Tuesday, November 30, 2010

Wikileak: Is it possible to embarrass US banks

From Barry Ritholz the Big Picture blog:
 Here is the sad reality: Can you really embarrass any [... U.S.] banks? 
They were incompetently run, with criminally inept risk management. They blew themselves up, and exist today only due to the largesse of the taxpayer. They gratefully took all they could grab and more.
What else can you release to embarrass them?
Unless they have 5GB of video showing their CEOs engaging in bestiality, its hard to imagine Wikileaks embarrassing the big banks.
Harsh but probably true, even the Vampiresquid GS got away with "murder"

Canada’s Balance of Payment – Deeply negative

Sorry missed this data yesterday!

The strength of the Canadian dollar continues to affect the Canadian economy.  Canada’s trade balance continues its downward trajectory into the negative…In the third quarter of 2010, our current account deficit widened to C$4.6bn, for a total of C$17.5 bn for the year.

The strength of the Canadian dollar is sucking-up foreign demand; at the same time demand for Canadian goods (non-energy) is ebbing.  This has been financed by the dramatic increase in foreign capital inflows (see here) that have been the hallmark of Canada’s economy for the past two years.

On the bright side, Canada’s Gross fixed capital formation advanced 9.4% driven by non-residential investments (+19.8%) with machinery & equipment surging 28.7%.  In a nut shell Canadian company are investing heavily to increase labor productivity.  

(Source Data:  StatsCan)

Steven Harper's Hair -- very funny joke

Amid the furor and embarrassment of the state and military secrets revealed in the latest Wikileaks data dump, there is perhaps some reason for pride among Canadians in keeping at least one important state secret. Buried in the thousands of pages are a few telling lines that point to Ottawa’s steadfast defense of Prime Minister Stephen Harper’s Unmovable Hair. It appears that Canada’s spy agency, CSIS, was inundated with calls from world leaders and military chiefs in the wake of this summer’s rainy G20 meetings in and around Toronto. It did not go unnoticed that while wind and rain assailed many a presidential coiffure, come photo time Harper’s hair was as unruffled and well-ordered as a Ken doll’s. 

Hoping to coat the undersides of Humvees and helicopters in war zones with this seemingly indestructible unguent that protects yet provides volume and shine, foreign powers had their entreaties rebuffed again and again, “lest the secret fall into the wrong hands.” Having grown weary of the constant requests, a clearly peeved Harper responded sharply to one unnamed European chancellor, telling her to “get [her] own damn tailings pond.”

source: BNN Martin Cej

Producer inflation is a worry for the Canadian economy:Stagflation signal?

While the Canadian CPI Index has recently felt a bump, there reality for producer price is one of very heavy inflation.  In October, the Industrial Product Price Index (IPPI) and the Raw Materials Price Index (RMPI) were up 0.5% and 1.7% respectively from September. Both indexes advanced mainly because of petroleum and metal products.  Importantly, excluding petroleum and coal prices, the IPPI would have remained unchanged in October.

(Source: Statscan)

The story for the Raw Materials Price Index (RMPI) is one of strong year on year inflation.  They increased by 1.7% in October, primarily because of higher prices for mineral fuels (+2.0%), non-ferrous metals (+2.8%) and vegetable products (+5.1%). Crude oil prices were up 2.5% in October, after falling 3.7% in September. Excluding mineral fuels, the RMPI would have increased 1.4% in October, continuing its upward trend that began in July 2010.


Compared with the same month a year earlier, the RMPI rose 5.0%, following a 5.7% advance in September. Year-over-year, the RMPI has been on an upward trend since November 2009. Prices of non-ferrous metals (+15.4%), vegetable products (+23.5%), animal and animal products (+9.3%) and ferrous materials (+18.6%) were the main contributors to the RMPI year-over-year increase in October. Mineral fuels (-2.5%) and wood products (-0.4%) registered the only year-over-year declines.

Excluding mineral fuels, the RMPI would have increased 12.2% compared with October 2009, the largest advance in the last 12 year-over-year movements.

This data is problematic, on one side the BoC is finding that GDP growth is seriously below expectation (although tax receipt have so far been substantially above expectation), but prices are rising more quickly than the BoC would want, and is testing the Canadian government’s stated 2% inflation target – the core of the BoC’s mission is price stability and not employment.

Could Canada be entering a stagflation spiral?  Is the American QE2 experiment exporting U.S. inflation to its main trading partners?

Canada’s 3rd quarter GDP numbers make for grim reading

As expected third quarter GDP growth in Canada was poor, annualized growth of 1.2% (against 5.8% in the first quarter), is nothing to write home about.  Moreover, in September itself GDP declined by 0.1%, which is far worse than expected and sets a difficult stage for the 4th quarter. 

Our initial estimate in December 2009 was for GDP growth of 3.2% for the year, based on solid natural resource prices (check), strong-ish Canadian dollar (check) and oil price in the $72-$75 range (check) what we underestimated was the impact of trade, exports were a massive drag in the 3rd quarter GDP numbers to the tune of 0.4% -- somehow we had anticipated that the U.S. economy would be doing better than it is.  The one single item of strength in the GDP figure is personal consumption which rose 0.9% (again in the quarter).  Housing was also a drag on the GDP number, not entirely surprising, since it was during all of 2009 and early 2010 such a massive contributor to Canada’s GDP growth.

The BoC target was 3% GDP growth for 2010, revised down from 3.7% in late 2009.  The reality is that although 3% for the year is achievable it is a difficult target, since it would imply a massive acceleration in the last quarter.  Since so much of Canada’s economy is dependent on exports a 2.1% GDP growth rate for the last quarter is a tall order (especially since September itself saw a negative print).

It seems that I was, after all, too bullish on the Canadian economy – and me who thought I was too bearish! 

(Source: StatsCan) 

Monday, November 29, 2010

Federal deficit for September shrinks to $3.9B

The federal government’s budget deficit in September was C$3.92 billion, a 21% improvement from $4.97 billion a year earlier thanks to stronger revenues, the Department of Finance said today. Revenues were up 13% to C$17.31 billion for the month, while expenses increased 3.1%.

In the first six months of the current fiscal year, April to September, Ottawa’s deficit of C$17.4 billion, was 39% lower than for the same period in 2009.  Moreover of this C$17.4 billion a total 52% are for programs (C$9bn) implemented during the recession that will expire in March 2011.

It is important to remember that until 2009, Canada’s federal government was operating a surplus.  Estimate for the current year’s deficit is C$55.6 billion, which is equivalent to a 4% deficit.

Source:  Reuters

The Euro – A digression

Friday night I was invited to a “late Thanksgiving dinner”, late because Americans based in Canada celebrate Thanksgiving on the Friday night – its easier than doing it on Thursday, since Friday is a school day up here (Canada’s Thanksgiving occurred several weeks ago).

At our dinner was the CIO of a major pension fund, and his background was a fascinating element to his perception of the future of the Euro currency.  Before being in the investment game, he worked for the ministry of finance of one of Europe’s core country.  Clearly a very smart and dedicated man, he came across as typical of this high profile network to which he belongs, reserved and effacing.  I mean this as a compliment; this is what always irritates people who meet Goldman Sachs bankers, they never come across as arrogant (nearly ever), but their few (and quiet) comment are usually incisive.

However, this upbringing can create some major blind spots; in this case his view is that the ECB and the “government” authorities will do all that is necessary to preserve the Euro – in fact, the creation of the Euro is a first hand process; those responsible for its creation are still in charge today.  What was fascinating was that this man, who lives and dies by the market, could not contemplate that the market would reject the Euro experiment.

One aspect which always troubled me was the European bureaucrats’ antipathy for the democratic process; brought up in specialized institution, operating in the rarefied air of academia and government the democratic process has always been an afterthought, something that gets in the way of the “Grand projet”.  Well democracies don’t work that way:  Ireland will soon elect a new government that will probably repudiate the agreement made last night (with the granting of €85 billion in “help”) because lets be clear here, the only people being help here are the European banks – French, British and German banks are being “saved” at the expense of the ordinary Irish citizens. 

How long does anyone think this will work?  Many forget that Ireland rejected the latest form of the European Union, for the Irish citizen which rejected further integration this is a slap in the face.  Spaniards, Portuguese and Italians are waking up to this European plans that insures that the institutions survive at the expense of its citizens – actually its even worse, since these institutions are perceived as foreign (which they are).

It reminds me of the situation in the province of Quebec with the Independence movement which began in the early 1960s. Those who though they were so close to success in the early 1980s, and again in 1995 cannot change their discourse, their life was sacrificed on the altar of this cause, to repudiate this cause would be equivalent to them repudiating their life’s work:  unthinkable, and yet the likelihood of Quebec ever “separating” for the rest of Canada must be in the 2-3% range today, the conversation has moved on.  It no longer resonates with the population, and yet their song remains the same. 

It will be interesting to see what happens to the Euro, my guess is that as soon as one restructures (e.g. defaults) several others will follow.  Greece is almost certain to be that country, and early 2011 would seem to be when the chips fall, Ireland, Portugal and Spain each with massive unemployment and social unrest are certain to follow closely by, and leave the Euro.

The interesting countries are: Italy and France.  Only time will tell.

Take that you Sonofa$itch! (Favorite picture of the day)


“Damn you, cherubim and seraphim!”

- Eddie Izzard

Source:  The Gatekeeper

Friday, November 26, 2010

China Slowdown: What does it mean?

First, this is a long post, my point is that the anticipated slow down of China – due to its inflation worries – will negatively impact the Canadian economy.

A few months ago, Jim Chanos, president and founder of Kynikos Associates, a New York City investment company said that there was a property bubble in China, evidence was that there are 65 million homes in China that are not connected to the electrical grid – therefore no one lives there (See here and here).  There was a great deal of skepticism as to his views, but what is important was that Chanos said that he was not shorting China (despite his perception that a contraction was in the cards), rather, Chanos said that since shorting China was “impractical” he would short first and second derivatives assets.

What does this mean?  Well it means that if you believe that China will slow down, the demand for many raw materials will fall, as will their price, hence shorting the stock of firms that are active in these sectors, you achieve the same objective (as shorting China).  Yes dear reader, here comes Canada and Australia – the great commodity suppliers.  Obviously, Australia is directly impacted by a slow down in China, since it exports a great deal to the Middle Kingdom, but all materials are fungible, and therefore when steel, Copper, oil prices drop, both countries will be directly affected.  On the bight side these are not massive employers, but the impact on government revenues cannot be underestimated.

Consensus is now moving towards a Chinese slow down, because of growing inflation pressures the Chinese government fears unemployment but it fears inflation much more.  Looking back trough Chinese history it is inflation that has been the most destabilizing factor for the political class (the riots of 1987 – which culminated in the Tiananmen Square protest were first caused by high inflation).

Last week one of the most interesting economic analysts in China Michael Pettis made three assertions about growth over the next few years:

  • Global demand growth over the next several years is likely to be anemic with or without China.
  • If China's trade surplus contracts, it will provide an expansionary boost to the rest of the world, not a contractionary one.
  • A slowdown in Chinese growth might not be the disaster for the world that many believe.
Uneven Consequences

Point number one is a given. I agree with point number two and three although I can see how many would disagree. The devil of course is in the details, and that's where I possibly differ from Pettis. It's hard to say for sure because he did not expound on country-to-country differences.

This is how I see it.

China is clearly overheating (see above commentary on housing), the slow down will halt the pressure on commodities and their prices.

For the U.S. falling oil and commodity prices would help reduce the US trade deficit, especially if grain prices remain firm. Falling energy, copper, and metal prices would help US homebuilders and small businesses hurt in a price squeeze of rising input prices and falling prices of goods and services. The net effect of this would be to strengthen the US dollar, yet help the US economy (BTW, American inflation will continue to be very low).  A slow down in China will impact corporation ad the stock market.  It may even but a dampener on Congress’ protectionist streak (one can hope, right).

Australia and Canada Will Suffer

Australia and Canada with their housing bubbles already poised to implode would suffer mightily if commodity prices tumble.  Resources account for nearly 1/3 of the country's GDP, a great deal of investments have been made in oil and gas while assuming energy prices in excess of $70 bbl.  What happens if oil prices drop by $30 to the mid 50s or 60s?  the impact would be hard.  In other primary resource sectors the same problem would arise.  

Given that the US and Europe are far more important globally, A slowdown in China might be a net benefit for the world "in general", yet a total disaster for countries overly dependent on continuous strong growth in China.

Australia and Canada would be especially hard hit, right at the worst possible time.

Thursday, November 25, 2010

Nigel Farage on the Future of the Euro -- Some home truth!

Text from an elocution in the European parliament this morning:

Good morning Mr. van Rompuy, you've been in office for one year, and in that time the whole edifice is beginning to crumble, there's chaos, the money's running out, I should thank you - you should perhaps be the pinup boy of the euroskeptic movement. But just look around this chamber this morning, look at these faces, look at the fear, look at the anger. Poor Barroso here looks like he's seen a ghost. They're beginning to understand that the game is up. And yet in their desperation to preserve their dream, they want to remove any remaining traces of democracy from the system. And it's pretty clear that none of you have learned anything. When you yourself Mr. van Rompuy say that the euro has brought us stability, I supposed I could applaud you for having a sense of humor, but isn't this really just the bunker [or banker?] mentality. Your fanaticism is out in the open. You talk about the fact that it was a lie to believe that the nation state could exist in the 21st century globalized world. Well, that may be true in the case of Belgium who haven't had a government for 6 months, but for the rest of us, right across every member state in this union, increasingly people are saying, "We don't want that flag, we don't want the anthem, we don't want this political class, we want the whole thing consigned to the dustbin of history." We had the Greek tragedy earlier on this year, and now we have the situation in Ireland. I know that the stupidity and greed of Irish politicians has a lot to do with this: they should never, ever have joined the euro. They suffered with low interest rates, a false boom and a massive bust. But look at your response to them: what they are being told as their government is collapsing is that it would be inappropriate for them to have a general election. In fact commissioner Rehn here said they had to agree to a budget first before they are allowed to have a general election. Just who the hell do you think you people are. You are very, very dangerous people indeed: your obsession with creating this European state means that you are happy to destroy democracy, you appear to be happy with millions and millions of people to be unemployed and to be poor. Untold millions will suffer so that your euro dream can continue. Well it won't work, cause its Portugal next with their debt levels of 325% of GDP they are the next ones on the list, and after that I suspect it will be Spain, and the bailout for Spain will be 7 times the size of Ireland, and at that moment all the bailout money will is gone - there won't be any more. But it's even more serious than economics, because if you rob people of their identity, if you rob them of their democracy, then all they are left with is nationalism and violence. I can only hope and pray that the euro project is destroyed by the markets before that really happens."

Note:  Nigel Farage is a noted Euroskeptic (see here)

Not much else needs to be said 

A fascinating analysis

Chief economist at National Bank of Canada looks at the various inflows into investment assets (Cash, Equity and Bonds).  First, the interesting elements; in 1995 (15 years ago, fixed income accounted for 30% of investors portfolio, in 2000 it accounted for only a little more than 10%, today the proportion is growing again (around 25%), but is still today (2010) below the long term average of 30%. 


The flow away from equity continues unabated:

What is truly interesting is the median age of investors is around 50, so that an increasing number of investors are looking at their retirement requirements, having lost some confidence in the equity market (essentially flat since 2000), investors are taking their most recent experience as a barometer of future occurrence.

Are the correct?  Only time will tell.  Corporate profitability has risen dramatically over the past two years, to reach stratospheric levels, in fact, American companies have seen virtually no growth in top line revenues, but massive increase in profitability, via cost cutting (hence today’s U6 unemployment of nearly 17%).

The reality is that the baby boomers are approaching retirement age, and as such, and following the advice of their investment advisor, are moving towards more income heavy portfolio, with less risk.  The time for capital gains is gone, income and stability are key as retirement becomes closer.

Wednesday, November 24, 2010

It's official -- no housing bubble!

Apparently, Canada's minister of finance (Jim Flaherty) today stood in the Chamber (House of Commons) and declared that there is "no housing bubble in Canada", there cannot be because interest rates are low.

On another note, Today the Teranet - National Bank Housing Price Index came out for September 2010, and there's been small correction in the Canadian housing market, its down 1.1% across the country:

Canadian home prices in September were down 1.1% from the previous month, according to the Teranet-National Bank National Composite House Price Index™. The monthly decline ended a string of 16 consecutive increases in the composite index since the last monthly deflation in April 2009. For the first time since February 2009, prices fell in all six of the metropolitan markets surveyed. The declines were 2.4% in Halifax, 2.2% in Calgary, 1.6% in Toronto, 0.5% in Ottawa and 0.3% in Montreal and Vancouver. For Vancouver it was the third consecutive monthly decrease and for Calgary it was the second.
This result was reflected in a further deceleration of the 12-month price increase in September, to 7.9% for the composite index. It was the third consecutive month of deceleration, leaving the 12-month rise the smallest since last January. The 12-month increases range quite widely from market to market: 9.2% in Vancouver and Ottawa, 9.0% in Toronto, 7.6% in Montreal, 3.6% in Halifax and 1.7% in Calgary.

From Teranet-National Bank House Price Index 

So maybe not overpriced, but there can be housing movement.  Frankly, housing prices are high in Canada, but so is national income...

Only time will tell

One wonders (bit of a rant)

Today the economic news south of the border is mixed, it’s very important to Canadians, because America accounts for ¾ of all our exports (and imports).  Most non-Americans fail to realize that the North American relationships are North South, and not East West (physical barriers).  Canadians are more “to the left” than their American counterparts, and aside from a very small minority, Canadians are satisfied with their health care system.  However, few Canadians have patience with Bay street (Canada’s Wall Street), and a bank rescue as was organized in the US would probably not fly here. We have a few issues with our neighbors, aside from entertainment dominance, belief that Hockey is an American game, disbelief that basketball was invented in Canada! 

Of late it’s the economic news that has been troubling me.  Sure the Federal Reserve has been aggressively expanding the money supply (of sort) whereas last year the Bank of Canada has withdrawn all liquidity facilities – today’s Bank of Canada’s balance sheet is the same size it was in 2006.  Almost every economic indicator is better in Canada: employment, housing, indebtedness both personal and corporate.  Canadian productivity lags that of America (and always will it seems).  So aside from the colder weather on our steps – things are generally good in Canada.

In America the news, aside from corporate profitability, is poor or indolent at best. 

  • Home prices continue to fall (-1.6%)
  • New home sales at 283k p.a. is just 8,000 shy of the all time low of last August.
  • Durable orders are negative and substantially below expectation
  • The good stuff, unemployment is no longer getting worse
  • Personal income is rising (slowly)

Despite these terrible data points the market is on fire today.  Sure there is some good news, unemployment seems to have stopped worsening, although forward looking data is looking difficult, if the states, which account for 13% of America’s GDP have to cut expenses by, an average of 5%, then the impact on GDP will be to push America back into a recession.

Personally, I don’t really care that much about the daily market movements, its just the overall sense that our neighbors are kidding themselves, and that we Canadian will pay some measure of price for their foolishness.  On December 31st, 2010 the “Bush Tax cuts” expire, its impossible not to not seem these cuts as crucial to their continued well being of America’s economy, and yet because of political games it is increasingly likely that the opportunity to re-new the cuts will be passed up, because of game play.

Ok rant over, happy American Thanksgiving

Tuesday, November 23, 2010

October inflation in Canada -- not good news

Most Canadian economist were betting on unchanged core inflation numbers (stripping out the more volatile elements), but core inflation rose to 1.8% from 1.5% it was in September.  Including all CPI elements consumer prices rose 2.4% in the 12 months to October, the largest increase since October 2008. It follows a 1.9% increase in September. About half of the 0.5% increase can be attributed to higher gasoline prices (prices at the pump were 8.8% higher than a year earlier, following a 3.1% increase the previous month).

The seasonally adjusted CPI increase was even worse, consumer prices rose 0.7% during the month, the largest increase since 2006.  Could we be seeing stagflation in Canada? (Low growth and high inflation?). 

The distribution of price increase seems to be across the board, and seems to confirm the PPI increase of the summer, which are finally being passed through to consumers (on the bright side PPI have been tame of late – which could be good for future inflation).

It would appear that the strength of the Canadian economy has allowed producers to pass on to consumer their increase in production costs.

The implications of such increase will be to add pressure to the bank of Canada to maybe raise interest rates again, although this would feed to the Canadian consumer shelter costs (which have been rising at a rate of 2.8%).  Part of the BoC’s problem is that the economy appears to be weak, despite Ontario’s better than anticipated fiscal performance it remains that the 3rd quarter of 2010 was difficult in terms of GDP growth, and worse is anticipated for the 4th quarter. 

The Bank of Canada and the government of Canada may have to look at different tools to slow down inflation in Canada which will not throttle the economy.  The BoC will be under intense pressure not to raise interest rate since Federal elections are very likely in the new year. 

Monday, November 22, 2010

Deficit, Growth and the Canadian dollar

Demand for Canadian assets by foreign investors continues to grow at an almost uncomfortable level, account for more 8% of GDP today.  One reason is that the Canadian federal deficit for the current year is anticipated to be around 2% of GDP (slow down Nelly it sounds better than reality!).  The issue is that in Canada, the provinces account for a substantial portion of total government activity.  In fact, at a Federal level, Canada’s government should be generating a surplus, since the economy is “humming along”. 

Late last week, the Ontario government (Canada’s largest province by population, wealth and GDP), gave an update on the state of the nation.  Certain surprising facts:

  • Deficit is anticipated to be $1 billion lower at $18.7 billion (or 3.1% of the GDP), the reason – revenues are higher ($750) and costs were lower ($250).
  • Ontario has revised its growth forecast to 3.2% from 2.7% as a result of the better level of economic activity – tax receipt are an undisputable proof of higher economic activity.
  • The one negative aspect Ontario has reduced its forecast GDP growth for the next two year by one percent, taking the 2011/12 number from 3.2% to 2.2%.

National Bank of Canada had a very interesting (although slightly flawed) analysis indicating that the Canadian dollar still has lot of room to maneuver since it has appreciated a lot less than the Kiwi or Ausi dollars!  Although this is correct, neither of these countries export a great deal to the U.S.  – their target market is Asia in general and China specifically, which changes the equation slightly, whereas the U.S. is Canada’s largest trading partner, accounting for 70% of our exports. The implication of Canada's exposure to the U.S., is that it is there that Canada's competitive pressures exist, for Australia and New Zealand it is elsewhere. 

If what is occurring in Ontario is also true for Quebec (Quebec’s economy is doing better than Ontario, with better tax revenues, and possibly lower expenditures.  Although the public unions are looking to extract their pound of flesh with high wages and salaries.

No wonder foreigners are attracted to Canada's sovereign bonds, the place looks reasonable compared to the rest of the OECD.  although my historical standards, Canada's fiscal shape is not that great, but for investors its not absolute that count, but relative performance.  On that scale, Canada is the place to be.

Friday, November 19, 2010

Canadian Productivity Revisited

I have often written about productivity here in Canada  (here, here and here).  Part of the problem is that with the U.S. economy next door, Canada's performance has almost always lagged, and no one seems to know why this occurs.  there are many theories, and I know for a fact that the are hundred of articles in Canadian literature as to why it lagged and how it can be improved by the "right policy".

In fact, provincial and federal governments have tried all kinds of policies to get productivity to rise with little success, and when it does suddenly rise (as it did early in 2009) the reason is unexplained and it is evident that no policies were in place.

There are four factors which drive productivity; Canada has structural weakness in two of the four:

(1)               Innovation and Technology:  Canada is a small open economy.  Its small size, labor market inflexibility and stronger union make this force weaker in Canada.
(2)               Specialist knowledge workers;  Canada is a country of generalist, specialists are often attracted away from Canada to other markets
(3)               Reallocation of resources:  Canada has suffered far fewer, and less severe recessions – creative destruction has had less impact here.
(4)               Globalization as a tool of market expansion: Canada, is one of the world’s most open economies, and should be able to improve productivity because of its growing markets.

Canada’s disadvantage because of a stronger currency can only be alleviated by better productivity.  A constant headache for Canadian policy makers, who have noted that for years Canadian labor productivity has lagged that of the US.  The number of studies on Canadian productivity’s shortfall is too numerous to count. 

Policy has tried to accommodate the needs of industry, remove impediments to increased productivity.  Maybe the treat of a stronger dollar is the only real incentive to Canadian entrepreneurs to increase productivity.

As an example, in 2009 the province with the "best score" in terms of increased productivity was Quebec, and yet it is the province that saw the lowest fall in employment, and the mildest recession (mainly because in 2005 the Quebec government enacted a massive infrastructure spending program).  One aspect of the data available from StatsCan is that at time they give you information that allows you to infer trends.  Quebec entrepreneur have been wary of the strength of the Canadian dollar for some time, and have made a decision to invest in technology (you can see the increase in imports of machine tools), that helps a growing economy.

It could be that because of this decision to invest in their business, they were able to multiply labor productivity.  Although as can be seem from the chart above, we still have a long way to go.

Thursday, November 18, 2010

Canada’s September TIC report

Foreigners’ love affaire with Canada continues unabated, although the flow direction has changed somewhat towards bonds – to levels only second to the January 2009 amount. Non-residents acquired $8.8 billion of these instruments in September, focusing on US dollar and Euro denominated private corporate and provincial bonds.

Non-resident investors purchased $3.6 billion of Canadian private corporate bonds in September, following acquisitions of $5.3 billion in August. This activity was dominated by new bonds issued by resource and financial firms.

Foreign investment in federal government bonds leveled off in September, accounting for a $1.9 billion inflow of funds from abroad. Federal bonds have attracted sizeable foreign investments since January 2009, with foreign holdings of these instruments more than doubling since then.

Although the risk associated with the Canadian economy remains positive – in fact Canada’s economy is underperforming its southern neighbor in Q3/2010 (and possibly also in Q4/2010).  The risks associated with Canadian securities remains attractive, however, the Canadian dollar’s volatility and high correlation to oil prices make it an unattractive play for foreign investors.  Asset swaps are the name of the game.

Part of the dilemma for foreign investors is that the Canadian dollar is highly correlated to oil price, up to the point where the Canadian dollar reaches parity with the US dollar, thereafter the correlation breakdown.  It may have to do with the other high correlation with the S&P500 (also in the high 70s), when oil prices breach the $85/bbl level the drag on the U.S. economy becomes too strong (anyway its an hypothesis).

Bottom line foreign investors want Canadian exposure with no foreign exchange exposure.

Wednesday, November 17, 2010

Europe Cluster&uck-- Zero Hedge Comment today

..(I)t seems that more of the Eurozone is starting to get cold feet over how to proceed with this classical defection from a game theory set up. As a result, the entire EU has delayed the December tranche of the Greek payment until January. Presumably this is to teach Greece a lesson, although it is unclear what it will actually end up achieving. As Greece can not fund itself outside of the ECB framework, as its banks are insolvent, and as it does not have the capital to exist in isolation, this action is comparable to the EU pointing a gun at its head and telling itself it has to stop lying or else.

So the clock has been set -- Greece goes down in December unless Europe changes its tune.  the problem is the first sentence; Austria has thrown the gauntlet (As has Finland vis-a-vis Ireland), who will be next?    

On related news today Obama, at the request of the Republicans, has agreed to delay a November 19th meeting on the Bush tax cuts to November 30th (it could be delayed further).  making the whole tax cut more problematic is Moodys' comment of yesterday -- prolongation of the Bush tax cuts would lead to a downgrading of U.S. debt.

The odds of the Bush tax cuts being renewed:

November 2:  100%
November 10:  85%
November 17:  50%
November 18:  40%

If the two sides cannot even sit down to talk, there is high likelihood that the tax cuts will die in the reconciliation -- furthermore, since the Republicans will refuse to raise the debt ceiling this is going to be difficult.

Tuesday, November 16, 2010

Canadian manufacturing in the dumps

Well it was to be expected; with our southern neighbor having a difficult time in the sales department (although consumption was up in October, removing gas and cars from the equation shows sales growth of 0.2% as anemic).  StatsCan just released the September manufacturing data, and sales are off 0.6% for the month, in constant dollars sales are off by 1.4% -- manufacturing sales are still up 11% from the March 2009 low, but as the chart shows Canada’s manufacturing sector is having a hard time.

Of course a month doesn’t a trend make, especially since the bulk of the shortfall (7%) came from Aerospace (a particularly volatile sector), but the automobile sector was also off by 10% -- which considering consumption figures in America were largely the result of demand for new vehicles – should we read something here with regards to U.S. consumption for the rest of 2010?  Unsurprisingly, the material and energy segments are both up, but then they have less scope for dramatic rebound (oil and gas flows are predictable and steady).

With motor vehicles and aerospace being the biggest losers it follows that Quebec (-2.3%) and Ontario (-1.6%) suffered the brunt of the decline, while the energy rich western province are up slightly.

Overall, this confirms that the BoC was right to stop raising interest rates.  Canada’s economy is slowing dramatically, the 2010 GDP forecast that were around 3.6% in January have been revised four times since, and the BoC’s 3% GDP growth for the whole year now appears to be wildly optimistic, a figure of 2.6% seems more probable, Vs. 3.1% for the U.S.

On the bright side inventory continue to fall (again StatsCan numbers) as to inventory to sales, but and this is more problematic “unfilled orders” declined.  So we know that Canadian companies are very good at controlling inventory levels, but it may be due to a realization that order backlogs are not where they should be.


The Chinese are finally building their own aircraft.  They’re on the verge (two years away anyway) of having a 70 seater aircraft (ARJ70) ready for delivery to their airlines, and to airlines around the world.  Good for them, it’s about time!  Of course this is not a question of cheap labor; making aircraft requires very experienced engineers, people that are expensive to train (5 years for full engineer ticket) and have to be retained (not low paying jobs).  So we are talking here of direct competition to Embraer (Brazil) and Bombardier (Canada).   

Of course what few notice is that the market for 70 seater aircraft is not in China, it is in Europe and America.  A news article this morning talked about a Californian executive having to wait 5 days to get a flight out of China to the U.S.  (no seats available).  Now these stories have a tendency to exaggerate the real problem, but it remains that China’s density, wealth and growth (coupled with horrible land transport infrastructure) make bigger aircraft a necessity.  So the Chinese have now announce the manufacturing of 168 seat aircraft (same size as A320 or B737 aircraft).

First, the Chinese have a steep leaning curve so the first 168 seat aircraft are not set for delivery until 2020 at the earliest – they have to build an entire infrastructure to manufacture these aircraft.  Although Boeing builds an aircraft every other day, the reality of building a new aircraft is a 2-4 year process (from manufacturing the first wing spars to the million of aircraft grade rivets that will be required).

In fact, these new aircraft will not compete with Bombardier C Series aircraft, but with the generation after that.  This is also true of Bombardier and Embarer’s smaller regional jets.  Although delivery of the ARJ70 will begin in two years, the production ramping up is complex, expensive and difficult.  

A very interesting development.  It will be interesting to see how the Chinese will include global engine (25%), electronics (15%) and landing systems (10%) manufacturers in their building process.  Both Boeing (B787) and Airbus (A380, A350) have experienced difficulty recently.

In the short and medium term, the entry of the Chinese in the market will have limited or no impact on Embaraer or Bombardier.  However, around 2015-17 period, these manufacturers will find the road to Chinese markets more crowded with local players involved

Monday, November 15, 2010

Getting Fit

Ok, since there’s so little going in Canada, I though a more personal entry would be interesting.  Last summer my weight ballooned (literally) to 143kg (don’t even want to think what that was in pounds).  Anyway, I took a decision that this time I would get serious about the weight loss!

On August 1, 2010 my objective was to loose 44kg (96.5 lb).  For those serious about permanent weight loss, the maximum you can lose (as a man) is about 2kg per week, beyond that you run risk of major health issues.  You also have to be realistic.  Some weeks you will loose more and some less.  My doctor, yeah I know its sounds lame but when you target this kind of weight loss you really need a third party involved, says that the trick is to not think of the deviation as anything as something that happened (don’t make a mountain out of a molehill).  As of last week my blood pressure is around 110/78 and my heart rate at rest is 59.

As of November 15, 2010 I’m down to 125.8kg, or 17kg, my actual weigh loss has been lower than optimal but its difficult to stay on track, there are special events that get in the way, and the occasional relapse.  

Another part of the process is training.  Several of my colleagues are sports nuts, bicycles feature heavily in these conversations (costing upward of $7,000), but generally they follow very regimented exercise programs.  When I started running (treadmill and running tracks only for me) I could do about 2km, at a 7.5km/h pace.  Last Thursday I hit 5km in 30 minutes or a pace of 10km/h.  That’s a huge improvement (clearly loosing 17kg makes it easier).  I was really impressed with myself, although I have no pretensions:  the winner of the New York marathon averaged a speed of 20km/h – or twice as fast and kept it for 2 hours 9 minutes.  I can now run at 10km/h almost indefinitely (although I’ve not tried to run more than 9km in one go).

So this is my personal Mount Everest, will I succeed I reach my 99kg target?  I have no idea.  One thing for sure that my target date of February 1, 2011 is out the window.  I think that a more realistic end date is March 31, 2011.  So basically 5 months to go.


Tuesday, November 9, 2010

Housing & GDP Growth

Canadian new housing construction is slowing rather quickly, not only are new permits off by nearly 9.2% from their September numbers, these numbers were also revised downward.  Primarily, it is cities that were affected, but then since they account for nearly 90% of all construction anyway… The worse affected region was Ontario (down ¼) followed by the prairies, while Eastern Canada did ok (flat or up).
Canada’s peak in new housing construction occurred in the early spring, and is consistent with a slowing economy.  Mortgage rates in Canada are still very lower – in Canada mortgage are set for a 5 year period after which rates are reset, there are no 30 year fixed mortgages in Canada. 

Some home truth here are that construction was outpacing potential demand for the better part of 2009 and early 2010, so the drop off is just a re-adjustment to more reasonable levels.  Canada requires nearly 200k new homes, but production was far above that level in 2009.  When the government puts expiry dates on policy shifts (BoC rate increases and more restrictive mortgage rules from CHMC, not to mention the introduction of the HST in B.C. and Ontario), the writing was on the “housing” wall in Canada. In effect the Federal government with the BoC brought forward two years of housing activity into nine months and it is payback time. I expect residential construction to negatively contribute to growth over Q4/2010 and Q1/2011 at the very least. 

Impact of American mid term elections

It has now been a week since the mid term elections took place.  Personally, I never thought that the Republican would recover so quickly from their 2008 drubbing, but then I made two miscalculations:  First, Americans are shell shocked by the 2007-2009 recession, the worse in nearly 80 years.  Second, the Obama administration has gone a long way to demonstrated that Democrats are not fit to govern.

Obama’s priorities to focus on the status quo appear somewhat strange.  The banks problems have been swept under the carpet, and sustained by a mix of lies and omission.  Level 3 assets are the perfect example of the weakness of the U.S. banking system.  His focus on the health care reform was important, but a 2,000 page new law is beyond the pale of what is acceptable. 

Americans like black and white solutions and Obama has failed to deliver these.  He has spent an inordinate amount of time courting Republicans who have time and again spurn him.  His desire to re-regulate the banks, while leaving them unchanged was bound to end badly, since the banks have nothing to loose from aggressively pushing back on regulations.  If he thought the system was broken, why did he not fix the problem at its source?

So today America finds itself in a gridlock, no legislation will be approved, it’s almost certain that the Bush tax cuts will not be reconvened, because some idiotic congressman will do something stupid.   For Canada the news is somewhat good, many were concerned that America would slow the inflow of oil sand sourced oil in view of the severe pollution – when in fact this issue died the day following the BP explosion in the Gulf of Mexico. 

I don’t believe for one minute that the Republican will cut expenses – aside from maybe a $100 billion of token cuts, America needs to cut nearly $1 trillion for its federal expense bill and those will have to be generated entitlement programs.  The first real test of congress will be the extension of the ethanol and biofuels subsidies – if these are renewed, Canada will know that the Republicans have no real intention of addressing the budget deficit. 

The real risk for Canada is the new congress “nativists” streak.  The real risk is that Canada, as America’s largest trading partner, will be in the crosshair of Congress as a way to increase jobs at home.  

Friday, November 5, 2010

Interesting comment on Gold

While this is not a prediction that the price of gold will fall, McElvaine simply believes bullion isn't the type of investment he is looking for. "You're more of a psychoanalyst than an investor if you're buying gold," he says. "When an investment is advertised on television, I have hard time thinking it will fit in to what I do.

"On a fundamental basis, the manager notes that three years ago, net producer output of gold (less hedging, plus scrap) came to about 3,000 tonnes per year. Meanwhile, fabrication demand -- industrial, dental and jewellery -- came to roughly the same amount. So fundamental supply was roughly in line with fundamental demand.

Fast forward to today and McElvaine expects we'll have about 4,000 tonnes of production and scrap. However, lower fabrication demand will only absorb about 2,000 tonnes.

"My issue with that is I don't like situations that are so dependent on emotion. Could that demand double? Of course. Could it halve? Just as easily."

Tim McElvaine, of McElvaine Investments, in November5th financial Post

Tuesday, November 2, 2010

Canada’s Dilemna

Over the next few days Canada’s Prime Minister will have to decide if BHP will be allowed to purchase Potash Corp (TSE:POT).  POT is considered a Canadian company, not sure that’s a fair representation of reality, since most of the management is based (day to day business) in Chicago, and a good portion of the company’s shares are owned by non-Canadian (some will say that in excess of 50%).  Moreover, it’s not like BHP can “move” the business.  Potash is mined, and something like 60% of the world’s supply is in Saskatchewan.

The Federal competition tribunal has ruled that it’s Ok for BHP to buy POT, however, there are two additional twists:  First, Steven Harper, Canada’s prime minister can over-rule the competition tribunal, second, mining is of provincial jurisdiction, in other words, the province can still veto the whole thing. 

Bottom line, BHP’s offer is around $140 per share, and the stock trades at $148 so that fight is not over yet.  In the past Canada has been very willing to see “national assets” sold on to foreigners, one reason is that Canadian companies have bet net buyers of foreign assets in the past.  The Alcan purchase by Rio Tinto has not been a great success, in fact Rio Tinto has been backing out of deals they made with the Province of Quebec, and so the province of Saskatchewan may well see similarity between the two events. 

On the other hand, Canada see’s itself as an open economy, the reality is that it is difficult to justify blocking the purchase for any other reason that pure nationalistic jingoistic reasons.

This should be interesting.