Why are mortgage rates going up?

I earlier stated that posted rates are irrelevant, but the change in them is somewhat more relevant. The change in mortgage rates, however, are dictated by the Canadian government bond market.

5-Year Canada Government Bond Benchmark Yield

As you can see, the 5-year government bond yield is at a high for the year – at 3.06%, it has not been this high since October 2008.

Today some of the major banks increased their posted rates to 6.1% from 5.85%. The best market rate you can receive today on a 5-year fixed mortgage, without going through too much hassle, is around 4.25%. This will likely go up to 4.5% soon.

Over the past 5 years, the peak for the 5-year benchmark government bond yield was 4.72% in the week of June 13, 2007. The posted bank rate then was around 7.3%, and a typical market rate on 5-year fixed rates would have been around 5.8%.

As government bond yields continue to increase, mortgage rates will also follow.

Chinese investing in Alberta Tar Sands

It’s making the news headlines that Sinopec, a Chinese “crown corporation” is taking ConocoPhilips’ 9% stake in Syncrude, for US$4.65 billion. This will put Syncrude’s valuation at around $52 billion.

Syncrude is a joint venture company with a strange ownership structure. They are one of the large tarsands miners in Alberta, right up there with Suncor.

What’s odd is that Canadian Oil Sands’ market capitalization is about $15.4 billion at this moment and they only have a billion dollars of long term debt. Canadian Oil Sands’ 36.4% valuation of Syncrude would be worth about $18.8 billion at the rate that Sinopec paid for their 9% stake. Obviously I might be missing something here in terms of valuation (not being able to access Syncrude’s financial statements would be an important part of this), but it seems like Sinopec might be overpaying.

China has accumulated a lot of cash (especially US currency) through exports and are concerned that it will be inflated away and are trying to find places to invest it. One way is through minority investments in other corporations, especially ones that serve the strategic purposes of the Chinese government.

Brokerage firms in Canada – Questrade Review

(June 19, 2012: A good chunk of this article is out-dated and will not be updated. Specifically they have changed their trading platform to emulate Interactive Broker’s TWS and apparently have increased their margin interest rates. The security concerns remain prevalent, although they do now ask a “security question” before logging in.)

(Article updated January 4, 2011 to update margin rates and put in a current rate of interest.)

(Readers may also be interested in reading A Questrade Failure [January 4, 2011], and Watch out for Questrade – Check those statements [February 16, 2011].)

I reviewed Interactive Brokers previously; I use them for my non-registered investments. For my RRSP and TFSA, and for TSX-traded debentures, I use Questrade.

Questrade

I transferred in my RRSP to Questrade in early 2008 from BMO Investorline. The primary attracting feature was the ability to retain US dollars in the account and not having to incur currency exchange fees whenever you transacted in US securities. Just as an example, ignoring commissions, if you bought USD$1000 of something, and then sold it the next day, you would probably pay around $40 of implied currency conversion charges at BMO Investorline. With Questrade, this is nothing, assuming you had the US currency in the account to begin with.

If you bought USD$10,000 of something and sold it the next day, your typical currency conversion charges (going from CAD to USD and USD to CAD) would be around $400 – with Questrade, it is nothing. For anybody transacting in US dollar securities in their RSP, it is an essential feature.

The RSP transfer took about a month. It also took them another couple months to refund the RSP transfer fee, but they explained this up-front.

The web-based interface for Questrade is very simple – it is missing a basic feature of “how much will this entire transaction cost” whenever previewing an order, but other than this, it is OK. The problem is mitigated by using a desktop calculator. They provide a better platform for active traders, but I have never used it and probably never will. They provide three separate logins for account information and trading, but once you’ve bookmarked them, it is surprisingly easy to get detailed access to your information. In particular, their clearing is performed via the Pension Financial Corporation, and the historical account information they provide through this interface is comprehensive. I can easily see how people that are not as “in-tune” with web navigation would find this system very confusing.

Costs at Questrade are very cheap – basically a trade costs $1 per 100 shares, minimum of $5, maximum of $10. They are also the cheapest Canadian broker to trade TSX-traded debentures – basically the standard commission charges (as if you were trading stocks) applies – so it would be about $10/trade. Most other brokerages charge around $40 per trade, plus $1.50 per $1000 par value – which could make trades very expensive. Questrade does not charge any inactivity fees or any other “garbage” fees, but something people should be aware of are fees for taking liquidity away from the market (i.e. buying at the ask, or selling at the bid) which would amount to material sums if you are dealing with penny stocks.

Questrade’s margin rates currently (as of January 4, 2011) are 4.5% for Canadian dollars, which is prime plus 1.5%. They generally are in line with other “big name” brokerages (e.g. BMO Investorline is at 4.25% or prime plus 1.25%), but both do not come close to Interactive Brokers.

I have no problems with Questrade customer support – they have an online web-chat interface and sometimes it takes awhile to get a customer support agent, but once you do get on with them, they are fairly responsive. I suspect most of the people that have complained about Questrade (and there are a lot of financial forums that have supremely negative reviews on them) didn’t have a clue what they were doing (e.g. dealing with Canadian vs. US dollar securities, or wondering why their shares got sold out when they had a margin call).

Deposits and withdrawals are simple – provide the EFT information, and a few button clicks is what it takes to fund accounts or withdraw funds from accounts. The withdraws typically take three business days to process, and I have always received my funds promptly.

For a simple buy-and-hold investor, Questrade seems to be a decent and low-cost provider. They aren’t going to win any awards for any of the other ancillary services brokerages provide (research, fancy interface, hand-holding customers), but if you don’t care about those, they serve the job very adequately for RRSP and TFSA accounts. I have no idea how they are for active traders.

Questrade’s inadequate security

The reason why I can’t give a blanket endorsement of Questrade is security – they do not offer any sort of guarantee (e.g. BMO Investorline’s Online Security Guarantee) against hackers, and unlike Interactive Brokers, if somebody managed to rip off your username and password, they can do a lot of financial damage to your account. This is my biggest concern with Questrade, and it is a sufficiently high concern that I wish they would offer some sort of guarantee against hacked accounts, and/or provide an account authentication system that is similar to Interactive Brokers. In addition, Questrade is privately held and as a result, one has no idea how financially solvent they are. Although Canadian investors are protected through CIPF, you do not want to have to reclaim your assets through this mechanism.

The reader might wonder why I am concerned about an issue that has not materialized for me – I am very cognizant of potential risks. I do not want to have to suffer through a security incident before taking measures that will protect me. I do not believe Questrade takes security seriously enough beyond the typical lip service of telling its customers to “run a firewall and a virus scanner” and as a result, some of its customers will have their accounts compromised. Although I am very computer-savvy and it is unlikely that a phishing scam will get my username and password, it could happen and I want a form of protection beyond a username/password combination to make sure that my account is protected. Questrade does not offer this.

Until they provide better provisions with respect to account security and provide some more transparency on their own financial solvency, I only will give them a tepid recommendation. The only reason why I use them is they support RRSP/TFSAs well and they allow inexpensive trades on TSX-traded debentures. If they beefed up their security, I would rate them much more highly than present. I just don’t get that warm and fuzzy secure feeling that I do with Interactive Brokers.

Unlike practically all other financial blogs out there, I won’t insult you (the reader) by offering some referral scheme, which they do offer – I do these reviews without remuneration.

Geopolitical risks of foreign operations

Kyrgyzstan is a country that probably was on nobody’s radar before a few days ago when the country went into a revolution.

However, some companies have operations in Kyrgyzstan – Centerra Gold has mining operations located there and correspondingly, their stock price took a drop with the heightened uncertainty:

Whenever having an investment interest in a Canadian-headquartered company with foreign operations, it always pays to keep an eye on the country where the operations are located. I am reasonably sure that if somebody was paying attention to Kyrgyzstan before their revolution hit the news, they could have protected their investment interests.

Vancouver Moneyshow / Financial Forum

I try to make the effort to go out to the annual Vancouver Financial Forum, usually held at the Vancouver Convention Centre (where the Pan Pacific Hotel is on Waterfront). This year, apparently the conference was acquired by another company and is now re-branded as the Vancouver Moneyshow and was held at the Hyatt on Burrard Street.

The reason why I try to show up to this is because I have found it to be a rather uncanny barometer of investment sentiment, and what the “strategies of the day” tend to be. As a result, I know what to stay away from for at least the next year. I consider it to be more entertainment than anything else, although occasionally you will get some corporate swag that is actually useful.

The themes to avoid this time around seem to be heavily concentrated on gold and silver (both bullion and mining ventures), and also real estate limited partnerships.

So this year, I would like to thank the two ladies at the booth of Vale Corporation, who gave me a steel thermos. Considering I never heard of the corporation before, I much later realized that the reason why the two ladies had Latin American-sounding accents is because the company is headquartered in Brazil, and does about $30 billion in revenues a year in the mining industry.

There were a few other large-cap companies that showed up, including Proctor and Gamble, Cemex, National Bank and a couple others. I truly believe the only reason why they show up to these things is to get some vacation time out in Vancouver, although the weather this time of year was pretty rainy and windy and not hospitable.

I enjoy listening to bad investment pitches, and about half of them I classify as bad, so it takes a bit of cherry picking and research to determine which is the worst of the worst. To protect the guilty I will leave out the specific names of the companies involved.

There were three “trading schools” that had tables. One of them in particular, had a 5-day training course which you could pay $4000 for, and they give you a live account to trade 100 share lots of Apple or some stock of the day with using technical indicators they train you with. They then explained you could take the course as many times as you want with no charge, and that they train their people to do around 60 to 80 trades a week. They also said their classes have 21 people and despite them trading furiously in training, they collectively don’t lose more than around $200. I found that tough to swallow. I liked their marketing front, however – one guy and three attractive women – it implied “Want to meet women? Sign up to trading school!”. Fortunately as I left the table, I still had my wallet with me.

There were plenty of real estate “opportunities”, ranging from commercial real estate to residential apartment investing. They typically pitched a limited partnership format. One of them, which I thought was particularly atrocious, was pitching a limited partnership that proposed redeveloping a strip mall in northeastern Edmonton. The partnership would then acquire the property from a related party through a leveraged buyout (this is where the promoters truly make their ‘money’ even if the underlying project fails), the limited partners get a substantial tax-loss writeoff in the first year, and then they very patiently have to wait many, many years for payback (i.e. 2022). A great deal for them – get your money today, and maybe give it back to your investors 12 years later.

When asking the guy “So, let’s pretend I have $25,000 in my wallet, why should I invest in you guys than Rio-Can?” and the salesguy basically gave three minutes of speech about how great their property is, and how they are not exposed to “market risk” like Rio-Can is… I did say this was entertaining, right?

The companies providing charting services were also equally amusing, although they have been a mainstay at the financial forum – charts that can produce the fanciest lines and do a wonderful job of extracting value out of historical data, but with no predictive value whatsoever.

For the first time, I’ve noticed a few firms trying to get into the fundamental data analysis sales business, but the companies were relatively uninspiring. The worst of them pretty much copied all the information out of a company’s annual information form and just put it in a research report with some very bland extrapolations of their financial status in a typical research report.

I truly wonder how many people that go to these things actually think the information they receive at these forums can be acted upon with real money.