Hot Off the Web- November 5, 2012

Contents: LTC costs up, cap- vs. GDP- weighted bond indexing, estate planning in Canada: advantages to giving it away before death, closing the retirement income gap, adviser designations, US house prices up, demographics and Canada’s house prices, Florida property tax, public pensions under attack in Canada and UK, Arnott: avoid big companies, gold price might fall if Romney wins? Shilling warns on over-reaching for yield.

Personal Finance and Investments

In the WSJ’s “The cost of living longer” Kelly Greene reports that “Nationwide, long-term-care costs in a number of categories have risen faster than inflation over the past year…(in addition) care providers are changing the types of services available or bundling services in new and at times confusing ways.” In the past five years there was a 17% increase to $3,486 in the price of rent including “help with day-to-day activities but not necessarily round-the-clock nursing care.”, while private room rates increased 4% to $248 a day in nursing homes. Other options which, if they work, may be cheaper such as: selecting only those services in the nursing home that are required, choosing assisted living facilities, or independent living apartment with even fewer services, or in-home care, or even day-care services… The article also contains a state-by-state cost of assisted-living facilities with Arkansas at about $2300 and all the way to almost $6000 in D.C.

Joe Light in WSJ’s “Is your bond strategy wrong?”discusses the advantages of GDP over market capitalization weighted bond indices. He writes that “what makes sense with stocks can lead to dangerous outcomes for bonds… market-cap weightings in bond indexes mean that countries with spiraling debt, like those in the euro zone or Japan, take up ever-larger portions of the index and investors’ portfolios… (whereas) GDP weightings reflect a country’s capacity to pay off its debt.” For example, emerging markets bond weighting would jump from a cap-weighted 4.8% to a GDP weighted 21%!

Jamie Golombek in the Financial Post’s “Estate planning: Give your money away now- save taxes” discusses the possible tax advantages of giving away assets before death. Examples include individuals with wealth well in excess of what they would spend in a lifetime given their standard of living, might give some of the assets to their children who have mortgages and/or are in a lower tax bracket than the children are.

In the Financial Post’s “Retirement savings: What if it’s STILL not enough” Andrew Allentuck writes that if the gap between what you expected from government and private pensions as well as other savings, and the money needed to support you planned retirement costs is too large, consider renegotiating your mortgage, a home equity line of credit, downsize to a smaller house, rent out rooms in the house, relocate to a cheaper area, and/or go back to work part-time

In the WSJ’s “Alphabet soup of advice” Caitlin Nish looks at the “confusing array of acronyms” used as financial adviser designations. She tries to shine some light on the subject, explaining that: RIA (Registered Investment Adviser) is not some specialized credential but it is a statement indicating that they charge for their services not with transaction costs but at “flat rate or an asset-based fee and (most importantly) are bound by a fiduciary duty”, CFA (Chartered Financial Analyst) ”is an investment specialist, trained to value stocks, bonds and alternative investments and build portfolios. This certification requires work experience, extensive study and the passage of three exams”, CFP (Certified Financial Planner) “have training in comprehensive financial planning, ChFC (Chartered Financial Consultant) is similar to CFP, CLU (Chartered Life Underwriter).” is an insurance specialist educated in topics such as risk management and estate planning”. Coincidentally Preet Banerjee discusses Canada’s confusing designations in the Globe and Mail’s “The ultimate financial adviser designation…” and combined CFA and RFP (Registered Financial Planner) might be the ultimate combination of designations for your ideal financial advisor. (I am not familiar with the requirement for  an RFP designation but you could do a lot worse than having an advisor with a CFA designation (disclosure: some might say that I am somewhat biased since I have a CFA charter), which requires extensive training including financial planning considerations (e.g. IPS) and the CFA Code of Conduct requires that the end-client interest takes precedence over advisors’ and their employers’ interests.)


Real Estate

The August 2012S&P Case Shiller Home Price Indices indicate that “average (US) home prices increased by 0.9% for both the 10- and 20-City Composites in August versus July 2012. Nineteen of the 20 cities and both Composites posted positive monthly gains in August… The 10- and 20-City Composites recorded annual returns of +1.3% and +2.0% in August 2012… Phoenix continues to lead the home price recovery. It recorded its fourth consecutive month of double-digit positive annual returns with a +18.8% rate for August… The sustained good news in home prices over the past five months makes us optimistic for continued recovery in the housing market”. (While overall increases are small, it certainly feels like we are near the bottom even if significant increases are not on the horizon.)

Garry Marr in the Financial Post’s“Canada need not fear a US style housing crash” reports that according to CIBC’s Benjamin Tal, while prices will fall in Canada, Canadians need not worry about a US style housing crash since he considers the circumstances between the two countries so different as to make the analogy irrelevant. He sees a soft landing in Canada, rather than a crash like in the US.

In the Financial Post’s “House prices depend on demographics” Jason Heath argues that “Despite all of the analyses and hypotheses in the media, the answer may not be based on historical real estate prices, interest rates or ratios. The answers may lie, to a great extent, in our demographics. Seniors will downsize because they need the money and they don’t need the space or the stairs, and “It’s also one reason supply, demand and prices for condos in this country may continue to rise.”  Furthermore “What this means is that the pressure of Baby Boomer downsizing could be an impediment to home prices, economic growth and inflation.”  He also suggests that demographics might drive Canada, like Japan, to deflation rather than inflation. On a related subject is Garry Marr’s Financial Post article “Boomers warned using home sales to fund retirement could backfire” where he reports that Bank of Montreal is warning “Boomers not to count on that nest egg (their homes), while other observers suggest that even if prices don’t plunge, big increases in property values are a thing of the past.”

My Florida property tax is 43% down from 2006 peak but it is still about twice what I paid in 2000 or what many of my homesteaded neighbors are paying today. It’s progress, resulting from the property price meltdown, but Florida voters are going to be voting on new property tax amendments which are likely to further increase the gap between taxes paid residents and non-residents. The outcome is TBD. (You can read my take last year on the proposed changes in the Florida’s nonhomesteader snowbirds shafted again by new property tax Bill 381” blog)


A very clever approach to ending the divide between public and private pension systems in the UK is proposed in the Financial Times’“A solution to pensions apartheid where Steve Johnson writes that why not allow private sector employees to join public sector pensions. Of course the counter argument is that“it would be too costly to fund and unfair to future generations forced to pay the bill. But if it is too expensive to provide such a pension for a private sector worker, then it is clearly too expensive to provide it for an identical public sector worker… benefits should be downgraded equally across the board, for public and private sector workers alike, ensuring intra-generational fairness, even as government has to take a decision on inter-generational equality”. (Ouch!)

In the C.D. Howe report entitled “Further reforms to federal pensions required” Robson and Laurin write that  the recently proposed changes in Canada to pensions of “federal employees and MPs are a move in the right direction…(but) the deep flaws in these plans require more fundamental revisions”. They argue that the guarantees associated with those plans are “far more valuable, and their costs and obligations on taxpayers are far larger than reported”. The authors mention: “annual wealth accumulation far higher than reported their reported current service costs”, “taxpayers still bear more than half the risk…unless plans converted to target-benefit plans”, tax deferred savings of federal employees are still triple those of other Canadians, and proposed changes “will still leave the MP’s plan completely unfunded”.  (…and Ouch again…)

Things to Ponder

The Canadian Department of Finance has issued a report on the “Economic and fiscal implications of Canada’s aging population”which indicates that “demographic changes will make it increasingly difficult to continue to improve the income and standard of living of Canadians through increases in the employment rate. Projections show that, as a result of population aging, the proportion of the population of working age (15 to 64) will shrink over the coming decades, which will lead to an inevitable fall in the employment rate”. The report also contains some interesting statistics. (Thanks to Ken Kivenko of Canadian Fund Watch for recommending)

In an interview with Rob Arnott in Index Universe’s“Arnott: Big companies best be avoided”, as usual, he challenges (some) conventional thinking by arguing that the largest companies are (often) “too big to succeed”. “His research suggests that “maybe the markets aren’t as efficient as we’d like to believe. And if the markets aren’t as efficient, then maybe companies that are very expensive do in fact tend to underperform—and maybe they even tend to underperform T-bills.” (Interesting argument which coincidentally support his “fundamental indexing”.)

Jack Farchy writes in the Financial Times’ “Romney’s threat to the gold price” that the threat to the gold price is two-fold if Romney and the Republicans win: first “bringing down the deficit, that could lead to a stronger dollar and therefore weaker gold” and second that “he would replace Ben Bernanke with a more hawkish chairman of the Federal Reserve when the latter’s term expires in January 2014”.

And finally for a downer you can count on Gary Shilling to find the cloud in the silver lining, in Bloomberg’s “Low rates lure yield seekers onto thin ice” in which he sees nothing but gloom and doom in investors chasing more risk in search for better returns in below investment-grade debt (junk bonds, munis, illiquid east European sovereign debt, emerging market bonds), the decoupling myth (the expectation that developing countries “can grow independently of Europe and the US”), “peak oil” and other commodity plays ( “human ingenuity and substitutes have always overcome shortages quickly”).  If you have over-reached for yield, or are considering doing so in the near future, you might want to also read David Merkel’s piece in Seeking Alpha entitled “Yield is the last refuge of scoundrels”.


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