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?

OK,

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).