Finance & The City

Summer 2011- what is happening.

2011-08-08T07:41:00.000-07:00

Hi everyone,

I am just back from our holidays and as usual a lot of things happen to the markets whenever I am away. I am going to briefly summarize the key reasons for the recent market volatility and attempt to explain the reasons behind the market disruption. I am also going to go on record as saying that more volatility is expected. The current volatility has little to do with economics, financial markets or corporate profits; it has everything to do with politics and poor leadership.

"The latest economic and political soundings from Washington and other embattled capitals have done nothing to dispel the thick fog of uncertainty that has been hovering over global markets for months and made them even more volatile and tougher to navigate than usual".

Brian Milner Globe & Mail July 11 2011

Europe (Portugal, Italy, Ireland, Greece and Spain) PIIGS

Recently the talk in Europe has been focused on Greece defaulting on their national debt. Furthermore there was rioting and protest due to the political decision to raise the mandatory retirement age from 57 to some realistic age and implement government austerity programs to clean up the country's balance sheet. First off; the problem is not just a Greece problem, it's a PIIGS problem. All of these countries have mandatory retirement before the age of 65 and provide retirees with government sponsored pension plans. These pension plans are grossly underfunded. These countries also have an rapidly aging population and a culture that says it's ok not to pay your income taxes.

Mario Draghi, (new head of European Central Bank) said " Who knows what the effect of a Greek default will be?". According to Mr. Draghi "Everybody who owns Greek bonds are insured in the derivatives market using credit-default swaps against the risk of default".

If this sounds like double talk....it is. The problem is nobody knows who are the owners of these credit-default swaps are or who has insured others against such a default.

Poor political leadership could result in another debt default contagion, like the one in 2008.

In other words, according to Mario, three years after derivatives almost destroyed the global financial system, again they pose an unknown risk to global finances.

Generation Y: Why this country is in trouble

2011-01-13T12:30:00.000-08:00

In Canada, the 4 million people in Generation Y (those born 1980 to 2000) have a combined disposable income of $20 billion. That's enough to make any product marketer salivate. The rest of the world pays close attention to the products Generation Y choose because they not only influence each other, but studies have found that their preferences shape their parents' purchasing decisions on everything from groceries to big-ticket items.
Generation Y's life is expensive: clothes, cell phone bills, internet service, cable TV, dining out, movies, concert tickets and nightclubs (with cover charges and high-priced drinks). How are they possibly going to afford all this on an entry-level salary?
Shopping is a social experience for those in their late teens and early twenties. Peer pressure has always existed; however, it's difficult to be financially savvy when spend-thrift friends are constantly barraging you with a never-ending shopping list. Shopping as a form of entertainment can become a lifelong addiction. It often leads to spur-of-the moment purchases. As your income increases, your shopping sprees become more expensive.
You may not think you have a problem because you buy inexpensive items, but the frequency and volume of shopping poses a threat to already strapped bank accounts.
Once you start overspending it's hard to stop. Credit card companies love generation Y because they know you can't possibly have enough cash to buy everything you want. They expect you to use your credit card for everything from fast food to downloaded music so they can charge you high interest rates. They also know that consumers tend to become more brand loyal with age. That's why they want to get you hooked on their stuff now, since they expect you to continue to be a customer for the next 20 years. Make sure you're in control of your credit card and not the other way around.
Create A "save" verses. "buy" mentality early to succeed financially.
• Keep an eye on people who spend responsibly and befriend them. You'll feel comfortable not having to say no to expensive escapades.
• Let your friends know that you are working toward specific financial goals like a new car. They will understand why you don't take them up on every spending opportunity.
• There are more things for you to buy because technology is changing at such a rapid pace. For example, most people replace their cell phone every few years. It's difficult to keep up with everything. Understand that there is a difference between a "want" and a "need". A need is a necessity for you to live: food, shelter, transportation. A want is a "fad or thing" with little or no long term impact on your well-being.
• Don't pine over "stuff." Sitting around thinking about all the "things" you want to buy will only entice you to go out and spend your rent money on it. If someone around you is obsessed with an item, distract them by changing the subject.
• Don't take all credit cards and ATM cards with you when you go out. If you don't have it, you can't spend it.
• Volunteer to be the pickup person for concert tickets and pizza. That way you can make the decisions about how much to spend. Have your friends pool their money ahead of time so that everyone contributes and you are not chasing them around for the funds afterwards.
The marketing world revolves around Generation Y. They basically control what becomes the next big thing. It is your responsibility to choose carefully. Start by carefully selecting your friends. Learn what to watch for before you find yourself drowning in debt or filing for bankruptcy.
Five indicators that you are living beyond your means.
Credit Score Below 600:
Credit bureaus keep track of your payment history, outstanding loan balances and legal judgments against you. They then use this information to compile a credit score that reflects your credit worthiness. The numerical rankings go from a low of 300 to high of 850. The higher the better. It's this score that lenders use to determine whether they'll grant a loan. In general, any credit score below 600 means that you are probably in over your head.

How to improve your credit score:
• Pay down debt
• Satisfy any outstanding judgments
• Apply for and use fewer credit cards

If you are saving less than 5% of your income:
In 2006, the average rate of personal savings was an astonishing negative -0.5%, That means that not only were we spending all of our income, but also that a good number of us were also dipping into personal savings to maintain our lifestyle. The savings rate bounced back to positive territory in 2008 and 2009. If you haven't jumped on the savings bandwagon, now is the time to do it.

A savings rate below 5% means you could be in real danger of financial ruin. Ideally, everyone should try to save as much as they can, but in terms of targets, the rule is 10% of your gross income. Beginning at age 30, if you were to save 10% of your $100,000 annual income in your RRSP or $10,000 every year, and earn a conservative rate of return of 5%, that money would grow to more than $900,000 by age 65.

Your Credit Card Balances are Rising
If you are one of those people who pays only the minimum due on their credit card balance each month, or if you send in only a small contribution toward the principal balance, then you are most likely in over your head. Ideally, you should only charge what you can pay off at the end of each month. When you can't afford to pay off the balance in its entirety, you should try to make at least some contribution toward the outstanding principal. The importance of paying down credit card balances as soon as possible cannot be overstated. A person with $5,000 in credit card debt that makes the minimum payment of just $200 per month will end up spending more than $8,000 and take almost 13 years to pay off that debt.

More Than 28% of Income Goes To Your House
Calculate what percentage of your monthly income goes toward your mortgage, property taxes and insurance. If it's more than 28% of your gross income, then you are likely in over your head.

Why is 28% the magic number? Historically, conservative lenders have used the 28% threshold because their experience has told them that this is the rate at which the average person can get by, make their mortgage payments and still enjoy a reasonable standard of living. Certainly, some homeowners can get by spending a higher percentage on their homes, particularly if they cut back elsewhere, but it's a dangerous line to walk.

Note that if you are currently spending in excess of 28% of your gross income on housing, it may be because many lenders have loosened their requirements over the last decade, and allowed some to borrow as much as 35% of their income. However, since the collapse of the subprime mortgage market, many lenders are becoming more cautious and are once again returning to the 28% threshold.

Your Bills are Spiralling Out of Control
Buying on credit and paying by instalment has become a national pastime. It's much easier to buy a new flat screen TV when the salesman breaks down the price in monthly instalments. What's an extra $50 per month, right? The problem is that all of these bills start to add up, and you end up nickel and dimeing yourself into bankruptcy. If your monthly income is being sliced and diced to pay for dozens of unnecessary instalment purchases and services, you are likely in over your head.

Lay out all of your monthly bills on your kitchen table, and go through them one by one. Do you have a cell phone bill, a PDA bill, an internet bill, a premium cable TV package, a satellite radio bill, and all of those other gadgets that generate countless monthly bills? Ask yourself whether each product or service is really necessary. For example, do you really need a 500-channel premium cable TV package, or would you really notice the difference if you had fewer channels (and paid less)? Some of the best places to find savings include your telephone bills (cell and land line), your utility bills (turn off the lights, and don't run the air conditioning if nobody is home) and your entertainment expenses (you could stand to dine out less and to pack a lunch for work.

Puppies and children are almost the same:

2010-08-23T12:05:00.000-07:00

My brother-in-law and sister-in-law have recent additions to their families both have bought a new puppy. I've noticed through the course of the past few months’ parallels with friends bringing home new babies and those purchasing pets. First off that there is a substantial list of things the experts don't tell you when they send you home from the hospital or the kennel, for that matter, in regards to babies or puppies.

I've taken it upon myself to compile a list of things to know about having children and buying a puppy. Something that may or may not be of use to you; but every new parent and pet owner deserves to know.

1. You will no longer own light color clothes. Between baby poop, spit up and puppy accidents white is no longer a color that can be maintained.

2. There is no such thing as a moment of silence. Nothing fills the void of silence more effectively as the sound of children (happy or un-happy) and the constant barking of a dog. Better still combine the two (kids and pets) to experience total mayhem in regards to noise and commotion.

3. Ever run into parents who think that because their child can walk at nine months that he or she is going to be the next Einstein? This same concept applies to pet owners. I witnessed a full half hour conversation between my brother-in-law and sister -in -law as to whose puppy was smarter! The best reaction is just to smile, and remember one simple fact: Einstein was a late bloomer and considered a dunce by his parents and teachers.

4. Once you have children or pets, possessions of value become redundant. Your home and your car is just another thing of value that your children or pet will eventually destroy. This fact increases with children as they reach the age in which they can drive you car.

5. Once you have kids or pets your definition of clean will be substantially lowered. What used to qualify as dirty will become fitting for even the most distinguished of guests. In our home our kids destroy table cloths. After each and every meal we have to change the table cloth and no matter what you eat somehow someway it becomes a permanent part of the linen. Add pets to the picture and rugs, sofas and even back yards become dirt magnets and mess areas.

6. Potty training and paper training is a frustrating activity
that is overrated. First off there is no such thing as a potty
chair. There are potty rugs, potty panties. potty tile, and potty
loveseats. Both with children and pets this is an activity and
a subject that parents and new puppy owners like to talk
about. The worst thing a host wants to hear is "don't worry
he/she is potty trained/paper trained.” Because what that
means is your house is going to be the first place an accident
occurs.

7. Both with children and pet owners comes the ability to be
mortified, humiliated, embarrassed, First of all expand your
list of the things you had no idea children or pets could do.
Children tend to say things out loud that will turn even the
darkest of faces a cherry shade of red. With pets anything
goes; from playfully ripping a sofa cushion apart to marking
their territory on the new Persian rug it can all happen in a
second.

8. Being a parent or a pet owner, things that use to be simple
will no longer be. Nothing clips the wings of freedom as
having a child or pet. In some cases children are easier
because there usually someone in the family or a list of
friends who will watch over them while the two of you get to
go on a date or away overnight. Having a pet in need of
sitting may not be the same. Less people are inclined to baby
sit a full grown German Sheppard or a high strung puppy

One thing I can tell you about being a parent is that no two
kids are alike and children do not come with an owner’s
manual. Sometimes being a parent is similar to trying to
herd puppies or kittens. But one thing I can assure you is
that being a parent is the most rewarding experience you will
ever have. There will never be another job more demanding
or as important then being a parent.

2010 in the Market

2010-08-23T12:02:00.000-07:00

The year 2010 will forever be remembered as the year of excessive volatility and rollercoaster rides in the financial markets. World markets experienced a -55% return in 2008 and a positive 30% return in 2009. This year we have literally moved between +/- 10% almost monthly.

Most clients that added money to their accounts during 2008 & 2009 (either through pre -authorized monthly deposits or lump sum purchases) were rewarded with significant gains in their portfolios. Clients that required an income from their investments or who took out lump sums from their accounts during 2008 and 2009 have experienced a negative return on their portfolio throughout this time.

For 2010, markets have been gyrating + or - 10 % several times over the last 9 months. Although the see-saw effect that the markets are experiencing is normal after a recession, this amount of volatility is significant and concerning.

The economy and the markets have become disconnected; what we are experiencing now is the effects of this disconnect coupled with government interference, regulations and downright stupidity with increased taxes (HST) and increasing cost for staples such as Ontario Hydro. All this is happening during a time where the lack of jobs and fear for job security, have most Canadians watching their pennies and cutting costs.

The majority of companies that are represented in your investment portfolios are actually in better shape than they were in 2008 and are making money. However, most companies have cut jobs, cut costs, or implemented spending freezes to build up their financial health.

Positive earnings reports, large contracts being won by Canadian firms and a lower dollar are all contributing to a healthy economy- yet the market volatility and excessive gyrations continue.

I know it is a difficult time for all of you, however maintain a long term perspective and understand that being patient will pay off in the long- term.

Oil - Why are we paying so much?

2010-07-28T10:49:00.000-07:00

Figuring out how the price of oil is determined is a perplexing and frustrating exercise. Consumers are reminded of this every time they fill up at the gas pump. Just over two years ago the price of oil was sitting at $147/barrel. The bank owned stock brokerages were touting a price of $200 before the end of 2008. The media was reporting that cheep oil was a thing of the past and that China and the developing world were going to increase demand so much that we were going to run out. I can remember filling up my car in Ancaster at over $2.00 per Litre

In a recent article in the Globe and Mail it was reported that 97% of the United States shoreline has been embargoed for just over three decades. That means no off-shore oil exploration, no off-shore drilling for oil and no off- shore development to bring up the existing known oil deposits can take place. What does all that mean?

• It means that an estimated 86 billion barrels of crude oil is sitting within the coastal waters of the United States.
• The USA imports 540,000 barrels of oil from OPEC daily.
• If the USA allowed off-shore oil they would have 159,259 days of oil.
• That's 436 years of supply
• That would be in addition to the 30 million barrels of America’s known reserve.
• Let's not forget the USA also cancelled 5 oil exploration agreements in Alaska.
• One zone in Alaska holds 77 billion barrels of crude oil.
• That alone is another 390 years of oil.

Now I'm just talking about the USA in this article. When you factor in Canada, Cuba, Brazil, Venezuela and Russia all of whom utilize off shore drilling and exploration...it kind of makes you wonder if there is a real oil shortage.
OPEC has also announced that even if oil reaches $90 a barrel they will not increase production....

Global demand is slowing by 135,000 barrels a day.
OPEC isn't convinced that current oil prices will persist, citing a global excess of crude oil.

The price of Gas in Saudi Arabia is 15 cents a gallon!
Personally I really don't think there is an oil shortage and I feel gouged every time I fill up. If we are really running out of oil, the technology exists today whereby we can convert to a greener and renewable source of energy within five years.

Health Spending Accounts (by Kevin O'Brien CFP, CDFA)

2010-07-28T10:46:00.000-07:00

I recently was introduced to a local small business owner by his accountant. It was in regards to his lack of retirement savings. Like most business owners this individual had built up substantial equity in his company, but had failed to save for retirement. This concerns the accounting firm because a large number of baby-boomer business owners are all planning on selling their companies at exactly the same time. This happens to coincide with a time period where Canada's work force will contract. With fewer people working and more businesses being sold, there is a significant risk that some business owners will be unable to sell their company at retirement.

I conducted a thorough interview and obtained the necessary documents from the business owner; one of the statements he relayed to me was the lack of excess cash-flow to fund an RRSP; so as I left the meeting I knew I had my work cut out for me.
One area that I narrowed in on was a group health plan that had been implemented five years ago. The carrier had increased the premiums each and every year and the plan cost had more than doubled. Furthermore the employer had removed coverage, lowered allowable expenses and limited some of the coverage in an effort to control cost and maintain cash flow during the recession. These changes had resulted in tension between the employer and his employees.

By recommending a Health Spending Account we were able to lower the employers cost, fixed his annual contribution limit for health benefits and provide the employees more flexibility and control over their health spending needs. The savings on cost by moving to a Health spending account enabled the business owner to save for retirement.