Hot Off the Web- October 17, 2011

Personal Finance and Investments

In the Financial Post’s “Don’t sabotage your own portfolio”Michael Nairne advises readers to: “quit checking your investment accounts online every day…quit comparing the value of your portfolio now with its value when the stock market peaked earlier this year…quit dichotomizing your portfolio into “winners” and “losers”…revisit you your long term investment plan (the asset allocation consistent with your risk tolerance)…and tune out the media noise”. (Great advice, but it is difficult to follow for mere mortals.)

Ted Rechtshaffen in the Globe and Mail’s “Now is the time for a fixed rate mortgage” argues that given that in Canada 5-year mortgages are now available at 3.2% (compared with 2.5% variable) rate locking in eliminates the worry for next 5 years, at a very low (0.7% up front) penalty to secure peace of mind.

IndexUniverse’s  interview “Russell’s Friedman: Redefining beta”highlights the scramble for ETF latecomers trying to get/increase market share in the fast growing ETF market.  Russell’s “intelligent or smart beta” refers to avoiding the already well covered and crowded cap weighted index ETF market. The leftover space forces newcomers to look for niche areas which could be used in the ‘explore’ part of a ‘core and explore’ portfolio such as: different weighting schemes (dividends, earning, etc) or active management. (Time will tell if real value is being sustainably added over cap-weighting after higher fees/transaction-costs/taxes, but I am not convinced. Yet you’ll find more and more Johnny-come-lately ETF sponsors shift from value-added to marketing-added products in the ETF playing field; there will be some creative value added niche opportunities but probably few in number.)

The Economist’s “Nowhere to hide” discusses the impact of low interest rates on retirees which is low income on savings and dramatically lower annuity payments for new annuitizers. In addition, to “the danger for savers is not simply of disappointing returns, but of devastating blows to their wealth. Just after the Second World War, British government bonds (gilts) offered yields similar to today’s; those who bought them lost three-quarters of their money, in real terms, by 1974. Investors with more of an appetite for risk may do even worse. Those who bought Japanese shares at the peak in 1989 are now sitting on a nominal 80% loss.” (Thanks to CFA Institute Financial NewsBriefs for recommending)

In WSJ’s “Time to ditch commodities?”Levisohn and Maxey write that while commodities have been hot, as they gained in popularity, they no longer seem to have diversification benefits: “from 1959 through 2004, commodities generally moved independently of the broader stock market. The long-term average correlation was close to zero between 1959 and 2004; zero would mean they are completely uncorrelated. During the past three years, however, the average increased to about 0.7 or 0.8.”

Rob Carrick in the Globe and Mail’s “An insider’s guide to choosing a financial adviser” suggests: identifying prospective advisors to interview, speaking with adviser not helpers, look for compatible client base, insure qualifications, understand communication plan, and fees and services. But be careful! Ron Lieber in the NYT’s “Financial planner’s red flags”observes ‘advisors’ (especially brokers) don’t usually begin the relationship with a financial plan and that “is sort of like prescribing drugs without first taking a full medical history…We need trusted professionals who start with a plan and don’t use it as a vehicle to push their own products. And for most people, it shouldn’t require paying 2 or 3 percent of their net worth in fees or take more than a handful of hours of a professional’s time each year.”

Real Estate

In the Globe and Mail’s “An American asks: Is Canada’s real estate market in a bubble?”Preet Banerjee reports that one of the unchallenged views at a recent investment conference was that “…Canadian real estate is giving bigger warning signs than the U.S. market did before its real estate meltdown. So even Americans are starting to wonder aloud how long house prices can stay so high.” Banerjee is not fully sold on a crash because:  not only debt-to-income but also net-worth-to-income ratios have increased, more conservative Canadian lending practices and generally less leveraged mortgages in Canada. So while he accepts that prices might fall in Canada, but he suggests less dire outcomes than in the US.

In the WSJ’s “It’s time to buy that house” Jack Hough argues that the combination low mortgage rates (<4.0% for a 30 year mortgage) and single digit price to (annual) rent ratios in many areas, affordability is better than in decades.


In the Ottawa Citizen’s “Lehman, Nortel lose $3.5B pension appeal” Kit Chellel reports that “A London appeals court ruled in favour of the British Pensions Regulator, which is seeking 148 million pounds from Lehman and 2.1 billion pounds from Nortel (a total of about $3.5 billion Cdn) to meet the shortfall. The case hinged on whether employee pensions take priority over creditors when a company collapses into administration.” Unlike in Canada, in the UK the answer is yes. (You’ll recall that the UK pension regulator is also fighting in the Canadian and US courts (now in arbitration) to have the Nortel UK pension shortfall be admitted as a claim against the Canadian and US estates. Imagine the scenario where the Canadian government continues not to protect Nortel’s Canadian pensioners by increasing the priority over other unsecured creditors while at the same time, the UK claims end up being permitted in Canada. This sounds like a worst case scenario when everybody gets paid effectively from what rightly belongs to Canadian pensioners. I wouldn’t dismiss any scenario as impossible given the consistent negative outcomes suffered by Nortel pensioners, as a result of actions/inactions of Nortel, its pension advisers, regulators, the courts and the governments.)
In the Financial Post’s “Pension legislation to be introduced before year end: Menzies” Jonathan Chevreau that there is no news in the latest PRPP speech given by Minister Menzies. What we are still hearing is the continued determination to deliver unsuspecting Canadians into the waiting arms of Canada’s financial industry known for the highest fees in the world. The PRPP, at least based on the currently available limited amount of information, is not meeting any of the four requirements of real pension reform: (1) insure adequate savings, (2) low cost administration and investment management, (3) low-cost longevity insurance and (4) end victimization of bankrupt company pensioners. See my earlier blog PRPP (Pooled Retirement Pension Plan): on the subject.

In the Financial Times’ “The real bull market”Gillian Tett reports that many American pension plans are increasingly investing in farmland. “In the past few months, the world’s population has risen above seven billion. That is creating a lot of mouths to feed. And as emerging market countries get wealthier, their populations are embracing richer, meat-focused diets.” This led to rise in prices: corn +85%, beans +37%, and “brutal consequences” for the world’s poor to the extent that governments are concerned about political unrest. But Tett points out that as usual “somebody’s pain is usually someone else’s gain” and, this case, farmers have been doing well. She points to the other recent change where we went from from a relatively high level of pre-2007 trust in finance, to a complete distrust; this had led to increasing search for tangible things like gold, property and timber.

In the Globe and Mail’s “Pension funds take hit in third quarter”in which Janet McFarland reports that “Pension consulting firm Mercer said its pension health index slipped to 60 per cent funding at the end of September from 71 per cent at the end of June and 75 per cent at the end of March. The index measures the change in funded status of a typical pension plan with average asset allocation.” One expert quoted that pension plans need to be monitored more closely/frequently. (Duh…current regulation only requires status reporting only once every three years. If pension plans were funded properly by the sponsors, instead of making aggressive actuarial assumptions and instead of gambling with pensioners’ assets with aggressive/inappropriate portfolios aimed as swinging for the fences in the hope of minimizing the pension plan contributions, we wouldn’t be in this situation with private sector pensions. A reasonably immunized portfolio with asset liability durations matched to a reasonable extent would have prevented much of this crisis from happening, but then employer contributions would have to have been higher than what actually was contributed. Canada’s pension system is in systemic failure, and those who should do something about it because they were elected to do so or because they have/should have professional/fiduciary duties toward pensioners, are just sitting on their hands.)

Things to Ponder

Buttonwood in the Economist’s “Give us the money” suggests that given that QE, in the US, UK and Japan, mostly failed in its objectives of driving investors into riskier assets and boosting confidence, so why not try instead giving every household a voucher that must be spent as they see fit within a time limit; “this would provide an immediate boost to consumption”.

In the Financial Times’ “Pimco’s Gross makes U-turn on Treasuries”McCrum and Mackenzie report on Pimco’s Gross eating humble pie and reversing himself after completely exiting US government bonds earlier this year. He has now reversed himself and is back in Government bonds trying to ride the Fed’s “operation twist”. (It’s tough to manage investments in full public view. In fact it might be at times one of the most humbling experiences around.)

In Financial Times’ “Risk-on, risk-off behaviour is making markets dysfunctional” James Mackintosh looks at the behaviour of markets and points out the highly uncorrelated behaviour of equity markets and USD (‘safe haven’), the historically high correlation of stocks within the S&P 500 as well as among different equity markets. It’s either risk-on or risk-off.

Also, in WSJ’s “Volatile market sends warning”E.S. Browning writes that “What is surprising is that big one-day gains also tend to come in troubled times, often proving to be temporary rallies in bear markets. Of the Dow’s 20 biggest one-day percentage gains, 16 came in the decade that began with the 1929 crash. Two more came in 2008….In periods of such turmoil, some long-term investors get burned by the sharp swings and pull back, leaving the market increasingly in the hands of short-term players such as hedge funds and high-frequency traders. The pullback by those with longer-term goals makes markets even more volatile.” $93B has left the market since May. Other sources of volatility might be leveraged ETFs and the fact that more and more of the trading is sourced from speculators (e.g. hedge funds). High volatility “…also can come when a bad period is ending and investors are piling into stocks as they turn bullish again. Some think stocks could be bottoming out now…Until we get investors back to the market, we will have really tough markets; this kind of nonsense will continue…”

In the Financial Times’ “Charges go up, returns go down” Pauline Skypala writes in reference to new “distributor influenced funds” where UK advisers try to increase their take of fees, that there are “too many middlemen getting between savers and the capital markets, adding complexity to justify their existence, and taking a cut of asset value. Sadly, it only seems to get worse, never better. Charges go up, returns go down and trust goes out the window.”

And finally, In WSJ’s “Capitalists of the world Unite” Brett Arends writes that it not just those who “Occupy Wall Street”  are short-changed, all you capitalists (who provide capital to Wall Street) get a raw deal: mutual fund investors lose about 25% over 30 years (make that 50% for Canadians), 401(k) participants due to limited investment choices (asset classes), hedge fund investors (annual 2% of assets and 20% of profits fee structure), following Wall Street advice (can they tell the future? Not.) and investing in (US) banks (see bank stocks or that Goldman Sachs employees earned $80B in the last 5 years while stockholders lost $25B!). Arends concludes with “Maybe Wall Street is a socialist paradise. After all, where else does “labor” (if you can call it that) have a bigger whip hand over “capital”? As the old saying goes in lower Manhattan, you can search in vain for the customers’ yachts.”


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