ECONOMY

Canada - Canadian new home prices rose 5.2% year-over-year in April, after a 6.1% increase in March.  The increase was the slowest pace of home price appreciation in Canada since September 2005.  This is further evidence that the Canadian housing market is cooling off.

The Canadian trade surplus was $5.1 billion in April, slightly lower than expected.  Net exports were up 0.8% month-over-month, while imports were up 2.6% month-over-month. Essentially, this was due to high gasoline prices.  Exports were down for agriculture and fishing, auto products and other consumer goods.  Imports were down for forestry products, industrial goods and materials, machinery and equipment.

Labour disruptions in the US’s auto sector impacted both exports and imports of auto products in April.  Imports of auto products were up 4.7%.  Exports look as though they are softening.  Exports of agricultural goods were down 3.4% month-over-month, which will likely reverse itself over the next several months.

U.S. - It appears that corn planting will be slightly less than last year.  The wheat harvest should provide an excellent crop.  Prices, however, will likely be up again. It does not appear that crops will be as large as last year. 

The May ISM index moved to 49.6 from 48.6 and was much better than had been expected.  The new orders index edged up to its highest level since February.  New export orders were firmer in May than in April.  The correction of the US dollar has been a major positive.

Manufacturers however, are facing tougher production conditions.  The prices paid sub index rose to 87.0 in April; the highest since April 2004.  High energy prices are creating tight margins and leaving manufacturers in a tight spot. They lack the ability to pass on higher prices.

Total US import prices were up 1.8% in April, primarily due to a 4.4% increase in petroleum import prices.  In the last 12 months, import prices rose 15.4%.  There was a 1.1% increase in non-petroleum imports, which were up 6.2% over the last year.  Global inflation is making its way to the US.  Import inflation from France was 9.4% and from Germany 6%.  The stronger US dollar would reduce inflation escalation, but also would reduce exports.

The Baltic Dry Index has been rising continually for the last several days.  This indicates that the supply/demand environment remains very strong for commodities, particularly the bulks including iron ore and coal.  The forward curve suggests demand through September will remain very strong. One problem that may develop could be infrastructure bottlenecks and issues between the mines and the ports. 

The latest Fed Senior Loan Officer Survey for the second quarter indicates that banks are tightening their lending standards beyond the mortgage market.  Loans are now being tightened in the small business area, commercial real estate, credit cards and consumer instalment credit.  Banks have also raised their spreads well over the cost of funds, which is unprecedented.

The economy is very sluggish and consumer confidence is now running at deep recession lows.  Job growth appears to have started to slow much earlier than had previously been thought.  New data released on Business Employment Dynamics suggests that private non-farm payrolls could be revised down by 500,000 in the next major release of payrolls. 

Statistics indicate that half of all US homeowners who bought at the peak of the real estate bubble in 2006 owe more on their mortgage than their home is worth today.  About 4 of 10 who bought the year before or the year after are also underwater on their mortgages.  In Las Vegas, 90% of homeowners who bought in 2006 owe more than their home is worth.  In Stockton, California, it is 95.8%.  These numbers come from surveys by Business Week and through real estate firms.

The US Department of Agriculture has reported that the corn crop is 95% planted as of June 1st, compared to the average of 98% over the last five years.  74% of the corn crop has now emerged, which is below the historical average of 89%.  Planting was much later this year.  63% of the corn crop looks to be in good to excellent condition, down from 78% last year.

It is still too early to determine the yield; however it does look like yield expectations will be less this year than last year.  This could put pressure on corn prices this fall.  Soybeans are now 69% planted, compared to the five year average of 81% at this time.  It looks like the demand for fertilizers will continue at high levels.

The US international trade deficit widened to $60.9 billion in April, up 7.8% month-over-month.  This is the largest deficit since March last year.  Net exports were relatively unchanged at $26.4 billion.  Thus the deficit widened due to a surge of energy imports.  Imports rose 4.5% month-over-month, while exports rose 3.3%.  Compared to a year ago, exports were 19.2% higher than they were in March last year, and imports were 13.5% higher.

The biggest mover on the export side was the civilian aircraft component.  There was also a rebound in automotive exports.  Crude oil imports were up 12.9% month-over-month, and up 68.6% year-over-year.  Consumer goods imports were up 1.7% month-over-month.  The big concern is a potential deterioration in the export position.

Consumer spending, following a 6.2% increase in March, cooled in April and was up only 4.2%.  There was only a 0.4% increase in credit card debt.  This was the lowest increase since the decline in May 2005.  The tax deadline on April 15 likely affected spending to some degree.  Non-revolving debt, which is basically automobile loans, did increase 6.5% in April, up from a 5.5% gain in March.

Tax rebate cheques are being returned quite rapidly this year, and with the increased cash distribution, consumer spending should maintain some growth.  The majority of these funds will likely be used to cover the increased cost of fuel and food.

The New York Fed’s Empire manufacturing index was -8.68 in June, down from -3.23 in May.  This is much worse than had been expected.  Unfilled orders were negative on the month at -10.47, shipments were -6.54, and new orders were - 5.48.  Price pressures were in evidence with prices paid at +66.28, and prices received at +26.74.  There is now some considerable downside risk to the ISM manufacturing index.

International - There is now some evidence of a slowdown in the European and Japanese economies.  In Germany, the jobless rate rose unexpectedly in May, for the first increase since March 2006.  Consumer confidence in the Euro Zone fell to its lowest level since September 2005.  UK house prices continued to decline.  Japanese unemployment hit a seven-month high of 4% in April.  Japanese industrial production declined 3% in April, after a 3.4% drop in March.  There is considerable evidence of weaker domestic demand in many of the economies, which will affect US exports to some of these countries.

MARKET

Wal-Mart and Costco continue to have better than expected same-store sales growth.  These are both lower-priced retailers.  With high fuel and food prices, the consumer is now shopping at the large discounters, not only for lower prices but to limit fuel consumption and traveling from store to store.  These two retailers will likely outperform the overall retail sector by a significant amount.

The Mongolian government is apparently bringing in amendments to its windfall tax on gold to encourage companies to mine more gold.  The amendments are such that they would increase the volume of gold sold to the Central Bank of Mongolia.  Last year, gold mining companies sold 10.5 million tons of gold to the Central Bank.  They held onto the rest of the gold to avoid paying the huge windfall tax.

This is positive for Centerra Gold and Entrée Gold, which have gold mining projects in Mongolia.  Ivanhoe Mines is developing its Oyu Tolgoi project in Mongolia and could receive about 20% of its initial revenues from gold.  That likely will drop after four years production to 15% of revenue. There is also an indication that the windfall tax on copper production could be amended. 

A major plus in the market is liquid assets, which are at record highs.  Savings deposits are at a record $4.1 trillion, and US money market fund shares are at a record $3.3 trillion.  There is no evidence however to indicate that investors are ready to put money back into the market at the present time.  Mutual fund inflows and outflows are very volatile.  In January there were net outflows of $44.1 billion and net inflows of $57.4 billion in December.  In April, money flowed into Global & International, Growth & Income and Emerging Markets. 

There is a strong possibility that institutional stock holdings, which have been in a major uptrend since the early 50s will be changing due to the number of baby boomers getting set to retire. They now account for almost 44% of total holdings. This is going to add pressure to pension funds to take less risky allocations.  Merrill Lynch reports that corporate pension plans will likely pull $115 billion from equities in 2008.  This could create some market reaction.

Mutual funds have also very little cash reserves.  Households continue to be very much less optimistic.  Household equity holdings were about six percentage points above 55-year norms.  These have now started to come down.  It looks like extreme optimism will be followed by extreme pessimism with a lot of stock money going into bonds.

Corporations continue to be big buyers of stocks through mergers and acquisitions as well as buybacks.  The next move will be for corporations to sell stock to raise capital going forward.  This is already occurring in the financial industry.

The Tokyo Stock Exchange is going to launch a bullion-backed exchange-traded fund this month.  Japan's Parliament passed legislation allowing ETFs for commodities as well as letting firms begin emissions trading.  The SPDR Gold Shares ETF are already traded on the New York Stock Exchange as well as in Mexico and Singapore.

The Tokyo Stock Exchange is the second-largest stock exchange in the world.  The Gold Shares ETF are distributed by State Street Global Advisors.  This will be the first ETF that invests in gold bullion on the Tokyo Stock Exchange.  The ETF has a total net asset value of about US$16.8 billion and contains an estimated 19.5 million ounces of total gold in trust.

The S&P 500 Financial index is close to the bottom it reached in March 2003.  The S&P 500 is less than 15% from its 2007 peak, but the Financials are down by nearly 40%.  The Financials now trade at 1.2 times reported book value.  The market is still too optimistic about bank earnings over the next few quarters.  2008 estimates are going to be below consensus for many of the banks.  Once expectations are dampened for 2008, the stocks may become buys.

Although there have been some buy signals on the indices, there is no evidence that these are in fact in place.  Market breadth is not positive.  Bulls and bears have both had strong trends during the last two weeks; however none have developed any major trend.

Declining issues outnumbered advancing issues by 3 to 2.  Stocks reaching new 52-week lows exceeded those reaching new highs by over 3 to 1.  The Financials have fallen back to mid-March lows.  So while the major indices seem to be at a stalemate, the underlying support for equities continues to deteriorate.