Wednesday, November 30, 2011

Canadian House prices stabilize

After an epic 9 month rise in prices, things seem to be cooling a little up in the great white north.  Obviously the Federal government enacted new mortgage provision in May of this year, it was always anticipated that it would eventually impact price/demand.  Maybe this is the first sign.

The Teranet National Bank House Price Index was release this morning, the news for the country as a whole was that growth on a national basis has been slowing for several months -- in  July price rose by 1.5% (not annualized) and in August the number was 0.9%, so September 0% growth is a clear indication of slowing.

Obviously, with a country like Canada the local picture is somewhat different.  Halifax (-1.1%), Calgary (-0.8%), Quebec City (-0.4%) were balance by increases in Winnipeg, Victoria and Toronto.  Interestingly other data points (from StatsCan) show that mortgage borrowing growth has "tempered" to 7% (it was as high as 16% in 2007), and construction for housing is also dipping.

It is still much to early for the BoC to claim victory on the ridiculous Canadian housing market, because national income is rising in Canada (its still falling in the US) should growth in price be tempered for a year or two the problem (soft landing -- ha ha) would literally go away in most areas (BTW I don't believe this for one second).

We shall see.

Canadian Maybach

Ok, so this morning walking by a very fancy hotel, there was a Maybach parked in front of the door.  That's that insanely expensive car



Anyway, what was interesting was the "Canadian" aspect -- back seat was covered in Hockey gear, back window was open and there were at least two hockey bags on the back seat and a couple of sticks. Only in Canada -- you drive to your local hockey ring with your gear in the back, 'cause you may be able to afford a $400,000 car, but yous till play hockey with your mates!

Canada is hockey mad!



All central banks coordinate action

Yesterday the Financial Time announces that the Euro had 10 more days, Moodys downgraded a bunch of banks, and this morning Global QE3 was jut announced (coordinated central bank action, Europe, Switzerland, USA, Canada England).  So borrowing dollars (swap rate) has just become a lot cheaper.  If past performance is any indication of how long this will push stock price, I would say December 31st 2011 for a high (S&P 500 could even breach the 1,300 level -- its at 1,225 this morning).  This is not a market for short players.

Eventually, the world will realize that yes there's a liquidity problem, but there a more dramatic solvency issue here too.  The question is will this help?  Because although a cut int he borrowing cost is nice (in 2008/09 US banks generated $13 billion in profits from borrowing cheap (s/t) and the lending the government (l/t) and milking that zero cost yield curve, the fundamental problem is that if you don't trust the counterparty (i.e. other banks) to be around in a few months, there is only one interest rate that interest you 100% payable upfront!


Tuesday, November 29, 2011

Known unknowns! Iran flexes its muscles

Rumsfeld famous quote "for there are things we know, there are things we know we don't know and then there are things we don't know we don't know" (better known as: Shit happens!).  Still, we've know for some time now that things in Iran were heading on a collision course.  Stuxnet was clearly part of a "dirty covert war" no one knows who started it all -- but there are only a few place were such a sophisticated worm program could have been written (and the delivery system was amusing -- apparently via peer to peer sites! you know these sites were you download movies illegally!).  Then not so subtle was death; for a time the world's most dangerous profession was Iranian nuclear scientist -- several died from bullets, other via bombs and one apparently from gas attack!

No doubt this slowed down the Iranian's "peaceful" objective to gain nuclear technology, now buried in 20 different sites across the country.  Iran has been seething at this "cold war" with few weapons at its disposal (although rumors are that they've been arming the Taliban and other "anti-Western" freedom fighter (ok so they call them that, we call them terrorists -- its a matter of where you sit in the debate).  The stakes were just raised last week when the UK imposed an embargo on all oil products from Iran (BP is still a British company -- so the embargo stung). This morning Iran decided to "invade" the British Embassy and take hostages (anywhere between 6 and 8 people were abducted).  

Iran is not loved, first of all the rest of the Middle East hates their guts, Iran is not an Arab country its Persian, its dominant religion is Shi'a Muslim, not Sunni -- ok same branch, but tell that to the protestants and Catholics -- some rather impressive wars have been fought on that difference (BTW they are also divided, Sunnis are mostly in the South and are mostly Arab...).

So, the Brits are really pissed, the American never in love with Iran (at least not since 1979 -- that's when the Iranian monarchy was deposed -- puppet regime of the U.S. CIA), a good chunk of the 6th fleet "happens" to be around the corner (just outside the Syrian border and in the Persian gulf).  Israel is really getting nervous (there are apparently 10,000 missiles aimed at Israel), the rest of the gulf would really like a regime change in Iran (see above), but will not actively participate (but will not get in the way either).  Russia's just had as much fun as it can stand from Iran.  Don't forget that it was Iran that was supporting the Chechen movement (and Putin just got the president's job back).  

No, the stars are not in a very good position for a peaceful resolution.  BTW if "war" is declared (really antediluvian concept), or an border accent occurs (more than likely) you can bet that oil prices will shoot up dramatically.  Finally, a note on the 6th fleet thing; that was made public last week, and everyone assumed that this was a direct consequence of the recent events in Syria -- no one made a move to change that narrative, although it made zero sense for America to get involved in that fight, but Syria is the direct path to Iran (Iran is basically just behind Syria.

Sino-Forest -- or is it Monthy Python

Imagine that the entire world thinks that you are a fraud; to debunk these views you hire an independent group that will investigate your business, your assets and your suppliers/buyers.  Sino bought standing forest and then sold these forests to third parties (Authorized Intermediaries ) -- you give the names of these AI and their addressed to your crack team of investigators, these buyers are big firms BTW, the own truck, chain saws and possibly even processing plants (these are huge) then again this can be farmed out to other parties (still these plants must exists somewhere -- trust me transporting timber is not a small scale operation). Then your crack team goes to China and goes to meet with these companies.  Guess what happens in the case of Sino-forest's AI:  The independent investigator goes to the business addresses (supplied by Sino-Forest) but they can find no trace of the companies -- in fact they find other business that have been around for years...

Bronte Capital does an excellent job here, have a gander.  How some of these guys don't end up in jail is beyond me... of course since they are mostly Chinese national living in China, I wish the RCMP good luck in locating them and arresting them (thank God the CFO is Canadian -- he's going to have fun over the next decade).

This is the kind of conversations the RCMP will soon have:

RCMP:  Im looking for Mr. Kai Kit Poon

China Police:  我不知道主席套件


RCMP:  Mr Poon lied to Canadian investors


CP: 他没有中国人所以我不在乎


Nuff said!



I am accused of being too bearish

A friend of mine accused me of being too bearish; I'm not bearish, I'm selective in what I report on (like growth of derivatives).  Like this morning's successful Italian 10  5and 30 10 year bond auction at a yield of 7.6% and 7.2% respectively... Yeah, that's "winning" as Charlie Sheen would say!

However, I had not seen Cramer of late, last night rant:  "Defcon 3" was truly bearish.  I only saw that this morning.  Have a look here try that for pucker factor!  Unfortunately, I agree with Cramer, credit makes the world go round, and its in short supply with the European banks cutting everywhere -- think about it AMR declared bankruptcy this morning (American Airline's parent co), most probably because it cannot access credit (and thereby repay its current lenders).

Now that's bearish

Monday, November 28, 2011

Air Canada may go! TSX Rebalances

The indexes used by all investors as a barometer to the investment strategy is reviewed on an annual basis to make sure that it is representative. The TSX is doing its periodic review and several companies are looking to join the index (huge impact in terms of price as money managers will buy the underlying stock to "re balance" their index -- yeah that's why I pay my guy 1% a year in fees...), and who's about to get kicked-off.  Anyway of the two names on the list for getting kicked out:  Yellow Page Media and Air Canada stick out.

The former is phone book companies that is discovering that the internet is a much quicker and useful search engine that their phone book... call it a technological shift.  The other, is Air Canada, the country's "National Carrier" -- it is still Canada's largest but not the most profitable (WestJet wins that one), and has gyrated from small profits to big losses throughout its existence.   Reminds me of an airline joke:

Q:  How do you make a small fortune in investing in the Airline business

A:  You start with a large fortune.

Now don't get me wrong, by North American standards Air Canada is by far the best customer experience on long haul flights -- its about the same on short haul as West Jet -- and much better than anything on a U.S. airline which is always a dismal experience...  When I was in "the business" a respectable carrier could expect a load factor in the mid 60s.  For the past 8 years Air Canada's load factor has been in the mid 80s -- trust me that's very impressive.  Fuel costs are huge (20/40% of an airline's variable costs), aircraft are not cheap, the latest 787 will set Air Canada back about $120 million each (they also have to train crew, get spares and train maintenance crews).  The job of flying is generally undemanding -- until it isn't.  Commercial flying is hours of boredom punctuated by the occasional crisis (with a huge "pucker" factor)-- where a million things can (and at time do) go wrong.    Dealing with passengers (even if you are a glorified waiter) is difficult -- they cannot leave and sometimes things don't go as plan.

Those who did well are the Private Equity funds that invested early in the restructuring and got a kings ransom out of their short term investments.  They were able to walk away with the goodies will employees pension plan went unfunded (in what universe is this legal?).  However, while Air Canada's stock in 2001 was trading around $20/share it trades around $1/share today.  Its market cap is 1/4 of billion (Westjet's market cap is around $1.6 billion). The airline operates with negative tangible net worth (about -$1.5 billion).  Despite the CEO's best efforts Ac is circling the drain (again).  The TSX has more or less decided that its curtains for AC -- its just now "representative" of Canada's listed companies. 

Futures up 2.27%

Looking at the action in Europe this morning, it is evident that something is going on.  First, these massive moves (more than 3% -- and financial institutions more than 4%) impact short positions, either forcing additional collateral posting, or liquidating and taking the hit!  Well, it looks that option two was selected (usually that's the way out), buy the underlying and get out of your short positions.

The same is true for the U.S. BTW -- so now what.  Well the reality is still the same; there is no quick or easy fix for Europe -- and some rather hard things are occurring in Italy this week (a number of bond auctions).  Stories that the ECB has changed its mind (over Merkels cold dead body!), or that the IMF is putting in place a $600 billion facility for Italy (right because it makes sense for the rest of the world to "bail out Europe" when they don't have the balls to do anything!) have come and gone (official denial).  Right now the market says up up up, and so the shorts have to liquidate.    

These rumors are just explaining a classic short squeeze that's been played a number of times in the past.  Since the regulators know the size of the short positions, they can judge when and where to act to "kill the shorts" .  Bottom line there are no real solutions being contemplated (in public at least).  My guess is that Germany's unwillingness to do anything here is a precursor to a German exit of the Euro -- more expensive for Europe but probably cheaper for Germany.  The only other option is fiscal integration (they don't have the time), ECB action (Merkel would have to eat her words of the weekend and resign herself to losing power). IMF could come in but just doesn't have the resources here to do anything useful (and the Americans who pick up 1/4 of the IMF build would throw a hissy fit).  


Its Free now

Until a few days ago most of Canada's statistical output was "pay per view"  it made some sense that those who wanted the data should have to pay for the stuff.  On the other hand the amount payed was  fraction of the total cost of obtaining the data (like less the 2%), so Canadian paid to collect data (that they didn't get) and some guys paid a notional amount to get the information.  I'm sure that the initial idea was good, but Canada is so small and there are so few players (7 main banks, 6 large insurance companies), even if each paid a $100,000 a year  (they don't) it still would not come close to me meeting StatsCan's bill.  Enough with the insanity (my guess that the team that collected all these monies cost more than the government raised from selling the data).  So that means that the hoypoloi (BTW I though that was Yiddish, its actually Latin for "the many") gets the same data that the big boys get.

So today's data:

Shipping (by sea) rose 9.8% in 2010 to 450 million tones -- great I guess but 2009 was a recession.  Canadians have a travel deficit with the rest of the world (shock and horror -- Canadians get sun in the winter and visit the world in the summer, foreigners love to come to Canada (not so much) to see how "Indians living in tents and Canadian trappers" also apparently bitch about our Tar Sands). My favorite stats:  growth in the asphalt roof (September)  -- seriously they measure everything at StatsCan!


Italy

I think the Italian story is make or break. Either this gets fixed or Italy defaults in less than six months. The default option is not really an option that policy makers would consider. If Italy can’t make it, then there will be a very big crashing sound. It would end up taking out most of the global lenders, a fair number of countries would follow into Italy’s vortex. In my opinion a default by Italy is certain to bring a global depression; one that would take many years to crawl out of. The policy makers are aware of this too. (Bruce Krasting)

Italy has Euro 300 billion of maturing debt in 2012 -- interest rates have nearly doubled in the past 30 days.  There is no market solution for Italy.  Pick your poison; ECB or IMF -- otherwise is default.  Cannot wait to see how Ms. Merkel plays this card.  After all, she's worked very hard at painting herself in a corner "there will be no ECB bailout"  I would be surprised if she survives this.  In fact, I would be very surprised if any politician in any OECD country survives this crisis.

Steven Harper (Canada) must be happy he got an election in May, he is probably the only safe politician (unless we get a depression).

This is the Financial Times big headlines today


The eurozone really has only days to avoid collapse



Despite that markets are up nearly 3.5%.  Goes to show, it doesn't matter what the newspaper say, when the market decides to go higher, it goes higher.

Sunday, November 27, 2011

$ 700,000 billion

On thursday, the Bank of International Settlements (BIS) published the above figure. It represents the total value of all OTC derivatives outstanding, BTW global GDP is about $63,000 billion, so more than 10x global GDP. The most amazing thing here is that six months ago, total outstanding derivatives was $600,000 billion. In the space of 6 months, financial institution grew their OTC exposure by more than 10%. Picking up premium to make up their revenue shortfall, in the business we have another name for that; picking up dimes in front of a steam roller! Buffet called them weapons of mass destruction, the Europens were blaming derivatives for their current difficulties, they stopped when they found out that it was their central banks that were some of the biggest players... It remains that this development is serious. 

In other news, the British foreign service is preparing for a rapid failure of the Euro, with the obvious dislocation that this would entail. This morning France and Germany have announced that they can achieve closer integration without changing the European treaty, via bilateral agreements. Basically, we are looking at a core Europe that will include France, Germany and maybe Italy (if they can), the rest are on their own. If this last bit of news is true, then both French and German banks will be nationalized (insufficient capital to go on). But it means that core Europe is finally looking for a real solution!

Friday, November 25, 2011

Arming Canada's border guards!

Ok, so 5 years ago, Canadian border agents finally got what they wanted: guns.  Gave them a feel of equality with their American counterparts...  total cost so far $214 million, and three shots fired (two by mistake, one to take out a moose).

Now lets talk of the human toll.  A few years ago at the Quebec, NY border I had to go into the US immigration side, and things were slow (papers to process), I asked the agent how much his kit weighed, first off a handgun is rather heavy, but the total (gun, two clips, baton, and manacles) plus the leather belt was 25 pounds.  These guys wear that day in day out (even when sitting at their desks...) on top of that most wear bullet proof vests -- not heavy but constricting.  The result, back pain is chronic in the business.

Still $214 million -- that's lots of cash for bagging one moose (FYI, the moose was hurt, it was a mercy killing).  Also there have been 10 "fire arm storage" infraction -- my guess is that a border guard didn't store his weapon properly.  Granted you plan for worse possible outcome when manning Canada's borders, and it cannot be easy every day (especially at some of the quieter and remote crossings), still not a single "real" instance of needing a firearm in 5 years, sometimes what looked like a reasonable idea is a huge waste of resources.

Alied irish Bank -- most exposed

Business insider has a series of slides -- 20th most exposed banks to the PIIGS default.  The winner is apparently Allied Irish, who has $129 billion in PIIGS exposure and only $2 billion in capital .  The other "winners" as Charlie Sheen would call them are:

Banca MPS (Italy)  46x paid in equity
Banco Popular (Spain)
Intesa (Italy)
EFG Eurobank (Greece) 16x paid in equity

# 8 Unicredit (Italy) 10x
#9 Santander (Spain) 9.5x
#10 Dexia (Belgium) -- gives a sense of proportion, its already in bankruptcy because of its sovereign exposure

After that its all the big French and German banks at between 5x and 8x their paid in equity. lets say an average of 30% hair cut, that means that basically the Commerzbank, BNP, Unicredit, Santander and BBVA are done! Their equity base is wiped out!  DB squeaks through (maybe) as do the British banks. SocGen too apparently.

Basic trading strategy in a panic

There's an old saying in a panic don't sell what you want, sell what you can!  So when the solid hit the wall sometime in the next few days/weeks -- either Germany and France take a long walk and decide to dump the Euro, or the PIIGS decide that although separation will be painful, it's better than their current situation.  Either way, high quality liquid assets will fall in price, as those who need liquidity will sell assets they can (especially if they don't have to take a hair cut).  Gold and other metals that have often been bought at much lower prices will be liquidated.

I would not be especially surprised if gold didn't hit the 1,500 level before Christmas -- it will go up afterwards as those with wealth will try to protect themselves.

Fun times

Euro 7,000 billion

A few weeks ago, I wrote that the European bond market for banks was frozen since June.  The consequence of this Euro 30,000 billion funding machine grinding to a halt was that financial institutions had to replace around $ 1,000 billion per month in funding.  First to go was new lending activity; lines of credit and loan facilities were made more difficult to obtain. Second, the Euro/USD curve went ballistic (1.39:1) as European financial institutions liquidated foreign assets  and streaming the cash "back to the mother ship".  Third stage is securitize and dump on the ECB their "less than prime" assets.

European banks are now packaging their "non-core" assets and by over-collateralizing are trying to selling these portfolios to the ECB.  Rumors are that Europe's banks have "agreed" to reduce their combined assets by Euro 7,000 billion, so to improve their capital ratio. Again rumors are that things are not going well because the ECB is market the assets to market (as of today);  these lovely 10y Italian bonds acquired 8 months ago with their 4.5% coupon, are marked down to reflect their current Italian yield of 7.4%.  The resultant massive "hair cut" right now is apparently more than what the banks can stomach... so we are back at a stalemate. 

The EFSF died yesterday, when it was announced that the maximum leveraged the fund "can" sustain will be 100% -- reducing the size of the facility from Euro 1,700 billion to Euro 800 billion -- just the perfect size to absorb the Greek losses (an nothing else).  BTW so that no one is confused -- this was a market decision. No one is ready to provide the EFSF with the leverage the politicians were seeking -- BTW the 50% Greek hair cut that was "agreed to" a few weeks ago is still no closer to occurring, private lenders have not agreed to anything yet.

In my opinion, at stake now is not the survival of the Euro -- that's a done deal, its the survival of the European community and the risk that the countries that leave the Euro will engage in competitive devaluations and raise trade barriers.  

Thursday, November 24, 2011

Deceleration in earnings growth

Over the past 18 months, Canadian inflation has been rather higher than in the U.S., although both Canada (1%) and the U.S. (0.25%) have each very low director rates have been substantially below headline inflation -- around 3% for Canada and 2% for the U.S.

Of course, and I have said this on a number of occasions, Canada's economy is fundamentally different to that of the U.S.  Services are a much larger percentage of US economic activity than in Canada, but still both economies are dominated by services.  The most important component of cost growth in a service economy is wages -- and whereas America has a huge (but slowly resorbing) unemployment problem (U3 at 9% and U6 at 16%), Canada has a much lower level of unemployment (on a like for like basis about 6% -- high still at this stage of the recovery but hedging closer to the BoC's "full employment" target range of 3%).

As an economy moves closer to full employment labor market tightness causes wages to rise, and this has been the case in Canada -- as demonstrated by the rising national income.  This rise has been dramatic over the past few years, substantially higher than inflation.  Now however (and the data is as of September 2011) the rate of growth in earnings is tampering as can be seen below:

Year-to-year change in average weekly hours and average weekly earnings

of course, after the 2008/09 recession it was only normal that some correction would occur, but now it appears that wage growth are slowing dramatically, a reflection of our export market -- not only have wages tempered but so have the number of hours worked.  What is remarkable, is that Canada is now in a position where wages have tempered while hours worked have not decline that much.  A strange situation.

On a geographical basis the changes in wages is also very interesting -- while wages in Western Canada continue to rise dramatically, they are stagnant in Quebec and have dropped by 2% in Ontario -- these two province account for almost 3/4 of Canada's entire population -- so Saskatchewan's 8% YoY wage growth (population 1 million) is insignificant.

BTW that may explain why the Ontario government is in "freak out" mode this morning -- stagnant or falling wages impact tax revenues -- and Ontario's got a problem there!

Wednesday, November 23, 2011

Another war: Syria

Well now that's interesting Stratfor is reporting the a U.S. aircraft carrier is parked within striking distance from Syria.  Looks like we are going to get a Iran War proxy after all (America, Europe and the Arab league on one side, Syria and Iran on the other).

What else on the news:  Feds ask banks to stress test a doomsday scenario, Europe Banks are on the verge of armageddon (funding,liquidity and solvency issues), China's economy is slowing (fast) -- now the world looks like military intervention is about to occur in Syria.  The only thing missing here is an alien invasion!

O yeah, happy Thanksgiving America (my guess is that a few senior traders are going to hang around town this weekend).

JPM -- Sell Commodities!

Ok so its not like they get it right all the time, Goldman told investors that the Euro was going back up to 1.41 to the USD, instead it has dropped like a stone (now 1.34:1).  But JPM's missive does point to a real issue for investors that have been using commodities as a store of wealth.  The world is bulging with inventory, and once the infamous "Chinese Pig Farmers" start selling their copper -- all bets are off for commodities.

This has a dramatic impact on Canada, already the flight to the USD is "hurting" the loonie -- not so long ago the CAD was above parity against the USD, now it trades around 0.94: 1 against a very strong USD (its strong against all currency -- back to 1997 level actually).  Which is another reason for commodity weakness since a vast majority of commodities are priced in USD.

The impact on Canada is certain to be hard; first exports will drop (as will productivity -- since the price is part of the equation).  Already I was tempted to "predict" that the CAD could drop as low as 0.92:1 from the 0.96:1 level today.  Things could change, China could decide that 5.5% inflation is not that bad after all (unlikely) and that what they want is even more industrial production -- just don't have enough idle capacity yet (and more empty apartments).  I don't buy it, China will not ride to the rescue, simply because Chinese are students of history, and through the ages Chinese governments have fallen because of high inflation -- moreover, the Chinese authority know they have one of the world's most unbalanced economy --more industrial production is not the solution.

So back to Canada, the health of our economy is driven by the health of the rest of the word -- its not doing so great right now.


Canadian productivity up -- so what

I'm no fan of the productivity numbers, especially since services is such an important percentage of the modern economy.  American productivity has always been better than Canada's there are a number of reasons for this, but my bet is that the guys who processed the mortgaged that polluted the CDO and CDO square cut corner and added to productivity -- somehow the mess that has to be taken apart today is not part of the "productivity equation".  Measuring productivity when you are making widgets is easy -- look at input costs and output, and if the ratio changes in the right direction: Voila!.  Measuring productivity when you offer services is a lot harder.

Best example of how stupid the numbers are Nunavut (where 65,000 people live) saw an 11.5% increase in productivity, while the NWT saw productivity decline....

Anyway the table below says it all:
Canada Productivity Gain 2009 - 2010
  Labour productivity in the business sector by province and territory, 2010

There you go, very exiting stuff, productivity is up!


Will thanksgiving be postponed for traders?

Capital market are going through a rough spot right now.  earlier this morning the Dow was down 120 points -- its only down 78 right now.  Europe continues to scare the crap out of everyone, and now the Feds have mandated 30 US financial institutions to conduct further stress test -- that assume rather cataclysmic breakdown:  Unemployment over 13%, European GDP 6.9% collapse.

The banks are not too keen since they don't know if that will set their minimum capital level.  Anyway, another difficult week for the market.  The German had a terrible bond auction this morning (nearly 40% of the issuance was withdrawn -- for lack of buyers).  Contagion is spreading, France, Belgium bond markets are now suffering too.

Rumors of a tighter core Europe is emerging with France and Germany (Maybe Benelux), but excluding just about everyone else.  Finally, China's PMI number this morning was terrible at 48 -- below 50 means contraction.  Suddenly the risk of hard landing is becoming more real for China (I have no idea how commentators who think that OECD governments are a bunch of dunce unable to find their asses with two hands give some much credit to the Chinese authorities... wonders never cease).

Anyway, I suspect that some no so junior traders will be at their desk Friday - foregoing the family turkey

Tuesday, November 22, 2011

Not only the Americans: Canadian retail sales doing well again

It is tempting to say that, american alone are irresponsible consumer, ever increasing consumption despite very difficult economic conditions.  of course there are two America, the average Joe one where unemployment is high and wages have been stagnant for more than a decade, and the 1% that has seen an average increasing in income of about 10% per annum for over a decade -- that's how the 1% controls somewhere between 40% and 60% of all American wealth.

Canada is different, first off, national income for all Canadians has been rising, and more Canadians are employed today than before the crisis in 2007 (of course population growth needs to be taken into consideration...).  However, by all measures the Canadian picture is good (or at the very least better than our southern neighbor...).   So stats come out day in and day out.  Retail sales for September (+1%) were released this morning; guess what they are up (virtually all sectors) both on a absolute basis (and chained dollar basis -- discounting the impact of inflation).

Retail Sales -- September 2011
Retail sales increase in September

In fact, the news was good in virtually all sectors of the economy, and the same story for the geographical distribution.  Aside from the "world is burning" problem around Canada, these data points would be an excellent reason for the BoC to raise rates (not going to happen).  I know that I sound like a broken record, but as a second derivative country (we sell stuff that people use to make stuff) Canada is very dependent on the rest of the world being in good shape.

Honestly, Europe is looking at dislocation for the next few months/year -- in fact we could easily see a sovereign default (it has been the solution of choice for nations that borrow too much in the past), America is trying hard to choose the worse possible outcome.  Republican obstructionism, and Democrats "big government solution" and a lobby system that is made to measure to fail Americans (and by default Canadians too), and a weak financial system for ever looking for the next way to loose a bundle (other people's money syndrome).

Canada needs to stay vigilant, not certain that low interest rate is the solution here! but I don't really have a better idea, and Carney seems to know what he doing.


New favorite word: Zukunftangst

Zukunftsangst’ - literally, fear of future insecurity.

Why are markets so depressed?

The truth is that earnings have been very good (both in the US and in Canada), sales in the 3rd quarter (reported) have been softer than their profits (which exceeded expectation -- they always do) but the real kicker has been guidance -- where North American companies look at the future and don't see anything good. On the retail front one has to wonder, with Black Friday sales already in full swing --- a few days earlier than usual.  What is strange is that for America at least, the consumer has been pulling the economy, with savings falling to fund consumption.  But there is a bad feeling in the air!

The gloom is based on a perception maybe that there are some big events out there -- but on the North American front there is nothing really threatening until after the election (Nov 2012) in fact any automatic budget cuts in the US federal budget will not take place before 2013 -- almost two years from now.  Europe has only limited impact on North America -- since few of our good go there anyway (Europe is a big, closed economy -- as for as North America is concerned). Still unease rules!

Now don't get me wrong I am not personally bullish on stocks, I've actually been out of the market for several weeks now. As a Canadian things are looking good, oil prices are around the $93-97/bbl range, although zinc and copper prices are off their high, they are still in a "good place" for Canada's exporters.  Gold prices are not moving much, but its still around $1,700/oz -- hardly a depressed level.

What is threatening is a "end of empire" feel to the the global economy.  A few weeks ago a graph (here) showed the level of OECD countries overall debt burden, Canada was the lowest but hardly a star performer.  Kyle Bass was on British TV last week, explaining that the reality that is Europe is unsustainable. In the past the outcome as ALWAYS been the same -- sovereign default, why would this time be different?  Maybe that's the problem; everyone who is informed knows that this problem has only one outcome -- default, and the worry now is that with the excessive bank leverage the risk of contagion across the globe is massive.

I've said it before, when one banks has $5 trillion of derivative gross exposure, it doesn't take much, in a crisis situation, to cause terminal damage!  A few weeks ago MF Global went bust, where now $1.2 billion in client segregated cash has disappeared without a trace!  Rumors are that the EU authorities are working with Switzerland to force repatriate Eur 60 billion in cash that Greeks have "stashed away".  Safe harbors are difficult to find in these situations.  As one commentator mentioned earlier this week:  The sale of mattresses is bound to rise as a way of storing cash!
  
After a 1.7% correction yesterday in North America (around 4% in Europe) one would expect a pull back! Not really, markets are flat this morning.

T-Bill Rates

Just for the sake of comparison:

Spain:  3 month T-bill    5.11%
Canada:  3 month T-Bill 0.91%
U.S.A.: 3 month T-bill 0.05%

Spain is not out of the woods by any measure, only a month ago Spain was paying 2.94%.  On top of all this, the ECB is buying the 3 and 6 months maturities like crazy.  Without intervention by the ECB, the T-Bill(3m) would have approached the 6% level....

Just saying!

Monday, November 21, 2011

OWS -- Montreal edition

I suspected that Montreal's mayor would not take any action  to evict OWS (Montreal edition) leaving that task to the weather!  We get lots of snow (none so far) in Montreal -- and tents are really not made for such weather.  Anyway, it turns out that those who organized the protest in Victoria Square are leaving.  

The reason is that any loose movement such as OWS has a tendency to bring its share of problems - and whereas elsewhere in the city the police deals with these problems at OWS the cops stay well away.  Turns out that there is a very real problem with drugs/drink and mental illness (BTW I am not making fun of these people here), and so the organizers have had enough and are leaving.  Unfortunately, it doesn't solve the problem of the tent city -- but it gives an opportunity to the mayor to move in and remove the rest.

Frankly, the OWS has gotten all it can expect -- it has changed the debate, the next stage requires something more than a few hundred people to sit in the sidewalk  But remember OWS is the first organisation (after the Tea Party) to change the conversation, and they have done this without sponsorship.  Proof, if any was needed, that free societies can still effect change.

As for those who remain, the smart ones should go home ASAP (now that the "leaders" are going home).  Get the rest into homeless shelters, and other organisation better able to deal with their problems.  The press speaks of several fights that broke out in the camp over the weekend...

Misc. leads wholesale sales

Think about it, while wholesale sales rose (5th consecutive month), virtually all the growth came from the miscellaneous segment (BTW this is mostly an agricultural sector) -- too inconsequential to be enumerated, the melting pot of the the wholesale sector.  One sector is hurting, and it's a critical one:  machinery, equipment and supplies -- that's gone down (again).

Wholesale Sales September 2011
 Wholesale sales increase in September
(Source: StatsCan)

Needless to say that since Misc. is mostly agricultural, the gains were mostly in Canada's Western provinces.  It's still a good report, although worrying for the rest of Canada -- the recent weakness of the CAD should help the manufacturing sector -- assuming that the world doesn't end (odds are good).

Although this week should be fascinating.  Greece has a right wing government (we're not talking garden variety, but the extreme -- you know think of the more nutty element of the GOP), Spain has a new center right  (majority) government.  Yields are rising in France, Italy and Greek bonds are also having fun -- with a French downgrade looking increasingly likely.  Watch some of the French banks this week, as investors realize that nationalization cannot be far off (not that they can afford it -- if you thing the UK and Irish were screwed by the size of their bank bail out -- child's play compare to France...).

Then you've got 'Merica and its "Supper Committee" that will come out tomorrow with "no agreement" -- was there ever any doubt about this...




When water doesn't quench your thirst

After a committee of experts spend many years deliberating, the EU decree that water cannot be described as a way of quenching your thirst!  That this is now the "official position of the EU" speaks to this ability of this organisation to cover itself with ridicule. (for those who don't know a human body is 75% water).

Granted its probably less stupid than the U.S. congress decreeing that pizza's are vegetable, that french fries should continue to be served in schools.  Proof, if any was needed that the U.S. Congress has been paid for by special interests.

America is #1 -- ok I will have to stop laughing when I hear that -- my American friends think I'm insane.

Friday, November 18, 2011

Now even Einstein is wrong?

A few months ago a research facility showed that neutrino could go faster than the speed of light, massive disbelief since virtually any modern cosmology is built on that stepping stone, that Einstein was right.  Imagine the nightmare, another laboratory also succeed  in breaching the speed of light.

Oh, the nightmare, Einstein was wrong, gravity doesn't exist and little green men are for real....

Canadian inflation finally falling

The BoC can breath a sight of relief headline inflation (CPI) dropped from 3.3% to 2.9%, and there's been an equally large fall in the Core CPI from 1.9% to 1.5%.  Energy prices in the CPI were the primary reason for price drops.  So good new right!

Not really, because on a seasonally adjusted basis CPI actually rose a bit (I like being a party pooper).  However, honestly even there the increase was minimal 0.1% and actually is more or less meaningless since its directionless (and the increase was smaller than last month) -- at one point over massaged data looses all significance.

For now, Canadian inflation is heading lower -- which makes policy makers happy -- they've got enough trouble elsewhere.

The Word: Monetization

It would seem that monetization of Europe's debt is now "on the table".  First off, it is the path of least resistance, but with the funding market frozen -- even the US (funding) market is starting to find the going tough.  The easiest solution is for the ECB to monetize, the the risk of inflation and hope for the best (I exaggerate, but not that much).  Europe's bank problem has reached such a catastrophic stage that now the only hope is to starve off the liquidity crisis by buying all the bonds it can, so that banks can access liquidity.

A few days ago Unicredit, Italy's largest bank announced losses of Euro 10 billion -- market didn't move that much, but what is not widely accounted for is that two of Unicredit's biggest assets are its tax loss carry forward and goodwill -- yep, the excess price of acquisitions and the tax implication of making losses (with the potential for lowering future tax payments), account for more than 100% of the bank's tangible net worth. Needless to say that the market cap of Unicredit stands at 25% of its tangible net worth.  BTW, that tax loss carry forward is actually counted as capital in Europe.  Almost as priceless is US banks taking a profit on the falling price of their issued bonds...




Thursday, November 17, 2011

This is ridiculous

The USD swap market is now "frozen".  Things are moving so fast that you cannot keep up.  The head of Citi's streategy (a dutch guy) said that Europe was weeks or months from implosion.  Maybe he was right, just got the timing wrong.  Banks don't trust each other anymore...

This could end badly...

I can only hope (I'm almost sure its the case) that the Bank of Canada is ready with the cash. When there is a crisis, its not what you want to sell that you sell, you sell what you can sell.  Canada money market,s overeign bonds can be sold.

I expect the CAD to take a big hit over the next few days/weeks -- don't know if we will hit the 90/1.10 but we could get very close to that.


Foreigners continue to park they cash in Canada

Another month and another $7.3 billion in foreign capital.  Composition has changed from bonds and stock to 99.5% in money market (a new trend).  This ultra hot money says less about Canada than it does about the worries foreigners have as to the global economy.  

Capital inflow -- (incl September 2011)
Foreign portfolio investment in Canadian securities
(Source: StatsCan)

CAD is toying around the 0.97/1.03 range to the USD.  Despite WTI hitting a high of $103/bbl early this morning.

Wednesday, November 16, 2011

Oil prices

So the spread between WTI and Brent oil is "drying up" fast, the reason is simple Enbridge is buying a pipeline from Conoco and will reverse the flow. Long story short Conoco kept the pipeline in its current direction because low prices at Cushing help support Conoco's crack spread  (difference in price between raw oil and finished product).

Conoco looks like the bad guy (a little actually) but the reality is that for years crack spreads have been too thin (actually making it hard to implement changes to refineries).  Still it means that the peak difference of $24 per bbl is gone for some time.  That's why WTI prices are up.  At the end it will not impact oil prices that much since a good chuck of the increase in WTI prices will result in lower crack spreads (elasticity there is unclear...).

Now you know!

From bad to worse

So two headlines this morning:


  • The Euro 1.4 trillion EFSF will not be enough (Italian Prime Minister)
  • The German debt level is already at dangerous level (Junker)
  • The Feds state that they may have to help Europe (Rossengren)
This is a problem, the truth shall make you free... but these are unexpected soruce of truth these days.  Also Italy has decided not to release  Q3/GDP numbers, in the same press release announced that they need to additional cash.  Just as the Italian treasury announces that new money requirements will be Euro 600 billion in 2012....

Blue or Red pill, at this stage watch the endgame.  It could be interesting.

USD 5 Trillion

last night, JP Morgan Chase revealed that they have sold a total of USD 5 trillion [for European readers US$ 5,000 billion] of sovereign credit protection.  That's a global number and doesn't break out the PIIGS -- but how much of that will be for Germany or France? lets be honest you hedge was you are concerned with!

Put this in perspective, JPM has US$125 billion in market capitalization (TNW of US$ 182 billion), and total assets of USD 2.2 trillion.  Obviously, not all of this is to bad credits, but lets say that just 5% of JPM's book is to PIIGS, that folks is USD 250 billion, or 1.3x their tangible net worth and 14x their annual profits (2010).  Just saying that's a lot!

Inflation in the US?

Well not according to this morning CPI numbers that came in at -0.1%, while core CPI was at +0.1% -- which gives an annualized rate of inflation of...drum roll... 1.2%.  So CPI was slightly below expectation and core CPI was exactly on expectation.  The fact that the Feds yesterday announced that its rates will stay at 0.25% until 2013 made these number a certainty.  BTW it kind of blows a massive hole in the Republican's world view that the Fed printing will lead to hyperinflation.  Of course eventually they could be right... like in 3 or 5 years!

Ok so Canadian inflation is still much too high at 3.2%, but everyone is working on the assumption that rates will fall (they come out on Friday) to 2.5% to 2.8% [take your pick]

Now its nice to have a small and local bond market!

The past few days in Europe have been amazing.  It is hard to figure out what's the game!  There is a demonstrable liquidity crisis in Europe, with French bonds price falling (as interest rates rise), and even Finland bond price falling -- consider that Finland is the ONLY Maastricht  compliant country... Yet the ECB stands on the sideline waiting for something or someone.  

The latest realpolitik "plot" is that the ECB is at the center of a fight between France and Germany, where France doesn't want the leveraged EFSF program installed (It would kill its AAA rating), and is trying to push Germany to act more unilaterally, while Germany (aka Angela Merkel) wants a more tightly wound Europe (read common fiscal policy with a parliament that has a right of veto on national budget).  

The assumption here is that Merkel has an "evil plan" where she kills democracy (it is certainly the Daily Telegraph's contention -- see Abrose Evans-Pritchard latest missive here.  But the Daily Telegraph is rabidly anti-Europe and assumes a degree of cunning from the Germans and French that has been largely absent so far from the European stabilization exercise of the past 24 months.  However, it is possible that Germany only see's a future for Europe if there tighter fiscal integration -- the implication is less local democracy, but for serious economist this was always a given if the monetary union was to function.

Looking at this as a Canadian, where the bond market is about as domestic as it can be, yes there are foreign buyers of treasury bills (the short end of the curve) but the treasury bond market is a largely Canadian affair.   Moreover, Canadian institutions are already in compliance with Basel III (well at least as it relates to capitalization -- the other bits will take some time), so there is no need for them to liquidate anything.  I am certain that most Canadian investors would look favorably at certain European sovereign bonds -- if the can isolate the currency risk -- because the Euro is seriously overvalued, a consequence of European institutions repatriating funds to Europe (hence driving up the demand for Euros).  

The Canadian bond market is a bit like Japan, a largely "domestic" affair, so as a rule Canada's institutions are looking at the whole European mess (and watch out next week for the U.S. after the "failure" of the Super-committee) and hoping that we can insulate our bond market and financial institutions from the mess in Europe.

Tuesday, November 15, 2011

When Deustch Bank Panics what do you do?

So it would seem that DB has finally reached for the emergency parachute, and has contacted the ECB president with a presentation which can be summed up as:  Do nothing and the Europe ship goes down in flames, or print lots of money, delay the end of the Euro experiment and maybe end up with hyperinflation in a few years.  But at least you stand the chance of delaying the "end of the world as we know it".

Don't believe me check this out, in living color thanks to DB here

It speaks for the "moral bankruptcy of Europe's financial institution that they are ready to write, black on white (with lots of nice charts) that the ECB should abandon all caution to save the Euro (who cares) and the banks (I guess they care -- they have lots of vested shares).

We are getting close to the end of the beginning!

Canadian Manufacturing -- doing well again

Canada's manufacturing sales headlines were good again this month.  -- the third increase in so many months.  Source of growth was first oil and coal (+13.7%), followed by transportation equipment (+7.1%) which includes aerospace (+17%) -- a very volatile sector and motor vehicle (+6.2%) which is much more stable.  In fact, several vehicle manufacturing plants are now operating either at or near full capacity (restricting the scope for growth in that sector).  So the bottom line is not so good.  On a geographical basis the two biggest winners were Alberta (oil) and Quebec (Aerospace).

Manufacturing Sales
(Yes it includes Oil & Coal)

 Manufacturing sales rise in September for a third consecutive month

 Inventories are rising in machinery (while sales are flat) and aerospace (sales are rising), but more importantly, the overall ration of Inventories/Sales is going down.  So the rise in inventory is a response to increase in sales.

Inventories are Rising

 Inventory levels up for the 12th straight month

Inventory to Sales are Falling

 The inventory-to-sales ratio declines

The news is "goodish" but not great, so while Ontario did ok this month, the reality that its car plants are now operating at near full capacity which means that there is little scope for improvement... this could be trouble.  Canada's reality in the auto sector is that it is entirely driven by the U.S. market -- where consumption has been on a tear -- in fact consumption is rising faster than income, so Americans are raiding their savings to fund consumption, this can only go for so long.

(source:  All diagrams are from StatsCan)

 

First fines for long airport flight delays

its about time, American airlines will not have to face reality.  I used to be in this business, and we always remember that at least 20 flights were scheduled to take-off at 13:30 (choose your major city airport).  Now, you know that in the best of conditions there is simply no way that 20 flights will take off on time, some will, be definition, be 15-20 minutes late!  This is in the best conditions, when the weather is perfect, and in reality add a bit of fog, rain or snow and all bets are off.

There is no reason today for flights to take off (on the hour) you can schedule your flight dispersion much better without affecting the bank systems that airlines use in hubs (don't ask).  The joke was always that an airport such as La Guardia will have at least 75 days of bad weather per year (that's an average for the North East), doesn't include problem that will spill from other regions.

Airlines have in the past not worried so much about this, and have threaten that the new fines will force them to cancel flight -- GOOD, because cancelling flights is not a costless situation for airlines.  Personally, I remember a flight between San Francisco and Las Vegas, the flight was 90 minutes late, speaking to passengers (and crew) I found out that the flight is absolutely never on time -- it is always 30-40 minutes late.  It begs the question why didn't the airline shift the departure time by 30/40 minutes?  Speaking to the then CEO of the airline, it was simply not a priority for them!  They had more important things to think about (he was thankfully shortly thereafter fired -- turns out for using private jets...instead of his own airline to get to meetings -- he was a asshat!).  The reality is that airline will now consider the separation of flight slots (its not the end of the world), in the case of some airlines they will create (not joking here) plans to deal with heavy delays (like having the home number of critical employees, and do some cross training so that in an emergency those missing can be replaced).  Today's' $900k fine for American Airline sub is a first step to making flying in America more pleasant... you sure have a long way to go

CDP -- A funny, not really!

Ok so this morning on CBC radio there was this outrage because one of the bosses at the Caisse de Depot & Placement du Quebec (You couldn't have a more francophone institution) is apparently uni-lingual anglophone.  What's worse is that he's lived in Quebec for many years (I just cannot remember how many years).  My assumption was that this was a storm in a tea cup, this guy is a specialist in some kind of exotic derivatives and there and therefore employing him was the right thing to do.  

Guess what I was wrong, he's actually the head of human resources for the real estate arm of CDP.  This division has something like 3,000 employees about half of which are francophone (the real estate arm of CDP invests on a global basis).  This means that the entire HR department for this division runs in English (when the boss speaks English everyone else speaks English).  Turns out the head of HR cannot speak to half the firm's employees, and the guy has been living in Quebec for some years (so clearly doesn't care about French if he never bothered to learn it).

Also lets be honest, HR is not the most specialized business in the world, find one that speaks French should not be that hard.  It shows how stupid some decision can be sometimes.  On a more global basis the whole French thing (I'm kind of for this BTW) has been getting bitch-slapped of late!  First, the latest Supreme court appointee is unilingual anglophone (Not so much a problem -- all they see is written) and the newest auditor general is also a anglophone (from New Brunswick where French is as prevalent as in Quebec), which is a huge problem (both BTW promised to learn French; but since they are both in their mid-50s, and very busy with their day jobs, the likelihood that they would learn French is slim to none), because he interacts with the public at large.

You expects this kind of outcome out of the Federal government (the Conservatives have been particularly bone headed of late), but from one of Quebec's premier institution -- no, you don't.  

Monday, November 14, 2011

OWS -- Montreal kind of a dump

OK so this morning at 7 am I was walking by OWS (Montreal version).  As I walk a guy walks out of his tent and starts pissing -- literally right there in front of me.  The worse part, there was a Porta-Cabine 10 feet away.  The site is increasingly gross with refuse everywhere -- despite the city installing large blue bins they are empty and the junk is on the ground (I know I saw a garbage truck going round all the bins and picking none of them -- empty).

If nothing else, these guys should pick up their shit!  It makes the whole place look like a dump, and there is no reason for this just laziness.  Maybe the Montreal Mayor will tackle this issue (then again probably not -- more interesting in seeing the world that one).

Finally, this morning the King of Jordan "encouraged" the President of Syria to resign!  

Real Canadian debt position


(Source:  ZeroHedge)
First, look at the list of "true" debt and Canada is en enviable position at "only" 274%.  However, it is hardly doing great, and while it has the lowest number it is not that far from U.S., Germany and if looking only at the government debt Canada is no better than Spain (OK lots of dead stuff -- like bank recapitalization will end up on the Government's balance sheet in Spain).

The kicker of course is the UK -- which lead toe world, of course no so much in sovereign debt but in banks and business debt... that too could eventually be socialized.  Still an ugly picture.  BTW, before anyone gets to happy about China, it is important to note that the Chinese government is heavily indebted too (and not taking into consideration the loans it has "guaranteed" to the SOEs...). The government debt for China is also in the 70% of GDP...  

Maybe Rossenberg is right that we are in a massive depression with massive deleveraging on the way.  On thing for sure, is that the "social contract" is about to get hit hard everywhere!

Europe on its own now


Officials were stung by the implosion of Wall Street firm MF Global, which gambled and lost on European debt, and they are working on contingency plans for a worst-case scenario should another financial firm crumble.
A senior U.S. Treasury official said regulators are contacting big U.S. financial institutions to make sure they are scaling back exposure to Europe and are ready for a potential worsening of the crisis.(Source: Reuters 11/14/11)

 This cannot end well for Europe.  IF America, Asia are not only not considering reducing their current exposure, there is strong likelihood (certainty in fact) that they will not buy the new ECB (EFSF) Bonds.  Cannot say that I am surprised.  Speaking to several Canadian bank treasurers one theme has been consistent for the past 3 years -- reduce European bank exposure and monitor everything you hold, mark to market on a daily base and ask for collateral.

Europe seems to be entering the endgame.

XL eyeing the West Coast

Because of political pressures (in my view largely warranted) the XL Keystone pipeline to the US is now off the table until 2013 -- a redesign to avoid the Western U.S. largest aquifer that feeds 4 or 5 states with all their drinking water (it is also very close to the surface -- so at great risk when there is a spill).  That TransCanada didn't first consider this route shows the serious lack of understanding of environmentalist's often very justified concerns.   The second error was to over-estimate the number of jobs created.  Reading some of the more "pro-oil" crew it was anywhere between 20,000 and 100,000 new jobs, would be created by the building of the pipeline.  How the highly automated construction of a pipeline could require 20,000 employee begged to be questioned.  XL Keystone has now admitted (on the record) that it's a few hundred jobs that will be created.  So the XL Keystone pipeline will not be an engine of growth...

Canada's solution is to built a pipeline to the West Coast (some real challenges there too) that will feed the oil to Asia and other parts of the world here.  

The NAFTA agreement set out the percentage of oil Canada produces that is to be sold to the U.S. -- a kind of "security" agreement (Canadians have no issue with selling to America), but this new shift with the pipeline going West (instead of South) will have implication for America.  Currently 22% of America's oil needs are from Canada, the XL pipeline would have increased this to nearly 30%.  Clearly America prefers oil from Venezuela, Nigeria, Iraq -- all people who "love America".

And then they was One!

I've often written that Canada and Australia are the two outliers in the OECD world, both economies not only survived the 2008 recession but have thrived since.  Well things in Australia are taken a turn for the worse.  Already, earlier this summer the red hot Australian real estate market seem to take a pause.  Now, we are seeing a massive swing in negative territory for discretionary expenditures, as Australian begin to address their debt burden.

I must also point out that Australian house price are at multiple levels higher than Canada's.  From memory the House Price to income ratio in Sydney (the worse, but not the only one) is around 9x (it's only around this level in Vancouver).

That leaves Canada as the last OECD country where house prices are still rising!

Thursday, November 10, 2011

Brit Speak -- funny!



Seen this before, first time in such a lovely format

Canada's First trade surplus in 9 months

From a half billion trade deficit in August, Canada has swung to a $1.2 billion surplus, and its not only prices that are at the root cause of the increase in exports, volume were also up.  Energy lead the way +11.3%, of which 8% was price induced, the balance was volume.  Industrial goods were up 3.4% and agricultural and fishery was up 9.4% -- with the higher volume since 2008.

On the other side of the equation imports were down (aerospace -- a very volatile segment -15%), but it remains that import volumes were down.  September is a place holder in view of the global market tensions.  The Financial Post this morning reports that the Bank of Canada could easily reduce interest rates next year.

Overall a good report.

Wednesday, November 9, 2011

Italy is a different kettle of fish

So as a short hand the world has been talking about club med as the PIIGS (Portugal, Italy, Ireland, Greece and Spain).  What many fail to realize is that not all these pigs are equal [to continue the word play].  Italy is a systemic problem (Greece was a pimple).  Whereas the world can "write-off" Greece with impunity (it's only about Euro 350 billion -- lots of money but inconsequential on a global capital market scale).  Italy is a different game entirely.  The world's third largest bond market issuance, lots of banks "own" Italian debt.  The French banks hold about half a trillion (yeah that's real money).

The issue has always been if Europe cannot deal with Greece (the EFSF is a demonstration of this half measure) it stand little chance to deal with Italy (Belgium is next on the list).  There's no real point in going into details, because the big picture part of the equation doesn't add up at all!  European leaders tried to cobble together a leveraged SPV when the capital was less than the anticipated losses for Greece alone, the rule of half measures.  if you want to scare the market you need howitzer not a BB gun.  Europe's leaders failure (numerous) has been to mislead their citizen, continually underplaying the stakes and the risks, because the failure points directly back to these very same leaders!  

Hoping that things would change, like saying that Greece will grow by 5% in 2013 when the government compress expenditure, salaries are cut and taxes are raised -- just not going to happen, and yet these are the type of assumptions that are used by Europe's leader as a demonstration of how the EFSF will "work out"

Lest reader thing I forget the U.S. November 23rd is the day on which America will discover that they are as dysfunctional as Europe.  BTW for those interested, if you think the Democrats and Republicans hate each other, its nothing compare to the right wing and left wing parties in Greece and Italy... blood feuds! 

Shipping down -- worse than 2008

That's the Reuter's headline this morning.  China is finding the going tough!  Finally, sales in Europe are starting to falter.  Reported elsewhere, Apple has reduce component orders by nearly 20% -- still very much a rumor, but it remains that a global recession seems to be on the cards.

Short term I see the USD rising in value, as investors seek the safety of the US debt and equity market (I could be wrong), at least until the 23rd of November -- when the supercommittee on the deficit reveals that they could not agree on a USD1.2 trillion cut in expenses (that over 10 years).

As I like to repeat Canada is a second derivative country, we should see some weakness in the price of some of our export goods.  Oil price (if there is a global recession) should drop, as should copper prices ("the" bell weather of global growth).  It goes without saying that everything else will be affected too.  Of course this is a worse care scenario, italy and Greece could wake up and decided that "some" real austerity (and tax collection) is a good idea... but don't count on it.  ECRI says that a recession is "baked in".  Interesting time

The big question after that is: Where do investors put their money after that?

Other interesting headlines:

Half of all mortgages in the US are underwater
Mortgage delinquency is rising again
Las Vegas saw a 9% drop in home price in 2011, and expects another 100,000 home to be foreclosed on.  Total so far 1/5 of the Vegas entire housing stock has been foreclosed.
FT:  Thinking the unthinkable -- Greece on the way out?
Gold nearing $1,800 price point
German confidence level dropping (as are exports)


Tuesday, November 8, 2011

Food for thought: New housing in North America

This morning StatsCan released new housing numbers for the country (it was down slightly) for a total of 208,000 for the full year.  Consider that the U.S. is working on the basis that new homes for 2011 will total something like 595,000.  America a country who's population is literally 10 time bigger (and 12 times richer) will only build slighly more than twice as many homes as are built in Canada.

In fact, for the US you need to go to the 1960s (when America's population was was half of today's) to come close to the current level of new housing.  It is also about a third of what it was at its peak in 2006/7.  This creates a serious drag.  Part of the problem is aging population (true also in Canada) but also the slow formation of household.  Young people without a job cannot move out of their parent's basement.

More proof that holding European sovereign debt is toxic


Société Générale on Tuesday moved to calm jittery investors by announcing sharp cuts to the euro-zone sovereign-debt exposure that has weighed heavily on its stock in recent months, lifting its shares despite reporting lower-than-expected net profit for the third quarter.
Net profit at the Paris-based lender fell 31% to €622 million ($856.9 million) from €896 million a year earlier, undershooting analyst forecasts of €732 million. It was hit by higher provisions against Greek sovereign bonds, and as volatile financial markets pressured its corporate and investment bank. (Wall Street Journal, 08/11/11)

If any additional proof was needed, now the French banks are looking at "provisioning" or liquidating their European sovereign debt portfolio.  Taking the PIIGS + Belgium (country without a government for 2 years) total sovereign debt (including banks) is Euro 5 trillion, looking at a 30% to 50% hair cut the world is looking at a Euro1 to 2.5 trillion hole.

Once the banks are out, it leaves the insurance companies and the pension funds "holding the bag"  imagine with the Portuguese, Irish, Italian, Greeks and Spaniards realize that their pensions are funded to the level of 20% to 30% -- that there is no money available.  Those who purchased annuities from insurance companies or life insurance (a form of savings in Europe because of the tax code) will realize that the money is simply not there anymore.  This is going to end badly (not that there could be any other outcome).  The reality of solvency problems (while the intelligentsia has been selling liquidity) will hit those Europeans very soon.  I remember being in Seoul in 1997 during Asia's financial crisis, the anger was palpable...  


Liquidity crisis in the making

Bank of Canada governor Mark Carney, warned on Tuesday that the world was “on the cusp of another retrenchment” in liquidity, and urged careful management of European bank recapitalization to limit the effects (Financial Post, 11/09/11).

 As the new head of the FSB (Financial Stability Board) Carney carries lots a weight (he did before he got that gig too).  He also announce the name of the 29 institution that were systemically too big to fail -- these institution will be required to keep additional capital at hand.  if you consider that among them are all the major German and French banks (leveraged to the tune of 60:1) and the big four Americans (Leveraged at 12:1) you get a feeling that the "recapitalization" effort will require the support of governments.

I'm not making any predictions, but my instinct tell me that as an investor it would be wise to steer clear of European banks -- ROE is about to drop! 

 [no position on any American or European banks]