Aug 012016
 

Stock Markets Reach Record Highs… Again¬†

Both the Dow Jones and the S&P 500 indexes have climbed to all time highs in late July. ūüôā But corporate earnings have been stagnant and economic growth remains weak. Restaurant sales have slowed. The U.S. economy only grew a disappointing 1.2% in the second quarter, well below expectations. ūüėē

So what’s producing¬†so much excitement in the stock market? In short, I believe it’s largely caused by¬†Negative Interest Rate Policies (NIRP). For example, in Europe the benchmark lending rate is negative 0.4%. Usually the bond issuer pays interest to the investor. But with negative rates, the investor pays the issuer.¬†Currently about 1/3rd of the world’s government bonds are producing negative yields. Investors can’t get rich by holding these securities¬†anymore. So in this kind of¬†environment bonds really hold people down.?

As a result of NIRP, more investment capital has moved from the bond market to relatively stable stocks. These tend to be companies that operate gas pipelines, railways, utilities, telecommunication services, and other infrastructure that are recession resistant. Last year I wrote about how to easily make $75 of annual income without using any of my own savings by using leverage to buy shares of TransCanada Corp (TRP.)

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I purchased TRP stocks for $42 per share. I mentioned at the time that analysts had an average price target of $57.50 per share. This doesn’t always happen, but sure enough TRP is trading at roughly $60 per share today. ūüėÄ So not only am I making $75 a year in dividends, but I’ve also made $1,800 in unclaimed capital gains so far. ūüėČ

In normal circumstances this kind of price movement in a large cap, blue-chip company wouldn’t happen. But due to a lack of viable investment alternatives, an influx of additional buyers¬†has pushed up TRP and many other relatively safe stocks.

Increasing Valuations and Risk

Unfortunately, NIRP produces asset bubbles and may cause the markets to behave precariously. The chief executive of DoubleLine Capital, who oversees more than $100 billion in assets, recently said¬†that many asset classes look frothy and his firm continues to hold gold, which has also climbed¬†due¬†to¬†NIRP. ¬†At the end of July gold reached $1,350 per ounce, the highest monthly close in years!¬†Stock investors have entered a ‚Äúworld of uber complacency,‚ÄĚ said¬†Jeffrey to the¬†media.¬†“The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong. Continue reading »

Oct 102015
 

New Purchase: Royal Bank of Canada Stock

September has historically been a bad month for the stock market, and this year was no exception. This is why I didn’t invest aggressively last month. However now that it’s October, I decided to get back into buying more equities. ūüôā

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So after looking through my watch list of different companies, I’ve decided to invest in shares of¬†Royal Bank of Canada. ūüėÄ I usually don’t keep disposable cash lying around so last week I borrowed $4,000 from my TD margin account and transferred the money into my TFSA to buy 55 Royal Bank shares (RY.TO) at $71.30 each.

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I know purchasing about $4K worth of stocks with no money down sounds a bit risky, but I think I’ve made the right decision here. ūüėÄ The stock pays me a 4.43% dividend yield, which happens to be more than the 4.25% interest I’m being charged for the margin loan.¬†As long as I¬†plan to hold the stock until my retirement and can service the cost of the loan, then I don’t see any downsides to financing this entire purchase with debt. ūüôā

Royal Bank Stock Analysis

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After doing some research and analysis on this company here are some reason why I chose to buy this stock.

  • It can print currency. Due to fractional-reserve banking, all chartered banks can create new money through lending. This license to manipulate the money supply in the market has many unique advantages.
  • Safety and stability. RBC is currently the largest company in the country, worth $106 billion by market capitalization. An economy of scale offers RY a competitive edge against smaller rivals. Even if Canadian banks run into solvency problems in the far future, the CMHC or other Crown corporations will probably step in to bail them out. In the U.S. the government’s TARP program in 2008 transferred $431 billion to struggling U.S. banks.
  • Growing profits.¬†Royal Bank continues to deliver earnings growth year after year. According to stock¬†analysts the estimated earnings in 2017 will be around $7.35 per share, which would make RBC 19% more profitable than last year’s actual earnings.15-10-royal-bank-stock-earnings-growth
  • Attractive valuation,¬†relative to historical averages. The P/E ratio is used to determine¬†how much investors are willing to pay for a stock. A high ratio signals that buyers are willing to pay a premium for the shares. But lately the trailing P/E ratio of Royal Bank (Blue line¬†below)¬†is at the lowest it’s been in years! This P/E compression won’t last forever so right now looks like a good time to start accumulating a position.15-10-ry-royal-bank-price-to-earnings-ratio-historical
  • Growing dividends. According to its investor’s relations, RY has increased dividends by more than 400% since the year 2000. It increased dividends almost every year, except during the financial crisis period.
  • Protection against rising interest rates.¬†RBC holds about $463 billion in net loans. If it can charge even 0.25% more interest on average, then that’s an additional $1.16 billion of revenue every year, minus loan lost provisions. A rising interest rate environment benefits all banks. The more interest homeowners pay for their existing mortgages over the next 25 years, the more money Royal Bank can make from those loans. ūüôā
  • Potential split soon.¬†The stock tends to split 2:1 when each share reaches around $80 to $90. The most recent split was in 2006, and then in 2000 before that. The share price is currently around $74 today. Stocks splits create more demand since each share becomes more affordable to¬†own for new investors.

Continue reading »

Jul 162015
 

Earlier this year a Vancouver house with a $5 million assessed value was put on the market for¬†$6 million. Guess how much it ended up selling for? Hint, it’s in the upscale Shaughnessy neighbourhood. ūüôā

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After 12 days and multiple bids from 10 prospective buyers the 78 year old¬†home was sold for $8 million, lol. Welcome to Vancouver. You’re welcome to buy a house¬†here, as long as you’re willing to pay $2 million over the asking price. ūüėõ

Our hot real estate market is about to get¬†even more extreme because yesterday morning¬†the Bank of Canada announced another 0.25% rate cut.¬†Holy pumpernickel! Now it will be even harder to raise rates in the future without pricking the bubble.¬†📌

The Effects of the Rate Cut¬†‚úā

The overnight lending rate was lowered to 0.5% in an attempt to boost capital expenditure and drive companies to spend more on hiring and manufacturing. However this will also unintentionally persuade already heavily indebted consumers to take on even more debt.

The problem with monetary policy is that it affects the entire country even though places like Vancouver really don’t need any further easing of credit.¬†A better solution would have been to address the faltering economy in some parts of Canada, like Alberta, using targeted fiscal policy instead of a blanket rate cut. But that’s just my personal opinion.

Continue reading »

Feb 152015
 

A new¬†study¬†by the¬†University of Pennsylvania’s Wharton School found¬†that adults in¬†many countries make money¬†decisions with surprisingly little financial knowledge.¬†Researchers¬†asked people in 18 countries THREE¬†simple financial literacy questions about interest rates, inflation and investing.

When Americans over 50 years old were asked these 3¬†questions, only 50%¬†could answer the first two questions correctly. Furthermore, just 33% knew the correct answer to all¬†three questions.¬†“Even well-educated people are not necessarily savvy about money,” according to the report. Among people with post-graduate degrees, 64% were able to ace the quiz. That’s better than the average, ūüôā but still less than my expectations.

Do you think you are smarter than most Americans? According to the report, answering each additional question correctly is associated with a 3% to 4% greater probability of planning for retirement.

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The Wharton study found that men (38%) were more likely than women (23%) to know the answer to all three questions. The guys also claimed to feel more confident about their financial knowledge, even when they answered incorrectly. The ladies, on the other hand,¬†were more likely to admit that they didn’t know the answer to a question. Women are so modest. ūüė≥

So how many did you get right on your first try? Feel free to¬†spoil the answers below in the comments section if you think you know the correct answers. ūüėČ I’ll verify by tomorrow. Financially literate individuals save more, earn more on their investments, and manage their money better. So if you got 3 out of 3 correct then congrats! Your financial future is looking¬†bright. ūüėÄ Otherwise, keep brushing up on your personal finance knowledge. ūüôā

Continue reading »

Jan 232015
 

Today’s post is about¬†something of interest to a lot of people. ūüėĬ†Earlier this week the Bank of Canada surprised just about everyone¬†with¬†an interest rate cut from 1.00% to 0.75%. The Canadian dollar¬†dropped to the lowest it’s been in years.¬†Over 20¬†economists were surveyed prior to the Bank’s bomb shell reveal and not a single one of them expected the news, lol. Maybe economists are just there to make weather forecasters look good.¬†ūüėõ

Even our¬†country’s most prolific real estate blogger, Garth Turner, was taken by surprise. Just last week a commentator on his site named BlackDog pointed to a report which¬†predicted this week’s interest rate cut, and Mr. Turner promptly replied to dismiss the report. Not even a¬†best-selling Canadian author of 14 books on economic trends saw this announcement¬†coming.¬†It just goes to show how difficult it is to read the minds of central bankers. ūüėē

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The Rate Cut is good for:

  • Debtors¬†who have variable rate mortgages, lines of credits, car loans, student loans, or other types of floating rate debts. Every $100,000 of debt one has will translate to about $20 a month of LESS interest one has to pay. ūüôā
  • Investors in the stock market. Lower cost of borrowing is a type of monetary stimulus that has the same effect of printing money. The U.S. stock market has gained 100% over the last 6¬†years since it began it’s Q.E. programs.
  • Existing bond holders. Lower coupons on new bonds mean existing bonds are worth more.
  • Industries like¬†manufacturing, exports, hospitality, tourism, companies with primarily¬†$USD revenue, or any¬†other businesses¬†that benefits from a lower Canadian Loonie.
  • People who have¬†debt in general. Lowering interest rates is inflationary¬†which¬†diminishes the¬†value of one’s debt.
  • Home owners. Rate cuts drive¬†real estate prices higher.

The Rate Cut is bad for:

  • Savers. High interest savings accounts are looking less attractive with the threat¬†of inflation.
  • Consumers. Canadians import a lot of food and staple items from the U.S., which will cost more¬†for us with a lower $CAD.
  • Cross border shoppers. Trips to the U.S. will become more expensive.
  • People living on a fixed income, like pensioners.
  • Retailers who’s suppliers are from outside of Canada

Thank you Stephen Poloz¬†for this rate cut. ūüôā I appreciate your¬†continuing support to prop up the already inflated housing market in Vancouver and increasing my home’s value. You’ve successfully penalized¬†all the savers and risk adverse¬†members of the investing community¬†by lowering the returns on their GICs and term deposits. You have instead rewarded the speculators and heavily leveraged investors, such as myself, by leaving more money in our pockets, ūüėÄ and encouraging even more borrowing activity! ūüôā Hurray for cheaper financing and more incentive to use debt because that’s exactly what Canadians need more of right now. I applaud your push for higher inflation with this rate cut.¬†The 2% CPI in 2014 just wasn’t high enough. I’m sure making it even more expensive to live in this country¬†is exactly what consumers want,¬†especially when more people are out of work now than a month ago. ūüėõ

Continue reading »