Season's Greetings and a Happy New Year

Probably not what you were expecting but with the holidays upon us, I plan on taking a break for a couple weeks.

Best wishes to you and your family and I would like to wish everyone a Merry Christmas, Happy Hannukah and Happy Kwanza.

Banking Advantages To Being Canadian?

Looking out the window this morning, to a beautiful blanket of snow covering the front of my house, I remembered something that we, as Canadians, take for granted. Please thank the government for instituting far more stringent controls over banking in this country than our southern neighbours. With all of the attempts by the government to "restart" the economy, the failure of their banks to lend money out to individuals and businesses and other banks will keep the economy in slow mode.

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:

1. Stock markets well above where they are.


2. Dramatic market swings on a regular basis.


3. Bailout of the auto industry with Canada leading the way.


4. 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.

Is the glass half full or half empty?

Trying to figure out which direction the stock market will go has gotten to be very difficult, even for the so-called experts. With the defeat of the bailout of the "big 3" auto companies in the Senate on Thursday, many expected a massive drop off in North American stocks on Friday. So what happens? They all finish in positive territory. While I'm sure that the announcement by Dubya (using TARP $$$ to bail them out which seems to defeat the purpose of the term TARP) had some positive effect, it makes you wonder whether anyone really knows what is happening.

Is there a point where things get so bad, it’s good? Yes. In every capital market there are essentially two drivers – fear and greed. Not to keep harping on this but as Warren Buffett once said "Be fearful when others are greedy and be greedy when others are fearful". Right now, fear is winning. Capital market volatility, tight credit conditions, broad economic concerns, and murky outlook for companies have caused a significant shift in asset allocation – away from all things ‘risky’ (i.e. equity and credit products like corporate bonds), into all things ‘secure and safe’.

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.

Here is a fact that I thought I misread the first time. In Friday's Globe & Mail, Barrie McKenna reported the following - For more than a generation, Americans have steadily piled on trillions of dollars worth of debt to buy ever-larger homes and cars. But something remarkable happened this year as the economy sank into recession and financial crisis. The long credit binge came to a screeching halt. New data from the U.S. Federal Reserve Board show that in the three months ended in September, U.S. households cut their debt levels for the first time since 1952. And for the first time on record, Americans paid off more mortgage debt than they took on.

The shift in assets that has taken place over the last several months have meant that ‘good’ companies have been sold right along side the ‘bad’ companies at depressed prices.

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.

Ultimately, the next few weeks and months will determine who wins the "game" and who loses. Which game you may ask?

Idiots Guide to Tax Free Savings Account

If you would like to save $14.95 on the purchase of the book shown to the left (not a real book anyway), then heed this warning - since no two people are the same, then how you approach a TFSA is different for every person as well. I am constantly reminding people that hearing what someone at work is doing, or your neighbour or brother in law thinks may lead you down the wrong path.

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.

Many journalists have espoused the benefits to holding such a product but they also caution people to research into their own situation so people avoid "following the crowd". I have included links to articles from three Toronto writers (James Daw and Tim Cestnick and Jonathan Chevreau) that explain more. If you would like more information, the best recommendation is to call me.

When is a Mortgage not a Mortgage?

If you live south of the 49th parallel is when.

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.”

Recourse Loans

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.

US homeowners borrowed money they couldn't afford to repay (subprime)

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.

“Pessimists see problems in every opportunity. Optimists see opportunities in every problem.”

The title for today's blog comes from Winston Churchill. It was quoted in an article in the Globe and Mail by Dan Richards of Strategic Imperatives. Dan is well know within the "financial advisor" industry as someone who can look at all sides of an argument. In this article, he points out "10 pieces of good news in the gloom".


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.

Largest Stimulus Package Since The 1950's

Nonetheless, here are some short quick thoughts on what to expect this week.

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.

The Bank of Canada is expected to further reduce interest rates tomorrow (50 points is expected although some "experts" say 75 points). Based on the current squabbles in government, and the fact that the Canadian economy is markedly better off than the US, expect a decrease of only 50 basis points. Whether those savings get passed on to consumers remains to be seen.

More and more "experts" are pointing to the past two weeks as "the bottom" of this financial mess. However, expect that sudden sharp increases (1000 points) in the market will be quickly followed by people taking profits to make up for the downturn.

You can probably expect to see record low dollar numbers flowing into RRSP's in the traditional RRSP "silly season". The advent of the Tax Free Savings Account along with the drop in markets will make people skittish about investing. The reality is that now is a perfect time to buy into the market and hopefully people will realize this fact.

Expect the number of bankruptcies, both personal and corporate, to increase sharply come January. He waits for no one.

The number of people who withdraw from their RRSP's will increase as people seek to avoid the "reaper".

Pension plans already in rough shape will be further negatively impacted as companies offer incentives to get those close to retirement to "go early".

The Toronto Maple Leafs (Leaves) will not win the Stanley Cup (or make the playoffs). You knew I had to have at least one easy pick didn't you.

Here Is Something To Think About

Wanted to have the weekend off but couldn't resist.

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?

So who won that election?

This will not be a political commentary; however I believe that Canadians have now lost the right to criticize out neighbours to the south and their two party system. At least they know who is "running" the show. If the Conservatives are defeated in late January, does that mean that Stephan Dion (whose own party wants him out) becomes Prime Minister?

A recent survey by Canadian executives showed that almost half believe the the Conservatives should have done more to "stimulate" the economy. More interesting is that the divide on whether the Conservatives should have done more or done nothing was geographically based. Those out west liked the status quo; while those in the east felt they needed to do more. However, almost 80% believe that a "coalition" led goverment would do more harm then good. I'm not picking sides in this debate - just pointing out that perhaps some middle ground would have been more appropriate.

Now we come to the good news - apparently we going to test my theory on the glass half full/half empty analogies. In the month of November, 71,000 Canadians lost their jobs driving the "employment rate" down to 93.7%. This monthly figure represents the worst monthly loss since 1982. How does this rate stack up with previous historical numbers you may ask?

As you can see, we would need to almost double our September 2008 "unemployment rate" before we began to approach the rates of the early 1980's and early-mid 1990's. The trends indicate more losses to follow but the majority of losses are expected to fall in the manufacturing provinces (specifically Ontario). However, the majority of people will still have a job through this "crisis of economic uncertainty", and for those people, you may want to heed the "warning" of Bill Carrigan. Bill writes a weekly article in the Toronto Star about the technical analysis of stock markets (think about me discussing market performance and adding tons of boring charts that you cannot and do not want to understand). He appeared on BNN (I have unofficially renamed the station Bad News Network) yesterday and showed how he believes that the worst is over and that we have already seeing signs that the market has bottomed. That is not to say that the economy will get better tomorrow - remember that stock markets tend to lead nor lag the economy.

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...

How to make 50% returns in the market...

Obviously, your's truly has suffered some form of a stroke or other mental disorder. The above statements tend to bring to mind the infomercials you see on BNN that show everyday investors how to time and beat the market. It always amazes me how many people get duped into buying these - makes you wonder why true professionals (fund managers/economists) ignore them.

George Vasic, strategist and chief economist at UBS believes that the Toronto Stock Market will hit 12,500 in 2009. That's a 54% increase over current values. Now, who the heck is George Vasic you may ask.

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.

Which Looks Better To You?

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).

1. Price is what you pay. Value is what you get.
2. 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.
3. 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.

How The Stock Market Works

One of my clients (thanks Mae) sent this to me and I felt compelled to share it. A little light reading after a busy weekend.

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.