Blessed by the Potato

Despite numerous articles touting the benefits of winter tires, I’ve never really bothered. That’s largely been because I’ve never had to drive, so I could wait for the roads to be plowed/salted before heading out on my all-seasons. No one in my immediate family usually bothered either (except my dad, who for a while had performance summer tires on his car, rather than all seasons, which really necessitated a winter set as well). Getting the Nokian WRs this year though, I’ve noticed a difference (they are severe-service rated all-seasons), and there are even better winter tires than those out there. However, now winter tires will be mandatory in Quebec. I doubt this measure will follow through in Ontario though: there are too many people in Toronto who just don’t have the space to store a second set of tires who would complain.

With their high interest rates, credit cards can become a maw of doom for people with credit issues. For everyone else though, they can be a great way to defer your payments by a week or two and earn rewards at the same time. I’ve been looking into my credit cards and figured that it’s time to upgrade my Mastercard. A few years ago I got my BMO no-fee Mozaik card, which gives me 1 air mile for every $40 I spend (an approximate return of about 0.35%), which was a pretty good offer at the time. Now, however, that rate of return is a little lacklustre. Part of the problem is that Air Miles have been devalued in the last year or two (they used to be worth about 16 cents each, and now are just above 14 cents each — based on the number of Air Miles required to get a gift certificate), and part is that other no-fee rewards cards have come out and become competitive. Right now I’m trying to decide between the PC Financial Mastercard, which essentially returns 1% good for groceries at any Loblaws/Supercenter/Valu-Mart/No Frills, and a Canadian Tire Mastercard, which won’t tell me its rate of return but which I believe is also 1%, good for stuff at Canadian Tire. I’m leaning towards the PC card for a number of reasons, mostly because I also have my chequing account there so things will just be easier.

While I’m not looking for a Visa card, TD has a cash back Visa that can return up to 1%. My RBC Gold Visa also gives a return of about 1% (though it is a fee-based card; of course, I have that card for other perks like free insurance on certain purchases).

So 1% looks to be the rewards level to shoot for these days. Does anyone know of any cards with even higher rewards? I’d really prefer a no-fee card, but might run the numbers for a card with an annual fee and higher rewards to see if it makes sense. Does anyone have any other recommendations? (I’m not really interested in getting an AmEx card — I haven’t found a single place that would take AmEx but not Visa/MC, and I’m not interested in a card from MBNA since their telemarketers drove me crazy).

I’m really not much of a negotiator, and usually roll over after the first refusal. I do try though, and I know that it can work sometimes. Of course, in retail the sales drones really don’t have much flexibility in pricing, but in other matters, discounts can sometimes be had. What brought this to mind was thinking about my budget recently, and how when we moved in to the house, we managed to get the landlord to agree to keep the rent fixed as long as we were here (instead of increasing it 2-3% per year). It’s the sort of small thing that was pretty easy to get her to agree to, but which does make a difference in the long term for me. I mean, grad students in my department haven’t had a raise in the better part of a decade (probably longer, since who knows how many years before I arrived the last stipend increase was), yet rent and food and gas keep going up year after year. Not having a rent increase will save us over $400 this year, and something like $850 the year after. Contrarily, in the old apartment rent went from ~74% to ~78% of my stipend over the course of my MSc (all the while quality of life there went down the shitter as increasingly noisier and messier neighbours moved in).

Unfortunately, I still have another few posts under money to come over the holidays; apologies to those of you bored by this already.

I know I just got through talking about diversification and mutual funds, and how I had parked some of the cash I was sitting on in my high interest savings account into a few low-cost index funds from TD. I warned against the hazards of trying to pick individual stocks to beat the market — since only a minority of investors do manage to beat the market. But my dad calls the stock market “the great casino” and of course, every now and then there is the great urge to gamble.

So shortly after becoming “fully invested” my beloved Trans-Alta (TPW.UN) has been bought out and my shares were forcibly redeemed. That’s left me once again with cash to invest somewhere. I could follow my earlier reasoning, and buy some more index funds and just hold on for the next decade. Or, I could look at the signs of dreary economic forecasts coming in and say to myself that this might be a good time to have some cash, and to not worry about buying anything for a while. Or, I could gamble.

I’ve been watching the bank stocks for a while now, and they have been hit fairly hard by this subprime/ABCP fiasco. And they deserve to be: there’s billions of dollars of debt at stake, and their loosey-goosey lending/accounting/risk management may pull the whole continental economy down into a recession. However, if any industry can turn it around in the long term, I’m sure it’s the banking industry. So, if the current crisis makes bank stocks a good value for a long term hold, then I’m going to look into that.

One bank I like is TD: they have quite good customer service including extended branch hours, and were the only ones conservative enough to stay the hell out of the ABCP mess. They’ve been fairly flat for the last few weeks and are probably close to their fair value. TD is probably the least risky Canadian bank at the moment for both the near and long term, but since it looks like a lot of other investors see it that way as well, it’s also not “value priced” at the moment.

Going to the other end we have CIBC. While I love PC Financial, which is offered through CIBC, I’ve never been a direct customer of theirs and have heard of customer service problems from other people that have been long-standing. They’ve also managed to dig themselves into the deepest pit of any Canadian bank with this subprime mess. Will they lose a billion dollars? TEN billion dollars?! It’s not going to be pretty whatever happens, and there’s still a lot of risk and uncertainty there. However, they’ve also had the ever-loving shit kicked out of their stock, down 20% in the last month, about 8% in the last week alone. So with a stock like this, at what point is the price low enough to reflect the losses and risk factor? At what point is there a potential over-reaction and thus a potential value buy? When I was first looking at what to buy a few weeks ago, I read through a lot of information available on CIBC, and jotted down a quick note: “Don’t touch till $75”. Well, today it’s crashed through that point, closing down at $73.60.

Trying to value something like this is a skill I do not really have. I tend to rely a lot on people like my dad and stock analyst reports. Unfortuantely, my dad says that the risk is too big with CIBC at the moment, since they keep saying that they’ve released their bad news, just to have another batch of bad news come out the next week. No matter how cheap it may seem he’s not interested in touching it, so he’s not going to walk me through how he values companies. And I think the analyst reports I’ve read are wrong, overly optimistic, or at least out of date. So I’m going to have to wing it on my own.

There are a number of ways to try to put a value on a company’s stock, and I’ve probably never heard of the ones that actually work well, but here are two very amateurish methods I can try to apply to CIBC. First, we have price-earnings-ratio. This is the ratio between a stock’s price and the earnings per share. For instance, CIBC has about 335 million shares, and made about 3 billion dollars last year, or about $9/share. Many bank stocks typically trade at about 12X earnings, so to put it very simplistically you expect to buy about 12 years worth of earnings with your stock purchase. If there’s anything that might upset the forecast for future earnings (such as massive losses from a subprime mess), then you have to adjust your stock value accordingly. So if we imagine that over 12 years, CIBC might stand to make 12*3 = 36 billion dollars, but might also have 10 billion in losses from bad investments or an economic downturn, then we might project that the 12-year earnings would be $26B, or $77.60/share, and then we say that’s what the stock should be worth. If the losses are “only” 5 billion, then we might be looking at $92/share. Of course, things are more complicated than that, since the losses wouldn’t be averaged out evenly over the 12 years like that, they would happen soon, and things that happen soon are worth more (in this case, more of a hit) than things that happen later. There’s also still so much uncertainty about what’s going to happen, and uncertainty and risk carry a price penalty as well. This little analysis also started from the current year $9/share earnings, but that might be an optimistic start point, as that’s a pretty high earnings figure for this bank. The 5-year average looks to be more like $5.40/share/year. Using that to find 12-year earnings (~$22B), taking a subprime hit ($5B), and then finding the share value gives me something like $50/share. I think that might serve as a good “floor” price.

Another simplistic valuation is to look at the share price relative to the book value. The book value is about $33/share (about $11 billion total when you multiply that out). Take off a $5B subprime hit (and how arbitrary these numbers can be in the face of uncertainty) and that book value comes down to $18/share. The stock had been trading at something like 3X book value, which would put the new, adjusted price at $54. If the hit to book value is only $2B, then we’re looking at $81/share, which we’re already below.

From all this you can plainly see that I am not at all qualified to be doing this kind of value analysis without further training. However, I think that some point between $50 and $75/share, CIBC might be a good long-term buy. “Calling the bottom” is a very difficult thing to do, but I think if CIBC drops any more (below, say $70/share) I might buy some, though I’ll probably wait until it starts to turn around, possibly months from now. One complication is that the share price is quite high, especially compared to TransAlta, so I don’t have enough money to buy a “board lot” of 100 shares. Normally, I’d stay away from odd lots, but for big bank stocks there is so much volume, so many shares being traded every day, and so many dividend reinvestment plans producing odd lots that I think it’s pretty safe to not worry about getting a block of 100 shares and just investing what I can (and as always, only what I can afford to lose).

I’m in favour of nuclear energy for Canada. While it does have a history of delays and cost-overruns, the delays are often a result of making sure that we implement it safely. Plus even at double the cost, nuclear power is still one of the very cheapest forms of energy available to us, and the only large-scale carbon-free source we can count on for the medium term. There are hazards with nuclear power. The risks are very remote, but when things go wrong, they have the capability to go very wrong (whereas with other sources of power, the risks associated with them occur more frequently, but usually are more minor). However, Canada has a reactor design that is inherently safe, and a strong history of keeping things above-board and putting safety as one of the highest priorities (which is part of where all the crazy budget overruns come from).

…until the Harper government decided to thwart the nuclear regulator in order to bring the NRU reactor in Chalk River up sooner. The NRU shutdown has had a big effect on nuclear medicine scans across the country, and in fact, across the continent. Somehow, this one reactor had come to be the dominant source of molybednum-99 for much of the world, with no backups, anywhere. The shortage has turned the nuclear medicine corridor at my hospital into a ghost town, with the tiny bit of remaining isotopes used strictly for emergency patients. There was a stockpiling process before the reactor went off-line, but since the isotopes break down so quickly that could only last for a few weeks, and as the shutdown stretches on still…

Personally, I think the reactor probably could be turned on for at least a short while to do another round of stockpiling, and then upgrades can be made over the next year a week or two at a time as necessary, while keeping the medical isotopes flowing.

But I must strongly disagree with what the Harper government is doing here. Politicians do not have the expertise necessary to say with any degree of confidence things like:

“There will be no nuclear accident,” Prime Minister Stephen Harper asserted in the House of Commons, saying the government has received independent advice indicating there is no safety concern.

“On the contrary, what we do know is that the continuing actions of the Liberal-appointed Nuclear Safety Commission will jeopardize the health and safety and lives of tens of thousands of Canadians. We do have the responsibility to demand that Parliament step in and fix this situation before the health of more people is put in jeopardy.”

The Harper government has a nasty habit of closing up and relying on “independent advice” without ever sharing its sources with the public, and this is absolutely not the time for that kind of bullshit. Likewise, it’s not time to throw in nasty, probably untrue snipes at the Liberals (Hey, “Canada’s New Government” you’ve been at it for well over a year), especially as the spendiest government in our history has found billions for Quebec, arctic patrol routes, etc, but didn’t bother to throw some money at the new Maple generators until a crisis hit.

This is not an issue that should be politicized: in fact, that’s the sort of thing that makes nuclear reactors dangerous. Design them well, operate them meticulously, listen to the careful watchdogs, and spend the money it takes, and then we can all benefit from nuclear reactors (whether for energy or isotope production).