But it doesn’t look like Canada will hold its edge for long. If the oil boom fades and the financial market continues to bleed money from structured product losses, then Canada might face a serious economic slowdown.

At last count, total write-downs at Canada’s six largest banks stand at approximately US$11 billion. That’s roughly 5% of the total global sub-prime write-downs to date. Once US$11 billion may have seemed like a large loss, but now it pales in comparison to the US$200 billion banks have written off their books since last summer worldwide. It’s also far less than just Union Bank of Switzerland’s (UBS) cumulative US$38 billion in losses alone.

Canada, however, is not immune to the woes now affecting its largest trading partner, the United States.

Canada Is Already Slowing – Even During a Raging
Bull Market for Raw Materials

If you can look past the bull market in raw materials that has enormously benefited Canadian exports and the Canadian dollar, then you’ll see the country is starting to show strains in lending, housing, and manufacturing.

Indeed, a slowdown has already arrived. Canada’s economy contracted in the first quarter for the first time in five years. The economy slowed mainly because the surging Canadian dollar and weak U.S. auto sales caused a slump in auto manufacturing.

Meanwhile, some Canadian banks can’t escape the relentless wrath of sub-prime and other losses tied to illiquid structured financial products.

First quarter profits at Canada’s largest six chartered banks points to an acceleration of write-downs for Royal Bank of Canada (RBC) and Canadian Imperial Bank of Commerce, or CIBC.

Canada’s biggest six banks logged a first quarter profit of US$2.5 billion in the January to March period, down almost 50% from a year earlier when combined earnings were US$4.7 billion. Most of these losses, however, are tied to CIBC and Bank of Montreal – the hardest hit since 2007.

CIBC Hit the Hardest, While TD Escapes Sub-prime Wrath

Some Canadian banks have fared much better than their peers since the advent of the credit crisis last year. Of these, Toronto-Dominion Bank (TD) has almost escaped without any serious losses at all since last July. Meanwhile, the Bank of Nova Scotia has also easily absorbed modest losses tied to sub-prime and other structured products.

In fact, TD Bank ranks among one of the best-performing major banks in North America in 2008 – up 8% compared to a loss of 14% for the KBW Bank Index in the United States.

Here’s What the Best Performing Bank in North America Looks Like

But the story is altogether different for Canada’s other big banks.

RBC and CIBC now share the dubious distinction of being featured on the “sub-prime hit list.” Both banks are on the global banking sectors’ top 40 list for the largest write-downs and credit losses since the banking sector started hemorrhaging last fall. And Bank of Montreal (BMO) is ranked second only behind CIBC for posting rising losses tied to structured products and other write-downs in Canada. RBC is Canada’s largest bank by stock-market value.

From its all-time high last year, the Bank of Montreal has seen its stock plunge 31%. CIBC, which takes the booby-prize for Canada’s biggest loser in the sub-prime crisis because of its largest U.S. presence, is 33% off its best level.

CIBC has already written off a cumulative US$6.7 billion since the onset of the sub-prime crisis. That number is almost twice the figure posted by Canada’s other five largest banks put together.

Since last fall earnings have eroded and write-downs have accelerated. In short, the U.S. credit crunch that battered the U.S. housing sector has knocked the wind out of the banks’ sails. Everything from consumer and corporate lending to mortgages has been adversely affected as Canada finally begins to feel the impact of an American slowdown or recession. Over 85% of Canada’s trade is with the United States – the two largest trading partners in the world measured by the volume of goods and services.

But the news isn’t all gloomy. Dividends were largely unchanged over the first quarter while Bank of Nova Scotia actually raised its payout.

In addition to sub-prime losses, many banks were also hit by exposure in asset-backed commercial paper or ABCP. Other smaller lenders and brokers, including Canaccord Capital, saw losses in the hundreds of millions tied to illiquid short-term commercial paper.

Canada Now Slowing But Will Avoid Recession

The Canadian economy is now slowing in 2008. Stripping away booming oil and gas exports, the country’s merchandise trade balance is now in deficit. Without commodity exports, Canada would probably be in an economic recession.

First quarter GDP data confirm this trend. Manufacturing belts in Ontario and Quebec continue to suffer from a soaring Canadian dollar, up over 50% since 2002 versus the U.S. dollar while the unemployment rate is rising, housing is showing signs of slowing and commercial bank lending is gradually contracting.

The Canadian economy should escape a serious slowdown this year. The country’s trade balance and budget surpluses are indeed shrinking amid a slowing global economy but remain well managed compared to most industrialized economies.

Canada’s housing market is also in far better shape than America’s. That’s mostly because “zero-money down” was never a part of the country’s housing culture. But a continued strengthening of the Canadian dollar and more losses tied to structured investment products could tilt the nation into recession if combined with a significant decline in crude oil and gas prices.

ERIC ROSEMAN, Investment Director

Source: Even Commodity Rich Canada Is Not Immune to This Global Slowdown

Potash is a mineral form of potassium, and a key ingredient in fertilizer. For the last 20 years, farmers have bought potash for about $125 a ton. But the BPC started the year selling potash for $270 a ton. It quickly raised the benchmark price to $450 a ton. In March, it raised the benchmark to $650 a ton. Last week, the BPC announced its latest price hike. On June 1, it will begin selling potash for $1,010 a ton. That’s a 274% price increase in six months… and a 709% leap from its 20-year norm.

Prices for potash are rising so fast, stock analysts can’t maintain their spreadsheets. They update their models on Monday. By Friday, the models are obsolete…

And the stock prices of potash producers are arcing into the sky like fireworks, too. Take the Potash Corporation of Saskatchewan, for example. The largest potash producer in the world, its stock price has risen 1,000% in the last five years and 620% since June 2006. It’s now the second-largest company in Canada, ahead of EnCana and the Royal Bank of Canada. It trades for 10 times book value and more than 46 times earnings.

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Uralkali, a large Russian producer, has seen its shares rise 1,984% in the last three years.

Intrepid Potash, the only American producer, floated shares on the stock market for the first time last week. Its shares rose 58% on the first day of trading.

You couldn’t make me invest in the big potash producers if you put a gun to my head. This is a classic investment mania. Commodity producers have huge capital expenses and nearly no competitive advantages. They should not sell for 46 times earnings.

Here’s the thing: While I wouldn’t touch the major potash stocks, I still think potash, the commodity, could go much higher.

China is the world’s largest consumer of potash. In 2007, it bought 2.5 million tons in a contract with the BPC. The supply crunch is so serious, this year the BPC could only sell China 1 million tons. My point is, even at $1,000 a ton, potash supplies still cannot meet demand.

So potash prices can keep rising. How far? Consider this: Before potash was discovered in New Mexico, Germany was the world’s only supplier. In December 1915, when World War I cut trade between the United States and Germany, potash prices jumped from $35 per ton to more than $500. In today’s money, that’s the equivalent of more than $10,571 per ton.

My advice: Don’t buy the major potash stocks. The upside is already “priced in.” If potash doesn’t rise, these stocks could collapse.

If you want to invest in potash, buy the potash “juniors” and use a stop loss to limit your exposure. These small potash companies are building mines in risky countries. They’re risky, but you get a big discount on the potash in the ground. If potash keeps rising, you’ll multiply your money. If it doesn’t, you’ll lose only as much as you’ve put at risk.

Good investing,

Tom

P.S. In my newsletter International Strategist, we’re getting into the potash business. I’ve found a potash mine that I think is worth $2 billion. And because it’s in a third-world country, you can buy this mine today for just $520 million. To learn about a trial subscription to International Strategist, click here.