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(TRUTH LEEM/Truth Leem/Reuters)
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David Rosenberg's fears: Housing woe, currency wars Add to ...

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What's weighing on David Rosenberg There are 12 things worrying David Rosenberg among trouble signs throughout the global economy. In a research note today, the chief economist of Gluskin Sheff + Associates outlines his dozen concerns:

  • China is overheating, and further tightenening will be needed. "When government officials begin discussing price controls, you know the situation is serious."
  • Europe's debt crisis is spreading. "If the contagion reaches Spain, it would likely be game over for the euro."
  • It's too early to say whether the Federal Reserve's latest quantitative easing program, dubbed QE2 by the markets, is succeeding or failing. "Bond yields and mortgage rates have gone up in the U.S., not down, despite further deterioration in the housing market. The U.S. dollar has reversed course and is rising to the detriment of foreign currency translated earnings. On this score, QE2 is clearly no match for the debt crisis in Europe."
  • Did Canada experience some type of housing bubble? "We are worried about looming default risks but have been pleasantly surprised by the fact that the real estate market has eased, rather than busted. Be that as it may, a more pernicious turndown in real estate values cannot be ruled out, especially if the Bank of Canada follows the market and resumes in its rate-hiking program early next year."
  • Renewed housing deflation in the United States.
  • Canadian household debts. "This is a longer-term concern, especially if interest rates were to be raised further in the future. I see this as a very big intermediate-term concern for the consumer spending outlook."
  • Lack of productivity growth in Canada. "This is a key source of debate - but we contend that the U.S. data are overstated and the Canadian data are understated."
  • The high Canadian dollar. "In our view, it is still overvalued by a nickel even with the recent firming in the commodity complex ... the Canadian dollar is impeding growth in the local manufacturing sector and clearly dampening domestic export competitiveness."
  • The retrenchment of U.S. state and local governments. "This is the one critical source of downside risk for the U.S. economy in 2011, which could easily result in 1.5 to 2 percentage points of withdrawal from GDP growth."
  • Currency wars. "The trend toward globalization not only has stalled but may be reversing."
  • Military skirmishes. The skirmishes between the Koreas is an example, but they will also "test" U.S.-China relations.
  • Downside risk to the views of economists for global growth of 4.2 per cent next year. "It does not seem to me that economists have fully taken into account the drag from the fiscal side of things in the U.S. and the euro region."

Markets stil fear European crisis European policy makers may have wanted a bailout party, but nobody came. Markets still fear Europe's debt crisis is far from solved after the latest bailout details, to Ireland this time, were unveiled over the weekend.

"With no guarantee that the Irish budget will pass on Dec.7 and increasing austerity fatigue amongst populations, not only in Ireland, but also the rest of Europe, the next few days will continue to be fraught with difficulty for the European currency," said CMC Markets analysts Michael Hewson.

"Particular attention will remain on the yield differentials between German and Portuguese, and especially Spanish bond yields, which hit life time highs on Friday, and whether they will continue increasing as investors remain concerned at the ability of European politicians to actually deliver on their promises to support not only the euro, but the indebted peripheral countries."

The finance ministers of the EU approved an €85-billion rescue for Ireland and its troubled banks, as well as endorsing a new, longer-term bailout scheme for the group.

"This is a measure which is not simply a single shot taken in response to an important crisis, it forms part of the absolute determination of Europe - of France and Germany - to save the euro zone," a spokesman for the French government told a radio interviewer.

Investors aren't convinced, and the fear remains that the crisis will spread next to countries such as Portugal and Spain, where government borrowing costs remain exhorbitant.

"Europe continues to crumble under the weight of their escalating debt crisis," said Scotia Capital currency strategist Camilla Sutton. "As this has moved from a sovereign debt issue to a major crisis of confidence, it has become increasingly difficult to quantify and forecast the snowball effect."

Scotia Capital's "base case" is that Europe, through various aid packages and bailout mechanisms, should have enough ammunition to see the crisis through, though the interconnections among European banks, combined with the tremendous loss of confidence, "complicates matters materially."

At a conference today in Prague, Nouriel Roubini, the New York University professor and co-founder and chairman of Roubini Global Economics, said Portugal will also probably need a bailout, but that Spain is the "big elephant in the room" in the euro debt crisis.

"There is not enough official money to bail out Spain if trouble occurs," Mr. Roubini said, according to Bloomberg News.

What to expect this week If the projections are right, markets will see three signs this week that Canada's recovery is slowing. Not dead in the water - not by any stretch - but nowhere near the rapid pace of the post-recession rebound.

"After delivering a solid 'V' shaped recovery in the early stages of economic recovery, Canadian economic growth has moderated significantly over the last six months," said Toronto-Dominion Bank economist Diana Petramala.

The first sign is the faltering trade picture, released today by Statistics Canada. The federal statistics gathering agency reported that Canada's current account, the broadest measure of trade, hit a fresh low as the deficit widened in the third quarter to $17.5-billion, far deeper than expected.

"This marks the eighth quarterly deficit since the fourth quarter of 2008," Statistics Canada said.

The deficit in the current account, which includes goods, services and investment income, represents more than 4 per cent of gross domestic product, just over the outside edge of what the U.S. would like to see as a target. Treasury Secretary Timothy Geithner has proposed that countries keep their surpluses and deficits to within 4 per cent of GDP.

The bulk of the increase came from imports, but exports also slipped.

"The deterioration in the current account balance reflects the divergence between domestic momentum and subdued foreign demand," said David Tulk, senior macro strategist at TD Securities.

"In trying to place this release in a positive light, we can find some comfort in the observation that the sharp increase in imports has been directed towards business investment, which should provide some structural support to Canada's woeful productivity performance."

The current account data will be followed tomorrow by Statistics Canada's reading of how the economy performed overall in the third quarter. Economists believe GDP expanded at an annual pace of about 1.5 per cent in the quarter, a marked slowdown from the surge that followed the recession.

Although second-half growth will likely be a mere shadow of that earlier in the recovery, economic activity is still rising, and growing wages are encouraging gains in consumption," said Emanuella Enenajor of CIBC World Markets.

"However, as the housing market and external trade continue to act as a drag on the economy, we will likely see a cautious approach to rate hikes by the [Bank of Canada]in 2011."

Finally, on Friday, economists expect to see slower growth in the labour market, though it's important to keep in mind that the projection is still for "growth" and Canada has already recouped the jobs it lost to the recession.

Markets expect Statistics Canada to report that anywhere from 10,000 to 20,000 jobs were created in November, with the unemployment rate holding steady at 7.9 per cent.

"After recouping all of the recession's job losses in roughly a year, the economy has simply been unable to find new work," said BMO Nesbitt Burns deputy chief economist Douglas Porter.

Banks to report earnings There are somewhat heightened expectations as Canada's major banks begin to report fourth-quarter results this week.

In particular, analysts widely expect National Bank of Canada to boost its dividend when it kicks off earnings tomorrow. Initially, some thought Toronto-Dominion Bank would also hike its dividend this time out, though analysts at National Bank Financial have pushed that back by one quarter.

These projections follow a decision by Canada's bank regulator, the Office of the Superintendent of Financial Institutions, to unshackle lenders from restrictions on spending their money.

Over all, analysts expected to see loan growth to be a major feature as reports roll out, given a Bank of Canada report that backs that up.

"Robust domestic loan growth is the most striking aspect of the recently completed quarter," said National Bank analysts Peter Routledge and Grant Connor.

"According to Bank of Canada data, Canadian household credit expanded 1.6 per cent in [the fourth quarter of fiscal 2010]- we expected the growth rate to fall below 1 per cent.

"Meanwhile, Canadian business credit expanded for the first time since December of 2008, growing 0.3 per cent quarter over quarter."

Gildan also to report National Bank analyst Hugues Bourgeois also upped the ante on fourth-quarter results expected Thursday from Gildan Activewear Inc. .

Expecting "strong growth" and gains in market share, as higher cotton prices are offset by higher prices, Mr. Bourgeois wondered in a report whether shareholders will see a first dividend.

The T-shirt manufacturer's cash position stood at $201.2-million (U.S.) at the end of the third quarter, compared to $119.1-million in the second quarter, a dividend is "a possible use for the cash," he said.

He noted that among its "basic apparel" peers, only Ennis Inc. pays a dividend, the current yield at 3.7 per cent. Fashion apparel manufacturers that pay dividends have an average yield of 1.7 per cent. So, using a range of 1.7 per cent to 3.7 per cent as a guide, Mr. Bourgeois says any dividend from Gildan could be between 50 cents (U.S.) a share and $1.10, or $60-million to $133-million. That would represent between 26.2 per cent and 57.6 per cent of National Bank's estimate of earnings per share next year.

"If a dividend is initiated, we would expect it be at the lower end of this range as we believe that the company will likely want to expand capacity above already announced expansions," he said.

Husky in western energy deal Husky Energy Inc. is paying $860-million for western Canadian oil and gas properties held by ExxonMobil Canada Ltd.. Today's deal will add boost production and add reserves in regions where the company already operates.

The acquisition boosts Husky production to 21,900 barrels of oil equivalent a day, and reserves to 113 million barrels.

"The properties have very attractive metrics, reflecting our commitment to financial discipline," chief executive officer Asim Ghosh said in a statement.

"They are located in core operating areas where we will be able to leverage our existing infrastructure to create additional shareholder value."

Husky also said it plans to spend almost $4.9-billion in 2011, a 20-per-cent increase of the the current capital spending program. Today's agreement is part of that increase.

From today's Report on Business

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