Hot Off the Web- October 28, 2009

Personal Finance and Investments

The Financial Post’s Jonathan Chevreau reporting from the World Money Show indicates that “At World Money Show in Toronto, mutual funds are yesterday’s investment” . Unlike in past such shows, mutual fund companies were almost invisible. An investor poll presented suggested that “only 12% of its users “prefer” mutual funds”. (Are Canadians finally waking up to the damage caused by mutual fund fees to their retirement?)
In another Chevreau article “Trading commences in nine more BMO ETFs”he tables the new BMO ETFs rolled out which include Canadian and U.S. fixed income ETFs, as well as some currency hedged and unhedged equity ETFs. The article also has a link to more detailed information on these ETFs.

WSJ’s Brett Arends writes that “TIPS buy peace of mind, but at a steep price”with so much fear of inflation, people have been loading up on inflation protected bonds, so you must buy 20 year bonds before you get historical 2.2% real yield.

Alliance-Bernstein did a survey on investor attitudes related to retirement savings and in it they asked the level of interest in a lifetime guaranteed income version of target-date funds in “Inside the minds of plan participants”. More than 75% indicated that they would be interested in “a steady stream of income to last them throughout their retirement.” (Target-date with minimum guaranteed income stream sounds good, if price is right; 2.0-3.5% or even higher fees are not. Those who want guaranteed lifetime income might be better of with fixed annuities, rather than the hope of illusionary (or perhaps delusionary) upside protected with expensive guarantees. (Thanks to Ken Kivenko for bringing to my attention.)

Real Estate

In the August Case-Shiller Home Price Indices  U.S. 10 and 20 city composite indices are up about 1.2% over July and down about -11% over last August and -30% from 2006 peak. Miami and Tampa are up 1.0% and 0.4% over July and down about -22% over previous year and off -53% and -60% from 2006 peaks, respectively. The worse performers in August were Charlotte, Las Vegas, Cleveland, Seattle and Dallas which were essentially flat over July. Best month on month performers were Minneapolis (+3.2%) and San Francisco (+2.8%).

In James Hagerty’s WSJ article “Waiting for next McMansion to drop” he discusses real estate in 28 different US cities. Some of the good news relates to lower inventories, though this is offset by high rate of foreclosures in some areas (like to bring more inventory onto the market) and slow sales rate of higher priced houses.

In an update on Florida’s discriminatory property taxes, AP’s Bill Kaczor reported in “Florida appeals court hears Save Our Homes case”  that last week retired Florida State University President Talbot “Sandy” D’Alemberte “now a law professor at the school, represented recently arrived Florida residents in one argument to the 1st District Court of Appeal and out-of-state owners of second homes in another.” He “asked the appellate panel to send the cases back for trials he argued would bring out evidence proving the tax breaks are unconstitutional.” The pending decision of the three Florida appellate judges is not promising, given their previously expressed views and judgments on the matter. I suspect the good news is that this is just another step on the way to trying to get to the U.S. Supreme Court.

Bayles and Kessler in Herald Tribune’s “Home sales heat up while pries stay flat” report “Though sales rose 34 percent statewide, pricing slipped month-over-month, down about 4 percent from $142,000 in August, data released Friday by the Florida Association of Realtors showed. The median sales price nationally was $174,900, slightly lower than August’s $177,300.” Other Florida real estate data points can be found in the Herald Tribune’s “Condo sales on rise” indicating that Southwest Florida’s condo market volume is up significantly in September but with mixed news on prices; but according to Tom Bayles in “Housing bottom? Analysts wary” there is considerable skepticism that the Southwest Florida prices have bottomed, since another wave of foreclosures is on the horizon.

On the Canadian real estate front Diane Francis writes in the National Post’s “CMHC bubble is 100% made in Canada”that “Ottawa has been creating a housing bubble in Canada with taxpayer money, which is why residential real estate prices rise in defiance of high unemployment and recession. Ottawa’s low interest rate policy and Crown agency Canada Mortgage and Housing Corporation’s dramatic increase in mortgage backstopping, for people who put only 5% down, have pushed up activity and prices.” “Canada’s real estate markets are hitting highs in the middle of the worst recession since the Depression.” Francis argues that housing bubble will have to be dealt with higher interest rates, which in turn will aggravate the already high Canadian dollar. (The Canadian Teranet House price index for August is expected later on this week and we’ll have another data point on the direction of prices.)


In the Globe and Mail’s “Canada’s gathering pension storm” Konrad Yakabuski reports that Canada’s “public pension system (is) considered one of the world’s most financially sustainable. There’s only one catch: That system pays among the least generous government-sponsored benefits in the developed world. It’s a prudent approach, but it’s laying the groundwork for a host of other problems.” “today three-quarters of Canadians in the private sector have no employer-sponsored retirement plan. Less than a third contribute to an RRSP and only a tiny fraction stash away the maximum allowed – 18 per cent of earnings up to $21,000 annually” “The biggest obstacle to overhaul…The insurance industry and big banks, which manage hundreds of billions of dollars held in corporate pension plans and RRSPs, are lobbying fiercely to protect their turf against any incursion by Ottawa or the provinces.” By percentage of seniors living in poverty, Canada does quite well, however “official poverty statistics mask the increasingly severe financial hardship faced by urban seniors in this country.” There are at least three proposed plans on the table are: CARP’s UPP (based on CPP with mandatory contributions increasing from 9.9% to 19% and maximum pensionable earning from $46K to $116K; the payout would be 70% of preretirement income instead of current 25%), Ambachtsheer’s CSPP (auto-enroll with opt-out right; target replacement rate of 60%), and the Alberta and BC ABC plan (voluntary contribution accessible to any BC or Alberta resident). Government’s pension research results headed by Ted Menzies will be tabled in December, but given Jack Mintz as its research director (and his already declared view that the current system is working fine) and Mr. Harper’s natural inclination of “survival of the fittest”, the outcome is not promising. (Not only is time of the essence since the leading edge of the boomers are entering retirement, but there is no mention in any of the proposals on the transition plan which will protect those whose retirement incomes have been damaged by the current systemic failure of the Canada’s private sector pension system.)

Karen Mazurkewich reports good news for the almost 4000 Quebec based Nortel pensioners in the Financial Post’s “Quebec offers to take over Nortel pensions”. The Quebec regulator of pensions “Régie des Rentes du Québec announced that it would attempt to safeguard the pension assets of Nortel employees in the province by taking over the management of the remaining pension assets.”  This in effect prevents forced wind-up and annuitization for this subset of Nortel pensioners. “The Ontario Pension Benefits Act has provisions empowering the government to create an agency that could receive pension assets but have never been proclaimed”. (It is amazing how long it takes the Federal/Ontario governments to do the simple, sensible and right thing, while deferring the decision on a undesirable outcome; Quebec seems to have no problem focusing on its people.)

Pushed by popular demand for urgent pension reform, a cause now picked up all three opposition parties as reported in Steven Chase’s “Federal parties square off on pension reform” the federal government rolled out a hasty announcement on so called pension “reform”. Chase McFarland and McNish in Globe and Mail’s “Jim Flaherty unveils pension reform” report that the federal Conservative government, under growing pressure due to their stonewalling and inaction on pensions, has made an announcement of “reforms”. The most significant changes are the increase in allowed over-contribution from 110% to 125%.and restrictions on contribution holidays; other more trivial changes were tabled as well. This is at best a “pretend” action, a diversionary tactic to give the appearance of doing something. The proposed changes will have no impact on the “systemic failure” of Canada’s overall private sector pension system. For those companies which wanted to contribute more to pension plans there was always lots of actuarial wiggle room on actuarial assumptions; unfortunately this was almost always used to underfund plans, by minimizing pension plan contributions by those who had no regards for the welfare of pension plan beneficiaries and whose only concern was to maximize profits and bonuses. The tabled changes have absolutely nothing to protect pensioners of underfunded pension plans whose sponsor has gone bankrupt. The required remedy is to change BIA now, to give priority to pension underfunding and nothing to do with real pension reform that Canada needs. There was also nothing about pension reform in general. This “pension reform” announcement is unlikely to fool anyone into complacency; this was an essentially do nothing announcement, even for the 12% of private sector pension plan members (the federally regulated ones) to whom the announcement is applicable- a lot of ink for little substance. In fact the provision that states that “Companies must fully fund pension benefits when they voluntarily terminate a plan. This does not deal with bankruptcy situations” might even encourage more companies to go into bankruptcy protection to escape pension obligations (just as Nortel has done. Considering that the government so far has insisted that there is no problem with pension, and now has rushed out some “corrective’ action, is at least indicative that they finally realize that there is a problem; even that is progress.)

Things to Ponder

Martin Wolf looks at Andrew Smithers’ new book Wall Street Revalued: Imperfect Markets and Inept Central Bankers in the Financial Times’ “How mistaken ideas helped bring the economy down” .“The big points of the book are four: first, asset markets are only “imperfectly efficient”; second, it is possible to value markets; third, huge positive deviations from fair value – bubbles – are economically devastating, particularly if associated with credit surges and underpricing of liquidity; and, finally, central banks should try to prick such bubbles. “We must be prepared to consider the possibility that periodic mild recessions are a necessary price for avoiding major ones.”” “The right time to buy is not when markets have done well, but when they have done badly. “Markets rotate around fair value.” “Mr. Smithers proposes two fundamental measures of value – “Q” or the valuation ratio, which relates the market value of stocks to the net worth of companies and the cyclically adjusted price-earnings ratio, which relates current market value to a 10-year moving average of past real earnings.” “Imperfectly efficient markets rotate around fair value. Bandwagon effects may push them a long way away from fair value. But, in the end, powerful forces will bring them back. Trees do not grow to the sky and markets do not attain infinite value.” “Anybody interested in investing would gain from reading this book. They would then understand, for example, why the “buy and hold” strategy advocated by many pension advisers, even at the peak of the stock market bubble, was such a catastrophe.” (It sounds like it’s a book worth reading; it would have been even better if we read it about 18 months ago, and paid attention to it.)

In the Financial Times’ “Why sovereign bond yields will explode” David Roche writes that when “Japan’s bubble economy collapsed, it was able to run huge budget deficits and raise outstanding government debt from 60 per cent to 140 per cent of gross domestic product, while still experiencing a fall in bond yields from 8 per cent to 1 per cent. But this “miracle” was only possible because Japan’s household savings were huge and invested at home. Japan did not need foreigners to fund its government deficits. Even today, foreign ownership of Japanese debt is only 6 per cent compared with 50 per cent for US government paper. But Japan’s household savings rate has collapsed due to an ageing population who no longer save.” Roche concludes that once quantitative easing stops, bond prices will deflate and “very probably equity markets to, as these feed on the same source of liquidity and are priced off bond markets by addition of a risk premium.” In a related note from Brian Milner in Globe and Mail’s “Nouriel Roubini warns of bubble”reports on warnings by Roubini and Pimco’s Gross that essentially zero interest rates are driving asset into a bubble to levels that cannot be sustained without matching economic fundamentals.

On the inflation/deflation front there is Alan Ruskin’s Financial Times article “Inflation or deflation” where he warns that inflation is worse than deflation and policy makers must not err on side of inflation, whereas Jonathan Chevreau reports in “Protect yourself against falling prices” that Garry Shilling predicts for the next ten years annual price drops of 2-3% per year.

In the Financial Times’ “A decoupled world” John Authers writes that “Decoupling was not supposed to work this way. The grand theory was that decoupling by emerging markets would be good for everyone – they would grow even if consumers in the developed world caught a cold, and help everyone through.” But while “Asian economies are already at the point where overheating is the main danger, while US consumers, for all the money thrown at them, are still not feeling any better. This is not encouraging.”

In Globe and Mail’s “A new world order forged in crisis” Gwyn Morgan writes that “These enormous global economic imbalances were unsustainable before the meltdown and they are even less sustainable now. So what will “after the recovery” world look like? History will record the arrival of a new world order, with global economic growth dominated by the East, while the overextended West faces the consequences of living beyond its means for far too long.” And the related Financial Post article by Paul Vieira “Do not underestimate ‘historic’ restructuring ahead: Carney” which suggests that Canada’s traditional U.S. market orientation will have to change dramatically as a result of the financial crisis quoting BOC Governor Carney “Businesses are going to have to re-orient, and they are going to have to find new markets, and there’s going to be some adjustment. And it will be painful.”
And finally, perhaps in a sign of things to come, the Financial Times’ Norma Cohen reports that “Economists call for pensions at 70” by 2015 in the UK.


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