Tuesday, 20 December 2011

Carbon Emissions, 1990 - 2009

In an article titled "O Canada", The Economist points out that Canada recently withdrew from the Kyoto protocol. The Kyoto protocol does not apply to the world's two largest emitters (China and the US). The huge increase in emission by countries like China, Turkey, Australia and Spain are cause for concern and make it more difficult to engage in future climate treaties. Domestic energy policies focused on a low carbon economy are the best way to go, but these seem to be the most difficult politically. Since about 2/3 of global greenhouse gas emissions comes from energy, any serious effort to reduce emissions is going to have to come from reducing fossil fuel consumption and increasing renewable energy. Climate change, energy security, peak oil, new technology and green consumers are all examples of big drivers of renewable energy. Green jobs, a topic that is very much discussed by politicians, is not necessarily a good argument to put forth.We still have time to build a clean and secure energy future, but the window of opportunity is closing fast.

Renewables are the fastest growing component of the energy mix, but renewables account for a small proportion of total energy demand.

Data sourced from REN21

Saturday, 17 December 2011

M2 to Gold and Inflation

By most conventional measures of inflation, like the CPI, inflation does not appear to be too great of a problem for developed economies. For the US, inflation is running at 3.5% per year while for Canada it is 2.9% per year. The Canadian inflation rate is near the upper band of the Bank of Canada's target rate of 3% but so far, there is no strong indication from the Bank of Canada that it will raise interest rates in the near future. Inflation rates in China and Britain are slightly higher than 4% per year while Japan is experiencing deflation.

Another measure of inflation is to compare the M2 money supply with gold prices. The chart below shows this ratio for the US. The money supply is measured in billions of dollars and gold is measured in dollars per ounce which means that the vertical axis is measured in billions of ounces of gold. By this measure, inflation is a much bigger problem and more closely resembles what happened in the 1970s. Notice also, that the M2 to gold price ratio is indicative of equity performance. During the long bull run in equities (1980-2000) the ratio was rising. Since 2000, however, the ratio has been falling indicating a drop in the real value of money. Today's $9.6 trillion dollars of US M2 only buys 5.5 billion ounces of gold. Stocks do not do well in inflationary environments.

One other point. The calculation of US CPI is somewhat controversial (especially with respect to substitutes and hedonics). In the 1980s and 1990s, changes were made to the way that the CPI was calculated. If the original method of calculating the CPI is used, then current US inflation is running above 10%.

Wednesday, 14 December 2011

More Holidays Please, We're Canadian

The Economist has an interesting chart showing employee holiday entitlement in different countries. Workers in Austria, Greece, France and Spain enjoy the most number of holidays per year, while workers in Canada have the fewest.

Fewer holidays might mean that Canadian workers are more productive. According to the Conference Board, however, Canadian productivity is downright dismal. There are several reasons for Canada's low productivity including low investment in machinery and equipment, low R&D intensity, weak innovation record, and a low number of Canadians with advanced degrees in science and technology. There is also some evidence that workers in Canada are paid less than their marginal product of labour.  So, Canadian workers enjoy fewer holidays and are less productive than workers in many other countries. Perhaps, we need more holidays.

Sunday, 11 December 2011

More Ominous Signs

Michael Riesner, Head Equity Technical Analyst, at UBS has put together an interesting set of slides (UBS Cross Asset Overview). In the slides there is lots of evidence of divergence and major tops being made. 2012 could be a difficult year for equity markets around the world.

Friday, 9 December 2011

Is the US Headed for a Recession?

Lakshman Achuthan of ECRI sticks with his call from September 30 that the US is headed for a recession.   While many people focus on the GDP numbers, the Gross Domestic Income (GDI) numbers are more accurate and as he talks about in the video, GDI is barely growing. Add this to concerns about the job market, retail sales and industrial production and there is enough negative news to indicate the making of a recession. Moreover, some of the yield spreads are now indicating recession. In particular, the spread between BB (Junk Bonds) and AAA Bonds or Government treasuries is now at recessionary levels.

There are problems in other countries as well. Of the 8 countries regularly tracked by the St. Louis Federal Reserve, Australia and Germany are the only two where real incomes coming out of the most recent recession are above their averages. Paradoxically, Germany has been benefiting from the debt mess in Europe as a low euro is good for Germany's exports.

Monday, 5 December 2011

A Tough Year for RIM

It has been a tough year for Research in Motion. RIM's share price is down almost 70% on the year to date.  The systematic risk, as measured by beta, doesn't look too bad as it is hovering around 1. The beta values are calculated using a rolling window of 200 days. Technically, however, the stock looks weak. On the positive side, Jim Cramer recently released RIM from the sell block meaning that in his view, RIM is no longer a sell. There is lots of talk about what RIM is worth and what its next move will be but for now the picture is not bright.

Saturday, 3 December 2011

Sector Rotation for November 30, 2011

At the end of each month, I rank a selection of  Canadian ETFs according to their price strength. The ranking is based on a simple average of three month returns, six month returns and twelve month returns.

Canadian size portfolios
iShares S&P/TSX 60 Index (XIU.TO)
iShares S&P/TSX Completion Index (XMD.TO)
iShares S&P/TSX SmallCap Index (XCS.TO)

Canadian industry sectors
iShares S&P/TSX Capped REIT Index (XRE.TO)
iShares S&P/TSX Capped Energy Index (XEG.TO)
iShares S&P/TSX Global Gold Index (XGD.TO)
iShares S&P/TSX Capped Financials Index (XFN.TO)
iShares S&P/TSX Capped Info Tech Index (XIT.TO)
iShares S&P/TSX Capped Materials Index (XMA.TO)

International portfolios
iShares S&P 500 Index C$-Hedged (XSP.TO)
iShares MSCI EAFE Index C$-Hedged (XIN.TO)
iShares MSCI Emerging Markets Idx (XEM.TO)
Claymore BRIC (CBQ.TO)


Rank 12 9 1 11 10 3 14
Above ma(10)? No No Yes No No Yes No

Rank 7 2 6 5 4 8 13
Above ma(10)? No Yes No No No No No