Canadian Real Estate – More Reasons for Caution (Bradley)

Thursday, April 26th, 2012

by Tom Bradley, Steadyhand Investment Funds

Last Sunday, while flying to the hottest housing market in Canada (Toronto), my airplane reading surfaced a couple more statistics about Canadian housing, both of which point towards caution.

In their quarterly report, Mawer Investment Management noted that an average home costs 84% more in Canada than the U.S. ($372,762 versus $203,100). Yikes, we complain about paying more on J. Crew’s Canadian website, but 84%?

Also in the briefcase was The Economist Magazine’s quarterly house price survey. In all the years I’ve been following the survey, I’ve never seen Canada featured so prominently. We were at the top of the list for 1-year price change (+7%) and near the top in terms of The Economist’s valuation measures. On price-to-income, our market is shown to be 32% overvalued and on price-to-rents, it’s 76% overvalued. Overall, the survey suggests that Canada’s housing market is 54% overvalued, only slightly behind Singapore, Hong Kong and Belgium. On the same measure, the U.S. market is 19% undervalued.

Also in The Economist was an analysis of Toronto prices over the last 5 years compared to Shanghai, London and New York. Toronto was up 32% in Canadian dollar terms, but 93% when adjusted for exchange rates. On the adjusted basis, Shanghai was up almost 150%, while the other two were down. What this shows is that Toronto has not only got more expensive for the people who live there, but has increased at triple the rate for foreign buyers.

The Economist’s numbers are rough measures of value, and like some others I discussed in my Globe column a few weeks ago (Real Estate as an Investment? Look Elsewhere) – RBC’s affordability index, home ownership ratio, mortgage rates – each can be explained, and maybe even justified. And each may or may not be representative of a particular local market. But what worries me is that there are so many valuation measures that are at extremes and they all point to lower prices in the future.

As my friend Francis Chou said in a recent report, “If there is a choice, it is better to rent rather than buy a house.”

Copyright © Steadyhand Investment Funds

Tags: Adjusted Basis, Affordability Index, Canada Toronto, Dollar Terms, Economist Magazine, Home Ownership, House Price, Housing Market, Investment Funds, J Crew, Last Sunday, Local Market, Mawer Investment Management, Mortgage Rates, Price Survey, S Market, Singapore Hong Kong, Steadyhand, Tom Bradley, Toronto Prices
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The Emotions of Fear and Apathy Create Good Buying Opportunities

Sunday, February 26th, 2012

The Emotions of Fear and Apathy Create Good Buying Opportunities

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

One of the most debilitating forms of human emotion isn’t anger, fear or sadness, it is apathy. Apathy can be defined by an “I don’t care” attitude, an indifference to events and the world around them. Helen Keller once said: “We may have found a cure for most evils; but we have found no remedy for the worst of them all, the apathy of human beings.”

Over the past few years, an onslaught of onerous regulations, market volatility and a lack of political leadership has pushed investor apathy to new highs.

Many of the new, “one size fits all” regulations are poorly thought out and haven’t received sufficient cost-benefit analysis. I’ve been discussing this theme for several years and now it’s on the cover of The Economist magazine this week. From the Patriot Act to Sarbanes-Oxley to Dodd-Frank, it appears we have wrapped a suffocating amount of red tape around American business over the past decade, according to the magazine.

Even with good intentions—we need checks in place to prevent the next Enron or Bernie Madoff—the faulty design of some regulations has resulted in several unintended consequences. Money is the lifeblood of the American economy. A healthy economy is dependent on money flowing freely. Business, like life, needs to cycle and circulate, or it declines. However, the cost of compliance, in terms of dollars, time and resources, has clogged the arteries of American enterprise. Excessive regulation is an injection of cholesterol when the economy needs a dose of Lipitor to heal and grow stronger.

The Economist uses the Volcker Rule as an example of unhealthy regulation. The rule, which is intended to limit proprietary trading by banks, includes more than 1,400 questions banks must answer in order to verify compliance. This means that it would take one full year to assure compliance if a firm answered 27 of these questions (four a day) each week. Instead of beefing up business, finance and research & development (R&D) departments, business leaders are hesitant to commit capital because of uncertainty about how much they’ll need to allocate toward compliance.

If burdensome regulations are the bad cholesterol in the system, then tax breaks have acted as a stent, keeping the economy alive. Removing these stents and raising taxes could spell cardiac arrest for the recovery.

Business owners aren’t the only ones feeling out of sorts; uncertainty surrounding economic policy has dispirited the general public. According to a recent Barron’s article, an index measuring economic-policy uncertainty from Stanford and the University of Chicago jumped to an all-time high toward the end of last year.

Investors need hope and a vision of cooperation and building together. This is what we experienced during the 1990s when President Clinton streamlined and deregulated industries such as telecommunications and financial services. Add in the Internet, a public gateway to the world, and you had an economy that boomed.

Today, a lack of faith and trust has driven investors to the sidelines and halted the flow of capital in the U.S. According to the Investment Company Institute (ICI), investors pulled more than $130 billion from equity mutual funds during 2011. This represents the second-largest withdrawal of funds in the past 25 years and is four times the amount withdrawn in 2010. The Barron’s article cites an Investment News survey that found just 43.6 percent of financial advisors planned to increase their stock allocations in 2012.

Finding a Solution

The article offers a solution: The Economist says “rules need to be much simpler” because “all-purpose instruction manuals” get lost in an “ocean of verbiage.” I agree. What makes the U.S. special is our entrepreneurial spirit, and we must adopt policies that promote prosperity and efficiency in order to empower the world’s most innovative companies.

This discussion is not intended to condemn either political party or claim that all regulation is bad. Business, just like sports, needs rational refereeing in order to ensure a fair game is played. However, we need to be careful that we don’t put more referees on the court than players.

Rays of Sunshine in the Market

Just like you wouldn’t spend a day on the golf course without sunblock, investors need to protect themselves. Think of these observations as your sunblock and don’t step foot into global markets without it.

Now that you’ve got some sunblock on, it’s time to go searching for rays of sunshine in the marketplace. All great bull markets climb a wall of worry and one of today’s brightest spots is the “American Dream Trade,” which can be found in emerging economies. Designed to inject liquidity into the system and stimulate economic growth, a global liquidity boom that began in December has initiated the resurgence of markets around the globe. In total, 77 countries have instituted stimulative measures since late last year. With per capita GDP increasing and local markets rising, it is shaping up to look like a strong year for natural resources.

A second driver could be the recent improvement in investor attitudes, which can have a significant effect on market performance. Back in early October, we discussed how Citigroup’s Panic/Euphoria model, which measures a combination of nine facets of investor beliefs and fund managers’ actions, had been stuck in panic mode for months.

This was a signal to us that market sentiment was destined to improve and lift share prices with it. Since then, the S&P 500 has jumped 18 percent and is currently at levels not seen since before the credit crisis. Small caps have felt an even greater lift, rising 26 percent over the same time period.

One of the reasons money has found its way back to the market is that low interest rates and a bubble in bonds have upped the attractiveness of equities relative to other asset classes. In fact, many large-cap equities come with a higher yield. Currently, 222 companies (roughly 44 percent) of the S&P 500 are paying dividends at an annualized rate of at least 2 percent. This is greater than the yield on a 10-year government note. This means that investors can wait for the growth, while receiving the income.

Overall, it looks like the market’s dark clouds are lifting and we could be in for a period of sunny skies in the months ahead.

Tags: American Economy, Apathy, Bernie Madoff, Care Attitude, Chief Investment Officer, Cost Benefit Analysis, Economist Magazine, Excessive Regulation, Faulty Design, Frank Holmes, Helen Keller, Human Emotion, I Don T Care, Lifeblood, Market Volatility, New Highs, Political Leadership, Proprietary Trading, U S Global Investors, Unintended Consequences
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Albert Edwards On The BRICs As A “Bloody Ridiculous Investment Concept”… And A China Hard Landing

Wednesday, November 30th, 2011

Just in time for the Chinese 50 bps RRR cut, we get a note from Albert Edwards reminding us just why this desperate and sudden move from China comes: “We have identified a China hard landing as one of the biggest investment shocks next year.” Not only that, but the SocGen strategist takes a long overdue swipe at the world’s most ridiculous concept, Jim O’Neill’s BRIC debacle: “Despite recent poor  performance investors still seem to favour EM and the BRICs. My good friend and former colleague Peter Tasker came up with an alternative for the widely (over) used BRIC acronym – Bloody Ridiculous Investment Concept.” It appears that the PBOC was well aware of this re-definition when it decided to announce to the world that it has started easning once again last night.

Why the feud with the BRICS?

Eurozone equity markets have suffered badly this year amid the crisis that has engulfed the region. Speaking to clients, they still retain a preference for the rapidly growing emerging markets (EM) against the highly indebted and struggling developed economies. Yet, much to many investors’ surprise, EM, and especially the so-called BRIC equity markets (Brazil, Russia, India and China), have performed even more poorly (see chart below).

Despite recent poor performance investors still seem to favour EM and the BRICs. My good friend and former colleague Peter Tasker came up with an alternative for the widely (over) used BRIC acronym – Bloody Ridiculous Investment Concept.

As my former colleague James Montier always used to point out, investors are suckers for a good story. When you look at the evidence, there is absolutely no correlation between investment returns and economic growth because investors overpay for growth stories and there is no margin for error (see Dimson, Marsh and Staunton at the London Business School 2005 – link). In addition, The Economist magazine reports that Paul Marson of Lombard Odier has extended this research to emerging markets. He found no correlation between GDP growth and stock market returns in developing countries over the period 1976-2005. A classic example is China; average nominal GDP growth since 1993 has been 15.6%, the compound stock market return over the same period has been minus 3.3%. (link)

Yet investors persist in the BRIC superior growth fantasy. But it is no different from many of the other investment fantasies I have witnessed over the last 25 years – only to see them end in severe disappointment. If growth does matter to investors, they should be worried that things seem to be slowing sharply in the BRIC universe, most especially in Brazil and India (see chart below).

As for China…

We have identified a China hard landing as one of the biggest investment shocks next year. The crucial driver investors are missing is the change in global liquidity as measured by growth in EM foreign exchange reserves (see charts below). Confidence often ebbs as growth slows and EM economies are seeing a sharp drop in reserves and liquidity tightening. In this context did anyone spot the Chief Economist of the China State Information Centre calling for a yuan devaluation now that reserves are falling (link). Shall we call this Investment Shock II?

How conveneint of the PBOC to confirm Edwards’ thesis literally minutes after this note’s publication.

Tags: Bps, BRIC, BRICs, Debacle, Dimson, Economist Magazine, Emerging Markets, Good Friend, Investment Concept, Investment Returns, Lomba, London Business School, Marson, O Neill, Pboc, Peter Tasker, Poor Performance, Strategist, Sudden Move, Swipe
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Agriculture: Fundamentals Strong at the Core

Wednesday, March 25th, 2009

This week’s Economist magazine provides a strong outlook for agricultural investment and commodities. The article, Green Shoots, dated March 19, 2009 discusses the fundamental strength of the global trend in increased consumption of grain, meat and milk. “There is reason to believe that this strength is more than just another of the many bubbles that have recently inflated, only to pop.”

Here is an excerpt:

China’s role has been profound, reflecting its enormous economic progress and huge population. In the past decade, says Carlo Caiani of Caiani & Company, an investment-advisory firm based in Melbourne, the consumption of milk has grown seven-fold, and that of olive oil six-fold. China is consuming twice as much vegetable oil (instead of less healthy pork fat), 60% more poultry, 30% more beef and 25% more wheat, and these are merely the obvious foods. Scores of niches have expanded dramatically: people are drinking four times as much wine, for example.

And yet even with all this growth, people in China still, on average, consume only one-third as much milk and meat as people in wealthy countries such as Australia, America and Britain. The gap is even larger with India, which is also growing fast. Overall, protein intake in Europe and America is unlikely to expand much, but a combination of rising incomes and population in developing countries could increase demand by more than 5% annually for years to come. “Once people are accustomed to eating more protein, they won’t take it out of their diet,” says Mr Caiani.

Expanding supply at the same rate will be difficult, because the amount of arable land under cultivation is growing by only a fraction of a percentage point each year. In China and India many of the most fertile areas are the ones being developed for roads and factories. That means existing land is becoming more valuable, and must become more productive.

Read the whole story here.

Source: Green Shoots, The Economist, March 19, 2009

http://www.economist.com/business/displaystory.cfm?story_id=13331189&fsrc=rss

Tags: Advisory Firm, Agricultural Investment, Arable Land, Caiani, Economic Progress, Economist Magazine, Emerging Markets, Europe And America, Fertile Areas, Fundamental Strength, Gap, Global Trend, Incomes, India, March 19, Niches, Olive Oil, Percentage Point, Protein Intake, Vegetable Oil, Wealthy Countries
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Albert Edwards: Back in the bear camp

Wednesday, January 28th, 2009

Albert Edwards, London-based strategist of Société Générale, has always been a firm favourite among Investment Postcards’ readers. His latest research report appeared a few days ago and saw him firmly back in the bear camp after turning short-term bullish at the end of October. (See the previous posts “Albert Edwards: Turning More Bullish” [October 24] and “Market Fundamentals are Appalling” [July 5]).

Edwards’s “Global Strategy” report is sub-titled “Technicals say it is time to bail out. Cut exposure and prepare for rout. US depression looking likely. China’s 2009 implosion could get ugly.” The executive summary below provides the gist of his thinking.

“After increasing our equity exposure at the end of October we believe that the market is set to quickly slide sharply towards our 500 target for the S&P. While economic data in developed economies increasingly reflects depression rather than a deep recession, the real surprise in 2009 may lie elsewhere. It is becoming clear that the Chinese economy is imploding and this raises the possibility of regime change. To prevent this, the authorities would likely devalue the Yuan. A subsequent trade war could see a re-run of the Great Depression.

- Economic data has been truly dreadful through the fourth quarter. Over a year ago we forecast deep US recession. As it had not suffered one since the early 1980s, we thought this outturn would shock. Yet recent data has been consistent with something far worse than deep recession. There is no agreed definition of a “depression” as opposed to a deep recession. But The Economist magazine is probably more qualified than many to take a view. They consider a peak-to-trough decline in GDP in excess of 10% a reasonable definition. We had been thinking of deep GDP declines of the order of 5% peak to trough but we are now thinking that this view might be too optimistic.

- But, until yesterday, equity markets had been paddling quite happily sideways for most of the last few months. They have been broadly flat since we increased our equity weighting sharply on 23 October. Within that time the intra-day peak-to-trough rally in the S&P was a creditable 28% from 740 low of November 21, but we do not claim to have captured that. Nevertheless we feel very comfortable that the technicals at the end of October cried out to close our extreme underweight equity exposure. They now tell us to cut exposure again.

- 2008 was a shock for investors. But 2009 could be an even bigger shock. There is evidence that the Chinese economy is imploding. Investors should consider what would happen if China descends into social chaos. Yuan devaluation could spark a 1930’s style trade war. Do you really trust the politicians to ‘do the right thing’?”

Source: Albert Edwards, Global Strategy Weekly, Société Générale, January 15, 2009 (hat tip: David Fuller, Fullermoney).

Tags: Albert Edwards, Bear Camp, China, Chinese Economy, David Fuller, Economic Data, Economist, Economist Magazine, Equity Exposure, Gist, Global Strategy, Global Strategy Weekly, Great Depression, Implosion, London, Market Fundamentals, October 24, Recession, Regime Change, Rout, S&P, Societe Generale, Strategist, Strategy Report, Target, The Economist, Trade War, Trough, United States
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