These are stories Report on Business is following Wednesday, Oct. 22, 2014.
Diamonds and rhinestones
Warren Buffett takes the long view, but I still can't help wondering whether the world's most famous investor has his finger's crossed today.
Mr. Buffett's Berkshire Hathaway Inc. has suffered two days of hefty losses as shares of IBM Corp. and The Coca-Cola Co. tumbled on disappointing quarterly results.
The investment company lost big time - reportedly some $2-billion - on those two companies since IBM posted results on Monday, followed by Coke yesterday.
IBM and Coke are part of what Mr. Buffett calls Berkshire Hathaway's "Big Four" investments, the two others being American Express Co. and Wells Fargo & Co.
Those four, by the way, are indeed important to the Oracle of Omaha.
"If you think tenths of a per cent aren't important, ponder this math: For the four companies in aggregate, each increase of one-tenth of a per cent in our share of their equity raises Berkshire's share of their annual earnings by $50-million," Mr. Buffett said in his latest letter to shareholders, in March.
It's worth noting, too, that Mr. Buffett praised the managers of the four "excellent" businesses.
"At Berkshire, we much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100 per cent of a so-so business; it's better to have a partial interest in the Hope diamond than to own all of a rhinestone."
IBM shares are down about 13 per cent so far this year, as of yesterday, while Coke shares, despite yesterday's loss, haven't moved much.
Amex shares are down some 5.5 per cent, but Wells Fargo stock is up more than 11 per cent.
(On a personal note, I've done my bit for Coke and McDonald's, the other dog of the week, which together account for a big part of my diet. For that matter, my spending habits no doubt helped Amex, as well.)
Having said all this, Mr. Buffett has also had the opportunity to buy some stocks at bargain prices, given the volatility in the markets. Remember a week ago today?
Indeed, earlier this month he told CNBC that he was out buying, as you'd expect, though he wouldn't say what.
"I like buying it as it goes down, and the more it goes down, the more I like to buy," he said.
For that matter, he is sitting on what he noted in the last shareholders letter was "our endless gusher of cash."
IBM shares were little changed in the early going today, while Coke shares slipped about 1 per cent.
- Susan Krashinsky: Healthy food trend sees McDonald’s, Coca-Cola’s profits slim down
- Ian McGugan in ROB Insight (for subscribers): Big Blue's big blues
- IBM plunges as 2015 earnings forecast abandoned, profit falls
Central bank cites housing
The Bank of Canada is raising red flags about the Toronto, Calgary and Vancouver housing markets.
Those are, of course, key markets in Canada, where real estate values differ widely across the country.
In its monetary policy report today, the central bank said housing activity "has been more robust than anticipated, buoyed by continued very low mortgage rates and exhibiting strength beyond a rebound from weather-depressed levels earlier in the year."
However, it highlighted big regional divergences colouring this picture.
Housing markets in eastern Canada "appear to show signs consistent with a soft landing," given slower price increases and sales volumes.
"This contrasts with major cities in Ontario, Alberta and British Columbia, where housing markets are generally robust and much tighter," it said.
"While a good part of the strength can be explained by favourable demographics and strong employment gains in parts of the country, it nonetheless suggests that household imbalances could increase further," the central bank warned.
It did not cite specific cities. Nor did it say they were headed for trouble. Indeed, in an interview with The Globe and Mail's Carrie Tait, senior economist Randall Bartlett of Toronto-Dominion Bank said the sky's not falling.
Thus, I took it as a warning sign.
"Simply, this is the main reason the bank would be extremely reluctant to consider cutting rates (in a stress situation)," said chief economist Douglas Porter of BMO Nesbitt Burns.
"They have frankly been surprised at the underlying strength in housing and consumer spending, and now explicitly tie that to low interest rates," Mr. Porter said.
"There is no more brave talk about a soft landing for housing."
Over all, Bank of Canada Governor Stephen Poloz and his colleagues noted "renewed vigour" in residential real estate. They also noted stronger car sales.
"Housing activity has been more robust than anticipated, buoyed by continued very low mortgage rates and exhibiting strength beyond a rebound from weather-depressed levels earlier in the year," it said in the report.
"Housing starts have remained broadly in line with demographic demand in recent months," it added.
"However, sales of existing homes have picked up noticeable since the beginning of the year, to a four-year high … This is contributing to sizable increases in house prices, although the national picture continues to mask important regional divergences."
According to the Teranet-National house price index, home prices in Canada rose 0.3 per cent in September from August and 4.9 per cent from a year earlier.
Notably, Calgary, Toronto and Vancouver were well above the national average, at 9.5 per cent, 7.4 per cent and 6.5 per cent, respectively.
Just this week, Moody's Investor Service also flagged concerns of Canadian home prices, warning the housing market and swollen household debt levels are a risk.
Mr. Porter noted the shift in the central bank's tone over the past six months where housing is concerned.
"Earlier they were convinced (perhaps bravely so) that the housing market was on course for a soft landing," Mr. Porter said.
"Now, they are openly suggesting that it has been stronger than they expected, and thus the associated risks with household debt 'are edging higher,'" he added.
"The focal point of that 'stronger than expected' housing market has been in Calgary, Toronto and Vancouver, as we (and others) have noted. Most of the rest of the country is not seeing particular strength in housing."
What's important here is that the strength in various housing markets is "localized," as Mr. Porter put it, and thus "broad" policy measures are not necessarily the best way to deal with it.
As in, "higher interest rates would hit all markets, including many cities that don't need cooling."
Remember that former Bank of Canada chief Mark Carney and the late Jim Flaherty, Canada's finance minister at the time, each took measures as household debts got out of hand.
Mr. Carney threatened to raise interest rates, and Mr. Flaherty brought in a series of measures.
As The Globe and Mail's Barrie McKenna reports, the Bank of Canada also held its benchmark overnight rate at 1 per cent today, bringing to more than four years its longest rate freeze since the 1950s.
The sudden drop in the price of crude has become a new wild card for the Bank of Canada, our Ottawa correspondent writes, knocking the wind out of inflation and delaying any move to hike interest rates.
The central bank said inflation risks remain "roughly balanced," but it pointedly dropped the word "neutral," a hallmark of its monetary statements for the past year. This comes after Mr. Poloz indicated he wants to move away from an explicit commitment on future changes to its key rate.
The most significant shift in the bank's latest economic forecast centered on inflation, where the bank said that patchy global economy is pushing some prices up, while depressing others. There is strong growth in the U.S. and weakness virtually everywhere else in the world.
A news conference by Mr. Poloz, which was to have come later in the morning. was cancelled, as was a scheduled appearance before a parliamentary committee by Mr. Poloz and senior deputy Carolyn Wilkins.
- Barrie McKenna: Plunging crude prices could delay interest rate hikes: Bank of Canada
- David Parkinson: Moody's warns on housing, debt, but Canada retains top rating
- David Parkinson: Bank of Canada continues to justify its caution on interest rates
Canadian shopping habits didn't change all that much in August, but consumers were paying less in some respects.
Retail sales across the country slipped 0.3 per cent in August, Statistics Canada said today, the second monthly dip in a row after six consecutive gains.
But when you strip out the impact of price changes – notably, lower costs at the gas bump – sales inched down 0.1 per cent in volume terms.
Gas station sales fell 2.1 per cent to their lowest since late last year.
Over all, sales fell in seven of the 11 sectors measured, accounting for 76 per cent of all sales.
Come for a visit. Please
American tourists appear to have soured on Canada somewhat, but there's new-found interest among the Chinese.
So much so that Chinese visitors leapfrogged the French to become the second-biggest overseas group, behind those from Britain, to visit Canada in August.
Americans still accounted for the lion's share, according to the latest report from Statistics Canada, and there was a notable rise in travellers from Brazil.
But actually changing the order of things were Chinese visitors, who made a record 43,000 trips to Canada in August, up from 34,000 a year earlier, according to Statistics Canada earlier this week.
The number of American visitors, in turn, dipped. On a month-to-month basis, there was a drop of 1.6 per cent in overnight trips to Canada by Americans in August compared to July.
Overseas travellers, by the way, visited Canada in record numbers in August.
Senior economist Sal Guatieri of BMO Nesbitt Burns noted the rise in the Chinese yuan over the past few years, giving those tourists somewhat more buying power.
But the weaker Canadian dollar versus the greenback, in turn, doesn't appear to have spurred on Americans.
(Who knows, maybe they don't feel the need to head north and visit Target and Tiffany's.)
"A sagging Canadian dollar has staunched the flow of Canadians travelling to the U.S., but it hasn't incented more Americans to travel north," Mr. Guatieri said.
"Despite the loonie's fall to levels that nearly equalize retail prices in the two countries, Canada is seeing less than half the number of American visitors that came in the early naughts when the loonie was at record lows."