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Daily Market Commentary

Earnings are grabbing most of the headlines this morning as Intel misses and JP Morgan adds $1.3 billion to the write downs.  It is worrisome that they specifically called this a subprime write-down.  We're worried that this credit problem extends FAR past subprime, and it will be interesting to see if other assets such as Alt-A, investment grade CDO's and especially derivatives begin to get written down as well.



As mentioned above, the disturbing news of the day came out of the Canadian banks.  We've much discussed the spread between the Bank of Canada's target overnight rate and the rate that the average individual or company can borrow money.  Part of the problem with this cycle is that the spread is increasing to alarming levels, as witnessed by high LIBOR, a huge TED spread and closer to home high Bankers Acceptance rates compared to T-Bills.  This, in essence, means that the central banks have less power to influence short term rates, and therefore less power to influence the direction of the economy through monetary policy.



The implications of this kind of move are huge.  The banks are attempting to increase their margins at the expense of the consumer in Canada, while the Bank of Canada is trying to provide relief.  We sincerely hope that the BoC will lean on the banks and encourage them to pass along the stimulus.  We also hope that the banks don't go cartel on us.  Should one or two of the banks decide not to lower prime, while the others do, they will see a precipitous loss of business in that competitive environment.  If the government is so intent on protecting our oligopoly banking system, this is where they need to step in on the other side and prevent a gross injustice from happening.



US CPI is out this morning, in line with expectations.  The core is running at 2.4%, a slight tick up from last month.  This is remaining somewhat sticky, probably stickier than the Fed would like, but we re-iterate our view that it will come down eventually.  CPI is a rear-view mirror number, and we should be looking at leading indicators and employment as an indication of where it will go.



As expected with the turmoil, Yen, Greenbacks, and Swiss Francs, are much stronger on the day.  This is to be expected on days where equities tumble and investors run for cover.  CAD$ and Aussie dollars are weaker.



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