Hoodlum

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.

He could have been adding in mid January already, for all we know.

http://www.theglobeandmail.com/report-on-business/abitibi-warns-of-more-capacity-cuts/article1525264/ Insolvent newsprint giant AbitibiBowater Inc. says it may be forced to further cut its production capacity this year if market conditions worsen, even as it trimmed losses last year despite lower sales. “North American newsprint consumption continued to decline in 2009 due to a significant decline in circulation and advertising,” it said. Global demand for market pulp increased slightly in 2009, despite significant declines in North America and Western Europe, which were partially offset by increased demand from China.

Thanks for the great article. I found the following comments most interesting and would suggest the 8% growth is no longer sustainable over the long run. Add to this the over supply in many sectors and it looks like China's growth will be pulling back soon. https://srv111.services.gc.ca/WordDefinition.aspx?id=Provisions Wall Street also tends to downplay the darker aspects of the Chinese demographic story. China’s population is set to decline in 2015. The worker participation rate will peak this year. It’s anticipated that the number of people joining the workforce will fall off quite rapidly. Yet it’s this section of the population that tends to move to the cities and has provided China with an apparently limitless supply of cheap labor.

http://online.wsj.com/article/SB10001424052748704100604575145981713658608.html?mod=WSJ_latestheadlines

I guess everything is back to normal now. ??? http://www.marketwatch.com/story/gm-to-reinstate-about-600-dealerships-wsj-2010-03-05-1319570 General Motors Co. will reinstate about 600 dealerships that it had originally planned to drop from its network, The Wall Street Journal reported Friday in its online edition. GM had initially planned to eliminate 2,400 dealerships as part of its reorganization but about 1,160 of the dealers had appealed through an arbitration process, the Journal said. The automaker is expected to make an official announcement of which dealers will be retained later Friday, according to the newspaper.

My personal favorite is False Lession #6. Markets need not be in sync with one another. Simultaneously, the bond market can be priced for sustained tough times, the equity market for a strong recovery, and gold for high inflation. Such an apparent disconnect is indefinitely sustainable.

Fairfax had estimated losses from Hurricane Charley at $40M. Not sure how this will translate to the Chilean Earthquake.

The Canadian dollar is now starting to have an impact as well. It has gone up 2% since yesterday, which impacts the book value of the US based businesses. If this trend continues in the coming weeks then we could see new lows for Canadian investors. This won't impact the US investors.

http://online.wsj.com/article/BT-CO-20100301-717756.html?mod=WSJ_World_MIDDLEHeadlinesEurope "Catastrophe risk modeling firm, Eqecat Inc., estimated that insured losses from the 8.8 magnitude earthquake that hit Chile Saturday could range from $3 billion to $8 billion, or 25% of the total economic losses. The company said the loss represents 15-40% of the estimated insured limits for earthquake coverage. The firm noted that the estimate range is so wide because it was not formed by on-the-ground data and the extent of Chile's infrastructure damage is still unclear." "Sometimes losses can lead insurers to increase prices for insurance. But "We do not foresee this as a potential pricing catalyst for the [reinsurance] industry," wrote Macquarie analyst Bill Yankus in a research note." "About 90% of homeowners in Chile have property policies that cover earthquakes, Hartwig said, citing information from Axco, an independent supplier of global insurance market information. By contrast, roughly 12% of homeowners in California, a U.S. state vulnerable to earthquakes, have such coverage."

Here are some more comments on where the housing market stands on a historical basis. http://www.theglobeandmail.com/globe-investor/investment-ideas/features/experts-podium/canada-not-immune-to-downward-pressure-on-housing-prices/article1472226/ While there may be a healthy debate as to whether there is a bubble or not in the Canadian housing market, suffice it to say that residential mortgage balances relative to disposable income just hit 92 per cent, which is exactly where this ratio was in the U.S. in 2005 when the mania was about to morph into a full-fledged bubble. It was barely a year later that the process of mean reversion began its course. The Vanier Group just conducted a study showing that the price of an average home is now five times the size of average household after-tax income, which is 35-per-cent higher than the long-term norm.

I also suspect much of the renovation activity from the last year was on borrowed money to take advantage of tax credits. http://www.theglobeandmail.com/globe-investor/personal-finance/home-reno-activity-to-slow/article1471082/ Ottawa’s home reno program, which allowed taxpayers to get up to $1,350 in tax relief for projects worth between $1,000 and $10,000, was introduced as a limited-time measure in the 2009 federal budget. It was available for a year and expired last month. Toronto-Dominion Bank economist Diana Petramala calculated that the program bolstered renovation activity by between $4- and 4.3-billion and provided a 0.3-per-cent lift to Canada’s real gross domestic product. “We believe that the stimulus measure likely borrowed $3-billion of demand from the future – as those with future plans for renovations undertook the spending in 2009, rather than waiting until later years,” she said in a report. Because the economic benefits of home reno projects often lag over time, especially those last-minute ones started by people scrambling to take advanatge of the credit before it expired, activity will likely drive a 1-per-cent annual gain in renovation investment this year. However, Ms. Petramala expects “the pace of growth will diminish over the course of the year and into 2011 as payback from the tax credit occurs.”

A few more months of frenzy before things turn. http://www.theglobeandmail.com/report-on-business/why-economists-expect-a-hot-spring-real-estate-market/article1470915/ "The effect of the tightened mortgage rules will be to spur avoidance activity before the new rules become truly effective in July after the pipeline commitments on preapprovals burn off," Scotia Capital economists Derek Holt and Karen Cordes said in a research note today. "That avoidance behaviour will also apply to the HST that dings new homes in Ontario and B.C. after Canada Day. Thus, look for a very strong spring market that transfers sales from [the second half of] 2010 and beyond into [the first half] of 2010 and drives house prices even further into record territory."

arbitragr, I have not seen any discussion on this specific to Canada, although we could use the changing demographics of Canada to come to some type of direction. The general aging of our population will eventually have an impact. The baby boom generation (ages 48-63) are no longer upgrading their homes, but instead will be looking at downsizing. So I see an eventual surplus of larger homes for many years. Some of these larger homes will be purchased by recent immigrant families as multi-generational homes. In general you will see less demand for single unit houses due to fewer first time buyers and existing buyers downsizing. The shift to multi-residential units will continue in large and median urban cities. So I think you supply/demand picture could vary depending on location and type of housing.

Here is a response from the Canadian Government (effective April 19th). http://www.theglobeandmail.com/report-on-business/reckless-speculators-get-a-cold-shower/article1470418/ Ottawa's decision to increase the minimum down payment required to obtain Canada Mortgage and Housing Corp. insurance on investment homes to 20 per cent, from just 5 per cent, will have a sizable impact, said Craig Alexander, deputy chief economist of Toronto-Dominion Bank, because these properties account for up to 15 per cent of all new mortgages. “Raising the requisite down payment could be a significant deterrent to making the investment,” he wrote in a report. “The actions announced by the government for non-owner-occupied dwellings significantly reduce the risk of speculation driving the market forward.”

The supply situation in Toronto is at the tightest it has been in many years. We'll have to wait to see if the January uptick in inventory is a new trend or not. http://guava.ca/indicators.html I don't believe this will go on much longer. We are at historical highs as far as home ownership in Canada (~68%), which has provided much of the growth over the past 20 years. Interest rates have nowhere to go but up, which will lower displosable income due to our high personal debt levels.

http://www.cbc.ca/fp/story/2010/01/14/2442664.html The company will get immediate capital through a US$100-million bought-deal financing led by GMP Securities and conduct a US$121-million private placement to a group made up of Fairfax Financial Holdings Ltd., some Trimark mutual funds and Victor Bertrand Sr., Mega Brands’ chairman, Vic Bertrand, its chief innovation officer, and Marc Bertrand. Mega Brands has also committed to a US$50-million asset-based facility from Wachovia Capital Finance Corp. The company is also issuing US$35.9-million worth of common shares at 50¢ a share to the secured debtholders. If approved, the transactions are expected to close by the end of March. The company should then carry about US$131-million in debt, with annual interest expenses reduced to US$13-million from the current US$43-million. In addition to cutting annual interest payments, the plan will provide $45-million in credit to help fund product lines in 2010. According to this 2nd article, Fairfax now owns 20% of MegaBrands. http://www.stockhouse.com/News/FinancialNewsDetailFeeds.aspx?n=13080366&src=cp "Fairfax will be the largest shareholder, holding 20 per cent of shares, followed by Trimark mutual funds at 15 per cent and the Bertrand's at eight per cent, down from 11 per cent currently."

Looks like round 2 of the California crisis may be coming again this summer. Although this time around we will likely see other states joining in. California Creditors Dread IOUs With Aid Plea Failing California’s hopes are fading for federal help in closing a projected $19.9 billion deficit that has caused the lowest-rated state’s borrowing costs to rise 24 percent since September. “We recognize they have enormous problems,” David Axelrod, senior adviser to President Barack Obama, said in an interview. “But we can’t solve all of those problems from Washington.” Investors are growing more concerned that California, whose debt rating was cut today by Standard & Poor’s, will repeat last year’s fiscal crisis that forced it to use IOUs to pay bills. With Governor Arnold Schwarzenegger seeking $6.9 billion in federal assistance to narrow the deficit, the extra yield paid on the state’s 10-year bonds over AAA-rated municipal securities rose to 1.31 percentage points yesterday from 1.06 points on Sept. 11, according to Bloomberg fair market value index data.

The debt load of many governments will likely limit growth for many years to come. A paper was recently released discussing this. Higher Debt May Stunt Economic Growth In a new paper presented Monday at the annual meeting of the American Economic Association, Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard study the link between different levels of debt and countries’ economic growth over the last two centuries. One finding: Countries with a gross public debt debt exceeding about 90% of annual economic output tended to grow a lot more slowly. For advanced countries above the 90% threshold, average annual growth was about two percentage points lower than for countries with public debt of less than 30% of GDP. The results are particularly relevant at a time when debt levels in the U.S. and other countries at the center of the financial crisis are rapidly approaching the 90% threshold. Gross government debt in the U.S., for example, stood at 85% of GDP in 2009 and will reach 108% of GDP by 2014, according to IMF projections. The U.K.’s gross government debt stood at 69% of GDP in 2009 and is expected to reach 98% of GDP by 2013. “If history is any guide,” the rising government debt “is very troubling for the U.S. and other advanced economies,” says Ms. Reinhart. The relationship between government debt burdens and growth is even stronger for emerging-market economies, Ms. Reinhart and Mr. Rogoff find. For countries above the 90% threshold, average annual growth was about three percentage points lower than for countries with public debt of less than 30% of GDP. The countries above the threshold also experienced much higher inflation: prices rose more than twice as fast as in countries with small debt burdens.

This really puts the Canadian market into perspective. Since this survey was done in Q3 2008, Canadian prices have gone up significantly compared to what has happened in other countries. Toronto would be close to 6.0 now. Looks like Australia housing needs a correction as well.

I guess the real question is whether the government will print more money or allow the long term rates to rise. My thinking is that in the short term (12-18 months) the government will extend the program to buy up treasuries and risk a devalued currency.

Looks like Fannie and Freddie have been given further leaway. http://news.yahoo.com/s/nm/20091224/bs_nm/us_fanniemae_freddiemac_credit The Obama administration pledged on Thursday to back beleaguered mortgage finance giants Fannie Mae (FNM.N) and Freddie Mac (FRE.N) no matter how big their losses may be in the next three years. Treasury also said it would not require the two agencies to reduce their portfolio size next year, in a move that would allow them provide even greater support for the housing market as it begins to recover from its worst slump in decades. The Treasury Department said it made the changes to assure markets it was fully behind both Fannie and Freddie and to give the agencies more time to reduce the size of the portfolios. The two agencies each had a credit line of $200 billion. Combined, the two have thus far tapped about $111 billion.

Ended up selling some of my shares I bought a month ago for a $50/share gain. It'll be interesting to see if this has any legs.

Losses from AIG could easily offset any gains they get from TARP.