Better some pain now than more pain later when it comes to markets and taxes

Good morning. It’s all too easy for non-cryptocurrency investors to look at the increasing number of bankruptcies, crashes and downright fraud in that space and laugh: “Told ya so.” And we do it with delight. Though some big investors, such as CPP Investments, Canada’s largest pension fund, have stopped investigating crypto as a suitable investment, others continue to make excuses for all the tomfoolery or just keep plowing ahead. But those of us who were always skeptics of the easy money promises are also making some strange decisions. 

For example, a Wall Street Journal headline on Monday read: “Dow Falls 500 points on Solid Economic Data.” That morning’s market headline on CNBC was: “Dow slides more than 200 points on fears the Fed will keep tightening into a recession.” A few days earlier, markets were rallying when United States Federal Reserve chair Jay Powell indicated he might increase rates by only 50 basis points instead of 75. What changed? Nothing.

Central banks are still raising rates to fight inflation, a fight they have repeatedly said isn’t close to being over, so there’s no reason for investors to celebrate a 50-bps hike, which is still massive in a historical sense. The Bank of Canada, meanwhile, was expected to issue a normal 25-bps hike on Wednesday, but opted for a 50-beeper instead, though it indicated it may pause now to see what happens.

That said, cryptocurrency gamblers — let’s not call them investors — really seem to have their blinders on. Crypto exchange FTX is going through a US$32-billion bankruptcy, its founder might be arrested for fraud and yet people were still downloading the app through November. 

Need further proof that crypto is just betting? Nevada ranks as America’s most crypto-friendly state based on five factors including the number of bitcoin ATMs and tellers per 100,000 residents, the number of cryptocurrency-friendly merchants per 10,000 establishments and cryptocurrency regulation friendliness. 

Of course, gambling isn’t illegal in a growing number of states and provinces, so you’re free to do what you want. But the Canadian Securities Administrators warns “there are unregistered crypto asset trading platforms accessible by Canadians where essential safeguards that protect investors’ assets from loss, theft or misuse may not be in place.” Even those that are registered “cannot eliminate all risks associated with crypto asset trading platforms,” says the umbrella organization for all 13 provincial and territorial securities regulators.

Hackers worldwide stole US$4.3-billion worth of cryptocurrency from January to November 2022, a 37-per-cent increase from 2021 during the same period. But as easy as it is to deride crypto lovers — and, as many readers have pointed out, the organized crime rings they unwittingly support — the rest of us seem to be a little too optimistic in expecting seasonal phenomena such as a U.S. midterm election bump or Santa Claus rally to save the day.

A big midterm bump hasn’t really materialized yet despite the Republicans gaining control of the House. The Dow and S&P 500 indexes have been pretty flat since Nov. 10, when the U.S. election results became clearer, and are down 17.4 and 7.7 per cent, respectively, for the year.

Could the Santa Claus rally turn into something more Grinchy? The holiday season typically gives markets a boost because bullish retail investors, sometimes flush with year-end bonuses and seasonal good cheer, tend to buy stocks ahead of January while taciturn institutional investors take the last week of December off. One trader this year spent about US$36 million on a bullish options wager tied to the S&P 500’s level over the next month.

If there is a rally, it may be a temporary one. “We do not think the economic conditions for a sustained upturn are yet in place,” says Mark Haefele, chief investment officer at UBS Global Wealth Management. “Growth is slowing and central banks are still raising rates.” But instead of complaining about policymakers, maybe it’s better to just take our lumps now and get it over with. “The question is, is it better to take our medicine sooner or later?” asks Charles Schwab & Co.’s chief investment strategist Liz Ann Sonders. “And I think sooner.”

Andy Holloway, editor of the FPI and Financial Post Magazine, and senior features editor of the Financial Post. If you have any quips, queries or comments, get in touch at [email protected].

12 questions investors should ask when looking at companies that have yet to turn a profit

Emerging technology companies had a great time when investors wanted growth at any cost. Now, investors are less starry-eyed and want to see profits, or at least a credible plan to get them, since profits lead to dividends and, ultimately, higher stock prices. Should you ignore all unprofitable growth companies then? Veteran investor Tom Bradley has some questions to ask before diving in.

INVESTOR CHECKLIST

Three self-appraisal mantras to help investors get ready for 2023

An honest self-appraisal can be a very useful exercise to improve future decisions, so portfolio manager Martin Pelletier does one every year around this time. To help make your own review effective, he offers three mantras he tries to factor into his analysis and, ultimately, his investment philosophy and thesis heading into the new year.

DON’T JUST SAY UMMM

Tired of mutual funds, ETFs? Build-your-own-index boom could hit $825 billion in four years

Wall Street has been pouring billions of dollars into direct indexing to offer investors an alternative to mutual funds and exchange-traded funds. Direct indexing allows investors to cherry-pick which stocks to buy in a benchmark index instead of owning a fund that tracks a specific gauge such as the S&P 500. The strategy has been hailed as an “ETF killer,” but it’s still a niche play in the grand scheme of things. Here’s what you need to know.

DIRECT DELIVERY

FP 500 — The most authoritative survey of corporate Canada: The 2022 FP 500 is the only national ranking of the country’s public, private and Crown corporations, making it an indispensable research tool with vital data on Canada’s top companies across all sectors. Order your copy here.

Canada’s housing bubble has finally popped — don’t underestimate the impact

National housing prices are dropping, but rising rates mean homes are still unaffordable for many. Economists David Rosenberg and Krishen Rangasamy estimate prices will have to drop another 25 per cent for affordability to return to its historic average, which would chop roughly $1 trillion in home equity. That’s enough to generate some serious negative wealth effects country-wide, so investors might want to treat consumer discretionary and residential homebuilding stocks with caution.

BUBBLE GAME PLAN

Slumping oil prices mean drivers are getting some welcome relief at the pumps, but should investors be worried about their oil stocks? Randy Ollenberger, managing director at BMO Capital Markets, tells the Financial Post’s Larysa Harapyn that Canadian oil stocks offer “tremendous upside” for investors, partly because BP PLC’s heavy oil refinery in Texas will soon come back online, there’s a new refinery opening in Mexico and China finally seems to be reopening.

WATCH THE VIDEO

How do I invest my inheritance if I’m in a low income tax bracket?

Getting an unexpected windfall is generally a good thing, but it can lead to some questions, especially if you don’t need the money right away. Certified financial planner Janet Gray walks one reader through his options after he and his sister received $350,000 from selling part of their parents’ estate.

GET THE ANSWER

Got an investing or personal finance question? Hit us up at [email protected].

Paying taxes in instalments can bring trouble with the CRA if you make this mistake

Taxpayers have three options when it comes to paying their taxes in quarterly instalments instead of annually: the no-calculation option, the prior-year option and the current-year option. But if you choose to pay less than the no-calculation option, you could face arrears interest and a penalty if your payments are late or too low, as happened to one Alberta couple. Tax expert Jamie Golombek has the details.

PAY NOW OR PAY MORE LATER

Why it’s time for borrowers to accept the new normal of higher rates and plan accordingly

Canadians have had to contend with increasingly higher mortgages for many years as real estate prices have risen. Now they have to budget for higher mortgage payments due to rising rates while housing prices are falling. Certified financial planner Jason Heath has some advice for young borrowers, real estate investors and older homeowners to help manage their mortgage payments and price expectations.

THE RISE AND FALL

Housing market shows signs of life, but it’s too soon to celebrate a recovery

Those with a bearish housing outlook will quickly point out that home sales in October were still 36 per cent lower than a year ago, while the bulls will say the month-over-month increase is significant for being the first such increase since February. But real estate industry veterans Murtaza Haider and Stephen Moranis say a longer-term view of the data indicates October sales activity was below pre-pandemic levels, so it’s premature to start celebrating a housing market recovery.

RATE PAIN

That’s the extra amount an average Canadian household can expect to spend to put food on the table in 2023, according to the 13th annual Canada’s Food Report compiled by four Canadian universities from Halifax to Vancouver. The annual food expenditure for a family of four will hit $16,288 next year, an increase of seven per cent from this year.

Good news if you’re a Cenovus Energy Inc. shareholder: The oilsands major says it will boost shareholder returns to 100 per cent of its excess free funds flow from 50 per cent after it meets its net debt target, likely by year-end. It also plans to increase production in 2023 by more than three per cent.

Bad news if you’re an oil fan in general: West Texas Intermediate futures on Monday fell below US$80 as markets weigh restrictions on Russian supply and China’s gradual reopening against the risk of an economic slowdown in the United States and other parts of the world. “Many traders have decided to tune out altogether,” says Rebecca Babin, a senior energy trader at CIBC Private Wealth Management. “Volumes are light and positioning is decimated as it seems prudent to wait until 2023.” 

Good news if you’re fan of being cheap: Dollarama Inc. shares on Monday rose 5.2 per cent to an even $84 after the Montreal-based discount chain hiked its forecast for same-store sales growth to between 9.5 and 10.5 per cent while reporting that third-quarter sales grew nearly 14 per cent to more than $1.2 billion.

Bad news if you’re hoping the economy won’t stall: The yield on Canada’s benchmark two-year debt on Monday reached 100 basis points above 10-year bonds, the largest inversion since the early 1990s, just as the country’s economy was plunging into a deep downturn. “The inversion is telling us that current policy rates and their near-term expectations are entirely unsustainable over the long run,” says Taylor Schleich, a strategist at National Bank of Canada.

Good news if you want to buy a house in Toronto: The average price of a home fell 7.2 per cent to $1.08 million in November from $1.16 million a year ago. Year-over-year sales declined 49 per cent and, as we all know, sales lead prices when it comes to real estate.

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