Monday, January 31, 2011

2011 Economic Forecast

I don't place much faith in economic forecasts, save one - the outlook of management of the company I own stock in.  They are holding the order book, so if they think it is going to be a good year, then that helps me to have confidence in their numbers.  Good management rarely surprises on their numbers. 

Having said all that, I recently attended a venue in which Craig Alexander, the Senior VP and Chief Economist at TD Bank gave us his view of the state of the economy.  He emphasised at different times the continuing volatility in the markets.  As if on cue, Egypt is making the news and having an affect on markets, especially the price of oil.  Here are some of the highlights. 

The global economy is, currently, a two-speed economy.  Despite our interconnectedness, the developing economies are experiencing fast growth, while the developed economies are experiencing slow growth.

Inflation is growing in China, not so much in the Western World.

A slowing in China's economy would be favourable; a hard landing would not be.

China has the ability to reverse the course of its economy.

We are at an inflection point today where the so-called developing economies are surpassing the so-called developed economies.

In Europe, real problems existed before the financial crisis, which were made worse.

The European bailout fund is not large enough to cover all possible defaults.

One method to fight recession is the devaluing of the currency; Europe lacks this ability

The normal recession is caused by high inflation and high interest rates.  The following contraction causes rates to fall and growth to resume.  This time IS different (to the normal recession).

Compared to other financial crises, the U.S. situation is on track, with recovery taking 7 quarters (the one we are in now).

The total (as opposed to reported) inventory of houses in the U.S. market is currently 19 months.

In Canada, the main loss of jobs was in manufacturing; the recovery in services, and government.

Canadian housing market is NOT in a bubble, simply a response to supply and demand.

While Canadian household debt is high, a lot of it can be attributed to the large number of first-time home buyers recently entering the Canadian housing market.

So, what does that mean?

Braking in China.

Continued volatility, especially in Europe.

One and a half percent growth in Europe.  Boom in northern Europe, including Germany.

Default on debt by a European country is still likely.

No double dip, and no depression.

Recovery in the U.S. housing market will take 4 or 5 years.

Three to three and a half percent growth in the U.S. economy.

U.S. employment will rise slowly, as will inflation.

U.S. interest rates likely to rise in second half of 2012.

Canadian growth of two and a half percent.

Canadian exports to the U.S. could take 10 years to get back to "normal".

Slight drop in Canadian housing market.

Strong business investment.

Bank of Canada interest rate hike in July, 2011.

All of this would suggest cash and cash equivalents will return less than the rate of inflation.  Good corporate bonds at the shorter durations are most favoured in this environment.  Growth in U.S. equities is expected to be in the high single digits, with low double-digit growth in Canadian equities.  Most of all, continued high volatility in the financial markets.

Friday, January 28, 2011

Timing The Market

Click to enlarge
The new FCIC report came out yesterday with blame for everyone as to who caused the financial crisis.  Most deny any wrongdoing by saying, "Nobody knew!"  Do they mean to tell me that the actuaries at AIG who are trained in probability analysis figured there was a zero percent probability that the U.S. housing market might correct?  Are they telling me the rating agencies whose job it is to assess the worthiness of a security had no idea products based on mortgages from the U.S. housing market might be less than AAA?

I would have a difficult time proving anyone is that stupid.  Assuming they aren't, then doesn't it go to follow they are not telling us the truth?  Why would they lie to us?  Could it have to do with how they were  being compensated and by how much?  I have read stories of traders who barely understood how to spell the word market (okay, I'm exaggerating) were pulling in multiples of six figure incomes.  Would you lie for a million dollars?  I know some people who would.  I think we all do.

What if I told you some of these people are the same people who are telling us we cannot time the market?  Are you surprised?  Please look at the chart.  This is a very basic chart showing the monthly price ranges of a security that trades on the TSX.  The ticker symbol is XIU.  It is an Exchange Traded Fund (ETF) that derives it value from the Toronto Stock Index.  In other words, as the TSX goes up, so does the ETF by the same percentage.  Likewise when the TSX goes down.

Also shown is the line which, basically represents the 200-day moving average.  Take the average price of the XIU for the last 200 days and draw a dot on the chart.  Take the 200-days one day prior to that and do the same.  And so on.

How do I use that information?  Once a week, I look to see if our price is above, or below the line.  When it has crossed from below, I buy XIU.  When it has crossed from above, I sell XIU.  Doing that from even the peak of the market in the year 2000, and I would likely have more than doubled my return since then, even after paying any commissions.  A little better than that of the "buy and hold" mutual fund owners, wouldn't you say? 

I'm sure I could show that to some children and they would be able to do it for themselves.  Do you really think your financial advisor has never seen this?  Can they really be that dumb?  Of course not.  The reason they don't tell us about it is because they won't make any money if that's all we do.  More importantly, the company they work for will only make a lousy little commission.  Now, we couldn't have that!  Now I'm not saying I will double my money every ten, or so years, but I like the returns a lot better than a "buy and hold" approach.

Still, I can hear the protests.  "But you're not diversified, the TSX isn't always going to do so well, nobody can predict the future", etc., etc., etc.  Do I really think the world is going to stop growing?  Does the world have too much oil, copper, wood, grain, fertilizer, water, that nobody is ever again going to buy anything from a free, democratic, trading country like Canada?  Maybe Australia will fill all the needs!  Come on folks!  I'm not saying we have to put all of our money into the TSX, and even though it may represent only three percent of the companies in the world, it is three percent of the best financial, mining, and energy companies anywhere on this entire planet!

There is no doubt in my mind there will come a time when what Canada has to offer will no longer be so desired.  Until then, why make it more difficult than it needs to be?  Simplify, simplify, simplify.  Look past the elaborate smoke screens and misinformation and marketing ploys.  There are any number of companies who want to mislead us in order to lighten our pockets.  Never mind a million dollars, there are people who will lie for a lot less than a million dollars.  After looking at this chart, do you really mean to tell me there is no timing the market?!?

Thursday, January 27, 2011

Using Financial Advisors

I use an online discount stock brokerage.  Discount brokerages do not offer stock picking advice.  The reason I don't want their advice is because I have not found one which adds value to what I can do for myself.  That does not mean I don't seek professional advice in areas such as estate planning, asset allocation, risk analysis, and tax strategies.  I also realize that I am the exception.  I have managed part, and then all of my own stock market portfolio for more than a decade.

When I do go to see the professionals, it is to get specific questions answered.  If they tell me I need to allocate a percentage of my portfolio to bonds, then I research ways of doing that.  I listen to product suggestions, but choose my own.  Needless to say, a Financial Advisor, in my case, needs to charge me for a plan, because there won't be any product commissions.

Obviously, I am not the best person to ask about what to look for in an advisor, but I do have two additional tests for my advisor that are not often discussed in the media.  For the rest of the questions that must be answered, my suggestion is to google "Questions to ask your financial advisor".  I would never consider doing business with someone who cannot address all my questions to my satisfaction.  Otherwise, I would just keep looking.

I want my advisor to discuss their sell strategy.  Sell strategy?!?  Okay, if not a sell strategy, then let's call it an exit strategy.  The stock market goes up, down, and sideways.  Most people who bought mutual funds ten years ago have very little to show for it.  I believe there are good times to buy and times when it is necessary to sell.  If my broker doesn't know the difference, then I don't feel they are providing any additional value.

It makes no sense to me to just keep pouring money into a market which is either due for a correction, or in the middle of one.  We can make contributions to our investment account without immediately having to divide and allocate the funds.  I recently spoke to a friend whose advisor put him into a pile of bonds.  Now, bonds are something most of us need in a balanced portfolio, but have you noticed what's happening to them lately?  Why not wait for them to bottom for awhile or even break the downtrend before throwing away all that money.

Secondly, I try to be more than modest when filling out any risk assessment tool.  Under no circumstances would I leave such a matter to my advisor to complete on my behalf.  They may suggest it is just a routine formality, but the only way they can cheat and put my money into schemes I don't understand is if they have the paperwork that says I am more experienced than I actually am, and that I am willing to take more risk than I actually want to.  I can not overstate the importance of this one issue.  I would rather have my advisor talk down to me and think they have to explain everything than the alternative.

Too many people have thought they would be protected from brokers who illegally traded their account and put them into products they didn't want, or understand.  Only afterwards did they find out that the company's successful defence was that the products were consistent with the risk assessment documents signed by the client (and later filled in by the advisor).

By no means am I saying every Financial Advisor is out to scam people, but history has shown the really good scam artists can be hard to spot.  As for needing a stock broker, I have learned to make more money mostly without one.

Wednesday, January 26, 2011

Charitable Giving

At the beginning of the year I committed to setting aside $10,000.00 to invest in the name of charity.  Any money I make by investing that money during this calendar year will be donated to charity as soon as possible in 2012, if not before.  I know that is a little like counting your chickens before they hatch, but I am confident I can come up with some amount of profits between now and then. 

If you have ever seen, or read The Secret, you will know they recommend visualising the amount of money you want to give, and make it seem like it is right now in the present, as if you are already in possession of that amount.  I can attest to the power of visualising.   In my own case I was able to consistently improve my shot making ability in curling by several percentage points, just through the act of visualisation.  There are any number of other sports examples.  If you do not believe you can simply attract money, then it won't work for you.  However, if you do, why not set yourself an aggressive goal and make it happen!

I believe we are being too selfish when we look at the many blessings present in our lives and regard them as being for our own benefit.  Our destiny is not written on some hidden scroll waiting for us to spend a life time of effort trying to discover it.  Rather, I believe our destiny is the result of choices we make every day.  I'm not talking about life and death decisions, either.  We choose our own consequences by the actions we choose.  Choosing to see our blessings as gifts with which we are able to help others who are less fortunate, frees us from the limitations of scarcity. 

Hoarders believe in scarcity.  I do not.  If I am in the process of helping  others why would I believe I should end up with less, and not more?  Circumstances favour those who help.  We want to reciprocate - it is in our nature.  It is a much used example, but the way to more loving relationships is by giving love freely.  Don't even consider meeting someone half way. Be the example and go all out.  Yes, it may be scary, and not worthwhile every time, but in the end I can promise you that more will come back to you than you would ever have imagined.

Too many people struggle because their focus is inward instead of outward.  Don't be one of them.  Concern yourself with the well-being of others and I guarantee you will be in a better place.  The people you help will be sure to see to it.

I haven't necessarily decided on a charity to give to.  If you have a preference, or have your own story, then please share it.  Be inspiring.  Inspire us all.  I have all of 2011 to make a decision.  Individually, we can only do so much.  Together, we have the power to accomplish anything.  Yes, anything.



Tuesday, January 25, 2011

Saving For Retirement

I find the media debate about what is wrong with the pension "system" in Canada to be somewhat amusing.  While the situation isn't funny, I do find it interesting how the politicians and the professionals in the financial services industry can't seem to put their finger on the problem.

In my personal experience, the opening to the pension bucket is too small, while the bucket, itself, is filled with too many holes.

By that I mean, if they really want people to save more, you would think they would make it easier.  When I was making sufficient money to actually top up my RRSP savings, there were too many income restrictions, and no Tax Free Savings Account to do so.  With all but senior executive and government compensation decreasing in real dollars I am afraid that window of opportunity is lost.  At the same time our governments, in my opinion, have done a lousy job of protecting hard-earned Canadian pensions from foreign controlled companies, and even the likes of Nortel.  Besides, given the state of modern computer technology, why are pensions not portable?  Why does it matter where I work, as long as it is in Canada?

The holes in the bucket I am referring to are the enormous commissions, fees, and charges imposed by the financial services industry on people trying to save for retirement.  What is worse, in exchange for all of that hard earned money that could have been going toward people's retirement, we receive terrible advice since most of it is designed to make the institutions money at the expense of the "client".  No person, it has been said, can serve two masters, and since one of the two is directly in charge of compensation, we can guess which one is being listened to.  At the same time, I am expected to save more so, in future, I can help pay for those indexed pensions of our faithful civil servants despite having no pension of my own.

It all reminds me of the debate over why people don't vote in Canadian elections.  The politicians run around acting like little children, while spending like drunken sailors (sorry to slight any sailors out there) on shore leave.  Then, when it comes time to vote they can't understand why everybody has lost interest or any hope of ever seeing any positive outcome.

It has always been my opinion that if people are not acting in the desired fashion then those doing the managing have failed in their job.  We can call people lazy, indifferent, and even ignorant, but wouldn't that tell you they have not been educated, motivated and inspired?  I keep hearing, "Save more, save more!"  I don't think, "Do as I say and not as I do", is going to inspire people in this situation any more than it has in the past.