Hot Off the Web– June 21, 2010

Personal Finance and Investments

In Bloomberg’s  “Financial abuse victimizes one in five elderly, non-profit says” Alexis Leondis reports that in the U.S. “More than 7.3 million senior citizens have been taken advantage of financially through inappropriate investments, high fees or fraud” and “Forty percent of children who have parents age 65 and older said they are “very” or “somewhat” worried that their parents have already become or will become less able to handle their personal finances over time.”

The Globe and Mail’s John Heinzl in “The risks of ETFs, the opacity of bond prices, the ABCs of ACB” discusses the opacity  of the Canadian corporate and government bond market compared to the stock market. Unlike in stocks where there is a centralized “auction market”, bonds “trade in what’s known as a dealer or principal market. Instead of acting as an agent, the dealer trades bonds out of his own inventory, earning a potential profit on the spread between what he paid for the bond and what he sells it for.” He suggests that some comparative bond prices are available in Canada at,, and “With bonds, it pays to shop around.”

Rob Carrick referred to in the past week to a couple of recent opposing articles on ETFs: against ETFs the legendary John Bogle   “Bogle: Investors are getting killed in ETFs” and a rebuttal in “ETFs better than mutual funds for long-term investors” . Bogle’s issue with ETFs is reported to be based on investor behaviour potentially induced by the ease of trading ETFs resulting in more frequent  trading and usually end up buying high and selling low thus actual ETF investors receiving worse returns that those offered by the same ETFs. He found that investors in comparable mutual funds traded less frequently and ended up lagging returns of the same funds by less.  (Is it clear that people trade more because they have ETFs or did they buy ETFs because they want to trade more, for example?) The article taking the opposing side argues that ETFs are the best for long-term investors because of: Bogle’s analysis is based on imprecise data, but more importantly because there are cost and tax advantages of ETFs in case a large fund investor sells a significant holding. (Frankly, with all due respect to John Bogle, I am not particularly impressed with either argument; the ETF investor can be a long-term investor as well if she so chooses and the mutual fund can have tax advantages as well, such as harvesting losses when gains are realized. As far as Canadian investors are concerned, ETFs are their only option when they want to access U.S. originated funds, as mutual funds are not permitted to be sold to Canadians due to some unfathomable reason. Also see my new “Thanks, but I’ll stay with ETFs for my money”blog.)

While nobody knows for sure the answer to the WSJ question “Is a Roth IRA Safe from taxes?”  Laura Saunders reports that, despite the risk of future tax changes to counter advantages of Roth IRAs, many tax experts and relatively wealthy individuals are converting because some of the following considerations: estate, no mandatory withdrawals, likely higher future tax rate, future tax bracket creep.

Real Estate

Steve Ladurantaye in the Globe and Mail’s “Homeowners sell, start renting instead” writes that “Many homeowners who cashed out at the peak of the market are putting their money in the bank rather than investing in a new house. And as a slew of new renters look for temporary homes, they are driving up prices and engaging in bidding wars to ensure they snap up properties that are comparable to the properties they left behind.” The phenomenon is visible in both Toronto and Vancouver markets, where “vacancy rates are among the lowest in the country, at 2.2 and 2.7 percent, respectively.”

In the Globe and Mail’s “Why David Rosenberg sees a ‘cold spring’ for real estate”Michael Babad reports that Rosenberg predicts falling prices in Canada in the second half of the year due to surging new and resale inventory, and sales pulled into June to beat the B.C. and Ontario HST.


After some initial enthusiasm resulting from the about face by the finance ministers on the need for pension reform, more and more second thoughts are emerging about what actually has been committed to do about Canada’s pension crisis.

In “Pension reform discussions in PEI: Some progress, but so much more is needed” the Professional Institute of the Public Service of Canada nails it on the head as these are just proposals which “are all part of the overall solution. But they are not sufficient to address the pressing issue of retirement security for working Canadians or current or future retirees…we do not feel that a “modest increase to CPP” is going far enough, fast enough. The longer the government waits to take any meaningful action the more expensive the solution becomes”.”

Also, the Toronto Star editorial “Breakthrough on pensions?”indicates that “What a change after six months — and a chorus of criticism from Canadians who demanded straight talk on pensions instead of a snail’s pace on reforms. Reunited in Prince Edward Island this week, the politicians did a dramatic about-face…(but) then insisting on moving slowly so as to “do no harm.” That sounded suspiciously like “do nothing.””

Yes, the government has (finally) recognized/admitted that there is a problem, but as far as action is concerned it is unclear as when anything will happen or what actually will be done. When I am particularly pessimistic (or perhaps realistic), then I would interpret that “he will move gradually with “modest,” phased-in hikes” as: we’ll make a token adjustment to the CPP so we can tell Canadian voters that we have started and are continuing to fix the pension crisis, yet we are leaving the system essentially unchanged with Canadians at the mercy of continued usurious high costs associated with funds offered by Canada’s financial services industry (even if multi-employer type plans are eventually introduced). But then, there are (perhaps naive) moments when I think that something of substance might actually be done like: increasing CPP pensionable earnings to about $90K, and (to help those already retired or within 10 years of retirement) allowing voluntary contributions (transfers from RRSPs and RRIFs) to CPP/OMERS/Teachers-type investment management pools and introducing (compulsory) ‘longevity insurance’ (separating the insurance from the asset management part of an annuity) for those who want access to those funds without having to transfer their assets to an insurance company to buy an annuity.

Things to Ponder

The Economist’s “Something doesn’t fit” explains how come that both Treasury bonds and gold are performing so well. They quote Martin Barnes who “points out that the direction of official policy (low rates, quantitative easing, big deficits) looks inflationary but the economic fundamentals (a big output gap, sluggish credit growth) look deflationary. Faced with this dichotomy, investors who buy both Treasury bonds and gold are not displaying cognitive dissonance. They are just hedging their bets.” (from CFA Financial NewsBriefs)

In the Globe and Mail’s “California on ‘verge of system failure’” Barrie McKenna describes the disintegration of California’s public sector and its probable imminent bankruptcy, unless they get a federal bailout. “It’s a story that’s being repeated all across California – and throughout the United States – as cash-strapped state and local governments grapple with collapsed tax revenues and swelling budget gaps. Mass layoffs, slashed health and welfare services, closed parks, crumbling superhighways and ever-larger public school class sizes are all part of the new normal…Think of California as Greece on the Pacific: bankrupt and desperately needing a bailout.” “The task is made all the more difficult because California and virtually all other states are barred by legislation from running operating deficits, forcing them to balance their budgets annually by slashing spending, raising taxes or both. Typically, states can only borrow short-term funds, or for capital projects.”

Jason Zweig in WSJ’s “So that’s why investors can’t think for themselves” reports on new research that “found that the value you place on something is likely to go up when other people tell you it is worth more than you thought, and down when others say it is worth less. More strikingly, if your evaluation agrees with what others tell you, then a part of your brain that specializes in processing rewards kicks into high gear. In other words, investors often go along with the crowd because—at the most basic biological level—conformity feels good. Moving in herds doesn’t just give investors a sense of “safety in numbers.” It also gives them pleasure. That may help explain why market sentiment can change so swiftly, why true contrarians are so hard to find and why investors care so much about the “consensus view” on Wall Street.” Zweig reminds readers of Benjamin Graham’s view that the market isn’t a weighting but a voting machine.” (Though in the long-term it is a weighting machine.)

In the Financial Times’ “Case for commodity futures weak”James Mackintosh argues that none of the three arguments (“diversification, the belief that scarcity will drive up prices, and as a hedge against inflation”) for buying commodities is “clear-cut”. But buying via commodity futures is even worse. With commodity futures the “bulk of the return comes not from rising prices, but from the “roll”: the price difference between the existing futures contract and the new one, further in the future, into which it must be rolled” and the more people are investing in futures their prices increase, so investors pay higher and higher prices the further in the future they go with their contract (contango). “This is not just a technicality. The S&P Goldman Sachs Commodity Index has almost doubled since 2001. But investing via futures over the period – when commodity prices boomed – actually lost money, due to roll losses. None of this means commodity futures are not a good asset to trade. But they are not a good place to invest for the long term; and the more investors try to use them as inflation insurance, the less inflation protection they are likely to provide.”

And finally, Pauline Skypala in the Financial Times’ “Looking beyond shareholder value” argues that “When it comes to practices that are good for profit but bad for customers or society, though, there is an obvious conflict. Taking the long-term view, they should look beyond the immediate gains to the possible downside.” Some elements that may be used to drive in this desirable direction are: culture change to “push for companies to be better run from a risk management perspective, which should include reputational risk from unethical business practices”, culture change as a regulatory role, “directors should be required to promote the success of a company with regard to “the common good”.


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