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Market Commentary to August 31, 2009 Sept. 1, 2009

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Canada's economy fell at an annualized rate of 3.7% in the last quarter of 2008. In the first quarter of the year it plunged 6.1% — the worst quarterly decline in the past 50 years. The rate of contraction slowed in the second quarter, to 3.4%. After 10 consecutive months of decline, Canada's gross domestic product showed a glimmer of hope in June with a 0.1% rise in GDP and there is a lot of evidence that growth has continued into July and August.

It has been the longest and deepest recession since the Second World War, with 2.3% trimmed from the world’s real GDP in 2009. But, according to a forecast by IHS Global Insight, 2010 will see real GDP grow by 2.4%, accelerating to 3.4% in 2011.

The global contraction stabilized in the spring as declines in the U.S. and Western Europe slowed and emerging Asian economies posted strong growth.

"Massive inventory liquidations in the first half of 2009 have set the stage for rebounds in global production and trade," wrote IHS Global Insight's chief economist, Nariman Behravesh, and economist Sara Johnson. "Financial markets have stabilized, and investors' appetite for risk is returning, although credit will remain relatively tight as banks rebuild their capital positions."

Recovery will not be balanced across the world, however, and the think tank says major economies in western and emerging Europe will lag the rapid growth of emerging Asian markets.

In both Europe and the U.S., consumers are expected to tackle their own debt problems before rebuilding their assets through savings, and this reluctance to invest capital could pose a risk to the speed of the recovery.

"There is a risk that the recovery in some countries could lose steam in the next couple of quarters," wrote Behravesh and Johnson. "The fiscal stimulus measures in many countries are temporary. Once these effects wear off, sustained recovery will depend on a rebound in consumer spending, housing and business fixed investment in the key economies of the world."

Three months after the stabilization has begun, the market has typically moved up by about 20% off its bottom. Granted this was a much deeper bottom than most, but the fact that many equity markets are currently up, close to 50% off their March bottom, may indicate a period of time lies ahead where the markets will “tread water” or consolidate.

Trim Tabs Investment Research indicates that August ’09 saw the highest level of insider selling since May of ’08. (Trim Tabs' data on insider transactions is based on daily filings of Form 4, which corporate officers, directors, and major holders are required to file with the Securities and Exchange Commission.) This negative impact is being offset by a significant decrease in shorts (people selling stocks betting they can buy them back at a lower price), and shorter-term individual investors borrowing at low interest rates to invest more into the market.

UPDATE ON PREVIOUS RECOMMEDATION:

Those that acted on my February 4th, 2009 recommendation to purchase the Canadian bank common shares have enjoyed returns of up to 80% since that recommendation! The preferred shares that I recommended are also up significantly and have locked-in a very attractive and tax efficient income for the next five years!

THE SWEET SPOT

While there are no opportunities for attractive returns in the area of short-term cashable investments, and there may be a few weeks or months before the market for growth-oriented investments resume their upward movement, the current opportunity for attractive returns rests in the preferred share market. Retractable preferred shares provide tax-efficient income (NOT growth) and a fixed maturity date and value. Retired individuals and those within 3 years of being retired with funds available for investing should be working with us to identify attractive preferred shares. We are currently purchasing high quality preferred shares that are 3 to 5 years from their maturity and offer interest-equivalent yields more than double that of GICs of equivalent term.

If you have any questions about the information presented above, we welcome your call.