“15 reasons to (still) love the loonie”: Exporters and global investors take note

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

Note:  This is a re-posting of an earlier blog which I thought was worth posting again as the Canadian dollar nears $1.06 USD/CAD and the CAD strengthening story is still intact. 

 

I have been blogging about the long term strengthening of the Canadian dollar (the loonie) for around 2 years now. More recently David Rosenberg summarized in 15 quick reasons why the loonie is currently rising against the US dollar (see list below). What is interesting is that 13 of the 15 reasons are arguably long term habits of the Canadian economic and political system and thus reinforce the continuing steady rise of the currency. 

What is also interesting to note about the past two weeks is that the traditional “flight to safety” to the USD in the face of geo-political and economic uncertainty has not been happening (gold, silver and the Swiss Franc are the current safe havens).  I believe that is a significant event and should have the risk managers looking more closely at their US market/investment exposure.

 

15 Reasons to love the loonie:  

1. Better growth than in the U.S.A. and without need for stimulus

2. Responsible central bank, limiting growth in its balance sheet

3. Better fiscal backdrop

4. More conservative political environment

5. Triple the exposure to raw material than the U.S.A.

6. Investors get 115 basis points premium over US Treasuries at the front end of

the government yield curve

7. Canada in the top 15 net oil exporters globally … U.S.A. top importer

8. TSX dividend yield at 2.36%; S&P 500 dividend yield at 1.82%

9. Housing market in balance in most of the metro areas; no foreclosure

supply coming

10. Inflation is low and stable with minimal risk of deflation

11. Economic recovery being fuelled principally by business spending

12. Corporate tax rates on a sliding scale down

13. Immigration and capital flows running at record levels

14. Vancouver rated top city in the world to live (Toronto 4^th, Calgary 5^th)

15. Stable banking system with consistent dividend growth”

 

from:    David A. Rosenberg  (March 2, 2011)

Chief Economist & Strategist Economic Commentary 

Gluskin Sheff + Associates Inc.

 

Innovative Intelligence

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc

www.RSDsolutions.com

info@RSDsolutions.com 

 

Just finished reading the new book Innovative Intelligence: The Art and Practice of Leading Sustainable Innovation in Your Organization by David S. Weiss and Claude Legrand.  Very interesting book with a lot of innovative (no pun intended) ideas. 

The central premise of the book is that there are three types of organizational intelligence: (1) Analytical Intelligence, (2) Emotional Intelligence, and (3) Innovative Intelligence.  Analytical Intelligence is the standard academic, think your way through a problem type of intelligence.  It is the type of intelligence that is second nature to every MBA trained student, and even more ingrained for those who have studied financial engineering.  Emotional Intelligence is understanding people and their relationships in the workplace.  Again, something that is studied (although perhaps not practiced efficiently) by every B-school student, but more foreign to those who were trained in a more quantitative program.  The final type of necessary intelligence is Innovative Intelligence which the authors define as the “capability of gaining insights into complex problems or opportunities and discovering new and unforeseen implementable solutions”.  

Risk managers tend to excel at Analytical Intelligence.  Senior risk managers also learn to excel at Emotional Intelligence.  Great risk managers excel at all three types of intelligence.  Buy the book and dare yourself to become a great risk manager.

 

Help – this roller coaster goes up and down!

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

Saudi Arabia’s oil minister recently commented that he thinks the world crude oil market is oversupplied.  His Kuwaiti counterpart agrees.  They believe that prices are driven by speculation.  This is not much comfort to you and me when we fill our cars up at the petrol (gas) pump.  (Actually I personally can barely afford to fill my tank any more but that is more to do with the tax regime in Britain than world oil prices.) 

One thing that appears apparent is that when prices of anything go up or down very fast, especially if it appears that speculation is a major factor, rather than demand and supply fundamentals, they tend to overshoot and come back off their peak or low point. 

The last time oil prices peaked at a higher level than where they are now and they come off quite quickly and quite a long way.  A client who came to us after this and who suffered major losses would have been all right if their derivatives intended as hedges had matured a couple of months later.  After all, as they said, nobody would have expected prices to do what they did!  However, their “hedges” actually increased their risk.  They were unsuitable and the company did not understand them properly. 

The client would also have been better off had they done nothing.  But they would have been best off with a properly conceived hedging approach.  They should have avoided expecting or not expecting anything out of the ordinary.  The only thing that will inevitably happen is “unknown unknowns” and a risk management system should be designed with this in mind.

 

Rugby Car Loading

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc

www.RSDsolutions.com

info@RSDsolutions.com 

 

Around this time of year I become a rugby parent.  I realize at this statement that some of you will be calling the authorities, shocked that as a parent I would let my kid play such a sport.  My girls love it, and yes, while they do get dinged up a bit, they learn valuable lessons about hard work, overcoming challenges, and what it means to go through experiences as a team.  It is a truly awesome sport, and I only wish I was a few years younger. 

The other thing I wish is that a sportswear company would come out with a line of clothing for rugby spectators – particularly the parents who need to stand on the sidelines and cheer on their offspring.  At a typical rugby tournament (and this week is no different), you need to prepare for hot sunny days, rain and even snow!  After loading the car with Super-Soakers (long running team rugby tradition – too complicated to explain) and the different types of cleats, and practice rugby balls, there is barely room left for the different types of outwear required for the parents.  Now it becomes a risk management exercise in what exactly the weather will be.  

Some parents plan for the worst and just assume the weather will be cold and snowing.  They pack a parka and winter boots.  Others assume a different doomsday scenario which is rain – which could be warm rain, or cold rain – and thus requiring different clothing strategies.  Others hope for the best and hope for warm breezes and just bring sun screen.

Finally you get the risk averse who bring a separate vehicle simply to carry the different types of outerwear that may be needed.  This of course involves extra costs – a hedging cost if you will. 

The whole exercise in picking your clothing for a rugby tournament is a lot like deciding on the type of hedging program that a company will pick.  You can plan for the worst, the best, or everything, but the more diligently you try to cover every possible scenario, the more expensive it becomes.  

Meanwhile the kids just play with no regard to the weather.  The benefits of youth!

Making banks safer – UK style

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

In Britain, an independent Commission on Banking, set up to determine how to make the banks safer, has recommended that retail banking be ring-fenced within a bank from its investment banking operations by having the latter in a subsidiary.  Some people had called for a break up of the two sides of such banks – a sort of latter day Glass-Steagal.  The thinking being that investment banking subsidiaries would be allowed to fail while retail banking would be well capitalized and benefit from implicit (or explicit) government support.  However, the commission did not go this far.  There had been a certain amount of scaremongering by banks and others that some banks might move their head offices out of Britain and with them thousands of jobs. 

Quite apart from unaddressed issues such as where to draw the line between the two businesses as there are many possible grey areas, or when can capital flow down to the investment bank or be required to flow up to the retail bank, is this a useful approach in principal?  What was seen as the trigger for the global financial crisis was the demise of Bear Sterns and this was a pure investment bank.  If a similar circumstance arose again, would such an operation be allowed to fail?  (Actually the true cause of the crisis was bad lending decisions facilitated by an environment of great liquidity enhanced by factors such as opaque derivative structures, weak regulatory oversight, etc.)  The problems of British banks were caused largely by straightforward bad lending decisions, without much help from investment banking operations and opaque derivatives.  How would such ring fencing helped? 

How did markets react to the ring-fencing recommendation?  Shares in the two biggest banks with major investment banking operation rose significantly on the news.  Wisely, banks said they do not like the recommendation.  Wisely, because there is a negative mood against banks by public and politicians.  With that background, it would not be politically astute to gloat when you may suffer a slight inconvenience but have most of what you want.

 

A Drive to the beach or take in a movie? Not both. Demand destruction has begun.

By Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Last week the IMF raised its expected average price of oil for 2011 from $89 to $107 (20%); about where it is as this blog is written. Note: that is the yearly average so you can expect spikes above that during the year. IMF expectations for 2012 are $108: so the IMF is advising us to say goodbye to double digit oil prices and hello to Jeff Rubin’s world of triple digit oil. What the IMF’s guesstimate is also saying is that even the surplus supply of oil is tight and that even after geopolitical tensions ease don’t expect prices to drift far below $100.  

This view of a tight global supply for crude is being confirmed by the International Energy Agency.  From a risk perspective what is coming into play now is demand destruction – the high price of a commodity that decreases the demand for the high priced good but which can also decrease the demand for other goods. This will likely be the case for oil as it is broadly considered a necessity for Western economies to operate. Thus expect reduced demands for air travel, weekend jaunts to the country and restaurant meals. This oil lead demand destruction will then translate into changes of behavior and possibly price increases for energy or activity substitutes. The question is, will this positively or negatively affect your business and how is your risk team advising you to live in this triple digit oil environment. 

 

For more on the International Energy Agency’s view of oil, click on the link to BBC news:

http://www.bbc.co.uk/news/business-13047854