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Real estate: Ontario, B.C. at 'top of our list of concerns'

These are some of the major stories Report on Business followed this week. Get the top business stories on weekdays on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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Mortgage angst Canadians are fretting more and more about mortgages and property values.

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Canada's Finance Minister Jim Flaherty said this week that he's ready to act again if he must, though he has no plans to do that at this point. But as The Globe and Mail's Tara Perkins, Grant Robertson and Bill Curry reported, Canada Mortgage and Housing Corp. is preparing to take steps to keep a lid on the mortgage market.

The problem is that Canadian consumers are juggling record debt loads, pumped up by the cheap cost of borrowing in an era of emergency low interest rates. And while cooling, the country's residential real estate market is still seen as overvalued, notably in Vancouver and Toronto.

If another financial shock were to hit, there would be big trouble. And when interest rates inevitably rise, some people may find they've taken on more than they can handle.

"We stand behind our assessment that the resale housing market is overvalued by roughly 10 per cent to 15 per cent and that an oversupply of new home projects exists," said Toronto-Dominion Bank economist Sonya Gulati.

"These excesses should be gradually unwound over 2013 and 2014, with higher interest rates the impetus for the adjustment."

Much of the angst is related to Vancouver and Toronto. Markets are not the same across the country.

"In our past regional housing forecasts, we have repeatedly put Ontario and British Columbia at the top of our list of concerns," Ms. Gulati said in her report.

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"For the second part of 2011, both regions saw a deceleration in prices, striking debate about whether each market had already begun the correction journey. However, year-to-date in 2012, we have seen price momentum pick up in both provinces. Standard metrics like price-to-income and price-to-rent are already significantly higher than what we consider to be warranted based on underlying factors. Both regions are expected to realize small price appreciations in 2012, which pushes up the magnitude of adjustment of about 15 per cent that is waiting for them come 2013 and 2014."

Goodbye CWB, Goodbye Viterra Just how much did the government's decision to end the Canadian Wheat Board monopoly play into this week's sale of Viterra Inc. ?

After a fairly quick auction, Glencore International, the giant commodities trader, struck a $6.1-billion deal for the Canadian agribusiness and grainhandling company with an $16.25-a-share offer that still has to pass regulatory muster.

Glencore has also reached side deals to break Viterra up, and plans to sell the bulk of its retail business to Agrium Inc. and almost one-quarter of its grainhandling assets to Winnipeg's Richardson International.

"Glencore's acquisition of Viterra is consistent with its strategy to expand its global network and strengthen its position as one of the global leaders in grain and oilseeds markets," said UBS Securities Canada analyst Hila Maraachlian.

"Vittera has a 45-per-cent market share in the Canadian grainhandling market and is expected to benefit from the end of CWB's monopoly," she added.

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"As a direct impact of the grain marketing freedom and the ability to purchase grains from the farmers directly, Viterra expects to increase its earnings by attracting additional volumes and optimizing its operations efficiencies ... We believe CWB's dissolution and Viterra's attractive assets interested several parties, including Glencore. The potential upside from CWB's dissolution and Viterra's extensive network of silos and export terminals drew a lot of attention from international players."

As The Globe and Mail's Boyd Erman notes, Viterra would have been a target regardless given consolidation in the industry.

Apple pays out Analysts are marking up their outlook for shares of Apple Inc. after the tech giant this week unveiled its first dividend since 1955, along with a three-year stock buyback worth $10-billion (U.S.).

Apple had been under pressure to do something with its almost $100-billion in cash, and now plans to use about $45-billion of that over the three-year period, The Globe and Mail's Kevin Carmichael and Omar El Akkad reported.

Apple is starting with a quarterly payout of $2.65 in the fourth quarter of this year, and some analysts believe that could rise in time.

RBC Dominion Securities boosted its price target on the stock to $675 from $600. Goldman Sachs to $700 from $660, and Morgan Keegan to $800 from $650, according to various reports.

"Apple's $2.65-a-share quarterly dividend (paying out all U.S. cash flow) to us communicates a confident future, including: 1) strong product pipeline with sustained economics; 2) accelerating growth from markets outside U.S.; 3) $34-billion domestic cash retained for acquisitions and other strategic uses," said RBC's Mike Abramsky.

"We also believe Apple has room to raise its dividend over time (currently 1.8-per-cent yield)."

Telus has hedge fund issue Telus Corp. has an issue with frisky hedge funds that could complicate its plans to overhaul its share structure.

It involves a plan announced by Telus, one of Canada's major telecommunications groups, to collapse its dual-share structure and swap its non-voting shares for common stock on a one-for-one basis.

As The Globe and Mail's Boyd Erman reported, Telus is stuck between various foreign hedge funds, which are said to be buying common shares and shorting the non-voting stock. That, Telus said, is aimed at a quick profit, and, according to analysts, could be a bet that the plan will fail at a May 9 vote, or the exchange ratio will be changed.

"The voting shares traded at a 4.5-per-cent to 5-per-cent premium on average over the non-voters over the last three years," said CanaccordGenuity analyst Dvai Ghose. "This spread narrowed to essentially zero after Telus' Feb. 21 share collapse proposal announcement, but has since widened to approximately 1.3 per cent as some arbitrage traders now assume that Telus may not receive the two-thirds approval required by voting shareholders."

There's a side issue, too. The appetite for the common stock among the non-Canadian investors would, if approved and left unchecked, push their holdings up against foreign ownership rules, though Telus can deal with that through various measures.

Required reading this week There's a growing exodus to U.S. border airports by Canadians going out of their way for big travel savings, Brent Jang reports.

A non-existent winter coupled with an early spring has merchants scrambling to move up warm weather inventory, Marina Strauss writes.

Sharing a change-room mirror with more attractive shoppers proves bad for self-esteem , and sales, Susan Krashinsky reports.

Aveos Fleet Performance Inc., reeling after its contracts to repair planes were scaled back by Air Canada, said it would liquidate assets and shut down, Brent Jang reports.

TransCanada Corp. is proposing a shift in the way oil moves across Canada, urging the oil patch to consider a massive new pipeline system to carry western crude to refineries in Ontario, Quebec and beyond. Nathan VanderKlippe and Shawn McCarthy report.

What to watch for next week Not only is it budget week in the capital, it's also, in the afterglow of Apple's dividend, the week that Research In Motion Ltd. reports fourth-quarter results.

First, though, comes the Ontario budget on Tuesday.

"While the Ontario government has already ruled out raising taxes, other revenue-raising options will likely be examined, including a host of user fees," said senior economist Jacques Marcil of Toronto-Dominion Bank.

"In addition, the government has already announced that it will realign its lottery and gaming crown corporation towards higher income-generating goals. Also, the 1.5-percentage-point cut in corporate taxes planned for 2012 could likely be delayed. Over all, while the Ontario government obviously has long-term directions in mind for the economy, we expect the upcoming budget to be highly focused on immediate cost-reduction measures."

Finance Minister Jim Flaherty follows on Thursday with his budget, and with a better story to tell, given that everyone believes he's doing several billions of dollars better than planned.

"The primary focus will be on the extent of any new restraint and any new proposals on Canada's pension system (specifically Old Age Security)," said Douglas Porter and Robert Kavcic of BMO Nesbitt Burns.

"The good news is that the economy has largely performed as expected over the past year, despite the many global challenges, and federal finances are coming in better than forecast. Whereas in last fall's review, Finance was expecting the deficit in the current fiscal year (which ends March 31) to narrow to $31-billion from $33.4-billion in fiscal year 2010-2011, it now looks like it may be as low as $26-billion (or 1.5 per cent of GDP). And, after pushing out the target for balancing the books by a year to fiscal year 2015-2016, current trends suggest that it is quite doable to hit that goal one year earlier without major new restraint measures."


To say that RIM has had troubles of late would be putting it mildly, and Thursday's expected to be no exception.

"We foresee another tough quarter for RIM when it reports Q4 results next Thursday," said Phillip Huang of UBS Securities Canada, forecasting revenue of $4.4-billion and earnings per share of 81 cents, which is below estimates of other economists.

"We believe RIM's BB7 devices continue to struggle, Playbook sales have seen some traction on discounted pricing, with the low-end doing relatively better," he said. "We estimate 11.5 million phones/375,000 tablet units in 4Q."


One last thing: Statistics Canada reports Friday on how the economy performed in January, and it's expected to say that it just about stalled, and even possibly dipped.

"Friday's January GDP report is expected to be lacklustre with consensus distributed within one tick on either side of a flat print," said Scotia Capital's Derek Holt. "There are huge portions of the economy we simply cannot track on a monthly basis including many services, resource sectors, and the public sector. That said, what we do know was not encouraging."

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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