Canada’s great recession wasn’t that bad after all: Stats Can
Source: Canadian Press – Julian Beltrame April 15 2010

A year or so ago, most reports described Canada’s recession as the biggest financial collapse since the Great Depression of the 1930’s, However recent economic numbers may prove that the statement is not completely accurate – perhaps not even accurate at all.

According to the Canadian Press article:” Canada did suffer through a technical recession -- a 3.3% drop in gross domestic product over three quarters between the fall of 2008 and the summer of 2009. But that was shorter and milder than the six-quarter slump of 1981-82 in which GDP fell 4.9% or the four-quarter 1991-92 downturn.”

[Ed. note: a quarter is 3 months; the recession lasted 9 months]

“Although the report [Statscan] does not touch the subject, Canada appears to be bouncing back stronger than any country in the G7 -- which includes the U.S., the U.K., France, Germany, Italy and Japan.”

Although the recession was very real for the 400,000 Canadians who lost their jobs, the article explains the reasons why the Great Recession should be more accurately described as the Great Escape.

The reasons given for Canada's superior performance included: past fiscal surpluses, low corporate and government debt and generally, sounder financial conditions.

GIC rates online 24/7

GIC rates are now available (daily) on our new web site, www.belmontvillagefinancial.com.

Here is a bit of background: Belmont Village Financial Group is one of the very early pioneers of the Canadian GIC deposit industry with roots going back to the late 1970's. In fact, one of the early founders laid claim that the Canadian GIC deposit industry was actually invented here in Kitchener, Ontario.

Our goal is simple and straightforward. Find the best GIC rates for our clients and do so without charging any fees or commissions.
We can place GICs with TD-Canada Trust, Scotiabank, Bank of Montreal and dozens of other banks,trust companies and credit unions. Your money is placed directly with these financial institutions and your GICs are safe and secure. All banks and trust companies that we deal with are members of the Canadian Deposit Insurance Corporation (CDIC) - an agency of the federal government that insures eligible deposits up to $100,000. Please visit the CDIC web site at www.cdic.ca for more details.

Although many other full service brokers claim they also offer GICs, in reality they do little business in this area. GICs are a low margin investment product and stock brokers generally prefer to sell stocks rather than GICs.

Belmont Village Financial is one of the largest if not the largest GIC broker in the Kitchener, Waterloo, Cambridge and surrounding area.

Please visit www.belmontvillagefinancial.com in order to see the best daily rates. Please call me or email me for a quote at glenns@belmontvillagefinancial.com

The Search for Yield – Part II

In last month’s newsletter we asked the question “Is there anything else that can potentially pay a bit more income to me without incurring a huge amount of risk?”

I had suggested using a Canadian mortgage fund like the TD Mortgage Fund or the National Bank Mortgage Fund in order to get a better rate than a daily interest account or short term GIC. To get a potentially higher interest rate the Powershares 1-5 Laddered Corporate Bond Index Fund could be used as an alternative to GICs. An appropriate target for this fund is to outperform a 5 year term deposit. A mutual fund containing foreign government bonds and corporate bonds such as the Manulife Strategic Income Fund also has the possibility of earning higher rates of return.
 
There is another investment that can give you the possibility of earning a higher interest rate. It is not a mutual fund, it is a GIC.  It is the National Bank Canadian Advantage 8 Plus GIC. This investment is a CDIC insured GIC that has a variable interest rate. The National Bank Canadian Advantage 8 Plus GIC interest rate is based on the performance of 20 Canadian stocks.
The overall rate of return consists of two parts:

1. You will receive 1% annual interest paid annually (no matter what the stocks do)
2. The second part depends on the performance of the basket of stocks. This is the variable portion of your return. The maximum possible return from the variable portion is 40%.

Worst case scenario: If calamity hits and the stocks drop in value (no matter how low – even zero!) you still get paid 1% per year for each of the next 5 years.

Basically, the stocks would have to increase in price by more than 5%, five years from now to increase the overall rate of return over and above the minimum 1% per year. That is why this particular GIC is called a variable rate GIC. The interest rate you receive is variable depending on how well (or not well) the stocks do. The bank gives you a head start by assigning 8 of the 20 stocks as having performed the maximum 40% on Day 1!

Best case scenario: This means that only the remaining stocks (12 of the 20) have to go up in value of 40% or more five years from now. If this scenario happens, you will have already pocketed the 1% a year and you will receive an additional 40% at maturity.

Please refer to the product brochure for the specific examples of how this might work.

Bottom line – depending on how well the stocks perform, you will receive somewhere between 1%  and about 7.5% per year return. The GIC is guaranteed by the National Bank of Canada and backed further by the Canadian Deposit Insurance Corporation (CDIC).

How to lie with statistics

The above title was the title of a book that was suggested reading in a Quantitative Economics course I took many decades ago. It’s all in how the numbers are presented.

The 10 year performance numbers for many stock market indexes (gleefully reported by the media) is not very good according to the press.

However, before we pass immediate judgment on this number we should recall our history, lest we are doomed to repeat it. Just to clarify - the press is 100% correct. They are not in any way misreporting the truth. They just are not telling the entire story.

If you are measuring from a high point 10 years ago and comparing them to an index at current levels, your theoretical rate of return may not appear to be very good at all. In the past 10 years a lot has happened. There was the famous “tech wreck” early in the decade and how can we forget …”9/11”, the Iraq war, the U.S financial crisis, sub-prime, etc. During that time the stock market went up a lot and down a lot. Lately it has gone up a lot.

Hopefully, you hadn’t invested your life savings all at once into a stock market index or ETF 10 years ago. Thankfully, very few investors would ever consider doing this.  In reality, most investors invest money as they earn it and would have been taking advantage of the lower stock market prices earlier in the decade. A practical example that comes immediately to mind would be contributing to your RRSP every year or having a systematic investment plan in a regular investment account.

Also, if we wait a year or two from now the 10 year returns will likely be measured from the low point – not the high point, so the very bad numbers may suddenly become very good numbers. Certainly, a topic for another future news story.

Therefore, the moral of the story is – be wary of how certain “stats” are presented to you in the popular press.

 ¹ For comparison purposes, the current interest rate is 2.1% for a 5 year conventional GIC at Canada’s five largest   chartered banks (Scotiabank, CIBC, TD-Canada Trust, Royal Bank, Bank of Montreal on May 3, 2010).

Whither the Canadian Dollar and interest rates?

dictionary: “whith-er”:  to what place? where?

According to a National Bank Economics & Strategy conference call recap of April 21, 2010, the bank believes the Canadian dollar which is at par with the U.S. is “priced for perfection” and that the Canadian Dollar may go up at most, a couple more cents. The “priced for perfection” assumes that the Bank of Canada may increase interest rates a staggering 200 basis points over the next year.

In a recent meeting with a TD bank V.P. their view is decidedly more modest. They are calling for a 0.25% to 0.50% rate hike this year (2010) and a further 0.25% to 0.50% in 2011.

I do not necessarily agree or disagree with the National Bank’s or TD’s projection for interest rates or currency as I firmly believe that we cannot know the unknowable and if economists have a flaw, it is their propensity to offer an opinion when asked for one.

[ed. note: as a graduate of the “dismal science” and having worked on an academic paper studying stagflation many years ago and briefly, tried to make a living at it, I can delight in skewering my former colleagues. My view is that economists are best suited at modeling past economic data rather than creating economic models based on future economic data.]

Have a great spring!

Regards….Glenn Szlagowski, Financial Adviser

PS. On a sad note, after three years as my sales assistant, Kim Carter has left our firm. We wish her well.

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Services and products may be provided by an Assante Advisor or through affiliated or non-affiliated third parties.  An investment in the Canadian Advantage 8 Plus GIC is not suitable for all investors and even if suitable, investors should consider what part of the product should serve in an overall investment plan. The information Statement includes a summary of various suitability considerations and guidelines. You are encouraged to read the Information Statement carefully