Financial Update

Why was the TSX down and the DOW up on Friday?

Research In Motion, which torpedoed down 28.2% due to a softer forecast of 1c per share, which resulted in $100m less profit, even though RIM posted quarterly revenue of US$2.58-billion, up 88% from the same period a year ago.
· TSX -420.51pts hit with a triple whammy-- uncertainty over the fate of the U.S. financial system rescue plan, a selloff of RIM and lower oil prices Normally, a 400+ point drop is big news, but this is only the 4th-largest drop in the month so far.
· Dow +121.07pts. on optimism as U.S. lawmakers were back at the bargaining table Friday after a standoff by a group of Republicans derailed a tentative agreement on the controversial rescue package Thursday, and that they will come to some kind of agreement soon over the $700b plan that calls on the U.S. government to buy up toxic mortgage debt and other questionable securities.
· Dollar +.14c to $96.82US.
· Oil -$1.13 to $106.89US per barrel.
· Gold +5.20 to $882.90US per ounce Lawmakers. Some participants in the talks expressed hope that a deal could be reached over the weekend or early next week
Bailout pressure mounts; U.S. sees largest bank failure in its history
More bank bailouts on the horizon? Eoin Callan, Financial Post
If you have an account with this bank, have no fear, all accounts have simply been moved over to another institution and "no one lost any money that was deposited," said an official note to Washington Mutual Inc. customers from the U.S. government Friday after the largest bank collapse in American history.

If you have shares or bonds in this bank, too bad - you've probably lost everything, the note effectively went on to say after the Federal Deposit Insurance Corp. stepped in to seize the sixth-largest U.S. lender and hand much of its branches and deposit base over to its more stable competitor JP Morgan Chase & Co.

The message posted by the government was a sign of the times. And it looks to become a recurring feature as more banks turn to Washington or former rivals for relief from the punishing mortgage meltdown.

"Wachovia is next," said a senior investment banker on Friday, as the U.S. lender's value was cut by 40% amid growing expectations it will surrender its independence as early as this weekend.
The government-led rescues have featured late-night operations executed without the knowledge or consent of the bank management, board members or shareholders and have cast their interests aside in a bid to avert the chaos and panic that would accompany sudden branch closures.

The way investors are being cast aside is in turn pushing down the bank shares of other walking wounded like Wachovia. But the distress is creating plum opportunities for competitors that want to expand their footprint of bank branches in the U.S., like TD Bank Financial Group, which this week signalled its intentions to come out on top after the corporate bloodletting abates.

TD was still in the running on Friday to pick up the seized branch networks of Washington Mutual after it got privileged access to the bank's private books earlier this week by entering an auction process that ended with government intervention.

While JP Morgan has right of first refusal on the branch network, analysts expect the U.S. bank to shed more than 500 storefronts that overlap with its existing operations to recoup the estimated $30-billion in writedowns it has agreed to assume for the government .

"The combination itself presents an opportunity for TD to acquire locations, customers and deposits," according to Michael Goldberg, an analyst with Desjardins.

The analyst sees the tranche of 237 branches in New York state and 86 branches in New Jersey as the best fit for TD, which is already among the top five banks in that region and stands to increase its size by up to a third.

TD also emerged from this week's failed auction for Washington Mutual two slightly more intangible benefits. The first was a qualified mandate of sorts to pursue retail acquisitions in the U.S. from some of its own biggest shareholders, who did not flee for the exits when word leaked TD was in the auction for a badly listing U.S. bank, and instead told the Financial Post they backed management.

The auction also allowed TD to stare into the banking system's heart of darkness: toxic pools of original subprime mortgages, and glean intelligence about the worth of the underlying assets.
"Information is valuable in this marketplace," said one banker on Friday.

This knowledge will give TD an edge in bidding rounds for a growing list of regional banks and financial companies likely to entice interest from other Canadian banks, including Bank of Montreal, Bank of Nova Scotia and Royal Bank of Canada.

Royal Bank Chief Executive Gord Nixon said on Friday the bank would consider buying branch networks or wealth-management units, but cautioned against expecting large-scale deals.
"Under the right circumstances we could strategically support a retail-banking or wealth-management acquisition and we expect opportunities particularly, but not limited to, the United States over the next 12 months," he said.

One of the stumbling blocks facing Canadian banks is ambiguity over how a planned US$700-billion bail out fund will treat U.S. operations owned or acquired by foreign companies.
There is a deep split on Capitol Hill over the issue, with one camp wanting to exclude foreign-owned subsidiaries, according to a bank lobbyist in Washington. This would pull the rug from under Canadian bidders on distressed banks.

"It would hurt foreign buy-outs, and leave a very bad taste in the mouths of foreign investors," said Gary Hufbauer of the Peterson Institute.

A separate camp wants discretionary power handed to Hank Paulson, the U.S. Treasury secretary, that would, in turn, give Washington leverage over other countries.

Canada 'not immune' from U.S. fallout: Carney Paul Vieira, Financial Post Dean Bicknell/Calgary Herald Mark Carney, the Governor of the Bank of Canada OTTAWA -- Canada is "not immune" from the negative fallout in the U.S. financial system, Mark Carney, the Bank of Canada governor, said Thursday, warning the current credit turmoil "poses particular problems" for the Canadian economy.

In an address to the Canadian Club of Montreal, Mr. Carney suggested the U.S. economy may not recover as quickly as the central bank initially expected, and that commodity prices, which have driven income growth in Canada, will remain volatile due to slower economic growth in emerging markets.

The remarks were the first public comments by Mr. Carney on the financial turmoil in the U.S. system. Bank of Canada watchers said they were more cautious than usual, likely because of the federal election campaign in which the economy has emerged as the top issue. For weeks, the Conservative Party, which is seeking another mandate to govern, has argued that Canada's economic fundamentals are "solid" and not at risk despite the meltdown in the U.S. markets.

In comments last week, Stephen Harper, the Prime Minister, told reporters the negative fallout from the U.S. financial turmoil "should not spill over into Canada."

As it happens, economists at Toronto-Dominion Bank released their outlook for the Canadian economy. The TD report said the economic fallout in the United States will get worse before it gets better, and as a result it will likely be a year before Canada experiences a "shallow recovery."

Mr. Carney indicated through his remarks that the central bank may be of a similar view as the TD economists.

He said the central bank is in the midst of "revisiting" its outlook for the U.S. economy, adding the turmoil in that country's financial sector has increased the risk that a U.S. economic recovery will be delayed.

"A fall in U.S. domestic demand seems likely. Household credit growth has slowed sharply and will slow further," he said. "Any slowdown in the U.S. economy would have consequences for Canada, but the current situation poses particular problems.

"The prolonged housing slump has affected Canadian exports of lumber and building materials. In addition, the fall in U.S. motor vehicle sales ... has adversely affected our auto sector. Even the spring fiscal stimulus package does not appear to have boosted consumption in the areas that matter most for Canada."

Mr. Carney reiterated that Canada's financial system is solid and well-positioned to withstand the financial turmoil. Nonetheless, "we are not immune from the fallout from this process elsewhere."

Despite the credit turmoil, Mr. Carney said the central bank "will not deviate" from ensuring, through its monetary policy, that inflation remain at its 2% target. Yet, he added, "events beyond our borders have important influences on the outlook for inflation in our country. They must be considered in tandem with domestic factors, including the strength of domestic demand, the evolution of potential growth, and the health of our financial system."

Douglas Porter, deputy chief economist at BMO Capital Markets, said Mr. Carney's language has turned more "dovish," suggesting the bank may be "open to the thought" of cutting rates if necessary. This month, the central bank said its current benchmark lending rate was at an "appropriately accommodative" level.Some economists, most notably David Wolf of Merrill Lynch and Derek Holt of Scotia Capital, have argued the central bank would need to cut lending rates, starting next month