Hidden fees can destroy your retirement dreams

When asked about contributing to a company’s pension plan, my standard answer was always put in enough to receive the company’s matching percentage. Never turn down free money, it’s like receiving a yearly bonus of 2% or 3% of your annual salary.

However be aware of fees that are hidden in the fine print. Make no mistake, these fees do matter. They may seem tiny, barely noticeable but they can eat away your future. A one percent reduction in fees can add an additional 10 years to your retirement income. If two people have the same 7 percent return over time but one pays 1 percent in fees while the other pays 2 percent, the latter will run out of money 10 years earlier.

For nearly 30 years, the pension plan industry wasn’t legally required to explain exactly how much it was charging investors. Sadly, a recent industry survey showed that 67 percent of Americans believe they pay no fees in their 401(k) plan. In a recent survey in Canada, 36% of Canadians claimed that they paid no fees and 11% were unsure.

In a muddy but legal arrangement, a high percentage of plan providers accept payments from the mutual funds they offer in your 401(k) plan. This is called revenue sharing or, more aptly, paying to play. Naturally, the list you have to choose from includes the funds that pay the provider the highest amounts, rarely the best performing and certainly not the lowest in cost.

Additionally, many providers restrict low-cost funds to plans that exceed a certain amount of assets, meaning that employees of smaller companies are forced to invest in funds with higher fees. Since the providers don’t make much of a profit on the lower-cost funds they do offer, they will usually charge a significant markup. For example; you could be paying a 1 percent annual fee for an S&P 500 Index fund when the actual cost is .05 percent. That translates into a 2,000 percent markup.

“Last year the Obama administration announced that hidden fees and backdoor payments were costing Americans $17 billion per year. And that’s not counting the excessive “out-in-the-open” fees that are draining our retirement accounts. The Department of Labor is also sounding the alarm. “The corrosive power of fine print and buried fees can eat away like a chronic illness at a person’s savings,” said Labor Secretary Thomas E. Perez.

A company pension plan is a wonderful savings vehicle when it’s efficient. The problem is that many of these plans are plagued with a variety of additional hidden layers of fees. These added layers have seemingly arbitrary labels, such as “asset-management charges” or “contract asset charges.” They often add up to 1 percent or more and are buried in the fine print of plan disclosures.

New regulations for advisors

Beginning in April 2017, a financial professional who makes investment recommendations to you about your 401(k) or IRA will be legally required to provide advice that is best for your situation, not the funds that provide the most compensation to the advisor. “The advisor will now be required to disclose their conflicts of interest.” This new fiduciary standard will only apply to retirement accounts, and advice provided about other types of taxable investment accounts will not be held to the same standard.

Employers need to wake up and take their role as pension plan sponsors more seriously. It’s in their power to dramatically impact the future quality of life for their employees.

My advice;  put in enough to receive the company’s matching percentage and read the fine print before making any additional contributions to your company’s pension plan.

Beware of Negative Growth in Corporate Profits





My previous blog posts have been leaning towards being more bearish regarding the stock market. The revised forecast for negative growth in corporate profits for the first quarter of 2015 makes me wonder if forecasters will reduce their expectations for the second quarter as well. I find the magnitude of the decline in expectations are somewhat alarming. Previous estimates for the first quarter were for a gain of 8.57 percent, with the second quarter projected at 7.33 percent and the full year at 9.78 percent.

Some Wall Street forecasters are putting a positive spin, by discounting the negative earnings from the oil & gas sector,  claiming that the rest of the S&P earnings will be positive. Energy profits are forecast to tumble 62.51 percent in Q1 and about the same in Q2, with the full-year sector drop pegged at 57.08 percent.

While others point to the strong U.S. dollar as a headwind to weak earnings for the next two quarters.

“Since the end of World War II in 1945, each of the 10 economic recessions has been accompanied by a decline in earnings growth. Only three times during that period did negative earnings not see a recession follow”, according to Sam Stovall, chief equity strategist at S&P Capital IQ.

“While not an official profit recession, as no contraction in EPS growth is currently projected, the full-year growth estimate is getting uncomfortably close to that threshold,” Stovall said in a note to clients this week.

Capital IQ expects the first quarter to show a loss of 2.92 percent for the S&P 500. Expectations for the second quarter, IQ sees a loss of 1.84 percent”.

These conflicting views makes it difficult for me to put money to work in the stock market. I am old school, in the past, the transportation sector has been a good indicator of economic activity. The one year chart below of the transportation ETF (IYT) shows signs of weakness. It is currently trading below its 50 & 100 day moving average and is close to breaking below the 200 day.



I will be focusing on changes in revenue (top line growth) over earnings which can easily be skewed. I expect the railroads will show some weak revenue growth because they depend on transporting commodities like oil and coal. Norfolk Southern released an earnings warning on Monday, first quarter earnings per share are expected to be $1.00 per share. That is 15% below the same quarter in 2014 and is primarily due to lower expected revenues.

Take a good look at revenue growth from parcel delivery companies, air freight and trucking companies to confirm that economic activity is getting stronger. Here are a just few names that I am watching.


C.H. Robinson CHRW 27-Apr
Ryder Systems R 22-Apr
J.B. Hunt JBHT 14-Apr
United Parcel Service UPS 28-Apr
FedEx FDX 11-Jun
Forward Air Frieght FWRD 21-Apr

The first quarter GDP of 2014 came in at -2.1% but rebounded to 4.6% in the second quarter. Could we have a repeat performance this year? Consumer spending was positive for March after three negative months in a row. The low price of gasoline will add $800 to $1,200 extra dollars this year into consumer pockets. I expect that those dollars will be spent during the second half of 2015!

 As I was writing this post, J.B. Hunt released their earnings report:

J. B. Hunt Transport Services, Inc., (NASDAQ:JBHT) announced first quarter 2015 net earnings of $91.9 million, or diluted earnings per share of 78 cents vs. first quarter 2014 net earnings of $68.7 million, or 58 cents per diluted share.

Total operating revenue for the current quarter was $1.44 billion, compared with $1.41 billion for the first quarter 2014. Current quarter total operating revenue, excluding fuel surcharges, increased 10% vs. first quarter 2014. Intermodal (JBI) load growth was 6% over first quarter 2014 levels.




Tug of War in the Oil Market

tug  tug1

The tug of war continues between the oil bulls and the bears. Volatility continues in the price of oil which was up 6% on Tuesday and was down more than 4% on Wednesday after the Energy Information Agency (EIA) reported an inventory build of 19.95 million barrels (14 year high). This far exceeded the Thomson Reuters estimate of 3.43 million barrels.

The takeover of BG Group by Royal Dutch Shell poses the question whether the oil market has hit a bottom? The oil bulls believe that the halving in the price of crude is similar to the early 2000s when many super-mergers took place. Back then, BP acquired rival Amoco and Arco, Exxon bought Mobil and Chevron merged with Texaco.

The BG acquisition will provide Shell with enhanced positions in competitive new oil and gas projects, in Australia LNG and Brazil deep water. The other interesting point about this deal is the nearly total absence of North American assets. Shell has multiple reasons for buying BG, but more access to North America, is clearly not among them.

What I find fascinating is that 78% of BG Group’s reserves are in natural gas. Another curious fact, Shell has estimated the cost of its proposed LNG export terminal in Kitimat to be up to $40 billion (Canadian). It owns 50% of LNG Canada through its subsidiary Shell Canada Energy.

Paying a 50% premium for BG raises three more questions:

  1. Is the BG takeover based on the current low price of natural gas or oil?
  2. Is it cheaper to buy existing LNG plants than to build new ones?
  3. Is it cheaper to buy existing deep water wells than to drill new ones?

Wild cards in the oil market:

  1. When will Iran’s 30 million barrels stored in oil tankers hit the world market?
  2. When will oil storage in the U.S. reach capacity?
  3. How much of China’s cruel oil imports are going into storage?
  4. When will low oil prices force U.S. share production to actually decline?
  5. When will the Saudis cut production?

The price of oil has been stuck in a trading range but the current tug of war is slanting towards the bull side. According to oil experts, being interview in the business media, the hot money is flowing into oil stocks. The year to date price chart of the U.S. oil ETF (XLE) has moved above its 50 and 100 day moving average.


I am not an expert when it comes to analysing chart patterns. I do know that the daily trading volumes are on the weak side. I have seen many money managers on business networks indicate that they dipping their toes into oil stocks. They are reluctant to call a bottom but they are buying some large integrated oil stocks and refineries.

The XLE has 28% of its value composed of Exxon and Chevron shares. Both of these companies report their earnings on April 30th along with Royal Dutch Shell. BP earnings come out two days earlier on April 28th and I have mention in a previous post that I own some bearish BP puts in my play money account. By the way,  the BP puts are currently under water but it is money that I can afford to lose.

Remember, trading in the oil market is being dominated by hedge funds with very deep pockets.










Spring Cleaning Your portfolio, Start With Junk Bonds!



Wall Street has a bad habit of putting a bunch of junk into a nice package and changing the label. Junk bonds have been repackaged into “High Yield” ETFs and many retirees looking for income have ignored the default risk. Junk bonds are issued by companies that have low credit ratings, high debt to equity ratios or face  financial difficulty.

One lesson that I learned from the financial crisis is you can’t blindly trust Wall Street. Let me remind you that these are the same people that approved sub-prime mortgages to unqualified borrowers. Packaged these mortgages into investment grade Mortgage Back Securities knowing that there was a high degree of default risk.

Three Sectors with lower revenue growth and higher default rates

  • The oil and gas industry
  • Base metal mining companies
  • Silver & gold miners


Add the fact that the Fed will start raising rates sometime in 2015, Greece could leave the Euro zone, the possibility of a correction in the U.S. stock markets and you have the making of a perfect storm. (Check your Target Date Mutual Funds to see if they contain any high yield products)

I briefly discussed the danger of investing in Master Limited Partnerships (MLP) geared to mortgages in my last blog post. They are also popular in the oil & gas sector. The tax benefit is hard to resist since the companies pay no income tax on profits and the money is taxed when unit holders receive distributions. The high dividend yields of over 8% should be a red flag that some of these partnerships are just too good to be true.

cautionBe aware that investors living outside the U.S. are subject to  a 40% withholding tax on income received from a MLP plus retirement accounts are not eligible to receive a foreign tax credit.

If you are new to my blog, I am a bond bear and don’t own bonds in any of my portfolios. We may be years away from getting back to more normal interest rate levels but I see no point in buying bonds with negative  yields. Consider reducing your exposure to bonds along with Wall Street’s high yield income products.

The U.S. stock market returns over the past six years have been much higher than the 20 year average.

Stock Investors Should Expect 6%-7% Annual Return, Buffett Says

“The economy, as measured by gross domestic product, can be expected to grow at an annual rate of about 3 percent over the long term, and inflation of 2 percent would push nominal GDP growth to 5 percent, Buffett said. Stocks will probably rise at about that rate and dividend payments will boost total returns to 6 percent to 7 percent”, he said.

“That math isn’t bad, but it is bad for people who expected long-term returns based on looking in the rear-view mirror,” Buffett said at Berkshire Hathaway Inc.’s annual shareholder meeting in Omaha, Nebraska.

U.S.  economic growth is currently under 3% and could turn negative for the first quarter of 2015. Low oil prices combined with a strong U.S. dollar with keep inflation below 2% plus reduced earnings for the stock market.  The job numbers for March came in at 126,000 which was way below estimates of 240,000 plus January & February numbers were revised lower.  The warning signs suggest that we are not out of woods yet, 2015 stock market returns could be negative this year or below average.

I am not a buy & hold forever like Mr. Buffett nor am I a market timer. My spring cleaning includes  taking some profits by selling some winners like Disney and Starbucks. Two excellent companies that I plan to buy again this summer. Cheaper gasoline will hopefully be spent at Disney theme parks this summer and the “Star Wars”movie franchise will be begin again this Christmas.  I am a little worried that the slow down in China and the stronger U.S. dollar could affect Starbucks’ earnings for the next quarter or two. Besides, I am not a fan of drinking hot coffee during the summer months.

I have also reduced my holdings in some under preforming Canadian Reits that are exposed to Alberta’s oil patch and Reits that own a lot of retail space. Target leaving Canada and last week’s Best Buy’s announcement that it is  closing some Future Shop locations makes me more cautious regarding the Reit sector.

Spring is the season for new beginnings. Get rid of your junk, trim back some of your winners and get ready to plant some new investment seeds.

Do you have a suggestion for a blog post? Leave a comment or email me ricodilello@rogers.com





Should You “Sell in May and Go Away”?


“Sell in May and go away” is an old Wall Street saying. It is a well-known trading adage that warns investors to sell their stock holdings in May to avoid a seasonal decline in equity markets. In Canada, we say “buy when it snows and sell when it goes” This strategy is based on the historical underperformance of stocks in the six-month period commencing in May and ending in October, compared to the six-month period from November to April.

According to the Stock Trader’s Almanac, since 1950, the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period.

Another paper published in the Financial Analyst Journal in 2013 studied this effect during these periods and found that the phenomenon did indeed exist for 1998 to 2012. “On average across markets and over time, stock returns are roughly 10 percentage points higher in November-April half-year periods than in May-October half-year periods,” the paper concluded.

There are many theories about why this seasonal trading pattern happens

  1. Lower trading volumes due to the fact that many investors go on vacation during the summer months and it also takes away potential buyers for stocks.
  2. Increased money flows into retirement plans during the winter months are also cited as reasons for the difference in performance during the May-October and November-April periods. This could explain the relative increased demand for stocks during the winter.

Additional positive factors for the November-April period

  • Seventy percentage of economic growth comes from consumer spending. Consumers tend to spend more for home renovations during the summer, kids going back to school in September and of course Christmas spending in the fall.
  • Therefore corporate earnings tend to stronger in the third & fourth quarters with reporting results starting in mid-October and mid-January respectfully.
  • Investors feel more confident putting money into stocks when economic growth and earnings numbers are more robust.

Additional negative factors for the May-October period

  • First quarter consumer spending and economic growth can be effected by the severity of winter weather.
  • Credit card debt from Christmas spending and higher heating costs can affect the amount of money available for consumers to spend.
  • Wall Street recommends a buy & hold strategy yet indulges in market timing. They use weaker economic first quarter growth and lower profits to justify selling stocks. (Reporting results start mid-April)
  • Some of the biggest stock market corrections started during the months of  September & October

There are limitations to implementing this strategy in practice, such as the added transaction costs and tax implications of the rotation in and out of equities. Another drawback is that market timing and seasonality strategies do not always work out and the actual results may be very different from the theoretical ones.

buy low

Although, selling everything in May and buying back into equities in November  isn’t a good strategy. Being aware of seasonal patterns can assist in boosting your investment returns.

Consider these action steps:

  1. Rebalance your asset allocation away from high risk into safety before May (sell high)
  2. Allocate new purchases of  stocks or ETFs during August, September and October (buy low)
  3. Beat the crowd and contribute to your retirement plans before their deadlines

Keep in mind, the first quarter GDP numbers and the March employment numbers come out the first week of  April. Market expectations have turned negative, analysts have lowered earnings expectations and are expecting weaker economic growth.

Living in Canada, I definitely spend more time on investing during the fall and winter months. Too busy enjoying our short summer to follow the stock market.

Do you take into account any seasonal investing patterns before making your investment decisions?

Views on the Future Price of Oil: the Good, the Bad and the Ugly



There are no shortages of oil experts giving their opinions regarding the future price of oil. The price volatility in the oil market has been much higher than the overall market. It has made some traders and hedge fund managers a lot of money during the first quarter of 2015. For the record, I am still bearish on the oil patch as an investment but I have traded some options on Canadian oil companies in my play money account.

The Good:

Energy entrepreneur Boone Pickens was on CNBC on  March 19th

He sees $70-a-barrel oil by year’s end, and between $80 and $90 within 12 to 18 months. But Pickens did dial down his longer-range forecast from December, when he predicted on “Squawk Box” $90 to $100 barrel in 12 to 18 months.

CNBC’s Jim Cramer on Mad Money Mar 11

Forget the oil patch! There’s no crash in sight Jim Cramer

Jim Cramer has been waiting with bated breath for some sort of collapse of oil. With all these talks of a $48 oil price causing oil companies to go bust, where the heck is the collapse? Cramer has also been waiting for the junk bond market to go up in flames, now that it is flooded with $200 billion in oil and gas paper that was raised back when oil was at $90 and headed higher. How the heck is it still going strong?

Even the high-yield ETF called HYG, which includes a lot of these junk bonds, has pretty much sustained its rally since the bottom where most oil stocks hit their low. Cramer thinks that if things were really as bad as they are supposed to be, wouldn’t HYG be down at least 10 to 15 percent?

The Bad:

Exxon CEO Rex Tillerson Mar 5 on CNBC

“Expect low prices, more volatility in oil: Exxon CEO”

He would not predict where oil prices were headed. He noted that U.S. crude could dip below the $40-$50 level for a period of time because of those inventory numbers or if things calm down in spots like Libya or Iraq, which could bring more oil online. Prices could also rise if there were disruptions to supply elsewhere in the world, he added.

In the next couple of years “we’re going to kinda wallow around where we are with a little bit this way, a little bit that way, until some of this sorts itself out.”

“If you look at the performance of the U.S. economy, it’s OK but it’s not robust. Europe is still struggling with declining demand and China has actually slowed its rate of energy demand growth. So all of those are conspiring to create this imbalance,” he said.

“Meanwhile, Exxon Mobil is cutting capital expenditures by about $4.5 billion, to $34 billion for 2015,” Tillerson said. However, Exxon  is expecting an increase in production


Goldman Sachs says its oil forecast at US$40 per barrel may be too low, as market ‘surprisingly healthy’

Bloomberg News March 9, 2015

Goldman forecast in a Jan. 11 note that WTI would drop as low as US$40.50 a barrel in the second quarter before rebounding to US$65 in 2016. The bank projected that Brent will slide as low as US$42 and average US$70 next year.

WTI may not reach Goldman’s forecast of US$65 a barrel in 2016 as U.S. producers prepare to increase activity later this year by raising equity, reducing debt and “building an uncompleted well war chest,” according to the report.

The Ugly:

Citi: Oil Could Plunge to $20, and This Might Be ‘the End of OPEC’

Bloomberg Feb 9, 2015

The recent surge in oil prices is just a “head-fake,” and oil as cheap as $20 a barrel may soon be on the way, Citigroup said in a report on Monday as it lowered its forecast for crude. 

Despite global declines in spending that have driven up oil prices in recent weeks, oil production in the U.S. is still rising, wrote Edward Morse, Citigroup’s global head of commodity research. Brazil and Russia are pumping oil at record levels, and Saudi Arabia, Iraq and Iran have been fighting to maintain their market share by cutting prices to Asia. The market is oversupply, and storage tanks are topping out.

A pullback in production isn’t likely until the third quarter, Morse said. In the meantime, West Texas Intermediate Crude, which currently trades at around $52 a barrel, could fall to the $20 range “for a while,” according to the report.

Dennis Gartman, the Commodities King, March 19 on CNBC’s “Futures Now”

For months I’ve said that crude oil is heading from the upper left to the lower right of the chart,” said the CNBC contributor and editor and publisher of The Gartman Letter. “I wouldn’t be surprised if oil went down to about $15 a barrel.”

“We’re going to have an abundance of crude. Storage is going to be topped out very soon and the front month spread is going to continue to deteriorate,” he said.

Some addition information; The cost to store a barrel of oil in an oil tanker at sea is about $1.20 per month. The cost in land storage tanks in the U.S. is about $0.50 per month. Oil is also being sold in the future markets and the December price is $8.00 higher than the May price. The oil futures market is pricing oil contracts below $60 a barrel until May 2017.

Before you decide who’s view may be right, Goldman & Citi depend on their trading operations to add earnings to their bottom line. I would take their views with a grain of salt. Jim Cramer was a hedge fund manager and now is paid to entertain you on T.V. Dennis Gartman wants to sell you his very expensive newsletter. Boone Pickens retired from the oil & gas business  a billionaire however he is 86 years old and his view may not be very accurate.

In my humble opinion, I think the CEO of Exxon’s view is worth your attention.

What is your view on the future price of oil? Are you a bull or a bear on the oil patch?






It’s all ‘Bout the Fed, ‘Bout the Fed, No Trouble



Are you surprised that the party on Wall Street is back on? Fed Chair Janet Yellen didn’t take away the punch bowl. She dropped the word “patient” from the post-meeting statement, an indication that the era of zero interest rates was about to end.

Traders were seemingly caught off-side, with many expecting a more a hawkish Fed. The stock market was negative before the announcement and turned positive with the Dow up triple digits, a 350-plus point swing. The Dow ended the day at 18,076, a gain of 227, and the S&P 500 was up 25 at 2099. Gold, oil, the Euro and the Canadian dollar all went up in price as the value of the U.S. dollar dropped after the Fed statement was release. Both short-term & long-term bond prices went up and yields went down.

“Just because we removed the word ‘patient’ does not mean we will become impatient,” Fed Chair Janet Yellen said at a post-meeting news conference.

“The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term,” the statement said.

What was really important were the comments made during the press conference by Fed Chair Janet Yellen. She made it clear that the FOMC is looking for further improvement in the economy. The FOMC members have adjusted their projections lower for economic growth and inflation. Citing a slow housing market, a weakening export market and a lack of wage inflation as some of the main reasons. The stronger U.S dollar has lowered import prices plus the fall in crude oil prices will lower the rate of inflation.

Full-year 2015 GDP projections fell from a range of 2.6 percent to 3.0 percent in December to 2.3 percent to 2.7 percent from this week’s meeting. Core inflation (excluding food and energy prices) dropped from a 1.5 percent to 1.8 percent range to 1.3 percent to 1.4 percent. Headline inflation expectations declined from a 1.0 percent to 1.6 percent range to 0.6 percent to 0.8 percent.

Of the 17 members, including those who do not vote, 15 said 2015 is the right year to being tightening policy, while just two supported waiting until 2016.


From my February 22 blog post Bond Yields Rise on a Possible Rate Hike

I am by no means an expert but here is my 2 cents worth. I think that more data on the health of the U.S. economic is needed before a rate decision will be made. The 4th quarter growth in the U.S. was only 2.6% which isn’t exactly stellar. Consumer spending was negative for both Dec. & Jan. which could lead to weaker growth in the first quarter of 2015. The low price of cruel oil is deflationary and would get worse in an environment of raising interest rates.

If I had to guess, a small rate hike wouldn’t happen until sometime in the fall of 2015 however I do have some cash on the sidelines.

 I still stand by this prediction, what do you think?