Banks Holding, So Far

It is now the end of August and all the major Canadian banks have reported their quarterly results. This seems like a good time to revisit my take on bank stocks from just over two weeks ago (August 13).

At the time I was optimistic, figuring that most of them would hold above their 50-day moving averages. This was wrong - they pretty much all dipped below that line leading into this week. (I can treat the banks as a group since, despite their distinctness, their stocks do tend to behave alike with extraordinary regularity.)

Those dips in share price were accompanied by low volumes and (apparent) trepidation about earnings, so I chose to hold my existing position in one of those banks. The questions I did wonder about were:

• Are the low expectations for their results baked into the share price?
• Is the low volume instead due to late summer doldrums, as is generally true across the market just before Labour Day, rather than a drying up of selling?

Now the results are out, and while not great they seem to be above investors' expectations. I can now breathe a sigh of relief that, so far, I seem to have made the right decision. All the majors are now trading back above their 50 DMA lines. Let's see if this price appreciation continues in September.

Fussing Over Broadband Usage Caps

I do not understand the fuss and outrage over broadband usage caps that Comcast, 3G mobile networks, and perhaps soon Bell Canada are implementing. The cost of providing service does scale with the instantaneous peak traffic. It is much like the electrical power grid. Since these ISPs (correctly, I believe) are being increasing restricted by regulators to prevent their application-based throttling efforts, it is understandable they would take this step. That being said, I do have a problem with how they are going about it.

As much as we all love to criticize large, quasi-monopolistic corporations, they nevertheless have the right to expect a profit from each line of business. Users have no right to unlimited consumption and should not expect it. While usage caps were not an issue in the age of dial-up since, at 56 kbps, the traffic carriage costs were a managable percentage of the total cost of providing service, this is increasingly less true due to broadband.

If ISPs are forbidden by regulation to throttle applications or to charge for data usage, their increased variable costs will have to be accounted for elsewhere. This would most likely mean higher average prices to all users. Like with electricity consumption there is sense in increasing charges for users who create high traffic loads during peak hours. That's what Ottawa Hydro and the rest are planning, and it is a good policy. No one wants to pay the cost, financial and environmental, for new power generating stations, nor do we want brown-outs.

The puzzle over ISP usage charges is the indiscriminate caps, such as 250 GB/month Comcast plans. It would be far better, and more justifiable, to charge differentially in tune with overall traffic load by time of day and day of week. This is what is being planned with the smart meters the electricity providers are now deploying. It is even easier for ISPs to implement this scheme since it is a software upgrade rather than a wide-scale deployment of metering hardware. For example, my previous ISP, Magma, did this. Large downloaders were given free rein after midnight while the bulk of their customers slept.

So while I can concur with the broad objective of usage caps, I do not agree with how it is being done. Undiscriminating monthly caps reek of the old bugaboo of protecting their own media properties while giving the appearance of implementing a cost-justified data management protocol. It's getting better, but I still don't buy it.

News: Relevance

When I first introduced the subject of news I described how I rate each item by relevance, importance and timeliness. My aim is a repeatable method of measurement. A news item that is relevant, important and timely is the equivalent of news nirvana. Timeliness is objective, while importance and relevance are subjective; you and I would measure news against the subjective criteria from the perspective of our unique interests and needs.

Since that first article (and if this topic interests you, you may want to read it) I discussed timeliness in a two-part article. Now I would like to talk about relevance. I am discussing it before importance because I view relevance as a prerequisite to importance.

Achieving relevance is difficult because the producers, aggregators and distributors of news have a commercial need to reach a broad audience, yet each member of the audience has his or her own criteria for relevance. Every player has come up with numerous techniques to meet its needs, using a growing set of technological tools.

Producers:

• Tag each news item so that search engines and aggregators can help consumers find it;
• Choose a mix of content to be broadly appealling to a hypothetical average member of a selected demographic;
• Editorial selection for quality and best fit to demographic and tags;
• User feedback to help order items for popularity, as a proxy for relevance;
• Correlate news items with background material and with related news and data (e. g. stock charts).

Consumers:

• Bookmark sites or authors that have a high percentage of news items that meet a need or interest;
• Select sites that allow customization of news feeds by source, topic and tag;
• Subscribe to push delivery from relevant (filtered) and timely news feeds;
• Follow recommendations from trusted sources to locate other relevant news sources and items (e. g. blog roll).
  

The above is not a complete list. There is a tremendous amount of experimentation going on, mostly in the startup space, to create more sophisticated, and hopefully relevant, techniques to fit the news to every individual's specific needs.

Next I would like to discuss some of those techniques and what you need to consider as you attempt to locate timely and relevant news.

• Reputation Services: You see it in blogs and more traditional media, those icons from various reputation and sharing services like Digg, Reddit and many others where you, the reader, can recommend or vote on articles and authors. The broad intent is to help you find news that is highly rated. Other web sites use page views, time spent on a page, comment volume, and site-unique user feedback to rate articles. This is all fine, but do these services help you to find relevant news? I can only give a very qualified 'yes'. Most often highly-rated articles are more attuned to determining general interest and popularity, not relevance; lots of things are popular but of little value. Consider this article and this one recently published on Seeking Alpha. One makes extraordinary claims about oil prices and the other about bank stocks. Both attracted vociferous and negative comments from readers. That pushed them to the top of the popular articles list, which had the dual effect of wasting your time (they are, arguably, awful articles) and pushed potentially more relevant articles off the list. Do not trust popularity - it is not a measure of quality or relevance. Popularity is better for finding humour and for tracking celebrities, if that's your thing.
• Selection Bias: If you are like most people you will seek out articles, news sites and authors that you tend to agree with. If you stick with this strategy you are wasting time reading news that is not actionable since it will only confirm you in your already-chosen positions. I do tend to talk here about market-oriented news, but the same could be said for any topic. Perhaps you seek authors who always say nice things about the Sens, even when they're on a losing streak. Or you only read political articles that confirm your view that Stephen Harper is the perfect leader. Or you only read conspiracy articles that argue against evolution or the safety of the Large Hadron Collider. You might only read contrary articles because you (subconsciously) want to feel self-righteous anger, and may vent with a witty or abusive comment. If you do any of these things you are avoiding relevant news and analysis by practicing selection bias. You must seek out, read, and understand articles that challenge your deeply held beliefs. If you are convinced gold will go to $2,000 you need to read well-argued articles by professionals who conclude gold will first hit $400. You may continue to hold your original view, but you can feel more confident in your position if you can argue (rationally) against the contrary views. You might even change your mind, and perhaps thereby avoid a major loss. Seek out contrary views in all areas of news topics that are important to you - they are especially relevant. You aren't required to enjoy it, just do it.
• Thought Leaders: Do you think Jim Cramer is a buffoon? If you do, perhaps you ignore what he has to say about stocks, including ones you hold. This is a mistake. Regardless of what you think, people like him have a large and loyal audience. If Cramer says Sirius is a winner, you can bet the price will move, even if only for an hour. This is relevant to you if you hold or trade any stock or sector he opines about. Other market movers include Alan Greenspan, Barrons (trusted by many professionals), and even those discredited analysts who issue stock recommendations. There are more of these people and publications, and if you play the markets you need to listen to them if only to understand what others will do. Understanding that when they speak it is news and relevant, you can profit by playing with or against the crowd as you deem appropriate. First, however, you need to watch for timely news of these events.
• Popular Topics: If you follow a popular topic or stock you will be flooded with news articles. The latest Google or iPhone rumour? Expect to see hundreds of articles from reputable journals and bloggers. The same is true of celebrities, your favourite sports team, and popular politicians. You need to manually filter out the dross or ruthlessly prune your news feeds so that you don't waste valuable time reading uninformed or 'me too' articles. Stick to the experts with timely and insightful articles, whether the author or publication is top tier or a quirky blogger. That's how to stay with relevant news for popular topics.
• Aggregators: As mentioned above, there are many experimental news aggregator services appearing on the scene every week. Each has its own little innovation for helping you find relevant and timely news. Don't waste too much time searching them out, but do play with a new or recently improved one once a month or so. Try not to get stuck in a rut with any one aggregator. Some that I've looked at recently include Seeking Alpha, Newsflashr, Newscred and Streetread. I don't necessarily recommend any of these, but they are interesting in that they each take a different approach to finding and filtering news feeds to individual specifications. You should also never settle on any one aggregator or you will miss relevant news. Especially for stocks if you are in to it seriously, you should visit several aggregators each morning to find all the news relevant to stocks you hold or are watching. This is particularly true for Canadian stocks since most of these aggregators stick exclusively with US stocks and news feeds. Supplement these feeds with visits to Report on Business, the Financial Post and other Canadian sources of market news.
• Segregate: If you are like me you have many fields of interest. There are times when you do need to focus on one to the exclusion of others. Segregate your news feeds to avoid counter-productive distractions. You may have a deep personal interest in an ongoing debate in Parliament, but if you monitor and read news about it on the job it is irrelevant and potentially disruptive to your best interests. The same goes for market news. While it may be difficult to accomplish, you need to do some segregation of news that mirrors the compartmentalization of your time and your life. News can become addictive, and like many addictions can render you unproductive in every activity in which you participate, including the job that feeds your family. You can use several aggregators (or one aggregator, but multiple identities) to divide and direct news feeds to the appropriate time, place and appliance. Do this and you'll achieve greater relevance of news, and minimum distraction, as you proceed through your daily routine.

As you can see from these articles, I can pin down timeliness as a rigid technical requirement. This is not so of relevance and, as will be seen in my next article, it is even less so of importance. Despite a lack of rigidly objective criteria, relevance is a critical property of news. You determine the relevance, but you also have to understand how to select news appropriately so as to maximize the average relevance of the news you consume. It is even necessary to occasionally challenge yourself to dive into news that is unpleasant though entirely relevant; you don't have to like brussels sprouts to gain the benefit of eating them.

My next article in this series on news will be on importance, the final criterion in my list. No promise when I'll get to it considering how long it has been since I wrote on the first criterion, timeliness. This blog is my hobby.

My Blind Spot for US Politics

You have of course noticed the increasing amount of coverage in the media, especially traditional media, of the US presidential campaigns. Perhaps like many Canadians you are paying attention to it and find it interesting. I am not paying attention except insofar as I can't avoid it whenever I turn on the radio, click on a news site, or on the odd occasions I find myself in front of a television.

I don't pay attention because I consider it all quite unimportant. Certainly it is of importance to Americans, but I would argue it is unimportant to Canadians. Yes, it is entertaining, if that's the sort of thing that turns your crank. It can also be titillating, if you enjoy the questionable tactics often employed. But does it matter? I say that it does not.

To my way of viewing US politics, the only event in this campaign that matters is the election result. Everything up to that point is time-sucking noise. I am not a US voter so the campaigns help me not at all. Apparently it isn't even important to the large proportion of Americans who will not vote.

Even the result of the election is of only moderate importance to this Canadian. Regardless of who wins, the impact on trade and foreign relations won't differ a great deal. The forces underlying those themes, the only ones of particular interest to non-Americans, are greater than any president. The US administration will have some sway, mostly in the way of minor adjustments to the greater forces of the country's economic and political interests.

So if you do like to watch the electioneering, go ahead. Just don't deceive yourself that anything of great moment is occurring or that it will impact you to any degree. The US will continue to be broadly open to trade, with selected barriers due to security concerns and industry pressure groups. The US will find a way to get of Iraq, no matter which candidate wins. Petroleum policy and security will continue to be priorities if only because the entire country believes in their importance. There may be bigger internal changes, such as in their approach to health care, but that does not affect us. As usual we can learn from their policy experiments, both the successes and failures, and perhaps emulate or expunge them in our own institutions.

If there is a federal election of our own this fall, I will pay close attention. That, to me, is truly important since it affects my life and my country.

Perils of Timestamps on News

A while back in my series on internet news (still not complete!) I criticized using relative time stamps on news articles. Those are the type that tell you that news is from, say, 3 hours ago. I have since discovered another problem with this method of time-stamping news.

As I mentioned then, I use myYahoo for market-oriented news. On their home page, but not on pages specific to stock portfolios or individual stocks, they use these relative timestamps on all news, including those fed via RSS feeds. Their system has been misbehaving recently.

From the symptoms of the problem it appears that the time-stamp is not relative to the time the article was published. Instead it is relative to the time the article arrived via the feed. If the feed mechanism misbehaves the timestamps are wrong.

As examples, news articles for stocks and from RSS feeds are periodically disappearing. Okay, so problems do happen. The bigger problem is that when they fix the problem and the news is refreshed, the timestamp is relative to the time the news was refreshed! That's not good. I am seeing, for example, news for thinly-traded stocks (which tend to have few news articles) showing up as from 2 hours ago that were in fact published weeks ago. That ain't news.

One more reason these service should stick with clock times for time-stamps.

Elimination of Corporate Tax

The author of this Globe and Mail article, Neil Reynolds, asks an old question: would we be better off to eliminate all corporate income taxes? Without his being too explicit, he certainly leans toward saying yes, we would be better off. I also believe that is the right answer. However, the devil is, as always, in the details. Mr. Reynolds does describe some of the advantages to our economy of the zero-tax regime, but does not address how we can get from here to there without causing havoc. Fair enough, since that wasn't his intent. While I don't have all the answers I do have some thoughts on an implementation plan that would minimize the pain while accentuating the gain, and therefore might be politically feasible.

Before that I want to first make a point that is often lost in the noise of any discussion on this topic. Corporations are not people. It is true that the word itself comes from the Latin word for body, corpus, yet it is simply a legal fiction intended to erect a firewall between a business entity and its officers, directors and owners that, if they adhere to certain rules, protects their personal assets in the case of business failure and permits profiting from the business in a controlled, and taxable, fashion. It is not meaningful to talk of corporate profiteering since corporations don't run out and buy big houses, gamble and live hedonistic lifestyles. Pieces of paper don't do that.

So then, what happens if you eliminate corporate income tax? The immediate (first order) effect (assuming the corporation is profitable, which many are not!) is that the corporation will have more cash. Since cash is an asset the corporation's book value increases. That's it. The money did not vanish into thin air and did not end up in someone's pocket. On the larger stage there is a rebalancing occurring, since provincial and federal coffers will be lighter by the same amount. This is a concern since if you implement the tax elimination plan in one fell swoop there would be pain in the financing of our public institutions, which includes all government-sponsored programs. The solution is to not implement corporate tax cuts in this way.

Instead let's suppose we reduce corporate taxes a small amount so that profitable corporations have a little more cash in hand, and governments have a little bit less. A cynic might claim that greedy and unethical corporate actors will line their pockets with that extra cash. In some cases that may in fact happen. However, if it does it's because those same bad actors already do so. Corporate tax policy does not change this type of misbehaviour; corporate taxation is not an instrument of law enforcement or ethical policing. It is a matter of corporate governance and enforcement of existing laws and securities regulations. That can be done today as it entirely distinct from taxation. Therefore such an argument is a red herring.

If that concern is allayed, what is the likely impact of a padded corporate bank account? If kept in the bank, the company's value will increase by the same amount. Public companies will, on average, see their share prices rise. The amount of the rise is easy enough to calculate: divide the cash by the number of shares. If nothing more is done, your retirement plan (assuming you hold mutual funds or directly own stocks) increases in value proportionately. This includes the CPP which hold shares in Canadian corporations.

Companies are not inclined to hold onto excess cash since it does little work other than generate a small amount of interest and, if allowed to grow too far, can attract predatory and hostile takeovers from larger entities that want access to that ready cash. No, competent managers put the money to work to increase the company's value or distribute it to shareholders by increasing dividends (which, by the way, generate tax revenue for government) - this is a secondary effect of a tax cut. There are many ways for companies to put cash to work, some of which are listed below, along with tertiary effects.

• An increased asset base allow the corporation to take on more debt or make a secondary stock offering (or IPO it is not yet public) on attractive terms to fund expansion to research and new products and markets, thus ensuring future success and growth.
• Reduce prices to competitively bid on new business, while maintaining similar levels of profitability. The company will be able to grow its business, especially in foreign markets, thus growing the Canadian economy and increasing personal wealth. Governments benefit by a greater tax base due to economic growth, which can then better fund public institutions and social programs.
• Attract superior talent with higher salary and stock offers, which will increase the quality of products and services while also innovating on new markets and products. Other tertiary effects are the same as those in the previous point.

Now let me return to the idea of implementing change slowly. Doing it in small increments, especially initially, will allow everyone, politicians, businessmen and the overall population, to see benefits of each change. This can create confidence so that further incremental change is welcomed by all and, if all is done within a government's term in office, will reward the politicians that took on the risk.

I am also realistic is seeing that despite the positive potential the risk of failure must be faced. Perhaps the biggest risk is that a down tick in the economy due to exogenous factors could well be blamed on the initial tax reduction, even if a careful analysis shows that the tax reduction reduced the economic distress. There will also certainly be nay-saying from parties in opposition (just because they're the opposition!) that may get a sympathetic ear even if the overall experiment is working. These politicians would only have to highlight one or two examples of negative impacts on a group of people or companies that may, or may not, be directly attributable to the tax reduction. Politicians live by public perception so the pro and con forces will work hard to sway opinion, regardless of the success or failure of the experiment.

Okay, so this has been an interesting thought experiment, but can it actually be made to happen? Sure, but possibly not in our present political environment. There are politicians who would certainly be willing to act, even as a matter of principle or ideology. A competent politician, which is one who is in tune with the electorate, will not do it today since it is unlikely to be supported by the people. It is more likely to result in political death. Leadership is risky. Despite this situation I would still like to see one of the parties, at either level of government, start talking about it so that it can be seriously contemplated before many more years go by. The entire country could benefit from making our companies more globally competitive.

Diversification for Canadian Investors

Because I follow the markets, I am occasionally asked by those I know of my opinion on how or where to invest. Invariably I deflect those questions since I know enough to know that I am not qualified to give that sort of personal and critical financial advice. Also, my track record is modestly good but far from stellar. I know enough to know I don't know enough; at least when I trade for myself I am somewhat comforted that my mistakes affect the fewest possible people.

A common and often very good investment strategy is diversification. The idea here is to spread your investment dollars across a broad range of sectors (mining, financial, technology) and investment classes (equities, fixed income) so that you reduce volatility. This protects you on the down side when one sector drops precipitously, such as the recent financial meltdown or more recent fall in commodities, even though it also limits your near-term gains on the upside. If you are not an active investor and simply want to invest and forget, diversification is your friend, with the caveat that there can never be certainty of positive returns.

One technique for diversification that many use is to buy index funds or cross-sector mutual funds. It's simple and seems to meet the criteria for the casual investor. However, if you're a Canadian investor you should perhaps think again.

The Canadian economy is not diversified and neither are broadly-based investment vehicles that focus solely on Canadian markets. Many of you are likely familiar with the cliche that Canadians are "haulers of wood and drawers of water", yet some fail to take that into account in their investment choices. The TSX Composite index, as a prime example, is heavily skewed toward commodities and raw materials. While the numbers do fluctuate wildly, one estimate has the current index almost 50% basic materials and 18% manufactured goods, which is almost the reverse of the far more diversified US markets. We are also prone to bizarre situations like in 2000 when Nortel itself was about one-third of the total Canadian market capitalization.

The message here is that if you do want diversification, and you want to stick with Canadian investments, you will have to be more active with your investment. I do not mean you have to pick stocks, but you should at least select sector-specific mutual funds and take the trouble to rebalance your holdings every one or two calendar quarters. By doing this you avoid the heavy weighting inherent in the broader Canadian markets. With the loosening of foreign holdings in RRSPs you can of course diversify to US and other markets, but keep in mind that when you do that you are engaging in currency speculation. Since the loonie's value does tend to reflect the domestic economy's strength, which remains raw materials, this can run counter to any diversification strategy.

The Fine Line Between Marketing and Hyperbole

The greatest salesman I have ever had the pleasure to work with made an observation to me that I've always remembered. It was one of those little pearls of wisdom that sticks with you because it is so true. The original context was about selling telecommunications equipment, yet it is applicable throughout all aspects of business, politics and life in general. His message was this:

"The more you have to tell someone how great you are, the less they believe you."

It's a good rule that I try to follow, even though I don't always succeed. Despite my background in technology, many years of promoting products and ideas have moved my approach more towards sales and marketing where promotion is fundamental. The trick is in knowing where to draw the line between promotion and hyperbole, and also knowing when to stop it entirely.

The process is to use promotions to gain an audience. Once you have gotten in the door and you have an audience let your product (or service, concept, business proposition, or whatever you are pushing) do the talking for you. Once they're paying attention, stop marketing and start helping them benefit from the product. If it's any good to them they'll let you know. If you can't back up your promotion with a product that delivers value to the customer, or you have left a trail behind you of broken promises and unhappy customers, no amount of marketing can save you or your company.

Success comes when the customer tells you how great your product is and how they are able to benefit from it, whether by solving a problem better than their current solution or how they can do useful things they couldn't do before. Many of these customers will agree to be references. This will help you win over new customers, and also investors if you are a startup. This is the source of building a good reputation and credibility, and true commercial success.

There are corollaries to this rule. For example, do you like to name drop? That's when you try to impress someone by relating that you know important person 'X'. It is instead far more impressive when person 'X' knows you. Do you primp and preen before an important date, wash the car and pick an expensive restaurant? That's marketing, and there's nothing wrong with that provided you can back it up. It's what comes out of your mouth and in your casual behaviour that tells the truth about the product, you, not the packaging.

To close this off post I will note that my MP, John Baird, has started filling my mailbox with one-sheet flyers extolling his and his government's virtues and accomplishments, suitably simplified and inflated. There's nothing particularly wrong with that considering that an election is increasingly probable - it's marketing - if they can show they know where to draw that line between promotions and delivering the goods. My vote will depend on what I really believe he and they actually accomplished and what that indicates for the next term, and if they show wisdom in letting their record speak louder than the message.

To Google: All (or at least most) Is Forgiven

It was only a week ago I wrote a post haranguing Google about the delays in getting a more complete and unimpaired Android SDK released, and today they've done it. This blog obviously has tremendous influence - uh, right.

The enhancements to the telephony module seem to be just about what I was looking for, and there are associated additions that are particularly useful to the applications I have in mind. I can't go in to specifics about what I am up to, but telephony integration in Symbian doesn't meet my needs. I have not looked at LiMo or iPhone or Blackberry to the same level of detail so I can't comment on those.

I have only quickly skimmed the other changes in the 0.9 SDK beta, but what I've seen does indicate that that it is as advertised - close to production release.

Some things I want to do still require an actual Android phone, which I would have preferred to see in the emulator. I can live with that if the phone can be tested here, in Canada, on a actual network. I am less hopeful about that occuring anytime soon, though I'd be happy and relieved to be proved wrong.

I am feeling a bit more positive about selecting Android as a basis for prototyping mobile applications that require telephony integration. I haven't made an actual decision yet, but the new features and now firm schedule for Android appears likely to tip me in that direction.

Which Country Controls the Arctic Ocean?

This isn't the sort of topic I had intended to address in this blog, but after reading, first, an article in the Globe and Mail this weekend about our non-existent presence on the northern ocean and its implications to our claims in the area, and then a second in the New York Times decrying how the lack of US ice breakers is imperilling their own interests, I simply couldn't resist.

Our hand wringing over Arctic sovereignty usually focusses on the US. While they do have a massively larger navy and coast guard they are almost as badly off as Canada when it comes to navigating through ice. That surprised me.

It turns out that the real power in the Arctic is Russia; they have a large ice breaking fleet, an advantage which will continue for another decade at the very least. Considering the renewed tension between the Russia and the US (and us via NATO), rapid opening of the northwest passage, or at least an increase in open water, oil and gas exploration, and claim staking by all countries bordering the Arctic Ocean, there could be some incidents over the coming years.

Canada will be seriously challenged to defend its Arctic interests as our more powerful neighbours jockey for position. Our economic capacity to patrol and defend the Arctic, and our claims, pales in comparison, no matter what we do or what our politicians say.