Thursday, November 27, 2008

Feature: No jolly season for Ontario manufacturing workers

By Jamie Sturgeon | Financial Post | 11. 28. 08

Scores of manufacturing workers in Ontario won't be pried from family gatherings because of work this holiday season but not for a reason they're likely happy about.

In what may well be remembered as the Christmas Ontario's factories went silent, manufacturers from cars to steel are shutting down operations to clear bulging inventories and save cash, forcing an unpaid vacation upon thousands of their employees.

Thursday, Hamilton's rusting steelworks were caught in a mounting economic downdraft that has already resulted in a series of unusually prolonged production freezes at auto-manufacturing plants in the province.

ArcelorMittel, the biggest steel producer in the world, said it will be shuttering its Dofasco plant for a two-week period beginning Dec. 21 in an effort to slash $1-billion in company-wide spending.

Some 5,000 workers will go without pay during that time.

The stoppage is also designed to alleviate rising inventory levels, said company spokesman Larry Meyer.

Steadily falling demand across the economy has hit virtually every manufacturer regardless of industry. Steel, a building block in countless products, is no exception.

"It's not a surprise," said Wayne Fraser, president of the United Steelworkers Canada. Production has be slowing for months at Canadian smelters, he said, adding that member workers are braced for similar announcements from others.

"Companies are preparing for the worst. We have to be patient and hope this thing turns around."

Limited Christmas shutdowns are normal for Ontario's auto assembly factories, but this year is different.

U.S. auto sales have plunged 12 straight months through October to lows not seen since 1991 as consumers defer spending. And Canadian plants, which ship almost every vehicle they produce to the United States, are cranking down output far more than in previous years.

General Motors Corp., the largest vehicle producer in Canada and the U.S., is extending the typical Christmas shutdown of its Oshawa, Ont. car plant and the CAMI Automotive Inc. plant it shares with Suzuki Motor well into January.

The automaker is also idling its Oshawa pickup plant, which makes the Chevrolet Silverado and GMC Sierra trucks, for four weeks starting Dec.15, said company spokesperson Patty Faith.

"We don't typically take [inventory adjustments] in December," Ms. Faith said. "Of course, nothing about this year is typical."

GM's U.S. sales last month plunged 45% while Chrysler LLC's dropped 35% and Ford's fell 30%. All three automakers are readying "viability" plans due to Congress by Dec. 2 as part of their bid to win US$25-billion in emergency aid.

The companies are also asking the Canadian and Ontario governments for financial help.

Ford's assembly plant in Oakville, Ont. will be idled four weeks starting Dec.15 to adjust inventory, said company official Lauren More. Ford's St. Thomas, Ont. factory will suspend production for four weeks starting Dec. 8, she said.

Privately-held Chrysler confirmed only that its Brampton, Ont. factory would be shut down next week.

Tighter credit markets are serving to exacerbate the downturn, as companies are forced to stockpile cash for common functions they would normally be able to borrow for, like payroll, said Michael Gregory, a senior economist at BMO Capital Markets.

As a result, temporary production halts in industries traditionally unaccustomed to using the tactic are beginning to look long and hard at the option.

"Manufacturers across the board are looking at ways to pare back," he said.

"Will this become more of a norm going forward? Well, that will depend on what happens in the U.S. economy."

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Tuesday, November 25, 2008

News: Auto bailout tip of iceberg: JP Morgan

By Jamie Sturgeon Financial Post 11.25.08

The tens of billions of U.S. taxpayer dollars being asked for by Detroit could be the tip of the iceberg, analysts at JP Morgan said Tuesday.

With Congress preparing to hand struggling automakers General Motors Corp., Ford Motor Co. and Chrysler LLC US$25-billion in loans, JP Morgan analysts said any emergency cash would just be a lifeline until Barack Obama's administration takes over in January.

Mr. Obama's economic team would be put to work quickly, tasked with crafting a second, more comprehensive bailout package involving concessions from creditors and labour in what would amount to a sweeping restructuring of the Big Three.

Structural costs would be a primary target under any Washington-brokered overhaul, JP Morgan said, with concession from creditors and the United Auto Workers "inevitable."

The so-called "shared sacrifice scenario" would take months to negotiate, analysts said, likely equating to further injections of operating capital for Detroit.

What all of this means for Canada, which has already shed more than 10,700 auto-manufacturing jobs this year, is uncertain.

Ottawa, too, is mulling a co-ordinated effort to prop up the North American industry, as GM, Ford and Chrysler's Canadian operations pine for up to $6.5-billion in loan guarantees here.

What is certain is that a significant turnaround is of paramount importance. Reeling from a maelstrom of economic headwinds, Canadian auto manufacturers are expected to collectively lose $1.7-billion this year, according to a report by the Conference Board of Canada, also published Tuesday. The loss will be the third in as many years.

Moreover, as demand crashes in the United States, where 90% of Canadian automotive production heads to, 2009 is shaping up to be equally as bleak. New vehicle sales are expected to fall to their lowest point since 1992, leading to another loss of more than $1-billion.

The decline in the Canadian dollar will provide little support, the Ottawa-based independent research association said, adding it expects the loonie to recover to US85¢.

"At this level, the dollar dampens prospects for vehicle exporters, who are being forced to contend with competitive headwinds from low-cost foreign suppliers and more competitive U.S. labour settlements."

Another certainty is that the lines of communication between the federal Conservatives and the Canadian Auto Workers union are quiet for the time being.

Industry Minister Tony Clement said on Monday any restructuring effort would require concessions from the union, but has yet to begin in earnest any dialog with CAW officials.

"He's not talked to me. I've sent him a letter asking for a meeting," said Ken Lewenza, CAW president. "He has not followed up in terms of talking to us about what role the labour movement can play. And until I hear from [the Minister], I prefer to continue to do what we've been doing, and that's building cars."

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Monday, November 24, 2008

Feature: Flip shows feeling the flop


Jamie Sturgeon | Financial Post | 11.22.08

"Big profits! Quick turnovers! Everyone's getting into the act! Live the dream of working for yourself while raking in the cash."

House flipping -- the act of buying, renovating and selling a property for profit -- was a seduction that tempted many during the real-estate market's near decade-long boom that's now sputtering.

Nowhere was that dream more enticing than on television, where networks in Canada, the United States and Europe crafted dozens of entertaining shows making the whole process look just so damn easy.

"How hard can it be to successfully flip a house?" the shows on HGTV, TLC and elsewhere, all seem to say.

As it happens, very hard, says Sam Kamoutsis, a veteran property flipper from Toronto.

"It's not easy," the 42-year-old says. "All these shows rarely show the hard work and knowledge that goes into it. You can't renovate a property in one week."

Mr. Kamoutsis, a former information technology consultant, rode the market between 1998 and 2006, when price wars were the norm across Toronto's red-hot housing sector.

In all, it took eight years to flip eight houses before he exited the market to focus on his real-estate business finding distressed properties for other, mostly commercial, flippers.

With falling home prices and credit more difficult to get, the ranks of speculative flippers are thinning by the day.

"It's becoming more and more difficult now," confirms Mr. Kamoutsis. "Even our regular deals are failing due to financing."

The Canadian housing index fell for a fifth straight month in October due to slumping home sales, Statistics Canada said this week. And last week, the Canadian Real Estate Association (CREA) said that nationally, the average price of a resale home last month suffered its steepest decline in 26 years, down 10% from a year ago, to $281,133.

Hardly the stuff of quick turnovers and big profits.

"We're seeing a lot of the homes that were renovated and are on the market now unfortunately sitting there," Mr. Kamoutsis says.

Not surprisingly, it's precisely at the market's peak that popular interest is highest, says Lawrence Smith, a professor on housing in the University of Toronto's economics department.

The boom in flip-style television programming since 2005, when U. S. network A&E first aired the seminal Flip This House, is a natural extension of this.

"You've got to view them in the context of the cycle," says Prof. Smith. "The programs start coming in the period when the market has been showing great increase for a few years. In that kind of environment, there's nothing really wrong with it in the sense that it's going to work. But it's going to work because of the basic market fundamentals."

Between 2002 and the end of 2007, home prices in Canada soared 78%, to $315,800 from $177,100, according to CREA figures.

Clearly, there was room to flip.

But there's an inevitable time lag that comes when a trend is identified by a network, a series is commissioned and is finally aired.

By the time Canadian shows, such as HGTV's The Big Flip (first aired in October, 2006) launched, there was little growth left in the market, Prof. Smith says.

"Now you're bringing people into the market and enticing them to go buy a house, renovate and think they're going to flip," he says. "And they're going to lose."

Home To Flip, another of the network's four flip-themed programs just debuted in October.

"All these kinds of shows have fueled this sense that flipping houses is a great way to make money," says Anna Gecan, vice-president of content at the lifestyle network. "And up until recently it probably has been."

It was also a great way for the network to rake in viewers. Through 2005 until August, 2007, viewer numbers grew by 40% on the strength of its real estate and renovation programming.

It was at the beginning of this year that numbers began to slip, Ms. Gecan says. Focus groups in March resulted in altering programming "to reflect the changing market."

That means cheaper renovation options explored by its shows, and "loving the home you're in," she says.

As for the future of flipping on HGTV, after two seasons, The Big Flip won't be returning for a third. The other three remain on the bubble.

"I do think we're going to have to look long and hard at whether this is really the right kind of programming for the moment," Ms. Gecan says about renewing the network's other flip-based shows.

"My sense is that we won't."

News: Deflation threat still distant in October

By Jamie Sturgeon | Financial Post | 11. 23. 08

The rate of inflation cooled to 2.6% in October as a slowing economy put the brakes on gasoline and other consumer prices, Statistics Canada reported on Friday.

Economists had expected a slowdown from September's clip of 3.4% as the financial crisis moved into the broader economy, however, the drop is sharper than expected, with notable slowing in a variety of core components.

Price declines for vehicles, clothing and computer equipment as well as a slowdown in transportation costs all contributed to an actual fall of 0.5% in consumer prices last month on a seasonally adjusted basis.

Prices at the pumps, however, were the biggest drag on inflation, "easing" to just 13% higher than a year ago, compared with a 27% rise in the cost of gas in September, the federal agency said.

Excluding gasoline, consumer prices rose 2% year-over-year in October. Excluding all energy components in the index, prices advanced 1.8%.

The core inflation rate, which excludes consumer segments subject to erratic price behaviour such as energy and is the metric used by the Bank of Canada to help determine the overnight interest rate, advanced 1.7%, identical to September. On a seasonally adjusted basis, core inflation posted no growth last month.

The lower-than-expected report "gives the all-clear signal to the Bank of Canada to continue cutting rate," said Douglas Porter, deputy chief economist at BMO Capital Markets in a morning commentary.

The Bank of Canada, which has stated it would cut interest rates further to boost the flow of credit, is set to review the key rate, currently at 2.25%, on Dec. 9.

Beyond falling energy prices, the cost of buying or leasing a vehicle fell by 9% for the second straight month. The clothing and footwear component declined 2.8% from a year ago, led by a sharp decline in women's clothing prices, Statscan said.

Food prices continued to exert upward pressure on inflation though, as the average price for groceries was 7.3% more expensive than last October, marking the eighth straight month food prices have gained. Mortgage interest costs also increased.

By province, Manitoba and Saskatchewan were the only two provinces to not report a slowdown. P.E.I. experiencing the biggest decline, to 3.9% from 5.5% in September.

October's results could mark a pivotal point. As the national economy braces for recession and demand for energy abates, some say inflation will continue to fall sharply in the remaining two months of the year.

"Inflation is poised to plunge again next month, as gasoline prices have dropped in the double-digits again this month - probably down about 18% - which alone could take the annual inflation rate well below 2%," said Mr. Porter.

The central bank's targeted inflation rate is 2%.

Some have even warned of a period of deflation in the coming months as developed economies slow rapidly. However, the threat of deflation, or a self-reinforcing period of falling prices combined with limited consumer spending, here in Canada is distant at best, said Avery Shenfield, economist at CIBC World Markets.

"It’s hard to even think about a wage [and] price tumble when average hourly earnings have still been rising at a 4% clip, the employment rate is still close to record highs, and when a weaker [Canadian dollar] promises to offset some of the drop in global prices for goods set in U.S. dollars."

Wednesday, November 05, 2008

News: Investors yank even more from mutual funds

Jamie Sturgeon | Financial Post | 11.05.08

September's record rush for the exits by Canadian mutual fund investors grew to a full-on stampede last month as they pulled more than $8.2-billion of their savings out of volatile financial markets, preliminary data showed Tuesday.

Net redemptions from mutual funds for October are estimated to total between $8.2-billion to $8.7-billion, the Investment Funds Institute of Canada said, far exceeding the $4.5-billion redeemed in September.

IFIC estimated that net assets across the mutual fund industry fell 10% to $633.6-billion.

The news Tuesday came just hours after new data from mutual fund research firm Morningstar Canada showed virtually every mutual-fund category suffered sharp declines of 10% or more in October.

"These are some of the ugliest numbers," said Philip Lee, a fund analyst for Morningstar, who said most fund categories suffered their worst drops since the Russian financial crisis in 1998 and market crash of 1987.

"Some of the funds could have been uglier if we didn't get that big currency move."

All but four of 43 fund indexes -- a basket of mutual funds within one category such as U.S. equity or real estate-based funds, for example -- tracked by Morningstar suffered losses, as markets tumbled and credit circulation "came to a grinding halt," Morningstar said in a report measuring the change in funds' net asset values per share.

Twenty fund categories in all declined more than 10% over the 31-day period.

Indeed, a rally to the U.S. greenback followed by some respite on American equity markets in the last four trading sessions of the month staved off even deeper declines in some categories, Mr. Lee said.

The historic run-up in the interbank lending rate, or Libor, through the first half of October exacerbated investor anxiety, Mr. Lee said, triggering massive sell-offs among mutual funds. "Credit essentially came to a grinding halt in the middle of the month," he said.

Indexes that tracked financial funds - once the definition of stability in equities - as well as other blue chip stocks absorbed declines between 13-18%, Morningstar's data showed. The domestic financial services index fell 15.1% led by an almost identical fall in the category's biggest fund, the iShares CDN Financial Sector Index.

Precious metals and other commodity-laden fund indexes witnessed declines of 30% or more in October as investors fretted that demand in energy and base materials was evaporating. "[The declines] certainly didn't play out well for the Canadian equity market, which is heavily influenced by energy and materials stocks," Mr. Lee said.

Not surprisingly, the four fund indices that did not lose ground were global fixed-income, which actually earned 4.5% "primarily on currency moves" in the month, Mr. Lee said; Canadian short-term fixed-income, advancing 0.6%; and Canadian and U.S. money market funds, with almost negligible returns of 0.04% and 0.02%, respectively.

The 12.9% rise in the greenback against the Canadian dollar in October benefited "any fund that owned a U.S. bond," Mr. Lee said. "You're getting that currency kick."