Blessed by the Potato

Not too much to report from this year’s round of holiday shopping. I managed to do about half of my shopping online, which was fantastic given the amount of snow we had in London, and how sick I was for a week there, both leading to a state of not wanting to leave the house.

A quick hiss at Toys Toys Toys in Fairview Mall (Toronto): they wouldn’t accept a manufacturer’s coupon for a boardgame, and they have a no returns policy. I may be a spoiled, decadent consumer for feeling entitled to a decent return policy, but right before xmas at a toy store? Toys may not be as hard to buy for someone as clothes, but it’s so easy to get the wrong thing for kids (or for a kid to end up with two of something), and have to take it back that a no-returns policy is just mean. On top of that, there was no warning from the cashier, just a sign posted at the check-out. (And to top it off, we do indeed find ourselves with a surplus Scrabble set – anyone know of any toy drives still accepting donations?)

A much longer fuck you goes out to EB games. Wayfare bought me a copy of Fallout New Vegas for the Xbox, which, unbeknownst to her, I played months ago on the PC. So back it goes. While they do have a return policy, the reality was that it failed. We got quite the run-around, which I’ll try to detail below, but the end result is that a full refund was not provided — Wayfare lost $5.50 just for the privilege of shopping at EB Games, and they were skeevy to boot. Fuck ’em.

The longer version starts at purchase: the clerk offered Wayfare some variety of store membership card, which she declined. The clerk said it wouldn’t cost her anything, and she still declined, but the clerk put it on anyway. Then we go to return the game, and the new clerk mumbles and fumbles for a bit about having to manually alter the price — we assume because it’s now boxing week and the current price is lower than the price she paid before. But no, as he processes the credit card for the return, we see that it’s not for the full amount, and not for the new sale price, either. He starts to explain how the card was non-refundable, and we’re confused — what card? He explains the card, and how it was rung up originally so that the end price for buying the game was the same if we kept it, but for the return the game came out cheaper with an added charge for the membership, which is non-refundable. Wayfare explains how she said she didn’t want it, that she never goes for memberships you have to pay for, so there must be a mistake and why can’t we return that too? He’s adamant that there’s nothing he can do about returning the membership, and that we’re out $5.50.

He says one reason why it’s not refundable is that we could have bought it, then run out to another EB games and used it to save 10% on used games, then tried to return it… I’m like wait, the membership gives you 10% off used games? Yes, just used games. So why, I ask, was the discount applied to this purchase, of a new game? “Oh,” he says, “that was a used copy of Fallout New Vegas.”

This is where it goes from being a rip-off story to a major skeeve-out. He’s already put the returned game away behind the counter so we can’t double-check, but no, Wayfare is sure she bought a new game. I swear there was nothing on the packaging to indicate it was used when I opened it — it was even shrink-wrapped (usually the used games have open cases with just a sticker to seal them). Two sets of eyes saw this game and believed it to be new, and EB is saying that it was actually a used game they sold her. Plus, it was at the same price all the other stores were selling the new copy for.

To sum up: rip-off return policy with a bizarre mandatory membership fee, and passing off used merchandise as new. Avoid EB Games.

Looks like the credit tightening may be taken seriously, as Mark Carney’s warnings are being widely picked up now. There are several other articles with similar themes this week, indeed it seemed to be the Globe’s major story for the week.

In one Globe round-up, the “As one economist puts it, Mark Carney’s warning on consumer debt is akin to leaving the cookie jar in plain sight but telling you not to touch.” analogy was put out there. I don’t think that’s accurate — the metaphor there implies that Carney is being hypocritical or just downright negligent in his expectations. But the children and cookies framework would be better phrased as “Those are for guests, don’t touch!” Because there is a good reason for the cookies (low rates) to be out — to stimulate the economy, capital spending, etc. But they’re not for the kids (housing market) since they’re already hyper enough. The cookies aren’t arbitrarily out, and can’t be easily put away just because the kids are getting into them.

Ed Clark of TD explains why regulation is needed: even though they recognize the problem, the banks don’t want to move first to tighten lending because it would be a competitive disadvantage to the bank that moved first (plus, systematic risk is beyond their business plan, and these loans are essentially risk-free to them thanks to CMHC). A good lesson for deregulation in lots of other areas: competition alone doesn’t always lead to a good outcome.

Michael James had a few good posts this week. another on index investing. I’m not a people person, so I think it’s much easier to pick stocks than to pick advisors/managers…

John Hempton has a post up about some statistics on Chinese ethanol consumption (provided by a controversial producer). There’s a discrepancy between the statistics the company provides, and what the WHO (and educated guessing) suggests is the status of alcohol consumption in China. Either the stats are wrong, or there’s a massive over-capacity building up… I’m starting to worry about stories like these. Don’t know what to do about it yet, but it’s got me thinking…

Jenn sends along this article in the economist about why doing a PhD is usually a waste of time. Speaking of finishing a PhD though, Netbug sends this inspirational video with the helpful tip: “the way to finish something on time and on budget is to ship when you run out of time or money.” Just finishing something and sending it along is the problem I’m wrestling with right now – and I’m long past out of time for sending a first draft to my committee… time to just “ship” something! :)

Jeffery Simpson has a column on misinformed people. Perhaps not surprisingly, “The people who were the most misinformed – in terms of having opinions that varied the most from verifiable facts – were those who watched Fox News almost daily.” I love learning things (I should hope so, as I’ve been a student all my life), and I like being an educator: not even necessarily as a teacher/lecturer, but even just helping to correct misinformation here on the blog. I’m deeply disappointed by (deliberate?) misinformation in the media…

The snow here has been just insane. I wonder sometimes if it’s not real, and just a product of my prolonged illness. Sadly, I can’t wish it away as some kind of fever dream, since I’m not all that sick (just a stupid cough that won’t clear up now).

The city seems to have found some crazy new plows for the sidewalks that I don’t recall seeing in previous years. They cut through the drifts leaving a nearly vertical wall of snow on either side of the cleared path. Though by my reckoning we’ve had roughly 5 feet of snow fall in total over the last week and a half, the general snow accumulation isn’t nearly that high as it has been melting and compacting thanks to bright sunshine whenever it’s not an active snowsquall, plus a final dump of heavy, wet snow last week. Nonetheless, there is still a solid two foot wall of snow lining the sidewalks.

And as I discovered today, that is too much snow for a squirrel to bound over.

I was walking to work and saw a squirrel on the sidewalk playing in the snow. At first I thought he was just having fun, slipping and sliding and jumping around, the equivalent of pulling squirrel doughnuts. But soon I saw he was either very sick, drunk, or exhausted. He let me get very close as I was walking down the sidewalk, then tried to run away from me, but kept slipping over and falling into the wall of snow. I stood back to let him get some room, and then he tried to jump up and over the snowbank to get out of the sidewalk canyon. It took him something like 8 tries, some of which weren’t even close to getting up — he’d try one side, then turn around to go for the other but jump halfway across the sidewalk and land before even reaching the other snowbank, crash into it after sliding, turn around, and try again. I didn’t know whether to laugh hysterically, feel sad, or call animal control over his weird behaviour (I ended up splitting the difference on the first two). He did finally get up and over, and then basically swam through the snow drifts to a tree. Once on solid bark, he just hung there and wheezed.

There are a lot of questions and confusion about the TFSA out there, which I find surprising since to my mind it’s basically the most straight-forward tax-sheltered account the government has ever created. You put $5000 in. You get to invest in whatever you want (plain jane savings/GICs, stocks, bonds, mutual funds of same, even split it up and do a bit of each at different institutions as long as the total is < $5k/yr) and it grows tax-free. You can take it out whenever you want, tax-free. The next year, you get $5000 more room, and any room you didn’t use in prior years (or got back due to withdrawals). That’s about it.

But still, people have questions, so on the CMF I tried to explain it in a different way:

Think of the TFSA like rabbits in your backyard. The government is your parents at the front door. They say you can bring 5 bunnies into the backyard every year. Beyond that, they’re looking out at the front door, so they don’t care what happens in the backyard.

You can have your bunnies reproduce like, well, bunnies, you can put them all in one big pen or a bunch of different ones. It doesn’t matter, as long as no more than five ($5k in) bunnies goes past your parents per year.

If you need to take a bunny out for some reason, like to bring it to show and tell at school, your parents will remember you took that bunny out and will let you put it back in the next calendar year and not count it against your $5k limit per year – it’s not a new bunny. (recontribute withdrawals) Even if you did really well at bunny farming and want to bring all 40 of your bunnies to school with you, your parents will count them up and let you bring those back in the next year without counting against your new year’s limit of 5 bunnies.

If you don’t handle your bunnies well and they all die, your parents don’t want to hear about it, you can’t bring in any more bunnies.

It was a pretty crazy month+ on the market. The overall indexes didn’t have huge swings in them, but I saw a number of stocks I watch (but don’t own) swing all over the place +/- 10%, with several-percent changes day-to-day. Part of me started to freak out at the apparent increase in volatility, but for the most part I just rode it out. Some key points:

Let’s start with Priszm, the troubled operator of KFC restaurants in Canada. I’ve written about Priszm many times before, in large part because I think it’s an interesting story with a lot of lessons to learn (and in no small part because I lost a lot of money on it, so it’s a very personal, painful lesson). Today’s update to the saga is that they’ve sold off over half their locations. The Ontario and BC restaurants were the “core” of their business in many respects, as Quebec has always been a bit of an oddball, and there just aren’t many restaurants in the other provinces (432 total, 232 for sale). So it looks like this is about it for the Priszm story: this is quite likely the first step in a wrap-up of the business. The amount they’re getting for the sale lines up with roughly half of the P&E and franchise rights values on the balance sheet, so they’re likely getting nothing back for goodwill. If that’s the case, then there’s not likely any value left in the equity.

In an effort to conserve cash as the company prepares for the traditional KFC sales decline during the winter season, Priszm withheld its continuing fee that was payable to the franchisor on December 7, 2010, as well as its debt interest which was payable to its senior debt lender on December 10, 2010. […] Priszm is also in the process of obtaining a forbearance from its senior debt lender relating to the debt interest which was payable to its senior debt lender on December 10, 2010.

Here we go, the end times are nigh. I’m actually surprised that they didn’t make this payment: I figured the default would come at the end of the month.

Canexus (CUS.UN) had another good, consistent quarter — most critically for me, demonstrating that their new technology upgrade is actually working (it’s always a worry with me that big capex spending on new technology for plants won’t actually deliver the efficiencies promised — see Opti). Despite that news, the stock barely budged, so I went out and bought more. It’s now roughly 9% of my portfolio, has an 8% yield, and the payout ratio (now that all that capex is coming to an end) is down around 50%, which means that distribution should be quite safe going forward. The big open question is what the end-game is here for Nexen. Nexen owns the lion’s share of Canexus, and is reported to be looking to sell its share. Would that go to the public market, or would another player (one of the pension funds?) instead try to take the whole thing private?

Other than that though, I’ve been a seller as stuff has been rising. I had an ask in on Imris (IM), but then got blindsided by the sudden share issue and NASDAQ listing (I thought it would have taken way longer to set a price and open — or at least that it would happen one morning, rather than halfway through the trading day!). So my nice-looking gain there has been wiped out, but I’m fairly confident it’ll get back up there. I do worry about why they were raising more money after finally starting to turn a profit — leaving their core competencies? I’ve also got a high ask sitting on IPL.UN (kind of the opposite of a stink bid).

Basically, the theme is that the rest of the market suddenly has a hard-on for yield, and with many trusts dropping to ~8% yield, I’m happy to take the capital gains now, and plow the money into the broader index. Indeed, aside from keeping some money in cash to cover the costs for finishing my PhD (another semester of tuition, and hopefully soon a few hundred dollars in printing and binding costs), I haven’t really found anything else I like to buy in my active portfolio, so I’m sending the money off to the indexed side of things.

One final note for the active portfolio: Freddie Mac reported its third quarter, and the results were incredibly obtuse. The numbers looked very promising for the bull case on the preferreds: delinquency rates are improving, non-performing loans have stabilized, and though they took more provisions for credit losses this quarter, it looks like they should be fully reserved at this point (a ~30% severity should be in the ballpark). However, the politics are still terrible and looking worse: I’ve made the point before that capital reserves are there to keep a company out of the shit pile, and once its in government protection, it doesn’t make sense to borrow money at usurious rates to maintain that margin-of-safety: the government becomes the margin-of-safety. Yet here FRE came up $58M short, and for the dollar amounts involved here, that’s basically a rounding error on a neutral quarter — next quarter they should start making progress towards paying back the treasury. Yet rather than overlooking the immaterial deficiency in their capital ratio, or just making them borrow the $58M from the government, the conservator requested an even $100M. This makes no sense at all, except if indeed the government is trying to make a profit from FRE at the expense of the other stakeholders. So even though the credit numbers look to be getting better, I think that the political risk is alive and well, and if anything is even more clearly negative.