Blessed by the Potato

I haven’t talked much about individual stocks lately, largely because I’ve been proven to be pretty terrible at evaluating them (or at least, no better than just buying the market as a whole, as I’ve been dragged down with it). However Yellow Pages (YLO.UN) took another 10% hit yesterday, and is down 20% on the month, and I just can’t wrap my head around why. There’s been very little news lately, though apparently BMO released a research report putting it as an “underperform” with a $4.50 price target. I don’t have access to it, so I can’t see the reasoning, but that sounds downright crazy. TD also released a report today, rating it an “action list buy” with a target of $9 (it closed at $5.25).

I find I agree with TD’s report, though of course YLO is my biggest single holding so I’m bullish on it to begin with (and have been buying all the way down). Basically, things are going to be a little rough in the autotrader, etc., segment, but the basic Yellow Pages business should roll along just fine and generate enough cash to cover the payouts, which is what really matters to most investors in these things. Very roughly speaking, the payout ratio is around 80%, and the “vertical media” part makes up <20% of revenues, so as long as the core business stays steady, the payout should be fine until 2011. Of course, investors these days will sell at the drop of a hat, any hat. So a negative report from BMO as well as news that “recession-proof” companies like Kraft can still manage to find huge losses can tank a stock (though the market as a whole didn’t seem too concerned by Kraft’s earnings).

These low prices are tempting me to do something stupid, like borrow money to buy more (20% return when it only costs 5 – 5.5% to borrow??), or sell something else to concentrate on YLO (hasta la vista, BCE), but I’m already a little uncomfortable with how much YLO I own — if I’ve made a mistake in my reasoning (something that’s happened an unfortunate number of times over the last year) and it tanks (moreso than it already has) then that could start going from unfortunate to catastrophic. I think I’m going to sit around and do nothing (ok, maybe I’ll fantasize about loading up at $5 and then raking in the cash when it inevitably goes back above $7).

Not many people outside a university know this (and not many within, either), but there are a lot of research studies out there yearning for human participants. I’d know, since my own study is in desperate need of a few healthy brains — but I’m not supposed to advertise the fact that you can make $50 for 2 hours of lying still or that you get a CD with images of your brain on it so you can have the coolest facebook profile around. So instead I’ll limit myself to talking in generalities.

First off, paid research studies aren’t quite like you’d see in the Simpsons — they’re not going to inject you with untested drugs and pit you against chimpanzees. Most studies involve a short psychological or physiological test of some sort, possibly combined with some kind of tool to look at what’s happening in the brain (MRI, EEG, etc). They’re not necessarily painless — some do give a bit of pain, or draw some blood, or have you exercise one part of your body until it cramps up, or show you grotesque images from wars and holocausts to measure your reaction. Some are inconvenient, requiring an hour of your time at the same time every day for a week or something like that… but they generally pay at least minimum wage, and usually higher for ones that are more inconvenient, which is not bad for a university student (or as bonus income for anyone that wants it, really).

A volunteer recently asked me why it was so hard to get people “These studies are a great way to make a few bucks, and the posters are all over campus. How can people miss them?” Unfortunately they do somehow, perhaps because the recruitment posters are a little bland, and don’t prominently feature the money aspect (or often mention it at all). After all, volunteers are supposed to be doing these studies for their love of science, to be part of history in the making: the financial kick-back is supposed to be just an incidental bonus. After all, it would be unethical to have people participate in a study just for money, especially if they put themselves at risk in the process. It’s an ethical dilemma I don’t fully grasp: we allow people to put themselves at risk for altruism, but not if they make a risk-benefit analysis with money? Of course, I have to say that there is the issue of paid subjects telling us what we want to hear, or doing the minimum to try to get paid (whereas those with an interest in the study might be more willing to hold their damned heads still).

If you are in the UWO area (or any university for that matter), have a closer look at some of those “volunteers needed” posters on the various designated bulletin boards. You may be pleasantly surprised at the rewards, and help a needy PhD student finish off their degree. If you’re in (or going to visit) the London area and want to know what research studies are going on, send me an email and I’ll hook you up!

Well the opposition coalition seems to have lost its will to run the country, which is unfortunate because then it makes Stephen Harper’s whining to the GG and setting the country adrift work. The new version of the budget is out, and it doesn’t wow me.

I reluctantly agree that a monumental stimulus package is probably needed to keep this recession from snowballing into a depression, and that going into deficit, temporarily, is probably needed. However, I can’t wrap my head around the amount of money we’re forecasted to miss out on. A lot of it is due to lack of tax revenue (you don’t pay taxes if you don’t make any money) rather than spending, but still, where’s the grand stimulus?

Where’s the reintroduction of the green car feebate to stimulate auto sales? Instead we get some vague restructuring of car loans. Where’s the grand vision, the infrastructure spending to not only get bodies working, but also to lay the roots of a better society when we come out of this? In short, where’s my Windsor-Quebec Shinkansen???

Universities, never exactly rolling in the dough even in good times, are finding things are seriously tight as their endowments have been decimated by the stock market (and real estate) crash. PhD comics pointed out that academia is often a refuge for those who would otherwise go into engineering or business or the real world in general: spend a few years in grad school below the poverty line (but at least with some kind of income) and wait the recession out. However, this time there doesn’t look to be the capacity there. I’m pretty sure our department is shrinking, and will shrink more next year as many supervisors seem to not have the funds to take on students. The US is throwing more money at this, specifically towards graduate fellowships, so why nothing from our government?

I did like seeing the duration of EI benefits increase. To my thinking, EI should be automatically scaled to the unemployment rate: as the job market gets tougher EI should automatically extend a few weeks/months to reflect the fact that people need the extra support and that finding a new job is just plain harder; likewise in a hot market EI benefits should be scaled back slightly. Another step I’d like to see is flexibility added to RRSPs: they can continue to tax withdrawls, but the contribution room should be given back, though I don’t think many people in the situation of both having RRSPs and needing to tap them in hard times are terribly worried about losing their tax shelter for future years.

There’s a small rejigging of income tax brackets, leading to a small savings for most Canadians (most of which was already planned to account for inflation), arguably where the previous frittering of the surplus (yes, there was a surplus just a year ago) should have gone, rather than to cutting the GST, though I would have argued it should have all gone to paying the debt from the last recession. The problem with broad-based stimulus packages like this is that the dollars very quickly become diluted: $40 billion spread out amongst 30 million-some Canadians comes out to something like $1300 each. That’s not something I’d sneeze at… but it is easy enough to have that disappear in a family budget, especially after a summer of record high gas and food prices, or to vanish into savings*. To get the economy rolling again a big kick is needed to specific areas that will, hopefully, get those going and lead the way for the economy as a whole, rather than spreading a small amount of love around everywhere. Of course, this isn’t a video game and the recession monster’s weak point isn’t flashing neon orange telling us where to hit it. The banking and auto sectors might be good ones to try to prop up/nationalize — banks in particular are needed to supply credit to grease the wheels of the recovery. However the budget also contains a lot of measures targetting home ownership: renovation credits (which might be as much about getting contractors to issue receipts and file taxes), and changes to help get first-time homebuyers into the market with a modest increase to the HBP and a tax savings of up to $750 for a purchase. I don’t think trying to prop up the housing bubble here is going to help the economy. In fact, more money sunk into houses/mortgages by first-time buyers is less money out there circulating in the economy. These are also poor measures because they can’t even focus spending in one area in a focused way: there are at least 3 different ways of trying to stimulate housing rather than that one big kick.

I’m also a fan of the targetted big kick for infrastructure because then the country gets something it might need/want anyway at rock-bottom recession make-work prices. Take $40B, heck raise the GST back to 7% while at it and make it $60B or whatever, and build a shinkansen in Ontario, a few hospitals in BC, some nuclear plants in Alberta, some wind farms in Saskatchewan, carve a whole new riverbed and hydro project through Manitoba, create a shinkansen network in Ontario and Quebec, covered bridges for NB, some tidal energy projects for NS, and a teaching hospital for NFL, then have PEI build a 50-storey phallic fucking tower just because they can. You know, at least that way you get something to show for your stimulus money.

* – Savings are great things to have on an individual level. However, as a country as a whole we should be doing our saving during the boom years, and then tapping the savings during downturns to help stabilize everything — stimulus packages that just go straight to savings just make recessions worse. I’ve seen some recommendations that stimulus gift cards be sent out: something that you have to spend (though that wouldn’t necessarily stop people from then saving the equivalent amount somewhere else).

In a brazen move, TD has introduced an inactivity fee for unsecured lines of credit, and apparently is also pushing through a rate increase. Despite having a LoC at TD myself, I haven’t received any notification of this from TD yet.

From a customer care point of view, the inactivity fee is bad optics — LoCs were marketed as accounts with no fees that would be there when you needed them, that you could open and have just in case… then bam! as soon as the economy starts to sour and people might actually need to use them, they get pricey. The fee is targeting those people who don’t need the credit and so are arguably the smallest credit risk! Personally, I’d be more annoyed at a rate hike since the fee is easy enough to get around (move money out for a day, put it back in the next, pay a cent in interest, and you save the $35 fee).

But like many things going on these days, I don’t think this is exactly what it appears on the surface. This to me is a fee that will never be collected. It’s unfortunate that they’ve chosen to do things this way, but this fee has been designed to infuriate people into closing their inactive LoCs. TD wasn’t making any money from people who weren’t actively borrowing and racking up interest charges, but they had to keep some capital reserve on hand in case they did. And lately they (and the other banks) have had to raise capital at some pretty costly rates to shore up their ratios, and the big increase in default rates coming down the pipeline hasn’t even hit yet. So it just made sense to try to convince those people to close their accounts, and a “eat shit and have a nice day now” letter in the mail is one way to achieve that. Heck, just look at the number of people around the blogosphere closing their LoCs in outrage. Of course if they do find a need for that loan, they’ll have to reapply from scratch, and the rates offered nowadays can’t be pretty. After three rounds of negotiations with TD last summer I managed to get Prime+1% on an unsecured LoC — I doubt I could get that on a secured loan these days.

Edit: And just as I get around to posting this after writing it two days ago, I find out that TD has cancelled their plans for the fee, citing negative feedback. I suppose I was at least correct in that this was a fee that would never be collected.

I’ve started reading a blog with a horrendous eye-puking colour scheme called Bronte Capital, by John Hempton. Why do I subject myself to 4.5″ of column lost in a 12″ sea of green? (actually, these days I just read the RSS feed in Thunderbird) Because he writes about a lot of interesting (to me) macro-economic issues, in particular bank failures. To paraphrase a number of his posts, the banking crisis was started with some bad bets, some opaque financial instruments, and a poor sense of risk management and risk correlation (the odds of improbable losses all occurring together). But this was a fixable problem. What has happened is the bad bets, the subprime loans etc., have spiraled out into a crisis of confidence in the banking sector. Nobody knows who is and isn’t solvent, and lending between banks dried up. As runs on banks happen, governments are forced to step in with bailouts before the house of cards comes crashing down even further.

So it was a recent post of his that made a point that stuck in my mind: “[In many cases,] the processes are as important as the outcome. Indeed, they are more important. Markets work because we have a legal process.” When it’s not clear whether or not a bank is actually insolvent, yet the government decides to step in, unasked, and nationalize it on a Sunday afternoon, wiping out the bondholders (as well as the equity holders, where that risk is more explicit), and then next week acts completely differently for the next bank, it makes things very unclear. The markets (both stock and debt) can price in risks and defaults and bad loans, but the random acts of government are chaos. If investors can’t even begin to guess at how much something might be worth and whether the government will wipe them out, they’ll stay away.

Indeed, it was this exact problem that really raised my ire when Harper and Flaherty decided to make a 180 degree turn, breaking their election promise to tax income trusts. If it’s necessary, then you’ve got to hammer the market with data showing that’s the case. A phone book sized report full of evidence should have landed on the desk of every trust investor in the country explaining why it was absolutely critical to flip-flop and tax trusts, and explaining the process of that decision, and how it was absolutely justified, and followed a process of due consideration and laying the groundwork for people to anticipate any further moves so that investors never feel blindsided. Now the clowns in blue are at it again, trying to speed up the auto bailout. As though the bailouts and mortgage buy-backs weren’t ad-hoc enough, it’s very strange and troubling to read that the government is the one lighting a fire under the auto companies to take government money. WTF?

So far Canada’s banks seem to have avoided the worst mis-steps of the rest of the world. Indeed, I own some shares of them, so I’m hopeful things will pull through all right. But it’s time for someone at the government to sit down and draft some rules — hopefully ones that will never be needed — guiding a potential nationalization so that we don’t follow in the footsteps of the US. Heck, draft some rules for bailouts, nationalizations, and infrastructure boosts for other sectors as well so that people can know what to expect.

…and just as I was writing this up, along comes an article that says the Canadian government is taking steps to change the rules to allow it to own shares in banks. I find this a little troubling, actually. First off, Flaherty has shown no foresight in anything he’s ever done, which makes me worry that Canadian banks are closer to needing a handout than they’ve previously let on. Indeed, they all just did a fairly expensive round of fund-raising, ostensibly to boost capital levels well above the minimums to give investors some peace of mind, but now I’m starting to wonder if desperate times are nigh. Also, no mention is made of due process or deciding when or how the government will take a stake, which was the biggest point John Hempton had to make. I am invested in the Canadian banks, with rather huge paper losses, but I’m hanging in on the hopes that they will avoid the worst of this banking “thing”, and my investment will turn around. I’ve had some heartburn over the last year, and had to re-check the dividend yields a few times to stay the course, but now I’m having serious thoughts about bailing. After all, I have been far too optimistic all along. I was wrong about other banks: this time last year I was looking at Citi (I didn’t buy), and I figured that they got ahead of the credit troubles by raising cash early, even though the initial stock sale at $25 seemed like a steep discount at the time. Now they’re floundering. I was wrong about the extent of the troubles (and pessimism about said troubles) for the Canadian banks: I’m down 35% on those, and that was after waiting until I felt most of the bad news was “priced in” to buy…