Bay Street changes rules of rates game

Eoin Callan and Gary Marr, Financial Post Published: Tuesday, December 09, 2008

Canadian bank executives say the cost of funding in international markets remains extraordinarily high.

Bay Street's profit margins are starting to come under pressure as official interest rates creep closer to zero, prompting retail banks to change the rules of the game so customers pay more.

While the Bank of Canada on Tuesday cut interest rates to the lowest level since the 1950s, the country's five big banks indicated they would no longer march in lock step with the central bank. Instead, Bay Street is keeping the cost of borrowing for consumers more elevated in a bid to protect corporate earnings, passing on only part of the rate cut to customers.

While the decision of Bay Street to pocket part of the Bank of Canada rate cut is seen as good for shareholders and bad for customers, there is less certainty about how it will impact wider demand, partly because there are few historical precedents.

"We just don't have much experience with this," said an official at the Federal Reserve who has studied how financial institutions behave when central banks cut rates close to zero.

The central banker said data were limited but suggests retail banks remain willing to lend even when official rates fall near zero, as they tend to find ways to protect profit margins on loans.

In normal times, financial institutions do better when the central bank lowers the cost of funds, happily passing on cheaper loan rates to consumers to encourage them to borrow more. But when the official rate starts getting closer to zero, the dynamics start to change, as the prime rate that banks charge customers is pushed nearer to their own cost of funds.

This was key to Tuesday's decision by RBC, TD, Scotiabank, BMO and CIBC to cut their prime rate by 50 basis points instead of the full Bank of Canada cut of 75 basis points, according to people in the industry.

Joan Dal Bianco, vice-president of real estate-secured lending with TD Bank, said it would have left the bank without a profit if the full rate cut had been passed on to customers with variable products tied to prime.

"We are still trying to earn something on this stuff. This has been quite the roller-coaster ride and it has not been too hot on the mortgage front. We just can't take on the whole 75-point cut," Ms. Dal Bianco said.

Nancy Hughes-Anthony, head of the Canadian Bankers Association, acknowledged the decision to break step with the Bank of Canada created a public-relations challenge for Bay Street.

But she said: "The banks are still borrowing in a very volatile marketplace. The Bank of Canada rate is only one component of their cost of funding, and while the cost of borrowing in international markets has come down a bit, it is still higher than before the crisis."

John Aiken, an analyst at Dundee Securities, said banks were "starting to see margin compression" as the central bank cut rates to 1.5% from 2.25%, while banks reduced their prime lending rate to 3.5% from 4%.

"The new loans that are being put in the books are arguably at a less profitable rate," he said.

Vince Gaetano, a vice-president with Monster Mortgage, said he expects pressure will start to mount on the banks in the coming weeks to reduce prime further.

"That's what happened the last time they tried to resist rate cuts," he said.

This willingness to pass on rate cuts is critical to determining the ability of the Bank of Canada to stimulate the economy in the midst of a downturn.

The central bank's own research shows "it is the real rate of interest that is most relevant" to the purchasing decisions of households, and that it can "influence demand only to the extent that adjustments to the [official] interest rate feed through to the real interest rate.

Your home: hot or not?

Financial Post Published: Saturday, November 22, 2008

Can your home weather the financial storm? Don R. Campbell, a real estate analyst and author of Real Estate Investing in Canada, gives a dozen ways to analyze your property's exposure to a downturn.

First, it's vital to remember that property markets are not national; they are regional, local and even vary widely from neighbourhood to neighbourhood in the same city.

That being said, there will always be hot real estate markets and others that are cold, but national and provincial figures are too generalized to be used by Canadian homeowners and investors to make sound decisions on their most important asset.

The 12 questions below will help you decide if your area and personal property are poised to go up, stay flat or collapse.

The more "yes" answers you get, the better the market will perform.

But overall, to dramatically reduce your risk, the most important thing to remember is: Don't fall in love with your property.

12 ESSENTIAL QUESTIONS

1 Is your area's average income increasing faster than the provincial average?

2 Is your area's population growing faster than the provincial average?

3 Is your area creating jobs faster than the provincial average?

4 Does your area have more than one major employer? 5 Is real estate booming in the surrounding region more than where you're looking?

6 Will the property values benefit from a major new development nearby?

7 Has the local and provincial political leadership created a growth atmosphere?

8 Is the region's economic development office helpful and proactive?

9 Is the neighbourhood located in an area of renewal or gentrification?

10 Is there a major transportation improvement occurring nearby?

11 Is the area attractive to Baby Boomers?

12 Is there a short-term perceived problem (negative stories, short-term layoffs) that will disappear?

In fact, there are 13 major influences on the long-term value of property. Underlying the local analysis of your property market you need to consider the outlook for Canada generally.

The Canadian economy and real estate are relatively well-positioned to withstand the economic storms that are buffeting property values in many other countries.

Ottawa boosts effort to fight spreading global credit crisis

RICHARD BLACKWELL AND HEATHER SCOFFIELD Globe and Mail Update

TORONTO — Ottawa has announced three new aggressive measures to get Canada's credit markets back in working order.

Finance Minister Jim Flaherty said Wednesday in Toronto the government would add $50-billion to its mortgage purchase program. He has also agreed to slash the price the government is charging to Canadian banks to insure their wholesale lending.

At the same time, the Bank of Canada is injecting another $8-billion into money markets over the next few weeks, in one-month money, through a new Canadian-dollar term lending facility it is setting up.

“Canada has stepped up to the plate in a major way this morning, announcing three major new actions today, all designed to crack the nute that is the credit crunch,” commented Eric Lascelles, chief economic strategist at TD Securities.

Ottawa “has introduced programs that should contribute to a notable narrowing in financial institution credit spreads, and possibly in credit spreads overall,” he said in a note to clients.

Mr. Flaherty's announcement means the government will now buy up to $75-billion of insured mortgage pools from the major banks, up from $25-billion.

He told reporters he made the move because he now expects an “extended period of stress in global credit markets.”

In addition to increasing the amount of money available to buy mortgage debt, the Department of Finance also slashed the price it will charge banks for guaranteeing their loans.

Commercial banks have complained loudly that the loan guarantee program designed by Ottawa a few weeks ago was too expensive to be of much use.

While other countries' banks could buy what amounts to insurance at a low price, Canadian banks were paying higher rates. The program was only useful for banks in dire trouble, and was putting the Canadian financial institutions at a competitive disadvantage globally.

In Ottawa, the Bank of Canada said it will put an additional $8-billion into one-month money markets, spread out in four auctions over the next few weeks, through a newly created Canadian-dollar term loan facility.

The Bank of Canada has hinted heavily in recent weeks that it had further measures in store, to make sure financial institutions have cash on hand to finance their transactions.

Financial institutions can post almost any kind of loan on their books as collateral, in order to take part in the auctions, the bank said.

“By providing greater flexibility for liquidity provision with respect to eligible collateral, the [new facility] will facilitate further improvement in money and credit markets.”

Canadian banks have been pressuring Ottawa to boost their help for the sector, and all countries have been urged, in a series of international meetings, to do much more in order to get the global economy back on track.

While lending spreads in some markets have edged down gradually in the past few weeks, Canada's key spreads have not moved much for a month, suggesting a lingering risk aversion among banks in Canada.

“At a time of considerable uncertainty in global financial markets, this action will provide Canada's financial institutions with significant and stable access to longer-term funding,” Mr. Flaherty said in a statement. “This extension of the program to purchase insured mortgages will further support the availability of credit, which will benefit Canadian households, businesses and the economy. In addition, it will earn a modest rate of return for the government with no additional risk to the taxpayer.”

Mr. Flaherty indicated last weekend that he understood the banks' complaints, and would consider acting. But Bank of Canada Governor Mark Carney said in an interview Ottawa had carefully designed the program, and suggested Canadian banks weren't at a global disadvantage because they are in far better shape than other banks around the world.

Canadian banks may not need gov't aid:

TD Reuters, November12, 2008

Canadian banks should be able to get through the financial crisis without relying on the kind of government aid that is being deployed to financial institutions in other countries, Toronto-Dominion Bank's top executive said on Wednesday.

While the Canadian government just announced an increase in the size of its bank mortgage buyback program -- boosting the program to $75 billion from $25 billion -- the federal government is actually making money on that program, TD Bank president and chief executive Ed Clark said.

"This is a pretty good deal from the government's point of view," since it gets paid to buy mortgages that a government agency has already guaranteed, he said.

Canadian banks, with strong balance sheets and healthy mortgages on their books, are using the government buyback program to fund themselves at rates comparable with, or better than, what banks elsewhere in the world can get, he said.

Clark was speaking at a financial conference in New York organized by Merrill Lynch.

"We would like to get through this crisis without government bailouts, there have been no bailouts of the Canadian banking system," Clark said.

TD, which has grown substantially in the United States through acquisitions in recent years, does not have to make another U.S. purchase to fulfil its business objectives, he said.

The bank acquired New Jersey-based Commerce Bancorp earlier this year, and privatized TD Banknorth in 2007.

"We can grow organically, if you take a look at the average bank in the U.S. and strip out acquisitions, it's not obvious that there's a lot of organic growth there," Clark said.

But TD, Canada's second largest bank, would consider U.S. acquisitions if certain conditions were met -- that is, if a potential deal were in its existing East Coast footprint, if it were cheaper to buy than build out its branch network, and if it involved minimal asset risk.

"You're not going to see us suddenly move up the risk curve in this environment," Clark said.

He also said it seems "inevitable" that a U.S. recession will spread to Canada, where the bank's loan book is more retail oriented. TD expects provisions for credit losses to rise in the next few years, but from a low base, Clark said.

Home construction beats expectations, while prices rise

Jamie Sturgeon, Financial Post

Canada's housing market showed some resiliency through September and October, as national new home prices unexpectedly rose two months ago while the rate of construction on new homes was higher-than-expected in October, a pair of reports said Monday.

Statistics Canada reported that new-home prices rose in September even as the year-over-year increase fell to its slowest pace since 2000.

New home prices gained 0.1% between August and September, StatsCan said. Year-over-year, home prices appreciated 2.1% -- the slowest pace in more than eight years, and down from August's 2.3% rise.

The results were better than expected though, as economists predicted new home prices would decline 0.1% in September, according to the median of 14 responses in a Bloomberg survey.

Meanwhile, construction on new homes remained above 200,000 starts in October, Canada Mortgage Housing Corp. said Monday, defying expectations among most industry watchers calling for a protracted slowdown.

The seasonally adjusted annual rate of housing starts declined 3.1% to 211,800 units in the month, down from 218,600 in September, but still well above the consensus view among economists that predicted between 195,000 and 200,000 new homes annualized.

"This is in stark contrast to the [United States] where over the first nine months of this year, starts are down 29.8% compared to year-ago levels," wrote Paul Ferley, assistant chief economist at Royal Bank of Canada in a morning note to clients.

"Housing starts remained strong in October and are consistent with our new home construction forecast for [the year]," said Bob Dugan, chief economist at the agency.

Single-detached starts in urban areas declined 1.1%, while construction on urban multi-family dwellings such as condominiums and townhouses fell by 6%, CMHC said.

By province, urban starts decreased in British Columbia, the Prairies and Ontario, CMHC said. In contrast, starts leapt 41,300 in Quebec, while builders began construction on 9,600 units in the Atlantic provinces.

Starts on detached urban housing declined in every province except Ontario, where construction increased 10%, the agency said.

It is the second month in a row that CMHC figures have come in widely-better-than expected.

October's numbers are in line with the 212,000 annualized rate the agency forecast for this year.

However, last month's pullback from September may also indicate the country's housing market has begun to downshift toward CMHC's projection of 178,000 starts for 2009, a more constant rate, historically.

"For the first 10 months of 2008, actual starts in rural and urban areas combined were down an estimated 1.6% compared to the same period last year," the agency said.

"The current tight credit conditions are expected to put further downward pressure on new construction through next year," RBC's Mr. Ferley added.

Flaherty eyes measures to ease credit flow

Paul Vieira, Financial Post Sat Nov 8,08

SAO PAULO -- The Finance Minister, Jim Flaherty, acknowledged Saturday that funding pressures remain in Canada, with banks reluctant to lend to certain ailing sectors, and is in talks about undertaking further measures aimed at easing the flow of credit.

"There are credit constraints in the Canadian economy, and naturally the banks are concerned extending credit in certain sectors in the Canadian economy, because of their concerns about the viability of their customers," said Mr. Flaherty in Sao Paulo, where he is attending a meeting of Group of 20 finance and central bank officials.

He said that Department of Finance officials have spoken with the federal banking regulator and the chartered banks about the credit tightness. "I can look at additional measures that we could take."

Nancy Hughes Anthony, president of the Canadian Bankers Association, said the Minister was right to acknowledge that funding pressures exist in Canada.

"While banks are open for business and are active in providing credit, we are all working hard to ensure that our banks and financial sector remain strong while at the same time meet the credit needs of businesses that are having a tough time because of the economic downturn," she said Saturday.

It is one of the first acknowledgments from Mr. Flaherty that measures taken to date, by Finance and the Bank of Canada, are not entirely having their desired effect.

The central bank has made nearly $27-billion available to financial markets, and expanded both the type of collateral it will accept and the number of market players that can access its cash. Meanwhile, the federal government has pledged to acquire at least $25-billion of bank mortgages and has offered to backstop interbank lending through a temporary insurance scheme.

This past week, a coalition of manufacturers called on Ottawa to issue a temporary guarantee on loans and lines of credits because credityworthy producers of goods remain unable to access cash. Also, Canada's top bank and insurance executives have urged Ottawa to take fresh steps to ease funding pressures, mainly by cutting the price for banks to participate in the government-backed insurance program.

The fee to access the insurance on wholesale debt was set at 1.6%, which financial institutions must pay to get the government's guarantee. This was Ottawa's response to moves by other governments, most notably the United States, to issue guarantees on lending, and ensure that Canadian banks were not put a competitive disadvantage compared to their peers.

One of the potential outcomes of this weekend's G20 meeting is a co-ordinated response by industrialized and emerging economies to take measures that would mitigate further economic damage to countries as a result of the U.S.-originated credit crunch.

Canada may skirt recession: IMF

Julian Beltrame The Canadian Press

Evidence was mounting yesterday that Canada may be following the rest of the world on the path to recession, even as global policy-makers look to new measures to combat the economy-destroying financial crisis.

In its latest update, the International Monetary Fund sharply downgrades the economic outlook for Canada and the rest of the world from its previous projection a month ago.

The world organization, headquartered in Washington, said Canada's economy will avoid recession by the slightest of margins with 0.3 per cent growth next year, while all other G7 leading industrial counties will see their economies actually contract, led by Germany and the U.S.

The IMF's latest forecast for Canada is well down from the relatively robust 1.2 per cent advance it had predicted only last month.

"Prospects for global growth have deteriorated over the past month,'' the body said, urging governments to act to stimulate their economies.

The darkening outlook shook markets around the world, with stocks plunging the Tokyo index more than six per cent, while shares fell 3.3 per cent in Toronto and 4.8 per cent in New York's main exchange.

Yesterday brought more indications that the economy in Canada is slowing sharply.

An official government report showed bankruptcies in Canada were climbing steeply even before the worst of the financial crisis hit, increasing by almost 19 per cent in September from the previous month and 28 per cent from a year ago.

And in an indication that Canada's housing slump is deepening, permits for new housing fell 4.9 per cent during September, the second straight monthly decrease and sixth during the year.

Overall, building permits rose 13.4 per cent in September largely on the strength of publicly financed non-residential construction.

Worse news is expected to come this morning with the new employment report from Statistics Canada.

Many economists believe the October jobs number will usher in an uncomfortable period of monthly job losses that will begin to track what is occurring in the U.S., which has already shed 760,000 jobs this year.

"The worst part for the economy is largely still ahead of us,'' said Derek Holt, vice-president of economics with Scotia Capital.

"The speed at which things are deteriorating is alarming.''

'The sky is not falling,' says BOC governor

Declines in housing market and commodities more rapid than expected

Jacqueline Thorpe, Financial Post

The Bank of Canada continues to believe Canada can avoid a recession this year and next, despite the protracted three-quarter recession it forecasts for the U.S. economy into 2009, a "mild" global recession, and "the deepest, broadest and most persistent financial crisis" the world has faced in decades.

The central bank forecasts real gross domestic product will expand 0.8% in the third quarter, followed by a contraction of 0.4% in the fourth quarter. Growth is expected to be flat in the first quarter of 2009 and to pick up to 0.8% in the second quarter.

Two successive quarters of contracting activity is technically considered a recession.

The bank believes Canada is starting from a better position of strength than many other countries going into the downturn, with a stronger labour market and better household and corporate balance sheets providing some support.

The "sky is not falling," bank governor Mark Carney said at a news conference after the document's release.

Still, it forecasts the economy will not do much better than flatline over the next couple of quarters as the global credit crisis will resolve slowly, putting the economy under strain.

Despite of the "healthy" position of Canadian financial institutions, the intensification of the global financial crisis has led to a "substantial" tightening of credit conditions in Canada, the bank said.

"Given the high degree of volatility and risk aversion in recent weeks, there is considerable uncertainty around any assessment of current credit conditions in Canada," the bank said. "In particular, it is difficult to measure the non-price factors that may limit the availability of credit."

Credit spreads between borrowing rates for financial institutions across curve and the expected overnight Bank of Canada interest rate spiked to around 200 basis points in early October.

While strong actions taken by central banks and governments to support financial institutions have lowered those spreads, the bank said they are likely only to recede slowly as confidence is gradually rebuilt.

Effective borrowing rates for financial institutions have, in fact, eased somewhat since August, thanks to the 225 basis points of cumulative interest rate cuts the bank has already implemented, the bank said.

"These indicative borrowing costs likely do not, however, adequately take account of the decreased availability coming from illiquid and risk-averse interbank markets," the bank admitted.

Non-financial firms, meanwhile, have had difficulty getting access to both short-term and long-term markets.

"Indeed, corporate debt and equity issuance have effectively stopped," the bank said.

The bank pointed out, however, that credit growth for Canadian households has slowed only slightly in recent months and there was little evidence terms or conditions have tightened significantly for household borrowers.

Still it sees growth of consumer spending receding after robust gains in recent years as real income declines with commodity prices, and household net worth takes a hit from sliding equity markets and a projected "modest" decline in house prices.

While it has been predicting a slowdown in housing activity and price gains for some time, the bank now says housing investment is declining more rapidly than it had expected. But it does not anticipate the same type of sharp housing contraction experienced by the United States.

The sharp decline in commodity prices has, like many, caught the Bank of Canada off-guard, and it is basing its projections on oil futures prices of US$81 to US$88 per barrel, though it projects a further 10% drop in non-energy commodity prices from current levels.

The bank has also revised down its estimate of Canada's potential output -- or the rate the economy can grow without generating inflation -- to 2.3% for 2008 and 2.4% in 2009.

The bank said it was encouraged by the loosening in global financial conditions in recent days. While one of the main risks to its outlook was that full recovery would take longer than expected, there is now the chance that measures governments and central banks have taken to restore liquidity and confidence will improve prospects more rapidly.

For the year as a whole, the bank repeated its Tuesday forecast that growth will average just 0.6% in 2008 and 0.6% in 2009 before picking up speed to 3.4% in 2010.

While the big jump in growth forecast for 2010 might seem sharp, it is not unusual by historical standards to see economies start to gain steam quickly once the worst of a crisis has past.

Weakness in Canadian economy helping homebuyers

Garry Marr, Financial Post

There is some good news in the falling housing market, affordability is improving.

Desjardins Economic Studies says that after eight years of rising prices, housing costs are going down. "For the second quarter in a row we have had an increase in affordability," said Hélène Bégin, senior economist with Desjardins.

However, she warned consumers should not get too excited about the market conditions because affordability is still very close to the all-time low reached in 1990.

The Desjardins Affordability Index is calculated by determining the ratio between average household disposable income and the income needed to obtain a mortgage on an average-priced home, known as the qualifying income.

The report from Desjardins said its affordability index climbed to 110.7 last quarter after dropping close to 100 at the end of 2007. In the early 1990s, the affordability index was as low as 93.6. Desjardins says that affordability has increased by about 10% in the past two quarters because of falling home prices and lower mortgage rates.

The Canadian Real Estate Association said last week that the average price of a home sold in the country's major markets was $327,020, a 3.6% increase from a year ago. It was the second consecutive month prices had dropped on a year-over year basis.

Statistics Canada also said last month new homes prices grew only by 3.5% in June from a year earlier. It was the slowest rate of growth since March, 2002.

Desjardins noted that in the first half of the year, existing home prices rose by 4.4% compared to 10% a year earlier. The posted rate on a one-year mortgage also fell from 7.25% in March to 6.3% by the end of June. The posted rate on a five-year mortgage fell from 7.15% to 7.1% during the same period.

"House prices are just not going up as strongly as before and in some places in Western Canada, like Calgary, we have had some price drops. With the kind of return we have in Calgary, it has a big impact on affordability," said Ms. Bégin.

Prices in Calgary fell 7.8% in July from a year earlier, according to CREA. They were off 5.8% in Edmonton during the same period. Desjardins says affordability in Calgary improved by 7.5% over the last three months.

Even with the improved conditions, affordability is still off almost 30% from the peak reached in late in 2001. Long-term Desjardins thinks affordability will continue to improve. "Prices are going to go up slowly," said Ms. Bégin. "Out west we've seen a turning point where prices are going down."

The drop in prices is good news for home builders, according to the chief operating officer of the Canadian Home Builders' Association.

"If you were sitting in my chair what you would be experiencing is one very busy housing industry from coast to coast," said John Kenward. "There has been a slowing down in certain markets and builders in those market say it's a return to a more normal market place."

Canadian consumer confidence hits lowest level in 26 years

JOHN PARTRIDGE

Globe and Mail Update

October 17, 2008 at 10:51 AM EDT

Canadian consumer confidence plunged to its lowest level in 26 years this month, the Conference Board of Canada said Friday, adding to a string of ever more gloomy readings on the popular mood in the midst of the global financial meltdown.

The index dropped by 11.9 points to 73.9, after climbing for three months in a row, the Ottawa-based organization said in a news release.

The gloomy tune is just as evident in the United States: the University of Michigan consumer sentiment index fell to 57.5 points for October from 70.3 per cent in September, the largest monthly drop yet and well below the 65.0 level forecast by economists.

The Conference Board findings are based on a survey of 2,000 Canadians, conducted between Oct. 2 and Oct. 8.

Consumer confidence is sagging in Canada

“The global credit crunch and major stock market declines clearly had an effect on consumer confidence in October,” Pedro Antunes, the board's director of national and provincial forecasting, said in the release. “In addition, consumers felt that they would be worse off in six months, indicating concerns that the financial crisis would not be resolved quickly.”

The board's consumer confidence index has not plumbed these depths since the third quarter of 1982, when Canada was mired in a recession.

A growing number of economists, including those at Bank of Montreal, Bank of Nova Scotia and the University of Toronto are now predicting that Canada is again headed for recession, along with the United States.

However, the board is not among them. Its chief economist Paul Darby forecast Wednesday that although the country faces tough challenges, especially because of falling exports, it will avoid recession, which is technically defined as two consecutive quarters in which the economy contracts.

As for the October consumer confidence readings, the board also said that there have been “indications” over the past couple of days that global credit markets are beginning to loosen – although it could take months before lending conditions return to normal.

Spokesman Brent Dowdall said this was a reference to “marginal” improvements in interbank lending rates.

The survey showed that all the index's components decline.

“Respondents said it was not a good time to make a major purchase and their view about their current and future financial situations also deteriorated,” the board said.

As well, consumers were less optimistic about future employment prospects for the fifth time in six months, and the October decline was the largest this year.

Ontarians' view of the economic universe took the biggest hit, with the confidence index plunging more than ever before, to 67.9 points from 94.5 in September.

In Quebec, it lost 10.2 points, marking the seventh dip in 8 months, while in British Columbia, the index fell British Columbia tumbled by 12.5.

The reading for the Prairie provinces dropped by 6.1 points while that for the Atlantic provinces was least hard hit, falling 4.9 percentage point, the board said.

Bush defends bailout

President explains intervention in financial system as necessary to prevent a wider crisis.

NEW YORK (CNNMoney.com) -- President Bush on Friday d

efended recent federal intervention in the financial system as necessary to ward off a wider economic crisis and said the actions were not just a Wall Street bailout.

"People look at the crisis and say, 'Oh, it's only Wall Street,' " said Bush, addressing the U.S. Chamber of Commerce. "I don't think so. In fact, I know that if we had not acted, it would have affected the American people directly."

"If the government had not acted, the hole in our financial system would have gotten larger," he added.

Bush's comments - his 34th public statement on the economic crisis since the collapse of Lehman Brothers in mid-September - came just minutes after the Commerce Department reported that initial construction of U.S. homes fell to a fresh 17-year low in September. Housing starts fell to 817,000 residential units, down 6.3% from 872,000 housing starts the prior month.

Wall Street got off to another rough start on Friday, with the Dow falling more than 200 points. Stock prices have been highly volatile. This week alone, the Dow Jones had its second biggest daily point gain and second biggest drop ever.

Of the many recent measures that the U.S. government has taken to address the ongoing economic crisis - and the credit freeze in particular - the most sweeping is the $700 billion in newly approved funding that will be used, in part, to invest in banks and buy bad mortgage assets. The aim is to free up the major banks to lend once again.

Bush said the government would limit its intervention in size and scope, and did not intend to nationalize the banking system. "The government intervention is not a government takeover," he said.

Nevertheless, the government has taken a 79.9% stake in battered insurance giant American International Group (AIG, Fortune 500), in exchange for its initial $85 billion credit line granted on Sept. 16. On Oct. 8, the Federal Reserve extended an additional credit line of $37.8 billion to the company, for a total of $122.8 billion. So far, AIG has tapped $82.9 billion of the emergency funding.

The first big government intervention occurred on Sept. 7, when Treasury Secretary Henry Paulson and James Lockhart, director of the Federal Housing Finance Agency, extended as much as $200 billion to save Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500).

This action, essentially a taxpayer-funded government takeover, was intended to prevent the collapse of these spiraling mortgage giants, which own or back more than $5 trillion worth of mortgage debt, or about half the mortgage debt in the country.

First Published: October 17, 2008: 9:16 AM ET

By Aaron Smith, CNNMoney.com staff writer

Last Updated: October 17, 2008: 10:35 AM ET

Buffett: I'm buying stocks

Berkshire Hathaway CEO gives advice on how to invest during America's money crisis in a New York Times op-ed.

NEW YORK (CNNMoney.com) -- Billionaire investor Warren Buffett used a guest commentary article in the New York Times on Friday to announce that he's sticking with stocks.

Buffett, the so-called Oracle of Omaha for his ability to buy up the right companies at the right time for his holding company Berkshire Hathaway (BRK.A), said the worst may not be over for the faltering economy.

"In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary," Buffett wrote.

But for that reason, the Berkshire CEO said, he has converted his personal portfolio almost entirely to U.S. stocks. Previously, he said he owned nothing but Treasury bonds.

Buffett said the fear surrounding the disastrous credit crisis, which has dropped stocks about 36% from their all-time highs set around this time last year, has left equities with attractive purchasing prices.

"A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful," said Buffett. "And most certainly, fear is now widespread, gripping even seasoned investors."

Stock prices have been volatile, to say the least. Consider what happened this week alone: The Dow Jones gained 976 points on Monday; fell 76 points on Tuesday; dropped 733 points on Wednesday and then gained 401 points Thursday. But Buffett says the future is much brighter for stocks.

"Fears regarding the long-term prosperity of the nation's many sound companies make no sense," wrote Buffett. "Most major companies will be setting new profit records 5, 10 and 20 years from now."

Still, many nervous investors have been ditching the up-and-down stock market and pouring their funds into physical assets like gold or cash equivalents. Though they may feel safe now, Buffett said those investors are holding "terrible long-term assets" that will not come close to matching the future gains of stocks.

"The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy," Buffett added.

So if strong companies are destined for long-term success, bad news is good news when you're looking to invest in the stock market.

"Bad news is an investor's best friend," Buffett said. "It lets you buy a slice of America's future at a marked-down price."

First Published: October 17, 2008: 8:27 AM ET

Don't panic: a market meltdown survival guide

Joshua Zumbrun, Forbes Financial Post

Washington, D.C. -- It's been a bad week on Wall Street. The Dow has been avalanching downward, and the July to September summary of 401(k) statements in people's mailboxes look like black diamond ski slopes. It's a lousy time to be an investment banker, or a hedge fund manager, or planning a December retirement.

So Forbes.com asked some of the nation's foremost experts in financial crisis what people should do in a moment like this. Their message (and picture this in large, friendly letters): DON'T PANIC.

"Sit still," says Robert Aliber, a professor of international economics and finance at the University of Chicago. Mr. Aliber helped write the book on manias, panics and crashes. Literally. He co-authored the most recent edition of Charles Kindleberger's classic Manias, Panics and Crashes which chronicles and anatomizes crashes from tulip mania to the Great Depression to the dot-com bubble.

"By and large what we have is a liquidity crisis," says Mr. Aliber. Banks depend more than anyone on the constant availability of credit, and they're in a much worse position than they were a year ago. But should a freezing of liquidity cause a 40% drop for all stocks? A recession would cut into firms' profits but not by that much, says Mr. Aliber. That means there are a lot of cheap stocks out there.

In the long term, economists agree. Markets have always recovered in the past. But a famous bit of dismal science wisdom is that in the long term we are all dead. What about in the here and now?

"I would worry about a crash on Monday, but it could also be a huge buying opportunity," says Robert Shiller, the Yale economics professor who wrote Irrational Exuberance and The Subprime Solution and has made much of his career studying bubbles. Even if the majority of businesses are fundamentally OK, that doesn't stop people from overreacting. Irrational exuberance on the way up and irrational panic on the way down are all part of market psychology.

"One question is how big a role patriotism pays in their thinking. You don't want to be part of a market panic," says Mr. Shiller. "There's a moral issue in not pulling out."

There's also the issue of not being the sucker who sells at the very bottom of a market.

Stefan Nagel, an assistant professor of finance at Stanford recently co-wrote a paper on this very topic titled "Inexperienced Investors and Bubbles." Harvard's Robin Greenwood and Nagel found that inexperienced investors, in terms of age, are particularly likely to focus too heavily on recent returns.

After the lousy returns of the 1970s, inexperienced investors were more reluctant to invest in stocks. They missed out when stocks returned. After the boom years of the '90s, inexperienced investors were more likely to increase their stock exposure. When the dot-com bubble burst, they got burned.

"We don't have the latest numbers on the current situation yet, but, based on the historical experience, it seems likely that it is particularly inexperienced investors who are rushing for the exit at the moment," says Mr. Nagel.

It's another old market maxim, and it's as true on the way down as it is on the way up: Past performance is no guarantee of future results.

In the past four weeks, the Dow Jones industrial average has lost 26% of its value. In the past year, it's lost 40%. And despite comparisons to the Great Depression, the economists who talked to Forbes.com see nothing nearly that severe.

People don't panic forever. And compared with watching CNBC all day, the economists are optimists. That's the pain of being an academic, always the Cassandra: pessimistic when times are good (because there's always a fall coming) and optimistic when times are bad (because things always recover).

But they're not just optimistic because a crisis boosts book sales. "I borrowed money to buy stocks," confides Mr. Aliber, with a hint of excitement. "They've lost money since earlier in the week, but I'm going to make a bundle."

Ottawa may make millions on CMHC plan for banks

TARA PERKINS AND BOYD ERMAN Globe and Mail

The federal government stands to make hundreds of millions of dollars off of its new program to buy mortgages from banks.

The government today is launching the first purchase of $5-billion of mortgages from Canada's banks as part of a program to buy $25-billion of home loans from banks to give them cash to make new loans.

It is taking advantage of its ability to borrow cheaply to buy the mortgages, which will pay a higher rate of interest. The difference will be the government's profit.

Ottawa doesn't have a forecast of its likely take, but given current market prices and the guidance that the Finance Department has provided to bankers on the prices to be paid, the federal government may expect to earn about $250-million a year. That could rise to $1-billion if the government increases the size of the mortgage purchases to $100-billion, as some in the banking sector suggest could be done.

Those potential profits are significant at a time when Ottawa projects its surplus will fall to $1.3-billion for the year ended March, 2010.

While government officials say any profit isn't the point, earning money on the program does drive home the message that Ottawa has been sending: The program isn't a bailout at taxpayers' expense.

“The goal is not to make money for the government,” said a Finance Department official who spoke on condition of anonymity. While the program is an efficient way to support lending in Canada by providing reliable funding to banks, it is important that the banks pay a competitive rate to tap into the funds, the official said.

“This is not a subsidy for banks.”

The credit crunch, which first erupted more than a year ago, has made it more expensive for banks to raise long-term funding to finance mortgages.

Finance Minister Jim Flaherty announced the initiative last Friday to have government-owned Canada Mortgage and Housing Corp. buy up loans from banks. The loans are solid, but by taking them off bank balance sheets in return for cash, the banks will theoretically be able to make new loans.

Ottawa has committed to buy up to $25-billion in total, but has not yet set the dates for the remaining purchases. Participants expect the government to carry out four more purchases of $5-billion each.

The purchases will be conducted by so-called reverse auction, where banks will essentially have to tell the government how much they will pay in the form of interest to move the loans off their balance sheets. The government will accept the most profitable bids.

Mortgage lenders can submit up to three bids for various amounts, but no one lender can sell more than $1.25-billion of loans to the government.

The government will establish a minimum acceptable yield, or interest rate. That minimum is expected to be above the yield on comparable five-year Canada Mortgage Bonds that CMHC sells to investors.

Banks are expected to place bids somewhere above the minimum, with more-stressed banks giving the government a better deal as they try to ensure they can raise cash.

John Manley, a former deputy prime minister and finance minister, said he was surprised Ottawa didn't pick up the program earlier.

“They make money on it, it increases liquidity in the system – why don't you answer the phone when people suggest things?” he said, pointing out that banks had been suggesting the program for some time.

One bank chief executive officer said that, even as the financial crisis worsens, Canada is in a unique position where it can establish programs to ease the flow of funds that don't put taxpayers on the hook. A shortage of government bonds and an excess of mortgages sitting on the banks' books make this an easy program to increase if necessary, he said.

Canadian government unlikely to follow U.S. lead and buy financial shares

By David Friend, The Canadian Press

TORONTO - Canada's government is unlikely to buy shares in the country's domestic banks because they are in much better shape than their American and European counterparts, which have required massive assistance from their governments, market observers say.

National Bank analyst Robert Sedran said Tuesday that Canadian banks have emerged relatively unscathed by the U.S. subprime problems because of more conservative lending practices.

"The banks in Canada have strong balance sheets and are doing fine," he said Tuesday in a phone interview.

However, Sedran said there is a need to ensure that Canadian banks aren't put at a disadvantage by other countries injecting capital into their local institutions, such as the $250-billion share purchase plan unveiled by George W. Bush.

On Tuesday, Bush said the U.S. government would buy shares in the big American banks as part of the $700-billion bailout package designed to jolt the economy back into growth.

The decision raised some concern that capital would flow towards government-backed banks because they appear more secure, and possibly away from institutions that don't have that guarantee. Sedran said government-backed risk has an appeal over corporate risk and could ultimately steal some confidence from the Canadian banking system.

"Capital is mobile in this global market," Sedran said. "You need to protect the Canadian banks from a competitive positioning perspective so that they're not unnecessarily disadvantaged."

However Laurence Booth, a professor at the Rotman School of Management, says Canadian banks are already better capitalized than the American and British banks.

And the federal government in Ottawa has made efforts to aid Canada's financial system without fully putting its hands into their operations.

On Friday, the Canadian government announced it will buy up to C$25 billion in residential mortgages to give the chartered banks more cash for loans. The first round of purchases is scheduled to be $5 billion on Thursday, two days after the federal election.

Finance Minister Jim Flaherty also said last week that the government is prepared to do "whatever we have to do" to protect Canada's financial system, though he declined to outline any plans.

However, some observers say Flaherty has only provided a vague outline of a plan, compared to other countries that have provided significant disclosure.

"Everyone else had all these details, specific plans - even numbers - and all we got from the Canadian side was that we'd make sure our banks aren't disadvantaged," said Chris Blumas, an analyst at Morningstar.

Prime Minister Stephen Harper has defended the way that the Conservative government handled the economic crisis and their insistence that the domestic economy is relatively stable compared to the United States.

"The No. 1 job of the next prime minister of Canada is to protect this country's economy - our earnings, savings, and jobs, at a time of global economic uncertainty," he told supporters on Monday at a rally in P.E.I.

Liberal party leader Stephane Dion has announced a 30-day plan to address the Canadian economy, and boost the struggling manufacturing sector in Ontario.

NDP Leader Jack Layton has suggested that Canadian banking regulations undergo a comprehensive review.

End of financial crisis is in sight

End of financial crisis is in sight, Tal says; U.S. house prices
falling at a diminishing rate



Tuesday, October 7, 2008

Investment Executive



By Megan Harman



The Canadian economy will no doubt experience a downturn going forward,
but signals indicate that the end of the financial turmoil is in sight,
CIBC World Markets senior economist Benjamin Tal said on Tuesday.



The problem at the core of the U.S. financial crisis is house prices,
Tal said in a keynote speech at CIBC World Markets' annual income fund
conference. He showed figures indicating that although house prices
continue to fall, they are falling at a diminishing rate.



"We are starting to see the end of this game," he said.



Since Canada has a much healthier housing market, prices in this country
will not fall nearly as severely as the plunge experienced south of the
border, according to Tal. He expects house prices in this country to
fall between 5% and 10%, with markets in the west experiencing the
biggest drops, since massive growth in those cities have pushed house
prices artificially high in recent years.



The Canadian economy in general will witness a slowdown of its own in
the months to come, though Tal said a healthier housing market will
shield it from some of the turmoil facing the U.S. economy.



The U.S. housing market was a major factor supporting the U.S. economy,
and it fueled what Tal calls the 'housing wealth effect'-- a phenomenon
that drives homeowners to spend more in general when they feel their
house is highly valued. The deterioration of this value has hurt
consumer spending --and the economy -- all around, Tal said.



"The consumer in the U.S. is really struggling," he said.



But Canada's energy-heavy economy won't escape a downturn either,
especially as commodity prices continue to fall. Tal pointed to figures
showing that by the first quarter of this year, Canada's GDP growth rate
had already dropped below that in the United States, despite a seemingly
better economic environment in this country.



"Clearly it's about commodity prices," Tal said. "They are falling big
time."



But it doesn't necessarily mean this is the end of the commodity cycle,
he added. The U.S. comprises just 12% of global GDP growth, whereas
Brazil, Russia, India, China and Middle East oil producing countries
together comprise almost 40% of global growth. He expects demand from
such key emerging markets to fuel a rebound in commodity prices.



"We believe this is a correction within a bull market for the commodity
market," he said.



In fact, by 2010, supply restraints on food and energy will drive up
demand and create another dramatic rise in commodity prices, fueling
widespread new concerns about inflation, Tal said.



"By 2010 or late 2009, the story will not be subprime; the story will be
inflation."

Canada Has Biggest Job Increase in at Least 30 Years

By Alexandre Deslongchamps



Oct. 10 (Bloomberg) -- Canada recorded its biggest one-month employment
gain in at least 30 years as voters get ready for the Oct. 14 election,
adding more than 10 times as many jobs as expected in September.



Employers added 106,900 workers, Statistics Canada said today in Ottawa,
following an August gain of 15,200 jobs. The unemployment rate remained
at 6.1 percent as people entered the labor force. Economists forecast
10,000 new jobs and a jobless rate of 6.2 percent, according to the
median of 20 estimates in Bloomberg surveys.



The report may help Conservative Party Prime Minister Stephen Harper,
who has dropped to a virtual dead heat with Liberal opposition leader
Stephane Dion in some polls after leading for most of a campaign.
Harper's effort to depict his party as the best steward of the economy
initially gave him double-digit leads in polls, before the financial
crisis worsened and hurt his popularity.



``This was still much, much better than we would have thought given
what's been happening to the North American economy, and will have
interesting election implications as well,'' Avery Shenfeld, senior
economist at CIBC World Markets Inc. in Toronto, said today in a note to
clients.



A net 40,000 jobs were added in the health-care and social- assistance
industry in September, reversing drops in the previous three months.
Some 19,800 jobs were created in business services, such as maintenance,
and 16,300 positions in transportation and warehousing.



Manufacturers added 19,700 workers, or one percent of their workforce,
erasing their loss for the year. Payrolls are down by 42,600 from a year
earlier.



Part-Time Jobs



Canada added a net 96,600 part-time jobs and 10,300 full- time jobs, the
statistics agency said. The agency says it started using the current
methodology in 1976, making it impossible to compare September's gain to
earlier records.



Support for Harper's party fell to 33 percent on Oct. 8, the lowest
since the start of the campaign, according to Nanos Research, an
Ottawa-based pollster. The Liberals are within 4 percentage points at 29
percent, after trailing by 15 points last month. The margin of error is
2.8 percentage points.



Average hourly wages rose 4.6 percent in September from a year earlier,
trailing an 11-year high of 4.9 percent reached in February. Pay raises
are still outpacing inflation, with the consumer price index advancing
3.5 percent in August from a year earlier, the agency said.



Employers have added 276,800 workers since September 2007, a 1.6 percent
increase, Statistics Canada said.



The Bank of Canada said the economy will grow 1 percent this year, the
slowest since 1992, hobbled by an export slump. The central bank, which
unexpectedly cut its benchmark lending rate by half a percentage point
to 2.5 percent on Oct. 8, has a scheduled rate decision on Oct. 21 and
will revise its economic outlook on Oct. 23.

Rubin is still optimistic for a dramatic 30% turnaround in 2009.

Rubin still optimistic about a turnaround next year; Oil Will Rebound

Eric Lam
Financial Post
10/10/2008
National Post
National
FP6
(c) 2008 National Post . All Rights Reserved.

Despite predicting the benchmark TSX composite index to close out 2008
at 9,500 points, CIBC World Market's Jeff Rubin is still optimistic for
a dramatic 30% turnaround in 2009.

Expecting a big rebound in oil to lead a surge in commodities next year,
CIBC's chief economist projects a 2009 year-end total of 12,000 points
for the TSX.

"If US$90 [per barrel] is the price of oil during what is being
perceived as a deep global recession, what is the price of oil in the
recovery?" he said in a new strategy report released yesterday. "We
continue to believe that oil prices will average US$150/bbl over the
second half of next year on the back of even a modest recovery in global
economic growth."

But in the meantime, massive sell-offs in North American markets as
investors drop assets "tied to a strong economy" will take a big bite
out of the senior index in 2008.

This suggests a very real possibility the TSX will end the year at less
than 10,000 points after closing below the mark for the first time since
July, 2005 on Tuesday.

As well, repeated 800-point drops in the last few weeks have created an
atmosphere of fear for Canadian investors.

"That de-leveraging story is likely to hold sway for the balance of the
year," he said.

Mr. Rubin argues that this knee-jerk reaction from investors is actually
making a manageable problem worse, even if the most recent economic
figures for the United States and other members of the Organization for
Economic Cooperation and Development (OECD) show a firm recession.

"The recession is neither deep enough nor global enough to warrant the
massive haircut in energy and other resource stock valuations that have
taken place over the last several months," he said.

"While there is little to warrant near-term optimism, investors at the
same time should not lose sight of the fact that many of yesterday's
fundamentals have not changed."

Fuelled by commodities, worldwide economic growth will not slow as much
as nervous investors are expecting.

Mr. Rubin predicts the growth rate will not dip to less than 3.5% in the
rest of 2008 or all of 2009. This rate is a step down from recent years,
but still "a far cry" from figures historically associated with bear
markets, he said.

As for the roots of the U. S. subprime mortgage fiasco, Mr. Rubin
believes there is a light at the end of the tunnel for housing prices.
Within the next six months, he sees a "trough" in U. S. housing prices
and a price decline of an additional 5% at most.

Mr. Rubin's pessimistic readjustment of his 2008 yearend numbers for the
TSX is the latest in a series of downward projections he has made since
boldly predicting a 16,000-point close in December, 2007.

"Our year-end target for 2008, of 16,200 for the composite index,
implies a year of double-digit gains, including the dividend," he said
at the time.

Mr. Rubin also said he did not expect the fallout from the U. S.
subprime lending crisis to lead to a recession, or that it would last as
long as it did.

His most recent predictions, made in September, pegged the TSX to close
at 13,000 points by the end of 2008 and 14,000 at the same time in 2009.