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Second Quarter 2012 Forecast and Opinion

All eyes are still fixed on the European credit crisis, whose underlying issues are still in need of resolution. The crisis intensified in the second quarter as Spain and Cyprus became the fourth and fifth of the Euro zone’s 17 members to require bailouts from the E.U.
A necessary fiscal and banking union should include several initiatives: common European banking regulation, a Europe-wide deposit guarantee scheme, Europe-wide labour market reforms, and a harmonization of tax rates across Europe for both individuals and businesses. The outcome of the recent E.U. summit surpassed the low expectations of the market, after so many disappointing prior summit meetings, and on July 9th EU leaders will meet again to ratify the euro zone’s permanent bailout fund known as the European Stability Mechanism. Some erosion of sovereignty is now to be expected by countries in need of EU bailouts in exchange for more “burden sharing” by the more “virtuous” countries. Any legislation indicating an acceptance of short term Euro bills as a prelude to longer term Eurobonds would be seen in a positive light by the financial markets as a further step toward European fiscal integration.


Central banks worldwide will continue to increase liquidity in an attempt to boost economic conditions. The Federal Reserve is likely to stimulate investment through credit easing to boost industrial borrowing, which will have a much better impact on the economy than purchasing treasuries. A cut of 25 basis points in the European short term interest rate, now at 0.75%, will have a positive effect on the European business landscape and may help to weaken the Euro to the benefit of European exporters. China also cut its benchmark interest rate today by a third of one percent, while Brazil is likely to provide further monetary and fiscal stimulus to its own economy.


The “fiscal cliff” the United States is headed for in 2013 will probably cost between 1-1.3% of U.S. GDP unless it gets pushed out further in time. This is still being built in to the market. On the other hand, positive trends in the housing market and in energy prices are very encouraging. Some analysts predict that lower energy costs may amount to $1,000 of additional discretionary spending in 2012 per household, with additional savings expected for 2013 and beyond. Indeed, the burgeoning natural gas and oil industry in the U.S. may prove to be a blessing to the economy. Natural gas is eight times cheaper in the U.S. than it is in Asia, and the U.S. is positioned to become the lowest cost provider to China even after liquefaction and shipping. It is also four times cheaper in the U.S. than in Europe. As American exports of gas begin (despite congressional debate on the subject), longstanding trade imbalances, particularly with China, may begin to stabilize. The first natural gas export license was approved last year, with eight more projects pending review from the U.S. Dept of Energy, poised to export 12 billion cubic feet per day. It takes four years to build a major export gas terminal, so the positive benefits to the U.S. economy remain medium to long term, but important changes are now afoot. It is estimated that the shale gas boom is on track to support 1.5 million U.S. jobs by 2015.


Given the unfavourable trend in unemployment, economics will play a large role in the upcoming U.S. election. A Republican victory would most likely be welcomed with a Wall Street rally, benefiting the pharmaceutical industry (unwinding of “Obamacare”), the oil and drilling industry (less environmental regulation), and the financial sector (less financial regulation).
The biggest positive for stocks might be associated with a lower tax increase for the wealthy, which would benefit consumption, particularly at the high end.


Grant Rogers


Partner


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This report has been prepared by Metis Capital Management LLC. This report is for distribution only under such circumstances as may be permitted by applicable law. It has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the report. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Any opinions expressed in this report are subject to change without notice. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. The analyst responsible for the preparation of this report may interact with trading desk personnel, sales personnel, other analysts, journalists, and other constituencies for the purpose of gathering, synthesizing and interpreting market information. Metis Capital Management LLC is under no obligation to update or keep current the information contained herein. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Options, derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky. Mortgage and asset-backed securities may involve a high degree of risk and may be highly volatile in response to fluctuations in interest rates and other market conditions. Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report. Metis Capital Management LLC accepts no liability for any loss or damage arising out of the use of all or any part of this report. Certain of the information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Metis believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.


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