Blessed by the Potato

Was it a whole month ago that I wrote:

…today I seemed to pass through that psychological barrier where it goes from being this impossible wall to climb, to being something that ‘hey, I can do!’ There are still a lot of pieces to put together, but it’s starting to look like the pieces will go together in the end, so I will finish it.

Now just a few weeks later and that psychological peace and steady, incremental accomplishment has gone right out the window. The last two weeks I’ve had just terrible writer’s block. That happens disparagingly often with science writing in large part because I care. It’s important that I write something that communicates a complex idea well, and also that what I write is accurate and backed up by ample references to the literature. And by actually caring about the quality I seem to just get locked up in a writer’s block loop where I’ll start a sentence or paragraph, then decide I don’t like it, go back to the paper I was referencing, rewrite it, decide I don’t like it… ad nauseum.

It doesn’t make sense, people tell me all the time that I’m a good writer, (and try to trick me into co-authoring screenplays with them) and I don’t have any problem writing on the blog here (look! I’m doing it now!). That’s partly because I know that this kind of writing doesn’t matter: the whole future trajectory of my life is not going to depend on the content and quality of my blog. My PhD thesis… maybe. But I have to write something, so my process so far has been to not interrupt the brief productive runs that come except for the very most urgent of biological necessities — which does not include sleep. I get myself good and stressed and sleep-deprived and it becomes much easier to not care so much and actually get something down on the page.

But I’m sure you’ve spotted the delicate balance that must be struck: too sleep deprived, and there’s an obvious deleterious effect on writing output. I read a paper and forget what I read before I can even get a summary into my annotated bibliography or a few lines about it in my manuscript. I make grammatical mistakes, get sloppy. I actually don’t mind that part too much — if I can at least get something on the page, it can be edited later. But worst of all is when I get out to the other side of the productive middle ground and find myself losing time to staring at the wall and clicking the top of a clicky pen for a half hour straight (incidentally, this is why I’m not allowed clicky pens at work).

I don’t quite know what to do at the moment. There’s a big gulf between recognizing the source of writer’s block, and actually crossing over to getting stuff done in a healthy, productive way. Our work holiday party is tonight, and though I’ve already got seats reserved I’m thinking of skipping to just keep writing now and sleep then, rather than trying to grab some sleep now. I know that at this rate I’d probably only get 100 or so words out in the whole evening, but I also just don’t want to go and deal with people right now. I’m a mess: exhausted, twitchy, stressed, and vibrating on a level mortal consciousnesses will never truly comprehend as my body becomes one with the stuff that underlies our universe’s existence (that is: caffeine).

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).

Do you have cash/GICs in your TFSA? Wish it was stocks/bonds/mutual funds you were sheltering instead? Or are you invested in an account with one institution and want to move it without having to pay transfer fees? This may be a good time to withdraw from your TFSA so you can recontribute in the new year. This is known as the December Shuffle.

Any withdrawals you make from your TFSA get added back to your TFSA room the following calendar year. This makes the December Shuffle handy: you can withdraw near the end of December, wait just a few days for January to roll around, and deposit back into your TFSA at a new institution.

You can of course transfer at any point during the year you want to, but many institutions charge more for a transfer than they do for a withdrawal, which makes this strategy useful in that way. PC Financial for example, charges $50 to transfer your money out to another TFSA, but you can make (at least, AFAIK) one free withdrawal per year. And trying to withdraw and re-contribute can mean waiting a long time outside of the TFSA at other times of the year — a withdrawal in January may mean waiting almost a whole year until you can put it back in the following January.

Remember that you’ll get another $5000 of TFSA in the new year [at the time of this post; $6000 as of 2021], so be ready to contribute (and potentially re-contribute) in January.

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.

The Star’s Moneyville section had another real estate fluff piece on Friday, aiming yet again to reassure people that a housing correction won’t happen here. I was at first just going to let this one slide — after all, this is going to be my 4th post in a row on real estate, so sorry for those that are interested in other topics. It doesn’t really raise any new points (except for the incorrect one about no downpayment mortgages being “illegal” — they’re only illegal without insurance, but they’re all CMHC insured, so it’s a red herring), and it was quickly dismissed by people in the forums, over at Financial Insights, and even the big dog took a bite out of it over at Greater Fool. Where this takes a turn is that in the comments section of the Greater Fool blog post, Ian Lee comes in to try to clarify his points (see comments #75, 96, and 146). So now there’s some new points to counter. For the most part his arguments apply more to reasons why a housing downturn won’t spiral out of control and take the rest of the banking system out with it (AKA, the “US style” crash), rather than why housing won’t go down in the first place.

It’s a long conversation thread over there, with many people going back and forth, so I’ll just focus on a few keys points here.

Nothing he’s said so far has made me reconsider that buying a house now, in Toronto, would be anything but a terrible idea. Anyway, on to the specifics:

“But you are assuming that because you lose your job, you immediately list your house for sale AND reduce your asking price. A large number of mortgages issued today are issued to two income households which diversifies risk for both the bank and the borrower. Even if you decide to list your house, you list it at what the real estate agent recommends AND if you are clever, you will NOT disclose your unemployed status to the broker, which would reduce your negotiating power”

This all depends on whether two incomes are needed to keep the property, and my understanding is that in the expensive markets (Toronto, Vancouver) they are. If that’s the case, requiring two incomes to afford the house increases risk. When you have two wage earners the odds of either one suffering a job loss is higher than the odds of just one person suffering a job loss: basically, you’ve bought two tickets in the “unemployment lottery.” If only one income is needed to stay afloat, then yes, it adds redundancy… but that is not how it’s working in many cases these days. For many couples that second income is a mandatory component of the household’s income statement, a requirement to keep the household operating. That means systematic risk has been increased by this demographic shift.

“In fact, Canadian home ownership is at the highest level in our history at 67%. AND the mortgage delinquency ratio – which must be reported to Bank of Canada by the banks is less than 1% (compared to the USA where 1 in 4 homes are under water OR in foreclosure)”

I think his numbers are a bit dated — the spike has been tremendous in the last few years and is closing in on 70% now. Either way, that rate of home ownership is several points higher than it ever has been in our history, and the same thing played out in the states: people who perhaps had no business owning homes ended up buying them anyway, because it was trivial to get a mortgage.

Furthermore, you must realize that foreclosures lag prices. The fact that foreclosures are as high as they are in Canada is an extremely troubling point. In many major markets prices have been increasing at a very decent clip for several years now. Even with a zero downpayment, a borrower in trouble should be able to sell their house and come out whole after just 7-10% increase in prices, which is just a year or two of appreciation these days. So if anyone is getting foreclosed on, it’s either due to extremely bad lending (where the homeowner can’t even budget for repayments a year into the future), or because the foreclosure rate is very high in the non-bubbly areas, making the national average rate look “normal”. Remember, in the US the foreclosure rate was also quite low even while trouble was brewing.

“Concerning my comment that the US housing crisis was caused – NOT by market failure or by government failure – but by what I called “Congressional failure”, I can provide the approximately 60 slides of a paper that I presented at a conference called “Financial Armageddon” at Carleton University in 2009. EVERY slide I presented was publicly sourced from the Federal Reserve or the US Treasury or from Fanny or Freddie or HUD or the US Census Bureau or quotes from the Congressional Record of Barney Franks or Chris Dodds. These slides are remarkably illuminating and demonstrate my hypothesis that Congressional policy caused the housing bubble and then the housing collapse. […] In my Financial Armageddon paper, I provided empirical data to show a large influx of new first time buyers into real estate, that upset the equilibrium or balance between supply and demand, causing a bubble to form i.e. excess demand chasing limited supply. It was caused by the US Congress watering down the mortgage eligibility rules e.g. zero down payment, which encouraged large numbers of low income people to buy homes. Then when these low income people realized they could not afford the new home, they walked away (no recourse in the US), turning the bubble into reverse – into a collapse.”

I’m so puzzled by his views… Except for the non-recourse part (which as we’ve seen with recourse states is a small factor), how is this different than the scenario where CMHC allows for low/no downpayment, 35-year mortgages in Canada? We had a large influx of new buyers because of the rule changes. We shot our home ownership rate up 5% in 5 years in the midst of lowering interest rates. We had prices increase far beyond the historical norm for several consecutive years. How can you then conclude that our outcome is going to be so dramatically different than what the US experienced? [Yes, I will concede that it will not be as deep or as fast a correction, but house prices are going down, especially in TO and Van].

“I concluded that, going forward, we will experience what we experienced in the past with housing prices that overshoot. In the early 1980s, house prices went flat line for several years as they did again in the early 1990s.” [… he is then challenged by the fact that there was in fact a fairly substantial crash in Toronto in the early 1990’s …] “again, it depends on which real estate market you are using. Nationally, it was a wash – although yes, TO and VAN declined. No disrespect to anyone – but Toronto (3 million?) and Vancouver (2 million?) are not the totality of Canada’s 34 million residents.”

I’ll be the first to say that real estate is local, and that most of Canada will not be hurt too badly by what’s coming. But, those are huge local markets (their metro areas combined are 1/5th of Canada’s population). For me, I’m looking to move to Toronto, and chose to rent because the local market has gone insane. If you’re being interviewed for the Toronto Star, it’s very disingenuous to say that Canada’s [national average] housing will be ok, but snicker behind your hand at the suckers in Toronto and Vancouver who are going to get wiped out.

[Ok, yes, that’s a bit of hyperbole]