Clippings 2017

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AltaRed
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Re: Clippings 2017

Post by AltaRed » 19 Nov 2017 18:46

I think there is a place for bond ETFs in the corporate market, especially the higher, but still investment grade, corporate market due to default risk, but otherwise, it is about convenience. I'd been able to pick through Scotiia's inventory for bonds every 6 months or so and sometimes I will find something that they have low inventory on, e.g. $30k left on corporate bond X. The Ask seems to appear (to me) perhaps 5-10bp better than other equivalents just to move it if out of inventory. Might be just my imagination since a lot goes into pricing, including nuances on maturity date and credit risk even within a given credit rating.
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Re: Clippings 2017

Post by ghariton » 19 Nov 2017 21:56

I agree that retail investors can get a bad deal from a bond desk, especially if the bond is a corporate issue with little liquidity. But for government securities and a long expected holding period to maturity (over ten years), the markup isn't that bad. As well, I get to pick a duration that is convenient and a maturity date that suits me.

If I were to hold corporate bonds, I likely would resort to a bond index fund. But for me, the extra yield of corporates just isn't worth it.

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Re: Clippings 2017

Post by patriot1 » 20 Nov 2017 06:57

longinvest wrote:
19 Nov 2017 18:36
patriot1 wrote:
19 Nov 2017 18:28
longinvest wrote:
19 Nov 2017 18:12
HISAs and GICs are cash investments. As such, their value doesn't fluctuate, unlike bonds which have a fluctuating market value.
The value of a GIC fluctuates just like a bond with the same coupon. You just aren't able to sell it.
As far as I understand, the value doesn't fluctuate.
The value of any debt security is the present value of its future cash flows. If interest rates go up, its value goes down and vice versa. The difference between a GIC and a bond is with a GIC you don't have a market which trades at that value. Your bank statement always shows it at face value of course, but that's not what it's actually worth, because you would not pay the same today for a GIC with the same future cash flow.

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Re: Clippings 2017

Post by longinvest » 20 Nov 2017 07:17

patriot1 wrote:
20 Nov 2017 06:57
longinvest wrote:
19 Nov 2017 18:36
patriot1 wrote:
19 Nov 2017 18:28

The value of a GIC fluctuates just like a bond with the same coupon. You just aren't able to sell it.
As far as I understand, the value doesn't fluctuate.
The value of any debt security is the present value of its future cash flows. If interest rates go up, its value goes down and vice versa. The difference between a GIC and a bond is with a GIC you don't have a market which trades at that value. Your bank statement always shows it at face value of course, but that's not what it's actually worth, because you would not pay the same today for a GIC with the same future cash flow.
Just tell me how I can sell a GIC at a higher price than face value, when interest rates go down, and I'll concede the argument. Otherwise, I stand by my statement: a GIC is a cash investment which does not fluctuate in value (except for potential penalties, when redeemed early).

While one could estimate a theoretical value for its residual payment stream, the actual price of a GIC does not fluctuate with this theoretical value.
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Re: Clippings 2017

Post by Park » 20 Nov 2017 07:37

longinvest wrote:
19 Nov 2017 18:43
I invest into the total bond market; I don't concentrate my investments into short-term bonds.
I'm primarily a taxable investor. I divide asset classes into cash, bonds and stocks. After taxes and inflation, the only asset class where I can make money is stocks. Why have cash and bonds? Cash is a source of liquidity and dilutes out the volatility of stocks and bonds. Bonds, especially government bonds, can diversify equity risk. However, if you've been through a bad bear market in stocks and it didn't bother you, the ability to diversify and dilute equity risk is less important. Bonds are also a source of stable income. Over a stock market cycle (minimum of 5 years), that is important.

Some bonds can hedge inflation, at least in tax advantaged accounts. Even in an RRSP though, the tax on inflationary gains will eventually have to be paid. I would agree that RRBs in a TFSA do hedge inflation; you will pay a price of muted growth though. And stocks historically have been reasonably good inflation hedge over spans greater than 5 years. I've seen data from the Weimar Republic in the 1920s consistent with that.

Basically, cash and bonds are risk management tools. A good way to manage portfolio risk is to having a growing portfolio, so stocks manage risk also. But there are certain niches where cash and bonds manage risk better.

Bonds have fixed income and fixed return of principal. Stocks have variable income and variable return of principal. Bond funds turn bonds into sluggish stocks. With a bond fund, I've lost some stability of income, which is one of my reasons to own bonds.

However, with corporate bonds, I want to diversify and the cost of buying corporate bonds may not be low. I've read that American investors have not historically been rewarded for taking the credit risk of corporate bonds. I don't know of any nonAmerican data. The one exception to this lack of reward has been short term corporate bonds. So one can make a case for a short term corporate bond fund. But such a fund is competing with GICs and HISAs. It's not obvious that a short term corporate bond fund is a better choice for me than GICs and HISAs.

From what I understand, the fixed income market is dominated by nontaxable investors. Whether a bond is discount or premium is less important to a nontaxable investor. As a taxable investor, why not take advantage of that?

At present interest and inflation rates, it's difficult (impossible?) for me to make money in cash or bonds, even in my tax advantaged accounts. And I'd prefer to use my tax advantaged accounts for stocks, where the possibility of making money is greater.

Edited to include the following: about bond funds turnings bonds into sluggish stocks, this is more of an issue for funds having long term bonds than those with short term bonds.


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Last edited by Park on 20 Nov 2017 09:50, edited 1 time in total.

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Re: Clippings 2017

Post by Shakespeare » 20 Nov 2017 08:53

While one could estimate a theoretical value for its residual payment stream, the actual price of a GIC does not fluctuate with this theoretical value.
There is no actual price because there is no actual market.
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Re: Clippings 2017

Post by longinvest » 20 Nov 2017 09:08

Shakespeare wrote:
20 Nov 2017 08:53
While one could estimate a theoretical value for its residual payment stream, the actual price of a GIC does not fluctuate with this theoretical value.
There is no actual price because there is no actual market.
Exactly*. With a cashable GIC, it's explicit that its value doesn't fluctuate. For non-cashable GICs, we know that when a holder dies, its principal is paid back, not affected by the "theoretical value of the residual payment stream".

* Except for AltaRed's claim about the existence of a secondary market; would such a thing even be legal?

So, I would summarize this as: a GIC is a cash** investment. It is illiquid except when cashable.

** A fundamental property of cash is that it doesn't fluctuate in value.

For those who wish to dispute my statement, I'll repeat what I wrote previously:
longinvest wrote:
20 Nov 2017 07:17
Just tell me how I can sell a GIC at a higher price than face value, when interest rates go down, and I'll concede the argument.
Last edited by longinvest on 20 Nov 2017 09:17, edited 1 time in total.
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Re: Clippings 2017

Post by brucecohen » 20 Nov 2017 09:15

Shakespeare wrote:
20 Nov 2017 08:53
While one could estimate a theoretical value for its residual payment stream, the actual price of a GIC does not fluctuate with this theoretical value.
There is no actual price because there is no actual market.
There is an actual market -- sort of. If the issuer has declared a GIC to be "transferable and assignable" a deposit broker will buy it. But the market is very thin and such sales are extraordinary so you won't get anything approaching actual value. I don't know if such sales are available for GICs held in registered plans.

GIAs -- the life insurance industry form of GIC -- can be sold back to the issuer before maturity with a "market value adjustment" that works like bond pricing. But this too is a captive market so it's doubtful that you'd get full value.

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Re: Clippings 2017

Post by DavidR » 20 Nov 2017 10:15

Shakespeare wrote:
20 Nov 2017 08:53
While one could estimate a theoretical value for its residual payment stream, the actual price of a GIC does not fluctuate with this theoretical value.
There is no actual price because there is no actual market.
I have seen evidence of a secondary market. I have a client with a full service brokerage who purchased a number of GICs on the secondary market a few years ago. I suspect the seller was the the same brokerage firm, and was motivated to sell. But such a market would not be very active I would think, and there would not be a quoted bid-ask..

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Re: Clippings 2017

Post by AltaRed » 20 Nov 2017 11:07

DavidR wrote:
20 Nov 2017 10:15
I have seen evidence of a secondary market. I have a client with a full service brokerage who purchased a number of GICs on the secondary market a few years ago. I suspect the seller was the the same brokerage firm, and was motivated to sell. But such a market would not be very active I would think, and there would not be a quoted bid-ask..
RBC told us they could 'flog' the GICs through, I believe, Dominion Securities....so that would jive with perhaps a DS client* interested in buying up unmatured GICs at a very steep discount. True, there is no Bid/Ask and RBC was clear that selling on the secondary market was not a negotiation, i.e. the seller simply takes their chances and the price wil be whatever the offer is. Selling blind so to speak.... so no one would in their right mind sell GICs on the secondary market if there were alternatives (and conveniently there is....at a price of course).

So it is indeed correct there is a secondary market but there is no actual price that can be quoted. Thus why our FIs show the accrued interest on top of principal value for multi-year compound GICs (the only type I buy in registered accounts) as the price of the GIC. It also serves the purpose for declaring annual accrued interest in taxable accounts. Needless to say, this discussion is kind of theoretical and has minimal practical application.

* It would be interesting for us here if someone with a full service brokerage account would query their broker to see if there is an 'opportunity' to buy unmatured GICs at significant discount. I suspect the client would have to be a special one...i.e. the opportunity would be restricted to 'favoured clients'.
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Re: Clippings 2017

Post by kcowan » 20 Nov 2017 15:15

This reminds me of MILs portfolio when I was managing it. Somehow GICs and Bond were different even though they would all deliver face value at maturity. Her FA was buying high interest bonds and paying a premium so she could show a high interest rate on each statement. When I took it over, I claimed the capital losses on her CRA submission until we got out from under all that nonsense.

Then I started buying bond offerings at IPO to avoid commissions. Spare us from compartmentalized thinking!
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Re: Clippings 2017

Post by ghariton » 20 Nov 2017 18:21

Reminds me of the mark-to-market debate of a few years ago. Should financial institutions be obliged to show their fixed income holdings at current market value, or should they be allowed to show them at book value (or face value)?

"Progressive" thought wanted compulsory mark-to-market. This is what helps you measure solvency, they claimed. Then the financial crisis of 2007-2008 came along, and many securities' market prices tanked. In such cases, mark-to-market showed many financial institutions to be insolvent, triggering covenants and with the potential for drastic consequences. So mark-to-market became less popular.

I thought that the problem was with the way the covenants were written, not with mark-to-market. But that's another debate. The point here is that it is always possible to calculate a market value. What's up for debate is whether it is meaningful. In turn, that depends on what kind of decision, if any, turns on it.

So if one is looking at potential insolvency, perhaps mark-to-market should be calculated over a longer time period, to smoothe out fluctuations. If the purpose is to serve as collateral, the term of the credit is relevant. If the decision is to buy or sell a security, the present market price is what is relevant. If there is no present market price, one can be imputed using the futu5re cash flows, discounted at an appropriate discount rate. What is an appropriate discount rate? The investor's expected rate of return for this kind of investment (taking into account the various kinds of risk). Again, the discount rate will vary, depending on the type of decision your analysis is intended to support.

The analogy is with real estate. You may have a unique property, with no transactions of a similar property for a reference point. But your unique property still has a market value, whether it is for the tax appraiser or for probate, or for securing a mortgage.

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Foreign Small Caps As A Diversifier

Post by Park » 23 Nov 2017 08:06

I've heard the argument made that an ETF investor should consider having an ETF that invests in foreign small cap stocks. The rationale is that foreign small caps correlate less with the domestic stocks market, and are therefore better diversifiers. It should be noted that this comes from Americans. I've never heard this discussed about Canadian investors.

http://beta.morningstar.com/articles/83 ... ation.html

The following is from an American perspective; the author is discussing correlation of US stocks with nonUS mid and large cap stocks vs. the correlation with nonUS small cap stocks.

"Clearly there has been a gap, with the advantage historically going to small caps, but it hasn’t been huge. A small diversification benefit such as this would not appear sufficient enough to justify a stand-alone investment in foreign small caps. Furthermore, the rolling correlations in Exhibit 3 show that that gap between large and small caps has been shrinking. What to do? I previously wrote about the risk/reward relationship in foreign small caps here and concluded that gaining access to small caps was probably best accomplished with a broad-market fund that covers the entire spectrum of large, midsize, and small companies. That conclusion still stands. Any performance or diversification advantage that foreign small caps can offer will be baked into the performance of these more broad-based funds."

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Re: Clippings 2017

Post by CROCKD » 24 Nov 2017 13:45

" A verbal contract isn't worth the paper it is written on " Samuel Goldwyn
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Re: Clippings 2017

Post by AltaRed » 24 Nov 2017 19:28

I believe some banks have eliminated their Interac e-transfer fees. Others charge $1 or $1.50. Scotia charges $1 except for select 'free' periods now ant then. I have been ragging on them to get competitive.

I have been using Interac e-transfers as much as possible with various contractors, handymen, etc. Some are progressive and others still have a ways to go to get into this century...I razz them about getting with the times. It absolutely pisses me off when I have to write a cheque.
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PB To Predict Drawdowns

Post by Park » 26 Nov 2017 14:01

http://www.starcapital.de/files/publika ... imling.pdf

Above is a link to a paper by Norbert Keimling. Previously, he has published research showing the ability of CAPE to predict stock market returns over the next 10-15 years. In the above publication, he confirms that, and also shows that CAPE correlates with drawdown risk over the next 3 years. He then shows that price/book (PB) has similar predictive ability, when it comes to returns over the next 10-15 years and drawdown risk over the next 3 years.

The following are the average maximum drawdowns over the next 3 years for PB

0-1 -5.2%
1-1.5 -8.0%
1.5-2 -13.2%
2-2.5 -18.6%
2.5-3 -23.7%
3+ -29.8%

First of all, the use of valuation metrics to predict drawdown risk in the short-intermediate future gets less attention than the use of such metrics to predict long term return. But you can make the case that predicting drawdown risk over the next 3 years is at least as useful as predicting return over the next 10-15 years.

Also, CAPE data tend not to be as readily available as PB data.

IMO, CAPE and PB may be more useful when it comes the the risk aspect of investing, rather than return.

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Re: Clippings 2017

Post by Park » 26 Nov 2017 15:18

http://ritholtz.com/2017/01/cliff-asnes ... efficient/

The link above is an interview of Cliff Asness. At around 7:15 minutes into the interview, he gives his generic advice to an investor. Buy the most aggressive bond/stock mix that you can tolerate and invest it with Jack Bogle.

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Retirement Withdrawals

Post by Park » 26 Nov 2017 20:44

A common withdrawal strategy in retirement is to take out x% of the portfolio the first year, and then the same amount each year subsequently after adjusting for inflation.

That doesn't take into account investment costs.

https://financialmentor.com/retirement- ... rate/13192

"you don’t have to subtract the expenses directly from the theoretical withdrawal rate because the math doesn’t work that way. (It’s a common mistake.)

Instead, you subtract expenses from the investment return first and then calculate the sustainable withdrawal rate. The reduction in withdrawal rate is significantly less than the actual expenses.

For example, Pfau adjusted his 3rd Generation research results for administrative fees of 1.6% for stocks and 1.2% for bonds (similar to recent Morningstar averages). After he did so, he reduced his safe withdrawal rate by only .66 percentage points – far less than the nominal expenses

If you invest in low cost ETF’s without additional advisory fees then you may be able to ignore the investment expense issue since its impact should be limited. However, if you invest with an advisor in expensive mutual funds then this issue is a serious consideration that could reduce the amount you can withdraw each month by 10-20%"

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Re: Clippings 2017

Post by Park » 30 Nov 2017 10:33

http://awealthofcommonsense.com/2017/08 ... ign=buffer

"After seeing countless stories and statistics on the Canadian housing market I did some research to check things out for myself. The numbers I found are staggering. They make the U.S. housing bubble that led up to the financial crisis look like an amateur. I don’t throw around the word ‘bubble’ loosely but the Canadian housing numbers are insane."

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Re: Clippings 2017

Post by CROCKD » 30 Nov 2017 19:18

More Ethanol in gasoline.
Ontario to double gasoline’s ethanol content requirement
Although studies have proven this is a bad idea, governments continue to flog this dead horse.
The growing of more corn has been shown to be bad for the environment. But not for ethanol producers.
The province's two largest corn-based ethanol producers applauded the move, saying it would not only contribute to Ontario's climate-change strategy, but provide a boost to the local economy as well.

And as for the arguments around fuel conservation
To date, ethanol has been antithetical to fuel economy. According to the U.S. Department of Energy, vehicles typically go 3 to 4 percent fewer miles per gallon on E10 and 4 to 5 percent fewer miles per gallon on E15, because ethanol packs only about two-thirds the BTU’s of gasoline.
Once again the Ontario Government in its blind dogma of "green energy" and ignorance of the scientific facts has distorted economic realities.
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Re: Clippings 2017

Post by brucecohen » 01 Dec 2017 09:12

CROCKD wrote:
30 Nov 2017 19:18
And as for the arguments around fuel conservation
To date, ethanol has been antithetical to fuel economy. According to the U.S. Department of Energy, vehicles typically go 3 to 4 percent fewer miles per gallon on E10 and 4 to 5 percent fewer miles per gallon on E15, because ethanol packs only about two-thirds the BTU’s of gasoline.
Once again the Ontario Government in its blind dogma of "green energy" and ignorance of the scientific facts has distorted economic realities.
Ethanol can also gum up carbs in small engines, especially newer ones whose jets are plastic and very narrow. As recommended by my small engine repair instructor, I use only Shell's premium 91 octane because it contains no ethanol.

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Re: Clippings 2017

Post by bcjmmac » 01 Dec 2017 11:28

Luckily, here on the east coast ethanol isn’t a mandatory “additive” so I simply avoid the chains that add it. Did a trip to Onterrible & US a few weeks ago - rise in litres/km was noticeable.

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Re: Clippings 2017

Post by AltaRed » 01 Dec 2017 11:35

I have read a number of studies in the past (all US based) that ethanol is net energy negative. It takes more energy (full cycle) to make ethanol than what is delivered at the pump. It's a perfect example of how almost anything can be manipulated.
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Diversification with Foreign Stocks

Post by Park » 02 Dec 2017 23:55

Much of the material that Canadian investors get on foreign diversification comes from the US, and may not be relevant to them. The following link is a brief summary of a paper which looked at foreign diversification from the viewpoint of several countries, including Canada.

https://alphaarchitect.com/2017/07/24/a ... ake-sense/

"What are the diversification benefits of domestic and multinational corporations with varying degrees of internationalization, including foreign companies with sales only in their domestic market, companies with sales concentrated in their home region, companies with sales concentrated in other regions and global companies?

Adding international stocks to a local portfolio offers statistically significant diversification benefits to investors in Canada, Europe and Japan, but not the US or the UK.
When looking at varying degrees of internationalization, global stocks offer diversification benefits only to Belgian investors. Differently, for the remaining eurozone countries, Canada and Japan all but global stocks classification add diversification benefits. Finally, for the UK and the US only foreign domestic stocks offer statistically significant diversification.
Generally, the greatest improvement in Sharpe ratios comes from adding foreign domestic stocks."

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Re: Clippings 2017

Post by hboy43 » 03 Dec 2017 08:17

AltaRed wrote:
01 Dec 2017 11:35
I have read a number of studies in the past (all US based) that ethanol is net energy negative. It takes more energy (full cycle) to make ethanol than what is delivered at the pump. It's a perfect example of how almost anything can be manipulated.
if only our engineers were in parliament and the legislatures where they could do some real good, instead of in the GG's residence.

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