Hot Off the Web- January 9, 2012

Personal Finance and Investments

In WSJ’s “How to build your financial dream team”Karen Blumenthal defines her financial Trust Team as a combination good estate lawyer, accountant and financial adviser. For an adviser she suggests credentials such as CFA, CFP or CPA. In addition (unlike stockbrokers, insurance and mutual fund salespersons who are paid transaction and/or commissions) RIAs (Registered Investment Advisers), lawyers and CPAs are paid for ‘advice’ and have a fiduciary obligation to the clients. She has a good list of a number of questions to ask individuals being considered as advisers: “What services do you provide?” “How do you charge?” “Will you be acting as a fiduciary?” “How often will we talk?” “Have you been disciplined by professional or regulatory body?” “What’s your money management style?”

In the Financial Post’s “Work longer, save more money”Jonathan Chevreau provides a graph illustrating how the latest changes to CPP more than double the annual payout when CPP starts at age 70 rather than age 60. He also quotes actuary Fred Vittese that with increasing longevity and lower savings rates “staying in harness a few extra years” will delay/reduce need to draw down savings, and allow those saving to grow a few more years.

Retire Early compared Vanguard and Fidelity GLWB’s in “Comparison of Fidelity and Vanguard Guaranteed Lifetime Withdrawal Benefit (GLWB)” and not surprisingly finds Vanguard’s GLWB far superior. This blog compares the two GLWBs against a very low cost 60/40 stock/bond portfolio without guarantees at various levels of withdrawal rates in terms of years to first failure and min/max/expected terminal assets after 50 years of withdrawals. The author also questions to what degree you trust the insurance company’s ability to pay off on the guarantee given the 2008 experience when insurance companies needed a taxpayer bailout. If you do have faith in the insurance company guarantee, he opines that an inflation indexed annuity might give you more downside protection than the unindexed guarantee; and he reminds readers that the cheapest inflation indexed annuity available is delaying the start of Social Security. (If you are interested in GLWB/GMWBs you might wish to read my earlier blog on the subject Vanguard GLWB. If you are contemplating a GLWB, Vanguard’s is the best that I’ve have come across. )

In WSJ’s “Retiring in 2012? Read this today” Tom Lauricella  recommends five things to do now if you are planning to retire this year: (1) keep track of your expenses (not just to establish a baseline but also on an ongoing basis), (2)  fine tune your income expectations (are you making realistic assumptions give current circumstances), (3) decide when to start Social Security (in general, later is better), (4) build a cash reserve (two years of expenses in a separate account) and  (5) prepare emotionally (overcome “job=identity”, aim to retire-to-something rather than retire-from-something)

Bill Curry reports in the Globe and Mail’s “Ottawa will not go ahead with securities plan: Flaherty”that “Finance Minister Jim Flaherty says Canada will not move ahead with its proposed Securities Act in light of the Supreme Court of Canada’s decision to declare it unconstitutional.” (Rather unfortunate that some provinces’ perceived parochial control desire will prevent doing the sensible thing for their residents and all Canadians.)

In Barron’s “The word for 2012: Tanstaafl” Steven Sears writes that “Some covered-call sales can generate more money than the actual dividends on the underlying stocks. If the stock isn’t called away, the money received for selling the call increases your investment returns. If the stock is called away, sell a put and try to buy back the shares at a lower price. If you can’t repurchase the stock, keep selling puts to generate more conditional dividends. Again, the money received from selling these could exceed the stock’s dividend yield. If you do buy the stock because it slid below the put’s strike price, the premium will have lowered the purchase price and increased the shares’ dividend yield.” Another potentially return enhancing strategy mentioned in another Barron’s article “Buy-write is the right buy”where Steven Sears writes that “…buy fear, and sell confidence. You don’t have to be a trader to do that. When the market sinks, stay cool. Sell out-of-the-money puts against quality stocks you own, or would like to own. When the market surges higher, sell calls… (an option strategist tells clients) that “buy-write often beats buy-and-hold,” and now he is telling them that “put-write often beats buy-and-hold”… (and that) “Investors must learn to let volatility work for them, not against them”…”

In the Globe and Mail’s “How to insure smooth sailing for your snowbird flight”Catherine Scarrow reports on some advice from cross-border expert Robert Keats that Canadian snowbirds heading south should: arm themselves with evidence that they are just visitors to the US (e.g. recent phone/utility bills, tax return, provincial drivers licence, etc), become knowledgeable about US immigration rules (e.g. permissible time in the US,  US 8840), avoid border red flags (e.g. < 6 months to passport expiry, one-way ticket or cash-bought ticket just before flight, etc), arrange for medical insurance before you leave Canada (e.g. high deductible emergency travel medical insurance or 12-month international policy including non-emergency)

In the Globe and Mail’s “When to rebalance and when to avert your eyes”Larry MacDonald discusses some examples of rebalancing triggers for your portfolio: stock allocation increased from 60% to 75%, stock market dropped 20%, asset trended some percent (e.g. 25%) beyond its target allocation. Another trigger for action mentioned is a quarterly comparison of actual rate of return with required rate of return to achieve one’s goals might require remedial steps like increasing savings rates. (For retirees the last scenario might instead require a reduction in spending.)

In the Financial Post’s “A gift from risky markets” Michael Nairne writes that the recent “gloomy economic prospects and mercurial markets are actually bringing investors a gift in the form of increasingly attractive stock valuations”. Some of the examples he quotes are  Shiller’s CAPE measures of 20 for US markets and 13.7 for the MSCI EAFE index.

Gillian Livingston in the Globe and Mail’s “Where is my passport? Do we have life insurance? How to keep track of this vital information?” writes that “To help people manage and keep track of their financial information, the (CLHIA) association has created a downloadable “virtual shoebox”where you can electronically stuff all that information so it’s in one safe place. A couple should sit down and fill out all this information together so you’re both aware of what the list contains…”

Real Estate

Canada’s October Teranet-National Bank House Price Indexwas flat for second month in a row but four cities were still up during the month: Toronto (+0.8%), Winnipeg (+0.4%), Quebec City (+0.3%) and Hamilton (+0.1%). There was a 7% gain over previous year with Toronto up 10.4%.

In the Globe and Mail’s “Toronto real estate market ‘the hottest’: BMO” Sean Silcoff reports that this may turn out to be “somewhat of a booby prize, as the Canadian market, following a 13-year boom, is cooling overall- and Toronto is expected to follow suit…” December sales were up 10.1% over 2010 and average selling price was $451,436 up 4% YoY. Vancouver sales were off 12.7% YoY in December. The Toronto condo market appears more at risk as new condo starts outpaced single family new construction 1.5 to 1. But Christine Dobby in the Financial Post’s “Look for 5% to 10% drop in home prices for the first half of 2012”reports that “Canadian home prices are likely to drop 5% in the first half of 2012 as the economy slows and could slide as much as 10% if the unemployment rate rises above 8%, economists at Bank of America Merrill Lynch said… (and) warn the market is overvalued and flooded with supply.”

The U.S. October S&P Case-Shiller Home Price Indicesshowed “showed decreases of

1.1% and 1.2% for the 10- and 20-City Composites in October vs. September. Nineteen of the 20 cities covered by the indices also saw home prices decrease over the month. The 10- and 20-City Composites posted annual returns of -3.0% and -3.4% versus October 2010, respectively… “There was weakness in the monthly statistics, as 19 of the cities posted price declines in October over


In the WSJ’s “Will home prices pop after they hit bottom? (Hint: Probably not)”Nick Timiraos reports that Goldman Sachs economists predict “that home prices will fall by another 3% through the middle part of 2012 before stabilizing in 2013. Their outlook after that is sobering: It calls for a cumulative increase of just 5% over the next five years, and around 30% after 10 years. But in real terms, or after adjusting for inflation, prices will rise by about 12% over the coming decade, or about 1% average annual home-price appreciation…(but while) valuations have returned to equilibrium levels in a growing number of markets, but many parts of the country face an oversupply of homes as foreclosures continue to empty onto the market”


Bill Curry in the Globe and Mail’s “Old Age Security for boomers heads toward $100-billion” OAS payments will climb from $36.5B in 2010 to $48B in 2015and $108B by 2030, and there is some discussion about raising the eligibility age from 65 to 67. The subject is also discussed in the Financial Post’s “Ottawa ponders squeeze on retirees” which happens to also ask: “Can you imagine Harper or Flaherty trying to justify a reduced CPP or OAS while Ottawa’s public servants (not to mention MPs) continue to float along on big, fat guaranteed retirements?” Also, in the Financial Post’s “Canada’s Old Age Security showing signs of aging” there is reference to a study recommending a CPP eligibility shift from 65 to 67. (Perhaps we will get ‘pension reform’ after all, just not the kind you might have hoped for.)

In the Globe and Mail’s “Pension plans’ funding plummets” Janet McFarland reports that based on pension consultants’ models Canadian DB pension plans’ funded status plummeted in 2011 primarily due to falling interest rates. “Towers Watson said its pension index fell to 72 per cent by the end of December from 86 per cent at the beginning of the year, while Mercer said its index dropped to 60 per cent from 75 per cent at the start of the year.” This will require additional contributions by employers.

There were also another set of articles discussing the impact of the QE-induced low interest rate environment on DB pensions in the U.S. in WSJ’s “Bond buying proves poisonous for pensions” and “Funding gap doubles for corporate pensions”, and QE’s impact on European insurance companies described in the WSJ’s “Europe’s insurers struggle for life”. (Low interest rates are also killing retirees who saved all their lives to allow them a worry-free retirement and then instead of 5-6% interest rates they are stuck with 1-2% rates which are then taxed, while inflation is eroding their capital; are governments trying to ‘fix’ the economy on the backs of retirees?)

Alan Greenspan in the Financial Times’ “The Tea Party tsunami and the welfare state slowdown” writes that “only viable long-term solution appears to be a shift in federal entitlements programmes to defined contribution status. The assets of private defined benefit pension plans, confronted with the same economic forces, have already fallen from 67 per cent of private pension plans at the end of 1984 to 37 per cent at the end of September… Cutting back on benefits that are “entitled” is going to be a far harder political task than curbing federal discretionary spending. We have created a level of entitlements that will require a greater share of real resources to fulfill than the economy seems likely to be able to supply.”

Pauline Skypala’s Financial Times articles entitled “Page turners full of shock and awe” is mostly a thorough review of Ellen Schultz’s book “Retirement heist: How companies plunder and profit from the nest eggs of American workers” (previously mentioned in this blog) which “explains in detail the practices US companies have used to undermine the pension and health benefits accruing to their employees in order to boost earnings and share prices, and to help fund the growing burden of executive liabilities.”

Meanwhile Bert Hill in the Ottawa Citizen’s “Ottawa’s prospects” does a great summary of the dismal state of affairs for Nortel’s Canadian pensioners and disability recipients as compared to those in the US and UK, in what he refers to a “Nortel’s neverending story”. Here are a few of the issues mentioned: “The ever-helpful federal government, having botched pension and benefit regulation and reform, decided the lump sum life insurance payments could be taxed… The Canadian pensioners and former employees alone are owed $1.06 billion. Meanwhile, tens of thousands of Nortel pensioners in the U.S. and Britain have experienced little pain because they are protected by superior pension insurance plans and legal rulings that have postponed reductions. The big pension insurance schemes in those regions are fighting for a piece of Canadian assets. The U.S. government has a $2.1-billion claim against Canadian Nortel assets over an accounting scandal. If Nortel assets and liabilities are not settled equally around the world, as appears likely, the Canadian pain will be even worse.” (A well worth reading article describing how Nortel’s Canadian pensioners’ rights are trampled under the watchful eyes of the Canadian and Ontario governments, the Courts and others supposedly entrusted with defending pensioners’ interests; a pathetic and sad, but true story which might make Ellen Schultz’s book in the previous paragraph seem like a nice walk in the park.)

Things to Ponder

We first ponder the message in a number of articles which suggest that “Freedom 55” is turning into “Freedom 70 or 80 or keep working as long as you can and somebody is prepared to give you a job”. This certainly wasn’t the “promise” or even the “plan” for the bleeding edge of boomers, but those 50 and under still have time to minimize the effect of the new demographic reality and its consequences, not that the boomer demographics are a sudden surprise.

The Daily Finance’s “Are you doomed to be a never-retiree?”  (Thanks to MB for referring article) reports that “A recently released study from the Employee Benefit Research Institute reveals a major trend toward working longer before retirement. According to its latest figures, more than a quarter of all workers who are at least 50 years old expect to retire at age 70 or later, with 5% who expect that they’ll have to work until they’re 80. Those figures are all up significantly from 2006. But even worse, one in six Americans think that they’ll never be able to retire.” In Canada the Financial Post’s “Tories end forced retirement, decades of ‘age discrimination’” reports that mandatory retirement is history among employees of Canada’s federally regulated employers. However WSJ’s “Oldest baby boomers face job bust” points out that “Many older Americans fear they will be working well into their 60s because they didn’t save enough to retire. Millions more wish they were that lucky: Without full-time jobs, they are short of money and afraid of what lies ahead….Boomers of refusing to gracefully exit the workplace. But their long-held grip is slipping, as employers look past older Americans to younger, cheaper workers. The Labor Department counts people as unemployed only if they have looked for a job in the previous month. By that definition, 6.5% of workers aged 55 to 64 were unemployed in October, below the national average but more than twice the jobless rate for the group five years earlier. Taking into account the number of older people who want full-time work but are unemployed, working part-time or need a job but have quit looking, the percentage jumps to 17.4%…” And in another sign that the over 55 crowd is in trouble financially, in the WSJ’s “Aging and broke, more lean on family” E.S. Browning reports that “Thirty-nine percent of adults with parents 65 and older reported giving parents financial aid in the past year… Eighteen percent of unemployed Americans 55 and older said they borrowed from family or friends other than adult children, while one in 25 reported moving in with family or friends to save money… In 1900, 57% of adults 65 and older lived with relatives, according to Pew Research. Because of Social Security, Medicare and improving health and wealth, that rate declined to 17% by 1990, Pew says. Now it is up to 20%.”

Moving on to various other “Things to Ponder”, William Cohan in Bloomberg’s “Did psychopaths take over Wall Street?” reports on a new “theory of the financial crisis that would confirm what many people suspected all along: The “corporate psychopaths” at the helm of our financial institutions are to blame… psychopaths are the 1 percent of “people who, perhaps due to physical factors to do with abnormal brain connectivity and chemistry” lack a “conscience, have few emotions and display an inability to have any feelings, sympathy or empathy for other people”… such people are “extraordinarily cold, much more calculating and ruthless towards others than most people are and therefore a menace to the companies they work for and to society.””

Canadians tend to be very complacent and smug about how well Canada’s financial institutions have weathered the Great Recession, especially compared American and European ones. However, recently we’ve been hearing that insurance companies are not as healthy as previously perceived and now this blog “Canadian banks hold more risk than reward” by Dan Werner in Seeking Alpha sees dark clouds forming on the horizon for Canada’s banks which are “priced at 2-3 times tangible book value…and there is a reasonable likelihood of slower growth and higher loan losses in the near future”. While the Canadian specific circumstances favour Canadian banks, there are also some areas of concern: lower net interest margins due to flattening yield curve, slower loan growth due to already historically high consumer debt, lower investment banking revenues due to world economic problems, etc and the banks’ drive for diversification may actually increase the risk. (Thanks to HP for referring)

In the WSJ’s “SEC ups its game to identify rogue firms”Eaglesham and Eder report  on a new SEC initiative to scrutinize hedge funds based on their reported performance when “Their performance seems too good to be true, with some trouncing the overall market and others churning out modest results without ever suffering a down month. Some funds on the list stumble but still always outperform rival hedge funds.” This is after failing to detect Madoff’s long running Ponzi scheme. (Is there increased regulatory vigilance in Canada?)

The Financial Times’ “Commodities: Choose your weapons” overviews the three approaches for passive investors to partake in commodities: the S&P GSCI “production weighted” index, the Dow Jones UBS index which uses “both liquidity and production weightings” with some caps and the less well known “equally weighted” Continuous Commodity index, which according to the article might have the most investment merit for 2012.

In the Financial Times’ “Flash crash threatens to return with a vengeance” Gillian Tett writes that the “bizarre event might have faded from memory but remains a threat”. She argues that there has been no clear explanation of what happened or what caused it. She refers to a new report which concludes that the unpredictable interactions of IT systems will make future flash crash events unavoidable. “The risks and near misses are rising all the time” and if the flash crash would occur late in the trading day and had market closed before it had a chance to recover, then the contagion would then have spread to Asian and European markets.

In the Financial Times’ “The ugly side of ultra-cheap money” Bill Gross argues that ultra-cheap money (as yield approach zero, like now) instead of creating expansion might in fact result in economic contraction. He gives as example the money-market business which has become unprofitable at these low rates; individuals might also question why take any risk with their money, given that they earn zero interest so the just keep the money in a mattress, the effect is less availability of credit. His conclusion is that central banks need to consider whether continued ultra-cheap money might in fact be “destroying liquidity, de-levering and obstructing recovery. (Interesting perspective and probably right; in addition accumulated saving of current and growing numbers retirees earn close to nothing on their saving. This approach is not only a futile attempt to try to drive economic activity with lower yields effectively on the backs of retirees/savers, but their resulting dramatically lower incomes reduce what would otherwise be their contribution to economic activity.  Time for a re-think? In some cases the medicine might actually be worse than the disease!?!)

And finally, in The Financial Post’s “How one man got away with mass fraud by saying ‘trust me, it’s science’” Joseph Brean reports on “a prominent Dutch social psychologist, was faking his results on dozens of experiments” and asks “how he got away with such blatant number-fudging, especially in a discipline that claims to be chock full of intellectual safe-guards, from peer review to replication by competitive colleagues. How can proper science go so wrong?” In psychology in particular, “Critics point to the prevalence of data dredging, in which computers look for any effect in a massive pool of data, rather than testing a specific hypothesis. But another important factor is the role of the media in hyping counter-intuitive studies, coupled with the academic imperative of “publish or perish,” and the natural human bias toward positive findings — to show an effect rather than confirm its absence.” Furthermore, quoting a New Yorker article in which Jonah Lehrer writes that the problem with the scientific method is that “Just because an idea is true doesn’t mean it can be proved. And just because an idea can be proved doesn’t mean it’s true. When the experiments are done, we still have to choose what to believe.” (I suspect the same comments on “data dredging” “positive findings” (e.g.  interpreting correlation to mean causality) would be applicable to a lot of financial world findings/forecasts/analysis; so handle with care.)


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