June: Canadian Investment Outlook


Barron’s June 4th 2011 investment newspaper ran a great article by Michael Santoli who described the US quantitative easing situation as follows:

In typical fashion, stock investors are dreaming of more candy, while bondholders fret over the cavities and calories that more stimulus could cause. Harris (Chief Economist at Bank Of America) says that equity types are asking when QE3 will come, fixed-income investors when the Fed will tighten monetary policy. His answer to both: “Not this year.”

Corporate profits remain strong, macroeconomic numbers are softening, stocks remain not far off a multi-year high and stubborn fears of a recession relapse in the air. What will happen after the second round of US stimulus, known as QE2?

We asked one of our investment managers, Bruce Campbell, for his comments on the market overall and the issue of further stimulus:

The mild market correction of the past few weeks has deepened as global growth worries abound. The end of QE2 has investors worried. We are keeping our gold holdings high, will consider raising our cash levels, reducing energy and technology weights. Having a bit of cash to invest during dips through the summer makes sense.

The month of May resembled the month of April in terms of its trading pattern. Both months started up, dipped in the middle and recovered over the last two weeks. There was a significant magnitude to the swings but both months finished down modestly relative to the volatility. In fact, May probably would have finished flat with slightly stronger banking results in the last week – more on those shortly. The TSX closed the month at 13,803 which is up 360pts from the start of the year which is 2.6% or 3%+ when you incorporate dividends.

We started the month with the end of Bin Laden, the start of a Harper majority government, new COMEX leverage rules and better than expected job numbers. This was followed by the arrest and subsequent resignation of Dominique Strauss-Kahn, head of the International Monetary Fund. Unfortunately this occurred at a time when Greece is struggling with austerity plans, Italy was warned that its credit rating could be downgraded and Spain’s ruling party suffered a major hit in elections. It now appears that French Finance Minister Christine Lagarde is a lock as Strauss-Kahn’s replacement. In addition, it appears a Greek bailout plan is to be finalized by the end of June apparently without a restructure.

Closer to home, the Big 5 Banks reported weaker than expected quarterly numbers over the past month. All of the banks were hit by weakness in their domestic retail banking segments. This suggests that consumers are making a renewed effort to manage down debt levels. A softer housing market further pressured residential secured lending. Commercial lending was generally strong but not sufficient to compensate for the margin pressure from the retail. As a reminder, all five banks have important domestic operations but they also have an international strategy. The international strategy of TD, Royal Bank and Bank of Montreal is the U.S. – only TD has managed this strategy well and the Royal Bank is in retreat mode. The international strategy for CIBC has been the Caribbean while Scotia Bank has been very successful throughout Central and South America. A balanced portfolio of assets won the day as Scotia’s second quarter far exceeded those of the other four. A ranking of the five based on the second quarter would be: Scotia, BMO, TD, CIBC and Royal.


The Bank of Canada did not raise rates this month and despite stating that rates will have to increase ‘eventually’, any rate rises will be ‘carefully considered’. The BoC statement in general was very balanced. Inflation is expected to be above 3% ‘in the short term’ but only 2% by middle of 2012.

Hawkish comments that are consistent with a raise sooner rather than later:

  • Commodity prices expected to remain high
  • Canada’s economic recovery is ‘largely as expected’

Dovish comments that are consistent with no imminent raise:

  • Increased risks from ‘peripheral’ Europe … see above
  • Canadian economy still has ‘material excess supply’
  • ‘Greater headwinds’ from strong dollar

The consensus view is still two raises prior to year end with the first occurring in the third quarter – however, moved from July to September. It is our view that we probably will only see one raise before year end and if we were to assign probabilities it would be 30% September, 60% October and 10% Other.

The US economy is showing signs of relative weakness compared to expectations. Job numbers were very weak in the first week of June. Our very large weighting in gold is helping and feels like we should hold it for awhile longer.

We are at an inflection point where the economy will either re-accelerate with possible QE3 help or will stay soft. We are in the camp of this being temporary and the economy will get back on its weak but positive track starting in the third quarter. We may have front-loaded the correction and we could well climb the wall of worry in the back half of the year.

Is Canadian residential real estate overvalued?


Real-Estate-Overvalued-CanadaI was at a dinner party recently and the topic came up; “We’re renting, just waiting for property prices to tank” said Bruce. “Well this house has been our best investment ever, we built it 14 years ago and have watched it go up every year since” quirked Janice.

The debate on peaking property prices is now commonplace as we all wonder just how much longer we can expect things to remain good when so many countries have experienced such dramatic property price destruction.

The so called double dip in US home prices is here. On average home prices are selling at the same values that they were nine years ago, which are 34% below their 2006 peak. (Source: S&P’s HousingViews blog).

The Standard & Poor’s/Case-Shiller 20-city housing Index shows that the housing market remains in a protracted and horrendous bear market wherein housing prices have continued to fall.

Case-Shiller noted that prices fell in 18 of 20 major cities in the US in March and of those 18 the prices in 12 of them fell to levels not seen since 2006.

This is not good for US banks, among others. S&P calculates that a double dip in home prices could cost US banks an additional $70-80 billion in loan losses.

The man who called the last two bubbles, Mr Baker, calculates that U.S. home prices still have 10% to drop. He wrote; “given the continued near-record vacancy rates and huge inventory of homes in the foreclosure process, there is no reason to think that house prices will stop falling anytime soon.”

But what of Canada’s real estate market? He said; “I would be very wary in markets like Canada. In fact, I would be very, very wary.” (G&M June 4th 2011)

The Economist magazine’s latest survey of global home prices claims that Canadian real estate is overvalued by a staggering 23.9 per cent.

The Economist determines fair value by comparing the current ratio of house prices to rent with the long-term average, which is one of the major, fundamental determinants of house prices.

By that measure, Australia led the way among the overvalued markets, with homes 63.2 per cent more expensive than they should be, followed closely by Hong Kong, where the housing market was 58.1 per cent overvalued. By comparison, the Economist says real estate in the United States is undervalued by 2.1 per cent, and houses in Japan are 34.6 per cent cheaper than their fair value.

The magazine says Canadian home prices rose by 4.5 per cent over the past year, and gained 70 per cent between 1997 and 2010.

Canadian real estate has become very expensive as evidenced by the ‘house price to income’ ratio, which is at its peak, 40% above its long term average. The translation is that our houses are too expensive relative to our incomes.

The United States had a similar spike only to have this ratio fall back to normalized levels and we should expect that Canada will be no different.

We recently featured the TVO Agenda program that made a strong case for renting given the many hidden costs of home ownership and demonstrated the rates of return of equity markets clearly favor not owning a home, see “A case against home ownership”.

The April 2011 issue of the Toronto based Post City Magazines, published the result of a roundtable discussion on the future of our real estate market. There is no mentioning of science or complex mathematical modeling; however, the discussion is diverse and informative. Click here to read the full story and then decide for yourself.

A December 2010 report on Canadian home prices concluded that;

‘Though overpriced, the absence of widespread speculation and egregiously loose credit standards suggests the market is not in a bubble. Instead, Canada’s housing market remains reasonably affordable because of exceptionally low interest rates. Barring a sharp spike in mortgage rates or a relapse into recession, a substantial price correction is unlikely to occur. The greater risk could be that sustained low interest rates might recharge the housing market and inflate a true bubble that ultimately bursts when rates normalize.’

(Source: TriDelta News)

“She Didn’t Update Her Beneficiary Form” – Joan’s Story


When major life changes occur, forgetting to update insurance and will beneficiaries can have unhappy consequences. Our senior financial planner Heather Holjevac shares this real life story of her client Peggy and daughter Joan, to illustrate the importance of accurately updating your chosen beneficiary.

“When a prestigious law firm in New York recruited Joan for an internship, she seized the opportunity. Unfortunately, she had to leave her boyfriend behind and after a year, the long distance relationship ended. She moved on to meet and marry Jeff, and got pregnant. It was not an easy pregnancy and sadly, when the baby was delivered, the doctors found a large tumour in Joan’s ovary and she was given 3 months to live. To the day, 3 months later Joan passed away.

Since Joan lived in the US while working, it took longer to settle the estate. On a warm summer day, a courier delivered a cheque to my client Peggy. She opened it and in the envelope was a cheque for $75,000 US which was Peggy’s 50% share of Joan’s company life insurance policy benefits. I commented that it was nice that her husband and new son would get the other half.

Peggy looked at me with tears and said no, that the other 50% of Joan’s life insurance went to her ex-boyfriend.

The insurance money that went to the wrong benenificiary

Turns out when Joan was hired, her benefit forms were all filled out naming her ex-boyfriend as beneficiary, the intent was to someday get married. When they broke up and Joan married Jeff, the health benefit forms were updated, but not the life insurance beneficiaries.”

If a Life insurance policy has a named beneficiary, then the proceeds do not go into the estate and therefore are not governed by what is stated in the will. This story should serve as a reminder for all of us to be more diligent in keeping our will current and also the all important beneficiary designations updated, particularly after major life events such as marriage, divorce, death and births.

Tips to Manage your Parents’ Money


For an adult child, being asked by your parents’ to manage their money can be a potential minefield. If  you have stayed out of your parents’ financial decisions until this point, it can be overwhelming to even know where to start. In addition, conflicts may arise with your siblings, other family members or parents themselves if others are not happy with your financial management style.

Whether it is for power of attorney situations or because your parents’ simply feel more confident having you take charge, tread carefully and keep in mind these four rules:

1) Understand the full financial picture.

Like any financial planner, you can’t do a good job managing someone’s investments unless you understand their situation, including how much risk they need to take, their annual expenses, income, assets and their personal risk tolerance. If you are not able to communicate or have access to the whole financial picture, then you simply can’t do a good job. Do not wait for an emergency or an illness to get yourself involved. Encourage them to explain to you their full financial picture now so you can be ready. Sit down with your parents and gather all important information (such as account numbers, passwords, company affiliations etc) in a document like the  Tridelta Financial Planning Questionnaire.

2) Don’t be afraid to use a professional.

Even if you manage your own money, you may want to work with a professional when handling your parents’ money.

There are three reasons for this:

  1. It takes some of the responsibility and burden off of you and your siblings might be more comfortable in this setting
  2. A good financial planner can often provide a wider range of insurance, investment, savings and tax options than you might be able to on your own
  3. A planner in emotionally removed from the money. Especially when managing your parents’ money, emotions can wreck havoc on investment decisions
Managing your Parents' Finances can be complicated

Photo: kenteegardin

3) Know how much capital is needed to support your parents.

If a parent might reasonably live to age 90, plan for age 95 and know the capital requirements. If their current amount won’t cover potential needs, you might be restricted in taking risks. However, if someone only requires $350,000 in income and has $1 million, it might be a mistake to be too conservative. Manage the necessary capital safely, but the other $650,00 should be managed based on a higher risk tolerance (for example, don’t make the mistake of an all-GIC portfolio).

4) Communicate with other family members.

In almost every case, there will be some criticism from other family members of how you are managing things. It is one of the reasons why it is sometimes better to hire a professional to take the heat. In any case, you can minimize criticism by communicating what you are doing, why you are doing it, and to get notional buy-in.

While it is a big responsibility to manage your parents’ money, remember these four tips and remember the ultimate reward of this: you parents’ and family’s appreciation.


Psychology: The Role of Emotions in Investing

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Everybody seems to “know” that getting emotional about investment decisions and market fluctuations is a bad idea. However, when it comes to making investments, human psychology often plays a large role and investors have a difficult time keeping emotions out of it. It goes without saying that this type of “emotional investing” can lead to very negative consequences.

One of the most common examples of emotions posing an obstacle to smart investment decisions is when it comes to “risk tolerance.” At the first sign of discomfort, many investors run to “adjust their risk levels.” I believe that it is more prudent to avoid this temptation. Because “risk tolerance” is a concept derived from our emotions, and not our intellect, this is every bit as volatile as any human emotions.

Successful investing is to a large extent managing our emotions, which often prompt change at precisely the wrong time.

People also change their “risk tolerance” in reaction to, rather than in anticipation of, market movements, which confirm it is also a lagged response.

Another key observation is that individual investors react to market movements by altering their comfort and “risk tolerance” in line with market cycles rather than against the cycle as should be the case.

Let me explain. As stock prices rise – and especially as they rise sharply, which reduces stock value – the investor perceives that risk in those companies/markets is actually declining, when in fact it is rising.

Since price and value are inversely related, risk is greatest when prices are high; the opposite is equally true. As stock prices rise there is less and less substance supporting the advance. Hence, the curve of a rising stock market is synonymous with rising risk.

Top -performing equities and mutual funds continually demonstrate this counterintuitive trend. Remember Nortel? At its peak people could still not buy enough. And the reverse remains true, which is when the individual investor no longer wants to own stocks and it is precisely at this moment that you can be sure we’re approaching the point of maximum financial opportunity. Just ask Warren Buffett or Peter Lynch when they get excited. It’s certainly not at market tops; that’s for sure.

The following chart illustrates the importance of managing our emotions when investing. Notice that if you relied solely on your emotions, you would drive yourself out of the market just before the point of maximum financial security. As our emotions become more negative, we often forget the bigger picture:


Human nature will ensure that this trend lives on, but through us you have the opportunity to disassociate emotional investment decisions by allowing us to invest professionally and ensure long-term success.

To avoid another investment myth, read about the reasons an age-based investing strategy may not be right for you!

The High Cost of Owning a Home in Canada

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A recent TVO agenda program claims that there is a strong “case against home ownership”. When examined from a purely financial perspective, there is a high cost of home ownership in Canada. Case after case shows it could be cheaper to rent for many than to try to own their own houses.

Here is an example.

A Toronto property is up for either sale or rent. The listing is for $680,000 and the rental is at $2,700.  At these rates (and considering you take a mortgage), the annual rent is only 4.8% of the sale price. If you attempted for home ownership, this amount would easily be taken up by property tax, insurance, mortgage interest (or opportunity cost), maintenance etc.

The TVO Agenda program, A Case against Home Ownership, discussed this issue amongst a panel of distinguished guests. Here is the full video below, as well as highlights from the show:

Some highlights include:

  • Historical rates of return on investments in housing versus equity markets clearly favour not owning a home. As stated by the economist Professor Shiller, “If there are no other considerations, you want to own a diversified portfolio of stocks and bonds and then rent and you’re putting yourself into assets that have historically done very well in contrast to housing”.
  • Home ownership rates in Canada have climbed steadily since 1970 to a current 68% ownership. This is very much in line with the US rate, currently at 67%. This is however in stark contrast to Switzerland for example that is only around 33%.
  • Society and consumer psychology has evolved to home ownership as the definition of the nuclear family. Given the huge number of single parents, renting a home could become the new trend instead, allowing people to be more mobile.
  • The business of America through government intervention became “housing”, which resulted in much of the recent collapse in many US residential markets.
  • Demographic trends dictate that Baby-boomers will be dumping their houses in exchange for town houses, condo’s and seniors homes

We generally believe that much depends on your life stage, but that the staggering rise of house prices in Canada over the last few years suggests that if you don’t own, it’s probably a good idea to keep renting for a while.

Critics like Professor Milevsky of the Schulich School of Business still point out that the argument for or against home ownership is too financially focused.  “It’s (the debate) lost the qualitative lifestyle aspect that should drive the decision.”

If you liked this article, read the 5 reasons why it may be better for you to rent instead of own your cottage.