Blessed by the Potato

I haven’t posted much on the housing bubble lately because there hasn’t been much to say: I’ve been more of a bottom-up than top-down person, so each monthly release of building starts, sales numbers, or immigration figures doesn’t affect what I’ve already said about the individual decision of whether to rent your shelter or rent the money for one from the bank. I think I may have exhausted the limits of what a spreadsheet can do.

Plus, the story is all over the news now, it’s not like you really need me to keep digging up nuggets of information for you. The correction looks like it’s started in Vancouver, with both sales volumes and prices plunging over the past few months – though I’d wait a bit longer before lighting the ceremonial bonfire and starting the dance of the bear, as the typical summer seasonality is probably distorting things. I don’t have to stick to any kind of short-term news cycle, so I’d prefer to wait at least a year before calling it.

Hey, these things move slowly.

That torpid pace and the tendency for volumes to dry up as the correction starts also means that for many, it’s too late to cross over to the bear camp. The time to consider long-term implications was over the past few years — when I was most heavily posting on the matter — when it was easy to sell for a profit if you had bought, when you had the luxury of time to locate a high-quality rental. Not now that the cracks are starting to show. For most, by the time the procrastinating and hand-wringing is done there’s little to do but watch as it unfolds, particularly if they’re paralyzed at the prospect of taking even minor losses (preferring instead, as many do, to wait for major losses).

Toronto isn’t looking as strained yet: volumes are down something like 10% while prices hold steady… but there are anecdotal signs out there of realtors talking of slow-downs, buyers holding off and refusing to enter bidding wars, and new condos that aren’t sold out within minutes of the presale doors opening. But by this time next year I expect the correction to have (finally!) begun.

Meanwhile, the talking heads speak of soft landings and single-digit corrections. Many are quoting verbatim the things the US vested-interests said before the bubble collapsed there, like “it’s not a bubble, it’s a balloon, the air will come out slowly.” Kind of ridiculous.

The bank economists keep revising their forecasts down, and this by the way is a feature of bank economist predictions — for stocks as well as real estate. First they’ll predict that prices will be flat. Then maybe a 5% correction. Then 10%. As house prices fall and approach that 10% mark, the forecast will be revised again to 15%, and so on. The expectations are “walked” down. They don’t suddenly awake to the over-valued state one day and turn bearish (or at least, their writing doesn’t) which is why I’ve never put much stock in their predictions. Plus many like Scotia’s this week will talk about modest numbers for the country as a whole, leaving unsaid what happens to the particular cities driving the action.

The same is not true of home buyers: they can and do suddenly turn bearish. When prices are rising rapidly, people build rising prices into their assumptions and plans to buy (e.g., in their mental version of my rent-vs-buy spreadsheet, they’ll put in a high value for expected appreciation, skewing the decision towards buying). They don’t see a higher house price as a bad thing – the house being more expensive and shelter costing more – they see it as something positive. The opposite happens as prices fall: buyers don’t suddenly turn into value-hunters, glad to see that the house they were lusting after the year before can now be had for 10% less. Instead they put a lower number into that mental (or actual) rent-vs-buy spreadsheet, and hold off further. Why buy now if it will be even cheaper next year?

This psychology drives bubbles and crashes. It is inherently unstable, which is why all the calls for a soft landing are so misguided. There are very few examples in history of soft landings happening.

One example is recent though: Alberta. Going into the GFS, Calgary & Edmonton real estate was arguably even more over-valued than Toronto real estate. In late 2008, the market there seized as it did in Toronto and Vancouver, falling 10-15% in just a few months. Then, interest rates cratered, credit began to flow, and Toronto and Vancouver recovered and rocketed ahead to new heights in the years since while Alberta flattened out.

Alberta then has shown that a so-called soft landing is possible: a snappy 15% nominal price decline followed by a few years of stagnation while inflation helps the fundamentals catch up.

The thing is, there’s a pretty exceptional set of circumstances that lead to that soft landing: namely an incredible drop in mortgage rates that cannot now be repeated in Toronto and Vancouver – where those same rates were insanely stimulative. Without that factor, who knows? Alberta real estate might have fallen another 15% by now.

Even with that unlikely soft-landing, it was not a good time to be invested in Alberta real estate: if you had bought in the few years before 2008 without much of a downpayment, you’d still be underwater now; those who chose to rent can be proud of that decision. The soft-landing, also known as correction by stagnation, will likely continue for a few more years yet while fundamentals creep their way upwards to meet the nominal prices.

And so it is in Toronto: though they didn’t explicitly say so, Scotia implied a forecast of 9 years of stagnation ahead by comparing the previous two corrections in the city. Plug that in to the rent vs buy calculator and you’ll almost certainly decide to rent, yet this is a report that is more positive than many out there right now.

After Blueberry was born, I spent a fair number of nights up late with her playing (single-player) turn-based strategy games. The turn-based part was key: I never knew how much attention I’d be able to give the game, when I’d have to walk away, and even when I was playing, I often had a sleeping baby in one arm. So I returned to that old well-loved classic, Master of Orion 2. Indeed, if you have access to the family photo album, you’ll see a MOO2 screen in the background of one of the cute shots of me and her.

A few weeks ago I heard about a new game called Endless Space that promised to capture many of the important elements of MOO2. I bought it through Steam immediately. I’ve now had a chance to play through a few games so I can give a bit of an informed opinion. In short, it’s fun but slow, and not in the “book off a week of time” slow like a huge CivIV map on epic speed is slow, but in the inpatient “ok I clicked the damned end turn button and now I’d like the next turn to begin already” way.

Like MOO2 and many other 4x space games since, ES has a bit of backstory about ancient advanced civilizations, but the game universe is fairly sparse aside from a bit of flavour text here and there. You won’t be travelling to Orion to dig up ancient tech, and Antarans won’t be appearing over your colonies to extract vengeance and then disappear. So as a practical matter, it’s a pretty straight-forward 4X game without any underlying plot or external events to worry about.

The good: Well, I’ve played more than one round, so there’s obviously some good in there. The balance between system/planet level and galaxy level is pretty good: there’s some micromanagerial options to tweak your systems’ output, but you won’t get bogged down in minutiae. It’s not too hard to monitor your empire at a glance — though I wish there was a “take me to this planet” button when you got a notification about building being done so you could see where it was on the map.

The AI seems reasonably clever, and has put up a decent fight in the games I’ve played so far. Otherwise there isn’t a whole lot that really stands out in my mind as being note-worthy: it’s just fairly-well put together and balanced, with a few points that I’ll mention specifically below.

Travel: One item I liked was the method of faster-than-light travel: they have star lanes connecting stars that are close to each other in a cluster, and using those lanes is the starting tech, though you continue to use them later as they’re the fastest way to get around. Wormholes link different clusters, and you have to research the ability to use those. Later, you’ll be able to develop warp drive to fly between any two points without the need of having a wormhole or space lane linking the systems.

A pretty cool way to do it. The Sword of the Stars had really attracted me at first precisely because of the different FTL technologies the races had. However, I never could get into the rest of the SotS gameplay (never got past the demo, even). So I was excited to see this. However, aside from opening up more systems to explore in the galaxy, I don’t think warp drive was implemented very well. One particular feature that I found lacking was the option to force warp travel. The pathing AI automatically uses whatever combination of star lanes, wormholes, and free-flow warp drive will get your ship to its destination the fastest. But there are times when an enemy may have a natural starlane/wormhole chokepoint system, and have that planet heavily defended. If I have warp tech, I could in theory fly directly to a system in their rearguard and wreak havoc. Yet there’s no way for me to force a warp journey: the pathing AI will always try to send me through the starlanes (and thus, the enemy fleet) where possible.

Ship Battles: ES has a very simplified tactical battle system, where ships automatically engage each other while closing distance, which is broken into three phases (far, middle, near). At each phase the player gets to choose one action (termed “playing a card”), such as buffing kinetics damage by 25%, or sabotaging enemy laser accuracy by 15%. Sometimes your action will nullify the enemy’s action, which is kind of like a double bonus for you. Really basic stuff.

So I can’t for the life of me figure out why it’s so slow. If you choose to manually control a battle (picking your card(s) yourself), you’re presented with a loading screen, then a pretty 3D-rendered movie of the battle playing out. It looks good, and it can be kind of helpful to see which of the enemy weapon systems is tearing you apart… but you can’t interact with it in any way. You can’t even fast-forward once it’s started. It’s just pointless and slow. Even the automatic battle resolution is slow, with a big timer bar (a “feature” that seems to be there for the benefit of multiplayer). I’m not sure why there isn’t a hybrid option giving you the ability to pick your cards, but not actually watch the action unfold.

To complement that simple enagement, ES also has a simple 3-weapon-type combat system, with 3 corresponding types of shielding. It’s not quite a rock-paper-scissors type of arrangement: though each offers benefits, lasers don’t lose to missiles but beat kinetics. Supposedly each type is good at a different engagement range: missiles for distance, lasers for medium range, and kinetics to tear shit up in close. However, lasers have the barest of range penalties for distance, so I’ve found in practice (my whole 3 games played) that kinetics get ditched in favour of the other two technologies. Indeed, all engagements after the first few technology steps end in the first round (distance), which exacerbates the annoyance of a manual battle: all that loading just to play one card.

I wish there were more tactical options beyond just picking which buff or debuff card I wanted to play that time. For example, what if I built a ship that was faster than my opponent’s? Shouldn’t I be able to choose to close the distance faster, passing through the effective range of missiles and lasers to open up with my kinetics? Or if I had missiles myself, to kite the opponent and extend the duration of the long-distance phase of combat? Plus many of the other neat tactical options that MOO2 had that are missing, like boarding enemy ships or racing past a fleet to bomb a planet.

Indeed, that’s another missing element from the combat system: the option to bomb the enemy into submission. If they built a wretched colony on a gas giant, and the people are starving and rioting and just generally detracting from the empire rather than adding to it — or even if it’s just in your way and not something you can afford to defend — there’s no option to just glass the planet from orbit and move on. Your only option is to invade and take it over, though I have to admit that I do like the mechanism for that: you spend a certain amount of time with your fleets in orbit on an invade mission, and the ownership bar moves steadily towards your side. When it’s full you have the planet, but just barely: the people are angry and upset, and it will take very little time for the enemy to take it back — when their fleets take back the skies, they’ll find the takeover progress bar already nearly filled. No marines and transports to micromanage.

Events: There are random events, but so far they seem very dry. Except for one (you magically get a colony ship), they’ve all consisted of buffs/debuffs adding percentages to some trait, sometimes permanently, but more often for a set number of turns. There are no space monsters, hyperspace fluxes, or archaeological digs uncovering the ancient secrets of mass driver technology. Even the boring percentage effects seem to magnify their dullness by almost always affecting all players at once.

I think the space monsters are one of things I miss most from MOO2. To make up for it, ES has pirates that rampage across the skies, seeming to originate from neutral systems. Thing is, in one game the pirates were pretty much non-existent: there were so many players crammed onto that map that very quickly there ceased to be any neutral systems (at least, none outside the scanning range of the other colonies, which seems to be another pirate prerequisite). In another game, the pirates had this little arm of a spiral galaxy to themselves until after wormhole travel was discovered. By that point, the pirates had more fleet strength than all the other players combined, which was kind of nuts — and that was on “normal”. There’s another level of amped-up pirate activity available in the game options that I’m frankly afraid to experiment with for fear they will come through the screen to overtake the earth itself in our reality.

Speed: My biggest problem with ES is the speed. I don’t know if the game is just inefficiently coded, or if the delay is a carry-over from multiplayer that screws up single-player… but it is slow. You click the end turn button and a progress bar worms its way around. Even at the very beginning with nothing to resolve it takes at least 3-5 seconds per turn to complete. So even if I have all my build orders queued and am just trying to burn through turns until I discover a technology (or whatever it is I’m waiting on), it can still be a slow game to play. The slow loading and playout for combat (when all I want to do is pick my buffs) really adds to that — and even automatic combat has a timer to wait through. Indeed, the slow speed of the game is ultimately what will relegate it to the dustpile for me.

Bugs and Miscellany: There’s the option to blockade your systems with fleets so enemies can’t just sail through to the next system: they have to park it or fight. Yet even though I never seem to be able to run a blockade, the enemy never seems to be slowed by mine. In one game there was a player I just couldn’t kill because my ships simply refused to accept their system as a valid destination.

One staple of the genre is cloaked ships, which don’t seem to exist here, though one technology’s description (of spotting all ships orbiting the system) suggests that at one point in the development cycle there were. There’s also no spying or technology stealing, though there are faction traits that give you research points and/or money when you blow up enemy ships.

It’s tough to think of hidden terrain existing in a space 4X game: surely your astronomers can at least tell you where the stars are, even if you have to send ships to survey the planets. Yet in ES you’ll find that even knowing how many systems lay beyond the wormhole you just found (and thus how big your opponent’s empire might be) is left as a mystery.

Each race has a good/evil/neutral alignment, but for the life of me I can’t figure out what it is they do [a search result suggested that it indicates how the AI will play the race — so no effect on the player].

Conclusion: To sum up, Endless Space is a fun 4X game that mostly gets the strategic formula right. Though I may miss the GNN robot, the dry atmosphere is perfectly fine for multiplayer, and I think the slowness in the single-player stems from that. The tactical game leaves a fair bit to be desired, but that’s ok — except for the odd important fight auto-resolution is the way to go with these games anyway. If you’ve been looking for a 4X game that’s like MOO2 but not just another game of MOO2 (and important to some, with more modern graphics) then it’s worth a shot. Though they don’t quite get the formula right, it comes closer to the mark than many other 4X attempts out there.

There are some readvancable mortgages that are sometimes billed as all-in-one accounts at a few different institutions. The way they work is to basically pull together your mortgage, line of credit, savings, and chequing accounts into one product. The stated benefit is that your emergency fund and cash float from your savings and chequing accounts will be used to pay down the mortgage, but are still available for your use as needed.

All else being equal, this would be a great idea, and indeed recently Nelson at Financial Uproar had a post covering them.

The problem though is that these products usually come with a higher interest rate than you could get on a plain vanilla mortgage, about 0.5-1% more. So does the benefit of having your whole float working on your mortgage balance outweigh the extra cost of the higher interest rate? Like many things, the answer is it depends… but mostly, no.

You can grab a spreadsheet and play along at home with the full calculations if you like, but for once I’m just going to back-of-the-envelope it. There will be some minor effects from the compounding, but not enough to really worry about.

So let’s say you’re a fairly typical recent homeowner: you bought a few years ago, and just recently crossed over into having enough equity to try out this scheme. You’ve got $10k in your emergency fund, and your chequing account balance varies through the month depending on the timing of your bills and payroll deposits, but is on average about $3k. So you could potentially put an additional $13k towards your mortgage with this plan. If you’ve got $400k left on your mortgage, then the amount of interest you’d pay in a year would be $12k at 3%. With the new plan, you’d only be paying interest on $387k, but at the higher rate of 3.5%, which would cost you $13.5k. So the higher interest rate makes it a fair bit more expensive to go with this plan (and any impact of compounding would be balanced by the interest the cash would be generating in a savings account).

If you have more in cash and less owing on your house, it may look better: with $20k in cash and only $100k owing on the mortgage, you’d be paying $3k in interest the traditional way, versus $2.8k for the all-in-one. Still, you need almost absurd amounts of cash compared to the mortgage balance for it to work out.

Plus, with just a little bit of effort on your part, you could in those situations do even better with separate accounts: you can get a regular mortgage at the lower rate, put all of that cash on the mortgage, and open a separate HELOC to get the flexibility to re-withdraw your emergency fund if and when needed. All the money goes on the mortgage at the lower rate — you can even put your chequing account float on the mortgage and use the HELOC for the revolving cash needs (which sounds scary, but is functionally exactly what is happening with the all-in-one products).

I keep coming back to look at poor unloved RIM, and I keep not buying it.

At one point I was openly wondering if it was a good buy, trading a hair above book value and some ridiculously low P/E. I even thought it was good enough for the misfit bloggers stock picking competition (good enough for fake money — now there’s a recommendation!). Then it fell lower than that even, and I still didn’t buy. It wasn’t due to any squeamishness about falling knives, but rather because the business outlook kept deteriorating just as fast if not faster than the share price. Not even a year ago I had figured that even if the BlackBerry brand was losing out to Apple and Android, it wouldn’t happen overnight, and there’d still be a year or two of positive earnings. Yet now they’re already reporting a loss.

A few months ago, I reasoned that they’d be worth the cash on the balance sheet plus some generous value for their trove of patents. After all, they had paid some billions of dollars for just a subset of the patents in the Nortel bankruptcy. Except, that line of reasoning kind of fell apart as I examined it: they were the highest bidder in the auction, so the patents would by definition be worth somewhat less than what they paid. Plus, those patents are a few years older and closer to expiry now. RIM’s own core patents might be valuable (they still do have some strengths)… but Apple and Google’s device manufacturers have had no problem moving product without access to those patents. How much could they really be worth?

So now I’m lowering my sights once again and demanding a larger margin-of-safety before buying. If the negative sentiment continues and the stock price continues to suffer then there may well come a time where I’m willing to buy. But now I think that point will be when the stock is trading at a discount to their cash: where I get the patents for free, the business for free, and a cushion to insulate against a few years of losses eating into that cash hoard. From a quick back-of-the-envelope calculation, I probably won’t be putting in any bids until I see it under $4.

This is a monthly update from the Blueberry Portfolio. The events I talked about below happened approx 8 months ago.

The market has been much stronger in the last month, and we’re now up just over 6% from the beginning, vs. the market up 2.5% (in the last report, the market was down 2.5%, so both us and the market are up about 5% in the month).

Though my goal is to be almost fully invested most of the time, at the moment we have about 15% cash in the portfolio: I just don’t have any great high-conviction ideas at the moment. I’m researching some options, but haven’t had much time to put towards that. One problem is fear: we own a bit of Indigo Books & Music, which is one of the few stocks that’s down a lot since we bought it, and though it looks even cheaper now, I’m afraid to put any more capital towards it in case I’m wrong about the book and knick-knack selling business in Canada. It has really clean financials, and due to the decline in the stock price the modest dividend is now on its own an attractive feature: it’s yielding about 7% at these prices. However, they lost money in the last quarter, and the big gamble is what happens over the next few months. Will Canadians buy books, music, upscale wrapping paper, and whatever else Heather Reismann wants to sell in Chapters stores over the holidays, or has Amazon finally caught up and killed Canadian bookstores, after feasting on the carcasses of the American chains?

That’s really the key question. Indigo at the moment is trading for just a bit more than the value of their current inventory and the shelving units in the stores: if the company is at all profitable for the next couple of years, then this is a stupidly low price for it and we could make a lot of money by buying now. Historically, most of their money is made over the holiday season. If they can come out in the black again this year, then the stock will probably go up on the news. But if their losses continue into the new year, then we may be looking at store closings and the end of an era for physical books.

At the moment I view Indigo as a potential high-risk, high-reward stock. Even just getting back to where we bought it a few months ago would be a huge percentage return. So while I do seek out and invest in high-risk, high-reward situations, I try to keep the size small so that if we see the high-risk side rear its head and lose money (as we already have to a large extent on Indigo) it doesn’t hurt us too much (indeed, the returns in the first paragraph include losing money on Indigo — not all of our ideas will be winners).

As to the cash, well that’s there in large part because we’ve had a few take-overs.

One of my big ideas at the beginning was Capital Power income fund: it was in the process of being taken over by Atlantic Power. Both were power utilities paying nice, stable dividends. I was happy to own either for the long term, but an interesting opportunity was in buying Capital Power just for the takeover: we bought at $18.60 per share, and Atlantic Power was promising to buy those shares from us at $19.40 in just a few months. It seemed like a very low-risk opportunity, and so it was immediately one of the biggest positions at over 10% of the portfolio. In the end, I made a small mistake in evaluating the deal: Atlantic Power was offering a combination of shares and cash, and I thought we would be able to choose just cash and get just cash, but Atlantic Power wanted the whole deal (across every shareholder) to average out to half cash and half shares. If I was being a proper arbitrageur, I would have shorted the Atlantic Power shares at the same time I bought the Capital Power ones (short about half of one ATP for each CPA). In the end, we ended up getting the equivalent of $18.98 per Capital Power share, plus one tax-effective dividend payment of $0.145. That’s a gain of 2.8% in two months, which is fantastic (some investments don’t make that in a whole year). Still, a bit less than I had figured we’d make in my mistaken initial all-cash estimate.

Anyway, one of our biggest positions has been turned from a stock back into cash, which explains why we once again have a fair bit of cash to invest in something else.

At the moment, I don’t know what to invest it in. I’ll be doing research from my end, but remember Peter Lynch’s advice: good stocks don’t come out of nowhere, many are the companies you interact with every day as a consumer. So if you see the beginnings of a new fad (like crocs or lululemons), or ongoing good value and customer support, something that you find your friends and family talking about and recommending to each other consistently, make a mental note of it and let me know.

And especially make note of how busy your local Indigo/Chapters is this holiday season, and how that compares to previous years.