Thursday, March 26, 2009

Real Estate Fever!

Real estate fever – really?

We hear you can buy a house in Windsor Ontario for $25,000 to $30,000. We hear that 40% of Windsor’s houses that were sold last month sold for under $100,000. It seems that there is a small part of Canada that has the same depressed house prices as our American cousins. Pierre Elliott Trudeau was right: when the America sneezes, Canada catches a cold. March 2009 sees America suffering from real estate pneumonia and Canadian just now getting the sniffles. Will Torontonians or Calgarians be able to buy houses for under $100,000 some day?

The very thought of such a steep drop in house prices sends chills through the bones of Canadian home owners – especially those with big mortgages. “Yes, it happened in the USA, but it could never happen here. And the Windsor situation is the exception, not the rule!”

In his book, Beyond the Bull, Ken Norquay points out that the human animal uses the most primitive bestial parts of his brain when dealing with money matters. We use our herd instinct to do what everyone else does just when we should be thinking independently. We use our “deer-in-the-headlights” fear instinct to “fight, flight or freeze” when we should be calmly executing our pre-determined investment plan. And now we wonder what instincts homeowners will apply to the current decline in house prices.

So far, Canadian realtors are acting like ostriches with their heads in the sand. They are in denial. “What’s happening south of the border cannot happen here.” And who can blame them? Their job is to help Canadians buy and sell their houses. Realtors do best in rising markets. When house prices go up, they do well. Commissions are good, mortgage brokerage fees are good, and the customers are happy. In times like these, it’s easy to find sellers but more difficult to find buyers. It’s no wonder Canadian realtors don’t want to face the reality of this downturn. They prefer the scramble of speculative activity associated with rising prices.

What about Canadian homeowners? What should they be thinking?

If they were getting a cold, they’d take zinc and vitamin C and get plenty of sleep. But what should you do if you think the price of your house might drop under $100,000? Sell it and rent? Scale down: sell your big house, buy a smaller house? Ride out the storm? What should you do if you are at risk of losing your job and not being able to afford your mortgage payments? Tricky, isn’t it? What is the intelligent thing to do?

For guidance in this question, we encourage you to objectively assess your position as a homeowner and mortgagor. Did you buy a too-big house because you wanted more exposure to a red-hot rising real estate market? Did you take a too-big mortgage because you wanted to leverage your exposure to rising house prices? Now that prices are not going up, are these “too big” decisions still valid? If house prices are going down, maybe you should have a “too small” house. Or maybe you should have only a small mortgage. If the times have changed, we should change with them.

For further guidance, look at the stock market. Most of today’s buy and hold investors have noticed that the 10-year rate of return on equity mutual funds is negative. They are wishing they had sold out 10 years ago. Or even one year ago! But they believed the mutual funds salesman’s line: “Stocks go up over the long term.”

Could that be happening in real estate now?

This is not a good time for speculation in Canadian real estate. Check in with your common sense: are you stretched out in a “too big” real estate situation? What will happen to you if Windsor prices spread to other areas of Canada?

Ken Norquay, CMT
Chief Market Strategist,
CastleMoore Inc

Tuesday, March 24, 2009

Suncor/Petro-Can wedding

The “Corporate Efficiency” Racket.

This week two of Canada’s biggest energy companies, Petro-Can and Suncor, announced their engagement. The marriage will occur this autumn. Soon another corporate giant will be born.

And why is this giant merger being undertaken?

They say it’s something about corporate efficiency. Apparently the new giant oil company will be able to lay off thousands of workers and save millions of dollars in expenses. Very efficient.

What an interesting country we live in. Governments are being asked to put up billions of dollars of taxpayer money to prevent the layoff of thousands of auto workers. And now two corporate oil giants have a plan that will likely result in the layoff of thousands of oil patch workers. The Petro-Can/Suncor wedding seems to do the exact opposite of what the government is trying to do in the auto industry.

I wonder what our federal government will do. Will they approve the oil merger and allow the oil companies’ corporate efficiency to neutralize their auto industry bail out? Will they block the merger and receive criticism from corporate Canada for preventing the corporate IN-efficiency that got GM, Chrysler and Ford into the jam they are currently in? Will they attach strings to the deal: approve the merger only if the new merged company agrees to cooperate with the government’s goal of maintaining high levels of employment in Canada? (After all, they are attaching conditions to the auto bail out: the bail out loans will be subject to certain production guarantees etc.) What will our government do?

If they do nothing about the auto industry, hundreds of manufacturing jobs will be lost. If they do nothing about the oil merger, hundreds of energy jobs will be lost. Corporate efficiency is a tough game. It seems that efficiency means running lean and mean: maximum corporate output for minimum labour cost. Isn’t that how the Japanese and German car companies operate? If our government bails out the American car companies, they will be promoting corporate IN-efficiency. Maybe we are asking the wrong question. Maybe the government shouldn’t DO anything. Maybe it’s more important for them to NOT DO.

Ken Norquay, CMT
Chief Investment Strategist
CastleMoore Inc

Monday, March 9, 2009

Scale and perspective: March 9, 2008

It was only a few years ago that Royal Bank was Canada’s biggest corporation and, for the first time in its history, had earnings of one billion dollars in one calendar quarter. It was a red letter day for a big well managed Canadian company.

Last year General Motors lost $31 billion US. There once was a time when GM was the biggest company in the world. Now they are talking bankruptcy and bail out. Makes Royal Bank’s one billion look small.

Earlier this month, AIG, recently the world’s biggest insurance company, announce a quarterly loss of $67 billion US. Makes GM’s loss look small.

Sometimes we can be mesmerized by big numbers: a billion here, a billion there. We can become numbed the sheer size of these accounting facts and figures.

Do not be numb to this fact: America’s giants are going down. There’s no doubt about that. In the early 1990s Soviet communism fell: now it appears that American capitalism is falling. America’s biggest and best are coming down.

We feel sorry for new US president Obama: what a job he has! In fact, we feel sorry of all heads of state in this global financial fiasco. But, at least they are all trying to do the right thing. They are trying to ease the problem by intervening, by offering help when help is needed. They are trying to reduce the risk in their economies.

We are concerned that today’s financial planners are not acting in the same manner. Governments all over the world are trying to bail out the big corporations. But financial planners are not trying to bail out their clients. It costs taxpayers billions to bail out big companies, but it costs the financial planners nothing to save their clients. All financial planners have to do is recommend that their clients sell their stock-based mutual funds and switch to money market or bond mutual funds. It’s that easy. Then, no matter what goes wrong in America, their clients’ investments will survive.

Last week CastleMoore sold out its small position in the stock market. It was easy. They noticed that the US stock market had dropped to a new low and they sold their clients out of the stock market. Why did they sell? Are they trying to ace the market and “time” every tick and bop of the stock market? No, not at all.

CastleMoore is an investment counsellor that manages people’s life savings. And right now the danger level of the stock market has increased beyond their level of tolerance. Why would they expose ordinary investors to that much risk?

Do they hate the stock market? No. They just don’t want to invest in it at this time. They will buy back once there is evidence that the down trend is over.

Why don’t financial planners do the same thing? Just because Blue Chip America is coming undone, there is no reason for ordinary Canadian investors to come undone. There is no need for our savings and investments to evaporate like American capitalism.