Monthly Archive for October, 2008

How This Bear Market Compares to Other Bear Markets

The New York Times has a great graph that compares this bear market to other bear markets. Of course, it only looks at the S&P 500. Unfortunately it doesn’t look like they are updating it. I’d be very surprised if we reached the same bottom that we did in 1932, but who knows, anything can happen. The current bear market looks a lot like the one from 1937 to 1942.

Popularity: 57% [?]

Global TV Says Vancouver Housing Bubble Has Burst

Just over 4 months ago, I wrote that the Vancouver housing bubble had finally burst. The mainstream media has finally come on board and is supporting the idea that housing prices will fall over the next few years, based on a report from Central 1 Credit Union. Take a look at this report from Global TV:

Global TV is now saying that the “air is now officially out of the real estate balloon.” My only complaint with the piece is that there is no mention of the complete lack of affordability being any factor in the price drop. They are attributing the drop to “the global financial crisis and a big drop in consumer confidence” which have “combined to drive the housing market into recession.” Helmut Pastrick mentioned the “uncertain and volatile times we’re living in.” They say “how many times have we heard that somehow Greater Vancouver’s real market was insulated from what was happening in virtually everywhere else in the western world….that prices were falling?” They talk as if there are only two possible outcomes: either Vancouver is insulated from the rest of the world in which case our prices won’t fall along with the rest of the world, or Vancouver is not insulated in which case our housing prices will fall because prices are falling elsewhere. Even if Vancouver were completely insulated from the rest of the world (no trade, no communication, an island in the middle of the ocean) our housing prices would have to fall in order for affordability return to normal levels. Yet the piece leaves us with an overwhelming feeling that Vancouver’s real estate market woes are the fault of others, the fault of a US/world credit crisis and of a US/Canadian recession, the fault of some mysterious outside, external force. There is some mention that speculators and investors, who up until recently were lining up to pre-buy condos are likely to be the hardest hit, but no mention of their part in causing this mess. No mention of the fact that housing prices were just too damn high and affordability too damn low.

The real estate agent near the end says that we are now (or are soon to be) in a “classic move-up market.” What he is saying is that when housing prices are low, it is easier to move up from a small townhouse/condo to a house, for example. It’s funny because this is what a lot of people were doing when market prices were high; taking the equity out of their home and buying a second home or moving into a bigger house, while taking on more debt. Obviously when market prices are on the low-side it is a better time for a “move-up”, just like it is a better time to buy, or to enter the market for the first time. When market prices were high it is a better time to “down-grade”, or to leave the market entirely and become a renter.

The piece also got some of the math wrong. A drop of 12%, 13%, and 5% is an overall drop of 27.2%, not 30%:

1-(1-0.12)(1-0.13)(1-0.05)=0.272

The above is just a complicated way of saying that you had something that was reduced by 12%, then 13%, the 5%, the result would be a reduction of 27% from the original, not 30%.

Hmm, my guess is that no banks will be offering 0% down mortgages any time soon… at least not unless you have some other really expensive assets that they think they can repossess..

Popularity: 64% [?]

A Lost Decade?

If you had purchased shares in the S&P 500 index (through the SPY index ETF) in July 1997 (at about $91-92 per share), your investment would be worth the same amount today, but in today’s dollars. So technically you would have lost money if you consider inflation. So it has an annualized return of about 0%, neglecting inflation. All this ignores dividends which were roughly 1.5-3% during that period (very rough guess). So let’s just for sake of argument that the dividends cancel out inflation. So again, the annualized return would have been roughly 0%. If you made any more purchases of the S&P 500 index after 1997, well, you annualized return would have only gotten worse because except for a brief period in early 2003, SPY hasn’t been below $91-92 since 1997.

Popularity: 62% [?]

VEA vs XIN: Foreign Exchange Fees vs. Higher MER

A commenter named Blitzkrieg asked:

How do currency exchange fees factor into the decision between VEA and XIN? XIN’s MER is 0.35% higher than VEA’s, but it is purchased using Canadian dollars, so there is no exchange fee. VEA’s MER is nice and low, but don’t you immediately lose a few percentage points of your investment when you buy it due to currency exchange fees?

He’s exactly right. The answer to “which one is better, VEA or XIN, from a cost perspective” is “it depends.” In this case, it depends on how long you hold your investments.

I did some similar calculations to determine the “effective MER” of a foreign currency investment over time but this time I do it a bit more simply, to determine, simply, how long to I have to hold my VEA until it beats XIN.

When you buy VEA, you’ll pay a foreign exchange fee (spread). This varies depending on your broker but they range from 0.5% to 1.5% each way. Let’s assume it’s 1% each way. So when you use Canadian dollars to buy VEA they convert your dollars to USD but they take 1.5% for themselves. So our present value has gone down by 1.5%, or 98.5% of the original. When we sell your USD investment, VEA, in the future, the broker/banks will again take 1.5%. So your final value is also reduced by 1.5%. So originally, we had this:

FV=PV (1+i)^n

Our initial PV needs to get reduced to 0.985 of the original, and the result of the right-hand needs to be reduced by 0.985 (when we sell the investment). So what we end up with is this:

FV_{VEA}=(0.985)(0.985)PV (1+i)^n

If we invest in XIN, there are no foreign exchange, just an MER that is 0.35% higher. This 0.35% will reduce our annual return, so we get this:

FV_{XIN}=PV (1+i-0.0035)^n

We can get rid of PV (it won’t affect the result) and assume a return of 7% (i=0.07). It turns out that:

FV_{VEA} > FV_{XIN} \quad \textbf{if} \quad n\geq10

So if we hold onto our investment in VEA for 10 years or greater, we will end up better off, assuming a rate of return of 7% (note that the rate of return does not have much effect here, eg. 10% rate of return gives the same result) and a foreign exchange fee of 1% each way. The two variables that have the greatest effect here are the foreign exchange fee and the difference in MERs.

Popularity: 18% [?]

Vanguard ETFs Move to NYSE Arca Exchange

I was hoping to buy some VTI today but I couldn’t buy it through E*Trade’s website because there was no quote available. I had noticed in the past few weeks that there was an asterisk next to the market prices of my Vanguard ETF holdings that said: “A quote was not available on this security. It has been priced using the previous day’s closing value.” I called E*Trade and they weren’t much help. The lady kept saying “that is not the correct symbol” to which I kept replying “I don’t understand what you are saying.” Eventually she said that it was on the “Pacific Exchange.” Well the Pacific Exchange doesn’t actually exist anymore:

by 2005, the Pacific Exchange was bought by the owner of the ArcaEx platform, Archipelago Holdings, which in turn was bought by the New York Stock Exchange in 2006. The New York Stock Exchange conducts no business operations under the name Pacific Exchange, essentially ending its separate identity. Pacific Exchange equities and options trading now takes place exclusively through the NYSE Arca (formerly known as ArcaEx) platform

Googling for NYSE Arca and Vanguard finally gave me some hits. Apparently on September 19th, 2008, Vanguard ETFs are now trading on the NYSE Arca Exchange after moving from the American Exchange:

NYSE Euronext (NYX) announced that its fully-owned subsidiary NYSE Arca today began trading 34 Vanguard Exchange Traded Funds (ETFs) after the group transferred over from the American Stock Exchange (AMEX).

I wonder if E*Trade will ever support quotes from the NYSE Arca exchange? Apparently I can buy them over the phone. Going to give it a go tomorrow because the markets were closed by the time I sorted everything out.

Update (2008/10/7): They will not charge you extra commission because it is sold on an exchange that E*Trade’s website doesn’t support. They have apparently always done this with stocks that cannot be purchased through the online system. We just bought some VTI shares. I’ll give it a few days and I’ll let everyone know if I see any extra commissions drawn my account due to this trade.

Popularity: 16% [?]