Financial life in a big town

WASHINGTON–Worker productivity increased at a faster pace in the first three months of this year than previously estimated, while wage pressures moderated.

The Labor Department reported Wednesday that productivity rose at an annual rate of 2.6 per cent in the January-March period, faster than the government's initial estimate of 2.2 per cent made a month ago.

Wage pressures, meanwhile, moderated from the final three months of last year with unit labor costs rising at an annual rate of 2.2 per cent in the first quarter. That was a marked slowdown from a 4.7 per cent surge in labor costs in the final three months of last year.

While rising wages and benefits are good for employees, those increases can lead to higher inflation if businesses are forced to boost the cost of their products to cover the higher payroll costs. However, if productivity is increasing, it allows businesses to finance higher wages out of the increased output.

The Federal Reserve, always on guard about the threat of inflation, closely monitors developments in productivity since wage pressures are often the main way inflation gets out of control.

The 2.6 per cent rate of growth in productivity was a significant improvement from a 1.8 per cent increase in the final four months of last year. The 2.2 per cent rise in labor costs, unchanged from the initial estimate a month ago, marked a sharp slowdown from a 4.7 per cent rate of growth in labor costs in the fourth quarter of last year.

Those developments should be welcomed by the Fed, which has started to worry more about inflation pressures in the face of a relentless surge in energy and food costs. The Fed cut rates for a seventh time on April 30, but the reduction was a smaller quarter-point move. The central bank indicated the rate cuts could be drawing to a close as the attention shifted from worrying about keeping the country out of a steep recession to concerns about inflation.

Fed Chairman Ben Bernanke discussed his inflation concerns in a speech on Tuesday, worrying that a rapid rise in prices, if sustained, "might lead the public to expect higher long-term inflation rates, an expectation that ultimately could become self-confirming.''

Bernanke's remarks were seen as a strong signal that the Fed is through cutting interest rates and may start raising rates later this year as a way to battle inflation pressures.

The Fed wants to make sure that soaring energy costs don't produce higher wage pressures that could trigger a disastrous wage-price spiral like the country experienced in the 1970s.

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The country’s highest court has agreed to weigh in on the $52 billion privatization of phone giant BCE Inc., a transaction that appeared close to imploding after a lower court effectively ruled the phone company’s bondholders had been treated unfairly.

In a victory yesterday for BCE and its buyers, the Supreme Court of Canada said it has agreed to review last month’s unanimous decision by the Quebec Court of Appeal, a ruling that several observers said could have far-reaching implications for future corporate takeovers in Canada.

BCE, which owns Bell Canada, now has one last chance to complete what is being billed as the biggest leveraged buyout ever.

At issue is whether BCE’s board erred in its duties by failing to consider the interests of BCE bondholders when directors accepted a $42.75 per share takeover offer.

The bid was made by the Ontario Teachers’ Pension Plan and United States private-equity firms Providence Equity Partners Inc., Madison Dearborn Partners LLC and Merrill Lynch Global Private Equity.

The current legal thinking on Bay Street has held that a board’s duty is to maximize shareholder value. The appeal court, however, said that the interests of other stakeholders must also be considered in such a transaction.

The bondholders have complained that a leveraged buyout of BCE would load up the telephone company’s balance sheet with too much debt.

That would probably make the investments of the bondholders less valuable.

Both BCE and lawyers representing the bondholders declined to comment on yesterday’s decision, which was released after the markets closed.

"We’re pleased that the Supreme Court granted leave and will hear the case on June 17," said Deborah Allan, a Teachers’ spokesperson.

The court had already decided to fast track the process if permission to appeal was granted.

The timing is important.

BCE investors have been speculating for months that the banks backing the deal – and possibly the buyout consortium itself – are eager to find an excuse to walk away from their commitments, and are therefore unlikely to agree to an extension.

The purchasers have until June 30 to conclude the purchase, which can be delayed only with approval from both sides.

The ongoing credit crunch has raised the cost of borrowing money.

That has made the price of completing the transaction significantly higher than when the deal was inked last June.

Shares of BCE closed at $34.65, down 40 cents, on the Toronto Stock Exchange yesterday, before the court’s decision was made public.

BCE had argued in its submissions to the Supreme Court that a failure to hear the case threatened to destroy billions of dollars of value for the company and its shareholders.

Bondholders, on the other hand, had urged the court not to be swayed by the deal’s size when making a decision on whether to grant a leave to appeal.

With files from The Canadian Press

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Canada’s slowing economy is starting to take a toll on homeowners.

"Defaults are rising in certain parts of the country," said Peter Vukanovich, president of Genworth Financial Canada, which insures mortgages against default.

Which parts of the country?

"Here in Ontario and in Quebec," he replied.

The Canadian real estate market is healthier than in the United States, where prices are falling and many homeowners are facing foreclosure.

Still, there’s a concern that some homeowners in Canada may not keep up their mortgage payments if they lose their jobs.

"We’re monitoring losses and making sure the lending is responsible," Vukanovich said.

Homebuyers are required to buy mortgage insurance if their down payment is less than 20 per cent of the purchase price.

Mortgage insurance protects lenders when borrowers fall behind and properties have to be sold at a loss.

Canada Mortgage and Housing Corp., a federally owned Crown corporation, is the largest provider.

Genworth, owned by General Electric Co., is the largest private-sector mortgage insurer.

In its 2006 budget, the federal government opened the mortgage insurance market to more competition.

With competition came innovation. Mortgage insurance providers started underwriting loans with no down payments and with amortizations of up to 40 years.

"The longer amortizations and the 100 per cent loan-to-value products have been relatively popular," Vukanovich said.

But what if Canada’s economy flattens out? How will this affect highly leveraged buyers?

It’s not only CMHC, Genworth and other mortgage insurers on the hook if there’s a rash of defaults.

Taxpayers will also be liable for losses.

Few people know that Ottawa guarantees 100 per cent of CMHC-insured mortgages and 90 per cent of privately insured mortgages (up to $200 billion).

Because of the federal guarantee, mortgage insurers don’t have to carry capital on their books to match their potential risks.

In recent months, the finance department has been holding secret talks with mortgage industry players.

"We consult on a regular basis on a wide variety of issues," said a finance spokesperson.

While Ottawa won’t confirm the discussions, mortgage lenders know they’re going on.

"The degree of risk that’s involved with 40-year mortgages and no down payments is certainly of some concern to the finance department," said Don Drummond, chief economist with TD Bank Financial Group.

"It definitely creates a riskier environment."

Here’s how the risk could play out.

Suppose you bought a home in the Toronto area last year, borrowing the whole purchase price and opting for a 40-year payback. Your mortgage insurance premium added another 3.5 per cent to the loan amount.

Suddenly, you lose your job or have your hours cut back. Or this happens to your spouse.

Within a few months, you can no longer cover mortgage payments.

You think about selling. But you can’t make money because you have no equity and 99.9 per cent of your payments are interest, not mortgage principal.

So, you wait for the lender to take over your house under a power of sale.

Our mortgage lenders are strict about checking credit scores and making sure borrowers don’t take on too much debt.

But there’s a sky-high bill to shoulder if a slowing economy results in mortgage defaults.

It’s time for Ottawa to talk openly about cutting back its mortgage insurance guarantee to adapt to a climate of looser lending.

Ellen Roseman’s column appears Wednesday, Saturday and Sunday.

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MONTREAL – Forestry firm Tembec Inc. reported today a second-quarter loss of $59 million, deepened from a year-earlier loss of $45 million.

The company (TSX: TMB), which underwent a major financial recapitalization in February, broke out its results into two separate blocks to account for the transformation of its books.

Tembec's loss for January and February was $42 million or 49 cents per share and in March, following the recapitalization, was $17 million or 17 cents per share. It's per share loss for the full prior-year came in at 54 cents per share.

The quarter included the two components due to the requirements of "fresh start" accounting as of Feb. 29.

"The March quarterly operating results were an improvement over the previous quarter, but remained well below acceptable levels," Tembec said.

"The extremely low US-dollar lumber selling prices experienced over the last several months offset most of the gains in pulp. As well, higher prices for fossil fuel are increasing the cost of transportation, chemicals as well as direct energy purchases."

Quarterly sales fell to $593 million from $714 million.

Forest products sales were relatively unchanged, with seasonally higher by-product sales offsetting lower prices and volumes for lumber and engineered wood.

The pulp segment had sales of $369 million for the quarter, on higher volumes and selling prices for all grades of pulp. The paper segment posted sales of $98 million.

Tembec has been idling some of its mills and laying off workers because of a lack of wood supply in the northwestern Quebec region. Along with other forestry companies, it's also being impacted by slowing demand due to a slump in the housing market.

The newly recapitalized company employs about 8,000 people at its operations located primarily in North America and France.

Under the recapitalization plan, Tembec converted US$1.2 billion of debt into equity. The deal is expected to cut Tembec's annual debt payments by nearly two thirds, from $100 million to between $30 million and $35 million.

On the TSX today, Tembec shares rose seven cents or 1.7 per cent to trade at $4.16.

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The stars finally seem to be aligned for a Canadian launch of Apple’s popular iPhone nearly a year after it was first unveiled to lineups of gadget-crazed consumers in the United States.

There have been no official confirmations, but industry sources say that Rogers Communications Inc., the only Canadian carrier with a compatible GSM network, was hoping to include the iPhone as part of a campaign that focuses on "touch screen" phones, to be rolled out between May and July.

That would put one of the world’s most talked-about devices in the pockets of Canadians right around the time that Apple Inc. is expected to roll out an updated version of the iPhone that runs on so-called third generation, or "3G," networks.

It could also mean that the iPhone will be available in rival smartphone-maker Research In Motion Ltd.’s backyard before it is able to unveil its response: a 3G version of its popular BlackBerry email device for GSM carriers that is being dubbed "Meteor."

Shares of Waterloo-based RIM fell nearly 3 per cent or $3.52 to close at $122.25 on the Toronto Stock Exchange yesterday amid reports the anticipated June launch of a new BlackBerry has been pushed back to August.

"Reasons appear to be battery life, voice quality and other issues," said Mike Abramsky, an analyst at RBC Capital Markets, in a note to clients yesterday that cited sources "confirming" the rumours.

A RIM spokesperson declined to comment.

As for the iPhone’s arrival in Canada, a source said Rogers Wireless executives believed they were "close" to inking an agreement earlier this year with Apple, which has used its clout to force significant changes to the standard industry relationship between wireless carriers and handset makers.

That includes the way the iPhone is marketed and sold, as well as a sizeable cut of subscribers’ monthly bills.

However, it’s still unclear whether a deal has actually been reached because neither side is talking.

"We believe it is a phenomenal device and we look forward to being able to offer it to our customers if and when the device becomes available in Canada," said Elizabeth Hamilton, a Rogers spokesperson.

An Apple spokesperson declined to comment.

While Rogers initially said it planned to offer the iPhone in Canada, the carrier was later forced to backtrack after it admitted it didn’t actually have a deal with the Cupertino, Calif.-based maker of iPods and computers.

It has been widely speculated that the stumbling block was Rogers’ wireless data plans, which typically cost more than those offered by carriers in Europe and the United States – a disparity that critics blame on a lack of Canadian wireless competition.

As well, most of Rogers’ wireless data plans have usage caps, with users charged by the megabyte if they go over their allotment.

"We’re not fans of unlimited plans," Rob Bruce, president of Rogers’ wireless division, told analysts during a February conference call.

Apple, by contrast, emphasizes the consumer experience of its products and is said to be adamant that the iPhone be offered with unlimited data plans. That way, subscribers don’t have to worry their mobile Web browsing habits will put a crater in their wallets.

In return, carriers offering the iPhone can expect to woo new customers and coax more of their customer base onto higher-priced wireless data plans. AT&T Inc., which has an exclusive deal with Apple in the U.S., this week reported a 57 per cent year-over-year increase in its wireless data revenues, which was attributed in part to the iPhone and its focus on mobile email and Web browsing.

Apple also demands a portion of subscribers’ monthly bills. That’s bound to be a sticking point with Rogers, which has little incentive to bow to all of Apple’s demands since there’s little risk the iPhone will wind up in a competitor’s hands.

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U.S. consumers’ confidence weakened to the lowest in 16 years in March, pointing to recession, as worries over fading job prospects and rising inflation clouded the outlook, a survey showed on Friday.

The Reuters/University of Michigan Surveys of Consumers said its final index of confidence fell to 69.5 in March — its lowest since February 1992, when it was at 68.8 — from the previous month’s reading of 70.8.

Economists polled by Reuters expected a reading of 70.0 in the index of confidence, which the preliminary report had said was at 70.5 in early March.

The index of consumer expectations fell to 60.1, its lowest since January 1992, when it was at 59.1. In February this year it was at 62.4.

The Reuters/University of Michigan Surveys of Consumers said in a release that “it is now nearly unanimous among consumers that the economy has already entered a recession.”

“Consumer confidence slipped due to growing concerns about weakening prospects for the economy as well as anticipated increases in unemployment and inflation during the year ahead,” the statement said.

The report showed the final reading on one-year inflation expectations jumped to 4.3 percent in March from 3.6 percent in February.

That was the highest final reading since October 2005, when gasoline prices were soaring in the wake of Hurricane Katrina, but was down from the preliminary March reading of 4.5 percent. 

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HAMILTON–Gianluigi Botton fires up a computer and a mysterious image pops up on the screen. It doesn’t look like much. A bunch of blurry white dots tightly packed together on a black background. Kind of like looking through a screen door on a blindingly sunny day.

"Those would be silicon atoms," he says casually, like someone who works at the atomic level every day and is not easily impressed.

Behind the computer is an awkwardly shaped, vaulted room. Soundproofed and strictly climate controlled, the room is almost a building within a building. It rests on its own foundation, undisturbed by the vibrations around it. Inside sits a machine called Titan – a $14 million electron microscope, and one of only a handful in the world capable of zeroing in on the nearly invisible fabric of our existence.

"The world’s most powerful microscope," says Botton, director of McMaster University’s Centre for Electron Microscopy.

Like satellites that can seek out new planets and submarines that can venture into the undiscovered depths of the ocean, Titan can peek into the miraculous world where protons and electrons dance. We’re talking smaller than viruses, molecules, DNA and even "nano" particles. Titan can zoom in on objects slightly less than one angstrom in size, or a million times thinner than a sheet of photocopy paper.

It’s part of the reason why McMaster is fast becoming a global leader in material sciences and, under that umbrella, at the leading edge of innovation in the red-hot market for solar technologies.

Flexible Solar Cell, Cleanfield Energy and Arise Technologies are just three companies hoping to launch commercial products based on innovations coming out of the Hamilton university.

Researchers here say solar could fill the vacuum left behind by the collapse of the telecommunications industry, from which once proud giants such as Nortel Networks and JDS Uniphase have never fully recovered.

Engineering professors Ray LaPierre, who is working with Cleanfield on solar cells made from a dense turf of nanowires, and Adrian Kitai, who co-founded Flexible Solar to make bendable solar panels that are less costly to manufacture, are showing how skills typically prized in the telecom sector can be repurposed to build better solar technologies.

Similar efforts are also being made at the University of Toronto’s Institute for Optical Sciences, where a new spin-off called The Solar Venture aims to improve the economics of solar.

"Ontario was a global leader in telecom, but now that has slowed down," says Rafael Kleiman, professor of engineering physics and director of McMaster’s Centre for Emerging Device Technologies.

"All the people, all this research (in telecom), is finding a new home. I really believe Ontario can make itself a global hub in solar photovoltaic technologies."

Semiconductor research has long been at the heart of Canada’s telecom industry, earning Ottawa the reputation as Silicon Valley North. Apply electricity to a semiconductor and it can create light, allowing for the development of lasers and detectors used in high-speed telecom switches and fibre-optic networks.

But the materials used to make semiconductors, silicon as well as so-called Group III-V elements such as gallium, indium, phosphorus and arsenic, can operate in reverse. Shine light on them and they can absorb the energy and turn it into electricity. In other words, semiconductors are solar cells that operate in reverse.

"A solar cell is just a big specialized chip, so everything we’ve learned about making chips applies," Paul Saffo, an engineering professor at Stanford University, recently told the New York Times.

There’s a reason why California’s Silicon Valley, the headquarters of data-networking king Cisco Systems and semiconductor goliath Intel, is positioning itself as Solar Valley. Companies such as SunPower, Miasole, Nanosolar and Optisolar are all aiming to create cheaper and more efficient solar cells. They hope to hit their target by applying lessons learned from telecom and computing, where Moore’s Law has led to a dramatic reduction in the cost of cellphones, laptops and all the networking in between.

Some say the solar industry is where the computing industry was in the mainframe-era of the 1970s, before the personal computer and Microsoft.

Last month, Waterloo-based solar-cell manufacturer Arise Technologies and the Ontario Centres of Excellence awarded Kleiman and his research team $4.1 million to help commercialize a new way of making more efficient solar cells.

Conventional solar cells are essentially made from thin wafers of silicon, capturing between 12 and 21 per cent the energy in sunlight. When the sun hits the silicon, it excites the electrons in the material, knocking them free. That flow of free-moving electrons is harvested as electricity.

Kleiman and colleague John Preston, also a professor of engineering physics at McMaster, have come up with a way to grow an extremely thin layer of Group III-V materials, such as gallium-arsenide, on top of a silicon wafer.

Silicon absorbs energy from the invisible part of light spectrum, such as ultraviolet light, while gallium-arsenide can capture energy from the visible light. By capturing more of the energy across the light spectrum, Kleiman says the new "double-junction" cells can theoretically achieve 43 per cent efficiency.

The trick is in properly aligning the top layer with the bottom layer in a way that’s consistent enough for mass production. It’s a process that the McMaster team believes it has figured out, with help from the Titan microscope.

"We figure we could get this to market in three years," says Kleiman.

He admits that Canada is behind in the solar market when compared to Japan, Germany and now Silicon Valley. But at a time when other sectors are hurting and the world demand for renewable energy technologies such as solar is booming, Kleiman suggests there’s still an opening in a race that’s far from over.

"We have the ability to play catch up, and to succeed," he says.

Mark Romoff, president of the Ontario Centres of Excellence, says there’s no reason technology from Ontario automotive manufacturing, telecommunications and microelectronics couldn’t be modified and applied to solar-energy innovation.

"One of Ontario’s strengths is its ability to transfer technology, knowledge and expertise from one sector to another," he says.

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Do Canadians need another tax break in order to save for their children’s post-secondary education?

Liberal MP Dan McTeague thinks so. His bill, passed by the House of Commons last week, will provide an up-front tax deduction if you contribute to a registered education savings plan.

Right now, you get an up-front tax deduction only if you contribute to a registered retirement savings plan.

Parents might welcome a tax refund to use for spending or paying off debt. But would they save more if they received more tax breaks?

It’s debatable, since education saving is already subsidized in several ways:

• The RESP, introduced in 1974, allows contributions to grow tax-free until the children go to college or university.
• Withdrawals are added to students’ income once they attend college or university. But most don’t earn enough from part-time jobs to pay tax.
• The Canada Education Savings Grant, launched in 1998, gives a 20 per cent rebate (up to $400 a year) on the first $2,000 contributed to an RESP.
• An enhanced grant for low-income families – a rebate of 30 to 40 per cent on the first $500 contributed to an RESP – was introduced in 2004.
• The Canada Learning Bond, also introduced in 2004, is a $500 gift – increased by $100 a year for 15 years – to babies born into low-income families.
• Parents get another tax break since they can claim tuition, education and textbook credits that post-secondary students can’t use because their income is too low.

RESPs exploded in popularity a decade ago when Ottawa came up with matching grants. Parents can get up to $7,200 in free money if they contribute at least $2,000 for 17 years. Nowhere else can you get a risk-free 20 per cent return on your money. RESPs are irresistible to rational parents.

It’s no coincidence that the Liberal private member’s bill was passed right after the Conservative government brought down its last budget.

The budget proposed a tax break for those contributing up to $5,000 a year to a tax-free savings account – actually the reverse of an RRSP. You put in money that has already been taxed and you face no tax bite when you take it out.

Naturally, the Conservatives are angry that the Liberals managed to get an expensive new tax measure passed in Parliament.

On Friday, finance parliamentary secretary Ted Menzies said he was confident the government could persuade the Liberal-dominated Senate to reject the bill that would cost the government $900 million a year.

"It’s tax policy nonsense," says Finn Poschman, director of research at the C.D. Howe Institute, about the idea of sweetening tax breaks for education saving.

Here’s why he thinks RESPs don’t need to be beefed up:

• Middle-income parents already use the grants available for RESP contributions.
• Low-income parents won’t save any more in RESPs because of up-front tax deductions.
• There’s no evidence of an affordability issue in Canada for post-secondary education or a failure that needs reform.

In 2002, the C.D. Howe Institute published a paper that said the RESP added needless complexity to Canada’s tax system.

Author Kevin Milligan said the matching grants ended up disproportionately in high-income households and were "a poorly targeted use of public money."

I agree that another tax break for education savings would be too rich – and I hope the Senate blocks the bill for further study.

Ellen Roseman’s column appears Wednesday, Saturday and Sunday. You can reach her by writing Business c/o Toronto Star, 1 Yonge St., Toronto M5E 1E6; by phone at 416-945-8687; by fax at 416-865-3630; or at eroseman@thestar.ca by email.

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