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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

June 22, 2017 | The Landing

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.

Update time:

First, Sears surrenders. As prefaced here yesterday, the company which was once our largest retailer is going down for the count. Sears Canada is bankrupt, announcing on Thursday the first 55 locations that will be shuttered, erasing the jobs of about three thousand people (without severance pay).

Sears has been a disaster for shareholders, with the stock collapsing in value over the course of a year and, it seems, about to go to zero. Retailing’s in the same soup as print and electronic media – where the industry is now begging Ottawa to pony up money to pay 35% of reporters’ salaries, so they can rewrite press releases from the local real estate board.

But newspapers are as terminal as regional shopping malls, travel agents, cashiers and (yes) realtors.

Second, the Buffett factor. Shares of Home Capital, Genworth and almost all other outfits involved in mortgages shot higher Thursday after legendary rich guy Warren Buffet became the largest shareholder in troubled Home Capital. Soon he will own almost 40% and has provided a backstopping LOC – effectively taking Home Cap off the critical list.

Does this mean everything is suddenly okay with the real estate market?

Nope. No change there. It’s negative sentiment  – not struggling subprime lenders or retreating Chinese dudes – that’s responsible for a 50% sales drop and a 12% price plop in the Big Smoke. What Buffett did (again) is recognize an opportunity to mine profits out of a distressed company. He’s already made $260 million in a capital gain, and he’s actually not loaning Home Cap anything – just providing an emergency pot of money which is already invested and on which the company must pay standby interest.

Third, up she goes. Expectations of a Bank of Canada rate hike are undiminished by oil’s recent slide or the growing anxiety of GTA homeowners. An increase next month is 50-50, but one by the end of the year is now 80-20.

Benefiting from that already are rate-reset preferred shares, which this pathetic blog has consistently recommended you own. Not only do prefs churn out a nice steady dividend, currently in the 4%-4.5% range, but they do it in a tax-efficient way, since you get to claim the dividend tax credit on cash that flows in every 90 days. Better yet, they go up in price along with rates – which helps explain the 25% hike in the capital value of preferreds since early 2016, and the 8% total return investors have enjoyed so far this year. When the BoC pulls the trigger, there’ll be more.

Prefs should make up about 20% of your overall portfolio, and half of the fixed-income allocation – along with corporate, provincial and high yield bonds, and a smidgeon of government debt. Remember – this part of your accounts is there to reduce volatility, provide consistent income and be a counterweight when you do something stupid, like short Home Capital (or anything else).

Lastly, Joe has a question.

Love your blogs! In Sept 2015 I decided to go with a 5 year variable for my mortgage, currently at 1.90%. Should I try to switch to a fixed with a possible anticipation of rates going up soon or hold on with the variable until renewal?

That’s easy. Hang on. Your mortgage rate is so obscenely, ridiculously, freakishly low it will take several rounds of tightening by the central bank to make it worth your while locking in. If feeling frisky, Poloz may up the cost of money four times between now and the beginning of 2019, which would add a full point to your home loan. But it’ll still be a lowly 2.9% at that point, barely more than the cost of a fixed-fiver if you locked in now.

So relax. Divert your extra cash into an ETF-based investment portfolio for the next three years. Then dump the growth against the mortgage principal upon renewal. That should help take some sting out of what comes next.

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June 22nd, 2017

Posted In: The Greater Fool

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