Book Review: Greater Fool (Part 1 of 2)
Subtext: Invest in Canada?

With the U.S. markets on the decline, every buyer out there is asking if the same will hold true in Canada. For my own interests, I will focus on Garth Turner's discussion about Toronto. His arguments that Canadian real estate is not immune to what is going on around the world use some of these points:

Economic:

• Majority of exports is to the U.S.
  
• Majority of oil is exported to the U.S.
  

Consumer:

• Canadian personal savings rate is similar to U.S. personal savings rate
• 30% of condos in Toronto are investments (after 1989, owners rented condos at a loss)
  
• mortgage payments account for a substantial amount of consumer expenditures
  

Turner discusses the role of the dotcom bubble and 9/11 in the U.S. housing bubble effectively. He also discusses the role of demographics over the next 10 years, and environmental issues as factors that will influence the real estate market in the future. I did not, however, find the latter two arguments to be very effective. Nevertheless, for $16 this book is worthwhile reading for anyone who wants to buy real estate. After all, $16 is far less for a buyer than a single percentage drop in the price of a home.

Retrospective:
I previously visited the notion of a weaker real estate market back in June 2008. Since then, some things have changed for Canada:

• Commodity prices collapsed (See TCK, AA, ABX)
  
• Canadian dollar rallied
• GM/F collapsed in share price - there are rumors that 10% of the workforce will be cut
• Nortel cut jobs; its future is in doubt
  

From an international investor point of view, Canada represents 30% resources. This sector will rally about twice the rate of other sectors if the stock markets recover. It will also decline by twice the rate.

From a real estate perspective, the above factors are too great to ignore. The only positive is that the Canadian dollar is stronger. This should benefit the manufacturing sector.

So, let's simplify the investment strategy, because there are simply too many things to monitor (let alone the health of the U.S. markets).

Right now, trading is dominated by economics. Recession/"Depression", consumer spending, deflation, government debt, and government policy. If we roll up all of these factors, the gold sector comes to mind. It would appear to me that there will be numerous reasons to eventually buy into this sector. Note that gold producers will move more over the underlying commodity. My favorites are: Goldcorp, Barrick, and Kinross.

Stay tuned.

Another Long Idea (Part 2 of 2)
Think poor. Think saving money.

What does the consumer NOT do? The consumer will avoid expensive ticket items (cars, LCD TV's, electronics, computers, items over $1,000).

What DOES a consumer do? Go thrift. Eat burgers, shop discount.

Yumm. Cheese-burgers (not the expensive big macs):


A dollar can go a long way:
Walmart might be everywhere, but so will shoppers looking for one-stop low-cost shopping:




Time to go to fewer yoga classes and to wear sweats at home with yoga videos (SELL):

Job Losses a Concern

Personal Notes:
I briefly celebrating a top-5 position with an "elite" ranking on FSX Player, a stock trading game on Facebook, before falling to 8th for the week. I strongly recommend that even seasoned, experienced investors join the trading game. Investors may test trading strategies without real-world losses.

Now on to the Negativity:
The U.S. reported unemployment rose to 6.5%. The total job loss for 2008 is now 1.2 million. Both GM and Ford reported very poor results, and announced intentions to layoff staff. The theme for the economy remains unchanged. This ongoing theme might be hidden amongst all the headlines about bailouts and stimulus packages from other global nations.

The economic theme is as follows:

• The automobile market is experiencing a "depression-era" economic downturn, precipitated by but suffering more than the housing sector
  
• The financial sector will benefit from loosening liquidity in borrowing
  
• Housing is severely weak in the U.S. and its problems are only slowly showing up in other nations (Canada, Europe, China)
  

The unemployment report needs to be assessed. Growing job losses is now only beginning to feed into the consumer sector. I had already noted that semi-conductor/IT companies warned on weaker revenue last month. This leading indicator makes it no surprise that consumers will spend far less in the months ahead. Christmas is only one month away, but consumers have already been cutting back.

At this time, day traders would benefit most from a market moving in no particular direction. I continue to monitor and search for longer-term plays, as I prefer to hold a few quality companies/ETFs that will make money over an extended period of time.

Investor interested in products/sites I promote, or for my research report should email me at chrispycrunch [at] gmail [dot] com.

A Long Idea: Activision


Activision is displaying a technical signal. A rally to $14US is possible. The stock is trading relatively stronger to the S&P500 (not shown). Fundamentally, the company has a very good basket of products that will appeal to the consumer. The product success and mix is important for the company, because weakness in consumer spending in the next few months is expected.

Toronto Real Estate: Price Moderation in October

I have compiled some aggregate sales figures for Toronto Real Estate for the month of October. It is the same story. There is a flurry of active listings when comparing monthly and yearly figures. The total sold has fallen in most areas. Prices have mostly fallen

Monthly
Central - activity (# listings) up 14%, but total number sold is down 16.8%. Average prices up 1.6% but median prices down 5%
East - activity (# listings) up 2%, but total number sold is down 22%. Average prices up 1% and median prices up 3.5%
West - activity (# listings) up 3.5%, but total number sold is down 19%. Average prices down 7% and median prices down 9%
North - activity (# listings) up 2.4%, but total number sold is down 22%. Average prices down 5.9% and median prices down 0.7%


Yearly
Central - activity (# listings) up 65%, but total number sold is down 44%. Average prices down 9.2% but median prices down 17%
East - activity (# listings) up 21%, but total number sold is down 14%. Average prices down 3% but median prices up 0.5%
West - activity (# listings) up 28%, but total number sold is down 13.4%. Average prices down 7.8% and median prices up 1%
North - activity (# listings) up 48%, but total number sold is down 39%. Average prices down 7.2% and median prices down 4.5%

Why would prices be falling here? We see no major job losses and Toronto does not have direct exposure to the fallen commodities market. Supply is increasing because people are seeing the US housing bust storm headed our way. The Toronto stock market was also weak last month due to the falling commodities prices globally.

Just this past weekend I would stroll along various streets. There are literally 3-5 open houses on some blocks.

Toronto Real Estate Prices Finally Fall

National Post announced the housing boom in Toronto is finally over, because average prices have fallen for the first time in 12 years. Here are the figures from TREB (The Toronto Real Estate Board):

• Average prices fell to $393,647 year-over-year in September 2008
• Sales were down 6% from a year ago, and down 11% in Toronto
• Housing "supply" increased 19% year-over-year to 16,236
• Days on the Market increased to 36 days, from 31 (year-over-year)
• 905 sales declined 3% (to 3,878) but average price increased to $352,071 from $351,641
  

Analysis:

• 2007 was a strong year, so the figures illustrating the decline are exaggerated
• A month-over-month comparison is required to get a truer picture of the health of Toronto real estate
• Using averages is too broad: median home sale prices and an analysis

Some counter-figures:

• For Central "C" area month-over-month average prices increased 6.2% from August to September, and median prices increased 12.2%
• For Central "C" area year-over-year (Sep 08 vs Sep 07) average prices declined 7.5%, and median prices declined 2.4%
  

One thing is for certain: the days for bidding wars is long over. I find it hard to perceive buyers over-bidding for homes when the supply has increased.

Risks are increasing that the Toronto housing market will falter further, the longer the U.S. economy struggles. Ontario (and global countries, already facing substantial housing bursts) is not special and therefore not immune to the weak US economy. In short, the U.S. is an important trading partner for this province.

Lower home prices is simply good news for the buyer who is not willing to devote a large pay cheque to paying down monthly mortgage payments.

Raw Material and Commodity Prices Falling. Buy These Stocks

There is a stealth bull market brewing. FSX Players take note. Companies that benefit from lower grain prices, like General Mills, is performing well. In Canada, George Weston rallied back. It's quietly clear that the market is betting the bailout will result in dis-inflation and slower growth. Again, watch the US Dollar, gold and oil prices, and stocks like Potash.

What the 700B Bailout Delay Could Mean for Canada

Many are asking if or when the frozen credit system and slower growth in the U.S. will impact the Canadian economy. The answer is broken down to a number of points:

• The energy index fell greater than the TSX Index
  
• The materials index fell greater than the TSX Index
• 5-year first time mortgages reached almost 8% (signaling a flight to safety)*
• The auto industry remains in a decline
  
• Gold rose
  

* as reported by Diane Francis in Financial Post for Sep 30. Rate could not be verified

Impact on Toronto Real Estate

I have been assessing the Toronto real estate activities for 2008. The theme remains the same: listings are increasing (supply), days on the market is increasing (activity is slowing slightly), housing prices have increased. With mortgage rates rising significantly due to the events in the U.S., the purchasing power for consumers will weaken.

As we have already seen, provinces most exposed to the commodity market will see declining profit (and a need to hire more workers). Again, there will be pressure on the demand side of the housing market.

At some point, perhaps in a month's time, the prices for homes in Toronto will need to adjust to the pressures of the global economy. After all, other countries have been proven to be impacted by the weak U.S. economy. This includes China, London, India, and Europe. Canada will be no different.

Chart below: U.S. Energy Sector reflects economic health for Canada:


Source: http://stockcharts.com/charts/gallery.html?XLE

What Credit Crisis?

Business reports around the world are reporting last week's trading activity was net neutral. For example, the Toronto Stock Exchange was up 1% for the week. The Bush Administration is creating another bailout package that will cost US $700 Billion. This is a massive amount. Worse is that this is on top of the cost of saving AIG ($80B) and Fannie And Freddie Mac ($200B combined). The total deficit excluding these items will be $482 Billion.

It has taken me months to really comprehend why the credit market is seizing. Mortgages were given out to many homeowners who should not have qualified in the first place. Why? There were "workarounds" against the checks and balances associated with calculating the risk these homeowners would default. The repackaged debts, CDOs, and other instruments that were created still actually have value, but there is no market for them. What do you assign investments that have no buyers? Zero. Yet these debt obligations have property backing them, so its book value should not be zero.

The government is effectively buying all of the above illiquid debt obligations and creating a market for them. This should solve the problem of the credit market seizing up. In fact, this was so severe that several money market funds had a redemption value of $0.99 for every $1.00 deposited. Investors were even buying US 30 day T-bills were paying almost 0% interest.

The action taken by the Government was necessary. Now, as stock investors, we must review the consequences of this drastic bailout, and make a few assumptions.
Let's start with the logical assumptions:

1. Credit markets open up again, making it easy for consumers to borrow again
2. Consumers re-gain confidence and boost spending
3. Companies boost revenue because consumers are happy again and buying their things
4. Companies do not lay off employees because their sales are steady
   
5. Companies import raw materials, developed products thus aiding in economic growth for China, India and Europe
   
6. US Consumers take out mortgages and buy homes, and assume that housing prices will not fall the next month
7. US Consumers take on more credit card debt, and don't mind paying the high credit borrowing rates

Assumption #2, Consumer Confidence, will be a key factor in ensuring the latest banking sector bailout succeeds.

Consequences to stabilizing the Financial Sector:

1. The US will buy debt and increase Money supply, fueling inflation
2. Higher consumption = Higher supply of products = Greater demand for oil, metals, and other commodities
3. Interest rates will need to increase, creating higher borrowing costs
   
4. The US dollar will weaken
5. The US is spending $400B a year just to pay for the interest on the debt. This will severely limit the ability for the next President to fulfill spending promises.

It's clear that the cost of this massive government action will be severe inflation. Therefore investors need to do the following:

• Buy gold (trades inversely to the price of the US Dollar)
  
• Buy commodities, especially oil
• Sell US Government Bonds (I can no longer recommend TLT)
• Begin to take a position on the consumer discretionary sector and semiconductor sector

The VIX (Volatility Index) peaked on Thursday @ 42.16 and is headed down. Stock markets will probably trade in a range but may risk re-testing lows reached early last week.

...and On Toronto Real Estate?

The renewed bank sector stability in the US will have a positive impact on Ontario's economy. Home buyers will be less fearful that the weakness in housing in the U.S. will spread here. As always, I would recommend home buyers monitor the health of the commodities market and the job market. These two factors are good indicators for the health of home buyers.

I recommended TLT on September 4th. It is now a SELL.

Notes on the Lehman Brothers Fallout

Excerpt from The Economist:

Even if markets can be stabilized this week, the pain is far from over—and could yet spread. Worldwide credit-related losses by financial institutions now top $500 billion, of which only $350 billion of equity has been replenished. This $150 billion gap, leveraged 14.5 times (the average gearing for the industry), translates to a $2 trillion reduction in liquidity. Hence the severe shortage of credit and predictions of worse to come.

Indeed, most analysts think that the deleveraging still has far to go. Some question how much has taken place. Bianco Research notes that while the credit positions of the 20 largest banks have fallen by $300 billion, to $1.3 trillion, since the Fed started its special lending facilities, the same amount has been financed by the Fed itself through these windows. In other words, instead of deleveraging, the banks have just shifted a chunk of their risk to the central bank. As spectacular as this weekend was, more drama is on the way.

Full Article: http://www.economist.com/finance/displayStory.cfm?story_id=12231236&source=features_box1

Analysis:

• WaMu and AIG might be next to file for bankruptcy
  
• Look for the U.S. Federal reserve to lower interest rates
• Monitor for weakness in the US dollar rally: a weaker US dollar is bullish for commodities and most especially, gold.

Note that the VIX (Volatility Index) closed at 31.7. This indicates the market is reaching a capitulation phase.

Canadian Real Estate Not Immune to U.S. Housing Weakness

According to CREA:

• Sales of previously owned Canadian homes fell 3.4 percent in August from July
  
• Year-over-year, resales were down 19.3 percent
• Average house prices fell 5.1 percent from the year before to C$316,052 ($296,160)
• number of new listings in the country's major markets fell 5.3 percent on a seasonally adjusted basis, to 47,657 units

Price weakness was greatest in Vancouver. In Toronto, prices actually rose very slightly in August.
Full Article.

Analysis:
Home buyers need to continue to monitor the health of the Canadian job market. With the commodities/resources sector now declining very rapidly over the past month, the risks are higher that job losses will increase for Canada. Therefore, the Western part of Canada (Alberta, Calgary, Vancouver) will be hit harder than the other provinces first.

The housing market weakness in the U.S. is due predominantly to tight credit market conditions, and the banking failure fallout of FRE, FMN, LEH, and soon AIG and WaMu.

Canadian Housing - No Bust Just Yet

After declining 5.3% in June, the value of building permits increased 1.8% to $6.4 billion in July, mainly as a result of multi-family dwelling permits in Central Canada and industrial construction intentions in Saskatchewan.

In the residential sector, the value of building permits rose 2.7% to $3.7 billion, mainly as a result of an increase in the value of multi-family dwelling permits in Ontario, Quebec and Manitoba.

In the non-residential sector, the value of building permits edged up 0.6% to $2.7 billion. An increase in industrial construction intentions more than offset declines in both commercial and institutional permits.

Residential: Increase in multi-family dwelling permits

After two consecutive monthly declines, municipalities issued $1.5 billion worth of permits for multi-family housing in July, up 9.6% from June.

At the same time, single-family permits declined 1.4% to $2.2 billion. Ontario accounted for more than half of the decline, while Quebec posted a second consecutive monthly increase in single-family housing.

Municipalities approved 19,518 new residential dwellings in July, up 12.0%. This was due to a 24.4% increase in multi-family units. The number of single-family units approved declined 1.4% to 8,257.

Source: www.statscan.ca

Analysis:

The figures are skewed by building starts for condominiums in July. Real estate activity continued to increased but so did supply. Investors must continue to monitor the health of the commodities market (currently declining), unemployment levels, and the health of U.S. banks and U.S. real estate market.

How Real Estate Stocks Are Performing

Some of the Canadian real-estates stocks that have stabilized include Brookfield Properties, Riocan, and Rona. Although technical signals for these stocks are positive, there are risks in their fundamentals.

Brookfield properties has the potential to rally to $28. Careful, as it has heavy exposure to New York's commercial property market:

Riocan:

Rona's Rally quite a surprise: