Month: February 2011

Housing, again

Hamilton

The Toronto Star carried an article about housing from Capital Economics, precisely along the same lines as I have talked about before. I am sure they will not mind my using one or two of their charts.

housing 2011feb Housing 2011 feb2

On the left a comparison is made of house prices in relationship to family income. (it is not clear always what that is, his & hers; before or after tax etc.) .Typically since thee stone ages that ratio runs at about 3x, according to the chart 3.5X on average. We are at 5.5 x, almost 60% higher then the norm. To get back to the norm they argue that our market needs to drop 25%, but to get back to the average (regression to the mean) a drop of 40% is needed and that does not take into account the usual overshoot.

Country properties, hobby farms and other such properties can be hurt a lot more. From 1989 to say 1996 some properties North of Highway 7 (the edge of the Earth for Torontonians then), dropped 50–60% easily and some commercial properties 70-80%.

housing 2011

According to the Toronto real Estate Board chart (the annotations are mine) prices rose pretty evenly (staying in narrow channel) but also quite rapidly over the past 10 years. Roughly from $200,000 to $400,000 which equates to an annual compounded return of 15%. Notice the throw-over in late 2009. That may just be it for a while. None of this, of course,we are told by the central Banks, has anything to do with variable mortgage rates close to 2%!

EW and the TSE

Hamilton

 

TSE up2 TSE up1

 

Of course I am annoyed by this market going up 160 points a day, simple because I  (EW) do not like being wrong and worse, not sure that I am. We went down 50 % and up the 50/60% as anticipated, that is like 3/4 right . But we seem to keep going without  rhyme or reason. The question now is do you capitulate and join the mob, or stick to your guns? I would opt for the latter!

      First of all there are more B-waves all over the place that suggest this thing is as ripe as a rotting plum on a hot summer day. Secondly, now that we are close to 14,000 there is not that much upside before we hit the proverbial concrete wall. first at the double top level and then, at the parallel trend-line.  Thirdly, even if we should reach these lofty heights, the NEXT big move is down big time. This is where the Pavlovian dogs excel at being stupid, and I certainly do not wish to join that party.

     What is going to do the trick? At the previous top it was Nortel, which stock then constituted more than 30% of our market. I had a target of below $10  (documented!) when it was at $124. Nokia did the same for Finland. Obviously I did not “understand”. Here the catalyst, I suspect is going to be China. The misallocation of capital is going to ruin them, not in the long run but for the next 5 years or so , starting soon.

    Here on a semi-log scale is the Dow Jones for comparison purposes. One can argue where the actual top should be (2000 or 2008) but in the vast scheme of things it really does not matter one iota.

Dow up

Amazingly, it has done everything EW would have suggested.  Except that the scale of it all seems to be so large. If one adjusted the above chart for the purchasing power of the currency of the US, the market essentially flat-lined for a century. Today we had the first press conference ever given by a Fed chairman, that is in the 100 year plus 3 months history of this institutions conception. For the first time we need not wonder anymore if there is a plunge protection team; the chairman Bernanke nervously confessed today. What we do not know yet is if the world will forgive him. Time will tell.

MDA McDonald Dettwiler & Ass.

Hamilton

mda jan 2011 1 mda 2011 2

This is a good example of a double top, a rather precise one from which the stock has dropped almost 13% already. For the record , back in August last year, we suggested that the stock was a sell at about $50.(see chart below and previous blogs). This is a great company but so is a single line move from $15 to $55. The possibility exist that the stock drops to $35 (in a bull market) or further if we get a double dip type of scenario. This is a simple case of buy low/ sell high. Alternatively rather than selling one could use a stop-loss at about $46

MDA

PV, Present Value (again)

Hamilton

If you prefer $95 today to $100 a year from now, the PV or present value of that $100 a year from now is $95. This is the time preference that we all have and it is objectively calculated by using a discount rate that reflects the interest that we forgo by having to wait a whole year, or, alternatively the income we forgo by not being able to invest for a year.

In simple terms the formula is  PV= amount/ (1+ interest rate) . This can then be compounded to incorporate multiple periods and multiple amounts. We will keep it simple, in our example you are indifferent to receiving $95 now or $100 a year from now. Using the formula we get 95=100/1+0.05=100/1.05= 95 (not precisely).

When things get a little more complex you either do financial acrobatics or use a table.

PV

You can make your own table on a spreadsheet if you want a wider range but for our purposes this will do. Suppose you are to receive $1000 a year renting out an apartment for 30 years (anything else that pays a same amount will do), what is that worth today? At 12 %, $8,055.18, at 6% $13,764.80 and at 2% $22,396.46. (of course at the extreme of 0% the present value is simple 30x $1000=$30,000.) No big revelation here except when you look at the impact interest rates have. We all know that a rising tide lifts all boats, but this much? From 12% to 2% is 2.8X and from 6% to 2% is 1.7x. Put a different way, a stock that was worth ,say $20 in the late eighties should now be worth $56 . If rates go back to equilibrium at, say 6%, that same stock will drop to $33. All this courtesy the US Fed.