blog29mar2009

Hot Off the Web- March 29, 2009

Jason Zweig in WSJ’s “The fight over who will guard your nest egg” discusses the tug war over who will regulate those who sell investment products and financial advice to investors. He explains the distinction between “stockbrokers and other securities salespeople who work for Wall Street firms and banks and insurance companies” and “financial planners or investment advisers who often work for themselves or smaller firms”. The former must observe “suitability” guidelines (consistent with risk tolerance, objectives and personal circumstances, but no mention of cost!), while the latter have a fiduciary duty to act first and foremost in the interests of the clients. (I think in Canada the situation is analogous.) The new SEC chief Mary Schapiro indicated that it is time to have the same standards both and “I think investors would rationally say that they prefer fiduciary duty as the standard of care. And they are entitled to have their interests come first, always.” (I suspect that most investors would say it’s about time.) About 2/3 of those surveyed last year thought that brokers already have a fiduciary responsibility and must disclose conflicts of interest.

In the NYT’s “The delicate art of helping out with cash” Ron Lieber discusses the ways you might go about to help someone in financial straits with cash, without offending them and making sure that they accept the offer. He looks at five issues: (1) a grant or loan? (e.g. condition is that repayment is by helping another person), (2) ask first, or just do it? (even asking can be helpful), (3) act alone or with others? (4) anonymously?(e.g. clergy intermediary), (5) cash or direct payment? (cash is most flexible).

Financial Times’ Tom Elliott discusses “The signals for recovery”. The signals he lists for the U.S., which is expected to recover first, are: housing market, auto sales, chain store sales, new unemployment claims reduced to 400K-500K from recent 600K, He also reminds readers why it still makes sense investing in the U.S. even though the previous signals are all negative still: competitive market, lots of innovation and productivity growth, better demographics than Europe and Japan, hunger to buy goods accompanied by willingness to work for them as well as limited welfare benefits provide significant motivation to work.

Is it deflation or inflation? In “Divining the economy’s direction: Deflation” InvestmentNews’s Jeff Benjamin. Reviews arguments why deflation is here (in the U.S.) driven by overcapacity, deleveraging, and growing unemployment and quotes Gary Shiller that deflation will stay with us for 5-10 years. On the other hand Daniel Pimlott’s “Inflation surprises with jump to 3.2%”in the Financial Times indicates that Britain’s year-over-year “consumer price index (CPI) increased from 3% in January to 3.2% in February, confounding economists…”; the inflation is partially driven by the impact of the 28% depreciation of the pound sterling over about 18 months. The broader retail price index (RPI), including falling housing and energy prices, showed no change in February. Here again the consensus appears to indicate drops in both CPI and RPI over the next 6-12 months, though CPI is expected to do so only briefly. (So who knows? Though some believe that while we’ll have short-term falling prices, medium to long term inflation is inevitable due to current monetary policies.)

Karen Blumenthal’s WSJ article “Mom and dad, you’re broke” discusses the all too real problem of aging parents’ shrunk retirement savings and the need for adult children to address the topic with them. A suggested opening line may be “My (RRSP) 401(k) is half of what it was,” you might say. “Have your savings been affected as well?”. Once the taboo subject has been breached she suggests a number of possible questions: “How are you doing financially?” and perhaps suggest a financial planner to review matters with, “Will you be able to afford a nursing home?” and perhaps(?) LTC insurance might be appropriate, “Is there a salesperson trying to sell you something (that you don’t need)?” and “Should you update your will?”. (The discussion is good, especially if you think there is a problem and the aging parent have had a recent decrease in capacity to deal with problems.)

Financial Times’ “Is it back to the Fifties” John Authers writes about how retail investors, professionals and academics are losing faith in some of the most fundamental assumptions on which the investment industry is built. Equities outperform bonds: since 1900 U.S. equities returned 6% real vs. 2.1% for bonds, though they haven’t really done better than long term bonds in the last 40 years. Efficient market theory: the assumption that market prices “always reflect all known information”, is certainly is under attack; how do you explain bubbles? You are rewarded for taking equity risk: equity risk premium has been absent over the recent decades. “The notion that the long run will bail you out no matter what stupid things you do in the short run I think is dead,” says Robert Arnott, who examines such performance in a forthcoming article for the Journal of Indexes. “And the notion that if you have the better asset class it doesn’t matter what you pay for it is on its deathbed.” Andrew Lo proposed a behavioral twist to efficient markets called “adaptive markets hypothesis” which suggests that markets are efficient “during periods of calm. However “Periods of extraordinary prosperity have behavioural effects – it gives us a false sense of security and therefore there is too much risk-taking. Eventually that kind of risk-taking is unsustainable and you get a burst of the bubble.”

And finally, in last week’s Ontario Budget 2009, pensions received an entire section; clearly a matter front and center of the Government of Ontario. The bad news was that there were no immediate steps identified to protect pensioners in imminent danger of losing all or part of their pension due to their plan sponsor’s current financial difficulties and past neglect of their obligations to the pension plan. The good news is that there some general indication of future action may provide improved protection. Read more on this subject in my accompanying blog on Pensions: Relief for companies, but not pensioners .

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