Thursday, February 26, 2009

BMO says "Worst likely behind us"

Every once in a while, one of the Big Banks amaze me with their incredibly useless analysis of this recession.

Today in the G&M, it was reported ("Worst likely behind us: BMO", VIRGINIA GALT, Feb 26)

“Our current view remains that the Canadian recession will be somewhat milder than the past two major downturns … We continue to maintain the view that a recovery will take hold by the end of the year, despite the recent wave of downbeat economic releases.”

However, Mr. Porter said he believes the recession will not be as deep or prolonged as the recessions of the early 1980s and early 1990s for a number of reasons:

“First, interest rates were cut early and often in this cycle and are much, much lower than in the past two downturns…

“Second, stimulative fiscal policy is kicking in relatively early in this downturn.

“Third, corporate balance sheets were in much healthier shape heading into this recession than in the past two cycles.”

And, finally, the 20 per cent depreciation of the Canadian dollar relative to the United States dollar, “will offer some relief to industry,” he wrote.

He added that Bank of Montreal economists now predict a 2 per cent decline in Canada's gross domestic product this year, and project that the unemployment rate could average 8.2 per cent in 2009 – not as high as the unemployment rate of 13 per cent reached in December, 1982.

The recovery, when it does take hold, will be half-hearted and, to some extent, “will be force-fed by this wave of fiscal stimulus that we are seeing around the globe,” he said.

But for the stimulus efforts to work, the United States must first stabilize its financial system, he added.

“If that doesn't happen, of course we have got to start over again with the forecast,” Mr. Porter said.

“We don't need the U.S. consumers to go back to their free-spending ways, we don't necessarily need that. We just need the U.S. financial sector to sort of stabilize and we need their growth to stop falling before we can realistically look at a turnaround in Canada,” said Mr. Porter, who noted that U.S. Federal Reserve Board Chairman Ben Bernanke has also projected that the economy could start to recover by the end of 2009.

My thoughts:

Hmmm, a 2nd half pickup. Wait a minute, didn't this same Mr. Porter look for a second half pickup for 2008 in January of 2008? No one could have seen this coming back in early 2008, could they?

BMO economists aren't predicting a recession for Canada but expect the economy will grind to a halt by the second quarter before picking up momentum again in the second half (of 2008).

But there are positives amid all the doom and gloom, said Doug Porter, deputy chief economist with BMO Capital Markets.

U.S. core inflation remains relatively low, he said, giving the U.S. Federal Reserve room to aggressively cut interest rates if it needs to.

"There's room for Washington to cut taxes or to increase spending," Porter said. "It's not as if policy makers' hands are tied."

Sound familiar? Didn't see the recession coming, huh? This is the problem with most economists and many investors these days: they are relying on the same models that did not see any of this coming. They dismissed anything that happened before 1980 and dismissed the Great Depression as a series of policy errors. What do these esteemed models of Porter say?

1) Porter's model says: Interest rates are low, so the economy will pick up

2) Porter's model says: Fiscal policy is kicking in, so the economy will pick up

3) Porter's model says: Corporate balance sheets are great, so companies will spend and the economy will pick up

4) Porter's model says: The Canadian dollar is depreciating so exports will pick up, so the economy will pick up

5) Porter puts in a ridiculous qualifier on the US banking system so that he can blame it when his forecast inevitably falls apart.

6) Porter says that Bernanke says the US will recover in late 2009. The same Bernanke that said that subprime was contained and that didn't have a clue about any of this?

Porter's points are all true versus the 1980s and 1990s recession. However, he does not point out the negatives which ironically are the reason that many of these "positives" are happening.

Interest rates are low because the economy stinks and there is deflation. Low interest rates are a symptom of this fact.

Public money (Fiscal policy) is kicking in because private money is not spending.

Corporate balance sheets were in relatively good shape before the recession hit. However, consumer balance sheets are absolutely horrible with record debt levels and leveraged against bubblish assets such as housing.

The Canadian dollar is depreciating due to falling commodity prices (among other things). Canada needs those falling commodity prices like we need a hole in the head. Exports are tanking as world demand for everything is falling.

Porter also conveniently omits that there was no global stock market crash in the past 2 recessions. There was no global banking panic. There was no global housing crash. There was no fear of deflation. There was a far less leveraged consumer. Commodities did not drop by 80%. The demographics were more favorable.

I guess all this works in fantasyland where you get to use the same discredited model that makes symptoms of a disease appear as cures.

I hope when this recession/depression is over, that the economics community is thoroughly discredited. (I doubt that it will. I also realize that there are a handful of great ones such as Roubini, Paul McCulley, etc...It is the other 99% that I take issue with. Keep in mind that the consensus of the famous Blue Chip Economist survey in the US has failed to ever correctly predict a recession.)

Until the future arrives, I accept that Porter could be right and I could be wrong on this, and I also accept that one day there will be a recovery. However, on this issue, as Charles Barkely once wrote "I may be wrong, but I doubt it..."

Monday, February 23, 2009

Window for the bull case is closing soon

As you may know, I have been short term bullish since late November, with admittedly nothing to show for it. I have been quite cautious about it (being only 20% long at my most bullish and currently less than 10% long).

I had mentioned that my target was around S&P 944 to 1000 recently, but that if we broke 800 all bets were off. That was way probably way too optimistic. Something close to 844 may even be stretching it, and unfortunately, I did not follow my own advice (as I didn't get to 0% long on the recent break of 800).

I subscribe to services written by people much smarter than me. They provide me with insights that I can not obtain on my own and are time tested and accurate. My interpretation of technical services that I subscribe to, such as Lowry's and others are getting more and more ominous of pending moves to new lows. Jeffrey Cooper at is also speaking of upcoming cycles that point down as well. The esteemed Bob Hoye who has been on the money throughout this crisis is warning as well of upcoming danger, albeit in April or May.

My own readings tell me that the first chapter of the Currency Crisis (in late 2008) was not the last.

  • Overlooking the North American economy for a minute, there is pending disaster in countries such as Ireland and much of Eastern Europe including Russia. How can the EU deal with this stuff as it was not set up to do so?
  • $33 oil is causing havoc with the Middle East and other economies such as Venezuela. Dubai's economy is in big trouble.
  • The British, European and Japanese economies are falling as hard or harder than North America. The so-called (no offense intended) PIGS (Portugal, Italy, Greece and Spain) are particularly vulnerable.
  • Asian economies are generally very export driven and as such, are getting hammered by the global recession.
  • Most emerging countries have a lot of debt in the senior currencies (Yen, US dollar, Euros). As their currencies fall, this debt becomes more expensive, and in some cases, country defaults are a possibility.
Then you add all the obvious things such as the downward spiral of soaring unemployment and horrible banking systems in most countries to the mix and you get all the conditions for another ugly leg down.

Today we closed right near the November lows. These levels need to hold here right away. I had been expecting a retest (and failure) in March, but perhaps my timing was off. Alternately, perhaps we are now getting a retest and then we rally for a week or two and the bulls scream "successful retest" (maybe spiked with some government intervention, yet again?) before taking out these lows as the snow melts.

My target for the next downleg is S&P 600. Do we rally a little first and then get there or has the move already began? I am finding it very tough to decide, but it feels as if there is a level of despair here that may give rise to a fast and furious short term rally sometime this week.

Where am I planing on hiding? The US dollar & Japanese Yen and some selected shorts (if we get this rally). Even gold may sell off for a few months before resuming its upward journey.

The ultimate low in this bear market may be S&P 450 (roughly where the super bull of the mid 90s started from).

Disclosure: Long Yen, US dollars, Canadian cash, and a few longs

Friday, February 13, 2009

Another stinker from CREA

CREA numbers continue to deteriorate -11.3% YoY in January. Recently, CREA projected a decline of 8% for 2009. In November, I conservatively forecast a -10%. Nice to see that they are getting a little more realistic (they had a -2% back then), but remember that my number was conservative. I have to crunch some numbers, but I plan to revise that number significantly lower. At the least the flagrant cheerleading by CREA has been toned down. This will lower the comedic value of their reports. Nonetheless, there is still some spin left....

CREA states:

“there are certainly buyers and sellers in the Canadian residential
market,” says the President of the Canadian Real Estate Association, Calvin
Lindberg of Vancouver.

My thoughts: All it takes is 2 buyers and 2 sellers to make that statement factually correct.

CREA states:
The supply of homes for sale remains high, but is trending lower nationally. The
decline in new MLS® listings is trending lower in line with sales activity
in many regions. The decline in supply to meet lower demand is expected
to help stabilize the resale housing market balance and put a floor under

My thoughts: I will agree that if the supply of homes is decreasing, this is a positive.
However, it remains to be seen if this will continue. I expect that since the large layoffs began in November, there will be a large increase in foreclosures with a lag of a few months. The same applies to the stock market crash of Sept to November. Therefore, if we assume a lag of six
months, there may be a large number of new listings in April or May, due to people forced to sell due to job losses or stock market losses. Until recently, sellers were taking advantage of high prices to sell their house. The next wave of new listings may be from sellers who have no choice but to sell.

Also, the CREA assumption assumes that all of this exists in a vacuum. This floor on price means nothing if buyers can not obtain mortgages or if buyers set their price levels lower (as
they are apt to do given the fact that we are in a depression).

In theory, there is a floor on price. I suspect that it is a lot, lot lower than anyone can fathom.

Other key points:

  • 4 of the 6 NHL cities were negative with Calgary -13%, Edmonton -3%, Toronto -8% and Vancouver -9%. Ottawa and Montreal remain in la la land at +2%. Anecdotal information for Montreal tells me that the tide is turning here, and I suspect that Ottawa will turn negative soon as well.
  • 13 of 25 markets were negative. Remember how CREA used to say that only 4 of 25 markets were negative, thereby attempting to spin. Now that the majority of markets are negative, conveniently omitted from the press release. Still, 13 is not bad, considering it will be probably 25 by year end.

All in all, another bad report and I suspect that given the lags in homebuying, some real disastrous reports are waiting for the springtime. In fact, if the housing market was a hockey game, we're still in the first period. The US is probably somewhere in the second period.

Wednesday, February 11, 2009

Pilots who can't fly

Fantastic interview on Bubblevision (no thanks to the bubbloids with their lousy questions) this week with Nouriel Roubini and Nasim Taleb, two of the few who called this depression. Taleb thinks that we are very early in this debt unwinding and I believe that he is right.

Taleb mentions that he would like to see the responsible people out of office. Example, Bernanke. Someone crashed your plane and now you are giving him a new plane. He suggests that someone like Nouriel Roubini be called in to fix the problem. At least he saw it coming.

I am very disappointed that President Obama appointed Geithner as Treasury head since he was part of the Establishment that watched this happen. He talks about change and yet he has the “same old” (Summers & Geithner) running the show. Perhaps he should have appointed Former Fed Governor Paul Volker to the Treasury. Volker at least understands tough medicine and wrote a prescient article back in April 2005, that really stuck out at the time, a solid 18-24 months before the crisis began in earnest.

A great line in his article:

I don't know whether change will come with a bang or a whimper, whether sooner
or later. But as things stand, it is more likely than not that it will be
financial crises rather than policy foresight that will force the change.

The problem is that even with the current crisis, we are not forcing that much change. We are trying to use more debt to stimulate the economy, when the problem is already too much debt and consumption. Even Volcker seems to be going along with this crap in his current role as an economic advisor to Obama.

The same logic applies in Canada. Why do we listen to all these Big Bank and BoC economists, none of whom, with the possible exception of former NatBanker Clement Gignac, saw this coming? We are giving them our plane (our taxpayer dollars borrowed from our children). Even right wingers PM Harper and Flaherty, who are supposed to be conservative, are going along with all this stimulus crap. The electorate wants to bribed with its own money.

Friday, February 6, 2009


The TD report released Wednesday on the economy for 2009: The number that many have talking about is a prediction of 325,000 job losses (or about 27,000 per month). In light of today’s report that the Canadian economy lost 129,000 jobs in January (and 234,000 in the past three months), I think even TD knows that their numbers stink.

I have been asked about this TD report recently and here are my thoughts:

In a January posting, I mentioned that the Canadian economy was losing about 50,000 to 100,000 jobs per month.

Where did I come up with this number? We lost 71K in November and 34K in December (average of -52K jobs per month).

I assumed that since the economy went south in the fourth quarter, the real ugly numbers would begin in the first quarter. Why? First of all, most companies do not just fire people before Christmas for obvious reasons and secondly, most companies did not have a -4% GDP planned in their internal budgets. To announce layoffs, it often takes companies a month or two to go through the payrolls, formulate plans for severances, get legal involved, etc…

TD assumed that job losses will just magically decelerate to 27K per month.

The good news is I doubt that we lose 129,000 jobs each month. I suspect that we are in the midst of a job loss hurricane that is tracking the steep fall in GDP in recent months. Once this round of job cuts is finished (spring?), we may get a lull for a few months where job losses continue but at a much lower pace. Another round may begin in the fall once people return from summer vacation and realize that the economy won’t magically pick up in 2009.

The unemployment rate has risen 1% in just 3 months (6.2% to 7.2%). This is the same 1% increase as in the US (Yes, as much as we keep claiming that we are doing better than the US, I don’t see it in the employment data). Using somewhat complicated calculations from the esteemed John Hussman, a 1% increase in unemployment PER QUARTER is perfectly consistent with a 5% drop in GDP, which is exactly what is happening right now.

Here is what these bank jokers had to say today after the report, as reported in the G&M:

“The recession deepened at the start of 2009, and we are likely to see the
jobless rate rise above eight per cent by year end,” warned Benjamin Reitzes,
economist at BMO Nesbitt Burns.

My thought: At this rate, it will be at 8% in April. By mid year, at the absolute latest. 9% by year end is looking conservative. Remember in the last 2 recessions, unemployment went to 12%.

“The fact that most of the job losses were in the private sector adds to worries
that the economy has significantly throttled back,” said Charmaine Buskas,
senior economics strategist at TD Securities.

My thought: Is it not obvious that the economy has significantly throttled back by now?

Canadian Imperial Bank of Commerce economist Krishen Rangasamy said in an
interview that economists “knew things were going to get worse, but they got
worse a lot faster than expected.”

My thought: Faster than you expected….

The Big Banks are either deliberating understating their predictions or they are using models based on recent recessions (early 80s and early 90s). When they are wrong, they are surprised. They will say this is unprecedented. It isn’t unprecedented. There is a precedent. The 1930s. The Great Depression. Their models can’t capture this, so they will keep on acting surprised every month.

Conclusion: For 2009, I would look for an average of 50-60K in job losses (600K-720K annualized). This is optimistic, and it could be worse. I project an increase to 9% or 10% unemployment by the end of 2009.

The job losses are not just in the US anymore. This week, there have been layoffs announced by many high profile Canadian companies (which are not even reflected in the January numbers).

In this job loss hurricane for the next few months, 50 to 100K should be the range. I hope that I am wrong but I think it is better to be realistic here. If you can, build up an emergency fund (I will have more on Emergency Funds in a future posting). If you are thinking of selling your house, sell now while you still have a nice profit. Pay down debt before deflation makes it even more expensive.

I laugh at Carney. How is the consumer supposed to come back in 2010? As I wrote recently, there is a secular trend at hand with the savings rate. To add fuel to the fire, the consumer is now getting hit by massive job losses. Even if you haven’t lost your job, you are starting to fell worried about losing it or you may know someone who has lost their job. That is going to affect your spending. Your portfolio may be down 40%. Your house may soon be down 30%.

Let’s be honest here. We are in a depression. Maybe(?) not the Great Depression, but definitely a depression. Expect the "surprises" to be negative.

Thursday, February 5, 2009

Still in the bull camp?

Since a huge reversal day on November 21st, the stock market has basically been in a “relatively” narrow trading range from 800 to 944. I mentioned that I had turned bullish back in late November (after a few failed attempts earlier in the month).

Am I still bullish?

Yes, but.

I am only about 20% long (mostly gold stocks, a little oil and a little SPY) right now and already planning my next shorting strategy.

Back on November 26th, I was looking for a rally to S&P 1000-1100 into late January to mid March. Now, I think, at the very best, we get to the lower part of that range. My gut tells me that we should test the 944 level we hit back in early January. It could even happen very quickly as a big rally day may be coming in the next few trading sessions. Perhaps ironically even on Friday, Feb 6th, when a horrible employment report is expected?

For now, as long as the S&P 800 level holds, I am willing to give the benefit of the doubt to the bulls. A high in mid March is still possible but I am now thinking that the top could be as early as mid February and as late as mid April. From that top, we would then drop sharply to test the November lows and I suspect that we take those lows out.

I will have much more to say on this later with better explanations, but my time is limited right now. I plan to post much more on my 2009 views next week…

Wednesday, February 4, 2009

Name is catching on

It seems as if the name change from November 2008 is catching on....(I doubt these people read the blog though...)

U.S. May Be in for ‘Great Recession,’ Longest Postwar

By Steve Matthews and Timothy R. Homan
Dec. 2 (Bloomberg)

There seems to be a bunch of sites using this term now. Perhaps, I'll have to change the name again to stay one step ahead. If anything, I think the term "recession" is being nice. Something with the word depression is more and more likely....