Equity Strategy October 12, 2007:          

North American equity markets appear to be willing to overlook the credit problems and have instead focused on the potential for more Federal Reserve interest rate cuts. I think the market bullishness will be short lived the reality of a slowing economy will prove to be too much for the market to bear. Economic data released over the past couple weeks has been less bearish than expected, this is should not be a surprise as the information tends to be old news by the time it is released.

Investors should really be focused on the potential for the economy over the next 6 – 12 months and that time frame does not look very attractive. The Canadian dollar remains at historically high levels and it does not look like it will weaken substantially any time soon. The damage this last surge to parity will have on the export and manufacturing sectors will not be fully felt for a few months but it will certainly not be positive. The manufacturing sector is has been hurting for over two yeas as the dollar relentlessly moved higher.

The impact of high interest rates and a stronger currency will slow the economy over the next few months and that will impact the profitability of Canadian corporations. If investors start to realize that profitability is falling the market will get hit and the sell off is likely to be severe, due to stretched valuations currently.

The technology sector has been showing a considerable amount of strength over the past month or two as investors do not see any direct link to sub prime mortgages. The strength in the technology sector does not have any longevity as this sector will be heavily influenced by any slowing in consumer spending in the coming months. The consumer has been turning to higher cost credit as a means of maintaining lifestyle but that can only last for so long before the costs pile up and stop the spending.

I still see value in some of the commodity sectors such as uranium which is not nearly as dependent on the short term economic fundamentals, but is being driven by a long term shortage of supply in an expanding consumption situation. The global supply of uranium is not meeting the current demand and this will become a larger problem as new nuclear plants come on stream. Demand is forecast to consistently increase over the coming years while supply is nit likely to expand as rapidly causing prices to continue to rise. Companies such as Cameco (CCO-T), Denison (DML-T) and Uranium One (UUU-T) have excellent long term potential for growth.