Hot Off the Web– March 15, 2009

WSJ’s Larry Light writes in “With deflation possibly near, this economist is all abuzz” about preparing for the coming deflation. He reports on Garry Shilling’s views who recommends apartment REITs (demand for renting will increase as buying houses will become less interesting given little or no promise of appreciation) and conventional government bonds (not inflation indexed ones). Shilling bases his deflationary predictions (2-3% a year even after recession is over) on efficiencies resulting from globalization and technology and increasing thriftiness of aging boomers. (Not everyone agrees that the risk of deflation is greater than that of inflation, but there are sufficient numbers of respected experts arguing the deflation theme that it is impossible to dismiss out of hand.)

In Brett Arends “Should you fire your financial adviser?” He lists 10 reasons why you should fire your financial adviser; among the reasons are: lost money stupidly, doesn’t return your calls, uses jargon rather than explain issues clearly, and your portfolio had inappropriate asset mix for your age/circumstance.

In “Poll finds investment pros lack the knowledge to properly manage portfolio risk” Jonathan Chevreau reports on the findings from EDHEC survey results which show that: lack of knowledge and lack of commitment to ongoing leaning by advisors are the root causes of poor or no (absolute, relative and extreme) risk management.

On the pension front in general, the Ottawa Citizen’s Mark Sutcliffe in “A real world solution for public pensions” asks the question, how long will the growing gap/disparity be politically sustainable between the non-public/private pensions system (the one with contracting RRSP values due to the market collapse and underfunded private pension plans due to inadequate regulations and regulatory oversight) and the public pension system (the one with fully indexed defined benefits guaranteed by the government, i.e. taxpayers). (Interesting question which I asked in my November 2007 submission to the Ontario Expert Commission on Pensions)

Is Nortel going into liquidation? In WSJ’s “Nortel in talks to sell key units to rivals”reporters Silver and McCracken indicate that that Nortel is in “talks to sell its two main businesses (wireless and office products) to rivals”, despite management’s protestations that they are working on a restructuring (rather than a going out of business) plan. (Who knows what the outcome will be, but of course even very late last fall while Nortel management was indicating no plans for bankruptcy, they were feverishly working with E&Y (now the Court appointed monitor!?!) since September and Lazard since at least December preparing for the bankruptcy protection; so protestations aside, my guess is that liquidation is at least a 50% probability.)

Financial post’s Karen Mazurkewich writes that “A Nortel break up not good for pensioners” She reports that in case of liquidation, without the ongoing support of a going concern corporation, the pension plan may have to be wound up; if wound up today the pensioners may have to take a 40% reduction in pensions. It is not clear even if additional payments are made to the plan as a result of the likely available asset sales in liquidation, that there is any assurance that it will make significant difference to the shortfall. (What pensioners need right now is further changes, on top of those implemented last summer, in the bankruptcy legislation. so that pension plan underfunding is given super-priority in bankruptcy protection and liquidation.)

And finally for those of you interested in Florida property tax situation, all I can say is: Here we go again! The Sun Sentinel reports that “Palm Beach County property tax rates may rise more than expected” Duh…so what’s   new after years of gorging on obscene property tax increases paid for by non-homesteaders whose taxes were increasing in line with the property bubble (while locals were enjoying the double protection of homestead exemptions of $25K increased to $50K last year, and the 3% cap on assessed property value increases due to Save-Our-Homes); but the chickens are coming home to roost. Plummeting property values are decreasing the tax base and thus tax revenues. So instead of looking at how and why the counties and cities which have doubled their spending between 2001 and 2006 and perhaps reducing spending, instead they are off to raise mil rates. At least mil rate increases are not (yet) protected under SOHA and so some of the pain is transmitted to locals/voters who may try to constrain government spending somewhat. Non-homesteaders beware; there is no limit to the creativity of Florida’s politicians in finding ways to offload taxes on non-voting non-homesteaded out-of-staters!

In “Homeowners see taxes rise as property values sink amid rising deficits” Bloomberg’s Jerry Hart discusses how because of falling property values local governments (nationwide in the U.S.) are facing massive drops in revenues and are driven to increase tax rates. Property owners are shocked that despite falling values taxes will be increasing due to opaque and contorted property tax laws, especially in Florida. (This is the state where local governments have doubled their spending from 2001-2006 essentially without increasing property taxes to homesteaders who have bought their homes prior to the property price run up which started around 2000. Most of the excess costs were absorbed by non-homesteaded “snowbirds, and businesses, resulting many non-resident owners with tripled taxes over 5 years and paying 4-10x and more tax that old time residents.) Floridians are now complaining that taxes will be rising because of a combination of allowable increases up to inflation (up to 3%) in assessed value coupled with likely rising tax rates. (If I was a Florida resident, I wouldn’t worry too much; Florida always managed to come up with new and “innovative” (or should I say discriminatory) ways to transfer the load to non-residents, like last year increase in homestead exemption and the addition of Save-Our-Homes benefit portability. What is next: an increase in exemption from $50,000 to $100,000 and capping property tax for homesteaders (rather than just assessed values)? On the other hand if you are a non-resident owner or someone who is thinking of becoming one, you may want to worry considering Florida’s grossly discriminatory history, in fact as far as I know Florida is the U.S.’s by far most discriminatory state (please let me know if you are aware of other states which deal in a more punitive manner with non-residents). Here are couple of illustrative quotes from the report which show the level of distortions resulting from Florida’s property tax regime: “Several studies have examined the effects of Florida’s Save Our Homes 3 percent assessment cap. Hawkins (2006) reported that by 2004 the tax base loss (the differential between the market value and assessed value) of Florida homestead properties had grown to more than $160 billion. A University of Florida (2007) study reported a difference of $398 billion in 2006, more than 17 percent of the market value of all property that year” and “Seasonal homeowners are at a particular disadvantage because they do not qualify for the state’s Save Our Homes assessment limit. They therefore pay higher property taxes than permanent residents, while at the same time consuming fewer local services.”

Sun Sentinels Paul Owers reports that foreclosures in Florida are up 14% since last month (January) and 43% over the past year in “Foreclosures keep mounting in south Florida”. U.S. foreclosure rate champions are Arizona, Nevada, California and Florida. Property values can’t really stop falling while foreclosures keep increasing.


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