Monday, December 21, 2015

Maybe I should have taken his bet!

Several weeks ago, during a heated discussion on oil prices a good friend told me:  "You believe that oil prices are going down, put your money where you mouth is"

The bet was for oil to hit $30 before it would hit $50.  That bet -- was a sucker bet.  The marginal market is unknowable.  That's simply the truth is that one serious global event and oil prices can jump back to $80.  What is more interesting is where will oil be in 24 or 48 months.  Will it remain as cheap as today.

There are a number of factors at play:

  • Producers the world over have gotten use to the $80/100 bbl economic windfall; enabling them to buy off their citizen -- from Caracas to  Ryad the plan has been "buy off the natives"
  • US producers of expensive shall gas and oil have used "expensive" debt to fund their development.  Sunk costs are sunk!  Right now they are pumping as much as they can so that they can meet interest payments.  But soon even variable costs will not be covered.
  • Nearly 50% of all high yield debt is issued by E&P companies...
  • There are no massive growth pushes out there.  America just raised interest rates.  Although several economies have gone "negative" the overall impact is not working out as planned as banks are actually raising interest rates on consumer loans
  • 2016 is election year in America -- there will be no further tightening by the Feds (there may even be a reversal
  • America, as a net energy exporter, doesn't benefit from lower energy prices

So there we have it; oil (the sweetest kind) briefly dipped below $34 -- now around $35.  The trend tells me that oil prices are not done falling, at least until some fundamentals start changing.  The producers need to cash to keep the population happy, and users are in the same boat they've been for the past 12 months -- lower oil prices have not stimulated demand.

I shoulda taken that bet!


On a side note, yesterday I "fell" on a copper -- as value investing, video on you tube.  This video was from a guy who bought some pre 1983 pennies which with 95% copper content were worth twice as much as their face value.  That's when copper was trading around $4,000 a ton.  Today coper is around $2,000 a ton -- so our friend, who bought is pennies at a slight premium to their face value -- plus stored them for nearly 3 years is siting on an investment worth exactly what he paid for.  

Turns out it was a good store of value -- he didn't make a fortune, but on the other hand he didn't lose anything (aside from holding costs and inflation).  However, had he invested in the stock market his worth (assuming no tax impact) would have risen by nearly 50%.  Soooo maybe not the greatest strategy EVER!

Wednesday, December 16, 2015

Canada's shameful history -- but what are the lessons?

So Canada's Truth and Reconciliation Commission has finally closed its books and the Canadian government has decided to apply all 72 recommendations.  Fine as it stands, the Residential Schools were traumatic.

The issue today is where does Canada go from here?  What is to be done about the Aboriginal problem, because its an C$ 8 billion per annum cost.  What are the solutions?

First, some hard truths, if you are an Amerindian in Canada you have two choices; live a coddled and largely pointless life on a "reservation" pay no taxes and receive benefits.  Education, despite being expensive, is widely seen as completely useless.  Children leave school with little useful knowledge or socially (outside the reservation) useful skills.  If you are smart -- you get out as fast as you can. My experience, at McGil University years ago, where I met a single AmerIndian was telling, smarter than most, engaged and had little time for his tribe.  He was out in the world -- a loss to his tribe a tremendous gain to Canada's society.  BTW those Amerindians who live in reservations near large centres are not the topic of conversation here -- they're doing just fine!  

The second issue, and this is a difficult one is that the Supreme court has for 30 years accepted "oral history"  the problem -- well the stories don't match, conflicts on which land belongs to which tribe -- in Northern Quebec alone, there are 60 distinct tribal groups -- that have a separate world view and very distinct nationhood.  Each with its own history -- and vision of its land rights.

Third if they are a sovereign nations -- where do we come off telling them how to manage things (well or poorly is irrelevant) granted the golden rule applies here too (he who has the gold rules!), but it remains that many problems arise from the tribes own decision process -- flawed or otherwise.

The fundamental problem is integrating a hunter/gatherer "stone age" society  -- a great part of the Amerindian heritage are hunting and fishing seasons -- when EVERYONE leaves for these activities it is how they define their society.  

Call centres, manufacturing or assembly require employees to be present -- every day and every week.  These 21st century activities cannot accommodated the labor force disappearing for weeks.     Moreover, most tribal land is in remote locations (by choice or otherwise) with generally poor communication channels.  There are no obvious solutions here -- Like Romeo and Juliette its is simply a tragedy the Amerindian's expectations and the 21st century's needs simply do not meet. 

Programs to extricate their brightest will only sentence their brothers and sister to a worse life.  It s a tragedy that within the Canadian constitution their "rights" have been inshrined in such a way that their hunter/gatherers ways are protected -- allowing them to retain their way of life -- but at the same time condemning them to their way of life.  

It seems that the solution is:  Shovel money -- a tragedy!

Tuesday, December 8, 2015

$37.60

Oil are now lower than at any time since 2009!  That's going to cause serious trouble in America's oil patch (not that things are going to be that great for Saudi or Venezuela for that matter.  The shift from a few to many (lower oil prices benefit many while high prices benefit the few, is a massive transfer of wealth.

The Saudi royals have been "buying off" their country men with the windfall of expensive energy.  Now they have to liquidate their holdings...that could hurt stock prices.  In america, nearly 50% of all junk bonds (High Yield bonds) are issued by oil & gas companies drilling expensive shall gas and oil.  So far they've been buying time with massive increase in flows, but that cannot keep up.


Interesting times

How can a nation so well armed be so afraid?

Every day another nut-job professes his desire to "kill" Syrian refugee "in Paris" as if that's where they were... The most amazing thing, of course, is that America has seen these kind of commentaries before, many many times in the past -- at the turn of the century it was the Irish and before them the Jews.  Although historically America has welcomed the poor --that have served it so well, today the behavior of most Americans remains appalling.  Obama is proposing bringing 10,000 refugees to America, that compares to nearly 25,000 before Christmas in Canada, and tens of thousands in Europe.  Recent polls show that 72% of Republicans believe that the values of Islam are at odds with American values, for the Democrats the number is 48%.  There are many similarity between the Christian and Islamic faiths; neither are totally comfortable with secular governments, but Christians made (mostly) their peace with the separation of Church and State.  As for the place of women honestly both faiths position women in a subservient role; at odds with the feminist movement that achieve so much over the past 40 years.

The reality that is America -- gun crazed but also deadly afraid of anything and everything is an outcome that seems odd when it continually professes its machismo strength "We're #1".  Political polarization and the poor prospects of middle class are the root cause of these positions.  A blue collar worker looking at his wages for the past 20 years has seen no real incrase (median wages are still falling in America and have since the 1980s), and yet everything is more expensive, there is no feeling of security and the media's feeding frenzy on anything that could be remotely considered terrorism is simply fanning the flames of distrust.

If America was as generous as Canada it would have taken nearly 250,000 refugees -- instead it may well accept less than half of what Canada is taking in the last few days of 2015!  Moreover, the difficulties in arriving on American shores makes it the least interesting place to consider.  

Yet American remains deadly afraid -- mind you not of guns that kills!  They like those but those pesky terrorist well that's something else.  I don't really understand why a crazed gunman is better than some extremist.  The dead and maimed remain dead and maimed; is it any better to be told that your 13 year old son/daughter was killed by some crazy bottom dweller or some radical terrorist? In my book neither are attractive scenario.

But America is not alone in this; yesterday it was the "Premier tour" of the regional elections in France, and the far right National Front did very well across the country and in some place almost got 50% of the ballots -- are seeing a golden opportunity to finally take power an enact some rather aggressive anti-immigration legislation.  

So there we are; America and Europe are bombing the shit out of the Middle East, this causes refugees afraid of dying from "our bombs" and our reaction is -- stay home enjoy the free landscaping!

Pathetic!



  





Wednesday, December 2, 2015

Clown #1 lead widens !

Now that's a great headline.  This morning the latest poll, just 12 weeks ahead of the first primary races in New Hampshire and Iowa (its getting serious now) show that The Donald(TM) is now leading the field with 35% support of primary voters -- in Iowa Carson is still #2, but with the bad press -- he ran as an "honest guy" who turns out has lied about his entire life... is really toast.

Things are unchanged in the Dems field, HC is still well ahead of Sanders.  

The Donald continues "outrageous statements" is a non-stop spin machine.  He now suggest that the US and its friends should "Kill the families of terrorists".  Now I don't condone terrorism in any way shape or form, but history has shown that "Freedom fighter" and "Terrorists" can easily be confused -- depending on your side of the argument.  If you are a surviving member of a Yemeni wedding party that was bombed "in error" by a predator drone -- you may feel that America has an unpaid debt, even a blood debt!  

Trump is employing the Kayser Soze solution:  you not only kill your enemy but you also kill the family of your enemy and their friends and even people who lent them money (watch the clip). Anyway, blind and total revenge.  Don't think its a good idea, but its red meat to the base... 

Months ago a Andrew Sullivan made a joke -- inauguration day for Trump. It could happen!




Tuesday, December 1, 2015

Are markets primed for a 25% drop -- e.g. the big correction?

So despite all the BS news over the past few months, if you had bought the S&P500 or the DJ industrial you would have assumed that 2015 was a very quiet year for investors -- the S&P started at 2020 and today is trading around 2100, a 3.9% increase and if you add your dividend (a whole 1.9%) you are looking at total revenues of 5.8% -- before tax not too shabby and certainly better than what a bank deposit will give you.  In a nut shell 2015 has been a good year for investors, at least better than for depositors.

So what about 2016?  One of my very favorite commentators is Bob Janjuah -- an old colleague with tons of street smarts.  He's the voice of reason and a very good macro commentator.  He was long the whole year and told his clients to stay the course -- if not increase position when the market soften. He's now gone full bear told his investors to liquidate their positions in September on the often heard rumor that the feds were going to raise rate -- their last chance before the 2016 presidential election. Its now December 1, and nothing has happened so far.  The state of play is as follows:
  • America, as an energy exporter, doesn't like lower oil prices
  • America has a weak recovery (although better than what the Bush years produced
  • Europe could have a better 2016 than the market thinks
  • Japan will have more QE -- because the economy is back in recession
  • China is facing difficult decisions -- and is finding that the usual levers of control don't work too well anymore -- China is the big unknown.
Overall, what we are seeing is growth but tepid growth, if the Feds decide to raise rates...then recession will follow, because the US recoveries are getting weaker and weaker -- Europe and the emerging economies could not sustain much tightening and China is being China.  His view is that real earnings are stagnating -- at best!  Steady earnings are a poison to earnings multiples that are justifying the current very high p/e numbers.  The death of growth will directly impact p/e ratios and therefore Bob's call for a 25% market correction.

Finally, and this is one if my favorite factoids:  The economy always grows better when the White House is occupied by a democrat -- and that's been true for the past 50 years.  Budget deficits are always smaller, and the the tax base shrinks.  When the GOP takes control -- the goody train goes full blast for the rich folks and everything else gets screwed (the deficit, wages, the economy).  Cannot think of a better reason not to vote for the GOP (wait there are 17 good reasons not to vote GOP -- starting with Trump...)

Wednesday, November 25, 2015

Terrorism, the media and the flight for the right (GOP/Conservative etc) A very short post

I hardly ever watch network TV, I don't think I've watched a political gabfest in more than 3, maybe even 5 years.  Its just that pundits the world over have an opinion, it will not change, and its why the are on TV, they're a sure thing for the bookers -- the "hooker" of the TV world -- you get what you pay for!

Anyway, at a loss, in an Ottawa hotel I saw this debate on the confluence of recent Canadian elections, the Liberals' (left of centre) victory and the impact of the Paris terrorist attacks.  Present were a conservative pundit, a token "good looking" muslim women and  a radio host -- my guess is that no smart liberal wanted to be on that show.  BTW I do realize that's probably the beginning of a joke:  So a conservative, a Muslim and a radio guy walk into a bar...  

Back to my story: the conservative pundit (hereafter know by her initial TK) who I vaguely know is asked a leading question:  If the Canadian elections were held the day after the Paris terrorist attacks would the conservative have won?  Now TK is very good at her job, although I think she could have been blindsided if a Liberal had been present.

Her glib answer was that "she knew that the liberals were praying for no terrorist attacks".  Now this statement is made for a very good reason -- so that TK will be asked to come again.  She's the Canadian (therefore not crazy) version of Anne Coulter -- a right wing firebrand always present in the media.  Had a reasonably smart Liberal been there he could have answered the following:

"TK the implication of that statement is that Steven Harper and his army of minions (Sound evil but in a harmless kind of way) were praying for there to be some form of terrorist act!"  

Since no Liberal was there (and this is an imaginary conversation in my head) TK's assertion was left hanging unchallenged by either the Muslim (who's apparently very very afraid of walking in Toronto) and a quiet radio guy.   For starts it is self evident that neither the Liberals or the Conservative were praying for anything but victory.  Their real prayers were for local and national bread and butter issues, and not the risk of a terrible terrorist attack in Paris.

But this kind of vacuous punditry is why I don't watch TV -- ever. BTW is it just me or are there more commercials then before, and are they dumber too?  Gosh I'm turning into a surly old man...

Sunday, November 22, 2015

Goldman says oil going to $20/bbl -- so it probably will not do that!

This morning GS in a E&P report said that the current glut in oil could easily drive prices to $20.00/bbl. Nine times out of ten whatever GS says doesn't happen!  Take gold, it's rather amazing, although GS has a 2012 US$ 850 target (when it was trading at $1,300), today it's trading at US$1077.00/oz -- so not a very good prediction (it did make the cover of the WSJ).

So why is GS so often wrong?  

The short answer is that GS, like all brokers, is looking at generating "buzz" for their ideas.  The real issues are the following:
  1. There is a glut of oil with virtually all storage options full
  2. Lots of investors played the yield curve assuming that oil prices would rise -- it didn't
  3. New production in the US "non-conventional" is dropping fast -- drilling rig count is down 60%
  4. Other stuff that's worrying:  overall demand for trade is off, freight rates (ships) is down 70% in a month (that cannot be good)
So the signs are not good for oil, but they are not the "end of the world either".  GS's point is valid that weak oil prices seem to be here to stay a bit longer as the world economy slows further.  Not sure that the recent attacks have much to do with overall economic growth, but its certainly not going to help.  

So for all the hedge funds and private equity funds that went long oil as a sure thing, the big unwind is about the begin.   Any good trader (ok ok) will eventually kill a losing trade.  So that will add additional pressure on oil prices, its a great opportunity for the US government to build its strategic reserves (assuming they've not done so already).

Anyway, for Canadians, oil prices are as low as they've been in nearly a decade.  So there's that

Monday, November 16, 2015

Paris!

Friday night the world has changed, again. The multiple attacks in Paris are a stark reminders of what happened in 2001, where several aircraft were directed at various American targets (World Trade Centre, Pentagone and White House).  These attacks are somewhat similar, except they targette the France's youth.  The region of Paris where the attacks occurred are known as the primary "fun spot" of Paris.  

It was horrible!

In Liars Poker, Michael Lewis talked about how his boss would use real (horrible) world events to theorize on how they would impact the world. economy in general and markets in particular. Therefore one question I got asked this weekend was what will be the economic impact of the attacks on the world economy; we have a strange confluence -- whereas last week everyone was "anti-Putin" this week, no so much.  My first guess is that conflict with Russia is now off the table;  The enemy of my enemy is my friends (or something akin to that). We seem to be on the same side (or sides that are close enough), the attacks (Monday morning) by the French air force seem to indicate that the country was "ready for trouble" and more news over the past few days seem to indicate that the French authorities had some information that attacks were expected. Over the next few weeks it will probably emerged that some very specific intelligence was available marking the targets; however, they were maybe dozens of similar target rumors.  With hindsight, the French will discover that they had specific intelligence together with a  number of false positive.


So the questions has to be:  Will the events of Friday change economic outlook?  The short answer is almost certainly, it may be a contributing factors to an already tepid global growth.  Europeans have a new reason not to go out and have fun, because although it was the French that were attacked no one believes that this will be an isolated incident.  The mass of Syrian refugees (apparently several of the terrorists arrived as refugees) makes detecting any "hidden" terrorist almost impossible.  The attacks could be the infamous "the one drop that made the water spill over"!  But other factors cannot could also be determinant: This morning Japan announced that it had, again, slipped into recession.  China's PPI came in below 52% indicating that growth was probably less the 7.2%.  Oil price this morning were briefly below $40.00/bbl.  Rumors abound that some of the big players in the US unconventional gas markets are very very close to default (technical -- convenants) or real payment issues.  

On the other hand military spending is spending, and it may not be seen as a positive thing, but it remains that a nation at war -- as France basically declared on Sunday will see increased spending.  The reaction to Friday's shooting is certain to increase the security threat in Europe (and elsewhere) that should/could lead to high GDP.  

So the short answer is; all the primers for a global recession are in place, maybe this was the "event" that made things go bad.  There is no doubt that a frighten population will spend conservatively.  That cannot be go for global GDP growth.

Monday, November 9, 2015

Gold, Automation, Oil and deflation (Revised)

First off, Gold's been off its feed for some months now.  Its not clear what's going on, but in USD gold is off nearly $200 since spring -- where it had been trading around $1,200/$1,250 for nearly 3 years.  Normally, I would blame the strong dollar, but its been more or less unchanged for two years, so that's not it.  My instinct tells me that something else is a foot!  My best guess is inflation expectation are going down the tube.  Not only are primary ressources suffering (e.g. oil prices, steel etc) but the central bank's pumping action seem to achieve little.

This morning a very prominent hedge fund declared that "the floor on oil prices had been reached" within 20 minutes of this pronouncement oil price dropped nearly 8%... goes to show "nobody knows nothing".  But a massive failed auction of used heavy equipment in Australia, CEO of Maersk declaring that trade was far worse than the market assumed all point to further economic slow down. What's going on in the Oil business is a massive inventory build-up in non-conventional channels (e.g. ships).  VLCC parked off Singapore is "standard" its easy to store there, and there are half a dozen large markets within 3 days sail, but off the coast of Texas?  Everywhere there are those tankers full of oil; the trade was obvious, as the market assumed a recovery in oil price, the old adage of "buy cheap and sell dear" was too much to resist by all these hedge funds and private equity firms looking for an easy profit, not only a crowded trade but a trade that's going to wrong way!   This is driving the inflation expectations down (and there goes gold prices...)

Over the weekend two studies came out on the impact of automation; now we are not talking of auto-painters or windshield installer we are talking learning machines that can do complex tasks -- like driving a car!  The two studies one from BoA the other from McKinsey have different prospectives -- McKinsey says this will change the work environment while BoA says its the end of the world (or words to that effect).  

Two anecdotes:  When I returned to Montreal working in the trading room the F/X desk was large (although this was a small bank), it had about 7 traders actively working their clients; today there are only two traders left, the reality is that most treasurer's F/X interactions have been taken over by machines; the treasurer checks his future f/x requirements (hedging or otherwise) and the systems (from different banks) look at the projected cash flow and offer a hedging solution.  For the treasurer it allows to manage the position weekly, daily or hourly without having to justify his changes/requirements to anyone -- its a machine.  The banks lost a massive information channel to the clients, but improved margins, fewer errors and greater profits.  The trader pool shrank from 7 to 2 -- a net 5 job losses (forget about back and middle office reconciliation error rates with machine orders has dropped dramatically.  There jobs too have been eliminated.

A friend ran a business with many suppliers across the globe and a single buyer -- its the wine business.  Every day they would receive bills from the suppliers that required reconciliation, these bills were ALWAYS identical.  over a 7 year period the font changed but little else.  The business employed a team of 10 to reconcile these invoices (each product in each business and each currency) with discount information for volume.  I pointed out to this friend that for $10,000 a year the business could purchase an intelligent system that would automatically scan emails for invoices, download the invoices select the information and create worksheet and upload the data directly to accounting system -- checking twice for errors.  Total annual cost savings.... nearly $500,000.  Error rate fell to insignificant levels, reports were automatically sent to vendors -- in their own language.  Of course 9 people lost their jobs -- these were mind numbing and the staff turnover for this segment was nearly 200% per annum, error rates were nearly 5% -- which created friction with the suppliers.  However, these jobs were a net loss to the economy, even if they were boring, it was also a filter to find new long term employees -- that is now gone.   This friend saw an immediate increase in profitability, reduction in expensive errors and satisfied customers.  

The reality is that two two examples were for very different jobs; a trader earns $400,000 to a million a year, and these systems made their knowledge worthless -- it could all be coded into computers.  While the win broker's job were mind numbing they were still jobs that someone had.  The benefits to society of these trading systems was unequal, the bank saved errors and massive salaries, the client go a better system (really it was a massive improvement).  The win guy increased his profits (massive), reduced errors.  The economy lost anywhere between 17 and 30 jobs.  Potentially pure salary deflation both for high and low paying jobs



Tuesday, November 3, 2015

Self driving cars and the market

Earlier this summer I was having a conversation with my father, the topic was self driving cars.  I though that within a few years self driving cars would begin as a solution to gridlock and the complete absence of parking spaces in large cities.  My estimate that "in the next 10 years" experiments would start.  My dad was far more pessimistic, he thought that the Americans would never be able to get around the liability issues (then again 30,000 people die from guns and that doesn't appear to be a problem, but I digress).  

Imagine our surprise when Tesla unveiled its latest software update which allows limited automatic driving on motorway.  Furthermore two guys drove across the country with a Tesla; 99% of motorway driving was automatic driving.  It gets better, last week I learned that machine learning was involved!   That every time an American (because the software is so far only available in the US) takes his tesla on the road and activate the automatic driving, the entire Tesla network learns how to better drive -- talk about Science Fiction -- OK so maybe I don't have my jetpack, but my self driving car is here.

Now, what does all this mean for the automobile market?  First off, the "big three"  (aka the legacy manufacturers -- BMW, Ford, Merc, GM etc) were once again caught flat footed.  The self driving explains why the new Tesla (4x4) is built the way it is built.  With machine learning taxi (electric) could soon be driverless -- imagine a Uber with no driver.  The car picks you up, and brings you to your destination... Do you need to own a car, could you be part of a pool of cars?  Will "mini-uber" be created?  If you live in a large city the whole issue of parking your car may have gone away!  You live in Manhattan and your car is parked in New Jersey!  

I never anticipated that the US would be the first market to have automatic cars -- really for such a litigious country its a little surprising.  Still for the past two months they have been there.

As for the great market crash of 2015, lets be clear it has not happened, sur stocks are not going anywhere fast, but they are not sinking.  Stocks today opened within a margin of error of where the were at the very beginning of 2015!  Granted, its not the 7-10% yield that investors have come to expect, but with interest so low, equity market investors still got their dividend (around 1% on average).  Every morning I wake up to some more doom and gloom (I'm usually Mr Doom and Gloom) and while I agree that the world economy is not firing on all cylinders its really not crashing yet.  There are "black swan" signs out there, China is a real worry -- its economy seems to be in stall speed, and the government seems to be out of stimulus tools -- Russia is very aggressive although I think the entire world wishes them luck in Syria (rather them than us mentality) Honestly, none of the G7 countries has any idea how to deal with Syria!  

Still there's nothing on the horizon that would suggest that changes are afoot.  



Friday, October 30, 2015

Its been a while....

Honestly, I find myself hard pressed to get exited about any of the recent political developments.  Everyone agrees that the Greece tragedy is over, well maybe not over, but swept under the carpet, shovelled forward -- use any analogy, but there the reality of Greece's tragedy is there for all to see, the country has more debt today than it did 6 months ago, the economy is still not recovering.  We shall see -- I am still confident that I will eventually win my bet (that Greece will be forced out).

On the American side things are unchanged, Canada had election and the conservative government was defeated by the left of center Liberals.  Mostly untested, but already some positive actions have occurred -- such as cancelling the F35 -- a ridiculous acquisition by the previous government of a poorly suited aircraft for Canada's usual border defence mission at a cost that is simply unacceptable, nearly $200 million per aircraft!

The American long long winded electoral process grinds on, with the republican primary being both entertaining (what a bunch of clowns) and depressing (what a bunch of clowns!).  

The world economy seems to be grinding to a halt, China the engine of growth is discovering a reality -- you can borrow for a long long time but eventually if have to repay the loan -- or at least pay the interest on the loans.  That has not happened for a long time on many post 2008 projects.  The simple reason is that these projects were not needed.

Europe is in a strange place; on the one side there is floor of refugees that are just knocking down the doors to come in, on the other you've got the Brits that are looking for an exit (to what is not entirely clear).

The biggest things are interest rates rates, and what the Feds will do.  They have been threatening to raise interest rates for some time now, and in fact Q4/2015 was suppose to be the big raise!  However, the world economy is giving all the wrong signals, US GDP growth that is interesting is probably the only one doing OK, and there again for most americans standards are living are still falling as median wages continue their relentless fall (in absolute and relative terms).  Even the richer segments are starting to feel the burn.  Banks are cutting down and bonus pools are evaporating.

So interest rate rises would seem to be off the table and the world's central bank have no idea how to prime the pump!  No exactly encouraging.




Tuesday, September 29, 2015

Eximbank: The fall out has begun

Well that was unexpected (NOT), GE today announced that its new $300 million engine plant, where all the new engines will be built (next generation) will be located in Canada!  People still cannot believe that US Export Import Bank has closed its doors, but GE has decided that it can no longer wait for the US government to figure out reality.

For Canada this is massive, because engines production line have a very very long life cycle; first the engines are developed for a new type, these are built for a number of years (eg the 777 was built for 15 years) but then new engines are required for the fleet going forward for another 25 years.  Moreover, once "one plant" has been moved, others will follow -- mainly because the specialised skills are there.  On the long run this is all good for Canada.  Granted we are only talking 350 jobs, but in reality there are a lot more jobs involved; GE does the final assembly, but a great deal of sub assembly is done by risk participants, these will want their core operations to be near the final assembly partner (very often but not always), bottom line we could be looking a several thousand jobs here; some will be Americans moving to Canada, but many will be Canadians.

I guess that in a market of 350 million americans, 300 jobs is nothing, but GE is the sharp end of the stick others will follow; Canada's labor is relatively cheap (especially with a cheaper Canadian dollar) health care costs are not a company's problem and the political landscape is subdued.

Now that GE has started how many more high tech companies will follow (either Canada or Mexico) in their footsteps?  These are very high paying jobs, because the degree of skills required here is substantial.


Anyway, I didn't think I would be proven so fast, turns out capitalism can turn on a dime


Were any markets not rigged?

Its beginning to sound insane, but this weeks's UBS "gold" scandal is just adding insult to injury. Turns out that for giving up its co-conspirators UBS will be given a "lighter sentence" on its manipulation of the gold market.

Now first off, I don't know what gold market they are talking about -- is it physical gold how did they cheat, I just don't know -- and don't want to give any excuse to the goldbugs to say"  See we were right".  

The list of markets that were rigged by the big banks -- we are not talking 2007 here, but 2015 is getting long (rather the number of market that were not rigged -- against customers is getting short):  So far the LIBOR market was rigged (interest rates), the Foreign exchange market was rigged, the treasury market was rigged [the VW diesel market was rigged...oops wrong industry -- they will go to jail for ever], and now the gold market (and I would venture the entire precious metal market) has been rigged.  My guess is that its the option market that was taken for a ride, its too hard (and frankly too small and volatile) to do this in the physical market.

Turns out big banks were making the money the old fashion way after all... they stole it!

Cannot think of a better reason to break up the big banks into smaller entities.  But of course everyone know that no such thing will happen; instead some lowly trader will be prosecuted (the guy who's bonus is less than $50,000 and all the senior guys walking away into early retirement will walk away with multi million exit bonus).  What a crock!



Monday, September 21, 2015

Maybe not Bush, but Walker is a gonner!

So I think we are back to 2012 at the time of the last Presidential primary when a "cycle" of bozo and unprepared circulated as the "candidate of choice" as the GOP crowd favorite "Republican candidate to the presidency".  It seems that Mrs Fiorina has jumped from around 3% to 15%, ahead of "I am falling asleep" Carson who is just ahead of Rubio.

Now Mr Trump seems to have sunk from 32% support last week to 24% this week -- could this be the sign that the GOP establishment has been hoping for; the end of the Trump nightmare?  At the last CNN 3 hours marathon debate she was poling around 3% -- so she's now #2 in the race at 15%.   Mr. Bush the favorite of the neo-con wing (also favorite of the Roosevelt Republicans) is nowhere to be seen (sitting around 9%) in 5th place.  He's apparently sitting on more than $100 million -- so he will not rush for the exit, but its got to be somewhat dispiriting to be with the also ran.

It also brings hope that if Carson is replaced with Fiorina than the 30 days cycle is now in replay mode from 4 years ago.  It gives some hope to the guys sitting at the bottom of the ladder that one day it will be their day.  The preeminence of Carson, Trump and Fiorina is a strange outcome, and it is more telling of the GOP troubles than anything about the outcome of this race.  All three have zero executive experience in government.  The first guy who's ever run public office is Rubio who polls at 9%; many suspect that he may pick up steam -- especially away from Bush as the two guys from Florida battle it out.

The cycle of candidates at the top of the heap (with Trump lording over everyone around) There are good odds now that Fiorina will do well for a while and then her weakness (to GOP voters -- e.g. she's a women) will outshine her "new car" smell that she has now. It speaks loudly to GOP's own troubles than about the candidates and much more about the GOP political climat that seems to be toxic to anyone who has ever held elected office (Rubio being the one exception)

The biggest loser is Scott Walker who went from 20%, to 15%, 12% 8% 5% and now 1% support. His collapse has been rather stark and has to do with being out-crazied by both Trump and Carson and then going Full Retard with negative results -- I mean even the most rabid minutemen don't take the treat of Canada seriously.  Trying to out-crazy he lost, and his lack of understanding of major issue (plus pissing on his base back home) just made matters worse.  I believe that after Perry, Mr Walker will be the next to exit stage right!

Could not happen to a more deserving guy!  He's be unspeakable for months now he can get back to Wisconsin cheese steak sandwich  (really not a delicacy)




Wednesday, September 9, 2015

The primaries is all bullshit?

When I heard Sara Palin refer to Native Americans as people who should go back to Nativia I suddenly realised that the objective was not to say anything smart, in fact saying something stupid made sure that you were in the news.  It seems that the new game plan for Republicans is to say stuff that is so dumb that it will bring notoriety to the person saying it, and coverage.  Scott Walker's Canadian Wall was a case of very stupid idea -- this is a country that cannot find money to maintain its bridges and overpasses and would spent 10 of billion building a wall.  It got Walker press for 24 hours -- granted unlike Teflon Trump (TT for short) it didn't work out as intended.  There use to be a saying good or bad press it doesn't matter as long as they talk about you!  It seems that the 1617 37 36 candidates to the GOP presidential primaries are now taking this strategy to heart.  Don't know if it will work -- it worked for TT and for Carson because they were the only ones really going "full retard" but if all of them try that strategy it may backfire; so many candidates saying stupid things will get lost in the overall noise.  However, what its doing to the Republican Party is something else entirely.  The nativiste racist and bigoted statement made by the various candidates will impact the party's brand for a long time:  

(1)  Walking back the stupid is going to be hard in the age of internet:  Eventually, one of these guys is going to be the GOP's candidate to the White House, and what's been said -- some of it simply terrible, is going to be hard to walk back.  Granted the electorate has short memory span, but this is not the 1990's we've got YouTube now -- so any pronouncement can be replayed as if they took place yesterday, and who's to say differently.  Jon Stuart was a brilliant user of the format.

(2) Citizen United is killing the GOP:  The stupid season will last a long long time.  Even candidates that are polling less then 1% support are staying in the race, because these candidates are funded by the "plutocrats"  who don't mind spending a bit of cash on their favorite candidate -- even if he doesn't resonate.  The likes of Perry, Santorum, Pataki, Gilmore and Graham have zero chance of going anywhere, and yet they stay in the race; and there's a long list of candidates who hardly resonate at all.

(3) PAC money is of poor quality:  The GOP is realising that PAC money is of little value; Karl Rove spent more than $100 million (Crossroad America) on a dozen races -- all for nothing, PAC spending had little impact on voting turnout.

(4) Donald Trump and Ben Carson are a real problem; the first is a loud mouth self promotor the second is simply nuts!  These two account for nearly 5053% of all primary voters! voting intention; and their crazy is keeping them on top of the more serious candidates.

(5) Summer polling is showing a distressing trend; All candidates (except the above)  are converging towards three groups:  5%, 3% 2% and lower.  The non traditional cash available to candidates from their favorite billionaires will make the race wide open, as there are few distinguishing features between the candidates (aside from the crazy remarks).  This will prolonge the race to the convention, with all these candidates and many proportional state races no one candidate will have enough votes to win the nomination prior to the convention.  A brokered convention could be interesting (and not in a good way as far as the GOP is concerned).

UPDATE:  Trump & Carson are now at 53% combined 33% and 20% respectively.  Perry is out -- first off its not his fault, secondly he didn't raise enough own money to pay his staff, and I forget the third reason...

Thursday, September 3, 2015

So what's really changed and why the panic

Its like the movie Airplane, when the overhead seat belt signs in the aircraft indicates:  Okay Panic. Being honest for a few minutes with ultra low interest rates, and weak(ish) world economy (US seems to be doing OK, but Europe and Japan are not) and a slowing China (maybe not slowing as much as growing less quickly), the world is not really floundering, its just not performing.

So what has really changed is volatility -- it could be a sign of something else, as it could be just a bout of volatility because there are changes afoot:


  • Oil prices are falling again -- accelerating the shift of ressources from producers (of oil) to consumers; a far more diffused group than the oil producers.
  • Fed Chairman has indicated that interest rate hike(s) are on the way, that makes bonds "one way bet for the past 20 years" done and gone.
  • China -- well the government seems to have lost control ; and has decided that the stock market was a proof of economic virility!  What they do next is anyone's guess.  But when you start arresting investors for doing their job, its a slippery slope
  • Europe (Greece) is showing the limits of democracy -- will the ECB intervene in all European election, when funds will be "held up" until the electorate makes the right decision?
  • Inflation is nowhere to be found (except in assets!); the working class has no pricing power -- and with no pricing power there's no possibility of inflation; median wages are still falling in America (they have been falling since the mid-80s).
  • The US primary process are showing a very ugly side to the American electorate -- who know there were so many racists and bigots there?  Apparently 63% of Trump supporters believe that Obama is a secret muslim born in Kenya (and that's true for 50% of the Republican party members)
When the 2008 credit bubble imploded what amazing everyone in the financial sector (include me) was the extent of the lies; we all assumed that portfolio sellers were "massaging" their portfolio a bit, what we didn't know was that most portfolios were total B.S. because everyone down the line was lying; the mortgage generator where lying, the aggregators were lying, the arrangers were lying. Think Sadam's WMDs where he convinced everyone in his country that he had WMDs.  The USSR in the late 80s, was lying to itself on its productivity, because if you didn't meet your target you got sent to jail! 

Bottom line there are real risks out there that present potential market down scenarios; and investors are freeking out, because after 6 1/2 years of market growth everyone is expecting a correction.  You don't have to be a genius to figure out that there's a huge bubble in the tech sector; many eye watering valuations are based on the same B.S. that was a feature of the  2001 bubble (then it was clicks) now its the number of (unprofitable/free) customers.  The Grill cheese Truck [OTC:GRLD] is the most insane example, but some of the valuations of Airbnb, Uber and others make no sense and little potential for real profits, and don't get me started on Amazon which has NEVER made any money (in a full year).

Anyway, enough of my rant, the only guys that are happy right now are those trading the VIX, banks are pissed because their portfolio just got more expensive to hold (in terms of capital) and harder to hedge.  So to Bill who's been trading VIX for 10 years, its finally your day in the sun (assuming you got it right).

Will the market crash, lots of punters are worried, there's always one "well respected" analyst or fund manager that says its time to buy gold, or go all cash.  The one thing I know for sure, don't panic.


Note:  no position on Amazon, Uber, Airbnb or GRLD.  No VIX position either 

Sunday, August 30, 2015

Why cant Canadian elections be like in America?

I mean that's a justifiable question!  We get Harper, Trudeau and Mulcair, three reasonable guys who rarely say anything outrageous, Where are our Donald Trump, and our Scott Walker -- who today on Meet the Press indicated that building an almost 9,000 km wall (even across the great lakes) between America and Canada was "an idea that should be considered".  Personally I am all for it especially if its the American paying for the thing, after all how are we going to keep the zombie armies out of Canada, and when President Trump is elected and decides that Canada's oil is really America's oil and takes over Alberta a wall will help in slowing things down a bit, right?

America's crazies (aka the Tea party, and the Far far right) are absolutely certain that all crimes are committed by these Mexicans Canadians crossing the border illegally -- I mean look at the Ted Cruz, a prefect example of a Canadian gone South.

But back to our subject why are Canadian election so boring?  Mostly its because we have some very serious rules on who can give to political parties and how much can be spent during an election. In fact, the U.S. primaries are not about convincing the country they are about convincing the party that you're their guy.  For the GOP it means that majority of candidates are running as far right as is humanly possible -- in the last few days we've had "Wall in Mexico, wall in Canada, FBI to track all immigrantes (how far do you go back -- its OK the FBI is already tracking everyone!) mass deportation, start war with Iran, start war with Syria, start war with Russia, start continue war on women. Reduce the size of the government, but check every bedroom to be sure that only "approved positions are used" monitor all the terrorists.  Stop the "gay lifestyle" (because it gives rise to beastiality) stop women from talking, stop minorities from voting, actually the "new new idea" should be that only white men of a certain age and with a certain income should be allowed to vote. The rest, they don't deserve that privilege!

Trump is fascinating not because of his positions -- in fact there's very little room between the candidates on most of issues that Trump supports.  Until now, the GOP have been using "code language"  Trump goes out and say's it  outright.  He thinks women are good for one thing -- so do the other guys but they will preach the "right order of things".  He's anti-immigration well so is the GOP field -- they want the illegals to be "uncomfortable" so that they leave of their own accord, he wants to charter a few thousand flights and kick them all out (but allow the "Good ones back in").  He wants to keep Medicare (ok he's kind of alone there), He wants to keep Social Security (alone there too), but he knows how the fix the problem in Iran (Bombe the place) and make America great... ok maybe that's code for the white guys get to keep everything and the rest can just go a f$ck themselves.

That's what makes the current GOP primary so fascinating for the population at large (aka the rest of the bloody planet).  It is like watching a slo-mo trainwreck, an unfolding tragedy.  The damage that is being done to the "conservative" brand in America is incalculable.   I mean these are people who have no problem booing a gay soldier serving in Iraq -- did the booing douchbags join the army after that little session (MY guess would be no)?   As a liberal at heart its fun to watch and there's a sense of "gotcha" that is "almost" indecent.  The liberals were worried that the Citizen United decision to allow unlimited money in politics would destroy democracy (it may yet do that too) but the first casualty of that decision looks to be the Republican Party!  Now that's funny as hell.  



Wednesday, August 26, 2015

Electric cars, the sharing economy and the slow decline of the car manufacturing industry

I've been thinking about this post for a while, it strikes me that we are seeing some very interesting and potentially fundamental economic changes in one of the key component of our nation's economic activity; namely the car industry.

The arrival of the Tesla changed to the electric car landscape, it went from a hippy Prius owner to the rich guy considering a BMW or a Tesla and picking a Tesla.  The reality of the electric car business remains a rich people issue; to date you need a garage(s) (in which to store your battery charger) and long distance driving can be anxiety inducing that still make electric cars a luxury item. However, my guts are that over the next 5 years this will change -- and the sharing economy will be a major part of the solution.

Musk & friends are working on replaceable battery packs here and self connecting battery system here.  Google is working on self driving cars and Drivy is "driving" the shared personal vehicle space (the Airbnb of the car business).  Individually these technologies don't add to much, but lets assume that you live in a big city and don't have direct garage access -- if you have a self connecting electric car that can drive itself to the garage where there are chargers (which can be many blocks away) then your car needs are met.  Lets assume further that you need the car occasionally (because 70% of cars life is spent parked), you don't believe me do the math!  50,000km per annum is about 1,000 hours on the road -- and assuming 365 days with 12 hours day gives you about 4,400 hours "usable hours".

Now lets assume a sharing program where there are 10 cars (Tesla & friends), that can be shared between 40 people.  Because lets be honest if you live in a major city you may need a car for far less than 1,000 hours a year!  You have self driving self charging cars that can be shared between a large group, suddenly the $100,000 Tesla doesn't cost you all that much -- that's a $25,000 capital cost per "club members".

As the electric car population grows so does the network of battery replacement stations (like gas station at the turn of the 20th century).  Moreover, with a GPS that insures you use the right route, and schedules your arrival time so that you don't wait at the battery replacement station (by slowing or accelerating the vehicle) you have a different transport experience. As the cars are self driving the actual driving, speed is of little consequence to the users.

So far the legacy manufacturer's solution has been to stonewall and try prevent consumers from buying Tesla cars.  Unlike the music industry (they may have learned something there), they are all "trying" to produce hybrid vehicles (I suspect to keep selling gas powered cars in California).  They are at heart "Petrol heads" that think that electric cars are "pansy-ass". The odds are poor that they will be able to adapt.  I've seen the sexy BMW i8 hybride that is that manufacturer's attempt at keeping rich guys from buying Teslas (good luck with that), it corny in that its really a weekend toy (you should see the size of the trunk...) but at $150,000 its priced right(ish) and it looks really fast. Although I understand that compared to a Tesla P85 it drives like a pig.

One thing that is often forgotten is how few moving parts there are in an electric car -- assuming a 2 wheel drive a Tesla has about 20 moving parts!  Compare that to about 10,000 for the average gas driven vehicle.  Wear and tear (aside from tires) is very very limited few things can break!

In reality, the "big Three" are poorly positioned to take advantage of the revolution in the transport industry.  Their engineers have been conditioned to make cars one way, and the best example I can think of their failure is the Saturn project -- where management quickly gave up the idea of a "new type of car company".  BMW is for ever trying to get into the electric car business, I wish them luck -- rumours are that Apple is looking at fuel cell technology and BMW could be a partner.

Tesla is hoping to sell 55,000 cars this year; that's about the equivalent to what GM,Ford and Chrysler produce in a day!  So the battle is far from over.  However, fundamental changes are on the near term horizon; there remains a lot of issues to resolve, but self driving cars will massively increase the load levels on our motorways.  They can reduce the number of cars/person dramatically, and reduce the parking issues of our cities.  The disadvantage of battery powered vehicles will quickly diminish as more battery replacement/charging centres are built (chicken and egg issue here). As the electric car population grows so will services.  The very small number of moving parts will make electric cars much more reliable.  So cars can last a very long time.  The sharing economy that has made bicycles, an apartments available to "strangers" is well developed and will also be a contributing factor.  Already in major cities there are many car sharing schemes that allow the occasional user to access a fleet of cars.  A self driving car can be even more efficient in that the location of the cars doesn't need to take into account demand flows -- for the car location.  The car can simply drive itself to its needed destination (think Uber without the driver!).

The sharing economy also means that the overall number of vehicle can drop.  If you assume that you can run an car for 1,500 per annum you then change the landscape for vehicle demand.  My guess is that eventually the GM, ford and Chrysler of this world will adapt (they will have little choice) but the real players will be the Google/Apple and Tesla of this world, the market seems to agree. Although GM sold almost 3 million cars in 2014 (98% more than Tesla) its market cap is only twice of that of Tesla -- its tells you something about the legacy car business.

Added;  Check this out, found this a few hours ago, long after I had written my note








Saturday, August 22, 2015

Is this the end? Stocks down 3% on Friday, 6% in 48 hours

Although I know little about the dynamics of stock prices I can read a chart as well as anyone else. The real truth is that over the past year stock prices have been static (some up and downs).  On August 22, 2014 the S&P 500 closed at 1,988, last night the market closed at 1970 a 0.1% drop over 12 months!  Hardly what I would call a massive correction -- lets not forget that "smart" investors are suppose to invest and forget for a few months -- churn is the enemy of the successful investor (ask Buffet).  Sill there is the past 48 hours and the breathless comments and worries -- is this the big one?

Yes Thursday and Friday were bad, but aside from weak oil prices, China going crazy trying to maintain an artificial market up (for no apparent good reasons) the place is more or less unchanged. There's always talks of war in Ukrain, Iran Syria... the usual trouble spots but nothing over the past few weeks justifies a 6% correction.  There is a certain uneasiness in the market, and in fact this 6% correction could be the perfect example of bad news being good -- insofar as it will be difficult for the Feds to raise interest rates when the market drops by 6% over rumours of a "possible thinking of maybe raising interest in some distant future".  

The worry with oil a $40/bbl is that it indicates a real global economic weakness -- its not a good sign!  The problem with low oil prices when production has been more or less steady for the past two years (but also where reserves are sky high) is troubling, especially since these low prices are occurring during America's "driving season".  America's consumption of oil is still rising (about 4% -- or twice its GDP), its the rest of the world that's not pulling its weight.  


For the markets the worry is a global shift in those who have money to those who don't -- a large and diffused group (aka the consumer) away from the producers and the lenders.  That's a massive issue for the market.  Because those who lost in the energy game here a well know individuals (or nations) and they will have to shift ressources -- maybe away from treasury market maybe from the stock market.  

The real issue for investors is where to put your money.  Would you buy bonds when interest rates are 'about to maybe go up" especially if the yields are as paltry as they are today!  No the best place to keep cash right now are the markets -- there is the markets the possibility of making a decent yield (if you invest in dividend yielding stocks).  Which brings us right back to China's crazy behaviour of the past few weeks.  The Shanghai market is still massively up for the past 12 months up from 2,240 to 3,209 today 24/8) but is now flat for the calendar year (01/15); so why not let the market correct a little -- is it because China's leaders just don't understand the reason for markets -- its just another way of transferring "creating" wealth.  The reason for the intervention is unclear, maybe they view all these issues inter-related; real estate prices, shadow lending and now a stock market that will not go up 100% per annum.  

At any rate, a panic seems premature, and maybe Monday saner heads will prevail, then again this could be the beginning of the end!

Update: Tuesday 25th of August:  So watching the pundits state that: "the sell off could be seen a mile away" just keeps on amazing me. My favorite is that the selloff was telegraphed to the market because the high yield bond market had decoupled from the market -- in January!  So this morning, looking at the futures we see the Dow & S&P500 futures in the +5% range -- taking us right back to Thursday's price.  If you had gone to a no wifi resort for four days and get back in the office this morning, the market has not moved one iota (well aside from the VIX 12 to 50 to 23)...


Wednesday, August 19, 2015

Thanks to Vox I finally understand why Trump is so popular

For weeks now I've been mystified as to the enduring popularity of Donald Trump as the GOP's leading candidate.  You assume that they (GOP members) can't really all be that dumb...but weeks later you are forced to concluded that yes maybe they are that dumb.  However, this rejection of a large percentage of the population as 'functioning imbeciles" never sat well with me.  Vox here explained what's going on.  

First off, Trump is a "nativist" which is fine -- its a label of course, and not that kind either, but its a true reflection of the man and his message; America can be great, Immigration is bad and causes 100% of all the crimes.  So far Trump has not spoken of the Non-latino population -- but I'm virtually certain that over the next few weeks that will change -- the words "lazy" and "stupid" and "welfare queens" will somehow emerge. All republicans candidates are nativists; maybe not in such harsh terms as those employed by Trump, but they are all for the repatriating illegals (they say it differently, but at the very least they want to make life uncomfortable as possible to those living in America illegally).  This is a well supported view within the GOP.

Secondly, most Americans love social security -- that's important!  Poll after poll shows that an overwhelming majority of Americans (across party lines) want to keep social security, and that only 3% of Americans want Social Security to be eliminated.  Looking at America's top 3% and you get income in excess of $250,000 and savings in excess of $1,000,000.  Which explains why the other GOP candidates are against social security -- the money that candidates need to remain in the race comes from this very demographic.  You don't bite the hand that feeds you. Therefore, on social security Trump is a lone wolf (even his best bud -- Ted Cruz want social security to be privatised and/or terminated).

So Trump is siting in a very interesting position, and its going to be real hard to move him away from his leading position, because Americans are, in general, against immigration and pro social security; Trump is the only game in town.  He's the only one who could take that position -- because he owns nothing to no anyone.  If you want to support Trump with your millions fine, but it will be Trump's message not yours.  

Obviously if it gets serious the GOP brass can probably do something to push Trump out, but then he may decided to run as an independent -- my guess would be that on that basis its even possible for the GOP 's candidate to finish in third place.  

Yes Trump is inconsistent, and his policies make little or no sense, but the other "contestants"  have the same problem, healthcare but to name just one.  Iran is another one; lets be clear everyone in America agrees that the war in Iraq was a disaster -- the cost in lives and money was far higher than anyone (even the most pessimist) had anticipated -- and most of the leading candidates want to go to war with Iran... I mean do they thing Americans are stupid? 

So Mr. Trump is doing well, and unless one of the candidate "out-crazies" the Donald he could be there for a while.  Those who oppose him mention his inconsistence, without taking into account their own inconsistencies.   He is also doing well in some of the early primary states, the GOP with unlimited money unleashed a process; it is now reaping the result of its success.  Not sure that was the objective, once again the law of unintended consequences strikes.




Friday, August 14, 2015

So Eximbank is on holidays -- for ever!

Believe it or not, the GOP (Congress and the Senate) in their eternal wisdom have decided that the U.S. Import Export Bank is a luxury that America can no longer afford, and so on June 30th it was shut down as its mandate expired without being renewed !  

As a whole the US economy will not be impacted -- at least until Boeing and its buddies decide to move operations elsewhere, because international trade is such a small percentage of the US economy (less than 25% of GDP; compared to more than 50% in Canada).  However, some high paying high tech job (the kind the Republicans clearly hate) could well be in jeopardy.  If Boeing decided that more of its aircraft can be built outside the US, and gain access to other credit agencies.  Until now, Boeing has been very careful that at least 51% of the value added in its new aircraft are "American" just so that it can qualify for Eximbank's loan guarantee program.  Now that the loan guarantee or "off the table for the foreseeable future" it would seem that Boeing could easily shift the work to other shores (like Canada, Korea and Japan) already substantial partners in the building of its new aircraft.  

However, Boeing is not the only company affected here.  Many smaller companies depend on Eximbank for numerous services that financial institutions are simply not able to provide;   Eximbank provided completion guarantees, provided L/C facilities that allowed American companies to sell their good in "difficult markets".  None of these services are provided by commercial banks because its simply not economical (and its not a question of price -- well maybe, but if the fee has to be more than 100% of the underlying service...), the problem is that banks are not equipped to provide this type of services.   

The GOP's logic is that commercial banks will take over that job "tomorrow morning"  which is a huge misrepresentation of the bank's abilities.  First off, banks have zero interest in arranging long dated loans -- as those required to finance capital assets.  In fact, the Basel system makes these loans prohibitively expensive for the lenders (in terms of capital) reducing the interest in providing such facilities -- and its not really a price issue is the amount of capital tied down for long periods of time, issue.  

The whole situation is almost unbelievable, in fact when mentioning this to friends recently their first reaction was that the President would over turn this mess, but in fact he doesn't have the ability to do anything.  In effect, on June 30th, Eximbank mandate expired, there's literally nothing to "renew" because in essence Eximbank has ceased to exit.

I get the the GOP and the Tea Party hate Obama & friends, but it takes a serious lack of judgement to kill an institution that actually doesn't cost the American tax payers all that much.  Up here in Canada our export import bank has been operating from its initial capitalisation, got a boost about 25 years ago, when the LDC debt problem emerged, but since then, it has only used "Canada's credit" and actually no losses (it has generated a profit year after year) over that time.


Nuts, just nuts!



Wednesday, August 5, 2015

China's stock market

Having been away from the news (mainly because the internet was down) for a few days, I missed the latest and greatest about the Chinese stock market.  The news is not good, granted the panic seems to have ebbed but it remains that the past few weeks have been painful for investors (who are very leveraged).

Rumours are that there is an implicit price target of 4,500 for the Shanghai Composite index (the S&P 500 for China's main market) that today closed at around 3,600 off from its high of 5,100 (or about 35% lower -- which is bad).  The Chinese government has been working hard (and I mean really hard) at convincing the market that the market will go up, it has "encouraged" brokers to take large positions, ended the ability to IPO, it has made many stock "un-tradable" thereby reducing the volume of shares available.  In fact, the Chinese government has dubbed sellers as traitors!

If these rumours are true, and the Government can make the market calm down and start buying again there is still the 4,500 "liquidity" level -- at which the big stake holders will liquidate their unwilling participation in the market stabilisation efforts.  That, by the way, acts as a price barrier. In effect these stake holder have a put option (they can sell the shares to the market -- right now they cannot).  Now the nomenclature is not terribly important, but it means that the investors has a problem, as the prices of the market gravitates (eventually) close to 4,500 then liquidity will grow dramatically, and prices will fall.  In other words investors "know" that there is a real asymmetry of return, there is limited upside and massive downside -- that's a strategy, that as an investor you can take advantage of by using a series of puts or barrier options.  

The market is around 3,600 if you take the view that the government will do almost anything to get the price up beyond 4,200/4,400 then as an investor you have a massive opportunity -- not by shorting but by using derivatives!

My guess is that to limit the downside the best option (unintended pun) is to use some type of reverse straddle that will reduce your losses if the market plows through  4,500 but will give you massive upside if the market goes down further -- like to its 2013 level.

Honestly, I don't know who would allow you to write such an option position (especially since the Chinese market is closed to foreigners), but my guess is that it should be possible via the ETF market! At any rate this is almost a can't loose strategy (sure you've heard that before!!!), simply because the Chinese market is very "rich" the market perceives that barrier at 4,500 and so the cost of some of the protection options involved in this trade can be "cheap".

This, I think, is a sweet trade.

P.S.  I have to skin in the game here, no position either derivative or underlying stocks or ETF in the Chinese market.



Export Import bank of the United States of America -- Now that's intersting

The tea party has won, this fight anyway, it looks like US Eximbank's  may end up in the dustbin. The long term impact is minimal, the US can work to remove the other export import banks.  For companies the short term is more serious.  Exim Bank provided credit support to many many companies from confirmation of letters of credit to loan guarantees to Boeing.  For some reason America's far right has real issues with Boeing and the aerospace and defence sector, as a Canadian I can only say -- bring it on, because Canada would be a natural home for a lot of Boeing's non-defence work, these are very high paying jobs that require lots of skills and once the jobs are gone, they tend not to come back.

Canada has an export import bank called EDC, they too use Canada's credit rating to provide Canadian exporters with long term finance, letters of credit etc.  the cost to the Canadian tax payer has been nil for several years, in fact, EDC has only used Canada's borrowing capacity.  It has proven to be a very successful program, and by the way, Canadian banks have very limited interest in stepping in their shoes!

What the GOP congress is doing is just strange, Boeing's CEO will now look seriously at offshoring a lot of their activities.  So that they can benefit from other credit agencies support.  They seem to think that banks love the finance exports to Africa (they don't) or to confirm letters of credits from strange country (that too they don't like).  Exim is a very important tool to help America's export sector. Then again I suspect that many of the GOP have no real use for these pesky foreigners!

The idea seems to be that the banks will step in (maybe they will) but in general banks are not too keen on this type of business, new capital rules (for banks) make that business cumbersome and unprofitable (yes yes that too).  My guess is that the anti-Eximbank is driven by a fear of big government and they probably think that Eximbank is in cahoot with the world bank and its all part of a big plan to take over 'merica and impose martial law!

Its very strange, but then this is the party that think that Donald Trump and Scott Walker are heros!



Wednesday, July 29, 2015

Greece -- what now

Will they or wont they?

One thing is clear the process is far from being over, aside from that absence of debt forgiveness -- only extension of maturity they ECB seems to be kicking the ball down the lane even further.  However, Greece has just discovered the limits to its sovereignty, when the President announced the re-opening of the country's stock market to be told by the ECB, that non, Monday was not a good day after all!  The limits of sovereignty explored by the people (and government) of Greece.

So what now, well barter is back in a big way!  People no longer having access to the government's payment system (e.g. Euros) are resorting to plain and simple barter.  That usually increases transaction costs, removes the power of taxation -- no "stinkin" 20% VAT, and inefficiency.  On the other hand it allows people to eat, so that's something right.

The breakdown of government has to be near, clearly the efforts to get all the ECB inspired legislation is hitting massive roadblocks, and its only going to get worse.  However, for the people they will realise that they can do without basic services -- at least until the electricity grid shuts down. The issue is serious, the players are now seeing the effects of Europe's crazy solution.  Because of capital controls the economy is in meltdown, lots of companies are shutting down because they no longer have access to goods from abroad (i.e. outside of Greece), that means unemployment is about to rise, and capital owners are about to see their wealth drop precipitously.

It is increasingly hard to see how a happy (in eurozone) outcome can be generated.  In fact, the pressures on ordinary greeks (and their government) may prove to be too much, election are certain to beckon before the end of the summer, who will replace the current government, will they be more trustworthy?

No closer to an endgame, the game has become painful

Monday, July 20, 2015

Canada and Australia

Two resource rich countries nearly identical stories -- I wrote about this risk years ago; Canada and Australia are second derivative countries, largely open what happens to these economies is largely driven by what happens elsewhere.  In the case of Canada and Australia that elsewhere is China -- Australia more directly than Canada but the end results are the same.

Case and point, both currencies flirted with US dollar parity (CAD even reached 0.95 at one point), now both are trading in the 1.30/1.35 range.  Usually, for manufacturing companies in country this would be very helpful, but the reality is that both countries manufacturers have sought over the years to insulate themselves from currency fluctuation (trust me its possible), although a 37% drop from its peak is hard to plan for...

Bottom line both economies are now suffering because their customer (China) is having a bit of a hard time.  The question then becomes how long will this situation persist?  The question then becomes where is China going.  There is no doubt that the current "situation" is unsustainable -- the reaction of the Chinese government to the most recent stock market "correction" is somewhat out of character.  After all the market was up nearly 120% over the past 12 months -- a 30% correction should not have cause the Chinese government to stop all IPO, suspend nearly half of all stocks  and brand "stock sellers as traitors".  Something more serious is happening here -- as many commentators have noted the stock market is not a very important portion of the Chinese economy (when compared to the real estate market), the over-reaction would seem to hide more serious concernes.

Anyway, this is not about China (well it is a little bit), but Canada and Australia are suffering from the same "sickness":  both are wide open economies that rely on the sale of natural resources to keep their economies strong -- when international demand falters; then Canada and Australia suffer.

Canada and Australia are perfect example of second derivative countries -- its is the world's overall economic health that determines how well they do.  Here in Canada general elections are just around the corner (this autumn) and you can bet that all parties are going to work extra hard on promoting their ideals and solutions are Canada's faltering economic growth -- when in fact Canada's growth has little to do with Canada -- but how fast China gets its mojo back!

Monday, July 13, 2015

Greece -- an deal has been stuck, but will it stick?

One clause of the Greek/EU/ECB/IMF agreement felt wrong; Sunday trading -- this was considered an essential change that Greece has to enact.  Greece had to allow, even promote Sunday trading, this was an essential demand from Germany.  And yet if you ever travel to Germany (or France) you will notice that everything is shut! If this was so essential to the economic health of Greece, well then you would expect other European nations to enact/have similar laws, but this is not the case.  

The Greeks have just bought themselves a lot of money (necessary) to repay their lenders (German/British and American financial institutions -- and the providers of credit protection (CDS) must be breathing in relief).  Greece just got $90 billion that should keep them going until early 2016 -- their repayment/refinancing obligations run at around Euro 10 billion a month.  I've not seen/heard about any debt forgiveness or loan extension. 

There is no doubt that massive changes are about to occur in Greece, the Greeks themselves are in for a shock and a difficult time, but they got a taste of economic armageddon when the ECB effectively shut down the banking system.  One item missing from the agreement:  Debt forgiveness.  Greece will never be able to repay its outstanding debts, debt forgiveness should/must be part of the solution, but the asymmetry of power -- Greece has no cards left, allow Germany to dictate terms that itself would never agree to abide by in terms of economic changes.   

It is more than likely that I have lost my bet that Greece will leave Europe and the Euro.  Although my bet still has nearly 21 months until it expires.  The demands on Greece were onerous, the concessions appear to be few, and in fact if Greece could not afford $ 340 billion in debt, I am not clear how an additional $90 billion will help -- it just seems to me that the can was, once again, kicked down the road (BTW I am fully aware that most of the $ 90 billion will be used to refinance existing debt... so the overall debt burden may not rise as much as $ 90 billion).

Time will tell 

Tuesday, July 7, 2015

Did you know how many people are running for the president of the United States!

First off, I knew there were a few Republicans in the run, but I didn't know that the total was 14 with two more probables.  On the democrats there are five declared -- but realistically that race is done, Ms Clinton is well ahead in all the polls -- Sanders/Chaffe and Webb are all there to make sure that the left is well represented.

On the Republican side you've got the Christians:  Huckabee/Santorum.  On the far right you've got Cruz/Paul/Walker/Jindal and the crazies:  Trump/Carson  the funnies you've got Trump,Trump and I forget the third one (e.g Perry).  Then the corporatists:  Bush/Christie/Fiorina/Pataki/Graham probably forgetting someone.

On thing for sure, while the GOP was hoping for a more serious primary than last time -- they didn't get their wish.  Trump is certain to be a nightmare as is Cruz he is trying to prove that he's to the right of Gengis Kan!

Why are so many people running this time, why has the GOP been unable to get things under controls.  One reason is that the GOP doesn't actually control anything.  That's shocking but its true. The Democrats are less unruly, and don't really have a true "left wing" whereas the GOP has the Tea Party, the Evangelical, the Koch Brothers, each with their own funding and PAC money.

I still think that one of the corporatists will win the nomination, but the damage they will suffer getting there may be too much (to win the general election).  The reality is that Trump is showing the American voting public who the real GOP is, and its not pretty, there is no doubt that his initial polling success considering his bigoted statements is a clear indication of the debate the GOP will have over the next few months.  16 candidates will tear each other apart, before they are allowed to focus on Hillary!  The real issue for the GOP is that they NEED the ethnic vote, and the way they are behaving they will not get it!  George Bush got nearly 26% of the ethnic vote, by the time Romney was defeated a second time -- that number was down to 12%.

Even the corporatists face difficulties; Bush saw his wealth explode 8 fold between 2008 and 2015, while America was going trough a difficult time, Bush was advising the banks...Cruz is certain to pull a few stunts to show his "real conservative agenda", suppression of the Supreme court, Constitutional Amendment to ban same sex marriage.  By Q1/2016 there will be need to raise the debt level -- once again.  His famous filibuster to nowhere is certain to come again.



The real action is where?

So while the world has been focusing on Greece, a small country that accounts for less than 1% of Europe GDP (Yes I know they are people too), the real "global" risk issue is taking place the other side of the world (rather literally!).  The Chinese markets have been having a terrible time, you see over the past 12 months the the CSI 300 [China's equivalent to the FTSE100] has been on a tear -- its up more than 100%, the index has doubled.  Just so that we are clear, profitability has not changed, what has changed is the p/e -- its gone from an expensive 15x to a eye watering 31x.  That's more expensive than anything in the world.  This is a prime example of irrational exuberance (and just a bit of greed too).  What China's investment public has realised is that what's important is not what the intrinsic value of a company is a generator of wealth, but rather what other shmuck is ready to pay for it.  The Chinese stock market became the equivalent of a "fine art auction"; the underlying assets is almost irrelevant it's what the other guy is ready to pay for the trinket that counts!

Now, as long as the road was going uphill (at any rates prices were going up) China's government was happy(ish) but now that the ride is going the other way -- in a rather spectacular fashion, they Chinese government is paying close attention.

Over the past few days they've taken the following action:

  1. Stopped all IPO -- to reduce supplies 
  2. Central banks bailed out stock trading companies
  3. Government banned pensions from selling stock
  4. Rumours that government is using central bank as buyer of last resort
  5. Suspend trading in many many stocks (160 so far) 
Despite these efforts, the stock market continues to fall (despite an 8% upward bump Monday) we are back in the downward spiral.  The investors are being rational, they don't want to be left holding the bag.

The fundamentals never supported such prices, already there are strong assumptions that most Chinese companies "cook the books" which is something we North Americans are well acquainted with (this is not a Chinese sickness -- we all do it), and so what's the value of a Chinese company (based on its stated revenues and assets) is a big guessing game.

However, at issue here are not the companies themselves rather investors (with severe limitations in what they can invest their cash in) all going to the same well -- the capital markets!  The Chinese government tried to deflate the housing bubble -- with some success (at least the pace of growth has slowed), The Chinese government has also cracked down on "near banks" -- second tier lenders that have kept small private companies alive -- the big banks only lend to SOEs so the investing public has looked for the next investment vehicle, and that's the stock market -- well it was until a few weeks ago.

What does this mean?  

Another government will try to slow the inevitable slide in stock prices; as one commentator recently said, China will need a bigger boat fund if they want to continue in bailing out the market, banning short selling is bound the be near the corner, liquidation of ETF (and certain connected derivatives) may also suffer.  I don't know how ETF are built in China -- in Europe ETF are mostly synthetic so that the ETFs don't actually own the underlying stock, rather the "arranger" enters into a number of complex derivatives transaction that generates the same return -- at a fraction of the cost... at least until the whole thing implodes.

China has been the engine of global growth for some years now, absorbing an increasing amount of available resources and keeping prices "up".  That now seems to be changing, the question is will China suffer the same consequences as Japan when that economy slowed?  One thing for sure, this bodes poorly for resource rich nation -- CAD watchers watch out -- the 0.70c to the US dollar is on the horizon...  Remember the CAD peaked at 1.09 to the USD, its now at 0.72c.  

Time will tell










Tuesday, June 30, 2015

F-35 cannot outfly a 25 year old CF18c...a $180 million disaster?

Years ago I wrote about the debacle that has become the F35 strike fighter aircraft, and its failure as a replacement for the F18-C that the Canadian Air Forces uses today (a very very old fighter aircraft).

I wrote a blog here about the problems and shortfall that the F35 represented for the Canadian Royal Air Force that said all that needed to be said in terms of mission capability, single engine design and weapons load.

The "killer" was last week when the F35 went head-to-head against a American F18C -- the "last" and most modern variant of the type.  In a nutshell the overall comment about the F35 was:  can’t turn, can’t climb, can’t run.  Bottom line the aircraft is underpowered and easily outmanoeuvred which is really bad.  There's a National Post article here.

Now, lets be honest the days of manned fighter aircraft are coming to  a close.  Not that the "drone wars" are a cake walk either.  There have been many reports how poorly designed the flight controls systems on the majority of drones, requiring serious multi tasking with many different systems.  It takes upward of 5 people to operate a drone...

However, at $5/10 million each its substantially cheaper than the F35, which is now apparently a $180 million/per aircraft machine -- inflation and well you know it was more expensive than anticipated.  The question is will Canada still buy the aircraft, which is still at least 24 months from available for deployment?

BTW the aircraft does few of the necessary "Canadian" missions, but hell get a dozen to keep the air force going and replace the rest with drones...