Author: garth turner

Toronto, the burly premier said Friday, is staring down the barrel of another lockdown.

Remember that last one? House sales fell 62%. Showings evaporated. Listings crashed. The market just fell apart. Not only Toronto, but every major market in Canada. When Covid came, confidence left town.

Sit down. This time it could be worse. And it appears to be looming.

The virus is one frisky little pathogen. Combine that with pandemic fatigue and human nature, and the Second Wave may be far more consequential than the first. New cases are breaking records in most  provinces and cities, while this week US infections may hit 200,000 a day. The mainstream news is all-virus-all-the-time again. Emotions are high. Business closures are again imminent. And real estate’s in the crosshairs.

Why?

Because we went completely nuts following the first wave. Cheap mortgages, pent-up demand and a feeling we dodged a bullet, combined with WFH, nesting and a suburban rush led to galloping sales and exploding prices. As this pathetic blog spelled out, it was completely insane that we’d have a housing boom in the midst of a recession, record joblessness, economic disruption, historic deficits, political chaos and a global pandemic. But we did. Bad choices were made. Now some will regret that.

Lockdowns seem inevitable. Politicians are freaking. The real estate market will grind to a halt. This is taking place immediately after (a) record prices have been achieved, (b) family debt has been pushed to a new high, (c) huge numbers of condos have flooded the market after renters left and Airbnb choked, (d) more people will lose their incomes and businesses, (e) when we’re all emotionally exhausted and, of course, (f) when it’s almost winter. The weather sucks.

Here’s a harbinger. The eternal property-pumping Real Estate Investment Network (REIN) just published a report warning its army of specuvestor groupies to stand down and stand by. “All major real estate markets in British Columbia, Alberta, and Ontario have fallen further into the real estate slump phase driven mainly by the economic impacts of the COVID-19 pandemic,” it says. Toronto, Vancouver and Ottawa are at the “beginning” of the slump while Calgary and Edmonton are in the thick of it.

“At first glance, it might look like the data is pointing towards a market boom because in many key cities, real estate values have been, and continue to, increase. But this is all smoke and no fire. This is a common misconception since characteristics of the boom and slump phases of the real estate cycle sometimes overlap and can be confusing to many if not most people.”

Meanwhile, after hitting a new record high for all types of properties (at $1,026,925) the Toronto market is starting to unwind. Fast. Deal numbers are falling. Open houses are already essentially banned. Showings will be next. If you want to buy  you’d better be prepared for the huge risks of doing so over Zoom or FaceTime.

After months of virus stress, a shortage of listings, FOMO, multiple offers, emotional buyers and that kneejerk flight from urbanity, the market’s fraying. “Real estate fatigue,” as one broker puts it. “It’s more difficult to put deals together because of the collective anxiety.”

Indeed. The first lockdown came with an immediate gush of government money and emergency actions by the Bank of Canada. Now we have an historic $340-billion federal deficit and interest rates that can hardly fall lower, with 1.5% mortgages. Infections are worse. Hospitalizations increasing. The news out of America hard to believe. And if all the coffee chops, hairdressers, gyms, retail outlets, dentists, offices, daycares and schools close again you can expect unemployment in a city like Toronto or Vancouver to soar.

Now, this is grim. It’s also realistic. Political leaders don’t want a big body count on their watch. And lockdowns may be the only way to squish this bug until the vax arrives in Q2 of 2021. Hopefully there will be another outcome. But…

Says Re/Max agent Meray Mansour: “The levels of anxiety are high. People are drinking a lot more. We don’t have the normal things that we do every day, like going to the gym or being with friends and family. There’s a lot more isolation. All that stuff affects us psychologically. And most people are not even aware of that. It’s kind of like this underlying factor… Sometimes when people are anxious, they make bad decisions.”

Sadly so. Soon to be realized.

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  By Guest Blogger Doug Rowat

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Thank god the US presidential election’s over.

Not because we now have a declared winner, but rather because I no longer have to suffer the endless TV network advertising loop. Tom Selleck hypnotically reassuring me about reverse mortgages, learning that mattresses can be like McDLTs—hot on one side, cold on the other, or watching grey-haired dudes pumped full of Ageless Male slinging kettle weights like balsa wood was becoming too painful to watch. But at least CNN and Fox News had one thing in common: a target demographic.

However, the other recurring ad that caught my attention during election night (or, as it turned out, election week) was one for Schwab Stock Slices. I have to confess, until I started watching the election coverage, I’d never heard of these products.

But a “slice” is simply a fractional share of some of the largest and best-known US companies: Netflix, Apple, McDonald’s, Amazon, Facebook, Alphabet (Google), Nike and so on. With Schwab you can buy as little as one fractional share or up to as many as 10 fractional shares. The service that Schwab provides, of course, is ease of ownership. On an absolute price-basis, many of these stocks are expensive. Amazon and Alphabet, for instance, currently trade at more than $3,000 and $1,700 per share, respectively. Fractional shares have become popular and are not unique to Charles Schwab. Many other firms, including Fidelity, Robinhood and Interactive Brokers, offer similar products.

Now making investing more accessible is not in and of itself a bad thing. But like Tom Selleck’s ad plugging reverse mortgages, you’re not getting the full story. “Slices” present concerns.

First, fractional shares aren’t portable. In the case of Schwab, you can’t trade them on any other company’s platform. Owning a fractional share of Amazon isn’t like owning a full share of Amazon. If you owned a full share you could move it over to another financial institution without difficulty. However, if you want to do the same with a fractional share, you’ll have to sell it first, which introduces potential tax consequences.

Second, fractional shares encourage more frequent trading, which is particularly problematic for inexperienced investors. And if you’re trading five-buck fractional shares because you can’t afford the full price of a single share, I would argue that you’re very likely an inexperienced investor. I’ve mentioned many times on this blog that frequent trading is a doomed approach to investing.

And finally, owning even the 10-company “slice”, while better than nothing, still doesn’t even come close to providing proper portfolio diversification.

When it comes to portfolio risk, there are two main types: systematic and unsystematic.

Systematic risk refers to the broad, overall events that, to varying degrees, take down all individual stocks. Systematic risk is often referred to as “market risk”. The 2008-09 financial crisis, 9/11, 1987’s Black Monday, 2011’s Japanese earthquake and tsunami or, more recently, Covid-19 are all examples of systematic risk: forces or events that will drive any stock lower regardless of its particular individual business model. There’s nothing a portfolio manager can do to diversify away systematic risk.

Unsystematic risk meanwhile, refers to company-specific risk. Unsystematic risk refers to the internal events that can crater a company’s fortunes. The fraud at Enron, the mismanagement at Nortel or the inability to adapt to changing technologies at BlackBerry are all examples of unsystematic risk. Fortunately, unsystematic risk can be diversified away. The difficulty, however, is that it takes an enormous number of individual stocks to do this. Roughly speaking, about 60 individual positions (see graphic below).

Proper diversification: it takes a lot

Source: Burton Malkiel, A Random Walk Down Wall Street

The further problem, of course, is the impossibility of having an informed, thoroughly researched, and ultimately accurate, outlook for 60 different stocks.

I worked many years on an institutional research desk and a hardworking research analyst might cover 10 or 15 different companies. And this analyst would be focused: working long hours studying the industry and company-specific fundamentals affecting their concentrated coverage list. But, in the end, and I can tell you this from witnessing it first hand, the accuracy of the analysts’ recommendations was inconsistent and often amounted to nothing more than a coin toss.

I presume my readers have regular jobs or at least busy lives, so imagine the impossibility of trying to successfully analyze not 10 stocks, but 60, and doing it with a fraction of the available time. However, building a portfolio with anything less than 60 stocks means taking on unsystematic risk. Schwab stock slices might appear to provide sufficient diversification, but they fall well short.

A concentrated portfolio can be devastated if even just a few of the positions collapse. And even if you hold what you perceive to be blue chips, which is how Schwab currently positions its “slices”, this will offer little protection if you hold too few positions. Remember: General Electric, Lehman Brothers, Bear Stearns, Nortel, Boeing, Nokia (the list goes on) either are, or were once, blue chips.

So it might be kind of neat to buy five or 10 blue-chip companies in a single transaction. But five or 10 fractional shares aren’t enough to properly control risk.

There are many ways to properly diversify a portfolio. A Schwab “slice” ain’t one of them.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.

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All virus, all the time. How else should this miserable year end?

Blog dog Darren has been ‘trapped’ in Zurich for most of the year, unable to travel back to Canada, he says. It’s scary. “This is Coronavirus land . . It’s not a joke here (more than 1% of the population got the virus last week alone) but at least it doesn’t make the first page (or even the first 6 pages) of news and everything is open.”

In the US new confirmed infections are about to top 150,000 a day, just a week or so after they passed a hundred grand. President Trump continues to obsess about winning the election he lost, while hospitalizations explode and deaths snake higher. Estimates are for over 400,000 fatalities by March 1st, and a Biden presidency born into crisis.

In Toronto almost everybody has a mask, almost everywhere. Empty storefronts along prime retail strips speak to the devastation of this bug. Today I walked a long, long stretch of the glitzy underground pedestrian money mecca called the Path. Crickets. Deserted. Over $3 billion in annual economic activity from this one strip of eateries, clothiers, cleaners and retailers, gone.

The PATH, downtown Toronto. Friday Nov. 13 @ 11 am. Yikes.

Ontario – at least the hot bits of it – may lock down again. The Toronto mayor’s been on the tube begging people to stay home. Not the message you want if you own a shoe store, like the one I bought some awesome winter boots in yesterday. “We’re just hanging on,” Jacob said. “Thanks be, that I do not own this store.”

Well, so much for the miserable pathogen news. Now let’s look ahead.

Will the vaccine change everything?

Probably, but this will be a phased recovery. First, equities squirt ahead. The stock market’s a forward-looking beast, so investors are now firmly thinking of 2021 and the way global growth will resume, bringing with it increased corporate earnings and the resuscitation of air travel, manufacturing and commodity prices.

The bond market is also rustling to life, because with a Covid vax and GDP expansion comes inflation, especially after governments have spent $12 trillion fighting the virus. Bond traders price in this kind of news more than a year in advance, which is what’s happening now. Since the Pfizer announcement and the Biden victory, yields have been popping. As mortgage blogger Rob McLister warns, “By the time we know the economy is back to pre-pandemic levels, fixed rates will have already shot up.”

This sentiment is being echoed within the industry. “The only thing that will send mortgage rates tumbling further,” says mortgage company founder Dan Eisner, “will be an absolute failure of the final phase of FDA approval of this vaccine.” So while many people (especially on this pathetic blog) believe society cannot possibly withstand a rate increase, prepare. If the economy gets better, rates will swell.

Here’s the advice: (a) if you have a variable-rate mortgage, it’s time to lock in. After all, a five-year fixed is available these days for between 1.5% and 2%, depending on how much TNL@TB likes you. And (b) if you’ve been thinking about buying real estate, get approved for a loan now. Says BC mortgage broker Reza Sabour: “If you’re sitting on the fence and you haven’t really pulled that trigger or called a mortgage broker yet, I would highly encourage people to do that, if they are in the market to buy and especially if they’re in the market to buy very quickly.”

But wait. Is this really the time to be buying?

On one hand, we know the economy will get better when the bug is crushed, or at least fumigated. Stores will open. The planes will fly. The highways will be clogged again. People will go back to work. Incomes restored. This confidence will lead more people to think about purchasing real estate and getting on with their lives. That would suggest pulling the trigger now.

On the other hand, sustained economic recovery has the potential to double mortgage rates. That wouldn’t take a lot – bringing us back to 3%+ home loans. This will happen regardless of what the central banks do, since loan costs are more dictated by the bond market than the CBs. As history has proven, the single greatest determinant of real estate value is the cost of money. That’s why we currently have a housing boom in the very pit of a global pandemic when people are terrified of a sneeze.

The rate-price correlation is even more pronounced when (as now) a boring suburban house miles from the downtown core commands a price of more than $1 million – up a fifth in a year. Household incomes have not leapt to justify this increase. It’s all about financing. And price hikes bring FOMO. This is a vicious cycle, wherein low rates lead to historic debt.

And, now, it’s ending.

The death of the pandemic is still a ways off. But when it comes – and it will – expect change. For the better (savers). For the worse (borrowers).

Now, put on your mask, lather up with sanitizer, slip on the nitriles and the face shield and go spend some money. Jacob needs ya.

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May you live in interesting times, says the ancient proverb. And, kids, here we are.

First, politics. Biden will win, Trump will lose. The lawsuits, blustering, inquiries and threats are theatre. Fascination, irritating, costly and a barnacle on Biden’s butt? Absolutely. But ultimately without consequence.

BTW, were people dancing in the streets of every major US city when Trump was elected? Or in Paris and London? Nope. The crusty white dude is now a cult guy. And Kamala has a lot to do with that. Angry Donald is the old one now. So done.

Second, Covid. Your days are numbered, you slimy little pathogen. Even as the virus runs rampant through much of the world in a second wave (OMG, they just shut down Manitoba…) and as US infections are on track to hit 200,000 a day in the next month or two, this bug is finished. Pfizer says so. The new vaccine with its 90% kill rate is the first light at the end of the tunnel in nine months.

Yeah, yeah, this will take months – maybe a couple of years – to get rolled out to millions and billions before we can claim victory, but we’re moving now. And investors sure like the smell of that.

Third, Mr. Market is one happy dude. The vaccine not only lifted the pharmas and some beaten-up value stocks but also the airlines and related travel businesses. It would change everything ultimately, and make false the assumption people had (a month ago) that we’ll be wearing masks, social distancing and eschewing empty city downtowns for years.

So the market is forward-looking and while we may not see widespread inoculations for a long time with many more infections to come, the leap forward is evidence of optimism. If you’ve sitting on the sidelines, moaning, whimpering and in cash, you have now missed the second major virus opportunity. First on March 23rd. Then again in the opening week of November. Meanwhile folks with B&D portfolios who remained fully invested and worried about stuff like weatherstripping were just fine.

Fourth, bond yields exploded higher this week as the Biden/vaccine story broke. This now makes it w-a-y more likely we have just bounced off the bottom for mortgage rates. And you know what they’ve been doing lately to house prices.

It matters not what the Bank of Canada or the Fed do with their benchmark rates – which will be staying in the ditch until inflation is officially returned. The CBs influence, but do not control, the bond market. Investors there look a year or two down the road for cues, and this week they’re seeing rainbows, unicorns, growing economies, price increases and rising rates.

With ‘normal’ now possible next year or in 2022, bonds vigilantes are happy to hit the sell button. After all, bonds pay nothing and are a fine place to ride out a storm. So when the forecast looks better, it’s time to switch from riskless assets like government debt and into growth assets like equities.

This is why bond prices are falling (as demand slackens) and yields are rising (they move opposite to those prices). In Canada our residential fixed-rate, five-year mortgage costs are closely tied to Government of Canada bonds, where yields just popped (and are likely to continue over the months to come). This is why some of the major lenders informed brokers by email yesterday to brace for change.

Now, rates as low as 1.6% are not going to 5% next week. But (a) this is probably the floor, so (b) it makes no sense going with a variable-rate mortgage and (c) a hike of a quarter or half point in the near future is a real possibility. Once that first hike occurs, there’ll be a tsunami of folks rushing to lock into the lowest, most absurd home loan rates in history.

Fifth, there are real estate implications to the above.

Those unloved, unwanted, take-me-at-any-price urban downtown condos which have been falling by ten grand a week won’t be on sale forever. A world of vax means people will no longer view elevators and garbage rooms as Chambers of Death.

Phun with Pfizer also means the WFH era will end that much sooner. This was, of course, never a realignment of society, just a temporary thing embraced by people who like Zooming in their undies. Yes, offices will repopulate and people will be expected back at their desks. No, not everyone, since some companies like not having all the overhead. But for most people, no contest. You’re goin’.

Oh yeah, that house you just bought in Barrie or Kamloops, Fort Erie, Hamilton, Hope or Squamish? Good luck commuting. Better luck finding a buyer next year.

You thought it was different this time because you’re special? Ha. So did Donald.

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@dogwithsign

So the second wave has offed open houses. Realtor associations in BC and Ontario have told agents and brokers to stop walking clients through properties. It’s a rerun of what happened months ago during Wave One – which apparently was just a germy little rehearsal for what’s here, and about to arrive. (Until The Cure gets here.)

Recall what happened when showings stopped in the spring?

Yep, the market croaked. Here’s what Toronto realtors reported:

The competition for those properties already on the market when COVID-19 came to Canada ensured a tiny increase in the average home price last month but only in the semi-detached market; both the detached and condo markets saw a decline. However, real estate transactions and new listings were strongly affected by the city shutdown, plummeting 67 per cent and 64.1 per cent respectively, compared to April 2019.

But that was then. We were all going to die from the virus. Now it’s routine – and everybody’s wearing a muzzle.

So just as Zoom allowed WFH and people in their undies to keep their office jobs, so has FaceTime saved real estate. Sort of. Showings are virtual. Open houses are scheduled like online webinars. Agents are spending way more time on professional photographers and virtual tours to market their listings – and buyers have been stunningly compliant. Especially the kids.

Apparently Millennials don’t like going to banks, Or stores. Or car dealerships. Or open houses. If there’s not an app, fuggedaboutit. Many of them seem perfectly happy to buying a house they’ve only driven past, viewed online and never set foot it. Then they email an offer, have mom send an e-transfer for the deposit and get an online mortgage. Ba-boom. Done.

This, of course, is nuts. Especially these days when a lot of vendors won’t even let a home inspector in the door. If you buy without viewing, the risk is huge. You deserve what you get, including crap wiring, wheezy furnaces, weepy foundations, mold farms, nail pops and attic coons. I noticed American finance writer Ilyce Glink opining about this recently, and could not agree more. So here are a few things you should never, ever (ever) do when buying property…

First, don’t buy a house online. It’s called ‘real’ estate for a reason. This is not a video game. It’s not Amazon. You can’t return it if it’s broken. Realtor photos and digital tours can be highly misleading, masking flaws and distorting reality. Google Streetview is fun, but useless for knowing the texture of the hood and the dodginess of the neighbour. So if Covid means you can’t go there and look in every closet and crevice, plus have an inspection done, then don’t buy during the pandemic.

Second, never buy without your own agent. It costs you nothing to have a person representing and assisting you, since the seller pays for this service. Realize that the listing agent is working for the owner, not you. A buyer’s agent can find out valuable information on the sales history of the house, provide you with comparables, give an opinion on the price, the location and the market and negotiate the best possible terms. Especially if you’re a first-time buyer, you need this. It’s called adulting.

Third, be careful about that online mortgage. Yes, it’s totally easy to get financing through a broker’s website or one of those rate aggregators. But odds are you’ll be borrowing hundreds of thousands of dollars that will take years, maybe decades, to pay off. The loan will come up for renewal periodically, interest rates will gyrate, and your circumstances may change. This is where a personal relationship can be meaningful. Algorithms don’t give a fig.

Fourth, do not borrow based on interest rate alone. The lowest is not always the best. The cost of a home loan is just one aspect, and equally important are the built-in prepayment privileges or the penalty should you sell before the term expires. It might make more sense to borrow from your bank, for example, where you have investment accounts or a LOC than from a web site. But you may have to visit the branch. And that means putting your pants on. Oh, the sacrifice.

Fifth, believe nobody when told how much you can borrow. It’s insane. While I know most Mills think they’re just renting a big pile of money that never really needs to be repaid (because prices always go up) so the debt is irrelevant, this is unwise. When Covid leaves, inflation rears amid huge government borrowings and rates rise, real estate will be impacted. Borrow under the limit. Live below your means. Trust no one.

Sixth, have a damn good reason to buy. These days rents are falling, FOMO has jacked house prices while the virus and low rates have distorted the market. It’s a recession with high unemployment, a weak economy and in the midst of a pandemic. The suburbs are nuts. Recency bias is everywhere. Nesting is rampant. This is not normal and diving into over-valued real estate is not a path to financial security. So (as oft stated here) buy only if you really need a house and can afford one without gutting your finances or imperiling your family.

But above all else, go there.

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When they were still counting ballots last week Mr. Market was telling us Biden would win. After that Trump speech in the White House briefing room, he had to. How sad.

What did the big stock rally last week foretell?

Lots. Markets hate uncertainty, and finally the era of unpredictable, disruptive, quixotic leadership was coming to an end. Second, nobody outside of Trumpland or the Faerie Kingdom of QAnon believes Joe Biden is a socialist, or a Trojan horse for the radical left, or senile and destined to croak/crack by summer, or that commie Kamala will soon be the President, which was always the game plan.

Biden, Mr. M thinks, will not send the economy into a Depression, allow rioting in most major cities, defund the cops or turn America into North Korea. It’s just a shame, and dangerous, that 68 million people actually believed this crap. Just as they swallowed whole the fiction about all pre-election polls being rigged, secret ballots being shipped into counting rooms and dead people turning out in drives to cast their votes. Trump is utterly discredited. His law suits are meaningless distractions. The Republican establishment will disown him before long. He is so gone. And perhaps, soon after leaving office, will be in unfathomable legal and financial trouble.

Now, what’s all this mean for you and your portfolio?

Monday morning: futures on the Dow surge more than 1,000 points on the Biden win taking markets to a high surpassing that experienced during the brief but raucous Trump tenure.

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First the bad news. The virus. Trump supporters will deny it, but the guy is directly responsible for making Covid a political issue and letting it run wild – especially in red states. Cases have erupted. Up 54% in the past two weeks, and now routinely over 100,000 a day with a thousand deaths. Canada’s sliding, too, of course, but it’s the American economy we’re all obsessed with.

Biden’s first challenge is this. Task force named on Monday. By January things could be far worse, and it is possible lockdowns occur in all major US hotspots. Could we see troops on the streets enforcing it? You betcha. But we also see a firm hand dealing with the pandemic, leading to economic healing. Mr. Market likes that.

The good news is that this pandemic suppression will come with a massive stimulus package. As Trump is discarded and ignored, the Congress and Senate will support a multi-trillion-dollar tsunami of aid, supported by buckets of QE from the Fed and even negative rates. Of course, not tackling the virus with this naked aggression, while a vaccine is approved and finally goes into production, would be an American disaster. If Trump had won, the deaths may well have been in the millions.

In short, you will probably not like this winter. Bond yields will fall, volatility will flare, unemployment will go back up, stocks will gyrate and the news will be worse than in April. But the Biden brake will be far better than the Trump gamble. All reasonable folk know that.

What to do?

If you have that famous B&D portfolio, absolutely nothing. Your bond values will rise if equities fall and meanwhile the preferreds and REITs continue to churn out income. What’s about to happen is noise, not change. Stay the course. Turn off BNN. Learn to play sax.

If you’ve been waiting in cash to buy when others are bleeding, the moment may come. Stock markets cascaded 30% lower when Covid arrived. Yes, it was temporary, but great assets were seriously on sale. Could happen again – but look at today’s investor jubilation.

If you’re a saver, terrified of financial markets and with all your wealth in a HISA (Hilariously Idiotic Savings Account) or a GIC (Grossly Inadequate Certificate) your returns will be less than zero. Inflation will eat you. Taxes will finish you off. Unless you already have a million or two, this fear will also demolish your future security. We’ll say it again: the biggest risk people face is not losing money in an investment that declines, but running out of it. Especially women.

Real estate? Be careful. It’s a time to sell and reap, not buy and roll the dice. This flight to the burbs and into debt could be a road to regret.

Biden is a good thing. No Trump is a blessing. But he’s not gone yet.

And can this year end soon enough?

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   By Guest Blogger Ryan Lewenza

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It’s been a rough year for dividend-paying stocks, underperforming the broader markets. For example, the iShares Canadian Select Dividend Index ETF is down 14% this year, much worse than the S&P/TSX Index, which is down 5%. Dividend stocks are supposed to be less volatile and hold up better in downturns versus the overall market, so what’s up?

Canadian Dividend Stocks are Under Pressure

Source: Bloomberg, Turner Investments

Let’s first look under the hood of the Canadian dividend index and review the sector composition. Financials make up the largest sector weight at 60%, followed by utilities (11%), communication (10%), consumer discretionary (8%) and the energy sector (5%).

The Big 6 Canadian Banks – RY, TD, BMO, CM, BNS and NA – represent the lion share of the financials sector here in Canada and some of them have had a rough year. The banks with more international exposure like TD, BNS and BMO have taken it on the chin, while big blue and CIBC have held up relatively well.

A key reason behind the share price weakness in the bank stocks are the large losses the banks are writing down on their loan books. Called ‘provisions for loan losses’, they’ve been spiking as a result of the Covid-19 induced global recession. Below I capture this with loan loss provisions surging from roughly $2 billion per quarter in late 2018 to $11 billion in the second quarter of this year.

This happens in every recession as the banks have to estimate what mortgages and loans will go bad. But what invariably happens is the economy turns, they overestimate their loan loss provisions and the banks then end up reversing or ‘releasing’ these loan loss provisions in future quarters. This is exactly what happened a few weeks ago when HSBC Canada announced that it was ‘releasing’ $2 million from its previous loan loss provisions. I believe this may mark the peak in loan losses in this downturn.

Big 6 Bank Loan Losses look to have peaked

Source: Bloomberg, Turner Investments

Looking at the historical data, since 1994 there have been four (including this one) spikes in provisions for loan losses from the banks. These include the tech recession from 2000, the financial crisis recession of 2009, a mini spike in April 2016 related to losses on the banks energy portfolios, and the current one due to Covid-19.

Now the cool thing about this is that the peak in loan losses generally marks the bottom in bank share, prices with large gains following in the first and second year following the peak. As seen below, the median 1 and 2 year return after the peak in loan loss provisions is 20.4% and 43%, respectively.

This is one key reason why I’m advising our clients to stick with their dividend stocks and in fact, that they continue to add to them. I see dividend stocks doing much better next year in large part due to my bullish view of the Canadian banks. Patience will be required as Covid-19 is surging again and the Canadian economy remains under pressure, but this patience should be rewarded with nice gains in 2021.

Banks Do Very Well Following Peaks in Provisions for Loan Losses

Source: Bloomberg, Turner Investments

Another industry I see recovering are the Canadian pipelines, which have been hit hard as a result of weak oil prices. Currently, oil prices are around US$37/bl and I see oil prices recovering to $50-$60/bl next year as we get a vaccine, the global economy recovers from the current recession and we see oil demand pick up.

Below I chart US oil prices with Enbridge and TC Energy and it’s clear that the low oil prices have weighed on their share prices. But as oil prices recover so should the share prices. Additionally, with ENB and TRP yielding 9% and 6.4%, respectively, these beaten dividend stocks look quite attractive, which are large weights in our preferred dividend equity ETF.

Low Oil Prices have Weighed on Canadian Pipelines

Source: Stockcharts, Turner Investments

This year investors have flooded into tech and high growth stocks, while eschewing staid dividend paying stocks, which I believe is creating a good buying opportunity. As Garth keeps reminding readers, pandemics end and when we start to see a rollout of vaccines next year, I believe some of the ‘fast money’ will flow out of the expensive tech sector with beaten up dividend stocks receiving some of those flows. So get ahead this and consider adding to your dividend stocks and ETFs, as better days lie ahead.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.

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There was little doubt we needed each other. Badly. I’d recently lost my job and my identity. He had it worse. Abandoned, sores on his flanks, a cone of shame on his head and a shaved rump with a razored rat tail. Months in a cage. People came and left with cute puppies. He watched.

At the shelter our gaze met. Sad eyes. He turned away as if not wishing to be rejected again. I did not. I could not. Bandit came home with me, looking like a broken combat dog. That night he found the pulse and warmth of the dishwasher and tucked into it, wary of people.

He grew enough hair to defeat every vacuum cleaner ever invented. That abused body sprouted a lionesque mane, flowing feathers from his legs and a skirt any swirling Scott would die for. A purebred cream Chow, ancient and noble. Serene and aloof, showing affection in tiny, precious dollops. But always, the eyes of love felt upon my back.

Over thirteen years we lived in city, country, hamlet and town. On a farm. Above a store. In the urban core. For a while the only place to walk him was a downtown green space populated by street people, junkies, the troubled and destitute. The first day or two were terrifying, until this creature spent time smiling at those society didn’t want, letting soiled, punctured hands caress his coat.

All Chows, it turns out, know everything. So he walked me, set the route and duration and the treat rules. During the time we lived in a downtown hotel, all marble and fuss, he migrated to the lobby and held court. Weary travellers, yearning for their own pets, couldn’t stay away. One day I found him surrounded by the Russian national hockey team, all on their knees, looking like he was fluent.

For a spell we lived near a bar strip. At its beating heart was a dive where the servers wore wicked short shirts and plunging necklines. We’d walk by and the girls would flood out to the patio, bending over Bandit and stroking his fur. I swear he gave me a sly little glance, preening amid a sea of cleavage. Boys with their beers looked on in pure envy.

Speaking of the sea, in Lunenburg he loved it. Lobster gear on the wharf was inhaled, gangways trotted, otters ferreted and much time spent sitting with nose to the salt wind. By age 15 there was one spring-loaded knee, a bum foot and copious naps. But going out the door was still showtime. He knew how he looked. And he approved.

Just a dog, of course. Number seven for Dorothy and I. But the years together were so meaningful, so extended, so blessed. A gift.

Thank you, Bandit. Sleep well.

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On a day when fresh Rona cases topped 100,000 (again) and the central bank kept the emergency taps open, America lurched towards a new leader. A great country it is, but messed up. As Robin Williams once said, Canada’s location is the equivalent of a really nice apartment over a meth lab.

So the big blue wave never happened. But neither did MAGA. Looks like a Democrat-run House and Republican-led Senate will be working with the other guy in the White House and Trump’s Supreme Court. How the lame duck president will react to this is not entirely clear. But there are 68 million people who voted for him and a lot of them are pissed. Waiting for direction. And they have guns. Many, many guns. Big ones. And pickups. Camo underwear too, likely.

Maybe 45 will surprise us, embrace peaceful transition for the greater good of the country, and slink back to NYC. Nah, me neither. But we can hope.

In any case, the stock market has been on an election tear, once it became clear (a) Joe Biden would squeak in and (b) the Dems would not control Congress. Shooting the lights out have been the Dow, the S&P 500 and the Nasdaq. Investors poured back into tech, the FAANG companies and health care.

Despite higher jobless claims, a presidential contest that could still turn into a brawl, recession, unemployment and a pandemic arguably out of control, up she goes. Investors with US equity exposure (should be about 20% of your portfolio) are giddy. Hell, even Bay Street’s on a tear – adding 300 points as I write this.

So, howcum? How does this make any more sense than, say, middle-income Canadians snapping up million-dollar houses with 10x leverage while the economy tanks?

First, it’s a relief rally. Mr. Market really thought Biden’s bruisers might swamp Congress and sweep in a radical tax-and-spend agenda. Nope. Didn’t happen.

Second, this means Trump’s corporate tax cut will probably stay intact – and that was a major fire-starter for Wall Street. Third, no blue wave means breaking up tech giants like Apple or Amazon (part of the Democratic agenda) is unlikely to happen. So the Nasdaq has erupted.

Fourth, stimulus. It’s coming. Biden will push for a package worth about $2 trillion and while the Senate may water it down, there’s now no political reason to hold the thing up. This will goose the economy, put more cash into households and worm its way into the capital markets. Before Christmas (if they let us have one).

Fifth, but with a divided Dem-Rep Congress there’ll be less new government spending than Biden might want. So the betting is the Fed will make up the difference with more QE and sustained low interest rates. For a long time. Markets love cheap money.

Sixth, no contested election. Investors figure Trump’s blustering, his tweets, the groundless charges of electoral fraud and his spate of specious suits are all theatre. After all, the guy got four million fewer votes than Biden, and still thinks he should have won. Maybe in his world. Not in this one.

Seventh, a divided Washington with tempered spending also means less need for deficit financing. That eases pressure on the bond market, where yields tumbled as the drama unfolded. Lower bond returns means higher prices (good for balanced portfolios) and also shoves cash into equities where investors can make much better bank.

Eighth, personal tax increases are far more uncertain now that the Senate is red. The Bidenettes wanted to jack the bill of everyone making over 400 large, which is just so damn un-American. And, Ninth, it’s over! (Almost, sort of.) After a two-year, vitriolic, low-class election campaign, the balloting is behind us, even if the counting and grousing remain.

Now, of course, the hard stuff begins. The virus promises to be seriously ugly over the next two to four months. That could temporarily gut the GDP, spike the jobless rate and make Trump’s head explode. He’ll be all over Biden like a jilted, jealous, malevolent ex.

After that, Mr. Market sees the promised land. A vaccine. Good therapies. Global growth. Restored profits. And a president who is mercifully, thankfully, gratefully, finally a total bore.

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Election? Pffft. It’s a mess. (See the end of this pathetic post for details.)

And speaking of shameful disasters, let’s turn our attention to 98 Tragina Avenue, in a dodgy hood of Hamilton, that catch basin at the end of Lake Ontario. If you like deceased felines, empty cans, trash bags, decay and a thick coating of hoarder FOMO, this is your baby.

The junker was recently listed for $284,900 – low enough to seriously stir the loins of house-horny millennial GTA refugees. That came despite this warning from the listing agent:

Sold “AS IS” basis. Seller has no knowledge of UFFI. Buyer is to verify taxes and any rental equipment. Seller makes no representations and/or warranties. All room sizes approx. All Interior access denied due to safety concerns.

Well, you know what happened. Multiple offers and a selling price of $420,000. Here it is:

So in the middle of a global pandemic with surging cases, a recession, double-digit unemployment, record government deficits, historic mortgage deferrals and millions on the pogey we can now add a contested US election and political instability in the world’s biggest economy – where Covid is out of control.

So what shall we do this weekened, Honey? “Hey, let’s go pay an extra $135,000, or 47% more than the vendor is asking, for a crap house filled with dead cats and garbage! In Hamilton!”

Seriously. We’ve lost it. Here’s my report…

Hamilton (Pooched Index: 12)
Sales were up last month more than 23% over year-ago levels, but the decline from September was close to 8%. Maybe one reason is a 40% crash in active listings after all the house-lusty kids from 416 Hoovered the place. Dumps like 98 Tragina are all that’s left. Anyway, the average price for residential properties has jumped 20% year/year. It’s now $721,523. Yes, for Hamilton.

Kelowna (PI: 18)
Dig this: sales of single detached houses are up 114% from last October, but the number of active listings is down a withering 36%. Just as the Toronto kiddos are polluting Steeltown, so are the Van yuppies trying to turn the Okanagan into a world-class sinkhole for wealth. The price of a detached is rising eight grand a month, now almost $170,000 more than a year ago. Nobody wants condos (of course) while the average house is currently at $850,634.  But the babes at Joeys are priceless.

Toronto /GTA (PI: 7)
It’s two cities now. In urban Toronto condo sales crashed 8.5% last month, year/year, while detached houses kept selling. Apartment prices and rents are heading south, especially for units of 500 feet or less (Airbnb hosts and amateur landlords freaking). In the 905, though, it’s insane. Condo sales surged 28%, detached sales exploded 39% (twenty points more than in 416) and prices shot up 18%. The average, soulless, boring, next-to-Costco Mississauga box is now $1.12 million – just three hundred less than the city equivalent, thanks to WFH. But be aware you need a minivan or SUV with stick people in the back window.

Montreal (P1:3)
The locals don’t get it, but this remains one of the best, cheapest, deepest markets in North America. However you need to look French. Sales leapt higher in October by 37%, and as with other places, inventory is on the decline. Prices have swollen considerably – up 21% in a year for singles and 16% for condos. But the median value in Canada’s second-biggest market is still less than $450,000 – a million bucks less than five hours to the west, down the 401. C’est cool.

Vancouver (PI: 11)
Yes, sales were better again last month (29%) thanks to the combination of cheapo mortgages and the pandemic thing. But listings are headed up – there are now 37% more properties on the market than last autumn. The Frankenumber price index is ahead annually by a relatively meagre 6%, at just over a million. Detacheds are up 8.5%, over $1.5 million. But the FOMO is fading, locals say. Not enough immigrants and too many socialists, apparently.

London (PI:16)
It used to be a quality little city at a good price. No more. Last month recorded the most sales ever. The average house now tops $530,000, for a 28% year/year surge. Listings are down by a fifth and local realtors are attributing this all to the virus. Toronto refugees. Work-from-homers. People seeking safe, sedate, serene. If you like snow, but Moncton is too far away, this is your dish.

Calgary (PI: 0)
October was a hot month but there’s no hiding the fact that while almost every other city in Canada has had a Covid-crazy market, Cowtown sales are still running 6% below last year’s dismal level. Prices? Ziltch. Down about 1% from 2019, and 10% below previous highs. And that’s even taking into account a sales mix which is skewing to the top end now (over $600,000) since many people with nice houses are giving up and dropping the ask. Condos? Abandoned like all those uncapped wells. Sales are off 15% and the greatest action is with places worth less than $200,000. In Toronto those are called ‘garden sheds.’

Halifax (PI: 4)
Like London, but cheaper and with a navy. The largest city in the Atlantic Bubble has seen the virus bring a housing bubble – which would be worrisome if prices had not started from a relatively low level. The average detached house sold last month for just over $390,000, which is 13.5% more than a year ago and still cheap by national standards for a city of 500,000. How hot are things? The sale-to-list ratio last week hit 101%.

Victoria (PI: 13)
Got a navy, too. And a ton of government officials and old people. And condos. And delusional buyers. Sales last month exploded 59% over year-ago levels and (get this) condo deals climbed more than 70%. Record demand. Dwindling inventory (down 20%). Multiple offers. The benchmark detached price is now almost $880,000 while condos have hit $512,500.  That’s a lot of money to live in a place you need a boat to visit, and where the jobless rate went from 3.6% to almost 11%, thanks to Covid. But you get flowers in February. Plus Comrade Premier Horgan.

The Election

Okay, why did US stocks go on a tear Wednesday after an election nobody won? Mr. Market thinks Biden will squeak through, Republicans will keep the Senate, a stimulus bill is a slam-dunk but big tax increases, an assault on oil and breaking-up the FAANG guys are off the table. Who wins is now kinda irrelevant and it’s clear what we have to focus on. Rona.

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