Double Blind

Will be away in the Interior for the Easter weekend. See you Monday!

I did my RRSP re-balancing with Questrade – the account transfer from BMO Investorline took about a month to process.

Questrade’s interface (at least the web-based interface, the simplest and cheapest type) is quite basic, but it is adequate for my purposes. When reviewing the transaction summary, they process US transactions by performing a “negative currency fee”. For example, if you sold $1000 worth of securities, typically the spread a bank would charge would be 1.5% over, so they mitigate this with a negative fee.

So in their information systems, everything is still denominated in Canadian dollars, just that they’ve created “virtual US dollars” with this system.

I think I’ve already saved $500 in currency conversion charges by waiting for this service before doing my major rebalancing. So here’s a thumbs up to Questrade – they actually delivered what they promised on. The only thing remaining is whether they’ll reimburse me the transfer charges like they said in the promotion, but apparently this will come after 3 months of having an active account.

Believe it or not, the lottery requires one skill: the ability to choose combinations of numbers that nobody else would choose.

The draw on March 19, 2008 had the following numbers:
23 40 41 42 44 45 (Bonus 43)

Nobody got all six numbers correct.

236 people chose five numbers correct plus the bonus correctly. This was good for a $1,193.70 win. Assuming they chose numbers randomly, this event is a 1:2,330,636 outcome.

106 people chose five numbers correctly. This was good for a $2,223.40 win. Assuming they chose numbers randomly, this event is a 1:55,492 outcome, or 42 times more likely to happen than just choosing five numbers.

Here’s my award-winning tip to playing the lottery: Do not choose sequential numbers!

Three month US treasury bills are yielding 0.34% currently.

I don’t think I have seen yields this low since early 2003.

This isn’t exactly news, but it made the Vancouver Sun today and the reason the name change was declined was due to the lack of the phrase “regional district” in the name.

This is an absolutely correct decision. The GVRD has been trying to work its way up to a county-type government, and this represents a fourth layer of government which, needless to say, would try to expand into the power vacuum between the municipal and provincial level.

The provincial government should also state in no uncertain terms that the GVRD is not to be abused by municipal politicians for their own power sucking initiatives.

I’ve managed to diversify into the US banking sector – a market panic like we saw last Monday was a once in a ten year event. So my RRSP is now roughly 25% US banking, 30% telecommunications, 25% other financial/insurance and 20% in Rogers Sugar (regrettably now at fair value).

This is in no way saying that I think there will be additional panics, but it’s pretty clear that the “Greenspan put” is still in effect.

I avoided JP Morgan since they will have digestion problems taking out Bear Stearns.

The 2008 projected P/E ratio (even after the onslaught of downgrades) is 10.8. Even if earnings get cut in half, this is still above the 10-year risk-free yield rate. There is inflation protection built into the earnings of the various companies, but I am taking a relatively large currency exposure risk to the US currency. I figure that US currency will continue to have purchasing power by the time I need to take money out of the RRSP.

It was a very conscious decision to avoid anything relating to natural resources. I have absolutely no convictions that the price of oil will go up or down. What I do know, however, is that the marginal cost of producing oil currently is well below $110/barrel and people I know are making economically conscious decisions to consume less gasoline. If people in North America are doing this then one can imagine the impact that high oil prices will have in the rest of the planet.

I’m not saying that oil prices will drop, but I’m not saying that the doom-and-gloom of $200 to $500 barrel oil will materialize anytime soon. If anything, it’s more of a function of the depreciation of the US currency.

Just an update on my previous prediction – I have liquidated my entire position on the Florida primary at 10% (a very sloppy trade; I could covered the trade at 5%), and liquidated my Michigan position at 12%. My P/L on the transaction turned out to be $580.25, as I took an additional position on the Michigan item at 85%.

I could have held my Florida trade to expiration and be comfortable about it, but the Michigan trade still has some residual risk that I was happy to liquidate at 12%. Michigan is a smaller state and it is possible for them to arrange some weaker arrangement that would cause the contract to expire at 100.

The media hysteria over this issue also helped the trading positions – reports like to report as if things are a sure thing and people out there are silly enough to put money on it. I just take the opposite side. I wish they were all this easy.

The two Toronto ridings went heavily Liberal and this was no surprise – In Toronto Centre, Bob Rae managed to suck up most of the NDP votes and the NDP placed second in that riding. Toronto Centre will never vote a Conservative for at least the next 20 years. Willowdale also went strongly Liberal and there was no information to be obtained from that by-election.

In Desnethé–Missinippi–Churchill River (North Saskatchewan) where the Conservatives managed to take 7% of the vote at the expense of the Liberals, and the NDP were able to nibble away 2% for themselves. The Conservative victory in this riding was predicted in my previous post, and wasn’t surprising although the magnitude was about 5% above what I thought would happen.

The real news of the day was the Vancouver Quadra campaign – the Liberals won the seat by 151 votes (at least at the date of the preliminary count) or 0.5% of the vote. This narrow margin of victory was very surprising considering that in the previous general elections, Vancouver Quadra went Liberal by about 20% on average.

This leaves the question – was the close election result a reflection of which combination of variables:

While the Liberals have three more MP’s in the house of commons, this will not change the balance of control. The Liberals will gain Bob Rae who will make life difficult for the Conservatives, but other than that there is not too much that Dion would be happy about with today’s results. It’s pretty clear that other than in Toronto and Montreal the Liberals are losing support at a pace that would be difficult to form a minority government with. Although the Liberals may be polling at the Conservative levels, most of the Liberal voter concentration is in those two cities where they rack up massive electoral majorities.

If it turns out that Vancouver is eroding as a Liberal stronghold, they are in deep, deep trouble.

The other implication of this by-election result is that it virtually guarantees an October 19, 2009 election.

After doing my raid of the BC Property Assessment database, I managed to dump quite a bit of data on downtown Vancouver condo sales prices and cross-correlated them with some sample asking prices available on MLS. My general impression is that it’s generally a good principle to drop your bid to about 5-10% below what you see the asking prices as. There are also a ridiculously large amount of places that were sold in 2007 that are on the market today (in 2008) for roughly 15% higher than the previous purchase price. It’s clear there are a lot of property flippers out there.

I think a lot of real estate agents out there are making a killing from commissions.

After reading the CBC article on “Condo becomes only option for many Vancouver families“, the reality seems to be that “Getting out of Vancouver becomes the only option for many Vancouver families”. When you have people dumping a ridiculously huge fraction of their after-tax income toward interest payments, it’s no wonder that they can’t have kids – both parents have to work, otherwise you face foreclosure.

Let’s work the math here – a 2-bedroom condo in downtown Vancouver (e.g. 1331 ALBERNI ST) will set you back about $450,000. Your interest alone will be about $26,000 per year, add another $3,600 per year in maintenance, another $600 in insurance and $1,800 in taxes, and that brings you up to $32,000 per year. In BC, you need about $42,000 in pre-tax income in order to pay just that amount, with absolutely zero contingency, not to mention actually paying off the place.

The other option is to buy something really tiny, but who the heck would want to raise a family in a 1-bedroom 550 square foot dungeon in the middle of Yaletown? It’s not much cheaper either – around $350,000.

Renting is a sane option, but for a lot of people the only major financial investment they’ll make in their lives is through their houses – most people that invest in the stock market get crushed because they’re not mentally equipped to handle the rigours of the marketplace. If they knew that playing the stock market was the equivalent of playing golf in a foursome with Tiger Woods, Ernie Els and Phil Mickelson, they’d think twice. But the whole purpose of the stock market is to give the player a belief they have a chance. The property market is something that should retain value at least at the pace of inflation, but now people aren’t investing in properties – they’re investing in condominiums, which depreciate, unlike land.

It’s just best to get out of town and find work elsewhere if one’s interested in owning an actual strip of land. This is the attitude of most people that go south of the Fraser river to escape the dense urban landscape.

Take a look at Lehman Brothers today:

Once the Federal Reserve cuts the fed funds rate from 3% to 2% tomorrow, this will complete this cycle of the market panic. Bankers will be given a month to figure out exactly what crap they have on their books, write it off and then get on with their primary business of borrowing short and lending long. Bear Stearns trading above $2 a share implies that some idiots out there believe they want to take over the company for a lot more than what JP Morgan is willing to pay for it – if BSC was trading less than 2 bucks right now then there would be some real problems.

The US yield curve is as follows:
3 months – 0.88%
2 year – 1.36%
5 year – 2.23%
10 year – 3.35%
30 year – 4.31%

The Canadian yield curve is:
3 months – 2.25%
2 year – 2.43%
5 year – 2.86%
10 year – 3.48%
Long term – 4.02%

The Federal Reserve has clearly been reading up on their history books in the 1929-1932 era where they virtually shut down the entire US economy with raising rates. Inflation will be a problem, but it is the lesser evil compared to what makes capital markets tick, and that is liquidity. It’s just like how I said before – it doesn’t matter what the price of a barrel of oil is, but it does matter that there is a market out there for it and that you can get your hands on a barrel if you’re willing to pay the quoted price.

The entire core of modern finance was built under the concept of liquidity – without it, really, really bad things start to happen. Just note that the Federal Reserve still has the ability to do this since interest rates were at 5.25% last year – what if this type of situation happens when the short term rates are already zero?

Look no further than Japan in the 1990′s.