Oct 192014
 

Overreaction leads to market turmoil

Over the last several weeks investors saw a 10% correction in the Canadian stock market, and a 9% correction in the U.S. Someone with a $100,000 portfolio invested in index funds could have just lost $10,000. Ouch. :| Is this market sell off justified or is it simply an overreaction to some recent bad economic news? First, let’s review what those news are.

  • The Canadian dollar has dropped to a 5 year low
  • Germany’s economy is weaker than expected
  • The rest of Europe is still in a mess of unemployment and stagnation
  • Last week the Athens Stock Exchange in Greece tumbled more than 6% in one trading day.
  • ISIS is causing havoc in the Middle East
  • Ebola fears

I currently own shares in the Bank of Nova Scotia (BNS.) It’s one of the largest companies in the country and has been around for over 180 years. Over the last month the price of this stock fell 8%. Instead of asking where the stock will go from here, we should instead be asking does all the recent bad news justify an 8% drop in value for one of the largest banks in Canada? My answer is absolutely not. :P It’s important to remember that when we buy a stock we are literally owning a part of that company. This means we, as stakeholders in Scotiabank, are still entitled to split the $6.5 billion profit that the company makes every year, regardless of how the price of BNS shares performs in the short term.

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A lower loonie will likely spur economic growth and will not hurt Scotiabank’s profitability. Europe’s stalled economy is nothing new and Canadian banks don’t lend that much to Europeans anyway. The media has succeeded in sensationalizing the threat of Ebola in the U.S. Yes it’s a terrible disease, and there’s an outbreak in Africa. But Ebola will not hinder businesses in the U.S. and Canada from continuing to rake in profits. Literally more Americans have been married to Kim Kardashian than have died from Ebola – both a terrible fate. :(

For the intrinsic value of Scotiabank to actually fall by 8% substantial circumstances would need to be met, such as major accounting fraud or a 10% national unemployment rate, that would legitimately jeopardize the company’s ability to make money. The recent news is relatively trivial so an 8% correction of BNS shares seems like an overreaction. Imagine selling our stocks now only to see the markets rebound next month and regain all its losses. :|

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Oct 172014
 

The following is a guest post.

The days when you had to shell out thousands of dollars for a good cash register are gone. In their place and for less money, you can have a sleek cash drawer and a tablet computer with a card reader. Despite the minimal setup, the system works just as well as before. In fact, it’s often better, as the new systems like Shopify are faster and more efficient. These advances in technology might lead you to wonder when you will be able to set up a register with just the tablet and the card reader, without the receipt printer or bulky cash drawer. Those days aren’t here yet, sadly. For the moment, you still need all of these in order to make your checkout experience complete. Still, a cashless society is looming on the horizon and more than a few people are wondering what it will look like.

Added Security for Customers

14-10-cash-registerWhenever there’s a security breach online, people rush to point out that this is why cashless societies will never work. It’s just too easy to steal someone’s information, right? This argument only holds up if you forget that people get mugged and banks get robbed. Your cash isn’t safe, either. If someone steals your money, you can’t report it to a company and expect to get all of that back again. You can’t track where the thieves went after taking your check; there’s nothing for you to do but regret that you ever went down that dark alley or trusted that bank. Credit card theft is a very serious issue, but a person who can show that their identity and their cards were stolen stands a good chance of filing their claims and disputing the charges. With over 11 million cases of identity theft annually, according to Statistic Brain, there are systems in place to deal with these damages.

Tipping Doesn’t Vanish

One of the things that people are afraid of in a cashless society is that tipping will die. When you’re paying for your latte with a swipe of your card, how are you going to drop your change into the tip jar? Digital tipping is always an option, but most people think that working out how much to tip on a small purchase like a cup of coffee or a sandwich just wouldn’t be worth it. However, when tipping is made easier, then the amount that people tip digitally versus with cash actually rises. When taxi drivers in New York City started adopting a mode of tipping that let the customer check a box on a touchscreen payment device to add 10-30% to their bills, they saw their tips rise drastically. The average before digital tips was only 10%, and the average afterwards was 22%, according to The New York Times. That’s a huge boost! If this carries over to other industries, then ease and convenience of tipping might lead to better salaries for everyone from baristas and waitresses to bellhops and chauffeurs. Not to mention the fact that it will cut out the honest mistakes that people sometimes make when trying to find the proper 20% tip on an eight-person check.

Paperless Saves Business Expenses

Paperless is the way to go for many businesses looking to save costs. If you’re looking for the most expensive liquid in the office you can skip that water cooler that everyone loves and head straight to the printer. At an average of $3,330.14 cents per gallon according to Techopedia, printer ink is the most expensive reoccurring expense in your business. When you don’t have to print every receipt, you save money. When you don’t have to print out every report and checklist, you save money. When someone pays with cash, the only way for them to record their purchase is to get a receipt from you. When they’re willing to go paperless, you can either email their receipt to them or they can just check their debit or credit card statement online. The itemized lists will tell them exactly where that $50 they meant to save got away from them. This level of ease provides customers with more security and an easier way to plan their budget. No one wants to sit down with a ledger and a month’s worth of lunch receipts, bills, and payments made and missed when they can set everything up online and read the printout. You’re saving time and your customers are saving money.

Budgeting Advice Is the Only Thing That Stands in Its Way

Perhaps partly because mental math will put the brakes on your spending spree, the only place you really see someone advocating to pay cash these days is in the advice of budgeting analysts. There’s nothing to stop you from going over budget like literally not having the money to pay for something. But even electronic money can be budgeted, so when we do become a cashless society, the same principles will still apply.

Oct 132014
 

The trickle down effect

It has been said that if we cut taxes for the rich and help profitable businesses make even more money then the economic benefits would trickle down from the top to the rest of us. But for many in the working class this has simply not been the case. :(

14-10-trickle-down-treading-water

14-10-household-income-us treading water The top 1% have never been wealthier, but the rest of us still face many financial roadblocks. Both consumers and governments of all levels are still carrying a lot of debt. However real incomes in the U.S. have been slowly declining since 2008. Up here in Canada our debt-to-income ratio is near an all time high.

We often receive conflicting messages from policy makers. The Canadian Central Bank is keeping rates low to encourage consumers to spend and stimulate the economy. But at the same time it says that rising consumer debt is a major risk in this country. That’s right, patronize consumers for their debilitating debts when the Central Bank is responsible for creating the cheap money in the first place. Sound logic, Mr. Poloz. :P

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Oct 102014
 

The Labor Market

In September 248,000 new jobs were created in the U.S. :) The national unemployment rate dropped from 6.1% to 5.9%, the lowest since 2008. This must mean we’re almost back at pre-recession, full employment right? Well if you ask people on the streets how they feel about the strong labor market recovery, many of them will not know what you’re talking about.

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The Chicago PMI which is a confidence indicator for businesses dropped to 60.5 in September from 64.3 in the previous month. The Conference Board published its Consumer Confidence survey and they were expecting 92.5 in September. However the actual number was only 86 :( So why is there a disconnect between the employment data and how people really feel about their finances? To understand this we simply have to dig a little deeper into the numbers.

Read Between the Lines

Compared to Canada’s high unemployment rate of 6.8%, the U.S. appears to be quite smug sitting at just 5.9%. :P However the unemployment rate does not account for people who are no longer looking for a job. And in September 315,000 people in the U.S. dropped out of the labor market. The labor force participation rate is now at 62.7%. This is the lowest it has been in 36 years! The last time this many people was out of work relative to the population size was back in 1978. This is why so many people are still frustrated with the job market, and don’t believe that the U.S. economy has recovered. The number of jobless people rose to an all time high of 92.6 million last month. That’s 92.6 million people not paying any income tax. That’s more than 1/3rd of everyone who could be working, but aren’t. 8-O

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Sep 102014
 

While GICs bear certain similarities to other investment products like mutual funds, bonds, CDs, and time/term deposits, they remain distinct from other types of investment vehicles. So what is a GIC? A Guaranteed Investment Certificate is a financial product, usually presenting virtually no risk to the investor’s principle, with the potential for returns.

Minimum GIC investments usually start at $500. The money accrues interest for the period of time (usually 1 to 5 years) laid out in the GIC agreement. The key feature that makes GICs attractive to conservative investors is the principle protection. Even in the possible, but unlikely event of a bank collapse, the principle amount of a GIC held with that bank is still guaranteed by the government through CDIC insurance.

There are typically three types of GICs available to Canadian investors.

Regular GICs are set with a specific term and interest rate. This way the investor can be sure exactly how much money the account will be worth at any given time. Investors can often get access to their money and interest with 30 days notice, even if the agreed upon term has not run its course. But the investor may be motivated to let the account remain active until maturity if the interest rates increase annually, which is often the case with GICs, making the investment worth more as time goes by :)

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Interest linked GICs have better returns if the national Canadian interest rate increases. For periods of significant increase in interest rates, the investor can stand to profit substantially :) For periods with negative interest rate growth, the investor can cancel the account and reinvest the funds in a more fitting financial product.

Market Growth GICs behaves very similarly to index mutual funds, but without the risk of principle loss. Investors can invest their chosen principal at varied levels of risk in either the Canadian or United States indexes. Unlike standard mutual funds, the balance can never fall beneath the principle invested. Still other GICs can offer a guaranteed minimum return. Market growth GICs can also have maximum returns. Due of the rarity that this interest rate would be exceeded, most people don’t worry about it, but some may choose to put their money in other places, with no limits on growth :)

Most GICs today pay about 0.50% to 2.50% annual interest rate, depending on the duration. GICs aren’t for everyone. While there are more aggressive investment strategies with the potential for greater returns, the promise that the investor’s returns will never dip beneath a certain level gives GICs a fitting place in the portfolios of many investors.

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Random Useless Fact:
The Volkwagen Group owns all of the following brands: Audi, Bentley, Bugatti, Ducatti, Lamborghini, MAN, Porsche, Scania, SEAT, SKODA, and, of course, Volkswagen.