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.”

Pensions

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%”)

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