radio show excerpt on state of economy, May 31

Good Morning…This is Jeff Wareham, ScotiaMcLeod Wealth Advisor, and this is Beyond Funds market weekly for May 31st, 2008.

May 2008 is in the books, and it will go into the record books as a recovery month for 3 of the 4 major North American markets. The Nasdaq, Standard & Poors, and TSX all posted significant gains for the month, and the TSX posted a new record high later in the months, breaking through the psychologically significant level of 15000.

The Dow missed the party, dragged lower by continued losses in major US financials, and a significant, 20 percent drop in shares of General Motors, an index component.

An investor who followed the old adage of “Sell in May and go away” has certainly missed the positive impact of equity market returns this month.

Let’s take a look at global returns and year to date market performance, adjusted to our Canadian currency.

Across the Americas, the NASDAQ lags the field with a year to date return of -4.65%, while the Dow has returned -4.49% and the S&P 500 return is -4.39.

Toronto has fared much better, up 6.37 percent on a year to date basis, even though it has shed 2% from the peak reached earlier this month.

The true superstars of this year’s global market, on a currency adjusted basis, are Mexico’s Bolsa, up 14.89% and Brazil’s Bovespa, which has charged ahead a remarkable 24.53%

Europe, in spite of a strengthened currency, has joined the US on the negative side of the ledger. Every European market is down for the year, although Amsterdam (0.64), and Stockholm (0.41) are ahead slightly on a currency adjusted basis. The European majors have really struggled. The Stoxx 50 is off 8.2%, the FTSE off 6.09%, the CAC 40 off 4.51%,, the DAX is off 5.95%, and the IBEX is off 4.22%. These market returns are even worse without the impact of a six percent gain in the Euro…unadjusted, most are down over 10%.

Asia is flat to down, with the Nikkei off 0.47%, the ASX in Australia off 2.51%, and the Hang Seng is off 11.63%.

Scotia Economics has revised its global outlook this week, and here is some of the relevant commentary…it was entitled Up, Down and Sideways.

p — Our revised energy price outlook now calls for WTI crude oil to average US$125/bbl in 2008, and
$135-140/bbl in 2009. Natural gas prices are expected to average US$11/mmbtu both this year and next.
Changing fundamentals are behind the upward shift in the price of energy, particularly oil. While the
demand for products emanating from developing economies continues to move higher, the global supply of
energy products continues to move lower, reflecting aging production structures.
Accordingly, we have raised our aggregate inflation estimates for most countries through the remainder of
2008 and into 2009. This not only reflects the roughly 30% jump in the price of crude oil just to around
US$130/bbl since the beginning of Q2 alone, but the increasing likelihood that the elevated price of this key
staple will now trigger broader inflationary gains because of its pervasiveness throughout the production
chain for goods and services.
Down — We have lowered our output growth forecasts for 2009 in the United States, Canada, and
internationally as well. The downward revisions largely reflect the lagged fallout from the escalating rise in
the price of energy. Over the forecast period, the dramatically higher prices for crude oil, gasoline, and
other strategic petroleum-based inputs, will ultimately raise production costs, compress profit margins,
reduce investments, and put an added squeeze on discretionary consumer purchases. In the United States,
these trends should become more visible later this year once the temporary effects of the tax rebates work
their way through the economy.
Growth in Canada should essentially perform in line with the modest gains expected in the United States in
2008, led by the continuing buoyancy in the resource-rich sectors that cover virtually every province.
Prospects for Ontario’s large export-centric manufacturing sector have been further cut in response to the
weaker U.S. outlook, and the additional retrenchment in the key auto and housing sectors. A number of
factors, some transitory, helped to drag Q1output into negative growth territory, exaggerating the slowdown
underway. Domestic conditions — including profitability — fundamentally remain in better shape than south
of the border. Moreover, the performance gap between the two countries widens in Canada’s favour in
2009 — an important factor underpinning our stronger Canadian dollar forecast — owing to more
favourable construction, employment, household balance sheet, and fiscal trends.
Although recent results in Japan, the U.K. and the Euro Zone have added to this year’s growth, we have
lowered the outlook for 2009 modestly to reflect the further reduction in U.S. prospects, the continuing
monetary caution in the U.K. and on the continent to rein in higher inflation, and the downturn in selected
housing and consumer spending markets.
Sideways — Renewed inflation concerns have pushed bond yields higher and steepened yield curves
throughout the developed world. Recent guidance by central bankers in the developed countries suggests
that monetary policy, for the most part, will remain on hold through the remainder of 2008. However, we
believe that another bout of U.S. economic weakness later this year will dampen price pressures and
trigger renewed Fed easing that would see the overnight funds rate drop to 1.25% by the end of 09Q1 — a
combined 75 bp reduction from the 2% rate today.
The weaker-than-expected starting point for the Canadian economy in Q1 reinforces our view that the Bank
of Canada will trim the overnight cost of borrowing another 25 bps at its upcoming June 10th rate-setting
meeting. Thereafter, we feel that the Bank of Canada will mirror policy developments in the United States,
preferring to keep its overnight rate at 2.75% through the balance of the year before lowering it again by
50 bps in Q1 to 2.25% as the spillover from the intensifying economic weakness in the United States
becomes more evident domestically.

On a side note, an odd piece of data came to light…US growth has remained positive through the first quarter of the year, while Canadian GDP slipped to the negative. The technical definition of a recession is two periods of negative growth…it would be strange if the US avoided a recession, and Canada had one, with the remarkable psychological strength of our economy, relative to the US.

On a regional note, I was in Newfoundland last weekend, and I must say Ontario took some good spirited ribbing at the fact that Newfoundland was, for the first time, sending transfer payments to Ontario.

After the break, I will share more of my experience in Newfoundland, as I talk further about the opportunity to benefit charity, and your family, by considering a gift of securities in your estate plan.

Stay tuned for segment two of beyond funds market weekly.