Hot Off the Web– November 11, 2009

Personal Finance and Investments

Jason Zweig in WSJ’s “Are ETFs causing an emerging markets bubble?” warns readers about concentration of some emerging market ETFs. “As money pours into the ETFs, they must mechanically match their holdings to those in the emerging-market indexes. That forced buying drives up stock prices, attracting still more new money into the ETFs, spiralling stock prices even higher.” Many of the emerging market indexes are heavily concentrated (Brazil, Korea) but there are US legal requirements which drive funds to selling concentrated holdings “ETFs can’t allow their assets to become over-concentrated in a handful of holdings. In general, they can’t keep more than 25% of their money in a single stock, and at least half of their assets must be in securities that each account for no more than 5% of total holdings.” “ETFs probably haven’t caused a bubble, and they might even help a bit to prevent one from forming. But many will remain superconcentrated bets on very risky markets. If you invest in an ETF with most of its assets in a few stocks and think you have made a diversified bet, the real bubble is the one between your own ears.”

David Weidner in WSJ’s “Channelling your inner Warren Buffett”critiques some of Mr Buffett’s recent calls and discusses the advantages that he has over the average investor. So if you believe that Warren Buffett can continue to add value at his historical rate then the best way to participate is not to try to imitate him, but just buy into his fund BRK-A and BRK-B

In Globe and Mail’s “Keep tax savings in the family”Tim Cestnick suggests Canadian tax saving opportunities such as: home reno tax credit (up to $1,350), 1% prescribed rate of interest on lending to spouse/child locked-in for duration of loan, moving securities which (hopefully only temporarily) dropped in value out of RRIF as part of required withdrawal so that future appreciation will be taxed at lower rates.

In WSJ’s “Beware of ‘Debt Relief’ offers”Andrea Coombs warns readers who are considering taking advantage of tempting advertisements to help you settle their debts at 50% of their value, that this is neither a cakewalk nor does it work out satisfactorily for all. You still get harassed by creditors, some debt-settlement companies take their fees up front that they won’t return even if they fail to deliver the promised debt reductions, and “Unless you can prove to the Internal Revenue Service that you were insolvent at the time of the settlement, you may owe income tax on any forgiven debt.” She suggests alternatives like: explore bankruptcy, try to settle with creditors yourself; and “Debt settlement should not be about trying to wiggle out of your debts. It’s really about coming to an agreement with your creditors to pay what you can afford and getting them to understand that you can’t pay any more than that.”

Jonathan Chevreau’s “Protecting yourself from scams: 20 questions to ask your financial advisor” in the Financial Post is not a bad list. You should at least seriously consider 1-6, 8 and 16-20. The list includes advisor compensation, financial plan, custodian, wills, risk, etc


Jody White at BenefitsCanada website reports that “CIA offers 10-point plan for pensions”. It is encouraging to see that Canadian Institute of Actuaries’ head thinks that it’s time for major reform of DB pension plans. The proposals are somewhat vague though directional in nature. Points 9 and 10, of his 10 point recommendations are “Legislation is needed to better protect underfunded pension benefits in event of a bankruptcy” and “Better legislation is needed to handle the determination of benefits in an unfunded plan is wound up due to bankruptcy”. (Good to hear that even actuaries think that everything is broken.)

Is it legal to steal from pensioners while the government and courts are standing by paralyzed or not caring? So it seems. From a Citi financial analysts’ report on Nortel’s Optical Network division potential sale to Ciena, consider the following observation: “We like this deal on multiple fronts: it is an asset-carve out rather than a more typical acquisition, allowing Ciena to absorb the business but not the legacy processes, systems, and pension obligations” (Sounds like the company went into bankruptcy to rid itself of pension obligations, so creditors (e.g. bondholders) and buyers of the company can walk away with a great deal at the expense of pensioners. (Only in Canada…Pity…for Canadian pensioners.)

In November 11, 2009 issue of Macleans is Chris Sorensen’s “Without a plan: Our pension system is a mess and fixing it won’t be easy”, in which he discusses Canada’s collapsing private sector pension system and the so far ineffectiveness of both levels of government in tackling the problem. Mentioned are Air Canada at risk, CanWest and Abitibi under bankruptcy protection and Nortel in liquidation; all with pension plans at various levels of underfunding. No doubt that there are many more companies with pension plans on the brink. Sorensen quotes Ted Menzies, “Mr. Flaherty’s point man on pensions”, that the answer is to improve existing system since recently a Mercer report suggested that Canada’s pension system is fourth best in the world! The pension system in which over 60% in the private sector have no company pensions of any king, and those who have DB plans they are mostly underfunded and those who have Dc plans have insufficient assets for their retirement needs, doesn’t sound like fixable. There are good proposals on the table that can be used as a starting point to provide retirement income system for all Canadians in the private sector. But time is running out as the wave of baby boomers is about to enter retirement. (What wrong with the Mercer study? See my comments on the Mercer report in the Pensions section of my October 21, 2009 Hot Off the Web   blog.)

Things to Ponder

In Financial Post’s “Eric Sprott and David Franklin: U.S. risks default”they argue that “.The United States Government is on a trajectory to default on its obligations.” Well perhaps not default, since the US can print its way out of default, but at least serious inflation/devaluation. Their argument based on deficit/liability forecasts and who is buying Treasuries today; specifically that 50% of the Treasuries are bought by the Fed!

But Martin Wolf in the Financial Times’ “Private behaviour will shape our path to fiscal stability” suggests that “the deterioration in the fiscal position is a result of the cutback in the private sector’s spending, not a cause of it. Not surprisingly, the fiscal deterioration is also biggest where the private sector has cut back most: in the post-bubble economies. Of course, governments could have tried to tighten fiscal positions in the teeth of the crisis. All that would have done is turn the recession into a depression.” “The fundamental point, however, is that it is idiotic to discuss the reduction of the huge fiscal deficits, without considering the nature of the offsetting adjustments in the private and external sectors. Some adjustments would be desirable, but others would be extremely perilous.”

The Globe and Mail’s Simon Avery in “Jim Rogers v. Nouriel Roubini“discusses Nouriel Roubini’s view that we have a threat of an asset bubble (emerging markets, gold, etc) that could lead to a spectacular bust”, whereas Jim Rogers’ perspective we have anything but a bubble and commodities/gold are still heading higher. (There you have it, very clear advice as to what you should or should not invest in.)

Terence Corcoran’s Financial Post article ‘The coming assault on investor freedom” (this could have gone into the pensions section of this blog) rails against recently proposed government run compulsory pension systems as the solution of Canada’s pension crisis because this would be an “assault in investor freedom, aimed at controlling and limiting their role as protectors of their own assets”. Keith Ambachtsheer’s proposal (presumably the CSPP) is particularly disliked by Mr. Corcoran because it requires auto-enrolment (as far as I recall, the proposal actually proposes default enrolment with optional opt-out, rather than the diametrically opposite current default which is that you don’t participate in the plan unless you explicitly enrol). Terence Corcoran is at his persuasive best, but I would have to disagree with him on this one. The current Canadian retirement income system is a failure for most except the poorest of Canadians.

And finally, in the NYT’s “Money issues can test even a rock-solid marriage”Ron Lieber discusses financial situations that can seriously strain marriages. Examples include: providing support to aging relative (while trying to pay for college for your kids), changes in financial circumstances for the worse, blaming each other for bad investments. One of the solutions mentioned is to be “diligent early on and live below your means, to plan around many of these issues.” (Good advice; but difficult to execute.)


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