Monday, 29 November 2010

Waterfurnace Renewable Energy Q3 Report Good and Bad

Back in September when I rated Waterfurnace (TSX: WFI) a Buy at the then price around $25.50 it looked as though the near future would see no growth due primarily to the poor state of the US housing market. The 3rd Quarter report came out November 10th and things look even a little worse than merely flat results as Earnings Per Share dropped a fair bit from the same quarter last year. Profitability has been squeezed by a shift from residential to the more active but lower margin commercial market and due to the rising cost of inputs like copper.

The somewhat good news is that WFI continues to take back market share lost in 2009 to its main competitor LSB Industries (NYSE: LXU), as evidenced by WFI's 15% rise in sales while those of LXU (in the Climate Control business) fell in its 3rd quarter report. The company management in its Q3 earnings webcast and in an email in response to my questions state that things like a 3% price increase and bulk buying will improve margins.

We investors (yes, I still own the shares I bought in September) need to be patient. Maybe I'm just one of those "refuse to sell a loser stock" that all those behavioural finance books make fun of, but I'm not selling. I still think the payoff is two years away. The key US housing market is still looking very weak in recent data. The post Q3 report drop in price to around $22 makes WFI an even more attractive Buy in my opinion though two professional analysts have dropped their recommendation to Hold according to

The folks at Waterfurnace looked into why the US dollar version of the stock is not trading (and has not done so for a long while) on the TSX. This is their reply:
"WFI.U, WaterFurnace stock traded in U.S. dollars on the TSX, is still a valid symbol. When WaterFurnace set up WFI.U, there was expectation that there would be significant interest in trading in U.S. dollars. At first, the market maker made some attempt to get things going, but trading in U.S. dollars didn’t take off. The market maker has now posted its bid and ask orders so far apart that trading via WFI.U is not a feasible option. I think investors who want to trade in U.S. dollars simply use WFIFF.PK."
The Yahoo Finance chart for WFIFF.PK shows it is about as active in volume as it is in Canada.

Monday, 22 November 2010

Holiday Financial Tip: Eat Turkey Dinner

No, I'm not kidding, this is completely serious. It works like this.

Self-control and the ability to resist impulsive choices are key to financial and investing success. Whether it involves saving instead of spending or reacting too fast to market moves, such qualities are associated with success or conversely, where they lack, with failure.

Here's how the traditional turkey dinner comes in: foods that enhance levels of a body chemical called serotonin, such as the combination of turkey, containing tryptophan, with the carbohydrates of mashed potatoes, improve self-control and reduce impulsive choice. These effects were apparently confirmed amongst post-Thanksgiving US holiday shoppers in a paper on SSRN We Are What We Consume: The Influence of Food Consumption on Impulsive Choice by Arul Mishra and Himanshu Mishra, which I found in a new book by Meir Statman called What Investors Really Want (a book I will be reviewing soon).

So as US readers get ready for Thanksgiving this Thursday and everyone for Christmas, just remember to say, "Another helping please, I'm in training!"

Friday, 19 November 2010

Testing Purchasing Power Parity with Golf Equipment

The idea of purchasing power parity says one should be able to buy the same thing for the same price in different countries. I've previously compared prices of personal computers to see where the cheapest prices are to be found, with exchange rates factored in. From the 2007 comparison where the USA was the cheapest and Canada the most expensive, to the March 2010 comparison there was a big shift, as the UK became the cheapest, Canada fell in the middle and the USA went from least to most expensive. PPP wasn't much in evidence. There was huge spread in the price of Dell PCs - 16% in 2010 and 33% in 2007.

Golf is another passing interest of mine (ok, it's really become more of an obsession) and I have recently been in the market for a new set of irons so I've done more international online comparison shopping. This time it seems the pricing of individual equipment makers and online stores may be more important than exchange rates. My mini survey (using exchange rates found on Google Finance):

TaylorMade R9 (steel, 8 clubs, with delivery and taxes)
Mizuno JPX800 Pro (steel, 8 clubs, with delivery and taxes)
Golf Balls - Srixon AD333 (1 doz)
Canada is cheapest for one set and most expensive for the other, while the balls are all within tiny fractions of the same price. The price spread between lowest and highest for the golf equipment is under 10%, much less than what I found for the Dell PCs. The golf business may be managing foreign exchange better in equalizing prices than the computer industry, or than Dell does at least. Or maybe it's just that the movement of CAD versus USD has tightened considerably during all of 2010 and for CAD vs GBP, since March.

Moral of the story - right now, special deals, services and promotions make more of a difference. For instance, in the UK Mizuno has free custom-fitting test centres in various locations (with no obligation or pressure to buy and as it turned out, lots of friendly golf chat) and a number of linked vendors that will order at no extra cost the spec clubs from the factory.

However, if exchange rates go volatile again, or more likely when they do, and CAD has a big upswing against the USD that could well present cross-border buying opportunities.

Wednesday, 17 November 2010

Et tu Beta? A downside risk betrayal

A central tenet of modern finance theory is that Beta is the appropriate measure of the systematic risk of stocks. The idea is that the higher the Beta, the more a stock price varies when the overall market rises or falls and thus the higher the risk.

Nothing is sacred or safe. Researchers Victor Bahhouth and Ramin Cooper Maysami in Risk Prediction Capabilities of P/E During Market Downturns, on AllBusiness' Academy of Accounting and Financial Studies Journal, tested how well Beta and P/E (the Price/Earnings ratio) predicted downside risk of all NYSE and NASDAQ stocks during the year of the latest big crash up to the end of October 31, 2008. Their conclusion: " ... beta's power was insignificant in predicting stock price movements ... On the other hand, the price-earnings ratio exhibited significant power in predicting stock price movements and accordingly was a more reliable measure of risk." An unkind cut it is indeed.

I wonder how many people actually have tried to use Beta to assess individual stock risk. I suspect most who look at individual stocks fall into the fundamental value assessment camp and so have been using P/E all along. When I looked at Waterfurnace recently, I came across some finance website or other that showed a Beta of 0.5 or so for the stock, presumably because WFI has been ultra-stable, trading around $25 for about the last four years. It made no sense to me to consider that figure of any use in judging its upside or downside risk.

Tuesday, 16 November 2010

My Search for a Travel Rewards Credit Card

Recently my credit card came due for its bi-annual replacement so I wanted to check that I am still getting the best deal. Travel rewards credit cards give you points for what you spend that can be redeemed for travel or possibly merchandise. Not surprisingly, offerings vary quite a lot between card companies and there is lots of devilish detail and fine print that can turn a seemingly good deal into a disappointing choice.

Two web sites that I found to be extremely useful with lots of detailed comparative info and unbiased advice:
  • Rewards Canada - almost one-stop shopping for the features and costs of available cards, saves a huge amount of work flitting around vendor sites with its large spreadsheet-like comparative table. It seems to be quite up-to-date with the latest temporary bonus offers and specials. There is even a top 5 credit cards for 2010 article. The same web owner runs sister sites for the UK FrequentFlyerBonuses, and for worldwide
  • Financial Consumer Agency of Canada - yes, that's right a federal government agency actually can manage to supply useful information at its section on credit cards. The unique info, not found on the Rewards Canada site, is the table of extra fees and charges, and particularly for the traveller, the Cash advance fee outside Canada and the Converting transactions made outside Canada into Canadian currency (which, frustratingly, is 2.5% in the vast majority of cases)
The tables are invaluable for quickly eliminating cards that do not meet basic criteria e.g. for me, I absolutely want a card with Auto Rental Loss/Damage Insurance (which avoids needing to pay the usurious daily fees charged by rental companies to cover any damage, whether it's your fault or not; funny that if you decline the rental company coverage, they do not ask for proof that you have other cover, which of course means the rental company has its own insurance for damage and you are only lining their pocket ... but since you must sign on the rental agreement that you will pay for damage, you still are wise to get some insurance from somewhere). That meant, for example, eliminating the American Express Blue Sky card.

Despite the top 5 article mentioned above, my eventual choice did not settle on their top-rated RBC Visa Avion Card. Instead the separate Travel Anywhere Credit Comparison showing rewards redemption values versus spending required focused my choice initially on the Capital One Aspire World MasterCard. It seems to offer the best spending to reward ratio. Note the word "seems".

The fine print on the card reward scheme, found only by drilling down into the Capital One website, has some tricky conditions that ensure almost no one will be able to get full value from their points and achieve the seemingly best-in-class rewards. The tricky bit is buried in the Important Disclosures document you see only after starting the application process under the heading Reward Miles Redemption, where it says: "... The reward mileage requirement is as follows: 15,000 reward miles are required for tickets up to $150.00; 35,000 reward miles are required for tickets from $150.01 up to $350.00; 60,000 reward miles are required for tickets from $350.01 up to $600.00. For tickets over $600.00 in value, the required number of reward miles will be determined by multiplying the cost of the ticket by 100 (ex. $741 ticket requires 74,100 reward miles). You need to have the minimum reward miles required in order to redeem - partial redemptions will not be processed." In other words, you cannot buy a $500 ticket and top up the missing $100 you need. You must always use more points than the cost of the ticket. Unless you spend big amounts every year on the card - like $25,000 - you won't get to the 60,000 level of points where the no top-up point loss penalty gets less onerous. For me at least, it would be far too long before enough points for trans-Atlantic flights ($1000+) could be useful. Lesson, read the fine print.

After hours of reading the fine print, I literally came back to the place I started - my existing TD Travel Visa Infinite card. Not that TD Visa is the most wonderful outfit ever (see my own less than wonderful experience with them here and here). But their rewards accumulation and their redemption methods (especially where one gets triple the points when booking travel through their own travel agency, which I have found to be responsive and easy to reach) fit my current lifestyle. The devil is in the details and it is the devil I know.

Wednesday, 10 November 2010

Alzheimer's: NOT a Reason to Become Bilingual

Any news about Alzheimer's attracts my attention these days since it will become the major health issue for Canada as the population age profile gets older and it will have many financial consequences for retired people.

It is thus that a press release from the Baycrest health institute affiliated with the University of Toronto announcing with breathless seriousness that "A Canadian science team has found more dramatic evidence that speaking two languages can help delay the onset of Alzheimer's symptoms by as much as five years." Wow! Here comes the government with programs for teaching French, English or other second languages (any two will do, apparently). As a bilingual person I would love to believe the conclusion but skeptical me wonders if these professionals have made a very fundamental mistake in confusing association or correlation with causation.

Do a Google search with the words spurious correlation and causation and read the dangers of confusing the two ideas. One of my favorites is the video Everything is Dangerous: A Controversy from the American Scientist in which many spurious claims in medical research are dissected by Stanley Young Director of Bioinformatics at the US National Institute of Statistical Sciences for their faulty science and application of statistics. The most basic smell test - does this sound too incredible to be true? - when as they say themselves "There are currently no drug treatments that show comparable effects for delaying Alzheimer's symptoms", should make everyone highly suspicious. The lack of any reference to a physical causal (chemical, biological etc) process to link language-speaking with slowing down the brain gunk (to use a term that shows the depth of my medical knowledge on the subject) present in Alzheimer's undermines my confidence in the announced results even more.

The researchers say they are "dazzled by the results" in the original 2007 study announcement from Baycrest. Too ironically true.

Monday, 8 November 2010

Alzheimer's: Another Reason for an Expanded CPP

Retirement Action's Peter Benedek included a link in the Nov.8 ediction of his excellent weekly summary to the scary article The Financial Toll of Alzheimer's Disease, in which is explained the vulnerability of people with Alzheimer's to financial mistakes or fraud. The article mentions a number of useful protections.

Another defence not mentioned is simply to have a steady, reliable, lifetime, non-tradable/non-withdrawable/non-stealable source of income about which no decisions have to be made ... like the CPP.

Alzheimer's (and other forms of dementia) is a significant issue now and it will grow much worse. Increasing longevity will mean an increasing number of people getting Alzheimer's as pointed out in the appropriately-named report Rising Tide: The Impact of Dementia in Canada from the Alzheimer's Society of Canada.

CPP simplifies retirement finances. As such, it can help avoid financial problems by requiring fewer complex, people- and time-intensive legal and family protections.

Book Review: Behavioural Technical Analysis by Paul Azzopardi

This book is a rationalist's attempt to make sense and investing use, through technical analysis, of the often irrational behaviour documented in the field of behavioural finance. Two-thirds of this book is brilliant and the other third is disappointing.

The brilliant part: Azzopardi provides the best explanation and summary of behavioural finance concepts that I have come across to date. Not only does he explain simply and clearly with entertaining examples each individual idea like framing, representativeness, anchoring etc, he classifies and organizes it all and turns a bunch of seemingly random and contradictory ideas into a cohesive, sensible structured whole. His two groupings – the first is Complexity, Perception and Aversion and the second is Self, Society and Gender – really succeed in fitting together the disparate concepts. I found this material to be very helpful in reflecting on my own money and investing actions, to figure out what I'm doing wrong and right, which will allow me to make improvements.

In this regard, the book is a better and more satisfying read than more famous books in the behavioural finance pop charts like Dan Ariely's Predictably Irrational, Jason Zweig's Your Money and Your Brain and Terry Burnham's Mean Markets and Lizard Brains (my review here).

The disappointing part: The case for being able to successfully apply the undoubted truths of behavioural finance and the assumed efficacy of technical analysis isn't convincing. While there is no doubt that emotions and faulty thinking affect stock markets, the problem is the difference between ex post prediction and ex ante explanation. After the fact, everything is clear and periods when the crowd of investors has been irrational can be pinned down, as Azzopardi does do, to the stock price charts and technical indicators. But how do we know today what optimistic or pessimistic behavioural finance impulse is driving the market? As he writes on page 158, “It is always hard to tell what the reaction will be and the market often reacts to the same kind of news in a different manner.

A surprise for me in this book was to find a reference to a research paper by William Brock, Josef Lakonishok and Blake LeBaron that supports a conclusion that at least some technical analysis trading rules – all of which are entirely mechanical and have no behavioural finance shaping - were successful in generating true excess trading profit. I looked the paper up and indeed their research does state the technical analysis methods tested (moving average and trading range break) did “... provide strong support for the technical strategies”. It will be interesting to look into this stuff for a future blog post!

Another feature I like is the fact that the book provides the detailed reference to this paper and many other research papers and books cited in the book. Its website at also has online links, within a password-protected area (the password is in the book), to the actual documents.

Rating: This book is worth buying for the excellent first part alone but my rating for it suffers due to the second part – (5/5 x 2/3) + (2/5 x 1/3) = 3.5 out of 5 total.

Friday, 5 November 2010

British Airways Delivers Baggage Delay Compensation

On a recent holiday trip on British Airways to the lovely city of Barcelona, my wife and I got that sinking feeling on arrival when our bag did not show up. A day later, after we had gone shopping for essential bits of clothing and toiletries, BA did deliver the bag and everything was fine after that, including the bag's trip home, simultaneously with us.

Normally, this would not be worth noting. The big, and pleasant, surprise, which is worth a pat on the back to British Airways, is that the airline reimbursed all our expenses due to the wayward bag! Far different from the - how shall we say this politely - typical nasty treatment of passengers by such as Ryanair, who have to be coerced by the authorities to redress nasty behaviour e.g. here, BA dealt with our case quickly, politely and efficiently. Within five days of our return home, we had entered a claim online, sent in our invoices as requested by email and been reimbursed through an electronic deposit to our bank account. Well done British Airways.

What is all the more remarkable is that BA could have been a lot stickier with compensation. According to the AirTransport Users Council, the UK's consumer council for air travellers,
"There are no set rules for how airlines must assess baggage claims. For delayed baggage, some airlines offer immediate one-off payments at a set amount to cover emergency purchases (such as toiletries or underwear). Some will pay a set amount per day up to a maximum of days. Others will not make cash payments at the time, but prefer to reimburse expenditure on essential items on seeing the receipts. But the general principle is to cover essential expenditure resulting from the delay to delivery of the baggage."
The airline liability limit for lost or delayed luggage is 1000 Special Drawing Rights (IMF conversion table here) per passenger per the Montreal Convention. Or maybe not. There seems to be confusion about the amount, since BA itself says its liability is actually 1131 SDRs, or about £1000, as does Delta and the AUC, but the European Commission's Ireland section says it is 1000 SDRs, equivalent to about 1134 euros. has informative articles here and here on the differences between what airlines may wish to offer as compensation and what are the legal liabilities of baggage delay and claim.

The European Commission has passed laws that put additional responsibilities on air carriers for passenger treatment in cases of cancelled or delayed flights, denied boarding and the like in Regulation EC No. 261/2004. The rules apply to international flights into or out of the EC.

Mishandled baggage still accounts for the 3rd highest number of complaints received by the AUC according to its 2009/10 annual report published in July, though the number was down slightly from the previous year (maybe just in keeping with faltering air travel from the recession?). The AUC's special 2009 report on luggage problems showed that many airlines are much more tight-fisted and mean than BA, with Ryanair apparently a leader in that department as it drew particular mention from the AUC: "Some airlines set their own limits on how much passengers can spend while their bag is delayed. For example, complaints to the AUC show that Ryanair often limits passengers to £15 whatever the length of the delay."

Now if BA would only be as good at delivering baggage in the first place as it is at providing compensation for delay, it would be top class.

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