Monday, January 28, 2013

All is well in the world!

At least that's what I heard at a recent (thursday) investor conference -- I was shocked to hear that Europe was in year 6 of a 10 year de-leveraging cycle, there is no evidence of any deleveraging in Europe.  Of course house prices have crashed in certain countries, but this is not deleveraging insofar as the debt has not be repaid, it is a net loss for the economies (Spain, Greece), as these home stand empty today.

I was surprised how sanguine there were about the US (but not Canada), how things in the US were looking up, house price finally "rising" (they have in fact risen by nearly 9% since September).  However, interest rates are still very very low (lower than inflation), median income (not average) is not rising, speaking volume about the lack of purchasing power by the middle class.  

The view of Europe was that things are getting better -- they are particularly turned on by the UK -- which is strange considering the difficulties of the the Cameron government.  I suspect that there is general exhaustion about the bad news coming out of Europe.  The European central bank has decreed that it will do whatever it needs to maintain Greece's position within the union, but one has to wonder how long this will last?  Also as a "fly in the ointment"  problem is Cyprus, which is closely tied to Greece, and which has seen all three of its domestic bank forced into restructuring -- since so much of their assets were tied to Greece -- needing a rescue, Cyprus could fall out of the EU by sheer neglect giving an exit road map to other troubled economies.  

It seems that the investment community has taken the election of Obama into its stride, and are now looking at the US as an engine of growth -- for what its worth this morning's durable (December 2012 timeframe) goods number were twice as high as expected (4.6% Vs target of 2.1%), now I've not looked at the data granularity in any meaningful way, aside from Investments -- companies adding assets to their production capacity that was up marginally, but follows very strong performance in October and November its hard to draw meaningful conclusion.

Overall, their view as to the energy and ressource sectors are negative (e.g. Canada), and would see fall in prices.  China's economic growth would be lower -- at 8% but driven by consumption (not sure how that's going to happen since the incentive in China are still towards investments).  First step would be to make borrowing more expensive, paying investors meaningful interest on their deposit balances.  The other issue (to unlock value) are Chinese IPOs that are blocked because the companies cannot demonstrate profitability -- in a country were the books are unusually well cooked!  Tells you something about the strength and weaknesses of the Chinese economy.

Overall, the conference was interesting because I disagree fundamentally with their views of the world. The kicker is that these fund managers have outperformed the market almost every year (and by nearly 2% point over the life of their fund -- 25 years).  So although I disagree with their views of the world, they are probably better at reading the investment world than I am -- food for thought!

Finally, in a poll of the 150 participant (via electronic gismo) the overall risk was a black swan event!

Wednesday, January 23, 2013

I'm back

After 9 months of quiet I've decided to post again.  My focus remains Canadian, but of course now I can be less cautious about my identity, since I no longer work in a big-ish bank... the reason for posting was to provide my non-canadian clients some insight into "all things Canadian"  leaving banking, thank god that's over, means that my natural audience had disappeared -- I still have some thoughts that I want to share.

Right now I've got a few bees in my bonnet:

(1) Why are CEO & senior management of large companies receiving compensation out of proportion with their value added [short answer is that they can!].

(2)  Why are companies borrowing so that they can pay large dividends [this is illegal in the UK where I received most of my training]

(3)  Why are union so inefficient in protecting "real rights"  [I'm thinking of you Air Canada]

I will address these issues in upcoming blogs, I need to make sure that I have more than just anecdotal evidence...

I will resist talking about "American stuff" mainly because every time you make a comment about the good old US of A, the comments section gets out of control -- and I don't really care about the US (aside from a purely neighbourly voyeuristic way). Obviously I would prefer that Canada be less  dependent on the US, NAFTA has increased the overall trade between the two economies, and has increased the risk of interference.  On the bright side the US should continue to treat Canada like Saudi Arabia, we can do more or less what we want as long as we continue to ship the "black gold" they need.  The whole "American energy independence" discourse sounds fake to me, especially when looking at data that shows that shale sector durability to be a lot less than meets the eye.

I remain fascinated by the North American energy sector, especially the shale oil and gas sector that seems to be perpetrating a fraud, the number of drilling continues to increase but the quantity of oil being produced is levelling off, which means that older shall gas/oil wells are not producing nearly as well as had been anticipated by the market.  Some energy commentators have even suggested that shale drilling is really unable to meet its capital costs... the implication is that there is not enough oil to justify the expenses of drilling.

This is a small thing -- and this graph relates specifically to the Bakken region see here the original blog post.  I'm no engineer, but one thing I know is that once you start injecting water or other substances in oil wells production is about to fall of the cliff face; and that's the starting argument for shale gas/oil... anyway (NB  I know that the poster of the original statement is making the argument that the average is not falling off, the problem is the growth of exploration which is logarithmic -- you cannot drawn average from log progression -- that's a mistake)

I'm back