Financial Update

Speculation the Loonie may fly higher

· TSX + 35.21
· Dow -145.99 on Friday-closed Monday for Memorial Day
· Dollar remains above par -.38c to $100.81
· Oil +$1.36 to $132.19US per barrel
· Gold +7.70US to $925.60US

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


Canada now has more workers in stores than factories

Julian Beltrame The Canadian Press
For the first time ever, more Canadians are involved in selling products than producing them.
A Statistics Canada report yesterday showing retail sales rose 5.8 per cent last year contained the added curiosity that for the first time, more people were employed in retail sales than in manufacturing.

The sales increase was the second strongest in five years and underlined the growing importance of domestic demand as the lynch pin of Canadian growth, with the red-hot West, particularly Saskatchewan and Alberta, leading the wave.

But the flip side of the coin is that as the service sector has shone, manufacturing -- especially the auto and forestry sectors -- has gone from bad to worse, so much so that there are now more people working in car dealerships, and at the local supermarket or department store than in factories and mills. Statistics Canada said yesterday that there were 1,790,000 retail jobs on average last year, compared to 1,784,700 in manufacturing.
Speculation the loonie may fly higher

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May 24, 2008 Julian Beltrame The Canadian Press

Is the Canadian loonie preparing to take flight again?

While betting on the up and down movements of a currency is risky, some economists are beginning to move off their bearish outlook for the Canadian dollar and contemplating that the loonie may be readying a move to higher ground, well above parity.

"One could make the case that the loonie is undervalued at today's oil prices,'' says Bank of Montreal deputy chief economist Douglas Porter. "Partly, this likely reflects the fact that the foreign exchange market, for one, simply doesn't believe today's oil prices will last.
"Another factor may have also been that the Bank of Canada may cut (interest rates) further, but the U.S. Federal Reserve looks done,'' he added.

For several years, the Canadian dollar has generally moved in tandem with prices of commodities Canada has in abundance, particularly oil.

But the Canadian dollar hasn't gathered much strength during the surge from $95 US oil at the end of 2007, Porter noted. It only moved past parity with the U.S. currency when oil cracked the $130 level this week.

A good sign for the loonie's prospects was Scotiabank's commodities report Thursday that forecast crude oil prices in the $135 to $140 range for the rest of the decade, based on a shortage of new non-OPEC production and rising demand from emerging economies in Asia.

Scotiabank currency analyst Stephen Malyon said the bank is forecasting the loonie to finish the year at $1.01 US and 2009 at $1.06, but said it will likely revise the forecast upward next week on the growing perception that high oil and high commodity prices are here to stay.

"I think the Canadian dollar has a lot of things going for it, from a structurally sound economy, and the fact we're a commodity exporter amid a cyclical bull market in commodities,'' he said.
Of course, there are other factors that have come into play in the relative pricing of the loonie.
The Canadian dollar is directly impacted by the interest rate spread between Canada and United States and was lifted last fall when the Fed moved aggressively to cut rates in expectation of a serious economic slowdown.

As important is recent language coming from both central banks which suggests the Fed is heading for the sidelines, while the Canadian bank remains on an easing trend.
There is also the relative purchasing power of both currencies, which suggests that the loonie remains the weaker sister.

Financial Update

Toronto stock market tops 15,000 points for the first time ever propelled by higher oil prices

· TSX hits new record +63.14 to 15.047 pts. On May 11, 2007, it first crossed 14,000,
closing that day at 14,003.82.
· Dow -199.48 in contrast, has felt the effect of waning credit and its economic fallout far
more keenly than the TSX, as worries over the impact prices will have on the consumer
deepened, while a key inflation indicator rose more than expected.
· Dollar was boosted slightly to .81c $1.008
· Oil +$2.02 to $129.07US per barrel extended its red-hot advance, coming close to $130 a
barrel.
· Gold +14.50+US to $919.50US

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


Prices rise more than expected in April

HEATHER SCOFFIELD Globe and Mail Update
OTTAWA — Inflation was still benign in Canada in April, but prices rose more than analysts had projected, up 1.7 per cent from a year earlier, Statistics Canada said.
The 1.7 per cent increase was a pick-up in total inflation compared to March, when prices rose 1.4 per cent, and was the first such acceleration since last November.

Analysts had expected a 1.4 per cent rise in prices in April from a year earlier, and a 0.4 per cent increase on the month.

On the month, total inflation rose 0.8 per cent – much more than analysts had expected, with a consensus forecast of 0.4 per cent compared to March.

Core inflation, which excludes the most volatile items such as energy prices and some food, rose 1.5 per cent from a year earlier, and 0.3 per cent compared to March. Core inflation, too, was higher than economists had projected.

Food prices, which have shown little movement in Canada recently despite rampant food inflation elsewhere in the world, climbed significantly in April, rising 1.2 per cent from a year earlier. Excluding restaurants, however, food bought from stores rose 0.9 per cent in April, which is more than noted in previous months but is still a slower pace than total inflation, Statscan noted.

The main culprit was bakery products, with prices rising 10.4 per cent on the year – the steepest increase since November, 1981.

Fresh vegetable prices continued sliding, on the other hand, mainly because of the strong Canadian dollar and because there was a spike in prices a year ago due to frost in California, Statscan said.

“Food inflation may have finally come to roost in Canada, although we would need to see this trend continue over several more months before we could say that for sure,” said economists at Bank of Nova Scotia.

The main driver for higher prices in total inflation, however was gasoline, and fewer discounts for cars.

Gasoline prices were 11.6 per cent higher in April compared to a year ago, with the highest increases in the Prairie provinces. On the month, gasoline rose 6.0 per cent.

As for the price of cars, it fell 6.6 per cent compared to a year ago, but this was less than the 7.1 per cent decline noted in March, and so it added to inflationary pressure overall.

Falling car prices have been responsible for much of Canada's low inflation rate recently, and that trend will likely resume in May, as auto makers reinstate incentives for consumers, said the Scotiabank economists.

Financial Update

TSX UP! Dow UP! Dollar UP! Oil UP! Gold UP!

· TSX continued skyward +201pts Thurs and another 156pts Friday to reach a new high
of 14,984.
· Dow also up both days +94. + 41.36
· Dollar +.43c to $ $1.00
· Oil +$.76 to $127.82US per barrel is worrying not just for consumers, but also for major oil
firms and producer countries fearful of demand destruction and a potential price collapse.
“The price is scary,” a Sr oil executive said. “The market may be poised for a big drop,
especially if the speculators exit in a hurry.” So far, the highest profile predictions have
been for further price rises
· Gold +13.60+US to $917US

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

Tip:
Dow Jones Industrial Average (DJIA)

There are thousands of investment indexes around the world for stocks, bonds, currencies and commodities however the DJIA is one of the best known and most widely quoted stock market averages in the media. It contains an average made up of 30 actively traded blue chip stocks spanning many different industries that trade on the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest U.S. companies are performing.. The DJIA is calculated by adding the prices of each of the 30 stocks and dividing by a divisor. The average is quoted in points rather than dollars. It is price weighted, meaning that a $2 change in a $100 per share stock will have a greater affect than a $2 change in a $20 per share stock

TSX Composite Index

Comprises the majority of market capitalization for Canadian-based, Toronto Stock Exchange listed companies. It is the leading benchmark used to measure the price performance of the broad, Canadian, senior equity market. It was formerly known as the TSE 300 Composite Index
Please find attached an interesting mortgage article from The Financial Post on the different exotic mortgages and how both US and Canada were affected by their utilization of them.

HOW WOULD YOU LIKE YOUR MORTGAGE?

Sarah Dougherty Canwest News Service Published: Saturday, May 17, 2008
It's difficult to imagine what lenders and brokers were thinking when they dreamed up the shaky mortgage products that set off the U. S. housing meltdown.
Take the "Ninja" mortgage, for example. That's the catchy phrase one lender used for the "no income, no job, no assets" home loan for which just about anyone could qualify. Other lenders offered "liar loans" that let borrowers merely state their incomes without producing backup documentation.

In Canada, lending standards never deteriorated to the same extent, thanks to a less-fragmented and more-conservative banking sector and different regulatory environment.
But regulators have recently cut lenders in Canada some slack. Combine those changes with the entrance of new players on the mortgage scene and you have more choices for Canadian consumers, but perhaps some hidden risks for the housing market.

"Canada was kind of an anomaly compared to international mortgage markets," says Derek Holt, vice-president of Scotia Capital Economics, part of Scotiabank. "We didn't have as much mortgage product innovation. "

That changed in 2006 when the federal government liberalized the mortgage insurance market in Canada, Mr. Holt says. Until then, only Canada Mortgage and Housing Corp. (CMHC), the government-owned housing agency and one other company offered the mortgage insurance required when homebuyers put down less than 20% of the purchase price.

The changes allowed more foreign mortgage insurers to come to Canada and stimulated competition. New products emerged, including 40-year amortizations, 100% and interest-only mortgages. But the proliferation of options has some homebuyers confused. "There are so many variables in the mortgage market that you really need a road map," says Jim Rawson, a regional manager in Toronto with Invis, an independent mortgage brokerage.

So, how do some of the new products work and how risky are they for borrowers and the housing market?

With interest rates dropping, consumers might consider a front-loaded variable-rate mortgage. This option gives you a larger-than-normal discount from the prime interest rate for an initial period, say six months, before you have to decide whether to lock into a fixed rate. "This can be a terrific product for people considering playing the [interest] rate game ... if you think rates will come down again," Mr. Rawson says.

The only trick is to make sure you are, indeed, allowed to convert to a fixed rate and that when you do, you'll get the best discounted rate available, Mr. Rawson says.

Longer amortization periods, now up to 40 years, also are new. This option can suit young borrowers with high income-earning potential, people with other major short-term expenses, buyers in higher-priced urban markets and income property investors.

Mr. Holt estimates longer-term mortgages now account for three-quarters of monthly insured purchase applications in Canada, with 40-year products accounting for half of that.

The upside of this change, Mr. Holt says, is it will bring more buyers into the market. A longer period to repay also means less risk to credit markets in the short term because it eases cash flow difficulties for borrowers, he says.

But over the long haul, 40-year mortgages raise a new set of risks for housing and credit markets. "The shock risks from interest rate changes and changes in employment become accentuated if you are using higher-leveraged products," Mr. Holt says. And, of course, there is no free lunch: 40-year terms come with tougher qualifying criteria, higher interest rates and higher mortgage insurance premiums.

Then there are interest-only mortgages. These loans let borrowers pay only interest and no principal for the first five or 10 years. This option can be attractive for young buyers with high income-earning potential or borrowers expecting a large inflow of money from an inheritance, for example.

Given all these innovations, this is "no longer your grandfather's mortgage market," Mr. Holt says. But that doesn't mean Canada is headed down the same treacherous path as the U.S. market

The Canadian market is more resilient, Mr. Holt says. Subprime or low-quality mortgages make up only a small portion of Canadian mortgages, unlike the U. S. peak in 2006 of one in four.
We also have stronger underwriting standards than the U. S. market, Mr. Holt says.
But Canadians are paying a price indirectly. Some mortgage rates are higher than they should be because Canadian banks are taking writedowns related to U. S. mortgage-based securities.