World financial news

I’ve been writing about investing for nearly a quarter of a century. And if I’ve learned one thing after counseling Money readers through three recessions, three stock market crashes, and two derivatives debacles (yes, two: 14 years before the recent flare-up with mortgage-backed securities, derivatives tripped up several government income and money-market funds), it’s this: Savvy investing need not be complicated. Just focus on what’s most important to stay on the path to financial success and filter out all the noise along the way.

To do just that, follow this four-step program:

1. Don’t obsess over the "best" investments.

Cable-TV investing shows may make you feel like a slouch if you’re not constantly searching for hot new investments. But I’ve seen too many Next Big Things turn into the Next Big Letdowns — limited partnerships in the ’80s and, recently, mutual funds that replicate hedge fund strategies, to name two.

In reality, smart investing is more about assembling a group of tried-and-true assets that give you diversification than trying to predict tomorrow’s top gainers. "I’d rather have mediocre funds in the right mix of categories than great funds without an underlying allocation strategy," says Charlottesville, Va., financial planner David Marotta.

The reason is that asset classes, more than individual picks, drive your long-term returns. Creating a well-rounded portfolio isn’t that hard. Marotta figures you need only five or six funds that cover key assets such as large and small U.S. stocks, foreign shares, and bonds — plus maybe another that invests in natural resources, real estate, or other inflation hedges.

2. Think long term, not year to year.

Birthdays and anniversaries are the milestones of our lives. So it’s not surprising that we tend to think in annual terms when gauging our portfolios. Yet it’s dangerous to think of investing as a sprint rather than a marathon.

Why? If you’re seeking the best gains over the next 12 months, you’ll naturally gravitate toward more volatile investments because they’ll give you a better shot at big short-term gains. But your odds of picking those winners year in and year out are extremely slim.

"It’s like someone on a hot streak at the roulette wheel," says York University finance professor Moshe Milevsky. "You know it’s not going to last." What’s more likely to happen is that you’ll end up in investments that go down just as quickly as they went up.

3. Keep a tight rein on costs.

When was the last time you heard someone brag about his razor-thin mutual fund expenses? Probably never. That’s because high returns are a lot sexier than low fees.

Still, you’re better off paying as much attention, if not more, to what your funds charge than to past performance. "The probability of a manager outperforming going forward is small," says Financial Engines chief investment officer Christopher Jones. "But fees are far more predictable." And remember that every dollar you pay in fees reduces the returns you get to keep — and that can add up over the long haul.

To gauge the effect of costs, I used Morningstar’s database to sort all large-cap stock funds with 15-year records into four groups, based on expenses. I then compared each group’s average annualized 15-year returns. Result: The higher a group’s fees, the lower its average return. This mirrors an analysis that Burton Malkiel and Charles Ellis (two heavyweights in the investing world) include in their new book, The Elements of Investing.

4. Keep a tighter rein on yourself.

During my career at Money, I’ve seen stock prices fall more than 20% in a single day (Oct. 19, 1987) and twice drop by roughly half over longer periods (March 2000 to October 2002 and October 2007 to March 2009).

But if those crashes led to similarly steep losses in your portfolio, you can’t blame the market entirely for your misfortune. More often than not, to paraphrase Shakespeare, the fault is not in the markets, but in ourselves. When things are going well we tend to get overconfident and plow more money than we should into risky assets, making us overly vulnerable to downturns. And when a setback inevitably arrives, says Santa Clara University economist Hersh Shefrin, "We bail out and focus so much on safety that we’re not positioned to capture gains when the market turns around, which it typically does very quickly."

Rather than swinging between euphoria in up markets and depression in down ones, you’re better off keeping your emotions — and strategy — on an even keel. Granted, achieving that Zen-like outlook is easier said than done. But the more you can maintain your equanimity and resist Wall Street’s entreaties to fiddle with your investments, the fewer mistakes you’ll make — and the more wealth you’ll end up with in the long run.  

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Venezuela’s President Hugo Chavez has threatened to expel Japanese carmaker Toyota unless it produces an all-terrain model of 4×4 vehicles used for public transport in poor and rural areas.

The fiery socialist, in a speech late on Wednesday, also said he would not hesitate to expel and expropriate plants from other Asian and U.S. automobile companies operating in Venezuela if they failed to share technology with locals.

"What’s this that Toyota doesn’t want to make the ‘rustic’ model here?" Chavez said, during a ceremony in Caracas to hand owners the keys to economically produced cars that Venezuela’s government has imported from Argentina.

"We must force them. And if they don’t, then they should leave and we’ll bring another company in … The Chinese want to come and they make ‘rustic’ models."

During a decade in power, Chavez has nationalized large swathes of the Venezuela economy — including the oil and power sectors — as part of his "21st century revolution" but has so far left car manufacturing relatively untouched.

He turned on Toyota, the world’s biggest automaker, when a transporter said there was a scarcity of all-terrain models to serve people in under-privileged areas.

Caracas’ poor mainly live in hillside slums, while many rural areas lack decent roads, meaning tough 4×4s are the main means of transport.

Chavez ordered his Trade Minister Eduardo Saman to carry out a "severe inspection" of Toyota, and warned other companies they must start sharing technology with Venezuelans.

"You tell the people at Toyota that they have to produce this model and we are going to impose a quota, and if they don’t meet it, we will punish them," he told Saman, adding that the state would not hesitate to expropriate Toyota’s facilities and pay appropriate compensation.

Car industry in trouble

Following Chavez’s speech, Toyota has asked the Japanese government to verify the true intentions of his remarks as he has not contacted the company on the issue, Toyota’s Tokyo-based spokesman Yuta Kaga said on Friday.

Spokesmen for Toyota’s Venezuelan unit, which operates an assembly plant in the eastern state of Sucre, were not available to comment on Thursday.

But a source at the company said Toyota had stopped assembling the model in question — which he identified as Land Cruiser 70 — in 2007, with the government’s full knowledge.

It planned to import instead, but had not received the necessary licence, he added.

"The government was informed, it can’t be a surprise," the source said, adding that most Toyota managers were on holiday but were communicating with each other about Chavez’s speech.

In addition to Toyota, Japan’s Mitsubishi as well as Hyundai and General Motors have assembly plants in South America’s top oil-exporting nation, whose people are known for their love of cars.

"Companies who come here to set up must be ready to transfer technology to us," Chavez said.

"If they don’t want to, they should go away. I invite them to pick up their things and go," he added, saying companies from allies like China, Russia, Belorussia and Iran were ready to take their place.

Lack of access to dollars at the official exchange rate, and labor disputes, have combined with a recession to hit the automobile industry hard in Venezuela this year.

According to latest figures from the Venezuela Automobile Chamber, car sales in November were down 40 percent at 10,075 units, compared with the same month last year. 

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Critics say a $139 million settlement reached this week between securities regulators and eight big financial institutions is small potatoes.

Don’t be fooled.

I think this settlement is a big enchilada.

It’s not far behind the $205 million paid by five mutual fund managers in 2005 to settle complaints about short-term trading of fund units.

Both cases showed that investors have rights that can’t be trampled upon by large financial firms.

In 2005, fund managers agreed they should treat investors’ money as carefully as if it were their own.

They were failing to protect the interests of long-term investors by letting short-term traders take away some of their profits.

In the current case involving third-party asset-backed commercial paper (ABCP), there were several key principles at stake for investor rights. These principles include the following:

Investment advisers should not sell products they don’t understand.

Two firms were selling ABCP to smaller retail investors.

Cannacord Financial Ltd. will pay $3.1 million and Credential Securities Inc. will pay $200,000 under a deal with the Investment Industry Regulatory Organization of Canada. IIROC said the two firms did not do enough homework on the product in order to learn about its complexities and underlying risks.

They relied primarily on the credit rating provided by Dominion Bond Rating Service, an agency whose work was paid for by the issuers of the rated securities.

Interviews with several advisers working for these firms showed they knew nothing about the issuers or the composition and structure of the product, IIROC said.

Some advisers were representing it to their clients as a safe and secure product that was similar to a T-bill, guaranteed investment certificate or a term deposit.

Investment dealers should disclose known risks of products to investors.

Two firms were selling ABCP after learning of its risks from the product issuer.

CIBC World Markets will pay $21.7 million and HSBC Bank Canada will pay $5.9 million under separate deals reached with the Ontario Securities Commission.

They were dealing with an ABCP issuer, Coventree Inc., which had said that its average exposure to U.S. subprime mortgages was 7.4 per cent.

But in late July, Coventree sent an email to all dealers noting that its exposure to subprime mortgages in some conduits was as high as 42 per cent.

Coventree did not put any limits on disclosing information in its email, the OSC said.

But neither firm notified investors of the risks.

"CIBC continued to sell Coventree and certain other third-party ABCP from July 25 to August 3, 2007," the OSC said.

"During that period, CIBC sold $245 million to investors who may not have been aware of those issues."

HSBC sold $172 million in ABCP to clients who didn’t know about the risks that it had been made aware of during the same period.

Short-term credit products can be as risky as stocks.

ABCP was sold under an exemption from securities rules that allowed it to avoid much of the disclosure required for other securities, such as company shares.

The Canadian Securities Administrators has proposed that distributors of asset-backed short-term debt should have to issue a prospectus, similar to stock issuers.

It also wants to reduce reliance on the use of credit ratings in securities legislation.

I think both recommendations should go ahead.

Few investment products are safe and secure any more, even short-term debt.

Meanwhile, buyers aren’t protected in a system in which sellers rely on endorsements from for-profit commercial agencies.

eroseman@thestar.ca

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Uncle Sam is getting picky.

Despite two wars, President Obama’s 30,000 troop surge in Afghanistan and the Army’s goal to swell its ranks by 15,000 this fiscal year, potential recruits are finding that it’s a lot tougher to sign up.

"Military recruiting is through the roof," said Mackenzie Eaglen, a research fellow at the Heritage Foundation, a conservative think tank in Washington, D.C. "In fact, they’re turning people away."

The dismal job market has put the armed forces in an enviable position. Unemployment is at a 26-year high of 10.2%, and the U.S. economy has lost 7.3 million jobs since the start of 2008. This has prompted many Americans to consider the military for work, despite the prospect of armed combat in Afghanistan or Iraq.

"It’s just like any industry, when there’s a glut of employees vying for a certain number of jobs, the employer can be a little bit more choosey," said Army spokesman Wayne Hall, a civilian at the Pentagon. "That’s just the nature of supply and demand."

The Department of Defense said that all branches of the armed services — the Army, Navy, Air Force and Marine Corps - met or exceeded recruitment goals in fiscal year 2009, which ended Sept. 30. That’s the first time that’s happened since 1973, when the draft ended and U.S. forces withdrew from Vietnam.

Raising the bar

"We have tightened up our standards," said Army recruiting spokesman Douglas Smith, a civilian at Fort Knox, Ky. "There are types of waivers that we are currently not considering that we have considered in the past."

The Army is no longer giving second chances to recruits who fail the alcohol and drug tests, as it did during the height of the Iraq war several years ago, said Smith, nor is it providing waivers to overweight recruits or high school dropouts. The Army also no longer overlooks criminal infractions for even relatively minor offenses, like excessive parking tickets, he said.

"We’ve had such a dramatic increase in the unemployment rate in the last couple of years, it’s clear that’s had a dramatic effect," said Beth Asch, military recruiting expert for the Rand Corporation, a non-profit think tank based in Santa Monica, Calif payday loans for self employed. "It’s clear that they’re being picky. People who would have been marginal before are not being considered."

A more educated recruit

Applicants in 2009 were of an unusually high academic quality, according to the Army, which recruited 13,337 enlisted men and women with higher education, more than double the 2001 tally.

That included 523 recruits with master’s degrees and 19 with post-doctorate degrees, compared with 2001, when the Army attracted 117 recruits with masters’ degrees and none in the post-doctorate category.

The highly educated recruits probably entered the military as corporals or specialists making less than $22,000 a year, said Smith. Most enlisted personnel can expect to earn $1,568.70 a month by the end of their first year, which means an annual salary of $18,824.40, according to the DOD.

Asch said that workers at the top end of the educational scale are often involved in research, but a dearth in funding is prompting them to find work elsewhere, including the military.

"It’s really breathtaking, to get someone with a doctorate degree," she said. "That’s really unusual."

In it for the long haul

Sgt. 1st Class Marcus Pinkey, an Army recruiter in Carlisle, Penn. since 2002, said that some of the more seasoned recruits have an easier time adjusting to military life, because they’ve already experienced hardship.

"They know that it’s something that they have to do for the survival for their family," he said.

He added that the vetting has gotten tougher, to ensure that recruits are committed to a military life.

"The screening process is a little more stringent, to make sure that people want to stay in for a longer period of time, instead of just waiting for the economy to get better," he said. 

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The Japanese government may delay an economic stimulus package after members of Prime Minister Yukio Hatoyama’s coalition said the proposed plan was insufficient.

“It probably won’t come together” today, Mikio Shimoji, head of policy research at the People’s New Party, told reporters in Tokyo. The head of the Social Democratic Party, also a minority coalition member, said the government was still debating the plan.

PNP leader and Financial Services Minister Shizuka Kamei has urged for spending of at least 8 trillion yen ($90 billion). Hatoyama’s Democratic Party of Japan had planned a package of as much as 4 trillion yen, Finance Ministry officials familiar with the matter have said.

Kamei “won’t relent on the 8 trillion yen figure,” Shimoji said, adding “We’ve put negotiations on hold same day payday loans.” He said signs the economic expansion has been weakening mean the government will need to spend more than planned.

“We’re in deflation, so we need something quantitative,” Shimoji said. “We think that unless it’s around 8 trillion yen, the economy won’t respond. They have no choice but to bow down,” he added, referring to the DPJ.

“I think there’s a possibility it won’t happen today,” SDP leader Mizuho Fukushima told reporters at the Prime Minister’s residence in Tokyo.

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Whole Foods Market announced Wednesday that it is seeking space in downtown Honolulu as an alternative to its planned Ward Village Shops location.

In a brief announcement, the company said it is looking for “a new location to serve the downtown area of Honolulu as construction of the Ward Village development has halted.”

The company said that no Whole Foods representatives were available for comment.

The store at the Ward Village Shops had originally been planned as Whole Foods’ flagship store for Hawaii. It was scheduled to open in early 2008, but the Texas-based natural foods chain instead opened its first Hawaii store at Kahala Mall in September 2008.

Construction at the Ward site — between Auahi Street and the Queen Street extension — stopped in December 2008 when landlord General Growth Properties ordered the general contractor on the project to stop work.

The Whole Foods building and the adjoining 900-stall parking structure are about 60 to 70 percent complete.

It was not clear from the statement if Whole Foods was permanently abandoning the Ward site or if it would still locate there if General Growth resumed construction. General Growth, which owns the Ward complex as well as Ala Moana Center, declared bankruptcy in April with about $10 billion in debt.

General Growth has not said when construction on the $100 million project, which has already been stopped several times because of the discovery of ancient Hawaiian remains on the site, would resume.

Whole Foods said it is still on track to open a Maui store in February and a Kailua store on Oahu in 2011.

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A senior U.S. lawmaker unveiled a much-anticipated proposal on Wednesday that would give government regulators the power to break up financial firms that pose a risk to economic stability.

Democratic Representative Paul Kanjorski, chairman of the House capital markets subcommittee, said his proposal would give that power to a Financial Services Oversight Council, subject to review by the president in some cases.

He offered the plan as an amendment to a bill being debated and amended this week by the House Financial Services Committee as part of a broad push by the Obama administration and Democrats to tighten bank and capital market regulation.

“If my amendment is accepted, financial firms would need to demonstrate to regulators that their failure would not undermine the financial stability of the American economy,” Kanjorski said in a statement.

“No firm should be considered to be ‘too big to fail.’ Financial firms that want to play in a casino need to have their own resources to cover their bets and not assume that tax dollars are available in reserve if their bets fail,” he said.

Financial companies could appeal council actions, under the bill, according to a summary.

Size would be one factor considered by the council in determining whether to take action against a firm. Other factors would include “scope, scale, exposure, leverage, interconnectedness of financial activities,” the summary said.

Actions that could be taken would include “modifying existing prudential standards, imposing conditions on or terminating activities, limiting mergers and acquisitions, and in the most extreme cases, breaking up the company,” it said cash til payday.

Kanjorski added he will coordinate with the European Union on the issue. “After meeting with many European Union officials and members of the European Parliament earlier this year, I realized that we share many of the same concerns,” he said.

EU regulators are considering measures to force banks across Europe to sell assets and sometimes even break up to compensate for massive state aid they have received.

BIG BANKS WARN

On Monday, some of the world’s largest financial firms urged Financial Services Committee Chairman Barney Frank, a Democrat, not to pursue big bank break-up legislation.

The Financial Services Forum, a lobbying group for CEOs of firms such as Goldman Sachs and JPMorgan Chase, said empowering regulators to break up “too-big-to-fail” banks could cause “long-term damage to the U.S. economy.”

But small and mid-sized banks, which have demonstrated considerable political clout through this year’s financial reform debate, support break-up legislation, which would cut their largest rivals down to size, lobbyists said.

Giving break-up power to regulators would be “a good thing,” said Paul Miller, a policy analyst at investment firm FBR Capital Markets, on Wednesday. 

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The number of Americans filing first-time claims for unemployment insurance fell last week to their lowest level this year, the government said Thursday.

There were 502,000 initial job claims filed in the week ended Nov. 7, down from an upwardly revised 514,000 the previous week, the Labor Department said in a weekly report. It was the lowest number since the week ended Jan. 3, when 488,000 initial claims were filed.

The tally was also smaller than expected. A consensus estimate of economists surveyed by Briefing.com anticipated 510,000 new claims.

The 4-week moving average of initial claims was 519,750, down 4,500 from the previous week’s revised average of 524,250.

A new jobs forum

President Obama said the figures were a "hopeful sign" but cautioned that unemployment is one of the "great challenges" facing the U.S. economy.

"Given the magnitude of the economic turmoil that we’ve experienced, employers are reluctant to hire," he said.

Speaking at the White House, Obama announced plans to hold a new forum on jobs and economic growth in December. He said the forum will bring together chief executives, small businesses and labor groups to discuss ways to improve the job market.

"We have an obligation to consider every additional responsible step that we can to encourage and accelerate job creation in this country," Obama said.

Initial jobless claims have been declining for several weeks, raising hopes that employers could begin adding jobs as the economy appears to be emerging from one of the deepest recessions on record.

Government figures showed last month that the U.S. economy grew at a 3.5% annual rate in the third quarter, ending a string of declines over four quarters.

However, many economists expect the national unemployment rate, which rose to 10.2% in October, to remain elevated even as the economy recovers.

"The numbers are still terrible in absolute terms, but at least they are clearly heading in the right direction," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

Continuing claims. The number of Americans continuing to file weekly claims for jobless benefits fell by 139,000 to 5.63 million in the week ended Oct. 31, the most recent data available.

The 4-week moving average for ongoing claims fell to 5.79 million.

But the decline in continuing claims may reflect a growing number of fliers that have dropped off those rolls into extended benefits.

Last week, President Obama signed into law a bill to provide up to 20 additional weeks of jobless benefits to unemployed Americans.

The legislation will extend jobless benefits in all states by 14 weeks. Those that live in states with unemployment greater than 8.5% will receive an additional six weeks. The proposal will be funded by extending a long-standing federal unemployment tax on employers through June 30, 2011. 

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A reserve fund must be established ahead of time to give the government the working capital it needs to dismantle large, troubled financial companies, a top U.S. bank regulator said on Tuesday.

Sheila Bair, chairman of the Federal Deposit Insurance Corp, said she opposes the proposal by the Obama administration and a leading senator to collect fees from financial companies after another firm is seized and dismantled.

“This would not be a bail-out fund. This would not be an insurance fund,” Bair said in prepared remarks to the Institute of International Bankers. “It would provide short-term liquidity to maintain essential operations of the institution as it is broken up and sold off.”

Senate Banking Committee Chairman Christopher Dodd earlier on Tuesday released draft legislation that calls for any government expenses to be recouped after a financial company fails and is liquidated. The FDIC would be in charge of dismantling the company.

Treasury Secretary Timothy Geithner has been adamant that creating a standing fund would enhance moral hazard and be viewed by the financial industry as an insurance fund that would insulate it from risky bets.

Bair, however, has been successful in convincing Representative Barney Frank to reverse his opinion on the topic. He recently said he now supports pre-funding the so-called resolution authority.

The resolution authority is just one piece of sweeping legislation moving through Congress to overhaul financial regulation. Other pieces include creating a new consumer agency to police financial products, consolidating bank regulators and creating a new council to oversee risks to the financial system.

The House has made considerably more progress through public bill-writing sessions and hopes to have a full House vote by early December low fee payday loans.

The Senate Banking Committee will start drafting formal language and consider amendments in early December, Dodd said on Tuesday. He did not estimate when the full Senate might vote.

Bair said during her remarks on Tuesday that Frank, chairman of the House Financial Services Committee, is going to take other measures to strengthen his version of financial reform.

She said he will eliminate the government’s ability to assist open but troubled financial companies, will ban the government from investing capital in those institutions, and will create a higher standard for the FDIC and Federal Reserve to provide support to healthy companies in the event of a systemic meltdown.

“We’ve had too many years of unfettered risk-taking, and too many years of government-subsidized risk,” Bair said. “It’s time we closed the book on the doctrine of too big to fail.”

Bair also said regulators can restrain risk in the system by ensuring that large financial companies hold high amounts of capital. She said recent improvements in market conditions cannot deter the effort to follow through on tough new capital standards.

“There is little doubt that there will be eye-popping reductions in required capital when the good times return to banking,” she said.

(Reporting by Karey Wutkowski in Washington and Clare Baldwin in New York, Editing by Andrea Ricci and Gerald E. McCormick)

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Iran has always adhered to its implied output target under OPEC’s existing output curbs and has not violated its commitments, its OPEC governor Mohammad Ali Khatibi told the semi-official Mehr news agency on Saturday.

The most recent Reuters survey of oil firms, OPEC officials and analysts showed Iran, the group’s second-largest producer, pumped 430,000 barrels above its OPEC target in September, the most in absolute terms of any member.

“Iran has always been committed to crude production quotas set by OPEC and there has never been any violation by Iran in this respect,” Khatibi said.

Khatibi said reports by the International Energy Agency (IEA) and other secondary sources are based on “guesswork and not reliable.”

“The point to be noticed is that the figures reported by these sources are completely incompatible with one another.”

OPEC agreed late last year to lower supply by 4.2 million barrels per day (bpd) as recession curbed fuel use and led to a slide in prices.

But the Reuters survey showed the group met 63 percent of promised cutbacks in September, down from 68 percent in August, continuing a trend of rising output that shows some members have relaxed adherence amid higher oil prices.

Iran has long been one of the group’s members most interested in higher prices.

The world’s fifth-largest crude exporter has struggled for years to develop its oil and gas reserves and now has to contend with an international lack of credit, as well as the U.N. nuclear sanctions over its disputed nuclear program.

SANCTIONS

A report by a parliamentary research center, published on Saturday by Iran’s Aftab-e Yazd daily, said Iran’s crude oil exports will “drop to zero” in eight years in the absence of an annual $4.5 billion in investment in the oil sector.

The authorities blame sanctions for the lack of foreign investment in the country’s energy sector.

Iran also lacks sufficient refining capacity to meet its domestic demand and imports up to 40 percent of its gasoline requirements.

It subsidizes gasoline, which is therefore among the world’s cheapest, encouraging fast growth in demand and making it very reliant on imports from international markets.

However, Iran’s deputy oil minister Noureddin Shahnazizadeh said gasoline production had increased in the country. 

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