Hoodlum

http://www.theglobeandmail.com/globe-investor/banks-ottawa-discuss-measures-to-rein-in-canadians-personal-debt/article1834870/?cmpid=rss1 "Fairfax Financial CEO Prem Watsa is among the influential voices pointing to the impact of soaring debt on the broader economy. Not only are Canadians overleveraged, primarily with mortgage debt, low interest rates have prompted speculative buying that is artificially inflating housing prices, he said."

I believe that is just the writoff in convertible bonds due to the bankruptcy. http://www.thestar.com/Business/article/627037 "Last year, Fairfax bought $350 million (U.S.) worth of AbitibiBowater debentures convertible to shares at $10. Those shares face delisting from the TSX as the Montreal-based firm tries to recapitalize."

Why would this be a gain? Did fairfax do a write down in the past in expectation of loosing this lawsuit?

It'll be interesting if anybody rolls over. “They appear to have an interest in some of the traders who used to work at SAC Capital,” John Coffee, a securities law professor at Columbia University in New York, said in an interview. “Those traders that the government seems to be pursuing have to make a quick decision about whether they’re going to cooperate or whether they’re going to fight. They will get greater leniency if they give the government bigger fish.”

I wonder how much longer this can go on. I am sitting on the side for the most part just waiting for the pieces to fall. Somewhat lost in all of this is the drop in the US currency. The Yen is now at the highest level vs the US dollar since 1995!!! And somehow everyone is saying this trend will continue. So what what makes the Yen so attractive? I think Japan will be hit the hardest with these swings. There was an interesting article on the far-right movement in Japan and how it could become mainstream. http://www.theglobeandmail.com/news/world/asia-pacific/a-black-sun-rises-in-a-declining-japan/article1744434/

Great work Rick. After reading your comments I was wondering how the debt levels of the US and Japan compared before each crisis. I was certain that Japan would have had lower debt at the time their crisis begain but I found charts from the following link that shows Japan having a higher total debt to GDP level than the US. This was surprising. http://www.thoughtofferings.com/2009/09/mystery-of-japans-private-debt-levels.html http://1.bp.blogspot.com/_up3_ViopRks/SrjW_k2An4I/AAAAAAAACns/sVSMD5pm5dI/s400/USDebtToGDP.png http://4.bp.blogspot.com/_up3_ViopRks/SrjW3CgZAoI/AAAAAAAACnc/VXOrRA_aNVk/s400/JapanDebtToGDP.png I believe there is still one large negative to the current crisis vs the one Japan has been going through. During the first decade of Japan's crisis (1990s) the world as a whole experience huge growth and Japan was able to take advantage of this by increasing their exports significantly to help offset the slowdown locally. Japanese growth has become stagnant since 1997. This time around the debt problem affects most western countries so unless Asian consumers start spending more than they have traditionally, there maybe additional unforseen challenges worldwide.

Another report was just released on Canadian house prices. http://www.yourhome.ca/homes/realestate/article/854546--housing-prices-due-to-fall-says-think-tank The report, entitled Canada’s Housing Bubble: An Accident Waiting to Happen, by the Canadian Centre for Policy Alternatives, looks at prices in Toronto, Vancouver, Calgary, Edmonton, Montreal and Ottawa. It concludes that housing price appreciation is frothy in comparison to historic values. “I think at best you will see stagnation in housing prices or some kind of correction, and at worst you will see the bubble bursting,” said David Macdonald, an economist and research associate at the centre. Macdonald said this bubble is different than others, because for the first time it is spreading beyond Toronto and Vancouver. “Canada is experiencing for the first time in 30 years a synchronized housing bubble across the six largest residential markets,” he said.

I wonder who else is on the other side of the bet. "Some banks selling these derivatives say they are skeptical of deflation. Prices for the derivative insurance suggest a 20% chance of deflation over the next 10 years, traders say. The banks say they have hedged their exposure, or reduced their risk, by finding other investors skeptical of deflation to take the other side of the trades or by purchasing their own insurance."

The drop was much greater than expected. http://online.wsj.com/article/BT-CO-20100824-708958.html Existing home sales plunged to their lowest level in 15 years in July as inventories soared, painting a grim picture for the housing market absent government support in a stubbornly sluggish economy. Home resales dropped a record 27.2%--nearly twice as much as analysts had expected--to an annual rate of 3.83 million in July, the National Association of Realtors said Tuesday. Meanwhile, inventories rose to 12.5 months from 8.9 months in June, pressuring already depressed home prices. Inventories are at their highest level in more than a decade. "Historically July is the peak inventory month in any given year," NAR Chief Economist Lawrence Yun said. Economists surveyed by Dow Jones Newswires had expected existing home sales to fall by 14.3% to an annual rate of 4.6 million. Tuesday's data drove the Dow Jones Industrial Average down more than 100 points and pulled down yields on 10-year Treasury notes.

Are you suggesting this is a sell signal for FFH? ;)

http://www.xe.com/news/2010-08-04%2017:45:00.0/1316617.htm?c=1&t= Moody's rates Fibrek's senior secured notes B1; upgrades corporate family rating to B2

CPI derivatives just started trading in July and are generally used by Pension funds. Just remember that while Prem was correct with the Credit Default swaps he did get in a couple of years too early. http://www.pensionsweek.com/news/fullstory.php/aid/3706/CPI_swap_market_will_be_a_slow_burner_.html Consumer Price Index-based (CPI) swaps are unlikely to take off for schemes in the short term, despite the first being traded this month. The derivatives are aimed at replacing similar contracts currently used by schemes with liability-driven investment (LDI) strategies, in light of the government’s decision to change inflation-linked shifts in pension benefits from Retail Price Index (RPI) to CPI.

I talked with TD this morning and they said it would show on the 21st at the earliest.

One thing to keep in mind about home building is that the continuous supply of foreclosed homes will continue coming on the market for many years yet. The banks are holding back much of this inventory as they don't want to flood the market. There are also some general trends is house purchasing as mentioned by the NAHB that will influence this as well. Many of these are new longer term trends. http://www.nahb.org/news_details.aspx?newsID=10898 June 14, 2010 - The size of new single-family homes completed declined last year, dropping to a nationwide average of 2,438 square feet, according to detailed information about the characteristics of new homes completed in 2009 that was released recently by the Census Bureau. After increasing continually for nearly three decades, the average size of single-family homes completed in the United States peaked at 2,521 square feet in 2007. It was essentially flat in 2008, then dropped in 2009, so that new single-family homes were almost 100 square feet smaller in 2009 than in 2007. “We also saw a decline in the size of new homes when the economy lapsed into recession in the early 1980s,” said NAHB Chief Economist David Crowe. “The decline of the early 1980s turned out to be temporary, but this time the decline is related to phenomena such as an increased share of first-time home buyers, a desire to keep energy costs down, smaller amounts of equity in existing homes to roll into the next home, tighter credit standards and less focus on the investment component of buying a home. Many of these tendencies are likely to persist and continue affecting the new home market for an extended period.”

The Government panel of scientists have increased their estimate to the worse case scenario. http://news.yahoo.com/s/ap/20100615/ap_on_bi_ge/us_gulf_oil_spill_flow "A government panel of scientists said that the ruptured well is leaking between 1.47 million and 2.52 million gallons of oil daily. The figures move the government's worst-case estimates more in line with what an independent team had previously thought was the maximum size of the spill. As of Tuesday, the maximum amount of oil that has gushed out of the well since the April 20 explosion is 116 million gallons, according to the estimates by scientists advising the federal government. BP PLC now has a containment system in place in the Gulf of Mexico that has been capturing nearly 648,000 gallons of oil daily. That system was forced to shut down as a precaution Tuesday morning because of a fire on a ship connected to it. BP said the collection system was not damaged and about five hours after the fire, the containment operations resumed."

WOW, Atlantic water temperatures are 4 degrees above normal. Outside of the insurance damages I fear most for Haiti. If La Nina develops this summer then we should be in for a record hurricane year. “The main uncertainty in this outlook is how much above normal the season will be. Whether or not we approach the high end of the predicted ranges depends partly on whether or not La Niña develops this summer,” said Gerry Bell, Ph.D., lead seasonal hurricane forecaster at NOAA’s Climate Prediction Center. “At present we are in a neutral state, but conditions are becoming increasingly favorable for La Niña to develop.”

The NOAA will be releasing their hurricane forecast tomorrow. Here is one from WSI that was released yesterday. http://news.yahoo.com/s/nm/20100525/us_nm/us_storm_wsi_forecast_1 NEW YORK (Reuters) – The 2010 Atlantic hurricane season could be the most active since 2005, the most active season in recorded history, Weather Services International (WSI) said on Tuesday. In its latest forecast, WSI, of Andover, Massachusetts, called for 18 named storms, 10 hurricanes and five intense hurricanes, rated as category 3 storm with winds of 110-130 mph, or greater. WSI said the coastal region from the Outer Banks of North Carolina northward to Maine was twice as likely as normal to experience a hurricane this year. "Our model suggests the threat to the Northeast coast this season is on par with that in Florida and the Gulf coastal states," WSI Chief Meteorologist Dr. Todd Crawford, said in a release. WSI said the 2009 tropical season was the quietest since 1997, as an emerging El Nino event combined with relatively cool tropical Atlantic waters to suppress widespread storm development. "However, the primary drivers for tropical activity have sharply reversed course this year and everything is in place for an incredibly active season ... eastern and central tropical Atlantic sea surface temperatures are currently at record warm levels for May, even warmer than the freakishly active season of 2005," Crawford said. The 2005 Atlantic hurricane season, which included Hurricanes Katrina and Rita that devastated the oil and natural gas-rich U.S. Gulf Coast, was the most active in history, causing more than 1,500 U.S. deaths and more than $115 billion in damages, according to the U.S. National Hurricane Center. "While we've increased our forecast numbers in both of the last two monthly updates, we are still more likely to raise than lower these numbers going forward," Crawford noted.

The "perfect storm" comment came from Richard Lloyd, CEO of Lloyd's. He is suggesting it is a combination of higher payouts and low returns that will have a "very significant" impact on the insurance industry.

I expect the oil spill costs to get upgraded throughout the year as the damage becomes more known. The estimates are all over the map right now. http://content.usatoday.com/communities/ondeadline/post/2010/05/oil-update-spill-to-harm-europe-arctic-wildlife-hurricane-season-looms/1 "It's a huge mess and the liabilities are in the billions, possibly the tens of billions," said Gregory Slayton, a reinsurance expert at the Tuck School of Business. "This is a failure of risk management of epic proportions." I found it interesting that BP is quoted as saying in the following article that there is an equal amount of Natural Gas is coming out of the pipe. I guess NG is not as bad as oil for the environment so it doesn't get mentioned, but this should have some impact as well. http://www.marketwatch.com/story/bp-says-study-due-saturday-on-size-of-gulf-spill-2010-05-21?reflink=MW_news_stmp

Interesting to see some preliminary loss projections for the oil spill. Maybe we will finally see some price increases if the hurricane season is as bad as projected. http://www.guardian.co.uk/business/2010/may/18/lloyds-insurance-disasters-profit-warning The head of the Lloyd's of London insurance market warns today that one more major disaster could plunge the insurance industry into the red this year. Richard Ward will tell a gathering of insurance chiefs that the industry is facing the toughest year he can remember, the Guardian has learned. "It isn't overstating the situation to say that the insurance industry is facing a potential perfect storm this year," Ward says in his keynote speech at the Insurance Day London Summit. Speaking as the industry braces itself for the US hurricane season, Ward says: "That is a significant challenge for the industry worldwide but it is a storm we can see coming and we can prepare for. Insurers who keep their discipline and don't chase risky short-term profit will stand the best chance of long-term survival."

The banks may have some downward pressures in the coming months if the rating agencies follow through on their threats to severely downgrade the larger banks. http://online.wsj.com/article/SB10001424052748704904604575262522147920814.html?mod=WSJ_latestheadlines The financial-overhaul bill passed last week brings big banks closer to what could be major credit-ratings downgrades that would sock them with billions of dollars in additional financing costs. Implicit government support for "too big to fail" banks such as Citigroup Inc. and Bank of America Corp. means those banks get higher marks from rating companies Moody's Investors Service and Standard & Poor's than they would if the possibility of collapse weren't ruled out. The theory is that an implied government safety net makes owning the banks' bonds less risky. The rating companies have warned that they will cut bank ratings, possibly severely, if that safety net thins or goes away. The regulatory-overhaul bill passed by the Senate weakens that safety net significantly, while also curbing bank risk-taking and, some analysts argue, profitability. If the final bill, currently being negotiated between the House and Senate, shares those characteristics, then the rating companies will almost certainly lower credit ratings for some of the biggest banks.

Some interesting comments on the Euro bailout. http://thestar.blogs.com/globalfinance/2010/05/the-cult-of-bailout.html

Fairfax is considering pulling out now. http://www.theglobeandmail.com/globe-investor/torstar-bid-for-canwest-papers-in-doubt/article1551609/

Also, any banks that held Greece debt are now required (as of today's downgrade to junk) to replace that debt or find other capital. We know from the previous sub-prime crisis that the economy is more global now so the banks affected will not be limited to Europe. I suspect this will have an impact on market liquidity. Do the US banks disclose the amount of soveriegn debt they hold?

It is impossible to predict the timing but I can see this snowballing when it does happen. It looks like the US could briefly become a safe haven again. http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20100427/debt_loonie_100427/20100427?hub=Canada TORONTO — Canada's dollar plunged more than a cent in less than 30 minutes Tuesday after traders turned to the U.S. dollar amid new worries about Greece's debt. The loonie dropped to as low as 98.47 cents US shortly before noon, down 1.39 cents from Monday's close. It rallied briefly but fell even further to 98.21 cents US in the early afternoon, down 1.65 cents US.