Interview

Reality Stranger than Fiction: JP Morgan and Minority Report

Can you be fired or arrested for a crime you haven’t yet committed, but most likely will? JP Morgan thinks so – and they’ve developed new algorithms to monitor their employees and stop rogue trading behaviour before it happens.

Stay tuned to find out how and why they’re doing this.

Transcript


Amanda: Remember the movie Minority Report? It was a few years ago, and Tom Cruise’s smouldering eyes aside, the general gist of it revolved around arresting people for crimes they hadn’t yet committed, but were going to. Well, reality is becoming even stranger than fiction, as JP Morgan attempts to stop rogue trading behaviour before it happens.

And Tom Cruise doesn’t even star.


Jeremy: In a scene reminiscent of the movie Minority report, the Tom Cruise thriller, JP Morgan is using predictive analytic software to stop rogue trading behaviour before it happens. Let’s discuss.

Archana: JP Morgan has paid $36 billion in legal fees over the recent times, and since the financial crisis – and that’s led to the company unveiling a new algorithm that helps it to pinpoint rogue employees before erroneous trades happen.

Shaheerah: As Archana mentioned, they’ve paid $36 billion in legal bills. One of the famous ones was the 6.2 billion London Whale Fraud. And this both hurts their reputation and it hurts their profits as well. Now if they can actually cut legal and other expenses, the investment bank’s return on equity would actually rise to 13% as opposed to the 10% they made last year.

Jeremy: What kind of data points do you think they’re analysing to predict this rogue behaviour guys?

Shaheerah: Well, there are a lot of factors that will go into this new deduction software, some of them will include: are these workers skipping the compliance classes; are they breaking the personal trading rules; or are they reaching the Market risk limits? The whole point of this software is to predict the themes and the patterns in their employee behaviour, so it’s actually pretty cool. You’re trying to predict how a human is going to behave. And one thing I think is that they should really be keeping an eye on the middle managers and the top-level executives, as opposed to the lower level managers. It’s the top-level executives that have the access to the data, and have the authority to make the decisions, and they know all of the internal systems and controls.

Archana: Algorithmic misbehaviour prediction is apparently a booming business. Again, this all boils down to big data and data analytics which we’ve been talking about of late quite extensively. And going back to what we specialize in as well, so P4Capital we do understand the space and we do have the right kind of candidates who are experienced doing data analysis, and working with some of the latest and greatest in terms of software tools that are out there.

Jeremy: Okay, both of my colleges here have mentioned that JP Morgan has spent $36 billion in legal fees, and this will be a measure to help reduce those fees and reduce scandals that occur, but I think they’re going to be hitting some new legal actions and sanctions against them. When you try to discipline a trader for something that he hasn’t done yet – is that really going to hold up in court? You’re just opening up a whole new can of worms I think.

Archana: Absolutely, I do agree with Jeremy – it is a very tricky space to venture in, but I guess it’s more for the compliance team and the regulators to show to the institutions out there that they have the right kind of checks and balances in place, so that if JP Morgan again faces a similar situation that it has witnessed in the past, it would have its books in order.

Shaheerah: And just apart from this software, they are also spending money as well. So the company has hired 2500 compliance workers, and they spent $730 million over the past 3 years to improve operations. They’re also  equating a special surveillance unit to monitor the other electronic and telephone communication in the investment bank. So if you go back and look at the fraud investigations that they’ve done, a lot of it could have been caught earlier on if they were checking the emails and the phone calls that the employees were having.

Jeremy: Yeah, a company like JP Morgan must have billions of emails going through their systems in a year. That’s a lot of work for 2,500 compliance people to be monitoring. I can see where there’s some value added to automating this to the Big Brother.

Amanda: What if people go outside of JP Morgan, and employees just send emails from their private servers?

Jeremy: That can probably be monitored as well, depending on how they’re using it. I don’t know about the legality of that.

Archana: So in the past JP Morgan and some of the other investment banks as well have used dedicated whistle-blower phone lines and email addresses where workers could actually email anonymously with tips to the management if they do see any fraudulent behaviour. Obviously this is a step up for them in terms of using technology to monitor behaviour of their employees. Also another interesting thing is that this is obviously just part one – the algorithm is just part one of the entire review of the investment bank’s work culture. The second part is obviously is HR and training related – JP Morgan is invested heavily in terms of training their employees and also to identify and fix areas where potential lapses could occur.

Shaheerah: And I also just wanted to bring some more facts to the discussion. It’s a fact that each year more than 30 million consumers actually fall victim to investment frauds – it’s a pretty big number. And the average loss for an investor is about $15,000 dollars, as well as individual losses could be all the way up to millions of dollars. And this happens because there’s nothing really suspicious in the beginning. I mean high returns and the financials seem legitimate, and this could go undetected for years. And it’s always usually in the end when you finally find out, and you start to investigate what has happened.

Archana: The new program that’s actually being rolled out would be tested in the trading part of their business first, and then the bank will spread it out throughout their global investment banking division, as well as their asset management division, and their complete roll out would happen by 2016.

Jeremy: JP Morgan has always been a market leader and they’re one of the première investment banks out there, so I imagine that there’s a bunch of other banks watching with bated breath to see if this experiment works. So only time will tell.


 

That was the P4Capital team discussing JP Morgan’s new initiative of stopping internal banking crimes before they happen. Want to know more? Check out our website  and previous posts at www.planet4it.com or follow us @p4capital. Thanks and see you next time.

Advertisements

Done like Kraft Dinner

Kraft is in trouble. Accused of manipulating the derivates market to control the price of wheat, they are being investigated for misconduct.

But is this manipulation really as bad as it seams? The P4Capital executive team discusses the nature of the derivates market, and what crime, if any, Kraft has actually committed.

Stay tuned.

Transcript


In this week’s P4Capital discussion, the executive team talks about everyone’s favourite food – Macaroni and Cheese! Well, not really –  instead they explore the controversy surrounding Kraft and their manipulation of the derivatives market.

So enjoy some Easy Mac and stay tuned.

Jim: Today’s topic is Kraft versus the CFTC

Jeremy: Yeah, now I don’t see what the big deal is here. Kraft is being accused of manipulating the derivatives market for futures on wheat because they bought some wheat futures that they didn’t intend to actually receive delivery on, and the CFTC apparently has a problem with that. But isn’t this pretty much the whole nature of the derivatives market?

Jim: Absolutely it is, and if we take a look at what is the regulators problem, is what they’re saying is that they don’t want others onto the market that can take the market into an artificial place. So for example we all know that Kraft is probably the single biggest buyer of wheat because of their cereal divisions in North America. So they can be a somewhat easy target for a regulator to go after, and it’s not actually Kraft that they’re after – it’s all the others that could come onto the market and play Kraft behaviour. So for example the Jeremy empire comes onto the market and buys a billion dollars of the wheat futures out there – what does that mean for Kraft? Kraft is now going to have to pay a premium on the remaining crop if you will. All sorts of interesting things can happen from that point in time on, including a major rise in consumer price.

Shaheerah: Yes and they usually only keep about two month supply in the inventory. They never actually had 15 million bushels wheat like with this transaction, which is actually three times their storage capacity. Some of the wheat that was involved in this transaction is actually used in other products like cookies and crackers which is not even made by Kraft group. That’s kind of fishy.

Jim: So there’s a famous case where, the three of you are far too young to remember, but it was the Hunt brothers cornering the silver market back in the late 70s. And again, that’s a traded future or a traded commodity if you will. I’m sure that the aged regulators that will be of my vintage will remember that, and are saying to themselves okay it’s not silver and the Hunt brothers, it’s wheat and Kraft. I’m sure that’s part of this ruling as well too.

Amanda: Could this impact stretch out beyond just Kraft and wheat?

Jim: I think it’s a slap on the wrist. Don’t know – Jeremy, what are your thoughts?

Jeremy: Well again, I think we’re kind of making a mountain out of a molehill. The actual amount that Kraft got on the trade was about 5.6 billion dollars, that’s probably a daily profit for them. I mean – what’s the big deal? Other people trading in and out of wheat futures can affect the market adversely as well.  Are we going to stop allowing wheat future trading?

Jim: Yeah, I think it’s the precedent they’re after. I truly believe it’s the precedent of trying to corner a crop  or a metal. That’s my contention at least.

Shaheerah: Yeah, so when they buy all these futures, why does it make the stock price go down?

Jim: Could be a couple of reasons for that one. A the major buyers off the marketplace being Kraft, so the rest of the crop from different wheat boards and the farmers involved in that could be doing a bit of panic selling, so that could be reason one. Or two, which is probably closer to the truth, and that is you have bumper crops which are plentiful, and you get more supply than normal, and since there is a spoilage factor you can’t keep that for years and years. You have the supply but what happens on the demand curve is that it doesn’t change at all and the pricing elasticity falls, and possibly that would be the main reason the price would fall.

Jeremy: Well spot price is the daily price, so I don’t necessarily see how when Kraft buys wheat futures how that would negatively affect the price today. How do you see that happening?

Jim: Yeah, I don’t disagree on crop pricing aspects of it, but usually spots are also used for trend too. I’m just saying it could be your computer generating systems are saying, “hey, wait a minute, the trend is going to be down.”

Jeremy: Yeah, it could be.

Shaheerah: And they actually went as far as to do an investigation and they found some internal emails from the procurement team at Kraft, which said that Kraft was in line to save seven million dollars on the commercial cost of wheat, and make up to three million from moves in the futures market if all goes according to plan.

Jeremy: I say well done Kraft!

Jim: Same here! Hoo Hah! It’s well done, and isn’t that what the corporate treasury is supposed to do?

Jeremy: Yes, agreed!

 


That was the P4Capital team discussing the derivates market, and mistakes that Kraft committed. Want to know more? Check out our website  and previous posts at www.planet4it.com or follow us @p4capital. Thanks and see you next time.

Trends for top talent.

Skills become obsolete just as quickly as new talents are needed; continuously evolving as the world around them change.

The P4Capital team investigates what skills are desperately needed in the capital markets today, and how companies can capture them.

Stay tuned.

Transcript


Amanda: Who are the people your company should be looking for? What skills should you have to make yourself appealing to those employers? In this week’s round table discussion, the P4Capital executive team examines who the top talents are, and what skills they possess.

Stay tuned.

Jim: Today’s topic is about what needs we have seen in the technology/ capital markets area since the beginning of January of 2015.

Archana: For those of you just tuning into our weekly podcasts, a quick round of intros – we are the P4Capital team. A division of the established Planet4IT staffing agency, and we are the people who are close to the market makers – the Capital Markets as well as the wealth management professionals. And yes, we are nearing the end of the of the first quarter, and what we plan on doing, just like Jim said, just discussing in terms of where financial technology stands, and also a quick handbook for job aspirants; what are the skills that would be in demand for the rest of the year.

Shaheerah: I just want to start out with the importance of the capital markets: capital markets are where  both Canadian and International companies from all over the world come to raise capital in order to run their businesses and to expand globally. And it’s going to be done both through debt and also through equity. And Capital Markets is also a place where companies can come out and they can seek advice on potential transactions and strategic advice on implementing their business plans. And although this is a male dominated industry, there is now a growing need for women in the field as well. And you will see a lot of companies are launching new programs in order to attract more females into this career.

Jim: The interesting part is in the trading side of the financial institutions business, is we’ve gone through 36 months of high frequency routers, dark pools, low latency – and the rationale behind all that was to get better analytics on the trade, get better understandings of liquidity; obviously there’s been a heavy influx of new regulations and reporting. And that’s kind of affected the old creaky systems that have populated the world. So the talent, not only are we looking for the best and brightest of the female and male side, but we’re also looking for difference makers now too. And we hope to carry on more conversation about that momentarily.

Jeremy: Risk Data Aggregation and Reporting, RDARR* as it’s written sometimes, seems to be a big hot button topic for all of our clients. There’s a Basel 3 deadline with 21 months to go now, December 21 2016 that needs to be met, and all the banks and financial players in town need people who understand risk and are able to put it together into a model that will make sense for decision makers.

Archana:  Some of the trends that we’ve witnessed so far, and something that we’re definitely going to see more of, going forward, obviously the falling oil prices that’s been a hot button topic really, and a lot of the banks and financial services companies have been majorly impacted with the falling oil prices. Another thing that’s happening that we’ve witnessed is restructuring: a lot of banks are shutting down and really focusing on their core business and trying to automate a lot of these processes that don’t really have direct customer interaction. Another thing that we’ve witnessed, and this is definitely a growing, trend is  I call it the deconstruction of the traditional walls that have surrounded the large investment banks and how they’ve been privy to customer information and access to all this data. So this deconstruction obviously is happening as we speak, because access to data in this changing market is majorly on the rise. And another growing trend where banks are losing out on hiring talent is definitely to the digital guys, so banks are revamping their strategy to attract the brightest minds that are out there.

Jim: The position growth, if you will, I’ve also kind of thought to myself was interesting it’s core programming: Java, C, C#, C++. I  haven’t as yet seen the advanced analytics programming needs that the digital world is demanding, the R’s, the Matlabs, s and those types. We’ve also seen a heavy influx of business analysis. So people, as Jeremy alluded to, anything that has a strong element of risk process knowledge is in great demand out there. Traded products, front office products – also in great demand out there. Traditional, other support jobs like software package support or infrastructure support, not as much. But hardcore developers yes, hardcore business analysts with solid process knowledge, yes.

Archana: I agree with Jim that we haven’t seen so much of big data and data analytics on the capital markets, side, but I do think that’s something that’s set to change going forward. A lot of these data scientists have been employed by these capital markets firms. They’ve largely been restricted to governments, risk and compliance areas, but increasingly they are going to be used in the front office, and working hand in hand with the Quant guys.

Jeremy: Especially when we get to the phase where banks are going to be analyzing data in real-time, they’re really going to bring in some new and dynamic solutions. We’re really going to see that in the next year.

Jim: I’m hoping though that those people are still available for them Jeremy. We’ve seen in our Planet4IT part of the business, where people with knowledge of how to program advanced algorithms are being captured by game companies, big market data companies that have a service feel to them. And where do they draw them from? Obviously the traded markets, and the people that learned their skills there and have applied them successfully, and they’re being offered great sums of money to do so. I’m 100% in agreement that the front office people will have to come back onto the market, but I think they’re being overshadowed right now by the need for regulation people.

*RDARR stands for Risk Data Aggregation and Risk Reporting program


 

That was the P4Capital team discussing the Trends for Top talent, and how to be competitive in the workforce. Want to know more? Check out our website  and previous posts at www.planet4it.com or follow us @p4capital. Thanks and see you next time.

Volckers Volley or Folly

Paul Volcker is an American economist who was the chairman of the Federal Reserve, under Presidents Jimmy Carter and Ronald Reagan. He is still working though, and is still making recommendations that could forever change the American banking scene.

The P4Capital team investigates.

Stay tuned.

Transcript


Amanda: Change is never easy – but sometimes it is necessary. In this week’s round table discussion the P4Capital executive team talks about former chairman of the Federal Reserve, Paul Volcker, and changes he is recommending be made to US banking.

Jim: Today’s topic, or this week’s topic, is about Paul Volcker’s recommendation to put US banking and financial industry under one roof.

Shaheerah: Yes, he has outlined a new plan for revamping the way that the US government is going to oversee their financial plans. And he’s going to be publishing a paper soon which is going to talk about consolidating and reorganizing the US financial regulators, so what they’re going to do is create one single agency to supervise the financial institutions, while the Federal Reserve will be responsible for writing these regulations.

Archana: Paul Volcker is not new to devising strategies. When he was the Chairman of the Federal Reserve he actually was the person who in fact tamed inflation at that time. More recently, he also came up with the Dodd Frank initiative itself, where we wanted banks to engage less and less in risky, Wall Street style trading, and I guess this Volcker Alliance, which terms itself as a think tank, was basically set up to improve the way government essentially works at the local state and the federal level in terms of policy making and the financial decision-making.

Jim: With that said is, the current system in the US has a heavy regulation feel to it. The institutions that play in the US are now pushing back at a fairly aggressive rate, of saying “My business is my business. My business is not supporting your regulation.” In fact, the US has leaned heavily on the regulators side over the last seven years since 2008. Some of the legislation is badly needed, but some is over the top and more importantly, in Volcker’s words, is “why is the futures exchange being regulated by the Ministry of Agriculture?”

Shaheerah: This new plan is that the Fed would write the regulations, and then another agency would make sure that these rules and regulations were actually being followed. So this would be a combination of the Federal Deposit Insurance Corporation, the office of the controller of the currency, the Fed and then the other regulators such as the SEC and the CTFC. Paul Volcker was also responsible for proposing the Volcker rule, and the role prohibits short-term proprietary trading that Archana was talking about, of the securities of the securities, derivatives, commodity futures and options on these instruments on their banks’ own accounts. Basically this rule is to prohibit activities that don’t benefit the banks’ customers.

Jim: But in fact benefit the banks themselves, as long as they introduce the element of low to very high risk. Correct Shaheerah?

Shaheerah: Yup. And it was estimated that the banks would have to hire 3000 new employees in order to implement these rules, and another study had already mentioned that it would actually cost 350 million dollars for the banks and the investors in order to implement this rule.

Jim: So a billion dollar overhead put onto the banks by and large by the representatives that may or may not have their voters’ best interests at heart. It’s an interesting conundrum. We are hoping Paul Volcker wins this one.

Archana: So by the way, while we’re on this topic of regulations and compliance, we at P4Capital – we specialize in these kinds of jobs. So if you’re a person, or a capital markets professional with specialization in this area, or any other capital markets area, please do not hesitate to either give us a call or to send us your resume. We absolutely look forward to hearing from you. And that number by the way that we can be reached at is (416)363-9888. And you can either ask for Shaheerah Kayani or Archana Ravinder.

Jim: And the interesting part of what Archana just mentioned there, is not only are we at P4Capital dedicated to this space, we also understand the heavy impact that new legislation, new rules, new governing bodies have on the overall industry, and the complexity of big data coming onto the market from a global sense. So when we look at Chairman Volcker’s think tank recommendation, we understand the very many sides that he is speaking from. Not only from a centralized regulatory body, but the impact on big data, the impact on being able to do very fast high frequency trading, and be extremely competitive in the world.


 

That was the P4Capital team discussing the Volcker Recommendations, and the impact they could potentially have on banks. What to know more? Check out our website  and previous posts at www.planet4it.com or follow us @p4capital. Thanks and see you next time.

Maybe stress the stress test.

In this weeks P4Capital discussion, the executive team continues to talk about something most of us try to forget – the great recession of 2008.

In a follow-up to the stunning news of all the American banks passing part one of the stress test we have some bad news – a few banks didn’t in fact pass part two.

The P4Capital team investigates what this means, and how it will protect the world economy should the worst come to pass again.

Stay tuned.

Transcript


Amanda: So much for our winning streak. Several american banks couldn’t hold it together in the final inning, and failed part two of the stress test. The P4Capital team continues their discussion about what these results mean for the future of the economy, and what these banks are going to do about their failing grades.

I don’t think they can simply apply for extra credit.

Jeremy: All right, this week we’re doing part two in our Stress Test series. A couple of big European banks just failed the Stress Test in New York – Deutsche bank and Santander of Spain.

Archana: Apparently even Bank of America just received a conditional pass. This was part two of the stress test which actually happened last week, in which all of the 31 banks were cleared. Part two was essentially in order to assess their terms of raising capital by way of dividends, and these two banks essentially failed.

Jeremy: Bank of America’s actually going to try to do about 4 billion dollars into share buybacks, which they got the green light on. So Deutsche bank and Santander are going to face penalties where they can’t do any share buybacks right now, or raise dividends, but they’re still able to issue the dividends as they stand

Amanda: What does part two entail?

Shaheerah: Well it’s called the Comprehensive Capital Analysis and Review, CCAR. And basically these banks that failed, now they have to make some changes in their plans or they could have to pay some financial penalties. Basically, it prevents these US entities of the foreign banks from distributing any capital to their parent companies.

Jim: With that said, the question Amanda asked was what does this all mean? It means basically that the United States has said that either you’re going to have enough cash to be banking in the US, or you’re not going to bank in the US. As simple as that. They want a very strong and healthy financial system to spur their growth into this new age of technology meeting business and new entities being created, which should sustain their economy for the next three to five decades.

Archana: I’m just curious to hear the thoughts of the P4Capital team here – do you think the introduction of these stress tests and various levels of scrutiny – what do you think about another 2008 like meltdown? Do you think we could avoid another one of those again?

Jim: Not a chance. As the elder statesman at the table by a considerable factor so, I have seen these financial games in various shapes and forms over four decades, well – let’s call it five. And there will be a new game at hand somewhere, sometime in the future, but the objective here is to get stability for at least a 10 year run, and then let the governing bodies a decade out from now worry with what’s on their plate at that point in time. But quite bluntly, we’re in full economic recovery right now Archana, but it is so tender. It could not support another meltdown of the magnitude that was unprecedented by the way, that happened in 2008.

Archana: I would actually agree with Jim. To me, the only constant there is change. And we’ve all witnessed this within the Capital Markets environment. Yeah I mean, this is a way for stabilizing the marketing and the economy as it stands right now, but 10 years from now something else might just crop up and the regulators at that point will try to put checks and balances in place too.

Jim: The interesting part about these Stress Tests, that’s probably also illustrative to all those other financial institutions is the absolute weakness of the underpinnings of technology. I had this discussion last week with a senior banker in downtown Toronto, and we talked about their base engine technologies, which was something that the group 20 years ago installed. So now, you’re trying to run a multi trillion business using ancient, antiquated technologies. It should be very interesting as they continue to work on stress tests to see if these banks, in this case the group of 31, are going to be able to sustain it in the future or not.

Jeremy: I think what caused the financial meltdown revolved around derivative products; credit derivatives, swaps, CDS’s they were called. That was-

Jim: MBS’s

Jeremy:-right, mortgage-backed securities. Basically predicated on the fact that banks were issuing mortgages to just about anyone with a pulse, and then bundling those mortgages off as fast as they could into securities. There were three different levels of risk – they were called trenches. The lowest trench were all sold at one price – medium. They had another price – the top-level; senior level they were called. Wasn’t even that much of a risk premium that companies were taking – companies such as AIG — and there ended up being massive defaults across all three levels of risk. Lots of problems there, and here we are six years later or so, and there is still not a clear picture of what risk looks like on balance sheets, especially in the derivatives business which is largely unregulated. There are lot of measures to see how they can measure this risk better, but we’re not there.

Jim: Yeah, but that’s symptomatic Jeremy. You know any time you try to modernize debt you’re running risk, full stop. Debt is debt. But the interesting part were the reverberations in the marketplace of 2008, and how it brought the global economy down to its knees, almost overnight. So, I look at it again and say can that game of taking, using your words – providing debt mortgages to anyone who can apply – is that going to be game on in the future? I doubt it

Jeremy: It will be a different game

Jim: Maybe it will be a different game, absolutely! We don’t know what that will be.

Jeremy: Maybe it’s going on already?

Jim: I would suggest it probably is, going on already.


 

That was the P4Capital team discussing the Stress Test, and what these failing grades mean for the banks going forward. Want to know more? Check out our website  and previous posts at www.planet4it.com or follow us @p4capital. Thanks and see you next time.

Resume Formatting can be the Key to getting the Interview

Resume Formatting can be the Key to getting the Interview

Resumes can be the key to opening the door to your first interview or a direct path to the trash bin.  Hiring Managers and Recruiters see 100’s of resumes for every job opening.  There are 1,940,000 entries on google for “the 6 second scan of your resume”.  Yes – 6 seconds.  Barely more than a blink.  If you pass the scan the resume gets moved to the “follow up file” for a more in-depth look at.  At this point you might get an email or a phone call looking for more detailed job related exposure.

Planet4iT has been using the format in our slideshare presentation very successfully for the last 15 years.  Give it a try and good luck with your job hunting.

Black Gold

Black gold; oil; the cause of wars, peace and anarchy. What do we do when we have too much of it? The P4Capital team speculates on the future of the economy when oil prices are bottoming out.

Stay tuned.

Transcript


Amanda: The world runs on oil. Until it doesn’t. For the first time in a long while, the world’s demand for oil is less than what we can produce. What happens to the global economy when we have too much oil? The P4Capital team investigates in this weeks round table discussion.

Jim: Today’s topic is about the falling oil prices in Canada, and how that will affect our economy.

Shaheerah: Oil prices were really high since 2010, and that was because of all the demand from China.  But then these high prices made the US and Canadian companies search for new to hard to extract crude oil. And now oil demand is actually falling because of all the weakening economies such as the ones in Europe. And so by late 2014, there was an over-supply of oil and the price started to fall. And then at the OPEC meeting, Saudi Arabia refused to cut production, and so that made the price drop even more.

Jeremy: David Rosenburg from the financial post wrote an interesting article, outlining different predictions initially at $100 per barrel, which we were looking at the beginning of the year, compared to $50 per barrel, which is roughly the current price. At $100 a barrel, stocks on the TSX, their earnings per share were forecasted 15% growth, whereas at $50 a barrel we’re actually looking at a projected 10% decline at earnings per share. The effects to your portfolio are probably going to be seen.

Jim: Just a bit of clarity Jeremy, are you saying on the overall basket of TSX stocks, or does it pertain to each individual stock holding.

Jeremy: Well, no I think that would be projected across the basket of holdings in the TSX index. And welcome back Jim.

Jim: Thank you, it’s great to be here.

Archana: Oil, in my opinion is obviously the biggest driving force behind all financial markets, and just like Shaheerah pointed out first, it was an oversupply situation – supply greater than demand. And now it’s the global slowing down of economies that we’re currently facing, as well as the uncertainy in Europe and the unrest in the middle east as well, which is all adding to the decline in oil prices.

Amanda: It’s interesting to me, over the last few years in Canada, Alberta has always been in the news for having a thriving economy because of their oil sands. I wonder how the decline in oil prices, and as Jeremy said the overabundance of oil supply in the world is going to affect the Alberta oil sands. Any comments?

Shaheerah: Yeah, so let’s talk about how this is going to effect the Canadian economy. So the oil and gas sector makes up 11% of Canada’s GDP, and the oil price per barrel dipped to below 50 bucks in January, and this is the lowest level it’s been since April 2009. And now that oil prices are dropping, Canada’s energy sector is cutting back. Now CIBC bank is actually giving a warning that Alberta, which is Canada’s biggest oil and gas exporter, is going to face a mild and temporary recession. And similarly  to that, JP Morgans were that the oil collapse means there will be blood. Alberta’s economy is going to shrink by 0.3% and as well unemployment is going to be going up 6.8% according to the chief economist Avery Shenfeld. And this is not because of the production cut backs, but rather it’s because of all the Canadian oil companies that have been cutting back on their budgets and laying off all of their workers.

Jeremy: Yeah, to further on Shahherah’s point, the process of extracting gas from the oil sands is a pretty costly production. It only works at a certain price level. So at the prices where oil is at these days, you’re not going to find many new projects being greenlighted, so the existing ones are going to run their course, but there’s not going to be new ones underway which is going to affect the whole economy, specifically the banking sector which provides the funding on a lot of these new digs.

Archana: The situation in Alberta might actually be a go do thing for us here in Toronto, which traditionally has been a manufacturing hub. Activity might actually pick up here in Toronto; the contribution of the manufacturing sector to the overall economy might actually go up in the coming times.

Jim: The consumer price index is going to be very interesting to watch as the year goes on, because as cost per litre at the gas station has fallen so dramatically it’s actually putting hard dollars; green dollars back into the consumer market place. Those green dollars, one of two things is going to happen to them: either A Canadian’s will pay down more debt or B they will buy more things along the way. So for the hardships that Alberta is going to be facing, specifically the ones that are wildcatting, looking for new opportunities in the oil and gas sector, they’re going to be hit very hard. The existing production facilities, it’s more a function of the keystone pipeline going to be approved, yes or no? But it’s the CPI and the non-prairie provinces that I’m going to be very very interested in seeing.

Amanda: What do you mean by Wildcatting?

Jim: Wildcatting is exploring.

Jeremy: Probably not a great time to be selling your house in Alberta right now, especially in the Fort McMurray area.

Amanda: It might be a good time to buy a house though.

Jeremy: If you can afford it with oil at these prices.

Archana: Just like Jeremy had pointed out, oil extraction, the process itself, is quite expensive. Companies are obviously looking at other alternate products right from national gas to propane, and shale production in the US is also topping numerous lists. And overall, we’ve in fact seen a reduction in US oil dependence. From 2007, there’s been about 41% reduction in imports in the US.

Jim: That will probably lead to our next topic in our upcoming Podcast. “Is the overall global economy requiring less oil for its manufacturing and auto engines. It’s quite interesting to put your eyes into the crystal ball and say “Hmm, that in fact could be a game changer.”


 

That was the P4Capital team discussing the decline of oil and what it means for the Canadian economy. How much oil is too much? Want to know more? Check out our website  and previous posts about Bitcoin at http://www.planet4it.com or follow us @p4capital. Thanks and see you next time.