You millennials might not be old enough to remember it, but stock splits used to be a relatively common thing.
You’d have your 100 shares of some stock trading at $30. It would go up and up and up some more, because of course I picked a winner. It would hit $60 or $70 a share a few years later and then management would announce a stock split. All of a sudden you go from having 100 shares to 200, and you feel like an absolute baller. Never mind the reality nothing has changed. 200 shares just feels better, y’know?
Nowadays there are barely any stock splits. Dollarama is the only company I can remember recently that did one, which was back in 2018. It split its shares 3-for-1 and then promptly fell shortly after. I guess Apple had a pretty famous one a few years ago too.
Fun fact: I once knew a guy who would short stocks that had recently split, saying they were due to fall. This probably didn’t work out well.
This begs the question — where have all the stock splits gone? Have they disappeared forever?
The future of stock splits
To understand why stock splits are no longer a thing we have to dig into some of the inner workings of the stock market. Dig deep, baby. Like you’re searching your nostril for that one annoying booger.
Back in the day before online brokerages were common, you actually had to call a guy to trade stocks for you. I’m not even that old (Nelson’s wife: LOL) and I remember the days when discount brokers were on the other end of a phone line.
Trading was done by humans back then too, and to make things easy we’d divide shares into “lots”, which were typically 100 shares each. Anything that wasn’t a multiple of 100 was considered an odd lot and would have to be given special consideration.
Companies wanted the average retail investor to be able to buy their stock easily. Thus they’d make their shares reasonably priced enough so even a small-time investor could easily buy 100 shares. $60 per share means an investor is shelling out $6,000 for 100 shares. That was probably too much for the average person back in 1997, so they’d split the stock.
Nowadays nobody cares about lot sizes these days, and it shows. Just take a look at some of the big share prices out there:
- Amazon: $1,654.93
- Google: $1,084.00
- Booking Holdings: $1,795.67
- Markel Corp: $1038.88
- Fairfax Financial: $616.04
- Constellation Software: $961.36
I threw in a couple Canadian companies there so we wouldn’t feel left out. I’m a pretty generous guy, guys.
There are also an assload of companies that trade at anywhere from $100-$500 per share, stocks that sure don’t look like they have any intention of splitting soon.
The case for more stock splits
I’m the first to admit a stock split doesn’t matter nowadays. I don’t really care if I’m buying 50 shares of something worth $100 a share or 2,500 shares of something worth $2 per share. They both represent $5,000 investments.
But still, owning 2,500 shares of anything makes me feel like an absolute baller. Do you know how much money I’d have to put out to own 2,500 Facebook shares? I’m looking at US$364,575. That’s about $1.3 billion once converted back to Canadian. Give or take.
OKAY GUYS GEEZ. MATH IS HARD.
I own 17 Facebook shares today, an investment worth about $3,300 when converted back to my home currency. So when I tell people I own a “few” Facebook shares I’m not lying!
$3,300 is a reasonably-sized investment to have in one company. But I just can’t help but to feel inadequate when I look at my account and it says I own 17 Facebook shares. How lame.
Yes, it is cheap psychology and my big powerful brain should be able to overcome it. But my lizard brain just can’t help it. Why won’t you let me feel like a big deal? I don’t get this at any other point in my life. My cat harasses me for its basic needs and I don’t get to boss anyone around at work anymore. I’m basically society’s bitch (you want me to pay my taxes? SCREW YOU, BIG BROTHER) and all I want in return is to have low priced stocks so I can feel like a big deal. Is that too much to ask?
Sorry, that went off the rails a bit there at the end.
Oh come on. I just covered this. Didn’t the LAMESTREAM (NAILED IT) media get the message?
Okay, fine. Let’s do this thing. Again.
Early this week yet another bankruptcy alarmist story started making the rounds. This one claimed that 46% of Canadians are $200 away from insolvency, versus 40% who felt that way in September.
Naturally, all the usual suspects latched onto this story and pimped it with all their might. It became a big enough story I saw it shared a good half a dozen times on my Twitter feed by concerned Canadians who think this might be it. The massive debt bubble we’ve been accumulating for years is about to burst. Or at least it would seem like it.
But, like always with these stories, there’s a much more nuanced picture once we dig a little further.
Because I want to almost have a stroke, let’s compare headlines to reality.
46% of Canadians on the brink of insolvency as rates rise: Survey
46% of Canadians near insolvency: poll
Nearly half of Canadians just $200 away from insolvency: Study
(That last one is my favorite, as you’ll see)
Let’s start with the source of this information. Does it come from government statistics? Detailed analysis of thousands of personal balance sheets? Uh, no. It comes from a survey.
A new survey indicates almost half of Canadians have pushed their finances perilously close to the brink, underscoring the heavy toll that mounting debt loads are taking on households in this country.
Oh, they asked people. And who exactly did they ask?
Forty-six per cent of respondents to an Ipsos survey conducted on behalf [sic] MNP Ltd. said they’re within $200 of insolvency every month, compared with 40 per cent who faced such dire circumstances in the previous survey in September.
So somebody named MNP commissioned a survey, huh? I’m sure they are 100% unbiased.
JESUS FUCKING CHRIST.
Every day I wake up in the morning and tell myself I’m not going to cuss today. And then bullshit like this makes me SO FUCKING MAD mad and I just can’t help myself.
Did any of the people who published this story consider for one god damn second where the info was coming from? Or did they just take the word of a source with a massive conflict of interest? For all we know MNP found the most vulnerable people and asked them. I have zero reason to believe any of this is unbiased.
The whole thing smells worse than a Lithuanian bathroom. These bankruptcy trustees actually want people to go bankrupt. They want you specifically to experience the most horrifying and embarrassing thing that can possibly happen in your financial life. What a terrible thing to wish upon anybody.
The definition of insolvency
Let’s start with the other thing I abhor about this new survey.
What exactly does it mean to be within $200 of insolvency every month, anyway?
It doesn’t mean 46% of Canadians are on the verge of bankruptcy, like the survey suggests. What it does mean is approximately half of Canadians live paycheque to paycheque without much wiggle room. If their debt payments go up $200 a month then they’d find themselves in a difficult situation.
This is much different than the way this survey is worded, which suggests half of Canadians are absolutely screwed if their debt payments go up by $200 a month.
What happens to the average person who finds themselves in a tough spot? Do they throw up their hands and declare bankruptcy? Or do they find ways to cut back in order to meet their monthly obligations?
There are a million ways the typical Canadian can deal with temporary tough times. They can borrow against their house. They can cut back on meals out or coffee or whatever. They can sell crap on eBay. They can borrow from friends and family. They can work out temporary relief from a creditor. And so on.
To suggest the average Canadian is $200 away from bankruptcy is fucking irresponsible. It gives people no credit at all.
Let’s look at it another way. You run a company with $100,000 worth of assets and $20,000 worth of liabilities. You have a rough quarter and lose $2,500. Are you insolvent?
Uh, no. Of course you aren’t. Because your liabilities are not more than your assets. There’s plenty of equity there.
If the average Canadian was close to insolvency, then why do our collective net worth numbers look like this?:
This survey essentially says the average Canadian is $200 away from bankruptcy, yet the average Canadian actually has a net worth of $300,000. Those two facts do not jive. They make zero sense when put together back-to-back.
Look, I’m not going to deny there are a shitload of Canadians who are poor as balls and a shitload more that are living paycheque to paycheque. There are lots of people who spend their 20s and 30s at risk of disaster if they lose their job. But, for the most part, these people do not end up screwed. They are rational people who are working hard at paying back their debt.
Let’s wrap up this tire fire
First off, shame on the media for taking this and reporting it as fact without disclosing the bias so huge it’s visible from space.
I get what MNP is trying to do here. They’re trying to convince people on the brink to declare bankruptcy, giving them the chance to collect those sweet trustee fees in the process. These average about $2,000 per case, by the way.
Yeah, bankruptcy is big business. Who knew?
The point of this article isn’t to just debunk this terrible story that’s making the rounds. It’s also to encourage you readers to take a hard look at the source of your information.
Imagine my surprise when a Bitcoin miner announced it was setting up operations just outside my small Alberta town.
(I’ve just outed myself, haven’t I? Y’all can easily Google where I live and STALK MY ASS. I’d ask you to kindly not bother, but you’ll likely get bored to death before murdering me. I do not have an entertaining life.)
It turns out the move made sense for one simple reason. For whatever reason, the county where they set up operations has ridiculously low power costs. Since electricity was their main input cost, that price mattered. A lot.
This was back in 2016, and you can already predict what happened next. The price of Bitcoin fell and profits went down with it. The company recently made local headlines by laying off a big chunk of its workforce, which was mostly minimum wage guys doing pretty easy work. I know more than one guy who worked security, for instance. Why does this place need security? It’s just a bunch of Seacans on the bald-ass prairie.
Anyhoo, let’s move on from my newly laid off acquaintance and focus on what this post is really about. This company is publicly traded on the TSX Venture Exchange, which means we can finally see just how much it costs to mine Bitcoin. Are you as excited as I am?
How much does it cost to mine Bitcoin?
The company operating locally used to be branded as Bitfury, but now it’s ran as Hut 8. These two companies are quite connected. Bitfury owns a bunch of Hut 8 shares and they work together on all of Hut 8’s North American projects.
Hut 8 operates two Bitcoin mining facilities in Alberta. The larger facility is located near Medicine Hat, while the smaller one is close to Drumheller. Like previously mentioned, these locations were picked because they offer cheap power.
From a recent investor presentation, here’s how much it costs to mine Bitcoin. We’ll dig a little deeper into these numbers in a second:
So if they’re making such high gross margins, why doesn’t the company make any money?
It turns out they have massive depreciation costs, which account for just about all of the net loss.
They also spend a bunch of money on stock options for top execs, to the tune of $2.3 million in the first nine months of 2018.
These depreciation costs are actually going to accelerate going forward. The Medicine Hat facility was just finished over the summer at a cost of more than $100 million. It’s obvious the digital technology needed to mine Bitcoin doesn’t have that long of a life, so that $100M+ will be wrote off fairly aggressively.
The issue becomes the true life of this equipment, which represents the majority of the cost to get up and running. If it lasts longer than 3-4 years then there’s the potential to make some longer-term money here. But if it needs to be replaced semi-constantly then these miners are screwed. Especially with the price of the cyrptocurrency falling so much.
So to answer the question, it looks like it costs about US$3,000 to mine one Bitcoin, without spending a nickel on depreciation. The equipment used to mine Bitcoins will naturally become obsolete over time, so depreciation becomes a very important cost. This isn’t writing off intangible assets. We’re talking about computers and servers here.
One last note about Hut 8. Rather than selling the Bitcoins as it gets them — remember, that’s your reward for helping complete the transaction — it’s hoarding them on the balance sheet. It has some $26 million worth versus a market cap of $167 million. This will be a smart move if Bitcoins go back up in value, but it adds a further dependence on crypto that you don’t want if the price keeps sliding.
My kingdom for a good Canadian stock screener!
Nice try, mixing in some Shakespeare like you’re some sort of classy broad. You are not.
Wait, is that actually Shakespeare? There’s no time to check. Let’s just assume it is.
The Toronto Stock Exchange is, by far, the worst of the large publicly-traded stock exchanges. I want competition to show up more badly than I want to eat lunch early every day at 11:15. I restrain myself because the last thing I need at this point is extra meals.
I have many issues with the TSX. It’s filled with trash oil and mining stocks, and the TSX Venture exchange is even worse. This exposure to two shitty sectors is the main reason why I’d never touch a TSX index fund. Then, because having an exchange already filled with trash wasn’t enough for these rat bastards, they went ahead and created an even smaller and shittier exchange, the NEX.
But that pales in comparison to the world’s worst stock screener, which is located on the TMX Money website, a place that exists to give company information to investors.
Let’s run through a few highlights of this terrible stock screener:
- You can’t input any numbers, you must use one of the preexisting choices. If I want to screen for dividend stocks with a certain yield, I can’t put in my own choice. I have to use numbers that are chosen for me. These include 1,2,3,4,5, and then 10. I’m either searching for stocks with a 5% yield or 10%.
- Stocks that should show up in the screen are often omitted. Screens ran on other TSX stock screeners often turn up far different results.
- Preferred shares end up mixed in regular share results, which screws up any screen searching for stocks with low price-to-earnings ratios. The screener uses the particular preferred share’s market cap and the earnings for the whole company
- The easy way to fix this would be to make a separate preferred share screener
- When you click on a company’s information the screener will reset, forcing you to put in all the info over again
There are a million more reasons why I hate it, but lets move onto a solution to this problem.
TSX needs to step up
The Toronto Stock Exchange could easily dedicate more resources to building a better website. There’s all sorts of info they could have on there that currently doesn’t exist. Wouldn’t it be great to have a website that has:
- 10 year quick financials on every company
- Historical dividend growth rates
- Payout ratios based on net earnings, free cash flow, funds from operations
- The ability to rank stocks in a sector based on certain valuation criteria
And so on. There’s the potential to make something really interesting, something we can be proud of.
This will take a bunch of money. I’m the first to admit that. And I have the plan to pay for it. I want a new tax of $0.02 per trade that is earmarked to pay for the best investor information site in the country. Let’s get our national securities regulator on this immediately.
Oh shit. Never mind.
On January 15th there were approximately one million total trades on the TSX. A $0.02 tax would generate $20,000 per day in revenue. Multiply that by approximately 250 trading days and we have a $5 million annual budget. Is that enough to upgrade the TMX website into something worth bragging about? Maybe not, but it would sure be a good start.
There’s a certain guy on Twitter — I’m not going to give him the publicity of saying his name — who has built a reputation by talking about the very worst of his bankruptcy cases and tweeting about them, further cementing that the average Canadian with too much debt is doomed. DOOMED I TELLS YA.
I’m not a fan of this for a number of reasons.
- Who wants the details of the most embarrassing moment of their financial lives aired for everyone to see, even if there’s no name attached to it? Imagine going to this guy and then seeing a tweet a few hours later that basically says “hey take a look at this dumbass?”
- You can see the underlying glee in all of this in every tweet. It’s like he wants people to go bankrupt.
- He’s a bankruptcy trustee, which means he stands to benefit by more folks declaring bankruptcy or opting for a consumer proposal. No wonder he’s so excited.
- I’ve seen a lot of trash personal balance sheets during my time as a private mortgage lender, and he’ll tweet about six different cases a week that are far worse than the most terrible debt burden I’ve seen in years of doing this.
There’s also a big ol’ case of recency bias here too. If all you saw was the most indebted folks out there, the ones with nowhere else to turn day after day, you’d start to think the rest of the country was screwed as well. I fully admit I have the opposite bias — I’m constantly amazed at how rich Canadians are.
But maybe I’m wrong here. Maybe Canadians are screwed and a wave of bankruptcies are around the corner. Hell, maybe there’s a bunch of bankruptcies happening right now. Why don’t we take a closer look.
Fortunately for us nosy folks (I’m talking about you, Italics Man), the government keeps track of how many bankruptcies there are in the country. And 2018 was not a particularly bad year, even though interest rates crept up a little.
There were a total of 30,313 bankruptcies and consumer proposals in the most recent quarter, up a whole 2.6% versus the same quarter last year. On a rolling year-over-year basis there were a little over 123,000 bankruptcies, which is up just 0.9% versus the year before.
Let’s dig a little deeper into the underlying numbers. Only three provinces had big increases in the number of bankruptcies and consumer proposals. These are, not surprisingly, Alberta, Saskatchewan, and Newfoundland. All three of these provinces have been hit hard by a slowdown in the energy patch, a main driver of their economy.
Numbers in Ontario and B.C. were down on a year-over-year basis despite both Toronto and Vancouver having ridiculous real estate prices.
Putting the bankruptcy “problem” into perspective
Yes, Canadians have too much debt. And I’ll be the first to admit some folks will have problems servicing that debt if rates shoot up another percent or two.
But the bottom line remains: bankruptcy just isn’t that big of a problem in Canada.
There are close to 37 million Canadians. And 123,000 of them filed for bankruptcy in the middle of the biggest debt boom in the history of the world. That’s 0.33% of the population. 99.67% of the population manage to muddle along each year not declaring bankruptcy. And I thing that, like divorce, the repeat filers who manage to screw themselves every decade skew statistics upwards.
A condom is 98% effective at preventing pregnancy when used correctly. That gives it a 2% chance of malfunctioning.
See what I’m trying to get at here? This isn’t a very big problem, no matter what a guy who sees this every day says.
Even Alberta, a province battered by a crummy economy for a few years now, is hardly seeing a massive influx of bankruptcies. It had about 14,000 proposals over the last year for a population of four million. That’s just 0.35% of the population.
Newfoundland, which is widely considered a poor province, has a bankruptcy rate of a little more than 0.40%.
And so on. The stats across the country prove it. Bankruptcy just isn’t a very big problem in Canada right now.
How about historically?
In 2009 bankruptcy and consumer proposal rates hit a peak of about 6 people per 1,000. This gives us a total proposal rate of 0.6%. That’s during the worst financial crisis of the last what, 80 years?
Oh, and the trend has been clear over the last decade. The popularity of consumer proposals is up significantly versus bankruptcy, which has seen a significant downward trend. This means creditors are getting at least a portion of their debt back. This trend should continue even when the economy sputters.
Don’t sweat bankruptcy
Let’s take a minute and talk about bankruptcy and real estate. And let me tell you a little secret from a private lender’s perspective. I’m going to bold this because it’s super important.
People will do anything to keep their house.
This actually bodes well for the underlying real estate market. That wave of overfinanced people selling as they hit a position of negative equity? It just won’t happen. They’ll hunker down and start paying off debt. They’ll search for other innovative solutions. But, for the most part, they won’t throw up their hands and go back to renting.
Look, we all have friends who are terrible with money, right? And yet they don’t go declaring bankruptcy. They muddle along, not really getting ahead but not screwing themselves either. This is the most likely scenario, not a tsunami of bankruptcies.
Your investments and bankruptcies
So what does this all mean with your investment portfolio? Is now the time to sell your bank stocks and run for the hills, AKA the safest part of town?
Normal economic cycles aren’t a big deal. A bad year gives bank stocks the chance to write off some of their garbage loans. The market anticipates this, which means bank stocks will usually bottom months before.
The real risk is in buying the subprime lenders, which in Canada means Home Capital Group (TSX:HCG) and Equitable Group (TSX:EQB). They will struggle if the underlying economy sputters. And they will be more impacted by bankruptcies than regular banks. They also have an additional reputation risk. You’ll start to see deposits leave these two banks if the underlying economy gets too bad.
If you are worried about this, the play to make is shorting Goeasy (TSX:GSY), the purveyor (apparently a word!) of trash loans to dirtbags.
Let’s wrap this up
I’m the first to admit I know very little about macroeconomics, even though I did listen to a series of podcasts about the subject once. Some of the smartest minds in finance can’t get big picture stuff right on a regular basis. So what chance do I have?
But there is one thing I’m sure of, something that constantly influences investing decisions. I believe there’s no way interest rates can ever move back up again in a major way. We’re not going to be paying 8-10% again for mortgages in my lifetime.
A move from 2% to 4% will hurt a lot of people. Then the economy will sputter and central banks will panic. So they cut interest rates and the cycle repeats itself. Canadians are too indebted to support much higher interest rates. That’s the bottom line.