A good overview of perceived impacts of the EU situation to the US economy.

From the Investment Advisory Service I subscribe to. A good overview of the perceived impacts of the EU situation to the US economy.

Investment Comments

The generally benign market environment of the 1990s and low volatility experienced throughout much of the first decade of this century (until 2008) sometimes leaves investors unprepared for normal volatility that has characterized the market throughout history. As a result, investors panicked earlier this year when the Dow slipped over 900 points in three weeks. Over the next 2-1/2 months, the Dow moved up a strong 1500 points. The Dow has now given up about 1000 of those hard earned points in another three weeks. Volatility is the norm for investors, but it is still uncomfortable.

In the middle of what appears to be a market “correction” that happens in most years, even in a rising market, the Dow dropped over 500 points in ten minutes on May 6. Clearly this was not normal. It appears that “high-frequency traders” set off an avalanche. The term “high-frequency traders” refers to computerized techniques used by Wall Street firms and hedge funds to analyze short-term data and make trades faster than a human being could. It is said that over 70% of U.S. equity trades come from these traders. While such trading makes money for their sponsors, it also increases trading volume and is helpful to the market.

During a period of high market volatility the afternoon of May 6, it appears that many traders simply turned off their screens and stopped participating. The market for many ETFs (exchange-traded funds, which are unmanaged baskets of stocks) became quite thin, and there were far more sellers than buyers. Some of these supposedly safe index funds actually traded for a few pennies per share. This caused speculators to sell the underlying stocks that make up the ETF indexes because the index itself was much cheaper than the sum of its parts. The overall market dropped 5% in just ten minutes. This is the kind of traumatic drop that one might associate with a terrorist attack or assassination of a world leader. However, these were the actions of speculative traders and their computerized techniques, not of rational investors.

The broader trigger for the recent volatility is the growing concern over the status of the European Union (EU) and its currency, the euro. Market wags use the term PIGS to lump the troubled economies of Portugal, Italy, Greece and Spain into a convenient package. Greece accepted a massive bailout ($145 billion) from the EU as world markets were in turmoil. The EU and the International Monetary Fund (IMF) unveiled an even bigger rescue plan of $955 billion for any EU member country. Greece does have its problems, but Portugal is taking the responsible approach of cutting spending and raising taxes, rather than looking for a global bailout.

However, Greece and Portugal are a relatively small part of the global economy. To become a problem for the U.S., the problems would have to spread to Italy and Spain. Hopefully the size of the EU/IMF bailout will prevent this in the short-term, but longer term the presence of bailout money makes it easy for weak economies to avoid real reform.

The fundamental problem is that the euro is a flawed currency where 16 individual European countries devise economic policies under EU guidelines, but with little enforcement. European economies are simply too diverse for a single set of rules. Some countries, particularly the southern European ones, have historically taken on debt instead of paying their bills. The debt would keep piling up and the countries would experience currency weakness and devaluations as a way of inflating their way out of debt problems. This doesn’t jive with the stricter economies and stronger currencies that have historically come from countries like Germany.

So far the U.S. has been affected in three significant ways. The value of the dollar has skyrocketed, especially versus the euro. This can hurt U.S. exports as they become more expensive when denominated in euros, but it also helps keep inflation in check because import prices tend to fall. Second, global investors have flocked to U.S. Treasuries, helping our government fund its debt at much lower interest rates. Lastly, global oil prices have come down sharply, more than 20% in just a few weeks.

As scary as this volatility might be, it is fairly normal in a historical context. The global market reaction reminds us of the “Asian Contagion” in 1997-1998. Concern over Asian economies caused the value of their currencies to decline sharply, triggering a worldwide panic. Russia defaulted on its debts. There was also the bankruptcy of a large hedge fund that controlled 5% of the world’s bonds. Yet, economic growth continued, and the U.S. stock market was up by more than 20% in each year. While these types of events seem very significant at the time, the passage of time typically allows cooler heads to prevail.

U.S. economic statistics are starting to move from “encouraging” to “impressive.” An amazing 290,000 jobs were created in April, although the unemployment rate edged up as previously discouraged workers reentered the workforce and were now counted as unemployed. First quarter Gross Domestic Product grew at an annualized rate of 3.2% and consumer spending was even stronger. The factory sector is strong, although off of a weak base from early 2009. Factory orders were up in March for the eleventh time in the past twelve months. Consumer behavior is solid, with personal income rising in March for the ninth straight month. Personal spending grew even faster for the sixth straight month. Inflation remains well contained.

The recent events in Europe will likely have some impact on the U.S. economy, but we don’t expect it to be severe. Euro-zone economies make up only 14% of U.S. exports, and most companies indicated in their first quarter results and conference calls that Asia is booming. Hopefully, recovery in the U.S. and strong growth in Asia will be enough to offset continued weakness in Europe. We don’t see any reason at this point to believe this will turn into anything long lasting.

Gold vending machines

I found this very interesting:

Gold vending machines go global

by By Blake Ellis, staff reporter

As economic fears drive gold prices to new highs, the creator of a gold-dispensing ATM is attracting attention around the globe.

Germany-based GOLD to go, which is currently churning out 50 gold machines a month to meet a recent jump in demand, launched its first ATM in Abu Dhabi’s Emirates Palace Hotel earlier this month and opened its second in Germany last week.

The golden ATM’s next destinations are the Bergamo Airport in Milan, Italy, all major airports in Malaysia, one of Russia’s biggest banks and an undetermined location in Turkey.

By making gold investing as easy as buying a candy bar from a vending machine, GOLD to go hopes to attract average buyers to the gold market.

“We are going to make gold public with these machines,” said Thomas Geissler, CEO of Ex Oriente Lux AG, which owns GOLD to go. “The prices are so easy to control that we’re going to de-mystify gold and make it easier for anyone to buy it.”

GOLD to go’s ATM looks like a vending machine and dispenses gold coins and bars weighing up to one ounce at prices updated every 10 minutes based on the real-time spot price of gold.

ATM-owners can choose from a variety of other gold items, such as gold Canadian maple leaf coins, South African Krugerrands, and even some custom designs. For example, the special edition gold medallion it engraved with the Palace Hotel’s logo was created for the United Arab Emirate debut.

Earlier this month, gold prices hit an all time high of nearly $1,250 per ounce, and the precious metal has continued to climb as euro zone countries struggle with debt and investors worry that the region’s problems could spread globally.

Until this uncertainty in the market eases, the demand for gold will only grow, said Carlos Sanchez, a precious metals analyst at CPM Group.

“[The ATM] is just a reflection of the demand from consumers and investors for exposure to gold,” he said. “As long as prices continue to trend upward and investors remain concerned over economic and political conditions, I think we’ll keep seeing strong demand for safe-haven assets like gold.”

Not for serious investors? While the ATMs could be a hit with wealthy travelers, the idea is unlikely to catch on with serious investors, said Jeffrey Nichols, managing director at American Precious Metals Advisors.

“It’s an interesting phenomenon, and I can see that wealthy and high-net-worth travelers might make impulse splurges on gold bars or coins, but I can’t see a serious investor buying gold through a vending machine,” he said.

Jon Nadler, senior analyst at Kitco Metals, agreed, saying that he would be surprised if investors bought into the new invention, because unlike the spot market, ATMs don’t take your gold back when you want to sell it.

“Gold is a two-way market, so I would like to see that same machine buy back that gold and spit out cash,” said Nadler. “A gold-dispensing ATM is great, but a real ATM also accepts deposits.”

Nadler also said that GOLD to go’s higher prices may be a deterrent, especially to investors who want to purchase large amounts.

GOLD to go says that, like any physical gold vendor, it must apply a margin to its items. While the spot price for one ounce of gold was about $1,214 in midday trading on Thursday, GOLD to go was selling a 1-ounce gold bar for 1,044.86 euros, or approximately $1,284.13.

But the ATM’s popularity shows how much more available gold is becoming as demand picks up.

“It shows how attitudes toward gold are changing,” said Nichols. “Gold is available in more forms and through distributors that make it more accessible for average people around the world to buy gold.” http://ca.finance.yahoo.com/personal-finance/article/cnnmoney/gold-vending-machines-go-global-20100527

Housing in Canada not to collapse like the USA did

U.S.-style housing market collapse not likely in Canada, CREA says

By Mario Toneguzzi, Calgary HeraldMay 26, 2010 1:03 PM
Canadian homeowners are  unlikely to experience a U.S.-style decline in the value of their homes,  says a report released today by the Canadian Real Estate Assocation.

Canadian homeowners are unlikely to experience a U.S.-style decline in the value of their homes, says a report released today by the Canadian Real Estate Assocation.

Photograph by: Reuters, Reuters

CALGARY – Canadian homeowners are unlikely to experience a U.S.-style decline in the value of their homes, says a report released today by the Canadian Real Estate Assocation.

Instead, home prices will stabilize and will remain stable for some time, said the report.

“The relationship between average price and income has recently been cited as portending a U.S.-style correction in Canadian home prices,” said Gregory Klump, chief economist with CREA. “However, such warnings ignore the longer-term relationship between prices and income, and disregard typical Canadian housing market cycle dynamics.”

Just yesterday a report by CIBC World Markets Inc. said that on average Canadian home prices are now around 14 per cent over their “fair” value. The report also said that higher interest rates will likely lead to a “modest” decline in prices of between five to 10 per cent in the coming year or two.

CIBC said at least 1.5 million houses in Canada are now overvalued and this represents just over 17 per cent of all dwellings. Of those homes, about 760,000 are overvalued by more than five per cent. The report said 17.4 per cent of Alberta homes are overpriced.

But CREA’s report said home prices tend to rise in cycles, characterized by periods of sharp growth and periods of stability. By contrast, income generally follows an orderly upward trend over time.

“For home prices to keep pace with incomes, they must rise faster during housing booms to make up for periods of little or no price growth. Canadian home prices were stagnant throughout most of the 1990s, while incomes continued rising, making housing more affordable. Over the past decade, home prices have climbed sharply as mortgage interest rates declined,” said the CREA report.

Klump said that the Canadian housing market is now widely thought to be at, or very near, the top oaf a cycle and the ratio of home prices to incomes is high, but he said the ratio will revert to its long-term average as it always does as part of a normal housing market cycle.

“History suggests, however, that it will not do so by means of a significant correction in home prices. The more likely scenario is that home prices will stabilize, giving incomes a chance to catch up again,” he said.

Klump said conservative lending practices in the mortgage industry combined with “prudent borrowing and accelerated payments among Canadian mortgage holders” will help Canada avoid a U.S.-style housing crisis.

“The correction in U.S. home prices is set against a massive oversupply of homes due to distress sales, combined with a drop in housing demand due to unemployment. The unwinding of the housing boom in Canada will be more orderly, characterized by softening sales activity and stable prices,” said the CREA report.


RBC housing report

This is very interesting. Investors are still buying in Alberta as we see all the details. They seem to know that Alberta is still the place to invest in real estate.

TORONTO, May 25 /CNW/ – Alberta was the only province to experience an improvement in housing affordability in the first quarter of 2010, according to the latest housing report released today by RBC Economics Research.

The RBC Housing Affordability measures for Alberta eased between 0.1 and 0.6 of a percentage point, further extending the significant drop in the measures since the end of 2007, a trend that was only briefly halted last summer (a drop in the measure means homes are more affordable).

“In contrast to most other provinces, house prices remained relatively tame in Alberta during the past year or so and this has kept the cost of homeownership in check,” said Robert Hogue, senior economist, RBC. “In the first quarter, all RBC measures were at or below their long-term average, suggesting that affordability remains at favourable levels.”

The RBC Housing Affordability measures for Alberta, which capture the province’s proportion of pre-tax household income needed to service the costs of owning a home, declined across all housing types in the first quarter of the year. The measure for the benchmark detached bungalow moved down to 33.0 per cent (a drop of 0.4 of a percentage point over the previous quarter), the standard townhouse to 25.4 per cent (down 0.1 of a percentage point), the standard condominium to 21.9 per cent (down 0.4 of a percentage point) and the standard two-story home to 36.9 per cent (down 0.6 of a percentage point).

The report found that home prices in Calgary have maintained an upward trend, although the overall pace has fallen short of the national average. In the first quarter, the increase in the costs of homeownership in Calgary was roughly equal to or slightly smaller than household income growth, leaving the RBC affordability measures hovering around the zero mark. Two-story homes were down 0.5 percentage points, while a standard townhouse was up 0.2 percentage points. Affordability continues to be attractive in the city with RBC measures close to long-term averages.

“The housing market rebound turned out to be a much more restrained in Calgary, compared to most of the other major markets in Canada,” added Hogue. “After posting strong gains in the early stages of the rebound, resale activity has slowed considerably since the fall, which likely reflects challenges in the city’s job market.”

The report also looked at mortgage carrying costs relative to incomes for a broader sampling of cities across the country, including Calgary and Edmonton. For these cities, RBC has used a narrower measure of housing affordability that only takes mortgage payments relative to income into account.

RBC’s Housing Affordability measure for a detached bungalow in Canada’s largest cities is as follows: Vancouver 73.4 per cent (up 4.8 percentage points over the last quarter), Toronto 49.1 per cent (up 0.4 of a percentage point), Ottawa 40.3 per cent (up 0.3 of a percentage point), Montreal 39.7 per cent (up 0.9 of a percentage point), Calgary 36.5 per cent (down 0.3 of a percentage point) and Edmonton 32.0 (down 0.5 of a percentage point).

The RBC Housing Affordability measure, which has been compiled since 1985, is based on the costs of owning a detached bungalow, a reasonable property benchmark for the housing market. Alternative housing types are also presented including a standard two-storey home, a standard townhouse and a standard condominium. The higher the reading, the more costly it is to afford a home. For example, an affordability reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household’s monthly pre-tax income.

Highlights from across Canada:

–   British Columbia: Homeownership become significantly more expensive,

as housing costs rose in B.C. to the highest level among all

provinces. Continued momentum in the province’s housing market has

brought affordability measures close to the all-time highs reached in

early-2008. This trend represents a risk that could weigh on the

province’s economy in the near term.

–   Saskatchewan: Real estate activity picked up in the province as home

affordability measures rose significantly in the first quarter of the

year, which reflect rising house prices. This is a change from

previous quarters, which showed an improvement in affordability.

Despite this increase, affordability measures still remain below the

peak levels reached in early-2008.

–   Manitoba: Manitoba’s housing market surged ahead in the first quarter

of 2010, with affordability measures moving above the long-term

average for the province. Home prices became more expensive for

condominiums, townhouses and bungalows. Additional increases in

provincial housing costs may become more difficult for Manitobans to

manage in the near-term.

–   Ontario: Home prices in the province continued to rise, with property

values reaching record highs in many parts of the province. This has

led to a decline in housing affordability, after showing consistent

improvement since the middle of last year. With escalating prices,

affordability measures are now above the long-term average but below

peak levels, for most housing types. This suggests that housing costs

are becoming more difficult for Ontario residents to handle.

–   Quebec: Quebec’s housing market rally continued in the first quarter

of the year, with record-levels of buying activity and rising

property values. This escalation in home prices, while more moderate

than in the previous two quarters, exceeds the long-term average in

the province.

–   Atlantic Canada: Resale activity on the East Coast remained solid,

with an increase in sales balanced by an increased supply of

available homes. These stable conditions have limited the pace of

price increases in the region. Overall housing affordability in

Atlantic Canada continues to be among the most attractive in the

country, with affordability measures still below long-term averages.

The full RBC Housing Affordability report is available online, as of 8 a.m. E.D.T. today at www.rbc.com/economics/market/pdf/house.pdf.

Rates may not go up

Rate hike not guaranteed….Global financial chaos could override domestic factors

Emily Mathieu Business Reporter Toronto Star

Higher than expected rates of inflation and reports of record breaking retail sales means interest rate hikes will likely go ahead, according to a top economist with BMO Capital Markets. But domestic strength might not be enough to justify increases if the upheaval in global markets continues, said Porter.

“If the (Bank of Canada’s) decision was based solely on domestic factors, then this would be no questions asked, no debate,” said Doug Porter, deputy chief economist.

The central bank has long predicted rates would rise on June 1, but Porter said doubt over the future of global economic stability could cause them to go off course.

“It would take a very brave central bank indeed, I think, to raise interest rates in the face of the turmoil we are seeing in global financial markets right now.”

According to Statistics Canada’s Consumer Price Index, the core index advanced 1.9 per cent during the 12 months leading up to April, following a 1.7 per cent increase in March.

The boost in April was due mainly to a rise in prices for the purchase of passenger vehicles, passenger vehicle insurance premiums, property taxes, and food purchased from restaurants, the report showed.

The seasonally adjusted monthly core index rose 0.2 per cent in April, following a 0.3 per cent decline in March.

Consumer prices across the country rose 1.8 per cent in the 12 months leading up to April, following a 1.4 per cent increase in March. In Ontario, prices rose 2.2 per cent.

Porter said BMO has no plans to alter their position that rates will rise on June 1, but said that position could change if market upheaval continues into next week.

“If Canada were an island there would be no debate,” said Porter. “There is a very compelling domestic case for higher interest rates.”

Statistics Canada reported a 2.1 per cent increase in retail sales dollars in March, to $37 billion. Porter said earlier reports had predicted sales would be close to flat. “Instead we get one of the best gains on record.”

National energy prices rose 9.8 per cent between April and the same time the previous year, following a 5.8 per cent increase during the 12 months between March 2010 and the same time the previous year. Excluding the increase in energy the index rose 1.1 per cent, compared with a 1 per cent increase in March.

For the sixth month in a row, gas prices exerted the strongest upward pressure on the index. In April, Canadians paid 16.3 per cent more at the pump than they did the same time the previous year. That change follows a 17.2 per cent increase between March of this year and the same time in 2009.

Natural gas prices were up 3.3 per cent in April than the same time the previous year. Between March 2010 and the same time the previous year prices had dropped 22.4 per cent.

The cost of transportation was up 6.2 per cent in the 12 months to April and consumers paid a 5.6 per cent more for insurance premiums in April compared to the previous year.

Housing costs were up 0.8 per cent, after declining 0.7 per cent in March, with household utilities exerting the most upward pressure. The mortgage cost index fell 6.1 per cent, the report showed.

Food prices were up 1 per cent, following a 1.3 per cent increase in March. The 1 per cent rise, largely related to prices for food purchased in restaurants, was the smallest since March 2008.

Health care prices rose 3.3 per cent, the report showed. http://www.thestar.com/business/article/812567–rate-hike-not-guaranteed

Home ownership costs increase across Canada except Alberta says RBC report

By The Canadian Press    TORONTO – Owning a home in Canada has become even more expensive _ unless you live in Alberta, according to the latest housing report by RBC Economics Research.

The report, released Tuesday, says homeownership costs in Canada rose for the third straight quarter across all housing segments in the first quarter of 2010. A strong real estate market and jacked up housing prices are getting the blame for putting a strain on Canadians’ bank accounts.

“Although home ownership became more costly in the first quarter of 2010, affordability measures are still moderately above the long-term average and below peak levels,” said RBC senior economist Robert Hogue.

“We expect affordability to deteriorate throughout 2010 and 2011, but this should be limited as more balanced supply and demand conditions will take much of the steam out of the housing market,” he said.

The RBC Housing Affordability report projects that the cost of owning a home will continue to rise.

The main contributing factor is an expected rise in interest rates, as the Bank of Canada moves towards raising the current exceptionally low rates to more normal levels through the second half of this year and in 2011.

According to the report, housing affordability measures in Canada are unlikely to exceed the peak levels reached in early 2008.

With the exception of Alberta, home affordability measures deteriorated across all provinces with a significant decline in affordability in B.C., Saskatchewan and Manitoba.

Housing affordability declined more moderately in Quebec, Ontario and Atlantic Canada. Alberta is the only province to show a drop in the costs of owning a home. http://ca.news.finance.yahoo.com/s/25052010/2/biz-finance-home-ownership-costs-increase-across-canada-except-alberta.html

locking in …

Is It Time to Lock In?

With people banking on the main interest rate going up in June, it seems like a good time to for homeowners to lock in their fixed-rate mortgages.

About 12 percent of mortgage holders with fixed-rate mortgages “locked in,” or switched from variable rate mortgages, in the past year, , according to a report this month by Will Dunning, chief economist at the CAAMP , and another 10 percent had already switched from variable more than a year ago.

The rate for conventional five-year mortgages was at 6.25 per cent at the end of April, nearing the 5.25 per cent rate at the end of May last year – the lowest since 1973 when the Bank of Canada data began.

“As interest rates rise, expect home buyers to increasingly opt for fixed-rate loans, in turn leaving banks with more fixed-rate assets to hedge in the swap market” said Mohammed Ahmed, a rates strategist at Canadian Imperial Bank of Commerce in Toronto.

My View:

What is all the panic to lock mortgages into fixed rates? Sure interest rates will start rising, they have no where else to go, but I have not heard anyone saying that these rate hikes will be aggresive and fast. Being in a variable of 1.70% today is way better than being locked into a 5 year fixed of 4.4%. That’s a difference of 2.7%!!! It will take 10 rate increases or so for the variable to just reach the same level. The question is how many years will it take for rates to increase 10 times?