20 questions on the market meltdown
It was another week of worsts:
The Toronto Stock Exchange’s main index suffered its worst weekly loss in almost 70 years. The Canadian dollar had its biggest one-day drop in almost 40 years.
As hundreds of billions in bailout money fails to stem investor panic, a look at some of the questions on the minds of consumers amid the market mayhem.
- How much has the Toronto Stock Exchange lost since its peak?
The main index is down more than 6,000 points, or about 40 per cent, since hitting an all-time high of 15,154.77 on June 6 this year. That represents a value decline of more than $700 billion from about 250 companies that make up this index of most commonly held TSX stocks.
- Who are the panicked investors?
“There are some individuals who are very frightened by this,” says Fred Ketchen, ScotiaMcLeod’s equity trading manager and one of Bay Street’s deans. “There have been a lot of phone calls.”
But Ketchen and others says the sell orders this week are coming from more than just mom-and-pop investors. Mutual fund managers are being hit with a lot of redemptions, for example, as people move their money around and, to make sure they have the cash to meet those redemption obligations, mutual funds must sell out of some of their stock positions.
Managers of multi-billion-dollar pension funds, as well, may be deciding to shift their asset mix away from stocks and into other less riskier investments such as treasury bills.
Finally, there will be those who are buying and selling on margin and, with the precipitous drop this week, find that they don’t have the cash to cover their margins and, as a result, are forced to sell to meet those obligations.
- Who are the winners and who are the losers?
The winners really won’t be determined until the market turns up again.
Certainly, if there is a lot of selling there is, by definition, a lot of buying going on. So the winners, if you can call them that, are those who had some cash lying around and are able to buy stocks in some good companies for bargain basement prices. And there is a group of professional traders who will be in and out of the market all day long who could be making some money. “The more the action, the better for them,” Ketchen said.
As for losers, pretty obvious: those individuals or corporate investors who need the money from their investments right now or in the next year or two. Most Bay Street veterans say markets, over the long-term, will be up. But it’s unlikely stocks are going to recover quick enough for those who are being forced to sell their investments.
- What stocks are doing well?
While virtually all stocks have been impacted in a negative way by the recent market turmoil, shares that pay dividends, which haven’t been reduced, have gone down less than other stocks. Major Canadian banks fall into this category.
- What sectors are most vulnerable?
The sectors hit the hardest on the stock market are the sectors that will take the brunt of the economic pain. Resource industries will likely suffer because of a global economic slowdown. As resources industries hire fewer people here, overall consumer spending is likely to droop.
That, in turn, could hurt the retail sector, the housing sector and other areas of the economy that depend on consumers feeling good enough about their own economic future to keep spending.
- What happened to all the money leaving the stock market?
Most went into “cash” investments, which to refer things like savings accounts, bonds, GICs and treasury bills.
- What will it take to end the panic and losses in stock markets?
A bottom to the fall in U.S. housing prices would likely end the panic selling, since the U.S. housing crisis was the catalyst. But that may be months or more away. If interest rates around the world are driven low enough - most analysts expect they will come down at least another half a percentage point in the U.S. and a full point more in Europe - that could stem the bleeding and, in turn, the drop in U.S. housing prices. Also, once-toxic assets are off their books, banks will be willing to restart lending money to one another, easing the credit crunch.
- Where is the Canadian government going to get the $25 billion to lend to the banks for the mortgage buy-up it announced Friday?
Don Drummond, TD Bank chief economist and a former senior federal Finance Department official, says Ottawa will initially have to borrow the money, which through Canada Mortgage and Housing Corp., will be loaned to banks that will hand over good-quality mortgages to CMHC as collateral. Because they are secured mortgages, the risk is minimal and the government even stands to make money as it will be borrowing at the government of Canada rate, the lowest in the country, and lending it out at a higher rate to the banks.
Under federal accounting rules, the loan should not show up on the government’s books as a deficit either, but will instead be recorded as additional borrowing requirements.
“This action will help Canadian financial institutions raise longer-term funds and make them available to consumers, homebuyers and businesses in Canada,” says Finance Minister Jim Flaherty.
- How will the mortgage move help me?
If the banks have more money, they should be able to loan more to people and small businesses. At least that’s the theory.
“They really want to facilitate more loans to mom-and-pop businesses and just your average individual out there who’s looking to borrow some money for a good cause,” says Adrian Mastracci, a portfolio manager at KCM Wealth Management.
- How is the Canadian government package different from the $700-billion US bailout by Washington?
The big differences, other than the amounts, are that the U.S. government is buying the securities, not accepting them as collateral, and those securities are subprime-tainted and as such risky, not secured mortgages.
The U.S. government will have to increase its borrowing in global markets, either by issuing bonds or other government-backed securities. Washington will have to come up with an estimate of its losses and that will go on the budget deficit there.
But even in the U.S., the government won’t likely be on the hook for the total $700 billion and could even make money if the value of the securities rebounds.
- How is this different than the market crash of 1929?
Economists say there are few similarities between today’s economy and that of the 1930s.
The common factor may be that the financial system is being called into question so dramatically for the first time since the Great Depression.
The Depression saw the economy shrink by a walloping 30 per cent.
One of the differences is the intervention of central banks and governments. There was no central bank in Canada during the Depression and there was little in the way of a social safety net.
- Is Canada immune?
The financial crisis in the U.S. and in Europe has been brought on mostly because large banks there ended up with billions of dollars in bad debt. Canadian banks and insurance companies had some trouble spots on their balance sheet, but nothing like in the U.S.
But Canada is not immune to the broader economic malaise that is afflicting the world’s economies. With banks lending less, businesses can’t get the money they need to build new factories, do research and hire more workers. That will stunt economic growth.
And because Canada relies so heavily on exports, mostly to the U.S., slowdowns elsewhere invariably mean that there is reduced demand for Canadian oil, metals, wood and manufactured goods. That, in turn, could lead to slowdowns and possibly sustained jobs losses here.
- How is our banking system different?
Banks and insurance companies in Canada often complained that the federal government had too many regulations and restrictions that prevented them from merging or getting into the same kinds of businesses that their competitors in the U.S. were involved in. That over-regulation may now be the saving grace of Canada’s financial sector.
Although each of Canada’s Big Five banks have had to take some hits over the last year because of bad investments, they are, as a group, relatively stable, largely because they were either too small to play in some of the risky, complex markets that U.S. and European banks have been playing in or they were simply prevented from doing so by law.
- How are my bank deposits protected?
The Canadian Deposit Insurance Corp. guarantees up to $100,000 of deposits in registered financial institutions.
- Will I have trouble getting a mortgage or a line of credit?
You shouldn’t. Banks may be a little more discerning, given the current climate, but they still want to do business and a big part of that business is loans.
“It may be a little harder, but I think most banks out there really want to make those loans,” says Mastracci.
He said banks may impose higher rates or request collateral for lines of credit.
“They may get a little stingier in giving you that loan, so may not get quite the amount that you probably want,” he said.
However, if consumers shop around, they should be able to find something they can live with, he said.
- Will this affect any current debt I have?
If you have a reasonable debt level - a mortgage, a car payment, and a small amount of credit card debt - and you are making your payments on those debts, you should have no reason to worry.
The biggest risk for those who are paying off loans is rapidly rising interest rates. Indeed, rapidly rising interest rates and borrowing costs were one of the defining characteristics of the U.S. housing crisis. But economic experts in Canada are in general consensus that if interest rates are going anywhere in the next year, they will be going down.
- How can I protect myself financially?
The wealth and economic security of most households is built on three pillars: the value of your home; your job or your income; and your investments. Protecting yourself financially means looking after all three of these pillars.
House prices in most markets in Canada continue to rise but paying attention to that asset in terms of maintaining repairs and appropriate insurance is important.
Financial experts suggest you keep three months worth of salary in investments you can get at quickly if you find yourself out of work. And if you’re feeling nervous about work, perhaps it’s a good time to upgrade skills or burnish the resume.
As for your investments, there’s no standard answer for protecting yourself, but financial advisers generally agree that a portfolio that contains a mix of investments based on a mix of geographies -Canada, the U.S., Europe - is your best defence.
- What demographics are most vulnerable?
The plunge in the stock market hurts those most who need their investments now and that would be people over age 50 who either are about to cash in their RRSPs or who are already living off of their investments.
For these people, time is their enemy. It will be difficult to quickly regain any loss in the value of a portfolio. If you’re in this age bracket, advice from a good financial adviser would be a priority. But for those who are younger or do not need their investments for a decade or more, time may be on your side.
- What is a recession and is Canada in one?
The rule-of-thumb definition of a recession is when an economy suffers back-to-back quarterly contractions in the value of goods and services it produces.
That hasn’t happened here, yet, as output increased marginally in the second quarter after falling in the first quarter.
However, Statistics Canada senior economist Philip Cross has long dismissed the rule-of-thumb definition as a journalistic creation. It’s entirely possible to have two small quarterly declines without having a recession, he says. What is crucial is whether there’s a spiralling decline in which, for example, a drop in sales leads to job cuts and results in less consumer spending that in turn weakens sales even more. The latest economic reports, including record job growth in September, shows this is not the case today.
- How long might this last in Canada?
The forecasts of the country’s big banks and the Bank of Canada differ on the details, but most agree that Canadian economic growth will be slow this year and through most of 2009 with an improvement coming by 2010 or so.
“Over the next 12 months, home prices will have bottomed . . . the worst in institutional failures will be in the rear-view mirror, and the process of recapitalizing the financial system will be well underway but don’t expect a return to the status quo,” wrote Drummond in his most recent quarterly forecast, published Sept. 25.
- with files from David Akin, Eric Beauchesne, Derek Abma and Keith Bonnell
The Great Indian Butterfly 2010: Online
Filed under: Stock market, Stock market crash, Stock market for dummies, stock exchange, stock market canada, stock market crash of 1929, stock market crash of 2008
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