How much have major stock markets worldwide dropped from their 52-week highs after yesterdays 2-4% drop?
Source: Google Finance, WSJ
Where do we go from here? Most bearish commentators expect a 20-30% correction from the recent peak (52-week high) before another sustained rally… Can we expect another 5-15% drop? Is the correction almost over or are we in for more downside?
Yesterday I pointed out the bearish technical signals on the S&P500 charts which – here are charts for some of the markets above with similar signals (mostly bearish)
UK – FTSE 100
Chart Souce: stockcharts.com
Japan – Nikkei 225
Chart Source: stockcharts.com
Canada – TSX Composite Index
Chart Souce: stockcharts.com
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S&P 500 broad market index is likely to continue downtrend and re-test July 2009 lows…
Head & Shoulders Pattern projecting S&P 500 at 870
Chart: Stockcharts.com
Fibonacci Analysis, Descending Triangle & MACD crossover
Chart Source: Stockcharts.com
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The answer is pretty easy IF you know what your tax rate will be when you start making withdrawals from your retirement accounts (RRSP or TFSA)
RRSP or Registered Retirement Savings Plan is a retirement plan that provides immediate tax benefits when a contribution is made to the account. Money in the account grows tax free. However any subsequent withdrawals from an RRSP account are taxed at the account holders then marginal tax rate.
In summary, Tax benefit received now and tax paid in future
TFSA or Tax Free Savings Account as the name implies is a tax exempt account i.e. the money grows tax free (like an RRSP) and any withdrawals from this account are not taxed. Any withdrawal from a TFSA account is not taxed!
In summary, Tax paid now but tax benefit received in future upon withdrawal
There are 3 answer choices depending on your personal situation:
1. Current Personal Income Tax Rate EQUALS Future Tax Rate
Both accounts will have same after tax value.
2. Current Personal Income Tax Rate GREATER Future Tax Rate
Contributions to RRSP account will have a higher after tax value than TFSA all else being same.
3. Current Personal Income Tax Rate EQUALS Future Tax Rate
Contributions to TFSA account will have a higher after tax value than RRSP all else being same.
The recent rise in house prices across Canada bucking the trend elsewhere in the developed countries has given plenty of fodder to media & economic research houses…
Here is my take on it…
Until 2005 the house price rise in Toronto was at a constant rate year-over-year… the recent rise in prices since April/May 2009 has been at a much higher rate than the 10 year average AND it has been on decreasing sales i.e. fewer houses sold but at higher prices… this is analogous to rise in share prices but on lower than average volume…
Source: Teranet House Price Index
Source: Teranet House Price Index
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This is a very interesting and rather anomalous chart of the yearly change in Number of Sales… I wonder what happened in 2005 in Ontario that resulted in a huge spike… it is strange!
Source: Teranet House Price Index
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Year-over-Year house price changes for Canada’s biggest 6 metropolitan cities and the aggregate of these cities…
Yesterday I pointed out that house prices in Calgary are 7% below the peak in 2007… the charts below explains some of this… Calgary experienced the highest year-over-year and month-over-month change from 2005 to 2006 of almost 50%… thats right 50% appreciate in 1 year!!… that probably beats the housing boom bust down south
And interestingly, Toronto has experienced the sharpest yearly increase (15%) even though the preceding increase up to 2008 & the following descent in early 2009 weren’t this severe.
Source: Teranet House Price Index
Again, the monthly chart tells the same story
More importantly, the recent monthly price appreciation is in a downward trend nationwide… I think this was bound to happen and will continue for the next year or so primarily due to upcoming Harmonized Sales Tax on new homes and the recent increase in mortgage rates… the big economic research shops expect house prices to drop 5-10% in the next year or so
Source: Teranet House Price Index
Feedback & comments welcome…
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The chart below shows the composite house price index of 6 Metropolitan cities and the individual cities. According to Teranet, the House Price Index is “an independent representation of the rate of change of Canadian single-family home prices”
Some interesting facts from the chart:
House Price Changed ~ 50% from 2000 to 2005 and ~33% from 2005 to 2010 (March) across the 6 cities.
Calgary & Vancouver however experienced the biggest rise of 70% & 50% from July 2005 to July 2008 respectively.
All cities except Calgary have recently passed the previous high set in 2008; Calgary single family homes are still 7% below the previous peak.
Also note, the index base level is 100 in July 2005
Source: Teranet House Price Index
Where are house prices going from here?
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For simplicity, I will define profit on a mortgage as the difference between the interest rate that banks charge and what it costs the banks to fund that mortgage…
What banks charge is pretty straightforward to determine because it is widely advertised & there are plenty of data aggregators who compare current mortgage rate offers by institutions of all sizes from credit unions to the big five banks. Bank of Canada provides the posted mortgage rate for the last 30 years or so…
Cost of Mortgage to Banks: this depends on whether its a fixed rate mortgage or a variable/floating rate mortgage. For a fixed rate mortgage, the funding cost would usually be the yield on an equivalent term Government of Canada bond…
The current mortgage rate on 5-year fixed mortgage rate is 5.99% and the yield on a Government of Canada bond that matures in 5 years is 2.55%. The difference of 3.44% would be the banks gross profit with an astonishing gross profit margin of almost 135% (3.44/2.55)
Source: Bank of Canada
Since 1980, the profit margin has been increasing steadily as seen by the purple & red lines the chart… however, since late 2007 the profit margins have spiked and stayed there above 100%. And it is the same story for all mortgage terms i.e. 1 year, 2 year, 3 year, etc. Next I will also analyze the profit margin on variable rate mortgages.
Instead of passing on the extra savings to consumers, the banks are using the “recession” as an excuse to make wider margins. I want to know the breakdown of bank profits by division for the past couple years and why consumers haven’t benefited enough.
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i.e. the difference between what the Banks charge customers and what it costs them…
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