Blessed by the Potato

Bell has announced that it’s changing its UBB strategy in light of the fierce opposition (thanks to those of you that wrote your MP and/or the CRTC!). This is clearly not a case where Bell has seen the error of its ways and recanted, but just trying a less bad strategy to game the system to fleece the customers of its competitors. They’re still trying to push through a UBB scheme, but one that allows independents to aggregate their users, which gives them some flexibility on creating their own offering (rather than “white label” Bell retail). Still, it’s a cash grab, with the Globe reporting that fees would be 30 cents/GB — still gouging by about an order of magnitude. It’s not clear if this would replace the tariffs in place, or be an additional charge. As an additional charge, it’s still way too much (though given that the independents pay for their throughput, any UBB charge is too much). As a replacement for the existing tariff, I can’t really say, we’d have to see what the independents have to say on the matter. There’s speculation that Bell did this so that UBB wouldn’t become an election issue, though I have to wonder how it could: all the parties are already against it, which makes for a bit of a boring debate.

Also, Michael Geist had a series of posts on UBB this week, including one where he had some students put together a research report on UBB around the world. He also mentions the lack of linkage between congestion and charges designed to relieve congestion.

What’s the cost per GB? We’ve thrown around figures for the 1-3 cents/GB range, but that involves a fair bit of reverse engineering and some (pretty fair, IMHO) comparisons to US networks. Michael Geist digs up a report from Bell on the cost of bringing broadband to the boonies, and finds that with Bell’s own worst-case numbers for building a rural network from scratch are still less than 8 cents/GB. For the existing, largely urban/suburban network, the 1-3 cents/GB figures floating around are very likely correct.

I’m a snacker, always have been, but thesis writing has made it just that much more intense. Due to the constant shoveling of food down my throat without any movement at all, let alone vigorous cardiovascular exercise, I’m always on the hunt for “healthier” (less bad) snack options. Here are some of my favourites:

Old Dutch baked potato chips: they’re chips, they’re delicious, and only moderately unhealthy. Unfortunately, despite helping the RCSS clear out their shelves every week for the last few months, they seem to have stopped carrying them, and I have never seen them at Metro or Price Chopper. So I have no idea where to buy these now. I’ve also tried Lays Baked chips, and Old Dutch were far superior in my opinion: more of a solid crunch, as the chip is a bit thicker.

SuperSlim Brown Rice Crisps (several other varieties): these are a rice cracker with a really nice, light, crunchy texture. Not at all like a rice cake. They’re fairly salty, with a really finely ground salt, providing even covering. They stay crunchy for several chews in your mouth, like a nacho would, rather than going chewy like you’d expect a rice cake to. I like them with cheese, but they’re ok on their own. Despite the salty taste, I can apparently eat a whole box and “only” hit 40% of my daily sodium intake. I don’t have the chips to compare to, but I think they’re even healthier (as in, lower in fat) than the baked chips. They do have some kind of starchy coating on them to help them stay crunchy, and after eating a few dozen, I end up with a sticky residue on my fingers, so keep some wipes handy.

No Name Zoo Animals & Castle Adventure snacks have been the other big hit here. They are candy, but packaged into little 100-cal packages for childrens’ lunches… not that that helps me when I eat 5 at a time. They come in whimsical animal or dragon/knight/wizard shapes so that I can let my imagination run wild while fuelling up. They also have vitamin C to prevent thesis scurvy.

I like the note in this story about the advisor making clients check the box “I want to buy low and sell high” or “I want to buy high and sell low.”

Michael Geist had a tonne of UBB-related posts up this last week or two. I haven’t had a chance to read any yet, but I’ll get around to it (and likely posting on it) soon. If you can’t wait, go ahead and read him yourself!

Last time around I briefly mentioned Tokyo Electric Power, with a pointer to Financial Uproar’s take. After that little bump I mentioned, it just tanked. I was surprised by that: my take was that the cleanup costs would be several billion (let’s say $10B), and the liabilities were capped by Japanese law. What transpired was that that last part looks like it may not be true: though there is a law in place to limit liability for “exceptional” natural disasters, and that it would be a no-brainer that the worst quake/tsunami to ever hit Japan would count as “exceptional”, that’s not automatic, and the government is apparently not going to make that declaration. I don’t have expertise in Japanese law to say one way or the other, but I’m anxious to see what happens in court down the road.

Supposedly the reason for that is that, because of the public scrutiny, etc., the politics wouldn’t be very good of letting them partially/mostly off the hook. But no matter what, the lay public is going to have a bee in its bonnet about nuclear plants for some time to come now. If the Japanese government leaves TEPCO out to dry on the liability thing, despite the unprecedented size of the natural disaster and the existing laws, that could send a chill down corporate spines, and that would really sink nuclear power in the country (and possibly, everywhere).

Be sure to check out the comments section of my previous post on REITs vs Condos. Rachelle had some good points about the risks of REITs, and I realized that though I much prefer REITs to condos, I didn’t quite emphasize enough that I’m not hugely keen on either. After all, REITs are only 3% of my portfolio now. I’m not sure under what circumstances I’d go to zero allocation — even in my active portfolio, passive thinking on asset allocation means that, to some extent, I’m willing to risk losses to get exposure to a sector. I also explain further what I meant by “somewhat” interest-rate sensitive (TLDR: less leverage than retail condos, and the effective rates today aren’t as far below “normal” 2007 as CMHC-insured residential rates are, so the correction shouldn’t be as bad).

The Globe had an op-ed on the housing bubble here, saying “signs point to a severe housing correction.” Nothing new to BbtP readers (though he does trot out the hot asian money meme). I think the most remarkable thing about this article is not what it says but the very fact that it not only got published as-is in the Globe, but it was featured prominently rather than buried (or in a point-counter-point pair). If I was in a more optimistic mood, I might say that the big drop-off in sales volume for the 2nd half of March and the uptick in such articles in the MSM finally marked the top… but we’ll have to have passed it by months/years before we can really say where the top was. As always, patience.

A good TED talk on apathy in politics. I like his proposed zoning notice for Toronto. The topic of apathy and politics is perhaps particularly apropos with the current federal election.

Oh, humans, can I ever get you to stop relying so much on your limbic system? On the internet today: “nothing is more horrifying or ignorant than to hear the pro-nuke faction rushing forward to boast, as they are doing these days, that nobody-has-died-yet-from-radiation-at-fukushima.” Yes! Damn them for trying to inject facts and rationality into our Fukushima fear and outrage orgy!

I know that Word can be a downright malicious program sometimes, especially when formatting decides to take on a life of its own, animated by the unholy force of autocorrect/autoformat. I’m usually the wizard called in to correct the bad behaviour. But right now I’m dealing with a very strange case of possession.

I have a line that keeps bolding itself. I’ve unbolded it 20 times already, and yet whenever I go off and work on other parts of the document, poof, it’s bolded itself again.

WTF?

Update: And before I could even publish, it stopped. I had another issue with paragraphs taking on formatting style labels that weren’t theirs. It looks like that one was when I had an outline with point #1 as heading1 and point #2 as heading1 and then tried to go in and start writing bodytext between them, even though the new text looked like bodytext was supposed to, it was still registering as heading1, which matters when you have a ToC generated by the heading1 lines in the text… Anyhow, to get rid of the formatting/tags on the intervening text, I had to unformat everything from point#1 right through to point#2 and then reapply the formatting. Sigh.

And one final weird issue I’ll let you in on: I’m also something of a tax wizard, and I was getting my stuff together to start preparing my return this year, including a folder with all my tax slips, receipts, trading summary, capital gains schedule, etc. I also grab the previous year’s tax return and quicktax (now turbotax) file, which can help greatly with the process. I had 08 and 09 in the usual directory and made a copy to use, and then spent like 15 minutes searching and searching for my 2010 tax files. I looked on my desktop, I fired up my laptop, my old laptop… finally, it dawned on me that even though it’s 2011 now, it’s the 2010 tax year I’ll be filing this week. Sometimes the little things trip you up (related: how many PhDs does it take to turn on a projector? This week’s answer: 3).

Update 2: Oh, one more Word demon I forgot about: some time ago I utilized the feature that let you search not just for a word, but also for a word with a particular formatting. Ever since, any time I’ve hit CTRL+F and searched for something, I get no results, then scratch my head, and finally realize that “underline” is still active. I can turn it off and make my search work, but I have no idea how to make it stop defaulting to that. Any ideas, oh great hivemind?

Macquarie research put out a comparison of REITs vs direct (condo) ownership in Toronto and Calgary. The story was picked up by the Globe and others. It’s an interesting comparison, especially the part about leverage, when another article this week warned of the dangers in leverage.

“Unbeknownst to most of these families, their theory of home ownership as a safe, low volatility investment is based on the often-mistaken premise of no or little debt. This is a crucial blind spot because the moment that a large amount of debt is used to buy a home, that safe investment theory goes completely out the window. […] What happens when that family buys that house with just 10 per cent cash down and a 90 per cent mortgage that promises an interest rate of 3 per cent to the bank over the long term? Amazingly, the equity in the house has now become dramatically more risky than before. The equity is now three times as risky as the overall market rather than 30 per cent as risky. This is more risky than an investment in nickel mining stocks or Internet start-ups.”

I was asked after these reports about REITs, and specifically if they’re as risky as the housing market, given my views there. Briefly, a REIT is a real estate investment trust, a type of investment that owns real estate that it rents out. The majority of the cash flow is paid out as a distribution to the investors. I tend to view them as a step up from fixed income: essentially all of the anticipated return will come from the distribution (rather than capital gains), and though that can be cut or expanded depending on circumstances, it should for the most part be stable.

I do invest in REITs (until late last year they were a huge part of my portfolio, but now are down to ~3% as I was selling as the prices appreciated), and don’t think that they’re in for the pain that residential housing is, due to several key reasons.



The first is diversification: both personally and for the REIT. Even if I wasn’t hugely negative on housing, I’d be somewhat uncomfortable having my house be the entirety of my net worth for the better part of a decade. With a REIT, I can get some exposure to real estate without risking it all. Also, the REITs themselves are diversified, holding many buildings all across the country. Even if I think Vancouver and Toronto are bubbles, Canada on the whole is not quite as bad.

The second is the sector: most REITs I invest in lease retail and commercial buildings (plus some industrial and government properties). Even the REITs that invest in residential apartments are not buying individual houses or condos. The housing market has been blown up by speculation and cheap-as-free CMHC financing, but those factors haven’t applied to multifamily residential (i.e.: apartment buildings of 5+ units) or industrial/commercial/retail buildings.

The third is return: REITs are investment vehicles for professionals, run by professionals. Before investing money, a building is evaluated for its investment return, and only its investment return (not how nice the school district is or how grown up you’ll feel buying it or how only scumbags rent or how pretty the countertops are). A common measure of investment return is the cap rate: the rent less the expenses divided by the price. The lowest cap rate I’ve seen on a REIT purchase in the statements I’ve read for the last few years was 5%, but 6-8% is more typical. For residential housing, buyers don’t evaluate it for its investment return (often at all, but certainly not as a top priority) — some people don’t even investigate what their housing alternatives are, and I kid you not, more than one person (on the internet, granted, so trolling is a possibility) didn’t even know that you could rent detached houses/townhouses/anything but apartments — and if they try, don’t typically do a very good job of it (innumeracy at work). In Toronto, a typical residential condo cap rate is something like 2% right now, with gross yields at 5%.

And the fourth is liquidity: if I buy a house and I’m wrong, I’m sunk: up to 10% just in transaction fees, and in a down market it can take a long time to sell (or a big discount). Even if I could recognize a downturn early on (say after only a 5% drop in prices), I’d probably lose 20% by the time I got out, not even accounting for the risk-layering of leverage. For a REIT, transaction fees are the same as for other stocks: small (for the position sizes I take, I try to keep fees to less than 1%). If I’m wrong, I can sell as soon as I decide to — again, if I could recognize a downturn after only a 5% drop in prices, I could get out losing only 5-7% (depending on transaction fees).

The third point in particular explains why I don’t think REITs are as prone to a real estate crash as residential housing: the over-valuation simply isn’t there in the first place. Plus, unlike residential housing speculators, they don’t rely on flipping property to make money: even if property valuations slide, as long as it’s not so far as to threaten the ratios on their loans, the income should continue to flow.

That said, REITs have had a big run up from the financial crisis lows, and since they are leveraged, they are somewhat interest-rate sensitive. They’re not without their own set of risks. For residential REITs, if rents come down due to competition from accidental landlords, they could take a hit. Even if there was zero spill-over from the coming condocalypse to commercial/retail values, REIT pricing could suffer if crowd psychology caused people to jump ship from anything with “real estate” in the name. A downturn in the economy that causes businesses and shops to close means they have higher vacancies, and thus less income.

There’s been some discussion over whether to hold individual REITs or the iShares REIT ETF XRE. XRE has a 0.58% MER, and not a great amount of diversification, with only a few names making up three-quarters of the fund (Riocan alone is a quarter!). For zero MER, one could buy the top one (or two or three) holdings and get the same basic exposure, it’s argued. Though the MER is a touch high for an ETF, it’s still nice to get the diversification… but I personally wouldn’t/didn’t go the XRE route for a different reason entirely: I just don’t like RioCan (REI.UN). It only yields 5.5% (as of today), and that’s with over-distributions (paying out more than cash flow as they hope that future income growth will close the gap). I know yield-chasing for the sake of yield-chasing isn’t a good thing to do, but there are other (smaller, ‘natch) REITs paying substantially more with, IMHO, the same riskiness as RioCan. Either way though, not a bad way to go for a part of your portfolio, especially as a renter without other real estate exposure.