The Financial Post ran a piece by Lawrence Solomon recently that rightly counters the common criticisms of government policy changes in the housing market. Many people complain that the government is unfairly restraining the market and interfering with people’s freedom, when in fact it is only withdrawing some incentives that distorted the market while continuing to leave others in place.
Solomon looks to true free markets in Europe to show that homeownership rates in a free market can range from 30-50% compared to the current 70% here. That also compares to a rate in the mid-to-high 60s in the US (once again we’re beyond their peak). However there are also countries in Europe with homeownership rates of around 80%. I don’t know the reasons for that but 70% isn’t an absolute limit.
I don’t look at homeownership rates as much as affordability. Too many government policies try to help people pay for homes, only to drive up the prices and make everyone worse off. The end result in a Ponzi scheme where you have to help individuals by making the market worse, which requires more help for individuals. At some point this can’t continue.
I wouldn’t draw too many comparisons to Europe since this is the place where some people have to take on inter-generational mortgages due to high prices. Unlike Europe we shouldn’t have a scarcity of land for building. Some cities are sensibly restraining land expansion to promote denser development but overall the majority of Canadians should be able to enjoy a relatively low real estate cost. Overall the market could be worse and maybe the current home prices are just foreshadowing general inflation that will make them more affordable.
However if Solomon’s claim that the rental market is restrained by government policy is true then there could be a lot of potential for a true free market. This would involve stricter conditions for buying, lower homeownership, more renters, and more rentals operated by professionals with a long-term view rather than speculators who got caught. Overall a free market like this could reduce costs for everyone. Who could complain about that? (other than the realtors)
Although I usually invest in index funds we know that stock picking isn’t dead. And to back that up I made a rare prediction about individual stocks two months ago. Specifically I predicted that since everyone loves Apple and hates RIM, if someone were to make a trade betting that the price of Apple would fall and/or the price of RIM would rise, they could have good profit potential. Even if one stock went in the wrong direction they could still get closer together and make a profit. This could be executed by using options or by shorting one and buying the other each of which can require minimal cash outlay.
Well it’s not too early to call the results of this call since we’re just 3 days short of 2 months since that prediction. On September 27, Apple shares closed at $681.32 and RIM shares closed at $7.14 on the NASDAQ. As it turns out the Apple share price was essentially the peak for the week and beyond since it has not regained those heights. The RIM price on that date was only a few days away from a time when it almost touched the 52-week low. It may even be a few days after the actual 52-week low, I’m not too good at reading stock charts.
So what would the result be so far? Let’s look at the simplest way to do this by shorting and buying instead of using options.
If you shorted 30 Apple shares with a starting value of $20,439.60, you would have been able to buy 2862 RIM shares. Adjusting for the initial trading commissions and the leftover change you would pay less than $16 to enter this trade with a $10 trading commission. Let’s add some interest too. I don’t trade on margin but I’ll guess that you pay 4.5% interest for 2 months to short Apple, for a total interest cost of $153.30 (ha, I’d love to get that kind of interest for sticking $20,000 in a high-interest savings account). So the net cost for the first two months of the trade would be around $170.
If you liquidated this trade at Friday’s closing price, you would sell your 2862 RIM shares for $33,370.92 (Holy @#%”(*$@%(*!). You would then buy back 30 Apple shares for $17,145.00 (awesome). Subtracting the trading commissions again, that leaves you a net profit of $16,205.92. Or to put it another way you would earn a return of 9,555% on the $170 in cash that you started with in only 2 months. If you kept this up all year you would have an annualized return of 76,117,945,311,128%. I think that’s enough to buy the world.
And as you can see this is a foolproof trade. Even if Apple had gone up by 50% to reach a market cap large enough to buy the entire USA you would make a profit of nearly $3,000 (a 1,769% gain) because RIM did better.
In conclusion I must be a brilliant stock trader. Where’s my hedge fund? After all if even a joker who bought Apple can get a mutual fund I should get something better! Or do I need to start with a newsletter? I don’t know how this whole thing works, I’m just an index investor. I might have to switch though. This stock trading looks fun.