After trading through parity with the U.S. dollar for the first time in 30 years, Barron's says it's time to short the Loonie ($Cdn). Economists often use purchasing-power parity [PPP] - a currency's ability to purchase a basket of goods - to gauge its value. On that basis, the loonie is worth a mere $0.81 U.S., though it currently trades at about $1.02 - a 26% overshoot.
Canada followed the Fed's lead in cutting interest rates in early December, and indicated more cuts may be in store, leading to a drop. Strong jobs and trade surplus data failed to boost the currency. "A currency that doesn't rally on good news is a good candidate to short," it says.
Its failure to decouple from the U.S., which still accounts for 75% of its exports and 25% of its GDP, make it vulnerable to U.S. weakness. Weak gains in worker productivity make the country increasingly uncompetitive.
Barron's says the loonie could be headed for $0.88-0.90 over the coming year. It suggests shorting CurrencyShares Canadian Dollar Trust (FXC), and reducing exposure to the country.
The issue with the EMT company is not just one of the currency exchange rate. EMT is a commodity plain and simple. The main issue here is who is the low cost producer. If UUU has managed to lower its costs of production through the recent production expansion, it will be able to survive lower prices in both the Canadian and US markets. Other competitors will stop production first to stop the losses (provided that UUU has the cash to keep going in these bad times.)
UUU does have one advantage, however. EMT is a localized product -- by that I mean that the cost of transportation is high enough that Canadian product is unlikely to sell in Florida or Southern California because locally produced pipe will have a cost advantage in those markets due to lower transportation costs. That means that the US markets which matter most to UUU are those close to the border. The Northeast US is not experiencing the same housing melt down as the Southern regions. That is not to say that market conditions are good, but they are not a total disaster by comparison with the South. Thus, there is a market base to be served by UUU.
If the Canadian dollar sinks, the construction market picks up a bit and the UUU management did a good job of lowering production costs in the expansion, then the EMT company should start to make a profit. Not a big one, but enough to keep going. Real profits will have to wait for the turn in the construction market.
I think it is safe to say that this acquisition was not management's proudest moment.
Just a small point of clarification. EMT is not the method of choice in the construction of single family homes. Romex continues to be the method of choice. This product is primarily used in the nonresidential construction space.