Hot Off the Web– February 1, 2009

In a very interesting NYT article “American Express kept a (very) watchful eye on charges” Ron Lieber talks about the “big brother” credit card companies scrutinizing your purchases, not just looking for potentially fraudulent ones. Recently American Express cut customers’ credit lines based on what establishments they shopped at!?!

Jonathan Chevreau reports on the past week’s budget in the Financial Post’s “Tax relief for lower and middle income Canadians” . No doubt you read/heard about it, and while it contains some relief to the average Canadian, I don’t see how it will create a spending stampede that will re-energize the Canadian economy.

In Financial Post’s “Freedom 67- Bear market causes North Americans to postpone retirement” Jon Chevreau reports on a recent survey of North Americans which indicates that: 54% are postponing retirement by one year and 24% by five, those over 67 who still work 20 hours a week do so not to stay mentally engaged but maintain their lifestyle, and “guerrilla frugality” kicked in. Chevreau also asks if the phrase “retirement” needs to be retired; he prefers to think of it as not retirement but as financial independence (as in his new Findependence novel, which I ordered but hasn’t as yet got to me.)

Given the growing interest in working among individuals of retirement age, you might find John Tozzi’s “A guide to self-employment” in BusinessWeek of interest. While not directly focused on retirees, but the increasing numbers of those who have recently lost their jobs, Tozzi suggest that you start with setting long-term goals and then look at: “What are the specific skills, knowledge, money, resources, information, and contacts [you] need to bring that picture to life?”,
secure health care insurance (critical for Americans), networking, and hire a good accountant who could save you money on taxes.

In Karen Blumenthal’s WSJ piece “In a fight against bill creep, every extra fee is an enemy” she suggests a very simple common sense approach to increase your sensitivity to your spending. If automatic payments mean you automatically forget, reconsider whether you need the inconvenience of actually paying a bill to keep an eye on it or if you should cut it altogether and redirect the payment to automatic savings.

The free-fall of U.S. home prices continues. S&P Case Shiller, 10 and 20 city, Home Price Indexes dropped again by about 2.2% in November 2008.

Avner Mandelman in Globe and Mail’s “This won’t be your regular job loss” The grim forecast triggered by 4^th quarter 3.8% annualized U.S. GDP drop reported this week goes as follows: 13% unemployment and worse for developing countries, bond performance better than stocks, geo-political conflict. “Over the next one to two years, unemployment could zoom, conflicts among nations skyrocket, wars get hot and numerous, and many jobless Americans take a forced government job that involves picking up a gun. Under such a grim scenario, what is the best investment stance? First, unless you sleuthed the company yourself, be indifferent between long and shorts, and have tight stop-losses. Second, favour bonds so long as the economy is weak and inflation low. But if/when war heats up, the economy would likely pick up too, and so would inflation. Then you should be ready to sell your bonds and increase your gold position.” Pretty dismal outlook from Mandelman.

“Retiree hell isn’t as bad as you might think” according to James Stewart in the WSJ. Decimated retirement savings coupled with collapsing home values were the one-two punches which hit residents of Florida retirement communities. Stewart has a very unsympathetic perspective: from that may feel poorer but are not poor, to those in dire straits who should just suck it up and move on. An example is “They can place a bet on the market, and then pray that it rallies. Daunting as this prospect may seem, at least their odds are better than they were a year or two ago. Or they can move their remaining assets to safety, accept very low returns, and drastically reduce their spending and lifestyle. Maybe they can’t afford the Naples area any more, or even a second home. Plenty of people have worse problems.” (Now there is some well thought out and empathetic financial advice.)

WSJ’s Eleanor Laise looks at “Where the financial gurus are putting their money”. She says that the common thread among the pros is patience, substantially sticking with their asset allocations. However they seem to diverge on where they are adding to their holdings, like: TIPS and high quality corporate bonds (Arnott), junk bonds and emerging market equity (Siegel), quality high yield stocks (Siebert).

Pensions & Investments’ Barry Burr looks at research on a new index for measuring how corporations manage their DB risks. In “Executives are missing some big pension risks” he reports that executives a much too narrow view of the risk (18 risk factors are ranked in an executive survey.) Keith Ambachtsheer commenting on the result suggests that “asset liability mismatch is the primary risk of most DB plans”. (How true, look at the current pension plan mess.)

The Star’s Chris Sorensen reported that more than 500 concerned Nortel pensioners gathered in Toronto looking for information about and action to protect their pensions and benefits in “Ex-Nortel workers seek answers on pensions” . (Similar meetings in Ottawa last week attracted same sized crowds.) While pensioners wait to hear the fate of their financial futures, Bert Hill highlights some of the costs that Nortel will have to bear due to the bankruptcy proceedings in “Bankruptcy costs add up for Nortel” .

And finally, you might have heard that the Yale endowment portfolio lost 25% of its value in the last half of 2008 due to its high concentration in alternative assets, it reminds you of when you read in a prospectus that past performance is not indicative of the future. John Kay in the Financial Times’ “Financial models are no excuse for resting your brain”

“Quantitative portfolio management relies on measures of correlations between asset classes. These historical correlations are not universal constants but the products of particular economic conditions. Unless you understand the behaviour that produced them, you cannot assess their durability….Asset classifications change their meaning. The alternative asset classes that yielded strong returns in the 1990s for Harvard and Yale were hedge funds and private equity. But the increase in the number of hedge funds and the volume of their assets meant that an investment in the sector – once a bet on an individual’s idiosyncratic skills – became more similar to a general investment fund. Hedge fund returns were therefore increasingly correlated with those of other investments.” Among those were hurt by the quantitative models, some will abandon them completely, others will embrace some “new approaches”; however Kay says that they are both making a mistake, since financial models are indispensable but they must be applied with scepticism.