Thursday, May 24, 2012

More proof that the CAD is a Petro-Currency

So over the past few weeks, petrol has gone from $99/bbl to about $91/bbl.  During that time the CAD has gone from parity to the USD to 0.97 to the greenback.  Now my Western Canadian friends can say what they want but it remains that the correlation between the CAD/USD trade and the price of crude is well correlated (factor of 82% -- which is high).

Anyway, where oil price are going from here I have no idea.

On a related note several Shale Gas Cos are facing dramatic financial pressures.  Looking at the numbers it would seem that break even is around $8/MMBTU whereas price are around $2.6/MMBTU.  Turns out that the wells depletion rate is the issue -- Shale Gas Cos have been hiding the dramatic drop in production via faster and faster new drillings; a shell game that eventually blows up!

Turns out not only is Shale Gas exploration dangerous; its also a money losing proposition, who knew!

Thursday, May 17, 2012

Vampire Squid anyone?

If it were not so sad it would be funny; after the mortgage backed securitization fiasco in which GS played a leading role in mis-stating the facts for their clients -- like they had no role whichsoever on selecting the mortgage pool.

GS's muppets have been playing the games for years, they suspected that the bank was screwing them; now they know.  I had friends who work at GS (note the tense) I always though they have a certain moral fiber (and I don't mean it as a compliment), an ability to see the real world in a way that fits their own reality (thruthiness if you will).

The lastest, thanks to their (soon to be ex) grossly incompetent lawyer (and apparently not much of a human being) was to provide the world with the proof they they treat clients as muppets, unless of course they are favoured clients (read hedge funds).  Turns out that not only did GS actively promote naked shorting (which is in the same ballpark as insurance a house you don't own and then burning it down), but they told their favorit clients what were the big positions.

Turns out a specific company, not a favorite of mine, called Overstock was so popular in the shorting game that at one point more than 100% of the float was shorted (a mathematical impossibility), naked shorting is basically selling something you don't own -- obviously if you can short to infinity (without borrowing the stock so that it can be delivered) you can kill a stock price (you created artificial supply of the stock).

Don't get me wrong I really enjoy GS's "God work" in the financial markets, I really like when they were the main player in insuring that the US housing market would implode, I really enjoyed the way the screwed their clients on that one.  I really enjoyed the way that played the weasel game of Greek financing -- allowing a bankrupt country to hid additional borrowings.

I real enjoy this latest play with the naked short, they way the now admitted to removing expert witnesses by hiring them for "large sums of money" basically ensuring that the wheels stayed greased.

I wonder if congress is going to do anything about these activities -- my guess is that they will pull real hard on the SEC to do nothing, after all GS and its employees are massive contributors to the "democratic process".

One question to America's companies; why are you dealing with these guys -- you would not re-hire a plumber that screwed you over -- what are you waiting for here!  A sign?

What's going on in China?

Some very strange things are happening in China, but the overall theme is:  Capital outflow.  The discussion is remarkably technical, but in a nutshell investors because of global uncertainty and apparent economic growth deceleration in China are looking to hold US dollars.

First, it would seem that the opening gambit is the deceleration in China's export machine -- America is limping along and Europe is at the edge of the abyss.. so the Chinese government's "usual" source of dollars is drying up (e.g. exporters).  More to the point those exporters now appear to be short US dollars.  While foreigners are finding fewer investment opportunities in China.

Now, China has an easy out, it could sell US treasuries and replace these IOU with American dollars (the same thing really), but China is reluctant to admit to this problem, because it could create a vicious cycle outcome with more people believing that there is an excess of Yuan.   BTW the impact of selling US-T bonds is serious for the Chinese growth story that the government is trying to keep up appearance.

Again, this is a very technical discussion that really missed the point of discussion.  What we are seeing here is an inflexion point in the Chinese economy.  Last year the informal banking system collapsed (mainly because of warranted government action), but now even the short term bill market is collapsing (discounting of receivables is down 90% -- which BTW is a wonderfully cheap way to finance sales activities).

Rumours that loans are being repaid (well ahead of schedule) and that China's four largest banks have seen no new net lending in Q1/2012 is a serious problem for China's growth story.  Again, normal western bubble concept don't really apply to China, since the bulk of China's borrowing is made by either local governments or by state owned enterprises -- the usual rules of creditworthiness are irrelevant.

The "problem" mentioned above is no so much a problem, but a reflection of several realities:  There's a shortage of USD, there's an excess of Yuan (no one wants Euros) and the Yen is at the end of its tether --
but probably still has so appreciation to go.  The story is two fold; China is slowing, the smart money is moving out of China (or at the very least -- not moving in anymore), but changing the China growth model has implications for the rest of the world:

(1)  Oil and commodity prices should drop over the next few months (China is not dying its taking a breather -- maybe a few months maybe more)
(2)  Canada and Australia are the two most exposed countries to a China slow down
(3)  America could benefit from the weaker oil price, every 1c reduction in the price of oil is a 0.1% stimuli to the American economy
(4)  All this has zero impact on Europe -- they live in their own autarkic world (most of the trade in internal to Europe)
(5)  Russia as another exporter of commodities may also suffer -- Putin may not have that much fun in 2013 afterall

So if the CAD is not a petro currency why is it falling?


Over the past few weeks there's been a debat in Canada as to whether the Canadian economy was facing the "dutch disease", which for those who don't know -- the Dutch economy was decimated when the country discovered oil, that drove up its currency and killed its manufacturing sector (we're talking the late 50's and early 60s).

First and foremost the whole "dutch disease" has always been a side bet, even in the Netherlands -- other factors played an equally important role in the destruction of the manufacturing sector; bad management, bad labor practices and bad government policies -- added to a strong currency caused by the the oil & gas sector.

For some reason Westerners  (Canadian -- not global)  have taken the view that the strong commodity sector -- and oil in particular have nothing to do with the strength of the CAD, of course this is complete bullshit, but where they are right, its not the only reason.  Several studies have showed that manufacturing has been on a long decline -- while oil prices have only been a factor over the past 5 or so years.

I remember being in Calgary when oil was around $34/bbl -- wealth was just not there, the same guys with the same assets today are multi-millionaires and talking as if this had always been the case.

Anyway, riddle me this, if the CAD is not a petro currency (where the movement of the currency is tied to the price of oil) what has been happening to the CAD over the past few weeks.  As oil prices have weakened due to Europe and China, the CAD has come under pressure.

Now, Mr. Mulcair has never been one to take a very nuanced vue of the world -- in fact, that's what made him so successful.  It was his point that oil was hurting the economy of Ontario and Quebec -- while this is partly true, other natural ressources are also to blame here -- we are talking grain, metals and minerals here.  But the overall reality is that Ontario manufacturing has been declining for a very very long time. But sound bits are sound bits -- now Western Canadians (not always people with the thickest skin) are very offended...

In reality Canada is not Kuwait/Saudi Arabia, but the reality of our country is that what's made it strong over the past decade has been things that are heavy and heavy and hurt when you drop them on your foot.  Canada is increasingly a natural ressource play -- that's just the truth (look at the composition of the TSX).

Tuesday, April 17, 2012


I participated in my first ever Kickstarter project.  By coincidence it is, by now, the single most successful Kickstarter project.  The idea behind Kickstart is driven by cloud sourcing; where ideas go to the "cloud" to fund their ideas.

This one is for a watch that talks to your iPhone.  See here

Spring is really early!

Up here in the Great White North (Canada) spring is a May affaire (usually), there are even sayings that outline that until may you should stay bundled up.  I have seen major snow storms in mid April, so a month ago we got 26c and yesterday too.  Even mor unusual is the Laurentians when I have a cottage, and were last weekend the lake was completely free of ice... Usually we have to wait until mid May for the ice to go away.

Spring was at least 3 weeks early

Thursday, April 12, 2012

Car Economy

I've posted before about the fact that for more than a year now I have been living without a car, and loving it!  This morning I was reading an article in The Atlantic Cities citing JD Powers (the car evaluation company) about how young people were no buying the "American Dream"of buying a house in the "burb" with two cars and 2.5 kids.  Rather they were looking at living in areas were walking (or cycling) was a transit option. On a personal note the first generation of my friends' children are now of driving age (scary) but a surprisingly large number seem uninterested (many failing to even obtain driving licenses).  The JD Powers' analysis seem to show that young adults see cars as a tool rather than a status symbole.

One article (especially in a specialized publication that seem to favor mixed development housing etc) does not a trend make, although JD Powers does add weight to the argument.  As a 50 year old who lived for many years abroad (and who bought his first car when he was 33) I am in somewhat of an outlier, and my view of cars has always been as a tool (although I did really liked my ancient Mercedes 300 SEL, but it drove like a pig).  But this is an important trend.

Obviously technology helps, from video conferencing (Skype) to on-line shopping (Amazon and others) make cars far less important - as a friend told me (in the US) he ordered a ladder on Amazon, it was delivered the next day via UPS (I know, I know it sounds ridiculous).  Moreover young people have worse credit score and fewer financial ressources in a market that shows that housing is not a one way bet, and can even act as a anchor stoping them from taking on better paying jobs.

Equally important is the growth of car sales in the US ( a substantial economic industry).  Ever since the   car industry began churning out Model Ts, and excluding the war, the overall North American market has been growing -- increasing its market penetration.  This trend is now over, with a penetration of around 98% of the current population (98% of those who may want a car own a car) the overall growth of the car stock is complete (aside for population growth drivers) which means that future North American sales are driven by replacement of aging stock.  That creates a zero sum game for manufacturers which will in the medium term will drive down (already tight) margins.  

Add this factor to the trend in young Americans and you can see future trouble for the car industry

BTW I rented a Dodge Journey this weekend, not exactly a great vehicle.  It was alright I guess, I like the easy setup for the bluetooth (that allowed my iphone music to play in the stereo system), but the driving experience left a lot to desire, first whenever you try to pass another car on a country road the front wheel drive system woud not really compensate for torque so that the steering would pull  (a lot) to the left.  Although a new vehicle (less than 6,000km) it was already starting to "creak like a taxi".  On the bright side the driving position was comfortable.

Thursday, April 5, 2012

Back to Greece and Exit from the Euro Zone -- When there is simply no more money!

Everyone is now focusing on Spain and/or Portugal now as the "next domino" to fall, but in fact the "solved problem" that is Greece keeps on rearing its ugly little head. Last week the European commission published a 195 page paper detailing most of these facts (the second economic adjustment programme for Greece, march 2012).  Pay special attention to page 55 (where most of the juice lay).

In mid March the Greek government was so broke that it raided the bank account of the 6 largest Greek University, a public utility and other government controlled entities; the result now the six universities have to close because they cheques (like salaries) have begun to bounce -- the accounts were emptied to the tune of Euro 1.7 billion, so that the Greek government could make whole a sovereign owned bond payment.   

The reason is that although Greece was scheduled to receive Euro 74 billion on March 20th it only got Euro 7.5 billion.  Not entirely clear why this occurred, but one thing for sure, there will be no further payment til June (when the next instalment is due).  BTW the bulk of the Euro 7.5 billion it did get went to pay of ECB loans (in full).

Easter is on our doorstep, Greek universities are having (over the last few days) extraordinary meeting to decided if they will shut down (I don't see any other solution).  We have an automatic four day holiday in Greece, add a day or two and Greece could be out of the Euro by April 9th.  Sure I could be exaggerating, but it remains that when the government raids the cash accounts of universities to pay of bond holders they've got to be close to the end.  There is simply no more cash available...

Tuesday, April 3, 2012

Bully Rated "G" in Canada Rated "R" in the US

Go figure!  How can the same movie be rated G in Canada and rated R in the US.  Clearly something is wrong.  First off, the movie is a "pull no punch documentary about bullying"  the language is "frank" and the imagery is difficult.  The thematic is particularly troubling since it deals with something we have all at the very least all seen (or worse suffered).

For some reason a frank analysis of a huge problem for children in North America -- maybe cathartic to children suffering from bullying and may even make those who "tax" think hard about their action is seen as something unacceptable for American children to see.

Sad and amazing

Friday, March 30, 2012

Montreal is Hockey Mad!

I return to Montreal in the early 1990's from living more than a decade in London.  I worked for a few years here at what is now a major aircraft manufacturer.  One of the first thing I was asked is whether I played ice hockey -- I answered no (I really don't), but out of curiosity I asked if there was a team -- even then this was a big company, imagine my surprised when I was told there was not only a team, there were leagues (plural intended!)  In fact each "plant" had something like 30 or so teams -- some were nearly NHL caliber in the playing ability.

Every night when there is a hockey game in Montreal (at the Bell Centre) its a full house.  Every single ticket has been sold, and that's despite the team playing rather badly over the past few years (decade).  In fact, the Montreal Canadian are the NHL's most profitable team in terms of revenues (and by a long shot) with Boston and NY Rangers r.

So yesterday was budget day in Canada -- with the Canadian government announcing its first "majority" budget.  Aside from the trivial (abolishing the penny) there were some substantive changes announced; reduction in 22,000 federal employees, increasing in the retirement age to 67, and reduction in the cash allocation to CBC (Canada's national broadcast company).

So guess what was the first news (and discussed at length) this morning on Montreal's radio:  You got it the Montreal Canadian's decision to replace the general manger and the team coach.   After the issues there were fully covered they mentioned the Federal budget...

Proof, if any was needed, that Montreal is hockey mad!

Tuesday, March 27, 2012

Sometimes statistics matter

The continuing (although the end is in sight) saga that is the Republican primaries has proved to be a fascinating process and a recent article in the NYT has put even more colour to the race to the White House.  South Carolina has been the bellwether for presidential politics for more than 20 years, and yet in the recent GOP contest some of the data is hard to believe and represents a disaster for the GOP.

A few days ago I mentioned that the Hawaii GOP primaries participants totalled slightly less than 10,000 voters -- in a population basis of 1.7 million (trust me that's not a lot).  But the results from exit polls for the South Carolina primaries are even scarier (for the GOP).  First the shift in the type of voters; whereas four years ago something like half the primary voters (we are talking GOP here) were fundamentalist christians, now it's 64%.  Whereas 95% of voters in 2007 were white now its 98% (scarcely believable that South Carolina's GOP is now all white -- its says something about the GOP appeal to other races!)

It gets worse; 72% were over 45, almost 30% were over 65.

So far in the primary cycle 50.5% of all primary voters (across the entire country -- granted California and NY have not voted yet) describe themselves as evangelical christians.  Now there's nothing wrong with being an evangelical christian, but in America's population as a whole they represent less than 10% of the population, the implication here is that the views of a small minority of Americans is now forming the core of the GOP's base; which has resulted in the GOP taking a hard right turn.

This may explain why Romney is having such a hard time in getting his message across -- the "faithful" of the party are now a very concentrated minority with an agenda that has little if anything to do with the concerns of Americans in general.  Evangelicals (wealthier and better educated) have decided (with their Tea party brethren) that certain issues are core to their representatives; and that the fringe candidates are their best hope to pull the mainstream ones along (its working).  The GOP establishment that pushed hard for the Super PACs as a way to destroy the democrats have discovered that they face a doubled hedge sword; essentially three wealthy donors are fuelling the race to the GOP nomination.  Honestly, a guy like Santorum can hardly finance his campaign, but he doesn't need to raise money because one generous donor is paying for all his ads!  

The GOP is now regretting the SuperPAC strategy because it has made its eventual nominee unelectable for a vast tract of the electorate -- this is a huge disadvantage come November.  Its a shame because it means that the GOP nominee will be on the defensive -- not attacking but defending his previous statements.  It kills the electoral process, it kills democracy!

For Obama it is a golden opportunity; since 30% of the very active member of the GOP are over 65, the message has to be Medicare and Social Security must remain -- Paul Ryan's recent "budget" proposal does away with both programs -- The road to the White House for Obama has been scripted by the GOP and plays into the hands of the Democrats.

What I read

As a finance guy there are a few things you have to read almost on a daily basis; the Wall Street Journal, The Economist, The Financial Times are the three core "journals of record" of the financial world.  Over the past 5 years my reading habits have been changing.  First to go was the WSJ, frankly now that the rest of the journal (the Editorials and opinions always were) has been taking over by the loony right and now colours everything they write (I blame Newscos to some extent... but the seeds have long been there).  The FT for some reason (maybe because the problems in Europe are so severe) has become such a Eurocentric publication to become almost irrelevant to my needs.

I had a short divorce from the Economist (2002/06) but I'm now back in the fold.  The one surprise has been the NY Times that has proven to be a very good replacement for the WSJ (Ok the opinion pages has the same problem, except from the other side of the isle),  Still the NYT's financial coverage is now excellent -- and when I gave up the FT last week, it was the NYT that took its place.

I read virtually no Canadian papers, principally because their news coverage is terrible, the French side is bad (in fact the entire paper has been taken over by columnists -- at the expense of hard reporting).  I don't  really understand that here in Quebec "feelings" have replaced hard facts... The English press (Montreal's Gazette) here lived in that strange universe.  The two national papers (Globe & Mail and National Post) have strong political slants (left and right respectively) and have an axe to grind with regards to almost every issue with these polarized glasses. 

Monday, March 26, 2012

One year without a car!

Exactly 12 months ago today I moved out of my now sold "big house" in Westmount to my loft in Old Montreal.  It was also the day that I gave up my car -- actually my third ever car...

For a Canadian born in the 1960s I have an unusual relationship with cars; first as a teenager I lived downtown where owning a car was not only useless but was far too expensive, although I had great summer jobs (working in hospitals) the idea of paying a $100 dollars a month for parking was a non-starter.  As I grew older (and went to university -- less then 3 blocks for my parents's apartment), the idea of moving out was less than appealing .  So after three years of university I moved to London (England) where owning a car made absolutely no sense whatsoever (so by the time I came back to Montreal in 1994 -- I was 33 by then) I had never owned a car!  

In fact, the first car I ever owned was a 1994 Saturn -- all of three years before moving to Singapore where I was the proud owner of a white 1985 Mercedes  -- a tank, but since speed in Singapore is limited to 90km/h not really an issue.  It was a beautiful car, and old enough that it had character.

Returning to Canada my then wife and I bought a yellow Ford Escape.  I know that everyone bitches about American cars, but I've got to say that this small truck was unbelievably useful and versatile, and aside from some breaks issues (apparently a common complaint on SUVs) it was a great car.  But on March 26th 2011 I gave up my car and have been operating without one since then.

Now,  I've got to state that this move required adjustment on my part, but it was not all that painful either; first off there's a car rental agency across the street from where I live, picking up a rental (which I do often) is a very simple process (less than 5 minutes).  In fact, I rent a car almost every weekend -- so that I can go to my cottage.  The cost of renting cars for the whole year has been $ 4,000 including fuel.   I also "rented" a car from a friend last summer for a month.  Therefore, total for the year has been about $5,000.  

That's sounds like a lot for rental, but in fact when compared with the cost of ownership (maintenance, depreciation, insurance, and in my case parking) it is reasonable, and its no trouble; every Friday night the car I pick up is full of gas, clean and usually nearly new.  I go everywhere by cab or by foot (mostly the latter).   

In terms of adjustment; all my groceries are home delivered -- via an internet ordering system, there's a big grocery store less than 5 blocks away, and when I go to friends or restaurant I take a cab. The only irritant is that my friends often insisted (they've now stopped) on driving me home.  I've had to make it clear that this is a lifestyle choice and that I'm more than happy to "cab it home".  Finally, for most of the past 12 months I've walked to and from work (or used the BIXI bikes available here in Montreal).  

So this is the one year anniversary of my "car ownership free" existence, frankly I like it, I like it a lot!

What I've rented:
Passat -- Nice but lots of road noise
Fiat -- in France, it moved like a bat out of hell!
Ford Edge -- several times all kitted out but electronics tended to breakdown
Ford Explorer -- what a pig, and gas guzzler
Hyundai -- terrible car (my only Avis rental)
Jeep Grand Cherokee -- really nice car
Jetta -- also noisy, what's that all about with Volks and road noise
Ford escape -- a bit of a pig (compared to my old one)
Mazda 3 -- fine and bland
Dodge Charger -- what a terrible terrible car -- there's just no excuse for that pile of crap
Ford Fusion -- kind of forgettable
Altima -- also forgettable
Impala -- What were they thinking a real piece of junk

Overall, I prefer non American cars because they are more reliable.  To be honest all the cars I rented in Canada where low millage and in faire shape but several of the Americans had real issue with the electronics... Also why do no American sedan cars have pulldown seats, its a real pain in winter when I was shlepping my skis around.  Still the Jeep really stood out as a great SUV, it was a very nice (if thirsty) vehicle.  I've also learned to appreciate Sirius Radio -- the comedy channels are just brilliant...


Wednesday, March 14, 2012

Santorum & Hawaii

Ok so watching the Republican slug fest last night, it was amazing how well Santorum did, considering that all the polls had him trailing Gingrich and Romney, turns out that he won, and Romney came in third (although it must be said it was a very close contest with each of the three picking 1/3 of the vote).  It is also telling that despite Romney superior cash position (Romney outspends two or three times over the combination of Gingrich and Santorum), that he does so poorly.  Romney will almost certainly win this contest (although people said the same thing about Clinton in 2008) but the cost may be substantial.  In this era of "video playback" it will be hard for him to walk back his comments.  He will also be unable to go after Obama's health care program (since it was largely modeled on Romney's own Massachusetts' plan).  I think it was the NYT that outlined that this primary was the cheapest in over a decade.

Most amazing was Romney's win in Hawaii, where the total number of votes cast in the primary was justs slightly less then 10,000 -- in a state with a 1.3 million population.  That's 0.77% of the Hawaiian population that cast its vote in the Republican primary -- not exactly huge support -- in fact Romney won by 2,000 votes...  In Alabama (population 4.5 million) almost 500,000 voted!

Anyway good fashion fun.

Wednesday, February 29, 2012

I love Rick Santorum

First, I've got to be more precise, I love his honesty about his mid 17th century opinions, and be upright about his insane views.  This guy who clearly didn't understand Kennedy's speech about the separation of church and state -- that by the way allowed Santorum, a catholic, to run for president.  He doesn't understand why the founding fathers wanted separation (so that the European state conflicts would not appear in America).

This is a man who is against contraception (probably also against vasectomies?), against abortion at any cost, against women at work, and now against education for Americans (a guy who has BA, MBA, JD...).  Get this, America's right is eating it up, they love this stuff.

I love Santorum for his honesty, unlike his friends (those who are running, and those who are not) that speak in code, the kind of code that gave us "separate but equal" and "intelligent design".  No Santorum would gladly bring 'merica back to the 17th century, and his proud to say so.  It say's something about America's republicans love a freedom that they are basically siding with a guy who thinks that Iran has got the right answer -- frankly, I bet you all that he's also for religious police to monitor sexual activity.  I wish that someone would ask him the question that Kennedy when he ran:  Will you take your guidance from the Pope or the people?

Friday, February 24, 2012

Credit crunch in Europe is just starting -- again

My favorit line yesterday from Commerzbank's announcing 4th quarter profits up from Euro 257MM to Euro 316 MM, including in this marvellous performance was a profit from buying back its own bonds in the secondary market of Euro 735MM; so more than 100% of Commerzbank's fourth quarter performance was driven by the ECB's largesses -- in the form of LTRO borrowings; think about it the reason that the bank's debt was prices so low was because the probability of repayment was low, now with the help of the ECB's money, Commerzbank was able to retire that debt at a substantial discount.

At the same time Commerzbank will boost capital by Euro 1 billion, and the bank will improve performance by reducing risky assets (i.e. read here fewer loans).  You can bet serious money that what Commerzbank is doing is also being done by DB, SocGen, BNP.  So companies looking to borrow will find it increasingly difficult, if you cannot borrow you cannot invest -- especially in Europe were there is virtually no corporate bond market, and where companies are much more leveraged than in North America.

So, we now have an official Greek default -- manny don't seem to understand that the recent agreement with the Troika has an automatic (almost) system that forces private lenders to Greece to take a 50% haircut.  They may try to get away with a non-CDS default -- stating that it is voluntary, but since the mechanism can voluntarily force lenders to agree to a 50% haircut...

BTW the premise here is that for the next 7 years Greece will generate at least a 2.4% GDP growth, and that by then DEBT/GDP ration will be 120% -- the likelihood if this outcome is low in my estimation, since a recession is baked in the cake for 2012 (5th year) and it is hard to see the drivers to recovery in 2013 too...

On that note the markets are up again today... don't know why the news is not that good, fuel prices are through the roof (and seem to stay there -- for now at least) as there are supply constraints -- generated by the Iranian Embargo.  Brent crude is over $124/bbl and WTI is around $110/bbl.   I don't know why the European markets are positive (aside from all the cash sloshing around from LTRO) and American companies are doing OK,, but their forward statements are weak.  Nevertheless, up and away!

Thursday, February 23, 2012

Slow writting

its not a lack of material, but a lack of time.  I am now the General Partner in a new hedge fund... its a lot of work...

On that, my partner and I decided that will not accept any US money in our fund, we are much too concerned with the new Dodd Frank rules.  A hedge fund manager recounted to me that they've just received a 300 page questionnaire to fill out.  300 pages (that's phone book thick).  I though he was exaggerating -- until I read The Economist that mentioned that same document (apparently my friend was exaggerating its only 298 pages long...).

In Canada, hedge funds have a closer but more discrete supervision.  Fewer rules but tighter regulations.  It seems that America is doing its best to kill capitalism...

Anyway, now you know!

Monday, February 20, 2012

Basel III, European and American banks

As a Canadian living in Canada, where the Bank of Canada continues to warn of extremely dangerous financial times ahead, I watch in amazement the action of American and European banks -- maybe they know something we don't in Canada, but it remains that these institutions are trading as if Basel III was not going to happen -- ever.  Entering into trades that will soon be prohibitively expensive (because of capital requirements).

This was gleaned not through some great market insight on my part, rather a discussion today with some three "old bankers" who've worked the entire planet -- as bankers (you know, a few years in NY, Tokyo, London and maybe even some stranger outpost such as Shanghai...).  Bottom line these guys were telling me at lunch today (they now all work for Canadian banks) that they are observing what's going on in the market and are surprised!  First off, because all of Canada's banks effectively operate following Basel III rules, the loose lots of international business, to their American and European rivals.

First off, their bosses don't care if they loose the business, virtually every Canadian banks has assumed a horrible 2012 in terms of earnings, but (and this is important) they don't really care because more important than making money in 2012, is not loosing money in 2012.  Ask your friendly Canadian banker  if he will willingly extend any credit to an American or European bank; the answer is NO!  For the past 3 years Canadian banks have been cleaning up books, transferring their ISDA contract jurisdiction from NY to London (important for ownership of collateral).  Few counterparts really object, since their credit quality is much worse than that of Canadian banks.

Still, there is a massive worry in Canadian banks (and at the Bank of Canada) that things could unravel, today (Feb 20th) is a "decision day" for Greece -- we presume that cash will be lent another Euro 130 billion down the hole and in a few days (March 5th) private creditors have to agree to their 50% haircut -- otherwise it will be forced down onto them.  The assumption that this will all end well is presumptuous.

Greece, the end of the Euro and Risk mitigation

An article in today's FT drew my attention, how clients are asking their investment banks to create investment products that will protect them when/if Greece falls out of the Euro or the Euro ceases to exist (two option, one outcome).  Asking investment banks for this kind of advice smacks of stupidity.  First, because in the past, protection products have been better at generating fees for the arranger than at protecting the investors; think of portfolio protection in the early 90s.  Secondly, and more importantly, the issue with the failure of Lehman was not the direct consequences but the indirect ones!  It is the "Unknown, unknowns" that kill you, and that cannot be protected against.

A simple example, many companies would be looking at protecting core assets and revenue streams, but what if your bank goes belly up, not because it did anything really stupid, but because it had exposure to other banks that had stupid exposure -- the loops are endless.

The one protection is to own real assets that have little or no debt and good revenue potentials, even if the economic system collapses.  Non-cyclical COs with no or almost no debt, and lots of cash can ride out the storm.  After that, diversification, some cash will be lost, but diversification is almost certain to reduce total losses.  Finally, don't trust the banks, after all they've made a huge legislative push to stop you, the investor, knowing what they have invested into...


Ok, so most of North America is shut down today, family day in Ontario, and I'm not too sure what's the holiday in the U.S. But, what is interesting is the direction of oil prices -- not too sure what is driving them today, it is hard to believe that with Europe's economy is taters, China lowering interest rates (by 50 bps) because of the weakening housing market (although inflation is still sky high there), that the driver for higher oli price is a seemingly recovering U.S. economy... no, I suspect it is the neo-con (and evangelicals) trying real hard to start another war -- this one with Iran.

The most amazing commentary this weekend was that from a close confident of GW Bush (the young one) whose decision to invade Iraq was partly driven by a desire to see the apocalypse that woud eventually lead to the rapture (I wish I was joking), that and the ideal of finishing "dad's war" were the prime drivers -- despite what everyone say's in the GOP today there were no WMD in Iraq, the CIA didn't find any neither did MI6, Chenney, Bush and friends made it up.

So il prices are rising on the basis of rising tensions in the Middle East, specifically words of war with Iran, between the US or war between Iran and Israel, or war between Iran and Saudi Arabia... its hard to say who hates Iran more these days, the Americans, the Israel or the Saudis (granted they probably all hate them...).  So Brent crude has been hovering around $121/bbl -- Feb average of $115/bbl Vs $111/bbl for January.

Canada, and the CAD in particular, is a petrol related economy, despite Q4 GDP weakness, and an estimated 2011 GDP growth of less than 2.1%, Canada's currency has been sitting at or above par with the USD, and is unlikely to move lower until oil prices do the same.  In fact, odds are that the CAD will head back to its December high of 1.05/USD sooner rather than later.  This has nothing to do with Canada economic health, but rather rising oil prices (granted these are good for Western Canada's economies).

For America the problem is the critical $4/gallon threshold that is very near, and that has in the past been a hugh economic signal.  Like everything else, consumer eventually become desensitize to higher prices, once fuel is always around $3.5/gallon and then goes up a bit... still in the past this price rise has marked an economic slowdown.  

Friday, February 17, 2012

Canadian inflation going up again!

Not a huge surprise (a little surprise), still CPI for January 2012 is going up again, although a small increase (from 2.3% to 2.5%), underlying this inflation is higher food prices +4.2% and higher gasoline prices +6.5%, and February is looking dodgy on the fuel side, as oil prices (Brent crude hit the $120/bbl yesterday).  

So StatsCan shows that inflation that had shown a positive trend for the past few months, is now on a reverse course.  Canada's reality is that the economy did relatively well in 2011 with GDP growth of 2.1% (very very early estimates of Q4/11 are for GDP growth of 1.3% annualized).  The rest of world had a bad time in 2011 -- Europe seems to be  in a slow down mode -- Greece GDP shrank by 7% in Q4/11 -- not annualized data, real absolute shrinkage.  However, since so little of Canada's export are destine for Europe...

The first "reality" is that January 2011 saw gasoline prices at a 40 month high (yep we go to go "pre-recession" to see gasoline prices as high as they were in 2012 -- partly because  Gulf region tensions are rising again -- with the embargo of Iran.

However, and this is the important stuff, the Bank of Canada will not change its stance on ultra accomodative interest rates, the reality of the rest of the world says that tensions are still there.  Today, 1 year interest rates for Greece was 629% -- so there is a strong premonition that the endgame (intended or otherwise) is in its final stages.  

Wednesday, February 15, 2012

If Greece had exited two years ago

At the time the media claimed that such an exit would cause terrible dislocation:

Massive GDP contraction
Massive layoffs
Social unrest.

How exactly is the situation now any better for the Greeks, Check GDP contraction, Check massive layoffs and social unrest.  In fact, and BNP's quarterly results are the proof (if any was needed), the game of shell being played in Greece was to give European banks the time to write off, or selloff their risky assets. BNP first wrote off 20% of its exposure to Greece, then to 50% and now 70% write down.  They have also reduce USD denominated assets by 30%.

BNP is certainly not the only bank that has done this, several have also taken the hard decisions... but Greece is still failing; Over the past three years GDP is down 16% and unemployment has risen from 7% to 20%.  The latest demands -- 30% reduction in minimum wages and further cuts in government programs are certain to make things worse; and there is frankly no optimism to be had.  You can bet that good deals will be had for those foolhardy enough to take holidays in Greece this summer -- walking through the Acropole with the smell of tear gas and petrol bombs.

The big question is why did this occur, why did the Eurocrats agree to this game?  My guess is that saving the banks was the first (and possibly only) concern -- I suspect that everyone remembers Lehman brothers and don't want to risk contagion (especially since European banks have such high leverage).  The reality is that Greece will have to default eventually, both politically and economically the current status quo is unsustainable; April's election is certain to bring a new government -- that would probably be better off with a default prior to accessing power, the numbers don't add up; currently debt/gdp ratio is around 160% (anything above 80% is a problem) -- the new "deal" would reduce this to 120% -- because in the dream world of the Troika, reducing governmental expenditure is a certain way of increasing GDP (trust me its not).  

There is no doubt that Greece is a mess, like many European countries it is the first (and blueprint) for what will happen to the other troubled countries (Spain, Portugal, Ireland and Italy), for a variety of reasons all these countries are looking at Greece as the blueprint for their restructuring -- Greece is an insignificant country (in the greater scheme of things) if default is the outcome it will tell both Portugal and Ireland what to expect.

The Financial Times had a fascinating article about the ECB and other supranational European agencies; how they spurn suggestions from people who had seen massive economic dislocation from excessive borrowing, and then proceeded to make the exact same mistakes -- several times.

Monday, February 13, 2012

I love my Apple eco-system

I suspect that what Bill Gates and window were trying to do, Apple has in large accomplished. I own:
(1) MacMini
(2) Macbook Air
(3) Iphone
(4) Apple TV
(5) Apple Router

So first off I listen to all my music on my stereo via Apple TV, I use my MacMini DVD driver to load software onto my MacBook Air and finally, I now print on my old Canon printer with no wires attached to my MacBook Air. Of course I can access all my files that are on my MacMini hard drive -- useful because it is backed up by timemachine that backs all my files every night... I have no idea if I had a different wifi router all this would work?  I will try to print this weekend at the cottage -- maybe it will work, there too

Are you kidding me.

The only shortfall is the synchronizing of calendar and address book.  That is really is not working very well yet., although I seem to have found a solution with Fantastical...

There's an App for that!

Sunday morning, reading some tech writer on new and interesting things, I fell across an new GPS traffic app (been around for a while but I'm an old foggy!).  The app is called WAZE and it simply amazing, driving down to Montreal from the cottage it alerted me twice about minor accidents (that was slowing the traffic), and of congestion on two alterative routes to my place.

Think about this, this was freeware -- and about 20x more useful that the Garmin (also installed -- and not working well at all -- it refuses my address in Montreal).  First, Waze worked from the very first, finding my location in a few seconds (mix of GPS/GSM antena) then it gave me useful information, in understandable english.

For those who like to have accidents, you can also easily add hidden camera warnings (it is a Traffic social media), cop cars that are checking traffic.  The best bit, it figures out congestion just by watching other users that may be circulating slowly on a major road.

BTW no service fee of any type.  Garmin's model just got destroyed.  If some guy was smart he would figure out how to use your Iphone so that such apps are integrated into the car....

Europe's endgame?

Reading last night that the Greek parliament had voted to support the Troika's demand for renewed and deeper austerity measures, with 20% unemployment and nearly half of those between the age of 16 and 25 unemployed you know this is going to end well! (sarcasm).  This morning, the leader of the New-Democracy Party (the likely winner of the April elections), said that he wanted to renegotiate the deal with Europe... less then 24 hours after the deal was inked.

Reminds me of an old story; a friend started his working life at ACDI (Canadian developmental agency -- working mostly in Africa), he was dealing with a rather unsavoury type (President for life kind of guy) and as soon as they had signed a loan agreement; this President asked:  "Is it too early to start renegotiating the repayment schedule?" To his credit my friend soon left government employ -- since he had reported his conversation, and his boss had told him to "leave it alone".

Back to Greece, it would seem to me that Samaras idea here was to torpedo the "next tranche payment" while having voted with the government --- forcing a Greek exit before he takes over; being the clean up guy rather than the guy who lead to an exit in the summer or autumn (this game has only one outcome). I would suspect that Merkel is rather pissed right now.  She's the boss now that Sarkosy is in real trouble at home (he will probably lose the presidential elections in May).  March 20th is still the big day, Greek politicians are still playing game -- one hopes that they've got a Plan B in place.

Saturday, February 11, 2012

Canadian exports rising

On Friday, StatsCan published the merchandise trade numbers for December 2011 -- and despite a strong dollar, Canadian exports did very well indeed!  Canada generated a $2.7 billion trade surplus for the month, imports rose, but exports "exploded upward", in numbers imports rose 0.8% but export rose 4.9%.

The big winner was equipment and machinery and the auto sector.  Will this continue?  Hard to say, because the US economy, which is Canada's export market prime driver seems to be in recovery mode.  On bit of statistics that worries this writer is U.S. gasoline consumption; which is now lower than in 1980 -- 32 years ago.  BTW this not driven by a reduction in inventory, gasoline is a just in time business, no one keeps stocks, because it doesn't keep.

The problem is that historically, gasoline sales have been highly correlated with economic growth (or the lack thereof), and so this could be a important marker.  For Canada, the risk of a downturn in America is crucial to its export business (70% of all merchandise exports are to the US).  Bottom line, since July 2011, Canada's exports have been doing very well, a reflection of the US recovery.  But there are worrying signs out there

Thursday, February 9, 2012

Sino-Forest end of the saga?

Well the outside auditors published their final report February 1st on the on goings at Sino-Forst and the result are:  They found nothing, clearly the short sellers were wrong... one little problem; the outside auditors had very poor access to data in China.  It seems that the stone walling worked just fine.  I guess its in the hands of the RCMP now.

RCMP: Sir, we are investigating the Sino-Forest problems

Chinese officials:   你为什么戴你的滑稽装备(1)

RCMP: Sir, we are trying to find if Canadian investors were defrauded

Chinese official: 我不在乎 - 但你能这首歌“我是一个伐木工人......(2)

(1) why are you not wearing your funny outfit?
(2) I don't care -- but can you sing that song "I'm a lumberjack..."

And for those who don't know Monthy Python here it is

This woud be funny if were not so sad

Apparently the Russian authorities are still prosecuting Sergei Magnitsky -- you know the lawyer who died in police custody (after torture).  I wish the FT's account was fictional (it is a little) but it turns out its true.  Earlier this week a tribunal sat (and cited Magnitsky for contempt, because he didn't show up at the trial -- apparently dying in police custody is not good enough)

Read it here

Rio Tinto takes a $9 billion hit on Alcan

Rio Tinto announced its results for the year, the numbers were good, except for one tiny little problem.  They also took a write down on Alcan.  Rio bought Alcan at insane valuation in 2007 (just before the crisis), the figure if memory serves was $100 per share.  No other buyer could come up with a figure near that (rumours are that Alcoa was near $85).  So the company that Rio bought for $44 billion in 2007 is now worth slightly more than $36 billion.  BTW its not like Rio has been standing on its hands in terms of investments into Alcan.

On the bright side the CEO has agreed not take a bonus this year... 

Looking at the stock (up nearly 25% since mid December), shareholders seem largely unconcerned.  Granted that in the greater scheme of things $9 billion is peanuts, still its nice to see reality come knocking.  This was a bad deal, it is hard to say what will be the long term impact to Alcan going forward (in terms of capital allocation).   One thing for sure, Rio is selling aluminum assets -- $ 8 billion was "planned" in October -- my bet is more is to come...

Wednesday, February 8, 2012

Why doesn't the news translate into the markets?

This morning the stock price for Societe General is around Euro24.00 up 40% from its January 15 low of Euro 17. UniCredit saw its stock price double to Euro 4 from a low of Euro 2, granted the whole mess around its rights' issue clouds the picture a little bit but...

This morning looking at the VIX (Volatility of the S&P 500 -- or the fear index) is at a post crisis low (low 20s), yet none of the news is particularly good, the only explanation is that the ECB's LTRO program is working as planned -- boosting stock prices despite rising real uncertainty.  The reality of Greece is hard to escape -- Greece's tax revenus are collapsing, the Greeks are reluctant to push reform any further (there is no doubt that Greece is very unproductive, it has been for years).  Bottom line, we are looking at a very messy exit by Greece of the Euro -- if there is no new cash coming (budget deficit of 9.5% mainly because revenues have collapsed) then default will occur.

I don't think its appropriate to push the analogy too far, but no one knows the ramification of a Greek default, it was true for the U.S. Treasury when Lehman went under it is also true for Greece.  Two other bits of very gloomy information hit my inbox yesterday:

  1. Last month Glencore paid negative shipping rate on its leased verssels.  The vessel owners paid Glencore to use its ships -- granted it was not a large amount, still...
  2. Chinese electricity demand dropped by 7% last month (granted this was impacted by Chinese New Year festivities), still this has not happened in more than 10 years.
  3. Several friends in London are reporting massive salary cuts.  All three work in some of the bank's most profitable groups, yet all three saw cuts of between 12% and 25% in their gross salary.  Now, its important to note that when the bonus caps were introduced two years ago, many firms increased salaries to make up part of the difference.  Clearly banks are not feeling that pressure anymore -- by the way, none of the three left their jobs, but this will have a dramatic impact on their discretionary expenses.  

Despite this, and generally marginal earnings season so far, the markets are testing new highs.  Some will say that so much bad news was priced in the market that a bounce was almost a sure thing, yet its not like the market are very cheap.  P/Es of 13x are a little low but they are not "just emerging out of the recession" lows -- that would be p/e of 9x or 10x.  Granted the S&P 500 seems to be "topish" but then I thought it was heading towards 1,000 -- not 1,300.  Funny enough I don't invest with my head -- I leave that to my excellent broker.  He convince me in early January that we should get back in the market -- that my hugely successful bond bet was not going to get any better, and that I should go back heavy into the market (with companies that have low debt and nice dividend -- and little consumer  cyclical exposure), and I did, against my better judgment.  I've now learned to differentiate long term trend and short term price movements.

Note: I have no China exposure or Glencore, I don't trade the VIX and  

Tuesday, February 7, 2012

Borring but interesting -- building permits up 11%!

Ok, so yesterday I spoke of The Economist article about how expensive Canadian homes had become, after a 13 year housing boom that reality was about to catch up with the theory:  All performances (eventually) revert to the mean.

So imagine my surprise when this morning StatsCan published the new building permit for December 2011 that showed an 11% rise in permit requests...

(Source: StatsCan)

Now what's interesting here is not the trend but the level!  Frankly in building permits the trend is far from clear, but the level is important here, it is the first time that the number exceeds the June 2007 peak (not shown here -- take my word for it).  That means that despite all the statistical analysis, the view that Canadian are overly indebted (they are) construction is booming in Canada.  The increase was from "multi-family" units in Ontario and Alberta -- in fact that Ontario data is minde boggling, it represents a 28.9% increase to $1.9 billion.

Is the a representation of a market on the verge of imploding, the last hurray before reality sets in?  I have no idea.  Not only that, even if permitting drops of in January by 15%, there has been many instance of such reversals in the past.  But it does show a market that has a great deal of confidence about its future, which far exceeds what the "official" source are implying.

Granted there are "rumours" of heavy speculative inflows in the Toronto market which is aggravated by foreigners looking for safe house locations (and Canada is seem as a haven of peace these days).  I mentioned this before, downtown Toronto condo developments are seeing up to 60% take-up rate driven by "financial investors" -- people who are looking to make a quick turn on their cash... 

Things are getting interesting 

Monday, February 6, 2012

When even Canadian don't give a rat's ass about French translation

Forwarded by a friend this morning:

Now, that's simply careless and frankly insulting, that someone in Ontario would translate text from English to French, and clearly have no idea what he/she are writing.  For those who don't understand French; a loose translation would be a colloquial expression for  male self pleasuring... 

You got to give it to the people of Windmill Sausage Co., Ltd.   These people must be glad they don't have a web site!

Frankly, this next one is just funny:

Now, in both cases neither the label manufacturer, the client or for that matter the store notice that this wording was rather incorrect -- BTW the second one is the wrong translation they used "nuts" as in "nuts and bolts" Vs nuts to eat (which would be "noix").

I know that people in Ontario generally dislike French Canadians (especially if they are from Quebec), bust still both of these errors are rather glaring, even for some one who's only gotten the most basic French education....

Job creation in Canada: East Vs. West

If you are male between 15 and 24 and live in Montreal you are screwed!  Unemployment in the gender/population  segment is the worse in Canada -- on the other hand if you are a female, unemployment is not a problem!  In fact, in the 24/65 age bracket women in Canada are near full employment -- they are mostly service industry jobs, so probably not the best paying position, but at least women are working near or at full employment level.

The second trend is that a huge line divides between Ontario and Manitoba between job growth and job losses -- Ontario and Quebec, Canada's central manufacturing hub are suffering whereas Canada's resources based economy (yes oil and Gas but also mining) are doing great, and there is a deeper change too,, in that Western Canada's labor force is younger -- as Canadians are attracted to the job market there, so not only are there fewer jobs in Eastern Canada the demographic implications are severe.

Canada:  Employment Level

Canada's labour force survey (came out on the 3rd) shows that aside for a spike in mid June, Canada's labor market has come off a little, from around 17.4MM jobs in the summer, the number of jobs has decreased by about 75,000 jobs (which is a lot -- its like if the US had lost 750,000 jobs).  In Canada, the labor force survey is preferred because it shows the number of jobs and the number is not askew because of statistical analysis (discouraged workers who've stopped looking for work).  Anyway, Eastern Canada is seeing job losses while Western Canada is seeing job growth (-0.3%) Vs (+4.3%).  Of course, Western provinces are much smaller than Eastern Canada -- 70% of all Canadians live in Ontario and Quebec.

I've been bitching about the main stream media's sudden discovery that Canada's housing market was reaching bubble territory -- more worrying is this week's article in The Economist, about the Canadian housing market, which according the that publication has the highest house price to income average ratio in the "English speaking world" (Hey what about us in French speaking Quebec?).

Overall, the news in Canada is not good, economic performance has been deteriorating and yet the CAD/USD exchange rate is still near parity.

Thursday, February 2, 2012

And the there was one!

One of my favorit Australian blogs is Steve Keen's Debtwatch.  This is a sceptic, but in the right way.  His view on Australian housing is systematic and his 2011 call what right on the money -- Australian house price have begun falling (Australia has a lot of inflation compared to US and Canada), so for 2011 house prices fell (in nominal terms by 4.8%), but adding inflation and the figure becomes 10% -- I was not kidding!

His view for 2012, more of the same, another 10% drop.  Canada and Australia were the last two OECD countries that had not seen a real correction in house price, in both regions house prices have been growing faster than national income, and so eventually, the wall had to be hit.

It now leaves Canada as the only OECD country still seeing rising home prices (although the price creep has slowed apparently).  As of November 2011 house price (YoY) were 7.4% higher than in 2010 -- but for the month the prices had fallen by 0.23% for October (Teranet - National Bank house price index


Is it just me, but looking at Facebook's market valuation (around $75 billion) its revenues ($3 billion) you wonder what kind of growth is being factored in here.

From Facebooks's S-1:

We had 845 million MAUs {monthly average users} as of December 31, 2011, an increase of 39% as compared to 608 million MAUs as of December 31, 2010.
We had 483 million daily active users (DAUs) on average in December 2011, an increase of 48% as compared to 327 million DAUs in December 2010.
We had more than 425 million MAUs who used Facebook mobile products in December 2011
During the month of December 2011, we had on average 360 million users who were active with Facebook on at least six out of the last seven days, providing perspective on the number of people for whom Facebook is essentially an everyday activity

Think about these numbers for a minute in terms of total world population!  Lets say there are 7 billion humans on earth, that means that 12% have a Facebook account, and that 1/15 look/update there Facebook at least 6 days a week. Honestly, how do you grow from that base; when already 12% of the world population has a Facebook account -- It gets even worse, a good chunk of the population has no access (or very limited access) to the internet.  Lets say that 1/3rd of the world population has access (by hook or by crook) to the internet -- still 2.5 billion is a large number.  I would say that 800 million accounts of which half are daily users is a fair share of the global population.  So Facebook's model (which was always a way for people to socialise -- read hook up) will have to generate more dollar per users, in a new (and yet untapped) way.  

As one analyst point out when people go to google they are either looking for information about facts or about things and products -- in other words they are looking at solving a problem.  That's not the case on Facebook, they are there to socialise.  Frankly, I doubted Google's profit model when it first emerged, I suspect that even they could not contemplate how the world of information has changed.  Its true that for teenagers Facebook may be a great way of shopping for things, it may be true that it's a great way of finding a doctor, dentist on recommendation of people you know.  I for o ne remain wary of Tripadvisor - you never know who wrote the comments on a specific hotel or resort -- the future may be a more curated forms of information.  So Facebook may have an edge, still it remains that it is a largely unexplored area of growth for the company that has been focusing on growing its user based (at astonishing speed and volume) and not so much at growing its revenues -- although they have gone up rather dramatically.  But with net profits of $1 billion in 2011 (not bad really) a market valuation of $75 billion is a massive multiple.

One thing for sure, once 7% of the world population uses your site at least 6 days a week -- your growth model is more challenging and definitively outside your comfort zone. 

Note to readers:  Before any snide remarks are made, I do realize that tons of companies have Facebook pages, (movie too apparently).  So the comparison is not entirely appropriate, still 7% of the world population and probably 1/3 of the world's "connected" population... still a very large percentage.

Note to readers:  I have no positions in Google, Facebook, and Tripadvisor

Tuesday, January 31, 2012

Big day My Barbour is back

For nearly 15 years I have been the proud owner of a Barbour coat, you know these coats thte Brits wear, they are green and covered in wax...

Now, my coat is been "away" for some months (nearly 3 month) being repaired and re-waxed.  Well today at 12:55 the postman came and delivered the waxed and repaired coat.


Industrial Producer Price Index -- down again

The IPPI decreased in December after posting a 0.3% increase in November. It was the IPPI's largest decline since the 0.9% decrease in June 2010. The downturn in the index was largely a result of lower prices for petroleum and coal products (-3.7%) and primary metal products (-2.4%). Chemical products also contributed, though to a much lesser extent, with a 0.7% decline( StatsCan).

So the massive IPPI increase of earlier this year has tempered, on a YoY basis, IPPI is up 2.8%, not great but better than the 5.5% in May.  Again, fuel costs are at the center of the reduction, but they are joined by raw material prices (as metal prices have dropped).  Overall, its a win for Carney, that had resisted raising interest rate (because of global economic concernes) to meet inflation expectations, because he believed these pressures to be transitory.  Like the the Bank of England, the BoC was right on that call.

Looking at the data in greater depth, what is remarkable is how little price movement have occurred over  the last four years.  In 2008, the IPPI index was at 107 (2002 was re-based at 100), as of December 2012 the index is at 114, which gives an annual increase of 1.6% compounded.  Which is not a lot, and excluding petroleum products (not a brilliant idea) shows that the IPPI has been stagnant for nearly 4 years. 

Monday, January 30, 2012

On thing you can say about the MSM -- They like yesterday's story

Ok, so for more than a year, the governor of the Bank of Canada, Canada's minister of finance and a number of "important folks" have been making a point in speeches that Canadians are borrowing too much and are taking on too much debt, usually to buy a condo in Toronto or Vancouver.  Well guess who's finally joined the party, but the Main Stream Media (that's what MSM means).  Anyway suddenly the papers are awash (awash I tell you) with stories about the forthcoming large scale bankruptcy of Canadian facing impossible mortgages.

First off, yes Canadian have taken on too much debt, there is frothiness in the market, as is normal for any real estate market that has had a virtually uninterrupted boom for the past 13 years., but (and its an important But) comparing what's going on in Canada with the situations that has afflicted our American cousins miss the point.  First off, Canadian have seen a constant improvement in national income -- granted the mean has not improve as much as the average (that means that rich folks are lots richer and ordinary folks are more or less the same), but still national income has risen, the Bank of Canada has taken action (more than a year ago) to reduce market frothiness by reducing the term and the amount that can be borrowed -- forcing more savings in the housing complex.  Finally, Canadian banks were not crazy, there is really no such thing as "liar loans" in Canada -- all mortgage have to demonstrate income, and the independence of valuers is well established.

Clearly, Canada is overdue for a correction (13 years is a really, really long time for a real estate boom), and Canada will get a correction, but it will not be on the scale that our American friends have seen, because mortgage in most of Canada are full recourse -- yes the  are secured on the building, but in Canada (mostly) a mortgage is a personal liability -- you cannot walk away from your house.

Moreover, with lower loan to value (and no such thing as a 30 year fixed mortgage) the risk is lower.  No one knows what kind of correction Canada will have in 2012 (or 2013) but it will not be on the scale that has been observed in the US, moreover, a large percentage of the frothiness is in condos -- multi unit projects that are suitable (for a price) for the rental market in cities such as Toronto and Vancouver (actually in Montreal too, if truth is told -- there are lots of new downtown condos being build here too).

Anyway. the MSM has just figured out that a correction is in the cards -- now they are talking end of the world kind of outcome for Canada -- as if we were as crazy as our American cousins!

Aside from that, things are quiet in the stats front in Canada...

Thursday, January 26, 2012

DIP Financing - ECB & Greece

This is almost unbelievable but it is apparently true.  The ECB (and the IMF it has to be said) have decided (BTW this is a long held position) that their exposure to Greece is worth 100 cents on the Euro!  In effect the ECB takes the view that they provided new money (not always) and that their loans to Greece cannot be redeemed for less than parity.  It gets even better, all the bonds that the ECB bought from the market should also get 100 cents on the Euro!

Now the concept of Dip (Debtor in possession) financing is clear, after a bankruptcy new money gets preferential treatment in the waterfall of repayment.  Of course, the problem here is that non one in Europe wants to contemplate a Greek bankruptcy.  

The "funny" bit is that now the ECB wants to make a profit on the bonds it bought in the market, because if they are redeemed at par, since the ECB bought them at a discount (yield of 7% vs coupon of 3%) they would make a gain on their bonds.  In fact, this is exactly what the commercial lenders wanted to expose, they offered a coupon of 4% on new instrument "if the Supranational participated".  BTW 18 months ago, the 20% Greek har cut was supposed to reduce that countries Debt/GDP to 80%, the 70% haircut today -- will generate a figure of 120%, because Greeks GDP has been contracting at a rate of nearly 10% p.a. for the past two years...

Who believes that Greece can manage debt to GDP of 120% going forward?  Realistically, the Greek government will eventually wake up (or be defeated in elections) and will reneg on this ridiculous deal.  Certainly Greece was stupid in borrowing so much (but the lenders were stupid too), now "real men" have to make a serious decisions:  Greece needs to go its own way (however painful) and tell Europe to shove it!  The current path will lead to unimaginable pain for decades, and will lead to further negotiations.  I can bet serious money that soon some German politician will suggest that "Greece could sell the Greek islands -- for cash".  

Unbelievable, simply unbelievable

Wednesday, January 25, 2012

David Rosenberg

Mr. Rosenberg and I sing from the same hymn sheet.  We both take similar views (I have never met DR) that the current recovery in Canada is driven by externalities (Good for Canada), but that the economy faces some massive challenges; specifically the China ride seems to be over -- how many more cement or steel plants will the Chinese build?  For China the next shift has to be its consumption -- right now less than 35% of its GDP (compared to 69% and 55% for the U.S. and Canada respectively).

DR also takes the view that more debt for over-indebted countries is not the solution.  Canada is in relatively better shape (still not good), but the U.S., the U.K and parts of Europe are in terrible shape and it will take years for this debt burden to be reduced (or forgiven).  

Obviously the housing sector in America, the UK and part of Europe still have some way to go.  America will permanently reduce its single family units, so construction will be in multi-units will rise, but the UK still has some reduction in prices, and some parts of Europe (Spain I am looking at you) have not even started the hard bit - taking the hit on inflated house price (kept off the market).  DR and I were both very impressed by McKinsey's analysis of the debt burden adjustment -- using statistics going back to the late 19th century to find a comparable situation.  Their view was (and remains) that 10 years is the minimum period of adjustment -- so 2017/18 is the date!

The short term ups and down of the market are amusing but really mean little to wealth creation (ignoring AAPL of course) since 1,300 has been the "number" for the S&P 500 for several years now.  However, David has some choice thought for investors:

1.    Market volatility is part and parcel of every post-bubble deleveraging cycle
2.    Deflation trumps inflation 
3.    Balance sheet quality becomes so much more important 
4.    Always be on the lookout for assets priced for recession
5.    In this post-bubble environment, policy rates will remain near the floor for years
6.    Keeping policy rates low means that real rates will remain negative
7.    Global deleveraging cycles almost invariably bring on heightened geo-political tensions
8.    Populist policies win the roost in these types of cycles

As far as I can see, the action of the ECB, the Feds, (the Wall Street Kleptocracy), and the the EU are certain to cause irreparable damage to the European Union.  Already the level of suffering in Greece is beyond imaginable -- and Ms. Merkel wants more of the same , and this to give the Greeks cash so that they can pay their loans to the German, French and Italian banks pension funds and insurance companies.  Figure that one out -- where's the upside for Greece.
Finally, and in the "I shit you not" category -- guess what is the statutory discount rate that Canadian Pension funds use when analysing their future liabilities -- if I told you 7.25% would you be surprised?  Think about this, Canadian pension funds are somewhat underwater based on a discount rate that is out of this world high (making future liabilities seem smaller today).  BTW you can buy a Canadian government 30 year bond for 2.67% (yesterday anyway).  How will these pension funds make the difference of nearly 4.5% in yield shortfall?  

Canadian CPI tampering

Well, the BoC finally got its wishes and the CPI has finally taken a breather.  Granted most of the move was driven by lower fuel costs (its not over yet folks).  CPI was 2.3%, down 0.6% from last month while core CPI was down to 1.9% -- both figures are closer to the BoC target of 2%.  Yet worries remain, because although prices have tampered, the real "saviour" here is fuel cost.  As of November 30th they were up 13% for the year, but only 7.2% for the year ending December 31st -- a massive deceleration in fuel costs has helped, both measures for December.

Bottom line, 30 year BoC TBonds are still trading around 2.5% for 30 year money.  Granted there's a lot of foreign appetite for CAD sovereign bonds -- after all Canada has one of the few central banks not printing like mad.  The Americans are pricing the Feds printing an extra $777 billion (real cash) over the next few months.

Granted there is zero sign of inflation in the US economy... still that kind of printing has to translate into something serious (inflation wise) eventually. 

Anyway, good-ish news for Canada!