Given the 7% divergence between Bullion & Major Producers….

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Market Summaries

S&P/TSX Composite up 2.23% to 11927 (up 1.53% year-to-date)
S&P/TSX Venture Composite up 1.92% to 1488 (up 0.06% ytd)
Dow Jones Industrial Avg up 2.34% to 10450 (up 0.24% ytd)
Nasdaq Composite up 2.90% to 2309 (up 1.80% ytd)
Oil (West Texas Intermediate) up $4.48 to $78.26 (down $1.10 ytd)
Gold (Spot USD/oz) up $31.60 to $1258.30 (up $161.35 ytd)

Commentary – What is the price of Gold telling us?

Gold closed at an all time high of $1256.50 USD per oz on Friday, surpassing its previous record of $1254.80, set on June 8th. The yellow metal has climbed more than 15% this year, outperforming equities and bonds. Although, Gold could be headed for a cyclical correction in the coming weeks, its current strength suggests that interest is very strong as investors continue to lose confidence in fiat currencies.
With gold trading at all-time highs, one would think that precious metals stocks as represented by indices such as XGD in Canada and GDX in the US have also soared to new highs; peculiarly this is not the case. In fact, they are still trading approximately 7% below their respective all-time highs, a level reached over 3 years ago when Gold was trading around $850 per ounce. This is significant because under normal conditions stock prices lead commodity prices higher. Negative divergences such as this are worth watching due to the fact that it can signal future weakness in the broader equity markets. This also holds true for other sectors, such as copper which has been notably weak since the beginning of May.

The combination of Europe’s fiscal woes and dimming prospects for the US economy has prompted investors to step up and purchase bullion as an alternative asset. On Friday, reports showed US jobless claims rose unexpectedly and manufacturing in the Philadelphia region missed analyst forecasts. Meanwhile, Governments in many of the developed nations, including the U.S., are struggling to meet demands to spend more to boost their respective economies’ while cutting ballooning deficits.
People are looking at the euro as a wake-up call and they are becoming somewhat skeptical of a US recovery. If sovereign debt risks continue to grow then investors will continue to clamour into gold. Should the U.S. Federal Reserve be forced to keep interest rates at a record low in order to try and stimulate the economy, some analysts believe that gold may reach $1400 this year and rise as high as $1600 in 2011.
We have been long term bulls on gold bullion. However, given the divergence between the price of bullion and that of the major stock producers, we recommend clients continue to trade the precious metals sector according to seasonality swings and company specific opportunities.

Soundbites

It was only a matter of time before the US government took a look at the resource potential in Afghanistan. A recent study by the United States Geoligical Survey found a bounty of valuable minerals in much larger quantities than earlier anticipated. The total value potential of the minerals – including lithium, iron, gold, niobium, mercury, and cobalt – is estimated at $1 trillion USD, with one of the team members saying that may be conservative. President Hamid Karzai said in January, before the latest data, that he hoped the rumoured deposits could help one of the world’s most impoverished countries become one of the richest.
The much-anticipated dividend cut by BP was announced Wednesday and while it’s prudent given the uncertain future for the much-maligned energy giant, it’s going to take a toll on British investors. At last count, one in seven British pensioners owns BP stock and relies on its once-hefty payout for income. BP said it will probably be Christmas before it entertains the notion of re-implementing the distributions. I’m sure BP shareholders are cursing CEO Tony Hayward, who London’s Daily Telegraph recently reported sold a third of his BP shares only one month before the Deepwater Horizon rig fell to the ocean bottom.
According to one veteran of the energy patch, we could be in for a wave of consolidation as 2010 plays out. Grant Fagerheim, an oil & gas entrepreneur of 25-years says we are in for a major shakeup, predicting four of every ten companies will not be around this time next year. In a Q&A in Thursday’s National Post, Fagerheim attributes his belief to income trusts having to switch back to corporations and bigger players in search of growth. He mentions Cenovus, EnCana, Talisman, and Canadian Natural Resources as seniors that will be active in merger activity, as well as NAL Oil & Gas Trust and Bonavista Energy Trust as trusts who will be looking to pick off some of the weaker players in the trust conversion space.
Vancouver-based mining mogul Frank Giustra, Mexican billionaire Carlos Slim, and former US President Bill Clinton have launched a $20 million USD relief fund to help create jobs in earthquake-ravaged Haiti. The fund is targeting small to medium-sized enterprises which are having difficulty securing financing. A 7.0 earthquake ripped through Haiti in January, killing 300,000 and injuring countless others. The damage to buildings was extensive and has left many businesses inoperable making this donation that much more important. Giustra told The Province that the goal for these funds is the same as the principle behind the Clinton Giustra Sustainable Growth Initiative, which was launched three years ago to stimulate economic growth in impoverished countries. “What we’re looking to do is provide capital in a fashion that is more like providing the fishing rod instead of the fish,” Giustra said from Port-au-Prince

Marketwatch – A Look at the Week’s Newsmakers
Churchill Corp (CUQ) – shares of Churchill shot up almost 6% in Tuesday’s session after investors learned that rival Aecon Group has made a $51.2 million equity investment in the Calgary-based firm. The purchase gives Aecon a 15% ownership stake in Churchill which has just completed its own purchase of Seacliff Construction Corp, for $390 million. Churchill is now a well-diversified leader in electrical, data communications and heavy construction, nicely-equipped to take on the challenges of working in western Canada.
BP Plc (BP) – with BP shares plummeting and recently announced dividend suspension, many Brits are panicking. It’s estimated that 40% of all British households own BP shares and have grown accustomed to living off the robust income stream. British Prime Minister David Cameron put out a plea Wednesday afternoon to once again support the company and its shares, stating, “BP is an important company for people’s pensions, employs a lot of people, and it pays lots of tax.” This is just another layer of stress for Britain’s new government which is already facing a troubled economy and rising unemployment. BP shares have dropped more than 50% this year, seriously influencing the savings of individuals and performance of many of Britain’s pension funds.
Quadra FNX Mining Ltd (QUX) – the newly formed combination of Quadra Mining and FNX has hit its first speed bump with a much-ballyhooed partnership with a major Chinese player falling apart last week. The deal, which was announced in March, would have provided Quadra FNX with the needed financing to complete the final phases of the Sierra Gorda copper mine in Chile. After reviewing the proposed agreement, it appears State Grid International Development wanted to wait for all necessary permits to be in place before committing any capital and with Quadra FNX having designs on production by 2013, this simply wasn’t feasible. While talks are said to be ongoing, Quadra FNX CEO Paul Blythe made it clear his company is looking at other options.

“Quote of the Day

“An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.” Laurence J. Peter (1919 – 1988)

JAMIE SWITZER | Raymond James Ltd.
Senior Vice President, Financial Advisor
North Vancouver IAS
PH: 604.981.3355 | FAX: 604.981.3376
jamie.switzer@raymondjames.ca

MARC LATTA | Raymond James Ltd.
Senior Vice President, Financial Advisor
PH:604-981-3366 | FAX: 604.981.3376
marc.latta@raymondjames.ca

Suite 480, 171 West Esplanade
North Vancouver, British Columbia

This newsletter expresses the opinions of the writers, Marc Latta and Jamie Switzer, and not necessarily those of Raymond James Ltd. (RJL) Statistics and factual data and other information are from sources believed to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. It is not meant to provide legal, taxation, or account advice; as each situation is different, please seek advice based on your specific circumstance. RJL and its officers, directors, employees and their families may from time to time invest in the securities discussed in this newsletter. It is intended for distribution only in those jurisdictions where RJL is registered as a dealer in securities. Any distribution or dissemination of this newsletter in any other jurisdiction is strictly prohibited. This newsletter is not intended for nor should it be distributed to any person residing in the USA. Within the last 12 months, Raymond James Ltd. has undertaken an underwriting liability or has provided advice for a fee with respect to the securities of the Royal Bank of Canada. Raymond James Ltd is a member of the Canadian Investor Protection Fund.

Please check out our website at:
http://www.raymondjames.ca/jamieswitzer

If you would like to receive our “Weekly Wrap”, please click HERE to subscribe.

Market Summaries as of May 14th/2010

S&P/TSX Composite up 2.80% to 12015 (up 2.30% year-to-date)

S&P/TSX Venture Composite up 2.84% to 1593 (up 9.74% ytd)

Dow Jones Industrial Avg up 2.30% to 10620 (up 1.80% ytd)

Nasdaq Composite up 3.60% to 2347 (up 3.40% ytd)

Oil (West Texas Intermediate) down $3.50 to $71.61 (down $7.75 ytd)

Gold (Spot USD/oz) up $24.55 to $1232.95 (up $136.00 ytd)

Keep Playing Defense

Markets continue to be extremely volatile and last week’s series of swings is probably indicative of how the spring and possible summer will treat investors. Making forecasts beyond the next few weeks seems foolish based on the ever-changing landscape we are facing.

With Greece looking like it could act as the lynch-pin for many more European-based calamities, we are proceeding with caution and not rushing to “buy on the dips.” Gold continues to look strong in this uncertain environment and many utility and consumer staple stocks are weathering this recent round of selling remarkably well. On the “buy side” we have our eye on a few high-yielding utility names, while we may continue to sell broad-based equities as our “stops” continue to be breached to the downside. The addition of the iPath S&P 500 VIX Short Term Futures Index (VXX-US) a few weeks back has worked out very well in the short term but we would be sellers if this market gives any clear “rally” indicators. If this air of uncertainty remains, the VXX tool will provide investors with a great short-term trade opportunity if bought into index rallies.

With a steady diet of negative news, investors seem to be leaving commodities and rotating into more defensive options. Oil is down more than $14 USD a barrel over the past month and more than $10 in the past two weeks. This type of selling pressure is indicative of how the majority of the commodity sector is currently reacting.

In the short to medium term, stay focused on equities that are reacting well in this market volatility and try to avoid chasing the bottom on some of your favourite commodity names of the past year. It may be a while before they find traction again and the peace of mind of owning boring, high-yielding defensive names may be a comforting one.

Soundbites

BC Hydro has turned to the sporting world to find the man who will lead them into the next decade. Highly regarded former Vancouver Canucks senior exec and deputy CEO of VANOC David Cobb has been named Hydro’s new president and CEO after a lengthy search. Former CEO Bob Elton was shuffled out after a rocky 6-year tenure which now sees the Crown corp taking a risk bringing on Cobb who has a stellar background, but no experience in the electricity sector. Cobb will get thrown into his role head-first, with numerous initiatives to tackle including an aggressive energy conservation target, implementation of the new Clean Energy Act, and overseeing the multi-billion-dollar Site C hydroelectric project – all lightning rods for criticism.
Our country’s realtors, already under fire from Canada’s competition watchdog, are now facing a new obstacle that could ultimately lead to lower fees. iBidBroker.com has been launched in Toronto by 29-year old entrepreneur and former SmartCentres Inc employee Ajay Jain. The unveiling of the website comes at a time when the Competition Bureau is battling with the Canadian Real Estate Association (CREA) over access to the Multiple Listing Service (MLS) system, which controls about 90% of residential real estate transactions in Canada. Jain, who worked previously in land acquisitions at SmartCentres Inc, has invested $100,000 to $150,000 in his startup, claims his goal is not to lower commissions, but that may end up being the result. “The general concept is, if agents compete, the homeowner is going to win,” he said. Royal LePage CEO Phil Soper is quick to point out that similar websites are already established in the US. LePage recently released a survey that found 86% of its agents worry that deregulation in the industry would erode standards of service.
In an age where silver-haired men of distinction seem to be running all facets of financial senior management, Britain has turned to 38-year old whiz kid George Osborne to manage what may be the country’s most precarious financial environment in decades. Combine that with the country’s first coalition government since 1945 and you have an intriguing scenario that will keep market-watchers glued to the headlines for a long time to come. Britain is trying to pull itself out of its worst recession since the Second World War, which sees unemployment at a 16-year high and a ballooning deficit that currently stands at 11% of GDP. At 38, Osborne is Britain’s youngest Chancellor the Exchequer (Finance Minister) in more than 100 years.

Marketwatch – A Look at the Week’s Newsmakers
Cardiome Pharmaceuticals Corp (COM) – shares climbed in soft markets after the Vancouver-based bio-tech posted solid Q1 earnings of $15.5 million USD (26 cents per share), compared with losses of $9.2 million just a year earlier. Revenues flew to $23 million (from only $200,000) in the quarter on the momentum of Cardiome’s licensing deal with Merck for its flagship drug, Vernakalant, which focuses on irregular heartbeats.
Crescent Point Energy Corp (CPG) – announced Wednesday it has agreed to pay $1.1 billion to buy the 79% of privately-held Shelter Bay Energy Inc it doesn’t already own. The move boosts its exposure in the prolific Bakken oil field and establishes it as one of the region’s dominant producers. The Shelter Bay operations are extremely familiar to Crescent Point, having created the company in 2008 to avoid federal government restrictions on the growth of trusts. The most recent US Geological Survey estimates Bakken could contain as many as 5.5 billion barrels of oil.
Seacliff Construction Corp (SDC) – shares shot higher in today’s miserable session after the construction company announced that rival Churchill Corp has agreed to pay $390 million, or $17.14 per share for the company. This was a significant jump for the stock, which closed at $14.55 on Friday and represents a 23% premium to the shares’ 20-day average price. The business combination is highly-accretive to Churchill and creates a formidable entity on the general contracting side as well as a strong oilsands player in many facets.

“Quote of the Day

“The things that will destroy America are prosperity-at-any-price, peace-at-any-price, safety-first instead of duty-first, the love of soft living, and the get-rich-quick theory of life” – Teddy Roosevelt.

JAMIE SWITZER | Raymond James Ltd.
Senior Vice President, Financial Advisor
North Vancouver IAS
PH: 604.981.3355 | FAX: 604.981.3376
jamie.switzer@raymondjames.ca

MARC LATTA | Raymond James Ltd.
Senior Vice President, Financial Advisor
PH:604-981-3366 | FAX: 604.981.3376
marc.latta@raymondjames.ca

Suite 480, 171 West Esplanade
North Vancouver, British Columbia