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business briefing

These are stories Report on Business is following Wednesday, July 10, 2013.

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Housing market tame
Softer housing markets are going to eat into economic growth in Ontario, Quebec and British Columbia, according to new forecasts.

But "the worst in British Columbia may be behind us," one economist says.

The residential real estate market is of huge concern in Canada, particularly since it began cooling a year ago with new mortgage restrictions brought in by the federal government.

Of late, it has illustrated signs of stability in the most recent indicators that include resale numbers, construction starts and building permits issued by municipalities.

"A soft landing at the national level masks regional disparities in housing market performance over the forecast horizon," economist Jonathan Bendiner of Toronto-Dominion Bank said today.

"Outperforming markets will include those that can rely on above-average economic prospects – such as the Prairie provinces," he added in his outlook.

"While Ontario, Quebec and British Columbia are expected to have their housing markets weigh on growth."

Yesterday, Canada Mortgage and Housing Corp. reported a dip in housing starts in June, though construction remained strong. And earlier this week, Statistics Canada reported stronger issuance of building permits than had been expected. Add to that reports from several local real estate boards that suggest stability, as well, in the resale market.

"For all the horror stories out there surrounding Canadian residential real estate, the sector is actually holding in very well," chief economist David Rosenberg of Gluskin Sheff + Associates said today.

"Note that the worst in British Columbia may be behind us as starts there shot up to 31,000 units from 23,000 in May to stand at the best level in a year," he added.

The condominium market, particularly in Toronto, has been a big concern for many observers, including Finance Minister Jim Flaherty, who cited condos as an issue when he unveiled his latest round of mortgage rule tightening a year ago.

"I actually see the fact that multiple unit starts were down 15 per cent in Ontario as constructive news insofar as the data suggest that the condo builders are adjusting their construction schedules into line with new and lower sales realities, as such helping to forestall a more serious demand-supply imbalance and price erosion," Mr. Rosenberg said today.

"Note that current permits and starts could still be responding, in the case of multiples, to pre-sales that took place months ago, so there could be a substantial lag before decelerating demand flows through to building."

Judge rules against Apple on e-books
Apple Inc., the lone holdout in a price-fixing case that rocked the U.S. publishing industry, has been found guilty of breaking antitrust law by entering into a conspiracy to raise the price of e-books, The Globe and Mail's Omar El Akkad reports.

A New York district judge ruled against Apple today in a case initially brought forward by the U.S. Department of Justice last year. Prosecutors alleged Apple teamed up with five U.S. publishers – Macmillan, Hachette Book Group Inc., HarperCollins Publishers LLC, Penguin Group (USA) Inc. and Simon & Schuster Inc. – to effectively eliminate price competition in the e-books industry.

Unlike all the publishers named in the initial complaints, Apple refuses to admit it did anything wrong.

"Apple did not conspire to fix e-book pricing and we will continue to fight against these false accusations," a company spokeswoman said.

"When we introduced the iBooks store in 2010, we gave customers more choice, injecting much needed innovation and competition into the market, breaking amazon's monopolistic grip on the publishing industry. We've done nothing wrong and will appeal the judge's decision."

Fed less committed to 'tapering' than believed
Minutes of the Federal Reserve's latest policy meeting show the U.S. central bank was less committed to reducing stimulus than many market players believed at the time, The Globe and Mail's Kevin Carmichael reports.

That realization could calm some of the investors who have come to think the Fed is poised to leave the U.S. economy to its own devices.

After the two-day meeting concluded June 19, Fed chairman Ben Bernanke said a stronger economic outlook could persuade central bankers to slow monthly bond purchases later this year, an attempt at clarity that sent global financial markets into a tailspin.

Even though Mr. Bernanke was careful to say that any change in the bond-buying strategy would be contingent on economic conditions, many investors panicked at the prospect of life without exceptional support from the Fed. Trillions of dollars in wealth evaporated from equity and commodity markets.

The official account of the Federal Open Market Committee meeting, released Wednesday after the customary three-week delay, suggests any tapering of bond purchases is probably months away. Policy makers last month were feeling better about the economy, but were far from convinced that the recovery would continue to gather momentum.

Analysts differ on Lululemon
Is it safe to wear Lululemon Athletica Inc.'s trademark Luon pants and bend over?

One analyst suggests not, and she has cut her view of the company's stock. Another, though, projects "robust" growth and has a far brighter outlook for the shares.

Liz Dunn of Macquarie Capital in New York says there are still problems with "sheerness," the issue that led to a recall and restocking of shelves.

"Women continue to note that underwear are visible through the pants when they bend over," said Ms. Dunn.

"The company notes on its website that customers should do a downward facing dog in a mirror to test the product," she added in a new research note.

"They also recommend checking to make sure your size is appropriate and sizing up in some cases. We visited a store and were specifically told that the running product was not meant for bending. This was echoed in the comments of many product reviews."

There are other issues, but that's the main one, according to the research from Ms. Dunn, who lowered her 12-month price target on Lululemon shares to $62 (U.S.) from $74.

There are differences among the company's products, of course.

"The company has told customers that certain products (like those made for running) are not made for bending and if you bend, they may be sheer," Ms. Dunn said.

"Other products (like those made for yoga) are not made for sweating and if you sweat heavily, they may not wick as expected. If the average LULU customer is like most women I know, they grab a pair of pants/crops and go."

She was referring to the company by its U.S. stock symbol.

Lululemon said testing for quality "has never been better than it is now," and most of the feedback it has received related to the recall has been positive.

"However we know the Luon issues have heightened the focus about sheerness for some guests," it said.

Producing Luon products is Lululemon's top priority, the company said, adding it will continue to innovate.

"We're seeing a few negative comments online which may be because guests don't have the benefit of doing an in-store fit session with one of our educators to make sure the fit is right for them."

The company has taken steps to address the issue that led to the recall, including new testing procedures and putting its own employees in the factories that make the pants.

Ms. Dunn said she scoured 597 customer reviews since the issue was said to be resolved, and that "while we are still fans of the brand and think there is very little in the marketplace that is comparable from a styling perspective, we are concerned by what we see as ongoing quality issues."

Customers may have become more aware of the issue because of the publicity surrounding the recall, she added.

The sheerness issue remains the top concern, she said, "particularly for Wunder Unders but really it was mentioned among the complaints for almost all product containing Luon." She was referring to Lululemon's Wunder Under brand.

Ms. Dunn fears ongoing issues could "erode" the strong Lululemon brand, and believes the company must move quickly to resolve them lest loyal fans go elsewhere.

"One of the company's mottos is 'Sweat Everyday' and we believe consumers expect to be able to both bend and sweat in LULU's premium-priced athletic product," she added.

Analyst Camilo Lyon of Canaccord Genuity, however, has a price target of $87 on Lululemon shares, and sees "a number of positive catalysts" that should boost the "dramatically underperforming" stock.

"These include continued replenishment of Luon yoga pants that is yet to reach 100 per cent pre-recall levels, explicit advertisements to customers indicating its 'back in black, status, and the announcement of key management hires," Mr. Lyon said.

"We continue to fundamentally believe the demand for the brand has not ebbed and the growth opportunity both domestically and internationally is robust."

China's trade data disappointing
China's trade numbers weren't just disappointing. They also suggest more trouble ahead.

Indeed, a customs official told reporters today, according to Reuters: "China faces relatively stern challenges in trade currently. Exports in the third quarter look grim."

Exports are one thing, given what they mean to the domestic economy. Imports are another entirely, given what they mean to other economies, particularly those heavy into commodities, are counting on China.

Chinese exports fell 3.1 per cent in June from a year earlier, according to official measures, while imports slipped 0.7 per cent.

"China's exporters in June had their worst single month since the depths of the financial crisis," said Mark Williams and Qinwei Wang of Capital Economics in London.

"Imports for domestic use fell too," they added in a research note.

"Commodity imports performed relatively well, though there is no sign that the year-long stagnation in real import demand has ended."

EU proposes bank plan
Another pitched battle is brewing in Europe, this one over a new proposal for dealing with troubled banks.

And, as is usual in the European Union, Germany is poised to fight it.

The European Commission today unveiled a proposal for a "single resolution mechanism" for the region's banking union, one that would put power in the hands of a panel of officials from the EC, the European Central Bank and the "relevant" nations involved.

This centralized body would decide how to restructure or wind up failing banks. The country whose bank is at the heart of the matter, however, would lead the execution, though "under the supervision" of the oversight panel.

"We have seen how bank crises can quickly spread across borders, sending confidence into a downward spiral throughout the euro area," said Michel Barnier, the region's internal market and services commissioner.

"We need a system which can deliver decisions quickly and efficiently, avoiding doubts on the impact on public finances, and with rules that create certainty in the market," he added in a statement.

The EC said its role "would be limited to the decision to trigger the resolution of a bank." There's more there than meets the eye: The key is that the EC would have that deciding power in the first place.

Germany, the deep pockets in the ongoing euro zone crisis, has already warned of encroachment on sovereignty.

"I would strongly ask the commission in its proposal for an SRM to be very careful, and to stick to the limited interpretation of the given treaty," German Finance Minister Wolfgang Schaeuble said yesterday, according to Bloomberg News.

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