Category: Accounting tips

So what happens if you get punted at work thanks to Mr. Virus and you fear your mortgage? If you have scant savings and can’t pay the monthlies?

Scary days for many. Layoffs are piling up. Over 500,000 of our neighbours applied for EI this week, up from 27,000 last week. Bank call centres are swamped. Phone systems are going down. People are on hold for hours, looking for loan relief.

That’s some of the bad news. Way more to come. American jobless claims are two million, that’s three times the 2008 experience. There are estimates the US economy could shrink by 15% and unemployment top 20%. Compare that with a 13% contraction in 1932 and a Depression jobless rate of 24.9% in 1933. Yikes.

Warns celebrity mortgage broker (only in Canada would this be possible) Rob McLister:

To say lenders are concerned by these numbers is the understatement of the year. The percentage of mortgage applicants declined because of income concerns will spike. If your property and qualifications are not solid, expect a much greater likelihood lenders will ask you for a co-borrower, bigger down payment or decline you outright.

Of course in the Thirties there was no unemployment insurance, welfare, state-run health care or governments willing to spend wildly to support laid-off workers. The result was social misery, until politicians were forced to react. In fact, at first governments contracted, making things far worse.

Today, in contrast, pols and central bankers have been on steroids to flood society with cash, direct assistance, cheap financing and subsidies. As a result this year the Trudeau government’s budget deficit could soar past $100 billion – or twice the hole Harper dug to get out of the 2008 disaster. Never, ever, ever have governments coughed up this kind of dough. Dog help us when it comes to future tax rates.

The biggest positive: this is not structural, as in the 1930s or even in 2008. Banks are not failing. The system not collapsing. The economy is not broken. Instead it’s suicide. We’re deliberately murdering GDP, stifling demand and idling millions of people to thwart a bug. When it passes (and it will) or a therapy is found (coming) demand will swell, jobs return, markets rise. It’s hell. But it ends.

Okay, back to the question.

Whaddya do if the boss closes the shop door, your company goes paws-up, your small business fails for lack of revenue and customers or the gig economy eats you? Now that 70% of Canadians have real estate with $1.2 trillion in mortgages, virtually no savings and epic monthly overhead, are we headed for a smoky hole?

Nope. But you might run out of money before we run out of misery. So here are things to know:

Mortgage deferral
The Big Six have agreed to let folks set aside home loan payments for up to six months, as banks in Italy, France and the UK have done. In order to arrange this, one must ask – and that’s why banker call centres have been melting down under demand over the last three days. If you got your mortgage through a sub-prime lender or some guy who also sells insurance and dog beds, well, good luck.

By the way, a mortgage deferral stops payments. It does not stop interest from accumulating. This money will be added onto the amount you owe, increasing the principal which will have to be dealt with later. But later is later.

Mortgage adjustment
If a home loan has a 25-year amortization (or shorter) you can always apply to lengthen that to, say, 30 years. This will result in monthly payment amounts dropping, but the loan will last longer and ultimately cost more interest.

HELOC borrowing
Home equity lines of credit are relatively cheap (especially since the prime went down) and easy to access, if you already have one arranged. There are no stipulations on what the funds are used for, and payments can be interest-only.

LOC life lines
Ditto for personal lines of credit. If you have one set up (and you should, for emergencies like this) this is the time to access the sucker. Save your cash. Don’t liquidate good investments. Instead use the bank’s money until we have a better glimpse of the future. As with a HELOC, you need only make interest payments on the amount withdrawn. In fact you can probably make no payments whatsoever, with the principal amount increasing up to the credit limit.

Banks don’t want clients to go bust. They don’t want their houses. Or cars. But they need people to talk to them.

Meanwhile, every hour is bringing more government intervention. On Friday the feds allowed CMHC to buy up billions of uninsured mortgages plus those with 30-year amortizations. This is in addition to the $50 billion in bank loans being taken over. In the US the Fed is on a wartime footing and Friday bought $107 billion in government bonds and $35 billion in mortgages. So far this week, it’s spend over $300 billion. And Washington is about to dispense $1 trillion. Breathtaking.

We live in historic times. Remember them well. They will pass.

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The CIBC branch down the street was closed this morning. Just like that. How long? “Until further Notice” the sign said.

A block away the teller at the Royal was definitely not herself. I chatted for 90 seconds, doing reconnaissance, and she used hand sanitizer three times during the convo. I felt swarthy and heathen (more than usual). In any case, RBC is open for a few hours tomorrow, then shut. How long? “No idea,” she said, squirting.

The green guys were working. Bank was full as I withdrew some just-in-case cash (the Bank of Canada boss scolded retailers this week for not accepting real money). How long will you stay open, I asked? “Hopefully as normal,” the manager said. “But who knows?”

All the banks have closed branches this week. A ton of them, in every city. Hundreds, literally, in Toronto. Dozens in Calgary, Ottawa, Montreal and Vancouver. Lots of TDs in Halifax alone.

And here’s a prediction: many of them will never reopen. What a wonderful opportunity Mr. Virus has presented to the banks to shutter expensive pieces of real estate staffed by costly humans. Life is so much more efficient and profitable when people embrace online banking – even if they’re forced to by closed doors.

The point? Simple. We’re not going back to same old, same old when this thing is done in a few weeks or months or a year. By forcing the economy to commit suicide as we react to this ugly version of the flu, we’re also hastening structural change. Fewer physical banks will be a big manifestation of that. Reduced cities with regularly scheduled airline service. Way less people working in office towers. Or going to a central location anywhere. The beginning of the end of the open concept office environment, which those sharing-economy, collaborative moisters so love.

More change…

No revived cruise industry, now that we’ve seen giant, glistening white germ factories that nobody wanted to let moor. Maybe the open borders in the EU, now closing, won’t be opening again in the same way. Hotels and tourist destinations will be crippled for years. Airbnb is being decimated, likely resulting in a surge in the rental vacancy rate in Toronto and YVR.

Condos? Yikes. Covid has demonstrated that living in a few hundred square feet with no outside space, connected to the earth by an airless box stuffed with other people of questionable hygiene is, well, the definition of risk. Forget social distancing with common hallways, foyers, garbage rooms, mail rooms and, yes, elevators full of sticky buttons.

And then there’s government.

Months before the coronavirus came there was a robust populist movement in many western countries for less bureaucracy and regulation, more direct democracy, freer enterprise, reduced governance and personal independence. Well, kiss that goodbye. When things got rough, the tough guys folded.

Now we have a massive intervention of government into everyday lives. Public spending has ramped up as never before. Canadians are waiting for Ottawa to send them money for rent and groceries. Child care cheques are being fattened. Stranded vacationers are moaning that the government should come and retrieve them. People idled through no fault of their own see governments at all levels as their financial saviours.

You know why. Savings are pathetic. Debt is epic. The real estate fetish created a mountain of mortgages. Legions of people have lived on credit, beyond their means, with paycheques that barely cover the monthly nut. So when a shock like this comes along, they turn to government. And politicians are happy to oblige – since they’re doling out other people’s money.

What comes out of this? More pressure for a universal basic income. And if you think government can actually reduce the size of the cheques soon to be sent out to families, think again. Public benefits never go down. Only up. Like taxes. And that will be a growing part of our future, too.

Well, let’s end this post with good news.

Guess how many new cases of infection there were in China on Thursday? Zero. In a nation of 1.4 billion people. Looks like they beat this little bugger to death.

And oil? It rallied by more than 20%. The largest daily gain ever, as investors woke up. The world still runs on this stuff, yet there was talk of crude prices going negative. Utterly silly. We’ve lost our minds.

Finally, I heard from Tracy today. She reminded me of why I come here every day to do this.

I’ve written a couple times in the past. Two years ago you gave me some fantastic advice when my husband left me. I followed it. I read your blog everyday. And as a result I successfully moved from a married stay-at-home mom to a divorced mom with a full-time job. I left the matrimonial home. I live small. I worked two jobs last year. I saved lots.  I have landed on my feet.

And now I’m the midst of this chaos I have no clue what the next six months holds. I might be laid off in April; work is slow.  But it felt so good to tell the kids tonight – and to believe it – that regardless what happens we will be ok. I am debt free.  I have two months of income sitting in my HIS. Like everyone else my investments have plummeted but I still have a healthy amount left if I need to dip into them. But we’re not spending any money so I don’t think I’ll need to do any dipping for another 4 months. Yes, this might screw up my retirement plans, but being a SAHM for a decade did a number on that already. No regrets though.

Thank you Garth. I am forever grateful.

By the way, carrots and potatoes back in the store today. Toilet paper, too. Spring on Friday.

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The US border closes. Oil is $24 a barrel. The dollar at 68 cents. An airline grounds. Stocks have lay another egg. Recession’s coming. Shock.

But banks announced a six-month mortgage break. The stress test fell. Variable rates dropped. The prime sunk to 2.95%. HELOCs and lines of credits got cheaper. Another interest cut is close. Tax season is delayed. And governments throw money from ‘copters. Awe.

But fixed-rate mortgages are going up. Risk is, too. US Covid cases are about to explode. Wildly. Society is shutting down. The mindless hoarding continues.

There. The news segment is over. You can come out from under the table now.

If you have financial investments, it’s too late to sell and too early to buy. The pace of the decline has been unprecedented since 1928. Not over yet. And while the snap-back will be epic once (a) US cases start to peak or (b) a therapy emerges, this is painful. Bear it. Don’t obsess about your portfolio. And don’t bail. By missing the recovery days (they’re coming, without doubt) you’ll lock in losses. Check your emotions and look at this as a unique, once-in-a-century experience. Thank Dog we have Netflix, storm chips and that booze outlets are still open.

Now, a few words about real estate.

Yeah, mortgages are cheap, listings scant and the predictions were for the birth of a vibrating new gasbag this spring. But, ain’t gonna happen. As this pathetic, yet miraculously germ-free blog told you a couple of weeks ago, housing would be a Covid casualty. And lo, it’s happened.

For example, the traditional open house is kaput. Even Re/Max agrees, and this week told all its rabid agents to back off from opening sellers’ doors to the unclean public. Others who continue to conduct showings are insisting/suggesting this:

• Hand sanitizers for prospects to use upon entering.
• Recommended wearing of nitrite gloves and N95 masks
• No wrinklies present during the showing
• Soap and disposable toweling available in washrooms
• Plastic-covered, single-use, individual pens for docs signing
• Feature sheets emailed so no paper is passed by hand
• Virtual tours instead of real ones
• Cleaning and sterilizing of homes after each showing, with special attention paid to disinfecting doorknobs, faucets and Uncle Pete if you forgot and left him upstairs.
• Or, just don’t sell.

Sales that were cooking in February will be frozen in March. And April. And May. For example, the BC Real Estate Association today called it “an unprecedented paralysis of economic and social activity” that will keep buyers at home and keep sellers safely behind doors. Besides, interest rates are going up – even as the central bank slashes the cost of money.

Look at RBC. Besides closing a bunch of branches (announced yesterday) it just goosed mortgage costs by almost half a point, with the fiver traveling from 2.95% to 3.34%. Bond yields have actually exploded higher in recent days. The return on a 5-year Canada bond was just 0.299% ten days ago, now racing back to 1%. Incredible. This is why the Bank of Canada is busy buying up mortgage bonds to try and even out the market’s gyrations. If the financial system goes into a risk-off spasm, we’ve got 2008 all over again – with a virus and an oil crisis. Yikes.

But that’s unlikely. More probable is a recession with significant job loss, even as financial markets start to recover. It will take a long time for the oilpatch, airlines or the entire hospitality sector to get back on its feet. Some damage will be structural. A few big players and a myriad of smaller enterprises will be gone. This is why the feds are sending people money for rent and groceries, why taxes don’t have to be paid until August and why mortgage payments will be deferred for six months (but the principals will rise).

So here we are. That ‘economic shock’ the Bank of Canada spent the last five years warning about came in the matter of a few weeks. This is why a country where half the people are two hundred bucks a month from insolvency, where the savings rate is less than 1% and the debt-to-income ratio among urban homebuyers is 450%, is a dangerous place. We were told, and told again. And most listened not.

On CBC I heard a guy moan that he’s lost his job and has no money. “The government better send me some,” he said. “That’s what they’re there for.”

Oh boy. Shelter in place.

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When will markets bottom? Where does hope lie?

Each Tuesday evening my colleagues (and fellow bloggers) Doug Rowat and Ryan Lewenza join me on a conference call with the folks whose investments and finances we manage. Tonight we sought to answer the questions above. Here is a link to our conversation.

Turner Investments Client Call, March 17, 2020 (33 minutes)
LISTEN – .mp3 Audio – OR – .m4a Audio

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CIBC announced it’s closing the better part of a hundred locations and curtailing hours. BeeMo followed suit, saying 15% of its locations would be shuttered. Temporarily, maybe. The Canadian Bankers Association fessed on Tuesday it’s coordinating reduced hours and staff across the industry. The brunt of closures will be in urban centres. Small towns exempt. Another reason not to live in a $700,000, 600-square-foot box on the 28th floor.

But here’s the question: is Covid whacking the banks?

Of course share values briefly crashed. Look at RBC. Almost $110 a pop in February, all the way down to $78 last Thursday (and at $92 as I write this. Did you buy?). The banks are suffering from tighter spreads as rates drop and are now facing a lousy spring mortgage season. So could any of these guys be in trouble? After all, if Canadians are losing jobs, social-distancing and self-isolating – and owe record wads to the Big Six – what happens if loan losses accelerate when people just can’t make mortgage or CC payments?

Darren’s starting to sweat it.

“We sold our house and are riding out the real estate craziness before we buy again. We had a short time frame of less than two years and have $1.1M sitting in a single CIBC savings account because up to last week, we were earning 3%.

“Our concern is losing it all in a worse case bank collapse scenario. What advice would you give to prevent losing this capital? Split it into $100k chunks across multiple accounts and banks to maximize CDIC insurance? Looking forward to your sage advice.”

Three weeks ago CIBC announced a profit of $1.21 billion. That was for 90 days, topping last year, beating analysts’ estimates and allowing the bank to hike its dividend. In fact during the 2008 credit crisis – which (unlike now) was a financial pandemic – no Canadian bank even reduced a divvy payment, let alone suspended one.

As for a bank failing, won’t happen. If it came close, bail-in provisions are in place to turn certain forms of investor debt into bank equity and bail the place out. No deposits would be involved. No retail accounts. Nobody’s savings.

Finally, if one of the Big Guys failed, your deposit insurance would be moot. CIBC, for example, has 10 million clients and $17 billion in cash deposits. The deposit corp has $5 billion in cash, and $800 billion that it’s supposed to insure. Figure that out.

In any case, Darren, relax. Open a flurry of accounts all over town if you want, but it will be mosquito work. The bank will be there when you are dust. And to ensure that doesn’t happen soon, wash your damn hands.

Now, here’s Michael. He’s looking at these crazy markets, the 30% whack lots of good assets have taken, and like a true GF stud, feeling his oats.

“I’m curious about dipping into my LOC (6.45%) to put towards my accounts. I’m not one to borrow but feel this is a unique time. You’ve mentioned in the blog that the interest paid is tax deductible.

“I also want to be cautious because the auto industry will slow right down which will impact my income flow.  Any feedback would be appreciated.”

Let’s summarize, Mikey. You have no money lying around to invest, and need a loan. The cost of borrowing is huge – 3.5% above the current prime rate. You’re a novice borrower. And your job is tenuous in an industry currently being whipped. So, what are you thinking? If making money was this easy, why isn’t everyone on Wall Street and Bay Street doing it?

Simple. Risk. Interest on money borrowed to buy investment assets is, indeed, deductible from taxable income. That’s cool but not enough of an incentive to gamble buying things which (in this environment) could fall as easily as gain. Just as it’s unwise to sell anything in the middle of a storm, it’s equally imprudent to buy – especially with money you don’t own, and costing three times the inflation rate to access.

And, geez, how about your income? If Mr. Virus hangs around for three more months before releasing its grip, car sales will tank along with real estate and you could be looking at less cash flow and more debt. Yes, stocks and equity-based ETFs are (like me) value-packed and unloved at the moment, but this is not the best time to be a cowboy.

By the way, did you see the latest VIX chart, M?

Yup, we just sailed past the 2008 spike.

Today, down the street, the locals cleaned out all the bags of potatoes and carrots at the neighbourhood store. They weren’t doing that 12 years ago. In those halcyon days of crisis we had lots of bumwad, too. When the credit crunch hit, governments and central banks figured out how to solve it. This time – because the threat involves health – humans are utterly irrational.

Chill, Mike. Darren, too. Listen to the authorities. Stay at home and self-inebriate.

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A BC couple is caught on video buying every single cut of meat in the supermarket, pushing other shoppers out of the way to scoop them. They pay and leave. A US Amazonian donates his 17,700 bottles of hand sanitizer after he’s accused of price gouging. And Canada, long a light in the world, shuts its borders.

The world is nuts. You might have noticed. Empty shelves when there are no shortages. Raw panic at a disease from which 93% recover and 80% have mild symptoms. Social rebuke for businesses that just want to stay open. And try to survive. A prime minister who tells all citizens to ‘stay home,’ as the nation’s major airlines wither and croak, restaurants go dark and together we create a recession. Bad enough that oil has dropped by 50%. Now we’re supposed to be 19th-century homesteaders. With Netflix.

Well, economies are made up of people, and right now most of them are loopy. So time will be the only remedy. In that vein, let’s review what the next few months may bring, then the months after that.

The short – the next 120 days
Canada goes into recession, which means a period of negative growth. Contraction. A bunch of people lose their jobs (already happening with Westjet, the oil patch, tourism, lobster guys). A global recession is also possible, which means less demand and lower prices for crude. Alberta is kinda pooched.

Financial markets roil and volatility stays extreme. Look at the Vix…

Where’s the bottom? Dunno yet, but it’s coming. Markets are pricing in not only economic torpor but a 30-40% drop in corporate earnings. That would be historic. And while it’s also temporary, traders are so intensely risk-off that common sense is as unwanted as a share in Suncor or Tesla.

For real estate, this will be the silent spring long remembered. Listings and open houses are being cancelled. The specter of job loss has buyers frozen. Mortgage brokers are putting the brakes on loan approvals since it’s expected house values might suddenly and quickly drop below recent sale prices. Potential buyers face an employment risk that didn’t exist three weeks ago. Concerns about liquidity and credit are making renewals questionable. Especially for people who have depended on Airbnb revenue. Kaput.

But, all these things will pass. In time.

The long – come autumn
First, does anyone really, seriously, truly believe that in a global effort modern science will fail to produce a vaccine? Not me. It’s a done deal. Just need time. (First live test in the US happened today.)

As for the economy, consider that US unemployment is the lowest in a half-century with steady income gains over the last few years. Store shelves are empty right now because people have spent a storm. The guy who owns the indie grocery store nearest me says last Thursday he sold more stuff than during the entire Christmas season. Look at the vids online of hours-long lineups to get into a Calgary Costco, for example. Parts of the economy may be shuttering. Others are red hot.

Once public panic recedes pent-up demand for clothes, cars, iPhones and houses will be intense. It will happen in an environment in which central banks have injected enough stimulus to make Kevin O’Leary grow hair again. Cheapo loans. Oceans of available credit. Direct money transfers to families and businesses. All fuel for the fire.

Needless to say, financial assets will also ignite.

Come the autumn the world will look like a different place. Airplanes will be flying. Stores will be open. The amount of surplus toilet paper will be epic. You will be happy you didn’t bail out of perfectly good assets when they’d lost a third or more of their value, and that you were fully invested when values restored.

Darkness. Dawn. You know the drill.

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Big news Sunday as the US Fed slashed its rate again. By a full 1%.  To zero. Plus it’s throwing $700 billion into the liquidity pot through bond purchases. Breathtaking.

On Monday our Big Banks will lower their prime rates. Or not. Could take days. Despite the central bank’s panicked move on Friday there’s nothing compelling the Royal, TD or the other guys to cut. And if they do, the drop could be less than the half-point Ottawa delivered.

In fact, did you notice that some mortgage rates have increased? How could that be?

Well, the whole world’s getting weird. About to become weirder, too. If you thought last week was nutso, just wait for this one to be finished. The financial gods know this. It’s why the Bank of Canada delivered that steep and shocking reduction on Friday. It’s why Morneau just handed over $10 billion to the same small business dudes he was trying to eviscerate a year ago. And it’s why the bank regulator relaxed controls and urged the big guys to shovel $300 billion in loans into the economy. It’s also why Ottawa will soon announce how it’s going to send money to people to pay rent and buy groceries. Plus why CMHC is allowing a six-month mortgage holiday.

These are desperate, emergency measures to deal with the economic effects of a pandemic which has turned normal citizens into Tpaper-hoarding, self-isolating, social-distancing, zonked-out zombies. I mean, have you checked out the grocery store lately? Wal-Mart’s food area? Costco? Politicians, the media and the Internet have managed to alter human behaviour in less than seven days. The amount of disruption that stressed-out people are accepting is immense. Next up are sealed borders, grounded domestic flights, personal travel restrictions and the shuttering of every public institution save hospitals.

This by the way, is happening in the midst of an historic piddling-match between OPECers and the Ruskies which collapsed oil and decimates Canada’s main export commodity. What a perfect storm for this nation of little beavers – crude collapsing, travel and tourism gone, big sports closed, supply chains busted, businesses without customers and a for-sure recession starting. Good thing MPs are on the job in the House of Commons. Oh, wait…

So, this is why interest rates aren’t cascading lower at the banks. And why some home loans are going up. Cuts are not happy events for the banks, already lending money out for five years at the inflation rate. As the central bank was hacking on Friday one big bank jacked up its VRMs by exactly the same amount, for example. Low rates mean lower profits and a harder time matching the cost of borrowing with funding sources. Thus, some fixed-term rates increased on Saturday.

Recessions hit banks as well as workers. If you recall, mortgage rates were up a dozen years ago when the credit crisis was raging and CBs were slashing the cost of money. Same reason today. Low rates bring more banker risk. If you need a mortgage, go get one. Even if the Bank of Canada moves to zero (increasingly likely, now that the Fed is there) it doesn’t mean you borrow for nothing.

Next?

Widespread, drive-in virus testing in the US will probably bring shocking results. Trump will send the country into virtual xenophobic lockdown. The media will have a cow. The odds of a global recession will mount. Mr. Market will not be happy. The bottom of that bear market Ryan talked about here on Saturday could arrive swiftly. Of course, the pandemic will fade in a few months, the oil war will mitigate, pent-up consumer demand will explode and the trip back up for financial assets will likely be explosive. Don’t miss it by giving up and cashing in now. Bad idea.

And what about the real estate market? After all, this is rutting season. Realtors expected cheapo mortgages and thin listings to send prices skyward. Still on?

Don’t count on it.

People desperate to buy a $6 package of toilet paper, worried about their employment and being told every twenty minutes by CBC that they’ll soon die, are not exactly motivated to dive into debt. It doesn’t matter how low the cost of a loan goes if your workplace is quarantined shut and your job looks dicey. Meanwhile owners don’t want to list and open their homes to potentially infected strangers (especially if they rent. Yuck). Remember that in China during the virus attack real estate sales collapsed 98%, something which agents and brokers are seeing in Covid hot spots like Seattle and parts of California.

As for high-end properties, well, kiss them off until stock markets are restored. And condos? Pffft. Who wants to ride in stuffy, little, airless elevators with barbarians from other floors who hurl all their greasy germs on the buttons?

So, nah, forget the interest rate thing. This spring will be a real estate write-off. What comes after that, however, may knock your socks off.

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   By Guest Blogger Ryan Lewenza

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It’s official…we just experienced the first bear market – defined as a 20%+ drop from a previous peak – since the 2008/09 financial crisis. In the fourth quarter of 2018 we got within a hair of a 20% decline, so from my perspective that was a bear market despite it not meeting the industry standard of one. That said, with this market carnage, indiscriminate selling and many people/investors just basically losing their minds, where do we go from here? Today I’m going to review past bear markets to see if we can glean any valuable insights into this question and I’ll provide the indicators I’m monitoring to help me determine when this sell-off may be over.

Let’s begin with a look back at the previous bear markets in the table below. Again a bear market is defined as a 20%+ peak-to-trough decline, which I view as arbitrary and simplistic, but nonetheless let’s focus on these specific occurrences.

Since 1945 there have been 12 “official” bear markets. Here are the key takeaways from them:

• The average bear market decline is 31% while the median decline is 29%
• As of March 12th the S&P 500 is down 27% so we’re pretty close to the average decline
• More recently the S&P 500 declined 49% in the 2000 tech crash and 57% during the 2008/09 financial crisis. I do not believe these are good comparables since: 1) the S&P 500 was extremely overvalued at a 30x P/E in 2000 versus a recent peak in February of 22x; and 2) this is not a financial crisis as US banks are in much stronger shape today so we don’t see a potential economic recession bringing down the banks, leading to a negative feedback loo
• The 1987 stock market crash saw the S&P 500 decline 34% but not widely known, posted a 5% total return for the year. Personally, I think this may turn out to be the best comparison for this current downturn
• On average bear markets last 13 months. We’re only 2 months in so this suggests we have more time to go before this ends
• Finally, I then looked at how long it takes to get back to even assuming you were the worst investor in the world and invested right at the peak of every bull market. On average, it takes three and a half years to get back to even. Again this assumes you’re the worst market timer in the world

For me this analysis points to a potential silver lining. With the S&P 500 already down 27%, and the average decline being 31%, it suggests we’re getting closer to the bottom. Now I’m not making that bold call yet, as the headlines remain incredibly negative, infections should continue to rise in US and Europe, and we are likely to see a global recession in the coming quarters.

But are we 50%, 75% or more through this bear market? Time will tell but I do believe we have already endured a good chunk of this bear market and I believe strongly that we will get through this and we’ll look back at this time as a buying opportunity.

US Bear Markets Since 1945

Source: Bloomberg, Turner Investments

Now on to what I’ll be focusing on to help me determine when we may be through the worst of this.

First, we need to see a peak in infection rates. According to Johns Hopkins data, cases of new infections in China look to have peaked, however rates in the US and Europe are heading higher. Our hope and expectation is that infection rates will peak in North America and Europe in the spring. The next few weeks and month will be key!

Second, we need to see the US yield curve steepen. With fears the virus will lead to slower economic growth and possibly a recession, US government bond yields have plummeted, resulting in another yield curve inversion. This suggests a recession is coming. If there is one I believe it will be short lived with economic growth recovering once the virus is behind us. The Fed is starting to cut interest rates and is likely to cut further so this may help address the inverted yield curve.

US Yield Curve

Source: Bloomberg, Turner Investments

Third, I would be looking for attractive valuations for stocks. Currently, the S&P 500 trades at a 16.2x P/E ratio, which is well off from its recent highs of 22x and close to its long-term average. This is an interesting level since the S&P 500 has bottomed at this level three times since 2015 (see chart). Basically this level has created a floor in stock prices for the last 5 years. Let’s hope it holds.

If it doesn’t the S&P 500 would probably drop to a P/E of 13-14x level, which would then likely be a strong buy.

S&P 500 P/E Ratio

Source: Bloomberg, Turner Investments

Lastly, I would need to see a turnaround in the technicals. I would like to see: 1) the S&P 500 rise back above its 50 and 200-day moving averages; 2) the Hang Sang/Shanghai breakout; and 3) the airlines and cruise ships rally.

What I do is more of an art than a science so I don’t need all of these things to come together, but a combination of a few of these factors would likely make me more bullish. For now it’s time to sit and chill. No sudden movements!

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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The storm rages, but the week ends with hope. If you came here today looking for investment advice, fugeddaboutit. No change. Things are moving too fast. Most people should do zip. The bold might trim bonds and nibble equities. The cowboys yesterday were scooping up banks, oils and airlines with both hands.

The news is overwhelming. Covid emergency in the US. Drive-through virus tests in Wal-Mart parking lots, run by Google. Canada moving closer to sealing off borders. Maple interest rates plunging another half-point. Wow. Ten billion for small business. Next week Ottawa starts paying your rent, buying groceries. Maybe your mortgage, too. Society is shutting down by the hour. In a Burlington Costco lot they were fighting over parking spots on Friday. Fighting. Literally. The MSB continues unabated. Whipped up by sensationalist media, folks are doing the opposite of what they should. Hoarding. It guarantees shortages. So much for the collaborative, sharing economy we’ve all heard about. The animal instincts are at play.

Anyway, things are unfolding as advertised.

Big package from the Fed. Huge moves by Ottawa, freeing up liquidity. The Germans say they will paper everything with money. Canada has a fat stimulus package. CBs everywhere are ramping up economic stimulus. Tax cuts coming in the US. Worker support programs in European countries. Fat rate cuts as we move towards 0%, and the next trip down in the US could be a full percentage point. Trump looking and sounding presidential. Stocks markets roaring their approval. Soon we will have bailout plans for the airlines, tourist industries and more.

Short-term, Covid is winning. It’s turning people into fools. Long-term, the bug doesn’t stand a chance.

So when China went down, so did the lobster business. The big boats ended up moored and idled off NS as exports and prices crashed. But now that’s ending. China has defeated the virus. The seafood supply chain is being restored. This is a glimmer of what’s to come. And that is a full recovery, so long as our leaders make these wise choices – and stay on the job.

As my myriad of critics have pointed out, I’m no infectious disease dude. But I do know numbers. So when I look at a chart like this, I can see what’s coming. You should, too.

The world has 140,000 cases, of which 71,000 are recovered. Globally (7,700,000,000 people) there are 59,200 active cases. In China (1,340,000,000) new cases have ended. So far about 5,000 people have died. The infection rate in China turned out to be .00005% of the total population. (So why is Canada’s health minister saying “30% to 70%” of us could be infected?)

Well, we also know 80% of the souls who get the bug end up with (basically) a mild cold. Old geezers are more prone to complications, but even people over 70 have a 92% recovery rate. So is this really justification for fisticuffs in the parking lot? Storming Costco and the grocery store? Hoarding so your neighbours go without? Selling perfectly good assets when they’ve temporarily declined?

Remember the threat to your family is not medical. It’s economic. We’re heading into a recession, thanks not only to the bug but because of oil. The impact of that will be muted by governments and CBs as interest rates are crashed and cash falls from the sky. But it will still be felt, especially in the West. Be confident the oil war will end when the Saudis and Ruskies have had enough, just as the virus will flare and fade. (Seems like big strides are also happening with a vaccine.)

Meanwhile Trump has declared a national emergency, and gone globalist as part of an international effort to rescue the planet’s economy. One of Covid’s little gifts has been to underscore what insanity it is to believe countries can seal themselves off from one another without financial collapse and the destruction of national economies. When supply chains break, so do we. The populists are dream weavers.

Well, it’s Friday. The markets are wall-to-wall green. The news rocks. The toilet paper animalism continues. But the actions we forecast are taking place.

So turn off the news this weekend. Stop coming to this blog, I implore you. We’re gonna make it.

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We were in the eye of Dorian. The winds of 130 km/hr were ripping shingles from the roof. The basement sump pump was heroically losing it. Rivulents down the road had turned into a river. The hurricane went on for hours, each worse than the last.

“Hey, pal,” I said cheerfully. “Wanna go for a pee?”

Bandit opened one eye and gave me that look. ‘Are you out of your freaking mind?’ it said. And that was all. Roll over. Dogs know.

Well, here we are. The big storm. Venturing into it is foolish. Too late to sell. Too early to buy. Unless you’re epic. Best to sit this one out, riding the roller coaster lower, then letting it carry you up when the sun returns. And it will. Pandemics don’t last. Oil wars never do, either. The world isn’t ending. Just normalcy.

So the virus got real Wednesday night when Tom Hanks got it, the NBA shut down and wheezy Trump scared the crap out of investors. As he spoke futures sank. Where Mr. Market wanted emergency containment (since US virus testing has been virtually non-existent), he got an airline-killing European travel ban, faint stimulus and wall-to-wall uncertainty. The next day stocks sold off Biblically, Trudeau self-isolated (convenient), hockey went dark, Ontario schools closed  and everything tumbled. Stocks, Bonds. Gold. Oil. Dollar. Crypto.

“Risk Off. Risk Off. The 11 year Bull market ended more quickly than anyone has ever seen. The Dow declined at the fastest rate since 1933. We are in the grips of a Pandemic Bear,” was the histrionic take of one veteran Wall Streeter. People were taking no chances as high-frequency traders, the algos and the hedgies whacked the Sell button.

The fear? It’s not about health, but disruption. Trump pushed us a lot closer to a global recession with the complete disruption of the America-Europe supply chain. Recessions bring lower corporate profits, higher unemployment, bigger deficits, falling rates and negative growth. And while central banks will hack the cost of borrowing and inject stimulus while governments cut taxes and goose spending, nothing can match the speed of a virus. It took China six weeks of historic, draconian measures to quell this thing. America has not even started. It’s why Mr. Market is also looking at Trump and wondering if the guy will actually be around past November.

Well, let’s talk about investments. Overnight my suspender-snapping, omniscient, fancy portfolio manager colleagues and I did another asset allocation review. The process is endless, and leads to incremental but meaningful changes. I asked Ryan Lewenza to summarize some of the moves we took before the virus landed.

We were calling for an increase in volatility this year but this is getting a little out of control! Thankfully we’ve been systematically and proactively reducing risk in the portfolio over the last few years to help to minimize the downside against these market downturns. We did this for two key reasons. First, with the bull market reaching its 11th year anniversary in 2020, this current economic/market cycle was getting older. Second, the risks remained elevated, in our view, as we’ve had to contend with things like the US/China trade war, Brexit, Iran, Hong Kong protests etc. Given these factors we’ve been dialing back risk and as such our portfolio is as defensively positioned as it’s been in many years.

Our strategy to reduce risk started two years ago when we made the wise decision to switch our plain vanilla TSX ETF for a low volatility Canadian equity ETF. This invests in the lowest volatile stocks in the Canadian stock market and currently represents our single largest holding. It’s been a big winner for us as it’s been providing stronger returns in up years and less downside during market sell-offs.

Rounding out our Canadian equity exposure we have one ETF that invests in the highest-quality dividend stocks in Canada and our REIT position, which has been a great long-term holding for us. With interest rates dropping like a stone over the next few months this generally benefits REITs and is one reason why it’s down only 6% this year.

We then moved on to the US side of the portfolio making a number of changes to reduce risk. Two years ago we sold our US small-cap ETF and last year our US mid-cap position, resulting in the portfolio only holding large-cap US stocks. We also made the smart decision to buy a US healthcare ETF, in large part due to its defensive qualities. In market downturns the sectors that hold up the best are consumer staples (you still have to eat), utilities (you have to keep the lights on) and healthcare (still need drugs and go to the hospital).

Finally, late last year we had to address the international side of the portfolio where we introduced an ETF that invest in “high-quality” international stocks. It screens all the international markets for the highest quality stocks and this switch was very timely as it’s significantly outperformed the international ETF we previously held.

In summary, while we did not anticipate this virus/pandemic and the impact it’s having on the economy and markets, we have been proactively reducing risk in the portfolio to help soften the blow against this current downturn. While our portfolio will not be immune to this temporary market decline, it is currently positioned as well as it can be given our defensive positions.

Of course, the portfolio is also balanced, holding 40% in safer assets such as government, corporate and provincial bonds which have zipped higher in value as rates drop. The preferreds have lost capital value as the cost of money falls, but they pay a chunky, regular dividend of almost 5.5% and will soar once CBs start backing off, post-Covid. The next move, underway now, is to trim bonds that have soared and nibble equities that have tanked.

So, yeah, the roof is intact despite the blow. It’s not over yet. Not close. Stay invested. Wash your hands. Hug your Charmin. Don’t do stupid stuff.

Listen to Bandit, and hold it.

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PUBLIC NOTICE: The following blog post has nothing to do with Covid-19. It is virus-free, devoid of any toilet tissue, and no respirologists were injured during its production. You are on your own.

Imagine it’s October. Biden vs Trump. And in Canada the newly-minted Con leader, Peter MacKay, is angling for a no-confidence vote in Parliament prompting a general election. Given the country’s ballooning federal deficit, the oil-induced recession, the Wexit barbarians plus the FN goofs and their economy-crashing barricades, he figures he can win.

So why would the guy be such a fool as to send out this note to his right-leaning supporters?

Buying a home is hard. The world isn’t what it used to be. The cost of housing has skyrocketed across Canada. That might be great for people who already own homes, but it’s bad news for people struggling to make their first purchase. Buying a family home is the biggest investment most people will make in their lives.

Right now, we have a federal government mucking around trying to look like they’re doing something about it, but they’ve come up with a crazy plan to have the government own part of your home.

They’ve increased the limit you can “borrow” from your RRSP – but there shouldn’t be any limit at all. Your RRSP is your money. You should be able to use it to buy your first home. As Prime Minister, I would remove the limit on how much you can withdraw from an RRSP to purchase your first home. I’d also remove the requirement to “pay it back.”

This is a Conservative solution. Government getting out of the way instead of creating more problems with more expensive programs.

Seriously. Has Peter been kidnapped by a bunch of homeless weedy moisters, held down and plied with edibles before coming up with a platform? How can a conservative thinker ever devise such a ridiculous, counter-productive, market-distorting, pandering policy?

First, an RRSP ain’t all your money. A big hunk of it is unpaid taxes. When contributions are made, income taxes are returned. When you take money out, the tax is repaid. By letting people turn their RRSPs into downpayments, never having to return the money into their registered accounts, or pony up the tax, the cost to all taxpayers would be in the billions. In effect everybody would be subsidizing the few in a grossly unfair fashion. Nothing conservative about that.

Second, RRSPs were created to help ensure people can retire without becoming wards of that state. Now that corporate pensions are gone for 70% of the population and the savings rate has collapsed, it’s more critical than ever that folks amass some serious assets for the last third of their lives. Allowing people to take those diversified investments and dump them into a house, becoming less self-sufficient and more dependent on government retirement pogey, is nuts. And it’s sure not conservative.

  Third, if PM is worried about people not being able to afford houses, how is throwing billions in taxpayer-subsidized dollars into the market supposed to help? Increasing demand is no way to restore affordability. Quite the opposite. This policy would create a real estate gasbag of Biblical proportion. Pure market distortion. How is that conservative?

Meanwhile a certain germ that will remain nameless in this virus-free posting is busy nibbling away at mortgage rates.. A fiver will be 1.99%, which means home loans could slide into negative territory – less than the inflation rate – boosting purchasing power and suppressing the stress test. Surely a good con would be happy to sit back and let market forces prevail, instead of deep diddling like the Libs love to do.

“I’ve been a card carrying Conservative since the party was formed in 2004,” says one of this pathetic blog’s heathen readers. “Was Reform/Alliance for 15 years before that, I will not be maintaining a membership if this is the type of thing the party now stands for.”

Advice to Peter: the kids are all commies. Ignore them. If they can’t vote with an app, they probably won’t bother. Just be a conservative. That would be refreshing.

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So, you ask, whazzup with Van real estate? Realtors say things are getting way better. Multiple offers. Rising sales. But many disagree. Meanwhile the Horgan Dippers increase housing taxes at every opportunity, chase rich people away and repel foreign buyers (the few who remain).

According to local analyst Dane Eitel, the carnage has only just started. Current condo prices (average $666,000) are down 11% from the peak, and by this time next year will have dropped to $525,000 – a beefy 30% correction, and a big surprise to current buyers.

Spring will bring more inventory, Eitel says, and meanwhile a lot of units bought in pre-con developments years ago are coming online.

The frenzied presale market of 2016 is beginning to rear its ugly head. Those pre sold properties are just beginning to hit the market. Some buildings are seeing 25% of the building for sale while an additional 25% of the building is for rent. Meaning 50% of the building is available in one way or another. This does not bode well for the overall market as this is just one early example.

His advice? If you own a condo in YVR, bail. “This opportunity to sell with less competition is rapidly closing. Eitel Insights urges those thinking of selling to act now before you become another casualty of this upcoming chaos.”

Ah, chaos. Come back tomorrow. Bring Charmin.

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