These are stories Report on Business is following Tuesday, Dec. 18, 2012.
Mortgage defaults ease
Here’s a key fact, released today, where the housing market is concerned: “The number of Canadian residential mortgages that were three months or more in arrears was trending down in 2011 and the first half of 2012.”
That message from Canada Mortgage and Housing Corp. comes as the real estate market cools rapidly.
By most accounts, Finance Minister Jim Flaherty appears to be getting the soft landing he wanted, though some in the industry complain he went too far.
As The Globe and Mail’s Tara Perkins reports today, home sales across Canada slipped by almost 12 per cent in November from a year earlier.
According to CMCH today, residential mortgages in arrears by three months or more accounted for an average of 0.41 per cent last year, and 0.36 per cent in the first half of this year.
It compared that to the 3.04 per cent in the United States in the second quarter of 2012.
“Conservative mortgage lending practices in Canada are among the factors contributing to this performance,” CMHC said.
Mr. Flaherty has moved several times to cool down the mortgage market amid record debt levels among Canadian consumers. The latest restrictions came into effect in July.
“These are interesting times for Canada’s housing market,” said senior economist Robert Hogue of Royal Bank of Canada.
“Activity cooled substantially during the spring and summer but appears to have stabilized somewhat since August,” he said in a research note.
“Now the question is whether this apparent stabilization signals a bottom or is simply a pause ahead of further declines. While we recognize the risk of renewed weakness in an environment that is testing buyers’ confidence, we believe that the market is unlikely to crash.”
Fiscal talks buoy investors
Investors breathed a little easier and markets gained as U.S. politicians moved ever closer to a budget deal that would head off a “fiscal cliff” crisis.
While the talks could go any which way, news organizations in the United States say President Barack Obama made a notable move last night, offering to hike tax rates only for people who earn more than $400,000 a year.
That marks a change from the president’s earlier position of $250,000, though still shy of the $1-million set by the Republican side by House of Representatives Speaker John Boehner.
Still, the two sides are scrambling to strike a deal that would head off the toxic combination of automatic tax hikes and spending cuts observers believe would plunge the country back into recession.
“The two sides are getting closer and hopes of a deal have been rising since the weekend, with both parties starting to compromise on key fronts,” said senior currency strategist Elsa Lignos of RBC in London.
“The next real test will be how party members react. Boehner met his leadership team after the White House meeting last night and is set to meet all House Republicans for a briefing today that will be a litmus test of his ability to sell a deal.”
For now, investors smell a deal in the works.
"Markets remain in a positive mood this morning after the S&P 500 rallied more than 1 per cent yesterday on optimism over a U.S. budget deal," said Robert Kavcic of BMO Nesbitt Burns.
"That optimism is being stoked further this morning on reports that President Obama has scaled back his revenue demands by conceding to tax rate increases starting on incomes above $400,000 rather than $250,000. That brings the president’s revenue demand down to $1.2-trillion (over 10 years, matched by $1.22-trillion in spending cuts), ever closer to the $1-trillion offered by the Republicans."
Markets were on the rise in Europe and North America.
“The on-off optimism with respect to the fiscal cliff talks that has dominated sentiment over the past few weeks continues to drive sentiment in U.S. markets after yesterday’s move higher saw stocks resume the uptrend in stocks that has been in place since Nov. 16and as such help Europe’s markets open higher this morning,” said senior analyst Michael Hewson of CMC Markets in London.
“Yesterday’s gains were once again driven by growing optimism that ultimately Republicans and Democrats will step back from the brink and agree something by the end of this week to avert the fiscal cliff,” he said in a research note.
“It would appear that John Boehner’s weekend retreat on tax rises, a significant move, has offered a glimmer of hope that there could well be further wriggle room in the coming days, but progress between the parties remains glacial despite the fact that any agreement needs to wrapped up this week and then ratified by both houses of government to make it on to the statute books by Jan. 1.”
Not everyone believes a deal is in sight. Derek Holt of Bank of Nova Scotia, for example, sees the optimism as premature.
"A deal is possible, but hardly imminent as the two sides remain far apart on key details and it is not clear to what extent Boehner has the GOP’s full backing particularly in terms of the more conservative wing of the party," he said.
"There are enough major areas of disagreement between the White House and the GOP that leave ample room for talks skidding off the rails and no agreement being achieved by year-end with what we know so far."
Cerberus to sell Freedom Group stake
A major U.S. private equity firm is getting out of the gun business in the wake of the tragic Sandy Hook killings and amid pressure from a big investor.
While it expressed shock and sadness over Friday’s horror, Cerberus Capital Management LP also said today that it plans to sell its investment in Freedom Group so it won’t be drawn into the raging debate over gun control.
That’s not to suggest that Cerberus was not truly horrified by what it called the “tragic and devastating event,” but it stressed its role is to look after its investing clients, among them the California State Teachers’ Retirement System, which said yesterday it was reviewing its investments with Cerberus.
A Freedom Group rifle was used in the killing spree.
“It is apparent that the Sandy Hook tragedy was a watershed event that has raised the national debate on gun control to an unprecedented level,” Cerberus said today.
“The debate essentially focuses on the balance between public safety and the scope of the Constitutional rights under the Second Amendment,” it said in a statement.
“As a firm, we are investors, not statesmen or policy makers. Our role is to make investments on behalf of our clients who are comprised of the pension plans of firemen, teachers, policemen and other municipal workers and unions, endowments, and other institutions and individuals. It is not our role to take positions, or attempt to shape or influence the gun control policy debate. That is the job of our federal and state legislators.”
Cerberus said it will hire advisors to sell its stake in Freedom Group, which allow the investment firm “to meet our obligations to the investors whose interests we are entrusted to protect without being drawn into the national debate that is more properly pursued by those with the formal charter and public responsibility to do so.”
- Cerberus to sell investment in gun maker after Connecticut shootings
- David Berman's Inside the Market blog: Sandy Hook, gun makers, and the thorny ethics of investing
- Voices for U.S. gun control growing louder, but still face almost impossible fight
Oil price spread weighs on Canadian dollar
The spread between Canadian and global oil prices is playing out in the currency markets, weighing on the Canadian dollar.
As The Globe and Mail’s Carrie Tait reports today, the discount on western Canadian oil is not only huge, but is expected to continue through next year.
The bottom line, says senior currency strategist Camilla Sutton of Bank of Nova Scotia, is that Canada is importing oil at prices while selling it at low prices, creating a “negative shock” to the economy.
This had been playing out for a while, but settled down for a couple of months, Ms. Sutton said.
Recently, though, the spread widened again.
At the heart of the issue is what analysts say is a pipeline network desperately in need of an upgrade that would allow the flow of oil from west to east, meaning eastern refiners would not need to import as much.
For now, there’s a massive discount on the price of Western Canadian Select, of about $40 (U.S.) a barrel to the North American benchmark, West Texas Intermediate. The spread is even wider, more than $60, when measured against Brent, the global benchmark.
Charles St-Arnaud of Nomura Securities in New York has calculated that a $50 gap between WCS and Brent costs Canada some $2.5-billion a month because the country imports more than 40 per cent of its oil needs.