Year: 2009

Categories
Personal Finance

Stock Market Relapse Because Of China?

spring roll

Intelligent Speculator is a blog about investing, news and comments about the markets and the relevant news. It also supplies users with free stock picks that will hopefully help you get ahead. You can visit the blog at IntelligentSpeculator.net and subscribe to the RSS feed here.

It was mid-November, the market had reached new lows with the S&P 500 closing under 800 points and the economic news was not looking good. Then, something very odd happened as the markets started to rebound. Sure, there had been some positive news such as the end of uncertainty of a new US government and more information about the massive stimulus plan of the US government.  But economic numbers related to demand, consumer confidence and especially employment looked depressed.

However, the markets seemed to shrug off (ignore?) those negative factors very easily as they shot up 25% in a few weeks.  The market rebound hardly seemed justified .  Then the stock markets started dropping because of more bad economic news, the now famous Madoff fraud and more dire economic   news. So markets went back on their road towards new bottoms, with even the new year not being able to stop much of that momentum.

And just last week, with the S&P500 now on a losing streak and standing at 850, some very bleak predictions were released from French Bank SocGen. They have been gathering information from one country that has not received that much coverage given its importance; China. Say what you want about the communist state, it has been gaining importance in the global picture over the past few decades. In fact, as it has rapidly gained its spot in the biggest world economies, China generated much of the world growth over the past decade with growth over 10% year after year.

China is now encountering some severe structural problems that are slowing its economy in a way that will impact the world economy, especially with China’s importance in world trade. In fact, the OECD (Organisation for Economic Co-Operation and Development) has released some economic indicators that look very depressing and could signal an important slowdown. The Chinese authorities could devalue their currency. “It is becoming clear that the Chinese economy is imploding and this raises the possibility of regime change. To prevent this, the authorities would likely devalue the yuan” wrote Albert Edwards of Societe Generale

What would be the consequence of such a change? In fact, Societe Generale spoke of the increasing risk of a global recession and in their opinion, this could mean another 40% drop in the major stock market levels.  Perhaps it seems like a very negative perspective but I am fearful of buying until the market lows of November are tested or until economic data starts to improve, there is just not much positive and no reason really for the stock market to improve at this moment. There is always a risk of missing a positive move but for now, I’m ready to remain on the sidelines or do as I have in recent weeks, do some long-short trading which should not be as affected by a market downward move….

What do you think – is China going to drag the stock markets down further or has it’s problems already been factored in?

Photo credit – taiyofj’s photostream.


Categories
Investing

BMO Dividend Reinvest Program Now Has 2% Discount

As a member of the BMO (Bank of Montreal) share purchase plan (and drip), I recently received a notice that there is now a 2% discount on any shares bought through the dividend reinvest plan (DRIP).  Please note that this is the share purchase plan run through Compushare – it doesn’t apply to shares bought through a brokerage.

My Dad bought me a BMO share a long time ago and I have to admit I’ve never added to the position.  I might do it eventually but in my case, paying off the mortgage and adding to the RRSP make a lot more sense then having a relatively tax-inefficient open account.

My kids both own a BMO share as well (thanks to Mr. Cheap) in which we will be doing the occasional purchase – I’m thinking maybe $100/year or something like that.  This 2% discount will only apply to the reinvested dividends but it is still nice.

Categories
Announcements

New Theme – Come To The Site To Check It Out

As you can see, I’ve installed a new theme on Four Pillars.  If you are reading this in an email or feed reader then feel free to click on through to the site to check it out. I’ve been wanting a new theme for a while and finally made the decision to buy a theme called Thesis.  This theme looks pretty good without much customization and is pretty easy to modify using widgets.

One of the unfortunate casualties of this change was the Canadian flag I had proudly flying in the header…let’s just say that Sheila Copps called and she wanted her flag back.  🙂

I didn’t have time to do a lot of the changes I had planned but hopefully I’ll get to them sometime this year. If you are interested in buying this theme then please consider using my affiliate link by clicking on the banner below. Please let me know if you have any layout suggestions or find any problems.

Also the logo was done by Pete over at Logos for Websites.  I would definitely recommend him – he’s fast and creative.  I think my instructions were something like “Gimme one of those logo thingys” and he came up with what you see up top. 🙂

My hosting is provided by MediaTemple.

Categories
Announcements

Are You Changing Your Asset Allocation? Contest for $$!

Glenn Cooke, President of InsureCan, is sponsoring a contest on this blog (and a few others listed below) where you can win one of two $50 Chapters gift cards. Here’s how to enter the contest:

In the comments – please answer the following question

“Have you changed (or are you going to change) your asset allocation as a result of the awful equity returns in the past year?   Please indicate any change ie “used to be 100% equities – now I’m zero percent equities”.

Answering this question will give you 1 chance at a gift certificate.  Subscribing to the blog if you don’t already do so, might also help your odds (but not likely) 🙂

Contest will be closed at 8 pm on Thursday, January 22.

Contest is open to Canadian residents only.

Check out similar contests at the Canadian Capitalist and the Financial Blogger.

Categories
Announcements

Friday, Jan 16 LinkStuff

Weight

182 pounds – down 1 pound from last week which is good.  Didn’t run this week because of knee problems which are hopefully temporary.

The Links

Jordan’s post this week on investing part of a house down payment in stocks reminded me of a Rob Carrick article on investing lessons learned over the past year.  One of the people mentioned was an investment advisor who advised a client to invest the proceeds of their recent house sale into equities even though they were planning to buy another house in a year.  I thought this was pretty bad advice and if I were that client, I’d be looking for a lawyer!  The most amazing thing is that the advisor used his name in the article – perhaps he should sign up for my other blog and learn something about investment time horizons?

Another article I read recently which quite amazed me was about student loans and unethical private loan companies.  While the premise of the article was interesting (students being taken advantage of by loan companies) the thing that blew me away was the student profiled.  She obtained a degree in photography in Santa Barbara and managed to rack up $140,000 in student loans!  Just to show that wasn’t a typo – $140,000 in student loans!!!!!

Who in their right mind would ever agree to graduate from a program with a ridiculous debt load like that?  I can see if you are in medicine or some guaranteed high-paying career path it might make sense, but for most people, it just doesn’t make any sense.

The blogs

Big Cajun Man had an interesting story about his recent layoff from Nortel and the fact that he was lucky to get out when he did.  Unfortunately employees who were more recently laid off (or are about to be laid off) might not get much of a severance package.

Jason from Frugal Dad has started blog about blogging called SideHustleBlogging.com – if you are interesting in blogging or the business behind it then check out this blog.

Million Dollar Journey had an interesting case study – a young couple provided their finances and wondered if they can afford a house.

Preet has some total return indices’ calendar returns for the last 15 years.  This is in Canadian dollars.

Financial Blogger explains why the markets are so volatile.

PFN and stuff

Money Ning is looking for advice on where he should live in 2009.

Blunt Money says that sometimes repairs are worthwhile in it’s going to cost more to fix it than it’s worth.

Squawkfox created a free printable workout log.

Canadian Capitalist reports that currency neutral funds are no bargain.

The Intelligent Speculator tells us about the flip side to leveraged ETFs.

Investing School explains the spread between the bid and ask prices for stocks.

ABCs of Investing wrote about setting financial goals and variable and fixed annuities and stock splits.

Carnivals

Carnival of Financial Planning was held at the Skilled Investor.

Categories
Real Estate

Not Making Any More Land?

I’ve written before about quotes being twisted for various purposes and being misleading.  One witticism for real estate investing which means what it says is “Buy land!  They aren’t making any more of it”.  The wisdom that’s supposedly encapsulated in this saying is that there is a finite amount of space on planet Earth and by staking your claim to some of it you stand a good chance of getting higher returns in the future (as scarcity drives up the price).  I think this is the wrong perspective for a great many reasons.

They *ARE* making more of it

A variety of artificial islands have been created.  These can be made using sand dredged up from the sea.  Cost is certainly a consideration, with some construction being estimated at a billion dollars.  However, if land started to get scarce this is an option.  As more islands are created, the techniques and technologies supporting it would become better understood and it would get cheaper to make more.

Beyond making more, we are continually getting better at supporting a higher population density.  While a person with modest needs might live in a 600 sq ft living space, if they live in a 6 story apartment building, 6 times as many people are using that same plot of land.  A 44 story building has just allowed the land below it to be utilized 44 times over.  Construction techniques are also always improving to allow higher and larger buildings.

If for some reason we hit a limit on going up, there’s always the possibility to dig down.  With 101 floors above ground and 7 floors below ground Taipei 101 is the tallest habitable building in the world.  This allows 108 times the usage of every square foot of land where this building is located.

Demand isn’t uniform

In some ways it might seem odd that we’re devoting billions of dollars of resources to make islands and 44 story apartment buildings when there’s so much land going unused.  With 3.3 people / sq. km Canada has a crazy low population density.  We could cram TONS of people into the Northwest Territories (which currently has a roomy density of 0.02 people / sq. km – I wonder if anyone up there ever sees anyone else? 😉 ).

The unfortunately reality is that people want to live in the areas where they’re making islands and skyscrapers, not in the Canadian wilderness.  If someone is blindly buying land “because they aren’t making any more of it” they’re going to be sadly disappointed when developers keep focusing on maximizing the usage of high demand areas (instead of blindly buying all land for sale).

Heck, during the recent run up in oil prices people started talking about the death of the suburb.  Even the well known idea of buying a big plot of land on the edge of town, then selling it decades later when the city has grown around it may or may not work in the future, it all depends where people want to live.

The father of one of my dad’s friends moved into a retirement home a couple of years ago.  His house in the small town he came from is STILL sitting unsold.  Everyone who lives there already has a place to live and no one is buying.

Rate of demand growth is slowing

While the human population is definitely growing, that rate of growth is slowing and has been for some time.  We’re moving towards a point where births will equal deaths and we’ll have a stable population number.  People used to talk a lot about over-population, but the math just isn’t there to support it.  Already Japan has a negative population growth (if it wasn’t for immigrants their population would be shrinking).  Other countries are following this trend.  This doesn’t say much about other resource demands, as more of the world is leading an increasingly affluent lifestyle.  Slower (or no) population growth certainly won’t allow the whole world to live a Western lifestyle, but land isn’t going to be the limiting element.

What if it IS true?

Even if this statement was true and if eventually people would be standing back-to-back covering the globe, I’m still not sure it would mean that pouring all your money into real estate is the way to go.

All sorts of finite resources exist, and the market finds efficient ways to price them.  We’re running low on oil, but I think putting all your money into an oil stockpile and hoping to massively profit in the future is a mistake.  The current reserves, as well as usage and growth in usage, are all very well known factors and are incorporated into the price.  New refining technologies and gaining access to previously unattainable fields (such as Alberta’s oil sands or underwater oil wells) are also factored into the price and could limit the gains your oil stockpile could make.  Alternative energy technologies would also threaten it.

Similar considerations are there for other finite resources.

What to do from an investment perspective

My view is to treat real estate investing like any other investment,  look at the deal in and of itself (or the allocation of REITs if you’re more of a passive investor).  Future scarcity of specific land is going to be VERY hard to predict, so unless you have some special skill in this area you’re just speculating.  Giving real estate investments preference because of some imagined inevitable payoff is a strategy that I think is very likely to disappoint.

Categories
Personal Finance

John Bogle: “The stock market is a giant distraction.”

This guest post is written by Mike from the The Oblivious Investor.   This blog has been around for a few months and is very investment oriented (but not too techy) so I would recommend you check it out (I’m a regular reader).

For me, the above quote was enough to make Bogle’s Little Book of Common Sense Investing worth the read.

In just 7 words, Bogle manages to:

•    Provide an insightful piece of investing wisdom.
•    Make you question your assumptions.
•    Offend an entire industry.

So what is Bogle saying here? I think he’s making two distinct points. First, he’s making a statement about intelligent investing. Second, he’s offering a rather pointed criticism of the financial services industry.

Passive investing is a good thing

As to investment strategy, Bogle (as usual) is suggesting a system of passive investing. We can’t predict whether the market is about to go up or about to go down, and attempting to do so will only harm our performance. Similarly, attempting to pick individual stocks is unlikely to prove successful.

So if we stand to gain nothing by timing the market or picking stocks, what’s the point in watching the market? There is no point. All it can do it tempt us toward poor decisions. Better to ignore it.

Financial service is expensive

Bogle’s second point is one about the financial services industry in general, and it’s a bit less obvious. At their most fundamental level, financial markets exist to connect providers of capital (investors) with users of capital (businesses). Without a doubt, this is a valuable service.

However, in recent decades, the financial services industry has convinced us that it performs another service as well: Enhancement of investment returns. This is, however, impossible by definition.

There’s no way that investors—as a group—can earn more than the total earnings of the businesses in which they invest. The total return earned by investors must be equal to the return earned by the businesses in our economy, minus the costs of investing.

We can therefore conclude that, rather than enhancing investor returns, the financial services industry must in fact be reducing investor returns by the sum total of all the fees that they charge us. Sadly, these costs of investing—mutual fund sales loads, fund operating expenses, brokerage fees, etc.—now total in the hundreds of billions of dollars per year.

Conclusion – ignore the market

I think Bogle’s reference to the stock market as a “giant distraction” is his way of telling the reader precisely how much value he sees in the services offered by most firms in the industry.

Takeaway lessons for us:
1.    Turn off BNN and CNBC, and
2.    Do your best to minimize the investment costs you pay.

About the Author: Mike writes at The Oblivious Investor, where he regularly reminds readers to ignore the noise of the market. If you like this post, subscribe to his blog to read more.

Categories
Book Review

Book Review: Findependence Day

The Canadian financial press has been very kind to Four Pillars, so I was excited when Power Publishers offered us a review copy of Jonathan Chevreau’s new book “Findependence Day”.

Most Canadians interested in personal finance already know Jonathan Chevreau from his column in the Financial Post.  While Mr. Chevreau has written previous books on finances, with this one his goal was to present information in “classic fiction structure”.  By this, he means that it is first and foremost a story.  As he mentions in his interview with himself, and a number of the review blurbs on the book, he seems to be trying to create his own version of “The Wealthy Barber”.

Unfortunately, while “The Wealthy Barber” successfully used characters and a narrative to reinforce the financial concepts being presented, in this book the financial concepts and the story seemed to struggle against each other, with neither being particularly successful.

The story takes a predictable path from a young couple appearing on a “debt reduction” style TV show along their way to eventual financial independence.  The man, Jamie, gets talking to the financial planner that appears on the show with him and sets a “Findependence day” for himself:  A point in time where he’ll have enough money that he will no longer need to work unless he wants to.  The term “Findependence Day” is used throughout the book with a desperation to coin a new term that reminded me of Gretchen trying to introduce the new slang term “fetch” in the movie “Mean Girls”.

Gretchen: That is so fetch!
Regina: Gretchen, stop trying to make fetch happen! It’s not going to happen!

In terms of a story, the characters are flat and undergo very little development.  Jonathan Chevreau feels that you need to exaggerate human traits to make characters come alive, but his characters ended up coming across as caricatures.  The dramatic tension he tries to create doesn’t work.

Often conversations between the characters would jump between financial topics and plot development.  Rather than clarifying the ideas being presented, which “The Wealthy Barber” successfully did, these two directions undermined each other.

Similarly, he tried to offer both information for Canadians and for Americans (one of his fictional couple is a Canadian, the other is American).  Again, by trying to go too broad, he ends up not covering either topic well.

For some reason he felt vinyl music and classic rock were very important themes in this work, going so far as to title each chapter after a classic rock song.  I can’t even guess how this is supposed to relate to the work as a whole.

When I started reading this book I first thought it would be interesting for someone who was interested in learning about personal finance.  I figured the structure might help them get through the boring bits on finances and sneak a few of the core concepts into their head.  Instead, I think it would be tough for a novice investor to dig out these ideas.  In the end I felt that I was able to understand what he was getting at because I’d been previously exposed to the ideas presented, but for a rookie trying to get a handle on their finances, I think this book would a poor choice.

Later I thought maybe it would be interesting for people with a good understanding of finance to have a narrative incorporating some familiar ideas, but as mentioned previously the story wasn’t particularly interesting or well executed.

As much as I wanted to enjoy and recommend this book, in the end I really can’t think of anyone who would enjoy it or learn from it, so instead I’d just recommend giving it a pass.  Here are some suggestions for best personal finance books.

Preet was optimistic about this book when he posted about it, the Canadian Capitalist also reviewed it and the reviews on Chapter’s website have been glowing.  An exerpt can be read here.  We will be giving away our copy of this book at some point if someone wants to read it in spite of my review (hey, who are you going to trust, the reviewers at Chapter’s or me?).

[add]After this went live, I came across another review at “Blessed by the Potato” which was fairly balanced (and the author himself commented).[add]