blog26oct2008

Hot Off the Web – October 26, 2008
 Tom Herman writes in the WSJ’s “Fund investors face the risk of tax hit despite losses”  that many investors who are holding their losing mutual funds in taxable accounts may still end up having to pay tax on capital gains distributions. He suggests that this may be a good time to sell some of your losing funds “before they make the tax distributions”. (It may also make sense to replace them with an ETF covering similar asset class, if that’s what you asset allocation demands.)There are a growing number of articles on the impact of the recent financial meltdown on pensions. In WSJ’s “Argentina makes grab for pensions”  Matt Moffett reports that under guise of protecting pension plans the (almost bankrupt for the second time in less than a decade) Argentine government is taking over private pension plans. Not a good story for plan participants.

On a more positive note (I have not seen the details), B.C.’s premier “Campbell fast-tracks tax relief, recalls legislature”  “The province will create a new private sector pension option for British Columbians who currently have no access to a group pension plan.  More than 75 per cent of private-sector workers in B.C. currently aren’t covered by a group pension plan, Campbell said. “We will spearhead the creation of a privately financed, defined contribution plan that creates a viable option to those who want to participate,” the premier said. “It will be available to employers, employees and self-employed people on a voluntary basis.” “(On the surface this sounds good and may be similar to what I and others have advocated recently- see pension box at my Home page)

Another indicator of more bad pension news is coming is that “Calpers suffers $40B (20%) asset hit”  and “Calpers sells stock amid rout to raise cash for obligations” If you read the articles you find that execution at this pension fund was not flawless; not only did they take a bath due to their aggressive asset allocation, but they also ended up having to sell stock at distressed prices to meet capital calls from private equity and real estate partners.

In these times of stress, Jonathan Chevreau tells “Advisors: prepare for trouble from rogue clients if bear market worsens”  In his Financial Post blog, Jon quotes lawyer Ellen Bessner “that “rogue clients” are more likely to turn litigious when they start losing money”. The key element of protection for advisers is the Investment Policy Statement (IPS). (The IPS, by the way, is a key protection for the client investor as well. For those who forgot what an IPS is you can look at the Asset Allocation  section at this website. For those who don’t have an IPS, perhaps you should be looking for a new advisor.) Ms. Bessner also warns advisors against using expressions such as “guarantee”, market “will come back”, challenge of finding the fine balance between discouraging clients who want to go into all cash (at what may turn out to be or not to be the bottom) or encouraging clients to crystallize losses and miss a significant rebound (especially if they cashed out of the market at the bottom).

The Globe and Mail’s Rob Carrick in “GIC”s meager returns trump risk of stock market” reports that flight to safety by Canadians point them into GICs. He discusses the tradeoffs between the rates for short vs. longer term maturities, though there may not be much advantage to go long in terms of increased interest rates, (but then it may give you an opportunity to lock in a higher rate for a longer period of time if you believe that rates will fall further). Of course there would be fewer trauma associated with the decision of where to head to, if it was done in the context of an IPS.)

WSJ’s Joe White asks in “Boomer bust: Will the economy rebound without post-war babies financing their Harleys?”  “As Boomers send their kids out into the world, they are entering the phase of life when income starts to fall, spending slows and houses get sold…. (this) will now work against them as all of them rush to cash out and slow down at once. That puts more houses up for sale to far fewer buyers: a younger generation that is also less able to afford them….   Economists and demographers say Boomers will need to replace some $2 trillion of wealth lost in retirement funds during the recent stock meltdown, plus the billions in home equity that have vanished in the housing crash.”

Jon Chevreau reviews the highlights of John Rothchild’s “The bear book- revisited”  . Among the highlights reported (I haven’t read the book, but sounds interesting at this time) are: “In a bull market, the winners buy early and sell late; in a bear market, the winners sell early and buy late”, “The longer you wait, the less attractive folding becomes.”, “If it’s unclear whether the economy is headed for deflation or inflation, you can’t go too far wrong with cash.” and “Gold isn’t a cure for bear markets, although it has held up rather well on several occasions. Physical gold or gold stocks helped their owners in six of the eleven losing streaks for the S&P500.”…and many more…

And continuing on gold, Jon Chevreau in “The golden mystery”  discusses the surprise of some/many that gold has fallen from a peak of $1,000 to a recent low of $700, 30% down almost in concert with the rest of the market fall of 40-60%. One might have expected that people will rush to gold as a safe haven, but for various possible reasons (including some conspiratorial ones) it didn’t prove to be one (as yet). Jon Chevreau is in the “5% insurance camp” (so am I).

Jason Zweig in  WSJ’s “Capitulation: When the market throws in the towel”  explains why people may be waiting in vain for the moment of “capitulation” because “bear markets sometimes end with a bang, sometimes with a whimper. You’re more likely to see a unicorn in your backyard or a chimera in your kitchen than you are to spot an indisputable sign of market capitulation. The obsessive attention so many investors are paying to the huge swings in the Dow suggests that we may not have hit bottom yet; stupefaction seems not to have set in yet. What we can be quite certain of, however, is that stock markets around the world are already on sale. If you have cash to spare, put some to work.”

Derek DeCloet in Globe and Mail’s “Heed the advice of the smartest man” quotes Krishnamurthy Narayanan, who predicted much of our current mess, that he is bullish on: Canadian dollar, Canadian stocks (banks not so much), emerging markets and uranium.

And finally in WSJ’s “U.S. mulls widening bailout to insurers” Solomon and Scism report that insurance companies (and auto makers, state governments, etc) are lining up for U.S. government bailouts (handouts) as their credit ratings are being eroded. “Many life-insurance products are pitched to consumers on the basis of an insurer’s financial strength, so moving to a lower rating can have an impact on sales.” (Perhaps some of those insurance products being peddled are not just unnecessary and expensive, but the “guarantees” are not that guaranteed either.)

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