Friday, October 1, 2010

Newsflash: Canadian GDP Slowing!

At the same time we close the books on the best September for the markets since the Great Depression, we get word that Canadian GDP slowed in July.  Now, I am the first to admit that one month does not a trend make.  What strikes me most, however, is how the two can occur in the news at the same time.  I have been unable to justify to myself, the lofty returns of the TSX since around the time of the "flash crash" back in May.  I was beginning to wonder if everyone knew something I didn't.  Now, the floor that was propelling us upward seems to have dropped away from beneath us.

Imagine my surprise that nobody seemed to take into account that things would slow down after the introduction of the HST in BC and Ontario.  Who would have thought that people would try to spend their money on products and services ahead of the introduction of a new tax, pulling demand forward?  And, who could have predicted the implementation of the new taxes would slow down an already damaged economy?

There's more.  Look at the sectors that slowed the most.  Manufacturing, retail, construction and forestry all posted declines.  Can we guess why?  Could it be the result of problems in the economy of our single largest trading partner to the south?  Who could have predicted that?

How big are these sectors when it comes to providing Canadians with employment?  What does that say about our economy going forward, the taxes our governments were planning on collecting to cover deficits?

Anyone who has heard of a Price/Earnings ratio knows the relationship between growth and price.  The price of a share divided by the earnings per share gives us a number.  Said another way, the earnings per share multiplied by that number results in a price for a share.  That multiplier number is directly correlated to the growth rate of the company.  The faster the company is growing, the bigger the multiplier.  The growth rates of companies in Canada are usually highly correlated to the growth rate of the country's GDP.  If our countries GDP is slowing, the multiplier number used to determine the price of companies' shares will shrink.  When prices drop, the market contracts.

It would appear the market is headed in one direction while the economy may be headed in the opposite one.  The situation has to resolve itself, as the two can not continue to oppose one another for very long.  My guess is it ends up poorly for the market.  If we had only known!

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