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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

July 30, 2015 | Lessons

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Some things worth knowing as we head into a weekend federal election call, a slagging Canadian economy and the biggest vacation period of the entire year. So slide on those flip-flops, grease up with SPF 30 and throw a tofu burger on the barbie. Here we go:

THURSDAY SEPTEMBER 17th: That’s the day US interest rates will rise for the first time in a decade. This is a big deal, with global implications – not to mention for your mortgage and our dollar. There’s now little doubt the Fed will pull the trigger that day, after this week’s economic report.

The American economy grew at 2.6% in the second quarter – more than forecast – and growth in the first three months of the year (plagued by snow and strikes) was revised higher. Job creation has stayed impressive while corporate profits are running higher than anticipated and we’re heading into a Presidential election year. Even legendary bond guru Bill Gross has thrown his cards on the table, saying cheap rates are bad for the world – creating asset bubbles, distorting capital flows and turning people into porcine debt-snorflers.

So, up she goes. And down goes the loonie. Then, in 2016, the Bank of Canada eats a giant crow and follows suit. Unless, of course, we’re in the throes of a scary recession. In which case we are will have a helluva lot of real estate news to share.

DINKY DIVIDENDS: Here are three headlines which splashed across the MSM this week as we settle into what’s looking like a long and serious commodities rout…

Cenovus looking to cut jobs, slashing dividend by 40 per cent
Goldcorp slashes dividend 60 per cent as price of gold tumbles
Shell to axe 6,500 jobs, cut spending to cope with lower oil prices

It’s been ages – almost seven years, in fact – since we’ve seen news like that. Trust me, the last thing CEOs want to do is cut dividend payments to stockholders. This makes the shares inherently less attractive, drops the capitalization of the entire company, torpedoes the market price and signals that the company’s entering survival mode and needs cash that normally would be distributed.

This also throws more cold water on the belief many amateur investors have that they should load up on dividend-paying stocks and eschew diversification. Bad idea. See why?

COWTOWN CARNAGE: Well, not exactly, but it may be coming. What does it tell you when a local real estate board tries to get out in front of public opinion, and issues a warning? Yup, crapstorm coming.

That just happened in poor Calgary. The realtors, who seven months ago predicted prices would rise 1.58% this year are now forecasting a slight decline in values and a big drop in sales – 22%. The effects of cheap oil are just starting to be felt, they say, and the city’s economy “continues to be plagued with a level of uncertainty.” You think? Just take a look at the headlines above – the big job cuts may only be starting. About 12,000 positions have been cut – a whack of them highly-paid engineers or execs – and the Conference Board is predicting twice as many will get the axe in the next five months.

“Employment conditions are expected to worsen and put increased downward pressure on wages. When combined with lower levels of migration, it’s expected that these conditions will cause further impacts on the housing sector.” So far this year detached homes sales have dropped by a quarter, luxury-home sales are a disaster and the rental vacancy rate has doubled. Commercial space for lease? Don’t even ask.

Only a year ago Cowtown was a swaggering mass of bidding wars, cowboy testo and realtors leasing Audis. If you can’t see a lesson in here, I give up.

CANADIAN SUBPRIME: Remember how we loved to make fun of Americans with their insane borrowing, their zero down payments, adjustable mortgages with teaser rates, subprime lending market and liar loans? Well, those days are gone.

Now we borrow far more than they, with banks giving 100% financing. There are 1.99% home loans, while subprime lending is the fastest-growing segment of the mortgage market as people finance down payments for million-dollar homes. And, yes, lender fraud. Apparently almost a billion in diddled loans from one company alone, Home Capital.

The largest ‘alternative mortgage lender’ in the land, as the result of an OSC investigation, was forced this week to reveal that 45 brokers were punted from its network for falsifying the incomes of borrowers. Yup, liar loans. In order to secure larger loans, brokers purposefully inflated the earnings of clients. Collectively, these bad seed brokers wrote about 12% of Home Capital’s 2014 loans, representing 5.3% of its outstanding assets.

This raises serious questions about how often this practice goes on among the nation’s tens of thousands of mortgage brokers. Besides, all of these falsely-obtained mortgages were insured by CMHC, and apparently still are. Worse, Home Capital (in its defence) said it did not verify the incomes of applicants, because it doesn’t have to. Apparently CMHC guidelines don’t require such a bothersome detail. “The practice met the standards of mortgage insurance companies, including the federal government’s Canada Mortgage and Housing Corporation,” it explained.

Still feel smug?

This doesn’t end well.

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July 30th, 2015

Posted In: The Greater Fool

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