A Nickel Back Jeff Rubin Chief Economist and Chief Strategist - - PowerPoint PPT Presentation

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A Nickel Back Jeff Rubin Chief Economist and Chief Strategist - - PowerPoint PPT Presentation

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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

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SLIDE 1

A Nickel Back

Jeff Rubin Chief Economist and Chief Strategist Economics & Strategy

October 2007

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SLIDE 2

Stock Market Correction Well Within Context of a Bull Market

5000 7000 9000 11000 13000 15000 Jan-00 Jul-01 Jan-03 Aug-04 Feb-06 Sep-07 TSX: Serious But Not Unprecedented Setback

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SLIDE 3

But Contagion Evident in Credit Markets

100 200 300 400 500 600 700 800 Jan- 00 Feb- 99 Apr- 00 Jun- 01 Aug- 02 Oct- 03 Nov- 04 Jan- 06 Mar- 07 A-rated B-rated spread vs 10-yr Treasury (bps) LTC M/ Russian Default 2000 Recession Enron, Worldcom Bankruptcies Ford, GM Downgrades Subprime Shock

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SLIDE 4

Painful Mortgage Resets Still Ahead

10 20 30 40 50 60 07 08 09

$bn Rate Reset Will Peak in Late 2007 ...

Alt.A 10% Prime 18% Sub- prime 72%

… And Most of it is Subprime

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SLIDE 5

Global Private Equity Deals Falling Off the Cliff

20 40 60 80 100 120 140 160 180 J a n

  • 6

M a r

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M a y

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J u l

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S e p

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N

  • v
  • 6

J a n

  • 7

M a r

  • 7

M a y

  • 7

J u l

  • 7

$Bn

  • nly

$17.8 bn in Aug.

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SLIDE 6

Rising Bank Funding Costs Prompted Fed Easing

5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 4

  • J

u n 2 2

  • J

u n 1

  • J

u l 2 8

  • J

u l 1 5

  • A

u g 2

  • S

e p 2

  • S

e p 8

  • O

c t

% U.S. (3-Mon. LIBOR)

  • 15 bps since July

4.3 4.4 4.5 4.6 4.7 4.8 4.9 5.0 5.1 4

  • J

u n 2 2

  • J

u n 1

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u l 2 8

  • J

u l 1 5

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u g 2

  • S

e p 2

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e p 8

  • O

c t % Canada (3-Mon. CDOR)

+15 bps since July

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SLIDE 7

Umbilical Cord Between Canada & US Severed

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 1961- 1970 1971- 1975 1975- 1982 1983- 1991 1991- 2001 2002- 2007 C orrelation btw C dn & US Real GDP Growth Note: Date ranges refer to US business cycles

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SLIDE 8

Domestic Demand Much Stronger in Canada

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 03:4 04:2 04:4 05:2 05:4 06:2 06:4 07:2 C anada US Final Domestic Demand, Yr/Yr % C hg

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SLIDE 9

Housing Market Indicators – Canada vs US

9 9 10

  • 25
  • 9
  • 1
  • 30
  • 25
  • 20
  • 15
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5 10 15 20 Starts Resales New Existing C anada US Activity Level Prices

Year-to-date % chg

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SLIDE 10

Subprime Mortgage Market Much Smaller in Canada

5 10 15 20 25 2001 02 03 04 05 06 US C anada

Subprime Share of Originations, %

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SLIDE 11

A Nickel Back by the End of 2008

60 65 70 75 80 85 90 95 100 105 110 51 58 65 72 79 86 93 00 07 US¢/C $ Aug 1957 Peak 106.1 Apr 1974 Peak 104.4 2nd Half 08 Peak 105.0

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SLIDE 12

Terms of Trade

10 20 30 40 50 60 2001 2002 2003 2004 2005 2006 2007 Barrels of Oil to Buy Entry-Level Personal Computer

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SLIDE 13

Factory Share of GDP Hitting Past Recession Lows

14 15 16 17 18 19 20 21 1962 67 72 77 82 87 92 97 02 07 Mfg Share of Real GDP, %

Shading denotes severe N.A. recessions

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SLIDE 14

Even Goods Employment Unscathed by Factory Job Losses

Agriculture Utilities Oth Serv Transptn Pub Admin Resources M gmt/Admin Food/Accmdn Info/Rec Prof/Sci/Tech FIRE Education Health Trade Construction M anufacturing

  • 400
  • 200

200 400

Goods Industry Services Industry

Job Creation Vs End '02, 000s

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SLIDE 15

Energy Replaces Autos in Trade Surplus

  • 10

10 20 30 40 50 60 70 87 89 91 93 95 97 99 01 03 05 07YTD Energy Autos Trade Surplus, $billions (AR)

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SLIDE 16

Global Growth Strongest in Decades

1 2 3 4 5 6 7 8 71 74 77 80 83 86 89 92 95 98 01 04 07 World Real GDP avg 3-yr growth rate (%) 1971-73 5.6% 2004-06 5.0%

Source: IMF historical data & forecast

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SLIDE 17

US Not Driving Global Economy

Other 31% Oil Exporters* 10% China 30% US 12%

% of World GDP Growth, 2004-07 Developing Asia ex-C hina 17%

*OPEC, Russia & Mexico

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SLIDE 18

TSX Mostly Levered To Global Growth

  • 30
  • 20
  • 10

10 20 30 40 1 9 8 6 1 9 8 9 1 9 9 2 1 9 9 5 1 9 9 8 2 1 2 4 2 7 F 1 2 3 4 5 6 S&P TSX (L) World Real GDP (R) y/y % chg (avg of monthly closes) y/y % chg

0.1 0.2 0.3 0.4 0.5 0.6 C dn Real GDP World Real GDP 1986-2006, correlation with TSX

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SLIDE 19

TSX to Hit 16,200 by End of 2008

2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 Mar-02 Jan-04 Dec-05 Nov-07 5 10 15 20 25 30 35 40 02 03 04 05 06 07 08 Avg growth, last 20 years = +8% % chg

Earnings Growth TSX Composite

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SLIDE 20

Oil Prices Heading for $100 per Barrel

2 4 6 8 10 12 14 01:Q2 02:Q3 03:Q4 05:Q1 06:Q2 07:Q3 08:Q4 20 40 60 80 100 120 Natural Gas (Henry), (L) West Texas Crude (R)

Fcst $/Mn Btu $/bbl

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SLIDE 21

Two Very Different Consumption Trends

  • 2

2 4 6 8 1995 97 99 01 03 2005 07 09 OEC D Non-OEC D % chg in oil consumption

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SLIDE 22

Developing World Demand to Exceed OECD Demand Within a Decade

10 20 30 40 50 60 70 1995 2000 2005 2010 2015 2020 OEC D Non-OEC D Oil Demand, Mn bbl/day Forecast 4.0% annual growth

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SLIDE 23

Oil Consumption in Oil-Producing Countries

1 2 3 4 5 6 7 8 Kuwait Saudi Arabia Iran OEC D World annual % chg in oil demand, 2001-2006 Source: BP, IEA

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SLIDE 24

Big Price Subsidies in Many Oil-Producing Countries

2 4 6 8 10 Venezuela Iran Saudi Arabia Kuwait Nigeria Mexico Russia US C anada Median - 44 countries Germany UK Norway Retail gasoline prices, US$/gal.

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SLIDE 25

Oil Producers Now Second Largest Oil Market

0.0 5.0 10.0 15.0 20.0 25.0 U S O i l E c

  • n
  • m

i e s * W . E u r

  • p

e C h i n a J a p a n *OPEC, Russia & Mexico mn bbl./day

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SLIDE 26

Declining Export Capacity

  • f OPEC, Mexico and Russia
  • 3
  • 2
  • 1

1 2 3 4 5 1995-2000 2000-06 2006-10 OPEC Mexico Russia chg in daily exports, Mn bbl. Forecast

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SLIDE 27

Canadian Oil Sands Production to be Single Largest Source of New Supply

  • 0.5

0.0 0.5 1.0 1.5 2006-08 2009-2012 C onventional Deepwater Alberta Oil Sands Yearly capacity growth, mn bbl/day

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SLIDE 28

Over 50% of Investable Reserves in Canada

US 6% Nigeria 11% C anada 52% Other Open 20% "Investable" oil reserves=those not off limits due to restrictive foreign investment policies. Also excludes Iraq. Source: Oil & Gas Journal (2007), CIBC Norway 2% Kazakhstan 9%