blog16aug2010

Hot Off the Web- August 16, 2010

Personal Finance and Investments

The WSJ’s Neil Parmar in “Beware of ‘independent’ investment research” asks if we can trust the conclusion, of a life insurance company sponsored research at Wharton School that annuities are “the best way to go”. A, no doubt honest, professor/researcher (Babbel) at a reputable academic institution and one of the highest rated insurance companies New York Life which as a mutual insurance company can be expected to be looking out for the best interest of their policyholders. However “some critics dislike the idea of the financial sector tapping academia for market-driven research, whether it’s designed to shape the debate over regulatory reform or influence brokers and advisers—and their millions of clients. It’s “the equivalent of the cigarette companies promoting smoking as a healthy lifestyle”. (Note this is not about whether annuities are good or bad, which is a function of the circumstances of a particular individual and the cost of the annuity, but it is about whether one can trust sponsored research.)

In Barron’s “Does every financial advisor need to be a fiduciary?” Ed Mahaffy (himself a practitioner) writes that the SEC is being directed by the new U.S. law to “study effectiveness of current standards of care for broker-dealers and investment advisors (and insurance agents) providing personal investment advice”. “It stands to reason that all financial-services professionals offering personalized investment advice should be required to meet the fiduciary standard described in the 1940 Act. Anything less would continue to shortchange some investors, as recommendations would continue to be influenced by unidentified conflicts of interest. To accept any argument to the contrary is to believe that failing to always act in clients’ best interests is an acceptable practice (my emphasis). All medical doctors are required to meet the same standard of care, as are all attorneys. Why not all professionals providing personalized investment advice?” (It boggles the mind why somebody would think that a financial “advisor” does not owe fiduciary responsibility to her client; a financial product “salesman” is something else.)

Tim Cestnick writes in the Globe and Mail that “Corporate class mutual funds can save you money”, if you are “content with expected investment performance and fees”.  (But that’s a big if.) Cestnick explains how ‘corporate class’ mutual funds allow switching/reinvesting within a family of funds so long as funds are not withdrawn from the family of funds. He indicates possible 2-3% annual savings on income taxes on distributions and dispositions. However, you’ll likely be paying these 2-3% management fees per year for these Canadian mutual funds, rather 0.2-0.5% for passively managed ETFs. (So I am not sure about the savings here; sounds like mutual fund companies grasping at straws to try to hold onto clients leaving for much lower cost ETFs.) Dan Hallett addresses the same topic in the Globe and Mail’s “Some tax friendly investing alternatives to RRSPs”. (in the past when I looked at tax saving ‘products’ of the financial industry it usually turns out that you just end up paying the same level of fees as the taxes you are avoiding; I suspect we  are all better off if we pay our taxes to the government than to insurance/fund companies.)

In WSJ’s “Woes of ‘Continuing Care’ centers” Tom Lauricella refers to a new Congress GAO report which  “highlights just how much more complex evaluating a CCRC (Continuing Care Retirement Community) can be than buying a house or even choosing a stand-alone nursing home.” Entrance fees to CCRCs range of $160-600K with many them have gone bankrupt and many more have serious cash-flow problems. Other problems mentioned include inadequate regulatory oversight, difficulty with entrance fee deposit refunds. The “reports can be found at www.aging.senate.gov/pressroom.cfm by scrolling down and clicking on the link for the press release on the financial stability of CCRCs”.

Dianne Nice in Globe and Mail’s “Advice and tips on preparing for executor duties” has advice for would be executors: minimize family conflict by proper communication, plan for the time/effort that will be required, understand legal liabilities and consider getting help.

Tom Herman in WSJ’s “Estate-tax could return with senate inaction” explains the implications if the Senate does not pass a Bill to permanently extend of the estate law which existed in 2009. Bottom line is that the highest U.S. estate tax rate would go to 55% (from 45%), exemption would return to $1M from $3.5M and the so called “step-up basis” for appreciated assets would be lost. (We’ll find out before year end.)

The Washington Post’s “An investor’s manifesto” has a pretty good list that an investor, rather than a speculator, should follow. You might want to peruse it. (Thanks to VP for bringing it to my attention.)

Real Estate

In the Financial Post’s “Canada sees ‘dramatic’ housing slowdown” Julie Fortier writes that after significant home price increases over the past year in Canada and other countries (Australia, U.K., Sweden, and Switzerland), “the global trend has reversed itself…the recent slowdown has been the most dramatic in Canada.” CREA reported month on month MLS based sales activity off 8.2% and “sales fell in almost 70% of local markets.

In Florida, the Herald Tribune’s  “Long-feared wave of foreclosures has begun in Sarasota area” Michael Braga reports a 40% increase in foreclosure fillings in Sarasota, Charlotte and Manatee counties in July over previous month and a 10.6% increase over 2009. Dan Levy in Bloomberg’s “Foreclosure crisis spreads across U.S. as Idaho defaults mount” reports 4% month on month increase in foreclosures in July across the U.S., though numbers are 10% lower than in 2009. With the 9.5% unemployment at a 27 year high and still rising, no relief can be seen in foreclosures.

Pensions

You might be interested in reading my latest blog about the importance of determining the plan’s final windup ratio exclusively on the basis of an insurance company annuity quote rather some actuarial estimate from somebody with no skin in that estimate; see  “Nortel pensioners’ CCAA claim: How will the final windup ratio be determined?”

Sadly another nail in Mr. Flaherty’s “There is no pension crisis in Canada” coffin. Unlike Nortel, U of T won’t go bankrupt and any earned pensions to date will be met with high probability (ultimately Ontario government provides backstop to Universities)…but there is little doubt that there will be significant pressure on the university to modify future plan benefits. In “Challenging times are likely to persist for Canadian universities” and “Putting university pension plans on a sustainable track” the deteriorating financial state of Ontario universities is discussed and is reported that Ontario universities get a three-year solvency relief if they “submit a plan to the Ministry of Finance outlining how they will make their pension plans more sustainable…Following this timeframe, universities that have demonstrated an improved and sustainable plan would then be eligible for stage two pension solvency relief, allowing them to amortize their solvency deficits over a period of up to 10 years.” UTAM (University of Toronto’s Johnny-come-lately asset management company modelled on Harvard and Yale) lost about 30% of the 2.7B plan assets for the year ending June 30, 2009. UTAM incurred annual 1.5% fees and earned 2.1% annual return over 10 years underperforming a passively managed portfolio by about 4% per year, (thanks to CJ for bringing story to my attention.)

In SmartMoney’s “Retirement: The pension letdown” Angie Marek discusses the unravelling retirement/pension expectations of many Americans: “depleted 401(k) plans”, soaring healthcare costs, lower than expected pensions for those still working due to frozen pension plans, budget crisis driven state and local governments looking at ways to reducing pensions, and many struggling with little or no experience in managing their portfolios. The situation of a number of individuals and families is examined.

Things to Ponder

The WSJ’s “Demographics driving nations’ wealth” argues that while “demography is not destiny”, “yet demography does matter”. Japan and Europe labour pool will be shrinking by >30M each over next 40 years, China’s will grow for the next 15 years but then drop by 100M by 2050, and India’s will grow by 300M by 2050! The U.S. will grow about 35M. In a globalized world technological edge dissipates quickly. The article explores problems and opportunities associated with these diverging demographic trends. The U.S. with growing population, immigration, free trade and productivity growth might be in the sweet spot. However in the WSJ’s “Another threat to economy: Boomers cutting back” Mark Whitehouse sees America’s boomers, who haven’t saved enough, just hit by twin stock and real estate crashes, and due to lousy job markets are unlikely to be able to recover by working longer, will become a drag on the economy. To top it all off “low bond yields, combined with a volatile stock market, are making a dire retirement picture look even worse”. With few exceptions (e.g. health insurance and care) there is real 12.3% lower “average annual spending by people aged 65-74, compared to 10 years earlier”; so will the economy be hit?

The Financial Post’s “Taleb: Bet on a bond collapse, and hedge against inflation” and Bloomberg’s “Taleb says government bonds to collapse, avoid stocks” report that Black Swan author Nassim Taleb says that “by staying in cash or hedging against inflation, you won’t regret it in two years…The financial system is riskier than it was before the 2008 crisis that led the U.S. economy to the worst contraction since the Great Depression”. But the inflation/deflation battle rages on as described in the Financial Times’ “Bond markets: Inflation or deflation?”, which declares that “Deflationists and inflationists can agree on one thing, however: most government bonds are selling at the wrong price. But the fight over whether bonds are a great bargain or a great rip-off is not over yet.” The Economist’s Buttonwood column “Bad news bulls” suggests that “The choice for the bond market is either a lot more debt, or a bigger money supply, neither of which would seem attractive. So the bond market is surely betting that the Fed’s actions won’t work and that Japan is the template; the equity market is betting that the Fed will be successful and the Goldilocks economy will return.” (It’s a tough call. I haven’t substantively altered my asset allocation over the last 18 months, with still higher than usual (strategic allocation dictated) cash and short-term fixed income allocation.) Right now the ‘deflationists’ appear to be winning, as exemplified by the recent usually well reasoned David Rosenberg writings like the Globe and Mail’s “All evidence suggests that the recovery is far from normal”.

Brett Arends worry list in WSJ’s “Is a crash coming? Ten reasons to be cautious” includes: Shiller P/E is high at about 20, apprehensive Fed, three months of falling prices, high personal debt levels, real unemployment level much higher than the official 9.5% indicates and housing is still a disaster.

In Bloomberg’s “U.S. is bankrupt and we don’t even know it”Laurence Kotlikoff says “Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills. What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess.” To fix the projected fiscal gap personal and corporate taxes would have to double indefinitely, if action is not taken to contain Social Security, Medicare and Medicaid immediately. Otherwise boomers will see massive benefit cuts, the already mentioned “astronomical tax increases” or the government money printing presses going into overdrive. He predicts that “we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices”.

In the Financial Post’s “Riches for ratting a new industry” Diane Francis reports that the U.S. informant business has been doing well and business is about to take off with the new financial reforms package “contains a provision for huge payouts to whistleblowers.” A snitch gets about 10% of the government’s take up to one million according to Francis, and somewhat lower above that.

And finally, the AARP Magazine has a series of articles the Best places to retire abroad (e.g.  Argentina, Belize, Costa Rica, France, Italy, Mexico, Nicaragua, Panama, Portugal and Spain…no doubt the list will change if competitive devaluations take place or some countries would like to attract retirees/foreign-currency in the next couple of years ) including  “seven questions to ask yourself before you start packing”.

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