• TSX +109.61
• DOW -53.13 On the data front, demand for a wide range of U.S. manufactured goods unexpectedly fell in January, while new applications for jobless benefits rose again last week, suggesting a step back in the economic recovery.
• Dollar -.48c to 94.40cUS as market players fled to the greenback and other safe havens on worries about possible downgrades to Greece's sovereign debt and sluggish U.S. economic data
• Oil -$1.83 to $78.17US per barrel.
• Gold +$11.30 to $1,107.80 USD per ounce
David Rosenberg took your questions on housing In December, 2009, economist David Rosenberg wrote, “Is the Canadian housing market in a bubble? It sure looks that way.” (Floating high on a delicate housing bubble)
Two months later, Mr. Rosenberg reasserted his views in another column, arguing, “the hot Canadian housing market is now likely to burn even brighter in coming months... While there may be a healthy debate as to whether there is a bubble or not in the Canadian housing market, suffice it to say that residential mortgage balances relative to disposable income just hit 92 per cent which is exactly where this ratio was in the U.S. in 2005 when the mania was about to morph into a full-fledged bubble. It was barely a year later that the process of mean reversion began its course.”
Mr. Rosenberg took your questions on real estate, the economy and bubbles in a live discussion. You can view it by clicking on the Cover It Live box below.
Mr. Rosenberg received both a Bachelor of Arts and Masters of Arts degree in economics from the University of Toronto. Prior to joining Gluskin Sheff in 2009, he was chief North American economist at Bank of America-Merrill Lynch in New York and before that, he was a senior economist at BMO Nesbitt Burns and Bank of Nova Scotia.
Mr. Rosenberg has ranked first in economics in the Brendan Wood International Survey for Canada for the past seven years and was on the U.S. Institutional Investor All American All Star Team for the last four years, and was ranked second overall in the 2008 survey. Mr. Rosenberg also ranked fourth out of 104 economists in the 2009 Thompson-Extel survey of global portfolio managers.
when do we expect housing correction for the prices to come to down to reality.
10:38 Tony S.
David RosenbergDavid Rosenberg: ]
I expect the correction to begin sometime in the second half of this year
Looking on a 3-5 year horizon and with the likely chance of (significant?) interest rate hikes, is this likely to be a period where fixed rate mortgages are better than variable
David Rosenberg:
I found looking at historical data that sticking with shorter-term mortgages made more sense the vast majority of the time .... only when the Bank of Canada moves so aggressively as to invert the yield curve has this not been the case ... and I doubt Mr. Carney is going to do that in the context of a highly uncertain economic outlook.
Have you had the opportunity to study the Canadian real estate market during the last serious correction during 91-94? In light of everything that has happened to the global (& Canadian) economies and the increased amount of leverage in the system, what do you conclude about the potential severity of the peiod ahead relative to the prior correction?
10:43 George g
David Rosenberg:
The major difference is that back in the early 1990s John Crow had a perceived inflation problem on his hands and interest rates surged to double-digits .... and we had much more speculation back then (flipping). The more acute problem this time around surrounds the degree of leverage that has been applied to purchase residential real estate and the thin layer of home equity that buyers over the past two years have considering the easing in CMHC guidelines. While interest rates are not as big a problem now, one has to wonder how the excessive price today is going to crowd out potential new entrants .... as was the case south of the border around the summer of 2006.
What about smaller markets (i.e. NOT Toronto and Vancouver)? I'm in London, ON and housing prices don't seem to be much different than usual. I'm thinking of trying to buy in the next year or so. Are smaller markets just behind the trend or not affected?
10:59 sgoodwin
David Rosenberg:
I accept the premise that much of the overvaluation is in the urban areas, especially Toronto and Vancouver. But I shudder somewhat because I recall all too well in 2005 and 2006 about how the bubbles were regional and concentrated in Florida and California. Hindsight shows it was a lot more national than people were willing to acknowledge. Smaller markets are probably more stable -- that would not surprise me.
Our banks are heralded as among the best and safest in the world....will a downturn in real estate valuations change that view?
11:02 Joel M.
David Rosenberg:
Since the vast majority of the mortgages that have been issued in the last 1-2 years have been CMHC-insured, then the risk is more on the taxpayer than it is on the banks. Of course, there are second-round impacts from a housing correction (in terms of impairing consumer ability to pay off other loans) that could pose a risk but the Canadian banks are not nearly as vulnerable to a housing shock as their U.S. brethren were
Do you think it will be an actual downturn, or will we see a more balanced market as time goes on? I feel the demand will outweigh supply for quite a while, and so I just don’t see how prices will fall.
David Rosenberg:
They could move higher near-term indeed if there is a demand rush ahead of the CMHC changes, the sales tax harmonization in Ontario and BC and the broad expectation that the Bank of Canada starts to hike this summer. All these factors could "bring foward" housing demand and add more froth to prices this spring before they come down to earth. Good point.
I think that we will see a short-term boost to demand followed by a sharp slowing in the second half of the year. Meanwhile, the builders are boosting production of homes and condos ... keep a close eye on the unsold inventory data going forward.
Friday, February 26, 2010
Thursday, February 25, 2010
Financial Update For Feb. 25, 2010
• TSX -4.88 amid mixed earnings news and reassurance from the head of the U.S. central bank that key interest rates will stay low to stimulate the economy.
• DOW +91.75 In his first day testifying to the House, Bernanke told the House Financial Services Committee that while the economic recovery is moving along, the jobs market remains weak. Against this backdrop, the Fed is unlikely to lift the fed funds rate, the key overnight bank lending rate, anytime soon.
• Dollar +.24c to 94.88cUS
• Oil +$1.14 to $80.00US per barrel.
• Gold -$6.10 to $1,096.50 USD per ounce
Big banks' credit provisions may offer clues on economy
Earnings season starts Thursday
John Greenwood, Financial Post
A year after the worst financial meltdown in more than 60 years and in the wake of an equally historic recovery, analysts are closely watching the pile of cash set aside by the big banks to cover future bad loans known as provisions for credit losses.
The reason is simple: If the provisions get smaller, it's a sign that the economy is truly on the mend just as most economists predicted. If on the other hand the money pile gets bigger, that would suggest the banks are preparing for a less positive future.
We get our first peek of the year at what the industry is expecting when Canadian Imperial Bank of Commerce reports its first-quarter results this morning, kicking off earnings season for the big banks.
Analysts generally believe that the worst is over or soon will be with provisioning declining in 2010 against the backdrop of a strengthening economy.
Jim Bantis, an analyst at Credit Suisse, scaled back his forecast for 2010 credit loss provisions at the Big Six from $12-billion to $10.6-billion because of recent stability in credit card losses and the absence of large corporate loan losses.
John Aiken, an analyst at Barclays Capital, is similarly optimistic. "All signs point to improving credit quality and lower provisions," he said in a research note.
Brad Smith, an analyst at CI Capital Markets, takes a more bearish view, pointing to continued deterioration in credit conditions in the United States in the last three months of 2009. "With limited improvement evident in recent domestic employment and bankruptcy data, scope for adoption of a more optimistic view of domestic credit in our view remains limited," Mr. Smith said in a note.
Another reason for the concern around loss provisions is the sheer scale of the underlying borrowing. While Canadian banks have become global models for conservative risk management practices, the behavior of some of their customers has become a major cause for concern for some industry insiders.
Household borrowing compared with income has risen to 145%, from around 95% two decades ago and could exceed U.S. levels in the next three years, according to Moody's Canada. The concern is that if the economy suddenly deteriorates or if interest rates take a jump, many of those borrowers could find themselves unable to make the payments on their loans.
Peter Routledge, a senior vice-president at the rating agency, questions whether the banks are properly considering such a scenario. The conventional wisdom is that Canadians will try to meet their mortgage payments even if the house price falls below the value of the loan, and that idea is baked into many bank forecasts.
The trouble is that consumer behaviour is often very difficult to predict and historical performance is not always the best guide, Mr. Routledge said.
Read more: http://www.financialpost.com/news-sectors/financials/story.html?id=2608752#ixzz0gY3Cirnl
Bernanke's bittersweet rate pledge
Janet Whitman, Financial Post
NEW YORK -- Stock-market investors may have cheered Ben Bernanke's plan to keep benchmark interest rates at next to zero for at least the next several months but his pledge is also a signal the U.S. economy remains in rough shape.
Just how precarious the country's nascent economic recovery is was highlighted by a slew of data released this week: U.S. banks posted their sharpest drop in lending last year since 1942, sales of new homes plunged to their lowest level on record last month, already gloomy consumer confidence took a surprise dive this month, and hundreds of community banks could be forced to close their doors because of their exposure to souring commercial loans.
U.S. unemployment, meanwhile, is expected to remain stuck for the rest of this year at around a 26-year high of 10%.
Speaking before U.S. lawmakers at a hearing in Washington, D.C., Wednesday, Mr. Bernanke, the chairman of the U.S. Federal Reserve, said the economy still needs to be shored up by record-low interest rates.
"Notwithstanding the positive signs, the job market remains quite weak," he said as he delivered his semi-annual report to U.S. Congress. "Of particular concern, because of its long-term implications for workers' skills and wages, is the increasing incidence of long-term unemployment; indeed, more than 40% of the unemployed have been out of work six months or more, nearly double the share of a year ago."
Stocks surged on the news, relieved that borrowing to fuel leverage and company borrowing and investment would remain cheap for some time to come while rock bottom rates makes equities a more attractive bet than bonds.
The Dow Jones Industrial Average gained 91.75 points to 10,374.16, ending two days of losses. Toronto's main stock index ended virtually unchanged at 11,521.83.
Although perhaps a boon for stocks for now, the gloomy backdrop raises the question whether the U.S. economy can stand on its own two feet or faces the threat of a "double dip" recession as the hundreds of billions of dollars in government stimulus wears off.
"There's enough stimulus in the pipeline to keep the economy bumbling along for a while, but we haven't solved any of our main problems," said Joshua Shapiro, chief U.S. economist with MFR Inc. "There's still way too much leverage in this economy and how do you get out of that without further massive pain?"
Mr. Shapiro doesn't expect the economy, which emerged from its recession about seven months ago, to slip into a recession again this year or next. But he expects overall economic growth to slow in 2011 compared to this year. Beyond that, he said, the outlook is murky.
John Ryding, chief economist with RDQ Economics, said he's not anticipating another recession, but added that growth is likely to be so sluggish and employment so high that it might feel like a recession to many Americans.
"Jobs probably will start to be created in March and beyond, but the rate won't be fast enough to make significant inroads on the unemployment rate," Mr. Ryding said.
"It's going to feel like a recession in the labour market."
Tackling America's massive deficit will also be a major factor as the economy recovers.
"It would be helpful for the current situation if the Congress and the administration ... could provide a plan which shows how the deficit will fall to 2.5%-3% level, at least, over the next 10 years," Mr. Bernanke told lawmakers Wednesday. "I don't know exactly which programs, what taxes, what changes you would make. That's certainly up to Congress. But a concerted effort to do that would be, I think even a strong effort, would probably be good for confidence."
Some economists worry that lawmakers won't be able to find a solution to the debt problem.
"I think it's going to be very difficult for politicians to come to grips with this," said Mr. Shapiro of MFR. "The political cycle is two years or less. The temptation is to deny reality and go for temporary fixes."
Read more: http://www.financialpost.com/news-sectors/economy/story.html?id=2608710#ixzz0gY4oXX1v
• DOW +91.75 In his first day testifying to the House, Bernanke told the House Financial Services Committee that while the economic recovery is moving along, the jobs market remains weak. Against this backdrop, the Fed is unlikely to lift the fed funds rate, the key overnight bank lending rate, anytime soon.
• Dollar +.24c to 94.88cUS
• Oil +$1.14 to $80.00US per barrel.
• Gold -$6.10 to $1,096.50 USD per ounce
Big banks' credit provisions may offer clues on economy
Earnings season starts Thursday
John Greenwood, Financial Post
A year after the worst financial meltdown in more than 60 years and in the wake of an equally historic recovery, analysts are closely watching the pile of cash set aside by the big banks to cover future bad loans known as provisions for credit losses.
The reason is simple: If the provisions get smaller, it's a sign that the economy is truly on the mend just as most economists predicted. If on the other hand the money pile gets bigger, that would suggest the banks are preparing for a less positive future.
We get our first peek of the year at what the industry is expecting when Canadian Imperial Bank of Commerce reports its first-quarter results this morning, kicking off earnings season for the big banks.
Analysts generally believe that the worst is over or soon will be with provisioning declining in 2010 against the backdrop of a strengthening economy.
Jim Bantis, an analyst at Credit Suisse, scaled back his forecast for 2010 credit loss provisions at the Big Six from $12-billion to $10.6-billion because of recent stability in credit card losses and the absence of large corporate loan losses.
John Aiken, an analyst at Barclays Capital, is similarly optimistic. "All signs point to improving credit quality and lower provisions," he said in a research note.
Brad Smith, an analyst at CI Capital Markets, takes a more bearish view, pointing to continued deterioration in credit conditions in the United States in the last three months of 2009. "With limited improvement evident in recent domestic employment and bankruptcy data, scope for adoption of a more optimistic view of domestic credit in our view remains limited," Mr. Smith said in a note.
Another reason for the concern around loss provisions is the sheer scale of the underlying borrowing. While Canadian banks have become global models for conservative risk management practices, the behavior of some of their customers has become a major cause for concern for some industry insiders.
Household borrowing compared with income has risen to 145%, from around 95% two decades ago and could exceed U.S. levels in the next three years, according to Moody's Canada. The concern is that if the economy suddenly deteriorates or if interest rates take a jump, many of those borrowers could find themselves unable to make the payments on their loans.
Peter Routledge, a senior vice-president at the rating agency, questions whether the banks are properly considering such a scenario. The conventional wisdom is that Canadians will try to meet their mortgage payments even if the house price falls below the value of the loan, and that idea is baked into many bank forecasts.
The trouble is that consumer behaviour is often very difficult to predict and historical performance is not always the best guide, Mr. Routledge said.
Read more: http://www.financialpost.com/news-sectors/financials/story.html?id=2608752#ixzz0gY3Cirnl
Bernanke's bittersweet rate pledge
Janet Whitman, Financial Post
NEW YORK -- Stock-market investors may have cheered Ben Bernanke's plan to keep benchmark interest rates at next to zero for at least the next several months but his pledge is also a signal the U.S. economy remains in rough shape.
Just how precarious the country's nascent economic recovery is was highlighted by a slew of data released this week: U.S. banks posted their sharpest drop in lending last year since 1942, sales of new homes plunged to their lowest level on record last month, already gloomy consumer confidence took a surprise dive this month, and hundreds of community banks could be forced to close their doors because of their exposure to souring commercial loans.
U.S. unemployment, meanwhile, is expected to remain stuck for the rest of this year at around a 26-year high of 10%.
Speaking before U.S. lawmakers at a hearing in Washington, D.C., Wednesday, Mr. Bernanke, the chairman of the U.S. Federal Reserve, said the economy still needs to be shored up by record-low interest rates.
"Notwithstanding the positive signs, the job market remains quite weak," he said as he delivered his semi-annual report to U.S. Congress. "Of particular concern, because of its long-term implications for workers' skills and wages, is the increasing incidence of long-term unemployment; indeed, more than 40% of the unemployed have been out of work six months or more, nearly double the share of a year ago."
Stocks surged on the news, relieved that borrowing to fuel leverage and company borrowing and investment would remain cheap for some time to come while rock bottom rates makes equities a more attractive bet than bonds.
The Dow Jones Industrial Average gained 91.75 points to 10,374.16, ending two days of losses. Toronto's main stock index ended virtually unchanged at 11,521.83.
Although perhaps a boon for stocks for now, the gloomy backdrop raises the question whether the U.S. economy can stand on its own two feet or faces the threat of a "double dip" recession as the hundreds of billions of dollars in government stimulus wears off.
"There's enough stimulus in the pipeline to keep the economy bumbling along for a while, but we haven't solved any of our main problems," said Joshua Shapiro, chief U.S. economist with MFR Inc. "There's still way too much leverage in this economy and how do you get out of that without further massive pain?"
Mr. Shapiro doesn't expect the economy, which emerged from its recession about seven months ago, to slip into a recession again this year or next. But he expects overall economic growth to slow in 2011 compared to this year. Beyond that, he said, the outlook is murky.
John Ryding, chief economist with RDQ Economics, said he's not anticipating another recession, but added that growth is likely to be so sluggish and employment so high that it might feel like a recession to many Americans.
"Jobs probably will start to be created in March and beyond, but the rate won't be fast enough to make significant inroads on the unemployment rate," Mr. Ryding said.
"It's going to feel like a recession in the labour market."
Tackling America's massive deficit will also be a major factor as the economy recovers.
"It would be helpful for the current situation if the Congress and the administration ... could provide a plan which shows how the deficit will fall to 2.5%-3% level, at least, over the next 10 years," Mr. Bernanke told lawmakers Wednesday. "I don't know exactly which programs, what taxes, what changes you would make. That's certainly up to Congress. But a concerted effort to do that would be, I think even a strong effort, would probably be good for confidence."
Some economists worry that lawmakers won't be able to find a solution to the debt problem.
"I think it's going to be very difficult for politicians to come to grips with this," said Mr. Shapiro of MFR. "The political cycle is two years or less. The temptation is to deny reality and go for temporary fixes."
Read more: http://www.financialpost.com/news-sectors/economy/story.html?id=2608710#ixzz0gY4oXX1v
Tuesday, February 23, 2010
Financial Update For Feb. 23, 2010
• TSX -74.54 Weakness in resources, energy and financials stocks pulled the Canadian market into the red
• DOW -18.97 as investors weighed earnings news, President Obama's health care proposal and Schlumberger's $11-billion U.S. buyout deal for oil services rival Smith International. Stocks ended higher last week as investors digested the Federal Reserve's decision to lift the emergency bank lending rate
• Dollar -.20c to 95.91cUS
• Oil +$.25 to $80.16US per barrel.
Consumer debt could be drag on banks
John Greenwood, Financial Post
Last year Canadian banks emerged as global heroes after they made it through the financial crisis almost unscathed.
But if the financial meltdown was the defining challenge for 2009, analysts worry that ballooning debt levels may end up being the comparable trial for 2010 as consumers struggle to meet their obligations amid an uncertain economy and rising interest rates.
We'll find out what the big banks think as Canadian Imperial Bank of Commerce and National Bank of Canada kick off the bank earnings season on Thursday.
According to a recent report by Moody's Canada, Canadian household debt climbed to a record 145% of income, from around 95% 20 years ago, and could exceed U.S. levels in the next three years.
Meanwhile, a task force on financial literacy sponsored by the federal government found that more than a third of Canadians are struggling to keep track of their finances and make responsible decisions.
Analysts are watching closely because most of that debt, including nearly $446-billion of mortgages and $336-billion of credit cards and other loans, is held by the banks.
The good news for investors is that the riskiest mortgage debt is insured through the Canada Mortgage and Housing Corp.
Mario Mendonca, an analyst at Genuity Capital Markets, said he's not "overly concerned" by the high level of consumer debt, pointing out that Canadians tend to be conservative with their finances and try to meet their obligations even if they get into trouble.
With most economists predicting healthier economic growth in 2010 and 2011, unemployment should not prove a major headwind meaning that the banks' consumer loans are safe despite the high level of indebtedness, according to Mr. Mendonca.
He's calling for a provisions for credit losses to start to decline noticeably in the second half of the year as revenue from underwriting and advisory services pick up amid a strengthening economy.
"We view the next few quarters as a transition period," he said in a research note last week,
Barclays Capital analyst John Aiken is also optimistic on the debt front, pointing out in a recent note that "all signs point to improving credit quality and lower provisions."
Given recent positive signs in credit markets in Canada and the United States, Mr. Aiken said "it is quite possible" that the domestic banks will set aside less than they did last quarter to cover delinquencies.
Mr. Aiken's main area of concern is revenues from trading operations. A source of eye-popping profits last year as banks took advantage of wider spreads and the dislocation in credit markets, trading revenue at all the banks is expected to shrink in 2010 as financial markets continue to normalize.
"We believe that a significant decline in trading revenues could be the story of the quarter and reset earnings levels for 2010," he said in a note to clients.
Still, much depends on the economy which remains fragile as Ottawa looks for ways to withdraw supports put in place in the wake of the financial crisis.
"There is a fair degree of uncertainty," said Lindsay Gordon, chief executive of HSBC Bank Canada, who pointed out that while the Canadian economy appears in good shape relative to other countries, the world is increasingly connected and it was less than a year ago that storm gripping financial markets created almost "a sense of Armageddon."
"All governments including the Canadian government are in a challenging situation," he said in an interview.
Though a small player in this country HSBC has significant exposure to residential mortgages in Vancouver and other urban markets.
"There is no question that over the last year there has been an increase in delinquencies in residential mortgages at all the banks," he said, adding that the increase at HSBC has been slight.
Read more: http://www.financialpost.com/news-sectors/story.html?id=2598833#ixzz0gJZR7Wun
• DOW -18.97 as investors weighed earnings news, President Obama's health care proposal and Schlumberger's $11-billion U.S. buyout deal for oil services rival Smith International. Stocks ended higher last week as investors digested the Federal Reserve's decision to lift the emergency bank lending rate
• Dollar -.20c to 95.91cUS
• Oil +$.25 to $80.16US per barrel.
Consumer debt could be drag on banks
John Greenwood, Financial Post
Last year Canadian banks emerged as global heroes after they made it through the financial crisis almost unscathed.
But if the financial meltdown was the defining challenge for 2009, analysts worry that ballooning debt levels may end up being the comparable trial for 2010 as consumers struggle to meet their obligations amid an uncertain economy and rising interest rates.
We'll find out what the big banks think as Canadian Imperial Bank of Commerce and National Bank of Canada kick off the bank earnings season on Thursday.
According to a recent report by Moody's Canada, Canadian household debt climbed to a record 145% of income, from around 95% 20 years ago, and could exceed U.S. levels in the next three years.
Meanwhile, a task force on financial literacy sponsored by the federal government found that more than a third of Canadians are struggling to keep track of their finances and make responsible decisions.
Analysts are watching closely because most of that debt, including nearly $446-billion of mortgages and $336-billion of credit cards and other loans, is held by the banks.
The good news for investors is that the riskiest mortgage debt is insured through the Canada Mortgage and Housing Corp.
Mario Mendonca, an analyst at Genuity Capital Markets, said he's not "overly concerned" by the high level of consumer debt, pointing out that Canadians tend to be conservative with their finances and try to meet their obligations even if they get into trouble.
With most economists predicting healthier economic growth in 2010 and 2011, unemployment should not prove a major headwind meaning that the banks' consumer loans are safe despite the high level of indebtedness, according to Mr. Mendonca.
He's calling for a provisions for credit losses to start to decline noticeably in the second half of the year as revenue from underwriting and advisory services pick up amid a strengthening economy.
"We view the next few quarters as a transition period," he said in a research note last week,
Barclays Capital analyst John Aiken is also optimistic on the debt front, pointing out in a recent note that "all signs point to improving credit quality and lower provisions."
Given recent positive signs in credit markets in Canada and the United States, Mr. Aiken said "it is quite possible" that the domestic banks will set aside less than they did last quarter to cover delinquencies.
Mr. Aiken's main area of concern is revenues from trading operations. A source of eye-popping profits last year as banks took advantage of wider spreads and the dislocation in credit markets, trading revenue at all the banks is expected to shrink in 2010 as financial markets continue to normalize.
"We believe that a significant decline in trading revenues could be the story of the quarter and reset earnings levels for 2010," he said in a note to clients.
Still, much depends on the economy which remains fragile as Ottawa looks for ways to withdraw supports put in place in the wake of the financial crisis.
"There is a fair degree of uncertainty," said Lindsay Gordon, chief executive of HSBC Bank Canada, who pointed out that while the Canadian economy appears in good shape relative to other countries, the world is increasingly connected and it was less than a year ago that storm gripping financial markets created almost "a sense of Armageddon."
"All governments including the Canadian government are in a challenging situation," he said in an interview.
Though a small player in this country HSBC has significant exposure to residential mortgages in Vancouver and other urban markets.
"There is no question that over the last year there has been an increase in delinquencies in residential mortgages at all the banks," he said, adding that the increase at HSBC has been slight.
Read more: http://www.financialpost.com/news-sectors/story.html?id=2598833#ixzz0gJZR7Wun
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