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Bears should abandon ‘the Great White Short’ Add to ...

These are stories Report on Business followed this week.

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Uh-oh, Canada
BMO Nesbitt Burns is advising  investors who are bearish on Canada to "abort the Great White Short."

That comment Friday from senior economist Robert Kavcic came after several days of warnings from investors outside the country who are down on Canada and warn of potentially dire times.

"If it's unfashionable to be negative on U.S. equities, where do the bears turn?" Mr. Kavic said.

"Canada has become a popular place, and the anecdotes of hedge funds turning against Canadian banks and the housing market continued to pile up this week."

This followed comments earlier this week at a New York conference by famed hedge fund manager Steven Eisman, who raked in money by betting against the U.S. housing market.

The founder of Emrys Partners, who was mentioned in The Big Short, the book by Michael Lewis, cited the big run-up in Canadian house prices and noted that Canada Mortgage and Housing Corp. is nearing the $600-billion ceiling for its portfolio.

“When something gets that big, even governments get nervous,” Mr. Eisman said, according to The New York Times, which reported on the annual Sohn Investment Conference.

A housing meltdown would be an issue for Canada's banks, he said.

Mr. Eisman is not alone, though observers don't see a housing bust in the cards. Others have been down on Canada of late, as well.

Currency speculators, for example, are betting heavily against the Canadian dollar, according to the latest report from the U.S. Commodity Futures Trading Commission, though that eased somewhat in the reading as of Tuesday and released Friday.

Short positions in the loonie, as the dollar coin is known, narrowed to $5.2-billion, well down from earlier highs.

"The shift was primarily driven by short covering alongside a modest rise in longs," said Bank of Nova Scotia currency strategists.

"However, the overall position remains relatively unbalanced with shorts outnumbering longs 3:1, providing upside risk to [the Canadian dollar]."

Mr. Kavcic poured cold water on the bears.

"Household debt-to-disposable income is higher than in the U.S.!" he said Friday.

"But does that alone mean that Canada must therefore suffer the same fate, especially considering the quality of debt and underlying mortgage terms?" he said in his research note.

"Home prices have nearly doubled over the past decade! But wasn't the starting point a generational low for Canadian housing, especially in Toronto, which had just suffered a decade-long melt?" he added, noting that the latest report on housing starts showed construction slipping to what some see as a more sustainable level.

"Accounting for lower interest rates and higher incomes leaves valuations looking decidedly normal," Mr. Kavcic said.

"Rampant overbuilding! Is it just a minor annoyance for the bears that housing starts over the past six months, including this week's April print, have been running almost right in line with demographic demand?"

Chief economist David Rosenberg of Gluskin Sheff + Associates - a noted bear, by the way - also defended the loonie, warning that the bears must be hurting.

"The level of speculative net shorts on the Canadian dollar on the CME at nearly 70,000 contracts (a massive swing from net longs totaling 63,166 contracts at the end of 2012) is near its highest level ever," he said, referring to the number of contracts, rather than the value, on the Chicago Mercantile Exchange.

"In other words, the sellers of the loonie have totally exhausted themselves and the bears on Canada are hurting real bad," he said in a report, adding that he had a "good chuckle" when he read a Wall Street Journal article on the bearish sentiment.

"The last time the sharks on the CME thought they smelled loonie blood on the CME to this extent was back in July 2007. The result - the mother of all short coverings which sent the [Canadian dollar] surging 7 per cent in the ensuing three months."

Currency angst
Whether you consider it a currency war or just a byproduct of economic stimulus, it sure is causing a lot of hand-wringing.

A day after Japan's yen sank to break through a key barrier, Washington warned Tokyo on Friday that it's keeping close watch, and expects its trading partner to live up to its commitments not to manipulate its currency lower in a bid to boost exporters.

"I'm just going to refer back to the ground rules and the fact that we've made clear that we'll keep an eye on that," U.S. Treasury Secretary Jacob Lew told CNBC as G7 finance ministers and central bankers gathered outside of London for a two-day meeting.

The yen's move against the U.S. dollar through the 100-to-1 mark continued a trend of a weakening currency after the election of a new Japanese government and central bank stimulus measures.

Japan says it's trying to boost its economy and end a long run of deflation, not engage in competitive currency devaluation.

Over the past couple of weeks, the European Central Bank and its Australian counterpart, along with some others, cut interest rates, while the Reserve Bank of New Zealand disclosed it took a rare step of intervening in markets.

“There is a frenzy of carry-seeking behaviour globally,” said Sébastien Galy of Société Générale.

“This is a symptom of ultra-loose monetary policies, which are far from bottoming yet,” he said in a research note.

“We recently had the [European Central Bank] cutting rates. But the ultra-loose policies have also prompted defensive measures on the part of countries with robust domestic economic conditions but overly strong currencies. A few days ago the Reserve Bank of New Zealand stated that it had intervened in the [foreign exchange] market to try to blunt the New Zealand dollar’s appreciation. This is an escalation of the currency wars.”

Canadian Tire eyes REIT
The world of real estate investment trusts is getting more crowded.

Canadian Tire Corp. announced this week that it plans to spin off most of its property holdings into a $3.5-billion REIT, following a similar move by Loblaw Cos. Ltd.

It plans an initial public offering for the REIT this fall, though it would own the bulk.

“We believe we can grow this business through organic and inorganic means substantially over the coming years,” said chief executive officer Stephen Wetmore.

“This gives us financial flexibility to execute that," he said as he also unveiled quarterly earnings.

Said analyst Mark Petrie of CIBC World Markets: "We have long touted the possibility of this type of deal, but the upside is even greater than we anticipated based on more gross square footage."

Public sector props up jobs market
But for a public sector that says it's in austerity mode, Canada's labour market would have turned in another dismal showing for April.

According to Statistics Friday, the economy created 12,500 jobs last month, a turnaround from the hefty March drop of 54,500 jobs. The unemployment rate held steady at 7.2 per cent.

The public sector hired 34,200 workers in April, while the private sector lost 20,000 jobs, underscoring the uncertain economic outlook among employers.

Canada's labour market has now added 163,000 jobs over the past 12 months, led by the public sector at 94,000.

Private sector employment is flat over the year, and self-employment has increased by 2.2 per cent or 59,000 people.

"Over all, the report is slightly negative, but suggests that the labour market is gradually realigning itself with the weak growth performance and we believe that this should continue over the coming months," said Charles St-Arnaud of Nomura Securities.

The week in Business Briefing

The week in Streetwise (for subscribers)

The week in Economy Lab

The week in ROB Insight (for subscribers)

Required reading
Calgary correspondent Nathan VanderKlippe hopped in a car and drove the route of the controversial Keystone XL pipeline, sketching the people and places along the way.

Since the recession, temporary work has grown at three times the pace of permanent employment, Tavia Grant reports.

The PQ's 'North for everybody' upsets companies with its tax schemes and environmentalists with its failure to emphasize cleaning up abandoned mines, Sophie Cousineau writes.

Peter Munk says he's largely out of the real estate game, but he's putting his money in one surprising spot - Toronto condos. Marina Strauss reports.

A stubbornly sluggish economy is weighing down sales at fast-food restaurants, forcing rivals to pump up promotions to steal away business, Marina Strauss reports.

Follow on Twitter: @michaelbabad

 
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