Loonie hits the 91 cent US level

Loonie defies economic wreckage, but that's a bad thing

Fri May 29, 6:12 PM
By Julian Beltrame, The Canadian Press

OTTAWA - The recession has handed Canada its first double deficit in years but it's what many would consider good news - a suddenly resurgent loonie - that poses the newest economic threat.

The Canadian currency rose almost two cents Friday to soar well past the 91 cent US level for the first time since October, blithely oblivious to the economic wreckage piling up around it.

It's the last thing the Canadian economy needs at this time, say economists, because a strong loonie prices exports out of foreign markets.

"We're always concerned when there are rapid fluctuations in the value of the Canadian dollar and it has been relatively rapid in the past few weeks," said Finance Minister Jim Flaherty in a press conference.

He added that the Bank of Canada is monitoring the situation.

The latest economic news was sour on a number of fronts.

The federal government officially ushered in a new era of multi-year deficits, reporting it was short $3.6 billion in March, and ended the 2008-09 fiscal with the first annual deficit in a dozen years with an estimated $2.2-billion shortfall.

That's just the beginning. Flaherty is now booking a record $50 billion shortfall for this current fiscal year.

As well, the current account deficit - which measures transactions in goods and services with the rest of the world - also ballooned to $9.1-billion in the first quarter of 2009 after years of surpluses, reflecting the collapse of commodity prices and slower trade caused by the recession.

The true picture of just how badly the economy has nosedived will become clearer Monday when Statistics Canada reports on the first quarter gross domestic product.

Economists and the Bank of Canada are convinced the data will show a contraction of more than seven per cent, the worst quarterly retreat since the Great Depression and more than the 5.7 per cent contraction reported in the United States.

Such a serving of poisonous economic data would normally have sent investors running for the bear cave, but instead they sent the loonie skyward and pushed the stock market to a 2009 high on Friday.

The S&P/TSX composite index hit an intraday high of 10,493 and closed at 10,370 on Friday. It's still well short of the alltime high of 15,154 set nearly a year ago but up from the March 6 low of 7,479.

The loonie's strength is one part based on expectations of rising demand for oil and minerals that Canada has in abundance, and two parts the weakness of the American dollar, which makes the Canadian currency and commodities more attractive, say economists.

TD Bank chief economist Don Drummond predicted the loonie will return to parity with the U.S. greenback by the end of the year.

"This is problematic for the Bank of Canada, which wants monetary conditions to be high stimulative," said Avery Shenfeld, chief economist with CIBC World Markets.

"If this currency rally persists, and is not accompanied by an equivalent rally in our export prospects, the bank could step in by selling the Canadian dollar.

"That's a weapon that's been gathering rust, not having been used for many years, and the bank will be reluctant to do that," Shenfeld added.

But it may be the only weapon on hand. In normal times, the central bank would cut interest rates to trim the loonie's wings, but with the policy rate already at the practical low of 0.25 per cent, it can't cut rates further.

In a research paper, economist Dale Orr said the dollar often moves whenever increased global growth drive up demand and the price of crude oil, and other commodities that Canada exports.

But he said the loonie's current flight is more a case of the U.S. currency's fall, caused by prospects of a global turnaround and investors no longer seeing America as a safe haven in a sea of troubles.

The world is also factoring in the fact that as bad as the situation is in Canada, it's worse elsewhere - the best of a bad lot syndrome.

Canada's projected $50 billion deficit for 2009-10 represents 3.3 per cent of the size of the economy, compared to the U.S.'s 1.75 trillion shortfall, which is near 13 per cent of its economy.

"These numbers are fairly large, but in comparison basis not as bad as others," explained Paul Ferley of RBC Economics.

"The other thing is the starting point in our fiscal position is better than most other G7 countries, so that puts us in a better position to withstand the bad news."

The $9.1 billion current account deficit set a nominal record, but as a percentage of gross domestic product it was well less than half the 5.1 per cent recorded in the first quarter of 1975.

Economists said Canadians should expect the current account - the measure of what Canada spends and earns - to remain in negative territory for most of the year.

As for the government books, most now say it will take six years to get out of the hole, although the finance minister is sticking to a four-year horizon.

Friday's release of the fiscal monitor will go down as an historical curiosity pinpointing the moment Ottawa officially dipped from a surplus into a deficit position.

That occurred in March, when revenues, particularly from business taxes, literally hit the wall.

The government said corporate income tax receipts were down $2.1 billion, or 46.8 per cent, from the same month last year as firms began claiming refunds for having overestimated their profits. As well, revenues from personal income taxes declined by $1.3 billion, or 12.4 per cent.

Improving the sourcing process

4 Sourcing Strategies During a Downturn

By Jorina Fontelera

The global recession has added pressure on procurement departments to perform with fewer resources. Consider these four tactics to survive the economic slump.

As companies face one of the toughest markets in years, chief procurement officers (CPOs) are now under more pressure to keep costs low and accomplish more with fewer resources. A recent survey by Accenture found that 59 percent of CPOs questioned felt they were under greater pressure to perform and the same percentage reported an increase in their savings targets.

Due to new priorities, 73 percent were focusing more on suppliers and 64 percent were getting involved in new areas and projects within the company, the report notes. At the same time, 41 percent had their teams reduced, with 5 percent seeing a downsize of 15 percent or more.

To help CPOs cope with the challenges caused by the recession, CPO Agenda presents these key strategies for doing more with less.

Prioritize Workloads/Increase Staff Productivity
For many CPOs who now have to work with a smaller staff, it is important to allocate work appropriately between team members and ensure they are working productively. Jim Nelles, a former procurement head and current partner at Roland Berger Strategy Consultants, tells CPO Agenda that CPOs must use team resources as effectively as possible and understand where finite resources will bring the best results for the business as a whole.

He cites an example of one person looking after a budget of several billion dollars because it's with only one or two suppliers with few specifications, rather than someone looking after a budget of merely $100 million but dealing with 50 different suppliers on multiple continents. Although dealing with less monetarily, it is more important to shift more resources to the latter to deal with the volume of work.

CPO Agenda also advises CPOs to cut down on redundant activities and restructure the procurement team if necessary. Dan Morrissey, director of global procurement at Abbott Nutrition, told CPO Agenda that he hopes to overcome this issue by automating some operational tasks to remove junior positions and reinvest the savings into more experienced staff.

Maximize Technology
Accenture's research also found that 46 percent of CPOs saw a decrease in their technology budgets this year. As such, many will have to make do with less and must squeeze more value out of their current systems, CPO Agenda says. To do so, sourcing experts told George Colony, CEO of Forrester Research, on The Counterintuitive CEO blog, that CPOs should consider cutting maintenance contracts on mature or non-critical software to lower costs. They also advised to "stop constant, unnecessary updates" and "cancel or re-negotiate perpetual licenses." Lastly, make use of blogs or other social technologies to create vendor management transparency.

CPOs should also look at their e-procurement systems for opportunities to get more value. One company found the use of e-auctions to be particularly productive, CPO Agenda reports. In 2008, the company was able to put on 8,000 to 9,000 e-sourcing events in more than 50 countries.

Oracle suggests eliminating paper invoices and switching to electronic files to more easily reap early-payment discounts, as these can total 2 percent or more of the purchase price. Use Web-based supplier self-service portals to provide electronic ordering, shipping and invoicing, Oracle says. Having the "right mix of strategic sourcing technologies and policies" makes online negotiations faster and more effective, with savings ranging from 5 percent to 50 percent.

Stop Maverick Buying and Reassess Spend Priorities
E-procurement systems and purchasing cards can help cut down on maverick buying, CPO Agenda says, by having the procurement team follow certain processes and cutting unnecessary expenses. Adding a self-service electronic requisition tool can help reduce unnecessary and off-contract buying as well, Oracle adds.

Now is also the time to cut weak, superfluous vendors, The Counterintuitive CEO blog says. Companies should also mandate the sourcing strategy and make it stick. Part of this involves reassessing the company's spending priorities. Supply Excellence says that now is "a great time to source labor dependent services" and that this is "the best sourcing market we have seen in years."

Supply Excellence notes that for direct materials, companies should consider restructuring contracts, implementing price adjustment clauses and accelerating their sourcing/re-sourcing efforts. For logistics, CPOs should take advantage of the availability capacity in the market and lock in competitive rates. For indirect spend, aggressively source all categories including non-traditional spend areas, Supply Excellence says. "Unlike some direct materials categories that may require specific approval processes, many of these savings can be implemented immediately."

Improving the buying strategy can reduce costs by 5 percent, which can result in a 50 percent profit improvement, the Sourcing Innovation blog adds.

Outsource Non-critical Activities
Diminished resources and the need to focus on core expenditures has CPOs, particularly in manufacturing, looking at outsourcing indirect procurement, CPO Agenda says. "They might not outsource the whole source-to-pay process but they are looking for managed service providers to wrap more services into their portfolio," Accenture told CPO Agenda.

According to U.S. group purchasing organization Corporate United, the recession has been partly responsible for its 20 percent growth in 2008. Having an organization negotiate contract discounts with selected suppliers "gives companies the confidence that they're achieving savings while being able to redirect whatever limited resources they have," Corporate United Vice President David Clevenger said.

While there are plenty of difficulties during a recession, there are also opportunities for streamlining and improving the sourcing process as mentioned above. How is your company's procurement team handling these difficult times? Share your best practices tips in the comments section.

This Indicator Holds the Key for Investors
By Tom Dyson

To predict the stock market, I watch lumber...

To store lumber, you need a large climate-controlled warehouse with a railroad spur. Even then, it could still spoil within six months, destroying your entire investment.

Because lumber loses its value quickly and it's expensive to store, the investment public at large does not participate in the lumber market. The costs are too high...

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The mills use "just-in-time" manufacturing principles to keep inventories to the bare minimum. By producing only what they can sell immediately, they avoid wastage. Lumber customers do the same thing. They only buy what they need that week.

There is a lumber exchange in Chicago where you can trade lumber futures. It's a "professionals only" industrial matchmaking service. If you're a homebuilder and you need lumber for a current construction project, the lumber exchange works fine for you. But if you're an investor looking to hold lumber for a year or more, you'll get ripped off.

First, you'll pay huge storage costs. The market builds these costs into the futures price. Second, there's almost zero trading volume once you get beyond the next three months, so you'll pay a massive premium for illiquidity.
For example, right now, if you want to buy lumber into the future – say a contract that expires one year from now – you'll have to pay a 38% premium over the price of lumber delivered next week.

These costs keep the riff-raff out of the market. This is why I love to watch lumber. The price of lumber is set entirely by commercial money responding to real business conditions. There's no public speculation to muddy the water and generate confusing signals.

Take the 2008 credit crisis as an example. The lumber price was the first to signal a bear market was coming. It peaked in May 2004. The Bloomberg Homebuilders Index peaked in July 2005. The Case-Shiller U.S. home price index peaked in July 2006. The credit crunch started in February 2007, when New Century Financial collapsed. And finally, the S&P 500 peaked in October 2007.

Here's a chart of lumber going back three years. As you can see, lumber bounced like everything else earlier this year, but has not been able to hold its gains.

This Indicator Says Home Prices Are Nearing a Bottom The World's Most Important Commodity

I take this as a message from the homebuilders and the giant logging companies that the real estate market is getting worse again. And if that's the case, it might be time for stocks to take a breather, too...