Hot Off the Web– September 28, 2010






Personal Finance and Investments



In the Globe and Mail’s “Will you really need that much to retire?” Dan Richards discusses what percent of your pre-retirement income is needed in retirement. Numbers quoted range from 70% (the “old” standard) to 50% (suggested by one actuary) which Richards supports with a recent survey of actual seniors’ spend-rates. A 2007 Russell survey indicated that “the average retired household headed by someone 65 to 74 years old had annual expenses of about $30,000, or about $2,500 monthly. A typical household spent about $2,000 a month on essentials and $500 monthly on lifestyle items.” (While I have no reason to doubt the validity of the survey results, it is not clear that those surveyed chose to live on$30,000 income per year, or just that that’s how much was available to live on and it was possible to do it.) But “the top third of households aged 65 to 74 had average expenses of about $54,000. Of this they spent about $38,000 on essentials and approximately $16,000 on lifestyle expenditures.” Russell categorized spending in three buckets: essentials (food, shelter and transportation), lifestyle/discretionary (travel, dining out, alcohol/tobacco), and gifts/charities. The survey also had some good news, in that it indicated that “90 per cent of retirees talk about enjoying life and experiencing happiness, freedom and relief “. (While some of the data and categorization of expenses is interesting and useful, discussion of required income as a percent of pre-retirement income is not; retirement income need is better looked at starting from actual pre-retirement expenses as the base and applying changes to that base in retirement needs and expectations.)


In the Financial Post’s “Are your executors ready for your exit?”Michael Nairne says that you need more than an up-to-date will for a smooth ‘exit’. He suggests: (1) briefing executor on “reasons behind terms of will”, (2) briefing major beneficiaries/stakeholders on content of will, (3)preparation of ”comprehensive balance sheets” and how it will meet requirements and (4) a wealth management team and process to be in place.


In Barron’s “New websites tighten focus on ETFs” Mike Hogan reviews new websites XTF(ETF data and attributes like “tracking error, average bid/ask ratio and Sharpe Ratio”, ETF Database (screener), ETF Trends  (ETF screener) and ETF Expert (downside/risk) which collect, analyse and report on ETFs in as understandable fashion so the ETF users can act on the compiled information. The websites generally have a basic set of free features, as well as premium content for paying subscribers. You might want to try them all. As Hogan concludes “No one site covers all the bases; each contributes something different. And it never hurts to get different perspectives.”


In’s ”Retirement checklist: What to do from 35 to 55+” Walter Updegrave recommends  1.5x, 3x and 6x annual salary in savings between 35-45, 45-55 and 55+, respectively.  Not a bad checklist of to do items, but (unless I overlooked it) he seems to have failed to include paying off your mortgage (ASAP or at least before intended retirement date; this is especially critical for Canadians who don’t get any tax reductions from interest payments.) (Recommended by Rob Carrick’s Personal Finance Reader)


In the Globe and Mail’s “How to tilt investing odds in your favour”Dan Hallett  suggests some simple must do things for successful investing, like: write down and regularly review your goals (short, medium and long) and incorporate them into an Investment Policy Statement (IPS) that you can develop with your adviser, keep portfolio properly diversified, focus on overall (rather than parts of) portfolio performance, keep fees low but be realistic factoring in your need for advice, and “treat your portfolio like soap” (the more you touch it the smaller it gets)


Tim Cestnick in the Globe and Mail’s “Five ways to cut your year-end tax tally”suggests ways to reduce taxes, such as: TFSAs, time TFSA withdrawals before year-end as this increases your 2011 contribution room, and (low interest of about 1%) loan to your spouse for investment purposes


Rob Carrick in the Globe and Mail’s “How to achieve a happy client-adviser relationship”reports lawyer Ellen Bessner’s recommendation, that if you have an adviser, you shouldn’t treat him as your enemy (by withholding critical information). Ms. Bessner (who describes herself as working in a special niche “representing investment dealers, mutual fund dealers, IC/PMs, compliance officers, branch managers/supervisors, and advisors in Ontario courts of all levels and at various regulatory tribunals, including IIROC, MFDA, OSC and FSCO” ) suggests that you treat the relationship as a partnership for best results. Information sharing is especially important in order to determine the client’s risk tolerance; she says “Relax – approach the adviser like a doctor or a lawyer or any other professional”. (Assessing risk tolerance is important, but letting your guard down and ‘relaxing’ may be an overstatement. Unfortunately, ‘advisors’ do not generally take on a fiduciary responsibility (i.e. unlike doctors and lawyers are not necessarily required to act exclusively in the best interest of the client, except for financial planners in the U.S.). Also, unfortunately, advisors (especially brokers and mutual fund salesmen) do not typically develop an (essential) Investment Policy Statement for the client; you have to go to a financial planner for that. An IPS is the key document necessary to have the kind of relationship in which an advisor can truly act on the holistic needs of the client. So despite Ms. Bessner’s advice, you should not necessarily relax.))


Steve Johnson in the Financial Times’ “Wealth managers too costly”reports that “An “unsustainable” 40 per cent of wealthy investors’ expected portfolio returns are being swallowed up by fees and other charges” and “In a world where expected returns on a typical investment portfolio may have dropped 40 per cent compared with prior to the crisis, paying 1 per cent or more each year to a wealth manager is increasingly uneconomical”.


Robertson and Perkins in the Globe and Mail’s “Banking watchdog to track dementia-related cases” report that “Canada’s banking ombudsman is preparing significant changes to the way it handles complaints against the country’s financial institutions in a bid to track cases that involve people who suffer from dementia…(OBSI) plans to create a national case registry that will flag complaints in which dementia may be a factor.” (Thanks to Ken Kivenko of the Canadian Fund Watchfor bringing article to my attention.)






Real Estate



The July Case-Shiller Home price indiceswere released today and the U.S. 10/20 city indexes show 4.1%/3.2% increase over July 2009, and 0.8%/0.6% increase over the previous month. “The year-over-year growth rates for 16 of the cities and both Composites weakened in July compared to June. While we could still see some residual support from the homebuyers’ tax credit, which covers purchases closing through September 30th, anyone looking for home price to return to the lofty 2005-2006 might be disappointed. Judging from the recent behavior of the housing market, stable prices seem more likely. “In the monthly data, 12 of the 20 MSAs and the two Composites were up in July over June; but the monthly rates also seem to be weakening. The next few months may give us an idea of the true strength of the housing market, as the temporary.” The Florida cities covered showed Miami up 0.7% and Tampa down 0.2% over previous month, and up 0.4% and down 3.2% over July 2009.




Mortimer Zuckerman in the WSJ’s “The recession and the housing drag” describes what’s wrong with today’s housing market and why the U.S. is in such a mess and concludes with “The more the government tries to paper over the housing crisis and prevent housing from seeking its own equilibrium value in real terms, the longer it will take to find out what is true market pricing and then be able to grow from there.”


The Globe and Mail’s Rob Carrick refers the readers of his Personal Finance Reader to an interesting qualitative picture of how markets go through psychological phases of a bubble in  “Psychological states of a RE bubble market”; the picture also suggests the respective stage that the US and Canadian real estate markets are in.








In the Globe and Mail’s “Ontario rejects Nortel pensioners” Janet McFarland reports that “Ontario Finance Minister Dwight Duncan notified Nortel’s pension committee late Tuesday that his government will not allow a request to have the company’s $2.5-billion pension plan transferred to a private-sector financial company for management, saying it puts plan members at risk”. Ron McCaig writes in the Vancouver Sun’s “Lessons for pensioners from those who worked for Nortel” that “The current system, which would force them to cash out their depleted pension funds and lock into annuities at a time of historically low interest rates, is cruel and illogical. It helps no one except the insurance companies selling annuities…Millions already manage their own pension plans successfully, yet the Ontario government apparently believes the only people who can be trusted to manage pensions are the same politicians and bureaucrats who “regulated” so many plans into the mess they’re in today.” (As mentioned in last week’s Hot Off the Web , the simplest compromise solution might be compulsory annuitization of the first $1000/mo of pension for all those who receive the benefits of PBGF protection to that level, and allow transfer to RRSP or locked-in plan for the remaining assets. There is no reason, of course, why those who chose to annuitize 100% of their pension would not be allowed to still do so. This is really a painless win-win for all. Mr. Duncan achieves the objective to protect PBGF contribution and its beneficiaries, and pensioners who want to manage their own retirement assets are allowed to do so. There are superior but more complex solutions that may be usable in future on underfunded pension plan work-outs but there appears to be no political will to explore those options at this time.) The latest news, just in, is that Ontario Premier McGuinty will take a fresh look at the Nortel pension windup options as reported by Canadian Press’s Keith Leslie in “McGuinty agrees to another review of Nortel pension plan, just days after saying no”. (Who knows, perhaps they will offer an alternative to compulsory annuitization; there are lots of better solutions which all are zero cost to the taxpayers.) By the way, the NRPC announced that Morneau Sobeco has been appointed the administrator of the Nortel pension plans effective October 1, 2010.



In “CARP: Nova Scotia Pension Submission” CARP views the recently proposed modest and gradual  CPP expansion as inadequate; even doubling the current maximum benefit at the monthly cost of  $216 paid by employee and employer would only raise the annual benefits to a maximum of $23,600. CARP is recommending “that the CPP expansion be made at a level that will substantially improve on the adequacy of retirement income now provided by the CPP”, which is in the range of “60 – 70 percent that is considered the acceptable replacement rate for middle-income earners”. On the subject of MEPP (Multi-Employer Pension Plans) CARP is looking for features “necessary to ensure universality, adequacy, and fairness”: universal, adequate savings, defined benefits, regulated MERs, and sustainable size and portability. (CARP, with Susan Eng as its advocacy chief, is doing a great job in driving politicians to recognize the need for pension reform.)


Merton and Snippe write in the Financial Times that the “Dutch (are) not facing up to pension troubles”. “Aside from rapid increases in longevity, this dire state of affairs (90% funded in nominal and 60% in real terms) is primarily attributable to several years of insufficient contributions compared with the cost price of the pension promises they were supposed to fund, combined with risk-taking to try to compensate for that, followed by poor returns in equity markets and a sharp decline in interest rates. The decline in interest rates is increasingly singled out by pension funds as the main source of trouble. This is obviously misguided, because it is not the interest rate decline itself that has widened their funding gaps, but the fact that most pension funds were not sufficiently hedged against it (no ALM). The real problem of the low level of interest rates, and real rates in particular, is that it has made new accruals much more expensive.” The solution proposed is a combination of replacing real with nominal pension values and using higher than risk-free discount rates to liabilities. “Apparently, they seek to solve their problems by simply denying they exist.”


Jonathan Chevreau in “Revamping the pension system with the Total Career Benchmark Model” and “New times, new pension” discusses a proposal by actuary Tom Walker for a new pension system built from ground up (The Total Career Benchmark Model). I perused Tom Walker’s thoughtful proposal (though I’ll need to re-read a couple of more times as it is quite long and complex.) My first impression is that he is effectively proposing individual retirement plans, to be built on CPP administrative infrastructure to track accumulated benefits, comprised of a combination of compulsory Lifetime Account (which is eventually annuitized or transformed into something that sounds very CPP(rather than annuity)-like as it includes indexing and “under any major market collapse each Age-Specific Plan can adjust benefits or costs in a non-destructive manner”) and a voluntary Personal Account (where employee bears market risk); both employer and employee are required to make certain minimum levels of contribution to the Lifetime account and can make voluntary contribution to both accounts. Walker also proposes a more equitable allocation than currently permissible tax-sheltering opportunities, as well as a different allocation of risk than in the current employer sponsored DB plans. The proposal also includes a much simpler (than current CPP approach) of reporting to each individual the status of their retirement plan (i.e. some feedback mechanism). What I did not see in the proposal, and I consider essential, are: (1) how to deal with the usually corrosive costs associated with the proposed private sector management of funds and ‘annuities’ in the uncompetitive/oligopolistic Canadian financial services industry, and (2) in the spirit of eliminating the current ‘private sector’ conflicts of interest, the definition ‘private sector’ in the context of managing ‘pensions’ should be defined as ‘mutual’ rather than publicly owned financial institutions. (The other problem is that this proposal will do nothing of substance for those already retired or planning to do so in the next 10-20 years.) Still, what is encouraging is not only that we finally have reached consensus that there is a pension crisis in Canada after all, and that the momentum is building toward a massive pension (or requirement income) system re-architecture from  ground up, rather than the tinkering that the federal and provincial finance ministers have proposed so far.





Things to Ponder



In the Financial Times article looking at European asset management trends entitled “Regulators trailing cross-border trends”Pauline Skypala writes “Getting savers’ money into the right vehicles to deliver the capital returns and income stream they need in retirement or for other purposes is important for the efficient allocation of capital and for government finances. The more money savers can accrue, the less call they will need to make on taxpayers. Poor or biased advice, opaque products and expensive distribution channels all get in the way of this outcome.” (How refreshing; perhaps this is something that could be considered in Canada as well.)


Jane Kim in WSJ’s “How safe is your bond fund?”reports that some bond fund investors were suddenly surprised to find that their holdings were riskier than they thought as the “average credit quality” calculation was changed effective September 1. Morningstar and the industry’s bond mutual fund rating “used a calculation of the underlying securities’ credit ratings that assumed that default rates tend to rise at a steady, constant rate. The new methodology reflects the fact that defaults historically have tended to rise dramatically as one moves down the credit spectrum.”


Jason Zweig reports that “The market war between traders and investors heats up”in the WSJ. Mutual fund managers are unhappy with high frequency traders (HFT) because their profits come at the expense of fund investors. Zweig gives an example how mutual funds’ orders which are broken up into smaller chunks to minimize price movement are often detected and effectively “front run” by HFT due to current execution rules. He concludes with the questions “Whom should the market be designed to serve: Short-term traders or long-term investors? Is it serving both fairly?”


Floyd Norris reports in the NYT’s “Seeking to protect investors” “As Mary L. Schapiro, the S.E.C. chairman, put it, in the old system “the market participants with the best access to the markets” — New York Stock Exchange specialists and Nasdaq market makers — “were subject to significant trading obligations that were designed to promote fair and orderly markets and fair treatment of investors.” “These traditional obligations,” she added in a speech to the Economic Club of New York this month, “have fallen by the wayside.” The author says that the SEC failed in its mission as a regulator “to make things better, or at least not to make them worse.” The author suggests that a “principle based” approach rather than a “rules-based” one might work better. (Thanks to Dan Braniff of the CFRS for suggesting article)


In WSJ’s “Macro forces stump stock pickers” Lauricella and Zuckerman report on stockpickers’ lament that “it has made their entire investing approach feel like an exercise in futility”. Stockpickers’ bottom up approach is being overwhelmed by Macro forces (“big-picture market movers like the economy, politics and regulation”), and increasing number of investors “trading big buckets of stocks, bond and commodities based on macro concerns. As a result, all kinds of stocks-good as well as bad- are moving more in lock step.”



In the Globe and Mail’s “The bare essentials of share buybacks” John Heinzl explains implications of “share buybacks” and why we are seeing a buyback boom.



As usual there were numerous articles in the past week, expressing divergent views on the prospects of inflation and deflation. Here is a sampling of these:

In the WSJ opinion piece “Too little inflation?” it is suggested that the Fed is not so much concerned by the risk of inflation, but more so by “insufficient” inflation, and is thus likely undertaking additional quantitative easing (QE2). “…by calling the inflation rate too low, the Fed is signalling that it wants more inflation in order to reduce unemployment. No wonder gold kept rising yesterday, and the dollar kept falling, as investors interpreted the Fed decision as a promise to continue its Great Reflation until the jobless rate falls.”.  “Central bankers who wish for more inflation usually get their wish, and the result is rarely benign.” Also on the fed announcement, the related article by James Mackintosh in the Financial Times’ “Fed is cautious over its wording”suggests “the higher likelihood of QE2 did nothing for equities, which are flat to down. Printing money to buy assets ought to be good for shares…US core consumer price inflation, excluding volatile food and energy prices, has been at 0.9 per cent or below since April, its lowest since 1961. If this continues, hopes that corporate profits will rise further, even though they already stand at record levels, may prove misplaced. No wonder shares are weak.”


David Rosenberg writes in the Globe and Mail article “Can the US slip into outright deflation?” that “While a deflationary spiral seems overly pessimistic even for a bear like me, the arithmetic still points in the direction of an ongoing decline in the underlying trend in consumer prices in the United States….Food for thought, because that prospect is not remotely priced into nominal bond yields, even with the 10-year Treasury note sitting around 2.7 per cent and the long bond yield just under the 4-per-cent mark. Nor does it seem likely that, in such a challenging pricing and revenue environment, we will see the double-digit earnings trend still currently embedded in equity market valuation.“


On the other hand, Chen and Zumbrun report in Bloomberg’s “Former Fed Chief Volker ‘No Worried’ about deflation” that ““I’m not worried about deflation,” Volcker said today to reporters after a speech at a banking conference in Chicago. “I think we’re on a path to price stability.” “I do not think we should be worried about and consumed by the problem of a potential deflation that doesn’t exist,” he said.” On inflation and the Fed’s plan to possibly provide additional quantitative easing  he is quoted as saying that “We’re in a situation right now where we’ve got a sluggish economy, a lot of excess resources, a lot of unemployment…This is not an atmosphere that’s inclined to produce inflation. I think we ought to be sure that we don’t take actions that down the road might lead to an inflationary situation.”


But Erin Arvedlund in the Barron’s “Keeping it real” reports that hedge fund manager Haugerud has a slightly different take in the inflation/deflation debate. “Our view is that inflation and deflation can in fact coexist, an economic paradigm we have dubbed ‘inverse stagflation’… Inverse stagflation would entail little or moderate economic growth and the underperformance of traditional paper assets like stocks and bonds. Commodity prices, however, would soar, along with real asset values. Agricultural commodities and farmland would do well in such a scenario, while U.S. stock and bond returns would lag. This is a structural shift away from the regime of the past 30 years, in which paper assets have outpaced real assets five times over”.


And finally, the Economist’s

“Standards of living- Beyond GDP” refers to a new paper which suggests a “new measure of standards of living based on a simple thought experiment: if you were reborn as a random member of another country, how much could you expect to consume, in goods and leisure, over the course of your life? Based on this, a graph with the relative positions of various countries is presented, including a comparison with the PPP based year 2000 GDP of each. Interestingly Canada is about 81 on GDP but still only about 90 on “Standard of living” scale compared to US=100. (Recommended by CFA Financial Newsbriefs) Same subject is discussed in more detail in William Watson’s Financial Post article “Money never hurts”.


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