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Condos: Who will be 'stark naked' when tide changes?

These are stories Report on Business is following Thursday, May 10, 2012. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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Standing naked David Rosenberg weighed in today on the debate over whether there's a condo bubble in Canada, and in his usual colourful fashion.

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As others have noted, the condominium market shows signs of being close to overheating, particularly in Toronto, Vancouver and Montreal.

The debate has raged for a while now, but was highlighted earlier this week when Canada Mortgage and Housing Corp. reported that construction of multiple units, such as condos, drove housing starts to an annual pace of 244,900 in April, the strongest showing since September of 2007.

"If you think constructions are volatile on a month-to-month basis, the fact that new home starts have been rising for five months in a row (by 93 per cent an annual rate over this time frame!) may make you wonder whether the strong building momentum is sustainable or whether there is a Canadian housing bubble formation at play," Mr. Rosenberg said in a report today.

Over the past five months, the chief economist at Gluskin Sheff + Associates noted, construction starts for multiples such as condos have surged by 220 per cent, at an annual pace, compared to a dip of 1 per cent for single homes.

The multi-to-single ratio of starts is now is at its highest since the last housing bubble popped in the early 1980s. That, said Mr. Rosenberg, lends weight to the suggestion that more than normal investment and speculative demand is flooding into the condo market.

As others suggested earlier this week, the pace of residential construction is eclipsing that of natural democraphic demand.

"No doubt the Canadian economic backdrop is solid overall and mortgage rates are at low levels," Mr. Rosenberg said.

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"But at some point, the Bank of Canada will no longer be playing the role as the boy who called wolf, and mortgage guidelines are already being tightened up," he added in the report. "... If you are in the market to buy a home, that is one thing. But the condo market - quite another. There is no timing to this except that the next [Bank of Canada] rate-hiking cycle will likely prove to be the sort of situation where the tide comes in and we see who is standing on the shore stark naked."

What we'll see, he told me, referring to investors and speculators, is "which emperors were disrobed."

JPMorgan takes hit JPMorgan Chase & Co. is reeling today after disclosing trading losses of $2-billion (U.S.) on a credit portfolio over the past six weeks, related to a failed hedging plan.

It's facing possible losses of $1-billion more, chief executive officer James Dimon said.

JPMorgan's shares fell in after-hours trading, as did those of other banks.

The Wall Street giant expects losses of $800-million in the latest quarter. The trading loss was offset by about $1-billion in gains on other securities.

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"These were egregious mistakes," Mr. Dimon said on a conference call. "They were self-inflicted and this is not how we want to run a business."

Euro crisis deepens The political stalemate in Greece remains the focus of the euro crisis today, but don't lose sight of Spain.

Spanish bond yields have been climbing, and its jobless rate, at almost one-quarter of the work force, is the worst among Europe's major economies. The government has also been forced yet again to try to fix its hobbled banking system, seizing control of Bankia, the fourth-largest lender in the country.

A bailout for Spain, of course, would take the euro crisis to an entirely new level, which is what markets have feared.

"Europe continues to keep investors on the back foot today with Spain now vying with Greece in keeping markets nervous," said senior analyst Michael Hewson of CMC Markets in London.

"In Madrid fears about Spain's banks were manifested in a sharp rise in Spanish bond yields to dangerous levels yesterday, which reflect market concern about the solvency of the Spanish banking system," he added. "In an attempt to restore confidence the Spanish government last night took a 45-per-cent stake in Bankia, by way of its bank bailout fund."

The situation in Spain looks bleak on its own, but its troubles really come into focus when compared to Germany, as research by Sal Guatieri of BMO Nesbitt Burns shows.

"News of rising bank loan losses in Spain, alongside the usual chaos in Greece, drove Germany's 10-year borrowing costs to a record-low 1.5 per cent," Mr. Guatieri said.

"Lower rates beget lower unemployment, with the current rate already at a two-decade trough of 5.6 per cent. By contrast, Spain's yields jumped to 6 per cent up one percentage point since early March, which means its jobless rate, already sky-high at 24.1 per cent, hasn't peaked. The divergent situation is untenable in a monetary union."

(For Mr. Guatieri's research, see the accompanying infographic or click here.)

Spain's problems aren't quite the same as those in Greece, with the banking sector in the crosshairs, though its books are a mess. And many still see a default in the works, though a costly rescue would be the more likely scenario. Any way you cut it, Spain spells more trouble for the 17-member euro monetary union.

"Spain has a significant fiscal problem, with a forecasted fiscal deficit of 6 per cent of GDP this year (IMF); however in relative terms they do not have a debt problem, boasting a gross debt of 79 per cent of GDP," said senior currency strategist Camilla Sutton of Scotia Capital.

"The biggest problems (and we admit these are serious) are the large exposures the banking sector has to real estate, a lack of growth, unemployment, and increasingly important is dwindling investor confidence ... A crisis of confidence could well become Spain's (and the EMU's) biggest problem."

In Athens, the political stalemate after Sunday's elections continued, making a second vote likely in June. And, for her part, Angela Merkel held firm in demanding austerity measures not take a back seat.

Globe to charge The Globe and Mail is moving to charge readers for its online content, following a trend established by the New York Times and other major publications.

Publisher and chief executive officer Phillip Crawley told an all-staff meeting today that the paper will implement a metered paywall system this fall, asking readers to pay if they read more than a certain number of articles each month.

The number of free articles per month hasn't yet been established, nor has pricing, The Globe and Mail's Steve Ladurantaye reports.

"We have chosen to go for the big move rather than do it a step at a time," Mr. Crawley said. "Based on what we see going on in the advertising market, we've decided to go for it now. We had already made the decision, it was a case of how quickly we would do it."

Cineplex boosts dividend I found it funny at the time that, along with everyone else in the theatre, I was hoovering up popcorn during a movie called The Hunger Games. Clearly, I did my bit for Cineplex Inc. and its shareholders.

As The Globe and Mail's Steve Ladurantaye reports today, Cineplex hiked its dividend by 4.6 per cent to $1.35 annually as it swung to a profit of $15-million and posted a 12-per-cent gain in revenue in its first quarter.

It was the theatre chain's strongest first quarter ever for earnings before interest, taxes, depreciation and amortization, due to the success of the blockbuster film about kids killing each other.

Concession revenue climbed 18 per cent.

Bombardier profit slips Bombardier Inc. posted a 16-per-cent decline in first-quarter profit today, along with a dip in revenue, but cited "momentum" in orders for jets.

The plane and train manufacturer earned $190-million (U.S.) or 10 cents a share in the quarter, down from $220-million or 12 cents a year earlier, The Globe and Mail's Bertrand Marotte reports.

Revenue fell to $3.51-billion from $4.7-billion.

"We had a solid level of new orders in business jets and we're starting to see momentum in commercial aircraft orders which led to an increased backlog of $23.3-billion," said chief executive officer Pierre Beaudoin.

Analyst Benoit Poirier of Desjardins said the results were disappointing, but noted that "regional aircraft order momentum is improving and development of the CSeries and Learjet 85, which is key for Bombardier's future, are both on track."

Sun Life profit climbs Canada's Sun Life Financial Inc. reported first-quarter profits of $686-million Thursday, up from $438-million a year ago.

Rising stock markets and interest rates, especially in the United States, contributed roughly half the earnings, which amounted to $1.15 per share, compared to 73 cents per share in the same period last year, The Globe and Mail's Tara Perkins reports.

Interest rates led to a gain of $95-million, while new appraisals of Sun Life's real estate holdings led to a gain of $22-million.

Magna breaks through Magna International Inc. has made a breakthrough with Japanese auto makers, signing an agreement with Nissan Motor Co. Ltd. to assemble a vehicle for that company's Infiniti brand, The Globe and Mail's Greg Keenan writes.

Magna did not disclose where the Infiniti model would be built.

The Canadian auto parts giant also posted a stronger first-quarter profit of $343-million or $1.46 a share compared with $322 million or $1.30 a share.

Revenue increased by 6.6 per cent to $7.67-billion.

Trade surplus widens Canadian exports fell in March for the third month in row, all because of a dip in shipments to the United States. But that was eclipsed by a decline in imports, leaving Canada with a slightly wider trade surplus of $351-million, Statistics Canada said today.

And signs from the U.S. market are certainly pointing up, something in Canada's favour.

Canadian exports dipped only slightly, by 0.4 per cent, while imports slipped by 0.6 per cent. Export prices slipped 1.3 per cent, and those for imports 2.3 per cent. The drop in exports was largely due to lower crude prices and volumes.

It's the U.S. market that was notable in March. Exports to south of the border declined 2.1 per cent, while those to other countries climbed 4.5 per cent.

"The fall in two-way trade suggests that even after soft activity in February, there wasn't much of a 'snap' back in trade in March," CIBC World Markets economist Emanuella Enenajor said of the overall numbers.

"The fall in exports was led by energy, driven by prices and to a lesser extent, volumes. Auto exports were down by 0.7 per cent, boding poorly for those hoping for a bounce back in shipments from car factories, after the prior month's weak reading in that sector."

The overall U.S. trade deficit, meanwhile, widened in March despite record export levels. That was due largely to oil imports and trade with China. Indeed, America's trade deficit with China surged almost 12 per cent.

Going forward, though, it's the 5.8-per-cent jump in imports to the United States that are worthy of attention.

"The ramp-up in U.S. imports suggest that demand in the world's largest economy remains healthy, a positive not just for Canadian exporters but for global growth as a whole," said senior economist Krishen Rangasamy of National Bank Financial.

China also reported trade numbers today, though for April, showing that the year-over-year increase in exports slipped to 4.9 per cent, well down from the March pace of 8.9 per cent. But its the drop in growth of imports - to just 0.3 per cent from 5.3 per cent - that has investors concerned.

"The apparent weakness of domestic demand is the most disheartening aspect of today's figures," said Mark Williams and Qinwei Wang of Capital Economics.

"On balance, March's data had suggested that the economy was stirring back into life at the end of a weak first quarter. April's [purchasing managers indexes]were broadly consistent with that view. Today's import data don't entirely undermine the story but they do raise questions."

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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