Hot Off the Web– April 25, 2011

Personal Finance and Investments

In the Globe and Mail’s “Why paying more tax today may lower your overall bill” Ted Rechtshaffen says minimizing current year tax “is not necessarily good tax planning”; you should consider a multi-year view. Examples given are: consideration of starting RRSP withdrawals before 71 if tax rate later would be higher (or OAS claw-back can be reduced), occasionally it is advantageous to take capital gains in low income years rather than delaying them as much as possible, and think before you claim you RRSP contribution in an unusually low income year.

Amy Hoak in WSJ’s “Got insurance? Enough? You sure” asks that you consider is your home adequately insured, especially if you live in an earthquake or flood zone; these coverages usually have to be bought as additional riders or separate policies. Finally, research insurers selecting one that offers a good quality of coverage — not just the lowest price, Mr. Spencer says. “Many people think insurance is insurance and you buy a policy and they’re all the same,” he says. “But the offerings are as vast as cars. You can buy a Dodge Neon or a Cadillac Escalade.”

In WSJ’s “Why ETFs lag their indexes”(lag in time, not necessarily value) Sarah Morgan explains some reasons why, unlike for mutual funds which only trade at market closing prices), the intra-day ETF’s prices may diverge significantly from the last known NAV (net asset value). Some country ETFs can be traded at any time over a 24 hour period at some exchange that’s open somewhere in the world, even if the ETF’s home country stocks are not trading (prices not changing) because country’s exchange is closed.

In Paul Brent’s Globe and Mail article entitled “A way to pass on wealth without the burden of tax” he looks at life insurance in general, but universal life insurance in particular as means to accumulate and then pass wealth tax free to the next generation. (The best characterization of the recommendations of this article is described by one of the comments associated with this article “Pay CRA or pay the insurance company. No free ride here.” But things are actually worse because: it is easier (and probably less costly) to access the assets not in the insurance policy and the returns on an equity leaning balanced portfolio outside of a universal policy will likely be much higher even after taxes.)

Strasburg and Eder report in the WSJ that “Hedge funds bounce back” in assets, but performance is still ‘lacklustre’ (as measured by the HFRI fund weighted composite index compared to S&P500 returns, and many argue that the HFRI index overstates actual HF performance). Nevertheless, the asset growth is driven by the need of “pension funds and other big investors” to diversify and the lack of many alternatives in the current low interest environment. (Looking at the returns, it not even clear how much diversification is actually provided. Is this another case of triumph of hope versus reality?) The Financial Times’ Steve Johnson discusses hedge fund replication (“based on arguments that hedge fund returns are largely the result of selective market-based exposures, or risk premiums (beta), and not necessarily excess returns associated with manager skill” as described here) in “Hedge fund clones beat index but inflows low”.

Gail Vax-Oxlade looks at the necessity of disability insurance in “Are you asking for trouble?” and warns that “Since work-related plans seldom have the kind of coverage available on individual disability insurance policies, you could be in for a shock.: Considerations of: policy definition of “disabled”, percent of salary coverage, taxability of benefits, residual disability feature and policy exclusions are all important. “Buying private coverage that kicks in after your group coverage expired may not be as expensive as you imagine. Since the wait period – the time before benefits on your individual policy must kick in – is long because of your group plan, you could have peace of mind for a lot less money than you think.” (Recommended by Rob Carrick’s Personal Finance Reader)

The WSJ’s ETFs report contains about half a dozen articles on ETFs:  backgrounders in  “How ETFs have reshaped investing” and “The ABCs of ETFs”, one on bond ETFs “Bonding with ETFs”, where you can get info on ETFs “Information, please” (this is the most useful of the lot and provides references to info sources and ETF ratings like IndexUniverse, Morningstar, XTF, Standard and Poor’s) and on very specialized ETFs “Playing with your food” and “Active but not getting very far”.

Real Estate

In Bloomberg’s “Americans shun most affordable homes in a generation as owning loses appeal”Kathleen Howley reports that even “The most affordable real estate in a generation is failing to lure buyers as Americans…sour on the idea of home ownership. At the end of 2010, the fourth year of the housing collapse, the share of people who said a home was a safe investment dropped to 64 percent from 70 percent in the first quarter.” It was 83% in 2003.

In Palm Beach Post’s “Bills to lower property taxes gaining momentum in Tallahassee”Lilly Rockwell reports that the Florida Association of Realtors is pushing Bills to limit property tax increases to nonhomesteaded (businesses, investors and out-state) property owners to 3% (Senate) and 5% (House), if voters would approve this in an early 2012 referendum. While this would limit future property tax increases, it would not rectify existing locked-in inequities resulting from the 1992 Save Our Homes amendments. First time homesteaders would also receive a one year 50% exemption. (Better than nothing (if passed), but almost a decade too late for the many nonhomesteaders ravaged by the state’s property taxes over the past 8 years; and homesteaders continue to receive a $50,000 homestead exemption.)

In WSJ’s “Home resales increase”Sparshot and Ackerman report that according to NAR median U.S. home sales volume up 3.7% from previous month, but prices are down 5.9% to $159,600 from year earlier. 35% of transactions were all-cash.

In Palm Beach Post’s “Sales of existing homes drop 24% in PBC, compared to 2010”Kimberly Miller reports that according to FAR the median PBC March existing home prices were 24% lower than year earlier, however unit sales volume was up 31%.

Dianne Maley in the Globe and Mail’s “Easing the tax hit for investment property owners” includes a discussion of tax issues associated with U.S. condo rental and sale: CRA rules limit expense deductions to the months that the condo is actually rented, IRS requires a 30% withholding tax on rentals unless you file a U.S. tax return on a net rental basis, and when condo is ultimately sold “the IRS withholds 10% of the gross proceeds” (not just of the gain) unless you “file Form 82888 with the IRS requesting that the agency lower the withholding tax to the amount of capital gains tax actually payable”


In the Financial Post’s “Appeal could mend big hole in CCAA safety net”Theresa Tedesco writes that following the Indalex ruling putting pensioners ahead of even DIP lenders “the smart guys on the Street are concocting new ways to get around the judicial grenade flicked into the heady world of corporate restructurings, an appeal to a higher legal authority is apparently in the works”. “Most smart money is betting the high court knocks this decision down in haste.” (Whatever the outcome of any appeal, the landmark Indalex decision is a signal that a decent society should not consider it acceptable that a corporation be able to abrogate its employees’ already earned pension (i.e. deferred wage) obligations, but that such pension obligations naturally trump the rights of all other creditors when the sponsor is also the Administrator and thus has fiduciary responsibilities to pension plan beneficiaries. Finally some clarity of thought emerged, articulating the conflicts of interest of a sponsor/administrator in dealing with their unquestionable fiduciary responsibilities toward a most vulnerable (in fact, completely unprotected) party (the pensioners) versus the corporation/sponsor’s other responsibilities toward less vulnerable parties (the investors and lenders). It is OK not to offer a DB pension plan; but it is not acceptable to sell pensioners down the river to satisfy the greed/stupidity of management and investors. To do otherwise would be unconscionable in a civilized society. And, I am encouraged to report that the financial industry’s attempt to spread FUD (Fear, Uncertainty and Doubt) as suggested in this article, is actually indicative that this court decision might stick, as it should. Earlier arguments against changing priority to protect pensioners were focused on the unfounded fears of significantly increased cost of borrowing for corporations in general; that having been proven unfounded, now the arguments are more narrowly based, focusing on situations when the corporation has already sought bankruptcy protection. This, hopefully, last objection, will be dealt with quickly and appropriately by dispensing with it; according to this article the objector is a “leading lender to distressed companies in Canada”. It’s about time that pensioners get justice from the justice system and Federal legislators provide the necessary strengthened protections, so that no other Canadian pensioners will have their rights usurped. Of course, when this decision is confirmed, in the future companies/administrators of pension plans and their creditors will no doubt insure that their pension fund obligations are secured.)

Things to Ponder

In IndexUniverse’ “Does unreal GDP drive policy choices? Rob Arnott challenges the notion that “GDP is a good measure of a country’s economic growth and standard of living”. “GDP is consumer spending, plus government outlays, plus gross investments, plus exports minus imports. With the exception of exports, GDP measures spending. The problem is GDP makes no distinction between debt-financed spending and spending that we can cover out of current income. Consumption is not prosperity.” He suggests that “structural GDP which he defines as “GDP, after excluding net new debt obligations, a more relevant measure” a better measure. But a still better “measure of prosperity…is real per capita Structural GDP” and real per capita “Private Sector GDP”. Arnott says that real per capita GDP is only up 6% in a decade, while real per capita Structural GDP is actually down in the past decade.

In the Globe and Mail’s “Price hikes spreading as inflation hits 3.3 percent”Grant and Blackwell write that with “annual inflation rate climbed in March to 3.3 per cent, up from 2.2 per cent a month earlier and the fastest pace in 2½ years…the cyclical low is behind us” and “As the economy revs up and energy prices surge, higher prices are spreading to items such as car insurance, women’s clothes and non-prescription drugs…Faster inflation bolsters the view that the Bank of Canada will boost interest rates in the coming months, possibly in July.”

In the Financial Post’s “Full retirement a thing of the past”Jonathan Chevreau refers to several authors who suggest that “the tidal wave of Baby Boomers about to crash on the shores of retirement won’t be ending their working days anytime soon, if at all”. But Chevreau, after discussing several books on the subject, suggests that even if people never planned to retire “It’s important to have financial reserves so that henceforth you work because you want to, not because you have to”, and the real goal is financial independence.

In the Financial Times’ “Better models alone won’t avert crises”James Mackintosh writes that “As they reverse these (market knows best) policies, regulators and politicians are reverting to a common-sense approach. The experience of communism has shown that markets are better than politicians at allocating capital, and the heavy hand of the state is, mostly, being resisted. Equally, markets are not perfect, and need to be guided away from excess from time to time…(but) The willingness of politicians, even now, to help support obviously overvalued asset prices, such as London housing, suggests a better financial model will not prevent future crises on its own.”

IndexUniverse in “Global regulators compete to warn of ETF risks” reports that the FSB, BIS and IMF have expressed concerns about ETFs. For example “the IMF stability report categorises five specific risks that it sees as inherent to ETFs: counterparty and mark-to-market risk for the ETF provider; leverage risk for investors; liquidity risk; market disruptions; and legal and policy risks”. The counterparty risk is most pronounced wrt to synthetic ETF implemented as swaps; however “ETF providers attack systemic risk warnings” argues that these swap based ETFs represent less than 2% “of all equity-linked OTC derivatives” in Europe. Also in “HSBC says regulators’ ETF concerns ignore other risks” the article supports concerns about swap-based ETFs, especially since the associated very low expense ratios might make them particularly attractive to some investors, however it challenges concerns about security lending for ETFs (alone), when in fact these concerns are in common with mutual funds, which are significantly less transparent than ETFs.

In the WSJ’s “S&P cuts U.S. ratings outlook to negative” Paletta and Browning report that “The move to a negative outlook means S&P believes there is a one-in-three chance that Treasury bonds could be downgraded from their AAA rating, the ratings agency said.” Also in the WSJ, Stein and Oster’s “China speeds Yuan push” indicates that “…China’s central bank is “actively considering” new rules that would make it easier to bring yuan funds raised offshore back onto the Chinese mainland…wider use of the yuan outside China could redefine the balance of power in global currency markets, and in the broader economy, as the rest of the world begins trading more yuan-based assets and settling its bills with China in renminbi instead of the U.S. dollar…Ultimately, greater demand for renminbi could lessen demand for the dollar, raising U.S. interest rates and borrowing costs for everyone from the federal government to home owners.” However, Jason Zweig writes that “Bonds shrug off revised outlook” and that “It is farfetched to think that Uncle Sam will default. In the worst case scenario, the Fed simply runs its printing presses to help the Treasury cover its debts. The debt would get paid off, but at a cost. Flooding the world with more dollars would make each worth less, leading to inflation at home. “The Fed would print the money to pay off the debt holders,” Mr. Brodsky said. In that case, “the bonds would be money-good, but they would get paid off with bad money.”… While much of that exposure is in short-term bonds, American households have cut back on cash and bulked up on bonds at what may be the very end of a three-decade-long decline in interest rates. For many investors, the risk of losing money on bond funds has rarely been higher.” And Chris Martenson’s “Insolvent and going deeper”is a depressing view, but one which can’t be ruled out (Thanks to DF for recommending.)

And finally, in the Economist’s “Negative watch” Buttonwood writes “the fundamental debt problem has not been resolved. The debt has been moved around but not eliminated. This has undoubtedly bought time…But the debt is still there. It must be eliminated by growth, inflation or default.”


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