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!