Canada Pension Plan and Old Age Security benefits are changing.  The reason is simple – we are living and working longer then when these plans were designed.

The changes to CPP began January 1st of this year.  These changes may make it more attractive to delay taking CPP until later if you are health and having a greater indexed pension is preferred.  Here are the changes and their implications:

1 – Monthly CPP pension amount increases by a higher percentage if you take it after 65.  It becomes more attractive to take CPP later if an individual has other options to replace that income (like an RSP) or would benefit from a greater guaranteed and indexed pension for life.

2 – Monthly CPP pension amount decreases by a greater percentage if you take it before 65.  It becomes less attractive to take the CPP early if an individual has other options to replace that income (like an RSP) and if healthy and can expect a normal life expectancy.

3 – The number of low or zero earning years dropped from the calculation will increase.  With one less low income year impacting the calculation, a greater CPP benefit may result for some people.

4 – The “work cessation” test will not apply.  Now individuals will not have to stop work or reduce earnings to begin receiving CPP.

5 – A new “Post Retirement Benefit” is a new lifetime benefit and is indexed like the CPP.  If an individual begins collecting CPP and continues or goes back to work, they (and their employer) will have to contribute to CPP for this benefit.  The post retirement benefit will be added to CPP each year based on contributions and additional years worked.

From a planning perspective we need to consider when to begin withdrawing CPP.  Along with comparing the lifetime guarantee and indexing of CPP to our own investment returns, we need to consider our health and potential life span.  If we were to consider only the cumulative pension money paid out, we need to know the cross over point.

The “cross over” point is the age to which an individual must live beyond in order to benefit from taking the pension later vs earlier.  With the new changes the cross over point for taking the pension at age 65 vs 60 is now 73.

However, if we consider the CPP as one of the few guaranteed and indexed pensions available to us and we are in good health and expect an average to longer life expectancy, it may make sense to take CPP much later – possibly at age 70.  The cross-over point for someone who delays taking CPP until age 70 is now age 76.  In other words, the cumulative amount of pension money paid out from age 60 is exceeded by age 76 if started late – at age 70.  After age 76, the amount paid out increases significantly than what would have been received if started at age 60.

We’ve also read recently that the government is planning to increase the age at which Old Age Security is paid from age 65 to age 67 (for those currently 57 or younger).  This benefit is paid from general revenues to which all taxpayers have contributed.  Although clawed back at a specific income, OAS does not begin to be clawed back until an individual earns $69,562 for 2012.  Most Canadians would continue to qualify for OAS given this claw back limit.

The need for understanding the implications of the above on longer term retirement income has never been more important.

The Impact of Economic Policy

The key reason for the slow recovery is “economic policy uncertainty” according to Professor Steven Davis.  He suggests that the uncertainty of government direction regarding monetary and tax policy prevents the recovery from happening faster.   This study suggests the sooner governments clarify direction, the quicker recoveries may occur.

http://www.clientinsights.ca/video/prof-steven-davis-why-the-fed-committed-to-low-rates-for-three-years/type:investor

Dow 15,000 maybe 17,000 by end of 2013

According to Jeremy Siegel (professor of Finance at the Wharton School, University of Pennsylvania and author of several books) the Dow Jones index which holds 30 broadly diversified large company US stocks has a 2 in 3 chance of rising about 20% over the next 2 years.  He bases this on 141 years of stock market history which says periods of worse than average performance (that’s right, like what we’ve just had) have a tendency to be followed by periods of better than average performance.

For the whole article:

http://online.barrons.com/article/SB50001424052748704444604577207223617121572.html?mod=BOL_hpp_emc#articleTabs_article%3D1

National Housing Outlook – the Art of Analysis

This is an interesting article from a mortgage industry writer on recent housing market bubble projections of some economists in Canada.  Another example of economists looking at the same data and making different predictions.

http://tothepointwithbozic.com/mortgage/national-housing-outlook-the-art-of-analysis?utm_source=rss&utm_medium=rss&utm_campaign=national-housing-outlook-the-art-of-analysis&utm_source=feedblitz&utm_medium=FeedBlitzRss&utm_campaign=tothepointwithbozic

The Case for Emerging Markets

The following video is an interview with Gerardo Zamorano of Brandes Partners discussing the opportunities in emerging markets.

video interview

http://www.clientinsights.ca/video/gerardo-zamorano-the-emerging-markets-opportunity-2/type:investor

It’s not easy to be an optimist after a year like 2011. Canadian stocks sank more than 8%, led by a 52% drop in information technology. Even Canadian bank stocks offered less of a safe haven than in years past. Around the world, 2011 was a year marked by natural disasters, European and US debt and deficit problems, uprisings and protests. Time magazine asked in its December issue: “Is there a global tipping point for frustration?”

I believe there is – things that break often beg to get fixed, and challenges of any kind are often accompanied by opportunities. Here are my observations and comments for the year ahead:

Europe, US and China will continue to be the focus of 2012. Europe has made some progress but many suggest a recession there is likely, if not in place already.  It will take many years to solve their debt problems but we are beginning to see some leadership.  The US is in an election year with possible changes to its political landscape and real solutions not likely until after the election.  Fortunately we are seeing the beginning of sustainable but slow growth in the US economy. China is expected to have a lower, but still strong GDP growth of greater than 8%.

Bleak points in history are not necessarily bad times to invest.  Investors can either have good news or good prices.  The worst time to invest is often when investors are overly optimistic and asset prices are unjustifiably high. When there’s worry and negativity, stock prices generally reflect that sentiment. Today, your fund managers are finding stocks of many high-quality companies selling at very attractive prices. The way I see it, global markets are offering investors an opportunity to upgrade the quality of their portfolios right now and this is what fund managers are doing.

U.S. companies have been remarkably resilient. Despite a less-than-robust economy, and a host of other problems, U.S. companies continue to rebound. The S&P 500 was up 4.6% in 2011, and U.S. corporate profits are at record highs by some measures. When you compare corporate earnings to what government bonds are yielding, it’s hard not to be optimistic about stocks.

Emerging markets are alive and well. Emerging markets have relatively little debt, access to capital like they’ve never had before, powerful technology and a rapidly growing middle class. That’s real growth potential. Many Canadian, U.S. and European companies that do business in emerging markets may also be well positioned, even if their local economies aren’t strong. It’s where a company does business, not where it’s based, that matters most.  Fund managers are seeking out and purchasing the stocks of these companies.

Innovative companies around the world are creating new products and solving the world’s problems. I think that’s what makes markets go up over time — it’s the effort of the individual companies solving problems. That’s a reason for optimism, as long as you’re patient.

The biggest risk right now could be over concentrating your portfolio. When we don’t know what’s going to happen, it’s often wise to invest in different types of securities. Many people end up owning too much of a “good” thing, whether bonds, cash or high dividend-paying stocks. My job is to make sure you stay properly diversified, even when the markets make you nervous.  Note that the 20 year return of a balanced portfolio of 60% equities and 40% bonds to the end of June 2011 (after 10 years of near flat returns) was 8.4%

The recovery is inevitable. This past decade has been difficult for investors but history suggests times like these do end and growth resumes.  We need faith in human desire and ingenuity and that the market does go through a cycle and it will once again recover.

If you feel you’re at your tipping point for frustration, let’s talk. And even if you’re not, it’s a good idea to check on your financial situation and any changes that may have occurred.  As always, I’m available to talk or meet and review your situation.

There is plenty of room for us all – we are getting better at everything.

Matt Ridley is a professor at Oxford who wrote a book called the Radical Optimist – How Prosperity Evolves.  He refutes the media view expressed so often to us that the world is spiralling downward.  This is one of his presentations and he makes a strong case for optimism.

http://www.ted.com/talks/view/lang/en//id/915

I can’t help but use the start of the year as a time to reflect on my life and came across these questions.   As Socrates said, “An unexamined life in not worth living.”  Here are 40 questions you may want to answer for yourself.

http://www.marcandangel.com/2010/03/29/25-beautifully-illustrated-thought-provoking-questions/

The wonderful thing about a new year is we can start afresh.

As European debt woes continue to dominate headlines, it’s hard for this not to have an impact on our mood and our outlook.  The equity market recovery is taking longer than hoped.  From most of the analysis I’ve read the short term continues to be daunting – and this negativity is already priced into stocks.  The mid to long term global outlook is more positive.

One of the best speeches heard in a long time was delivered Dec 12th by our own Mark Carney, Governor of the Bank of Canada. Titled Growth in an Age of Deleveraging, Carney pulled few punches in laying out the background to today’s issues in blunt language not usually associated with central bankers.  A summary of his points are listed here and a link to the entire speech below.  I’ve read the entire speech and it provided me with an excellent picture of how the world got to where it are, the challenges we face and the likely solutions:

The end of the debt super cycle and a new era of deleveraging

Advanced economies have steadily increased leverage for decades. That era is now decisively over. The direction may be clear, but the magnitude and abruptness of the process are not. It could be long and orderly or it could be sharp and chaotic. How we manage it will do much to determine our relative prosperity.
Accumulating the mountain of debt now weighing on advanced economies has been the work of a generation. Across G-7 countries, total non-financial debt has doubled since 1980 to 300 per cent of GDP. Global public debt to global GDP is almost at 80 per cent, equivalent to levels that have historically been associated with widespread sovereign defaults.
As a result of deleveraging, the global economy risks entering a prolonged period of deficient demand. If mishandled, it could lead to debt deflation and disorderly defaults, potentially triggering large transfers of wealth and social unrest.

Big challenges for Europe

In Europe, a renewed crisis is underway. An increasing number of countries are being forced to pay unsustainable rates on their borrowings. With a vicious deleveraging process taking hold in its banking sector, the euro area is sinking into recession. Given ties of trade, finance and confidence, the rest of the world is beginning to feel the effects.
Debt tolerance has decisively turned. The initially well-founded optimism that launched the decades-long credit boom has given way to a belated pessimism that seeks to reverse it.
In Europe, a tough combination of necessary fiscal austerity and structural adjustment will mean falling wages, high unemployment and tight credit conditions for firms. Europe is unlikely to return to its pre-crisis level of GDP until a full five years after the start of its last recession.
In most of Europe today, further stimulus is no longer an option, with the bond markets demanding the contrary. There are no effective mechanisms that can produce the needed adjustment in the short term. Devaluation is impossible within the single-currency area; fiscal transfers and labour mobility are currently insufficient; and structural reforms will take time. Actions by central banks, the International Monetary Fund and the European Financial Stability Facility can only create time for adjustment. They are not substitutes for it.
The route to restoring competitiveness is through fiscal and structural reforms. These real adjustments are the responsibility of citizens, firms and governments within the affected countries, not central banks. A sustained process of relative wage adjustment will be necessary, implying large declines in living standards for a period in up to one-third of the euro area. We welcome the measures announced last week by European authorities, which go some way to addressing these issues
Austerity is a necessary condition for rebalancing, but it is seldom sufficient. There are really only three options to reduce debt: restructuring, inflation and growth. Whether we like it or not, debt restructuring may happen. If it is to be done, it is best done quickly. Policy-makers need to be careful about delaying the inevitable and merely funding the private exit. Historically, as an option to restructuring, financial repression has been used to achieve negative interest rates.

Getting growth restarted

Americans’s net worth has fallen from 6 ½ times income pre crisis to about 5 at present. These losses can only be recovered through a combination of increased savings and, eventually, rising prices for houses and financial assets. Each will clearly take time.
The most palatable strategy to reduce debt is to increase growth. In today’s reality, the hurdles are significant. Once leverage is high in one sector or region, it is very hard to reduce it without at least temporarily increasing it elsewhere.
In recent years, large fiscal expansions in the crisis economies have helped to sustain aggregate demand in the face of private deleveraging. However, the window for such Augustinian policy is rapidly closing. Few except the United States, by dint of its reserve currency status, can maintain it for much longer.
With deleveraging economies under pressure, global growth will require global rebalancing. Creditor nations, mainly emerging markets that have benefited from the debt-fuelled demand boom in advanced economies, must now pick up the baton.
This will be hard to accomplish without co-operation. Major advanced economies with deficient demand cannot consolidate their fiscal positions and boost household savings without support from increased foreign demand. Meanwhile, emerging markets, seeing their growth decelerate because of sagging demand in advanced countries, are reluctant to abandon a strategy that has served them so well in the past, and are refusing to let their exchange rates materially adjust.
(Both advanced economies and emerging markets) are doubling down on losing strategies. As the Bank has outlined before, relative to a co-operative solution embodied in the G-20’s Action Plan, the foregone output could be enormous: lower world GDP by more than US$7 trillion within five years. Canada has a big stake in avoiding this outcome.

Implications for Canada

Canada has distinguished itself through the debt super cycle, though there are some recent trends that bear watching. Over the past twenty years, our non-financial debt increased less than any other G-7 country. In particular, government indebtedness fell sharply, and corporate leverage is currently at a record low.
Over the same period, Canadian households increased their borrowing significantly. Canadians have now collectively run a net financial deficit for more than a decade, in effect, demanding funds from the rest of the economy, rather than providing them, as had been the case since the Leafs last won the Cup.
Developments since 2008 have reduced our margin of manoeuvre. In an environment of low interest rates and a well-functioning financial system, household debt has risen by another 13 percentage points, relative to income. Canadians are now more indebted than the Americans or the British. Our current account has also returned to deficit, meaning that foreign debt has begun to creep back up.

Canadian firms should recognize four realities: they are not as productive as they could be; they are underexposed to fast-growing emerging markets; those in the commodity sector can expect relatively elevated prices for some time; and they can all benefit from one of the most resilient financial systems in the world. In a world where deleveraging holds back demand in our traditional foreign markets, the imperative is for Canadian companies to invest in improving their productivity and to access fast growing emerging markets.

Putting today’s challenges in context

In reading this talk and in sharing Mark Carney’s perspectives, sobering as they are, there are three considerations to bear in mind:

First, the most positive news is that Europe’s leaders appear to be coming to terms with reality. It does seem that not just Carney, but politicians and central bankers across Europe do grasp the gravity of the challenges; and are starting to implement strong measures in response.

Second, strategists universally agree that the market has priced in a recession in Europe. Unless things get much worse, virtually all of the challenges Carney outlines are reflected in current stock prices.

And finally; a reminder of the continuing divide between the bad news when it comes to debt and economic growth on the one hand and companies that are continuing to find ways to deliver strong earnings on the other. Just remember that at some point company earnings have to re-establish a connection with overall economic growth.

If you’re interested in reading more, here’s a link to the Globe and Mail column:

http://m.theglobeandmail.com/news/opinions/jeffrey-simpson/mark-carney-the-man-who-speaks-the-truth/article2270030/?service=mobile

And here’s the full text of Mark Carney’s speech:

http://www.bankofcanada.ca/wp-content/uploads/2011/12/speech-121211.pdf

Thanks to Eric Lascelles, Eric Lascelles, the Chief Economist at RBC Global Asset Management has written an excellent article on the current and future challenges of the countries in the European Union.

Based on the research he did, his article suggests the following:
-    Despite the recent bail out, Greece remains unsustainable and likely to go through an orderly default
-    Italy should remain solvent despite its recent crisis
-    The plan to recapitalize the European banks is undersized but workable
-    European leaders are not acting fast enough and typically will require a crisis to make headway
-    Likely candidates for the next crisis are Portugal, Ireland and Spain.
-    European bad news will continue for awhile and over shadow good news.
-    Global contagion on the scale of the fall of 2008 is unlikely

More of the same for awhile

Is Buy and Hold Dead?

Any investor who invested a lump sum 10 years ago in a diversified portfolio has likely not seen any returns and may even be negative.   Investors who have continued to invest regularly through the highs and lows over the last 10 years likely have some returns to speak of – but not the returns expected.  So does this mean the strategy of buying a diversified portfolio holding for the long term – still worth using?  Questioning once recognized investment strategies is common during periods of volatility and this time is no different.

Even the shares of the renowned investor Warren Buffet who says the ideal holding period for a stock is forever, finds the shares of his company Berkshire Hathaway are only selling for just slightly above book value, the lowest valuation in decades.  Proof investors are not interested in buying the shares of investment managers advocating a “buy and hold strategy”.

Note that in this context, buy and hold means the stock is purchased at the right price – typically below its true value and reviewed regularly for its potential future return.  If at any time the stock is perceived as over valued, it is sold; or if its business or market changes and its future potential value is eliminated, it is sold.

After World War II, the average American investor held stocks for about four years.  Given a stock is not just a piece of paper but a shared ownership in a business, this seems appropriate.  By 2000 stocks were held for about eight months on average.  The 2008 numbers suggest the holding period was just two months.  The mood over the last year suggest the average holding period is down to days if not minutes.

Value vs Price

Most investors agree that the value of a stock is the present value of its future cash flows over the life of its business.  The value is not then in next years earnings but in the cumulative profit of the business over decades.

This tenant of investing – that stocks are long duration assets, has been forgotten.  Is it even remotely possible that all the great businesses like Walmart, IBM, Abbot Labs, Nestle and Johnson and Johnson with a history of increasing earnings and dividends suddenly reverse that trend?  If that’s not likely, why does their stock decline in so called periods of uncertainty?  The answer is, of course, that the current investor focus has moved to the short term outlook which impacts the short term price of the stock but not its true value.

This presents the long term investor with tremendous opportunity.  If stocks are at historic lows in price but represent good value, buying and holding is the logical strategy.

“A serious investor is not likely to believe that the day-to-day or even month-to-month fluctuations of the stock market make him richer or poorer.
-Benjamin Graham,  The Intelligent Investor

Why Sir John Templeton’s protégé feels tremendous opportunities now:

http://advisoranalyst.com/glablog/2011/11/27/mark-holowesko-right-now-the-opportunities-for-investors-are-fantastic/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+advisoranalyst+%28AdvisorAnalyst+Views%29

The article below in the Financial Post provides a perspective on the last six months regarding the volatility we’ve experienced – the equity market is like living with a person who is nice much of the time but goes through periods of “unstablity”

http://business.financialpost.com/2011/11/11/mr-market%e2%80%99s-mood-is-picking-up/

Media gurus have a long, ugly history of costing investors who follow their money advice.

Four well-known examples are Irving Fisher, Joe Granville, Robert Prechter and Henry Blodget.
Four sad stories
In the 1920’s, Yale’s Irving Fisher was a household name in America and by far its best known economist; his pronouncements regularly made front page headlines. Three days before the crash of 1929, he announced that “stock prices have reached what appears to be a permanently high plateau;” and for months after the crash, maintained that a recovery in stock prices was imminent.
In 1980 and 1981, Joe Granville’s investment seminars drew packed audiences and his predictions caused major one day moves in the market. He predicted that he would win the Nobel Prize in economics; and on one occasion literally walked on water as he made his entrance strolling across a swimming pool that he’d had filled with concrete. According to the report that tracks investment newsletters; from 1980 to 2005 The Granville Letter was dead last among American newsletters, with investors who followed its advice losing 95% of their capital.
In 1987, Elliott Wave proponent Robert Prechter told clients to sell in advance of “Black Monday.” He’s been dining out on that call ever since, in the process telling his readers to stay on the sidelines throughout the record bull market of the 1990s.
And in 2000, Merrill Lynch tech guru Henry Blodget predicted that tech valuations would continue to escalate and backed up his words by putting his personal net worth on the line; most of which quickly evaporated.
Understanding the media’s agenda
Last summer, a New York Times article examined why the media consistently provides a platform to financial gurus with extreme, often simplistic (and sometimes simple-minded) views.
The answer was simple; middle of the road, consensus thinking is boring. It’s much more interesting to have a guest with provocative, unconventional opinions. That’s led to a body of “they never saw a Mike they didn’t love,” experts in the field of politics and investing, opining on events of the day. Sometimes called media hounds; or by the less complimentary media whores, these experts can seem omni-present.

And while some of these media gurus do manage meaningful assets, many run trivial amounts of money; often their biggest asset is their reputation. But that doesn’t prevent clients who watch their interviews from getting worked up and potentially deflected from their plan.

So if we recognize that most of these experts’ impact on investors is neutral at best and does significant damage at worst, the question is what to do about it.
In today’s featured video, Mauboussin points to research proving that not only do expert predictions not beat the market, but that there is a negative correlation between media profile and accuracy. The higher an expert’s media profile, the worse they do.

http://bigthink.com/ideas/20680

This video lasts three minutes; for those looking for a more in-depth perspective, a 30 minute interview with Mauboussin is available below.

“Our fears are more numerous than our dangers, and we suffer more in our imagination than in reality.”
~ Seneca

Let’s face it, biologically it’s pretty much downhill from about age 18 for men. For woman I’m told this doesn’t happen until something like age 50 – and it happens more slowly after that for them.  So I’m farther from 18 than I ever was and every now and then think about to how close I am to, well, you know.   One of the poems I remember that helps me think about what’s really important is a poem written by Linda Ellis – The Dash.

http://www.thedashmovie.com/

Two contrary indicators regarding where the equity markets may go (over the short term!) are worth mentioning.

The first indicator is throughout the recent volatility investors in the US and Canada withdrew $80 Billion more from equity mutual funds in the four months from the market peak of April of this year to August than they did in the five months after the Lehman collapse in September 2008!  Remember that those five months from Oct 2008 to February 2009 represented the greatest buying opportunity in a generation and the prices paid for equities at that time will most probably never be seen again.  So once again, many investors “sold low” and history has proven that the masses never get it right.

The second statistic from this most recent panic is that during August, insiders in the US (company officers and directors) spent even more of their own money buying their stocks than they did at the bottom in March of 2009.   The dollar volume of insider purchases in August (for the US) was $681 million, up 15% from March of 2009. Another class of insiders, including hedge fund managers that own more than 10% of a stock, were net buyers in August of almost $1Billion!

Insiders in the US are required to hold the stock they purchase for 6 months, based on SEC rules, so market timing is likely not the objective – these buyers are acting like value managers and buying quality shares cheaply.  When a director of Exxon Mobil buys $700,000, a director of Berkshire Hathaway invests $843,300 and a Merck CEO spends a $1.5 million at a time when the average investor is scrambling to get out – somebody is trying to tell us something.

Significant market bottoms typically have less to do with market fundamentals than the magnitude of public panic.  The greater the fear – the closer we are to the bottom.