Financial Update For April 26, 2010

• TSX +78.77 gained ground for a fifth consecutive day, rising within a whisper of a 19-month high as strong economic data and a weaker U.S. dollar boosted demand for resource stocks.
• DOW +17.46 Data showing a surprising 27 percent jump in new U.S. home sales in March gave investors an early go-ahead to buy
• Dollar -.13c to 98.07cUS
• Oil -$1.44. to $79.80US per barrel.
• Gold +$3.60 to $1,105.10 USD per ounce

GM repays US $8.1B in government loans ahead of schedule, sets expansion plans Ken Thomas,Tom Krisher, The Associated Press
WASHINGTON - Fallen giant General Motors Co. accelerated toward recovery Wednesday, announcing the repayment of US$8.1 billion in U.S. and Canadian government loans five years ahead of schedule.
The Obama administration crowed about the "turnaround" at GM and fellow bailout recipient Chrysler LLC, saying the government's unpopular rescue of Detroit's automakers is paying off.
Much of the improvement comes from GM slashing its debt load and workforce as part of its bankruptcy reorganization last year. But the automaker is a long way from regaining its old blue-chip status: It remains more than 70 per cent government-owned and is still losing money - $3.4 billion in last year's fourth quarter alone. And while its car and truck sales are up so far this year, that's primarily due to lower-profit sales to car rental companies and other fleet buyers.
Possible rise in mortgage rates pitting couples against one another
Steve Ladurantaye and Carly Weeks From Saturday's Globe and Mail
When Rae Whitton started house shopping with Dan Madge last year, she agreed to a variable mortgage rate after their broker explained rates were likely to remain low until spring, at which point they could lock into a fixed rate.
But when February came and signs indicated the economy was getting stronger, anxiety kicked in. Ms. Whitton e-mailed Mr. Madge newspaper articles warning of possible mortgage rate hikes, and worried about worst-case scenarios, remembering how her parents paid up to 18 per cent on their mortgage.
“I was just freaking out. Not that I think it will ever be like that again, but what if this happens? What would we do?” she said. “You always think of the worst thing.”
With mortgage rates set to climb in coming months from historic lows, the emotionally charged decision to lock into a predictable fixed-rate mortgage or gamble on a variable rate that could change at any time is pitting couples against each other as they try to plan their future.
Call it the Battle of the Sexes: the Housing Boom Edition.
Ms. Whitton was terrified that rocketing rates would price them out of their new Toronto home and pushed for the certainty of a fixed-rate. Mr. Madge wanted to take a chance that rates would be lower.
“I didn’t like the uncertainty of it,” Ms. Whitton said. “I like knowing how much our payments are going to be every month.”
The conflict is based on fear of the unknown, and the fear of losing a home if circumstances spiral out of control.
A study commissioned by the Bank of Montreal indicated that women were more likely to be overwhelmed when buying a home than men, at 44 per cent versus 28 per cent. Men were also more likely – 39 per cent vs. 26 per cent – to take interest rates into account when deciding whether to buy.
“When it comes to a risky situation which usually involves some kind of uncertainty, women tend to perceive negative consequences to be more likely and perceive negative consequences to be more severe,” says Li-Jun Ji, a psychology professor at Queen’s University in Kingston, Ont., who studies how decisions are made.
After debating for several months, Ms. Whitton and Mr. Madge went to the bank a few weeks ago and locked into a three-year fixed-rate mortgage. And while Ms. Whitton said she knows more of their payment is now going to interest, she’s not going to let it get to her.
“I just try not to look at the statements,” she said.
Variable rate mortgages can be had for about 1.75 per cent right now, while a 5-year fixed-rated can be had for about 4.5 per cent. A homeowner can save thousands by choosing variable, but their monthly payments will get higher every time interest rates increase.
With the Bank of Canada expected to move its key lending rate higher in June, the variable rate will increase as well. And if history is any indication, rates go up a lot faster than they go down. From 1980 to mid-1981, rates gained 67 per cent, making many mortgages unaffordable.
There’s no sense that will happen this time, but even small increases can mess up a tight budget.
For example, a five-year variable rate mortgage at 2.25 per cent on $300,000 would carry a monthly payment of about $1,300, assuming a 25-year amortization period. A move to 5 per cent would boost the payment to $1,750.
It’s that kind of uncertainty women may be hardwired to avoid, said Lise Vesterlund, a professor at the University of Pittsburgh who has studied the role gender plays in financial decisions.
“My own work has shown that women are less confident about their decisions,” she said. “There are evolutionary reasons for that, and you can also argue there are circumstantial reasons as well.”
She said men are natural risk-takers - after all, there was a time when they could reproduce indiscriminately and not worry about consequences, while the women had to be prudent and think about the future.
That sense of risk is still fostered by parents today, she said, with the majority of boys playing games that have measurable results while girls are offered activities that have no discernible conclusion.
“From an evolutionary standpoint, men have always had more to gain by taking gambles,” she said. “Women tend not to get the same kick out of taking risks – part of the reason they like to lock in to something is they want to have more information about what their prospects will be like in the future.”
http://www.theglobeandmail.com/report-on-business/possible-rise-in-mortgage-rates-pitting-couples-against-one-another/article1545411/

Inflation eases in March, gives central bank more wiggle room
JULIAN BELTRAME, THE CANADIAN PRESS
OTTAWA - Inflationary pressures in Canada eased considerably last month, putting into question expectations that the Bank of Canada will be raising interest rates in a matter of weeks.
Statistics Canada reported Friday that Canada’s annual inflation rate slipped by two-tenths of a point to 1.4 per cent, and the closely watched Bank of Canada core rate fell even further — by four-tenths of a point to 1.7 per cent in March.
On a month-to-month basis, Canadians saw no increase in overall prices between February and March.
The agency said the big reason for the drops in both annual indexes was that the price-distorting Olympics ceased being a major contributor to inflation with the conclusion of the Winter Games at the end of February.
Prices for traveller accommodation soared 64.1 per cent in February, but in March they dropped back to earth to a more tame 2.8 per cent increase from March 2009.
Earlier in the week, the Bank of Canada cited inflationary risks for dropping its year-old conditional pledge to leave interest rates at record lows until at least July after the core reached as high as 2.1 per cent in February.
Economists had expected a slight slip in core inflation, once the Olympics ended, but the consensus was that core inflation would be right on the central bank’s target of two per cent.
March’s large fall now puts the core inflation rate, which excludes volatile items such as gasoline prices, well below the central bank’s target.
The March data suggests prices continue to be soft across many sectors with the exception of gasoline and everything else to do with cars.
Prices at gas pumps across Canada were 17.2 per cent higher in March than they had been a year earlier, overall transportation costs were six per cent higher, prices for the passenger vehicles rose 3.9 per cent and the cost of insuring them cost 5.5 per cent more. But food costs only advanced 1.3 per cent, mostly due to a 2.6 per cent hike in restaurant bills.
As well, consumers paid slightly more for household operations and furnishings, for health and personal care, reading, tuition fees, and cable and satellite services. But many items cost less this March than they did a year ago, including shelter costs and mortgage costs, clothing and footwear, as well as fresh vegetables, meat and fresh fruit.
With interest rates at record lows, mortgage costs were a full six per cent less in March than a year ago. Regionally, the agency said all provinces recorded a price increases, with the Atlantic provinces registering the biggest gains. http://news.therecord.com/article/701309

Financial Update For April 22, 2010

• TSX +21.03
• DOW +7.86
• Dollar -.04c to 100.08cUS
• Oil -$.17 to $83.68US per barrel.
• Gold +$9.60 to $1,148.20 USD per ounce

Global economy growing but rising government debt worrisome
BY MARTIN CRUTSINGER WASHINGTON — The International Monetary Fund says the global economy, after enduring a crippling recession, should see better-than-expected growth this year, led by strength in China and other developing countries.
In an updated economic outlook, the IMF forecast that the world economy would expand 4.2 per cent this year, faster than its previous projection and a sharp improvement from 2009 when global output fell by 0.6 per cent, the worst performance since the Second World War.
However, the international lending agency warned that the recovery still remained vulnerable with the biggest threat likely to come from a surge in government debt burdens.
“The outlook for activity remains unusually uncertain,” the IMF said in its latest World Economic Outlook. “Although a variety of risks have receded, downside risks related to the growth of public debt in advanced economies have become sharply more evident.”
The IMF’s estimate that the global economy would grow 4.2 per cent this year, represented a 0.3 percentage point increase from the IMF’s January forecast. For 2011, the IMF projected global growth of 4.3 per cent, no change from its January outlook. The IMF expects wide disparities between regions with the United States and Canada outperforming Europe and Japan but lagging China and other developing countries.
For the United States, the IMF expects growth of 3.1 per cent this year, in line with private forecasters, after a 2.4 per cent plunge in the U.S. gross domestic product in 2009, the biggest decline since 1946. That compares with growth of 2.6 per cent expected for advanced economies as a whole. U.S. growth is forecast at 2.6 per cent in 2011, slightly above the 2.4 per cent predicted overall for advanced economies.
“Turning to Canada, the recovery there is . . . expected to be protracted, reflecting more moderate demand growth than in the United States as well as the substantial strengthening of the Canadian dollar,” the report said.
It said output growth is projected at 3.1 per cent in 2010, up from 2.6 in the IMF’s previous projection in January. However, its current projection of 3.25 per cent growth in 2011 was down from 3.6 per cent in the previous report. Recent Bank of Canada estimates projected growth in Canada at 3.7 per cent this year and 3.1 per cent next year.
“Canada entered the global crisis in good shape, and thus the exit strategy appears less challenging than elsewhere,” the IMF said. “The main priorities are returning Canada’s debt to a downward trajectory, ensuring that financial stability remains intact — amid rising house prices — and raising Canada’s labour productivity and potential growth.”
The IMF forecast that China’s economy would surge 10 per cent this year and that India would grow 8.8 per cent. But it looked for the 16 European countries that share the euro currency to see economic growth of just one per cent in 2010.
The new forecast was prepared for upcoming meetings of global financial leaders, including daylong talks in Washington on Friday involving the Group of 20, which include the world’s richest industrial countries and major developing states including China, Brazil, India and Russia.
The U.S. delegation will be led by Treasury Secretary Timothy Geithner and Federal Reserve chair Ben Bernanke. The G-20 talks and weekend discussions at the IMF and World Bank are expected to focus on overhauling financial regulatory systems and rebalancing global growth to make the recovery more sustainable.
Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney will lead the Canadian delegation.
U.S. Treasury officials who briefed reporters Tuesday on Geithner’s agenda said they believed support was growing for a financial risk levy along the lines of one proposed by U.S. President Barack Obama that seeks to raise $90 billion from the largest American banks to recoup losses from the $700-billion financial bailout fund. Flaherty has said Canada would not support such a levy.
The U.S. officials said they expected another key discussion topic would be the need to eliminate global imbalances, a goal that Obama and other G-20 leaders set at a summit in Pittsburgh last September. The rebalancing effort would mean countries with large trade and budget deficits would seek to boost savings and lower domestic demand while countries such as China that are running huge trade surpluses would transition to more domestic-led growth.
To foster the change in China, the Obama administration has been pressuring Beijing to allow its currency, the yuan, to rise in value against the dollar. American manufacturers contend the yuan is undervalued by as much as 40 per cent, giving Chinese producers huge trade advantages over U.S. companies.
However, the Treasury officials did not answer directly when asked whether the U.S. complaints would be brought up in the G-20 discussions. The administration has been recently seeking to temper its rhetoric with China on currency issues in hopes a softer tone will gain better results.
The IMF said it was essential for China, now the world’s third-largest economy, to do its part to assist in combating global imbalances.
The IMF said even with global growth rebounding, unemployment was likely to remain high in the United States and other developed countries over the next two years, given the severity of the downturn in those countries. The Associated Press http://news.therecord.com/Business/article/700389
What does one TRILLION dollars look like?


All this talk about "stimulus packages" and "bailouts"...

A billion dollars...
A hundred billion dollars...
Eight hundred billion dollars...

One TRILLION dollars...

What does that look like? I mean, these various numbers are tossed around like so many doggie treats, so here is an illustration from Google Sketchup to try to get a sense of what exactly a trillion dollars looks like.

We'll start with a $100 dollar bill. Currently the largest U.S. denomination in general circulation. Most everyone has seen them, slighty fewer have owned them. Guaranteed to make friends wherever they go.


A packet of one hundred $100 bills is less than 1/2" thick and contains $10,000. Fits in your pocket easily and is more than enough for week or two of shamefully decadent fun.


Believe it or not, this next little pile is $1 million dollars (100 packets of $10,000). You could stuff that into a grocery bag and walk around with it.


While a measly $1 million looked a little unimpressive, $100 million is a little more respectable. It fits neatly on a standard pallet...


And $1 BILLION dollars... now we're really getting somewhere...


Next we'll look at ONE TRILLION dollars. This is that number we've been hearing about so much. What is a trillion dollars? Well, it's a million million. It's a thousand billion. It's a one followed by 12 zeros.

You ready for this?

It's pretty surprising.

Go ahead...

Financial Update For April 21, 2010

• TSX +10.56 for a second straight session as a rebound in the price of oil sent the hefty energy group higher. But declining financials, one of the weightiest sectors, kept gains in check after the Bank of Canada made its clearest signal yet that it may raise interest rates as soon as June
• DOW +25.01
• Dollar +1.58c to 100.12cUS its biggest single-day gain in nine months following a bullish* economic forecast from Canada's central bank. At one point in the day it was up 1.76c. The Canadian dollar will remain strong as long as investors expect the bank to raise rates and tighten the money supply
• Oil +$.72 to $83.85US per barrel. snapped its three-day decline on demand increase as some European flights resumed after the threat from volcanic ash from Iceland receded.
Gold +$3.40 to $1,138.60 USD per ounce
•
There are many financial terms that are commonly used in daily discussions, however if we had to define some of them we might be stumped. Here are a few simple definitions
Basis Point
One-hundredth of a percentage point. For example, the difference between 5.25% and 5.50% is 25 basis points.
Bear Market
A market in which stock prices are falling. The rule of thumb seems to be at least 20 percent. 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.
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.

Gross Domestic Product
GDP is the value of all goods and services produced in Canada in a calendar year. The gross domestic product includes only final goods and services, not goods and services used to make another product. Changes in the gross domestic product are an indication of economic output.

Income Trust
Trusts structured to own debt and equity of an underlying entity, which carries on an active business, or has royalty revenues generated by the assets of an active business. By owning securities or assets of an underlying business, an income trust is structured to distribute cash flows, typically on a monthly basis, from those businesses to unit holders in a tax-efficient manner. The trust structure is typically utilized by mature, stable, sustainable, cash-generating businesses that require a limited amount of maintenance capital expenditures. An income trust is an exchange-traded equity investment that is similar to a common share
Index or stock price index
A statistical measure of the state of the stock market, based on the performance of stocks. Examples include the S&P/TSX Composite Index
Recession
Two consecutive quarters of contraction in the gross domestic product
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
Bank signals higher interest rates only weeks away, as dollar soars
By Julian Beltrame, The Canadian Press
OTTAWA - The Bank of Canada signalled Tuesday it is poised to start raising interest rates in a matter of weeks, a move that will make borrowing costs higher on everything from car loans to mortgages.
Over the last few weeks, Canadians have already felt the impact of expectations that rates were due to rise - most major Canadians banks started hiking fixed-rate mortgage rates by as much as 0.85 per cent.
But with the central bank now saying it is prepared to move off its emergency 0.25 per cent overnight rate as early as June 1, the whole menu of variable and short-term rates are being brought into play.
"The one that will be affected is the prime lending rate... so the whole gamut will go up when the Bank of Canada raises its rate," said Bank of Montreal economist Michael Gregory. Those include variable-rate mortgages, lines of credit and short-term car loans, he said.
The bank is also risking sending the Canadian dollar into the stratosphere by moving significantly and robustly before the U.S. Federal Reserve moves off its own zero per cent interest rate policy.
The loonie soared within minutes of the central bank's 9 a.m. ET policy statement, which, while leaving the rate unchanged for now, made no secret of where it is headed.
The bank's governing council declared that with the economy and inflation growing faster this year than had been previously thought, there was no need to stay with its "conditional commitment" to leave rates unchanged until the end of the second quarter, or after June 30.
"This unconventional policy provided considerable additional stimulus during a period of very weak economic conditions," the council wrote.
"With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus."
Hence, the council went on, it was withdrawing the conditional commitment.
The bank also said it was ending its key emergency lending instrument that helped inject liquidity into money markets during the crisis, which economists called a clear signal about the central bank's future intentions.
The dollar rose about 1.5 cents shortly afterwards, breaking through the parity ceiling with the U.S. greenback. It closed up 1.58 cents at 100.12 cents U.S.
The currency move suggested that while the market had expected bank governor Mark Carney to signal a tightening bias, it was surprised by the hawkish tone.
"Removing the conditional commitment to keep rates on hold until July and ending purchase and resale agreements are as good as cementing a June 1 hike," said economists Derek Holt and Karen Cordes Woods of Scotia Capital in a note to clients.
Holt added in an interview that the language from the bank opens the door for a bigger-than-expected hike in June, perhaps by as much as half a point.
Not all analysts believe the market is right to anticipate a June hike, however. Some say Carney is still leaving himself some wiggle room to stay at the lower bound until July 20, while others are advising the governor to wait until the Fed acts.
"I would keep rates unchanged until the Fed moves, because otherwise you create this problem on the Canadian dollar," said Brian Bethune, chief economist with IHS Global Insight.
A strong loonie is regarded as a brake on economic growth because it makes the price of Canadian exports less competitive in foreign markets.
In the statement, the central bank conceded the point, listing the "persistent strength of the Canadian dollar," along with poor productivity and low U.S. demand as "significant drags" on the Canadian economy.
But economists suggested the bank's language suggests it is prepared to live with a strong loonie.
Even so, economists that favoured a rate hike said the bank can only get so far ahead of the Fed. They note the Canadian bank has flown solo twice before in the past two decades, only to have to subsequently pull back.
"The need for emergency rates have passed but we still have a need for low rates," Holt explained.
C.D. Howe's monetary policy council, a sampling of nine economists, sees the bank's policy rate rising to 2.5 per cent by the spring of 2011. That is a significant hike from the current level, but it is still below what would be considered normal and only slightly above the rate of inflation.
While the tone on interest rates was hawkish, the bank's view on the economy was only mildly more rosy. It upgraded this year's growth to 3.7 per cent, from a previous prediction of 2.9 per cent, but it lowered its forecast for 2011 to 3.1 per cent, and it believes 2012 will only bring a 1.9 per cent advance.
It now expects the economy to return to full capacity in the spring of 2011, a full quarter before the previous estimate it made in January.
The bank did raise the temperature, slightly, on inflation.
It said core prices have been firmer than projected, but that they were expected to ease slightly in the second quarter of this year and remain near the bank's two per cent target over the next two years.
Total headline inflation, which includes volatile items such as gasoline prices, was expected to be higher than two per cent this year, but returning to target in the second half of 2011.