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Learn About Insurance: Get Cheap Car Insurance Rates

2011-05-05T00:31:00.000-04:00

Learn About Insurance: Get Cheap Car Insurance Rates

http://www.thinkinsure.ca/car-auto-insurance/car-insurance-ontario/insurance-quotes-ontario.php

Debts Keep Rising: Keep an eye on your debt level

2010-05-12T05:07:00.000-04:00

A slowdown in spending in Canada? What slowdown? Canadian’s continue to spend and find themselves with the highest household debt in history.

"Household spending, particularly in the housing sector, was a mainstay of the economy during the recession. But as interest rates rise – and they will - a bigger percentage of household income may need to be diverting into paying off debt, meaning less cash for other purchases, like autos, appliances, furniture and clothes."

How will an 1% or 2% increase in borrowing rates affect you? How about a 5% increase? Run the numbers and make sure you’re prepared.

OTTAWA - Neither recession, global uncertainty nor growing joblessness appears to have stayed Canadians' appetite for spending money they don't have.
Julian Beltrame, The Canadian Press

A new report by the Certified General Accountants Association of Canada shows that household debt in the country kept rising through the recession and peaked in December at $1.41 trillion.

That's $41,740 on average per Canadian, or debt to income ratio of 144 per cent that is the worst among 20 advanced countries in the OECD.

"This report is another indication of Canadians' readiness to consume today and pay later," says association president Anthony Ariganello.

"The concern is do they understand the full cost of paying later?"

The Bank of Canada has also voiced similar concerns, with governor Mark Carney having repeatedly advised Canadians to ensure they will be able to meet their mortgage commitments once rates increase. Ottawa has put that cautionary principle into effect by stiffening the means test chartered banks must apply when issuing open-ended mortgages.

Most Canadians don't yet share that concern. The accountants' survey found that almost 60 per cent of Canadians whose debt had increased still felt they could manage it or take on more obligations.

But the accountants say many households could find themselves in difficulty when interest rates, as expected, begin to rise.

The report estimates that even a small two per cent increase in rates would mean that mid-income and higher income households would have to cut their outlays on non-essentials by between nine and 11 per cent.

The finding is similar to one reached by the Canadian Association of Accredited Mortgage Professionals in a survey results release Monday.

The survey showed that while Canadians appeared well positioned to absorb higher rates, there would be a significant number that would come under stress. The mortgage professionals estimated that 475,000 households would be challenged if mortgages rates rose to 5.25 per cent, and that 375,000 were already facing pressure paying their bills.

The most likely outcome for a debt squeeze is that households will stop spending on non-essentials, and that could ripple in a general slowing of economic growth.
Household spending, particularly in the housing sector, was a mainstay of the economy during the recession. But as interest rates grow, a bigger percentage of household income may need to be diverting into paying off debt, meaning less cash for other purchases, like autos, appliances, furniture and clothes.

BMO Capital Markets economist Sal Guatieri says that is the flip-side to the Bank of Canada's decision to slash rates to historic lows during the recession.

"That's why we did not experience a great recession," he noted. "That was the intention all along of the Bank of Canada, to get people borrow and spend. The problem is if that continued, Canada eventually would have a debt problem."

But that is why the central bank is preparing to reverse course and start increasing the cost of borrowing, he added.

Most analysts believe Carney will start moving on rates on June 1 with a small quarter-point hike.

Bonds and interest rates: false safety?

2010-05-06T09:39:00.001-04:00

The question all investors have to ask themselves right now about their income-producing holdings: should I stay or should I go now?

Bonds and GICs maxed out with yields of about 4 per cent for five years just recently.

Many know the bond conundrum: Bond or Fixed Income funds fall in price – and will continue to fall in price - as bond yields rise. (Conversely, they go up as rates decline)

If you’re going to hold onto Bond or Fixed Income funds, get used to this sort of thing. Preferred shares behave more like bonds than stocks - they’re considered fixed income by some, but not all, advisers - and most types of bonds will fall in price as we continue moving through the rising rate cycle just begun.

Should you care as an investor about Bond or Fixed Income funds falling in price? If you’re tightly focused on generating income and can accept a price decline, then no. Bond or Fixed Income funds will continue to pay coupon interest commitments as rates rise, which means the income will flow.

The arguments for selling are that your prime goal is to preserve capital, or that it will drive you to distraction to see the value of CPD (and possibly other income holdings) in decline. After 2008, investors have every right to be sensitive about seeing their stocks fall in value. At the same time, however, one of the lessons of 2008 was that quality income investments continued to deliver cash to investors, even as they plunged in value.

Preferred shares were not immune to the carnage of 2008. You can see this in the fact that Bond or Fixed Income funds price is still down by almost 20 per cent on a cumulative three-year basis.

Expect another rally to begin when interest rates peak and everyone’s looking ahead to rate declines. Will you be around for the rebound of bonds and other income-producing securities? Depends on whether you’re all about income or capital preservation.

Material for this post was obtained from Rob Carrick's recent article

The Economy and Markets: time for prospective

2010-05-02T20:56:00.001-04:00

Greece and Europe, interest rates on the rise, the stock markets up some 70% plus and the global economy moving along. What does this all add up to for our retirement and investment portfolios?

The following is an excellent, albeit somewhat technical, prospective on matters:

Macro Overview: Economy & Markets

It is time to take a big picture look at everything: This is a summation of everything we have discussed over the past month and quarter. Where are we in this particular cycle?

Macro-Economy: The economic backdrop seems to be confusing quite a few people. Perhaps its the psychology of the moment. I keep hearing weak, data free analysis. Here is our 7 point overview:

1. The Economy is recovering; The recession is over: Of that, we have no doubt, as the data is clear. The free fall of 2008-09 is over, and a gradual improvement is seen across the board. Industrial manufacturing, exports, autos, retail sales, durable goods, travel all confirm the economy is “healing.”

2. But, the recovery is “Lumpy”: — Part of the reason some people doubt the recovery story is how unevenly distributed the improvements are. Geographically, much of the country is still soft. In retail, it is pent up demand plus luxury goods. In technology, its mobile devices and consumer products. Financial firms are taking advantage of the steep yield curve and ZIRP to arbitrage profits, as opposed to actually lending. Profits are not evenly distributed either.

3. Government spending is only part of the story: In the midst of the crisis, Credit froze, the consumer panicked, and business spending looked to be going extinct. Uncle Sam temporarily bridged the gap.

But the argument that government spending is the only game in town is overstates the case. Private sector CapEx spending and hiring is improving (albeit slowly); Consumers have come out of their bunkers and are dining out, going to the movies, hitting the malls, traveling.
We have not returned to the Home ATM days of 2004-07 — and probably wont in our lifetimes — but the present environment is a massive improvement from the 2008-09 contraction.

4. Weak Improvement in Employment: The massive labour under-utilization is one of the two biggest drags on the economy (RE being the other). Near record low hours worked suggest that employers can simply increase hours rather than make new hires. Thus, I do not look for a V-shaped employment recovery — forget about 400-500k NFP data — anytime soon.

There are 15 million unemployed, and 8 million underemployed — it will take a long time for them to be re-absorbed into the economy. The 2001 recession took 47 months to return employment to pre-recession levels. This recession will likely take 65-75 months to achieve that goal — if not longer.

5. Real Estate (Commercial and Residential): We do not believe that residential real estate has found its natural price level yet. It remains over-valued. This is due to artificially low mortgage rates, foreclosure abatements and mortgage mod programs. We are probably 10-15% over valued, when measured by Median Sales price to median Income, Rent vs Ownership Costs, and Home Value as a Percentage of GDP.

Commercial real estate tends to lag residential by 18-24 months. It is still adapting to the downsizing of America, particularly retail. The over-investment in commercial real estate of the past decade will take at least another 5 years to resolve, if not longer.

6. Deflation? Inflation?: Well, as my pal Jeff Saut notes, we definitely have “flation.” Just not the type that everyone fears.
As of today, Deflation is a fact, inflation is an opinion. We are still living in a period of falling prices, heavy discounts, wage deflation, asset depreciation and lack of pricing power. The S&P500 is below levels seen in the 1990s; Wages are flat for a decade.

The risk going forward is that the Fed fails to remove the accommodations in time. But they have Japan as an example of Zirp with no inflation. So long as labor under-utilization is near record levels, they can take their time in tightening.

7. The rest of the world: Europe is a disaster, and is likely to remain that way for a while. Asian economies are doing very well, helping to pull the rest of the world along — but China’s market is at 6 months lows, something few people are discussing. The risk in China’s real estate and stock markets has been mostly ignored,. Commodity regions and emerging markets still have strength.

~~~
Market Overview: Unfortunately, most of the commentary we see about markets have been unusually ignorant, myth driven, and based on rationalizing bad decision making.

Our views:

1. Cyclical Bull, Secular Bear: The secular bear market collapse of 55% was right in line with other such debacles. The collapse was faster and more furious than typical, but the depth was normal. The snapback is also well within the range of bear market rallies — cyclical bull runs that last 6 to 24 months and range from 25% to 135%.

While it is possible that we are witnessing the start of a new 1982-like Secular bull market, the valuations argue against it. Stocks most likely simply did not get cheap enough — or despised enough — to initiate a multi-decade bull run. My best guess about that bottom is its likely 3-7 years away.

2. Snapback: The 75% bounce over a year seems like a lot — until you put it into the context of a six month 5,000 point collapse. we call that the Armageddon trade — Dow 5000! 3000! We’re going to zero! – was a spasm of panic. It has been mostly unwound the past year.

3. Correction coming (eventually): The cyclical bull tends to end with ~25% correction that lasts about a year. So we are always looking for signs that this run is over. Despite the recent turmoil, we have not found confirmation that the bull run is over — yet.

We look at many factors to help identify that inflection point:

4. Liquidity: Institutional fund managers seem to be all in (only 3% cash), while Investors are at only median levels of equity exposure. Liquidity is still abundant, free money abides. Money flow for the past few months have gone into US equities — that is a new element — at about $2B per week.

5. Internals: The market technical/internals remain constructive: Breadth and momentum are positive. New 52 week highs are also strong. Earnings are supporting some of the move, as year over year comparos are absurdly easy. The uptrend remains in place, and until it is broken we maintain an upside bias.

6. Sentiment: The biggest risk is the unusually high level of bulls. Note however that event hat has moderated over the past week. We are not at the sorts of extremes yet that make the contrarian in us scream SELL.

Source: Barry Ritholtz

How is your path to a prosperous retirement?

2010-04-27T16:17:00.000-04:00

We financial planners preach the merits, virtues and practical common sense of “planning for that eventual day of retirement”. But it is still truly amazing how many people choose not to adhere to these basic tenants, or, worse, do not take the time to meet with an accredited financial planner to set a path to prosperity.

A recent poll by Ipsos Reid shows some staggering results. The key concerns for Canadians over the age of 50 are:

- Inflation and taxes the biggest worries.

- Inflation and taxes are among the top concerns for retirees, with 35% worried that inflation will negatively impact their retirement income, compared to 43% of pre-retirees.

- Sixty-two per cent of retirees worry about taxes on their income, with 66% believing the percentage of their income required for taxes will rise in the next 10 years. Retirees say they are currently living on 56% of their pre-retirement income, indicating that spending drops significantly in retirement.

- 22% of respondents entered retirement with a mortgage on their primary residence.

- The majority of retirees (70%) feel it is still important to be able to save part of their income, yet 28% have acquired new credit products since they retired.

- “It's not uncommon to be concerned about maintaining a sustainable level of income in retirement, but costs you never counted on may also arise,” adds Davies. “For example, our poll found that almost one-in-five retirees spend over $1,000 annually on prescription drugs. Working with a qualified advisor can help you prepare for taxes, inflation and unexpected costs that may impact your retirement goals.”

Many Canadians enter retirement with debt: poll

Four-in-ten Canadians over the age of 50, who have assets of at least $100,000, retired with some form of debt, according to a new poll released by Royal Bank of Canada (TSX:RY).

The first annual Retirement Myths and Realities poll, which examines Canadians' expectations and experiences in retirement, also found that 22% of respondents entered retirement with a mortgage on their primary residence.

The majority of retirees (70%) feel it is still important to be able to save part of their income, yet 28% have acquired new credit products since they retired.

“More and more, Canadians are carrying debt into retirement, which is not necessarily a bad thing,” says Lee Anne Davies, head, retirement strategies, RBC.

“Having access to credit in retirement can be beneficial to managing income and cash flow and provide additional flexibility. To help make your retirement dreams a reality, our advice is to start early and prepare a comprehensive financial action plan that will keep you focused on paying down debt and saving, as well as establishing a budget for both your pre- and post-retirement years.”

The poll was conducted by Ipsos Reid from March 10-19, 2010. For this survey, a national sample of 2,143 adults aged 50 and over with household assets of at least $100,000 from Ipsos' Canadian online panel was interviewed online.

By IE Staff

Mortgages: To lock-in or not?

2010-04-20T12:49:00.000-04:00

With all the hype around mortgage rates increasing, as opposed to writing directly about this I found a great piece from Ed Rempel. He really covers the “to lock-in or not” debate very well.

Avoid the 5-Year Fixed Mortgage Trap

Should I go short or long; fixed or variable with my mortgage?
“I wish I had an answer to that, because I’m tired of answering that question.” – Yogi Berra

Number 3 on our list of things on which Canadians waste the most money is 5-year fixed mortgages.
They are marketed as being safe and a good protection against a sharp rise in interest rates. The reality, though, is that they are nearly always a huge waste money, they limit your flexibility and result in losing your negotiating power for 5 long years.
That is why we call it the “5-Year Fixed Mortgage Trap”.

I am not a mortgage broker, but have researched mortgages and always have strong opinions. The most common questions about mortgages are “short vs. long” and “variable vs. fixed”. Which is better? Canadians often debate this, but studies consistently show that short beats long and variable beats long term fixed.
If it is so obvious, then why doesn’t everyone see it? Longer term mortgages are marketed heavily by banks and mortgage brokers that make far more money on them then short term mortgages. Also, most people are bad at math and may get a general feeling of security from a fixed rate, but they do not do the math on how much this protection costs or the odds that they will lose money.

“Unfortunately, most of the existing folklore and advice is rarely subjected to formal statistical analysis and does not address the probability that a given strategy will be successful.” (Moshe Milevsky) The main reasons commonly used for taking 5-year fixed mortgages turn out to essentially be myths:

3 Mortgage myths about 5-year fixed mortgages:

1. They are safer
A study by Moshe Milevsky, finance professor at York University, from 1950-2000 showed that the average Canadian wastes $22,000 after tax (based on a $100,000 mortgage for 15 years) in their life because they got sucked into 5-year fixed mortgages rather than variable.

If your mortgage started at $300,000, then you can expect to waste $66,000. They also took on average 38 months longer to pay off their mortgage. The chance of losing money over 5 years was 89%. A study by Peter Draper (mortgage broker) comparing 5-year vs. 1-year mortgages from 1975-2005 showed that the 1-year mortgage saved money 100% of the time! How can an 89-100% chance of losing thousands of dollars be safer?

2. Rates may go very high like in the 1980s
I was an accountant for a mortgage company in 1982 when mortgage rates peaked at 22.75%. My first mortgage was a 5-year fixed in 1980 at 13.75%. I thought that I had lucked out, since rates jumped to 22.75% and were back to 13.75% by 1985 when it came due. What I didn’t realize was that, even then, I would have saved money by going variable! Based on Peter Draper’s study, I would have lost money for 2 years and saved money for 3 years. So, even with a huge leap of 9% in mortgage rates in the first 2 years of my mortgage, I still lost money with a 5-year fixed rate!

Also, the odds of a huge rate rise are extremely low. We can’t calculate them, since it has only ever happened in the early 1980s, but the odds must be extremely low. Demographers, like Harry Dent, claim it related to Baby Boomers entering the housing market for the first time, which is a phenomenon we don’t expect to be repeated in the next few decades.

3. Your mortgage payments will stay the same
Most variable mortgages also keep your mortgage payment the same during the term. Many people believe that their mortgage payment will fluctuate with a variable mortgage, but this is also a myth.

Top 4 reasons to stick to short or variable mortgages:

1. Save thousands
On average, you should save 22% of the starting amount of your mortgage and pay it off 38 months earlier. (Moshe Milevsky) In the Toronto area, an average mortgage is $2-300,000, which would be savings of $44-66,000 after tax. That is essentially one full year’s earnings, so the average person works one extra full year just to pay the money wasted by taking 5-year fixed mortgages!

2. Low risk
With variable mortgages, the chance of saving money is 89-100%. Yes, the variable is the low risk!

3. Flexibility
Many things can happen in your life in 5 years that may make it advantageous to refinance. You may want to move, roll in other debt to get the lower rate, make extra payments with no limit or change some terms. Our experience with our clients is that most do some sort of refinancing every couple of years, so being locked in for 5 years is a long time.

4. Negotiating power
The mortgage market is very competitive, so every time your mortgage comes due, you have lots of negotiating power. You can change any term you want, get a free appraisal, negotiate a lower rate, or get an unsecured credit line or other banking service. During the term, you have hardly any power. Remember that when you sign a 5-year mortgage, you sign away your negotiating power for 5 years!
The main reason that 5-year fixed mortgages lose money vs. 1-year is that, in a normal market, they start about 2.5% higher. If you pay 2.5% more in year 1, you need the average for years 2-5 to be more than 3% higher than today’s rate. To be ahead, rates would have to jump by more than 3% and stay there for the next 4 years – a very unlikely scenario.

Conclusions:

1. Stick to 1-year fixed or variable mortgages. Usually, you should take whichever is lower, but only take variable at a good discount, such as prime -.8-.9%.

2. Avoid 5-year fixed. Sometimes, they are tempting, but always assume they will end up costing much more, plus you will have lost your flexibility and negotiating power for 5 years. Remember that even when rates leaped 9% in 2 years from 1980-82, short term rates still saved money.

3. Never take a mortgage term longer than you expect to stay in your current home.

We have been referring people to mortgage providers since the mid-90s and most today have rates below 2%. Most of our clients still have the prime -.85% rate that we had for years before this recent crisis or have our recent 1-year rate of 1.99%.
Today, we are recommending 1-year fixed, not variable. The best variable rates are prime -.4-.6%, but rates are normalizing quickly. We expect that the prime -.85% (or lower) rates will be back soon. We expect that anyone taking a variable today will regret having locked in before the larger discount is available.

Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.

Home Ownership: A Good or Bad Investment?

2010-04-13T17:47:00.000-04:00

Why home-buying is a great investment

I have little to add, this is a good piece for anyone who owns a home or is pondering a purchase or sale. Full credit goes to John Kelleher and Joe Castaldo

John Kelleher responds to Joe Castaldo's story "Why buying a house is a bad investment."

I refer to your cover article “Why buying a house is a bad investment” by Joe Castaldo in your March 15, 2010 issue (see below for full article).

This article is not a serious discussion of the topic that it purports to cover. It misses the most critical issues involved in understanding whether a home is a good or bad investment and confuses the topic with some misleading charts and facts.

Let me try to illustrate the errors in the article by referring to a summary chart the author shows on top of page 28 [not shown online] — a chart that compares housing returns in various cities to stock market returns. The chart and the article contain the following errors:

1. Exogenous benefits of an “owner lived in” housing investment. When an owner buys a home and lives in it, the owner receives what economists call “exogenous benefits” — meaning that (in addition to being an investment that you can buy and sell for a profit) a home is something that one can live in. You can’t live in a stock or a bond, so this “exogenous benefit” makes a home that you purchase to live in quite different. Simply put, the owner doesn’t have to pay rent to live somewhere else. This benefit is very large, yet is not quantified in the returns when one buys and sells a home. So comparing housing returns to stock returns without considering this issue is misleading and wrong. For example – let’s say I lived in a home for five years and sold the house exactly for what I bought it for — so I didn’t lose any money but I didn’t make any either. It would not be correct to compare the 0% return that is seemingly earned in that case with an 18% return on stocks and say that the house was a bad investment. The owner of the house had a roof over their head for five years! That benefit could easily be worth hundreds of thousands of dollars but isn’t reflected in the numbers because the owner is effectively “paying rent” to himself. This error is a serious one and should have stopped the article’s publication on its own.

2. Principal residence tax exemption. Amazingly, the article fails to mention the principal residence tax exemption on housing in Canada. Gains on housing are tax free, while the gains on investments are taxed! This is another huge miss that should have been caught and another reason why the chart and the article are wrong. By comparing pre-tax returns on stocks to what are effectively post-tax returns on housing, the article makes a critical error. So when an investor has a gain of $100 on a principal residence they keep $100. When an investor has a gain of $100 on stocks the homeowner keeps only about $77. (assuming cap gains tax of about 23%). This is another error that should have stopped this article’s publication.

3. Comparing investments with totally different risk profiles. One of the most basic principles in finance is that one should never compare returns on investments that have different risk profiles. Investing in stocks is generally more risky than investing in real estate — so you can’t make a chart like the one on page 28 and conclude (as most of your readers surely did) that housing is a bad investment because the returns appear lower than the returns for stocks. The author should have compared each asset to its own risk benchmarks (risk-adjusted returns). This is another huge miss that leads to a misleading conclusion.

4. Fees, commissions, and capital expenditures. Fees, ongoing capital expenditures, and commissions for a housing purchase are large and materially impact the attractiveness of a house as an investment. The friction associated with other investments is generally a lot lower. The author’s chart makes the comparison before all of these expenses which again makes the comparison silly. It is true that he chooses to mention this issue in the body of the article, but makes no attempt at quantifying this issue or estimating how it impacts returns. This would not have been hard and would have made for a more substantive contribution.

In addition to the errors above, the article uses poor examples to make points. These examples actually support the opposite view to what the author suggests! The author might have realized this if he had taken five minutes to run the math. Take the article’s assertion that leverage allows a buyer to make a $50,000 profit given a 20% down payment on a $500,000 house where the asset’s value appreciates to $550,000 in two years. Since mortgages don’t come free, this point is wrong, and materially so. Let’s do some work for a moment. If I assume just a 4% mortgage on the $400,000 of debt in your reporter’s example, the hypothetical profit drops from $50,000 to about $20,000 (yes, you have to pay about $30,000 in interest in those first two years). Now if I add in commissions, land transfer taxes, property taxes and so on the profit actually turns in to a loss. This is why it generally doesn’t make sense to buy a house for only two years. I respectfully suggest that these examples need more thinking and more homework.

Overall, the misses and errors in this article are really disappointing.

When a person buys a house to live in, it is actually an incredibly complex financial transaction. It is akin to a leveraged buyout of a company where the new owner lives in the corporate offices (thereby avoiding the need to rent elsewhere) and where the gains on the sale of the company can be enjoyed tax free. Many variables impact the true return on this decision and the only way to understand that return is to model it. Doing so requires some careful work and some basic training on financial principles.

Regards,
John Kelleher

Why buying a house is a bad investment

Interest rate hikes are looming, and talk of bubbles abounds — so what's with the real estate buying frenzy?

By Joe Castaldo, a staff writer for Canadian Business.

More than two centuries ago, the economist Adam Smith produced his landmark tome, An Inquiry into the Nature and Causes of the Wealth of Nations, in which he wrote, "a dwelling-house, as such, contributes nothing to the revenue of its inhabitant." The father of modern economics placed housing in the same category as clothing and furniture — useful consumer goods that do not generate wealth. For the homeowner, a house is a "part of his expense, and not of his revenue." Were Smith alive to make such a statement today, he would no doubt be regarded as a heretic.

These days, home ownership is widely heralded as the ultimate financial achievement and one of the surest forms of wealth creation available. Homeowners aren't throwing away money on rent, the common thinking goes, but instead putting it toward an asset that can only appreciate in value. Indeed, home prices have more or less climbed steadily for decades. For these reasons, at least two generations have grown up with the same abiding principles when it comes to real estate: save for a down payment, buy a house, and work hard to pay off the mortgage. And you better get in soon, because God's not making any more land.

Nowhere is that mentality more prevalent than in the current market, where housing has soared to record highs after a brief — but gut-wrenching — drop just over a year ago. Existing home sales fell 40%, and prices 12% from their peaks in late 2007 during the turmoil of the recession. But the average home price in January roared back to $328,537, according to the Canadian Real Estate Association, a jump of nearly 20% from the year before. Ultra-low interest rates are providing an unprecedented opportunity for young Canadians to buy their first homes. At the same time, there is a shortage of houses on the market, fuelling intense competition and bidding wars. "Some people don't even balk at paying thirty, forty, fifty thousand dollars over asking now," says Evan Sage, a real estate agent in Toronto. Many factors motivate people to buy property, but one nearly universal reason is for the economic benefits. "Every single decade, prices have gone up," says Sage. "The one consistent thing is real estate."

But a hard look at real estate returns shows that Adam Smith probably had the right idea after all. Viewed purely as an investment, an owner-occupied home has more than a few undesirable traits. In January, during a panel discussion at the annual meeting of the American Economist Association, Karen Pence, head of the Federal Reserve's household and real estate finance division, pointed out a few of the drawbacks buyers tend to overlook. For instance, a house can't be divided up and sold, like a stock portfolio, and it is highly correlated to the job market. Also, a house is undiversified; instead, its future is tied to a single neighbourhood.

Moshe Milevsky, an associate professor of finance at the Schulich School of Business in Toronto, has a similar take. "This blind devotion to investing in a house as being a very, very good idea might not make sense when all is said and done," says Milevsky, who held off purchasing a home for his own family for some time. He believed it was not a smart way to allocate money. In fact, it flies in the face of what decades of portfolio allocation theory have shown. "It's like a stock portfolio that consists of one stock," he says. "If I could buy a house where the bedroom is in Toronto, the kitchen is in Vancouver, and another bedroom is in South America, then that's a diversified house."

But the dream of home ownership is so deeply ingrained, and the belief that real estate is the ticket to wealth so strong, that Canadians are increasingly willing to put their economic well-being on the line for the sake of four walls and a roof. This fact is reflected in the growing levels of debt. The average household in Canada now owes $96,100, according to a study released in February by the Vanier Institute of the Family, an increase of 5.7% over the past year. The same report found that mortgage debt is at a record high.

The euphoria around home ownership crowds out some of the unpleasant truths about real estate: mainly, that long-term returns are often modest at best. Some studies have found that stock indexes actually outperform housing. More worrying is that real estate prices can and do fall — and they can take a long time to recover. Canada has not been immune to severe price corrections in the past, and we could be on the verge of another one now. With interest rates set to rise and curb affordability, and with economists speculating about a bubble, staking one's entire financial future on a home is not necessarily a wise bet. In fact, a house just might be one of the most overrated investments around.

The final months of 2008 were a difficult time for Vancouver real estate agent Peter Raab. His clients simply weren't interested in buying houses, and the market was tumbling. Raab prepared for the worst, cancelling his vacation and cutting expenses. His practice slowed down so much that he didn't get a paycheque for five months. "Everyone was trying to put on a brave face. It weeded a few people out of the industry," he says. But Raab didn't have to wait long for a recovery. His business started to pick up again in March of last year, as it did for agents across the country.

A number of circumstances brought buyers back. Canadians recognized the economy was not headed for disaster, and rock-bottom interest rates were too enticing to ignore. Buyers who had been waiting for the economy to smooth out before buying have started looking again, and others who may have waited until later in the year to purchase are acting now to avoid rate increases. The effect has been compounded in Ontario and B.C., where the introduction of a harmonized sales tax in July will increase the costs around buying and selling homes. Factor in a lack of housing supply and too many buyers, and it would appear prices have shot up alarmingly in a short amount of time, sparking plenty of debate over whether homes are overvalued now, and how they'll adjust in the future.

"There's a unique confluence of factors that has driven house valuations up this sharply," says Derek Holt, vice-president of economics at Scotia Capital. "They're all temporary, and that's a house price bubble that could be pricked as we go off into the next year." The rate of growth in home prices for the past 10 years has in fact been out of line with prior decades, pointing to lofty valuations today, according to Holt. Prominent Canadians such as money manager Stephen Jarislowsky and former Bank of Canada governor David Dodge have also sounded the alarm recently on today's unusually rich home prices.

Although both federal Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney have said they do not believe Canada is in the midst of a housing bubble, they are clearly watching closely. Carney warned about rising levels of debt late last year, as the household debt-to-income ratio reached a record high of 145%. Flaherty took steps to cool the market in mid-February by changing some of the rules around government-backed insured mortgages, most notably with the provision that all borrowers now must meet standards for a five-year fixed rate mortgage, even when opting for a lower rate and a shorter term.

The change was to ensure Canadians don't take on more mortgage debt than they can handle, but impending increases to interest rates still pose a danger to recent homebuyers who took advantage of the cheap credit available over the past year. Even a one percentage point change in a mortgage rate can increase the monthly payment by hundreds of dollars, and it's unclear how homebuyers will cope down the road. A study by CIBC in December said less than 4% of Canadian households would be vulnerable to rate increases, whereas the Bank of Canada estimated the number was considerably higher, at 5.9%. But so strained do Canadians feel that a survey from the Canadian Payroll Association in September found nearly 60% of the respondents said they would have trouble making ends meet if their paycheque was delayed by even one week. This group included many first-time buyers.

Canadians are clearly more than willing to take major financial risks to buy a home. What's ironic is that real estate price gains can be somewhat of an illusion when inflation is taken into account. "People get fooled by nominal numbers," Milevsky says. Long-term returns in real terms are less than spectacular. Harvard economics professor Edward Glaeser looked at the returns in more than 300 metropolitan areas in the U.S. between 1970 and 2000 (before the unsustainable credit-fuelled boom) and found prices increased on average only 1.7% annually. Yale School of Management professor Roger Ibbotson and a colleague examined returns between 1978 and 2004, a period including part of the U.S. housing bubble, and found residential real estate provided an annualized return of 8.6%. The S&P 500 significantly topped that with a 13.4% return.

Housing in Canada hasn't behaved much differently. In 2004, Milevsky examined the compounded annual returns on residential real estate in a dozen Canadian cities over the past 25 years. Toronto provided the best return at 5.75%. But the TSX provided an 8.64% return over the same period. The S&P 500 index did even better during that period, at 13.85%. The drawback, of course, was that stock indexes were far more volatile than real estate, although in some markets, the difference was not so pronounced. Real estate in Vancouver, for example, provided only a 3.68% compounded annual return with nearly the same level of volatility as the S&P 500.

Homeowners can easily argue that while the returns are modest, at least they are building wealth rather than paying rent to a landlord. Leverage can also make a huge difference on returns for homeowners if they choose to sell. In crude terms, assume a 20% down payment on a $500,000 house that is sold a few years later for $550,000. After paying back the mortgage, the seller is left with a $50,000 profit, or a return of 50% on the initial down payment. As far as investments go, that is an eye-popping return. But leverage is damaging when prices fall. A homeowner can end up with outstanding mortgage payments worth more than the house.

There are also a slew of egregious fees associated with real estate that affect returns. There are home inspection and appraisal fees, which can total hundreds of dollars each, not to mention land registration fees, legal fees and perhaps title insurance to purchase. Real estate agents take a commission, too — expect to pay at least 2.5% of the purchase price of the home. Regular maintenance has to be done for the home to maintain its value, and that can quickly add up. Canadian personal finance authors Eric Tyson and Tony Martin say a home usually needs to appreciate about 15% in order for the buyer to recoup all of the transaction and maintenance costs.

A society of renters is also more mobile. Andrew Oswald, an economics professor at the University of Warwick in England, found that high unemployment goes hand-in-hand with high rates of home ownership. In Britain, unemployment doubled since 1950 as the share of the population that rented dropped from 60% to less than 10%. Oswald found similar relationships in other countries, such as Finland and Spain. The Netherlands and Switzerland, by contrast, had lower unemployment and a lower rate of home ownership. Oswald theorized that, while homeowners are often stuck with their property through tough labour markets, renters can more easily relocate to find work, which lessens structural unemployment. His theory has been criticized for placing too much emphasis on a causal link between home ownership and unemployment, but it does echo Fed economist Pence's concern about the correlation between home prices and the job market. Prices fall when the labour market tanks. Everyone needs financial security during those uncertain times, but for homeowners, their greatest asset won't necessarily deliver.

In December of last year, CIBC economist Benjamin Tal estimated home prices in Canada to be about 7% overvalued, which he deemed to be a "modest overshooting" that did not necessarily portend a dramatic price correction. Economists at TD Bank Financial Group put the overvaluation at 12%, adding it could rise to 15% this year as buying activity rages on. David Rosenberg, the chief economist and strategist now at Gluskin Sheff + Associates who called a U.S. housing bubble back in 2004, has a more pessimistic take. He says home prices in Canada are between 15% and 35% overvalued, and could plummet as far as 20% from current levels. "That isn't cataclysmic, but believe me, that would hurt a lot of people," he says. A drop that steep would wipe out virtually all of the gains made in the past year and could leave some Canadians who bought at the top of the market with negative equity in their homes.

Housing has undergone painful corrections in the past. The current crop of homebuyers is likely too young to remember the housing bubble that burst in 1981, and the slow recovery that followed. According to data from the Centre for Urban Economics and Real Estate at the Sauder School of Business in B.C., the average real home price in Vancouver took more than 10 years to get back to its peak, before dipping again in the mid-1990s. Calgary fared even worse. Home prices didn't return to 1981 levels until the first quarter of 2006. Toronto homebuyers experienced a similar pain when a speculator-driven bubble burst around 1989. In real terms, prices didn't recover until 2007.

A wait that long can be brutal for those who bought at the top of the market. It can also thwart retirement plans for those expecting to sell their homes and use the profits to downsize and fund their golden years, particularly if they've neglected to save by other means, such as with an RRSP. Canadians have a significant portion of their wealth tied up in real estate — roughly 48%, according to the Vanier Institute of the Family, the highest level in two decades. The fact that real estate markets do fall highlights the need for Canadians to prepare for wild swings in the economy. That message is perhaps more important than ever as the buying rush continues, and the market looks increasingly pricey. "If you're going out buying a home today, understand that you're not following the doctrine of buy low and sell high," Rosenberg says. "You're doing the exact opposite."

The problem for policy-makers — and buyers trying to figure out the best time to enter the market — is that the existence of a bubble is impossible to know for certain until it pops. Gregory Klump, chief economist for the Canadian Real Estate Association, argues we are not yet in bubble territory. "I would describe this as a micro-cycle where demand is outstripping supply," he says. Housing starts are rising, which will help to satisfy demand. Higher prices are also bringing the sellers back to the market who disappeared in 2008 when sales activity dropped, all of which will lead to a more balanced market later in the year. There are signs of optimism elsewhere, such as in the Canadian house-price forwards market operated by Teranet and the National Bank Financial Group. The market allows investors to essentially place bets on where prices are headed, and the index reflects their collective sentiment. As of January, the index showed investors expect a bump of up to 9% in residential real estate by 2014. (Those investors have been wrong before, of course; last year, the index showed a potential nosedive of more than 20%, the exact opposite of what transpired.)

Not everyone is so sanguine about the market. "We're not in a classic bubble yet, but some of the pre-conditions are certainly in place," says Douglas Porter, deputy chief economist at BMO Capital Markets. One of his concerns is that the central bank is not going to raise interest rates any time soon. Carney pledged to keep rates steady until at least mid-year, and that could mean several more months of frenzied buying. The longer home prices continue to rise out of sync with the rest of the economy, the more worrying the situation becomes. Prices have already skyrocketed while incomes have barely moved, and the home-price-to-income ratio in Canada is at its highest level since the early 1990s.

Scotia Capital economist Holt sees a few possible outcomes as the temporary factors supporting the housing market start to wane. One is a "soft landing," where activity cools gradually. The other is a rapid decline. Holt says the speed at which the market recovered since last year lessens the odds of a soft landing. "We've had four or five drivers of the housing market leading toward strong house price gains in a very short period of time, and I think they all come off simultaneously," he says. "That points to just as quick a descent." The new federal mortgage changes will cause the housing market to "turbo-charge" over the next while, according to TD Securities' chief economics and currency strategist Eric Lascelles, as buyers rush to get in ahead of the implementation date in late April. Once that day passes, the new rules become just another factor that, in Holt's view, will contribute to lower prices and sales activity in the months ahead.

Ultimately, all of the uncertainty and concern around residential real estate is likely not going to deter many people from purchasing a home. A house is much more than an investment, after all. It is firstly a place to live. Even Milevsky, the finance professor at Schulich, caved and bought a house after resisting for a while. "We have a large family, and they wanted somewhere to call their own," he says. If prices fall, a home still provides a roof over one's head, unlike a stock portfolio. The danger comes when people link the idea of a house as a home with the idea of a house as an investment, particularly if they stretch their finances with the expectation of getting rich in a few short years. "There can be long periods of time where the real appreciation of housing is negative," Milevsky says. "All of that means is caution is warranted."

More on Gold, Silver and Base Metals

2010-04-09T18:49:00.000-04:00

In the not to distant future I will write about the reversals of some historical correlated assets: Gold vs. the US Dollar vs. the Canadian Dollar, etc. All are performing in non-traditional ways and I'll explore why this is the case. But for today, lets see what some of the guru's are saying about PGMs:

BMO forecasts gold, silver, and PGMs to do ‘very well' next few years

BMO Capital Markets Global Commodity Strategist Bark Melek, forecasts gold and other precious metals are "projected to do very well over the next several years."

"The key drivers for the precious metals group are the U.S. dollar, the competitive currency devaluation concerns, an eventual move toward a higher inflation environment, and improvements in jewelry and industrial demand as the world pulls out of recession," Melek suggested. "The end to producer de-hedging, central bank net buying after a very long pause, and concerns that excessive U.S. and European government debt may lead to future monetization are additional key drivers for the outlook."

He also suggested there will be "considerable upward price pressure well into 2011 due to lackluster mine site production, sharply higher power costs in South Africa and a relatively high currency in producing countries."
In his analysis, Melek noted that copper has jumped 165% from its low during the bad days of late 2008 and early 2009. Lead and nickel are up 150%, zinc has jumped 125% while iron ore is up 120%. Gold has jumped about 65%, platinum 100%, silver 105% and palladium just over 190%.

George Soros Bets on Gold - Soros Fund Increases Stake in Gold ETF
Legendary hedge fund manager George Soros is double downing his bet on gold, even though he considers the market to be a bubble.
Back in late January, at the World Economic Forum, Soros called gold "the ultimate asset bubble."
He failed to mention, however, that his hedge fund had recently more than doubled its position in the yellow metal.

“We remain positive on gold’s medium- to longer-term outlook. The fundamental
factors that have underpinned the nine-year bull market for gold remain fully intact
in our view, including:

• central banks are likely to continue to be net buyers of gold as emerging
economies look to diversify their reserve holdings,
• investment demand for gold (at the institutional and retail level) should remain
strong as individuals look to diversify their positions,
• questions remain about the long term viability of the U.S. dollar as the world’s
reserve currency,
• continued improvement in the U.S. economic situation could lead to
accelerated inflation fears,
• gold mine supply remains challenged over the longer term, and:
• a recovering economy is likely to lead to increased demand for labour and
materials further challenging the cost base to produce an ounce of gold”

INDUSTRIAL COMMODITIES TO PERFORM VERY WELL
BMO Research expects industrial commodities "to perform very well into 2011, with most prices above the 2009 levels.

Copper, iron ore and met coal are BMO's top industrial commodity picks, based on strong demand in China coming from fixed asset and export growth. Melek suggested demand for copper and other metals and bulks (iron ore, metallurgical coal) will move higher) "due to increased global industrial (U.S., Europe and Japan) production activity and firm capital spending."

The future's hot for lithium - and getting hotter
Lithium is not just a flavor of the year. It is in high demand for hybrid and electric vehicles, laptops, cell phones and will remain even more so as technology is perfected and consumer demand increases globally.

Our Economy: Will the Growth Continue?

2010-04-01T09:23:00.000-04:00

Like with any good "capitalist society", its takes a good blend of multiple conditions working hand-in-hand, harmoniously, so as to give us the opportunity to proposer, and to see and have our standard of living increase over time, for ourselves and for our children.

After a horrendous 2008 and beginning to 2009, the past few quarters in Canada are proving to lay the continued foundation for our society to prosper. Will this continue or is it a result 'all that government spending'?

Economy off to a roaring start in 2010, GDP records highest gain in three years

From Julian Beltrame, The Canadian Press, March 31, 2010

OTTAWA - The Canadian economy bolted out of the gate with its strongest performance in three years in January, with robust activity cited in factories, at construction sites, in mines and the oil patch.

The 0.6 per cent advance in the country's gross domestic product will have significant impact on everything from jobs, to interest rates and even government deficits if its a sign of things to come, economists say.

The dollar, which was up all day, closed up 0.35 cents at 98.44 cents U.S.

It was especially good news for Canada's battered manufacturing sector, which gained 1.9 per cent on the month. This week, both Honda and General Motors announced plans to hire more workers.

"The main message is that the economy has been a lot stronger than even the biggest optimists could have hoped for," said Douglas Porter, deputy chief economist with BMO Capital Markets.

"The economy has risen at better than a five per cent pace the past six months now...that's the best six months since the very height of the tech boom in early 2000," Porter said.

Porter says it likely means Bank of Canada governor Mark Carney will almost certainly raise interest rates in July and could move even sooner. And when he does, it may be a half-point hike that would push mortgage rates higher.

There are also implications for Ottawa's estimated $49-billion deficit this fiscal year, which was based on a 2.6 per cent growth rate. It now could be bettered by a full point, which would mean government revenues will rise and costs, for such things as unemployment benefits, will fall.

Finance Minister Jim Flaherty couldn't resist a shot at Liberal Leader Michael Ignatieff, saying that while Canada is "not out of the woods," the numbers show the government's policies are working.

"We need to stay the course ... and unlike the leader of the Opposition, we're not going to kill jobs by raising taxes," he told the House, a reference to Ignatieff's proposal to delay business tax cuts.

Stronger growth will likely also result in demand for more workers. In another strong economic report issued Wednesday, Statistics Canada said the total hours worked by payroll employees increased 0.3 per cent in January, a precursor to job gains.

A big question remains, however, about what happens with the recovery in the United States, since about three-quarters of Canadian exports head south.

But even there, there was an encouraging signal with the U.S. reporting a strong pick up in factory orders, following an upward revision for the previous month.

"No ifs, ands, buts or excuses," said Scotia Capital economist Derek Holt. "The V (shaped recovery) is even more alive at U.S. factories than previously thought."

Such robust growth coming out of recession is what historically happens as pent up demand, combined with the arithmetic of a smaller baseline, inflates growth numbers. But it wasn't supposed to happen this time because of the continuing uncertainty over the viability of the global financial system and the belief that U.S. consumers were tapped out.

In an interview, Bank of Canada senior deputy governor Paul Jenkins suggested growth may just be getting advanced by extraordinary government stimulus and low interest rates, as well as temporary factors. In other words, the surprisingly strong numbers may not last.

"When you've got that type of stimulus at play, particularly at turning points ... you can get more demand pulling forward," he said.

In January, the Bank of Canada estimated fourth-quarter growth for 2009 would come in at 3.3 per cent, while predicting first-quarter growth for 2010 at a slightly higher 3.5 per cent. The fourth quarter actually turned in a five per cent performance and economists now project the first quarter at between five and six per cent.

In the last five months, the economy has already recouped more than half of its recession losses, with output now up by 2.7 per cent from last May's low.

The rebound has surprised economists, given that the U.S. economy, although it has posted impressive GDP numbers as well, remains in the dumps in the area that impacts Canada most, consumer spending. As well, the U.S. has yet to stop bleeding jobs, while Canada has gained 160,000 since July.

Queens University economics professor Thorsten Koeppl credits the strong performance to the resilience of Canadian households, which have not been hit by a major loss in net worth given that house prices have held. In turn, Canadian consumers appear to be optimistic enough to fuel domestic spending.

But while short-term prospects appear strong, economists also cautioned that, longer-term, things are not quite as rosy.

CIBC analyst Krishen Rangasamy noted manufacturing is getting a one-time bump from the restocking of inventories in the United States. With American stimulus spending receding, a slowdown in the latter half of 2010 in the U.S. would also likely have an impact on Canada.

As well, with each good economic report in Canada, the loonie gains in strength, setting the stage for pain in the export sector later on.

There also remains major weaknesses in the Canadian economy. The output gap is still about two per cent below capacity and employment, while improving, is about 260,000 jobs lower than where it stood in October 2008, and that doesn't account for population growth.

But Porter also offers some reason for optimism. Just as it was not written in stone that the first half of 2010 was going to come in like a lion, there is no guarantee the second half will go out like a lamb, he said.

"I don't think it's a foregone conclusion things will taper off so adversely in the second half of the year," he said. "One has got to be impressed with what is going on in manufacturing, and there's lots of room for manufacturing to grow still."

How "safe" is YOUR pension?

2010-03-10T22:39:00.000-05:00

Unlike some 85% of company pension plans in the US that are underfunded and with no real resolve in sight, we’re not nearly that bad off here in Canada.

The reasons for this are, yes, the obvious of stock market declines but add to this the perfect storm of longevity and the current massive wave of retiring baby boomers. Its a perfect storm of increasing and extended benefits and recipients and less and less employees contributing.

OMERS posts $4.3B net gain on investments in 2009, or 10.6 per cent return rate
By The Canadian Press

TORONTO - The Ontario public-sector pension manager known as OMERS says it booked a $4.3-billion net gain on its investments for 2009, with a 10.6 per cent rate of return on its assets that marked its move back into positive returns after a dismal performance a year earlier.

OMERS says the average rate of return for the past five years now stands at 6.6 per cent. That's above the five-year average benchmark return of 5.8 per cent.

Crowley of OMERS said that has pulled its deficit to a deeper $1.5 billion for the year ended Dec. 31, down from a comparable $279 million the previous year.

"Like the majority of the large plans, pension obligations have been increasing at a greater pace than contributions."

He added that another $4.95 billion in net losses from 2008 will continue to affect its overall deficit for the next four years.

Unemployment Progress? – Impact on Interest Rates, Inflation

2010-03-05T13:17:00.000-05:00

My initial intentions were to write about my views on the Canadian Federal Budget just released last night. But as it turns out, it was truly a non-event, so I thought I would focus on the state of employment and people’s ability to earn an income.

Today’s U.S. employment headline: The Household survey showed a decent 308,000 increase in February.

"The chances that we are about to see employment conditions stabilize are high. However, job losses still stand at a massive 8.4 million since the recession began in late 2007. The size of the workforce is no higher now than it was in September 1999 and yet the economy is one-fifth larger (as measured by real GDP)."

The total unemployment and underemployment rate stands close to 17% and a record 40% of the unemployed have been without work for over six months.

Businesses see what we see — a recovery that has been engineered by massive bouts of fiscal and monetary stimulus that is likely to be unsustainable. So, against that uncertain backdrop they are opting to tap staffing firms to skate them for now rather than make a commitment to hire full-time staff.

The bottom line is that the U.S. economy is currently about 12 million jobs shy of being at full employment and as such it will likely take anywhere from 5 to 10 years to get back to the prior pre-recession peak in the employment-to-population ratio. This is a signal to us that deflation will be the primary theme for some time to come.

Now although this is a U.S. concern, it will unquestionably affect us, the little brother, here in Canada.

Safety and income at a reasonable price (SIRP) will be one way to play this theme.

What does DEFLATION mean to you?
- low or sustained low interest rates (mortgages and investment)
- Wage pressure non-existent (little if any increases to our pay)
- Our ‘Standard of living’ will only advance marginally

Data Source: David Rosenburg, Gluskin Sheff + Associates Inc.

Canada's Hot Growth: What this means

2010-03-01T18:19:00.000-05:00

The Canadian economy grew at a 5% rate: how will this affect interest rates, stock markets and the Dollar?

The Canadian economy boomed back in the fourth quarter of last year, pushing well past expectations and raising the likelihood that the Bank of Canada will start to raise interest rates this summer.”

Real gross domestic product grew at an annual rate of five per cent, a full point above what analysts had expected and the largest quarterly increase in nearly a decade, Statistics Canada reported Monday.

Buchanan predicted the bank will begin tightening interest rates in the third quarter of 2010, when Canadians can expect a rise in the key lending rate to one per cent.

The Bank of Canada and other central banks, particularly the U.S. Federal Reserve, have kept their key lending rates at, or near, the lowest levels possible in order to reduce the cost of borrowing and stimulate spending.

"I think the other thing that was a surprise was the continued strength of household spending and that's clearly a positive sign for the economy going forward and I think it shows that Canadian consumers... are in a bit better shape than their U.S. counterparts," he said.

From the beginning of 2010, we said that we believe the total return on Canadian equities — dividends/distributions plus gains — in 2010 will be higher than the total return on fixed income/Bonds and on cash. In other words, we are ‘somewhat’ bullish on Canadian equities for this coming year.

We are positive on Canadian equities because we believe that the Canadian economy will gain strength in 2010. Be careful about what that means. Our economy had started to recover by the end of 2009, and all indications that we see are that the economy will be more solid and stronger in 2010 than when it began its recovery.

With the economy being stronger at the end of 2010 than it was at the end of 2009, the TSX deserves to be higher at the end of 2010 than it was at the end of 2009. And higher by enough that its return will be better than the returns on fixed income or cash.

Now, be careful with what this means: I have written on several occasions before that logic and the stock markets are not always in sync. So while logic leads us to believe that with a higher GDP throughout 2010 should lead to a higher TSX by year end, “sentiment and emotion” of the markets can have a very different outcome.

Source: The Canadian Press - Rebound from recession: economy logs strong five per cent growth in Q4 2009

We're living longer than ever: StatsCan

2010-02-23T23:20:00.000-05:00

As a CFP Professional Financial Planner, I find this information imperative when making all sorts of different projections, from client's finances to estate planning tactics.

The trend of humans living longer will continue (as I have written in past: Demand for Medical Services Will Continue to Expand longevity) as much of what we do is based on one's "life expectancy".

You may simply find this info interesting...

A new study says Canadians are living longer than ever.

The Statistics Canada study, released Tuesday, says life expectancy at birth reached 80.7 years for the three-year period between 2005 and 2007.

That’s up from the average of 80.5 between 2004 and 2006, and 78.4 a decade earlier.

Gains during the past decade were strongest among men, although women still live the longest.

Men’s life expectancy at birth rose 2.9 years to 78.3 in 2005-2007, while among women it increased by 1.8 years to 83.

Provincially, life expectancy at birth in British Columbia was 81.2 years in 2005-2007, highest among the provinces, followed by Ontario at 81 years.

Life expectancy at birth in Quebec was at the national average, while it was below the national average in the rest of the provinces.

The lowest life expectancy was in the three territories combined, at 75.8 years.

Death rate increases

Deaths recorded their largest increase since 1993, continuing a long-term upward trend resulting from a growing and aging population.

In 2007, 235,217 people died in Canada, up 7,138 -- or 3.1% -- from 2006.

Both male and female deaths rose, but the increase was slightly larger among women, 3.2% compared with 3.1 for men.

The infant mortality rate rose to 5.1 infant deaths per 1,000 live births in 2007 from five in 2006.

Source: The Canadian Press

GOLD: An Investment, Hedge or for Protection?

2010-02-11T18:51:00.000-05:00

Why gold is rising and will keep rising

While gold has rallied 350% from the lows of 1999 and is up about 285% when adjusted for inflation, this still pales in comparison to the 1976-1980 bull market in bullion. During this period, the price rose by more than 750%. (See chart 1)

To some, this suggests that history is repeating itself and gold is heading beyond US$2,000 per ounce. That might be why John Paulson is launching a pure-play gold fund.

Let’s start with the U.S. dollar, which the price of gold is widely understood to mirror (See chart 2). When the dollar falls, the price of gold has to rise, assuming nothing else has changed in the supply and demand balance.

When fundamentals make gold more attractive, it overcomes its normal relationship, according to J.P. Morgan analyst John Bridges. “Don’t be surprised if gold is strong even on a modest dollar bounce,” he said.

So while the short-term correlation between gold and the dollar index has strengthened recently, it leaves much still unexplained.

Moving onto supply and demand factors, the gold market appears relatively balanced. The decline in mine supply in recent years has been supplemented by increased scrap sales and sustained central bank gold sales. In the first quarter, scrap sales rose sharply as gold re-visited its all-time high.

Meanwhile, central bank reserve sales, which have play ed a key role in keeping gold prices in check during the past decade, have slowed recently, according to Citigroup. In the 1990s, central bankers were acting as a group to reduce their gold holdings, confident that the fiat currencies were a better store of value.

Now gold’s attractions are re-emerging and bankers look set to be net buyers, which should help tighten the market, according to Mr. Bridges, who also sees sharp increases in industry costs supporting the gold price.

With industrial demand for gold limited, unlike other precious metals like silver or platinum, changes in demand are primarily due to fabrication needs, which have dropped sharply since 1997, according to a Citigroup report. Add to that the fact that the economic downturn, coupled with higher prices, further reduced the demand for jewelery, and supply-demand changes add little in terms of explaining bullion’s rise. With the exception of the 1976-1980 period, gold prices show little to no relation to changes in the Consumer Price Index, the firm noted.

So far the massive expansion of the U.S. Fed’s balance sheet and those of other central banks has not affected inflation due to the scale of the de-leveraging and slower money velocity. If it is not current inflation the market is worried about, then its future inflation, right?

The evidence is scant here too. Ten-year U.S. treasury yields have definitely rebounded from their end-of-2008 lows between 2% and 3.3%, but this can hardly be deemed conclusive evidence of inflation fears, according to Mr. Hart at Citigroup.

Yes, the government bond market is highly distorted right now, but markets don’t appear to have embraced the inflation thesis so far. So it can’t be said that gold buying is definitively a result of inflation fears.

Then what about speculation and ETF buying? Looking back to the surge in crude oil to US$147 per barrel in 2008, the market justified the move with an array of structural factors. This might suggest that a similar speculative bubble is forming in gold.

However, one obvious difference is that when oil peaked, the forward market was in backwardation, indicating that the market was expecting a decline in prices. The gold market does not and prices a value of US$1,268 per ounce for June 2014. While ETFs were cited as a culprit for the rise in oil and are also playing a role in the gold market, their impact has been limited of late, Mr. Hart noted.

ETFs may have been active buyers early in 2009, but their activity has leveled off since. There has been a sharp increase in long forward positions in gold at the Commodity Futures Trading Commission (CFTC) and net longs have reached a record.
”However, more often that not, these flows correlate with spot moves and rarely serve as a leading indicator. As a result, speculative positioning hardly represents the main factor driving the recent spike in gold prices,” the analyst said.

Despite all the attention being paid to sales of gold by central banks and the fact that world gold holdings have experienced a broad decline, holdings in industrialized economies are on the rise as a share of total foreign reserves. And this trend was renewed in the first quarter.

There is a popular presumption that developing economies will increase the share of their gold holdings. However, Mr. Hart explains that gold holdings in advanced economies are largely a function of the legacy of the previous gold standard. So if the rest of the world is to move toward the industrial country average of 40% of reserves in gold, then industrial economies would presumably have to sell some of their gold holdings, which would offset upward price pressure.

China does remain a big unknown in all of this and its reported gold holdings seems to suggest a large degree of under-reporting. This is particularly significant now that Chinese authorities can make their purchases on the domestic market.
So what about gold as simply another currency?

First off, this is factually untrue since it does not serve as legal tender in any economy, Mr. Hart points out. Yes, it is an investible asset, like cash, and its supply is limited, so it can serve as a more suitable store of value that fiat money.
“But unlike other assets, it doesn’t yield a return. Holders simply incur capital gains or losses and these are as uncertainas those of other assets over the long term (the relevant time horizon for central banks),” Mr. Hart said.

Then why hold gold? The answer lies in an increasing lack of confidence in paper-based currencies. The debasement of the U.S. dollar has a broad effect that undermines confidence in other currencies. And with central banks and policymakers still far away from removing themselves from their unprecedented fiscal and monetary accomodative positioning, this could continue for much longer.

So it is not a case of whether gold leads the dollar or the dollar leads gold, Mr. Hart explains, rather price movements in both are the expression of the same underlying malaise with the lingering effects of the financial crisis.

“Occasionally, investors lose confidence with currencies, and when this happens, because the pool of gold and related investments is so small, demand for gold can become intense,” Mr. Bridges said.
Some reprint from Jonathan Ratner

Greece & Europe: how their woes will affect us in Canada

2010-02-04T20:01:00.001-05:00

Here come the strikes, governments put to the test

First it was Dubai, now Greece. Government spending and excessive debts in dealing with the great recession have put some countries on the brink on bankruptcy.

Today, a history-making event in the 21st century: Greek government employees, namely customs and tax officials, will conduct a 48 hour strike. Next week there will be a 24 hour civil servant, doctor and Communist backed worker strike that will be followed by a general strike called by Greece’s main union on Feb 24th for 24 hours. This is all in protest to Greece’s new fiscal budget and is exactly what other countries will face that will test their will to make tough decisions on spending.

Up next to deal with these tough policy, spending and debt issues: the governments of Portugal, Spain, Italy and Ireland.

The markets continue to have a lack of confidence that these government choices will be implemented as country-denominated bond issues and stock markets trade lower, particularly in Portugal, Greece, Spain, Italy and Ireland.

The European concerns have the euro at the lowest level vs the US Dollar since June ‘09. With this we have seen an assertive increase in the value of the US Dollar, a countertrend to the Dollar’s slide over the past 10 months.

Not surprising Gold has been pulling back (inversely related to the US Dollar) and the Canadian Dollar has also retreated, but not in proportion to Gold and is, thus far, holding up well.

The greater implications for global stock markets? If Greece does not resolve their issues soon (unlikely) and we see the next country, as described above, encounter like issues, there will be a run on liquidity towards safety. And, as ironic as it sounds, the US Dollar is still considered the world’s safest store of value (even with the greatest amount of debt and deficit spending).

Thus, a scenario as depicted above would see a loss of appetite for any risk, US Dollar strength and global equity market and commodity, including gold, sell-off.

Loonie will hit parity with U.S. dollar in few months: analysts

2010-01-31T18:47:00.000-05:00

Some are forecasting the Canadian dollar will shoot well above its U.S. counterpart. As many of my BLOG readers will note, I have long argued the case for a 2:1 $CAD to $USD by 2020. As our dollar appreciates, so will our per capita wealth and standard of living.

SAN FRANCISCO (MarketWatch) -- The Canadian dollar is on track to hit parity with the U.S. dollar, a rise that would underscore the strength of Canada's economy compared with that of the United States, as well as the country's vulnerability to swift changes in commodities prices.

Analysts are forecasting that the Canadian dollar will trade on equal footing with the U.S. dollar within the next few months, largely based on investor demand for assets linked to rising commodities prices.

The loonie, the nickname for the gold-colored coin that replaced the paper dollar in 1987, is now trading at 94.11 U.S cents. It would have to rise about 6% to trade at one American greenback, or at parity.

"Our forecast is for [the loonie] to hit parity by the end of the first quarter," said David Watt, currency strategist for RBC Capital Markets. "There's a chance it could hit before that."

Such gains would increase the purchasing power of Canadian consumers. But they could curb Canada's export growth and cool inflation, taking pressure off the Bank of Canada to raise rates. Higher rates tend to make a currency more valuable.

"If China is tapping the brakes now, that would certainly upend the bullish views on commodities," Watt commented.

Rising prices of commodities like oil and gold, as well as a weak U.S. dollar, helped drive up the loonie 22% by the end of last year.

Some countries are diversifying their reserves into Canadian dollars. Russia, which has been outspoken about wanting to unload some of its U.S. dollars that it makes exporting oil and natural gas, said last week that it was buying loonies.

A Correction or Something More?

2010-01-26T15:40:00.001-05:00

The major equity markets across the globe have had a respectable pull-back over the past several days. Is this a natural and healthy correction within the major upward trend or the beginning of a more serious downward secular bear? Of course if we had the answer to that we’d be the one with the crystal ball.

The TSX (Toronto) stock exchange has had an 800 point retracement from its high of 12,070 on January 11, 2010. Today the index fell to 11,271 (as I write). That’s a 6.7% decline.

The market technicals suggest that there is good support around these levels (buyers believe this level represents good value) but if we break below the December low of 11,248 we could be in for a more serious pull back to the 10,800 level.

Some of the sharpest technical traders suggest that we’ll see a decent bounce upward from around this level, but could break down to lower levels shortly thereafter.

Most fundamentalists believe the global economy is getting stronger, not weaker – which bodes well for equity strength.

Some conspiracist say that “Wall Street” is trying to send a message to President Obama that his suggested levy on big bank (an effective sur-tax) and senior big-pay executives, a message to “back off”.

President Obama is having a state of the Union address tonight, which will very likely affect markets tomorrow. This speech could be the precipitous to the next leg down, or an adrenaline shot to get the markets moving up again. We’ll just have to wait and see.

US Housing watch & Consumer Psychology

2010-01-25T12:25:00.000-05:00

Our housing is red-hot in many markets throughout Canada, reaching new all-time highs in certain markets. But the US housing market is showing some serious signs of cracking. What will this mean to us in Canada?

Many US home owners have tried to wait out the bear market in housing, a technique that worked in earlier years when any price declines were small and short-lived. But huge excess inventories, a flood of distressed sales after mortgage modification attempts are over, depressed incomes and rising unemployment will probably keep sellers plentiful, buyers reluctant and prices falling throughout 2010 and perhaps beyond. In past regional house price collapses, it’s taken homeowners a year-and-a-half to give up and throw their houses on the market for whatever they will bring. After the final bottom is reached, house prices will likely mirror inflation, or in future years, deflation as they have historically.

As reported a few days ago, US existing home sales (EHS) fell a disappointing 16.7% as the rush from the first time home buyers credit earlier in the fall depleted sales in December. However, sales had rebounded significantly from the lows last Jan-Mar and have reduced inventories significantly as well.

2009 was a terrible year for US housing on many fronts, but was especially onerous from a foreclosure standpoint. Approximately 2.9 million home went into foreclosure and the outlook for 2010 is similar. As most know, a foreclosed home on average loses 15-25% of its value and also drags down other homes in the area due to comparables.

As part of the State of the Union address, the Obama administration is expected to announce changes to the Making Home Affordable program to assist more middle class borrowers. It's estimated that millions of US homeowners are upside down on their mortgages meaning that they owe more than they home is worth. This negative equity situation has not been addressed due to banks not incented to reduce the principal owed especially if the homeowner is keeping up on the mortgage.

Behavioral scientists are having a field day with this behavior and one professor states these borrowers are suffering from "norm asymmetry. According to a paper by University of Arizona professor Brent White, "Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This (article) suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences."

"Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations - and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse."

Writing in the NYT, Richard Thaler provides the disturbing potential conclusion on homeowners changing their viewpoint and strategically defaulting: "An important implication is that we could be facing another wave of foreclosures, spurred less by spells of unemployment and more by strategic thinking. Research shows that bankruptcies and foreclosures are “contagious.” People are less likely to think it’s immoral to walk away from their home if they know others who have done so. And if enough people do it, the stigma begins to erode." If enough people do it, the housing market collapses.

Fortunately if the US residential market continues to recover and prices continue to improve, the desire to walk away will decrease further as the potential recovery will keep borrowers paying. The key is to keep the market recovering. Job growth, low rates, and better access to liquidity will be all needed to keep the housing market recovering. If not, the scenario described by Thaler becomes more likely. And truly disturbing.

Source: Dave Rosenburg & Andrew Busch

A "Safe" Bond Market Bubble?

2010-01-18T21:32:00.003-05:00

Investors poured money into bonds and bond funds in late 2008 and all of last year in search of safety and higher returns. Now the bond advantage is shrinking as risks are rising.

In the late 1990s, it was tech stocks. In the mid-2000s, it was real estate. And today bonds are the investment people can't get enough of, unlikely as that might seem. Lured by bonds' perceived safety -- not to mention some spectacular deals, the kind unseen in decades, with 15% yields -- investors plowed $313 billion more into bond funds than they took out in the first 10 months of 2009.

Risk-free? Not really
Brokers, of course, get a commission on each bond they sell -- usually between 1% and 1.5%, often much higher than for a stock trade. And that adds up quickly: Based on 2009 data, fund companies stand to earn at least $2.6 billion more than they did in 2008 from sales of bond funds, whether bonds make or lose money.

Bonds, of course, are not the most straightforward of investments. Trying to explain how bond prices work -- they usually go down when interest rates go up, and vice versa - this inverse relationship - can exhaust even patient financial planners.

The math on bonds comes down to this; ask yourself one simple question: Will interest rates eventually rise from their current historical lows?

Consider: a one percentage point increase in 5-10 year rates can equate to a 10% drop in the value of your bonds.

Prices on even "safe" government bonds could fall 30% or more if interest rates soared over the next few years. Some corporate bonds could fall even more. Be ware.

For further see: MoneyCentral and WSJ.

BRIC and Emerging Markets in 2010

2010-01-11T17:56:00.001-05:00

A recent story in The Economist summarizes the resilient opportunity in global emerging markets, which is part of the reason why we believe so strongly in the long-term potential of this sector.

2009 was expected to be a very rough year for emerging markets, due to the reliance on exports to developed markets. And while some countries and regions did take it on the chin, the overall outcome was not nearly as bad as anticipated. The disaster of 1997-98 did not repeat itself.

A few of the key points from The Economist:

• Goldman Sachs estimates that the BRIC countries have been responsible for nearly half of global economic growth since 2007.

• In 2009 the stock markets in the largest emerging-market countries made up for all of their 2008 losses.

• The Institute for International Finance sees a doubling of capital inflows into emerging markets in 2010 to $672 billion.

• Belief in capitalism endured despite the weaker conditions. Nearly 90 percent of Chinese were “satisfied with national conditions” in 2009, compared to less than 40 percent of Americans, according to the Pew Global Attitude Project.

2010: OUTLOOK & Investment Themes

2010-01-07T09:55:00.001-05:00

Markets, Interest Rates & Commodity price CONSENSUS OPINIONS

Although financial forecasting can be a humbling profession even in the best of times, as we begin the dawn of a new decade we sought the greater wisdom of “the collective” – the brightest minds – those with proven track records.

We’ve perused several Wall Street, Bay Street, and global research documents and compiled many of the very best outlooks on what to expect for the coming year. The list of contributors includes a wide array of chief decision makers at top-rated firms; various analysts, chief economists, strategists, portfolio and mutual fund managers. We hope you find the conclusions helpful in mapping your successful 2010 and beyond.

send us an email at info@thinkinvest.ca for the complete report

A Decade of Happy Returns?

2010-01-03T12:22:00.000-05:00

One of the most important things that I have learned over the years is that statistics don’t lie. They are what they are, and tell us much.

As the decade concludes, the chart presents the price performance of the US stock market (Dow Jones Industrial average) for each decade since 1900. So how do the 10 years just passed rank? As today's chart illustrates, the performance of the Dow from the close of 1999 through 2009 was the second worst performance on record. Only the Great Depression decade of the 1930s was worse. The current decade also shares an unfortunate outcome with the 1930s in being a decade during which the Dow actually ended lower than where it started

Some statistical points of interest: (this spans 110 years of data)

• the average decade produced an average of 91.63% (simple return)
• the average annual return was 9.16% (simple return)
• the current decade was the second worst performance on record
• the twenty-year bull market of the 1980’s and 1990’s presented gains of 546% or an astounding average annual return of 27.3% (simple return)

So what does the next decade have in store? Have a read of my upcoming blog where I survey over two dozen of the brightest managers around the globe for their forecast.

Have a Happy New Year and a happy new decade.

Chart courtesy of The Chart of the Day.

Absent a 12.14% December return, this will be first losing decade for the S&P 500

2009-12-18T09:20:00.003-05:00

What’s in store for the next decade?

One interesting observation is that leaders in one decade usually don’t repeat in the following decade. This statement is clearer when viewed from the industry level. In the 1990s, five of the 10 top cumulative price returns came from IT. Yet in the following decade, not only did the entire sector sharply underperform the overall market, but all five IT industries that led the pack in the 1990s underperformed the market in the 2000s, falling from 43% for systems software to 87% for communications equipment. Conversely, nine of the bottom 10 in the 1990s went on to beat the S&P 500 in the 2000s. Not surprisingly, the one that didn’t was also an IT industry.

In addition, among the worst performers in the 1990s were industries in the energy and materials sectors — most notably gold and oil & gas exploration & production — which are now among the top performers this decade (Gold gained 112% in the 2000s and ranked 11th).

So what might this mean for the coming decade? When we finally emerge from this debt overhang — and the sooner we do this the better — the washout of prices and valuations may serve as a springboard for equity price advances for the remainder of the decade. If history is any guide (it is never gospel), the cyclical sectors will likely lead the recovery, while the defensive groups get pulled along for the ride.

What a Top Award-Winning Fund Manager is doing

2009-12-16T15:47:00.000-05:00

Canada's Equity Manager of the Year worries about the market impact of huge government deficits.

Eric Bushell, chief investment officer at Signature Global Advisors, says the global economy will face a crucial test in 2010 to determine if it can manage without extensive support by governments and central bankers.

"I am in the cautious camp," says Bushell, who is this year's winner of the Morningstar Equity Fund Manager of the Year award. This caution "plays into my theme of emphasizing those sectors in the equity market that are defensive and/or generate strong cash flow and dividends for investors."

On the health of the global economy, Bushell's call is that there will be an ongoing need for government stimulus. "Some key areas of weakness persist, for example the U.S. housing market."

At the same time, he says, there are growing concerns in the global debt market about the huge fiscal deficits that governments are running up to provide this stimulus. "This is rattling the sovereign debt market."

The good news for equity investors, says Bushell, is that central bankers are likely to keep short-term interest rates as low as possible for some time, given the uncertain economic outlook.

In the case of energy, Bushell is favouring exploration and production companies focusing on oil. "This commodity is a hedge against the possible resurgence of inflation over the longer term."

Is the Canadian Housing Market in a Bubble?

2009-12-14T19:26:00.000-05:00

It sure looks that way.

- A David A. Rosenberg, Chief Economist & Strategist SPECIAL REPORT

At a time when personal income is down around 1% over the past year, we have seen nationwide average home prices soar over 20% and last month hit a record high; as did home sales. In real terms, home price appreciation is back to where it was in 1989. Of course, back then, interest rates were far higher but then again, the economy was in the late stages of a phenomenal multi-year economic expansion, not making a transition from deep recession to nascent recovery.

We are in no position to make a claim that there is a high degree of speculation in residential real estate as there was during the “flipping” mania of the late 1980s. Be that as it may, housing has become a very crowded asset class in Canada, as measured by the homeownership rate, which at last count was estimated at 68.4% which is not only a full percentage point higher than the current U.S. ratio but is the highest it has been on this side of the border in nearly four decades.

While the Canadian economy is recovering, overall growth is still barely above zero as manufacturers grappled with excess inventories, a strong currency and a soft domestic demand picture south of the border. Employment conditions have improved, but are hardly that healthy, as we saw in the latest jobs report for November, where wages and the workweek were both down despite a constructive headline number (half of which were in the education sector, an inherently difficult area for statisticians to adequately seasonally adjust).

The bottom line is that even though home prices did come off a soft base from a year ago, so did most other economic indicators and they are still down from the depressed levels prevailing this time in 2008:

• Real GDP -3.2%

• Employment -1.5%

• Retail sales -3.3%

• Shipments -18.6%

• Orders -18.4%

• Exports -18.2%

• Personal income -0.8%

• But home prices are up 22%.

Go figure.

Upset you missed out on this year's mega stock market rally? Don't be.

2009-12-11T09:00:00.000-05:00

As many of my readers know, I follow closely some the brightest minds on the economy and the markets, those whom have excellent or at least good track records and past calls. As we approach the New Year, I’ll put together a survey of forecasts and predictions of a collection of the best minds.

One of the best forecasters of secular trends is John Mauldin.

John Mauldin of Millennium Wave Investments says long-term investors should ignore the temptation to get a piece of the action. In his view, there's only one metric to pay attention to: Valuations. And, for now, stocks are too rich for his blood -- "nosebleed" is the term he used.

That doesn't mean you should park your money in a CD or under a mattress. "There's lot of other things you can do while you're waiting" for valuations to come down, he says.

Among Mauldin's recommendations are fixed income and dividend yielding utility stocks. And for the more speculative at heart, he thinks buying real estate for rental income is a smart move now that housing prices have come down so dramatically.

"2010 will be a mediocre year for the economy, with GDP 1.0% at best"

"I'm in the double-dip recession camp," says John Mauldin of Millennium Wave Investments, who fears the Obama administration is "going to massively increase taxes…in 2011, in a weak economy. I think that's the absolutely dumbest thing we're going to do as a country."

Mauldin sees many parallels between today's economy and the malaise of the 1970s. With too much debt, slow growth and high unemployment, "it won't be fun" for the next few years, he says.

Nevertheless, Mauldin is actually optimistic about the future, which might shock some who've seen him in previous appearances on Tech Ticker.

In his e-newsletter, Thoughts from the Frontline, Mauldin envisions explosive growth in telecom, energy and medical sciences. Much the same way the PC revolution changed the way we communicate, work and live, so too will this next wave of innovation.

"It's going to be the most exciting time to ever be alive, in the next two decades" Mauldin predicts.

Climate Skeptics vs. Scientific Consensus

2009-12-10T08:49:00.002-05:00

I’m always looking for the most credible sources to write from and I especially appreciate a good depiction of information.

Today's letter is a follow up to my last post: "The Oil Sands and Al Gore: Blacklisted? - Oil Sands Threaten to Destroy the Planet”

The climate change debate seems to be heating up and we’re seeing more and more news for both sides of the camp.

This decade is on track to become the warmest since records began in 1850, and 2009 could rank among the top-five warmest years, the U.N. weather agency reported on the second day of a pivotal 192-nation climate conference.

What do you think is causing the warm-up? Is it human activity on the planet, or a natural cycle?

From the Wall Street Journal: “ Are Humans Responsible for Climate Change?”
http://online.wsj.com/article/SB126027972598681805.html

The Oil Sands and Al Gore: Blacklisted?

2009-12-07T16:56:00.000-05:00

“Oil Sands Threaten to Destroy the Planet”

In a recent conference call with infamous BMO Harris Bank economic and market strategist Donald Coxe, Don suggested a few interesting global investment phenomenons.

The most notable, of course, is one that concerns us right here at home – our beloved Alberta and Saskatchewan oil sands. In a somewhat recent speech, Al Gore (former VP of the USA), stated that the “Canadian Oil Sands threaten to destroy the planet”. This is of course because of their affect on global warming, by way of C02 emissions they emit in the production and usage of oil and gas.

The effect that these comments have had on global, mega-size institutional investors, the ones that manage large pension funds, endowment funds and the assets of charitable organizations, has been quite negative. If the story holds true, then these institutional investors have effectively “black-listed” the Oil Sands as an investment and therefore cannot be used as an option within the assets they mange, due to pressures for their clients.

So here we sit in Canada, a highly-liked nation by foreigners, a political-friendly and stable nation, sitting on one of the worlds largest natural resources that may need be avoided by some of the worlds largest money managers all thanks to Mr. Gore’s comments. Buy what if Mr. Gore’s scientific research and modelling on global warming doesn’t pan out nearly as bad as he suggests?

- A massive influx of new capital in to the Oil Sands?

Challenges to his theories are currently underway.

Is Profitability or Technicals Driving Equity Markets?

2009-12-06T21:33:00.000-05:00

More and more of the world’s best forecasters are singing the same tune recently. Should we take heed or keep with the crowd?
What will fuel the next leg up in the equity markets, after the 60% plus run over the past 8 months?

From The New York Times:
I’m not sure I agree with very much in this NYT article, describing the current cyclical bull rally within the longer secular bear market as A Rally That Needs More ‘E’.

“In the first leg of a bull market, when optimism and euphoria are ascendant, investors are willing to bet that the economy will improve and that corporate profit growth is just around the corner. This faith manifests itself not just in rising share prices, but also in rising price-to-earnings ratios.”

I do not believe that this is a) the first leg of a bull market; b) optimism or euphoria are ascendant; c) investors are betting that the economy is improving.

Rather, this has been a technically driven rally from very deeply oversold conditions. A 6 month, 5,000 point fall will set up the conditions that lead to a massive oversold bounce.

Indeed, the article notes that “the P/E ratio for companies in the Standard & Poor’s 500-stock index has soared 87 percent since this rally began on March 9.” That is not what a typical bull market looks like, and is more accurately described as the reaction to a prior collapse.

“Though conventional wisdom assumes that P/E ratios continue to grow throughout a bull market, that’s not always the case. In fact, it’s rarely the case.”

Well, it may be rare, but it was certainly the situation the 1982-2000 — the greatest bull market of our lifetimes. About 75% of the gains took place due to P/E expansion. The end of that rally (’98-’00) saw P/E rations expand dramatically, especially on the Nasdaq.

Source: NYT

Portfolio Managers Bullish, Consumer Confidence extreme low. What gives?

2009-11-29T21:07:00.000-05:00

Barron’s just did a survey. It revealed that the bullish sentiment on stocks is quite high and almost everyone hates US treasuries

"Whenever sentiment gets too strong in one way or the other, it is usually setting up the markets for a rally in the despised asset. "Mr. Market" (Ben Graham's Book) likes to do whatever he can to cause the most pain to the largest number of people."

"I am not predicting a near-term crash or imminent precipitous bear, although in this environment anything can happen. I am merely noting that there is an imbalance in the system. The longer this imbalance goes on, the more likely it is that it will end in tears. And the irony is that a recovering world economy could be the catalyst."

Proposed Changes to Tax-Free Savings Accounts (TFSA)

2009-11-27T17:33:00.001-05:00

Our Finance Minister is at it again.

The proposed changes aim to address deliberate over-contributions and penalize clients who intentionally abuse the Tax-Free Savings Accounts program. Changes are effective October 16th, 2009 and impact all transactions and withdrawals taking place after this date.

The proposals announced on October 15, 2009 by the Ministry of Finance contemplate a number of amendments to the tax framework applicable to TFSAs. These amendments seek to address deliberate over-contributions and penalize clients who intentionally abuse the use of TFSAs in tax-planning schemes.

For complete details, please see attached or visit our website under "what's New"

Another Foreign Bank buying Gold

2009-11-25T22:18:00.004-05:00

This is yet another bullish signal for gold, keeping with it's secular trend and good for Canada as a whole.

If the sources are accurate, according to the Financial Times, then Russia’s central bank, which without much fanfare (compared to India) purchased 15.5 tons of gold in October, recently indicated that it wants to add another 30 tons to its cache by year-end.

This is yet another example of a central bank with too much $USD looking to diversify its monetary base.

India says it will continue on its trend of last week. What happens when China has a drink out of this punch bowl?

Thanks in part to mounting US deficits and a weak US economy, the US dollar continues to trend lower. After all, a virtual collapse of the banking sector does have its consequences. For some perspective, today's chart illustrates the current trend in the US dollar (blue line) as well as that other world currency, gold (gray line). As today's chart illustrates, the performance of the US dollar has varied inversely to that of gold since the latter stages of the credit bubble. It is worth noting that the US dollar is currently testing resistance of its downtrend (red line) while gold makes record highs.

Contact us for a free copy of The Complete Guide to Investing in Gold: A Buyer's Guide

Sliding U.S. dollar pushes TSX higher

2009-11-23T20:52:00.001-05:00

The U.S. dollar continues its slide and gold moved further into record territory.

The dollar started falling after Federal Reserve official James Bullard said the central bank should continue to buy mortgage-backed securities after the program is supposed to expire in March. That would continue to keep interest rates low.

The U.S. dollar traded lower against six other major currencies. The Canadian dollar closed up 1.24 cents to 94.71 cents US in morning trading.

Commodities - which are priced in U.S. dollars also moved higher.

Gold soared to a record.

Crude oil - Canada's largest export - rose with the December contract adding 84 cents to settle at $77.56 US a barrel

Scotia Capital currency strategist Camilla Sutton told CBC News that central banks are moving away from the U.S. dollar as a reserve currency and into gold.

"We're in the midst of a long-term U.S. dollar weakening trend," she said. "We'll close next year at lower levels than we're at this year and the same is true for 2011," she predicted.

Sutton advised investors not to view the rise on the TSX too positively. Commodities will do well, but the higher dollar "plays havoc," particularly in Ontario where the manufacturers are "suffering dramatically."

She said a higher Canadian dollar would put more pressure on exporting companies here to invest in financial contracts that protect them from sudden changes in exchange rates or become more efficient by moving jobs offshore to countries where wages are lower.

The falling U.S. dollar has led in the last few months to a resurgence in what's called the carry trade. Traders sell U.S. dollars because American interest rates are low and buy the currencies of countries with high rates in an attempt to make money on the difference in yields.

That inflow of money into the strong currency economies, she said, in turn risks creating a buying frenzy in financial and housing markets similar to that which led to the downturn in the U.S. economy.

Sutton said the risks are "extremely high" that could lay "the groundwork for the next crisis a few years out."

Source: CBC News

Will the CRA follow the IRS to Foreign bank accounts?

2009-11-19T08:33:00.000-05:00

Behind closed doors, we are told, this has been a point of discussion. However, if attacking a simple offshore “bank account” is difficult, imagine the difficulty of cracking open a properly composed trust for Canadian beneficiaries.

14,700 Taxpayers Voluntarily Disclosed Foreign Accounts to IRS
By WebCPA
November 17, 2009

Over 14,700 holders of foreign bank accounts told the Internal Revenue Service about the existence of the accounts under a voluntary disclosure program.

IRS Commissioner Doug Shulman said the agency received voluntary disclosures about the presence of billions of dollars in assets in bank accounts located in 70 countries.

“To put it simply, this is a historic milestone for the nation’s hard-working taxpayers,” he said, according to the Associated Press.

The IRS had extended the program and offered to allow most of those who came forward voluntarily to avoid criminal prosecution for tax evasion. The agency has successfully prosecuted several UBS account holders who did not come forward voluntarily.

A Bull Market in A Weak Economy Doesn't Last

2009-11-06T13:15:00.001-05:00

With the consumer making up about two-thirds of the US economy, we need job growth to sustain this little increase in the economy and maintain current levels of stock market valuations.

The contrasts are too stark to ignore. Stocks are supercharging ahead, while unemployment continues to increase (as of this post at a 26 year high), home prices are stalled and likely to dip further. Emerging markets are eating the developed world's lunch. Asset prices in general are rising far above the economic reality that would rationally support them.

Main Street Americans are struggling to pay their bills, while Wall Street executives are getting record bonuses. Two Americas; trust me it's more than just a campaign slogan. It's the cold hard reality.

The dichotomy continues. Stocks, gold and oil all continue their amazing climb as the dollar descends to new lows.

Russian stocks are up 136% this year, and Brazil is up 117%, far outpacing the meager gains here and in that sick dog of an economy, Japan.

China and India have been kind to investors of late. You can even earn 8.75% on Brazilian bonds while you've lost 16% to date this year holding dollars. That's the most important dynamic in global markets.

Look at the dichotomy another way. The FHA is handing out mortgages on the basis of a 3.5% down payment of the home's value. That's leverage approaching 30-to-1, the kind that brought down Bear Stearns and Lehman Brothers.

Meanwhile, 15 million people are competing for 2.5 million job openings. The amount of time people are looking for a job has hit a new record high. Debt to GDP is still high. Trillions in household wealth have been lost. A bull market in a feeble recovery cannot last forever.

(Source: Forbes)

The Asians are coming! the Asians are coming!

2009-10-26T19:31:00.001-04:00

Cash-rich Asian countries who's governments can see the resource need of their countries well in to the next couple of decades will continue to scoop up cheap Canadian resource companies.

Canada's oil patch & mines tempt Asian giants (Thomson Reuters)

* More deals seen as Asian economies grow
* Squeezed Canadian balance sheets make for bid targets
* State-owned firms can take long-term view

By Jeffrey Jones and Pav Jordan
Canada's energy and mining sectors are riding a wave of acquisitions by Asian companies that are flush with cash and hungry for resources to fuel rapidly expanding economies, a trend not expected to let up soon.

Deals such as Korea National Oil Corp's C$1.8 billion ($1.7 billion) bid for Harvest Energy Trust on Thursday are aided by difficulties some Canadian companies have in funding their operations because of the financial crisis.

"We've been saying that the sectors which are the most susceptible to such M&A are the resource and energy sectors, and I still believe this to be the case," said Alain Auclair, head of investment banking for UBS Securities Canada.

"You still see the Asian countries with access to capital or strong balance sheets that can deploy cash quickly to seize opportunities.

"I think it's a trend that we're going to keep seeing, especially for companies who might be under pressure from a balance sheet perspective."

That is the case with debt-heavy Harvest, known for its Western Canadian oil and gas operations and a refinery on the East Coast, one it could not afford to expand by itself.
Last week, China's No. 2 nickel miner, Jilin Jien Nickel Industry <600432.SS>, and Canada's Goldbrook Ventures offered to buy mining developer Canadian Royalties Inc for nearly C$200 million to help feed China's appetite for metals.

The number of such deals will only increase as China, Korea and other Asian nations seek to own the production of resources such as nickel or oil, instead of having to buy them on international markets.

South Korea, for example, aims to pump 300,000 barrels of oil a day by 2012 as it expands its manufacturing economy. It is currently the world's fifth-largest oil importer.

In August, state-owned PetroChina paid C$1.9 billion for a 60 percent stake in two planned oil sands projects owned by Athabasca Oil Corp. That was China's largest Canadian oil acquisition to date.

The deal helped fuel the shares of small developers such as Opti Canada Inc and UTS Energy Corp , as investors wagered they might be the next to be absorbed by the Asian wave. Both are minority partners in large projects in Western Canada.

CASH IS KING
At a time when publicly traded businesses are struggling under the weight of a global economic crisis, state-owned oil companies can deploy cash for multibillion-dollar projects without having to seek shareholder approval.

"They couldn't care less about the balance of this year, or next year, even the year after," FirstEnergy Capital Corp analyst William Lacey said. "They're looking at the next 10-20 years, and the internal demands and they are going to meet those demands."

Bob Schulz, a professor of strategy and global management at the University of Calgary's Haskayne School of Business, said big, but not blockbuster deals will continue to be the order of the day in Canada's oil patch.

"Big, positive and probably in C$1 billion to C$2 billion bite-size chunks," said Schulz.

Those transactions are large enough to give new companies a a foothold in long-term projects like oil sands developments, but not of a scale to cause alarm in the United States, Canada's largest energy and minerals export market, Schulz said.

Canada has been coveted as a storehouse for natural resources for hundreds of years, and investors in oil, gas and minerals enjoy minimal political risk.
In energy circles, it is best known for Alberta's oil sands, the largest deposits of crude outside the Middle East.

Developing the unconventional oil using mining or underground steam techniques is costly, and numerous small players have been culled to make way for major companies with deep pockets.

Harvest is not an oil sands developer, but KNOC made a foray into that part of the business in 2006 by acquiring an oil sands property from Newmont Mining Corp .

Analysts say buyers will get a boost from legal changes in Canada that force most Canadian income trusts to convert to traditional corporations by 2011, when their favored tax status terminates.

The changes will force many, sometimes highly leveraged, trusts to either become corporations, merge or get squeezed financially, making many into attractive targets.

Source: Thomson Reuters

The Canadian Dollar; a recipe for success

2009-10-20T09:09:00.000-04:00

I love it when a plan comes together.

Nearly two years ago we wrote about the Canadian Dollar being on a long-term ascent when compared to the US Dollar and most other developed nation’s currencies. We talked about the fundamentals transpiring around the world that would push our loonie towards the $2.00 CAD per greenback. The fundamental uptrend in the Canadian dollar is likely to remain intact, notwithstanding the prospect that a technically oversold greenback may enjoy at nice countertrend rally at some point in the near-term. But that is what we refer to as a bump along the long road up.

We all know the story about the BRIC, and especially about the growth in the world’s two most populous countries: China and India, “Chindia”. As they grow, and the rest of the world does with it.

The world needs energy – oil, gas and uranium: Canada has energy to go.
The world needs food – wheat, fertilizer and nutrients to grow, Canada’s got food.
The world needs base metals – copper, nickel, moly and more - they can be found in abundance in Canada.
The world needs a safe, reliable place to do business, one that will honour it’s contracts - Canada seems to be a pretty safe bet.
The world likes to do business with others it likes; Canada seems to be a pretty friendly place, having good relations with nearly all other nations.

What a recipe for success!

A good time to look for a retirement home?

2009-10-15T08:51:00.000-04:00

Canadian Seniors' Residences: average vacancy rate of 9.2%

The Canada Mortgage and Housing Corporation conducted a recent survey revealing an average vacancy rate of 9.2% in seniors' residences across Canada. The survey polled 2464 Canadian seniors' residences to gather vacancy rates, rental costs, and the types of housing available to older adults throughout the country.

Bob Dugan, the Canada Mortgage and Housing Corporation's chief economist says that the anticipation of a spike in the demand for seniors' housing because of our aging population, has spawned the new construction of many new residences which in turn, has led to a much higher average vacancy rate in the interim.

The 2464 residences surveyed inhabited 176,845 seniors, and of this number, 81% of them lived alone. Most rental prices per month were inclusive of all meals and the average national rental price for a bachelor unit was $1774 per month. Prices varied from residence to residence given the difference in services and amenities offered at each location from a high in Ontario of $2519 per month, to a low in Quebec of $1271 per month.

Not to much surprise, the survey found that rental rates were significantly higher in Canadian seniors' residences offering heavy care - as opposed to those housing units with a more independent style of living and less intensive care.

Source: seniorservicedirectory

Bonds or Stocks: a rare occurance

2009-10-09T09:23:00.003-04:00

When designing a portfolio of investments, one usually chooses amongst different asset classes so as to diversify – with the intent of an overall increased rate of return and reduced risk. This is a form of asset allocation.

The investment choices usually range from cash and money markets, bonds and bond funds, stocks, and stock funds, commodities and gold. In almost any given time frame, history has shown us, that we very rarely see these asset classes move in tandem – all going up or all decreasing – at the same time. That is the whole point of asset allocation, that whist one asset class does well in a given environment, another will likely falter, hence diversification.

So what asset classes are doing well in the current environment?

More specifically, normally bonds and stocks move inversely, commodities and bonds move inversely, and commodities and equities (at least in the U.S.A. and less so in Canada) tend to move inversely and yet, all these asset classes are rallying at the same time. This makes for one very strange market setting and at some point, with 200 years of history as a guide; something is going to have to give.

Next shoe to drop

2009-10-07T14:39:00.000-04:00

Many gurus have been forecasting that the next serious problem that the North American economies will face will be the deterioration – and possible outright collapse – of the commercial property and REIT sector. Many have been hopeful of a steady and continued economic recovery so that this commercial smattering may not actually happen. Today, in the WSJ, we see signs that things are not getting better.

OFFICE REAL ESTATE STILL IN DEEP TROUBLE
The U.S. office sector vacancy rate rose to a five-year high of 13.7% in Q3 from 10.5% a year ago, and as is the case now in the apartment sector, rental rates are deflating and deflating fast. Net effective rents nationwide have fallen 8.5% YoY, which is the steepest deflation rate since 1995.

Billionaire Math: Nine Children + No Will = One Legal Mess

2009-10-06T10:03:00.000-04:00

Nearly one-half of Canadian adults do not have an estate plan which includes a will. As a financial planner, I can't stress enough of it's importance in a complete financial plan. Here is one interesting, real-life story...

Lesson to billionaires: get a will. Especially if you have fathered nine children with mistresses.

That sounds blindingly obvious, of course. But a nasty estate fight breaking out in New Jersey demonstrates that even multibillionaires can sometimes neglect the most basic of wealth-management issues.

The fight concerns the fortune of the late Wang Yung-ching, a plastics magnate who lived in new Jersey and Taiwan and was widely known in business circles as the “god of management.” His wealth was once estimated at $7 billion. Yet he didn’t leave a will when he died last year at age 91.

Oh, and he fathered at least nine children–with women other than his wife.
One question is whether the court battle will take place in New Jersey or Taiwan. A New Jersey Superior Court Judge ruled this week that Mr. Wang’s estate will have to open up certain financial records to figure out how much it holds in New Jersey.

Mr. Wang’s wife of 70 years, Wang Yueh Lan, who lives in Taiwan, is his legal widow. His oldest son, the 58-year-old Winston Wong, says he has power of attorney, granted by Ms. Wang, who, by the way, isn’t Mr. Wong’s mom.

Rest assured, this is just the beginning. Just sorting out how to divide up the estate among the widow and the nine children will be a difficult process. Image what will happen if any of the various mistresses/mothers emerge seeking funds.

And we thought Michael Jackson’s estate was complicated.

Posted by Robert Frank

Good for Canada?

2009-09-30T14:27:00.001-04:00

China is boosting spending on all kinds of natural resources - oil and mining acquisitions by at least half this year to take advantage of lower valuations after prices slumped. The nation’s sovereign wealth fund this week spent $2.75 billion on commodities companies and approximately $60 billion in the past year.

“China sees it as ‘We’re going to use the resources for several decades, so therefore our pricing expectations are different,’” Goodyear said. There “will be resource needs ahead, and they will want access to these resources in the years ahead.”

Chinese companies will step up the pace of overseas mergers and acquisitions in a “new wave” of deals.

This bodes very well for Canadian natural resource companies, and, in turn, for Canada as a whole. It goes along with my much repeated theme that "Canada has the goods that the rest of the growing world needs". Canada should be able to ride this secular wave that should last for at least another decade.

Another point of interest here is the simple little fact that one by one, Canada's mining companies are disappearing - either by way of merger with another or by take-over. With fewer companies to choose from, prices should...

Copper prices have doubled and oil has jumped 54 percent this year as China boosted imports to fuel its stimulus spending needs.

http://www.bloomberg.com/apps/news?pid=20602013&sid=ayAyMtVos3tQ

Smaller, Regional Banks tell tale

2009-09-24T10:22:00.000-04:00

Ninety-four banks have failed so far this year. 94 now gone and the pace of bankruptcies have not yet slowed. This, in my mind, gives us a good indication of the true current health of the US economy.

FDIC weighs extraordinary steps, including loans from banks, to shore up insurance fund

WASHINGTON (AP) -- The Federal Deposit Insurance Corp. is weighing several costly -- and never-before-used -- options as it struggles to shore up the dwindling fund that insures bank deposits.

Ninety-four banks have failed so far this year. Hundreds more are expected to fall in coming years largely because of souring loans for commercial real estate.

Bank failures since the financial crisis struck have drained the fund to its lowest level since 1992, at the peak of the savings-and-loan crisis. The fund insures deposit bank accounts of up to $250,000.

"Lots of banks are going to require more capital, and (Bair is) trying to rob from the rich and give to the poor,"

The agency is considering borrowing billions from healthy banks. Alternatively, it may impose a special fee on the banking industry.

Each option carries risk: Drawing money from healthy banks would take dollars out of the private sector, making that money unavailable for investment in the weak economy. But charging the whole industry a fee to replenish the fund could push weaker banks toward failure.

http://finance.yahoo.com/news/FDIC-weighs-extraordinary-apf-3266069115.html?x=0

If we had only listened to Shania

2009-09-21T12:29:00.003-04:00

She got it right.
A few years ago Shania came out with a song (lyrics below) about the excesses of spending, making money and greed that created the financial collapse we are all a part of. It's like she had a crystal ball, one that many did not heed to. Mortgages, credit card excesses – she sang about it all!

Check out the song at:

www.youtube.com/watch?v=0SAdIveCzXc

Artist: Twain Shania
Song: Ka-Ching

We live in a greedy little world
That teaches every little boy and girl
To earn as much as they can possibly
Then turn around and
Spend it foolishly
We've created us a credit card mess
We spend the money we don't possess
Our religion is to go and blow it all
So it's shoppin' every Sunday at the mall

All we ever want is more
A lot more than we had before
So take me to the nearest store

Can you hear it ring
It makes you wanna sing
It's such a beautiful thing--Ka-ching!
Lots of diamond rings
The happiness it brings
You'll live like a king
With lots of money and things

When you're broke go and get a loan
Take out another mortgage on your home
Consolidate so you can afford
To go and spend some more when you get bored

All we ever want is more
A lot more than we had before
So take me to the nearest store

Can you hear it ring
It makes you wanna sing
It's such a beautiful thing--Ka-ching!
Lots of diamond rings
The happiness it brings
You'll live like a king
With lots of money and things

Let's swing
Dig deeper in your pocket
Oh, yeah, ha
Come on I know you've got it
Dig deeper in your wallet
Oh

All we ever want is more
A lot more than we had before
So take me to the nearest store

Can you hear it ring
It makes you wanna sing
It's such a beautiful thing--Ka-ching!
Lots of diamond rings
The happiness it brings
You'll live like a king
With lots of money and things

Can you hear it ring
It makes you wanna sing
You'll live like a king
With lots of money and things
Ka-ching!

Prince Harry's inheritance

2009-09-18T10:30:00.004-04:00

Princess "D" legacy lives on...

England’s Prince Harry turned 25 this week when he’ll be entitled to the part of the inheritance left to him by his mother Princess Diana of Wales, writes Laura Elston in the Independent.

Princess Diana had an estate of £21 million ($35 million CAD$), but more than £8 million was paid in inheritance tax, leaving almost £13 million ($20 million CAD$) split between Harry and his brother, Prince William.

One of the more unusual aspects of the current economic downturn is the steady erosion in jobs. While employment always lags the economy and markets in times of rebound, the erosion of jobs in this cycle is like nothing seen in the post-war period. Until jobs show recovery, a major housing recovery will not occur, and deficits will rise.

Of significant concern is that fact that past recessions saw employment recovery in a rebounding manufacturing sector. Those jobs are gone, and aren't coming back.

Keep in mind these observations concern the US and not necessarily Canada. However, an anemic US consumer will have an impact on the goods and services Canada sells to our neighbor.

The most important take-away from this observation is the simple little fact that the US consumer accounts for some 80% of the country's economy. So with a high unemployment rate and no wage increase - the writing is on the wall for the foreseeable future.

To save or to spend: a conundrum or simply a matter of sentiment?

2009-09-14T11:29:00.000-04:00

In Canada the “savings” trend for the average person has been on a decline for decades. There was a time when the previous generation, and the ones before that – would save some 5 to 10% of their family’s net income. Great for thinking ahead – planning for retirement or just saving for a rainy day. But this prudent habit nearly all but ended in recent years until the financial meltdown and great recession of 2008-09.

Now the fear is that savings rates will escalate at a rapid pace – swinging the pendulum too far to the other side – and this excessive savings means that there will be less spending. Less consumer spending, of course, has a substantial negative impact of the economy. Therein lies the conundrum.

"The recession is confusing a lot of consumers who on the one hand are told to save money for a rainy day but on the other are encouraged to spend to help boost the economy."

It's a conundrum economists call "the paradox of thrift," which means that too much savings can lead to an overall drop in consumption and threaten a nation's economic growth.

"Saving is good, but at the same time ... consumption is good," said CIBC World Markets economist Krishen Rangasamy.

Rangasamy said savings rates typically fall when the economy is strong and rise when it's weak. Consumption rates run in the opposite directions.

When times are good, Rangasamy said people feel comfortable with the rising price of their homes and stock portfolios and spend more.

"They think 'Why do I need to save when I am getting richer?"' he said.
On the flip side, when a recession hits, there's a change in mindset.

"That encourages people to save for the future," he said, which in turn weighs on consumption, which in turn contributes to a weaker economy and higher job losses.

Rangasamy said the key to a solid economy is a balance of both saving and spending.

"Zero per cent savings is not good and neither is 40 per cent," he said
Canadians' savings rate was 4.5 per cent in the April-June quarter, according to Statistics Canada. That is up from 3.4 per cent for same time last year and well above the 1.9 per cent savings rate in the second quarter of 2007.

The savings rate was 6.1 per cent in 2001, when the last economic downturn hit. That's the highest it has been since 1996.

Consumer confusion: Save more, or spend more to help Canada's economy
By Brenda Bouw, The Canadian Press

Seniors flock to reverse mortgages?

2009-09-10T10:48:00.001-04:00

We don’t have to look very far to see - or to hear - stories about how many retirees and pre-retirees are looking for alternatives to replace some lost retirement income.

In the US - the new economic stimulus bill signed into law recently by President Obama raises the loan limits for reverse mortgages, which will expand the amount of home equity that seniors can either turn into retirement income or use to offset investment losses.

The number of 60-yearolds in Canada will double in the next 25 years. Will this increase in demand by seniors carry over to changes in the reverse mortgage rules here in Canada?

A reverse mortgage is simply an advance on the value of your home that accumulates interest. The accumulated debt does not need to be paid off until you die, sell the home or move out of the house. If you qualify, and are over age 62, you can get up to 40% of the value of your home and you can do whatever you want with the money. So a $500,000 home qualifies for at most a $200,000 loan.

The average CHIP client is 73 and stays in his or her home 10 to 12 years.

http://www.canada.com/nationalpost/columnists/story.html?id=51521fbf-2e25-436a-ad47-fe3dc593b67e

Market Summary: Sept. 9, 2009

2009-09-09T20:50:00.000-04:00

Banks, golds pull TSX lower; N.Y. up as Fed says economy stabilizing

By Malcolm Morrison, The Canadian Press

TORONTO - The Toronto stock market broke a four-session winning streak Wednesday, pressured by bank stocks while gold stocks fell as bullion backed off from the US$1,000 an ounce level.

The S&P/TSX composite index closed down 105.13 points at 11,000.17, more than wiping out a 88-point gain Tuesday that took the TSX to its highest close this year.

The financial sector lost 1.73 per cent, continuing a deterioration in the sector since the major banks reported earnings last month.

"I think what you're seeing basically is just general profit-taking from some of these financials," said Eric Brass, equity analyst at MFC Global Investment Management.

"Some of these stocks are up over 100 per cent since their lows, so I think people are just taking their money off the table to a degree."
The Canadian dollar moved lower following three days of gains which pushed the loonie more than two U.S. cents higher, moving down 0.13 of a cent to 92.51 cents U.S.

The US dollar fell against other major currencies and gold — which is typically bought as a safe haven asset — at times topped $1,000 an ounce before settling just short of that mark.

Tom Phillips, president of TS Phillips Investments in Oklahoma City, said investors are buying gold because they are nervous about the economy and rising deficits but don't want to miss more gains in the stock market. The S&P 500 index has jumped 50 percent from a 12-year low in early March.

Oil prices pushed higher for a second straight day Wednesday on continued weakening of the U.S. dollar and as investors awaited the outcome of an OPEC meeting that is expected to result in no change in production levels. Benchmark crude for October delivery climbed $1.15 to US$72.25 a barrel on the New York Mercantile Exchange.

The latest move up comes a day before the Bank of Canada makes its scheduled announcement on interest rates.

The central bank is widely expected to leave rates unchanged at 0.25 per cent, but is expected to address the sharply appreciating currency, following up previous comments that the high loonie could derail an economic recovery.

Financial literacy: Old vs. Young

2009-09-09T20:03:00.000-04:00

Old dogs, new tricks

Financial literacy is a hot topic these days. But teaching it is usually something aimed at kids and young adults. This Wall Street Journal article makes a compelling case that the people who actually need to take personal finance 101 classes are the elderly.

That may strike you as odd. After all, the older we get the more experience we have. Presumably that includes knowing how to handle money.

True enough, but what differentiates people in their 20s and their 70s when it comes to personal finance is that people in their 20s have time on their side. They can rack up giant credit card debt, learn from their mistakes, and slowly pay the bills off. They can make a lousy stock buy and not lose any sleep over their retirement–still 40-odd years away.

Seniors and aging boomers, on the other hand, don’t have the luxury of time to make mistakes. Also, seniors have more wealth accumulated so a mistake can cost them tens of thousands of dollars, if not their life savings. No wonder scam artists and the Ponzi set tend to target people who are 50-plus. They actually have money to lose. A lot of it, in fact.

If we’re going to teach kids in school how to handle money, we might also offer a couple of refresher courses on money, investing and (most importantly) preserving wealth to seniors as well.

From MoneySense Blog, Aug 20, 2009
By: Rob Gerlsbeck

Quote of the Day

"Most people have the will to win, few have the will to prepare to win."

Bobby Knight