ECONOMY - March 17, 2008

Canada - Canadian economic growth increased at a 0.8% annual rate in the fourth quarter.  The labour market still produced another 43,300 new jobs in February, with the unemployment rate at a 33-year low of 5.8%.  Canadian retail sales rose 0.6% in December due to increasing sales of automotive products.  Core retails sales actually fell 0.4%.

Housing starts slowed to 187,500 on a seasonally adjusted annual rate in December.  This is down from a revised 233,000 rate in November.  Starts in 2007 were up 1% to 229,600 over 2006.  The housing forecast is for 210,000 units in 2008.

The merchandise trade surplus dropped to $2.4B in December; the lowest since November 1998.  The strong Canadian dollar and a slower US economy indicate a continual drag on exports in 2008.  A major plus could be a significant increase in the export of natural gas if shallow drilling resumes this spring as expected.

The inflation rate remains quite weak; however the impact of higher energy and higher food costs will start showing up very shortly, and will reverse the trend in inflationary numbers as the impact of these will be quite significant.

U.S. - US nonfarm payroll employment fell by 63,000 in February which was the biggest drop since March 2003.  Private sector employment dropped 101,000 jobs in January.  Unemployment numbers dropped due to the reduction in people looking for work.  The unemployment rate therefore remained at 4.8%.

Average hourly earnings rose by 0.3% in February, and on a year-to-year basis were up 3.7%.  Service wage growth showed a small decline to 3.8%.

Employment is getting softer and is weakening further.  Employment in goods producing industries fell by 89,000 jobs.  There was a 26,000 increase in service providing jobs and a 38,000 increase from the government.  On the service side, education and healthcare increased by 30,000 jobs, while restaurants rose by 20,000 and retail lost 34,000.  Business and professional lost 20,000 jobs; the first time in nearly five years that this sector has lost jobs.   It is quite likely that restaurants and retail will lose more jobs as indications are that consumers are not eating out as much, and that retail spending, except in places like Wal-Mart or other major discounters, is weakening.

Meanwhile, the US trade deficit widened again to $58.2B and is expected to deteriorate further.  The price of oil has reached record levels with no sign of a major correction.

On Tuesday morning of last week, the Federal Reserve expanded its securities lending program.  It will lend up to $200B of treasury securities for a 28-day term.  They will accept various forms of collateral which are not acceptable at the present time.  This is an attempt to inject liquidity into creditworthy segments of the mortgage market which has also come under pressure despite limited deterioration.  This is an attempt by the Fed to reduce the threat to the economy by banks cutting back their lending dramatically. 

Banks and securities firms have losses of over $200B since the start of last year due to defaults of subprime mortgages, the effects of which have gone through the whole world’s financial markets.  The Fed is trying to do all it can to get them to start lending again.  The US is now dealing with a solvency problem, not necessarily a liquidity problem.  The Fed’s action still does not get to the problem itself, which is the number of very bad loans that are outstanding.

The US is now definitely in a recession, and although liquidity and solvency can be improved slightly by this recent action, it does not improve the consumer debt situation which is being further impacted by the higher price of gasoline and residential taxes.  The handout that will be available from June onward will add $150B to consumers purchasing power, but likely will do very little positive to the economy since much of this will likely be used to pay down debt or keep a little bit as a safety valve.

MARKET - March 17, 2008

The Dow Jones Composite Index is composed of the 30 Dow Jones Industrials, 20 Transports, and 15 Utilities.  On February 14, the Index had appreciated 7.3% to 4284.60 from its January 22 low of 3989.65.  The Composite has come up against its 50-day moving average, which stands at 4284. 

The next test would be to break out above its preceding peak into the area around 4350.  If the Composite rallies above the 4350, it would indicate that the market is gaining momentum, and both the Industrials and Transports should reflect that momentum, giving us at least a partial buy signal.

The outlook for uranium continues to improve.  The uranium price normally increases from February on as utilities resume their buy programs.  The fact that Uranium One has reduced its production schedule for 2008 and 2009 will also help the demand side.  The best way to take advantage of the imminent increase in uranium prices is through Cameco Corporation shares.  Cameco is a senior producer.

Paladin Energy Ltd., and its joint venture partner Cameco Corporation have been awarded rights to explore the Angela and Pamela uranium deposits by Australia's Northern Territory government.  These deposits contain approximately 27.5 million pounds of contained U3O8 grading 0.13% uranium oxide.  The joint venture has committed to spend AUD$5MM on initial exploration work, and a further AUD$5MM to $10MM on a feasibility study and an environmental impact assessment.  There is no ban on uranium mining in the Northern Territory.

The markets, both in Canada and the US, are now in a recessionary trend.  The Canadian market still appears to be in a much stronger position than the US market.  The Canadian market has, however, been hurt badly by the banks and other financials, as well as by a number of industrials such as the railways, which are economically sensitive.  The pipelines and utilities stocks continue to perform reasonably well.

The banks have been hurt badly by the CIBC and Bank of Montreal’s problems.  The other banks have been downgraded as well, although it does not appear that they are influenced by the number of high-risk investments that the other two banks seem to be holding.   In their quarterly reports, none of the banks indicated that problems would be as serious as they now seem to be.  This appears to be mostly due to the failure of the insurance coverage on these assets.

Expect to see further writedowns by the major banks, and that earnings expectations will not be met for this year. There seems to be no concern regarding dividends or serious impairments to their capital ratios.  The banks’ influence on the index is significant, and as a result, the index is doing much worse than the average security.  The banks will likely soon be coming into reasonable buying ranges.  It is more efficacious however, to wait until their second quarter earnings are released to determine whether any further damage will occur from presently suspected assets.