In this week’s issue: 1. Market closes for Friday, March 7, 2008 2. Investors see a bear, CFAs say 3. BoC slashes rates, hints at more cuts 4. TFSA sparks little innovation...for now 5. Energy's run isn't over: Rubin 6. RRSP not a priority for most Canadians 7. U.S. consumer sentiment sours
1. Market closes for Friday, March 7, 2008: Close Change YTD Dow Jones 11,893.69 -146.70 or -1.22% -10.34% S&P 500 1,293.37 -10.97 or -0.84% -11.92% NASDAQ 2,212.49 -8.01 or -0.36% -16.58% TSX COMP 13,258.18 -102.26 or -0.77% -4.16% Change YTD BoC Close -432.62 or Canadian $ Nikkei 12,782.80 -16.49% 3.27% US $ -841.40 or Hang Seng 22,501.33 -19.10% 3.60% Euro Spot Rate -566.56 or SENSEX 15,975.52 -21.31% Cdn 3.42% Euro FTSE 100 5,699.90 -66.50 or -1.15% -11.72% CAC 40 4,618.96 -59.09 or -1.26% -17.73% DAX 6,513.99 -77.32 or -1.17% -19.25% Bonds Cdn. 10- year bond Cdn. 30-yearbond U.S. 10-year bond U.S. 30-year bond $Current 103.46 115.85 99.71 97.17 $Previous 103.39 115.50 99.42 97.03 Close Today 1.0105 0.9896 Today 0.6585 1.5186 Previous 1.0131 0.9870 Previous 0.6588 1.5178
%Yield Gold AM PM 3.56 London Gold Fix (US) $978.50 $972.50 4.07 3.53 Spot Crude Oil -0.10 or $105.46 Future(US$) 0.01% 4.55
2. Investors see a bear, CFAs say (March 3, 2008) Sixty-five per cent of Canadian chartered financial analysts (CFAs) have described investor sentiment as decidedly bearish this RRSP season, according to a new poll. The poll of 1,770 CFAs — conducted for Business News Network — found that another 32% thought investor sentiment was flat and only 3% reported their clients were bullish
on RRSP investments. Respondents identified market volatility, uncertainty and the fortunes of the U.S. economy as the main reasons for investor worry. "Individuals are unsure in which direction to turn. There are no returns from GICs and fixed income; equities are so volatile it is making it very difficult to make comfortable investment decisions," one CFA responded in the comments section of the survey. "Personal investing isn't as much fun as it used to be." Another CFA said investors are afraid because there is a sense that problems in the credit markets could get worse before they get better: "I cannot be sure, but it is likely that the economic downturn much of the world is experiencing — and will be reflected in corporate profit declines for some time — is not fully discounted in share prices and that any share buys now could be a mistake," the CFA wrote. Jeff Young, a CFA and vice-president of investments for NexGen Financial, says the survey shouldn't necessarily be viewed as what CFAs think about the current investing climate as much as what they are hearing from their clients. Having said that, he says, there is a lot to worry about right now. "In the current environment, there are a lot of issues out there, particularly in the financial sector. People are worried about land mines on balance sheets and how to properly value a lot of bank holdings," he says. "When you run into a problem where banks have capital issues, you tend to see a tightening in lending. Lending is integral to growth in the overall economy. I think it's with good reason people are bearish on the economy." Young says the recognition that there is a problem in the financial markets has spurred central banks into action to fix the problems, but he's not sure if we've seen the bottom of the financial sector's credit woes yet. "From a market perspective, the central banks in Canada and the U.S are aware of the problems and have conducted very aggressive cutting to try to get ahead of the curve," he says. "If we could get some resolution on the financial sector, then I think people would be a lot more comfortable. It's worrying for people when they see a write-down here, followed by another write-down there." Cautious sentiment has not yet forced CFAs to advocate moving away from equities. More than two-thirds of respondents (67.7%) say that investors should favour equities over other asset classes — although it should be noted that a number of respondents felt that this question was too broad and that an asset class suggestion should correspond to the specific needs of an investor. 3. BoC slashes rates, hints at more cuts (March 4, 2008) The new governor of the Bank of Canada, Mark Carney, has made his first interest rate announcement, slashing the key overnight rate by 50 basis points to 3.5%. While the economy had unfolded as expected throughout 2007, the Bank said in a statement that "there are clear signs that the U.S. economy is likely to experience a deeper and more prolonged slowdown than had been projected in January." The threat of the U.S. downturn spilling across into Canada was deemed sufficient to cut rates. The Bank also suggested that further rate cuts were in the offing and could come as early as the April 24 Monetary Policy Report. "The Bank now judges that the balance of risks around its January projection for inflation has clearly shifted to the downside, and, as a result, the Bank is lowering the target for the
overnight rate," BoC said in its statement. "Further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to achieve the 2% inflation target over the medium term." 4. TFSA sparks little innovation...for now (March 5, 2008) With the federal budget passing first reading in the House of Commons on Tuesday, product providers now have to start the process of building the ideal tax-free savings account (TFSA) solution for 2009. The problem is, with contribution room building at only $5,000 per year, it will be a while before the TFSA will really add much to their business. As it stands, the TFSA is not a very lucrative proposition for fund companies who prefer to deal in multiples of tens of thousands if not hundred of thousands of dollars. Until an investor's contribution room grows to a larger amount, say 10 or 15 years down the road, it doesn't offer much benefit to the manufacturers. In addition, during the early days of analyzing the TFSA, there isn't any consensus on how the account should be used in an overall financial plan. If investors could deduct capital losses — which they can't — it would be an ideal high-yield investment shelter, where investors would be more comfortable gambling some of their savings to earn hefty tax-free capital gains. On the flip side, the contribution cap restricts its value as a tax-free income-generating vehicle. "Five thousand dollars a year is not a large enough amount in my view," says Don Reed, CEO of Franklin Templeton Investments. "The issue you are dealing with here is that every investor has different objectives. If you can take gains out of an account tax free, some will want to have some aggressive investments and others will want to have some income-oriented investments. It's going to vary, based on the risk tolerance of the investors." Reed says the TFSA is too varied in its usage to consider launching a product lineup specifically designed to cater to it. "The TFSA should be part of everybody's plan. I've got a fair amount of money invested in mutual funds, so I'll probably set up an account once it becomes available in 2009. I'll just direct $5,000 to that account," Reed says. AGF Funds plans to consult with its advisor network to see where the demand lies before determining where product opportunities are. Randy Ambrosie, president of AGF Funds, hosts "360 degree" dinners with advisors in which he directly engages them in conversation. He anticipates that the TFSA will be a hot topic. "I think where we are focused with the TFSA is how advisors will use them. Let's go back to advisors and ask questions," he says. "How are you going to use these now? How are Canadians integrating this vehicle into their financial plan? What kind of products do you think will be most appropriate? How can we help you help Canadians?" Like Reed, Ambrosie doesn't see anything significant in the works over the short term. Over the long term, though, he notes that it could have an impact on funds, such as taxefficient corporate class funds, which create a sheltered income. "In the short to medium term, I doubt if the TFSA will have much if any significant impact. There will be some subtle impact we might be looking for," he says. "The appetite for tax efficiency is growing. There is always going to be a lot of money outside
of registered plans, and now [that's the case for] the new TFSA as well. That is an area we are always going to have to find solutions for." Reed thinks his company's T-series funds should remain appealing until clients start to build six-figure contribution space in the TFSA. "I would say this is definitely not going to remove the benefits of T-series — not for one second. Even down the road, it's unlikely it will do that," he says. "With T-series, put $5,000 in in year one, and you got a 10% return. Are you going to want to withdraw $500? The answer I would say is no. Now, if you have $200,000 dollars in there, the answer is yes." 5. Energy's run isn't over: Rubin (March 5, 2008) Despite Canada's proximity to the economically troubled USA, there's no need for Canucks to take a "defensive posture" when it comes to investing, says Jeff Rubin a chief economist at CIBC World Markets. "There is more than sufficient momentum in both energy and materials stocks to warrant stock market exposure in the here and now," says Rubin. He adds that even with talk of a recession south of the border, the economies of Canada and the U.S. have decoupled enough that we can invest more confidently than in previous months. To prove his point Rubin explains that the gap between globally driven resource stocks and poor performing housing stocks "grows wider by the month." He says the TSX is pulling far ahead of the S&P 500 and that "within the TSX, energy and financial stocks continue to head in the opposite directions. We are betting that those trends will persist." Because of the increasingly good prospects for the Canadian economy, Rubin raised his oil price forecast by $5 per barrel this year to an annual average of $100. He's adjusted next year's price to $110. Rubin also says natural gas will hit $9.50 per million BTUs this year and $11 in 2009. "Oil prices seem now firmly entrenched in triple-digit territory," says Rubin. "[It's] a level from which they are unlikely to retreat, and natural gas prices have rallied as strong utility demand has eaten into once-bloated U.S. storage levels. "A tandem of $110 crude oil next year and $11 natural gas prices will support solid earnings gains while at the same time spurring increasing M&A activity in the sector," he explains. The economist is optimistic enough about the future of energy stocks to increase his "already overweight" position in the sector by 1%. But in order to do that he has to cut his stake in financials by 1%. The move away from financials is based on worries about future declines in U.S. housing prices and the likelihood of increased mortgage default. As for materials, Rubin remains overweight, specifically in base metals and gold components. "The U.S. economy has not contributed to demand growth for most major metals including aluminum, copper, zinc and nickel, while the Fed's ultimate pursuit of a sub-2% federal funds rate will weaken the U.S. dollar and send gold prices to $1,100 per ounce," he says. He recommends an underweight position in the consumer discretionary and telecom sectors — both of which are underperforming the index — and in industrial stocks, which are "vulnerable both to Canadian dollar-related stresses and a further deterioration in broad U.S. economic conditions," he says.
Bonds are another area where Rubin's Strategy Portfolio is overweight. He expects a 75 basis point interest rate cut from the Bank of Canada as a response the Federal Reserve Board's rate cuts and the hurting manufacturing sector. With more positive news coming our way, Rubin says the S&P/TSX Composite will hit 14,500 by the end of the year, and 16,200 by the end of 2009. 6. RRSP not a priority for most Canadians (March 6, 2008) Another poll has come out saying most Canadians aren't investing in their RRSPs. This time Investors Group is reporting that only 37% of eligible Canucks made contributions during the 2007 tax year. To make matters worse, RRSP contributions have decreased 5% from last year. Among those who did pay into their savings plans, 83% invested the same or more than they did in 2006. "Many Canadians seem to have taken a 'wait-and-see' approach due to current volatility in the stock market," says Debbie Ammeter, vice-president, advanced financial planning support at Investors Group. "Delaying your RRSP contribution while you wait for more favourable conditions may seem logical at the time, but it actually costs you money in terms of lost investment days." The IG poll also found that 26% of those surveyed chose to "park" their RRSP contributions this year by investing in short-term and typically low-risk, low-return vehicles such as bonds and money market funds. Half of those who park the funds do so for more than a year and a half, while the other 50% do it for less than 12 months. The company says "parking" can be a short-term solution in some cases, but more often than not, it hurts investors in the long run. "Parked funds are like an idling car — they're in neutral and not earning the return they should," says Ammeter. "Left unattended for even for a short period of time, they're a missed opportunity, one that underscores the importance of working with a financial planner to develop a longer-term investment strategy." The survey also found that 53% of Canadians who made an RRSP contribution spoke to a financial advisor about their savings plan. 7. U.S. consumer sentiment sours (March 7, 2008) Consumer sentiment continues to worsen south of the border, as house prices melt and energy costs spike, according to the latest reading of the RBC Consumer Attitudes and Spending by Household (CASH) Index. The overall consumer sentiment reading tumbled from 48.5 in February to 33.1 for March. "The U.S. consumer, who has carried the economy for the past half-dozen years, is in full defensive mode, battered by falling housing values, spiking food and energy prices, tightening lending standards, the teetering stock market and hints of weakening in the labour market," said T.J. Marta, economic and fixed income strategist for RBC Capital Markets. The index is composed of four sub-indexes, measuring attitudes toward current conditions, expectations, investments and employment. The latest drop in confidence was driven largely by consumers' expectations for the future. Thirty-five percent of those surveyed expect their local economy will be weaker in six months time, compared to 28% in February.
Forty per cent said their local economy was already weak, while 67% said the next six months would be a bad time to invest in stocks, and 62% said it would be a bad time to invest in real estate. Only 28% of Americans said they were confident about their personal employment situation, down from 32% in February. Have a nice and fruitful week!