CIBC - Rubin still optimistic about a turnaround next year

Despite predicting the benchmark TSX composite index to close out 2008 at 9,500 points, CIBC World Market's Jeff Rubin is still optimistic for a dramatic 30% turnaround in 2009.

Expecting a big rebound in oil to lead a surge in commodities next year, CIBC's chief economist projects a 2009 year-end total of 12,000 points for the TSX.

"If US$90 [per barrel] is the price of oil during what is being perceived as a deep global recession, what is the price of oil in the recovery?" he said in a new strategy report released yesterday. "We continue to believe that oil prices will average US$150/bbl over the second half of next year on the back of even a modest recovery in global economic growth."

But in the meantime, massive sell-offs in North American markets as investors drop assets "tied to a strong economy" will take a big bite out of the senior index in 2008.

This suggests a very real possibility the TSX will end the year at less than 10,000 points after closing below the mark for the first time since July, 2005 on Tuesday.

As well, repeated 800-point drops in the last few weeks have created an atmosphere of fear for Canadian investors.

"That de-leveraging story is likely to hold sway for the balance of the year," he said.

Mr. Rubin argues that this knee-jerk reaction from investors is actually making a manageable problem worse, even if the most recent economic figures for the United States and other members of the Organization for Economic Cooperation and Development (OECD) show a firm recession.

"The recession is neither deep enough nor global enough to warrant the massive haircut in energy and other resource stock valuations that have taken place over the last several months," he said.

"While there is little to warrant near-term optimism, investors at the same time should not lose sight of the fact that many of yesterday's fundamentals have not changed."

Fuelled by commodities, worldwide economic growth will not slow as much as nervous investors are expecting.

Mr. Rubin predicts the growth rate will not dip to less than 3.5% in the rest of 2008 or all of 2009. This rate is a step down from recent years, but still "a far cry" from figures historically associated with bear markets, he said.

As for the roots of the U. S. subprime mortgage fiasco, Mr. Rubin believes there is a light at the end of the tunnel for housing prices. Within the next six months, he sees a "trough" in U. S. housing prices and a price decline of an additional 5% at most.

Mr. Rubin's pessimistic readjustment of his 2008 yearend numbers for the TSX is the latest in a series of downward projections he has made since boldly predicting a 16,000-point close in December, 2007.

"Our year-end target for 2008, of 16,200 for the composite index, implies a year of double-digit gains, including the dividend," he said at the time.

Mr. Rubin also said he did not expect the fallout from the U. S. subprime lending crisis to lead to a recession, or that it would last as long as it did.

His most recent predictions, made in September, pegged the TSX to close at 13,000 points by the end of 2008 and 14,000 at the same time in 2009.

Cool look: Banks predict lower oil and natural gas prices as demand fades

CALGARY - Two major banks released bearish forecasts for oil and natural gas prices Thursday, with global economic turmoil expected to further dampen energy demand.

RBC Capital Markets, the investment banking arm of Canada's biggest bank, is calling for an average 2009 oil price of US$80 per barrel, down from its previous estimate of US$90.

But oil could dip below US$60 per barrel if demand drops year-over-year - a phenomenon not seen since the early 1980s, the report said.

On the flip side, RBC said oil could be nudged above US$90 if the Organization of Petroleum Exporting Countries cuts production or there are major supply disruptions in places like Iran, Iraq, Nigeria and the Caucasus.

BMO Capital Markets, part of the Bank of Montreal, is predicting US$80-per-barrel oil for the rest of 2008 and an average price of US$78 next year.

BMO also said crude could trade below US$60 for a while if the economic picture gets gloomy enough.

"Oil prices are likely to remain highly volatile during the next year, given uncertainties as to the effectiveness of government efforts to alleviate the financial crisis, the magnitude of the U.S. recession, and the degree by which the economy is impacted," BMO said in its commentary.

RBC lowered its 2009 price forecast for natural gas to US$7 per 1,000 cubic feet, down from a previous projection of US$8, citing production increases in a number of U.S. resource plays.

But if the North American winter is colder than average, home-heating demand could lift gas prices.

BMO expects the U.S. natural gas benchmark to average about US$8.50 per 1,000 cubic feet in 2009, with the Alberta benchmark expected to be US$7.85.

U.S. natural gas output, especially from the Rockies and Texas shale, grew twice as fast as consumption in the first seven months of 2008, BMO noted.

On Thursday, crude for November delivery dropped below US$70 a barrel - its lowest trading level since August 2007 and less than half of its record high of US$147 reached in July.

Natural gas was around US$6.80 on the New York Mercantile Exchange.