What's next for our neighbors to the north?

It's mostly anecdotal evidence, but I think any trip to the many retail locations dotting the north country will see a healthy representation of Ontario license plates. The simple reason for this is the fact that the Canadian dollar has been near par for much of the last month (currently at $0.94). I think the question for local retailers and local politicians (trying to forecast sales tax revenues for 2010-11) is: How sustainable is this trend?

Via Jonathan Tonge's America Canada Blog...

Average Canadian home prices hit roughly $320,000 US – an all-time high. Residential mortgage debt in Canada has over doubled since 2002. We will surpass the US in per capita residential debt within the next year.

In 2009 alone, we will add 100 billion in fresh residential mortgage credit (equivalent of about 1 trillion in the US on a per capita basis). The average price of a detached Toronto home has approached $600,000. The listing-to-sales ratio in Toronto, the fifth largest city in North America, has surpassed the late 1980’s bubble.

In the greater Vancouver area, our third largest metropolis after Montreal, the average price of a detached home in March 2008 was $921,000. In fall of 2008 the market tanked, but only to find itself growing again in 2009. By September 2009 the average price was back up to $904,000. Average household incomes in Vancouver hover somewhere around the $70,000 mark.

Exports to the United States have fallen nearly 50%, in part thanks to “Buy America”.

In Ontario lurks an economic and political disaster. US Steel purchased Canada's largest steel manufacturer known as Stelco two years ago. They made the purchase just after Stelco had received hundreds of millions from Ontario’s provincial government to keep operating. Within days of “Buy America”, US steel shut down the Canadian Stelco plant.

A few months ago the benefits for the laid off workers dried up. The union notified US Steel that they would have to either bring the workers back or retire them and pay out their pensions. The company had no interest in paying out the pensions. US Steel decided to bring the Canadians back to a make-work project. Instead of making steel they painted all the buildings in a fresh coat of blue paint. If you understand the size of the Stelco plant and buildings than you can understand what a formidable task this was. A couple weeks later all the buildings were blue. The workers benefits have been renewed and they were laid off again.

Wait until more Canadians find out about this. “Buy Canada’, or more plausibly, “Do Not Buy America” will gain steam. We’re a free trade country by and far, but “Buy America” has been a hard hit below the belt for most of us."

I don't agree with some of the author's conclusions but those observations are important. Canada is by far our largest trading partner and it's worth noting that if a Canadian real estate bubble bursts the ramifications will be far reaching for the US.

Cheers!

Jobs report

Unemployment cracks 10% as the White House foreshadowed when they started hinting at a second stimulus last week.

"The unemployment rate rose from 9.8 to 10.2 percent in October, and nonfarmpayroll employment continued to decline (-190,000), the U.S. Bureau of LaborStatistics reported today. The largest job losses over the month were in construction, manufacturing, and retail trade.

Household Survey Data
In October, the number of unemployed persons increased by 558,000 to 15.7million. The unemployment rate rose by 0.4 percentage point to 10.2 percent,the highest rate since April 1983. Since the start of the recession in December 2007, the number of unemployed persons has risen by 8.2 million,and the unemployment rate has grown by 5.3 percentage points."

Other important numbers:

U-6, a measure of unemployed and underemployed, is now at 17.5% nearly one out of every five American workers.

The Birth/Death model ADDED 86,000 jobs in October. This has become beyond comical. The fact that the statisticians at the BLS look at the economy around them and say, "Yeah, we think enough new businesses started up this month to generate 86k jobs this month." Remember, this is net of new businesses that failed in the month. Playing this sort of game makes me question every number that the BLS releases.

The markets are off a little right now, but remember the crazy mindset of the Wall Street trader: Bad news for the economy means the Fed will continue it's easy money policies, which means the dollar should remain weak, which means commodities and stocks should rise.

I know it doesn't seem logical, but that's the thinking right now.

Facepalm Friday

Even with all of the wild stories I've read over the past year, major bankruptcies, wild stock swings, I'm still shocked by some stories. Case in point, Goldman Sachs getting more H1N1 vaccine then Lennox Hill Hospital and the crazy new Fannie Mae Lease deals.

1) From Businessweek "Citigroup has been supplied with 1,200 units and Goldman with 200, says Jessica Scaperotti, press secretary for the Department of Health & Mental Hygiene. The agency has so far approved orders by 29 employers—including 16 that have yet to receive any vaccine—after they were cleared by the U.S. Centers for Disease Control & Prevention (CDC). Big employers that have received or are scheduled to receive vaccine so far include Time Warner (TWX), JPMorgan Chase (JPM), Memorial Sloan-Kettering, New York Presbyterian Healthcare System, and New York University.

Health-care workers at those employers are bound by the CDC to distribute the vaccine only to populations deemed to be at high risk of developing serious complications from swine flu: pregnant women, children and young people aged 6 months to 24 years, people who live with or provide care for infants under 6 months (who cannot be vaccinated), people aged 24 to 64 with medical conditions that put them at higher risk for flu-related complications, and health-care workers and emergency medical personnel. A spokeswoman for Goldman, who asked not to be named, said the company had just received the vaccine and did not yet have information as to how it would be distributed, saying that Goldman will supply vaccine only to those who qualify as high-risk, per the CDC requirements."

As I watch more and more kids come out of school coughing every day I struggle to understand how in world this could happen. I understand corporations put in for allotments of H1N1 vaccine, but when millions of children remain unvaccinated the only proper thing for Goldman and Citibank to do is to walk their allotments to the nearest public school and hand them over to kids in need.

2) We continue to face the facts in the housing market. No one wants to address the fact that the emperor has no clothes in the housing market. John and Jane paid $500k for a split ranch in Arizona in 2007. They put nothing down and their option arm adjusted to a payment of 48% of their gross income in 2008. Then the house fell in value to $400k and the government offered to modify their mortgage. Before the modification could go through 20% of their neighbors had defaulted and their house was now worth $275k. What to do now?

Since John and Jane clearly deserve this home and because they have shown what excellent financial managers they can be Fannie Mae will come to the rescue.


a) Fannie Mae plans to allow homeowners facing foreclosure to stay in their homes and rent them for up to one year as part of the latest effort to help troubled borrowers while keeping a glut of foreclosed properties from hitting the housing market.

b) The Deed for Lease Program will offer borrowers who fail to complete or don't qualify for a loan modification or other workout to deed their property to the lender in exchange for a lease. Borrowers-turned-tenants will be able to sign leases of up to 12 months and will pay market rents, which in most cases are lower than the cost of mortgage payments.

John and Jane were facing a $3,600/mth mortgage, but if they let the government hold the deed and they can "rent" their house for just $1,350/mth. Great deal for them, a terrible deal for the taxpayer.

John and Jane were never homeowners. The n is silent... They were homeowers :)

Cheers!

Get ready to pull out your DOW 10,000 hats again!!

The market has reacted surprisingly well to collection of "less bad" news today. Initial claims were slightly lower than expected but the four week moving average is little changed and anything over 500,000 for initial claims is still a bad number in my opinion.

John Chambers at Cisco was his usual overly optimistic self because his sales only fell 19% so obviously we've turned the corner.....

Call me a skeptic on this rally. This has the feeling of someone that wanted to goose the market on no news, so that if we fall hard tomorrow on the jobs report (not likely, as the BLS continues to manage the numbers), we can end the week relatively flat.

If the market likes the jobs number tomorrow, look out. We could be screaming higher for a couple of weeks because the chart readers think this is critical juncture.

Cheers!

It's my prerogative (to pay 40% of assessed value)

At some point home prices will fall back to level that is interesting for patient buyers. Some homes are already there.... See Whitney Houston's NJ home that hit the market for just 44% of its assessed value and 10% less than she paid in 1987. Repeat after me "homes are always a great investment, right?".

"Whitney Houston has put the 5-acre Mendham estate where she married singer Bobby Brown on the market for $2.5 million, far less than its assessed value of $5.6 million.

The 12,561-square-foot home, which she bought in 1987 for $2.7 million, is described in its listing as modern, full of natural light, with three fireplaces, walk-in closets, a bar (uh-oh), floor-to-ceiling windows, and a four-car garage. The (quite frankly rather dated-looking, and we’re not the only ones who think so) home has Frank Lloyd Wright-style stained glass in the entry, an enormous kitchen, and what appears to be a custom-made bed in the center of the master bedroom."

You can see all of the pictures here...

Admittedly, it is more than a little dated -- and you have to really, really like the color white, but $2.5 million for 12,000 square feet and 5 acres in Mendham (a top 10 town in NJ) is probably a deal. I'd bet you could buy the house today if you walked in with $2 million cash. Any banksters from Goldman want the ultimate suburban party house?

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The ADP data was roughly as expected and since job losses seem to be slowing (more on this in a moment) the market is hopeful that they'll hear some positive news from the FOMC and hopes that the jobless numbers will be ok on Friday (expected to be 175,000 jobs lost and an unemployment rate of 9.9%).

The service sector of the economy grew barely in October - but at a slower rate than September - and employment contracted sharply in October again.

I suspect that the slowdown in job losses that we've seen is in part due to the stimulus allowing many jobs to be saved (while few have actually been created). However, as budget officers and CFOs look forward to 2010, I think we have to expect job losses to pick back up again.

Look for talk of Stimulus PART II to start circulating after Friday's jobs number.

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Walmart, Sears and a few other retailers are trying to spread out the Black Friday rush to the weekends throughout November. Walmart (click here for the flyer) today announced a series of electronics "specials" that are good on 11/7 only. The HP laptop for $298 w/Windows 7 3GB Ram and 250GB hard drive and the XBOX 360 for $199 with a $100 gift card (effective price $99) seem like pretty good deals, but expect them to be gone 1 minute after the stores open.

Cheers!

Ah, to be a Russian Billionaire....

This was the bill for lunch for 6 people late last week in Manhattan. There is some dispute as to whether or not the bill belongs to the owner of the Chelsea football club...

"The billionaire Chelsea Football Club owner was alleged to have racked up the impressive bill at Nello's Italian restaurant by drinking a selection of the finest champagnes and wines and dining on truffles and veal.

Restaurant owner Nello Balan made the bill public, commenting on how Mr Abramovich was a man after "excellence and perfection".

$10k for taxes and tip??? Some guys have all the fun.

Only 24 days to Black Friday!!

I think that I'm online more than anyone in NNY (except the people behind www.newzjunky.com), so from time to time I'll come across deals a little sooner than the average shopper.

One observation I made last week: Old Navy offered 50% off to the 1st 50 customers on a random Friday. They had a line of over 100 people a half an hour before the store opened. People really, really want to spend their money if they are getting a perceived deal, regardless of the economy. I think this will be true again this holiday season, but I think shoppers will be chasing deals more than ever.

In that spirit here are some deals that I've seen today....

1) Lowe's Black Friday sneak peak was released today. Nothing great, but the 18v 4 piece set for $59 and the 14 gallon shop vac for $29 are pretty good deals.

2) Get $25 gift certificates to Good Fellos or Sackets Harbor Brewing Co. for $4. Through restaurant.com $25 gift certificates are normally $10. However, if you use the code HARVEST at checkout you can knock 60% off the price and get a $25 gift certificate for $4. There are restrictions (Valid with a minimum purchase of $35. 1 certificate per party per table. 18% gratuity added), but at over 80% off the price is right for me take Mrs. Grindstone out for dinner.

3) Target printable coupons on toys.... you can probably find many of these online for the same price, but if you have to have it today you might just as well use a coupon.

Cheers!

Is our stimulus plan goosing the Spanish and Chinese economies?

That's probably an oversimplification and the Chinese have been offering up their own aggressive stimulus packages, but I was surprised to read that the majority of spending for green energy projects is going to overseas manufacturers.

When I think about it logically, I know the Chinese dominate the global solar panel market and the Europeans and Chinese have been very strong in wind power, so it makes sense, but these statistics really jump off the page at me.

"By Mr. Choma’s reckoning, 84 percent of the $1.05 billion in clean-energy grants distributed by the government since Sept. 1 has gone to foreign renewable energy companies — specifically, wind companies. Through its American subsidiary, Iberdrola, a global manufacturer of wind turbines based in Spain, commanded most of that funding: $545 million.

“We broke down some of the numbers and found out that the program funded 11 projects that installed 982 turbines,” Mr. Choma wrote in an e-mail message, “and 695 were built by foreign manufacturers.”

I'm not some protectionist loon -- I think we should buy the best product on the market at the best available price. If that happens to be a Chinese solar panel or Spanish wind turbine, fine.

However, I think it speaks to the problems we face as a country that even when we get behind an effort to generate clean power the best products are often not manufactured domestically. While we will still reap the benefits of clean power, we don't benefit from the original manufacturing of the products. This like deciding to go to sugar cane based ethanol but importing all of our ethanol from Brazil.

Cheers!

Domo arigoto, Mr. Roboto...

The biggest problem I've had with our national response to the financial crisis is that regardless of who is in charge, Republican or Democrat, we seem determined to repeat the mistakes of the Japanese during their lost two decades.

We would not force our banks to deal with their problem assets and instead we kicked the can down the road through debt issuance and capital infusion. Japan appears to be entering an even darker period for their own economy as debt levels cross critical points as indicated here....

"Japan wasted its immense fiscal firepower, scattering money for 20 years on half-baked spending projects to keep the economy afloat. QE was too little, too late, and this is the lesson for the West. We must cut borrowing drastically over the next decade, and offset this with ultra-easy monetary policy.

Does Downing Street understand this? Does the White House? Does the European Central Bank? Clearly not.”

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“The primary difference between Japan and the United States at this point of their respective monetary malaises is that whereas Japan created a nation of zombie corporations, the United States is creating a nation of zombie households.” - James Aitken, Aitken Advisors

In the early 90's, the US ratio of household liabilities to disposable personal income was about 85%. Today is at 130% and rising. The official response (from both parties) during this crisis has been an attempt to artificially engineer the same boost to housing markets that previously occurred naturally.

The Fed bought nearly a $1 trillion of agency debt to pull down mortgage rates, tax credits for homebuyers have been expanded to solve the problem of too much debt with MORE DEBT!

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In a statement that must send chills up the spines of other tech CEOs, Microsoft’s Steve Ballmer said that the vicious recession may have reset IT spending to a level which will never recovery to where it was in the period just before the downturn.

This is another huge concern of mine. The longer companies start surviving or thriving without the latest whiz bang tech gadget, CFO's are going to get more and more reluctant to open their purse strings. I hear this consistently, that people are experiencing a new normal, one that will never look like 2007.

In a related story, Apple continues to stick their thumb in Microsoft's eye at every turn. One of the tricks of advertising with Google is that if you are willing to pay the most, you get the premium ad space. When you search for various terms like "download Windows 7" the third ad to pop up is "Avoid Upgrade Problems" from www.apple.com/getamac

Too funny.
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Finally, for all my readers in NY23, get out and rock the vote today!! I'm not terribly excited by either candidate, but I'll still be voting even if it's just to write in Mr. Grindstone ;)

Cheers!

Watch the bouncing dollar

I've been a believer that much of the global surge in asset prices this year has been tied to the decline in the US dollar. When coupled with Fed Reserve actions to eliminate volatility in the markets you get a perfect storm that starts reflating asset bubbles around the globe. Today, Nouriel Roubini gets on board with that thesis in the Financial Times....

"Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March."

In layman's terms, traders are shorting the US dollar (selling dollars today at x, with the intention of buying them back at x-10%) and taking the proceeds from the short sale to buy very risky assets: stocks, gold, oil, etc. This has been wildly profitable this year.

However, if and when this unwinds, it may lead to a massive panic to get out of the door at once. Assets will be sold violently to buy dollars and cover short positions.

We have created the "mother of all highly leveraged global asset bubbles." Leverage and asset bubbles are what got us in trouble in 2008 but here we are again just 13 months later.

The timing of when this trade goes bad is always uncertain (clearly the markets are having a good day today-however, these large swings -- 175 pts up, 280 pts down, 200 pts up, 120 pts down -- are not healthy signs), but when if the dollar starts to rise quickly the swing in asset prices could be swift and violent.

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I've always found the holiday party to be an enormous waste of resources, but it is so ingrained in the culture of some firms that it's hard to cut it from the budget. According to Crain's...

"Just 62% of companies nationwide are planning holiday parties this year, down from 77% last year and 90% in 2007, according to a survey by outplacement firm Challenger Gray & Christmas. And like the law firm that is scaling back, 57% of businesses are holding their parties during the workday, according to the survey."

Cheers!

PS: A huge thanks to everyone that added the Alexa Toolbar. I was hopeful that maybe I'd crack the top 1 million sites globally if a few readers added the toolbar, but now I'm in the top 750,000 sites globally and the top 150,000 sites in the US. We've come a long way baby!

Oh C#$T!

The news of the day will likely focus on the CIT bankruptcy. CIT is another one of those enormous financial conglomerates that provides a tremendous amount of financing to small and medium businesses. The company contends that its daily operations will be unaffected by the bankruptcy, but it won't be long before they start tightening lending standards and shrinking their book of business. If you really want to have a good time tomorrow watch the common stock of CIT which should go to zero, but may not b/c it's become a favorite of daytraders everywhere.

"One loser from a bankruptcy would be the U.S. Treasury. Late last year it injected $2.3 billion of funds from the Troubled Asset Relief Program ... The government investment is likely to be wiped out ...

Even if CIT emerges intact, its lending capacity could drop to less than 20% of what it was two years ago, according to an estimate by Brian Charles, a debt analyst at R.W. Pressprich & Co."

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Via 24/7 Wall St. the FDIC continues to go easy on the banks and let them alter the classification of many troubled commercial loans.

"New guidelines for examining commercial real estate loans issued by the FDIC appear to allow examiners to go easy on banks as they account for what would be, under many circumstances, considered non-performing commercial real estate loans. This may help banks with their balance sheets and solvency, but it also misleads bank investors and the public about the seriousness of the huge problem in the commercial real estate lending business.

The new FDIC directive says ”Financial institutions that implement prudent CRE (commercial real estate) loan workout arrangements after performing a comprehensive review of a borrower’s financial condition will not be subject to criticism for engaging in these efforts even if the restructured loans have weaknesses that result in adverse credit classification.”

All that does is distort and hide the seriousness of the problem. It is a problem that is likely to ruin a number of banks. Putting it off does not alter its threat to the banking system."

I couldn't agree more. By changing the rules in the middle of the game we will ultimately reduce investor confidence in our banking system regardless of what the banks' financial statements say.

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Cheers!