Hot Off the Web- February 14, 2010

Personal Finance and investments

Jason Zweig in the WSJ’s “High trading is bad news for investors”reminds readers that while “Buy-and-hold hasn’t looked too good lately, but churn-and-burn is no better.” He quotes Morningstar study that “mutual funds with the highest portfolio turnover rates have underperformed the slowest-trading funds by an annual average of 1.8 percentage points over the past decade.”

In the Financial Post’s “Global bonds attracting attention…but risks remain” Jonathan Chevreau discusses approaches to investment opportunities in global bond market and specifically opportunities in emerging market bonds. He also discusses the trade-off between an active or passive approach to foreign bond markets. (I have invested previously in foreign closed end funds: global fund GIM and emerging market TEI and MSD; I do not currently hold these. Just remember the purpose of the “fixed income” portion of your asset allocation is downside protection of your portfolio and emerging market bonds might be more suitable components of your “equity” allocation.)

Another Chevreau article reports on a TD survey of Canadians and Americans and concludes that “Americans twice as likely to worry they’ll run out of money in retirement than Canadians”One might wonder why Canadians might feel more secure (is it false security?). A couple of possible reasons: Canadians (unlike Americans whose home values have been crushed) are still counting their overpriced homes as part of their assets to generate retirement income, and Americans tend to worry a lot more about the cost of healthcare in retirement. It’s not that clear to me that Canadians (without public service pensions) should feel that much more confident. U.S. social security payments for a couple max out at about $50K/year whereas Canadian CPP/OAS payments max out at about $30K for a couple (averages are much lower). Private pension protection in case of company bankruptcy is up to $54K/year whereas in Canada is essentially non-existent (Ontario has $12K/year guarantee). As to health insurance, All Americans over age 65 have Medicare coverage which is as good as Canada’s public health insurance coverage but without queues, though there are co-payments and deductibles.

WSJ’s Eleanor Laise in “The price of safety just went up”warns investors that in their rush to “safety” they might consider instead of “annuity-like guarantees (like expensive GMWBs), stable value funds, structured products like market linked CDs, consider respectively, working a couple of years longer and/or deferring Social Security, pre-paying mortgage, and building your own market-linked CD by combining a five year CD (about 75% of the funds) with an total stock market index fund.

In the Globe and Mail’s “ETF building blocks for a solid portfolio” Rob Carrick reports on the ETF based portfolio recommendations of three advisors for three levels of investor risk. Note the primary differences in recommendations had to do with the use of GIC ladders rather than bond ETFs for the fixed income portion of the portfolio and whether the equity portion should be currency hedged or not. (If you are interested in this topic, you might also want to read my recent take on the subject at Asset Allocation II)

Ron Lieber in NTY’s “The odds of a disability are themselves odd” discusses some of the misinformation used to sell disability insurance (and I am not discouraging readers from getting this protection, especially if they can do so as part of their employer’s group.) He has a very good graphic showing the cumulative percentage of 90-day or longer disability for white-collar workers for various age intervals; between age 25 and 65 it is 18% for males and 32% for females.

In Barron’s “Slow track, steady gains”Karen Hube reports that Wells Fargo’s James Lauder runs a different type of target date fund “Rather than establishing a mix of stocks, bonds and cash and leaving the allocation for months or years until the investor advances another step toward retirement, as many target-date managers do, Lauder adjusts his portfolio to match a desired percentage of downside equity risk every month, based on trailing three-year data….He is trying to manage downside volatility through mixing stocks, bonds and cash.”

Kristen Gerencher in WSJ’s “Yes, the uninsured can get care” describes the four levels of care available to the uninsured in the U.S. (which could also be useful to snowbirds with emergency travel medical insurance looking for medical care- of course never travel without insurance, a serious medical emergency can cost hundreds of thousands of dollars in an American hospital): (1) retail clinics (around $62, staffed by nurse practitioners or physician’s assistance, at CVS, Walgreens, etc) for things like flu, strep, bronchitis, (2) urgent care centers (typically $95-190, staffed by physician, operated by chains like Concentra, etc) for things like sprains, cuts, stitches, asthma, bladder infections, (3) community health centers (nonprofit typically for uninsured and low income with “fee scales according to federal guidelines and based on person’s ability to pay) for not just one-shot but also primary and preventive care for diabetes, pediatric, ob/gyn, dental, etc but require an appointment and often income documentation, (4) hospital emergency rooms(most expensive and about half the patients are admitted to the hospital) most appropriate perhaps for serious symptoms like high fever, shortness of breath or chest pain.


In the Ottawa Citizen’s “Former Nortel employees divided over benefits deal” Bert Hill writes that “The group of former employees agreed not to sue the Nortel executives and directors over the management of pension and health and welfare funds except for any alleged fraud. They also agreed not to try to move their claims ahead of other creditors in Canada and around the world when Nortel assets are finally divided. Another condition is an agreement not to oppose any of the new retention incentives for remaining Nortel employees?” Perhaps this is a misunderstanding of what actually has been agreed to, but at least based on my understanding, this doesn’t sound like it’s a great deal for pensioners. For about $2000 value that 9 months of guaranteed health and life insurance (assuming annual value of $4000 a $0.33/dollar recovery for these items as part of the CCAA proceedings) for pensioners or for LTD recipients 9 months of disability payments traded off against the potential of getting some priority on claims, getting redress from Board of Director’s liability insurance, and from potential recovery from the remains of Nortel; the carrot dangled before pensioners is that this deal secures Nortel as administrator of the pension plan until October 1st or else, the tick is that plan windup might occur at end of March which might result in forced annuitization. Doesn’t sound great, but I gather that the “deal” still needs Court approval; hopefully the Court won’t rubber stamp what appears to be a detrimental deal to pensioners. “Another, potentially bigger, problem is a $2.06-billion U.S. charge against Canadian assets to settle a U.S. taxation claim. It was a key condition of the funding deal and could hit Canadian creditors hard.” And of course the most important condition of this deal (for Nortel management at least) is “an agreement not to oppose any of the new retention incentives for remaining Nortel employees” reported in the related story “Nortel allots $92.3M for top staff”; this might in future appear in the dictionaries as an example next to the definition of “agency risk/cost”.

Jonathan Chevreau in the Financial Post’s “Raise RRSP limits to help rebuild losses”reports on a C.D. Howe Institute recommendation quoting CEO William Robson that the upcoming budget should “raise RRSP limits from the current 18% of earned income to 34% and bump the maximum dollar amount proportionally, from $22,000 to $42,000. The 34% is the amount of pay employees in the federal Public Service Plan enjoy. Similar increases would apply to group RRSPs and employer-sponsored Defined Contribution pensions. This would provide more parity with the traditional gold-plated Defined Benefit plans enjoyed by politicians, civil servants and a few fortunate managers in the private sector.” (Sounds like a good idea and likely an important element pension reform, though no help to those near or already in retirement who have essentially exhausted their human capital (earning power); nor is it of any value for DB pensioners who have been prevented from contributing to their RRSPs due to PA (pension adjustment formula) and then their plan sponsor declared bankruptcy with an underfunded pension plan.)

Real Estate

The debate on whether Canada’s housing market is in a bubble continues. John Greenwood in Financial Post’s article “Dodge warns on Canadian housing market” reports that ex-Bank of Canada Governor David Dodge said that: “One would have to say that the relation of house prices to Canadians’ income is right at the high end of what one would think would likely be sustainable over time”.  Of course interest rate increases are considered undesirable as they would reduce economic activity and further increase value of the Canadian dollar. So eyes are on the CMHC in that they “should be careful about the terms and conditions on which they are giving mortgage insurance”. In fact Peter Foster in “Canada Moral hazard Corp.”writes that “There are increasing concerns that the Canadian housing market is headed the same way as that of the U.S., stoked by the same factors: artificially low central bank interest rates, and the government insurance/promotion of risky mortgages.”  Foster reports, that a recent Fraser study concluded that “a stunning 90% of all insured residential mortgages in Canada are covered by the CMHC. This amounts to an estimated $480-billion for which Canadian taxpayers would be on the hook (well at least any shortfall thereof) if the housing market tanked”.

The Globe and Mail’s Steve Ladurantaye has a good summary of the unfolding Competition vs. MLS battle. In “What’s at stake in Competition Bureau’s MLS fight”he discusses the players, the stakes, the allegations and MLS’s defence. The savings for DIY sellers of an average Canadian home ($320K) who are only interested in paying for listing their home on the MLS site, could be 80-90% of the 5-6% ($15K+) transaction fee typically paid by the vendor on the sale.

The Herald Tribune’s “Condos are selling like hotcakes- Lower-cost hotcakes” reports that Q4’2009 Florida’s condo sales volume was up about 100% over previous year at the expense of about 25% lower prices (and of course because the corresponding 2008 quarter was not particularly conducive to spending on non-essentials. There is still lots of inventory from what I can see, so those looking to buy can take their time, be picky and drive a hard bargain. Renting still sounds very good.)

Things to Ponder

In the Financial Times’ “How baby boomers lead bear market by the nose” and “Storm clouds ahead for the markets” John Authers and Steve Johnson, both tackle recent reports indicating that demographic change drives returns and “Long-run returns from equity and bond markets are set to fall significantly, according to two heavyweight annual reports. The equity risk premium, which averaged 4.4 per cent a year between 1900 and 2009, will be just 3 to 3.5 per cent in the future” and should expect ““fairly severe downrating of asset classes” and “disastrous returns” for government bonds in the coming decade.” The demographic trigger is “the proportion of 35-54 year-olds in the US population peaked in 2001, coinciding with the dotcom crash. In Japan it peaked in 1990, since when Japanese equities have fallen sharply.” Also, “dearth of savings, combined with rising government deficits, will push Treasury and gilt yields from 4 per cent to 10 per cent, leading to negative real returns over the coming decade.”

In the Financial Times’ “Strong growth doesn’t equal strong stocks”John Authers discusses a new report suggesting that “Economic growth (e.g. in BRICs) does not necessarily translate into stock market appreciation. Indeed, recent strong economic growth might even translate into poor stock market performance in the near future”. “….the thing to do is to find countries that are beaten down and out of fashion, rather than countries that are booming.”

In Time’s “How to tame the budget deficit”Jeffrey Sachs writes that “Until both political parties make a serious effort to improve the performance of government while shrinking its swelling deficits, Americans will watch both their quality of life and their country’s standing in the world erode. Returning to fiscal responsibility while safeguarding needed public services and investments won’t be easy, but it isn’t impossible. “And in his closing call to arms he asks: “Will we kill our economic future by short-changing the public on investments needed to modernize the economy and train the workforce? Will we borrow heavily from China and other countries to cover today’s spending while racking up massive bills for our children? Or might we just decide to protect the future of our country through a judicious mix of tax increases and spending cuts that will bring honor to this generation and prosperity to the next”. (U.S. tax increases are appearing to be on the way, though Americans would never tolerate Canadian taxation levels, according to a respected accountant knowledgeable in both the Canadian and American tax systems.)

In the Financial Times’ “A Greek crisis is coming to America”Niall Ferguson writes that: “Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941…. On reflection, it is appropriate that the fiscal crisis of the west has begun in Greece, the birthplace of western civilization. Soon it will cross the channel to Britain. But the key question is when that crisis will reach the last bastion of western power, on the other side of the Atlantic.”

And finally a non-financial retirement related topic, in the Globe and Mail’s “The march of time? Get on with it” Margaret Wente talks about the good thing about turning 60. “The paradox of aging is that, as people get older, they become happier and more optimistic. This seems counterintuitive. But now, I’m learning that it’s true. Like many women, for example, I’ve spent most of my adult life in relentless battle with my inner critic – that nasty little voice that tells you you’re not good enough. And then, not long ago, it just went away for good.” So enjoy it!


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