Monday, May 30, 2011

3.9% GDP growth in Q1/11

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 (effectively the non-service segment of the economy), were the engine of growth for the first quarter.

Although not germane to this analysis it is interesting to note that in Q2/10 the U.S. anticipated Q1/11 growth in excess of 4% and that Canada expected GDP growth, for the same period, of 2.0%. The differences between the two economies are more than cosmetic, Canada's economy is driven by the export of natural resources, and at home has an oligopoly of well capitalized banks, the Canadian housing market is now 6% higher than it was in Q1/07, making the Canadian market expensive (and in the case of Vancouver outrageously so) but also means that Canadians have a sense of wealth when looking at their principal asset (their house). America is a far more diversified economy, and although housing is now an inconsequential proportion of the economy, it is the first "recovery" that America has had which has not relied on housing for its initial growth. Canadian employment has recovered from the recession (although we still have not taken account of population growth), where as America still faces a 6 million job.

Friday, May 27, 2011

Friday Funny: Assailant Suffers Injuries From Fall

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 broken jaw…injuries he
sustained when the slipped and fell off the
curb after stabbing the Marine,” according to
a police report.

(Source: Denis Garthman)

Thursday, May 26, 2011

Earning Announcement Season!

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; several banks are now exercising the call options on these 10 year bonds.  Market perception of Canadian banks will allow them to re-issue such instruments at much lower cost.

Despite all the evidence that the Canadian economy is firing on all cylinders (virtually every sector of the economy is exhibiting strong growth) the market’s perception is that an increase in the Bank of Canada’s overnight rates is months away (maybe Q1/2012).  In early May, Canada had elections, it was reasonable for the BoC to stand aside until the election cycle was completed, as to not make waves during that process.  But a new majority government has been elected, the government’s perception is that it must reduce expense to balance the budget (since the economy is growing), and yet the Bank of Canada stands still….

Maybe the market perception is wrong (usually not) and that Carney will decide at the next quarterly meeting to raise interest rates.  Already the BoC has given the excuse that America’s economy was slowing – GDP numbers seem to be indicating this (as is unemployment) he can now add the problems in Europe’s “Club Med” that appear to be heading the way of a Greek tragedy – eventually someone will notice that excessive borrowing is not cured by more borrowings.  

It could be that the Bank of Canada is concerned over the USD/CAD exchange rate.  Historically, the BoC has stated that they do not consider exchange rates when making monetary policy, yet it remains that a strong CAD is contractionary, on the surface the strong CAD doesn’t appear to have damaged Canada’s manufacturing export machine, yet there are rumors that the some companies are re-locating their production facility to the US because of the strength of the CAD (mostly in the auto sector – as if Southern Ontario needed another slap!).

On a final note, for anyone who believes that cutting government spending is actually stimulative I have two words:  Great Britain.  Proof (as if any was needed) that when a government cuts expenses, GDP will be negatively affected.  It seems obvious to anyone who has ever studied economics – but still seems to challenge the conservatives’ world view.

Tuesday, May 24, 2011

Inflation in Canada remains at 3.3%


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 there is a perception that the recent inflation burst was “transitory” and based on a specific factor:  all commodity prices have exploded over the past 12 months.  Early this morning, GS began reversing its view on fuel cost, with a prediction that Brent crude was on its way back to $130 (from about $111/bbl today), and that the correction of the past few weeks was a ‘buying opportunity”

(Source: StatsCan)

We shall see, the CAD is now back to the 102/98 level against the USD, and the Euro is down all the way to 1.41 this AM (it was near 1.50 two weeks ago).  Again this is not a predictive piece just an observation.  The BoC must be a little freaked out over the downgrading of Italy over the weekend and of the UK Tuesday morning.

There are those who fear a sudden Chinese slowdown – again my question is how would anyone know?  Data out of China is notorious for being unreliable, driven by policy requirements, as opposed to reality.  

Thursday, May 19, 2011

Harper forms his new cabinet

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.  The Federal government should be looking at diminishing its presence in the economy, as the private sector expands.

Harper is a smart operator, facing a new (and very inexperienced) opposition formed by the NDP – now a “Quebec” party with 60 of its 103 members elected in the province.

One action that left many Canadians surprised was the reappointment of all three “ex-senators” which had resigned to run for parliament.  This has created some comments in the press – since the idea that a resignation from the Senate is a permanent affaire, and not a 30 day holiday, it also jeopardizes the concept of separation of the two chambers.  Finally, to my personal disgust, Ms Bev Oda was retained, she which lied to parliament, and was caught, a first in Canadian parliamentary history, which may be a sign that Harper’s belief in Canada’s democratic institutions is skin deep, and will be ignored when it is convenient.

On the economic front, not much news fit to print over the past few days, aside from Canada's TIC report, wholesale sales numbers were out this morning, not much excitement there in terms of trend or direction...

Why the US economy faces headwinds:



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:

  1. 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.

  1. According to RealtyTrac, foreclosure filings in the United States are projected to increase by another 20 percent in 2011.

  1. It is estimated that 25% of all mortgages in Miami-Dade County are “in serious distress and headed for either foreclosure or short sale“.

  1. 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.

  1. Sales of foreclosed homes now represent an all-time record 23.7% of the market.

  1. 4.5 million home loans are now either in some stage of foreclosure or are at least 90 days delinquent.

Miami-Dade is just insane, 1:10 was bad but 1:4 is a catastrophe.  The system will eventually work-out this mess.  There is approximately 125 million household in the U.S.  Despite the foreclosures and sales that have occurred nearly 3% of households currently pay nothing towards their housing costs, and therefore channel this spending towards other forms of consumption.  This spending will eventually disappear as the household move to rental accommodations.  My thesis is not that America is facing a depression (despite what the article implies); rather that growth will be substantially below par for the next three to five years, as the households relocate.

Wednesday, May 18, 2011

Sometimes the French are hilarious!

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 video and commentary.  The problem with modern technology!

Tuesday, May 17, 2011

Canada’s March TIC report


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 ebbed a little, oil prices are closer to their non-crisis level (they could still fall to around $80/85 zone without breaking the overall sentiment that the demand/supply equation is tight).  

Back to our Canadian story, Canadian investors have reducing their holdings of foreign (read American) bonds, but continue to be attracted to foreign equity markets (it’s a diversification issue).  Over the past 2 years, bond investors have been crushed, both because M/T CAD bonds have higher coupon and because of the strengthening CAD.  Foreigners have been buying everything, from high price condo in Vancouver and Toronto, to Canadian equities and bonds (of all stripes – Feds/Provinces/Corporate).

Finally, SocGen has an interesting analysis as to what happened to China's US Treasury bond purchase.  There has been many commentary as to the disappearing presence of Chinese buyers at treasury auctions.  Well it turns out that the U.K. has become a HUGE buyer of US treasury -- could the UK be China's beard in buying US Treasury (is is simply a decision by the Chinese to operate out of a different market?




Monday, May 16, 2011

Welcom to ZeroHedge readers -- now go away!

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 have no lessons for anyone.  None of the rules that apply to Canada can be replicated elsewhere.

Education:  Run by the provinces and not the Federal government (many many reasons for this).  Even Canadians don't know why their education system is successful (its a new thing here).  If you talk to parents they will tell you they cannot figure out how well their children are doing (grading has become strange).  We know our children read more than other kids elsewhere -- personally I blame our cold dark winters...

Canada's army is a bit of a joke (granted its an affordable one), did you hear about the subs we bought... they sink (and not in a good way).  We are fighting to decided if its appropriate to replace our 30 year old fighter aircraft (yep that's what we talk about between snowball fights).

Still thanks for the bump in readership, Canada just cannot be that interesting.  Trust me on that, we are boring!

Have a good day

Must Read: Flash Crash, Volatility and LVaR

Canadian manufacturing, back on track?

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).  Overall 15 of 21 segments saw increase in sales.  On the other side of the equation, inventories rose in line with sales.  Two sectors saw out of proportion inventory increases: energy segment (+21%), and in fabricated metals (+6.3%).  Order backlog has risen again, indicating that Canadian companies are still doing well in a strong CAD environment.  It does beg the question, [Note; for some reason inventory levels include raw material stocks in the energy sector (Coal/oil/gas), hence the inclusion in the discussion here]

One question which begs to be asked is if oil prices are rising (were rising actually) why are stocks also rising especially since the oil & gas complex is in backwardation?  Could the comments from the Saudi oil minister be correct, and could the recent increase in oil prices (via the futures contract market) are in the grip of speculators?  There is no doubt that the recent increase in margin requirements took the “sail out” of the energy market, an indication as to how frothy the future market was, since traders could not afford the additional margins (a function of increased volatility BTW, and little else).  Today, oil is trading around $97 – 15% below its $114 peak.  [Ok end of RANT on investor speculation on the futures market for energy/metals etc]

Overall, it would seem to be a good report for Canada – don’t know what the “pros” will make of this.  One inescapable fact is that Canadian manufacturing industry (that has survived) has been able to thrive in an environment of a strong CAD.

Friday, May 13, 2011

Friday the 13th curse?

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 two banks???


Inquiring minds want to know -- not really!

To story so far


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 expenditure away from mortgage payment to consumption.

What does this mean?

First, there is little scope for personal consumption to rise organically since it is already such a large percentage of GDP.  Second, over the next two years many Americans that today “consume” their mortgage payments will begin to pay rent – reducing their ability to consume. The housing overhang will last for another 24 to 36 months, and it is unclear how it will clear since so many Americans are no longer credit worthy.  Between 2002 and 2007 Americans have accessed their “home ATM” to meet their standard of living expectations.  While 8% of mortgages are in foreclosure, about 25% are “underwater” where the value of the outstanding mortgage either equal or exceeds the value of the home.  The home ATM source of disposable income for consumption has disappeared for good.  Therefore, business as usual for the consumer is just not on the cards

The other part of the equation is government spending, which is set to fall.  Federal, State and local governments account for about 25% of total GDP; whereas the Federal government is only now beginning to look at expenditure reduction, state and local governments have already facing to large budget deficits, and they are cutting.  BTW state governments account for about 2/3rd of all government expenses.  It is also important to note that several state have resorted to increase in taxes, further reducing disposable income.

Finally, and despite what the GOP is preaching, there is no way to balance the Federal budget without some revenue generation strategies. The GOP may oppose increase in income tax, but the reality is that sales taxes are almost certain to be needed to bridge the gap, moreover, it is a more ”egalitarian” form of taxation.  This will further reducing available income for consumption.  Yes Americans are inventive, but it remains that a federal government that has a deficit equal to 10% of the GDP will have to take action soon, rather than later. 

I am reluctant to get into the argument for growth in the private sector, but one aspect resonate across many sectors, while net profits continue to improve top line revenues remain sluggish.  American corporations have become master at the art of cutting costs, but there’s a limit to this strategy (although Q1/2011 performance has been spectacular).  Most American companies have indicated a reluctance to increase employment, until they see an upward sign in sales activities.

For all these reasons, headwinds for the American economy remain heavy.  Moreover, one crisis (either in America or elsewhere) could cause systemic tension to explode.  

Tuesday, May 10, 2011

The world’s strongest banks:


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
Toronto-Dominion #12
Royal Bank of Canada #17
Bank of Montreal #19
Bank of Nova Scotia (Below #20)

The first two banks are principally domestic – with very little foreign operation/revenues.  Royal Bank of Canada is by far the largest, and Bank of Nova Scotia by far the most international. FYI, #1,2 and 5 are OCBC, Svenska Handelsbanken, and DBS.

Merging of Stock Exchange

 
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 being challenged by Toronto (following the ending of a 10 year non-compete agreement).  A costly fight between markets was avoided and market stability remained.  However, users saw no tangible benefits in the form of lower commissions or maybe lower posted collateral.  The only benefits appears to be intangible: a steady market maintained liquidity, and in the business of derivatives liquidity is all important.

The question then becomes what is the reason for merger, and what are the reasons for the various levels of governments to support or deny the merger (especially cross border in nature)?

For the users there are three core aspects to the stock market:  liquidity, pricing and price discovery.  Over the past decade the rise of “Dark Pools” has been troubling, because it hindered price discovery.  The next question is has merger led to lower execution costs?  It is not entirely clear – manly because the dark pools may have forced the exchanges to lower execution costs.  There is no doubt (and empirical analysis proves this) that less developed markets benefited greatly from mergers.  Introducing innovations and generating additional liquidity.  The replacement of market makers system has proved to be generally an improvement (also dramatically reducing transaction costs).   
So Dark pool have helped reduce commission costs, but have hindered the price discovery process, which introduces additional inefficiency, but this arose out of the slowness of the markets to adapt.  The same can be said of high frequency trading platform, which act as an ultra efficient (and fast) price discovery tool for certain hedge funds.

Aside from the premium that arises from an acquisition it is difficult for shareholders to value a merger of two exchanges.  Ideally, bigger market share enable additional efficiencies (economies of scale) – however, stock market cross border transactions are different.  Each jurisdiction must maintain data within the original country, and abide by local regulatory requirements.  This limits the scope for cost consolidation, and therefore cost savings.  In fact, aside from the cost of the merger (and the massive payoffs to each exchange’s board & senior management), shareholders are unlikely to see much value. 

The econometric analysis of the merger of stock markets over the past 10 years reached the following conclusions:

(1)               Liquidity for large market cap firms rose
(2)               Mid cap and small cap saw virtually no change in liquidity
(3)               Technologically “backward” markets benefit with better execution, and were “pulled up” by the more mature/advanced markets (Portugal’s stock market is the best example).
(4)               Benefits are mergers were asymmetric, but the winners share no common attributes.

Looking at the merger being contemplated now, the problem is that they are all mature with limited scope for technological leaps.  There will be winners and losers but they cannot be predicted.  

Monday, May 9, 2011

Bloomberg headline of the day: KILL the messenger!

PORTUGAL OPENS CRIMINAL INQUIRY INTO RATING AGENCIES

Greece, Europe and the Club Med Dilemma

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 matter which debt management option they choose, it will cost taxpayers hundreds of billions. It is highly unlikely states will accept fiscal transfers of such a size without imposing extreme conditions on one another.

The political reason this crisis goes from bad to worse is an unresolved collective action problem. Both sides are at fault. The tight-fisted, economically illiterate northern parliamentarian is as much to blame as the southern prime minister who cares only about his own backyard. The Greek government played it relatively straight but Portugal’s crisis management has been, and remains, appalling.
(Source: Financial Time)


Friday, May 6, 2011

American Non-Farm Payroll up 244k

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

Canadian Data points & a Play:

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 Canadian property as a hedge.  Bottom line Toronto is starting to behave like Vancouver, where rich foreigners have been buying bolt holes for years.  Implications for the Canadian real estate market are positive if foreign investors continue to look at Canada as a safe haven.


OK, enough crazy talk, last night I saw: À toi pour toujours, ta Marie Lou by Michel Tremblay, a giant among Canadian (Quebecois) playwrights.  First produced in 1971, when Tremblay was 29 years old, it is both fantastic and dated.  Fantastic because the word play between the four actors is impressive.  Only  a decade after the  quiet revolution which marketed the ending of the control of society by the Catholic Church, it is set in a poor blue collar household.

What intrigued in Tremblay’s play 40 years ago was his use of verbal iconoclasm to shock audiences.  Of course today its sounds a little more vulgar and not very shocking (although we are not so removed, as French Canadians, not to understand the social subtext), at the time, my guess, would be that nervous laughter greeted many scenes, whereas as today amusement seem to be more prevalent.  Tremblay’s thematic limits his characters’ verbal abilities since it is set in a poor blue collar household.  Despite these language limitations this meets all the criteria of a true Shakespearian tragedy, and the wordplay between the actors is truly impressive. 

Despite these “modern” limitation, the thematic remains valid today.  The play speaks of the human condition among the more desperate segment of the population. All four actors did a fantastic job, but then this is one of Quebec's most beloved play... you expect no less.  They were however let down by the direction and the staging which at time made the charter talk to the back wall of the stage -- I'm not deaf, but I could not quiet understand what the characters were saying, and the presence of water on the stage, just didn't get that.  Still a must see!

Thursday, May 5, 2011

Its official: World is ending!


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/need to reduce government debt levels.

America remains mired in difficulties (despite what the markets are saying).  The housing market problem has been swept under the rug by the Too Big To Fail financial institutions.  In some part of the country (Florida/California/Nevada) the foreclosure rate is more than 1/15!  Jobs are being created but at the current rate it will take a decade to absorb what was lost in 2007/08.  The U.S. federal government needs to take action on the federal deficit, of course reduction in expenses would be nice, but with Medicare, Defense, Social Security and interest expenses accounting for 77% of total expenditure new revenues are essential to the conversation – and not only on rich people or corporations.  Americans are not paying enough taxes for the government system they want.

Emerging economies (China/India & friends) are facing very serious inflation (manly because they open the credit market spigots in 2007).  Moreover, these economies are looking at the “First World” as they export nirvana.  If Europe and America are in recession where’s their prospects for additional exports looks troubled.

What drove oil prices was fear of up rise in the Middle East (maybe $30 premium), and demand supply issues – when the picture is one where anticipations are that economic growth in emerging economies VS. stagnation of demand in “First World” economies is replaced by slow down in emerging economy (and maybe recession in the first world), then the drop in demand will immediately impact is a very abrupt price fall.  Moreover, a study emerged out of China that indicates that the level of speculative purchase of hard commodities was driven by lack of access to capital (the SOE account for almost all the borrowings from the big Chinese banks).  None of these factors are new – in fact the story of China’s pig farmers copper stockpiling is at least a year old.  

It’s more interesting to think of these events as convergent issues that individually don’t change behavior but eventually, taken together, forces the market to reconsider its bullish stance.  Where do we go from here? 

Corporate earnings for Q1/2011 have been mixed but positive, with some great outliers.  On the other hand when Wall Mart’s CEO indicates that its 250,000 weekly clients “are running out of money earlier in the month” there is a problem.  The barometer of job losses that had for the past quarter been improving is now reversing its positive trend, with more jobs being terminated; last week’s print of 475k losses was bad especially after the previous week’s tally was revised from 410k to 431k losses.  The second week where job losses exceeded 400,000.

Personally, I believe that Bernake in his press conference indicated that QE3 is already here.  Since the Feds will not reduce their holding of securities – elegantly exiting the market.  Instead, the Feds will remain key players (at least until Congress tries something stupid).  By the way how stupid are members of congress that want to veto any increase in America’s borrowing limits…

Finally, what does this mean for Canada.  Strictly speaking as long as oil prices are above $80/bbl Canada's economy is fine.  The Canadian dollar will sink back towards parity with the USD, but Canada's economy is fundamentally sound (construction is "exploding" with demand for permits up 17% in April), but it remains that any drop in the prices of hard commodities is bound to affect the Canadian market.  

Maybe sell in May is a good investment strategy.

Tuesday, May 3, 2011

Canada Voted

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.  

Over the past 10 days the mood of the Quebec electorate had begun to change with the NDP support rising quickly [103 seats].  The Bloc Quebecois noticed, and changed its strategy, from one of “Quebec First” to this election is not about left/right, but about Quebec independence.  They brought out the big guns of the independence movement (Parizeau, Larose, Marois) and they hammered that message.  It was pointed out (everywhere in the press) that this was a very risky strategy, and their worse possible outcome emerge with a total rejection of the Bloc Quebecois by the electorate (what impact this will have on the provincial political landscape is unclear).  Voters rejected the “sovereignty” message, in fact it probably made things worse, turning off many BQ supporters with the radical dialogue, proving (if proof was required) that the BQ movement (since it only fielded 75 deputy it stood no chance of ever winning a Federal election) was a fight of our past.

I mentioned before that political parties are driven by the youth (although they don’t usually vote much), they provide the energy and the new blood required for a party to remain relevant (and cool), but with a majority of Quebec graduating students being from newer emigrant stock that have no interest in Quebec’s 50 year old fight for independence.

Where the BQ goes from here is unclear.  Oblivion is an obvious outcome, but the BQ could still survive.  One important factor is the Conservative’s agenda to cut the public funding of federal parties – introduced in the last parliament it was withdrawn, but now that the Conservatives have a majority… The only real problem for the Conservative is that they money game is currently very unbalanced, apparently in Ontario the spending was 15:1 in favor of the Conservative who had a massive war chest.  For the BQ the lost of Federal funding may be the last nail in the coffin.

Monday, May 2, 2011

IPPI 12 months up 5%

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 that will stabilize.  It is unclear at this stage with the BoC’s actions (or views for that matter) will be.  However, many signals are emerging from the Canadian economy that all segments are firing on all cylinders, and that there may be some scope for some monetary (and maybe even after today’s elections) fiscal tightening.

On the bright side (and maybe tempering Carney’s ardors) excluding mineral fuels, IPPI for March would have been down 1.9% -- of course eliminating factors that show increase will always result in better numbers.  Still, fuel prices are externalities to Canada’s economy, and impose a “tax” on Canadians.  Finally, the strength of the CAD also acts as a cooling mechanism.

Interesting times.