This week was another interesting week and in the world of investing things are acting fairly normally. In particular, the stock market had the best return during a 3 month period since 2007 and the treasury yield curve set a record. These are 2 good signs that the economic business cycle and investments are acting fairly normally and this is very good.
The stock market is increasing in a fairly choppy manner as it should for an economy that is coming out of a bottom. It should increase as interest rates increase which leads to the 2nd point. The difference in the interest rate of a 10 year treasury bond relative to a 2 year treasury bond reached an all-time record high. The 10 year bond rate increased while the 2 year bond rate has held fairly flat. Since this time, the 10 year bond rate has come down which means that the record was reached due to short term traders rather than investors. The important thing is that the treasury bond yield curve is acting fairly normally.
The bottom line is that we have to persevere and keep things in perspective and in priority. This week some wonderful things happened in my family which was a real blessing and more important than a treasury yield curve or stock market record. It is also good to see account balances grow.
Friday, May 29, 2009
Tuesday, May 26, 2009
Memorial Day 2009 Financial Information
Happy Memorial Day to you and your family. It is very important to remember that one of the purposes of this day is to help us keep our priorities in order. We need to remember the people who served our country and the people who are no longer with us that helped shape us into the people God intended for us to become.
The important financial news events last week included the index of leading economic indicators and the 10 year treasury rate. Thest 2 data points suggested that the economy contiues to improve and we are entering into a growth phase in the business cycle.
Numerous economic data gets published on a monthly basis. Some of this data tells us where we have been, lagging indicators, where we are, current indicators, and where we are going, leading indicators. The data is then compiled into the index of lagging indicators, current indicators, and leading indicators. For an investor keeping track of the index of leading indicators has value. For April, the index of leading indicators showed a 1% improvement over March with 7 of 10 components being positive. A 1% improvement is significant number.
The 10 year treasury rate continues to rise and last week the rate had another significant increase. Having this rate continue to increase is a good sign of economic improvement. This economic situation will pass, all we have to do is get through it.
This holiday, remember the important things of life.
The important financial news events last week included the index of leading economic indicators and the 10 year treasury rate. Thest 2 data points suggested that the economy contiues to improve and we are entering into a growth phase in the business cycle.
Numerous economic data gets published on a monthly basis. Some of this data tells us where we have been, lagging indicators, where we are, current indicators, and where we are going, leading indicators. The data is then compiled into the index of lagging indicators, current indicators, and leading indicators. For an investor keeping track of the index of leading indicators has value. For April, the index of leading indicators showed a 1% improvement over March with 7 of 10 components being positive. A 1% improvement is significant number.
The 10 year treasury rate continues to rise and last week the rate had another significant increase. Having this rate continue to increase is a good sign of economic improvement. This economic situation will pass, all we have to do is get through it.
This holiday, remember the important things of life.
Tuesday, May 19, 2009
Business Cycle by Rachel Bleich
The Business Cycle
What is the business cycle? How does it affect me? More and more, we hear about the business cycle in our ever-changing economy, but to fully understand just what we are hearing, we need to dig deeper. Once we comprehend what the business cycle is and what it does, then we can recognize the impact it has in daily life.
The business cycle, by its most common definition, is a period that extends from a peak in economic activity, through a following recession, recovery, and expansion until the next peak in economic activity is attained. The definition could also be looked at as a period extending from a trough in economic activity, through recovery, expansion, a peak, and recession until the next trough, or low point, in economic activity is reached. This cyclical movement is caused by changes in economic forces; one of the most common forces that affects business situations and the business cycle is aggregate demand, which can be looked at through the components of demand that make up the GDP. The relationship that represents aggregate demand is the sum of household expenditures (personal consumptions expenditures and residential investment), business expenditures (nonresidential investment), net exports, and government spending. All of these separate entities work together to create aggregate demand, whose fluctuations affect the macroeconomic forces that affect the business cycle, thus affecting each and every one of us.
The rise and fall in economic activity, also known as the business cycle, affects everyone in their daily life. As economic activity rises and the business cycle is expanding towards a peak, people make more money, invest more money, and feel more capable of spending more money. When the economic activity cycles towards a trough or recession, people make less money with some people losing jobs, and people feel less able to invest and spend money. How the economy is faring determines what we do with our money, which affects what we do, buy, wear, etc. This feeds into the household expenditures factor in aggregate demand, which is further proof of the relationship we have with the business cycle. When business expenditures, net exports, and government spending are thrown into the mix, it is easy to see how each part of demand works to influence the business cycle, and ultimately the average person.
The business cycle is an ever-changing rise and fall in economic activity that affects everyone, but it is also affected by everyone. It lives in a symbiotic relationship with household expenditures, business expenditures, net exports, and government spending as fluctuations occur. The important thing to remember is that no matter where the economy is in the business cycle, the cycle will continue and economic activity will change. So, although we maybe at a low point in economic activity, we will cycle into another expansion. The business cycle: it happens.
What is the business cycle? How does it affect me? More and more, we hear about the business cycle in our ever-changing economy, but to fully understand just what we are hearing, we need to dig deeper. Once we comprehend what the business cycle is and what it does, then we can recognize the impact it has in daily life.
The business cycle, by its most common definition, is a period that extends from a peak in economic activity, through a following recession, recovery, and expansion until the next peak in economic activity is attained. The definition could also be looked at as a period extending from a trough in economic activity, through recovery, expansion, a peak, and recession until the next trough, or low point, in economic activity is reached. This cyclical movement is caused by changes in economic forces; one of the most common forces that affects business situations and the business cycle is aggregate demand, which can be looked at through the components of demand that make up the GDP. The relationship that represents aggregate demand is the sum of household expenditures (personal consumptions expenditures and residential investment), business expenditures (nonresidential investment), net exports, and government spending. All of these separate entities work together to create aggregate demand, whose fluctuations affect the macroeconomic forces that affect the business cycle, thus affecting each and every one of us.
The rise and fall in economic activity, also known as the business cycle, affects everyone in their daily life. As economic activity rises and the business cycle is expanding towards a peak, people make more money, invest more money, and feel more capable of spending more money. When the economic activity cycles towards a trough or recession, people make less money with some people losing jobs, and people feel less able to invest and spend money. How the economy is faring determines what we do with our money, which affects what we do, buy, wear, etc. This feeds into the household expenditures factor in aggregate demand, which is further proof of the relationship we have with the business cycle. When business expenditures, net exports, and government spending are thrown into the mix, it is easy to see how each part of demand works to influence the business cycle, and ultimately the average person.
The business cycle is an ever-changing rise and fall in economic activity that affects everyone, but it is also affected by everyone. It lives in a symbiotic relationship with household expenditures, business expenditures, net exports, and government spending as fluctuations occur. The important thing to remember is that no matter where the economy is in the business cycle, the cycle will continue and economic activity will change. So, although we maybe at a low point in economic activity, we will cycle into another expansion. The business cycle: it happens.
Sunday, May 17, 2009
Stocks and 30 Year Treasuries
What a week in the auto industry. Chrysler, aka Crysler, and General Motors, aka Government Motors, announced the closing of about 2000 dealership. These dealerships were chosen by some reason probably not related to profitability of the individual dealer. Most people associated with Crysler and Government Motors are probably thinking why did we ask the government for money. Be careful what you wish for cause you just might get it.
About 8 months ago, Barrons had a nice article on why GM was a good buy at $25/share. I did not buy the stock then and still do not plan to buy it in the future. The reason for my decision is the metric of pension funding versus shareholder equity which says that funding pensions will cost more than the company is worth. This very smart person had great reasons on the surface but did not get to the real issue. GM hit a 76 year low this week at about $1/share. The moral of the story is be very very selective in buying an stock, I currently like only 4 stocks. You are better off to buy a few that you know very very well than just starting to buy based upon some very smart analyst. Better yet you are probably better off buying a highly rated mutual fund with low fees.
I have been saying that you want to avoid long term bonds. The latest issue of Barrons had an article stating that the 30 year treasury bond has lost 20% this year and this investment should be avoided. The reason is that government spending is causing interest rates to go up and this trend will continue. What does government spending at an annual deficit of a $2 trillion get us:
1) Higher interest rates
2) Losing money on long term bonds
3) Drop in the value of the dollar relative to other currencies
4) Higher prices for commodities that are imported like oil
For someone looking for fixed income, some good alternatives exist in bond funds that invest in corporate bonds and municipal bonds. If you go this route your return will be higher than a money market fund or CD.
About 8 months ago, Barrons had a nice article on why GM was a good buy at $25/share. I did not buy the stock then and still do not plan to buy it in the future. The reason for my decision is the metric of pension funding versus shareholder equity which says that funding pensions will cost more than the company is worth. This very smart person had great reasons on the surface but did not get to the real issue. GM hit a 76 year low this week at about $1/share. The moral of the story is be very very selective in buying an stock, I currently like only 4 stocks. You are better off to buy a few that you know very very well than just starting to buy based upon some very smart analyst. Better yet you are probably better off buying a highly rated mutual fund with low fees.
I have been saying that you want to avoid long term bonds. The latest issue of Barrons had an article stating that the 30 year treasury bond has lost 20% this year and this investment should be avoided. The reason is that government spending is causing interest rates to go up and this trend will continue. What does government spending at an annual deficit of a $2 trillion get us:
1) Higher interest rates
2) Losing money on long term bonds
3) Drop in the value of the dollar relative to other currencies
4) Higher prices for commodities that are imported like oil
For someone looking for fixed income, some good alternatives exist in bond funds that invest in corporate bonds and municipal bonds. If you go this route your return will be higher than a money market fund or CD.
Saturday, May 9, 2009
Business Cycle Investing - Long Term Investor
Articles are being written debating which investment is the best investment for a long term investor. One side of the debate extols the virtues of stocks and having an ownership position. The other side extols the virtues of bonds and having little risk exposure. If you look at Business Cycle Investing the answer is that you want to own both but at different times.
The building blocks of business cycle investing include:1) Any economy has business cycles.2) It is always good to minimize risk and make money.3) In general, the stock market goes us as the economy is growing and goes down as the economy is slowing. The change in the growth rate is also very important.4) The Federal Reserve moves interest rate to keep the economy growing at an annual inflation rate of about 3%.5) The Federal Reserve strongly influences the business cycle by changing interest rates.6) Long term bonds do well as interest rates are dropping and poorly as interest rates rise.
A business cycle has 4 segments: bottom, growing, top, and slowing. The Federal Reserve raises interest rates as the economy is growing at an inflation rate above 3% and reduces interest rates as the economy is slowing at an inflation rate below 3%.During a bottom, where we are now, interest rates are low and the economy is starting to grow. Stocks should be bought and long term bonds should be avoided. You know this phase as the Federal Reserve will publish information that the economy has bottomed and is growing.During a growth period, where we will be, interest rates are rising and the economy is growing. Stocks should be bought and long term bonds should be avoided. You know this phase by the Federal Reserve raising the interest rate.During a top, interest rates are at peak and the economy has stopped growing. Stocks should be avoided and long term bonds should be bought. You know this phase as the Federal Reserve will publish information that the economy has peaked and is slowing.During a slowing period, interest rates are dropping and the economy is slowing. Stocks should be avoided and long term bonds should be bought. You know this phase by the Federal Reserve dropping the interest rate.
An investor that would have followed Business Cycle Investing would have been out of the stock market during most of 2008 and would have been in long term bonds. During 2008 the stock market lost about 40% while long term bonds gained about 40%. An example to put this in terms of real money, a $100,000 account loses about $40,000 in the stock market and gains about $40,000 in long term bonds. You can have an account balance of $60,000 or $140,000. Obviously, it is better to have $80,000 more in your account even if you had to pay some capital gain tax.
The building blocks of business cycle investing include:1) Any economy has business cycles.2) It is always good to minimize risk and make money.3) In general, the stock market goes us as the economy is growing and goes down as the economy is slowing. The change in the growth rate is also very important.4) The Federal Reserve moves interest rate to keep the economy growing at an annual inflation rate of about 3%.5) The Federal Reserve strongly influences the business cycle by changing interest rates.6) Long term bonds do well as interest rates are dropping and poorly as interest rates rise.
A business cycle has 4 segments: bottom, growing, top, and slowing. The Federal Reserve raises interest rates as the economy is growing at an inflation rate above 3% and reduces interest rates as the economy is slowing at an inflation rate below 3%.During a bottom, where we are now, interest rates are low and the economy is starting to grow. Stocks should be bought and long term bonds should be avoided. You know this phase as the Federal Reserve will publish information that the economy has bottomed and is growing.During a growth period, where we will be, interest rates are rising and the economy is growing. Stocks should be bought and long term bonds should be avoided. You know this phase by the Federal Reserve raising the interest rate.During a top, interest rates are at peak and the economy has stopped growing. Stocks should be avoided and long term bonds should be bought. You know this phase as the Federal Reserve will publish information that the economy has peaked and is slowing.During a slowing period, interest rates are dropping and the economy is slowing. Stocks should be avoided and long term bonds should be bought. You know this phase by the Federal Reserve dropping the interest rate.
An investor that would have followed Business Cycle Investing would have been out of the stock market during most of 2008 and would have been in long term bonds. During 2008 the stock market lost about 40% while long term bonds gained about 40%. An example to put this in terms of real money, a $100,000 account loses about $40,000 in the stock market and gains about $40,000 in long term bonds. You can have an account balance of $60,000 or $140,000. Obviously, it is better to have $80,000 more in your account even if you had to pay some capital gain tax.
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