Financial Update

Canada's slowing economy is starting to take a toll on homeowners.

· TSX -42.77 losing some of Tues’s 140 pt gain
· Dow -206.48 also losing previous days small gain
· Dollar still bouncing -.41c to $ $99.30 losing almost half of Tues 1c gain
· Oil continues upward +$1.69 to $123.53US per barrel breaking new records
· Gold -$6.40US to $869.60US

Bond Rates: <http://www.bankofcanada.ca/en/rates/bonds.html> http://www.bankofcanada.ca/en/rates/bonds.html

Toronto Star
Ellen Roseman

"Defaults are rising in certain parts of the country," said Peter Vukanovich, president of Genworth Financial Canada, which insures mortgages against default.

Which parts of the country?

"Here in Ontario and in Quebec," he replied.

The Canadian real estate market is healthier than in the United States, where prices are falling and many homeowners are facing foreclosure.

Still, there's a concern that some homeowners in Canada may not keep up their mortgage payments if they lose their jobs.

"We're monitoring losses and making sure the lending is responsible," Vukanovich said.

Homebuyers are required to buy mortgage insurance if their down payment is less than 20 per cent of the purchase price.

Mortgage insurance protects lenders when borrowers fall behind and properties have to be sold at a loss.

Canada Mortgage and Housing Corp., a federally owned Crown corporation, is the largest provider.

Genworth, owned by General Electric Co., is the largest private-sector mortgage insurer.

In its 2006 budget, the federal government opened the mortgage insurance market to more competition.

With competition came innovation. Mortgage insurance providers started underwriting loans with no down payments and with amortizations of up to 40 years.

"The longer amortizations and the 100 per cent loan-to-value products have been relatively popular," Vukanovich said.

But what if Canada's economy flattens out? How will this affect highly leveraged buyers?

It's not only CMHC, Genworth and other mortgage insurers on the hook if there's a rash of defaults.

Taxpayers will also be liable for losses.

Few people know that Ottawa guarantees 100 per cent of CMHC-insured mortgages and 90 per cent of privately insured mortgages (up to $200 billion).

Because of the federal guarantee, mortgage insurers don't have to carry capital on their books to match their potential risks.

In recent months, the finance department has been holding secret talks with mortgage industry players.

"We consult on a regular basis on a wide variety of issues," said a finance spokesperson.

While Ottawa won't confirm the discussions, mortgage lenders know they're going on.

"The degree of risk that's involved with 40-year mortgages and no down payments is certainly of some concern to the finance department," said Don Drummond, chief economist with TD Bank Financial Group.

"It definitely creates a riskier environment."

Here's how the risk could play out.

Suppose you bought a home in the Toronto area last year, borrowing the whole purchase price and opting for a 40-year payback. Your mortgage insurance premium added another 3.5 per cent to the loan amount.

Suddenly, you lose your job or have your hours cut back. Or this happens to your spouse.

Within a few months, you can no longer cover mortgage payments.

You think about selling. But you can't make money because you have no equity and 99.9 per cent of your payments are interest, not mortgage principal.

So, you wait for the lender to take over your house under a power of sale.

Our mortgage lenders are strict about checking credit scores and making sure borrowers don't take on too much debt.

But there's a sky-high bill to shoulder if a slowing economy results in mortgage defaults.

It's time for Ottawa to talk openly about cutting back its mortgage insurance guarantee to adapt to a climate of looser lending.

Financial Update

Central bank plays down recession threat

· TSX -5.94
· Dow -88.66
· Dollar +.56c to $ $98.67US
· Oil +$3.65 to $119.97US per barrel
· Gold +16.20US to $872.30US

Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html

As other countries pump cash into their credit systems, the Bank of Canada is standing on the sidelines

May 03, 2008 Julian BeltrameThe Canadian PressThe Bank of Canada sat on the sidelines yesterday as the United States and Europe stepped up efforts to loosen tight credit conditions, a further indication that Canada's top banker believes the country's economic woes were not the same as south of the border.

Bank governor Mark Carney appeared relatively upbeat about Canada's economic prospects at two appearances before parliamentary committees this week, highlighting the country's "strengths'' and describing credit conditions as superior to those in the United States and Europe.

Yesterday, the U.S. Federal Reserve acknowledged the global credit crisis was not yet over, saying it will work with European central banks on the issue and announcing a boost in the emergency reserves it supplies to U.S. banks to $150 billion US in May, up from the $100 billion it supplied in April.

But in a statement, the Canadian central bank noted that while it had rolled over $2 billion in purchase and resale agreements with Canada's chartered banks on Tuesday, it was not injecting more or new money into the system.

"The Bank of Canada has not offered the specific types of facilities covered by these central bank announcements because markets and institutions in Canada have not been affected in the same way nor to the same extent as elsewhere,'' it said in a statement.

Carney's sanguine comments this week -- no recession and no inflation -- appeared directed at countering what the central bank likely considers overly pessimistic views propagated by analysts, the media and opposition politicians, especially after Statistics Canada reported gross domestic product had contracted by 0.2 per cent in February.

Bank of Montreal's Doug Porter pointed out that Canadians have had it far better than their American cousins, and will continue to experience superior economic prospects for some time.
The number of people working in Canada is at a record 63.9 per cent, while in the U.S. it has dropped to 62.6 per cent, he said.

As well:

Retail sales are up 6.8 per cent so far this year in Canada, compared to 2.9 per cent in the U.S.
Housing starts are up 3.7 per cent in Canada, versus down 29 per cent in the United States
And Canadian auto sales are up 6.1 per cent; American sales are down 7.7 per cent this year.
Part of the despair about the economy, said Porter, is related to analysts and Canadians putting too much weight on one indicator -- real gross domestic product growth -- which has been misleading in an era of rising exports values and falling import prices.

Financial Update

Interest rates set to climb back, taking resource stocks with them

· TSX +214.47 finished the week much stronger
· Dow +48.20
· Dollar -1.18c to $ $98.11US
· Oil -$0.94 to $112.56US per barrel
· Gold -13.90US to $848.90US

Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html

TORONTO, May 5 /CNW/ - CIBC (CM: TSX; NYSE) - "Unrelenting pressure" on food and energy prices will reverse the direction of interest rates in the next 12 months, and lift energy and materials stocks to new record highs, notes a CIBC World Markets report.

"While the bank of Canada may still have one more (rate) cut up its sleeve, markets will be surprised at how rapidly the Bank is compelled to take back those easings," says Jeff Rubin, Chief Strategist and Chief Economist at CIBC World Markets in his monthly Canadian Portfolio Strategy Outlook report.

"We expect to see at least 100 basis points of tightening" by the end of next year.

Because rising interest rates make bond yields less attractive, Mr. Rubin is paring back the bond weighting in his model portfolio to "neutral" from "overweight". That frees up funds to take a slightly overweight stance in equities, with emphasis on energy and materials stocks.

Mr. Rubin's increased weighting in energy stocks reflects supply struggles and surging demand that he predicts will push oil to US$130 a barrel and natural gas to US$13 per Mn BTUs in 2009.

"We remain wary of near-term market volatility. But the strength of the resource market, particularly energy, and a gradual recovery in the U.S.
economy should see the TSX justify our equity weighting," says Mr. Rubin.

Mr. Rubin's "overweight" stance in materials is tied to the strength of emerging markets where infrastructure developments are driving demand for metals and other resources, and rising income levels and meat consumption are pushing up global agricultural prices.

"An expected return to a global supply deficit in 2009 has led us to upgrade our forecast for copper prices," says Mr. Rubin. "In comparison to the other metals, the golds haven't shone of late. But the pullback there should prove temporary, given the prospect for further dollar weakness and continuing inflation jitters, fuelled by rising oil and food prices.

"Agricultural commodity and chemical producers, along with purveyors of needed infrastructure or crop improvements like irrigation and biotech firms offer the greatest potential positive leverage to global food supply troubles.
Profits in the agricultural chemicals sector are expected to nearly triple this year."

While those sectors are winners, Mr. Rubin says companies that "rely heavily on grain, oil, or other commodities as inputs face increasing costs and thus weaker profits." As a result, he has cut a half percentage point of weighting in the consumer staples group, which includes both food retailers and processors.

He has also shed weight in the utilities sectors where dividend yields are likely to prove less attractive in a rising interest rate environment. "In addition, rising carbon abatement costs could also reduce future profit growth, especially for coal-dependent power generators."

Mr. Rubin's end of 2009 forecast of 16,200 for the TSX, versus 1,475 for the S&P 500, points to the globally leveraged Canadian market continuing to outperform the S&P 500 for at least another year, aided by continuing strength in energy and materials stocks.

"We now expect TSX earnings to rise by an above-trend 16 per cent this year. That should easily surpass the consensus estimate of a 10 per cent rise in S&P 500 earnings, marking the fourth consecutive year of better earnings growth north of the border.

"Beyond the positive effect of triple-digit crude, US$4/lb copper and US$1,000/tonne potash on the energy and materials groups, profit expectations have also been upgraded for info tech and more modestly for key industrial producers like the rails. Alternatively, financial sector earnings are expected to fall modestly for the first time since 2002. That compares with expectations just three months ago for a near-double-digit gain for the sector.

The complete CIBC World Markets report is available at:
http://research.cibcwm.com/economic_public/download/psmay08.pdf