Last weeks news that Dubai World defaulted on a significant portion of its debt initially caused concerns over financial system stress and the markets reacted negatively. It is expected that debt refinancings will require reorganizations and equity injections for the next three years or so. The debt restructuring by Dubai World, which appears unable to refinance a large bond maturity next month, is precisely the sort of activity that we expect to see.
Dubai was the poster child for extravagant debt financing and conspicuous consumption – with palm leaf islands and towers to the sky – and its default should not be huge surprise.
U.S. financial institutions are not big players in the Gulf. Asian, European, local banks and insurers were the major lenders and are the ones most exposed to the risk. Overall, the debt refinancing problem in Dubai is a positive development for the U.S. since it will likely dampen blind and fearless enthusiasm for emerging markets.
A recovery in the U.S. depends primarily on interest rates staying low for an extended period of time to support the affordability of housing. But low interest rates were at risk of causing an asset price bubble in emerging markets. In some emerging markets, foreign speculative capital rushed in and caused overheated conditions. Policy makers needed and wanted a disruption in speculative flows.
Underlying these risk-seeking inflows were outflows from America. Associated U.S. dollar weakness was fueling inflation expectations as evidenced by the rising price of gold and other commodities.
We believe the real risk would be to have no shock occur to break this cycle. No shock would result in accelerated U.S. dollar declines, commodity increases and potentially cause a premature rate hike in the U.S. If American consumers were faced with rising commodity prices, particularly oil, and rising interest rates, they would be in trouble. The default of Dubai World buys more time for the U.S. Federal Reserve to heal the housing market without putting pressure on the dollar, interest rates or causing increases in commodities.
These short-term shocks and corrections to the market will help to keep speculation in check and build a longer, slower, and likely more sustainable recovery.
Source: Eric Bushell, James Dutkiewicz, Drummond Brodeur, Signature Global Advisors
Monday, November 30, 2009
Monday, August 24, 2009
The US Savings Dilema
The U.S. economy has, historically, been driven by its robust consumer base. Its 300 million citizens spent some US$10.1 trillion on personal consumption in 2008. This represented a full 70.1% of America’s entire gross domestic product and was, by far, the single largest component of GDP. However, more recent figures paint a different picture. The reversal in the economy has accompanied a retrenchment in consumer spending. As the origins of the current recession can be traced to over-leveraged individuals and corporations, a move to shore up balance sheets in the boardrooms and at home has been an appropriate response.
Watching the numbers
With the U.S. as the main trigger for the global recession, all eyes have been on it for clear signs of recovery. The U.S. Federal Reserve provided its most bullish assessment of the economy in more than a year, and suggested that a recovery may have already begun. At the conclusion of its two-day policy meeting in August, the Fed said that “economic activity is levelling out.” The commentary signals that the U.S. economy has halted the longest period of decline since the Great Depression. However, the Fed cautioned that economic activity is likely to remain weak in the near term. Accordingly, the press release also stated that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
Source: U.S. Bureau of Labor Statistics
Not surprisingly, recent economic data has been receiving considerable attention and the numbers are mixed. The July data for employment provided the best non-farm payrolls figures (a loss of 247,000 jobs) seen since August of last year. As well, unemployment edged lower for the first time in 15 months. Still, it is important to keep in mind that these numbers were still negative. Job losses continued to mount and unemployment remained high. Retail sales figures painted a similar picture and were a disappointment to the market. Annual growth remained stuck in negative territory at -7.9% in July in spite of significant success for the “cash for clunkers” program, which propelled auto sales to a 2.4% monthly advance. The U.S. economy has now been in retreat since the fourth quarter of 2007 and hopes of a consumer-led recovery still appear on hold. It is reasonable to expect that for the next while, the economic numbers will be mixed as the U.S. heads out of the recession. As a result, mixed responses from the world’s capital markets should also be anticipated. Nevertheless, there is room for optimism.
The latest data from the U.S. Bureau of Economic Analysis revealed a dramatic increase in household saving. In June, the savings rate stood at 4.6%, down from May’s 15-year high of 6.2%, but still well above the low levels posted between 2005 and 2007 and the near-zero levels recorded in early 2008. Meanwhile, the dollar value of these savings soared to an average US$566 billion (annualized) in the second quarter, the highest value seen since these records began in 1959. Clearly, the lessons of the nation's recent behavior have come home to roost during this recession. At the same time, the fiscal sobriety has also come with the cost of reduced economic activity. What is unclear right now is how much balance sheet repair households will continue to make before returning to more normal spending patterns.
The Canadian economy is less dependent on consumers, with individual spending representing a smaller 55.7% of total GDP. Another key reason that a return to growth is anticipated sooner is that the same degree of balance sheet rebuilding seen in the U.S. is not needed in Canada. Without the tax incentive of mortgage interest deductibility, Canadians have not been as aggressive as their U.S. counterparts when borrowing. While low by historical standards, Canada’s savings rate fell only to an average of 3.7% in 2008. Statistics Canada’s estimates that the savings rate rebounded in the first quarter to 4.7%. More conservative borrowing and lending practices have set the stage for a more rapid return to growth in Canada.
Eventually, consumers will be satisfied with their new levels of savings and more typical spending patterns will return. In the interim, investors have continued to allow cash to build up. Despite the gains seen so far, they continue to question long-held beliefs with respect to market efficiency. Fewer are willing to be passive and buy the index as their portfolios end up holding all companies, both good and bad. This is particularly true as markets experience more sideways trading, as the global economy struggles towards improving growth and the markets continue to reprice the surviving companies. Looking forward, evidence of a resumption of stronger consumer spending will eventually help draw more of this parked cash off of the
sidelines. History has shown, however, that trying to time this return of cash to the markets is fraught with risks. Taking the time to develop a financial plan with the help of a professional advisor and making regular contributions through an investment program can ensure that market upswings are captured.
Source: Richard J. Wylie, CFA, Vice President, Investment Strategy, Assante Wealth Management
Watching the numbers
With the U.S. as the main trigger for the global recession, all eyes have been on it for clear signs of recovery. The U.S. Federal Reserve provided its most bullish assessment of the economy in more than a year, and suggested that a recovery may have already begun. At the conclusion of its two-day policy meeting in August, the Fed said that “economic activity is levelling out.” The commentary signals that the U.S. economy has halted the longest period of decline since the Great Depression. However, the Fed cautioned that economic activity is likely to remain weak in the near term. Accordingly, the press release also stated that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
Source: U.S. Bureau of Labor Statistics
Not surprisingly, recent economic data has been receiving considerable attention and the numbers are mixed. The July data for employment provided the best non-farm payrolls figures (a loss of 247,000 jobs) seen since August of last year. As well, unemployment edged lower for the first time in 15 months. Still, it is important to keep in mind that these numbers were still negative. Job losses continued to mount and unemployment remained high. Retail sales figures painted a similar picture and were a disappointment to the market. Annual growth remained stuck in negative territory at -7.9% in July in spite of significant success for the “cash for clunkers” program, which propelled auto sales to a 2.4% monthly advance. The U.S. economy has now been in retreat since the fourth quarter of 2007 and hopes of a consumer-led recovery still appear on hold. It is reasonable to expect that for the next while, the economic numbers will be mixed as the U.S. heads out of the recession. As a result, mixed responses from the world’s capital markets should also be anticipated. Nevertheless, there is room for optimism.
The latest data from the U.S. Bureau of Economic Analysis revealed a dramatic increase in household saving. In June, the savings rate stood at 4.6%, down from May’s 15-year high of 6.2%, but still well above the low levels posted between 2005 and 2007 and the near-zero levels recorded in early 2008. Meanwhile, the dollar value of these savings soared to an average US$566 billion (annualized) in the second quarter, the highest value seen since these records began in 1959. Clearly, the lessons of the nation's recent behavior have come home to roost during this recession. At the same time, the fiscal sobriety has also come with the cost of reduced economic activity. What is unclear right now is how much balance sheet repair households will continue to make before returning to more normal spending patterns.
The Canadian economy is less dependent on consumers, with individual spending representing a smaller 55.7% of total GDP. Another key reason that a return to growth is anticipated sooner is that the same degree of balance sheet rebuilding seen in the U.S. is not needed in Canada. Without the tax incentive of mortgage interest deductibility, Canadians have not been as aggressive as their U.S. counterparts when borrowing. While low by historical standards, Canada’s savings rate fell only to an average of 3.7% in 2008. Statistics Canada’s estimates that the savings rate rebounded in the first quarter to 4.7%. More conservative borrowing and lending practices have set the stage for a more rapid return to growth in Canada.
Eventually, consumers will be satisfied with their new levels of savings and more typical spending patterns will return. In the interim, investors have continued to allow cash to build up. Despite the gains seen so far, they continue to question long-held beliefs with respect to market efficiency. Fewer are willing to be passive and buy the index as their portfolios end up holding all companies, both good and bad. This is particularly true as markets experience more sideways trading, as the global economy struggles towards improving growth and the markets continue to reprice the surviving companies. Looking forward, evidence of a resumption of stronger consumer spending will eventually help draw more of this parked cash off of the
sidelines. History has shown, however, that trying to time this return of cash to the markets is fraught with risks. Taking the time to develop a financial plan with the help of a professional advisor and making regular contributions through an investment program can ensure that market upswings are captured.
Source: Richard J. Wylie, CFA, Vice President, Investment Strategy, Assante Wealth Management
Tuesday, March 24, 2009
Global Markets React to Geithner Bank Plan and Suncor Takeover
Investors were greeted with some significant news on Monday morning concerning a merger and the Obama administration's "Toxic Asset" plan. Both news items were met with positive reactions from global equity markets. The S&P/TSX index climbed 5.32%, the Dow Jones 6.84% and the S&P500 7.08%. The broader S&P 500 closed above 800 points - a key technical indicator that analysts said had represented a significant barrier to gains.
Suncor Energy Inc. and Petro-Canada released a joint statement early Monday morning announcing the details of an all-stock deal that will see the companies form an entity with a combined market capitalization of $43.3-billion. The new corporation would continue to operate and trade under the Suncor name.
According to the companies, Petro-Canada shareholders are to receive 1.28 shares of the merged company for every Petro-Canada share they hold, while Suncor stockholders would receive a share in the new venture for each Suncor share they own. The companies say the deal represents a 25 per cent premium on the 30-day weighted average of Petro-Canada shares. The deal values Petro-Canada at $19.18 billion based on Friday's closing prices on the Toronto Stock Exchange. Existing Suncor shareholders would hold 60 per cent of the new company, while Petro-Canada shareholders would hold 40 per cent.
One challenge to the deal will be the Petro-Canada Public Participation Act, which states no person or company can own or control more than 20 per cent of the company's voting shares and the head office must remain in Calgary. Suncor could potentially get around the act by lobbying the government to change the law stressing the takeover is coming from a domestic company. The Act was created to prevent foreign majority ownership. Suncor could also structure the deal as a reverse takeover when Petro-Canada, legally speaking, would be taking over Suncor.
The Obama administration unveiled a program on Monday that may generate as much a $1 trillion in financing to buy illiquid assets using $75 billion to $100 billion from the U.S. bank rescue fund. The effort relies on a Federal Reserve partnership with private investors to buy the securities and FDIC guarantees to entice buyers. Tresury Sectretary Timothy Geithner said Monday the government will invest alongside private parties in funds that will buy troubled loans and securities from banks. The government will also lend the buyers money.
By providing a source of cheap, abundant financing, officials are hoping to bring together buyers and sellers in the troubled-asset marketplace. That market has been at a stalemate for months, with banks unwilling to accept the distressed prices vulture investors have been dangling.
The Treasury proposes a hypothetical transaction in which a bank would seek to sell a pool of residential mortgages with $100 in face value through an auction process and receives a bid of $84 for them. The FDIC would then provide cheap financing to the winning buyer. In essence $7 will come from the private sector which in an auction process will help determine a price for these mortgages, $7 will come from the federal government and the remaining $84 from a government backed loan. Markets reacted favorably as the concerns over the credit situation with the banks seems to have been addressed - at the very least there is a plan in place. Geithner had announced the plan about a month ago but with no specifics and as we all know the markets want to see details and does not like surprises. Time will tell if this plan will put us on the path to recovery.
Source: The Globe and Mail, CNN Money.com, Wall Steeet Journal, Bloomberg
Suncor Energy Inc. and Petro-Canada released a joint statement early Monday morning announcing the details of an all-stock deal that will see the companies form an entity with a combined market capitalization of $43.3-billion. The new corporation would continue to operate and trade under the Suncor name.
According to the companies, Petro-Canada shareholders are to receive 1.28 shares of the merged company for every Petro-Canada share they hold, while Suncor stockholders would receive a share in the new venture for each Suncor share they own. The companies say the deal represents a 25 per cent premium on the 30-day weighted average of Petro-Canada shares. The deal values Petro-Canada at $19.18 billion based on Friday's closing prices on the Toronto Stock Exchange. Existing Suncor shareholders would hold 60 per cent of the new company, while Petro-Canada shareholders would hold 40 per cent.
One challenge to the deal will be the Petro-Canada Public Participation Act, which states no person or company can own or control more than 20 per cent of the company's voting shares and the head office must remain in Calgary. Suncor could potentially get around the act by lobbying the government to change the law stressing the takeover is coming from a domestic company. The Act was created to prevent foreign majority ownership. Suncor could also structure the deal as a reverse takeover when Petro-Canada, legally speaking, would be taking over Suncor.
The Obama administration unveiled a program on Monday that may generate as much a $1 trillion in financing to buy illiquid assets using $75 billion to $100 billion from the U.S. bank rescue fund. The effort relies on a Federal Reserve partnership with private investors to buy the securities and FDIC guarantees to entice buyers. Tresury Sectretary Timothy Geithner said Monday the government will invest alongside private parties in funds that will buy troubled loans and securities from banks. The government will also lend the buyers money.
By providing a source of cheap, abundant financing, officials are hoping to bring together buyers and sellers in the troubled-asset marketplace. That market has been at a stalemate for months, with banks unwilling to accept the distressed prices vulture investors have been dangling.
The Treasury proposes a hypothetical transaction in which a bank would seek to sell a pool of residential mortgages with $100 in face value through an auction process and receives a bid of $84 for them. The FDIC would then provide cheap financing to the winning buyer. In essence $7 will come from the private sector which in an auction process will help determine a price for these mortgages, $7 will come from the federal government and the remaining $84 from a government backed loan. Markets reacted favorably as the concerns over the credit situation with the banks seems to have been addressed - at the very least there is a plan in place. Geithner had announced the plan about a month ago but with no specifics and as we all know the markets want to see details and does not like surprises. Time will tell if this plan will put us on the path to recovery.
Source: The Globe and Mail, CNN Money.com, Wall Steeet Journal, Bloomberg
Tuesday, March 3, 2009
March 3 2009 Bank of Canada Press Release
Bank of Canada lowers overnight rate target by 1/2 percentage point to 1/2 per cent
OTTAWA – The Bank of Canada today announced that it is lowering its target for the overnight rate by one-half of a percentage point to 1/2 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 3/4 per cent.
The outlook for the global economy has continued to deteriorate since the Bank's January Monetary Policy Report Update, with weaker-than-expected activity in major economies. The nature of the U.S. recession, with very weak auto and housing sectors, is particularly challenging for Canada.
Stabilization of the global financial system remains a precondition for the global and Canadian economic recoveries. The timely implementation of ambitious plans in some major countries to address toxic assets and recapitalize financial institutions will be critical in this regard.
National accounts data for the fourth quarter of 2008 and other indicators of aggregate demand point to a sharper decline in Canadian economic activity and a larger output gap through the first half of 2009 than projected in January. Potential delays in stabilizing the global financial system, along with larger-than-anticipated confidence and wealth effects on domestic demand, could mean that the output gap will not begin to close until early 2010. These factors imply a slightly lower profile for core inflation than was projected in the January MPRU.
The effects of the recent aggressive monetary and fiscal policy actions in Canada and other major economies will begin to be felt in the second half of this year and will build through 2010. Once the global financial system stabilizes and global growth recovers, the underlying strength of the Canadian economy and financial sector should ensure a more rapid recovery in Canada than in most other industrialized economies.
The Bank's decision to lower its policy rate by 50 basis points today brings the cumulative monetary policy easing to 400 basis points since December 2007. Consistent with returning total CPI inflation to 2 per cent, the target for the overnight rate can be expected to remain at this level or lower at least until there are clear signs that excess supply in the economy is being taken up.
Given the low level of the target for the overnight rate, the Bank is refining the approach it would take to provide additional monetary stimulus, if required, through credit and quantitative easing. In its April Monetary Policy Report, the Bank will outline a framework for the possible use of such measures.
The Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve its 2 per cent inflation target over the medium term.
Information note:
The next scheduled date for announcing the overnight rate target is 21 April 2009. A full update of the Bank's outlook for the economy and inflation, including risks to the projection, will be published in the Monetary Policy Report on 23 April 2009.
Source: The Bank of Canada
OTTAWA – The Bank of Canada today announced that it is lowering its target for the overnight rate by one-half of a percentage point to 1/2 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 3/4 per cent.
The outlook for the global economy has continued to deteriorate since the Bank's January Monetary Policy Report Update, with weaker-than-expected activity in major economies. The nature of the U.S. recession, with very weak auto and housing sectors, is particularly challenging for Canada.
Stabilization of the global financial system remains a precondition for the global and Canadian economic recoveries. The timely implementation of ambitious plans in some major countries to address toxic assets and recapitalize financial institutions will be critical in this regard.
National accounts data for the fourth quarter of 2008 and other indicators of aggregate demand point to a sharper decline in Canadian economic activity and a larger output gap through the first half of 2009 than projected in January. Potential delays in stabilizing the global financial system, along with larger-than-anticipated confidence and wealth effects on domestic demand, could mean that the output gap will not begin to close until early 2010. These factors imply a slightly lower profile for core inflation than was projected in the January MPRU.
The effects of the recent aggressive monetary and fiscal policy actions in Canada and other major economies will begin to be felt in the second half of this year and will build through 2010. Once the global financial system stabilizes and global growth recovers, the underlying strength of the Canadian economy and financial sector should ensure a more rapid recovery in Canada than in most other industrialized economies.
The Bank's decision to lower its policy rate by 50 basis points today brings the cumulative monetary policy easing to 400 basis points since December 2007. Consistent with returning total CPI inflation to 2 per cent, the target for the overnight rate can be expected to remain at this level or lower at least until there are clear signs that excess supply in the economy is being taken up.
Given the low level of the target for the overnight rate, the Bank is refining the approach it would take to provide additional monetary stimulus, if required, through credit and quantitative easing. In its April Monetary Policy Report, the Bank will outline a framework for the possible use of such measures.
The Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve its 2 per cent inflation target over the medium term.
Information note:
The next scheduled date for announcing the overnight rate target is 21 April 2009. A full update of the Bank's outlook for the economy and inflation, including risks to the projection, will be published in the Monetary Policy Report on 23 April 2009.
Source: The Bank of Canada
Putting It All In Perspective
Yesterday's business headlines were not for the faint of heart. AIG announced a $62billion loss - the largest in US history, Canada's GDP contracted at an annual rate of 3.4% in the 4th quarter of 2008 - the worst since 1991, the Dow is at it's lowest level in 12 years and the TSX at 2003 levels.
The ongoing global recession has taken a significant toll on investor confidence. Economic news from all the world’s major centres continues to paint a grim picture of corporate profitability. Consumers give every appearance of continuing their retrenchment as spending declines and savings rates rise. Recent employment reports from both Canada and the U.S. provided the weakest figures in a generation. Not surprisingly, these kinds of headlines focus attention away from the longer term as market participants dwell on reports of the most recent developments. Nevertheless, by looking beyond today’s market environment and paying attention to the bigger picture, investors can gain a useful frame of reference to gauge future prospects.
When digesting all this economic news, we need to be able to take a step back and distinguish the Stock Market Cycle from the Economic Cycle. The stock market is a leading indicator meaning it signals the direction the economy is headed. Most economic statistics are either co-incident indicators (signal what is happening currently) or lagging indicators (confirm what has already happened). Based on historical figures, the stock market traditionally moves 6-9 months ahead of the economy. For example, the S&P 500 peaked October, 9th, 2008 at 1,565 and June 30th, 2008 was the last positive growth quarter for US GDP (the beginning of the recession). This is close to a 9 month period. Historically , the average recession has lasted 15 months. Most agree that this is a more severe recession than normal so even if it lasts into 20-24 months this would mean the US would emerge from recession in the first or second quarter of 2010. Backing up 9 months would suggest possible market recovery beginning in the 2nd or 3rd quarter of 2009. Make no mistake, over the next 12 months we will continue to see a lot of bad ecomomic news in the areas of employment, bankruptcies, housing, etc.
The key challenge at this juncture is maintaining that longer-term view. This is particularly true when the financial markets appear to be at their worst. After surviving the market maelstrom of 2008, investors can be forgiven for having remained pessimistic entering the first quarter of 2009. Many had hoped that the move higher, seen on the world’s stock markets very late in 2008, would continue in the new year. So far, this has not been the case. Still, one positive trend has emerged: equity market volatility has begun to ease. While the light at the end of the tunnel appears dim and a full recovery remains elusive, the reduction in extreme levels of volatility will help establish the basis for more orderly equity markets moving forward.
Volatile trading is a normal reaction to an unexpected event in politics or the economy. The S&P 500 Index experienced trading days with a 5% or greater trading range1 on 41 instances between January 1, 1946 and September 14, 2008. Occasionally, these volatile days were clustered in groups. Until recently, the period of most frequent occurrence (nine trading days in total) appeared in the wake of Black Monday in October 1987. Nevertheless, over this entire 62-year period, on average one could expect to see this level of volatility during one trading day every 18 months. However, no one would describe the period between September 15, 2008 (when Lehman Brothers filed for bankruptcy due to the fallout from the subprime mortgage crisis) and December 14, 2008 as a typical market episode. During this three-month period,
there were 64 trading days of which 29 saw a 5% or greater trading range. A once-every-18-months occurrence had become an every-other-day event.
Canada' GDP contraction in the 4th quarter was a quicker and deeper decent into recession than the 1980's or 1990's when GDP fell less than 2%. With record low interest rates (as of 10am AST, the bank cut the rate to 0.5%) and hundreds of billions in government spending around the globe, Canada's recession may be be shortened. A few key factors remain, however, the ability of the stimulus package announced in the budget to offset the effect of the US recession on Canada and how quickly the US emerges from recession. One positive factor in the US is that the collapse of the housing market is stablizing with inventories leveling off, fewer residential construction is being completed and housing is becoming more affordable.
Taking a long-term market view is difficult, particularly when most of the recent news is dire. Still, history has shown that equity markets do recover and provide returns that give the best opportunity to grow wealth. We continue to reposition client portfolios to maximize the potential to fully participate in the market recovery. If you would like to discuss your portfolio specifically give me a call or send an email.
Chris
Source: The Globe and Mail, United Financial Corporation
The ongoing global recession has taken a significant toll on investor confidence. Economic news from all the world’s major centres continues to paint a grim picture of corporate profitability. Consumers give every appearance of continuing their retrenchment as spending declines and savings rates rise. Recent employment reports from both Canada and the U.S. provided the weakest figures in a generation. Not surprisingly, these kinds of headlines focus attention away from the longer term as market participants dwell on reports of the most recent developments. Nevertheless, by looking beyond today’s market environment and paying attention to the bigger picture, investors can gain a useful frame of reference to gauge future prospects.
When digesting all this economic news, we need to be able to take a step back and distinguish the Stock Market Cycle from the Economic Cycle. The stock market is a leading indicator meaning it signals the direction the economy is headed. Most economic statistics are either co-incident indicators (signal what is happening currently) or lagging indicators (confirm what has already happened). Based on historical figures, the stock market traditionally moves 6-9 months ahead of the economy. For example, the S&P 500 peaked October, 9th, 2008 at 1,565 and June 30th, 2008 was the last positive growth quarter for US GDP (the beginning of the recession). This is close to a 9 month period. Historically , the average recession has lasted 15 months. Most agree that this is a more severe recession than normal so even if it lasts into 20-24 months this would mean the US would emerge from recession in the first or second quarter of 2010. Backing up 9 months would suggest possible market recovery beginning in the 2nd or 3rd quarter of 2009. Make no mistake, over the next 12 months we will continue to see a lot of bad ecomomic news in the areas of employment, bankruptcies, housing, etc.
The key challenge at this juncture is maintaining that longer-term view. This is particularly true when the financial markets appear to be at their worst. After surviving the market maelstrom of 2008, investors can be forgiven for having remained pessimistic entering the first quarter of 2009. Many had hoped that the move higher, seen on the world’s stock markets very late in 2008, would continue in the new year. So far, this has not been the case. Still, one positive trend has emerged: equity market volatility has begun to ease. While the light at the end of the tunnel appears dim and a full recovery remains elusive, the reduction in extreme levels of volatility will help establish the basis for more orderly equity markets moving forward.
Volatile trading is a normal reaction to an unexpected event in politics or the economy. The S&P 500 Index experienced trading days with a 5% or greater trading range1 on 41 instances between January 1, 1946 and September 14, 2008. Occasionally, these volatile days were clustered in groups. Until recently, the period of most frequent occurrence (nine trading days in total) appeared in the wake of Black Monday in October 1987. Nevertheless, over this entire 62-year period, on average one could expect to see this level of volatility during one trading day every 18 months. However, no one would describe the period between September 15, 2008 (when Lehman Brothers filed for bankruptcy due to the fallout from the subprime mortgage crisis) and December 14, 2008 as a typical market episode. During this three-month period,
there were 64 trading days of which 29 saw a 5% or greater trading range. A once-every-18-months occurrence had become an every-other-day event.
Canada' GDP contraction in the 4th quarter was a quicker and deeper decent into recession than the 1980's or 1990's when GDP fell less than 2%. With record low interest rates (as of 10am AST, the bank cut the rate to 0.5%) and hundreds of billions in government spending around the globe, Canada's recession may be be shortened. A few key factors remain, however, the ability of the stimulus package announced in the budget to offset the effect of the US recession on Canada and how quickly the US emerges from recession. One positive factor in the US is that the collapse of the housing market is stablizing with inventories leveling off, fewer residential construction is being completed and housing is becoming more affordable.
Taking a long-term market view is difficult, particularly when most of the recent news is dire. Still, history has shown that equity markets do recover and provide returns that give the best opportunity to grow wealth. We continue to reposition client portfolios to maximize the potential to fully participate in the market recovery. If you would like to discuss your portfolio specifically give me a call or send an email.
Chris
Source: The Globe and Mail, United Financial Corporation
Wednesday, January 28, 2009
2009 Federal Budget and your Financial Plan
As you know, Finance Minister Jim Flaherty delivered his federal budget on Tuesday in Ottawa. The budget is aimed at stimulating the Canadian economy in reaction to a deepending global recession and the lack of availability of credit in many parts of the world (though much less so in Canada)
This budget has a few items that could affect your financial plan and present additional opportunities. In case you haven't had a chance to review the media coverage, I thought you would appreciate a quick overview of the federal budget.
For small business owners: The government plans to increase the amount of small business income eligible for a reduced 11% federal tax rate from the current $400,000 to $500,000 retroactive to January 1, 2009.
RRSPs, RRIFs and estate planning: There will income tax provisions to recognize a decrease in the value of RRSP or RRIF investments that occur after the annuitant's death and before they are distributed to beneficiaries.
RRIF withdrawal reductions: There will be a one-time 25% reduction in the mandatory withdrawals of RRIFs for the 2008 taxation year.
Senior age credit increase: The government increased the age credit amount by $1,000 for a total of $6,408.
Home renovation tax credit: Planning to upgrade or retrofit your home? This new credit, effective between January 28, 2009 and February 1, 2010, allows you to claim 15% on the portion of eligible expenditures exceeding $1,000, but not more than $10,000, for a maximum tax credit of $1,350. To encourage home ownership and home construction, the finance minister proposes to increase the amount first-time homebuyers can withdraw from their RRSPs to purchase or build a home — from $20,000 to $25,000. It also proposes to establish a first-time homebuyer's tax credit which could amount to $750 worth of savings on closing costs.
Tax Bracket Changes: Changes to the personal income tax brackets are among the more notable developments announced in Budget 2009. As of January 1, 2009, the two lowest income tax brackets will be raised 7.5% above 2008 limits to $40,726 and $81,452 respectively. The basic personal amount will also be increased to $10,320 in 2009, up from $9,600 in 2008.
I hope you find these highlights useful. I will be posting a more detailed budget summary on my website in the next few days, http://www.assante.com/advisors/cball/ If you'd like to discuss these and other federal budget initiatives and how they affect your financial plan, please don't hesitate to contact me.
Chris
Source: United Financial Corporation, Government of Canada
This budget has a few items that could affect your financial plan and present additional opportunities. In case you haven't had a chance to review the media coverage, I thought you would appreciate a quick overview of the federal budget.
For small business owners: The government plans to increase the amount of small business income eligible for a reduced 11% federal tax rate from the current $400,000 to $500,000 retroactive to January 1, 2009.
RRSPs, RRIFs and estate planning: There will income tax provisions to recognize a decrease in the value of RRSP or RRIF investments that occur after the annuitant's death and before they are distributed to beneficiaries.
RRIF withdrawal reductions: There will be a one-time 25% reduction in the mandatory withdrawals of RRIFs for the 2008 taxation year.
Senior age credit increase: The government increased the age credit amount by $1,000 for a total of $6,408.
Home renovation tax credit: Planning to upgrade or retrofit your home? This new credit, effective between January 28, 2009 and February 1, 2010, allows you to claim 15% on the portion of eligible expenditures exceeding $1,000, but not more than $10,000, for a maximum tax credit of $1,350. To encourage home ownership and home construction, the finance minister proposes to increase the amount first-time homebuyers can withdraw from their RRSPs to purchase or build a home — from $20,000 to $25,000. It also proposes to establish a first-time homebuyer's tax credit which could amount to $750 worth of savings on closing costs.
Tax Bracket Changes: Changes to the personal income tax brackets are among the more notable developments announced in Budget 2009. As of January 1, 2009, the two lowest income tax brackets will be raised 7.5% above 2008 limits to $40,726 and $81,452 respectively. The basic personal amount will also be increased to $10,320 in 2009, up from $9,600 in 2008.
I hope you find these highlights useful. I will be posting a more detailed budget summary on my website in the next few days, http://www.assante.com/advisors/cball/ If you'd like to discuss these and other federal budget initiatives and how they affect your financial plan, please don't hesitate to contact me.
Chris
Source: United Financial Corporation, Government of Canada
Tuesday, January 13, 2009
2008 Review
As you know, 2008 was a very difficult year for investors. Global equity markets declined sharply, following wave after wave of negative business and economic news.
Most global stock markets were down by more than 30% for the year. The U.S. stock market, represented by the S&P 500 Index, had its worst year since 1937. In Canada, it’s difficult to believe that our stock market hit a record high of 15,073 points on June 18, 2008, thanks to strong commodity prices pushing up the shares of Canadian resource companies. From that point to the end of the year, the index slipped by more than 6,000 points or 40%, resulting in a decline of 33% for the year as a whole.
Virtually all market watchers were stunned by the extent of these market declines and by how quickly they occurred. The problems began over a year ago as the U.S. housing market began to turn down and homeowners began to default on their mortgages – especially “sub-prime” mortgages. These mortgages were used to back billions of dollars’ worth of securities held by banks, hedge funds and a multitude of other financial institutions and investors.
The crisis gradually deepened throughout 2008, reaching a climax in September, as the losses led to the failure of a number of major U.S. and European financial institutions. The failures created a new crisis of confidence in the financial system, freezing credit markets and compounding concerns about the impact on the broader economy. This set the stage for the dramatic drop in commodity prices and global stock markets from September to November.
Certainly, this has been a painful period. So, where do we go from here?
In spite of all the bad news, there are many reasons to remain optimistic about the future. Here are just a few. Governments and central banks have taken co-ordinated and substantive action to support the financial system, increase the flow of credit and stimulate the economy. Inflation remains low. Technological innovation and development continue to drive productivity gains. And, we are seeing continued growth in emerging markets such as China and India, as these countries become more integrated into the world economy and millions of their citizens advance to the middle class.
You and I made a decision to invest a portion of your portfolio in equities to share in the growth achieved by companies and the economy. Over the long term, equities have provided superior returns when compared to bonds and cash – though not without short-term volatility. It’s important to remember that the rationale for investing in equities has not changed.
Despite today’s gloomy news, history has shown time and again that the recession will end, corporate profits will grow, employment will increase, and the stock market will recover and go on to new highs. Though no one can say for certain when the bottom will be reached, it makes sense to stay invested.
In fact, some of the world’s best-known and most successful investors, including Warren Buffet, see value in the market and are putting new money into stocks now. Investors who sell their equity holdings now not only lock in their losses, but risk missing the inevitable turnaround. In Mr. Buffet’s words, “I haven’t the faintest idea as to whether stocks will be higher or lower a month – or a year – from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”
Consider 1990, when there was a collapse in real estate prices, a severe recession, the failure of hundreds of U.S. savings and loan companies, and the threat of war looming in the Persian Gulf. However, the stock market turned around months before the recession ended and went on to post an increase of over 400% in the following bull market.
At difficult times like these, it is only natural to ask questions about your investments. I would be pleased to meet with you to discuss your portfolio and whether any adjustments are required for your investment plan.
Source: United Financial Corporation
Most global stock markets were down by more than 30% for the year. The U.S. stock market, represented by the S&P 500 Index, had its worst year since 1937. In Canada, it’s difficult to believe that our stock market hit a record high of 15,073 points on June 18, 2008, thanks to strong commodity prices pushing up the shares of Canadian resource companies. From that point to the end of the year, the index slipped by more than 6,000 points or 40%, resulting in a decline of 33% for the year as a whole.
Virtually all market watchers were stunned by the extent of these market declines and by how quickly they occurred. The problems began over a year ago as the U.S. housing market began to turn down and homeowners began to default on their mortgages – especially “sub-prime” mortgages. These mortgages were used to back billions of dollars’ worth of securities held by banks, hedge funds and a multitude of other financial institutions and investors.
The crisis gradually deepened throughout 2008, reaching a climax in September, as the losses led to the failure of a number of major U.S. and European financial institutions. The failures created a new crisis of confidence in the financial system, freezing credit markets and compounding concerns about the impact on the broader economy. This set the stage for the dramatic drop in commodity prices and global stock markets from September to November.
Certainly, this has been a painful period. So, where do we go from here?
In spite of all the bad news, there are many reasons to remain optimistic about the future. Here are just a few. Governments and central banks have taken co-ordinated and substantive action to support the financial system, increase the flow of credit and stimulate the economy. Inflation remains low. Technological innovation and development continue to drive productivity gains. And, we are seeing continued growth in emerging markets such as China and India, as these countries become more integrated into the world economy and millions of their citizens advance to the middle class.
You and I made a decision to invest a portion of your portfolio in equities to share in the growth achieved by companies and the economy. Over the long term, equities have provided superior returns when compared to bonds and cash – though not without short-term volatility. It’s important to remember that the rationale for investing in equities has not changed.
Despite today’s gloomy news, history has shown time and again that the recession will end, corporate profits will grow, employment will increase, and the stock market will recover and go on to new highs. Though no one can say for certain when the bottom will be reached, it makes sense to stay invested.
In fact, some of the world’s best-known and most successful investors, including Warren Buffet, see value in the market and are putting new money into stocks now. Investors who sell their equity holdings now not only lock in their losses, but risk missing the inevitable turnaround. In Mr. Buffet’s words, “I haven’t the faintest idea as to whether stocks will be higher or lower a month – or a year – from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”
Consider 1990, when there was a collapse in real estate prices, a severe recession, the failure of hundreds of U.S. savings and loan companies, and the threat of war looming in the Persian Gulf. However, the stock market turned around months before the recession ended and went on to post an increase of over 400% in the following bull market.
At difficult times like these, it is only natural to ask questions about your investments. I would be pleased to meet with you to discuss your portfolio and whether any adjustments are required for your investment plan.
Source: United Financial Corporation
Subscribe to:
Posts (Atom)