Hot Off the Web– November 4, 2009

Personal Finance and Investments

Consider yourself warned “Bond ETFs risky with rates so low”. The Financial Post’s Chevreau warns that you should keep your duration low or else be prepared for capital losses if rates rise quickly.

Rob Carrick in his weekly Personal Finance Reader email mentions “Tacita Capital’s “The Retirement Lottery” where the same strategy (from a $1M of 60:40 stock:bond portfolio, $48,000 withdrawal annually adjusted for inflation) used over a ten year period, but 20 years apart (starting in Jan 2000 instead of 1980) ended up with dramatically different outcomes. It’s a great story about luck/timing, but the key sentence is the final one, which states that “Winning tickets will only be available to those who can keep their expenditure levels in line with this reality.”

Tim Cestnick in his weekly Globe and Mail column talks about how “Share with your spouse and erase a cash drain”. If you don’t have gains against which to use capital losses, Cestnick describes an approach which allows you to transfer current year unrealized capital losses to your spouse’s use against current or past years’ gains. First sell shares which have unrealized loss and have spouse buy the same within 30 days. This will disallow the loss to you and resets her adjusted cost base to your adjusted cost base. She can now sell the shares (outside of the window of 30 days before and after your sale) and claim the loss against current or past years’ gains. (It’s an interesting approach, but you may want to read the whole article and consult with your tax advisor before proceeding to implementation.)

The Financial Post’s Jonathan Chevreau in “Manager sued over fees”describes the suit brought against a money manager and an advisor since despite of their  fiduciary duties ,because “the plaintiffs paid a fee for investment advice, account-management services and trade and tax-reporting services — the so-called 1% radius fee”, they have not only not agreed to this fees but the manager/adviser also received  undisclosed trailer and other fees, and also didn’t disclose relationship with source of and  risk associated with investment products.

In another Chevreau piece “Beware of the tail of the black swan” he refers to Moshe Milevsky advocating “product allocation” among three types of products: mutual funds/ETFs, annuities and insurance company products which have minimum income guarantees (e.g. GMWBs). (I am afraid that I am still not convinced about GMWBs- see my GMWB II blog on the subject. Interestingly, Jonathan Clements in his recent book Main Street Money- 21 Simple truths that Help Real People Make Real Moneymentions that you should run the other way when you hear “downside protection with upside potential” as it usually ends up to be the worst of all worlds, low return and high cost. You’ve been warned, again.)

Tom Lauricella in WSJ’s “Bears and bulls: Investing lessons of a wild year”  list the following lessons over the past year: (1) include tactical asset allocation into your arsenal, (2) don’t neglect stocks for the long runs (e.g. small company funds in emerging China), (3) Pay attention to Fed (year’s market run up result of Fed forcing people out of cash), (4) “buy fire insurance” (e.g. Treasuries, gold , new iPath S&P500 VIX Short Term Futures)

Also Tom Lauricella in the WSJ article “Gold mutual funds vs. gold ETFs: It depends on the goal” explains that since investing in gold (mining) stocks is really a leveraged investment in gold “gold stocks have, over time, tended to move twice as much—up or down—as the price of gold”. “So, if the idea is to have a slice of the portfolio that acts as a kind of insurance policy designed to hold up better than other investments when Armageddon seems imminent, the ideal investment is one that smoothes out overall returns and doesn’t make things worse. In that case, the better option may be gold ETFs such as the SPDR or iShares Comex Gold Trust. If the investment premise is that gold is in the midst of an extended bull market, perhaps because of rising inflation or monetary and fiscal policies that lead to a weaker dollar, then gold stocks may be the better choice.” (See more gold related stories in Things to Ponder below.)

Real Estate

The just released August Teranet-National Bank House Price Indexindicates that the Canadian real estate market is again firing on all cylinders. The August National Composite is up 2% over July. All six cities in the composite were up with Toronto leading at 2.7%, followed by Calgary and Vancouver at 2.0% and 1.7% respectively. The Composite is still down 3.4% from last August peak, but it was the fourth straight month of increase.

The Globe and Mail’s Perkins, Carmichael and Ebner might have an explanation to the rising Canadian real estate prices in “Easy credit, soaring prices raise new housing fears”. Mortgage interest rates mentioned in the article 1.5% (likely variable).  “Household debt rose 3.4 per cent in the first half of the year, as personal disposable income fell 0.2 per cent, according to Mr. Tal. The debt-to-income ratio has risen to 140 per cent from 131 per cent in the past year….Much of the new borrowing is mortgages, which have grown even as Canada’s broader economy was contracting…Novice buyers are jumping into surging real estate markets in Vancouver, Calgary and Toronto with little understanding that the value of the asset they covet can disintegrate.” If (when) interest rates will rise, given only 5-10% down payments and 35 year amortization periods, even those with (5 year) fixed mortgages will feel significant pain.

The Globe and Mail’s Roma Luciw answers the question “Is a condo a good investment?” in the negative, especially for retirees. “For retirees on a fixed income, the numbers often don’t add up for condo life, Mr. Rosentreter says. While the idea of moving into a smaller space where you don’t have to shovel the driveway or clean the eaves troughs is appealing, retirees should think twice about committing their limited (and often fixed) pension dollars to a rising array of maintenance and other costs that are needed to operate a multimillion-dollar building.”

Florida property tax mil rates are out and mostly up. While mil rates will vary depending on the county and city that you own property, here are some ball park figures:  Palm Beach County 2.46%, Broward 2.15%, Dade 2.2%, Collier county an amazing 1.1%. It always amazes me to see this unbelievable difference between the east and west costs of Florida (and I always wonder if I am missing something? So if you have info suggesting that the Collier County numbers are incorrect, please let me know.)

“Lessons learned in Singapore” With Asian property prices on the rebound, new fears emerged about new property bubbles. There is threat that the “flood of money in the global financial system is now potentially creating new mini-bubbles in certain asset classes.” “To make matters worse, there is a growing trend among Asian investment groups to hedge themselves against the chance of future dollar falls by investing in “hard”, non-dollar assets instead.” (e.g. commodities and real estate.) “Exclusive reliance on interest rate levers if, or when, the recovery takes hold” may not be the only solution when unemployment happens to accompany “spiraling asset prices”; credit controls are emerging as alternative levers (e.g. banning interest-only loans, stricter loan-to-value criteria, and minimum down payment rules on luxury homes.)

The Globe and Mail’s Steve Ladurantaye reports in “Real estate industry weighs outsider listings access”that “After a two-year investigation from the Competition Bureau of Canada, CREA is planning a major overhaul of its listing system in order to satisfy the Bureau’s concerns that the real estate association is discouraging competition. CREA is under pressure to give more access to MLS to small real estate services and individuals looking to sell their properties. The move would give consumers more choices on how to buy and sell homes and lower costs as discount realtors emerge and cut traditional agents out of the process.” (Time will tell.)


In the Financial Post, Jonathan Chevreau discusses “Why insurance industry sees no need to reinvent pension wheel” (surprise!). Hopefully the government won’t heed the advice of self-interested insurance companies, though I sometimes wonder. When will Canadians declare: I am mad as hell, and I am not going to take this anymore? The combination of the systemic failure of the private sector pension system, mutual fund fees of 2-3%/per year, followed by GMWBs with 3-4%/year total cost, will guarantee that Canadians will live in poverty or work until they get carried out feet first; something is broken here. The government(s) must not miss opportunity to reform the entire financial services industry by means of pension reform or a new retirement income system, now. Decades of neglect of reform accompanied by insiders’ attitude (mentioned in the article) that “problems that people are complaining about are not solvable problems” got us in the hole that we are in. Continuing on the path we are on is not an option.  When you are in a hole, stop digging.  And remember the definition of insanity is “doing the same thing over and over again and expecting different results.”  Perhaps we need to reconsider the de-mutualisation of insurance companies, so that they can better focus on the needs of their policy holders. Some of the products now being peddled might then disappear.

Things to Ponder

Sara Hansard reports in InvestmentNews that “SEC to begin scrutinizing risks related to retirement products”. Specifically, here are some quotes from SEC Chairman Mary Shapiro”  “Issues related to disclosure, product development and marketing for retirement products will be areas of focus in the coming year at the SEC”, ““Barraging investors with retirement products that feature the latest financial gimmick or marketable fad will ultimately be a disservice to investors, their financial intermediaries and the economy overall,” and “A high fiduciary standard should apply regardless of whether the professional carries the label broker-dealer or investment adviser,” she said. The standard of conduct must not be a watered-down.” (These are fighting words; let’s hope she can deliver. Perhaps this would motivate the Canadian/Provincial governments to drive similar long overdue changes.)

Edward Chancellor reports in the Financial Times that “Japan sovereign debt crisis looms”. “Japan’s national debt is fast approaching 200 per cent of GDP. The debt mountain is the result of prolonged economic weakness and successive fiscal deficits since the bubble economy collapsed in 1990. These problems are compounded by the fact that Japan’s population is now shrinking. The economy’s trend growth rate has fallen and tax receipts are shrinking, while welfare payments for pensioners are rising. Japan’s debt trap, it seems, is structural rather than cyclical. “

The hot story this week is the Financial Times’ “India gold purchase adds to dollar concerns”Lamont and O’Connor report that that it bought 200 tons of gold ($6.7B) from the IMF (“the sale to India was the first by the IMF to a central bank in nearly a decade”). This brings gold to 6.2% of India’s foreign exchange reserves (was 20% in mid-90s) and China is at 2%. (By the way one of my readers, MF, just returned from the Barron’s conference and numerous speakers recommended gold as an opportunity. Who knows, as part of my periodical rebalancing exercise, I recently scaled back my catastrophe insurance gold allocation from about 6% to under 4% of my portfolio; perhaps I was premature. Time will tell.)

Peter Tasker writes in Financial Times’ “China is heading for a Japan-style bubble” that “If China continues to follow the Japanese template, the end of the dollar peg will be the trigger event, setting off a Godzilla-sized credit binge. Why would China’s rulers embark on such a disastrous course? Because the alternative – unleashing deflationary forces stored up over years of mercantilist policies – would be too painful to contemplate.”

You might find interesting the Financial Times’ special section on “Stock Indexing”. Here are three articles to whet your appetite. “Stock lending discovers its spiritual home” “The practice, which involves lending stock to those keen to own it on a temporary basis…Securities lending also entails a degree of counterparty risk; if those to whom you have lent go under, will the collateral you are holding protect you against financial loss?” (Some security lenders claim that they get >100% collateral) Profit from lending belongs to whom? Is investor assuming the risk and fund sponsor/manager getting the benefit? Is the risk understood by investors? (e.g. Barclays’ lending is done by parent but benefits are shared with fund; but how? Some other funds mentioned have outperformed the index due to earnings from security lending (i.e. cost of operating were exceeded by income from securities lending.) Other interesting articles in the special report are “Putting a cap on it is not infallible” and “Commodity indices: ‘rollover’ practice hits investors” Commodities are perceived as attractive since they have similar risk premiums to equities but are negatively correlated. The problem is implementation with futures, whereby nearby future is bought and rolled over at maturity; “return is positive when futures prices are lower than the prevailing front-month price – a backwardated market – and negative when futures prices are higher – or in contango.” “Since January 2005, the S&P GSCI spot index – measuring just the appreciation of the commodities – has risen a massive 60 per cent on the back of China’s voracious appetite for raw materials. But when taking into account the roll yield, the total return is a loss of about 15 per cent during the period due to the contango”

The Financial Times’ Pauline Skypala in “Start understanding the product problem”discusses the problem of “promoting complex products to people (advisors/distributors) who fail to understand them, or do not care how they work but like the commission involved, is definitely one.” The originators such as banks (and insurance companies) often misrepresent products to distributors who themselves don’t understand them or have little or no incentive to understand them because of the fat commissions that come with the products.

An interesting story by Michael Lewis in Vanity Fair about how AIG-FP Cassano’s personal flaws might have triggered the entire crash, entitled “The man who crashed the world” . One of the closing observations hit home with the pension crisis as well: “The people still left inside A.I.G. F.P. like to list just how many things had to go wrong for their business to implode. Any one of a number of things might have sufficed to avert their catastrophe: our political leaders might have decided against the Wall Street argument not to regulate credit-default swaps; the ratings agencies might have resisted the Wall Street argument to rate subprime bonds AAA; Wall Street banks, in 2006 and 2007, might have declined to replace A.I.G. F.P. in the role of subprime risk-taker of last resort; and on and on. Their list is mostly a catalogue of large, impersonal forces. But impersonal forces require people to conspire with them.” Especially the last sentence; so many could have stopped it but no one did. They all just went along for the ride, because it was good for them personally. Just like with pensions Systemic Failure in Canada’s Private Pensions: Who could have prevented it? What could be done now? )

And finally, in an interview (that you might find interesting Part 1 (11 minutes) and Part 2 (3 minutes)) with Robert Shiller and Martin Wolf, Fareed Zakaria quotes Herbert Simon who explains that “the reason why economics is not a science is because the subjects of  our studies think, unlike particles.”


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