North American stock markets face further declines this spring with the prospect of significant writedowns by North American banks and weakness in the U.S. economy, according to CIBC World Markets report released today.

“The tandem of falling U.S.housing prices and rising default rates should trigger as much as another US$30-50 billion in asset writedowns by North American banks over the next quarter, which, together with a visibly struggling U.S. economy could be a catalyst for another five percent correction,” says Jeff Rubin, chief strategist and chief economist at CIBC World Markets in his monthly Canadian Portfolio Strategy Outlook report.

“Already at US$140 billion, world-wide writedowns on U.S. subprime mortgage assets are likely to peak in the US$265 billion range over the next year,” says Rubin, adding that those losses are likely to occur in spite of both Fed easing and efforts by Washington to spare over 300,000 mortgage holders from painful mortgage resets.

“As long as falling U.S. house prices continue to generate significant negative home equity among subprime mortgage holders, default rates will continue to rise even if subprime mortgage rates do not,” says Rubin. “A double-digit decline in housing prices will bring a concomitant increase in default rates which will likely approach just under 30% by the fourth quarter.”

Yet despite the near-term bumpiness, Rubin remains bullish on the year. “While interest rate cuts and fiscal stimulus will not salvage U.S. housing prices or prevent subprime mortgage default rates from rising, they should go a long way in containing broad contagion effects to the rest of the economy,” he says, adding that “a 2.5% federal funds rate should resuscitate the U.S. economy and North American equity markets by the second half of the year.”

Rubin also points to continuing strength in overseas economies and the prospect of triple-digit oil prices over the next twelve months which “should set the stage for a powerful second-half rally in the market that will see the TSX end the year at 14,500.” These conditions should also see the energy and resource laden TSX hitting 16,200 by the end of 2009, he says.

To guard against interim volatility, Rubin is cutting the weighting of stocks in his model portfolio by nine percentage points, and putting that money into bonds. “We would expect to be adding weight back to our equity position over the latter half of the year” as markets move closer to his targets, he says.

By sector, Rubin remains overweight in energy, gold and base metal stocks which he says have been undervalued by subprime jitters. “We continue to like the energy and commodity side of the market which is largely detached from the problems of the US housing market and even the more general outlook for the US economy,” he says.

As well, Rubin is raising his target for bullion prices to US$1,000 per ounce this year and is reaffirming his overweight stance in this sector. He’s also forecasting that base metal prices, while not keeping pace with gold prices, “should remain at historically high levels despite the performance of the US economy, reflecting robust economic growth not only in China but in other resource-intensive developing economies like India and Brazil.”

Rubin is also reducing his weighting in banks and telecoms by a further half-percentage point each, and moving those funds into utilities.