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?

Big day in the markets

June 6th: just another day for the markets!

-Dow down almost 400 points (3%)
-Unemployment rate in the US jumps 0.5% to 5.5%
-Oil up $11 (8%)
-Financials hit new lows (BKX index lower than Bear Stearns panic March 17th)
-TSX barely moves (down 26) as higher metals and oils offset by everything else plummeting.

If you are not in a few select areas (oil & gas, fertilizers, steels, a few select techs) you are getting killed. The TSX is "lucky" in that it has some of each (ECA, POT, RIM). Take away a few select stocks, and it is not doing well either.

Now, can we ask the question again?

I asked the question back in February: Did we go into recession in December?

I am still waiting for the G&M or Financial Post to ask this question.

Today we got news that February GDP was -0.2%. On April 1st, I stated that based on Dec-Jan data, it appears that the economy was basically going flat. So now we can make it 3 months of basically no growth.

Can we at least start to ask the question, and also ask: If we are at zero now, and then the housing bubble and commodity bubble only began to deflate in March, how do we avoid recession?

G&M? FP?

Commodity Markets Updated

It appears that I was a little early in my bearish call on commodities. However, with the exception of oil and a few select commodities, most are still below their Feb/March highs. I covered most of my shorts at small losses in late March when it looked as if the Socgen and Bear Stearns lows would hold. I played gold pretty well thus far as I took profits on some big down days.

I still think that commodities (excluding gold) are headed lower this year and the TSX with it. The TSX is actually a big up day away from its all-time highs! (With the exception of HGD (an ultrashort gold ETF), I have no positions here but may take some in the future).

Bubbles can persist for a long time, and perhaps I am way too early on this one.

What will be the catalyst?

One thing that can hurt commodities in the short run is a strong US dollar. The US dollar has become universally despised. If it can put a short/intermediate term bottom here versus the Euro and rally to 1.50-1.52, it could put a top in oil, gold and other commodities, especially given the leverage and profits inherent in these positions. The Fed meeting next week looks like a 25 pt cut, and this could be the spark that the USD needs.

What are some of the clues that perhaps this commodity rally is not for real?

1) The Canadian dollar topped in November at 1.10. It is currently near par. It has not confirmed the 2008 commodity rally (bearish divergence). If commodity prices were to continue strong, shouldn't the Canadian dollar be stronger? Perhaps the loonie has been weak due to the aggressive rate cuts or perhaps it was simply too speculative a move back in November.

2) Record oil prices have only recently allowed oil stocks to hit new highs. Perhaps this is due to general stock market weakness or perhaps the stocks are leading the underlying commodity... The same is true in certain other areas (such as gold). I believe that the crude oil market is not a free market with a level playing field as it trades so strangely. However, if we get a true breakdown (as we did in Sept 2006) to sub $100, this would likely bring the rest of the commodities down as well. I don't buy the BRIC argument and I think that oil at these levels can not be explained by demand pressures.

Since it also looks as if the financial rally is ending, the 75% of the TSX in 3 groups (mining, oils and financials) could be vulnerable here. I don't think most Canadians realize how risky the TSX is right here.

I'm also looking for the BoC to cut 50 tommorrow.

Recession Fears Over: Canadian Economy Soars in January

Yup, it's official. Now that Canada's economy grew by 0.6% in January, any fears about recession in Canada are over right. After all, 0.6% is actually about 7% annualized. That is the strongest growth since April 2005. Heck, a new boom has started!!

Wait a minute. January did grow by 0.6%. However, December shrank by 0.7% (8% annualized). Clearly, monthly figures have too much noise in them, as both 7% growth or 8% contraction are not sustainable in the current environment.

Let's just conclude that in the December-January timeframe, it is likely that the Canadian economy was stalling out near 0% (if two months can be used as a good indicator, if the two months are averaged out and if these numbers are not significantly revised in the future).

Therefore, I will say it is premature to conclude whether or not the Canadian economy started a recession in December. I think it did but I will keep an open mind about it.

Note that on March 31 (Jan GDP release date) the Canadian dollar sunk despite the "strong" January GDP likely due to the continued sharp sell-off in commodities. The falling Canadian dollar may help the manufacturing sector a little but the move down to 97 cents is much too little and way too late. Falling commodity prices are likely to hurt the Western economy if this implosion continues, as I think it will. I think that the Canadian dollar will likely fall to 92-94 cents over the coming months, but once again "too little, too late" to save the economies of Ontario & Quebec.

Positions in HGD & HOD, Can & US cash

Commodity Markets Imploding

As written on Feb 19th

"All this liquidity being pumped in by the central bankers is going into the "hot games", which are the commodities. Many of the charts (ie wheat) look parabolic. Similar to Nasdaq in early 2000. I suspect that the next downleg in the market will be brutal and will take out the commodity stocks, even gold (which should decouple from the rest later in 2008). This will bring out a wave of margin calls, hedge fund blowups etc...This coming commodities bear market (perhaps it is only cyclical) will help sink the Western Canadian economy as well."

After today's 427 point smashing, it is clear that something is amok. Gold down $60 (!), oil down $6 and all commodities got smashed! The last place to hide in the markets is now being taken out. Everyone and his uncle was bullish on gold and commodities. Everyone knows that BRIC (Brazil, Russia, India & China) will keep prices high for many years. I am agnostic on the long term bull market in commodities. I am sympathetic to many of the arguments of the bulls but I also know that this run-up in most commodities has beaten all of the great all-time commodity bull markets. So I say, let's let the cyclical bear do its thing and then decide.

All of the hiding places are being destroyed. In a bear market, usually no stone is left unturned. Commodities are no different.

In fact, Investopedia.com says that the basic idea is that there is little differentiation between a commodity coming from one producer and the same commodity from another producer - a barrel of oil is basically the same product, regardless of the producer. Therefore, the price is determined purely by supply and demand. Since there is little if any pricing power for producers (versus one another), over a very long period of time, the price should be close to the cost of producing the good. If the goods are sold below cost, then over time, producers stop producing. If prices are much higher than cost, producers try to sell more, which raises supply and ultimately depress prices. This is a long term story however.

Short term, commodity prices across the board have risen due to demand from final users AND more importantly of late, demand from investors (escaping financial assets for hard assets). Supply has been constrained in many areas partly due to BRIC and partly for a multitude of individual stories (weather, underinvestment over the past 20 years, etc...). There is often an inverse relationship between the US dollar and commodity prices in the short term. In recent days, the US dollar has shown
signs of bottoming or at least stabilizing. Also, there appears to be a rotation at play as investors sell their winners and invest in the losers (financials). Finally, when there are a lot of people hiding in commodities with huge profits in this environment, as soon as things look like they are heading south, you get a huge move down.

The move was discussed here last month, as the charts all looked parabolic. Now, if you were hoping for the commodities to save Western Canada from at least an economic slowdown, maybe think again....Also, remember that the TSX is approximately 75% financials, mining and oil stocks. It could get dessimated in a commodity bear.

Positions in HGD, HXD, GLD, gold mutual funds, DBA, DUG