Merger News

Suncor (SU) is about to potentially merge with Petro Canada (PCA) in an all stock exchange to become the largest energy company in Canada.  Should the deal meet Canadian government approval, both companies will trade under the symbol SU.  Existing PCA owners will receive 1.28 shares of SU for every share of PCA that they own.

Question for you, what are your thoughts on selling a company that is about to merge with another?  I’ve been thinking about selling my PCA shares ever since the big news.

Disclosure: I hold both SU and PCA.

Sales Tax Going up in Ontario!

It seems that Ontario may be going the way of harmonized sales tax (like Atlantic Canada).  The Ontario government may say that it’s for the business owners, but in the end, it’s the consumer who will be paying more taxes.  When they harmonized sales tax here in NL, everything went up in price.  Gasoline, baby clothes, new houses, real estate/lawyer fees and insurance all got more expensive.

This new change in the taxation system may affect other Canadians as well as there are quite a few mutual fund companies based out of Ontario.  This may result in mutual funds increasing their MERs.

You can read more about this on Canadian Capitalist.

Weekend Links

One year ago, I explained the differences in Non-Refundable Tax Credits and Tax Deductions.

Four Pillars hosted this weeks Carnival of Personal Finance!

The Financial Blogger lists 3 reasons why investors should not time the market.

Money Grubbing Lawyer has an entertaining article about negotiating in: Leave Emotion out of Negotiation.

The Digerati Life writes about the buy and hold strategy.

Lazy Man and Money lists 7 new rules of financial security.

The Sun’s Financial Diary evaluates Pin vs Signature debit transactions.

Brip Blap tells us that everything will be fine.

Money Smart Life claims that all CEO’s are crooks!

My Dollar Plan explains how to manage money in your marriage.

Generation X Finance lists 5 things we can learn from the market bust.

Frugal Dad shows us the financial impact of having kids early.

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“It was impossible to get a conversation going; everybody was talking too much.” – Yogi Berra

In 1996, Fed Chairman Alan Greenspan coined the term “irrational exuberance” to describe what he felt was unjustified speculation in the stock market as the S&P 500 rose past 744. Now, 12 years later, the S&P500 has moved past 744 again, this time on the way down in what may be another case of irrational markets. Do we now have “irrational pessimism”?

We have talked to literally thousands of people in the last few months and found it amazing how unanimous everyone’s outlook is now. “It will get worse in 2009”, “It will take 3-5 or even 10 years or more to recover”, and “it is the worst since the Great Depression”. Doomsday scenarios are also common. Pessimism is everywhere!

The argument that this pessimism is justified is everywhere in the news. Here are the reasons why it may be “irrational pessimism”.

When you look at the economy, however, all the pessimism is hard to understand. An advisor to John F. Kennedy created the “Misery Index” to gauge the pain of an economic crisis. It simply adds unemployment rate and inflation. By this measure, we are now only at 7.6% which is nowhere close to the recessions of the 70s and 80s when it was 22% and 19.9%.

In fact, despite all the bad news, the US economy is holding up better than these other recessions by all the main economic stats:

* New York Post

This recession is, of course, not over yet and may deepen, but none of these statistics are expected to get as bad as the prior recessions. An average of 55 forecasters in the January 15 Wall Street Journal survey expect real GDP to eventually reach only -2.1%. Industrial production appears to have bottomed in September 2008. The news is full of stories of massive lay-offs, but unemployment is only expected to rise to 8.9%.

The main driver of the economy is still consumer spending, which rose 3.6% in 2008. It fell sharply in the last quarter, but rebounding early in 2009. Other than the last quarter of 2008, consumers held up fine with high oil prices (though it did hurt car sales), falling house prices, and tightened credit markets.

In short, the economy is in an ordinary recession. The economy needs to pause to clear off over-building. Far too many houses had been built, so new construction has slowed to clear these off. The current level of auto production would take 27 years to replace all cars, so demand will come back. The economy is not the problem.

So, how do you explain the stock market having its worst year in history (other than during the 1930s)? The crash is more surprising, since there are no good alternatives. In 1982, not only was the economy worse than now, you could buy a GIC at 19 7/8%, and yet the stock market still fell less than today and recovered in one year.

There are real reasons why the stock market crash has been larger:

1. It was exaggerated by the popping of 4 bubbles at once – real estate, oil/commodities, China (BRIC countries) and a debt/financial bubble. Four more cases of irrational exuberance! Not surprisingly, the market problems have been mainly in the same 4 sectors.
2. The banking crisis created fear among consumers, made it harder to get credit, and took the entire financial index down 80%.
3. The recession is global (like 1973-74).

Do these reasons justify the current pessimism?

• The 4 bubble sectors have probably deflated fully – and probably more – except for real estate, which has a bit more to fall, especially in the U.S.
• The US financial index is down 80%, so there is not much more room to fall. This despite the worst banks, Citibank and Bank of America, both making profits again in 2009.

Is the fear and constant bad news now out of control?  Everyone is wondering how bad the economy could get and when it will recover, but the economy is not the problem.  Everyone is wondering how low the stock market will get, while trillions of dollars sit in cash on the sidelines waiting for the right time to jump back in.  The media is also full of ridiculous comparisons to the Great Depression.

Has “irrational pessimism” become the latest bubble?  If so, then just like the last 4 bubbles, you can never predict how far irrational bubbles will go, but they all eventually pop. This time, it would need a “melt up”, not a “melt down”.

MDJ readers are well-read. What do you think? Do we now have “irrational pessimism”?

Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.  If you would like to contact Ed, you can leave a comment in this post, or visit his website EdRempel.com.  You can read his other articles here.

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