Hot Off the Web- November 24, 2009

Personal Finance and Investments

In one of his occasional contributions, ex-WSJ personal finance writer Jonathan Clements in “The case for retiring in a bear market”, writes “Here’s a formula for a comfortable retirement: Wait for stocks to plunge 30%. Watch your neighbors panic and market pundits suffer palpitations live on camera. Then quit your job.” Clements suggests ways for retirees to deal with bear markets without selling stocks: (1) keep cash and short-term bond reserves to cover about 5 year need or (2) set yourself up (if you can) to live on dividends, interest, pensions, annuities; then in good years you can cash some of your stocks for luxuries. “In a sense, a bear market creates a financial cushion. If you can look at your beaten-up portfolio and remain confident that you have enough to retire, maybe you are indeed in good enough financial shape.”

On a somewhat related topic in WSJ’s “How to escape the rat race” Brett Arends tackles the question of how much money do you really need to tell his boss to “take this job and shove it”. He discusses having: two years’ worth of living expenses in cash, and looking at moving to a location with a lower cost of living (e.g. see the neat calculator’s cost of living calculator for comparing the cost of living for two cities). Clearly, other considerations are: is it a change of career with a lower income or it is retirement, realistic expected draw from assets, changes in expenses (downsizing home and other expenses). He also quotes Ernie Zelinski author of “How to retire Happy, Wild and Free”(mentioned in these blogs a couple of years ago) who lives on $15,000 a year.

In the Financial Post’s “Invesco Trimark responds to ETF industry criticisms” Jonathan Chevreau wrote a clarification to the story I mentioned in last week’s blog about new mutual funds which are just wrappers for ETFs. Last week (November 17, 2009 Hot Off the Web) I mentioned that the fund wrappers (MERs 1.73-2.01) and the ETF (MERs of 0.75%) totalled MERs of 2.5-2.75% range. In fact a correction is in order: the mutual fund MERs include underlying ETF MERs, but it still doesn’t make any sense at all to pay an extra 1-1.25% annually for a mutual fund wrapper, just to buy the same underlying ETFs but from a mutual fund salesman!

In the Globe and Mail’s “Do your homework to find adviser best for you”John Heinzl list seven desirable traits to look for in an advisor, among them are: fee transparency, recommendations, chemistry, simple/understandable communication, “having a process” that they can articulate, and lower risk approaches.

In Investment News’ “Pimco jumps into actively managed ETF biz”David Hoffman reports on Pimco’s MINT which is the “Bond giant’s fund offers the promise of greater transparency – and yields that beat money market funds”. He also mentions the launch of another actively managed ETF by Barclays, iShares Diversified Alternatives trust, ALT, with the “objective is to maximize absolute returns from its portfolio of exchange-traded futures contracts and foreign currency forward contracts, while seeking to reduce the risks and volatility inherent in those investments”.

The Forbes’s Marilyn Cohen suggests in “Swapportunities” that there are some opportunities not to be missed in your bond portfolio. “If you bought a four-year bond a year ago, it’s now a three-year bond. You could continue to hold it to maturity. But your yield from this point forward is very meager. You’d be better off selling the aging bond at a profit and buying another four-year bond to take advantage of the higher yields available a bit further out on the maturity spectrum….sell the short-term bond at a premium to par and invest the proceeds in somewhat longer-term paper trading at par…(if your bond is in a taxable account, you also get some tax benefits) If you are like most mortals, you are still sitting on unused capital losses racked up during the recent stock market crash. Those losses can absorb your gain on the appreciated bond. When you swap from a premium-priced bond into a new bond with a lower coupon, you effectively convert high-taxed coupon income into an untaxed capital gain.” (Pay attention to transaction costs and spreads which are extremely opaque for bonds.)

Real Estate

The September 2009 Case Shiller numbers are out today. The 10 and 20 city Composite-10 and 20 are up month over month 0.4% and 0.3% respectively, and year over year are down -8.5% and -9.4% respectively. This was the fifth consecutive month over month increase in the composites. But not all cities participated in the upward trend; among the ten which decreases were Las Vegas, Tampa, Seattle, New York and Portland.

Unfortunately in “One in four (US) borrowers is underwater” Simon and Hagerty report that 23% of the U.S. home owners with mortgages “owe more on their mortgages then their property is worth”; in Florida the number is an astounding 44.7%! The problems associated with underwater mortgages include: lower mobility, high default risk, and therefore higher risk of the property being dumped on the market at fire sale prices. (In many states borrowers can walk away from their homes and mortgages with no impact on other assets, though an impact on their credit rating. The good news is that “Realtors reported that home sales in October were up 24% from a year earlier”. And while new home sales down, yet “Existing home sales jump 10.1%” MoM in October. What does that mean? Likely, that you can buy cheaper than build new homes. Home builders will have to start building much smaller houses to compete on price with what’s already out there in resale inventory.

The Herald Tribune’s Alan Zibel reports that “Florida has most new home foreclosures”. While “14% of homeowners are behind on mortgage payments or are in foreclosure”, the corresponding Florida number is 25%, the highest in the U.S.. This might at least partly explain today’s Palm Beach Post cover story indicating 45% year over year increase in Florida home sales. (The volume of sales is almost comparable to 2004-2005 levels, of course at lower price levels).

And more bleak Florida numbers from Jeff Kunerth in Sun Sentinel’s “Shrinking Florida faces tough choices as residents flee, jobs vanish” where he reports that the “migration out of Florida that began before the housing market collapsed and the recession kicked in. In 2009, more than 500,000 people like them will leave. And for the first time since World War II, Florida’s population will actually shrink — by about 60,000 residents, state demographers estimate.”

No doubt you are also wondering some of the 10 question on the mind of WSJ’s James Hagerty in “Ten questions on the volatile housing market”. Among the questions are: Are we at the bottom? Is market getting better? Signals to indicate improvement (supply :number, month of inventory, etc; demand: job market, etc), Is it time to buy for renters?

And James Hagerty in WSJ’s “Fear of double dip in housing”asks the question on some people’s mind, what is the probability of double dip in real estate prices, given the high rate of foreclosures and underwater mortgages.

The Canadian Teranet-National Bank Home Price Index to be out in the next couple of days, but according to recent articles based on real estate sources, the market is still on fire with supply low and prices up, especially in Toronto.


In USA Today’s “As pensions dried up, four firms paid execs 49.5M” Matt Kelley reports that “The Government Accountability Office (GAO) reports that pensions at the companies, United Airlines, US Airways, Polaroid and Reliance Insurance, were underfunded by more than $11 billion when the companies turned them over to a government-backed insurance fund. The report says executives at those four companies and six others that abandoned their pension plans took in a total of $350 million in pay and perks in the years leading up to the bankruptcies. “

For those still following the Nortel story, Nortel’s MEN division (fiber optic group which had $10B sales and $3B profits in 2000) was sold last weekend to Ciena for about $750M. Mr. Z was expecting about $1.5-2B for this division about 12-18 months ago. This is great news for the 2000 employees who were promised jobs as part of the sale, but there is (again) essentially nothing here for pensioners.

Things to Ponder

The Globe and Mail’sLiving standards sink, report says”refers to Dale Orr Economic Insight which indicates that “Canadians have seen a 4.3% falloff in their standard of living since 2007, in terms of real gross domestic product per capita”.

The Financial Times’ David Watt in “Limbering up for lumber”reports that things may be looking up for Canadian lumber industry with changes announced in Shanghai’s building code allowing woodframe construction. “A British trade delegation to China once mused that if the Chinese added one inch to their shirt-sleeves, ‘the textile mills of Lancashire would be busy for the next 100 years’”…“Similar dreams have lingered in Canada’s lumber industry; if only China clarified rules for wood frame construction, a massive market would crack open, easing (Canada’s) heavy dependence on the US.” This could add to the forces pushing the Canadian dollar higher as well.

As the price of gold is increasing day by day, so are the number of stories in various newspapers advocating gold to be included in one’s portfolio (if only more would have suggested this a few years ago). Here is a sample of two of such stories. Jon Chevreau’s Financial Post article “Hedge inflation with gold bullion” where he discusses the distinction between the CPI (according to some a government manipulated number to minimize assorted costs which are a function of prices) and your personal experience with prices (e.g. see my earlier Senior Inflation blog). According to a source quoted in the article the latter may already be in double digits. The solution? Gold portfolio weightings of 33-50%(!) are mentioned (pretty extreme). The other article is Jonathan Davis’s “Ignore Buffet- gold’s time has come” in the Financial Times, where he discusses the polarized views about gold. But the author comes down squarely against Buffett’s negative views on gold. “While the seeds of a future bubble in gold are being sown, we are a long way away from any kind of climax. Despite growing media attention, gold remains surprisingly underowned by private investors….Whether or not you care to define it as an investment, gold offers protection against the devaluation of the dollar and the eventual re-emergence of inflation”.

And finally, Louise Story’s article in the NYT entitled “Wall St. finds profit by reducing mortgages” where she shows you that the really smart set continues to make money even in the midst of disaster. “Investment funds are buying billions of dollars’ worth of home loans, discounted from the loans’ original value. Then, in what might seem an act of charity, the funds are helping homeowners by reducing the size of the loans…But as part of these deals, the mortgages are being refinanced through lenders that work with government agencies…This enables the funds to pocket sizable profits by reselling new, government-insured loans to other federal agencies, which then bundle the mortgages into securities for sale to investors….While homeowners save money, the arrangement shifts nearly all the risk for the loans to the federal government — and, ultimately, taxpayers”. “there is something disturbing about investors that had substantial short-term profit in backing toxic loans now swooping down to make another profit on cleaning up that mess.”


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