Canadian Economy Shrinks For First Time Since 2009; Recession Next?

Don't look know but Canada just confirmed the first signal of a recession, after its GDP printed negative (on expectations of an unchanged number) for the first time since Q2 2009, due to a drop in exports and oil output, most of it blamed naturally on "transitory" factors. Odd how the US used the transitory line for months until it all turned out to be permanentory. What, however, is truly hilarious is the continued denial to look facts in the face as confirmed by the following three Canadian sellside analysts, who seem positively giddy that the number was major miss to expectations: their take home, just like as in the case of Canadian banks having some of the lowest TCE ratios in the world: "ignore it." Perhaps when next quarter Canadian GDP prints negative again, and the economy is officially in a recession, then the delightful comedy crew of what passes for "analysts" up north will have some words of caution finally. As for whether a recession confirmation in 3 months will be negative for the same banks which are downplaying both the GDP and its risk to their near world record leverage, we leave to the far more erudite, and far less shoot-from-the-hip Globe and Mail.

SAL GUATIERI, SENIOR ECONOMIST, BMO CAPITAL MARKETS

"Its worth noting that the economy did grow at a fairly respectable rate, plus 3 percent in the previous two quarters, and there were some temporary factors that slowed the economy in the second quarter. The supply chain disruptions in the auto industry, wildfires in Alberta and importantly, the economy appears to have ended the quarter on a fairly healthy note, June GDP up 0.2 percent. That suggests growth will rebound to about 2 percent in the third quarter."

"For the Bank of Canada, growth clearly came in well below its expectations back in July, when it thought the economy would grow 1.5 percent. On balance the report will likely weigh towards keeping the Bank of Canada on the sidelines and we believe they will not raise interest rates until next summer."

"There may have been a knee-jerk (currency) reaction, but I'm not seeing any long-lasting effect. Again, the report does not carry many implications for monetary policy, even though quarterly growth came in a little weaker than expected, June GDP came in a little better than expected, raising hopes that the economy bounced back in the third quarter."

BENJAMIN TAL, SENIOR ECONOMIST AT CIBC

"People should not pay too much attention to this number. It does not represent the real health of the Canadian economy. We all know the second-quarter was impacted in a very significant way by a supply disruptions in the auto sector and energy sector. Those two sectors really were significantly impacted. We know exports went down significantly during this quarter and you will see a nice bounce back in the third-quarter."

"Having said that, if we assume that the U.S. economy will remain relatively soft, exports will remain relatively soft and be under pressure. So although this picture in this quarter overstates the weakness of the Canadian economy and should not be taken at face value, given the temporary factors I mentioned -- this gives the new mix that we should expect over the next 6 to 12 months, which is a somewhat weaker export story given the fact that the U.S. economy will underperform."

PAUL FERLEY, ASSISTANT CHIEF ECONOMIST, ROYAL BANK OF CANADA:

"Going into the report, expectations had been flat GDP growth. So a little bit weaker than expected, unfortunately showing a decline, though it is a fairly minimal drop, a decline nonetheless. Weakness is largely coming from the net export component, and final domestic demand did manage to strengthen to 3.0 percent from a 1.8 percent gain in the first quarter. Nonetheless, it is indicating a marked weakening in the second quarter, certainly below the Bank of Canada's recent forecast suggesting growth at 1.5 percent, though subsequent comments by Bank of Canada Governor Carney did suggest the possibility we could see a small decline."

"Certainly this is reason to keep policy accommodative, holding steady, the overnight rate (target) at 1 percent. At this point, I think they'll view some of the weakness as being the result of transitory factors, and watch the data for indications of a bounceback in growth. And the monthly GDP numbers sort of indicate a start to that process, with growth ticking up to 0.2 in June after the 0.3 drop in May.

"The quarterly numbers (are) weaker than expected plus showing that decline, so as a result it could be a slight negative for the Canadian dollar. However it might be tempered a bit by the June GDP coming in stronger than expected."

Five Basic Materials Stocks With Solid Valuations: GLT, RS, SEE, VAL, WIRE

The materials group as a whole is not a place that value investors mine too deeply. Perhaps it's because of the traditionally low dividend yields (and higher P/E ratios) associated with the group, or perhaps it's the lack of price predictability in some of the underlying commodities. Either way, most stock buyers who dig through share tables in search of better fundamentals manage to skip over this broad swath of the market.

But is it justified? Perhaps not. Below, we highlight five stocks from the basic materials group with rock-solid valuations by any sector's standard.

Encore Wire Corp. (Nasdaq:WIRE) manufactures copper wiring for the building trades and for cable. The company's shares trade slightly over book value, with a Price to book (P/B) of 1.2. Price to sales is a very competitive 0.49. It's no wonder that approximately 75% of the company's shares are held by institutions. (Big-money sponsorship might make a company look good, but it's not always a reliable gauge of stock quality.

Fresher Cheeses And Meats
Sealed Air Corp. (NYSE:SEE) develops materials for efficient packaging and shipping of fresh and processed meats and cheeses. The company pays a 3% annual dividend and trades with an 13 P/E. Institutional holdings of Sealed Air currently stand at 89% of the outstanding float.

PH Glatfelter (NYSE:GLT) stock is up approximately 14% over the past six months and pays a very reasonable 2.5% dividend yield. The P/E ratio is also very low, coming in at 9 times last year's earnings. GLT stock is also 90% institutionally held and trades at 1.12 times book value and just 0.42 times sales. Glatfelter manufactures a wide variety of paper products, from book covers to tea bag paper, and everything in between.

Old Reliable
Reliance Steel and Aluminum (NYSE:RS) operates a metals service business with over 100,000 products and 125,000 customers globally. The stock's dividend yield is approximately 1%. Looking closer at the fundamental rations, P/B is 1.01, forward P/E is 7.12 and price to sales, 0.42, which suggests that this stock has room to grow.

The Valspar Corp. (NYSE:VAL) is a paint manufacturer with a 2.2% dividend yield and a 15.25 P/E ratio. Institutions control 73.8% of the common stock.

The Bottom Line
The basic materials, like every other group, have to be sifted carefully to uncover value. Institutions have managed to do so regardless of the lower yields and higher earnings multiples.

The Rise And Fall Of US Confidence, Or Why The Fair Value Of Gold In Phase Space Is $6,000-$12,000

The Rise And Fall Of US Confidence

Today we look at a graph of confidence in the US system. The US confidence ratio represents the ratio of outstanding US Federal debt to the dollar value of US gold holdings (as reported*). No corrections for inflation should be necessary, as both terms are valued in the same depreciating dollars. We use the term confidence as the ability of the US to stretch this ratio to (by our thinking) absurd multiples was a reflection of the world's confidence in the United States--which differs from the ability to actually repay debts.

For post-1971 I used the assumed holdings of 250 million ounces multiplied by the average annual price (from Kitco). There are those who suggest the true holdings are substantially less than 250 million ounces. That may be so, but the picture is already bad enough if we accept the official numbers.

Confidence level sank throughout the Depression up until the beginning of WWII, after which ascendant American power was reflected in a climbing confidence ratio up to the oil crisis in the early 1970s. Confidence sank as the US withdrew from Viet Nam and inflation rose until the price of gold rose sufficiently to restore confidence in American solvency.

From 1980 to 2001 was a golden age for the US. In this time, both stock and bond markets were strong, the US currency was strong, and the only credible opposition to US hegemony disintegrated. But every bubble meets its pin, and ever since the planes hit the towers, the US power and prestige has gone into decline. This decline is marked by a rapid decline in the confidence index. How low will it go?

There is a provocative looking left shoulder and head, suggesting a drop to the neckline somewhere around 2020, after which there may be something of a resurgence in American confidence. The anticipated completion of the bankruptcy head-and-shoulders formation promises to be a hair-raising event.

Actually, though, what appears to be happening is the blowing of bubbles. A bubble is blown, but can only expand so far before confidence fails and the bubble deflates. Then another, in this case larger, bubble is blown. If the bubble is able to deflate without society collapsing, perhaps it will be possible to blow another. Or perhaps we will be wise enough to act in ways that prevent the bubble from being blown in the first place.

At the World Complex we are of the opinion that bubbles are bad--but we recognize they can be a lot of fun. Sort of like going on a bender. The US has been on a bender since 1980. Soon the weekend will be over and it will have to be back at work. Although the new boss may be of the Asian persuasion.

For the bubble to deflate, the debt must disappear, or the gold price must rise. Assuming no change in debt levels, the gold price would have to rise about ten-fold for the confidence ratio to fall to historical values. Unfortunately, a considerable rise in US debt appears to be baked into the cake at this point, so we would foresee gold to eventually reach breathtaking prices.

The 2-d reconstructed phase space of the confidence ratio appears below:

On this chart we don't dare suggest anything other than a fall towards the origin of the graph. If the ratio falls to 10, then gold has to rise to about $6,000 per ounce at today's level of debt. If the ratio falls to 5 (the last low in 1980), then gold would have to be about $12,000 per ounce (again, only at the present debt level). The numbers could be quite astronomical once the deficits in Medicare and Social Security start being realized.

McAlvany Weekly Commentary

The IMF has Effectively Pronounced the US Bankrupt: An Interview With Laurence Kotlikoff

Posted on 31 August 2011.

A Look At This Weeks Show:
- Let’s get real, the US is bankrupt. Neither spending more nor taxing less will solve the problem.
- What it can and must do is radically simplify its tax, health-care, financial and retirement systems, each of which is a complete mess.
- The good news is that with a complete redesign we can lower our current costs and bring in more revenue.

About the guest:
Laurence Kotlikoff is a William Warren FairField Professor at Boston University, a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Research Associate of the National Bureau of Economic Research, a Fellow of the Econometric Society, a former Senior Economist, President’s Council of Economic Advisers, and President of Economic Security Planning. Purchase Jimmy Stewart is Dead Here

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Gold Miners Poised For a Breakout: GDX, NEM, ABX, GG, AUY, SLW

The Gold Miners ETF ($GDX) has been stuck in this range between the low 50s and low 60s for about a year now. It’s inevitable that a breakout occurs in one direction or another. The upper end of the range and the lower end have each been tested 4 or 5 times since last Fall so the break should occur pretty soon.

When these sort of consolidations take place, I like to give the benefit of the doubt to the direction of the underlying trend. In this case, the trend has been higher for a long time so we’re anticipating a breakout to the upside here. Look how powerful this decade long trend has been:

For now we are still stuck in this 10 point range for $GDX. Some of the big names that we want to watch here are Newmont Mining ($NEM), Barrick Gold ($ABX), Goldcorp ($GG), and some smaller holdings like Yamana Gold ($AUY) and Silver Wheaton ($SLW). These are a few of the components in $GDX.

To the downside, a break below the recent lows in the low 50s will force us to reevaluate our bullish stance. To the upside, a breakout to new highs into the mid-60s would confirm our bullish bias. It’s not a small range, which makes it more difficult for trend traders, so trading the individual names while using the ETF as a guide is probably our best bet for now. It make take a little bit more consolidation before a clear breakout, but I certainly don’t see this as a major top, so I’m buying dips.

Did Bonds Just Peak?

Commentary: Bill Gross's mea culpa sounds like capitulation

They say the time to sell is when the last bear turns bullish.

When it comes to U.S. Treasury bonds, did that just happen?

Bill Gross, the world's most famous bond manager, has now fessed up that he made a blunder when he turned bearish on the bonds last winter. Gross says his bet against Treasurys was a "mistake" and that he had been "losing sleep" over it this summer. Read the story about Gross losing sleep on the Wall Street Journal web site.

Treasury bonds have been booming to higher and higher prices for months, as fears have grown of a new recession and a deepening financial crisis.
More from MarketWatch.com:

• Why Would Anyone Want to Weaken the Economy?

• Don't Ditch Those Treasurys Yet

• September Is the Cruelest Month

Bonds work like a seesaw, so when the prices go up, the yield, or interest rate, goes down. Today the interest rate on 10-year Treasury notes has plummeted to just 2.2%. The 30-year bond pays a mere 3.5%. These are at, or near, historic lows.

The "real yield" on inflation-protected Treasuries, known as TIPS, has collapsed as well. Short-term TIPS now lock in a guaranteed loss of purchasing power. Even long-term TIPS don't pay you much over inflation.

In the circumstances, it's easy for commentators to throw rotten eggs at Gross.

But successful investment management is like successful poker playing. It isn't about predicting the future. It's about understanding the odds -- and the other players. And when Gross got out of Treasuries he was making a reasonable decision, based on the prices at the time and the scenarios in front of him.

Uncle Sam is basically broke. The national debt, which was $3 trillion a generation ago, is up to about $15 trillion. Within five years it is forecast to pass $20 trillion.

More importantly, our political system has become a farce. Neither party has any serious intention of dealing with the deficit. Witness the childish and surreal attitudes toward taxes and the Pentagon.

The "super committee" created a month ago is just a feel-good bedtime story you tell to children, which is who we now are.

In the circumstances the only recourse left is for Ben Bernanke to clip the coins -- in other words, to print more dollars to cover the shortfall.

Sooner or later that is going to smoke bondholders. It has already trashed the U.S. dollar.

Why would anyone lend to such an entity for 30 years at 3.5% interest? Or even for 10 years at 2.2%?

As the late Herbert Yardley once wrote, in the classic "Education of a Poker Player," I wouldn't bet on that hand with counterfeit money. You're taking on the risk of a big loss in return for the hope of a small gain.

If you're playing your hand on behalf of widows, orphans and other bond-fund investors, you don't try to bluff too often. And you don't draw to an inside straight.

Why have Treasuries boomed?

I suspect there are three reasons.

First, investors around the world still believe in the American Empire. They haven't worked out that the game is up. And so when they smell crisis they still run to the Treasury market.

Second, many investors here are still hung up on Modern Portfolio Theory, which tells them aging Baby Boomers should be buying more bonds, regardless of the price. Every month they sock more money into their bond funds, merrily trusting that "bonds are safe." Tell that to anyone who bought government bonds in the Fifties, before the great inflation. Tell that to anyone who has lent money to any number of European governments -- from Greece to Ireland to Italy.

The third reason? Many private investors are succumbing, once again, to the biggest single mistake in the markets -- performance chasing. In effect they are saying: "Look -- bonds have done really well, so we should get on board!" You may be surprised that anyone could be so foolish, but believe me, an amazing number of investors really do think that way. The momentum can even make them look good -- for a while.

Diehard bears argue that US Treasurys will keep rising, just as Japanese Government Bonds did in the Nineties, to the point where long-term yields fell below 1%.

But there are problems with that analogy. Yes, the Japanese government ran huge deficits while its bonds boomed. But Japanese society didn't: The country ran a trade surplus every year, and households saved and saved. The contrast with the ailing American Empire could scarcely be more stark.

If you want to own government bonds, you're probably better off buying them from a country with a grown-up political system. Norway's bonds actually pay a higher rate of interest than Treasuries -- and Norway has a balanced budget, and no national debt. No kidding.

Brett Arends is a senior columnist for MarketWatch and a personal-finance columnist for the Wall Street Journal.

Gerald Celente: “I’m Now 100% In Gold, Roubini Is Wrong, 70’s vs Today” & More

King World News has just released an interview with Gerald Celente: Founder & Director of the Trends Research Institute.

Gerald gives the King World News audience his most recent thoughts regarding trends, why he is now 100% in gold, Roubini being wrong and much more. Gerald has been quoted and interviewed in media throughout the world such as, CNBC, Fox News, CBS This Morning, 48 Hours, ABC, NBC, BBC, The New York Times, The Wall Street Journal, Time, Business Week, FT, U.S. News and World Report, The Economist and more.

You can listen to the interview HERE. (On the left side of the page, half way down, click on the small purple logo that reads, “Listen to MP3 – CLICK HERE”)

How To Profit From Fear In Today's Market : CVS, DE, MON, MOO, WAG

Investors are back in panic mode again. While there are indeed short-term concerns about the state of the economy and longer-term concerns about the U.S. consumer, patient investors have the opportunity to benefit from the market's current state of paranoia.

Be Selective
Even though markets are fearful and stock prices have come down, investors should still be very selective in their equity purchases. Focus on quality names that are operating in fundamentally sound industries. Agriculture is an industry with a favorable outlook over the long-run. There is simply not enough agricultural-producing land to support the ever-growing urbanization of the world. Investors can buy the Market Vectors Agribusiness ETF (NYSE:MOO) and immediately have a diverse basket of businesses involved in agriculture in one way or another. One of the largest positions in the ETF is farm equipment manufacturer Deere (NYSE:DE), one of the most dominant businesses in its particular industry. But you also get exposure to Monsanto (NYSE:MON), the world's leading producer of genetically modified seeds. Overall, MOO is a focused play on the world's growing demand for agricultural products and services.

Play the Aging Population
The U.S. population is aging and that will lead to an increased demand in health care, primarily medicine. But rather than investing in the pharmaceutical companies themselves, a better play may be on the distribution side. The biggest winners here are likely to be CVS Caremark (NYSE:CVS) or Walgreens (NYSE:WAG). Over the next couple of years, numerous blockbuster drugs will be going off patent, which will affect the companies that make those drugs. But CVS and Walgreens will benefit as the generic versions of those drugs helps boost sales. Customers like the convenient locations of CVS and WAG and the smaller store size makes the trip less time consuming than Wal-Mart. CVS and WAG have effectively become duopoly in their industry thanks to continued consolidation. Both securities are reasonably valued at less than 14 times earnings.

The Bottom Line
Investor panic leads to profits for the opportunistic investor. When emotion overcomes rationality, sounds tenets of investing - valuation, patience and independent thinking - all disappear leading to opportunities that otherwise would not exist.

Can anything stop the Swiss franc?

The Swiss franc just won't quit.

The currency jumped more than 2% against the euro and the U.S. dollar Wednesday after the Swiss government announced a stimulus package that was smaller than investors had anticipated.

While the currency's strength diminished in August, it is still up 9% against the euro and 13.5% against the dollar so far this year.

The Swiss franc has appreciated as investors sought out safe-haven investments amid the waves of uncertainty that have hit markets this year.

But the currency's strength is causing major problems for the Swiss economy.

A strong franc makes Swiss goods less attractive to trading partners, and tourists -- a major source of income for Switzerland -- are less likely to visit.

"The largely overvalued Swiss franc against the euro and the dollar poses great challenges for certain export-oriented sectors ... like manufacturing and tourism," said Swiss economic minister Johann Schneider-Ammann earlier this week.

Complicating matters, the country's central bank chose to leave its money supply unchanged on Wednesday.

"Where the franc goes from here depends on what the Swiss National Bank does and developments coming out of the eurozone," said Brian Dolan, chief currency strategist at Forex.com.

In early August, the franc's sharp rise prompted the Swiss National Bank to step in to try and cool the rally.

The Zurich-based central bank cut interest rates to "as close to zero as possible" and boosted the supply of Swiss francs to money markets.

At the time, the bank said it considers the franc to be "massively overvalued," and that its strength "is threatening the development of the economy and increasing the downside risks to price stability in Switzerland."

Not that much has changed. The currency is still very strong, but the brief weakness in August might have given the central bank pause.

The Swiss National Bank "still has plenty of options" to control appreciation, Dolan said.

The bank could levy a tax on foreign deposits, making it more expensive for investors to hold francs. Or the bank could move to negative interest rates.

"The Swiss need to be continually applying pressure on markets to prevent another surge," Dolan said. "The more they step back, the more investors will move back into the franc."

Louise Yamada: Critical Levels to Watch on Gold & Silver

With gold and silver still consolidating longer-term gains, today King World News interviewed legendary technical analyst Louise Yamada to see where things are heading from here. When asked about the recent action in the gold market Yamada responded, “On the initial pullback, gold held above $1,700 and I think that’s important. I would like to see gold continue to consolidate here, it would be healthy if it would just do some backing and filling. I think this is healthy action, but I want gold to continue to hold above those lows. I would not like to see us have a rollover at this point that goes below $1,750.”

Louise Yamada continues: (more)

The Price Of Weed in the US

Its a slow holiday week, and with the end of August on us, we can have a little fun with the maps below from floatingsheep. They have mapped the price variants of marijuana across the country. Yellow = more expensive, Darker green = lower price. (There are no controls indicated for quality of product or THC density).

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A Caveat: The analysis was based on data from the Price of Weed, a user-managed source that tries to paint a geographic picture of ganja cost. We can assume the folks who use that site perhaps might not always be the most reliable sources.

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Source:
Price of Weed Flowing Data, August 29, 2011