Why Investors Should Pay Attention to the Yen/Euro Cross

The strength of the Yen and US dollar have been quite remarkable especially since the US started this economic spiral. The theory behind the US currencies strength is that if they are in trouble, everyone else will go down first leaving the US as the last standing economy in the world.

Japan is not far behind the US, however, their currency is going up for a different reason. You may have heard the business media talk about “The Carry Trade”. Interest rates in Japan are close to zero while significantly in higher in Europe. Over the last several years, investors have been borrowing yen at low interest rates, converting the currency to Euros, and buying equities and fixed income investments that were yielding considerably higher rates than the interest rate they were required to pay in Japan.

This worked extremely well for many years. However, as markets have come off and the balance sheet of many investors have become somewhat shaky, Japanese banks have been calling in their loans. Borrowers are required to sell their investments at lower prices and convert their Euros back into Yen.

A chart showing the exchange rate of the Yen vs Euro would mirror the markets as every new low in the exchange rate has led to a new low in the equity markets. Hopefully, there won’t be further lows on the cross as there will be further lows to equity markets.

Your thoughts or comments are welcome.

Canadian Banks Ratcheting Down Mortgage Rates

Up until now, mortgage rates have been steady, even with the Bank of Canada lowering the bank rate by 1.50 percent over the last few months with lower rates expected to follow on December 9th. Banks have been holding on to their funds as write-offs relating to lower markets and US mortgage related holdings have hurt their ability to follow suit and lower rates.

Over the last week, Canadian banks have been able to raise some more capital through preferred shares and are comfortable with their balance sheets. As such, I noticed that Bank of Montreal and Royal Bank of Canada lowered mortgage rates with BMO offering a 5 year fixed rate at 4.99% and Royal Bank offering a 4 year fixed at 4.89%.

The lowering of rates will help buyers as they can now qualify for a larger mortgage and allow other buyers to enter the housing market for the first time. With the glut of inventory available, the lowering of rates will be a welcomed sign from a multitude of home sellers as inventories may start to deplete as the affordability will bring more buyers into the system.

What are your thoughts? Do you believe that the lowering of rates will help the Canadian housing market or are we in for a long drawn out downturn?

Why Deflation is Bad For You and the Economy

While the “D” word being discussed in the media can either be a “Depression” or “Deflation, I will concentrate today on deflation and why central bankers around the world will try and do whatever they can to prevent it.

At first glance, most consumers would rejoice as lower pricing for goods and services makes everything less expensive. However, think about what would happen if you knew that something you needed to buy would become less expensive if you held off purchasing it for another month.

You would keep the money in the bank, earn some interest, and then buy it for a reduced price. The longer you waited, the cheaper things would become. So what’s the downside? The retailers offering the product would go out of business as consumers weren’t buying since they were being paid to wait as long as possible. Manufacturers would shut down operations since demand would drop off and create greater unemployment.

Since there would be an overabundance of supply in terms of workers, salaries would be cut since the ablity to hire workers would become easier at lower prices. Due to higher unemployment rates, income tax revenues that would be collected from the government would drop. Corporate tax revenues would fall as companies earned less. Government tax revenues dropping would lead to a reduction in social programs and infrastructure projects.

As you can see, deflation can be detrimental to you and the economy which is something to think about the next time you see that bargain at the mall. Japan has been in a deflationary environment on and off for almost 20 years. North America has just had its greatest reduction in producer prices and consumer prices in almost 70 years. 

What are your thoughts? Are we in for a sustained deflationary cycle or will this pass in relatively short order?

IncomePlus Products Provide Protection in Down Markets

You have heard the ads on radio or seen them on TV. Manulife has been promoting IncomePlus. Desjardins Life has Helios while Industrial Alliance, Standard Life, and Empire Life all have products available or soon to be available in the new year.

The availability of these products are realtively new to Canada and have been very popular in the US. Another name for them is Guaranteed Minimum Withdrawal Benefit where the insurance company underwriting the contract bears some of the risk if the markets stay low for years to come.

The Rothenberg Group is hosting a luncheon seminar on these products and how they may fit within your overall plan. To learn more about the presentation, you can click on the following links.

http://rothenbergcapitalmanagement.com/index.php?id=201

http://rothenbergcapitalmanagement.com/index.php?id=191

 

Any comments you have are greatly appreciated.

REIT’s May Need To Cut Distributions To Conserve Cash

Canadian Real Estate Investment Trusts will start looking closely at their ability to payback mortgages and convertible debentures as they come due.

In a normal credit environment, Real Estate Investment Trusts are able to renew mortgages and go to the capital markets to roll over convertible debentures if their stock price is low. Today, many REIT’s have convertible debentures coming due between 2010 – 2014 as well as mortgage renewals that may not be available at favourable rates.

Ideally, free cash flow would be used to buyback debentures trading at significant discounts to help their balance sheets. However, cutting distributions will have a short term negative impact on their share prices.

Expect REIT’s to start selling off assets as they try and strengthen their balance sheet and survive as mortgage renewals and debentures come due which could place lower valuations on commercial property as supply increases.

Your thoughts on REIT’s and commercial real estate are greatly appreciated.

The Big 3 On Life Support

With GM’s stock at its lowest levels since World War II and Chrysler and Ford with stock prices at their lowest levels in memory, it is evident that these companies will struggle to stay alive until the end of the year.

Some analysts have slashed their target prices to zero while current debtholders will see pennies on the dollar. The Big 3 automakers are lobbying the federal government for aid to the tune of $25 billion. The amount unfortunately is a band-aid solution to keep them going for another 6 months or so.

The companies were struggling well before this economic decline and this recession just put the finishing touches on an already bad situation. The federal government has to weigh the contribution that these companies are making in terms of employment and spin-off jobs as there will be a spike in jobless claims when they go down along with reduced tax revenues so the government has a different framework to measure if it should bail them out.

All three companies should go through bankruptcy protection, potentially merge and re-emerge with stronger balance sheets, lower health care costs to retirees and reduced pension obligations. Any way you slice it, it isnt a pretty situation. Keeping the status quo doesnt make sense and the Big 3 wont be able to compete going forward as they havent been able to in the past.

I think I saw this movie before here in Canada. It was called Air Canada 1 and Air Canada II. What are your thoughts? Should the Federal Government bail out the Big 3 automakers?

Tax Free Savings Accounts Around The Corner

Every year, Canadians are inundated with ads for RRSP contributions in January and February as they deal with their Christmas credit card statements. This year will be no exception,  however, the ads will encompass the new Tax Free Savings Accounts which will be available January 2, 2009.

I wrote a post in the Rothenberg Capital Management Blog outlining some of the issues that remained unanswered July 30th. You can view the post by clicking here. Since then, the government has answered these questions and we have prepared a Frequently Asked Question sheet that should be able to answer most of your questions. To view it, you can click here.   

Should you have more questions, a Rothenberg Advisor can help you out. Contact information can be found at www.rothenberg.ca. Do you think that you will be opening a tax free savings account in the new year?

Your comments are greatly appreciated.

Market Update – November 4, 2008

Stocks on Bay Street surged today, led by a jump in gold stocks, as traders took in a fresh batch of corporate earnings. Oil and metals prices gained and the polls opened for the U.S. presidential election. The S&P/TSX composite index gained 395.32 points to 10,116.58.

In corporate news, TSX Group Inc. is cutting 10 percent of its workforce, 85 people, as the stock exchange operator’s integration of the Montreal derivatives market continues. Elsewhere, Gabriel Resources Ltd. reported a quarterly loss of $2.8 million, as its Rosia Montana gold project remains entangled in politics and regulation. The company is hopeful about a new Romanian government after elections Nov. 30.

Lastly, Quadra Mining said on Tuesday its third-quarter profit fell 59 percent as weaker copper prices eroded revenue and prompted the Canadian producer to halt its two development projects and suspend production forecasts beyond 2008. Net income was $20.1 million, or 30 cents a share, down from $48.8 million, or 86 cents a share, in the year-before period.

 

In the U.S., stocks rallied Tuesday as millions of Americans cast ballots to determine whether Republican John McCain or Democrat Barack Obama wins the presidency, with polls favoring the latter to replace George W. Bush in the White House. The Dow Jones Industrial Average gained 305.45 points, or 3.3 percent, to 9625.28, and the S&P 500 was up 39.45 points, or 4.1 percent, to 1005.75. The Nasdaq tacked on 53.79 points, or 3.1 percent, to 1780.12.

A series of solid corporate earnings results were bolstering investor enthusiasm. Following Monday’s close, credit-card company MasterCard took a net loss on charges related to its settlement of a legal scuffle with Discover Financial Services. Excluding the charge, however, MasterCard’s earnings trumped the Street’s forecasts.

Energy company Anadarko Petroleum reported that third-quarter profit climbed year over year and beat analyst estimates. In the technology sector, analysts say a revised search deal with Google Inc. will likely limit the upside for Yahoo Inc. and could push the Web portal back to considering a merger with Microsoft Corp.

On the data front, U.S. and foreign businesses sharply cut back their demand for capital equipment for the second straight month in September, the Commerce Department reported Tuesday. Factory orders fell 2.5 percent in September, much weaker than the 0.2 percent fall expected by economists.

The Canadian dollar, meanwhile, is trading up 2.14 cent at 86.86 cents US. Oil futures climbed sharply to trade above $70 a barrel, with the contract for December delivery rising $6.62, or 10.4 percent, to finish at $70.53 a barrel.

Shorts Make Volkswagen #1

What a week as the S & P posted its largest gain in almost 35 years and its worst month since 1938.  As short selling and naked short selling in particular is creating more volatility, I thought I would touch on something interesting where the naked short selling of shares in Volkswagen created the worlds most valuable company overnight.

For those who may not know what short selling is, it involves the practice of selling stock today with the hope that the share price will decline in the future. By buying the stock back at a lower price, you would cover your short position and make a profit. Should the stock price go up, you would have a loss.

Legally speaking, in order to short sell stock, there must be shares available to short. If you call your broker to short sell a postion, they should have the stock in inventory allowing you to do so. If they allow you to short and dont have stock available, this is called a naked short or naked short selling.

Porsche that was thought to own about 35% of the outstanding shares disclosed that it actually owned 74%. VW’s home state of Lower Saxony owns 20% which leaves only 6% available for shorting purposes. There was lack of disclosure on Porsche’s part that it owned so much of VW as the disclosure was not required by the German Stock Exchange.

VW’s stock closed on Tuesday at 1,005 Euro or $370 Billion US overtaking the Exxon that had a value of $343 Billion. Hedge Funds lost over $35 Billion US in two days on this trade alone. However, Porsche indicated that they would help alleviate some of the hedge fund problems by allowing more of their shares to be borrowed in the marketplace for shorting purposes. VW’s shares closed at 475 Euro by the end of the week.