March 3, 2009, 11:27 am

Bank of Canada cutting its rate again by 0.5% – Canadian Economy on the slump

by: The Financial Blogger    Category: Financial Rambling
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I’m studying all day today so I have the possibility of posting this extra post concerning the Bank of Canada and another rate cut. The overnight lending rate is therefore cut by half to 0.5%.

According to the Bank of Canada, the Canadian economy could suffer more than predicted for the first half of 2009. However, they see the economic growth coming back in early 2010.

They think the economy should get better in 2010 and even though the overnight lending rate is very low, inflation rate should be maintained around 2%.

The Bank of Canada is also considering other methods to stimulate the economy such as a program of “credit and quantitative easing” announced Mark Carney. Since the room for another rate cut is almost nil, The Bank of Canada has to look at other “non traditional ways” to stimulate the Canadian Economy.

Providing additional monetary stimulus, The Bank would become a buyer in credit markets. Therefore, the price for corporate debts should decrease and this should help maintaining a little appeal in the middle of a global recession.

More details regarding such measures are to come in The Bank of Canada’s next report on April 23rd.




This is actually quite a challenge as Mr. Carney is trying to get Canadians out of its first recession for almost 2 decades.  However, as long as the financial industry across the world is not stabilized, there is not much hope for an economic jump, even in Canada.

On a more positive note, The Bank of Canada think that the country has the necessary resources and the economic system strong enough to be part of the first country to get out of this global recession.

The good news is that all our banks declared profit for this year first quarter. I personally think that our banking system will be one of the reasons why our country will suffer less than other from this recession.

Most banks already confirmed that they will follow the trend and therefore, drop their prime rate by 0.5% to 2.5%. Even though variable rate credit such as HELOC have been increase to P+1, you still have the possibility to borrow at 3.5%, not bad, huh?


While a rate cut is good news for people in a good financial position (it is a perfect timing to borrow in order to buy productive assets or to pay off your debts faster… I’m doing both ;-), this is definitely not a good news for our economy.

Personally, it means that I can maintain my Smith Manoeuvre investment of $500 a month while paying down $650 per month in capital on my mortgage. This is quite a perfection situation for those who are in a position to benefit from such low interest rates. Borrow carefully and for the right reasons…

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Comments

Yeah and its lowest level since 1934!! Bank of Canada is talking about Quantitative easing. Not easy concept.

By cutting the target lending rate to zero, Central banks have one more weapon in their arsenal: Quantitative easing.

FYI Senior Editor Paddy Hirsch explains what this “nuclear option” it is, and what the Fed or other Central Bank hope it’ll do. Interesting way to learn!

http://marketplace.publicradio.org/videos/whiteboard/quantitative_easing.shtml

I personally love the rate cuts, like i mentioned in my recent posting if you have a good credit and safe job great to take advantage of the low rates.

That will bring my rate down to 2%. As much as I am satisfied, i am in a dilemma right now. Earlier on, my 200k mortgage @4.25% was absorbing all my excess cash for a guaranteed rate of return. The question is, what now? Dividend paying stocks time?

Btw, great blog, am a newbie around here.

by: The Financial Blogger | March 3rd, 2009 (9:40 pm)

Mich,
I am a strong believer in leveraging. Therefore, I would be temped to tell you that buying dividend stocks (Canadian banks are giving 6-7% dividend yield right now) can be quite interesting if you borrow at 2% 😉

In any case, you will be a winner if whether you decide to pay down your mortgage faster or invest in the market for a long time 😀

Could you please elaborate on your statement: “Therefore, the price for corporate debts should decrease and this should help maintaining a little appeal in the middle of a global recession.”
I am a little confused per what would happen with returns on corporate bonds. For my bond side of investements I was planning on buying a corporate bond index to hold in my TFSA. In theory it should perfom quite well considering companies have to pay more nowadays to borrow. If this is passed on to you the final investor you should be ok no?

The rate cuts feel real good, but just liek the so-called stimulus packages, they are treating the symptoms rather than the cause of our economic ills.

There is a reason we feel pain when we touch a hot stove – it makes us remove our hand before hopefully we do permanent damage to our hands. What if we could hold our hand on the stove without feeling pain? We would burn our hands with permanent scars and, if held there long enough, cook our hands.

The problem we face now is that we spent too much on borrowed money. Simply put, we are overdrawn. The solution is to spend less, save more and pay down our debts. Low interest rates won’t do that. Nor will governments increased spending on our behalf. All these measures do is hold our hands on the stove longer.

I’ve just tipd this stpory and posted it to zoomit at http://business.zoomit.ca/bank-of-canada-cutting-its-rate-again-by-0-5/ (Please feel free to vote for this story there).

by: The Financial Blogger | March 4th, 2009 (8:58 am)

Remus,
if the price of corporate bonds decrease, this means that the yield will remain higher. Therefore, there will be an interest from investors to buy them. Right now, GIC’s are providing yield very close to corporate bonds. Why would you bother having a risk of default with a company when you can buy a 100% fully guaranteed investment (backed by the government)?

FB

I am new new to the investing world. So far what I have learnt was that it’s a good idea to keep bonds for example inside your registered accounts because of the way income from bonds is taxed in a taxable account.
I also look at the market now and I am a little scared to jump in right now. This would be my entry point in the market and from what I am reading based on what is going on things can still deteriorate further. I know market timing is not recommended but hey common sense tells me why not wait a little more before you commit. Entering the market for the long run at its lowest in so many years might be a good call no?
But this does not solve the problem of what to do with the TFSA account as that was my main concern now. I am saving my powder for now but I earn close to nothing inside my ING account, 2.3%.
So I said to myself how about I move into some corporate bonds. The one I found and like is CBO-T, the newly claymore etf. http://www.claymoreinvestments.ca/etf/fund/cbo/holdings
If you look at its holdings it contains a lot of companies so I would say the risk is small for default no?
And from what I’ve read the corporate bond world right now should be an attractive place to be. Good companies.
I would hope the returns there will be better than a regular GIC…
Any thoughts on this?

thanks

Remus:
keeping bonds and income producing investments makes sense to keep them in registered account for tax reasons.

About market timing i am not a big fan of market timing, things can always go lower but the fastest gains are made over a couple of days during a bear market. Depending on ones situation, either option makes sense. i think for the long hold there is great amount of value in the market, but there is as always downside potential. it is harder to make up losses, so some people would rather wait till markets turn around, they would rather reduce losses over quick gains.
I personally bought somethings early February and am not down about 20%.

Corporate bonds are very attractive right now, the spreads are fairly high and if you want to purchase some AAA and AA bonds you can get very good yields on them.

I took a look at the calymore fund and majority of the holdings are financials over 50%, look at the companies if you comfortable with holding them than it looks good.

Ray thanks for your insight.

My main point with market timing was not to have spectacular gains (or benefit from that) from the bear market rallies – even though it would be nice but I don’t even consider that 🙂
The whole idea is: say you are just starting up (I am 30 now) now and you have some money to deploy in the market for the next 20-30 years. Buy now and never sell kind of thing. Wouldn’t it be nice to get in at the bottom? Of course it would problem is nobody knows where the bottom is or will be.
However from what is going on around us right now and from what I keep reading and listening and using my own brain too 🙂 all this tells me the markets can still go down. The consensus among bears is around 500-600 for the S&P 500 in US for example. I was actually losing faith in this prediction in the past 2-3 months as we’ve seen that rally from November lows to January. But look now how it goes down.
So I’d rather wait some more for my larger investement. Could we see a huge drop like in 1929… who knows and see the S&P at 300? Maybe.
Anyway my gut for now tells me to wait some more and risk going down from a 500 level rather than a 700 level 🙂 Just an example.

For the bond part however anytime is a good time to start assuming you don’t generally lose money in bonds. However I am not sure how that ETF will work exactly as they roll over the bonds after 5 years. I think they buy the bond and hold it till maturity no? Because if the bond prices go down and it’s time for the ETF to sell them because of its laddered structure you might end up losing money on it no?

by: Phillip Huggan | March 4th, 2009 (7:50 pm)

The AB oil economy benefits from a strong CAD. Ontario gets hammered as it loses manufacturing industries cross border and prefers a weaker CAD. No one likes revenue oscillations on the Provincial level given multi year investment time tables.

It would seem to make sense to use eachothers business and mortgage portfolios as a natural hedge. I think there should be some incentive or revenue neutral incentive/penalty for banks in AB and southern ON to swap eachothers portfolios as a partial revenue stream hedge.

by: The Financial Blogger | March 5th, 2009 (9:16 am)

Remus,
If you don’t want to loose money with your bonds, I suggest you run a bond ladder (1 year to 5 years). You will hold the promised guarantee of capital. If you hold bonds through ETF’s or mutual funds, you are not the holder of the guarantee (the fund manager is). Therefore, it is still risky (international bond funds were loosing money for the past years (excluding 2008) because of the rise of the Canadian dollar for example).

As for market timing, if you wait until you get “the bottom” you will probably miss it anyway. You saw what happened between November and January… markets went up 10% to 15% and you still waited. You were right this time but what if it would have jumped by 25%? What is your trigger? Almost impossible to determine. As for the media, they wake up when the market get 40% back 😉

If you have to invest for your retirement, today, a year ago or next year won’t matter in your overall return as this is definitely not the last drop in the market you will see in the next 30 years 😉

FB from what I saw in the claymore ETF those are all canadian companies bonds so I don’t think the currency exchange rates should influence them so much.
I still have to dig some more into it as I need to find out their laddered strategy involves keeping the bonds to maturity or sell them before. If they hold them to maturity they should not lose money I think.

Regarding the market timing I agree it’s impossible to find the absolut bottom. However from November ongoing I listen and read and read and there are a lot of voices saying things will get uglier before they get better. And that we might see a much lower level of the S&P 500 in US. That is the indicator I am following for this purpose. If it reaches a low enough level (like 5-600) then I would feel ok to jump in with no regrets. Even if it keeps dropping so be it. If we end up with the market at 300 for example well… tough luck. Things will be really bad then and we would have to ride this one out.
The main idea was to try to pick a low enough “bottom” one feels comfortable and join the party. For me that would be around 5-600 for the S&P.

Moving away from that I like more and more the dividend idea. And getting the passive income from that. So I was doing a lot of reading on some smarter than me peoples’ blogs for that 🙂 That is not easy either, as dividends are slashed in these times left and right. So welcome in the wonderful world of investing in troubled times which supposedely are the best of times for people deploying capital 🙂

by: The Financial Blogger | March 5th, 2009 (12:00 pm)

Remus,

There are some very successful portfolio manager that were saying it was going to get ugly in 2006, than in 2007 and they finally were right in 2008 (even though their funds didn’t do better than anybody even if “they knew”).

Right now, you will read a lot more articles about the end of the world than anything else. Just keep in mind that these are written by the same people that were saying that the oil barrel would jump at $200 2 years ago ;-0

I agree. This thing I was talking about would work only once: when the entry point should be? Once you’re in, you’re in for good 🙂 The whole idea was to be in at the lowest level possible or at least at a low enough level that if the market goes even lower than that you won’t lose any sleep. And as some of them don’t exclude an S&P around 5-600… I decided to wait a little.

Speaking of which whom would be your list of people you like to read/listen to?
Personally I read a lot on the canadian blogs (canadian capitalist, million $ journey, you recently 🙂 etc.
But I also enjoy listening to Marc Faber, Garry Shilling, Jim Rogers, Peter Schiff sometimes. I would say one of the best minds out there is Marc Faber, with his swiss accent describing things I love it 🙂 Also Ron Paul talks a lot of sense too bad nobody is listening. Roubini is also OK.

Hey remus,

I actually read a lot but I prefer making my own point of view.

Jarislowski for example, predicted the crash in 2006,2007,2008 then he got it right.

So if people likew him can be wrong 2 yearsd in a row, who can be right?

Cheers,

Tfb