In this weeks issue by fionan


									In this week’s issue:

1. Market closes for Friday, January 30, 2009
2. Maybe it's a "reset" but it's not a depression
3. Budget 2009: Tax cuts aimed at middle class
4. Bankruptcies on the rise
5. History suggests a bright future: O'Shaughnessy
6. Canadian GDP worse than expected
7. TD backs down on "inactivity fee"

1. Market closes for Friday, January 30, 2009:
          Close            Change                YTD
Dow Jones 8,000.86         -148.15 or -1.82%     -8.84%
S&P 500   825.88           -19.26 or -2.28%      -8.57%
NASDAQ    1,476.42         -31.42 or -2.08%      -6.38%
TSX COMP 8,694.90          -67.86 or -0.77%      -3.26%

         Close          Change            YTD BoC Open             Today     Previous
Nikkei   7,994.05                             Canadian $
                        -257.19 or -3.12% -9.77%                   0.8153    0.8175
Hang                                          US $                 1.2265    1.2233
         13,278.21      +123.78 or +0.94% -7.71%
SENSEX 9,424.24         +187.96 or 2.04%       Euro
                                           -2.31% Spot Rate Today            Previous
FTSE 100 4,149.64       -40.47 or -0.97%       Cdn
                                           -6.42%           0.6367           0.6306
CAC 40 2,973.92         -35.83 or -1.19%       Euro
                                           -7.58%           1.5705           1.5857
DAX      4,338.35       -89.76 or -2.03%   -9.81%

Bonds                   $Current   $Previous     Gold
                                               %Yield                 AM      Previous
Cdn. 10-year bond       109.86     109.71      3.03                           PM
Cdn. 30-year bond       121.85     121.05        London Gold Fix
                                               3.74                   $918.50 $919.50
U.S. 10-year bond       107.64     107.47        ($US)
U.S. 30-year bond       116.17     115.78      3.60
                                                 WTI Crude           $41.64 +$0.20 or
                                                 Future($US)                +0.48%

2. Maybe it's a "reset" but it's not a depression
(January 26, 2009) Today's economic environment is difficult, but it's not the start of a
depression, according to two of Invesco Trimark's senior portfolio managers, who say
while there's no way to sugarcoat the severity of this downturn, it's nonetheless rife with
opportunity for shrewd stock pickers.
Dana Love, vice-president at Invesco Trimark and the lead manager of the firm's flagship
Trimark Fund, says many managers are now referring to the 2008 downturn as a reset.
Speaking to the Invesco Trimark's Portfolio Manager Forum in Toronto, Love was
adamant he has no idea what's going to happen in the near term, and he strongly
suggested that nobody at this point can accurately forecast what is going to happen with
"You can gather enough data in this market to make whatever argument you want," he
says. "There is no one single entity in the world right now that can solve the problems on
their own."
Instead, Love says a global restructuring of the financial system is taking place. Much of
the run-up in the markets has been due to the leverage and debt that inflated asset prices.
As the world de-leverages itself from this debt, it is, in a very real way, structurally
resetting itself.
"The structure of the global financial system is changing as we speak," he says. "Within
the last 25 years, we've had this broad trend of a rising market, increasing productivity,
relatively low inflation rates, stable monetary policy rates, increased risk taking and all
these things have led to uniform increases in asset prices across all asset classes. If you
look at the 25 years, you view this as a hiccup; you buy on the dips — because over the
last 25 years buying on the dips was a strategy that worked."
Love says there's a growing view that the last 25 years was an aberration in stock market
performance, fueled in part by the massive amount of leverage in the markets.
"If you look at a much longer period of time, such as 80, 100 or even 200 years of
financial history, you can see that the last 25 years have been the outlier," he says. "If
what we are doing is resetting, as some people are suggesting — which are some very
bright business leaders — then we all need to reset our expectations. If we are resetting to
a lower level, and have to re-grow from that lower level, we may have to reset our
expectations for the next quarter century."
Love emphasizes that for long-term investors this is actually a positive development. The
Trimark investment discipline is focused on bottom-up selection, buying individual
businesses at discounted values. The present market is offering historical opportunities
for this stock selection process, he argues.
"Different doesn't mean worse. It just means we think a little bit differently and frame
things a little bit differently," Love says. "This isn't something that is measured in months
or quarters; it's likely to be measured in years."
He says the economy may have to start to improve for people to even gain a sense of
confidence before they return to the market.
"Right now is the best time to buy some of the very best businesses ever created, as long
as you're not too picky about what happens in the short term," he says. "We've been
mostly focused on upgrading the quality of the companies in the portfolio. That means
making some hard decisions, so portfolio turnover is probably higher than you're used to
seeing with the Trimark discipline. Usually we have to be very selective, because there
are only a few companies at any given time that meet our portfolio selection criteria."
He adds, "Nobody knows when things are going to improve. The good news is that if
you're a buyer of good businesses and you're not doing any sort of tactical or strategic
allocation between sectors, you can make money. Given the abundance of opportunities
across all sectors, we're actually able to cherry-pick the best businesses wherever we find
them across different industries."
A thesis being thrown out by the pessimistic is that another Great Depression is
imminent; a doomsday scenario for stock investing that would make buying now a very
bad idea.
Rob Mikalachki, vice-president and portfolio manager for Trimark's small cap mandates,
such as the Trimark Canadian Small Companies Fund, says that if an advisor can take the
emotion out of what's happening, most clients will realize circumstances are nowhere
near where they were during the Great Depression.
Unemployment during the Depression was 25%; today it's 7.2% and rising, but there are
no indicators to suggest one in four adult Canadians is going to be officially unemployed.
It should be noted that data for employment statistics gathering has changed in the last 70
Other indicators do not suggest anything resembling the 1930s. For example, GDP fell
30% during the Depression, while the Bank of Canada is calling for a decline of a little
more than 1% next year. Mikalachki also notes there were more than 9,000 bank failures
globally in the Depression; in the current crisis, that tally stands at 23. Also, Depression-
era depositors did not have deposit insurance we have today.
Mikalachki says, "2008 was the second-worst year on record in 183 years. When the
market bottomed last November, on a ten-year basis, this was the worst market we have
ever endured in almost 200 years of recorded years. The market was given a decent
punch and we've absorbed it."
Mikalachki places much of the culture of fear surrounding the markets squarely at the
feet of financial pundits who have been trying to outdo each other with predictions of
financial devastation.
"These economists, these prognosticators, are showmen, in a sense. That's how they earn
their income. They are not going to earn an income by being the guy that says what
everyone else is saying. It's very easy to take a single data point and look at it out of
context to support some of the crazy arguments out there."

3. Budget 2009: Tax cuts aimed at middle class
(January 27, 2009) Markets are in the toilet which means most clients with invested
assets are feeling the pinch in some way — especially if they are retired and obligated,
under federal government rules, to liquidate their assets to comply with mandatory
registered income fund withdrawals. If the budget passes, they may just get a break in
this respect.
Seniors might also benefit, marginally, from an increase in the age credit amount to
$6,408, but the big news for seniors appears to be a direct response to current market
conditions: For one time only, for the 2008 tax year, the government will reduce the
amount seniors are required to withdraw from their RRIFs by 25%. The measure was first
tabled in Parliament in November 2008.
A newer measure relates to RRSP or RRIF payments after death. Where the fair market
value of investments held in a registered plan are generally included as income when
clients die, the budget points out that "there is no existing income tax provision to
recognize a decrease in the value of RRSP or RRIF investments that occurs after the
annuitant's death and before they are distributed to beneficiaries. Budget 2009 proposes
to allow, upon the final distribution of property from a deceased annuitant's RRSP or
RRIF, the amount of post-death decreases in value of the RRSP or RRIF to be carried
back and deducted against the year-of-death RRSP/RRIF income inclusion."
Notably absent from Finance Minister Jim Flaherty's announcement today is any hint that
the government might eliminate or reduce capital gains taxes. Infrastructure spending is a
cornerstone of this budget announcement as well, but the government seems to be keen to
go it alone: Although many will likely benefit — including those employed in the
building and forestry sectors, supply chain managers, commuters, other travellers and
those using outdated university and research facilities (Flaherty says most new funding
for infrastructure projects will only be available for only the next two years while the
country's need for stimulus is greatest) — there is no mention that public–private
partnerships or other investment opportunities might be part of the equation.
That said, there are a number of new measures that will affect clients and business
Tax bracket changes
Changes to the personal income tax brackets are among the more notable developments
announced in Budget 2009. As of January 1, 2009, the two lowest income tax brackets
will be raised 7.5% above 2008 limits to $40,726 and $81,452 respectively. The basic
personal amount will also be increased to $10,320 in 2009, up from $9,600 in 2008.
This change to the lowest tax bracket could also affect those collecting income–tested
benefits like the National Child Benefit Supplement and the Canada Child Tax Benefit —
the budget proposes to apply the new upper limit of the 15% tax bracket for income
testing both, allowing lower income families to earn more before clawbacks begin — a
move that Flaherty says, "will help low and middle income Canadians and it will
stimulate consumer spending."
Additional Support to Low-and Middle-Income Families with Children
Example-Single Parent with Two Children-July 2009 to June 2010
                                                   Existing         Additional
                                                   Benefits         Benefits        New
Family Income
                                                   NCBs CCTB NCBs CCTB
$20,000                                            $3,913 $2,680 $0         $0      $6,593
$25,000                                            $3,181 $2,680 $436       $0      $6,296
$30,000                                            $2,031 $2,680 $436       $0      $5,146
$35,000                                            $881    $2,680 $436      $0      $3,996
$40,000                                            $0      $2,633 $166      $47     $2,846
$45,000                                            $0      $2,433 $0        $76     $2,509
$50,000                                            $0      $2,233 $0        $76     $2,309
Note: Totals may not add due to rounding.
TD vice-president and deputy chief economist, Craig Alexander said, "as you go up the
income scale, the amount you tend to consume out of every dollar you earn diminishes.
People who earn a lot of money only spend a fraction of what they earn and they have
significant savings. At the low end of the income scale, people who have very modest
income spend almost everything that they earn. If you want to boost spending, reduce the
impact of how much goes to savings, the people you should target are people with the
most modest income." Also, he says, those at the low end of the income scale have huge
effective tax rates because of their reduced access to government programs. "Your
effective tax rate is enormous for those individuals. That's really unfair and it also tends
to diminish their willingness to participate in the labour market. So for a number of
reasons, both economic and social, I think the government should target tax cuts for low-
income Canadians as opposed to mid-income Canadians."
Business owners
Businesses and small business owners also have a few reasons to be cheery. Small
business owners will benefit from an increase in the amount of small business income
eligible for the reduced federal tax rate of 11% — changes announced raise the current
limit of $400,000 to $500,000 as of January 1. Those planning business investments will
also be helped by plans to extend temporary measures that allow companies to write off
investments in machinery and equipment.
According to budget documents, the capital cost allowance (CCA) system determines
how much of any capital asset costs can be deducted each year for tax purposes. "The
government's approach has generally been to set CCA rates so that the deduction for
capital costs is spread over the useful life of the asset," say the budget's authors.
Budget 2009 proposes temporary increases in CCA rates for computers and machinery
and equipment used in manufacturing or processing, to provide "economic stimulus and
assist Canadian businesses during this challenging economic period."
The measures include a move to create a temporary 100% capital cost allowance rate for
computer hardware and systems software acquired after January 27, 2009 and before
February 1, 2011. For manufacturers, the budget proposes to extend measures announced
in the 2007 and 2008 budgets that gave business in manufacturing and processing sectors
a 50% straight-line accelerated rate for eligible assets acquired during a certain period of
time. Budget 2009 proposes to extend the rate to investment in machinery and equipment
made in 2010 and 2011 as well.
"Canadian business must be free to reinvest. In our last two budgets our government
temporarily accelerated the capital cost allowance treatment of investments in machinery
and equipment," Flaherty says. "We will extend the 50% straight-line accelerated capital
cost allowance rate by two years."
Other proposed initiatives that affect business owners include:
Reduced Employment Insurance premium rates to $1.73 per $100 of insurable
earnings, their lowest level since 1982.
A repeal of section 18.2 of the Income Tax Act. This section is scheduled to come into
force in 2012 and will affect businesses by constraining the deductibility of interest in
certain situations in which a Canadian corporation uses borrowed funds to finance a
foreign affiliate. "Early action is being taken in relation to the panel's recommendation
concerning section 18.2 because of the conclusions of the panel on the potential effects of
the provision on foreign investment by Canadian multinational firms, particularly in the
context of the current global financial environment. Accordingly, it is proposed that
section 18.2 be repealed."
Increasing access to credit for small business through proposed amendments to the
Canada Small Business Financing Program and the Business Development Bank of
Home-buying and home ownership
First-time home-buyers who are eyeing the market, and those interested in making
renovations in the next year or two, are also on the government's thoughts this year. To
encourage home ownership and home construction, the finance minister proposes to
increase the amount first-time homebuyers can withdraw from their RRSPs to purchase
or build a home — from $20,000 to $25,000. It also proposes to establish a first-time
homebuyer's tax credit which could amount to $750 worth of savings on closing costs.
The second "limited-time offer" being offered up in this budget is a temporary home
renovation tax credit. Until January 31, 2010, this proposed measure will provide tax
relief for home renovation costs. Once calculated on a client's 2009 tax return, the
savings could work out to $1,350 for each family.
Flaherty says the home renovation credit is available for any project. "Everything from a
new furnace to energy-efficient windows to a new deck" at the house or cottage is
eligible. The credit can also be claimed in addition to support from existing government
energy retrofit programs and the medical expense tax credit.
Other measures
Finally, additional measures announced today include but are not limited to, a new
extension to mineral exploration tax credits, the establishment of a new Clean Energy
Fund to support research, development and demonstration projects, possibly in areas of
interest to green investors, protection for workers when employers go bankrupt and
changes to employment insurance provisions.
Flow through shares could get an extra boost by way of a one-year extension in the
existing 15% mineral exploration tax credit (the shares allow companies to renounce or
"flow through" any tax expenses associated with Canadian exploration activities to
investors, who deduct the expenses when calculating their own taxable income). The
mineral credit, first introduced in 2000, is currently scheduled to expire at the end of
March 2009.
"In light of global financial conditions and the important role of the mining sector in
Canada, Budget 2009 proposes to extend eligibility for the mineral exploration tax credit
for one year, to flow-through share agreements entered into on or before March 31, 2010.
Under the existing 'look-back' rule, funds raised in one calendar year with the benefit of
the credit can be spent on eligible exploration up to the end of the following calendar
year. Therefore, funds raised with the credit during the first three months of 2010 can
support eligible exploration until the end of 2011."
Bankrupt employers can cause significant financial strain for many when their
underfunded pension plans are left behind as well. To address this possibility, plans
announced will extend the Wage Earner Protection Program to cover severance and
termination pay. The program currently provides guaranteed and timely payment of
wages and vacation pay owed to eligible workers if employers fail to pay after declaring
bankruptcy. Currently this assistance is worth $3,254 per person.
Maternity and parental benefits for the self-employed are also likely to be examined in
the future as a result of this budget announcement. According to documents, the Minister
of Human Resources and Skills Development will be asked to establish an expert panel
that will consult Canadians on how to best provide self-employed Canadians with access
to EI maternity and parental benefits. "These benefits could help self-employed parents to
better balance work and family responsibilities and give them the opportunity to spend
more time with their newly born or adopted children."

4. Bankruptcies on the rise
(January 29, 2009) The slowing economy has led to increased bankruptcies in Canada,
according to consumer credit rating agency Equifax Canada. The number of bankruptcies
has increased by 9% year-over-year, to 109,068 at the end of November 2008.
"Unfortunately, our latest data illustrates that the weaker economy coupled with high
personal debt levels has led to an increasing number of consumers declaring bankruptcy,"
said Nadim Abdo, vice-president of Equifax Consulting Solutions.
Not only are more consumers declaring bankruptcy, but the average loss resulting from
the filing has increased to $33,000 (excluding mortgage debt) for October and November.
In January 2008, the average loss was $31,000.
While all parts of the country are seeing an increase, some are holding up better than
others. In the west, the number of bankruptcies increased 4.2% in the first 11 months of
2008. In Ontario, the increase was 10.5%.

5. History suggests a bright future: O'Shaughnessy
(January 30, 2009) If investors truly believe that "this time it's different," they need to
understand that they are betting against almost 200 years of market performance, says
Jim O'Shaughnessy, the Connecticut-based star fund manager renowned for his
quantitative investment philosophy.
O'Shaughnessy, chairman and CEO of O'Shaughnessy Asset Management, who manages
a number of popular mandates for RBC Asset Management, lets the numbers dictate his
investment strategy. He points out that, in more than 100 years of U.S. market data, long-
term stock market returns always come back to their mean, an annualized compounded
7% real rate of return.
If historical numbers are a reliable guide, as things have gotten worse, market prospects
have drastically improved.
"The challenge we have as investors is to take the behavioural aspect of people into
consideration. Everyone I've talked to — and I talk to a lot people — is terrified; they
have the inability to unstick themselves from what has recently happened, and have the
inability to recognize that a) this has happened in the past and b) we are not unique in our
situation," O'Shaughnessy says. "Human beings buy securities. Things move in and out
of fashion. There is a business cycle, and you cannot repeal that business cycle."
O'Shaughnessy says recent research into the 19th century shows the same pattern:
regardless of global economic circumstances, business cycles and therefore stock returns
drive back toward the same mean.
As cycles go, the early part of this one has been the worst in history, he says, meaning the
prospects for the next 11 years of investing seem very appealing. Even if the stock market
were to have a healthy compounding real rate of return of 6%, this rolling 20-year period
of stock returns would still finish off as the worst in history.
"What I found is if the stock market beginning this year starts to compound at 6% real
rate of return through December of 2019, the 20-year annualized real rate of return would
be 1.9%, ten basis points lower than the lowest 20-year period ever recorded, which
ended in 1949," he says. "I do not believe the current economic circumstances warrant
that type of conclusion."
He adds, "If you look back to the early 1930s, the United States had 25% unemployment,
GDP declined by 33%, and land values were cut in half. The Federal Reserve contracted
the money supply by 80%. Clearly, none of those are present. Yes, GDP will slip,
unemployment may get to 10%, but the Fed, far from contracting, is expanding and is
serving as the lender of last resort."
As a man who will let only math dictate his investment decisions, deduction then
suggests that a 6% return is the baseline prediction for the next 11 years of stock returns.
Given that economic conditions don't seem as dire as they were in the Great Depression,
he says it wouldn't be unreasonable to expect double-digit returns.
Few investors share this unbridled optimism right now — it feels different for them —
but O'Shaughnessy has maintained for years that they were spoiled over the last 20-year
rolling cycle of returns that ended in 2000, which were the best in history.
"In March of 2000, there was nary a negative story on the market anywhere. Everyone
felt like an heir to a glittering throne. The U.S. had a surplus; it had destroyed the USSR,
the biggest superpower in the world. Everyone thought their birthrights were returns of
15% to 20%," he says. "There are 200 years of data suggesting that in fact what happened
is that the market reverted down to its mean. If you invested a dollar in the S&P 500 in
2000, when you strip inflation away, it is worth 50 cents today."
At the turn of the millennium, O'Shaughnessy was ridiculed in some corners for
predicting 3% to 4% annualized returns for the coming years. Ironically, this prediction
ended up being overly optimistic. O'Shaughnessy concedes that even he didn't anticipate
the eventual carnage of this decade, but this only strengthens his conviction that things
will get better.
"Back at the turn of the century, we were forecasting 3% to 4% annualized returns and
everyone thought we were barking mad because they were expecting 15%," he says.
"Well, if you compounded at a 12% real rate of return from now until the end of 2019,
you'd still only turn in a real rate of return of 3.3%. From our perspective, because of the
damage happening so early in the game, we expect the market will certainly deliver 6%
and 12%.
Even more interesting are the short-term prospects for the markets, O'Shaughnessy notes,
because historically the returns on stocks have realized phenomenal gains not too long
after a devastating correction. In examining the 12 worst periods of ten-year returns,
O'Shaughnessy says they were always followed by years with positive returns.
On average, the year after one of those worst-12 periods, returns were 25.8% for that
year. After three years, returns compounded annually at 11.46%, five years later they
compounded at 13.49% and finally ten years later they compounded at 10.75%," he says.
"We have beta back to 1900 on U.S. stocks, on an annual basis. When you look back to
1900, there were only three decades that provided negative returns to investors. The first
decade was 1910 through 1919, the second decade was 1970 to 1979 and, barring a
miraculous 100% to 200% rally this year, the [third is the] decade of 2000 to 2009."
Of course, each of those preceding two periods were followed by historically strong bull
markets: the Roaring Twenties and the 1980s.
Not surprisingly, O'Shaughnessy is loading up on equities.
"I don't often say this, but this is buy-everything time," he says. "We do think the
prospects for a couple of strategies are superior. One area is large cap growth stocks,
since they have been down 70% in the last nine years. Another area is small cap value.
We think that, given the hit that small cap value took in the last quarter in 2008. Small
cap value has been the best asset class bar none and our expectation is you'll see that
coming back strongly."
He remains very upbeat on quality dividend stocks.
"These dividend stocks are a godsend to conservative investors. We are buying stocks on
their dividend yields, making certain they are market-leading companies. We define a
market-leading company as having a market cap, shares outstanding and cash flow all
greater than average. In addition, these companies have sales or revenues greater than
50% [more] than average. If you apply that criteria to companies in a universe that holds
about 8000 names, that gets you down to about 340 names."

6. Canadian GDP worse than expected
(January 30, 2009) The Canadian economy contracted 0.7% in November, according to
the latest data from StatsCan. That's almost double the rate of contraction expected by
economists, with a consensus estimate of 0.4%.
In October, the decline had been just 0.1%.
"The combination of the fall's intense financial market volatility and the deepening global
downturn caught up with Canada big-time in November," wrote BMO Nesbitt Burns
deputy chief economist Douglas Porter. "After largely skating above the fray for a spell,
the economy clearly reached a breaking point late last year."
Porter said that when December's data is released, he expects Canadian real GDP will be
roughly in line with that of the U.S. for the fourth quarter.
"By the same token, Canada will have to look south for the first inklings of recovery, and
that awaits the second half of this year...if everything goes right," he wrote.
So far, things don't look so good south of the border, where real GDP contracted by 3.8%
on an annualized basis in the fourth quarter. There is some good news, however: That
beat consensus estimates of a 5.5% decline for the month of December alone.
"Despite the better-than-expected print on U.S. economic activity, the fact remains that
the U.S. economic recession intensified in a fairly dramatic fashion in Q4," wrote TD
Securities economics strategist Millan Mulraine. "And with the financial sector turmoil
and labour market woes likely to continue for some time, we continue to believe that a
recovery in economic activity remains some way off, with the recession expected to drag
well into this year."

7. TD backs down on "inactivity fee"
(January 30, 2009) The customer has spoken and the bank has listened. TD Canada Trust
has announced that it will not charge its customers an inactivity fee for unsecured lines of
The new fee was slated to kick in at the end of April and would have seen clients tapped
for $35 simply for the privilege of having the line of credit.
The negative feedback was so overwhelming that the bank has committed to introduce no
new fees or fee increases on personal and small business banking products, through to the
end of 2009.
"We've been listening to the concerns our customers and employees have been
expressing, and we believe that this commitment is the right response in the current
environment," said Tim Hockey, president and CEO, TD Canada Trust. "We recognize
that times are challenging for many people right now. Holding the line on fees is one
tangible way of helping."
Have a nice and fruitful week!

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