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February 17, 2016 | Patience

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.

Let’s clean up a few items.

A few mutts on this blog joshed yesterday about buying Bombardier stocks at 89 cents, since it was so damn cheap. After all, this company’s shareholders saw 90% of their investment evaporate over the past five years as Canada’s aerospace giant sank further into the red.

Well, anyone who did act on Tuesday made a 23% profit on Wednesday, as the stock soared to well over a buck. (Hope in your TFSA.) Of course all it took for that to happen was news Bombardier is laying off 7,000 people – which means less cash flow sucked off for useless employees and more for stockholders in potential dividends. Isn’t commerce great?

You might remember Montreal-based Bombo scored a $1.3 billion handout from the Quebec government only three months ago, and is now going chapeau-in-hand to the T2 gang for a matching pile of loot (despite the big Air Canada deal oddly announced at the same time). Will they get it? The federal NDP is lobbying hard for the handout, but I’m not sure that counts for much. Mulcair is so 2015.

The key point here is the loss of seven thousand highly-skilled, highly-paid manufacturing jobs, most of them in Canada – in a company which should be benefiting directly from a collapsed dollar, and is subsidized by taxpayers. I guess when your employees pay some of the world’s highest taxes and live in expensive houses, you should expect to be uncompetitive.

By the way, remember last year I told you about a major industrial collapse on the way? Uh-huh. Still want that stock?

$   $   $

So far this fun year, Bay Street has handed investors a 1% loss while the S&P in New York is down almost 6%. In fact, the TSX has been on a major rebound now for a while, outperforming major American markets and just a winning session or two from breaking into the green numbers.

Credit oil, of course. The black stuff jumped more than 5% on Wednesday and has been strong on the back of the Russia-Saudi deal to freeze production. This may not hold since the world is swimming in surplus crude and no producer seems ready to blink. Goldman Sachs is still saying prices will plunge from this level (by ten bucks), but nobody should have any illusions it will rise again. Not to a hundred dollars (for a long time), but maybe half that.

Commodity prices in general are at 1990s levels. Nuts. This is worse than the 2008-9 financial crisis when the world was contracting and deflation/depression was just around the corner. But today the global economy continues to expand, albeit slowly. The US recovery’s on track as it moves to statistical full employment and Chinese expansion will be just under 7%. Meanwhile the world still runs on oil. So, don’t bet against it.

Some weeks ago I suggested equities might be getting to the oversold point, just as residential real estate is overbought. And while I wouldn’t be backing the Silverado up to shovel in Suncor stock, every investor should maintain a sane exposure to Canadian assets. The recommendation here sticks. Keep the maple at around 17% of your growth assets (which should total 60% of the overall balanced portfolio) with the other two thirds buried in ETFs providing US and international exposure. (The exchange-traded fund XIU, which paces the TSX 60, has gained about 10% in the past month.)

The important thing to remember is that investing’s a long-term gig. Over decades, markets advance more than 70% of the time. Over 90% of all corrections never result in a bear market, and yet 100% of the time people react to declines the same way – moaning, lamenting, foaming and knee-jerking off in another direction after selling at a loss. The only thing most people lack more than foresight is patience.

CLARK modified

Ever wanted to screw up something significant? Then you might be a perfect fit for the BC provincial cabinet, which this week sucked and blew so much that weather patterns changed.

Reacting to the cry to ‘do something’ about insane real estate valuations in Vancouver, the Lower Mainland and saucy bits of the Island, the Christy Clark government embarked on two opposite paths, both of which will result in higher prices. Duh.

First, it guaranteed expensive properties (over $2 million) will become more expansive by increasing the land transfer tax by a withering 50%. Thus, there’s a new built-in cost which won’t deter anyone in that segment of the market, and will be added to the long-term value of the assets being traded.

Then, worse, the pols rolled back the tax on new houses costing $750,000 or less. They’re now exempt, in the name of ‘increased affordability’ for first-time buyers plus the hope a moribund construction industry can be rescued. Yes, you’re right. Encouraging kids to bid on houses will generate more demand, and push prices higher. This move also neuters the federal move (effective on Monday) to raise downpayments to 10% on houses costing over half a million – designed to dampen demand and holster debt.

Brilliant. Tax people who don’t care and inflate top-end properties while detaxing people at the bottom, goosing demand and prices.

The nimrods in Victoria need to understand something: Chinese dudes did not do this to Vancouver. Nor did realtors, their registrar, assignment clauses nor hundreds of flips. Those are interesting and probably contributory factors. Not the cause, though.

This is a classic lesson in speculation. The market has been fueled by cheap rates, idiot policy-makers and human greed. Once the train bolted out of the station, everybody wanted to pile on. BCers have been willing to eat mountains of debt and assume epic risk to be part of what’s now seen as a sure thing.

This is your Nortel moment. Google it.

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February 17th, 2016

Posted In: The Greater Fool

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