Blessed by the Potato

I’ve soured against gift cards in recent years, and have tried to turn back the stigma against cash gifts by thanking people profusely for the “universal gift card”. The government did a world of good by not letting companies forcibly expire the easily-misplaced interest-free loans, but in these tough economic times, that won’t necessarily stop a company from going bankrupt and not honouring them. I was reading a completely unrelated article about the mess we’re in when I noticed a little blurb about Linens ‘n Things going bankrupt this week, and that they might suspend their gift cards. “Hey!” I said to myself, “we just got a Linens ‘n Things gift card!”

I have no idea if they can do such a thing here in Ontario, but I’m hoping to rush right out to use it up soon anyway.

Well, I just got back from my vacation, and was all keen to get back to using my “real” computer, only to find that the video card was dead (it may also possibly be a problem with the power supply — I’ll check that out in the morning). I’m not quite sure how to take it: on the one hand, it’s a real bummer, and I don’t need the expense of a new video card now, especially since that one was just over a year old. On the other hand, that was an off-brand ATIx1650 (made by ASUS), and for some stupid reason the ATI drivers wouldn’t work with it, so I was stuck with the ASUS version of Catalyst 6.2 or something like that (and have run into problems with games that wouldn’t work with the old drivers).

I’m on the fence about what to do: my computer is now 5 years old, and might need to be upgraded in the next year or two (if it couldn’t handle StarCraft 2, my next anticipated must-have game, it would have been upgraded then). So, I could let this prompt me to upgrade early, but I really don’t have the cash for that right now. That means just replacing the video card (and possibly adding another gig of RAM as long as I’m at the store and tinkering), but then I’ll have a new AGP video card that I can’t use on a new system (which will almost certainly be PCI-e). Dilemma, dilemma.

Anyhow, I am completely behind the times on what a good video card is in the ~$100 range. Anyone know what I should look for?

Well, it seems to be a theme here lately that I try to reassure myself that the equity world is not ending. Since asking when will we hit bottom?, there has been a terrible week on the market. So again I have to wonder, how low can it go? How bad can it be?

The credit crisis is, obviously, nasty. There is a lot of fear out there. And we are probably heading into a recession, a nasty one from the looks of things.

However, the stock market is down something like 40% now, over 15% this week alone (down over 20% in the US S&P500). We’re just about back to where we were in the trough that followed the tech bust when stocks were not exactly overvalued. So how bad can it be? Have we really wiped out 6 years worth of growth and value? Are earnings going forward going to be 40% less than what they were last year?

I’m profoundly unqualified to answer those questions with any certainty, but my feelings are that we must be getting near the bottom of this market. I don’t think we’re heading into a depression; I don’t think owning pieces of large companies is going to go out of style and become a worthless hobby. Still, it’s hard to psych yourself into buying stocks.

However, I’m also more fearful than I have been previously. Credit is becoming less available, which makes me think that my LoC is not sufficient for my emergency fund, and that it’s time to start keeping some cash outside the market.

Also, huge daily drops like this feed on each other due to the leverage in the margin buying. People who borrow to buy stocks have a limit on how much they’re allowed to borrow. Once a stock falls too much, they can be forced to sell some in order to bring their loans (margin) back into balance, which can then drive stocks lower in a positive feedback cycle that feeds on itself. However, it’s got to stop at some point. At some point, the market will recover (though that might be 10+ years from now).

This post originally appeared as part of my irregular feature “Potato Wedges” over on the Moneygardener

In the course of all that school work, I’ve pulled a lot of all-nighters, which has required a lot of caffeine to keep me somewhat awake. I’ve never been able to get into coffee, just too bitter for my sweet tooth (actually, I have about 28 sweet teeth), so Coke was my vice. Lots and lots of Coke.

The thing about Coke is that it is just stupidly destructive to teeth, especially when you’re in the lab for 14 hours straight and aren’t brushing until you sleep, and you’re not doing that, either. Pretty much every tooth from my canines back has a cavity, and the funny thing I learned about cavities from my dentist is that the fillings, particularly when you “chew hard” or grind your teeth like I supposedly do, have a limited lifespan, on the order of about 10 years at which point they usually have to be re drilled and refilled because the enamel starts wearing down around the filling (widening the hole), or the filling itself may crack or become loose. So now I’m in this holding pattern where I have more than 10 fillings that are all on this 10-year cycle, so I’m getting at least one filling redone every year. Needless to say, I spend a lot on dental care — I usually max out my $500 university dental plan every year, and still end up paying another $500 or so out of my own pocket in co-pays.

To try to ameliorate the situation, I jump on almost every dental care fad there is (I have yet to get a water pick irrigator thing, but I know it’s coming). Recently, Crest and Colgate came out with new toothpastes: Crest Pro Health and Colgate Total Advanced Health/Professional Clean. They were more than twice as expensive as the regular version of the toothpaste I usually buy (Colgate Total), so they must be good, right? Well, after I got home from the store (Shoppers Drug Mart, btw) I looked at the active ingredients and the health claims and they were exactly the same. What a scam! I went back to the store and also saw “enamel hardening” toothpaste, which sounded like just what I needed. Turns out this had fluoride as its only active ingredient — basically, they renamed their basic toothpaste (non-total, non-12-hour-antibacterial, non-tatar-fighting) enamel hardening. I started to wonder if the new Advanced Health tubes were just a marketing gimmick, repackaging the same stuff for a much bigger markup.

To make a long story merely medium-length, I found that there was one very slight difference: the new expensive versions had tiny silica particles in them, basically sand grains to act as abrasives to help clean teeth even more. I’m skeptical first off of how effective that might really be, and secondly on whether that really makes the toothpaste cost twice as much. I was just about to launch into full righteous indignation mode and write to Colgate-Palmolive and P&G expressing my dismay at their deceptive price gouging tactics and how I was going to switch back to Colgate Total when I was hit by the noodly appendage of perspective. Toothpaste, in the grand scheme of things, is an extremely minor expense, especially in light of how much I spend on dental care. In fact, I’ve gone and bought myself some Colgate Prevident, something I had been avoiding merely because it costs $12/bottle. Prevident, for those who don’t know, is a concentrated fluoride toothpaste (1.1% vs the 0.243% in regular toothpaste) that’s meant to be used as a before-bed brush-on treatment after you’ve already brushed your teeth with regular toothpaste. It’s really for people like me with particularly horrible mouths; most people don’t need that kind of treatment.

So kids, brush and floss those teeth, and do your homework early so you don’t stay up all night drinking Coke like it was your job. I don’t want to recommend caffeine pills since they always seemed kind of extreme to me, but it might not be such a bad alternative.

Oh, and MG: Sorry, I know you own Procter & Gamble (PG), but I’ve just always been a Colgate (CL) guy (and Crest doesn’t have a Prevident alternative!)

Fear is the name of the game lately in the markets. I’m off in vacationland on dial-up, so I’m a little disconnected from everything, but I couldn’t help but check in on the markets the last two days, and it’s been pretty damned scary. Because of that, I couldn’t help but make a post.

Huge, dizzying drops in the stock market. I was in physiological shock (hyperventilating, cold sweats) at how bad the market was on Monday — I was really glad I slept in and only checked at the end, so at least it wasn’t as bad as it was briefly. Tuesday was another terrible day, bringing us back down about to where things stood briefly on Monday.

I’m sort of at a loss as to what to do. I can’t justify selling out — as much stress as it’s causing me, I figure this just means we’re closer to a bottom today than we were on Friday, and panic selling is rarely a winning strategy. There is a lot of fear out there; it’s looking like we’re in for a major recession rather than a brief correction. Credit is seriously tightening: TD is upping their mortgage/HELOC rates even though the prime rate hasn’t changed [before I got to publish this, the central banks lowered the bank rate by 0.5%, but TD only lowered prime by 0.25%]. But the market is the great pricing machine, and maybe that is now priced in to stocks.

There are a couple of huge losses on my screen right now: Priszm, the income trust that manages a number of Canadian KFC outlets, is down 71% for me (not counting distributions). Even after the distribution cut, it’s yielding 34.6%. I have to wonder if that just represents panic selling, or unloading of something under $3-5 to free up margin, or if they’re toast? Does someone out there know some bad news I don’t? Should I bail and at least get something from it? That’s a question I had to face last week when the clinical trial of a biotech start-up I invested in went poorly. The stock instantly went from $2 to $0.10 [and today to $0.04]. I thought very hard on selling out, looked at the balance sheet a few times (the liquidation value should be about $0.05/share), and decided to just sit tight in the very slim chance some good news came around, though that’s a very slim chance, especially since in this environment they can’t really raise money to have a second go at a clinical trial.

Oddly enough, I’m still fairly optimistic about the stock market in general. It’s probably not going to get better this week or this month, but just in case it does I threw another $200 into the TD e-series index funds today to average down into these prices. My dad, who maintained a bright outlook through the gloominess of the past year, finally seems to have lost his optimism this week. He thinks we’re in for a reinforcing downward spiral of margin calls and increased credit costs. He says if the banks won’t lend to each other, they won’t lend to anyone, and the whole economy is going to grind to a halt until this gets sorted out, and everyone is going to get mauled in the process. Even the Canadian Savings Bond program had to delay their issue this year because of the chaos in the credit market.

Interestingly, a friend just had their offer on a house accepted last week. The housing market scares me right now. The stock market is fast, and liquid, and dizzying. We just had a major crash, and could be in for more, but then it was hard to see coming, and should stabilize shortly. The housing market on the other hand is slow and pondersome, and you can just see the downturn coming from miles (years) away, and can’t do anything about it — you can’t even short a house or a condo as a hedge. As for my friend: well, she’s going into this with eyes open. She knows it’s a rough housing market, she knows my views on the matter, and she got 3% off asking, so that’s something. Plus she’s got to live her life, and doesn’t want to wait any longer. In what I consider a bizarre twist, my dad, who also thinks that “condos are going to be going for pennies on the dollar in 2010”, and who won’t touch a Canadian bank stock — not because of ABCP, but because of the trouble he thinks regular Canadian mortgages are in for — supported her decision.

“We bought our first house in late 1987,” he said, “right near the peak of the last boom. Our house was worth about half what we paid for it by 1990. Last year, just for shits and giggles, I asked a real estate agent friend what he thought we could get for it if we were to sell. He said we’d get about $1.2 million. This week, if I had to sell, I’d be lucky to get $600k. Sure, the listings are still way over that in this neighbourhood, but nobody can buy right now; there’s a good three dozen homes for sale that have been up since the new year, and only 3 that closed. If you need to move it, you’ve got to price it down, and the market is going to come down. But when you buy a house, none of that matters. Just look at us: we bought right at the peak, and just held on through down and up and down again over 20 years, and we’re still living there. The price of the house hasn’t affected us at all.”

Well, Wayfare just lapped that right up. She is, of course, beset with the worst kind of house lust and it also seemed to reassure our recent homeowner friends. Heck, maybe that’s exactly what it was designed to do — there’s no sense in panicking our friends when at this point there’s really not much they can do. I, of course, disagree with my dad. Overpaying for a house is something that follows you for almost the rest of your lives. Even if you never sell, if you pay 20% more for a house, then your mortgage payment will always be 20% more. That’s a big part of your household budget that could have gone to vacations or cars or early retirement. If your house goes down by 20% and you lose what equity you had built up, then you can’t get a HELOC to fund a roof repair or the Smith Maneouvre; if you do have to sell and move, then your equity is wiped out and you’ll have to pay extra for a CMHC high ratio mortgage on your next house. If you lose your job, you can’t necessarily count on selling the house to get back your equity if you don’t have any. It is, by it’s nature, a highly leveraged purchase. Buy into the troubled stock market at the wrong point and all you’ve lost is what you invested, but you could be in for more pain if that was a leveraged purchase.

So in addition to the general bubbliness of the housing market (high housing costs-to-rent costs and housing-to-income ratios), there are a number of other nasty factors like the tightening of lending standards (no more zero-down, 40 year mortgage people to feed the fire), increasing rates, decreasing credit availability, looming recession fears, and of course, the psychological effect of witnessing what’s happening in the States just below us even if we were completely economically isolated, that all come together to make me afraid of the downturn in real estate to come. And unlike the stock market, that doesn’t get priced in quickly; this could be a few years of pain ahead. Sellers can sit in their homes for a long time, refusing to sell (except for the very few who can’t), making prices sticky. The September numbers were just released, and the downturn has finally started picking up momentum, with a 6% decrease for Toronto.