Chris Kuflik - ScotiaMcLeod Montreal

Although in Canada we have been relatively insulated from some of the worse banking practices in the U.S., nevertheless we cannot always remain unaffected by them. So it is that a new rule change in Washington may indicate some weakness for Canadian bank share prices even though our financial institutions are much healthier.

As mentioned in a previous commentary, we should expect a new series of mortgage losses in the U.S. moving into 2010 based on scheduled resets for Alt-A and Option ARM mortgages. The large majority of these mortgages have not yet been modified. The Center for Responsible Lending south of the border predicts the number of foreclosures to triple over the next four years, totalling over eight million. Even a third of borrowers whose mortgages were restructured over the last half-year have re-defaulted, and the proportion rises to over half if we go back another two months.

Recently a client asked me why my recent writings seem bearish. Although I do not believe, given current information, that we will revisit the lows of March 2009, nevertheless I do see many problems that could cause a correction of 10% or more in the future. Markets can continue to rise, andvaluations can continue to expand. Indeed, over the last week, some of the market’s technicalindicators have reversed and turned positive again. However, if the global economy does not grow sharply, then the correction could be greater in proportion to how much longer and higher the markets continue to rise.

Lately speculators have been borrowing dollars at low interest rates to purchase stocks and bonds, then emerging markets, commodities and even gold to earn a profit, since everything is going up against the greenback. This is called the ‘carry trade’, and it is very similar to what happened in the late 1990s, except that then the currency of choice was the Japanese yen.