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1st Quarter Review March 31, 2010

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• US to turn bailout into windfall with Citigroup sale. The $25 billion loan is currently valued at $33 billion in Citigroup stock, a current gain of 30% for US taxpayers.
  
  
• Nine of the big US banks have repaid $150 billion of Government loaned funds – 2/3 of what was lent to them under the TARP Program.
  
  
• 27% of all homes purchased in the US in March 2010 were cash purchases with no mortgage.
  
  
• Office vacancy rates are 24.5% in Phoenix, 25% in Plan Beach Florida, and 29.3% in Detroit.
  
  
• Canadian corporate balance sheets are strong. The debt to equity ratio for the non-financial sector is 50% ($1 of debt for every $2 of equity) – compared with 100% fifteen years ago.

Summary:

The first 5 weeks of the quarter saw markets retreat by 4% year-end values and from the heady pace they enjoyed in the final 3 quarters of 2009. By the second week of February, the markets recovered and went higher. While US residential and office real estate are still struggling in many areas of the US, manufacturing, in general, is doing very well and providing crucial support for the economic recovery.

Going forward, many of Canada’s banks have increased their residential mortgage rates, ahead of the anticipated increases from the Bank of Canada and US Federal Reserve later this year. Scotiabank continues to forecast that interest rates will increase by 1% both this year and next. Many economists have increased their forecasts of economic output (GDP) at least once.

According to a Bloomberg survey released last week, 73% of Americans stated that their portfolios had not improved in the last 12 months (i.e., that they had missed the rally). This never-ending sense of the doldrums highlights the current disconnect between Wall Street optimism and main street pessimism. It also explains why many are still chasing fixed income products. With the S&P 500 up 72% since March 9, 2009, we doubt 73% of portfolios (mutual funds, pensions) stayed flat or declined year-over-year. I believe main street perceptions are currently trumped by the lack of tangible positive macro developments. When U.S. employment headlines improve, cash flows into equities may surprise on the upside.