ECONOMY

Canada - Excluding autos, retail sales were up 0.5% month-over-month in April. This was much higher than expected.  Including autos; sales were down 0.2%. A negative impact on gasoline sales has begun. This is due to high retail prices. Gasoline station sales fell 4% month-over-month.

Consumers continue to spend on electronics, sporting goods and clothing, as well as some general merchandise.  March sales, however, were only up 0.1%.  The major beneficiaries are discount stores such as Wal-Mart which showed exceptional increase in sales.  There are signs that the weaker labour market is starting to have an effect on the consumer.

Canadian new-home prices rose by 0.2% month-over-month in March, after 0.3% increase in February.  On a year-ago basis, prices are up 6.1%, with increases in all major cities except Windsor.  The Canadian housing market is starting to show signs of moderation. However, significant weakness has not shown up to date.

Canadian building permits rose by 1% month over month in February after a 3.5% drop in January.  This was worse than had been expected.  The biggest drop was in the non-residential sector, where the permits fell by 25.6%.  Ontario was hit the hardest.  Residential building permits were up 18.2% in February over January's 15% decline.  This indicates that the housing sector is still in pretty good shape.  Ontario is the one area which is starting to show some weakness.

Both Canadian and US banks have tightened their lending standards significantly.  This will reduce the restructuring of mortgages in the US and will likely have a negative impact on consumer spending in Canada.

U.S. - US consumer credit continues to increase and was up 7.2% annualized in March compared to 3.1% in February.  Credit card spending was up 7.9% in March compared to a 5% increase in February.  There have been 65 consecutive quarters of positive consumer spending and consumers continue to add debt.  It does not look like they will throw in the towel at this stage, but if the unemployment situation continues to remain negative, consumers will have to reduce increases in credit card debt.  Defaults on credit cards are now starting to increase although they've had no material effect on total dollars spent.  The US consumer does not seem to be worried about debt.

US new home sales declined 8.5% month-over-month in March.  This is the lowest level of new homes sold since 1991.  The median home price fell by 13.3% year-over-year to $228,000 which is the biggest drop since 1970.  The inventory of new homes jumped to 11 months supply from 10.2 months previously.  The recovery in housing is still a long way off.

US consumer spending is up again in the first quarter.  It has grown in every quarter since the early 1990’s.  Delinquency and loss rates are also rising towards recessionary levels across a number of consumer loan products.  It appears that the consumer is now struggling to pay debts, and as a result, this will eventually have an effect on spending.  Although consumer debt is about 14% of disposable personal income, the Fed has not differentiated this ratio by income group.  If they did, it would be much higher for all but the wealthiest Americans.  Despite low interest rates, many Americans are spending one-third to one-half, if not more of their income, on their mortgage.  This is going to have a negative effect on discretionary spending for other items. 

US personal income was up 0.3% month-over-month and 4.0% year-over-year.  In real terms personal disposable income was flat.  Spending from a year ago was up 5.3%, which is still quite strong.  The three month annualized trend for the core PCE deflator was up 2% in March, and for six months the trend was 2.2%.  Spending was mostly on services which were up 26% month-over-month in March.  Durable goods spending fell 4% and nondurables was up 0.4%.  Real personal consumption expenditures were up 0.1% in March.

Although the inflation rate is not very strong, there are signs of further deterioration.  Incomes also are not rising and spending is done by the increase in debt.

The job report for April was better than had been expected as the economy only lost 20,000 jobs.  The unemployment rate dropped to 5% from 5.1% in March.  Job loss, however, was large in the goods producing sector where 110,000 jobs disappeared.  Services added 90,000 jobs.  Construction lost 61,000 jobs in April.  Manufacturing lost 46,000 jobs.  Strong demand from overseas has not showed up in the manufacturing sector which continues to lose jobs.  Trade and retail trade are also losing significant numbers of workers.  Business services added 39,000 and education/health added 52,000.  The leisure and hospitality industry added 18,000 jobs because of an increase of tourists taking advantage of the weak US dollar.

The job report is likely to look worse over the next several months as the financial industry starts reducing employees.

International - Food is becoming a major concern among many nations.  China has now established a process whereby they are going to try to buy food production in a number of countries.  The US might not be on their list, but Canada will be.  Africa, South America and other Asian countries are definitely candidates for Chinese agricultural land acquisition.  In the Ukraine, and other formerly communist regimes in part of Russia, an Englishman is buying up as much acreages as possible from small landowners to create gigantic farms to produce agricultural products.

China is also not alone since Saudi Arabia has already indicated the necessity of controlling agricultural land outside of their own country.  Other OPEC countries also appear to be looking in that direction.  They have a lot of cash to invest.

If this begins to occur, (likely within the next three to five years), these large tracts of farmland will require manpower, considerable equipment, water access and likely additional fertilizer, seeds and crop insurance.  It is therefore likely that demand for these products has not peaked

There is considerable land available with which to increase crop supplies, but it needs to be brought into production, requiring capital and the above-mentioned necessities.

There are considerable political considerations as food could become a diplomatic weapon. (Much as the Saudis tried to use oil as a bargaining tool.)  Agricultural producing countries now could be using production of agriculture products as a bargaining tool.  The Irish famine was caused by the English taking Ireland's food production to England and leaving the Irish without.  This is an area that needs considerable study and likely will be a very profitable longer-term investment.

MARKET

Retail investors have pulled money out of 24 of the 25 largest mutual funds in the US.  Although much of this occurred in the first quarter, it is an ongoing trend. This indicates that the credit problem is starting to hurt the confidence of smaller investors.

The BC government has imposed a uranium exploration and development moratorium.  A previous moratorium was imposed in 1980 and lapsed in 1987.  It has a direct effect on Boss Power Corporation which was readying a 5,000 metre drilling program on its 100% owned Blizzard uranium project near Beaver Dell BC.

Chinese mutual funds lost $92.5B in the first quarter.  Share prices lost nearly half their value from October highs.  Funds reduced their holdings in financial, steel, transport and warehousing stocks.  There are slight increases in petrochemical, real estate, food and beverage sectors.  There is no sign that money is coming back into the Chinese mutual fund market.

The Ecuador government has suspended mining concessions for 180 days.  A new mining law is expected to be approved during this period.  The government also announced that it would reduce the number of mining holdings for companies to three concessions.  There is also the intention to have a referendum to ban open pit mining for metals.  Ecuador is likely also going to create a state-owned mining company.

Companies exploring or developing projects in Ecuador include Ascendant Copper Corporation, Aurelian Resources Inc., Cornerstone Capital Resources, Dynasty Metals & Mining, and IAMGOLD.  In addition, Corriente Resources Inc. is developing the Mirador open-pit copper-gold project which is affected by the mining ban and potential ban on open-pit mining.  There will be no news at least for another six months from Ecuador.

This market correction has not had a major cleansing effect on the market, and the various financial excesses. Except for Bear Stearns there has been very little punishment of the executives and the corporations who created this situation.  The correction has been about 9% to 10% whereby previous major market corrections were much more severe.  After these types of corrections, markets rally, but in most cases after the rally the market has had more corrections.

In major crashes like 1962 or 1987, which provided a real cleaning out of speculation; valuation excesses became valuation bargains.  Markets then had more major and more solid uptrends, which led into new bull markets. Because the Fed started to take action very quickly it has taken the biggest shock out of the financial markets and therefore has not allowed the cleansing process to be completed.  The result is that rallies do not follow through to become new bull markets; at least until a significant time span has passed, which will allow for the elimination of the speculative premium.

Most market averages have now advanced above their February highs.  In spite of this, the advance/decline line is still only neutral.  New highs are also weak, as are volumes.  It is quite likely that the market averages will go somewhat higher; however there does not seem to be evidence to indicate that a new major bull market is in place.