Archive for May, 2006

Is it a Tax-cut or a Tax Increase?

May 23, 2006


I read this column in The Globe and Mail with some amusement. It talks about a new report released today by a “leading economist” that says that the recent federal budget “actually lowered take-home pay for many Canadians”. I have not read the actual report but I don’t think that its contents should be a surprise. Soon after the budget was presented, columnists and bloggers pointed out that the lowest tax rate is going up from the current 15% to 15.5% and weren’t fooled for a minute that it is actually going down from 16% as the budget had claimed (though it may be technically correct).

Let’s do the math: most Canadians work for a paycheck. They get to keep half of the current tax cuts and the new employee tax credit is worth about $155 starting next year. Add the two up and we will pay about $20 more in taxes. And we haven’t even accounted for the 1% cut in the GST or tax credits for transit passes, kids sports, textbooks or apprentice tools, which are worth at least another few hundred dollars in tax savings for an average household. The bottom line is that most Canadians (unless you are a self-employed, non-parent, non-student, non-apprentice, who doesn’t ride the transit, in which case your income taxes are going up but your overall tax burden might well be lower) have more money in their pocket after the budget, however those on different sides spin the issue.

Mayhem in Emerging Markets

May 22, 2006


Pretty much every equity market in the world fell last week but emerging markets have been hit especially hard. The iShares MSCI Emerging Markets Index Fund (EEM), which closed above $111 as recently as May 9th, closed today just above $94, a fall of 15%. The recent drops also illustrate how volatile these markets can be.

The Bombay Stock Exchange (BSE) Sensitive Index comprised of 30 blue-chip Indian equities had been on a tear reaching a historic high of 12,612 on May 10. The market then fell slightly for a few days before dropping a stunning 826 points or 6.7% on a single day on May 18. The carnage is not over yet. The index slipped another 450 points on May 19 and plummeted another 1,111 points on Monday before recovering to close the day down a mere 457 points at 10,481. That works out to a loss of 17% in a matter of weeks. The Globe and Mail is reporting that there is so much panic that Indian “police are closely monitoring lakes and canals because of concerns that the market rout could lead to suicides”.

While emerging markets have a place in every portfolio, the past few weeks illustrate the risks of over-weighting this asset class. The extreme volatility is just the start. Investors also need to consider the currency risks (most emerging market currencies are below investment grade), political risks (wars or political instability), regulatory risks (property rights may not be well established) and liquidity risks (relatively small flows of money can move market significantly).

Interest on Savings Accounts

May 18, 2006


Ellen Roseman, personal finance columnist for the Toronto Star, writes that even though the Bank of Canada has increased interest rates from 2.5% to 4% since last September (another interest rate announcement is set for next week), ING Direct has only increased the interest rate on its savings accounts from 2.4% to 3%. The article notes that Manitoba’s Achieva Financial is currently offering a savings rate of 3.85%, which is quite a bit more than that of ING Direct.

BoC Versus ING Direct