February 12th, 2008
Blurb: With U.S. stocks and real estate slumping and the loonie stronger, is now the time to bargain hunt south of the border?
Investing in U.S. assets
By Peter Diekmeyer • Bankrate.com
These days, U.S. assets aren’t on the top of many investors’ lists. Stocks there are down, the country’s real estate sector is in a funk, the greenback is in decline and the country’s economy is slowing. In short, investors with a modicum of common sense are staying far away from U.S. stocks, bonds and real estate. But that’s why people with common sense don’t often get rich.
The fact is that the most successful investors buy when asset prices are low and sell when they are high. And right now, the prices of many U.S. assets are lower in Canadian dollar terms than they have been for some time. But figuring out whether there are opportunities out there is easier said than done. Because when everyone else is panicking, it’s hard not to panic too.
That said, while right now may not be the easiest time to buy U.S. assets, they certainly merit a closer look.
A strong Canadian dollar
One of the biggest arguments for a reassessment of attitudes regarding U.S. assets comes from the increasing bang that Canadians are getting for their buck. During the past five years, the loonie has risen by 50 percent against the greenback, from about U.S. $0.65 to near parity.
The stronger loonie means that U.S. assets now cost a third less in Canadian dollar terms than they did just a short while ago. This has completely changed businesses calculations says once expert.
“We can talk about the credit and commercial papers crisis, of the imminence of a U.S. recession, of rising energy prices or the volatility of financial markets, but the subject that should be preoccupying us most is the rise of the Canadian currency,” said Jean-Guy Langelier, chief of treasury operations at Mouvement des Caisses Desjardins, Quebec’s largest financial institution, during a speech to the Board of Trade of Metropolitan Montreal earlier this week.
U.S. stocks: still expensive, but cheaper than they once were
One of the first places that Canadian investors look when they are thinking of putting their money into the United States is the stock market. This has become easier in recent years, due to the relaxation of RRSP rules regarding foreign investments and more urgent too, due to the increasing awareness among sophisticated investors of the need for global portfolio diversification.
But is it a good time to buy U.S. stocks? There are some indications that indeed it is. As of this week the Dow Jones Industrial Average traded at 11,508, which close to 20 percent below its 52-week high of 14,280. And if history tells us anything, in recent markets it has paid to buy during correction phases. Over a five-year time frame though, things are less clear. The DJIA was trading at close to 8,000 five years ago, which means that even after the recent correction, the benchmark average has still soared by 78.5% during that time. That’s a bad sign because run-ups of that scale tend to be followed by declines or stagnations.
But where it gets interesting is when you price the Dow in Canadian dollar terms. For example five years ago, when the loonie was trading at U.S. $0.65, the Dow (then trading at 8,000) would have been worth 12,307 in Canadian dollar terms. That’s actually below where it is trading today in Canadian dollar terms with the loonie at parity (about 11,508). And since over the longer-term, stocks as a group inevitably move up, the fact that one category hasn’t, would be regarded by many investors as a clear buy signal.
U.S. real estate: starting to look more affordable
Another major U.S. asset class that merits a look is real estate. Yes, I know, I can hear you saying that U.S. real estate is in the doldrums, that homeowners there are over-borrowed and that according to the National Foundation for Credit Counseling 78 percent of Americans are losing sleep because they are worried about their current financial situation. This is all real bad news. But remember, if you are a believer in the buy low-sell high theory, then you have to look at bad news somewhat skeptically.
For example the November data of the Case-Shiller 10-City Composite index show that house prices declined by a record 8.4% on an annual basis. In real terms (after inflation is taken into account) the drop is even larger.
On top of that, unsold U.S. home inventories are at historically high levels. That means that prices will almost certainly fall further, as sellers cut their asking prices to move product. On the other hand, after its rise of recent years, the Canadian dollar gets you a lot more house-bang for your buck than it once did.
Despite this, according to one expert, the herd mentality continues to inform Canadians. “Despite the rise of the Canadian dollar, and the strong drop in Florida real estate prices, we see no signs that Canadians are taking advantage of the bargains,” said Lawrence Barker, executive director of the Canadian Snowbirds Association.
So is it time to buy U.S. assets? Well, if you have any common sense, then you’d have to say the answer is no and that in fact things could get much worse. But then again, people with common sense sell when everyone is selling and buy when everyone is buying.
Which is why so few of them ever get rich.
Peter Diekmeyer (www.peterdiekmeyer.com) is a freelance business and economics writer.
|© 2008 Peter Diekmeyer Communications Inc.|