There is a lot of news and I can’t do it all justice but: 1) Canada spending big time in the budget; 2) corporate earnings are bad but not as bad as investors thought (in general); 3) the U.S. government is moving very quickly and differently under the new administration.
TSX finished more than 1% higher yesterday (today should also be very strong) as optimism ahead of Canada’s budget boosted financial shares and overcame a drag from commodities & materials groups. The financial sector rose 3.88%, partly on hopes that the federal budget, released after market close, would contain measures to ensure stability in the financial system (which it did). Analysts said investors are beginning to look beyond some of the gloomy economic news amid hopes about efforts to stabilize the economy. The Dow Jones industrial average jumped 0.72%, the Standard & Poor’s 500 Index jumped 1.09% and the Nasdaq Composite Index jumped 1.04%.
Keeping the economy from going into severe recession is going to limit their loan losses. If the recession is milder and shallower as a result of this fiscal stimulus then the banks are not going to lose as much money on credit card loans or personal lines of credit. In the budget document, the government said it would seek to secure the financial system and improve access to financing by committing C$50 billion more to a program that buys insured mortgages from the banks (which frees up their capital and improves their tier 1 ratios). It will also give the government the authority to inject capital into banks and financial firms that need support (this is new and a legislative change in Canada).
The summary of the budget is simple, accumulate $85 billion in new debt in the next 5-years, cut personal taxes, invest in infrastructure and give tax credits for home renovations. Now we will await the reaction from the main opposition (the Liberals) at 11:00 a.m. in order to determine if they will support the budget, change it or reject it all together.
In U.S. political news today the U.S. House is set to approve President Barack Obama’s proposed $816 billion ($U.S.) economic stimulus package aimed at wresting the economy out of recession through a combination of tax cuts and $604 billion in spending. The proposal will face an uphill battle in the Senate where Republicans, who say the plan includes too much spending and not enough tax cuts. Obama travelled to Capitol Hill yesterday to lobby reluctant Republicans in an effort to get a bill approved by mid- February with bipartisan backing.
“The American people expect action; they want us to put together a recovery package that puts people back to work,” Obama told reporters. “I don’t expect 100% agreement from my Republican colleagues, but I do hope that we can all put politics aside and do the American people’s business right now.”
In pressing for approval of the stimulus, Obama has cited announcements by companies, including Caterpillar and Home Depot that they are cutting at least 77,000 jobs because of withering sales amid the recession. The nation lost 2.6 million jobs last year, and economists surveyed by Bloomberg News forecast the unemployment rate will rise to a 26-year high of 8.4% by the end of 2009.
This morning stocks rose around the world and U.S. index futures gained as President Barack Obama’s administration prepared a plan to absorb toxic bank assets and earnings from SAP and Yahoo exceeded analysts’ estimates. The Federal Deposit Insurance Corp. (FDIC) may manage the so called bad bank that the Obama administration is likely to set up as it tries to break the back of the credit crisis, Deutsche Bank, Barclays and Citigroup rallied at least 17%. FDIC Chairman Sheila Bair is pushing to run the operation, which would buy the toxic assets clogging banks’ balance sheets, one of the people said. Obama’s team may announce the outlines of its financial-rescue plan as early as next week, an administration official said.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
www.roicapital.ca
