NORTH AMERICAN & INTERNATIONAL ECONOMIC HIGHLIGHTS
The subprime mortgage default swap market may be pricing in a darker picture than the one likely to emerge, but that will not help the valuations of American financial institutions in the coming months. An unprecedented drop in house prices and the resulting surge in negative equity positions will continue to put upward pressure on default rates. When all is said and done, mortgage-related write-downs will reach the US$300 billion mark. But as opposed to the first wave, the next US$150 billion of global write-downs will be led by insurance companies and numerous smaller players such as regional banks. This lack of concentration should ease the pain.
We are in the midst of the worst US housing meltdown in the post-war era. Home sales are already down by 30% from their recent peak—the fastest pace of decline seen in any previous housing downturn. And the 50% drop in housing starts to date is already in line with the entire decline seen in the early-1980s housing market correction.
But for this cycle, the bottom is not yet in sight, despite the dramatic slowing in the pace of home construction. The excess number of unsold new and existing homes, based on their typical ratio to the total stock of homes, has now reached the one million mark. To put that in perspective, that represents a full year of construction by the US housing industry.
What really counts for markets is not the actual level of activity in the housing market, but what it will do to home valuations. Already down by more than 8%, the Case-Shiller House Price Index (CSI) will continue its descent in the coming quarters. Evaluated against benchmarks such as household income, and based on mean revision estimates of some key house price drivers such as inventories, rent and average user cost, we project that by the end of 2008, house prices will be roughly 20% lower than their late-2006 peak, and 12% lower than their current level. With every dollar drop in the value of their houses, more and more Americans find themselves in a negative equity position. Zooming in on the 2006 vintage, no less than 30% of households who bought a house in that year are already in a negative equity position. And by the end of the year, with house prices dropping by an additional 10-12%, close to 50% of households in this vintage will find that their mortgages are larger than the value of their houses. With total subprime exposure at close to US$1.3 trillion and a weighted average loss rate of just under 15%, we project that total cumulative subprime related losses will reach US$186 billion—of which more than 90% are concentrated in the vintage years of 2005-2007. But the story goes beyond subprime. Alt-A mortgages, which have seen their share in total mortgage originations rising quickly in the past few years, will add an additional US$56 billion to the loss tally. And even prime mortgages, where foreclosure rates are already 60% higher than the rates seen in the 2001 recession, will add to the pain. Sum it all up and you get a projected total mortgage market-related loss of close to US$315 billion. With global financial institutions writing down roughly US$150 billion of mortgage-related losses to date, we are half-way through. Where will the next wave of losses come from? Banks and brokers will end up assuming more than half of total mortgage-related losses. But this group has been aggressive in writing down assets against those losses.
With total cumulative write downs of close to US$135 billion to date, banks and brokers have already recognized more than three-quarters of their total projected losses. However, insurance companies, which will end up losing roughly US$50 billion on their mortgage exposure, have recognized to date only a fraction of that loss. Ditto for savings institutions and other players such as pension funds. Also note that the lion’s share of the losses recognized to date were by large household-name banks, and most of these write downs were on their CDO exposures, which account for roughly 50% of total projected losses. And with the ABX index currently pricing in the equivalent of close to US$330 billion in losses on subprime paper alone—well above our US$186 billion estimate for the subprime component—banks, which have been forced to mark to the ABX, may eventually benefit from write-backs if the index recovers and they continue to hold their positions.
Benjamin Tal
Senior Economist
CIBC WORLD MARKETS INC.
Weekly Market Insight February 22, 2008
TOP FIVE GARDENING TIPS
While fashionistas may follow the couturiers and home decorators watch television makeovers, in the world of gardening, the tables are turned. No longer are we looking for direction from designers and landscapers, rather, the gurus are paying close attention to what we're doing in our own backyards. Styles and themes are growing from a groundswell of grassroots passions about the way we want to live.
Here are some of the ideas that are taking root.
1. Growing and eating close to home:
With the popularity of the 100-mile diet, which advocates eating locally grown produce, a home garden of freshly picked and organically grown vegetables, herbs and fruits is catching on fast. We're finding that planting an edible garden is 'way more rewarding than pushing a cart down a supermarket aisle.
2. The eco-friendly gardener:
How our daily activities affect the environment has never been more important. We're measuring our carbon footprints, toting our purchases in biodegradable bags and banning pesticides. All of this has led to what Britain's Royal Horticultural Society is dubbing "The New Gardening". It's an approach that advocates wise ways to water, matching the right plants to the site, fighting pests with their natural enemies and managing the soil with plenty of organic matter.
3. Performance plants:
We've lusted after the darkest foliage, the bluest blossoms and the biggest blooms. Now, all that is over, replaced by a growing respect for plants that outlast the trends. Drought-tolerant, long blooming, no-fuss plants are what we want. Don't give us one more new, improved variety that doesn't last the winter.
4. Capturing a sense of place:
For decades, we've borrowed landscapes from foreign parts – tea gardens from Japan, cottage gardens from England and formal parterres from France. Now it's time to celebrate the landscape in which we live, be it a cityscape of tree-lined boulevards or the rolling hills and pastures of the countryside. Designing gardens that reflect the places and activities of our daily lives ground us in ways that are far more meaningful than the ephemeral delights of exotic gardens.
5. Deconstructing tradition:
Finding fresh ways with commonplace items is transforming tar-blackened rooftops into lush landscapes and crumbling brickworks into thriving farmers' markets. The rethinking can be as avant-garde as Claude Cormier's Blue Stick Garden or as simple as snowdrops growing under glass cloches for a new twist on terrariums.
Garden writer Lorraine Flanigan is web consultant and consulting editor for Canadian Gardening.
TAXATION UPDATE
On February 26th, 2008, Finance Minister James Flaherty presented the 2008 Federal Budget which contains several measures of interest to Investors Group and its clients. This summary contains highlights of these proposals, which are not yet law. Clients should contact their Investors Group Consultant for information on how these proposals may affect their financial plans.
Personal Tax Measures
Individuals
New Tax-Free Savings Account
The Budget proposes to introduce a “Tax-Free Savings Account” (TFSA), which will allow individuals to set money aside in an account from which any subsequent withdrawals, including not only the contributions, but also any income, dividends or capital gains, can be withdrawn tax-free. Withdrawals can be used for any purpose whatsoever, and may be taken at any time.
Eligibility and Contribution Limits
The Budget proposes that commencing in 2009, individuals age 18 and older may establish a TFSA to which they can make non tax-deductible contributions subject to certain dollar limits. Similar to RRSPs, individuals will accumulate contribution room that will limit the amount that they can contribute to TFSAs. For 2009, the maximum contribution limit will be $5,000 with this limit being indexed for subsequent years. Any unused contribution room can be carried forward indefinitely. Based on the Budget documents, it appears that the Canada Revenue Agency will determine and report unused TFSA contribution room to eligible individuals. Unlike RRSPs, amounts withdrawn are not only tax-free, but can also be returned to the TFSA at a later date without reducing unused contribution room.
Qualified Investments
The Budget proposes that a TFSA will generally be permitted to hold the same investments as an RRSP. These include, for example, mutual funds, publicly traded securities and government and corporate bonds.
Borrowing to Contribute to a TFSA
Because investment income within and withdrawals from a TFSA are not taxable, interest on money borrowed to contribute to a TFSA will not be tax deductible.
Spousal Contributions and Attribution Rules
Generally, if an individual transfers property to his or her spouse or common-law partner, any income and capital gains on that property will be taxed in the hands of the individual making the transfer under the attribution rules contained in the Income Tax Act. Withdrawals from a TFSA and income and capital gains generated within a TFSA will not be subject to these attribution rules.
Impact of TFSA on Federal Income-Tested Benefits
Currently, a number of federally delivered credits and benefits may be negatively impacted by an increase in an individual's level of “net income”. While contributions to a TFSA will not be tax deductible, income, losses and capital gains on investments held within a TFSA, as well as amounts withdrawn, will not be included in computing income for tax purposes or affect federal income-tested credits and benefits. Examples of the credits and benefits that will not be impacted include the Old Age Security benefit, the Guaranteed Income Supplement, the Canada Child Tax Benefit and the age credit.
Example:
TFSA vs. Non-Registered Investments
Assumptions: A middle-income earning couple making a $833.33 monthly contribution (ie. $5,000 each per year) for 20 years at a 6% rate of return and a 42.4% marginal tax rate. Investment mix assumes 40% interest, 30% eligible dividends and 30% deferred capital gains. The projections do not take into account the potential benefits of the TFSA on income-tested federal benefits and credits.
Dividend Tax Credit (DTC)
The Budget proposes to adjust the dividend gross-up factor and DTC rate on eligible dividends for 2010 and later years. The rates are being changed due to the previously announced reduction of the general corporate income tax rate which is being implemented in stages to eventually reach 15% by 2012. Currently, eligible dividends are grossed-up for taxation purposes at a rate of 45%, and the federal DTC rate on the grossed-up dividends is 19%. The reductions will be effective as follows:
Medical Expense Tax Credit (METC)
The Budget proposes that beginning in 2008, the list of expenses eligible for the METC will be expanded to include the costs associated with a number of items (where prescribed by a medical practitioner), including altered auditory feedback devices for the treatment of a speech disorder, electrotherapy devices for the treatment of a medical condition or a severe mobility impairment, standing devices for standing therapy in the treatment of a severe mobility impairment and pressure pulse therapy for the treatment of a balance disorder. The Budget also proposes to extend eligibility for the METC with respect to expenses for service animals which are specially trained to assist an individual who is severely affected by autism or epilepsy, to cope with the individual's impairment.
The Budget proposes to restrict the METC provisions so that the costs of vitamins, supplements and other drugs and medications that can be purchased without a prescription will not be eligible for the METC, even if they have been prescribed by a doctor and recorded by a pharmacist.
Retirees
Federally Regulated Life-Income Funds (LIFs)
In order to provide more flexibility to the owners of federally regulated LIFs, the Budget proposes the following:
- An owner of a LIF who is 55 years of age or older and whose locked-in assets are less than 50% of the Year's Maximum Pensionable Earnings (YMPE) will be able to wind up the LIF or transfer the assets to an RRSP or RRIF. The dollar threshold in 2008 will be $22,450 (i.e. 50% of $44,900). The YMPE is indexed to annual increases in the average industrial wage.
- A LIF owner who is at least age 55 will be able to make a one-time transfer of up to 50% of the value of the LIF to an unlocked RRSP or RRIF.
- A special withdrawal from a LIF of an amount up to 50% of the YMPE will be allowed where the owner of the LIF is experiencing "financial hardship", for example, low income or high disability/medical-related costs.
Exempt Income for the Guaranteed Income Supplement (GIS)
The GIS provides a tax-free monthly benefit to lower-income Old Age Security recipients. The GIS is income-tested and is reduced by 50 cents for every dollar of non-exempt income that low-income seniors receive. The Budget proposes to increase the amount that recipients could earn before the GIS is reduced, by exempting the first $3,500 of net employment earnings for individuals in receipt of the GIS from the income test. Currently, the exemption is 20% of net employment income up to $2,500 which results in a maximum exemption of $500.
Students
Registered Education Savings Plans (RESPs)
The Budget proposes to increase the time that RESPs may remain open to 35 years from 25 years, and to extend the maximum contribution period by 10 years. For certain plans where the beneficiary is disabled, the plan may now remain open for 40 years instead of 35. The Budget also proposes to allow a 6-month grace period for receiving Educational Assistance Payment (EAP) withdrawals from an RESP, so that a beneficiary may receive EAPs for up to 6 months after ceasing to be enrolled in a qualifying program. This will provide more flexibility for a beneficiary to access RESP savings. These changes will apply for the 2008 and subsequent taxation years.
This report specifically written and published by Investors Group is presented as a general source of information only, and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide legal or tax advice. Clients should discuss their situation with their Consultant for advice based on their specific circumstances.
Special Budget Edition: Taxation Update
This article of intrest was presented By Jocko Toic at the Investors Group. If you would like more one on one information, please feel free to contact him at:
Jocko Toic - Consultant
Investors Group Financial Services
2-2429 Dobbin Rd. Westbank, BC V4T 2L4
Ph. (250) 768-4546 Cell (250) 869-9636
Fax (250) 768-9005 Toll Free (866) 768-4546
Email jocko.toic@investorsgroup.com
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TD Economics Report
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Steve's Rates
| Mortgage Term | Our Rates | Standard Rates |
|---|---|---|
| Variable Rate | 5.15% | 5.75% |
| 6 Month Closed | 6.75% | 7.35% |
| 1 Year Closed | 5.85% | 9.50% |
| 2 Year Closed | 6.20% | 7.50% |
| 3 Year Closed | 6.05% | 7.50% |
| 4 Year Closed | 5.95% | 7.54% |
| 5 Year Closed | 5.85% | 7.54% |
| 7 Year Closed | 6.20% | 7.85% |
| 10 Year Closed | 6.40% | 8.20% |
| 15 Year Closed | 6.40% | 0.00% |
| 18 Year Closed | 6.90% | 9.20% |
| 25 Year Closed | 7.00% | 9.50% |
Rates are subject to constant change, for the best rates call 1-866-993-8787.
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Fax (250) 768-9005 Toll Free (866) 768-4546
Email jocko.toic@investorsgroup.com
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