Friday, April 28, 2017

NAFTA: Its been 23 years; time for a divorce?

NOTE:  In the hours following this announcement, Trump announced that he's changed his mind -- for now.  If I were Canada and Mexico, I would start investigating the availability of Wheat & other grains from Brazil..

Well it looks like Trump is getting ready to kill NAFTA. Since he's probably not aware of the full ramifications of the agreement it will come and bite him in the ass, but for now he sounds tough. He's even claimed that its at the urging of Mexico and Canada that he's about to "try" to kill NAFTA.

Should NAFTA survive?  The short answer is yes it has been good for all three trading partners, in fact it has been very very good for the US.  However, and as usual, its the squeaky wheel that gets the notice.  For most US companies (and consumers) trade with Mexico or Canada has been good, but not for dairy farmers who feel that Canada is an unexplored opportunity -- they are right, but the introduction of of more American milk will kill Canada's dairy industry -- the costs of production are much lower in the the US.

So despite the fact that Canada runs a US$ 400 million dairy deficit with the US, America's President believes that American farmers have been treated unfairly.  Killing NAFTA will have the strange impact for American dairy farmers of completely cutting off US milk from Canadian markets.  Two other examples of unforced errors:  (a) Mexican grain buyers are buying from further afield for new supplies; the US had a $ 1.6 billion grain surplus with Mexico, and (b) Fruit & vegetable farmers are seeing their "cheap labor" disappear, courtesy of ICE (America's immigration police).

The list of "winners" in America is long, but they've got what they want so they don't need to voice their opinion.  American pork farmers have very healthy sales to Mexico (maybe now Mexicans will consider Canadian pork instead?).

Now, can Trump kill NAFTA -- probably not directly, but he certainly can disrupt trade with his two principal trade partners?  There is a school of though that believes that because NAFTA was approved via a new law adopted by Congress, it is the only body that can terminate the agreement. However, there is a very simple process for Trump, like Theresa May in England, he can invoke the termination clause, and within 6 months America will be able to withdraw from the agreement.

Again Congress can stand in the way of Trump, Iowa farmers are already voicing their displeasure at the disappearance of Mexican grain buyers, but will this be enough?  It is hard to say.  There is a huge wave of protectionism gripping America -- the media (especially FOX) has been playing boogyman to all the worse fears of American blue collar workers.   That its those pesky foreigners that are taking all their jobs.  Killing NAFTA will have a similar impact than Britain's exit from Europe.  The economics costs of such decision are hard to quantify, but a certainly substantial.

This morning, Trump indicated that being President was very hard, and much harder than he anticipated.  Imagine how he will react when a real crisis occurs -- and not one created by his twitter account!


Tuesday, April 25, 2017

Canada, really a trade war with Canada...who saw that coming?

Soft Lumber

The soft lumber thing has been going on for years -- it actually goes back to the 1980s -- so a long long time.  In 2004, the world court sided with Canada, that in fact there was no specific advantage to Canadian timber producers, nevertheless the Americans keep on feeling shortchanged and Trump (it could have been Obama too) decided to side with the American producers instead of the American consumer, and impose stiff tariffs.  Its happened before and will happen again.  Obviously, the problem right now is that many posts, in the department of exterior, remain unfilled.  It is hard to have a conversation with the appropriate level when that job has not been filed.  As it stands, so far trump has nominated 23 of more than 470 politically sensitive jobs within the US government.  That could also be part of the problem, like Mexico, Canada has no real interlocutor.

So the US is planning to impose a 20-28% duty on Canadian timber, certain that the American companies are happy as hell, their stock price went up, in terms of greater picture with the whole NAFTA can of worms getting ready to be open you got to wonder about timing -- winning a small battle to lose the war.  His next target is Canadian dairy duties that are substantial (more than 200%), and yet, Canada has a dairy deficit with the US of nearly C$ 400 MM.  

Pre electoral Trade targets

So Trump, when he was running for office, had two main target (actually more than that) but (1) Mexico that has a US$ 50 billion trade surplus with the US, and (2) China that has a US$ 200 billion trade surplus with America.  Instead Trump attacked Canada that has a US$ 50 billion trade deficit with America.  

He's now made Canada mad, and looking for payback, and there are many many ways in which this can occur, first off, Canada may look at working with Mexico -- against the interest of America, second they too can go on the offensive -- not sure that I would start with the automobile industry, but if you consider that no cars are currently assembled in Canada -- there is nothing preventing Canada from importing cars from Europe...instead of America.

Dealing with Europe and French Elections

On another matter, A few weeks ago Trump asked Merkel (a number of times) if he could do a trade agreement with Germany...yes Trump decided that the EU didn't exist.  Maybe that's why he's such a fan of LePen? Which brings to mind the French Presidential election and Macron's promises -- its hard to see how he will execute them.  France is deeply conservative and has a history of "always more".  All Frenchman love their benefits and decry the benefits of others.  There is a fundamental problem in an economy who's government has produce deficit year after year since the mid 1970.  

Impact on Canada

The tariff thing was not a surprise, and in fact the stock of major timber producers rose (the number was at the lower end of the scale).  The CAD took a hit, obviously -- further negating the impact of tariffs.  the BoC was on target to raise rates, that probably off the table now with the risk of a trade war between the two largest trading partners.  That means that the BoC's tightening agenda is off the table...again.









Monday, April 24, 2017

Valuation & Location, location, location the future of suburbia

The old adage that in real estate location, location, location are the only true valuable elements in buying a home.  Years ago now, I was an owner of a house in Montreal, top of the mountain twenty yards from the vaunted "Westmount"  -- the view from the house was spectacular and an anomaly in the neighborhood, insofar as every single house but ours, was a multi-million affaire -- everyday the street was full of painters, landscapers and general maintenance people, who were seining that every aspect of every house was at all time prefect...

Our house was less than that, we both worked for a living (granted so did a lot of my neighbors) but our house was ordinary in an extraordinary area.  For me it was a house, yes a nice house, but it was just a house!

When time came to sell the house we had more than a 100 visits!  Which is a lot I assure you, we had one "open house" event and more than 30 people came to see the house.  The biggest complaint we got was the they didn't like the color of the walls -- I restrained myself from stating the obvious; its called paint!

Anyway, my point was the our house sold within a few weeks, and we even had a bidding war for the place at the last minute.

Now, all this is an intro to the housing market and how millennial view housing.  They view housing the same way I do, it is important to live and work locally if at all possible, a smaller footprint is desirable -- less stuff.

The question become what happens to all these suburban homes when the baby-boomers -- retire and die?  This is not a nothing question.  While I was selling my house and getting dozens of visits and multiple offers a colleague was also in the process of selling his house.  He lived in the burbs and he got few visits and even fewer offers -- If memory serves it took him more than 3 years to sell his house, and he got exactly what he paid for it 15 years earlier.  Zero capital appreciation, if you take that in consideration he would have been better off renting all these years and investing his capital in the market.

This is an important question; what happens to all these homes that the baby-boomers are expecting to sell as they downsize their living space?

Unfortunately I have no easy answer to that question; my friends though I was a little crazy to buy such an expensive property when I could have had twice the space "only 30 minutes from downtown montreal" -- yeah a 3 am a Wednesday you can make it in 30 minutes, but a wet Monday morning its more like  one hour -- if not more.

This is a question I raised a few years ago about Malls -- and how the world's shopping patterns were changing.  Granted it took a few years to adjust -- its only now that the Mall market is facing "the end of the world" in terms of pricing.

However, its important to note that like Malls its a marginal thing.  Malls are still being built in America -- as will suburban homes, the issue is at the margin.  if the Millennials decide that even with children its better to live in the city, it doesn't have to be all of them, just an appreciable portion.  It will impact the REIT business, especially that which is based in poorer and less well connected areas.

If the Millennials give up the car, or even if the car gives them up (thing self driving cars) then the image changes dramatically.

I am just saying that we are at the edge of a demographic change that will have an impact on residential real estate prices -- where would you buy real estate, where demand is high and about to go higher or in the burbs...



Tuesday, April 18, 2017

Why Trumpcare failed?

Although the GOP (or at least its associated think tanks) is deeply associated with Obamacare (think of Massachusetts) I suspect that the real issue in the debate about health care is far more phylosphical than most people understand:

The GOP is fundamentally against a government provided healthcare system and will try everything to stop it, its not a question of social good, or of equality is a question that the government should not be involved in healthcare at all.

The Freedom Caucus at least is honest -- it would prefer the government have no role in healthcare at all, in fact, corporation that have deduction for healthcare -- should face the fact that these deduction (for taxes) should disappear!

This is not about making society better or more efficient (you would think it would be in the end) its about philosophy and how the role of the government should be limited to inter-state commerce and defense.  Aside from that nothing.

As for the states, they are sovereign entities; and are responsible for everything else.  Does it make sense in the 21st century -- no not really, why then even go back to the creation of the states -- why not go back further?

I am beginning to fully understand the repudiation of Romneycare -- as it was created because it was never suppose to occurred, it was just a way of responding to Clinton's single payer proposal (yes that's what it was in the early 90s).

It is strange that a political party would support a policy that actually harms its citizen, but its not unheard of, after all the Muslims also have policy that arm their economies, why not the far right of America?

The same issue with abortion and out of wedlock birth; there is a "religious" and social aspect to their vision of the world that is hard to understand.

However, if you want to understand the debate on healthcare its not about healthcare, a healthcare program that excludes hospitalization and medication is not a healthcare program -- in fact, what the GOP had proposed was a tax break for America's wealthiest citizen -- who have no use for healthcare anyway!  They buy what they need, when they need it.

Only 17% of the population supported the GOP's healthcare plan; a large percentage wanted more and a large percentage wanted less...  They know they are hurting their own healthcare interest but if you firmly believe that government has no role in healthcare, education, pollution control then you take the view that these things should be cut, and damn the consequences!

Strange but tested elsewhere too!





Brexit: It continues to be interesting -- June 8 elections!

Wow, I mean Wow

Theresa May, the UK's prime minister has just announced that she will call an election on June 8th. A massive reversal from her past view that an election would be disruptive, it also gives here a mandate as prime minister -- a useful tool if you are to negotiate with Europe.

More important are the elections in France this weekend could be very very important: both the far right (National Front) and the far left (Socialists) are anti-Europe.  This could be one of those times when the choice is between two anti-Europe forces!

Europe would not survive -- to the pleasure of Trump and Putin.



Tuesday, April 11, 2017

Getting it right too soon -- as bad as getting it wrong!

In March 2014 I wrote:
The economics have changed the smart money has moved on.  So the markets are freaking out!  Moreover that's for the housing prices, considering the damage that Amazon is doing to the average mall (without generating any real profits) it amazes me how well commercial real estate income trust continue to perform.  I cannot remember the last time I bought goods in a store.  So the malls are dying and real estate is back in trouble.  However, this time around the guys suffering are hedge funds and their "rich" investors-- and not the banks.  My guess is that Congress will pass new "hedge fund saving legislation" very quickly.  After all, you got to support the guy who got you elected.

I wrote this three years ago, and although  today Malls are in real trouble, it took much much longer than anticipated to go from being a negative trend to a route.  On the bright side there is virtually no (economical) way these days to short REITs, but should you have taken a position 3 years ago, the red ink of the trade would have killed you.

OK it is well know that America has a special love for Malls -- years ago I was given direction to a restaurant (sports bar) as "Look its just over there -- two malls to the right, and you will find it!". This morning the Atlantic had a piece on Malls, and showed an interesting statistic:


Cannot think of better proof that there are too many Malls -- but the reality is that its been a long and on going trend.  The article goes on to say that there are two trends:

(1) People do their research on-line
(2) People buy more on line

These are not the same thing, in the past, shoppers would go to a mall several times to investigate the purchase of a large good -- sofa was their example, each time they would be side-tracked and do other purchase (new shoes etc etc).  Now the research is done on line -- because often the store doesn't have the "knowledge" and they arrive in the store ready to make the "big purchase".  All these side trips are gone.  The chain stores have made sure that this was going to be the inevitable conclusion; be reducing staffing levels (cost) and high turnover insured that they staff knew little if anything about the goods they were selling -- they often had to go on the internet to find the color of fabric...

People buy massively more online, Amazon grew from $16 billion in sales (2010) to nearly $80 billion in sales today -- to give a scope to that, its equivalent to 4 times Sears sales...

The direction of the mall (or the store) can only go one way -- down.  Another technology that I cover, self driving cars. Lets say that you want specific medicine, and instead of going to the nearest drug store, the drug store comes to you -- its physical presence is a truck -- or van.  

America's baby boomers are retiring and changing their shopping habits -- the millennials have very different demands -- try pawning off a sofa to your son or daughter, a dare you!  They want less stuff, regularly unclutter their lives -- granted when they have children it changes a little, still they remain frugal in their consumption.

Back to my story, I was right, absolutely right in 2014, that the great retail bonanza of the 1990 was over, I didn't get how long it would take for all these stores to give up the ghost, and that as a trader can be the biggest mistake!



Friday, April 7, 2017

Trump: Don't believe a word he says

This is a man who said that:  Obama should not attack nations, on any condition, without the approval of Congress, and that Syria is a quagmire from which there is no escape.  Finally, the poison gas attack of last week was Obama's fault.

Yesterday Trump bombarder Syrian with  29 59 cruise missiles!

Trump is a dangerous man, what he says on Tuesday has no consequence on Wednesday.

To have a situation so dire in the White House there is no precedent, there was no good reason to bomb Syrian, there is no goal there is only a petty man-child who wants to bomb shit.  The state department knew nothing of this, there are no system in place. Congress (Democrats) applauded the bombing -- but that was as stupid.  You just don't bomb for the fun of it, there as to be a specific objective -- and I mean a geopolitical one (not just "bombing shit").

It would seem that Trump's honey moon with the Alt-right is coming to a close, of course there are still lots of bozos who "applaud Trump's show of force"  but you've got to ask, what is so great about what Trump did Thursday evening?

The inescapable conclusion has to be that what come out of Trump's mouth is verbal diarrhea, and should be largley ignored.

I got a bad feeling about this!

Wednesday, April 5, 2017

Snapchat: MS screwed up the earnings caluculation

Think about it, MS screwed up Snapchat's earnings forecasts by a massive $5 billion -- and yet the price indication was left unchanged.  BTW they didn't underestimate the performance they over estimated.

Tells you all you need to know about research -- its a wonder anyone will ever pay for that drivel!



Tuesday, April 4, 2017

Indicator of decline: Auto loan sector

Did you know that between 2010 and today, the percentage of car buyers (leased vehicles) that have a FICO score of 550 or less has risen from 5% of all leased automobiles to nearly 33%.

Investors, in the hunt for yield, have bought the idea that sub-prime auto loans were a good idea because the yields were so much better than the prime stuff.  Who does this sound familiar?  It sounds familiar because it's exactly what brought the 2008 financial crisis -- granted there it was exotic securities but they were based on the same flawed logic, that sub-prime borrowers would, in general pay their leases -- because they need them (the cars that is)!

In terms of size, its still "manageable"  at US$ 200 billion (yeah yeah) its still not that much, but it could still hurt, if 20% of those borrower default -- and this is not an unreasonable number, if you consider that's mostly junk credit (30% to 40% default is not unusual -- check Moody's default rates)

However, the problem is serious for other reasons:  channel stuffing -- the car manufacturers have "convinced" dealers to accept almost unheard numbers of cars --about the same level as of 2008 crisis -- 74 days average inventory, while the economy is not in a crisis...so the absolute number of cars on dealer lots is large

The impact on the investors losses are important, but also the auto industry is a major employer in the US (and Mexico too).
  • Lots of loan delinquency will lead to a lot of repossessions which means a lot of used cars competing with new cars -- price for used cars is almost certain to fall...
  • Dealer "giveaway" are substantial, and over the past 5 years car prices have, on average, fallen somewhat
  • Dealer inventories are near historical highs
  • The negative implication for manufacturers is significant; as an example the share price of Ford (NYSE:F) stands at $11.25 today against a peak of $17 in MARCH 2013 
  • Sidebar:  Did you know that Tesla Motors' market capitalization stands at $52 billion Vs. Ford Motor that stands at $48 billion.  One manufactured 3.5 million cars the other 83,000 guess which!
It is hard to quantify the size of the problem.  However these are the important factors:
  1. Since a very large percentage of cars are sold as leases, and 
  2. that the quality of borrower has declining dramatically, 
  3. The price of used cars could fall by 30-40% (drop of 1.8% and 3.6% in 2016 & 2017)
  4. The investor's portfolio losses will result in a tighter lending standards 
  5. That will make it more difficult for the manufacturers to sell their new cars
  6. Add the arrival within 3/4 years of self driving cars -- that could itself transform the car industry
  7. Figures are complicated but the number of people in the car industry is around 3 million or 2.4% of America's labor force
  8. The car industry could be at an historic inflection point -- where the auto industry is completely reshaped. 

Then again, it could be nothing!  I don't know, Trump could decide to help his friends at Ford & GM and make electric car illegal