Nearly half of U.S. mortgages seen underwater by 2011

"For many, the home has morphed from piggy bank to albatross," wrote analysts Karen Weaver and Ying Shen in a research report.

More and more strapped homeowners are finding that the amount they owe on the mortgage exceeds the house's value as prices and sales continue to drop in many parts of the country. This situation is known as negative equity or being underwater on the mortgage.

Deutsche Bank estimated that 14 million U.S. homeowners had negative equity at the end of the first quarter, or about 27% of owners with a mortgage. More Americans could go underwater on their mortgage if prices continue to fall, which makes it more difficult to refinance.

There have been lukewarm signs recently that the residential market is stabilizing after peaking in 2006. However, job losses, mounting foreclosures and depressed credit markets could delay the recovery, economists say. In particular, many worry about a wave of coming mortgage resets that could spike foreclosure rates.

Although subprime and option adjustable rate mortgages "are currently the worst cohorts with underwater borrowers, we project that the next phase of the housing decline will have a far greater impact on prime borrowers," the Deutsche Bank analysts wrote.

They projected that 41% of prime conforming borrowers and 46% of prime jumbo borrowers will be underwater by the first quarter of 2011. "The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding," Deutsche Bank said.

Mark Zandi, chief economist at Moody's Economy.com, this week said negative equity and foreclosures are the main threats to an economic recovery. "That such a high proportion of homeowners are underwater is testimony to the severity of the foreclosure crisis and the risk that it still poses to the broader economy," he said. See WSJ.com blog.

On Tuesday, the Treasury Department provided an update on its mortgage refinancing program designed to keep troubled borrowers in their homes.

China's CIC has cash to seize investment opportunities

China Investment Corp, the country's $200 billion sovereign wealth fund, said it has ample cash on hand to take advantage of investment opportunities that may arise this year.

In its 2008 annual report, published on Friday, CIC gave no indication of any markets or sectors in which it was looking to invest and was more focused on convincing a critical domestic audience that it had performed well in trying circumstances.

"We are very happy to see that in 2008, when the global economic environment was horrible, CIC achieved a 6.8 percent return on capital," Lou Jiwei, its chairman, said in the report.

CIC said its global portfolio return was negative 2.1 percent in 2008, adding this was better than other sovereign wealth funds, university endowments and pension funds.

The main reason it had steered clear of bigger losses was that 87.4 percent of its portfolio was held in cash or cash equivalents, according to the report.

"With ample funds, CIC has made full preparations to embrace investment opportunities in 2009 and in the future," Lou said.

It was CIC's first published financial statement since it was founded in 2007 to seek higher returns on part of China's foreign exchange reserves.

The State Administration of Foreign Exchange, an arm of the central bank, manages the bulk of China's reserves -- $2.13 trillion as of June 30.

Lou said his fund was exclusively commercially driven, an assertion he has made repeatedly over the past two years.

CIC has still encountered a frosty reception overseas, finding it difficult to convince other countries that it does not have political motives as well.

Not wanting to arouse hostility, CIC has been relatively low-key in its investment approach, not vying for large direct stakes that would require regulatory review.

"CIC is mainly conducting portfolio investment in financial products with a small portion in direct investment," Lou said.

"CIC hopes to realise mutual benefits with its partners through good cooperation and it is not pursuing control of companies or industries in its investments."

Officials at CIC have said it must become more transparent to quiet fears about its intentions and improve its investment possibilities.

The annual report shed only a sliver of light on its inner workings. Of its 194 employees, it said 73 had experience working abroad and 18 were non-Chinese passport holders.

CIC's two highest-profile investments were a combined $8.6 billion in U.S. private equity company Blackstone Group (BX.N: Quote, Profile, Research, Stock Buzz) and Wall Street bank Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz).

The wealth fund has drawn intense fire at home over these investments, both made before the financial crisis flared up last year.

As well as investing overseas, CIC controls Central Huijin, a company that holds the state's shares in big commercial banks. Huijin announced that it was increasing those holdings when the domestic stock market was in the doldrums last year.

Canada July Jobs Loss Triple Economists’ Forecasts

Canada lost three times as many jobs as economists expected last month, led by construction and tourism-related businesses, signaling the country’s recovery from a recession may be slow.

Employment fell by 44,500, the third straight decline, Statistics Canada said today in Ottawa. The jobless rate remained at an 11-year high of 8.6 percent as the labor force shrank. Economists surveyed by Bloomberg predicted a job loss of 15,000 and unemployment at 8.8 percent.

Prime Minister Stephen Harper and Bank of Canada Governor Mark Carney have said the country’s job market will continue to worsen this year, even as Canada’s first recession since 1992 is expected to ease. The central bank cut its key interest rate to a record low 0.25 percent and the government predicts a record budget deficit as they act to revive the economy.

“Labor markets are a lagging indicator of activity, so I wouldn’t abandon hope the economy is emerging from recession,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “But there’s a little more doubt about that view now.”

Canada’s dollar weakened 0.6 percent to C$1.0841 at 7:17 a.m. in Toronto, from C$1.0777 yesterday. Earlier this week the currency reached C$1.0633, the strongest since Oct. 2.

Construction Employment Falls

Construction employment fell by 17,800 in July, while accommodation and food service companies fired 22,200 workers. Information, culture and recreation employment declined by 10,600.

The job losses were concentrated in the full-time, private- sector jobs that economists focus on as a measure of the labor market’s strength.

Full-time employment fell by 29,100 positions, Statistics Canada said, while part-time jobs decreased 15,400. The number of employees at private companies fell by 74,900, while government employment dropped 4,400 and self-employment rose by 34,800.

Manufacturing employment fell by another 6,500 in July, bringing the total loss since October to 218,000, or 11 percent, Statistics Canada said.

“Depending on what happens in the market, we’ll continue to adjust it if we think it’s necessary,” said Neil Manning, chief executive officer of Wajax Income Fund, which has cut payrolls by 15 percent, according to a transcript of an Aug. 5 conference call. The Mississauga, Ontario-based company sells parts and equipment to industrial companies.

Auto Workers Hit Hard

Automotive workers have been among the hardest hit, as the bankruptcies of Chrysler Group LLC and General Motors Corp. led to slower production, dealership closures and shuttered parts suppliers.

Governor Carney said July 23 the country’s stronger dollar is threatening the recovery and he is watching it closely. That was two days after he kept the benchmark rate at 0.25 percent and repeated he intends to keep it there through the second quarter of 2010 unless the inflation outlook shifts.

Unemployment will average 9.3 percent in the fourth quarter, according to a separate Bloomberg News economist survey. That suggests joblessness may reach a lower peak than the 12.1 percent rate set in November 1992.