Actual finance blog

The Royal Bank of Canada expects to report a 15 per cent drop in fourth-quarter profit to $1.1 billion due to the global financial crisis when it releases its results next week.

The Royal is the latest big Canadian bank to report setbacks stemming from the shakeup swirling through financial markets.

In a preview of its results for the quarter ended Oct. 31, Canada's largest bank said Monday it is booking $360 million in one-time charges after taxes.

"These are challenging times, with extreme volatility in the global financial markets and an uncertain outlook," CEO Gord Nixon observed in a statement.

"However, RBC continues to be in a strong financial position."

The Royal's $1-billion-plus three-month profit contrasts with multibillion-dollar losses at big financial institutions in other countries – notably the United States, where the Bush administration undertook Sunday to rescue Citigroup by investing another US$20 billion of taxpayer money and backstopping US$306 billion of dubious loans.

In Toronto, RBC shares (TSX: RY) initially dipped on the morning's news but by midafternoon were up 5.5 per cent on the day, gaining $2.01 to $38.49 – still down from $54.50 a year ago.

Michael Goldberg of Desjardins Securities said the impact of market turbulence "looks to be relatively small" on Royal's overall earnings. He maintained a "buy" rating on the company's stock.

And DBRS confirmed its AA rating on RBC's senior debt, reflecting the bond rating agency's view "that the writedowns are manageable, given the strength of the bank's earnings profile."

Last week, TD Bank (TSX: TD) said its fourth-quarter earnings will be hit by a $350-million loss on wholesale banking operations, and Bank of Nova Scotia (TSX: BNS) warned of a $595-million impact.

Royal, which will report full fourth-quarter and year-end results Dec. 5, said its market-related charges include $645 million in writedowns of held-for-trading securities free business cards. It also booked $355 million in losses on available-for-sale securities.

These losses were partly offset by a $330-million gain caused by widening credit spreads and a $250-million reduction in provisions for lawsuits related to failed U.S. energy company Enron Corp.

Royal said its provision for credit losses for the fourth quarter to be about $620 million, up from $334 million in the third quarter.

Goldberg pointed out that the Royal is the first big Canadian bank to warn of "some weakness in credit quality in addition to trading losses."

He also called it "sort of a perverse accounting situation" that the Royal's $1 billion of trading losses would be partly offset by $330 million of gains related to the mark-to-market of its own obligations.

The RBC results also are being helped by new accounting measures that soften the blow from trading losses and a souring U.S. lending environment.

In face of mounting concerns over how deep a recession could go, “in relative terms they (RBC) are well positioned," said Goldberg.

The Royal, TD and Scotiabank are "seen to be less sensitive" to credit crunch issues, he added.

"But we still haven't seen CIBC and Bank of Montreal, the two banks considered more sensitive."

The Royal, active in all parts of the Canadian financial services sector, is also a major U.S. regional bank through its Centura unit based in the southeastern states, hard hit by collapsing property prices.

Canada's banks are widely acknowledged as among the most strongly positioned in the world, but have said they won't be unscathed by the global upheaval.

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WASHINGTON–Consumer prices plunged by the largest amount in the past 61 years in October as gasoline pump prices dropped by a record amount.

The Labour Department said Wednesday that consumer prices fell by 1 per cent last month, the biggest one-month decline on records that go back to February 1947. The drop was twice as large as the 0.5 per cent decline analysts expected.

The big drop reflected not only a huge fall in gasoline and other energy costs, but widespread declines in other areas. Core consumer prices, which exclude food and energy, fell by 0.1 per cent last month, the first drop in core prices in more than a quarter-century.

The big retreat in consumer prices reflects a remarkable turnaround from just a few months ago when a relentless surge in energy prices raised concerns that inflation could get out of control.

Since that time, the economy has been jolted by the most serious financial crisis in seven decades with all the turbulence expected to push the country into a severe and prolonged recession.

The U.S. troubles have quickly spread overseas, depressing growth around the world and cutting into demand for oil and other products, a development that has resulted in sharp declines in the price of crude oil and other commodities cash in 1 hour.

While some are worried that the price retreat could raise the prospect of a deflation, a prolonged bout of falling prices, most economists believe that current conditions are not likely to set the stage for such a development, which last occurred in the U.S. during the Great Depression.

Over the past 12 months, consumer prices have risen by 3.7 per cent, substantially below the 17-year high of a 12-month price increase of 5.6 per cent set this summer. Core prices are up 2.2 per cent over the past 12 months.

This price moderation is giving the Federal Reserve the room it needs to cut interest rates to battle the economic slump. The central bank is expected to cut the federal funds rate, the interest that banks charge each other, down to 0.5 per cent at its December meeting, even lower than the 1 percent where the funds rate stands currently. The 1 per cent funds rate ties the record low for the past half century.

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Australians are anxious to know if they will avoid recession and are turning to some unexpected, unofficial economic indicators to find answers.

Unconvinced by official data, which are sending mixed and sometimes dubious signals, pundits are instead turning to everything from muffin sales to home-brewing kits.

Even economists and the central bank are being forced to play private detective and rummage through the rubbish bin of economics in search of important clues.

“We look at everything,” said Craig James, chief economist at brokerage CommSec. “You need to paint a picture of the economy and you do that by looking at all the available indicators.”

Economists spend most of their time analysing official data, ranging from retail sales to job statistics, but they also rely on the street to tell them if the figures are lying.

Right now, the street is confirming that Asia Pacific’s star developed economy is slowing sharply but suggests that it is still weathering the global storm fairly well, at least for now.

The gloomier alternative indicators include reports that corporate Christmas parties are being canceled and, in a very dark sign, more Australians are brewing their own beer at home.

ALTERNATIVE THEORY

Newspapers report daily on big job losses and are themselves leavened with fewer job ads, while shop windows on the high street are plastered with “sale” signs freecreditscore.

But the real harbinger of recession — known as the “muffin effect” in alternative Australian economic theory — is far from conclusive. Muffin sales appear to be holding up.

Advocates of “the muffin effect,” as it was dubbed by the Australian Financial Review recently, believe that when the economy slams into reverse, office commuters deny themselves their usual muffin with their morning cup of coffee.

“We are selling the muffins with the coffees,” said Matthew Burke, owner of Prima Vera coffee shop in downtown Sydney, as office workers queued to place orders.

“I don’t think we have noticed the flow-on into the real economy yet. People are still getting their pay packets. But it will definitely start to affect us if people lose their jobs.”

Anecdotes and alternative indicators like the “muffin effect” are gaining ground as doubts grow over some of the official data produced by the state Australian Bureau of Statistics.

Budget cuts have forced the bureau to cut the size of sample surveys for its flagship series, retail sales and employment, at a critical time. Economists say the results can be more volatile and therefore less reliable. 

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Swiss Life (SLHN.VX: Quote, Profile, Research, Stock Buzz) warned on profits and cut its dividend, while Dutch financial group ING (ING.AS: Quote, Profile, Research, Stock Buzz) posted its first quarterly loss, as the financial crisis bites into insurers’ investment income and premiums.

Swiss Life, Switzerland’s third-largest insurer, said on Wednesday third-quarter premium volumes fell 11 percent to 3.075 billion Swiss francs ($2.61 billion), warned it would not meet its full-year net profit guidance and halted its share buyback program.

ING reported its first-ever quarterly loss as impairments on stocks and bonds, counterparty losses and property writedowns ate into its income.

Banker and insurer ING projected its loss in October before agreeing to a 10 billion euro ($12.7 billion) cash injection by the Dutch government to shore up its core capital.

Swiss Life said it no longer assumes its dividend will be 600 million francs and halted its share buyback programme.

Shares in Swiss Life fell steeply, down 14 percent at 93.6 Swiss francs, while ING shares were up 1.7 percent at 8.2250 euros at 0825 GMT. The DJ Stoxx European insurers index was up 1.2 percent.

“It’s really a problem that the dividend is going to be cut. It was said this was a sure thing and people bought the share in the hope of an attractive yield,” said one trader.

The insurer now expects to report a clear full-year loss on continuing operations but said it would post extraordinary gains of 1 short-term cash loans.5 billion francs from disposals.

“The pronounced intensification of the financial crisis since the end of September, however, means that we cannot confirm our earnings guidance for 2008,” Chief Executive Bruno Pfister said in a statement.

A Swiss Life spokesman confirmed the company does not intend to sell its stake in German pensions specialist MLP (MLPG.DE: Quote, Profile, Research, Stock Buzz) or launch a hostile bid.

Swiss Life shares have fallen around 60 percent since the company bought a near 25 percent stake in MLP in August. It trades at about five times forecast 2009 earnings, just behind the average of the European insurance sector .

German financial services provider AWD (AWDG.DE: Quote, Profile, Research, Stock Buzz) also said on Wednesday it was closing some of its activities in the UK.

ING LOSS ALREADY PROJECTED

ING was one of the healthier financial institutions with relatively manageable losses from the credit crisis, but it decided to take the capital injection to shore up its balance sheet after its share plummeted to a 15 year-low on investor concerns over the impact of the credit crisis.

Its net loss for the third quarter was 478 million euros, after writedowns totaling 1.5 billion euros. ING posted a profit of 2.3 billion euros a year earlier. 

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Canadian cultural policy has long relied on two levers to promote Canadian content. First, regulators require broadcasters and cable companies to allocate a portion of their revenues to help support the creation of new Canadian content. Second, that content is granted preferential treatment through minimum "CanCon" requirements for both television and radio broadcasting.

While these approaches may have worked for conventional broadcasting, the big question in the Canadian Radio-television and Telecommunications Commission’s forthcoming hearings on new media is whether they can be applied to the Internet.

Canadian cultural groups, the biggest proponents (and beneficiaries) of this policy approach argue that similar mechanisms can be adapted to the Internet by requiring Internet service providers to hand over a portion of their subscriber revenues for the creation of new media content. ISPs unsurprisingly opposed, arguing an Internet tax is unfair since it forces all subscribers to fund content in which they may have little interest. Moreover, they note such a scheme may also be illegal since it applies the Broadcasting Act to telecommunications activities.

The CRTC adopted a new CanCon approach for the introduction of satellite radio in Canada and similar creative thinking is needed for the online environment.

One possibility would be to provide new media creators – whether independent filmmakers, digital photographers, musicians, podcasters, or bloggers – with the assurance of equal access to online audiences by mandating that Canadian ISPs treat all similar content in an equivalent or neutral fashion.

In recent months, many Canadian ISPs have engaged in "network management practices" that degrades the bandwidth allocated to certain applications and content. While the ISPs argue such practices are essential to ensure quality of service for the majority of their users, similar activities in the United States have drawn a rebuke from the Federal Communications Commission and a promise from President-elect Barack Obama to address the issue.

This issue has been typically treated as telecom matter, yet there would be considerable benefits in assessing it through the lens of Canadian cultural policy Faxless pay advances. Granting preferential treatment for Canadian content may have made sense in a world of scarcity when there were limited channels and bandwidth, however, it no longer applies in a world of abundance in which the Internet offers virtually unlimited choice.

Canadian creators, therefore, do not need guaranteed space since there is room on the Internet for everyone. Rather, they need guaranteed access – the assurance that their content can find an audience by being treated like any other video or cultural programming. As ISPs move toward tiered access that grants preferential treatment (such as faster speeds) to their own content or to premium content promoted by deep-pocketed interests, an equal approach to new media content would bring CanCon into the Internet era by asking for nothing more than a fair shake.

This approach would also address the funding side of cultural policy. Many ISPs object to the equal treatment principle by maintaining that new media creators should pay for equal access and avoid using technologies such as BitTorrent that are viewed as transferring the cost of distribution from the creator to the network provider. From their perspective, if a new media creator (or a public broadcaster like the CBC) wishes to use an application to distribute content subject to reduced speeds, a requirement to grant unimpeded access should be regarded as a subsidy from the network provider to the content creator.

If so, such a subsidy could be seen as the Internet equivalent of cultural funding. Rather than adopting an ill-suited ISP tax, the costs associated with providing Canadian content with equal treatment could be treated as the financial contribution, thereby eliminating the legal concerns associated with an ISP tax and allowing the CRTC to extract support from network providers for the benefit of Canadian cultural production.

Michael Geist holds the Canada Research Chair in Internet and E-commerce Law at the University of Ottawa, Faculty of Law. He can reached at mgeist@uottawa.ca or online at www.michaelgeist.ca.

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Air Canada has reported a third-quarter loss of $132 million during the busy summer travel season, citing rising fuel costs and the impact of fuel-hedging contracts negotiated before the price of oil tumbled.

The country’s largest airline, which is flying out of a period of record fuel prices into a global economic recession, said it lost $1.32 per share during the three-month period versus a profit of $273 million, or $2.73 a share, in the year-earlier period.

Sales, meanwhile, rose 4.1 per cent to $3 billion.

Investors, who had expected a profit, responded by pushing the airline’s stock down 91 cents, or nearly 17 per cent, to $4.49 on the Toronto Stock Exchange.

Montie Brewer, the airline’s chief executive, told analysts during a conference call that high fuel prices still hurt operations during the third quarter, even as the price of oil began to fall after hitting a high of $147 (U.S.) per barrel in July.

"As the great proportion of our tickets are sold in advance of the date of travel, the prices we charge simply could not match the pace in the rise of fuel prices," Brewer said.

Air Canada said its fuel expenses increased $348 million in the third quarter to $1 cheapest cash advance.1 billion, up 49 per cent, compared with the third quarter of 2007.

At the same time, the airline incurred mark-to-market losses of $93 million on financial instruments, consisting mostly of fuel hedge contracts, and net losses on foreign currency of $87 million.

Analysts expressed concern that Air Canada’s liquidity situation was tightening just as it headed into a seasonally weak period. As well, the opportunity to borrow money is limited by the ongoing credit crunch.

In June, Air Canada said it was scaling back flying by 7 per cent and slashing up to 2,000 jobs to combat a fuel bill expected to soar by nearly $1 billion for the year.

Brewer said yesterday that the recent fall in oil prices – a barrel of crude now trades for about $60 (U.S.) – does not change Air Canada’s plan to cut back flights.

"Although oil prices have since retreated, the tight capacity strategy remains valid as we are expecting demand to weaken, given the global financial crisis and weakening customer confidence."

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South Korea’s central bank cut interest rates for the third time in a month on Friday to soothe markets and shore up its economy, after a flurry of deep rate cuts across Europe failed to calm panicky investors.

Central bank action could not halt a slide in global stock markets and coincided with a warning by the International Monetary Fund that the developed economies were headed for the first full-year contraction since the World War Two in 2009.

“Increasingly, the signs point to a deep and synchronized global recession that began last quarter and has gathered momentum,” said Bruce Kasman, an economist at JPMorgan Chase in New York.

The IMF cut its 2009 global growth forecast to 2.2 percent from 3 percent, a prediction made only last month, and urged governments to ramp up spending to support the economy.

Asian stocks fell for a third day and commodity prices also tumbled, as layoffs and corporate profit warnings piled up.

Later on Friday, Barack Obama is due to hold his first news conference since winning the U.S. presidency after a meeting with his economic team, as the world awaits signs of how he might tackle the economic crisis.

Markets are particularly keen to learn who will become Obama’s Treasury Secretary, but it was not clear when he might announce his choice.

Among those seen as leading candidates for the job are Timothy Geithner, president of the Federal Reserve Bank of New York; former Treasury Secretary Lawrence Summers; and former Federal Reserve Board Chairman Paul Volcker easy online payday loans.

Investors also looked anxiously ahead to Friday’s U.S. jobs payroll report for October, which is expected to further underscore the weakening economy.

According to the median of a Reuters forecast of 87 economists another 200,000 non-farm jobs were shed last month, which would be the largest monthly cut in jobs since March 2003 and would mark a 10th straight month of losses.

CORPORATE WOES

In Asia, Toyota saw its stock overwhelmed with sell orders and tumbling as much as 12 percent, after it halved its profit forecast because of dwindling demand. The carmaker’s stock had fallen 10 percent on Thursday ahead of the profit warning.

Its woes illustrate how the financial crisis, which started when the housing boom in the United States turned sour 15 months ago, has spread from Wall Street to Main Street.

Hit by economic slowdown, sliding property prices and a sharp fall in its capital markets business, Singapore’s DBS Group, Southeast Asia’s biggest bank, suffered a bigger-than-expected 38 percent drop in profit, as bad debt charges quadrupled. Its shares fell 9 percent.

As investors are bracing themselves for a dismal set of quarterly results from General Motors and Ford on Friday, industry sources said their chief executives sought a $50 billion federal bailout to survive a financial crunch blamed on a worsening economy and the “near collapse” in demand for cars. 

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U.S. consumers slashed spending in October, shunning purchases of items over $1,000, as a global financial crisis battered their savings accounts and their psyches, according to figures released on Wednesday by SpendingPulse, the retail data service of MasterCard Advisors.

“The numbers for October are very negative across the board,” said Michael McNamara, vice president at MasterCard Advisors, of sales figures tracked by SpendingPulse.

“Any area that deals with consumer durables, especially areas like furniture, electronics and appliances … that relies heavily on sales purchases that exceed $1,000 in value are under significant pressure,” he said.

SpendingPulse data is derived from aggregate sales in the MasterCard U.S. payment network, coupled with estimates on all other payments including cash and checks.

The data provides an early glimpse into the strength of retailers’ monthly sales, which will be released by chains like Wal-Mart Stores Inc (WMT.N: Quote, Profile, Research, Stock Buzz), Saks Inc (SKS.N: Quote, Profile, Research, Stock Buzz) and American Eagle Outfitters Inc (AEO.N: Quote, Profile, Research, Stock Buzz), later this week.

Wall Street is already bracing for weak sales. Consumers clamped down on spending as the financial crisis that began in September swept into October, roiling stock markets, erasing trillions of dollars in wealth and raising the prospect of a deep global recession.

According to SpendingPulse, October specialty apparel sales fell 12.2 percent from a year earlier. Women’s apparel sales dropped 18 low fee pay day loans.2 percent, while men’s apparel sales fell 8.3 percent. Footwear sales dropped 9.7 percent.

Sales of electronics and appliances tumbled 19.9 percent, compared with a decline of 13.8 percent in September.

“If you take out the purchases above $1,000, the sector is really down about 10 percent,” McNamara said. “Sales above $1,000 just aren’t really moving.”

That trend, along with further weakness in the housing sector, also hurt demand for home-related merchandise. Furniture sales dropped 15.1 percent in October from a year ago, while sales of home furnishings, or decor, fell 20.6 percent.

High-end retailers took a hit, with luxury sales dropping 20.1 percent, compared with a 4.8 percent drop in September.

“The sector has been down five consecutive months, but October was a more significant decline,” he said.

While luxury shoppers continued spending in the face of rising fuel and food prices earlier this year, the group has retrenched as the global financial crisis hits investment portfolios and devalues real estate holdings.

SpendingPulse also found that e-commerce sales declined 3.9 percent. McNamara said purchasing volume rose, but shoppers were buying cheaper items, driving down total sales results.

In a bright spot, restaurant sales rose three-tenths of one percent in October, with sales at fast food restaurants rising 1 percent. 

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Insurance firm Hartford Financial Services Group Inc. said Monday its capital position should be sufficient to maintain "AA" ratings levels at the end of the year, even assuming further deterioration in the markets.

Hartford Financial (HIG, Fortune 500) said that, to maintain investment-grade "AA" level ratings, it would need to have excess capital of about $2 billion if the Standard & Poor’s 500 index fell to 900. The company said its capital reserve totaled about $3.5 billion as of Oct. 6.

The S&P 500 closed Friday at 968.75.

The insurance firm also said its risk-based capital ratio was well above the levels historically associated with "AA" level ratings.

Should further capital be needed, Hartford Financial said it would not have to tap public markets during the ongoing credit crisis and instead could use a $500 million contingent capital facility and a $1 loan till payday.9 billion bank credit facility. Amid the downturn in credit markets, it has become difficult and expensive for financial firms to raise new cash.

Shares of Hartford Financial fell sharply last week after the company said it lost $2.6 billion, or $8.74 per share, during the third quarter, compared with a profit of $851 million, or $2.68 per share, in the year-ago period.

Hartford Financial shares plummeted 58% during the week, to close at $10.32. Shares fell as low as $8.23 during the week. 

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As the impact of the economic crisis takes hold, employees from Wall Street to Main Street are feeling nervous about their jobs, and with good reason.

As of September, 760,000 jobs have already been lost this year, according to data from the Bureau of Labor Statistics.

And a quarter of U.S. employers expect to make layoffs in the next 12 months, according to a recent report by consulting firm Watson Wyatt.

But which industries will suffer the most? Experts say certain sectors are more vulnerable to layoffs than others.

Housing: Jobs in the housing sector were the first to go when the mortgage meltdown took hold. But with the industry outlook at an all-time low, even more layoffs could follow.

Beyond mortgage lenders and homebuilders, jobs in commercial real-estate and at real-estate agencies will be the next to go, according to Dean Baker, director of the Center for Economic and Policy Research in Washington, D.C.

With the worst September for new home sales since 1981, "some of the big [real-estate] chains will do some consolidation," Baker said, "clearly you need fewer offices," Baker said.

Finance: Few in the financial sector are feeling secure about their positions. The latest employment figures from the Department of Labor show financial firms have eliminated an estimated 110,000 jobs over the past year through September, and experts say there will be even more losses in the months ahead.

As financial firms reorganize and consolidate, there are going to be a lot more layoffs, Baker said.

"Financial services firms have cut tremendously and I don’t think that’s over," echoed Lee Pinkowitz, associate professor at Georgetown University McDonough School of Business.

Retail: Before the credit crunch, retailers were already struggling with soft sales as high gas prices and falling home equity forced consumers to curtail non-essential purchases. Now retail sales are dismal heading into the holiday season. "This could be the weakest holiday hiring season since 2001," said John Challenger, chief executive of global outplacement firm Challenger, Gray & Christmas, and that’s not good for those employed in the retail industry.

"I doubt we’ll see the pick up in seasonal hiring that we’d normally see," Pinkowitz said.

But while department stores and high-end boutiques may be particularly hard hit, discount retailers, like Wal-Mart (WMT, Fortune 500) could fare well in the current climate, Challenger said. Wal-Mart is also the nation’s largest private-sector employer, and could be a safe haven for those who work there.

Publishing: As consumers cut back, advertisers follow, and that means tough times for print publications, including newspapers and magazines, experts say creditreport.

According to Bureau of Labor Statistics data, employment in the publishing industry has been contracting since the beginning of last year.

But the "grand decline" of jobs in the media industry, which also includes broadcast and digital media, began with the dot-com bust in 2001, noted Heidi Shierholz an economist at the Economic Policy Institute, a research group based in Washington. Now a loss of jobs in traditional publishing is being exacerbated, in part, by the move away from print toward digital media.

"Every time you have a recession it pushes companies that have been holding on by their fingernails out of business," Challenger said. "It clears away an old generation of companies and I think we’ll see that with print."

Autos: While sales at the Big Three automakers have fallen 20% this year and are likely to tumble further, trouble in the auto sector is not confined to manufacturing. All told, about 2 million Americans work in the industry.

While declining sales will likely lead to more job losses, those in "the tentacles of the auto industry" could be particularly hard hit in the coming months, Pinkowitz said, which includes those jobs at dealerships and suppliers.

Travel: Airlines have already announced layoffs across the board, but as consumers and businesses continue to scale back discretionary spending on travel, the implications go far beyond flying.

"All the industries under the umbrella of travel are going to be at risk" Challenger said, including rental cars, hotels and even restaurants.

If people are cutting back, travel and leisure activities are the easiest things to do without, explained Baker. Big restaurant chains will close locations, he said, which means eliminating many wait staff and service jobs, while some smaller restaurants will be forced out of business entirely.

But despite the mostly doom-and-gloom predictions, some say there are some bright spots ahead for American workers.

"Even if you’re in an industry where there has been some job downturns, there still can be some opportunities," said Kimberly Bishop, vice chairman of Chicago-based executive search firm Slayton Search Partners.

Bishop suggests focusing on those skills and experiences that can translate beyond the industry in which you work. There are certain roles that every organization needs, she said, and you may be able to fulfill that role in another industry that has more promise. 

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