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Showing posts from July, 2010

Fun Facts

The European bank stress test assumed a 1% economic contraction, the American bank stress test assumed a 4% contraction.If the European stress test had used 2% contraction instead of 1%, the amount of additional equity required by European banks jumps from €4.5 billion to €24 billion.
European banks need to refinance senior unsecured debt to the tune of €3.3 trillion, about three times as much as US banks, which stand at USD1.3 trillion.
Greek trucker are entering their 4th day of strike, oil foodstuffs are becoming scarce.Government has implemented War measures to no effect (yet).
China’s second largest steel producers increased capacity by 26% in 2010 to 45 million tons, number one producer’s capacity stands at 47 million tons.The entire US steel production capacity is 16 million tons.
America has 140 million homes 19 million house for sale, about 8 million empty homes.China has 65 million empty homes (on purpose) bei…

Good news on Canada?

Over the past few days there has been a large amount of Canadian economic news:
(a)Retails sales fell more than anticipated (b)Inflation was lower than anticipated (1.7%) (c)Q2 GDP growth is down (2.5%) (d)Wholesale trade was down, and inventories are rising
The data is a mix of good and bad news; the Canadian economy is clearly slowing, the Baltic Dry Index, which has dropped dramatically over the past month is an illustration of the change in trade of heavy things – for which Canada specializes.  Housing market seems to have reached an inflexion point, in all but two markets the losses of the 2007-08 housing slowdown have been fully made up (Calgary is still off by 10%). 
One key issue for Canada is inflation.  It would appear that deflation is not a problem in Canada, inflation appears to be well within the 1% to 3% range that the Bank of Canada favors at around 1.7% (once you strip out energy and food),  slightly down from the 1.8% level, and below the consensus forecast of 1.9%.
Worryi…

SOLVED: Chicken or Egg which came first

OK, we can cross this one off our list... From Metro UK: But now they believe they have cracked the conundrum of what came first: the chicken or the egg. British researchers say the chicken must have come first as the formation of eggs is only possible thanks to a protein found in the chicken’s ovaries. ‘It had long been suspected that the egg came first but now we have the scientific proof that shows that in fact the chicken came first,’ said Dr Colin Freeman, from Sheffield University, who worked with counterparts at Warwick University. Now if only the scientists can figure out why and how AIG was able to funnel $300 billion in taxpayer funds to themselves and their "circle of trust". Source: The Chicken Came First, Not The Egg (MetroUK)

Foreign capital inflows growing

Canada has always been an inconsequential portion of the world economy – the “boring American cousins”. Early in 2009 the American TIC data started showing a trend: Americans investing in Canadian securities was growing. This American trend is expanding with global investors investing “heavily” in Canada.
Statistics Canada released data showing the growing inflow of money into Canada, equivalent to 7.6% of our GDP.Net foreign purchases of long-term securities (bonds and equities) rose to $23.7 billion in May 2010. Over the past 12 months total foreign direct investment into Canada totaled $121 billion.
(Statcan data via global Insight)
Continuing a global trend ¾ of all these inflows have been into bonds:first and foremost, Federal government followed by corporate bonds and then provincial bonds. (Statcan data via global Insight)
What makes Canada such an attractive investment destination?
Canada got the deficit religion early; in the mid 90s, the Federal government undertook massive cost…

Canadian labor productivity and Oil Prices: An Observation

(This is a long blog – sorry about that because initially I was only going to talk about oil, but then it dawned on me that the issue is what will be the impact of higher oil prices on the Canadian economy because of international competition issues)


In 2007, oil prices peaked at over $140 per barrel.Most blamed speculators for this meteoric rise in prices, but one inescapable fact is that in the short term oil demand is inelastic, and oil supply is not growing nearly as fast as demand.Overtime consumers can modify their behavior to accommodate rising oil prices, but in the short term they cannot.

The International Energy Agency (“IEA”) predicted that be 2011 global oil demand will reach 87.8 billion barrel per day – the previous peak in 2007 was around 86.5 billion.Since the OECD demand has dropped from a high of nearly 50 billion barrel to 45 billion, a 10% drop, but non-OECD countries saw demand rise from 35 billion to 43 billion barrels over the same period (23%).On the bright side …

Baltic Dry Index – Reasoning for its 34 day collapse:

The record slaughter of shippers continues as the BDIY posts the largest overnight drop of 4.5% in the most recent 34-consecutive day trounce in dry bulk shipping rates. At this point it is not a question of if but when the bulk of shipping companies especially levered ones, start going bankrupt and flood the seas with yet more anchored rusting dry bulk hulls.
First over the past month the Baltic Dry index has been droping through the floor, problem is that the container business has not seem the same kind of drop of, my guess, and it can only be a guess is that there are a number of factor affecting the Baltic Dry Index, first is the massive new vessel build that has begun delivery over the past 2/6 months. Again, actual numbers are not available, but from the new vessel order (size and type) it is clear that 2010 was the beginning of a massive delivery cycle for new ships from an average of 10-20 a year to around 80. Rising to 100 vessels in 2011/12.
The report estimates that the dry …

Fun fact:64 million empty apartments in China

According to Yi Xianrong, an economist at the ChineseAcademy of Social Sciences, a government think tank in Beijing, noted estimates from electricity meter readings that there are about 64.5 million empty apartments and houses in urban areas of the country, many of them bought up by people wagering on a constantly rising property market.
At first I tried to make a comparison with the U.S., but that’s simply impossible, there is simply no equivalent for this anywhere in the world. This figure only counts “urban” areas, Chinese stats count a small 2 million people city as “rural” which would mean that most American (never mind Canadians) live in rural settings.

This has nothing to do with Canada’s Economy

Videotron is a Montreal based internet/TV/telephone provider – after the 2002 deregulation in Canada, internet providers were allowed to provide voice over internet protocol, services, basically, they were allowed to compete with Bell Canada – until then the sole provider of telephone services.
Since then there’s been an explosion in demand, seriously eroding BellCanada’s profits and market share.One reason was the price that Bell Canada was charging had become ridiculous – for what I was paying BellCanada for phone service I could get the internet cable TV and phone service, so me and many others jumped ship (everyone was surprised starting with Videotron).
Now to my story:Saturday morning I realized that the internet was no longer functioning – nor was the phone.After resetting the modem and the router the phone came back, but the internet was gone.So I called Vidoetron service number.
I call these guys at 8:30 AM Saturday morning, expecting voicemail.My wife expecting a bunch of well …

High probability that the Bank of Canada will raise interest rates in July

Canada’s economy is about 1/10 of that its neighbor at the south ($1.5 trillion Vs $15 trillion), so today’s blowout announcement that June employment rose by 93,200 is as if the U.S. had announced the creation of 930,000 jobs (instead they lost another 125,000). Since Jan 1, 2010 the Canadian economy has created more than 300,000 jobs, which is truly astonishing.

As a major exporter Canada is excessively exposed to the world at large, probably the last country one would expect to “decouple” from the G8 crisis. In fact, Canada finds itself in the interesting position to have reached a level of employment almost equal (still 14,000 jobs missing) to the pre crisis level.

Wages are still decelerating (despite the strong employment growth), and this new gives the Bank of Canada an opportunity to increase interest rates – allowing Canada’s central bank to create a buffer for future recession. According to David Rosenberg, this is not the very first time that Canada economy has diverged from…

Proof that the U.S. banking system is a big head fake

Saturday evening I had dinner with a number of American friend, Europe and its problem was at the core of their discussion, I kept my mouth shut until one guys said that they were happy to live in the U.S. were things were much better.  It shows how little people understand about the American's financial system's difficulties.  In fact, the U.S. banking system is probably insolvent (as a whole).  Last night, I did a bit of digging and this morning David Rosenberg provided the bulk of the pieces.  First, here are some numbers:
Two-thirds of American homeowners have a mortgage — 56 million in total. Around 50% are guaranteed by the GSEs (e.g. Fanny May & Freddy Mac), 35% are held directly on the balance sheets of the banks, and 15% are private label..Estimates suggest that 14% of these 56 million mortgages are already in arrears or in the foreclosure processThis means that about eight million Americans have stopped paying their mortgage. Staggering. Other…

GDP Growth in April at Zero

After two strong quarters Canada's GDP growth has taken a break.  Some will say that the road to 4-5% GDP growth for 2010 will generate some reduction in the growth rate.  However, others (me), who take the view that after two strong quarter (Q4/2009 and Q1/2010) Canada was growing too quickly, in view of what is happening in the rest of the world.
If my target growth rate for Canada of 3.2% is to be achieved, Canada's economy will slow down dramatically in the second half of the year. The Baltic Dry Index, a "fair" indicator of demand for bulk good is way off its year high of 4,500 -- as it hovers around the 2,900 mark, a 35% drop since mid December 2009. The death cross has been reached on this index (when the 50 day average falls below the 200 day average), which speaks of wide spread weakness in the bulk good delivery system.
Oil prices are off the high, Copper is also way off its 12 month high, a further indication that demand is faltering. For Canada, where miner…

ROSSENBERG’S INVESTMENT STRATEGY IN A DEFLATIONARY ENVIRONMENT

Focus on safe yield: High-quality corporates (non- cyclical, high cash reserves, minimal refinancing needs). Corporate balance sheets are in very good shape.Equities: focus on reliable dividend growth/yield; preferred shares (“income” orientation). Starbucks just caught on to the importance of paying out a dividend.Whether it be credit or equities, focus on companies with low debt/equity ratios and high liquid asset ratios — balance sheet quality is even more important than usual. Avoid highly leveraged companies.Even hard assets that provide an income stream work well in a deflationary environment (ie, oil and gas royalties, REITs, etc…).Focus on sectors or companies with these micro characteristics: low fixed costs, high variable cost, high barriers to entry/some sort of oligopolistic features, a relatively high level of demand inelasticity (utilities, staples, health care — these sectors are also unloved and…