Benefits of a Fixed Rate Mortgage

Buying a house can be a giant decision and for some of us the biggest purchase in our lives. Knowing where to live, what kind of house, how big, how many rooms, property size, fixed rates, variable rates, approval processes, renewals and re-mortgaging pre-existing owned houses can all be very stressful, knowing where to start is a great first step.

  • Fixed rate mortgage’s have a fixed or pre-determined interest rate on the loan for the duration of the contract. Variable rates float and change depending on the Bank of Canada and over night lending rates. The fixed rate mortgage offers security, dependability and comfort as the monthly payments are the same and do not depend on interest rate fluctuations.
  • Although Fixed rates come with higher premiums due to lending risk/uncertainty in the future, they can be dramatically worth the R:R (risk/reward) in the long-term especially in a low-interest rate environment (Z.I.R.P) like present times.
  • When interest rates rise the premium paid is offset by the risk of rising variable rates. If you have a variable rate mortgage your monthly interest payments will increase to reflect the interest rate rise on the borrowed capital. If you believe interest rates are going to rise in the next 3-5 years it may be a smart idea locking in a 5 or 10 year fixed rate mortgage.
  • Pay raises are not dependable and job changes are frequent, locking in rates in un-dependable times can prove to be very dependable.
  • A 10 year fixed rate mortgage would be beneficial based on current rates of roughly 4% depending on the lender. Variable rates are roughly 3% representing a 1% spread for 10 years of interest rate risk. The chances of a 100 point basis point rise (1%) over the next 10 years is likely and some expectations are for 60-70% rate increase over the next 5 years. That would leave variable interest rates roughly at 4.5-5.5% by 2017-2018.
  • Knowing your debt obligations with no unexpected surprises helps one to sleep better at night as finance issues can cause serious stress. If housing prices begin to slump in combination with interest rate hikes home owners can be left with “under water” mortgages. This means the value of the mortgage is higher than the value of the home, leading to bankruptcies, lending defaults, and may force an owner to sell, leaving you with a helplessness feeling.
  • Yield curves and interest rate charts from previous history can be good indicators and provide positive feedback on possible choices you may make.

Compare competitor rates and meet with a financial advisor if this option is a viable one for you.


Alberta Real Estate: Melcor Developments Valuation

Melcor Developments is a residential and commercial property real estate development and management company that was founded in 1923. Melcor developments has land exposure in Western Canada and some in America, most in various energy “hot beds” and quickly growing areas.

Locations Shown Below:

Edmonton: 4,300 acres

Red Deer: 1,933 acres

Calgary: 3,400 acres

Regina: 680 acres

Kelowna: 700 acres

Denver: 1,100 acres

Houston: 2 acres

Phoenix: 86 acres

Melcor Developments operates in four integrated business units that are responsible for purchasing and developing raw land, community planning, construction and development of real estate, before managing leasing operations on finished residential and commercial properties. At the current share price of $15.59 I believe this is a company worth investing in for the long haul. As real estate has a built-in inflation protection component and properties are in higher growth areas with exposure to North America energy growth.

TTM P/E: 5.0

Market Cap: 470 Million

Basic E.P.S: 2.70

B/V per share: 21.28

Return on Equity: 18.2%

Annual Dividend: $0.46 cents (roughly 3%)

Terminal Capitalization Rate: 6.80%     (Avg. 6.56%)

Land Inventory Value: 580.23 Million (272.92 Million, raw land)

Dividends paid since: 1990 (22 years)

Melcor Developments also has a recreational properties unit specifically golf courses and recently reported a 7% increase from the number of rounds played in 2011. When further research is conducted as well as prior initial statistics you can see Melcor Developments does seem to be under valued currently and would expect share price to trade in the $21-25 range over the next 1-3 years while you get paid to wait.

Disclosure: I am long and received no compensation for writing this article.

Amazon Versus Wal-Mart: The War For Your Dollar

Wal-mart is a name we all know and most of us have probably shopped at one of their locations in The United States, Canada, Mexico, or another international location around the globe. Wal-mart operates under 69 different banners (names) in 27 different countries. Wal-mart employes a staggering 2.2 million people globally. What first brought my attention to Wal-mart was in the fall of 2011 I was shopping at a location and could not understand why so many people came to the same place to purchase goods and are willing to stand in line behind 25 other people and wait. Every register consistently ringing as you stand there and listen, if only it was partially yours.

I then went home researching company internals mainly the annual reports for the past 13 years going back to 1999. Wal-mart has increased annual cash dividend every year since 1974, an extremely impressive track record. I also looked at the value of the shares through many different metrics and ratios making sure I understood the fundamentals to the best of my ability. I first purchased shares at the cost of $57.60 and had planned on holding them, until recently. As macro head winds continued to cause investor panic and fear, Wal-mart continued to climb. I felt it was too far too fast and had reached my intrinsic value mid-range for 2012. While Europe had gotten worse and QE3 had been announced, I believed general markets were also due for a pull-back (also using technical analysis). I decided to raise capital when shares were trading at around $73.00, unfortunately missing the short-term top (and now 52-week high) of $77.60. After a brief pull-back and another earnings period I have decided to re-visit this company.

Some Valuation Metrics of Wal-mart: Current Share Price: $69.50

P/E Ratio: 14.6

Price to Sales: 0.5

Dividend Yield: 2.2%

Annual Dividend: $1.59 per share

E.P.S 10 year average growth rate: 11.7%

Operating Margin: 5.9%

Payout Ratio: 32%

B/V per share: 20.91

ROE: 23.5%

Debt to Equity: 0.63

Current Ratio: 0.82

Wal-mart is also targeting an organic business growth rate of 5%+ over the next 5 years, while increasing free cash flow per share substantially in most recent years. Through active buy-backs shareholder ownership will increase, higher dividend distribution, as well as “artificially” higher E.P.S.

Over the next 5 years if all goes well and Wal-mart continues to steal market share and while growing organically, we could see a P/E multiple expansion closer to a Coca-Cola or Pepsi valuation. Add in E.P.S growth, no margin decline, and share buy-backs and I would see the share price around the 95-105 range, 3-5 years from now. Wal-mart is continuing to grow the grocery segment of the business as well as the e-commerce department. They have rolled out various services in recent years, depending on your location and could possibly offer a lending service internationally in the future.

I wanted to compare Wal-mart with Amazon to show an extreme discrepancy in valuation with relatively close business models.

Amazon Share Price: $243.40

P/E Ratio: 2500.00

Price to Sales: 2.0

No Dividend

E.P.S 5 year average growth rate: 24.9%

Operating Margin: 0.94%

B/V per share: $16.67

ROE: 0.52%

Current Ratio: 1.04

Debt to Equity: 0.18

Although Amazon has been growing at astonishing rates, margins have been compressing continually and debt is expanding. I don’t believe Amazon fundamentals justify the price and have thought of pairing the two together as a pair trade and hedge. At the very least I expect AMZN to crack the $200 marker by early next year while seeing Wal-mart continue the journey upward. Wal-mart continues to target Amazon directly by offering price matches, a payment method of cash on delivery, and extreme focus/penetration in the e-commerce department. One thing to keep in mind is that CASH IS KING and Wal-mart certainly understand this concept.


Trade Idea = Long WMT, Short AMZN

(AMZN possibly through a “put butterfly spread” if expecting downside alone)

I have no positions mentioned above but my initiate a position in the next 72-hours.

Apple Stock Valuation

Apple is talked about almost daily if not hourly, so I figured I would put in my two cents. Apple was founded on April 1st, 1976 by Steve Jobs and Steve Wozniak in a Garage in California. Since then there has been many trials and tribulations, some of which almost brought Apple to bankruptcy. Today Apple in is in a different position, the top of the consumer technology industry. Some people see the unexpectedly high share price and assume it is a very expensive stock, that is simply not the case and here is why.

Based on Share Price of 571.75

P/E Ratio: 12.9

Price to Book: 4.5

Price to Sales: 3.5

Price to Cashflow: 10.6

Dividend Yield: 0.9% ($2.65 per share)

Based on next years earnings with growth factored in AAPL is trading at a forward P/E of 9.3

B/V per share: 125.66

During the most recent quarter 26.9 million iPhones were sold (58% Y.O.Y growth), 14 million iPads sold (26% Y.O.Y growth), 4.9 million Macs (1% Y.O.Y growth), and 5.3 million iPods (19% Y.O.Y unit decline). Earnings before tax margin has been continually expanding over the most recent 9 years. There is speculation margins will be effected after renewing their new product line but consumer price point levels will be maintained and margins will return to the equilibrium (roughly 35%) short to medium term. iPhone and iPad sales are continuing to impress, although missing some analyst expectations the growth is still much intact.

  • Almost all money managers/hedge fund managers have exposure to Apple and it is heavily weighted in the Nasdaq, QQQ, and SPY.

The 10-year revenue growth average is roughly 39.10% and a 10-year operating income average of 124.48% both are extremely impressive. Some say Apple is running into the law of large numbers and can not continue to grow at these rates. Although I some what agree with that statement, I believe Apple will continue to grow, only at a slower pace. Apple has a mind-blowing 2012 ROE of 42.8% attributable to alpha of management.

That brings us to the current share price. Apple is worth 550 Billion measured by market cap, and may be the first to 1 Trillion. Although it will take time and predictable growth it can be done, but the bulk of shareholder gains will come from distribution in the form of dividends and share buy-backs. Apple is a company worth holding but at what price? Long-term trend lines show support around the 510 and 490 price levels as well as a 200 day moving average at $594 (resistance). I would suggest we are in a trading range until $595-$600 is broken on volume. As a longer term holding I would aim to buy in the 495-515 range and hold the shares until Apple’s growth starts to run out of fuel. I would suggest a 3-5 year price target of $900 and a 1 year target of $650. Consider buying up to $575 but the higher price you pay comes with a lower margin of safety and lower expected returns.

200 and 50 Day moving averages, RSI (top), MACD (bottom)

You must conduct your own research, know your risks, and always do your due diligence before investing or trading.

Disclosure: I have no positions mentioned but my initiate a position in the next 72 hours.

Capital Gains Tax

Capital Gains and losses can only be triggered when a taxpayer disposes of a capital asset. The effective inclusion rate is 1/2 in Canada for capital gains and capital taxes. Taking the proceeds from disposition and subtracting it from disposition expenses will give you the sum of the capital gain/loss (negative or positive determines gain or loss).

Example: You bought 10 shares of XYZ at $10.00 per share ($100 total). The shares than increased in price to $30.00 and you decide to sell, leaving you with $300 cash in your account. Proceeds from disposition equals $300, while disposition expenses (original cost) is $100. You now take 300 -100 = 200 in capital gain. The 1/2 inclusion rate now comes into play, you divide the capital gain by 2. Therefor 200 / 2 = 100 is your taxable capital gain.

Simple ways to avoid capital gains tax is to hold assets inside a TFSA. Another way to avoid paying to tax is to avoid selling, this is because taxes are only triggered on the “back end” when selling, not at the point of purchase. Although capital losses may be beneficial as it becomes a credit towards future gains, it is never pleasant to lose money on an investment. Planning for effective tax rates and best possible taxation scenarios is a great way to start off on the right foot. Commissions and tax can eat away a lot of gains if they are not properly managed.

In general, when capital assets are transferred, they are not considered to involve a disposition unless the beneficial ownership changes. An example would be if an asset is transferred from one trust to another, but both are owned by the same beneficial owner. One exception to this is when there is a transfer to an RRSP.