Hot Off the Web– December 13, 2010

Personal Finance and Investments

In the NYT’s “How to avoid being taken in a Ponzi scheme” Paul Sullivan says that “Sadly, the people who are most likely to involve you in a swindle are friends and relatives. It has become so common that it now has its own name: affinity fraud.”Doing a little research before making an investment is essential; something as simple as: “ask manager what institutions have invested”, “manager pedigree”, perhaps hire a firm to do the vetting for you, not put all eggs in one basket and check if firm uses different firms for clearing house (buy and sell), custodian and administrator valuing the assets. If you are victim of the a Ponzi scheme, your best chance of recovery is if you are a “net loser” and you may even have to pay back previous gains if you are a “net winner” unless you can prove that you are destitute. Jane Musgrave’s Dec 6, 2010 PBP article ”Trustee targeting victims” discusses Irving Picard pursuing recoveries from investors who were ‘net winners’. Picard was expected to file claims against about 1000 individuals including some charities. Those with ‘net losses’ are eligible for up to $500K from SIPC, however those who are ‘net winners’ are not eligible for anything.

In the WSJ’s “Plenty of Ponzis”Al Lewis reports that since August the DOJ has “rounded up 343 criminal defendants and 189 civil defendants” affecting 120,000 victims for $10.3B losses. “The characters, the settings and the dramas differ, but Ponzis are all the same. Someone gains trust, promises profits that are too good to be true and fabricates statements. The money is then either blown in desperate trades or on mansions, cars, planes, art and jewelry.” And the victims fall for these schemes because “They want to believe”.

Canadian Tax Resource Blog’s “Income splitting guide” has an elaborate discussions on income tax splitting opportunities such as: pension splitting, spousal RRSP, higher earner spouse pays non-deductible family expenses including income tax of lower income spouse while lower income spouse uses income to invest, lending money to lower income spouse at prescribed rate to invest, etc (I am not a tax expert but there appears to be a long list  of opportunities that you might wish to read about. Recommended by Rob Carrick’s Personal Finance Reader)

In the Globe and Mail’s “Why investors can’t have it both ways” John Heinzl dissects some “new ’market-linked’ guaranteed investment certificate that offers “the potential for bigger gains with the same safety net attached”. His lesson is very simple: “if you want market-like returns, you have to accept market-like risk. And if you want safety, there are better ways to achieve it.” (Sounds just like the GMWBs story, as in my earlier blogs GMWB I and GMWB II, just schemes of collecting fees and commissions.)

In the WSJ’s “Look before you reap: Tax loss harvesting can backfire”Jason Zweig looks at the practice of “harvesting your losses” and argues that it may not be the “no-brainer” that we often assume it to be; even if future tax rate rises moderately. He questions the advantages under various future tax scenarios (Canadian tax payers might get even lesser benefits given that there is no opportunity to use capital losses against income or trade-off long vs. short gains or step-up gains when passed on via estates.)

Laura Saunders does a very clear overview of the proposed U.S. estate tax changes in “The state of the estate tax”. The $5M exemption and 35% tax rate with assorted bells and whistles included in the bill means that “estate planners got everything they wanted and nothing they didn’t”. As it stands it will be effective only for 2011 and 2012, it’s indexed, and 2010 estates can choose between 2010 and 2011 rules (advantageous to the affluent rather than wealthy).

In Barron’s “New ways to hedge your bets” Murray Coleman looks at a couple of new ETFs using long/shot strategies. “The iShares Diversified Alternative Trust (ALT) uses computers to crunch data on stocks, bonds and currencies. Humans take it from there to make sure the right moves are being made” “In choppier markets where everything seems to be falling in tandem, that’s when a long/short hedging strategy tends to do better” A futures contracts based approach is used in the Mars Hill Global Relative Value ETF (GRV). Coleman concludes with “Time will tell how well ALT and GRV will be able to balance strong defense with opportunistic offensive strategies. Either way, these are alternative tools much like large endowments and pension funds use as complements to core holdings.”

“McAfee warns of ‘The twelve scams of Christmas’” lists of scams to watch out for including: charity phishing, fake invoices, and others (Thanks to Ken Kivenko for referring article)

In WSJ’s “Retiring in 10 years? Uh-oh” Karen Damato discusses messages that people must hear if they are within a decade of retirement: with limited time left for compounding “investment returns will not bail you out. You need to get serious about trimming your spending to save more money or resign yourself to working more years”. And “when your nest egg is small and time spent is short, you can make things worse for yourself by being either too conservative or too aggressive”

Ari Weinberg in WSJ’s “Is an ETF really a fund? Maybe not”writes that not all ETFs are the same and the differences can have “implications for taxes, liquidity, tracking error and credit risk”. Some are like traditional mutual funds (or unit investment trusts), grantor trusts (“which hold assets and pass along ownership stakes to investors” like SPDR Gold TRUST-GLD), limited partnerships (e.g. funds which give “exposure to commodities markets by buying futures contracts”), added share classes (e.g. Vanguard’s approach to attach exchange traded shares to conventional mutual funds), and exchange traded notes which are “actually debt issues of the sponsor”.

Real Estate

In WSJ’s “More foreclosures expected in 2011”Amy Hoak reports that according to RealtyTrack U.S. foreclosures will peak in 2011 above the 2009 and 2010 levels of  900,000 and 1.2M respectively. The reasons listed include the slowdown due to “robosigning” related foreclosure processing problems in 2010, “continuing high unemployment”, “upcoming interest rate resets on adjustable-rate mortgages”. However outlook for foreclosure is improving since 30 delinquencies are 11% lower since 2009 and 60 day delinquencies expected to be 20% down by end of 2011 (5%) from 2010 (6.2%) (normal is 1.5-2%). “So how does all this bode for housing prices? High housing inventory, along with high unemployment, will likely add up to continued depressed home prices in the year ahead in many markets, says Nichole Jordan, banking and securities industry practice leader for Grant Thornton, an accounting and business advisory firm. “It’s going to take several years to work through the excess inventory,” she says.” Various industry experts quoted are expecting further 5-10% price erosion before price stabilization in 2012.


Protection by giving preferred status to private sector pension plan shortfalls when sponsor seeks bankruptcy (to escape paying pensions) is not only extended to individual pensioners in the U.K. but also to the agency which insures the pensioners. Other civilized countries can do the right thing, why can’t we do the same in Canada and modify BIA to protect private sector pensioners? Just out from the U.K., in the Financial Post’s “Lehman, Nortel lose U.K. pension case” it indicates that not only are pensioners protected in the U.K. (up to about $50K/yr of pensions), but the pension regulator and insurer of private sector DB plans has super-priority for pension shortfall in case the sponsor is bankrupt. (This is how the system is supposed to work….but not so in Canada!)

Pension Consultant Greg Hurst in the Financial Post’s “Pension myths”while agreeing that Canada is ready for pension reform has some serious reservations about proposed CPP expansion, which he says “is a very complex undertaking that would likely have widespread repercussions for Canada’s pension system overall”. He lists assorted ‘myths’ (which some might consider as intended to just produce FUD-fear, uncertainty and doubt) and concludes that “Canadians should take pride in their pension system; it is truly among the best in the world. Pension reform is required, however, particularly in the underutilized areas of employer-sponsored workplace pension plans and individual retirement savings. CPP expansion is not the answer to these needs — other more targeted solutions can be deployed in a manner that preserves the stability and improves the integrity of the current system.” This must seem like a pathetic joke to those private sector pensioner who lost a massive portion of the DB pensions when their employer went into bankruptcy protection to allow sponsor to escape pension obligation, and further put in doubt all of Mr. Hurst’s myths. (Thanks to Dan Braniff of the Common Front for Retirement Security for recommending article.)

In the Toronto Star’s “Commercial Workers pensioners face benefits cuts”Ralph Van Alphen reports on “major funding shortfall” in multi-employer pension plan covering 350,000 workers. Those still working will see up to 50% increase inc contributions while those no longer contributing will see 57% reductions in pensions when they retire. (Even though these plans are not really defined benefit but are rather target benefit plans, did somebody say that Canada’s pension system is “the best in the world”(?) rather than in “systemic failure”?)

Michael Corkery in WSJ’s “Pension woes prompt GOP move” reports that Congress is concerned that (US) state and municipal pension plans might blow up and end up being dumped onto Washington’s lap. A new bill introduced proposes to “deny states and localities the ability to sell tax exempt bonds-the lifeblood for many governments-unless they report their pension fund liabilities to the Treasury Department…the goal…is to get a better handle on funding woes of public pensions, which they say are not always forthcoming about the true extent of their financial exposure”. On the same topic in the NYT’s “Accounting for public pension”in which Floyd Norris discusses pension accounting deficiencies for state and city plans, implying that that doing honest accounting and facing the true cost of these public sector plans will lead to the same outcome as in the private sector, i.e. move from DB to DC plans. (Given the estimated $3T shortfall that resulted due to ostrich approach to calculating the funded status of state and city pension plans, aided and abetted by crooked actuarial/accounting practices, is it offensive only to me, the suggestion that doing proper accounting would lead to the demise of DB plans? Something doesn’t feel right here.)

Things to Ponder

In WSJ’s “Number of the week: 1.6M put off retirement”Mark Whitehouse reports that that people approaching retirement are suffering due to market drop, low interest rates and real estate crash, and this forced many to stay in or return to the workforce. By one estimate, labour participation of 51-65 year olds as a result of their financial losses increased 2.9% or by 1.6M, further aggravating unemployment rate.

Brett Arends in the WSJ’s “Is the bond bubble bursting?” looks at the implications of a potential turn in the bond market, given the about 1% increase in the 2, 5, 10 and 30 year Treasuries. The implications “if the Treasury market loses control will be felt” in: wealth effect, knock-on impact on corporate bonds, impact of higher mortgage rates on real estate, lower corporate profits due to increased borrowing costs, and because price of Treasuries affect the price of everything else (higher Treasury yields forces other assets to compete; it also increases discount rates and thus reduces NPV of future income streams.) Arends concludes with “Maybe bonds will recover. This business is full of uncertainties. But investors need to understand that there is now a serious danger that the events of the last month are the start of a long-term slump in Treasurys. That makes this investment environment more dangerous than many people seem to realize. Look out.”

On the same topic, in the Financial Times’ “Pay attention to the bond market’s new ‘creatures’”Aline van Duyn writes that since 2008 when individual investors in search of safety started piling in en masse into bonds, the nature of the bondholder community has dramatically changed from primarily pension funds, insurance companies and other large investors . The question now is how these individuals will react to losses resulting from interest rate increases, if and when they occur. Losses will impact the individuals’ wealth effect and may result in mass exodus from bond funds which could “turn a price decline into a plunge”. “Equity-like risk factors can bleed into other asset classes like bonds because investor psychology does not automatically change,” says Ian D’Souza, professor at NYU Stern Business School. “As retail investors move from equity into new asset classes, the asset class inherits the genetic profile of those retail investors.”

James Mackintosh in the Financial Times’ “Coming of age, a grim outlook for savers”writes that “It is not enough to think about how companies can sell products to the elderly. The shift in population from workers to retirees-or from savers to spenders- will affect the value of assets in ways that could be far more important.” Mackintosh paints a dismal picture for returns of savers given the “falling proportions of prime savers and rising numbers of dependents could see long-run price/earnings ratios for shares continue to fall over the next decade. A falling p/e ratio will mean lower prices for each dollar of profit, even if profits rise.”

In the Globe and Mail’s “Hey seniors, time to review your will” Lynne Butler looks at the non-financial aspects of what seniors need to plan for: review your healthcare directive potential incapacity and the related financial consideration of how the healthy spouse will cope financially if the incapacitated spouse needs to be institutionalized, powers of attorneys and who you feel will be in best position to act in your behalf, “death of a spouse should bring about a complete review of the survivor’s plans”, estate planning.

Here are a couple of upbeat articles for a change. In Bloomberg’s “Bear market that wasn’t gores pessimists amid rebound” Whitney Kisling  writes about investors “who heeded warnings about falling home sales, record European budget deficits and the debasement of the U.S. dollar can nurse regrets after the 2010 bear market didn’t happen; even the usually pessimistic David Rosenberg “Canadian economic picture far brighter than it appears” and “far brighter” from David must be very bright. (This is not to say that we can’t have a bear market start next week or next quarter, it is just an indication that market timing is not something that is a cakewalk even for experts. So we mere mortals are generally better off to basically have a portfolio consistent with our risk tolerance and rebalance it as required- this must increasingly sound like a broken record!?!)

The Financial Times’ “Madoff” says “don’t invest when something looks too good to be true, and you don’t understand how it works.” The trustee working to recover funds for Madoff victims wants to demonstrate that third parties “channelling money to hedge funds” have responsibilities associated with the fees that they receive, like: “aside from assessing performance, anyone taking a fee for recommending a fund should be checking references for the fund’s auditor and external legal counsel. Who are the fund’s prime brokers and administrators? Not to mention a conversation about investment strategy, portfolios and positions that should last months, rather than minutes… (and) perhaps a reason to pay third parties for the effort, and expect redress when they fail to spot fraud.”

And finally, in WSJ’s“What’s No. 1 for brokers?”Suzanne Barlyn reports that “Putting client interests first may seem like a simple concept, but it’s causing an uproar on Wall Street.” “Right now, securities firms don’t have to put investors’ interests first. New regulations may change that—and Wall Street isn’t happy.” “”There’s no question that the average client perceives his broker at a large wirehouse in the same way he perceives his doctor, lawyer or CPA” According to an expert on fiduciary standards “The brokerage industry will have to embrace a fiduciary standard to remain competitive…it is embarrassing to defend that you don’t believe that the client’s interest should be put first.” (Pretty amazing that the requirement to act in the best interest of the client needs so much debate, when it is just the right thing to do. Besides, why would somebody go to an ‘advisor’ who will not prepared to offer her advice which is in her best interest?)


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