How Stupid Decisions Are Made and Rubber Ducks


Your assumption that a chunk of your hard earned money that goes to the government is wasted does not go unfunded. For the celebration of the 150th anniversary of Canada, the Ontarian government is spending $120,000 on a giant inflatable rubber ducky. This is one of many cases where you wonder who makes these decisions? How does this happen?  We will never know in this case but having worked for a large organization in the past I have insights on how stupid decisions happen. It’s easy to blame the Premier/leader for such stupid waste but with so many levels of management and bureaucrats, I think good ideas are lost in the process and are affected by the result of group think. Here’s my take on the rubber ducky fiasco.

First, a comity probably set a budget for the festivities. With the help of a HR firm, they hired a bunch of people (like Bill and Randy) with MBAs to come up with ideas how to spend the money. Lacking ideas, Bill and Randy hires an external consulting firm to come up with something exiting. The very expensive per hour +fees consulting firm gladly accepts the task. The consulting firm runs a bunch of focus groups, do some “market research”, and other gimmicks to fill up their pricey report. Bill and Randy then send the report to the comity for approval. The comity, looking for ways to justify is existence, hires another consulting firm to have a 2nd opinion. The consulting firm suggests some changes to justify their fees. The comity submits the amended report to some board to get it approve. The board then sends the report to some regulatory agency with their own army of bureaucrats to make sure that none of the ideas were too over the top because you wouldn’t want a scandal on the 150th anniversary of Canada. This takes a lot of time and the report is sent back requesting some changes. By that time, the original people that were hired, Bill and Randy, got transferred to a different department and were replaced by new hire Linda and Hank (both MBAs). Hank and Linda goes back to the drawing board to come with new refreshing ways to celebrate Canada’s 150th. During the process, Hank is off on paternity leave for a year and Linda is unfortunately on medical leave. Again with the help of an external HR firm, the comity manages to temporarily replace Hank and Linda with Tim and Gus (MBAs) at the last minute. With time running out and knowing that he has no job prospect following this project, Gus decides to smoke weed with his buddy Bobby (Bob) that has a rubber ducky company. Bob makes a joke about a giant rubber ducky and that’s when Gus decides to use it as his idea to celebrate Canada. Gus suggests the giant rubber duck idea to the comity and plugs in his buddy’s rubber ducky company. The board submits the idea for approval to a few agencies like nature, ethics, marketing, First Nation, Second Nation etc… And finally Bob gets the contract because he’s the only one that submitted a bid since nobody else has a giant rubber ducky in their inventory. Gus is then poached by Bob’s rubber ducky company and becomes an official lobbyist. Happy 150th Canada Day!

I think that what happened. I think that’s how a lot of serious decisions are made. I have seen some of the stuff above happened when I worked in the private sector. I don’t mind giant rubber ducks. I just wish it was private money that funds it. Anyway if the rubber ducky ever comes near my home I will bring my daughter to see it so I can tangibly show her why her school is broke.

As for what’s to come next, since the giant rubber ducky has no particular meaning, it could be used for a bunch of other government celebrations. With about 200 countries around the world and a scarcity of giant rubber ducks, this could lead to situations of over bidding which would result into a gold mine for Bob since governments are not in the business of saving money any time soon.

“Sorry hunny, I’m skipping Subway today for Wendy’s, I want to eat healthy today”

Subway’s Soy + Other Stuff Sandwich

Let’s say you are on the road and you need a quick, healthy, fast meal. If you had to choose between A&W, McDonald’s, Wendy’s,  Tim Hortons, and Subway, you would probably hop for the last one. Subway has always positioned itself as a healthier alternative. So all the time that you went to Subway because you though you were making a healthier choice, well you are in for a slap in the face. It turns out that the chicken in your Subway chicken sandwich might not contain very much chicken meat at all.

Trent University and the CBC’s marketplace conducted a DNA analysis of the poultry in several popular grilled chicken sandwiches and wraps found at those popular fast food joints. The study revealed that in the case of two popular Subway sandwiches, the chicken was found to contain only about half chicken DNA. In testing, Subway’s oven roasted chicken and the chicken strips in its Sweet Onion Chicken Teriyaki sandwich clocked in with just 53.6% and 42.8% chicken, respectively. The results stood up after extra rounds of sampling.

So it looks like chicken, might taste like chicken, but it’s not chicken. So what is it? An unadulterated piece of chicken from the store should come in at 100 per cent chicken DNA. Seasoning, marinating or processing meat would bring that number down, so fast food samples seasoned for taste wouldn’t be expected to hit that 100 per cent target.

Here are the results:

Source: Trent University/CBC

In the tests, most of the meat from Subway’s competitors was shown to contain 85 to 90% chicken DNA.“Subway’s results were such an outlier that the team decided to test them again, biopsying five new oven roasted chicken pieces, and five new orders of chicken strips,” CBC News explained. Surprisingly, A&W and Wendy’s topped the chart. Now I didn’t expected that. McDonald’s and Tim Hortons did well. So if you are limited in your options, you know you are getting at least 85% chicken. McDonald’s has been working very hard at cleaning its reputation in the last few years. I wish they did the study 10 years (I’m sure its out there) to compare the progress they made.

Naturally, Subway disagree with the results. Subway claimed to use only 100% white meat chicken in their chicken products, they did admit to using soy as a stabilizer. They are going to check with their suppliers. I wonder if A&W and Wendy’s are going to ride high with the results with some kind of marketing campaign. Wendy’s is delicious, but its delicious for all the wrong reasons. You committing a sin eating there, but it’s a sin that makes you feel good (well just at first when you are eating). Now the quality of their chicken is superior to Subway!!??? “Sorry hunny, I’m skipping Subway today for Wendy’s, I want to eat healthy today”. I smell class action lawsuit for misleading consumers…

Subway’s chicken also caused a stir in late 2015 following a study by the environmental group Friends of the Earth, which awarded the franchise an F for using antibiotics in their meat. In response, Subway announced that they would be removing poultry raised with antibiotics from its 27,000-plus of its U.S. locations by the end of 2016.


What’s in your chicken sandwich? DNA test shows Subway sandwiches could contain just 50% chicken

The chicken challenge: Testing your fast food (Video)

Company responses: Chicken


Negative Interest Rates for Dummies

If you ever borrowed money, you are most likely familiar with the concept of positive interest rates. That’s the world where you pay interest on the money you borrowed. Lately, you probably been hearing more and more about negative interest rates, where depositors are actually charged to keep their money in an account and borrowers are paid interest on their debt. I admit that the concept of negative interest rates can take a while to sink in. Imagine a bank that pays negative interest.  The common reaction is “Wait, what! Instead of paying interests on my mortgage I’m receiving interests? Why would a bank do that? I don’t follow you…” or the other popular reaction is “If the bank charge me interest on my deposits I’m taking my money out”. Well it hasn’t gone that far, yet.

Negative interest rates are a last ditch effort by a central bank to stimulate the economy by effectively imposing a tax on the excess reserves that banks hold at the central bank. Banks earn interest on the money, called reserves, they park at the central banks, just like savers park money in a bank. In countries where there’s negative interest rate, the banks have so far mostly taken on the cost on holding excess reserves at the central bank.  At the moment, they haven’t pass the cost on to the consumer, out of fear that doing so might spark a bank run. In some cases, in the Denmark, where some homeowners are getting paid interest on their mortgage. In Switzerland, there’s a bank that’s charging clients to hold their deposits. There’s definitely side effects, both positives and negatives.

Why is this happening? The economy is weak and needs a boost. Banks are a pillar of the economy and are not lending as much as they should. Maybe the standards to borrow are too high following the financial crisis. Maybe there is not enough demand. Whatever the case is, banks are keeping excess reserves at the central bank and are receiving interest on them. Theoretically, low interest rate is suppose to stimulate demand for loans and as a result grow the economy. Central banks provide an ample supply of cheap money to banks in order to encourage lending to various individuals and businesses. But that’s not happening. The banks are “hoarding” the money. You are not growing the economy if you have money parked doing nothing. So to stimulate lending and to get these excess reserve out in the real economy, central banks are charging banks for their holdings.

Denmark set negative interest rates as early as 2012, followed by the European Central Bank in 2014. Since then, they’ve been joined by Switzerland, Sweden, Japan, and Hungary. For some, it’s a bid to reinvigorate an economy with other options exhausted. Others want to push foreigners to move their money somewhere else so they can keep their currency down in an attempt to make their exporters competitive. With the European Central Bank trying to “tank” their currency, Sweden and Switzerland responded. Policy makers are also trying to prevent a slide into deflation, or a spiral of falling prices that could derail the recovery. By weakening their currency, they hope to import inflation by making goods coming into the country more expensive, raising domestic prices.

There are other consequences as well. Retirees are feeling the pain as they need income to live on. The days where you could get a guaranteed 5% on your money have been behind for a few years now, but this is something else. Pension plans, insurance companies, retirees, are being driven in riskier asset classes to make up for the loss income. This works in the short-run as long asset prices are increasing, but is not necessary a sound investment policy. In the long-run, who knows what the consequences are? It’s uncharted waters. There are other side effects, Sweden is dealing is a potential housing bubble and people are on a borrowing frenzy. It might ended up badly once rate rises. The best analogy I heard about the dilemma is the joyful feeling of eating McDonald’s right now. It’s delicious in the moment but the perverse effect of eating it will show up later.

Both Canada and the U.S. have their current interest rate at 0.50%. After decreasing them last year Canada just announced they were maintaining their rate. The U.S. are slowly starting to increase them after almost ten years of no increase. There is debate on whether they should go negative. Rates are just above zero, so nobody knows if going negative will actually make a difference. So far the North American central banks are looking at the experience in other countries and will judge the results.

Negative interest rates are a sign of desperation, a signal that traditional policy options have proved ineffective and new limits need to be explored. They punish banks that hoard cash instead of extending loans to businesses or to weaker lenders. It’s a bid to boost the economy. Is it working? So far the experiment doesn’t prove to be fruitful. Instead of boosting lending like the theory states, banks are taking on the cost which hurt their income, and as a result tighten credit. If banks are not profitable, they don’t lend.  Another perverse effect, banks have been unwilling to pass on negative rates to individual depositors, and have tried to compensate for profits by jacking up mortgage rates, even as headline interest rates fall. These are not the results they were hoping for. Taking such action is suppose to help the economy, not hurt it.

This is where a herd of academics, bankers, analysts and economists are getting in a never ending debate, and the person with the argument that nobody understands usually wins. You get the feeling that nobody knows what they are doing. Falling prices, banks paying you money, it’s a confusing world. I hope this clarifies the insane world of negative interest rate.

Barron’s 2016 Roundtable

This is a massive repost from Barron’s 2016 Roundtable. Barron’s does this every year and I read it every year.  You have some of the best investment mind in the business debating their ideas and picks.

I included all three parts in this post.. Here are the original links:
Barron’s 2016 Roundtable Part 1, Part 2, and Part 3

I merged all three articles so its all accessible with one click. Like I said, it’s very long.


Continue reading “Barron’s 2016 Roundtable”

Why are the markets melting?

Stocks are tumbling at a fast rate around the world. The Dow is down ~400 points at the moment of writing these lines (an improvement from the -500 earlier). Looks like we are in a good old traditional correction. After one of the longest bull market in recent history, we forgot how a correction feels.


So why are the world markets falling like a rock? Well fear is dominating investors sentiment and that fear derives from uncertainty. Since uncertainty is the seed of fear and chaos, where is it coming from? None of following should be surprising to you but here are the top concerns that are behind this extended selloff:

  • Oil: The speed and magnitude of the decline in oil. Crude is at a 12 year low and is now trading below $30. The selloff comes down to two simple Economy 101 forces: Increased supply and decreased demand. Lower oil prices also cancel plans for capital spending. This is a source of major business spending and equities takes cue from that.
  • The withdrawal of Fed’s stimulus. This was a major leg of the stool on which the global recovery was resting on. Now the Fed is in tightening mode.
  • China slowdown fears. Nobody knows what’s going on in China, the 2nd largest economy in the world. The lack of clarity is a source of fear and adds to the volatility. People who does business in China said that the growth rate is closer to 3% than 6%. Also it seems that the Chinese government doesn’t know how to handle the problem.
  • Europe’s recovery remains to be fragile. At maybe 1% economic growth, it’s not growing fast enough.

These are some of the factors that fuels the selloff. Combine all of that and you are in a major funk. Fear is a very contagious emotion. Fears breeds more fear and that’s how you lose 300-400 points a day.

Bear Market

CFOs who spend lots of time golfing produce financial reports full of holes

That’s the results of a new academic study: Chipping Away at Financial Reporting Quality.

Here’s a copy of the abstract. I highlighted the most interesting parts:

“Chief financial officers are responsible for managing the financial reporting process. We test whether the quality of a firm’s financial reports is a function of the effort expended by the CFO. Using golfing records to measure leisure consumption, we first show that CFOs consume more leisure when they have lower economic incentives to work. We show further that higher levels of CFO leisure are negatively associated with a number of indicators of financial reporting quality. The use of firm fixed effects and an instrumental variable analysis suggest that the observed relations are causal. Further tests indicate that higher leisure consumption is associated with shorter conference calls with a more uncertain tone. Finally, the effects of lower quality reporting are demonstrated by results linking CFO leisure with analysts’ forecast dispersion and weaker earnings response coefficients.”

Bombardier Inc. – Canada’s Too-Big-To-Fail

Bombardier CSeriesBelow is my latest article on Seeking Alpha which you can access for free. There are already some interesting discussions in the comments section.  Below is just a sample of the article because Seeking Alpha has the rights to it.  The article are my general comments on the bailout of Bombardier by the government of Quebec.


  • The Quebec government invested US$1 billion (CA$1.3) for 49.5% of Bombardier’s CSeries and 200m warrants for BBD.B.
  • The government is not in for the money, but to solve a confidence crisis. The CSeries is not expected to deliver free cash flow until 2020.
  • Bombardier’s CSeries is in a Catch-22. The CSeries program can’t survive without orders, and there’s won’t be orders unless the CSeries program survives.
  • I’m disappointed in the deal. I wish the government had better represented the interest of the taxpayers.
  • Bombardier is too big to fail in Quebec and Canada. It’s the heart of the aerospace industry.



Bombardier Inc. is primarily traded on the Toronto Stock Exchange under the tickers BBD.B and BBD.A. Class A has ten votes per share, and Class B has one vote per share. The Beaudoin-Bombardier family has 54.35% of all the voting rights. BBD.B is the most commonly traded ticker.

Note: Dollar amounts are in Canadian $ unless mentioned otherwise. The price of 1 USD in CAD as of October 31, 2015 is USD-CAD 1.3146.

This is not a valuation of Bombardier (BBD). I’m providing my general comments on the latest Bombardier bailout by the Quebec government. I was never a shareholder of the company, I’m “not a shareholder today”, and I don’t plan to invest in the company in the future. I used quotation marks because, as a Quebec taxpayer, I’m now indirectly a shareholder of Bombardier. Actually, I should clarify that the taxpayers are a shareholder in BBD’s CSeries program, not the parent company. If you don’t read the media report carefully, it might lead to the conclusion that the Quebec government is a shareholder in Bombardier, which they are not. Like many others, I woke up on Thursday morning as an indirect shareholder in the now-infamous CSeries program that’s sinking the company.

This leads to many questions. What’s the upside for the taxpayers? What are the risks? Why would the government get involved? Plus, the timing of the investment was a little insulting. It came a day after a one-day strike in the public sector to protest the government’s austerity budget, after cuts in the education and health sector. Without getting sidetracked, the government’s rationale for investing in Bombardier is that the cost of not investing is greater. Well, this rationale also applies to education. The cost of not investing in education is higher than not investing.

Let’s find out what my dear provincial government got me involved.

Full Article here.

Guess Who Is In The News (For The Wrong Reasons)

BOFI There’s no smoke without fire as the saying goes.
BOFI Holdings, the parent of the Bank of the Internet, is in trouble. Back in April 2015 I wrote a post (I Have a Feeling This Won’t End Well) on the company after its over the top ads caught my attention. The bank also attracted attention for its fast growth and its non-traditional lending practice. The Bank of Internet was one of the hottest banking stock until recently. We saw what happened to banks in 2008-2009 after years of growing profits with weak lending practices.

Well things started to turn south for BOFI in August when they got the New-York Times’ attention. Here’s the first article on BOFI by the NYT: An Internet Mortgage Provider Reaps the Rewards of Lending Boldly

Then this week, again in the NYT, a former auditor is suing the bank. The auditor said he was fired after revealing what he believed to be wrongdoing at the bank to federal regulators and management at Bank of Internet. He contended that Bank of Internet was cutting corners as it grew at a rapid pace.

If this interest you, I also recommend reading this great Seeking Alpha article by the Friendly Bear on BOFI: The New York Times Has Only Scratched The Surface On BofI Holding…

The Canadian Dollar is Taking a Beating


The CAD is taking quite the beating, especially since oil crash. The loonie is trading at its 52-weeks low and the mid-market rate is ~$1.32 USD/CAD. That means that $1 US dollar gives you $1.32 Canadian and one CAD will give you about US$0.76. Again that’s the mid-market quote, so you probably get less when you are buying at the exchange dealer. This is what happens when we are a commodity linked currency.

The winners is the exporting sector which has been choking from the high CAD for quite a while. The loonie crash is a gift for them. Their cost are in CAD and they sell in USD, pocketing the difference. The other clear winners are American tourists coming to Canada. Spending some hard currency should beneficial to the country. The losers are the Canadian tourists and the importing sectors. Consumers also takes a beating since we consume a lot of American goods which will be priced higher. A year ago on the app store, a $1 app was $1. Last time they raised it to $1.19 for an app and I’m sure they will raise it again.

This should not be surprising. The Canadian economy is in a technical recession (two quarters of negative growth) and the outlook is gloomy. The US economy is growing. Canadian interest rates are trending downward while the Fed is looking at when they will hike their rate. Where is it going next? Who knows. In my opinion I  expects more up and downs but wouldn’t bet on a quick recovery to par.


Tough Retail Life in Canada

Lately it’s been a rough ride for retailers in Canada. Just by listening to the media it feels like there is a new chain of store closing every day. The names Future Shop (rebranded Best Buy), Target Canada, Bikini Village, Parasuco, Areopostale, Jacob, Smart Set, Mexx, Zellers have disappeared, are disappearing or restructuring with the hope to have a 2nd life (or 3rd or 4th depending on the retailer). I would even add Sears Canada to the list since it’s just a zombie store (I think somebody forgot to turn off the lights). Some of the names above will be gone of the scenery for good and others will be a thing of the past. Regarding Sears, I have a great shopping tip during the holiday season; park your car at Sears, it’s the only parking lot with space available and use their store entrance to get in the mall. That strategy has worked for me for at least ten years and counting. There’s seems to be an endless list of reasons to lay the blame on. A weak dollar, high rent, the economy, the minimum wage on the rise, intense competition, lack of parking etc…without a doubt it’s an extremely difficult to be in retail. But one reason not cited is that nobody seems to blame the failure at them. Of course the reasons cited above are huge issues to overcome and I’m not trying to minimize their effect. However successful businesses know how to navigate a tough environment. There are other retailers facing the same problems and they are doing just fine. Stores like H&M, Zara, Forever 21, American Eagle, Mango, the Apple Store comes to mind. Do you think Target Canada failed because of the minimum wage or the lack of parking. No it failed because it was a terribly run business. Jacob failed because they didn’t adapt to change in customer’s taste. If you don’t provide what the customers want you will be in trouble. These stores are responsible for their own failure.The economy is not shrinking either. In 2014, according to Stat Canada and le Conseil Québécois du Commerce de Détail, sales excluding car, gas, and food are up 3.8% in Quebec and 4.6% in Canada. Consumer spending seems to exceed GDP growth. The number suggests that Canadians are spending and consuming more. They are simply not spending their money at the stores mentioned in the first paragraph. A guy I know opened a restaurant in downtown Montreal. I went once to check it out and it was mediocre. The place was huge and empty, it felt cold instead of cozy and comfortable, the lighting wasn’t good, service was ok, and the food was average (they actually burned my wife’s pizza but made a new one). I had the feeling that he won’t be in business very long. My wife wasn’t impressed. I couldn’t recommended it to anyone. Indeed, the restaurant survived six months with a couple months behind on rent. He told me that it was the city’s fault for his failure. He said “The city doesn’t do enough to bring people downtown and parking is expensive.” Of course I agree with these reasons but the number one reason for the restaurant failure was his own. The street he was on is packed with restaurants, some with lines outside. If you depend on the city for your success, you’re in for a long ride. The bottom line is he didn’t do enough to bring people in his restaurant. But again instead of taking responsibility and learn from his errors, it’s easier to lay the blame on other things.