financialuproar

Turning My Back On WordPress

Apr 232010

And you can turn your back… But it won’t go away
And you don’t look scared… But you should be afraid
You can shut your mouth… But you still have a say
And you just don’t care… For tomorrow today!

Billy Talent- Turn Your Back

Okay, that lyric really doesn’t have a whole lot to do with this discussion. It’s still a cool song though.

This weekend, I’m taking the plunge. I’m moving this blog from WordPress.com. I can hear the collective gasps from here. Don’t worry guys, there won’t be any problems. You’ll still get blogging goodness every day from my keyboard. You’re welcome.

The free version of WordPress is great for a blogger just starting out. They have all sorts of widgets, decent stats, as well as a nice interface that makes starting out a breeze. If you want, you can even get rid of the crappy whatever.wordpress.com address easily once you buy your own domain.

For all its strengths, there are a few major disadvantages to wordpress.com. (not to be confused with wordpress.org, the paid version of wordpress) First of all, you cannot monetize your blog. WordPress places ads on your blog, not you. You’re also limited to only WordPress widgets, and while the selection is decent, any sort of third party widget won’t work.

WordPress.com is great for getting started. Now that I’ve created a bit of something here, it’s time to upgrade.

From poking around the interwebs, I found two choices- WordPress (the upgraded version) or Typepad. The ability to customize templates with WordPress.org is impressive. So is the dazzling selection of widgets. Yet I’m not nearly advanced enough when it comes to that kind of stuff to utilize it.

Then there’s Typepad. Much like the free version of WordPress, it’s more of a platform for not so technically inclined people. While their selection of widgets isn’t as impressive, they support any third party applications. Another huge plus is the fact that they host the blog themselves. There’s no backing up of files and no worrying about figuring what hosting package to pick.

The other reason why I switched is I simply don’t understand WordPress.org. When reading other people’s reviews, it was said many times that WordPress is for tech savvy people while Typepad is for people who want to focus on writing. Perhaps in the future I’ll switch again once I get WordPress.

Plus, Typepad got high marks for being endorsed by both Seth Godin and one of my favorite sites MLB Trade Rumors.

So while there shouldn’t be any disruptions this weekend while I do the switch, please be patient if there are. Also, I’ve purchased financialuproar.com, so hopefully getting that set up as well shouldn’t be too difficult. Wish me luck!

David Rosenberg On Canadian Housing

Real Estate 3 Responses »

Apr 222010

It turns out that I’m not the only one super bearish on Canadian housing. David Rosenberg, formerly from Merrill Lynch and now of Gluskin Sheff was kind enough to take some questions about the Canadian housing market from Globe and Mail readers. Some of the highlights include:

(My thoughts will be in italics under each series of question and answer)

“Looking on a 3-5 year horizon and with the likely chance of (significant?) interest rate hikes, is this likely to be a period where fixed rate mortgages are better than variable?”

David Rosenberg: I found looking at historical data that sticking with shorter-term mortgages made more sense the vast majority of the time …. only when the Bank of Canada moves so aggressively as to invert the yield curve has this not been the case

Interesting. Rosenberg thinks we should stick with short term mortgages. I assume he means fixed rates, as short term variables really don’t exist in Canada.

If you want to buy a new home.should you wait or buy now?

David Rosenberg: the name of the game is to buy low and sell high … by many measures, home prices on average are overvalued right now by between 15% and 30%.

I would almost argue Toronto and Vancouver are overextended by more than that. Please listen to Rosenberg if you’re counting on any sort of appreciation.

Is there a way to hedge exposure to Canadian housing?

David Rosenberg: It’s not easy to hedge out an illiquid asset and there are no pure ways to short the stock market as there is in the USA where there is an actively traded (though small market cap) homebuilding segment. Perhaps focussing on those retailers who cater to housing (shorting them) in an indirect sense, but this is a crude way to “play” a looming downturn in real estate. If home prices do correct, then the Bank of Canada is hardly going to do what is priced in to the bond market and begin to raise rates, so buying BAX futures or short-term Canadas would again be a back-door way to “trade” around this prospect of a housing correction. From a more basic standpoint, best to either rent if you can, trade down, again if you can, or make sure you can make your payments upon renewal, especially with these new CMHC requirements announced the other day.

I like that Rosenberg came to pretty much the same conclusion I did about shorting housing. That is, just either rent if you haven’t bought yet or don’t go overboard with the amount of house you buy. Validation, it tingles!

At this point in the Q&A, there were a bunch of questions about individual markets, all of them basically saying “my market is different because of x”.

David Rosenberg: I accept the premise that much of the overvaluation is in the urban areasd, especially Toronto and Vancouver. But I shudder somewhat because I recall all to well in 2005 and 2006 about how the bubbles were regional and concentrated in Florida and California. Hindsight shows it was a lot more national than people were willing to acknowledge.

I think the decline will be steeper in the Toronto and Vancouver market, but will be felt nationally. Even places in the Atlantic provinces that seem super cheap compared to the rest of the country will not be immune.

late 2010 and 2011 seems like a very short time-frame for these cracks to appear. can you explain your timing calls here?

David Rosenberg: Prices won’t stay 15%-30% overvalued indefinitely. That’s all I know. You can rack your brain trying to time the eventual blowoff but that misses the big picture.

Like every bubble, getting the timing right is tough.

Since this post is getting super long, I’ll wrap it up. Be sure to check out the entire interview, Rosenberg provides tons of great information.

Are Variable Rate Mortgages Always Better Than Fixed?

Real Estate 2 Responses »

Apr 212010

There’s a great post over at Million Dollar Journey weighing on the age-old variable vs. fixed mortgage rate debate, titled Avoid The 5-Year Fixed Mortgage Trap . In the post, writer Ed Rempel argues that Canadians are always better off with a variable rate mortgage, or a short term fixed loan rather than the traditional 5 year fixed. It turns out that Canadians are very willing to pay a premium for stability, a premium Ed argues they should avoid all the time.

Yet like most personal finance choices, this one isn’t all about the dollars and cents. Like Mike from Four Pillars pointed out in the comments, fixed rate mortgages give borrowers protection from rising rates. And while they do pay a premium for that protection, it’s a premium that people would gladly pay. How much is peace of mind worth? Every person answers that question differently, that’s the crux of personal finance.

Recently, we saw 5 year fixed mortgages for 3.69%. Even though rates have now gone up from those lows, could someone be better off with a 5 year fixed than a variable at prime minus 0.5%? (currently 1.75%) Remember, the Bank of Canada is widely expected to start raising rates in June. Let’s assume our imaginary borrower has a 200k mortgage, 25 year amortization. Let’s also ignore property taxes and other expenses for the sake of simplicity.

Let’s first figure out the interest expense over 5 years for the fixed rate person.

$200,000 mortgage 3.69% interest rate:

Monthly payment 1018.70

34,277.69 paid in interest

26,844.43 paid back in principal

173,155.57 still owing

The issue for figuring out the variable rate mortgagor is raising rates aren’t predicable. They could go up quite quickly, or fizzle out after just a few increases. For our discussion here, let’s look at rates going up at the pace that TD thinks they are. (I tried to just embed the chart, but with no luck)

TD thinks the Bank of Canada’s overnight rate will rise to 1.5% by the end of 2010, and 3% by the end of 2011. Prime rates are currently 2% above the Bank’s overnight rate. After 2011, obviously nobody really has any idea what’s going to happen with interest rates, so let’s run a few different scenarios: (Remember, prime minus 0.5% is the mortgage rate used)

1. Rates stay with prime at 5% for the remaining 3 years.

2. Rates rise 0.5% a year, peaking at 6.5% for year 5.

3. Rates fall o.5% a year, bottoming at 3.5% for year 5.

Scenario #1:

Payment goes from $895.93 per month to $1099.10. Total interest paid is $37855.66 for the 5 year period and the principal owing is $174374.81. The five year fixed person is ahead of the game, although only slightly.

Scenario #2:

Payment goes from the same $895.23 per month to $1253.72 in year 5. Total interest paid over the 5 year period is $43,273.93 with a balance owing of $176,037.33. This handily loses to the 5 year fixed option.

Scenario #3: This does much better, with the payment ending up at $954.96 during year 5. Total interest paid is $32,456.06 with $172,479.68 owing at the end of the 5 year term. This is a much more attractive option than 5 year fixed.

Whew! Okay, what does all this mean?

Now I know I’m using the benefit of hindsight here, but I think the people who locked in at 3.69% are going to come out the winners. Which of my three interest rate scenarios do you think is the most realistic? Will rates rise to a still relatively low level and stay there? Or will they keep slowly rising over time? I don’t have the answer, but unless they come back down after 2012 you’re better off with the stability of a fixed payment.

Please don’t lose sight of my point because I cherry picked the absolute best situation for fixed rate mortgages. The point is that although variable usually wins in the long run, fixed rate can also have its advantages. What’s certainty worth to you? Perhaps someone else is willing to pay more for it.

Tenets of Investing #3: Dividends

Tenets of Investing 1 Response »

Apr 202010

This is the first part of my 10 part series on the tenets of my investment philosophy. I believe that investing without a game plan is equivalent to a baseball player swinging with his eyes closed. Sometimes contact will be made, but not having a game plan makes the at bat that much harder. I’ve sent up a Tenets of Investing page where you can click to check out all 10 of my tenets. And just to screw with you guys, I’m going to write about them in a random order.

I’m really going to anger my pal Dividend Growth Investor with this statement, but I’m going to make it anyway. Dividends are not the be all and end all when investing.

Please don’t think I’m anti-dividend. Like my other pal Kevin O’Leary, I enjoy when companies “pay daddy”. Dividends are the nice payments you receive while waiting for the stock price to go up in value. When you’re a value investor like me, often that waiting period can be a long time. While dividends are nice, I believe investors should view them as a bonus rather than a necessity.

There are two components to return on investment. One of them is capital gains, the other is income. Some investments should focus on capital gains, while others should focus on income. And some investments should incorporate parts of both income and capital gains. That’s the sweet spot of dividend investors. That’s their game plan, not mine.

For someone like me, I’ll buy a company that’s trading below book value, yet isn’t making any money. In a situation like that, I’m more interested in buying assets worth a dollar for fifty cents. As long as I believe the business has potential for turnaround, I’ll buy it, earnings and dividends be damned. Not every investment needs a dividend to be considered attractive.

Saying all that, a company gets a bonus thumbs up from me if they pay a dividend. While getting paid to wait is a plus, it’s not imperative. If I was presented with two equal companies, with one being a dividend payer and the other doesn’t, I would pick the dividend payer every time. It’s just not very often that we’re given that choice as investors.

I’ve come to the conclusion that a lot of the stocks I’ll find attractive won’t pay dividends. I’m okay with that, I’m just hoping to find some companies I like that pay daddy.

Lessons To Be Learned From The Big Short

Stocks No Responses »

Apr 192010

I finished reading the Big Short by Michael Lewis this morning. It was a solid read and I recommend it to all my readers. Without getting into too much detail, the book was about the people who bet against the subprime mortgage market during the height of the housing peak. Specifically, Lewis profiles a half a dozen very unlikely investors who made all sorts of money when the market went south.

My reasons for reading business related books is twofold. First of all, I enjoy reading them. Some people read romance novels, I read about the financial markets. The second and much more important reason I read these types of books is to learn something. If I can pull some nugget of information from a financial book, even if that nugget only makes me a few dollars, then reading book was a valuable use of my time. It also increases my knowledge base just a little bit, which hopefully comes in handy at some point.

What did I learn from The Big Short?

The lesson is very simple. I refuse to invest in financial stocks that have large investment banking arms.

There’s two reasons for my newfound trepidation. First of all, rouge employees can take substantial risks with a company’s money, risks that often turn south very badly because of the leverage involved. There is no other industry where employee risk is so scary. Often, a CEO has little to no idea what the trading desk is really doing. Employees in the big investment banks are given an incredible amount of freedom, an amount that seems staggering considering the amount of money involved.

The second reason is I simply don’t understand the world of derivatives. While Lewis does a good job of explaining the use of derivatives in the mortgage backed security market, I still don’t really understand it. The derivative market is really only understood by the players. The amount of capital at stake is staggering as well, yet another reason to avoid these investments.

In the interest of full disclosure, I own a small position in Citi. The position was initiated as a speculative play on the recovery of the U.S. financial system. The investment is currently down around 50%. While I have little reason to lock in my losses, you won’t see me investing in a financial institution like Citi unless I find it incredibly compelling.

Often you hear the mantra that you should invest in what you know. While I think only investing in companies that you’re intimately familiar is limiting your investment choices, I think that you should limit your investments to products you understand. If you don’t get it, don’t invest in it.

Older Entries

Financial Uproar