Econowatch

THE GOOD NEWS

Shop therapy

Canadian retail sales edged higher in March for a third consecutive month—gaining 0.3 per cent. The improvement was driven, surprisingly, by rising sales of automobiles and rising food prices. All this is welcome news, but sales are still almost five per cent below where they were last year at this time, and America’s retail sector suffered a setback in April, so much will be riding on next month’s retail report from Statistics Canada.

Clear eyes, full hearts

U.S. consumers are feeling much better, thank you very much. The Conference Board’s confidence index surged to 54.9 in May, double where it was in March.

Inflation? In check.

Consumer prices rose a modest 0.4 per cent last month. Falling oil prices helped keep the lid on inflation, meaning the Bank of Canada has plenty of leeway to leave interest rates parked at rock bottom for the rest of the year.

Leading where?

The Conference Board’s index of leading economic indicators reversed an almost year-long decline in April. It wasn’t a surge by any means, but it marked the first sign of actual improvement in the economy since last June. The Canadian index lags the U.S. by a month, so it was no surprise that the March reading was still negative (down 1.1 per cent), but the descent is at least slowing.

THE BAD NEWS

The end of cheap oil

Don’t get used to the relatively modest prices for gas and heating oil—the International Energy Agency warns that we’re headed for a sharp spike in prices, right about the time the economy is getting back on its feet. Falling prices have slashed energy investment (in drilling, development and exploration) by US$170 billion—cutting expected production by about two million barrels per day in 2012. And so, in a couple of years, just when global demand is recovering, you can expect a supply shortage, sending prices sharply higher.

Housing horrors

The pace of new home construction in Canada declined by a surprisingly dismal 12.8 per cent last month, meaning the construction industry is now operating at its lowest level since January 1959. Analysts had been expecting a decent gain, but were sorely disappointed. Eventually, this lack of building will help drive up prices, but for now, it just means a lot of tradespeople are out of work.

Still jobless

Weekly claims for jobless benefits in the U.S. fell to 631,000 last week. The number of mass layoffs (firings of 50 or more people at once) also dropped to 2,712—affecting 271,226 people. Fewer jobless claims, fewer mass firings? That’s good news isn’t it? No . . . Those numbers are still astoundingly high. The flood waters may have crested, but a lot of people are still drowning.

SIGNS OF THE TIMES

• It seems those foreclosure tours aren’t quite the draw that some had hoped. International tourists are not lining up to take bus rides through half-empty subdivisions to view America’s economic carnage up close. The U.S. Commerce Department is projecting an eight per cent drop in travel to the U.S. this year. Truth is, nobody has much spare cash, so Amtrak is slashing fares by as much as 25 per cent for the summer in hopes of encouraging domestic travel.
• When the going gets tough, the tough call their lawyers. This week Sara Lee, maker of Ball Park franks, sued Kraft, maker of Oscar Mayer hot dogs, over the latter’s claim that it makes the best-tasting wieners. False advertising, says Sara Lee, because it thinks its hot dogs taste best, and besides Oscar Mayer wieners aren’t “100 per cent pure beef” as claimed. Chances are, this case is going to reveal way too much information about the humble tube steak.
• According to the New York Post, Playboy is for sale, but no one has yet stepped up to acquire the iconic-but-fading brand because the price is way too high. It’s believed it would require a bid of US$300 million to convince founder Hugh Hefner to give up control, but the company’s stock is valued at roughly a third of that.
• Entrepreneur magazine is facing a US$178-million class action lawsuit from 87 readers over a bad stock endorsement. The magazine included Agape World on its “Hot 100” list of up-and-coming companies. A little while later, it was revealed that Agape was a Ponzi scheme and investors lost their money.

LATEST INTELLIGENCE

The price of gold hit a two-month high this week, cresting above US$954 per ounce. Gold has been a rare safe haven through the market storm, more than doubling in value over the past five years. But as the price closes in on the US$1,000 level, on fears about a weakening U.S. greenback and rampant inflation ahead, traders are once again debating whether this surge will last.

“Once the Fed leaves the game, it’s going to be calamitous. Investors can profit by shorting the dollar and U.S. Treasuries. Going forward gold will be the major beneficiary.”—Ken Windheim, founder of hedge fund firm Strategic Fixed Income LLC
“The level of fear is going to pale in comparison to earlier fear and we’re going to see the value of gold go up significantly. It’ll be a hard crash that’ll drop past the lows we experienced last fall and it’ll really shake people up.”—Dan Deighan, founder and president, Deighan Financial Advisors

“The fact equity markets appear to have stalled and inflation fears are on the increase should give gold increased upward momentum.” — James Moore, an analyst at TheBullionDesk.com in London

“To me, the most surprising aspect of this current crisis is that gold prices didn’t rally to extreme levels. If you had told me before about the type of crisis that was about to unfold, I’d have thought gold would have hit $2,000 an ounce.”— Joel Crane, vice-president of global commodities research at Deutsche Bank

“There has been a seismic shift away from capital appreciation toward wealth preservation and we believe this trend will define investment behaviour in the next decade.”—Aram Shishmanian, chief executive of the World Gold Council

THE WEEK AHEAD

Thursday, May 28: The major Canadian banks will begin reporting quarterly earnings, with CIBC, Scotiabank and TD up first. Investors are awaiting word on whether dividends will be maintained.

Friday, May 29: The U.S. will report gross domestic product for the first quarter, with a decline of 5.6 per cent expected. Canada will report GDP for the first three months of the year on Monday.

Monday, June 1: U.S. authorities will report on the number of personal and business bankruptcies in the first quarter.