The correction

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If I’d known the people reading this pathetic blog were so damn well off, I’d have dressed better. At least changed my leather Harley-Davidson briefs. It’s one thing to make a lot of money (we already know you do that), but quite another to accumulate wealth. So after reading yesterday’s comments on net worth, new respect. What a rapacious horde of capitalist swine we are. I am so proud.

Of course, we also want to keep it that way. So let’s talk about markets, and risk.

On Tuesday the Globe asked its readers (a collection of druggie, infested homeless people compared to you) whether they were concerned or not about a stock market correction. Just 14% said they were very anxious. Half were somewhat worried. A third were confident.

Let’s compare that with a Bloomberg survey done a few days ago among institutional investors, analysts and traders. They see it this way: 47% say the market is close to unsustainable levels, while 14% concede it is already in a bubble.

In other words, 86% of retail investors (the little guys) are cool with things the way they are while 63% of financial pros (the insiders) are worried. So, should you fret?

Let’s recap. The S&P is up almost 17% from this week a year ago. In 2013 it increased 30%. In fact, the market is now fully a third higher than it was back in the pre-crash days of 2007. More than $15 trillion has been added to US equities, and the gain since the low point in March of 2009 is a staggering 193%. And while the TSX was relatively lackluster last year (up just under 10%), so far in 2014 it’s ahead 14%, with the 12-month gain now running over 26%.

This all means US markets (which set the tone for most others) have not had a correction of 10% for almost three full years – since the American debt ceiling crisis of 2011 (when gold peaked). This is abnormal, to say the least. On average, corrections have gripped markets every 18 months since way back in 1946. That would suggest we’re way overdue.

But these are not normal days. By any stretch. Interest rates have been at emergency levels now for almost five years. In fact, Europe is battling deflation and rates may go negative. The US Fed has been spending billions a month buying bonds with wealth it created, to keep money costs down and the system flush with cash. Corporations have amassed record levels of capital, and been using it for an orgy or mergers and acquisitions – $1 trillion in new deals this year alone.

US unemployment has plunged from over 10% to barely over 6%, with more than 200,000 new jobs every month for the last half-year. House prices, decimated 32% in the American crash, have risen on average 1% a month for more than a year. Inflation’s been tame, while markets soared. Investors have been able to borrow at 3% and earn 14% – which explains a record surge in margin debt. Demand for bonds, thanks to government stimulus, has pushed yields down and prices up. Suddenly everything looks expensive, but how can you walk away from gains like these? To invest in a 2% GIC? Pshaw.

But are markets overvalued?

Yup, stock indices are at record highs, however expressed as a multiple of corporate profits, things look a lot less scary (with one exception). The S&P is now at just over 18 times earnings, which is the highest in four years, but still miles below the 30 level reached during the height of the dot-com nonsense back in heady 2000. That was a prelude to the market losing half its value over the next couple of years.

It seems investors never learn some stuff – like speculating in companies which are cool, but don’t make money. Internet stocks as a group, for example, are at 72 times earnings on the Dow. (Facebook, Amazon and Netflix are all above 90 in price/earnings ratios. Yikes.). Besides social media companies, which are obviously in a hipster bubble, biotechnology stocks have been trading at more than 500 times earnings – which is why this part of the market (and the tech-heavy Nasdaq) have been whipsawing around most of the year, falling 20% in the spring before recovering.

So, let’s hope you haven’t built your entire portfolio on Twitter.

But apart from trendy, flaky companies, how much fear should you feel?

Probably not that much, if you stick to buying the indices and achieve lots of diversification with US and Canadian large cap ETFs, for example. The American economy holds out opportunity for lots more growth over the next few years, plus major corporations have paid down costly debt, become more efficient (that’s why unemployment shot up) and expanded their markets. In short, they learned what people buying houses in East Van did not.

Of course markets will correct, but when is unknown. By historic valuations, the S&P is about 12% too expensive. But then (as I said) these are not normal times. Inflation is tame. Rates are extreme. Companies are making money. Central banks are vigilant. Even events like MH17 and Gaza don’t seem to matter much. So expecting a badass move down may be unreasonable.

If you have a balanced (40% safe stuff, 60% growth assets) and diversified (ETFs in Canada, US and abroad, large and small cap) portfolio, a 10% or 15% dive for stocks will be a piffle. If you’ve been sitting on dead cash, then it’s a time to buy.

Of course, most people won’t. They’ll sell. But then, they read the Globe. Losers.

134 comments ↓

#1 AGO on 07.22.14 at 4:58 pm

Thanks Garth

#2 Derek R on 07.22.14 at 5:01 pm

Long may the stock market rise continue!

#3 earthboundmisfit on 07.22.14 at 5:05 pm

Most grateful for your approval of my plan.

#4 Ronny on 07.22.14 at 5:15 pm

Can something PLEASE crash already!?

Housing market, stock market, whatever. As someone ramping from cash into the market, I’m tired of investing and never feeling good about it.

#5 David w on 07.22.14 at 5:20 pm

I already know the answer but is there an argument to wait for that 10-15% dip before entering the market if inevitable funds are limited to $20k?

Not if you’re young and investing for the long term. — Garth

#6 T.O. Bubble Boy on 07.22.14 at 5:20 pm

Here’s the magic question: Garth, has your wealth of finance knowledge made you the wealthiest on your blog?

You betcha. I have a leg full of titanium! — Garth

#7 mid20millenials on 07.22.14 at 5:21 pm

Didn’t you write a post in middle of May telling millenials to hold off buying until the markets correct 10-15%?

S&P 500 and the TSX has gone up 4-5% since then.

Good thing I didn’t listen ;)

I suggested that because most Millennials are investment wusses and might fold in a correction. So, what did you buy? — Garth

#8 totalinvestor.com on 07.22.14 at 5:21 pm

10% correction, who cares? Think long term, buy quality and hold it.

http://postimg.org/image/n9awdfccz/

#9 Liquid on 07.22.14 at 5:22 pm

I used to read the Globe. Now I read daily articles by Garth instead :)

#10 R on 07.22.14 at 5:38 pm

They are reading the globe… or worse … Zero Hedge.

#11 stop lying on 07.22.14 at 5:39 pm

Regarding DB pensions from yesterday… if they really have no value then why are taxpayers bitching about them so much. I think it is valid to include PV in your net worth, including CPP but less taxes. Same with a RPP and RESP. OAS you can stick a fork in if you have any savings.

Also with low rates I wouldn’t take the commuted value, you’re getting ripped off. But every case is different.

For todays post I think the market has at least another year and 10-15% to go. Same with real estate to be honest in GTA and ‘the west’. So, still think it is relatively safe to buy. Those waiting for either to crash will have to stay patient. It will come, but not yet.

#12 Doug in London on 07.22.14 at 5:39 pm

Well, I guess I’m a loser because I read The Globe. However, if a correction occurs I WILL scoop up more stocks, ETFs, or other investments that are on sale, just like how I scooped up REITs as well as XPF and CPD when they were on sale last year.

Back to that governor idea about buying stocks I’ve posted before, a small drop in speed is followed by the governor opening the throttle slightly for more fuel to increase engine power to pull the speed back up. If a big speed drop occurs, the throttle goes fully open and the position switch closes to engage the electric clutch to operate the supercharger. That results in a BIG increase in horsepower to pull the speed back up. It’s so ridiculously simple, why don’t more people apply this idea to investing?

#13 wayne on 07.22.14 at 5:42 pm

Yup, stock indices are at record highs, however expressed as a multiple of corporate profits, things look a lot less scary (with one exception). The S&P is now at just over 18 times earnings, which is the highest in four years, but still miles below the 30 level reached during the height of the dot-com nonsense back in heady 2000.
The American economy holds out opportunity for lots more growth over the next few years, plus major corporations have paid down costly debt, become more efficient (that’s why unemployment shot up) and expanded their markets.

They achieved those “less scary” multiples via massive stock buy backs. They borrowed massive amounts of money at ultra-low interest rates to buy back stock and artificially raise EPS.

It’s financially reckless because that cheap money must still be paid back in the future and guess where it’s going to come from? Future earnings. Just like housing virgins that mortgage the future for instant gratification, US corporations are doing the same.

It is frightening that you are delivering a macro outlook that ignores the most basic corporate financial document: the balance sheet.

http://blogs.ft.com/andrew-smithers/2014/03/us-companies-are-highly-leveraged/

#14 Happy Renting on 07.22.14 at 5:48 pm

Great post, thanks Garth! Good to have some rational discussion on what can be an irrational topic (should I wait for the correction before buying in/cash out before the big crash?) When we were “overdue” a year ago, anyone sitting on the sidelines is still waiting and has missed out on some good gains. Glad I was logical enough to (partially) buy in versus completely succumbing to the temptation to try to time the markets.

#15 Smoking Man on 07.22.14 at 5:50 pm

I don’t know about a correction, the world has gone mad.

Example, my Twitter feed, slow, then it lights up. Rasing through my phone, one after an other.

Rebels shot plane down by accident, Russia had nothing to do with it.. Mind you from nameless defence department officials, with still no proof..

As if one guy had control of the story, pushed a button and boom…. Same story flying…..

Far to much power in the hands of a few..

#16 Shawn on 07.22.14 at 5:56 pm

Blue Chip Stocks (and ETFs)

For those who dabble in individual stocks and can accept some risk I like Bank of America on a price to book value and price to tangible book value basis. It is still in recovery mode from the crisis.

#17 Happy Renting on 07.22.14 at 5:58 pm

#9 Liquid on 07.22.14 at 5:22 pm
I used to read the Globe. Now I read daily articles by Garth instead :)

Honestly, that pay wall has been a blessing in disguise. I waste far less time reading articles which are of marginal utility to me, which, unfortunately for the Globe, means fewer eyeballs and click-throughs for their ads. I’m surprised the pay wall has lasted this long.

#18 Robyn the soon to be ex Canadian on 07.22.14 at 6:00 pm

While I agree the markets look overvalued, it’s skewed by truly global corporations in America. Other countries markets are still in line with their respective realities.

This points towards an American financial recovery, while their jobs market still corrects towards their new industries such as solar.

The rest of the world? notsomuch. For example, South Korean tech giants are building innovative tech and are global players can still be bought at a discount.

And, although American industry leaders have their innovative potential priced in already, their supply chain can still be bought at a discount until they produce on their ideas (graphite is at its bottom still, and companies like Northern Graphite are positioned to lead even at that price point). So, when a correction comes to American companies this fall/winter, there are places to put money until then and still be a part of the emerging industries.

#19 TJ on 07.22.14 at 6:00 pm

Cool post today Garth. Thanks

#20 devore on 07.22.14 at 6:05 pm

#88 NoName

which provides evidence that stock market movements are affected by emotions, not just cold calculations.

Also, I have evidence the sky is blue.

#21 Larry Laffer on 07.22.14 at 6:16 pm

I’m not so confident in buying market-capitalization indexes such as the S&P 500 when there currently are so many tech stocks with excessive market value are distorting it. Buying XUS or XSP might make sense after a market dip, but the strategy seems less compelling these days.

I prefer buying index funds based on fundamental FTSE RAFI indexes (such as CLU.C, PXC and CIE), low-volatility indexes (such as ZLB or XMU) or value indexes (such as FXM or XXM.B). They have higher management fees than their market-capitalization index funds but in the long run, they tend to deliver better value by dropping less when the markets are correcting and growing faster when the market is on the upswing.

We’ll see how that strategy turns out in a few years.

And no currency-hedging please.

#22 mark on 07.22.14 at 6:25 pm

Bring up one of those Bull/bear market length charts.

It’s a waste of time predicting these things as Dimensional or Vangard will tell you. It could end tomorrow or run another 1000 days.

#23 Mark on 07.22.14 at 6:26 pm

The evidence of a US “recovery” is scant, but there isn’t much evidence that Canada’s economy really even slowed down much from the 2008 era when the TSX was last at 15k. If you figure that there’s 6 years of retained earnings embedded into the index valuation, and simply draw a trendline going back to the 1980s, the TSX more properly belongs in the 26-27,000k range.

Also, if you take a simple ratio of dividend yields between the S&P500 and the TSX Composite Index, the TSX should be in the 25-28k range to compensate.

Keep in mind that there’s a heck of a lot of the TSX that hasn’t even begun to participate in the rally. The gold firms are still mostly 50-70% off even their 2011 highs. Oil and gas firms like Suncor are 50% off the 2008 levels. Talisman looks like its going to fall off the face of the Earth at not even $10 (was $25 once!). Uranium is starting to ramp up. And even the telecoms have been able to push through fairly aggressive rate ramps.

So instead of losing more money in declining-for-the-last-year Canadian RE, why not buy some stocks or an index fund like XIU? I try to explain this to my friends, and they look at me like I’m some sort of alien, complaining in the next breath of how much Bell and RBC allegedly suck.

#24 Mark on 07.22.14 at 6:29 pm

“The rest of the world? notsomuch. For example, South Korean tech giants are building innovative tech and are global players can still be bought at a discount.”

Indeed, the VWO ETF, for the emerging markets, has been one of the biggest laggards over the past 5 years of the ‘recovery’. Which is why I’ve been buying as much as I can.

#25 Mark on 07.22.14 at 6:32 pm

“It is frightening that you are delivering a macro outlook that ignores the most basic corporate financial document: the balance sheet.”

Its not corporate leverage to worry about, its all the leverage that is inherent to their customer base. Credit is embedded into the system to a crazy degree. As that credit becomes more expensive, good bye demand for many of the goods and services made by those US companies.

I’m not just talking about the folks who have been rolling new iPhones onto ever-longer contracts. I’m also talking about the enormous amounts of credit used to buy Boeing airplanes, or GE jet engines. Both of which are mostly leased/bought on credit these days, not cash. A day of reckoning *will* come for industries that sell stuff to credit-reliant customers.

#26 Mark on 07.22.14 at 6:33 pm

“For those who dabble in individual stocks and can accept some risk I like Bank of America on a price to book value and price to tangible book value basis. It is still in recovery mode from the crisis.”

Only problem with the US banks is the balance sheets aren’t worth the paper they’re written on, and there is enormous embedded interest rate sensitivity throughout the entire financial system. Which helped the US financial system become spectacularly rich as rates have gone down, but will be a problem for decades to come as the other side of the cycle reveals itself.

#27 mitzerboy on 07.22.14 at 6:45 pm

the dogs eyes can see into your soul…

#28 Kilby on 07.22.14 at 6:51 pm

#4 Ronny on 07.22.14 at 5:15 pm
Can something PLEASE crash already!?

Housing market, stock market, whatever. As someone ramping from cash into the market, I’m tired of investing and never feeling good about it.

Well said, there are many who want SOMETHING to happen…….Lets get on with it! Maybe Herr Harper can stall everything until after the election. “Not on my watch”

#29 Bob Copeland on 07.22.14 at 7:24 pm

DV x Q = W
I’m darn good at my career but it had nothing to do with investing. I sure wish you would put out a monthly newsletter that said exactly what to buy, when to buy it at what price and when to sell it. I’d pay $1,000.00 a year for that.
Your gain?
Distinctive value times quantity equals wealth.
Do the math. Think about it.

#30 NoName on 07.22.14 at 7:24 pm

#20 devore on 07.22.14 at 6:05 pm

Sky is blue?! What if its cloudy, what colour is then? I copied wrong paragraph.

“The study, which was published in the Journal of Economic Behavior & Organization this month, examined the relationship between daily sentiment on Facebook and trading behavior in 20 countries.”

#31 Tony on 07.22.14 at 7:33 pm

The S&P is about 12% too expensive??

Someone has been listening to all the garbage on CNBC and Marketwatch. In actuality the S&P 500 is just like its name says about 500 percent overvalued in the real world. I peg fair market value for the S&P 500 at 400.

Historic valuation has been a p/e of 16. Now just over 18. That’s 12%. — Garth

#32 devore on 07.22.14 at 7:35 pm

#24 Mark

VWO is heavy into financials and China. Maybe a combination of XEM and CBQ would be better?

#33 devore on 07.22.14 at 7:38 pm

#30 NoName

The bottom line point was that sentiment is a large markets driver. The study might make a more valuable contribution if it contrasted Facebook sentiment with other investor sentiment indicators. For all we know, they’re basically the same, and why wouldn’t they be.

#34 Retired Boomer - WI on 07.22.14 at 7:40 pm

Funny your post tonight addresses something I did today.

Sold off a few of those stocks which have had great runs. CSX, AWR join the MCD KMB, and BMY that were sold a few weeks ago. The whole dam idea was to ‘buy low, and sell high’ right? Could they GO further up? Maybe, but, it is well known that pigs get slaughtered.

So, time for the Retied Boomer to goose up the checkbook by selling a few stocks back to cash, which will join the cash idling in the margin account (taxable of course) so we set off the Fed, and state tax bite, and plump future spending by $17 grand-give, or take a grand. So done for this year with the withdrawals, and no reason to hit that government stipend which grows 6% for each year to delay to 66 then 8% thereafter to 70 should the luck in the market continue.

Yes, the US is a weird place, but Canada has its own peculiarities tax wise which I am not fully informed. Both places will screw you to the limit of the law, that is a certainty. So be smarter than average is all I’ll say.

As to tomorrow, well RISK is much higher now than in 2009-2013. Why, market is higher. Yes, historically we are overdue, and yes the market value is higher than i would like, and YES, the Boomer is taking profits!

The balance (750K investible) is 60/38/2% cash as I write. I feel comfortable there. Still some JNJ,F, GE,BMY,PG, and a few others to go, but they haven’t hit their ‘best by’ dates, or I missed an opportunity already.

My needs are simple, my wealth adequate, and I still have that government geezer pension yet to tap. So why not enjoy the day, do what I wish, and worry about tomorrow, when there will be “Free Beer” at my favorite pub. The sign says “Free Beer Tomorrow” would they lie?

Live life like it’s your last day. One day you will be right.

#35 Tony on 07.22.14 at 7:47 pm

Re: #14 Happy Renting on 07.22.14 at 5:48 pm

Don’t you even see it? The market is conditioning all the morons to buy on the dip. The very last thing you want to do in the future is buy on the dips.

#36 Taber Nac on 07.22.14 at 7:48 pm

Hi Garth,

Please explain to us the wisdom of now buying stocks knowing, as you say, that the odds are very high they will correct downward. This makes no sense to me.

Where did I say to buy stocks? Diversify instead. And when things are 10% cheaper (whenever that may be), buy more. – Garth

#37 Mark on 07.22.14 at 7:52 pm

VWO is heavy into financials and China.

Not really on the financials, and what’s wrong with China?

#38 TurnerNation on 07.22.14 at 7:54 pm

XRE.TO’s gonna make a moonshot here.

#39 Ralph Cramdown on 07.22.14 at 8:05 pm

#13 wayne — “They achieved those “less scary” multiples via massive stock buy backs. They borrowed massive amounts of money at ultra-low interest rates to buy back stock and artificially raise EPS.”

What’s artificial about it? Bondholders want bonds, stockholders want stocks. If your stock is cheap but bonds are high, sell some bonds and buy back some stock (like IBM is doing). If interest rates go up, the company can always buy back its bonds in the open market at a discount. In 2009, Ford bought back some of its own convertible bonds at 28 cents on the dollar.

If your stock is high (like Facebook’s) use it as currency to buy other companies.

Look at IBM’s numbers. Earnings yield of 8.1%, issues ten year bonds at 3.625%. IBM earned $16.5 billion last year, and all-in interest expenses were $1 billion. $44B debt and a market cap of $194B. This is leveraged? You must not remember the last two LBO manias.

Andrew Smithers: The problem is, he’s on the record saying stocks were 40% overvalued in 2009, 70% overvalued in 2010, 50% overvalued in 2011 and 80% overvalued now. Listening to him, an investor would have missed a giant five year bull market, perhaps the biggest of his career.

http://pragcap.com/this-might-be-a-stock-bubble-but-valuation-metrics-wont-help-you-understand-that

#40 Taber Nac on 07.22.14 at 8:05 pm

Alright Garth. What is your forecast for the Canadian dollar this year and over the coming years?

Choose a name that does not insult Québécois and I’ll tell you. — Garth

#41 Ralph Cramdown on 07.22.14 at 8:18 pm

#21 Larry Laffer — “I’m not so confident in buying market-capitalization indexes such as the S&P 500 when there currently are so many tech stocks with excessive market value are distorting it.”

Facts, not conjecture! The S&P 500 technology subindex is trading at a forward* P/E of 15.2, lower than the broad index (15.6), and higher only than the financials (13.7), energy (14.6) and telecom (13.4) sectors.

Source: http://www.yardeni.com/pub/mktbriefsppesecind.pdf

P.S. Any relation to Arthur?

* – all I could find on short notice

#42 lifeisgood on 07.22.14 at 8:20 pm

Interesting article…

http://www.montrealgazette.com/business/Rochon+prediction+even+better+times+Jones/10029583/story.html

#43 Mark on 07.22.14 at 8:22 pm

“What is your forecast for the Canadian dollar this year and over the coming years?”

My personal prediction is a moonshot to the $1.2-$1.5 range as housing deflation picks up steam in Canada and the USD$ resumes the long-term downtrend.

In other words, the BoC is going to have a real struggle keeping the CAD$ down, and probably will need to lower interest rates and engage in ZIRP for far longer than the US Federal Reserve. The equity risk premium is going to re-appear in Canada in a big way.

#44 mid20millenials on 07.22.14 at 8:22 pm

I suggested that because most Millennials are investment wusses and might fold in a correction. So, what did you buy? — Garth

Boring stuff. ZCN, VUN, VAB, XEF, XEC, etc. My balanced portfolio is similar to the one you suggested ;)

#45 omg on 07.22.14 at 8:36 pm

#36 Taber Nac

Long-term investing in equities is about playing the odds.

Nobody, absolutely NOBODY knows when equities will correct, not Garth (or anyone else on this blog), not Warren Buffett, NOBODY.

Are we due for a correction – odds would say yes, but when and how much.

Will it be from today’s S&P levels or much higher S&P levels? Will it be tomorrow, next month, next year or two years from now – again NOBODY knows.

Will you have the BALLS to buy when it corrects – that is one of the hardest things to do – as that is when the media trots out the crazies saying its just the beginning of a 50% correction? Will you have the BALLS to jump in if it bounces off the bottom of the correction and you have not bought?

So unless you think you can be a day trader, you should be investing for the long-term and not worry about day to day, week to week, or even month to month fluctuations. Just buy knowing that history shows that almost certainly 5, 10 and 20 years from now the S&P will be much higher. Again nobody can say that with 100% certainty, but the past 100 years of data shows that’s about the best investment bet you can make.

If you cannot put money aside for 5, 10 or 20 years DO NOT BUY EQUITIES, stick with GICs and short duration bond funds.

#46 bgs906 on 07.22.14 at 8:37 pm

Gotta agree with the crazy market and keep riding “the trend is your friend” wave …….seems the best buying dips are only ~ -2% so there ya go.
Big night in our house tonight…. time to open another bottle of Red !!
..Findependance Day has arrived :) !!!!

#47 Toon Town Boomer on 07.22.14 at 8:40 pm

@#11 Stop Lying
Regarding DB pensions from yesterday

Also with low rates I wouldn’t take the commuted value, you’re getting ripped off. But every case is different.

Are you sure? I understood that lower interest rates = higher commuted value and higher rates = lower commuted value?
Garth can you clarify this?

Low rates mean a higher commuted value. — Garth

#48 Catalyst on 07.22.14 at 8:43 pm

Man there are some really bad investing strategies being thrown out there. If a companies stock has been declining or has not kept pace with its peers, that doesn’t make it a cheap buy or a surefire winner. This isn’t vegas and stocks dont rise just because they havent in a while.

Please invest wisely and choose broad etfs. Don’t go for the home run, try and hit for average.

#49 Ralph Cramdown on 07.22.14 at 8:49 pm

It’s a bit of a sad commentary that I can’t search for “François Rochon” on the Gazette’s website, because their search function eats the ç and doesn’t return the pieces. Searching with a plain ‘c’ comme les Anglos doesn’t work either. Have to use Google to search the site, which works just fine.

#50 Nemesis on 07.22.14 at 8:55 pm

#YouWantYourTummyTickled,GT? #NoWorries,Team7Deployed,EnRoute.

http://youtu.be/_U-91r-57_c

#51 Freedom First on 07.22.14 at 8:58 pm

Well said Garth. The Globe and Bloomberg have it nailed.
Little guys-86% sleeping/complacent, Pros-63% nervous/aware. Herd always gets slaughtered. No exception.

Question is, am I ready for a correction?-check, Deflation?-check, Inflation?-check. Yes, Garth’s reasoning is sound with the facts/numbers for a 10-15% correction. Myself, because of the GFC market crash, I think the possibility of a 15-25% panic drop is feasible. Maybe more, but I would be surprised. I am overweight cash from my last re-balancing/profit taking. One of the advantages of being an individual investor, unlike most of the pros who have to invest at all times, I don’t. Dips are good, Drops are really good. Freedom First.

#52 Setting the Record Straight on 07.22.14 at 9:04 pm

@34
‘Live life like it’s your last day. One day you will be right’

But think of all that time in jail if you’re early! :-))

#53 Setting the Record Straight on 07.22.14 at 9:18 pm

@39
http://www.lewrockwell.com/2014/07/eric-englund/radioshack-is-going-bankrupt/

radio shack and stock buybacks as malinvetment

See also Stockman on IBM

#54 Josh Renning on 07.22.14 at 9:19 pm

Nobody wants to believe that we can’t end like Japan or some part like Japan.

QE is nothing new, Japan did and are still doing it for decades.

Don’t tell me that fast rising stock, equity markets and fast falling to very low bond yields are not happening now in Canada, U.S. and Europe.

Real estate markets are another canary in the coal mine.

In 2000, if someone told you would have 0% central bank rate interest rates in U.S. and 1% in Canada, 2.66% 30 year Canada bonds, 30 year U.S. 3.25% then you would would say that it would not happen.

Nasdaq is still 15% below 2000 levels and Dow Jones, S&P 500, TSX etc. are at best up 3.5% to 5.25% a year over the last 14 years without annual fees taken into account.

Hardly an annual equity return in the 15% to 18% seen in 1982 to 2000.

The nest 5 to 10 years will be the years of capital depletion time for 90% of the population.

I heard all the excuses and comments about it is different here. Much higher property taxes, insurance, income taxes, RRSP and RRIF income taxes, gasoline taxes, user fees, sales taxes, water, electricity and gas prices, green energy taxes etc. will conspire to kill any chance of savings, investments, economic progress for peoples personal finances.

#55 Mark on 07.22.14 at 9:21 pm

“This isn’t vegas and stocks dont rise just because they havent in a while.”

But unless a company/country hasn’t fallen off a cliff, buying after a lengthy consolidation period can, and has led to, in many cases, outsized gains.

After all, the boring-ness of the asset class is behind you if someone else has sat on it for a decade and seen little or no return. Bull markets are usually born out of significant consolidation phases. The time to buy that piece of Toronto RE is not when its spent the last 5 years going up, but rather, when its sat at the same price for a good 5+ years and tire kickers are a’few.

BTW, this is why the gold mining sector looks so succulent these days. The sector hasn’t produced much of any shareholder return for the past 30 years. So that phase of the market is statistically more likely to be behind us, than ahead of us.

#56 HD on 07.22.14 at 9:26 pm

@ #45 omg on 07.22.14 at 8:36 pm

Well said. Great post.

Best,

HD

#57 lee on 07.22.14 at 9:26 pm

Garth,

Is diversifying between large and small Cap really necessary?. Doesn’t every cap level stock fall when there is a correction?

No, besides small companies usually recover first when economies start growing again. — Garth

#58 hohoho on 07.22.14 at 9:27 pm

> … moonshot to the $1.2-$1.5 range as housing deflation picks up steam in Canada …

with economy down the drain, interest rate at zero, foreign money try to bailout at the same time, CAD is going up to $ 1.5 USD??

#59 Mark on 07.22.14 at 9:31 pm

“Nasdaq is still 15% below 2000 levels and Dow Jones, S&P 500, TSX etc. are at best up 3.5% to 5.25% a year over the last 14 years without annual fees taken into account.

Hardly an annual equity return in the 15% to 18% seen in 1982 to 2000.”

Sure, which, over the long term, averages out to 10-12%/annum. Excess returns lead to below average returns, and vice versa.

Since 2000, stocks have progressively becoming more affordable. I can go to my broker, borrow $1M at 2%, and be instantly cash-flow positive just on the dividends alone from the TSX. This has not been possible for many decades. And that’s just dividend yield, not even the full earnings yield.

“The nest 5 to 10 years will be the years of capital depletion time for 90% of the population.”

Agreed, because 90% of the population is dramatically over-weight GICs, real estate, and bonds, or is otherwise dependant on government hand-outs — all asset classes that are going to fail as interest rates rise. But as Garth points out, it is quite possible to be diversified, and those who do will be relatively prosperous.

#60 Mark on 07.22.14 at 9:34 pm

“with economy down the drain, interest rate at zero, foreign money try to bailout at the same time, CAD is going up to $ 1.5 USD??”

Absolutely. Debt and RE deflation is profoundly supportive of currency. A weak Canadian “consumer/RE” economy implies a strengthening trade balance. And why would “foreign money” want to bail out of an appreciating currency?

#61 Timmy on 07.22.14 at 9:37 pm

Stay away from the social media air fairy stocks. Buy AT&T, Verizon, CN, Canadian Tire, Scotiabank, IBM

“That same year, Federal Reserve Board Chairman Alan Greenspan made his famous comment about irrational exuberance in the stock market, but the market kept on rising for four more years.” TSI

#62 ETF FAN on 07.22.14 at 9:41 pm

I do enjoy a market pullback. My ETFs within my registered accounts all DRIP so monthly purchases at a bargain can be a great deal.

I would really like some US exposure within the RRSP (no witholding tax on US dividends) and have been eagerly awaiting some type of sizeable correction to pick up an ETF of US blue chips.

The disadvantage of a pullback? Each day the MSM looks for a reason (excuse) to inform their listenership/readership why the market fell a “huge” 100 points in one day! ha ha. I just sit back, relax, and continue with my investing strategy. Life is too short.

#63 Life's a supermartingale on 07.22.14 at 9:42 pm

He who lives by the crystal ball soon learns to eat ground glass. – Edgar Fiedler

Stop with the prognostications, Garth. It’s foolishness. Corrections are not “due” – it’s a random walk. The best estimate of the value of the S&P500 tomorrow is the value today. All information is already in the price. If you can tell by eyeballing the stock market that it’s overvalued, you should be in charge of much more than just this blog.

#64 espressobob on 07.22.14 at 9:42 pm

Not sure what all the fuss is about regarding a correction? Rebalancing ones portfolio takes into account that possibility. I love a fire sale!

#65 Porsche on 07.22.14 at 9:54 pm

In Spain they pay you to take a mortgage

#66 jimmy doo doo head on 07.22.14 at 10:02 pm

Garth…will you ring the bell just before that correction comes? I want to buy…….but I don’t want to take any risk.

#67 Ralph Cramdown on 07.22.14 at 10:13 pm

#53 Setting the Record Straight — “See also Stockman on IBM”

What, this?

http://news.google.com/newspapers?nid=1955&dat=19830213&id=2NQxAAAAIBAJ&sjid=oOMFAAAAIBAJ&pg=5084,955070

David Stockman, Reagan budget director. When Reagan came into office, the Federal debt was 31% of GDP. When he left, it was 49% of GDP. Just Sayin’

What did young David do for an encore? “David Stockman was a managing director at two Wall Street firms, then the founding partner of a private equity fund, Heartland Industrial Partners. In the wake of the bankruptcy in 2005 of one of the fund’s companies that he ran, auto-parts maker Collins & Aikman, he was indicted by federal prosecutors. He pleaded innocent and all charges were dropped in early 2009. A SEC lawsuit was settled April [2009].”

About Collins & Aikman:
In early 2005 the firm had to review its 2004 results due to accounting problems. It then suffered a liquidity crisis which resulted in the ousting of the chairman and CEO, David Stockman, in early May, followed by the Chapter 11 filing. […] The [SEC civil fraud] suit alleged that C&A had inflated its quarterly earnings from the end of 2001 to 2005, by using “round-trip” transactions with Elkin B MacCallum, a member of C&As board, and a supplier to C&A, to falsely increase reported indirect income. It then engaged in other acts of false accounting to further increase its reported earnings. The SEC settled with five of the defendants in 2010, with the settlement including David Stockman paying $7.2 million in settlement.”

So let’s hear no more accounting or investing advice from David Stockman, OK?

#68 AK on 07.22.14 at 10:24 pm

“Of course markets will correct, but when is unknown. By historic valuations, the S&P is about 12% too expensive. But then (as I said) these are not normal times.”
====================================
Sure they will. Since I am not smart enough to time the Market, I just buy and hold.

#69 RayofLight on 07.22.14 at 10:31 pm

I believe it is a stock pickers market. There are about 12,000 stocks available in North America. You only need 20 good ones. Look for good companies with growing earnings in well established trends ( US Housing, Autos, Oil by Rail & Airlines as a start)

#70 Setting the Record Straight on 07.22.14 at 10:49 pm

Yesterday
“All this ” look at me I’m wealthy,” is leaving me deflated.”

Nobody claimed to be wealthy. The highest number I recall was around 7 million. Their MP wouldn’t take their phone call.

#71 Kenchie on 07.22.14 at 11:06 pm

“On Tuesday the Globe asked its readers (a collection of druggie, infested homeless people compared to you)…”

Garth, if this is what you call G&M readers, what do you call National Post readers?

#72 wayne on 07.22.14 at 11:07 pm

#39 Ralph Cramdown

What’s artificial about it?

How do you not understand this? Debt must be repaid.

The debt they are taking on for stock buybacks adds ZERO value to the fundamental strength of the business. It is not being used for an acquisition. It is not being used to exploit an emerging market opportunity. It is not being used for R&D. It is not being used to grow production capacity. It is being used for stock buybacks.

All they are doing is trading future earnings for a higher EPS right now. Just like bozos with HELOCs that make interest-only payments and brag about their Mercedes-Benz and European vacations.

Look at IBM’s numbers. Earnings yield of 8.1%, issues ten year bonds at 3.625%. IBM earned $16.5 billion last year, and all-in interest expenses were $1 billion. $44B debt and a market cap of $194B. This is leveraged? You must not remember the last two LBO manias.

lol did you ever pick a brutal example. IBM’s debt-to-equity ratio is 2.674. That means for every dollar of equity IBM carries $2.67 of debt. Yes, IBM is leveraged. Out the arse.

From 2012 to present their debt-to-equity ratio rose from 1.55 to 2.674. Guess where most of that money went? Stock buy back.

http://ycharts.com/companies/IBM/debt_equity_ratio

#73 Sheane Wallace on 07.22.14 at 11:08 pm

no ‘safe’ stuff. unless you means some preferred. thank you very much but inflation is already taking place.

If you are already in stocks stay there. Internationally diversified, dividend bearings stocks – Europe, Australia, some Asia. US internationals.

The market analysts have predicted 9 out of the last 5 recessions and market crashes.

Stock market might go 20 % down from the top but your portfolio would go down 10 % and then go up again. Dow would be at 30 k.

Active management can hurt you these days, just stay passive.

#74 45north on 07.22.14 at 11:10 pm

Mark : My personal prediction is a moonshot to the $1.2-$1.5 range as housing deflation picks up steam in Canada and the USD$ resumes the long-term downtrend.

what! Canadian $ is at .93 US
http://www.xe.com

you’re saying that Canadian $ will be 1.20 US ?

how bizarre!

#75 Sheane Wallace on 07.22.14 at 11:12 pm

#54 Josh Renning

Absolutely.
Depletion of capital in North America. Through inflation. Did somebody said gold?
Europe has bright future, very bright as well as the BRICS.
Time to brush my german and move on.

Auf wiedersehen. Astalavista Baby (Harper)

#76 Sheane Wallace on 07.22.14 at 11:15 pm

#45 omg

Absolutely.
Who has the guts to buy GDXJ these days? I do.

#77 Kenchie on 07.22.14 at 11:23 pm

#53 Setting the Record Straight on 07.22.14 at 9:18 pm

The biggest problem with share buybacks is that companies’ execs tend to order buybacks when the shares are not “undervalued”. Rather, they often do it when companies are doing well and have “excess cash” (i.e. they are out of investment ideas), which usually means they are “fully-valued” or “overvalued”.

The RadioShack article you post is a sad example of how buybacks can destroy companies. It would be interesting to see at what p/e multiple they did their buybacks at. I bet it wasn’t near historical lows.

#78 Long live Quebec! on 07.22.14 at 11:23 pm

Alright Garth. What is your forecast for the Canadian dollar this year and over the coming years? :-)

#79 Spectacle on 07.22.14 at 11:33 pm

GREAT reading Garth , thnx.

Re:

#54 Josh Renning on 07.22.14 at 9:19 pm
” Nobody wants to believe that we can’t end like Japan…..

Real estate markets are another canary in the coal mine.

The nest 5 to 10 years will be the years of capital depletion time for 90% of the population.

Much higher property taxes, insurance, income taxes, RRSP and RRIF income taxes, gasoline taxes, user fees, sales taxes, water, electricity and gas prices, green energy taxes etc. will conspire to kill any chance of savings, investments, economic progress for peoples personal finances.”

You’ve got a great commentary Josh Renning, please feel free to elaborate. Excellent review of potential risk ……and can you please provide some references, I do research myself rather extensively.

Ps, anyone else please feel free to jump in. Reards all.

#80 Sheane Wallace on 07.22.14 at 11:50 pm

Amazing shift in the official position of the West on the crises with the Malaysian plane. Harpo looks stupid again (he is very good at that). Embarrassing.

#81 stop lying on 07.23.14 at 12:03 am

#58 no chance. i’d say .80-.85 range when the us starts to think about raising rates next year, something we will not do to keep the loonie low.

#82 Joe Calgary on 07.23.14 at 3:08 am

Here in Calgary real estate is pulling away full steam ahead with no slowdown in sight. How much longer can this stupidity go on? Or is it stupid? Looking for a new place to rent and a $280000 townhouse is renting for $1700 + utilities. $2000 for a shitty townhouse 30km outside of city centre. Makes spending the $280000 seem like a good deal.

#83 backwardsevolution on 07.23.14 at 4:32 am

#13 Wayne – yep, scary. And this is different from a real estate salesman, how?

#84 Ralph Cramdown on 07.23.14 at 7:35 am

#72 wayne — “IBM’s debt-to-equity ratio is 2.674. That means for every dollar of equity IBM carries $2.67 of debt. Yes, IBM is leveraged. Out the arse.”

And what is IBM’s return on that equity?

#85 Nomad on 07.23.14 at 7:58 am

Unless earnings suddenly start doing worst, I won’t sell my ETFs with PEs of 15% higher than history. My reasoning is that bonds return so little that we can be certain that a large number of retirees will be sold by advisors to buy stocks. Well, maybe not all types of ETFs but beasts such as ZDV and XDV. ETFs that produce 1.5% more than bonds pre-tax (3x more than bonds after-tax).

This is the best piece of writing I came across regarding selling because you think the market valuation has gone ahead of itself:

http://www.5iresearch.ca/blog/how-not-to-time-a-correction

In a balanced portfolio you buy bonds for stability as much as yield, as well as capital appreciation when equities inevitably correct (all bonds are marketable). Smart people include some high-yield bond exposure, where returns are 5-7%, commensurate with risk but excellent as a risk-adjusted holding in the FI part of the portfolio. — Garth

#86 rosie "moving forward" in the knowledge that, "this won't end well" on 07.23.14 at 8:05 am

#70 setting the …

A narrow view lacks perspective. Try it everyone and see how you do.

http://www.leastof.org/worldwealthcalculator

#87 Larry Laffer on 07.23.14 at 8:32 am

@Ralph Cramdown #41
Interesting reading, thanks for the link. But I’ll stick to fundamental indexes for now. The tech subindex may be somewhat lower than the global index, but it’s still twisted by the LinkedIn’s and Facebook’s -I wonder how would the forward P/E ratio look like without those. The fundamental index still includes many high-quality tech stocks such as Cisco, Microsoft and IBM. I’ll stick to that.

The current P/E ratio for the S&P500 iShares (XUS) stands at 18.59, not unreasonably high but no bargain either. The current P/E ratio for US Fundamentals iShares (CLU.C) stands at 16.97, slightly more reasonnable.

And no relation to economist Arthur Laffer. It actually is a nod to the main character in Sierra’s Leisure Suit Larry game series.

#88 mark on 07.23.14 at 8:46 am

Not that I’m advocating moving to Prince George or Rupert, but there’s some nutty income to house price valuations here vs Vancouver.

http://www.princegeorgecitizen.com/news/local/going-north-1.1255273

#89 Smoking Man on 07.23.14 at 9:11 am

#80 Sheane Wallace on 07.22.14 at 11:50 pmAmazing shift in the official position of the West on the crises with the Malaysian plane. Harpo looks stupid again (he is very good at that). Embarrassing
…….

Not embarrassing today two Ukrainian fighter shot down
near the area where Ukraine shot down MH17

The Bugs Bunny, Daffy Duck saga goes forward.

#90 Casual Observer on 07.23.14 at 9:35 am

“Low rates mean a higher commuted value. — Garth”

This is true, however, people are still getting short-changed because there is a “loop hole” in the calculation.

When calculating the commuted value, pension administrators use either the long-term government bond rate or 6% (whichever is higher).

This causes the commuted value to be much lower than it should be because the 6% figure is more than double what the actual long bond rate is.

This discount rate is supposed to be based on the “risk-free” long term interest rate. In other words, it is used to calculate the Net Present Value of the amount you would need to invest in long term gov’t bonds in order to duplicate the income stream that the pension would provide.

The problem is that the risk free rate of return is nowhere close to 6%. A person taking the commuted value of their pension cannot hope to duplicate the income that they would receive from that pension unless they invest in risk assets.

I’ve spoken to a pension administrator about it, and they have told me that this is how the pension rules say to do the calculation, so it is not something that they are purposely doing, but the end result is the same. People are getting the short end of the commuted value stick.

Things may be different in other parts of the country, but I’m told that’s the way it is in BC.

You were told wrong, probably by an administrator who wants to keep your assets under management. Nobody is using a 6% risk-free benchmark, since we have not seen rates that high for most of a decade. There is no doubt a person commuting a pension and putting it into an actively managed, balanced and diversified portfolio will equal or exceed the plan’s distributions, plus pass on 100% of it to a surviving spouse or family — and avoid the inevitable pain many public pension plans are bound to feel in the decades ahead. — Garth

#91 Jj on 07.23.14 at 9:38 am

Looks like the buyers who have been on the sidelines are the greater fools:

http://www.theglobeandmail.com/report-on-business/economy/housing/red-hot-toronto-condo-market-up-94-per-cent-from-last-year/article19715863/#dashboard/follows/

How can an increase in sales make anybody a loser? But, go ahead and buy a Toronto condo. See how that turns out. — Garth

#92 Ralph Cramdown on 07.23.14 at 9:40 am

#87 Larry Laffer — “The current P/E ratio for the S&P500 iShares (XUS) stands at 18.59, not unreasonably high but no bargain either. The current P/E ratio for US Fundamentals iShares (CLU.C) stands at 16.97, slightly more reasonnable.”

Interesting on the CLU. I compared it to Vanguard’s Canadian S&P 500 ETF and to its total US market ETF. Can only go back two years, but it looks like CLU is running neck and neck with the total market, and underperforming the S&P 500, for now. Yields for all three are within 13 BPS of each other, so no big tax differences, presumably, but CLU’s MER is 50 BPS higher than Vanguard’s, plus expenses in both cases. Absent research to the contrary, we’ll have to let those horses run a few more years to see if CLU is worth the extra 1/2% in fees… though I know what Jack Bogle would say about it.

http://goo.gl/z5qOUO

#93 raider on 07.23.14 at 10:09 am

#4 “Can something PLEASE crash already!?”

Opportunities are plentiful. For example, mortage-backed securities have not really recovered since 2009. There are plenty of opportunities there.

Also REITs in Canada are still at fairly reasonable valuations since the US started to pull the plug from QE.

Don’t hope for exceptional capital-gains. If unsure invest in safe things that have a reasonable cashflow (ETFs in large-cap corporate bonds, preferreds, medium-term bonds, REIT ETFs…). Wait it out in that camp until the equity market corrects. Any correction in stock markets is going to be steeper than in a diversified fixed-income portfolio.

Patience is a virtue. Always have cash-flow in mind when investing.

Some people in the US started to notice a decline in Ad-revenue. This could be a fluke or a leading indicator that a buying spree could start soon.

#94 Ralph Cramdown on 07.23.14 at 10:22 am

“There is no doubt a person commuting a pension and putting it into an actively managed, balanced and diversified portfolio will equal or exceed the plan’s distributions, plus pass on 100% of it to a surviving spouse or family”

I’m going to go out on a limb and say the math on that one doesn’t add up.

Enjoy the limb. I see the benefits of commuted pensions daily. — Garth

#95 CJ on 07.23.14 at 10:23 am

Have a look at the Calgary census numbers and let me know if you still think house prices are going down in this city. No chance. Thousands of people are moving here annually, there is a major shortage of supply with no end in sight.

But, hey, keep waiting for that crash. Average home price in Calgary will soon start with a 6.

#96 liquidincalgary on 07.23.14 at 11:41 am

@94 CJ

38000 people moved to calgary last year, as a matter of fact.

just under 1.2M ppl in calgary proper now

#97 Well-T on 07.23.14 at 11:44 am

RE: 85 – Nomad

I tend to agree with you about bonds. As a young-ish investor, my 700,000 portfolio is 100% stocks and I sleep very well. I hold some dividend ETFs, plus individual CAN/US stocks. Total portfolio yield is around 4%. Many of these companies are dividend growers and I feel comfortable holding them for the long run. Taxation is also advantageous. Risk tolerance alert: paid off house and 2 DB pensions.

* Garth, interesting points about cashing out the commuted value of the pensions. I’ll have to look into that if we have a career change.

#98 Karl hungus on 07.23.14 at 11:50 am

I love how when it comes to real estate, the tiniest stat proves that its all going downhill, yet when it comes to the stock market, all the stats are somehow justified.

Stock markets are 100% liquid, performance-based and instantly measurable. Housing markets can be seriously illiquid, emotional and subjective. There is no direct comparison. — Garth

#99 prairieboy43 on 07.23.14 at 12:22 pm

http://news.yahoo.com/disturbing-look-retirement-130400189.html?soc_src=copy

People who are experiencing difficulties. Good read from Yahoo.

#100 Big Brother on 07.23.14 at 12:36 pm

#89 Smoking Man on 07.23.14 at 9:11 am
#80 Sheane Wallace on 07.22.14 at 11:50 pmAmazing shift in the official position of the West on the crises with the Malaysian plane. Harpo looks stupid again (he is very good at that). Embarrassing
…….
Not embarrassing today two Ukrainian fighter shot down near the area where Ukraine shot down MH17
The Bugs Bunny, Daffy Duck saga goes forward.

……………………………………………………………………..
Smoking Man we are Bugs Bunny, Daffy Duck and the leaders of the Ukraine. We create and destroy with the tip of a needle. We are MKULTRA. You were spotted at your casino last night, glass of wine in hand and a fist full of dollar bills, headed towards your bar.

#101 Pre-retiree on 07.23.14 at 12:53 pm

Re: DB pension. Need to check if HOOPP allows for commuted value at retirement or not. Could be one the best invested pension out there however. One worry is about the total amount of the commuted vlaue where above a certain treshold (and no significant room in RRSP), one may have to take some of the amount in lump sum payment which would result in an ugly income tax situation.

You always have to take a portion of a commuted pension as taxable income. But you will pay the tax eventually anyway. Plus you can invest the after-tax amount in TFSAs and non-registered accounts earning tax-free or tax-efficient income. Can’t do that inside your RPP. — Garth

#102 neo on 07.23.14 at 12:54 pm

Hello Garth,

The IMF just cut its forecast for 2014 U.S. GDP from 2% to 1.7%…

You sure you want to stick to your 3% prediction?

#103 TRT on 07.23.14 at 1:13 pm

Rents rising in Metro Vancouver.

See for yourself.

Influx of foreign demand.

#104 Shawn on 07.23.14 at 1:28 pm

There is no doubt a person commuting a pension and putting it into an actively managed, balanced and diversified portfolio will equal or exceed the plan’s distributions, plus pass on 100% of it to a surviving spouse or family — and avoid the inevitable pain many public pension plans are bound to feel in the decades ahead. — Garth

******************************************

I am shocked that such a definitive claim is made.

Commuted / balanced could work out much better if interest rates and market returns rise. But, there is no guarantee of that.

All else equal a pot of pension money can pay out more annually precisely because there is no survival benefit after the death of both spouses. (longevity risk is averaged).

Given the financial acumen of the average person, taking a commuted value in place of a life annuity could be a HUGE mistake.

Anyone advised to so, especially, by a financial advisor who would then benefit by getting that money under management should definitely seek independent advice.

Suggestions that Canadian government defined benefit pensions that have already been earned are at much risk seem unfounded. In most cases pensions already earned will be untouched. In some cases inflation protection may be reduced.

The voice of inexperience is heard again. The survivor aspect alone makes a powerful case for a person to consider commuting. And, of course, they should not self-direct any more than they’d do their own liver transplant. — Garth

#105 Fatso Brown on 07.23.14 at 2:19 pm

No rate increase in 2015 says IMF.

http://business.financialpost.com/2014/07/23/fed-interest-rates-imf/

RE will continue it’s uptrend in this scenario. M&A/Healthy profits are already rip roaring and making investors very happy. Has anyone been following CP ( up from $83 to $213 YOY) SAP….TLM….BA ( BCE taking it private) THI….IPL…..GIB.a….etc etc etc ……..Plenty of double baggers for the sneaky stock pickers this year because of the rate policy and general macro. Stocks are still cheap compared to 2007-2011…….many will double and triple again from here.

But in one acct I manage for the kid I hold some Sector Mutual Funds TD NRG…Div Growth & RES…..up respectively 32.5% , 31.46%…..& 25.88. I’m kicking myself for not going with the 60/40 Balanced approach. This excitement is no good for me. …….it’s un Canadian. OK….I’ve made enough money today…..the bars just opened….I’m going drinking.

(a) Not what the IMF said. (b) It doesn’t set interest rates. (c) The Fed is still expected to move in 2015. — Garth

#106 Tony on 07.23.14 at 2:49 pm

Medbox is down to about 14 dollars American for all the people who shorted it. The only dope was the dopes who were long the marijuana shares.

#107 Tony on 07.23.14 at 2:54 pm

Re: #105 Fatso Brown on 07.23.14 at 2:19 pm

Since Bell has always done everything wrong could Bell have put in an offer (albeit too low) for Bell Aliant at the very peak of the market before the great crash?

#108 Tony on 07.23.14 at 3:01 pm

Re: #95 CJ on 07.23.14 at 10:23 am

The last change to second and infinite properties in Canada thumped Edmonton real estate. The same will probably happen to Calgary.

#109 Tony on 07.23.14 at 3:07 pm

Re: #4 Ronny on 07.22.14 at 5:15 pm

It might be prudent to wait as I have no long positions only short ones. Bought back some Medbox shares today in which I’m still heavily short.

#110 Bottoms_Up on 07.23.14 at 3:25 pm

#104 Shawn on 07.23.14 at 1:28 pm
——————————————
Agree with Garth on this one. Imagine upon retirement you were told you have a million in your pension, and it is all yours as long as “buddy down the street doesn’t die. if he dies, we keep your money”. Not commuting and therefore guaranteeing the money for you and/or your family is irresponsible– it’s a major gamble.

Happened in my extended family, worker died in late 60’s, and lost 35 yrs of paying into both CPP and defined benefit plan…that was an immediate loss of wealth to his estate of at least hundreds of thousands of dollars.

#111 Ralph Cramdown on 07.23.14 at 3:32 pm

If compound interest is the eighth wonder of the world (as postulated by Albert Einstein), then life insurance, life annuities and pooled pensions, underpinned as they are in actuarial science, are probably the ninth.

I’m starting to think that the switch from defined benefit pensions to defined contribution might be the one of the greatest sleight of hand manoeuvres of all time. Apparently it was sold as transferring market risk from plan sponsor to beneficiary (equitably?), but no mention at all was made of the longevity risk that the beneficiary would now have to shoulder — with no compensation. Two hundred years of beneficial financial engineering down the drain.

The law of large numbers — which is the insurance world’s equivalent of the ‘free lunch’ of diversification in the investment world — has been supplanted by the wishful thinking of “of course I won’t get hit by a bus tomorrow, and I won’t live to one hundred, either.” Good luck with that.

#112 Nomad on 07.23.14 at 3:33 pm

Re: Garth “In a balanced portfolio you buy bonds for stability as much as yield”

I hold short term corporate bonds. Small yield of 2.2-2.5% these days, in a seggregated annuity fund that preserves the capital, and tax-sheltered.

I also held CHB high yield bonds for a while but sold it because the yield is very low relative to history. I no longer felt compensated for the risk. Now I read that some firms are betting against high-yield bonds. They could fail but if they don’t I’ll buy back into those at lower prices. For more passive investors probably better not to sell. Those should only be 5% of your portfolio, max.

What I was trying to say isn’t that I’m out of bonds (you should have bonds, or better, you should have had bonds in 2005), but that retirees will remain hungry for yield, especially as the yield on bonds keep hitting new lows, so that makes me feel even more comfortable holding dividend stocks even if valuations are a bit stretched right now.

Fun stuff.

#113 Long Time Lurker on Here on 07.23.14 at 3:33 pm

After investing (or should I say trading/gambling) for almost 10 years, I have learned a thing or 2. I noticed that there are 2 crowds. First, there are the ones who would stand on the sideline screaming “too late” or “bubble”. These people wait forever for things to go down. When things do go down, they either take no action because they don’t see things will ever go up again, or they would jump in, only to knee jerk when things go down more. Then there are people who would pump every bubble til it blows up. Take profit and move on.

Stock goes up and stock goes down (same goes for housing). Buy on up ticks. Cash in when you are satisfied and never look back.

People who buy on up ticks are not greedy. Greedy are the ones who try to catch a falling knife by going all in and hoping that the market will eventually return back it it’s peak.

#114 fred on 07.23.14 at 3:35 pm

It’s quite simple and as usual Warren Buffet is spot on.

“You buy when everyone is selling and sell when everyone is buying”

Right now is a time to be selling or holding because the herd mentality is to buy. It’s impossible to time the markets so don’t bother trying.

There will be a correction. It will take something to set it off. My guess is it will be another greece like crisis. Probably Portugal or Spain which everyone is saying are next in line.

#115 Mark on 07.23.14 at 3:39 pm

“you’re saying that Canadian $ will be 1.20 US ?
how bizarre!

Absolutely. And even somewhat beyond. As Canada’s RE continues to deflate, and consumer consumption arising from such falls. While the US dollar resumes its long-term down-trend.

As for Calgary, sure, people might still be moving there, but the housing industry has more than built enough capacity to deliver product to market. That’s why prices are going down, and have been for the past year or two. Same deal in the GTA. High prices hyper-stimulated the business of RE supply, and the resulting onslaught of product, as well as a reduction in the availability of subprime CMHC insured mortgages, has reduced house prices in the GTA, GVR, and YYC.

Immigration to a city isn’t a problem if the business of housing supply can keep up.

#116 Weather man on 07.23.14 at 3:40 pm

http://finance.yahoo.com/news/fannie-mae-slashes-forecast-home-172300494.html

Gotta love this, Fannie Mae lowers their home sales forecast for the entire year by almost 100,000 units, and what’s to blame? You guessed it, bad weather, ha. To think that people will change their mind about buying a house because winter was longer than expected, especially in the US.

This is beyond non-sense, how can a marginally colder and longer winter explain a decrease of forecast by roughly 20 percent.

Clearly someone is grasping at anything. I could somewhat buy the excuse if it was holiday home sales, but at the same time, with all the warmer spots in the US, one would rationally expect that colder and longer winter for Canada too would drive up the demand, and therefore sales of homes in the US. A colder and longer winter may have pushed some sales from Q1, or Q2 to the next quarter, but to think that someone’s need for a home disappears because of more snow is nuts.

Am I missing something here? ‘I feel like I’m taking crazy pills’…

#117 devore on 07.23.14 at 3:41 pm

#37 Mark

Not really on the financials, and what’s wrong with China?

30% financials, more than twice the next highest segment, O&G at 13%.

The goal of buying a broad ETF is supposed to be diversity, no? Well, you’re the millionaire, so wtf do I know.

#118 Mark on 07.23.14 at 3:43 pm

“Rents rising in Metro Vancouver.
See for yourself.
Influx of foreign demand.

So the ‘foreigners’ are renters now? Is that what’s being suggested? I thought the Realtors pushing the “HAM” myth swore up and down that it was culturally sacrilegious for Chinese to “rent”.

#119 Mark on 07.23.14 at 3:45 pm

(on the VWO ETF) “30% financials, more than twice the next highest segment, O&G at 13%”

Where are you getting that info?

http://finance.yahoo.com/q/hl?s=VWO+Holdings

Says 26.74% “Financial Services”. Which is far less than, for instance, XIU, which is around 37% financials.

#120 Mark on 07.23.14 at 3:51 pm

“Since Bell has always done everything wrong could Bell have put in an offer (albeit too low) for Bell Aliant at the very peak of the market before the great crash?”

Seems like a pretty fair price to me. Its not a bad thing when you can buy a stock for prices of nearly 10 years ago. As firms like Netflix and Google fill the pipes with their video products, the telecoms are gaining significant pricing power.

#121 Tom from Mississauga on 07.23.14 at 3:58 pm

The market starts a sell off (July 15th). Set my buy orders to where things should come down to, then presto. The market rallies and I’ve added nothing. Buying dips been harder than thought.

#122 CJ on 07.23.14 at 3:59 pm

#115:

Hahaha. Prices are going down in Calgary? Please post proof.

#123 Shawn on 07.23.14 at 4:33 pm

Flawed Pension Thinking

110 Bottoms-up said:

Happened in my extended family, worker died in late 60′s, and lost 35 yrs of paying into both CPP and defined benefit plan…that was an immediate loss of wealth to his estate of at least hundreds of thousands of dollars.

******************************************
The amount paid in reflected the amount needed to fund a pension to average age of death. CPP and pension contributions are actuarially lowered to reflect that those who die young will subsidise those who live longer than average.

That is “the deal”. And pension contributions are quite a bit lower because of it.

The thinking is that dead people don’t need a pension.

If people want to leave an estate that is outside of pension savings.

Commuted Values should not be allowed once retirement age is reached. In Alberta the provincial plan does not allow commuted values after age 55. Before age 55 you can get a commuted value if you quit the government job.

Commuted values at retirement defeat the fundamental group pension idea of averaging the age of death. Funding to average age od death is quite a bit cheaper than funding for maximum lifespan.

The bad thing that “happened” in the family here was early death. The discontinuance of pension and CPP was no tragedy. It was needed to subsidise those who live past the average age of death.

Also, counting on an inheritance is hardly a sign of independence. Let your parents spend it all. Pathetic that parents should have to think about supporting middle aged children with an inheritance.

I have told my parents I have no need for an inheritance. Nor should they leave anything to my children.

Upon death of parents at a younger age, say with younger children, that is different and that is where life insurance comes in.

Of course everyone reaching retirement age should get serious advice about commuting a pension or not. Failing to consider this, or leaving survivors struggling, is financially irresponsible. — Garth

#124 CJ on 07.23.14 at 4:39 pm

Here you are #115. Thought I could help you out:

http://www.calgary.ca/_layouts/cocis/DirectDownload.aspx?target=http%3a%2f%2fwww.calgary.ca%2fCA%2ffs%2fDocuments%2fCorporate-Economics%2fHousing-Review%2fHousing-Review-2014-06.pdf&noredirect=1&sf=1

#125 stop lying on 07.23.14 at 4:57 pm

#47 good catch, I was thinking of it backwards. then yes, there probably won’t be a better time to look at commuted values than now.

#126 Shawn on 07.23.14 at 5:04 pm

Of course everyone reaching retirement age should get serious advice about commuting a pension or not. Failing to consider this, or leaving survivors struggling, is financially irresponsible. — Garth

*****************************************
No harm in looking into it but for most people there is nothing to think about. Pensions already have certain survivor benefits for a spouse.

Except in cases of disability the children should be independent.

A government DB pension is as close to risk free as it gets.

My advice is to be VERY wary of financial advisors suggesting this move except in unusual circumstances.

Attempting to leave an estate from pension money adds risk and likely lowers the monthly payment. That money is for the enjoyment of the retirees not sponging middle aged kids (disability aside).

Dependent survivors are one thing. Independent middle aged kids are not dependents. For shame that they seek their parents pension money.

Should the government also allow commuted values on either CPP or old age or both? If good for BB pensions why not those too?

(a) Most pensions leave a fraction of benefits for a spouse. Why should he/she not enjoy what the family unit worked for? (b) No pension is risk-free, given government debt levels. Already teachers in Ontario pay more and will receive less. (c) Financial advisors have nothing to do with the wisdom of this. Run the numbers. Commuting a pension offers equal or better benefits immediately and sustained family financial security. (d) The monthly payment for most commuted pensions is usually higher, not lower, than RPP administrators offer. (e) Your comment about ‘sponging’ children shows you are coming at this from a prejudiced point of view. Unbecoming. — Garth

#127 Casual Observer on 07.23.14 at 5:05 pm

“You were told wrong, probably by an administrator who wants to keep your assets under management.”

Even though I asked specifically about the interest rate used to calculate commuted value, I’m going to give her the benefit of the doubt and hope that she just misunderstood my question.

It looks like she gave me the rate used for calculating the maximum annual income payment from a Life Income Fund.

http://www.fsco.gov.on.ca/en/pensions/policies/active/Documents/L200-413.pdf

From Page 3…

Maximum Annual Income Payment Table for 2014

The table at the end of this policy identifies the percentages for use in calculating the maximum
income payment amount for 2014… For the table, the interest rate assumptions used…

(1) 6.00%, which represents the greater of the CANSIM V122487 rate (the long-term Government of Canada bond rate) for November 2013 (which is 3.01%) and 6.00%, for the first 15 years, and

(2) 6.00% for the sixteenth and each subsequent fiscal year.

#128 Mark on 07.23.14 at 5:26 pm

“Hahaha. Prices are going down in Calgary? Please post proof.”

Crawl out of your hole and go look.

#129 devore on 07.23.14 at 7:53 pm

#119 Mark

Where are you getting that info?

VWO quarterly.

#130 RD on 07.23.14 at 9:57 pm

I received the commuted value of my pension when I retired at age 55.

The number I was given was $250,000 or collect the monthly benefits of $30,000 a year for 10 years until age 65, and then $21,000 a year for life. The spousal amount is $15,000 per year for life.

Given those numbers, at the current age of 63 I have already collected $240,000 and would be running out of money this year.

I am thinking the “numbers” I was given had to be wrong, but therein lies a problem.

It was…..”sign here or take the pension”.

#131 Jordy on 07.23.14 at 10:34 pm

Garth is right, take the commuted value of your pension if you are lucky enough to get a chance. Did this years ago and I am way ahead of the value of the pension, without taking undue risk. The real advantage is the money is yours, and you have control of it, and you aren’t relying on some extinct or dieing industry to uphold their obligation to support the pension short falls.
Take the money and run!

#132 CJ on 07.24.14 at 8:42 am

#115 Mark

Maybe you missed this: http://www.calgary.ca/_layouts/cocis/DirectDownload.aspx?target=http%3a%2f%2fwww.calgary.ca%2fCA%2ffs%2fDocuments%2fCorporate-Economics%2fHousing-Review%2fHousing-Review-2014-06.pdf&noredirect=1&sf=1

#133 LL on 07.24.14 at 3:21 pm

#10 – R on 07.22.14 at 5:38 pm

They are reading the globe… or worse … Zero Hedge.

….”Le silence est d’or”….

#134 Doug in London on 07.25.14 at 10:39 am

As I mentioned before I am one of those losers who reads The Globe. While I have no idea of when a correction will occur and by how much, you can get a sense by reading the business section of that loser paper. I’ve read many articles over the last 4 months there advising caution, warning a correction could occur. Recently I saw a more positive article suggesting a melt up of the market is coming. I’ve never heard the term before, but guess it means the opposite of a melt down. When articles advising caution disappear and are replaced by positive articles suggesting the market could keep going up that’s a probably sign a correction is coming.