Get Rid of the CMHC

I am not going to argue or throw statistics at you. I’ll just tell you one fact. My yoga instructor/hair dresser recently bought her second condo. Nuff said.

Perhaps at the next election, Harper and Flaherty will learn that renters are voters too. Not to mention retirees who don’t appreciate 0.7% on their GICs — on the back of the system’s irresponsibly low interest rates.

The answer to higher property prices is lower property prices, not cheaper financing and capital that doesn’t know how to price risk. So get rid of the CMHC already. The Canadian banks are “safer” than their global peers because they’re unloading their risk to the taxpayers via the CMHC. But this will eventually bite us all in the butt. Have our Canadian politicians learned nothing from the global experience? Have they never heard of Wikipedia?

Not that I believe they will do anything. Which brings me to my investment strategy:

Regular readers of this irregular blog will know that I have increased market exposure over the last year and that I am worried about a long period of  ultra-low rates. What that means given my semi-retired status is that I am on the search for yield along with all our blue-haired folk. Because the only constant I believe in is politicians’ idiocy, I am increasingly investing in REITs – principally the residential ones.

Clickworthy: Bernanke locks in his own mortgage

I find it fascinating to see that Bernanke has himself decided to lock in his mortgage for 30 years rather than going the variable route. Perhaps my GIC income will be rebounding faster than I thought.

What scares me?

That Japan happens here.

Years of near- zero interest rates. That was Japan’s  reward for not dealing with their bubble. And it’s made life very difficult for the country’s retirees and savers, who saw their post-retirement income dwindle to nothing.

At least when this is all over, and US rates start to rise, the United States will have adjusted. It will be globally more competitive with a markedly lower dollar and property prices some 30-50% below peak levels.

But what about Canada? The country’s asset prices have not adjusted downwards. When interest rates start rising, the economy will be in a world of pain. It won’t just be the home-owners now who get burnt with 40-year mortgages, but all the retirees who’ve been forced to rush out and find yield by taking excessive risk. They have little choice because they could not earn a decent return with 0.5% GICs.

Take my mother for instance. I just examined her portfolio and saw that her adviser had moved a large portion of her GIC maturities into higher-yield perpetual preferreds.  Is the adviser not aware of how exposed these perpetuals will be to the smallest increase in interest rates?

Are these low interest rates in Canada really so necessary? All it seems to be doing is fueling the housing bubble.  For the life of me, I can not understand why our government sacrifices  savers for spenders &  higher home prices.

As for me, I’ve certainly gotten more aggressive in my (miserly) risk-appetite, and gone beyond the parameters I outlined in this earlier post. Like my mother, I need yield, and I seem to have adopted an “if you can’t beat them, join them” attitude. Notice how I trick myself into thinking I have not bought beyond my initial risk-tolerance  by creating categories of exposure. My exposures currently sit around:

6% “risk” equity

8% high-dividend equity

3% preferred-equity

3% gold

I’m sitting on some nice gains on the “risk” equity which is further increasing my tolerance for risk. For any new purchases right now I’m using a portion of those gains to buy puts since volatility is so cheap and I fear an impending correction. The high-dividend stocks are supplementing my pulverized GIC income nicely and will be held  for perpetuity in theory. I will likely soon start to write calls on them  above resistence levels. The preferred stocks are expensive and I will not buy perpetual or anything with greater than three years till reset, so I am focusing only on a small universe of fixeds.

Baltic Dry Index now set to spike on Green Shoots

Ever since Ben Bernanke, chairman of the Fed, told 60 Minutes back in March that he detected green shoots of economic recovery, “green shoots” has become the mantra of stock market bulls who seek out positive information to justify rising market prices. Often the green shoots in question aren’t so much good news as they are a reduction in bad news.

A spanner in the works for the green shoots story has  been the recent precipitous decline in Baltic Dry Index. The index, which measures the cost of shipping commodities,  is conventionally perceived as a leading indicator of how commodities and the global economy will perform.

The index has now declined 40% from its peak in June, and some industry watchers are concerned that the strong rise in the index between March and June merely reflected China restocking rather than any real pick up in final demand.

Obviously the naysayers haven’t seen this recent photo — tangible evidence that green shoots are indeed benefiting the shipping industry.

I just want to be human

I started this blog in July 2008 because I was angry. Angry because I believed the media and financial industry were misleading Canadian investors. Angry because the high-priced Canadian stock market was due for a fall.

And perhaps angry because I hadn’t benefited from the circumstances which made stocks expensive in the first place?

Well, I’m angry again. So angry in fact, that you might not have to wait seven months till my next update.

I spent 15 years in the investment industry  — as a research analyst and more recently a hedge fund manager. I did quite well for myself. Not buying wineries-and-yachts-well, but well-enough to pursue my other passions: writing a humor book, studying carpentry — that’s been my life since 2006.

When I left finance, I sold all my stocks — partly because I felt the market was overvalued — and partly because I didn’t want to risk my riches. Readers haven’t exactly been lining up to buy my Sedaris-ish lamentations and apprentice carpenters only earn $12 an hour.

This wasn’t the first time I’ve had zero stock market exposure. The only time I’ve ever been aggressive in my stock market investing was in the early 1990s. After two years as a research assistant in a Bay Street firm, I backpacked to Asia to find my fortune. I found work as an equities analyst in Hong Kong, a pretty big promotion for somebody who spent his previous job arguing with secretaries over who should send the fax. Those were bull market times in Hong Kong and I received my first large bonus in January 1995 which I put to “work” in stock options on a floppy disk manufacturer called Hanny Magnetics — oops. Losing all my money, coupled with the knowledge that I share the DNA of my risk-loving father who has gone bankrupt twice, permanently imprinted me with the risk tolerance of an 88-year-old widow. Since then, I’ve rarely had more than 10% of my money in equities.

Sometimes my conservative disposition was a good thing: I was an analyst living in Asia during the 1997-98 financial crisis. Sometimes it was a bad thing: I missed out on the internet stock boom.

But it had another unexpected effect. It made me an outcast in society. Having no stock market exposure has turned my soul black. It made me evil. You see, while the rest of the world cheered when stock markets rose, I was The Grinch angrily waiting the collapse – the pain – that would prove me right for my caution. I relished in recessions and stock market blood.

But I didn’t want to be a grinch.  I didn’t want to steal anyone’s Christmas. I wanted to be like regular people. Who wants to be the only one with a bomb shelter in their backyard when everybody else is dead? No – it was time to rejoin society.

Early this year, with the market headed back to 1929 levels, I saw my chance to once again become human. By God if we were headed back to the time of soup kitchens, I would get in line with my brothers.

So I decided to get long the markets.  I set myself a target of 25% of my complete wealth.

While my heart was in the right place, the mistake was the time frame. You see back in January 2009, I envisioned only two scenarios for the market:

1. 10 years of pain
2. 2 years of pain

Based on these scenarios, I decided to gradually build myself up to 25% equity exposure over a two year period.

Which brings me to the here and now. I wish I’d considered a third scenario: Namely that the BEAR MARKET IS #@$!! OVER — because seven months into my strategy, the markets are up sharply, and I only got about 9% of my money invested. Sure, I’ve made money but not enough to make me feel good.

The icing on the cake for me is my term deposits. A good chunk of my GICs rolled over  last week, and the best I can now do is 1.5% compared to 4.5% a year ago. In other words, I just received a 66% pay cut!

This leaves me very angry.

The grinch-in-me tells me that the rally is overdone – and that the bear market may not be over. But this grinch-in-me tends to see the world in shades of green and I’m not talking about the color of money.

And while the grinch-in-me still  prays for a correction to destroy all of you who dared prevent the Apocalypse that would allow me to buy the whole world for nothing, I’ve pledged to keep to my strategy of buying slowly – roughly 1% per month – as per my original dopey strategy. I just want to be human in the end.

Clickworthy: Satyam fraud

No time for discussion,  as I’m out the door, but this is important:

The chairman of India’s Satyam Computer Services Ltd. quit Wednesday after admitting the company’s profits had been doctored for several years, shaking faith in the country’s corporate giants as shares of the software services provider plunged nearly 80 per cent.

Click here for story.

• It’s important because Satyam is a big name  in India.
• It’s important because it’s only in a deteriorating market environment that all the corruption and lies come out. Something tells me there’ll be more of this going forward from Asia — especially China.
• It’s also important because the Indian stock market is dominated by foreigners. I don’t know the exact number right now, but memory tells me that more than 80% of the Indian market is owned by foreign investors. It’s like a giant game of of chicken — foreigners tend to think alike — so it’s led to some pretty wild one-day swings in the past. (circa 25% if memory serves correct).
• Satyam closed down 80%; I’m actually impressed that the market only fell 7%. Watch this space.

Clickworthy: $90m missing from Canadian hedge fund?

According to the Financial Post, the Ontario Securities Commission says it is unable to account for more than $90-million in the accounts of hedge-fund operator Sextant Capital Management Inc.

In a decision released Tuesday to settle an argument over the OSC’s right to freeze Sextant’s assets, the regulator said “more than $90-million is unaccounted for and a combined total of only about $7.6-million is in the custodial accounts of the Sextant Fund and the Sextant Offshore Funds.” …  Driving force of Sextant, Otto Spork, denies the allegations.

Ironically in a Globe & Mail article some months ago titled, “Six things you should know before investing in hedge funds,”  Sextant Strategic Opportunities received mention for it’s exceptional 122.9% return.

Uhhh, perhaps the author of the article should have added a 7th thing to consider: That they might be lying to you!

Clickworthy: Chinese GDP & electrical consumption

Double-digit GDP growth year in and out? I’ve never met a credible economist who believed that China’s spectacular GDP growth figures could be taken at face value. Simply put, the numbers have never added up. The smart economists tend to look at other indicators to give a a better idea of what is really going on.

On that note, the next time somebody tells you, “Who cares if China GDP growth is slowing, they’re still growing much faster than the west” you should point them to the latest figures on electricity production. Electricity production in in China in November fell 9.5%, more than in October, which had marked the first fall in a decade.

It’s not what they say, it’s what they do

About six months ago a friend of mine in the arts world who knows absolutely nothing about finance inherited eight hundred thousand dollars. To “Steven” (and his new wife) this was a significant amount of money. They could finally afford to buy a house.  Steven reckoned he would put  $200,000 of the inheritance towards a $700,000 house — mortgaging the remainder. He could then get the remaining $600,000 to  “work” for him. He met with three financial planners and then called me up to ask my opinion.

• Financial planner A had  told him he could achieve 5% per year.
• Financial planner B had told him he could achieve 8-10% per year.
• Financial planner C had told him he could achieve 12-15% per year.

This is what I told him:

I was skeptical of the property market, but since ownership was their priority and the two of them did not have a consistent income I suggested he put $600,000 to the house.  I didn’t want him worrying about the mortgage. I reckoned that if he really felt the need to make the rest of his money “work” for him, he could invest half of the remainder in stocks. I figured it would do him some good to lose some of his money in the markets. That is because it’s better to lose a little bit of it sooner than a lot of it later.

Oh and I also told him that financial planner A sounded sensible, B was exaggerating slightly and C was a liar.

In my years in the industry, I can count on one hand the number of people who have convinced me that they have “it” — “it” being that special gift of timing the market. I don’t include myself in that category. For the 99.999% of investment professionals like me who don’t have ‘it,” we can take solace in the fact that we could still get rich by convincing others that we know what the market will do (as opposed to getting rich from knowing what the market will do).

The discovery that Bernie Madoff’s superior hedge fund “returns” were hocus pocus is a good reminder of this. A lot of retail investors aren’t particularly concerned by this event, because they don’t think it effects them. This is short-sighted. I expect this fraud will accelerate redemptions at hedge funds. This effects all of us because increased redemptions means increased selling of assets by hedge funds which means more market weakness.

It’s time for investors to start using their own heads and to stop caring what others say, whether it’s promises of investment returns or forecasts on the market:

• Morgan Stanley cuts its global growth forecast for the sixth time in seven months
• The Goldman Sachs analyst who predicted oil at $200 per barrel in 2008, has lowered his 2009 forecast again to $45.

Equities better than junk?

I’ve been pretty nervous these last few months. Fortunately it’s not because I’m losing money — I exited the markets completely about two years ago. No, I’m guilty of avarice. This little piggie wants to make sure he goes to the next bull market.

They say that every trader’s investment style is colored by his or her “first” market. I started in the industry some twenty years ago just as the stock market was peaking. I lost my entire first year’s bonus when the market crashed; I had invested only in three-month options – oops. That experience, coupled with being sired by a risk-loving father who’s gone bankrupt twice, has permanently imprinted me with the risk tolerance of an 88-year-old widow.

Sometimes my bearish disposition is a good thing: I was an analyst living in Asia during the 1997-98 financial crisis. Sometimes it’s a bad thing: I was bearish about internet stocks about a year-and-a half too early.

I tell you all this because I honestly don’t know what to do right now. My gut feeling — which you should consider irrelevant — is that this bear market is not yet over. I base this on three factors:

1. A broken US consumer
2. A China which I believe will disappoint
3. Valuations which are not compelling

I won’t bother to elaborate for the reasons discussed here.

But there is another factor which does bear discussion. AAA-rated debt aside, the fixed income guys aren’t buying. The last few weeks have seen powerful rallies in US equities. This could be a bear-market rally — bear markets are notorious for vicious short-term swings to the upside. Or it could be something more. But if this bear market is over, you’d think junk debt would be rallying at least a little. But as you can see from the chart, HYG has barely budged. The average yield to maturity on this high yield corporate bond fund is currently around 18% per year on a 4 1/2 year duration. Since bond holders rank first in an insolvency, bond investors must be expecting some pretty steep losses at these companies. So why are equity shares rallying? Can the equity guys and the debt guys both be right?

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All that said, with the Canadian political “crisis” causing the TSX to underperform global markets, this little piggie decided to dip his toes back in the water these last few weeks — mainly through XIU and a little HYG. This puts me at just under 4% market exposure, which may not seem like very much — unless you’re an old lady like me.