The market is at extremes

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After going without a television for about a year, we finally broke down and got satellite recently. My two boys enjoy watching the channel with all of the extreme sports. Of course, I enjoy watching the business channel, which these days also seems to be full of extremes.

Everyone knows that the economy and markets move up and down and go through cycles. I'm not sure whether it is my imagination or not, but it seems like many areas of the financial world are hitting either record highs or lows lately. Every day I am seeing extremes, anomalies and trends of divergence. In a few rare cases, they may be somewhat lasting trends, but for the most part they will eventually correct themselves.

Here are some of the extreme financial conditions:

– Although gold is presently around $900/oz, it was recently at record highs of over $1,000/oz.

– Oil keeps hitting record highs, most recently seen in the neighbourhood of $120 per barrel. Chief economist of CIBC World Markets, Jeffrey Rubin, projected oil would average $150 by 2010 and more than $200 by 2012. I'm not sure if I agree, but $120 is still twice what it was trading at less than six months ago.

– It's not just oil and gold. Most other resources and commodities are either trading at all-time highs or have touched highs this year.

– One of the hottest areas in the markets lately has been agricultural stocks. The largest company on the S&P/TSX right now happens to be a fertilizer company from Saskatchewan (Potash). I would call that extreme.

– Wal-Mart recently had to put restrictions on purchases of rice due to a perceived shortage and escalating world rice prices. World food shortages are growing due to the increased prices.

– Despite the climbing resource prices, inflation in Canada remains at 1.4 per cent.

– Meanwhile, China's economy is growing at double-digit rates and is worried about runaway inflation.

– After 30 years of a stronger U.S. dollar, we saw the loonie reach and exceed par this year.

– We are seeing a recession in Ontario and a boom in Alberta.

– We are seeing the U.S. with huge deficits, debt and stimulus packages. Meanwhile, in Canada, we are arguing about how to spend our surplus and whether or not we are paying down the debt too aggressively.

– Canadian unemployment rates have touched 5.8 per cent this year, a comparatively low number.

– U.S. government five-year and 10-year bonds only pay 3.11 per cent and 3.83 per cent. Short-term U.S. bonds actually trade at a negative real rate of return after inflation.

– Sovereign wealth funds from places like Singapore and Saudia Arabia are buying up (and helping to bail out) troubled U.S. banks.

– Canadian banks are trading as some of the lowest price/earnings multiples they have seen in several years.

– Preferred shares are defying logic by becoming cheaper even though interest rates have generally declined.

– U.S. credit spreads have widened to exaggerated levels and the U.S. housing market has dropped by drastic proportions. At the end of 2007, 15 per cent of U.S. homeowners had a mortgage that was greater than the value of their home.

– There is talk and some evidence that the U.S. economy and markets are "decoupling" from other world markets. There is some truth to this, but not completely. As emerging markets like China, India, Brazil and Russia have grown, the world has become less dependent on U.S. growth. There is no question though that the U.S. is still a major influence.

The opinions expressed are those of the author and may not necessarily be those of Berkshire Securities Inc., Member CIPF. Greg MacPherson, BBA CFP, FMA, CSA, FCSI is a financial advisor in the Woodstock branch. Contact his office with questions or to book a free appointment at 328-8889.