beerbaron
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Posts posted by beerbaron
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As a rule of thumb all assets are inversely correlated with risk free rates. If interest rates went up to 20% in the course of 5 years, real estate prices would collapse. Maybe partially offset by higher inflation expectations but not that much. The math is quite simple, if one has a mortgage of 300 000$ the current interest payment would be about 9 000$/ Y (3%). It's quite manageable for a household making about 60 000$ net (15% of net income). Go forward 5 years later and that interest payment is now 60 000$. To be able to service that kind of interest you need at minimum 120 000$ net income.
So in short your household salary would have to compound at 14% for 5 years and even then you are barely afloat with 50% of your money going to service your mortgage (opposed to 15% 5 years earlier). What do you think would happen to the supply in such scenario? There would be a flood of foreclosures. No speculator looking to fight inflation would touch this with a 10 foot pole. You can buy TIPS instead and you would sleep much better.
BeerBaron
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The cool aid is still on the table. You can put as many warnings signs around the bowl it won't change a thing until lots of people lost their shirts. This will be when all players rush for the exit and the market crashes.
BeerBaron
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Is it shown in the marked to market on in the revenue line?
BeerBaron
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I'd invert and say that high margin for sustained period of time= sustained competitive advantage. If you want to find lasting business with a moat, find the one with high margins.
BeerBaron
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Interesting take from a great tech/business writer I follow:
https://stratechery.com/2016/dollar-shave-club-and-the-disruption-of-everything/
The article makes me think about our industry (investing). It is much harder these days to find lasting businesses. There are a few other examples of these disruptors.
Casper in mattresses
Blue Nile in diamond rings
Warby Parker in glasses
I'd argue that network type of business are actually lasting business that will go on for a long time. It seems that the network effect has given them a competitive advantage that allows them to have margins way above normal businesses. I don't invest in anything above a PE of 20 but I do think the Googles and Facebooks of this world are much more lasting than low PE investors like me are ready to admit.
Regards
BeerBaron
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I'm sure there is a knowledgeable person on this board that can shed some light on this question: If I have some share that have lost value and are held into a margin account can I sell them into the margin account to have the tax loss and buy into a TFSA the same amount of shares?
Thanks
BeerBaron
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I don't know whether this is related, or possible, but I do recall a situation in South/Central America (I think anyway) where there was an inflation issue and they couldn't get a handle on it. I believe what ended up happening is they introduced a new currency and started listing prices in both the current currency and the new currency. While the current currency had inflation problems (e.g., doubling in price over some series of time), they held the new currency stable (So, e.g., you might have a banana cost $1 at time A and you set it at 1 bogo at that time, then later, the banana costs $2, but it still costs 1 bono (but now 1 bono is worth $2)). Thus, people got used to this new currency being stable, and then trusted that currency, and the whole system stabilized.
As you can see, I'm pretty vague on the details, I just remember the story. And I feel like I didn't read it from an economics viewpoint either. Anyway, sounds like a story Munger would like.
Brazil, this is when they introduced the Real.
BeerBaron
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Well, that high on hype and low in details!
BeerBaron
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CMHC is a crown corp. But there are other players such a Genworth and Canada guaranty. I believe they have been agressive in increasing their market share after the government forced CMHC to reduce risk. In the first place it was the feds that doubled their cap to $600B after GFC to help the Canadian economy.
Yea, that's what I've been talking about. MIC is Genworth. What I've said is that MIC doesn't have government backing. As you said they've aggressively picked up all that risk that the feds didn't want. One such area are loans to self employed that have no income verification. In Canada it's not a NINJA loan it's mortgage insurance for hard working entrepreneurs.
But as far as I know the only people that get insurance from MIC are the ones that don't qualify for CMHC. So you gotta think that the most rotten of the stuff will be with the MIC or Canada Guaranty.
It's also interesting that we're in the middle of a boom boom bull market and MIC trades at 2/3 book
I remember seeing that MIC insurances also backed by the Canadian government. Can anyone validate or deny that information?
BeerBaron
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It's quite easy to interpret. For some people the amount of money they have is the choke to their consumption, having a credit card removes part of the choke.
For others (like me), the amount of money I spend has nothing to do with my credit card... it's alway minimal!
BeerBaron
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I just don't believe that Canada is some Shangri-la that isn't bound by the RE logic of the rest of the world, where families making $50k/year can carry mortgages of over half a million and live in ugly old bungalows from the 1970s selling for $800k+, etc.
The RE logic of the rest of the world? What is it?
The more I look at real estate across the globe, the more I see the differences. I wish there were a universal ratio on housing valuation. There isn't.
Within Canada, the price difference between cities is huge and likely widening. Within a city, prices can change a lot between neighborhoods.
Not saying property prices cannot go out of whack and correct. It's a fact that property prices go down less often and less dramatically than stock markets.
I'd love it if someone can present a cogent case on why Canadian housing prices will fall significantly in the near-term. I am all ears.
Among reasons for corrections in any sectors but applies especially well for canadian real estate are:
Debt serviceability
Increase Competition (in case of real estate, other cities or rents)
Subpar return on capital
Interest rate increase
BeerBaron
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How much did Overstock sink in the lawsuit?
BeerBaron
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Agreed RSU are taxed like income... and they should be. I should have clarified that I was talking about stock options.
On the other hand RSU appear directly as an expense in the SG&A. So there is really no difference between RSU compensation or cash when you look at net income.
All an all, I'm fairly neutral about stock compensation for as long as the compensation is adequate and fair to all stakeholders.
BeerBaron
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Well one could argue that stock compensation is a more effective salary payment to employees since stocks don't get taxed at 100% like salary. So instead of paying an employee 100k in salary and in the end he's left with 75K you could pay 85K in stock options an he's left with 75k in the end.
I would expect to see a lower SG&A from stock options focused payment firms but higher dilution. Overall a slight positive over salaries.
BeerBaron
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Wow, I never followed preferred but they got killed last year. I just suddenly got a new interest in Canadian preferred. What's the reason here? I would have expected high quality preferred to go up in a lowering interest rate environment..
BeerBaron
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I work for a lighting manufacturer selling to retailers so I can give some insights as to how it works in the background.
Manufacturer (us): Canadian dollar went down 15% this year we are increasing our cost 15% in consequence.
Retailer: You can't do that, materials went down and transit is cheaper. You should actually give us a price reduction.
Manufacturer: You are right but the year before the Canadian $ went down 10% but only increased 5% to give you some relief. Material reduction is less than 5% plus labour went up.
Retailer: Ok well you gotta help me on some SKUs, we are partnerts after all right? I'll be above my target of 19.99$ for sure if you don't help. (the ones I sell the most)
Manufacturer:I could do something for you on SKU A and SKU B, but on SKU C there is nothing we can do for you. Maybe we can change the SKU we have this great light made of plastic instead of aluminun, you could keep 19.99$ retail if you go to plastic.
Retailer: That is a great idea let's do the change.
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All in all you have to see the process as a moving average, the change in currency is not immediately reflected in the retails but they do end up getting there. There are several reasons for the delays:
[*]Prices given to retailers are usually locked in for the year, it's not always in a contract but understood in my industry.
[*]Some companies import and store in their warehouse and then sell to the retailers. If they bough SKU A at an exchange of 1.0 and the dollar is now 0.75 they fail to account that the goods should go up in price. If there is no outgoing cashflow what's the cost of an item after all?
[*]Retailers, Manufacturers, Factories in China all understand that certain price points generate a lot more volume. Hence they are ready to accept margin compression to keep the sweet spot.
[*]There is a payment terms delay. For example a customer can place a purchase order in january and receive/pay for it's goods in July. During those 6 months the middle man take a currency hit if he was not hedged. The retailer does not necessarily bring it's retail up because he paid the old price
All in all in a lowering currency environment you can expect almost all importers in USD to see an eroding margin by some points. The higher the margin the more they can absorb. Losing 1% margin on a 50 points margin item is a lot easier than losing 1% on a 10% margin item.
Hope in sheds some light for you.
Beerbaron
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4.8% I'm about 50/50 Canadian and US equities so I kinda got a tailwind there. Overall I'm ok with the results when I factor in that I did about on transaction in the year excluding some arbitrage plays.
BeerBaron
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A good review of the last few years. Very rosy report tough. Underwriting is better tough but I'm not sure it's accounted by Mr. Bernard's new role. I thinking a good part of it is FFH listing in Canada only and being relieved from Sarbane-Oxley, they gained more flexibility in their reporting. Over reserve in accident year and gain later results in a lower taxation in real dollars.
Not all their cylinders are running tough. Insurance is well but investment is average in the last few years. But who am I to question Michael Jordan on it's basketball game.
BeerBaron
Could you elaborate on the SarbOx/reporting stuff?
Thanks
Pete
From what I understood in a W.R. Berkley interview, Sarbane Oxley made the insurance companies less flexible into how they reserve. An insurance company that does not have to comply could over/uderreseve hence reducing taxes more then they should in accident years .
Beerbaron
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A good review of the last few years. Very rosy report tough. Underwriting is better tough but I'm not sure it's accounted by Mr. Bernard's new role. I thinking a good part of it is FFH listing in Canada only and being relieved from Sarbane-Oxley, they gained more flexibility in their reporting. Over reserve in accident year and gain later results in a lower taxation in real dollars.
Not all their cylinders are running tough. Insurance is well but investment is average in the last few years. But who am I to question Michael Jordan on it's basketball game.
BeerBaron
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Colonization anyone?
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Most Chinese manufacturer have combined books with their operating business and their speculative real estate. Since the real estate went down in the last few months, the banks are a lot faster to ask for more equity. Putting a serious strain on the operating side of the business. At my workplace we just had two supplier go belly up in the last few weeks because of this. One creative way of playing a bust play would be to short a public company with:
- All products made in China
- Very concentraded suppliers
- Known supplier in financial troubles
Point 3 is really the hard part tough, one would need to do a lot of scuttlebutt to find it.
BeerBaron
- All products made in China
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Rates were low for 20+ years after the Great Depression. Rates have been low for 20+ year in Japan. When you have a financial crisis, you generally get low rates for the next 2-3 decades. Doesn't have to happen, but seems like it generally does because the government/Fed lacks the political support to do what's necessary to change that (for better or for worse).
Then again, I'm biased. I'm assuming that rates will be low for a long time regardless of Fed action and I believe in Fairfax's deflationary thesis.
Well, I'd like to point out that Japan has tried everything in the books to get rid of deflation. Without success... it's not only political support.
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Interesting graphic, see below. Something changed in China this year. The steel picture looks the same.
Food prices just saw there biggest one month drop according to the UN. Every commodity seems to be in free fall, not just oil.
The graph has a truncated scale which gives the impressions that cement is almost zero. Actually cement is only about 75% of the peak of the last 4 years... I would not call this a free fall.
BeerBaron
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Junior mining.
Garth Turner - Real Estate in Canada
in General Discussion
Posted
Supply will outpace demand by a wide margin. The bargain might be there but there will be lots of other assets that would look much better. TIPS, land, gold, commodities, etc... This is where the money will flow, it's a lot easier to maintain, does not cost a lot to own and is a good hedge against inflation. A building on the opposite requires maintenance and taxes. If you live in it you are not getting such a great deal because you could get good returns on the assets mentioned above. It you rented it, your returns would be abysmal because you would likely not be able to compound the rent at the same rate as inflation. Especially in Canada. Long term you might make your money back when inflation reverse it's course but just like today's never ending 1% inflation we could have a never ending 20% inflation.
You might want to read Buffet's essay titled How inflation swindles equity investor, it has good nuggets of information in there.
BeerBaron
BeerBaron