Financial Update for March 2, 2009

· TSX-63.80(Reuters) as the U.S. government's announcement that it will take an equity stake in Citigroup put pressure on the heavily weighted financial sector.
· DOW-119.50
· Dollar -.20c to 79.60USD
· Oil -$.46 to $44.76US per barrel.
· Gold -$.30 to $941.50 USD per ounce
· Canadian 5 yr bond yields -.05bps to 2.05
· http://www.financialpost.com/markets/market_data/money-yields-can_us.html

Is the Bank of Canada running out of bullets? JULIAN BELTRAME Globe and Mail Report on Business The Canadian Press

OTTAWA — Just about now, Bank of Canada governor Mark Carney should be experiencing that sinking, helpless feeling about the economy.

It's not for want of trying to shock the economy back to life.

On Tuesday, the telegenic former Goldman Sachs executive is widely expected to cut short-term interest rates another half-point to bring the central bank's overnight rate to a barely-noticeable 0.5 per cent. For all practical purposes, zero.

That would make it the seventh time Mr. Carney has eased a notch, sometimes several notches, on interest rates since taking charge of the central bank last February. In that time he has also injected $40-billion in cash into the economy through asset swaps with banks, and last week took the unusual step of agreeing to accept corporate bonds as collateral to try and free up credit.

None of it has worked and the economy continues to decline.

One problem Mr. Carney faces is that in the current global credit crunch, financial market interest rates are volatile so there's no assurance Canadian banks will pass along the full Bank of Canada rate cuts by reducing their prime lending rate by the same amount.

The prime is the base used by banks to set rates on consumer and corporate loans, lines of credit and some mortgages. While the prime has dropped in most cases by the same amount as the Bank of Canada rate in the last year or so, other interest rates in the market have been rising and loans have been harder to get as the banks avoid riskier lending during a recession.

A recent survey shows a majority of manufacturers say access to credit is still the major obstacle they face.

“There is clear evidence that very low interest rates are not working to expand economic activity,” former Conservative cabinet minister Doug Peters, once also a TD Bank chief economist, wrote in a paper for the Canadian Centre for Policy Alternatives.

“In the current recessionary environment, banks are obviously worried about lending to each other, and of course, are worried about lending to consumers and firms. Interest rates that count, such as inter-bank lending rates, mortgage lending rates, bank commercial lending rates, are all unusually high, especially considering that inflation is also very close to zero.”

Even before Mr. Carney's Tuesday move, a new report Monday from Statistics Canada is expected to reveal that the Canadian economy, in Finance Minister Jim Flaherty's blunt words, “fell off the table” in the fourth quarter of 2008.

Private sector economists are predicting a sharp three-to-four per cent contraction in economic activity — severe recessionary territory — but remarkably it could be worse. In fact, Mr. Carney is predicting worse for the first three months of this year with a 4.8-per-cent economic contraction.

In his last public speech in January, Mr. Carney insisted that monetary action taken so far “will work,” noting the lengthy lag time between action and impact, often cited as 12 to 18 months.
Since the bank started cutting 15 months ago, Canada should be just beginning to feel the effects.
Of course, Mr. Carney has invested a lot of credibility in the assertion it will work. He has stuck out his neck by predicting the economy will bounce back like an Indian rubber ball to 3.8 per cent growth next year, a forecast that has a few supporters and many detractors.

Although he doesn't believe the rebound will be as dramatic, Bank of Montreal economist Douglas Porter says there are good reasons to buy into Mr. Carney's rosy assessment, which would make the current slump milder than the recessions of the early 1980s and 1990s.

First, interest rates are much lower now than during the previous downturns. Second, aggressive stimulus policy is kicking in. And lastly, corporate balance sheets were in better shape heading into the current recession as compared to the previous two.

These act as shock absorbers for the economy's hard landing. However, they will be of little use if the world financial system is not fixed.

That's because until global banks have the confidence and wherewithal to start lending again, the U.S. and global economies will continue to struggle. And that will keep prices for commodities that Canada exports low, sap demand for Canadian manufactured goods, and in turn stifle Canadian job creation and incomes.

And that's where Mr. Carney's frustration comes in. He is largely a spectator in a game played outside his borders, able to influence the outcome only at the margins.

Mr. Carney has received some heat for some of his decisions, most notably keeping interest rates unchanged for a full five months from May to October last year in the mistaken belief that financial markets were stabilizing. But given that he's made up for lost time since then, most economists conceded the period of inaction wasn't critical.

“There are some quibbles I might have over what the Bank of Canada or Ottawa have done, but those are just specks of sand on the beach compared to what's hit us from outside this country,” says Mr. Porter.

“There are things policy makers here can do to cushion the blow, but the tools at their disposal are only so big and they can only do so much to offset this deep global downturn.”

In his January speech, Mr. Carney talked about other measures at his disposal besides rate cuts, no doubt foreshadowing last week's action on corporate bonds. The bank could also follow the Fed example by implementing so-called “quantitative easing” facilities to pump funds into the private sector, or follow Japan's lead by directly buying corporate bonds, or still more exotic intrusions in the money markets.

But Mr. Holt cautions non-traditional initiatives, even if Mr. Carney judged taking on the added risk necessary, would likely not be game-changing in isolation.

The next big round of central bank action should be left to the Fed and perhaps the Bank of England, he said. This could involve printing mounds of money to buy up government treasury bills in order to free up more cash for the private sector economy.

“You can cut rates to near zero, you can stimulate the domestic economy through fiscal policy, but you still need a rebound in the U.S. and European economies,” he explains.

“The smart position (for Carney) is to cut rates Tuesday and wait and see what global central banks do elsewhere.”

Financial Update for Feb. 27, 2009

TSX higher for third straight day on oils, banks

· TSX +254.52 to 8186.82(Reuters) in a rally sparked by better than expected bank earnings and stronger oil prices
· DOW-88.81
· Dollar +.09c to 79.80USD
· Oil +$2.72 to $45.22US per barrel.
· Gold -$23.90 to $941.80 USD per ounce
· Canadian 5 yr bond yields +.08bps to 2.11
· http://www.financialpost.com/markets/market_data/money-yields-can_us.html

Canadian Banks still profitable despite global crisis

The Canadian PressCanada's banks are reporting weaker profits than a year ago, but even the feeblest of the Big Five is still raking in a net profit of $1.6 million a day while many major banks in the United States and elsewhere are effectively insolvent.

Bank executives are congratulating themselves that, as CIBC's Gerry McCaughey put it, "Canada finds itself better positioned than other economies both to weather this downturn and benefit from a subsequent recovery.''

But the bankers also acknowledge that 2009 will be tough, and even maintaining flat earnings for the year will be hard as the shrivelling economy erodes their volume of business and cranks up the number of bad loans.

The Royal Bank, Canada's largest, said yesterday it earned $1.05 billion, almost $12 million every day, during the first quarter of the banking year. This was down 15 per cent from a year earlier, but better than Bay Street was expecting.

Also above analyst expectations was CIBC, which earned $147 million in the November-January period. That was better than its year-ago loss of $1.46 billion but still was corroded by hundreds of millions of dollars because of ongoing exposure to toxic debt instruments in the United States.

The Royal and CIBC reported a day after TD Bank started the quarterly series with a profit of $712 million, down from $970 million a year earlier but with all its businesses solidly profitable -- even U.S. banking.

The National Bank of Canada, the country's sixth-largest, had first-quarter earnings of $69 million, down from $255 million a year earlier.

Still to report are Bank of Nova Scotia and Bank of Montreal, both next Tuesday. Analysts expect them, like the others, to be profitable but less profitable than in recent years.

Financial Update for Feb. 26, 2009

· TSX +72.97(Reuters) as energy issues gained on stronger oil prices and financials got a boost from smaller-than-expected drop in quarterly profit at Toronto-Dominion Bank .
· DOW-80.05
· Dollar -.72c to 79.71USD
· Oil +$2.54 to $42.50US per barrel.
· Gold -$3.40 to $965.70 USD per ounce
· Canadian 5 yr bond yields +.08bps to 2.11

· http://www.financialpost.com/markets/market_data/money-yields-can_us.html

Associated Press DETROIT - General Motors Corp. says it lost US$9.6 billion in the fourth quarter and burned through $6.2 billion in cash as it sought government help to avoid running out of cash.

America's biggest domestic automaker lost $30.9 billion for all of 2008 as it struggled against a U.S. sales slump and a global recession.

GM has received $13.4 billion in federal loans and its executives are in Washington, D.C., Thursday to talk to the Obama administration about the company's request for up to $30 billion.

First-time homebuyers could lead real estate rebound

Kristine Owram The Canadian Press

Lower home prices and shifting demographics mean first-time buyers could lead a rebound in Canada's real estate market, experts said yesterday at a real estate conference in Toronto.

Phil Soper, president and chief executive of Brookfield Real Estate Services, said rookies are the largest category of buyers in the real estate market, accounting for close to 70 per cent of all transactions at the height of the housing boom.

However, they've been scared away in droves by the economic downturn, which was led in part by record foreclosure rates in the United States as homeowners defaulted on their mortgage debt.

Such a lack of first-time buyers can grind the real estate market to a halt, Soper told Scotiabank's annual real estate outlook conference.

"When new buyers stop entering the market, it's like sand in the gears,'' he said.

Although Canada has managed to duck the severity of the housing crisis in the U.S., the 10-year boom that saw housing prices soar, particularly in the western provinces, ended abruptly last year.

Canadian housing starts -- the number of new residential construction projects -- were down to 211,056 in 2008, about eight per cent lower than an average of almost 230,000 in the period from 2004 to 2007. Resale activity fell by 17 per cent in 2008 while home prices dipped by one per cent, according to Scotiabank.

Things seem to have worsened dramatically in January, with housing starts falling to an eight-year low of 153,500 annualized units and home prices down 11 per cent year-over-year.

And the bank predicted the decline will continue through 2009, with housing starts forecast to fall to around 155,000 units, another 15 to 20 per cent decline in the number of resales and a 10 per cent drop in prices.

But Adrienne Warren, a senior economist and real estate specialist at Scotiabank, said this points to a buyers' market.

"Certainly the softening we've seen in prices, the increase in listings, is giving first-time buyers more choice,'' Warren said.