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Government as Robin Hood: Taxing rich to pay the debt

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Stories Report on Business is following today:

How governments are taxing the wealthy

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Call them modern day Robin Hoods, taxing the rich to pay the poor, who happen to be themselves, in this age of austerity.

Governments laid low by the recession are turning more and more to the wealthy for sources of income through higher taxes. Bloomberg News notes today that several governments - from the European laggards to the United States - are looking more and more to the rich as their budget deficits spiral to new heights. Spain's prime minister has called for higher taxes on the wealthy, as have politicians in France and Sweden, while Britain has already made the move. At least 14 U.S. states have boosted tax rates or are studying the move.

"There's a real move to get at whatever revenue you can get at without being so broad as to get the populace all up in arms," Scott Pattison, executive director of the National Association of State Budget Officers in the United States, told the news agency.

Taxes aside, government austerity measures are hitting the masses in Europe's weaker economies. Several governments have unveiled cutbacks that hit public sector workers and have led to mass protests, notably in Greece, where the demonstrations turned deadly, and today in France, where thousands protested plans to raise the official retirement age above 60.

Related: French workers hit the streets

Obama unveils new drilling rules

President Barack Obama today threw the offshore energy industry into a tailspin, unveiling sweeping new measures that will affect the sector for months to come. Mr. Obama extended a moratorium on drilling permits for six months, and suspended planned exploration drilling off the Alaska and Virginia coasts, as well as on more than 30 wells in the Gulf of Mexico.

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The decision is a blow to Royal Dutch PLC, which had planned to drill off Alaska this summer, The Wall Street Journal noted.

The president's move comes as BP PLC scrambles to plug a well that has been spewing oil into the Gulf with a so-called 'top kill' process that involves pumping in heavy fluids and then sealing it with cement. Read the story

Dollar, stocks in strong rally

Global stocks, the Canadian dollar and oil rallied today as the mood in financial markets changes considerably. The Canadian dollar shot up, oil is well above $73 a barrel, and The Dow Jones industrial average , S&P 500 and S&P/TSX composite index all jumped as North American markets opened.

Helping to drive stocks, and commodity-linked currencies such as the loonie, was positive news from Spain, the OECD's economic forecast yesterday and a denial by China of a news report that it is reviewing its holdings of euro assets, which is described as "groundless." In Spain, the parliament approved a €15-billion austerity package, though it passed by just one vote.

Market Blog columnist David Berman noted this morning that while global markets are rebounding, stocks have behaved erratically recently, to say the least, and markets have been whipsawed over the past two trading days.

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As for the loonie, Scotia Capital economists Derek Holt and Karen Cordes Woods noted that, while there have been extreme ups and downs, the Canadian dollar is outperforming most of its global peers. "The [U.S. dollar]has outperformed almost all currencies this month, but [the Canadian dollar]has held its own better than most. The [loonie]has slipped 4.9 per cent against the greenback so far this month ... The point is that [the Canadian dollar] has outperformed on the upside and downside of broad movements in global risk appetite compared to a basket of currencies. Investors have done well over-weighting both the [U.S. dollar]and [the Canadian dollar]in portfolios. Yes this has been a [U.S. dollar]friendly environment, at least for now and until U.S. admonishment of European finances swings around to focus on U.S. fiscal austerity and drag effects on U.S. GDP over the next three years."

North American stocks closed on a down note late yesterday but there was a sharp turnaround today.

In his Global View blog today, Kevin Carmichael reports on why Prime Minister Stephen Harper's G20 summit must strike a decisive deal on sovereign debt.

Related: Wild dollar swings cause headaches

Related: Kevin Carmichael's Global View blog on reasons to remain fearful

Sprott sees long market slump

Money manager Eric Sprott says he's bracing for a "long, deep" market slump, so he's buying gold. Mr. Sprott told Bloomberg News in an interview that the slump that so far has driven down the S&P 500 by more than 10 per cent is the start of a major pullback that will take the index, some time in the next year, below its weakest level of 2009. The $1-trillion bailout of the euro zone by the EU, International Monetary Fund and European Central Bank has failed to calm investors' nerves, while governments are running out of measures to continue pumping their economies.

"Our thesis is we're in for a long, deep cycle, and we've thought that since 2000, but up to this point, governments and central banks have always tried to stave it off," he told the news agency.

Mr. Sprott has boosted gold assets, and shares of gold companies, while betting against banks such as TD, Bank of Nova Scotia and National Bank of Canada through short sales.

Of course, Mr. Sprott is just one voice, though a prominent one in Canada. Mark Mobius of Templeton Asset Management Ltd. had a different view, also in an interview with Bloomberg.

Mr. Mobius has been buying stocks in the BRIC countries - Brazil, Russia, India and China - and "despite the fact that a lot of people that think that we entering a bear market, we don't believe so. This is a correction in an ongoing bull market."


U.S. rebound weaker than believed

The recovery in the U.S. economy is slightly weaker than initially believed. The U.S. Commerce Department said this morning the economy expanded in the first quarter at an annual pace of 3 per cent, compared to an initial estimate of 3.2 per cent and below what economists had expected. The revision was largely due to lower consumer and business spending, on equipment and software, compared to the initial reading.

"With the first quarter in the rear-view mirror, attention now turns to the second quarter (and beyond)," said Toronto-Dominion Bank economist James Marple. "All the indicators point to a growth rate in the second quarter at least on par with the first quarter and likely above, leaving little doubt that the recession is over and a recovery is under way ...

The key to a sustainable recovery in the United States remains conditions in the labour market."

The Associated Press notes that while 3-per-cent growth would be deemed healthy in normal conditions, it will have to be two or times stronger to bring down the nation's unemployment rate in any significant way. Expansion of about 3 per cent is only enough to keep job growth on pace with population growth. Read the story

Banks miss estimates

Three banks, three misses, Streetwise columnist Andrew Willis writes.

Royal Bank of Canada , Canadian Imperial Bank of Commerce and Toronto-Dominion Bank all fell shy of analysts' estimates in reporting second-quarter results today.

Despite missing, RBC's quarterly profit surged 40 per cent to $1.3 billion, but its international earnings were hit by the stronger Canadian dollar. RBC's cash earnings per share were 96 cents, shy of the $1.10 projected by analysts.

"Once again, provisions for credit losses came in well below expectations but were offset by revenue weakness as lower net interest income and non-interest revenues were well off expectations," Barclays Capital analyst John Aiken said of the results from Canada's biggest bank. "While last quarter [RBC's]meeting consensus expectations was a disappointment, we believe that this material negative surprise on revenues will likely be frowned upon once again by investors."

CIBC rebounded to a profit of $660-million from a loss of $51-million a year earlier, as earnings per share of $1.46 were short of the $1.49 projection.

"While wholesale was disappointing, the strong retail results should support the stock and positively impact our outlook," said analyst Mario Mendonca of Canaccord Genuity.

TD's profit more than doubled to $1.18-billion but per share earnings of $1.36 did not meet the expected $.140.

"The slight miss in the quarter relates entirely to wholesale banking results (trading particularly)," Mr. Mendonca said. "While wholesale was disappointing, the strong retail results should support the stock and positively impact our outlook on TD."


Streetwise by Andrew Willis

Strong dollar undermines RBC profit

CIBC back in black in second quarter

TD profit more than doubles

Nixon, Harper warn of sporadic bank reform

RBC chief executive officer Gordon Nixon warned this morning that a lack of co-ordination on financial reform is destabilizing financial markets and could set back the global economic rebound. "At a time when the world needs strong co-operation by all parties, the complete opposite appears to be occurring," Mr. Nixon said on a conference call related to the bank's earnings. "Various jurisdictions are creating their own rules ... The problem we face today is a number of constituents including banks, regulators and politicians each have very different interests and very different views on regulations."

Financial reform is shaping up to be a major sticking point at the upcoming G8 and G20 summits in Canada, where various interests are going to call for a global bank tax, which Canada strongly opposes.

Prime Minister Stephen Harper, in Ottawa today, agreed on the need for a co-ordinated global approach. "With the fragile global economic recovery hanging in the balance, it is crucial that we build consensus at the summit on reform of the financial sector, control of sovereign debt, and the framework for strong, sustainable and balanced economic growth over the long term," he said. Read Kevin Carmichael's Global View blog on the summit.

OMERS strikes deal for Logibec

OMERS today struck a deal to acquire Logibec Group Informatique for more than $240-million. An arm of the Ontario Municipal Employees Retirement System is bidding $26 cash for the software company's share. Société générale de financement du Québec has agreed to tender its stake, as has the family of Logibec chief executive officer Claude Roy.

"We do not believe a superior offer will emerge for Logibec given the overwhelming support from major shareholders in conjunction with what we believe is a fair offer price," said Desjardins analyst Maher Yaghi. "We also note that Logibec was a consolidator in its industry. We believe many minority shareholders will tender to the bid as it offers a significant liquidity event that allows shareholders to capture upside on the stock, which is not usually very liquid." Read the story

Agrium chasing takeovers

The chief executive officer of Agrium Inc. says he's still chasing targets. Mike Wilson told Bloomberg News in an interview that he expects consolidation in his industry, and that he's looking for deals that would him to expand the company's North American and South American retail network. "We don't wait for someone to knock on the door," said Mr. Wilson, who recently lost out in an attempt to acquire CF Industries Holdings Inc. "You're going to see organic growth and acquisitions."

Adviser to stars arrested, charged

Federal prosecutors in New York today arrested and charged an investment advisers to the stars. Kenneth Ira Starr, who has advised actors such as Wesley Snipes and Sylvester Stallone, was accused of stealing money from his clients. Allegations also include money laundering. In documents filed in court, according to reports, FBI agent Robert Beranger said Mr. Starr "used his access to famous and powerful clients to burnish an image of trustworthiness, leading his clients to entrust him with management and control of their financial affairs." Mr. Starr is alleged to have used some of the money to buy a swank Manhattan apartment, and funnel more to friends. No alleged victims were named, but the complain filed against Mr. Starr describes them as a hedge fund manager, an actress, a former talent agency executive, an elderly heiress and a jeweler, The Wall Street Journal reports. The allegations have not been proved in court,

How luxury goods are performing

Here's a tale of two continents: Tiffany & Co. this morning topped analysts' projections as profit surged to $64.4-million (U.S.) or 50 cents a share from $24.3-million or 20 cents a year earlier, and revenues rose to $633.6-million, topping the estimates. Tiffany also boosted its forecast for annual profits.

But in Zurich, Richemont, the producer of the iconic Cartier, warned that Europe's deepening debt crisis could take a toll. Richemont's annual profit from continuing operations fell 18 per cent on currency losses, and sales fell 4 per cent. "What is going on in the western world is not very encouraging," said deputy chief executive officer Richard Lepeau. "Look at Europe and what may happen in the U.S."

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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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