Interest rates continue to trickle down.  Variable rate as low as 2% now, or prime minus .25%, and new 30 day quick close special on the 5 year fixed rate at 3.79%.

Some conditions apply. 

                                   ·          TSX +121.76  

                                   ·          DOW +29.55

                                   ·           Dollar +.05c to 94.40cUS  

                                   ·            Oil  -$.36 to $69.51US per barrel.  

                                   ·           Gold +$3.90 to $1,123.40USD per ounce  

Canadian 5 yr bond yields +.02 bps to 2.56.

No change in prime rate.  Staying put at 2.25%.  So can still borrow money with mortgage at 2%!

Economic recovery is ’solidly entrenched’: BoC

Paul Vieira, Financial Post 

OTTAWA — After months of uncertainty, the economic recovery now appears to be “solidly entrenched,” the Bank of Canada said Tuesday, indicating its forecast for growth should unfold as envisaged.

Still, in its latest interest rate announcement, the central bank reiterated, as expected, its conditional commitment to keep its key policy rate at a record low 0.25% until June 2010 as inflation is still not expected to hit its preferred 2% target until the second half of 2011.

Recent data – from retail sales to a stunningly strong jobs report for November — have painted a mostly cheer picture of the Canadian economy, analysts say, even though third-quarter GDP growth of 0.4% annualized came in well below the central bank’s 2% expectation.

Since the central bank’s latest economic forecast in October, “global economic developments have been slightly more positive and the global outlook has improved modestly,” the bank’s governing council said in its statement, adding though that “significant fragilities” remain.

The central bank said the composition of economic growth is unfolding as expected, highlighted by a shift toward stronger domestic demand and less reliance on exports.

“The main drivers and the profile of the projected recovery in Canada remain consistent with the bank’s [outlook],” it added. “The bank continues to expect economic growth to become more solidly entrenched over the projection period and inflation to return to the 2% target in the second half of 2011.”

According to the central bank’s outlook, Canada is expected to grow 3.3% this quarter, followed by expansion of 3% next year and 3.3% in 2011. Predictions for strong growth gained steam late last week when data indicated the Canadian economy added 79,000 jobs in November.

Further, the central bank on Tuesday played down the impact of the stronger dollar, even though it acknowledged it remained a key risk to its forecast, and “could act as a significant further drag” on growth and inflation. The stronger loonie, which has advanced as much as 25% this year against its U.S. counterpart, led to a surge in imports in the third quarter – resulting in net exports acting as a drag on the economy of roughly 5.3 percentage points.

Since the last rate announcement, however, the dollar has on average traded a couple of cents below the central bank’s working assumption of a US96¢ loonie.

Most analysts were looking for any change in nuance in the bank’s statement – in particular a hint or two that it might move before its conditional pledge to keep rates at a record low until June 2010 given the surge in domestic consumption as households take advantage of record low borrowing costs.

Instead, the central bank reiterated that its target rate of 0.25% “can be expected” to remain intact until the end of the second quarter of next year. The pledge is conditional on inflation hitting the 2% target in the third quarter of 2011, as the bank expects.

The last time the bank raised its key policy rate, to 4.5%, was in July of 2007 – and shortly afterward the first signs of the credit crisis emerged.

Some economists, such as Ryan Brecht of Action Economics, expect the central bank to begin hiking its policy rate, and aggressively, starting in the second half of next year.

In a note released Tuesday morning, Mr. Brecht, the firm’s senior North American economist, said he envisaged the Bank of Canada raising its target rate by 175 basis points before December of 2010, for a policy rate of 2%, or “more normal levels.” Still, that would be below the 3% level in September of 2008, when Lehman Bros. collapsed, or the 4.5% peak hit more than two years ago.

Financial Post

More lenders lowering rates to below prime on the variable, meaning today rates south of 2.25%.  And popular five year fixed rates have additional lenders just over 4%.  Special rates with 30 day quick closing options below 4%. 

Troubles in financial markets as Dubai hits credit snag.  See below. 

                                   ·          TSX +27.61 TSX ended higher on Friday but stock markets were mostly bruised last week in the wake of news that the Dubai government’s investment company Dubai World wants a standstill in payments on its approximately US$60 billion in debt until at least May

                                   ·          DOW -154.48

                                   ·           Dollar -.09c to 94.21cUS    

                                   ·            Oil  -$1.91 to $76.05US per barrel.  

                                   ·           Gold -$12.80 to $1,174.20USD per ounce

Canadian 5 yr bond yields unchanged: remains at  2.36.

Dubai’s reputation as investment magnet takes hit amid ‘standstill’ on $60B debt

The Associated Press

DUBAI, UNITED ARAB EMIRATES — Just a year after the global downturn derailed Dubai’s explosive growth, the city is now so swamped in debt that it’s asking for a six-month reprieve on paying its bills — causing a drop on world markets today and raising questions about Dubai’s reputation as a magnet for international investment.

The fallout came swiftly and was felt globally after Wednesday’s statement that Dubai’s main development engine, Dubai World, would ask creditors for a “standstill” on paying back its $60 billion US debt until at least May.

The company’s real estate arm, Nakheel — whose projects include the palm-shaped island in the Gulf — shoulders the bulk of money due to banks, investment houses and outside development contractors.

In total, the state-backed networks nicknamed Dubai Inc. are $80 billion in the red and the emirate needed a bailout earlier this year from its oil-rich neighbour Abu Dhabi, the capital of the United Arab Emirates.

Markets took the news badly — with the Dubai woes and the continued fall of the U.S. dollar giving investors twin worries. Dubai’s move raised concerns about debt across the Gulf Region. Prices to insure debt from Abu Dhabi, Qatar, Saudi Arabia and Bahrain all rose by double-digit percentages Thursday, according to data from CMA DataVision.

 “Dubai’s standstill announcement … was vague and it remains difficult to discern whether the call for a standstill will be voluntary,” said a statement from the Eurasia Group, a Washington-based research group that assesses political and financial risk for foreign investors interested in Dubai.

“If it is not, Dubai World will be going into default and that will have more serious negative repercussions for Dubai’s sovereign debt, Dubai World and market confidence in the UAE in general,” the statement added.

Dubai became the Gulf’s biggest credit crunch victim a year ago. But its ruler, Sheik Mohammed bin Rashid Al-Maktoum, had continually dismissed concerns over the city-state’s liquidity and claims it overreached during the good times.

When asked about the debt, he confidently assured reporters in a rare meeting two months ago that “we are all right” and “we are not worried,” leaving details of a recovery plan — if such a plan exists — to everyone’s guess.

Then, earlier this month, he told Dubai’s critics to “shut up.”

“He needs to produce a recovery plan that will be respected by those who want to do business with Dubai,” said Simon Henderson, a Gulf and energy specialist at the Washington Institute for Near East Policy. “If he does not do it right, Dubai will be a sad place.”

After months of denial that the economic downturn even touched the glitzy city-state, the Dubai government earlier this year showed signs of trying to deal with the financial fallout that has halted dozens of projects and touched off an exodus of expatriate workers.

In February, it raised $10 billion in a hastily arranged bond sale to the United Arab Emirates central bank, which is based in Abu Dhabi. The deal — seen by many as Abu Dhabi’s bailout of Dubai — was part of a $20-billion bond program to help Dubai meet its debt obligations.

On Wednesday, the Dubai Finance Department announced the emirate raised another $5 billion by selling bonds — all taken by two banks controlled by Abu Dhabi.

Abu Dhabi’s ruling Al Nahyan family has been more conservative with its spending, investing oil profits into infrastructure, culture and state institutions. During Dubai’s real estate bonanza, the Nahyans saw their flashy neighbour race ahead with development plans and tourism plans that had plenty of hype but few details on how they would be pulled off.

Some did materialize. The more than 800-metre Burj Dubai is scheduled to open in January as the world’s tallest building. But many other projects, including a tower even taller than the Burj Dubai and satellite cities in the desert, are still just blueprints.

The standstill will likely not immediately affect CityCentre, an $8.5-billion casino complex opening next month in Las Vegas that is half-owned by Dubai World. A Dubai World subsidiary and casino operator MGM Mirage agreed with banks in April to fully fund and finish the six-tower, 27-hectare development of plush resorts, condominiums, a retail mall and one casino on the Las Vegas Strip.

However, the standstill’s effect may be felt on the famous Keeneland thoroughbred horse auctions near Lexington, Ky., where Sheik Mohammed is a prominent bidder.

Last week, Sheik Mohammed demoted several prominent members of Dubai’s corporate elite and replaced them with members of the ruling family, including his two sons, one of whom is Mohammed’s designated heir.

Businessmen who fell out of favour were closely associated with Dubai’s phenomenal success. They include the head of Dubai World, Sultan Ahmed bin Sulayem, and Mohammed Alabbar, the chief of Emaar Properties, developer of the Burj Dubai and hundreds of other projects.

“He is trying to shake things up,” said Christopher Davidson, a lecturer on the Gulf at Britain’s Durham University and an author of two books on the UAE.

However, Davidson added, Mohammed’s decision to replace those who helped put Dubai on the world map with his relatives might be “read as an increase in autocracy which does not look good internationally.”

Not everyone is upset at Dubai Inc.’s transformation into a family business, analysts say.

Mohammed’s latest moves may have pleased Abu Dhabi more than the foreign investors, but it is Abu Dhabi that still has the strongest incentives to save Dubai from its financial misery.

“By shifting the power base back to the family things are as they should be as far as Abu Dhabi is concerned,” said Mohammed Shakeel, a Dubai-based analyst for the Economist Intelligence Unit.

After an expensive adventure in doing things the Western way, it’s “going back to basics” for Dubai, Shakeel added.

UAE central bank to bolster Dubai banksmess

By Barbara Surk and Tarek El-Tablawy

DUBAI, UNITED ARAB EMIRATES — The United Arab Emirates’ central bank said Sunday it would offer additional liquidity to banks, signalling a push by the federal government to reassure investors worried about the country’s banking sector and its exposure to Dubai’s crushing debt.

Global equity markets were set to reopen today, and investors are worried about a routing similar to that seen last week after Dubai’s chief engine for growth, Dubai World, announced it wanted more time to pay some of its roughly $60 billion US in debts.

The UAE’s official WAM news agency said the central bank issued a notice to banks saying it would make available “a special additional liquidity facility linked to their current accounts at the central bank.” The statement said the facility can be drawn upon at a rate of 50 basis points — half a per cent — above the three-month Emirates interbank offered rate.

International investors reacted with shock and outrage at Dubai World’s announcement Wednesday that, as part of its restructuring effort, it would ask creditors to delay repayment of its debt and that of its real estate arm, Nakheel, until at least May. Nakheel has a $3.5 billion bond coming due in December.

The company’s roughly $60 billion in debt makes up the brunt of the at least $80 billion Dubai owes as a result of a meteoric decade-long growth boom that saw the tiny city-state transformed into a Middle Eastern Las Vegas, New York and Los Angeles all wrapped into one. Dubai World was a key driver of that growth, with interests ranging from ports to real estate.

In the days since the announcement, Dubai officials have gone to neighbouring Abu Dhabi, the oil-rich home to the federal government for a series of meetings. Some analysts have speculated that the timing of Dubai World’s announcement — on the eve of a three-day Islamic holiday — caught even Abu Dhabi’s rulers by surprise, putting them under pressure to act decisively in a bid to shore up confidence in the country’s banks.

UAE banks are believed to be shouldering a large chunk of Dubai’s debts, and international ratings agencies have either downgraded the ratings of some of the country’s banks — or at least placed them on review for further downgrades — citing exposure to Dubai World’s debt.

The central bank’s statement was also aimed at mitigating any negative fallout on the country as a whole, with concerns that Abu Dhabi would be branded with the same iron of pessimism and skepticism that Dubai will likely endure for years to come.

The UAE’s banking system is “more sound and liquid than a year ago,” the bank said.

Dubai World’s call for more time is seen by many analysts as a classic case of over-extension — a tale of a city-state whose dreams for development propelled it to stardom with its indoor ski-slopes, man-made islands and world’s tallest tower.

But that dream was built on borrowed time and money, and as the global recession hammered Dubai, driving property prices down by 50 per cent in a year, forcing layoffs and project delays and cancellations, the emirate no longer had access to the easy credit on which it had pinned its growth.

It simply couldn’t pay.

At the beginning of the year, it launched a $20-billion bond program, of which $10 billion was snapped up by the UAE’s central bank. The same day Dubai World issued its murky statement about a debt-extension, the emirate’s government said a new $5-billion bond issuance had been bought up by two banks majority owned by Abu Dhabi.

While the Dubai World statement made clear that the bonds were not linked to its debt woes, it was obvious that the emirate had little recourse but to turn to Abu Dhabi, whose more conservative growth was fuelled by the same oil that Dubai lacks.

Dubai’s debt saga is not new.

It’s been obvious for some time that the emirate owes more money than it can repay. But what remained unclear was the overall extent of the debt load and what officials were doing to avert a panic at a time when the world was in the nascent stages of emerging from its worst recession in over six decades.

UAE newspaper Al-Itihad on Sunday quoted an unidentified Dubai World official as saying the conglomerate, over the past few months, “totally rejected the idea of selling some of its good investment and real estate assets at low prices.”

The official said any asset sale needed to be in a “commercially fair manner in order to achieve (Dubai World’s) long-term strategic objectives, away from … economic pressures.”

The Associated Press

Variable rate special as low as prime minus .25% or 2%.  Five year fixed rates holding around 4% with specials just under.

TORONTO - The cost of homeownership in Canada became more expensive in the third quarter, according to a report by RBC Economics Research.

The bank says this hasn’t happened since the spring of 2008 and was due to a slight rise in mortgage rates and higher property values. The RBC index measures the proportion of pre-tax household income needed to service the costs of owning a home.

During the third quarter, the benchmark detached bungalow moved up by one per cent to 40.2 per cent and the standard townhouse rose by 0.7 per cent to 32.3 per cent.

The standard condo climbed by 0.5 per cent up to 27.6 per cent and a standard two-storey home increased 1.2 per cent to 45.8 per cent.

RBC says housing demand has outgrown supply, leading to a more competitive market and widespread increases in home values.

“With such strong momentum in the housing market and the cyclical low in mortgage rates behind us, it seems unlikely that affordability will improve in the near future,” said RBC senior economist Robert Hogue.

“The housing market still faces obstacles, as mortgages have become more difficult to handle for many Canadians amid challenging labour conditions. This is likely to persist until the economic recovery is well established and job creation is sustained next year.”

Variable Rate Special with one lender at prime minus .25% or 2%!   30 day quick close special.   Fixed rates also down a smidge, as low as 3.94% if closing by end of year. 

“The real risk is deflation, not inflation”  Q&A with Peter Gibson

                                   ·           TSX +46.92 (Reuters)  

                                   ·           DOW -73.00

                                   ·           Dollar -.50c to 95.19cUS    

                                   ·            Oil  -$.59 to $76.35US per barrel.    

                                   ·          Gold -$10.10 to $1,116.70USD per ounce    

Canadian 5 yr bond yields -.02bps to 2.68

“The real risk is deflation, not inflation”  Karen Mazurkewich, Financial Post 

Q&A with Peter Gibson

Peter Gibson is the managing director, portfolio strategy and quantitative research at CIBC. He is considered one of the best quantitative research strategists in the country, having made good calls in the past while employed at Desjardin Securities Inc. and Scotia Capital Inc.

Mr. Gibson made the right call in 2001, that the greenback would be massively devalued over the next few years, at the same time as interest rates fell. It was a prediction that bucked economic theory, but was accurate.

In early 2007, Mr. Gibson predicted that the easy money in the equities market had already been made and forecast major corrections due to shock to the financial system. Three months ago, he created a bond volatility index and began measuring the spread between it and the stock market index.

And what does a quant man do in his spare time? While growing up in Port Credit, Ont., Mr. Gibson dreamed of travelling in space. While he applied his science training to the business world, he is still pursuing his first love: In 1997, he paid $175,000 to book one of the first rides on Richard Branson’s SpaceShipTwo suborbital ship to fly to the stars. He travelled to Philadelphia’s National AeroSpace Training and Research Center to train. The trip is still pending.

Q. Let’s look into your crystal ball. Six months down the road, what do you see happening in the economy?

A. My view is that the economy will show further signs of improvement, very much like the years 1979, 1989, 1999, when there was economic recovery after the crisis. As the outlook improves again, people feel better about the economy, but then they will start worrying about inflation again. That’s problematic because nowadays it only takes a little worrying to push bond yields up.

Q. What is the tipping point when higher bond rates will trigger another change in the economy?

A. Somewhere between 4.3% to 4.6%.

Q. When do you predict that will happen?

A. I don’t like to put a calendar date on it, but probably close to the third quarter or year end of 2010, the bond yield will have pushed up to its ceiling and the Federal Reserve will respond by tightening its bias. At that point, the change in tone from the Fed might cause the dollar to strengthen and gold to sell off temporarily. This will be an important development, because the Chinese will have to look at the implications for their market.

Q. So what’s driving all this is an emotional response from consumers?

A. Yes. Whenever the economy is growing, the bond market very quickly gets back to fretting about inflation, and that’s where the psychological aspect comes into play. It’s a misplaced fear. I’d argue that the real risk is deflation not inflation. There is no evidence companies are able to pass on price increases, in any sector, anywhere in the world.

Q. Who is worrying?

A. It’s not the guy on the street worrying about inflation, unless his wages don’t keep up. Rather, it’s the bond market, which is so large. You are talking trillions and trillions of dollars of government debt. If even 20% of the bond market started to panic about inflation, they won’t sit around and wait for evidence of deflation. They will start to sell their treasuries quickly, because any time real inflation rises it cuts into the real returns for bonds. Imagine what would happen if $2-trillion of debt was being sold — bond yields would rise rapidly because of fear the selloff would destabilize the economy.

Q. So the volatility in the stock market is directly linked to the debt?

A. Absolutely. A small amount of inflation can cause the bond yield to rise sharply, and since bond yields and stock prices are positively correlated, that’s why volatility is suddenly coming into the stock market.

Q. So what do you tell investors?

A. We favour equities until the bond yields push higher. In Canada, the improvement in financial [stocks] will be muted. I’d be more focused on commodities until the bond yield rises.But investors today have to have a good grasp of the macro-fundamentals. I predict that 70% to 80% of future price moves in the stock market will not be due to stock fundamentals but to changes in the bond yield. Recently, stocks with poor fundamentals have done better than stocks with good fundamentals. That’s what makes an environment like this so difficult for investors.

Q. What sectors will see the biggest impact?

A. The same forces that will drive the bond yield up later next year will cause gold prices to reverse and perhaps even oil prices to reverse as the Chinese economy slows down dramatically.

Q. You predict a crisis in China. Can you explain?

A. The global crisis caused a collapse in exports and forced China to prop up its domestic growth through massive stimulus. In the first several months, China put in about $1-trillion worth of lending, and that lending quickly found its way into another round of asset inflation. A real estate bubble if you like. The day when the bond yield starts to move again, it will probably cause the real estate crisis in China to start unwinding and probably affect the banking sector as well. If China is experiencing a banking crisis through the earlier part of the next decade, that will probably help keep capital in the U.S. treasury market and help protect the U.S. economy from a significant slow down. We’ll probably see a stock market selloff in 2011-2012, but it might not be as bad as it would have been otherwise.

Five year fixed rate now at 4.05% and adjustable rate mortgage as low as prime minus .10% or 2.15%.  Bank of Canada still suggesting no change in prime rate til mid 2010 and TD Experts suggesting economy not growing as strong as initially forecast.   Thich could keep rates from jumping down the road.

Fixed payment variable rate mortgage also available at prime + 10% or 2.35%.   Little bit of premium but perhaps worth it for peace of mind of knowing low payment for next 5 years while still hopefully saving vs. going with higher fixed rates. 

Canadian home builders scramble to meet demand

Garry Marr, Financial Post 

The Canadian housing market’s surprising turnaround is spreading to new home construction as developers scramble to respond to a supply shortage that has sent pricing soaring for existing homes.

But any increase in construction on the new home side will likely not surface fast enough to feed the demand for housing that continues to be spurred on by record low interest rates.

Canada Mortgage and Housing Corp. said Monday there were 157,300 units constructed last month on a seasonally adjusted annualized basis, a 5.4% increase from a month earlier. Annualized starts at dropped as low as 118,500 in April.

“There is not a lot of inventory around,” said Gary Friend, president of the Canadian Home Builders’ Association, adding his industry has been careful not to speculate. “We have to watch our Ps and Qs, as we try to meet this demand.”

Any increase in supply would be welcomed as a shortage of new listings has lead to a spike in prices. The Canadian Real Estate Association said last month existing home prices across the country were up 13.6% in September from a year ago as a supply problem was evident in almost every city.

The shortage has yet to ease despite the suggestion higher prices would coax homeowners to sell. This month the Toronto Real Estate Board reported sale prices in October were up 20% from a year ago.

“The existing homes market is in short supply so we’ve gone from a buyer’s market to seller’s market. The way it gets linked is you get some spillover into the new homes market and that’s starting to happen,” said Bob Dugan, chief economist with CMHC.

The agency has already upped its forecast for new home construction for 2010 from 150,300 to 164,900. Even at that level though, construction is still well off the 211,000 new starts recorded in 2008.

Paul Ferley, assistant chief economist with the Royal Bank of Canada, said “at the margins” new home construction could help ease the housing crunch. “Builders are aware and will contribute where they can to advance construction activity but no they can’t turn on a dime.”

gmarr@nationalpost.com

Variable still a low 2.15%.  Five year fixed rate up a little to 4.09%. 

CMHC forecasts continued new housing rebound

The Canadian Press

OTTAWA — The national housing agency is reporting that housing starts have started to recover and it expects the recovery to continue.

Canada Mortgage and Housing Corp. predicts starts will reach 141,900 this year and increase to 164,900 in 2010.

The CMHC’s fourth-quarter market outlook forecasts housing markets will continue to strengthen over the next year as economic conditions improve.

It says demand for existing homes has rebounded and both new and existing home markets are characterized by lower inventory levels.

However, the national housing agency says the strong pace of sales in the second and third quarters partly reflects delayed activity and is not likely to be sustained.

The CMHC says it expects the level of sales to move back closer in line with anticipated economic conditions.

It predicts existing home sales will reach 441,300 units in 2009 and increase to 445,150 units in 2010, while the average price is expected to be $312,950 in 2009 and $324,500 in 2010.

Five year fixed term at 3.99%.  Variable / adjustable rate mortgage dipped to prime minus .10% or 2.15%.   Head of Bank of Canada Mark Carney reaffirmed no change in prime likely til mid 2010.  Recent dips in value of Cdn dollar may help him keep this estimate in line and inflation in check. 

                                   ·           TSX -147.25(Reuters)   after an early morning surge as investors, who have been dithering over further gains for days, took confusion over the U.S. homebuyer tax credit as excuse to sell and lock in profits

                                   ·            DOW -104.22  

                                   ·          Dollar -1.35c to 93.72  to the lowest level in almost three weeks as the head of the nation’s central bank reiterated concern the currency has grown too strong and crude oil and stocks tumbled.

                                   ·           Oil  -$1.82 to $78.68US per barrel.  on concerns that a sluggish economic recovery will keep fuel demand low.
Gold -$13.50 to $1,042.10USD per ounce   

Canadian 5 yr bond yields +.02bps to 2.81.

By Bruce Whitaker

When buying you should always consider how the features of your potential home will appeal to other buyers. You don’t want to buy something that uniquely appeals to you but is unlikely to be attractive to others. You don’t want to be in an awkward spot in 3-5 years where it becomes hard to sell your home. Consider the following:

Central air conditioning is the most sought-after feature. Central air is a pricey add-on, especially in a home without a forced-air heating system, so you may want to favor a house that already beats the heat.

Storage is an absolute must. The majority want a garage with two or more bays and a walk-in closet in the master bedroom.

Try to find a property with energy-efficient features like newer windows, Energy Star appliances and a well-maintained HVAC system.

A growing number of buyers want to stay wired at home — nearly half say cable and satellite connections are important, while 40 percent want access to high-speed Internet.

A backyard is important with a fence.

Be close to parks, transportation and good schools.

Finally, the kitchen and bathrooms should be fairly large. I haven’t heard of anyone that prefers a smaller bathroom and kitchen.

Rates up and down.  Fixed rates have jumped somewhat from lows of 3.79% for a five year fixed rate up to above 4% at most major lenders.  Still one lender holding out at 3.99% on five year deal.  Special at 3.79% for 4 years as well. 

Yet down is the variable / adjustable rates to a low of 2.15% or prime minus .10%.   With Bank of Canada suggesting no changes til mid 2010 still may be way to go.

Contact us for other rate news.