Friday, April 29, 2011

February Canadian GDP negative

After the blistering pace of GDP growth on Q4/2010 (4.5%), the sudden drop in activity is somewhat worrying (-0.2%).  Then again, Canada, an export nation is dependent on its southern neighbors for nearly 70% of its exports, and as yesterday’s U.S. figures show that the economy is slowing south of the border.

(Source: StatsCan)

Moreover, the strength of the Canadian dollar is almost certain to have impacted the terms of trade and new order flows.  Interestingly the Canadian real estate sector continues to grow, and expectations of this trend to continue for some time (maybe until he end of Q2/2011).  

 (Source: StatsCan)

The net contributors to GDP for February were retail, services and construction whereas manufacturing was a real drag on GDP for February (-1.6%), it had been positive to the tune of 2.5% in January.  The biggest drag in the manufacturing -7.5% was vehicles and spare parts… once again the North American picture is painted south of the border.

Thursday, April 28, 2011

Canada votes on Monday

The democratic process is an amazing thing.  How the mood of a nation can be expressed and make radical changes to the direction of a country, and to the life of its politicians.  A month ago when the Liberal/NPD and Block Quebecois “forced” a no-confidence vote against the Conservative government of Steven Harper, the intent was as follow:

Steven Harper was hoping that his conciliatory budget would provide sufficient ammunition to demonstrate to the population that (a) he didn’t want elections, (b) he had the best and most experienced team to lead the country.  Michael “Iggy” Ignatief was not really a player here, he was not courted by Harper in the budget negotiations – he was bidding his time till the next election.  Jack Layton, the forever leader of the NPD thought he held the most compelling cards; setting himself apart from the other two parties as the one offering a third way.  The Block was for “Quebec” whatever that means.  They have been adrift for years and survive because Quebec “Independentists” cannot bring themselves to vote for the Liberal who stole their dream of a Nation.

In the past 30 days, there has been a dramatic change in the landscape.  Early on the Conservatives’ campaign strategy seem to pay-off:  an aloof leader (Harper would not talk to journalists, and only to pre-selected conservative audiences) with a very disciplined message demonstrated a competent team that “should” be given a majority.  But some times even the best laid plans fail.  There is no doubt that the Harper’s decision to stay on message meant that with nothing to report, news leaders looked elsewhere to fill their pages.  This opened the door to Iggy’s Liberal, the Bloc and the NPD to fill the pages of Canada’s leading newspapers.

There is no doubt that Canadians were offended by the cavalier attitude of the conservative vis-à-vis Canada’s constitution (prorogation & lies to parliament by Ministers), and Iggy was very good at getting that message across, but it’s boring.  Jack Layton was much more interesting with his many “gifts” of OPM (Other People’s Money), and the Bloc had literally nothing interesting to say.  For some reason the confluence of promises the legalistic vision of Iggy and the “Nothing to see here” bloc platform changed Quebecers sentiments.  Despite anything heard outside of Quebec, the last thing we want to talk about in Quebec is independence.  The fight is long over; we are far more worried about getting access to the latest Ipad/Ibook/Iphone.  Moreover, independence is not the fight of Quebec’s youth!  More than half of Quebec’s high schools graduating class of 2010 families were not born in Canada, and do not share the Anglo/French, Catholic/protestant angst that dominated politics in the province over the past 30 years.  The fire of a political movement is its youth, and the youth of Quebec has no interest or stake in the separation of Quebec.

So at the outset of the election and in less than 30 days the Liberal’s and the NPD’s equal standing with the electorate with 20% of the votes has shifted with the NPD rising to more than 30% and still rising, and the Liberals have sunk to 16% (equal with the bloc).  Layton has been eating away at the Bloc’s and the Liberals popularity.  The Bloc’s ineffectiveness has been compounded by its recent stupidity bringing out the “old” guns of the “independentist” movement (Jacques Parizeau, a former Quebec prime minister and survivor of the independence movement in the 1960s…), and Gerald Larose a rabid pro-independence figure that will have nothing to do with Canada -- begging Quebecers to vote for the Bloc (one wonders if Larose ever voted in Federal elections).  Making the Bloc look even more out of touch, and accelerating the process of voter attrition.

Finally, everyone likes a winner, and jack Layton has all the hall mark of a winner, so that even Ontario is looking at him in a more positive light.  It is almost guaranteed (there are no guarantee in politics—except when the votes are counted) that the NPD will be the official opposition, that Harper will lead another minority government that Iggy will retire from politics, disgraced.  However, the big shift here is the potential death of the Bloc Quebecois – that will, in the medium term change the political discourse in Canada.

Wednesday, April 27, 2011

Nunavut


Yeah most people have only barely heard of this place.  Basically the Canadian Northern Territories eastern part that was split out 12 years ago.  A tiny (29,000) population an incredibly harsh climate and really far from the beaten track.  From Montreal it’s a 5 hour flight with a connection. The last road north ends at James Bay project, nearly 500 km from the southern border.  There are no roads between the communities (distance and cost).  Nunavut is Land area 1.6x the size of India.  

The Globe and Mail has a fascinating series on the territory – discovered while reading the Economist… Saddening is the level of despair, extreme binge drinking, low education standards (or even completion rate) and massive unemployment.  Although I didn’t live in Canada when the region was formed, it remains that a territory constituted I remember wondering what was the benefits of creating this new territory. 

Turns out that those who runt he place agree, that Nunavut has been a disaster, the idea to create a specific administrative zone for the Innu people sounded good, but the reality is that with extremely low education levels it is very difficult to fill the job openings for the local population.  Moreover, the education system allows for student to graduate with very low standard (High school graduate but functional illiterates)

Those who decide to make their life in such a region, by choice, and to serve the local community deserve high praise.  Although the Innu peoples’ way of life was destroyed more than a century ago (hunting and fishing) and that the life expectancy has risen dramatically from 35 years to 60 years, theirs is not a happy lot.  Canada has wrong these people robbing them of their culture and language (Canada instituted “Residential Schools” where Innu children were taken from their home and forbidden from speaking the own language).  Unfortunately, the damage has now been done, and there are few obvious options; unable to attract good teachers, and the lack of any real job prospects (aside from working for the government) means that their lot will continue to be difficult.  Some communities are experimenting with a return to their roots (hunting and gathering) as an alternative – but it also means that as a population their life is that of a museum piece, which I personally find extremely sad.

Read the article, fascinating

Canadian house prices: Up again


Not terribly exiting, but it turns out that Canadian house prices are up again to the tune of 0.1%.  The Canadian market had seen a brief correction, in the closing months of 2010, but this “correction” (about 0.3%) has now been fully reversed.  Everything is well again in the land of Canadian housing, Vancouver’s recent insanity (25 bidders on one house with a $600k bump over the asking price) is not a sign of anything nefarious, it’s all good.

Canadian premier house price index is the Teranet National Bank of Canada House Price index

Tuesday, April 26, 2011

Taking democracy for granted

Having lunch with a friend today we realized that we were both voting Liberal for the same reason:  The Conservatives’ assault on our democratic system.  In politics it is often the small things that need to be watched.  Unfortunately, few are watching the small but important things. 

First assault was the Prorogation a very Canadian move by the governor general that allows for the suspension of parliament.  It was used by the conservative government as a way to stop the three opposition parties from forming a government.  Never mind that this all started because Canada’s minister of defense refused to answer some embarrassing questions on the action of Canada’s troops in Afghanistan.

The second assault occurred just a few weeks before the recent budget failed and the minority conservative government lost a vote of no-confidence (leading to the election of May 2nd).  This was the Minister of International Cooperation Bev Oda who LIED to parliament.

In a federal parliamentary democracy such as what we have in Canada two things are important, first the government is elected by having a majority of seats in parliament, and one member is chose to become the Prime Minister – all his authority derives from being a dully elected member of parliament chose by his colleagues to be the Queen’s prime minister (same concept as the British system).  When Harper decided to prorogue parliament he was no longer the chosen member of parliament (by a majority of his parliamentary colleagues), that role fell on Ignatief’s Liberals that has the support of the other opposition parties to form the government.  The Conservative (and the Queen’s representative) we involved in a coup d’etat It sounds bad and it is bad, but this is a real shift and it is possible that the next government may use this again, as  a way to retain power when you have lost the authority of the parliamentary chamber.

As for Ms Oda – showing here true incompetence and willingness to lie to parliament with immunity is a first (some others probably lied but were never caught).  From now on Minister (who BTW are representative of the Chamber) are able to lie – the death of parliamentary democracy at the hands of the conservatives.

For this reason alone, a fundamental principal in Canadian politics the bums must be thrown out!

Surprise Canadian farmers plan to increase planting acreage!

Considering the direction of grain prices (actually all commodities) Canadian farmers are unsurprisingly looking to max out their planting acreage.  No so much an interesting statistics, but in fact if you double the price of wheat farmers will increase their wheat production.

Obviously farmers have done their math, and the dramatic increase in fuel prices (and pesticide and fertilizer) still make the farming business attractive.  Anyway, there you go, if you raise prices farmers like the rest of us will respond to price incentive.

Monday, April 25, 2011

Canadian House Price – Bubble yet


A few weeks ago, I blasted a Canadian newsmagazine over its coverage of the Canadian house price rise over the past few years, and how there was not really a bubble (then maybe there was) without giving any facts.

In Canada, looking at the principal cities house price to median income we have:

Montreal:  4.2x
Toronto:    5.6x
Vancouver 7.0x
Victoria   9.0x
Halifax:  3.5x

BTW these are those I remember of the top of my head, although Calgary house price are high, income (all that oil business) have been rising even faster, so that although Calgary is expensive in absolute term, its not in terms of income.  Finally anything seriously over 4x is considered overvalued territory.

Below is a diagram of the U.S. (countrywide average) median income to house price.  




As can be observed U.S. house price are still not “affordable” by any sensible metrics (despite what the medias are saying) that have stood the test of time.  Last week, an amazing incidence, a house that was listed in a nice neighborhood of Vancouver sold for $2.5 million, about $600k over the asking price.  Its possible via Google Map to see this house, nothing spectacular, it looks like an average 50/60’s house with probably 3 bedrooms and a finished basement – lets call it 2,000 sqfeet.  The question is how can anyone justify $2.5 million for that?

I have no answer; moreover, there were 25 bidders on the house!

Thursday, April 21, 2011

Oil at $200

The story right now is that the “war” premium – caused by Middle Eastern instability is around $30; oil should be priced around $80 -- $90/bbl, instead of the $125/$110 we are seeing in the Brent and WTI markets. One of my favorite bloggist is EarlyWarning which discuses a range of issues but seems to have built a very interesting side business in looking at the Middle Eastern oil production market.

Readers will remember my commentary a few days ago that the Saudi oil minister had indicated that because of glut the Kingdom was reducing production from 9 million to 8.5 million bbl/day.  

 (Source:  Early Warning)

Early Warning looking at some third party data noted a number of interesting facts:  Rig count which had been declining for years has been rising in the past quarter.  Halliburton, one of the companies involved in drilling in the Kingdom indicated that most of the rigs were being deployed on older fields (that’s how you increase production), but also that long dormant projects were being re-activated.  Early this week the same oil minister indicated that it was unlikely that the Kingdom could increase production beyond its peak 9.5 million/bbl/day within the next five years.

Now if you read the Early Warning blog you would get all that, and since he’s a better writer than me… My focus remains Canada, with it ever increasing production of oils ands (the new production doesn’t involve tailing ponds), and the impact on North American energy security.  The Americas are in a position to be independent from the Middle East with regards to energy supply (prices are another issue), with Brazil’s new giant discovery (which make some of the current deep ocean drilling look like child’s play), Mexico (if they can get their act together and begin re-investing) and Venezuela (Chavez is not immortal) and Canada there is scope for energy security.  

The price side of the equation is something else, if it is true that Saudi Arabia will not be able to increase production beyond 9.5 MM/bbd/day until 2017, there is a major piece of the “assumed” production segment missing – because this has always been the bet, that despite demand/supply balance, there was always the perception that the Kingdom could increase production in a pinch, being the swing producer to keep the balance between supply and demand in place.  However, this is not the case, demand for oil is certain to keep on rising from BRIC countries as their economies are economies are on fire, in the case of China the current drought (one of the most severe) and coal shortage will force the country to import more oil (despite the treat of rolling blackouts).

Even if America slows down – gas price is now above $4 a gallon --- and expected to reach $5 during the peak driving season, the reality is that high (and even higher) oil prices are her to stay, because the supply side of the oil equation is no nearly as clear cut (and simple) as many analysts would like people to believe.  

Tuesday, April 19, 2011

O-Oh! Inflation in Canada

Expectations was for March 2011 inflation to be 0.6% and 0.2% (CPI & Core CPI), but the numbers were a lot higher:  1.1% and 0.7%.  More to the point, over the past 12 months consumer prices rose 3.3%, very close to the Bank of Canada’s target CPI upper edge (The February number was 2.2% -- so this is a very bad figure).


Digging in the data some of the biggest culprits were clothing/shoes (100% imported) and food (part of the food component is included in core inflation calculation).  Of course last week I commented on the difference in prices in Canada Vs. the U.S. and one of the sectors where Canada did worse was clothing and shoes… I guess Canadians are used to getting ripped off.  The implication here is that the BoC will have to look very closely at its interest rate policy; the second impact is that the apparels segment will probably face some margin compression going forward.

Seasonal:



What is even more worrying is the seasonally adjusted inflation number (Pure number no Core Vs. non-core): CPI rose 0.8% from February to March, the largest increase since October 2010. The food index, which was up for the fourth consecutive month, rose 1.6% in March. The transportation index, which includes gasoline, advanced 0.6% in March, following a 0.3% increase in February and continuing its string of increases since July 2010.

One niggling question:  Where is U.S. inflation?  Canada has seen its currency appreciate by nearly 7% over the past 12 months, and the U.S. and Canadian economies are tied to the hip.  Yet no trace of U.S. inflation.  Strange.

Monday, April 18, 2011

Euope and Da Banks

Reality of the European crisis are finally hitting market prices.  Also this weekend the Saudi oil minister said that SA was reducing production, because there’s just not enough demand to justify the current production level, which would seem to indicate that a good chunk of the current market pricing is driven by financial market hysteria – wow something new.

Back to Europe, over the weekend two developments:  the Finns elected parties that are against further PIIGS bail outs.  The second event was that the British government has indicated that they will no support any further financial aid beyond the help they have given so far under current European agreements.  Then this morning a spokesperson for the German ministry of finance indicated that Greece debt will be restructured before the summer.  

Once it is generally accepted that restructuring is required, the issue then becomes how much of a hair cut will be required.  The generally agreed (and to a certain extent priced) cuts for Greece, Ireland and Portugal is around 30% to 35% for the bond holders.  Implications for many German, French and Spanish banks are very serious, since they still hold huge amounts of sovereign paper on their books (and have much higher leverage than their American counterparts).  This morning’s CDS rates for Portugal (615), Italy (156) Ireland (588) Greece (1225) and Spain (250) were all rising (BTW anything over 400 is insolvent territory).

Another development, largely unnoticed, is that two CFO of TBTF U.S. banks resigned over the past few weeks (Bank of America and Wells Fargo); personal reasons were given, but those who read the tea leaves are taking the view that these CFO couldn’t be pushed anymore.  How to justify that JPMChase was able to further cut loan loss reserves while its CEO was saying that they don’t know what to do with all the homes they’ve owned for more then 500 days, no income and no outlook to sell these properties.  .

Finally about 30 minutes ago, S&P has put the U.S. rating in negative watch.  Still has its AAA/A-1 rating, but negative watch has been implemented.  No one expected S&P to take such action.  

Thursday, April 14, 2011

NDP or Conservative -- a perspective

“I asked my friend's little girl what she wanted to be when she grows up.  She said she wanted to be Prime Minister of Canada some day. Both of her parents, NDP supporters, were standing there, so I asked her, "If you were Prime Minister what would be the first thing you would do?"  She replied, "I'd give food and houses to all the homeless people." Her parents beamed, and said, "Welcome to the NDP Party!"  "Wow...what a worthy goal!" I told her. I continued, "But you don't have to wait until you're Prime Minister to do that. You can come over to my house, mow the lawn, pull weeds, and sweep my yard, and I'll pay you $50. Then I'll take you over to the grocery store where the homeless guy hangs out. You can give him the $50 to use toward food and a new house." She thought that over for a few seconds, then she looked me straight in the eye and asked, "Why doesn't the homeless guy come over and do the work, and you can just pay him the $50?" I smiled and said, “Welcome to the Conservative Party." Her parents still aren't speaking to me.”  

(Source:  Ms. Darcia Siryjenko via Denis Gartman)

Canadians are getting rip-off!

A study conducted by the Bank of Montreal showed that prices in the U.S. are between 15% and 30% lower than in Canada!  This is no big surprise, with the internet I can buy books at Amazon (for my Ipad) that are at least 20% cheaper than if I bought them from the Canadian equivalent.

But the best one yet relates to Quebec’s based SAQ (Quebec’s liquor store monopoly).  A few months ago they purchased a high end U.S. distributor, and the same bottle of wine in the U.S. sells for 28% less than in Quebec.  When confronted with this fact, the PR person (soon to be unemployed if there is any justice) argued that the SAQ has a wider mission, to generate additional revenues for the Government -- really this person said that to a journalist from the Montreal based French newspaper “La Presse”.  Truth of the matter, the SAQ is now stating that as a monopoly it has an OBLIGATION to rip-off its customers.

There used to be a thriving business in Canada of buying cars in the U.S., especially luxury models, at a very steep discount to what you would pay in Canada.  A friend bought a BMW X5 and saved more than $30k – the car was literally 30% cheaper in the U.S (with higher specs).  This trade is now more or less dead, as car prices in Canada and the U.S. are almost identical.  Still if you’ve ever bought shoes in Burlington (Vermont) you must wonder why the same pare is nearly double in Montreal…

A few months ago I purchased a new showerhead, using a U.S. distributor reduced my purchase price by more than 50%.  If I were able to purchase a heat pump in Vermont it would cost less then 40% of what the same machine (I know I checked) in Montreal.  Less competition I guess, importers with near monopoly position that are able to extract economic rent.  My guess is that increasingly Canadians will turn to the internet for their shopping as the price differential is wide enough to justify action.

The report by BMO outlines something that Canadians have known for many years, the internet was not an option a few years ago – and with NAFTA the only duties you have to pay are taxes (not an issue in any of the discussions we’re having here by the way).  I always check on the internet before I buy.  My guess is that once Amazon comes to Canada (for things other than books) Main Street will suffer.

Wednesday, April 13, 2011

Odds and ends in Canadian economic statistics



We’re in the quiet zone, some data is coming out but no real identifiable trend is emerging.

Interest Rates remain unchanged

The Bank of Canada once again decided to remain on the sidelines.  The BoC said: 
Although recent economic activity in Canada has been stronger than the Bank had anticipated, the profile is largely consistent with the underlying dynamics outlined in the January MPR.  Aggregate demand is rebalancing toward business investment and net exports, and away from government and household expenditures.

In other words the BoC is happy that industry is spending and that consumers are “holding back” a little.  There is still tremendous concern about the level of Canadians 'indebtedness.  

Inflation Expectations are rising

Input costs have been rising for more than a year.  Most Canadian companies are seeing their margins being squeezed and are looking at price increases – that would result in higher inflation in Canada (still below the BoC’s upper target range of 4% -- still).  Again this is not driven principally by wage inflation but material input costs.  There’s not much the BoC can do about those.

Employment growth:

In March, Canada lost 1,000 jobs!  As I’ve said before the underlying trend is more interesting, as 92,000 permanent jobs were created and 93,000 part time jobs were lost.  Quebec hit a speed bump, and saw a 14,000 job decrease – while Ontario saw a 5,400 job increase (I missed that one, it was a reminder from a reader!).

Merchandise Trade Surplus sinks to zero

OK, maybe not zero, but $33 million is hardly huge after the $1 billion registered in January.  It would seem that the car industry here is to blame, as is lower fuel exports.

Oil Prices

Gyrating between $105 and $112/bbl in the space of three days, tells you nothing, except that there are lots of upside open interest contracts out there (and some margin calls that caused a rapid price deceleration).  Predicting oil prices is a mugs game.  However, the EIA came out yesterday with its projections for demand and supply, and whole the excess capacity is not the same scope as it was in 2008 (1 million/bbl/day) it is still contracting from 3.6 to 3.1MM/bbl/day.  Short term demand elasticity is very low (very difficult to change short term consumption patterns).  Obviously Libya 750,000/bbl/day is the reason for the contraction, again war zones (Iraq and Libya) are at the centre of the supply/demand balance.  

U.S. Retail Sales meet targets, almost!

The more interesting news this morning was the U.S. retail sales numbers which showed a decelerating economy, although adding back car sales to the number showed a relatively good performance – at least until you realize that the car numbers include fuel purchase…and there the 16% YoY price increase may have something to do with this “strong” performance.

Monday, April 11, 2011

Strange day

This morning I woke up to the radio going-on about how oil prices had dropped, getting to my Bloomberg terminal at 7 this AM, I looked at oil prices and saw, WTI at $110/bbl – not far from Friday’s close, so a big WTF moment, then I realized that overnight WTI crude had gone up as high as $112/bbl.  Hence the radio freekout.

This morning, TSX opened down 45 pts, and is now near -85 pts, the news is that commodity prices are off.  So I checked “King” copper, and he’s up.  Mr. Aluminum (he’s up too, so are steel prices).  Oh and VIX index is down at 18, like everything is fine, 18!  So I just don’t know what’s going on here.  Actually, European and Asian markets were all off in Monday’s trading  – that makes more sense than commodities reflex, and the reality of the U.S. market is driven by POMO activity (Feds’ money injection machine).  My guess is that around 3 this afternoon the U.S. market will roll over.

Kaddafi (or Gadafy depending on your preferred spelling) is looking at a serious problem with the “rebels” and is in the process of buying time (maybe looking for a country that would take him and his family in?) from the “Coalition” (read the French Air Force here).  Hence oil prices are off a little this morning.  Fundamental problem in the oil market is the excessive speculation in the OTC market – we are talking net long position close to the 2007 peak.  The other problem in the oil market is demand and supply – there is virtually no systemic spare capacity:  America’s oil production has not changed in a decade, Mexico is falling fast (will start importing by 2020).  Canada is still growing but from a low base.  Middle East has not risen for more than 4 years.  Iraq oil is the only game in town now for supply growth.  Finally, and this is the kicker whereas in 2002 demand was 80/20 OECD/Developing world, it’s now 50/50 – and developing world is growing fast.

Back home we are in election mode.  You almost have to disregard the news cycle because the level of BS is simply astonishing.  Worse of the lot are the Conservatives (my natural affiliation), who are picking up cash from thin air on a daily basis (actually on Sunday nearly $7 billion magically appeared).  Ignatieff (the guy running for the Liberals) continue to behave like a university professor – and a particularly pompous one at that (you know the type, he’s always got to show how *&$# smart he is!).  Fortunately, I live in an electoral riding which consistently picks the Liberal candidate – Conservative candidates usually finish in 3rd place, so my very reluctant conservative vote will be wasted.  Moreover, I really really like the Liberal candidate – smart and well spoken.

Friday, April 8, 2011

Canadian Employment: Bad or Good news?


This morning the numbers for job creation were reported with a small drop for the month of March 2011, 1,000 jobs were lost instead of 28,000 created – as per the market’s expectations.  Now that’s bad news on the surface.  Dig a little (and since its on line 4 of the StatsCan report you don’t have to dig very deep, the underlying is that 91,000 full time jobs were created and 92,000 part time jobs were eliminated.

That’s good, because few people work part time out of choice.  Hence the U6 unemployment in the U.S. is around 15% (while unemployment is around 9%), because some people have part time jobs when the want full time work.  So this is good-“ish” news for Canada. 

Yesterday’s building permit for February came out at +9% which somewhat erases the precipitous fall in new permits for January.  Most of the gain was in the non-residential sector (not entirely surprising as if you are going to buy machine tools and equipment you will require space in which to install them.

These factors says nothing for the direction of monetary policy; we still have to see what’s going on with income growth.  However, the door to interest rate normalization is open the question is when will the BoC take action.  BMO is of the opinion that interest rates will be around 2% by year end… we shall see.  Canada’s economy is performing much better than the BoC had anticipated last year (target of 2.4% to 2.5% GDP growth), when in reality Q1 numbers are almost certain to generate GDP growth in excess of 4% (on an annualized basis).  

Wednesday, April 6, 2011

F35 to buy or not to buy

Canada is in the process of replacing its aging CF18 (already 30 years old) fighter aircraft.  Canada is a both a small and a large country, its geography is large, but its 36 million population is small.  The decision to replace the aging CF18 has been long and arduous, and the Department of Defense has finally settled on the F35 strike aircraft, currently being tested and readied for deployment (2016) in the US Air Force.

So far the DoD has indicated that the aircraft should cost about $75 million a piece and we are looking to buy 65 – for a total of nearly $5 billion.  On top of that the DoD has budgeted for the aircraft consumable and training facilities – basically another $4 billion. For a grand total of $9 billion. 

Those who want to buy the aircraft maintain that it was specifically created as a replacement for the F18 aircraft (the American version of the CF18), and therefore an excellent and affordable aircraft for the Canadian armed forces.  It also a dual mission aircraft, it is both a fighter and a bomber.  As those involved indicated, when the CF18 was bought it was purchased in the cold war environment where our enemies would be flying over the Pole!  The aircraft will be used by the US army, which means that in war theater Canadians (who often work in concert with the Americans) will have access to spare parts….

Those who are against the purchase have three principal issues:  First, the aircraft is not yet “operating”, it has been flying for a year but is still in the test phase.  So the final cost of the aircraft is unknown.  However, the cost per aircraft will not be $75 million, but nearly twice that $145 million per aircraft.  Which means that the total program cost is not $9 billion but nearer to $16 billion.

Second, although it is a replacement aircraft for the F18, it has two major flaws – it’s a compromise aircraft, as a fighter and a bomber it is great at neither.  Third, two key features are missing, long range and super cruse.  Canada is a big country and military aircrafts are the F1 of the air, they consume lots of gas, and have limited range.  Moreover, if the aircraft doesn’t have super cruise it must use its afterburners – great speed, but range drops off dramatically.

The first and second arguments are the poorest, firstly, the numbers given by the DoD are preliminary, Canada will not embark on this adventure until it knows the final number.  In fact, the aircraft may indeed cost $16 billion but that’s not a reason for not buying them.  One aspect that is somewhat strange in the cost calculation: Wikipedia shows the estimated flyaway cost of the aircraft (in all its versions) at $140-$150 million per aircraft (that the DoD talks about $75 million per aircraft seems to be an exercise in deception on their part).  Those who say that we should not buy fighter jets misunderstand the discussion.  If Canada is to have borders (especially in the North) it must enforce its sovereign rights.  Fighter aircrafts are a wonderful force projection tool.  The second argument that the aircraft is bad at its two missions is valid but irrelevant; Canada cannot afford to have both a fighter and a bomber.  It needs a fighter for force projection, and it needs a bomber for flight interdiction missions (e.g. Libya).  Canada needs a multi-mission aircraft. 

The one aspect that is troubling is the last one, specifically; Canada’s primary use for the aircraft is force projection.  Most of this will take place over the high artic – very far from bases, so the aircraft need long range operation capability (unless the DoD is also planning to buy a bunch of refueling aircraft).  Finally, the F35 is a single engine aircraft.  That’s a bit of a problem when flying in the artic. 

In terms of competitors to the F35 there is the F22 and the European Typhoon.  The F22 cannot be exported.  The Eurofighter Typhoon is also a twin engine super cruse high range aircraft, but by 2020 (when we are looking to replace the CF18) it will be an old program.  There are good arguments why the Typhoon is not appropriate, because by the time Canada is ready to replace the CF18 (around 2020) the aircraft will already be “old” at 17, and nearing the end of its production schedule.  Maybe the DoD bought the only “available” modern Fighter aircraft available!

Anyway these are the facts 

Canadian House Prices -- The Puff piece edition

One of Canada’s premier magazine:  Macleans (nice folks that talk about nice things – think of it as the Canadian version of Time Magazine), wrote an exposé on the Canadian housing sector.  Actually, a non-exposé, since the one hard fact disclosed in the article is that Canadians have too much debt.  [Note I don't link the article  -- its too embarrassing, use Google its called the "Canada Bubble", march ]

Although there is some discussion about how the Canadian boom in natural resources is driving demand for housing (and foreign investors are poring money into Canada), at no time does this article talk hard facts.  It’s a bit like watching U.S. TV news: “After the break, how your cat is killing you!”.  The truth of the matter is that Canada’s housing is doing very very well indeed!  In some places (Vancouver and Victoria) house price (as a percentage of median income) are in nose bleed territory (900% and 700 respectively).  In fact, there is a simple rule of thumb, if house price exceed 4 times the median income, the risk of bubble market increase dramatically.  Toronto at 520% is at risk, Montreal at 460% is on the edge, and Halifax at 360% is in the green zone.

These are hard facts, not to be found anywhere in the Macleans article.  Nor does the article mention that the Bank of Canada, OSFI and CMHC recently tightened credit rules for the more aggressive mortgages (the starting point for housing). No more 30 year, 95% mortgages!  Now the maximum is 90% with a 25 year amortization, and an interest rate reset test with higher rates.  In Canada, liars loan and non-docs loans just don’t exist.  

The Macleans article is all about fear and nothing about substance.  It presents both sides of the argument with equal standing, Robert Schiller in one corner (the guy who first alerted the world to the U.S. housing bubble), and a bunch of famous unknown each talking their books (guy at Fidelity selling his Canadian funds, and a guy in a local shop selling his foreign wares).

The reality is that for the past two years, the Canadian real estate market has been in the danger zone.  On the bright side income is rising, but house prices are rising faster.  However, change is a foot (nowhere mentioned in the article).  CMHC (Canada’s equivalent to FannyMay) increased qualification thresholds for its mortgage guarantees sector will take some time to work through the system.  Some signs that the changes are impacting the market.  New builds and permits for have been tepid for the last 2 quarters now, an indication that things are slowing.  

The other side of the equation is that Canada’s wealth is built on its materials & energy bull market, which is already a decade old, and shows some fundamental differences from the older boom bust periods.  The demand/supply drivers are fundamentally different; whereas in 2002 emerging economies accounted for 20% of oil demand, today it is 50%.  OECD economies have seen stagnant demand for energy, whereas emerging markets have seen near double digit growth.  These economies continue to grow (at high paces), demand destruction in OECD economies is more than compensated for by the growth in emerging economies.

The hard facts that Maclean avoided are: 

  • Canadian house prices are ripe for a correction as prices are growing fast than income (and are already in nose-bleed territory)
  • A 10% to 15% correction is “baked in the cake”, but it could overshoot
  • Canadian regulatory agencies are well aware of the problem, and have taken action
  • Resource bull market is not about to end – although if oil goes to $200/bbl, all bets are off.

The Macleans story was unfortunately a lazy scare-mongering puff piece that makes you wonder about the future of Canadian journalism.  BTW, if they published that what did they turn down?

Monday, April 4, 2011

Bank of Canada Quarterly Survey


As the title implies every quarter the BoC does a business survey, which ask four basic questions, (1) Are sales prospects growing, (2) Will you hire more people, (3) are you capacity constrained and (4) What is your inflation perception.

As a whole the answers were unsurprising; on the growth front, outlooks are tempering – but are now near the historical (last decade) average.  The same goes for employment growth and capacity utilization.  However, it must be noted that capital expenditure on plant and equipment is still above the trend line (but also returning to the historical trend line).



The BoC is well aware that there is a substantial level of commodity inflation baked in the cake for the summer.  Producer price have been nearly double the level of CPI (Core or otherwise) for nearly a year now.  Canada’s strong economy gives manufacturers some pricing power (inflation in the service sectors has been stronger for months now).  Overall, this report is indicative that the 0.5% growth in January will be the high for the year (the BoC had budgeted GDP growth of 2.5%, and the January GDP growth number would give rise to an annualized 5.6% GDP growth). 



So while inflation is now well contained, and the supply shock of higher commodity prices will be expressed during the summer, the BoC’s reality is that assuming that the CAD takes a break from rising (a big if…) then it would have the opportunity to raise interest rates.  Moreover, the ending of QE2 in the U.S. will also put upward pressures on U.S. interest rates.



Friday, April 1, 2011

Screening for Prostate Cancer is apparently a waste of time


I wrote about something similar a few years ago, specifically as it relates to the use of two stents during an angioplasty procedures instead of one.  Now the British medical Journal says that the incidence of cancer among those who are tested for prostate cancer and those who are not (rectal exam and PSA) showed no statistical difference.

In other words, testing for prostate cancer doesn’t improve survivability!  Rather a shocker as a guy who gets an annual physical, but not entirely surprising.  The same type of study was done for Breast cancer and it was showed that survivability didn’t improve for women below the age of 50 (in other words an expensive, intrusive test didn’t help).  

I wonder if there will be the same type of outcry there was for the breast cancer testing for women below the age of 50?  My guess is that exams (not fun, but part of the annual check up will continue), and that inertia will keep PSA tests on the list of blood test that are done every year by my doctor.

It remains interesting that over time a statistically significant (or insignificant) analysis of medical procedures can be conducted and lead to conclusions to improve treatment (or reduce inefficacies).  Still I will have a word with my doctor next June about these tests…

Socialized Canadian Medicine


Americans often (some Canadians too by the way) complain about Canada’s “socialized” medical system – in fact in Quebec it is one of the most restrictive systems in the world.  The bitching is that you may have to wait for essential car, whereas in the U.S., you pay your money and you get your service.

Of course never mentioned in these comments are what if you don’t have the money, or more to the point you don’t have enough.  How about if the choice is about feeding your family or getting cancer screening/treatment?  What do you do?  Well it appears that the answer is you feed your family.

In "More Adults Foregoing Medical Care, Health Insurance Due to Cost," Becker's Hospital Review highlights one of the tough choices the "recovery" is forcing many Americans to make.
More adults are foregoing medical care or health insurance because they can't afford it, according to studies by the New York-based Commonwealth Fund and D.C.-based Families USA.
The studies, reported in American Medical News, found that the economic recession has driven patients out of physician offices. The Commonwealth Fund study found the number of uninsured adults rose over the last decade from 38 million to an estimated 52 million, representing 28 percent of the working-age population.
The good news, of course, is that it leaves them with more money to squander spend on dollar store trinkets, junk food, lottery tickets -- and stocks.
More fodder for the bulls?

About half of America’s personal bankruptcies are caused by medical bills – wait for it, for people who have medical insurance.  Of late, I am unable to watch even the Daily Show (on Comedy Central) because the Republicans are big fat liars, and the Democrats are clueless.  

Right now America’ congress is debating a budget cutting measure that would reduce expenditure by a whole $60 billion (or about 4% of total deficit how impressive is that?).  At the same time the GOP is pushing for more tax cuts, and the Democrats are saying nothing useful, starting with the President himself.  Every morning I wake up glad that I don’t live in that country, now I try to avoid most news about that country.  I just cannot take it anymore

End of Rant