September 14, 2016

On Wednesday, the S&P 500 was down 0.1% while Toronto was up 0.1%.

Element Financial was the largest gainer, up 2.4%. I have been corresponding with Element trying to understand their income taxes which seem rather complicated. They have been friendly and helpful. But I am still confused by aspects of their income tax. I also just realised that they report net income before deducting preferred shares dividends. Most (but certainly not all) companies add a line for net income to common share holders when they have preferred dividends. My view is that Element’s approach, while completely acceptable to regulators is not best practice. (The net income is to common is somewhat lower than I had thought because I missed making the deduction for pref shares)  All in all, Element is complex and seems aggressive in how they define adjusted earnings. I am basically not quite willing to trust them. So I sold the rest of my shares. I only had a small position so it won’t make much difference. Element could very well gain when it splits into two companies in October. But I just decided I am out of this one.

Wells Fargo’s issues (with its employees having opened bank accounts without customer authority in order to meet sales totals) continue to be in the financial news and are not going away. The company is very strong and will get past this. But it’s unclear what the damage will be.

The Canadian Bankers Association came out with the 90 day mortgage delinquency figures for May. (They have a long lag in reporting). The delinquencies in Canada remained stable. But they have started to creep up in Alberta although they still remain very low. I have long been suspicious that the Banks are essentially manipulating these numbers but I cannot be sure of that. No bank wants to see its numbers turn bad. Therefore the banks have an incentive to sort of sanction late payments and try to keep people off the 90 day list. I fully agree that people should be given a chance to pay and should not be immediately foreclosed on. But if banks are getting way more generous in allowing deferred arrangements to pay and allowing skipped payments, (and they are)  then the 90 day delinquency figures of today are not comparable to the figures of 20 years ago assuming the banks were less generous back then (and they were).

Also today, unlike 25 years ago, anyone unemployed and unable to pay their mortgage from wages  likely has the ability to take money out of a line of credit to make the payment. In that case the bank may not notice the customer is unemployed.  I have suspected for years that the early warning system regarding job loss that existed 25 or 30 years ago is gone. It is likely much easier today to rack up huge debts while unemployed without the bank noticing. But so far everything has worked out. Things will not work out so nicely if we get a long recession. I think the last deep recession in Canada was around 1991. We have not yet had a long and deep recession with double digit unemployment levels in the age when large lines of credit became so ubiquitous.