Is it the 1950’s again? The financial war is over!

There is a plethora of articles and blogs out there desperately trying to find a period comparable to now, in order to get some understanding of what markets might have in store for us over the next several years.  After three decades in the investment business, the only thing I can say with certainty is that such comparisons just don’t work.

George Santayana (December 16, 1863 – September 26, 1952) the philosopher and man of letters, is often quoted: “Those who cannot learn from history are doomed to repeat it.

It’s true people will make the same mistakes over and again, but history never actually repeats itself.  Trying to forecast the future is absurd, and so it must be even more ridiculous to expect that the future will be similar to some time period long ago.  Nevertheless, it’s winter and all my friends are on vacation so I’ve nothing else to do.

Post-War Reconstruction: In my simple mind, we’ve just fought a global war against financial corruption.  The weapon of mass destruction?  The ‘derivative!’ These things managed to infiltrate the entire global banking system and almost brought it crumbling down.  Like most wars, it’s difficult to put a pin into when things flipped from a crisis to all out war, but let’s say the seeds were planted when the U.S. Senate tried to introduce a bill in 2005 to forbid Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) from holding mortgage-backed securities (pretend capital) in their portfolios. That first cannonball missed the mark when the bill failed to pass.  By 2007 the two government sponsored entities were responsible for 90% of all U.S. mortgages, and the fly in the ointment was the use of ‘derviatives’ instead of real capital to hedge their interest-rate risk.   Banks did the same thing but much more aggressively. What followed is a long story we’ve been living for years.

Paul Volcker once said, “I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence.”  Well, we’ve plenty of evidence now that financial innovation led only to the mass destruction of wealth.

When the foundation fell out from under us (value of the derviatives dropped) we went to war in earnest.  The list of casualties like Lehman Brothers Holdings Inc. (announced September 15, 2008 it was bankrupt) just kept getting longer.

I believe the war ended six years after that failed 2005 Senate bill – in the summer of 2011. You can disagree, but your opinion is as meaningless as this whole exercize. (Laughing out loud.)

Way back when World War II (1939 – 1945) ended, governments around the globe began to print money and spend to rebuild the wealth that had been destroyed.  Isn’t this precisely what we’ve been doing since our financial crisis decimated wealth on a global scale?

So maybe some of what happened in the 1950’s post-war period will happen again?

In 1949 there was a brief struggle with the threat of deflation (and again in 1954) but for most of the decade inflation remained steady between 0% to 3%. We too saw the threat of deflation briefly in 2009.  However since then inflation has been fairly steady:  1.5% (December to December) in 2010 and 3.2% in 2011 in the U.S.  Although T-bills are currently paying a negative real rate of return (yields are below the inflation rate) there will come a time soon when investors insist on earning something or they just won’t hold them.  Short term rates will climb as they did throughout the 1950’s.

Prediction #1:  T-Bills will begin to rise until their returns cover the rate of inflation (see chart).

What happened in the stock market back then?  Government spending to rebuild infrastructure and create jobs had a significant impact, because arguably the 1950’s was one of the best if not the best decade for making money in the stock market.  Unfortunately, we only have reliable data for the Dow Jones Industrial Average dating back that far (okay, there might be more data out there but I’m surely not going to go looking for it). 

At the end of 1949 the Dow was at 200.13 and by the end of 1959 it had climbed to 679.36.  Excluding dividends that equates to a (IRR) return of about 13% per year for a decade.  As always lots of volatility had to be endured in stocks, but in the long run the reward was not shabby!  On the other hand, in Treasury bonds you might have averaged a 2% return, but suffered an actual loss in 5 out of the 10 years.

Prediction #2: Global growth fueled by government initiatives will translate into healthy returns on average in stock markets for several years to come.

Are we doomed to repeat history?  Although the 1950’s turned out okay, a wild ride was to come during the following couple of decades.  Easy money and inflation would eventually get the better of us and although there were some very good years for investors in the stock market (and those invested in shorter term T-bills for sure), inflation mayhem was on its way.

All we can hope for is that today’s policy makers have studied their history.  If we allow inflation to get out of control, interest rates will skyrocket like they did through the 60’s and 70’s. Younger folks today will have to suffer rising interest rates (mortgages, car loans) of the sort that created havoc for decision-makers and choked economic growth to a standstill for us older generations back in the day.

It’s true that if we don’t learn from history, we can and will make the same mistakes over again.  But I also said history does not repeat itself.  Although we somehow managed to eventually wrestle the inflation bogieman under control before, this does not mean we will be so lucky next time around.  And it’s a wealthier more technologically advanced world we live in now….which means we’ve so much more to lose if we really screw things up.

Prediction #3:  If governments don’t slow down their spending, bond investors will really get burned.

My instincts tell me that 2013 will be a happy New Year.  And bear in mind that if none, any or all of these predictions come true it will be an unadulterated fluke.

 

 

 

 

Malvin Spooner.

 

 

Anywhere use of the company Smartphone is great for hackers, not so great for the bottom line

By Terry Cutler

Where technology goes so do hackers.  Where hackers turn up, usually means bottom line problems for companies, and these unscrupulous hackers are already snaking and slithering unknowingly in many cases in the back end of company networks; through employee mobile devices like Smartphones and laptops.

So it is safe to say that where Smartphones go, specifically these devices in the hands of executives, a hacker with malicious intend will follow and with the rate of Smartphone adoption and capabilities; anywhere from access to email, applications, the Internet and company data, executives are using their devices to stay in touch with family and co-workers through social networks, all the time building a larger and larger database, all the time adding data to their applications.

It may be good for business, but the appeal for hackers with mal-intent is obvious.  The build up of data, times the growth in Smartphone usage, means that one-day a massive attack on sensitive company data could have begun its path to destruction through a Smartphone or laptop.

In a nutshell, a Smartphone is a cell phone to make phone calls, but also adds in features that normally would be found on computers or in the past on what was known as Palm Pilots. In the past, the ability to send and receive e-mails, search the Internet and work on office documents was restricted to the office or laptop computer.  The palm pilot could sync with a computer, but for the most part was a secure personal database, known as a digital assistant that stored data. The biggest security concern was losing the storage device and having someone using the information for mal-intent.

So now we can create and edit Microsoft Office documents, download apps with personal and business managers, personal assistants, or driving GPS directions; the list of apps is endless. What these Smartphones can do now, they will be doing twice as much in the near future.

The list of possibilities is also endless for a hacker. What the hacker can do today may also be twice what he or she can do tomorrow. Data theft is at the forefront of these Smartphones because these devices are excellent tools to steal user data.

In 2010, Canadian Mobile Ad Placement revenue grew at a rate of 105% year-over-year, driven primarily by Search and Mobile Display/Sponsorship according to Mobile In Canada: A Summary Of Current Facts and Trends http://www.iabcanada.com/wp-content/uploads/2012/04/IABCanada_MobileInCanada_041012_FINAL.pdf

The study reported almost 85% of Canadians are cell phone subscribers and 45% of the latter have Smartphones. Half of Canada’s Mobile subscribers are monthly Internet users, dominated by 18-44 year olds, mostly using the device for monthly Internet activities, downloaded apps and browsing the study concluded.

So when companies issue Smartphones to employees without security hoping for a bottom line reward, they may be asking for a lot more problems, which can indeed bottom out the bottom line.

 

 

 

 

2012 Taxes – some quick reminders

With mid-December upon us, I wanted to just do some quick reminders for year-end!

a) Don’t go into debt on credit cards just because it is Christmas!
b) Tax Free Savings Accounts (TFSAs) – to use your 2012 allowable limit, you must contribute BEFORE December 31st, 2012. There is no 60-day grace period as there is with RRSPs and Spousal RRSPs. The TFSA limit increases for 2013 to $5,500.
c) Registered Educations Savings Plans (RESPs) – similar to TFSAs, there is no 60-day grace period to get your contribution into the plan for 2012 purposes and obtain the maximum Canada Education Savings Grant (CESG).
d) If you need to maximise your 2012 Medical Expense Claim, and need prescriptions refilled, glasses or contact lenses ordered or maybe hearing aids purchased – do them now before December 31st, 2012 or you won’t be able to use them for your 2012 tax return claim. Also consider any needed dental work.
e) Charitable donations also run on a calendar-year basis so mail those cheques now or do it on-line. Remember, once you have donated $200. in a tax year, the Federal Tax Credit on all donations in excess of $200. increase from 15% to 29%!
f) For those of us who are self-employed and are considering when to purchase software upgrades, software updates (for programs that are income-tax sensitive) or new hardware, consider purchasing them now – some very good deals are available and thy should count toward 2012 allowance business expense deductions. The same applies to car servicing or repairs that are due – including switching to your snow tires!
g) For students, pay for your 2013 tuition fees before the end of December and the deduction can be applied to your 2012 tax return – particularly if you have income from a part-time job.

Be happy, be safe and look forard to a happy and successful 2013! Cheers

Invest like you shop and your savings won’t drop!

Huge lineups of shoppers looking for deals on Black Friday and the massive retail sales that occur the weeks after Christmas are testimony to the ability of people to shop wisely.  I know many families that defer buying expensive gifts (for their kids but especially for themselves) until after the Christmas holiday in order to save hundreds of dollars.  So why are people so bad at investing their money?

A recent study by Blackrock, the largest money management firm in the world, confirmed what all of us know already:  The average investor sucks at investing.  Despite the fact that the skills and emotional fortitude necessary for successful shopping are pretty much applicable to the task of investing one’s money, it seems the average person just won’t use these abilities when making important investment decisions.

According the the American Research Group Inc., the average shopper plans to spend $854 on gifts this year. Let’s assume it will be the same next year and the next.  Virtually everyone realizes that since they’ll be spending the money anyway, shopping smartly and getting all gifts at perhaps a 20% lower price leaves them better off.  Wealthier in our example by more than $500 after three shopping seasons in fact!

But when it comes to buying investments, investors prefer to pay a premium.  What proof do I have?  Many years of observation, but the results speak for themselves.

The average investor managed to earn less than virtually all asset classes at his disposal earned over ten years according to the Blackrock study.  To be perfectly honest, I’m surprised the average investor did so well.

I’m not sure about how the study was conducted.  If everyone that participated had a home and kept all their money in a checking account….the result wouldn’t be very surprising would it?  Let’s assume that the sample was comprised of real “investors.”  Some with homes and minimal savings, but others actively investing serious money in both bonds and stocks. Where would they be going wrong?

It’s hard to imagine retail investors trading aggressively in the bond market, but assuredly a significant amount of their long term savings could include fixed income securities.  It’s equally difficult to conceive that the lion’s share of their savings might be in gold or oil.  Likely, the average investor does include stocks in his retirement savings and participates actively in decisions.  He/she would either use an adviser to implement asset allocation decisions or occasionally channel money into or out of funds.

Consider one proxy for stocks, the S&P 500 Index over roughly the same time frame as the study.  It’s certainly been a rollercoaster, but a simple buy and hold strategy would have contributed nicely to the average investor’s nestegg.  In my opinion the only way the average investor could have done so poorly is by losing money making poor investment calls along the way.

Generally, folks wait until the stock market has climbed quite a long way upward before committing their own money – see the “Buy” indicators on the graph?  This decision is made based on the past performance charts and tables that are promoted ad nauseum by the investment industry when the rates of return earned by their funds have been excellent.

Even though past performance means nothing, for some reason impressive historical returns awaken the greed in all of us, just like an extremely large lottery jackpot suddenly inspires many more people to go out and buy lottery tickets.

Unfortunately, great historical performance is very often followed by lousy market environments – evidenced clearly by the graph of the S&P 500 Index over the ten year period.  As anxious as people are are to pile into a market that has been rewarding (after-the-fact), they are just as eager to get out of a losing situation that leaves them feeling they’ve been suckered.  The average investor sells at the worst possible time.  A few of these buy high/sell low episondes is sufficient to reduce the overall return he/she has earned in other assets like bonds or the family home.

Put another way, the shopper in you is always on the lookout for discounts while the investor is more than happy to pay a premium to the list price.  Greediness completely overides any bargain-hunting intuition.

Back to our shopping example.  Imagine that you can shop wisely and get gifts at prices 20% below list.  But also imagine that you and your family can use those gifts for a time and then sell them at a 20% premium to list.  Crazy?  You can actually do this with your investment portfolio.  Apply those shopping skills to your savings and you’ll be surprised how much better off you can be.

 

 

 

Malvin Spooner.

 

 

 

 

 

Bullying at work – the total cost – financial and societal Part 2 of 2

Outside the financial costs, the personal costs are also of major concern to health-care professionals. Treatments for depression, stress, heart conditions, ulcers, other forms of gastric and intestinal stress, PTSD, internal trauma, alcohol abuse and drug abuse. The physical, emotional and mental abuse of families and friends. Other mental illnesses including paranoia and schizophrenia are common as is bi-polar disorder. In extreme cases, severe and unrestricted violence against themselves – including suicide and against others including events such as robberies, assault and in some cases and situations, even murder. These are all potential consequences to society that result from bullying. Is it really worth it? Bullying tears families and communities apart and it is preventable. Are you part of the problem or part of the cure?

“If you turn and face the other way when someone is being bullied, you might as well be the bully too.” ~Unknown

Inside family units, bullying is a well known, if very well hidden issue. Yes, we hear about parents abusing and bullying children but we don’t hear as often about siblings bullying or abusing each other – and it is not always the older child bullying younger one – I know of several cases where the reverse is true. There is no “typical” situation, which makes it tough to help the victims and educate the perpetrators or provide punishment as appropriate. Please remember, not all abuse is physical – the hidden damage of emotional and mental abuse is very often hard to identify and treat. Victims of emotional and mental abuse sometimes even appear to live outwardly “normal” lives, but on the inside are ready to explode with sometimes terrifying consequences to themselves and others – most often directly impacting those closest to them.

“By being a bully, you show everyone what an inferior coward you are.” ~Unknown

Psychologists, psychiatrists, family medical care providers and counsellors all deal with the effects on a daily basis. Unfortunately, law enforcement and other first responders see the consequences when no intervention or support has been provided. Healthcare practitioners and paramedical professionals have long known that bullies act out of feelings of inadequacy, jealousy and fear but the driving forces behind those issues are very challenging to define. They tend to use the bluster, self-aggrandisement and brash behaviours to cover their feelings – they are actually crying for help but too often that cry goes unheard until the damage has been done to one or more other people in their lives.

I have included several quotes in this article that can provide a starting point for readers to consider this issue. I suggest that to one extent or another, everyone’s lives have, are or will be affected by some form of bullying and/or related abuse. Can we do anything less than exert our best efforts to eradicate it from our lives?

“Respect – simple respect. I expect nothing more and I will accept nothing less.” From the Emmy Winning Series MASH – Margaret Houlihan talking to Hawkeye Pierce.

In closing, please think about the words of the famous song by Aretha Franklin:
“R – E – S – P – E – C – T”

These are but a very few links to sites that offer information on workplace bullying, abuse and violence. I urge you to use these and other resources to help yourself and others.

http://www.bullyingcanada.ca/index.php

http://bullyinworkplace.com/

http://www.bullyonline.org/

http://www.workplaceviolence.ca/

Bullying at work – the total cost – financial and societal Part 1 of 2

“Courage is fire and bullying is smoke.” ~ Benjamin Disraeli. For non-history buffs, Benjamin Disraeli was one of England’s most important Prime Ministers and noted around the world for his oratorical skills and his strong beliefs – and I subscribe completely to his perspective.

This article is a very large challenge for me to write. Unfortunately, I know first-hand of what he speaks from school, to various work locations and elsewhere – you can check out a blog I did by clicking on this link (http://money.ca/you_and_your_money/ian-r-whiting/) and go back to early October 2012. Recognition of bullying against children is coming to the fore and many new programs are being developed to help the victims and to re-educate, and as necessary, ensure there are severe consequences to the bullies.

What about bullying at work? Does it happen – absolutely and I had the misfortune to experience some of that too – but don’t feel for sorry for me – it simply made me more determined than ever to succeed – and I did!

“Bullies need to make others feel insecure because they are insecure.” ~Unknown

At work, it takes many forms – this is not an exhaustive list but simply representative:
a) verbal abuse such as public pressure to swearing, name calling and public belittling;
b) standing too close in a threatening manner or throwing objects while displaying aggressive behaviour and a speaking or shouting in a loud voice;
c) emotional abuse often takes the form of undermining a co-worker’s results, efforts, resulting work and their professional or business credibility and can lead to keeping track of and reporting every minor mistake or error;
d) character abuse often comes from “water-cooler” or “lunch-room” gossip, lying about another someone else or deliberately damaging their reputation; and
e) professional abuse through actions such as continually finding fault with their work in public forums, talking over them at meetings or ignoring their input.

Bullying is a lack of respect. It is often obvious – as you can see from the previous points, but it’s more subtle forms often cause more damage. It is responsible for increased absenteeism, a lack of workplace motivation, poor performance, employee dissatisfaction, increased turnover and a lack of trust together with the absence of team building with other workers. The financial effects of these consequences are enormous. Productivity always drops. As a result of the pressure on the abused employee, increased error rates are inevitable, work has to be re-done and even the non-abused staff are faced with negative consequences. All of this results in higher costs for the same end result – more sick-time, absenteeism, more stress-related health benefit claims. Added up across Canada, the cost is several billion dollars according to several studies. That cost is passed on to everyone – we all pay.

“Only cowards are bullies.” ~Unknown. It causes substantial damage to self-esteem and the ability to contribute at work. It can also be responsible for depression, physical illness and severe trauma and is some cases PTSD. Bullying is never acceptable in the workplace – or anywhere for that matter.

Security not included ?? real lessons you should know about before you hire your next IT service provider

By Terry Cutler

A recent vulnerability audit and stimulated hacking scenario on a website belonging to a small non-profit uncovered 25 possible vulnerabilities, and according to the director and his board of directors such a problem should have never occurred.

“When we created the site two years ago we assumed that our web developer would consider security of the site as a normal consideration,” said the director, who asked to remain anonymous for security reasons. “Actually, we are a small association with a small budget and a small website. Who would think that anyone would want our information?”

It is a prevailing attitude, one that has implications on the bottom line.

As the head of an association or business, you expect your outsourced IT group or web developer to be handling security, but are they really? The answer to that is a resounding no. Website creators or managed service providers are not in the business of testing or coding  your website to security best practices.

It is assumed that they are.

Not long ago, I ran a 45-minute rapid audit for the website of a Door and Frames supply manufacturer and discovered a vulnerability that allowed an attacker to modify the website which would deliver an infected PDF file to every site visitor. Breaking it down, any visitor who didn’t have an updated Adobe reader could be compromised. After contacting the web master I learned he didn’t feel the need to fix it or insert any protection.

“If I’m paying my outsourced IT group several hundreds of dollars a month, I assume they’re taking care of my security as well since it falls under IT. No one will hack my site because there’s nothing valuable on it,” said the owner of Doors and Frames.

The common theme in the industry is that providers have adopted a “sweep the incident under the rug” attitude as a best practise without advising the client. The hope is that it will go away. That assessment may be too harsh. Most developers are still making the transition from basic web development to a more secure built-in security development.

In the interim, directors and owners are caught staring like a “deer in headlights”.

Small businesses are the perfect victims for the unscrupulous and this is directly linked to a small, and sometimes non-existent security budget. The unscrupulous are not after your information but want to use your systems as the middle man to break into others and more likely a mega-companies’ systems with more to lose.

In other words, they are using your network to frame you.

The big problem for the unwilling and unknowing middle man is that when a security forensic team shows up and uncovers what happened, law enforcement will be paying you a visit since it was your system, or someone you employ, that have been led to believe committed the crime.

Many small businesses are simply not aware of how vulnerable their sites are to hackers. While developers in the past were not trained to build in security, their roles are changing. More certified training is being offered, which lays the basic foundation required by all developers to produce applications with greater stability, posing lesser security risks to the end-user.

 

When Internet security takes a back seat

By Terry Cutler.

Why is it that those in charge of protecting the company’s security network, that database of sensitive customer data – bank cards, credit cards, bank accounts and personal information – don’t seem to spend the money to protect it? This is a question that is baffling to those in the data protection business, and may be more baffling in the years ahead.

CEOs and Chief Security Officers (CSO) do not always see eye-to-eye on this problem. The CEO is budgeting the overall books, while the CSO is focused on his task, and can only submit for his budget. This is understandable. However, a recent survey (http://www.cioinsight.com/c/a/Security/Information-Security-Views-of-CEOs-CISOs-Diverge-Sharply-418309/) released by Core Security which highlights and demonstrates this separation over the security stance of the same company who has the potential to drop a company in a “click”.

Staggering is the first word that comes to mind after a quick read of this benchmark. Only 15 percent of CEOs said they were very concerned about an attack on their network, and didn’t think their systems were under attack or even compromised. There is a large gap between CEO and CSO thinking.

Sixty percent of CSO’s reported being very concerned about attacks and reported their systems were already penetrated. Yet with all the breach threats filling the news, and the numbers in dollars lost rising with each attack, or even a threat, the report unearthed that 36 percent of CEOs don’t deem it necessary to get a security briefing from the member of their own security team. It is inevitable. With large customer databases becoming the norm with big companies, the norm for hackers is to go after the company. Decide this at the board level, or decide how to fix it later, of course at a loss of reputation and customers and millions.

It isn’t fashionable to call Internet security unimportant, yet CEO’s continue to scoff at filtering money in that direction. This is risk management of the grandest form. One breach can cost millions. As I have written in previous blogs, that extra money may go to training that one employee not to “click”, or maybe not?

It’s the CEO’s call.

When the complacent CEO gets hacked

By Terry Cutler

When that home phone rings at a time of morning when sleep has moved into deep R.E.M., and the text messages start appearing it could only mean one thing to a CEO; there is a problem with the company security net. This could cost millions.

From best-case scenario to worse, you go over it in your head. Best Case? The security team caught a small breach. It isn’t enough to be overly alarmed, but it does warrant a phone call. Worse? Your monitoring system has spotted what security is calling “highly” suspicious activity over the company network. They are addressing the problem.

When the phone is answered you are told it is the ladder and the situation is expected to get worse.

This could mean even bigger money problems. Nasdaq, Sony, Citibank, whos hacks cost millions. Citibank’s hack attack (http://moneywatch.bnet.com/saving-money/blog/devil-details/citi-hack-attack-6-things-you-must-do-now/4769/) in June of 2011 exposed personal information about some 200,000 customers. Since 2005, some 533 million personal records have been exposed, according to the Privacy Clearing House (https://www.privacyrights.org/). Sony’s 2011 hack of its PlayStation now reports that up to 70 million people had their personal data in jeopardy to hackers after a breach in 2011. Sony’s cleanup was estimated at 2 billion dollars.

In the meantime, the overnight customer service representative is reporting more than the usual complaints of unauthorized debits to their credit cards and banks, and your customer service department is overloaded with irate customers.

You’re next move? Admit it: you’ve been hacked.

Three credit card companies are on hold. Enough, you say. You’ve known all along, and on your way to work, the longest drive of your life. The year 2011 has been called the year of the hack, or at least more companies are admitting their security had been breached. Time to minimize the damage. On the drive to the office, you order company representatives to post a notification letter on the website, explaining the situation and assuring customers that the company is working on the problem. Offer credit-rebuilding services and flag unauthorized use of credit cards, and offer free stuff.

As CEO, you are aware of the value of reassuring customers and keeping them as valued customers. It’s the company’s bread and butter. A company’s reputation if founded on how customers are treated, and including them in the problem through notifications will help maintain the established reputation. Your head security consultant meets you at the door. He informs you that the hack is not as bad as first thought. In fact, only a few files were lifted, but the network was breached, and the consultant reminds you that security is not a reactive game, but one with a proactive approach.

What he is saying is budget more money for security – it’s better that way. Or pay the price of a large-scale hack!

The decision is clear, or is it?

Next week: why companies don’t budget for an eventual hack

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