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Showing posts from October, 2010

High Frequency Trading runs wild

Yesterday between 14:25:27 and 14:27:20 (one minute and 53 seconds), 2.8 million orders were made for on particular ETF:  XLF which is the ETF for U.S. financial companies (Bank of America, Citibank, Wells Fargo etc etc).  That equates to 23 trades per millisecond -- the idea here was to generate a small profit, in this case one penny, but if you do this kind of trade at the right point of the cycle -- it can be very profitable.

No wonder retail investors are quiting the market, so far we are up to more than USD 80 billion withdrawal from the market over 26 weeks.   The game looks rigged, the market, despite its "optimism" still trades below 1220, and has not broken this level since September 2008, when it was heading down from its all time peak of 1550.  You cannot make money in that market, and it appears to be rigged!

Canadian House price continue to rise

Look at the dichotomy between Canada and the U.S.Between 2007 and 2010, house price in the U.S. fell by, on average, 29%, in Canada they are up by 6%.One massive difference is income, whereas average income has been stagnating (some would say even falling once you remove health care) it has been rising in Canada.

The impact of this on the economy is two fold:First, Canadian banks – the primary lenders to the housing sector are seeing few problem mortgages, and even if there are problems sales prices are sufficiently high to minimize losses (moreover in Canada a loan is a personal liability, any shortfall from the disposal of the property remains as a liability of the mortgagee).Secondly, is spurs the new home construction industry, since demand keep s on growing, a result of Canada’s different aging factors and the continued growth in household formation.  It is difficult to believe, but U.S. household formation has dropped, over the past 5 years, from 600,000 per annum to just slightl…

A bit of S&P 500 Trivia: What lasts for 11 seconds?

70% of stock purchase of S&P 500 companies are held for 11 seconds 120 seconds or less.  The implication of this is that most market activity on S&P500 companies is driven by high frequency trading (HFT) activity; there is virtually no other reason for this figure to occur.  2/3 or all stock trading is done for no fundamental reasons, but because some algorithm has detected some minute arbitrage opportunity.
It also explains why long short equity strategies don’t function; in fact the stock market has become highly correlated, first the presence of ETF has ensured that investors are seeking investment strategies that are high beta (looking at riding the market – not picking the winners), and secondly the presence of HFT has insured the any slight anomaly will be corrected immediately.
Aside from aging baby boomers (in 2000 average age of baby boomers was 45 today its 55) that have decided that principal security is more important that riding the market (which has not generated a…

Inflation & Taxes

So Canada’s currency, like the Australian and New Zealand dollars remains strong – my gut feeling is that this is a bad thing, especially since on a “fair market value” the Canadian dollar is probably 5-7¢ lower!However, a small economy, such as Canada, has little control over its currency, especially when the rest of the world seems to be run by a bunch of people intent on debasing their currencies.
Earlier today, Statistics Canada released the inflation figures for September 2010, bottom line inflation is weak in Canada and falling.Core inflation that was edging around 2.1% in January is now around 1.5%, while the headline inflation rate is higher up by 0.2% over the month to 1.9% entirely caused by higher fuel costs.

Going forward the one element that is worrying is the service inflation, which at 2.2% is higher than desired – service accounts for a large percentage of the economy (45%) so this is not a trivial figure.However, pressures seem to be abating there, so that expectations …

Will the Bank of Canada pause its interest rate increases?

Contrary to market sentiments of a few weeks ago, the general view now is that Mark Carney and his chums at the Bank of Canada will now pause in their objective to further normalize Canadian interest rates, to level that better reflect Canada’s economic “health”.As a small open economy, with an 800 pound gorilla next door which appears to be heading back into the intensive care unit, we can ill afford interest rate differential in excess of 40-75 bps.
The Canadian dollar (the Loonie) is hovering near parity with the US dollar when most economists believe that it should trade 10% lower, around the 91/92 level.Industrial product (the non-service part of the economy) is doing poorly, and there is still a substantial amount of slack in Canada’s economy.
Over the past 10 days the numbers for Canada have been strong but remain dismal, and had it not been for Canada’s housing market, commentators would be concerned about economic growth in the 4th quarter of 2010.
Industrial product generated g…

Employment, Interest Rates and Construction

Canadian economic data doesn’t make the headlines as it does in the U.S.However, as the G-7 best performing economy (still not sure this is a compliment!) data out of the “Great White North” is interesting because as an open (ish) economy what happens here can be seen as an early warning system.
First, the data:
September employment numbers were -6,600 instead of +10,000.Although the headline was a little worse than the underlying data; 43,000 temp jobs were lost and 37,000 permanent jobs were created.Losses were uneven across the country, Ontario did the worse losing 23,000 and Quebec did the best with 15,000 new jobs.On that note, Quebec has created more than 122,000 jobs over the past 12 months.Quebec’s economy is 1/50th that of the U.S., so Quebec’s job creation performance is the same as if the U.S. had created 6.4 million jobs.New permits for construction are off by nearly 10% in August, a further indication that Canada’s econ…

Debt, Deflation, Inflation and Hyperinflation

This is where the rubber meets the road.Kyle Bass at the Barefoot Economic Summit in Texas made some very interesting points discussing the risk of hyperinflation, cause by the Fed reserves QE2 program (which by the way is now “baked-in”).The big word used by everyone is “Price Convexity” which is a big word for feedback loop, in effect the prices rise because the prices rise, which leads to the destruction of fiat currencies (dollar, Euro, Yen etc).The example of the best performing stock market in the world in 2007 was Zimbabwe, yet despite extraordinary returns, fiat currency wealth was completely destroyed.
One of Kyle Bass’ first comments was that America doesn’t have the luxury of going to way of Japan – by the way that was not the objective of the interviewer.In fact, he was angling to find out if things could get as bad as they did in Japan, and Bass’ point was that because ½ of America borrowings are from foreign investors, that every week “America” borrows $120 billion (rolli…

U.S. Protectionist Trends:

60% of Tea Party members believe that trade has been bad for America65% of union members believe that trade has been bad for America95% of large U.S. corporates believe that trade has been good for the profits

This will not end well!

Food Price Inflation in 2011

Last week I noticed that certain economic sectors were seeing some rather dramatic price inflation over the past 12 months.The numbers out of the U.S. are worrying:Food price inflation of 17%, and Non-food agriculture (bio-Mass) 44.7% inflation.That’s a lot, especially when you consider that the Nfa concerns ethanol (in plain English we are talking about Corn).This morning, StatsCan revealed that the numbers for the 2010 harvest were looking bad, estimates for the wheat harvest (Alberta, Saskatchewan, Manitoba) at 22,200 tones is off the 2009 harvest by nearly 20% -- add to this the fact that Russia is experiencing dramatic drop in yields (because of excess heat and fire) and the impact good be serious.
Canada’s wheat production has the following profile:
2010:22,200 2009: 29,700 2008:36,900 2006:23,600 ’00-05:20,000 (avg)
This is equivalent to a 40% drop in lest than 36 months.We know that China had a difficult year with its wheat production.Now, this is not a disaster (forgetting what’s go…

Picture of the Day

Photographer decides to stop Tiger's ball with his lense.

Because I’m bored!

Ok, this is a bit of an inside joke.There’s this guy (hereinafter know as the “Guy”) in Montreal who just joined a big investment bank.He used to be a minister (equivalent to a secretary in the US) under the previous liberal federal administration.
A few weeks ago, the Guy was interviewed by a major national newspaper about his new job (as vice chairman of the investment banking group), and he referred to the head of the Montreal office (basically his boss) as a “good boy” (he actually said it French which is even more condescending), needless to say that in the IB community this was “the joke” for August and September – you get bet that the “boss” was less than happy about that one, since he was on the receiving end!
Yesterday the Guy gave second interview to another national newspaper and suggested that it should be a constitutional obligation for the Province of Quebec to hold a referendum on independence every 15 years, so that for the other 14 years the real economic problems of t…