Wednesday Night #1332 – Jacques Clément Report

12 September 2007

U.S.
Since its record of over 14,000 on July 19, the Dow Jones has lost 750 points with the collapse of the U.S. subprime housing market, followed by the credit crunch. Mortgage delinquencies and foreclosures (up 93% y/y in July) reached a record high with 36% of mortgage loans in late payments. Over 100 mortgage operations have halted their operations worldwide; worldwide there is over $891 billion asset-backed commercial paper at risk.
Housing prices have declined for the first time since the Depression and will go down further. Housing starts in July tumbled to the lowest level in 10 years; house sales in the second quarter were at a 5-year low. There is nearly 9 months of supply of houses in the market. Two million home foreclosures are expected to be filed this year. Sales of existing houses declined in July for the fifth consecutive monthly decline. Bad loans with U.S. banks have increased by 51% – the largest increase in 16 years. Subprime mortgages account for 20% of U.S. home loans. These loans were made at 8-10% versus the market rate of 6%. There are two million adjustable rate mortgages (ARMs) including $400 billion of subprime loans scheduled for rate adjustment of 30% or more by the end of next year. The housing slump has already affected the US. Economy: employment (August) was negative for the first time in 4 years; consumer spending and confidence are waning. Consumer credit growth has abated substantially. The services sector has flattened.
The Beige Book has called for limited growth in the near term. The manufacturing sector has slowed down significantly since June, particularly new orders. Capacity utilization has flattened at under 82%. Auto sales are the slowest in 9 years. Production is being curtailed; construction spending is 2.5% for the year. With personal consumption expenditures deflator under 2%, there is increasing talk of … recession and financial market turmoil. The Fed is likely to cut its Fed Fund rate by ½ to 4¾ on September 18 and to leave its discount rate unchanged.

Canada
Since July 19, the TSX has lost 869 points as the U.S. subprime mortgage market created havoc in the $35 billion non-bank mortgage backed commercial paper (or Asset backed Commercial Paper – ABCP) market. The total Canadian mortgage-backed commercial paper market is over $16 billion.
The economy has remained very strong with a second quarter growth of 3.4% after 3.7% in the first quarter. Employment has remained strong with nearly 24,000 new jobs created (August) and 6% unemployment remaining at a 30-year low. Exports have recovered in July (+1.5%) and very strong imports (3.5%), indicating strong domestic demand.
The housing sector remains strong with a rise of over 5% in August housing starts, and expected existing house sales rising by over 8% this year, and prices by 10.5%. Retails sales in the second quarter were the highest in almost six years. July manufacturing shipments are expected to rise by 1% when figures are published on Friday.
Bank of Canada kept its overnight rate steady at 4½ despite core inflation at 2.3 above the inflation target and despite the economy operating further above its production potential as domestic demand remained robust. But recent developments in financial markets have led to some tightening of credit conditions for Canadian borrowers, which should temper growth in domestic demand. Despite receding commodity prices (particularly metals: copper, zinc, nickel and aluminum, these four metals down an average of over 7% for September to date and 12½ for year-to-date) crude oil has risen $4, trading at a new record of over US$80, and gold has risen to over US$721, pushing the Canadian dollar to its 30-year high of over 96 cents on July 19.

Near Term Trading Outlook

Canadian dollar: 96¢ U.S. – 97¢ U.S.

Euro: $1.38. U.S. – $1.39 U.S.

Crude: $79.00 – $81.00

Gold: $720.00 U.S. – $730.00 U.S.

T.S.X. 13,700 – 13,900

Dow-Jones: 13,300 – 13,500