Will we fall over the edge or ride the wind currents?

Happy New Year!

Nothing like starting the new year with stocks falling off a cliff. Well US stocks at least. Canada has been buffeted by gold, materials, and in the early part of the year, oil.

But now, given the latest job numbers (Canada lost 19,000 jobs over the latest measuring period), analysts are talking slowdown. Correct me if I am wrong, but haven’t US economists been talking about a US slowdown? And the last time I checked, Canada’s economy is still dependent on the US.

A slowdown in Canada should not come as a surprise to anyone. A slowdown will have the greatest impact on the loonie. The jobs report alone knocked a full cent off the value of the Canadian dollar vis-a-vis the US dollar.

In fairness, the reaction was probably overdone. Any employment report is not worth the paper it is written on. And the numbers were not dramatic. More likely, they were a correction of faulty numbers from previous reports. The real issue is the trend, and for that, better gauges are available south of the border.

US retail sales for example, which during Christmas, while not great, were better than expected. Pay attention to comments from the US Federal Reserve. Like the one yesterday, where Chairman Bernanke talked about significant rate cuts. Read that to mean 200 basis points this year! The point is, what happens in the US does not stay in the US. It will affect Canada.

A slowing US economy, means less demand for oil and of greater concern, a slowdown in manufacturing exports, the major driver of economic activity in Central Canada.

How serious you believe this to be, depends on whether the US economy slows, falls into a recession, or worse, enters a period of stagflation. A slowdown means slower growth, not negative growth. A recession implies negative growth for one to three quarters and stagflation is negative growth with inflation.

Stagflation is the worse case, and as I mentioned in my last post, the scenario most likely to drive gold prices significantly higher. It is also the least likely.

A recession, or more likely, a slowdown, will mean lower oil prices, a weaker Canadian dollar (or if you like, a stronger US dollar) and another year of single digit growth in the S&P TSX composite index.

Regardless, we will continue to see a strong labor market. We may lose see some jobs, but c’mon, North American demographics (i.e. so many workers are heading into their retirement years) virtually guarantees low unemployment.

Having said that, and with apologies for continuing to harp on the same theme, in the slow growth / recession scenario banks will lead the recovery. That’s because we are all but guaranteed to see lower interest rates in a slow growth / recession scenario, which should stimulate economic activity, stabilize, and perhaps, even revitalize the housing market. All the above, rekindling loan demand.

Gold will also be one of the better performing sectors this year. Of course, I say that at a time when it has already kick started the performance parade, which is what I talked about in my last post. By the way, if you bought calls on Barrick or Goldcorp, take some profit off the table.

But, gold at US$2,000 an ounce is not a likely scenario. More likely gold will get to US$1,000, which will then lead to a pullback. So, there remains some upside for Canadian gold producers with lots of the yellow stuff in the ground.

Finally, let’s pool our resources and push the Mx to list options on the Horizon BetaPro Funds. This company provides bull and bear ETFs that leverage (usually 2 to 1 leverage) the performance of an underlying index.

What we have with these products is an index based ETF with significant volatility, which leads to higher option premiums. Producing some excellent covered call writing and option buying opportunities. Further most of the BetaPro ETFs have excellent liquidity, which is what MX traders use to offset market making activity.

C’mon MX, let’s get these options listed.