Thursday, July 31, 2008

May GDP "unexpectedly" shrank (again)

The Canadian economy shrunk again in May (unexpectedly) after already shrinking for the months of December and much of Q1. The question asked back in February is finally being whispered around Canada.

The usual banter from those who didn't see this happening: It's not really a recession because GDP doesn't measure price changes, yada yada yada.

There is clearly some truth to this, in that there does not appear to be a recession happening (unlike in the US). Yet.

So far:
-Canada has avoided the housing bust
-The TSX is only down slightly
-Energy prices have risen sharply (hence the positive price change alluded to above)

What happens when:
-The housing bubble turns into a full fledged bust
-Energy prices drop precipitously
-The TSX goes down with it

Then can we call it a recession?

Wednesday, July 16, 2008

Minus

It's official: CREA reported a negative YoY for June (-0.4%).

I feel good about my prediction back in April that we would be close to zero by summer. I recently opined (and most voting in my poll) that this would wait until at least July but it appears that the market has collapsed even faster than the housing bears (including yours truly) could have anticipated.

Such is the nature of a bubble: Prices go higher for longer than even the bulls can imagine and then they seem to fall faster and harder than even the bears can imagine.
One month of data can always be distorted, but the underlying trend all year has been clear.

The news in the past few weeks has been horrible: declining stock markets including the TSX, carnage in the financial sector, still high oil prices, rising mortgage rates and a new crackdown on overprime. Does this sound like the recipe for June being a one month blip?

The spin by CREA is that the weakness is due mostly to Calgary and Edmonton going negative. I notice that whenever companies or organizations spin numbers, they always omit the very positive numbers (such as Saskatchewan).

"The Canadian real estate market, while cooling, is still much different than the U.S. market with its record low number of foreclosures or defaults" says the President of The Canadian Real Estate Association, Calvin Lindberg. In the United States home prices dropped by 14.1 per cent in the first quarter of the year, according to the Case Shiller national home price index.

True, as of June 2008...Stupid comparison, though. No one is saying that Canadian housing is dropping at US rates today!

It appears that Canada is tracking the US with a 2 year lag, as the US market only went negative in 2006. I suspect that while this lag is currently about 2 years, that it will shorten over time. The US market took about 12 months to cool from overheated to negative. It appears as if Canada has done it in about 6 months. Also, when the US market began to slow, the US economy and the credit crunch were not big factors.

I will update my Chain of Events in the next few weeks. I wonder when CREA will update their fantasy numbers? For CREA's 5% to happen, the YoY increase would have to average about 7% the next six months!

Wednesday, July 9, 2008

Overprime Lite

“It's a bit like closing the barn door after the horse has already run down the road.”

Douglas Porter, deputy chief economist at BMO Nesbitt Burns Inc. (Ottawa tightens mortgage rules to avoid 'bubble' - LORI MCLEOD AND KEVIN CARMICHAEL, G&M July 9, 2008)

Couldn't have said it better, Mr Porter.

The official story that the Big Banks, the Harperites and the mainstream media like to spin is that there is no housing bubble in Canada, despite the fact that Canadian home prices have risen about the same as the US did (pre 2007). Why? There is no big subprime here.

I've explained the Overprime concept here before: 40 year mortgages, 0% down...

The government, both Liberal and Tory, allowed it become easier and easier to buy a home. They poured fuel on the fire back in 2006 by extending the backing of mortgages from 25 years to 40 years.

Today, the announced that as of October 15, they will no longer back mortgages longer than 35 years and will demand a 5% down payment. According to the Globe, the government is trying to protect against creating a bubble.

If this were true, I would say: Good move! In fact, they probably should have tightened their standards back in 2006 instead of loosening them.

However, there already is a bubble and now that the bubble is bursting, they are to compound their first mistake by bursting it even faster!

Why Canadian banks would even contemplate making overprime mortgages currently given what is happening everywhere in the world, is beyond me. In recent months, Freddie Mac and Fannie Mae (publicly traded US Government Sponsored Entities) have been annihilated (falling 80%). Maybe the Harperites are worried about something similar happening here?

I believe that ultimately the market will go where it has to go regardless of the government, but this move is definitely going to hurt some buyers thereby depressing demand further. In a healthy market, this move would likely have little impact. In a market that is possibly about to crash, this move will have an impact.

As a renter looking to one day buy a house, I am supporting this move from Overprime to Overprime Lite.

Tuesday, July 8, 2008

$60 Oil and a 9000 TSX

On June 18 (just 3 weeks ago!) the TSX broke 15K and the bulls were out in full force. The TSX had now bucked the trend and had held up well in the face of a US bear market.

Today, we hit the "magical" 10% correction and erased all the YTD gains! With a 10% correction in just three weeks, I think the TSX is due to bounce and all the bulls are likely to buy their favorites again.

The TSX is a commodity play. If you can predict where oil and other commodities are headed, then you can predict where the TSX is headed. It is not a diversified index like the S&P500 and in a global bear market, any complacency about being up 10% YTD is crazy.

At the risk of sounding like a broken record, I talked about the risk to the TSX and commodities back on June 6,
May 16, April 21, March 20. Clearly in hindsight, I was too premature in most instances (perhaps not in June?) but the nature of bubbles are such that the blowoff phase can decimate bears and bulls that overstay the course.

I have seen what happened to some of the tech bears who shorted the Nasdaq in early 2000. They were ultimately right but they never lived to see the day. The blowoff parabolic phase can see enormous increases.

I am currently trying to study the signs to identify when a bubble is popping and when a bubble is simply in a correction phase. For example, the Nasdaq had some sharp corrections in January 2000 but then went much higher. Same for oil in late 2007/early 2008.

For the record, I agree with the esteemed John Hussman's analysis on oil. He throws out a possible $60 oil target. I believe that this is a reasonable target. Why?

1) First of all, the guy is good. But independently, I seem to recall oil being in the upper $60s last summer. What has changed since then to justify a doubling in price? Not much. Most of the developments seem to point to lower prices:

-Lower stock prices, lower housing prices, weaker economies, a massive credit crunch unseen since the 1930s

-Even the BRIC argument is weak as most of the emerging market stock indexes are down sharply, especially India and China

-Perhaps an Israeli attack on Iran would justify these prices. And even then, it would likely take a multimonth war to justify these prices.

2) $60 oil used to be high just a few years ago. I am not calling for $10 oil. $60 oil allows most oil producers to still remain profitable.

3) No one is even contemplating $60 oil. Even bears that I respect only talk about $100 oil.

4) We are on the cusp of a global recession/slowdown so demand is likely to tank. Add to that all the demand destruction caused by $145 oil, demand is likely to tank even further...

I have no position right now ("never short a chart that you can't ski down" is a famous quote I once read) but if we break $120, I would look for an opportunity.

If we get $60 oil and a bursting commodity bubble, the downside for the TSX would be unfathomable in my opinion. A 30% garden variety bear from 15K is 9000.... I don't know if this is where we go (we could easily go lower!) as all it takes is big moves in ECA, Suncor and Potash (to name a few) and you are there. And this 10% correction is nothing if we get a bursting of this bubble. Consider this yet another warning shot.

No positions at the current time

Tuesday, July 1, 2008

When do housing prices go negative?

Happy Canada Day!!

I have put up a poll on this to the left....

Back in April, I ventured a guess that the YoY numbers in Canada go negative in summer. Summer for me is June-July-August. I will clarify that thought: I now think that July will be that month (we were 1% in May)

Why July?

1) June may be too early and CREA may do everything it can to report a positive number. Remember that in most data, there are usually assumptions and estimates involved that can reflect the bias of the organization.

2) There was a huge increase in mortgage rates in June. There is usually a lag in the time that it affects prices (due to mortgage pre-approvals, psychology, etc...). The effect of this rate increase may only show up in late summer. However, by July, there should be enough of a negative effect to start hitting prices

3) June was a horrible month for most stock markets, albeit not quite as bad for the TSX. Nonetheless, most Canadians have some exposure to this, and psychologically, this will not help matters in July.

4) $1.50/L for gas. That is what I paid today. Granted, prices are higher in Quebec than the rest of Canada, but nonetheless, this is depressing consumer spending, consumer confidence and killing discretionary spending. It is also likely hard in places far from public transit/downtowns as people no longer want to commute as far. The effects of this are showing up in recent auto sales numbers and I think will begin to affect the housing market by July.

Prediction: June will be marginally positive and July will be negative.

Please vote and also leave comments on your thoughts and what is going on in your neighbourhood real estate market...

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