By Eric Beauchesne and Don Macdonald
Ottawa Citizen
Wednesday, June 14, 2006

Also published in:

The Canadian stock market meltdown accelerated yesterday with the main market index plunging by nearly 300 points, its steepest one-day point drop in more than two years, and closing below 11,000 for the first time since early December.

Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, “Remember that the best approach to the markets is to invest with our logical side of the brain, not the emotional.

The benchmark S&P/TSX index fell for the seventh straight trading day, nosediving 293.24 points, or 2.6 per cent, to 10,904.34, pulled down by the continued retreat in oil, base metals and gold prices, with the price of bullion dropping $44.50 to $566.80 in New York, the biggest one-day drop in 15 years.

Heightened worries about higher U.S. inflation and U.S. interest rates were also blamed. The freefall followed a global selloff in equities overnight.

The question on investors' minds yesterday was: Where's the bottom?

"The fog has rolled in and investors aren't sure where we're going," said Clement Gignac, chief economist and strategist at National Bank Financial.

"Risk appetite has suddenly given way to risk aversion."

He notes that the TSX composite had gone 959 trading days without a correction of more than 10 per cent before it crossed the line on Monday. That kind of a volatility free rally hadn't been seen for 35 years.

With the latest plunge, the Bay Street index was sliding towards bear market territory, seen by some as a 15-per-cent drop in the value of stocks.

The market has turned and there's more trouble ahead, according to Hans Black, chairperson of Montreal's Interinvest Global Management.

"In the near term, (the market) might bounce but our sense is that it's headed lower," said Mr. Black, whose firm manages $3 billion in international assets.

In late March, Mr. Black was predicting a 25-per-cent decline in the TSX due to commodity weakness and he sees no reason to change his mind.

"People took on too much risk and markets got overbought; metal prices got way too high," he said yesterday. "I think we entered a bear market a month ago."

Adrian Mastracci, with Vancouver-based KCM Wealth Management Inc. said "having nerves of steel helps being invested in the markets today" but suggested that now is not the time for a panic sale.

"Remember that the best approach to the markets is to invest with our logical side of the brain, not the emotional," Mr. Mastracci said in his investment newsletter.

"If the market risks still feel comfortable, stay with the chosen asset mix," he said, adding in an interview that for many that would include 40 to 60 per cent in equities.

Meanwhile, the retreat in commodity prices, including steep drops in oil prices, gold, and copper, plus the increased threat of higher U.S. interest rates, also torpedoed the Canadian dollar.

The currency sank more than a full cent to a close of 89.87 cents U.S. from 91.05 cents U.S. Monday, its steepest one-day drop in nearly six months, and reversing a strong two-day rally.

Oil prices fell about three per cent to a three-week low of nearly $68 U.S. a barrel while copper was down nearly seven per cent.

Fears of rising U.S. inflation and a further runup in interest rates by the U.S. Federal Reserve are the main culprit behind the drop in stock markets here and in most other countries, said TD Securities economist Marc Levesque.

"The market concerns are most likely overblown," he said. "But at the same time ... Fed officials have been singing an increasingly hawkish tune with every single Fed speaker over the past couple of weeks voicing inflation concerns."

Mr. Levesque predicted that there will be at least one more U.S. interest rate hike next month, but that further increases will depend on whether there's evidence of rising inflation.

And the first piece of evidence will be today's report on U.S. inflation, he said, warning that if it suggests inflation pressures are increasing, the global market turmoil will continue.

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.