A Yen for Canada?

Monday, January 18th, 2010

Back in September I wrote Canada on the Cusp of Something Big outlining my case about the Canadian economy, markets, and loonie. My central argument then, and now, was that Canadians need to get in front of the “invest in Canada,” theme before foreigners do. Sound fiscal policy, strong, well capitalized banks, a productive commodity complex, and our good-old-fashioned brand of conservatism, continue to make Canada the leading destination for investors, both on the domestic front, and internationally, in the G7.

There is more to the Canada story than meets the eye. The fundamentals, are only half the story, and relevant, particularly for the longer term outlook . What matters equally in the near and long term, however, is what is going on behind the scenes in the proprietary institutional and hedge fund trading rooms.

Read the whole article here.

Pierre Daillie (AdvisorAnalyst.com), GlobeAdvisor.com, January 18, 2009

Tags: Advertisement, Banks, Canada, Canada Story, Canadian Economy, Canadians, Central Argument, Commodities, Commodity, Conservatism, Cusp, Foreigners, G7, Globeadvisor, Half The Story, Hedge Fund, Investors, Sound Fiscal Policy, Term Outlook, Yen
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Rosenberg: Is the Canadian Housing Market in a Bubble?

Thursday, December 10th, 2009

In today’s Breakfast with Dave, Rosie discusses the Canadian housing market:

It sure looks that way. At a time when personal income is down around 1% in the last year, we have seen nationwide average home prices soar 21% and last month hit a record high, as did sales. In real terms, home price appreciation is back to where it was in 1989. Of course, back then, interest rates were far higher but then again, the economy was in the late stages of a phenomenal multi-year economic expansion, not making a transition from deep recession to nascent recovery.

While the Canadian economy is recovering, overall growth is still barely above zero as manufacturers grappled with excess inventories, a strong currency and a soft domestic demand picture south of the border. Employment conditions have improved, but are hardly that healthy, as we saw in the November jobs report where wages and the workweek were both down despite a constructive headline number (half of which were in the education sector, an inherently difficult area for statisticians to adequately seasonally adjust).

In answer to the question as to whether prices are in a bubble, all we will say is that when we ran some models showing Canadian home prices normalized by personal income or by residential rent, what we found is that housing values are anywhere between 15-35% above levels we would label as being consistent with the fundamentals. If being 15% to 35% overvalued isn’t a bubble, then it’s the next closest thing. We are talking about 2-3 standard deviation events here in terms of the parabolic move in Canadian home prices from their lows. So if it walks like a duck …

Source: Breakfast with Dave, Gluskin Sheff, December 10, 2009

Tags: Canada, Canadian Economy, Closest Thing, David Rosenberg, Economic Expansion, Education Sector, Employment Conditions, Excess Inventories, Gluskin Sheff, Headline Number, Home Price Appreciation, Housing Market, Lows, Market Musings, Personal Income, S Market, Standard Deviation, Statisticians, Target, Textcolor, Workweek
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Canada’s IMF Upgrade an Important Sign Post

Friday, October 2nd, 2009

Canada’s GDP growth outlook got an upgrade from the IMF this week thanks in part to the outlook for commodities prices, as well as global demand coming from the developing world, in particular, China and India. Yesterday, we discussed the outlook for China and India in Mobius, Rogers, and IMF Love China.

Bloomberg reports: Canada’s economy will grow more in 2010 than previously forecast and shrink more in 2009, helped by commodity prices that have rebounded ahead of a global recovery, the International Monetary Fund said in its World Economic Outlook report.

The U.S.’s biggest trading partner will contract 2.5 percent in 2009 and grow 2.1 percent in 2010, the IMF said today. The IMF had predicted in July the Canadian economy would shrink 2.3 percent this year before rebounding to 1.6 percent in 2010.

“The recent rebound in commodity prices and reduced reliance on manufactured products have helped exports,” the report said. Canada exports oil, natural gas, metals and other commodities.

The IMF upgrade is an important signpost, and on its own, its great news, but it is actually far more important than it appears at first. As local investors, we tend to focus more on how we feel locally. You have to also pay close attention to Canada’s attractiveness to foreign investors.

Last week, we discussed the idea that China and BRIC peers may not be interested yet in investing in Canada Bonds, even though they are an ultra-safe alternative to US Treasuries, because the by-product would be a higher Canadian dollar, which means they would pay higher prices for our commodities exports.

Its true, for those reasons, they may not be interested in our paper, but on the other hand, large global investors are.

Our yields are not only higher (for now), our bonds are also perceived to be inherently safer than those of the US and UK, thanks to Canada’s sound fiscal position, stable credit market, and strong, and well capitalized banking system.

Andrew Willis reports that Ontario floated $2-billion of 10-year bonds, with a 4% coupon in the US, following an offering of Canada bonds made by the Federal Government.

Ontario tapped American credit markets on Tuesday with a $2-billion (U.S.) 10-year bond offering, a financing that follows of a federal government issue in the global market.

As part of a busy week, Ontario sold debt with a 4 per cent interest rate, offering investors a 73 basis points premium over the benchmark U.S. government bond. Bank of America/Merrill Lynch, BNP Paribas, Deutsche Bank and TD Securities were the lead underwriters.

These developments continue to provide evidence that Canada is in the uniquely advantageous position in the developed world to become a powerful, and key, world financial market, as a result of its once-in-several-decades position.

The benefits are two-fold.

1. Canada’s capital market as a magnet for foreign capital, attracting large investments from global investors looking for a safe haven in both the fixed income and equity markets. Canada’s risk/reward is favourably tilted for reward given its position in the global commodity complex and economic stability.
2. Canadian companies will be among the world’s biggest producers and vendors of commodities to the emerging markets, which all face long term shortages of oil, food, water, and metals.

Its high time for Canadians to recognize that Canada is poised for superior growth during the next decade.

The perfect-storm-like convergence of the credit crisis, which has investors looking for the safest places in the world to invest, and the dramatic redistribution of wealth and economic transformation that is driving the growth of the developing world, and the resultant demand for commodities has Canada is in the cross-hairs of both.

Bottom Line: Canadian investors should view any weakness in markets as a graduated opportunity to accumulate positions in Canadian banks and key, preferably under-levered, commodities producers.

Tags: 10 Year Bonds, Andrew Willis, BRIC, Canada, Canada Bonds, Canada Exports, Canadian Economy, China, Commodities, Commodities Prices, Commodity Prices, Credit Markets, Emerging Markets, Fiscal Position, Foreign Investors, GDP Growth, Global Demand, Global Investors, Global Recovery, Growth Outlook, India, International Monetary Fund, Investing In Canada, Ntario, oil, Outlook Report, Post Canada, Signpost, Uk Thanks, World Economic Outlook
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Mobius, Rogers, and IMF Love China

Thursday, October 1st, 2009

China is getting a great deal of attention upon its 60th anniversary. This is great news for the Canadian economy and investors in Canada’s well-positioned market. Bloomberg reports today that the IMF has raised its 2010 GDP growth forecast for China to 9%. It also trimmed its forecast for India by 0.1% to 6.4% from 6.5% which is still very good, given that India has not embarked on as bold a spending strategy. The two are altogether different though. China is an economy now more equitably balanced between its exports sector and domestic spending, with domestic spending taking a near 60% share of the economy, versus 60% exports just ten years ago. India’s GDP consists of 85% domestic spending and has been far better insulated economically from the credit crisis, that the Indian parliament was not forced into providing a massive stimulus as India’s economy was not as vulnerable to a downturn in exports as China’s was. The silver lining here is that China’s bold 4-trillion Yuan (US$ 586-billion) stimulus may successfully transform China into a formidable domestically biased economy, well ahead of original expectations, from once being held as export dependent or vulnerable to export shocks.

As the year progresses though, India’s GDP forecast may get upgraded again on increased spending plans. During the course of the last year, India has begun a new political cycle, and its incumbent Congress party won a mandate in the election earlier this year. In the midst of the credit crisis in the spring, and in the midst of campaigning, India’s spending plans were criticized as being somewhat anemic as compared to China’s. In hindsight, it would have been political suicide if the incumbent party had embarked on bold stimulus initiatives when so many were fearful of the credit crisis. Don’t ignore India at China’s expense. On this basis, its very likely that the Indian government will step up spending, though on a gradual basis over the coming year, which could push growth forecasts higher for 2010. It is notable that India has a sound fiscal position and a nice and clean banking system, and a strong tradition of high savings rates.

Investors looking at investing in emerging markets should consider positions in both India and China, rather than one or the other. These are the only two economies in the world that have sustained their records of growth throughout the current crisis.

Either way, if you choose not to invest directly in India and China, this is good news for the commodities complex, and its good news for Canadian investors taking exposure in the commodities sector.

Mark Mobius says China is his top pick among the emerging markets:

Jim Rogers says he likes China for the next 60 years:

HSBC CEO, Sandy Flockhart says China is the strategically the most important market to HSBC:

Tags: 60th Anniversary, Canada, Canadian Economy, Ceo, China, China China, China Economy, China Mark, Commodities, Congress Party, Credit Crisis, Domestic Spending, Downturn, Emerging Markets, Gdp Forecast, GDP Growth, Great News, Hindsight, Imf, Incumbent Party, India, India Economy, India S Economy, Indian Government, Indian Parliament, Jim Rogers, Love, Mark Mobius, Mobius, Political Suicide, Sandy, Silver Lining, Stimulus
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Canada on the Cusp of Something Big - Forget about inflation for now

Friday, September 25th, 2009

Canada is on the cusp of something big. A boom in commodities means Canada will outperform the US over the next decade. Our recovery and upward trajectory is tied to global demand coming from China and India, and the rest of the developing world. And with attractive risk/reward fundamentals, sound fiscal position, and strong banking sector, Canada  is destined to become a darling of global investors. At this time, Canada resides in a sweet spot of long term investing opportunity, but not for the one reason - inflation - that gets cited most often. Not yet anyway.

Mark Carney says Canada’s economic recovery is merely a ‘consequence’ of  unconventional measures. And, his report cites that prices are still falling in Canada.

This flies in the face of all the hoopla surrounding the inflation-motivated theme of investing in commodities and/or commodities producers. Investing in commodities producers is by no means a bad idea; its the rationale for doing so, by way of inflation, that may be flawed. Investing in commodities falls under the aegis of inflation protection, because if indeed we find ourselves in inflationary times again, we will be happy to own real things, such as commodities and real estate.

In the U.S. however, is it really a big surprise that the G20 meeting is yielding a “strong dollar” consensus? China, and other dollar reservists, Brazil, Russia and India, have been squawking about the faltering greenback, threatening to take measures to reduce its appetite/dependency on the US dollar since before the crisis began. If you listen to the Michael Pettis interview regarding China, you’ll get the idea very clearly that China is in no position to undo its marriage to the US. At least not anytime soon. Un-pegging from the greenback would have destabilizing consequences for China, not too mention the global economy, if not because of its effect on China, then due to its effect on the US economy. The US/China relationship is a  symbiotic one. In the meantime, we will watch the U.S./China economic ballet continue.

Therefore, as the G20 has reached a strong dollar consensus, the Canadian, Aussie and NZ dollars have all pulled back. It preserves balance for the dollar, yen and euro economies, and more importantly it keeps everyone happy politically. As for the Canadian dollar rising in value, it’s not a good development for the Canadian economy, but rather a by-product of the demand for what we produce. Its terrible for our non-commodity exports. So, balance works for us too, in the long run.

Kathy Lien: The Canadian Dollar tumbled against the greenback as investors took profits ahead of G20 meeting. Oil prices also fell more than 4 percent while gold prices closed below $1000, providing no support for the commodity currencies. The Canadian government returned to easier monetary policy after Canadian Finance Minister Jim Flaherty proposed an expansion of mortgage buy-backs to C$125 Billion or $116.4 Billion. The proposal comes on the midst of yesterday’s comments by Governor Mark Carney who claims the recovery is not “self-sustainable” and is a mere consequence of unconventional measures. If they proceed further with this, we could see a turnaround in the Canadian dollar.

In What is Gold to China?, we discussed the idea that gold is a safer long term bet as a result of the “Beijing put,” the notion that whenever gold falls to lower levels, the Chinese come in as strong buyers, bidding gold back up, as they are continually out to diversify their reserves into other currencies. Its all part of a symphony of intervention that is choreographed between the US, Europe, the IMF, Japan, and China to keep the dollar in a fundamentally stable range. Having said that, this too, benefits Canada as one of the world’s biggest gold producers, despite the fact the price of gold is subject to the manipulation of central bankers.

In that vein, Canada, as important as it is in today’s world, is along for the ride. Our recovery will depend upon a stable global recovery determined by steady interest rate policy and coordinated currency balancing.

Herein lies the opportunity; we just need to recognize it, and get our (long-term) peas lined up.

Canada really is the best thing going in the G7. We’ve written about this in the last two weeks in Canada: There’s no place like home, and Canada’s Universal Appeal and Advantage.

The long-term rationale for investing in Canada

Canada has what the world needs (resources), a sound fiscal position, and a strong banking system - So why haven’t the dollar reservists chosen to invest in Canada bonds, as an ultra-safe alternative to US Treasuries? Simple.

Canada has so much of what the reservists (BRICs and other emerging economies) need and want in order to build out their own economies, that investing in our debt would raise the price of the very things they want to buy from us, such as wheat, oil and gas, metals, and minerals. They are not just interested in importing commodities from us; more important, they have their eyes on buying the companies that produce the commodities, as well. Despite this, Canada’s bond market may perform well in the near term, as a by-product of today’s continued price weaknesses. And, the time will come, though not in the near future, when foreign investors will alternatively opt to buy Canada bonds.

Among the great inefficiencies that have plagued Canada is our conservatism (or rather the reluctance among Canadians to invest risk capital in the most strategic areas of our economy), and our complacency. Canadian companies have historically faced shortages of domestic investor capital, and that issue has forced them to look first to the US, and now globally for substantial sources of capital. This has meant that Canadians have foregone the ownership of our homegrown companies to foreign interests. Its this inefficiency that makes the opportunity to invest in our own commodities producers, and other companies so attractive.

By the way, every time something creative comes along to make it easy to raise money in Canada, for example, income trusts, someone in government comes along and shuts it down. There’s no doubt that there was some abuse and stretching of the rules which led to the legislation shutting them down, but then again, it was also one of the most successful equity financing periods in Canada’s capital markets history. At times it feels as though the Canadian government would rather help foreign investors take over our industries, rather than police the tax incentives that make raising capital easier, more fairly. Then again, this too, is part of our conservatism as a society, isn’t it?

Foreign investors are more interested in our companies than we are. As a country and as investors we need to realize that our assets are worth far more to foreigners right now than they are to us. We take our greatest assets, our natural resources, water, oil and gas for granted, because we have always lived in a state of surplus and exported most of what we produce, mainly to the US.

Now that the balance of demand is coming increasingly from the large emerging economies who face massive future shortfalls of materials, water, food, and energy we need to prepare for the geometric growth of demand coming in the next several decades. We sincerely owe it to ourselves to exercise our right to own and nurture these precious assets, before they pass into the hands of foreign corporate interests.

David Rosenberg states in his latest report, out today, that Canada is in the sweetest of spots because we are in the midst of a secular commodities boom. He cites Chindia as the key driver of demand over the next decade, but initially 2009 and 2010, where it is shown that China and India will lead the world in GDP growth, and currently command 21.4% share of Global GDP. This is no big surprise to anyone following commodities, but rather, more confirmation.

We believe that commodities are in a secular bull market, and this is where Canadian outperformance relative to the United States comes into play - nearly 45% of the TSX composite index is in resources; almost triple the share in the U.S. Almost 60% of Canada’s exports are linked to the commodity sector, roughly double the U.S. exposure. This explains how it is that the Canadian equity market has managed to outperform the S&P 500 this year by a cool 2,000 basis points (in this sense, Canada is basically a low-beta way to play the emerging markets via commodity exposure).

This by no means indicates that the US and the Western consumer will cease to be the world’s top consumer, but rather that we will have to line up with the new consumers from the developing world, to buy the same stuff. That is ultimately inflationary, but not for some time.

Rosenberg points out very nicely that commodities prices bottomed last year at the highest recession levels ever.

And, that prices bottomed at levels above historical peak prices.

This last chart is remarkable, because it illustrates how strong demand has gotten during the last ten years with the rise of China and India. Even after last year’s blow-off, prices are fundamentally higher because of the surge coming from the developing world’ growing appetite for food, shelter and commerce.

Forget about inflation, at least for now, as a reason to buy commodities. There are two overriding themes, that should be front and centre:

1) demand for commodities - Foreign interests wish to lock up supply which means the commodities themselves will be bid up.

2) demand for producing companies - Foreign interests, particularly China and its rapidly developing and mutually rich peers have their eyes squarely focused on our businesses and our natural resources. Mergers acquisitions and hostile takeovers will bid up the prices of Canada’s most desirable commodities producers, and it won’t be only China which comes knocking, though they will likely turn out to be the most aggressive. The onslaught of foreign-sourced capital markets activity is likely to come well in advance of peak prices for the commodities themselves.

What do policymakers think of, in the now wealthier, fastest growing countries of the world, whose nations are facing shortages of materials, oil, water, and food that would be devastating to their economic progress? “What will we need, and what do we have to do to get it?”

Let’s come back to the notion of complacency. Canadian complacency. We have taken our most valuable assets for granted, because they are abundantly available in our backyard. Also, the last year’s turmoil has also made it more difficult for investors to commit long term capital out of fear.

In the period ahead, it is not so much inflation, but rather pure and simple demand for the future supply of commodities that will take centre stage. Inflation, when it re-appears will be the icing. Canadian investors should view any market corrections as opportunities to accumulate meaningful overweight positions in their portfolios in the commodities complex in some combination of commodities and commodities producers.

This period represents Canada’s big chance to get out in front of foreign interests in our own backyard. We have the right to participate in the growth that will come Canada’s way as a result of the massive global economic transformation that is underway or we can choose to be bystanders.

We will continue to write and drill deeper into this subject in the coming weeks and months.

Sources: Kathy Lien | Bloomberg | Gluskin Sheff

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BCA: Canada Upbeat Jobs Report

Monday, September 7th, 2009

BCA Research Reports on Canada’s upbeat jobs report:

The Canadian economy continues to show signs of gradual improvement.

“Domestic activity has picked up from the depressed levels in H1 2009, as evidenced by the leading economic indicator and sentiment survey’s. Part of this rebound can be attributed to a leveling off in the pace of job losses over the past few months. Today’s release showed that overall employment increased by 27,000 (from -44,500), although all of the gains came from part-time work.”

“This is consistent with business survey’s that suggest employers are becoming more upbeat about future sales prospects. Importantly, employment among private sector employees increased in August, the first increase in this group since September 2008. Statistics Canada noted today that “the trend in employment has changed recently. Since employment peaked in October 2008, total employment has fallen by 387,000 (-2.3%). Over the last five months, however, employment has fallen by 31,000, a much smaller decline than the 357,000 observed during the five months following October 2008.”

“Bottom line: The Canadian economy still faces headwinds from a strong currency and weak demand from its main trading partners but the underlying trend is towards further improvement. We continue to favor the Canadian dollar versus the U.S. dollar.”

Source: BCA Research

Tags: Bca Research, Bottom Line, Business Survey, Canada, Canada Jobs, Canadian Dollar, Canadian Economy, Decline, Depressed Levels, Five Months, Future Sales, H1, Job Losses, Jobs Canada, Leading Economic Indicator, Part Time Work, Private Sector Employees, Rebound, Sales Prospects, Sentiment Survey S, Statistics Canada, Trading Partners
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Canadian Dollar: Good But Not Great Data

Monday, September 7th, 2009

Aside from U.S. data this morning, we also had a few important releases from Canada. Canadian employment printed much stronger than expected earlier in this morning and just a few minutes ago, IVEY PMI beat expectations. Last month, manufacturing activity expanded by a faster rate with the IVEY PMI index rising from 51.8 to 55.70, marking the third consecutive month of growth. Aside from the drop in the employment component, the details of the report were encouraging. The contraction in employment was in line with the weakness that we saw beneath this morning’s Canadian employment numbers and is part of the reason why the Canadian dollar has struggled to rally.

Canadian Employment: Weakness Beneath the Headlines

This morning’s Canadian employment numbers were very strong. The market had anticipated the fourth month of job losses but instead Canadian employment rose by 27.1k, the first month of job growth since April. In contrast to the U.S. who reported the 20th consecutive month of job losses, in that same time, Canada only saw 11 months of net job losses and they were not even consecutive.

Part of the reason why the Canadian economy has been so resilient is because of the rebound in oil prices and demand from China. However weakness beneath the headlines is capping the gains in the Canadian dollar. First, the rise came primarily from the service sector and exclusively in part time work while full time employment actually fell by 3,500. So far this year, full-time jobs have decreased 403,700 while part-time jobs have risen 101,100.

When a labor market recovery is driven by part time and not full time hiring, it is definitely not all that positive. The manufacturing sector is also extremely important in Canada and so the lack of improvement in the sector is certainly discouraging.

Tags: Canada, Canada Canadian, Canada Employment, Canadian Dollar, Canadian Economy, Canadian Employment, China, Contraction, Employment Numbers, Few Minutes, Full Time, Headlines, Job Losses, Manufacturing Sector, oil, Oil Prices, Part Time Jobs, Part Time Work, Rebound, Service Sector, Time Canada, Time Employment
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David Rosenberg on BNN - Canada’s Recession Ending

Monday, July 27th, 2009

July 24, 2009 - David Rosenberg appeared on BNN for a long and worthwhile interview about the Canadian Economy.

Note: He believes the recession in Canada is ending, though he believes Mark Carney’s outlook for 3% GDP growth is on the very optimistic side. He says the exogenous shock may be over, but to achieve 3%, there would have to be a sustainable turnaround in the US economy, and he can’t see that yet, given its current state.

Click image for video:

Tags: Bnn, Canada, Canadian Economy, Current State, David Rosenberg, GDP, GDP Growth, Mark Carney, Optimistic Side, Outlook, Recession In Canada, Shock, Turnaround
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Rebecca Wilder: Canada’s “Normal” Recession Set for “Normal” Recovery

Wednesday, July 15th, 2009

This post is a guest contribution by Rebecca Wilder*, author of the of the News ‘n’ Economics blog, July 15, 2009.

I have been pretty “positive” about Canada. Compared to the U.S., the Canadian economy simply sits on a firmer (financial) foundation: housing fundamentals were stronger going into this mess; unemployment created a migration pattern toward work; saving rates are rising as in the US, but on a smaller wealth effect; and the overall GDP loss in the current cycle is expected to fall short of a recent time-series of Canada’s recession.

But the standard policy response, lowering the policy target to stimulate consumption and investment, has been the same: the Bank of Canada (BoC) lowered its policy rate, the overnight rate, to 0.25%. It did not (correctly) engage in quantitative easing measures - and I believe that it has not officially announced that such measures have been taken off the table - because it is becoming evident that the economy is responding to the massive monetary stimulus already in place.

And Merrill Lynch’s new chief strategist and economist for Canada, Sheryl King, criticized the BoC for being too aggressive. From the Globe and Mail:

In her report, Ms. King actually upgraded Mr. Wolf’s Canadian gross domestic product forecast for 2009 (she’s now calling for a decline of 2 per cent versus 2.7 per cent in the old forecast) and 2010 (growth of 2.7 per cent versus 2.3 per cent). She also suggested that the improved growth prospects over the next 18 months are policy makers’ own doing – the flood of fiscal and monetary stimulus “will produce growth.”

And she warned that the Bank of Canada “overreacted to the downside risks” and may have positioned itself to do the same on the upside. She fears that the short-term growth fuelled by policy-driven economic stimulation could artificially boost inflation and output, fooling the bank into tightening its policy too soon.

“It’s hard to get monetary policy right at the best of times,” she said. “The probability that [the Bank of Canada's current policy] is exactly the right tonic for the economy is so infinitely small, it’s laughable.”

She might be right. Canada doesn’t have the strong productivity growth to offset inflation pressures coming from the demand side. And it is becoming quite clear, especially in the housing market, that low interest rates are stimulating some economic activity.

The Canadian Real Estate Association reported a surge in Q2 existing home sales:

National resale housing market activity bounced back strongly in the second quarter of 2009 above levels reported for the same period last year. Demand continues to rebound sharply in some of the most expensive markets in the country, skewing the national average price upward.

According to statistics released by The Canadian Real Estate Association (CREA), actual (not seasonally adjusted) home sales, via the Multiple Listing Service® (MLS®) of Canadian real estate boards, totaled 147,351 units in the second quarter of 2009 – the fourth strongest quarterly sales figure ever. Up 1.4 per cent from the second quarter of 2008, this marks the first year-over-year increase in quarterly activity since the fourth quarter of 2007.

…

The national average home price also scaled new heights on a monthly basis, climbing 3.6 per cent year-overyear to $326,613 in June 2009. However, only 13 local markets posted new average price records in June, less than a handful of which are among the most active or expensive. The strong rebound in sales activity, not price, in Canada’s most expensive markets is skewing average prices upward nationally and in some provinces, just as a sharp decline in activity in these markets skewed the average lower in late 2008.

Although the re-sale market is really heating up, especially in the high income bracket, new home prices are still falling, -3.1% over the year in May 2009. From Statistics Canada:

Contractors selling prices decreased 0.1% in May following a 0.6% decline in April.

Between April and May, prices declined the most in Saskatoon (-1.2%) followed by Hamilton (-1.1%) and Edmonton (-0.9%). In Saskatoon, a number of builders reported reduced material and labour costs while other builders have lowered their prices to be more competitive and to encourage sales.

And building permits are growing in the single-family home sector, rising for three consecutive months in May. This is usually a leading indicator of new construction in the residential space.

And other types of big-ticket items are likely responding to low financing rates. Auto sales, driven by a surge in truck sales, are stabilizing and actually grew in May. However, preliminary reports indicate a drop in June.

Overall, the economy is stabilizing on the heels of big monetary and fiscal stimulus. And unlike in the US, we are starting to see first-derivative signs of growth. The housing market will (and always) plays a significant role in the early stages of an economic recovery.

When the recovery starts to firm a bit more (Q3 growth is projected to be weak, 0.0% by the Bank of Montreal), we will see if King is right - whether or not the BoC was indeed too aggressive. I wouldn’t be surprised if they were.

* Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.

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10-Yr+ US Treasury and Canada Yields Falling

Monday, December 1st, 2008

During the December 1st liquidation of stocks, the yield on 10-Yr. US treasury securities fell to 2.81%, a level not seen since 1954. Incidentally, during the 1935-1955 period, the yield on these was at levels far below current levels, this being the period following the collapse of the US financial market post circa 1929.

With the bond market rallying in the longer durations, its hard to NOT see how this plays right into the hands of the US government’s needs for long-term funds to pay for a trillion-dollar war and a trillion-dollar plus bailout, not to mention just staying in business.

Bloomberg says: Yields on two-, 10- and 30-year debt dropped to levels not seen since the U.S. began regular sales of the securities after Federal Reserve Chairman Ben S. Bernanke said the central bank may purchase Treasuries and target long-term interest rates to combat the deepening recession.

Which once again begs the question:

What incentive does the US Government have for reviving the equity market, except to levels which keep some hope alive? Not much, right now.

With investors being crowded out of equity markets by continuing volatility and losses surmounting from deleveraging, it should eventually be a snap for Washington to amortize very sizable short term obligations by selling bonds to fleeing investors. Bernanke is merely pointing out the obvious in a roundabout way.

Debt is the new equity. Why would you bet against the Fed? This is the direction they have been moving us in, deliberately.

Canada Long Bond Yields Falling

By the way, the 30-year Canada rates fell from 3.97% last week, to 3.76% today, in the face of the 9% drop in the TSX. Until 5 months ago, the Canadian economy was bolstered nicely by rich commodities prices. Now that commodities prices have fallen sharply and fairly quickly, Canadian investors haven’t yet adjusted to the reality that Canada is in recession too, and given that, it is likely the long-term Canada yields will fall. Our three key industries are now dealing with a slump; autos, financials, and commodities.

Which is the likely scenario over the next one to two years: Long-term Canada Yields go up, sideways, or down, given that Canada is entering a full-blown recession?

Bloomberg says: The yield on the two-year bond declined 12 basis points, or 0.12 percentage point, to 1.59 percent at 4 p.m. in Toronto, the lowest since Bloomberg records began in 1989. The price of the 2.75 percent security due in December 2010 rose 23 cents to C$102.29.

The 10-year note’s yield fell 19 basis points to 3.13 percent, also the lowest since at least 1989. The price of the 4.25 percent security maturing in June 2018 climbed C$1.66 to C$109.18.

“Long-term rates are playing catch-up in terms of the decline in yields we have seen in short-term bonds,” said Mark Chandler, RBC Dominion Securities Inc. “There is limited downside in short-term yields,” he said.

“The relatively greater drop in yields on long-term bonds compared with short-term bonds is a theme that could continue into the first half of 2009,” Mr. Chandler said. “This is known as a yield curve flattener,” as the spread between the short-term and long-term rates narrows.

Currently, Canada’s yield curve is steep, defined by short term rates near zero percent, and 30 year rates, which closed today (12/01) at 3.761%, down 21 bps from last Thursday (11/27) morning.

As Hugh Hendry recently put it:

“I withdrew my hard-earned money from a bank this summer. But it may surprise you to learn that I bought government bonds of long duration. Surely I should have bought gold? Except that I believe the way to make money is to seek opportunities through paradox.

And therein lies our brinkmanship: everyone has skipped our story and read the conclusion. They fear financial anarchy. Gold coins are sold out. Everyone is in. And yet the price of gold has fallen this year. So, for now, I would stick with the bonds. The 18-year British gilt yields 4.8pc but, with the Bank of England likely to follow the Fed and slash rates to 1pc, I believe we could see gilt yields below 3pc.

And I promise you that if bond yields broke 3pc there would be a stampede to buy. At this stage gold might trade close to $500, and those who missed its rally from 2002 would have the solace of schadenfreude when in reality they should be buying the stuff and selling their bonds. What delicious irony: deflationists and inflationists could both claim to be right. But how many will have profited?”

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