Posted at Friday, December 28, 2007 EDT



The Stars and Dogs of '07
By DAVID PARKINSON and JOHN HEINZL, Globe and Mail Update




To say the loonie was a star in 2007 doesn't nearly go far enough. It was a spoiled, moody, swell-headed superstar on a 12-month bender, pursued doggedly by a voyeuristic press chronicling its successes while eagerly digging up dirt. (“Dollar slugged me in the face, bruised manufacturer sez!”)

When the year began, our once-humble currency was actually in a bit of a dry spell. The currency ended 2006 at 85.76 cents (U.S.) – which, while still up almost 40 per cent from its early 2002 lows, had apparently run out of steam after reaching 28-year highs above 90 cents earlier in the year.

Prices for oil and other key commodities had fallen well off their midyear highs, Canada's trade surplus had dipped to a seven-year low in the fall, and U.S. economic growth was losing momentum – all of which suggested the loonie's star was fading in the eyes of the world's currency traders.

Then, just when it looked like the loonie was yesterday's news, it returned to the spotlight bigger than ever, like a post-prison Paris Hilton.

The main driver of the dollar's rising fortunes, once again, was oil. Crude prices skyrocketed to almost $100 (U.S.) a barrel in November, and the Canadian dollar, as one of the world's leading oil producer currencies, went along for the ride. Toss in a skidding U.S. dollar, as investors shed the currency amid a deepening subprime lending crisis, falling interest rates and faltering economy, and you had a recipe for a high-octane rally in the loonie.

But like the young Ms. Hilton, the Canadian dollar seemed to possess an inexplicable charm that fuelled infatuation far exceeding its tangible talents. In the space of two weeks in September, it went from under 95 cents to more than $1, breaking par with its U.S. counterpart for the first time in 31 years. Then, over the course of two weeks in late October and early November, it surged from $1.02 to an astounding $1.10, its highest level since the 1870s.

Along the way, the currency trampled a lot of the little people who had supported it on its way to the top. Exporters, retailers and the tourism industry all bemoaned the impact of the increasingly rich dollar. The manufacturing sector begged for mercy, after shedding almost 100,000 jobs in the past year. Heck, the high dollar was even putting Christmas tree growers out of business. Humbug.

All those intoxicating gains have, naturally, left the loonie with a bit of a hangover. In recent weeks, it could be seen slumped over a bar stool in a pile of its own excess, including a day last month when it took its biggest one-day pratfall since 1971. Once the Bank of Canada started hinting at interest rate cuts – it followed through on the threat in early December – currency traders lost interest, sending the loonie back below par with the greenback.

Now, it seems, the loonie is taking a bit of a break – presumably to campaign for underprivileged rain forests and work on its memoirs. (Translation: spending a month at the Betty Ford Currency Clinic.) But with the U.S. economy flirting with recession, the Bank of Canada toying with further rate cuts and oil prices headed who knows where, it could be a bumpy rehab.

Not a year to bet the house

The U.S. housing bust may have been the most predictable financial collapse in history. With property prices soaring to ridiculous heights and mortgage brokers extending no-money-down loans to anyone who could fog a mirror, you had to know this movie was going to end badly.

And it did. The only surprise was that the subprime fallout was worse than even most pessimists predicted, sending a trail of toxic mortgage paper around the world and eviscerating billions of dollars of shareholder value at the world's biggest financial institutions.

Even Canadian banks were caught in the swirling waters of the subprime toilet, although most, with the exception of CIBC, have only recorded modest losses – so far.

At first, analysts thought the damage would be contained, a notion that in hindsight seems laughable.

In one of the earliest warning signs, HSBC Holdings in February raised its provisions for bad loans by about $2-billion (U.S.), citing an increase in defaults among subprime borrowers. The depth of the problems soon became apparent as hedge funds started blowing up and mortgage brokers bit the dust.

The list of subprime casualties included New Century Financial, American Home Mortgage Investment and scores of smaller mortgage brokers that closed or filed for bankruptcy protection.

Home builders – which had overbuilt during the boom times and were forced to slash prices to clear bloated inventories – posted huge losses and saw their shares get hit by a wrecking ball. Two of the largest, Pulte Homes and Lennar, lost two-thirds of their value, while D.R. Horton's stock was cut in half. All three had their credit ratings cut to junk status.

With subprime losses topping $80-billion – and counting – it wasn't long before heads started rolling on Wall Street. Merrill Lynch chief executive officer Stan O'Neal and Citigroup head Chuck Prince both stepped down.

As central banks pumped billions of dollars into the financial system in a bid to grease the credit wheels, the world's biggest financial institutions turned to deep-pocketed sovereign investment funds to shore up their balance sheets.

Morgan Stanley sold a $5-billion stake to China Investment Corp.; Citigroup hit up the Abu Dhabi Investment Authority for $7.5-billion; Merrill Lynch turned to Singapore's Temasek Holdings for about $5-billion.

If any of these foreign investors wants a nice McMansion to go with their investment in the U.S. financial system, now would be a good time to get a deal.

U.S. property prices have been plunging, and as the year draws to a close there is no relief in sight. In October, home prices in 20 U.S. metropolitan areas tumbled 6.1 per cent from a year earlier, according to the S&P/Case-Shiller home price index released this week. It was the biggest drop since the group started tracking year-over-year price changes six years ago.

And as record foreclosures put more properties on the market, you can bet prices are a long way from hitting bottom

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