U.S. confidence data drives sharp loonie rally -TSX rallies as BMO tops estimates-Oil hits six-month high on consumer confidence
TSX+216.40 to 10,285.90 climbed to their highest closing level since October on a big jump in U.S. consumer confidence this month and a favourable start to second quarter bank earnings releases.
DOW +196.17 U.S. data showed that consumer confidence rose in May to its highest level in eight months.
Dollar +.45c to 89.46USD touched its loftiest level in more than 7 months, spurred by a rise in oil prices and by upbeat U.S. economic data that whetted investor appetite for risk.
Oil +$.78 to $62.45US per barrel hit a fresh 6-month high, bolstered by U.S. consumer confidence data and comments from OPEC kingpin Saudi Arabia that prices may continue to rise.
Gold -$5.60 to $953.30USD per ounce
Canadian 5 yr bond yields +.09bps to 2.37- Four weeks ago it was 1.93. The spread, based on 5 yr rate of 3.89%, so is now lower again at 1.52%.
http://www.financialpost.com/markets/market-data/money-yields-can_us.html?tmp=yields-can_us
Historically spreads have been closer to 2% or 2.25%. In January the spread was 3.30, however cost of funds had risen drastically with the “credit crunch” With today’s spread of 1.52%, half of January’s, rates are artificially low. Watch for fixed rate increases-two lenders increased yesterday already.
The yield, rate of return on your bond, can be read through a yield curve, which is the pattern of yields on bonds. This increase in bond yield is something to watch. If the bond yield continues to go up, the spread will continue to shrink and this could be a trigger for interest rates to rise
Transmitted by CNW Group on : May 26, 2009 06:00
Affordability and job security most important factors for first-time homebuyers
New government incentives help but market fundamentals more important,Canadians say
TORONTO, May 26 /CNW/ - Canadians who are considering purchasing their
first home are primarily motivated by lower home prices and very low interest
rates, but some require confidence in the economy and their employment
prospects before they will enter the market, according to a report released
today by Royal LePage Real Estate Services. Eighty-six per cent of potential
first-time buyers say low interest rates make them more likely to purchase a
home; 81 per cent cite lower housing prices as a motivating factor; while 76
per cent cite job security and 64 per cent say a stable economy is an
important factor in their decision to buy.
Potential buyers were asked to rank their top incentives for purchasing a
first property. While home prices and interest rates took the number one and
two rankings, respectively, the third most popular incentive was the
First-Time Home Buyers' Tax Credit. The recently introduced Home Renovation
Tax Credit for 2009 was cited by 42 per cent of potential first-time buyers as
either 'very likely' or 'somewhat likely' to impact their purchasing decision.
"When first time buyers stepped out of the market in the fourth quarter
of 2008, at the height of the global recession, their absence was profoundly
felt. Without significant volumes of entry-level homes trading hands, the
entire market limped through the winter months. First time buyers are back in
force this spring, and with them the beginnings of a market recovery. While
these consumers appreciate government incentives such as tax credits, greater
RSP deduction limits and rebates on home renovations, it is markedly improved
affordability that is proving to be the powerful drawing card," said Phil
Soper, president and chief executive of Royal LePage Real Estate Services.
"Our survey demonstrates how important affordability factors such as interest
rates and house prices are in stimulating demand."
Across the country, potential first-time homebuyers agreed that
affordability was their top consideration, however the survey also revealed
differences amongst buyers in various regions of Canada. In provinces such as
British Columbia where high housing prices have kept some buyers out of the
market in recent years, 92 per cent of potential first-time buyers are now
motivated by low interest rates and 96 per cent say lower home prices are
likely to prompt them to buy.
In Atlantic Canada, where local economies have been resilient in the face
of a worldwide recession and housing markets remain stable, 43 per cent of
first-time buyers say they that job security is a factor in their decision to
buy, while 84 per cent of buyers in British Columbia and Alberta said job
security will influence them.
Atlantic Canadians were less motivated than other Canadians by declining
interest rates, with only 72 per cent saying it will likely prompt a buying
decision, compared to 86 per cent of Canadians overall. Buyers in Ontario and
Quebec rated the Home Renovation Tax Credit as a bigger factor in their buying
decision, compared to the Canadian average.
Mr Soper continued, "The significant response differences from region to
region show how closely the residential real estate market is tied to broader
economic trends and consumer confidence. Buying your first home is a major
life decision, and people are more likely to purchase a home if they feel
comfortable about the state of the economy and confident that they will have a
job to support their new mortgage obligation."
Top Incentives for First-Time Buyers Across Canada
Potential first-time buyers were asked to choose their number one
incentive for purchasing a first property. The table shows the percentage
of respondents who selected each factor as their top incentive.
-------------------------------------------------------------------------
BC &
Overall Territories Alberta Prairies Ontario Quebec Atlantic
-------------------------------------------------------------------------
Lower Housing
Prices 33% 49% 48% 55% 32% 13% 26%
-------------------------------------------------------------------------
Low Interest
Rates 27% 32% 29% 4% 23% 41% 17%
-------------------------------------------------------------------------
First-Time Home
Buyers' Tax
Credit 12% 3% 10% 22% 15% 11% 10%
-------------------------------------------------------------------------
Job Security 10% 6% 5% 2% 10% 16% 15%
-------------------------------------------------------------------------
Additional
Government
Actions to
Stabilize
Housing less less
Markets 3% 3% than 1% 10% 3% 4% than 1%
-------------------------------------------------------------------------
Home Renovation less
Tax Credit 2% 1% than 1% 1% 1% 3% 11%
-------------------------------------------------------------------------
Stable less less less
Economy 2% 2% than 1% than 1% 3% 2% than 1%
-------------------------------------------------------------------------
Greater RSP
Deduction less less less
Limits 1% than 1% 1% than 1% 1% 1% than 1%
-------------------------------------------------------------------------
Stable
Financial less less less less less less
Markets than 1% than 1% than 1% than 1% 1% than 1% than 1%
-------------------------------------------------------------------------
REGIONAL SUMMARIES
Atlantic
Overall activity in the housing market has remained steady in the
Atlantic region with first-time homebuyers continuing to enter the market. Low
interest rates and recent government incentives, such as the Home Renovation
Tax Credit, greater RSP deduction limits and the First-Time Homebuyer's Tax
Credit speak to affordability. Buyers in this area are entering the market
that would not have a few years ago, due to these influencing factors.
Entry-level buyers in Newfoundland, Prince Edward Island, New Brunswick and
Nova Scotia continue to search for detached bungalows, with the average price
ranging from $157,000 in Charlottetown to $215,667 in Halifax during the first
quarter of 2009.
Quebec
First-time buyers continue to pursue the dream of home ownership in
Montreal, as the number of entrants to the housing market has remained
relatively stable. Low interest rates are contributing to increased market
entry with 41 per cent of first-time buyers suggesting this is the key
incentive driving the purchase of their first property, followed by 13 per
cent who suggest lower housing prices might influence their buying decision.
With 47 per cent of new buyers in Quebec planning to settle in urban areas,
buyers are planning to invest and live in their first home for ten or more
years. Fifty-six per cent of first-time buyers hope to purchase a property in
the $150,000 to $300,000 price range.
Ontario
Encouraged by recent government initiatives, home ownership in Ontario is
becoming a reality for an increasing number of younger purchasers. Across
Ontario, 36 per cent of potential first-time buyers are most likely to
purchase property in an urban setting. Condominiums continue to attract
first-time buyers in the Greater Toronto Area with urban communities at
accessible price points appealing most to market newcomers. In addition to
affordability, location is a leading factor dictating condominium appeal.
Neighbourhoods in Toronto's east and west downtown core are popular with
first-time buyers. In Ottawa, affordability continues to drive activity and
most first-time buyers are opting to purchase in suburban areas where
properties typically cost $50,000 to $75,000 less than in the city centre.
Active first-time buyer markets include Orleans, Barrhaven and Kanata.
Manitoba & Saskatchewan
Thirty per cent of Prairie buyers planning on purchasing their first home
in the next three years will choose a detached bungalow. The second-most
popular choice for first-time buyers is condominiums at 21 per cent, followed
by detached two-story homes at 15 per cent. In Winnipeg, up-and-coming
neighbourhoods for first-time buyers include River Heights - which has
traditionally been attractive for people entering the market - Fraser's Grove
and East / North Caldonin. With a good selection of older bungalows and two
story homes, Broders Annex is the hottest neighbourhood for first-time buyers
in Regina.
Alberta
Alberta's urban centres continue to be popular with first-time buyers,
who make up nearly a third of home sales in both Calgary and Edmonton.
Condominiums and detached bungalows are the most popular choices for
first-time buyers in Edmonton, where lower housing prices and low interest
rates are the biggest incentives for buyers entering the market for the first
time. Popular areas for new buyers include the suburbs, where a new
condominium may be within budget, the university area, where many parents are
buying for their kids, Allendale and McKernan. In Calgary, new buyers are most
interested in inner city condominiums and detached houses in the suburbs, with
many seeking new or renovated homes.
British Columbia
With home prices either flat or declining in many communities in British
Columbia and with interest rates at record lows, first-time buyers are taking
advantage of greater affordability, with female buyers leading the trend.
Sixty per cent of the buyers getting into BC's housing market for the first
time are women. In British Columbia, 40 per cent of prospective first-time
buyers intend to purchase a 'fixer-upper' while 80 per cent would take
advantage of the Federal Government's Home Renovation Tax Credit in making
upgrades to a home. First-time buyers in Vancouver are favouring condominiums
and townhomes, however an increasing number of entry-level buyers are finding
affordable detached homes outside the city in the Fraser Valley suburbs.
Thursday, May 28, 2009
Tuesday, May 26, 2009
Financial Update May 26, 2009
Financials send TSX higher amid investor optimism over bank earnings
TSX+76.08
DOW -14.81(unchanged with Memorial Day holiday)
Dollar -.25c to 89.01USD
Oil -$.46 to $61.21US per barrel
Gold +$7.70 to $958.50USD per ounce (unchanged)
Canadian 5 yr bond yields +.01bps to 2.28
http://www.financialpost.com/markets/market-data/money-yields-can_us.html?tmp=yields-can_us
Where will the breaking point be for banks to trade competition for profitability? Rates are artificially low with these spreads. Watch for rate increases
The yield, rate of return on your bond, can be read through a yield curve, which is the pattern of yields on bonds. This increase in bond yield is something to watch. If the bond yield continues to go up, the spread will continue to shrink and this could be a trigger for interest rates to rise
The next decade: Return to growth, high loonie and western economic power
Julian Beltrame, The Canadian Press OTTAWA - Canadians can look forward to a sustained period of strong growth in the next decade, but one that will be different from the rise that came a cropper in the last, says a new report.
Canadian Imperial Bank of Commerce (TSX: CM.TO) economists say the next decade will bring major fundamental changes to the world economy, and a bit of deja vu for Canada, with the return of Western power, a high-flying loonie and surging stock values.
The major change is that Canada's economy will be less dependent on consumers or the United States, says the report written by economists Avery Shenfeld and Benjamin Tal.
Overall, it's a rosy picture of a decade that begins slowly next year but picks up steam based on global growth and surging consumer demand in newly-rich emerging economies like China and India, as well oil-rich countries from the OPEC nations and Russia.
"I am optimistic, particularly relative to those who say the global economy is in such a deep hole that even when we look over the medium turn we are going to be paying for it," said Shenfeld, the bank's chief economist.
"This is making the point that just because the last decade's growth included a lot of excessive leverage that came to ruin, it doesn't mean we are doomed for a slow decade of global growth ahead."
Excessive leveraging, or irrational consumer spending on borrowed money, will result in a sea-change in attitudes in the U.S., but also Canada and many other industrialized nations. But emerging economies, with their newfound wealth, will likely more than take up the slack.
Canada's economy will get a boost from exports, particularly commodities, whose prices will get back some of their lustre as demand in emerging markets grows.
"We're not going to break our ties to the US economy," said Shenfeld, "but what we sell to the world will be much more driven by demand coming from East Asia and even (the raw materials) we sell to the U.S., the price will be more determined by East Asia."
The diminished importance of the U.S. will impact the currency, the report states, forecasting a 20 per cent tumble during the decade. In part, the devaluation will be based on high inflation caused by the Federal Reserve's current quantitative easing policies that are massively increasing the supply of dollars.
That, in turn, will push the loonie above the U.S. dollar again, damaging central Canada's manufacturing sector and forestry exports, but boosting the West's resource sector.
Rising resource prices will re-ignite capital-intensive development of the oilsands, natural gas projects and metal mines, the report states.
"It'll be a bit of a return to some of the boon days we saw a couple of years ago," Shenfeld said.
One sector that won't bounce back as strongly is housing. The report sees housing starts averaging a tame 170,000 in the next decade, after being above 200,000 for most of the current decade.
TSX+76.08
DOW -14.81(unchanged with Memorial Day holiday)
Dollar -.25c to 89.01USD
Oil -$.46 to $61.21US per barrel
Gold +$7.70 to $958.50USD per ounce (unchanged)
Canadian 5 yr bond yields +.01bps to 2.28
http://www.financialpost.com/markets/market-data/money-yields-can_us.html?tmp=yields-can_us
Where will the breaking point be for banks to trade competition for profitability? Rates are artificially low with these spreads. Watch for rate increases
The yield, rate of return on your bond, can be read through a yield curve, which is the pattern of yields on bonds. This increase in bond yield is something to watch. If the bond yield continues to go up, the spread will continue to shrink and this could be a trigger for interest rates to rise
The next decade: Return to growth, high loonie and western economic power
Julian Beltrame, The Canadian Press OTTAWA - Canadians can look forward to a sustained period of strong growth in the next decade, but one that will be different from the rise that came a cropper in the last, says a new report.
Canadian Imperial Bank of Commerce (TSX: CM.TO) economists say the next decade will bring major fundamental changes to the world economy, and a bit of deja vu for Canada, with the return of Western power, a high-flying loonie and surging stock values.
The major change is that Canada's economy will be less dependent on consumers or the United States, says the report written by economists Avery Shenfeld and Benjamin Tal.
Overall, it's a rosy picture of a decade that begins slowly next year but picks up steam based on global growth and surging consumer demand in newly-rich emerging economies like China and India, as well oil-rich countries from the OPEC nations and Russia.
"I am optimistic, particularly relative to those who say the global economy is in such a deep hole that even when we look over the medium turn we are going to be paying for it," said Shenfeld, the bank's chief economist.
"This is making the point that just because the last decade's growth included a lot of excessive leverage that came to ruin, it doesn't mean we are doomed for a slow decade of global growth ahead."
Excessive leveraging, or irrational consumer spending on borrowed money, will result in a sea-change in attitudes in the U.S., but also Canada and many other industrialized nations. But emerging economies, with their newfound wealth, will likely more than take up the slack.
Canada's economy will get a boost from exports, particularly commodities, whose prices will get back some of their lustre as demand in emerging markets grows.
"We're not going to break our ties to the US economy," said Shenfeld, "but what we sell to the world will be much more driven by demand coming from East Asia and even (the raw materials) we sell to the U.S., the price will be more determined by East Asia."
The diminished importance of the U.S. will impact the currency, the report states, forecasting a 20 per cent tumble during the decade. In part, the devaluation will be based on high inflation caused by the Federal Reserve's current quantitative easing policies that are massively increasing the supply of dollars.
That, in turn, will push the loonie above the U.S. dollar again, damaging central Canada's manufacturing sector and forestry exports, but boosting the West's resource sector.
Rising resource prices will re-ignite capital-intensive development of the oilsands, natural gas projects and metal mines, the report states.
"It'll be a bit of a return to some of the boon days we saw a couple of years ago," Shenfeld said.
One sector that won't bounce back as strongly is housing. The report sees housing starts averaging a tame 170,000 in the next decade, after being above 200,000 for most of the current decade.
Monday, May 25, 2009
Financial Update May 25, 2009
TSX+43.83
DOW -14.81
Dollar +1.39c to 89.26USD
Oil +$.62 to $61.67US per barrel
Gold +$7.70 to $958.50USD per ounce
Canadian 5 yr bond yields +.01bps to 2.27
http://www.financialpost.com/markets/market-data/money-yields-can_us.html?tmp=yields-can_us
The yield, rate of return on your bond, can be read through a yield curve, which is the pattern of yields on bonds. This increase in bond yield is something to watch. If the bond yield continues to go up, the spread will continue to shrink and this could be a trigger for interest rates to rise
Bear Market
A market in which stock prices are falling. The rule of thumb seems to be at least 20%. However, a lot depends on how long the drop lasts. The quicker the rebound, the less likely that investor psychology will turn from optimism to the pessimism that usually accompanies a bear market.
Bull Market
A market in which stock prices are rising for a length of time. Prices need not rise continuously. There can be days, weeks and even months in which prices fall. What matters is the long-term trend. When it comes to people, bullish describes one who is optimistic
Interesting article below on credit and interest rate costs
Banks walk tightrope while hoping to cushion profit fall
Bulls believe earnings season will signal turning point for industry, but the bears are still urging caution
RITA TRICHUR
BUSINESS REPORTER TORONTO STAR
Swollen loan losses, soaring writedowns and slumping profits – it's enough to make even seasoned bank shareholders run for cover.
But with Canadian bank stocks on a rebound since March, wary investors are wondering whether it would be wise to hang on for the long-term or head for the exits while the getting is still good. Analysts appear divided on the hold `em or fold `em debate, but surmise that next week's round of second-quarter earnings should provide some sense of direction.
Banks, meanwhile, are facing a delicate balancing act for the remainder of fiscal 2009. In order to stay profitable, they have to keep loans flowing, while boosting some rates because the recession is rife with risk. At the same time, they must sop up climbing credit losses and maintain plump capital cushions – all without jeopardizing the sanctity of their dividends.
While acknowledging that the economic outlook remains murky, bank bulls argue this earnings season marks a turning point for the industry. For the first time in about 18 months, those much-maligned capital markets-related writedowns are not expected to eclipse the earnings parade.
The running tally of those charges hit $20.24 billion for the "Big Six" at the end of January. While more writedowns are anticipated for the February-to-April quarter, some analysts suggest this batch of reports could signal those charges are on the wane. With capital markets on the mend, many are also betting that results from the banks' trading businesses could even surpass expectations.
Another plus, rebounding stock prices have taken the banks' dividend yields out of the danger zone, which has dampened speculation of cuts to those sacred payouts. In fact, Michael Goldberg of Desjardins Securities is actually expecting "minimal dividend growth" for the second half of fiscal '09.
Those in the bear camp, however, are advising investors to be extremely cautious because bank stocks remain fraught with risks. In short, "the economy still sucks," observed John Aiken of Dundee Capital Markets in a research note to clients. He has a majority of "sell" ratings on Canadian banks, most because they are bracing for more bad loans as the economy sheds jobs and consumer bankruptcies soar.
Provisions for credit losses, the money banks set aside to cover bad loans, have been rising in recent quarters. Craig Fehr, an analyst with Edward Jones, predicts credit conditions will worsen for the rest of this year.
"We are seeing some of the pressures that have existed for the last year or so, largely on the capital markets side, are starting to subside. And we're exchanging that a bit for the pressures that are coming from good old-fashioned credit deterioration – higher loan losses," Fehr said in an interview.
"I think that we are going to see pretty substantial year-over-year increases in provisions across the board – for all the banks. We're talking about 50 to 100 per cent increases in provisions year over year."
The key trouble spots are likely defaults in credit-card lending, while commercial mortgages are also expected to show increasing signs of stress. The Canadian Imperial Bank of Commerce administers Canada's largest credit-card portfolio. It began curbing lending during the second half of fiscal 2008 but remains at risk of more losses, Fehr said.
Toronto-Dominion Bank, meanwhile, has large exposures to the hard-hit U.S. commercial real-estate sector and the sputtering Ontario economy, suggesting its "results might disappoint," said André-Philippe Hardy of RBC Capital Markets. His research also proposes that results from the Bank of Nova Scotia could miss expectations because it "is also exposed to rising credit losses in Latin America and the Caribbean."
While all banks are expected to pad their provisions, it appears to be "less of a negative" for Bank of Montreal, while National Bank of Canada is "least exposed to deteriorating credit quality near term" because of its regional concentration in Quebec, Hardy said.
Royal Bank of Canada, meanwhile, is facing its own challenges south of the border. Last month, RBC pre-announced an $850 million (U.S.) goodwill impairment charge for its international banking business. "The impairment charge is the result of the prolonged economic difficulties in the U.S., in particular the deterioration of the U.S. housing market, and the decline in market value of U.S. banks," noted Scotia Capital's Kevin Choquette.
Despite those economic hurdles, some analysts contend the Canadian banks' penchant for being "boring" retail lenders is standing them in good stead for longer-term profit growth.
While the banks' net interest margins – the difference between the money they make on interest and their own interest expenses – are being squeezed because of historically low interest rates, that pressure is expected to ease going forward for a number of reasons.
First, banks have taken action to hike their rates on popular consumer loans such as personal lines of credit and float-rate mortgages. "Banks have repriced some of their mortgages and we believe banks are now charging a premium of about 75 to 100 basis points over prime on a five-year variable mortgage versus a discount of 75 to 100 basis points before the crisis," Hardy said.
Moreover, the banks' key short-term funding costs have fallen in recent months. Medium-term funding is also down from crisis levels, while longer-term funding remains elevated. Banks are also benefiting from a surge of new deposits as their customers hoard cash.
Fehr said those various factors have created a wider spread between short-term and longer-term interest rates, which suggests that banks are poised to reap profits from interest income in the not-too-distant future. That's because banks tend to borrow "cheap" short-term funds to make longer-term loans that feature higher interest rates, he said.
"As we reprice on the long end and keep the short end very cheap, that spread will increase for the banks. And it will actually be a very strong driver of profits for them going forward," Fehr said.
"There's no doubt in my mind that (loan) volumes will slow relative to peak years. The idea here is that the profitability of each loan they make now has the potential to be higher. So, net interest margins, in my mind, will probably increase as we move throughout the year."
Retail sales rise for third-straight month
THE CANADIAN PRESS
OTTAWA–Retail sales increased for the third straight month in March in a further evidence of a stabilizing Canadian economy or at least a slowing of the torrid pace of decline experienced early this year.
And economists say the data, one of the last major pieces of information left that make up the first quarter gross national product reading, suggests the first three months of 2009 might not be as bad as some feared.
"I think we've put to bed the notion that the first quarter hit could be as large as nine or 10 per cent (contraction), which was some of the scare talk earlier in the year," said Derek Holt, vice-president of economics with Scotia Capital.
"Now we're only looking at about 6.5 per cent contraction."
That would still be the biggest quarterly decline in GDP since records began being kept in 1961, beating the 5.9 per cent fall-off in the early 1990s.
The actual retail sales pickup of 0.3 per cent in March, to $33.9 billion, was smaller than some economists had hoped. But it also obscures the better 0.7 per cent increase in the volume of sales.
That suggests Canadian were buying again, but partly because they were taking advantage of bargains, particularly large rebates at car dealerships.
Bank of Montreal economist Douglas Porter said after the sizable decline in retail sales last fall and over the holiday season, the modest bounce-back is at least partly pent-up demand and likely does not signal a major and lasting change of sentiment among consumers.
"It's nice to see three modest gains in the row, but we have to take into context that they took an absolutely massive step backward last year. We're only just beginning to recover," he said.
Statistics Canada noted the three consecutive months of gains in retail sales have not completely offset the sharp declines reported in November and December.
The agency says March's retail sales were 6.3 per cent lower than their peak in September 2008, and the volume of sales were down 2.6 per cent.
The main contributor to the rise was a six per cent volume increase in new vehicles, while the automotive sector as a whole increased by 0.5 per cent.
Holt cautioned that the new figures already show the gain in March auto sales won't be repeated when the April numbers are released next month, as "we already the volume of new vehicle sales was flat in April over March."
As well, higher food prices boosted sales at food-and-beverage stores, which rose 0.9 per cent, their third straight increase.
The largest drop in the four sectors that registered sales declines came at miscellaneous retailers where sales fell 0.7 per cent. The sector includes sporting goods stores and office supply stores.
Sales increased in seven provinces in March, led by a third straight month of rising sales in Quebec, at two per cent, and Ontario, at 0.6.
The largest sales decline in March was a 1.8 per cent drop in Alberta, coming on the heels of a 1.5 per cent decrease in February.
DOW -14.81
Dollar +1.39c to 89.26USD
Oil +$.62 to $61.67US per barrel
Gold +$7.70 to $958.50USD per ounce
Canadian 5 yr bond yields +.01bps to 2.27
http://www.financialpost.com/markets/market-data/money-yields-can_us.html?tmp=yields-can_us
The yield, rate of return on your bond, can be read through a yield curve, which is the pattern of yields on bonds. This increase in bond yield is something to watch. If the bond yield continues to go up, the spread will continue to shrink and this could be a trigger for interest rates to rise
Bear Market
A market in which stock prices are falling. The rule of thumb seems to be at least 20%. However, a lot depends on how long the drop lasts. The quicker the rebound, the less likely that investor psychology will turn from optimism to the pessimism that usually accompanies a bear market.
Bull Market
A market in which stock prices are rising for a length of time. Prices need not rise continuously. There can be days, weeks and even months in which prices fall. What matters is the long-term trend. When it comes to people, bullish describes one who is optimistic
Interesting article below on credit and interest rate costs
Banks walk tightrope while hoping to cushion profit fall
Bulls believe earnings season will signal turning point for industry, but the bears are still urging caution
RITA TRICHUR
BUSINESS REPORTER TORONTO STAR
Swollen loan losses, soaring writedowns and slumping profits – it's enough to make even seasoned bank shareholders run for cover.
But with Canadian bank stocks on a rebound since March, wary investors are wondering whether it would be wise to hang on for the long-term or head for the exits while the getting is still good. Analysts appear divided on the hold `em or fold `em debate, but surmise that next week's round of second-quarter earnings should provide some sense of direction.
Banks, meanwhile, are facing a delicate balancing act for the remainder of fiscal 2009. In order to stay profitable, they have to keep loans flowing, while boosting some rates because the recession is rife with risk. At the same time, they must sop up climbing credit losses and maintain plump capital cushions – all without jeopardizing the sanctity of their dividends.
While acknowledging that the economic outlook remains murky, bank bulls argue this earnings season marks a turning point for the industry. For the first time in about 18 months, those much-maligned capital markets-related writedowns are not expected to eclipse the earnings parade.
The running tally of those charges hit $20.24 billion for the "Big Six" at the end of January. While more writedowns are anticipated for the February-to-April quarter, some analysts suggest this batch of reports could signal those charges are on the wane. With capital markets on the mend, many are also betting that results from the banks' trading businesses could even surpass expectations.
Another plus, rebounding stock prices have taken the banks' dividend yields out of the danger zone, which has dampened speculation of cuts to those sacred payouts. In fact, Michael Goldberg of Desjardins Securities is actually expecting "minimal dividend growth" for the second half of fiscal '09.
Those in the bear camp, however, are advising investors to be extremely cautious because bank stocks remain fraught with risks. In short, "the economy still sucks," observed John Aiken of Dundee Capital Markets in a research note to clients. He has a majority of "sell" ratings on Canadian banks, most because they are bracing for more bad loans as the economy sheds jobs and consumer bankruptcies soar.
Provisions for credit losses, the money banks set aside to cover bad loans, have been rising in recent quarters. Craig Fehr, an analyst with Edward Jones, predicts credit conditions will worsen for the rest of this year.
"We are seeing some of the pressures that have existed for the last year or so, largely on the capital markets side, are starting to subside. And we're exchanging that a bit for the pressures that are coming from good old-fashioned credit deterioration – higher loan losses," Fehr said in an interview.
"I think that we are going to see pretty substantial year-over-year increases in provisions across the board – for all the banks. We're talking about 50 to 100 per cent increases in provisions year over year."
The key trouble spots are likely defaults in credit-card lending, while commercial mortgages are also expected to show increasing signs of stress. The Canadian Imperial Bank of Commerce administers Canada's largest credit-card portfolio. It began curbing lending during the second half of fiscal 2008 but remains at risk of more losses, Fehr said.
Toronto-Dominion Bank, meanwhile, has large exposures to the hard-hit U.S. commercial real-estate sector and the sputtering Ontario economy, suggesting its "results might disappoint," said André-Philippe Hardy of RBC Capital Markets. His research also proposes that results from the Bank of Nova Scotia could miss expectations because it "is also exposed to rising credit losses in Latin America and the Caribbean."
While all banks are expected to pad their provisions, it appears to be "less of a negative" for Bank of Montreal, while National Bank of Canada is "least exposed to deteriorating credit quality near term" because of its regional concentration in Quebec, Hardy said.
Royal Bank of Canada, meanwhile, is facing its own challenges south of the border. Last month, RBC pre-announced an $850 million (U.S.) goodwill impairment charge for its international banking business. "The impairment charge is the result of the prolonged economic difficulties in the U.S., in particular the deterioration of the U.S. housing market, and the decline in market value of U.S. banks," noted Scotia Capital's Kevin Choquette.
Despite those economic hurdles, some analysts contend the Canadian banks' penchant for being "boring" retail lenders is standing them in good stead for longer-term profit growth.
While the banks' net interest margins – the difference between the money they make on interest and their own interest expenses – are being squeezed because of historically low interest rates, that pressure is expected to ease going forward for a number of reasons.
First, banks have taken action to hike their rates on popular consumer loans such as personal lines of credit and float-rate mortgages. "Banks have repriced some of their mortgages and we believe banks are now charging a premium of about 75 to 100 basis points over prime on a five-year variable mortgage versus a discount of 75 to 100 basis points before the crisis," Hardy said.
Moreover, the banks' key short-term funding costs have fallen in recent months. Medium-term funding is also down from crisis levels, while longer-term funding remains elevated. Banks are also benefiting from a surge of new deposits as their customers hoard cash.
Fehr said those various factors have created a wider spread between short-term and longer-term interest rates, which suggests that banks are poised to reap profits from interest income in the not-too-distant future. That's because banks tend to borrow "cheap" short-term funds to make longer-term loans that feature higher interest rates, he said.
"As we reprice on the long end and keep the short end very cheap, that spread will increase for the banks. And it will actually be a very strong driver of profits for them going forward," Fehr said.
"There's no doubt in my mind that (loan) volumes will slow relative to peak years. The idea here is that the profitability of each loan they make now has the potential to be higher. So, net interest margins, in my mind, will probably increase as we move throughout the year."
Retail sales rise for third-straight month
THE CANADIAN PRESS
OTTAWA–Retail sales increased for the third straight month in March in a further evidence of a stabilizing Canadian economy or at least a slowing of the torrid pace of decline experienced early this year.
And economists say the data, one of the last major pieces of information left that make up the first quarter gross national product reading, suggests the first three months of 2009 might not be as bad as some feared.
"I think we've put to bed the notion that the first quarter hit could be as large as nine or 10 per cent (contraction), which was some of the scare talk earlier in the year," said Derek Holt, vice-president of economics with Scotia Capital.
"Now we're only looking at about 6.5 per cent contraction."
That would still be the biggest quarterly decline in GDP since records began being kept in 1961, beating the 5.9 per cent fall-off in the early 1990s.
The actual retail sales pickup of 0.3 per cent in March, to $33.9 billion, was smaller than some economists had hoped. But it also obscures the better 0.7 per cent increase in the volume of sales.
That suggests Canadian were buying again, but partly because they were taking advantage of bargains, particularly large rebates at car dealerships.
Bank of Montreal economist Douglas Porter said after the sizable decline in retail sales last fall and over the holiday season, the modest bounce-back is at least partly pent-up demand and likely does not signal a major and lasting change of sentiment among consumers.
"It's nice to see three modest gains in the row, but we have to take into context that they took an absolutely massive step backward last year. We're only just beginning to recover," he said.
Statistics Canada noted the three consecutive months of gains in retail sales have not completely offset the sharp declines reported in November and December.
The agency says March's retail sales were 6.3 per cent lower than their peak in September 2008, and the volume of sales were down 2.6 per cent.
The main contributor to the rise was a six per cent volume increase in new vehicles, while the automotive sector as a whole increased by 0.5 per cent.
Holt cautioned that the new figures already show the gain in March auto sales won't be repeated when the April numbers are released next month, as "we already the volume of new vehicle sales was flat in April over March."
As well, higher food prices boosted sales at food-and-beverage stores, which rose 0.9 per cent, their third straight increase.
The largest drop in the four sectors that registered sales declines came at miscellaneous retailers where sales fell 0.7 per cent. The sector includes sporting goods stores and office supply stores.
Sales increased in seven provinces in March, led by a third straight month of rising sales in Quebec, at two per cent, and Ontario, at 0.6.
The largest sales decline in March was a 1.8 per cent drop in Alberta, coming on the heels of a 1.5 per cent decrease in February.
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