Sunday, June 28, 2009

Acting Smarter

The year is half over and what a year it has been so far in the world of politics, the economy, the banking system, tax law changes, etc. This year will go down as the one of the most pivotal in our nation's history as we try to address every issue on the democratic platform while in a recession. Praying for our leaders is a good thing to do this year.

It was announced this week that personal income rose in May, the 2nd month in a row, much to the surprise of the people who tend to focus on the negative side of life. The stimulus package spending is flowing money into people's pcokets during April and May. Normally this is viewed as wonderful news and the stock market would rally because consumer spending is about 70% of the economy. People are acting smarter in that the savings rate also increased to a level not seen since 1993. The stock market took a dim view of this smart behavior and went down slightly.

Having people save rather than spend is wonderful news for the long term future of our country. We all need to save for the future for things like retirement, major purchases, college, etc. Our Social Security system is headed for trouble as people live longer and jobs move oversees reducing inflows. People need to have additional savings beside just Social Security for retirement. For example, a recent study forecasted that $450,000 more than Social Security benefits is needed by a retired couple for future medical costs alone.

Cash for Clunkers is great for someone who is wanting a new fuel efficient car. You have heard details about it in the media. If you do not have a qualified clunker and still want a new car here is a gameplan. Some people who have clunkers will not be able to take advantage of the program. They will sell them as part of their normal routine of upgrading vehicles. Buy a $1,000 clunker, title, register and insure it then drive it to the dealer. Sell the extra older car yourself to maximize your return.

Sunday, June 21, 2009

Fahers Day, Bucketizing Investments

The wonderful thing about today is it reminds us that the most important things in life are family and relationships rather than investments. The purpose of investing is to help support family and relationship by providing additional resources. Sometimes the world gets the priority backwards.

With that said some retirement planning advice for you to consider so that you have the resources for your retirement and beyond. The principle is to divide resources into 2 parts, income and growth. Ideally it is best to have 2 separate portfolios one designed to provide income to meet day to day needs and the other to grow to keep up with things that grow faster than inflation like medical costs. This is what a financial advisor is supposed to do for you.

The income part matches income to daily expenses. It is a lot easier to have to match income to expenses if expenses are in order. This means it is important to have common sense like having a home mortgage paid off and no lingering credit card debt. The income part is invested in money market funds, CDs, short term bonds, TIPs, fixed annuity, etc. It is a portfolio designed for one purpose to only keep up with inflation and have a guaranteed source of income.

Growth is aimed at riskier investments like long term bonds, US stock mutual funds, Emerging market stock mutual funds, etc. It is a portfolio aimed at providing future value. Even if a repeat of 2008 occurs in the future your ability to meet expenses are not impacted reducing stress. This is where business cycle investing applies to continue growth and maximize long term performance.

You will do well if can put together a gameplan that can bucketize investments into these 2 categories. It reduces stress and provides clarity. If you need help contact me or another financial advisor.

Sunday, June 14, 2009

Do As Financial Experts Do

Perhaps you have heard and seen financial experts talking about what to do now with your investments. For example, Jason Zweig, The Intelligent Investor, recently wrote that now might be a good time to take some profits and sell some stocks as the market has risen 30+% in about 3 months. Other experts talk about stocks normally go down to sideways in June any now may be a good time to sell and take some profits.

To understand what to do now, look at the money trail of what category of investments are being bought and sold. We all know that what someone does is more important than what someone says. Barron's reports money flow into mutual funds by category on a weekly basis. For the last 4 weeks an average of $3.1 Billion dollars has gone into Equity, aka Stock, funds while an average of $8.4 Billion dollars has left Money Market Funds. The rest of the money, about $5.2 Billion, has gone into different categories of bond funds.

The numbers say that investors are investing, taking lots of money from money market funds, about $35 Billion over the last month and putting it to work and that they are buying stocks. If you look at the trend over the last 4 weeks, the amount of money going into stock funds is staying stable while the amount going into bond funds are going down by a significant amount.

It is true that stocks tend to do very little in June since typically few companies report earnings in June, the last month of a quarter. With this said, it is very possible for some individual stocks to make significant moves during June. It is true that the stock market has gone up 30+% in about 3 months. This is good information for a trader who is looking to buy and sell fairly frequently instead of a long term investor. The flow of money tells a long term investors that financial experts for all of their talk are putting money from a defensive position and into the stock market.

Investing in gold has also gotten a lot of press lately and people are being encouraged to buy stock in gold mining related companies. A few months ago, I wrote that you should avoid gold for a number of reasons. Since writing this statement, gold has risen slightly while stocks in general have given far superior returns. In my view of the current economic situation, it still is not time to buy gold or shares of gold mining related companies.

Sunday, June 7, 2009

GM, Fed, Treasuries

This week my top 3 stories are: bankruptcy of GM, message from Ben Bernanke - Federal Reserve Chair, and Treasury bill and bond yield rates. The story that got the most press was GM.

The new GM will be a great company to invest in whenever the new shares are issued in 2010 or 2011. It has most of the debt and pension obligation responsibility removed. It is important to keep track of the winners and losers in this bankruptcy as it gives insight into fiscal policy. The winners are the members of UAW and banks who are kept essentially whole while the losers are bond holders and tax payers who get about $0.50 per $1.00 invested. This means that the administration has placed a priority on the UAW and bank returns over private investors and taxpayers. This means that the investing climate is favorable for banks and not favorable for buyers of corporate bonds. If you as a citizen want to get the rest of your money, you will need to buy some shares of the new GM.

Ben Bernanke made a statement this week that the government needs to have fiscal restraint which means that the Congress and the President should stop passing spending bills. He viewed the stimulus bill and future spending plans as being fiscally irresponsible because the interest payments will become a huge financial burden and the printing of money to fund additional spending will lead to higher inflation and higher prices for imported commodities like oil. The long term impact of living beyond your means is always bad for an individual, a business, and our government. It appears that he made this statement so that people would remember that the Fed makes monetary policy and has nothing to do with fiscal policy and wants to disconnect from the current direction. As an investor this means that the current investing strategy of being in the stock market and having mutual funds that emphasize commodities and avoiding long term treasury bonds makes great sense.

The statement from Ben Bernanke fits well with the next topic, treasury bill and bond yield rates. From an investment perspective, the important news that got very little press was the steepening of the treasury bond curve. Longer term bonds continue to get higher and higher in yield while the yield on short term bills stay very low. Banks really like this environment since they pay little interest on savings accounts and make loans at higher interest rates. The current return for an investor on a 3 month treasury bill is about 0.19%. With the increasing 10 and 30 year treasury bond yield rates investors who are holding them are losing money, about 27% so far this year for the 30 year treasury bond. The reason long term bond yields are going up is an indicator for higher inflation.

The US stock market continues to go up in value while employment rates get worse, does this make sense? Losing a job is terrible for the person and their family. From an investment viewpoint, with the economy improving and companies reducing cost, this will resu;t in higher productivity with higher revenues and higher earnings per share in the future compared to last quarter. Yes it continues to make sense to buy stocks of US companies.

Summer is upon us. Enjoy the good things of life.