TSX likely in for further losses as investors lose confidence in economy

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(The Canadian Press)

By Malcolm Morrison, The Canadian Press

TORONTO - Investors should be prepared for further losses on the Toronto stock market, even as its main index tumbled a stomach-churning 6.6 per cent last week on investor realization that a widespread economic slowdown is settling in.

"There has been this herd mentality this week that 'The good news is over now, I have to sell'," said Andrew Pyle, investment adviser at Scotia McLeod in Peterborough, Ont.

"People (were) basically selling in anticipation of more bad news down the road and just getting out. People are not in a waiting mood right now, they're not in a wait-and-see mood."

Commodities led the way downward this week on fears of how slowing economies can maintain demand for oil and metals but the contagion spread to all sectors of the market, leading to a drop of 955 points on the week.

The bearish sentiment was unrelenting even as oil prices, down steadily during late summer on signs of lower demand, moved even further towards the US$100 a barrel level - automatically bad news for an energy sector that had been the main prop for the Toronto market in recent months.

But it should have been good news elsewhere as higher oil has driven all kinds of other costs higher, raising inflation worries and heightening concerns about when central banks would have to tighten interest rates.

"What's happened is the oil story has faded into the background because we haven't had any further movements, like we're not through US$100 yet, we're kind of just hanging around here between US$105 and US$110," observed Pyle.

"We have't seen that translate into prices that everyone pays and that's the key thing here, we're not paying a lot less for gasoline, the beige book (on U.S. economic conditions) comes out and the Federal Reserve is still talking about price pressures and I think investors will go, hold on I thought this was supposed to be good news, why is everyone still talking about the price they're paying. And that is because this thing hasn't trickled through yet."

Pyle thinks that investors who have already dealt with an avalanche of bad news this year are worried that there is going to more of the same, particularly next month when third quarter warnings and earnings come out.

"The problem that we're facing is this whole October issue is going to come back to haunt us if we get some really negative news on the financials again, (it) could be a bank failure, firm failures, data suggesting even more foreclosures, delinquencies - that all is going to come in October," he said.

"And that's the real risk to this market is that you may get this what they call a double bottom and that may not hold if we get an event risk transpiring in October and that's an unknown."

Pyle thinks another reason to expect further TSX losses is that the price of oil still has a long way to fall.

"The problem here - oil prices still hovering between US$105, US$110 still haven't priced in the reality of perhaps a U.S. or Canadian recession, or European downturn," he said.

"I think oil prices around US$85 a barrel probably are a better reflection of that if that happens. But if that was to happen, if oil falls to $85, which I think is very likely, then that could easily take the TSX down to 11,200."

And he warns that scenario assumes that financials will continue to "do OK."

But before that happens, Pyle believes the market will soon test the lows of the year, just above the 12,000-mark.

In the meantime, he counsels that you shouldn't be fooled into buying back into the market by a spasm of one-day spikes as some suspect the market is oversold.

"You have to be careful about one day bounces, here, the so called dead-cat bounces," he said.

Is there any place to hide right now?

"Even though yields are low, people I still think will gravitate towards bonds because they don't see as much risk there," said Pyle.

"With inflation fears off the table, if the worst thing that happens is your bonds don't do anything, people will still say, that's better than losing eight per cent a week. That may be the strategy for the next few weeks - investors shouldn't be swinging around like this but the active players out there will say, 'where can I go and just wait and see'."