Friday, June 25, 2010

Our Aging Population & Primary Care: For Wealth, invest in health

One of the earlier investment lessons I learned was to focus on trends (as opposed to fads). Almost six years ago when I was writing my first book, Stop Working: Here’s How You Can!, I dedicated an entire chapter to the importance of oil and how demand was certain to rise with the rapid industrialization of the developing world and how this would result in oil being a good investment over time. Anyone who invested in energy stocks at that time made a lot of money – but this observation was in plain sight. It didn’t take a rocket scientist to connect the dots!

Another trend that is pretty obvious to all is the fact that North America is rapidly aging. The simple reality is that as people age they tend to consume more healthcare – whether it’s medicine, medical devices, surgery, etc. This fact bodes well for some health-related companies. For example, I have written numerous times about my investment in Johnson and Johnson – arguably the most diversified health care company in the world with businesses which include pharmaceutical products, medical devices, and over-the-counter consumer products. This company has been an incredible long-term performer, which is conservatively managed (low debt), and has strung together almost half a century of consecutive dividend increases!
by Canadian MoneySaver Derek Foster.

Demograhics and Primary Care
By Robert Truog

The face of aging in the United States is changing dramatically — and rapidly, according to a new report from the U.S. Census Bureau. The population age 65 and over in the US is expected to double within the next 25 years. Almost 20% of all Americans will be 65 years or older by 2030. The age group 85 and older is now the fastest growing segment of the U.S. population.

The health of older Americans is improving. Still, many are disabled and suffer from chronic conditions so they will demand and receive more health care as they age. The 14 million people age 65 and older reported some level of disability in Census 2000, mostly linked to a high prevalence of chronic conditions such as heart disease or arthritis.

The need for health care will continue to grow as the population in the US ages. This one issue will make the demand for physicians to increase and could lead to shortages of medical services. Other factors are impacting demand for health care, the shrinking economy and the purported health care “reform".

Primary Care Shortage

As many as one-third of today's 650,000 physicians may retire by the year 2020. There is particular concern about primary care shortages in the near future as older physicians retire and younger ones seek higher paying specialties instead of primary care. Rural areas are especially vulnerable to attracting and retaining new physicians as the old ones retire.

By 2020, American Academy of Family Physicians suggests there will be a shortage of 40,000 primary care doctors and others(Geriatric jobs, Emergency Medicine jobs, General Practice jobs). Since the number of medical students choosing primary care as a profession has already dropped by 51.8% since 1997, there could be a continued drop in supply for primary care physicians if nothing is done to correct. The drop in interest in primary care is likely a response to the significantly higher salaries that sub specialists command.

Weak Economy and Aging Population

With the recession and massive job loss across the country has had a direct impact on the revenue stream to physicians. When people lose their job, they also lose their health care benefits and so access to health care. However, many doctors are postponing retirement since watching the stock market decimate their retirement savings. This postponement has resulted in fewer jobs being offered and graduating residents not finding as many opportunities as before. Residents rather than committing themselves to less desirable jobs are opting for locum tenens jobs and waiting before committing to full time employment. So for the short term, it appears there are fewer good jobs available.

Health Insurance Reform

Another uncertainty is the national health reform which seems to be changing and shrinking every day. However, to the degree that reform increases enrollment of health care insurance then these increased numbers should push demand for services and therefore cost higher. However, no one yet knows what will happen to reimbursement rates from Medicare. Already there has been some lowering of rates they pay in Radiology which has directly impacted that specialty. The question is will there be more rates cut that will affect all specialties.Because of these and other factors many physician practices are holding off making any decisions until they have a better idea of how the health reform will impact these reimbursements.

Saverio Manzo
http://saveriomanzo.com/
http://saveriomanzo.blogspot.com/

Wednesday, June 23, 2010

U.S. Fiscal Crisis Will Likely Occur Within 2 Years

The following is a reality of what our next door neighbour is facing as a nation. The best take-home point from this is where Niall Ferguson brilliantly discusses the bond market and our rapidly increasing debt loads.

The perception of the bulls is that low rates and easy money will eventually get us out of this mess. What Niall counters with here is a mathematical reality check in regards to the sheer magnitude of the amount of debt we are issuing and the cost to service it. The USA's ability to service their Treasury debt is mathematically impossible if they continue to sell $120 billion in treasuries every other week.

As Niall describes, when the debt loads become so large, it only takes a small increase in rates to create a fiscal crisis because you become overwhelmed by the huge amount of debt issuances that you need to service. For example: Increasing interest rates by 2% on bonds with the overwhelming amount of debt we have today might be the equivalent of taking rates to 8-10% in the early 1980's when it comes to the percentage of GDP it will cost us to service the debt (pay interest on the debt).

The bond market will eventually call the Fed out by taking rates higher as they begin to realize that our GDP will simply not be large enough to service the debt.

Will the PIIGS and the rest of Europe get called out before us? Sure, but eventually we will end up in the same place; our situation is no better. We get a pass for now because we are still considered to be the safest haven left. Or as I like to say: The best of the worst!

This is all unsustainable and I think the reality is beginning to set in that we cannot continue to spend like this. Anyone that has a job and pays bills understands that you cannot spend more than you bring in every month over a long period of time without going bankrupt.

The problem we have here is the political will is not there to make painful decisions we need to make in order to clean up our fiscal house. It's going to take a fiscal crisis similar to Greece in order to finally force the government to clean up its balance sheet.

The fact that Niall predicts this will likely happen within 2 years is a pretty alarming statement.

The Bottom Line

We have the G-20 coming up here soon and Germany seems to be pumping fiscal restraint, whereas we are still promoting throwing money out of helicopters. It will be interesting to see how this plays out.

Folks: The jig is about up. The Ponzi scheme is on its last legs. The borrowing path we have chosen is proving to be mathematically unsustainable. Greece went down via the same route. England and Japan are right behind them.

The question is now WHEN, not IF.

When accomplished people like Niall Ferguson are confident enough in their thesis to put time lines on the collapse, it's time to be afraid.

Canada is in far better shape fiscally, but as the US fares, so may we…

Saverio Manzo
www.saveriomanzo.com
http://saveriomanzo.blogspot.com/

Monday, June 21, 2010

Global investment perception of Canada changing

Our reliable friend at GS makes the following observation about Canada and how she is being perceived from our global counterparts as a safe, reliable and responsible place to do business and invest.

I continue to say it; as the world’s major industrialized nations may suffer for some years to come (USA, Europe, etc.), Canada is on solid footing from many prospectives and will continue to see money flow in to our economy and currency.

“We have said it once and we have said it again, the downside risks and upside potential for Canada vis-à-vis the U.S.A. have rarely looked as compelling as is the case today.

This is true in terms of the financial, economic and fiscal landscape, but in terms of which jurisdiction has the pro-business and pro-market political atmosphere, Canada has never been more to the right of the U.S.A., which is one reason why the loonie managed to test par against the greenback this year without the price of oil heading towards $150 per barrel.

It is because Canada has been re-rated in eyes of the global investment community. Have a look at 49th Parallels on page 39 of the Economist for more on this file.

This pro-business theme in Canada looks set to last for quite a while and so it is difficult to see, in this relative political setting, the Canadian dollar failing to remain in what looks to be a long-term bull market.”

Source: David A. Rosenberg, Chief Economist & Strategist GS

Saverio Manzo
http://saveriomanzo.com/
http://saveriomanzo.blogspot.com/

Thursday, June 17, 2010

Baby Boomers: Long-Term Investing Doesn’t Have to End at Retirement

If it’s not quite a central investing rule, it is at least one of the most common approaches to portfolio management: You invest aggressively when you are young and more conservatively as you get older. This age-based approach to investing, which has led to the proliferation and increasing popularity of target-date funds in RRSPs, essentially dictates that a stock-heavy investment approach eventually give way to a healthy diet of bonds throughout your investment lifecycle.

But Catherine Avery Investment Management, challenges this common investment approach in a new survey assessing best-practice investment strategies for baby boomers. The firm recently completed its first ever recommended “mock portfolio taste test” that examined different investment parameters and long-term return characteristics for boomers. The results show that a value-oriented portfolio loaded with dividend paying stocks is cheaper and less risky than a traditional growth portfolio. The firm also says its value portfolio is trading more cheaply than the S&P 500.

According to CAIM’s analysis: A $1,000 principal investment in a dividend paying stock, with a 3% annual dividend yield growing at 5% a year, and modest 5% annual stock appreciation, will grow to more than $4,000 (342%) at the end of 20 years. By comparison, Government Bonds/Treasuries will grow to just over 200%, while the S&P 500 has a 20-year historical return of 191%.

CAIM recommends that boomers purchase “a portfolio of less expensive, fundamentally attractive, large cap companies that are under leveraged and pay dividends.” Besides the 3% dividend yield, it has less than half the leverage of a growth portfolio, is generating more free cash flow per share and is significantly cheaper than the indices. Although the growth portfolio has generated more than three-times the stock price performance versus that of its value portfolio year-to-date, over the last five years the growth portfolio has only slightly outperformed the value (10% versus 8%). The firm argues that this suggests “significantly greater potential upside” for the value portfolio.

“Stocks in general help preserve purchasing power and are the best defense against inflation,” says Catherine Avery, founder of CAIM. “Bonds won’t protect them. The first inclination is to retire and to load up on bonds but with baby boomers living longer that’s not going to work. A 10-year treasury yields 3%.”

According to Avery, value stocks that pay dividends will help boomers protect themselves against some of the main risks as they age: Health care costs, outliving assets, forced retirement or locking in poor returns with low-yielding, safer investments.

But that learned investing practice that so many of us carry—load up on bonds and get conservative a we grow older—has in many ways been reinforced by the recent financial crisis. Investors are more risk-averse. Older investors are more concerned with value preservation. So this begs the question: How difficult will it be to convince aging baby boomers to think like younger, long-term investors?

“I think at this point in time considering what happened with the financial crisis people are frightened and paralyzed,” Avery concedes. “Mutual fund flow data shows the bulk of money is going into bonds. But I also think people are finally becoming at ease with what’s happening the market right now.”

And the point of this survey, Avery continues, is to help baby boomer re-learn their investment approach. The biggest risk when money is shifted into bonds is that investors become complacent, she says. When the interest rates begin to rise, the value of the bond investments begin to filter off.

“We are tying to shift the thinking and focus of these investors going forward,” Avery says. “A lot of baby boomers might think, ‘I don’t have 10 or 20 years’ [to wait on returns]. But you don’t have 10 years to sit with a bond that collects 3% either. Think about what you’re leaving for your heirs.”
Source: Paul Menchaca

Saverio Manzo
http://saveriomanzo.com/
http://saveriomanzo.blogspot.com/

Tuesday, June 15, 2010

Back to the Basics: Reasons to Own Gold

I have written about Gold – both positive and negative fundamentals, with a skew to the bullish camp, albeit, several times since 2007. So let me share with you a recent excellent piece from the most recognized Gold Bullion bull that I have ever come to know, Mr. John Embry. I worked with John back in mid 1990’s when at the time he was just as bullish. Well, hat tip to you, John, for being right for so long. But what does the future for the bullion hold?

REASONS TO OWN GOLD

The fundamentals for gold are impeccable,
the long term technical picture is exceptional
and gold remains very inexpensive when
compared to almost every other alternative.
I expect gold to trade at several multiples
of the current price before this bull market
breathes its last breath.

By: John Embry, Chief Investment Strategist, Sprott Asset Management LP

1. GOLD IS RETURNING
TO ITS TRUE HISTORIC
ROLE AS MONEY

The role of gold in society was succinctly
summed up by J.P. Morgan in 1912 when
the renowned financier stated that “Gold
is money and nothing else.” Ironically,
he made that comment one year before
the U.S. Federal Reserve was created.
There have been long periods (1980-
2000 being one) when this immutable
fact was dismissed. The fact remains,
however, that every fiat currency system
in history has ended in ruins. Our current
experiment seems to be headed down the
same disastrous path, thus allowing gold
to reemerge as a currency once again.

2. THE INEVITABILITY OF A
COLLAPSE IN THE U.S. DOLLAR

The U.S. dollar is the world’s reserve
currency and thus anchors the world’s
monetary system. Unfortunately, by
virtually any measurement we look at,
the United States is beyond ‘the point
of no return’ with respect to its financial
position. Imbedded federal government
debt of nearly $13 trillion, unfunded future
liabilities in medicare, social security, etc.
well in excess of $50 trillion and a current
budget deficit of over 10% of GDP virtually
ensures ongoing massive monetary
debasement. When the near bankruptcy
of the majority of the fifty states in the
union is factored in, the situation looks
even more dire.

3. OTHER SIGNIFICANT WORLD
CURRENCIES OFFER NO REFUGE

The current travails of the European Union
are well advertised. The recent pledge of
nearly $1 trillion in potential bailout money
by Eurozone members and the IMF in the
wake of Greece’s problems, coupled with
the fear of contagion throughout southern
Europe, effectively disqualifies the
Euro from serious consideration. Great
Britain is in such disarray that it doesn’t
even deserve comment. Japan has a
rapidly aging population and embedded
government debt that already exceeds
200% of GDP. Even China, that paragon
of all things financial and economic, is
suspect. As the result of its bank lending
spree in 2009, the country is dealing with
considerable overcapacity, an emerging
inflation issue and a potential bad debt
crisis in its banking system.


4. THE DESTRUCTION OF
GOVERNMENT BALANCE
SHEETS AND THE WIDESPREAD
IMPLEMENTATION OF ZERO
INTEREST RATE Policies MAY
ULTIMATELY RESULT
IN HYPERINFLATION

As the result of the global financial crisis
which enveloped the world between
late 2007 and early 2009, the world’s
governments were forced to step in
and bail out the financial sector while
propping up overall demand in the face
of the collapse in the private sector.
This unfortunately occurred as their own
revenue streams were under severe
pressure due to the issues in the private
sector. To combat the massive deficits
that inevitably resulted, widespread
quantitative easing (i.e. unfettered money
printing) was undertaken. That policy is
here to stay and the fiscal deficits in many
countries have now reached percentages
of GDP that have almost always resulted
in eventual currency collapse. Thus, the
frightening term ‘hyperinflation’ is now
being heard with increasing frequency.

5. THE TRUE IMPACT OF THE
MALIGN SIDE OF DERIVATIVES HAS
YET TO EXPRESS ITSELF

Remarkably, the notional value of
derivatives has continued to grow, both
throughout the global financial crisis and
during the ensuing recovery period. The
fact that derivatives played a major role
in the financial meltdown seems to have
been conveniently forgotten. Attempts
to regulate OTC derivatives, which
Congressional committees have been
warned are “ticking time bombs” and
“financial weapons of mass destruction,”
surprisingly continue to meet resistance.
The fact that many derivatives are
essentially worthless but are being carried
on the books as ‘marked to model’ is
creating an extremely distorted picture of
the health of the financial sector.

6. INVESTMENT DEMAND FOR GOLD
IS RAPIDLY ACCELERATING BUT
WE’RE ONLY IN THE EARLY STAGES
OF THIS PHENOMENON

Despite the fact that gold has been rising
steadily for ten years and sophisticated
investors are climbing aboard to protect
themselves from the ravages of monetary
debasement, conventional institutions and
the average citizen remain largely unaware
of gold’s utility. When the next leg of the
global financial crisis arrives and stocks
and bonds come under severe pressure,
investment demand for gold could
potentially rise exponentially. To facilitate
this demand, new gold investment vehicles
are being created including the very well
received Sprott Physical Gold Trust (see
disclaimer).

7. GROWING RECOGNITION THAT
MANY PAPER GOLD PRODUCTS DO
NOT HAVE THE GOLD BACKING
THAT THEY PURPORT TO HAVE

At the March CFTC hearing with respect
to position limits on gold and silver on the
Comex, Jeffrey Christian of CPM Metals,
advertised on his firm’s website as “an expert
on precious metals”, openly acknowledged
that transactions on the London Bullion
Market Association (L.B.M.A.) are minimally
backed by available physical gold. Given
that the L.B.M.A. has long been regarded
as the exchange where physical gold is
transacted, that qualifies as a remarkable
admission. Investors should also have
strong reservations about gold ETF’s,
gold pooled accounts and gold certificates
where the gold is unallocated and thus not
specifically accounted for.

8. MINE SUPPLY IS NOT
ANTICIPATED TO RISE FOR
SEVERAL YEARS, IF AT ALL
Despite gold prices surging from a low of
$252 per ounce in 1999 to over $1,200
recently, mine production has been eroding
for nearly a decade. This suggests that mine
supply is insensitive to higher gold prices,
a fact confirmed in the 70’s when mine
supply actually fell as gold made its historic
rise from $35 per ounce to $850. Aaron
Regent, the head of the world’s largest
gold company, Barrick Gold, was quoted
at a conference in late 2009 lamenting
the state of the gold mining business. He
went so far as to suggest that global gold
production was in terminal decline despite
record prices and the Herculean efforts
by mining companies to discover new ore
bodies in remote areas. He actually alluded
to “peak gold” by implying that production
has already reached levels that can’t
be exceeded, an expression that is now
commonplace in the oil industry.

9. CENTRAL BANKS ARE NEARING
AN INFLECTION POINT WHERE THEY
WILL NO LONGER BE IN A POSITION
TO SUPPLY THE GOLD NECESSARY TO
KEEP THE MARKET IN EQUILIBRIUM
The western central banks, who have
supplied massive quantities of gold to the
market over the past fifteen years, both
to meet burgeoning demand and to suppress
the price, are running dangerously short. Their
activities were reminiscent of the late 60’s
when central banks expended over 100 million
ounces in an ultimately failed attempt to hold
gold at $35 per ounce. We believe that this
time they disposed of far more gold and did so
clandestinely, employing swaps, leases and
opaque accounting. This era’s central bankers
have obviously learned nothing from the past but
are clearly considerably more desperate due to
the dramatically worse situation on the financial
and economic fronts. It is telling that the annual
selling quotas under the European Central Bank
Agreement are 400 tonnes per annum and the
banks, after meeting their past quotas for years,
are selling nothing.

10. INCREASING LIKELIHOOD OF
ACCELERATING PURCHASES OF GOLD
BY EASTERN CENTRAL BANKS
The enormous concentration of U.S. dollars in
the reserves of a number of Asian central banks
in conjunction with low gold exposure virtually
ensures that they will be more aggressive
purchasers of gold in the future. Russia and
China have already revealed their intentions
and India may have stolen a march on everyone
when it announced late last year that it had
purchased 200 tonnes of the well advertised
IMF sale. What appears to be a huge swing
from collective heavy selling by the central bank
community to net accumulation is going to have
an extremely salutary impact on the gold price.

11. INCREASING SKEPTICISM ABOUT U.S.
GOLD RESERVES
The U.S. has long been the world’s largest gold
holder with a current reported position of 8,133
tonnes (over $300 billion worth). However,
there have been recurrent rumors that the
U.S. has mobilized an unknown portion of their
gold reserves via swaps to facilitate leasing, a
key component in the gold price suppression
scheme. The absence of any outside audit of the
reserves since the 1950’s and the Fed’s current
intransigence towards being subjected to an
audit only heighten suspicions that the U.S. does
not have nearly as much gold as they claim.

12. LARGE SHORT POSITIONS
Despite dramatic de-hedging by the gold
producers, whose original excessive hedging
was ostensibly the reason for the proliferation of
gold derivatives, the notional value of OTC gold
derivatives still remains elevated. This suggests
either a major legitimate bet against the secular
trend of the gold price or ongoing nefarious
activity (i.e. price suppression by the usual
suspects). The existence of large concentrated
short positions on the Comex held by a few
bullion banks makes it reasonable to assume
that it is the latter. If the longs were to ever to
call for delivery, the shorts’ position would be
extremely problematic due to the increasing
physical shortage of gold.

13. INCREASING RECOGNITION OF THE
FACT THAT THE GOLD PRICE HAS BEEN
SERIOUSLY SUPPRESSED
More and more members of the financial
establishment have been forced to concede
that gold has been subjected to constant price
management by western governments, their
central banks and their bullion bank surrogates.
The increasingly egregious activities in this area
are forcing any thoughtful person to acknowledge
what is occurring. The work of the Gold Anti-
Trust Action Committee (GATA), which has been
remarkably accurate over the past ten years,
is finally receiving belated acknowledgment
following years of being studiously ignored. The
extent of the suppression has been so great
that it virtually guarantees a far greater upward
explosion in the gold price than would otherwise
have occurred.

14. THE SUPPRESSION IS EVIDENT
IN THE CONTINUING EXTREME
UNDERVALUATION OF GOLD
Measured by any number of metrics (gold price
in relation to the staggering amount of money
and credit that has been created over the past
several decades, gold’s extreme undervaluation
relative to platinum, the gold producers’ pathetic
returns on capital at the current price, etc.), gold
is far behind where we believe it should be. If
gold had merely kept up with the reported rate
of U.S. inflation since its peak price in 1980, it
would presently be trading in excess of $2,300
per ounce.

15. THE RELATIVELY SMALL SIZE OF
THE GOLD MARKET
In the past, gold’s small market footprint has
actually been a negative because it more
easily facilitated the price suppression activity.
This is about to change, however, as gold
becomes the asset of choice for more and more
investors for all the aforementioned reasons.
All the gold mined since the beginning of time
is worth less than $6 trillion currently and the
total capitalization of all the world’s gold stocks
barely exceeds that of Walmart. This pales in
comparison to the amount of paper money that
could seek refuge in the world’s eternal money.

16. GOLD IS IN AN ESTABLISHED
POWERFUL BULL MARKET
Gold is in the tenth year of a powerful bull
market since it double bottomed at just over
$250 per ounce in early 2001. It is most
definitely a stealth bull market as the sentiment
remains remarkably subdued, a fact illustrated
by an extensive worldwide poll conducted by
Commodities Online in the spring of 2010 that
revealed that 93% of the respondents expected
the gold price to fall. Gold has been climbing a
classic “wall of worry”, a climb made steeper by
the stout resistance of the anti-gold cartel and
the constant negative propaganda emanating
from its mainstream apologists.

17. GOLD HAS ENDURED
Gold is indestructible, possesses a high value to-
weight ratio (which makes it easy to store
and transport), is not anyone’s liability, can be
easily hidden (which has been a considerable
attribute in the past) and, most importantly, has
provided protection against the destruction of
wealth for centuries.

CONCLUSION
The fundamentals for gold are impeccable,
the long term technical picture is exceptional
and gold remains very inexpensive when
compared to almost every other alternative.
I expect gold to trade at several multiples
of the current price before this bull market
breathes its last breath.

Saverio Manzo
http://saveriomanzo.com/
http://saveriomanzo.blogspot.com/

Monday, June 14, 2010

Demographics, deflation and debt will impact investment strategies

Recently my job has been made easier thanks in part to some great contributions from other financial planners. This includes the following, from John Nicola. I happen to agree with most of this assessments, thoughts and opinions in this piece:

The 3 Ds of investing
Demographics, deflation and debt will impact investment strategies.


As part of our annual review of the markets, the economy, and consequently our investment strategies going forward, Nicola Management organized two seminars whose theme revolved firmly around the impact of massive global government fiscal stimulus and the debt that goes along with it.

We discussed the questions that are on everyone’s mind:

• How will that debt be funded and eventually repaid?
• Will increasing government debt be inflationary or deflationary?
• What impact will demographics have on debt and deflation/inflation?
• How might that affect our asset allocation and specific asset selection?

For any answers to emerge, first let’s summarize the current government debt situation.

It would be kind to say the picture is not pretty, although the world has now split between what appears to be the profligate spenders of the developed world and the industrious ants of the developing world.

Debt levels are rising, because countries are trying to mitigate the impact of the financial crisis that began in 2008. On average, the G20 nations will have a 2010 fiscal deficit equal to 8.6% (anything more than 3% is not considered sustainable in the long term) and a current debt-to-GDP of 100%, which puts them at the tipping point of default, according to a detailed analysis of government debt written by Carmen Reinhart and Kenneth Rogoff (This Time it is Different: Eight Centuries of Financial Folly).

Their observations about sovereign debt and the numbers are sobering - especially the fact that over the last 200 years it was far more common for countries to have defaulted on their debt than to have repaid it.

• 66 countries have represented 90% of global GDP since 1800;
• Only 17 have not defaulted;
• “Ne’er-do-wells” include France, Germany, China, Russia, Latin America, and Japan;
• Greece is a serial defaulter (according to Reinhart and Rogoff, it has been in default for 105 out of the last 200 years);
• Default Virgins include Canada, Australia, Singapore, and the U.S.
Other countries are also facing a wall of resistance from the bond market regarding their never-ending deficits. Portugal has just experienced a reduction in its bond ratings; Britain, Spain, Ireland and even the U.S. may not be far behind.
To exacerbate this current fiscal mess, we have much bigger future problems with the joint unfunded liabilities of health care and pensions in an aging world.

• Global birth rates have declined from five children per woman to 2.5 today (replacement is about 2.1);
• Those rates will continue to drop to below two by 2050, at which time the global population will reach about 9 billion;
• While this is good for both the environment and limited natural resources, it also means we will be aging faster in the next 40 years than we have ever experienced (and not just in the developed countries);

• China is arguably the fastest aging country in the world as a result of its one-child policies, and the percentage of its over-65 population will rise from 12% of the working population to 38% within 40 years - far more than the U.S.

These unfunded liabilities are estimated to be in the range of 300% to 400% of GDP, or several times larger than all existing current debt (see “The cupboard is bare”). Our observation is that they are unaffordable and, as such, many of the promises made about funding health care and government pensions will be reduced. The bottom line is: we will work longer and be more directly responsible for our own health care - perhaps a better outcome and one more likely to lead to a healthier and more productive life.

Long-term effects

The prolonged effect of the recession - and what some observers are calling The New Normal - will likely cause:

• Unemployment to take longer than normal to recover to pre-recession levels;
• Interest rates to remain below normal for longer than most analysts expect;
• The secular bear market in equities to continue as ongoing personal (and eventually government) deleveraging takes place;
• BRIC countries (Brazil, Russia, India and China) to continue to outperform in relative terms, as do commodity-based countries such as Australia, New Zealand and Canada;

• The U.S. dollar to continue its downward spiral (although recent issues with the Euro may slow that down);
• Sovereign debt to find there are limits to government borrowing. When governments deleverage this will create a drag on economic growth in the short to medium term.

Investment strategies

The last decade was, in terms of making positive returns, the most difficult in well over a century. Ten-year returns for 10 different asset classes - a diversified portfolio of 10% in each category - would have netted about 2% per year after fees for the last decade.

While the importance of diversification can’t be stressed enough, our main focus is (and will continue to be) cash flow - through assets that generate a sustainable or growing income stream. That approach has worked very well over the last 10 years, especially when compared to traditional balanced fund approaches (typically 60% equities and 40% fixed income as represented by the Globe Peer Index.

As we look forward to the next 10 years, we are reminded about how difficult it is for anyone to make accurate predictions this far out. How many people would have predicted a Canadian dollar over par in January of 2000 when it was trading at $0.69US, or that the noughties would provide the lowest return for U.S. stocks of any decade ever (including the 1930s) when for the previous two decades it had increased by 1,400%?

Our approach is to develop a strategy based on value principles, cash flow and diversification, and then look for good opportunities within each asset class.
Some of those opportunities could include:

• Life annuities (with or without life insurance) as an alternative to other fixed-income vehicles. Yields are excellent and for non-registered capital, as much as 60-80% of the income is tax-free;
• Preferred shares with adjustable medium-term rates; significant tax benefits on income received for non-registered and corporate accounts; Mortgages on income-producing assets; especially subordinated debt-to-low-loan-to-value first mortgages;
• Distressed debt in publicly traded companies;

• Other private equity pools that are able to acquire assets at far better pricing than might exist in public markets;
• Income-producing real estate where the spread between cap rates (income yield) and mortgage rates is at least 2%;
• Diversification out of the Canadian dollar to take advantage of its increasing purchasing power of foreign assets. (Specifically, we are looking at U.S. income-producing real estate and global bonds).

We remain in a challenging environment where the two main factors will be the deleveraging of both consumers and governments, and the political and lifestyle changes society will make as a result of aging populations. This does not mean that good investment opportunities will not exist. As usual it will take significant effort to find value.

John Nicola is partner and financial advisor at Nicola Wealth Management.

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Saverio Manzo
http://saveriomanzo.com/
http://saveriomanzo.blogspot.com/

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Friday, June 11, 2010

Canada: A resource sellout to China?

Is it just that we [Canadians] are complacent about our own natural wealth? Or perhaps we’re scared that we will wind up with pumpkins and mice at midnight, that Canada is some Cinderella story? How about we let the Prince keep the glass slipper, have more faith, and stick around long enough to let our wealthiest foreign corporate courtiers remain that way, and not give up control of our children’s national legacy in return for ‘taking the money.’

China is now the world’s great locust… hopping from land to land in hopes of ever more commodity resources to placate its massive demands for growth [May 13, 2009: Commodities - It's China's World: We Just Live in It] Australia, Brazil, Canada, Africa, Southeast Asia, and now even its neighbor Russia with whom it’s had an icy relationship.

As oil surges, we see the same Chinese hands behind the scenes

The first set of China's strategic oil reserves, which can hold about 100 million barrels, were built over the past two years, but data on their status is considered a state secret and information about their operations or tank levels is scarce. China plans to build a second-phase strategic reserve that will nearly triple the first batch to 280 million barrels by 2011, and industry executives have said the current storage capacity has already become a hurdle to bringing in more imports.

Penn West Energy Trust and China Investment Corporation Announce Strategic Partnership - China/CIC will have certain rights to maintain its percentage ownership interest in Penn West through participation in additional private and public offerings of Units or securities convertible into Units.

Penn West is one of the largest conventional oil and natural gas producers in North America and the largest producer of light and medium oil in western Canada. Penn West operates a significant portfolio of opportunities with a prominent position in light-oil in Canada.

Also, see:

China’s Thirst of Any Commodity that Moves Leads to Thawing of Relations with Russia
[Apr 13, 2010: China's Quest for Resources Makes Billionaires Out of Some Australians]
[Feb 16, 2010: India Worries as China Builds Ports in Southeast Asia]
[Dec 15, 2009: China's Economic Power Unsettles Neighbors]
[Nov 11, 2009: China Continues Expanding "Infrastructure for Resources" Policy with Agreement in Malaysia]
[Sep 30, 2009: China Attempting to Secure 1/6th of Nigeria's Proven Oil Reserves]
[Jun 13, 2009: Australia in Perfect Position Aside China, but at a Cost?]
Source: Advisor Analyst

Saverio Manzo
http://saveriomanzo.com/

Are you a Boomer? Are you Prepared?

Boomers in retirement fantasyland says BMO

On the heels of a StatsCan report indicating that all boomers will be eligible for retirement within the next 20 years, a BMO Retirement Institute poll finds that only 48% of boomers are prepared for retirement.

This means that less than half are planning or have already discussed their post-retirement income strategies with a financial advisor, including how they will structure their investments and plan for financial contingencies.

Longevity risk is not even on the radar for two-thirds of respondents, who have given no thought to the possibility of outliving their savings, despite increased life expectancy among the Canadian population.

"Living off of retirement savings is different than saving for retirement. As Canada's boomers draw closer to their retirement years, having a strategy to manage investment income throughout retirement should be a top priority," says Tina Di Vito, head of the BMO Retirement Institute. "Financial resources available through programs such as the Canada Pension Plan and other pension schemes likely won't be enough to support the average retirement lifespan. The onus is on individuals to be prepared in order to live out their desired retirement lifestyle."

Di Vito explains that boomers must shift their focus from saving for retirement to retirement income planning in order to make insure their investments will support their desired retirement lifestyle.

"A fundamental element to successful financial management is to ensure strategies are aligned properly with current life stages," says Di Vito. "Those in the 55-65 age range may need to restructure their investments, develop financial contingency plans and possibly make course corrections to their overall portfolios."

BMO offers boomers the following advice:
Understand employer and government pension plans: While employer sponsored pension plans are becoming increasingly rare and government/public pension programs only provide a basic level income, it is important that people understand what they are eligible to receive and factor it into their investment savings strategies.

Plan for taxes on RRIF withdrawals: Withdrawals from Registered Retirement Income Funds (RRIFs) are taxed as interest/salary income. Canadians must take this into account when creating post-retirement plans to avoid unpleasant surprises.

Plan ahead: Those with retirement on the horizon may need to restructure their investments, begin framing financial contingencies and creating monthly budgets in order to adapt with ease to a new financial reality. BMO advises retirement-bound boomers to speak with a financial advisor ahead of the game to ensure the proper adjustments are put in place.
- Jody White, RCI.

provided by Saverio Manzo
http://saveriomanzo.com/

Wednesday, June 9, 2010

Is your Financial Advisor looking after your best interests?

Not according to the highest industry standard, the CFAs.

The Canadian financial system and capital markets are in fine shape, according to a survey of Canadian CFA charterholders. The confidence of these professionals is the highest it's been in the past three years, according to the 2010 Financial Market Integrity Index (FMI).

Canadian charterholders said they have seen significant improvements in accounting standards, corporate governance, transparency, legal protections and shareholder rights.

But they expressed some concern about the ethics of financial advisors.

On a scale of one to five, the perceived integrity of financial advisors to private individuals scored 3.1, just slightly above hedge fund managers, the lowest rated professionals at 2.8. By comparison, pension fund managers were seen to have the best ethics, with a score of 3.9, followed by buy-side analysts, at 3.6.

Unattributed comments point to a perceived misalignment of client and advisor interests.

"In my career the thing that stands out the most is that most advisers are not out for the client’s best interest; instead they are out for their own interests ahead of the client," said one portfolio manager/investment consultant.

"Clients often don’t understand the risks for themselves compared with the gains for the adviser," said a vice president of investments.

One assistant treasurer said: "Most advisers are interested in their own bottom lines, which usually coincides with their firm’s bottom line. The individual investor’s bottom line is the last consideration, if a consideration at all."

The call for a single regulator has been consistent since 2008. This year almost 40% of survey respondents commented on fragmented securities regulation regime and indicated support for a single regulator which could coordinate regulation and strengthen regulatory enforcement mechanisms.

More than 2,700 CFA charterholders (including more than 570 in Canada) participated in the research for the 2010 FMI by taking the survey either online or by scripted telephone interview between February 1, 2010 and March 9, 2010.

Steven Lamb, published on Advisor.ca

Saverio Manzo
www.saveriomanzo.com

Tuesday, June 1, 2010

Bank prime is now at 2.50%. Whats lurking?

Bank of Canada Announcement

Well it finally happened, the Bank of Canada raised it's rate by 1/4% this morning. As long as economic conditions continue as they have been recently and inflation stays in check, this is the start of an upward trend with them.

With Canadian GDP growth at 6.1% in the most recent quarter – the most robust we have seen in years – what concern is there? Lots. Our largest trading partner, the US, risks heading in to a double-dip recession. Europe and the PIIGS. A China slowdown. Potential nuclear war commencing from Korea or Iran. The list goes on and on. Yes, Canada is in an enviable position, but how long will this last if other areas suffer?

The Bank of Canada’s last paragraph in the announcement speaks as to the uncertainty in the markets. They are acknowledging that they will be cautious on more rate increases until they see more indicators from around the world.

"Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments."

OTTAWA - The Bank of Canada today announced that it is raising its target for the overnight rate by one-quarter of one percentage point to 1/2 per cent. The Bank Rate is correspondingly raised to 3/4 per cent and the deposit rate is kept at 1/4 per cent, thus re-establishing the normal operating band of 50 basis points for the overnight rate.

Bank prime is now at 2.50%.

The next scheduled meeting for interest rate policy is on July 20th, 2010

Impact on Bonds: Negative
Impact on Equities: Positive/Neutral
Impact on the Canadian Dollar: Positive (upward)

Saverio Manzo
www.saveriomanzo.com
http://saveriomanzo.blogspot.com/