Hot Off the Web– January 12, 2010

Personal Finance and Investments

John Spence in WSJ’s “Wisdom Tree launches currency hedged ETF” reports on the arrival currency hedged international ETF in the U.S. market, hedging against the rise of the U.S. dollar (of course investors also miss out on the benefits should U.S. dollar fall.) The article also mentions “Some ETF investors appear to be positioning hedging against a continually rising dollar in 2010, based on the surging popularity of PowerShares DB U.S. Dollar Index Bullish Fund (UUP), which holds nearly $3 billion in assets. The fund follows the movement of the U.S. dollar against a basket of six major currencies: the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona and the Swiss franc. As its name suggests, the ETF profits when the dollar strengthens against global currencies.”

In WSJ’s “The Google Nexus phone may herald end to overpriced cellphone service” Brett Arends has two messages. The first is in the title, that an unlocked cellphone allows you to save by shopping around for best service value. (This is generally unavailable in U.S. and Canada, whereas it is quite common overseas.) The second message, more in context with personal finance, is that, even $1 saved a month, over 35 years at 4.5% real return becomes $1000. “In other words, a $70 a month phone bill may not seem like much, but over that sort of period it will deprive you of about $70,000 that you might otherwise have owned.”

In the Globe and Mail’s “Consolidate now- and prevent grief later”, John Heinzl discusses some of the values of consolidating your assets with one (or perhaps a couple of) institution(s). Some of the values listed are: easier tracking/rebalancing, lower fees and no orphan accounts.

Jonathan Chevreau’s Financial Post article “A unanimous vote for indexing” summarizes the views expressed in three books by respected authors of investment related books (William Bernstein, Jason Zweig, and Burton Malkiel and Charles Ellis). The themes in the books are consistent use ETF based indexing (Vanguard, rather than iShares, due to concerns about the new BlackRock ownership of iShares; I agree with these concerns, though I also would prefer not to have all my eggs in one basket), investing through a discount broker and they advocate to “save money in the first place and present various “get rich slowly” methods of investing those savings. Their keynotes are simplicity, low cost and cultivating a patient, long-term view. Credit cards are verboten; homes are items of consumption that should be owned free and clear, and government-mandated tax shelters and employer-pension vehicles are to be embraced and maximized.” Bernstein “profoundly suspicious of the financial-services industry, suggesting investors should regard stockbrokers, mutual-fund salespeople and insurance agents as “hardened criminals.” “ (Wow, that’s using a single harsh brush for an entire industry- I would consider that cautionary note rather than a condemnation of all commissioned salespersons in the financial services industry, and an encouragement to get financially educated so that you can become a do-it-yourselfer or at least an intelligent customer of a fee only financial planner.) In his follow-on blog, in which he reviews Zweig’s book “The little book of safe money” specifically, he lists Zweig’s three commandments which include: not taking unnecessary risk, risk that is not most certain to reward, and not putting money at risk that one can’t afford to lose.

In WSJ’s “How steady is your paycheck?” Jonathan Clements reminds readers that a secure (e.g. government worker or tenured professor) employment income may be considered like a bond and if you are far (>5-10 years) away from retirement you can have a heavy (90%) allocation to stocks; of course as retirement approaches, you will need to shift your allocation to closer to 50% bonds. For those with less secure employment a lower 75-80% stock allocation might be appropriate even when they are young,

The NYT’s Tara Siegel Bernard looks at advantages of converting 401(k) to Roth in “New rules ease Roth conversions” . I addition to the advantage for those expecting a higher tax bracket in retirement, other advantages are: no minimum distributions, no impact on taxation of Social Security, expectations in tax/policy changes by government and specific individual considerations. Given the considerable policy uncertainty, you might also consider the value of tax diversification by having assets split between 401(k) and Roth IRA.

The other significant change for American (an some Canadian) investors in 2010 is discussed by Paul Sullivan in the NYT’s “Bizarre year for the estate tax will require extra planning” as to the implications of the (temporary) end of U.S. estate taxes, such as: the “shifting of a deaths from 2009 to 2010, capital gains taxes for those who didn’t expect to pay estate taxes due to the disappearance of estate tax associated death date valuations. Some of the ways Canadians can be affected as well by the U.S. estate tax changes is looked at by Jamie Golombek in “A tax break to die for”.

And for some snowbird specific articles in the Globe and Mail, you might be interested in Tim Cestnick’s “Timely advice if Uncle Sam beckons” and Roma Luciw’s “Five tax and money tips for snowbirds”. Cestnick discusses: tax return filing requirements for U.S citizens and green card holders, rental property owners’ 30% withholding tax or filing NRIM (with 1040NR), meaning of “substantial presence test” and related form 8840, filling Form W-7 to get a U.S. individual taxpayer identification number if you have to file a U.S. return. Luciw suggests: updating your will and power of attorney, getting a U.S. dollar denominated bank account, and most importantly get health insurance before you leave.

Real Estate

Thiruvengadam and Batter in WSJ’s “Home-sale gauge fell as tax deal expired”report that according to the National Association of Realtors there was a 16% reduction in the index of pending sales in November (though the index is still 15% higher than previous year). The drop is attributed, at least partly, to demand pull-ahead due to expiration of first time home buyer tax incentives.

Pensions

Globe and Mail’s Boyd Erman reports that “Nortel bonds make amazing rebound”; and yes it is truly amazing, with some bond that were selling at $0.10 on the dollar, are suddenly valued at $0.76. This appears to be the case for only bond which have a claim on Nortel’s U.S. estate. According to Diane Urquhart (in the next story) the unsecured bonds with a claim on the Canadian estate only, are selling at $0.42 on the dollar. The likely reason for the price difference is the expectation of higher payout from the U.S. Canadian estates; this is pretty disastrous if it is representative of the expected payout to Canadian pensioners.

In “Bankruptcies and Employee claims- Nortel case”Diane Urquhart pulls together quite a comprehensive set of data pertaining to the subject of bankruptcies and employee claims. She looks at a wide ranging list of issues, from the impact of modifying Canada’s BIA to give some level of priority to underfunded pension claims on cost of credit (minimal) to differences in Nortel bond prices depending on which country the bondholders have a claim in (payout from American estate expected to be at close to double the level of that from Canadian estate), the impact of credit default swaps (CDSs) on bondholders’ inclination to force liquidation rather than accommodate restructuring (devastating for workers and the economy in general). She has a table with countries with and without (or with low limit) priority protection in bankruptcy for employee claims (34 of the 53 countries listed give super-priority or preferred status to employee claims). She also has a list of countries which provide public pension benefit guarantee/insurance. Among 19 of 54 countries listed, the developed countries listed which have no bankruptcy protection (or have low limit protection) are Finland, Netherlands, Portugal, Canada, U.S. and England; of these developed countries Canada and Portugal are the only countries which don’t have a public pension guarantee! (Pretty amazing and it shows how out of step Canada is with the rest of the developed world!)

In the National Post’s “Stop the music! CARP speaks”, Terrence Corcoran spills most of his ink Moses Znaimer’s unquestionable marketing prowess under the umbrella of his Zoomer activities, one of which is his advocacy for (much needed) Canadian pension reform. Mr. Corcoran seems overly perturbed about proposals for government, rather than private sector, run pension system for Canadians. My take is that the private sector in general and the financial services industry in particular has failed to deliver mechanisms for adequate retirement income for Canadians (some will argue that it is due to greed, stupidity, incompetence and conflict of interest) and the government also fell asleep at the switch as Canada’s traditional DB pension system went into “systemic failure”. Nevertheless a government administered (if not run) retirement income system for Canadians is a valid and a strong runner to reform Canada’s pension system. More studies are not the answer; the time to act is now!

Things to Ponder

The Economist editorial “Bubble warning” suggests caution on ongoing bullish expectations. “Investors tempted to take comfort from the fact that asset prices are still below their 2007 peaks would do well to remember that they may yet fall back a very long way. The Japanese stock market still trades at a quarter of the high it reached 20 years ago. The NASDAQ trades at half the level it reached during dotcom mania. Today the prices of many assets are being held up by unsustainable fiscal and monetary stimulus. Something has to give.”

Jason Zweig (like many others in the past couple of years) in the WSJ’s “Inefficient markets are still hard to beat” challenges the Efficient Market Theory. He quotes Benjamin Graham’s view that stock prices have two components: (expected cash flow based) “investment value” and (sentiment and emotion based) “speculative element”. However he warns that you should keep in mind the following: “Consider a fund manager who outperforms the averages by 2.5 percentage points annually,
before expenses; that’s a spectacular return. But his trading costs and management fees are likely to eat up at least 2.5 percentage points, leaving his clients no better off than if they had bought an index fund that simply mimics the returns of the overall market….The market may be inefficient, but it remains close to invincible.”

Peter Tasker in the Financial Times’ “Busting the myth of Brics” questions the wisdom of the emerging market investment frenzy in general and China in particular. He argues that lack of positive correlation between GDP growth and stock market returns, coupled with overvaluation in equity and real estate markets, suggests caution.

In Financial Times’ “Longevity offers opportunities” Paul Davies reports that experts forecast almost a decade of increased longevity for UK 65 year olds over the next 75 years; specific group longevity will be radically different from broad population longevity. A market is developing so that pension funds can offload/securitize their longevity risk. (Not sure why this idea has legs; the pricing of this will build in already all known expectations with additional safety factors for the insurer and there is little opportunity to for insurance seller to hedge the risk, so it will likely be very expensive; therefore, while there may be a perceived “high demand from pension funds and insurers and to offload this risk”, that demand will no doubt decrease dramatically if/when prices will be seen as high.)

WSJ’s James Stewart’s “Predictions for stocks, interest rates and overseas markets”, goes against CW (conventional wisdom) and calls for: at least one >10% on stocks, no short-term interest rate increase risk, and foreign markets will also suffer a correction but pessimism over Japan market is overdone.

And finally, Jonathan Chevreau reports on a recent survey of boomers in “42% of “sandwich” boomers stressed by dual role; financial aid to grown kids may jeopardize their own retirement”. He quotes survey author “With children taking longer to become self-sufficient, and aging parents expected to live longer, boomers are headed for the perfect generational storm,” said Olshewski. “One way to cope with these responsibilities is to know how much assistance you can afford to give, and how much you need to take care of yourself.”