A Nickel Back Jeff Rubin Chief Economist and Chief Strategist October 2007 Economics & Strategy
Stock Market Correction Well Within Context of a Bull Market 15000 13000 TSX: Serious But Not Unprecedented Setback 11000 9000 7000 5000 Jan-00 Jul-01 Jan-03 Aug-04 Feb-06 Sep-07
But Contagion Evident in Credit Markets spread vs 10-yr Treasury (bps) 800 2000 Recession Subprime LTC M/ 700 Shock Russian Default 600 Ford, GM 500 Downgrades Enron, 400 Worldcom Bankruptcies 300 200 100 0 Jan- Feb- Apr- Jun- Aug- Oct- Nov- Jan- Mar- 00 99 00 01 02 03 04 06 07 A-rated B-rated
Painful Mortgage Resets Still Ahead … And Most of it is Subprime Rate Reset Will Peak in Late 2007 ... Sub- 60 $bn prime 72% 50 40 30 20 Alt.A 10 10% 0 Prime 07 08 09 18%
Global Private Equity Deals Falling Off the Cliff 180 $Bn 160 140 120 only 100 $17.8 80 bn in Aug. 60 40 20 0 6 6 7 7 6 6 7 7 6 6 0 0 0 0 0 0 0 0 0 0 - - - - - - - - - - l l n y n y r v r p u u a a a a a a e o J J M M J J M M S N
Rising Bank Funding Costs Prompted Fed Easing Canada (3-Mon. CDOR) U.S. (3-Mon. LIBOR) 5.8 % 5.1 % 5.7 5.0 5.6 4.9 5.5 4.8 +15 bps since July 5.4 4.7 4.6 5.3 4.5 5.2 4.4 -15 bps since July 5.1 4.3 5.0 l l n t n p g p u u c u u u e e J J n n l l O p t u u g p J c J - - A S S u u e u e - - J J - 0 8 O - - - J J S 4 8 - - 2 A S 1 2 2 5 0 - - - 0 8 - 2 - - 4 2 8 1 2 1 2 2 5 0 2 1 2
Umbilical Cord Between Canada & US Severed C orrelation btw C dn & US Real GDP Growth 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 1961- 1971- 1975- 1983- 1991- 2002- 1970 1975 1982 1991 2001 2007 Note: Date ranges refer to US business cycles
Domestic Demand Much Stronger in Canada Final Domestic Demand, Yr/Yr % C hg 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 03:4 04:2 04:4 05:2 05:4 06:2 06:4 07:2 C anada US
Housing Market Indicators – Canada vs US Year-to-date % chg 20 Activity Level Prices 15 10 9 9 10 5 0 0 0 -1 -5 -10 -9 -15 -20 -25 -25 -30 Starts Resales New Existing C anada US
Subprime Mortgage Market Much Smaller in Canada Subprime Share of Originations, % 25 20 15 10 5 0 2001 02 03 04 05 06 US C anada
A Nickel Back by the End of 2008 US¢/C $ 2nd Half 08 Peak Apr 1974 Peak 110 105.0 104.4 105 100 95 90 Aug 1957 85 Peak 80 106.1 75 70 65 60 51 58 65 72 79 86 93 00 07
Terms of Trade Barrels of Oil to Buy 60 Entry-Level Personal Computer 50 40 30 20 10 0 2001 2002 2003 2004 2005 2006 2007
Factory Share of GDP Hitting Past Recession Lows Mfg Share of Real GDP, % 21 20 19 18 17 Shading denotes severe N.A. 16 recessions 15 14 1962 67 72 77 82 87 92 97 02 07
Even Goods Employment Unscathed by Factory Job Losses Construction Trade Goods Industry Health Services Industry Education FIRE Prof/Sci/Tech Info/Rec Food/Accmdn M gmt/Admin Resources Pub Admin Transptn Oth Serv Utilities Job Creation Agriculture Vs End '02, 000s M anufacturing -400 -200 0 200 400
Energy Replaces Autos in Trade Surplus Trade Surplus, $billions (AR) 70 60 50 40 30 20 10 0 -10 87 89 91 93 95 97 99 01 03 05 07YTD Energy Autos
Global Growth Strongest in Decades World Real GDP avg 3-yr growth rate (%) 8 7 2004-06 1971-73 6 5.0% 5.6% 5 4 3 2 1 0 71 74 77 80 83 86 89 92 95 98 01 04 07 Source: IMF historical data & forecast
US Not Driving Global Economy % of World GDP Growth, 2004-07 US 12% Other 31% China 30% Oil Exporters* 10% Developing Asia ex-C hina 17% *OPEC, Russia & Mexico
TSX Mostly Levered To Global Growth 1986-2006, correlation with y/y % chg 40 y/y % chg 6 0.6 TSX (avg of monthly closes) 30 5 0.5 20 4 0.4 10 3 0.3 0 2 -10 0.2 1 -20 0.1 -30 0 F 6 9 2 5 8 1 4 7 8 8 9 9 9 0 0 0 0 9 9 9 9 9 0 0 0 1 1 1 1 1 2 2 2 C dn Real GDP World Real GDP S&P TSX (L) World Real GDP (R)
TSX to Hit 16,200 by End of 2008 Earnings Growth TSX Composite 40 18,000 % chg 16,000 35 14,000 30 12,000 Avg growth, last 25 20 years = +8% 10,000 20 8,000 15 6,000 10 4,000 5 2,000 0 0 Mar-02 Jan-04 Dec-05 Nov-07 02 03 04 05 06 07 08
Oil Prices Heading for $100 per Barrel $/Mn Btu $/bbl 14 120 Fcst 12 100 10 80 8 60 6 40 4 20 2 0 0 01:Q2 02:Q3 03:Q4 05:Q1 06:Q2 07:Q3 08:Q4 Natural Gas (Henry), (L) West Texas Crude (R)
Two Very Different Consumption Trends 8 % chg in oil consumption 6 4 2 0 -2 1995 97 99 01 03 2005 07 09 OEC D Non-OEC D
Developing World Demand to Exceed OECD Demand Within a Decade 70 Oil Demand, Mn bbl/day 60 Forecast 50 40 4.0% annual 30 growth 20 10 0 1995 2000 2005 2010 2015 2020 OEC D Non-OEC D
Oil Consumption in Oil-Producing Countries annual % chg in oil demand, 2001-2006 8 7 6 Source: BP, IEA 5 4 3 2 1 0 Kuwait Saudi Iran OEC D World Arabia
Big Price Subsidies in Many Oil-Producing Countries Norway UK Germany Median - 44 countries C anada US Russia Mexico Nigeria Kuwait Saudi Arabia Iran Venezuela 0 2 4 6 8 10 Retail gasoline prices, US$/gal.
Oil Producers Now Second Largest Oil Market mn bbl./day 25.0 20.0 15.0 *OPEC, Russia & Mexico 10.0 5.0 0.0 S a n e * U a n p s i p o e h a r i C m u J E o n . W o c E l i O
Declining Export Capacity of OPEC, Mexico and Russia chg in daily exports, Mn bbl. 5 Forecast 4 3 2 1 0 -1 -2 -3 1995-2000 2000-06 2006-10 OPEC Mexico Russia
Canadian Oil Sands Production to be Single Largest Source of New Supply Yearly capacity growth, mn bbl/day 1.5 1.0 0.5 0.0 -0.5 2006-08 2009-2012 C onventional Deepwater Alberta Oil Sands
Over 50% of Investable Reserves in Canada "Investable" oil reserves=those not off limits due to restrictive foreign investment policies. Also excludes Iraq. Other Open 20% Norway 2% Kazakhstan 9% C anada 52% US 6% Nigeria 11% Source: Oil & Gas Journal (2007), CIBC
Recommend
More recommend