Hot Off the Web– January 5, 2010

Personal Finance and Investments

Jeff Opdyke in the WSJ’s “Covered calls prove popular strategy” discusses covered call strategy, which may be advantageous in flat markets, whereby “An investor buys a stock, but also sells a call. The call obligates the investor to sell shares to the buyer of the call option at a set price on or before a set date. For this service, the investor typically receives a few dollars a share, immediately pocketing that gain. If the stock rises, the investor potentially shares in part of that upside as well.” Of course you still have the downside of holding the stock and you may not participate fully if the market had a strong year.

In the NYT’s “Resolved: Pascal and the long-term bond dilemma” William Bernstein reminds readers of Pascal’s Wager. The “17th-century French mathematician and philosopher, chose to believe in God because of what we would today call “asymmetric consequences:” the mistaken atheist is in far worse shape than the mistaken believer.” The lesson for the bond market right now, he says, is that “If you fear inflation and consequently keep your bond maturities short, and then turn out to be wrong, you’ve only lost a few percent of yield. But if you make the opposite bet — ignore the inflationary possibility and reach for yield on long-term maturities — and inflation does flare up, you may well be subsisting on Alpo and Little Friskies in retirement.”

For American investors only, Paul Sullivan in the NYT’s “Thinking hard about retirement and death” looks at the “Roth conversion” opportunity that will, at least partly, be based on a tough call on one’s post-retirement vs. current tax rates. For those with heavy portfolio losses and wealthy investors who don’t anticipate lower post-retirement tax rates, it may still make sense and as well as for those who plan to leave the Roth to their estate (no minimum distribution requirements). The estate tax moves to zero in 2010 (only, unless the law is changed as expected) but it brings some complications with it “for moderately wealthy people. When a person dies now, the value of his or her assets gets a “step-up in basis,” which means for tax purposes the assets are valued on the day of death. Without an estate tax, this provision disappears, and the appreciated value is subject to capital gains tax.”


Karen Mazurkewich in the Financial Post’s “OMERS calls for pension changes in Ontario” reports that OMERS’ chief Nobrega says that “OMERS and Ontario Teachers’ Pension Plan, the two largest pension plans in the province, are available only to their constituents. But with a little legislative imagination, these plans could be open to anyone who wants to join, and ease the pension woes of people who are not covered by a plan”. (Now that’s a refreshing idea; allow any Canadian to join one of the government run pension plans for public servants.)

David Friend’ s Canadian Press article “Corporate restructuring and bankruptcies are expected to affect pensioners in 2010” points out that Nortel pensioners are not alone; “pension plans at Canwest, AbitibiBowater and Fraser Papers are still engulfed in disputes with company unions and former employees” and Air Canada was on the edge of bankruptcy protection before the Federal government allowed them a “moratorium on past service contributions”. Pensioners are being forced to take lower priority in bankruptcy distributions, even though the earned pensions are deferred wages or their own contributions. (Thanks to Diane Urquhart for bringing this article to my attention.)

Forbes’ Stephane Fitch in “Wal-Mart 401(k) pays retail” points out that while Wal-Mart does a great job getting low prices from its suppliers, it didn’t do such a great job with its employees 401(k) plans in terms of cost of funds and selection. An employee lawsuit claims that company was motivated by “revenue sharing deals between Merrill and eight outside firms with funds on the plan’s menu”, has breached its fiduciary duty toward employees.(Thanks to Ken Kivenko for pointing out this interesting article.) (By the way limited selection, assuming it is the right selection, may not be all bad, however not offering institutionally priced index funds to allow the building of a low cost passive portfolio should be considered a breach of fiduciary duty; no doubt many Canadian companies’ RRSP offerings are not what would be considered “optimal” for the plan members. When you are a victim of such a situation, just set up parallel RRSP and taxable investment accounts at a discount broker and periodically move assets across; just make sure that you do it RRSP-to-RRSP to have no tax consequences and you do it so that you don’t lose any employer matching contributions.)

Real Estate

The October Teranet-National Bank Canadian House price Indexshows prices up in all six tracked cities included in the index with 1.3% overall month-on-month and 0.6% year-on-year increase. Toronto and Vancouver showed highest m/m increase at 1.6% and 1.8%. Only Calgary and Vancouver still showed y/y decrease, at 3.6% and 2.2% respectively. The very positive news in the Canadian real estate market continues to surprise on the upside, as compared to the U.S. situation, described in the next story.

The October U.S. “S&P Case Shiller Home Price Index”is summarized by David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s, as “The turn-around in home prices seen in the spring and summer has faded with only seven of the 20 cities seeing month-to-month gains, although all 20 continue to show improvements on a year-over-year basis. All in all, this report should be described as flat.”

On U.S. sales volumes, existing home sales were up 7.4% in November (“Home sales, prices brighten”) but new home sales were off 11.3% in the month (“New home sales drop 11.3%”)

As to the Florida real estate story, it sounds great in the title of Kim Miller’s Palm Beach Post’ “Home sales up 63% in Palm Beach County, 78% in Treasure Coast”, but she suggests that one might consider holding off celebrations given that the 2008 November base line was extremely low due to distractions of “a historic presidential election and the beginning of a historic economic recession”. Also “The 733 Palm Beach County single-family homes sold in November are actually down from October sales and more than 100 fewer than June and July. The median sales price in Palm Beach County fell about 6 percent from October’s $243,900 to $227,500 in November.” Prices are expected to continue to fall due to invisible foreclosure backlog (‘ghost inventory’) and high unemployment. On Florida’s west coast the story is not better reports Peter Goodman, in the NYT’s “Real estate in Cape Coral, FL is far from a recovery”, as he rides around in a “bus is emblazoned with red letters spelling the name of this thrill ride:” Goodman comes back again to the area after a similar trip two years ago and “The Mess is found in the glut of vacant commercial spaces; in the local unemployment rate, now pushing 14 percent; and in the discarded furniture at curb-side and the overgrown front lawns left by some of those relinquishing their homes to foreclosure.”
In an attempt to slow down rate of foreclosures Kim Miller reports “Florida Supreme Court orders mediators to be the first step in foreclosure cases” . This “guarantees (that) homeowners will have an audience with their lender to discuss whether a loan modification or short sale is an option instead of foreclosure.” “Right now, we have a court system that is going to break with the volume of foreclosures…We’re at a meltdown point and have to find new ways to manage the situation. In Palm Beach County,…more than 27,550 foreclosures were filed between January and November this year — nine times the amount filed in all of 2004. For the 2009 calendar year, 52,000 foreclosure cases were filed in the Broward County court system, up from roughly 45,000 in 2008.”

For those of you who are reading this “up north” and are jealous of those of us wintering in  Florida, the forecast for tonight’s low is 32F (that 0C for Canadians).

Things to Ponder

In the Financial Times’ “Buckets of risk and successful diversification” Jaeger and Taraporevala attack the know-it-all talking-heads who claim that diversification has failed us, since “genuine diversification, which includes both “risk assets” and “safety assets,” worked. What failed was ersatz diversification, which diversifies among risky assets but ignores safety assets. In a crisis, the correlation between risk assets and safety assets goes to -1 as investors flee risk to buy safety….Investors therefore need three major “risk buckets”: equities and related “growth-oriented assets,” inflation hedges (“inflation-linked bonds, commodity futures, and the stocks of commodity-based companies”, though not always good hedges), and deflation hedges (US Treasury bonds). In addition, investors need a fourth “safety bucket” to serve as a cushion during the inevitable panics.” The other task is to “determine the relative size of each bucket” and the authors believe that there is “less herding behavior” on this decision and “less herding, and more reliance on individual judgment, that would be a splendid outcome.
In WSJ’s “Adjusted for inflation Dow’s gains are puny” Browning looks at the miserable performance of the DJIA over the last decade and says that things are even worse than that if you adjust for effect of inflation. He also looks at the DJIA in terms of gold and Euro. But “Stocks’ ability to keep up with inflation over the very long haul may be their best selling point. In real-real terms, stocks did better (4.5%) over that period (1978-2008) than municipal bonds (2.5% a year), long-term government bonds (2% a year) and corporate bonds (0.2% a year). Real-real home prices were unchanged over those 30 years. Both short-term government bonds and commodities suffered losses.”

Jeff Rubin in Globe and Mail’s “Just how big a mortgage can you carry?”  writes that “A financial bubble is built on an unsustainable premise. Tomorrow’s bubble in the Canadian housing market is constructed on the premise that today’s record low mortgage rates will remain in place. And that, in turn, is based on the idea that inflation will continue to dissipate in the face of a slack economy. Neither premise should be in your financial plan. “Similar concerns about inflation and interest rates are expressed in “Bond vigilantes could send rates higher” and “A savvy bond man bets on rising inflation”. (While I tend to agree, there must be some who are betting on a Japanese style decade or two of deflationary pressures due to excess capacity and aging population, despite massive government deficit spending.)

In the Financial Post’s “I say good riddance to a bad decade”, William Hanley takes stock of the events of the last decade and concludes “that self-interest is paramount when it comes to Wall Street and business generally. The events of the past 10 years have taught you that you are at the very bottom of the investing food chain. Despite all the high-blown talk of responsibility, obligation and ethical conduct, the Street is going to take care of itself first, and it always will despite all the talk of tougher regulation.

And finally, a real “cheery” Economist article “Global tinderbox”  suggests that we rising poverty rates coupled with “exaggerated income inequalities, poor governance, lack of social provision and ethnic tensions” may lead to social unrest, despite the fact that we avoided it last year in the “worst recession since the 1930s”.


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