You can't grow your economy if you can't grow the revenues

Here is a great summary from Lynn Lewis at Scotia McLeod. You can reach Lynn at: [lynn_lewis "at" scotiamcleod.com]

North American markets have continued to trade in a very tight range this week as we have heard good news and bad news stories. Following some proclamations last week that the recessions for Canada and the U.S. are supposedly over, markets rocketed higher on the expectation that economic growth is going to be strong and sustainable for the rest of 2009.

The TSX Index is getting closer to its recent high from June 10, while U.S. indices have broken through their recent highs since the market downturn last fall. The calls for the end of the recession are based on the technical definition of a recession in that some economists are predicting marginal if not breakeven growth for Canada and the U.S. in Q3; but those economists are also adding the caveat that while growth may return, the recovery will be difficult as unemployment is expected to rise further, home prices may continue to struggle in the U.S. and you'll still have a financial system that is on government assisted life support for some time.

Lynn says, "I add these caveats as they are a warning to us as investors not to get too carried away with how high we take the markets since this is not just an economic downturn we've witnessed, but a financially structural problem that is going to take years to fix."

This does not mean that markets can't appreciate over the next year or so, but it does mean that we should not see the magnitude of appreciation we've witnessed in previous recoveries when the economy expanded but the financial system was in much better condition.

We also saw the U.S. Case-Shiller Home Price Index report for May where a year over year decline of 17.06% was registered. This was better than the 17.9% decline that economists were forecasting, but let me be clear while this number is improving, it is still awful. All in all we are still cautiously optimistic.
General Commentary from Gareth Watson, CFA
An almost US$4.00 per barrel decline in the price of crude oil on Wednesday sent the TSX lower by 115 points or about 1%. The weakness was not contained just to energy but to other commodity prices as rumours continue to come out of China indicating that the Chinese government may be changing loan policy in an attempt to slow the pace of economic growth in an attempt to avoid any type of asset pricing bubbles in the near term.

Since China has basically been the place where everyone is pointing to for growth, any indication of lending restrictions or signs of reduced lending is definitely going to make investors think twice about piling into economically sensitive areas of the market such as oil, gas and base metals. The Energy subsector was easily the weakest on Wednesday followed by Materials and then Financials (even though some Canadian banks finished higher).

In fact only three sectors managed to post gains including Industrials, Consumer Discretionary and Consumer Staples. Wednesday was the second day of triple digit losses for the TSX as investors are realizing that valuations may be too optimistic at this stage of the economic cycle. Today is an exceptionally busy day for corporate earnings in both Canada and the U.S. We've had some companies already report in the U.S. this morning and we continue to see the recent trend of beating on the earnings line but missing on the revenue line which means we can't be too excited about these results as it would appear as though the earnings are being driven more by cost cutting than by revenue growth.

There definitely have been some companies that have beaten expectations on both lines, but there are others do exist where cost cutting appears to have been the theme for the quarter. You can't grow your economy if you can't grow the revenues.