Via Reuters:

08:59 01Jun10 RTRS-BANK OF CANADA RAISES KEY RATE BY 25 BASIS PTS TO 0.50 PCT, SAYS WILL CAREFULLY WEIGH FURTHER HIKES AGAINST DOMESTIC, GLOBAL ECONOMIC DEVELOPMENTS
08:59 01Jun10 RTRS-BOC SEES “CONSIDERABLE UNCERTAINTY” SURROUNDING OUTLOOK, CITES POSSIBILITY OF RENEWED WEAKNESS IN EUROPE
08:59 01Jun10 RTRS-BOC SAYS MOVE STILL LEAVES CONSIDERABLE MONETARY STIMULUS IN PLACE IN LIGHT OF SIGNIFICANT EXCESS SUPPLY, STRONG DOMESTIC SPENDING, UNEVEN GLOBAL RECOVERY
08:59 01Jun10 RTRS-BOC SAYS ACTIVITY IN CANADA UNFOLDING LARGELY AS EXPECTED, CPI IN LINE WITH APRIL PROJECTIONS
08:59 01Jun10 RTRS-BOC SAYS CANADA HOUSEHOLD SPENDING EXPECTED TO SLOW , PICKUP IN BUSINESS INVESTMENT IMPORTANT FOR BALANCED RECOVERY
08:59 01Jun10 RTRS-BOC-SPILLOVER TO CANADA FROM EUROPE HAS BEEN LIMITED TO MODEST FALL IN COMMODITY PRICES, TIGHTER FINANCIAL CONDITIONS
08:59 01Jun10 RTRS-BOC SAYS HOUSEHOLD, BANK AND SOVEREIGN DELEVERAGING WILL ADD TO VARIABILITY AND TEMPER PACE OF GLOBAL GROWTH
08:59 01Jun10 RTRS-BOC-RECENT EUROPE TENSIONS WILL LIKELY RESULT IN HIGHER BORROWING COSTS AND FASTER TIGHTENING OF FISCAL POLICY IN SOME COUNTRIES
08:59 01Jun10 RTRS-BOC-IN MOST ADVANCED ECONOMIES THE RECOVERY IS HEAVILY DEPENDENT ON MONETARY AND FISCAL STIMULUS
08:59 01Jun10 RTRS-BOC TO RE-ESTABLISH NORMAL OVERNIGHT MARKET OPERATIONS, WITH TARGET FOR O/N RATE AT MIDPOINT OF OPERATING BAND
08:59 01Jun10 RTRS-BOC SAYS WILL MAKE 0VERNIGHT STANDING PRA A PERMANENT PART OF FRAMEWORK, WILL CONDUCT SPRAS AS NEEDED

There appears to be a general consensus amongst Canadian economist that a 0.25% increase is imminent. The futures market is currently pricing in an 83.96% probability of the move. The bigger unknown is the language that accompanies the decision.

Should Mr. Carney take a more hawkish tone, one which the market anticipates further hikes soon, expect yields to jump across the curve.

Should Mr. Carney take a more dovish tone, given the turmoil in Europe, yields won’t fluctuate much from current levels, as the 25 point hike is already priced into the market.

Tomorrow will be the most interesting trading day on the Money Market in over a year. I can’t wait. Yay!

From the wire:

-BANK OF CANADA CUTS KEY RATE BY 25 BP TO 0.25 PCT; NARROWS OPERATING BAND TO 1/4 POINT FROM 1/2 PT

BOC - WILL PROVIDE FRAMEWORK ON THURS FOR NONCONVENTIONAL POLICY, DOESN’T COMMIT TO IMMEDIATE ACTION

BOC-OVERNIGHT TARGET RATE BECOMES DEPOSIT RATE, WHICH IS LOWER LIMIT OF OPERATING BAND

-KEY RATE CAN BE EXPECTED TO STAY UNCHANGED UNTIL END Q2 2010, CONDITIONAL ON INFLATION OUTLOOK
-BOC SEES GDP GROWTH -3 PCT IN 2009 (REV FROM -1.2 PCT IN JAN), +2.5 PCT IN 2010 (REV FROM +3.8 PCT)
-BOC SEES 2011 GDP GROWTH +4.7 PCT,  PRODUCTION CAPACITY REACHED IN Q3 2011 (REV FROM MID-2011)
-BOC SAYS REVISES DOWN POTENTIAL GROWTH DUE TO RESTRUCTURING IN SEVERAL SECTORS
-BOC-CPI TO TROUGH AT -0.8 PCT IN Q3 (REV FROM -1 PCT), RETURN TO 2 PCT IN Q3 2011 (REV FRM MID-2011)
-BOC-CORE CPI TO DIMINISH THROUGH 2009, RETURN TO 2 PCT TARGET IN Q3 2011 (REV FROM MID-2011)
-BOC-RISKS TO INFLATION PROJECTION ARE TILTED SLIGHTLY TO DOWNSIDE
-BOC TO ROLL OVER PORTION OF EXISTING TERM PRA AGREEMENTS AT LONGER TERMS TO REINFORCE OVERNIGHT RATE
-BOC TO TARGET BALANCE OF C$3 BLN IN SETTLEMENT SYSTEM INSTEAD OF C$25 MLN TO REINFORCE O/N RAT

I’ve highlighted the most important part of the Bank of Canada announcement. The fact that the bank will keep interest rates at 0.25% for over a year will have a significant impact on the marketplace. Already yields on short term investments have plummeted. If the government plans on quantitative easing (printing money to buy government bonds), then yields will drop on longer term investments.

This will have an eventual impact on mortgage rates, to the benefit of borrowers. So for all those thinking about switched from variable to fixed mortgages, wait a little while longer. Rates are deffinetely not going up any time soon.

In truth, it’s more like what can they do. With rates already at historical lows, another 0.25% cut will likely have a small impact on lending. Most economists are predicting the bank will stand pat and not cut. However, the futures market where people are placing bets on the decision tell a slightly different story:

Probability is the likelihood that the Bank of Canada will either increase or  
decrease the Overnight Target Rate.                                             
                                                                    
===========================================
 Meeting                 Implied     Implied      Prob. Of     Prob. Of       
  Date                       Rate            BP                 0.25%        0.50%          
—————————————————————————–
21-Apr-2009       0.3620      -13.80       55.21%       44.79%       

What we can decipher from the above table is that traders, or people who are willing to bet real money on where interest rates are headed, believe that there is a 55% chance that the Bank of Canada will cut interest rates 0.25% tomorrow, the opposite view of most economists.

Ultimately, cut or no cut, the main focus tomorrow will be on quantitative easing. In simple English, quantitative easing is simply when the governement creates (prints) more money and uses it to buy bonds. The result is often a jolt in the arm to the economy …… and inflation. For now inflation isn’t really a problem and the amounts of money needed to be printed will be modest. We’ll know more tomorrow at 9am Eastern when the Bank’s announcement is published.

Many individual investors are completely unaware that some of the industry’s most powerful and meaningful tools are available free online. One of those tools is bank written economic reports.

While most financial research written is intended for client use only, economic reports tend to be public. One of the major driving factors behind this is media exposure. Business journalists need access to economic reports to write stories and quote authors. The more an economist is quoted in the media, the more credible they become.

The payoff is that the bank can then bring their oft quoted on tv/radio/print economist to client meetings and leverage them one of the benefits of doing business with the bank.

While individual investors won’t get any face time with economists, they can still read the reports that are published online regularly. The information contained, while somewhat bland, often yields nuggets of perspective that can be beneficial on analyzing future expectations.

Below are links to the economic publications of Canada’s big 5 banks. If you have time this weekend, take a few minutes to go over the weekly reviews published every Friday. It’s time well spent.

Econ Reports:

• Bank of Montreal
• Scotiabank
  
• Canadian Imperial Bank of Commerce
• Royal Bank of Canada
• Toronto Dominion Bank

Education

At a minimum a University Bachelor in Commerce/Economics and preferably some industry courses. All the large institutions recruit at the major Universities in September for positions beginning after graduation in June/Aug. There are usually two types of positions, Analyst & Associate. Analyst is for Undergrads and Associates for MBAs. 

To be considered you’ll need to have a strong GPA, expect to be asked to include a transcript.

Ability

You have to be able to show your interest and experience in the field. There are both very important and an interviewer can see right through you if you aren’t sincere. It is also important to research what EXACTLY you want to do & why. There are many different positions and desks and too many people seem unsure why they’re even applying for the position other than a “desire to be a trader”.

Personality

If you posses the education and ability, the next important thing is personality. Traders work in very close quarters. There are no cubicles or offices, just long desks. You have about 3-4 feet of space separating the staff. Employers want to make sure you’ll fit in with the corporate culture and that you will be able to handle the lifestyle. There are no real breaks, lunch is eaten at your desk. There are many cases of the top student with the perfect CV not getting a second round interview because they didn’t have the right personality ‘fit’.

Drive & Luck

If you don’t get an offer through campus recruitment (and very few do) all is not lost. If you have the ability, education & personality, then all you need is a lot of drive and a little luck. Get experience working in different financial jobs, make as many contacts as humanly possible and don’t be afraid to set up information interviews with firms where you’d like to work. In time, you should land some interviews and if you meet all the criteria, eventually get an offer.

So that’s it, now just spend your summer preparing for your application in September.

Today the Toronto Stock Exchange Index (TSX) hit 15,000 points, its highest number ever.

Even though 15,000 is purely a nominal number, skewed heavily by a small number of companies granted heavy weightings by the indexing formula, now is as good a time as any to reflect on the past 10 years.  

Why 10 years? Well, firstly that is as far back as my graph will go. More importantly, it is a period that encompasses two market cycles (the second is yet to be completed).

Looking at the far left In the above image, we can observe the effect of the tech bubble on the TSX index. A very quick boom was following by an equally quick bust. During the boom, the hot stock in the index was Nortel Networks. At one point, Nortel represented over 32%of the entire index. It was the market darling. It didn’t last. Today, Nortel trades at about 8 dollars, but it is really worth 80 cents after you account for the marketing wonders of stock splits (Nortel had a 1-for-10 reverse split).

Moving on over to the right, we can see that the current bull run does not appear to be too similar to previous bubble. Here we have a much slower and paced increase. There are however, some similarities.

Three companies: RIM, Encana & Potash Corp. account for over 20% of gains in the index over the past 5 years. The good news is that currently we have three firms leading the way, not one. There are also two sectors involved: Tech & Energy.  The last positive note is that the banking sector appears to be regaining steam. The big five Canadian banks haven’t been contributing much to the index the past few months as they struggled with write-offs from the credit collapse. If they continue to perform, it will provide a good hedge against a slowdown in Energy, assuming commodity prices begin to come back down to earth.

It is important to remember that the past will not reflect the future. Do not think that there is anything in the above chart that will hold the magic key to unlocking where the market will go next. Charts are only useful for giving us the ability to take a minute and reflect on how we got to where we are, so that our minds are a bit more focused as we decipher where it will go next.

Canadian consumers are suckers, willing to buy at any price.

How else can one explain the record quarter for new auto sales during the first quarter of 2008. Sales that had their biggest increase since 1998. That’s a freaking decade, people!

Sales of new passenger cars were up 17.8%, the largest increase since 1976.  That’s more than three freaking decades!

I don’t get it.

Canadian cars are expensive. No, that’s too nice, they’re a rip-off. Auto manufacturers are scamming the Canadians and they seem more than happy to go along with it.

How else can one explain these sales numbers?

The Canadian dollar has been near or above par with the US for over a year. Yet Canadian car prices are still more than 10, 20, even 30 percent more expensive than identical models south of the border. The only leverage Canadian consumers have to reduce this discrepancy is to buy used cars, or simply not buy at all.

However, going out like lemmings and buying new cars just because the dealer’s marketing campaign uses slogans like “Canadian Pricing” while giving you a 3% discount on price is just stupid.

Boo on you Canada, Boo on you.

You might be wondering what the heck is this CreditCrunch? There has been a lot written on the subject, but not too much explained at a basic level. So here goes…..

The current issues with credit is that it has become more expensive. What does that mean? Well, essentially it means that the funding of lower credit investments have become more expensive. Why? Because people were afraid of risk and wanted only the safest investments. Treasury Bills (T-Bills). 

T-Bills are government issued short term investing products (less than 1 year) that are virtually riskless as they are backed by the taxation power of the government. There is also a limited supply available to investors. So when everyone wanted these products, the price skyrocketted and the rate of return dropped like a rock.

Now lets look at what happened to a lower credit investments. Lets use GICs or CDs (Cdn/US equivalents). Banks love to sell GICs and CDs. They provide great liquidity for loans and they are easy to sell to investors as they usually have some form of insurance. However, when less people want to invest in the product because they prefer T-Bills, banks have to compensate by offering higher rates, increasing the difference between the rate of return of a treasury bill and GIC/CD. Since they are offering a higher rate of return to investors, the bank will also have to demand a higher rate of interest from lenders.

But wait! You might be asking yourself: “If this is true, then why the heck are my GIC/CD rates been so crappy!

You have to understand that everything is relative. Look at the following sets of rates:

• Set A: T-Bill Yield 2.2%  - GIC/CD Yield 3.00%    
• Set B: T-Bill Yield 0.5% – GIC/CD Yield 1.7%

Normally the market should function with Set A’s rates. During a credit crisis, we find the market spread, or the yield difference between T-Bills & GIC/CDs has widened to almost double the prior amount. So even though your GIC/CD rate of return in Set B is lower than Set A, the premium interest you receive compared to a T-Bill has increased.

Did I make it simple enough for you?

If the world financial system is “over-inflating” prices as he put it, then we’re in a bubble. As bubbles don’t last forever, TD Bank is wise to begin planning for lower prices in order to protect itself from future losses.

His remarks are in stark contrast to the bullish predictions by market analysts who see prices going nowhere but up. If the head of a major international bank is weary of current prices, then maybe it’s time for you to review your portfolios…. Or maybe the analysts are right….What do you think?