ECONOMY

Canada - Canada’s trade surplus improved to $3.7 billion in November, up from $3.1 billion the previous month. Exports were up by 3.1% and imports by 1.7%. There were big gains were in energy and automotive products, but declines in industrial goods and materials, and machinery and equipment. Despite the strength of the Canadian dollar, exports are still doing quite well. Although the trade surplus should narrow somewhat, it should still remain positive for the foreseeable future.

Canadian employment fell by 18,700 jobs in December. This is the worst monthly job loss since May 2003. The unemployment rate remained unchanged at 5.5%. Wage growth was up 4.9% year-over-year, indicating continued scarcity of trades in the labour market. Private paid jobs were down 51,300 on a year-over-year basis, recording its weakest growth since April 2005. Agriculture lost 23,900 jobs and manufacturing 33,200 jobs. The service sector added 5,200 jobs. The Canadian labour market will likely continue to soften over the next several months, however will not reduce labour income growth. Many Canadian companies would prefer to keep people on staff, even though they may be superfluous for the time being, rather than laying them off and not being able to hire as business improves.

The Canadian housing market appears to be getting softer as the value of building permits fell by 9.9% month-over-month in November. Permits for residential construction fell 5%, and non-residential by 17.5%. This is the largest decline since July 2007. The number of units actually fell slightly less on a percentage basis. The Toronto market remained flat, while there were declines in Regina and Calgary. Edmonton, London and Hamilton were quite strong.

In November, Canadian manufacturing shipments rose by 1.1% month-over-month, and were higher than had been expected. New orders increased by 8.1%. Shipments in real terms, however, were down 0.1% in the month. Durable goods shipments were up 0.8% and non-durable goods shipments rose 2% month-over-month. Auto shipments rose 2% month-over-month. Ex-auto shipments increased 1.1%. The jump in new orders for the month is a very positive development as well.

U.S. - Merrill Lynch believes that the US is now in recession, which will require further rate cuts. The 75 basis point cut has not eased recession fears. The banks are still limited in their mobility as they have to work themselves out of the sub-prime mortgage mess. The biggest problem with the US banks is that they will likely have to set aside more money for bad loans.

The US trade deficit widened in November to $63.1 billion, and was worse than had been anticipated. Exports were up 0.4% in November to a record $142.3 billion. Total US imports were up 3% to $205.4 billion, while exports were up 0.4% to $142.3 billion. With oil prices trending down somewhat, numbers will look slightly better in the next report.

The trade gap with China narrowed 7.6% to $23.9 billion, which was about the only plus.

Exports benefitted from the weaker dollar and strong demand from Asia and Latin America. A Merrill Lynch economist has indicated that manufacturing of certain products for export purposes in the US is now showing considerable gains.

The increase in oil price resulted in the biggest increase in imports. Capital equipment imports were also higher. The US trade balance will not turn positive until there is a considerable decline in the price of oil, and that does not look likely.

US total consumer credit outstanding grew 7.4% in November to $2.5 trillion. There was an 11.3% increase in credit card debt. Consumers spent all they could on heavily discounted merchandise during the holiday season. January and February numbers will likely be a better indicator of consumer financial health. The numbers indicate that although sales were not as strong ion dollar terms, unit sales were up as prices were discounted significantly. Retail margins were therefore under pressure.

December CPI in the US was up 0.3% month-over-month, and 4.1% year-over-year. Core CPI was up 0.2% month-over-month, and 2.4% year-over-year, which was in line with expectations. The problem is that the longer-term inflation trends remain very disturbing in spite of Mr. Bernanke’s comments on January 17. Energy did not create a particular problem in inflationary pressures since energy has been at this level for some time. Food and housing had lower gains. Beverage prices were flat. The moderation in food prices was due to the small improvement in the US dollar in December. In general, food prices are moving up. Medical care continues to move up, and was up 0.3% in the month.

US industrial production was flat in December. Capacity utilization dropped from 81.6% to 81.4%. This is basically positive for inflation. The manufacturing sector is not falling apart, and seems to be improving somewhat in certain areas which are benefitting from exports due to the lower dollar. The Consumer Comfort Index fell to -24 in the week ending January 13, its lowest level since 2003. This is a pretty good indicator of consumer spending over the next six months.

US housing starts fell to just over 1 million in December, which is the biggest drop in starts since January 2007, and the lowest level since November 1991. Building permits fell to 1.07 million, the lowest since September 1991. The housing correction is likely going to be much more severe than had been originally anticipated.

International - British consumer prices, which were expected to fall in December, instead rose by 2.1%. Due to this increase, there are indications that the Bank of England will not cut interest rates. There is more concern about inflation than the economy.

MARKET

Gold futures started trading in China on January 8. Demand has been especially strong, with futures increasing about 10% the first day. Chinese trading will likely result in a much stronger market in gold securities.

A survey indicates the 70% of China's 136 million investors are middle income earners. 32 million accounts were opened last year, which is ten times more than the previous year. Over 10% of these investors said they never consider possible losses. They may have another thought coming.

Markets around the world are trending down due to lower US retail sales and projected lower earnings. The concern about recession is very serious for foreign markets, as these markets are very dependent upon the flow of US dollars into their countries. If the US consumer stops buying foreign merchandise, there will be less money going into these countries, and therefore less economic activity that would create investment dollars.

The 50- and 200-day moving averages in New York have now crossed. This is a sure sign that the bear market is in place.

A typical recession lasts about ten months. The market normally declines for about 60% of the way through the recession. It therefore it looks like May or June will be the bottom of the market, if the recession is typical. The buying program could likely begin at that time. At the present time, the US market is priced approximately one third of its way through the recession. No sector is fully discounting the recession yet.

Treasury bonds are priced about halfway into the recession. This means that 10-year Treasury note yields should drop considerably more, especially if the funds rate drops to 2.5%.

Home prices are still in a free fall. The supply/demand situation is way out of kilter, and therefore starts might not bottom for some time. The level of starts may have to drop to as low as 800,000. The major question is that if the first 7% down in home prices triggered almost $100 billion in write-downs in the banking sector, a 65% jump in foreclosures, the highest residential real estate loan delinquency rate in 20 years, and a 20% decline in S&P financials, what will the next down leg in prices bring?

Argus Corporation, which had been bearish for the short term, and long-term bullish, has now turned long-term bearish. Investors are not going to pay attention to technical signs; instead they are focusing on the economy and corporate outlooks, as well as the negative developments in the ABCP business.

A number of quality companies have had significant drops. For example, Canadian Tire, as a trading situation, is now down over 35%. CIBC has had a drop of 41%. In the mining sector, Inmet stock has come down from $101 to $61. In New York, many securities are down between 25% and 50%. Normally these stocks will become buys as trading situations when they close for two consecutive days above their short-term moving average.

The Volatility Index hit a six-year high last Tuesday. If the Index starts to drop, that would indicate an intermediate bottom, which would lead to a short-term rally. This is more of a trading index then an investment indicator.

Asian and European markets are predicting a recession in the US in spite of the cut in the Fed funds rate of 75 basis points. US markets are already indicating a recession in the US. Recessions normally last six to twelve months. It is doubtful that the Fed action will have any significant effect over the next several months. The drop in the Fed funds rate will likely take at least nine months to be felt in the economy.

The government emergency aid package of approximately $150 billion also will have not an immediate effect, as it will likely take several months before the funds are actually distributed. It is quite likely that a $600 one-time payment to a consumer will be used to pay down debt, rather than for a purchase.

Citigroup and Merrill Lynch have had an infusion of $21 billion from government-run sovereign wealth funds in Kuwait, Abu Dhabi, Korea and Singapore. They bought convertible preferred shares and negotiated dividends of 11%. Expect to see further investments by sovereign wealth funds in US financials.