Friday, December 19, 2008
Best wishes to you and your family and I would like to wish everyone a Merry Christmas, Happy Hannukah and Happy Kwanza.
Wednesday, December 17, 2008
While the Standard & Poor’s 500 Index is up 23 percent from last month’s low (this indicates we are now in a bull market) and the Fed promised to use all tools at its disposal to end the longest recession in a quarter century, investors remain wary of any securities except Treasuries. As banks hoard cash, businesses are struggling to refinance debt and consumers can’t get loans. The LIBOR (London Interbank Offered Rate) has dropped dramatically over the past 3 months, yet banks are still wary of lending to each other and the consumers. The reason? They have became wary of lending to each other amid concern that the same securities that ruined Bear Stearns would cripple themselves. Financial institutions have reported almost $1 trillion in losses and write downs since the start of 2007.
To help alleviate the problem, yesterday, the Federal Reserve in the US cut rates to "historic lows". This statement best demonstrates where the Fed wants to go;
"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," the Fed said.
Sounds good doesn't it. Here is something to think about - if you are a bank and want to borrow $1M from the federal reserve, the interest only loan would cost you $212 per month. Looks suspiciously like a sub-prime loan to me. Unfortunately, they are beginning to run out of bullets for their gun. It's not like you can reduce interest rates below 0%. At this point, the Federal Reserve will have to turn to other strategies to turn things around. Ben Bernanke has done literally all he can do to jumpstart the economy short of...(see picture).
The fear amongst US banks regarding lending has now begun to spill over our borders. The diligence that had always (for the most part) existed in Canada, has begun to creep into "everyday" life. Recently, several institutions suspended the ability for people to "leverage" (borrow money and invest), while other lenders have dramatically increased the borrowing costs associated with borrowing. The Bank of Canada has also cut rates dramatically - yet the banks have not always followed suit. Mortgage rates have not dropped along with general lending rates and when was the last time you read your credit card statement to see what interest rate they are charging you.
The mere fact that Canadian banks have had recent share offerings (at a discount in the case of one) to maintain their Tier 1 capital at 10% makes many people nervous. In addition, three of the six banks are still below that magic mark, and it's expected that they will be selling stock in the new year. Do they know something we don't? Is there more to come?
So where do we go in 2009? Looking into my crystal ball, I expect to see the following:
- Stock markets well above where they are.
- Dramatic market swings on a regular basis.
- Bailout of the auto industry with Canada leading the way.
- The Toronto Maple Leafs will not win the Stanley Cup.
My hope is that we look back in twelve months and that things not only look better, but that people wonder why they didn't invest more money when they had the chance.
Monday, December 15, 2008
The continued demand for government bonds with little to no regard for the ultra-low yields is a clear sign that investors are now significantly more focused on the return of their money, than the return on their money. Companies and households have forgotten about profit maximization, and have become preoccupied with minimizing debt. This is a primary reason why interest rate cuts have yet to stimulate increased economic activity - simply put, no one is interested in accumulating more debt.
This broad-based and indiscriminate selling has created additional downward pressure on the stocks –and so a cycle of prolonged downward pressure on stocks plays out. Despite the best intentions to buy low and sell high, many have done just the opposite, essentially cashing in losses to invest in assets with little to no expected return. While no one can pinpoint the exact moment, as time wears on there will be a shift as fear begins to subside and investors (perhaps timidly at first) begin to seek out a return for their investments. When that happens, the reverse flow from fixed-income products and cash will create an abundance of buyers in the equity market, rewarding those investors who resisted the temptation to abandon their well diversified, long-term investment strategies.
Friday, December 12, 2008
In the past week, I have had seven meetings with clients interested in setting up a TFSA or at least learning about them. I decided to run a TFSA 101 course based on some of these conversations.
Obviously (to me at least) I am kidding. To refresh, I have included some information from a previous blog.
Here are a list of the top 10 things to know about the TFSA.
- The Tax-Free Savings Account lets you invest while not being taxed on interest or investment earnings.
- You can contribute a maximum of $5000 a year. A couple can each contribute $5,000. If you contribute $5,000 each year for 5 years you’d have more than $25,000 earning interest Tax-Free!
- You can have more than one Tax-Free Savings Account and you can also have Tax-Free Savings Accounts with more than one financial institution. Like RRSP’s you will need to keep track of how much you’ve contributed so you don’t exceed your limit.
- Unlike an RRSP, you don’t have to pay any tax on money you take out of your Tax-Free Savings Account, and withdrawals from your Tax-Free Savings Account don’t affect your ability to qualify for Federal benefits like the Child Tax Benefit, Guaranteed Income Supplement, Old Age Security benefits, Age credit, or Goods and Services Tax credit – so you’re not penalized for saving.
- You’ll be able to open savings accounts, GIC’s and mutual funds tax-free.
- Unlike an RRSP, money you put into your Tax-Free Savings Account will not be deducted from your income on your tax return.
- Just like an RRSP, when you file your tax return each year, the government will determine your remaining available Tax-Free Savings Account contribution limit for the coming year.
- If you take money out of your Tax-Free Savings Account, you don’t lose the contribution room. You get it back in the following year. If you don’t make the maximum contribution you don’t lose the contribution room. The unused contribution room gets carried over to the following year. There is no limit to how much or how long contribution room can be carried forward.
- You can open a Tax-Free Savings Account if you are 18 years of age and a Canadian resident.
- The Tax-Free Savings Account comes to Canada January 1, 2009, but we can arrange the paperwork now.
Thursday, December 11, 2008
Last spring I had the opportunity to hear a speech by Martin Feldstein (seen at left), a Harvard economics professor. He spoke at an investment company education day, and he mentioned something that I (and several others I shared a table with) was shocked by. On Tuesday, in an interview with Bloomberg Radio, he explained how these problems created much of the mess in the US housing market and the spillover into the whole global economy.
He stated "The cycle of falling prices and rising defaults needs to be broken by restructuring U.S. mortgages to make them similar to others throughout the world", Feldstein said. "Owners should be at risk of losing a portion of their incomes or assets other than their houses during foreclosure", he said.
Right now, “there is a very strong incentive to walk away,” said Feldstein. “If you have a substantial gap between what you owe and what the property is worth, you have a very strong incentive to default. That doesn’t happen in other countries around the world.”
Feldstein advocates the use of so called “recourse loans” that allow banks to garnishee wages or repossess personal property like automobiles or furniture in the event of a default.
Say what? You mean you can buy a home in the US, and then if the deal goes sour and you owe more than it's worth, you can just walk away? Try doing that in Canada. Other than a reverse mortgage (where you cannot finance 90% of your home value), these beasts are essentially not allowed in Canada. I did some digging on the Internet and found the following explanation of the differences.
I have developed the following flow chart (humour definitely intended but also a dose of reality) that explains the entire mess we find ourselves in.
From lendors who gave out loans like the government gives out bailouts
Lenders then sold the "mortgages" as great "investments" to investment dealers
People in the US then used their homes as giant ATM's
People in the US spent more than their homes were worth
The sub prime meltdown made mortgage default rates increase
This then led to the mortgage "investments" going sour
Which led to the financial crisis we find ourselves in
Which led to the bailouts by governments around the world
Which leads us back to government telling consumers to "spend money" to help support the economy, which means you now go back to the top of the flow chart and repeat the process until our children's children's children can pay for it.
Tuesday, December 9, 2008
So we have gone through this mess (and are hopefully finished with it) yet I constantly wonder why I feel like someone is watching me. The reason is simple - while markets may climb, the economy will lag for another 6-12 months and that means we need to remember a very important fact.
By that I mean remembering not to cash in a RRSP (when it's down in value and pay the taxes too) to pay off a credit card debt. There are ways to solve problems without making the problem worse.
One of the keys to success is looking at your retirement plans on a long term basis, meaning a 20 to 30 year period. Even if you're 55 years old, the time from now through your retirement years represent a 30-35 year window. Don't think of retirement as a specific date in the future; it actually represents a period of time (of as many as 40 years for some).
The end of December is fast approaching, soon to be followed by the arrival of your year end investment statements. What should you do? I have heard several clients tell me they will simply file them without looking. One suggested they would simply add them to the fireplace. While I am not suggesting we all go out and torch our paperwork, I have come up with an interesting remedy to the situation/problem.
The year end statement will reflect values for the year 2008, and will also show how much you have contributed to the plan. My solution; we plan to create summaries (where able) to show everyone how their plans have performed since they started. I'm not sure why, but I'm confident that looking at a net annual rate of return of 4% over the last 5 years looks better than looking at a 30% loss.
Monday, December 8, 2008
Markets will rise this week. Markets will fall at some point in the future. See what I mean about not being an expert. Actually, let's see what else your seer of the future can prognosticate.
Pension plans already in rough shape will be further negatively impacted as companies offer incentives to get those close to retirement to "go early".
Saturday, December 6, 2008
Quote from this blog from November 4th:
North American markets bottomed out around the 27th of October. Based on history, can we expect a second trough around December 1st? That would last until early January at which point markets would be expected to rally. However, the confluence of forces we have seen over the past four months are unlike most things in history. Previously on my blog, I showed that over the past 22 years, the TSX (and for that matter the S&P 500) had experienced their best growth during the month of December by a wide margin. With a 2.6% average annual increase, are we now headed back to the important psychological 10,000 mark on the TSX, or are we likely to take another step back before pushing ahead.
Let's put the December 1st date on our calendars, and see where things are headed.
Check out this chart from the Toronto Star. Do you notice anything?
Thursday, December 4, 2008
Who is right? Who is wrong? I don't feel that any one person can accurately predict the future, but when the number of people telling us we have hit the bottom begins to grow, i think it safe to assume that we are either near or at the bottom.
One last point - in earlier blogs, I explained how the market tends to bottom out then bottom out a second time at around 35 days later. The date for that second bottom? December 4th (yesterday). Now we see whether history will repeat itself again...
George Vasic is the Equity Strategist and Chief Economist for UBS Securities Canada Inc. In this capacity he is responsible for the Canadian market and economic outlook, sector rotation and asset mix recommendations. He has consistently ranked in the top 5 in both the strategy and economics categories, has won several awards for forecast accuracy, is widely quoted in the media, and for five years was a contributing editor to Canadian Business magazine.
Obviously, Mr. Vasic made this rather bold statement due to his lack of knowledge, or because he wants the entire business community to percive him as having gone off the deep end. He woudn't actually say something like that because of a deep-seated belief that things are ripe for a quick turnaround now would he? More and more people "in the know" are pointing to a bottoming for the market, and if you would harken back to past blogs, you would see the date December 4, 2008 as a predicted market bottom from yours truly (courtesy of the work of very smart people). We will see how accurate these forecasts are over the coming weeks.
This now brings us to the point of this blog entry. Will you be a buyer of RRSP's during the annual "RRSP season"? It's like walking into a mall and the sign says "Everything 50% off". The only difference is this - we don't know when markets will rise and waiting to see may mean paying higher prices. In talking with clients over the past month or two, most of them have taken the approach to "stay the course" and continue doing what they have always done in the past.
The mole seems to know what you should do. Who or what is the mole you ask? He is a writer for CNN Money Magazine and in the this recent article, he certainly hits the nail on the head. He makes one very important point, "I ask about risk tolerance only to make the point that hypothetically losing half of your portfolio doesn't inspire the same fear that actually losing it will". Now before someone emails me or comments that they didn't know they had lost half of their money, that is nnot the case. However, I firmly believe that the recent market drop will help people better understand the importance of long term planning based on good sound judgement.
Tuesday, December 2, 2008
If you had a gun to your head, which of the above charts would you choose for your investments? It's always interesting to me when you present something in different ways to see what the reaction is. The first chart represents annual stock returns for US large stocks per year. If you had to ride that roller coaster, I wouldn't recommend eating anything that would upset your stomach.
The second chart - the rolling 20 year history of the EXACT SAME US LARGE CAP STOCKS. If you averaged the returns over a period of twenty years for US Large Cap stocks from 1930 to 1950 and then presented a percentage, it would be 7%. This figure is in spite of the depression. Since 1950, the 20 year average has never fell below 7% (the high point came from 1941 to 1961 at 17%).
Now if you're not a fan of the previous reading material, I would pay attention to the following statements. Apparently people have forgotten the concept of "long term" investing. That refers to developing an investment strategy for 20-30 years, not 20-30 minutes. With every other show on the idiot box being devoted to some inane "lack of reality" show", infomercial, or a get rich quick by buying and flipping US real estate (I wonder how many of these shows will be off the air next year), the concept of saving money the old fashioned way seems passe. We would be foolish to ignore the thoughts of Warren Buffett (the richest man in the world although that they may have changed).
- Price is what you pay. Value is what you get.
- For some reason, people take their cues from price action rather than from values. What doesn't work is when you start doing things that you don't understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it's going up.
- Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.
If you believe that your retirement will be taken care of by the government, or you would rather "live for today" and forget tomorrow, then ignore me. For everyone else out there, remember the following - markets go up and markets go down. This is not new - it has been going on since markets began. When markets jumped up dramatically last week, I wondered about the "prediction" for a second bottom on or around December 4th. Yesterday's results reminded me that history does tend to repeat itself. Nonetheless, last month, in an article by Shawn Tully, Fortune magazine stated the following:
"If you buy now and wake up in 10 years, you'll probably get a return around the historic average," said Yale economist Robert Shiller. In the near term, however, Shiller - who correctly predicted the implosion of the stock-market and real-estate bubbles - is more cautious. "There is a substantial risk that with all this economic turmoil, stocks will fall far lower," he warned.
Heed my warning:
Most of us will live to get old and retire. If you don't save money, then you won't have money. Do you know the difference between an old man and an elderly gentleman? $1000 per month.
Monday, December 1, 2008
Once upon a time, in a place overrun with monkeys, a man appeared and announced to the villagers that he would buy monkeys for $10 each. The villagers, seeing that there were many monkeys around, went out to the forest, and started catching them. The man bought thousands at $10 and as supply started to diminish, they became harder to catch, so the villagers stopped their effort.
The man then announced that he would now pay $20 for each one. This renewed the efforts of the villagers and they started catching monkeys again. But soon the supply diminished even further and they were ever harder to catch, so people started going back to their farms and forgot about monkey catching.
The man increased his price to $25 each and the supply of monkeys became so sparse that it was an effort to even see a monkey, much less catch one. The man now announced that he would buy monkeys for $50! However, since he had to go to the city on some business, his assistant would now buy on his behalf.
While the man was away the assistant told the villagers, "Look at all these monkeys in the big cage that the man has bought. I will sell them to you at $35 each and when the man returns from the city, you can sell them to him for $50 each." The villagers rounded up all their savings and bought all the monkeys. They never saw the man nor his assistant again, and once again there were monkeys everywhere.
Now you have a better understanding of how the stock market works.