What the 700B Bailout Delay Could Mean for Canada

Many are asking if or when the frozen credit system and slower growth in the U.S. will impact the Canadian economy. The answer is broken down to a number of points:

• The energy index fell greater than the TSX Index
  
• The materials index fell greater than the TSX Index
• 5-year first time mortgages reached almost 8% (signaling a flight to safety)*
• The auto industry remains in a decline
  
• Gold rose
  

* as reported by Diane Francis in Financial Post for Sep 30. Rate could not be verified

Impact on Toronto Real Estate

I have been assessing the Toronto real estate activities for 2008. The theme remains the same: listings are increasing (supply), days on the market is increasing (activity is slowing slightly), housing prices have increased. With mortgage rates rising significantly due to the events in the U.S., the purchasing power for consumers will weaken.

As we have already seen, provinces most exposed to the commodity market will see declining profit (and a need to hire more workers). Again, there will be pressure on the demand side of the housing market.

At some point, perhaps in a month's time, the prices for homes in Toronto will need to adjust to the pressures of the global economy. After all, other countries have been proven to be impacted by the weak U.S. economy. This includes China, London, India, and Europe. Canada will be no different.

Chart below: U.S. Energy Sector reflects economic health for Canada:


Source: http://stockcharts.com/charts/gallery.html?XLE

Stock selection is only one factor in successfully profiting from the equity market. The more significant weight for a portfolio performance is sector allocation. For those who don't like to play the short-selling side of trading, I would recommend a small allocation on bear funds. In Canada, I like HXD.TO It has a beta of 2, meaning it is twice as volatile as the TSX Index. It's counterpart is HXU.TO.

Since I remain bearish on both the energy and the financial sector, I favor investors consider having no more than 5% of their portfolio on HXD.TO. It's better to profit in a falling market than to watch 100% of it exposed to the bear.

My target is for this hedge is $19.90, a 9.50% on top of today's gains.