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Showing posts from June, 2011

LSE TSE merger/sale is off

The Toronto Star said it best;  This was not a merger it was a sale.  

Investors wondered what was the deal logic, eventually the TSE shareholder meeting yielded a rather massive: NO.  Only 54% of proxy votes supported the transaction, well short of the 70% requirement.  The consequence is that the only deal now is a :Pan-Canadian deal via the Maple group, basically Canada's banks will be buying the stock exchange.  

Canadian banks own Alpha and CDS -- the first is a "dark" exchange for institutional investors -- similar to what is available in other jurisdiction.  CDS is Canada's trade clearing and settlement system for eligible securities.  Of course for two banks the cost has been high; BMO and RBC both invested heavily time, energy and reputation to get the LSE/TSE merger off, and they failed -- my guess is that they will soon join the Maple bid...

Another big loser is the CEO of the TSE, his role in the group become "more difficult" to remain polite.  We …

Teranet - National Bank House Price Index

This morning from TBNHPI:

Canadian home prices in April were up 1.1% from the previous month, according to the Teranet–National Bank National Composite House Price Index™. That rise took the index to a record 140.47 (June 2005 = 100). The April increase was the largest of five consecutive monthly rises following three straight monthly declines. For the first time in 10 months, prices rose in all six of the metropolitan markets surveyed. The gain was 1.8% in Vancouver, 1.4% in Ottawa, 1.0% in Montreal, 0.8% in Halifax, 0.7% in Toronto and 0.6% in Calgary. For Calgary it was only the second monthly rise in nine months. Vancouver extended its string of monthly increases to seven, the longest run among the six markets.As if further proof was required, April saw the single largest increase in Canadian house prices.  Bottom line Canadian housing is "on fire".  On a year of year basis house price rose faster than inflation.  Any clearer signal needed, that inflation is a problem?  

Inflation is becoming a real problem in Canada

This morning from Statistics Canada:
Consumer prices rose 3.7% in the 12 months to May, the largest increase since March 2003. This follows a 3.3% increase posted in April. The increase in May was primarily a result of higher gasoline prices.Granted that most of this increase was food and energy (respectively 5% and 16%), yet it remains that the 3.3% registered in April was suppose to be (according the Bank of Canada) a peak, and now it appears that the peak is even higher.  Virtually all sectors saw price rise (excluding clothing), with transportation the worse affected (since fuel costs are a very large component of this sector...).  

(Source: StatsCan)

The Canadian authorities are taking a very aggressive stance vis-a-vis the risk of exogenous shocks, the BoC's recent risk assessment tot he global financial system shows greater stress than 12 months ago, and yet the internal numbers are worrying.  Will the BoC eventually be forced to "overreact" on interest rate if it w…

Shale Gas & Dot Com bubble – similarities?

The new Eldorado according to some, to others it’s just “this side” of poison. One thing for sure that this weekend’s long article on Shale Gas in the New York Times does put the sector in perspective here and here. My usual source of “all things energy related" here has more to say on the whole issue

First, a few months ago a study was published that showed the incidence of water table poisoning for test samples within 1km of the drilling/fracking site (doesn’t that sound a little too much like Battlestar Galactica!) however it refers to the practice of fracturing the rocks so that the gas/oil can be extracted. Part of the problem with regards to the “poisoning” aspect of the gas extraction is that certain of these chemicals have not been deemed to be poison, because they are almost never found in the drinking water. Especially with regards to Methane that has been found (and has been documented recently in a feature length movie).

Now, today natural gas is sold for about $…


Saturday was a miserable day in Montreal, the weather was just awful with heavy rain most of the day, so I was reading the papers (on my Ipad...Please) and listening to CBC Radio One (French) generally their opinions are just a little strange; a few weeks ago a commentator was bitching that the process of building one of Montreal's two teaching hospital was very slow because the Quebec government has used Public Private Partnerships (P3 for short). This was not challenged by anyone on the show, despite the fact that contracts have not yet been awarded! It's like blaming the taxi driver for being late when you have not yet called him!

Back to our story, many will remember that there was an electoral tsunami in Quebec during the May 2, 2011 federal election, where the Block Quebecois (a nationalist movement) was wiped out by the left wing NPD (trust me they are left wing...). This was a vote of protest for many Quebecois tired of hearing the word "independence" and w…

1978 & Babby-Boomers

This amazing graphic from another blogger, Worthwhile Canadian Initiative shows the amount of equity in U.S. and Canadian housing since 1990. Two things to note: First, as far as Canadians are concerned all the increase in house price is accounted for by more debt – recently there has been negative equity build-up in the Canadian housing stock, because house price are increasingly financed with debt (instead of equity). The second item is the level of “equity” in the U.S. housing stock, it is today equivalent to the level last reached in 1978, or as Stephen Gordon says: “Nineteen seventy-freaking-eight”32 years ago

Interestingly the peak in U.S. home equity occurred in 2006, with deceleration in 2005, an interesting match with the housing crisis. Here in Canada the situation was slightly different (as was the hiccup in housing prices) that was about 9/12 months later than in the U.S. (See the Teranet National Bank house price index).

The most interesting analysis of U.S. housin…


StatsCan today revealed that Canada’s population was 34,349,200 at the end of March 2011. So almost exactly 11% of the United State’s population and around 9% of America’s GDP. Without making a comment about the validity of these numbers, they are what they are.

Last night while picking up cheeses for a dinner party (it was excellent) I heard the cheese shop owner discussing with a bunch of French tourists (surprised that the quantity of cheeses in the shop – something like 200 different cheeses), he mentioned that Quebec’s population was about 7.5 million. Well he short changed the province by nearly 500,000 residents. In fact, hence the title, Quebec’s population according to StatsCan is 7,957,600, just 42,400 shy from 8 million… a nice round (but meaningless) number.

Of course Quebec is not the fastest growing province that goes to Alberta – Canada’s energy capital which has seen the fastest growth rate (2.3% per annum over 40 years). In 1970, Alberta’s population was 1.5 mill…

Think of the Greek parliamentarian’s dilemma

At 9 PM (GMT) the Greek parliament will vote on confidence vote with regards to the government’s proposed austerity economic strategy. The question is how will the opposition vote?

Greece’s problem is that the current administration discovered that public finance were a mess, far worse than anticipated. In fact, they discovered that total debt was three times higher than had been previously revealed. The prime minister tried to form a national unity collation, the opposition would have none of this (why share the blame). Now the opposition has three choices: Support, reject or abstain. My guess is that they will be blamed even if they abstain – since the government would win the confidence vote. So they will have to choose between elections -- maybe taking power and having to solve the mess themselves or support the current administration, and let them suffer the eventual electoral backlash. Difficult calculations if you “believe” that more debt is the solution (in my opinion…

Retail Sales:

Headlines are good, dig deeper and it’s not so great. First the headline, retails sales grew by 0.3% (3.6% p.a. annualized), but strip out cars and car parts and there is no growth. Again this sounds worse than it is, in fact slightly more than half of retail sector saw growth (with the sale of new automobiles at 8.6% the top), and the growth segment represent ¾ of the retail sector.

Still, compare to previous retail sales report this is by far the weakest, with an unbalanced economy that is causing some headaches. Needless to say that the market sees no hikes in interest rate this year, and even Q1/12 is looking mightily dodgy in terms of increase. Economic weakness is certain to affect policy, and may even cause the Federal government to slow down its “exit” from stimulus expenditure contraction.

Overall, this is a transitory number; there is no reason for Canada’s retail sector to slow down, except fear of a “collapse” south of the border. In reality, Canada’s economy looks sol…

Canada Vs. the United States

According to the press, Michael Bachmann candidate for the Republican Party’s presidential nomination said that Canada was doing better than the U.S. and that the Conservative government had not provided any stimulus to the economy.

Now, we know here that in early 2008, the Prime Minister Harper (and his finance minister) where rather keen to provide only minimal stimulus to the economy, but as a minority government they were “forced” to implement a more aggressive package (strike one for Bachmann – but then she’s about as uninformed as can be, a true blowhard!). In retrospect, I suspect that Harper and Flaherty were happy to bend to the demand of the opposition parties.

Canada did in fact implement a $40 billion economic recovery package of governmental spending. In Quebec, where I live, there is no doubt that the participation of the Federal Government in several programs helped greatly (the bulk of Canada’s Federal government spending are indirect). Quebec had long announced (an…

Troubling data on the Canadian manufacturing segment

The problem with data is lag, let’s say that Canadian manufacturing companies believe that the CAD is going to stay at the 1.05/95 level, it changes their pricing perspective both in Canada and abroad, but this expectation as to interest rate takes time to be absorbed. The same also applies to exogenous events – such as the Japanese Tsunami of a few months ago.

(source: StatsCan)
April 2011 saw a 1.3% reduction in manufacturing sales, by no means “end of the world” and to a certain extent represents a walk back of the previous month’s increase, so conclusions are hard to draw, especially when one sector is responsible for the bulk of the pull back: namely transport. In the case of April the shortfall is not only Aerospace (11.6%) but also automobiles (8.6%) and parts (5.4%) that are to blame for the drop off. Energy manufacturing was also to blame but marginally (2.3%), while food 1.8%, machinery 3.2% and chemical 1.7% added to the positive side of the equation.

Far more serious i…

Mark Carney: I cannot call it a bubble, but...

Yesterday, Mark Carney (Governor of the Bank of Canada)gave a speech on the direction of the Canadian housing. Bottom line, he concerned that some part of the country have seen prices reaching unsustainable level (e.g. Vancouver). Canadians will only have themselves to blame if they rise to the bait and believe that these prices will continue to grow at their current rate.

Central bankers can say certain things, but to say that the Canadian housing market is in a bubble is not one of the things they can say -- imagine that Canadian suddenly see this as a reason to be wary of leaving money in their bank accounts (it could happen). However, in his speech here

he said two things:

"One cannot totally discount the possibility that some pockets of the Canadian housing market are taking on characteristics of financial asset markets, where expectations can dominate underlying forces of supply and demand,"

“The risk is that expectations become extrapolative, prompting the classic…

Thinks are getting interesting

Although a rather arcane art, the funding market is the canary in the coalmine of the financial markets, and the canary appears to have succumbed overnight. Ultra short term liquidity has died – BTW (and this is an analogy) just like it did the days before Lehman collapsed…

This is hugely serious, also relayed by a friend was last night DB note on his visit with 70 money managers in Finland, where all those who he asked (virtually everyone) if they has supported the “True Fin party” reply was unanimous, no one in the room did (all were emphatic about this). The question then becomes are financial types (including officials) misreading the distrust and disgust of the general population vis-à-vis all the game that are being played in their name?

Only time will tell, but the next 48 hours will be fascinating.

No much going on in Canada, So…

Let’s talk Greece!

You just have to go on the web here to see that things there are deteriorating. Riots, members of parliament resigning, German minister stating that commercial lenders must take a hair cut, Belgian Minister saying no hair cut, and president of ECB saying: What’s a hair cut!

The market has already decided that the inevitable will happens very soon. Kudos to the German banks for selling off all the Greek, Portuguese debt to the ECB, they probably got top dollars…and are now asking for a Greek debt restructuring. French banks not so amused, Trichet told them, no restructuring of Greek debt, so they kept it all, Result: French banks are looking at the hard end of an S&P downgrading.

Some say that Greece has hundred of billions in assets to sell (after all it could sell the Elgin marble to the British for a few bucks!) The reality is that most buyers know that when the seller is sovereign, has a gun to his head and feels that all its treasure is worth a fortu…


That is the difference between Brent crude ($118bbl) and WTI Crude ($97) this morning. Now one problem is that Cushing is where the WTI price is established, whereas Brent is based on deliverable oil anywhere in the world. So generally WTI crude must take into account glut conditions at Cushing (you got to store oil...).

Anyway, no one seems to know why the differential is as large as it is today -- a month ago (when the storage issue at Cushing was even worse than today) the difference was $14.

Are U.S. banks suffering because of their level 3 assets

Over the past 6 months, and unnoticed by most is the weakness of the U.S. banks share price. One issue, often forgotten is the level 3 assets held (either willingly or unwillingly) by America's largest banks. A good portion of these level 3 assets related to Mortgage Back Securities of one form or another. During the pre-2007 days banks would often keep some of the juicier tranches (higher rating with good coupons).

Over the 2007/10 period many of those securities saw a rehabilitation in their price for a variety of reasons; (1) oversold, or (2) Armageddon, in the form of massive write-offs, didn't occur! Now a new reality is emerging. First, that loan recoveries (that were in the past around 60/70% are now in the 10/20% range -- in some areas the recovery is below zero -- trust me its possible), secondly in many cases the title chain has been broken. Most famously by Countrywide which as of 2002 decided that transferring title was too much trouble (actually admitted t…

22,000 Vs 54,000

Earlier this week, the US released its job creation for the month of April May, the number was a disappointing 54,000. Canada over the same period created 22,000 jobs, in an economy 1/10 of that of the U.S. Canada's unemployment fell from 7.6% to 7.4% (if we counted jobs the same way the Americans do, we would be a 6.4%). Clearly, the employment situation is positive, but also labor unrest for higher wages is also starting: Canada Post has staged one day strikes across the country (did anyone notice?) and Air Canada's ground crew is looking at strike action later this month.

Obviously, Canada's economy is now firmly detached from its southern neighbor (although exports account for 1/3 of our GDP and 3/4 of that goes to the U.S.). The market is still of the firm belief that interest rates will remain at their current accommodative level of 1.0% (although long dated Canadian interest rates 10Y and 30Y are 50bps and 87bps lower than for similar duration U.S. sovereign de…

Canadian exports down 1.9% in April

Obviously, the 4.8% growth in March 2011 exports was not sustainable (especially since Canada’s #1 trade partner seems to be slowing down), and exports were of by nearly 2% (equality divided between volume and price). The worse sector down (36%) was the forever volatile aerospace sector. Aerospace sales rise and drop with little regards to the economic cycle. Overall (and because of aerospace) exports of machinery and equipment was down 8.9%. Exports of food were up, but exports of metal and minerals were down. Finally, energy exports were up, entirely because of higher volume (prices have been relatively constant).

On the import side there has also been a slide, although volumes are up 1.5%, price decline lead to an overall drop in value of 1%. The biggest loser was the automotive segment, down 9% (which is massive) and completed automobiles and chassis were down 22%. It seems that Japan’s damaged automotive sector is largely to blame here following the terrible earthquake an…

Canada's Federal Government -- A balance budget in three years or less!

While our southern neighbors seems to find new ways to increase the Federal deficit, Canada's new majority conservative government plows ahead with plan to turn its current deficit into a surplus by 2014/15.

As I have often mentioned Canadian are well versed in the risk of ever rising deficit, and most Canadian remember how painful the correct was to Canada's economy (1996/00). We also know that we correct our budget deficit while the world economy was growing at a fast clip (no longer the case).

Jim Flaherty "re-introduced" his March budget (the one that caused the 2011 Federal elections) almost unchanged. Canada's economic position remains more or less unchanged -- although the Canadian dollar, unlike other resource based currencies has remained subdue in the face of rising commodity prices because of the fear that America's economy is heading back into a recession.

As usual the normal caveat must be assumed, should the U.S. really fall into a new rec…

Europe's 33 largest banks apparently need $347 billion in additional capital

In part blame the PIIGS (at least for $180 billion) for the banks' capital problems. One reason given by those who are optimistic that the European single currency will survive -- the problem for the banks is such that Europe's government cannot contemplate a collapse of Greece under any consideration.

Earlier today some analyst indicated that European bank's capital ration was in excess of 50, in other words for every 100 Euro of lending, the banks have $2 in capital, compare that to about $8 for U.S. banks and about $10 for Canadian banks!

In a nutshell a loss of 2% of their assets would wipe them out! Look at this analysis

OK nothing to do with Canada, but tomorrow data is coming out about the European banks' capital strength...

Canada Post on strike yesterday -- did anyone notice?

There was a time when I would receive all my bills by the mail, electricity, taxes, credit cards etc. Today, even contractors send you bills via email. what I get in the post is mostly flyers and magazine (mostly addressed to the previous owner!).

So apparently yesterday the Quebec branch of Canada Post was on strike (OK it may have been Montreal only!) but I don't think anyone noticed (I certainly didn't). The problem for Post Canada is that its a 20th century service that 21st century customers don't need (like a fixed phone line).

I have not received a personal letter in many years -- 99% of birthday, Christmas and other greetings have become eCards. I ended all newspaper subscription about 18 months ago (thank you Ipad), The FT, The Economist, WSJ, and local newspaper are all delivered electronically.

Bills are all electronic...

the one service I would appreciate from the post office is a package delivery system that actually works well. There is a post office less…

Canadian Building Permits (Frustrating entry)

There are statistics that are worth following, and then there are statistics that tell you absolutely nothing… building permits (like aerospace orders) are so lumpy that an average analysis over several months is required to “say anything” about the state of the Canadian building industry.

Bottom line new building permits in May were down 21% from the previous month… now in March they were up 18% and in April they were up 9%. In the non-residential segment building permits fell 33%!

This kind of volatility is troublesome, and year on year analysis (2010 Vs. 2011) is also not very informative. However, one thing can be said, that the overall average (excluding 2008 recession) remains “in-line” with expectations. Non-residential levels are actually very low, and are testing levels last seen during the recession of 2008 (and yet GDP growth in Q1/11 was 3.9%).

Maybe smarter people than me can draw some interesting conclusion as to why so few non-residential permits were issued, I c…

Something strange

Yesterday, Muddy Waters Research continued its trend in exposing Chinese fraud, with its exposure of Sin-Forest Corporation (TSE:TRE) a Canadian listed company with a Canadian CFO (Guess who’s maybe going to jail…). I don’t want to discuss the Sino-Forest data, but rather a quirkiness of markets; last night the TSX suspended trading of Sino-Forest shares pending clarification.

Now considering that Muddy Waters did a rather in-depth analysis (and provided all their data in a massive data dump), I don’t see how the TSX will re-authorize trading until all the information has been digested (especially if a ponzi scheme is suspected), and yet today it is possible to buy and sell Sino-Forest on the Pink sheet in the U.S. Strangely the stock has not been suspended in the U.S.

For those who are curious the stock is currently trading around $6.15 (effectively down 75% from Wednesday’s close.

Will QE3 be a concerted attack against the 10 year bond?

A few weeks ago several of us were discussing what shape could QE3 take, clearly (even at the Feds) QE2 has been a dismal failure; after all it only created bubbles in energy and stock prices. Expectation for economic growth have been substantially below target once the Fed (State and Local too) started contracting spending. Virtually all the GDP growth over the past 2 years has been driven by government spending, companies have improved profits by cutting costs – especially labor cost (there is clearly no labor inflation). Top line growth has been minimal – that’s important. The fact, that investors are finally waking up to Q1/11 GDP growth of 1.8% and not 4% is sinking in – BTW pay attention to bank stocks, look at GS, its not $175 anymore…

So Bernake has to find a new target, and that target has to be the longer end of the interest rate curve. The Feds will begin an aggressive program of buying America’s real benchmark bond – the 10 year. You don’t believe me; look at the 10Y…

I have a theory on Europe!

This may sound crazy, but I am starting to believe that the “extend and pretend” on Greece will continue until mid August. In fact, Europe’s ECB will be looking to a restructuring date a week or two after America’s August 2nd debt ceiling. Europe maybe taking the view that if everyone is concerned with America then maybe no one will pay attention to Europe. My take is that they are betting that the world can only have one major crisis, so if its America in August, Europe can do its thing and no one will notice.

Call me crazy, but for the life of me, I cannot understand the ability of Europe’s leadership to disregards the reality that Greece’s contraction in governmental spending has lead to a contraction of the GDP, now they are looking to maybe continue lending to Greece with the hope that they will achieve a different outcome. Greece was give 12 parameters that were to be met so that further lending could occur, Greece failed to meet all 12!

Insanity is pursuing the same action …

America’s broken job creation machine

On Monday GS and friends predicted that the NFP number (job creation) would be in the 300k range for May, well this morning the number came out at 54k (BTW the kind of number that is seen as very positive, not impossible, in Canada). The granularity is even more worrying, the Birth/death adjustment added 200k jobs to the total – and this a the time when America’s small business organization just released data from their members indicating that may was one of their worse month for job creation.

This is a terrible number and may force a QE3 program (although it is not clear how Benake will do this)

Canadians' personal debt -- worse than America

The number is terrible, $25,597 per Canadian (and this excluding mortgage debt), so how is it made up? First, and probably the single largest item is car loan: Cars are expensive, especially if like most Canadian you've discovered 4 wheel drive (trust me with winter here, 4x4 is not a luxury, its a necessity!), but its not cheap.

Second is credit cards, massive debt that is carried around for years (with an interest rate in excess of 20% for more cards). There have been many warnings about Canadians' indebtedness, and here in Quebec its growing even faster than the rest of Canada (up 7.8% whereas the Canadian average is 4.5% -- still bad, but not "as bad"). Bottom line lots of consumption demand in Canada is fueled by borrowing, when interest rates start rising (anybody's guess) the pain could be substantial. Then again, if Canadians are borrowing on their credit card at 20%, I don't suppose they will freak out when it goes to 25%...

Canadian interest rates are on their way up

Until last week, most Canadian economist (institutional) took the view that, in their opinion, Canada should raise interest rates, but that the BoC appear to look for any excuse not to raise them. It had become a joke; last month it was America forthcoming recession, and this month it would be "Club Med's possible default", well, how a BoC rate setting meeting can change things.

Canada's impressive Q1/11 growth (granted a good chunk of that was inventory growth) at 3.9% (annualized) far exceeds the BoC's anticipated growth rate of 2%, the "transitory" inflation story is proving to be not so transitory, as headline CPI remains at 3.3% while core is around 1.6% -- both figures are considered high!

Yesterday's BoC statement (keeping overnight rates steady) signaled that this policy is about to change, giving Canadian interest rates analysts a "good feeling" that by the end of 2011, the BoC overnight rate could be as high as 2%... Ideally thi…