World markets are back in testing mode today. We are watching carefully to see how they fare. As of 1pm the TSX at 7845 is some 121 points above its previous all time closing low this cycle of 7724 on November 20, 2008. One would expect buying pressure to kick in strongly in this area; if it is able. If there is a big bounce again off the Nov 20 low that would be constructive and may suggest we have found at least an interim bottom this cycle.
The big wild card here is how much more forced selling we will see from funds and levered players having to raise cash by year end. If the Nov 20 lows are breached, then we are back searching for the next bottom of this downturn.
Our worse case scenario still has its eye on the 2002 lows for the TSX of 5678. That is still 2167 points below where we are trading today and would be a big 62% below the cycle peak last summer of 15200 on the TSX. That would admittedly be one “bad-ass” bear market. Having already fallen 48% to date from its peak, hopefully the TSX won’t go all the way back to its 2002 low. Although this same hope was recently dashed in the US markets as the S&P and Dow broke through to their previous cycle lows, erasing 100% of the price gains they had made since the last expansion began in 2002. At this point we can still hope that Canada can avoid the ’02 re-test. But that may be a low-probability hope at this point.
Our worst case scenario (as I have said for some time) is that the lows this contraction could actually break below the 2002 market lows. I know- that is a horrible thought for people who are risk-exposed here. Only time will tell for sure how deeply the market will discount this worst global economic recession since the Second World War. Markets are mean-reverting things and they have a nasty habit of over-correcting below their longer term average in order to correct for the over-shoot they delivered to their euphoric peak.
Many factors seem to be driving the re-test here. This morning we got job loss numbers in Canada (-70K) and the US (-533K) that were triple and almost double what the consensus had been expecting. Businesses responding to vaporized consumer demand in the world are presently sacking hundreds of thousands of workers a month.
The emblems of demand-ferocity in the 2002-2007 expansion were of course oil and commodities. Copper today has hit a new cycle low at 1.38 (-65%) from its cycle peak of 3.90 just 6 months ago. From its summer peak of $147 a barrel, WT crude was today trading at $40 and change (a 72% correction), and down more than 20% this week alone. Long term secular support for oil since the 1950’s has been $45 a barrel. The fact that we have now traded below that support reflects a secular shift down in western world consumption rates. The big question is how long this shift down will last.
On the one hand, $40 oil will no doubt prompt higher consumption rates than did triple digit prices. But the number one problem in the western world right now is too much debt. Crippling debt is a handicap on consumption that will last for at least a few years. Even Wall Street and other CEOs are not getting big lump sum bonuses these days. For the most part, existing personal debt will have to be written off through bankruptcy or paid down slowly month after month over time. While governments around the world are desperately trying to infuse liquidity into world markets, the real issue is not yet acknowledged: the consumption culture stoked by mass marketing and credit is no longer viable. Not now. Not for quite a while.
