• TSX -69.91 A combination of earnings disappointments, poor U.S. economic data and a rising greenback pushed the Toronto stock market lower. Nine of the index's 10 main groups declined.
• DOW -115.70 Soft quarterly results from big U.S. and Canadian companies, ongoing concern about the uneven U.S. economic recovery, and fiscal worries in Greece all contributed to negative investor sentiment
• Dollar -.13c to 93.79cUS The U.S. dollar gained strength as investors sought safety after Standard & Poor's said it no longer considered Britain among the "most stable and low-risk" banking systems.
• Oil -$.03 to $73.60US per barrel.
• Gold $-.90 to $1,083.60USD per ounce
Bernanke wins second term in 2nd closest vote ever for a Fed chief after bitter opposition
By Jeannine Aversa, Jim Kuhnhenn, The Associated Press
WASHINGTON - Embattled Federal Reserve Chairman Ben Bernanke won confirmation for a second term Thursday, but only by the closest vote ever for the crucial post and after withering criticism from lawmakers for bailing out Wall Street while other Americans suffered in recession.
The Senate confirmed Bernanke for a new four-year term by a 70-30 vote, a seemingly solid majority but 14 votes worse than the closest previous vote for a Fed chairman.
President Barack Obama hailed the Senate's action and praised Bernanke's "wisdom and steady leadership."
The battle over Bernanke's confirmation has been a test of central bank independence, a crucial element if the Fed is to carry out unpopular but economically essential policies. Its decisions on interest rates can have immense consequences, from the success or failure of the largest companies to the typical home-buyer's ability to get an affordable loan to the price of cereal at the grocery or gas at the corner station.
Created by Congress in 1913 after a series of bank panics, the Federal Reserve is an independent agency, supposedly outside politics, but its chairman is typically assailed by lawmakers and others when the economy falls and jobless ranks lengthen.
CNW
Ontario economy to grow faster than national average for the first time in eight years
Economy at risk from overvalued Canadian dollar and slower U.S. growth
TORONTO, Jan. 28 /CNW/ - Ontario's economy will outpace the national average in 2010 but remains at risk to a high Canadian dollar, weak U.S. growth and high provincial deficits, finds a new report from CIBC World Markets Inc.
"For Ontario, 2009 was a year to forget," says Warren Lovely, senior economist in CIBC's latest Economic Insights report. "But Ontario outpaced the national average by a significant margin in (the third quarter of 2009), and with momentum carried into the first half of this year, Ontario's full-year growth rate should exceed the national average for the first time in eight years.
"It was once the case that Ontario outperformed in expansion, at least until the Canadian dollar began its trend appreciation. Since that time, Ontario has lagged the national average. This year's growth rate captures comparisons to depressed levels of activity in 2009. That's particularly true in manufacturing, where shipments slumped and factory job losses lopped more than 1.5 per cent off total employment. Once an inventory restocking has run its course, growth could be harder to sustain."
Mr. Lovely expects GDP growth in the province to climb 2.4 per cent in 2010 and 2.8 per cent in 2011, once again falling behind the national average of 3.0 per cent. He adds that the factory sector must contend with an overvalued exchange rate. Lower U.S. costs and heightened competition from emerging Asia pose a threat to Ontario, North America's largest auto producer. And as a net-energy importer, higher oil and gas prices won't do producers any favours and future years will also feel the drag from government belt tightening.
However, he notes a harmonized sales tax, alongside cuts to corporate taxes, will boost competitiveness and help lure jobs. A focus on emerging sectors, such as green power, also looks to pay dividends. Growth in Canada's banking sector stands to benefit Ontario disproportionately.
The report finds that the economic recovery will not be even across the country. On the back of strong oil, potash, agriculture and uranium sectors, Saskatchewan is expected to lead economic growth in the country in 2010 with GDP up 3.0 per cent. Solid job prospects will continue to spur in-migration, with population growth stronger than at any time in the past 30 years.
The B.C. economy will be the second strongest in 2010 with 2.8 per cent growth on the basis of strength in the resource sector. The province will also see a broadening and deepening of its export base, with expanded transportation infrastructure allowing the province to lever its Gateway to Asia status. Mr. Lovely does not see the end of Olympics spending as a significant drag and notes that the adoption of a harmonized sales tax should boost investment and spur productivity growth.
Newfoundland and Labrador is forecast to see a big rebound this year with its GDP climbing 2.6 per cent as output recovers from production difficulties that plagued 2009. The economy also benefits from strong consumer spending and business investment. Barring disruptions, growth in 2011 should strengthen further to 3.3 per cent, with large energy projects having the potential to deliver strong growth longer-term.
A newfound availability of cost-effective inputs, alongside a recovery in commodity prices, is sparking re-investment in Alberta. But a still-tentative consumer suggests that the province will be slower to re-accelerate in 2010 seeing GDP growth at 2.4 per cent for the year, same as Ontario. However, by 2011 growth is expected to reach 4.2 per cent, tops in the country, just ahead of Saskatchewan.
Manitoba escaped the recession relatively unscathed, tabling a fourth straight year of above-average growth in 2009. With less ground to be made up, growth should run just in line with the national average in 2010 at 2.3 per cent, climbing to 3.1 per cent in 2011.
Recent outperformance in Québec and the Maritimes likely won't be repeated, with solid, if unspectacular gains due in 2010-11.
Real GDP Performance
-------------------------------------------------------------------------
CIBC Forecasts
Y/Y % Actual --------------------------------------------
2008 2009 2010 2011
-------------------------------------------------------------------------
BC 0.0 -2.2 2.8 3.4
-------------------------------------------------------------------------
Alta 0.0 -2.6 2.4 4.2
-------------------------------------------------------------------------
Sask 4.2 -1.7 3.0 4.1
-------------------------------------------------------------------------
Man 2.0 -0.2 2.3 3.1
-------------------------------------------------------------------------
Ont -0.5 -3.5 2.4 2.8
-------------------------------------------------------------------------
Qué 1.0 -1.4 2.2 2.7
-------------------------------------------------------------------------
NB 0.0 -0.7 2.2 2.8
-------------------------------------------------------------------------
NS 2.2 -0.4 2.1 2.6
-------------------------------------------------------------------------
PEI 0.5 -0.5 1.8 2.4
-------------------------------------------------------------------------
N&L 0.5 -3.5 2.6 3.3
-------------------------------------------------------------------------
CDA 0.4 -2.5 2.3 3.0
-------------------------------------------------------------------------
U.S. 0.4 -2.5 2.8 2.4
-------------------------------------------------------------------------
Source: CIBC, Statistics Canada
Friday, January 29, 2010
Thursday, January 28, 2010
Financial Update For Jan. 28, 2010
• TSX -17.08 Commodity stocks again led the market lower as investors continued to react to moves by China to curb bank lending. The worry is that tighter monetary policy in China to check inflationary pressures could kill off the limited economic recovery around the world. Also in part because of poor U.S. housing sales data that raised fresh concerns about the economy. The U.S. Commerce Department reported that new U.S. home sales unexpectedly fell 7.6 per cent last month, capping the industry's weakest year on record
• DOW +41.87
• Dollar -.20c to 93.92cUS as the greenback gained after the U.S. Federal Reserve kept interest rates near zero and was slightly more optimistic about the U.S. economy.
• Oil -$1.04 to $73.67US per barrel.
• Gold -13.50 to $1,084.40USD per ounce
JEANNINE AVERSA Associated Press
WASHINGTON–The U.S. Federal Reserve pledged Wednesday to hold rates at record lows to nurture the economic recovery and lower unemployment. But its decision drew a dissent from one member, signalling the Fed's challenge in deciding when to pull back stimulus money it pumped into the economy.
The Fed's statement sketched a mixed picture of the economy. Pointing to weakness, it noted bank lending is contracting. It also dropped a reference in a previous statement to an improving housing market – reports on home sales this week pointed to a still-fragile housing market.
But on the positive side, the Fed said business spending on equipment and software seems to be rising. And it said economic activity "continues to strengthen.''
The Fed said it still expects to end a $1.25 trillion (U.S.) program aimed at driving down mortgage rates on March 31. Yet it reiterated that it remains open to changing that timetable if necessary.
The Fed member who opposed the decision to retain a pledge to keep rates at record lows for an "extended period" was Thomas Hoenig, president of the Federal Reserve Bank of Kansas City. He said the economy has improved sufficiently to drop the pledge, which has been in place for nearly a year.
With the economy on the mend, the Fed this year can focus on how and when to pull back the stimulus money. Fed chairman Ben Bernanke will lead that effort now his prospects for another four-year term have improved. The Senate is slated to vote on his confirmation on Thursday.
Bernanke and his colleagues will need to tread delicately. Reeling in the stimulus too soon risks short-circuiting recovery, sending unemployment higher. If they move too late, they could unleash inflation.
Against that backdrop, the Fed kept its target range for its bank lending rate at zero to 0.25 per cent, where it has stood since December 2008. Commercial banks' prime lending will remain about 3.25 per cent – its lowest point in decades.
An interest rate hike this summer?
Don't count on it. For the Bank of Canada to raise rates before the middle part of 2011 would be totally inconsistent with its current forecast
David Rosenberg Published on Wednesday, Jan. 27, 2010
David Rosenberg is chief strategist for Gluskin Sheff + Associates Inc. and a guest columnist for Report on Business
Canadian market watchers will get some good news this week. The predictions for a "blowout" reading on fourth-quarter GDP are already out there and it is likely to be an abnormally strong number. But for anyone who thinks a big number is likely to help lock in a rate hike this summer, I would suggest that is not going to happen. In fact, my view is that the Bank of Canada will not be raising rates until mid-2011 - at the earliest.
This is critical to the outlook for Canadian money market and bond yields since futures have priced in nearly 100 per cent odds of a 25 basis point rate hike this June, and another 25 basis points by September. (A basis point is 1/100th of a percentage point.) The central bank has already told us that its base case is for 2.9 per cent real GDP growth this year and 3.5 per cent next year, with the starting point on the "output gap" being 3.7 per cent ("output gap" is the gap between the actual level of real GDP and where real GDP would be if the economy were at full capacity). Remember that an output gap that big in any given quarter classifies as a 1-in-20 event. Moreover, baselining these expected growth rates against the latest estimates of potential growth puts the output gap at a smaller level of 1.55 per cent this year, narrowing further to 0.25 per cent in 2011.
The history of the Bank of Canada is such that - outside of when it had to defend the Canadian dollar - it typically does not embark on its tightening phase until the output gap is close to closing. Even during the aggressive John Crow era, the bank's modus operandi was to time the first rate hike just as spare capacity was being eliminated, and not much before. On average, the first central bank rate hike following a recession takes place one quarter before the output gap closes (there is still a gap, but it is small at 20 basis points). If such a strategy is replicated this time around - and the cause for being on pause longer in the context of a historic deleveraging cycle is certainly quite strong - then the very earliest the bank will move is the second quarter of 2011.
Under this scenario, based on some back-of-the envelope calculations I just did, the unemployment rate at no time declines below 7.5 per cent through to the end of 2011. The peak in the jobless rate was 8.7 per cent in August, 2009. Going back to prior recessions, the central bank does not begin to tighten rates until the jobless rate is down an average of 150 basis points with a range of 130 basis points to 170 basis points.
Unless the bank wants to be pre-emptive - highly unlikely when it acknowledges in its economic outlook last week that "the recovery continues to depend on exceptional monetary and fiscal stimulus" and that "the overall risks to its inflation projection are tilted slightly to the downside" - then to raise rates before the middle part of 2011 would be totally inconsistent with its current forecast. More to the point, while bored Bay Street economists analyze every word to see if the bank is more or less "hawkish" than in its previous outlook, what is important for investors is to assess the bank forecast and decide what it means for the degree of excess capacity in the economy and what that implies for the future inflation rate.
The bottom line is that even with the fragile recovery, the bank sees more downside than upside risk to its inflation projection, and, to reiterate, for it to start tightening policy until the jobless rate falls below 7.5 per cent would be a break from past post-recession actions.
And whatever future "policy tightening" is needed could also come via the overextended loonie, limiting any need for an interest rate adjustment in the time horizon that the markets have discounted. This is a source of debate on Bay Street, but the bank is still sensitive to the growth-dampening impact of an exchange rate too firm for its own good. To wit: "The persistent strength of the Canadian dollar and the low absolute level of U.S. demand continue to act as significant drags on economic activity in Canada," the bank says.
In a nutshell, the Canadian market is already braced for 50 basis points of tightening from the Bank of Canada by September. With that in mind, it is difficult to believe that there is any significant rate risk here; if anything, the surprise will be that the bank is on hold for longer. If that proves to be true, then there is actually more downside than upside potential to Canadian bond yields, particularly at the front end of the coupon curve.
The reason the markets think the bank may pull the trigger is because of this one sentence that shows up in every press statement: "Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target."
So the central bank has really only given a pledge to keep rates where they are until mid-year. But June is only five months away and so one would have to think that at one of the next three meetings, the Bank is going to have to update this particular sentence or cut it entirely and leave the market without a de facto time commitment. Either way, the moment the bank changes this sentence is the moment the market will put on hold its expectations of a new rate-hiking cycle coming our way.
• DOW +41.87
• Dollar -.20c to 93.92cUS as the greenback gained after the U.S. Federal Reserve kept interest rates near zero and was slightly more optimistic about the U.S. economy.
• Oil -$1.04 to $73.67US per barrel.
• Gold -13.50 to $1,084.40USD per ounce
JEANNINE AVERSA Associated Press
WASHINGTON–The U.S. Federal Reserve pledged Wednesday to hold rates at record lows to nurture the economic recovery and lower unemployment. But its decision drew a dissent from one member, signalling the Fed's challenge in deciding when to pull back stimulus money it pumped into the economy.
The Fed's statement sketched a mixed picture of the economy. Pointing to weakness, it noted bank lending is contracting. It also dropped a reference in a previous statement to an improving housing market – reports on home sales this week pointed to a still-fragile housing market.
But on the positive side, the Fed said business spending on equipment and software seems to be rising. And it said economic activity "continues to strengthen.''
The Fed said it still expects to end a $1.25 trillion (U.S.) program aimed at driving down mortgage rates on March 31. Yet it reiterated that it remains open to changing that timetable if necessary.
The Fed member who opposed the decision to retain a pledge to keep rates at record lows for an "extended period" was Thomas Hoenig, president of the Federal Reserve Bank of Kansas City. He said the economy has improved sufficiently to drop the pledge, which has been in place for nearly a year.
With the economy on the mend, the Fed this year can focus on how and when to pull back the stimulus money. Fed chairman Ben Bernanke will lead that effort now his prospects for another four-year term have improved. The Senate is slated to vote on his confirmation on Thursday.
Bernanke and his colleagues will need to tread delicately. Reeling in the stimulus too soon risks short-circuiting recovery, sending unemployment higher. If they move too late, they could unleash inflation.
Against that backdrop, the Fed kept its target range for its bank lending rate at zero to 0.25 per cent, where it has stood since December 2008. Commercial banks' prime lending will remain about 3.25 per cent – its lowest point in decades.
An interest rate hike this summer?
Don't count on it. For the Bank of Canada to raise rates before the middle part of 2011 would be totally inconsistent with its current forecast
David Rosenberg Published on Wednesday, Jan. 27, 2010
David Rosenberg is chief strategist for Gluskin Sheff + Associates Inc. and a guest columnist for Report on Business
Canadian market watchers will get some good news this week. The predictions for a "blowout" reading on fourth-quarter GDP are already out there and it is likely to be an abnormally strong number. But for anyone who thinks a big number is likely to help lock in a rate hike this summer, I would suggest that is not going to happen. In fact, my view is that the Bank of Canada will not be raising rates until mid-2011 - at the earliest.
This is critical to the outlook for Canadian money market and bond yields since futures have priced in nearly 100 per cent odds of a 25 basis point rate hike this June, and another 25 basis points by September. (A basis point is 1/100th of a percentage point.) The central bank has already told us that its base case is for 2.9 per cent real GDP growth this year and 3.5 per cent next year, with the starting point on the "output gap" being 3.7 per cent ("output gap" is the gap between the actual level of real GDP and where real GDP would be if the economy were at full capacity). Remember that an output gap that big in any given quarter classifies as a 1-in-20 event. Moreover, baselining these expected growth rates against the latest estimates of potential growth puts the output gap at a smaller level of 1.55 per cent this year, narrowing further to 0.25 per cent in 2011.
The history of the Bank of Canada is such that - outside of when it had to defend the Canadian dollar - it typically does not embark on its tightening phase until the output gap is close to closing. Even during the aggressive John Crow era, the bank's modus operandi was to time the first rate hike just as spare capacity was being eliminated, and not much before. On average, the first central bank rate hike following a recession takes place one quarter before the output gap closes (there is still a gap, but it is small at 20 basis points). If such a strategy is replicated this time around - and the cause for being on pause longer in the context of a historic deleveraging cycle is certainly quite strong - then the very earliest the bank will move is the second quarter of 2011.
Under this scenario, based on some back-of-the envelope calculations I just did, the unemployment rate at no time declines below 7.5 per cent through to the end of 2011. The peak in the jobless rate was 8.7 per cent in August, 2009. Going back to prior recessions, the central bank does not begin to tighten rates until the jobless rate is down an average of 150 basis points with a range of 130 basis points to 170 basis points.
Unless the bank wants to be pre-emptive - highly unlikely when it acknowledges in its economic outlook last week that "the recovery continues to depend on exceptional monetary and fiscal stimulus" and that "the overall risks to its inflation projection are tilted slightly to the downside" - then to raise rates before the middle part of 2011 would be totally inconsistent with its current forecast. More to the point, while bored Bay Street economists analyze every word to see if the bank is more or less "hawkish" than in its previous outlook, what is important for investors is to assess the bank forecast and decide what it means for the degree of excess capacity in the economy and what that implies for the future inflation rate.
The bottom line is that even with the fragile recovery, the bank sees more downside than upside risk to its inflation projection, and, to reiterate, for it to start tightening policy until the jobless rate falls below 7.5 per cent would be a break from past post-recession actions.
And whatever future "policy tightening" is needed could also come via the overextended loonie, limiting any need for an interest rate adjustment in the time horizon that the markets have discounted. This is a source of debate on Bay Street, but the bank is still sensitive to the growth-dampening impact of an exchange rate too firm for its own good. To wit: "The persistent strength of the Canadian dollar and the low absolute level of U.S. demand continue to act as significant drags on economic activity in Canada," the bank says.
In a nutshell, the Canadian market is already braced for 50 basis points of tightening from the Bank of Canada by September. With that in mind, it is difficult to believe that there is any significant rate risk here; if anything, the surprise will be that the bank is on hold for longer. If that proves to be true, then there is actually more downside than upside potential to Canadian bond yields, particularly at the front end of the coupon curve.
The reason the markets think the bank may pull the trigger is because of this one sentence that shows up in every press statement: "Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target."
So the central bank has really only given a pledge to keep rates where they are until mid-year. But June is only five months away and so one would have to think that at one of the next three meetings, the Bank is going to have to update this particular sentence or cut it entirely and leave the market without a de facto time commitment. Either way, the moment the bank changes this sentence is the moment the market will put on hold its expectations of a new rate-hiking cycle coming our way.
Wednesday, January 27, 2010
Financial Update For Jan. 27, 2010
• TSX +6.68. by renewed strength in golds and financials.
• DOW -2.57 "Markets can handle good news. Markets can handle bad news. But what the markets have a tough time digesting, is not knowing what the news is. If there's one thing that bothers them, it's uncertainty," said Chandler, SVP at Canaccord Wealth Management.. "That's sort of where the market is."
• Dollar -.39c to 94.12cUS
• Oil -$.55 to $74.71US per barrel.
• Gold +2.70 to $1,097.90USD per ounce
Special Report
Peter Thal Larsen, Reuters /Financial Post
DAVOS, Switzerland -- The Bank of England estimates governments the world over have spent or committed a staggering US$14-trillion to prop up the financial system following the fall of Lehman Brothers in September 2008.
So, what did we get for all that dough?
Unfortunately, more questions than answers.
Indeed, many of the factors that helped cause the previous crisis -- a sustained period of low interest rates, high levels of consumer debt in the West and excessive risk-taking by financial institutions -- remain in place.
At the same time, supersized government bailouts could have created the conditions for future financial crises that will be larger and even more expensive than the one the world has just suffered.
Despite the protestations by politicians that such a large-scale rescue should never be allowed to happen again, their actions over the past two years suggest the opposite.
"Knowing this, the rational response by market participants is to double their bets. This adds to the cost of future crises," Piergiorgio Alessandri and Andrew Haldane of the Bank of England wrote recently.
"This is a doom loop."
This, however, is decidedly not the prevailing mood in the banking industry. Following their near-death experience, many bankers have been pleasantly surprised by the industry's rapid recovery. Markets have stabilised, courtesy of government handouts. Banks' profits -- and their share prices -- have recovered.
But all that has come with a price. By cutting interest rates to zero and pumping liquidity into the markets, the authorities risk encouraging a new round of risk-taking by banks and investors. And by loading the bailout costs onto the public sector they have undermined the creditworthiness of large developed nations. This, in turn, has sparked a growing political backlash.
Meanwhile, reforms designed to make the banking system safer -- boosting banks' capital requirements, for example -- are still several years away from implementation. And the imbalances in the global economy that contributed to the crisis are far from resolved; they may in fact be worse.
This presents policymakers with a nasty dilemma. If they leave support in place for too long, they run the risk of inflating another bubble. But if they withdraw too soon, the danger is of a slide back into recession.
That may be enough to send banks back to the blackjack table. "The recovery in financial markets is a welcome development but ... if nothing is done to withdraw this stimulus, this search for yield will begin to lead to underpricing of risk," says Hung Tran, deputy managing director of the Washington-based Institute for International Finance, whose members include most of the world's large banks.
PITY GOLDMAN SACHS
Judging from the public outrage that has greeted their singular compensation system, the world's banks seem more vulnerable to pogroms than to another financial meltdown. In recent weeks large institutions including JPMorgan Chase & Co and Goldman Sachs Group Inc have reported healthy profits, and their counterparts on the other side of the Atlantic are expected to do the same when European banks report their results over the next few weeks.
Banks with large investment banking divisions have done particularly well by taking advantage of recent market volatility and heavy trading volumes in bonds, currencies and commodities.
Many have also used the market rebound to rebuild balance sheets. According to the Bank for International Settlements, the amount of capital raised by the world's banks -- which has now exceeded US$1-trillion -- has overtaken the write-downs triggered by the crisis.
One major source of profit for banks stems from their ability to borrow at near-zero short-term interest rates, while making longer-term loans at higher rates. In other words, the regulators are allowing banks to earn their way out of trouble.
This cannot last for ever.
Oliver Wyman, the financial services consultancy, compares these profits to the short-term "morphine high" that patients undergoing medical treatment experience.
CENTRAL BANK VALENTINES
As with morphine, the pain is only being masked. Many large banks are still dependent on central bank liquidity facilities and government-guaranteed debt to fund their balance sheets.
The European Central Bank's Long-Term Refinancing Operation, which allows banks to pledge assets in return for cash, has current loans of 670-billion euros, up from 50-billion euros before the crisis.
Meanwhile, the Bank of England is currently providing 185-billion pounds of funding to the UK banking sector through its special liquidity scheme. The UK government has also financed a further 134-billion pounds of bank funding by allowing them to issue government-guaranteed debt.
"Central bankers have to say: how do I withdraw that without destabilising the system?" said Davide Taliente, head of the public policy group at Oliver Wyman.
FRAGILE FUNDING
Direct support from the authorities is only part of the problem. The bigger issue is that banks have responded to the crisis and uncertainty by replacing long-term debt with shorter-term maturities when it came due.
The average maturity for U.S. banks' newly issued debt over the past 29 years was 6.6 years, according to Moody's, the credit rating agency. By 2009 that had fallen to just 3.2 years. This means banks must refinance a large proportion of their liabilities in the next few years.
That could turn out to be expensive for some. For example, if Bank of Ireland replaced its current funding with long-term unsecured debt, the extra costs would wipe out its expected 2012 profits, according to analysts at Barclays Capital. For Commerzbank, the hit would be 20% of profits. But UBS could secure long-term funding by giving up just 5% of expected profits.
In practice, governments are unlikely to turn off the liquidity tap anytime soon. Oliver Wyman's Taliente, who is a member of the advisory team on financial regulation for Britain's opposition Conservative party, says he expects governments to respond by fully nationalising some institutions or winding them down.
"If the central bank lifeline is cut off, we are looking at liquidity shortfalls in the tens of billions. That's the main worry in the system right now. We do predict that there will be some further casualties."
RISK-TAKING ON THE RISE
These concerns have not, however, prevented banks from putting more risk on their balance sheets. Analysts at FBR Capital Markets estimate that up to 40% of investment banking revenue over the last 12 months has come from banks trading with their own funds, compared with a more typical level of about 25%.
All of the top U.S. banks have reported rising value-at-risk levels, signalling that their biggest trading loss on most days is rising.
Take Goldman Sachs, for example. Its biggest possible loss on 95% of the trading days in 2009 was US$218-million, compared with US$180-million for 2008. For JPMorgan Chase the largest possible loss for 99% of its trading days in 2009 was US$248-million, compared with US$202-million.
But value-at-risk is a crude way to measure how much the banks are gambling, in part because it does not specify how big possible losses are on the remaining trading days in a year.
Investors are split about how to interpret banks' apparent willingness to take increased risk. Some argue that banks are looking to rebuild their capital through reckless trading, safe in the knowledge that the government will bail them out in the worst-case scenario.
Other investors argue that banks are sitting on bigger inventories of securities to provide liquidity to capital markets, and that otherwise, investors could have much more trouble buying and selling securities.
BOND TIMEBOMB?
Perhaps the greatest concern, however, is that banks are hoarding government bonds.
According to the BIS, banks are buying government bonds for two reasons: because of lower demand from consumers and companies for loans; and because they want to reduce the riskiness of their balance sheets.
Another factor is that regulators, in an attempt to ensure that banks are better able to withstand a sudden freeze in the capital markets, are demanding that they hold greater reserves of liquid securities. In practice, these are likely to be government bonds.
In the United States, holdings of government bonds by banks fell from 16% to around 10% in the decade up to 2007, according to the Federal Reserve, but have increased again since the crisis struck.
Some bankers believe this is a significant issue.
Historically, banks' risk models have tended to assume that the bonds of developed countries were close to risk-free assets. No longer. The government finances of peripheral countries such as Greece and Ireland are already creaking. And many investors believe it is only a matter of time before ratings agencies lower the UK's credit rating. A downgrade -- or, heaven forbid, a default -- could leave banks exposed.
"Banks are filling their books with long-dated government paper, funded with short-term government funding," said a senior executive at a large UK-based bank, who asked not to be named. "It's the biggest carry trade in the world."
INTERVENTIONIST GOVERNMENTS
Apart from creating systemic risks, however, large-scale purchases of government bonds by banks are also failing to fix the paltry flow of credit. Despite the liquidity being pumped into the economy, lending to consumers and small- and medium-sized businesses has not yet picked up.
It is not entirely clear banks should be blamed. One explanation is that demand for credit has fallen as consumers and companies decided they had too much debt. The moribund state of the securitisation market has also crimped lending, as has the burden of badly performing commercial real estate loans in the U.S. on medium and small-sized banks.
Bankers also point out that some people who took out loans during the boom should never have been allowed to borrow so heavily. Even so, this situation contributes to the widespread public perception that bailing out banks has been of no benefit to the broader economy. The longer this continues, the more likely it is that governments will interfere in banks' affairs.
Indeed, it is perhaps surprising that government interference has been so limited to date. Since the crisis erupted, governments have upheld a fragile consensus that any financial reform should be implemented on a global basis.
Naturally, that's made this process slow and time-consuming. Though regulators have made progress in drawing up new rules dictating how much capital banks should hold, these will not be finalised until the end of the year, and will probably not be in force before 2012.
"Because the crisis was so big and because the capital markets are so rich, you can't have three or four central bankers sitting in a room and deciding," said a European central banker who asked not to be named. "That means the technocratic debate takes a lot longer."
In recent weeks, political pressure has spilled over as countries -- particularly the United States -- have unilaterally introduced new taxes and regulations. President Barack Obama wants to tax banks' wholesale funds and has promised "a fight" with Wall Street if it resists his proposal to stop investment banks from engaging in proprietary trading. The United Kingdom has introduced a 50% windfall tax on banks who pay their employees bonuses of more than 25,000 pounds. Faced with a combination of fiscal pressures and profitable but unpopular banks, other countries are bound to attempt similar moves.
These moves may make political sense. But some investors fear that overt bank-bashing by politicians will undo much of the benefit of the bailout.
"Political interference could derail all the efforts made so far in restimulating the economy," says Davide Serra, co-founder of Algebris, a London-based hedge fund that specialises in financial stocks. "If you crack confidence because you see fights between financiers and governments, these actions have a massive cost to the economy."
DELEVERAGING DILEMMA
Any discussion about the response to the crisis must acknowledge the need to reduce the levels of debt that have been built up. A study by McKinsey, the consultancy, found that previous deleveraging episodes have generally taken four forms: a period of belt-tightening, in which credit growth lags behind economic growth for many years; massive defaults; high inflation; or a period of rapid GDP growth as a result of a war effort or an oil boom.
The most likely outcome is that deleveraging will lead to a long, slow slog. Indeed, falling property prices in the developed world mean many consumers are now more leveraged than they were before. According to Oliver Wyman, the ratio of household liabilities to financial assets in the U.S. is now 40%. Two years ago, it was 29%.
Another big concern is that the global economic imbalances -- whereby Western economies import and consume and Asian economies export and save -- have not yet been addressed. China's foreign currency reserves are now US$2.4-trillion. Japan has reserves of about US$1-trillion.
Mervyn King, the governor of the Bank of England, likens this buildup of international assets and liabilities to adding blocks to a tower.
"With skill, it can be done for a surprisingly long time. But eventually the moment comes when adding one more causes the tower to fall down," he said in a recent speech. "If countries do not work together to reduce the ‘too high to last' imbalances, a crisis of one sort or another in financial markets is only too likely."
For central bankers, politicians and policymakers, then, the challenges are immense. They must withdraw the financial support that has been provided to the financial sector without triggering a collapse, but before new risk-taking creates the conditions for another collapse. They must overhaul regulation to make banks safer while reversing the moral hazard that has characterised the current round of bailouts. They must manage a controlled reduction of government debt. And they must attempt to rebalance the world economy without withdrawing into conflict and protectionism.
There is little doubt that the authorities' swift response to the crisis prevented an even more severe economic collapse. But the global financial system is far from being fixed
• DOW -2.57 "Markets can handle good news. Markets can handle bad news. But what the markets have a tough time digesting, is not knowing what the news is. If there's one thing that bothers them, it's uncertainty," said Chandler, SVP at Canaccord Wealth Management.. "That's sort of where the market is."
• Dollar -.39c to 94.12cUS
• Oil -$.55 to $74.71US per barrel.
• Gold +2.70 to $1,097.90USD per ounce
Special Report
Peter Thal Larsen, Reuters /Financial Post
DAVOS, Switzerland -- The Bank of England estimates governments the world over have spent or committed a staggering US$14-trillion to prop up the financial system following the fall of Lehman Brothers in September 2008.
So, what did we get for all that dough?
Unfortunately, more questions than answers.
Indeed, many of the factors that helped cause the previous crisis -- a sustained period of low interest rates, high levels of consumer debt in the West and excessive risk-taking by financial institutions -- remain in place.
At the same time, supersized government bailouts could have created the conditions for future financial crises that will be larger and even more expensive than the one the world has just suffered.
Despite the protestations by politicians that such a large-scale rescue should never be allowed to happen again, their actions over the past two years suggest the opposite.
"Knowing this, the rational response by market participants is to double their bets. This adds to the cost of future crises," Piergiorgio Alessandri and Andrew Haldane of the Bank of England wrote recently.
"This is a doom loop."
This, however, is decidedly not the prevailing mood in the banking industry. Following their near-death experience, many bankers have been pleasantly surprised by the industry's rapid recovery. Markets have stabilised, courtesy of government handouts. Banks' profits -- and their share prices -- have recovered.
But all that has come with a price. By cutting interest rates to zero and pumping liquidity into the markets, the authorities risk encouraging a new round of risk-taking by banks and investors. And by loading the bailout costs onto the public sector they have undermined the creditworthiness of large developed nations. This, in turn, has sparked a growing political backlash.
Meanwhile, reforms designed to make the banking system safer -- boosting banks' capital requirements, for example -- are still several years away from implementation. And the imbalances in the global economy that contributed to the crisis are far from resolved; they may in fact be worse.
This presents policymakers with a nasty dilemma. If they leave support in place for too long, they run the risk of inflating another bubble. But if they withdraw too soon, the danger is of a slide back into recession.
That may be enough to send banks back to the blackjack table. "The recovery in financial markets is a welcome development but ... if nothing is done to withdraw this stimulus, this search for yield will begin to lead to underpricing of risk," says Hung Tran, deputy managing director of the Washington-based Institute for International Finance, whose members include most of the world's large banks.
PITY GOLDMAN SACHS
Judging from the public outrage that has greeted their singular compensation system, the world's banks seem more vulnerable to pogroms than to another financial meltdown. In recent weeks large institutions including JPMorgan Chase & Co and Goldman Sachs Group Inc have reported healthy profits, and their counterparts on the other side of the Atlantic are expected to do the same when European banks report their results over the next few weeks.
Banks with large investment banking divisions have done particularly well by taking advantage of recent market volatility and heavy trading volumes in bonds, currencies and commodities.
Many have also used the market rebound to rebuild balance sheets. According to the Bank for International Settlements, the amount of capital raised by the world's banks -- which has now exceeded US$1-trillion -- has overtaken the write-downs triggered by the crisis.
One major source of profit for banks stems from their ability to borrow at near-zero short-term interest rates, while making longer-term loans at higher rates. In other words, the regulators are allowing banks to earn their way out of trouble.
This cannot last for ever.
Oliver Wyman, the financial services consultancy, compares these profits to the short-term "morphine high" that patients undergoing medical treatment experience.
CENTRAL BANK VALENTINES
As with morphine, the pain is only being masked. Many large banks are still dependent on central bank liquidity facilities and government-guaranteed debt to fund their balance sheets.
The European Central Bank's Long-Term Refinancing Operation, which allows banks to pledge assets in return for cash, has current loans of 670-billion euros, up from 50-billion euros before the crisis.
Meanwhile, the Bank of England is currently providing 185-billion pounds of funding to the UK banking sector through its special liquidity scheme. The UK government has also financed a further 134-billion pounds of bank funding by allowing them to issue government-guaranteed debt.
"Central bankers have to say: how do I withdraw that without destabilising the system?" said Davide Taliente, head of the public policy group at Oliver Wyman.
FRAGILE FUNDING
Direct support from the authorities is only part of the problem. The bigger issue is that banks have responded to the crisis and uncertainty by replacing long-term debt with shorter-term maturities when it came due.
The average maturity for U.S. banks' newly issued debt over the past 29 years was 6.6 years, according to Moody's, the credit rating agency. By 2009 that had fallen to just 3.2 years. This means banks must refinance a large proportion of their liabilities in the next few years.
That could turn out to be expensive for some. For example, if Bank of Ireland replaced its current funding with long-term unsecured debt, the extra costs would wipe out its expected 2012 profits, according to analysts at Barclays Capital. For Commerzbank, the hit would be 20% of profits. But UBS could secure long-term funding by giving up just 5% of expected profits.
In practice, governments are unlikely to turn off the liquidity tap anytime soon. Oliver Wyman's Taliente, who is a member of the advisory team on financial regulation for Britain's opposition Conservative party, says he expects governments to respond by fully nationalising some institutions or winding them down.
"If the central bank lifeline is cut off, we are looking at liquidity shortfalls in the tens of billions. That's the main worry in the system right now. We do predict that there will be some further casualties."
RISK-TAKING ON THE RISE
These concerns have not, however, prevented banks from putting more risk on their balance sheets. Analysts at FBR Capital Markets estimate that up to 40% of investment banking revenue over the last 12 months has come from banks trading with their own funds, compared with a more typical level of about 25%.
All of the top U.S. banks have reported rising value-at-risk levels, signalling that their biggest trading loss on most days is rising.
Take Goldman Sachs, for example. Its biggest possible loss on 95% of the trading days in 2009 was US$218-million, compared with US$180-million for 2008. For JPMorgan Chase the largest possible loss for 99% of its trading days in 2009 was US$248-million, compared with US$202-million.
But value-at-risk is a crude way to measure how much the banks are gambling, in part because it does not specify how big possible losses are on the remaining trading days in a year.
Investors are split about how to interpret banks' apparent willingness to take increased risk. Some argue that banks are looking to rebuild their capital through reckless trading, safe in the knowledge that the government will bail them out in the worst-case scenario.
Other investors argue that banks are sitting on bigger inventories of securities to provide liquidity to capital markets, and that otherwise, investors could have much more trouble buying and selling securities.
BOND TIMEBOMB?
Perhaps the greatest concern, however, is that banks are hoarding government bonds.
According to the BIS, banks are buying government bonds for two reasons: because of lower demand from consumers and companies for loans; and because they want to reduce the riskiness of their balance sheets.
Another factor is that regulators, in an attempt to ensure that banks are better able to withstand a sudden freeze in the capital markets, are demanding that they hold greater reserves of liquid securities. In practice, these are likely to be government bonds.
In the United States, holdings of government bonds by banks fell from 16% to around 10% in the decade up to 2007, according to the Federal Reserve, but have increased again since the crisis struck.
Some bankers believe this is a significant issue.
Historically, banks' risk models have tended to assume that the bonds of developed countries were close to risk-free assets. No longer. The government finances of peripheral countries such as Greece and Ireland are already creaking. And many investors believe it is only a matter of time before ratings agencies lower the UK's credit rating. A downgrade -- or, heaven forbid, a default -- could leave banks exposed.
"Banks are filling their books with long-dated government paper, funded with short-term government funding," said a senior executive at a large UK-based bank, who asked not to be named. "It's the biggest carry trade in the world."
INTERVENTIONIST GOVERNMENTS
Apart from creating systemic risks, however, large-scale purchases of government bonds by banks are also failing to fix the paltry flow of credit. Despite the liquidity being pumped into the economy, lending to consumers and small- and medium-sized businesses has not yet picked up.
It is not entirely clear banks should be blamed. One explanation is that demand for credit has fallen as consumers and companies decided they had too much debt. The moribund state of the securitisation market has also crimped lending, as has the burden of badly performing commercial real estate loans in the U.S. on medium and small-sized banks.
Bankers also point out that some people who took out loans during the boom should never have been allowed to borrow so heavily. Even so, this situation contributes to the widespread public perception that bailing out banks has been of no benefit to the broader economy. The longer this continues, the more likely it is that governments will interfere in banks' affairs.
Indeed, it is perhaps surprising that government interference has been so limited to date. Since the crisis erupted, governments have upheld a fragile consensus that any financial reform should be implemented on a global basis.
Naturally, that's made this process slow and time-consuming. Though regulators have made progress in drawing up new rules dictating how much capital banks should hold, these will not be finalised until the end of the year, and will probably not be in force before 2012.
"Because the crisis was so big and because the capital markets are so rich, you can't have three or four central bankers sitting in a room and deciding," said a European central banker who asked not to be named. "That means the technocratic debate takes a lot longer."
In recent weeks, political pressure has spilled over as countries -- particularly the United States -- have unilaterally introduced new taxes and regulations. President Barack Obama wants to tax banks' wholesale funds and has promised "a fight" with Wall Street if it resists his proposal to stop investment banks from engaging in proprietary trading. The United Kingdom has introduced a 50% windfall tax on banks who pay their employees bonuses of more than 25,000 pounds. Faced with a combination of fiscal pressures and profitable but unpopular banks, other countries are bound to attempt similar moves.
These moves may make political sense. But some investors fear that overt bank-bashing by politicians will undo much of the benefit of the bailout.
"Political interference could derail all the efforts made so far in restimulating the economy," says Davide Serra, co-founder of Algebris, a London-based hedge fund that specialises in financial stocks. "If you crack confidence because you see fights between financiers and governments, these actions have a massive cost to the economy."
DELEVERAGING DILEMMA
Any discussion about the response to the crisis must acknowledge the need to reduce the levels of debt that have been built up. A study by McKinsey, the consultancy, found that previous deleveraging episodes have generally taken four forms: a period of belt-tightening, in which credit growth lags behind economic growth for many years; massive defaults; high inflation; or a period of rapid GDP growth as a result of a war effort or an oil boom.
The most likely outcome is that deleveraging will lead to a long, slow slog. Indeed, falling property prices in the developed world mean many consumers are now more leveraged than they were before. According to Oliver Wyman, the ratio of household liabilities to financial assets in the U.S. is now 40%. Two years ago, it was 29%.
Another big concern is that the global economic imbalances -- whereby Western economies import and consume and Asian economies export and save -- have not yet been addressed. China's foreign currency reserves are now US$2.4-trillion. Japan has reserves of about US$1-trillion.
Mervyn King, the governor of the Bank of England, likens this buildup of international assets and liabilities to adding blocks to a tower.
"With skill, it can be done for a surprisingly long time. But eventually the moment comes when adding one more causes the tower to fall down," he said in a recent speech. "If countries do not work together to reduce the ‘too high to last' imbalances, a crisis of one sort or another in financial markets is only too likely."
For central bankers, politicians and policymakers, then, the challenges are immense. They must withdraw the financial support that has been provided to the financial sector without triggering a collapse, but before new risk-taking creates the conditions for another collapse. They must overhaul regulation to make banks safer while reversing the moral hazard that has characterised the current round of bailouts. They must manage a controlled reduction of government debt. And they must attempt to rebalance the world economy without withdrawing into conflict and protectionism.
There is little doubt that the authorities' swift response to the crisis prevented an even more severe economic collapse. But the global financial system is far from being fixed
Tuesday, January 26, 2010
Financial Update For Jan. 26, 2010
• TSX +11.08 investors felt better about Bernanke's reappointment Monday after two key Democratic senators said they would support giving him another four-year term. Presidential adviser David Axelrod added that Bernanke has enough votes to win reappointment.
• DOW +23.88
• Dollar unchanged to 94.51cUS
• Oil +$.72 to $75.26US per barrel.
• Gold +6 to $1,096.50USD per ounce
Economic recovery becoming more solidly entrenched, says Bank of Canada
OTTAWA - Canada’s economy is becoming more solidly entrenched with the private sector beginning to play an increasingly pivotal role in leading the country out of recession, the Bank of Canada said today in its latest policy report.
In a mildly upbeat assessment of the recovery, the central bank’s quarterly outlook contains some upward revisions for growth in the United States, China, Europe and Japan that should help Canada’s battered exporters and manufacturing sector in the next two years.
And it says Canada’s economy will grow faster going forward than expected, in part because it got off to such a slow start last summer.
Overall, the bank appears more optimistic about the sustainability of the recovery that is happening around the world, although it also cautions that risks of a stall remain.
There is also some upside hope, the bank adds, that conditions may continue to improve better than projected.
“It is thus possible that the recovery in global demand could be more vigorous than projected, resulting in stronger external demand for Canadian exports,” the bank judges.
In Canada, it adds: “Economic growth is expected to become more solidly entrenched over the projection period as self-sustaining growth in private demand takes hold.”
The analysis is broadly similar to what the bank said last October, when it last issued a comprehensive forecast on the economy, but the tone is brighter at the margins and the danger signals less frequent.
For months, bank governor Mark Carney has been cautioning Canadians not to get overextended in purchasing homes, but there is no such warning this time. In fact, the bank says it expects the housing market to cool this year and next as a result of pent-up demand becoming satiated and relatively high home prices.
As well, the bank appears more confident that the private sector is ready to take the handoff from governments as the main driver of economic growth.
The bank says Canada’s reliance on government stimulus spending likely hit its peak at the end of 2009, representing about two per cent of all economic output for the country, and will decline this year.
By 2011, the private sector will be the sole driver of Canadian growth, the bank said.
But while Canada’s domestic demand continues to be the key driver of economic growth, the big change from October’s outlook is that prospects are also improving for the country’s battered export and manufacturing sectors.
“Export volumes are expected to continue to recover over the projection period in response to growing external demand and higher commodity prices. Export growth is projected to be somewhat stronger than was expected last October, owing to a more favourable outlook for the U.S. economy, particularly in the sectors that figure most importantly for Canadian exporters,” the bank says.
Those volumes would be even greater but for the strong Canadian loonie, it adds.
Canada’s auto and forest products sectors were particularly hard-hit during the recession, the bank notes, and will benefit most from renewed growth in the U.S. Canadian manufacturers shed about 200,000 jobs last year.
The central bank now says the U.S. gross domestic product will grow by 2.5 per cent this year, largely as a result of improvement in the financial sector. Three months ago, the bank estimated U.S. growth at a mere 1.8 per cent.
In Canada, the bank says the economy likely grew by 3.3 per cent in the last three months of 2009. For 2010, the economy will advance by 2.9 per cent, followed by a 3.5 per cent pickup in 2011.
In retrospect, the bank noted that Canada’s recession, while severe, was not nearly as damaging as it was in other industrialized countries, partly because of Canada’s solid banking system.
But neither has the recovery been particularly impressive in Canada, starting with a disappointing 0.4 per cent advance in the third quarter of 2009, which the bank attributes to a surprisingly strong influx in imports. The U.S., backed by a weak currency, rebounded more strongly with a 2.2-per-cent increase in the third quarter and a bouncy 4.7-per-cent advance in the fourth quarter of 2009.
The bank believes Canada will make up for the slow start this year, projecting it will advance stronger than the U.S., Japan and Europe.
The main engine of global growth remains China, however, which is expected to be back close to double-digit growth this year.
• DOW +23.88
• Dollar unchanged to 94.51cUS
• Oil +$.72 to $75.26US per barrel.
• Gold +6 to $1,096.50USD per ounce
Economic recovery becoming more solidly entrenched, says Bank of Canada
OTTAWA - Canada’s economy is becoming more solidly entrenched with the private sector beginning to play an increasingly pivotal role in leading the country out of recession, the Bank of Canada said today in its latest policy report.
In a mildly upbeat assessment of the recovery, the central bank’s quarterly outlook contains some upward revisions for growth in the United States, China, Europe and Japan that should help Canada’s battered exporters and manufacturing sector in the next two years.
And it says Canada’s economy will grow faster going forward than expected, in part because it got off to such a slow start last summer.
Overall, the bank appears more optimistic about the sustainability of the recovery that is happening around the world, although it also cautions that risks of a stall remain.
There is also some upside hope, the bank adds, that conditions may continue to improve better than projected.
“It is thus possible that the recovery in global demand could be more vigorous than projected, resulting in stronger external demand for Canadian exports,” the bank judges.
In Canada, it adds: “Economic growth is expected to become more solidly entrenched over the projection period as self-sustaining growth in private demand takes hold.”
The analysis is broadly similar to what the bank said last October, when it last issued a comprehensive forecast on the economy, but the tone is brighter at the margins and the danger signals less frequent.
For months, bank governor Mark Carney has been cautioning Canadians not to get overextended in purchasing homes, but there is no such warning this time. In fact, the bank says it expects the housing market to cool this year and next as a result of pent-up demand becoming satiated and relatively high home prices.
As well, the bank appears more confident that the private sector is ready to take the handoff from governments as the main driver of economic growth.
The bank says Canada’s reliance on government stimulus spending likely hit its peak at the end of 2009, representing about two per cent of all economic output for the country, and will decline this year.
By 2011, the private sector will be the sole driver of Canadian growth, the bank said.
But while Canada’s domestic demand continues to be the key driver of economic growth, the big change from October’s outlook is that prospects are also improving for the country’s battered export and manufacturing sectors.
“Export volumes are expected to continue to recover over the projection period in response to growing external demand and higher commodity prices. Export growth is projected to be somewhat stronger than was expected last October, owing to a more favourable outlook for the U.S. economy, particularly in the sectors that figure most importantly for Canadian exporters,” the bank says.
Those volumes would be even greater but for the strong Canadian loonie, it adds.
Canada’s auto and forest products sectors were particularly hard-hit during the recession, the bank notes, and will benefit most from renewed growth in the U.S. Canadian manufacturers shed about 200,000 jobs last year.
The central bank now says the U.S. gross domestic product will grow by 2.5 per cent this year, largely as a result of improvement in the financial sector. Three months ago, the bank estimated U.S. growth at a mere 1.8 per cent.
In Canada, the bank says the economy likely grew by 3.3 per cent in the last three months of 2009. For 2010, the economy will advance by 2.9 per cent, followed by a 3.5 per cent pickup in 2011.
In retrospect, the bank noted that Canada’s recession, while severe, was not nearly as damaging as it was in other industrialized countries, partly because of Canada’s solid banking system.
But neither has the recovery been particularly impressive in Canada, starting with a disappointing 0.4 per cent advance in the third quarter of 2009, which the bank attributes to a surprisingly strong influx in imports. The U.S., backed by a weak currency, rebounded more strongly with a 2.2-per-cent increase in the third quarter and a bouncy 4.7-per-cent advance in the fourth quarter of 2009.
The bank believes Canada will make up for the slow start this year, projecting it will advance stronger than the U.S., Japan and Europe.
The main engine of global growth remains China, however, which is expected to be back close to double-digit growth this year.
Monday, January 25, 2010
Financial Update For Jan. 25, 2010
• TSX -125.67
• DOW -216.90
• Dollar -.60c to 94.51cUS
• Oil -$1.54 to $74.54US per barrel.
• Gold -$13.50 to $1,089.70USD per ounce
•
• DOW -216.90
• Dollar -.60c to 94.51cUS
• Oil -$1.54 to $74.54US per barrel.
• Gold -$13.50 to $1,089.70USD per ounce
•
Friday, January 22, 2010
Financial Update For Jan. 22, 2010
• TSX -210.22 its biggest one day drop in 3 months as fears mounted about tighter lending in China, and economic concerns pressured commodity stocks while financials were negative after U.S. President Barack Obama called for tougher regulations on banks. Obama's proposals will limit the size and complexity of large financial companies so that a bank's collapse wouldn't endanger the overall financial system. The move could mean sweeping changes for how big financial institutions like Bank of America who’s shares fell 5.8%, and JPMorgan Chase & Co.(down 6%) are structured.
• DOW -213.27 as a strong dollar and concerns about China's bank lending practices zapped commodity prices and shares, sparking a broader selloff.
• Dollar -.40c to 95.11cUS
• Oil -$1.66 to $76.08US per barrel.
• Gold -$9.60 to $1,102.70USD per ounce
by David Aston, MoneySense Magazine
Monday, January 18, 2010provided by
Nothing is more frustrating than trying to figure out how much to save for retirement. You know the amount you’ll need to save depends on what kind of retirement lifestyle you want. But how can you decide that without having some idea of how much it will cost? Is dreaming of endless vacations and a 44-ft yacht realistic? Or should you be aiming for walks in the park and the occasional meal out? Many people have no idea what they’re aiming for—and after a lot of sweating and calculating, they end up right back where they started.
We can help. While many retirement plans use complex formulas to calculate what you’ll need, we find that many Canadians just want a ballpark to aim for. If your retirement is still quite a ways off, it’s often good enough just to know what you’ll need to save to achieve each of three levels of potential retirement: a bare-bones basic retirement; a middle-class retirement with two cars, some restaurant meals and vacations every year; and finally, a deluxe retirement complete with a vacation home or regular jaunts around the world. Interested to know what kind of dent each of these three scenarios will make on your nest egg? Read on and we’ll price them out for you.
No-frills retirement
This is the worst-case scenario, but it’s good to know what you’ll need if you just want to scrape by, if only because it gives you a starting point to build from. For this scenario, the costing has already been done for us in a recent study, called Basic Living Expenses for the Canadian Elderly, by three University of Waterloo researchers. The study describes a no-frills retirement as one in which a couple rents (rather than owns), has no vehicles (so they take public transit), and it doesn’t include spare cash for even minor indulgences such as cable TV or alcohol. This is not the stuff of most people’s retirement dreams, but the study does budget for three nutritious home-prepared meals a day, a one-bedroom apartment plus utilities, along with typical health-care costs and other essentials like clothing and personal-care products.
How much do you need?
The study’s authors conclude that the annual cost of such a retirement in five major Canadian cities ranges from $20,200 to $27,400. Here’s the good news: to achieve this bare-bones scenario you don’t have to save a penny. The combination of full Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) program for low-income seniors pretty much covers all your basic needs, at least outside the highest-rent cities. If you and your spouse are at least 65, those government programs would provide you with a combined $22,750 a year if you have no other income. “We’ve kind of made sure the Canadian elderly don’t live in poverty but we’ve given them, like, 50 cents more than the poverty line,” says study co-author Robert Brown.
Canadians who have worked most of their lives can also usually count on substantial Canada Pension Plan payouts in retirement. A couple which receives the average CPP payout, plus maximum OAS, and maybe a little bit of GIS, can expect to receive almost $30,000 a year. So you can relax about the worst-case scenario: Even if you don’t save at all, you’re not going to have to live off cat food.
Middle-class retirement
Most Canadians, of course, hope to do better than bare-bones. Bill VanGorder, 66, the Nova Scotia chair of CARP, a group representing older Canadians, says he wants the same level of comfort he enjoyed while he was working—maybe even a bit better. He finds that increasingly seniors want to travel, pursue sometimes pricey hobbies like golf, eat out at restaurants, and maintain cottages or second homes in warm places. For the most part, this lifestyle is about having experiences and being active, rather than having more possessions. In fact, some seniors are downsizing to smaller homes to help finance their active lifestyle, he says. Active senior couples with different interests are more likely to want to keep two cars to allow both spouses to stay mobile. And VanGorder himself aspires to do more traveling, including an Alaska cruise, seeing the British Isles, visiting his sister in Australia, and seeing the rest of Canada. He’s also interested in woodworking and was surprised to find the hobby is much more expensive than he anticipated.
According to Statistics Canada, median spending by a couple over 65 is about $40,000 a year, and average spending is about $51,000. But VanGorder says to enjoy the type of retirement he wants, you might spend as much as $60,000 a year.
How much do you need?
Assuming you receive about $30,000 a year from CPP and OAS and have no employer pension, you’ll need a nest egg that can support an additional $10,000 to $30,000 a year in extra spending, plus inflation adjustments. Financial planning research suggests that you need retirement savings that amount to 25 times your annual retirement spend (not including CPP and OAS) if you want to keep spending that much for the rest of your life. So for a typical middle-class retirement, you need a nest egg of $250,000 if you just want to spend the median amount, but if you want a higher-end retirement of the kind VanGorder describes, you’ll need to save up $750,000.
Retirement deluxe
Once you get beyond the typical middle-class retirement, costs tend to skyrocket. Norbert Schlenker, a fee-only financial planner with Libra Investment Management on Salt Spring Island, B.C., says that at this level the fundamentals don’t change—people still typically have a house, two cars, restaurant meals and vacations—it’s just that the house is bigger, the cars are fancier, the restaurants are more exclusive, and the vacations more exotic. Here you are more likely to find the trophy kitchen, memberships in a golf or boating club, professionally designed and maintained gardens, and, says Schlenker, perhaps “the boat their brother-in-law saw.” Such retirees are more likely to own a vacation home, and there is more money available for spoiling the kids and grandkids. There’s no hard and fast cutoff for the deluxe life, but if you’re spending $100,000 or more each year per couple, you’re well into the realm of truly disposable income.
How much do you need?
If you don’t have an employer pension, you’ll need to be a millionaire to afford it. Assuming you get $30,000 a year from CPP and OAS, you’ll need retirement savings that can provide you with an additional $70,000 a year, which means a $1.75-million nest egg. If that sounds outrageously high, welcome to the club. Schlenker says that when he does similar calculations for his clients, invariably they’re “just shocked.”
There’s an interesting exception here though. If you and your spouse both had long careers as public employees, your public sector indexed pensions might be the ticket to the high life. For instance if you and your spouse earned an annual salary of $63,000 each working in the public sector, and you both retired at age 65 after working for 35 years, you can expect to live like royalty when you retire. Your combined pensions plus OAS will typically pay about $100,000 a year plus inflation adjustments—the equivalent to saving up a $1.75 million nest egg. That’s why many public sector workers discover that they actually have a much higher standard of living in retirement than they did when they were working.
Keep the dream alive
In the end you have to match wants to means. If you’re no millionaire, there’s no need to give up on your retirement dreams, says Schlenker. Instead try to find a lower-cost version of what you’re looking for that fits your budget. For example, if you planned on owning a luxury beach front condo in a swanky part of Florida, but you’re worried you won’t be able to afford it, you could try renting a condo away from the beach in a less sought-after locale. Or you could do what VanGorder is doing. After retiring he decided to go back to work for three days a week as business development manager for HiringSmart, a systems software and services provider. The extra cash is helping him live the good life, and he loves the work too. “I’m meeting a financial need in a way that, fortunately, turns out to be very enjoyable for me.”
• DOW -213.27 as a strong dollar and concerns about China's bank lending practices zapped commodity prices and shares, sparking a broader selloff.
• Dollar -.40c to 95.11cUS
• Oil -$1.66 to $76.08US per barrel.
• Gold -$9.60 to $1,102.70USD per ounce
by David Aston, MoneySense Magazine
Monday, January 18, 2010provided by
Nothing is more frustrating than trying to figure out how much to save for retirement. You know the amount you’ll need to save depends on what kind of retirement lifestyle you want. But how can you decide that without having some idea of how much it will cost? Is dreaming of endless vacations and a 44-ft yacht realistic? Or should you be aiming for walks in the park and the occasional meal out? Many people have no idea what they’re aiming for—and after a lot of sweating and calculating, they end up right back where they started.
We can help. While many retirement plans use complex formulas to calculate what you’ll need, we find that many Canadians just want a ballpark to aim for. If your retirement is still quite a ways off, it’s often good enough just to know what you’ll need to save to achieve each of three levels of potential retirement: a bare-bones basic retirement; a middle-class retirement with two cars, some restaurant meals and vacations every year; and finally, a deluxe retirement complete with a vacation home or regular jaunts around the world. Interested to know what kind of dent each of these three scenarios will make on your nest egg? Read on and we’ll price them out for you.
No-frills retirement
This is the worst-case scenario, but it’s good to know what you’ll need if you just want to scrape by, if only because it gives you a starting point to build from. For this scenario, the costing has already been done for us in a recent study, called Basic Living Expenses for the Canadian Elderly, by three University of Waterloo researchers. The study describes a no-frills retirement as one in which a couple rents (rather than owns), has no vehicles (so they take public transit), and it doesn’t include spare cash for even minor indulgences such as cable TV or alcohol. This is not the stuff of most people’s retirement dreams, but the study does budget for three nutritious home-prepared meals a day, a one-bedroom apartment plus utilities, along with typical health-care costs and other essentials like clothing and personal-care products.
How much do you need?
The study’s authors conclude that the annual cost of such a retirement in five major Canadian cities ranges from $20,200 to $27,400. Here’s the good news: to achieve this bare-bones scenario you don’t have to save a penny. The combination of full Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) program for low-income seniors pretty much covers all your basic needs, at least outside the highest-rent cities. If you and your spouse are at least 65, those government programs would provide you with a combined $22,750 a year if you have no other income. “We’ve kind of made sure the Canadian elderly don’t live in poverty but we’ve given them, like, 50 cents more than the poverty line,” says study co-author Robert Brown.
Canadians who have worked most of their lives can also usually count on substantial Canada Pension Plan payouts in retirement. A couple which receives the average CPP payout, plus maximum OAS, and maybe a little bit of GIS, can expect to receive almost $30,000 a year. So you can relax about the worst-case scenario: Even if you don’t save at all, you’re not going to have to live off cat food.
Middle-class retirement
Most Canadians, of course, hope to do better than bare-bones. Bill VanGorder, 66, the Nova Scotia chair of CARP, a group representing older Canadians, says he wants the same level of comfort he enjoyed while he was working—maybe even a bit better. He finds that increasingly seniors want to travel, pursue sometimes pricey hobbies like golf, eat out at restaurants, and maintain cottages or second homes in warm places. For the most part, this lifestyle is about having experiences and being active, rather than having more possessions. In fact, some seniors are downsizing to smaller homes to help finance their active lifestyle, he says. Active senior couples with different interests are more likely to want to keep two cars to allow both spouses to stay mobile. And VanGorder himself aspires to do more traveling, including an Alaska cruise, seeing the British Isles, visiting his sister in Australia, and seeing the rest of Canada. He’s also interested in woodworking and was surprised to find the hobby is much more expensive than he anticipated.
According to Statistics Canada, median spending by a couple over 65 is about $40,000 a year, and average spending is about $51,000. But VanGorder says to enjoy the type of retirement he wants, you might spend as much as $60,000 a year.
How much do you need?
Assuming you receive about $30,000 a year from CPP and OAS and have no employer pension, you’ll need a nest egg that can support an additional $10,000 to $30,000 a year in extra spending, plus inflation adjustments. Financial planning research suggests that you need retirement savings that amount to 25 times your annual retirement spend (not including CPP and OAS) if you want to keep spending that much for the rest of your life. So for a typical middle-class retirement, you need a nest egg of $250,000 if you just want to spend the median amount, but if you want a higher-end retirement of the kind VanGorder describes, you’ll need to save up $750,000.
Retirement deluxe
Once you get beyond the typical middle-class retirement, costs tend to skyrocket. Norbert Schlenker, a fee-only financial planner with Libra Investment Management on Salt Spring Island, B.C., says that at this level the fundamentals don’t change—people still typically have a house, two cars, restaurant meals and vacations—it’s just that the house is bigger, the cars are fancier, the restaurants are more exclusive, and the vacations more exotic. Here you are more likely to find the trophy kitchen, memberships in a golf or boating club, professionally designed and maintained gardens, and, says Schlenker, perhaps “the boat their brother-in-law saw.” Such retirees are more likely to own a vacation home, and there is more money available for spoiling the kids and grandkids. There’s no hard and fast cutoff for the deluxe life, but if you’re spending $100,000 or more each year per couple, you’re well into the realm of truly disposable income.
How much do you need?
If you don’t have an employer pension, you’ll need to be a millionaire to afford it. Assuming you get $30,000 a year from CPP and OAS, you’ll need retirement savings that can provide you with an additional $70,000 a year, which means a $1.75-million nest egg. If that sounds outrageously high, welcome to the club. Schlenker says that when he does similar calculations for his clients, invariably they’re “just shocked.”
There’s an interesting exception here though. If you and your spouse both had long careers as public employees, your public sector indexed pensions might be the ticket to the high life. For instance if you and your spouse earned an annual salary of $63,000 each working in the public sector, and you both retired at age 65 after working for 35 years, you can expect to live like royalty when you retire. Your combined pensions plus OAS will typically pay about $100,000 a year plus inflation adjustments—the equivalent to saving up a $1.75 million nest egg. That’s why many public sector workers discover that they actually have a much higher standard of living in retirement than they did when they were working.
Keep the dream alive
In the end you have to match wants to means. If you’re no millionaire, there’s no need to give up on your retirement dreams, says Schlenker. Instead try to find a lower-cost version of what you’re looking for that fits your budget. For example, if you planned on owning a luxury beach front condo in a swanky part of Florida, but you’re worried you won’t be able to afford it, you could try renting a condo away from the beach in a less sought-after locale. Or you could do what VanGorder is doing. After retiring he decided to go back to work for three days a week as business development manager for HiringSmart, a systems software and services provider. The extra cash is helping him live the good life, and he loves the work too. “I’m meeting a financial need in a way that, fortunately, turns out to be very enjoyable for me.”
Thursday, January 21, 2010
Financial Update For Jan. 21, 2010
• TSX -84.10 Worries about tighter lending standards in China sparked sharp losses
• DOW -122.28 a strong dollar and reports that China intends to slow the pace of lending this year in an attempt to get ahead of inflation, slammed commodities.
• Dollar -1.48c to 95.58cUS data showing volatile gasoline prices pushed Canada's annual inflation rate up in December. The better-than-expected inflation reading, along with strength in the U.S. dollar and weak oil and metal prices, depressed the Canadian dollar with the largest one day drop since Oct
• Oil -$1.66 to $77.36US per barrel.
• Gold -$27 to $1,113.00USD per ounce
Retailers' deep discounts keep rate fears at bay
Paul Vieira, Financial Post
OTTAWA -- Retailers chopped prices for clothing, furniture and appliances at a record pace in December in a battle to lure cautious consumers in the key Christmas period, data showed Wednesday - reinforcing the view that inflation poses no threat and the Bank of Canada could hold off longer than expected on rate hikes.
That helped send the Canadian dollar into a tailspin, as it posted its sharpest decline in three months. Also weighing down on the currency was news that Chinese authorities had instructed certain of its banks to curb lending because they failed to meet capital requirements. Traders sold the loonie on worries that the red-hot Chinese economy could slow, and hence dampen expansion in commodity-rich Canada.
But the shocker for markets was Canadian consumer price data for December, which showed inflation was much softer than analysts' expected. The Bank of Canada sets its key policy rate to achieve inflation of 2%.
Headline inflation dropped 0.3% month over month, while the year-over-year rate stands at 1.3% - a big swing from negative readings in September but below the expected 1.6% rate. Meanwhile, core inflation, which removes volatile-priced items such as energy, also fell 0.3% in the month, leaving the year-over-year rate unchanged from November at 1.5%.
Six of the eight broad consumer-price categories measured by Statistics Canada were either flat or down in December.
"Inflation is subdued with a capital ‘S,'" said David Rosenberg, chief economist at asset manager Gluskin Sheff + Associates of Toronto. "These are hardly [inflation] rates that will cause the Bank of Canada to tighten policy prematurely."
Driving prices lower was a bid by retailers to lure weary consumers to spend. Prices for clothes, furniture and appliances sustained their biggest single-month drop on record, said Douglas Porter, deputy chief economist at BMO Capital Markets.
"This says more of the competition among retailers than anything else," he said, adding prices have mostly dropped on discretionary goods, which are the type consumers delay buying in uncertain economic times.
Sales volumes have returned to pre-recession levels, but Mr. Porter said the rate of sales growth "is not blowing the door down" as in previous recoveries. Retail sales are expected to advance between 2.5% and 3% in the fourth quarter, which would be down from the 3.1% gain recorded in the preceding three-month period.
In its interest-rate statement on Tuesday, the Bank of Canada acknowledged core inflation was ahead of expectations. Nevertheless, it indicated it was comfortable with keeping its key rate at a record-low 0.25% until at least July, which it has conditionally pledged to do, as a result of "persistent strength" in the Canadian dollar, which makes imports cheaper; weak U.S. demand; and the large amount of economic slack, which includes unused industrial capacity and relatively high levels of unemployment.
The central bank is scheduled to expand on its rate statement and economic outlook with the release of its quarterly monetary policy report Thursday.
Mr. Rosenberg told clients in a note Wednesday he reckons the Bank of Canada would not begin raising its target rate until mid-2011 "at the earliest."
He said historically the central bank has resisted tightening until the economic slack is nearly absorbed and the unemployment rate drops 150 basis points from its peak. (That peak - 8.7% - was set last August. The jobless rate is now 8.5%.)
"Unless the bank wants to be pre-emptive, which is highly unlikely when it acknowledges that ‘the recovery continues to depend on exceptional monetary and fiscal stimulus' ... then to go and raise rates before the middle part of 2011 would be totally inconsistent with its own forecast as it stands right now," Mr. Rosenberg said
• DOW -122.28 a strong dollar and reports that China intends to slow the pace of lending this year in an attempt to get ahead of inflation, slammed commodities.
• Dollar -1.48c to 95.58cUS data showing volatile gasoline prices pushed Canada's annual inflation rate up in December. The better-than-expected inflation reading, along with strength in the U.S. dollar and weak oil and metal prices, depressed the Canadian dollar with the largest one day drop since Oct
• Oil -$1.66 to $77.36US per barrel.
• Gold -$27 to $1,113.00USD per ounce
Retailers' deep discounts keep rate fears at bay
Paul Vieira, Financial Post
OTTAWA -- Retailers chopped prices for clothing, furniture and appliances at a record pace in December in a battle to lure cautious consumers in the key Christmas period, data showed Wednesday - reinforcing the view that inflation poses no threat and the Bank of Canada could hold off longer than expected on rate hikes.
That helped send the Canadian dollar into a tailspin, as it posted its sharpest decline in three months. Also weighing down on the currency was news that Chinese authorities had instructed certain of its banks to curb lending because they failed to meet capital requirements. Traders sold the loonie on worries that the red-hot Chinese economy could slow, and hence dampen expansion in commodity-rich Canada.
But the shocker for markets was Canadian consumer price data for December, which showed inflation was much softer than analysts' expected. The Bank of Canada sets its key policy rate to achieve inflation of 2%.
Headline inflation dropped 0.3% month over month, while the year-over-year rate stands at 1.3% - a big swing from negative readings in September but below the expected 1.6% rate. Meanwhile, core inflation, which removes volatile-priced items such as energy, also fell 0.3% in the month, leaving the year-over-year rate unchanged from November at 1.5%.
Six of the eight broad consumer-price categories measured by Statistics Canada were either flat or down in December.
"Inflation is subdued with a capital ‘S,'" said David Rosenberg, chief economist at asset manager Gluskin Sheff + Associates of Toronto. "These are hardly [inflation] rates that will cause the Bank of Canada to tighten policy prematurely."
Driving prices lower was a bid by retailers to lure weary consumers to spend. Prices for clothes, furniture and appliances sustained their biggest single-month drop on record, said Douglas Porter, deputy chief economist at BMO Capital Markets.
"This says more of the competition among retailers than anything else," he said, adding prices have mostly dropped on discretionary goods, which are the type consumers delay buying in uncertain economic times.
Sales volumes have returned to pre-recession levels, but Mr. Porter said the rate of sales growth "is not blowing the door down" as in previous recoveries. Retail sales are expected to advance between 2.5% and 3% in the fourth quarter, which would be down from the 3.1% gain recorded in the preceding three-month period.
In its interest-rate statement on Tuesday, the Bank of Canada acknowledged core inflation was ahead of expectations. Nevertheless, it indicated it was comfortable with keeping its key rate at a record-low 0.25% until at least July, which it has conditionally pledged to do, as a result of "persistent strength" in the Canadian dollar, which makes imports cheaper; weak U.S. demand; and the large amount of economic slack, which includes unused industrial capacity and relatively high levels of unemployment.
The central bank is scheduled to expand on its rate statement and economic outlook with the release of its quarterly monetary policy report Thursday.
Mr. Rosenberg told clients in a note Wednesday he reckons the Bank of Canada would not begin raising its target rate until mid-2011 "at the earliest."
He said historically the central bank has resisted tightening until the economic slack is nearly absorbed and the unemployment rate drops 150 basis points from its peak. (That peak - 8.7% - was set last August. The jobless rate is now 8.5%.)
"Unless the bank wants to be pre-emptive, which is highly unlikely when it acknowledges that ‘the recovery continues to depend on exceptional monetary and fiscal stimulus' ... then to go and raise rates before the middle part of 2011 would be totally inconsistent with its own forecast as it stands right now," Mr. Rosenberg said
Wednesday, January 20, 2010
Financial Update For Jan. 20, 2009
• TSX +12.88 as an uptick in bullion prices helped push up gold producers. Strong economic data and a Bank of Canada growth forecast suggested that Canada's recession recovery is on track
• DOW +115.78 By comparison, major U.S. stock indexes advanced more than 1% as investors bet a potential Republican victory in Massachusetts' Senate race could stall President Barack Obama's reform agenda.
• Dollar -.40c to 97.02cUS
• Oil +$1.02 to $79.02US per barrel.
• Gold +$9.60 to $1,139.70USD per ounce
Bank lowers slightly growth forecast for 2009 and 2010, but keeps interest rates unchanged
OTTAWA - The global recovery is under way but expansion of the Canadian economy remains dependent on government support and historically low interest rates, the Bank of Canada said today.
As expected, the central bank again pledged to keep its trendsetting policy rate at the lowest practical level of 0.25 per cent until mid-2010, saying the economy at the moment is performing slightly worse than it projected three months ago.
To reinforce the commitment, the bank said it was extending its emergency lending instruments to April, with maturity dates beyond June, at the low policy rate.
The announcement contained few surprises for markets, but the tweaking of growth rates — although at the margins — was somewhat unexpected.
“Economic growth in Canada resumed in the third quarter of 2009 and is expected to have picked up further in the fourth quarter,” bank governor Mark Carney and his policy-making council said in an accompanying note.
“Nevertheless, considerable excess supply remains, and the bank judges that the economy was operating about 3.25 per cent below its production capacity in the fourth quarter of 2009.”
Carney had been among the most bullish of forecasters for the economy this year, although by historic standards, even Carney was not anticipating a robust recovery.
Now the bank says the economy likely contracted by 2.5 per cent last year, a little worse than the 2.4 per cent it had predicted in October.
As well, it says growth this year will be 2.9 per cent, one-tenth of a point less than it had previously forecast and more in line with the private sector consensus of 2.6 per cent.
The good news is that the economy will make the up ground in 2011, says the bank, with a growth rate of 3.5 per cent. It had earlier pegged next year’s growth at 3.3 per cent.
The bank’s message to Canadians is that although conditions are improving, strengthened by a global economy that is expanding faster than expected, the recovery still is dependent on “exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems.”
In Canada, the bank says the private sector won’t become the sole driver of domestic demand until 2011.
As has been the case throughout the recession, Canada’s recovery continues to be hampered by the slow pick-up in U.S. demand for Canadian products and the high Canadian dollar, which makes those exports less competitive.
That means Canada’s internal domestic economy, largely reflected in consumer spending and the hot housing market, will be the main engine of the recovery.
The bank noted that inflation has been rising faster than it anticipated, but appeared not to be overly concerned, especially with the large amount of slack in the economy.
Although economists forecast inflation likely hit 1.6 per cent in December, after being below zero through much of the summer and part of the fall, the bank said it still doesn’t believe inflation will return to the two-per-cent target until the third quarter of 2011, when it expects the economy to be firing on all cylinders.
• DOW +115.78 By comparison, major U.S. stock indexes advanced more than 1% as investors bet a potential Republican victory in Massachusetts' Senate race could stall President Barack Obama's reform agenda.
• Dollar -.40c to 97.02cUS
• Oil +$1.02 to $79.02US per barrel.
• Gold +$9.60 to $1,139.70USD per ounce
Bank lowers slightly growth forecast for 2009 and 2010, but keeps interest rates unchanged
OTTAWA - The global recovery is under way but expansion of the Canadian economy remains dependent on government support and historically low interest rates, the Bank of Canada said today.
As expected, the central bank again pledged to keep its trendsetting policy rate at the lowest practical level of 0.25 per cent until mid-2010, saying the economy at the moment is performing slightly worse than it projected three months ago.
To reinforce the commitment, the bank said it was extending its emergency lending instruments to April, with maturity dates beyond June, at the low policy rate.
The announcement contained few surprises for markets, but the tweaking of growth rates — although at the margins — was somewhat unexpected.
“Economic growth in Canada resumed in the third quarter of 2009 and is expected to have picked up further in the fourth quarter,” bank governor Mark Carney and his policy-making council said in an accompanying note.
“Nevertheless, considerable excess supply remains, and the bank judges that the economy was operating about 3.25 per cent below its production capacity in the fourth quarter of 2009.”
Carney had been among the most bullish of forecasters for the economy this year, although by historic standards, even Carney was not anticipating a robust recovery.
Now the bank says the economy likely contracted by 2.5 per cent last year, a little worse than the 2.4 per cent it had predicted in October.
As well, it says growth this year will be 2.9 per cent, one-tenth of a point less than it had previously forecast and more in line with the private sector consensus of 2.6 per cent.
The good news is that the economy will make the up ground in 2011, says the bank, with a growth rate of 3.5 per cent. It had earlier pegged next year’s growth at 3.3 per cent.
The bank’s message to Canadians is that although conditions are improving, strengthened by a global economy that is expanding faster than expected, the recovery still is dependent on “exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems.”
In Canada, the bank says the private sector won’t become the sole driver of domestic demand until 2011.
As has been the case throughout the recession, Canada’s recovery continues to be hampered by the slow pick-up in U.S. demand for Canadian products and the high Canadian dollar, which makes those exports less competitive.
That means Canada’s internal domestic economy, largely reflected in consumer spending and the hot housing market, will be the main engine of the recovery.
The bank noted that inflation has been rising faster than it anticipated, but appeared not to be overly concerned, especially with the large amount of slack in the economy.
Although economists forecast inflation likely hit 1.6 per cent in December, after being below zero through much of the summer and part of the fall, the bank said it still doesn’t believe inflation will return to the two-per-cent target until the third quarter of 2011, when it expects the economy to be firing on all cylinders.
Tuesday, January 19, 2010
Financial Update For Jan. 19, 2010
• TSX +65.17 as energy and materials producers rose on the back of stronger commodity prices. investors will comb through the Bank of Canada's interest rate announcement today and Monetary Policy Report on Thursday for hints on when bank intends to raise rates for the first time since the recession hit.
• DOW U.S. markets closed for the Martin Luther King Jr. holiday.
• Dollar +.28c to 97.42cUS
• Oil +$.25 to $78.25US per barrel.
• Gold +$2.90 to $1,133.40USD per ounce
Record home sales capping 2009 due to supply and demand, not bubble
BY SUNNY FREEMAN, THE CANADIAN PRESS
TORONTO — Record home sales last month are based on low supply and high demand and are more likely to drop off this year than inflate a housing bubble that could threaten a fragile recovery, economists say.
A Canadian Real Estate Association report released Friday said December and the 2009 fourth quarter were the best periods on record for home resales, while prices also rose sharply from their year-earlier levels.
Meanwhile, strong demand continued to deplete the number of homes for sale and the estimated 5.6 months it would take to sell a house through the Multiple Listing Service in December was less than half the 12.3 months it would have taken a year earlier.
The number of total listings fell 22 per cent in December from the same 2008 period and 12.6 per cent for the year.
The imbalance in supply and demand drove the national average price of homes to $337,410 in December, 19 per cent higher than in December 2008, but slightly lower than the 2009 average of $348,840.
Douglas Porter, deputy chief economist at BMO Capital Markets said while high prices caused by strong demand and weak supply could pose a risk to the fragile recovery, he is not willing to jump on the “bubble bandwagon” yet.
A bubble occurs when prices increase without any sound underlying fundamentals, he explained, and that’s not the case in Canada’s housing market, which is closely tied to changing interest rates and economic fundamentals.
“We still do have a relatively tight supply situation and exceptionally low interest rates and a mild recovery in the economy, so there are a lot of good reasons why home prices are rising.”
“What we’re seeing is almost textbook recovery,” he said. “The speed of the recovery is mind-boggling, the fact that housing is leading the recovery is really not a surprise... it’s exactly what you’d expect to happen.”
Finance Minister Jim Flaherty said Friday he does not see a housing bubble yet, but he noted the government has many tools at its disposal — from raising down payment requirements on insured mortgages, to lowering amortization periods and urging the banks to be more cautious in their lending — to prevent such a thing from happening.
“We don’t want to have a group of house purchasers who purchased houses now at insured mortgages at relatively low rates who would not be able to manage them if rates were to increase later on,” Flaherty said in an interview with Business News Network, a cable TV business channel in Toronto.
“I’ve looked at the numbers with CMHC,” he added. “We’re monitoring it. I do not see evidence of a bubble right now, but we’re going to keep watching it. There are some steps we can take that we will take if it’s necessary.”
The association said 27,744 units were sold across Canada in December, up 72 per cent from the same month in 2008. The year-earlier period saw the lowest sales in a decade in the wake of a global credit crunch and the start of the recession in Canada.
The Kitchener-Waterloo Real Estate Board set a record in December with 356 sales. The Real Estate Board of Cambridge recorded 150 sales, up 60 per cent from the same month a year earlier.
December also marked the end of the strongest quarterly sales volume ever measured by CREA, with 137,957 homes sold over three months on a seasonally adjusted basis — up 2.6 per cent from the previous record set in the first quarter of 2007.
“CREA’s latest statistics will no doubt spark further bubble talk amongst the usual suspects,” said the association’s chief economist Gregory Klump. “(But) cooler heads recognize that many of the recent gains reflect temporary factors that could fade by summer.”
The 59 per cent year-over-year fourth quarter gain drove last year’s annual sales volume above 2008 levels, but the number of transactions last year was 10.7 per cent below the peak reached in 2007.
“The extraordinary decline in activity one year ago and subsequent rebound, particularly for higher-priced real estate, is stretching current year-over-year comparisons,” said Klump.
Klump believes the market will balance out in 2010 because consumer demand will be met with a supply side rise as the number of new homes increases and cautious homeowners become confident about selling, which will add more homes on the market and help drive prices down.
Porter said Friday’s report signals that Canadians have regained their confidence in the economy and the surge in demand is beginning to be met with a serious supply response, citing a notable uptick in December housing starts.
“Builders had been very cautious and they’re only now starting to crank up their output again, but even so, the comeback in new housing starts has been much more modest than the rebound we’ve seen in sales,” he said. “And people who own homes have also been a little reluctant to put their house up for sale because of the broader uncertainty that we’ve seen.”
He said that the demand in housing was most pronounced in B.C. and Ontario, where home buyers might be hoping to beat the introduction of the HST, the harmonized sales tax which is set to replace provincial taxes in those provinces later this year.
The Bank of Canada indicated last week that it was premature to be talking about a housing bubble in Canada and said recent house price increases are in line with supply and demand fundamentals.
The bank considers the current hot market to be a phenomenon based on temporary factors, such as pent-up demand from the recession, and low mortgage rates.
A CIBC forecast released Thursday indicated that the hot housing market will continue to drive economic growth during the first half of 2010, but will come to a screeching halt in the second half of the year, when interest rates are expected to rise.
The Canadian Press
Canada to press G7 finance ministers to reform financial system
BY JULIAN BELTRAME
OTTAWA — Canada believes time is running out for meaningful reforms to the world financial system to avert future economic meltdowns and will push for movement on the issue at next month’s G7 finance ministers meeting in Iqaluit.
Canadian officials briefing reporters on what is likely to be the most unusual G7 meeting ever say signs of hubris are again apparent among many of the global financiers blamed for plunging the world into recession.
Finance Minister Jim Flaherty is hoping that holding the meeting in isolated Iqaluit in the middle of winter will concentrate minds and lead to a renewed commitment to implement reforms.
The officials, speaking on background, said Monday that Flaherty is concerned that the momentum for reform of the world’s financial and banking sectors is waning as the economic crisis recedes.
The United Kingdom has imposed a punitive tax on executive bonuses, and the United States is also proposing to tax its largest banks. But system reform, such as ensuring risk is properly assessed, still remains to be implemented.
Canada believes the G7 countries have the primary responsibility for ensuring abuses are not repeated since the crisis originated within the world’s leading economies, the officials said.
The Iqaluit meeting in early February will be the first since the larger Group of 20 forum was declared the pre-eminent body for dealing with the world’s economic and financial problems.
And it will be unusual not just for its location, but also for its form.
Unlike past meetings, there will be no final communique issued of policies adopted in principle by the ministers and central bank governors.
By making the meetings more informal, the officials say Flaherty hopes they will be more frank and useful and prove that the G7 club is worth preserving.
One official said the necessity of producing a communique, or final concluding text, tends to concentrate discussions along producing unanimity. Freed of the need to produce a text, ministers and governors can engage in a more freewheeling, frank and political discussion.
One of those discussions will actually be held by a roaring fire, the official said.
The future of the G7, whether it will remain as a separate institution or becomes a subgrouping of the larger G20, remains up in the air and will be an issue before the ministers and governors in Iqaluit.
One reason it’s important to Canada that the G7 remain an influential institution is that collapsing the group into the larger G20 dilutes the country’s influence at the top table.
The officials say the Feb. 5-6 meeting in Iqaluit will tackle the gamut of issues dealing with the global economy, including ensuring the recovery is sustainable, exit strategies from government stimulus spending, global imbalances, currency exchange rates and trade.
One agenda item was added in the past week — Haiti — since the G7 countries are the biggest donors to the earthquake-devastated nation’s relief effort.
Flaherty has indicated that with relief efforts underway, the G7 meeting would be an ideal time to begin exploring how countries can help Haiti reconstruct and recover from the disaster.
The meeting’s unusual location, above the treeline in the middle of winter, has also necessitated contingency plans in case of inclement weather.
Should Iqaluit become inaccessible from air for the Feb. 5-6 meeting, the conference will be switched to Ottawa, officials said.
• DOW U.S. markets closed for the Martin Luther King Jr. holiday.
• Dollar +.28c to 97.42cUS
• Oil +$.25 to $78.25US per barrel.
• Gold +$2.90 to $1,133.40USD per ounce
Record home sales capping 2009 due to supply and demand, not bubble
BY SUNNY FREEMAN, THE CANADIAN PRESS
TORONTO — Record home sales last month are based on low supply and high demand and are more likely to drop off this year than inflate a housing bubble that could threaten a fragile recovery, economists say.
A Canadian Real Estate Association report released Friday said December and the 2009 fourth quarter were the best periods on record for home resales, while prices also rose sharply from their year-earlier levels.
Meanwhile, strong demand continued to deplete the number of homes for sale and the estimated 5.6 months it would take to sell a house through the Multiple Listing Service in December was less than half the 12.3 months it would have taken a year earlier.
The number of total listings fell 22 per cent in December from the same 2008 period and 12.6 per cent for the year.
The imbalance in supply and demand drove the national average price of homes to $337,410 in December, 19 per cent higher than in December 2008, but slightly lower than the 2009 average of $348,840.
Douglas Porter, deputy chief economist at BMO Capital Markets said while high prices caused by strong demand and weak supply could pose a risk to the fragile recovery, he is not willing to jump on the “bubble bandwagon” yet.
A bubble occurs when prices increase without any sound underlying fundamentals, he explained, and that’s not the case in Canada’s housing market, which is closely tied to changing interest rates and economic fundamentals.
“We still do have a relatively tight supply situation and exceptionally low interest rates and a mild recovery in the economy, so there are a lot of good reasons why home prices are rising.”
“What we’re seeing is almost textbook recovery,” he said. “The speed of the recovery is mind-boggling, the fact that housing is leading the recovery is really not a surprise... it’s exactly what you’d expect to happen.”
Finance Minister Jim Flaherty said Friday he does not see a housing bubble yet, but he noted the government has many tools at its disposal — from raising down payment requirements on insured mortgages, to lowering amortization periods and urging the banks to be more cautious in their lending — to prevent such a thing from happening.
“We don’t want to have a group of house purchasers who purchased houses now at insured mortgages at relatively low rates who would not be able to manage them if rates were to increase later on,” Flaherty said in an interview with Business News Network, a cable TV business channel in Toronto.
“I’ve looked at the numbers with CMHC,” he added. “We’re monitoring it. I do not see evidence of a bubble right now, but we’re going to keep watching it. There are some steps we can take that we will take if it’s necessary.”
The association said 27,744 units were sold across Canada in December, up 72 per cent from the same month in 2008. The year-earlier period saw the lowest sales in a decade in the wake of a global credit crunch and the start of the recession in Canada.
The Kitchener-Waterloo Real Estate Board set a record in December with 356 sales. The Real Estate Board of Cambridge recorded 150 sales, up 60 per cent from the same month a year earlier.
December also marked the end of the strongest quarterly sales volume ever measured by CREA, with 137,957 homes sold over three months on a seasonally adjusted basis — up 2.6 per cent from the previous record set in the first quarter of 2007.
“CREA’s latest statistics will no doubt spark further bubble talk amongst the usual suspects,” said the association’s chief economist Gregory Klump. “(But) cooler heads recognize that many of the recent gains reflect temporary factors that could fade by summer.”
The 59 per cent year-over-year fourth quarter gain drove last year’s annual sales volume above 2008 levels, but the number of transactions last year was 10.7 per cent below the peak reached in 2007.
“The extraordinary decline in activity one year ago and subsequent rebound, particularly for higher-priced real estate, is stretching current year-over-year comparisons,” said Klump.
Klump believes the market will balance out in 2010 because consumer demand will be met with a supply side rise as the number of new homes increases and cautious homeowners become confident about selling, which will add more homes on the market and help drive prices down.
Porter said Friday’s report signals that Canadians have regained their confidence in the economy and the surge in demand is beginning to be met with a serious supply response, citing a notable uptick in December housing starts.
“Builders had been very cautious and they’re only now starting to crank up their output again, but even so, the comeback in new housing starts has been much more modest than the rebound we’ve seen in sales,” he said. “And people who own homes have also been a little reluctant to put their house up for sale because of the broader uncertainty that we’ve seen.”
He said that the demand in housing was most pronounced in B.C. and Ontario, where home buyers might be hoping to beat the introduction of the HST, the harmonized sales tax which is set to replace provincial taxes in those provinces later this year.
The Bank of Canada indicated last week that it was premature to be talking about a housing bubble in Canada and said recent house price increases are in line with supply and demand fundamentals.
The bank considers the current hot market to be a phenomenon based on temporary factors, such as pent-up demand from the recession, and low mortgage rates.
A CIBC forecast released Thursday indicated that the hot housing market will continue to drive economic growth during the first half of 2010, but will come to a screeching halt in the second half of the year, when interest rates are expected to rise.
The Canadian Press
Canada to press G7 finance ministers to reform financial system
BY JULIAN BELTRAME
OTTAWA — Canada believes time is running out for meaningful reforms to the world financial system to avert future economic meltdowns and will push for movement on the issue at next month’s G7 finance ministers meeting in Iqaluit.
Canadian officials briefing reporters on what is likely to be the most unusual G7 meeting ever say signs of hubris are again apparent among many of the global financiers blamed for plunging the world into recession.
Finance Minister Jim Flaherty is hoping that holding the meeting in isolated Iqaluit in the middle of winter will concentrate minds and lead to a renewed commitment to implement reforms.
The officials, speaking on background, said Monday that Flaherty is concerned that the momentum for reform of the world’s financial and banking sectors is waning as the economic crisis recedes.
The United Kingdom has imposed a punitive tax on executive bonuses, and the United States is also proposing to tax its largest banks. But system reform, such as ensuring risk is properly assessed, still remains to be implemented.
Canada believes the G7 countries have the primary responsibility for ensuring abuses are not repeated since the crisis originated within the world’s leading economies, the officials said.
The Iqaluit meeting in early February will be the first since the larger Group of 20 forum was declared the pre-eminent body for dealing with the world’s economic and financial problems.
And it will be unusual not just for its location, but also for its form.
Unlike past meetings, there will be no final communique issued of policies adopted in principle by the ministers and central bank governors.
By making the meetings more informal, the officials say Flaherty hopes they will be more frank and useful and prove that the G7 club is worth preserving.
One official said the necessity of producing a communique, or final concluding text, tends to concentrate discussions along producing unanimity. Freed of the need to produce a text, ministers and governors can engage in a more freewheeling, frank and political discussion.
One of those discussions will actually be held by a roaring fire, the official said.
The future of the G7, whether it will remain as a separate institution or becomes a subgrouping of the larger G20, remains up in the air and will be an issue before the ministers and governors in Iqaluit.
One reason it’s important to Canada that the G7 remain an influential institution is that collapsing the group into the larger G20 dilutes the country’s influence at the top table.
The officials say the Feb. 5-6 meeting in Iqaluit will tackle the gamut of issues dealing with the global economy, including ensuring the recovery is sustainable, exit strategies from government stimulus spending, global imbalances, currency exchange rates and trade.
One agenda item was added in the past week — Haiti — since the G7 countries are the biggest donors to the earthquake-devastated nation’s relief effort.
Flaherty has indicated that with relief efforts underway, the G7 meeting would be an ideal time to begin exploring how countries can help Haiti reconstruct and recover from the disaster.
The meeting’s unusual location, above the treeline in the middle of winter, has also necessitated contingency plans in case of inclement weather.
Should Iqaluit become inaccessible from air for the Feb. 5-6 meeting, the conference will be switched to Ottawa, officials said.
Friday, January 15, 2010
Financial Update For Jan. 15, 2010
• TSX -49.18 hurt by weakening oil prices and after the U.S. futures regulator said it would review possible position limits on gold and silver
• DOW +29.78 as Intel Corp., the world's biggest chip maker by volume, surpassed analyst estimates of 30cs a share. Earnings came in at 40c a share, a big improvement from 4c a share a year ago. Investors see the chip maker's earnings as a sign of business and consumer demand in the overall economy
• Dollar +.68c to 97.71cUS
• Oil -$.26 to $79.39US per barrel. as weak U.S. economic signals and high inventories spurred fears of a sluggish rebound in demand in the world's largest energy consumer. Also hurting prices was a proposal by the U.S. regulator to limit how many energy contracts hedge funds, investment banks and other speculators can control.
• Gold +$6.20 to $1,142.60USD per ounce
Ontario's battered economy picked up in 3rd quarter, 1st gain since recession
THE CANADIAN PRESS, 2010
TORONTO - Ontario's battered economy picked up in the third quarter of 2009, the first gain since it sputtered into recession.
The province's real gross domestic product increased 0.5 per cent from July to August, largely due to improvements in the auto sector, Ontario's Ministry of Finance reported Thursday.
That surpassed Canada's real GDP, which rose 0.1 per cent in the same period. The U.S. economy rose 0.6 per cent in the third quarter.
Ontario's growth follows four consecutive quarters of declines, including a drop of 1.0 per cent from April to June.
It's a good start, but Ontario isn't out of the woods yet, said TD economist Derek Burleton.
"Until many of the industries begin to make up a significant amount of the ground lost, it's hard to claim victory," he said.
Job numbers haven't turned around either, he noted.
According to Statistics Canada, Ontario lost an estimated 16,600 jobs in December. It gained 2,000 full-time jobs but lost 18,600 part-time positions. However, the unemployment rate was unchanged at 9.3 per cent.
The job numbers show that unemployment remains at a high level, said Alicia Johnston, a spokeswoman for Ontario Finance Minister Dwight Duncan, who was unavailable for comment.
"While this modest growth in Ontario's economy is encouraging news, our families and businesses are still feeling the effects of the global downturn," she said.
The ministry said Ontario's third-quarter growth reflected gains in all major spending areas, including consumer, business investment and government expenditures.
Consumer spending rose one per cent in the third quarter, as more people purchased vehicles, furniture and appliances, clothing and footwear and natural gas, it said.
Spending on motor vehicles and parts increased 5.7 per cent during the three-month period.
Auto production is still almost 50 per cent below levels posted at the beginning of 2007, the ministry said.
However, auto industry output grew 16.8 per cent in the third quarter, as several assembly lines resumed production following a big market downturn in the second half of 2008.
Business investment on plant and equipment rose 7.6 per cent. Exports also increased 4.2 per cent and imports rose 6.5 per cent following three consecutive quarters of declines.
Residential construction investment spending rose 0.6 per cent, following a 0.8 per cent gain in the second quarter. Spending on new housing construction slipped 11.2 per cent - the seventh consecutive quarterly decline - while renovation activity surged 5.8 per cent.
Obama: Tax banks to recover remaining cost of public’s big bailout; ‘We want our money back’
BY JIM KUHNHENN
WASHINGTON — U.S. President Barack Obama told banks Thursday they should pay a new tax to recoup the cost of bailing out foundering firms at the height of the financial crisis. “We want our money back,” he said.
In a brief appearance with advisers at the White House, Obama branded the latest round of bank bonuses as “obscene.” But he said his goal was to prevent such excesses in the future, not to punish banks for past behaviour.
The tax, which would require congressional approval, would last at least 10 years and generate about $90 billion US over the decade, according to administration estimates. “If these companies are in good enough shape to afford massive bonuses, they are surely in good enough shape to afford paying back every penny to taxpayers,” Obama said.
Advisers believe the administration can make an argument that banks should tap their bonus pools for the fee instead of passing the cost on to consumers.
The president’s tone was emphatic and populist, capitalizing on public antipathy toward Wall Street. With the sharp words, he also tried to deflect some of the growing skepticism aimed at his own economic policies as unemployment stubbornly hovers around 10 per cent.
The proposed 0.15 per cent tax on the liabilities of large financial institutions would apply only to those companies with assets of more than $50 billion — a group estimated at about 50. Administration officials estimate that 60 per cent of the revenue would come from the 10 biggest ones.
They would have to pay up even though many did not accept any taxpayer assistance and most that did have repaid the infusions.
Obama said big banks had acted irresponsibility, taken reckless risk for short-term profits and plunged into a crisis of their own making. He cast the struggle ahead as one between the finance industry and average people.
“We are already hearing a hue and cry from Wall Street, suggesting that this proposed fee is not only unwelcome but unfair, that by some twisted logic, it is more appropriate for the American people to bear the cost of the bailout rather than the industry that benefited from it, even though these executives are out there giving themselves huge bonuses,” Obama said.
He renewed his call for a regulatory overhaul of the industry and scolded bankers for opposing the tighter oversight in legislation moving through Congress.
“What I’d say to these executives is this: Instead of setting a phalanx of lobbyists to fight this proposal or employing an army of lawyers and accountants to help evade the fee, I’d suggest you might want to consider simply meeting your responsibility,” Obama said.
At issue is the net cost of the fund initiated by the Bush administration to help financial institutions get rid of soured assets. The $700 billion Troubled Asset Relief Program (TARP) has expanded to help auto companies and homeowners.
Insurer American International Group, the largest beneficiary at nearly $70 billion, would have to pay the tax. But General Motors Co. and Chrysler Group LLC, whose $66 billion in government loans are not expected to be repaid fully, would not.
Administration officials said financial institutions were both a significant cause of the crisis and chief beneficiaries of the rescue efforts, should bear the brunt of the cost.
Bankers did not hide their objections.
“Politics have overtaken the economics,” said Scott Talbott, the chief lobbyist for the Financial Services Roundtable, a group representing large Wall Street institutions. “This is a punitive tax on companies that repaid TARP in full or never took TARP.”
Even before details came out, Jamie Dimon, chief executive of JPMorgan Chase & Co., said: “Using tax policy to punish people is a bad idea.”
Obama is trying to accelerate terms that require the president to seek a way to recoup unrecovered money in 2013, five years after the law was enacted.
So far, the Treasury has given $247 billion to more than 700 banks. Of that, $162 billion has been repaid and banks have paid an additional $11 billion in interest and dividends.
In Congress, Democrats embraced Obama’s proposal while Republicans rejected it.
“I think it is entirely reasonable to say that the industry that, A, caused these problems more than any other and, B, benefited from the activity, should be contributing,” said Democratic Rep. Barney Frank of Massachusetts, chair of the House Financial Services Committee.
But Republican Rep. Scott Garrett of New Jersey, who’s on Frank’s committee, called it a “job-killing initiative that will further cripple the economy by increasing fees passed on to consumers and small businesses, while reducing consumer credit.”
The Associated Press
• DOW +29.78 as Intel Corp., the world's biggest chip maker by volume, surpassed analyst estimates of 30cs a share. Earnings came in at 40c a share, a big improvement from 4c a share a year ago. Investors see the chip maker's earnings as a sign of business and consumer demand in the overall economy
• Dollar +.68c to 97.71cUS
• Oil -$.26 to $79.39US per barrel. as weak U.S. economic signals and high inventories spurred fears of a sluggish rebound in demand in the world's largest energy consumer. Also hurting prices was a proposal by the U.S. regulator to limit how many energy contracts hedge funds, investment banks and other speculators can control.
• Gold +$6.20 to $1,142.60USD per ounce
Ontario's battered economy picked up in 3rd quarter, 1st gain since recession
THE CANADIAN PRESS, 2010
TORONTO - Ontario's battered economy picked up in the third quarter of 2009, the first gain since it sputtered into recession.
The province's real gross domestic product increased 0.5 per cent from July to August, largely due to improvements in the auto sector, Ontario's Ministry of Finance reported Thursday.
That surpassed Canada's real GDP, which rose 0.1 per cent in the same period. The U.S. economy rose 0.6 per cent in the third quarter.
Ontario's growth follows four consecutive quarters of declines, including a drop of 1.0 per cent from April to June.
It's a good start, but Ontario isn't out of the woods yet, said TD economist Derek Burleton.
"Until many of the industries begin to make up a significant amount of the ground lost, it's hard to claim victory," he said.
Job numbers haven't turned around either, he noted.
According to Statistics Canada, Ontario lost an estimated 16,600 jobs in December. It gained 2,000 full-time jobs but lost 18,600 part-time positions. However, the unemployment rate was unchanged at 9.3 per cent.
The job numbers show that unemployment remains at a high level, said Alicia Johnston, a spokeswoman for Ontario Finance Minister Dwight Duncan, who was unavailable for comment.
"While this modest growth in Ontario's economy is encouraging news, our families and businesses are still feeling the effects of the global downturn," she said.
The ministry said Ontario's third-quarter growth reflected gains in all major spending areas, including consumer, business investment and government expenditures.
Consumer spending rose one per cent in the third quarter, as more people purchased vehicles, furniture and appliances, clothing and footwear and natural gas, it said.
Spending on motor vehicles and parts increased 5.7 per cent during the three-month period.
Auto production is still almost 50 per cent below levels posted at the beginning of 2007, the ministry said.
However, auto industry output grew 16.8 per cent in the third quarter, as several assembly lines resumed production following a big market downturn in the second half of 2008.
Business investment on plant and equipment rose 7.6 per cent. Exports also increased 4.2 per cent and imports rose 6.5 per cent following three consecutive quarters of declines.
Residential construction investment spending rose 0.6 per cent, following a 0.8 per cent gain in the second quarter. Spending on new housing construction slipped 11.2 per cent - the seventh consecutive quarterly decline - while renovation activity surged 5.8 per cent.
Obama: Tax banks to recover remaining cost of public’s big bailout; ‘We want our money back’
BY JIM KUHNHENN
WASHINGTON — U.S. President Barack Obama told banks Thursday they should pay a new tax to recoup the cost of bailing out foundering firms at the height of the financial crisis. “We want our money back,” he said.
In a brief appearance with advisers at the White House, Obama branded the latest round of bank bonuses as “obscene.” But he said his goal was to prevent such excesses in the future, not to punish banks for past behaviour.
The tax, which would require congressional approval, would last at least 10 years and generate about $90 billion US over the decade, according to administration estimates. “If these companies are in good enough shape to afford massive bonuses, they are surely in good enough shape to afford paying back every penny to taxpayers,” Obama said.
Advisers believe the administration can make an argument that banks should tap their bonus pools for the fee instead of passing the cost on to consumers.
The president’s tone was emphatic and populist, capitalizing on public antipathy toward Wall Street. With the sharp words, he also tried to deflect some of the growing skepticism aimed at his own economic policies as unemployment stubbornly hovers around 10 per cent.
The proposed 0.15 per cent tax on the liabilities of large financial institutions would apply only to those companies with assets of more than $50 billion — a group estimated at about 50. Administration officials estimate that 60 per cent of the revenue would come from the 10 biggest ones.
They would have to pay up even though many did not accept any taxpayer assistance and most that did have repaid the infusions.
Obama said big banks had acted irresponsibility, taken reckless risk for short-term profits and plunged into a crisis of their own making. He cast the struggle ahead as one between the finance industry and average people.
“We are already hearing a hue and cry from Wall Street, suggesting that this proposed fee is not only unwelcome but unfair, that by some twisted logic, it is more appropriate for the American people to bear the cost of the bailout rather than the industry that benefited from it, even though these executives are out there giving themselves huge bonuses,” Obama said.
He renewed his call for a regulatory overhaul of the industry and scolded bankers for opposing the tighter oversight in legislation moving through Congress.
“What I’d say to these executives is this: Instead of setting a phalanx of lobbyists to fight this proposal or employing an army of lawyers and accountants to help evade the fee, I’d suggest you might want to consider simply meeting your responsibility,” Obama said.
At issue is the net cost of the fund initiated by the Bush administration to help financial institutions get rid of soured assets. The $700 billion Troubled Asset Relief Program (TARP) has expanded to help auto companies and homeowners.
Insurer American International Group, the largest beneficiary at nearly $70 billion, would have to pay the tax. But General Motors Co. and Chrysler Group LLC, whose $66 billion in government loans are not expected to be repaid fully, would not.
Administration officials said financial institutions were both a significant cause of the crisis and chief beneficiaries of the rescue efforts, should bear the brunt of the cost.
Bankers did not hide their objections.
“Politics have overtaken the economics,” said Scott Talbott, the chief lobbyist for the Financial Services Roundtable, a group representing large Wall Street institutions. “This is a punitive tax on companies that repaid TARP in full or never took TARP.”
Even before details came out, Jamie Dimon, chief executive of JPMorgan Chase & Co., said: “Using tax policy to punish people is a bad idea.”
Obama is trying to accelerate terms that require the president to seek a way to recoup unrecovered money in 2013, five years after the law was enacted.
So far, the Treasury has given $247 billion to more than 700 banks. Of that, $162 billion has been repaid and banks have paid an additional $11 billion in interest and dividends.
In Congress, Democrats embraced Obama’s proposal while Republicans rejected it.
“I think it is entirely reasonable to say that the industry that, A, caused these problems more than any other and, B, benefited from the activity, should be contributing,” said Democratic Rep. Barney Frank of Massachusetts, chair of the House Financial Services Committee.
But Republican Rep. Scott Garrett of New Jersey, who’s on Frank’s committee, called it a “job-killing initiative that will further cripple the economy by increasing fees passed on to consumers and small businesses, while reducing consumer credit.”
The Associated Press
Wednesday, January 13, 2010
Financial Update For Jan. 13, 2010
• TSX -126.94 with commodity stocks bearing the brunt of the selloff as aluminum giant Alcoa Inc. delivered disappointing earnings and China moved to cool off a hot economy.
• DOW -36.73
• Dollar -.24c to 96.22cUS
• Oil -$1.73to $80.79US per barrel. the Chinese action to curtail economic growth put pressure on commodity prices because of concerns about a possible slowing of demand.
• Gold -$21.80 to $1,128.90USD per ounce
Canada falls back into trade deficit as dollar, low demand stalls exports
JULIAN BELTRAME, THE CANADIAN PRESS
THE CANADIAN PRESS, 2010
OTTAWA - Canada was pulled back into a trade deficit in November as the country faced twin headwinds of both a strong loonie and weaker demand for exports, after a surprisingly strong performance the previous month.
The value of exports from Canada rose 1.1 per cent from October, but imports jumped 3.9 per cent, producing a deficit of $344 million. In October, saw Canada posted its first trade surplus in months at $503 million.
In terms of volume, exports fell a disappointing 0.1 per cent in November, Statistics Canada reported.
Economists say with the loonie worth nearly as much as the American dollar, and potentially reaching parity within the year, the prospects for 2010 remain bleak for Canadian exporters.
"Don't look for a quick return to the halcyon days of big surpluses any time soon with domestic demand reviving faster than U.S. spending, and the Canadian dollar remaining lofty," BMO Capital Markets economist Douglas Porter wrote in an analysis of the trade data.
On Monday, Prime Minister Stephen Harper blamed soft international demand and the strong loonie for the weakness in Canada's manufacturing sector and slow jobs recovery.
But Export Development Canada offered some modest hope Tuesday, saying its semi-annual trade confidence index rose to 77.4 in the fall of 2009 from 68.5 during the spring.
"Trade is definitely in a growth mode, but we can't forget the starting point," said EDC chief economist Peter Hall. "Canadian exports took a 20 per cent hit in 2009, six times greater than any annual decline in recent memory. What exporters are saying is that they expect to start climbing out of that chasm."
And Hall believes exporters will be getting a break from the currency in the latter half of this year, although many other analysts see the loonie remaining near or above par with the U.S. dollar for most of 2010.
"We think the drivers of the currency are out of whack with reality," Hall explained. "Base metal prices seem a little too high and oil prices now are more indicative of an economy that is fully recovered than it actually is." Hall says he believes the Canadian dollar will slump to about 86 cents US in the second half of 2010, about 10 cents US lower than its current level.
Still, economists are not looking for a quick turnaround in Canada's trade performance.
TD Bank economist Dina Petramala said although goods exports are on track to record a 12 per cent annualized gain in the fourth quarter of 2009, she still expects Canada to stay in a trade deficit for most of this year.
She said weak U.S. demand for Canadian exports and the high dollar points to another year of struggle for the export sector. About 75 per cent of Canada's exports head to the U.S.
As well, a strong dollar has the effect of making imports more attractive to Canadians, further exacerbating the trade deficit.
In November, exports increased to $31.6 billion benefiting on the higher price of oil - the fifth increase in six months - as prices rose 1.1 per cent.
But in volume terms, exports actually slipped 0.1 per cent. And excluding energy products, exports fell 0.3 per cent.
Meanwhile, imports to Canada increased by $1.2 billion to $31.9 billion, almost offsetting the declines of the previous three months.
Most import sectors posted gains, with automotive products, machinery and equipment, and energy products accounting for the bulk of November's increase.
The exception was industrial goods and materials.
Exports to the United States rose two per cent while imports, which increased 3.8 per cent, accounted for almost two-thirds of the gain in overall imports.
As a result, Canada's trade surplus with the United States narrowed to $3.2 billion in November from $3.5 billion in October.
Exports to countries other than the United States fell 1.2 per cent while imports from these countries increased four per cent.
Consequently, Canada's trade deficit with countries other than the United States widened to $3.6 billion in November from $3 billion in October.
China takes new steps to curb bank lending
By Joe McDonald
BEIJING — China took new steps Tuesday to control bank lending, ordering institutions to set aside more reserves in a move to avert a surge in credit that Beijing worries might fuel inflation or asset price bubbles.
China’s nascent rebound from the global crisis was fuelled by a flood of lending by state-owned banks last year. Bankers cut lending under government orders toward the end of 2009 but regulators worry credit might rebound this year.
The move indicates Beijing is confident growth can be sustained and has shifted focus to preventing financial excesses and economic overheating. The government is forecasting growth of 8.3 per cent for 2009, up from a low of 6.1 per cent for the first quarter of the year.
The central bank raised the amount of reserves that banks must hold by 0.5 per cent to 15 per cent of their deposits. Also Tuesday, the bank raised interest rates paid on one-year bills for the first time since August to absorb money from the market and cool credit growth.
“This series of moves by the central bank provides a clear sign that policy-makers are following through on their pledge to guide credit in order to pre-empt rising inflation and avoid asset price bubbles,” said Jing Ulrich, chair of China equities for J.P. Morgan, in a report.
Chinese stock and real estate prices soared last year, driven in part by stimulus money being diverted to speculation. The central bank governor and others have called for measures to prevent a dangerous boom and bust in asset prices, warning that could hurt the economy and banks that are left with unpaid loans.
Beijing also is trying to curb an inflow of foreign “hot money” that is coming into China to speculate in stocks and real estate.
Chinese banks lent 8.95 trillion yuan ($1.3 trillion) in January-October, up from a total of 4.2 trillion yuan for all of 2008. Much of that was in the first half of the year and lending fell sharply after July, when regulators tightened regulations on loans to buy second homes and ordered banks to scrutinize borrowers more closely.
The recent measures appear to be aimed at preventing a return to the torrid lending of early 2009. Despite the lending curbs, Chinese leaders have repeatedly assured the public that stimulus spending would continue in 2010. They say the government will pay special attention to entrepreneurs who missed out on aid in the first year of the stimulus.
The spending has sent housing prices soaring in Beijing and Shanghai since late 2008. Prices have roughly doubled over the past three years to more than 12,000 yuan ($1,700) per square meter, according to a December report by the U.S. bond manager Pimco.
Neighbouring Russia is suffering from the opposite problem.
Lending there is weak because banks are afraid of incurring bad loans, the chair of its central bank, Sergei Ignatyev, told parliament last month. He said corporate lending is flat, and retail lending is declining.
The politically sensitive prices of food and consumer goods also are edging up. After nine months of decline, consumer prices rose 0.6 per cent in November from a year earlier.
The bank reserve rate now stands at 15 per cent, its highest level since Dec. 5, according to the Chinese financial data website Hexun.com.
Rural credit cooperatives were exempt from the increase to make sure they can lend enough for spring planting, the central bank said. Their reserve rate was left at 13.5 per cent, according to Hexun.com.
The boost in the interest rate on the one-year bill was the first since August. The central bank had raised the rate for its three-month bills on Thursday.
The increase in the reserve rate was announced after Chinese stock markets closed.
The country’s benchmark Shanghai Composite Index closed up 1.9 per cent, or 61.22 points, at 3,273.97 on Tuesday. The index was one of the world’s best performers in 2009, ending the year up 80 per cent after heavy stimulus spendin
• DOW -36.73
• Dollar -.24c to 96.22cUS
• Oil -$1.73to $80.79US per barrel. the Chinese action to curtail economic growth put pressure on commodity prices because of concerns about a possible slowing of demand.
• Gold -$21.80 to $1,128.90USD per ounce
Canada falls back into trade deficit as dollar, low demand stalls exports
JULIAN BELTRAME, THE CANADIAN PRESS
THE CANADIAN PRESS, 2010
OTTAWA - Canada was pulled back into a trade deficit in November as the country faced twin headwinds of both a strong loonie and weaker demand for exports, after a surprisingly strong performance the previous month.
The value of exports from Canada rose 1.1 per cent from October, but imports jumped 3.9 per cent, producing a deficit of $344 million. In October, saw Canada posted its first trade surplus in months at $503 million.
In terms of volume, exports fell a disappointing 0.1 per cent in November, Statistics Canada reported.
Economists say with the loonie worth nearly as much as the American dollar, and potentially reaching parity within the year, the prospects for 2010 remain bleak for Canadian exporters.
"Don't look for a quick return to the halcyon days of big surpluses any time soon with domestic demand reviving faster than U.S. spending, and the Canadian dollar remaining lofty," BMO Capital Markets economist Douglas Porter wrote in an analysis of the trade data.
On Monday, Prime Minister Stephen Harper blamed soft international demand and the strong loonie for the weakness in Canada's manufacturing sector and slow jobs recovery.
But Export Development Canada offered some modest hope Tuesday, saying its semi-annual trade confidence index rose to 77.4 in the fall of 2009 from 68.5 during the spring.
"Trade is definitely in a growth mode, but we can't forget the starting point," said EDC chief economist Peter Hall. "Canadian exports took a 20 per cent hit in 2009, six times greater than any annual decline in recent memory. What exporters are saying is that they expect to start climbing out of that chasm."
And Hall believes exporters will be getting a break from the currency in the latter half of this year, although many other analysts see the loonie remaining near or above par with the U.S. dollar for most of 2010.
"We think the drivers of the currency are out of whack with reality," Hall explained. "Base metal prices seem a little too high and oil prices now are more indicative of an economy that is fully recovered than it actually is." Hall says he believes the Canadian dollar will slump to about 86 cents US in the second half of 2010, about 10 cents US lower than its current level.
Still, economists are not looking for a quick turnaround in Canada's trade performance.
TD Bank economist Dina Petramala said although goods exports are on track to record a 12 per cent annualized gain in the fourth quarter of 2009, she still expects Canada to stay in a trade deficit for most of this year.
She said weak U.S. demand for Canadian exports and the high dollar points to another year of struggle for the export sector. About 75 per cent of Canada's exports head to the U.S.
As well, a strong dollar has the effect of making imports more attractive to Canadians, further exacerbating the trade deficit.
In November, exports increased to $31.6 billion benefiting on the higher price of oil - the fifth increase in six months - as prices rose 1.1 per cent.
But in volume terms, exports actually slipped 0.1 per cent. And excluding energy products, exports fell 0.3 per cent.
Meanwhile, imports to Canada increased by $1.2 billion to $31.9 billion, almost offsetting the declines of the previous three months.
Most import sectors posted gains, with automotive products, machinery and equipment, and energy products accounting for the bulk of November's increase.
The exception was industrial goods and materials.
Exports to the United States rose two per cent while imports, which increased 3.8 per cent, accounted for almost two-thirds of the gain in overall imports.
As a result, Canada's trade surplus with the United States narrowed to $3.2 billion in November from $3.5 billion in October.
Exports to countries other than the United States fell 1.2 per cent while imports from these countries increased four per cent.
Consequently, Canada's trade deficit with countries other than the United States widened to $3.6 billion in November from $3 billion in October.
China takes new steps to curb bank lending
By Joe McDonald
BEIJING — China took new steps Tuesday to control bank lending, ordering institutions to set aside more reserves in a move to avert a surge in credit that Beijing worries might fuel inflation or asset price bubbles.
China’s nascent rebound from the global crisis was fuelled by a flood of lending by state-owned banks last year. Bankers cut lending under government orders toward the end of 2009 but regulators worry credit might rebound this year.
The move indicates Beijing is confident growth can be sustained and has shifted focus to preventing financial excesses and economic overheating. The government is forecasting growth of 8.3 per cent for 2009, up from a low of 6.1 per cent for the first quarter of the year.
The central bank raised the amount of reserves that banks must hold by 0.5 per cent to 15 per cent of their deposits. Also Tuesday, the bank raised interest rates paid on one-year bills for the first time since August to absorb money from the market and cool credit growth.
“This series of moves by the central bank provides a clear sign that policy-makers are following through on their pledge to guide credit in order to pre-empt rising inflation and avoid asset price bubbles,” said Jing Ulrich, chair of China equities for J.P. Morgan, in a report.
Chinese stock and real estate prices soared last year, driven in part by stimulus money being diverted to speculation. The central bank governor and others have called for measures to prevent a dangerous boom and bust in asset prices, warning that could hurt the economy and banks that are left with unpaid loans.
Beijing also is trying to curb an inflow of foreign “hot money” that is coming into China to speculate in stocks and real estate.
Chinese banks lent 8.95 trillion yuan ($1.3 trillion) in January-October, up from a total of 4.2 trillion yuan for all of 2008. Much of that was in the first half of the year and lending fell sharply after July, when regulators tightened regulations on loans to buy second homes and ordered banks to scrutinize borrowers more closely.
The recent measures appear to be aimed at preventing a return to the torrid lending of early 2009. Despite the lending curbs, Chinese leaders have repeatedly assured the public that stimulus spending would continue in 2010. They say the government will pay special attention to entrepreneurs who missed out on aid in the first year of the stimulus.
The spending has sent housing prices soaring in Beijing and Shanghai since late 2008. Prices have roughly doubled over the past three years to more than 12,000 yuan ($1,700) per square meter, according to a December report by the U.S. bond manager Pimco.
Neighbouring Russia is suffering from the opposite problem.
Lending there is weak because banks are afraid of incurring bad loans, the chair of its central bank, Sergei Ignatyev, told parliament last month. He said corporate lending is flat, and retail lending is declining.
The politically sensitive prices of food and consumer goods also are edging up. After nine months of decline, consumer prices rose 0.6 per cent in November from a year earlier.
The bank reserve rate now stands at 15 per cent, its highest level since Dec. 5, according to the Chinese financial data website Hexun.com.
Rural credit cooperatives were exempt from the increase to make sure they can lend enough for spring planting, the central bank said. Their reserve rate was left at 13.5 per cent, according to Hexun.com.
The boost in the interest rate on the one-year bill was the first since August. The central bank had raised the rate for its three-month bills on Thursday.
The increase in the reserve rate was announced after Chinese stock markets closed.
The country’s benchmark Shanghai Composite Index closed up 1.9 per cent, or 61.22 points, at 3,273.97 on Tuesday. The index was one of the world’s best performers in 2009, ending the year up 80 per cent after heavy stimulus spendin
Tuesday, January 12, 2010
Financial Update For Jan. 12, 2010
• TSX -6.70
• DOW +45.80
• Dollar -.24c to 96.76cUS
• Oil -$.23to $82.52US per barrel.
• Gold +$12.50 to $1,150.70USD per ounce
How your mortgage can set you free of other debt
by Michelle Warren, Bankrate.com
Wednesday, January 6, 2010provided by
Credit crunch, debt crisis — call it what you will, but the current economic climate is spurring people to get their own finances in order. For Jack and Sarah Stewart, of Toronto, this means tackling the $40,000 in debt they've allowed to balloon during the past eight years. With their mortgage coming up for renewal, they're thinking of clearing the slate and rolling the burden into their mortgage.
"We want to consolidate our debt, but we're not sure if increasing our mortgage is the best way to do it," says Jack, who asked that his and his wife's names be changed to protect their privacy.
He's not alone. Laurie Campbell, executive director of Credit Canada, says it's a question people grapple with all the time. "Homes in the past have been your sacred cow," she says, referring to the drive to pay down one's mortgage as quickly as possible.
These days, however, with people juggling debts and paying varying rates of interest, increasing one's mortgage can be a smart move, even if it takes longer to pay off.
Lowering interest rates
Peter Majthenyi, a mortgage planner with Mortgage Architects, in Toronto, says it's a common theme as homeowners strive to bring down the overall interest they pay, as well as reduce their monthly obligations. He prefers to think of it as repositioning one's debt, and in his experience, "in almost all cases, it's justified."
"If you have debt that is sitting at 18 percent interest, then it certainly makes sense," says Campbell, adding that it's something to consider only if you have enough equity in your home and if your mortgage is coming up for renewal (read the fine print to find out if the penalties for breaking a mortgage outweigh the possible benefits).
Majthenyi notes that if you're working with the same lender, there's often no penalty involved with increasing your mortgage before the term expires.
The Stewarts seem like prime candidates. They have a $200,000 mortgage on a house worth about $425,000. They have plenty of equity, they're up for renewal at the end of the year and they say they're serious about getting their finances in order. Ideally, they'd roll the debt into their mortgage, continue an accelerated payment program whereby they pay every two weeks and they would not increase their amortization period, but instead increase their payments.
Dealing with debt
It's a good plan, says Campbell, who thinks all mortgage holders should accelerate their payments. She also likes the idea that they plan to stick to a 17-year amortization instead of renegotiating another 25-year mortgage. However, she stresses that none of this amounts to much if the Stewarts are going to continue the same spending habits and find themselves in a similar position five years from now. "They have to understand what got them into this $40,000 debt in the first place. They have to make sure they don't fall victim to that again."
She recommends cutting up credit cards, especially store cards, which have higher rates of interest, and not using one's line of credit like a bank account.
The Stewarts say the bulk of their debt was incurred for renovation costs, including a new kitchen and installing hardwood flooring, but admit their spending habits need a makeover. "We're always dipping in to our line of credit because we're strapped for cash," says Sarah Stewart. "I think if we consolidate the debt, it'll increase our cash flow and we'll be able to live within our means."
Jeanette Brox, a Certified Financial Planner with Investors Group in North York, Ont., always encourages her clients to look at the big picture when it comes to financial health: "My job is to make them think outside the box." She says helping people manage debt, while securing their future, is essential. "People need to think beyond what our parents did, which was paying down the mortgage," she says. "I used to think that way too, but I don't anymore."
In her view, the Stewarts and others like them need to take an aggressive approach if they ever want to get ahead. Not only do they need to improve cash flow, but they also need an emergency fund for unforeseen expenses, not to mention a retirement plan.
Planning for the future
Brox admits a lot of people would balk at the idea, but she thinks the Stewarts, both in their early 30s, should not only roll their debt into the mortgage, but increase their mortgage an additional $35,000 for a total of $275,000. To make payments more manageable, she'd also recommend increasing the amortization period to 25 years. She would invest $25,000 in mutual funds and further $10,000 in a money market account (earning about two percent interest).
"This is what I call a lifestyle fund," says Brox, adding that part of the interest cost on the mortgage would be tax deductible. "It's a win-win situation, but you've got to be really disciplined."
That means using their increased tax return to pay down the principal on the mortgage, thereby helping compensate for the interest cost of carrying the additional $35,000. The other bonus is that within five years (or so), the $25,000 registered retirement savings plan, or RRSP, will have grown to about $40,000. She stresses this is a long-term plan and people have to realize that the market is going to rise and fall.
"It's all based on comfort level," says Brox, adding that the biggest mistake she sees with people who reposition debt is that they don't have a long-term plan and, as Campbell, pointed out, go back to old spending habits. "People need to have their whole financial picture analyzed. It's something to consider, but you need to work with a planner or bank manager."
Lines of credit
There's a whole school of thinkers that shudder at the thought of increasing one's mortgage. At the core of this is that you're trading unsecured debt for secured debt and paying interest on that debt for the entire life of your mortgage, which can dramatically increase the cost of borrowing. In addition, refinancing also involves added legal costs (in most cases a minimum of $500). An alternative is consolidating debt onto a line of credit or home equity loan, which have higher interest rates than a mortgage, but can be paid off more quickly.
This works in theory, say our experts, but rarely in real life. "A lot of people just make the minimum payment and never get it cleaned up," says Brox.
"I'm wary of open lines of credit because they can easily stay at $50,000 forever," says Campbell, adding that an increased mortgage payment forces people to be more disciplined in paying down debt.
As for paying the debt for the entire length of your mortgage, all the experts stress that the way to combat this is by channelling extra funds back into the mortgage and paying off the mortgage early. This could mean accelerated payments, using tax returns or bumping up the payments. "We're putting all the money back into the principal of the mortgage," says Majthenyi, who points out that an extra $10,000 on a mortgage costs about $50 a month, while a $10,000 loan requires minimum payments of $300.
In the Stewart's case, it's costing them about $1,000 a month to cover $40,000 debt. If it's part of their mortgage, it translates into about $200. Ideally they'd direct the bulk of that money back into their mortgage through an annual lump payment or by increasing individual payments by a few hundred dollars.
Repositioning debt into one's mortgage is a sound option for people who are committed to changing bad habits and/or taking a long-term approach to getting their finances in order.
When it comes to money, Brox says that people need a big-picture plan, not a band-aid solution: "A lot of times it's not what you make but how you manage it."
• DOW +45.80
• Dollar -.24c to 96.76cUS
• Oil -$.23to $82.52US per barrel.
• Gold +$12.50 to $1,150.70USD per ounce
How your mortgage can set you free of other debt
by Michelle Warren, Bankrate.com
Wednesday, January 6, 2010provided by
Credit crunch, debt crisis — call it what you will, but the current economic climate is spurring people to get their own finances in order. For Jack and Sarah Stewart, of Toronto, this means tackling the $40,000 in debt they've allowed to balloon during the past eight years. With their mortgage coming up for renewal, they're thinking of clearing the slate and rolling the burden into their mortgage.
"We want to consolidate our debt, but we're not sure if increasing our mortgage is the best way to do it," says Jack, who asked that his and his wife's names be changed to protect their privacy.
He's not alone. Laurie Campbell, executive director of Credit Canada, says it's a question people grapple with all the time. "Homes in the past have been your sacred cow," she says, referring to the drive to pay down one's mortgage as quickly as possible.
These days, however, with people juggling debts and paying varying rates of interest, increasing one's mortgage can be a smart move, even if it takes longer to pay off.
Lowering interest rates
Peter Majthenyi, a mortgage planner with Mortgage Architects, in Toronto, says it's a common theme as homeowners strive to bring down the overall interest they pay, as well as reduce their monthly obligations. He prefers to think of it as repositioning one's debt, and in his experience, "in almost all cases, it's justified."
"If you have debt that is sitting at 18 percent interest, then it certainly makes sense," says Campbell, adding that it's something to consider only if you have enough equity in your home and if your mortgage is coming up for renewal (read the fine print to find out if the penalties for breaking a mortgage outweigh the possible benefits).
Majthenyi notes that if you're working with the same lender, there's often no penalty involved with increasing your mortgage before the term expires.
The Stewarts seem like prime candidates. They have a $200,000 mortgage on a house worth about $425,000. They have plenty of equity, they're up for renewal at the end of the year and they say they're serious about getting their finances in order. Ideally, they'd roll the debt into their mortgage, continue an accelerated payment program whereby they pay every two weeks and they would not increase their amortization period, but instead increase their payments.
Dealing with debt
It's a good plan, says Campbell, who thinks all mortgage holders should accelerate their payments. She also likes the idea that they plan to stick to a 17-year amortization instead of renegotiating another 25-year mortgage. However, she stresses that none of this amounts to much if the Stewarts are going to continue the same spending habits and find themselves in a similar position five years from now. "They have to understand what got them into this $40,000 debt in the first place. They have to make sure they don't fall victim to that again."
She recommends cutting up credit cards, especially store cards, which have higher rates of interest, and not using one's line of credit like a bank account.
The Stewarts say the bulk of their debt was incurred for renovation costs, including a new kitchen and installing hardwood flooring, but admit their spending habits need a makeover. "We're always dipping in to our line of credit because we're strapped for cash," says Sarah Stewart. "I think if we consolidate the debt, it'll increase our cash flow and we'll be able to live within our means."
Jeanette Brox, a Certified Financial Planner with Investors Group in North York, Ont., always encourages her clients to look at the big picture when it comes to financial health: "My job is to make them think outside the box." She says helping people manage debt, while securing their future, is essential. "People need to think beyond what our parents did, which was paying down the mortgage," she says. "I used to think that way too, but I don't anymore."
In her view, the Stewarts and others like them need to take an aggressive approach if they ever want to get ahead. Not only do they need to improve cash flow, but they also need an emergency fund for unforeseen expenses, not to mention a retirement plan.
Planning for the future
Brox admits a lot of people would balk at the idea, but she thinks the Stewarts, both in their early 30s, should not only roll their debt into the mortgage, but increase their mortgage an additional $35,000 for a total of $275,000. To make payments more manageable, she'd also recommend increasing the amortization period to 25 years. She would invest $25,000 in mutual funds and further $10,000 in a money market account (earning about two percent interest).
"This is what I call a lifestyle fund," says Brox, adding that part of the interest cost on the mortgage would be tax deductible. "It's a win-win situation, but you've got to be really disciplined."
That means using their increased tax return to pay down the principal on the mortgage, thereby helping compensate for the interest cost of carrying the additional $35,000. The other bonus is that within five years (or so), the $25,000 registered retirement savings plan, or RRSP, will have grown to about $40,000. She stresses this is a long-term plan and people have to realize that the market is going to rise and fall.
"It's all based on comfort level," says Brox, adding that the biggest mistake she sees with people who reposition debt is that they don't have a long-term plan and, as Campbell, pointed out, go back to old spending habits. "People need to have their whole financial picture analyzed. It's something to consider, but you need to work with a planner or bank manager."
Lines of credit
There's a whole school of thinkers that shudder at the thought of increasing one's mortgage. At the core of this is that you're trading unsecured debt for secured debt and paying interest on that debt for the entire life of your mortgage, which can dramatically increase the cost of borrowing. In addition, refinancing also involves added legal costs (in most cases a minimum of $500). An alternative is consolidating debt onto a line of credit or home equity loan, which have higher interest rates than a mortgage, but can be paid off more quickly.
This works in theory, say our experts, but rarely in real life. "A lot of people just make the minimum payment and never get it cleaned up," says Brox.
"I'm wary of open lines of credit because they can easily stay at $50,000 forever," says Campbell, adding that an increased mortgage payment forces people to be more disciplined in paying down debt.
As for paying the debt for the entire length of your mortgage, all the experts stress that the way to combat this is by channelling extra funds back into the mortgage and paying off the mortgage early. This could mean accelerated payments, using tax returns or bumping up the payments. "We're putting all the money back into the principal of the mortgage," says Majthenyi, who points out that an extra $10,000 on a mortgage costs about $50 a month, while a $10,000 loan requires minimum payments of $300.
In the Stewart's case, it's costing them about $1,000 a month to cover $40,000 debt. If it's part of their mortgage, it translates into about $200. Ideally they'd direct the bulk of that money back into their mortgage through an annual lump payment or by increasing individual payments by a few hundred dollars.
Repositioning debt into one's mortgage is a sound option for people who are committed to changing bad habits and/or taking a long-term approach to getting their finances in order.
When it comes to money, Brox says that people need a big-picture plan, not a band-aid solution: "A lot of times it's not what you make but how you manage it."
Monday, January 11, 2010
Financial Update For Jan. 11, 2010
• TSX +66.3
• DOW +11.33
• Dollar +.38c to 97.00cUS
• Oil +$.09to $82.75US per barrel.
• Gold +$5.10 to $1,138.20USD per ounce
Bad numbers, but good news
Hope remains despite rise in U.S. jobless figures
Ian McGugan, Financial Post
Wall Street is looking for a happy ending to the Great Recession. Now if it can just get the facts to agree.
Many forecasters had expected yesterday's release of U.S. payroll data to show that the world's largest economy was no longer destroying jobs. Instead, the U.S. Labor Department reported that nonfarm payrolls continued to shrink, shedding 85,000 jobs this past month.
There were bright spots in the lacklustre report. Most notably, November figures were revised upward to show that the economy gained a handful of jobs during that month. It was the first time in two years that U.S. payrolls have managed to eke out any increase.
Overall, though, the U.S. unemployment rate remains stubbornly high at 10% of the workforce. About 15 million people are unemployed, double the number of two years ago.
The continuing pace of job destruction should raise concerns about the gap between the sunny views of the recovery propounded by Wall Street and the darker reality that appears to be prowling Main Street. While stocks are surging, the real economy isn't.
This is distinctly unusual. Stocks usually suffer during periods of rising unemployment because unemployment typically goes hand-in-hand with falling corporate profits. Declining profits make stocks less attractive.
In this downturn, though, stock markets have taken off like a rocket despite rising unemployment. The S&P 500 has advanced by 70% since March, although about two million jobs have been destroyed during those months.
One force driving stock prices higher is massive stimulus spending by government. Another is near-zero interest rates, which make the future stream of dividends from stocks that much more valuable.
But stimulus spending and low interest rates can't keep a stock market up forever. Japan provides the ultimate proof of that. Despite massive government spending and near zero interest rates for much of the past two decades, the Nikkei stock index trades for about a quarter of what it did back in the glory days of the 1980s.
Based on the ratio of its current price to its earnings over the past 10 years, the U.S. stock market is trading at valuations well below its dot-com levels, but about 30% above its average levels. Stocks could take a tumble if the unemployment picture -- and the profit picture -- don't start to recover soon.
Many traders believe such a recovery is well in progress. First-time claims for unemployment benefits have been dwindling, and job losses have grown steadily smaller since the darkest days of early 2009, when nearly 700,000 U.S. workers were being thrown out of work each month.
The small gain of 4,000 jobs in November is invisible compared to the entire U.S. workforce of about 150 million people, but any jobs number with a plus sign these days constitutes a victory in the recovery story. "The fact that positive job creation occurred in November 2009 is a very important fact, one that should not be ignored despite the headline print in December," says Ian Pollick of TD Securities.
Another positive sign is the continued increase in temporary help services, which added 47,000 positions in December. This was the fifth-consecutive monthly increase in the sector and suggests that employers are feeling out opportunities, although they're still reluctant to hire full-time workers.
A further jolt of good news may be in store thanks to the U.S. Census. The once-a-decade count of every American takes place on April 1 and hiring for the survey will provide as many as a million jobs during the first half of 2010.
Derek Holt and Karen Cordes of Scotia Capital believe the combined effects of census hiring and the natural recovery process could propel job creation in the U.S. far past expectations and create two million jobs in 2010. While those new jobs would only partially replace the seven million jobs that have been lost over the past couple of years, they would at least signal an end to the current downturn.
But there is the risk of a double-dip recession if Congress and the Federal Reserve decide to remove stimulus too early. Holt and Cordes, as well as Nobel-winning economist Paul Krugman, worry that any sudden improvement in the jobs numbers could lead to a premature hike in interest rates and withdrawal of stimulus.
If there is any undeniably good news in yesterday's disappointing numbers, it's that nobody will be agitating to hike interest rates or remove stimulus anytime soon. The Great Recovery remains a work in progress.
20,600 Total U.S. jobs lost among women 25 and over.
13,400 Full-time U.S. jobs lost among women 25 and over.
December job losses reality check
8.5% unemployed
Paul Vieira, Financial Post
OTTAWA - Financial markets were dealt a reality check yesterday with disappointing December jobs data from Canada and, more notably, the United States signalling an uneven and choppy recovery, and prompting U.S. analysts to scale back expectations on rate hikes.
Analysts noted, however, that an improving trend is definitely emerging in both countries. Furthermore, some reckon unemployment levels in Canada may have peaked.
Statistics Canada said the economy lost 2,600 jobs last month, but the unemployment rate remained unchanged at 8.5%. Markets expected 20,000 new jobs in December, after an off-the-chart 79,000 gain in November.
"It's looking more believable by the day that the 8.7% jobless rate in August will mark the peak for the cycle, far below past recession highs -- 13% in 1982 and 12.1% in 1992 -- and no worse than the average unemployment rate in Canada over the past 30 years," said Douglas Porter, deputy chief economist at BMO Capital Markets.
Stewart Hall, economist at HSBC Securities Canada, said there was "palatable" disappointment given the big gain in November. But the fact the economy held onto most of those jobs "is in and of itself fairly significant," he said.
With the December figures in hand, they suggest the Canadian economy shed 240,000 jobs in 2009 -- the bulk of which occurred in the first half of the year. In the last five months of the year, the economy generated an average of 20,000 new jobs per month.
Mr. Hall said average monthly gains of 20,000 are likely in the offing, as this recovery is likely to mirror the one following the recession of the early 1990s. "One characterized by some jobs growth followed by consolidation. Not terrific, but infinitely preferable to the experience of the previous year."
The Canadian recession ended in the third quarter with meagre annualized growth of 0.4%, as domestic strength was offset by a weak export sector that was hampered by a strong Canadian dollar and weak U.S. demand. Economists estimate growth in the final three months of 2009 to register between 3% and 4%.
The Bank of Canada is expected to begin raising its benchmark lending rate in the third quarter. There is less confidence about near-term tightening from the U.S. Federal Reserve Board.
The U.S. Bureau of Labor Statistics said non-farm employment in December fell 85,000, compared to expectations for no change. The unemployment rate was unchanged at 10%, although analysts note it was due to a plunge in the labour force, as people stopped looking for work.
"Firms are still bent on boosting productivity and remain cautious about hiring," analysts from London-based Capital Economics said of the U.S. data.
The yield on the two-year U.S. Treasury note -- a market gauge of interest rate expectations -- dropped yesterday below 1%, indicating analysts believe the likelihood of a Fed rate hike has been "pushed out for a few more months," Ajay Rajadhyaksha, head of U.S. fixed-income strategy at Barclays PLC in New York, told Bloomberg News.
The U.S. bureau noted, however, that during 2009 monthly job losses moderated, from an average 691,000 in the first quarter to 69,000 in the fourth quarter. Also, the bureau revised data for November indicating the U.S. economy created 4,000 jobs -- the first monthly gain in more than two years.
Still, Avery Shenfeld, chief economist at CIBC World Markets, said the 10% U.S. jobless rate masks the "true extent" of labour slack, "as it ignores those working part-time involuntarily [and] those who gave up looking for work."
• DOW +11.33
• Dollar +.38c to 97.00cUS
• Oil +$.09to $82.75US per barrel.
• Gold +$5.10 to $1,138.20USD per ounce
Bad numbers, but good news
Hope remains despite rise in U.S. jobless figures
Ian McGugan, Financial Post
Wall Street is looking for a happy ending to the Great Recession. Now if it can just get the facts to agree.
Many forecasters had expected yesterday's release of U.S. payroll data to show that the world's largest economy was no longer destroying jobs. Instead, the U.S. Labor Department reported that nonfarm payrolls continued to shrink, shedding 85,000 jobs this past month.
There were bright spots in the lacklustre report. Most notably, November figures were revised upward to show that the economy gained a handful of jobs during that month. It was the first time in two years that U.S. payrolls have managed to eke out any increase.
Overall, though, the U.S. unemployment rate remains stubbornly high at 10% of the workforce. About 15 million people are unemployed, double the number of two years ago.
The continuing pace of job destruction should raise concerns about the gap between the sunny views of the recovery propounded by Wall Street and the darker reality that appears to be prowling Main Street. While stocks are surging, the real economy isn't.
This is distinctly unusual. Stocks usually suffer during periods of rising unemployment because unemployment typically goes hand-in-hand with falling corporate profits. Declining profits make stocks less attractive.
In this downturn, though, stock markets have taken off like a rocket despite rising unemployment. The S&P 500 has advanced by 70% since March, although about two million jobs have been destroyed during those months.
One force driving stock prices higher is massive stimulus spending by government. Another is near-zero interest rates, which make the future stream of dividends from stocks that much more valuable.
But stimulus spending and low interest rates can't keep a stock market up forever. Japan provides the ultimate proof of that. Despite massive government spending and near zero interest rates for much of the past two decades, the Nikkei stock index trades for about a quarter of what it did back in the glory days of the 1980s.
Based on the ratio of its current price to its earnings over the past 10 years, the U.S. stock market is trading at valuations well below its dot-com levels, but about 30% above its average levels. Stocks could take a tumble if the unemployment picture -- and the profit picture -- don't start to recover soon.
Many traders believe such a recovery is well in progress. First-time claims for unemployment benefits have been dwindling, and job losses have grown steadily smaller since the darkest days of early 2009, when nearly 700,000 U.S. workers were being thrown out of work each month.
The small gain of 4,000 jobs in November is invisible compared to the entire U.S. workforce of about 150 million people, but any jobs number with a plus sign these days constitutes a victory in the recovery story. "The fact that positive job creation occurred in November 2009 is a very important fact, one that should not be ignored despite the headline print in December," says Ian Pollick of TD Securities.
Another positive sign is the continued increase in temporary help services, which added 47,000 positions in December. This was the fifth-consecutive monthly increase in the sector and suggests that employers are feeling out opportunities, although they're still reluctant to hire full-time workers.
A further jolt of good news may be in store thanks to the U.S. Census. The once-a-decade count of every American takes place on April 1 and hiring for the survey will provide as many as a million jobs during the first half of 2010.
Derek Holt and Karen Cordes of Scotia Capital believe the combined effects of census hiring and the natural recovery process could propel job creation in the U.S. far past expectations and create two million jobs in 2010. While those new jobs would only partially replace the seven million jobs that have been lost over the past couple of years, they would at least signal an end to the current downturn.
But there is the risk of a double-dip recession if Congress and the Federal Reserve decide to remove stimulus too early. Holt and Cordes, as well as Nobel-winning economist Paul Krugman, worry that any sudden improvement in the jobs numbers could lead to a premature hike in interest rates and withdrawal of stimulus.
If there is any undeniably good news in yesterday's disappointing numbers, it's that nobody will be agitating to hike interest rates or remove stimulus anytime soon. The Great Recovery remains a work in progress.
20,600 Total U.S. jobs lost among women 25 and over.
13,400 Full-time U.S. jobs lost among women 25 and over.
December job losses reality check
8.5% unemployed
Paul Vieira, Financial Post
OTTAWA - Financial markets were dealt a reality check yesterday with disappointing December jobs data from Canada and, more notably, the United States signalling an uneven and choppy recovery, and prompting U.S. analysts to scale back expectations on rate hikes.
Analysts noted, however, that an improving trend is definitely emerging in both countries. Furthermore, some reckon unemployment levels in Canada may have peaked.
Statistics Canada said the economy lost 2,600 jobs last month, but the unemployment rate remained unchanged at 8.5%. Markets expected 20,000 new jobs in December, after an off-the-chart 79,000 gain in November.
"It's looking more believable by the day that the 8.7% jobless rate in August will mark the peak for the cycle, far below past recession highs -- 13% in 1982 and 12.1% in 1992 -- and no worse than the average unemployment rate in Canada over the past 30 years," said Douglas Porter, deputy chief economist at BMO Capital Markets.
Stewart Hall, economist at HSBC Securities Canada, said there was "palatable" disappointment given the big gain in November. But the fact the economy held onto most of those jobs "is in and of itself fairly significant," he said.
With the December figures in hand, they suggest the Canadian economy shed 240,000 jobs in 2009 -- the bulk of which occurred in the first half of the year. In the last five months of the year, the economy generated an average of 20,000 new jobs per month.
Mr. Hall said average monthly gains of 20,000 are likely in the offing, as this recovery is likely to mirror the one following the recession of the early 1990s. "One characterized by some jobs growth followed by consolidation. Not terrific, but infinitely preferable to the experience of the previous year."
The Canadian recession ended in the third quarter with meagre annualized growth of 0.4%, as domestic strength was offset by a weak export sector that was hampered by a strong Canadian dollar and weak U.S. demand. Economists estimate growth in the final three months of 2009 to register between 3% and 4%.
The Bank of Canada is expected to begin raising its benchmark lending rate in the third quarter. There is less confidence about near-term tightening from the U.S. Federal Reserve Board.
The U.S. Bureau of Labor Statistics said non-farm employment in December fell 85,000, compared to expectations for no change. The unemployment rate was unchanged at 10%, although analysts note it was due to a plunge in the labour force, as people stopped looking for work.
"Firms are still bent on boosting productivity and remain cautious about hiring," analysts from London-based Capital Economics said of the U.S. data.
The yield on the two-year U.S. Treasury note -- a market gauge of interest rate expectations -- dropped yesterday below 1%, indicating analysts believe the likelihood of a Fed rate hike has been "pushed out for a few more months," Ajay Rajadhyaksha, head of U.S. fixed-income strategy at Barclays PLC in New York, told Bloomberg News.
The U.S. bureau noted, however, that during 2009 monthly job losses moderated, from an average 691,000 in the first quarter to 69,000 in the fourth quarter. Also, the bureau revised data for November indicating the U.S. economy created 4,000 jobs -- the first monthly gain in more than two years.
Still, Avery Shenfeld, chief economist at CIBC World Markets, said the 10% U.S. jobless rate masks the "true extent" of labour slack, "as it ignores those working part-time involuntarily [and] those who gave up looking for work."
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