| Why is X never doubled?... Read more of Why is X never doubled? at Speaking Writing.com |  InformationalPrivacy |
Feeds from National PostAwardsCareers Economy Energy Financial Services FP Comment FP Executive FP Magazine Daily FP Trading Desk FP500 Full Comment Legal Post MBA Mining NP Editors Peter Kuitenbrouwer Posted Driving Posted Homes Posted Sports Reports RRSP Centre RSS Rudyard Griffiths Small Business Steve Murray Succession Planning Tax Centre Technology TFSA Centre The Afterword The Scene Tools of the Trade Toronto Trading Desk Wealthy Boomer All Feeds |
FP Magazine Daily - Feed
Find the latest news stories from National Post on the topic FP Magazine Daily. |
 FP Magazine blog has movedHello readers, Our FP Magazine blog has moved to a new home, over here: http://business.financialpost.com/category/fp-posted/ There will be no more updates at this location, so please change your bookmarks to the address above. We hope to see you soon!
|
 Investors Shaken as PIIGS Bring out the BearsThe financial mess that has engulfed Europe has caused a lot of bears to come out of the woodwork and individual investors are rattled by the rise in volatility. What is interesting is that up until a little over a month ago, complacency was rampant and warning signs were being ignored. Most mutual funds had made an all in bet by continuing to wind down their cash positions to the point that recent data shows mutual fund cash positions as percent of assets down to about 3%. Typically, this has been seen as a contrarian indicator as it means that there is less "fuel" in the form of cash remaining to power markets higher. The warning signs that were coming from the credit markets where the prices of debt issued by the most financially troubled countries of Europe were being sold off had also receive little attention from investors until the crisis had arrived front and center. Add in a stock market that was overbought mixed in with overly complacent investors and we have the conditions requisite to send stock markets sharply lower. More specifically, investors have traded their complacency for fears based on the idea that the troubles in Europe are going to create the second installment of the financial crisis. It is amazing how investor perceptions change in just over a month. To be sure, the problems confronting Greece and the other European nations are significant. They are facing serious challenges that are going to require a great deal of sacrifice from their populations. The financial markets have made it clear that these nations will have to cut government spending, raise taxes and put fourth credible plans towards ensuring that their national debt levels will be brought under control. At this point, concerns about whether the world will be dragged down into a "double-dip recession" seem a little misplaced. While the global economy may slow down a notch from its recovery pace so far, the idea that there will be an abrupt halt to global growth is a stretch at the current time. The real issue that should worry the markets is whether or not this turmoil will spill into the global banking system turning the European debt crisis into a global financial crisis. One of the objectives of the European Central Bank's trillion dollar emergency rescue package announced earlier this month was to calm the fear amongst banks so that they would continue to lend to one another. European monetary authorities had become worried that banks were beginning to look upon one another with suspicion - not knowing who had what exposure to which country's debt. The level of fear can be seen by looking at the LIBOR (London Interbank Offer Rate) which is the interest rate banks charge each other for short-term borrowing. The more worried they are - the higher the LIBOR goes as the chart below shows. 
(click on chart to enlarge - www.stockcharts.com)
A higher LIBOR can mean higher borrowing rates for borrowers since it is often used a benchmark for other interest rates. Secondly, a higher LIBOR means that if banks are fearful, they might end up reducing the amount of lending they are willing to do.
Thus, this would short circuit the global economic recovery and could lead to a marked slowdown. The real issue for investors who are worried about the sovereign debt crisis comes down to one thing: the banks - will they be able to adjust to these risks and continue to ensure that they are performing their essential duty which is to allocate capital from savers to borrowers. If the banking system - with the coordinated effort of the world's central banks - is able to function as close to normal as it can, then the odds of a double dip recession will remain low.
The other indicator to watch will be the yield curve. The yield curve measures the difference between longer term and shorter term interest rates. As long as long term rates continue to remain above shorter term rates, lending will continue. If longer term rates drop relative to shorter term rates, the banks tend to find it less profitable to lend capital since their profit margins on loans drop. In such a scenario where the yield curve is flat (short term rates are about equal to long term rates) or in which the yield curve is inverted (short term rates are higher than longer term rates), a recession has usually ensued. Inverted yield curves have also tended to coincide with stock market tops.
At this point, the yield curve is continuing to do its part to help the economic recovery. The European crisis has sent mortgage rates to below 5% in the US - helping to provide a buffer to the economy. Lower oil prices will also help to give the US economy a helping hand.
The stock market correction at this point has been helpful to those investors who saw the risks on the horizon and who had reduced their equity exposure in advance over the last several months. With many equities off 12-25% or more in a short period of time, risks and rewards are a little better balanced than they have been in several months.
AJ Sull, CFA, MBA, CMT is president and chief investment officer at Pacifica Partners - Capital Management in Surrey, B.C.
|
 Money Coaching - "I know you're on my side!"A few years back, Sheila Walkington of Money Matters was dubbed by CBC as Canada's first Money Coach, but quite honestly most of us in the financial planning biz thought she was crazy. Who would pay someone to help them get out of debt and deal with difficulties in living within their means? But we were so wrong - Sheila now has a thriving practice and can't keep up with the demand. She's so busy in fact that she's started an associate program and is looking for like-minded advisors across Canada who also want to help people take charge of their money - and their lives. When asked about what a Money Coach actually does, Sheila Walkington laughs and says, "Basically, I help individuals and couples get a grip on their money." She then goes on to explain that she grew increasingly uncomfortable with earning commissions while also dispensing financial advice. "I saw a big gap in financial planning. People were seldom getting the objective financial advice they truly needed. The focus was always on investing, but people often needed help getting out of debt, managing their cash flow, and focusing on what they really wanted out of life. That's where I can help best." According to Sheila, being a Money Coach often entails dealing with some core financial issues. Most Canadians are certainly spending more than they are taking in. Credit cards and overdrafts are often maxed out. Debt loads are at an all time high. There are strains in relationships as new couples merge their financial affairs or start raising a family. Other common challenges include career transitions or job losses, buying a house, divorce or retirement. Very few Canadians have even a basic financial plan to help guide them through these hurdles. There are also emotional issues around money matters including guilt, anxiety and even shame. But, as Sheila reassures us, this doesn't have to be the case. For one thing we're definitely not alone in experiencing confusion and stress around money. Its just one of the downsides of the voracious consumer culture we live in. And, judging by the volatile economic news from the world, even large corporations, financial institutions and entire governments are feeling the heat. In her experience, as both a Money Coach and financial educator, Sheila has found that most people just need some good independent advice and a simple working plan to regain control of their financial lives. When people come to her for advice, Sheila charges them a fee to set up a system for managing their money. She then helps them stick with it. "I first get them to take a close look at where they are at right now, Sheila emphasizes. "Then I get them to look at where they want to go. Once they get clear on their dreams and goals then they get very motivated and determined to reach them. It then becomes much easier to focus on getting rid of debt, setting up a workable savings plan, planning for a family, buying a new home and preparing for medical or other emergencies and retirement." And, she adds, "When you know where you want to go, it becomes much easier to say no to those things that are keeping you from your dream."Sheila has helped a lot of people over the years and has earned the respect of her clients and her colleagues both past and present - myself included. I recently asked her about a highlight of her career as a Money Coach and Sheila replied with the story of a recent client who paid her the highest compliment by simply saying: "I know you're on my side." - Karin MizgalaKarin Mizgala is a Vancouver-based fee-only financial planner with an MBA and a degree in psychology. She's the President of LifeDesign Financial and co-founder of the Women's Financial Learning Centre.
|
 Greece's Debt Crisis Shakes Investor ComplacencyOver the last several months, the world has watched the events in Europe unfold with a sense of disbelief mixed in with a measure of anxiety. The disbelief comes from the fact that many investors must be asking themselves how the world could be confronting yet another credit crisis - when we just seemed to be finished papering over the last one. The anxiety comes from the fact that there are some prognosticators who believe that Greece is just the tip of the iceberg - and other European nations such as Portugal, Italy, Ireland, and Spain are next on the bailout list. Many observers believe that the very existence of the Euro and the European Union is being called into question. Greece's citizens are finding out firsthand the implications of a government that has allowed a disregard for fiscal discipline to run unchecked. The cost is real. Greece is trying to take corrective measures to deal with its debt crisis by enacting wage rollbacks, pension benefit reductions, cuts to government programs and higher taxes. This is a tall order at the best of times let alone when your fellow members of the European Union (i.e. your bankers) are facing reluctant voters at home who would rather see Greece kicked out of the European Union. The recent aid package announced this past weekend in which almost $145 billion (more than twice the originally proposed $58 billion) in loans would be used to prop up Greece over the next three years. It was supposed to have calmed the markets. Instead, the markets have shrugged it off and Greek interest rates are still rising. In part, nobody seems to believe that the Greeks can deliver on their promised return to fiscal responsibility. The Euro has continued to fall and the response by the Greek population is one of shock and anger. As the Greek government has tried to implement very tough spending controls, its citizens have responded with anger. Last month, Greece's air force showed its displeasure as several members of the air force decided to "take an unscheduled day off" and the country has seen some violent protests. Most individuals in North America might believe that this is a European problem and does not impact them. For the most part this is true - thus far. What we are seeing is a general aversion to sovereign credit. The markets are telling governments that "We are not confident in your abilities to pay back the money that you owe". If this aversion continues, governments will have to offer greater incentive to investors in order to sell their debt. Recently, before the aid package was announced, Greek two-year bonds were seen yielding 18% -indicating that the markets viewed them as being high risk. The shockwaves from the Greek debt crisis have sent the yields on corporate bonds higher as investors have decided to reign in their appetite for risk assets. The Euro has tumbled, the US dollar seems to be regaining some respect and investors have shrugged off a fairly decent performance from corporations that have reported recent quarterly earnings. Ironically, only a few short weeks ago, Greece was able to float a bond issue to investors that saw such significant demand that it was oversubscribed. But this was not to last as these bonds quickly began trading for less than their issue price - a sign that some investors underestimated the extent of the Greek debt crisis. The real issue that has not gotten so much attention is the level of debt exposure the commercial banking industry has to debt issued by the PIIGS. The chart below shows that the European banks have over $2 trillion in debt exposure to the PIIGS group of countries. 
(Click on Chart to Enlarge)
This is one of the real reasons (along with trying to maintain the credibility of the Euro) that the European Union countries have no choice but to try to stabilize the sovereign debt crisis.For those who think this is a European problem, we have to look at the involvement of the International Monetary Fund (IMF) which will contribute about 30% of the funds to Greece. The largest shareholder in the IMF is the US which means US taxpayers will be contributing a large portion of the rescue package.
It is perhaps amazing that this issue has not come to the front in political discussion yet in the US. For that matter, Canadians are also seemingly quiet on this issue. Given how much political backlash there was for bailing out GM, the banks or other industries during the financial crisis - this is surprising.
The crisis in Greece is nowhere near the size of the one that enveloped the financial markets nearly two years ago - but it is significant. The question is whether or not this crisis will become a contagion.
For investors, there are always winners and losers in every crisis - and opportunity to be had. The problem is that too many investors were caught flat footed by this crisis as it has been bubbling for some time. Hence, the violent reaction we are now seeing in the financial markets.
As we have commented before, complacency levels had set in amongst investors over the last several months and we know from history, that complacency is often replaced with panic.
AJ Sull, CFA, MBA, CMT is president and chief investment officer at Pacifica Partners - Capital Management in Surrey, B.C.
|
 Employment Insurance for Self-Employment - Is it worthwhile?EI for self-employed. At first blush this sounds pretty good. But how good is it really? Starting in January 2011, self-employed Canadians will be able to collect Employment Insurance (EI) special benefits which include: maternity benefits;parental benefits;sickness benefits; andcompassionate care benefits.How it worksThe program is voluntary for self-employed Canadians and you register online through My Service Canada. If you register after April 1, 2010, you must pay in for a full year before you are entitled to benefits. In 2010, if self-employed earning are $43,200 and over, you pay the maximum annual EI premium rate of $747.36. You can cancel your participation anytime unless you have collected EI benefits. Once you collect, you have to pay in as long as you are self-employed. What you getIf you are eligible to collect, the weekly benefit is 55% of the average weekly earnings from the calendar year before the year you submit an EI claim. Maximum weekly benefit is $457 subject to a maximum depending on the type of special benefit. (6 weeks for compassionate care, 15 weeks for sickness and maternity, 35 weeks for parental leave).While some of these benefits might provide much needed relief to those who truly need them, proceed with caution. If you work part time or your business generates income while claiming sickness or maternity benefits, your earnings will be deducted from the EI benefit dollar for dollar. You can earn up to a maximum 25% of your weekly benefit if you are claiming parental or compassionate care benefits without affecting your benefit. Anything earned above that amount will be subtracted from the EI benefit you receive.The RealityCertainly there are circumstances where a person's ability to generate self-employed income would cease completely because of caring for aging parents or having a baby. But most self-employed people I know would do just about anything to keep their business going through thick and thin using technology, creativity and just plain stubbornness. It wouldn't take long to see the EI advantage disappear completely.Some skeptical observers see this new initiative as just another way to top up the much depleted EI fund (expected to peak at $10.74 billion next year). Perhaps not coincidently, the announcement comes along with news that EI premiums are about to rise sharply for both employees and employers to pay down the deficit and set aside a $2-billion cushion.While the new EI program might work for some, be sure to crunch the numbers before committing to it. I know I'm not rushing out to sign up. - Karin MizgalaFor more: Check out Service Canada's FAQ's. Karin Mizgala is a Vancouver-based fee-only financial planner with an MBA and a degree in psychology. She's the President of LifeDesign Financial and co-founder of the Women's Financial Learning Centre.
|
 Canada's Housing Bubble: It's Not Different This TimeDuring the depth of the financial crisis, the political appetite to rein in perceived excesses in various segments of the economy was significant. It seemed that international conferences amongst the G20 nations were being held at ever shrinking intervals promising that those deemed to be held responsible for the financial fraud would be held accountable and new regulations were sure to be implemented. The implicit message from the business community and the politicians was that lessons were learned and the same mistakes would not be repeated. One of the most surprising things has been despite all of the upheaval, how little has changed with respect to real estate prices. From Beijing to London, real estate prices have climbed back faster than would have appeared possible only a couple of years ago. While attending the annual market forecast dinner for the local CFA society, one of the speakers on the podium asked the attendees: "Has Canada learned nothing from the United States?" This was in response to the discussion about expectations for Canadian interest rates and the incredible rebound in Canadian real estate prices. The reason this question is so relevant is that internationally, it is thought that Canadian real estate does not suffer from the broad levels of excess that has been seen in other parts of the world. However, it is not a question of excess on the Canadian level - rather, what is happening at the regional level and just how much debt are Canadians taking on. It would seem plain to see that the Canadian banks and the government are getting a little skittish as well. While they are careful to claim there is no Canadian real estate bubble, it might come down to a question of semantics. In the US, it can be argued that there was not an American real estate bubble - just one in Nevada, California and Florida. In Canada, it could be claimed that the bubble is only in Vancouver and the other major metropolitan centers. What we have seen is that when a large market hits turbulence, the impact is felt much further than just the epicentre of the boom. In Canada, a significant amount of fiscal and monetary resources were committed to ensuring that the real estate market was stabilized. This helped to encourage Canadians to take on record amounts of debt and take advantage of the brief pull back in real estate prices. However, nobody seems to be asking the question "What happens if interest rates go back to normal levels?" We are finding out that answer now as we have seen mortgage rates rise more than once within the last month alone. In addition, the federal government has begun to respond to the concerns of the banks to issue tighter guidelines for mortgage underwriting. Some observers are now coming to the conclusion that policy makers wasted the opportunity to guide the global economy away from the debt-consumption cycle. Amazingly, the US seems to be leading the world in bringing down debt and increasing savings because consumers there felt the impact of too much debt and not enough saving more than in most nations. As has been mentioned before in previous posts, a surprising number of Canadians assume that they are not as reckless as Americans when it comes to piling on debt. The numbers seem to be showing otherwise. Part of the reason for this debt is that incomes in Canada have been stagnating relative to rising mortgage and credit card debt. Some of the best work produced in a long while with respect to looking at real estate prices in Canada comes from Alexandre Pestov published at the Schulich School of Business. Petrov's analysis led him to conclude that the affordability levels in major Canadian cities - led by Vancouver - are worse than in the twenty largest metropolitan areas in the US during their boom. 
(Click on chart to enlarge)
In Vancouver, there seems to be a prevailing logic that "Vancouver is unique therefore prices are justified?" People in Miami or San Diego probably felt the same way a few years ago.
What makes a city unique is income, employment prospects and livability. At the elevated valuations we are seeing currently, it would appear that for prices to continue higher, Canadian real estate prices - led by Vancouver - will have to demonstrate the "Greater Fool Theory" - where sky high prices fueled by record amounts of debt can only continue if there is someone else willing to take on even more debt and pay even higher prices. This sounds like a recipe for trouble.
As James Chanos, the renowned hedge fund manager who is shorting Chinese stocks - said in a recent television interview - it is not high prices that mark the existence of a bubble but rather high levels of debt punctuated with a lack of rational behavior. In his words, China is "on the treadmill to hell".
Likewise, for Vancouver or other Canadian cities, it cannot be said that there is a real estate bubble just because prices have run up. That logic is linear and simplistic.That is too easy a hurdle to earn the bubble label. Rather, it is the herd mentality and the belief that somehow "this time is different." Those four words are often said to be dangerous to one's financial well being.
AJ Sull, CFA, MBA, CMT is president and chief investment officer at Pacifica Partners - Capital Management in Surrey, B.C.
|
 How Much is Enough?A few months ago - a woman came into my office. I was a bit taken aback as she was dressed pretty shabbily and her hair was disheveled. Honestly, I wondered if she had the wrong office. Turns out she was worth $12 million. But the real kicker was that she was worried that she didn't have enough money and would end up as a bag lady living on the streets. How can this be? Although her case is an extreme example, most of us suffer in some way when it comes to money. Where is the next dollar going to come from? How am I going to pay off the Visa bill? Will I have enough for retirement? And on and on it goes.In my experience of working with clients for 25+ years, I can safely say the question of "enough" really isn't about the numbers. Sure we need money to survive, but let's be honest, the math needed to balance our chequebook isn't all that hard. It's the "relationship" we have to money that holds us back from looking at money too closely. And if we give money the cold shoulder, how can we possibly become successful or comfortable with it? In my favourite money book, "The Soul of Money" Lynne Twist describes money as the "most universally motivating, mischievous, miraculous, maligned, and misunderstood part of contemporary life." I agree completely. We figure that if we work harder and make more money, we will have more - perhaps so we will be more? In a culture that largely defines success through monetary pursuits and the acquisition of more material things, who can blame us. But somehow we know this isn't quite right and, judging by the state of the world and our personal suffering, we have to begin questioning the conventional wisdom of acquiring and accumulating beyond what we truly need. Gandhi said it beautifully: "The world has enough for our need but not for our greed".Perhaps we need to think about what's enough - for us. How much do we really need? Are we earning and spending our money in ways that are consistent with our higher values and commitments? This certainly doesn't mean deprivation, poverty or lack, but it does mean being conscious about how money flows through our life. It also means taking responsibility for our personal finances and paying attention to what we spend money on. It means taking charge of our money and holding it accountable to our highest beliefs. It means believing that we are ok right now, no matter how much money we have. I came across a quote by a great spiritual leader who said that "money is a medium of transformation". What's so reassuring about this phrase is that it captures both the potential that money has, and at the same time it puts money in its proper place. It's simply a medium, not an end in itself.It's certainly not easy to maintain this higher level perspective living in the midst of our consumer culture. But the more awareness that we have about the role that money plays in our life, and the more we can clear any blocks we have around our relationship to it, we can then aspire to see the transformative powers that money has.What this allows us to do on a practical level is to look at the numbers without fear, plan for the future with confidence and enjoy what money has to offer without guilt. And that is enough!!! - Karin Mizgala Karin Mizgala is a Vancouver-based fee-only financial planner with an MBA and a degree in psychology. She's the President of LifeDesign Financial and co-founder of the Women's Financial Learning Centre.
|
 Interest Rates Rising - Faster Than You Might Have NoticedIt is amazing how little attention is being paid to the rapid rise in interest rates in the US Treasury bond market. Given its potential to upset the mortgage market and impact the economy, investors might want to pay attention to the US Treasury market. The chart below shows just how fast interest rates (in this case the yield or interest rate on 10 year Treasury Bonds) have risen. From a level of just over 2% in January 2009, they have risen by almost 90% since. This particular interest rate is watched by investors because it often serves as a benchmark for other interest rates. For example, if the Treasury yield is 5%, then a corporation would have to borrow at over 5%. 
(Click Image to Enlarge - data courtesy of Stockcharts.com)
However, the tumult in the bond market in recent weeks has given rise to an event that many investors have never seen before - some corporate bonds are yielding a lower interest rate than those of the US government. As was mentioned above, the interest rate on a Treasury bond should serve as a benchmark for all other forms of debt. Instead, companies such as Johnson & Johnson, Berkshire Hathaway, and Procter & Gamble have seen their two year bonds yielding less than Treasury bonds of the same maturity.
Part of the reason for this occurrence is that the bond market is signalling its concern about the mountain of US Treasury bonds being sold to help pay for the rise in government spending. It seems that appetite for US Treasury bonds is waning and as a result, we are seeing a creep up in interest rates rather quickly.
It is interesting as noted in the chart above that in the first week of last December, investors witnessed a rally commence in the US dollar index and a coincidental decline in gold prices. This is not surprising given gold's inverse relationship to the US dollar - which is responding to higher US interest rates relative to some of the major European nations and the belief that the US will begin raising interest rates before Europe does.
One consequence of the rise in bond yields is that they tend to impact the economy just as an interest rate hike from a central bank might. Investors sometimes refer to a bond market that is experiencing rising bond yields as one which is run by the "bond vigilantes". In effect, these vigilantes are taking monetary policy into their own hands and forcing interest rates up. If it continues, the vigilantes will force the Federal Reserve to abandon its easy money policy faster than many might expect. This would not help the gold stocks or commodities.
As was mentioned in previous writings, a rise in interest rates is not necessarily a negative if it is orderly and supported by a strengthening economy. As the Federal Reserve has begun to take steps to wind down its support measures to help the economy along, the markets will have to show that they can stand on their own without the support of central bank special measures.
AJ Sull, CFA, MBA, CMT is president and chief investment officer at Pacifica Partners - Capital Management in Surrey, B.C.
|
 Who's The New Head of the Household?Not since Rosie the Riveter rolled up her sleeves in the armaments factories and shipbuilding yards during WWII has there been such a fundamental shift in gender roles and earning power. As Canada's economy coughs, sputters and chugs back to life, there are signs that some dramatic societal changes have taken place behind the scenes while we were all distracted by the recession. The new reality facing us is that more women than ever before are taking on the role of primary breadwinner.The recent recession, labeled the "man-cession", has been particularly cruel to working-class males. Statistics Canada reports that over the previous year a total of 249,000 men lost their jobs, particularly in the manufacturing sector. This compares to a decline of 28,000 for women. Even the rise of dual-income families has meant an erosion of the male's economic power and control. (In 1980, 53% of couples were dual earners, compared to 65% by 2007.) This new domestic reality also parallels another emerging trend that sees women controlling more and more of the nation's wealth - up to a startling 70% by 2019.Seldom, if ever, has history recorded such a dramatic and unprecedented upheaval in the age-old standard of the man "bringing home the bacon" and the woman taking care of the house and kids, and maybe earning some supplementary income on the side. For many men this is a humbling even humiliating experience. For women, this role reversal can be just as emotionally challenging and psychologically threatening. She has not only lost her Prince Charming - the one person who was supposed to protect and defend and provide "forever after", but there is increasing financial pressure and stress on her as well. And those kids still have to be fed, clothed and educated.I take all of these social changes rather personally. My husband was also one of the casualties of the recession. He was co-owner of a small investor relations firm that specialized in the resource field, another sector that was also hard hit by the economic downturn. Trying to turn a crisis into an opportunity, he went back to his first love of copywriting and teaching history (waynemelvin.ca), which I fully supported. But I gotta say - the bucks are skinner and there's now more pressure on my income to make ends meet. I'm ok with this - sorta, kinda, maybe.... I'm sure family counselors and economic advisors across Canada are struggling to make sense of this rapidly changing economic and social landscape. But maybe all this change isn't such a bad thing -- for both men and women - and for Canadian society as a whole. Sure we will have some major adjusting to do and it's not likely to be easy. Nevertheless, there are great new opportunities out there that we can take advantage of as the new paradigm reveals itself. Creative work. More balanced, supportive and healthier relationships. A revisiting of priorities, dreams and financial goals. A new vision of how men and women interact in the workplace - and at home. Welcome to the new world order. We'd better get used to it - it's here to stay. - Karin MizgalaKarin Mizgala is a Vancouver-based fee-only financial planner with an MBA and a degree in psychology. She's the President of LifeDesign Financial and co-founder of the Women's Financial Learning Centre.
|
|
|
 Biotech Stocks: The Unappreciated Drivers of the NASDAQ's LeadershipWhen the economy is emerging from recession, the markets tend to gravitate towards "Early Cycle" themes. These are the segments of the markets that are the first to feel the benefits of an uptick in economic activity. Semiconductor and related technology stocks are one part of the "early cycle" segment of the market. To that end, investors will watch for the technology stock laden NASDAQ to begin to exert leadership over other broad market indices such as the S&P 500. As the chart below shows, the NASDAQ began to outperform the S&P 500 almost five months before the S&P 500 made its bear market low. It would stand to reason then that this would be because the market was able to factor in the idea that the economy would begin to bottom and early cycle stocks were a good place to be. However, a look at the facts gives a somewhat surprising reason for the outperformance of the NASDAQ over the S&P 500. Biotechnology stocks, which comprise a significant portion of the NASDAQ's market value but less than technology stocks, are not typically thought of as early cycle stocks. Yet, they have been quietly outperforming the market for quite some time. In fact, even before the financial crisis began to make waves, the outperformance of the biotechnology stocks against semiconductor stocks (Figure 1) and the broader market (Figure 3) was already underway. Surprisingly, the semiconductors which should be outperforming the NASDAQ are thus far underperforming (Figure 2). Put another way, Figure 2 shows that the NASDAQ is outperforming computer chip stocks. 
(Click to Enlarge Image - Data: Stockcharts.com)
However, investors should be careful with this sector as it can be exceptionally volatile. The last two years has seen a good deal of merger and acquisition (M & A) activity as the large pharmaceutical companies have looked to smaller biotech companies to help refill their product pipelines. The largest biotech company is Amgen with a market value approaching $60 billion. Despite this strong outperformance, the biotech sector seems to be attracting very little attention from many investors.
In addition, the current health care debate has left the markets trying to grapple with who the winners and the losers will be if and when health care legislation is passed. The thinking amongst some market analysts is that as the number of individuals who will qualify for medical coverage increases as a result of the health care reform bill, the industry will benefit. In addition, certain provisions of the health care reform bill would allow biotech firms to receive twelve years of competitive protection from lower cost, generic competitors. This should prove beneficial to their profit margins.
In light of this weekend' historic health care reform vote in the US, investors may want to give this forgotten sector a second look.
AJ Sull is president and chief investment officer at Pacifica Partners - Capital Management in Surrey, B.C
|
 Bernanke or Obama: Who Should Get Credit for Stabilizing the Economy?Watching the Sunday morning talk shows on the US networks is always an entertaining experience for the politically inclined. No matter what the issue being discussed, both sides are advocated with verbal vigor. This past weekend, one particular show was asking the panel whether President Obama's economic policies are responsible for stabilizing the economy and the financial markets. The White House has been expressing its opinion that its stimulus program, jobs bill and various other policies are starting to have an impact. What is interesting is that in the heat of political debate, there is one person who does not seem to get any credit and that person is Ben Bernanke. As head of the Federal Reserve, he was confronted with a financial crisis that was unprecedented in scope. The policy making playbook needed some instant updating as events were seemingly spinning out of control. While the level of fiscal policy coordination amongst the major economies was certainly helpful in instilling confidence to help turn the tide, Bernanke led the charge from the monetary policy side of the rescue effort. Watching the political pundits kick the issue around while missing key facts in their discussion is sometimes frustrating. For example, if we look at the stocks that comprise the S&P 100 Index (an index of the 100 largest members of the S&P 500 stock market index) we can see that the share prices of 29 of these 100 companies bottomed either before the 2008 Presidential election even took place or before Obama even officially took office. The point is that the markets - as they so often do - are able to discount the future into stock prices well before consensus logic prevails in declaring an end to an economic crisis. If we look at the S&P/TSX 60 Index (which is comprised of the 60 largest companies in Canada that account for the vast majority of Canadian stock market capitalization), we see that 33 of these 60 companies touched their low points before Obama was even sworn in as President. The objective of pointing out these observations is not to advocate one political viewpoint or another. Rather, it is to inject another perspective that is hopefully devoid of political bias and is able to add some objectivity to the debate. Another factor we can look at is the TED Spread. The TED spread is defined as the difference between the interest rates on interbank loans and short-term US government debt. In a normally functioning market environment, banks lend funds to each other for short periods of time. But when Lehman Brothers collapsed, fear was prevalent and interbank lending ground to a halt. As a result, the TED spread rose quickly. Taking the lead, Bernanke launched unprecedented policy measures in coordination with other major central banks in order to get financial institutions to begin lending to one another again. As fear began to recede, the TED spread dropped. 
(Click to Enlarge Chart - data courtesy of Stockcharts.com)
While it may not make for good TV on a political talk show, the answer to whether or not President Obama is responsible for easing the panic that had gripped the markets is: "He might have helped but Ben Bernanke and his magic bag of monetary policy tricks deserves the lion's share of the credit".
Having noted the above, it is still not clear what the impact of Bernanke's measures will be in the future. Some believe that he has helped to create bubbles in other areas of the economy and will eventually result in a spiralling of inflation and the demise of the US dollar.
At this point, perhaps the pragmatic viewpoint is that Bernanke did what he had to do in the short term by stabilizing the markets. In future, we can only hope that he and his fellow central bankers are equally as successful at ensuring inflation does not take root in the economy.
AJ Sull is president and chief investment officer at Pacifica Partners - Capital Management in Surrey, B.C
|
 The Loonie Looks Ready To FlyThe rebound over the last year in the Canadian dollar has left the Bank of Canada in a bit of a quandary. The strong Canadian dollar has proven to be a challenge for Canadian exports as it has made Canadian goods and services more expensive. This leaves the policy makers at the Bank of Canada between the proverbial "rock and a hard place". If it decides to raise interest rates aggressively and the US Federal Reserve decides that it can afford to wait to raise interest rates in the US it is likely that the Canadian dollar could be in for a prolonged period of appreciation. The implication for Canadian exports is clearly negative. The central bank knows that it has to be mindful of preventing inflationary pressures from taking root. On the other hand, Canadian interest rates can only go so far ahead of US interest rates. If the spread between the two countries' interest rates widens too far in Canada's favour, then the Canadian economy could be hit with the sledge hammer combination of high interest rates, a surging Canadian dollar and by extension a slumping export sector. Not to mention the fact that many consider the Canadian housing market to be overheated - which is yet another concern for Canadian monetary policy makers. 
(click on image to enlarge)
One other variable that Canada would have to consider is that as the Canadian dollar has become increasingly popular amongst investors around the world, foreign inflows of capital are likely to stay strong - again putting upward pressure on the "loonie".
As exports tend to slow down with a strong Canadian dollar, imports and spending by Canadians abroad is rising. The number of Canadians doing their shopping in the US has been steady and rising as they take their newfound purchasing power to get bargains on lower priced US goods. For Canadian retailers, this has to be an area of concern. We can also look to the Paper and Forest sector to be severely impacted by the dollar's strength.
With imports starting to rise, Canada is going to need a stronger uptick in US imports. Otherwise, the net-exports segment of Canadian GDP could begin to put a damper on the strength of Canada's economic rebound.
Clearly, the Bank of Canada has its work cut out. It is going to have to balance the need for interest rate hikes against the movements of the Canadian dollar. At this point in time, the market seems to have priced in at least one interest rate hike and now maybe two - back into its calculations.
AJ Sull, CFA, MBA, CMT is president and chief investment officer at Pacifica Partners - Capital Management in Surrey, B.C.
|
 How to negotiate the best possible salary in tough timesFor Carrie Gallant negotiating is more than an art or a science it is a way of life. "We negotiate every day," she insists. And it's not just in business, but also in our marriages, with our children, and every other aspect of our lives. "We compromise. We make trade offs. We offer to make dinner if someone else does the dishes. We negotiate something countless times every day." But, she adds, "this doesn't mean we're always good at it." Gallant is a former lawyer who works as a professional negotiator and expert in conflict management and resolution. Her clients include large mining and pharmaceutical companies, small businesses, government organizations and individuals. She sees a growing necessity for people to bone up on their negotiating skills. For some this need is particularly urgent because their income or even their jobs are at risk. According to Gallant, the recent recession has put a lot of financial pressure on both employers and employees. Raises that people were counting on are being axed. There is a much tougher line on salaries, bonuses and expense accounts. Even pensions are under siege as employers are looking for ways to cut back.So, what happens the next time negotiating or renegotiating your salary? How can you make sure that you are earning what you are worth - even during a recession or a down dip in your employer's fortunes? (After all, many Canadian employers are hiring their own top notch negotiators to nail down a tougher deal with you and your co-workers.) Negotiating can vary from culture to culture with some countries embracing the art of haggling while others find it unseemly or stressful. Many women find negotiating salaries a particularly nerve wracking experience. Gallant says that some studies show that women can leave as much as a half million dollars on the table during their careers - simply from not valuing what they do and asking for what they are worth. Negotiating is a learned skill, Gallant says, but it does take a little homework and some practice to get good at it. While it is difficult to share all of the tricks of her trade here (Gallant is writing an entire book on the subject), she does have a few helpful tips to help guide us through what can be a very trying process - especially if there is a lot at stake. Be prepared. Do your homework in advance of salary negotiations, promotions, or a change in jobs. "Work it out. Plan it out. Rehearse" Know and appreciate the true value of what you do. What leverage do you have - such as work experience, transferable skills, length of time with your employer, strong relationships with clients and suppliers, etc. In short, how much are you worth to them - to another employer - and, most importantly, to yourself? Realize that your employer's offer is often just a starting position. In fact, it could be a test to see how confident you are in your job and how well you negotiate on their behalf A "no", doesn't necessarily mean the end of discussions. It could very well signal the real start of them and may simply mean you need to frame your desired outcome in a way that the other person can justify to "their people" Don't be pressured into making a quick deal. You are entitled to think things over and get advice Know at what point you are willing to walk away if your legitimate needs are not being met. What alternatives or options are available to you within the organization or, perhaps, with a new employer. Remember that "No deal is often better than the wrong deal" Skilled negotiations often call for creative solutions. Maybe you can't get more cash, but you can reduce your hours or have more vacation time. What do you have to trade? For example, you could offer to take a smaller office in exchange for an accelerated performance and salary review Gallant's style of negotiating is not about "winning vs losing". It is about creating a deal that is fair to both parties based on mutual trust and respect. But you still have to negotiate for what you want and need. - Karin MizgalaCheck out www.thenegotiationcoach.com Karin Mizgala is a Vancouver-based fee-only financial planner with an MBA and a degree in psychology. She's the President of LifeDesign Financial and co-founder of the Women's Financial Learning Centre.
|
 Looking at the Fears That Fuel Gold PricesOne of the most important drivers of the rise in gold prices since the end of the Great Financial Crisis has been the fear of impending inflation. The gold bulls (AKA "Gold Bugs") believe that the key source of this inflation will be due to an increase of the willingness of governments to accept inflation in order to get out from under their rising debt obligations. They argue that the debt levels are so high that they can never be paid back - so they will simply unleash inflation to bring down their level of indebtedness. That is, they will pay off their debt with increasingly devalued currency. In inflationary periods, gold tends to prosper as its traditional role of being "hard currency" takes on a greater level of importance. We only need to look back at the period from the 1970s to 1980. As inflation was brought back under control in the major industrialized countries, gold began an almost twenty year bear market. To be sure, the inflation argument cannot be dismissed out of hand. After all, the debt levels are enormous for some countries and they could use all the help they can. To some nations, perhaps a little inflation seems like an enticing option. However, as the data from the OECD compiled below shows, the deficits - while considerable - are not insurmountable. Many nations were in similar budgetary positions in the early 1990s.Canada's deficits at that time were comparable and in some cases greater than the levels facing many countries today. 
(Click on Chart to Enlarge - Data source: OECD.org)
Additional data from the OECD shows that even though debt burdens are at record highs, interest costs are not rising. This is due to the low interest rates in nations such as the UK and the US. It is because of these low interest rates that the gold bulls also take the central banks to task.
There is no central banker who receives more criticism from the gold bulls than Ben Bernanke, the head of the US Federal Reserve. The Fed's critics believe that its attempt to force interest rates down by unleashing an unprecedented expansion in the monetary base of the US economy and the purchasing of all kinds of US government and financial sector debt is bad policy. They believe that the Fed simply bailed out those responsible for the financial crisis and these measures will eventually usher in inflation.
However, it could be that the inflation fears are a little ahead of themselves at this time. The global economy is still quite weak as unemployment reaches a 26 year high, banks are still reluctant to lend and consumers around the world seem to be gripped by fear once again. Recent consumer confidence numbers from the US show this clearly as they dropped to a ten month low - leaving many on Wall Street scrambling for possible explanations.
At this point in time, it seems that the Fed and other central banks are doing what they have to do so that the economy can stand on its own. As some call for gold to reach levels of $2000 per ounce or more - it would be best to step back and take an inventory of the facts. This is not to dismiss the arguments of the gold bulls. They are not altogether invalid. But for the kind of inflation to take hold that would result in an upwards explosion of gold prices from current levels, the Federal Reserve and other central banks would have to throw in the towel and abandon the fruits of the hard won victory against inflation almost thirty years ago. At this point, it would seem that a policy error is a more likely reason for inflation getting out of control rather than outright indifference.
What they must do is to ensure vigilance against inflation, communicate to the markets that they are steadfast in their commitment to maintaining price stability and demonstrate that they are willing to stand up to political pressures to keep interest lower for longer should it no longer be prudent to do so. In addition, it must be made clear that the policy response from central banks was unprecedented but so was the depth of the financial crisis.
On the fiscal policy side of the equation, governments will have to raise taxes and cut spending as gingerly as they can. Any government which states that they only have to cut taxes and the road to reducing government deficits will be painless is simply not being straight with its citizenry.
AJ Sull, CFA, MBA, CMT is president and chief investment officer at Pacifica Partners - Capital Management in Surrey, B.C
|
 Do RSPs Still Make Sense?For most people they still do.That's the short answer, but it is well worth reviewing your overall retirement strategy and the role that RSPs play in your financial decision-making.So what are your neighbours doing about RSPs? It's true that lots of them are shying away from investing in RSPs citing disappointing markets, big mortgage payments and newer TFSA options. Statistics Canada reports that 88% of tax filers were eligible to contribute to an RRSP in 2007, but only 27% actually made contributions. They only used 7% of the total contribution room available to them and there is now almost $500 billion in unused RRSP contributions being carried forward. The median RSP contribution was only $2700.Some advisors recommend paying down your mortgage before investing in RSPs. I disagree. The problem with this strategy is that with large mortgages and longer amortization periods, by the time the debt is paid off, there is limited time to save for the income needed in retirement.A paid off mortgage is great, as it means lower expenses in retirement, but you still need income to cover the rest of your retirement expenses. So, unless you plan to sell your home or significantly downsize in retirement, you still need to save and invest. RSPs still almost always make good sense if: You are under 50 with 10-15 years left before retirement You have less than $200K invested in RSPs to date You are in the highest tax bracket now You pay less than 6% on your mortgage You have a balanced portfolio of conservative stocks, bonds and cash investments in your RSP Here's what I recommend: Set up a plan to be debt-free before retirement - preferably 5 years before the big day. Invest monthly in your RSP especially if your income is higher than $40K. If your income is less than $40,000, use a Tax-Free Savings Account (TFSA) instead. You can always move the money to an RSP later if your income increases. Take the time now to figure out your investment game plan. Decide on the optimal mix of equities, fixed income and cash to meet your specific needs and risk profile. (Note: Choosing the right asset mix is far more important than what investments you actually select. Most people spend time on the wrong things here.) If you're a "do it yourself investor", then use low-cost mutual funds or index funds (Hot Tip: Check out Investor's Aid Coop). Otherwise use an advisor that provides "value-added" financial planning advice. Ask questions to make sure you are getting the advice you are paying for. (check out: Questions to Ask your Financial Advisor). If you don't feel you can pay down your mortgage and contribute to your RSP, then review your cash flow and reallocate your resources so you can. Sure you might have to give up some good stuff today, but you'll thank me at retirement! Since most people think twice about withdrawing money from an RSP before retirement, topping up your RSP will help ensure you have some savings when you retire, even if you do have to pay some tax. Just do it! - Karin Mizgala Karin Mizgala is a Vancouver-based fee-only financial planner with an MBA and a degree in psychology. She's the President of LifeDesign Financial and co-founder of the Women's Financial Learning Centre.
|
