1. Short-term stock market trends
In the previous edition we analyzed this rare phenomenon of massive U.S. bond (10-30 years
maturity) price declines. The crash of what is considered considered safer investments could
have triggered devastating spillover effect on stock and precious metals and base metals oil
prices etc..This direct relationship is usually observed when economists expect sudden changes
in inflation. A significant increase in inflation would ‘force” the hand of the Fedto raise short term
interest rates. But this scenario did not materialize. This is evidence that participants in financial
markets have no fear of inflation.It’s just that they no longer consider interesting the decision to
"lend" the government money (negotiable bonds) over a period of 30 years at 2.65% (Canadian)
rates. These bonds were interesting as long as the problems in Europe had the potentialof
slowing the economies of Asia and America. However this slowingeconomies scenario is not
unfolding. Consequently we can expect a continuation of the flows of money out of bonds. The
sale of bonds is likely to push yields on 30 years treasuries beyond the historical average of
4.50%. This means a further decrease in bond prices much larger than those recorded since
early October 2011. What are the implications for the world bourses of this significant shift? One
can expect all the liquidities resulting from sale of fixed income portfolios to be redirected into
equities and commoditiesas investors rebalance their portfolios. Consequently the chart below
that displays the level of the Dow Jones Industrial index against 30 years bond prices will
continue the divergence that started in the first week of October 2011. In fact chances are this
divergence will most likely accelerate at a rate of growth - well above historical norms.
As a result it is reasonable to expect that the main Canadian index the S & P TSX Canadian will
appreciate 7-13% in the next 6 months. The only obstacle that would halt this significant
impending rise in stock prices would be an accelerationin the number of new jobs created in the
U.S..This possiblereality would revive fears of inflation and drive change of central bank policy
of easy money well ahead of expectations (2014). In this respect it is important to follow the
U.S. Bureau of Labor Statistics figures of March which will be released in the first week of April.
In terms of specific stocks we can expect a resumption of the bull market dynamics at a rate that
will symmetrically mirror the decline in bond prices. Bank stock prices i.e. RBC,

2. Scotia,andresource stocks like Agnico Eagle, Suncor Energy, Potash can be expected torise to
new post 2008 highs. Of note is a specific basic materials sector raising enormous interest
namely graphite. This previously boring natural resourceis inflaming the imagination of
investors. Whygraphite and why now? Two Russian scientists. Andrei Geim and Konstantin
Novoselov received the Nobel Prize in 2010 for research work on graphene. Graphene is made
from large flakes high concentration of Carbon (>94%) and it is the thinnest and most resistant
of all known materials. In addition electrical superconductivity properties makes it increasingly
present in electronic industry products like semiconductors. All these new applications have led
to higher demand and a tripling in the price of graphite in the last 7 years. As such the U.S.and
the European Union added graphite to the list of basic materials at dangerously low level of
reserves.Some graphite companies of note are: Focus Metals, Northern Graphite, Zimtu
Capital, Flinders. What is interesting is that significant graphite deposits have been discovered
in our back yard- Quebec located in the Grenville Laurentide corridor. Until next edition, I wish
you profitable decisions.