Another brilliant post from Morgan Housel of venture capital firm Collaborative Fund has direct implications for the Canadian housing markets. Mr. Housel discusses the research of famed economist Hyman Minsky who concluded that market bubbles were an evitable outgrowth of asset markets.
The column highlights an important reason that bubbles occur, “Bubbles have less to do with rising valuations and more to do with shrinking time horizons among people playing a different game than you are.”
He illustrates this thought by asking how much an investor should have been willing to pay for Yahoo! stock in 1999. His answer is that depended on ‘who’ you were. An investor with a 30-year time horizon would estimate the present value of the next three decades of Yahoo! cash flow. A 10-year investor would look at industry prospects and management skill and get a much different target stock price. A day trader wouldn’t care about price – they’d just use technical analysis to scalp a few dollars per share.
Canada’s hot real estate market presents a similar dilemma. A prospective homebuyer who intends to live in the house forever might have a maximum buy price calculated using long-term average home price appreciation and estimated inflation.
A condo buyer intending to buy numerous units and rent them out looks at supply and demand for condo units, trends in rental income, prospective mortgage rates five years out in order to maintain positive cash flow – the difference between mortgage payments and rental income.
House flippers only really care about when the bear market in real estate begins. As long as they can turn the property over quickly, the buy price doesn’t matter much. Foreign buyers from China with the primary goal of moving funds offshore to avoid confiscation are similarly not price-sensitive.
The extent to which speculation and foreign buyers are driving domestic home prices is difficult to assess because of a lack of data. Anecdotally, we know this activity is higher than normal, and to the degree that Canadians looking to buy a home to live in for decades are bidding against parties who don’t really care how much they have to pay, they are indeed playing ‘a different game.’
-- Scott Barlow, Globe and Mail market strategist
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you, you can sign up for Globe Investor and all Globe newsletters here.
Stocks to ponder
SIR Royalty Income Fund (SRV.UN). SIR Royalty is one of about half a dozen restaurant royalty funds in Canada. The key thing to understand is that these royalty funds don’t own any restaurants; rather, they indirectly own trademarks that they license to the restaurant operating company in exchange for a royalty based on sales. It offers an 8 per cent yield. John Heinzl takes a look at the investing case for this stock.
Trinidad Drilling Ltd. (TDG-T). When the board of Trinidad Drilling Ltd. announced in late February that they had “initiated a strategic review in an effort to enhance shareholder value,” investors paid very little attention. Earlier this month, however, Trinidad Drilling issued a press release to announce the sale of its Saudi Arabian rigs as evidence of progress in this strategic review. This prompted Robert Tattersall to revisit the year-end financials to see whether the board was on to something. (for subscribers).
The big question: Will strong earnings finally spark a rally on the lagging TSX?
The good news is that a strong Canadian earnings season is shaping up, providing a potential support for domestic stocks at a time of considerable volatility. The bad news is that nothing has succeeded in igniting the Canadian stock market over the last year – not earnings, not the economy and not oil prices. Despite synchronized economic growth here and globally, despite several consecutive quarters of double-digit corporate profit growth, and despite a dramatically improved global market for crude oil, Canadian stocks have failed to keep pace with other developed markets. Tim Shufelt reports (for subscribers).
Skepticism emerges ahead of earnings reports this week for Facebook, Amazon and Alphabet
Everyone knows the tech giants have grown huge. But few people realize just how huge. Put it this way: Three of the most iconic names in technology − Facebook Inc., Amazon.com Inc. and Google’s parent, Alphabet Inc. – are together worth more than Canada’s S&P/TSX Composite. Add in Apple Inc. and Netflix Inc. and the market capitalization of the group swells to more than the entire German stock market. The massive size of the FAANGs (for Facebook, Apple, Amazon, Netflix, Google) will ensure attention when three of them − Facebook, Amazon and Alphabet − report first-quarter results this week. But what’s particularly intriguing this earnings season is the hint of skepticism that’s beginning to emerge about what lies ahead for these gigantic success stories. Ian McGugan reports (for subscribers).
The case for Canadian tech stocks
Canadian technology companies are often overlooked by investors. That’s too bad: The sector has been demolishing the Canadian benchmark index over the past year and keeping up with the mighty Nasdaq Composite Index, home to tech giants Apple Inc., Amazon.com Inc. and Google. Is the sector worth a closer look? David Berman reports (for subscribers).
These dividend stocks have bucked the downward trend brought by rising rates
Rising interest rates are generally bad news for dividend-paying stocks. As returns on safe government bonds rise, investors tend to shift more money into fixed-income assets, depressing the price of interest-sensitive securities. Of course, this is nothing new. I have dealt with the implications of rising rates on several occasions. Everyone should know what to expect. Gordon Pape takes a look at some stocks that have been able to buck this trend. (for subscribers).
Investor suit targets fund managers for wrongly charging advice fees
Investment-fund managers may be held responsible for do-it-yourself investors being charged millions of dollars in fees for advice they are not receiving, according to a recent lawsuit filed against TD Asset Management Inc. Earlier this month, two Ontario-based law firms, Siskinds LLP and Bates Barristers P.C., filed a proposed class-action lawsuit against TDAM regarding trailing commissions paid to discount brokers on certain TD mutual funds. Clare O’Hara reports.
Where not to seek investing advice
Ask Dan Solin, author of the Smartest series of investment books, to talk about bad advice coming from television’s financial pundits and he gives a short laugh. “How much time do you have?” he asks. As it turns out, much of what emerges from today’s 24-hour financial news cycle, especially in the United States, drives him bonkers. Opinions about stock picking, trading manoeuvres and market predictions are a dime a dozen, but solid, balanced information is usually in short supply. Kira Vermond reports.
Seeking income? Here’s a five-pack of 5% dividend stocks
The sad year-to-date performance by the Canadian stock market has had some positive results for income seeking investors. As of late April, it was possible to get a dividend yield of 5 per cent or more from a five-pack of stocks in the S&P/TSX 60 index. A company doesn’t get into the 5-per-cent club without its share price coming under attack from unhappy investors. But a yield of 5 per cent from a blue chip member of the 60 index (large, liquid stocks) is an attention-grabber. That’s more than double the latest inflation rate of 2.2 per cent. Rob Carrick takes a look at these five stocks (for subscribers).
Top Links (for subscribers)
Others (for subscribers)
Others (for everyone)
Number Crunchers (for subscribers)
Ask Globe Investor
Question: I have been lucky over the years in investing and now have sufficient funds that an average 4-per-cent return would be enough to support my wife and I without touching the capital. As banks and utilities pay decent dividends, and have very low chances of going out of business, would investing in them for the long term be a good idea? This would allow me worry free long-term security, free of concern about the market’s ups and downs.
This is a good strategy as long as you are comfortable with the probable dips in the prices of interest-sensitive stocks as rates rise. There are many high-quality companies that offer good yields and are unlikely to go out of business no matter what the economy does. Your portfolio could include shares in companies like Scotiabank, CIBC, BCE, Telus, Fortis, Canadian Utilities, and TransCanada Corp. If you want to add some high-yield U.S. stocks to the mix, look at AT&T, Verizon, and Southern Company.
One suggestion: don’t invest everything at one time. With rates rising, yields are likely to improve in the coming months. Take positions gradually to take advantage of that.
Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.
What’s up in the days ahead
As interest rates continue to rise, where’s an investor to hide? Stocks and bonds both look unattractive in this environment. But there are a few other options open to investors. Ian McGugan will share his thoughts.
More Globe Investor coverage
For more Globe Investor stories, follow us on Twitter @globeinvestor
Click here share your view of our newsletter and give us your suggestions.
Compiled by Gillian Livingston