Today’s top tales from Report on Business :

Stocks may be overvalued, central bank says

It may not have quite the ring or import of “irrational exuberance,” but the Bank of Canada warned today that stock prices may be overvalued and could fall if corporate earnings don’t hold up. The central bank said in its review of the financial system that the recent rally in stock prices has been at least partly fuelled by better-than-expected corporate results in the second and third quarters of the year. It noted in the semi-annual report that 70 per cent of S&P 500 companies topped expectations in the second quarter, and, among those reporting third-quarter results by Nov. 23, some 80 per cent beat estimates. The central bank pointed out that the better-than-anticipated results in the second quarter were primarily because of cost-cutting, while in the third quarter revenue growth was also a reason.

“For the recent improvement in equity markets to be sustainable, future earnings will have to be driven by revenue growth,” the review said. “Equity markets may thus experience some reversal if earnings growth proves to be disappointing. While indicators point in different directions, various measures, such as forward price-earnings ratios, suggest that equity prices may have increased by more than warranted in the context of an expected slow recovery.”

Rising debt also cause for concern

Part of the central bank’s semi-annual report was also devoted to warnings on rising consumer debt, which the review cited as the largest risk to the financial system at this point. The Bank of Canada urged both borrowers and lenders to keep in mind that historically low interest rates won’t last forever. While conditions in the markets and the broader economy are better, the central bank honed in on the risks of homeowners who can make their mortgage payments now but not be quite as secure when borrowing costs increase. The report warned: “Households need to assess their ability to service these debt obligations over their entire maturity, taking into account likely changes in both income and interest rates. Financial institutions need to carefully consider the aggregate risk to their entire portfolio of household exposures when evaluating even an insured mortgage, since a household defaulting on an insured mortgage would likely be unable to meet its other debt obligations.”

After the central bank’s report, TD Securities strategist Eric Lascelles said variable rate mortgages “have become unusually well loved in recent years, and the housing market has once again begun to surge. This combination makes obvious vulnerabilities in a rising interest rate environment. The Bank notes that the household debt-to-income ratio has continued to rise in recent quarters, even as the U.S. and U.K. levels have declined (though the absolute level in Canada remains lower).”

Still, the central bank noted that Canada’s lenders have more than the adequate capital that would be needed to absorb possible losses.

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The Bank of Canada’s review came just after fresh data showed the real estate industry is on track for another strong month. Sales results from Canada’s seven largest cities show a gain of 90 per cent from last year’s “admittedly depressed” levels, led by Vancouver and Toronto, BMO Nesbitt Burns said this morning. “But Ottawa, Calgary, Edmonton and Montreal all saw sales rise by at least 40 per cent year over year,” BMO said. “Average price gains were generally a small less gaudy than the blowout October readings, but still posted a weighted average increase of just over 10 per cent year over year (led again by Toronto at +13.5 per cent year over year).”

Separately, Gluskin Sheff + Associates chief economist David Rosenberg warned today that Canada’s housing market appears to be in a bubble.

Related: How Canadian wealth rebounded

Goldman changes bonus system

Goldman Sachs Group Inc. GS-N , oft criticized over its pay schemes, said today its 30 top executives will receive no cash bonuses this year, but instead will get stock they can’t sell for at least five years. “The measures that we are announcing today reflect the compensation principles that we articulated at our shareholders’ meeting in May,” Goldman Sachs chief executive officer Lloyd Blankfein said.

Bank bonuses have, of course, been a hot spot recently, peaking yesterday with the British government’s choice to slap a “supertax” on bonuses just before Christmas. It’s not stopping there. British Prime Minister Gordon Brown and President Nicolas Sarkozy jointly called today for a bonus tax that would be adopted globally, the thought being that financial institutions would strike a new deal with society. “We propose a long term global compact that will encapsulate both the responsibilities of the banking system and the risk they pose to the economy as a whole,” the British and French leaders wrote in the Wall Street Journal.” We agree that a one-off tax in relation to bonuses should be considered a priority due to the fact that bonuses for 2009 have arisen partly because of government support for the banking system.”

Read

Sarkozy joins call for tax on bank bonuses

Record bonuses at Canada’s banks

Britain slaps tax on bank bonuses

Citigroup plans stock offering

Citigroup Inc. C-N plans a stock offering of about $15-billion to help pay U.S. bailout funds, the Reuters news agency reported today. It’s one of the last huge U.S. banks to pay back the government but, Reuters said, officials want to first ensure that Citigroup can afford it. Citigroup borrowed $45-billion (U.S.) under the program last year, some of which was converted into stock, meaning the government owns more than 30 per cent of the bank.

AOL debuts as independent

AOL Inc AOL-N . started trading today as an independent company, its stock dipping on its debut. AOL was spun off from Time Warner Inc., ending what a BMO Nesbitt Burns analysts called “a nine-year adventure akin to a marathon through the mud.”

Canadian exports rise in October

Canada’s exports are rebounding from the collapse in global trade, driven most recently by higher demand in the United States and strong demand for precious metals such as gold. Statistics Canada said this morning exports rose 3.4 per cent in October to $31.1-billion, as both volumes and prices rose. Notable is that the United States accounted for 75 per cent of the increase, excellent news for a country so dependent on its largest trading partner. Imports fell 0.8 per cent, leaving the country with a trade surplus of $428-million, compared to September’s $850-million deficit. Industrial goods and material led the export surge, accounting for more than half the increase, the federal statistics gathering agency said, although energy, agricultural and fishing producers were also strong. “Exports of precious metals rose 34 per cent to a record high of $1.3-billion,” Statistics Canada said. “Worldwide surges in gold prices and in the demand for gold bars fuelled the rise.” Read the tale

Toyota to boost Ontario production

Some excellent news this morning for Ontario’s embattled auto sector. Toyota Motor Manufacturing Canada Inc. plans to add a second shift of production at its Woodstock, Ont., plant, making 800 jobs. This will double production of its RAV4 crossover utility vehicle to 150,000 a year beginning in March. About 80 per cent of the vehicles produced at the plant are sold in the United States, where demand has picked up. It’s really a delayed go compared to Toyota’s initial plot. The Japan-based auto maker originally plotted to open the plant with two shifts when it opened about a year ago, but chose on one shift instead given the economic crisis. Read the tale

Where are interest rates headed?

The economic haves and have-nots are coming into sharper focus based on where interest rates may be headed. Monetary authorities in the Asia and Pacific regions indicated today that they may hike their benchmark lending rates earlier than anticipated. The central bank in South Korea suggested interest rates are now too low, while New Zealand’s central bank backed away from a plot to hold rates steady until late next year. The Reuters news agency also reports speculation is mounting that Australia may soon raise rates again, which would be the fourth time, given better than expected employment data. Central banks in the United States, Europe and Canada are eyeing no such moves. The Federal Reserve and the Bank of Canada remain committed to hold rates at historic lows well into next year. Iceland today cut its benchmark rate, while the Bank of England stood pat.

Greece calls for fiscal “cleanup”

Financial markets appear to be coping better with fears over sovereign debt, though worries remain. Greece, Spain and Dubai are still in the spotlight. Greece’s Prime Minister Geroge Papandreou today called a meeting of the political parties and urged a “national rally” to clean up a fiscal mess. The meeting is scheduled for next week and, said Mr. Papandreou, is aimed at “sending a powerful message abroad showing that we’re determined to go forward, to clean up our economy and … give hope to every Greek citizen,” Agence France Presse reported. The young Greek government is learning quickly. In an interview with Le Figaro, the finance minister, Georgios Papaconstantinou, blamed the previous government, pointing out his administration has been in office for just 50 days. On the overall credit fears, BMO Nesbitt Burns this morning advised investors to “get used to that, given the enormous deterioration in government finances globally in the past year.”

Apple plots iTunes remake

Apple Inc. APPL-Q transformed how people listen to music through its iPod and iTunes. Now, the Wall Street Journal reports, the technology giant is studying a remake that would widen its dominance. Already the largest seller of music, the newspaper said, Apple plans to use its recently bought La La Media, a music-streaming company, to allow users to buy through a Web browser. Now, consumers download music through the iTunes online store to a single computer, but Apple’s plans would allow them to buy from anywhere through an Internet connection. This, the Journal reported, would allow Apple to sell music via search engines and other sites, thus widening its reach. Several issues remain to be worked out.

From today’s Report on Business

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