In Canada, a discount brokerage is a type of investment firm that can not provide advice and must take all instructions given by the client regardless of how poor it may seem. General information may be communicated but what to buy, why to buy, and when to buy can never be answered. Essentially, these accounts are self-directed by investors with the knowledge and capabilities of taking control of the investments and finances. At least, that's what I thought.
Throughout my tenure at the firm, I encountered a vast amount of Canadians so ill-informed about the market that their stories still stick with me today. I would try to refer them to an advisor but often times that could be taken offensively. It was a fine line to walk on. The stories I share today are not meant to ridicule any one in particular or the firm, but to put into perspective your financial ability's and whether or not you are ready to manage your own investments.
The Dentist
I received a phone call from a brand new client. His profile said he was a dentist and had been with us for less than a week. He asked me to sell his mutual funds which were just transferred in. I made the trade as discussed and noticed that the transfer came from our company's full brokerage side. I made the assumption that either he felt confident in running his own portfolio or he wanted a cheaper commission on the sale of his account. Either way, I went ahead and made the trade. After confirming the order, this is a paraphrase of how our conversation went from there on.
"How much money did I receive?"
"Well, we don't know the actual value of the sale as it is not determined until the end of the day."
"What? I don't understand."
"Unlike stocks, mutual funds are priced at the end of the day. So the price you see on the Internet is yesterday's close."
"But my old broker told me that they would be sold immediately."
"Yes, the mutual fund has been given instructions to be sold, but again, the price is not determined until the end of the day. That is how mutual funds work."
The conversation would loop for a few more minutes before the dentist finally absorbed the information. What was interesting to me was that he mentioned he was with the full broker for years, but did not learn a thing. It was this moment that made me decide that if I took the full-advice channel, I would build a relationship that was built on education and information to form strong, trusting bonds.
The lesson to take away here is not just that mutual funds are priced once a day, but that you should be taking ownership of your investments when you feel educated and confident. And although your level of knowledge on financial products may never be equal to those in the industry, it is beneficial to familiarize yourself with the basics and invest within your comfort level.
To give credit, this client was not stupid by any means, he was simply unaware of the major differences of mutual funds and stocks, which is very frequent as we will see in the next story.
The Research in Motion Lady
I call her the RIM lady because of her holdings. It was well into the six-figures, but a large chunk, like 90 per cent, of her holdings were invested in one company, Research in Motion, now BlackBerry. And then there were two mutual funds which accounted for the rest. This was not well-diversified enough by any means, but she was up like triple on the stock. She called in to sell her mutual funds as well, but had just purchased them within a month.
"Hello there. I would like to sell my mutual funds."
"Absolutely ma'am, but just so you are aware, these funds were purchased two weeks ago and will incur a charge for not holding them at least 30 days."
"What? I thought this was a discount brokerage and these funds don't have charges."
"Yes ma'am, we are a discount brokerage, but mutual funds have a holding period."
"Okay fine, just sell them. I've had them for two weeks and the price has barely moved. They are terrible products."
"Well, that's because these are diversified mutual funds and they're designed to hold a lot of companies. And considering you've had them for only two weeks, you can't say they are bad products. Big returns so shortly don't happen."
"Well, Research in Motion did."
"Yeah, that is an exception."
As you can see, I got emotional and defensive because she was complaining about our brand's mutual funds and in doing so, I potentially may have crossed the fine line between advice and education but I felt that this lady was just not informed enough about her investments. If she still owns her stock, she has seen her shares fall to $8 from as much as $150 just four years ago.
The moral of this story is to diversify if you are starting out and not a great stock picker. Patience will get you through the long-term, especially if the companies you own are very well run and managed and have a steady stream of profits. There will be ups and downs, but what matters is the plan you devised. Although I am against mutual funds myself, they do have their benefits. And before making any purchase in any professionally managed product, always ask questions especially about the fees.
The Crying Lady
The last story I would like to share was actually an event that happened with my co-worker who sat next to me. It was a devastating situation that needed empathy and understanding, but a real lesson can be learned here.
It was days after the financial meltdown and the stock market was plummeting. Margins were being called and people were losing money all over the place. But the story of this one lady struck a cord with me. She was retired and had been very wealthy all her life. Not a millionaire, but saved enough to retire comfortably. Prior to the financial crisis, it was a raging bull market and more people starting borrowing money to better returns. It worked for years until October 2008.
The lady called in and got my colleague. It appeared that she had to sell all her stock to cover her loans but because of the collapse, it was not enough. She had piled up a debt within her trading account that exceed $100,000. To top it off, she was retired. She started to cry because she was lost. She did not know who to turn to or what. I believe in the end Credit made a payment plan of some sorts, but it made me really fearful of borrowing for weeks to come. She went from having a comfortable retirement build up of wealth to massive debt. And this was four days into the crisis.
Again, she was a smart woman and it was not that she was financially naive, no. It was a set of bad luck that tore through the accounts of hundreds, if not thousands of Canadians and millions across the globe. An event like this reminds us that we should invest within our means and if you plan to borrow, which is actually a very good way to make money, you must remember to have a secondary plan when things go wrong. Can you pay back the debt? Can you afford to invest? These are questions you must ask yourself before making your first real investment.
Gold's Punishment Not Over
The euphoria that surrounded gold two years ago made gold bugs wealthy as lofty predictions and price targets sent traders in a frenzy trying to play catch-up, but its decline over the last two years has shown us how quickly momentum can shift. And the accelerated drop in prices this year has been triggered by news of Fed tapering coupled with a stronger American dollar.
Last week, an independent author for Marketwatch.com provided technical analysis informing traders that a breakdown on the uptrend line would result in massive selling. Two different continuation patterns were crossing paths giving reason that the breakdown was days away. On Tuesday, that trend-line was breached with many indicators going bearish such as the DMI and RSI, as seen below. Gold is down about 4 per cent since. Based on our calculations, the selling pressure could mount to an additional 3 per cent drop with the SPDR Gold Trust (GLD), a US-priced exchange-traded fund that tracks the spot price of gold, could drop to the $124 price, which is the last level of support
How to read the charts
The price chart's purple trend lines were rising upwards until September 10, when the price dips below it. A general rule of thumb is to allow three days for any signal to be confirmed since signals of change can be false or to find additional evidence. Today is the third day, and gold prices have not mounted any comeback and has pushed down to the Bollinger Bands, a mathematical band creating a range used to determine overbought or oversold conditions. We see that gold is now oversold, suggesting a short-term rise or end to declines, but its breach also means that the bands will start moving downward and create conditions for more falling prices.
In the lower indicators, the MACD (Moving Average Convergence/Divergence) confirmed gold is bearish as well, pointing to a second potential signal. MarketWatch uses simple to use colours and when the "red line" rises above the "blue line," it is basically saying that negative conditions trump positive conditions. This is consistent in all their indicators. The black divergence curve also went negative at the same time as the cross and is another clue that the trend was confirmed.
In the DMI (Directional Movement Index), we see the exact same colours crossing. The lines essentially represent the battle between the bulls vs. the bears. And a declining "blue line" means that bulls have lost strength. A crossover means that sentiment has shifted, in this case bullish to bearish.
So what do I predict? Gold will have declines into October, but for two days, we should not see anything. Wait until next week to create a position, either short, go long a bear-ETF, buy the puts or a credit call spread. Any of these trades should be profitable if executed properly along with a decline in gold prices.
Last week, an independent author for Marketwatch.com provided technical analysis informing traders that a breakdown on the uptrend line would result in massive selling. Two different continuation patterns were crossing paths giving reason that the breakdown was days away. On Tuesday, that trend-line was breached with many indicators going bearish such as the DMI and RSI, as seen below. Gold is down about 4 per cent since. Based on our calculations, the selling pressure could mount to an additional 3 per cent drop with the SPDR Gold Trust (GLD), a US-priced exchange-traded fund that tracks the spot price of gold, could drop to the $124 price, which is the last level of support
The price chart's purple trend lines were rising upwards until September 10, when the price dips below it. A general rule of thumb is to allow three days for any signal to be confirmed since signals of change can be false or to find additional evidence. Today is the third day, and gold prices have not mounted any comeback and has pushed down to the Bollinger Bands, a mathematical band creating a range used to determine overbought or oversold conditions. We see that gold is now oversold, suggesting a short-term rise or end to declines, but its breach also means that the bands will start moving downward and create conditions for more falling prices.
In the lower indicators, the MACD (Moving Average Convergence/Divergence) confirmed gold is bearish as well, pointing to a second potential signal. MarketWatch uses simple to use colours and when the "red line" rises above the "blue line," it is basically saying that negative conditions trump positive conditions. This is consistent in all their indicators. The black divergence curve also went negative at the same time as the cross and is another clue that the trend was confirmed.
In the DMI (Directional Movement Index), we see the exact same colours crossing. The lines essentially represent the battle between the bulls vs. the bears. And a declining "blue line" means that bulls have lost strength. A crossover means that sentiment has shifted, in this case bullish to bearish.
So what do I predict? Gold will have declines into October, but for two days, we should not see anything. Wait until next week to create a position, either short, go long a bear-ETF, buy the puts or a credit call spread. Any of these trades should be profitable if executed properly along with a decline in gold prices.
How Low Interest Rates Affect Pension Plans
Two weeks ago, I posted an article examining the health of Canadian defined-benefit pension plans in light of the battle between retired workers and the city of Detroit. I wanted to follow up with a basic educational article discussing how they work and why they are failing.
A pension plan is essentially a fund or scheme designed to provide funds at retirement. Contributions made by an employee through out his or her working life at a company eventually gets paid out when that worker retires. A defined-benefit plan determines the benefits to be received in the future, as is indicated in its name, it defines the benefits to the employee. In between that time, the fund will invest its assets in a number of investment vehicles. The problems that arose in Detroit and maybe for many in the future is that DB plans are only obligated to pay the debt if they can afford to. If a fund or employer declares bankruptcy, those obligations could become a part of a bankruptcy litigation.
The single biggest culprit to the failure of so many pension plans are interest rates. It is the backbone of economies because rates give value to assets and currencies, and determine the cost of borrowing. But when interest rates are as low as they have been, it significantly cuts returns. Although the chemical make-up of any pension plan will vary from company to company, most traditionally will invest in bonds, stocks, real estate, and other opportunities.
When interest rates are low, the income earned on bonds are reduced. In the world of lending, low interest rates push debt prices higher. If the government sets rates at 1 per cent, then a bond expiring in one year should yield about 1 per cent. The bond will be priced so that the purchaser of the bond (lender) receives just one per cent yield. So if the bond pays 3 per cent a year, the value of the bond must rise to offset the 3 per cent earned through interest income (known as the coupon). If a pension plan purchased a 10-year bond that matured (expired) today, the value of the bond will have risen and could be sold for a nice profit. But any new investment option purchased to replace it would be in the same asset class and yield less. And if rates do rise, then the value of the newly purchased bond will eventually decline.
Interest rates affect the prices of equities in the exact same manner with minor differences. The issue that money managers are faced with are low dividend yields as a result of low interest rates. Stocks are at all-time highs, yes, but money managers are in the business of creating income, not net worth.
The third common investment choice is real estate. Whether the property is a sky scraper or housing unit, these products are intended to earn income through rent or revenue-sharing. Think about it like this. You just bought a strip mall and rent out floor space to offices and business. A bad economy simply means lower demand for your space or lowered revenue-sharing opportunities. The value of your strip mall is moot because the intention of purchasing the mall was to generate income.
A reduction in the work force also negatively affects pension plans. When baby boomers retire, it pulls from the plan and obligations must be met. But, the supply and demand for workers continues to be low. Advancement in technology results in fewer workers required for the same job. And a struggling economy means companies are not ready to hire and worse, more ready to fire. The impact of employees matters for pension plans.
Pension plans are steady-state programs that use contributions from current members to pay owed retirees. Any difference is made up by withdrawing from the fund itself. Logically, the fund will release any cash first. Then, if a deficit remains, assets are sold. This is why income generation and cash flow is often more important than the net value of any fund. Combined with low interest rates yielding terrible returns and a smaller pool of workers to contribute to funds, we see that it is a recipe for the inevitable failure of many pension plans.
So, here is a long-winded summary of what money managers are faced with. Pension plans need high interest rates to survive. Central banks cut rates to spur economic growth, but it has failed. As a result, asset values rose to record highs creating low-yielding products for an extended period of time. Historically speaking, economic cycles hint that interest rates will rise, but based on tepid economic growth, rates will not rise until the pace of economic growth is comfortable. Rising interest rates are meant to deter growth. Since Central Banks are not yet ready to raise target rates, the only way to increase yields is to reduce the value of assets in some form. Now, with the baby boomers retiring and claiming benefits, pension plans must sell a chunk of assets at highs to offset shortages. This could be the supply side pressure needed to raise yields. However, these major moves hurt the economy and slow growth too, so businesses might cut hours or payroll numbers, mortgages rise, and demand for business space decline. Down the road, lower asset values means deficits are being offset by selling more asset units. And a reduction in contributions from fewer employees could be made up by increasing contribution payments, but reduces short-term money supply for the worker. A continued cycle exists all because the reduction in interest rates failed to spur growth.
A pension plan is essentially a fund or scheme designed to provide funds at retirement. Contributions made by an employee through out his or her working life at a company eventually gets paid out when that worker retires. A defined-benefit plan determines the benefits to be received in the future, as is indicated in its name, it defines the benefits to the employee. In between that time, the fund will invest its assets in a number of investment vehicles. The problems that arose in Detroit and maybe for many in the future is that DB plans are only obligated to pay the debt if they can afford to. If a fund or employer declares bankruptcy, those obligations could become a part of a bankruptcy litigation.
The single biggest culprit to the failure of so many pension plans are interest rates. It is the backbone of economies because rates give value to assets and currencies, and determine the cost of borrowing. But when interest rates are as low as they have been, it significantly cuts returns. Although the chemical make-up of any pension plan will vary from company to company, most traditionally will invest in bonds, stocks, real estate, and other opportunities.
When interest rates are low, the income earned on bonds are reduced. In the world of lending, low interest rates push debt prices higher. If the government sets rates at 1 per cent, then a bond expiring in one year should yield about 1 per cent. The bond will be priced so that the purchaser of the bond (lender) receives just one per cent yield. So if the bond pays 3 per cent a year, the value of the bond must rise to offset the 3 per cent earned through interest income (known as the coupon). If a pension plan purchased a 10-year bond that matured (expired) today, the value of the bond will have risen and could be sold for a nice profit. But any new investment option purchased to replace it would be in the same asset class and yield less. And if rates do rise, then the value of the newly purchased bond will eventually decline.
Interest rates affect the prices of equities in the exact same manner with minor differences. The issue that money managers are faced with are low dividend yields as a result of low interest rates. Stocks are at all-time highs, yes, but money managers are in the business of creating income, not net worth.
The third common investment choice is real estate. Whether the property is a sky scraper or housing unit, these products are intended to earn income through rent or revenue-sharing. Think about it like this. You just bought a strip mall and rent out floor space to offices and business. A bad economy simply means lower demand for your space or lowered revenue-sharing opportunities. The value of your strip mall is moot because the intention of purchasing the mall was to generate income.
A reduction in the work force also negatively affects pension plans. When baby boomers retire, it pulls from the plan and obligations must be met. But, the supply and demand for workers continues to be low. Advancement in technology results in fewer workers required for the same job. And a struggling economy means companies are not ready to hire and worse, more ready to fire. The impact of employees matters for pension plans.
Pension plans are steady-state programs that use contributions from current members to pay owed retirees. Any difference is made up by withdrawing from the fund itself. Logically, the fund will release any cash first. Then, if a deficit remains, assets are sold. This is why income generation and cash flow is often more important than the net value of any fund. Combined with low interest rates yielding terrible returns and a smaller pool of workers to contribute to funds, we see that it is a recipe for the inevitable failure of many pension plans.
So, here is a long-winded summary of what money managers are faced with. Pension plans need high interest rates to survive. Central banks cut rates to spur economic growth, but it has failed. As a result, asset values rose to record highs creating low-yielding products for an extended period of time. Historically speaking, economic cycles hint that interest rates will rise, but based on tepid economic growth, rates will not rise until the pace of economic growth is comfortable. Rising interest rates are meant to deter growth. Since Central Banks are not yet ready to raise target rates, the only way to increase yields is to reduce the value of assets in some form. Now, with the baby boomers retiring and claiming benefits, pension plans must sell a chunk of assets at highs to offset shortages. This could be the supply side pressure needed to raise yields. However, these major moves hurt the economy and slow growth too, so businesses might cut hours or payroll numbers, mortgages rise, and demand for business space decline. Down the road, lower asset values means deficits are being offset by selling more asset units. And a reduction in contributions from fewer employees could be made up by increasing contribution payments, but reduces short-term money supply for the worker. A continued cycle exists all because the reduction in interest rates failed to spur growth.
Canadian Pension Plans Not So Good
The plight of Detroit is a somber reminder that the tragic falls of empires can still exist even in the modern-day era. Municipal bankruptcies have become all too common in America and a chapter 9 of this magnitude sent shock waves across the globe. Many questions can be asked how a former vibrant, manufacturing city with a population exceeding 1.8 million crashed to a city of ruins with just 700,000 citizens. Devoid of life and street lights, the city is terrorized by black and white jump suits instead of the traditional blue collars. It might sound like the plot to "Robocop," but the events that led to the financial collapse of a large American city resonates with so many working people all over the world because it exposed that public pension plans are not promises.
Government jobs are known to be lower-paid salaries relative to an equal private-sector job. But the trade-off in salary is off-set by better benefits and pensions. At least, that was the belief until Detroit unraveled and claimed its pension plan obligations as a liability to be considered in its bankruptcy decision. It is expected that all creditors will receive at most 20 cents to the dollar after proceedings are finalized: yes, that includes pension plan beneficiaries. With a world in turmoil and interest rates so low, are your pension plans safe?
DBRS evaluated the health of 461 defined-benefit (DB) pension plans world wide and is "mightily concerned." For the first time in a decade, the aggregate fund status was 78.6%, below the 80% minimum threshold they deem safe. More concerning was that 45% of funds world wide are in the "danger zone." For Canadians, news could not be worse. Not a single private DB pension plan had a surplus. Surprisingly, the government-run CPP had a surplus last year and is estimated to have enough funds for 75 years, although this is a defined-contribution fund.
Among the worst funds were three financial firms and two telecommunications companies. Check the list below to see if your DB pension plan is on the list, courtesy of DBRS.
Stay tuned for a second post explaining how a pension plan works and why they are failing.
Government jobs are known to be lower-paid salaries relative to an equal private-sector job. But the trade-off in salary is off-set by better benefits and pensions. At least, that was the belief until Detroit unraveled and claimed its pension plan obligations as a liability to be considered in its bankruptcy decision. It is expected that all creditors will receive at most 20 cents to the dollar after proceedings are finalized: yes, that includes pension plan beneficiaries. With a world in turmoil and interest rates so low, are your pension plans safe?
DBRS evaluated the health of 461 defined-benefit (DB) pension plans world wide and is "mightily concerned." For the first time in a decade, the aggregate fund status was 78.6%, below the 80% minimum threshold they deem safe. More concerning was that 45% of funds world wide are in the "danger zone." For Canadians, news could not be worse. Not a single private DB pension plan had a surplus. Surprisingly, the government-run CPP had a surplus last year and is estimated to have enough funds for 75 years, although this is a defined-contribution fund.
Among the worst funds were three financial firms and two telecommunications companies. Check the list below to see if your DB pension plan is on the list, courtesy of DBRS.
Stay tuned for a second post explaining how a pension plan works and why they are failing.
Summer Not so Hot for Stocks
If you're an investor looking to make some purchases, you may want to wait out the summer. There has been a huge shift in the market's sentiment over the last few weeks and traders are showing signs of fatigue. Many traders and professionals are predicting that this summer won't be so hot for stocks.
Last year, traders following the adage “Sell in May, stay away” lost out on a decent summer run up. But this year, the market is entering summer with a little less optimism. May 22 was a critical juncture as charts went bearish. For traders using candlestick charts, there were signals that bullish sentiment was fading. Ben Bernanke’s remarks about cutting back on monetary stimulus has introduced much needed volatility back into the market. For the first time this year, the Dow Jones Industrial Average lost value for three consecutive days this week.
Sentiment has shifted from a “buy on the lows” to “sell on the rallies.” The indices have been unable to break new highs and many large cap leaders have seen their shares revisit support levels instead of testing resistance. The charts do not look very favourable in the near to short term. Many stock charts look nearly identical to that of the indices, which does not bode well for traders looking to find leaders. Although the uptrend is still intact, the double retracement to the support trend line in a matter of days could be seen as a sign of sellers taking over.
Here are some big-name NASDAQ components that have showed some decay in bullishness.
Google (GOOG), a market leader, has not seen its shares climb back above $900. It was touted as being the next stock to hit $1,000, but those predictions will have to be delayed.
Shares of Netflix (NFLX) are developing a head and shoulders top. And if the stock trades below $200, shorts may come in.
Other leaders like Apple (AAPL) tried to reverse upwards but has seen its shares fall.
Facebook (FB) moved higher earlier in the spring courtesy earnings but have fallen to the lowest levels of 2013. Optimism has worn out as the company introduces insignificant updates to enhance shareholder value.
Volatility and uncertainty have taken focus no doubt. It appears big traders are placing bets that the market will make a big move in one way or another. Check out these option trades from Monday.
Staples (SPLS) reached new highs but saw one trader buy to open 10,000 September 15 put options for just $0.15 and then another 5,000 contracts for $0.85. The shares closed at $15.51 on Monday. Total volume on the day was 15,084. The trader makes profit if the stock falls below $14.62 by September or if the option values rise above $0.38.
Pfizer (PFE) options also pointed to a big move. A trader implemented a long straddle buying 65,000 $35 calls and puts for July - prices not available. A long straddle combines two different predictions that the stock will be above $35 and below $35 on the third Friday of July. Because this is not possible, the goal of the trade is that the winning option’s gain is larger than the losing option’s loss. The further the stock trades from $35 in any direction, the more the trader earns. This is a strange trade as the stock is $28 today.
On the other hand, Dupont (DD) was on alert on Monday when 15,000 October 57.50 calls were bought to open and 15,000 October 50 puts were sold to open. Some are saying a trader or firm is making a bet that it will break out above its resistance. However, taking the options route is a cheaper alternative than buying the shares out right, as it cost this trader just $0.30 a share versus $55 to control the 1.5 million shares.
Prior to the three-day loss, put options to open on Monday outgrew call options. On Monday, traders ready to capture on the decline bought to open 2.08 million put contracts versus 1.67 million calls. It appears that short-term traders were anticipating this decline. Get ready for an exciting summer, traders.
Last year, traders following the adage “Sell in May, stay away” lost out on a decent summer run up. But this year, the market is entering summer with a little less optimism. May 22 was a critical juncture as charts went bearish. For traders using candlestick charts, there were signals that bullish sentiment was fading. Ben Bernanke’s remarks about cutting back on monetary stimulus has introduced much needed volatility back into the market. For the first time this year, the Dow Jones Industrial Average lost value for three consecutive days this week.
Sentiment has shifted from a “buy on the lows” to “sell on the rallies.” The indices have been unable to break new highs and many large cap leaders have seen their shares revisit support levels instead of testing resistance. The charts do not look very favourable in the near to short term. Many stock charts look nearly identical to that of the indices, which does not bode well for traders looking to find leaders. Although the uptrend is still intact, the double retracement to the support trend line in a matter of days could be seen as a sign of sellers taking over.
Here are some big-name NASDAQ components that have showed some decay in bullishness.
Volatility and uncertainty have taken focus no doubt. It appears big traders are placing bets that the market will make a big move in one way or another. Check out these option trades from Monday.
Prior to the three-day loss, put options to open on Monday outgrew call options. On Monday, traders ready to capture on the decline bought to open 2.08 million put contracts versus 1.67 million calls. It appears that short-term traders were anticipating this decline. Get ready for an exciting summer, traders.
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