Monday, September 29, 2008

What a mess!

TSX down 840; Dow down 777; S&P down 106; Nasdaq 100 down 10%

What a mess! This is the kind of stuff that I was worried about when I wrote this, this and this.

While I did not expect the bailout to get rejected today, I mentioned back on the mother of all bailouts that a crash was a definite scenario. Today was not a crash but perhaps a mini-crash or a slow crash. I wish that Paulson & Co hadn't manipulated things so much that I could have been more short but the volatility is too intense.

Today was the first time in this bear market that things really got panicky. Not enough panic to set a bottom in my opinion. But maybe a bottom for 2 days to 2 weeks if we get any type of good news (ie government manipulation).

However, for there to be a real bottom, IMHO, we need it to be one without government intervention, in that sellers have to become exhausted naturally.

I feel bad for those affected negatively by this (and it will probably spread to affect everyone including yours truly). Hopefully, the readers of this blog have taken note and spread the word to friends and family. Cash is king, debt is bad.

We have had a long uninterrupted boom (with a brief hiccup around 2001) for about 17 years. We are only about 1 year into this and to expect a magic wand to be waved and everything to go back to the way things were before is folly.

Every single asset class except cash, short term government bonds and selected currencies (Yen, the US dollar) and maybe gold are holding up here. Everything else (stocks, most bonds, real estate) are getting annihilated. I suspect that we are getting close (in time but maybe not price) to a multi month bear market rally that should start in late October or November and should last into January or so. But we have a few more storms to go before this financial hurricane lets up.

Expect to see one or more of the following government steps announced on Tuesday: temporary ban on all short selling, return of the uptick rule, there is the talk of the elimination of much of the credit defaults swaps out there. Also a global interest rate cut can not be ruled out any day this week. Plus, this bailout will likely get reworked and go for another vote this week. All these measures will ultimately fail though but may cause another short term spike.

By the way, is there anyone out there that can still say that Canadian housing is going to be up this year (with a straight face) or that a Canadian recession is not a distinct possibility?

Credit crunch hits Canada (again)

From Friday's G&M "Mortgage rates climb as squeeze tightens"

In Canada this week a number of banks raised mortgage rates, and it's a matter
of days before others follow. The posted rate on the popular five-year fixed
mortgage, for example, has gone up by 0.35 of a percentage point to 7.2 per

Back in mid-December, 2006, when the Canadian housing boom was
full swing, the spread between posted five-year mortgage rates and bond
was 2.59 percentage points, close to the average level over the past

Today, as the credit crunch persists, the spread has widened by
56 per
cent, to 4.05 percentage points as a result of tighter liquidity and

Executives at Canada's big banks say the
industry will cut
back on lending and raise rates as a result of the current

In an interview this week, Tim Hockey, head of Canadian
banking at
Toronto-Dominion Bank, said that loan growth will slow in the

"Clearly, one of the things that's happened as a result of the
credit crisis is that the absolute cost of funds has gone up. And
that has
effects on both the price of lending, as well as on ... competition
deposits," he said.

Just another thing that will hurt the financing aspect of this housing crash. We have the October 15th change, interest rates rising and the access to lending which is all drying up.

Combine that with falling house prices and falling stock prices and you have a recipe for a disastrous housing market for the fourth quarter of 2008.

Unless you absolutely need to buy a house right now (downsizing or you can't rent) or you completely ignore the news about this stuff (and yet are still willing to spend hundreds of thousands), I wonder why anyone would be buying a house here....

Thursday, September 25, 2008

Odds & Ends

A few housekeeping issues:

1) Here is a list that I put out on September 11, 2008 (just 2 LONG weeks ago: feels like 2 months ago given all that has happened since then):

Given that WaMu appears to be done as of tonight, a review appears to be in order...

Here is my list of candidates once LEH and WaMu are done. I have no special insight, just the way that they are trading:

Bear Stearns



Very Likely and soon?

Lehman (Sept 14th)

WaMu (Sept 25th)

National City (not yet?)

MBIA (not yet?)

Ambac (not yet?)

Wachovia (not yet?)

AIG (Sept 17th)

Eventually? Some type of takeunder/breakup?

Merrill (Sept 14th)

Citigroup (not yet?)

Morgan Stanley (not yet?)

While the list is shorter now, there are still plenty of candidates left.

I think that JPM got a nice deal on WaMu and I may actually look at buying some JPM when I feel that this bear is ending AND if JPM shows good earnings and technicals at that time. Note that "that time" could be in a month or in 5 years...

2) I kicked out some of my shorts on Tuesday and gold today and I am currently about 90% in cash with a few small positions left. I did so anticipating a big up day (today would qualify) once the bailout's passage seemed likely. Tonight there is news that the bailout is in trouble, so Friday may be a down day. While I believe that the bailout won't ultimately work, the market perceives this bailout to be necessary to avoid a crash, so if we don't get a bailout by Monday morning, look out below!

Assuming a bailout, I think the market has an upward bias here, but I am looking to reinitiate at higher levels in October. Just not sure how to make money on the short side given all the recent manipulative actions from the SEC.

3) One note about the Canadian dollar: While I have a lot of Canadian dollar cash (mostly in the CDIC insured Altamira Cashperformer), I am very bearish on the loonie here. Back in April, I saw the Canadian dollar heading to 92 to 94 cents (it was at 98 at the time). We hit 92ish 2 weeks ago and since then, we have bounced all the way back to 97! I have been buying US dollars this week.

My reasoning: This is an oversold bounce for the Canadian dollar as oil bounces and as the perception is that US finances are in shambles (they are). However, in a credit crunch, debt gets extinguished and much of the debt out there is denominated in US dollars and was used to buy real estate and lever up in commodities. As most asset classes fall (a global margin call), the US dollar will rise, as it did since mid July (while gold & commodities sold off).

I hold some US cash as I think that if we take out 92 cents, we could eventually settle at 85 cents, if we get a market meltdown this fall.

4) My winter outlook may not be "cold" enough as I think that there is now a risk

that if the market is not saved here, that we go lower than I initially thought (S&P 1080) to S&P 990. This would translate in to roughly 9000 on the Dow.

Risk is high here, bailout or not...

Wednesday, September 24, 2008

Merrill Lynch gets it!

Merrill Lynch gets it! : (I encourage you to read the report linked here)

Finally, some one in a big position (David Wolf, Chief Strategist, Merrill Lynch Canada) published a report basically saying what this blog has been discussing for a long time:

Canada is no different than the US (or the UK): We are more indebted than they were and our housing market is tracking the US with a 2 year lag (I have discussed this recently as a 1 year and a few months lag, but this is a minor detail). Also, the report says that the lack of a credit crunch thus far in Canada is more a concern than an comfort given the impending housing crash.

In various media articles, CREA, PM Harper and CIBC denounced this view. BMO said that while they are not as pessimistic, they are cautious on housing.

In the G&M today (courtesy of Canadian Press, "Canada could face housing woes, Merrill warns")

Benjamin Tal, an economist with CIBC who has been following closely the ups and downs of the housing industry, said Wednesday he sees no “trigger” threatening Canada's housing and mortgage market.

“To see a crash in the housing market you need a trigger,” Mr. Tal said.

“The trigger in 1989-1990 was extremely high interest rates. The trigger in the U.S. was subprime mortgages. We're still missing the trigger for Canada.”

Good point, Mr. Tal: I agree that a "trigger" is needed.... Hmm, maybe:

1) Biggest credit crunch since the Great Depression
2) A near crash last week in the global stock markets
3) Commodity bubble crash
4) A recession in the US and Canada
5) Falling house prices in Canada feeding into a vicious circle
6) Overprime
7) No more 0%

Take your pick...

While ML the company was nearly toast a few weeks ago, they actually have some good research these days. Their US top dawg, David Rosenberg (a Canadian, by the way) has been correctly talking about the US housing crash for years.

ML is saying what is becoming obvious. The Big Banks are talking their book so they won't say this until it is obvious. While Wolf has been one of the "no housing bubble" people until recently, he has now changed course. Perhaps the recent events at his parent company in the US woke him up to the reality of a credit crunch? Or perhaps Rosenberg has convinced him?

Tuesday, September 23, 2008

The Next Bailout?

Maybe GM (or Ford?)

Good article from the Motley Fool on how GM has tapped its line of credit (after saying as recently as June that it did not want to do so) as its access to capital is likely closed:

Now that the bailout money is free flowing and the election is near, I would not be surprised to see GM speed up its inevitable crisis. In an election year, I would not be surprised to see a bailout for GM as there are key votes in the midwest...

I do not see how this will not help the overall market either as GM has a ton of debt, a lot of employees and is still responsible for a decent bit of US GDP. In addition, GM resonates with the American psyche.

Monday, September 22, 2008


Last week felt like a month compressed into a week!! Exhausting to say the least...

I wrote as of last Wednesday that it had been an unbelievable week. Little did I know...

Let's add to the list I compiled:


And then on Monday

  • Oil hits $130 (up $40 in a few trading days)
  • Market falls sharply and financials lead the way down (guess they can't blame the short sellers now)
  • Morgan Stanley gets money from Japan, maybe

Stepping back for a minute, it is difficult to draw conclusions just yet. Why?

1) The bailout fund proposed is huge at $700 billion. However, the Treasury can buy more than $700 billion over the lifespan of the “line of credit” since they can buy and resell as much as they wish, provided that it does not exceed $700 billion. However, what is to stop Treasury from asking for more at a later date.
2) Is it big enough? That depends on what the final resting point for the US housing market is and what happens to the credit and equity markets from here. Who really knows?
3) Will the legislation really pass?
4) It also depends on the structure of the bailout. Does Treasury pay a premium for the toxic waste paper and thereby allow banks to recapitalize or does it pay the current market price (as I would assume that the banks would not take a discount)? If it pays the market price, then can the banks raise capital to offset the huge losses. Does the government allow the banks to disregard their capital ratios?
5) What do the currency and treasury markets think of the bailout? Monday’s verdict was not very promising in that regard as the US dollar and bond markets tanked, along with soaring oil and sinking stocks.
6) Can the Treasury really manage all this junk? Even if it outsources this, can it be done in a timely manner?

7) I believe that the US in probably midway through its recession. That recession has not even fully been priced in to the stock market (crazy since it probably started late in 2007!). These measures MIGHT prevent the recession from worsening but it will not save the US economy from a long and protracted recession.

In my opinion, there is no free lunch. The market (what’s left of it anyway) is bigger than the government. Now that short selling financials has been banned, a layer of future demand has been removed. Today’s vicious selling in financials can not be blamed on short sellers. Therefore, longs probably came in and felt that they got a nice gift here (thanks to massive short covering and expiration hangover) and decided to sell.

I still believe that we are in a bear market (unless otherwise proved wrong) and I will operate for the time being with the winter outlook previously described.

One thing is clear: The US government confirmed on Thursday that a crash was likely by taking the action that it did as these were last resort desperation measures.

Therefore, if these measures do not work, a crash is still likely AND perhaps EVEN MORE likely than pre-bailout Thursday as all hope is lost by the bailout bulls and there is less short covering to lessen the crash.

While I don’t doubt that “they” have something else up their sleeve (perhaps banning all short selling, reinstating the uptick rule, 200 basis points of Fed Funds cuts, 225 basis points of the discount rate, etc…), I believe that this was likely the Big One that they used on Thursday.

I plan to keep my shorts on for the time being and wait and see....

Gary Kaltbaum: Just ban selling

Gary Kaltbaum is one of the best out there ( . He has sidestepped the entire bear market thus far and provides a free radio show and weekly column:

I always listen to his show and greatly respect his views on the market.

On his site today, he states (I have cut & pasted it word for word because it is excellent):

Sooooo... why not? Let's just ban selling. Let's just go all the way in rigging the free markets in order to raise the prices of bad companies. That's the goal isn't it? Since it is all the shortseller's fault, let's go all the way. No selling... just buying! Then, we all have no worries.

So let's tally it up... Countrywide was bought out by BAC at about $4 because of the shortsellers. They never did anything wrong. They never gave out loans to people who could not afford the first payment. They did not give out no doc loans. They did not have fake appraisals. Nope, they did nothing wrong.

Bear Stearns puked because of the shortsellers. They never lied about their financials. They did not provide 100-1 leverage. They did everything just right. Nope - they did nothing wrong.

Lehman went bye-bye because of the shortsellers. They didn't lie about their financials. They didn't move losses onto off-balance sheet entities only to be caught. They did everything right. Nope - they did nothing wrong.

Citigroup stock dropped 75% because of the shortsellers. They did not commit Enron-like offenses. They did not hide billions of losses, only reporting them when forced to. They had to raise billions at higher prices because they did everything right. Nope - they did nothing wrong.

Merrill Lynch had to sell because of the shortsellers. Again, John Thain did not lie to the public when he said he did not have to raise any additional bucks... only to raise $8.5 billion within a week. They were in perfect compliance. I trust their word! Nope - they did nothing wrong.

Fannie Mae and Freddie Mac were taken over by the government. Remember that one? That is when our government said no more to bailouts... for the 5th time. FNM and FRE's problems? Yup, all caused by the shortsellers. There was no fraud there. The fact they lost money during the greatest boom in housing and went out of business just 3 years from the top... darn those bad shortsellers. They too did nothing wrong.

AIG was bailed out because of the shortsellers. It is all their fault. AIG never used leverage... ok, maybe a little. They did not leverage their balance sheet several trillion times over. OK... maybe an exaggeration. They didn't insure several trillion in toxic caca... not an exaggeration. Nope - they did nothing wrong.

ABK and MBIA'S problems... yup, all caused by the shortsellers. They did not go outside their business of insuring munis... they were forced to insure caca by the shortsellers. Yup... they did nothing wrong.

The ratings services gave out AAA ratings to stuff that didn't even deserve ZZZ... all because of the shortsellers. Yup, all their fault. The ratings services who get paid by the people they rate, had no confict of interest and only had the best of intent. Nope - they did nothing wrong.

WAMU dropped 99% because of the shortsellers. They did not hand out money to anyone, any time, anywhere... just for the sake of fees. Nope, they did nothing wrong.

All these financial companies, and the many I left out of this report, well, they are victims of greedy shortsellers... or as one famous financial blowhard said: "financial terrorists!" You see, when you miss the bear market, when you tell everyone to buy financials all the way down, when you have called a market bottom on every up day, when you tell everyone to buy LEHMAN a couple of weeks back, when you have to come up with excuses for your incompetence... blame the shortselling "financial terrorists!". When you are best friends with all these slimebags who ran these companies into the ground, you have to have someone to blame. When you are the Treasury Secretary who came from Goldman Sachs, you have to blame the shortsellers even though Goldman is in a better position today because they short sold all this crap when it was going down. Anyone think of that hypocrisy? When you are the head of the Fed and you missed all of this, you have to blame the shortsellers. When you are the ex-Fed who created this problem with easy money and lax oversight, you have to blame the shortsellers. When you run the SEC and you came out on national TV to defend Bear Stearns a few days before they went belly up, you have to blame the shortsellers. Nope... it is all the shortsellers fault. That can only explain why the Bolsheviks (Bernanke, Bush, Paulson,Cox, Congress and all the financials) came up with the great idea to just ban shortselling in 799 financials. Just take it all the way. NO MORE SELLING!

Well said Gary!

Saturday, September 20, 2008


Great questions of late:

Question 1:

Would you recommend getting out of money market funds regarding what has happened with these funds in the US? I'm feeling it might be best to move MM funds into short-term treasuries or bonds, but I'm not sure what to do. I can see the quality of ABCP in MM funds getting ever lower and riskier, but I'm not sure how this will affect Canadian banks.

Any advice would be highly appreciated.

I don't think it is wise for me to answer specific questions as this could get me into trouble as I am not a registered financial planner, but I will tell you what I am doing and you can draw your own conclusions. Also, please remember that this is a blog where I am spouting my opinion. All investment decisions depend on your timeframe, risk aversion and whether you can sleep at night. My views could change tomorrow and it is always dangerous to blindly follow what analysts or experts are doing. What I try to do is use my own analysis/opinion and then seek out the analysis and opinions of others (both similar and dissimilar to my own) and decide a course of action. I am honored that anyone would even ask or listen to my views.Here is what I am doing:

I am leery of most money market funds as they often chase returns by adding risk. For a money market fund, you want to have as little risk as possible. I am in the Altamira Cashperformer since it is CDIC insured (up to 100K) and in the Franklin Templeton T-Bill. I am thinking about transferring out of the Templeton T-Bill as there are some things in there that are not pure T-Bills. There are not too many choices in "safe" money market funds in Canada as most of the low MER and plain vanilla T-Bill ones are for high minimum investments (such as $250K). I am staying away from anything but T-Bills in the current environment and I think that ABCP and commercial paper is not worth the risk (just look at Lehman)

Question 2:
I have $50K in a BMO monthly income fund, which is basically ~55% bonds and the rest in Canadian Equities, with 5 of the top 10 holdings in Canadian Financials (mentioning that part makes me wince.) The money is dedicated to a downpayment on my first property, something I have been staying FAR away from since I started looking in 2006 - at least I feel I made one wise decision. Fortunately I'm not being pummeled like some of the other funds - today dropped ~1.3%. I'm not expecting to purchase property for at least one year, and most likely two. Regardless, my current instincts are telling me to stick it out and NOT PANIC. But logic is telling me to swing by the bank with a large sack.

I'm not a savvy investor by any means, but I am getting into it now and learning the ropes. But right now I'm hoping to make a wise decision before I get knocked out.
Once again, here is what I am doing: I have a lot of cash, some shorts (which went up like a rocket early in the week and tanked late in the week- not sure what I am going to do), a little gold. I still believe that we are in a bear market unless otherwise proven wrong, and so I think capital preservation is key here. A monthly income fund is probably not that bad in this environment (not sure about the particular one mentioned above since I did not do the research) but at least it seems to be holding up relatively well. Even a monthly income fund has some risks though as bonds and equities can go down together (although they seem to be in an inverse relationship at present). The key is to judge your time horizon and whether you can sleep at night. In a bear market, I believe that capital preservation is key (live to play another day). To catch the absolute bottom of a bear market is hard, but I believe that even if you miss the first 5 or 10% of the new bull and miss the 30% or so on the downside, you are way ahead.

I plan to update this blog when a new bull market has begun. I don't think that Thursday's bailout bottom was THE bottom but I will let the market decide and I will watch carefully. The best thing though is waiting to buy property as that bear market has just begun.

Friday, September 19, 2008

RIP Free Markets

I have said in the past that there is no free market. What an understatement.

This is the Mother of All Government Bailouts and a true government bottom

Paulson & Co are now spending trillions of taxpayer dollars to bail out his friends on Wall Street (banks, brokers, PIMCO etc…) while 45 million Americans have no healthcare and millions live in Third World conditions (remember Katrina?)

Banning short selling on financials and taking billions of dollars of junk off the books of the banks is disgusting. Why not cover the losses on all those people with mortgages under water? What about losses on oil longs? This is no different than communism where the government controls the market. That would be fine if the US didn’t criticize Japan and Asia for their attempts to manipulate markets in the 1990s. How much pressure did the US put on Japan to let banks fail and write off debts!

I’m not sure how this ultimately plays out but they clearly saw a 1987 type crash out there to do all this. It could still happen once we get through the near term spikes with heavy short covering. I covered some ultrashort funds on Wednesday but I still have some exposure here. I am not sure what to do as the rules that have governed this “game” have changed overnight.

It is probably best to be 100% cash IMHO as I don’t believe a new bull market has started but shorting here is almost illegal and hazardous to your mental health.

Wednesday, September 17, 2008


As bearish as I've been with my $60 oil/9000 TSX & 9000 Dow talk months ago.
As bearish as I was when I wrote this on August 8 on a day when the Dow was up 300 pts (11,734):

Then we plunge into mid November as the credit crunch really takes hold, the US economy plunges and recession is accepted by all. There is a chance that we get a slew of bank failures at the same time and systemic risk becomes a concern.
Even though, I predicted bank failures at the same time (I think Fannie, Freddie, Lehman and AIG with Merrill in astericks meets that standard)

and even though, I knew that Lehman & FanFred were goners (I purposely did not buy puts on Lehman, Fannie & Freddie because the risk/reward was not good enough and the puts were expensive) and I had puts on AIG for this possibility (sold them on Monday & Tuesday)

I am still AMAZED BY THIS UNBELIEVABLE WEEK (and it is only Wednesday)!
  • 2 400+ down days on the Dow
  • Lehman, Merrill and AIG gone
  • Fed taking anything as collateral
  • Central banks injecting massive liquidity
  • 3 month TBill going to 0.02% in the US; TED spread up huge
  • 1 money market fund breaking a buck
  • Russia down 17% in 1 day; closed for 2 days
  • Treasury saying No to Lehman; Fed saying no then yes to AIG 1 week after saying yes to Fannie & Freddie
  • Merrill Lynch taken over with 70% premium to Bank of America in a shotgun marriage
  • Gold up $80 in 1 day
  • New rules instituted against naked short selling

It is one thing to predict something; quite another to live through it.

I feel bad for all those losing jobs and money in this, but unfortunately, this was inevitable after a 25 year credit bubble. The good news is that finally the financial markets are beginning to get it and eventually we will set the stage for a sustainable and healthy economic boom (unlike the most recent 2003-2007 one).

The other good news is that despite global deflation in all asset classes, Canadian housing will continue to grow at 5%+ a year and thus, housing is a great investment at these prices...

Full Disclosure: Puts on MER , SKF and equity in SKF, SDS, QID, GLD, GDX and gold mutual funds.

Monday, September 15, 2008

Spin, baby

I wrote on Friday's preannouncement:

I now expect August to be at least -5% for the country overall. My
projection of -6% to -9% by December
is looking more likely and perhaps
skewed to the low side of that projection.

Today the news: -5.1% in August.

Vancouver, Victoria, Calgary, Edmonton and Windsor all negative. Toronto was barely positive (0.8%). Ottawa and Montreal keeping the number from tanking at 5.6% and 6.2% respectively.

I wrote on Friday:

And CREA will likely spin away 1) saying that the market is now balanced and a great time to buy, 2) the number is skewed by Alberta and BC and 3) this is just a
healthy correction and that Canada is nothing like the US.

The actual spin had heavy emphasis on 2 with a new take on 1 (stable/solid) and 3 (as quoted):

CREA President Calvin Lindberg. "In light of that fact, our current market can certainly be characterized as stable. The Canadian market fundamentals are still solid, and mortgage rates are still at near record low levels," the CREA President adds. "The challenge is for sellers to price their home to meet the local market realities, and for buyers to realize there is no real estate bubble that will burst and send prices to new lows."

Stable = -5.1%. I would hate to see what instable looks like....

The guy is exhorting sellers to cut their prices ("for sellers to price their home to meet local market realities") and commanding buyers to just buy already and close your eyes to the overvaluation in prices from any type of historical perspective or to the news everywhere else in the world.

I suspose that Lindberg will write you a put option on your house if he is wrong? CREA sounds desperate but words alone will not prevent the bubble from imploding. Look at Lehman...

Sunday, September 14, 2008

Lehman Monday

Now that it looks as if the US government has not bailed out LEH and drawn the line in sand at Fannie & Freddie, let's see if and how the stock market bottoms this time....

The US government finally did the right thing as the list is going to get longer and longer and start involving non financials as well (GM, Ford?). Fannie & Freddie were government already but Bear was the real mistake as that set an artifical bottom in March and allowed market participants to believe that the government would step in (thus creating a premium in the stock market).

Historic Monday (and week) on Wall Street coming up:

1) Lehman gone via bankruptcy (kudos to David Einhorn for calling Lehman out months ago when the stock was at $40)

2) Merrill gone via a takeover by Bank of America: I am shocked that BAC is paying a huge premium ($29) to MER's 17 closing price on Friday. I think that BAC is making a big blunder. If they wanted MER, they should have at least waited until later this week, in case MER traded to single digits. Then they could have offered peanuts. BAC is the same company that bought a hug stake in Countrywide at $18 and watched it go to single digits before paying $8 for the rest of the company. If they had waited, they probably could have got it for $1 or less.

The details are sketchy as I write this: BAC (closed near $34) and deal is supposed to $29 for MER. That would be a 0.85 ratio. I predict that BAC will open near $30 on this news and analysts and shareholders will blast BAC for this. Assuming BAC opens at $30, that would give MER a theoretical price of $25.50 and with the risk inherent in this deal, I would expect MER to probably trade near $22.

3) AIG, a Dow stock, is announcing details of assets sales and asking the Fed for $40 billion in a bridge loan.

4) Washington Mutual is also near bankruptcy or could be sold for next to nothing.

5) Fed meeting on Tuesday. Prior to Sunday, the market only had a 10% chance of a 25 basis pt cut. As I write this, there is now a 60% chance despite all the hawkish rhetoric of Bernanke & Co. Even if the Fed doesn't move on Tuesday, it can move at any time, and an interest rate cut is definitely back on the table, especially if the stock market tanks this week. There are a few hawks on the Fed, but there are also a bunch of academic doves who panic anytime the market goes down a few percent.

Even if we get a panic bottom on Monday, I doubt that it will hold for long, as the world economy is slowing down big time, the financial system is a mess and stocks (and many asset classes) remain overvalued.

Oh yeah, since this is a Canadian site, everything will be fine here, no impact. Housing will continue to go up 5% a year every year and the Canadian economy will be just fine forever...

Full Disclosure: Puts on AIG, MER , SKF and equity in SKF, SDS, QID.

My MER puts are likely to go down versus Friday thanks to BAC's stupidity but they are January paper (bought when MER was in the mid 20s) and I'm not sure that the deal will stick, so I'll have to see what happens tomorrow...

Saturday, September 13, 2008

CREA preannounces....

Funny how this slipped out Friday from the G&M "Cooling Vancouver leads fall in house price"

National sales numbers for August, to be released by the Canadian Real EstateAssociation (CREA) on Monday, will disclose the third consecutive monthly drop in existing-home prices and the largest decline since prices slipped in June for the first time in more than nine years.

Nationwide, the price of a resale home fell more sharply in August than the 2.4 per cent year-over-year drop posted the month before, mainly because of softness in Vancouver, the country's most expensive residential real estate market, said CREA chief economist Gregory Klump.

Sales activity fell by 53.4 per cent in greater Vancouver in August, compared with the year before, and average prices there dropped by 4 per cent for both detached homes and condo units, to $737,985 and $374,366, respectively.

In July, overall housing sales in Vancouver dropped by 44 per cent, while the average price declined by 1 per cent.

Hmmm, prices fell by 4% YoY in Vancouver in August (vs 1% in July). Since Vancouver has the highest prices in Canada, this will drag the overall number down for August.

And CREA will likely spin away 1) saying that the market is now balanced and a great time to buy, 2) the number is skewed by Alberta and BC and 3) this is just a healthy correction and that Canada is nothing like the US.

To which I will say 1) the market is beginning to become more balanced after being a sellers' market for about 7 years. Hence, we need a buyers' market for a number of years to return prices to reasonable levels (i.e. not a few months of "balance" after the biggest bull market in history)

2) Yes, Alberta and BC are dragging things down just as they brought things up in 2006/07. I expect their markets to eventually drop more than others but their crash has only begun. Wait until the foreclosures get started...

3) This is not a healthy correction and Canada is exactly like the US except with a one year lag and overprime instead of subprime

Also, notice how CREA has not updated their 5% figure for 2008. Why should we believe CREA since they have yet to admit we have a problem? The US real estate associaton did the same thing back in 2006 & 2007.

As I said before, once this storm that started in the US in 2005/06, washed up in Alberta late last year and has now spread to BC really hits the center of the universe (Toronto), it is game over for the Canadian housing market.

Plus, what has happened in recent months (and likely with only limited impact in August)?

1) The awful July employment numbers: That is likely to impact housing this fall
2) Commodity and TSX crash/correction since July: Going to make things even worse out west...
3) Credit spread widening making mortgages more expensive and harder to get
4) Fannie & Freddie, Lehman, WaMu only makes 3) worse
5) October 15th mortgage changes AND

what may happen in coming months:

6) Another huge leg down in the overall stock market

Based on the preannouncement from CREA, I now expect August to be at least -5% for the country overall. My projection of -6% to -9% by December is looking more likely and perhaps skewed to the low side of that projection. When I started this blog, I had a question mark on the title. Perhaps I can finally remove that question mark....

Thursday, September 11, 2008

Government Bottoms and Bailouts

All climactic US stock market bottoms have involved government intervention thus far:

Aug 16/07: Fed cuts
discount rate, telegraphs rate cuts (follows up with 50 basis pts in Sept)

Jan 22/08: Socgen bottom: Fed cuts emergency 75 & telegraphs more (another 50 next week)
S&P 1270

Mar 17//08:
Bear Stearns bailout bottom/new lending facilities S&P 1256
July 15/08: Fannie Mae/Freddie Mac announcement of future bailout
S&P 1200
Sep 8/08: Fannie Mae/Freddie Mac takeover S&P 1217 (Friday before)

Every major bottom has been in the 1200-1270 range and every rally has ultimately failed (we are still waiting for July and Sept bottoms to be breached however).

This tells me that market is not bottoming naturally (ie prices low/sellers exhausted/buyers bargain hunting). Perhaps one of the signs that a new bull will be here is when the market bottoms naturally.

What happens on the next Bailout Monday, this week (September 15th)? Washington Mutual (WaMu) and Lehman?

Since the Bear Stearns bailout (with the incessant bottom calling...a financial failed, market bottom- that is so 1998) I have been waiting for a period where more than one bank/broker goes under in the same week and then you get some type of climactic bottom that leads to a multi-month bear market rally (similar to September 2001-January 2002).

We had Fannie & Freddie last weekend and it looks like WaMu and Lehman won't make it much longer. That would be 4 in 1/2 weeks. Weirdly, that would qualify but I don't think these 4 will cut it. It may take a few more bankruptcies or bailouts plus weakness in other sectors (retail? as commodities have already crashed) to cause that type of washout.

Here is my list of candidates once LEH and WaMu are done. I have no special insight, just the way that they are trading:

Bear Stearns



Very Likely and soon?



National City





Eventually? Some type of takeunder/breakup?



Morgan Stanley

Full Disclosure: Puts on MER, C, AIG, MBI, SKF and SKF equity

Saturday, September 6, 2008

Dow 9,000 as President Obama wins election?

On the hottest day of the Montreal summer (33C on Sept 6th!), I felt a need to update my financial markets "winter outlook" from August 8th:

Markets remain choppy for August into mid September 2nd. Commodities bounce a little mid/late August and sell off again in early September. US and world markets peak in mid August, pull back in late August, rally into mid September 2nd to test August highs.

Then we plunge into mid November as the credit crunch really takes hold, the US economy plunges and recession is accepted by all. There is a chance that we get a slew of bank failures at the same time and systemic risk becomes a concern.

Canadian, US and European economies in recession or hard landings. I plan on conserving capital and shorting at opportune times.

Basically, the only change is that the markets topped out faster (Tuesday Sept 2nd) and from a slightly lower level than I thought. Thursday was the first 90% downday (technical measure). If a new downleg has started, you will likely get a series of them over the next few weeks/months.

Cash is king here for all but experienced investors (who can short carefully). Stay out of debt. I saw (and still see) a move to about S&P 1078-1090 (Dow 9Kish?) for this downleg which should last into November, around the time that Barack Obama (or John McCain) becomes the new President.

Some may feel that I am a permabear but I believe that I am a realist. The structural issues facing the global economy are deep. The credit cycle has gone on for most of my life (about 25 years- since the early 80s). Look at any long term chart of debt/GDP, debt/annual income, etc... It will take a severe bear market and a severe and lasting recession to correct the excesses of 25 years. This stock market bear thus far has not been severe (20% +/- on the S&P, 10 months in duration). Severe bear markets can last years (the 2000-03 one lasted about 3 years) and usually shave off 30-50%.

We currently have the worst housing recession in the US and many countries since the Great Depression. We have one the worst financial instability since the Great Depression, as the esteemed Paul Volcker stated today. The US consumer (70% of the US economy and 20% of the world economy) is overleveraged and underwater in his/her stocks and houses. Inflation has been high in recent years, thereby preventing further rate cuts in most countries.

All this and we are supposed to have a garden variety bear market of 20% and 10 months? And Canada is supposed to muddle along impervious to the massive hurt going on to our south. Housing will just magically rise by 5% a year.

I believe that we are likely heading for one of the 50% bear markets in the stock market. We haven't even had a real panic. The August 07 panic was minor. Socgen January was minor. Bear Stearns March bottom was minor. July Fannie Mae bottom was minor. Look at the VIX index. It peaked in the upper 30s in all but the July bottom (it only hit 30 in July). In 1997, 1998, 2000-03, we had numbers in the 50s and 60s. In 1987, we hit 180ish I believe. Perhaps there are structural difference in the markets (ultrashort ETFs, etc...) that will prevent a 60 reading, but even using other measures, we have yet to see true panic in the markets yet. I am old enough to remember scarier "corrections" in the 1997 and 1998 bull markets. There were none of the structural issues out there today! I believe that over the next few weeks you will finally get some panic.

The good news is that after this downleg, I believe that we will finally be past the halfway mark in terms of percentage and maybe, just maybe, in time. We even could get a nice 3 to 5 month counter trend bear market rally. If things got really ugly in October/November and we sunk to say 770 S&P with a few bank failures, you could even have the end to the bear in terms of price.

Eventually, there will be a new secular bull market in stocks and homes. It will probably not be like the ones of the 80s and 90s in stocks and 2000s in homes, but it should be good. We will definitely get a cyclical bull (2003-2007) at some point in 2009 or 2010. The BRIC country story may well be true and if the US can do a (much) bigger 1995-97 Canadian style cleanup cleanup of its structural problems, this could eventually make me start a bullish blog. But the "summer outlook" is likely many years away and for now winter has resumed in the financial markets.

Friday, September 5, 2008

Comments on the G&M website

From the G&M comments

FSA LDU from Canada writes:

Adil, a link to your own blog, spouting about the housing downturn is hardly concrete evidence of the same. I think I'll take the analysis of CREA, the BoC and several major economists over the 'dabbling in financial markets' of a renter.

I dabble in the financial markets too, every time I put my ATM card in a bank machine and take out 20 bucks for lunch and a train ticket home. That gives me as much credence to predict the future of housing prices as you.

As for the job market - great to see our economy still moving forward, albeit slowly, despite the global turmoil in the financials, commodities and jobs. Here's Harper gets his majority and we can enjoy four more years of smart economic planning by our federal government, as opposed to four years of economic hell if the Green Shift ever happens.
I thought I would address his many comments:

Go ahead and trust the CREA, BoC and Big Bank analysts! I think they'll lose you money but that's why we have markets. Notice that I didn't say "free" markets, as the manipulation by the US government with all its new facilities, Bear Stearns bailout, Fed cuts and short selling rule changes have discredited that idea.

As for my credentials, I am comfortable that they are sound enough to work for CREA, BoC etc.., I have a professional designation, many years of experience with financial institutions and I have been a markets junkie for 17 years. I am a renter by choice as I believe that housing is overpriced and I will buy when prices are lower, much lower.

I "dabble" in that I am not a full-time trader and I have a day job as a freelance consultant, but I manage my own portfolio and I am up in the bear market.

The gist of FSA LDU's comments are that I am not credible because I don't work for a big institution. That's fine by me. I'll let you the reader be the judge of that, but I have made many predictions on this blog and most of them seem to be coming to fruition. I do plan to change the profile description (thanks to FSA) as it does sound a little hokey.

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