Making Cents of the News

Just the Facts - Closer Look at the US Debt Situation and Problems in Europe

2011-07-22T09:41:00.001-07:00

Many of you have no doubt seen the doom and gloom that is being professed on the evening news, newspapers and on the internet almost every day. The old adage is “bad news sells”, and boy, is it selling these days. So far, in 2011 the world stock markets have been volatile to say the least. With the Japanese earthquake, the debt crisis in Europe and the debt ceiling in the US, one would think the markets have plummeted this year according to the media. In fact, the S&P 500 is slightly up year to date and the TSX is down approximately 1%.

The objective of my blog today is to provide you with some facts around the situation in the US and in Europe. First, in the US the second round of quantitative easing (QE2 which is an increase in the money supply so public debt can be serviced by the government) ended at the end of June. The current debt ceiling in the US is $14.3 trillion. The US has reached this and requires this be raised on order to service upcoming maturing government bonds. The deadline to raise this ceiling is August 2. Currently, the US is in a presidential election cycle so there is a tremendous amount of political posturing going on between the Democrats and Republicans. Both are trying to increase their favor with the voting public. The Democrats are suggesting a combination of modest tax increases and cuts to government spending while the Republicans do not want to consider any tax increases. While both parties negotiate a deal, I am of the opinion there is very little chance that a compromise deal will not get done. The alternative to the US not increasing the debt ceiling is not in anyone’s best interest. If the world’s largest economy defaults on its debt this will result in a downgrade to their debt rating (the rating institutions have threatened this to hopefully motivate the decision makers) which will increase their cost of borrowing and reduce the value of all the US debt currently being held around the world – the largest holder being the Chinese.

The Republicans passed a motion through Congress that will most likely be defeated in the Senate and President Obama has promised a veto which called for a cut and cap in government spending. It would allow the debt ceiling to be raised by $2.4 trillion as long as Congress approves a balanced budget amendment to the Constitution. As recently as yesterday, a bi-partisan Senate proposal has been circulated with a $3.7 trillion debt reduction plan. At the end of the day a deal will be struck.

The US is currently attempting to grow themselves out of their deficit by keeping their dollar artificially low (helps manufacturers export their products) and keeping interest rates low so consumers can continue to service their debt and get their balance sheets in order as well as encourage spending with homes, etc. Once a new president is elected and during the first year of office in 2013, this will be the opportune time to begin increasing taxes – perhaps a Value Added Tax, etc as currently the political will is not there to increase taxes.

If we focus on some of the economic statistics that have come out over the recent weeks, it is clear that recovery continues albeit at a slow pace. In the second quarter the US experienced a normal mid-cycle slowdown. The balance sheets of the banks are in a lot better position than they were 2-3 years ago (same with corporations and individuals). The expectation for hiring is good and credit is available. Loan charge offs and delinquency rates are down indicating improved consumer health. The unemployment rate in the US continues to go down albeit at a slow pace. If we look back 50 years on previous recessions, employment has taken longer to improve in each successive recession due to technology and continued increase productivity. If we expand our view globally, we saw 4.3% in annualized GDP growth in the second quarter of 2011 (World Economic Outlook, April 2010).

THE EUROPEAN SITUATION

Now turning our attention to Greece. Early in 2010, Greece’s inability to service their debt became evident to the rest of the world and the threat of the country defaulting on their debt was a real possibility. Thanks to the intervention of the International Monetary Fund and the European Central Bank a “line of credit” was established called the European Financial Stability Facility. As long as countries introduce measures to address the public debt problems than this facility is available to them. Greece, Ireland and Portugal have already accessed this facility. What it does is allow these countries refinance their debt in controlled, transparent way. To put things in context, the PIIGS countries (Portugal, Ireland, Italy, Greece and Spain) represent only 4% of world GDP (International Monetary Fund Estimate 2010 and CIA Fact Book 2010) and so long as Germany and France remain strong economic powers (as they are today), the threat of one or more of these countries defaulting and pulling the world into a global recession is remote. The other positive point is that the EU has taken ownership over the issue and convened various meetings and summits (one this week) to ensure there is a clear consensus among all policy makers. European leaders negotiated a Greek aid package yesterday during an emergency summit in Brussels. Banks will voluntarily agree to write down the value of their Greek securities by 21% as part of a bond buyback and exchange program. Europe’s 90 biggest banks hold about 98 billion Euros of Greek debt. This package will require the banks to contribute 54 billion Euros. (Bloomberg)

The most recent source of market volatility was the passing of austerity measures in Greece to ensure they would receive funding from the IMF and European Union. While these measures were met with public protests and political brinksmanship, they were passed in the end. While this is the first on many measures, I am sure there will be protests again at a later date. A summary of the Greek austerity measures include:

Tax Increases
· Solidarity Levy – applied to all citizens – amount dependent on income
· Lower Income Tax Free Threshold
· Sales Tax – VAT increased from 13% to 23%
· Wealth Taxes – yachts, pools, property

Spending Cuts
· Public Sector Wages decreased by 15%
· Public Sector Wage Bill – cut 150,000 public sector jobs
· Social Benefits Reforms – raise retirement age to 65
· Spending Cuts
· Social Contribution – cut down on evasion
· Public Investment – decrease spending on infrastructure

Privatization of Government Companies

They say that the biggest issues contributing to Greece’s debt problems is corruption resulting in poor tax enforcement (it was estimated that around 25% taxes are not being paid in Greece), corruption does not go along with transparency. What is important to keep in mind that with both the situation in Europe and the US, is that all the information is known and priced into the markets. It is the unknown or unforeseen events that trigger short term market volatility. It is important to ensure your portfolio continues to remain well diversified and actively managed. As well, maintaining an asset mix that matches your time horizon, risk tolerance and stage of life.

Cheers,
Chris

Commentary on the Situation in Japan

2011-03-15T05:25:00.000-07:00

The recent earthquake and subsequent tsunami in Japan has naturally caught the world’s attention. Our thoughts are with the people of Japan during this time of great human suffering.

One of our management teams, Signature Global Advisors, has provided me with their view on how this natural disaster will impact the Japanese economy. Below is a brief commentary from Drummond Brodeur, Portfolio Manager from our Signature team who specializes in Asian securities. Drummond also discusses their funds’ exposure to Japanese securities.

At this time, many uncertainties remain and the key risks of further aftershocks and nuclear accidents are impossible to quantify.

In terms of our portfolio exposure, all of our funds were significantly underweight in Japan compared to their respective benchmarks. Beyond our global and international funds, no fund has a direct exposure greater than 1%.

We do expect there to be several short-term implications as markets asses the scale of damage and policy responses. From a macro perspective, there will clearly be a near-term hit to Japan’s fledging economic recovery, as many factories and facilities close for varying lengths of time to asses and repair any damage. In the medium-term, there will be an offset as significant disaster recovery and infrastructure rebuilding commences. The earthquake and tsunami hit to the north of Tokyo while the core of Japan’s industrial heartland is to the south. Overall, most of Japan’s key global industries and international trade infrastructure remains operational. The region covered by the disaster is estimated to account for about 6% of Japan’s GDP.

The Japanese government will be required to fund significant rebuild programs and given their massive debt and deficit, how these get funded is unclear. Certainly, some will come from various reserves designed for such purposes, but it will also likely require additional borrowing, which could potentially be funded through further easing by the Bank of Japan (BOJ) or quantitative easing as the U.S. calls it. I have argued for many years that with structural deflation and a strong Yen, the BOJ should be printing more money regardless and such a tragedy may be a catalyst for more aggressive policy. While the Japanese government may have a massive debt, we cannot forget that Japan as a nation has massive net savings and continues to run a current account surplus, so policy options do exist. As for the currency, initial strength is expected as funds are repatriated by companies and financial institutions. Think of insurance companies facing significant claims needing to sell and repatriate some of their overseas holdings. By later in the year, I would expect any Yen strength to reverse as weaker economic numbers and low rates weigh on the currency, particularly if the U.S. recovery continues to gain traction. The ultimate pace and direction for the currency will be dependent on Japan’s policy decisions over the coming months, which we will continue to monitor.

One area of particular concern is the damage to nuclear facilities. While the extent of damage and radiation leakage remains unclear, at the very least, one and possibly two plants have been rendered permanently inoperable while several more have been shut down to asses any potential damage and will be offline for months. In the near-term, Japan will have to rely on a significant increase in gas, oil and coal fired power generation, thereby increasing demand for oil, gas and coal imports. One likely consequence of the unfolding nuclear plant accidents will also be an increased aversion globally to expanding nuclear power generation, particularly in the West.

Several refineries have also been closed, so we can expect a decline in crude imports and an increase in refined product demand, leading to an overall tightening in these markets. For the electronic components and auto industries, there will be some specific disruptions in supply chains, but for the most part, these industries are globally diversified and supply will be sourced from alternative sources and existing inventories, thereby also tightening up several of these markets as well.

We were lucky to have a very limited exposure to the areas directly impacted by this disaster. All of our portfolio managers and analysts continue to look into the potential implications in their sectors and holdings, and will interpret information as it becomes available. In short, the unpredictable nature of such events only underscores the need for well diversified portfolios, across regions, sectors and asset classes, where appropriate, such as those managed by the Signature Team.

Drummond Brodeur, Signature Global Advisors

A Glass Half Full

2011-03-03T05:29:00.000-08:00

Please see below some excerpts from a commentary on the situation in Europe by Richard J Wylie, Vice President Investment Strategy for Assante Wealth Management. In his comments he highlights the reforms that have taken place by the European Union to help Greece, Ireland, Portugal and Spain restructure their debt in an orderly manner.

Recent European history seems to be full of financial crises. In the fall of 2008, Iceland’s three major commercial banks collapsed, and that was followed by more turmoil on the continent. However, even though Europe has seen plenty of shocks, signs of improvement have appeared. As with most industrialized nations, the major European economies have found that global growth, driven by the developing world, has translated into stronger exports. In addition, the region-leading German economy has seen considerable improvement since the end of the recession.

Debt and deficit

Most of the headline-grabbing news in Europe has been with respect to what is now being called the “sovereign debt crisis.” As the original creation of the Eurozone raised the interconnectivity of those countries that use the euro, so too did it increase the risk of contagion spreading if financial problems were to emerge. Greece’s borrowing problems became a headline issue in early 2010. Worries quickly spread to include nations that would eventually be branded the “PIIGS” – Portugal, Ireland, Italy, Greece and Spain. After the introduction of the euro in Greece in 2001, the country was able to borrow at lower interest rates than had previously been possible under the nation’s former currency, the drachma. However, new
borrowing at lower interest rates was not used to retire higher interest rate debt: Greece’s overallindebtedness continued to climb, along with heavy social spending.

Debts and deficits among the so-called PIIGS were significant economic issues in 2010. The global financial crisis that began in 2008 and the subsequent widespread recession had a particularly large effect on Greece. Real gross domestic product (GDP) declined by 2.0% in 2009 and the International Monetary Fund expects the Greek economy will have contracted by an additional 4.0% during 2010. Eventually, government austerity measures and a European Union loan arrangement helped to restore some stability to the Greek government’s finances. Similarly, Ireland was on the receiving end of a €67.5 billion bailout later in 2010. As worries over the plight of Portugal arose in the wake of the Irish crisis, a framework for assisting member nations emerged. To shore up longer-term confidence in the euro, European Union finance ministers also agreed on a permanent mechanism that from 2013 onward would allow a country to restructure its debts once it has been deemed insolvent.

Currency implications

Interestingly, if the PIIGS were applying today to enter the Eurozone and use the euro as their common currency, they would not meet the Maastricht criteria, which are the requirements for membership:

1. The ratio of government deficit to GDP must not exceed 3% and the ratio of government debt to GDP must not exceed 60%.
2. There must be a sustainable degree of price stability and an average inflation rate, observed over a period of one year before the examination, which does not exceed by more than one and a half percentage points that of the three best performing member states in terms of price stability.
3. There must be a long-term nominal interest rate which does not exceed by more than two percentage points that of the three best performing member states in terms of price stability.
4. The normal fluctuation margins provided for by the exchange-rate mechanism must be respected without severe tensions for at least the last two years before the examination.

Source: European Central Bank

However, today’s practical realities of maintaining the Eurozone have allowed for flexibility. Debt and deficit targets as opposed to unbending requirements have become part of the bailout packages. As well, because these nations are members of the Eurozone, they cannot unilaterally stimulate their respective economies with monetary policy. They are not free to independently pursue policies like lowering interest rates or using quantitative easing if they desire – options that are available to nations like Canada and the U.S., for example, which do not have linked currencies. Eurozone countries face the catch-22 of wanting to stimulate their economies but having to adopt austerity measures to qualify for the bailout packages.

Germany generates robust growth

While much recent market attention has been focused on the travails of the PIIGS, significant improvements have been seen in Europe, particularly in Germany. By the close of 2010, Germany recorded a new 18-year low in unemployment, declining to 6.8% – and itsemployment level exceeded the pre-recession peak. In line with the employment gains, wages and salaries rose 3.8% during 2010. However, consumption edged up only 0.5% over the year.

Despite the relatively soft growth in Germany's domestic spending, the economy recovered surprisingly quickly from the economic crisis, revealing some disparity between it and other European nations. German gross domestic product (GDP) advanced at roughly twice the pace of the Eurozone economy as a whole for 2010. In fact, Germany's overall economy grew at its strongest rate since the country's reunification in 1990. Significantly, trade was key to the nation’s improving circumstances. Exports in 2010 surged 14.2% in inflation-adjusted terms, while imports rose 13.0%. This followed on the heels of declines of 14.3% and 9.4%, respectively, in 2009. Not surprisingly, developing nations where economic growth has been strongest were providing growing demand for German exports. In particular, well-recognized luxury brands experienced strong export growth. Chinese demand for luxury autos has been especially robust. According to marketing research firm J.D. Power and Associates, China’s
luxury car segment expanded by more than 40% in 2010 and nine of the top-selling luxury models in China are German, led by Audi.

Elsewhere

While China is not the only destination for European exports, it does stand out as one of the fastest growing. Global management consulting firm Bain & Company estimated that the Chinese luxury market grew by more than 23% in 2010. As this suggests, one of the paradoxes of this communist country is that luxury exports from Europe are in very high demand. Italy’s Ferrari announced its 999th Chinese customer in January 2010, something that would have been impossible before China began its economic reformation. Also, retail outlets for other well-known European luxury goods providers, from clothing to jewelry, are becoming more commonplace within the country. The United Kingdom, France and the other nations that
export these goods will derive increasing benefit from this trend. Avoiding protectionism and fostering improved trade ties should eventually benefit all of Europe.

Conclusions

• The European sovereign debt issue will continue to take time to play out. Additional bailout funds and austerity measures may yet be required, but in the end the fiscal and monetary lessons learned will provide a firmer base for the region’s economic expansion.
• Germany stands as an example of how good economic and financial market news can be drowned out by other events within the region. Good prospects for continued expansion in trade will further bolster overall economic growth for Europe.
• Looking beyond the headlines for investment opportunities can bear fruit.
• Investors can capture opportunities if they use a disciplined approach, professional advice and welldiversified portfolios.

Time to Take Advantage of Gloomy US Markets

2010-09-01T06:27:00.000-07:00

Good Morning,

I came across this article from Larry Sarbit which really caught my eye. What is interesting is this money manager has been the eternal pessimist over the past decade. For the past decade most of his portfolios have been invested in cash....at one point at AIC he was holding 3 stocks with Waste Management being his largest and the rest was on cash at over 70%. His fund is now 15% cash and 85% stocks -the eternal pessimist is jumping in with both feet. Larry Sarbit is the CEO and Chief Investment Officer for Sarbit Advisory Services and sub-advisor to IA Clarington Sarbit US Equity Fund. Here are some excerpts:

Time to take advantage of gloomy U.S. equity markets
You should be buying American now: The sale won't last forever

I remember John Templeton on the PBS show, Wall Street Week in the summer of 1982 when the U.S. markets were trading at ridiculous bargain prices. The gloom at the time was so thick you couldn’t help but feel it.

Mr. Templeton’s advice cut through it all: Stocks are at fire-sale prices – they won’t be this low again for a generation. And he was right.

Moments like that are rare but we are living in one now.

They tend to happen when the available evidence looks so lopsided that you simply have to cut through it all if you are going to figure out what to do. And right now the task is cutting through the fear and loathing around the idea of investing in anything American. To put it bluntly: You should be buying American now.

'Clients won’t buy anything in the U.S. – period.'

Why do I say that? Well, clients usually give you a range of opinions about what they like or don’t like. A consensus view might rise up from time to time, but generally the outlook is mixed or divided. Not now.

I just got off the road talking to advisers, planners and brokers. Every single visit the exact same message was delivered: “Clients won’t buy anything in the U.S. – period. If it has any U.S. content, they won’t touch it!" Meanwhile, U.S investors, according to the Investment Company Institute, have withdrawn a staggering $33.12-billion (U.S.) from domestic stock market mutual funds in the first seven months of the year.

The sort of unanimity of opinion of the masses that the U.S. markets are radioactive, is exceptional, to say the least. I’ve been in the investment business for 31 years and I’ve seen a few such circumstances – the market bottom of 1982, the gold and precious metals buying panic in the late 1970s and early 80s, the tech madness at the beginning of this century, to name a few.

Now, we have seen some dire circumstances strike fear into the hearts of investors – the financial crisis did start in the U.S. after all; there is a lot of debt is piling up at all levels of government; the stimulus package seems to not quite be doing enough; unemployment remains stubbornly high; and on and on it goes.

It’s worse in a way for Canadian investors since anyone holding unhedged U.S. investments has been clobbered by the loonie’s rise against the greenback. There have been terrific returns here at home as well. From the sound of things, it seems that a lot more Canadians intend to keep their loonies here at home. Wrong move.

Before we relegate America to the trash heap of other fallen economic and military empires, remember that they have been through worse. It will undoubtedly take time and cost to get over the current mess. But America is a vibrant nation, composed of an entrepreneurial, adaptable people who don’t easily accept being second rate.

As usual, people mistakenly conclude that what has happened in the past is indicative of what the future will look like.

Warren Buffett, referring to pension fund managers, said back in a 1979 article, that they “continue to make investment decisions with their eyes firmly fixed on the rearview mirror. This generals-fighting-the-last-war approach has proved costly in the past and will likely prove equally costly this time around."

Canadian Stocks

Ten years ago, all clients wanted were U.S. and global investments, after they had achieved a fantastic appreciation over the previous 18 years. Canada? You couldn’t give Canadian investments away a decade ago. Fixed income, balanced funds, and dividend funds – at the time, all out of favour.

And which categories outperformed over the next 10 years? We all know the answer. Canadian equities have comfortably outperformed U.S. and global stocks.

In August, 1999, I wrote an article in this paper in which I said, “The only predictive statement I feel comfortable in making is that I’d be shocked if the next 20 years’ worth of returns even slightly resemble the past 15 to 20 years."

I went to large cash positions in our U.S. investment vehicle because I couldn’t find what I was looking for – wonderful businesses at bargain prices. Many investors didn’t appreciate this stance but I’ll let my track record speak for itself. We protected our clients from losses and actually made money over the decade. That was not too bad, especially compared with the no-return world of the average U.S. business during the same period.

There are rare occasions when the evidence is so overwhelming, that you can make such broad pronouncements. So, here’s my prediction: I’d be shocked if you don’t make a lot of money in U.S. stocks over the next decade.

Bargain Prices

As usual, I can’t begin to forecast what will happen in the short term. What I do know is that for the first time in years, I’m finding fantastic businesses for sale at what I know are bargain prices. Are you all sitting down? I’m over 70 per cent invested (in the early 2000s I reached peak cash at about 90 per cent), and buying more U.S. equities almost every day.

Mr. Buffett brilliantly summed up our current situation from his perch in 1979: “There may well be some period in the near future when financial markets are demoralized and much better buys are available in equities; that possibility exists at all times. But you can be sure that at such a time the future will seem neither predictable nor pleasant. Those now awaiting a ‘better time’ for equity investing are highly likely to maintain that posture until well into the next bull market."

In my opinion, there currently exists an exceptional opportunity for investors to pick up some real bargains in the U.S. equity markets. When economic conditions are this dismal, at some point, the environment will begin to turn positive and a lot of money will be made. But remember: The opportunity won’t last forever.

Our investment philosophy remains committed to well diversified portfolio that includes exposure to US companies. We must be careful not to confuse exposure to the US Economy with exposure to US companies. We all agree the US economy has a long way to recover and most liekly will do so at a slow pace. It is important that we expose our portfolios to good US companies which are multi national in scope but just happened to be headquartered in the US. Our managers focus on strong companies who derive a significant amount of thieir revenue outside the US ie. the emerging markets. These companies have a lot of free cash on their balance sheets, little or no debt, have the ability to buyback shares, pay dividends and have been increasing their dividends each year. Some examples of companies we are investing in the US are: American Express, IBM, Coca Cola, Walmart, etc

Please forward any questions or comments

Potential Error on NASDAQ Causes Market Selloff

2010-05-07T05:35:00.000-07:00

On Thursday, the Dow Jone plunged nearly 1000 points in mid afternoon trading. Going into yesterday's trading session, global markets were already jittery due tot he Sovereign Debt situation in Greece (see previous post). Shares we trading lower during the early afternoon due to these concerns, but without any apparent trigger at approximately 2:45pm EST Proctor and Gamble's stock fell 10% to $56 on the New York Stock Exchange (the NYSE sets prices on which all other stock markets work from). This triggered a "circuit breaker" which slowed the trading of the stock for less than a minute. During that time other stock exchanges were allowed to trade the stock on their own without getting the price from the NYSE. According to Proctor and Gamble and the NYSE, the NASDAQ stock exchange may have may have misprinted a quote of $39.37 per share. It is also possible that the electronic trades actually occurred (trader may have incorrectly entered an inflated sell number - 1 billion instead of 1 million) but were made in error.

Other companies like Apple and Accenture were also affected as automated trading took over. Due to the irregular stock prices and trading patterns, the NASDAQ said all trades executed between 2:00 and 3:00 p.m. ET greater than or less than 60% of the stock price as of 2:40 p.m. ET or immediately prior to that time will be cancelled. The SEC said they "are working closely with the other financial regulators, as well as the exchanges, to review the unusual trading activity that took place briefly this afternoon. We are also working with the exchanges to take appropriate steps to protect investors pursuant to market rules."

By the end of the day the market returned to levels before the sharp sell off began. While many retail investors were not aware of this activity it underscores the importance of maintaining a disciplined approach to your investment strategy and the need to focus on the fundamentals in the market and the economy where the indicators have been pointing in the direction of continued recovery. This morning Canada announced 108,000 jobs were created in April (4 times more than expected) and the unemployment rate fell to 8.1%. The issues that happened yesterday will be investigated and corrected like in the past.

Source: The Globe and Mail, CNN Money

The Credit Crisis in Greece Explained

2010-05-03T05:00:00.000-07:00

During the past few months, there has been concern in the global economy that some countries in the European Union will not be able to honor their debt obligations due to their rapidly increasing budgetary deficits. In the case of Greece, in December 2009 they announced a budget deficit of 12.7% of GDP which was a result of existing budget deficits, election year spending and a stimulus plan created in response to the financial crisis. European Union member nations are supposed to keep their annual budget deficits to no more than 3% of GDP. Other countries that also may have issues with their budget deficits are Portugal and Ireland.

In response to this budget deficit, the yields (interest rate) on Greek bonds increased from 3.5% to 8% within months. Even though the the Greek government has wisely financed this debt over the long term, it still has to roll over US $30 billion in debt maturities and finance a US $30 billion deficit - for a total US $60 billion in annual funding requirements.

Last week, stock markets around the world moved lower after ratings agency Standard and Poors downgraded it's sovereign credit rating for Greece to "junk" status and also lowered Portugal by two notches. The downgrades reflected growing fears that the southern European governments will prove unable to implement promised reform measures in the face of determined domestic opposition, raising the danger of the sovereign debt crisis spreading to the world’s major economies.

With the adoption of the Euro, Europe's weaker countries like Greece, Spain, Portugal, Ireland and Italy saw their interest rates converge with the rest of the Eurozone falling from double to single digits. This interest rate decline triggered housing booms, leading to rising employment, growth, wage inflation, bigger government and more generous pensions and entitlements. This debt-financed growth was funded by financial institutions in the core countries of France and Germany, which enjoyed strong exports.

Germany and France ran current account surpluses (exports more than imports) while the countries on the periphery of the Eurpzone ran deficits. The surplus countries funded the property booms in the periphery. These imbalances were masked by the single currency, because the Eurozone as a whole was running current account surpluses. The access to funds for the borrowers is being cut off and these countries need to re-establish its competitiveness compared to Germany, but they lack the option of currency devaluation. As a result, wages and asset values in these countries need to fall, and this will be accompanied by government cutbacks and lower growth.

This past weekend Greece was able to secure a US $150 billion bailout that will help protect the country from debt speculators and restore confidence in the ailing Euro. The EU is contributing $80 billion of the total at an interest rate of 5% while the IMF is supplying the rest. These lenders have demanded sweeping reforms in Greece that will most likely cause the recession in Greece to last longer and cause a social backlash. This will include tough spending cuts and tax increases. The measures will include the extension of a public sector wage freeze until 2014, the elimination of a bonus equivalent to two months salary for many civil servants, a sin tax and a boost in the value added tax (similar to GST in Canada) from 21% to 23%.

Many critics would argue that there is no need to bailout a country which has brought on a lot of it's current difficulties itself. However, saving Greece from bankruptcy may be necessary for preserving the European economic union, countries have an even more compelling reason to prop up the debt-ridden state. Foreign banks are exposed to $236.2-billion (U.S.) of public and private debt in Greece, nearly a third of it ($75.2-billion) held by French banks. A Greek collapse would ripple throughout the EU and beyond.

When looking at the situation in Greece one must keep these events in context. A US $150 billion dollar aid package for the country is still smaller than the US $173 billion bailout of AIG - much of which went to Bear Stearns and a number of European banks.

WHAT ARE THE GLOBAL IMPLICATIONS

The Greek crisis highlights several important global trends. First, investors are now more attuned to sovereign credit risk, especially for countries with more generous social welfare schemes. The financial crisis resulted in a double hit to government finances through lower revenues and costly stimulus schemes, with the result that debt-to-GDP ratios have soared by 20% across the board.

In the same vein, differentials in the credit risk between countries are now becoming more pronounced. For example, Canada is perceived to have kept its fiscal house in relatively good order, so Canadian government bond yields are 30 basis points less than their U.S. equivalents. These shifts will continue. "(higher yields are attached to more risky bond issues)

The recovery has a structural weakness that poses a potential risk for investors. Government authorities have fired both fiscal and monetary bullets at the financial crisis. They appeared to have hit their mark, but there are no bullets left.

Source: Signature Global Advisor, World Socialist Website, Globe and Mail, Bloomberg News

2010 Nova Scotia Budget

2010-04-08T05:38:00.000-07:00

Finance Minister Graham Steele tabled the 2010 Nova Scotia provincial budget on April 6, 2010. After an initial forecast of $592 million, the deficit for the just completed 2009-2010 fiscal year is estimated to be $488 million. The minister indicated that after consultations with the public and the report of the experts on the Economic Advisory Panel, it was necessary to “get back to balance.” The government laid out its four-year plan to return to balanced budgets by the 2013-2014 fiscal year. The budget projects a deficit of $222 million for the 2010-2011 fiscal year, notwithstanding significant efforts at expenditure control. The four-year planning horizon calls for cumulative savings of $772 million, including reducing the size of the civil service by 10% by 2013.

The government also intends to secure the public service pension plan by borrowing $536 million at today’s low interest rates to eliminate the unfunded pension liability. In addition, there are expected annual savings of between $150 and $200 million by limiting pension increases to 1.25% per year for each of the next five years. Annual increases from 2016 and on will only be made if the plan is in a surplus position.

On the tax side, there were tax increases for high-income earners, a drop in the small business corporate tax rate, and an increase in the harmonized sales tax.

We have summarized the changes announced in the budget. Please note that these changes are still proposals until passed into law by the provincial government.

Personal income tax rates
The budget proposes to change the personal tax rates and tax calculation for high-income Nova Scotians. The first element of the change is the suspension of the high-income surtax until the budget returns to balance. Effective January 1, 2010, the 10% surtax that applies to provincial income tax payable in excess of $10,000 will be eliminated. Also effective January 1, 2010, is the creation of a fifth personal income tax bracket applicable to taxable income in excess of $150,000. The provincial tax rate for this new bracket will be 21%, resulting in a combined federal-provincial marginal tax rate of 50%. Both of these measures are temporary and are only planned to be effective until the budget is balanced. The table below shows Nova Scotia tax rates for 2010.

Taxable income range 2010 tax rates
$8,231 - $29,590 8.79%
$29,591 - $59,180 14.95%
$59,181 - $93,000 16.67%
$93,001 - $150,000 17.5%
Over $150,000 21%

Basic personal amount
The basic personal amount is equivalent to the amount of income you can earn without paying any tax. In 2006 the government implemented legislation to increase the personal amount by $250 in each of the four subsequent years. The final $250 increase, to $8,231, is effective for the 2010 tax year.

Other Non-Refundable Credits
Other non-refundable credits will increase proportionately to the basic personal amount (3.13% for 2010).
The list of affected credits is as follows:
• spouse or common-law partner;
• dependent;
• pension income;
• disability;
• caregiver;
• age; and
• infirm adult dependents.

Low-income tax reduction
The budget proposes that, effective January 1, 2010, the definition of adjusted family income for the purposes of the low-income tax reduction will exclude the guaranteed income supplement (GIS). This should result in GIS recipients not being liable for provincial income tax.

Equity tax credit
The budget proposes to increase the equity tax credit rate from 30% to 35%, effective January 1, 2010. In addition, the maximum annual credit is increased from $15,000 to $17,500, and the expiration date is extended by two years to December 31, 2011. The tax credit is designed to assist small businesses, co-operatives and community economic development initiatives in obtaining equity financing by offering a personal income tax credit to individuals investing
in eligible businesses.

Labour sponsored venture capital tax credit
The labour sponsored venture capital tax credit was scheduled to expire on December 31, 2009. The budget proposes to extend the expiry date by two years, to December 31, 2011.

Graduate retention tax rebate
The budget confirms the government’s intention to proceed with the previously announced graduate retention tax rebate. This program will provide a tax rebate for university graduates of up to $15,000 over six years, to a maximum of $2,500 per year. College graduates will be eligible for up to $7,500 over six years, to a maximum of $1,250 per year. These rebates are available to individuals who graduate in 2009 and subsequent years if they choose to live and work in Nova Scotia.

Harmonized sales tax
The budget proposes to increase the harmonized sales tax (HST) by 2%, to 15%, effective July 1, 2010. This will be accomplished by increasing the provincial portion of the HST from 8% to 10%. The government will have transitional rules to assist consumers and suppliers in implementing this change.

Point-of-sale HST rebates
Effective July 1, 2010, point-of-sale rebates will be available for the provincial portion of the HST on the following products:
• children’s clothing;
• children’s footwear;
• children’s diapers; and
• feminine hygiene products.
The current point-of-sale rebates on books and home energy will continue with adjustment for the new HST rate. The rebates for public sector organizations and first-time home buyers will also continue, although there may be some changes in administrative practice.

Affordable living tax credit
Low- and modest-income households will be eligible to receive a refundable tax credit payment beginning in July 2010. The credit will be payable on a quarterly basis in conjunction with the federal GST credit, and will require the filing of a personal income tax return in the prior year to qualify. The credit will be available to households earning less than $34,800 per year. The annual credit will be $240 per household plus an additional $57 per dependant child under age 19 living in the household. The full credit will be available for family incomes of $30,000 or less. Every $1 of income in excess of $30,000 will result in a five cent reduction of the credit, until it is completely eliminated at an income level of $34,800.

Poverty reduction credit
In addition to the affordable living credit, the budget proposes a new poverty reduction credit, to be effective July 1, 2010. This new credit is aimed at providing quarterly tax-free payments totalling $200 per year to about 15,000 low-income Nova Scotians, many of whom have a disability. To qualify, an individual must:
• be over the age of 19;
• have no dependants;
• be receiving social assistance through the income assistance program as their main source of income; and
• have total annual income of $12,000 or less for the previous tax year.

Sales tax measures
Effective July 1, 2010, tax on the sale of used motor vehicles, boats and aircraft in Nova Scotia will be 15%, up from the current 13% rate. The proposal to increase the rate to 15% makes purchases of used vehicles and other property subject to the same tax rate as purchases of new motor vehicles.

Out of province medical treatment assistance
The budget proposes to provide assistance for patients who need medical treatment that is not available in the province. These patients may be eligible to receive up to $1,000 for round trip travel and $1,500 for accommodations for up to 12 medical visits per year.

Source:
Jerry S. Rubin, B.E.S., B.Comm.(Hons), CMA, TEP, CFP,
Vice-President, Wealth Planning Group,
United Financial, a division of CI Private Counsel LP

Debt Restructuring by Dubai World

2009-11-30T08:51:00.000-08:00

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

The US Savings Dilema

2009-08-24T08:57:00.000-07:00

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

Global Markets React to Geithner Bank Plan and Suncor Takeover

2009-03-24T05:46:00.000-07:00

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

March 3 2009 Bank of Canada Press Release

2009-03-03T06:16:00.000-08:00

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

Putting It All In Perspective

2009-03-03T05:38:00.000-08:00

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

2009 Federal Budget and your Financial Plan

2009-01-28T07:39:00.000-08:00

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

2008 Review

2009-01-13T05:43:00.000-08:00

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

2008-12-12T06:19:00.000-08:00

I am pleased to announce that I have officially aligned my practice with the Make-A-Wish Foundation Atlantic Provinces. The foundation's mission is to grant wishes to create hope and happiness for children with life threatening illnesses in the Atlantic region. We will support Make-A-Wish through donations made at various client seminars and events. My practice is registered on the Make-A-Wish donation website under the "Chris Ball" campaign.

https://secure.csfm.com/makeawish/