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Frank Mueller

Weekly Update – November 24, 2017

“This would be a much better world if more married couples were as deeply in love as they are in debt” – Earl Wilson

TSX Posts Modest Increase on the Week

The Toronto Stock Exchange’s S&P/TSX composite index, helped by broad gains, finished up on Friday by 33.79 points (0.21 per cent) to finish the week at 16,108.09. For the week, it was up 0.7 per cent (87.93 points) over last Friday’s finish at 16,039.26.

The energy and financial sectors gained on Friday.

Gold prices jumped this week overall, although it fell on Friday by $4.90 USD per ounce to $1,287.30. The $11.70 USD per ounce was good for a 0.92 per cent week-over-week increase.

U.S. light crude oil closed at a two-year high mark of $58.95 USD per barrel, while Brent crude oil gained 31 cents USD to finish at $63.86 USD per barrel. OPEC countries have once again been dancing around a potential supply cut, but nothing has been set in stone.

The Loonie gained 2 basis points on Friday, and stood at 78.68 cents USD as of Friday at 3:03pm PST. On the week, the Loonie dropped 25 basis points from last Friday’s finish of 78.93 cents to the Greenback, a drop of 0.32 per cent.

U.S. Markets See Dow Jones, S&P 500 Break Mini-Losing Streaks; NASDAQ Jumps

Black Friday, the famous shopping day that immediately follows the U.S. Thanksgiving – and for all intents and purposes, signals the green light for holiday shopping – meant a half-session on Wall Street. All of the Dow Jones Industrial Average (DJIA), S&P 500 and NASDAQ posted gains on Black Friday.

U.S. Thanksgiving Thursday saw three things: football, turkey and online shopping. According to Adobe Analytics, U.S. shoppers spent nearly $3 Billion online on Thursday.

Some heavyweight online retailers saw boosts on Friday, as optimism over the holiday shopping season is expected to bode well for 4th Quarter Earnings. Bricks & mortar stores with strong online presences fared quite well on Friday.

The Dow Jones rose 31.81 points (0.14 per cent) to finish at 23,557.99; the S&P 500 rose a modest 5.34 points (0.21 per cent) to finish at 2,602.42; the NASDAQ jumped 21.80 points (0.32 per cent) to settle at 6,889.16.

Lastly, the CBOE Volatility Index (VIX), dropped to a 3-week low of 9.67.

Canadian Household Debt Levels Highest Amount 35 Developed & Developing Countries

According to the Organization for Economic Cooperation and Development (OECD), Canada’s household debt ranks as the highest among 35 developed & developing countries that are monitored by the OECD. Read our blog post on the subject here.

Sources: Globe Advisor, Yahoo! Finance, Adobe Analytics, CNBC.com

Frank Mueller

OECD: Canadian Household Debt Levels Highest Among 35 Developed/Developing Nations

According to a recent report by the Organization of Economic Cooperation and Development, aka the OECD, Canada now has the highest household debt level per GDP in the world.

Canadian household debt is now greater than the national GDP, at 101% of GDP. As a brief refresher, GDP, or Gross Domestic Product, is the total of all goods and services – essentially everything – that is produced by a country; that is, everything produced within a nation’s borders.

The gap between Canada and the next-highest country on the list (South Korea), is roughly 8 per cent, as South Korea’s Debt-to-GDP mark of 93 per cent.

Economic powerhouses United Kingdom and United States post Debt-to-GDP levels of 88 per cent and 80 per cent, respectively; meanwhile, Germany’s Debt-to-GDP is below 60 per cent.

Why does this matter, you might ask? After all, this means that Canadians are spending money and driving the economy! This is only partly true. Yes, spending is good (to an extent); however, spending at this level can be risky.

Think about it like this: when stock markets like the TSX, S&P 500, NASDAQ, etc are increasing (recovery and expansion periods of the economic cycle), carrying debt is helpful. Debt allows companies the liquidity needed to purchase inventory, make capital investments (new bricks & mortar locations) and hire employees. But when the market starts declining and recessions hit, the companies that have over-extended themselves generally are hit the hardest.

Increasing interest rates heavily affect companies that are carrying debt, as all debt has a set interest rate. Revolving credit, such as lines of credit and credit cards, generally has an interest rate set as “prime + some additional amount”. So, when revenues start to decrease, during contractionary periods, while debt payment requirements begin to increase, companies carrying heavy debt loads can find themselves with a cash crunch.

The average family, in many ways, is synonymous with an average company, in that they have revenue (net income), they have debts (mortgage, car loan, line of credit, etc) and they must ensure they have liquidity to make it all work. The risk to families is camouflaged when things are going well, everyone is employed, and rates are low; however, the risk presents itself when rates increase (as they have twice since July), the economy slows down, and perhaps one – or both – of the family breadwinners suddenly find themselves out of work.

With all of this said, it is no surprise that the OECD has pointed out that such high indebtedness levels across the country is a risk to the economy. It is also no surprise that the soaring Debt-to-GDP has been linked to the red hot real estate markets across the nation.

The OECD stated in their report: “research points to a number of links between high indebtedness and the risks of severe recessions.” We are only about a decade removed from the U.S. housing crisis and resulting “Great Recession.”

Former British Prime Minister Sir Winston Churchill famously said: “Those who fail to learn from history are doomed to repeat it.” So, how can we learn from the past?

One of the most important things a family can do is create a budget. The budget must be feasible, it must be achievable, and it must allow for some fun.

A good budget should include some liquid savings account for emergency funds, travel funds, and the like. This way, when that emergency strikes, and you need cash in a pinch, there is a pool of money ready to deploy. Many people who do not have an emergency savings fund have to resort to drawing upon a line of credit. This will add to your debt load in a hurry.

If you do not have a budget in place, we can work with you to create one that is customized to your unique situation. If you have an interest in getting a budget on paper, please don’t hesitate to let us know!

Sources: CNBC.com

Frank Mueller

Weekly Update – November 17, 2017

“Having a baby is one of the most wonderful things in your life, as well as the hardest thing in your life” – Nuno Bettencourt

A New Addition to the You First Family

Earlier this week, Mitra and Anthony welcomed their second child! Sophie Chandler Sabti was born at 4am on November 14th at St. Paul’s, weighing in at 8 pounds, 15 ounces. Mother and baby are happy and healthy, and resting up at home.

Anthony is home for the next couple of weeks, returning full-time on Monday, December 4th.

Despite Friday Gains, TSX Winning Streak Snapped

The Toronto Stock Exchange’s S&P/TSX composite index gained 63.20 points (0.40 per cent) on Friday to finish at 15,998.57. Energy and gold prices helped to push the TSX upward.

For the week, the TSX was down by 40.69 points (0.25 per cent).

The week-over-week decrease halted the TSX’s nine-week winning streak, its longest such streak since 1996.

Oil rose by $1.54 USD per barrel to finish at $56.68, a rise of 2.79 per cent on the day. For the week, oil was down 0.39% from last Friday’s $56.90 USD close. The rise was spurred by a possible OPEC production cut.

Gold popped up by $16.20 (1.27 per cent) on Friday to settle at $1,294.40 USD per ounce. This represents a gain of 1.47 per cent over last week’s finish at $1,275.60 USD per ounce.

The Loonie dropped by 0.00079 of a penny to finish at 78.302 cents to the Greenback as of Friday 3:19pm PST. For the week, the CAD was down about half a penny.

U.S. Markets Down Friday, Trump’s Proposed Tax Overhaul Continues to Weigh on Wall Street

Continued uncertainty in the U.S. about tax reform, and the Republicans’ ability to get it passed, led Wall Street lower on Friday. However, Congressional Republicans approved a broad tax cut plan. The U.S. Senate, also Republican-controlled, now must review the proposal.

Investors continue to look on with great interest, as a large corporate tax cut would lead to stronger bottom lines across the board, further propelling the hot markets south of the 49th parallel. A small Reuters poll of 60 economists found nearly 2/3rd of the 60 to be pessimistic that the Trump-led GOP will pass the tax reform legislation.

The Dow Jones Industrial Average (DJIA) dropped by 100.12 points (0.43 per cent) on Friday. On the week, the Dow Jones was down 72.77 points (0.31 per cent).

The S&P 500 fell by 6.79 points (0.26 per cent) on Friday and settled at 2,578.85, down 0.13 per cent on the week.

NASDAQ also dropped on Friday, with a pullback of 10.50 points (0.15 per cent). On the week, the NASDAQ was up 32.58 points (0.52 per cent).

Sources: Globe Advisor, Reuters, Yahoo! Finance

Frank Mueller

OSFI to Make Conventional Mortgage Approvals More Difficult

As we mentioned in our Weekly Update for July 28th 2017, the Office of the Superintendent of Financial Institutions (OSFI) released a set of proposals that would serve to tighten up the conventional mortgage market. The objective of these proposals is to protect would-be home buyers from over-extending themselves during our current low-rate environment against further rate increases; additionally, the measures look to protect banks from creditor default risk.

On a more basic level, the proposed measures have been put forth to protect the economy overall. Canadians owed an average of $1.67 per $1 of disposable income, according to a debt-to-income report released by Statistics Canada in December of 2016. The Bank of Canada, as well as many of the “Big 5” banks, has been vocal about household debt levels. The Bank of Canada has also raised concern over inflated house prices in major Canadian markets such as Toronto, Vancouver, and recently including Victoria and Hamilton. Rising rates and an uptick in unemployment could lead to increased mortgage defaults.

How Would It Work?

The counteractive proposal for uninsured, conventional mortgages would require potential buyers to qualify for their mortgage using a new stress-test qualifying interest rate. Where the high-ratio stress-test rate is simply the Bank of Canada’s 5-year fixed rate (recently raised to 4.84%), the conventional stress-test rate would be the street rate offered by the lender plus 200 basis-points (2%).

So, let’s say you have a mortgage rate offered by your bank or credit union for 2.85%. When qualifying, your bank/credit union would use the stress-test rate of 2.85% + 2.00% = 4.85%. The logic is simple: if you can qualify – and afford – your payments at a rate of 4.85% in this case, then surely, you’ll be able to absorb an interest rate hike of 25bps (as we’ve experienced twice now in the last 3 months).

Of course, it’s important to remember that the borrower would only be exposed to the increased rate when their current mortgage term expires.

What’s the Bottom Line?

Analysts believe that if enacted, prospective borrowers would lose about 20% of their purchasing power. For instance, if without the stress-test, a borrower could qualify for a $1 Million mortgage, when using the stress-test, the same borrower would only qualify for an $800K mortgage.

If enacted, this proposal would look to cool the overheated Canadian real estate markets with a more precise, surgical approach, rather than the more broad-based interest rate hikes (which affect the economy overall due to cost of borrowing, the effect on the Canadian dollar, etc).

Frank Mueller

Weekly Update – August 25, 2017

“Beware of little expenses; a small leak will sink a great ship” – Benjamin Franklin

TSX Drops to End Week

The Toronto Stock Exchange’s S&P/TSX composite index ended Friday down 20.17 points, or 0.13% to finish the week at 15,055.99. For the week, the TSX was up 0.7% for the week.

The Loonie rose by 31 basis points to finish the week a nose above 80 cents at 80.18 cents to the Greenback; for the week, the Loonie rose by nearly a penny.

West Texas Intermediate (WTI) rose by 44 cents (USD) to finish at $47.86 per barrel, as Hurricane Harvey moves through the Gulf of Mexico and toward a touchdown in Texas. It was recently upgraded to a category 4 storm.

Gold rose to $1,296.50 USD per ounce on Friday, a rise of $4.50 per ounce on the day. It has been, along with many markets, relatively flat over the last few weeks.

U.S. Markets See Slight Rise on Friday

Federal Reserve Chair Janet Yellen spoke this week but stayed quiet about a potential rate increase. Her speech, at the annual meeting of central bankers in Jackson Hole, Wyoming, gave no hints at the potential timing of a future rate hike.
U.S. Treasury yields dropped lower following Yellen’s speech.

Analysts expect President Trump to turn his attention toward another of his key agenda items: tax reform. This expectation helped to move U.S. markets higher.

The Dow Jones Industrial Average (DJIA) closed with a 30.27 point (0.14%) rise at 21,813.67.

The Standard & Poors 500 (S&P500) rose 4.08 points on Friday, 0.17%, to close at 2,443.05.

The NASDAQ was down 5.68 points on Friday, dropping 0.09% down to 6,265.64.

Sources: Thomson Reuters DataStream, Globe Advisor, BNN

Frank Mueller

Weekly Update – August 4, 2017

“The biggest problem is not to let people accept new ideas, but to let them forget the old ones” — John Maynard Keynes

TSX Rises, Jobs Growth Keeps Rate Hike Door Open

The Toronto Stock Exchange’s S&P/TSX composite index closed at 15,257.97, up 0.43%, or 66.01 points on Friday. The Friday closing number represents a 0.85% increase on last week’s finishing mark of 15,128.65.

Decreased energy shipments pulled Canadian exports down in June, further widening the trade gap; however, strong and sustained jobs growth is keeping the door open for further rate hikes in 2017. The export numbers, however, did weigh on the Loonie on the way to a close of 79.02 cents U.S., down .39 of a cent.

Gold futures dropped 1.1% to $1,254.5 per ounce, which weighed on Gold miners both north and south of the 49th.

Crude oil rose by 49 cents (USD) to close at $49.52 per barrel, although the data showed strong U.S. output and rising OPEC output which might usually lead to a drop in oil pricing.

Strong U.S. Jobs Report for July & Notes on Earnings Season

The non-farm payrolls number increased in July by 209,000 jobs, beating the street expectations of 183,000 jobs. In addition, the June jobs numbers were revised upward, from 222,000 jobs to 231,000 jobs.

U.S. unemployment dropped to 4.3%, although it should be noted that “unemployment” figures do not count employable people who are not actively looking, or who have been actively looking for over a year. Still, 4.3% is a respectable figure.

The potential knock-on effect of the strong jobs figures was felt as analysts increased the odds of a December rate hike from 46% to 50%. The Federal Reserve may also consider shrinking its $4.5 Trillion bond portfolio starting in September.

Although the S&P 500 is currently trading at 18 times expected earnings (the 10-year average is 14 times earnings), the strong earnings season has partially mitigated fears of over-valuation. The S&P 500 closed Friday at 2,476.83, a modest increase of 4.67 points, or 0.19%.

The Dow Jones Industrial Average (DJIA) rose above 22,000 for the first time ever on Wednesday, amidst hitting record highs for 8 straight days as of Friday. The DJIA closed Friday at 22,082.12.

Sources: Thomson Reuters DataStream, Globe Advisor