#85 - Canadian Housing Market, Operation Varsity Blues and the Power Of Voice
In this week's episode of Reformed Millennials, Broc and Joel talk about the insane Canadian Housing Market, the Operation Varsity Blues Scandal, and the impacts AirPods are having on voice apps like Spotify and Clubhouse.
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👉 For specific investment questions or advice contact Joel @ Gold Investment Management.
The Russell 2000 tumbled 3.6%, marking its worst day since February 25th.
Bear Markets are environments where a majority of stocks are falling in price for a prolonged period of time.
Sometimes you'll hear lies about a 20% decline defining such things, but that's just bs. The number 20 is a completely arbitrary number that has absolutely no meaning. Thinking it does is foolish. Why 20? Why not 19.5? or 20.2?
There is no reason.
If you ever hear anyone say that, "A bear market is when it falls 20%", you know it's because they're in the entertainment business, not in the truth business.
It's their job to distract, it's our job to ignore.
In reality, expansions in the new low lists are things you’ll find near the beginning of market declines. You’ll see spikes in these lists that haven’t been seen in years. Mathematically, you cannot have bear markets, or prolonged broad market declines, without those expansions in new lows.
So you should be watching closely.
In the meantime, however, from a more tactical perspective, we would continue to expect a choppy messy market. As long as Small-caps and Micro-caps are below their February highs, expect a messy market for small-caps.
You can also see this on a relative basis as Small-caps are failing at a key level here vs Mega-caps. This small-cap leadership is unwinding, and it could take a while:
FOMO, low inventories drive Canadian home prices up to $100,000 since August
Home resales climbed one more step into record territory: Sales increased 6.6% from January to 783,600 units(seasonally adjusted and annualized) in Canada or 39% above the year-ago level. The activity was especially strong in Ontario where a majority of markets notched sizable gains, including London (up 24% m/m), Kitchener-Waterloo (up 20%), the Niagara region (up 16%), and the Greater Toronto area (up 16%).
Western Canadian markets also recorded solid advances, with Saskatoon leading the way (up 19%m/m) followed by Calgary (up 10%), Winnipeg (up 7.1%), and Vancouver (up 4.7%). Montreal bucked the trend with a sharp 21% m/m drop—though the level remained historically high.
Home prices soared further… and faster:
Canada’s aggregate MLS Home Price Index jumped 17.3% y/y in February, marking a sharp acceleration from rates of 13.6% in January and 9.4% in August last year. The single-family home index blasted through the 20% line for the first time ever, with the annual increase coming in at 22.1%. The condo index increased more modestly by 4.2%— though this represented the first acceleration in seven months. Properties in many markets in Ontario, Quebec, and parts of Atlantic Canada appreciated at rates exceeding 20% y/y, with some surpassing 30%.
How will this end?
Signs of overheated market conditions of course raise the risk of a price correction down the road. Our base-case scenario, though, remains that prices will continue to appreciate in the year ahead, albeit at a slower and slower pace as we get closer to 2022. A creeping-up of longer-term interest rates, deteriorating affordability, the resumption of office work, and possible policy intervention will eventually cool homebuyer demand and set the stage for a soft landing. We think modest outright price declines could be in the cards over the medium term, perhaps by the latter stages of 2022 when interest rates rise more broadly.
A surge in cannabis sales during the coronavirus pandemic, and the spreading legalization of cannabis, are driving fresh interest in cannabis-related startups.
"The war on drugs has been a war on people. We can all see that. I'm for the total decriminalization of cannabis, and we have to make sure that communities of color actually participate in the economic gains that are going to result from legalization." - Andrew Yang
Nobody is paying attention to Fairfax’s investment portfolio and their CEO (Prem) is a low-key Unicorn Hunter. He’s everything Chamath wishes he could be.
Blackberry stock has more than quadrupled since Q3 and Fairfax’s true ownership does not appear on filings because they are hidden in low cost ($6) convertible debentures. Their Blackberry exposure was more than doubled in just September before the rally. Assuming the debentures get exercised, they would now control 16.5% of Blackberry stock with (101.725m shares).
Today, that value is now ~$1.7b, or an increase of US$56.50 per share (C$71.75). That’s a 12.8% increase to Fairfax’s book value. I’m pretty sure Fairfax has not sold a share since they would likely have to disclose any trade given Prem is on the board of Blackberry.
Back in 2018, Fairfax invested $45m in Digit with a subsequent round shortly thereafter:
“Digit was founded in June 2017 by Kamesh Goyal, with backing from Fairfax, which is controlled by Indian-Canadian billionaire Prem Watsa. Goyal formerly led Allianz’s business in India.”
Digit is an Indian app based general insurer that is 100% cloud-based to simplify processes for its customers. Fast forward to 2021 and Digit is raising at $1.9b from Indian funds A91 Partners, Faering Capital and TVS Capital.
Prem has been investing in FarmersEdge since March 2017.
FarmersEdge is an agricultural SAAS company based in Winnipeg that the Globe & Mail just reported is ‘set to file a prospectus with regulators’. SAAS with agritech? Fairfax had this valued on their books in 2018 at 4x EBITDA. Not even, 4x Revenue, but 4x EBITDA…)
However, most importantly you need to look at the rest of Fairfax listed equity investments. They are highly cyclical stocks, positioning them well for a post vaccine rollout and the stocks have been on fire since Q3. Here’s just a few.
Fairfax Africa + 48%
Thomas Cook India +51%
Fairfax India +63%
Recipe Unlimited +66%
Resolute Forest Products + 94%
Excluding Blackberry, it looks like their listed equity book has increase by $1.2b or $47 in additional book value per share!
Now, a number of these companies are recorded with equity accounting so it won’t all show up directly in book value immediately but the increase frees up capital allocation options for the company.
And all of this is happening in an insurance market where pricing has been materially improving.
If we assume Fairfax has retained 45% ownership of Digit, that’s another ~US$17 per share of book value growth. (We don’t know what Fairfax has Digit on their books for beyond the 2019 AR)
WANT MORE PROOF THAT CHAMATH HAS NOTHING ON PREM?
Fairfax has been steadily improving its insurance operations and this is far more important to the investment thesis long term. But I wouldn’t be surprised if the narrative on Fairfax’s investment side becomes much more positive and quickly, pushing shares higher.
Fairfax stock has yet to recover from the pandemic and trades at 84% of Q3 stated “book value” US$442.17 (C$562.51).
🌊Best Links of The Week☔
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If you can just avoid dying, you get rich. From Paul Graham
The DAO was an early Decentralized Autonomous Organization (DAO) and venture capital fund. 11,000 people invested 11.5 million ETH, 14% of the total supply at the time, worth roughly $150 million, which they planned to collectively invest in crypto projects.
Ben Evans makes the great point that software companies end up growing into non-software over time. When one winner takes all, there's less excitement about the pure software component. Meanwhile, the winner is generating cash flow and has a data/information advantage, allowing them to invest in the non-software parts of the supply chain.
Ben Thompson has a great collection of interviews on moderation: high-market share platforms are often stuck making terribly fraught decisions. On the one hand, keeping a controversial client often means risking 5% of revenue in order to preserve 0.001% of revenue. On the other hand, every ban creates a precedent, and contributes to a broadly conspiratorial view among the people who are getting banned. If there's a chain of events that starts with you having unpopular opinions and ends with you being unable to get a cab ride, hotel room, or bank account, it starts to feel like the world really is full of powerful, shadowy organizations that are all in cahoots with one another. This makes platform neutrality a positive externality; it makes the world feel more trustworthy to people who are inclined not to trust much.
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