Tuesday, February 22, 2011

Mixed message from the Canadian economy

Last week, Statistics Canada revealed that for December 2010, an expected small trade deficit ($300 million) turned out to be a relatively large surplus $3 billion.  This morning, retail sales came out for the same period, and whereas the previous four months had seen rather large increase in retail sales, the December numbers were disappointing, down 0.4%.

Again, this is a month on month change, over the past 12 months, retail sales rose by 5.1%, which is actually greater than the growth in income.  Canadians have the dubious honor of having the world's largest personal indebtedness.  Which goes to show that not all things are well in the Great White North. 

So in a nutshell, Christmas sales were not great (hence lower imports) but exports were gangbusters!

Friday, February 18, 2011

Canadian Inflation in January -- Slightly lower than December 2010

Turns out the Canadian CPI has tempered a little over the past month, "falling" from annualized 2.4% t0 2.3%, while core inflation (removing fuel and food) remained unchanged at 1.7%.  Canada is bucking the trend, but then again the CAD is up 5% over the past 12 months, so that took some sting out of the inflation data.


Nothing to see here

Thursday, February 17, 2011

Quebec to hold public hearing on the LSE acquisition of TSX

If it was not so sad, I would laugh!  Really, this is what the Quebec government focus on?  Lets be clear, Quebec has some very strange securities rules.  For example, you cannot have a IPO sold in Quebec unless the offering documents are fully translated into French... not even the French securities regulator requires this, so when there are global IPO (like Visa a few years ago), Quebec and North Korea are the two places in the world where you could not buy the IPO (no kidding here).  However, once the stock is listed you can buy it on the secondary market! 

Quebec's politicians want Montreal to retain the derivatives business/expertise, sounds a reasonable position -- but public hearing?  The Montreal branch of the TSX does all the derivative transactions on Canadian securities (Puts, Calls exotics etc), this was a condition for the acquisition of  the the Montreal Stock Exchangeby the TSX.  Public hearing seems a bit much:  First, the derivatives market is primarily an institutional market; most retail investors' understanding of securities precludes them from investing in derivatives,  second most retail brokers don't have a derivatives license (for very very good reasons). Finally, Canadian and foreign institutional investors don't actually care where the derivatives are listed, they care about cost and liquidity.  

Quebec's only issue is that the London Stock Exchange maintains the TSX/MX agreement on derivatives... that's about it.  

Unfortunately for the great majority of Quebec based investors this is not the issue that should be addressed.  The real problem for Quebec based investors -- they cannot participate in global IPOs and a greater and greater number of Canadian IPOs bypass Quebec entirely because of a "French" prospectus requirement.

BTW a substantial portion of my day job requires me to read prospectus and other legal documents, I speak excellent French but would NEVER read a prospectus in French, because they don't use capitalized terms it makes it almost impossible (even for professionals) to understand the nature of the underlying transaction described.

Yet because of "language" and "Cultural" issue it is literally impossible to have an adult discussion about this, and the government would never dare to open a discussion on this -- but they will hold public hearings on the derivatives market... what a joke!

Finally, my guess is that the transaction has a high likelihood of failing, the Ontario Government is almost certain to impose impossible conditions:  they're the one getting screwed here!  The Ontario minister of finance was a great fan of merger of the TSX and MX and of the creation of a Canadian SEC, as a means of consolidating Toronto's position as the financial capital of Canada.  His support for the Pan-Canadian SEC has blown up in his face -- with the proposed decentralized structure, and now the TSX is being taken over by the Brits.... Dwight Duncan that's bile you are tasting!

Capital inflow continues Part Deux

Over the past 12 months, total capital inflow into Canada exceeded 6% of GDP ($112 billion).  Big winners are Corporate bonds which saw the largest increase, followed by Federal Gov't bonds.  The lowest growth was experienced by the provincial bonds -- maybe an overflow of the perception of municipal bonds in the US following Meredith Whitney's comments on that market...

(Source: StatsCan)

Most Canadian economists are talking about the CAD trading around 105/0.95 range tot he USD, recent studies (and trade numbers) show that Canada's manufacturing sector remains very competitive with America's despite the strength of the Canadian dollar (that will further improve as Canadian CAPEX programs initiated in 2009 and 2010 begin to bear fruits).

In a world of massive bank stimulus, and easy money Canada's central bank stands apart (or at least on the side).  The growth of money supply in Canada has been somewhat more reasonable

(Source:  Statistcs Canada & Bank of Canada)

In fact, among the G7, G8, G20, OECD Canada is probably the only country which is supporting a stronger currency.  That makes Canada very interesting for foreign investors.


Wednesday, February 16, 2011

Matt Taibbi Strikes again

http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216?page=1


This has to be read, Mat Taibbi, he of "Vampire Squid" fame strikes again against the U.S. banksters.  It almost makes you sick to read what goes on here.  No wonder Maddoff was able to pull his Ponzi scheme; no one wants to know. BTW the only reason is in jail...he stole from the rich!

In a nuttshell the U.S. financial system is set up to protect fraudsters, and not catch them in the act

Sunday, February 13, 2011

Tea Party and mental disfunction

Interesting comment by Mark Thoma, of Economist's view blog, why the Tea Party can take the view that Gov't expenses need to be cut, but that Social Security and Medicare should stay "out of the clutches of Government". Many "wealthy Americans" believe that the have actually paid for these services, that over the years their taxes created their personal reserves, and that therefore these are not entitlement, but the use by ordinary americans of what they have saved. Medicaid and other social programs on the other hands provided mostly to poor people are in fact unearned and these deadbeat should pay their own way.

Since social security has been underfunded (to meet the baby oom generation) and that longevity has been rising for years, it is unclear that this is the case, nevertheless it explains how the Tea Party cn say less government at the same time as they say stay away from Social Security and Medicare....

Interesting analysis, and it explains their logic.

Friday, February 11, 2011

$3 billion trade surplus

I cannot believe how well this news fits into the narrative I have been building. January's trade surplus clocked in at $3 billion, while most economists were expecting a small deficit. The reality of Canada's manufacturing is that despite a rise in the CAD Canadian manufacturing remains competitive.

BTW it also means that our trade surplus with the US passed the $5 billion level, although this was to be expected with Canada becoming America's no 1 energy provider

Why I cannot stand the American right!

I've been getting angrier and angrier at my southern neighbors, especially the right,the latest was New Jersey's governor decision to not only cut services by a cool $5 billion and cut taxes by $4 billion. NJ is in trouble, as are Texas and California. But it seems to me that America's right is missing the point.

A few weeks ago the same Governor proposed that to trim school budgets that class size should rise from 32 to 65! I don't have children, but I can bet that little learning will occur in classes of 65 students. America has a fundamental problem, it has to be one of the few countries that manages to outspend almost everyone else on education, and have ranking in math and reading that puts it firmly in 39th place in the world. Moreover, it's politicians see or care for no solution, they seem not to care that jobs are being shipped abroad, not because it is cheaper, but because foreign workforces are better educated.

America's right seem not to care that medical expenses are twice as high as a percentage of GDP than any other country, in fact the right specifically and the political class in general seem more preoccupied with preserving the status quo.

America's right seem interested only in helping corporation to increase profits at the expense of every thing and anyone else, politicians have sold out! The only one a that had some shred of credibility were the tea party's ideal to cut the size of government and stop the bailout out banks, but it turns out that too were too stupid to understand that cutting 50 or even 100 billion (not really) is a drop in the bucket, you see, the last thing that the Tea Party wants is for their entitlement programs to be cut, they just wanted poor people to have less! America's government is out of contrôle, the Federal Reserve are running the place down by printing money.

There is a lack of sense of resonponsbility in the political class, and the right in particular, so instead of focusing on solving the massive financial and political problems, the right has decided tha it should instead focus on redefining rape! As one blogger one commented, the right's view the importance of life begins at conception and ends at birth! A very twisted way of looking at life.

Ok end of rant

Tuesday, February 8, 2011

Rag Tag Stuff:

Snow in Canada:

Saturday we got a foot (20cm) of snow in Montreal, the city is beautiful all in white, sidewalks are still a little slippery, but the streets are more or less clear of snow.  I guess we are used to the white stuff, which reminds me I cannot think of anything scarier than flying from a “southern” airport after snow storm.  These guys don’t know what deicing is all about.

Canadian dollar, Yield Curve and Interest rates

Still trading above parity with the US dollar, it seems a permanent fixture now.  The interest rate differential on 30 year bonds between Canada and the U.S. (89 bps) seems to be permanent.  The Bank of Canada has the option of raising rates on March 1, 2011.  Some (David Rosenberg) believe that the BoC will retain overnight rates at 1%, I disagree, although 65% of the new January jobs were government related, 23k were created by private enterprise (which is more than the target jobs growth penciled in for Canada by pundits).  The only issue for the BoC is can we afford to have such a dramatic difference between U.S. overnight rates (0.25%) and Canada (1.25%).  Of course if the world ends tomorrow, copper price fall, energy prices fall the loonie will take a hit.

Manufacturing productivity

Some very interesting research done by a Canadian bank came into my possession.  Basic message is that manufacturing productivity in Canada (and more important unit labor costs) is very positive for Canada – despite a 30% appreciation of the CAD for the past 4 years (they compare very favorably to the U.S.).

Canadian House Prices

What is one to say, a REMAX study today shows that over the past decade the average annual increase in the Canadian house price has been around 7%.  Not many markets can claim this kind of growth…. We’re rich, we’re all very rich!

Spring Elections

I don’t watch that much TV, but I’ve seen my third political add in the past 10 days – on how great a job the current government is doing.  Seems to me that we can expect elections in the spring.  How about May 15/16 would seem optimal, it will give the government a chance to make a nice “give away” budget.

Friday, February 4, 2011

69,000 new Jobs in January

A huge print for Canada, 69k is the equivalent of 600,000 jobs in the U.S. (they are hoping for $150k… later this morning).  This will create an opportunity for the Bank of Canada to raise interest rate prior to May 2011 (the initial date on which the market anticipated that Carney & Friends would begin considering interest rate hike).


As usual, the “good feeling” has lead to an increase in the unemployment rate as more Canadians are encouraged to look for work (yes a perverse effect, nevertheless, it is what it is).  Over the past 12 month, employment in Canada rose by 1.9% (+327k jobs).  On the down side of the equation, half the jobs created in January were part time. 


Women over the age of 25 were the biggest winners here accounting for a large percentage of the total increase in new jobs (80%).  In terms of geographical distribution Ontario was the big winner, followed by Alberta (not entirely surprising with oil prices over $90/bbl).  Quebec (Canada’s second most populous province) saw little change in employment, but then it was less affected than the other provinces from the recession, and saw massive increase in employment during 2010 (+2.3%).

The employment numbers result will provide the Bank of Canada proof that Canadians can sustain normalized interest rates, so that the short term rate can rise back to the 2.5% level (equal to the rate of inflation).  I would suspect that the BoC will continue with its 25 bps incremental interest rate policy, with a June 2011 short term target of 1.5% (50bps rise.  I would put the probability of a 25bps rise on March 1st at 80% and a 50 bps at around 40%.

(Graph source:  Statistics Canada)

Wednesday, February 2, 2011

Could the CDS market make the Euro stronger?


In the closing days of 2010, the credit default market for European sovereign names hit a speed bump when the debt for Italy started to be infected by the PIGS problems.  Whereas Portugal, Ireland and Greece are small, Italy is large (10% of Europe’s GDP).  It is possible that with Italy’s credit swap market imploding (or at least showing some signs of contagion) that Europe’s governments have finally realized that some form of fiscal centralized action is required.

Obviously, there are still many hands to play, since elections and “domestic” politics will intrude on the proposed pan-European fiscal model. So far, it is more hope that action will bond holders do their share of the heavy lifting? Germany’s government has been its worse enemy during this crisis.  It now seems to have learned its lesson and appears to only speak sparingly with a clear message.  .

Europe’s first step was to realize that liquidity was not the problem, rather solvency was the issue; and it seems apparent that certain tools are being discussed that would enforce a more conservative fiscal track.  These (so far) theoretical discussions seems to meet with the approval of participants and commentators alike, but more interesting will be when implementation is contemplated.  How will the Greeks react to fiscal policy being set in Brussels (or Berlin)?  The first test is Ireland February general elections.

Personally, I am doubtful that southern Europe will bow to Berlin’s will; Europe’s history makes such outcome uncertain.  The negotiations on the faith of Ireland’s bond “hair cut” will be the most telling for the behaviors of Greece, Portugal and to a lesser extent Spain.


Europe’s fiscal imbalance (except for Germany) poses real challenges especially since Europe income tax levels are relatively high.  Europeans have shown a propensity for mass demonstration against the removal of workers rights acquired over the past 40 years.  Yet the reality of Europe’s fiscal imbalance will have to be addressed sooner rather than later.

Over the next 24 months Europe (and the Euro) have many challenges, Ireland will act as the canary in the mine, its election process will give a good sense of what to expect elsewhere in Europe.  Today, I believe firmly that there exists a road that will allow the survival of the European currency (and union).  However, this road is tortuous and requires a great deal of fortitude not only from its leaders but also its citizen.  I retain my reservations

Oil is in serious contango again!

About two years ago, the forward curve on oil prices rose dramatically, this means that oil delivered in the future was more expensive than oil delivered today.  Generally futures’ prices are in backwardation, since goods delivered in the future are worth less than goods delivered today (think cost of money).  However, every so often contango occurs (actually more often than most would think), it is also a statement on the anticipated future demand for oil, what the futures indicate is that the markets anticipates the price of oil (in USD terms) to rise by at least 10 dollar over the coming 12 months:  January futures for oil (West Texas) are priced around $100/bbl, compare to $91/bbl this morning.


Assuming no storage costs and no transaction cost, oil traders have the opportunity to lock in a 12% profit by buying oil today for delivery in one year – futures do not have optionality, the trade must be executed on the purchase date.

My guess is that many hedge funds (since so many investment banks have “shut down” their prop desks) are looking at this trade very carefully.  Last week you could purchase spot oil at $85/bbl, a gross 18% “risk free” transaction.  Funny enough the trade became a lot cheaper with the Baltic Dry Index continued drop – down to 1,107 last night.

So if you are seriously rich, there is out there a risk free trade in the oil space.  Look at many oil tankers parked off the cost of Singapore and in the Gulf of Oman, loaded to the gill with oil for delivery in early 2012.

Note:  I have no position in this trade, its just an observation