Loonie will hit parity with U.S. dollar in few months: analysts

Some are forecasting the Canadian dollar will shoot well above its U.S. counterpart. As many of my BLOG readers will note, I have long argued the case for a 2:1 $CAD to $USD by 2020. As our dollar appreciates, so will our per capita wealth and standard of living.

SAN FRANCISCO (MarketWatch) -- The Canadian dollar is on track to hit parity with the U.S. dollar, a rise that would underscore the strength of Canada's economy compared with that of the United States, as well as the country's vulnerability to swift changes in commodities prices.

Analysts are forecasting that the Canadian dollar will trade on equal footing with the U.S. dollar within the next few months, largely based on investor demand for assets linked to rising commodities prices.

The loonie, the nickname for the gold-colored coin that replaced the paper dollar in 1987, is now trading at 94.11 U.S cents. It would have to rise about 6% to trade at one American greenback, or at parity.

"Our forecast is for [the loonie] to hit parity by the end of the first quarter," said David Watt, currency strategist for RBC Capital Markets. "There's a chance it could hit before that."

Such gains would increase the purchasing power of Canadian consumers. But they could curb Canada's export growth and cool inflation, taking pressure off the Bank of Canada to raise rates. Higher rates tend to make a currency more valuable.

"If China is tapping the brakes now, that would certainly upend the bullish views on commodities," Watt commented.

Rising prices of commodities like oil and gold, as well as a weak U.S. dollar, helped drive up the loonie 22% by the end of last year.

Some countries are diversifying their reserves into Canadian dollars. Russia, which has been outspoken about wanting to unload some of its U.S. dollars that it makes exporting oil and natural gas, said last week that it was buying loonies.



Saverio Manzo

A Correction or Something More?

The major equity markets across the globe have had a respectable pull-back over the past several days. Is this a natural and healthy correction within the major upward trend or the beginning of a more serious downward secular bear? Of course if we had the answer to that we’d be the one with the crystal ball.

The TSX (Toronto) stock exchange has had an 800 point retracement from its high of 12,070 on January 11, 2010. Today the index fell to 11,271 (as I write). That’s a 6.7% decline.

The market technicals suggest that there is good support around these levels (buyers believe this level represents good value) but if we break below the December low of 11,248 we could be in for a more serious pull back to the 10,800 level.

Some of the sharpest technical traders suggest that we’ll see a decent bounce upward from around this level, but could break down to lower levels shortly thereafter.

Most fundamentalists believe the global economy is getting stronger, not weaker – which bodes well for equity strength.

Some conspiracist say that “Wall Street” is trying to send a message to President Obama that his suggested levy on big bank (an effective sur-tax) and senior big-pay executives, a message to “back off”.

President Obama is having a state of the Union address tonight, which will very likely affect markets tomorrow. This speech could be the precipitous to the next leg down, or an adrenaline shot to get the markets moving up again. We’ll just have to wait and see.



Saverio Manzo

US Housing watch & Consumer Psychology

Our housing is red-hot in many markets throughout Canada, reaching new all-time highs in certain markets. But the US housing market is showing some serious signs of cracking. What will this mean to us in Canada?

Many US home owners have tried to wait out the bear market in housing, a technique that worked in earlier years when any price declines were small and short-lived. But huge excess inventories, a flood of distressed sales after mortgage modification attempts are over, depressed incomes and rising unemployment will probably keep sellers plentiful, buyers reluctant and prices falling throughout 2010 and perhaps beyond. In past regional house price collapses, it’s taken homeowners a year-and-a-half to give up and throw their houses on the market for whatever they will bring. After the final bottom is reached, house prices will likely mirror inflation, or in future years, deflation as they have historically.

As reported a few days ago, US existing home sales (EHS) fell a disappointing 16.7% as the rush from the first time home buyers credit earlier in the fall depleted sales in December. However, sales had rebounded significantly from the lows last Jan-Mar and have reduced inventories significantly as well.

2009 was a terrible year for US housing on many fronts, but was especially onerous from a foreclosure standpoint. Approximately 2.9 million home went into foreclosure and the outlook for 2010 is similar. As most know, a foreclosed home on average loses 15-25% of its value and also drags down other homes in the area due to comparables.

As part of the State of the Union address, the Obama administration is expected to announce changes to the Making Home Affordable program to assist more middle class borrowers. It's estimated that millions of US homeowners are upside down on their mortgages meaning that they owe more than they home is worth. This negative equity situation has not been addressed due to banks not incented to reduce the principal owed especially if the homeowner is keeping up on the mortgage.

Behavioral scientists are having a field day with this behavior and one professor states these borrowers are suffering from "norm asymmetry. According to a paper by University of Arizona professor Brent White, "Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This (article) suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences."

"Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations - and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse."

Writing in the NYT, Richard Thaler provides the disturbing potential conclusion on homeowners changing their viewpoint and strategically defaulting: "An important implication is that we could be facing another wave of foreclosures, spurred less by spells of unemployment and more by strategic thinking. Research shows that bankruptcies and foreclosures are “contagious.” People are less likely to think it’s immoral to walk away from their home if they know others who have done so. And if enough people do it, the stigma begins to erode." If enough people do it, the housing market collapses.

Fortunately if the US residential market continues to recover and prices continue to improve, the desire to walk away will decrease further as the potential recovery will keep borrowers paying. The key is to keep the market recovering. Job growth, low rates, and better access to liquidity will be all needed to keep the housing market recovering. If not, the scenario described by Thaler becomes more likely. And truly disturbing.

Source: Dave Rosenburg & Andrew Busch



Saverio Manzo

A "safe" bond market bubble?

Investors poured money into bonds and bond funds in late 2008 and all of last year in search of safety and higher returns. Now the bond advantage is shrinking as risks are rising.

In the late 1990s, it was tech stocks. In the mid-2000s, it was real estate. And today bonds are the investment people can't get enough of, unlikely as that might seem. Lured by bonds' perceived safety -- not to mention some spectacular deals, the kind unseen in decades, with 15% yields -- investors plowed $313 billion more into bond funds than they took out in the first 10 months of 2009.

Risk-free? Not really
Brokers, of course, get a commission on each bond they sell -- usually between 1% and 1.5%, often much higher than for a stock trade. And that adds up quickly: Based on 2009 data, fund companies stand to earn at least $2.6 billion more than they did in 2008 from sales of bond funds, whether bonds make or lose money.

Bonds, of course, are not the most straightforward of investments. Trying to explain how bond prices work -- they usually go down when interest rates go up, and vice versa - this inverse relationship - can exhaust even patient financial planners.

The math on bonds comes down to this; ask yourself one simple question: Will interest rates eventually rise from their current historical lows?

Consider: a one percentage point increase in 5-10 year rates can equate to a 10% drop in the value of your bonds.

Prices on even "safe" government bonds could fall 30% or more if interest rates soared over the next few years. Some corporate bonds could fall even more. Be ware.

For further see: MoneyCentral and WSJ.



Saverio Manzo

BRIC and Emerging Markets in 2010

A recent story in The Economist summarizes the resilient opportunity in global emerging markets, which is part of the reason why we believe so strongly in the long-term potential of this sector.

2009 was expected to be a very rough year for emerging markets, due to the reliance on exports to developed markets. And while some countries and regions did take it on the chin, the overall outcome was not nearly as bad as anticipated. The disaster of 1997-98 did not repeat itself.

A few of the key points from The Economist:

• Goldman Sachs estimates that the BRIC countries have been responsible for nearly half of global economic growth since 2007.

• In 2009 the stock markets in the largest emerging-market countries made up for all of their 2008 losses.

• The Institute for International Finance sees a doubling of capital inflows into emerging markets in 2010 to $672 billion.

• Belief in capitalism endured despite the weaker conditions. Nearly 90 percent of Chinese were “satisfied with national conditions” in 2009, compared to less than 40 percent of Americans, according to the Pew Global Attitude Project.




Saverio Manzo

2010: OUTLOOK & Investment Themes

Markets, Interest Rates & Commodity price CONSENSUS OPINIONS

Although financial forecasting can be a humbling profession even in the best of times, as we begin the dawn of a new decade we sought the greater wisdom of “the collective” – the brightest minds – those with proven track records.

We’ve perused several Wall Street, Bay Street, and global research documents and compiled many of the very best outlooks on what to expect for the coming year. The list of contributors includes a wide array of chief decision makers at top-rated firms; various analysts, chief economists, strategists, portfolio and mutual fund managers. We hope you find the conclusions helpful in mapping your successful 2010 and beyond.

send me an email at saverio1@yahoo.com for the complete report



Saverio Manzo

A Decade of Happy Returns?

One of the most important things that I have learned over the years is that statistics don’t lie. They are what they are, and tell us much.

As the decade concludes, the chart presents the price performance of the US stock market (Dow Jones Industrial average) for each decade since 1900. So how do the 10 years just passed rank? As today's chart illustrates, the performance of the Dow from the close of 1999 through 2009 was the second worst performance on record. Only the Great Depression decade of the 1930s was worse. The current decade also shares an unfortunate outcome with the 1930s in being a decade during which the Dow actually ended lower than where it started

Some statistical points of interest: (this spans 110 years of data)

• the average decade produced an average of 91.63% (simple return)
• the average annual return was 9.16% (simple return)
• the current decade was the second worst performance on record
• the twenty-year bull market of the 1980’s and 1990’s presented gains of 546% or an astounding average annual return of 27.3% (simple return)

So what does the next decade have in store? Have a read of my upcoming blog where I survey over two dozen of the brightest managers around the globe for their forecast.

Have a Happy New Year and a happy new decade.

Chart courtesy of The Chart of the Day.



Saverio Manzo