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Showing posts from April, 2014

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…

Greece Euro 3 billion 5y 4.95% first new bond offering

Greece has sold out its first bond offering a Euro 3 billion priced at 4.95% (coupon) and issued at par. The issue was three times oversubscribed.

Greek unemployment continues to rise -- 27% as of the end of January 2014, with youth unemployment around 58% -- although stats are unreliable because so many in the public service have been fired!

How can the financial market see Greece as an acceptable risk?  The kind of social dislocation we are seeing there is well outside the norm.  Certain parties that are running for office are downright scary (SYRIZA and New Dawn), how can investors make the calculation that this is a good buy?

There are three aspects (at least) that govern bond purchases.  The price (yield) the term and the size. This first Greek bond in many years is certain to become a benchmark offering.  Because it is the first, it will be a benchmark, it will stay "on the run" longer than it normally would -- that means that its offered for sale or purchase by a num…

Inflation: are the fundamental changing?

StatsCan February 2014  Consumer Price Index

Unsurprisingly the CPI was up for February -- Energy costs were way way up for the year -- Oil and Gas +9.2% and Electricity 5%.  Energy is a big component up here in Canada, the cold weather makes Canadian high energy consumers.  A few weeks ago I mentioned that the IPPI (producer's costs) were rising fast -- The CAD is going nowhere fast so the outcome is a bit of inflation.

Could this be the real thing, a resugence of "permanently higher inflation? In 2010 and 2011 we went through a similar cycle as energy costs rose dramatically, but when prices fell, so did inflation.  Inflation can only rise if the economic agents have pricing power -- if labor and producers are price givers.  Right now it seems they are both price takers:


Fewer workers are unionized, and when they are it is benefits that are at the core of their demands.  Benefits erosion is the key labour risk and not inflation that has been low for more than a dec…

Flash Boys -- halfway there

Well one thing for sure, Lewis knows is "shit".  This book is even better than I thought, no wonder Wall Street is pissed off,via their surrogate: FOX news.  The hubbub has now died down, but I've got to tell you that all the stuff in that book is a roadmap for regulators who want to take action.

My favourite part so far is the 2010 Flash crash explanation.  It merges very well with my own issue with HFT which is the price discovery mechanism (lots of small order that test the market prices -- and disappear quickly -- microseconds).  The SEC report was complete BS because they could not get the data on what happened because they were limited to seconds of trade -- the HFT were working in 1,000 of a second -- the SEC didn't see the trading pattern.

I remember very well that day, I was on the options desk and nobody understood what had happened, first the "fat figure" reason was given (but it turned out there was no such massive trade anywhere in the market. …

Hubble, lensing and Thursday morning

Most Amazing image.  14 hours exposure from the Hubble
It puts life on earth in perspective -- these are all galaxies about half way to the "end" of the universe.  Yeah since there's is no end... how can this be halfway there.  Still mightily impressive.  Apparently the galaxies that are hazy is due to lensing effect -- where the light is distorted (and creating a lens) allowing the Hubble to see further.  Creationists put that in your pipe and smoke it!

Corporations are people too...

Some will remember Mitt Romney's comment during the 2012 presidential cycle.  For me the day that corporations are people is the day a corporation ends up in SuperMax for killing someone.  Really, has any company ever done jail time, ever?

Looking at GM's ignition key inaction they appear to have been "criminally negligent"; they knew their product was defective, they knew that it would cause accidents and they chose to do nothing.  GM knew that their product would cause injury, or even possibly death (that's kind of the meaning of criminally negligent).  I presumed that GM did a cost/benefit analysis (as they did for the Pinto problem) that the cost of paying those injured (or the family of those killed) compensation would be cheaper. Not only that but because of their re-organization that may well escape paying compensation to injured parties.

Proof if any was needed that corporation are in fact not people, since they can evade their responsibilities.  Chapter …

Gold going down -- anyway that's what the big banks are saying

There is one thing for sure when the market is certain of one thing, usually the opposite occurs.  Morgan Stanley and Goldman Sachs are both telling their clients that gold is a sure thing for $1,050 -- or a drop of about 15%.  As Mish Shedlock tells it the big bank have a long dated habit of telling their clients one thing and doing the opposite.  Mike's point is that you cannot trust the big boys their are playing there own games.

First off, the big players like MS and GS (Citi too for that matter) have a reputation for saying one thing and then doing the opposite.  IN 2008 GS were encouraging their clients to buy CDS, but the bank's prop book was very short.  Giving the prop book massive profits -- despite near bankruptcy for part of the banking system, it remains a prime cautionary tail.

Back to the gold story.

There is an issue with gold's price gyrations, which is often unconnected from any macro or micro economic drivers (very low correlation to the market activity)…

Still no $%& inflation

The Bank of Canada has a thing for inflation.  For years the BoC has had a 1.5% to 2.5% inflation target.  A necessary lubricant to a growing economy, and yet prices are just not cooperating.  Inflation has been rising recently to near the lower target of 1.5%, but every time we get close inflation disappears again.

(Source:  Statistics Canada)

The CPI is a measure (warts and all) of the consumer costs, another is the Industrial Production and Raw Material which also shows limited movement (at least until early 2004)

The problem that virtually all that price increase was caused by energy costs that have soared following the "continuing disagreements" in the Ukraine.  Bottom line oil prices rose from around $90/bbl to $106/bbl -- a 17% increase in 4 months.  So really no help there because everything else is not doing much at all.

What is the BoC to do?  Well the foreign exchange markets have already decided that the era of interest rate tightening is already over, and in fac…

I'm not market smart, I really don't understand

A friend last week asked me where I though Facebook should be priced, and should it be more expensive than Apple?  Good question, first off I looked at both stocks; FB is around 60 and APPL is around 420.   On thing for sure in terms of market capitalization AAPL is about 2.5x more valuable than FB, but in terms of p/e then FB wins hands down at 90 vs AAPL around 13.

My friend's question is interesting insofar as there is no fundamental reason why, in terms of earning, FB is almost 8 times more valuable than AAPL.  In fact, the market is saying that every dollar that FB earns is 8 time more valuable than what AAPL produces.  The issue is not how much AAPL but how much earnings growth can be generated -- in fact the stock market doesn't value a company for its past performance but for its potential performance.

Here lies the problem, at this level the stock market is all about feeling and instincts.  There is no way to know how FB will grow and monetize its "eyeballs"…

Back to regularly scheduled programming: market market market

Thursday morning and the big question is what's going on.  The past few days/weeks the word of the day was rotation -- away from bond towards equities.  Looking at the bond market 10y & 20y and its yields have returned to their mid 2013 levels, you begin to wonder what rotation?

I still see Europe as a disaster in waiting (maybe not really waiting), the markets are touting normalization because sovereign bond rates are down in the 7% range (from 15%) but then that's what happens when the ECB buys everything and anything.

News out of China is that they are having some success with deflating the investment balloon.  There have been only a few, and largely insignificant, bankruptcies so far (most of the insane to start with high yield variety).  Michael Pettis (a very smart guy) who has been an impartial China watcher for several years seems to think that they are on the right track.  So that could be good news, although its still a mighty big ship to turn around.

News out …

Similarities: The US Republican Party Vs. Partie Quebecois

Last two days remind me of the days following Obama's re-election to the utter astonishment of the GOP and its supporters -- as a side note I viewed Mitt (documentary on Netflix), and the opening sequence where Mitt "jokes" that maybe he should write a concession speech (and find Obama's direct phone number) is telling as to the GOPs complete surprise as to its defeat.  It is evident that the PQ here too was stunned as to the popular rejection of its ideals and objectives.  18 months ago, the PQ was elected with about 31% of the popular vote, this time around they had around 25% of the support of the electorate -- its worse ever defeat.

The GOP and the PQ had the same reaction: The people didn't understand us, we compromised too much, we need to get back to our roots and be clearer. The PQ has decided that the people though they were too timid in their objectives of separation. This inability to "hear" the popular verdict, blinded by their own analysis…

Election here in Quebec

What a night!

Last night Quebec voters rendered their verdict, and by 20:36 last night (or 36 minutes after the polls closed) all Networks predicted a majority Liberal government.  For the PQ it was a slap of immense proportion; their leader (Pauline Marois) lost her seat -- and as a whole the PQ registered its lowest popular support ever (that going back to the 1970 election).

Obviously, the PQ made some rather spectacular errors (the advantage of being a Monday morning quarterback!), some were not obvious own goals when the occurred; attracting a billionaire to run for the PQ on a platform of "independence" looked like a brilliant move, turns out the electorate was unimpressed. The whole "national question debate" was a massive turn-off for the electorate nearly 70% of Quebec voters rejected the idea -- that's going to be a real struggle for the PQ (-24 seats).

Peace has been re-established with the rest of Canada.  Quebec has indicated in a loud voice that i…

Democracy, NRA & Lewis -- Friday's bucket


Last night I participated in the Canadian primary process for the first time ever (possibly for the last time too).  It was following the creation of a new electoral district in Montreal -- called Ville Marie.  Initially the two candidates (actually acquaintances both) we running for Canada's Liberal Party (run by Trudeau -- not the cartoonist, but the son of the one who was Prime Minister in the 1980s).  Anyway this event had to be moved to a larger venue -- there was just too many registered Liberal party voters in the district.  The room could sit about 600 and there was another 100 to 200 outside the doors in the corridor.  The final result was 289 to 198, so about half the room that attended the vote was there for show (among them a friend or two)!

The first thing that comes to mind is that the democratic process is a strange one.  the new district is widely recognized as being a Liberal bastion -- so in effect 50,000 Canadian voters (all those who live in the dis…

Let the people speak -- the reality of elections

A few weeks ago the Quebec government decided, after 18 months in power (but without a majority in the house of representative) to seek a new mandate.  The polls were in their favor; a majority in parliament looked like a real possibility.  Three weeks on, the leader of the PQ (government) is hoping to retain a status of minority government, and they may loose all together.   [it was such a sure thing that the main opposition party had a real problem in finding attractive candidates] How did it get there?

First off, the polling numbers in general and in this case in particular looked suspicious.

In particular, the PQ's initial strength went from 40% to 45% within the space of a few weeks -- and over the christmas break -- when no one was around.  Today, the latest (small sample poll) shows the PQ at 29% -- neither polls add up. The more general worry is that polls are done via land line phone only,  these have shown to be increasingly unreliable:Last year in Alberta, all the polls…

Minimum Wage should be a conservative talking point

Why should WalMart (or McDonald)  benefit from paying its workers less than is necessary to survive just to have the Government make up the difference?  Food Stamps for the working poor are a form of corporate welfare since they don't have to pay the full cost of labor.

Of course,  right wing parties will never crouch the idea of minimum wages as a way of reducing subsidies [to big business] because these "mooch" are huge political contributors to  the right -- lets cut subsidies to Corporation will never be their slogan.  The day that the GOP or Steven Harper's Conservatives ever bite the hand that feeds them will be a cold day in HELL!

Of course certain corporations may decide that they should reduce the number of workers.  However, corporate profitability (as a percentage of sales) has never been as high as it is today.  Its more than likely that they could easily absorbe these additional costs.  But as long as minimum wages is a battle of the left (and that same …