Farmer Diaries

Expressed at an annualized rate, Canada's Q1/11 GDPgrew3.9%, after expanding 3.1% in the fourth quarter of 2010. By comparison, real GDP in the United States grew1.8% in the first quarter of 2011. Considering that that last week the Federal government announced that its revenues were $6 billion higher than anticipated – reducing the deficit to $24 billion, it surprised no one that Q1/11 GDP growth was around 3.9%. Together with the higher inflation that Canada has been experiencing over the past few months (Core at 1.6% and total at 3.3%), this should give ammunition to the BoC increasing interest rates. However, the market doesn’t believe that interest rate tightening is in the cards until Q1/12 – principally, because the BoC remains concerned about exogenous risk in America, Europe in General and Club Med in particular). Digging into the data it is evident that manufacturing (we already knew this) is doing very well, manufacturing, mining and oil and gas extraction (effectiv...

Orville Smith, a store manager for Best Buy  in Augusta , GA. told police he observed  a  male customer, later identified as Tyrone  Jackson of August, on surveillance cameras  putting a laptop computer under his jacket.   When confronted the man became irate,  knocked down an employee, drew a knife  and ran for the door.   Outside on the sidewalk were four  marines  collecting toys for the Toys for Tots  program. Smith said the Marines stopped  the man, be he stabbed one of the Marines,  Cpl. Phillip Duggan, in the back; the injury  did not appear to be severe.   After Police and an ambulance arrived at  the scene, Cpl Duggan was transported  for treatment. “ The subject was also transported to the local hospital with two broken arms, a broken ankle, a broken leg, several missing teeth, possible broken ribs, multiple contusions, assorted lacerations, a broken nose and a bro...

Canadian banks are announcing their first quarter results.  Overall the trend is one of rising revenues and profits (all six major Canadian banks have announced rising profits and five have announced rising revenues), which support the overall economic story for Canada that the recession is well over, and companies, can and do borrow for productive purpose.  No doubt, yesterday’s announcement that house prices across Canada were still rising is giving food for thought to Mark Carney, the Bank of Canada’s Governor.   Ok, so in a nutshell, Canadian companies (manufacturing or otherwise) are doing well, headline inflation at 3.3% is well above the target range of 1% to 3% that the BoC tracks, and the core CPI is around 1.6% at the middle of the range, and yet overnight Canadian interest rates remain excessively simulative at 1% (in effect real interest rates are negative).  All Canadian banks issued subordinated debt in 2006/07 as a way of increasing tier one capital;...

The headline says it all, again Energy is the main culprit for April’s high inflation number (YoY increase if 17% for crude and 26% of gasoline).   There’s not much that Canada can do about energy prices, in fact removing energy from the total CPI leads to inflation to be 2.0% and core inflation to be 2.4% (the impact of lower summer prices on vegetable is a net negative on the index). (Source: StatsCan) Of course an open economy such as Canada has will always face external factors ( Canada is a price giver in no segment – maybe excluding Maple Syrup…).   Although the Canadian capital market continue to expect tightening with increase in interest rates, timing has slipped to Q4/11 (with a 25 bp hike) and maybe another hike in the early part of 2012.   Market perceptions are extremely fluid, a week ago a Q3 and Q4 hike was “baked-in”, and today the market takes the view that any tightening will happen rather in late Q4 and early Q1/12.   Among certain economist ...

No real surprise here, any new government is constrained by regional representation.   For Quebec , which sent five conservatives to the Ottawa parliament, four made the cut to minister, which is high.   But then Quebec is about 1/5 of Canada ’s total population.   The entire cabinet (28) dictates (unfortunately) this level of representation.   Some look really smart, others have been given position where they can do little harm. It is too early to say how this cabinet will perform; the big jobs remain in the hands of Haprer’s trusted lieutenants, so continuity should be the name of the game here.   The budget (which led to the May 2, election) will be presented to parliament for its approval, and with a 12 seat majority should pass easily.   The conservative nature of this budget (with target to reduce the Federal government deficit by 2015/16) will probably be well received by most Canadians and is especially relevant given Canada ’s economic strength....

Last week I made a  comment  about how the US recovery was jeopardized by housing.   This morning Zillow came out with a long list of issues with the housing market, but these are six that attracted my attention: Historically, the percentage of residential mortgages in foreclosure in the United States has tended to hover between 1 and 1.5 percent. Today, it is up around 4.5 percent. According to RealtyTrac, foreclosure filings in the United States are projected to increase by another 20 percent in 2011. It is estimated that 25% of all mortgages in Miami-Dade County are “in serious distress and headed for either foreclosure or short sale“. Two years ago, the average U.S. homeowner that was being foreclosed upon had not made a mortgage payment in 11 months. Today, the average U.S. homeowner that is being foreclosed upon has not made a mortgage payment in 17 months. Sales of foreclosed homes now re...

France has been bitching about DSK’s treatment, especially the Perp walk!   Let see in France DSK, via is political connections, would probably be walking free right now, but lets just suppose that he faces the French criminal system. In France , via the Napoleonic code, you are presumed guilty, you have to prove your innocence, you have no right of silence and “illegally” obtained proof is admissible.   Finally, access to a lawyer is not always guaranteed.   Now granted that DSK has the resources (after all he was staying in a $3,000 a night hotel room) to have a top notch lawyer, it remains that under the French criminal legal system the burden of proof is with the accused, and not the other way around.. Still, my suspicion is that DSK will get a better treatment in U.S. courts than he would in France … I especially liked the French government’s prohibition for French newspaper to show the Perp walk, after all, anyone with the internet could see not only images but...

March 2011 has the distinction of being the second worse month for capital inflow, with “only $6.3 billion” in new money coming to Canada .   February was the worse with slightly less then $5 billion.   One thing for sure is that the all time high of May 2010 ($22 billion) is in no danger of being upstaged.   Interestingly, whereas in February there was net bond redemption and the story was all equity all the time, the March number show a very balance investment strategy between bonds and equity.   (Source: StatsCan) The reality is that for Canada $6 billion per month (equal to 4% of GDP on annualized basis) of inflow is very respectable and can easily be absorbed by our economy.   The total inflow last year was slight more than 8% of GDP, which is a fair chunk of change, and although Canada is reluctant to consider capital control, the risk is always there that the “hot money” will cause problem to the economy.   Thankfully, the commodity “rally”: has ...

Trust me there's nothing to see here.  This blog is all about Canada, 24/7, Canada all the time!  Really boring boring place Canada -- we speak English (more or less) like the Americans (different spelling on certain words). We also speak French (although our French cousins need subtitles to understand our movies -- and sometime us too).   None of our successes (or failures) have any applications elsewhere!  Canada is a special case country.  No lessons can be drawn from our political process.  Trust me on this: Healthcare -- its OK but France and Germany are almost certainly better (less expensive with better outcome). We don't talk about our "southern neighbors" health care system here (they get really pissy when we mention that their system seems to fail many of them and is terribly expensive) Banking system -- our tiny banking system with 6 "real banks" that account for about 95% of all retail deposits.  We ha...

W arning signs on market liquidity risks

Once again, a month does not a trend make.  It is often forgotten that although manufacturing is a smaller percentage of Canada ’s GDP (than it was just 5 years ago) it is still an important component (around 13% of GDP), and about 15% of Canada ’s export (granted a good portion of that are cars destined to the U.S. market). Nevertheless, Canadian’s manufacturing performance, in light of the strong CAD, is impressive.  So when the CAD was at its highest level manufacturing exports rose by almost 2%, reversing the sales losses of February.  I am looking forward to Canadian productivity numbers (especially those that strip out the service industry) to see if once again, despite the absence of Canadian industrial policy, Canada’s manufacturing sector found its own way to increase productivity (without the ineffectual hand of various levels of government).   ( source: StatsCan ) The increase was across the board (transport equipment +6.3% was half the total gain). ...

Markets are tanking today!  Numbers were not that bad, Greece is at the same place it was!  Suddenly investors care.  Aside from that Bloomberg released an analysis of the world's strongest banks -- In the top 15, 5 were Canadian, three from Singapore and two from Switzerland.  None of the Canadian banks are rated AAA by Moody's (or S&P) in fact, National Bank of Canada (#3 in the world) is actually rated the weakest (in rating terms).   I point this out to make this story funnier, it turns out that Cyprus only two commercial banks have an exposure to Greece of about $30 billion, or about 170% of Cyprus' GDP.  Today, everyone is talking write-downs on Greek debt (Duh!) with hair cuts of 40% to 75%.  In this instance, a poor country that has not too much sovereign debt could find itself as the world's most bankrupt country in about 5 minutes. I wonder what rating Moody's and S&P assigned to these...

Over lunch yesterday with a friend we discussed the direction of the American economy.  I am naturally bearish and he is naturally bullish. So this lead to an interesting lunch. He asked me to articulate my thoughts and here they are: I believe that the American economy faces heavy headwinds and that “business as usual” is just not on the cards.  Moreover, the American economy’s make up, imposes some real limits to future growth. Over the past two decades, personal consumption as a percentage of GDP has trended upwards.  Looking back to the 80s and 90s personal consumption hovered around 60%.  In 2010 it reached 70% – it is much higher in the U.S. than in the rest of the OECD. Secondly, more than half of all adult Americans have FICO score of less than 600, prohibiting them from obtaining a mortgage.  Third, in some of America’s largest cities 8% of all homes are in default, where the home owners are channeling all expenditu...

The list here is interesting insofar that Singapore three banks are all included (Five of Canada’s 6 largest are in the top 20).  Switzerland’s two main banks are in the top 15.  Interestingly, all these countries banking regulators share a common view of banking:  Banks are utility, that are too big to fail, and therefore have to act cautiously.  Granted, Canada has so far been extremely lucky, the commodity boom, and a very healthy housing market have been tremendously helpful to banks' balance sheet, and aside from Australia it is the only housing market where prices are higher today than they were in 2007.  Bloomberg’s rating methodology may prove to be excessively beneficial for financial institutions that operate in small market, where retail deposits account for a higher percentage of their funding base.  Still Canadians will take honors when they are given. Canadian Banks Ranking National Bank of Canada #3 Canadian Imperial Bank of Commerce #4 T...

  Merger mania is in the air.   So far, aside from generalities, little has been said about what benefits a merger between the TSX and the LSE would bring to shareholders and users.   Since shares have to be listed on a public exchange and Canada has only one, the TSE has some aspect of a public good.   Moreover, whereas the merger of the various European stock exchanges in the beginning of last decade made a lot of sense, the new cross border transactions are a different kind of animal.   One has to wonder what benefits are derived from the merger of cross border stock markets.   There have been a number of studies, although the “merger mania” only began 12 years ago.   So far the data is sketchy, and most analysis seems to indicate that, at worse, users are no worse off.   A few years ago the Montreal and Toronto stock exchanges merged.   This was probably a good merger because Montreal’s position as the sole market for derivatives was be...

PORTUGAL OPENS CRIMINAL INQUIRY INTO RATING AGENCIES

Last week’s non meeting between the various European finance minister solved one thing, Europe is not set up to deal with a crisis. On the face of it this is an indictment of European union, but this problem is also true for the rest of the G7 countries. Exception would be Canada, simply because Canada’s fiscal crisis occurred in the mid 90s. When the world was growing, and Canada benefited from inclusion in NAFTA.   Anyway the Financial times said it best   The core issue in the eurozone crisis is not the overall size of the peripheral countries’ sovereign debt. […]. The problem is that the eurozone is politically incapable of handling a crisis that is now contagious and has the potential to cause huge collateral damage. The “grand bargain” – a series of institutional agreements on eurozone sovereign debt by the European Council in March – did not address the resolution of the current crisis. That process is starting only now. Those responsible have realised that, no mat...

At 8:30 this morning the US Gov't published the above figure.  Reading the fine print:  Birth/Death added 175,000 jobs to the report.... so nearly 3/4 of the "job creation" was a statistical fix.  The B/D adjustment used to be a small number (like 10-15%) today its is often half the index, and today it was nearly 3/4 (72% actually). Total unemployment rate rose to 9%..  market reaction has been very bullish, although after 4 down days there was bound to be a positive spin on the week.  Oil $114 to $99, Silver $50 to $33, Euro from 1.49 to 1.45. Have a great weekend

Yesterday, Statistics Canada disclosed the March 2011 construction permit demands:   Up 17%.   This morning StatsCan announced that 58,000 jobs were created in Canada, of which about 13,000 were full time (BTW, for US readers that’s about equivalent to NFP printing 600,000 jobs – we know the market this morning is “hoping” for 185k). The recent (this week) commodity price weakness will probably not change anything, being a metal & energy producer Canada is used to the wild gyration of commodities, and the productions companies of these goods, are well aware that nothing moves in a straight line. A friend involved in the real estate segment was amazed by the construction boom in Ontario (where the majority of new construction permits were issued) where the $1,000 +sqf condo market is out of control.   This “ultra” luxury segment in Canada is being overbuilt and in their estimation will end in tears for someone.   Speculations are that rich investors are buying...

Ok, Monday morning oil was at $114 /bbl.   Today it’s around $100 – all this in less than 96 hours.   The markets have been down for 3 days running (if history is any guide we are looking at the difficult quarter).   Could it be “Sell in May, go away” actually works?   Bottom line is that the market was setting for a fall over the past 30 or so days.   First, in the U.S. a great deal of the market upturn in the first quarter was driven by a 4% GDP growth target – the figure no is looking more like 2%.   Not exactly a barn burner is it?   One indicator that the market is ready for a fall is Bull/Bear index – when it goes to extreme, its time to do the opposite. Fundamental are also tricky, honestly how can the European situation improve if the only solution to too much indebtedness is “more debt” in the form of rescue loans from the ECB.   The UK , Greece , Portugal and Spain are all looking at economic contraction this year due to a desire/ne...

Turning on the TV last night at 10 PM (when the first results began to emerge), one inescapable fact had to be contended with:   The Quebec political landscape has changed dramatically.   From 48 members of parliament the Bloc Quebec is down to 3 (maybe 4).   Not only did they lose the election, the also lost the popular vote – at 23% its lowest showing in nearly 17 years of existence.   The lowest figure that anyone anticipated for the BQ was to retain 20/25 seats (that would have been considered a terrible loss) – 3 or 4 seats is a disaster, especially since the BQ will no longer be considered a party in parliament and therefore will loose financing and speaking opportunities. The Conservatives won a majority (deservedly so) [167 seats], and the Liberals were decimated [30 seats] with their worse showing ever (I mean since 1867 when Canada came into being…).   For the first time ever, the Liberal Party is neither the opposition nor the government.   Ove...

Title is a little cryptic, but bottom line Industrial Produce Price Index for the month of March 2011, shows a 12 month increase of 5%, over March 2010.   It would have been 6% had the CAD not strengthen by 4.8% during the same period. The biggest contributors were the energy complex, with oil up 13% YoY and coal up 24% YoY.   On the positive side metals and raw material prices were down, but as everyone knows precious metals were up.   There is no doubt that there is continued pressure on producers’ prices will eventually impact the bottom line of Canadian producers, and already the diffusion index (on prices) shows that an increasing number of producers are looking at price rises. None of this will be a surprise to Mark Carney (BoC Governor) in his ultimate decision to increase (or to stay) on interest rates.   It is evident that the Federal Reserve takes the view that raw material prices (energy, Metal and non-metal materials) are showing transitory increases t...