Friday, April 18, 2008

Boom and bust

OK. So you've no doubt heard the news that Canada's housing boom is slowing. "Canada's Housing Boom Officially Over," if memory serves, was the early headline on the Globe's story about resales tumbling 22% in Toronto during the first quarter (although I note they've since toned down the doomsaying a tad.)

As I've said before, as a non-owner looking to buy at some point in the relatively near future, I'm not holding my breath for an outright crash. Toronto is a vibrant city with a fairly strong, diverse economy and a growing population. All the elements for a natural increase in house prices are there. But that's not to say I don't look at charts like this and wonder where it's all headed.

Still, I'm not nearly as pessimistic as this U.S.-blogger is. As much as the schadenfreude drips off the page, I have a hard time arguing he doesn't make a few rational points.

Ultimately, I don't expect any pain here to be anywhere near as bad as it's been in pockets of the U.S. I raised my eyebrows at the advent of 30+ and 40+ year mortgages in Canada, but the fact is, they still remain a tiny part of the overall picture in Canada.

But as long as there are people like my real-estate obsessed colleague telling me how she's already "made" $11,000 on the condo she bought in March (because the identical unit one floor up just sold for that much more) I know there's still a ready supply of people looking to join the game, confident that the music isn't about to stop.

Depending on a greater fool than I to come along in a few years time and take it off my hands isn't the strategy for me. I'm going to wait and see how this plays out.

Monday, April 14, 2008

The Final Countdown

As a (relatively) young cub in the journalism world, one of my secret pleasures is reading the final offerings of columnists before they retire or move on to other things. From where I sit, the opportunity to have a weekly soapbox, wherein you're entitled to write about all the things that are stuck in your craw and have readers respond to your thoughts, is such an awesome way to make a living that I find myself constantly seeking out the fruits of various columnists' final efforts.

I figure people who do that for a living accrue so much knowledge over their column's life that witnessing its final incarnation -- where the writer gets to choose how that column will end -- is a truly special experience.

Sometimes, they're generic and feel rushed. Sometimes, the columnist chooses to honour what the column was about was to make the final one in the exact same voice as the first one, giving readers a final taste of what made it special for so many years. Sometimes, I stumble upon a truly special one that, although clicheed, reminds me of just how lucky I am to be able to get paid to write for a living.

And sometimes, a writer opts to distill a lifetime of knowledge on their particular beat into two or three nuggets of advice he hopes his readership will take to heart, which is exactly what Wall Street Journal writer Jonathan Clements went for last week.

Pay yourself first. Live below your means. Always save for a rainy day. We hear these simple axioms of personal finance so often, that they begin to lose their meaning, and we think we can get rich quick by predicting which junior mining play is going to find the next great molybdenum deposit, or which obscure, money-losing Internet firm is about to be bought out my Google.

But when a man who covered everything from the mexican peso crisis to the rise of mortgage-backed securities basically tells you ignoring the noise and focusing on simple investing for the long term is the secret to a happy life, I find myself nodding in agreement.

I'm not one to encourage greed, but this column really hit home for me. Money can't buy you happiness, but it does buy you the option of pursuing things that do make you content in the long run. I think the people who realize that the quickest are the ones who end up feeling truly fulfilled.

Thursday, April 10, 2008

Thinking aloud: Loblaw's

It's almost sad to watch what's happened at venerable Canadian grocery chain Loblaw's over the last several years.

The grocery business is a notoriously low-margin business, where stores generally rely on high volumes of sales to make up for the microscopic profits they make on each individual item. For decades, the firm expanded the old fashioned way -- earning customers organically by offering better quality or lower prices, and strategically buying up smaller rivals when their low valuations made it worthwhile.

For several decades, the formula worked. Consumers were happy to lap down their Memories of Kobe marinade by the gallon. Stockholders were happy with double-digit returns, year after year, as earnings and market share increased. And the wealthy Weston family that controls the company went from super-rich to ultra-rich.

Then, in early 2006, all that changed when an 800-pound retailing gorilla appeared on the horizon and informed the world it was going to start selling groceries. The Canadian market was about to get a lot more competitive, so hegemon Loblaws decided that the most prudent course of action was to throw out the formula that had worked for the better part of a century, and try to out-Walmart Walmart. Loblaw's decided it needed to get bigger, and start selling in sectors it had no retail experience in. Huge stores! Furniture! Clothing! Mortgages! It was totally going to be great. As long as they could squeeze suppliers for an extra 1.3 cents on every jar of baby food, it didn't matter that customers didn't want to buy metric tonnes of bok choy. And look at this trendy patio furniture! "Stop focusing on the fact that milk sells out by 1 p.m. on a Saturday now -- look what a lean, modern operation we are, you backwards-thinking Philistines," the company seemed to be saying to its customer base.

The madness didn't end there. Throwing the old chestnut that "the customer is always right" on it's ear, in late 2007 the company launched a splashy ad campaign built around their folksy, populist superdork CEO, Galen Weston Jr. People are willing to put up with being told they're poisoning the planet by using plastic bags, or that purchasing their favourite burger paddy is actually going to kill them when it's Dave Thomas of Wendy's doing the talking. But they're a lot less open to being badgered by the heir to a $7-billion fortune who looks like he's 12, yet somehow still comes off as smarmy.

A few years on, it's painfully clear that a huge mistake has been made. Loyal customers complain loudly, and frequently, to anyone who'll listen. The stock's been an absolute ski-hill downwards for more than a year, as $12-billion of market cap has been wiped out in the process. Some insist we've hit bottom, and it's time to buy in for the turnaround. Others say there's more pain to come, and the tone of some analyst reports is borderline funereal.

The whole thing's just a mess, and it really is painful to watch a once-great Canadian retailer shoot itself in the foot time and time again. As an investor, I have a hard time getting excited by a battered, mismanaged retailing giant that pays a microscopic dividend. At this point, I wouldn't touch Loblaw with a 10-foot pole, but that's not to say I'm not keeping an eye on them down the road. They're almost at the point where the real estate they own alone is worth more than the stock's current price. And I still think the company's problems are fixable -- they just need to get back to basics, and stop trying to fight too many battles at once.

The day Loblaw's realizes it's a high-end grocery store and little else is the day I'd consider buying in.

Until then, I'm happy to wait it out, park my cash in one of their high-interest savings accounts, and track down the stockperson to find out why, exactly, they're always out of non-brown bananas.

Tuesday, April 08, 2008

Thinking aloud: AX.UN

(Disclosure: I've owned Artis REIT for more than two years)

Being a long-term value investor, I try not to worry too much about short-term fluctuations, but that doesn't mean I'm not keenly interested in the reasons behind them. If a stock loses, say, 10% of its value, I want to know why. Did earnings fall off a cliff or did they lose a key customer? Or did it simply get knocked back by a broad market sell-off, but still has a decent long-term outlook? If it's the former, I'll probably avoid it, as it may have further to fall. But if it's the latter, I might kick the tires and take a stake if it's suddenly on sale.

The point is, I'm more than willing to live with my stocks being in the red (temporarily) as long as their long-term prognosis looks good, and as long as I can understand, sort of, why the market values it one way or the other. I like my companies to be predictable -- even when they have bad news, is what I'm trying to say.

It's why, despite the fact that's its actually made me money, one stock that's always been a noggin-scratcher for me is Artis Real Estate Investment Trust (AX.UN on the TSX.)

Artis has always been something of an anomaly, because it's done inexplicable things in both directions for as long as I've owned it. Typically, REITs are steady, dependable sources of income, that shouldn't be counted on much for capital gains. I bought Artis in 2006 when I was looking for exposure to two things in my portfolio: real estate, and the booming economy of Western Canada. I figured Artis (then known as Westfield REIT) was a good proxy for both.

In the first 12 months that I owned it, Artis' unit price increased by nearly 30 percent, and that doesn't even include distributions. Nice, but not exactly typical REIT behaviour, especially since the company was shelling out a disturbingly high percentage of its cash flow in distributions. In the year or so since then, it's been picked clean of most of those gains, before recently starting a mini-march upwards again. All this, despite the fact that its holdings and focus (retail and industrial properties in booming Western Canada) have remained largely the same. As I said, it's been quite the head-scratcher.

I'm oversimplifying a little, but conventional wisdom has it that falling interest rates are good for REITs. So you would imagine REITS have been doing quite well since the end of last year -- but you'd be wrong. They've started inching up a little of late, but the sector sank like a stone from about September until early 2008.

As I said, it's not the what that concerns me -- it's the why, and frankly, with Artis and Canadian REITs in general right now, I have no idea. The REIT's FFO recently increased (meaning they have more cash on hand available to pay distributions) which is nominally a good thing, but the marker hasn't really rewarded them too much for that yet.

I like to make informed investment decisions, but to be frank, while Artis was riding high, I didn't understand what was going on, and now that it's doing less well, I still don't get the rationale. That seems like a bad sign to me, so I'm thinking of selling my stake. I'm not in any urgent rush or anything. But since I'm slowly migrating my portfolio over into a passive ETF-based one, at some point soon I'm probably going to sell AX.UN and put the proceeds into a broad-market ETF, or possibly even the REIT ETF, if I want to maintain a real estate presence.

Who am I to ignore Warren Buffett's advice -- holding an asset I apparently don't understand (even one that's managed to make me money) it doesn't leave me with a very good feeling, and might be a pretty good signal to sell.

Nothing imminent, but it's safe to say Artis is officially on notice.

Friday, April 04, 2008

Housing is crashing -- unless it's not

Interesting news in the ol' newspaper this morning, albeit it's info I'm taking with a grain of salt.

Toronto real estate is off to its worst start to the year in years, with the number of housing resales dipping 22% in the first three months of the year, Tony Wong reports in The Star.

Some are blaming the dip on the city's much-publicized new "land transfer tax" (meaning there are less buyers now because there was a rush in December to get in under the wire) while others, somewhat less convincingly, are blaming the weather. I have my doubts that people are so simple as to be influenced in as major a decision as buying a home by something as nebulous as the weather, but as a friend who recently took the plunge into real estate told me, "the best piece of advice I can give you if you want to save money when you buy a house is to do it in January, and look for a house that's been on the market for a while."

That's quite the number -- 22% -- but I'm not getting carried away quite yet for a couple of reasons. No. 1, real estate was at some pretty lofty heights to begin with, so pulling back a little isn't particularly indicative of anything to me. And No. 2, shrinking volume might suggest overall activity is down, but to me, the more significant number is what's happening in prices. If prices slow their increase (never mind actually come down) that's a much more significant development, because it would signify, in broad terms, that people are actually at the point of taking losses -- not just acting a little hesitant about the process of moving in general.

So far, that doesn't appear to be happening, as this pdf shows. Overall prices are up about 4% GTA-wide, although there are some regional dips. That million-dollar house in the Annex I've been dreaming about got 6% cheaper, down to a mere $759,000, for example...

Getting closer!

As much as I'd love doomsayers like Garth Turner to be right this time, I'm not holding my breath. Still, as someone on the outside moving in, this is certainly a trend worth keeping an eye on.