Massively Im-'pressed!'

by Zubin Driver
March 23, 2009

Just like the statement from the ancient Greek philosopher Heraclitus , that 'one can never step in the same river twice,' the markets are always changing and never fully predictable. However, over the last half year there have been more staggeringly shocking events, defying expectations of even the most experienced industry players, to render the notion that the market is unpredictable a gross understatement. Until now, all of these shockers have exclusively benefited the bears.

Last week, however, Fed chairman Ben Bernanke brought out his printing press to reverse the trend. A brief background: Bernanke is often referred to as 'Helicopter Ben' due to a speech he made in which he said the government can fight deflation by printing money. The nickname envisages the Fed chairman throwing the newly printed money out of a helicopter onto the economy. Well, last Wednesday Bernanke stunned the market by printing up a monetary bomb to drop on the bears from his chopper. The Fed said in a statement after its meeting that it will release over a trillion new dollars to buy long term treasury bonds and mortgage-backed securities in order to free up lending and further unlock credit markets.

In a monstrous reversal, gold, perhaps the best gauge of inflationary expectations, went from looking as though it would break its uptrend extending back to November, to stage a huge rally. Down about $25 to $890 / ounce before the Fed released its statement, it closed up $40 to $945 / ounce. The stock markets had a similar day, with the TSX dropping almost 300 points earlier in the day before closing up on strong volume. Other commodities such as the base metals and oil, also strong measures of inflation, strengthened as well. The US dollar, due to the obvious dilution that all this money printing will entail, plunged due south, dropping 3 cents on the day. The reversals made clear that the size of the Fed 's announcement surprised the markets, providing fresh impetus for further price appreciation.

Quantitative Easing
Quantitative easing is the term used to describe the Fed's new initiative. In broad strokes, quantitative easing refers to federal banks printing money to stimulate growth rather than using the traditional weapon of lowering interest rates, a weapon that is out of bullets as rates have already been lowered to almost zero. In an expanding economy inflation becomes a concern that central banks fight by raising rates, but during this recession the far greater fear is deflation. If investors believe inflation could return, commodities and stock markets should rally as they did last week in response to the Fed announcement.

Whoa, Natty! - a potential reversal?
While other commodities such as oil and copper have been forming multi-month bottoms and base-building, natural gas has been in a relentless downtrend. Last Thursday morning the natural gas inventory numbers were released with a small net withdrawal from storage, which means that the excess supply overhanging the natural gas market has come down marginally. Compared to this time last year though, inventories are high. Uses for natural gas are mainly heating and cooling, and many were surprised that over this cold winter the price continued to trend downward. Now we are into a shoulder season between the heating needs of winter and cooling needs of summer.

As with all the other commodities people speak of supply destruction and demand destruction. The demand destruction for most commodities has been the dominant force as supply has grown far larger than demand, decimating prices. However, lower prices means a lot of supply coming off line and nobody exploring to find new reserves, eventually leading to 'supply destruction,' which should rebalance supply and demand to support the price. After the inventory announcement Thursday prices shot up far more than the small withdrawal from storage warranted--was this simply a blip, or a more significant trend reversal?

Another week, another trillion!
Wow are Obama's team and the feds ever working hard. Last night (Sunday, March 22nd) they released their $1 trillion plan to purchase the toxic loan assets from troubled banks' balance sheets, to build what's come to be known as a 'bad bank.' These assets consist of mortgages, credit card debt, auto loans, etc, many of which, particularly on the mortgage side, are worth far less than their par value. The question has been what exactly are these loans worth? At the darkest moments of negative panic people have wondered if they'd even get 10 cents on the dollar, creating the major reason for banks' such as Citigroup's massive share price devaluations. Were these loans to be valued that low than the losses on them would exceed the value of the banks' assets.

The government has now created a plan to partner with the private sector and have their private partners decide the loan values by bidding for them directly in an auction format. In this way they will buy the toxic assets, thus removing them from the banks' balance sheets. Toxic loans have been the negative nucleus of this bear market, and how the government would attempt to resolve the problem has been a perpetual question overhanging prices. When treasury secretary Tim Geithner first addressed congress in February markets sold off significantly under the rationale that his plan contained too many generalities without specifics; today the specifics for dealing with toxic assets have been provided and the market is bidding up a significant vote of approval, with the TSX having closed up 458 points and the Dow 497. Over the coming months we'll get to see whether the plan actually works...

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).