Stocks & Equities

Six predictions for the Canadian economy

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Posted by Kevin Press - BrighterLife.ca

on Friday, 21 September 2012 10:11


Consumers are paying down debt rather than spending, businesses leaders remain nervous and governments across Canada are unlikely to invest in further economic stimulus unless something major threatens our recovery. TD Economics’ latest quarterly outlook for the Canadian economy is a mixed bag at best. Next year will be better, we mean it this time.

The report makes a number of predictions about Canada and global factors that could impact our economy:

  1. The economy will grow, but not dramatically. Real gross domestic product (GDP) growth will be 1% this quarter, 1.8% in Q4 and plus-2% throughout 2013. Diana Petramala, an economist with the bank, told me that what’s holding us back has less to do with the 2008 financial crisis than it does with other, more systemic factors. “The first is poor productivity performance,” she said. “The second is our aging population. The labour force isn’t growing as fast as it has in the past … We’re pretty much growing right at our potential growth rate.”
  2. Federal and provincial governments will spend less, and may even raise taxes. Despite Prime Minister Stephen Harper’s comments last week, we shouldn’t count on further government stimulus. This will have a negative effect on economic growth. Petramala told me that if the domestic economy went into a sustained downturn, then of course this wouldn’t be the case. “But we think that the economic environment will start to improve in 2013 and government will have the capacity to remain on-track and get their budgets balanced,” she said.
  3. Consumer spending will be relatively soft. Relative to income levels though, consumer and household debt will remain high. “Incomes aren’t growing as fast as they have in the past,” said Petramala. Still, a lot of consumers have gotten the message about debt. “In the last quarter, we saw the savings rate rise from 3.1% to 3.6%. So it’s not that they can’t go out and spend, it’s that they’re choosing to focus more on restraint.”
  4. The Canadian housing market is 10% over-valued on average, and prices will come down accordingly. We’re not looking at a crash. Prices are expected to come down over a two- to three-year period. Vancouver and Toronto are over-valued by something more like 15%.
  5. Business spending, particularly among exporters, will start to pick up next year. There’s still uncertainty in Europe, the U.S. and in emerging markets. This all contributes to the Canadian economy’s weakness in the short term. But next year and the year after will see a 7% to 10% boost in business spending according to TD Economics.
  6. The Bank of Canada’s overnight interest rate isn’t moving until the second half of 2013. Expect a 50-basis point increase next year, followed by the same again in 2014. From there, look for gradual steps to “bring the overnight rate back to a more normal level,” Petramala told me. One of the effects of the latest round of quantitative easing in the U.S. is that “the Bank of Canada won’t be able to go as quickly as maybe it would like.”

A couple of other interesting calls: the U.S. recovery will strengthen next year; we’ll see more positive growth in the eurozone and emerging markets; and crude oil will hit US$102 per barrel.

Keep up to date on what’s happening in the capital markets and the real economy. Subscribe to receive Today’s economy blog automatically by RSS or email.


Stocks & Equities

Why All Emerging Markets Are Not Created Equal ... and Where Investors Are Heading

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Posted by Mike Burnick - Money & Markets

on Thursday, 20 September 2012 07:21

The latest monetary easing by the European Central Bank (ECB) and Federal Reserve has given financial markets on both sides of the Atlantic a positive lift. But the global cheer did not extend to China as stocks in Shanghai continue to slide.

In fact, many emerging stock markets have been under-performing, as I pointed out in a previous Money and Markets column. And the trend hasn't improved much for some, including China, in spite of a pickup in global capital flows into the region.

But all emerging markets are not created equal. While some are high-profile laggards, others are beginning to outperform.

This highlights the fact that not all emerging markets are moving up or down together these days. It also underscores the importance of doing your homework to uncover the hidden opportunities in emerging markets.

[Editor's note: To help you uncover these opportunities, Mike has a FREE special report where he gives you his five tried-and-true rules for global ETF trading. Click here to read it now.]

China: No Sign of a Bottom Yet

China, the emerging market poster-child, has continued to underperform almost all major global stock markets in 2012. The Shanghai Composite index is now down 36 percent from its 2009 peak — a period in which the S&P 500 Index soared 44 percent.

The reason: China suffers from self-inflicted economic wounds. Its past reliance on an export-led growth model was fine ... when the global economy was going strong. But as you can see in the chart below, China's trade volumes are shrinking, and the global economy is forecast to expand just 2.1 percent in 2012.



Years of over-investment in China has led to a glut of unused industrial capacity and a real estate bubble, souring investor confidence. On top of that, according to the World Trade Organization (WTO), global trade volume expanded just 5 percent last year, down from 13.8 percent in 2010, and is expected to slow further to just 3.7 percent this year.

The result: China's industrial output growth in August fell to the lowest level in three years. The People's Bank of China is cutting interest rates, the same as many other central banks around the world. But investors worry that further easing may only inflate property values without doing much for the real economy ... that sounds familiar.

Unfortunately, there is not much evidence pointing to a turnaround for China's economy anytime soon.

Some Good News in 
Select Emerging Markets

Of course China is certainly not alone in experiencing a manufacturing slowdown as a result of the downshift in global growth — it's just more apparent for their export-led economy.

A recent survey of global manufacturing purchasing managers index (PMI) readings by Bloomberg finds 20 out of 24 countries are showing contraction in their manufacturing sector. The countries that still have expanding PMI's include: Mexico, India, Russia, and Ireland.


India, for example, is much less reliant on export growth than its neighbor China. And its economy should expand 6 percent this year — certainly in the top-tier among global GDP growth. Global investors have noticed ...

Net equity inflows from foreign investors have surged $12.5 billion so far this year, equal to 10.9 percent of India's total stock market value.

It's no surprise that India's stock market has been one of the better emerging market performers ... up nearly 20 percent year-to-date and tops among the big-four BRIC markets.

The Bright Spot in Europe

In Europe, where many stock markets, both emerging and developed, have been crushed this year by the European debt crisis, Russia has been a bright spot with its equity market up 12 percent this year. Granted, its economy remains closely linked with commodity prices, particularly energy. But Russia's economy should grow 3.7 percent this year.

And Russia's recent entry into the WTO could provide the same kind of boost to its economy as it did for China over a decade ago. Plus, Russian stocks are among the world's biggest bargains, trading at less than six times earnings today.

Bottom line: Despite the ongoing and high profile underperformance of markets like China, not all emerging markets are lagging, and several are beginning to take the lead in performance. That's why global investors must differentiate between the fundamentals of each market — evaluating them one country at a time.

Good investing,

Mike Burnick


About Money and Markets
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Money and Markets is a free daily investment newsletter published by Weiss Research, Inc. This publication does not provide individual, customized investment or trading advice. All information is based upon data whose accuracy is deemed reliable, but not guaranteed. Performance returns cited are derived from our best estimates, but hypothetical as we do not track actual prices of customer purchases and sales. We cannot guarantee the accuracy of third party advertisements or sponsors, and these ads do not necessarily express the viewpoints of Money and Markets or its editors. 


Stocks & Equities

Recession 2013: Here's What Jim Rogers is Doing

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Posted by Don Miller - Resource Investor

on Tuesday, 18 September 2012 08:37

If legendary investor Jim Rogers is right, not only is Recession 2013unavoidable, it's going to be a doozy.

In recent interviews, Rogers has been predicting a 2013 recession, bowled over by a potential blowout in Europe and unsustainable spending by the US government.

"Be very worried about 2013 and be very worried about 2014, because that's when the next slowdown comes," Rogers told Reuters.

And while Rogers sees no true safe havens out there, a few investments can provide some comfort – specifically, commodities in the form of agriculture, gold, and silver.

Rogers' statements usually get lots of attention, mainly because he has an uncanny tendency to be right.

Together with George Soros, he founded the Quantum Fund in the 1970s and posted returns of 4,200% over 10 years. Rogers retired in 1980 at the age of 37, but remains active as a private investor.

Back in 1999, Rogers recommended gold when it was trading at $252 and silver at $4.

We all know what happened after that.

Here's the Jim Rogers take on the economy and how to survive Recession 2013.

Elections Will End Good Times

Rogers sees the coming elections as the end of a joy ride for both Europe and the United States.

 "President Obama wants to get reelected. German Chancellor Angela Merkel wants to get reelected," Rogers said. That means they'll both be spending lots of public money to keep voters happy until the elections are over.

 The ECB's controversial decision to purchase unlimited quantities of bonds from struggling Eurozone members indicates Merkel is ready to pull out all the stops to save the euro – and her job.

 In fact, Merkel has made a sharp about face and now wants to stop Athens from leaving the euro zone at all costs.

"For [Merkel], it is essential to avoid the consequences of a Grexit before national elections next year," influential German news magazine Der Spiegel said recently.

 But the EU rescue will "absolutely not" work, Rogers says. He expects the Greeks to be the first to exit the EU.

What's more, Greece will be merely the first domino to fall.

 "You have got countries that are essentially bankrupt. The solution to too much debt is not more. I suspect that the euro will not survive," he said.

 Eventually the entire EU may be restructured with a core group of countries like Finland, the Netherlands, and Austria joining Germany and perhaps France in a new monetary union. 

.....read page 2 HERE


Stocks & Equities

Game-changing events and market action?

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Posted by Larry Edelson - Uncommon Wisdom

on Monday, 17 September 2012 06:47

Last week we certainly had some game-changing events, with the German court ruling in favor of the European Stability Mechanism ... Europe going ahead with yet more bailouts ... and, perhaps more staggering, Fed Chairman Ben Bernanke committing the Federal Reserve to buying $40 billion worth of mortgage-backed securities each month on an open-ended, unending basis until employment improves.

These are possibly game-changing fundamentals for the markets.

They’re entirely consistent with my longer-term views of monetization of debt, commoditization of not just commodities but stocks as well, and monetization of paper money (or fiat currencies) by levitating and re-flating financial assets and tangible assets much higher over the longer term.

So with that in mind, we’re going to take a look at some weekly charts.

Although there have been some game-changing events in the last week or so, they have confirmed my longer-term views on longer-term bull markets in commodities and stocks.

However, I am not convinced that the recent rallies are the beginning of those long-term breakouts. So let’s take a look at this weekly chart of gold.



Stocks & Equities

Market Buzz: How the Divide Between Investing Strategies Amplifies Market Volatility

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Posted by Ryan Irvine: Keystone Financial

on Saturday, 15 September 2012 00:00

One unfortunate habit that we commonly see with investors is the tendency to look to short-term market activity for investment guidance. In Behavioral Finance this is referred to as “herding” (or convoy behavior) which is the hardwired instinct of most human beings to flock together for perceived safety. When individuals are not confident in their independent position, they typically acquiesce to the group. Unfortunately this can also be true even when individuals do have confidence in their independence. Accordingly, there is a general understanding in the money management industry that it can be okay to be wrong when your peers are also wrong, but being wrong independently can cost you your job.

Over the past couple of years global stock markets have experienced levels of volatility never before seen in history. Recently the media has started referring to this as “risk-on/risk-off”. Regardless of what you call it, markets have inarguably been exhibiting symptoms, which exhibited in a person, would be diagnosed as manic depressive disorder. And there are some fundamental justifications behind this: High-public and private debt loads, the recessionary pressures of deleveraging, unstable short-term economic prospects....it has all been said a hundred times before. Regardless of the source of the volatility, it has investors at the edge of their seats ready to hit the sell button; frantically looking for any sign that the markets might fall of the proverbial cliff like they did in 2008. Real economics are a force in the recent volatility but there is also another force at play and it has nothing to do with fundamentals. This other force is investors’ own biases (private and professional) and how we make our buying and selling decisions, also known as investment strategy. And it plays a big part in the markets’ current volatility.

You can divide investment strategy (or investment mentality) into four main camps: 1) buy and hold; 2) momentum; 3) value; and 4) pure speculation. Each of these investor types makes buying and selling decisions based on a different set of rules, and the resulting actions impact the market in different ways. The buy and hold investor is the most benign of the camps. They don’t make investment decisions and asset allocation decisions based on overall market conditions. This type of investor passively purchases stocks when they have capital available, and looks to hold his positions through market cycles and varying conditions. Momentum and value investors, on the other hand, are not passive; they actively look for opportunities. Momentum traders will buy into market uptrends and then sell into market declines, without consideration for actual economic or company fundamentals. They are basing decisions purely on volume and price movement. Value investors will take a more contrarian approach, typically buying into market price weakness and selling into market price strength. In contrast to the momentum investor, the value investor will base decisions on fundamentals and not price chart formation. The characteristics of the fourth group, the pure speculators, are less relevant to this discussion but would typically exhibit buying and selling behaviour similar to the momentum camp.

The effect that momentum trader and value investors have on market volatility is polarized. When the market moves in one direction, the momentum traders exacerbate the movement, and therefore increase market volatility, by increased buying when the market is rising and increased selling when the market is falling. In fact, momentum investors unwittingly work together to generate market extremes. But when market prices move too far in either direction, value investors get involved. When prices get too high, value investors create a dampening effect by selling into the strength. Then, momentum investors begin to see the uptrend slowing, and they start to sell. As the market weakness persists, more and more momentum trades drive prices continuously lower until value investors start to see opportunities and move in to create support though increased buying. And so on and so forth, the cycle continues.

It may be apparent that not all investors fit neatly categorized into one of these investment types, because real world investment strategy involves a lot of human behavior and is too complex to be summarized into a few lines of text. Some investors will utilize multiple investment strategies. For example, an investor can purchase on value but then transition to a buy and hold approach. Investors can also purchase on initial momentum but then sell on value. Some investors will subscribe to one strategy in theory but another in practise. Some investors switch between strategies from trade to trade. And in the case of professional money managers, there is also the structural issue of investor contributions and redemptions: the fund manager may subscribe to a value strategy, but if the fund investors decide to redeem in down markets and contribute in up markets, the impact the fund has on the market may be more closely associated with momentum than with value.

Complexities aside, most investors, whether they know it or not, are largely loyal to their respective strategy. Equally true is the growing trend in favour of momentum strategies. This trend, which naturally increases volatility, is due to a number of reasons. The evolution of discount brokerages and low cost trading has made trading easier from a logistical and financial perspective. Many brokerages also encourage excessive trading by offering lower fees to high-frequency traders and platforms which provide momentum-based, technical analysis research tools. Next, a virtual explosion has occurred in the market for computerized trading programs that promise to automate the BUY/SELL decision for retail investors who have limited research skills. These retail trading programs are also based on momentum indicators. Of course, legitimate global economic risks have also reduced investor confidence in long-term stock market returns, and increased investor scrutiny. These factors make investors, on average, more willing to hit the sell button at the first sign of trouble and potentially the buy button when the market appears to be improving. And finally we have the onset of high frequency trading (HRT) companies, which have exploded in numbers and importance over the past several years. HRT uses sophisticated computing programs to execute (in some cases) thousands of trades per minute, resulting in profits of a faction of a cent per trade. The impact of HRT in today’s market is becoming more and more evident. Estimates will vary, but the research we have seen is staggering: in August 2011 (an extremely volatile period) Bloomberg reported that the percentage of average daily volume attributable to high frequency trading had exceeded 80% in the US markets.

We only need look to the Flash Crash of 2010 (also referred to as The Crash of 2:45) for a recent example of how momentum trading creates abnormal volatility. The Flash Crash occurred on May 6, 2010, when the Dow Jones Industrial Average plunged about 1000 points and then quickly recovered after a few minutes. This was the biggest intraday point decline in the Dow’s history. On September 30th, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) issued a report on the crash after a five month investigation. The report "portrayed a market so fragmented and fragile that a single large trade could send stocks into a sudden spiral.” The report also discussed how immediately before the crash, a large institutional investor sold an unusually large number of S&P 500 contracts. The report concluded that this activity put selling pressure on an already weak market, which triggered high-frequency traders to start selling aggressively, causing a mini-crash to occur.

Put into context of the divide between different investor camps, the amplified market volatility we have seen in the past year becomes easier to understand. There has always been a divide between momentum and value investors. The difference today is that technology has facilitated a trend towards momentum trading, which in conjunction with real fundamental risks, has had the effect of amplifying market volatility. Since none of the trends that are facilitating momentum investing show any sign of slowing, it may be perfectly rational to conclude that higher volatility is the new normal, regardless of whether the world finds a solution to its financial woes. While this may be disconcerting for some value investors, it really shouldn’t be: remember, value investors move in to restore rationality when momentum investors distort valuations. When the Flash Crash occurred at 2:45 pm, it only took a few minutes for the Dow to recover from its 1,000 point decline. A market recovery requires buyers, and those value investors who recognized the opportunity of the Flash Crash were able to generate a nice profit on the momentum traders’ hysteria. Ultimately, a stock is a piece of a business, and as long as that business generates positive cash flow then it will be able to invest in growth, pay a dividend, and command a fair price in a takeover transaction. There is nothing disconcerting if momentum traders give value investors the opportunity to purchase these companies at discounted prices, and then potentially sell them right back when those prices become inflated.

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Disclaimer | ©2012 KeyStone Financial Publishing Corp.


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