the Wealthy Canadian

During the last boom Calgary was one of the hottest markets in Canada.  Combining a global real estate bubble with a commodities surge, Calgary, the home to Canada’s oil sector, was well positioned to benefit.

Things have been cooling off in the last 18 months, or so, so I decided to take a look at the Calgary Real Estate Board’s December 2008 statistics package.  Side note: I have to hand it to CREB for keeping and publishing great stats, the best in Canada, in my opinion.

• Over the last year median sale price has dropped from 368,500 to 340,000, or 7.7%.
• They’ve had huge volume compared to sales for a long time now and the absorption rate is currently sitting at 10 months.  That means if you have a house to sell, you can expect it to take 10 months before it gets sold.

What isn’t in this report is the state of the local economy.  I have heard from friends that the job market is starting to look bleak.  People are starting to lose jobs.  Apparently, if you apply for a job and don’t list a Calgary address then the application ends in the garbage.  What this means is that inventory may increase and/ or prices will start to drop as people are forced to sell.

I am not a professional blogger and I am not in this to make money.  My blog is really a journal where I write about things I learn, have learnt in the past, and other items that just pique my interest.

Today I came across something that did pique my interest – a Web Company that promises to mentor people in everything that you need to do in order to succeed with an online business. Online Profits dot Com.

Judging from their ad copy it looks like it is more than the run-of-the-mill e-book scam (a la the “$49 special where we teach you nothing that you need to know”).  They’ve divided a program up into multiple modules in a step by step approach.  Their list of mentors looks impressive, as well.

Is it worth it?  I have no idea.
Will I buy it? Doubtful.

However, I am submitting my name for a free draw at Daily Blog Tips .  I am also a sucker for free stuff.:)

Nortel was once the crown jewel on the Toronto Stock Exchange.  At one point Nortel alone accounted for 35% of the entire composite index.  Today the weeping giant, Nortel, announced that they have filed for bankruptcy protection.  You can see the announcement on their website.

Trading on the TSX has been halted, and according to Andrew Wahl Nortel will likely be de-listed completely from the TSX and NYSE.  From largest company in the index to de-listing in a decade.

I have always been personally interested in this company as I used to work for them.  I worked for them until I got frustrated and quit.  There were still many great people at the time of my departure.  Over the years they have slowly been leaving (one way or another).  My heart goes out to those that are still there.

What is interesting is that Nortel sucked it up and declared bankruptcy, after years of trying to recover from poor management.  While some other poorly run companies are getting bailed out.

Update: The TSX has resumed trading of NT.  The price has dropped 62.34%

Just about everybody seems to be frustrated with insurance.  High premiums, large deductables, and coverage that never seems to match what we end up needing.

By and large, however, the insurance industry works as it should.

• The premiums are based on risk and coverage.  An 18 year old male insuring a Ferrari is going to cost.. alot.  Short driving exprerience and statistical likelihood of an accident, and the value of the asset being insured.
• Deductables are there, IMHO, to prevent us from making frivolous claims.  Consider that a smashed windshield might cost 100$ to replace, but in total might cost $150 insurer once they pay administrative costs.
• The coverage can be somewhat sneaky, e.g., they may pay for floods but not sewer backups, and we never realize it until it is too late.  However, you do get the coverage that you pay for.

So whatever our feelings on insurance, it works as intended.  Usually.

Insurance works best when only a few of the many insured make claims.  When widespread catastrophe strikes it becomes very difficult for the insurer to cover all payments.  It’s not like an insurance company puts our premiums under their mattresses, they invest the money. They invest your premiums in the same market that has seen your savings and retirement plans lose 50% of their value in a few short months.

I’m not doomsaying, I’m not predicting that you won’t be able to get your car fixed after your recent fender bender.  I am merely pointing out that insurance is not a guarantee.  For more of a gloomy perspective check out this from Bankruptcy Law Network

Where I am going with this is how this relates to the Credit Default Swap (CDS) market and our current ‘credit crisis.’

CDS’s are similar to insurance, except that they insure against loan defaults.  Your bank will pay a premium for insurance against people not paying back their loans.  The good folks at places like Bear stearns will gladly accept premium payments at the risk of having to pay out the full amount in case of default.  Unfortunately, if a large number of these loans do default then the insurer may not be able to meet the payments.  Your bank paid their premiums for insurance but did not receive the benefit.

Consider this hypothetical example.

Balgonian International Group (BIG) commences a leveraged buyout of Louisiana Trust Insurance (LTI) for $2B.  It’s leveraged because they need a loan, which they get from Bull Steers Investment Bankers (BSC).  BSC implements a Credit Default Swap to remove the risk from their books, Frehman Sisters (FEH) accepts the swap.  FEH gladly accepts the premiums and invests them wisely in an up and coming insurance company called Louisiana Trust, whose shares have seen a dramatic increase lately (since the announcement of a buyout).

Unfortunately a bad hurricane season, and the fact that LTI only services Louisiana, has bankrupted LTI.
BIG has also been hit hard and they can not make the payments on their loan, they default.
BSC attempts to recoup their losses on the loan by asking their swap counterparty (FEH) to pay up.
FEH invested the premiums so they sell their stake in LTI.  Unfortunately, due to the bankruptcy of LTI, their stock has dropped 99%.
Everyone loses.

Yesterday I told the story of Joe, an unfortunate victim who got caught in the jaws of the credit trap.  Joe made liberal use of his credit to buy all the things he never wanted. Then watched as it spiraled out of control.

To be fair cheap credit can be a great thing.  It is the ease with which we get it and how we use it that determines whether or not it is a good thing.  Easily obtained credit and cheap credit are two different things.

Financing a house at 4% is definately cheaper than financing it at 4%.  Being pre-approved for twelve different credit cards at the same time while purchasing that dream home is ease of credit. Combining the two can be deadly.

Here are a two tips to help avoid the credit trap.

1. Pay cash for everything!  You can only spend what you have.  An alternative for the more disciplined is use free reward credit cards to pay for everything (and get the cash back, or free groceries) – but only buy as much as you can back with cash.  This takes much more discipline and you need to be extra cautious for the trap.
2. Buy only what you can afford.  It is reasonable to assume that you will need to take out a mortgage to buy a house but buy one that makes sense given your income – not what you can afford based on the monthly payments!

That is it, two tips to sum it up.  Buy what you can afford and pay cash (or equivalent).

Paying the maximum payment you can afford every month for a house is not a house that you can afford.  What happens if/when the payments go up?

If you want a big screen TV, plan for it in your budget.  It may takes months to get enough cash but you will know that you will have enough to pay for it.

Thinking of a car loan?  What happens if you finance that shiny new Escalade for $50,000 and a few months later get into an accident that destroys it?  By that time the car has depreciated, as car do, to below what you owe on it.  E.g., insurance offers you $40,000 but you still owe $45,000.