Month: December 2014

Continental Illinois Bank, 30 years ago

Hamilton

conti illinois

At the time Continental Bank had grown to become the largest C&I (Commercial and Industrial) banking operation in the US. It sourced a good part of it’s loans through a country hick bank called Penn Square, most of which were related to the oil and gas industry. They were a happy lot, masters of the universe and drinking beer from their cowboy boots. But it did not last long, Penn went bust first in 1982 and Conti followed in 1984. I had worked for their Canadian operation. This was the biggest bank failure in the US and it helped to promote the concept of TBTF, too big to fail, but fail it did and in a rather spectacular way. That was then and this is now and as this event is 30 years old just few care to remember. Now with oil down 44% and all the shale producers leveraged to the eyeballs the time may have come for history to repeat itself, somewhere and somehow.

Just remind yourself never to work for a company that has CON in its name, as in this bank and, for instance, Confederation Life. I worked for both.

TSX update

Hamilton

tsx dec 11 2014

There are a number of other possibilities than shown here. However, these two are the most plausible. One is a large a-b-c correction that would later lead to new highs. We do not think so as the recent drops are totally out of proportion. The other is that the real bear market has started and we are in wave 3, more precisely 4 of 3 or more bearishly, 4 of 3 of 3. Either way the large ups and downs fit well with the notion that we might be tracing out a triangle pattern (typical for 4th waves). This should take us through the weekend and then we will continue with 5, or 5 of 3 and 4 and 5. The whole thing should take us down to about 13200 or lower.

The DOW shown below, is clearly “out of phase” with the TSX. No idea why but obviously low oil prices are generally good for the US and not necessarily for Canada. So far this is the first clear manifestation of the coming deflation. It will have to metastasize to other areas like housing, banking etc. before it takes hold of the US economy. In the mean time their plunge protection team is far more skilled than ours. They have barely budged.

dow dec 11 2014

RDS, Royal Dutch update

Hamilton

rds dec 11 2014 bRDS dec 11 2014 s

Royal Dutch is doing exactly as expected. See previous blogs. At the time, of course, it was not clear what would cause such a dramatic drop in such a blue-chip, widows and orphans type of stock, but now we know that it might be a 40% drop in oil itself in just a month or two. This stock came from $87 and traded below $66 which is just shy of 25%. It has not even finished it’s first leg down which should take it close to $60, the bottom of the triangle pattern. The RSI is not yet oversold so give it a little more time. Ultimately the target is much lower at <$40.

Housing prices

Hamilton

housing prices dec 10 2014

This is a busy chart but oddly enough it is hard to get good historic info. This is from Brian Ripley at www.chpc.biz . and is updated to today. Houses have changed in size over time so now you get a bigger house than you would have gotten, say, immediately after WW2. We will ignore all those niceties and just concentrate on the big picture.

   Notice that a SFD (single family dwelling) cost around $350m only 12 years ago. Today that is $750m or double that plus a bit. Income over roughly that same period rose by just 31%, a lot less. If I am not mistaken family income in Toronto is in the neighbourhood of $70,000 per annum which would put the price to income ratio at about 10X (the norm, over centuries is about 3x). In other words locals cannot afford to live here, unless they moved in 10 years ago, inherited from their parents and or are bankers, judges or the like.

    The Bank of Canada came out today to tell the world that they now have a model. As if that was not amazing enough the Governor explained, with a straight face, that according to the model house prices are in fact overvalued, possible by as much as 10 to 30%. This in contradiction to earlier ramblings by the CMHC, Remax, Real Estate Board, OECD, RBC etc etc. all of which did not see any problem at all from their disinterested vantage point. Not to worry though as the Governor went on to explain that this model has a risk-meter built into it and surprise, surprise, the needle on the meter shows a diminishing risk. None of the academics working at the Bank of Canada were of age when half of Calgary was on the market under power of sale back in 1989. It is an economic risk, not a financial risk so they say but the difference will be less clear when the oil glut comes home to roost.

    In EW terms a correction of an exuberant market invariable takes prices back down to the last kink on the way up, that is a minimum. Here that would be about $450m in 2008 just before the great recession which would be about 40% down. This could happen even without any measurable increase in interest rates simply due to loss of employment or reductions in pay, immigration etc.etc.Fortunately the Bank has looked into this and is confident that this will not happen. It is good to have a dream.