Entries from July 2020 ↓

Us, 1. Them, 0.

Friday of a long weekend. Yahoo! In the middle of a pandemic. Yuck!

These are weird days, as this pathetic blog chronicles. In the last 24 hours, for example, more evidence some industries are in deep poop (technically speaking) while others are feeding off Covid. Air Canada’s revenues have collapsed 89% and its stock is seventy per cent lower than it was in January. These guys are going down without a bailout. It will, of course, materialize. Maybe the Kielburgers can finance it.

“I hope they keep the US border closed a long., long time,” Brenda said to Bandit and I while on our morning walk. Most people are repeating that. And the airline is being crushed as a result.

But here’s Apple. Stock up 80% in a year, earning over $59 billion in the last three months with revenues smashing analysts’ predictions. It’s all that CERB cash flying around (and the US equivalent, which ends today) allowing people to snap up new iPhones and iPads as the stay-at-home economy blossoms.

The revolution is in full swing. Physical retailers are being squished, while online sellers blossom. The stay-at-home stocks, companies and enterprises – from Zoom to Apple, Netflix, Etsy, Shopify and Amazon – are exploding higher. Government fiscal stimulus (all those cheques flying around) and central bank monetary stimulus (2% mortgages and bond purchases) have helped propel markets higher. And it’s not stopping

Said Fed boss Jerome Powell this week: “The path forward for the economy is extraordinarily uncertain, and will depend in large part on our success in keeping the virus in check. We’re not even thinking about thinking about raising rates and it will take continued support for both monetary and fiscal policy.”

On balance things are w-a-y better than most people believe. There are solid reasons the S&P 500 is up 48% since March and has a year/year gain of 11%. The Nasdaq, with all those SAH companies in it, has climbed 60% since the virus hit, and has given investors a 31% one-year gain. Bonds prices are higher. Preferreds have revived recently and kick out a solid 5% return. Balanced portfolios have pretty much erased the Covid collapse of 2020, which means investors get to keep all of the 15% (or more) they made last year. And 2021 will probably blow the doors off.

Did you see the latest stats for Canada?

The economy gained about 4.5% in May and it looks like a 5% advance in June. In two months we gained back half the ground lost during the virus disaster in March and April. In short it means the country’s total output is running at about 90% of what it was back in February, when everybody was commuting to work instead of wearing sweatpants all day and drinking gin at breakfast.

The swoon Covid caused here was about the same as the damage inflicted in the US. No big surprise. But now it’s our turn to shine, and there are many who think the Canadian market could outperform in the rest of 2020. First, we may have an ethically-challenged PM but there won’t be a general election in Canada this year causing deep polarization and social unrest. Not so in the States. The November 3rd contest, whether it happens through physical or mail-in balloting, will be a disaster. Whoever wins. Mr. Market may recoil somewhat as that unseemly spectacle unfolds.

Second, the virus. In parts of Canada there is none. Zero. Nada. Nary a single active case. Deaths have diminished. Long-term care homes have been largely restored to safety. No ICU anywhere is overwhelmed. Nobody talks about ventilators. The kids are going back to school. The percentage of the population that was infected, required medical attention, or perished was tiny. The projections made in March by scaremongering politicians (like our health minister – heard from her lately?) that 40% of the country would get Covid now look extreme.

Meanwhile the US has seen 4.5 million cases with 152,000 deaths (about 17 times the number here, with 9 times the population). The virus is still ripping through many areas and it seems reopening the economy was done in haste (politics over science). Says a Bay Street bank economist, correctly: “The good news is that the cautiousness has kept virus cases under control north of the border, suggesting Canada’s economy is in a position to outperform that of the US in Q3.”

You bet.

Third, as a result of bad choices about the virus, the US economic recovery seems to have stalled. Initial jobless claims this week were 1.43 million, over seven figures for the 19th week running . Not good. Congress adjourned yesterday with the Dems and Republicans reaching a deal on extending supplementary benefits to the unemployed. So those cheques end today. Also not good.

Fourth, Trump. The man used to be a firecracker for markets, with tax cuts, infrastructure spending, regulation expunging and job-fueling protectionism. No more. Covid has hobbled and discredited him in the eyes of many who believe the pandemic was waved off instead of seriously addressed (as here). Now he’s a president with 25 million unemployed, a bottomless deficit, a recession, widespread civil unrest and a tone-deaf wife who just announced she’s revamping the Rose Garden while the president attacks TikTok. This week Trump Instagrammed a picture of himself golfing, smiling, and was savaged for it. Then he suggested delaying the election (the polls say he’s losing) and even his own party bosses laughed. Once again, this presidency will not end well.

So, yes, we have problems. Doesn’t everyone? But the facts remain. Markets have plumped. Investors are unscathed. The economy’s rebounding. The panic’s fading. There’s no solid evidence of a second wave or that assets will tumble again.

We should also have learned to ignore politicians. Leaders used to lead. Now they manipulate. So odd what a wee virus can teach.

Bug update

Just another day on the farm. Ninety thousand more bank workers told to stay home. Trump suggests the election (that will likely defeat him) be delayed. The American economy contracts the most in, oh, 200 years. You don’t need to pay your income taxes now until the end of September. And a ten-year mortgage costs the same as a one-year term used to.

Nope, not even close to normal. And not changing soon.

On the surface, there’s lots to scare people. And scared, they are. Surveys show a majority don’t want the Canada-US border opened. They embrace masks, even where there is no virus. They won’t fly. Most are avoiding restaurants and jumping off the sidewalk when another human approaches. Small businesses are dying on the vine (a new survey shows one in seven will go bust soon – that’s 160,000 enterprises in Canada.)

Of course, the gloom is overdone. That’s what financial markets have been saying for a while now, and investors with decent portfolios have skated through this whole Covid mess. In fact the virus-induced plop back in March now looks (in hindsight) like a generational opportunity. Since then the S&P 500 has gained almost 50%, the Nasdaq has exploded higher and even laggard Bay Street is ahead more than 40%. Year/year the US markets has gained 9%, which would be a crackerjack annual return even without the worst global pandemic/crisis/mess/crapstorm in modern history.

And look at oil. Forty bucks now, compared with negative thirty-seven in April. WCS (the Alberta stuff) is worth thirty, and three months ago you couldn’t give it away. For people who don’t panic easily, with the serene confidence that pandemics are temporary and most folks are flaky, this has been a good year. Plus you got to stay home and play with the dog for the last four months. She’s happy, too.

Through this mess, the balanced and diversified portfolio approach has worked again. When stocks plunged by 30%, the portfolio declined by less than half that amount, and regained ground steadily thereafter. As stock values fell, bond prices rose. REITs kept pumping out distributions. Preferreds kept on paying a 5-6% return. As equity markets rebounded, so did the global component of the B&D accounts. So volatility was smoothed, income was maintained and the recovery time shortened. This is why people who have the twin goals of capital preservation and steady returns should invest this way. Not all stocks. Not GICs. It worked in 2020, just as in 2008-9. And Nine Eleven. The dot-com bust. Y2K. The US debt ceiling crisis. And every other storm we’ve gone through. Sixty/forty rocks. But ensure the weightings are correct.

Invest it. Set it. Fuggedaboutit.

Now, as stated, we’re not out of this weirdness yet. TD Bank just told 89,600 employees they won’t be going back to their offices until sometime next year and those who are working (in branches that remain open, for example) must be masked and pass a daily app health test. Such a thing would have been unthinkable twelve months ago.  (RBC just joined in.) The American economy contracted 32.9% in the April-June period, which sure beat both 2008 and 1932 by a long shot. But it was better than anticipated (the consensus estimate had been a drop of 35%), and the next quarter’s expected to show a dramatic reversal.

President Trump is praying this is so, but already playing defense. He promised 3% annual growth, but the virus has changed the green arrows into red and thrown 25 million people out of work. No wondered that moments after the GDP stats were released Thursday he was suggesting the election in November be delayed, mail-in balloting would give a fraudulent result and that America needs to wait until physical voting is safe. In a year, maybe? (But only Congress can change an election date, thus it ain’t happening.)

So things you can count on include economic, market and political upheaval. Structural unemployment, more scared people leaping out of your way, especially if you have a naked nose, and more opportunity.

Like cheap money. So long as Covid hangs around, central banks will keep interest rates in the ditch. The Fed said as much this week, and the Bank of Canada’s already hinted the next rate move up might not be for three years. Wow.

So here are two thoughts. First, lock in this rate foolishness since it’s unlikely mortgages this low will come again in your lifetime. Do not choose variable, and think long. Five-year money is available for 2% or a little less from the major banks (if you’re very nice to [email protected] and compliment her mask choice), which is basically free. All this government spending will deliver more inflation in the future. Borrow at this level and you will look like a genius in 2025. Even moreso, in 2030.

Ten-year loans are now down to the 2.5% range, posing an historic opportunity to stabilize your loan costs for an entire decade. It’s a certainty rates then will be substantially higher, Covid will be a memory and you will be a lot older. Just make sure you don’t try to get out of a 10-year during the first half of its life, since the prepayment penalty will be gross.

By the way, if you borrow cheap money for investment purposes, the interest is all tax-deductible. Plus no CRA payment until the autumn. Thanks, bug.