Blessed by the Potato

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.

I’m pretty miserably sick here. Sore throat, cough, fever, and vile fluids being produced all over the place. I think the combination of thesis stress and digging out from over a meter of snow just did me in.

My cache of drugs was pretty low to be heading in to a major illness. In particular, I was just about out of advil; I had to ration them yesterday so that I’d still have one to take this morning to get me out the door to the pharmacy.

On the bright side, I was going through the Pharma Plus flyer, and just about everything I wanted was on sale. Advil, vitamins, mouthwash, nyquil, and cold-fx all had pretty substantial sales on. Plus, it was a big bonus airmiles promotion if I spent $50 or more (which wouldn’t be hard to hit with all the stuff on my list). There was even a 1-day sale on 7-up ($2.22 per 6-pack of bottles! awesome!) today. I didn’t feel like driving, especially since we got another dusting of snow last night, and that would involve sweeping the car off. The Pharma Plus is only like 3 blocks away, so I walked.

And when I got there, there was no sale tag out for the Advil, just one of the “switch to the store brand and save X” tags. I figured I must have remembered the flyer wrong, put some store brand ibuprofen in the cart, and moved on… but the vitamins had no sale tag either. Nor did the mouthwash. The toblerone did, but not the door-crasher one-day sale price, and the 7-up wasn’t even available in the bottles. Something was definitely wrong, so I went to the front of the store where the flyers usually are to double-check (maybe I had the effective day wrong? Maybe I dreamed it all in my fever?), and there were no flyers. There wasn’t even that tray where they usually sit. I asked the cashier for a flyer, and he said they’re not a flyer store.

What? I know they were a flyer store just a few months ago, the last time I was there. How can they not be a flyer store? Can they do that, opt to use the Pharma Plus name and everything but then not follow their flyer? And also, if they’re not a flyer store, why is Pharma Plus sending a flyer to my house? The next closest store is 4 km away, and I have to pass by three Shoppers Drug Marts (and this Pharma Plus) to get there. Not a very effective use of the advertising budget…

I have to say though that given the amount of snow that was dumped on London, the city has done a decent job at cleaning up the sidewalks. This is particularly remarkable because the city usually does a terrible job at keeping the sidewalks free of snow — the sidewalk ploughs seem to take a day or two before they come around, and by that time the snow has been packed down into an irregular icy surface by the passage of what pedestrians there are, and that’s nigh-impossible to walk on. The one issue is that at many intersections the sidewalk ploughs went by first, and now the street ploughs have put up an icy barrier for pedestrians to hop over. Nothing new to anyone out there, I’m sure, but with the amount of snow we have, those ice dams mean that we’re going to have some epic meltwater ponds forming soon…

It’s been a hell of a few weeks. Thesis progress has been exceptionally slow. Diet has been downright terrible for similar reasons. The snow is ridiculous here: something like 4′ has fallen since Sunday. The height of the snow on the lawn isn’t quite that high, as it’s settled and compacted, but I’m calling it 4′ as I measured 3′ of snow after the first day and a half of solid snowfall, and had to clear another foot or so after shovelling that away. And now to top it all off I’m sick. I think I’ll cry if I end up writing better while hopped up on cold medicine.

After the first 24 hours of snowfall, and halfway through the third round of shovelling:

Then, against all reason and goodness in the universe, it continued to snow all through the following day:

And while the worst of it is over, it’s not completely over yet. It’s going to snow at least a little (up to a few inches) for each of the next 5 days, according to the forecast.

First up in the links, the 4th edition of the Canadian Real Estate Blog Carnival. As an update to my post in that, Wayfare tells me that the landlord has reimbursed us for most of the materials cost of the work we did (I believe everything we had receipts for).

Nova Scotia proposes mandatory organ donation. I tend to agree that the default should be “donor”, but it’s an ethical minefield for a number of reasons.

Another person (Prem Watsa this time) starting to question how far Chinese demand can take commodity prices.

A hilarious episode of BNN’s Market Call Tonight last night, as a real estate broker called in to rant about why rates can’t go up for 10-15 years. His logic is that a rate increase would cause a real estate crash, so it can’t happen. That reminds me of some other backward-thinking, such as the Globe article some time back that said Toronto rents were going to go through the roof in the next few years, because otherwise investors buying condos at today’s prices couldn’t make a profit. I find it hard to believe that some people are so wedded to the real estate only goes up meme that it becomes totally tautological as they use it as a justification for other calls… but there we have it.

Ellen Roseman reports on a case of a real estate agent abusing the buyer’s agreement.

I already had a quick note on the December TFSA strategy, but CC also has one for you.

David at Toronto Realty Blog points to an article about questionable spending at MPAC. He then comments on how wildly variant the MPAC assessments are relative to actual sale values in Toronto. I then point out that getting the absolute valuation of properties isn’t important to MPAC, since it’s only the relative valuation that matters (though perhaps it is fair to poke them for playing their tax-payer funded Wiis since they don’t do a great job there, either). The city doesn’t collect more tax when property values go up. Instead, the tax rate is adjusted so that their total revenue figure comes out: they basically take the total budget, divide it by the sum of all property values (assessments), and that gives them the tax rate for the year. The MPAC assessment is just for determining relative taxation. You can check that by looking up what the property tax rates were over the past few years. The tax rate actually went down from 2005-2006, and 2008-2009-2010. Under each of those boxes for the year is an example calculation, where you see that despite the changing tax rates and property values, the total tax grab goes up fairly consistently by about 2-3%/yr, which is I’d wager about what the typical Torontonian has experienced. When I am finally redeemed and property values do turn around… property taxes won’t. The mill rate will just be adjusted up to compensate for the lower assessed values so that the take remains the same.

Indeed, there’s a good reason for MPAC to consistently under-assess: there’s a cost of dealing with challenges. People who believe that the assessment should have some relation to the actual sale price will think that they’re getting a steal when the assessed value is below recent comparable sales, and not appeal the assessment when it comes in low. However, I don’t want to leave off with the impression that MPAC is doing all right — though they only need to get the relative valuations right, there are far too many stories out there about how they’re not doing even that much. And indeed, checking up on whether the relative assessments are correct would be easier if the absolute measures were at least close.

Winter has arrived: last night the wind was howling and the rain was freezing. A big swing in temperature from just a few days ago. Things are just going horribly right now: I’m not even halfway towards my writing goal for my thesis this week, despite spending all kinds of time staring at the screen and wishing it was over. The diet’s been shot to hell as I run out the last of the Halloween candy. Plus last night was a new low: with the rain and the cold and the wind I didn’t feel like walking to work, but driving seemed silly considering it’s only a 10 minute walk. So, I rationalized it by driving out to pick up a pizza, and then taking that to work. Two fitness goals killed with one stone!

Do you know what I like?

Puppies.

I’m walking in to work and it’s as cold out as it will be the day in hell when I finish my thesis (i.e.: frozen over), and I’m basically freezing my nuts off and cursing the very sudden arrival of winter winds. There’s this guy walking along at a perfectly normal pace, and trailing behind him are these two tiny puppies. They’re hauling ass just trying to keep up with him, falling all over themselves if they catch up and try to jump on his leg, and just generally enjoying the hell out of life. I’m freezing, that guy is freezing, and these tiny puppies who should have no body heat left to them are just having a blast out in the wide world, just super-excited to be outside.

Conclusion: Puppies are awesome.

Sometimes, life’s little lessons are both obvious and fantastic.

The Globe had an article on travelers choosing to head to US airports to take flights, and discussed/blamed airport taxes this weekend. There are a lot of people from here that go to Detroit for flights, as it is cheaper to drive down there than take a flight out of London or Toronto most times. Significantly cheaper, since it does take gas or bus fare to get down there, as well as the hassle of crossing the border. So, is that price difference attributable to taxes as the article suggests? “Pearson, which holds the dubious distinction of charging the world’s highest fees for planes to land, paid more than $140-million in rent last year.” That sounds like a lot, but Pearson saw 30 million passengers last year. The math is simple: the airport tax amounts to less than $5 per ticket. Believe me, I’m not driving to Detroit for five bucks. The price differential is coming from somewhere else. Maybe it’s the other fees the airport is charging, rather than the government, but I suspect more blame can be pointed at Air Canada than Pearson (though the article did discuss other government subsidies in the US).

Canadian Financial DIY shows that beta is not the best measure of downside risk.

In an aptly titled article, “Priszm’s recipe for disaster”, Canadian Business magazine looks at the troubled operator of KFC restaurants in Canada. You may recall that Priszm was my single worst stock pick since I started doing my own research (yes, even my zero-or-hero bet on Freddie Mac preferreds are doing better). IMHO, Priszm’s “recipe for disaster” was two-fold. First, they didn’t have control over vital parts of the company’s budget: Yum brands (the owner of the KFC rights) did. They had the usual trick of deferring capital spending (i.e.: renovations) and claiming that since depreciation was a non-cash expense, they could pay out so much of their cashflow. Normally, that works in the trust model, if the depreciation expense you can claim doesn’t reflect the reality, so you can indeed defer/reduce capital spending. Unfortunately, it turned out that to renew the KFC franchise agreements, Priszm had to agree to renovate its locations, whether they needed it or not. That put them in a bit of a bind, not having been saving up for that all along. The second issue was that they had an interest-only loan (something I did not catch when evaluating them earlier on), and it all rolled over at once. So when lending is tough (e.g.: now) they face a liquidity crisis. I wasn’t impressed with the communication to investors about that issue, but communication issues aside, that looks to be the biggest risk facing the company right now. Either they find a new lender (and the clock is ticking — they’ve already arranged for one extension, which runs out in a month), or they could find themselves defaulting.

I think the big take-away lesson there is to avoid balloon payment schemes: it’s much easier to roll small portions of your debt, even if you have to suffer high interest rate spreads, when conditions are tight. And, if it comes to it, aggressive focus on reducing the debt could mean a company could pay off the debt as it matured, as long as the amount maturing in a given year was within its capabilities. Many lending covenants will keep companies to something like a 5 to 1 debt to earnings/EBITA ratio, so if the loan maturities are evenly spread out over 5+ years, it should be possible to become debt free by paying off the loans as they mature (by suspending dividends/capital reinvestment spending/deferring maintenance etc). Priszm’s one big loan strategy deprived them of that option.

Back to the issue of depreciation, it’s really an interesting one, and something that’s fairly important when looking at whether or not a trust’s payout is sustainable. The accounting rules provide guidelines for what depreciation figures to use — and it is important to have some kind of standard, or it would be all too easy to manipulate the books by just choosing a figure for depreciation that suits your mood. But a standard figure for depreciation is going to be perfect for almost nobody. Take computers for instance. At home we have here a powerful desktop system I use for everything from gaming to doodling to running MATlab scripts (as well as blogging, checking email, etc). The price curve of computers is such that all that power didn’t come cheap, and two years later that computer’s likely worth maybe 30% of what I paid for it, as now it just has the power of a typical mid-range desktop system. Wayfare on the other hand just has a little netbook for doing word processing and surfing the internet (and because it’s light and portable), and even though it’s also two years old now, it’s probably still worth at least half what she paid, since it’s still perfectly suited to achieving those goals. Similarly, you’ve probably seen lots of workplaces with downright ancient technology that still serves their purposes fine, even though it was long ago depreciated to zero on their balance sheets.

So, one example to think about: Canadian Helicopters (CHL.UN) is one company I like a lot – they’re paying out a decent amount of cash, and they’re earning that even under GAAP earnings. They amortize their helicopters at 4%/yr, straight-line (that is, after 25 years, the helicopters are recorded as having $0 value). I’m told though that a helicopter is far from worthless, even after 25 years. Though they didn’t say how old the helicopters were, in 2009 CHL sold 11 helicopters (plus some land) for $30 million. It’s unfortunately not spelled out how much of that was for the helicopters, or how old the units were when sold (likely fairly old since the buyer is reported to be replacing them within 2 years), but the end result was a reported one-time gain of $1.4M on the sale. Anyway, my point is that here’s a company that’s likely getting close with their amortization figures, or potentially even over-reporting depreciation (that is, their assets may be worth more than their balance sheet indicates). Though I have a “full position” in CHL at the moment, and though it’s been up a fair bit this year (I generally prefer buying stocks when they’re down), I’m thinking of getting more for this reason. The biggest issue is that its largest few clients make up a large part of their revenues, and can be fickle — Ornge took over their own operations, and for the NWS work, CHL lost out in the last round of bidding. That was offset a bit by picking up more work in Afghanistan, but now a very large part of their business is focused there.

Jim Chanos makes the case to CNN that China’s in a construction bubble. What to do about it? How will that affect the fertilizer and oil stories for China?

Michael James reminds investors that a good reason to limit trading is because of the opposition. I have to wonder if they’ve got room for another almost-PhD on their team :)

The folks at CMT report that TD’s Ed Clark supports a return to 25-year amortizations being the maximum. I’d support that: though it might be nice to have a 35-year amortization as an option for when times get tough, it’s just too tempting for enough people to make it troublesome, plus, it’s a systematic risk issue. After the first 5-year term (about the amount of time the average person goes before picking up and moving again), a person with a 35-year mortgage has only paid off about 7% of their loan. Combined with a minimum 5% down-payment, and it doesn’t take much of a move downward in house prices at all for that person to find themselves in negative equity (or effective negative equity, where their equity is not enough to allow them to sell the house and cover closing costs without finding additional funds). On a more traditional 25-year mortgage, almost 13% of the principal will be paid down in that first 5-year term. [Note that this is an interest-rate dependent calculation: I put 4% into the mortgage calculator, but higher rates result in even less principal paid down: at 6%, the paydown becomes 5% and 10% for the 35- and 25-year amortizations, respectively]

The WikiLeaks release is making waves. I know that they are themselves very secretive about where they get their information from, perhaps to protect their sources, but I have to wonder how they’re getting so much information. I also wonder if they think through what they’re doing. Scott Gilmore had an oped in the Globe examining that issue. A commenter also pointed out that these kind of full, plaintext releases may compromise cryptography. I think that modern techniques in use by governments will still be strong even with a number of cases of cryptotext and plaintext to work with, but I think it may be a question worth asking, especially if there’s a concern of a player with a long memory breaking transmissions from long ago (the news says the releases date back to 1966).

One of the downsides of new, more efficient lightbulb technology (CFLs and now LEDs) is a nearly paralysing amount of choice. No longer do you go down to the store to grab any old lightbulb, evaluated on at most one or two dimensions (wattage, occasionally long life or a bluer hue). Now there are dozens and dozens of varieties of CFLs.

Many of them attempt to tackle the unfortunate downsides of CFLs in one way or another: instant-on*, dimmable, 3-way, outdoor temperature tolerant — all the sorts of things one never had to worry about with incandescents. Plus with a series of phosphors rather than simply heating an element up, you get to pick your colour temperature and overall spectrum. Unfortunately, I think that’s one of the more important aspects of a CFL for giving good quality light, and it’s one of the only measures that’s not listed on the box. I’m pretty sure we’ve got a spectrophotometer at work to produce graphs like this one below, and I must say I’d be sorely tempted to buy a dozen CFLs and plot out their spectra if someone were to fund such a study. Wayfare says it’s just another way for me to try to get away from writing my thesis, but I think it would be a valuable contribution to society.

Unfortunately, I’m a pretty technical guy, and even I’m not sure I could translate such a graph into a useful buying decision of whether I’ll qualitatively like the light output of my bulb, so maybe there’s a good reason for that information not being widely available.

Another “problem” with CFLs is that they last so damned long. As far as my experience tells me, they last forever (haven’t had one burn out yet, though the oldest is only just coming up on ~7 years old now). So it’s becoming such a very infrequent event that I actually haul my butt down to the store to buy a CFL, as the last holdout incandescents die. The last time I had to buy a lightbulb was over a year ago: even if I did manage to make a good decision last time, I can’t remember which model I bought, and even then the selection I’m facing is almost totally new and revamped in that time. They even have lightbulbs now that I don’t know how they work (these CFLs with LEDs in the base for “nightlights” — but I didn’t take the time to find out if they needed a special base/switch, or how the LEDs are lit up if the switch is off, and now my curiosity is killing me. Is there a tiny capacitor/battery in there to power the LED while the circuit is closed??).

And unfortunately, there are bad CFLs out there, so it’s important to make this choice well. There are a few left behind in the Toronto house from the landlord or previous tenant that we just don’t like: they’re slow to come up to full brightness, and the light is very “harsh”. Conversely, the Ikea ones we had put in the kitchen of our old house we didn’t like for being so “warm” as to cast everything with a sickly yellow pallor (the colour depth really didn’t seem very good).

* – which are the ones I ended up settling on, and have to say I’m quite disappointed in. Instead of having a 1-2 second delay before the light comes on, it does come on instantly, but only at ~20% brightness, and then very gradually warms up. I prefer the slight delay and then coming on at ~70% brightness of more normal CFLs. Once it finally warms up the quality of the light seems pretty good though.