High Interest Savings Accounts Rates Update (2017/09/19)

Since Bank of Canada raised benchmark rates a few weeks ago, by this time, all the major HISA issuers in Canada have updated their corresponding rates. The average rate on a high interest savings account that can be purchased through the brokerage channel is now 0.95%. Yes, still less than 1%, but 10 bps higher than it had been before the Bank of Canada raised rates.

Click here to view current rates

The standout rate among those that I follow is Home Trust HISA which is currently offering 1.00%. This rate has dropped slightly and the spread between this rate and competitors has narrowed since Berkshire Hathaway took a position at the lender. Also, at the recent shareholders meeting to decide whether to issue more shares to Berkshire chose, the shareholders voted not raise more capital. This gives Berkshire more limited control of the company going forward, and also signals to the market that the lender has found better liquidity. This is also evidenced by the rate being offered on Home Trust HISAs.

How to trade bitcoins on QuadrigaCX

Now that you’ve opened and verified and also funded your QuadrigaCX account, you are ready to trade some Canadian dollars and US dollars for bitcoins and ethereum. This post will explain how to make a trade on cryptocurrency exchange QuadrigaCX.

After logging into your QuadrigaCX account, choose the “Trade” tab from the main menu. When on the “Trade” menu, you will see the current order book displayed for the default market (btc/cad) with the bids displayed on the left side of the page and the offers displayed on the right side. Stacked on top of the order book are order entry modules that you can use to place your order.

If you are unfamiliar with how a market works and/or how prices are formed, the first thing you do is examine the current bids and offers. The bids and offers listed are orders from other users who have placed orders to either buy or sell at certain prices. For example, if you see a bid price of $4,000 CAD for 2 BTC, this means that someone (or a number of users) has placed an order to buy 2 bitcoins at a price of $4,000 CAD.  Oppositely, if you see an offer for 2 BTC at $4,010 CAD, this means that someone (or a number of users) has placed an order to sell 2 bitcoins at a price of $4,010 CAD.

The “price” of bitcoins is simply the last time that a bid or an offer was matched. If you want to buy bitcoins with Canadian dollars, then examine the offers. Using the example above, the lowest price offered is $4,010 CAD for 2 BTC. This means that you can buy up to 2 BTC at a price of $4,010 CAD. If you want to buy 0.10 BTC, and this price meets your objective, then go ahead and enter your order to make a transaction. Using the BUY side order entry module on the left side of the order book, enter a price of $4,010 and quantity of 0.10 BTC. As you enter your order details, you will see that the order entry module dynamically updates to reflect your inputs. This helps you confirm the price and amount you wish to enter.

Once you have input your desired price and quantity, and reviewed your order, simply press the “buy” button located within the order entry module, and your order will be sent to the market. If the current offer was $4,010 and you enter an order to buy at this price, your order will be matched and filled. This will mean you purchase bitcoins at this price.

Conversely, if you’d like to sell bitcoins, the same mechanics are used to sell, but instead of trying to pay the lowest price, you are trying to sell at the highest.

Maybe you’d like to buy bitcoins, but only if they reach a certain lower level. Maybe you’ve determined that a price of $3,500 is the highest price you are willing to pay. You can enter these details in the order entry module, and your order will be sent to the order book where it waits until the market falls to this price, or you cancel your order. This is called a “limit” order. From what I can tell, there is no time limit to how long orders can sit.

QuadrigaCX is the best place for Canadians to buy and sell bitcoins with the most liquid order book and the most stable deposit/withdrawal methods. Please use this link to open an account as it will mean some referral revenue for me 🙂

Crypto Credit Events

Crypto currencies, such as bitcoin and ethereum, are growing rapidly and the opportunities for profit are enormous. But these markets are also highly risky and investors using crypto currencies shoulder this risk. The situation should make risk management a main area of focus for crypto investors.

Risk in the crypto currency markets shows up in a variety of ways including many different forms of financial, tax and other operational risks. Much of the counterparty credit risk found in crypto currency markets comes from undeveloped crypto market infrastructure. We just don’t have the same plumbing in crypto currency financial markets as we do in fiat based financial markets. Fiat economies have developed the rule of law, deposit insurance, and credit ratings, but none of these these exist in crypto currency markets. Crypto currencies also don’t rely on any central authority, so dispute resolution is much more problematic, if not impossible. If your crypto currency wallet gets hacked, for example, you have little (or no) recourse to recover your loss.

Interestingly, the lack of financial market infrastructure also presents profit opportunities. Many financial services businesses operating in developed fiat economies could be replicated by clever entrepreneurs to crypto economies. The opportunities are huge.

Consider the cryptocurrency investor who makes a deposit on Bitfinex or Poloniex, and then lends their crypto currency to traders on the exchange in return for interest. How can this investor estimate the chances the exchange will remain solvent, and how can the investor estimate the chances of their account suffering a loss in the event the exchange gets hacked?  At present, there are very few ways to quantify the risks of such events. The crypto currency investor is left to rely on message boards, online posts, and a poll of their friend’s opinions. These methods are unscientific, and won’t give the investor reliable metrics they can use to make investment decisions. The average crypto currency exchange depositor simply relies on their own “gut feeling” along with some basic rules of thumb about portfolio management to make risk management decisions (don’t put all your eggs in one basket).

As far as I know, there doesn’t currently exist any method of obtaining deposit insurance for a crypto exchange or hosted wallet balance. In developed fiat economies, deposit insurance makes it cheap for consumers to assess the credit risk of counterparties, but the cryptocurrency world doesn’t currently have this same infrastructure. I believe that creating a rating agency for crypto currency credits is required for crypto currency finance to reach a more sustainable path.

One of my main goals as an investor is to better assess the creditworthiness of my cryptocurrency counterparties, and then use this information to make better investment decisions. As an investor, the degree of credit risk matters to me. Mostly all crypto currency investments have counterparty risk, but few ways exist to assess this risk. In fiat currency economies, we can rely on rating agencies, deposit insurance, and many different forms of information to make credit decisions. But this this same market infrastructure does not currently exist for most crypto currency finance.

To enlighten the market, the first step should be to define a credit event. When is a counterparty in default?  Below, I outline five categories of credit events: Bankruptcy, Acceleration, Default, Failure to Pay, and Restructuring.

Bankruptcy

Bankruptcy occurs when a relevant regulator declares the organization to be bankrupt.

Acceleration

Acceleration covers the situation, other than a Failure to Pay, where the relevant obligation becomes due and payable as a result of a default by a reference entity before the time when such obligation would otherwise have been due and payable.

Default

Default covers the situation, other than a Failure to Pay, where the relevant obligation becomes capable of being declared due and payable as a result of a default by the reference entity before the time when such obligation would otherwise have been capable of being so declared.

Failure to Pay

Failure to Pay is defined to be a failure of the reference entity to make, when and where due, any payments under one or more obligations. Grace periods for payment are taken into account.

Restructuring

Restructuring covers events as a result of which the terms, as agreed to by the reference entity and the holders of the relevant obligation, have become less favourable to the holders than they would otherwise have been.

By the above definitions, I believe it would be possible to achieve consensus on whether a credit event has occurred. The process of determining consensus could be done by a system of member voting and/or a pari-mutuel pool. The result of the credit event determination process could be used to settle derivative markets such as default insurance pools. These default insurance pools could in turn be used by market participants and credit rating agencies to help determine the creditworthiness of underlying entities. The pools themselves could also be used by both speculators and hedgers to manage their investment risk.

When the Yield Curve Predicts a Recession

Stock market investors should pay at least some attention to the yield curve. An inverted yield curve has signaled a coming recession many times in the post war era, and an inverted yield curve might be appearing again soon.

More often, the yield curve slopes upward, meaning, short term rates are lower than long term rates. Intuitively, “if one in the hand is better than two in the bush”, investors should expect interest rates today to be lower than future rates because of the time value of money when living with monetary inflation. When the yield curve is “inverted”, this means that short term rates are higher than long term rates.

An inverted yield curve represents many different things. It at least represents expectations about the future value of money.

I’ve been using a fun dynamic graph on stockcharts.com for many years, here is a link to the Dynamic Yield Curve.

Creating a Legal Will for Ontario

Many Ontario residents do not have written wills. Dying without a will causes headache for loved ones who then have to deal with unnecessary financial and legal administrative costs during a time when they could be grieving. For most of us, writing a simple holograph will is good enough. A holograph will is written in your own handwriting, dated, witnessed & signed by a couple of people and it outlines what you want to happen when you die. If you don’t feel comfortable with writing your own will, consult a lawyer.

Here is a checklist of items to address in your will:

  • date the will was made
  • who will be your executor?
  • what to do with your assets?
  • who looks after your kids?
  • who decides your personal (medical) care when you can’t speak for yourself?
  • how to access your digital accounts such as your social media accounts
  • communicate your intentions

First, date your will and if its more than 1 page, say how many pages the will is and put page numbers on each page (tip, if your will is more than 1 page, consult a lawyer). Start your will by stating its purpose such as “this is the last will and testament of xxx”. Name your executor by writing something like “I want my executor to be xxx”. Outline what you would like to do with your assets by saying something like “I would like my daughter xxx to be the beneficiary of my estate”. If you have kids, outline the person who will be the guardian of your children. It would also be good if you name someone in your will who will speak for you if you can’t speak for yourself, this is sometimes called a “living will”. This person will address your medical care while you are in a coma, and can be a different person than your executor.

After you’ve written and signed your will, it is important to communicate your intentions to those who have an interest in your estate. Make sure your executor knows about their responsibilities, tell the key people with an interest in your estate where your will is located, and make sure everyone who has an interest in your estate is up to date, this will reduce conflict. If the people with an interest in your estate are currently in conflict, try and resolve these conflicts as soon as possible.

For most of us without business interests, settling our estate is a simple administrative task. If you are married, it might help to hold financial assets jointly with your spouse. If you own a small business, make sure the business has a succession plan. Keep your will somewhere that is accessible to your heirs and/or your executor. That way, they can begin settling your estate in a timely manner.

If this sounds too complicated, consult a lawyer.

OSC Killing Home Capital Group

Terence Corcoran: The Kool-Aid man out to kill Home Capital raises a glass to the OSC

An investment banker with one of Canada’s major banks, surveying the devastated state of Home Capital Group, has a question: “I want to know why the OSC (Ontario Securities Commission) perpetrated this thing.” Did Home Capital, whose shares have lost 70 per cent of their value since April 19, “perpetrate a fraud on the market?

Canadian HISA Rates Update

I just reviewed the Canadian High Interest Savings Account rates. Not much has changed over the past year, the major banks are still at 0.75%. The only other issue to mention is about being cautious with issuers when your deposit is more than $100,000. Recent events with Home Capital have illustrated the importance of diversification and not chasing returns too aggressively. Even though interest rates are low, this is the reality, and an excessive hunt for yield will lead a reckless investor to losses.

Toronto Condo Apartment Return % Examples

Many people assume someone who owns 3 individual condo apartments in Toronto is getting a free lunch, but the truth is, owning apartments has pros and cons, risks and rewards, just like any other investment. Its difficult to explain how the returns of real estate investing actually work over a conversation at a cocktail party. This post will show real life examples of the returns of 3 individual 1 bedroom apartment condos in Toronto for 2016. I hope this post gives the layperson more knowledge about the actual results of owning condos on Toronto. The rates of return might not be as high as you’d expect!

Below is a table listing the income and expenses of 3 apartments in Toronto. Each of these apartments are located in downtown Toronto. Condo 1 was purchased 10 years ago, Condo 2 was purchased 8 years ago, and Condo 3 was purchased 6 years ago. Condo 1 and Condo 2 are proper 1 bedroom apartments where the bedroom is a separate room from the kitchen and living area. Condo 3 is a bachelor apartment where the living space is contained in a single room with only a separate bathroom. Each building has 24 hour concierge, Condo 1 and Condo 2 have modest rooftop terraces, whereas Condo 3 has extensive amenities including indoor and outdoor pools, a large fitness center, and meeting space. Condo 1 and Condo 2 are rented unfurnished to long term tenants. Condo 3 is rented furnished with term leases. Each unit includes utilities, and Condo 3 also includes unlimited internet. The rent is $1,600 per month for each unit.

Condo 1 Condo 2 Condo 3
Rent $19,200 $19,200 $19,200
Insurance -$195 -$168 -$150
Property Taxes -$2,288 -$2,119 -$1,954
Interest Expense -$4,138 -$5,642 -$6,062
Condo Fees -$5,644 -$3,834 -$3,823
Legal Fees -$1,933
Maintenance -$407 -$433
Utilities -$1,981
Profit $6,935 $5,097 $4,797

The additional insurance expense listed is required because although each building has insurance to protect damage caused by common elements, there are gaps in the policies so individual units need to also have insurance for damage caused by the resident or elements exclusive to the unit, such as if there is a flood caused by the resident of the unit causing damage to the building, this risk is covered in the unit specific policy. Also, damage to articles of the resident are also covered under the unit specific policy regardless of fault.

Interest expenses are associated with the mortgages held on each unit. At the time each unit was purchased, a 20% down-payment was invested, and the balance of funding was provided by mortgages.

Condo 2 suffered legal expenses in 2016 because of an error made by the property manager who was subsequently terminated by the condo board. The legal expenses were associated with adjudicating the dispute resulting from the error by management. This impacted the returns of Condo 2 for this particular year.

Maintenance expenses are related to tasks such as appliance repair. The utilities expense on Condo 3 is the cost of providing internet to the resident.

The total annual income provided after expenses for all three units is $16,829 or $1,402 per month.

What is the rate of return these condos produce?  This can be determined by dividing the income of each property by an estimate of their market value. I estimate Condo 1 to be worth $450,000, Condo 2 to be worth $425,000, and Condo 3 to be worth $325,000. The estimated rates of return are provided in the table below.

Condo 1 Condo 2 Condo 3
Value $450,000 $425,000 $325,000
Mortgage $250,000 $225,000 $200,000
Loan to Value 44.44% 47.06% 38.46%
% Return Equity 3.47% 2.55% 3.84%
% Return Cash 2.46% 2.53% 3.34%

As the table illustrates, each property has a bit of financial leverage. Its been a number of years since these condos have been owned as described above, so a portion of the mortgage debt has been paid down, and the properties have appreciated in value, so they carry more equity with a lower leverage rate than when they were each initially purchased.

Readers might be surprised to see the low rates of return. Higher cash yields can be obtained in many other liquid investments such as many blue chip stocks, and some bonds. I’m not going to argue that real estate (in particular condos in Toronto) is the best investment. Many investments are good ones, and from time to time certain asset classes will outperform others. There are many factors to consider when investing in stocks, bonds, and real estate, and its impossible for the individual investor to know which one will be the best. Individual investors can only assume that the market price has accounted for all the relevant factors. I think its more important for the individual investor to maintain a diversified portfolio rather than attempt to dramatically outperform the market. The individual who wants to create wealth should focus their energy on business activities where a financial investment is limited and operational success is far more important. With those thoughts in mind, a low rate of return in the short term should not cause an investor to sell their real estate today.

The % return on equity row describes the rate of return based on the equity invested = profit / (value – mortgage). The % return on cash row describes the rate of return based on the market value of the property = profit / value. The difference between the two rates is the impact of leverage. If the rate of return on the apartment is higher than the interest rate paid, then its profitable to borrow, otherwise, its better to invest without borrowing, or to mortgage the property but use the cash generated to invest in some other higher rate of return. Its also important to note that without the one-time legal expense associated with Condo 2 in the current year, the % rate of return on equity would have been 3.52%.

How does the rate of return on these properties compare to publicly traded REITs?  An investor could probably obtain similar rates of return by investing in REITs, without the hassle and risk of managing individual assets. The leverage rates of residential REITs compared to the current leverage of these three apartments is similar. Some REITs have higher leverage, some have lower. The other benefit of owning a REIT, besides the passive nature and less work, is the benefit of liquidity and diversification. Shares of a liquid REIT can be sold at any time with very low transaction costs, whereas individual properties are expensive to sell if a broker is used.

From a tax perspective, the individual properties are probably a better investment. The expense categories that CRA allows for real estate investments are pretty broad, and can include transportation and administrative expenses. The individual property investor can also make CCA deductions to reduce any other current year’s tax owed, but this comes with the caveat that if/when the properties are sold this CCA is clawed back in the form of capital gains tax. With REITs, the distributions are mostly taxed at the holder’s marginal rate in the year they are received. REIT distributions are not dividends, but are considered passive income to CRA. If its possible, try and hold REITs and bonds inside registered accounts (RSPs, TFSAs, RESPs, RDSPs, etc) and hold dividend paying stocks in non-registered accounts since the tax rate on eligible dividends is relatively low.

Another element that should be considered when analyzing the rate of return of condos in Toronto is the potential for their value to appreciate. This is one of the main drivers behind many real estate investments, the idea that the property will become more valuable over time, regardless of the annual yield %. This has certainly been the case in Toronto throughout its history, but who knows what the future will bring. If we consider urbanization will continue, major cities around the world will to grow and the added population will continue putting pressure on real estate prices. With leverage, the returns from appreciating real estate prices are magnified.

Home Capital Buyout Rumours

So who’d want to buy Home Capital Group and why? Before considering who, let’s first consider why. What would the buyer of Home Capital get and how might this transaction be structured?  First, could a big bank wring value from HCG?  Probably not, the big banks such as BNS, RY, CM, TD, BMO can source better quality mortgages on their own terms without needing a portfolio of mortgages from HCG. What about competitors such as EQB and FN? They have a similar business model, and they could probably clean up HCG’s mortgage book and further leverage relationships in the mortgage channel?  The problem with this logic is EQB and FN are about the same size as HCG, and if the quality of HCG’s mortgage portfolio is less than expected, it would drag down the buyer, possibly also causing a larger bankruptcy. Its pretty risky for EQB and FN to buy HCG, and there is limited upside. A better strategy for EQB and FN, and its the one that EQB has taken, is to play defense and arrange for liquidity to get by the near term GIC redemptions.

What about a larger firm such as Brookfield?  I guess its possible, but not likely. This would be a departure for Brookfield, but it does have some logic. If Brookfield could fund $10 to $15 billion in the short term, it could satisfy GIC redemptions and put the mortgages into a MIC, even offering this MIC to the secondary market (as a private equity or public listing). It would take some time to do the re-organization, but Brookfield has the capacity for this and could certainly find financial partners. Once the MIC was setup, it could be re-capitalized further diversified. This type of strategy would preserve the HCG mortgage and deposit brokerage relationships.

All of this is armchair speculation. I think the most likely next step now is to find further information from the OSC on their claims and settlement process.  Also, I think investors need to know more details on the quality of the HCG mortgage book, is it indeed full of holes or could it stand up on its own?

 

OSC should be blamed for Home Capital destruction

Terence Corcoran: Home Capital Group didn’t just fall from the edge of a cliff – it was pushed

By now most Canadians have likely seen the Home Capital Group Inc. stock graph, a Rocky Mountain plunge that began April 19 at $22 before hitting bottom a few days later at $6, wiping more than $1 billion off the value of one of Canada’s most successful non-bank mortgage lending enterprises.