Financial Update May 22, 2009

 TSX-282.85 the index is still up about 30 % from its March lows.
 DOW -129.91 A possibility of a rating downgrade of British government debt and renewed worries about an American economic recovery sent stock markets down sharply
 Dollar +.18c to 87.87USD the strong performance on equity and commodity markets energized the Canadian dollar
 Oil -$.99 to $61.05US per barrel
 Gold +$13.80 to $951.20USD per ounce
 Canadian 5 yr bond yields +.11bps to 2.25- Unexpected with the drop in TSX. Four weeks ago it was 1.94.
 http://www.financialpost.com/markets/market-data/money-yields-can_us.html?tmp=yields-can_us

The yield, rate of return on your bond, can be read through a yield curve, which is the pattern of yields on bonds. This increase in bond yield is something to watch. If the bond yield continues to go up, the spread will continue to shrink and this could be a trigger for interest rates to rise


A couple of articles which may mistakenly seem conflicting on Canadian Banks. One says due to the strength of the Canadian banking system, Canadian Banks will be the first to recover. The other announces a drop in bank ratings, however although it agrees Canadian Banks are still strong, it advises Canadian banks are still heavily influenced by U.S. and global economic trends.

New federal credit card rules give clearer info, minimum 21-day grace period
By The Canadian Press
TORONTO - The countless Canadian consumers willing to pay the often hefty price of relying on a credit card are getting a break from federal Finance Minister Jim Flaherty - although some critics aren't convinced that it's much of a reprieve at all.

Flaherty unveiled new rules Thursday that will cost banks and other credit-card issuers "tens of millions of dollars," requiring clearer information and a minimum 21-day interest-free period on new purchases made with plastic.

However, Flaherty has no intention of limiting card interest rates, which range from about nine per cent to twice that much for bank-issued cards, and typically from 19 to 28 per cent for cards from big department stores and other retailers.

The banks and other credit card issuers have come under fire during the recession from ordinary consumers, businesses and critics worried about a clampdown on credit, more restrictions on card use, rising penalties and sky-high interest rates at a time when the global credit crunch has squeezed their ability to get financing.

Thursday's changes, Flaherty told a news conference in Toronto, will improve a well functioning financial system that already provides adequate choice for consumers.

"There are dozens and dozens of options for consumers - some credit cards with higher interest rates offer more frills and benefits and points and various things," he observed.

"Our concern is to make sure that consumers have easily available, clear information so that they can make informed choices."

NDP Leader Jack Layton jibed that Flaherty's changes merely mean consumers will be told a bit more about how they're going to be gouged.

"Today was a day when the banks won," Layton said.

He called for legislation requiring banks to provide no-frills low-interest cards, saying the choice consumers have now is that "they can be gouged, or they can be gouged more deeply."

However, Bruce Cran, president of the Consumers' Association of Canada, said consumers should be pleased.

"All of the things that he's done in there are actually just what we asked for," Cran said from Washington, where the U.S. Congress has approved a bill that prohibits card companies from arbitrarily raising interest rates on existing balances, bans a variety of fees and restricts access to cards for people younger than 21.

The Americans "have got a range of different problems to what we have in Canada," Cran said, "but I think Mr. Flaherty has done a much better job of addressing the real problems that we've encountered."

As for the level of card interest rates, "these things take care of themselves," Cran said. "We do have 300 card issuers, and if there's demand for that sort of (low-interest) card, it should gain a place in the marketplace without having to legislate it."

In Ottawa, Liberal finance critic John McCallum - a former chief economist at the Royal Bank - said Flaherty's moves are "not a bad start, but they have not finished the job."

The new framework - particularly the 21-day grace period on all new purchases when cardholders pay the monthly balance in full by the due date - "was resisted by financial institutions," Flaherty declared.

"It is a major change; it will cost financial institutions tens of millions of dollars," he said.

"Right now the situation is that credit cards offer 15-to 24-day grace periods with most offering 21 days. However, many cards also charge consumers interest that accrues during that period, even if they pay their balance in full that month," Flaherty said.

"Moreover, if a consumer carries a balance from one month to another, some cards essentially give that consumer no grace period on new purchases."

Under the new regulations, the 21-day grace period on new purchases applies even if an outstanding balance is carried forward from the previous month, as long as the full balance is paid by the current month's deadline.

The new regulations will also require that credit card applications and contracts feature a simple summary box of "all salient information, such as interest rates, grace periods and fees."

Additionally, monthly statements will have to show how long it would take to pay off a balance by making only minimum payments. This will give consumers a truer picture of their debt load, Flaherty said.

The regulations, open for comment until June 13, also include:

-Notice on monthly statements if interest rates are going to increase during the next statement period;

-Express consent from the consumer for credit limit increases;

-Prohibition of some debt-collection practices, such as contacting clients later than 9 p.m. on weekdays or Saturdays, and after 5 p.m. on Sundays.

Flaherty noted that about 25 million Canadians have credit cards and most pay their monthly balances in full, "which is a great credit to how prudent Canadians are generally."

But Layton said financial institutions are encouraging consumers to use credit cards to buy groceries, and he meets people who are using cards to meet mortgage payments.

"In other words, they're up against the wall with a gun to their head," the NDP leader said, "and the banks refuse to give really fair interest rates to people like that, and the government is backing the banks."

The Consumers' Association's Cran commented that low introductory card rates "tend to take advantage of people that don't fully understand what's going on," and "we do object to some of the high penalty rates - I just can't see the point of penalizing people who can't pay."

But overall, "I've got to congratulate Mr. Flaherty."

"The proposed regulations are too little, too late to stop gouging of financial consumers by credit card companies," countered Duff Conacher, head of the Canadian Community Reinvestment Coalition.

The bank-accountability citizen group is calling on Flaherty to require credit card companies to undergo independent audits "to determine if they are reaping excessive profits."

In addition to not addressing interest rates, the rule changes do not deal with credit card interchange fees levied on merchant transactions.

Flaherty noted that parliamentary committees have been looking at the issue.

Credit Suisse chops ratings on Canada banks

John Greenwood, Financial Post

Canadian bank stocks are headed for a second wave of trouble, a Bay Street analyst warned Thursday.

James Bantis, an analyst at Credit Suisse, chopped his ratings on Canadian Imperial Bank of Commerce, Bank of Montreal, Royal Bank of Canada and Bank of Nova Scotia on concern the recent run-up in share prices fails to take into account the impact the recession will continue to have on bank revenues.

Mr. Bantis forsees rising loan loss provisions and pressure on retail margins, as the second round effects of the credit crunch and recession set in.

"We believe the severity of the economic slowdown in Canada is still in early days and earnings challenges remain ahead, not behind the banking sector," Mr. Bantis said in the note, titled "Green Shoots or Green Weeds."

Many of the threats that emerged at the height of the financial crisis late last year such as the risk of depression and possible systemic failure of global credit markets have abated, but Canadian banks are still heavily influenced by U.S. and global economic trends, most of which suggest tough times well into 2010.

But according to Mr. Bantis, this possibility is not reflected in current bank share prices.

Since its February low, the S&P/TSX Bank index has moved up 58%.

"Time to sell into strength," Mr. Bantis said.

Thursday he cut his ratings on CIBC and Bank of Montreal to "Underperform" from "Neutral," and lowered Royal and Scotia to "Neutral" from "Outperform."

The comments come about a week before the banks are set to report financial results for the second quarter.

On Friday, Scotia Capital analyst Kevin Choquette predicted an 8% decline in second quarter bank earnings compared to the same period in 2008 because of a doubling of loan loss provisions.

But he said results would be buoyed by a falling Canadian dollar and improving wholesale banking margins.

Mr. Choquette did not change any of his ratings at the time.

Calling their share prices "compelling," Mr. Choquette said Canadian banks "are well capitalized, with high-quality balance sheets, a diversified revenue mix [and] a solid long-term earnings growth outlook."

"The reduced fear about the collapse of the U.S. banking system has taken a lot of pressure off Canadian bank stocks that have been suffering from valuation contagion compounded by aggressive investor views that the Canadian system has massive leverage," he said.

Despite share price declines they suffered in the financial crisis -- the sector lost more than half its value -- Canadian banks for the most part steered clear of the kind of investments in credit derivatives that destroyed Lehman brothers and brought so many global banks to their knees.

As a result they are now widely recognized as among the safest in the world, which has attracted a lot of interest from foreign investors as well as governments.

But while the effects of the credit crunch appear to be subsiding, the Canadian economy has suffered a blow from the declining global economy and the collapse of the commodities market, and the impact is starting to manifest itself in the form of slumping corporate profits and rising unemployment.

Canada, Australia, the U.K. seen first to recover from recession

Alia McMullen, Financial Post

Canada, with Australia and the United Kingdom, is expected to be among the first of the advanced economies to emerge from recession, close its output gap and return to a normal rate of economic growth. But it will likely be close to a decade before conditions normalize in the mega economies of the United States, Europe and Japan, a report says.

By analyzing business new orders data, a key indicator of growth, Goldman Sachs economists Peter Berezin and Alex Kelston said Canada, Australia and the U.K. would likely return to their long-term trend rate of economic growth sometime in the second half of 2010 or early 2011.

Their output gaps -- the difference between actual and potential output -- would likely close between 2013 and 2015.

On the other hand, the United States and Europe were not expected to return to trend growth until 2011, with output likely to run under capacity until 2017. Japan, while returning to a trend rate of growth sooner, was not expected to close its output gap until 2019.

Not all believe the U.S. juggernaut will lag others in recovery. Bill Cheney, the chief economist at MFC Global Investment Management in Boston said the U.S. was the first to fall into recession and it would likely lead the world back out.

Nariman Behravesh, the chief economist at IHS Global Insight said China and the U.S. would likely lead the world out of recession, with Europe lagging behind.

This sentiment falls in line with U.S. government expectations. Douglas Elmendorf, the director of the Congressional Budget Office said in a testimony to the House Budget Committee on Thursday that the economy's output gap would average 7% of gross domestic product, equivalent to about US$1-trillion, in 2009-10. However, he said the U.S. would close this output gap by 2013.

While some countries are expected to take longer than others to make a full recovery, Mr. Berezin and Mr. Kelston said it appeared almost all major economies had already experienced their worst quarter of GDP in either the fourth quarter of 2008 or the first quarter of this year.

"This is important in as much as our research suggests that equity markets tend to bottom and equity volume tends to peak around the time when growth is at its worst," they said. "This supports our strategists' view that equities should continue to grind higher in the months ahead."

The report predicted the time taken for countries to return to their trend rate of growth and close their output gap would have a huge bearing on asset prices.

"Countries that are among the first to close their output gaps are also likely to experience foreign exchange appreciation," the Goldman economists said.

Emerging market economies were likely to return to trend growth an average six months before advanced economies. These countries are also expected to close their output gaps almost two years before developed nations.

However, conditions across the emerging markets will differ. For example, Asian economies are expected to rebound before those in Eastern Europe, while Latin America will likely recover before Mexico.