Scott Barlow
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the World Wide Web.
This will be my first "link of a link of a link" but when someone credibly suggests that mutual funds and conventional exchange traded funds should be banned, it's hard to ignore. Matt Levine's terrific daily column recently featured an academic paper citing the anti-competitive implications of large mutual funds and ETFs using airline stocks as an example:
"Mutual funds that own lots of shares in all of the airlines don't really push any one airline to cut prices to compete hard against the other airlines: Cutting margins to gain market share might work for one airline, but for the airlines as a group it drives down profits. And airlines' shareholders own airlines as a group, not individually."
The academics solution is to restrict managed portfolios to one stock in each industry. This will never happen, of course, but it's an interesting point that affects Canadian investors more than Americans because the fund industry is more concentrated, particularly now that the major banks' creeping takeover strategy in the mutual fund industry continues.
"Should Mutual Funds Be Illegal?" – Levine, Bloomberg
Equity investors have been searching madly for producers that prudently hedged against the collapse in oil prices, but they might have forgotten that the Canadian banks that sold them this protection might now be on the hook for big losses. The banks that sold the call put options on oil prices have likely hedged these positions themselves, but nonetheless, the expected losses could reach big numbers:
"Bank of Montreal, Canadian Imperial Bank of Commerce and Bank of Nova Scotia are among lenders that provided price protection for U.S. shale drillers that bought insurance against declines in energy prices when North American crude oil was above $90 (U.S.) a barrel. The Toronto-based lenders, which have all said they've hedged their risk with offsetting trades, must make good on the protection sold to wildcatters now that oil is trading around $56 a barrel…The amount owed is probably much higher than the $478-million reported in filings."
"Canadian Banks on Hook to Energy Firms That Hedged Oil" – Bloomberg
Crisis-era Treasury Secretary and former Goldman Sachs executive Henry Paulson is on a publicity tour with an ominous warning for China's economy:
" 'Frankly, it's not a question of if, but when, China's financial system,' he writes, 'will face a reckoning and have to contend with a wave of credit losses and debt restructurings.' "
"A Veteran of the Financial Crisis Tells China to Be Wary" – New York Times Dealbook
Unfortunately, Mr. Paulson's words are well-timed. Reports Tuesday noted the first debt default for a Chinese state-owned company:
"Baoding Tianwei Group Co., the unit of central government-owned China South Industries Group Corp., said it will fail to pay 85.5 million yuan ($13.8-million U.S.) of bond interest due Tuesday. Kaisa Group Holdings Ltd. became the first Chinese developer to default on its U.S. currency debt Monday."
Despite the massive rally in Chinese equity markets, profit reports have been awful – Sany Heavy Industry Co. Ltd. reported a 28-per-cent year-over-year decline in earnings Monday as an example – and more defaults are expected.
"China Sees First Bond Default by State Firm With Tianwei" – Bloomberg
See also: "China's stalled catchup?" – Keohane, FT Alphaville
The loss of jobs in Texas has obvious implications for Alberta but there remains a heated debate among economists as to how much of the Lone Star state's employment growth was directly caused by the oil industry. Some note that the energy sector was only a small percentage of total job growth but others note that the multiplier effect could be in play.
"Oil Price Collapse Means Texas Is Still Losing Jobs, J.P. Morgan Economist Says" – Wall Street Journal
Tweet of the Day: "@LJKawa National Bank: Canada's housing market doesn't look THAT overvalued http://t.co/QHqEPFgR7p"
Diversion: The most expensive, high-tech research into electrically powered vehicles is not done at Tesla Motors Inc. but by Formula One racing teams with near-limitless budgets, as this report on Honda Motor Co. Ltd.'s new F1 engine makes clear. The new engines are charging onboard batteries in remarkable ways, gathering energy from the brakes, back axles and engine exhaust,
"Technical insight: Honda's radical Formula 1 engine for McLaren" – Autosport
Scott Barlow