Trader’s Narrative

Today the Bank of Canada decided to maintain their historically low interest rates at 0.25% but they did sound cautiously optimistic:

Recent indicators point to the start of a global recovery from a deep, synchronous recession. Global economic and financial developments have been somewhat more favourable than expected at the time of the July Monetary Policy Report (MPR), although significant fragilities remain.

A recovery in economic activity is also under way in Canada. This resumption of growth is supported by monetary and fiscal stimulus, increased household wealth, improving financial conditions, higher commodity prices, and stronger business and consumer confidence. However, heightened volatility and persistent strength in the Canadian dollar are working to slow growth and subdue inflation pressures. The current strength in the dollar is expected, over time, to more than fully offset the favourable developments since July.

Source: Bank of Canada

Unlike Australia, who has already started ended their easing cycle, they believe that inflation is not a danger and won’t be for the foreseeable future. Not only is it being kept in check by the frail economic recovery, the annoyingly strong Canadian dollar promises to keep a lid on it, if it does creep up.

Add to that the intoxicating cocktail of a commodity based economy, a strong real estate market (see below), strong fiscal discipline, and a famed (and quite boring) political stability that rivals Switzerland and you have the makings of a love affair:

One of the main reasons for our resilience has been the health of our real estate markets. I must confess that I was surprised to see the subdued reaction of the Canadian real estate market to the crash of its US counter part. After all, the two economies are intertwined like no other two countries in the world. However, for all our inter-dependence, there are significant differences. Canadian bankers never quite got the hang of laughing in the face of infinite risk or perhaps our regulators have yet to be so completely and embarrassingly captured as they are in the US.

Whatever the root cause, the Canadian real estate market has bounced back after a very late and shallow decline. As well, while our mortgages do default, the rate is extremely low and has barely experienced an uptick worthy of note:

Source: Globe & Mail

Canadian REITs gave long term investors quite a scare late last year as they were dumped along with everything else. However, while their price may have declined, their value continued to be very attractive. When I featured RioCan (REI.un) in November 2008 it was trading at $13 Cdn and yielding 10% - since then it has risen to $18 Cdn - and that’s not even considering all those juicy monthly distributions.

Meanwhile, Canadian equities have risen 27.3% in 2009 and slightly over 50% since their spring lows. But here’s the curious thing. While most major stock markets around the world have recovered from their shallow retracement in late September and gone on to newer highs for the year, the Canadian S&P/TSX index has not. That non-confirmation is slightly unnerving, especially when you consider just how much the Canadian equity markets have going for them.

The weekend is here and time to catch up with what you may have missed in last week’s reading list. Here are just a few examples from news.tradersnarrative.com:

• Never Short a Dull Market
• How Canada Avoided the Banking Crisis
• The Problem with Commodity ETFs
• Get a FREE Subscription to Financial Magazines
• Time to Turn Cautious
• Crude Oil: The Rise and Fall… and Rise
• The Lazy Way to Investment Success
• Explaining Cramer’s Popularity: Humans Prefer Cockiness to Expertise
• Relax Throughout Trading Day By Learning How to Breath
• Free trading videos
• Another Ascending Wedge Formation
• Ginormous Infographic of 20 Largest Bankruptcies
• Which US President is Most Responsible for Sea of Red Ink?

For the complete list, follow the graphic below:

And remember to check back regularly since there are interesting links added throughout the week.

Week Ahead: Energy Costs Could Kill Recovery

The Federal Reserve made a bold move and lowered rates effectively to zero. Here’s the full statement:

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

It took a few years but finally they’ve moved in front of the bond market. As I’ve been saying for more than a year, the Fed allowed the bond market to get way ahead of it and then started to play a game of catch up where they would lower only to see the 90 day Treasury bill rate slip lower still.

To put it bluntly, the Fed is punishing saving and rewarding spending and debt. With inflation running at ~1% anyone who saves money is a chump. Many money market funds now have a negative return (due to MERs).

Anyone who goes in debt to the gills wins. Isn’t that how we got into this mess? you might ask. Well, who said common sense had anything to do with monetary policy.

Believe it or not, the US now has a lower interest rate than Japan. And the lowest rate since records have been kept.

After Japan, the lowest rate is claimed by Switzerland after the Swiss national bank cut their benchmark rate to 0.5% last week. Then Canada at 1.5%. Follow the link to see more global central bank rates.

According to a recently released Global Competitiveness report from the World Economic Forum, Canada has the “soundest” banking system in the world.

With runners up being:

Sweden, Luxembourg, Australia, Denmark, Netherlands

And coming in third:

Belgium, New Zealand, Ireland, Malta

The United States? Ranked 40th. Zimbabwe? 122nd.

The methodology for the results isn’t all that clear but it was based on the opinion of 12,000 executives which ranked banks based on a scale of 1 (insolvent) to 7 (healthy).

So then, why are the Canadian banks getting spanked in the stock market? Here’s a chart of the weakest Canadian bank, CIBC, having fallen about 53% from the when the market topped in October 2007:

In comparison, Bank of America (BAC) has fallen 59% in the same time span and Citigroup (C) 68%. Case of the baby getting thrown out with the bathwater?

Just a few short years ago no one in Canada had any other platform to trade on other than that provided by the Toronto and Montreal Exchanges. If you want to get technical, there were “dark pools” but you’d have to be an institution to have access.

Now the Canadian market is bursting at the seams with alternative trading systems:

Pure Trading
I wrote about Pure Trading last year: Canada finally gets an ECN. It has come online and for the most part is trading without any major hiccups.

But Pure doesn’t really have any serious liquidity. To give you a sense of what I mean, consider their November 2007 stats:

Trades: 29,991
Total Volume: 5,400,100
Total Value: $376,379,506

Alpha Trading Systems
Alpha ATS is being created by a partnership between all the major financial players in the Canadian market: BMO Capital Markets, Canaccord Capital, CIBC World Markets, National Bank Financial, RBC Capital Markets, Scotia Capital and TD Securities. The system is expected to be an algorithmic traders delight - able to match almost 5000 trades/second and routing to other exchanges or ATS for price improvement. It is being patched up by Capco and will launch sometime in 2008.

Since the backers are major liquidity suppliers, you can expect it to have some serious numbers right out of the gate.

Omega ATS
Omega is the result of a partnership between Perimeter Financial, MarLar Group and Swift Trade. Perimeter (see below) will provide the technical know-how and Swift Trade, as the largest proprietary firm in Canada, the liquidity. I have no idea who MarLar is or what they bring to the table.

Omega has gotten a wobbly start. They were criticized by the street for rushing into implementation without giving their potential customers time to iron out the technical wrinkles. And just this week the owner of Swift Trade, Peter Beck, was slapped by the Ontario Securities Commission for lying about the beneficial ownership of Barka, the company that employs most of the traders on Swift Trade’s system.

Apparently, Beck mislead the OSC when he didn’t disclose that his wife and father were controlling owners of Barka - creating a non-arms length legal relationship. I can’t say that I’m surprised. All I’ve heard about Swift Trade, from former traders, managers and regulators has been pretty negative.

Instinet: Chi-X Canada
Instinet’s alternative trading system will be called Chi-X Canada (chi, as in the 22nd letter of the Greek alphabet: x) similar to its European counterpart launched in April 2007.

Unlike the others, Instinet is an old hand at building flourishing ATS (or ECNs) and by referring to a successful brand in Europe, they hope to build trust in potential customers. Instinet’s owners, Nomura Securities, is a deep pocketed liquidity supplier.

Bloomberg: TradeBook
TradeBook is an institutional “dark pool” which operates in Canada. They are not open to retail clients as far as I know. TradeBook provides clients with anonymous & direct access to equity, futures and foreign exchange markets. It allows traders to bypassing market makers and specialists to trade directly with each other.

Liquidnet Canada
Liquidnet is a US “dark pool” operator which got regulatory approval to implement their ATS platform in Canada last year. They went live in October 2006.

Targeting the institutional order flow, LiquidNet provides an electronic marketplace where traders can buy and sell large blocks of equities directly and anonymously.

TriAct Canada Marketplace
TriAct is an all in one, “dark pool”, institutional and retail ATS:

Smart routers receive a synopsis of the content of MATCH Now’s dark book. They only route orders to MATCH Now if a potential match exists. If no potential match resides in the dark book, the order is not sent to MATCH Now and instead routes directly onto another marketplace.

Perimeter: BlockBook
As the name implies, BlockBook is an institutional ATS specializing in the trading of large block trades. According to their website, “Trading is done anonymously and without revealing side, size, or price in order to minimize the market impact of any trade and inhibit fishing and gaming.”

TSX & Montreal Merge
So what are the incumbents doing to face all these new challengers? They’re joining forces.

Well, technically Toronto is buying out the Montreal derivatives exchange. On Monday, they announced a $1.3 Billion deal where MX shareholders will own 18 per cent, and TSX investors will hold 81 per cent of the new TMX Group. Don’t ask where the errant 1% will go to find an owner.