S&P/Case-Shiller housing index October numbers are out and the devastation continues Phoenix, Miami, Las Vegas are down 30-35% from last year and 3-4% from last month; the multicity composite indices are also down about 18% from last year and 2% from last month. Prices are now back to first half 2004 levels. New York, Seattle and Charlotte are still holding up much better (so far).
In Financial Times’ “Kudos for the contrarian” John Kay writes that “The American political scientist, Philip Tetlock, has studied the prognostications of pundits over several decades. He finds that the better known the forecaster, the less accurate the forecast. Business people, politicians and journalists value clarity and certainty of view more highly than acknowledgement of the uncertainty of a complex world. But it is mostly people who appreciate that complexity who have worthwhile things to say about the future.”
Cohen and Hughes in the Financial Times’ “Auditors urge rethink on pension calculations” report that UK auditors suggest that companies reconsider use of high grade corporate bond rates for discount rate to calculate present value of pension liabilities in going concern valuations (for accounting purposes in financial statements). However in current market conditions increases in these rates have become abnormally high relative to government issue bond rates, resulting in pension plan surpluses despite major losses in the equity portion of the portfolios (no doubt, some may argue that government bond rates may also be somewhat lower than they should be). Auditors don’t feel that these are representative of true state of the pension plans and thus investors won’t be able to compare true financial state of companies’ from their annual reports.
In “A legacy of values” Globe and Mail’s Tim Cestnick writes that each of us leaves two legacies; (1) legacy of money (“minimize taxes and maximize the value” of the estate by wills, and for wealthy individuals- estate freezes, U.S. equities held in Canadian corporations, and testamentary trusts) and the more valuable (2) legacy of values (“ethical will” which he suggests you search the internet for many good resources- “what is most important to you, life lessons you’ve learned and your hopes and dreams for those you love”- e.g. integrity, truthfulness, hard work, etc)
The Financial Post’s Jamie Golombek lists his “Top 10 tax tips for 2009” . Among the tips are: start TFSA, max out RRSPs, spousal RRSP, tax-efficient investment income (Canadian dividends and capital gains), start RESPs for kids, and investigate pension splitting.
WSJ’s Karen Blumenthal in “Assessing risk: The questions to ask yourself” suggests some additional questions to consider in establishing your 2009 risk tolerance (which you recall is a combination of willingness and ability to take risk). Willingness to take risk “depends on our moods and our experiences (the most recent once tend to have the greatest influence), as well as our investment goals: you may be willing to gamble more with education funds than with retirement. Or, after a terrible, horrible, awful year for stocks, you may not feel like taking any risk at all.” You may need to consider not just your 2008 experience, but balance that against how you felt in 1999. You must also ask “How much risk do you need to take to reach your goals?” Can you still reach them? If you reached your goal, given the flexibility that your current income gives you, could you continue to take higher risk (more stock content in your portfolio)? Are your goals immediate (pay for college next year or insure that you can pay for your next 2-5 years of expenses) or more distant (you may have not yet entered retirement or have recently started it and you still have 20-30 years of it left)? For more distant goals you have much more recovery time.
Samuel Brittan in his interesting Financial Times’ commentary “The problem with all this economic doom and gloom”reminds the reader of the differences between accumulating “public and private debt” in fighting depression, about the value of “creative destruction” but only up to a point, and that “We are in a kind of parallel universe familiar to cosmologists, when the normal rules are turned upside down and the traditional prudential warnings no longer apply.” He closes with “There will be a time to return to the copybook virtues. But it is not yet. As the writer of Ecclesiastes put it: “To everything there is a season and a time to every purpose under the heavens.” “.
Ezra Levant’s piece in the National Post entitled “Not quite the 1930s”injects a little optimism counterbalancing the growing media frenzy of the coming depression. (As the saying goes: “forecasting is difficult, especially about the future”, but I suspect that he may be on the right track.)
And finally, an essay that some of you may find interesting in the WSJ, by psychologist Stephen Greenspan, on “Why we keep falling for financial scams”. After reviewing a long list of financial scams in the past 200 years he identifies four factors that drive such gullible behaviour: situation, cognition, personality and emotion; these factors “come together to cause one to put one’s critical faculties on the shelf.” “Skepticism is generally discussed as protection against beliefs (UFOs) or practices (feng shui) that are irrational but not necessarily harmful. Occasionally, one runs across a situation where skepticism can help you to avoid a disaster as major as losing one’s life (being sucked into a crime) or one’s life savings (being suckered into a risky investment). Survival in the world requires one to be able to recognize, analyze, and escape from those highly dangerous situations.”