Blessed by the Potato

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.

I’m sick. Siiiiiiiiick. And it’s snowy here, so very snowy. I don’t feel like doing much of anything, but I can’t sleep anymore since I just got up from 14 hours of nyquil coma. I call up Wayfare to express my dilemma, and she suggests that I play a video game, which as it turns out is an excellent suggestion.

Now I haven’t played StarCraft2 for well over a month now, since I’ve been so busy not writing my thesis. And a real-time strategy game sounds like it would hit the spot… except I don’t want to play SC2 itself right now. I’ve already finished the single-player part of the game, and I’m too dopey and ill-tempered to keep up/put up with the “people” on battle.net. So I start searching for alternatives, and discover that they’ve come out with a 4th installment to the Command & Conquer franchise. Some single-player play with that sounds like it would hit the spot, so I go ahead and download it.

For those of you that aren’t familiar with the RTS concept, it is generally composed of three pillars of gameplay: resource collection & management, base building, and unit control/tactics. In the C&C tradition, you send out your harvesters to collect “tiberium” which magically gets transmuted into tanks, which are built at the factories of your base, which you defend with more base structures like walls and turrets, then you venture forth across the map to complete objectives, using strategy of some sort.

For C&C4, they decided to throw all that out the window: there are no resources to collect or manage. Just a simple unit cap, which is absurdly low (~6-7 tanks maxes it out), which of course limits the strategic options, taking out the 3rd pillar. As soon as a unit is killed, you can build another to replace it — no resources to manage, so it’s “free”. With such a small force, there’s really no way to split it up and try for different objectives, especially since the computer has you outnumbered all the time. Plus, there’s essentially no base-building either: gone are the factories, barracks, airports, and defense towers. Now everything comes out of one building that you get at the beginning. So the game is basically a dull grind of build your pitiful 6-tank force, go smash it against the first objective, lose 5 tanks in the fighting, replace them, then on to the second objective.

The game was so horribly pointless and dull that after the 3rd level I decided I’d rather go work on my thesis.

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.