Hot Off the Web– July 19, 2010
Personal Finance and Investments
Ron Lieber in the NYT’s “’Daddy, are we rich?’ and other tough questions”discusses how one might approach answering (young and older) children’s questions about the family’s financial state, like ‘are we rich’, ‘how much do you make’, ‘why we don’t have a second home’ and about delayed gratification.
With the approaching hurricane season, in the NYT’s “Natural disasters happen. Will your home be ready?” Paul Sullivan looks at insurance and beyond in preparing and protecting your home against natural disasters. (Those, like I, who have been affected by Florida’s 2004 or 2005 hurricanes, will no doubt resonate with what he is talking about; and those who have not, should pay attention as well. Hurricanes, windstorms, wildfires and even neighbours’ falling trees can and do happen.)
In the Globe and Mail’s “How to find a good financial planner” Ted Rechtshaffen offers advice on finding a good/suitable financial advisor. He suggests that selection criteria are a function of your needs and goals (your expertise, expected level of involvement, risk tolerance, goals, and other questions of particular interest like taxes, estate, etc). Therefore you better understand these before you head off to find an advisor. Then, you can ask others with likely similar goals about their planners (if they have one) and how they met their goals. You are then ready for your search for names on the internet or the Financial Planning Standards Council website (not an endorsement). When meeting a few of the selected names he suggests focusing on: chemistry, fit (similar clients), expertise, philosophy, ability to implement plan unconstrained by firm or designation, fees and track record. In his previous week’s article “Is your advisor a good one?” Rechtshaffen lists signs of a good financial advisor which include: (1) providing financial education, (2) access to a full range of products, (3) versed in broader financial questions (insurance, pensions, taxes, estate) and (4) deals well with the uncomfortable topics like financial discipline.
In WSJ’s “Your adviser is changing firms. Should you follow?” Jamie Levy Pessin discusses some circumstances when an advisor’s move might (or might not) be beneficial to you, such as changes in business model (from fees for products to fees for advice), fees (higher or lower), tax considerations (do you have to sell appreciated assets to move with advisor), access to broader range of products (in house products to open architecture). You might also want to check to see if advisor’s departure might be related to a regulatory issue.
In the Globe and Mail’s “Want to boost your net worth? Live in a mid-sized city” Andrew Binet has assorted interesting data that you might find of interest, about household incomes, net worth, debt, savings and investments in different Canadian cities.
Tim Cestnick defines tax alpha as “the additional after-tax return you can add by taking steps to minimize the tax burden on your portfolio” in “Getting ahead with ‘tax alpha’”. 2 to 3+% difference between pre and after tax portfolio returns are typical (the lower end of the range is for passive portfolios), and some studies showed in some instances differences as high as in excess of 7%. Cestnick believes that active tax management is the answer and will address it in this week’s article on the subject.
Tom Lauricella in the WSJ’s “Beyond the hype of payout funds” suggests that managed payout type funds initiated about two years ago by companies like Vanguard, Fidelity and Schwab have failed to deliver on expectations. These funds are intended to provide (hopefully not very) variable retirement income without having to buy (insurance company guaranteed) annuities which require one to essentially turn over the money to the insurance company. “Ideally, the funds generate a predictable, but not guaranteed, stream of income in a format that gives investors easy access to their money….But launched into the teeth of a vicious bear market, managed-payout funds have highlighted the trade-offs that come when choosing between guaranteed investments and returns linked to market ups and downs.” Lauricella suggests that managed payout funds are “still a work in progress”. (I still like these types of funds, so long as individuals’ overall portfolio is consistent with their risk tolerance.)
ETFdb’s Michael Johnston reports that “iShares rolls out nine ex-U.S. sector ETFs”each with 0.48% expense ratios. The article indicates that that while there are U.S. and global industry sector products on the market, these new ETFs are the first ex-U.S. ones available. (These could be useful for those who might want to construct their international exposure based on sectors or might want to overweight a particular sector.)
And in an interesting result of the U.S. health care bill, in the Globe and Mail’s “Health bill opens doors to Canadians seeking U.S. retirement” Diane Nice reports that according to Robert Keats (author of Border Guide mentioned in my blogs before), the new Pre-Existing Condition Insurance Programmay be the route to overcome one of the biggest obstacles in the way of Canadians wishing to retire in the U.S. but can’t do so due to lack of health insurance.
The April 2010 Teranet- National Bank House Price Index issued at end of June was up 12.9% over previous year with Toronto and Vancouver each contributing >15% increases. All six cities in the index were up month-on-month in excess of 0.5% and the composite increased 0.8%.
Quite a different picture of Canada’s real estate market appears to be emerging as reported by Michael Babad in the Globe and Mail’s “Canadian real estate: A soft landing or something worse?”, and Garry Marr in the Financial Post’s “Home sales continue to drop” using more current CREA data. The data indicates 8.2% drop in June sales and 1.2% drop in prices as compared to previous month. Sales dropped 13.3% in the past quarter and were off 19.7% from year ago, though prices are still 5% above year ago. Babad quotes a number of economists: on one side Rosenberg-supply demand imbalance and 20% overvaluation last year will result in price reductions during the coming correction and on the other Porter- while problems are visible now the market could regain its balance as rates drop and employment is up; these two are representative of the opposing perspectives. In the Globe’s “Home sales sink in Toronto, Vancouver” Marr reports that Toronto’s June sales were off 23% from previous year, while Vancouver’s and Calgary’s decreased 30% and 42%, respectively. Active listings were up about 30% over previous year. Toronto Life’s Maryam Sanati in “Bubble trouble” suggests that after the faster than expected recovery following the Great Recession, “we got in the mood to buy again, and the housing market spontaneously returned to bidding wars and double digit gains. Experts say we are in a bubble that’s ready to pop.”
U.S. News & World Report’s “Home sales poised to drop in coming months”indicates that the 30% drop in the U.S. “Pending Home Sales Index, which measures sales contract signings”; the “drop was more than twice as steep as projected” after the expiration of federal home buyer incentives. Low mortgage rates and steep price drops should help buying but high unemployment rates and low job creation limit a housing rebound.
Interestingly, according to the NYT’s David Streitfeld “The biggest defaulters on mortgages are the rich”! “Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population. More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic… many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment… The delinquency rate on investment homes where the original mortgage was more than $1 million is now 23 percent. For cheaper investment homes, it is about 10 percent.”
Nortel pension update: The latest NRPC newsletter is full of interesting information. On finding a replacement for the health insurance coverage abandoned by Nortel, work is reported in progress to find a retiree (rather than Nortel) funded replacement group insurance option (some considerations on insurance are available at some of my recent blogs on the subject at Individual health insurance in Canada and Insurance: To insure or self-insure? Public or mutual insurance company?). Also indicated in the newsletter is the effort under way to improve PAR (pension adjustment reversal) for those who have chosen the CV (commuted value) option to have immediate access to PAR and 100% PAR even if CV received so far was only 69% (Up to the January 2009 bankruptcy protection filing, and even for a few months thereafter, many CVs paid out were at 86% and 100%, effectively reducing the pensions for those staying in the plan; current ‘estimate’ suggested in the newsletter was that pensions are expected to be reduced to 65%). Unfortunately there was no mention of similar work on getting PAR recoveries for those who were already pensioners or elected to stay in the pension plan. The PAR changes proposed offer zero benefits to pensioners who no longer have employment income and need PAR in a refundable tax credit form. The newsletter did not mention the Court’s decision to be “fair” to nine executives and make their pension/annuity whole as part of the bankruptcy process but failed to do the same for the over 10,000 pensioners in similar position (not clear if these individuals were represented by KM or were permitted by the court to have separate representation) as reported by Ottawa Citizen’s Bert Hill in “Nortel ordered to restore annuities”. And finally, according to Brian Baxter reporting in The American Lawyer’s “Cleary killing it in the Nortel bankruptcy”, the other clear winners are the lawyers involved in the Nortel bankruptcy. The numbers quoted in the article are just in-progress numbers on some of the legal costs incurred by Nortel in the U.S. However with numbers such as these, it is possible that total legal costs may exceed the eventual Canadian pensioners’ recovery via the CCAA process (the current Canadian bankruptcy protection proceedings). So far, Canada’s government has been standing by and watching, without taking the necessary steps to raise Canadian pensioners’ protection in the case of sponsoring company bankruptcy to a level more common among OECD calibre countries. By the way, the UK government and regulator are continuing to press for compensation from Nortel due to “12 year contribution holiday” of about 300 million pounds according to Norma Cohen in the Financial Times’ “New twist to pension tussle at Nortel”; but UK pensioners’ retirements are protected by UK government guarantees, unlike Canadians’ pensions.
In the Financial Times’ “How to put scheme members first” Pauline Skypala reports discussions on potential European Community moves to 401(k) like DC pension plans. She indicates that the EC asset management industry would be particularly pleased if such plans would include auto-enrolment (good) and Australian model (bad). “A review of the Australian system published last week finds changes are needed to address a number of issues. Top of the list is the problem that “member interests are not always paramount”. Inefficiency, complexity, lack of scale, and high costs are also issues…member-driven competition through choice of fund has struggled to deliver a competitive market that reduces costs for members”. “New architecture is needed, according to the report. Under this, most members (about 80 per cent) would save in a simple cost-effective product with a single, diversified portfolio of investments where the investment strategy is designed and implemented by the trustee.” (Some elements of Australia’s pension system are still worth emulating such compulsory individual and employer contributions.)
Jeannette Neumann in WSJ’s “Retirement security brighter” reports that in the U.S., primarily thanks to the introduction of ‘auto-enrolment’ to 401(k) plans, there is better retirement security for workers. “Nearly half—47.2%—of households whose oldest members are age 56 to 62 are at risk of not having enough retirement income to pay for basic expenditures and uninsured health-care costs in retirement, according to the study. That is better than the 59.2% of households who were projected to run short on retirement income in EBRI’s 2003 study.” (Hmmm, yes the numbers are better, but certainly not good enough. However ‘auto-enrolment’ clearly works and it should be required by law in Canada for DC pensions, yet nothing has been done about this zero cost solution to increased savings, despite the overwhelming evidence of its effectiveness.)
Things to Ponder
In the Financial times’ “Three years and new fault lines threaten’, Martin Wolf writes that “the earthquake of the past few years has damaged western economies, while leaving those of emerging countries, particularly Asia, standing. It has also destroyed western prestige. The west has dominated the world economically and intellectually for at least two centuries. That epoch is over (see charts). Hitherto, the rulers of emerging countries disliked the west’s pretensions, but respected its competence. This is true no longer. Never again will the west have the sole word.” He quotes Prof. Rajan view (“Fault Lines”) that further earthquakes are coming including the end of the ‘deal’ which “was the post-second-world-war settlement: in the US, the deal centred on full employment and high individual consumption. In Europe, it centred on state-provided welfare.” The article discusses many other fault-lines and reports much interesting data. (It is a highly recommended read!)
In the Financial Times’ “Mr. Market should sometimes get his way”John Kay writes that “The democracy of one dollar one vote is not attractive. But one can reject that and still believe in the merit of a system in which people with strong views put their money where their mouth is. The weakness of electoral democracy is precisely that talk is cheap – politicians lie to their voters, newspapers pander to popular prejudices, public opinions are superficial.” Mr. Market’s “Anonymity is often the most effective means of telling truth to power: and sometimes the only one.”
In Investment News’ “SEC’s Shapiro stumps for single standard of care- but what will it be?” SEC Chairman Mary Schapiro is quoted as saying “I have long advocated such a uniform fiduciary standard and I am pleased the legislation would provide us with the rulemaking authority necessary to implement it”. Hopefully she’ll deliver on the necessary uniform fiduciary standard for all those handling investors’ and pension funds’ assets. (And hopefully, Canada will follow quickly as well.)
John Waggoner in USA Today’s “How will Baby Boomers’ retirement affect stocks” looks at the possible negative impact of baby-boomers on the future stock market returns. However the article also suggests that the effect may be overstated and in fact overcome by generation-Y’s size and even greater need/urgency to save than their parents. (Article referred to in a Jonathan Chevreau blog)
The Barron’s reports in “A savings superfund?- Consumer blues” that despite high unemployment the U.S. savings rate is forecast to rise to 10% over the next five years and this will have major impact on the consumer spending which represents 70% of economy. The article mentions the silver lining as well, that all this new money will be chasing investment opportunities.
Jones and Farchy report in the Financial Times’ “Hedge funds look for that golden edge” the increasing interest of hedge funds in gold. Arguments include the inevitable (?) inflation resulting from the rapidly growing monetary base. Though some believe that gold price is also driven by the low interest rates which allow low holding costs, and gold will pull back when interest rates rise. Also on gold in the Globe and Mail’s “Precious metals manager sees gold heading north”Shirley Won reports that RBC fund manager Chris Beer sees gold higher due to: Euro fears driving buying, it’s not a bubble since only 0.5% of global assets in gold as compared to 5% in late 60s, and it’s at half the inflation adjusted 1980 price of $850. He buys gold stocks rather than gold itself.
The pro and con arguments for a major crash are debated in Jason Zweig’s “Get ready for cataclysmic market crash! (Or maybe not)” and Dave Kansas’s “Why doomsayers are wrong” WSJ articles.
In WSJ’s “Who needs risk rules? Pensions act on their own”Randall Smith reports increase vigilance among pension funds in their investment managers’ use of derivatives (options, futures, swaps). But more interestingly, he mentions that Oklahoma fired Pimco “citing the risks of its use of derivatives whose values couldn’t be cross-checked in audits”. ..”they found that for “the swaps we’re in, we don’t even know which side we’re on. We don’t know what we’re exposed to through those derivatives.” He added, “we’re not comfortable with that lack of transparency.”” (Is there a Pimco reputational issue here?)
And finally William Hanley in the Financial Post’s “New norm in gains is subnormal” discusses many retirees sense of being between a rock and a hard place as they really want “preservation of capital and a guaranteed income stream” yet while reported inflation is low the goods purchased by retirees are going up; and HST just made things worse. Hanley concludes with: “My pessimistic disposition also leaves me reckoning the art of retirement is not going to get any easier for the Boomers heading into their “golden” years. And that goes for the Gen-Xers coming after them….(and he worries that)… my generation will have been the last to have a better life than that of our forebears. So I say to the younger generations to come: Start saving. Now.”