Comments from our Market Strategist: Ed Sollbach

1. The S&P 500 held the key level of 1300 S&P, while gold plunged $50, held, held $1535, and
then gained $28.
The reason markets are finding support is that valuations have become as attractive as at
the market bottoms in 2009 and 2011
The S&P 500 yields 48bps more than US bonds, with yields at about 2.2%, and US bond yields
at 1.72%, about the same as at the market bottoms in 2009, and 2011, and beyond that 1958!
The TSX yields 3.17% versus 1.87% for the Canada ten year: the 130 bps spread is more
then last summer, and the same as at the market bottom in March 2009, and beyond that
WW 2.
Moreover, in 2009, 12% of S&P 500 companies were slashing dividends (on a 6 month basis),
while now only 0.7% are cutting while a record 40% of companies have increased their
dividends over the last 6 months, even with worries about Europe.
Ultimately we believe the US economy will continue to forge ahead despite the mess in
Europe, just like it did in 2010 and 2011. In fact it is benefitting as the flight to safety trade has
brought record low mortgage rates of 3.81%, that are making buying homes through a
mortgage, 19% more affordable then renting on average. Also the $18 fall in oil prices is
increasing US consumer confidence more then worries about Greece, that only affects those
glued to CNBC. As we noted Tuesday, US house prices increased 10.1% in April, the most
since 2005, after home inventories fell to around the long-term average of 6.1 months this winter,
that is associated with RISING prices.
While markets will likely remain volatile until the June 17th Greek election, at least it looks like
an end to the soap opera with Greece is coming, one way or another.
The pro-austerity parties have a slight lead in the polls, but if Greece votes against austerity, then
a Greek exit from the Euro will happen quickly, likely within days. We expect the rest-of Europe
and ECB is already making plans to firewall the rest of Europe from a Greek contagion, and
that a Europe without Greece will ultimately be stronger and more stable. According to the
WSJ, "Senior finance ministry officials from the 17 euro-zone governments have decided to
develop national "contingency" plans should Greece abandon the euro". Investors have had 2
years notice to either sell or write-down their Greek investments.
Ultimately, we believe some of the money that does not trust the Euro, and fears a breakup, will
find its way go to gold, and $1610 and $1650 are the short-term targets.
Having lost faith in paper money, some investors will not want to buy another fiat currency, dollars
or yen, with higher debts then Italy, and worse deficits then Spain.
Gold generally benefits from currency crisis, which is what we saw in 2010, and 2011. Fear in
Europe has been ramped up to extreme levels, with an open bank run in Greece, a Greece exit
from the Euro a 50% possibility in June, depending on election results, and bank runs spreading
to Spain and Italy. The future of the world’s second reserve currency, accounting for 27% of FX
reserves, is in doubt. We view gold as a zero-yielding currency, who’s worth is timeless, and
unlike paper currency, gold is nobodies liability. We believe gold should rally with the US dollar
on Euro-worries, as it did in 2010 (+14% between end of April and Oct 6) and 2011 (+23%
between end of April and 6 Sep 11 as US dollar gained 5%). The US with $15T in debt
approaching 100% of GDP, does not inspire long-term confidence either, save that because of
the printing press, it has been able to stave-off worries about its unsustainable $1.2T deficits ( 8%
of GDP).