This month I’d like to present a letter from John Rovansek of Great-West Life:

Over the past few weeks, I sent out correspondence on a couple of themes. The first theme focused on building a case for considering, or re-considering, US investments and the second theme built a case for consideration in adding global fixed income exposure to client portfolios. Based on recent financial data, articles & interviews, I thought I would ponder the question – are we headed for another recession?

Since the end of May a number of headlines have made their way to the front pages of financial publications. One prominent headline on May 30 featured Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group. Mr. Mobius postulated that another financial crisis is inevitable because the causes of the previous one haven’t been resolved. His thesis focused on the derivatives market, and specifically, the effect the volume of derivative “bets”, in different directions, will have on volatility in the equity markets. He also cautioned that the largest US banks have grown larger since the financial crisis as has the number of “too big to fail”. If his prediction proves correct, the US taxpayer will once again be forced to protect those deemed “too big to fail”.

A second headline was the hawkish tone that Mark Carney, governor of the Bank of Canada, signaled when he delivered his May 31 speech to hold the line on interest rates. Mr. Carney pointed to continuing global threats & the dampening effect of the strong Canadian dollar on exports for keeping rates steady. He also indicated he is worried about a slowdown in spending by US consumers but also acknowledged inflation is hotter than was anticipated in Canada, and this could be interpreted as a sign the central bank will raise rates before the end of the year.

Do these headlines indicate we are headed for another global recession? I suggest we look to yield curves for guidance. Yield curves are leading indicators. Let’s examine the US yield curve to get sense if a return to recession is on the horizon in the US. Why? For several reasons. One, the US is the largest economy on the planet. Two, economic expansion has been increasing, albeit at a morbid pace. Three, the Federal Reserve has been steadfastly accommodating on its monetary policy.

With the Federal Reserve’s benchmark rate at zero to 0.25% & the 10-year Treasury note yielding approx. 3.06%, the spread between the two interest rates is among the widest in history. It’s when we see an inverted yield curve – short rates above long rates, that recession takes hold. The spread derives it predictive ability from the simple fact that one rate is artificially pegged by the central bank while the other is determined by the market. When the yield curve is steep, as it is now, it induces banks to expand their balance sheets – borrow short, lend long & increase the money supply. That US bank credit isn’t growing is more a reflection of the lessons learned during the period of excess leverage & in part to the new lending standards imposed by banks.

The time to worry about recession is when the Fed raises the funds rate to the point where the yield curve inverts. The yield curve is one of 10 components of the US Index of Leading Economic Indicators. Historically, the yield curve has been the first of the leading indicators to signal a turn in the business cycle. With the spread currently about 300 basis points & the Fed in no hurry to raise short-term rates, recession doesn’t appear to be on the horizon any time soon. In the recession that we just completed, the fed funds rate rose above the 10-year Treasury yield in June 2006. The US recession started on or about December 2007. Over the past seven expansions, they lasted, on average, 71 months. The current one is not quite 24 months old, and by some metrics, it has yet to get going. The US $15 trillion economy won’t, & doesn’t turn on a dime. While the possibility for a recession may still exits, the probability remains small. Things don’t change that quickly.

For the time being, being contrarian and looking at the aforementioned themes of US & global opportunities may prove to be correct after all.

If you would like to talk about John’s comments and how they might affect your investments, please give our office a call and make an appointment to speak with one of our financial advisors.

You’ve worked hard to find just the right home. Shouldn’t you take the time to find just the right mortgage life insurance protection for you and your family?

Most lending institutions offer mortgage life insurance as part of their mortgage packaging. But, look carefully before you sign on the dotted line. You could find yourself locked into insurance that does more to protect your lender than it does to protect you.

A personal life insurance policy doesn’t insure your mortgage – it insures you. After all, you’re the one making the mortgage payments. Through a personal life insurance policy, you can plan to meet more of your family’s needs in the event of death, including living in your dream home.

Here’s a closer look at how a personal life insurance policy compares to mortgage life insurance offered by most lending institutions.

It’s about being covered

Generally, most lending institutions offer nonconvertible term insurance; with no cash values, no premium flexibility or ability to move to a permanent life insurance plan if your needs change. With personally owned life insurance, you select the plan that meets your financial security goals. Most personally owned term life insurance products are fully convertible to permanent plans; if your health changes and you find it difficult to get life insurance, you can keep the full death benefit and convert your insurance to any permanent plan without having to re-qualify medically.

Mortgage life insurance offered by most lending institutions usually covers the exact amount of your mortgage. This means your coverage decreases as you pay down your mortgage. When the mortgage is paid off, you are left with no coverage. With personally owned life insurance, your financial security advisor will help you determine the amount of coverage you need and your coverage doesn’t decrease as you pay down your mortgage. Additional funds could be available at a time when your family may need it the most. You have the flexibility to reduce the face amount when you want. Or, if you need the protection for other purposes, you can keep the insurance.

It’s about being in control

With mortgage life insurance your lender owns the policy and if you find a better mortgage rate at another lending institution, you may have to re-qualify medically for the life insurance protection. Your mortgage life insurance cannot be moved to another institution. Your lender also pays off the mortgage automatically if you die. Your beneficiary has no choice in how to use the funds, at a time when funds may be required more urgently somewhere else.

With personally owned insurance, you own the policy, not your lender. You have the freedom to switch your mortgage to another lending institution without jeopardizing your life insurance coverage. Your beneficiaries can choose how to use the funds – to pay off the mortgage, provide a monthly income or take care of a more immediate need. It’s their choice, not your lender’s.

A personal life insurance policy doesn’t insure your mortgage – it insures you.

Article courtesy of The Great-West Life Assurance Company.

On December 15, 2008, Great-West Life announced a temporary suspension on withdrawals and transfers out of its Canadian Real Estate Investment Fund.

This fund is unique in Canada, as it directly owns physical properties across the country, as opposed to the much more volatile Real Estate Investment Trusts (or REITs) which trade on the open market like an equity stock (REITs are to properties as Mutual Funds are to individual stocks).  The benefit of the GWL fund’s structure is long term stability and dependable growth; so much so that we have long made it a significant part of our recommended portfolios.

Unfortunately, that same stabilizing structure also makes much less “liquid”, or able to respond rapidly to major changes like those that have come about in the last few months.  Because the fund directly owns property, requests for money to be moved out of the fund require a buffer of cash be kept available.  With the recent market volatility, the fund was at risk of exceeding the cash available and being forced to sell assets at very unfavourable conditions.  This potential downward spiral would have put all unitholders at significant risk, so the decision was made to temporarily freeze redemptions until a time at which the fund has sufficient cash available.

While this is certainly a frustrating and unprecedented event for most of us, this decision was made to best attempt to protect the assets of investors in the Real Estate Fund.  We have begun contacting all of our clients that hold this fund, but if you have any questions at all please contact us.

FYI, here is the letter being sent out from Great-West Life to all unitholders:

We want to bring to your attention some changes regarding the Great-West Life Real Estate Fund in your segregated fund policy that may affect you.  Please read the information below carefully and contact your financial security advisor if you have any questions.

We announced a temporary suspension on withdrawals and transfers out of the Real Estate Fund effective 4 p.m. EST, Monday, Dec. 15, 2008.  This temporary suspension was not an easy decision.

Given the current economic environment and the unprecedented events in the capital markets, withdrawal requests have increased.  Real estate assets are generally less liquid than other major asset classes – such as common stocks and bonds – and cannot be rapidly sold.  Therefore, rather than sell quality assets at unfavourable market values, it was determined that the best way to balance the long-term interests of unitholders was to institute a temporary suspension on cash withdrawals or transfers out.

The Real Estate Fund is a segregated fund that holds a diversified portfolio of high-quality, income-producing properties.  As part of a well-diversified portfolio, the Real Estate Fund continues to be appropriate for unitholders with a long-term investment horizon.  It has performed well over time and substantially outperformed common stock investments during 2008, with a marginally negative return, compared with larger drops for many common stock indicies.

At present we don’t know how long the temporary suspension will continue.  Our goal is to re-establish an appropriate level of cash in the Real Estate Fund to meet client withdrawal requests.  We will update you and your financial security advisor on progress.

The Real Estate Fund is still open for new contributions, subject to the suspension on withdrawals.  If you are currently contributing to the Real Estate Fund, those contributions will continue unless you instruct us otherwise, and will be subject to the current suspension on withdrawals and transfers out.  You can change your allocation of future contributions at any time by contacting your financial security advisor or calling our Client Service Centre at 1-800-665-5758 from 8:30 a.m. to 6 p.m. EST.

We thank you for your patience and reiterate this temporary suspension has been made to treat all unitholders equitably.