February 26, 2013 Comments

Markets were generally strong today.

Toll Brothers was up 3.3% on strong reports regarding U.S. housing prices and new home sales. It should really be no surprise that U.S. house prices are rebounding given record low interest rates and given that houses were often selling below replacement cost less an allowance for depreciation and obsolescence. Stories of shadow inventories had many convinced that U.S. house prices would not rebound. But last Spring, Warren Buffett was saying that houses were among the best investments possible for U.S. citizens due to their low prices. When Warren speaks, smart investors listen. Uniformed people disparage him despite his 60 year record of exceptionally astute investment moves.

Melcor has fallen to $18.25, down 2.7% today and down from recent highs of over $20 on news it will spin off some investment properties into a REIT. I suspect there are fears that the Alberta market is cooling. And fears that the REIT plans could fall through. I am holding this stock with excellent gains on it and will re-evaluate after it releases earnings around March 7.

I have been thinking of adding Proctor and Gamble to the site. I like their brands and I don’t think the stock will look overly expensive. But a fortune magazine article has painted a disturbing picture of the CEO. Apparently several years ago he was involved with some 18 outside organizations and commitments including sitting on various boards. Now he has culled that back to about six. I guess I would have thought that being CEO of a huge company would be a full time job. It would seem to take a special kind of idiocy to be involved in 18 outside organizations. I would seriously question his judgment on that. I would think that about 2 outside commitments would be enough.

There was an interesting story today about the Ontario Teachers Pension Plan. Indexing of the pension for inflation, for service earned after 2013, will only occur if the plan is fully funded. Past service will apparently remain fully indexed. Even though it is being made on a go-forward basis this change apparently entirely eliminates the pension’s deficit calculation as at January 1, 2012. The plan had a relatively modest deficit of 8.2%.

I believe this is a wise and fair move. It’s not that pensioners do not “deserve” inflation protection. They do. But from now on it will be paid only if investment returns are such that there is no pension deficit. Currently all the pension investment performance risk has been with the still-employed teachers and the employer. There has been zero risk for the retired teachers. This change puts some of the risks on the retired teachers but only on a go-forward basis. In fact it appears to have no impact on current retirees and will only affect those that retire after 2013. For retires in the next five years or so the impact should be very minimal. But those retiring in (say) 20 years will only receive inflation indexing if the fund is fully funded. In hind-sight the plan has been too rich and the contributions were too low. Contributions have already been increased about as much as feasible and there was really no choice but to deal with the benefits. This change appears to be a good one although it might be described as the lesser of the possible evils.

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