Skip to main content


Showing posts from 2014

America, democracy and torture

Did you know that in a recent Poll (yesterday) 78% 59% (if you exclude -- sometime justified) of Americans thought that torture was A-O-K! Jack Bower proved that torture is a righteous tool!  That it works and it should be used.  That its OK for ordinary people to be killed by drones (even though their only crime is to be live in country that are not America).

Across gender, race and income levels Americans are pro-torture!

Right now its foreigners (mostly) that get tortured, but how long will that last, when will it become ok to torture an guy so that he tells you who were his accomplices in a bank robbery (still no problem).  How about we torture a couple of bankers to tell us how the made sure their deals would fall apart... how about then.

How about when Americans protest about their civil rights... a OK turns out they don't care about that either.

Rouble is back... for now, and other news

(1)  Less than 24 hours after the Russian Rouble became unconvertible its back.  Again, this could be temporary, this could be permanent, but its clear that the world's central banks decided that the impact of having the Rouble out of the equation was not acceptable.  

Will it last, don't know

(2)  Yesterday Greece (a non-consequential country) continues to play its political games, the opposition announced that if elected they will repudiate parts of its foreign debt (that's more like it).

(3)  This morning inflation numbers came in (USA) and they are -0.3% for the month; that a 3.4% deflation rate on an annual basis -- fuel cost have half, and fuel is core to the inflation calculator

Where we go from here?  Don't know

(4) Christmas is around the corner, trading (for real accounts and not algo) is about to collapse -- cause the punters are full of turkey.

(5) Heavy oil (Canada) is in the low $40 -- we are close to variable cost of extraction in Canada for the Tar san…

Could this be it?

I've often said (in this blog) that when the end comes it will come from an unexpected direction.  First off, those who are losing in the oil price "war" are producers - they are many, but they are still far fewer than consumers.  So this correction left a lot of very big losers and many many small winners. This morning the Russian Rouble ceased to be convertible, and "trades" will be unwound.

Russia was always on the edge, its been playing political hard ball for some months/years now. Russia has been funding its world stage presence with oil at $105/bbl.  As the saying goes: "being elegant is expensive", but being a bully even more so!  Especially when a oligopolistic business system is driven by high borrowings -- driven by a desire to limit dilution, but also driven by a junk bond market primed for risk and yield -- in a world of very low yields junk bond financing is attractive.  Russia borrowings were not cheap before -- the prime rate was aroun…

First comes the reassurance, then the penny drops


GS says that the extraction costs for Bakken fields (fracking oil) are in the low $40s.... at most.  Well that sounds not right.  First off, this stuff is deep, so deep that at times radioactive waters are extracted at the same time -- the oil has to be heated out of the rock, and then cleaned from all the chemicals used to extract and make it more viscous.  All together this is not a simple process, or inexpensive.

GS is the same gang that says that oil extraction in Libya (where the stuff is almost lying on the ground) is very expensive, but the "North American deep and expensive wells costs are around $40" is their new song -- why?

The reason is that GS is well aware that lots of investors (in the junk bonds they issued over the past few years) are starting to either (a) read the prospectus they were given, and (b) are just starting to panic -- and are thinking the worse case scenario.  Now, I am certain that GS is not lying (hey they know how to be "economica…

Oil price, elasticity winners and losers!

Sunday night I began writing on the astounding drop in the oil sector, at the time (Tokyo time 9am Monday) the price of oil was on its way to $64/bbl down from $105 in January -- this is a 39% drop in price -- a singularly important component of the world economy, just became much cheaper. Since then oil prices have risen back to the $67/68 range, so crisis averted...

The retracement in the oil market is natural, a function of properly working financial market.  My guess was that at $64.55/bbl we were looking at a massive natural barrier to further drops, there's a futures market out there, and for the players there are "natural" inflection points.  Now these are usually technical (rules of thumb) issues, but it remains that they are real for the market.  What is happening is "consolidation", the market overshot and now its finding a new (maybe temporary) equilibrium.  Oil prices are not independent, they are a transfer of wealth between the user and the suppli…

Japan quantitative easing and trade wars?

My favourite flavour has always been geo-politics, I was never comfortable with pure economics, because economics is not really a science (sorry dad & Sis and mom too).  Using complex model that make massive behavioural assumption is a recipe for disaster...  case and point Japan.

Over the past 24 months the Japanese government has begun a massive inflation drive, and a massive devaluation push.  The Yen went from 90 to 110 to the dollar, but the impact on regional currencies has been even more dramatic.  Japan's objective is to create inflation -- so far its been unsuccessful. The means has been massive quantitative easing (e.g. government prints money) and with this cash they have been buying assets -- lots and lots of assets; MBS, bonds (short and long) stocks in a nutshell the Japanese government has depressed the printing button and have been printing Yens like crazy.  In the past 12 months they have issued $750 billion in new money - slightly more than what the US treasu…

Impact of lower oil prices -- its not all good, right?

First off, understanding the impact of dropping oil prices is complex, because the law of unintended consequences applies.  There is no doubt that falling oil prices is good for business and good for consumers.  Because it increases, directly, income (and profits), so the impact at first blush is positive.  At the end of the day, the impact of oil price drops is good in terms of inflation expectations (down) and to growth to the economy.

The fall in oil prices is caused by a change in the supply demand equation (either figure can shift):

First, the supply picture has changed enormously over the past decade.  In 2004, fractioning margin (refining process) carried negative price.  Oil company could not pass on the cost (necessary) of refining the oil they produced.  The impact was under-investment that has translated into compressed supply (at the very least limited search for new oil reserves).  The massive boost in price from $35/bbl to $100/bbl had the obvious impact on supply -- it r…

Energy costs, CAD level and inflation expectations

Oil prices are crashing, from a peak of $105 per bbl its down to $83, a massive 20% drop in the price of energy in the last 4/5 months.  First, the world is awash with oil (granted not cheap oil) but oil nevertheless is plentiful.  From the Montana Bakken fields to Libya production has outpaced faltering demand for oil.  For the American producers, the headache is that production costs are high. According to some analysts, fracking production costs are in the upper 80s  which means that light and sweet crude at $83 is a massive problem for the producers of this "synthetic" oil.

Even up here in Canada, oil at $83/bbl is a problem, because some of the more recent oil sand projects have exploitation costs that are near that level (older projects are apparently producing at around $40/50 per bbl).  I've said it here, and I said it often, Canada is a bit of an oil play.  Canada accounts for nearly 20% of America's oil consumption.  An addiction that many Americans would l…

doubting Europe's creditworthiness!

La grande correction?  I don't know.  Generally, you only know that a big move is afoot once its all over.  Dragi could once again put forward the "plunge protection team" at work and prove that everything is fine, by buying every bond in sight.

But the reality of core/non-core Europe is serious.  First off, Germany is exporting to the rest of Europe, and still works on the premise that its client's inability to pay their bills is not its problem (right).  France is starting to behave like a non-core (that may be temporary) yields are rising fast in France:

But that's northing compare to Greece that saw a 200 bps yield rise in the past week.  (Hurray to all the French and German banks that sold off their Greek exposure to ECB over the past 36 months).   Don't know how many Macro funds went bust this week -- my guess is that its going to take a few weeks/months before the blood bath there emerges fully, but these leveraged hedge funds are simply not equipped …

Markets are topping -- Should I care?

Well, personally I have had the opinion that the markets were near their peak about 4 years ago! Got that wrong!  However, now the consensus is that the markets are near their peak (there's always a consensus that support your views/opinions).

How did we get to such high levels -- today earnings as a percentage of GDP are at a historical high (12% of GDP).  Companies are sitting on mountains of cash (granted most of that cash is offshore and will not be repatriated for tax reasons.  Companies continue to do well, and yet all earnings are directed to either dividends or stock buybacks.  Paying dividend is rational (some would disagree) and in many low growth sector essential.  But stock buybacks are another story: either funded by free cash -- or via more debt (debt is always cheaper than equity -- and has been incredibly cheap recently).  The CEO's decision to buyback his company's share are driven by a number of factors:

Increase earnings per share (smaller number sharing…

Law enforcement breakdown Greek and American versions

A few weeks ago it was reported that:

A Greek individual called 911 to report a crime in progress; burgler were robing his house.  Apparently the police told this individual that they:  "Didn't have enough gasoline to make it to his house"  He was on his own.

When the state stops building/repairing roads, picking up garbage, paying pensions, providing clean water or providing basic policing services -- breakdown is among us.

Today the Canadian government told Canadian to no longer bring cash to the US.  Apparently, police officer regularly seize any cash as "proof that they individual was involved in drug trade".   Apparently, the police were given the authority to seize drug proceeds (their interpretation) and keep the cash (in the police force we presume).  That create great incentive for them to seize all cash and sundry... after all it helps their pensions!

Finally, as proof as to the size and importance of this:

Hundreds of state and local departments and …

Tesco income overstatment and the financial press

I don't know the details of Tesco's income overstatement -- the total looks large from here but not earth-shattering.  There are clear problem there but not really of my concern.  I know little about the company aside from the fact that I think my sister works there -- but in a non-retail division (maybe there are two Tesco's?) and that I used to shop there for groceries. Now this is a big company with annual profits in the STG 2 billion range (USD 3 billion with US$ 100 billion turnover) , so a STG 250 million error in net profit is a problem but its not about to kill the company (another story for its management).

This story is about analyst and financial reporters.  Last night flying back from Europe (on Air France -- man were we lucky that our flight was not cancelled) I was reading "Les Echos"  which is the French equivalent to the Financial Times.  There was a long winded article on the Tesco saga.  I was not very interested but one bit of information was …

Scotland & independence movements

Can it ever be the same?

The reality of the 55/45 vote overnight in Scotland is a cold shower for independence aspiration in Quebec and Catalonia (among many many others -- looking at you Wales).  The Scots got a very clear question -- do you want to be governed from London or Edinburgh?  The Scots said, no thanks -- better the devil you know!

However pandora's box is now open.  Once talks of divorce start its hard to stop -- my guess is that yesterday's vote solves nothing;  discussions will continue for a long long time, with the Scottish nationalist party finding a new excuse to restart the process. As an example:  "although the question was "clear" it didn't spell-out what was the alternative, what was the ideal of an independent Scotland".  It remains that 45% of Scotland's voting population said "we want things to be run out of Edinburgh", that's 1.5 million people, a not insignificant percentage of the population.

Already, the…

Ebola -- a public heath crisis

Several years ago, at the bookshop in Hong Kong I bought the Hot Zone.  To say that the book freaked me out would be an understatement.  It is a compelling look at the risk of contagion (and the movie with the similar name was scary enough) by one of the world's deadliest diseases.  Thankfully, Ebola is not airborne (yet anyway) apparently ebola is a very sloppy virus that has a tendency to mutate -- already there are two or three variants.

The CDC, Medecins sans frontier, and others have raised the alarm.  So far America (today) is the only country that has raised a hand -- with 3,000 personel.  Not Russia, not China and nor Europe.  How is it that America is always seen as the policemen or the doctor of the world.

If Europe and China were to look seriously at the security of the middle east (the oil zone) it may be of comfort that is America that is providing all the security in the straight of Hormuz, and yet 99% of the oil produced in the region goes to China or Europe -- who…

Enough already with Europe -- lets trash America instead!

So apparently France's prime minister (Manuel Valls) said that its economy was "screwed" if there was no recovery within the next 3-6 months.  personally, I think that he's now calling "higher powers" in the hope of a devine intervention... He wishes!

Out in in 'merica the situation is all rosy, at least if you look at the stock market which continues to define any logic.  There is no good news, aside from stock buy back -- that's it aside from a few companies that are doing well (looking at you Disney) but the real game has been the stock buy back. Why do better if you can just reduce the float!!!

The reality is that without wage growth in the middle class there can be no economic boom.  Moreover, the big spending now is in "education" as John Oliver pointed out the $1 trillion student debt has been mostly used to attend private (for profit) universities -- who according to Oliver spend nearly twice as much on advertising than they do on …

So Europe is on track

Over the weekend, Draghi spoke at the Jackson Hole economic symposium.
He addressed the absolute disaster that unemployment in the Eurozone has been, but also made the case that the ECB has been somewhat limited in its ability to address the economic situation in the bloc because of austerity measures taken by European governments.  Ok so first off, Draghi has no control over fiscal policy (he can have a word, but nothing else) .  Moreover, when European government put the breaks to spending (largely at the urging if the ECB -- with an objective to cut deficits) the impact was, surprise, surprise, economic contraction. Amazingly, the ECB is now saying "it's not us, we didn't tell Portugal, Spain, and their friends to cut spending". Guess what then, European countries put pressure on their economy to stem the flow of capital out -- so that the pain would be mitigated, the ECB was surprise of this outcome -- "Sovereign pressures also interrupted the homogenous tran…

Markets are going down -- what should I do?

Twice last week I got that question, don't know why!  I keep on telling all my friends that I must be the world's worst stock picker -- if I choose it, it will go down.  Anyway, the markets have decided that the news is suddenly bad, don't know what is different suddenly (not wars, not economics).  It used to be that in thin summer trading "trolls" could play their games but with the advent of high frequency trading this is no longer realistic -- for those who don't know HFT accounts for 40-50% of all trading activities on most North American markets.

So since computers don't take holidays summer doldrums cannot be it, maybe the markets have over-reached over the past few months.  I always commented that the markets were rich over the past few months -- corporate profitability has never been higher (NEVER) as a percentage of GDP, earnings multiple while not insane are "rich" insofar as there's not much increase in multiple (again the logic …

Why are Russian reading my blog?

Google analytics is cool, a bit of "porn" if you will, and I've notice that of late (I've not written anything in two months) Russia has been the biggest source of readers for my blog!  Now I should not get a big head about this, we are talking at most 50/60 readers a day, hardly a large population, still its funny to think what makes me attractive to them -- maybe my "non-American" voice (really Canadians think they are not Americans... we are a little delusional some times). Anyway, an amusing situation -- BTW the second largest reader base are Americans followed by Australia -- Canada is 6th.

Back to work now!

European rates test new low -- financial risk in China

Over the past few days new records have been set; Spain saw rates on its new 5y debt at 2.5%, the lowest ever -- and that's a country that has had a debt market for 500 years!  Italy saw its debt rate fall to a new low, the same day that the Italian government admitted that it owed more than $100 billion in late payments to its creditors (local suppliers).  What's going on, for a start there are no risks in Europe, the ECB has decided that it will buy all paper not absorbed by the market, making peripheral (higher yield) Europe a sure thing for institutional investors, this is particularly true for the short dated instrument (interests could still go up -- and destroy bond values).  But deflation is a greater risk (especially since European countries are locked-in with a single currency) its almost an objective of current policies.

The above graph is very positive for Europe (not good, but positive) insofar as the total debt volume is down, mainly because core Europe has squee…

US Q1 GDP bad news for Obama -- maybe good news for the GOP?

Numbers as published are always subject to revision.  The initial Q1 U.S. GDP number has been revised as more information was made available.  Today, the US government revealed that Q1/2014 GDP growth was revised downward from -0.7% to -2.0%.  Apparently healthcare costs that were assumed to grow by 9.9%, and account for about 15% of overall GDP actually fell by 6% instead.  This is a truly terrible number, one of the worse (top 10) since the end of WW2.  If that provides some perspective!
It's going to make the 3.5% target set by Wall Street difficult to achieve!  
In other news the boys on Wall Street are suffering, low volatility and a scarcity of new deals in the 2nd half of the year means that banks are thinking of trimming traders numbers and even IB guys are looking around in fear (let's not exaggerate) nevertheless it is we'll know that the bonus pools are shrinking, and that the banks are mindful of their overheads!
The usual exit strategy into private equity and hed…

Christine Lagarde -- 2,000 Greek names with Swiss bank accounts

So Ms Lagarde was in Montreal yesterday for the "Montreal Conference" a watered down version of Davos that aspires to do... something.  Anyway, the lunch speaker was Christine Lagarde the current head of the IMF (Washington based) and all around cheerleader for capitalism!

The highlights was that the global economy is back on its feet, yep we're looking at 3.5% growth in America and "something positive in Europe"  China should be around 7% -- less than before but still respectable, shifting towards consumption...

Ok so there are a few things wrong here, Q1/2014 GDP growth in America was -0.7%, so to make the 3.5% target Q2/3 and 4 are going to have to be gangbusters.  Still, Europe is going to get something positive because the ECB is so brave -- they have entered into the land of negative interest rates.  If you accept a deposit from the ECB, you pay them interest.  There's no way that this can go wrong, and deflation is not just around the corner.  As fo…

AAPL down 85% pre-opening

Sometimes I love the ticker!

Shares of AAPL in the pre-market are trading around $92 a share... sure the stock has lost 85% of its value overnight, there was big news today -- AAPL stock split 7:1.  So really nothing to see here.  All the automated news will show that AAPL is the biggest looser today -- some will correct the news to reflect the split.  Others will not.

My bet is that a few investors will call their broker in panic!  The stock is down, the stock is down sell it all!

It reminds me, a million years ago, my then firm had created a structured product for Nortel shares.  It was a strange instrument created in the early 00s (before Nortel went bust).  So in 2005 I get a call from this angry investor, because her structured note was not going up, and all her friends at bought Nortel at $8 and it "was going to $18" -- according to her friends.

I had to point out that she had bough the instrument when Nortel was at $85, we had offered to buy it off her at $100 and at…

Greece, The far right and the GOP!

Watching Greece over the past few months has been an education, and education in the rise of fascism! Turns out that the Greek population in general is not enamoured with its politicians and their current method of "saving the country"  The new favourite pastime for the middle class (well educated at that) is to support Golden Dawn a avowed  fascist  party that is "blaming the Jews" for all that has befallen the country.

Granted financiers have a lot to answer for, but they're not the ones who spent like drunken sailors -- yes bankers were enablers, but... at any rate in local election Golden Dawn which is just short of being thugs (actually not that short) and who have committed some rather appalling actions (and enjoy a bit of Nazi salut) got almost 10% of the vote.

It's really not that surprising; considering the state of the economy, the unemployment and destruction of the middle class that a far right party would take hold of the popular imagination. …

Guns in America

Yesterday's tragedy in Moncton (where 3 police officers will gunned down) just brings closer the whole firearm mess that is a constant headline grabber.  In the US the number of "daily" incidents is so large to make it almost farcical.  The number of American who manage to shoot themselves (or their family or friends) is simply depressing.

Interestingly enough gun ownership is in free fall in America.  Despite all the rhetoric and the crazies in Texas with their "Open Carry" demonstration gun ownership has dropped from around 40% in 1980 to around 25% today.  granted those who own guns tend to own many many guns!

Look at these two morons!  I mean you've got shorty on the right who's clearly got some "size" issue -- will anyone ever tell that guy that his assault weapon is some form of penis replacement therapy (well maybe not to his face), and as for the fat bastard on the left, you know he's wanted to be a soldier all his life but all the…

Polls, Politics and the Future

This morning the local French newspaper (called La Presse) released a new poll for 18-24 year old party affiliation/interest.  The result is both stunning and obvious; from the 500 young people who were asked, 34% would vote for the Liberal party, 23% each for the CAQ and QS and 16% for the PQ. What was obvious at my time in high school and college that the "cool and Hip" crowd supported the Parti Quebecois -- the party pushing for the independence of Quebec (maybe) is no longer true.  The Party Quebecois is GrandPa's party -- its no longer cool, and the people who run it are the same who were running it in the late 70s and early 80s!

The reality is that young Quebecers don't really see their future here -- 60% say that would like to work and live elsewhere!  Canada, the US doesn't matter -- they are considering a future (or at least dreaming of) that doesn't include Quebec and its "aspiration" to become a country.

For the PQ that is about to sit d…

GDP Growth

American Q1/2014 GDP growth that was to be 3% (when discussed in late 2013) was finalized last week....drum roll; its -0.7% (I presume that the media will blame the weather).  Why is the economy underachieving what everyone believes to be the right way to go?

There are several reasons:  First off, median income continues to fall, America's middle class is seeing real wage contraction and has done so since the mid 1980s.  There is no doubt that the contraction in high paying blue collar jobs is a culprit, personally I blame the financial services that accounted for less than 5% of GDP in 1980 and today accounts for nearly 10%.  This "value added" has to be paid for.

Looking at machinery from cars to telephone via white goods (washer etc) one inescapable truth is that the craftsman is a dying breed.  Two years ago my range oven "died" it was $900 to replace the electronics or $1,200 for a new range oven.  Guess what I did -- I bought a new oven.  Worse part is t…

Sometimes its de denominator that counts!

Last week StatsCan announced that jobs were down 29,000 in Canada for the month of April!  That's not good news with Quebec and the Atlantic province suffering the most.  In  fact, Quebec accounts for 110% of all job losses in Canada -- the province actually lost 32,000 jobs -- but the rest of Canada made up the difference. This is not good, and in fact, will probably probably cause the Loonie to drop some more over the next few days (which it did).

Sometime not only is the Nominator in the equation an issue, sometime its the denominator that has an impact.  As an example, Europe has seen no real changes to its economic fundamentals, France's government budget deficit is going to be huge, again!  Greece has seen no reduction in its overall debt burden, in fact it continues to worsen.  Italy that has a new government (and seem to want to tackle some hard issues), the market has given an unusual sign of confidence with historical low borrowing rates, but there too the overall d…

Gold, new economics et Friday stuff

Well two weeks ago, GS and Merrill stated that Gold was a sure thing to hit $1,045/oz.  Guess what its now at: $1,300 so again a bad call by the boys.

Although I've not started it, it now looks like I've found the  an economist for the 21st Century".  I bought his book! I have not  yet started reading Thomas Piketty book  Capital for the 21st Century, but it seems that he's found what ails us!  No wonder the WSJ and the GOP hate the thing.  It explains that the normal state is the all powerful 1%, and that the period between the first world war and the new century are the aberration.

The markets do what markets do!  The DOW, NADAQ and S&P 500 are all testing their all time highs; but again they retreat, once again failing to achieve their exalted goal.  BTW I, like many others, are bemused by the strength of the markets.  Earnings are high, but their quality dubious.  Most economies are on the edge (Look at the QE program and ECB "buy every bond" strate…