Wednesday Night #1336 Jacques Clément Report

October 10, 2007

U.S.
The Dow Jones reached a record level yesterday at 14,165 a gain of 762 points since the Sept, 18 bold cut of ½% by the Fed on its administered rates, despite crude reaching a record $84.10 U.S. on September 28, a weak economic outlook for the second half and the drying up of private equity and mergers and acquisitions in the third quarter, the lowest in four years. “The Federal Reserve/(F.O.M.C.) minutes published yesterday, indicated unanimity in their decision to lower Fed funds to 4¾% and discount rate to 5¼% as they were worried that a jarring credit crunch would stifle the economy, that the credit crisis and worst housing slump in sixteen years could undermine their economic health. They expressed concern that a weaker economy could worsen the credit crunch and reinforce the economic slowdown. Financial markets were expected to stabilize over time. The cut was appropriate to help offset the effects of tighter financial conditions on the economic outlook. Economic growth is likely to run at a sub-par pace and they expect inflation data on the favourable side.” Employment data have been revised to average, close to 100,000 new jobs per month in the last three months and unemployment rose to 4.7%, a one year high. Personal income and spending rose by 0.4% respectively in August and personal consumption expenditures inflation eased to 1.8% (year/year). The manufacturing sector is weakening with the third consecutive decline in the I.S.M. index, weaker new orders, production, employment, all declining one to two points, but prices were off four points in the index. Factory orders (August), off 3.3% was the largest decline in seven months and durable goods orders off almost 5%. Non-durable goods orders eased 1.6% and non-defense capital goods orders, excluding aircraft, down 0.5%, a good gauge of investment plans. Pending home sales (August) were at record lows, down 6.5% (-22%, year/year) because of high credit costs and lender restrictions. The U.S. dollar weakened to a record Euro $1.42 U.S. on September 26 and is now trading just below $1.41 U.S. The Fed is likely to ease by another ¼% on October 31 to 4½% federal funds rate.

CANADA
At 14, 276, the T.S.X. is now 350 points away from its July 19 record of 14,626 and has recovered 1,427 points since its bottom of August 16, with crude reaching a record $84.10 on September 28 and gold, $754.00, a twenty-eight year high on October 1. Since then crude has lost $3.00 U.S. and gold, $14.00 U.S. The Canadian dollar has traded at a thirty-one year record high of $1.0217 U.S. on October 5 and has eased slightly since. The Canadian economy has remained very strong with 75,000 new jobs created in August-September and an unemployment rate of 5.9%, a thirty-three year low, very strong housing starts (+25% in August-September), building permits 1.4% (August), a fourth consecutive monthly rise, a strong manufacturing sector, particularly in Western Canada, strong consumer spending, business capital investments, a strong non-residential sector, healthy profits and a strong energy sector. With a record currency, exports to the U.S. are likely to remain weak. David Dodge estimates that “the Canadian economy appears to be operating further above its non-inflationary production potential. Domestic demand remains robust. Wages are rising (4.2% hourly earnings year/year, a ten year high). Housing sales and prices are at record pace. The turbulence in financial markets has meant some tightening of credit conditions that should temper growth of domestic demand.” Bank of Canada is likely to remain steady at 4½% overnight rate and 4¾% discount rate at their meeting October 16. Every three years, Bank of Canada, with fifty-three other Central Banks and monetary authorities conduct a survey of foreign exchange activities world-wide. In Canada, the survey is done with eighteen institutions representing 99% of foreign exchange activities. It concluded that there is the equivalent of nearly fifty-four billion dollars U.S. average daily foreign exchange trading, an increase of 11% versus 2004 with just over 95% involving the U.S. dollar. The Canadian dollar was involved in almost 68% of the transactions, the Euro, 11.7%, Sterling for 6.9%, Yen, 5.4%, Mexican Peso, 3.9% the Australian dollar, $3.5% and the Swiss Franc, 2.6%. Other currencies, including the Hong Kong dollar, for 2.5%.

Fourth Quarter Trading Outlook:

Canadian Dollar $1.01U.S. – $1.03 U.S.
Euro $1.41U.S. – $1.43 U.S.
Crude $80.00 U.S. – $85.00 U.S.
Gold $745.00 U.S. – $755.00 U.S.
TSX 14,250 – 14,500
Dow-Jones 14,000 – 14,300