Category: Accounting tips

Source: Gary Shokar @gshokar1199

Will the virus forever change the future? Or is this just recency bias talking? After all, it’s a human failing – projecting current conditions forward.

For example, when assets rise (stocks, houses, gold, Bitcoin, fine art) people think they’ll rise forever. So they buy into inflating markets. But when stuff plunges (like equities in late March, or Vancouver detached houses now) buyers vanish as the meme spreads that losses will continue without end. So, we buy high and sell low. Almost always.

But this pandemic challenges every assumption. Financial markets have rallied bravely. House buyers have vanished as prices fall. Doctors are running the country. Unemployment has surged as the economy turned off.  Governments have moved hard to blunt the impact of their own actions. Nobody has a convincing argument about what happens next. However we can all grasp the destruction taking place. This virus will not just go pffft. We gotta live with the sucker.

But how?

For example, I have a fancy corner office with giant windows overlooking Toronto’s downtown and Lake Ontario on the 53rd floor of a 68-storey building at the corner of King and Bay. These days I’m not there, instead taking the sea breeze in NS, where people still talk to each other.

The elevator banks are highly computerized, requiring users to punch in a floor destination then wait for a car dedicated to delivering a selected group to identified floors efficiently. But the group can be 20 or 30. And the trip back down is indiscriminate. Doors open, people flood in to swarm the shopping concourse, restaurants and food courts below.

What happens when my entire floor – now vacant – is repopulated with hundreds of colleagues? How do they get there in an age of social distancing? Most come by streetcar, subway or GO Trains, then walk through clogged tunnels to the elevator banks. Stairs are not an option. Car traffic and parking is prohibitive. Few live close enough to cycle. What to expect in a few weeks, or months, when this gleaming tower – which sold a few years ago to a REIT for $1.4 billion – reopens? Will people balk at commuting via mass transit? Or stepping into those lifts? Eating in the giant take-out emporium downstairs? Squeezing through the underground passageways?

Will my corporate partner decide leasing a few floors on Bay Street is foolish, when it can operate with a remote workforce – people at home paying for their own Internet provider, accommodation, heat and toilet paper? Will this shave value off those neighbouring downtown condos which folks bought to avoid commuting – where elevator quagmires also exist?

See what I mean? This is just a sliver of working life. And it’s all messed up. Increasingly it seems the virus threat will be long-lived. As time drags on, changes will become ingrained. I may never ride that elevator, nor gaze through those windows, again. But I bet the corporation ends up making more profit as the virus revamps the workforce, empties expensive rental space and slashes costs.

What else is going to change?

Leon Cooperman is the CEO of a company called Omega Advisors. A few weeks ago he was on CNBC (almost as bad as BNN) and presented a list of long-term implications of Covid. Some of these will come as no surprise, as we’ve touched on such themes recently on this pathetic blog. He said…

• Capitalism as we know will likely be changed forever. When the government is called upon to protect you in the downside, they have every right to regulate the upside.
• Taxes will have to go up. Quickly if Biden (Trudeau) wins, slowly if Trump (MacKay) wins, but they will have to go up. Things like carried interest, capital gains, ability to rollover real-estate sales tax free all will have to be eliminated (for the good).
• Consistently low interest rates are indicative of a troubled economy and should not be viewed positively. We have negative interest rates in Japan and in Europe. Yet their P/E ratios are lower than the U.S. The level of interest rates are not bullish.
• Demand is likely to come back slowly. If you think about large gatherings like sporting events or concerts. We can’t imagine them coming back until we have a vaccination. With the possibly of a mandatory “vaccination card” to gain admittance.
• Business is going to incur larger compliance costs.
• There will be a lot of equity issuances to replace lost capital. Airlines are the perfect example, they bought back billions of stock at high prices that were previously sold at low prices, so there will be a ton of new issues to replace lost capital.
• Stock re-purchases, which has risen EPS for the last half dozen years, will largely be over.
• Looking at Warren Buffet, who is obviously the greatest investor of our generation, and has always been a buyer on weakness not a seller. He’s been very quiet. Our guess is that he’s having difficulty figuring out what’s going on and if Buffet hasn’t figured it out, who are we to make a judgement?

What to do when the future fogs in?

If you had a balanced, diversified, low-cost and liquid ETF portfolio when this crap started, then change nothing. No reason to cash out, run to gold or crypto, or bargain-hunt oil companies and airlines. Just stay the course and seriously bone up on tax-avoidance strategies. More on that in a future post.

On a personal level, Covid should have taught you this: don’t speculate, leverage, gamble, be an Airbnb host or amateur landlord. Save some money, have reserves, trash debt and live within your means. Value your job and do whatever it takes to keep the damn thing. Curb your house lust. Arrange an emergency LOC. Pay your cards off monthly. Have a retirement plan. Stay married. And never go to work on the 53rd floor.

Source

Ten years ago. Mark Carney was our central bank boss. “Individuals who have taken on too much debt could be at risk of going broke if there is another adverse economic shock,” he told reporters, while delivering the latest interest rate news.

Nobody cared. The debt-to-income ratio for households was 150%. The average Toronto property cost $431,000. There was a housing boom.

Today that GTA place is $821,000 and singles go for $1.2 million. The national debt ratio is 176% and in Toronto and Vancouver 450% for detached homebuyers. Over this decade real estate and debt have ascended together. Carney moved on, Stephen Poloz took over, and now as he leaves the Bank of Canada that ‘adverse economic shock’ has arrived.

In spades. Who knew it would be a pandemic?

So here we are with a 13% unemployment rate, 7.6 million on government income support, 80% of small businesses shut, 720,000 people with deferred mortgage payments, airplanes grounded, highways empty, schools shut, subways vacant and the immediate future foggy. The central bank has pulled out all the stops, using $150 billion to buy residential mortgages, while the federal government’s spending $250 billion more than it has to keep households from financial ruin.

An indictment of our society, and affirmation we’re a nation of financial illiterates? You bet. Like the 29-year old Ontario mom, Melanie, using the $2,000-per-month CERB to buy her kids dirt bikes. The government money is greater than her employment income, by the way. Now the windfall’s gone. (I hate to showcase an individual, but she agreed to speak with a CTV reporter. So the story’s out there.).

Source: CTV

Thus, a legacy of the virus could be Covid cash. Ongoing governmental income support. How does Mr. Trudeau propose to turn it off? If 13% unemployment falls to 10%, then 8% over the rest of 2020 and beyond (a likely pattern), you can bet there’ll be political pressure to keep the funds flowing. Especially in the new world with fewer employers and less risk tolerance. Many believe this will lead to UBI – the universal basic income.

The lobbying effort has been ramped up dramatically thanks to the virus. The pandemic, as it turns out, was everything the pro-UBI lobby could have hoped for. The federal CERB, proponents argue, should be made permanent, extended to all citizens and continue seamlessly from where the Covid cash leaves off. There’s a well-oiled, politically-connected lobby group. An expanded group of advocates. And a slick website clearly hooking the virus into a universal income. Here it is.

The argument: there are more people than work available. Globalization stole jobs. AI is finishing off the rest. Lack of income means stress, preventing people from realizing their human capital. For example, there’d be more entrepreneurs if they could start businesses without worrying about paying rent or buying food – since the UBI would handle that. Plus the universal basic income would essentially eliminate poverty, plumping the middle and narrowing the gap between the wealthy and the rest. And this, you might notice, fits in perfectly with the Trudeau agenda – since we already have a federal Minister of Middle Class Prosperity.

Here’s the argument:

• Universal Basic Income is an innovation policy: it recaptures our risk tolerance: unlocking the opportunity for everyone to take bigger risks, think long term, and create.
• A Universal Basic Income defends equality of opportunity & self-reliance in a world where technological job displacement is reducing incomes for many.
• A Universal Basic Income guarantees there is no longer a “working poor” ensuring that ongoing technological innovation is directed at preserving and expanding a middle class way of life for everyone.
• UBI is an economic need that puts markets in service to humanity, installing the plumbing into capitalism that adds resilience and robustness to the economy, ensuring everyone can fully participate to their potential.
• Universal Basic Income abolishes poverty and reduces human suffering as well as all reducing the costs of poverty to society.

It’s not a new idea, of course. Conservative senator Hugh Segal was pumping the concept of a guaranteed annual income decades ago. There have been pilot projects in various regions of Canada (mixed results). And this is a key plank in the increasingly influential ‘progressive’ wing of the US Democratic party. It goes hand-in-hand with MMT (Modern Monetary Theory) whose left-wing adherents believe central banks should print all the money a society and its citizens need, since they just owe it to themselves. Kinda like our prime minister giving us $250 billion we don’t have.

Of course UBI would cost a mother of a pile. Providing it to the 7.5 million at the bottom of the income scale would require $43 billion, says the Parliamentary Budget Office. Extending it to everyone would take $76 billion, even with it taxed back from higher-income folks. That’s equal to 50% of all the employment taxes collected today – suggesting revenues might have to jump that much to afford UBI. But that’s okay. The rich can pay. (Here’s a snapshot of federal revenues and expenses.)

By the way, polls find Canadians overwhelmingly support a universal basic income. Just as they’re loving their CERB. And what it buys. Free money. Varoom.

Anyway, it’s coming. Hide your stash.

Source

   By Guest Blogger Ryan Lewenza

.

When I got into the investment industry 25 years ago I was that classic, arrogant, overexuberant whipper snapper who thought because I did ok in university that I knew more than most. But I learned quickly how naive and wrong I was, and that having experience and some battle scars are what is required to survive and excel in this industry.

I started in the industry shortly before the tech crash, but not before I could be approved for my first line of credit and shortly thereafter lose most of it as the tech crash unfolded. That lesson, and others, have taught me to be much smarter and measured about my investment decisions. Singles and doubles are fine by me now versus throwing caution to the wind and going for the home runs.

Apparently, someone at a large Canadian pension fund has not learned these crucial lessons, as news that Alberta’s pension company – AIMCO Inc. – has lost over $3 billion in a derivative trade gone terribly wrong, providing a one-time (hopefully) hit to all its members, largely nurses, cops, and firemen. You know them, our heroes!

Today I’m going to review some high-risk derivative strategies that have gone terribly wrong for investors, and how hubris can lead people to make these poor investment decisions, causing much unnecessary loss and pain for investors.

Probably the most well-known example of these derivative trades blowing up is Long-Term Capital Management, which was a massive hedge fund run by a prominent bond trader, John Meriwether, and a few Nobel Prize-winning economists in the 1990s.

The hedge fund ran an arbitrage strategy, trying to find inefficiencies in the market and then using a lot of leverage on top of it. Their investment strategies were based upon hedging against a predictable range of volatility in FX and bonds. However, their fancy spreadsheets and models failed to account for events outside of this “predictable range” or otherwise known as black swan events. In this case it was a Russian debt default in 1998, which lead to the implosion and demise of the fund and requiring a $3.5 billion government bailout.

Another beauty was the natural gas trade from hell for Calgary-based trader Brian Hunter and the Amaranth fund. I remember reading about this at the time and I couldn’t believe the colossal screw-up and arrogance that led to this disastrous trade.

Brian, apparently a very successful energy trader in his day, began taking on larger and larger bets on the price of natural gas. In 2005 he made a huge speculative bet that natural gas prices would spike during the summer hurricane season. He was right and made over $1 billion in profits on the trade.

Then 2006 rolls around and hubris gets the best of him as he implements the same trade in 2006, but this time with an entirely different outcome. Natural gas prices started falling, leading the trader to double-down on the trade. This proved to be his and the hedge fund’s downfall with the trade losing over $6 billion.

For the huge $3 billion AIMCO trading loss it appears that an analyst or portfolio manager implemented a short volatility trade, where they would profit if volatility remained low. But if volatility goes the other way, they lose, and in this case $3 billion! Clearly someone’s calculator was not working that day.

What’s crazy about this whole thing is another firm, LJM Partners, a Chicago-based hedge fund blew themselves up in 2018 implementing the exact same trade. The fund was implementing these “low vol trades”, shorting volatility and collecting the premiums. All is good until volatility inevitably spikes and then boom, a multi-billion dollar hit. This is exactly why Warren Buffett famously called derivatives “financial weapons of mass destruction”.

What really grinds my gears about this risky strategy is that 2019 marked one of the least volatile years in recent history. Last year the S&P 500 did not endure even one 5% pullback (on average the S&P 500 has three 5% pullbacks and one 10% correction each year) and the volatility or VIX index traded at historically low levels of 11-12 and well below its long-term average of 21. This is exactly why I stated in our 2019 outlook, “That doesn’t mean we won’t see bouts of volatility and sell-offs occurring this year. In fact, I see the potential for higher volatility this year.” Apparently, the pension company did not see this as a meaningful risk for this year.

The VIX Traded At the Lowest Level in Years During 2019

Source: Stockcharts.com, Turner Investments

So what are the lessons from today’s blog post?

First, keep it simple by investing in a mix of stocks and fixed income, and avoid investing in these sexy, high-risk, derivative strategies. As one person said in regard to these strategies, “it’s like picking up nickels in front of a steamroller”.

Second, stop thinking you’re the smartest person in the room and have figured out some new amazing investment strategy that no one else has hit. Trust me, it’s already been done before and the few examples noted above are proof of this.

Third, risk-management needs to be front and centre when constructing portfolios. Sure, not every investment is going to work out, but that’s why you need a mix of different assets and investments to spread out the risk and try to minimize major portfolio losses.

Lastly, don’t just assume your pension, whether it’s private or public, is 100% safe and is going to be there when you need it. AIMCO will likely recover from this major loss and hopefully learn from this experience, but this black swan/global pandemic event and steep market correction shows that anything can happen and that life doesn’t always adhere to “predictable ranges”.

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.

Source

The GreaterFool Nation’s latest poll results are in. A decent sample – over six thousand responses in the last 24 hours. This is interesting: the readership of this pathetic blog appears to drip with maskless cowboys, eschewing government pogey, worried about civil liberties but generally supporting political anti-virus actions and definitely not going shopping or eating out any time soon. Oh, and too damn many anti-vaxxers.

Full results below.

First, did you see the jobless reports? These are weird days when the loss of 1.9 million positions in a single month is considered a big reprieve. That’s what happened in Canada in April, hiking the unemployment rate to 13%. Economists, always a fun bunch, were expecting 18%. Maybe this is why. Here’s what StasCan said: “The unemployment rate in April would be 17.8% if those who had worked recently and wanted a job but did not search for work were included.” So the dollar went up. Stocks, too.

In the States over 20 million jobs evaporated in four weeks, pushing the rate to just under 15%, making Trump the only president since the 1930s to preside over such employment carnage. Actually the rate would have been 20% but millions left the workforce voluntarily. So, in response, the Vix (a gauge of investor fear) went down, bond yields went up and Wall Street advanced. Why? Because the worst news is now known. It gets better from here.

Unprecedented US job carnage. Is this the bottom?

Source: New York Times

The States is in recession. Us, too. But layoffs have levelled out. The number of people seeking a government handout (7.6 million in Canada, 33 million in the States) has trailed off. Economies are starting to trickle open again. Virus cases have peaked in most areas. Mortality rates are tiny in some provinces. The health care sector was not overwhelmed. If you can declare a ‘win’ in a global pandemic, this is one.

So, the gap continues. Financial markets plump as they anticipate recovery and feed off huge CB and government stimulus, but millions of people are unemployed, scores of businesses will fail and the backbone of the Canadian economy – house lust – has been doused. The wealthy hold assets and the rest hold debt. Thus, the chasm between financial investors and the mortgaged grows. As we told you, this will be a lasting legacy of the Year of Covid.

Remember, some 70% of Canadians are into residential real estate, many holding the bulk of their net worth there. So having almost 8 million unemployed or on the dole is a big deal. “How many of these families own homes?” asks mortgage broker Rob McLister. “A meaningful minority. But the bigger question is, how many will continue paying their mortgage after September if/when payment deferrals end? Many believe deferrals will have to be extended. Banks aren’t thrilled by that prospect but most would comply if prodded by the feds. It’s the smaller, less capitalized lenders that simply can’t keep deferring and could be in trouble.”

Recall that Home Capital yesterday increased its loan loss fund by over 650%. Getting ready for what’s coming.

But TD bank thinkers are not so pessimistic – at least for 2021. Sales levels will surge next year, they forecast, but before that, “financial stresses will force some homeowners to list their properties,” resulting in “an outsized decline in home prices in the second quarter.” After that, as economies reopen and jobs return, values start to restore. Now you know when to buy, and sell.

Clearly we’re in the middle of the mess. Not the end of the beginning, but now the beginning of the end. How many people find work again, how long mortgage deferrals or government benefits are in place, what happens to Trump in November, whether we get another virus wave, or a vaccine, or if business failures mount, or malls, rinks, restaurants reopen – all things we do not know.

But as stated here when this began, pandemics pass. They’re temporary, not structural. Recovery comes. How we survive depends on the manner in which politicians, banks, leaders, citizens and, yes, blog dogs respond.

And now to the vox canibus (6,511 unique responses):
(click on image for enlarged view of survey results)

Source

Charlie spotted an ad this week on Twitter, seeking a renter. The unit is a 350-foot nest in a giant downtown 416 tower, fully furnished since it used to be an Airbnb. Before the deluge. The key point: over the course of a month the rent ask has dropped seven times, from just below $2,000 down to $1,700. Still negotiable, I bet.

This is called disinflation. Maybe even deflation. Rent goes down. The tenant benefits. The mortgage payment, condo fees and insurance payments stay the same, killing the owner. Meanwhile the unit is likely falling in value, as dozens of similar ones come to market – also owned by a squad of unfortunates. Asset values fall. Debt does not. Liquidity rules.

What a world we’re in. Greyhound said it’s ending all bus routes in Canada. Vendors won’t take cash. This is hurting those at the lower end of the income spectrum. Now 33 million Americans are on pogey. Home Capital just set aside 674% more money to deal with bum loans. Yet stock markets on Bay Street and Wall Street have jumped 33% in the past six weeks. Friday morning we get the Mother of All Employment Reports showing the jobless rate in both countries is, like, 20%. 1930s stuff. We all knew it was coming.

Despite that, oil has leapt back from the grave. Canadian crude has inflated dramatically. But big guys like Suncor are in serious trouble. So is Alberta. The office vacancy rate in Calgary will be 40% by the time we hit bottom. Meanwhile investors have seen their portfolios improve as governments and central banks pour historic rivers of money into the economy and capital markets. Yup – the gap between the afflicted (female hospitality workers are most impacted so far) and the immune (you know who) has widened, because of the virus and our response to it. This is not great for society, but it was an inevitable result. The suffering is far from equal.

The next few months will be critical in shaping the years after that. Will we be going back into offices? Will the malls open? Will Westjet survive? Or Disney? Or the pub down the street? Or Trump?

Polls widely show citizens have had the crap scared out of them by the media, public health officials, politicians and wall-to-wall virus talk on every social media channel. The reaction to Covid, rather than the bug itself, is now our challenge. Are stock markets signaling the pandemic will pass and the economy restored? Or are they on a sugar-high, thanks to CBs and irresponsible government spending? Public opinion has never been so critical to a civilization’s outcome, as this is the first economy 70% driven by household spending.

So today we’re going to probe and prod the Greater Fool Nation. Whither us?

Results tomorrow.

Source

Over 700,000 homeowners have pleaded for mortgage relief. What does this tell us?

First (duh) these folks can’t pay, don’t want to or need the cash to finance food, Netflix and N95s. In short, they own real estate they could only afford when a regular income was flowing. No savings, no reserves, lots of stress and debt.

It’s what you’d expect when the jobless rate explodes from 5% to 20% in a month, and after ten years of unbuckled house lust. Having all your net worth in one asset at one address on one street in one town doesn’t look so genius anymore.

Beyond the personal grief, there are systemic wobbles.

The federal agency standing behind all this mortgage debt – CMHC – has been saying and publishing some worrying things. Since the agency is funded by tax dollars, we should pay attention. (If there are any of them left.) For example, on Tuesday this was buried in the corp’s annual report:

“Increases in insurance claims losses may occur, however we are currently unable to estimate the potential impact on our financial results or condition. In the event our capital position may be impacted, under the Capital and Dividend Policy Framework for Financial Crown Corporations, the Government would stand prepared to inject capital into CMHC should additional capital be needed to deliver on our public policy mandate.”

Whoa. Did the guys insuring $600 billion in residential mortgages just say they might need a federal bail-out? After just buying $150 billion in mortgages from the banks amid the pandemic emergency?

Sure looks like it. Exploding unemployment, the certainty that reduced incomes will last for months (or years), historic levels of household debt, a collapsed real estate market and 10-15% of all owners who can’t pay their monthlies has the siren going off in Ottawa. Clearly CMHC is telling the government  defaults and loan losses may dot the horizon.

Already the agency has suspended its regular dividend payment to the federal government in order to preserve cash, and issued this statement: “As a key stabilizing component of the Canadian financial system, we will be substantially increasing our appetite for risk as we and other institutions absorb the impact of these events.”

Hmm. More risk. Sounds a tad ominous. Now add in what CMHC boss Evan Siddall and his colleagues said yesterday – that real estate markets will not bounce back this summer. Or autumn. Or next Spring. Instead: “The best case we’re looking at … house prices getting back to their pre-recession levels, at the earliest, by the end of 2022.”

That’s two-and-a-half years from now – the “best case” scenario, which presumably means Covid is defeated, we have a vaxxed herd, have managed to turn the economy back on, restored  personal incomes, reflated consumer confidence and revived the housing market. As you can see, lots of assumptions there.

But, as mortgage broker and blogger Rob McLister suggests, what if this doesn’t happen?

What if people stop believing in pent-up housing demand? When market psychology sours, more buyers step aside until the coast is clear. And the coast isn’t clear if people fear an avalanche of supply (property listings) post-lock-down. “Demand will be reduced by a weak labour market and weaker investment activity,” writes CIBC. “Forced sales will add to supply, and probably outweigh the offsetting impact of reduced supply of new units.”

Could these economic conditions (including troubles at CMHC) stop lenders from lending, preventing buyers from buying, causing prices to cascade lower as sellers grow more desperate? Some people think that’s already started to happen in the commercial real estate space.

Banks are freezing financing for smaller rental properties, thanks to virus-inspired worries over owners’ ability to carry the debt if tenants vanish, lose income or go broke. As one source put it: “If you’re a landlord, and looking to refinance, you can’t get that. So you’re probably going to have to sell. But they’re also limiting new owners who might want to buy that space.” As Reuters reported this week, this is driving some borrowers into the arms of the sub-prime lenders and their sky-high desperado lending rates.

Well, there ya go.

It’s a safe bet mortgage deferrals plus the CERB will be extended now, kicking the crisis down the road for a while longer. Key players – the banks, the feds, the housing agency – all pray enough jobs, income and confidence return to keep this baby from blowing. But it’s lookin’ shonky.

Source

This week BeeMo shocked many when the bank said it expected up to 80% of staff to stay home, post-virus. No cubicle farm. No collaborative work spaces. No elevators to floors in the sky. No gleaming bank tower. Another nail in the downtown coffin.

Daniel’s one of those financial worker bees. An IT banker dude who know he’s not going back. “Like many others I’ve been forced to work from home for the last two months. Now thinking about the days where I would spend my lunch discussing your blog and the market with my coworkers seems nostalgic.”

By the way, the Bank of Montreal has 45,500 employees. Cutting thirty-six thousand of them loose – many in Toronto – seems like a big deal. What could this mean? Danny continues…

Since I will not be going back to my downtown office after this is over I have decided to ditch the concrete shoe box I live in. I gave my landlord two months notice and will be moving back into my parent’s house in the burbs for the time being. Instead of paying a substantial amount each month to be close to an office I will rarely set foot in I’ll be investing a lot more.

This is where it gets interesting, my unit has been on the market for three weeks and there have only been two viewings. My overly confident landlord thought he could get more than he was already charging me. He is now growing desperate at the thought of the unit sitting empty for a while. A realtor friend of mine says around the same time last year there would have been multiple offers within a week. The inventory hasn’t been this big in the last five years and it grows each day. Thanks to real estate data now being available to the public, we can see listings being pulled off and relisted because they were there for too long. As you already know this is merely the tip of the iceberg and the real blood bath will be this fall when mortgage exemptions are up.

Hmm. Remember what a certain pathetic blog has been telling you?

The downtown condo market is living on borrowed time. An anachronism. Amateur landlords are in serious trouble. The Airbnb collapse just makes it worse. Rents and prices down. Post-Covid migration will bite urban values. The mortgage forbearance crisis is coming this autumn. And the bounce summer may bring could well be a bull trap.

Unemployment of 18% in April will not be 5% in July. Or December. Or next March. Or maybe this decade. The economy is being pulled into disinflation as the structure we had a few months ago is unwound. Low interest rates are bad news. Demand will trickle back. Not gush. Governments that spent big to support people will have a right to take back much when the crisis ends. Taxes. Many businesses are not re-opening. Movie theatres, arenas, convention halls, hotel ballrooms, underground food courts and most restaurants will be empty, or close to it, for months. Or years. Mass transit – the subways of Toronto and Montreal, the SkyTrain, GO Transit system, the CTrain – will lose ridership, become uneconomic and curtail service.

What does this mean?

One consequence is the devaluing of real estate close to city cores – since those cores will have fewer white-collar jobs, workers or appeal. Why would people continue to spend $2 million for a flimsy house on a 30-foot lot in the 416 mid-town hood of Leaside, for example, when a 15-minute car ride to downtown is no longer the big draw? Move 30 minutes north and save a million.

You might have seen the April real estate board numbers by now. Sales crashed everywhere. Down 63% in Van, 67% in Toronto, 63% in Calgary, 59% in Victoria. All these boards sought to blunt current price trends in their media releases with year/year comparisons. In Toronto, for example, prices have actually dropped to year-ago levels, wiping out twelve months of gains with an April decline of 11.8%. Inventories have crashed lower as sellers recoil. The sales-to-listing ratio has plunged. There’s just no positive glimmer in these stats, even as five-year mortgage rates spiral towards the 2% mark.

These are the lowest sales volumes in the lifetime of virtually every agent and broker. No showings, no sales and virtually no market mean families have their net worth trapped inside assets which the virus has turned illiquid. If this continues, it’s a nightmare scenario for households with income stress, no reserves or liquid wealth, uncertain employment and mortgage payments set to resume in September – after the government pogey has run out. If they need to exit, will they be able?

Combine that with the potential deurbanization that the Bank of Montreal’s promulgating and you can ask: whither housing?

One scenario: a torrent of listings by late summer as financial stress mounts. Forced sales. Foreclosures. Mortgage defaults. Job loss. Wary buyers. Fewer immigrants. Risk-averse lenders. “By 2021, as the economics of housing returns to fundamentals, we expect an array of factors to result in a weaker market with some downward pressure on prices,” say the economists at CIBC – another bank about to tell people to stay home.

Meanwhile, consider Dan. No more office downtown. No more condo. Moved home to the burbs. City landlord in distress. Will probably list. Too late.

Does any of this sound temporary to you?

Source

Alex asked a simple question of me on the weekend:

Should we make some low ball offers on houses that have been on the market for a while (given current state of market and low level of competition) while this pandemic is still going on? Or should we wait a bit, once it becomes apparent that real estate has jumped the shark, sellers get desperate/insolvent and listings start to pile up?

We have some flexibility in timing for buying a house, and don’t want to catch a falling knife… So I guess my question is: is it a good time to buy? 😉

Sadly I must utter the three words that pain me the most. I don’t know.

There, I’ve said it. Judge me. But first an explanation why this blog (or anyone else) won’t have the foggiest about what comes next until this week has ended. Or beyond. Here’s why…

The jobs massacre.
Friday will be epic. Historic. Remember that day since it’s unlikely you’ll see this again: a jobs report telling us 5 million Canadians have lost their incomes and the unemployment is 20%. Actually Scotiabank economist Derek Holt says the jobless level would be an unbelievable 35%, were it not that four million people have given up looking for work.

Remember the unemployment level hovered near 5% a few months ago. Thus, we have the largest, fastest, ugliest spike in history.

Ditto in the States. Poor Trump. In one month all the jobs – 23 million of them – created in the last ten years vanished. Thirty million are on the dole there and eight million here. This is the worst performance since the 1930s and ten times the drop at the end of WW2 when the economy demobilized from its war-time high. The US rate will travel from 3% pre-virus to 16% now. Ouch.

But it’s all temporary, right?
Yeah. It is. The jobless crisis didn’t happen because the economy choked on its own (as in 2008) but because politicians choked it off. The public health emergency has been unique in our lifetimes and deliberately gutting the GDP to stop it was an exercise never before tried in modern times, or on a global scale.

So what happens when it gets turned back on? How fast will the rebound be? How much pent-up demand? Will consumers burst out of lockdown and swarm stores, take vacations and buy cars – or not?

This, Alex, is what we don’t yet understand. Consumer sentiment is key to where real estate (and the whole economy) goes in the coming months. Polls show media and governments have done a bang-up job scaring the crap out of people. Most Canadians think they’ll probably get the bug and, if they do, die. The stats tell us under 1% are infected and 96% of those have mild symptoms. But no matter. We’re terrified. This is why Warren Buffet dumped $6.5 billion in airline stock. You should pay attention to that. Turning on the economy will be a lot harder than turning it off. And the longer this takes, the poorer the outcome for real estate, hospitality, travel, tourism, oil and Alberta.

So people have lots to spook them.
Car sales were down across Canada 74% in April. There are now 720,000 families who have asked for mortgage deferrals, or 15% of all those with home loans. A record, of course. This is twice the number that requested help in the US (7%). Obviously too many folks own real estate they can’t afford, and lenders have a lot of ‘splaining to do.

Major real estate boards (Toronto, Montreal, Vancouver) report their April numbers this week. They will be a disaster. Big headlines. As of last week there was a decline of 81% in condo sales across the GTA and a 79% dip in 416. Detached sales were down 69% in Toronto. Showings/appointments are averaging 30 a day, compared to a normal 130. But broker Stephen Glaysher says, optimistically, “We have reached the bottom of the market.”

Not so in Calgary. This is what the realtor’s in-house economist there says:

“COVID-19 changed everything. Our city and province face the additional challenge of the dramatic shift occurring in the energy sector. The uncertainty in the market is expected to cause a dramatic decline in housing demand over the second quarter. With social distancing expected to soften by the third quarter, the pace of the decline in sales will ease by the third and fourth quarter. However, a turnaround in sales is not expected by the end of the year, as the financial implications for many households will have lingering effects.”

Exactly. Lingering effects. Collateral damage. Wounded consumer confidence. How much, and how deep?

Conclusion:
Canadians are cocooning, frightened, with millions living off government handouts and bombarded with negative news. Unprecedented fiscal and monetary stimulus has resurrected financial markets, but the future now hangs on consumer confidence. Key is the ability of governments to unlock the lockdown without a surge in new cases – and the economy functioning in an age of social distancing with realtors in nitrile gloves and little blue masks.

So, Alex, this much is clear: people listing houses now have to sell. Otherwise they wouldn’t. They’re motivated and ripe for a lowball offer. Second, once the restrictions ease expect a flood of new listings – maybe more supply than demand in some markets. Prices will be unrealistic, as sellers try to exit at early-March levels. Wait them out. Because the real gush of listings comes when the six-month mortgage deferrals run out – September. Meanwhile the unemployment rate of 20% or higher now is not going back down to 5% any time soon. Widespread income loss and social distancing are negatives for houses. Plus we’re being told to expect a Covid-19 rerun (of some kind) in the autumn.

So if there’s a property on the market you like now, give it a shot. If not, wait for the fall surge amid a new spate of scary headlines. Then strike.

I guess I knew after all. How reassuring is that?

Source

  By Guest Blogger Doug Rowat

.

Michael Mann is a brilliant director.

I say this partly because his cinematography is often influenced by the incredible Canadian artist Alex Colville (see below). But I also say this because anyone who’s seen the iconic diner scene in Heat with Robert De Niro and Al Pacino knows that this is a director who can get the best from his actors.

Canadian art meets Hollywood

Source: Google Images

However, no director’s perfect and the uneven Miami Vice re-boot is proof of that. But there’s one scene in the movie that oddly reminds me of a key rule of investing. In a meeting with a drug trafficker (what else?), Sonny Crockett (played by Colin Farrell) threatens to set off a live grenade when the meeting goes awry. Eventually, Ricardo Tubbs (played by Jamie Foxx) argues that everyone can decide to splatter themselves against the wall, but “then ain’t nobody gonna make no money.” Tense nods of agreement. End scene.

It certainly wasn’t De Niro and Pacino, but I still appreciated Foxx’s practical outlook and have always taken the scene to represent a great investing lesson: focusing solely on worst possible outcomes means that you’ll never make a profit.

Right now, the forecasts for the coronavirus are loosely divided into three scenarios:

• Worst case. The global economy will be decimated by the virus with minimal recovery for years. The virus will mutate and the global health care community will ultimately fail to control it. Deaths will be in the millions. Essentially, the exploded-grenade option.
• Base case. The sheer amount of global stimulus will eventually intersect with a moderation in the global infection rate and, once this inflection point is reached, markets will rally (perhaps this is happening already). Progress in Italy, South Korea and particularly China, and even some of the hardest-hit US states, such as New York and New Jersey, lend evidence that the US will eventually contain the virus. There will be a gradual re-opening of the North American economy in early to mid-summer with something approaching a normal resumption of economic activity (with notable exceptions, such as a continued ban on large gatherings) by the third or fourth quarter. Equity markets will likely start pricing in this re-opening sooner. This is the pinning-the-grenade option.
• Best case. We’ll all inject ourselves with disinfectants, lie under tanning beds and the virus will be cleansed from our bodies. No one else will die or be infected and the US and global economies will soon resume their upward trajectories, preferably before the November presidential election. Ironically, this is also an exploded-grenade option (put down that bottle of Lysol).

If you’re an investor who assumes the worst-case scenario then the sensible course of action is a flight to safety. But here’s a sample look at some of the safe options at the moment, duration can be decided on based on your own estimate of crisis length:

What safe gets you in 2020

Source: Bloomberg, RBC. *posted rate. RBC is used as a rough proxy for the GICs of all the big banks. I don’t include durations longer than 2 years for GICs because banks, though extremely safe, can’t quite be equated to the government in terms of safety, especially over a long time horizon.

So, the average yield for all of the above is a whopping 0.47%. You earn basically nothing and then have the additional difficulty of correctly timing your way back into the market. Like almost all retail investors (and most professional money managers for that matter), your timing won’t be successful and markets will probably rally by 20% or more before you feel ‘comfortable’ getting reinvested. If you recently moved to the sidelines, ask yourself if this recent rally in the S&P 500 is tempting you to dip your toes back into the market? I bet it is, but again, too bad you already missed the 25-30% bounce.

So, you can certainly assume the worst case for the coronavirus and make a dramatic flight to safety with your entire portfolio. No one’s stopping you.

But then, most definitely, the person who ain’t making any money will be you.

_____________________________________________________

Finally, I’ve put a lot of emphasis on the health care sector in my previous blog posts and noted that it should be a part of everyone’s balanced and diversified portfolio. As it turns out, health care has done its job this year, almost completely recovering to its pre-crisis highs and outperforming the broader S&P 500. Sometimes good defense turns into good offense.

S&P Health Care Index (white line) vs the S&P 500 (orange) – 1 year

Source: Bloomberg

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

Source

Let’s talk rent.

First, all those house-lusty, first-timer, newbie moister buyers out there should understand the days of fist-over-fist price appreciation on entry-level homes (we’re talking condos here) are done. Kaput. Stick a fork in it. There were lots of reasons not to buy before Covid came to town. Now there are reasons to bail.

Advice: only buy a condo if the total of: the financing charges + monthly condo fees + property taxes + insurance + the opportunity cost of the downpament are less than rent for the same unit. The odds of this happening in most markets (Calgary may be the exception) are about zero.

Why?

Simple. Capital appreciation can no longer be considered a certainty. So without annual hikes in the value of your unit, why would pay more every month to live there as an owner, rather than a tenant? Especially when real estate costs a ton extra to buy and sell thanks to land transfer tax, legals and realtor commission.

Besides, a one-bedder in a concrete urban tower isn’t going to be anyone’s F House. Almost nobody moves into their forever home off the bat, which means you want liquidity when climbing the property ladder. Only buy what you can sell easily – and for enough profit to make all those extra ownership costs worthwhile. One lasting impact of the pandemic will be to render condos in the biggest, tallest, coolest buildings sinkholes of value.

By the way, renters are starting to rock in Toronto. Lease rates are falling. Selection is rising. Competition is going away. Thanks, pandemic!

The rental market in the country’s biggest city is changing by the day. Freaking-out Airbnbers are (as predicted) dumping their empty units onto the market since the travel/visitor sector is dead. Many of these are ‘professional hosts’ with multiple units and mega-financing. They can’t afford to carry empty condos, and so are (a) listing or (b) renting in a hurry.

Meanwhile (again thanks to the virus) the number of new renters is shrinking along with incomes, job opportunities and the population in downtown office towers. So while the number of rental units has jumped by 25% recently, showings and new leases have collapsed. Rents have started to fall – down about 4% in a month, with more to come.

So, yes, the bootie is on the other foot now. Amateur landlords are under financial pressure and more willing to lease or sell at a competitive price. Given the fact half of all city condos were bought by speculators and small-time investors, expect a lot more pressure to come as the vacation rental market disintegrates. First-time condo buyers today must have a powerful reason to proceed. I have no idea what that might be.

Now, how about the big guys? The real estate investment trusts owning thousands of rental units? There’s been a lot of talk here lately about rent strikes, deadbeat tenants, massive job loss, financial distress and the fact renters can cease making payments but can’t be evicted, as the virus has shut  government agencies and the courts. So, surely, residential REITs must be clobbered? In fact, the depressed price of trusts on the market today suggests this is the prevailing meme.

Crap, says CAPREIT, one of the largest apartment-owning trusts in Canada, with a whopping 56,800 suites and townhouses in its $800-million property portfolio. This week management issued this statement:

“Looking ahead, we strongly believe our business, and the multi-family real estate sector in general, remains a highly defensive and counter-cyclical asset class that can bear the broad market swings we are experiencing. With the strongest balance sheet and financial position in our twenty-two-year history, we have the resources to weather this storm.”

Just corporate bafflegab to drive the unit price higher? Of course, but look at this: CAPREIT collected 98% of all the rents owing to it from tenants in April. The number of renters on deferred payments equals less than one per cent. Occupancy is sitting at 98.2% of its units, and the trust is actively marketing the vacant ones, striving for 100%.

And this REIT, like the others, is benefiting mightily from the collapse in interest rates. The overall loan-to-value ratio is just 35%. The trust has about $150 million in cash. The average 10-year rate on its mortgages is 2.01%, and it just locked up another $45 million in mortgage financing at 1.59%. Given inflation, that’s basically free money.

But look what Mr. Market has done: CAPREIT was trading at about $60 when the virus swept into our lives, then dropped by 30%. It’s now recovered some of the loss and sits around $47. Lots of volatility, despite a business that continues to throw off big cash flow, where tenants are being responsible and crashed interest rates are filling the coffers. Oh yeah, and it pays investors income.

Amateur landlord? Fuggedaboutit. Condo owner? Hope you like losses. REIT investor? Smart. Renter? Sweet. Renter with REITs? Genius.

Source