Time to start shooting investment bankers.........

The headlines beam unprecedented financial; chaos, a once in a century financial Armageddon. Governments need trillions of dollars from the worlds people to fix this mess otherwise we fall into the dark ages...

If the headlines and solutions sound crazy to you, I have a simpler approach. Since the financial crisis was caused by greedy irresponsible investment bankers, the parties that are responsible should pay the price. As the grocer said, "You bruised it, you bought it". After all this does seam fairer than society paying the price for the bankers folly and the bankers getting a bonus.

To those that say shooting bankers is a bit extreme, I say nonsense. As Enron, Worldcom, Bear Stearn's, Merrill Lynch, Washington mutual etc have shown, they (the investment bankers) just don't get it. They make reckless bets that unwind leaving them unable to honour the commitments that they make. They need trillions of dollars of taxpayers money to cover their bets so as to not take down the financial system with them. Upon seeing that the blood of the poor is underwriting their folly, they use the tax dollars to pay themselves $18 billion in bonus for 2008. This hardly achieves the governments desired result of restoring peoples confidence in the system.

I have a simpler, cheaper and far more effective way of restoring confidence to the financial system. TIME TO START SHOOTING BANKERS.

Assuming that Chinese manufactured 9mm bullets cost $0.25 each, it should be possible to fix world finance for under $100. Or in other words if we as a society agree to shoot 200 bankers, the world financial system should behave more appropriately since inappropriate behavior has consequences.

I think most people would have an easy time with my idea of shooting bankers, as long as there was a fair method to assign which bankers get a cap busted in their head.

Here is how to make it fair:

1> Each financial institution receiving a taxpayer funded bailout greater than or equal to $1 billion dollars has to provide a sacrificial banker. For each additional $10billion dollar aid increment they must provide an additional banker. So a financial institution receiving $42 billion would provide one sacrificial banker for the first billion and four further bankers for thee additional increments.

2> Each institution receiving aid, delivers the investment banker that profited the most financially from the toxic banking that the financial institution was engaged in. If the guiltiest party is not obvious, select a tranche of the bank's management that is certain to include the guilty party, and select two bankers at random to pay the final price....

3> The selected banker is given two choices: Accept their punishment immediately KGB style with two bullets behind the ear; or name four additional saboteurs from their financial institution, resulting in the death sentence being commuted and 25 years shoveling tar sands being substituted in lieu of. The four named replacement bankers can mumble the Dominican slogan that "God knows his own".


I feel my approach has several benefits that the current approach of throwing tax trillions lacks:

a> Society gets the feeling that its respected because lowlife bankers pay the final price.

b> It provides a deterrent against future reckless behavior by financiers.

c> It is the cheapest way of restoring confidence and trust to the banking system, as all bankers would know the price of messing with general society.

d> Solves the shortage of transplant organs.

Till next time...

Budget 2009 a Report Card

Here is make report card and reasoning behind the assigned grades for the Flarhrety Budget.

1.5 Billion for retraining for people who don't qualify for EI. A

Any investment in human capital and skills upgrading has an immediate multiplier effect plus it improves Canada's future competitiveness. This spending does not lead to a size increase in the civil service.

12 Billion for Infrastructure Improvements. B+

Infrastructure improvements address future competitiveness plus they improve the quality of life of all Canadians. There is a significant time lag between the announcement of a project, and the effects of the stimulus being noticed in the real economy. There is a risk that the stimulus can be applied at a later point in time when stimulus is unnecessary thus contributing to inflationary pressure.

100% Write off year of acquisition computer hardware. A+

Have you ever been held up in a lineup because of a bottleneck that slowed down the speed of a computer network?

$1,350 maximum tax credit for residential renovations. A

This one gets maximum marks for creativity. At a low administrative cost, the government is able to sprinkle stimulus over the entire country. Like the chocolate sprinkles that the dutch children got to eat on their toast. It gives a reason for any homeowner that was considering upgrades for energy efficiency, geriatric fittings, etc and soon. An added advantage is that it provides Her Majesty with an expanded list of names of people who provide renovation services for money. This has a lasting impact in that it brings a significant portion of the underground economy within range of the taxman.

Overall, the Harper Government has earned a "Stay of Execution".

Ways Obama can screw Canada........ HARD.........

I have been watching with amazement this past week peoples reactions to the inauguration of B. Hussein Obama, as President of the USA. Seemingly rational people become irrationally giddy whenever the name Obama is mentioned. It is as if the trees would sprout gumdrops, the rivers would flow chocolate, magical cornucopias of plenty would spring from the earth spewing abundance in all directions, people would realize that arms are for hugging not war, and death would finally be conquered. Sound strange to you? It certainly sounds strange to me, as this altered perception seems to have hit most of the world with the exceptions of Pakistan, Afghanistan, Ann Coulter, various cranks & yours truly.

Before you get angry at me, take a deep breath and remind yourself which country of the world you reside in. Remember that manias such as dotcom, real estate, tulips and 1870s railroad stocks always have an underpinning that the laws of nature have fundamentally changed when nothing has occurred.

I am a Canadian. I put my country, Canada first. I wear the Maple Leaf, and am proud of what it represents. When I am abroad, I have no shame as to my nationality, and I proudly wear Canada's colours. I put the well being of the residents of Canada first ahead of the well being of residents of other nations. I feel that as far as Canada, and Canadians are concerned the election of Obama sucks big time. Here are a few ways that he can screw Canada over, and why I feel as a Canadian we will possibly be worse off.......

1> He curtails the importation of "Dirty Oil"

Canada is one of the worlds top ten producers of petroleum and we are a net exporting nation. Canada is the number one source of the United States petroleum imports. Canada mines the bitumen deposits in the desolate north west corner of Alberta, and through hard work and ingenuity turns this oily dirt into a liquid goo that can be shipped south to the USA through a pipeline. There is only one market for Canada's golden goo and that is the USA. Canada's oil pipeline network runs North-South, instead of East-West meaning that there is no domestic or foreign market for Canada's bituem other than the USA. Northern Alberta has been the primary engine of Canada's economic growth for the past five years. Fort McMurray has provided sufficient jobs for enough young Canadians that were entering the workforce from all regions of the country that it generated a lift in real wages nationwide.

Fort McMurray oil has a higher "Carbon Footprint", than oil from the tar pits of Venezuela, or Saudi Light Crude. Fort McMurray's oil production 1.5 million barrels per day is lower than the the 3 million barrels per day of capacity that OPEC has cut. With one stroke of a pen, President Obama can painlessly stop the importation of Canada's "Dirty Oil", and announce progress towards reducing the USA's "Carbon Footprint". At a price per barrel of $50USD, a ban on the importation of dirty oil would cost Canada's economy $30 billion of exports per year. With one stroke of a pen he can destroy the Alberta economy. With a single stroke of a pen he can make every resident of Canada significantly poorer. While George Bush slept peacefully at night with visions of Houston North fueling Americas SUVs, Obama has promised to act on the USA's "Carbon Footprint".

We breath it out, while plants breath it in. CO2, Obama calls it pollution, I call it life. Besides, I always thought that the sun warms the earth.......

2> Re-negotiate NAFTA.

George W. Bush was a free trader. He was opposed to any barriers that impeded the profitability of large American corporations. Obama is a protectionist who believes in protecting US jobs by beggaring the USA's trade partners. Canada is the USA's single largest trading partner.

3> Restart the "Brain Drain"

Historically Canada would lose its best and brightest in all fields to the USA. We would spend a fortune training a physician only to see the physician move to the USA. We would see our top academics accept posts at US universities. This horrible state of affairs was the norm prior to George W. Bush. This state of affairs reversed itself during the George Bush presidency. Thanks to number 43, Canada saw more physicians return than leave. Ask yourself how many really cool Americans have you met in the last eight years that were "Bush Refugees"? Ask yourself how many young Canadians would go south permanently if the USA were suddenly cool?

4> Drag Canada further into the Afghan conflict

I support Canada's role in Afghanistan. Our NATO ally, the USA was attacked. This attack killed over 2,000 American civilians and many Canadian citizens. Our NATO commitment requires us to treat an attack on any of our allies as an attack on Canada. A group of jihadists that were protected by the Taliban were responsible for 9-11. The Taliban earned a shitkicking, and we as a nation were honour bound to help the USA retaliate.

Obama wants to widen the Afghan war and turn it into a conquest. He has cast the beguilement spell on so many Canadians that I foresee Canada's doves wanting to increase our participation in this folly. 30,000 additional American troops with a like number from the ranks of NATO allies. What purpose would these additional soldiers serve other than to raise the number of NATO casualties?

Afghanistan is referred to as the "Graveyard of Empires". It has earned this distinction because nobody was ever able to make the occupation of Afghanistan a successful lasting conquest. A conqueror could hold the towns, but never the countryside, and attrition and hunger could do the rest. Alexander the Great could not do it. The Mongol Empire could not do it. The British Empire with the Maxim gun could not do it. The Soviet Union with all its might could not do it. B. Obama, a President with far less military experience than George Bush thinks he is capable of doing it.

I make my case.

GM Turns Down $3 Billion Federal & Ontario Assistance...

It appears that the days of General Motors producing cars in Canada are numbered. For a corporation to turn down access to auto aid package agreed to by Ottawa & the Ontario government signals a likely withdrawal from auto manufacturing in Canada. From a business standpoint, this makes sense. In my opinion these are the most likely reasons:

1> The Canada-US Auto Pact is irrelevant. In the 1960's when GM, Ford & Chrysler had over 95% market share, the Canadian government through it's branch plant doctrine forced the Detroit 3 to manufacture a car in Canada for every car they sell in Canada. Today the Detroit 3 are less than 50%. The Auto Pact is archaic since it does not even cover the majority of cares sold in Canada. It is highly unlikely that the government in Canada has the stomach to strangle GM's Canadian dealership network, which employs more Canadians than the GM plants.

2> The Canada US border is a hassle. Sourcing any vital components on the other side of the international boundary screws up manufacturing that uses the just in time inventory management. One has to ask how many dollars of a auto manufacturers production costs are due to busy border crossings, and overzealous Customs officers.

3> The new deals being negotiated with the United Auto Workers in the USA will undoubtedly have greatly reduced health benefits, thereby nullifying any advantage to producing in Canada where the majority of employee health care costs are covered by the national health system.

4> Obama is now President of the United States. Compared to George W. Bush, Barrack Obama is a protectionist who favours barriers to trade as a means of protecting domestic (US only) jobs. GM has probably calculated they are more likely to receive better terms from the US government. Any new production capacity for GM can be moved to Mexico, where the labour costs are dramatically lower.

This is why I think the days of the Detroit 3 manufacturing cars in Canada are numbered.

To every transaction there are two sides. This is the Fund Cos side of the story.

DEREK DECLOET AND SHIRLEY WON

From Saturday's Globe and Mail

January 23, 2009 at 8:42 PM EST

A few weeks ago, Blake Goldring was out at his favourite Bay Street lunch spot, the exclusive National Club, when he ran into a senior official he knew from the Office of the Superintendent of Financial Institutions, the federal banking regulator.

As the two men were parting ways after a brief chat, Mr. Goldring, the amiable chairman and chief executive officer of financial holding company AGF Management Ltd., said: “So, I'll see you around.”

“No,” came the official's reply, “you don't want to see me around.”

Mr. Goldring smiles as he tells the story, but the subtext is deadly serious. Any mention of AGF in the same breath as Ottawa's financial watchdog is a sensitive subject for him.

Blake Goldring is the Chairman & CEO of AGF Management, a Canadian, family-run funds firm founded by his father. (Yvonne Berg for the Globe and Mail)

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His company, which eight years ago made the decision to dive deeply into the business of lending money, was besieged by rumours last fall that OSFI was worried about the financial strength of its subsidiary, AGF Trust Co. The rumours were untrue and were unfairly spread by competitors, Mr. Goldring says, and the trust's most recent regulatory documents appear to back him up, showing that, as of Nov. 30, OSFI had not forced AGF to inject more capital into its lending arm.

Yet AGF still can't escape the perception that it is about to pay a heavy price for lending too much, too fast, too easily and too cheaply. The global financial crisis, and the demise of fast-growing financial companies like Countrywide Financial Corp., have cast a cloud over any lender that grew rapidly during the era of easy credit. Investors have begun to see truth in an old Wall Street adage: If it grows like a weed, it's a weed. They've also lost faith that regulators were watching closely enough to stop financial institutions from doing dumb things.

AGF is no Countrywide, clearly. But in this gloomy economic climate, the stunning expansion of the company's loan portfolio has raised the suspicions of some people on Bay Street that it may suffer significant losses, as the vise grip of recession and unemployment tightens around more borrowers. AGF Trust's assets have risen tenfold since 2003, giving it a $5.3-billion balance sheet, which makes it nearly as large as Home Capital Group Inc., a highly successful alternative lending firm that has been around since the mid-1980s.

An examination of AGF Trust's regulatory financial statements shows that most of that growth occurred after 2004. Its customers now owe it $2.4-billion for investment loans they took to buy mutual funds and other assets that may now be worth as little as $1.7-billion, according to the estimates of one analyst. AGF, these documents show, also participated in the real estate boom, moving hundreds of millions of dollars into uninsured mortgages and home equity credit lines between 2005 and 2007, as Canadian home prices were nearing their peak.

Interviews with investment advisers, competitors and former AGF insiders paint a picture of a firm that, until the credit crisis, was eager to lend money at low rates with few restrictions. “You would go online into the AGF Trust website [and] do a loan application online. No proof of income. No proof of assets. Push the button,” says Andrew Mayhew, president of Mayhew Wealth Management Ltd. in Mississauga. “Behind the scenes, they did a credit report. But minutes later, it comes back approved.”

A veteran executive at a Toronto-based financial institution believes that AGF Trust was “too aggressive” and “didn't know what they were doing” during its high-growth years. “We often just shook our heads and said, ‘Fine, let them have the deal,'“ said the executive, who spoke on condition of anonymity. “Because sometimes brokers would phone us and say, ‘Can you do better? We've got this [loan] commitment from AGF.' [We would say], ‘No, no.'” AGF's losses from bad loans have been minimal so far (the company will reveal its financial results next week for the September to November period). But that hasn't prevented it from becoming a case study of the difficulties that alternative lenders face in an era of more expensive money and plummeting confidence in even the most established banks.

And it has not stopped people from asking whether proper risk management was done – both by the company, but also by the regulator.

Punished more than most

During what has been a horrible time for financial services companies everywhere, AGF has been punished more than most. The firm's stock price is down 67 per cent in the past 12 months – the worst performance of any of the 39 Canadian companies in the S&P/TSX financial index, and far more than the declines of its two main public competitors, IGM Financial Inc. (down 30 per cent) and CI Financial Corp. (down 35). For AGF shareholders, the decline has wiped out all the gains of the past 10 years. The stock's dividend yield, at 12.3 per cent, indicates that the market believes AGF will have to follow scores of other financial companies and slash the payout.

Things are so tough that BMO Nesbitt Burns analyst John Reucassel baldly stated in print recently that selling the whole company “may be the best course of action for AGF.”

The stock crash has sliced some $200-million off the Goldring family's net worth. But what really stings is the implication that AGF, a business that the Goldrings have kept tight control over forever and have no desire to sell, might somehow fall victim to the same excessive exuberance that has crippled much larger financial institutions around the world since the beginning of the credit crisis in August, 2007.

“You're seeing really great companies – ours and others – that have been badly hurt, and I would argue, too much so,” Mr. Goldring says. “It has been a ghastly period.”

Of the speculation of sizable loan losses to come, which might require AGF to pump money into the trust company to satisfy regulators, Mr. Goldring says there's no substance to it. “I just can't countenance, frankly, the misinformed opinion that gets put out there. … It's essential that people know that we've got a well-run, good trust company that can stand alone on its own basis.

“This is serious, serious, serious business. I take it unbelievably seriously.”

The growth of AGF Trust

AGF's move into lending began, strangely enough, with an internal debate about whether to get out of that business entirely.

The 52-year-old firm had owned a small trust company since the 1980s, but never did much with it. By 2000, when co-founder Warren Goldring formally handed power to his son, AGF Trust was still a tiny operation. About 35 employees underwrote a small number of low-risk mortgages, mostly in Southern Ontario.

The Goldrings had been content to focus on selling mutual funds, which offered more than enough growth, thanks to the 1990s bull market and the unprecedented boom in fund sales. Then they got a phone call: Did AGF want to sell its trust licence?

“It was at that point that I really started to think long and hard,” Blake Goldring says. The last large independent trust company, Canada Trust Co., had just been swallowed by Toronto-Dominion Bank. The merger created a surfeit of ex-Canada Trust managers looking for new work. One of them was Mario Causarano, an Italian-speaking accountant from Toronto. Over lunch, the two men batted around ideas: What could they do with AGF Trust? Persuaded that the business had potential, Mr. Goldring hired Mr. Causarano to be the trust's president in 2001 with a mandate to make it grow.

By that point, AGF's main business was on the verge of trouble. The equity bubble had popped and was deflating the prospects for fund management companies. In 2002, it got worse. Brandes Investment Management Partners LP, the well-regarded San Diego firm that managed about one-quarter of AGF's assets, walked out to set up its own business in Canada. The “Brandes bomb” tipped AGF into a multiyear malaise and tested its new CEO. Mr. Goldring held a highly publicized search to replace Brandes and landed Harris Associates LP. But Harris's performance was subpar and the firm was sacked and replaced with internal AGF fund managers. Manulife Financial Corp. delivered another kick in 2004 by withdrawing $900-million it had placed with AGF.

Retail fund customers were also taking their money out, and former Canadian Football League player Randy Ambrosie was brought in to shake up the demoralized sales staff. By 2005, AGF's profit per share had fallen 44 per cent from its high point in 2001, even though a new equity bull market had taken hold.

In that hailstorm, Mr. Causarano's trust company stood out. “AGF needed a good-news story,” says one former insider. “This was a good-news story. [Blake Goldring] played it up. He talked about it a lot.”

The bulk of AGF Trust's growth came from a new program to offer investment loans to individuals through their financial advisers. In the fund industry, that's not such a new strategy. IGM's Mackenzie Financial unit has done so for years. If it works well, for the fund manager it can be a two-for-one deal, bringing in a new stream of interest income while also lifting mutual fund sales. In a rising market, the investor doesn't get hurt by using leverage.

Financial advisers like it, too, because a bigger sale means a bigger commission. And for the independent advisers who mainly sell mutual funds out of small financial planning shops, there's another benefit if they can arrange loans through AGF Trust or another alternative lender: They can avoid dealing with banks that might try to poach their best clients. “Most advisers don't want their clients anywhere near a big bank,” says AGF chief financial officer Greg Henderson. “To them, the bank's kind of a dirty word.”

Still, it's not an easy living for flea-sized lenders to exist in the shadow of elephants. The Goodman family, which controls DundeeWealth Inc., found that out when they set up Dundee Bank of Canada for that same purpose – to sell loans through financial advisers. After raising $2-billion in deposits, they promptly drove into the asset-backed commercial paper swamp; to extract themselves from it, they had to arrange the hasty sale of the bank and 18 per cent of DundeeWealth to Bank of Nova Scotia.

Others are too scared to even try to go up against the banks. Executives at CI Financial, AGF's much-larger mutual fund competitor, thought hard about getting into the banking business, but concluded they just couldn't compete. “You saw what happened with Dundee,” says CI president Stephen MacPhail, a former trust company executive. “When things didn't go as well as they would have hoped, they didn't have the size of company backing it up to make it work.”

What made AGF Trust different from some other investment-loan operations was how few restrictions they placed on loans.

Borrowers weren't even required to invest in AGF's line of funds – though they could get a lower interest rate if they did.

“It was fantastic,” said Michael Hill, a financial adviser with Windsor, Ont.-based De Thomas Financial Corp. “They gave us prime rates, virtually zero underwriting and we could do anything we wanted with the money.” He arranged AGF loans to buy exchange-traded funds for his clients.

“It was shocking that they would give away so much … the hope was that the money would go back to AGF funds. I knew what they were shooting for.”

Better yet, from Mr. Hill's point of view, virtually all of AGF's investment loans were done on a “no margin call” basis, meaning the company could not automatically call the loan, or require the investor to come up with more capital, just because the market value of the underlying investments went down.

Brokerage firms use margin calls to protect their capital during a market decline, and to ensure that their customers don't wind up with too much debt that's backed by declining investment. They used them frequently last fall to force retail investors to cut their personal leverage: Canadian margin debt dropped 36.6 per cent in the 12 months ended Nov. 30 to $9.6-billion, says the Investment Industry Regulatory Organization of Canada.

But at AGF Trust, the debt owed to it by investors hasn't gone down as stock prices tumbled.

The market's collapse has exposed a potential weakness in AGF Trust's strategy. Mr. Reucassel, the BMO analyst, has estimated that as of Nov. 30, perhaps $700-million of the firm's investment loans were unsecured (that is, the loans exceed the value of the collateral by that amount – similar to a situation where a mortgage is worth more than the home). GMP Securities analyst Stephen Boland believes the number is more like $500-million. (AGF Management's market capitalization is $729-million.) What no one knows yet is how much of that unsecured debt will turn into losses for AGF, as borrowers lose their jobs and can't – or won't – repay. “In a market like this, when you have no margin calls on loans and people borrowed the money to invest, and the loans are still outstanding but the fund values are down, what prevents people from walking?” Mr. Hill asks. “People do everything they can to pay [for] their home, and even if they do go bankrupt, often people will try to work out a deal to stay in the house,” says the financial executive who requested anonymity. “[But] they don't love their investment loan like they might love their house.”

But others say the problem is manageable. Mr. Boland points out that banks' credit card portfolios are also unsecured, yet the losses on them run only into the 4- to 5-per-cent range. The average customer who owes AGF money on an investment loan has a “beacon score” of 721, indicating a strong credit rating. The score is based on a person's payment history and debt profile. AGF executives are placing their faith in that.

“I can't believe that because the underlying asset's gone down, they're going to wreck their whole credit situation because of that,” says Mr. Henderson, the chief financial officer. It may also help that AGF Trust did not deal directly with the public; financial advisers who convinced their clients to borrow in the first place will work hard to get them to stick with the strategy and not panic.

But some borrowers may struggle to repay, even if they want to. One popular strategy was to borrow from AGF – generally at rates at or near prime – and put the money into high-income mutual funds that promised monthly distributions and an annual yield of 8 per cent or more. The distributions more than covered the loan interest, allowing the investor to build his portfolio with borrowed money without digging into his own income.

Not every adviser thinks it's a sound idea, however. Mr. Mayhew, for one, says counting on fund payments to pay the interest on the loan is “a huge can of worms” because the distributions are unsustainable. IA Clarington, the mutual funds unit of Industrial Alliance Insurance and Financial Services Inc., recently chopped the payout on a Canadian dividend fund by 36 per cent, and many other funds are sure to follow because the stocks and income trusts they're invested in are slashing theirs. AGF Trust decided last fall that it would no longer lend money to fund purchases of funds from Clarington and Stone & Co., two purveyors of high-income funds, because Mr. Causarano felt his trust company had enough exposure to those groups.

That was only one change he made in response to the crisis. AGF Trust is pulling back. In early November, it laid off about 50 of its 400 employees, and said it would kill some of the most attractive parts of its lending program. Investors will no longer be able to borrow 100 per cent of the amount they want to invest, for example, except for some RRSP loans for some of its most loyal advisers.

In an environment where the markets can swing 10 per cent in a day, “it would be like playing with fire, to keep that stuff going,” Mr. Henderson says. AGF's mortgage portfolio is also getting smaller after years of hypergrowth, and it will no longer give home equity lines of credit.

All of these are necessary changes, Mr. Causarano says, because the credit crisis has increased borrowing costs for financial institutions. Since AGF doesn't have branches, it relies on selling guaranteed investment certificates through brokers to get the money for funding operations – and in the GIC market, buyers have little loyalty. They'll jump to wherever the best rate is.

An analysis by Mr. Reucassel found that AGF's interest margins have been falling faster than the big banks – making him wonder if the profits from the trust company will be enough to offset the risk, once the full effects of the recession are felt.

In addition to the spectre of higher loan defaults, there are questions about how well the strategy met AGF's other objective of increasing sales of mutual funds. Mr. Henderson says just less than $1-billion of the firm's mutual fund assets were funded by loans from the trust, or between 4 and 5 per cent of its $20-billion in mutual funds under management.

If the trust is helping fund sales, there has been little sign of it lately. Investor redemptions and the market crash caused AGF to lose 32.8 per cent of its fund assets in 2008, the second-largest percentage decline among Canada's top 10 fund companies.

Mr. Goldring does have a couple of advantages for weathering the crises. For all its troubles, the investment management business is still a cash cow. While AGF Trust is heavily leveraged like all financial institutions (its assets are 21 times its equity), the parent company, AGF Management, presciently repaid most of its debt before the financial crisis. If it's forced at some point to prop up its lending division, it has bank lines that it can tap, Mr. Goldring says.

“There are a number of options. You hate to speculate,” he says. With the stock price so low, “the last thing I'd ever want to do is issue equity to deal with that.” But he makes no apologies for the strategy and says it has worked – the trust company produced $50.2-million in profit before taxes, interest and amortization in the 12 months that ended Aug. 31.

“I think anybody running their business by watching or reading only analyst reports or analyst comments would be doing a grave disservice to their shareholders,” he says.

The real problem may turn out to be not that AGF Trust will face big loan defaults, but the financial crisis will squeeze the consumer loan business so hard – and raise the alternative lenders' cost of borrowing so high – that the trust can't make an acceptable return any more. At the very least, AGF Management's eight-year experiment has altered, perhaps for a long time, equity investors' view of the risks that lie in what used to be a reliably dull fund firm.

Mr. Goldring vows to fight on: “Lending money is a good business. It's got to be done prudently. You've got to have the proper controls. But you can do well at it.

“I believe in just proving people wrong.”

DEREK DECLOET AND SHIRLEY WON

From Saturday's Globe and Mail

January 23, 2009 at 8:42 PM EST

Economic Meltdown - The Winners & the Losers

"May you be born during rapidly changing times." This is an ancient Chinese curse of unknown origin, whose literal translation would be "May you have the misfortune of being alive during a changing of the guard".

China is an ancient civilization that has survived basically intact in it's present form for the last 2,500 years. During this time frame there have been over a dozen dynastic changes. When China was ruled by a corrupt Northern Dynasty, a peasant rebellion would occur in the South. While when China was ruled by a corrupt Southern Dynasty, a peasant rebellion would occur in the North. If these rebellions were successful, the leader of the revolt would found a new Chinese Dynasty. Yin and Yang on steroids.

During the 20th century there were two such changes. The first occurring in 1912 when the imperial Dynasty of the Royal Qing family was overthrown by Sun Yat-sen and the Kuomintang nationalist movement who upon victory proclaimed a Nationalist Republic. The second occurred in 1949, when Mao Tse Tung's Communists overthrew the Kuomintang under Chaing Kai-shek , and proclaimed a People's Republic.

A dynastic change was a period of great upheaval where a previous oppressive class was replaced is violently overthrown and replaced by a new oppressive class. These transitions were never peaceful, and invariably famine, deportations and mass executions would be an integral part of the power realignment . Up to 10% of the entire population of China would die as a direct result of change. The old saying it's always better with the devil that you know than the devil you don't explained why change in itself was for the most part considered bad. Change however is an evolutionary process, and a result of this process is that there are winners, and there are losers.

In this blog post, I am going to put my predictions, and hopefully my reputation out on a limb. We are witnessing an economic upheaval comparable to the Great Depression. Instead of calling the obvious losers such as; dummies who levered 3 to 1 with mutual fund company loans in October of 2007. Or the obvious winners; smart people who couldn't understand the gobbledygook that financial advisers were preaching and had their entire positions in cash, GICs and Government Bonds. I am going to identify groups of people and entities and through my assessment predict weather they will be better or worse off five years from today. Those that are worse off will be Losers, and those that are better off will be Winners. So let's start with the Losers.....

People who refinanced their principal residence as a day job - Losers

I had to grab at least one gimmee...... Government statisticians use GDP as measurement of the size of the economy. GDP or Gross Domestic Product is the sum of, consumption, investment, government and net exports. The primary component of GDP is consumption, which in most instances is anywhere from 50 to 72% of all economic activity. GDP as a measurement of economic well being has a couple of inherent flaws because it is possible to double count. An example of an of how government measures an improvement in "economic well-being (consumption) would be two next door neighbors called Bob & John. Bob and John both own their houses clear title. Bob and John each borrow $20,000 against their houses on an equity line of credit. Bob pays John $20,000 to dig and refill a hole in his backyard. John pays Bob $20,000 to dig and refill a hole in his back yard. While this sounds absolutely absurd, government statisticians would call this a $40,000 growth in GDP, when it is obvious that nobody is better off, and both John and Bob are worse off......

For the last eight years, most of North America has been operating under an illusion of growth, just as the government was deluded with Bob & John's holes. A significant portion of the population who had acquired real-estate before the expansion of the credit bubble made a startling discovery. Their homes were appreciating at a rate many times greater than their total annual earnings. Instead of waking up, when they did not want to, and doing jobs they did not want to do, they could just keep refianacing their homes whenever they needed money. The beauty of this lifestyle was all the money was tax free, and you got wealthier as you spent, because your underlying asset was appreciating faster than you could bleed it dry.

For the last eight years in North America, this spending of wall money amounted to up to 10% of total annual consumer spending, or up to 7% annual increase in GDP. To a government statistician a 7% increase in GDP sounds great. But when we look under the facade, we as a society were going backwards while fixated on Bob & John's holes..... Those that were too lazy to work, but energized enough to spend will lose bigtime.

Assemblies of God Megachurches - Losers

These cavernous monstrosities are built in exurbs. The land of 4,000 square foot houses, cul de sacs, and SUVs. These buildings sold spiritual well being to the indebted exurban masses. They proclaimed themselves non-denominational Christian. A funny thing happened during Christmas of 2005. That year Christianities, holiest day occur on a Sunday. Fearing empty caverns, most pastors closed their megachurches for a "Family Holiday". Funny thing happened during the 2005 "family holiday".... The US real Estate bubble popped........

The parishioners started to get squeezed. No longer could they refinance their McMansions. A horseman of the apocalypse in the form of skyrocketing energy costs appeared. The collection plate started to shrink just as the floating rate mortgages for these churches started to reset. Over the next five years don't be surprised to see megachurches converted into homeless drop-in centers.

Industrial Auctioneers - Winners

These companies are the Valkyries/Vultures, the agents of change in Schumpeters "Creative Destruction". They carry off to the corporate Valhalla the souls of bankrupt enterprises. They do not carry any risk of being stuck with inventory. They are guaranteed to earn their Auctioneers premium, as they run "No Reserve" auctions. They clear the landscape so the survivors may prosper. In addition, in a world where one does not know whom to believe, they bring about a a brutally clear true transparency in asset pricing. The speed at which they operate goes a long way towards facilitating the re-allocation of the factors of production in an efficient manner.

Investment Banks, and Financial management Companies - Losers

The share of the total economic pie that went to the people and firms involved in finance grew far faster than the economic pie grew. Prior to the meltdown, approximately 1/3 of all public companies profits accrued to financial firms. A entire religion was founded on mutual funds, the ten year rule, and 24 hour financial news. When people came to their senses, realized that they were gambling on which square the proverbial chicken would defecate on, while the house took 33% of all funds wagered. The house of cards collapsed. People found out that the people they thought were looking out for their interests destroyed half of their life's work. Once bitten, twice shy, the world will never allow the finance industry to steal a third of the total pie.

The Church of Jesus Christ and the Later Day Saints (the Mormons) - big winners.

The reason the economy collapsed is because we realized that the perpetually growing pie that would allow all of us to have more and more was an illusion. We could not continue to provide richer pensions,and higher levels of services to future individuals in perpetuity, at a lower cost. The birth control pill and the resulting decline in fertility robbed us of this comfortable complacency. The reality was that the individuals who were to be relied upon were never going to be born.........

The Mormons on the other hand have a high fertility rate that results in organic population increases. When a Mormon family has five or more children they are voting with their wombs that they have confidence in humanity. Their fertility rate is identical to the fertility rate that was assumed to be the underpinning of our great welfare state. The Mormon faith discourages debt, discourages conspicuous consumption, and encourages self reliance. The doctrine and covenants of the Church provide adherents with the expectation and duty to save a years worth of income, and to stockpile a years worth of food and necessities. Their doctrine limits their downside.....

Hopefully I guessed right, and I didn't put my foot in my mouth. BTW, I have not been talking to any Mormon Missionaries. I got my understanding of the Mormons from watching "Cannibal the Musical", "Orgazmo", and talking to traumatized former Mormons who had nightmares about sacks of wheat and jars of mayonnaise under their beds.

Til next time:)

A bailout of property speculators? I would prefer Lenin's solution

I am in favor of real estate investing, but I despise real estate speculation. While the two are similar in that they involve real property, the mindsets of the perpetrators are different.

A real estate investor is concerned primarily with the intrinsic, and the improvable value of a property. Intrinsically, the value of a property is the sum of the discounted returns from that property plus any residual value left. If we look at a fourplex, we have a stream of rents that we apply a cap value formula against. We take the gross rents, subtract property taxes, insurance, vacancy factor, and maintenance to arrive at an income stream. Assuming rents were $40,000 per annum, insurance $1,200 per annum, property taxes $3,800 per annum, maintenance was $2,000 per annum, and the vacancy factor was 5% or $2,000, would result in an income stream of $31,000 per annum. We do not look at financing costs yet in our analysis. We assume a residual land value of $50,000.

With the property earning a stream of $31,000 per annum, we divide by the cap rate, add the residual to arrive at the value of the property to an investor.

If the cap rate was 10%, the value of the fourplex would be; rent streams = $310,000 + residual = $50,000, giving the property a value of $360,000.

If the Cap rate was 8%, the value of the fourplex would be; rent streams = $387,500 + residual = $50,000, giving the property a value of $437,500.

If the Cap rate was 5%, the value of the fourplex would be; rent streams = $620,000 + residual = $50,000, giving the property a value of $670,000.

If one notes from these examples, the valuation of real estate investments is very similar to a bond. The cap rate is basically a expected yield formula, and this results in the value of the property is basically an inverse function of the investors implicit rate.

An investor when he is looking to purchase a property does his inspection, performs his analysis, and if the asking price is below his calculation of the properties intrinsic value, the investor purchases the property. If the asking price is above the intrinsic value the investor walks away.

Now comes the Real Estate Speculator................

The real estate speculator is an irrational beast. The closest analogy in nature would be a wildebeest. An animal that is incapable of seeing past the other wildebeests arseholse. No rhyme, no reason, just a mindless following of a leaderless heard.

The smart speculator realizes that he is a fool. The dumb speculator thinks they are intelligent.

A speculator generally looks at a property after the serious real estate investor has decided to pass on it. The speculator uses no tools to assess an intrinsic value. Instead they follow what is called the GREATER FOOL THEORY.

The speculator is certain property is going only up, and even though the purchase of a property makes no economic sense, the speculator is certain that there is someone out there (A GREATER FOOL THAN THE SPECULATOR) that will pay a substantially higher price, than they are prepared to pay.

I have seen both the smart speculator and the dumb speculators in action. The casino that I have watched them play in is condominium presales.

Both types of speculators have as much need for the Condo's as they need a hole in the head.

The smart speculator knows that the condo investment is not viable by any investment criteria. The dumb speculator has no idea, nor desire to study any investment criteria.

The smart speculator's greatest fear is having to close on the condo presale. They know that closing on the condo is similar to slashing ones wrists. Success means bleeding to death. So they will assign their agreement to purchase the condo to a buyer as soon as possible.

The dumb speculator can't comprehend what is involved with owning the condo. The only thing they comprehend is that the condo is going only up in value. They have no fear of closing, and they will often avoid assigning their presale contract for a tidy profit because of the certainty that holding on to the sales agreement will generate more money. Eventually, the dumb speculator closes on the presale condo (lets assume for $500,000), and much to their surprise the carrying costs are greatly in excess of a rental stream. They list the condo for sale at $550,000, but they can't find fool that is more foolish than they are. The serious investor looks at the condo, applies the valuation formula, and figures the condo is worth 75% of the speculators purchase price, and offers $375,000. If the speculator is smart, he will counter offer and see if its possible to get their loss below $100,000.

But lest we forget we are dealing with a fool here.........

The speculator gets indignant at the offer, makes a reference to the investors Mother, and holds out for a better offer....... All the while carrying a $500,000 debt. All the while making interest payments that cannot be covered by the rent. By paying the property taxes and the strata fees, out of ones vocational pay. Living off of credit cards during the months that the condo is vacant. Watching the wear and tear slowly bleed the resale value of the condo away........

Vladimir Lenin decreed that anyone caught speculating in necessities is shot on the spot they are speculating. While this is quick clean and effective, it seems that showing the children the morality play of the Slow Death of Many Cuts of the Dumb Speculator, serves a better purpose since it is more likely to deter future irrational speculative behavior.....

Till again....

The BC real estate bubble, pass the LSD

Throughout history there have been episodes of mass delusion. There would be a triggering event followed by uncontrollable episodes of madness.

In the medieval times, mass delusions were often caused by Saint Anthony's Fire, a mass involuntary acid trip caused by eating rye grains that were contaminated by the ergot fungus (the precursor to LSD). When the Medieval mind was effected by St. Anthony's Fire all hell would break loose. People who when cognizant believed the world was flat, and the future could be foretold with chicken guts, would not be well equiped to handle a bad acid trip. A person would find themselves; talking to Jesus; watching a Rooster cast magic spells; or conversing in Latin with a duck.. Others would be effected by a Messianic delusion. They could find their self perception as one of omnipotence and thinking they could fly, hurl themselves from high places to their deaths. People would burn their children, their farms, and run into the wood with their Rooster who was talking with Christ. After about 24 hours, the survivors if they were lucky would get their sanity back. They would see their lives in ruins and they would see some fellow villagers who were still peaking and figure that the village was struck by witches. The peasantry would take the poor hapless souls who were suffering from psychosis , tie them to a stake, pile the kindling around them, and burn them along with the spell casting rooster. The children would dance the sun would rise and everyone would live happily.

However extreme and crazy a medieval outbreak of Saint Anthony's Fire was, the size and the scope of the mass delusions and insanity are nothing like British Columbia real estate bubble.

It seemed that logic, reason and common sense were thrown in the air. From 2002 to 2007 BC real estate prices increased an average of 150%. In late 2005, I started to rain on the parade and advise my clients this was unsustainable, real estate prices had overshot their fundamentals and we were in for a painful crash.

Fueling the medieval outbreaks of insanity was organic natural source LSD. Fueling the BC Real Estate Bubble was something far more sinister. It was a blinding all consuming greed that so warped many British Colombians perceptions of reality that probably half the province had the mind set of a seriously fucked up BAD ACID TRIP. BC's drug cocktail that turned otherwise sane cautious individuals into reckless morons was:

1> A Belief That Everything Has Changed, when no real change occurred. The acolytes of the Real Estate Cult, would preach things are different, people and are going to come to BC. Southern BC has better weather than Edmonton. People know about this place. Etc, etc. When we examine the facts, we will see that; people have always moved to BC. For the last 32 million years winter temperatures were warmer in Southern BC than Edmonton. Finally when the Canadian Pacific Company built the Empress hotel to serve as a Gateway to Asia, every child in the British Empire was aware of Southern BC. This delusion was quite similar to the medievil person watching a Rooster cast spells,. Nothing changed at all other than the thought process in the trippers head.

2> Real Estate is Finite and They Can't Make Anymore. The acolytes would use this statement in their two stage chant "People are coming to live in BC, and they can't create more Real Estate". This second point can only hold partially true, in the very short-term the amount of Real Estate is fixed. In the mid-term it is possible to increase the amount of Real Estate through re-development at an increased density. In the long-term, mankind has the potential to undertake LAND RECLAMATION, whereby garbage and fill are dumped into low-lying areas to raise the elevation turniing shallow bays and tidal flats into usable land.

3> The Olympics are Coming to Vancouver. The acolytes of the Real Estate cult would preach that the world would become aware of Vancouver's existence during the Olympic games and everybody on the Planet Earth would covet a place in Vancouver. Of all the delusions being preached by the Real Estate boosters, this was by far the stupidest.

Vancouver had a far better opportunity to put itself on the world stage 24 years before the Winter Olympics and it was called Expo 86. I refer to the Winter Olympics as "The White People Games", it is a celebration of Northern Nations with declining birthrates in a demographic death spiral, showing the world how they handle winter, which if Al Gore is right will be a distant memory in the all to near future.

If one put away their bong, swore off the chronic for a couple of hours, drank some orange juice and straightened up, they would realize that the Winter Olympics are one of the worst things that could happen to the BC real estate market. This is because:

a> The Winter Games take place in February in Vancouver, and they have to hold the opening ceremonies indoors in an inflatable marshmallow, to escape the torrential rain. The World media will be in Vancouver and they will be constantly beaming to the world the message that Vancouver is dark, rainy and the inhabitants are so stoned they think they have a pleasant climate.

b> The Winter Games trigger a wave of speculative building and buying of Real Estate. People who are wired on the Olympic delusion do so in anticipation of all the people who will see Vancouver on TV, and decide to abandon their lives elsewhere to come here. Real Estate has always been and always will be ultimately governed by the laws of supply & demand. The catch is the post Olympic demand increase will not exist, and may actually cause a demand decrease because who wan't to live in a dark rainy overpriced place. This occurring while supply has increased = a Real Esate bloodbath that started in 2008, and will continue to accelerate during 2009, 2010, and forward with no end in sight.

c> The Winter Olympics are a two week event that costs about 3 billion dollars. About 1 billion of the costs are recovered leaving a $2 Billion dollar debt hangover that will result in tax increases for BC residents that will serve to reduce FUTURE DISPOSABLE INCOME, thereby lowering FUTURE DEMAND FOR REAL ESTATE.

We are going to witness a financial fiasco with the Vancouver games. The greatest comfort will come from the fact that a significant portion the Olympic boosters were so deluded on the benefits of the games that they loaded up on speculative real estate with borrowed money... HAAHAAHAAAHAA.

Now if only we can bring some justice to the citizens of Victoria.

The Campbell Government has spent $1 billion dollars to upgrade the road to the cluster of Ski Chalets called Whistler. At the same time they keep telling the resident of the Capital Region that there is no money for safety improvements on the Malahat deathtrap. If there was justice, the property owners of Whistler would be assessed the bill for their upgrade road, and the $1 billion could four lane and centre barrier the main access road to the Provincial Capital.

This won't happen, so please pass me the LSD.

Til next time,

Mario

It's always easier to blame a Negro......

All the soothsayers are having the time of their life right now blaming the global economic meltdown on US sub-prime mortgages.... How could extending credit to a handful of Afro-American families have caused such widespread global chaos. My act of heresy is to state that granting mortgages to Afro-Americans did not cause a global economic meltdown.

It seems in the United States, whenever anything majorly goes wrong, they look to blame it on a Black person. This American trait effects both hard core conservatives "Blacks are too irresponsible with money", to the left wing bleeding heart liberals "the Blacks are still suffering from the after effects of slavery and institutionalized racism". I think blaming the meltdown on the Afro-Americans is hogwash....... The real culprit of this severe recession is, THE WHITE AMERICAN SOCCER MOM.

If we look at the events of the last 50 years, each and every major recession was preceded by a run up of energy costs. Usually within a year of a price hike, all hell breaks loose. In 1973 the Arab states implemented the oil embargo causing energy costs to skyrocket, this resulted in a recssion during 1974, and a S & P meltdown of a greater order of magnitude than we saw today.

In 1979/80 saw a tripling of energy costs in short order. Again a year thereafter we experience the 1981/82 recession. In 1990/91 energy costs shot up again do to uncertainty because old Saddam Hussein s invasion of Kuwait, and then we get another recession, this one costing George H. Bush the Presidency.

The energy cost recession mechanism works like this. Energy is an input cost in effectively everything we can see, touch, smell, taste or hear. Since it is integral to everything rising energy costs stoke the fires of inflation. To control inflation, Central Bankers use their policy tool called short term interest rates, and they raise these rates. Rising interest rates changes the relative costs of actions, causing some choices to not be made thereby lowering overall demand and moderating inflation.

Now the Soccer Moms.

The USA is different from most industrialized affluent societies in several fundamentally different ways:

1> The USA, has a higher percentage of women whose primary work is in the home than any similar country with the exception of Japan.
2> The USA has a higher birthrate than any industrialized country. This is due to the large role that organized religion plays in the American psyche. Examples would be, the Mormons, the Quiverfull movement, and dorks that get married right after high school so they can have intercourse.
3> Owing to a relatively low overall population density,energy which is represented by getting anything from Point A to Point B is a larger overall component in any tangible/intangible good than in Germany.
4> The United States developed Home and Garden Television, and beamed it at the Soccer moms 24/7. This gave these women insatiable "HOUSE LUST".

House lust led to the building of larger and larger houses further and further away from employment, services and Black People. This stimulated energy demand to heat and cool these McMansion monstrosities, and stimulated petroleum demand to get to and from these White exurban enclaves.

With more vehicles on the road, the Soccer Mom's started to worry that they might get into a car accident with some poor Negro that is driving an old economy car. This led to demand for monster people haulers such as Ford Expeditions, Chevy Suburbans, Dodge Durango's etc., so as to protect the White Soccer Mom from injury in a car crash with an economically disadvantaged minority.

This expansion in housing started to drive the bull market in energy. Petroleum is characteristic by having an inelastic demand curve. Which in the Queen's English, small oil shortages cause massive disproportionate price increases, while small oil surpluses cause disproportionate collapse in price. Durangos in exurbs needed more and more fuel the further out the exurbs spralled.

The final ingredient for the perfect storm was China's savings glut. The dismantling of the Iron Rice Bowl, brought the fear of capitalism to the Chinese masses. The new Chinese middle class started to disproportionately increase their savings rate relative to their income gains. Chinese capitalism meant people could no longer rely on state pensions, state schools, state hospitals or the state assigning people jobs. The Chinese state owned banks used these savings to buy US treasuries driving interest rates to rock bottom (see Risk 100 for the explanation of bond prices). These low interest rates made building McMansions in the middle of nowhere USA viable. As the McMansions crept, energy demand crept with it in lock step. Americans were insulted from these creeping energy costs by rising asset values. Basically who cares what a tank of gas costs when you can pull the money out of the walls of the McMansion....

Eventually, inflation started to heat up in 2004, and the Central bankers started to slowly raise interest rates. These rate hikes eventually caused a collapse of asset values, and a flight of money towards commodities like oil. This gave us the $147 barrel of oil in July of 2008..

The rest is history.

The moral of this story is. When you think it's the fault of a Black Person, you better take a close look at yourself.

Sincerely,

Mario

Short Term Bond Income Funds - A Fools Game

Of all types of mutual funds, the short term bond income funds tend to attract some of the most despicable forms of skulduggery and self dealing by the financial services industry. My act of heresy is stating that in most instances short-term bond funds are a horrible place to put money.

The theory behind a short-term bond fund is the investment in short term high grade interest bearing securities. In most cases these securities are strip bonds issued by either the Federal Government, The Provincial Government, or some entity that has either of the two aforementioned levels of government acting in the capacity of a guarantor. These bonds funds buy bonds with five or fewer years to go to maturity. These mutual funds are designed for low volatility, a steady stream of income, and capital preservation.

In theory as one gets older, they should gradually shift equity funds to short term income fund, so as to have a retirement fund that generates interest, generates gains, and acts as a living income cash float that depending upon the amount, may prevent the need to sell equities during tempory dips in prices since this short term bond fund helps provide liquidity.

So far every thing seems well on the surface. But there is currently a sever problem within these families of funds, and it is that private independent mutual fund managers (AGF, Trimark, Investors Group etc), operate and market these kinds of mutual funds. If you guessed that these privately operated Short Term Income funds used Optional Loads with Deferred Sales Charges to compensate the paper pimps, you deserve a strand of wool hanging on the back of your head so the world can see people can't "pull the wool over your eyes".

We are going to use a forward looking example. This example should help explain the ridiculousness of the independent mutual fund companies, Short Term Income Funds.

So lets look at some facts:
1> Capital preservation is important. One must ensure a risk free return which means only bonds that are backed by the ultimate authority to tax make the grade.
2> Since there is such a massive demand for safe financial instruments, the price of these financial instruments has been bid very high resulting in very low yields (to figure out for yourselves how price is the inverse of yield, please look at the two bond example at the end of my Risk 100, - a primer post).
3> We are entering according to Warren Buffet a period of diminished yields. From what I read in his Wall Street Journal interview, one should be happy to have equity (risky) returns of about 4% for the next 10 years.

Now the Independent Fund Company Short Term Income Funds:
1> Investors Mortgage and Short Term Income, fund assets $2,266,000,000.00, MER 1.94%, Optional Load via a Deferred Sales Charge DSC , or if you have read the simplified prospectus, or have found a ethical financial adviser, a Negotiable Front End Load.
2> Trimark Government Plus Income, fund assets $178,000,000.00, MER 1.3%, Optional Load via a Deferred Sales Charge DSC , or if you have read the simplified prospectus, or have found a ethical financial adviser, a Negotiable Front End Load.
3> MacKenzie Sentinal Short Term Income, fund assets $105,800,000.00, MER 1.57, Optional Load via a Deferred Sales Charge DSC , or if you have read the simplified prospectus, or have found a ethical financial adviser, a Negotiable Front End Load.

The Underlying Securities Providing the Value Backstop and the Intrest Income:
1> Government of Canada Bond Coupon, Matures December 1, 2012, term 3.9 years, yield 2.31%
2> Canada Housing Trust Bond, guaranteed by the Government of Canada, Matures December 15, 2011, term 2.86 years, yield 1.79%
3> Government of Canada Bond, Matures December 1, 2010, term 1.81 years, yield 1.12%
4> Government of Canada Bond Coupon, matures December 1, 2009, term 0.87 years, yield 0.89%

Things that should immediately jump out at you:

1> Only a 4 year term Government of Canada bond has a higher yield than the Investors Mortgage and Short Term Income fund MANAGEMENT EXPENSE RATIO. Any shorter term security results in a MER exceeding the yield which equals NEGATIVE INTEREST.

2> For the Trimark Government Plus Income fund and the MacKenzie Sentinal Short Term Income fund, the MANAGEMENT EXPENSE RATIO exceeds the yield on any bond with a duration of less than two years. Any shorter term security results in a MER exceeding the yield which equals NEGATIVE INTEREST.

Examining past years returns for these funds will show that they generated a modest positive return. The difference in our forward look versus the fund companies posted results is our forward look takes into account current interest rates on the classes of securities these funds are supposed to purchase. How are these funds going to generate a positive return for the unitholders, and fat commission cheques for the fund pushers????

By investing in assets riskier than Government of Canada Bonds.

If you must buy some Short Term Income fund, purchase a NO LOAD fund marketed by a bank, or bank owned investment boutique. These funds generally have MERs of 1% or lower, and there are no DEFERRED SALES CHARGE SHENANIGANS.

Another serious question one should raise is why does the Investors Mortgage and Short Term Income charge such a high MER when it has over ten times the assets of the other two funds that we examined. In this business, there are economies of scale. The larger you are, the cheaper as a percentage, that you should be able to accomplish things. It seems in the case of the Investors Mortgage and Short Term Income fund, the fund manager uses the scale of this fund to screw their investors royally.

If I saw my retired parents account statement, and on that statement there was a significant amount of funds invested in Investors Mortgage and Short Term Income - DSC. There would be a fund salesman confessing to being the King of England when I was through with them.............

Till tomorrow,

Mario

Deferred Sales Charges - How the paper pimps rape the investors

In my previous post I had mentioned optional load fees. Through these we have an investor friendly situation where it might be possible to make an investment of terms more favorable to the investor than the fund salesperson (paper pimp).

This is because the investor has the choice of fund entry via a Deferred Sales Charge, or the preferred method of a NEGOTIABLE FRONT END LOAD. If you are unsure as to whether you have been screwed by your adviser, you can find out if they railroaded you into a deferred sales charge by seeing the letters DSC on your account statement after the fund description.

Before we begin, I must reiterate that I am no fan of mutual funds. They charge excessive management fees for the services they perform, they charge 3 to 10 times the management charge of an index fund which picks stocks better, and finally Load Bearing Mutual Funds attract independent financial salespeople (lowlifes in slick suits) who ONLY IN THE RAREST OF INSTANCES HAVE THEIR CLIENTS BEST INTERESTS FIRST. If you must buy a mutual fund, purchase a no load fund from a financial institutions in-house group of funds.

To illustrate how the financial services industry fleeces the investor lets set up an example using the following parameters:

THE INVESTOR
1> You the investor have $20,000 to invest, you desire a diversified equity exposure to the Canadian markets primarily mid to large cap....
2> You have never heard of a simplified prospectus nor do you have any knowlege of optional loading of mutual fund purchases.
3> It is January 9, 2008

A TALE OF TWO MUTUAL FUND SALES PEOPLE
A> The first financial adviser you are considering, Jack Slick CLU drives a late model luxury car, dresses very sharply, advertises heavily and his name is well known in the community. He has a firm handshake , and his office wall is covered with investment awards issued by fund companies.
B> The second financial adviser, Karl Marx you consider is a an eccentric. He drives a beater car and is always watching where he step so can pick-up any loose money that some careless person lost, and to avoid stepping in dog poo. His office has ample supplies of Kleenex, paper towels and multiple hand sanitation pump bottles. He refuses to shake your hand by politely stepping back from you. They have a picture of their cat on the wall.

THREE EQUITY FUNDS (all made up)
1> Back Bacon & Maple Syrop True North Diversified Growth. Average 10 year return 4.5%, MER of 2.9%, size of fund $1,000,000,000 (one billion) dollars. Minimum initial investment $1,000, Optional Load, either Negotiable Front End or Deferred Sales Charge (6% yr 1&2, 5% yr 3, 4% yr 4, 3% yr 5, 2% yr 6, 1% yr 7). Commission payable to fund salesman either 6% up front if buyer elects for DSC, and a 1/8% per year trailer for each year client is invested.
2> Well Capitalized Stable Canadian Bank's in House Canadian Equity Fund Available to non Customers. Average 10 year return 5.5%, MER of 1.9%, Size of fund $1,000,000,000 (one billion) dollars. No Load. Commission payable to salesman is a one time $100 sign up fee, and an annual trailer payable to the fund salesman of 1/4% of funds invested per annum.
3> Boring S&P/TSX Index Fund. Average 10 year return 5.25%, MER of 0.5%. No Load. Sign up fee of $100, and an annual trailer payable to the salesperson of 0.1% per annum.

Both financial advisers evaluate all 3 funds and are familiar with them.

You will purchase one of the funds from one of the advisers making a $20,000 investment on January 9, 2008. The market will suffer a bloodbath during 2008, losing half its value by November 30, 2008. On December 6, 2008 your college age kid is on a road trip to Washington State. They get drunk, go skateboarding and break their leg, and they were too stupid to buy some travelers health insurance. Now you are forced to liquidate your investment.........

If you had first met financial adviser #1, and decided to do business with them....
Financial adviser one would tell you that they put your interests first, and they want to ensure that all of your money can take advantage of the markets. They don't tell you about the Negotiable Front End Load, and they steer you into the Back Bacon & Maple Syrop True North Diversified Growth fund, and they elect for the Deferred Sales Charge. On December 6, 2008 you issue a sales order, your funds are now worth $10,000, you get assessed your 6% of the initial investment Deferred Sales Charge of $1,200 and you only receive $8,800 net out of your initial $20,000 investment. The giveaway for why this adviser is a crook is the late model car, and the awards from the fund company. If he steered his clients towards index funds, he might have room for a picture of his pet on the wall. To pay for the depreciation on the late model car, someone has to get screwed.

If you had first met financial adviser #2 and decided to do business with them.....
Financial adviser #2 would outline all three funds. They would explain to you that the lowest risk fund is the index fund, and the actively managed funds while having a risk of a larger loss than the index have also the potential for a gain greater than the index. They would explain to you that the Back Bacon & Maple Syrop True North Diversified Growth fund could be purchased with a Negotiable front end load or with a deferred sales charge. They would explain that the advantage of a deferred sales charge is that all of your money can be put to work, but the big disadvantage is if choosing this option you are stuck with the fund company unless you pay a usurious redemption fee. They will offer you the choice of a deferred sales charge or a Front End Load of 1%. They advise you that the 1% front end load option provides the investor with the greatest flexibility. You choose that approach and invest $19,800 in the fund and pay the salesperson a $198 commission. On December 6, 2008 you issue a sales order, your funds are now worth $9,900. Since you Front Loaded the commission, there is no redemption charge and you receive the full $9,900.

Chances are if you chose Financial Adviser #1, you would feel bitter, but you would not know that you were taken advantage of. You might give financial adviser #1 the chance to rape you again....

If you chose Financial Adviser #2, you would still be suffering from your financial loss, but you would be aware that Adviser #2 has INTEGRITY. You most definitely would do business with #2 again.

If these two Financial Advisers got two identical clients who made $20,000 investments. Financial Adviser #2 would take his $200 and put it in the bank, whereas Financial Adviser #1 would take his $1,200, put $200 towards their auto lease, and spend the other $1,000 on a night with a ??????.

Financial Adviser #1 is such a smart cookie, because he may have the opportunity to screw someone twice on a single transaction.

Till next time,

Mario

Mutual fund load fees. What are they, a primer.

A load is a sales commission. It is a commission that a purchaser of mutual funds is required to pay the fund dealer, for entry into a fund or group of funds that are managed by a Investment Management organization. This commission when paid at the time of purchase is called a Front End Load and if its paid at the time of sale it's called a Back End Load. A fund dealer can be your friendly bank rep, an insurance salesperson, a stockbroker or a financial adviser.

There are mutual funds where there are no sales commissions payable by the purchaser and these are called No Load Funds.

When consulting a resource such as Globefund, you will see acronyms for Front End Load FE, Back End Load BE also known as a Deferred Sales Charge, and No Load NL. There is a very special type of fund called an Optional Load fund where the type and amount of load are optional.

Twenty years ago, the most common form of load fee was the Front End Load. My best guess is that 90% of the mutual funds used this method exclusively . Today the mutual funds that exclusively use Front End Loads tend to be specialized funds with a high initial investment and a non-negotiable front end load. An example would be Resolute Performance Canadian Small/Mid Cap ($150,000 minimum) or Chou Associates Global Small/Mid-Cap Equity ($10,000 minimum).

No Load Funds are, as their name implies funds with no purchasers commission payable. These funds are generally run by financial institutions and their management divisions, and they are generally only available to the financial institutions in house customers. An example would be the BOM (Bank of Montreal), PHN (Phillips Hagar North), RBC (Royal Bank of Canada) groups of funds.

Back End Loads, are paid by the investor upon exit from the fund. Sometimes the redemption fee is a straight percentage of the balance of the funds redeemed, say 10% of the redemption or $100 on each $1,000 cashed out giving the investor a new cash out of $900 on a $1,000 redemption. Most often however its via a Deferred Sales Charge, whereby the redemption fee is a declining percentage that declines based on how long you have had your moneys invested in the company. Say 6% DSC for the first two years, 5% DSC for year three, 4% DSC for year four, 3% DSC for year five, 2% DSC for year six, 1% DSC for year seven, and finally after seven years invested there is no charge to get your money back. This Deferred Sales Charge can either be a percentage of the redemption value, or percentage of the purchase price. A lot have people have discovered this fall that after a mutual fund company lost half of their invested capital in one year, the 6% redemption fee was 6% of the initial investment, or 12% of the reduced value of the funds portfolio... OUUUCCHHHH....... That can hurt....

Finally there are the Optional Load Funds where the load is at the fund purchasers discretion. The load can be Back End via a Deferred Sales Charge, or a NEGOTIABLE FRONT END LOAD.

Never heard of a Negotiable Front End Load, 99% of investors haven't. It's all in the Simplified Prospectus..... What is a Simplified Prospectus? Its a document that 95% of the investors, 75% of the fund pushers, and 50% of the fund managers have never bothered to read....

Till tomorrow.

Sincerely,


Mario Erlic

RISK 100, an Introduction to Financial Risk

Webster's Dictionary defines risk as: exposure to the chance of injury or loss; a hazard or dangerous chance. In the financial world risk would be the possible exposure of an asset to an impairment of value or loss, or the chance that a hazard gives rise to a yet unquantifiable liability.

Risk-free by this definition is a state where there is no chance of loss or impairment of an assets value. This is however a subjective state, as your risk free perspective can only occur in the instance of an absolute certainty of return of your investment in your base currency. If you make an investment in anything not denominated in your home currency, you are taking on currency risk. An American buying a Government of Canada Bond takes on the risk that at maturity, or any point until that time the exchange rate for Canadian dollar relative to the US dollar will be different than at the instance of purchase. Same holds for a Canadian buying a US Treasury Bond.

To an American, or any individual whose country uses the US dollar, the risk free investment is the US Treasury Bond. For a European, the risk free investment is a European Central Bank Euro denominated bond. For a Canadian, our risk free investment is a Government of Canada bond denominated in Canadian dollars.

Risk modeling is a form of rocket science. It takes advanced level skills in Mathematics & Probability. But as the recent financial meltdown has shown, even the rocket scientists finest work can suffer a catastrophic failure. How little we learned from Challenger disaster.....

The price of bonds is inversely related to their yield. The sky is blue, and leaves are generally green but what on earth is price inverse of yield. But I have a simpler approach to explaining risk. For the sake of simplicity assume we are in the USA.

1> Provide a amount of money payable at once upon maturity and discount it.

A US Treasury bond that pays $1,000,000 to the owner on January 7, 2039, is worth $404,594.00 TODAY. Treasury yield 3.02%

A Shell International Finance bond, that pays $1,000,000 to the owner on January 7, 2039 is worth $190,100 TODAY. Shell bond yield 5.69%

Shell International Finance Issues bonds that are secured by multi-billion dollar petroleum facilities. It is a relatively safe bet that Shell will still be around 30 years from now, and we will still be driving personal transportation thats powered by petroleum. But it is not an absolute certainty that between today and some point in time 30 years from now that a risk won't effect Shell, and its ability to honour it's debt.

So to borrow $1,000,000 today, with repayment occuring 30 years from today:

The US Government has to pay $2,441,442 on January 7, 2039 to retire it's debt.

Shell International Finance has to pay $5,260,378 on January 7, 2039 to retire a million dollar debt incurred today.

The difference of $2,818,936 payable on January 7, 2039 is the RISK PREMIUM Shell has to pay.

That in a nutshell is risk.

The Role of Fund Managers

When I was a young lad I worked for a prestigious multinational auditing firm. Since I was single and I had no dependants at the time, I was put on the internal availability list. This meant I lived in a standby state where for 5 years I could be getting a call Friday at lunch where I would be informed that I would be leaving for a surprise assignment on Sunday morning and I was to be out of town for up to 3 months. During 1990 Saddam Hussien invaded Kuwait. Shortly after the invasion the firm I was working for, Price Waterhouse implemented a policy that no memebers of their management staff were allowed to fly in commercial airliners. The firm was very worried about the potential for terrorism, and they didn't want to risk losing a senior worker that they spent $250,000 training. At that time I was a Senior Staff Accountant which was their highest staff classification that they considered expendable. It was the aftermath of Black Monday, when the Ontario Securities Commission issued a new set of mutual fund regulations with the goal of better protecting investors. Bay street needed compliance auditors, and I was considered expendable. It was a match made in heaven.

My experience with fund managers is that it is the ideal job for someone who wants to get paid well and do nothing. You work in a financial boiler room where you follow the relevant index for your fund area, and check out all of your competitors stock picks. Since a fund manager is at loathe to perform poorer than their peers, they follow the safety in the herd technique. If you make the same stock picks as your competitors, you won't stand out as have done more poorly than your peers in a bad month. For this the average negotiable load equity fund has a MER of approximately 2.9%. A index fund that has zero intelligence at the helm generally charges a MER of 0.25% to 1%.

Upon an examination of 609 Canadian growth equity funds from Globefund, and only looking at funds that have been in operation at least 15 years. I find that only 22 funds can beat the TD - Index fund. Of the 22 funds examined that beat the index, 19 of the funds were NO LOAD. Generally speaking NO LOAD, means either LOW COMMISSION or NO COMMISSION, and while the fund would be ideal for an individual who worked hard to save some money, they serve no purpose for the fund pusher whose primary duty is to enrich themselves.

To summarize, 609 Canadian Equity growth funds examined, of which only 22 funds could beat the TD index fund over 15 years.

Of the 22 funds that could beat the TD Index, 19 of them are NO LOAD. These 19 funds are primarily available only to the in house investors of financial services firms. An example would be either of BMO Equity, Philips Hagar North Cdn Equity, TD Canadian Equity, RBC Cdn Equity. The other type of no Load index beating funds require a high minimum investment such as Acuity Pooled Canadian Equity, which is the top performing fund of its class over 15 years. The minimum initial investment for the Acuity fund is $150,000, and the fund charges a MER of o.1%.

So far, it seems that the talent of the majority of mutual fund managers is DESTROYING INVESTOR VALUE. Only 3 load bearing funds out of 609 Canadian Equity funds could beat the TD Index fund over 15 years. So if you are determined to buy mutual funds follow my warning:

1> Never buy mutual funds from an independent fund dealer. There are only 3 funds in Canada open to the public, not sold in-house by a financial institution that pay load fee commissions to paper pimps that over 15 years were able to beat the TD Index Fund.

2> Meet with a fee for service financial adviser who can review your investment goals and COACH you on how to negotiate a LOAD FEE THAT IS BEST FOR YOU. If the fund pusher gets indignant and defensive when you tell them what you intend to pay as a FRONT END LOAD, you know the fee for service adviser gave you good advice.

3> If you are thinking that you can't pick stocks, and you need the professional assistance of a paper pimp (financial adviser), use the in house services of a financial institution such as Philips Hagar & North, or a big 6 bank. They offer no load funds, and the person selling you the funds does not have a vested financial interest that is OPPOSITE to yours.

The worlds smartest investor Warren Buffet will be the first person to admit he cannot beat an index. It is extreme arrogance and hubris to think some putz mutual fund manager can beat the Oracle of Omaha.

So my advice, buy an index fund with the lowest MER possible. These funds have no ACTIVE MANAGEMENT which means that there is no intelligent human being closely following the index, and taking 3 to 10 times as much of the investors money, while consistently showing poorer performance than the computer.

Keep in mind, some mutual funds will pay commissions of up to 10% to the fund pusher. On a $50,000 purchase that could be $5,000. To put that amount in perspective, a drop dead gorgeous Adult film starlet will do almost anything in a scene for $1,000. With a recent clean HIV test, what could you and Brianna Banks do????...... Then imagine how hard a fund pusher could screw you.......

Sincerely,



Mario Erlic

When should I contribute to a RRSP

The established canon is to max out your RRSP every year, ideally buying usurious management fee equity funds that generate big fat commissions to the paper pimps, excessive management fees to the fund companies, and bundles of advertising dollars to the media. It seems everybody is winning except for the investor.

My act of Heresy is that I advise that only under limited circumstances are RRSP contributions a good idea. I will outline when it's always a good idea, sometimes a good idea, and when RRSP contributions are a silly idea. If you have read my previous post, when you contribute to a RRSP, never contribute equity mutual funds.

1 RRSP CONTRIBUTIONS ALWAYS A GOOD IDEA

a> You are an employee of a firm, and the company has a RRSP contribution matching program. In this case it is FREE MONEY, and it would be silly not to load up on as much free money as possible.

b> If you are in the top income tax bracket, and you do not have a mortgage, it is advisable to contribute the maximum amount.

2 RRSP CONTRIBUTIONS MAY BE A GOOD IDEA

a> If you are in the top tax bracket and you have a mortgage on the house you live in. In this case if you have extra money, toss a coin heads = principal pay down, tails = GIC purchase for RRSP

b> If you have paid off your home, and you are in the middle tax bracket and you are not eligible for an employer pension, and you have insufficient RRSP assets to take advantage of the annual $2,000 pension income credit. This amount is about 40,000 in GICs. If you are below this level contribute to the RRSP, if you are above this level contribute to a TFSA.

3 RRSP CONTRIBUTIONS ARE A BAD IDEA IF

a> You are in the bottom income tax bracket, and you do not own a home. In this case contribute to a TFSA.

b> You are in either the middle or low tax bracket and you have a mortgage. In this case PAY DOWN YOUR MORTGAGE PRINCIPAL. There are two ways to view achieving an adequate retirement standard of living. One approach is to maximize your monthly income coming in thru RRSPs, and Pensions while the other approach is to be debt free, own a home, and require a minimum income because you have a negligible monthly burn rate.

c> If you have to borrow money for a RRSP contribution, don't do it. Your paper pimp has probably lined up loan financing for you thru the finance arm of a mutual company. The papaer pimp will get paid for, selling you the loan, selling you some crappy equity funds, and receive an annual trailer fee (kickback) from the mutual fund company for convincing you to stick with a loser.

Remember the paper pimp (financial adviser) works for itself. Not for you.

Please be wary of the pimps.

Sincerely,


Mario Erlic

Mutual funds in a RRSP is just plain dumb

A new year brings about a new RRSP season. The paper pimps (financial advisers) start their annual push to sell as many mutual funds as possible to the unsuspecting public, and they trick people into putting equity funds in a RRSP. Putting equity funds in a RRSP is just plain dumb.

The established canons are that mutual funds in a RRSP are the best way to save for ones retirement, and that it is in the best interests of every saver to maximize their RRSP contributions every year by purchasing the maximum amount of equity funds.

My act of heresy is stating that putting equity funds in a RRSP is just totally dumb, and in many cases it's a silly idea to contribute the maximum amount you can to a RRSP.

In this post, I will explain the mantras that the paper pimps spew, followed by my explanation of the treachery in their thieving lies.

Lie #1 - Contributing the maximum amount to a RRSP will save you taxes.

Buy the maximum amount of mutual funds every year for your RRSP, and get a tax refund cheque from the government that you could further invest. You save on taxes, and you increase your nest egg.

A RRSP does not save you on taxes, it only serves to DEFER the eventual taxation of that income. In many instances a RRSP will actually serve to increase the amount of taxes that you finally wind up paying. This is because of the magic of marginal tax rates. Your RRSP contribution reduces your taxable income. Each dollar contributed generates a tax deferment equal to that dollar times your marginal tax bracket. Your last dollar contributed to a RRSP can generate a significantly LOWER DEFERMENT than the first dollar contributed because your RRSP contribution can take you to a lower marginal tax bracket. When you pull money out of a RRSP each dollar that is pulled out is added to your taxable income and taxed at YOUR HIGHEST MARGINAL TAX RATE. The small amount you stash in the RRSP each year can create a small tax deferment, but when a financial emergency arises and you pull your cumulative RRSP contributions out your tax bill is higher than your initial savings since the RRSP withdrawal increased the amount of taxable income subject to the highest marginal tax rate.

Lie #2 - Placing equity funds in a RRSP reduces your tax bill because the capital gains are sheltered in the RRSP.

Equity funds in a RRSP are good because you do not have to pay taxes immediately on your capital gains allowing you to reinvest the monies that you would have been sending to the taxman to generate further gains.

If you are fortunate enough to realize a gain on equity funds in a RRSP, you have INCREASED the amount of capital gains tax paid. This is because capital gains outside of a RRSP have a 50% inclusion rate, while capital gains in a RRSP have a 100% inclusion rate. A RRSP does not make distinctions as to the nature of income. A RRSP treats income from all sources the same. A capital gain outside a RRSP has half the income inclusion rate of a capital gain that occurs within the RRSP.

The reason why a paper pimp (financial adviser) will steer their clients into equity fund RRSP investments is because the commissions payable to the paper pimp are substantially higher on equity funds than on interest bearing investments. A five year GIC might pay a 1% commission, whereas an equity fund might pay 6% commission up front plus a further 0.25% trailer commission for every year they sucker the investor into staying invested.

Remember a paper pimp is working for itself, not for you.....

Sincerely,


Mario Erlic

Welcome to 2009

My name is Mario Erlic and this is my blog, and I have decided to name it The Financial Heretic's Page.

A heretic is defined as, One who commits heresy. Heresy is an introduced change to some system of belief, that conflicts with the previously established canon of that belief.

In the case of personal finance, the established canon was that having ones assets in a RRSP (Registered Retirement Savings Plan) is a good thing for all individuals in all instances.

My act of heresy was stating that in most instances there is a far better use for ones assets than placing them in a RRSP, and in some cases having assets in a RRSP can be harmful to the individual.

The established canon that a RRSP is always good in all instances is due to the vested interests of the financial services industry, and the media silencing individuals whose beliefs and opinions are in opposition to their financial interests. If people buy RRSPs, the RRSP pusher makes money. Next year in pursuit of further riches the RRSP pusher sets an advertising budget to rope in more customers. These advertising $s make the media company richer, so all the financial planning articles somehow avoid mentioning anything that upsets the RRSP canon. Etc. and so on...

This blog will be my soapbox where I can hopefully provide you my readers with A SECOND OPINION FREE OF ANY BIAS OR VESTED FINANCIAL INTEREST.

Sincerely,


Mario Erlic