The Beat Goes On...and on and on

by Zubin Driver
June 10, 2009

For yet another week markets remained strong. At this point, simply staying at or near current levels constitutes strength, but these markets keep rising. Indeed, one gets the sense that complacency and bullishness have replaced the despair of three months ago a little too quickly. How will things look when momentum slows and the 20 day moving average trend breaks down?

Last week ended on a positive note, as non-farms payroll data for May showed a decrease of 345,000 jobs, much better than the 520,000 that was expected, and just under half the 741,000 jobs lost in January. The May figure is the smallest since last September, when the deadly deleveraging process began in earnest. In fact, a number of measures, such as stock market performance, have returned to September levels. These levels will likely form resistance, and consolidation within 1,000 points or so of here through the summer may form a base for a strong fall.

Dow Adjustment

Last week the composition of the Dow Jones Industrial Average was changed through the replacement, respectively, of GM and Citigroup with Cisco Systems and The Travelers Group of Companies. We're living through history, and a statement accompanying the changes from DJIA powers-that-be stated that computers are as important to the current century as cars were to the previous one. While some stocks have been taken out of the average then added back in over time, GM has been part of the index since 1925 on a continuing basis. GE is the only older component, having been part of the Dow since 1907, and now that it is trading at $13 rather than $6 as it was in March, one would expect that its position in the DJIA, for the present time, is safe. Interestingly, Citigroup's replacement, the insurer Travelers Property Casualty Corp., was actually part of Citi until 2002 when it was spun off in an IPO.

Gas and Gold

A few times over the last two months this space has noted the tendency of gold to underperform in the summer, yet since mid-April gold has risen $100 / ounce. It has now encountered strong resistance at $985, and the better than expected jobs figures on Friday sent it tumbling $25 to $955. Of course, the market's job is to confound participants' expectations, but if gold trades well through the summer and hovers around these levels when it is usually weak, how well might it do in the fall when, seasonally, it usually outperforms?

Natural gas has also been a topic of this commentary, but with the question: when will it bottom? Finally, it's chart is showing more true signs of bottoming as it is now forming a base between $3.25-3.75 per thousand cubic feet. Companies aren't searching for it much, as drill rig counts are down by over half since the peak, and everyone knows the old supply-demand equation--when people finally give up on looking for it, that's when the supply destruction will finally overtake the destruction of demand. Another interesting note is that gas is historically very cheap at the moment relative to oil, as one barrel of oil buys 18 thousand cubic feet units of gas, a level the ratio hasn't seen since the early '90s. For those who feel they've missed the boat, gas could be a ship worth sailing...

Heating up in June?

Volumes have been picking up on the venture exchange as many companies are making comebacks and financing again. Last summer the month of June was 'hotter than July,' as potash, coal, and shale gas plays ran up to fantastic valuations in one last irrational hurrah prior to everything collapsing. As is the case on the big boards, there is a lot of pent up demand that is slowly tip-toeing back into things as markets continue to hold firmer than most expected. Should the broader market hold steady, we may see some continued trading opportunity here in June before the true doldrums set in by July.

Best regards,
Zubin

Zubin Driver
Investment Advisor
(W) 604 643-7608 / (F) 604 643-7606
Email: zubin_driver@canaccord.com

Canaccord Capital Corporation
Attention: Zubin Driver
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OFFICES IN MAJOR CENTRES ACROSS CANADA. MEMBER OF ALL CANADIAN STOCK EXCHANGES AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA. MEMBER CANADIAN INVESTOR PROTECTION FUND (CIPF).