Viking

FFH is now trading at a 52 week low CAN$603 and US$458. What is stopping Mr. Market from purchasing FFH? What is stopping me from buying shares is i have little confidence in how FFH evaluates equities. I am waiting to hear that FFH loaded up on GE when it was trading over $20 and Prem explain what a great business it is and how they think management is great (or some similar company). Yes, the stock looks cheap and the bond portfolio is positioned very well. However, it appears FFH is focussed on using excess cash to buy out minority partners in Brit, Allied and Gravalia. The stock is trading where it was trading in Janaury 2015. My fear is FFH will still be trading at CAN$600 in a couple of years in the future. Hard to see a catalyst. Other than ‘the stock is cheap’ can someone explain to me why FFH should trade higher than CAN$600 over the next year? What is going to happen with the underlying business that is going to warrant a higher share price?

With the current rate at 1.75% and a neutral rate of between 2.5 and 3.5% it looks like the BOC may increase rates 3 times in 2019 starting in January. Given the amount of debt held in Canada one has to wonder when higher rates will start to slow economic activity, particularly in the housing market. It looks like higher rates hit the economy with a multi-year lag as it takes years for mortgage rates to reset at the higher rates (given most mortgages are 5 year fixed). Perhaps we are another 12-18 months from more fully understanding the impact of higher rates on the economy here in Canada (not just slower housing sales but also reduced consumer and business spending as more money is shifted to servicing debts). Bank of Canada will keep raising interest rates, Stephen Poloz says - https://business.financialpost.com/news/economy/bank-of-canada-will-keep-raising-interest-rates-stephen-poloz-says Rate hikes to cost Canadian households $2,500 each year — but it isn't uncharted territory https://business.financialpost.com/news/economy/rate-hikes-to-cost-canadian-households-2500-each-year-but-it-isnt-unchartered-territory-report#comments-area

I think raising cash on strength (stock market run ups) will be a very effective strategy moving forward (the remainder of this year and next year). Being very patient on reinvesting the cash will also be important.

“Of course this is not the reality and there is uncertainty tied to this, but essentially the 10yr treasury trades on whatever the market thinks inflation is going to be for the next 10 years+some compensation for growth+some compensation for uncertainty (aka term premium, right now this is negative - prob because of QE - and a whole other subject).” Chesko, i am trying to understand QE and now that it is being unwound what that means for financial markets. Given it appears to have stoked financial markets when it was implemented it makes sense it will be a headwind moving forward. Any thought you or others have would be appreciated :-)

On curve inversion and a job well done. I’ve been critical and will continue to be, concerning various distortions and unintended consequences introduced in the market by the Federal Reserve and think that the interest rate “conundrum” has not been resolved. However, if animal spirits do lift growth and interest rates going forward in sustainable manner, such as suggested by the Fairfax team for instance, I take the pledge to openly recognize that I’m wrong. If that’s the case, I will also dissociate from the morbid fascination about what happened in Japan. First, some would say that flattening or inverted curves don’t matter and there was some interesting work that came out in 2006 suggesting that curve inversion no longer really mattered and, using Fisherian and Wicksellian concepts, that the curve was not inverted even if it was!? At this point, if long term rates don’t increase, the inverting curve will become inverted with the next short term hikes. Maybe, in a way, not that relevant for most investments, but useful concept when looking at something like the Bank of the Ozarks. Even if the underwriting culture at that bank was very strong, IMO the distorted interest rate market may have very well insidiously introduced a bias to underestimate the risk premiums and decisions to enter certain markets to an extent that credit mistakes have been made. When purely looking at reported numbers, this bank would constitute a good opportunity but, given the historical perspective and the tightening of the term spread which, if it continues, will invariably manifest the stress between borrowing short and lending long, the recent negative developments represent a leading indicator of things to come. Possibly cherry picking to some degree here but, when you look back at actual comments made by Mr. Greenspan (before the 1990, 2001 and 2007 recessions) and Mr. Bernanke, concerns about an inverting or inverted yield curve were put aside. Example (forecast vs foresight?): https://www.marketwatch.com/story/greenspan-discounts-flatter-yield-curve-as-warning-sign FWIW, here’s a recent, interesting and balanced study by the none other than the San Francisco Fed: https://www.frbsf.org/economic-research/files/el2018-20.pdf So what? When I was a young kid, my parents, sometimes tired of never ending questions, would send me to my grandfather who had been born before the 1913 Federal Reserve Act and who had no formal education. But he was one of the wisest man I’ve come to know and never answered questions in a conventional way. One day, looking at the sky, watching the V-shaped flocks of birds convincingly moving in a southern direction, after a typical run of questions, my grandfather explained some “principles”. First he said, “One swallow does not a summer make, nor one fine day; similarly one day or brief time of happiness does not make a person entirely happy" from which I understood that he meant that complex systems are complex, exact timing is difficult and false signals could lead one astray. Then he explained that Canadian geese, some time during the fall, migrate south. But why? My grandfather said I was lucky because, in the new era of Great Moderation (he may have said era of great abundance), I could get educated and hear from the masters as to why birds migrate but he also said that for him, winter coming meant that he had to prepare for survival (food supply reserved and preparation for the next year’s sowing) and that he did not need to understand why the birds were migrating. He just needed to know that no seasons were exactly the same, that occasionally birds, especially the younger ones, did not fly exactly in the right direction and that there were natural and deep-ingrained forces “telling” the birds when and where to go. The future is indeed unknowable and to each our own as we have to decide how to balance profits and protection but I wonder what my grandfather would say today. He always seemed to focus on the real and the enduring. It’s hard to be a contrarian when one “sees” a certain amount of collective foolishness but today, I look at the sky and I see tightening in a late cycle. I assume John has finished his book on cycles and wonder if I’m off-base here. Speaking of tightening and of a job well done and linking to what Cardboard opened with, and basically asking the question: Why suffer if we don’t have to? I read some interesting stuff today and will finish with a question. It’s from Horizon Kinetics Q3 2018. “The U.S. has $71.3 trillion of total debt, including everything from a car loan and credit cards to a U.S. Treasury Bond. If rates were to increase, across all instruments, by 1%, the additional debt service would be $713 billion. The U.S. consumes about 20 million barrels of oil a day. At roughly $70 a barrel, it costs $1.4 billion a day to pay for the oil, or $511 billion a year. So imagine, using the 1% increase in debt service as a reference point, if the country had to pay another $713 billion for its oil. That would be a 140% increase over what it is right now. That works out to an oil price of $168 a barrel.” Yields have been increasing across the board and there’s more in store. If gas prices at the pump would have gone to 5 bucks a gallon and were moving to about 8 bucks a gallon and more in such a short time, the 70’s oil shock induced consumer suffering would pale in comparison. Yet, in the context of a job well done, deleveraging, in the main, has not occurred and fiscal deficits are heading up without any sign of suffering. Why is that? There is a rare disease where some people don’t ever feel pain (those familiar with the Millenium movies will understand). Despite what first level thinking would suggest, people who never feel pain don’t do well. Unnecessary suffering is unnecessary but pain has to be felt. It’s unfortunate but it’s evolutionary. Cigar, one of my favourite posts of the year. Thank you for taking the time to write it!

Cardboard, my read is the 2008 financial crisis caused unprecidented easing by the Fed. Calitalism alsmost ended as we know it (there is some truth to it :-) Interest rates and QE went to extreme levels and this has created asset bubbles in Canada (not sure about Europe). Interest rates need to normalize. There is a huge debate in Canada about affordable housing and nobody wants to discuss the core issue which is crazy low interest rates. As interest rates normalize we are going to have a housing price correction and this will be a good thing for Canada long term (not in the short term). There will be winners and losers (just like there has been in the past 10 years). When asked if the stock market was overvalued Buffett has said repeatedly it was not with the yield on 10 year treasuries of 2% (where they were not too long ago). It makes sense that as rates normalize that the stock market averages will come under pressure. This is healthy. Will the Fed tighten too much too fast? Perhaps. But 18 months ago nobody would have thought they would have been able to raise rates 7 times and for the economy to be running at 3.5% GDP growth. What the Fed has been able to accomplish against the advice of pretty mich everyone else is pretty amazing (and pretty ballsy). The non-consensus view is that the 10 years rate continues higher in 2019 (to 3.5 or higher). If that happens i think the Fed will continue to tighten. (The key to both of these is US economic growth...) My question is why is Europe and Japan not taking the hard medicine to get their houses in order. Both look sick and in denial. What are they going to do when the next down turn hits, especially if it is bad?

It is exceptionally difficult to time the market. As of today, the US economy is performing exceptionally well. None of the leading indicators are flashing even yellow. Yes, there are issues but there always are issues. The current concern is rising rates, on both ends of the curve. And there is a trade spat with China. Is a big sell off coming? Perhaps. I really have no idea. The key is can you sleep at night? If not, something is likely wrong with your portfolio. As long as the US economy continies to chug along I am going to be patient with my holdings. All of the negativity actually makes me more positive on stocks. And we also will be having an election in the US in 4 weeks and a bear market is stocks will not be good for Trump so i expect he will not let it happen :-)

Calculated Risk has been very accuate with his economic forecast for US in 2018. Here is the link to his Q3 update: https://www.calculatedriskblog.com/2018/10/q3-review-ten-economic-questions-for.html Summary: “Currently it looks like 2018 is unfolding about as expected, although, employment gains will be somewhat higher than I originally expected.”

The report says “Moody’s Analytics predicts interest rates will rise through 2020, which could push mortgage rates back up to around 6 per cent from the current five-year rate of around 4.4 per cent. But the absence of “significant” house price declines should reduce the risk of mortgage debt “deteriorating” over the period, the report concludes.” Actual 5 year fixed mortgage rates in Canada currently are 3.25-3.5%. If they rise 1.5% to 5% over the next 18 months (and remain at that level for any length of time) my crystal ball says we will likely see significant price declines. Too many people at the margin are carrying far too much debt and when it has to be refinanced at rates 50% higher they will be toast. Once the turn in prices happens, it could get ugly if it spreads into the broader economy.

Retail milk prices across Canada are pretty much impossible to compare. Some regions had government actually set retail prices (not sure if they still do in Atlantic). In most other regions milk is used by retailers as a loss leader (sell at or even below cost to match a large competitor). I am not sure if milk is used as a loss leader in most US markets. If you want to really compare prices in Canada and the US you need to look at the price FOB the retailer (to understand impact of supply management). Canadians clearly pay much more for a basket of dairy products than US consumers. Look not just at 4L milk. Look at a variety of products: 2L milk, 250ml milk, sour cream, cottage cheese, butter and cheddar cheese. Dairy is sold to both foodserice and retail customers. I would prefer to see a system in Canada where there is more competition and better prices. To stop the smaller farms from disappearing then we can cut them a cheque for ? to earn an adequate return each year.

It looks to me like the many significant changes that have been implemented in the mortgage market over the past 8 years have been needed. Too late? We will see. However, i do think today as far as mortgages rules go we are far from where the US housing market was in 2006 (in terms of regulation). Perhaps we can say the regulators have been caught napping a number of times; however, over time they have addressed a number of issues as they became more obvious. I agree Sharper, it is very difficult for regulators to be early. It would be like playing a game of whack a mole, not knowing with alot of guessing involved.

Quote from RBC report on the Canadian housing market; released today. The Bank of Canada continues to increase interest rates. I think we are getting close to an inflextion point. Either economic growth slows, which would then reduce the need for more interest rate increases. Or, as mortgage rates continue higher, house prices start to come down. “To carry a home bought in the second quarter of 2018 would have taken up 53.9% of a typical household’s income. This is up sharply from 43.2% three years ago Blame interest rates for the rise in ownership costs in the past year… Unaffordability is off the charts in Vancouver, Toronto and now Victoria. Interest rates have a big impact in these high-priced markets… It’ll probably get worse. We expect further interest rate hikes in the period ahead. This is poised to drive ownership costs even higher across Canada. Household income increases will soften the blow for buyers.”

Obtuse, here is what i use to see what is going in my part of Vancouver (called the Fraser Valley). http://www.fvreb.bc.ca/stats/ I continue to believe that we have a housing bubble in Vancouver and Toronto. I have been wrong for many years and may continue to be wrong :-) The US had a housing bubble and it popped; this does not mean what happens in Canada is the same (why we have a bubble and what may eventually pop it). One key to me is interest rates. If mortgage rates in Canada continue their march higher higher interest costs will eventually start to bite.

Cigar, if Canada has a housing slowdown or worse the country will be in deep trouble. Real estate has been the road to riches for many. Calculated Risk says to watch inventory closely. When inventory in the US started increasing dramatically (in 2006 I think) he called the top in prices. I am watching inventory in my area and while it has been increasing and is elevated it doesn’t look concerning yet. However, if inventory continues to increase substantially over the next year then perhaps we will see prices start to crack. If the the Bank of Canada continues to raise rates this will also be a risk given how much debt many families have. Interesting times :-)

The US and Canada are very different countries (neither are perfect). Fit is important. Pick wisely. Eyes wide open. Lots of immigrants coming to Canada are happy with their decision (but not everyone of course).

For a young person i think the best book to start with is Peter Lynch and One Up On Wall Street. Exceptional advice for a young investor. A solid framework for how to look at investing in stocks. Lots of humour. If a young person reads this book and it does not motivate them to want to learn more then perhaps they should just buy index funds (and be a passive investor). If they are keen to learn more then i would have them read: 1.) chapters 8 and 20 from Intelligent Investor: to learn about Mr Market, Margin of Safety, if you are a passive (index) or aggressive investor 2.) watch youtube videos on Buffett: lots of great advice, including buy quality, concentrate (if you know what you are doing) 3.) A Random Walk Down Wall Street by Malkiel; this book gives a great overview of everything a young investor will face (technical analysis etc) from the investment industry. It is like a university course with real world mixed in. Not that i agree with Malkiels conclusions; rather i love the canvas he paints in the book. Just finshed re-reading it and it is a great education.

I like quarterly reporting and find it very valuable. I find it takes listening to 3 or 4 earnings calls to get a good handle on management. What do they say? Do they walk the talk? Etc. Moving to reporting 2X per year would make this more difficult.

Interesting read. Makes sense Trump will do everything he can to ensure the US economy runs hot until after the next Presidential election in 2020. I am watching the fall elections in the US to see if the Democrats can get control of the House of Representatives; if they do Trump may not make it to 2020. https://www.calculatedriskblog.com/2018/08/merrill-return-of-political-business.html

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/your-returns-in-2016/msg285229/#msg285229 http://www.cornerofberkshireandfairfax.ca/forum/strategies/what-do-folks-think-or-do-while-markets-are-at-highs/msg325599/#msg325599 http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/your-current-cash-weighting/msg23739/#msg23739 http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/all-the-negative-news/msg24148/#msg24148 http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/big-warning-sign/msg22442/#msg22442 http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/top-picks-for-the-new-year/msg13668/#msg13668 For someone that's been fully invested for 5 years you seem to post often about holding lots of cash and being worried about the macro picture. Pretty much all throughout your forum career from what I can see, in fact. Alwaysinvert, thanks for the trip down memory lane :-) In broad bresh strokes, i had large cash positions in 2010-12. My concern was that we would slip back in to Great recession part 2. Fortunately i changed strategies about 5 years ago and have been close to fully invested since. The one big exception was a few months after Trump was elected; i moved to 100% cash for a short period of time as i was quite concerned with what he was saying and doing. Fortunately (after deciding Trump would not be blowing up the world) i moved back to fully invested. And yes, earlier this year i expressed concerns regarding higher rates and the winding down of QE. I did raise some cash but returned to 100% fully invested too quickly. I am slowly learning that i need to keep a higher cash balance and to be much more patient when putting my cash to work. And, yes, it can be quite difficult to follow how a person is actually invested based on their posts as the trail will be incomplete (as it is missing important information). Best of luck :-)

Ajc, my current strategy is pretty simple. I am now getting more cautious with my overall portfolio. I am holding larger cash positions (selling on strength like we have seen the past month or so). This will allow me to take advantage of sell offs when they happen. For the past 5 years i have been pretty much fully invested most of the time. No more. I expect at some point in the not too distant future (the next year or two) i will get quite cautious and likely move my portfolio mostly to cash. I am watching the economic data out of the US closely for when it starts to turn down. Looks good right now but storm clouds might be forming. I will be happy to earn a little less while i sit amd wait for the next big down draft in stocks :-)

I decided to bring this topic forward and start WFT as its own topic.

Yes, very well done. Thanks for posting :-)

I ran a fianancial literacy club at my kids high school last year; we did 10 sessions and it went quite well. Most importantly, I learned a great deal about how to teach to teenagers. You might find some of the material on my web site useful (it is oriented to Canada). I initially called the club the Money Club but was asked by the school to change the name to Financial Literacy Club (a parent complained). www.wgssflc.ca I will be running version 2 of the Club In the fall and will be making lots of changes to the web site (especially the information on investing). The changes will be coming later in August. A great Utube station to look at is the Financial Diet; two young women, one was a fianancial train wreck and the other was very good. Lots of good videos on credit cards (and how easy it is to get messed up). Let me know if you have any other material, web sites etc that you think are especially good for teenagers. :-)

LC, the last 5 years have not been all that kind to the big banks: 1.) tens of billions paid out in fines 2.) exceptionally stringent regulation were imposed by regulators; costs to comply were very large 3.) banks were required to build up/hoard capital (with minimal dividends and stock buybacks) 4.) interest rates in US fell to generational lows (grealy reducing net interest income) 5.) constant fear US was about to slip back into deflationary spiral Since the Trump election, the last 20 months have been kind to the banks. 1.) no more massive fines (small ones, yes) 2.) we have passed peak regulation; will be reduced in coming years 3.) era of capital hoarding has passed; capital returns now are at or exceeding 100% of earnings 4.) interest rates are now on a solid path of increasing with benefits flowing through to net interest income 5.) US GDP growth is solid, with forecasts of 3-4% real growth for Q2. Given how worried everyone is right now, I am guessing US growth will surprise to the upside in the 2H 18. As much as I may not like Trump the man, I think much lower taxes, much less regulation, solid GDP growth and a pro US trade message will result in a stronger US economy and job growth. You are right, the nest 5 years will be different. My guess is what happens will likely be quite different from what people are talking about today. Inflation rising more quickly than expected may be the real threat that few people are talking about right now. What if the US economy continues to deliver solid growth for the next 4 or 5 years... many experts are predicting a recession in late 2019 or 2020.

If It's not asking too much, what other stalwarts do you have? Throughout this year I've intermitently been on brk, google and davita, accordingly to the price fluctuations, but I don't see them the same way I see brk... Thank you. Ps: added brk today. 18% of the portfolio now. Rolling, my favourite group right now are the large US banks (surprise, surprise). For the past couple of years I have viewed them as turnaround plays. However, I now view the big US banks as more like stalwarts. As an example, you can buy BAC today at $29. It will earn about $2.55 in 2018 and close to $2.90 in 2019. 100% of earnings will be returned to investors for the next few years (2% dividend and 8% stock buybacks). It will grow top line by about 4% and bottom line by about 15% for the next few years. Under Trump US GDP growth may actually accelerate. The Fed will continue hiking rates. Mobile banking is dramatically lowering costs. Operating leverage continues quarter after quarter. Deregulation has legs. Do I expect 30% per year from my big US bank stocks? No. I will be very happy with 15-20% returns. Like shooting fish in a barrel. :-) PS: I do think at some point in the next couple of years investors are going to fall back in love with bank stocks where they will bid up the PE multiple. When I see This happen I will be happy to sell and wait in the weeds for the next fat pitch.