Giuseppe Strazzeri

"Customer service is not a department...it's an attitude."

2012-02-01T06:33:00.000-08:00

This 3-minute video is a crash course on customer service! It's a simple, but powerful explanation about making your customers feel loved.

The Right to Lead

2012-01-30T12:59:00.000-08:00

An excerpt from
The Right to Lead
by John Maxwell

What Gives a Man or Woman the Right to Lead?

It certainly isn't gained by election or appointment. Having position, title, rank or degrees doesn't qualify anyone to lead other people. And the ability doesn't come automatically from age or experience, either.

No, it would be accurate to say that no one can be given the right to lead. The right to lead can only be earned. And that takes time.

The Kind of Leader Others Want to Follow

The key to becoming an effective leader is not to focus on making other people follow, but on making yourself the kind of person they want to follow. You must become someone others can trust to take them where they want to go.

As you prepare yourself to become a better leader, use the following guidelines to help you grow:

1. Let go of your ego.

The truly great leaders are not in leadership for personal gain. They lead in order to serve other people. Perhaps that is why Lawrence D. Bell remarked, "Show me a man who cannot bother to do little things, and I'll show you a man who cannot be trusted to do big things."

2. Become a good follower first.

Rare is the effective leader who didn't learn to become a good follower first. That is why a leadership institution such as the United States Military Academy teaches its officers to become effective followers first—and why West Point has produced more leaders than the Harvard Business School.

3. Build positive relationships.

Leadership is influence, nothing more, nothing less. That means it is by nature relational. Today's generation of leaders seem particularly aware of this because title and position mean so little to them. They know intuitively that people go along with people they get along with.

4. Work with excellence.

No one respects and follows mediocrity. Leaders who earn the right to lead give their all to what they do. They bring into play not only their skills and talents, but also great passion and hard work. They perform on the highest level of which they are capable.

5. Rely on discipline, not emotion.

Leadership is often easy during the good times. It's when everything seems to be against you—when you're out of energy, and you don't want to lead—that you earn your place as a leader. During every season of life, leaders face crucial moments when they must choose between gearing up or giving up. To make it through those times, rely on the rock of discipline, not the shifting sand of emotion.

6. Make added value your goal.

When you look at the leaders whose names are revered long after they have finished leading, you find that they were men and women who helped people to live better lives and reach their potential. That is the highest calling of leadership—and its highest value.

7. Give your power away.

One of the ironies of leadership is that you become a better leader by sharing whatever power you have, not by saving it all for yourself. You're meant to be a river, not a reservoir. If you use your power to empower others, your leadership will extend far beyond your grasp.

~~~

In The Right to Lead, you will hear from and read about people who have done these same things and earned the right to lead others. Because of the courage they found and the character they displayed, other people recognized their admirable qualities and felt compelled to follow them.

The followers who looked to these leaders learned from them, and so can we. As you explore their worlds and words, remember that it takes time to become worthy of followers. Leadership isn't learned or earned in a moment.

The Road To Happiness

2012-01-24T15:43:00.000-08:00

An excerpt from
The Road To Happiness
by Mac Anderson and BJ Gallagher

A thankful spirit is a healthy spirit. As the twists and turns of life lead to feelings of being out of control, sometimes our attitude is all that we have control over...the following reflection may help you develop a thankful attitude. Sometimes life is all about how we look at it!

I am thankful for...

• the mess to clean after a party because it means I have been surrounded by friends.

• the taxes I pay because it means that I am employed.

• a lawn that needs mowing, windows that need cleaning and gutters that need fixing because it means I have a home.

• my shadow who watches me work because it means I am out in the sunshine.

• the spot I find at the far end of the parking lot because it means I am capable of walking.

• all of the complaining I hear about our government because it means we have freedom of speech.

• my huge heating bill because it means I am warm.

• the lady behind me in church who sings off key because it means that I can hear.

• the alarm that goes off early in the morning hours because it means that I am alive.

• the piles of laundry and ironing because it means my loved ones are nearby.

• weariness and aching muscles at the end of the day because it means I have been productive.

Trying to calculate Interest Differential?

2012-01-22T15:54:00.000-08:00

With a little help from Ma and Pa Kettle

The 100/0 Principle

2012-01-14T06:20:00.001-08:00

An excerpt from
The 100/0 Principle
by Al Ritter

What is the most effective way to create and sustain great relationships with others? It's The 100/0 Principle: You take full responsibility (the 100) for the relationship, expecting nothing (the 0) in return.

Implementing The 100/0 Principle is not natural for most of us. It takes real commitment to the relationship and a good dose of self-discipline to think, act and give 100 percent.

The 100/0 Principle applies to those people in your life where the relationships are too important to react automatically or judgmentally. Each of us must determine the relationships to which this principle should apply. For most of us, it applies to work associates, customers, suppliers, family and friends.

STEP 1 - Determine what you can do to make the relationship work...then do it. Demonstrate respect and kindness to the other person, whether he/she deserves it or not.

STEP 2 - Do not expect anything in return. Zero, zip, nada.

STEP 3 - Do not allow anything the other person says or does (no matter how annoying!) to affect you. In other words, don't take the bait.

STEP 4 - Be persistent with your graciousness and kindness. Often we give up too soon, especially when others don't respond in kind. Remember to expect nothing in return.

At times (usually few), the relationship can remain challenging, even toxic, despite your 100 percent commitment and self-discipline. When this occurs, you need to avoid being the "Knower" and shift to being the "Learner." Avoid Knower statements/ thoughts like "that won't work," "I'm right, you are wrong," "I know it and you don't," "I'll teach you," "that's just the way it is," "I need to tell you what I know," etc.

Instead use Learner statements/thoughts like "Let me find out what is going on and try to understand the situation," "I could be wrong," "I wonder if there is anything of value here," "I wonder if..." etc. In other words, as a Learner, be curious!

Principle Paradox

This may strike you as strange, but here's the paradox: When you take authentic responsibility for a relationship, more often than not the other person quickly chooses to take responsibility as well. Consequently, the 100/0 relationship quickly transforms into something approaching 100/100. When that occurs, true breakthroughs happen for the individuals involved, their teams, their organizations and their families.

Stress is a choice

2012-01-09T07:06:00.000-08:00

An excerpt from
Stress is a Choice
by David Zerfoss

Several years ago while listening to my pastor give a Sunday sermon, he spoke about how life is made up of a series of choices. It made me realize that my hectic professional and personal life was of my choosing. Therefore, a life of stress had become my choice.

Many of us hurry through life going from one place to the next, focused on conquering the next mountain, making the next deal, running the next errand, and believing we will never have enough time to do all the things we need to get done. Yet, there is all the time in the world if we just realize that we are the creators of this life we choose to live. That's right. Life is a series of choices and being free from stress is one of those choices.

Whether your business life is overly complicated or your personal life (or both), you have chosen this current system of chaos. The world is a tantalizing swirl of getting the next "fix," tempting us to fit more and more things, people and processes into our lives, personally and professionally. And because we are so busy being busy, it's easy to be lured into the fray, with our lengthy to-do lists. Yet, the greatest achievements have often come from the simplest of ideas and in the simplest forms.

To experience a simplified life, we first have to learn to slow down long enough to see through all the clutter. We need to realize that we are powerful magnets that attracted this life to ourselves—no matter what—good or bad.

Finding Joy

2012-01-02T11:01:00.000-08:00

An excerpt from
Finding Joy
by Mac Anderson

Life can be complicated, but happiness...is simple. Of course, we try our best to make it complicated, but if we look closely, it's really very simple. And that's what this little book is all about...Simple Secrets to a Happy Life!

My goal is to have you sit down in a quiet place, and to slowly soak up every single page. Don't hurry, just take a deep breath, read each thought, and reflect on how it might apply to your life. Think about what is...and what could be, if your mind and heart is open to change.

But here is the real key to making this book all it can be...keep it close, and read it often. Because in a perfect world we read something once, record it in our brain, and never need to read it again.

Well, I don't know about you, but my world is far from perfect. I have doubts, fears and disappointments in my life, and I need doses of inspiration to bring me back to where I should be...to re-direct me to what's really important in life.

And this little book, if you'll let it, can be that source of inspiration! In just a few minutes it can put a smile on your face and in your heart when you need it most.

The Strangest Secret

2011-12-29T08:29:00.000-08:00

An excerpt from
The Strangest Secret
by Earl Nightingale

George Bernard Shaw said, "People are always blaming their circumstances for what they are. I don't believe in circumstances. The people who get on in this world are the people who get up and look for the circumstances they want, and if they can't find them, make them."

Well, it's pretty apparent, isn't it? And every person who discovered this believed (for a while) that he was the first one to work it out. We become what we think about.

Now, it stands to reason that a person who is thinking about a concrete and worthwhile goal is going to reach it, because that's what he's thinking about. And we become what we think about.

Conversely, the person who has no goal, who doesn't know where he's going, and whose thoughts must therefore be thoughts of confusion, anxiety, fear and worry—his life becomes one of frustration, fear, anxiety and worry. And if he thinks about nothing...he becomes nothing.

How does it work? Why do we become what we think about? Well, I'll tell you how it works, as far as we know. To do this, I want to tell you about a situation that parallels the human mind.

Suppose a farmer has some land, and it's good, fertile land. The land gives the farmer a choice; he may plant in that land whatever he chooses. The land doesn't care. It's up to the farmer to make a decision.

We're comparing the human mind with the land because the mind, like the land, doesn't care what you plant in it. It will return what you plant, but it doesn't care what you plant.

Now, let's say that the farmer has two seeds in his hand—one is a seed of corn, the other is nightshade, a deadly poison. He digs two little holes in the earth and he plants both seeds—one corn, the other nightshade. He covers up the holes, waters and takes care of the land...and what will happen? Invariably, the land will return what was planted. As it's written in the Bible,

"As ye sow, so shall ye reap."

Remember, the land doesn't care. It will return poison in just as wonderful abundance as it will corn. So up come the plants—one corn, one poison. The human mind is far more fertile, far more incredible and mysterious than the land, but it works the same way. It doesn't care what we plant...success...or failure. A concrete, worthwhile goal...or confusion, misunderstanding, fear, anxiety, and so on. But what we plant it must return to us.

You see, the human mind is the last great, unexplored continent on earth. It contains riches beyond our wildest dreams. It will return anything we want to plant.

What did you accomplish in 2011?

2011-12-22T05:49:00.000-08:00

An excerpt from
The Butterfly Effect
by Andy Andrews

There are generations yet unborn whose very lives will be shifted and shaped by the moves you make and the actions you take today. And tomorrow. And the next day. And the next.

Every single thing you do matters.

You have been created as one of a kind.

On the planet Earth, there has never been one like you ...and there will never be again.

Your spirit, your thoughts and feelings, your ability to reason and act all exist in no one else.

The rarities that make you special are no mere accident or quirk of fate.

You have been created in order that you might make a difference. You have within you the power to change the world.

Know that your actions cannot be hoarded, saved for later, or used selectively.

By your hand, millions—billions—of lives will be altered, caught up in a chain of events begun by you this day.

The very beating of your heart has meaning and purpose.

Your actions have value far greater than silver or gold.

Your life...
And what you do with it today ...matters forever.

Seven Choices for Success and Significance

2011-12-20T08:01:00.001-08:00

An excerpt from
Seven Choices for Success and Significance
by Dr. Nido R. Qubein

What is success? Only you can define it in your own life. In my own life, I have attempted to define both Success and Significance.

To me, Success is secular. Significance is spiritual.

It doesn't matter how you define your own spirituality. Spiritual matters are always finer, deeper, and longer lasting than secular matters.

Success focuses on three Fs:

• Fans
• Fame
• Fortune

Success is focused on tasks, even goals.

Significance also focuses on three Fs:

• Faith
• Family
• Friends

But, significance focuses on purpose. Why am I here? What do I do with the talents, experiences and skills that I have? How can I make the world a better place? How do I plant seeds of greatness in the lives of those around me? How do I make an impact in the circles of influence where I find or place myself?

To choose success and significance, you must be a strategic thinker who:

• Has a clear vision of what you want to accomplish
• Develops a solid strategy that answers three questions:

- Who or what are we today?
- Who do we want to become?
- How do we get there?

• Employs practical systems to achieve your goals
• Commits to consistent execution because in consistency, success
emerges.

When implementing your strategic plan for success, it really comes down to three "Ds":

Decide what you want most to achieve
Determine the first step to getting what you want
Do the first thing that will start you moving toward your goal.

Using these seven keys, you can choose success and significance. But keep this in mind: success is not a matter of luck, not an accident of birth, not a reward for virtue. The most successful people I know are the ones who have something to do, somewhere to be and someone to love.

No one is responsible for your success or your joy. You must search for it and be in a continual state of earning it.

To merely succeed is not an end in itself. You must use your success to impact other people...to impact the world...to Live Life from the Inside Out.

It all starts with the choices you make - they determine the person you will become.

2011-11-13T11:35:00.001-08:00

An excerpt from
Heart of a Teacher
by Paula Fox

He was in the first third grade class I taught at Saint Mary's School in Morris, Minnesota. All 34 of my students were dear to me, but Mark Eklund was one in a million. Very neat in appearance, he had that happy-to-be-alive attitude that made even his occasional mischievousness delightful.

Mark talked incessantly. I had to remind him again and again that talking without permission was not acceptable. What impressed me so much, though, was his sincere response every time I had to correct him for misbehaving. "Thank you for correcting me, Sister!" I didn't know what to make of it at first, but before long I became accustomed to hearing it many times a day.

One morning my patience was growing thin when Mark talked once too often, and then I made a novice teacher's mistake. I looked at Mark and said, "If you say one more word, I am going to tape your mouth shut!" It wasn't ten seconds later when Chuck blurted out, "Mark is talking again." I hadn't asked any of the students to help me watch Mark, but since I had stated the punishment in front of the class, I had to act on it. I remember the scene as if it had occurred this morning. I walked to my desk, very deliberately opened my drawer and took out a roll of masking tape. Without saying a word, I proceeded to Mark's desk, tore off two pieces of tape and made a big X with them over his mouth. I then returned to the front of the room. As I glanced at Mark to see how he was doing, he winked at me. That did it! I started laughing. The class cheered as I walked back to Mark's desk, removed the tape, and shrugged my shoulders. His first words were, "Thank you for correcting me, Sister."

At the end of the year, I was asked to teach junior-high math. The years flew by, and before I knew it, Mark was in my classroom again. He was more handsome than ever and just as polite. Since he had to listen carefully to my instruction in the "new math," he did not talk as much in ninth grade as he had in third. One Friday, things just didn't feel right. We had worked hard on a new concept all week, and I sensed that the students were frowning, frustrated with themselves and edgy with one another. I had to stop this crankiness before it got out of hand. So I asked them to list the names of the other students in the room on two sheets of paper, leaving a space between each name. Then I told them to think of the nicest thing they could say about each of their classmates and write it down. It took the remainder of the class period to finish the assignment, and as the students left the room, each one handed me the papers. Charlie smiled. Mark said, "Thank you for teaching me, Sister. Have a good weekend." That Saturday, I wrote down the name of each student on a separate sheet of paper, and I listed what everyone else had said about that individual.

On Monday, I gave each student his or her list. Before long, the entire class was smiling. "Really?" I heard whispered. "I never knew that meant anything to anyone!" "I didn't know others liked me so much." No one ever mentioned those papers in class again. I never knew if they discussed them after class or with their parents, but it didn't matter. The exercise had accomplished its purpose. The students were happy with themselves and one another again.

That group of students moved on. Several years later, after I returned from vacation, my parents met me at the airport. As we were driving home, Mother asked me the usual questions about the trip, the weather, my experiences in general. There was a lull in the conversation. Mother gave Dad a sideways glance and simply said, "Dad?" My father cleared his throat as he usually did before saying something important.

"The Eklunds called last night," he began. "Really?" I said. "I haven't heard from them in years. I wonder how Mark is." Dad responded quietly. "Mark was killed in Vietnam," he said. "The funeral is tomorrow, and his parents would like it if you could attend." To this day I can still point to the exact spot on I-494 where Dad told me about Mark.

I had never seen a serviceman in a military coffin before. Mark looked so handsome, so mature. All I could think at that moment was, "Mark, I would give all the masking tape in the world if only you would talk to me." The church was packed with Mark's friends. Chuck's sister sang "The Battle Hymn of the Republic." Why did it have to rain on the day of the funeral? It was difficult enough at the graveside. The pastor said the usual prayers, and the bugler played taps. One by one those who loved Mark took a last walk by the coffin and sprinkled it with holy water. I was the last one to bless the coffin. As I stood there, one of the soldiers who acted as pallbearer came up to me. "Were you Mark's math teacher?" he asked. I nodded as I continued to stare at the coffin. "Mark talked about you a lot," he said.

After the funeral, most of Mark's former classmates headed to Chuck's farmhouse for lunch. Mark's mother and father were there, obviously waiting for me. "We want to show you something," his father said, taking a wallet out of his pocket. "They found this on Mark when he was killed. We thought you might recognize it." Opening the billfold, he carefully removed two worn pieces of notebook paper that had obviously been taped, folded and refolded many times. I knew without looking that the papers were the ones on which I had listed all the good things each of Mark's classmates had said about him. "Thank you so much for doing that," Mark's mother said. "As you can see, Mark treasured it." Mark's classmates started to gather around us. Charlie smiled rather sheepishly and said, "I still have my list. I keep it in the top drawer of my desk at home." Chuck's wife said, "Chuck asked me to put his in our wedding album." "I have mine too," Marilyn said. "It's in my diary." Then Vicki, another classmate, reached into her pocketbook, took out her wallet and showed her worn and frazzled list to the group. "I carry this with me at all times," Vicki said without batting an eyelash. "I think we all saved our lists." That's when I finally sat down and cried. I cried for Mark and for all his friends who would never see him again.

The density of people in society is so thick that we forget that life will end one day. And we don't know when that one day will be. So please, tell the people you love and care for that they are special and important. Tell them, before it is too late.

The Best Way Out is Always Through

2011-11-10T09:06:00.001-08:00

An excerpt from
The Best Way Out is Always Through
by BJ Gallagher

Mary Kay Ash banged her head on the corporate glass ceiling one too many times. Working for several direct sales companies from the 1930's until the early 1960's, she achieved considerable success. She climbed the corporate ladder to become the sole woman on the board of directors of the World Gift Company — quite an accomplishment for a woman in the 1950's.

But life wasn't rosy at the top. Even though Mary Kay had the title and the track record, she was not taken seriously by her male peers. In board meetings, her opinions and suggestions were ignored, dismissed, or even ridiculed. Male board members minced no words in their judgment - pronouncing her guilty of "thinking like a woman."

Since the sales force was almost entirely female, Mary Kay thought that thinking like a woman was an asset. But her fellow board members disagreed. Finally, in frustration, she retired in 1963, intending to write a book to assist women in the male-dominated business.

Sitting at her kitchen table, she made two lists: one list was all the good things she had seen in the companies where she'd worked, and the other list was all the things she thought could be improved. As she re-read her lists, she realized that what she had in front of her was a marketing plan for her ideal company. In just four weeks, her "book" had become a business plan, and her retirement was over.

Both her accountant and her attorney did their best to discourage her, warning that she would be throwing her money away on this venture. But Mary Kay had heard enough male nay-saying in her corporate years — she ignored her advisors.

Her husband, unlike her accountant and attorney, was very supportive. With his help, Mary Kay developed cosmetic products, designed packaging, wrote promotional materials and recruited and trained her female sales force.

Then the unthinkable happened; her husband of twenty-one years died of a heart attack. Another woman might have dropped her plans, or at least delayed them, but Mary Kay was a strong Texas woman. She stayed on track with the help of her twenty-year-old son, Richard Rogers, and rolled out her new business in September of 1963.

Beginning with a storefront in Dallas and an investment of $5,000, Mary Kay Cosmetics earned close to $200,000 in its first year — quadrupling that amount in its second year. When Mary Kay took her company public in 1968, sales had climbed to more than $10 million.

Mary Kay's unusual corporate motto, "God first, family second, career third," was unconventional, to say the least. But she understood the need for women to have balance in their lives, and she was committed to providing unlimited opportunity for women's financial AND personal success.

Mary Kay authored three books, all of which became best-sellers. Her business model is taught at the Harvard Business School. She received many honors, including the Horatio Alger Award. Fortune magazine has named Mary Kay Cosmetics as one of the Ten Best Companies for Women, as well as one of The 100 Best Companies to Work for in America.

At the time of her death in 2001, Mary Kay Cosmetics had 800,000 independent beauty consultants in 37 countries, with total annual sales of over two billion dollars. Never underestimate the power of a woman with a mission!

The Power of Kindness

2011-10-24T15:14:00.000-07:00

An excerpt from
The Power of Kindness
by Mac Anderson

One day, a poor boy who was selling goods from door-to-door to pay his way through school, found he had only one thin dime left, and he was hungry. He decided he would ask for a meal at the next house. However, he lost his nerve when a lovely young woman opened the door.

Instead of a meal, he asked for a drink of water. She thought he looked hungry and so she brought him a large glass of milk. He drank it slowly, and then asked, "How much do I owe you?"

"You don't owe me anything," she replied. "Mother has taught us never to accept pay for a kindness." He said, "Then I thank you from my heart." As Howard Kelly left that house, he not only felt stronger physically, but his faith in God and man was strengthened also. He had been ready to give up and quit.

Years later, that young woman became critically ill. The local doctors were baffled. They finally sent her to the big city, where they called in specialists to study her rare disease.

Dr. Howard Kelly was called in for the consultation. When he heard the name of the town she came from, he went down the hall of the hospital to her room. Dressed in his doctor's gown, he went in to see her. He recognized her at once. He went back to the consultation room determined to do his best to save her life. From that day, he gave special attention to the case.

After a long struggle, the battle was won. Dr. Kelly requested from the business office to pass the final billing to him for approval. He looked at it, then wrote something on the edge, and the bill was sent to her room. She feared to open it, for she was sure it would take the rest of her life to pay for it all. Finally, she looked, and something caught her attention on the side of the bill. She read these words:

"Paid in full with one glass of milk..."

(Signed)

Dr. Howard Kelly

(Dr. Howard Kelly was a distinguished physician who, in 1895, founded the Johns Hopkins Division of Gynecologic Oncology at Johns Hopkins University. According to Dr. Kelly's biographer, Audrey Davis, the doctor was on a walking trip through Northern Pennsylvania one spring day when he stopped by a farm house for a drink of water.)

Attitude is Everything

2011-10-17T17:04:00.000-07:00

An excerpt from

Attitude is Everything

by Vicki Hitzges

I used to worry. A lot. The more I fretted, the more proficient I became at it. Anxiety begets anxiety. I even worried that I worried too much! Ulcers might develop. My health could fail. My finances could be depleted to pay the hospital bills.

A comedian once said, "I tried to drown my worries with gin, but my worries are equipped with flotation devices." While not a drinker, I certainly could identify! My worries could swim, jump and pole vault!

To get some perspective, I visited a well known, Dallas businessman, Fred Smith. Fred mentored such luminaries as motivational whiz Zig Ziglar, business guru Ken Blanchard and leadership expert John Maxwell. Fred listened as I poured out my concerns and then said, "Vicki, you need to learn to wait to worry."

As the words sank in, I asked Fred if he ever spent time fretting. (I was quite certain he wouldn't admit it if he did. He was pretty full of testosterone—even at age 90.) To my surprise, he confessed that in years gone by he had been a top-notch worrier!

"I decided that I would wait to worry!" he explained. "I decided that I'd wait until I actually had a reason to worry—something that was happening, not just something that might happen—before I worried."

"When I'm tempted to get alarmed," he confided, "I tell myself, 'Fred, you've got to wait to worry! Until you know differently, don't worry.' And I don't. Waiting to worry helps me develop the habit of not worrying and that helps me not be tempted to worry."

Fred possessed a quick mind and a gift for gab. As such, he became a captivating public speaker. "I frequently ask audiences what they were worried about this time last year. I get a lot of laughs," he said, "because most people can't remember. Then I ask if they have a current worry—you see nods from everybody. Then I remind them that the average worrier is 92% inefficient—only 8% of what we worry about ever comes true."

Charles Spurgeon said it best. "Anxiety does not empty tomorrow of its sorrow, but only empties today of its strength."

Finding Joy

2011-10-17T17:01:00.000-07:00

An excerpt from
Finding Joy

by Vicki Hitzges

The story behind Leading with Passion

2011-09-29T06:06:00.000-07:00

An excerpt from
Leading with Passion
by John J. Murphy

Light a match in a dark room and watch as the light instantly overcomes the darkness. Observe the power and grace of that single, solitary flame dancing with life. Now light several candles or kindle a fire and experience the added warmth and comfort extending from that first, vulnerable flame through others. This is the heart and soul of leadership - the essence of inspiring others. It is about courageously casting off fear, doubt and limiting beliefs and giving people a sense of hope, optimism and accomplishment. It is about bringing light into a world of uncertainty and inspiring others to do the same. This is what we call passion, the fire within.

Passion is a heartfelt energy that flows through us, not from us. It fills our hearts when we allow it to and it inspires others when we share it. It is like sunlight flowing through a doorway that we have just opened. It was always there. It just needed to be accepted and embraced. Under the right conditions, this "flow" appears effortless, easy and graceful. It is doing what it is meant to do. It is reminding us that we are meant to be purposeful. We are meant to be positive. We are meant to be passionate. We feel this when we listen to and accept our calling in life. We feel it as inspiration when we open the door of resistance and let it in.

Inspiration springs forth when we allow ourselves to be "in-spirit," aligned with our true essence. Stop and think about it: When you feel truly passionate and inspired about someone or something, what frame of mind are you in? What are you willing to do? What kind of effort are you willing to put forth? How fearful are you? Chances are, you feel motivated to do whatever it takes, without fear or doubt, to turn your vision into reality. You grow in confidence. You believe you can do it. You are committed from the heart and soul.

Our Words Create Our Worlds

2011-09-28T04:42:00.000-07:00

An excerpt from
An Enemy called Average

by John Mason

What we say is important. Our vocabulary should be filled with words of hope and dreams. Be known as someone who speaks positively.

Recently I saw a sign under a mounted large mouth bass. It read, "If I had kept my mouth shut I wouldn't be here." How true! Don't jump into trouble mouth first.

Let me pose this question for you: Starting today what would happen if you changed what you said about your biggest problem, your biggest opportunity?

I don't know if you've had this conversation or not, but last month I turned to my wife, Linda, while we were sitting together in our family room and said, "Just so you know, I never want to live in a vegetative state dependent on some machine. If that ever happens, just pull the plug."

She immediately got up, walked over and unplugged the TV.

"Our words create our worlds," says Dean Sikes. Your words have the power to start fires or quench passion.

Don't be like the man who joined a monastery in which the monks were allowed to speak only two words every seven years. After the first seven years had passed, the new initiate met with the abbot, who asked him, "Well, what are your two words?"

"Food's bad," replied the man, who then went back to his silence.

Seven years later the clergyman asked, "What are your two words now?"

"Bed's hard," the man responded.

Seven years later - twenty-one years after his initial entry into the monastery - the man met with the abbot for the third and final time. "And what are your two words this time?" the abbot asked.

"I quit."

"Well, I'm not surprised," the cleric answered disgustedly. "All you've done since you got here is complain!"

Don't be like that man; don't be known as a person whose only words are negative. If you're a member of the "negative grapevine," resign.

Contrary to what you may have heard, talk is not cheap. Talk is powerful!

First Thing Every Morning

2011-09-22T13:24:00.000-07:00

An excerpt from
First Thing Every Morning
by Lewis Timberlake What do you do when your whole world crumbles? I grew up in Texas and married Georgia Ann, the most beautiful girl in my hometown. I enjoyed a successful career in the life insurance business - even became president of the company. I was president of civic organizations and involved in running campaigns for governors. I'd won awards and honors and life was good. My first two children were simply amazing, and my third child, Craig, offered the same promise.

But at age 10, the doctors said he would be blind in two weeks' time. How could that be? Craig had never been sick - never even had a headache.

We discovered there is a gene that can "go bad." It causes Wolfram Syndrome. There is no cure. When it goes bad, bad things happen. First his optic nerve began to die, and I watched my 10-year-old son go blind a little each day. God blessed me with an amazing wife, three phenomenal children and a successful career. But when Craig went blind, my world crumbled. How do you get through that? What do you do?

I cried out in desperation and despair. There was no help available; nobody in high places could sort things out. Then radio broadcaster Paul Harvey told me, "In times like these, it's good to remember that there have always been 'times like these.' You can get through this better and stronger, and more able to live life victoriously - if you will do some things that help you get through each day."

I realized you must find a way to begin each day in a way that prepares you to say, "Whatever takes place, I shall win."

That's when I realized I needed to start every day, even challenging and difficult days, with a positive focus. I needed to do the things unsuccessful people don't do. I actually learned, "How you begin the day controls how you go through the day."

Preview of RBA, BOC, BOE, and ECB Decisions This Week

2011-09-05T08:36:00.000-07:00

Preview of RBA, BOC, BOE, and ECB Decisions This Week

Walk The Talk

2011-09-01T05:39:00.000-07:00

An excerpt from
Walk the Talk

by Eric Harvey and Steve Ventura

QUESTION: What does "courage" have to do with being a person of good character...with someone who stays true to their principles and their values?

ANSWER: EVERYTHING!

You see, being values-driven means two things:

Doing what's right - following our conscience; refusing to compromise our principles, despite pressures and temptations to the contrary, and

Taking a stand against what's wrong - speaking out, whenever we see others do things that are incorrect or inappropriate.

Unquestionably, both of those require guts and fortitude...they require courage.

Courage is...

Following your conscience instead of "following the crowd".
Refusing to take part in hurtful or disrespectful behaviors.
Sacrificing personal gain for the benefit of others.
Speaking your mind even though others don't agree.
Taking complete responsibility for your actions...and your mistakes.
Following the rules - and insisting that others do the same.
Challenging the status quo in search of better ways.
Doing what you know is right - regardless of the risks and potential consequences.

I'd like to share the "Cadet Prayer" that is repeated during chapel services at the U.S. Military Academy:

"Make us to choose the harder right instead of the easier wrong, and never to be content with a half truth when the whole truth can be won. Endow us with the courage that is born of loyalty to all that is noble and worthy, that scorns to compromise with vice and injustice and knows no fear when truth and right are in jeopardy."

That is truly the essence of courage.

Change is Good...You Go First

2011-08-30T05:33:00.000-07:00

As a leader, deciding to make changes is the easy part. Getting your people on board is much more difficult. Why is that? Quite simply, change is an emotional process. We are all creatures of habit who usually resist it, and welcome routine. Uncharted waters are scary!

In the long run, however, sameness is the fast track to mediocrity. And, mediocre companies won't survive.

Tuli Kupferberg said it best..."When patterns are broken, new worlds emerge." And, that is your challenge...to convince your team that the new world you are trying to create is better than the one you're in. Is it easy? Of course not. It takes planning, commitment, patience and courage.

The truth, of course, is that change can be a wonderful gift. In fact, it is the key that unlocks the doors to growth and excitement in any organization. And, most importantly, without it...your competition will pass you by. A big part of success, as a leader, will be your ability to inspire your team to get out of their comfort zones; to assure them that even though they are on a new path, it's the right path, for the right reasons.

An excerpt from
Change is Good...You Go First
by Mac Anderson and Tom Feltenstein

Something magical happens when we accept personal responsibility for our behavior and our results. But, it's not easy, because it's human nature to "pass the buck". I (Mac) know there have been times in my life when my business was struggling where I found myself blaming others, blaming the economy, blaming this, blaming that! But as I've gotten older (and a little wiser) when things go wrong in my business, or my life, I can always find the culprit...in the mirror. In every instance, it always comes back to choices I've made in my life that put me exactly where I am today. I have to say, that this one "tweak" in my attitude may sound like a little thing, but it has made a big difference in my life.

What does all this have to do with change? Plenty! As a manager, one of the most important things you can do in times of change is to get your people to understand how taking personal responsibility and recognizing problems as opportunities, will not only help the company, but will help them as individuals. In other words, sell the idea of...what's in it for them?

Authors B.J. Gallagher and Steve Ventura wrote a great little book about achieving success through personal accountability titled: Who Are "They" Anyway? I like their list showing how each individual in the company can benefit by adopting a "personal accountability attitude."

• You have more control over your destiny
• You become an active contributor rather than a passive observer
• Others look to you for leadership
• You gain the reputation as a problem solver
• You enhance your career opportunities
• You enjoy the satisfaction that comes from getting things done...the power of positive doing
• You experience less anger, frustration and helplessness - all leading to better physical health
• You realize a positive spillover effect into your personal life at home

According to Gallagher and Ventura, the most important words of personal responsibility are as follows:

The 10 most important words:
I won't wait for others to take the first step.
The 9 most important words:
If it is to be, it's up to me.
The 8 most important words
If not me, who? If not now, when?
The 7 most important words:
Let me take a shot at it.
The 6 most important words:
I will not pass the buck.
The 5 most important words:
You can count on me.
The 4 most important words:
It IS my job!
The 3 most important words:
Just do it!
The 2 most important words:
I will.
The most important word:
Me.

How do credit cards compare to bank debit cards?

2011-08-10T05:38:00.001-07:00

Half of all US consumers surveyed recently by TransUnion said they use their bank's debit card to pay for most of their purchases, but debit card fraud is increasing. Many of these same consumers reported that they fear becoming a victim of identity theft or fraud. How easy is it for someone to get your debit card information and help themselves to cash?

In case of loss or fraud

With both credit cards and ATM or debit cards, the key to quick recovery and low liability is how quickly you report the loss. If you report a credit card loss before the cards are used, under the Fair Credit Billing Act you aren't responsible for any unauthorized charges. If you report an ATM or debit card missing before it's used without permission, the Electronic Funds Transfer Act provides that the card issuer cannot hold you responsible for any unauthorized transfers. But the cards differ here: if you don't report the loss of an ATM or debit card within two business days after you discover the loss, you could lose up to $500 because of an unauthorized transfer. You also risk unlimited loss if you fail to report an unauthorized transfer within 60 days after your bank statement containing unauthorized use is mailed to you.

Cash vs. debit cards

Making purchases with cash, like debit cards, won't lead to finance charges. But cash can be lost or stolen and can never be recovered. A lost or stolen card, on the other hand, can immediately be reported to limit possible liability.

Debit card vs. ATM-only card

Most banks will issue you an old-fashioned ATM-only card, that allows you to withdraw cash from an ATM but unlike debit cards, don't operate on credit card networks. If lost or stolen, an ATM-only card is useless to a thief who doesn't also have your PIN code.

All payment methods have benefits and drawbacks. But from a fraud standpoint, the amount of liability for fraud losses may be lower with credit cards. To avoid piling up debt if you’re going to use it for daily purchases, apply for a new, low limit card and pay off what you’ve charged every month.

My first life lesson on systems

2011-08-06T15:22:00.000-07:00

I was 25 years of age and thinking of settling down, gettingmarried and raise a family. Lifehad been good to me and just thought it was time. No more games just enjoy life that’s ahead of me.

I met this girl 3 years my junior, not the usual girl woulddate but thought it was time for a change and wanted to make my family proudand I was looking forward to settling with one woman for a change.

I landed my first full time employment after experiencingdifferent types of work. Didn’tpay much $6.50 an hour, but it was a start. I started off as an order picker, easy job just fillingorders and getting them ready for the shipper. Fun job, regular breaks, started at 8:00 am and finished at4:30.

After about 3 months the shipper had quit so I startedpacking the orders I had picked and prepared for shipment. I had picked all the orders that camein and now had to have them ready for shipment. The Warehouse manager was showing me what needed to be doneto prepare the packages for the courier company and what forms needed to becompleted for each shipment.

There were shipments all over Canada and they needed to beweighed and priced out for invoicing. So we start one package at a time and managed to get all the orderspacked, invoiced and ready for pick up by the courier company.

No sweat!

Six months into my employment I met some great people,brought my mom to work as well as a seamstress. The company was manufacturing Shower curtains and they wereshort staff so I mentioned the opportunity to my mom and my employer and thatweek she started work.

7 months into my employment I arrive at work and find outthat the warehouse manager had quit. I was thinking what happens now? I had gotten to know the designer very well during my time here andasked him what I should do? Helooked at me and said, “just follow the system”. I looked at him and said, “What system?” Just repeateverything you were taught and follow it.

This was strange to me for I had never taken control ofanything till that day. The bosswas not in so I had no instructions except for the orders that were preparedfor me. So my lesson began.

Shipment from Switzerland arrives and the merchandise needto be counted entered into it’s designated section and inventory updated. OK, all done. That only took me twohours. Now I need to pick theorders for today’s shipment.

Started picking the orders and laid them out on the floorone by one. This process took meabout 2.5 hours, time was getting late the courier was going to be here at 3:30and it was lunchtime. I had nohelp but I knew it had to be done.

I was speaking with Helmit over lunch and we talked aboutjust following the same routine as I’ve seen everyone do time after time. I was shocked to see how much I hadaccomplished in such a short period of time.

After lunch I started packing all the orders, I was having agreat time, radio playing listening to all the hits being played and at times Iremember hearing the same tune twice. With all the excitement between the music and the thrill ofdoing something different for a change just drove me.

3:30 had come around and all the parcels were packed, taggedand invoiced, I looked around and said to Helmit “now what”. He asked me if I had done everythingand I said yes, order came in, entered into inventory, picked all the orders,packed them and parcels are ready at the shipping door on the skids for thecourier to pick them up.

I was sitting at the Managers desk and the boss came walkinginto the warehouse. I was ready anewspaper and I thought oh shit, now I’m in trouble. He looked at me and said were are all the orders. I told him the courier had already beenhere. He asked if the shipment hadarrived and I told him that it did and it was already entered into inventory.

He just looked at me and said you did this all on youown. I told him I had spoken toHelmit and he said to just follow the system and I did.

Into my 8^th month at this company, which by theway is the longest I’ve every stayed with one company I became warehousemanager. I went from earning $13,500a year to $45,000 in just nine months. What a wedding present.

There is a system in everything we do in life. Find it and work it and you willsucceed.

Today, I'd like to share a story in the book called: "Respect will carry you home."

2011-07-24T07:14:00.000-07:00

An Excerpt From

Finish Strong: Teen Athlete

by Dan Green

Western Oregon University's Sara Tucholsky had no idea that the first - and, as it turns out, only - home run of her career would cause ripples that would make her last swing of the bat as a college softball player a national media sensation.

With two runners on and her team down a run to Central Washington University, Sara hit a home run to centerfield. As she rounded first base, she missed the bag. When she turned to tag the base, she injured her knee. Able only to crawl back to the base, Sara was told that she would be called out if her teammates came to her aid. If a pinch runner checked into the game, her home run would count only as a single.

Players and fans alike were stunned when Central Washington first baseman Mallory Holtman, the conference's all-time home run leader, asked the umpire if there was any rule against opponents helping an injured player around the bases.

She was told that there was not. Together, Holtman and shortstop Liz Wallace picked up Tucholsky and carried her around the bases, stopping at each bag to allow Sara to touch it with her good leg. "It was the right thing to do," Holtman said in an interview on national television, after the respectful act of sportsmanship had been witnessed by millions on ESPN and had become a YouTube sensation.

The three runs sent Western Oregon to a 4-2 victory, ending Central Washington's chances of winning the conference and advancing to the playoffs.

"It's a great story," Western Oregon coach Pam Knox said, "something I'll never forget - the game's about character and integrity and sportsmanship, and it's not always about winning and losing."

As it turns out, the players who helped Sara had no idea of the circumstances surrounding the at-bat, or that the story would make headlines around the country. "We didn't know that she was a senior or that this was her first home run," Wallace said Wednesday. "That makes the story more touching than it was. We just wanted to help her." The gesture left Sara's Western Oregon teammates in tears. "I hope I would do the same for her in the same situation," Sara said. Central Washington coach Gary Frederick called the act of sportsmanship "unbelievable."

"In the end, it is not about winning and losing so much," Holtman, who initiated the act, said. "It was about this girl. She hit it over the fence and was in pain, and she deserved a home run."

New American Socialism

2011-07-10T05:47:00.000-07:00

You can't just call our economic system "socialism." It's not. There's a profit motive and private ownership of nearly all assets. Socialism has neither of these. Besides, far too many people have become far too rich in our system to simply label it "socialism."

Click here to read more

Rate Hikes to Return in Fall

2011-07-09T06:12:00.000-07:00

- "New Neutral" rate nearly half of historic norm - mostly owing to strong dollar - BMO encourages potential home buyers to stress-test their mortgage ahead of possible interest rate increases - BMO survey shows that two-thirds of Canadians say they will still be able to service their mortgage payments if interest rates go up

Click here for full story

Beware lines of credit, expert warns

2011-07-03T07:47:00.000-07:00

Canadians owe it to themselves to understand good debts vs. bad

Her story is not unique in Calgary or Canada, where household debt has soared to $1.5 trillion. The figure translates to a debt level of approximately $176,461, including mortgage costs, for an average two-child household, according to a report released mid-June by the Certified General Accountants Association of Canada.

The Money Masters

2011-06-21T17:50:00.000-07:00

We Need to go back to the Gold Standard. Stop borrowing money from the Federal Reserve which is a private bank, not owned by Government. If the Federal Reserve Bank can print money out of nothing why can't government? Instead of paying interest to the Federal Reserve or The Bank of Canada we can pay down the National Debt.

Who owns your mortgage?

2011-05-01T12:50:00.000-07:00

Mortgage mess: Who really owns your mortgage?

Scott Pelley explains a bizarre aftershock of the U.S. financial collapse: An epidemic of forged and missing mortgage documents

Do you know who really owns your mortgage? As Scott Pelley reports on "60 Minutes" this week, that question has become a nightmare for many homeowners since the invention of mortgage-backed securities. Yes, those were the exotic investments that sparked the financial collapse in this country. And the're still causing problems.

As it turns out, Wall Street cut corners when it bundled homeowners' mortgages into securities that were traded from investor to investor. Now that banks are foreclosing on people, they're finding that the legal documents behind many mortgages are missing. So, what do the banks do? As Pelley explains in this video, some companies appear to be resorting to forgery and phony paperwork in what looks like a nationwide epidemic.

Even if you're not at risk of foreclosure, there could be legal ramifications for a homeowner if the chain of title has been lost. Watch the "60 Minutes" report and listen to Pelley's discussion with "60 Minutes Overtime" editor Ann Silvio about the findings of his reporting team.
Watch Scott Pelley's report.

Have you contacted your mortgage servicing company to find out whether your mortgage has been bundled and sold? Did you get a clear answer and a copy of your mortgage paperwork to back it up? Share your experience with other homeowners below.

Rain - Chris Strazz (Original)

2011-04-05T13:12:00.000-07:00

Mortgage Brokers Do It Better!

2011-03-31T06:24:00.000-07:00

Denise Deveau, Postmedia News · Mar. 30, 2011 | Last Updated: Mar. 30, 2011 4:04 AM ET

Cheryl Hutton and Aaron Coates always thought getting a mortgage would be a challenge. But within 18 days of visiting a mortgage broker, they were able to close a deal on a new townhouse in Calgary without a hitch.
Now in their early thirties, both have careers in the theatre, something Ms. Hutton says has been a bit of a sticking point with banks. "In our industry we never fit the paperwork guidelines 'for the banks.' For some reason, people don't think we pay our bills."
Although it was their first home purchase, Ms. Hutton says it was surprising how easy the whole process was once they had someone who could walk them through it. "He sat us down, told us what our options were, showed us that it was possible and explained all the steps we needed to take. If it wasn't for him, we may not have made the leap."
Sorting through a mortgage process and negotiating rates can be overwhelming for firsttime and seasoned home buyers alike. That's why people such as Ms. Hutton and Mr. Coates turn to brokers to do the legwork for them.
Yet mortgage brokers will tell you that a good portion of home buyers out there don't really understand what they do. "Part of the challenge we have in our world is that people aren't really sure what a mortgage broker is," says Gary Siegle, regional manager for Invis Inc., a mortgage brokerage firm in Calgary.
Brokers should not be confused with "rovers," mortgage specialists attached to a specific financial institution who visit customers outside of banking hours, Mr. Siegle explains.
"They only deal with that bank's product. A broker, however, is an intermediary whose job is to make a match between a lender and a borrower. We represent the individual, not the bank."
About 30% of mortgages in Canada are done through a broker, according to Perry Quinton, vicepresident, marketing, for Investor Education Fund, a Toronto-based non-profit financial information service.
"The reason more people don't know about them is because the banks are so visible. It's easy to gravitate to them when you have your savings accounts, credit cards and investments there already," Ms. Quinton says.
Going for the comfort factor could cost you however, she adds. "A broker has access to different lenders including banks, and can shop rates and features. A halfper-cent may not sound like much but that could make a difference of about $20,000 for a $250,000 mortgage amortized over 25 years. Any little bit helps."
Mr. Siegle confirms that shopping around can deliver significant savings.
"Let's take today's average posted rate of 5.44%, and you get a point off that at your bank. So you think you just got a really great deal. But the vast majority of rates we deal with as brokers would be another 30 basis points lower -around 4.14%. And if you look at preferred deals that don't offer features such as prepayment privileges, it can get as low as 3.89%. That's another 25 basis points below what's generally available."
The reason for that is simple, he says. "We offer wholesale rates, banks offer retail."
For anyone considering a broker, Ms. Quinton advises people to do a bit of groundwork first if they have the time.
"It helps to educate yourself about options and what you can afford. Look at all your living expenses, including student loans and credit card debt. Chances are you are understating those."
Another thing to look into is the different types of available mortgages and features, including interest rates, payment frequency, amortization, cash-back programs and the ability to make lump sum payments.
"Knowing these things before you go in can save you a lot of money," she adds.
Any mortgage broker you choose should always meet the right licensing and education requirements, so be sure to check their registration.
If you're not completely prepared, however, that shouldn't be a concern when working with a good mortgage broker, Mr. Siegle says.
"After all, mortgages are pretty much all we do. So even if you come in cold, good brokers will walk you through the process and ask all sorts of questions," Mr. Siegle notes.
"You just need to be prepared to answer them openly and honestly so they can get you the best deal possible."Experts Best at Brokering Mortgages

Canada Bonds Rally With Bernanke And Supply The Focus

2011-02-10T06:10:00.000-08:00

TORONTO (Dow Jones)--Canadian bonds were rallying Wednesday after seven-straight days of declines, moving in tandem with U.S. Treasurys, after U.S. Federal Reserve Chairman Ben Bernanke said it will be several years until employment normalizes and acknowledged that inflation is still quite low.

2011-02-01T07:18:00.001-08:00

http://www.fin.gc.ca/n11/11-010-eng.asp

Canada’s Economic Action Plan Continues to Create Jobs and Economic Growth

Minister of Finance to Meet Private Sector Economists

2011-02-01T06:45:00.001-08:00

The Honourable Jim Flaherty, Minister of Finance, will meet with private sector economists on Tuesday, February 1, 2011.

Release of The Fiscal Monitor

2011-01-28T10:37:00.001-08:00

There was a budgetary deficit of $4.5 billion in November 2010, compared to a deficit of $4.4 billion in November 2009.

Click here to read more.

Mortgage deal revives stalled market

2011-01-27T06:23:00.000-08:00

Canada’s moribund commercial mortgage-backed securities market is awakening from a three-year slumber.
Two major real estate companies are tapping the market for $206-million in the first deal of its kind since 2007, signalling that investors are returning to a sector they had abandoned over worries about the health of the country’s commercial real estate market.

2011-01-26T13:53:00.001-08:00

http://www.fin.gc.ca/n11/11-007-eng.asp

Harper Government Is Keeping Taxes Low for Canada’s Job Creators

2011-01-26T13:51:00.000-08:00

The Honourable Jim Flaherty, Minister of Finance, joined other Ministers across the country today to highlight tax relief for Canada’s job creators.

What if competitive devaluation becomes the global norm?

2011-01-26T13:49:00.001-08:00

On Friday, 28 January 2011, Bank of Canada Governor Mark Carney will participate in a panel discussion at the World Economic Forum Annual Meeting.

Topic: What if competitive devaluation becomes the global norm?

Canada Imposes New Mortgage Rules

2011-01-17T09:06:00.001-08:00

Canada imposed new curbs on mortgage lending on Monday amid concern about spiralling consumer debt fuelled by high property prices and low interest rates.

Jim Flaherty, finance minister, said that the changes, the third tightening in mortgage rules since mid-2008, were designed to encourage savings and insulate taxpayers from risks associated with consumer debt.

CMHC releases preliminary data on housing starts for 2010

2011-01-12T09:39:00.000-08:00

Preliminary data released today by the Canada Mortgage and Housing Corporation (CMHC) show total housing starts registered in 2010 for the Toronto Census Metropolitan Area increased by 13 per cent to 29,195 units. In December,

click here to read full report

Canada CPI and Retails Data Give Central Bank Scope to Hold Rates Steady

2010-12-22T11:32:00.000-08:00

Canada’s consumer prices advanced less than forecast last month and the volume of retail sales fell in October, giving the Bank of Canada scope to hold interest rates steady until at least the second quarter of 2011.

The consumer price index rose 2 percent in November following a 2.4 percent gain the previous month and October’s retail sales fell 0.2 percent once the effect of price changes is removed, Statistics Canada said today. The core inflation rate, which excludes eight volatile items such as gasoline and which is watched closely by the Bank of Canada, rose 1.4 percent, the slowest pace since March 2008, the agency said.

“The conditions are in place for the Bank of Canada to maintain the status quo for several more months,” said Benoit Durocher, an economist with Mouvement Desjardins, Quebec’s largest credit union. Durocher predicts the central bank won’t begin raising its overnight target rate before July.
The central bank, which aims to keep inflation close to its 2 percent target, said in October inflation will average 2.1 percent in the October-December period, and core prices will average 1.6 percent. The bank kept its key lending rate at 1 percent Oct. 19 after three prior increases, and said inflation pressures will be moderated by “slack” in the economy that may persist until the end of 2012.
The inflation report “washes away any concern that may have developed in October,” said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto. November’s report was the “mirror image” of the previous one and “brings us back to square one, if not further,” in removing pressure on the central bank to raise rates.
Porter predicts the central bank will begin raising rates in May.

‘Considerable’ Stimulus
Bank of Canada Governor Mark Carney reiterated last week that the level of Canada’s policy interest rate “leaves considerable monetary stimulus in place.”
Economists forecast the annual inflation rate would be 2.2 percent, according to the median estimate in a Bloomberg News survey, while the core rate was forecast to be 1.6 percent.
Retail sales increased in October for a fifth straight month due to higher gasoline prices, Statistics Canada said in a separate report. Sales advanced 0.8 percent to a seasonally adjusted C$36.6 billion, Statistics Canada said. Leading the gain was a 7.4 percent increase at gasoline stations that was driven by higher pump prices, the report said.

The drop in sales volumes will subtract from October’s growth, making it likely that Canada’s economy will expand at an annual pace below 2 percent in the fourth quarter, Desjardins’ Durocher said. Statistics Canada will report October GDP data Dec. 23 at 8:30 a.m. New York time, and economists forecast a gain of 0.3 percent, based on the median of 21 estimates.

Currency Weakens
The Canadian currency depreciated 0.1 percent to C$1.0174 per U.S. dollar at 4 p.m. in Toronto from C$1.0168 yesterday. One Canadian dollar buys 98.29 U.S. cents.
The next Bank of Canada interest rate decision is Jan. 18. Investors have priced in an 11 percent chance that Carney will raise his benchmark policy rate to 1.25 percent from 1 percent, according to a Bloomberg calculation based on overnight index swaps trading.
Energy price increases slowed in November, gaining 6.7 percent on the year, compared with a 9.1 percent rise in October. Gasoline prices led the overall gain, rising 7.2 percent in November from a year earlier, Statistics Canada said. Electricity prices advanced 5.9 percent, slower than October’s 8.1 percent gain.

Food, Clothing
Food prices rose 1.5 percent in November after a 2.2 percent gain in October, while clothing and footwear were 3.2 percent cheaper than a year ago, the agency said in its report.
The inflation report “certainly provides the Bank of Canada with some increased elbow room on the policy front,” Stewart Hall, an economist with HSBC Holdings Plc in Toronto, said in a note to clients.
The Bank of Canada said in October that sales tax increases in Ontario, British Columbia and Nova Scotia will boost inflation by 0.7 percentage point from July to June 2011.

On a monthly basis, overall consumer prices rose 0.1 percent in November after a 0.4 percent gain the previous month. The core rate was unchanged in November, after a 0.4 percent increase in October that was the fastest since February. Economists predicted that monthly prices would rise 0.3 percent, and the core rate would increase 0.2 percent.

To contact the reporter on this story: Alexandre Deslongchamps in Ottawa at adeslongcham@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net.

http://www.fin.gc.ca/n10/10-017-eng.asp

2010-03-03T06:16:00.000-08:00

From the Department of Finance Canada

http://www.fin.gc.ca/n10/10-017-eng.asp

Ottawa warned against altering mortgage rules - The Globe and Mail

2010-02-10T14:10:00.000-08:00

Both Jim Flaherty and Bank of Canada Governor Mark Carney
say we are not in a bubble.

I Don't know were these guys get there information, are they looking at the
same market?

Ottawa warned against altering mortgage rules - The Globe and Mail

Happy times for interest rates can't last forever

2010-01-07T14:30:00.000-08:00

Where are interest rates going? For home buyers, the question is obviously relevant. After all, the higher the interest rate, the less house or condo the buyer will get for any given amount of mortgage payment.

Feds won't fight rising Canadian dollar, Flahery says - Northern News - Ontario, CA

2009-12-28T07:55:00.000-08:00

Feds won't fight rising Canadian dollar, Flahery says - Northern News - Ontario, CA

Carney's debt worries seem to be premature

2009-12-19T08:49:00.000-08:00

Carney's debt worries seem to be premature

Consumer bankruptcies start to ease - The Globe and Mail

2009-12-16T07:51:00.000-08:00

Consumer bankruptcies start to ease - The Globe and Mail

Canada Housing Resales Climbed to Record in November (Update2) - Bloomberg.com

2009-12-16T06:29:00.000-08:00

Canada Housing Resales Climbed to Record in November (Update2) - Bloomberg.com

Canada Bonds End Mixed; Front End Outperforms - WSJ.com

2009-12-09T05:56:00.000-08:00

Canada Bonds End Mixed; Front End Outperforms - WSJ.com

Bank profits back on the fast track - The Globe and Mail

2009-12-04T05:04:00.000-08:00

Bank profits back on the fast track - The Globe and Mail

http://www.mortgagebrokernews.ca/news/39077/details.aspx

2009-12-03T14:25:00.000-08:00

http://www.mortgagebrokernews.ca/news/39077/details.aspx

2009-12-03T14:19:00.000-08:00

http://www.mortgagebrokernews.ca/news/39077/details.aspx

Private Lending Tips

2009-11-16T07:29:00.000-08:00

Are you in need of private money or hard money?

I can help!

Before you submit your deal to a Private Lender....!

1. A thorough application is required (What are the funds being used for and the story behind the deal)

2. Explain the issues on the credit bureau (what is the balance really..? Why are you in arrears...?)

3. Get a copy of existing mortgage statements (You ever have the scenario where they say “I think about $120,000” but the real balance is $160,000? “My mortgage is paid up to date” (really it is 2 payments behind) This could kill the deal! Get this information up front)

4. Get a copy of the Property tax statement (this will also disclose any arrears and save you time and energy!)

5. Get an appraisal up front..we all know the value rarely comes in as the client states..they always hope for more (and so do we!) Get the appraiser to do up a broker copy so it is not prepared for any lender!

6. While you are at it you might as well get a copy of the Fire Insurance! It is the last piece of the puzzle!

I know I know this seems like a lot of work upfront...however..there is nothing worse than a deal dying at the lawyers because of property tax arrears, or not enough money to payout a mortgage.

We will still fund a good deal even if there is mortgage arrears or property tax arrears!! We just need to know up front!

If you follow my Quick Tips you should have a quick and easy close because you will have all your figures in line!...and don’t forget to give me a call or email to break down the deal..that always helps too!

905-778-8100 ext 5161

Giuseppe

Interest rates to remain at historic lows: Carney

2009-10-26T14:57:00.000-07:00

Interest rates will likely stay at their current historic lows through June 2010 in an effort to meet the Bank of Canada's inflation target of two per cent, says governor Mark Carney.

Speaking to CTV's Question Period Sunday, Carney confirmed speculation that interest rates would remain at 0.25 per cent, the lowest rate Canada has ever seen, well into next year.

When asked if Canadians should lock in to five-year mortgage terms on the news, Carney demurred.

"It's not my job to give investment advice to Canadians," Carney said. "But on the general point anybody, anytime they borrow for a longer period of time, wants to think about, 'Can I sustain that borrowing over the course of that time? What happens when interest rates ultimately normalize?'"

Carney reiterated earlier Bank predictions that the Canadian economy will continue to grow, by three per cent next year and by 3.3 per cent in 2011.

"That's more modest than usual recovery, so it's not going to feel like a gangbusters recovery," Carney said. "But it is a recovery and that's important."

According to Carney, government stimulus will continue to foster growth in the short-term. But investments from the business community will kick in by 2011 and beyond, when public money dries up.

"True growth comes from the private sector," he said. "And the private sector is starting, even after what has been a very difficult recession -- a short, but very deep recession -- is starting from a position of strength. Corporate balance sheets are in outstanding shape, the best they've been in 25 years in this country."

CMHC's Growth Fuels Worries Over New Risks

2009-10-17T06:46:00.000-07:00

Boyd Erman and Tara Perkins
Globe and Mail Update
Published on Friday, Oct. 16, 2009

The federal government has quietly given Canada Mortgage and Housing Corp. more financial muscle, raising concerns the multibillion-dollar agency is expanding at an unprecedented pace with little oversight.

For the second time since the beginning of 2008, Ottawa has raised the amount of mortgage insurance CMHC can have outstanding. The increase moves the cap to $600-billion, up from $450-billion and nearly double the $350-billion limit in place at the end of 2007.

CMHC is by far the largest provider in Canada of default insurance on mortgages, which home buyers are legally required to have if their down payment is smaller than 20 per cent. As home prices rise and smaller down payments become the norm, CMHC is selling more insurance each year.

That trend, combined with a ramped-up program of buying mortgages from banks as part of the government's strategy to spur the home-loan market, has turned the Crown corporation into one of the country's largest financial institutions. With $203.5-billion in assets last year, CMHC dwarfs the country's sixth-largest bank, National Bank of Canada, and its growth is blistering.

CMHC projects that its assets will hit $345.3-billion in 2009. Bank of Montreal had $415-billion in assets as of July 31.

Critics charge that such growth demands more oversight, pointing to the fact that even though CMHC is now central to the financial system, it is not regulated by the financial industry's main watchdog, the Office of the Superintendent of Financial Institutions. It's also a risk for taxpayers, because while CMHC sets aside billions as a cushion against losses, and is very well capitalized, Canadian citizens are ultimately on the hook for losses on its insurance should the housing market falter and those reserves prove too small.

“We need a debate, which I don't think we've had in my lifetime, about the role of the CMHC vis-à-vis our financial institutions and our housing market,” said Ian Lee, the director of Carleton University's MBA program and a former mortgage manager at Bank of Montreal.

The government and many economists credit CMHC for helping to pull the economy through the credit crisis of the past two years.

“The Canadian financial sector and housing market have remained sound throughout the recent crisis,” a spokesman for Finance Minister Jim Flaherty said.

“This has been in large measure due to the effectiveness of the roles played by federal institutions, including CMHC, in supporting markets, backstopping risks and sustaining the availability of credit.”

Canadian Imperial Bank of Commerce senior economist Benjamin Tal describes CMHC as the “secret weapon” that has now been revealed. “One of the main reasons we did not need a bailout [of banks] is because of CMHC, and the ability to provide cheap credit through its facilities,” he said.

“Did CMHC help to improve house prices today? Yes, they did because they gave cheap credit to bank and banks were able to provide credit and low mortgage rates, which I think is the main reason why house prices are rising now. That's a reflection of a system that works, in my opinion,” Mr. Tal said.

CMHC insurance helps to keep borrowing costs down for people with small down payments who would otherwise face higher interest rates from banks. That enables would-be buyers to bid more for houses, knowing that they won't be penalized for having a small down payment, and adds fuel to the housing market's soaring prices.

CMHC's securitization programs, through which it effectively buys swaths of mortgages from lenders, free up space on banks' balance sheets, allowing them to give out more mortgages than they otherwise could.

In an e-mailed response to questions, CMHC said housing affordability has improved over the years. The monthly mortgage payment on an average-priced house has decreased as a share of workers' incomes, the agency said.

As of the second quarter of this year, the mortgage payment on an average-priced house was 29 per cent of disposable income per worker, down from just under 39 per cent at the end of 2007.

The company attributes the need for the increases in the insurance cap to “a number of successive strong years of activity in the mortgage markets.”

CMHC also points to a trend of banks buying insurance for mortgages that aren't required to be insured, enabling them to sell the loans to investors to raise cash.

Whatever the reason, critics like Mr. Lee say that the institution's stunning growth deserves new scrutiny. Yet, because CMHC enables more people to buy homes, it's unpalatable for politicians to criticize it, Mr. Lee said.

“That value is embedded in the Canadian consciousness,” he said. “It's not as sacred a cow as health care, but it's right up there.”

Ottawa created CMHC in 1946 to house returning war veterans. Its main objective is now to facilitate access to more affordable and better quality housing for Canadians.

The two main programs it uses to achieve that goal – insurance and securitization – have ballooned in the past year. CMHC planned to insure 578,539 housing units last year for $86-billion in 2008. Instead it insured 919,790 units for $148-billion.

It guaranteed 2.5 times more mortgage securities than planned, an extra $64-billion, which is nearly double the 2007 level. Part of the reason for that is the emergency mortgage purchase program that Mr. Flaherty unveiled at the height of the credit crisis in October, 2008, to help ease the banks' funding costs. But even prior to that program's launch, CMHC's securitization activities were on a steep upward trajectory.

Canada Housing Trust, which carries out CMHC's securitization activities, has seen its assets grow by more than 20 times since it was established in 2001, according to Moody's Investors Service.

The opposition Liberal Party says the cap increases and the surging size of CMHC may warrant more attention.

“It's a lot of money and it could justify debate in Parliament,” said John McCallum, the Liberal finance critic. However, he acknowledged that suggesting the reins be pulled in on CMHC is ticklish for politicians and said that CMHC should be able to continue growing “as long as they're prudent.”

“I don't think we want the government to be rationing Canadian home-buying.”

OECD forecast, factory data dampen hopes of fast rebound

2009-09-17T09:03:00.000-07:00

Canada's recovery from recession is shaping up to be tepid, as new evidence underscores that the bulk of the demand in the world economy is being generated by government stimulus spending and companies remain reluctant to hire.

Continue reading: OECD forecast, factory data dampen hopes of fast rebound

Priceless: How The Federal Reserve Bought The Economics Profession

2009-09-16T08:54:00.000-07:00

By Ryan Grim

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed’s thrall, the economists missed it, too.

“The Fed has a lock on the economics world,” says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. “There is no room for other views, which I guess is why economists got it so wrong.”

Continue reading How The Federal Reserve Bought The Economics Profession

A ‘long and winding' road to recovery

2009-09-04T15:26:00.000-07:00

Globe and Mail Update Thursday, Sep. 03, 2009 08:28AM EDT

Recovery from the global recession is likely to arrive earlier than had been expected a few months ago, but the pace of activity will remain weak well into next year, the Organization for Economic Co-operation and Development said in a forecast Thursday. Canadian economists agree that the global economy is turning the corner. Here's a look at what that means for Canada:

Scotiabank's take: We'll get there, be patient

“Canadian domestic activity will revive in the months ahead as consumers begin to return to the malls in greater numbers and a myriad of government-funded shovel-ready projects actually get into the ground,” Bank of Nova Scotia chief economist Warren Jestin said in a research report this week.

“The Bank of Canada will likely nudge up interest rates as the economy recovers in 2010, but borrowing costs will not be an impediment to the revival of domestic demand. However, with foreign sales one-third of Canada's gross domestic product, the strength of the rebound will be tied to commodity markets and reversing the recent slide in U.S. sales,” Mr. Jestin said.

Canada is already benefiting from higher commodity prices in response to demand from China and other nations, he wrote, but global growth through 2010 will be tepid.

“The United States rebound will help bolster south-bound exports, but gains will be tempered if, as we expect, the loonie moves towards parity vis-à-vis the U.S. dollar as commodity markets strengthen further and the greenback comes under pressure on global currency markets,” Scotiabank said in its report.

“The bottom line – we will soon begin moving away from one of the most difficult economic setbacks experienced in our lives, but patience will be required because the road to recovery will be a long and winding one.”

Housing market recovering - but prices expected to moderate

Housing starts are expected to rebound in the second half of 2009, reaching a total of 141,900 for the year, and will increase to 150,000 in 2010, Canada Mortgage and Housing Corp. forecast Thursday.

This marks an improvement, but is well down from the 211,056 starts in 2008 as Canada came off a prolonged housing boom.

“Economic uncertainty and lower levels of employment tempered new housing construction in the first half of the year,” CMHC economist Bob Dugan said. “In the second half of 2009 and in 2010, we expect housing markets across Canada to strengthen.”

“Existing home sales … have rebounded strongly since January and will reach 420,000 units in 2009 and remain close to that level at 419,000 units in 2010,” CMHC said. “The average price is expected to moderate to $301,400 in 2009 and to increase to $306,300 in 2010.”

Jobless rate: still rising

Economists expect that the Canada's unemployment rate continued to rise in August.

Bank of Nova Scotia said in a note to clients that Friday's Statistics Canada release is expected to show a loss of 15,000 more jobs, and an increase in the unemployment rate to 8.8 per cent.

Furthermore, the labour market recovery will be slow, economists say.

“It is often said that employment is a lagging indicator, and that's particularly the case when the recovery is only modest, and that's likely to be the case in this cycle as well,” Bank of Montreal deputy chief economist Douglas Porter said this week in an online discussion on reportonbusiness.com.

“We don't believe that we will see a meaningful pullback in unemployment rates until the spring. Employers need to be convinced that the turn in the economy is for real, then they will shift part-timers to full-time, then go to overtime, and only after that begin to hire people again. And even then, payrolls may not rise as quickly as the underlying growth in the labour force,” Mr. Porter said.

Beyond the recovery: new world realities

“The road to recovery won't take us back to the world that existed before the sub-prime crisis began,” Scotiabank's Mr. Jestin said. The global financial system is being revamped, he noted, and “big government deficits are back and will be politically difficult to unwind…

“The global economic landscape is also changing, with developed nations like Canada and the U.S. likely to experience relatively subdued growth in the decade ahead,” Mr. Jestin said.

“World activity will be driven increasingly by China, India, Brazil and other emerging powerhouses, with their production and investment decisions having a major impact on world trade, commodity prices and financial markets.”

For Canadian businesses: tougher competition, new opportunities

“For many Canadian businesses, these new world realities point to tougher competition in traditional markets, but a world of opportunity in emerging ones,” Mr. Jestin said. “Our share of the U.S. market has dropped significantly over the past decade, with China gaining bragging rights as the largest U.S. supplier and, excluding energy products, the euro zone surpassing Canada in U.S.-bound sales.” This calls for new approaches.

“Focusing our collective attention and scarce national resources on supporting the familiar while avoiding the unfamiliar is a losing strategy,” Mr. Jestin said.

“At a time when the auto sector and other traditional manufacturing industries are shedding jobs, new enterprises associated with environmental remediation, global infrastructural development and emerging market demands have the potential for sustained, rapid growth.”

Soaring Prices for AIG, Fannie and Other Financial Stocks Sending Mixed Messages to Investors

2009-08-31T06:00:00.000-07:00

William Patalon III
Executive Editor

Three of the financial institutions that were key catalysts to the global financial crisis – and that owe the federal government billions of dollars as a direct result of those problems – have seen their shares triple in price so far this month.

That could signal that a big rebound in bank-sector earnings is just around the corner. Or it could be merely a speculative “short squeeze” that all but confirms that these stocks are basically worthless.

Shares of busted insurer American International Group Inc. (NYSE: AIG) have soared from $13.14 to $50.23, as of Friday’s close, a gain of 282.3% so far this month. Shares of mortgage giants Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM) posted similar gains, MarketWatch.com reported. Fannie’s shares advanced from 58 cents to $2.04, an increase of 251.7%. Freddie’s shares zoomed from 62 cents to $2.40 each, a gain of 287.1%.

AIG actually gained for a ninth straight day Friday, reaching a 10-month high, as short-shelling speculators got squeezed and were forced to buy back the shares they’d sold short, traders told MarketWatch. AIG has 21% of its “float” – shares available to the public sold short, the sixth-highest proportion in the Standard & Poor’s 500 Index, according to Bloomberg News.

But the gains might also sign that the banking sector is poised for a major profit rebound, according to some new analyst research.

"Dating back to 1995, bank-sector outperformance has typically preceded [earnings-per-share] growth outperformance by one to two quarters," Stifel Nicolaus & Co. (NYSE: SN) analysts wrote in a market-research note last week. “With sector earnings growth expected to exceed that of the general market in mid-2010, we question whether we will see another leg down in this rally before year-end. On the other hand, perhaps we should question the current growth expectations for the sector?”

Trading in financial-services stocks has dominated the stock-market volume this month. So-called “day traders” have gravitated to once-questionable financial stocks and helped fuel those stunning gains – and huge volumes.

Citigroup Inc. (NYSE: C), for instance, has seen daily trading volume topping 1 billion shares this week. The stock closed above $5.05 on Thursday and $5.23 on Friday. That represents a 439% gain from its 52-week low of 97 cents a share.

Financial stocks have led the market’s slingshot higher from the early March lows. Trading has been fierce in beaten-down shares of some companies that participated in the bailout, such as AIG, Citi and Bank of America Corp. (NYSE: BAC).

The New York-based AIG is trying to sell assets to repay government loans after accepting $182.5 billion in U.S. bailout money. AIG recently reported a profit for its second quarter – after having posted six straight quarters in the red. It engineered a so-called “reverse stock split,” in which AIG gave investors one new share for every 20 they turned in. The company did this to avoid a delisting action. That enhanced the short squeeze, since there were fewer shares available to for short-sellers to repurchase and “cover” their bets.

Despite the torrid run that AIG’s shares have been on, the insurance company’s bonds still trade at levels indicating the company’s shares may be worthless, Peter Boockvar, an equity strategist at Miller Tabak & Co., told Bloomberg.

“The value of the company is still the same,” Boockvar said. “AIG bonds tell you that the equity is possibly worth nothing and that they may not be able to pay back the government.”

AIG’s $3.24 billion of 8.25% bonds due in 2018 are quoted at 79 cents on the dollar, to yield 12.2%, Bloomberg reported. The insurer’s $4 billion of 8.175% percent bonds due in 2058 are quoted at 49.5 cents on the dollar to yield 16.7% Bloomberg said.

The Financial Select Sector SPDR Fund (NYSE: XLF), an ETF tracking the financial stocks in the Standard & Poor’s 500 Index, has rallied nearly 30% over the past three months and handily outpaced the market.

Market Matters

While the past few months have been anything but dull for the markets (euphoric may be more appropriate), investors enjoyed a few slow days of peace and quiet.

Another stimulus program came to a close as “Cash for Clunkers” ended with a last-minute flurry of activity. Analysts claimed that more than 700,000 cars were bought over the past month and August auto sales should rise on a year-over-year basis for the first time since mid-2007.

While dealerships enjoyed a nice rebound in activity (even if just temporarily), banks continued to experience challenges as the Federal Deposit Insurance Corp. (FDIC) reported that 416 institutions were on its “problem” list at the end of the second quarter, up from 305 on March 31, and also conceded that its insurance-fund reserves were dwindling.

Goldman Sachs Group Inc. (NYSE: GS) was in the news again as controversy has continued to surround the investment giant since the AIG bailout and Lehman Brothers Holdings Inc. (OTC: LEHMQ) failures. Regulators are investigating its weekly “trading huddles,” where its analysts allegedly gave short-term stock tips to select clients and traders, though most other customers were not privy to such insight.

Dell Corp. (Nasdaq: DELL) posted lower quarterly profits, though
the result still beat Street expectations and management projected stronger performance in 2010 when businesses get back in technology buying mode. Intel Corp. (Nasdaq: INTC) boosted its revenue projections for the next few months, another sign that chip demand is increasing and the business climate continues to improve.

The Dow Jones Industrial Average roared to eight straight days of higher closes, before hitting a stumbling block on Friday (though no one may have noticed as volume was so light) and the days of triple-digit moves ended (for a week at least).

The other indexes traded relatively flat during the week and even the positive news from Intel did little to generate any investor enthusiasm in the tech-heavy Nasdaq Composite Index. Fixed income fared better than most would have expected, considering another $109 billion in government debt hit the street.

Oil surged to a 10-month high before a larger-than-expected inventory report indicated that crude demand remained weak despite expectations of an economic recovery just around the corner. In fact, natural gas plunged to a seven-year low.

In perhaps the biggest news of the week, U.S. Federal Reserve Chairman Ben S. Bernanke will manage to avoid becoming a part of the so-called “jobless recovery” when he was nominated for another term as central bank chair by U.S. President Barack Obama.

While Bernanke certainly has his critics among grandstanding politicos from both sides of the aisle, few Fed watchers expect Congress to hold up his confirmation. For now, continuity seems to be the best thing.

The economic data of the week was relatively favorable with signs of renewed strength in both housing and manufacturing. New home sales jumped for the fourth consecutive month and the S&P Case-Shiller Index even depicted higher home prices last quarter for the first time since 2006. Durable good orders surged in July on increased demand within the transportation sector as both General Motors Co. (OTC: MTLQQ) and Chrysler Group LLC put bankruptcy in their rearview mirrors and boosted production, while other companies also benefited from the “Cash for Clunkers” program.

When second-quarter gross domestic product (GDP) was announced as a decline of 1%, many analysts expected a downward revision (perhaps significant) in the months that followed. Well, the initial revision again showed a 1% decline, a negative showing, but one that many economists believe will be the last contraction in overall activity for a while.

The U.S. consumer remains one big wildcard for the strength of the economy moving forward. Though the Conference Board reported a better-than-expected increase in its August consumer confidence report, the Reuters/U of Michigan sentiment index offered a contrasting view as it fell to its lowest level in four months. Personal spending in July got a nice boost from the increase auto sales (“Cash for Clunkers” strikes again), though the income component of the release was unchanged and concerns about the labor picture continued to hinder consumer activity.

Desperate for Capital, the FDIC Backs Away From Tougher Rules Governing Private Equity Purchases of Failed U.S. Banks

2009-08-29T06:26:00.000-07:00

By Shah Gilani
Contributing Editor
Money Morning

A new Federal Deposit Insurance Corp. (FDIC) plan to offload busted banks to vulture investors strikes an uneven balance between private equity players and public taxpayers and may inadvertently sow the seeds for another round of bank failures.

The FDIC currently insures bank depositors up to $250,000 – up from $100,000 prior to the financial crisis. So far this year, 81 banks have failed, costing the FDIC an estimated $21.5 billion.

And the situation is almost certainly going to get worse.
A Growing List of Troubled Banks

The FDIC reported yesterday (Thursday) that the number of distressed banks rose to the highest level in 15 years during the second quarter, thanks to an economic malaise that’s saddling banks with a growing level of bad loans.

The number of troubled banks rose to 416 at the end of June from 305 at the end of March. The FDIC hasn’t had that many banks on its “problem list” since June 1994, when there were 434, the agency said. Assets at these troubled institutions totaled $299.8 billion – the worst level since the end of 1993, according to the FDIC.

The FDIC’s insurance fund, as of March 31, was down to its last $13.5 billion. Bank failures in the second quarter cost the insurance fund an estimated $9.1 billion. These hits were mostly offset by an emergency special assessment of $6.2 billion and an additional $2.6 billion raised as part of the regular quarterly assessment on FDIC-insured banks.

The FDIC just took another hit due to the recent failure of Colonial Bank, which cost the fund an estimated $2.8 billion, and the failure last week of Guaranty Bank, which cost an estimated $3 billion. FDIC Chairman Sheila C. Bair is determined to not have an insolvent FDIC turn to the U.S. Treasury Department to draw on a $500 billion line of credit set up for just this purpose, although that move is clearly inevitable.

In a fatalistic twist of irony, however, the FDIC’s demand for another special assessment in the fourth quarter and another expected special assessment in the first quarter of 2010 may tip several more banks into failure.

Although there seems to be a desperate need for private equity capital to come running to the rescue, the reality unfortunately isn’t that simple.
A Disappointing Decision

As most all consumers and investors know, the FDIC only covers insured deposits. However, the ongoing cost of a busted bank becomes higher for the FDIC if the agency cannot merge that failed institution with a healthy player, or can’t sell it outright. When The FDIC can’t find a willing partner or buyer, the agency must instead manage the “unwinding” of every failed bank’s stockpile of illiquid and toxic assets. With so many more banks in trouble and so many fewer banks willing to acquire additional suspect assets, private equity firms have offered to step up and buy failed banks these professional investors believe can be turned around.

On July 9, the FDIC published and sought comments on its “Proposed Statement of Policy on Qualifications for Failed Bank Acquisitions.” The controversial proposed policy statement suggested tough terms and conditions under which the federal agency would be willing to sell failed banks to non-traditional buyers – specifically, private equity firms.

A total of 61 comments were filed during the 30-day comment period – most of them from private-equity firms, their lawyers, financial-services trade associations and lobbyists. There were also comments from academics, four U.S. senators and six individuals. The FDIC also received 3,190 form-letter comments in support of the controversial proposal.

The FDIC issued its final decision on the matter on Wednesday. The new version was much weaker, once again underscoring the federal government’s proclivity for weakening banking regulations – a willingness we’ve repeatedly warned will have dire consequences for the U.S. financial system, as well as for the broader economy.

These alterations are setting the stage for an escalation in bank failures. The real losers will once again be the U.S. taxpayers, who will end up footing the bill for the FDIC’s failure to take a tough stand.

How much weaker were the new regulations, when compared with the earlier proposals? In one instance, instead of the initially proposed requirement that new investors maintain a 15% Tier 1 common equity capital ratio – three times what traditional bank holding companies are required to maintain – the new entry hurdle is only a 10% ratio.

Private equity firms will be spared the requirement of other bank holding companies and will not be called upon as a “source of strength,” should their investment in a bank need shoring up.

Bank holding companies have to make their resources available if their banking operation requires support. But private equity companies don’t want to expose their vast pools of capital to any one investment. Just as Cerberus Capital Management LP refused to put any more money into its failed Chrysler LLC investment – leaving taxpayers to bail it out – firms are loathe to be put into a position to support a bank holding with anything more than what was deemed as a suitable capital investment at the outset.

The FDIC granted other compromises granted in favor of private equity buyers. For instance, the agency spared them from having to cross-guarantee their portfolio-bank investments – unless they owned at least 80% of two or more banks.
Getting “Real” About Private Equity

Private equity interests certainly didn’t get everything they wanted. For one thing, the final policy statement prohibits “insider” and “affiliated” loan transactions and strips firms of using a controversial “silo” structure to obfuscate ownership and control positions.

The final policy statement reads like the painful enunciation of a split decision in a controversial heavyweight title fight. The valiant efforts Bair, the FDIC chairman, to keep the howling wolves of private equity at the door and out of the banking henhouse were ultimately undermined by the rapidly dwindling coffers of the Deposit Insurance Fund, which brought the FDIC to its knees. The compromises in the final policy statement grant the private-equity crowd a lot of what it was lobbying for while only momentarily sparing the FDIC the embarrassment of being knocked out.

But make no mistake. That day of reckoning is on its way. And not even the entrepreneurially gifted private-equity set will be able to keep that from happening.

Let’s be clear: We’re not saying that the private-equity sector is made up of angels (angel investors, yes, but outright angels, no way). Indeed, as we’ve demonstrated in past columns, the private-equity set is actually a group of uber-capitalists who are hell-bent on turning their gargantuan ambitions into extraordinary wealth – and who aren’t above shopping for regulators or hardballing Congress to get what they want.

Private-equity players demanded – and got – the FDIC to agree to share whatever losses they might incur, whereby the government (meaning taxpayers) must bear the brunt of the losses incurred when risky loan pools are acquired.

In all fairness to private equity firms, acquiring banks also have loss-sharing agreements with the FDIC. But they are regulated entities and private equity firms are not. Nor will private equity firms willingly become regulated in order to buy banks.

And there are actually some advantages in having private equity investors acquire failed banks – including a host of issues that critics describe as “self-serving,” grousing that the private-equity benefits come only at a cost to taxpayers.

Given the new set of rules, private equity firms can swoop in and pick up failed banks by banding together and dividing the equity commitment and investment liability assumed upon purchase. If there is no recourse against other private equity firm assets or even any cross-guarantees against other acquired banks, unless they are 80% owned, the consortiums cannot be called upon and certainly not relied upon to be a “source of strength” for their depository, taxpayer-backed portfolio banks.

Regardless of any rules on self-dealing, as sure as “bank” is a four letter word, private equity firms will find a legal way to lend from their taxpayer-backed banks to leverage their other portfolio companies and extract their usual exorbitant fees. If they don’t lend to their own portfolio companies, they will surely lend to other private equity firms’ portfolio companies in a modified version of the “club deals” that bind them together. These firms have a mutual interest in generating deal fees and in controlling their lucrative franchises.
A Glimpse of What’s to Come

The problem with banks is that they became too leveraged. When they couldn’t amass assets on their books, against which they had to set aside “reserves,” they established “off-balance-sheet” vehicles to acquire leveraged pools of assets. They were leveraged inside and out.

But now the originators of the leveraged-buyout business model want to control taxpayer-backed banks, to apply another round of leverage to already crippled banks in order to squeeze out all the profits possible. Although this comes at a cost to duped and already drained taxpayers, regulators, legislators and the American public would be foolish to expect anything else from the private equity crowd. If the FDIC thinks it has a problem now, wait until the next implosion of leveraged banks happens.

In a comment letter to the FDIC on the original policy proposal, the Private Equity Council, an industry advocacy group, without recognizing the irony of its comment, suggested that mandating higher capital ratios for private equity buyers of failed banks would actually increase the risk at those banks because their owners would essentially have to employ more leverage to generate sufficient returns to meet the higher capital standards – while still generating returns high enough to satisfy the investors in their private-equity funds.

If that’s not an advance look at the next round of financial-sector problems we could be facing, we are deluding ourselves.

Private equity should be allowed to buy banks, but should also be held to a higher standard. They have a proven record of success at leveraging companies when they have access to cheap funding, and they also have a record of spectacular failures that resulted from their leverage. The last thing that American banks need – especially right now – is a hyper-aggressive management that leverages them to the hilt in order to generate “acceptable” rates of return for a select group of private investors.

Unfortunately, we’ve once again placed ourselves in a position where the viable solutions to the problems that were created will end up causing an entirely new set of problems – problems that always seem to provide a benefit to the old crony network while leaving the battered U.S. taxpayer as the ultimate victim.

We have no one to blame but ourselves.

More town hall meetings and more vocal opposition to being duped and used by Wall Street would be a good place to start.

Why Asia Will Supplant Detroit as the Global Center of the Auto Industry

2009-08-19T06:23:00.000-07:00

By Martin Hutchinson
Contributing Editor
Money Morning

Asia is poised to become the “new” Detroit.

Here in the United States, at a cost of a mere $3 billion, the “Cash-for-Clunkers” program appears to have given new hope to the U.S. auto industry.

But that new hope is destined to be short-lived.

It’s true that - in terms of value delivered for the money invested - “Cash for Clunkers” has eclipsed every other stimulus program that has been tried. But the program has a projected lifespan of only three months, meaning it can’t reverse the powerful global forces that are destined to turn the U.S. auto market from leader to laggard on the global stage.
Financial Crisis Fallout Reshapes Sector

Thanks to the financial crisis whose impact continues to be felt, worldwide automobile demand had dropped on an overall basis since 2008.

But regional differences are already emerging.

In the United States, for instance, the benchmark seasonally adjusted annual sales rate (SAAR) finally jumped up past the 11-million mark in July after failing to eclipse the “breakeven point” of 10 million vehicles in any prior month this year. But the actual year-to-date sales of 5.81 million vehicles through July was still 33% below the 8.55 million that had been sold by that point in 2008, and is 67% below the all-time annual record of 17.4 million achieved in 2000 and 65% below the decade average of 16.4 million.

(Prior to the global financial crisis and accompanying recession - which prompted the U.S. auto industry to restructure and shift its breakeven point down to 10 million vehicles - the breakeven point was actually 16 million vehicle sales in a year. Below that point, several or all of the U.S. “Big Three” would be spinning their wheels in red ink.)

It’s a much different story abroad, however, where several markets are in a long-term growth mode. In India, for example, sales were up 31% on a year-over-year basis, while auto sales in China were an astonishing 70% above those of a year ago. Even if U.S. auto sales continue to improve, China’s automobile market may outsell its U.S. counterpart for a full year for the first time ever.

Granted, India’s auto market - around 2.5 million cars and light trucks a year - is still much smaller than either China or the United States. However, its growth makes it comparable to the Japanese or German markets, the next largest automobile markets after its U.S. and China counterparts.

Thus, global automobile sales are undergoing a major reorientation towards Asia and away from the United States and Europe. This will inevitably have a huge effect on the structure of the sector.

That’s why Asia will become the new Detroit - the future center of the automaking world.
Gone For Good?

In the United States, General Motors Corp. and Chrysler Group LLC have lost market share because of the government takeover. They are unlikely to get it back in spite of the debt costs they have relinquished through bankruptcy.

For Chrysler, the partnership with Fiat SpA (OTC ADR: FIATY) is unlikely to help much. Fiat is among the weakest of the European companies, and has not been competitive in the United States since the 1980s. The U.S. market is undoubtedly moving toward smaller automobiles. That trend is being “fueled” by the new Corporate Average Fuel Economy (CAFE) standards for 2015 and probably by higher fuel taxes for environmental and budget reasons. Nevertheless, it seems unlikely that the Chrysler/Fiat partnership will have the models to compete.

General Motors has the model range to compete in the United States. However, GM is doing much better in China, thanks largely to its joint venture with Shanghai Automotive Industry Corp., which expects to sell 1.4 million vehicles in 2009. Since GM is also selling Opel, its European operation, GM will find itself driven primarily by the demands of the Chinese market. Given the growth of that market, it will probably make the most economic sense for GM to become Chinese-owned. Politics may delay this, but probably only for a few years.
The United States’ One “Better Idea”

Ford Motor Co. (NYSE: F) has picked up market share in the United States from GM and Chrysler’s problems. It should benefit both from "Cash for Clunkers," and from the early stages of the U.S. market recovery. If GM and Chrysler continue to have difficulties, Ford may be in a good position here in the large U.S. market - as the most-effective manufacturer of the large automobiles that Americans continue to prefer - no matter what the government tells Ford to do.

Nor is that Ford’s only competitive advantage going forward. Ford Europe is big and viable enough to allow Ford to remain credible as a producer of smaller cars, primarily in the higher price brackets.

Outside the United States, European manufacturers will find themselves increasingly confined to the luxury end of the market. However, as global incomes rise and the newly wealthy become brand-conscious - particularly in the emerging economies of Asia - that upscale portion of the auto market should continue to be strong.

Japanese and Korean manufacturers will continue to dominate their domestic markets. And such companies as Honda Motor Co. Ltd. (NYSE ADR: HMC), Toyota Motor Corp. (NYSE ADR: TM) and Kia Motors Corp., will also do well in the United States and Europe, and in countries where they have been able to establish viable local manufacturing operations, and lower labor costs.

But it will be the players from China and India who are destined to be the big market-share gainers on a global basis.
The New Leaders

For U.S. investors, India’s Tata Motors Ltd. (NYSE ADR: TTM) is the best known of the newly emerging global auto elite. Tata’s $2,500 for-the-masses “Nano" car has been well received. Over the long term, the Nano may expand the entry-level portion of the worldwide auto market, forcing other manufacturers to produce equivalent low-price models.

Indeed, the introduction of $2,500 cars may greatly expand the market’s size in India and other emerging markets, much as Ford’s Model T did after its introduction in 1908, or the Volkswagen AG (OTC ADR: VLKAY) VW Beetle did in the 1950s and 1960s.

Tata looked to be in financial difficulty after it bought the loss-making Jaguar and Land Rover brands in 2008 at the top of the market. However, the $300 million loan for its Jaguar Land Rover Unit announced on Aug. 10 gives Tata the room it needed to maneuver. Market growth in India, combined with the strength of its Tata Group parent now suggest that Tata Motors has the strength to survive without dismemberment.

The bottom line: Tata and its India-based competitors - Maruti Suzuki India Ltd. (Mumbai: MSIL) and Mahindra and Mahindra Ltd. (London: MHID) - as well as such top China carmakers as Chery Automobile Co. Ltd. (still publicly owned), Geely Automobile Holdings Ltd. (OTC: GELYF) and Great Wall Motor Co. (OTC: GWLLF), are thus the companies that will see most growth in the automotive market of the decade to come.

By 2020, the global auto sector will look nothing like it does today. Given that most of the muscle will be in Asia, investors shouldn’t be surprised.

High Frequency Trading: Wall Street’s New Rent-Seeking Trick

2009-08-14T14:16:00.000-07:00

Martin Hutchinson
Contributing Editor
Money Morning

Goldman Sachs Group Inc. (NYSE: GS) disclosed recently that it had 46 “$100 million trading days” in the second quarter of 2009. That was a record number, even for one of the biggest players on Wall Street.

When the U.S. economy is facing collapse and merger and acquisition volume is way down, it seems odd that investment banks like Goldman had record quarters.

Well, here’s the secret: They’ve found a new way to skim more of the cream off the top of U.S. economic activity. It’s called “High-Frequency Trading” (HFT).

High-frequency trading uses the speed of supercomputers to trade faster than a human trader ever could. Human owners of the supercomputers program them to take advantage of information milliseconds faster than other computers, and whole seconds faster than ordinary human traders. This is not a minor development; HFTs now represent about 70% of the trading volume in the U.S. equity market.

HFT computer servers are able to beat other computers because they are located at the exchanges. They take crucial advantage of the finite speed of light and switching systems to front-run the market. They also gain information on orders and market movements more quickly than the market as a whole. They operate not only on the New York Stock Exchange (NYSE), but also on the electronic trading exchanges such as the NYSE hybrid market.

According to a paper “Toxic equity trading order flow on Wall Street” by the brokerage Themis Trading LLC, there are a number of different types of HFT. Liquidity rebate traders take advantage of volume rebates of about 0.25 cents per share offered by exchanges to brokers who post orders, providing liquidity to the market. When they spot a large order they fill parts of it, then re-offer the shares at the same price, collecting the exchange fee for providing liquidity to the market.

Predatory algorithmic traders take advantage of the institutional computers that chop up large orders into many small ones. They make the institutional trader that wants to buy bid up the price of shares by fooling its computer, placing small buy orders that they withdraw. Eventually the “predatory algo” shorts the stock at the higher price it has reached, making the institution pay up for its shares.

Automated market makers “ping” stocks to identify large reserve book orders by issuing an order very quickly, then withdrawing it. By doing this, they obtain information on a large buyer’s limits. They use this to buy shares elsewhere and on-sell them to the institution.

Program traders buy large numbers of stocks at the same time to fool institutional computers into triggering large orders. By doing this, they trigger sharp market moves.

Finally, flash traders expose an order to only one exchange. They execute it only if it can be carried out on that exchange without going through the “best price” procedure intended to give sellers on all exchanges a chance at best price execution. The Securities and Exchange Commission (SEC) has now promised to ban this technique, and flash trading on the Nasdaq will stop on September 1.

This toxic trading has caused volume to explode, especially in NYSE listed stocks. The number of quote changes has also exploded and short-term volatility has shot up. NYSE specialists now account for only around 25% of trading volume, instead of 80% as in the past.

The bottom line for us ordinary market participants is that insiders are using computers to game the system, extracting billions of dollars from the rest of the market. While it is illegal to trade on insider knowledge about company financials, these people are trading on insider knowledge about market order flow. That’s how Goldman Sachs and the other biggest houses make so much from trading. By doing so they are rent-seeking, not providing value to the market.

There are two ways to stop this: Ideally, the SEC will employ both. First, they can introduce a rule that all orders must be exposed for a full second. That will reduce the volume of HFT, but still doesn’t truly protect non-computerized outsiders.

The second, and better, solution is to introduce a small “Tobin tax” on all share transactions. It could be tiny; maybe 0.1 cents per share. (The SEC would also need to ban “exchange rebates” to traders.) Such a tax would make the worst HFT types unprofitable without imposing significant costs on retail investors. It would also provide funds to help run the vast apparatus of regulation and control that seems to be necessary to run a modern financial system.

Goldman Sachs, and other financial institutions of its ilk, have imposed huge costs on the U.S. public with their “too big to fail” status. Now they are adding to the problem by scooping out money from the stock market through HFT. It’s about time the government imposed some taxes to stop the worst of these scams and recover the public some of its money.

The Three Reasons China Will Lead the Global Rebound

2009-07-24T13:39:00.000-07:00

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

For U.S.-centric investors who question whether it’s really necessary to invest in “risky” overseas markets, here’s an important fact to consider: It’s China - not the United States - that’s leading us back from the brink of a global financial collapse.

At a time when the U.S. economy continues to wrestle with joblessness, a housing hangover, and heightened inflationary fears due to a questionable central bank “exit strategy,” Beijing just reported that China’s economy advanced at a 7.9% clip in the second quarter, up from 6.1% in the first quarter.

This is well ahead of what most mainstream analysts had been projecting - particularly those who were writing the Red Dragon’s eulogy back in January - but as we’ve been telling Money Morning readers since the start of the New Year, China could well be on track for growth of 8% or more this year.

If you factor in the cash that’s not included in official state statistics - but that does influence economic growth - it’s possible that China’s growth rate could grow by an additional 3% this year and as much as 5% in 2010.

That’s not likely, mind you, but it is possible. And Beijing knows it.

Largely attributed to China’s massive $586 billion stimulus program, the country’s economic acceleration may seem startling when juxtaposed against the travails of other major markets and the United States in particular.

While Corporate America has admittedly buoyed investor sentiment with some better-than-expected earnings of late, many stalwarts continue to struggle. Take General Electric Co. (NYSE: GE), which is widely regarded as a global company, and which saw its profits drop 47%. Credit spreads remain tight and lenders are certainly in the pits as has been amply displayed by CIT Group Inc. (NYSE: CIT), which teeters on the brink of bankruptcy. Moreover, consumers continue to struggle in the United States, Europe and Japan.

In China, however, there’s a very different story coming to light. Thanks largely to an emerging middle class of 330 million people (more than the population of our entire country), Chinese consumers are coming into their own. With savings that are as much as 35% of earned income and a desire to have what we have, goods are flying off of store shelves. The expected increase in Chinese consumer spending in 2009 is greater than the forecasted consumer spending increases in the United States, Japan and the Eurozone combined.

At the same time, China’s property markets are rising again, and home values are increasing as well. Automobile sales, always a litmus test for consumer health in any developing country, are up 48% from last year and are accelerating so rapidly that China is already supplanting the United States as the world’s largest car market - a full three years ahead of my projections.

But, critics ask, what happens when the music stops? They’re worried that once the money runs out, China’s markets could crash all over again.

To China’s credit, the government acknowledges that there still are challenges and, as a seasoned China watcher, that gives me comfort. I find it reassuring to see that China’s leadership understands the game they’re playing. In fact, there are three key areas that could trip up the country’s global-growth strategy, but to keep that from happening, China’s leadership is focusing carefully on each of the three: unemployment, lending and currency.

Let’s look at each one in detail.

Unemployment: President Hu Jintao and his cabinet are acutely aware that if unemployment gets out of control, social unrest will become a major problem. So China’s leadership will do everything it can to ensure that this doesn’t happen.

Most Westerners will no doubt read into this comment with an emotional overlay, especially when the media has been filled in recent weeks with stories of the waves of riots and killings in China’s Western Xinjiang region. But, they shouldn’t. The Uyghur riots, while extremely unpleasant by any measure, are racially motivated clashes. That’s not to downplay the tragic nature of this violence, but the very nature of these riots does suggest that the chance they’ll spread beyond the largely Muslim region is minimal.

What concerns Beijing when it comes to unemployment is that riots spawned by shortages of basic human needs are a very different phenomena because they could prompt a now-divided and largely indifferent populace to unite against the government across a much broader geographic area.

And that would not only risk China’s growth, but powerful ruling elite, too, which is why Beijing is so insistent on direct stimulus benefits that keep people working. If it hasn’t dawned on you, yet, I’m sure it will in short order - China is playing it smart.

Here in the United States, Washington took its turnaround plans to Wall Street.

But in China, Beijing has taken its plans to Main Street.

While our leaders continue to pay lip service to unemployment, they really don’t care so long as protected (and connected) institutions remain standing when they should have been put out of their misery.

Lending: Since this crisis began, China has largely avoided the financial plague that has devastated Western economies. This is due in large part to historically tight restrictions on local banking practices and the confinement of derivatives and other potentially toxic financial assets to a few externally focused banks. But now Beijing has a different issue to contend with.

To ensure that the stimulus programs flow freely throughout China - and have the beneficial impact that Beijing hopes - Beijing’s bankers have more recently liberalized lending and reserve requirements inside China. This has resulted in an explosion of debt that many Western analysts believe will come back to haunt China in much the same way the lending orgy here continues to haunt U.S. financial institutions today. They’re entirely different forms of lending, but the concerns seem to be inseparable.

To be fair, that might be the case. However, the thing to keep in mind is that China is not just changing the rules in isolation the way the United States did leading up to the financial crisis. Instead, we’re seeing stronger internal controls being developed, increasingly strict layers of banking supervision being installed, and a general rise in the quality of borrowers - all at Beijing’s insistence.

The result of all this is that China’s financial system should become increasingly stable even as it grows by leaps and bounds.

Obviously there will be fits and starts, but this is a far cry from the warped system U.S. investors have been forced to rely upon to date - a system whose hallmarks seem to be inept leadership, somnambulant or sleazy regulators, conflicted lenders and greedy Wall Street executives who focus on profits no matter the cost.

Chinese Currency: Many Western observers worry about China’s intentions when it comes time to purchase our debt. I think that’s overblown. The real question is what Beijing will do to manage the concentrated U.S. dollar risk it currently faces.

To the extent that China can keep a lid on its unemployment situation and maintain control over its banking system, expect China to maintain the status quo and to continue its purchases of U.S. Treasuries and U.S. dollars. But don’t expect it to sit still. China is acutely aware of the highly concentrated risks it faces because of its ongoing dealings with the United States.

Therefore it’s logical to expect China to diversify its holdings with additional oil, gold and resources purchases in the months ahead. Not only will resource-specific investments help hedge the $2.3 trillion currency-reserve risk China bears, but if the dollar collapses such “hard-asset” investments will maintain much of their value and will be eminently tradable via the $120 billion in yuan-based swap agreements that China has assembled.

Here’s one final thought to consider.

Unlike the West - which views the financial crisis as a burden, a mistake, or a bad dream to be lived through - China’s leaders see this as the most significant opportunity of a generation. It’s a chance for their country to establish itself as a leading global power.

That’s why China will continue to pull further ahead. And that’s why U.S. investors who don’t wish to be left behind can no longer ignore China.

Market Recoils as CIT Edges Toward Bankruptcy

2009-07-20T07:07:00.000-07:00

By Jason Simpkins
Managing Editor
Money Morning

The probably bankruptcy of CIT Group Inc. (NYSE: CIT) could have major implications on the retail and manufacturing sectors this week, as many related companies are reliant on the financing giant.

With options running out over the weekend, CIT advisors began preparations for a bankruptcy filing. As of Sunday, JPMorgan Chase & Co. (NYSE: JPM) and Morgan Stanley (MS) were talking with other banks about a debtor-in-possession loan, used to fund a company’s operations after it seeks court protection from creditors, Bloomberg News reported.

Bondholders held calls last week to discuss whether to swap some claims for equity to reduce indebtedness. Thomas Lauria, a lawyer at White & Case LLP, told Bloomberg that a group of CIT creditors he represents offered to provide $3 billion in new loans to bridge CIT to an out-of-court restructuring or an orderly bankruptcy, but had yet to hear back from CIT management.

“It seems CIT was ill-prepared for this moment, so they’re scrambling,” Scott Peltz, a managing director at consulting firm RSM McGladrey Inc. told Bloomberg. “Unless you have all these bondholders holding hands and singing Kumbaya, I think they’re too far behind the eight ball to avoid filing.”

While CIT is not nearly the household name of Citigroup Inc. (NYSE: C) or Bank of America Corp. (NYSE: BAC), the lender finances over 1 million businesses – including Dunkin Donuts and Eddie Bauer.

Three prominent retail trade groups sent letters to financial regulators this week warning that the failure of CIT would undermine the industry supply chain.
“[Retailers] are unbelievably concerned right now,” New York bankruptcy lawyer Jerry Reisman told the Buffalo News. “What we may have here is a total disruption in small business.”

Reisman said he received more than two dozen calls from panicked stores and apparel manufacturers, some of which said they may not have the money to pay their employees.

An otherwise light week on the economic calendar gives way to the next round of earnings as Apple Inc (Nasdaq: AAPL) and Texas Instruments Inc. (NYSE: TXN) highlight the corporate releases this week, while consumer companies The Coca Cola Co. (NYSE: KO), McDonalds Corp. (NYSE: MCD), and Amazon.com Inc. (Nasdaq: AMZN) join the mix.

U.S. Federal Reserve Chairman Ben S. Bernanke will head to Congress where several critics await. As for the healthcare debate, the August deadline seems less likely, though the Senate has its two cents to add in the coming days. Expect plenty of politicized talk about the ballooning deficit and the impact on small businesses.
Market Matters

The financial sector appears to be on the mend as earnings season brought several positive signs that the worst is over and soon “business as usual” will return to Wall Street. Goldman Sachs Group Inc. (NYSE: GS) easily surpassed analysts’ earnings estimates on solid trading revenues, while JP Morgan got a boost from its investment banking division to shatter the forecasts.

Even Citigroup and Bank of America posted solid results (thanks to one-time gains), though both entities have many ongoing challenges to overcome before the Feds let them fend for themselves.

Of course, the possibility that CIT will file for bankruptcy protection has left panicked customers without a significant source of funding for their daily operations. After late hour negotiations failed, the government chose to pass on another sizable bailout and allow true capitalism to play itself out. CIT turned to private firm and bondholders to help devise a financing plan and avoid the fate of Lehman Bros. and others. But now, nervous retailers and manufacturers are lining up alternative funding sources with the hope of dodging significant business interruptions.

Bed Bath & Beyond (Nasdaq: BBBY) and Wal-Mart Stores Inc. (NYSE: WMT) are among CIT’s largest customers, though many are small independent operations. A CIT failure could prove devastating for those firms considered the lifeblood of American business.

In other earnings news, techs enjoyed another decent quarter as Intel Corp. (INTC) easily bested expectations (that is, before that $1.45 billion antitrust fine) and International Business Machines Corp. (NYSE: IBM) earnings grew by double-digits, while management raised its outlook for the next few quarters. Though both offered encouraging signs for the sector (and economy as a whole), Dell Inc. (Nasdaq: DELL) warned that lower margins are impacting its operations and Google Inc. (Nasdaq: GOOG) experienced its lowest rate of revenue growth since going public five years ago.

The travel industry continued to struggle as consumers and business professionals delayed trips and Marriott International Inc. (NYSE: MAR) and American Airlines parent AMR (NYSE: AMR) posted disappointing results.

Economically Speaking

The White House also experienced a “good news/bad news” week as House Democrats began to push forward a major healthcare overhaul. Before the real lobbying could begin in earnest, the Congressional Budget Office (CBO) Director proclaimed the proposal would have no positive results on reducing costs or expanding coverage and would actually increase government spending.

Investors shrugged off the CIT developments and focused on positive earnings and economic data. Stocks surged early on the Goldman news and soared right through the technology reports. Technicians joined the fun as the Standard & Poor’s 500 Index broke beyond resistance at 930, a strong sign for traders who monitor charts. Major indexes snapped a month-long losing streak and the tech-heavy Nasdaq Composite climbed to levels not seen since last October, while fixed income suffered reverse “flight-to-quality” trades. Oil rebounded on the favorable market and economic signs.

While the debate over a healthcare overhaul rages on, the Treasury Department reported that the budget deficit ballooned beyond a record $1 trillion and seemed prime to move even higher if Congress cannot reign in spending. Analysts fear that interest rates ultimately will move higher should the alarming trend continue and foreign investors shy away from U.S. securities.

But for now, inflation seems very much under control, despite sizable jumps in both the retail and wholesale gauges. Though gasoline prices surged by 17% in June, prices have already begun dropping at the pumps and most economists do not expect a repeat performance in the months to come.

Though retail sales increased in June for the second consecutive month, much of the gain was related to the rising gas prices and consumers remain reluctant to part with their hard-earned income in light of the weakening labor picture.

On a positive note, weekly jobless claims fell to its lowest level since January. However, naysayers claimed that much of the decline was due to calculation problems stemming from auto closures and layoffs are still very much on the rise.

Finally, the hectic economic calendar ended on a positive note as the housing sector showed renewed signs of a rebound as both new construction and permits for future activity experienced unexpected strength. Even Dr. Doom himself, NYU professor Nouriel Roubini, the man best known for predicting the current crisis, reversed course and claimed the global economy would move out of recession by late 2009.

The minutes from the June Fed meeting showed that policymakers revised (positively) their forecasts for economic activity in 2009 and 2010, though they expect the unemployment situation to remain weak through next year. Most Fed watchers do not see any change in the funds rate for the foreseeable future.

On another note, numerous renown economists (about 200), including a few Nobel prize winners, called on Congress to cease the grandstanding and stop criticizing the Fed’s handling of the financial crisis and economic downturn (particularly Bernanke’s “tactics” surrounding the Bank of America/Merrill Lynch deal). The strongly worded letter by some of the nation’s sharpest minds stated that such politicizing could prove detrimental to the recovery.

How to Profit From China’s “Hot Money” Strategy

2009-07-17T14:32:00.000-07:00

China made headlines around the world this week when it revealed that its foreign reserves had eclipsed the $2 trillion market for the first time, rising by a record $178 billion in the second quarter – thanks to a flood of “hot money” that flowed into the world’s most promising economy.

Complete story
http://www.moneymorning.com/2009/07/17/china-hot-money-strategy/

Real Estate: Firing your agent is a serious matter

2009-07-06T08:50:00.000-07:00

By BOB & DONNA McWILLIAMS, For The Capital

Published 07/05/09

When you sell your house with an agent, you'll enter into a written agreement with the agent and their brokerage firm to list your property for sale.

Depending on which company you select, these agreements may differ somewhat, but they all contain a lot of the same basic information. For example, the agreement will specify a term of the listing (many last for a period of six months); it will obviously contain the agreed-upon list price, and numerous other clauses will address the various other responsibilities of the broker, agent and seller. Not too long ago, listing agreements were only a page or two long. Today, they can be six pages or more. The additional detail is all directed toward making sure there is maximum clarity about who is going to do what.

One part of all these agreements is a paragraph that outlines the conditions and procedures for terminating the listing.

This brings us to the topic of our column - firing your agent. The process of selling a house can be a long and stress filled event. In this environment, even the best of client/agent relationships can be put to the test. Also, market conditions may change, causing a client to reconsider the whole concept of selling.

Regardless of the reason, terminating a listing agreement is a very serious matter and there are a number of things you should remember, before going down that road, including:

Does the agent deserve it? If you want to terminate the listing contract, because you've just decided you no longer want to sell, that's one thing. But, if you want to give the listing to another agent, that's an entirely different matter. As we have said in previous columns, agents get paid nothing unless a house goes to settlement. Agents pay out of their own pockets for virtually everything associated with putting a house on the market. So, if an agent loses a listing, not only are they obviously out the commission, they also realize a significant financial loss for things such as signs, showing services, brochures, Internet services, advertising and myriad other expenses associated with selling your house. Plus, an agent can quickly spend hundreds of hours of time establishing and servicing your listing. Add it all up, and an agent may have five or ten grand invested in your place in no time at all. Pull your listing, and it's all just money down the drain.

As a result, carefully examine the reason why you want to switch agents and make sure you have legitimate beef. Before you just haul off and give them the heave ho, call your agent and let them know what's bugging you. Chances are you may find out that your concerns are either ill founded or the agent was simply unaware of the existence or degree to which you had a problem.

In most cases, issues with an agent/client relationship can be traced to a lack of communication. Don't let an issue fester. Bring concerns up with your agent before they rise to the level where you want to terminate the agreement.

Finally, recognize that there are many things which are beyond your agent's control. Especially these days, market conditions are rapidly changing. Just because your agent said you could get $500,000 for your place, that could change - two months from now it might only be worth $450,000.

Being up-to-date with the competitive environment and how it might affect the sale of your house is an important duty for a listing agent. But, if the news is bad, don't shoot the messenger. It's not a perfect world and, from time to time, things are going to get messed up. We forgot who first said it, but we like the quote, "Excellence does not require perfection".

Know what it says in your listing agreement. If, for whatever reason, you've decided to terminate your listing agreement, make sure you understand the process for doing so. In most listing agreements, there will be a paragraph that says something like this: "Either Owner or Broker, by giving written notice, may cancel this Agreement so that it will terminate at midnight ( x ) days from the date of receipt of such written notice. Owner and Broker may also terminate this Agreement at any time by mutual written agreement." The number of days for that written notice is something you would have agreed to when you first signed the agreement. Many times, you'll see 30 days in there. But, once again, listing agreements can vary from company to company and agent to agent.

So, if you've decided you're going to call it a day with your agent and send in the written notice, please give them a call, talk it over one final time, and if the problem can't be resolved, let them know the letter will be forthcoming. It's not fair to the agent to just let a termination letter show up unannounced in their fax machine or e-mail. Remember, this thing works both ways. It's not unheard of to have agents fire their clients.

Understand the impact of terminating your listing. Even after you terminate a listing, this does not completely sever your relationship with the former agent. Most listing agreements will state that for six months (this time can vary) after you end the listing, you may still owe the agent a commission if you sell the house to someone who was made aware of the property during the time you had the property listed with that agent. This clause is usually in listing agreements to protect the agents from unscrupulous sellers who use an agent to attract a buyer, then try to dump their agent in an effort to avoid paying commissions.

Another misconception some sellers have is that changing agents will make their property appear as though it's new to the market. In this market, houses can be on the market for a long time and sellers worry that their property could become stale or stigmatized. But, unless you take your house completely off the market for at least 90 days, the counter that keeps track of how long you've been for sale will not reset to zero. Just changing agents won't help this. Besides, don't get too worried if your house has been on the market for a while. These days, seeing a house be around for 200 or 300 days isn't uncommon, and buyers don't see that as a red flag like they used to. In fact, some buyers may see a long time on the market as testament that a seller is ready to make a deal. In that way it can even be looked upon as a positive in generating an offer.

In conclusion, terminating a listing agreement is not something to be taken lightly. You have signed a contract with someone who is going to shell out considerable time and money on your behalf, all with absolutely no guarantee that there will be a pay day at the end of the road. Keep the communication going, and it will probably avoid the unpleasant process of parting ways.

How China Could Rescue General Motors

2009-06-12T14:11:00.000-07:00

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How China Could Rescue General Motors

By William Patalon III
And Jason Simpkins
Money Morning Editors

For anyone who still disputes that we’re operating in a global economy these days, consider this bit of business irony: The long-term survival of America’s biggest car company could depend on how well it does in Mainland China.

As it works its way through bankruptcy and crafts a corporate turnaround plan, General Motors Corp. (OTC: GMGMQ) – derisively referred to as “Government Motors” by critics – has five factors on its side. The first four are pretty predictable fare for a U.S. auto company that finds itself on the ropes:

* First, bankruptcy will turn GM into a company whose smaller size is better suited to the diminished size of the post-financial-crisis U.S. auto market.
* Second, the bankruptcy process will also allow the company to turn billions in liabilities into equity, freeing up cash it can use to invest in its future.
* Third, even with the sale of Saturn and Hummer – and with the elimination of additional models and nameplates – General Motors has a stronger stable of products than most observers realize.
* And fourth, the consumer backlash against the bankruptcy likely won’t be as damaging as had been initially feared – meaning sales won’t just “fall off a cliff.”

But the fifth factor – the wild card – is still China, where GM has established a surprisingly strong and successful presence. That should allow General Motors to capitalize on a market that’s the world’s fastest-growing right now, and that will one day be the world’s biggest market, too. Eventually, GM will be able to use that low-cost market to build cars and trucks and ship them back to the United States for sale at competitive prices. China’s big carmakers are already planning to do just that. So why shouldn’t GM?
The bottom line: China’s car market could be GM’s savior.
Why China Could Save “Government Motors”

The good news for General Motors is that its Asian operations will be unaffected by the bankruptcy.

“Our operations are separate, they are profitable, they are well-funded, and we generate our own funds for future investment,” GM China President Ken Wale told reporters. “We do not see any change to our growth activities.”

GM China is trying to drive home this point by emphasizing to its Asian customers that it isn’t an extension of General Motors, but is actually a joint venture between GM and Shanghai Automotive Industry Corp. Each company owns 50% of the venture.

GM China has actually been one of the bright spots in General Motors’ operations. While U.S. sales have plunged, sales in China have advanced at a stunning rate. In the first five months of this year, GM China sold about 670,000 vehicles – a 33.8% increase from the same period a year ago. May sales surged 75% from last year.

"Shanghai GM is a brand name here by itself and its Wuling minivans and mini-trucks are selling like hot cakes all over the country," Zhang Xin, an analyst with Guotai Junan Securities Ltd, told Reuters. "I think it will be business as usual here, as whoever is calling the shots at GM eventually would make sure that its China business remains on the right track."

And while worldwide auto sales continue to plunge, sales in China are expected to grow between 8% and 9% this year. China actually overtook the United States as the world’s largest auto market for the first time in history in the first quarter.

“Within 10 years, this will be our largest market in the world,” Wale, the GM China president, told Time magazine.

GM China plans to double its sales in China to more than 2 million vehicles and introduce at least 30 new or updated models over the next five years. Meanwhile, General Motors will close or idle 14 U.S. plants and warehouse operations, shedding up to 20,000 workers.

As part of that streamlining effort, GM is looking at ways to roughly double the number of cars it builds abroad for sale in the U.S. market. Currently the company imports the Chevrolet Aveo and Pontiac G3 from South Korea. The Saturn Vue and Chevrolet HHR sport utility vehicles come from Mexico. And the Pontiac G8 comes from Australia.

The company could export small vehicles such as the Chevrolet Spark from China to the United States. That fuel-efficient mini car is to debut in 2011, GM’s Web site says.

But GM has been so successful in China that it is reportedly negotiating with U.S. lawmakers to send a greater proportion of the carmaker’s production overseas, the U.K.’s Telegraph reported.

No matter how those discussions go, GM will start shipping cars to the United States from Shanghai in 2011. While many carmakers import components from China to save on labor costs, this would make GM the first carmaker to actually import whole cars from Mainland China. But those numbers will be small – at least initially. The company plans to export slightly more than 17,000 vehicles in the first year, before ramping up to 50,000 cars a year by 2014.

In fact, GM sold more vehicles in Asia in the first quarter than it did in the United States. Only 26% of GM’s first-quarter sales came from the United States, a 36% decline from a year ago.
The Wild Cards that Could Cause GM to Crash

Of course, the plan doesn’t sit well with unions.

“GM should not be taking taxpayers’ money simply to finance the outsourcing of jobs to other countries,” Alan Reuther, a Washington lobbyist for the United Auto Workers (UAW) union wrote in a letter to U.S. lawmakers.

Indeed, the UAW and others argue that the whole point of bailing out the U.S. auto industry was to save American jobs and help prop up the sagging economy.

“I think that’s wrong,” Keith Pokrefky, a Michigan autoworker, told WILX, the Lansing TV station. “I think that’s wrong for America. I think it’s wrong for American jobs. It’s un-American.”

For its part, GM argues that it is only logical to produce cars where they’re going to be sold.

“GM’s philosophy has always been to build where we sell, and we continue to believe that is the best strategy for long-term success, both from a product development and business planning standpoint,” GM’s China office said in a written statement to the The Associated Press.

Harvard Business School professor Clayton Christenson – who was also a consultant to G. Richard Wagoner Jr., the former GM CEO who was also the architect of GM’s China strategy – told Time that inexpensive, Chinese-made Chevys, exported to the United States, could be the “disruptive” force the company needs to resuscitate its North American vehicle sales.

“It’s exactly the right thing for [GM] to do,” Christenson said.

While China keeps its data on labor costs under lock and key, analysts estimate that wages and benefit payments per factory worker are less than a tenth of what they are in North America, Time reported.

And as Ballard, the Michigan State economist notes, if GM fails, there are no jobs at all.

And perhaps that’s the reality on which everyone should focus. There was a time when what was good for GM was good for America. But somewhere along the line, the interests of the country and the carmaker diverged.

Even now, with the Obama administration having anted up with taxpayer money, the near-term steps that GM needs to take to survive may not be very popular with the “Buy America” crowd. In fact, having ponied up billions of dollars worth of federal assistance, U.S. President Barack Obama now finds himself trying to balance the competing interests of all the stakeholders, even as his administration tries to save GM – a balancing act that may prove impossible to pull off.

President Obama might be better served by focusing his energy on saving GM – allowing the company to employ the five factors that favor a turnaround to its own maximum advantage.

In fact, we’ll make this statement: These five factors could save GM. For the company to achieve long-term success, however, two specific things must occur.

* “Government Motors” must employ those five factors to their fullest potential.
* And the Obama administration must allow the company to do so.

Only time will tell if either or both of these happen.

Housing Starts

2009-06-08T18:02:00.001-07:00

Financial Post Published: Monday, June 08, 2009

OTTAWA -- Housing starts rose more than expected in May, with increased construction seen in both single and multiple dwelling sectors, according to Canada Mortgage and Housing Corporation.

The seasonally adjusted annual rate of starts increased to 128,400 units during the month from 117,600 in April, CMHC said Monday.

"Housing starts are expected to improve throughout 2009 and over the next several years to gradually become more closely aligned to demographic demand, which is currently estimated at about 175,000 units per year," the Crown corporation said.

Economics expected housing starts to total 126,000 units in May.

The seasonally adjusted annual rate of urban starts was up 11.1% to 107,800 units in May, CMHC said. Multiple unit urban starts rose to 60,900 units and single unit starts increased to 46,900 units -- with both categories rising by a similar 11.1% from the previous month.

"The increase in May is broadly based, encompassing both the singles and multiples segments," said Bob Dugan, CMHC's chief economist.

Overall urban starts were up 22% in Ontario, 16.8% in the Prairies, 7.3% in Atlantic Canada and 3.3% in Quebec. Meanwhile, urban starts fell 5% in British Columbia.

Rural starts were little changed at 20,600 units in May.

"The broad-based nature of the increase in residential construction activity in May was an encouraging development for this beleaguered sector of the Canadian economy," said Millan Mulraine.

"Indeed, after plunging precipitously since late 2007, and appearing to be in free-fall in recent months, this rebound may be an indication that the sector is perhaps stabilizing.

"Nevertheless, with the Canadian labour market continuing to weaken and the overall economy remaining quite soft, we expect residential building activity to remain in the current depressed range for some time."

Canwest News Service

TABLE

Housing starts in May (seasonally adjusted):

Canada, all areas 128,400

Canada, rural areas 20,600

Canada, urban centres 107,800

Canada, singles, urban centres 46,900

Canada, multiples, urban centres 60,900

Atlantic region, urban centres 7,300

Quebec, urban centres 34,200

Ontario, urban centres 41,600

Prairie region, urban centres 15,300

British Columbia, urban centres 9,400

Source: CMHC

Geithner Opens Up Debt Dialogue With China, but the Dollar Still May be Doomed

2009-06-03T15:38:00.000-07:00

By Jason Simpkins
Managing Editor
Money Morning

Two days of talks between U.S. Treasury Secretary Timothy F. Geithner and Chinese officials culminated yesterday (Tuesday) with both parties reaffirming their confidence in the value of the dollar, and the viability of U.S. debt.

Despite this public posturing, however, concerns remain about the dollar's near-term strength. And given the United States' precarious financial position, many observers question the dollar's long-term ability to remain the world's main reserve currency.

Chinese policymakers expressed "justifiable confidence in the strength and resilience and dynamism of the American economy," Geithner said during his first official visit to China.

China is the world's largest holder of U.S. Treasuries, with $768 billion of U.S. securities in reserve as of the end of March. In recent months, however, Beijing has increasingly voiced concerns about the value of its foreign-currency holdings, even going so far as to suggest the world adopt a new international reserve currency.

While Geithner's visit was initially described as an effort to promote stable, balanced and sustained economic growth, Geithner made sure to allay the concerns of China's leaders, including Premier Wen Jiabo, who just months ago called on the United States "to guarantee the safety of China's assets."

In remarks to China's state media, Geithner said the United States would "do everything necessary" to preserve the value of the dollar and to ensure that "the deepest, most liquid Treasury markets in the world" remain flexible.

For its part, China acknowledged the U.S. effort to open up a dialogue about fiscal responsibility that wasn't aimed at its own currency, the yuan. In January, Geithner accused the Chinese of "manipulating" its currency, keeping it artificially low to boost exports.

"You have established good working relationships with your Chinese colleagues and you are committed to increasing China-U.S. cooperation in tackling the international financial crisis," President Hu Jintao said at a meeting at the Great Hall of the People. "I appreciate that."

Still, not everyone was convinced that Geithner or U.S. Federal Reserve Chairman Ben S. Bernanke, are serious about shoring up the dollar. After all, the U.S. budget deficit is expected to balloon to $1.75 trillion in the fiscal year ending Sept. 30, a sizeable increase from last year's $455 billion shortfall. That figures to be about 13% of U.S. gross domestic product (GDP).

"We are going to have to bring our fiscal deficit down to a level that is sustainable over the medium term," Geithner said during his visit to Mainland China. "This will mean bringing the imbalance between our fiscal resources and our expenditures to the point - roughly 3% of GDP - where the overall level of public debt to GDP is definitely on a downward path."

Still, Geithner failed to elaborate on how exactly he and the Obama administration will accomplish that feat. And that's something that worries some Chinese economists.

"I worry about details," said Yu Yongding, a former central bank adviser who interviewed Geithner for the China Daily newspaper. "We will be watching you very carefully."

On Monday, Yu told Bloomberg News that he was hopeful Geithner would provide specifics about his plan. He also warned that despite its sizeable commitment to U.S. debt, China has other options.

"I wish to tell the U.S. government: 'Don't be complacent and think there isn't any alternative for China to buy your bills and bonds,'" said Yu. "The euro is an alternative. And there are lots of raw materials we can still buy."
Is China Ditching the Dollar?

Recent data supports Yu's position, as China appears to be putting more distance between itself and the dollar than ever before.

China bought less than a sixth of the Treasuries issued by the U.S. government in the 12 months through March, according to The New York Times. That stands in stark contrast to the Treasury market of two years ago, when China's demand for U.S. securities actually exceeded the United States' own borrowing needs.

Additionally, when China has purchased Treasuries, it has done so by swapping them with other U.S. assets, rather than exchanging foreign currencies or commodities. China has increased purchases of short-term Treasury notes - those that mature in a year or less - while at the same time unwinding its position in Treasuries with longer maturities. The takeaway: Beijing believes the dollar is safe for now, but has serious doubts that the greenback can shrug off the inflationary pressures that are certain to grow out of the United States' financial situation, and avoid major erosions in its value as a global reserve currency.
China has also paid for its recent Treasury purchases by selling off debt from such U.S. government-sponsored enterprises (GSEs) as mortgage giants Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE).

Last year, China was the world's biggest buyer of GSE securities, spending about $10 billion a month, The Times reported. And last fall, as much as one-fifth of China's $2 trillion in currency reserves was invested in Fannie and Freddie debt. But in the year ended in March, China actually sold about $7 billion of GSE debt.

In yet another move to safeguard its massive currency reserves, China has boosted its investments in commodities. China imported record amounts of copper and iron ore in April, and has been stocking up such commodities as oil and grain. China said last month that its gold reserves have soared to 1,054 tons, up from just 600 tons in 2003.

"While companies in the United States, Great Britain and Europe are being forced to shed promising assets in order to compensate for massive losses or to pay down debt, cash-rich China has been able to operate as a buyer in a buyer's market," said Money Morning Investment Director Keith Fitz-Gerald. "While the rest of the world has interpreted this as a sign that China's interested in buying the things it needs to grow, what they have not understood is that China's also interested in using physical assets as a source of 'currency' that offsets an increasingly eviscerated U.S. dollar."

According to Fitz-Gerald, China isn't simply stocking up on raw material to fuel its massive $585 billion stimulus plan, but instead use those commodities to bolster its currency. Indeed, Beijing's ultimate goal is for its currency to supplant the dollar as the world's most widely accepted transaction currency.
Replacing the World's Reserve Currency

Ahead of the G20 Summit in April, Zhou Xiaochuan, Governor of the People's Bank of China, released an essay titled "Reform of the International Monetary System."

Without specifically mentioning to the U.S. dollar, Zhou asked this basic question: What kind of international reserve currency does the world need in order to secure global financial stability and facilitate economic growth.

According to Zhou, the dollar's unique status as the world's primary reserve currency has resulted in increasingly frequent financial crises ever since the collapse of the Bretton Woods system in 1971.

"The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies," Zhou said. "Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws."

Zhou called for the "re-establishment of a new and widely accepted reserve currency with a stable valuation" to replace the U.S. dollar - a credit-based national currency. The central bank governor noted that the International Monetary Fund's Special Drawing Right (SDR) should be given special consideration.

After questioning the dollar's viability as the world's main reserve currency, Beijing took another step in its quest to expand the role of its own currency, the yuan, by agreeing to a $10 billion (70 billion yuan) currency swap with Argentina.

Including that deal with Argentina, Beijing has signed about $95 billion (695 billion yuan) of currency deals with Malaysia, South Korea, Hong Kong, Belarus, and Indonesia over the past few months. And China and Brazil recently acknowledged that they are in the early stages of a currency swap agreement of their own.

These deals eliminate the need for China and its trading partners to buy dollars to facilitate cross-border transactions. It also gives China's currency a more prominent role in the global economy, and moves the yuan one step closer to supplanting the dollar as the world's main reserve currency.

"For Westerners who are struggling to come to terms with the notion of a disarrayed dollar, the thought of oil, gold or other commodities being priced in yuan instead of dollars has to seem about as likely as having another country put a man on the moon," said Fitz-Gerald. "But the Chinese yuan is already well on its way to becoming that globally accepted standard unit of exchange and the proverbial genie, as they say, is out of the bottle."

[Editor's Note: Thirteen trades. All profitable. Since launching his Geiger Indextrading service late last year, Money Morning Investment Director Keith Fitz-Gerald is a perfect 13 for 13, meaning he's closed every single one of his trades at a profit. And he did this in the face of one of the most-volatile periods since the Great Depression. Fitz-Gerald says the ongoing financial crisis has changed the investing game forever, and has created a completely new set of rules that investors must understand to survive and profit in this new era. Check out our latest insights on these new rules, this new market environment, and this new service, the Geiger Index.]

Business Economists Predict Recession Will End in Third Quarter

2009-06-01T09:49:00.000-07:00

By Mike Caggeso
Associate Editor
Money Morning

A detailed report from the National Association of Business Economics (NABE) says the U.S. economy will recover in the third quarter after a continued contraction in the second.

NABE said the near-term setback will be a result of a “sharp retrenchment” in business investment, but the billions in government efforts to invigorate the economy will soon offset that.

“While the overall tone remains soft, there are emerging signs that the economy is stabilizing,” said NABE president, Chris Varvares, who is also president of Macroeconomic Advisers. “The survey found that business economists look for the recession to end soon, but that the economic recovery is likely to be considerably more moderate than those typically experienced following steep declines.”

NABE also downgraded its growth forecast for the next few quarters - with the second quarter contracting 1.8%, followed by a meager 1.2% growth in the second half. The end result will be an overall 1.2% contraction for 2009.

However, NABE believes a trio of key factors scaring consumers - job losses, tight credit conditions and declines in home values - are here to stay.

In fact, unemployment will likely reach as high as 9.8% by the end of the year while inflation moderates and oil prices remain “relatively depressed.”

NABE’s outlook is the consensus of a 45-person panel of economists.
Mixed Forecasts

NABE’s report joins a chorus of national and international institutions (both government and private) that have issued their own predictions of when the clouds will part over the global economy.

Earlier this month, U.S. Federal Reserve Chairman Ben Bernanke testified to the congressional Joint Economic Committee that the U.S. economy will begin to “turn up later this year,” Reuters reported.

But such recovery is contingent upon the financial sector’s continued improvement, Bernanke said.

“We continue to expect economic activity to bottom out, then to turn up later this year,” Bernanke told the committee. “An important caveat is that our forecast assumes continuing gradual repair of the financial system; a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall.”

Though Bernanke’s general timeframe for recovery is similar to NABE’s, there are a few differences in their outlooks. Bernanke said the housing market may be bottoming out and pointed to improving consumer spending, two areas NABE said will continue to remain depressed.

More broadly, the International Monetary Fund (IMF) recently slashed the growth forecast for every major country and urged more recovery actions. In its latest global outlook, the IMF said the global economy will likely contract 1.3% this year and post a 1.9% gain next year, Reuters reported.

And while the World Bank sees the global contraction easing and expects a recovery in late 2009, its report, “Swimming Against the Tide: How Developing Countries are Coping with the Global Crisis,” warns that 94 out of 116 developing countries have experienced a slowdown in economic growth. Of those, 43 have high levels of poverty.

Moreover, only one quarter of the most vulnerable countries have the resources to prevent a rise in poverty, the World Bank said.

“We need investments in safety nets, infrastructure, and small and medium size companies to create jobs and to avoid social and political unrest,” World Bank President Robert Zoellick said in the report.

Obama Stimulus May End Up Hurting the Economy it Was Supposed to Have Helped

2009-05-29T10:07:00.000-07:00

By Martin Hutchinson
Contributing Editor
Money Morning

Could the massive Obama stimulus plan end up hurting the U.S. economy?

It’s long been a worry, and now it’s beginning to seem possible.

The latest housing reports suggest that the recent rapid run-up in 10-year Treasury bond yields may be having an unhealthy effect on the U.S. housing market. That tells me that - although home prices are back to their long-term average in terms of earnings - we may not yet be close to the price bottom.

If that’s true, it’s very bad news. A further substantial decline in housing prices would destabilize the U.S. banking system again, because of all the mortgage debt in it, which would cause a very nasty “second leg” economic downturn. That would have one very ironic further implication: U.S. President Barack Obama’s $787 billion stimulus package - intended to help the U.S. economy push back the recession - would instead have succeeded in pushing it deeper into the mire.

A month ago, it appeared that the housing market might be in the process of bottoming out. The ratio of house prices to average incomes - which peaked at about 4.5 to 1 in 2006 - had fallen 33% from that apex, which brought the ratio close to its long-term average of 3.2 to 1, according to an S&P/Case-Shiller Index report. While interest rates remained low and government-backed home financing was readily available, it appeared the forces pushing up house prices (low interest rates and accessible financing) might soon come into balance and then dominate the forces that push home prices down (an inventory overage).

The jump in interest rates - from 2.07% on the 10-year Treasury bond in December to around 3.65% today - has weakened the case for a stabilization of housing prices. Mortgage rates, which were far below their levels of the last 30 years, have moved back above 5% — even for “conforming” mortgages. Thus the Mortgage Bankers Association index of new mortgage applications was down 15% in the latest week. Meanwhile, new home sales have merely stabilized at very low levels of an annual rate around 350,000 - compared to more than 2.0 million at the peak of the market, while the latest price statistics suggest that price declines continued to be quite rapid in March, and possibly even accelerated slightly.

This interest-rate increase does not currently seem to be caused by expectations of inflation, which has remained around 2% annually, although oil, gold and other commodity prices have ticked up. Instead, it seems to have been caused by the exceptionally high demands being made on the government bond market by the U.S. federal deficit, which is expected to total about 13% of gross domestic product (GDP), or more than $1.8 trillion, this year.

It’s not surprising that such a blip should have occurred this month; federal tax receipts are at their peak in April, as companies and individuals pay their taxes due, so the beginning of May saw a resumption of mammoth U.S. Treasury funding needs after a month’s pause.

If interest rates continue to increase, the effect on the already-weak housing market could be severe, as housing “affordability” would be reduced in a period in which prices were declining and unemployment was rising. That, in turn, could have a self-reinforcing downward effect on prices, as home inventories bloat further, and buyers hold back.

Currently, according to the S&P/Case-Shiller 20-city house price index, prices are down 32% from their peak, but remain 40% above 2000 levels, while consumer prices are only 24% above those of 2000. However, 2000 was not a “bear-market” year; prices had already enjoyed several years of rapid recovery from their early-1990s low. Should rising interest rates cause prices to continue falling to 2000’s level (another 28% decline), then on average every 80% mortgage undertaken since May 2002 (when the index first went above 125% of 2000’s level) would be underwater, having an owed principal amount that exceeds the actual current market value of the house. That would cause a surge in mortgage defaults more severe than any yet seen, extending far into the prime mortgage category - and probably causing the U.S. banking system to implode once again.

The stimulus-package funds, which began flowing in April, may actually induce some GDP growth this quarter. At the very least, the Obama administration infusion should hold the economy to a very minimal decline in GDP.

However, if interest rates keep rising, the effect of further housing-sector weakness and the wobbling banking system would overwhelm any stimulus benefits, and would cause a second “dip” in this recession - one that’s far worse than the first. The stimulus would, in that event, have proved counterproductive, killing the very economic recovery it was supposed to have stimulated.

Rising interest rates will have adverse effects on all countries with large budget deficits, the most notable of which are Britain and Japan. The effects would be harsh enough to actually prevent those countries from recovering from their own recessions.

For investors, the remedy is clear: Look to invest in countries that have produced only modest stimulus packages, and whose budget deficits are currently the smallest. In the invaluable statistical section of The Economist, a number of countries are projected to have budget deficits of less than 3% of GDP in 2009, in spite of their recessions.

At that level, deficits are easy to finance, and do not force up interest rates, so economic recovery should be relatively rapid.

Let’s take a look at some of those countries in question:

* Canada: Budget deficit forecast of 2.5% of GDP. Americans are fond of sneering at Canada for its high public spending and sluggish growth. Well, Canada’s public spending as a percentage of GDP peaked in the early 1990s and since 2000 the country has run budget surpluses. In 2009, Canada is forecast to have public spending lower than the United States, when provinces and states are taken into account, and to continue lower than its arch rival (the United States) for the foreseeable future. I wrote a few weeks ago about investment opportunities in the Canadian energy sector; those opportunities are even more compelling with the continued rise in the oil price to current prices of more than $62 a barrel.

* Denmark Finland and Switzerland: Wealthy European countries with healthy budget positions - deficits of 2.5%, 2.6% and 2.0% of GDP, respectively - will recover more quickly than their neighbors, because they have kept their economies in balance.

* Brazil: Probably the best of the lot, with a projected budget deficit of only 2% of GDP, inflation of 4.4% and bond yields of 11.8% — meaning it can indulge in a little monetary expansion if it needs to. Brazil will also benefit if inflation returns (as I expect it to), because that will push up the prices of its commodities exports.

So there you have it. Maybe the U.S. bond market and housing market will stabilize, and the American economic recovery will proceed smoothly - nothing is certain. But investments in Canada and Brazil, in particular, will protect you against the possibility that the U.S. situation doesn’t improve.

[Editor's Note:When the journalistic sleuths at Slate magazine recently set out to identify the stock-market guru who correctly predicted how far U.S. stocks would fall because of the global financial crisis, the respected "e-zine" concluded it was Martin Hutchinson who "called" the market bottom.

That discovery was no surprise to the readers of Money Morning - after all, Hutchinson has made a bevy of such savvy predictions since this publication was launched. Hutchinson warned investors about the evils of credit default swaps six months before the complex derivatives KO'd insurer American International Group Inc. He predicted the record run that gold made last year - back in 2007. Then, last fall - as Slate discovered - Hutchinson "called" the market bottom.

Now investors face an unpredictable stock market that's back-dropped by an uncertain economy. No matter. Hutchinson has developed a strategy that's tailor-made for such a directionless market, and that shows investors how to invest their way to "Permanent Wealth" using high-yielding dividend stocks, as well as gold. Just click here to find out about this strategy - or Hutchinson's new service, The Permanent Wealth Investor.]

Canada's recession, likely its deepest since the Great Depression, may also be its shortest

2009-05-21T06:21:00.000-07:00

OTTAWA -- Canada's recession, likely its deepest since the Great Depression, may also be its shortest.

Bloomberg News Published: Wednesday, May 20, 2009

Rising home and car sales, unexpected gains in building permits and employment, easing credit conditions and higher commodity prices signal Canada's slump may be nearing an end. Eight of 11 economists surveyed by Bloomberg this month predict the economy will return to growth next quarter.

"It doesn't feel quite like it's over yet, but people are breathing a little bit better," said Russ Girling, president of pipelines at TransCanada Corp., the country's biggest pipeline company, which recorded a 12% rise in revenue in the first quarter.

All but one of the country's five post-Second World War major recessions have lasted at least one year, with the shortest in 1957 at nine months, according to Philip Cross, who tracks the country's business cycles for Statistics Canada.

Canada's economy contracted at a 3.4% pace in the last quarter of 2008 and growth in the first quarter may shrink at a 7.3% rate, the Bank of Canada estimates.

The U.S. recession started in December 2007, according to the National Bureau of Economic Research, the arbiter of U.S. business cycles. Statistics Canada, which defines a major recession as a slump in which both employment and output post annual declines, has yet to date the start of Canada's recession, Cross said. The Bank of Canada has said the country entered into a recession in the fourth quarter of last year.

No Bailouts

While Canada has suffered from falling U.S. demand for exports, the country's banks have largely avoided credit losses. No government money has been given to any of Canada's 21 banks since global credit seized up in August 2007. The U.S. government oversees about US$200-billion in investments in banks through the taxpayer-funded Troubled Asset Relief Program.

Canada's housing market has also held up better than in the U.S., where prices declined 18.6% in February from a year earlier, according to the S&P/Case-Shiller index of 20 major cities. Average resale home prices in Canada dropped at less than half that pace during the same period, according to the Canadian Real Estate Association.

"We may not be in a recovery, but I think we might be in a position where it's not getting worse, where it's truly plateauing," Prime Minister Stephen Harper said in a May 8 interview, adding he'd like another "month or two" of data before coming to that conclusion.

Canada's benchmark Standard & Poor's/TSX Composite Index has posted a 50% gain in U.S. dollars since its low on March 9, compared with the 34% gain for the Standard & Poor's 500 Index over the same period.

Recession

Economists surveyed by Bloomberg this month said they expect Canadian growth to rebound at an annual pace of 0.5% in the third quarter and by 2% in the fourth quarter.

"In February, the rapid decline in demand had come to an end and by April, the rapid declines in employment had come to an end," Cross said. "Was that a temporary end or not? We don't know."

While Canada's jobless rate is at a seven-year high of 8%, the economy in April created new jobs for the first time in six months and sales of existing homes rose the most in more than five years. Credit markets are also improving. The Bank of Canada's composite index of financial market conditions is at its strongest since September.

Improved credit markets have allowed companies such as Enbridge Inc., the biggest transporter of oil to the U.S. from Canada's oil sands, to move ahead with the new debt sales to finance operations. Enbridge sold $400-million of bonds last week.

'Cross Our Fingers'

"Our approach is to watch for windows when we think there are opportunities to raise capital funds," said Richard Bird, Enbridge's chief financial officer. "This is a window and let's cross our fingers and hope that it's a trend."

A quick end to the recession would raise pressure on the Bank of Canada, led by Governor Mark Carney, to say it no longer plans to keep its benchmark lending rate near zero through June 2010. The country's central bank projected last month the economy will contract four consecutive quarters, bringing it closer to the average length of the last five major recessions.

"The Bank of Canada will have to revisit their own view of what they will do with interest rates," said Paul-Andre Pinsonnault, an economist at National Bank Financial. "GDP will be stronger than what they are looking for."

A quick end to the recession doesn't guarantee a strong rebound. DBRS Ltd., a rating company, predicts an L-shaped recovery for Canada, which it defines as "a prolonged period of flat or slowly improving performance."

"The earliest I can see an improvement is in October or November," said Jacques Plante, chief financial officer of Hart Stores Inc., a discount retailer. "I can't imagine we'll have anything positive this summer."

Chrysler, GM Dealer Cuts Point to More Rough Times Ahead for U.S. Automakers

2009-05-19T07:04:00.000-07:00

By William Patalon III
Executive Editor
Money Morning/Money Map Report

Just days after Chrysler LLC said it would be cutting one quarter of its auto dealerships, 1,100 General Motors Corp. (NYSE: GM) dealerships have reportedly been told not to expect a relationship with the embattled U.S. carmaker after October 2010.

GM dealers targeted for separation were informed by letter over the weekend, Reuters reported.

The eradication of hundreds of hundreds of American auto dealerships is merely the latest development in the ongoing dismantling of the so-called U.S. “Big Three’’ – a process that seems likely to leave Ford Motor Co. (NYSE: F) as the last American automaker standing.

“These companies are making up for now for what they have avoided doing for years, if not decades,” industry analyst John A. Casesa, managing partner of consultantcy Casesa Shapiro Group LLC, told The New York Times. “And if the market doesn’t stabilize, this may only be Phase I.”

The moves will clearly change the entire auto-purchasing landscape for U.S. consumers. All told, nearly 800 dealers selling Chrysler brands were given notice that they would be cut off next month. These dealers represent about a quarter of the 3,200 in Chrysler’s dealership network, but account for only 14% of the company’s sales.

Without the dealership cuts, U.S. automakers will likely see their troubles continue. For instance, in its bankruptcy filing, Chrysler says it needs to streamline its distribution-and-sales operation to become more competitive. The current Chrysler dealership sells 303 vehicles per year, compared with 1,219 for a Honda (NYSE ADR: HMC) and 1,292 for Toyota. (NYSE ADR: TM).

GM is looking to close as many as 2,600 of its dealers – about 40% – by 2010. This weekend, it notified the first 1,010 that their franchise deals with General Motors would not be renewed after they expired in October. The other dealerships that will get cut are those that sell such brands as Hummer and Saturn – brands that GM plans to divest.

Both Chrysler and GM have been subsisting on government loans for months.

Just a few years ago, U.S. auto dealers were selling an aggregate 16 million vehicles annually. But after the biggest drop in vehicle sales in a quarter century, dealers are now struggling to even reach the 10-million-vehicle mark.

The letters to GM dealers did not specifically say the company would be filing for bankruptcy, but the move indicates that could well happen next month, which is when the longtime No. 1 U.S. automaker is due to submit a restructuring plan to U.S. President Barack Obama, The Times reported.

In fact, General Motors sales chief Mark LaNeve told reporters on a conference call that carrying out the plan without the benefit of bankruptcy-court protection would be nearly impossible, since state franchise laws make it "onerous and expensive" for manufacturers to force dealers out of business. Wrapped in the cloak of bankruptcy protection, however, the dealership contracts can be nullified, the The Wall Street Journal said.

Chrysler on Thursday asked its bankruptcy judge, U.S. Justice Arthur J. Gonzalez, to hold a hearing on June 3 to allow the company to reject its “contracts and unexpired leases with certain domestic dealers.”

At a time when the falling earnings are continuing to push U.S. companies to make deep job cuts, the dealership closures will add to the national rise in joblessness. The National Automobile Dealers Association (NADA) has estimated that all dealership closings – including those already announced by Chrysler and GM – could cost the U.S. economy 187,000 jobs – or more than the total U.S. employment of the two companies.
Market Matters

When the government was “forced” to help resolve the global financial crisis with bailouts and stimulus packages, analysts hoped for the best (economic and market recoveries) and feared the worst (overreach or even socialism).

To date, some signs have emerged that the recession may be nearing an end, though naysayers also warn about the ramification of “excessive” intervention.

On that note, the Obama administration has begun talks about a complete overhaul of the compensation structure for the entire financial services industry, a move that could even impact employees at institutions that did not accept bailout moneys. While some believe the current system rewards short-term goals in lieu of longer-term performance, many still feel the government is overstepping its bounds.

President Obama’s administration also announced plans to regulate certain derivative securities, many of which have done considerable damage to the balance sheets of the world’s leading institutions. While many “experts” agree greater transparency and oversight may have prevented some of the carnage, others worry that over-regulation is never a good things and efforts to improve the system actually may have the exact opposite impact. Stay tuned.

With the much-ballyhooed stress-tests in the books, banks moved to raise capital with US Bancorp (NYSE: USB), Capital One Financial Corp. (NYSE: COF), and Bank of NY Mellon Corp. (NYSE: BK) among those issuing $1 billion to $2.5 billion in new stock (and diluting current shareholders).

In fact, US Bancorp expects to be the first major institution to repay Troubled Asset Relief Program funds over the next few weeks. Meanwhile, as banks begin to move off the Treasury’s coffers, insurance companies become the latest recipients as The Hartford now is eligible for a $3 billion-plus government infusion with others to follow. Automakers continued their cost-cutting moves as both GM and Chrysler started saying goodbye to large percentages of their dealers (and perhaps another 150,000 in related workers), while Ford raised about $1.6 billion through a 300,000-share offering of its own. GM’s share price fell into penny stock territory for the first-time since 1933 as bankruptcy becomes an even greater likelihood.

On the earnings front, Macy’s Inc. (NYSE: M), JC Penney Co. Inc. (NYSE: JCP), Liz Claiborne Inc. (NYSE: LIZ), and Sony Corp. (NYSE ADR: SNE) all posted disappointing results, a sign that retailers have yet to overcome the ongoing consumer negativity. While Wal-Mart Co. Inc. (NYSE: WMT) continued to outshine rivals, its earnings were negatively impacted by currency translation.

Both SAP AG (NYSE ADR: SAP) and Intel Corp. (Nasdaq: INTC) expressed optimism about the future for techs as phrases like “bottomed out” and “glimmers of hope” brought renewed investor confidence, though the latter was greeted with a $1.45 billion record fine in Europe over sales and marketing abuses. Microsoft Corp. (Nasdaq: MSFT) announced its first debt offering in its 36-year existence and some expect the tech giant to explore acquisition opportunities.

Market/Index

Year Close (2008)

Qtr Close (03/31/09)

Previous Week
(05/08/09)

Current Week
(05/15/09)

YTD Change

Dow Jones Industrial

8,776.39

7,608.92

8,574.65

8,268.64

-5.79%

NASDAQ

1,577.03

1,528.59

1,739.00

1,680.14

+6.54%

S&P 500

903.25

797.87

929.23

882.88

-2.26%

Russell 2000

499.45

422.75

511.82

475.84

-4.73%

Fed Funds

0.25%

0.25%

0.25%

0.25%

0 bps

10 yr Treasury (Yield)

2.24%

2.68%

3.29%

3.12%

+88 bps
Economically Speaking

Yep, the consumer is a fickle sort. In fact, consumer statistics are quite fickle these days as well. A few weeks back, same store sales for April showed enhanced retail activity, a strong sign for the consumer-driven economy. Well, this past week, the U.S. Commerce Department reported that April retail sales actually fell by 0.4%, a worse than expected showing and the eighth decline over the past 10 months. Before analysts could express renewed doubt about any pending recovery, Redbook Research threw even more confusion into the equation by reporting that chain-store sales climbed 0.1% during the first week in May and bested Wall Street expectations.

Additionally, the University of Michigan Sentiment Index reached its highest confidence level since September 2008. As long as the labor picture remains bleak, however, consumer activity may vary from one month (week) to the next as many folks remain hesitant to spend and continue saving for that rainy day.

The inflation gauges calmed down those deflation naysayers as the producer price index (PPI) climbed in April on rising food prices and the consumer price index (CPI) was reported as unchanged last month. Additionally, as oil prices creep a tad higher, the threats of (economy-hurting) price declines lessens; therefore, analysts can focus on other more pressing matters (like labor, manufacturing, housing, retail, etc.) and leave the (soon-to-come) inflation hysteria for another day. Of note, RealtyTrac reported foreclosures soared by over 30% last month as unemployed homeowners struggle to make their mortgage payments.

Weekly Economic Calendar

Date

Release

Comments

May 12

Balance of Trade (03/09)

First increase in deficit in 8 months

May 13

Retail Sales (04/09)

Surprisingly weak 0.4% decline in activity

May 14

PPI (04/09)

Rising food costs led to higher than expected number

Initial Jobless Claims (05/09/09)

Claims rose more than expected

May 15

CPI (04/09)

Unchanged from last month

Industrial Production (04/09)

6th straight monthly decline

The Week Ahead

May 19

Housing Starts (05/09)

May 20

Fed Policy Meeting Minutes

May 21

Initial Jobless Claims (05/16/09)

Leading Eco. Indicators (04/09)

[Editor's Note: When it comes to banking or global economics, there's literally no one better than Money Morning Contributing Editor Martin Hutchinson - a former investment banker with more than a 25 years experience. Hutchinson has proven himself to be a market maven and he is currently offering investors an opportunity to make $4.201 in cash in just 12 days. You can also subscribe to Martin's new investment service, The Permanent Wealth Investor, by clicking here .]

THE SHAPE OF THE NEW PLANET

2009-05-16T09:43:00.000-07:00

I have been following Jon for several years and his topics are exactly what his website is "NO MORE FAKE NEWS"

Jon Keep up the great news. People all over the planet should now WHAT'S REALLY HAPPENING.

MAY 9, 2009. My new FREE telephone seminar, THE SHAPE OF THE NEW PLANET, will take place on Wednesday May 20, at 6:30PM Pacific Time.

To sign up, just click on the “Jon Rappoport Free Seminars” banner. If you’re reading this as an email and the banner didn’t come through in your email, go to my site, www.nomorefakenews.com and you’ll see it.

The live seminar is free. If you don’t attend the call and want the mp3, you’ll have to pay for it.

In this seminar, I’ll lay out the guiding principles and assumptions of the old planet, the one that has existed up until now. I’ll paint a picture of what the new planet could look like, if enough people change their assumptions.

One of the best sources on old and new planet is Buckminster Fuller. He spent much of his life delineating the differences. Bucky was the best kind of radical thinker. He didn’t let cynicism stand in his way. He didn’t try to figure out what “limited choices” were available to the human race. He just jumped in with both feet. He worked from an innate faith in human possibilities.

Bucky also saw where certain trends were taking us, and how we could use those trends to re-frame the whole human condition.

There are two major forces that need to be considered in any vision of the future. One: what capabilities the human race has developed that can be turned to good use for the whole population of Earth. And two: how to protect the freedom and power of the individual along the way.

These are not easy questions. But approaching them head on offers the chance of a dialogue on where we are going in the next ten, 20, 50, 100 years.

In the seminar, I will approach these questions directly. I hope you’ll be there. And I hope you’ll invite your friends to be there, too.

In one part of our minds, we think “a vision of the future” is a useless fantasy. But in another part, we all want to realize a vision. It’s this second part I’m interested in and will address in the seminar.

JON RAPPOPORT www.nomorefakenews.com

The Six Ways to Play Canada’s Oil Sector

2009-05-13T14:27:00.000-07:00

By Martin Hutchinson
Contributing Editor
Money Morning

With oil finally trading back above the $50-a-barrel level, it's time to recognize that crude prices are probably not going to remain low for very long, and may end up fluctuating in the $50-$80 range - regardless of what happens to the prices of other commodities.

After all, the economies in both China and India are apparently continuing to grow at a fairly rapid pace, and those countries' demand for transportation and other forms of energy are thus likely to keep pace. For some minerals, the period of high prices from 2005 to 2008 has produced a surplus. But no such effect has been seen in the oil market, as large new discoveries are hard to find.

If we've learned anything in the last few years, it's that political risk is very important in oil investments. It's not just a question of outright nationalization - as is true in Venezuela. Other greedy countries, like Nigeria, boosted the royalties payable when oil prices were high, and have shown little willingness to reduce them again now that they have declined.

Hence, it's once again time to look at investments in the one important energy source whose friendliness to the United States and decent quality of governance can be assured.

I'm speaking, of course, about Canada.

Canadian oil-and-gas investments are attractive for three reasons.

* Canada's political stability makes it a buffer against turmoil from less-stable oil sources.
* The country's conventional oil-and-gas sources add substantial capacity at reasonable prices to U.S. domestic oil production; these sources are profitable at almost any plausible oil price.
* And Canada's tar sands in the Athabasca region represent a potential source of oil, with approximately 1.6 trillion barrels of theoretically recoverable reserves. That's potentially larger than the Middle East, but with two major problems: The cost of production is high and the environmental impact could be substantial.

That last point - and the two major problems it identifies - is key. At low oil prices, both factors make tar sands problematic; it is politically more difficult to overcome environmentalist objections if secure oil sources do not appear a priority. However, at high prices, environmentalist problems go away, although they may add to extraction costs. However, if prices escalate rapidly, extraction costs also tend to escalate, so oil-shale-producers reaped less of a bonanza than they might have in 2007-2008.

Now that oil prices have stabilized, the cost increase has slowed, so that (for example) Suncor Energy Inc.'s (NYSE: SU) tar-sands-production costs in this year's first quarter rose only 6% from the previous year, hitting $28 per barrel. Since oil prices are currently around $58 a barrel, that leaves plenty of profit margin.

The Canadian oil business is still rather more entrepreneurial than the international majors - Calgary is that kind of place. I remember an instance when I was working as a banker back in the 1980s. I'd spent the weekend in New York with my girlfriend, and then turned up for a scheduled Monday lunch with some oilmen at the Ranchmen's Club. Not thinking, I'd ordered my normal urban cocktail, an Apricot Sour. This was quite rightly treated with great derision, and I was firmly presented with a bullshot (vodka and beef bouillon) - in a pint beer mug! Got the deal, I'm proud to say, but was pretty worthless for the rest of the day.

The message: Investing in Calgary oil is a little like dining at the Ranchmen's Club; you have to have certain qualities of fortitude and stamina!

Canadian oil companies you might look at include the following (when looking at earnings, the first quarter of 2009 is a good guide; 2008 is all over the place because of the bizarre behavior of oil prices):

Canadian Natural Resources Ltd. (NYSE: CNQ): Primarily a conventional oil producer, this company's operations are centered on Western Canada, the North Sea and offshore West Africa (Gabon), though it is also building an oil sands plant north of Fort McMurray, Alberta. It is trading at about 14 times earnings when you strip out misguided risk management, and about 80% above book value. It's over-leveraged, too. Conclusion: A decent company, but pricey.

EnCana Corp. (NYSE: ECA): North America's largest natural gas producer and conventional oil producer, with operations in Western Canada, offshore Nova Scotia and the Western United States. It is a leader in oil recovery through steam-assisted natural drainage. Based on first-quarter earnings, its Price/Earnings (P/E) ratio is about 9, and its Price/Book (P/B) ratio is about 1.7. It has only moderate leverage. Conclusion: This one looks like a decent value; it even pays a semi-respectable dividend, yielding 2.8%.

Imperial Oil Ltd. (NYSE: IMO): Majority-owned by ExxonMobil Corp. (NYSE: XOM). Even though it's now headquartered in Calgary, Imperial is the least Calgary-ish of Canada's oil majors. It owns 25% of Syncrude Canada Ltd., the oldest tar sands project, and also explores for and produces conventional oil in Western Canada and in the offshore Atlantic provinces. Imperial also refines and markets petroleum, owning a chain of service stations and convenience stores, and produces petrochemicals. It experienced a sharp drop in first-quarter earnings, its P/E based on the lower first-quarter results is about 40, with the stock trading at four times book value. Conclusion: Overpriced.

Nexen Inc. (NYSE: NXY): The former Canadian arm of Occidental Petroleum Corp. (NYSE: OXY), it owns 7% of Syncrude and another (Long Lake) start-up tar sands project, and has oil producing operations in Yemen, the North Sea, the Gulf of Mexico, Colombia and offshore West Africa. Its P/E is about 20 based on first-quarter results and it is very over-leveraged. Conclusion: Given the non-Canada risk, not very attractive.

Suncor Energy Inc. (NYSE: SU): A major tar sands play, Suncor has now agreed to merge with Petro Canada (NYSE: PCZ), a deal that's expected to close in the third quarter. Suncor also produces natural gas in Western Canada and operates refineries. Petro Canada has tar sands, natural gas, pipeline and retail operations. It is priced at about 30 times annualized first-quarter operating earnings, but oil prices are up about $10 since then (which should boost its earnings), and its tar sands production is ramping up. Conclusion: At 2.3 times book value, with a respectable balance sheet, it's a decent bet on oil's growth sector.

Talisman Energy Inc. (NYSE: TLM): The former BP Canada (NYSE ADR: BP), it was spun off in 1992, grew through acquisitions, and now has a diversified portfolio of holdings. It's active in Western Canada, the Western United States, the United Kingdom (including a wind-farm operation), Norway, Colombia, Peru, Algeria, Tunisia, Indonesia, Malaysia, Vietnam, Australia and Qatar. It has sold $2.5 billion worth of operations to raise cash. Talisman has a P/E ratio of about 8, based on its first quarter, or 11, based on continuing operations in that quarter. It has a P/B ratio of about 1.4, and only moderate leverage. Conclusion: An iffy company in terms of quality, but cheap, and is thus worth a look.
ow reached last month.

[Editor's Note: When it comes to banking or global economics, there's literally no one better than Money Morning Contributing Editor Martin Hutchinson - a former investment banker with more than a 25 years experience. Hutchinson has proven himself to be a market maven and he is currently offering investors an opportunity to make $4.201 in cash in just 12 days. You can also subscribe to Martin's new investment service, The Permanent Wealth Investor, byclicking here .]

Census Hiring and Reporting Methods Minimize April Unemployment

2009-05-11T13:13:00.000-07:00

By Don Miller
Associate Editor
Money Morning

Employers cut 539,000 jobs in April, the lowest total in six months, but the Labor Department said the unemployment rate still soared to 8.9%, from 8.5% in March. While some analysts viewed the latest report as a sign of a nascent economic recovery, the unemployment numbers are almost certain to head higher before the recession is declared over.

Last week’s report could have been worse if the numbers hadn’t been held in check by a burst of federal government hiring of temporary workers to prepare for the 2010 Census.

The report was also skewed by the way the government categorizes the unemployed. As Money Morning previously reported, if laid-off workers who have given up looking for new jobs or have settled for part-time work are included, the numbers skyrocket.

In fact, if the latest unemployment report had included those workers, the rate would have soared to 15.8% in April, the highest on records dating back to 1994. The total number of unemployed now stands at 13.7 million, up from 13.2 million in March.

The data released Friday wasn't as high as the 620,000 job cuts that economists were expecting, but the payroll figures for March and February were revised to show 66,000 more job losses than previously reported.

The report showed job losses across almost all sectors of the economy, but at a slower pace than previous months. The manufacturing sector lost 149,000 jobs in April, after cutting 167,000 the prior month. Construction industries cut 110,000 jobs after shedding 135,000 in March.

The service industry, responsible for roughly 90% of economic activity lost 269,000 jobs after eliminating 381,000 in March.

The one bright spot was government hiring, with public payrolls soaring by 72,000 after the U.S. Census Bureau began hiring 140,000 temporary workers last month to produce the population count that comes once every 10 years. It will hire more than 1.4 million people to conduct the survey over the next year.

Even though unemployment rolls are now at the highest level since September 1983, many analysts believe the numbers signaled the economy's steep decline may be easing.

“We appear to have passed the point of the most severe job losses,” Dean Maki, co-head of U.S. economic research at Barclays Capital PLC (ADR NYSE: BCS) in New York told Bloomberg News. “It’s still a weakening labor market but it’s weakening less fast. There are a few headwinds to growth, and a recovery will” likely be “modest.”

The worst financial crisis since the 1930’s has taken a steep toll on U.S. workers and companies, and most economists expect the unemployment numbers will get worse as the housing, credit and financial sectors sort out the mess. The jobs numbers usually don’t rebound until well after an economic recovery begins.

Government “stress tests” to determine whether 19 of the largest U.S. banks had enough capital to weather further economic turmoil used an “adverse scenario” that included an average unemployment rate of 8.9% in 2009 and 10.3% next year. But economists projected in an April survey that the jobless rate would rise to 9.5% by year-end, Bloomberg reported.

In the coming months, economists expect job losses to continue for most — if not all — of this year. But some are hopeful the cuts won't be as deep.
"There are glimmers of hope. We are moving in the right direction in terms of layoffs. They are measurably less bad than what we've been through," Mark Zandi, chief economist at Moody's Economy.com, told the Associated Press.

The biggest impact of job losses on the economy is the threat to consumer spending, the engine that drives 70% of Gross Domestic Product (GDP). After a first-quarter rebound, Americans could retrench again this quarter before spending shows sustained gains in the second half of 2009, according to economists surveyed by Bloomberg last month.

Joel Naroff of Holland, Pennsylvania-based Naroff Economic Advisors, thinks the numbers will be good for consumer confidence, which should help spending. In a note to investors, Naroff said the unemployment numbers are the latest in a long string of good news/bad news economic reports.

“This is a truly awful report that will likely be taken as a good report because the job losses have slowed,”he said. “As long as we continue to see the silver lining in the black clouds that overhang the data, then confidence will build. It does look as if we are falling more slowly and we are likely to hit bottom reasonably soon, at least as far as economic growth,”

The job cuts continued this week as steelmaker Severstal International (MCX: CHMF) said it's shutting plants in Wheeling, W.Va., and Warren, Ohio, forcing 3,100 layoffs due to the pullback in the steel industry.

E.I. duPont Nemours & Co. (NYSE: DD), the third-biggest U.S. chemical maker, plans to eliminate an additional 2,000 positions, while Microsoft Corp. (NASDAQ: MSFT) started laying off some of the 5,000 job cuts it announced earlier this year and left the door open for more in the future.

“We will continue to closely monitor the impact of the economic downturn,” Microsoft Chief Executive Officer Steve Ballmer said in a e-mail obtained by Bloomberg News. Redmond, Washington-based Microsoft will, “if necessary, take further actions on our cost structure including additional job eliminations.”

[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald is the editor of the new Geiger Index trading service. As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever. Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this "New Reality" will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as "The Golden Age of Wealth Creation". "The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it's particularly well suited to the kind of market we're all facing right now. Check out the latest report and find out how you can profit.]

2009-05-08T12:07:00.000-07:00

By Keith Fitz-Gerald
Investment Director Money Morning/The Money Map Report

HONG KONG SPECIAL ADMINISTRATIVE REGION, People's Republic of China.
As deep as the U.S. auto industry's financial crisis seems to be, there may actually be a fairly simple solution. Sell out to China. Nearly a decade ago, I warned that Detroit's Big Three, General Motors Corp. (NYSE: GM), Ford Motor Co. (NYSE: F) and Chrysler LLC had better learn to speak Chinese if they wanted to survive. I've repeated that warning many times since. Now, it appears that the idea is finally entering mainstream thought. China may well be Detroit's lifeline. From some ñ chiefly those who don't understand that Detroit has largely failed to make a passing grade in an increasingly global economy ñ my warnings have attracted a lot of criticism. That's unfortunate, because by adopting such a defensive posture, these critics have missed the real point I was making: Chinese companies would initially have no interest in taking over Detroit, but over time would likely demonstrate a deep interest in acquiring key parts of the U.S. auto sector ìvalue chainî that could support the expansionist efforts of their domestically produced brands. Distribution channels would be very attractive. And so would auto-parts producers, since they are a key element of such post-purchase ìaftercareî initiatives as maintenance and repair. The only real question, I noted at the time, was how big the lag would be between Chinaís acquisition of the U.S. auto-parts companies and the international expansion of its own brands. Absent the current financial crisis, I estimated the lag would have been five to 10 years. Now, however, that lag time has dropped to as little as five years. The reason: The financial crisis has eviscerated the market values of so many Western companies, creating bargain-basement opportunities for cash-rich Chinese companies that are so alluring that they were unfathomable a decade ago. Events are playing out just as I predicted. Enter the (Red) Dragon

Back in November, as GM and Chrysler tottered on the bring of complete collapse ñ and after Japanís Toyota Motor Co. (NYSE ADR: TM) had reportedly considered, and ruled out, the purchase of one, or both, of these carmakers ñ Chinaís SAIC Motor Co. Ltd. and Dongfeng Automobile Co. Ltd. ñ were reportedly working on a play to buy the two embattled U.S. firms, Huliq News and the 21st Century Business Herald both reported. Said one China auto-industry executive (who requested anonymity): ìWe really want to acquire some of our global counterpartsí core technologies now, because prices are so low.î His sentiment was echoed by Xu Liuping, chairman of Chongqing Changan Automobile Co. Ltd., Mainland Chinaís fourth-largest automaker, who recently said that ìthe longer the [global financial] crisis lasts, the bigger the chance of [a] failure or [of] a scale-down of some American and European carmakers.î For the most part, Chinese companies are still learning to do business overseas. They are not yet comfortable leading the charge in overseas markets, which is why so much of their overseas expansion efforts and shopping sprees remain largely confined to natural-resource sectors and, in the auto sector, auto-parts players. Top-tier managers of China-based companies recognize that the acquisition of overseas assets can strengthen their companyís domestic competitiveness. And with a market as big as Mainland China, thatís logical. But what might not occur to Western business leaders is that Chinese executives donít yet view themselves has having global-branding expertise, particularly when it comes to the so-called ìdesign elements.î Sign up below... and we'll send you a new investment report for free: "Credit Crisis Report."

Market Moves Will Remain on Hold Until Bank Stress Test Results Are Released Thursday

2009-05-04T09:46:00.001-07:00

By William Patalon III

Barring some dramatic – and unforeseen – news this week, expect investors to tread water until Thursday, when the government is expected to release the results of the bank stress tests it conducted on the 19 largest U.S. banks.

The stress-test results are expected to show that the 19 banks may have to raise between $100 billion to $150 billion – or even more – in new capital. Investors will cause the shares of the strong players to zoom northward, and will likely savage the shares of the weakest players.

"I can’t think of a time since I’ve been watching banks when there’s been so much uncertainty about the true value of a key set of assets," Douglas Elliott, a fellow at the Brookings Institution, a Washington think tank, told Reuters.

The U.S. bank stress tests have transfixed the world financial markets for weeks, exacerbating the ongoing financial crisis – worsening the U.S. recession and shaking economies around the world. That’s escalated the burden on the still-new Barack Obama administration and on the U.S. Congress.

The banks being tested include Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM), Wells Fargo & Co. (NYSE: WFC), and Goldman Sachs Group Inc. (NYSE: GS). All told, the 19 banks hold two-thirds of total U.S. bank assets.

"Most banks will have to raise capital in some form," Friedman, Billings, Ramsey Group Capital Markets Group (NYSE: FBR) managing director Paul Miller told Reuters. "The capital raises will be much bigger than people think."

Miller said that uncertainty about what the tests might reveal has made banks stocks "uninvestable" in the near term.

The issue for investors is that “you just don’t know how the government is going to view it," Miller said.

Public release of the stress test results is set for Thursday. The government is scheduled to brief the top officials of the banks themselves tomorrow (Tuesday).

Although all but one of the 19 major U.S. banks the government has stress-tested reportedly passed, many skeptics believe the banks are still using all sorts of accounting dodges to keep from revealing just much they still hold in toxic assets and bad loans, National Public Radio reported.

Secretive Bank Stress Tests Heighten Investor Stress

2009-05-01T16:04:00.001-07:00

By Shah Gilani
Contributing Editor

The bank stress test of the nation’s 19-largest financial institutions is a flawed exercise that threatens to elevate the very economic-system stress it was designed to relieve.

The U.S. Treasury Department isn’t scheduled to release the results of the much-ballyhooed bank stress tests until Monday. Little has been revealed so far, but one fact seems certain: Whatever information is disclosed is likely to be either too much - or even more likely - not enough for analysts, investors and the public to determine the soundness of a banking system upon which the nation’s economic growth is predicated.

We’re already starting to see bits and pieces leak into the public domain. And the response hasn’t been positive.

Although the tests reportedly concluded that only one of the 19 banks that received a stress test would require additional capital, the government’s own bailout-fund watchdog has questioned whether it was really much of a test at all.

The reason: The “adverse scenario” used for the test was “disturbingly close” to current economic conditions, said Elizabeth Warren, the chairperson of the Congressional Oversight Panel for the Troubled Asset Relief Program, and a frequent critic of the government bailout programs.

Now the government is urging foundering giants Bank of America Corp. (BAC) and Citigroup Inc. (C) - which have already taken in a combined $95 billion in taxpayer-provided bailout money - to raise more capital. Flawed Assumptions Lead to Flawed Results

As outlined to the public, the stress tests were to pre-suppose a set of declining economic circumstances that would negatively impact bank balance sheets. For example, one scenario assumes that U.S. unemployment rises to 10.3% by the end of 2010. How or why the 10.3% assumption was chosen - as is the case with other scenario parameters - is unknown and is supposedly not to be revealed.

The assumption of testing through the end of 2010 means only that a two-year window was established for definitive calculations. Under this scenario, examiners assumed two-year cumulative losses of 8.5% on mortgage portfolios, 11% on home-equity lines of credit, 8% on commercial and industrial loans, 12% on commercial real estate loans, and 20% on credit card portfolios. The results are then totaled and weighed against assumptions - again unknown - about the capital positions of the banks at that time.

The fact that the assumptions themselves are a constantly moving target in our current crisis doesn’t lend comfort to any baseline conclusions that may be reached. On the other side of the equation, the tests don’t assume any revenue forecasts - either negative or positive - and may not assume further equity capital destruction or changing capital structures at the banks.

The idea is to take an expansive look at capital adequacy in the face of inherent credit risks, and exposure to off-balance-sheet liabilities, derivatives, or counterparty agreements. Once those risks are quantified, the government examiners will attempt to determine about how much capital is needed to support bank balance sheets and fluid liquidity. The net result of the tests is to identify which banks need to raise additional capital now to meet assumptions that may never happen, or may in fact be more destructive than assumed.

What’s missing, unfortunately, is an assumption of how much additional capital would be necessary to facilitate credit expansion - which, in turn, would serve to fuel economic growth. That, after all, should be the ultimate stress-test objective.

In fact, the key problem with the whole stress-test exercise is that it does nothing to improve financial-system transparency - something I’ve said would be key to a true reformulation of the U.S. banking system. As currently conceived, there will be no clear assessments possible as a result of these tests upon which private investors can rely to provide the necessary capital to make up for any shortfalls. The stress tests may, in fact, have the opposite effect - and could discourage new equity investment in any of the banks.
Where Are the “Toxic Assets” Hiding?

Whatever is revealed through the convoluted prism of the stress tests should be compared to the relatively straightforward data available from other institutions, such as the Federal Deposit Insurance Corp. (FDIC). The FDIC’s “Quarterly Banking Profile” offers a cut-and-dried summary of financial results for all FDIC-insured institutions.

According to The Financial Times‘ review of the data as of Dec. 31, loans outstanding were $7.87 trillion. The Times noted that Goldman Sachs Group Inc. (GS) economists estimate the shortfall in Tier 1 capital, given certain liberal assumptions, to be at least $753 billion.

The International Monetary Fund (IMF) has estimated that the potential losses of U.S.-originated credit assets held by banks and financial institutions around the world is $2.7 trillion, The New York Times said last week. While the percentage of those losses that sit directly on the books of U.S. banks isn’t known, it is widely assumed that the value of impaired assets exceeds $1 trillion. To further complicate and obfuscate necessary transparency, new accounting rules replace mark-to-market reality with subjective internally modeled accounting of the value of distressed assets. And until those unidentified and convolutedly accounted for assets are removed from bank balance sheets, they will weigh down the worldwide banking system for years to come.

Perhaps the greatest danger the stress tests will cause may result from seemingly healthier banks pressuring the government to take back taxpayer-funded capital, while at the same time facilitating a dangerous lopsidedness to the entire banking landscape.

The fallacy that some banks are doing well and want to pay back government money is easily pierced. Whether it’s for general liquidity, for credit spreads, or to backstop their efforts to raise additional capital, the truth is that there isn’t a single bank that isn’t currently using government support in some form. The only way to determine if a bank is healthy is to require it to stand entirely on its own and to not incorporate any cheap government capital or any government liquidity enhancing facility.

That will never happen in the current crisis. No bank is going to give up the preferential, cheaper cost of borrowed money provided by government vehicles when their competitors remain at the trough soaking up cheaper, government-backed capital resources. Until the entire system is self-sustaining, privately funded and supportable - and that distinctly assumes that some banks need to die a quick death and be buried - the system should be looked at as just that - a system.

Attempting to measure the health of every patient in the hospital by sticking a thermometer in only the sickest patients isn’t going to do anything to stem the epidemic. The Treasury Department made a fundamental mistake in offering to reveal the results of stress tests. What it should have done is conduct system-wide tests on all banks, after which it systematically merged and shut down institutions that were either desperately threatened, or downright insolvent.

Yes, equity capital would be lost. But, as a lesson in moral hazard, it would be the clearest signal possible that shareholders are responsible for controlling boards even more so than boards are responsible for controlling management and risks at corporate institutions.

Until private-equity investors are confident that the nation’s sick-and-injured banking patients are truly curable, there will be a decided reluctance to invest necessary capital into an uncertain future.

Nothing has been accomplished by these “stress” tests - except to further stress the banks, as well as the already-badly stressed U.S. economy.

It’s Time to Restructure the Investment Banks

2009-04-25T06:41:00.000-07:00

By Martin Hutchinson

It’s time to restructure the wheeler-dealers of Wall Street – the U.S. investment banks.

Just over a year ago, there were five major investment banks. Now there are only two – or none, depending on how you define the term.

While the investment banks have disappeared, most of the business they were doing is still around, and some of it is actually essential to the functioning of the U.S. and global economies. The crucial question to answer, then, is this: In five years’ time – when the present unpleasantness has sorted itself out – what form will the purveyors of those services take?

To answer that, some history is necessary.
A Look to the Past

Prior to March 2008 the five investment banks were Goldman Sachs Group Inc. (GS), Morgan Stanley (MS), Merrill Lynch (SQD), Lehman Brothers Holdings Inc. (LEHMQ), and The Bear Stearns Cos. Inc. – roughly in that order of size, prestige and market share.

Then Bear Stearns was rescued by JPMorgan Chase & Co. (JPM), Lehman went bust, Merrill Lynch was taken over in a very expensive deal by Bank of America Corp. (BAC), and Morgan Stanley and Goldman Sachs acquired banking licenses.

Since the Glass-Steagall Act – which maintained a separation between commercial banks and their investment-banking counterparts – was abolished in 1999, two of the previous commercial banks, Citigroup Inc. (C) and JPMorgan, have been able to get into the investment banking business in a pretty big way. And going forward, BofA will now be able to do so through Merrill Lynch.

The upshot: There are now five serious investment banking operations, all with commercial banking licenses – each of which is rated as “too big to fail.”

Goldman Sachs’ first quarter earnings, released Tuesday, provide us with a picture of how successful investment banks will make money: Goldman made $1.66 billion in the first quarter, after payment of preferred stock dividends. By far the largest revenue producer was its fixed-income, currency and commodities division, which at $6.56 billion accounted for 70% of $9.43 billion in total revenue.

Equities trading and commissions accounted for another $2 billion, or 21% of the total. Asset management and securities services accounted for $1.45 billion, 15% of the total.

True investment banking – advisory and underwriting work – accounted for $823 million in revenue, a paltry 9% of the total. That makes 115%; the other 15% represented losses on principal investments that had gone wrong.

Morgan Stanley’s quarterly report, released Wednesday, showed a first quarter loss of $578 million – after payment of preferred stock dividends. Here’s how Morgan’s business breaks down:

* Trading and commissions (debt and equity): 62% of total revenue.
* Wealth management and administration fees: 32%.
* True investment banking activities: 28% ($884 million, or just a tad more than Goldman).
* Other revenue: 14%.
* And principal transactions (including interest received and paid): A loss of 36% of total revenue.

Thus, Morgan and Goldman had pretty much the same business mix.

Goldman Sachs and Morgan Stanley have now acquired banking licenses, but they resemble no other commercial banks. They have no retail-deposit base, no branches, and very little mortgage lending or small-business lending. What’s more, since they have no obvious comparative advantage in those activities, it seems highly unlikely that they can develop these areas of business without a massive destruction of shareholder value.
Can Looks Be Deceiving?

Given these current competitive positions, these two institutions clearly face uncertain – and possibly even unstable – futures. And it’s the shareholders and U.S. taxpayers that ultimately seem to bear the brunt of the business risks Goldman and Morgan are certain to face.

Thus, the question we need to answer is this: What will these two institutions look like a decade from now?

There seems no good reason why many of the operations undertaken by Goldman and Morgan should be housed in institutions deemed “too big to fail,” since that makes them eligible for taxpayer-finance bailouts.

Principal transactions – in normal years, a contributor to profits – are basically the provenance of a hedge fund. If we don’t want to bail out hedge funds, as we did Long-Term Capital Management, we must impose limits on the size hedge funds can achieve: After all, it’s pretty clear that gambling casinos that are large enough to bring down the entire financial system should not be permitted.

If Goldman and Morgan are deemed “too big to fail,” their scope for hedge-fund-type activity must be sharply limited, perhaps to a mere 50% of capital. This would also have the huge benefit of reducing conflicts of interest between the major investment banks and their clients. Currently, the conflicts between their direct investment activities and both their advisory work and their wealth-management activities are much too severe to be eliminated by mere “Chinese walls” that are supposed to keep proprietary information from flowing from the advisory to the investment departments.

Trading and commissions, the major revenue-producers at both Goldman and Morgan, are perfectly acceptable investment banking activities. But there is no reason why brokers and traders should benefit from state bailouts, however necessary we may feel it to protect clients who have accounts with those brokers. Arguments that traders’ derivative books cause a “nexus” with other market participants – requiring traders to be bailed out by the public – can be eliminated by mandating central clearing for derivatives contacts, and imposing harsh capital requirements on contracts, such as credit default swaps, which seem to be especially dangerous to the financial system.

Wealth-management and investment-banking advice are the core activities of an investment bank, and Goldman Sachs and Morgan Stanley are the leaders in those fields. However, gigantic capital bases are not necessary to practice them. The only true investment-banking function that requires large amounts of capital is new issue underwriting (such as initial public offerings, or IPOs), but even that can be carried out with a capital base much smaller than Goldman and Morgan currently employ. After all, isn’t that precisely what syndication is for?

If the principal investment business is removed because of its dangers and conflicts, and the trading businesses are scaled back to a more manageable size, Goldman and Morgan would come to resemble much more closely their 1980s ancestors, and would ideally revert to being privately owned by their partners. Nothing significant would be lost to the U.S. economy by such a change, and a great deal would be gained by the removal of the taxpayer risks and conflicts of interest that we’ve outlined here.

In such an environment, we might expect that the three universal banks – JPMorgan Chase, Bank of America and Citigroup – would have an advantage because of their greater size.

However, Citi has made it abundantly clear with its repeated failures over the past 30 years that there is no significant advantage to be gained in combining the very high-skill activities of asset management and traditional investment banking with the low-paid, low-skill activities of retail banking, most corporate banking and most standardized trading. Thus, given good corporate governance (i.e. shareholders who demand value and rein in management self-aggrandizement), the investment banking and asset-management businesses would in the long term migrate from huge universal bank behemoths to moderately capitalized specialists, if such existed.

Leaving Goldman and Morgan as they are is bad for their shareholders, bad for taxpayers and bad for the U.S. financial system. They must be restructured.

Why Wall Street is Missing the U.S. Housing Recovery

2009-04-10T09:41:00.000-07:00

By William Patalon III

Wall Street created the U.S. housing bubble and now it’s missing the real estate rebound.

And Andrew Waite understands why.

Waite is the publisher of the Personal Real Estate Investor, a glossy magazine that focuses on investors who buy houses or condos to manage for income or to fix up and sell for a profit. But he’s not some industry cheerleader whose statements are nothing but spin.

He’s a true expert on the U.S. housing sector who goes out of his way to "educate" journalists about the true state of the American housing market, and who criticizes most of the "indicators" in use as useless and irrelevant. Plus, as a onetime Wall Street venture-capitalist who subsequently joined Silicon Valley’s Sand Hill Road private equity crowd, Waite really understands how the Wall Street investment game is played - and, in the case of the U.S. housing market, the missteps Wall Street made and why.

"Wall Street analysts and economists do not understand the housing industry," Waite told Money Morning in a recent interview. "While stocks and bonds are relatively simple to analyze, housing is anything but. Unlike stocks, housing is a non-tradable asset."

But through the creation of mortgage-backed securities, Wall Street tried to transform housing into a tradable asset. That lack of understanding set the stage for the housing bubble. And it’s the same miscalculation that is keeping the big-money crowd from understanding that the housing market may have already bottomed - and may well be on its way back up.

Let’s look at both miscues.

Building a Bubble

Stocks and bonds are "tradable assets." They trade on central exchanges - in a very efficient manner - and play well into the kind of mathematical averaging that paves the way for all sorts of indices (the Standard & Poor’s 500 Index), and sub-indices (the Dow Jones Transportation Index).

That’s not the case with housing, which is very granular in nature - meaning how housing does in one neighborhood differs greatly from how it does in another. Housing is a "non-traded" asset because it is hard to trade - and when it does trade does so in a highly inefficient market.

As Waite says, housing is referred to as "real" property for a reason: Unlike stocks or bonds, which are paper representations of the underlying asset, housing is the asset itself. People live in houses, and most don’t buy them as investments - they buy them to live in. The typical house is owned for five to seven years, and only about 5% of the U.S. housing stock turns over in a single year. In a "normal" period - by that, I mean a stretch that’s not artificially souped up by the unrealistically loose credit that led up to the subprime-mortgage debacle - prices escalate perhaps 3% to 4% annually. And there aren’t the whipsaw pricing patterns that we see with stocks.

Even so, as part of its mission to transform housing into a tradable asset, Wall Street designed a reporting system that, true to form, was badly flawed, Waite says. The measures applied to the market - sample size, methodology, and statistical presentation - work well for assets that are dynamically traded, as stocks are. But they don’t work for housing:

* Stocks are analyzed by looking at the underlying company’s fundamentals, meaning the conclusions reached are very much tied to the specific earnings power of that firm.
* Housing, by comparison, is analyzed make "illogical" generalizations about the market that fail to reflect reality.
* Stocks are analyzed in a forward-looking fashion, being all about earnings projections and expectations.
* Housing analysis ends up being backward looking (45 days to 180 days), meaning the conclusions that are reached are likely outdated by the time we see them.
* Housing ends up being treated like a commodity, with "five-star" neighborhoods (where sales are brisk and the asking price is now being exceeded as prospective purchasers bid the values up in hopes of landing the house) being "averaged in" with "disastrous" one-star neighborhoods.

Says Waite: "Housing indexes and statistics emanating from Wall Street take a cynical view of housing … and they misrepresent the actual value of housing by ignoring the critically obvious point - most housing purchases are ‘buy, occupy and hold’," and aren’t a speculative play aimed at short-term profits.

By misfiring so badly, Wall Street established an environment in which housing prices were expected to escalate at better-than-their-historical norms, fanning the speculative flames. The easy credit made available by the mortgage-backed debt market only made matters worse. Banks made loans, and Wall Street bundled those loans into an asset-backed security - giving the banks back the cash that they could then use to make their next round of loans. Because the loans were "averaged" out, the resultant securities were given the highest credit ratings by the ratings agencies - which was more than the securities deserved.

It was a recipe for disaster - or, at least, for a bubble.

Wall Street never saw it coming.
Anatomy of a Rebound

Wall Street has also failed to understand the dynamics of a housing market recovery - which is already in the works, Waite says.

And he should know. The portion of the real estate market that Waite’s magazine caters to - the real estate investor - is significant. In fact, a groundbreaking study commissioned by the magazine, and conducted by real-estate researcher REALTrends Inc., in concert with Harris Interactive, found that real estate investors account for 22% to 28% of all home sales (existing and new) each year - a total of 1.5 million to 1.64 million houses each year. That’s a big piece of a $300 billion industry, so it provides a very solid sample.

According to Waite, the housing market bottomed last year. But that bottoming takes place in stages. Housing values continue to decline. But values can’t bottom, solidify, and then head north until sales volumes increase, Waite says.

"First you get volume, and then you get valuations," Waite says.

And it doesn’t get better across the board all at once: Sales will improve in a "predictable sequence" that start with the very best neighborhoods, work their way down to the really good neighborhoods, and finally reach the plain old good developments.

As noted, Waite says the very best neighborhoods are already seeing strongly improved sales, with actual bidding battles taking place as prospective buyers willingly pay more than the asking price in order to land the choicest properties.

As those markets sell out, and the credit spigots open, demand will move from the very best neighborhoods down to the "pretty good" residential properties, Waite says.

Three reports released over the course of three straight days the last week of March seem to support Waite’s view.

Sales of new homes rose 4.7% in February - the first increase in seven months, the U.S. Commerce Department reported March 26. The day before that report came out a government gauge of home prices posted its first gain in almost a year. And the third of that "hat trick" of upbeat reports issued that same week said that sales of previously owned homes - the biggest share of the market - also increased in February.

The plunge in housing prices is also starting to have an effect. In a second report issued March 26, the California Association of Realtors said that existing-home sales in the state were up 83% in February from the previous year. The reason: The median home price was down roughly 40%, which is helping shrink inventories to about a six months’ supply from 15 months in 2008.

If Waite’s theory is correct, as sales of new and existing homes pick up on a month-to-month basis, prices will follow.

But true to form, Wall Street is demanding proof.

The data "have allayed some fears that the housing market would continue to freefall," Omair Sharif, an economist with RBS Greenwich Capital, told The Wall Street Journal. "But it’s way too early to say if we’ve hit bottom."

But Waite fervently believes that bottom has already been hit and that it’s all uphill - over the long haul - from here.

"Wall Street would have you believe that putting money into a house is as sophisticated as putting money in a mattress," he said. "But as it continues to prove, nothing could be further from the truth."

The Three Ways China May Deal With Growing U.S. Debt

2009-03-30T06:50:00.000-07:00

By William Patalon III
And Jason Simpkins

Although there’s a veritable laundry list of obstacles that could blunt the U.S. government’s ongoing economic turnaround efforts, its single-biggest challenge may come from its single-biggest creditor - China.

When China announced a new array of stimulus measures earlier this month, this very important plan was overshadowed by China Premier Wen Jiabao’s concerns about the United States’ quickly growing debt load.

“We have lent a huge amount of money to the United States,” Premier Wen said. “Of course we are concerned about the safety of our assets. To be honest, I am definitely a little bit worried. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

China has cause to be concerned: As of December, the most recent figures available, China held $727.4 billion in Treasuries - about 26% more than the $578 billion in U.S. government securities the Asian giant held at the end of 2007. More than half of China’s nearly $2 trillion in foreign currency reserves are tied up in U.S. Treasuries and notes issued by other affiliated agencies of the U.S. government - including beleaguered mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE).

However, the value of U.S. Treasuries has dropped steadily since the government began selling record amounts of debt to finance its economic stimulus packages. Investors have lost an average of 2.7% in 2009, according to Merrill Lynch & Co. Inc.’s U.S. Treasury Master Index.

China’s leaders “are worried about forever-rising deficits, which may devalue Treasuries by pushing interest rates higher,” JP Morgan & Co. (JPM) analyst Frank Gong told The Associated Press. “Inside China there has been a lot of debate about whether they should continue to buy Treasuries.”

And as the U.S. debt soars as the government works to halt the worst financial crisis since the Great Depression, China’s concerns about this country’s growing deficits - and its creditworthiness - are escalating in kind.

Depending upon how it did so, were China to stop buying U.S. debt - or even worse, to start dumping it - the economic fallout could be widespread, and perhaps even catastrophic:

* The U.S. dollar would drop 15%-20%.
* U.S. stocks would get hammered.
* Inflation would spike and interest rates on Treasuries would jump into the 8% range.
* And the economy would end up flat on its back - where it would stay, with no rebound on the horizon.

Detailing the Deficit

During the first five months of the 2009 fiscal year, which began Oct.1, the U.S. budget deficit hit a record $764.5 billion. Last month, President Obama outlined a $3.94 trillion budget plan that would take the deficit to $1.75 trillion by the time the fiscal year ends Sept. 30. The plan then calls for a $1.17 trillion deficit for fiscal 2010.

As currently projected, the U.S. budget deficit is forecast to run at about 12% of gross domestic product (GDP) - even worse than the perennially anemic Japan, where the deficit is running at 11%. And the debt picture is certain to get worse.

The Treasury Department has the government’s printing presses running overtime just to finance the $787 billion stimulus passed by Congress earlier this year. And in order to pay for all the stimulus, bailout and fix-it plans that are being put in place to arrest the U.S. economic decline, the U.S. government is assuming a murderous amount of debt: Over the next decade, the Congressional Budget Office projects that the White House budget will run $9.3 trillion in deficits.

That’s $2.3 trillion more than the Obama administration had forecast. But even the CBO projection could prove way too low: It assumes that the U.S. economy - after declining 1.5% this year - will turn around an advance at a racy 4.1% clip in both 2010 and 2011, a forecast that seems far too rosy, given the depths that the U.S. economy appears to have reached.

And that brings us to China.
Enter the (Red) Dragon

During the past several years, government-operated “sovereign-wealth funds” (SWFs) from virtually every major economic powerhouse around the world had been on a global shopping spree, buying up assets and bidding up prices as they did so.

China was no exception.

So when worldwide financial-asset prices began to slide - and then to nosedive - China abandoned many of its riskier holdings, choosing to boost its stockpile of U.S. Treasury securities. That underscores one marketplace truism: Despite Premier Wen’s reservations, the market for U.S. debt is the only market large enough, liquid enough, and stable enough to accommodate China’s large-scale investments.

That’s forced China to engage in a kind of global investor activism - although, so far, most of that activism has been aimed at one country: The United States.

About one-fifth of China’s currency reserves were tied up in Fannie and Freddie debt last fall when the two mortgage firms were placed under government conservatorship, The Washington Post reported.

In fact, as Money Morning detailed back in September as part of its ongoing investigation of the bailout of the U.S. banking system, that U.S. government decision to take control of Fannie and Freddie was driven not by worries about the fading U.S. housing market, but by concerns that foreign central banks in China, Japan, Europe, the Middle East and Russia might stop buying our bonds.

China clearly made its risk concerns known at that time, adding to the sense of urgency U.S. officials felt to make a move. Today, as U.S. debt continues to mount at an obscene rate, financial and economic risks also escalate. This could lead to a spike in inflation and interest rates - a double-whammy that could cause any recovery that’s under way to sputter and stall. That duo of higher inflation and interest rates could also hammer bond values, including the Treasuries held in such large quantities by China. So it’s no wonder the risk concerns China articulated back at the time of the Fannie and Freddie takeovers go double or triple now.

Indeed, when Premier Wen unveiled the spending measures earlier this month, he made the point of saying that China should seek to “fend off risks” by further diversifying its reserves.

“We have already adopted a guiding management policy of diversifying our foreign exchange reserves, and at present our foreign exchange reserves are safe overall,” Wen said. “Our first principle in managing foreign currency is averting risk. We have always adhered to the principles of foreign currency security, liquidity and maintaining value, and implemented a strategy of diversification.”

When it comes to U.S. government debt, that strategy will take one of three forms, and will have the following potential effects:

1. Quietly threatening to stop purchasing (or even threatening to “dump”) U.S. Treasuries, a form of “back-channel” communications that can generate results (just look at how China forced the U.S. government to place Fannie and Freddie in conservatorship). Because this is back channel, it stays out of the marketplace, so long as the U.S. government finds some ways to appease Chinese investors by somehow reducing risk.

2. Quietly slowing or stopping its purchases of U.S. government debt. If China does this effectively and systematically, the fact that it’s cutting back on purchases doesn’t surface until the plan is executed. If China is able to pull this off - and it faces long odds to do so - the fact that it’s cutting back on U.S. debt doesn’t roil the markets too badly, especially if it doesn’t leak out until after the fact.

3. Publicly dumping U.S. debt. Self-explanatory in nature - and also the most unlikely, if it wants to maintain its “friendly” status with the United States - this is the worst-case scenario, and is the one that ends up with the dollar and the stock market getting stomped. If China chooses this route, it’s also essentially cutting off its nose to spite its face. The reason: By publicly dumping U.S. debt, the Treasury market will also take a beating - meaning China’s remaining U.S. debt holdings would take a haircut of 20% to 30%.
The Marketplace Realities

International demand for long-term U.S. financial assets actually fell in January, reflecting China’s smallest net purchase since May, Bloomberg reported.

International investors sold a net $8.4 billion in U.S. corporate debt in January, the report showed. Net foreign purchases of Treasury notes and bonds were a net $10.7 billion in for the month, after purchases of $15 billion a month earlier.

Few analysts believe China will abandon its Treasury holdings altogether, as that would hammer the dollar, hurt the value of its debt holdings and ruin its political relationship with the United States.

Besides, it’s becoming increasingly clear that Beijing wants a voice in Washington.

Yu Yongding, a former advisor to the Bank of China said last month that China should seek guarantees from the U.S. government that its holdings won’t be diminished by “reckless policies.”

Premier Wen echoed that request last week when he called on the United States to “honor its promises and guarantee the safety of China’s assets.”

“I think what they’re trying to say right now is, ‘Don’t take any steps that would impair our ability to access your market,’” Auggie Tantillo, executive director of the American Manufacturing Trade Action Coalition, told The Post. “The Chinese are starting to flex their muscles, they are becoming more powerful commercially and economically, and they want us to know it.”

The very possibility that China and other foreign countries would stop buying U.S. bonds already was enough to prompt the U.S. government to take control of foundering mortgage giants Fannie Mae and Freddie Mac.

Business for Hard Times

2009-03-21T09:59:00.000-07:00

By JON RAPPOPORT www.nomorefakenews.com

I know people don’t have time to read long articles these days. They’re too busy tallying up their massive profits in the stock market, selling their homes for astronomical prices, and deciding which yacht or private plane to buy---but if you can bear with me, you might glean a few data-McNuggets re how the financial world works.

And you could learn something about how to start a business that will make you rich without turning a profit.

I know. That sounds like a contradiction.

Have patience. Read on.

The first thing you have to do is find a wonderful product that people can afford. And I have one.

number 9 dream. Never heard of it? A novel. David Mitchell wrote it in 2001. Sensational reviews in England. I bought all 418 pages of it at Book Tales in downtown Encinitas for two bucks, used. That’s a little over half a cent a page.

And on page five and six, we have this:

“I sip my coffee foam. My mug rim has traces of lipstick. I construct a legal case to argue that sipping from this part of the bowl constitutes a kiss with a stranger. That would increase my tally of kissed girls to three, still less than the national average. I look around the Jupiter Café for a potential kissee, and settle on the waitress of the living, wise, moonlit viola neck. A tendril of hair has fallen loose, and brushes her nape. It tickles. I compare the fuchsia pink on the mug with the pink of her lipstick. Circumstantial evidence, at any distance. Who knows how many times the cup has been dishwashed, fusing the lipstick atoms with the porcelain molecules? And a sophisticated Tokyoite like her has enough admirers to fill a pocket computer. Case dismissed.”

I paid roughly an eighth of a cent for that paragraph. Not bad. (If you cajole people, some of them will give you pennies.)

The whole book has, so far, taken up three hours of my time. I’m moving through it slowly. I’m on page 87. Three hours, at a total cost of, let’s call it, 43 cents.

If I go to the movies, I’m paying at least ten dollars by the time I’m out of there, not even counting mileage in the car, and I’ve usually logged only two hours of screen time. And nobody on the screen is saying, “the waitress of the living, wise, moonlit viola neck.”

The Encinitas public library is a well-designed low-slung building with lots of big windows. You can even sit outside on an elevated deck and read. Of course, you can check books out of libraries for nothing, but I don’t count that, because I like owning a book and keeping it around for years. I like underlining passages and making notes in the margins. So I use the very nice bookstore the Encinitas library maintains next to its front door.

For two dollars, I bought a hardbound 1963 Grove Press edition of Henry Miller’s Black Spring. And I got this brief chunk of poetry for what I estimate was a fifth of a cent:

“The tide washes up in front of the curved tracks and splits like glass combs. Under the wet headlines are the diaphanous legs of the amoebas scrambling on to the running boards, the fine, sturdy tennis legs wrapped in cellophane, their white veins showing through the golden calves and muscles of ivory. The city is panting with a five o’clock sweat. From the tops of skyscrapers plumes of smoke soft as Cleopatra’s feathers. The air beats thick, the bats are flapping, the cements softens, the iron rails flatten under the broad flanges of the trolley wheels.”

A fifth of a cent.

Maybe these two passages smack of literature, for you. And for you, literature is crap--although at these prices nobody should be arguing. But all right. At the outdoor racks of used paperbacks at the Cardiff Public Library, I picked up Elmore Leonard’s Pagan Babies, a sensational crime novel set in Rwanda and Detroit, for 25 cents. Another three hours of reading. I haven’t seen three hours of television or movies in the last few years that stack up to Pagan Babies.

In a small shopping plaza off San Eliho, in Cardiff, there is a thrift shop. I found a few Jack Higgins thrillers there. Wonderful spy-crime writer. I bought an old Physician’s Desk Reference for four dollars. And one of the Isaac Asimov Foundation novels for fifty cents.

Marvelous. Wonderful. Such a fantastic product. Used books.

So I got to thinking…and the thinking produced this business----

I rented an old storefront in Encinitas. It had broken windows and cracked floors. I made some shelves and went to garage sales and bought old books by the foot and stuck them on the shelves.

I taped a big sign on the broken window: FREE BOOKS.

When people came in, I told them this wasn’t precisely true, but they could take as many books as they wanted if they signed an IOU. As long as they could legibly write their names, phone numbers, and addresses on a piece of paper or a rag or a stick of wood, they could have books. They could pay me later.

Well, this took off like a rocket.

I found two partners who had a modest amount of cash. We rented and opened eight such bookstores in the San Diego area and they all started doing gangbusters business.

Eventually, we took over 11267 bookstores from coast to coast and we did the “free book” thing with all of them. We got on Larry King and Nightline and Today.

We went to a bank, a big bank. We told them we had packages of IOUs. Bundles. Tons. We would be willing to sell them.

Wow.

We walked out of there with the kind of cash I had previously only dreamed of.

The bank manager called me three weeks later and told me he’d sold those packages and bundles and tons of IOUs to a guy in Belgium. And a month after that, the Belgium banker sold the tons to the investment honcho at AIG. After that, I don’t know what happened.

But I’m now living in a mansion on a Greek island and I have a 300-foot yacht.

I figured I should hire a security company, you know, to protect my assets, and a veteran with Special Forces training recommended bringing in a hundred dogs, three hundred armed guards---and he built electrified fences around the property. It all seemed a bit excessive to me, but he assured me this was the way to go.

I’m now writing my memoirs. The first line is:

“I never made a penny, but I made 400 million dollars.”

This is why America was created. This is the meaning of liberty.

Has Anybody Seen the Bottom Yet?

2009-03-10T08:25:00.000-07:00

By Martin Hutchinson

Last week’s economic data told us two things. First, this recession is almost certainly going to be the worst since World War II. Second, the pit isn’t bottomless; there are faint signs of a landing - although it is still some considerable way further down.

For investors, the prospect of a not-quite-bottomless pit in the United States is unexciting, to say the least, so it’s worth looking internationally for areas where the news is rather better.

Friday’s unemployment number for February was just about as bad as everybody feared, with non-farm payrolls losing 651,000 jobs. But the real news was the revisions made in the non-farm payroll numbers for December and January, boosting the job-losses for those months to 684,000 and 655,000, respectively.

This had the perverse effect of making February look better by comparison, since it was now the second month in which the number of jobs lost had slightly declined. Job losses have now been holding approximately constant for each of the last four months at about 650,000; thus, it doesn’t appear as though the economic decline is getting any steeper.

Other reports confirmed that the decline is not steepening, and even suggest that a turn may be on the way. The Institute of Supply Management manufacturing and non-manufacturing indices for February were both approximately flat - unchanged - from the previous month, suggesting again that the rate of economic destruction is constant at worst.

In the short term, help is on the way, partly from the continual gradual easing of credit conditions, assisted last week by the unveiling of a $1 trillion Treasury Asset-backed Securitized Loan Fund, which will help to restart the securitization market for consumer loans of all kinds.

Healthy banks will not welcome this new competition, since it will cut into their margins. Even so, when this new program starts in the spring, it will combine with two other government initiatives to create a trifecta of heavy-hitting stimulus programs that, in combination, should provide the U.S. economy with a shot of adrenaline - the results of which could start to show themselves by the May/June timeframe.

Those other two initiatives are:

The modest tax cuts for consumers in the lower and middle incomes.
And the first of the outlays from the $787 billion package passed and signed into law last month.
That’s where the bottom may be coming into view. If the downward slope is not getting any steeper - and we can expect some upward force in a few months - then there must be a good chance that the economic bottom is only a few months away.

Should that prove to be the case, the recession will have lasted about 18 months - about as long as the most severe recessions since World War II - and will have produced a drop in gross domestic product (GDP) of about 5%, slightly worse than the 1974 and 1982 recessions, which had previously been the post-war period’s deepest.

Still, this recession’s 5% drop in GDP will not seriously match up against the Great Depression’s 25% GDP drop, or against various other fairly severe recessions experienced in other advanced economies during the last 50 years.

Recovery is a different matter. Once the recession has fully bottomed out, perhaps in the third or fourth quarter of this year, the economic recovery from the bottom will be hampered by two factors:

First, the federal budget deficits will be continuing at a level of more than $1 trillion per annum - equal, perhaps, to 10% of GDP. Thanks to a manifestation known as the "crowding out effect," government financing of these huge deficits will tend to drive private borrowers out of the credit markets and restrict funds availability for business expansion.
Second, the huge increases in money supply in the last six months - the St. Louis Fed’s "Money of Zero Maturity" broad money index (the best broad money-supply measure left over since the central bank stopped reporting M3 money-supply statistics in March 2006) has been rising at an annual rate of over 20% since October - will almost certainly cause a resurgence in inflation once the economy has bottomed out. Combined with the afore-mentioned budget deficits, this surge in inflation will probably cause a steep uptick in interest rates unlike anything we’ve seen since the late 1970s. With rising interest rates and rising inflation, economic recovery will be very sluggish indeed, with full recovery delayed for several years.
If the recovery of the U.S. economy is exceptionally sluggish and delayed, it is unlikely that stock market returns will be satisfactory: Indeed, the U.S. market may remain at or below its current depressed levels for several years.

On the other hand, economies that have not incurred such huge budget deficits - or taken such huge risks with inflation - may find that their recovery arrives at the normal pace: Those markets could be rising rapidly from their recessionary low points by the middle of next year.

This suggests that the major East Asian countries, which have ample liquidity and generally positive trade balances, will be particularly well-positioned to be able to expand through domestic growth, boosting their companies’ profits and stock prices, accordingly. The best-run countries of Latin America - particularly Colombia, Brazil and Chile - may also benefit from Asian growth, without suffering high inflation or financing difficulties, since they have reacted to the global recession much more conservatively than the United States or Europe.

So, there you have the good news and bad news, all in an economic nutshell. And that brings us to the bottom line. Let’s look at all three:

The good news: We may be only a few months away from the bottom of the U.S. recession, which may be only a moderate distance below where the economy is right now.
The bad news: Any recovery that does manifest itself is likely to be very sluggish indeed.
The bottom line: Look to Asia and Latin America (particularly Colombia, Brazil and Chile) for the next investment bull markets.

Bank of Canada lowers overnight rate target by 1/2 percentage point to 1/2 per cent

2009-03-04T08:03:00.001-08:00

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.

Is President Obama Creating a Better Banking System by Capping Executive Pay?

2009-02-18T08:09:00.000-08:00

Is President Obama Creating a Better Banking System by Capping Executive Pay?

By Martin Hutchinson Contributing

By revamping the banking sector’s compensation system, and creating a salary cap of $500,000 for the top executives at institutions that accepted federal bailout money, new U.S. President Barack Obama could be launching a reform movement that helps make the American financial system worthwhile to invest in again.

For the last 30 years, Wall Street has had a problem with its remuneration system. Base pay was only around $150,000 even for a partner/managing director - not enough to live on for senior Wall Street bankers with a Manhattan lifestyle - while bonuses were 10, 20 or even 100 times that amount.

This promoted a culture in which risk-seeking behavior was encouraged - even rewarded - which is why the notorious office politics and 1egendary 100-hour workweeks became the Wall Street norm. Needless to say, shareholders in such institutions got a pretty raw deal; the universal assumption was that their returns would be whatever crumbs were left over after management had paid itself gargantuan bonuses.

It becomes easy to see, then, just why President Obama’s limitation will have an interesting effect. Some financial-services businesses - consumer lending, mortgage banking, routine business banking (including much large ticket lending) and retail brokerage - work very well at the operating level with a $500,000 salary cap. There are plenty of practitioners available with lots of experience in these businesses, whose remuneration, except at the very top, never soared to “Wall Street” levels.
Meanwhile, other businesses will become more or less impossible, except at a routine level. For example, if you try to engage in big-ticket trading, while paying traders $200,000 to $300,000 a year, and your competitors pay traders $2 million to $3 million a year, you will get your lunch handed to you on a fairly regular basis. The top Wall Street traders mostly got that way by developing an intimate knowledge of some major portion of the market’s deal flow, and that knowledge is worth millions to somebody, even if a particular bank’s salary structure is capped. Similarly, the top block traders in equities, the top merger specialists, and others, will not stick around for less than $500,000 a year.

After a year or so, a bank subject to a salary cap will be a very different creature. At the top, it will have primarily administrators, paid substantially more than their government counterparts, who will run a perfectly competent operation, but who will not be capable of broad strategic insight or aggressiveness, be it offensive (acquisitions) or defensive (major cost cutting).

The organization will compete only in those financial-service businesses that have become routinized. However, such businesses represent perhaps 90% of all financial-service transactions, so being limited in this way will not put the firm at a huge disadvantage. More importantly, each company’s risk management function will become very simple, since nobody will benefit significantly by taking on much more than modest risks.

Had regulators prevented the mortgage finance institutions Fannie Mae (FNM) and Freddie Mac (FRE) from paying their top managements $10 million a year, they would have been successful and low-risk models of this type (and we would all be much better off today).

With simpler risk management than their unrestricted competition, and much cheaper management at the top, these new banks will be highly competitive in the businesses in which they operate. Given such parameters, it is likely that their unrestricted competitors will either have to reshape themselves to match them, or get out of the commoditized businesses and concentrate only on high value added, high-risk markets.

This would be completely appropriate.

If the largest banks are to be considered “too big to fail” and must be bailed out from time to time with taxpayer money, then they must be prevented from taking large risks. By restricting their management’s remuneration, Obama will also have restricted the taxpayer’s downside risk, while at the same time providing more cost-efficient services in these commoditized business areas.

The high-risk and complex businesses will migrate to other houses, whether hedge funds or investment-banking “boutiques” - the former specializing in operations requiring large amounts of risk capital, and the latter specializing in operations requiring high-level financial creativity and connections.

If the authorities are wise, they will impose a size limitation on these operations, so that they are unable to become large enough to endanger the financial system or require taxpayer bailout. Naturally, pay for executives in these companies will be unlimited, in good years far higher than in the commoditized behemoths.

In general, the ordinary investor would be foolish to invest in the new hedge funds and investment banking boutiques. Insiders at those operations will always have an advantage over their outside investors, and will tend to treat their capital sources as “dumb money,” suitable only for extracting large management fees. The largest institutions, with an ongoing relationship with these houses, will be their primary sources of outside capital, but many of them will rely heavily on reinvestment of partner earnings, as Wall Street houses did before 1970.

For retail investors, the huge salary-capped behemoths will be ideal “widows-and-orphans” investments. They will not grow much, so will pay out most of their earnings as dividends. They will also not take large risks, so their earnings will fluctuate only moderately in any but the deepest recession. Because of their attractiveness as investments, they will have a very low cost of capital, another cost advantage enabling them to repel encroachments by more aggressive houses.

In general, as a believer in the free market, I strongly deprecate limitations on executive pay. But when the institution concerned is “too big to fail” the argument for such limitations is very strong indeed.

Weekly Market Insight

2009-02-01T09:56:00.000-08:00

NORTH AMERICAN & INTERNATIONAL ECONOMIC HIGHLIGHTS

Governments and central banks continue to fire from all directions. In the US, the fed funds rate is already at
zero. But the Fed continues to ease in different ways. Mr. Bernanke is now targeting not the fed funds rate but
rather private sector borrowing rates. By buying spread products, the Fed is trying to lower borrowing cost and
stimulate borrowing activity. Bank loans and leases outstanding increased by $8 billion in the latest week, the
first rise in four weeks, but are up just 1% from this time last year.

The Bank of Canada’s 50 basis points rate cut this week was not the last one for this cycle. Look for the Bank
to cut by another 50 basis points come March. This move is already fully discounted by the market and will not
have any significant impact on long-term rates.

But even if the Fed and the Bank of Canada are successful in lowering borrowing rates, you still need to create
conditions in which households will be willing to borrow. We know that there is some pent up demand for
borrowing following the recent decline in US long-term mortgage rates (after the Fed actively purchased MBA
securities), refinancing activity has tripled. But in order to insure a sustained rise in credit demand, we need a
stronger level of economic activity, and that’s where governments enter the picture.

In the US, the Obama Administration will soon introduce an estimated $875 billion in fiscal stimulus and in
Canada, we will see roughly $30 billion of new spending this year. A notable portion of this spending will go
towards infrastructure. And from an economic perspective, this is important as the economic multiplier of
infrastructure spending is significant. After all, when it comes to creating jobs and stimulating activity,
infrastructure spending is a much more effective tool than tax cuts. In the US, the impact of economic growth
of infrastructure spending worth 1% of GDP is more than double the impact of tax cuts, which have a greater
leakage to imported consumer goods, and which risk being saved by households. In Canada, $10 billion of
infrastructure spending can potentially create 110,000 jobs and lift economic growth by close to 1.5
percentage points—well above the stimulus effect of a tax cut of a similar size.

And that’s the main reason for the renewed optimism by the Bank of Canada, which now calls for a continual
recession in the coming six months but a healthy recovery in the second half. This is more or less in line with
our ongoing view—the combination of monetary and fiscal stimulus will be powerful enough to turn things
around in the second half of the year.

Benjamin Tal
Senior Economist
Economics & Strategy

Inflation Dips in Canada

2009-01-23T14:42:00.000-08:00

Inflation dips in Canada; three provinces already at zero or less

By Julian Beltrame, The Canadian Press

OTTAWA - Annual inflation dipped sharply last month to the lowest level in two years as falling gasoline prices continued to drive the consumer price index toward zero and beyond.

Three provinces are already experiencing the rare phenomenon - P.E.I.'s inflation rate hitting zero last month, while Nova Scotia and New Brunswick had inflation rates of negative 0.2 per cent and 0.6 per cent respectively.

Overall, Canada's inflation rate dipped to 1.2 per cent in December, a level not seen since January 2007, and almost a full point below November's two-per-cent rate.

On a month-to-month basis, prices were generally 0.7 per cent lower last month than they were in November.

"This is first and foremost a gas price story now," said Douglas Porter, a senior economist with BMO Capital Markets, noting that excluding gasoline prices inflation would have been 2.6 per cent.

"But starting in the next few months, we'll see a shift where price drops become more broad-based."

Gasoline prices plunged 25.8 per cent in December - the steepest drop since Statistics Canada began the gas index in 1949 - after a 14.4 per cent decline in November.

Earlier this week, the Bank of Canada forecast that the country's inflation rate is likely to slide below zero in the second and third quarters of this year as food prices start reacting to less expensive energy and agricultural commodities, such as wheat.

Economists distinguish between disinflation and deflation. With disinflation, which is a slowing of the rate that prices increase, and deflation - a more dangerous situation in which there's a general decrease in prices over a longer period of time.

Deflation can be harmful to economic growth because buyers tend to delay purchases in the expectation that prices will fall and that, in turn, can create a cycle of lower sales, profits and asset values.

But bank governor Mark Carney said the risk of deflationis "remote."

Porter agrees deflation is unlikely, in part because the lower Canadian dollar will boost the cost of imported goods. But he added that deflation is still a possibility.

"It's not hard to work up a scenario where we repeat what Japan went through in the 1990s, where they did have prolonged deflation," Porter said.

Conference Board chief economist Glen Hodgson says most individuals would regard deflation as a good thing, since it reduces their cost of living, but they shouldn't.

"Japan's experience during the latter part of the 1990s provides critical evidence that prolonged deflation can lead to repeated bouts of recession and a tepid recovery in economic growth. No country wants to go there," Hodgson says.

At the moment, rising food prices remain the main reason inflation in Canada remains on the positive side.

Food at grocery stores cost 7.3 per cent more in December than 12 months earlier, while the cost of fresh vegetables jumped 26.9 per cent and bakery and cereal goods swelled 12.4 per cent.

If not for higher food store prices, inflation would already be at zero, Statistics Canada said.

Of the eight major sub-groups tracked by Statistics Canada, five continued to record increases in prices over the past year, led by food and shelter costs.

Other components showing increases were household furniture and equipment, health and personal care and alcohol and tobacco. Meanwhile, energy, transportation and clothing and footwear fell sharply.

Ironically, 2008 as a whole actually brought a relatively strong 2.3-per-cent increase in the consumer price index. But the trend has been sharply down in the latter quarter of the year.

The annual inflation rate was 1.2 per cent in December, says Statistics Canada. The agency also released rates for major cities, but cautioned that figures may fluctuate widely because they are based on small statistical samples (Previous month in brackets):

-St. John's, N.L., 1.6 (2.6)

-Charlottetown-Summerside, 0.2 (2.3)

-Halifax, -0.1 (1.2)

-Saint John, N.B., -0.7 (0.7)

-Quebec, 0.5 (1.4)

-Montreal 0.7 (1.5)

-Ottawa 1.7 (2.2)

-Toronto 1.7 (2.3)

-Thunder Bay, Ont., 1.9 (2.4)

-Winnipeg, 2.0 (2.6)

-Regina 3.0 (3.6)

-Saskatoon 2.5 (3.1)

-Edmonton 2.0 (2.2)

-Calgary 2.4 (2.4)

-Vancouver 1.3 (2.3)

-Victoria 1.2 (2.1)

The annual inflation rate was 1.2 per cent in December, says Statistics Canada. Here's what happened in the provinces and territories. (Previous month in brackets):

-Newfoundland and Labrador 1.2 (2.4)

-Prince Edward Island 0.0 (2.3)

-Nova Scotia -0.2 (1.3)

-New Brunswick -0.6 (0.6)

-Quebec 0.5 (1.4)

-Ontario 1.5 (2.1)

-Manitoba 1.9 (2.7)

-Saskatchewan 2.6 (3.2)

-Alberta 1.9 (2.4)

-British Columbia 1.2 (2.0)

-Whitehorse, Yukon 3.0 (3.5)

-Yellowknife, N.W.T. 3.1 (4.7)

-Iqaluit, Nunavut 3.4 (3.4)

Bank of Canada Lowers Overnight rate target by 1%

2009-01-20T06:38:00.000-08:00

Bank of Canada lowers overnight rate target by 1/2 percentage point to 1 per cent

Press Releases

FOR IMMEDIATE RELEASE
20 January 2009

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 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 1 1/4 per cent.

The outlook for the global economy has deteriorated since the Bank's December interest rate announcement, with the intensifying financial crisis spilling over into real economic activity. Heightened uncertainty is undermining business and household confidence worldwide and further eroding domestic demand. Major advanced economies, including Canada's, are now in recession and emerging-market economies are increasingly affected. Energy prices have fallen as a result of substantially weaker global demand.

Stabilization of the global financial system is a precondition for economic recovery. To that end, governments and central banks are taking bold and concerted policy actions. There are signs that these extraordinary measures are starting to gain traction, although it will take some time for financial conditions to normalize. In addition, considerable monetary and fiscal policy stimulus is being provided worldwide.

Canadian exports are down sharply, and domestic demand is shrinking as a result of declines in real income, household wealth, and consumer and business confidence. Canada's economy is projected to contract through mid-2009, with real GDP dropping by 1.2 per cent this year on an annual average basis. As policy actions begin to take hold in Canada and globally, and with support from the past depreciation of the Canadian dollar, real GDP is expected to rebound, growing by 3.8 per cent in 2010.

A wider output gap through 2009 and modest decreases in housing prices should cause core CPI inflation to ease, bottoming at 1.1 per cent in the fourth quarter. Total CPI inflation is expected to dip below zero for two quarters in 2009, reflecting year-on-year drops in energy prices. With inflation expectations well-anchored, total and core inflation should return to the 2 per cent target in the first half of 2011 as the economy returns to potential.

Against this background, the Bank today lowered its policy rate by 50 basis points, bringing the cumulative monetary policy easing to 350 basis points since December 2007. Guided by Canada's inflation-targeting framework, the Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the 2 per cent target over the medium term. Low, stable, and predictable inflation is the best contribution monetary policy can make to long-term economic growth and financial stability.

Information note:

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 Update on 22 January 2009. The next scheduled date for announcing the overnight rate target is 3 March 2009.

How countries are trying to jolt their slumping enonomies

2009-01-04T06:14:00.000-08:00

The world's stimulating debate

How countries are trying to jolt their slumping economies

By Muriel Draaisma

World leaders from China to Mexico have announced plans in recent months to spend their way out of the global economic slowdown. Governments are scrambling to push their sluggish economies forward almost always through more spending.

As economic growth slows to a crawl, governments are trying to spark demand by
getting more money into the hands of consumers and enticing them to spend it.

Corporate and personal tax breaks, plans to build new roads and airports, and job-
creation programs are among the many measures being taken. The government of
Taiwan even plans to hand out shopping vouchers.

Here is how some countries around the world are handling the crisis:

Canada

Canada stands out in its decision not to offer a new spending package at least for now. No stimulus package was included in the government's economic update in late November. Finance Minister Jim Flaherty has said Canada has already introduced stimulus equal to 1.4 per cent of gross domestic product this year and two per cent of GDP next year. Measures already taken include cuts to the Goods and Services Tax and planning for infrastructure spending.

At a meeting in Washington earlier this month, members of the Group of 20 nations agreed that they would individually draw up economic stimulus plans that would equal about two per cent of GDP in each of their countries.

"Other countries are trying to catch up with Canada," Flaherty told CBC News after delivering his economic update in the House of Commons on Nov. 27. "We acted in advance."

But Flaherty has not ruled out more stimulus spending in the next budget, expected to
be unveiled in February 2009.

U.S.

In January, President George W. Bush signed into law a $107-billion US economic stimulus package that sent cheques to low- and middle-income families. They were delivered in the spring. Economists said many used the money to pay off debt, although spending did temporarily increase.

The Democrats lobbied for a second stimulus package in September, worth up to $300
billion US. Under the plan, the government would extend its unemployment insurance
benefits beyond 39 weeks and expand its food stamp program.

President-elect Barack Obama also called for a spending package to be implemented
immediately when he takes office in January 2009. Bush and the Republican party so
far have not committed to action.

The U.S., however, has not been shy about spending to prop up its financial system in
light of the financial crisis.

In addition to a $700-billion US financial bailout of the financial services industry
announced in October, the Federal Reserve announced on Nov. 25 plans to create two
additional programs. Potentially costing $800 million US (almost $1 billion Cdn), these
would lower mortgage rates and other consumer loan rates and to make those kinds of
loans more available.

Britain

The British government announced on Nov. 24 an economic stimulus package worth 20 billion pounds ($37 billion Cdn). The amount is about one per cent of Britain's gross domestic product.

In a pre-budget address, Alistair Darling, the chancellor of the exchequer or finance minister, said the government will reduce its value-added sales tax, known as VAT, to 15 per cent from 17.5 per cent until the end of 2009. The cut is effective Dec. 1. Taxes will increase for the country's top earners.

The cut is expected to cost the British treasury about 12.5 billion pounds ($23.7 billion Cdn).

"These are exceptional times and require exceptional measures," Darling said.

China

The Chinese government announced plans on Nov. 9 to spend about four trillion yuan
($722 billion Cdn) over the next two years on infrastructure and social welfare. It said it will reform taxes to cut industry costs by about 120 billion yuan.

China will spend money on 10 major areas, including low-cost housing, infrastructure (new railways, roads and airports), health, education, environmental protection and high technology.

And the government said it will spend on rebuilding disaster areas, including in Sichuan province, where 70,000 people were killed and millions were left homeless by an earthquake on May 12.

It will also remove credit limits for commercial banks to channel more lending to priority projects and rural development and it will reform the value-added tax system to cut taxes for enterprises.

Germany

The German government announced a stimulus package on Nov. 5 that includes tax breaks on new cars and credit assistance for companies. The package is to take effect over the next two years and cost the government about 23 billion euros ($36 billion Cdn) from until 2012.

Economy Minister Michael Glos said the package is designed to trigger investments of up to 50 billion euros ($79 billion Cdn).

The new package includes specific measures to help the ailing auto industry: a one-year holiday on tax for new cars and a two-year holiday on tax on most environmentally friendly vehicles.

Glos said every sixth job in Germany home to such automakers as Daimler, Porsche, Volkswagen and BMW is connected to the auto industry.

France

The French government said in late November it planned an economic stimulus package that will support the automobile and building industries, two sectors hard hit in France by the slowdown.

President Nicolas Sarkozy said the 19 billion euro ($30 billion Cdn) package, to be unveiled Dec. 4, will also increase government spending on infrastructure and include help for the environment.

Italy

The Italian government approved an economic stimulus package on Nov. 28, with the money to be spent on help for Italian banks, company tax breaks and financial support for low-income families.

According to one media report, the package is worth about five billion euros (about $8 billion Cdn), or less than 0.5 per cent of the gross domestic product in Italy.

Australia

The Australian government announced a $10.4 billion ($8.4 billion Cdn) economic security strategy on Oct. 14. The allocation worked out to about one per cent of GDP and wasdesigned to strengthen the Australian economy and support households.

The strategy includes support payments for low- and middle-income families and money to help first-time home buyers purchase a home. There will also be money for 56,000 training places and to push forward three national building funds.

Japan

The Japanese government in October pledged five trillion yen ($65 billion Cdn) in an economic stimulus plan to help households and small businesses deal with the slowdown.

The package came after the government announced in August it would spend two trillion yen to boost the economy.

Taiwan

The Taiwanese government said it plans a number of stimulus measures, worth $482.9 billion ($18 billion Cdn), that will be spread out over the next four years.

One of the measures includes $82.9 billion ($3 billion Cdn) in shopping vouchers for citizens. The vouchers, for $3,600 each (about $133 Cdn), are expected to be issued to all Taiwanese citizens early next year and must be used by the end of September 2009.

Mexico

The Mexican government announced in October a $4.4 billion US ($5.4 billion Cdn) economic stimulus package. The plan is partly designed to create jobs.

Mexican President Felipe Calderon said the "invisible hand" of the markets needs the "firm and just hand" of government and the "generous hand" of society.

The Organization of Economic Co-operation and Development said in a recent forecast that Mexico is particularly vulnerable to the U.S. economic slowdown.

Brazil

The Brazilian government is expected to be the next government to announce measures to boost its economy.

The Organization of Economic Co-operation and Development said in a recent forecast that economic activity "appears to be slackening" in Brazil, which has been a bit of an economic powerhouse in South America.

According to the OECD, growth in Brazil will slow to three per cent in 2009 from 5.3 per cent in 2008 but it will increase to 4.5 per cent in 2010.

European Union

The European Commission is urging EU governments to boost economic growth with a
stimulus plan worth 200 billion euros ($317 billion Cdn).

The European Economic Recovery Plan, which would be rolled out over two years, calls on all 27 EU members to spend more. The stimulus would represent 1.5 per cent of EU GDP.

About 170 billion euros ($270 billion Cdn) would come from national governments and the rest from EU funds and its lending arm, the European Investment Bank.

"Exceptional times call for exceptional measures," European Commission President Jose Manuel Barroso said in Brussels on Nov. 26. "This recovery plan is big and bold, yet strategic and sustainable."

Mortgage Outlook

2008-12-30T09:10:00.000-08:00

Slightly lower mortgage rates and house prices.

The credit crunch is far from over. But with credit spreads improving notably since early September, it seems that the market's focus is slowly shifting towards the US economy, which is deep in recession. Overall, it lost 1.2 million jobs this year, with about half of that taking place in the last three months.
What will it take to get out of this recessionary territory? The Federal Reserve has more ammunition than simply cutting rates—and in this sense, it's more powerful than in previous recessions. Specifically, the Troubled Assets Relief Program (otherwise known as the bailout) gave the Fed more flexibility to provide liquidity to banks without driving the effective Fed funds rate to 0%.

In Canada, the labour market continues to surprise on the upside. But it won't last. Look for notable slowing in the coming six months, with the unemployment rate approaching 7% by mid-2009.

House prices are falling, but not as much as the headlines say.
House prices in Canada are falling. But the headline numbers can be very misleading. In Vancouver, for instance, the close to 45% year-over-year fall in the number of homes sold and the fact that Vancouver prices are much higher than the national average combined to make it look as though national home prices were falling sharply. In fact, the decline was driven by fewer expensive homes being sold in Vancouver, as a fraction of the whole. As a result, the national headline number for October is down by close to 6% from a year ago. But if properly weighted, house prices actually fell by only 1%.
As far as interest rates are concerned, we're expecting the prime rate to drop a little farther. It's possible that we'll see long term rates dropping a bit too. But most of the decline in long term rates is already priced into the 5 year rate, so we won't see fixed rates declining by as much as the variable interest rate.

Benjamin Tal
Senior Economist
CIBC World Markets

What this means to you.

With variable and fixed mortgage rates still near historic lows, both options can offer real value. Deciding which one is most cost-effective for you depends entirely on your needs and plans. To help you make that decision, I’m happy to sit down with you and perform a no-charge analysis of your goals, requirements and financial abilities. Please feel free to call me at any time.

Giuseppe Strazzeri
Mortgage Specialist
Phone: 905-778-8100 ext 5161
Email: mymortgage@giuseppestrazzeri.com

Retainers versus Lenders Due Diligence Deposits and Commitment Fees

2008-12-24T09:46:00.000-08:00

We are providing the client with a specific lender who can offer financing to them based on the lenders review of the representations made by the borrower with respect to loan size, geography, credit profile type and mix of collateral etc. The retainer paid to us by the borrower is not a deposit to be used for due diligence but rather an engagement fee to arrange for the specific financing.

We require this retainer to protect ourselves against situations where our borrower has inadvertently misrepresented the value of collateral or the cash flows to cover debt service. It would also protect us in a case where the lender finds they cannot perfect a security interest in the collateral being offered or the borrower cannot provide the necessary documentation that the lender requires.

Because we do not require any exclusivity with respect to our fee agreement, the retainer also protects us in the event that the borrower obtains financing elsewhere, secures an equity infusion, or simply decides that they do not require the financing at this time. If the loan does not close for any reason, other that our inability to produce a capable lender, then the retainer covers our time, effort and expense regarding the work done by us.

We represent hundreds of lenders across the country and all generally require the borrower to cover their costs of due diligence prior to loan closing. The only exception to this rule is a local bank ( if the business is bankable ) who typically will not need such a deposit. If lenders were to pay the due diligence costs they would often waste their money traveling to the borrowers company or property and performing appraisals and audits on situations where the results of that due diligence were such that the loan cannot be closed.

If the lender were willing to pay for the examination and investigation necessary to close the loan, borrowers who have problems might not disclose them in hopes that the lender would not discover these issues that may have previously caused the loan to be rejected.

The lender will not require their due diligence deposit until they have issued their formal proposal outlining the specific terms and conditions that will apply based on the representations made to them by the borrower. The purpose of the due diligence is to allow the lender to confirm that the representations made by the borrower are true and correct so that they can close the loan.

Lenders due diligence may include a site inspection at your company focusing on your back office operations relative to the performance of your accounts receivable. Particularly they will want to examine the exact service or product provided, how you bill, to whom you are billing, the net collectable amount paid to you after allowances and deductions, any potential offsets due other parties or issues that could lead to offsets and the historical performance of your AR's collect ability.

Clearly, as the lender is typically expert in such matters you can benefit from such expertise as it relates to the efficient billing of your accounts and the ability to diminish underpayments etc. Real Estate, equipment and inventory appraisals that are more than 6 months old will likely need to be updated or in some cases may need to be redone.

The lender will also be concerned with the character of the borrower (both from a company perspective as well as from the principals perspective) as it relates to previous issues of fraud or bankruptcy etc. They will also need to clearly confirm the viability of the company going forward and any legal issues that might cause them to suffer a loss with respect to the loan to be consummated.

This could include the possible inability of the lender to obtain a first lien against the collateral or the borrower’s inability to cover debt service etc. The lender will be available to explain in detail what could cause them not to close the loan so that there are no surprises once you have agreed to their terms and conditions and before you pay for the due diligence.

Most lenders make the deposit refundable minus specific expenses in the unlikely event that they are unable to conclude the loan. Due diligence deposits vary widely from lender to lender but are generally in the $2,500 to $25,000 range. A loan transaction of $10,000,000 or more might require a due diligence deposit of greater than $25,000.

Once the due diligence is complete some lenders will issue a commitment to fund at which time the borrower will be required to post a commitment fee which will be around 1 point on the loan amount. If the borrower walks away from the transaction prior to closing they will forfeit this fee. Some lenders will go straight to closing after completion of due diligence and will not require a commitment fee. Normally, once the commitment fee is paid the only steps to be taken prior to funding would be the negotiation and execution of closing documents.

Giuseppe Strazzeri

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http://www.mortgagebrokernews.ca/news/39077/details.aspx

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