I hope that your Christmas was filled with blessings and that you are safe and warm given the Christmas snow. Since this is the last week of 2010, this gives a brief review of 2010 from an Economic Business Cycle Investing perspective. The first section is the weekly recap from Vanguard.
Vanguard
With the holidays upon us, consumers are increasingly jolly with their spending, as evidenced by personal income reports. Third-quarter real GDP was revised upward again to an annualized increase of 2.6%, even as the housing industry continued to struggle and durable-goods orders fell. For the holiday-shortened week ended December 23, the S&P 500 Index rose 1.0% to 1,257 (for a year-to-date total return of about 14.9%). The yield of the 10-year U.S. Treasury note rose 8 basis points to 3.41% (for a year-to-date decrease of 44 basis points).
2010 Review
The US economy stayed in the recovery mode of the economic business cycle for the year with hints of growth toward the end of the year. As with any economic recovery, this year had some turbulence with periods of fear and jubilation creating swings in interest rates and the value of stocks.
Interest Rates: Interest rates tend to stay flat during a recovery. Looking at the entire year the interest rates have been relatively flat where the rates at the end of the year being similar to that at the beginning. So far the 10 year US Treasury rate has dropped by 0.44%, not much of a change. The interest rates did drop giving a great opportunity to refinance a mortgage. Purchasing of US Treasuries by the Federal Reserve did influence interest rates.
Stock Market: Stocks typically do well in a recovery. The S&P 500 index has risen 14.9% for the year, above the historical average. Considerable volatility did exist as a high was reached in April followed by a significant drop and ending the year at an even higher level. It kind of looked like a yoyo climbing a flight of stairs.
Employment: The employment rate normally stays relatively flat in a recovery. The key metric is hours worked per week as employers delay hiring until the growth phase of the business cycle. Next year will bring employment gains.
Commodity Prices: The price of commodities normally stay flat during a recovery and rise during the growth phase. This was true during most of the year with increasing prices toward year's end. This recent rise indicates that the economy is entering a growth phase especially if you look at the price of oil, gas, and copper. We should expect even higher commodity prices next year.
The bottom line is that 2010 acted fairly normally for the recovery phase of the economic business cycle. Commodity prices are indicating that economic growth is coming and because of this some changes will occur to investing profiles during 2011.
The next posting will give the investing gameplan for 2011. I encourage you to read it and respond if you have a question as it is important to have a common vision for the upcoming year. Also, feel free to forward it to others.
Monday, December 27, 2010
Saturday, December 18, 2010
Merry Christmas and Social Security Tax Change
A week from today is Christmas, my how the year flew by. Merry Christmas to you and your family, enjoy the time and remember that the birth of Jesus is the reason for the season. This newsletter will be relatively brief and will discuss the change in the Social Security Tax in the recently signed tax cut bill as well as give some Christmas Facts.
Social Security Tax Change
The recently signed legislation called the tax cut bill or the extension of the Bush Tax Cut Bill has a provision to reduce the Social Security tax withholding from 6.5% to 4.5%. This tax is withheld twice, both from the individual and the employer unless you are self-employed they you pay both amounts. So the total tax is being reduced from 13% to 9%, for a total of 4% reduction.
The reasons for the change include an increase in the amount of take-home pay for people increasing consumer spending and to reduce business expenses so that businesses will hire people. This sounds great, it is always good to get more money. Unfortunately, some downside exists with this change.
Since the Social Security benefit payment that you get when you retire is based upon the amount that is withheld this change also reduces your future benefit. Having a reduced future benefit is a concern given the road of debt that our nation is driving down. My advice is to increase the amount you are putting in your retirement account next year by 2% and keep your retirement plan on track.
Christmas Facts
1) Each year, 30-35 million real Christmas trees are sold in the United States alone. There are 21,000 Christmas tree growers in the United States, and trees usually grow for about 15 years before they are sold.
2) Today, in the Greek and Russian orthodox churches, Christmas is celebrated 13 days after the 25th, which is also referred to as the Epiphany or Three Kings Day. This is the day it is believed that the three wise men finally found Jesus in the manger.
3) In the Middle Ages, Christmas celebrations were rowdy and raucous—a lot like today's Mardi Gras parties.
From 1659 to 1681, the celebration of Christmas was outlawed in Boston, and law-breakers were fined five shillings.
4) Christmas wasn't a holiday in early America—in fact Congress was in session on December 25, 1789, the country's first Christmas under the new constitution.
5) Christmas was declared a federal holiday in the United States on June 26, 1870.
6) The first eggnog made in the United States was consumed in Captain John Smith's 1607 Jamestown settlement.
7) Poinsettia plants are named after Joel R. Poinsett, an American minister to Mexico, who brought the red-and-green plant from Mexico to America in 1828.
8) The Salvation Army has been sending Santa Claus-clad donation collectors into the streets since the 1890s.
9) Rudolph, "the most famous reindeer of all," was the product of Robert L. May's imagination in 1939. The copywriter wrote a poem about the reindeer to help lure customers into the Montgomery Ward department store.
Construction workers started the Rockefeller Center Christmas tree tradition in 1931.
Social Security Tax Change
The recently signed legislation called the tax cut bill or the extension of the Bush Tax Cut Bill has a provision to reduce the Social Security tax withholding from 6.5% to 4.5%. This tax is withheld twice, both from the individual and the employer unless you are self-employed they you pay both amounts. So the total tax is being reduced from 13% to 9%, for a total of 4% reduction.
The reasons for the change include an increase in the amount of take-home pay for people increasing consumer spending and to reduce business expenses so that businesses will hire people. This sounds great, it is always good to get more money. Unfortunately, some downside exists with this change.
Since the Social Security benefit payment that you get when you retire is based upon the amount that is withheld this change also reduces your future benefit. Having a reduced future benefit is a concern given the road of debt that our nation is driving down. My advice is to increase the amount you are putting in your retirement account next year by 2% and keep your retirement plan on track.
Christmas Facts
1) Each year, 30-35 million real Christmas trees are sold in the United States alone. There are 21,000 Christmas tree growers in the United States, and trees usually grow for about 15 years before they are sold.
2) Today, in the Greek and Russian orthodox churches, Christmas is celebrated 13 days after the 25th, which is also referred to as the Epiphany or Three Kings Day. This is the day it is believed that the three wise men finally found Jesus in the manger.
3) In the Middle Ages, Christmas celebrations were rowdy and raucous—a lot like today's Mardi Gras parties.
From 1659 to 1681, the celebration of Christmas was outlawed in Boston, and law-breakers were fined five shillings.
4) Christmas wasn't a holiday in early America—in fact Congress was in session on December 25, 1789, the country's first Christmas under the new constitution.
5) Christmas was declared a federal holiday in the United States on June 26, 1870.
6) The first eggnog made in the United States was consumed in Captain John Smith's 1607 Jamestown settlement.
7) Poinsettia plants are named after Joel R. Poinsett, an American minister to Mexico, who brought the red-and-green plant from Mexico to America in 1828.
8) The Salvation Army has been sending Santa Claus-clad donation collectors into the streets since the 1890s.
9) Rudolph, "the most famous reindeer of all," was the product of Robert L. May's imagination in 1939. The copywriter wrote a poem about the reindeer to help lure customers into the Montgomery Ward department store.
Construction workers started the Rockefeller Center Christmas tree tradition in 1931.
Merry Christmas and Social Security Tax Change
A week from today is Christmas, my how the year flew by. Merry Christmas to you and your family, enjoy the time and remember that the birth of Jesus is the reason for the season. This newsletter will be relatively brief and will discuss the change in the Social Security Tax in the recently signed tax cut bill as well as give some Christmas Facts.
Social Security Tax Change
The recently signed legislation called the tax cut bill or the extension of the Bush Tax Cut Bill has a provision to reduce the Social Security tax withholding from 6.5% to 4.5%. This tax is withheld twice, both from the individual and the employer unless you are self-employed they you pay both amounts. So the total tax is being reduced from 13% to 9%, for a total of 4% reduction.
The reasons for the change include an increase in the amount of take-home pay for people increasing consumer spending and to reduce business expenses so that businesses will hire people. This sounds great, it is always good to get more money. Unfortunately, some downside exists with this change.
Since the Social Security benefit payment that you get when you retire is based upon the amount that is withheld this change also reduces your future benefit. Having a reduced future benefit is a concern given the road of debt that our nation is driving down. My advice is to increase the amount you are putting in your retirement account next year by 2% and keep your retirement plan on track.
Christmas Facts
1) Each year, 30-35 million real Christmas trees are sold in the United States alone. There are 21,000 Christmas tree growers in the United States, and trees usually grow for about 15 years before they are sold.
2) Today, in the Greek and Russian orthodox churches, Christmas is celebrated 13 days after the 25th, which is also referred to as the Epiphany or Three Kings Day. This is the day it is believed that the three wise men finally found Jesus in the manger.
3) In the Middle Ages, Christmas celebrations were rowdy and raucous—a lot like today's Mardi Gras parties.
From 1659 to 1681, the celebration of Christmas was outlawed in Boston, and law-breakers were fined five shillings.
4) Christmas wasn't a holiday in early America—in fact Congress was in session on December 25, 1789, the country's first Christmas under the new constitution.
5) Christmas was declared a federal holiday in the United States on June 26, 1870.
6) The first eggnog made in the United States was consumed in Captain John Smith's 1607 Jamestown settlement.
7) Poinsettia plants are named after Joel R. Poinsett, an American minister to Mexico, who brought the red-and-green plant from Mexico to America in 1828.
8) The Salvation Army has been sending Santa Claus-clad donation collectors into the streets since the 1890s.
9) Rudolph, "the most famous reindeer of all," was the product of Robert L. May's imagination in 1939. The copywriter wrote a poem about the reindeer to help lure customers into the Montgomery Ward department store.
Construction workers started the Rockefeller Center Christmas tree tradition in 1931.
Social Security Tax Change
The recently signed legislation called the tax cut bill or the extension of the Bush Tax Cut Bill has a provision to reduce the Social Security tax withholding from 6.5% to 4.5%. This tax is withheld twice, both from the individual and the employer unless you are self-employed they you pay both amounts. So the total tax is being reduced from 13% to 9%, for a total of 4% reduction.
The reasons for the change include an increase in the amount of take-home pay for people increasing consumer spending and to reduce business expenses so that businesses will hire people. This sounds great, it is always good to get more money. Unfortunately, some downside exists with this change.
Since the Social Security benefit payment that you get when you retire is based upon the amount that is withheld this change also reduces your future benefit. Having a reduced future benefit is a concern given the road of debt that our nation is driving down. My advice is to increase the amount you are putting in your retirement account next year by 2% and keep your retirement plan on track.
Christmas Facts
1) Each year, 30-35 million real Christmas trees are sold in the United States alone. There are 21,000 Christmas tree growers in the United States, and trees usually grow for about 15 years before they are sold.
2) Today, in the Greek and Russian orthodox churches, Christmas is celebrated 13 days after the 25th, which is also referred to as the Epiphany or Three Kings Day. This is the day it is believed that the three wise men finally found Jesus in the manger.
3) In the Middle Ages, Christmas celebrations were rowdy and raucous—a lot like today's Mardi Gras parties.
From 1659 to 1681, the celebration of Christmas was outlawed in Boston, and law-breakers were fined five shillings.
4) Christmas wasn't a holiday in early America—in fact Congress was in session on December 25, 1789, the country's first Christmas under the new constitution.
5) Christmas was declared a federal holiday in the United States on June 26, 1870.
6) The first eggnog made in the United States was consumed in Captain John Smith's 1607 Jamestown settlement.
7) Poinsettia plants are named after Joel R. Poinsett, an American minister to Mexico, who brought the red-and-green plant from Mexico to America in 1828.
8) The Salvation Army has been sending Santa Claus-clad donation collectors into the streets since the 1890s.
9) Rudolph, "the most famous reindeer of all," was the product of Robert L. May's imagination in 1939. The copywriter wrote a poem about the reindeer to help lure customers into the Montgomery Ward department store.
Construction workers started the Rockefeller Center Christmas tree tradition in 1931.
Sunday, December 12, 2010
Tax Cut Plan
I hope this finds you safe, warm, and dry. Winter has arrived early before the official start date. This is a lot like what happened this past week on the tax cut plan, it got started before the official start date of the next group of US House of Representatives and US Senators. This blog will include information from Vanguard, and the proposed tax cut plan that has people really talking. Just as the weather has changed this past week so has the investing climate.
We now have fiscal policy that is attempting to grow the ecomony at the same time the Federal Reserve has monetary policy that is also attempting to grow the economy. We have both feet on the gas pedal and we are going into the first turn on the track. Any NASCAR driver or fan knows the real pickup in speed will occur on the back straightaway. This means that it will take awhile for this action to have an impact on the economy.
Vanguard
While Washington buzzed contentiously over tax rates and other domestic policy items, this week's activity suggested the economy is still trying to sound a positive note. Consumer sentiment improved and new jobless claims dropped, but unusual short-term volatility in the fixed income markets depressed bond prices and bumped mortgage rates to their highest level since June. For the week ended December 10, the S&P 500 Index rose 1.3% to a 2-year high of 1240 (for a year-to-date total return of about 13.4%). The yield on the 10-year U.S. Treasury note jumped 26 basis points to 3.29% (for a year-to-date decline of 56 basis points).
Tax Cut Plan
This past week the news of the Obama compromise plan with the Republicans has really gotten people talking. I am going to avoid any political comment and focus on the impact for investing. I view this as positive for stocks and neutral to negative for longer term bonds.
Stocks go up and down with future growth rate. Since growth rate increases with this move so does the price of stocks. I have stated that we have been in a trading range with stocks. This move in my opinion changes things and allows stocks to go higher. We still have some end of year selling for tax reasons so some volatility will exist for awhile. It will be interesting to see what happens going into 2011.
Bonds are another story and they are in a tug of war. The 10 year treasury bond rose 0.26% last week based upon the news, a significant move. This tells us that the lower rates of about 1 month ago, when I wrote that it was a good time to re-finance your mortgage, are probably gone. While investors are selling long term bonds and driving prices up the Federal Reserve is buying them to keep prices down in a classic tug of war. This means that any rise in longer term rates should be muted. The significant move occurs next year when the Federal Reserve unwinds their position and sells these bonds.
This means that now is a good time to fund your IRA or savings account as we have a new buying opportunity. Do not let fear of the future keep you from enjoying life and investing today.
I understand the statements of growing our national debt. Remember that debt is measured as a function of GDP. The people who drafted this legislation is looking at the annual level of debt as well as long term level of debt relative to GDP. The growth of GDP for the longer term is the current focus.
We now have fiscal policy that is attempting to grow the ecomony at the same time the Federal Reserve has monetary policy that is also attempting to grow the economy. We have both feet on the gas pedal and we are going into the first turn on the track. Any NASCAR driver or fan knows the real pickup in speed will occur on the back straightaway. This means that it will take awhile for this action to have an impact on the economy.
Vanguard
While Washington buzzed contentiously over tax rates and other domestic policy items, this week's activity suggested the economy is still trying to sound a positive note. Consumer sentiment improved and new jobless claims dropped, but unusual short-term volatility in the fixed income markets depressed bond prices and bumped mortgage rates to their highest level since June. For the week ended December 10, the S&P 500 Index rose 1.3% to a 2-year high of 1240 (for a year-to-date total return of about 13.4%). The yield on the 10-year U.S. Treasury note jumped 26 basis points to 3.29% (for a year-to-date decline of 56 basis points).
Tax Cut Plan
This past week the news of the Obama compromise plan with the Republicans has really gotten people talking. I am going to avoid any political comment and focus on the impact for investing. I view this as positive for stocks and neutral to negative for longer term bonds.
Stocks go up and down with future growth rate. Since growth rate increases with this move so does the price of stocks. I have stated that we have been in a trading range with stocks. This move in my opinion changes things and allows stocks to go higher. We still have some end of year selling for tax reasons so some volatility will exist for awhile. It will be interesting to see what happens going into 2011.
Bonds are another story and they are in a tug of war. The 10 year treasury bond rose 0.26% last week based upon the news, a significant move. This tells us that the lower rates of about 1 month ago, when I wrote that it was a good time to re-finance your mortgage, are probably gone. While investors are selling long term bonds and driving prices up the Federal Reserve is buying them to keep prices down in a classic tug of war. This means that any rise in longer term rates should be muted. The significant move occurs next year when the Federal Reserve unwinds their position and sells these bonds.
This means that now is a good time to fund your IRA or savings account as we have a new buying opportunity. Do not let fear of the future keep you from enjoying life and investing today.
I understand the statements of growing our national debt. Remember that debt is measured as a function of GDP. The people who drafted this legislation is looking at the annual level of debt as well as long term level of debt relative to GDP. The growth of GDP for the longer term is the current focus.
Sunday, November 28, 2010
What's up with Ireland
The news that is influencing world stock markets is the financial crisis in Ireland. This blog looks at the situation and what we can learn from it. First is the weekly recap from Vanguard.
Vanguard
As Americans paused to count their blessings this week, there was news to be thankful for on the economic front: The latest figures on GDP growth were revised upward substantially, and far fewer people filed for first-time unemployment benefits than had been expected. For the week ending November 26, the S&P 500 Index fell 0.9% to 1,189 (for a year-to-date total return of about 8.4%). The yield of the 10-year U.S. Treasury note fell 1 basis point to 2.87% (for a year-to-date decrease of 98 basis points).
Ireland
Below are segments from a Reuters article
Ireland promised on Wednesday to cut spending and raise taxes to combat its banking crisis and secure an international bailout. Irish Prime Minister Brian Cowen, whose government is close to collapse, unveiled a 15 billion euro ($20 billion) four-year austerity plan that he said would affect all Irish people.
"The size of the crisis means that no one will be sheltered from the contribution that has to be made toward national recovery," Cowen told a news conference. The plan includes thousands of public sector job cuts, phased-in increases in Ireland's value-added tax (VAT) rate from 2013 and social welfare savings of 2.8 billion euros by 2014, but does not touch the country's ultra-low corporate tax rate.
Dublin's 10-year bonds are trading far below their face value, at less than 75 cents in the euro. On Wednesday they yielded 9.23 percent -- a level at which Dublin could not realistically issue news bonds, and far above the 2.63 percent on the equivalent German bond. Ireland is expected to be pay about 5% on loans from the International Monetary Fund.
So what does this mean? Ireland can not afford to lend money at 9.23% which is the going rate. The reason it is so high is due to a default risk where investors need a much higher return based upon the poor fiscal condition of the country. In comparison to a country that is in good fiscal shape like Germany the interest rate is only 2.63%. So because of this default risk Ireland has to to pay over 3 times higher in interest.
What does Ireland need? They need to borrow money at a lower rate which is 5% from the International Monetary Fund, IMF. Now the people at IMF are only charging 2X of the rate at Germany so this is not really a great rate but a lot better than 9.23%. So the IMF will only lend the money at this lower rate if and only if the Irish government make enough changes in taxes and spending to reduce the risk of default. Today we read that an agreement has been reached so that the Irish government will get money loaned at a lower rate.
What does this mean for us?
* First, I feel sorry for the people of Ireland who now have to pay for bad fiscal policy of the past. These people will be paying higher taxes and getting less in return, it won't be fun to get through this.
* Taking this to a person level this is like a person who has been living beyond their means living on credit and now can not get more credit and it is time to pay.
* It appears that the monetary crisis in Ireland, as well as some other countries like Portugal and Greece, will be resolved and the IMF along with other EU nations will be able to handle this crisis.
* A government that has good fiscal policy get money at the lowest rate while a government that goes deeper in debt pays a higher rate.
* The old saying holds true, people who do not need a loan can easily get one and people who really need a loan many times can not get one.
* According to usdebtclock.org the United States that has about $14 trillion in debt, a federal revenue of about $2.5 trillion, federal spending of $3.8 trillion, and interest paid on the debt of $200 billion per year. If we had to borrow money at 5% this would increase the interest paid on the debt to $700 billion per year increasing federal spending to $4.3 trillion.
* If we have to pay an extra $500 billion per year in interest and we have to reduce our debt to get the money this means that we have to reduce our spending from $4.3 trillion to $2.5 trillion just to break even and not generate more debt. We would have to cut spending about 40% to get to even.
Ireland shows us where we are headed as a country, higher taxes of all sorts and reducing spending everywhere. The best thing that the government can do for us now is to focus on fiscal policy and get the debt under control now and not later. Quit talking about the Federal Reserve and start talking about raising taxes, not cutting taxes, and cutting spending. The longer we ignore this the worse it gets.
Vanguard
As Americans paused to count their blessings this week, there was news to be thankful for on the economic front: The latest figures on GDP growth were revised upward substantially, and far fewer people filed for first-time unemployment benefits than had been expected. For the week ending November 26, the S&P 500 Index fell 0.9% to 1,189 (for a year-to-date total return of about 8.4%). The yield of the 10-year U.S. Treasury note fell 1 basis point to 2.87% (for a year-to-date decrease of 98 basis points).
Ireland
Below are segments from a Reuters article
Ireland promised on Wednesday to cut spending and raise taxes to combat its banking crisis and secure an international bailout. Irish Prime Minister Brian Cowen, whose government is close to collapse, unveiled a 15 billion euro ($20 billion) four-year austerity plan that he said would affect all Irish people.
"The size of the crisis means that no one will be sheltered from the contribution that has to be made toward national recovery," Cowen told a news conference. The plan includes thousands of public sector job cuts, phased-in increases in Ireland's value-added tax (VAT) rate from 2013 and social welfare savings of 2.8 billion euros by 2014, but does not touch the country's ultra-low corporate tax rate.
Dublin's 10-year bonds are trading far below their face value, at less than 75 cents in the euro. On Wednesday they yielded 9.23 percent -- a level at which Dublin could not realistically issue news bonds, and far above the 2.63 percent on the equivalent German bond. Ireland is expected to be pay about 5% on loans from the International Monetary Fund.
So what does this mean? Ireland can not afford to lend money at 9.23% which is the going rate. The reason it is so high is due to a default risk where investors need a much higher return based upon the poor fiscal condition of the country. In comparison to a country that is in good fiscal shape like Germany the interest rate is only 2.63%. So because of this default risk Ireland has to to pay over 3 times higher in interest.
What does Ireland need? They need to borrow money at a lower rate which is 5% from the International Monetary Fund, IMF. Now the people at IMF are only charging 2X of the rate at Germany so this is not really a great rate but a lot better than 9.23%. So the IMF will only lend the money at this lower rate if and only if the Irish government make enough changes in taxes and spending to reduce the risk of default. Today we read that an agreement has been reached so that the Irish government will get money loaned at a lower rate.
What does this mean for us?
* First, I feel sorry for the people of Ireland who now have to pay for bad fiscal policy of the past. These people will be paying higher taxes and getting less in return, it won't be fun to get through this.
* Taking this to a person level this is like a person who has been living beyond their means living on credit and now can not get more credit and it is time to pay.
* It appears that the monetary crisis in Ireland, as well as some other countries like Portugal and Greece, will be resolved and the IMF along with other EU nations will be able to handle this crisis.
* A government that has good fiscal policy get money at the lowest rate while a government that goes deeper in debt pays a higher rate.
* The old saying holds true, people who do not need a loan can easily get one and people who really need a loan many times can not get one.
* According to usdebtclock.org the United States that has about $14 trillion in debt, a federal revenue of about $2.5 trillion, federal spending of $3.8 trillion, and interest paid on the debt of $200 billion per year. If we had to borrow money at 5% this would increase the interest paid on the debt to $700 billion per year increasing federal spending to $4.3 trillion.
* If we have to pay an extra $500 billion per year in interest and we have to reduce our debt to get the money this means that we have to reduce our spending from $4.3 trillion to $2.5 trillion just to break even and not generate more debt. We would have to cut spending about 40% to get to even.
Ireland shows us where we are headed as a country, higher taxes of all sorts and reducing spending everywhere. The best thing that the government can do for us now is to focus on fiscal policy and get the debt under control now and not later. Quit talking about the Federal Reserve and start talking about raising taxes, not cutting taxes, and cutting spending. The longer we ignore this the worse it gets.
Sunday, November 21, 2010
Happy Thanksgiving 2010
Let me be one of the first to wish you a Happy Thanksgiving. At the end is a brief summary of Thanksgiving. The first paragraph is the weekly recap from Vanguard. In the middle is a quetion and answer section where a number of topics are covered.
Vanguard
The week's news suggests that the economy continues to recover at a steady but slow pace. Retail sales were up more than 1% for the month of October, while businesses expanded their inventories to keep pace with shoppers and to prep for the upcoming holiday rush. Meanwhile, last month's slight increase in consumer prices barely registered, sending inflation to its lowest level in more than 50 years. For the week ended November 19, the S&P 500 Index remained unchanged at 1,199 (for a year-to-date total return—including price change plus dividends—of about 9.5%). The yield of the 10-year U.S. Treasury note rose 12 basis points to 2.88% (for a year-to-date decrease of 97 basis points).
Questions and Answers:
Why did I buy General Motors stock this week? Since it has been restructured and the US Government needs the stock price to increase I believe the government wins and I want to be on the winning side.
What did mortgage rates do last week? 30 year mortgage rates rose 0.22% from 4.17 to 4.39%.
Which type of mutual funds are investors buying? The 4 week weekly averages are: bought $3.9 Billion more of stock funds, bought $5.4 Billion more of taxable bonds, sold $489 Million of municipal bond funds, and bought $2.4 Billion of money market funds.
Which type of mutual funds should be avoided? Municipal Bond Funds - lack of tax revenue and the end of stimulus money and Long Term Treasury Bond Funds - rising interest rates during 2011.
Is the Federal Reserve Quantitative Easing 2 a good thing? Based upon the stagnant consumer price index information and high unemployment rate this seems to be good monetary policy. If I was on the Federal Reseve I would do it, we need the economy to grow for numerous reasons. It would be good if the politicians would do something with fiscal policy, you know the taxing and spending part of the government. It will be good when we get good fiscal and monetary policy.
Thanksgiving Information
According to Noell Wolfgram Evans, the first Thanksgiving celebration held in America occurred in 1619. On Decem-ber fourth of that year, thirty-eight English settlers arrived at the Berkeley Plantation in Virginia. Part of their original charter stated that they would set aside that day every year as a day of Thanksgiving. Due to the hardships of those early times, the celebration turned out to be short lived.
The next recorded celebration in Plymouth, Massachusetts in 1621 is also the most famous. The first winter for the Pilgrims in the New World was a brutal one - nearly half of those who came over on the Mayflower died. Times even-tually grew easier. The following Harvest season was so bountiful that the Pilgrims decided to hold a feast to cele-brate. This three-day festival included the participation of nearly one hundred Native Americans. Governor William Bradford had invited them to show his appreciation for helping the colony survive the harsh weather conditions.
The next Thanksgiving celebration did not occur until 1623. This year the Pilgrims were again hit with a great hardship - a draught. In the hope of bringing much needed rain, they gathered in a prayer service. The next morning it started to rain, long and hard for several days. When it became apparent that the crops and the colonists would survive, Governor Bradford declared that they would hold another day of Thanksgiving - the Indians were again invited.
The first national celebration of Thanksgiving occurred in 1777. This one-time only event also served as a way to cele-brate the American defeat of the British at Saratoga. In 1789, George Washington made the first Presidential proc-lamation declaring Thanksgiving a national event. The first Thanksgiving held under this proclamation occurred on November 26 of that year. The pattern was set.
Thomas Jefferson decided against the idea of Thanksgiving and it was not celebrated for nearly sixty years, until Sarah Josepha Hale became involved. A magazine editor, Hale wrote strong editorials in many of the popular magazines of the time. She also wrote letters to anyone who might help her cause. She was concerned with her belief that the coun-try needed to set aside a day to give thanks “unto Him from who all blessings flow.”
Finally, she struck the right chord with Abraham Lincoln and in 1863, Hale saw her dream realized as Lincoln de-clared the last Thursday of November as a national day of Thanksgiving.
For the most part, it is a day that has stayed. In the 1930’s President Roosevelt tried to move the date to extend the Christmas shopping season. Facing immense outrage, he moved the day back with little fanfare. Later in his administration, – 1941 - Congress declared the fourth Thursday in November to be the legal Holiday known as Thanksgiving.
Vanguard
The week's news suggests that the economy continues to recover at a steady but slow pace. Retail sales were up more than 1% for the month of October, while businesses expanded their inventories to keep pace with shoppers and to prep for the upcoming holiday rush. Meanwhile, last month's slight increase in consumer prices barely registered, sending inflation to its lowest level in more than 50 years. For the week ended November 19, the S&P 500 Index remained unchanged at 1,199 (for a year-to-date total return—including price change plus dividends—of about 9.5%). The yield of the 10-year U.S. Treasury note rose 12 basis points to 2.88% (for a year-to-date decrease of 97 basis points).
Questions and Answers:
Why did I buy General Motors stock this week? Since it has been restructured and the US Government needs the stock price to increase I believe the government wins and I want to be on the winning side.
What did mortgage rates do last week? 30 year mortgage rates rose 0.22% from 4.17 to 4.39%.
Which type of mutual funds are investors buying? The 4 week weekly averages are: bought $3.9 Billion more of stock funds, bought $5.4 Billion more of taxable bonds, sold $489 Million of municipal bond funds, and bought $2.4 Billion of money market funds.
Which type of mutual funds should be avoided? Municipal Bond Funds - lack of tax revenue and the end of stimulus money and Long Term Treasury Bond Funds - rising interest rates during 2011.
Is the Federal Reserve Quantitative Easing 2 a good thing? Based upon the stagnant consumer price index information and high unemployment rate this seems to be good monetary policy. If I was on the Federal Reseve I would do it, we need the economy to grow for numerous reasons. It would be good if the politicians would do something with fiscal policy, you know the taxing and spending part of the government. It will be good when we get good fiscal and monetary policy.
Thanksgiving Information
According to Noell Wolfgram Evans, the first Thanksgiving celebration held in America occurred in 1619. On Decem-ber fourth of that year, thirty-eight English settlers arrived at the Berkeley Plantation in Virginia. Part of their original charter stated that they would set aside that day every year as a day of Thanksgiving. Due to the hardships of those early times, the celebration turned out to be short lived.
The next recorded celebration in Plymouth, Massachusetts in 1621 is also the most famous. The first winter for the Pilgrims in the New World was a brutal one - nearly half of those who came over on the Mayflower died. Times even-tually grew easier. The following Harvest season was so bountiful that the Pilgrims decided to hold a feast to cele-brate. This three-day festival included the participation of nearly one hundred Native Americans. Governor William Bradford had invited them to show his appreciation for helping the colony survive the harsh weather conditions.
The next Thanksgiving celebration did not occur until 1623. This year the Pilgrims were again hit with a great hardship - a draught. In the hope of bringing much needed rain, they gathered in a prayer service. The next morning it started to rain, long and hard for several days. When it became apparent that the crops and the colonists would survive, Governor Bradford declared that they would hold another day of Thanksgiving - the Indians were again invited.
The first national celebration of Thanksgiving occurred in 1777. This one-time only event also served as a way to cele-brate the American defeat of the British at Saratoga. In 1789, George Washington made the first Presidential proc-lamation declaring Thanksgiving a national event. The first Thanksgiving held under this proclamation occurred on November 26 of that year. The pattern was set.
Thomas Jefferson decided against the idea of Thanksgiving and it was not celebrated for nearly sixty years, until Sarah Josepha Hale became involved. A magazine editor, Hale wrote strong editorials in many of the popular magazines of the time. She also wrote letters to anyone who might help her cause. She was concerned with her belief that the coun-try needed to set aside a day to give thanks “unto Him from who all blessings flow.”
Finally, she struck the right chord with Abraham Lincoln and in 1863, Hale saw her dream realized as Lincoln de-clared the last Thursday of November as a national day of Thanksgiving.
For the most part, it is a day that has stayed. In the 1930’s President Roosevelt tried to move the date to extend the Christmas shopping season. Facing immense outrage, he moved the day back with little fanfare. Later in his administration, – 1941 - Congress declared the fourth Thursday in November to be the legal Holiday known as Thanksgiving.
Sunday, November 14, 2010
End of Tax Selling and Mortgage Rate Divergence
This past week had lots of financial news concerning the Fed monetary easing called QE2 where the Federal Reserve is puchasing longer term US treasury bonds. What was not in the news has to do with end of year selling and a Mortgage rate divergence that has never happened before and should never happen again, which I will explain. First is the weekly recap from Vanguard.
Vanguard
Following last week's upbeat jobs report, the U.S. economy continued to show signs of improvement. In a relatively light week for economic news, the trade deficit narrowed in September and initial jobless claims hit their lowest level since July. For the week, the S&P 500 Index fell 2.2% to 1,199 (for a year-to-date total return—including price change plus dividends—of about 9.4%). The yield of the 10-year U.S. Treasury note rose 18 basis points to 2.76% (for a year-to-date decrease of 109 basis points).
End of Year Tax Selling
The US stock market dropped this week and experts on the news were trying to explain it and how it relates to many things like QE2. Quite frankly, I believe the reason was end of year tax selling which is probably going to be heavier than normal this year. This applies if you have a brokerage account, it does not apply to an IRA account or 401(k) account, just a brokerage account.
Every year about this time people sell assets, like stocks or mutual funds, that have lost money so that they can write it off on their taxes. If the person wants to purchase the same asset they have to wait 31 days to repurchase it to avoid the wash sale rule. If you sell and buy it back within 30 days this is call a wash sale and for tax purposes the loss can not be deducted. So people tend to start to sell mid November and buy back mid December to reduce their taxable income.
This year I believe the end of year selling will be much higher due to the uncertainty of extending the Bush tax cuts. As it stands today any capital gain on an asset, like a stock or mutual fund, will be taxed at a higher capital gain tax rate next year. So to reduce the amount of taxes paid assets are being sold now to get a lower tax rate.
What this means is that between now and the end of the year the stock market should have some volatility. For a long term investment this is noise. If you have a short term time horizon you should becoming more conservative.
Mortgage Rate Divergence
Put this date down in the record book, Thursday November 11,2010 something happened that had never happened before. It is so exciting to see a once in a life time event, I wonder why the media didn't cover it more. Here is the big news, the interest rate on a 30 year mortgage was lower than the interest on a 30 year US Treasury bond. Wow wasn't that exciting!!!
This means it is cheaper to borrow from your house than the US Government. This has never happened because of how the mortgage game works. If you want to get a mortgage the provider will purchase a US Treasury bond of the same duration and amount, usually about 1% lower than the mortgage rate. So if the mortgage rate is 5% the mortgage provider has purchased a US Treasury bond at about 4% and that is why they provided the mortgage. This is big business and 1% of $1 Trillion is $10 Billion.
The reason it happened has to do with QE2 and the purchasing of longer term bonds and the time gap between when the US Treasury bond is bought and when the mortgage is converted. Since this has happened, either mortgage rates are going to go up, US Treasury rates are going to go down or both. Probably both is my belief.
When dealing with the Federal Reserve never bet against their policy since they hold the money. This tells me that interest rates are not rising anytime soon. It also tells me that now is a great time to refinance a mortgage as this divergence can not last long. No mortgage provider will stay in business to lose money.
Veterans Day Trivia
Veterans Day is always observed on Nov. 11 with speeches and parades across the U.S. The holiday began as Armistice Day on Nov. 11, 1919, the first anniversary of the end of World War I.
•In 1926, Congress passed a resolution for an annual observance.
•In 1938, Nov. 11 became a national holiday.
•In 1954, President Dwight D. Eisenhower signed legislation changing the name to Veterans Day in order to honor veterans of all American wars.
There were 21.9 million military veterans in the U.S. in 2009. Of those:
•1.5 million were female.
•2.3 million were black.
•1.1 million were Hispanic.
•9.2 million were 65 and older, according to 2008 figures.
•1.9 million were younger than 35, in 2008.
If you know a Veteran, thank them.
Vanguard
Following last week's upbeat jobs report, the U.S. economy continued to show signs of improvement. In a relatively light week for economic news, the trade deficit narrowed in September and initial jobless claims hit their lowest level since July. For the week, the S&P 500 Index fell 2.2% to 1,199 (for a year-to-date total return—including price change plus dividends—of about 9.4%). The yield of the 10-year U.S. Treasury note rose 18 basis points to 2.76% (for a year-to-date decrease of 109 basis points).
End of Year Tax Selling
The US stock market dropped this week and experts on the news were trying to explain it and how it relates to many things like QE2. Quite frankly, I believe the reason was end of year tax selling which is probably going to be heavier than normal this year. This applies if you have a brokerage account, it does not apply to an IRA account or 401(k) account, just a brokerage account.
Every year about this time people sell assets, like stocks or mutual funds, that have lost money so that they can write it off on their taxes. If the person wants to purchase the same asset they have to wait 31 days to repurchase it to avoid the wash sale rule. If you sell and buy it back within 30 days this is call a wash sale and for tax purposes the loss can not be deducted. So people tend to start to sell mid November and buy back mid December to reduce their taxable income.
This year I believe the end of year selling will be much higher due to the uncertainty of extending the Bush tax cuts. As it stands today any capital gain on an asset, like a stock or mutual fund, will be taxed at a higher capital gain tax rate next year. So to reduce the amount of taxes paid assets are being sold now to get a lower tax rate.
What this means is that between now and the end of the year the stock market should have some volatility. For a long term investment this is noise. If you have a short term time horizon you should becoming more conservative.
Mortgage Rate Divergence
Put this date down in the record book, Thursday November 11,2010 something happened that had never happened before. It is so exciting to see a once in a life time event, I wonder why the media didn't cover it more. Here is the big news, the interest rate on a 30 year mortgage was lower than the interest on a 30 year US Treasury bond. Wow wasn't that exciting!!!
This means it is cheaper to borrow from your house than the US Government. This has never happened because of how the mortgage game works. If you want to get a mortgage the provider will purchase a US Treasury bond of the same duration and amount, usually about 1% lower than the mortgage rate. So if the mortgage rate is 5% the mortgage provider has purchased a US Treasury bond at about 4% and that is why they provided the mortgage. This is big business and 1% of $1 Trillion is $10 Billion.
The reason it happened has to do with QE2 and the purchasing of longer term bonds and the time gap between when the US Treasury bond is bought and when the mortgage is converted. Since this has happened, either mortgage rates are going to go up, US Treasury rates are going to go down or both. Probably both is my belief.
When dealing with the Federal Reserve never bet against their policy since they hold the money. This tells me that interest rates are not rising anytime soon. It also tells me that now is a great time to refinance a mortgage as this divergence can not last long. No mortgage provider will stay in business to lose money.
Veterans Day Trivia
Veterans Day is always observed on Nov. 11 with speeches and parades across the U.S. The holiday began as Armistice Day on Nov. 11, 1919, the first anniversary of the end of World War I.
•In 1926, Congress passed a resolution for an annual observance.
•In 1938, Nov. 11 became a national holiday.
•In 1954, President Dwight D. Eisenhower signed legislation changing the name to Veterans Day in order to honor veterans of all American wars.
There were 21.9 million military veterans in the U.S. in 2009. Of those:
•1.5 million were female.
•2.3 million were black.
•1.1 million were Hispanic.
•9.2 million were 65 and older, according to 2008 figures.
•1.9 million were younger than 35, in 2008.
If you know a Veteran, thank them.
Sunday, October 31, 2010
Private Equity
This past week CommScope announced that it had reached an agreement with a Private Equity company, the Carlyle Group, to be acquired for $3.9 Billion at a stock price of $31.50 per share, a 36% premium. This newsletter will review what it means when a publicly traded company like CommScope is taken private and agrees to no longer to be traded on a stock exchange. This newsletter will have the usual things like the weekly recap from Vanguard and some trivia.
Vanguard
The economy's continued growth is good news, but the pace of that growth remains unimpressive. While gross domestic product rose for the fifth straight quarter, this wasn't enough to lower the unemployment rate. The housing market is recovering, but still in a rut. Likewise, consumer confidence and durable-goods orders were both up, but nobody was overdosing on optimism. For the week, the S&P 500 Index remained unchanged at 1,183 (for a year-to-date total return—including price change plus dividends—of about 7.8%). The yield of the 10-year U.S. Treasury note rose 1 basis point to 2.60% (for a year-to-date decrease of 125 basis points).
Private Equity
The acquisition by a Private Equity company taking it from being owned by shareholders to a group of investors is very important to understand. Bottom Line: When you see Private Equity Companies buying stock you should too.
First, what is the the Carlyle group and who can invest with them? Because of applicable U.S. securities laws, firms such as Carlyle work only with "accredited investors" and "qualified purchasers" as those terms are defined under the securities laws. These types of investors are highly sophisticated investors with considerable financial resources, such as high net worth individuals and institutional investors. Carlyle is prohibited from offering its products to the general public under applicable securities law regulations.
The federal securities laws define the term accredited investor in Rule 501 of Regulation D for an individual as:
1) a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase
2) a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year
An individual who is a Qualified Purchaser as defined by the Investment Company Act of 1940, has at least $5,000,000 in investments.
Why does Carlyle only want these types of investors? To minimize transaction cost and also because these categories of investors can not file a lawsuit.
Why do Investors keep giving Carlyle to invest? This happens when this is the best alternative of getting the highest return with the lowest risk. With the low interest rates for fixed income from treasury bonds these investors are getting a higher return for a fixed income style investment.
What does it mean for us? Carlyle made the investment and paid a 36% premium because the stock price was cheap and the company was consistently generating profits and cash flow from operations. When Private Equity companies start acquiring it means that relative value of stocks is inexpensive. Also, it reduces the total number of shares by publicly traded companies raising the value of stocks.
Halloween Trivia
•Halloween candy sales average about 2 billion dollars annually in the United States.
•Chocolate candy bars top the list as the most popular candy for trick-or-treaters with Snickers #1.
•Halloween is the 2nd most commercially successful holiday, with Christmas being the first.
•Halloween was brought to North America by immigrants from Europe who would celebrate the harvest around a bonfire, share ghost stories, sing, dance and tell fortunes.
•Tootsie Rolls were the first wrapped penny candy in America.
Vanguard
The economy's continued growth is good news, but the pace of that growth remains unimpressive. While gross domestic product rose for the fifth straight quarter, this wasn't enough to lower the unemployment rate. The housing market is recovering, but still in a rut. Likewise, consumer confidence and durable-goods orders were both up, but nobody was overdosing on optimism. For the week, the S&P 500 Index remained unchanged at 1,183 (for a year-to-date total return—including price change plus dividends—of about 7.8%). The yield of the 10-year U.S. Treasury note rose 1 basis point to 2.60% (for a year-to-date decrease of 125 basis points).
Private Equity
The acquisition by a Private Equity company taking it from being owned by shareholders to a group of investors is very important to understand. Bottom Line: When you see Private Equity Companies buying stock you should too.
First, what is the the Carlyle group and who can invest with them? Because of applicable U.S. securities laws, firms such as Carlyle work only with "accredited investors" and "qualified purchasers" as those terms are defined under the securities laws. These types of investors are highly sophisticated investors with considerable financial resources, such as high net worth individuals and institutional investors. Carlyle is prohibited from offering its products to the general public under applicable securities law regulations.
The federal securities laws define the term accredited investor in Rule 501 of Regulation D for an individual as:
1) a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase
2) a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year
An individual who is a Qualified Purchaser as defined by the Investment Company Act of 1940, has at least $5,000,000 in investments.
Why does Carlyle only want these types of investors? To minimize transaction cost and also because these categories of investors can not file a lawsuit.
Why do Investors keep giving Carlyle to invest? This happens when this is the best alternative of getting the highest return with the lowest risk. With the low interest rates for fixed income from treasury bonds these investors are getting a higher return for a fixed income style investment.
What does it mean for us? Carlyle made the investment and paid a 36% premium because the stock price was cheap and the company was consistently generating profits and cash flow from operations. When Private Equity companies start acquiring it means that relative value of stocks is inexpensive. Also, it reduces the total number of shares by publicly traded companies raising the value of stocks.
Halloween Trivia
•Halloween candy sales average about 2 billion dollars annually in the United States.
•Chocolate candy bars top the list as the most popular candy for trick-or-treaters with Snickers #1.
•Halloween is the 2nd most commercially successful holiday, with Christmas being the first.
•Halloween was brought to North America by immigrants from Europe who would celebrate the harvest around a bonfire, share ghost stories, sing, dance and tell fortunes.
•Tootsie Rolls were the first wrapped penny candy in America.
Sunday, October 24, 2010
Predicting the Future Direction of the Stock Market
The economic news this past week was that the economy remains in the recovery mode and has not yet gotten to the growth mode. This newsletter will cover the topics of predicting the future direction of the stock market and bank stocks after the weekly recap from Vanguard.
Vanguard
This week's economic reports were variations on a now-familiar theme: notes of growth with melancholy undertones. The Fed's latest report reiterated expectations of a "modest" recovery. The housing market and employment situation remained troublesome. For the week ended October 22, the S&P 500 Index rose 0.6% to 1,183 (for a year-to-date total return—including price change plus dividends—of about 7.8%). The yield of the 10-year U.S. Treasury note ended the week at 2.59% unchanged from last week (for a year-to-date decrease of 126 basis points).
Predicting the Future Direction of the Stock Market
With the economy in a recovery mode what does this mean for the future direction of the stock market? Every investor needs to have indicators that give direction. I use 2 indicators, the Federal Reserve and the Volatility Index. The best indicator for longer term direction is the actions of the Federal Reserve. The best indicator for shorter term direction is the direction and level of the volatility index.
When the Federal Reserve is taking action to grow the economy, like now, this is a positive indicator for the stock market. When the volatility index is dropping and at a low level, like now, this is a positive indicator for the stock market.
This means that now is a good time to buy and hold mutual funds that invest in the stock market.
Bank Stocks
Bank stocks remain in the headlines as the Attorney General for multiple states are investigating issues with issuing and foreclosing of mortgages. News exist that the FBI is now investigating improper behavior. Anytime the words Attorney General or FBI are in a news story it is not good.
For an investor with a short term time horizon this makes bank stocks unsuitable. It is difficult to see how bank stock prices can increase in an environment of legal investigation and potential lawsuits.
For an investor with a longer term time horizon this creates a buying opportunity. Bank stocks are posting better than expected earnings with a reduction in bad loans on the balance sheet and lots of money in reserve thanks to bank stress tests of 1-2 years ago. If you look at the financial picture without this issue these stocks look cheap. Sometime in the future this legal investigation will end and the financial performance of the individual companies will be more important.
Vanguard
This week's economic reports were variations on a now-familiar theme: notes of growth with melancholy undertones. The Fed's latest report reiterated expectations of a "modest" recovery. The housing market and employment situation remained troublesome. For the week ended October 22, the S&P 500 Index rose 0.6% to 1,183 (for a year-to-date total return—including price change plus dividends—of about 7.8%). The yield of the 10-year U.S. Treasury note ended the week at 2.59% unchanged from last week (for a year-to-date decrease of 126 basis points).
Predicting the Future Direction of the Stock Market
With the economy in a recovery mode what does this mean for the future direction of the stock market? Every investor needs to have indicators that give direction. I use 2 indicators, the Federal Reserve and the Volatility Index. The best indicator for longer term direction is the actions of the Federal Reserve. The best indicator for shorter term direction is the direction and level of the volatility index.
When the Federal Reserve is taking action to grow the economy, like now, this is a positive indicator for the stock market. When the volatility index is dropping and at a low level, like now, this is a positive indicator for the stock market.
This means that now is a good time to buy and hold mutual funds that invest in the stock market.
Bank Stocks
Bank stocks remain in the headlines as the Attorney General for multiple states are investigating issues with issuing and foreclosing of mortgages. News exist that the FBI is now investigating improper behavior. Anytime the words Attorney General or FBI are in a news story it is not good.
For an investor with a short term time horizon this makes bank stocks unsuitable. It is difficult to see how bank stock prices can increase in an environment of legal investigation and potential lawsuits.
For an investor with a longer term time horizon this creates a buying opportunity. Bank stocks are posting better than expected earnings with a reduction in bad loans on the balance sheet and lots of money in reserve thanks to bank stress tests of 1-2 years ago. If you look at the financial picture without this issue these stocks look cheap. Sometime in the future this legal investigation will end and the financial performance of the individual companies will be more important.
Sunday, October 17, 2010
Bank Stocks
The news this past week, other than the rescue of the miners in Chile, was on suspending mortgage foreclosures and the impact on bank stocks. This newsletter will look at bank stocks, in particular Bank of America, and the impact of suspending mortgage foreclosures. First will be weekly recap by Vanguard and at the end will be some trivia on Columbus Day which also occurred last week.
Vanguard
If you're old enough to remember the 1970s, you may think inflation is a dirty word. Lately, though, some economists (joined, this week, by the chairman of the Federal Reserve) have dared to utter an even dirtier one: deflation. For the week ended October 15, the S&P 500 Index rose 0.9% to 1,176 (for a year-to-date total return—including price change plus dividends—of about 7.1%). The yield of the 10-year U.S. Treasury note rose 16 basis points to 2.57% (for a year-to-date decrease of 128 basis points).
Bank of America Stock
This is one of a few stocks that I have previously recommended. This recommendation is a result of the company acquiring Countrywide Mortgage and Merrill Lynch Investments during the financial crisis at a bargain basement cost without issuing shares of stock for the purchases. Anytime a company can grow revenue and profit without issuing more shares is very positive for a stock holder. Since the acquisition, additional shares have been issued but not as many as the sum total of the 3 companies.
As far as the item in the news, the delay in foreclosures, it would have been a lot better if we would have had these delays when the loans were being made. So instead of doing due diligence when the loans were issued we are now researching if the loans were done properly, it think this is called looking at the technicalities now instead of looking at the fundamentals when the loan was made. Ultimately, a mortgage loan has to be either paid or the property goes back to the originator as stated in the contract. The best thing for everyone is for economic prosperity to return to our country so that this foreclosure issue goes away and people can pay their loan.
Bank of America stock went down 11% last week because of this issue. The concerns include: higher costs associated with the issue reducing profits, loss of revenue ie. mortgage payments, and uncertainty about the future for these loans. The size of the drop does not make sense to me.
The real question is what does this mean for an investor and the future price of Bank of America stock given that they report earnings in 2 days? Since morgage loans are a fraction of the business and they are not getting revenue anyway from these loans that are in the foreclosure process the impact on earnings will probably not be very large. This looks more like a footnote item rather than a headlline item.
If you are an investor with a short term time horizon that is nervous about the issue then selling on a price rebound makes sense. If you are an investor with a long term horizon then holding and buying more makes sense. I would be much more nervous if Bank of America only did mortgages. An improving economy is always good for a bank stock.
Columbus Day Trivia
A U.S. national holiday since 1937, Columbus Day commemorates the arrival of Christopher Columbus in the New World on October 12, 1492. The Italian-born explorer had set sail two months earlier, backed by the Spanish monarchs King Ferdinand and Queen Isabella. He intended to chart a western sea route to China, India and the fabled gold and spice islands of Asia; instead, he landed in the Bahamas, becoming the first European to explore the Americas since the Vikings set up colonies in Greenland and Newfoundland during the 10th century.
Later that month, Columbus sighted Cuba and believed it was mainland China; in December the expedition found Hispaniola, which he though might be Japan. There, he established Spain's first colony in the Americas with 39 of his men. In March 1493, the explorer returned to Spain in triumph, bearing gold, spices and "Indian" captives. He crossed the Atlantic several more times before his death in 1506; by his third journey, he realized that he hadn't reached Asia but instead had stumbled upon a continent previously unknown to Europeans.
The first Columbus Day celebration took place in 1792, when New York's Columbian Order–better known as Tammany Hall–held an event to commemorate the historic landing's 300th anniversary. Taking pride in Columbus' birthplace and faith, Italian and Catholic communities in various parts of the country began organizing annual religious ceremonies and parades in his honor. In 1892, President Benjamin Harrison issued a proclamation encouraging Americans to mark the 400th anniversary of Columbus' voyage with patriotic festivities, writing, "On that day let the people, so far as possible, cease from toil and devote themselves to such exercises as may best express honor to the discoverer and their appreciation of the great achievements of the four completed centuries of American life."
In 1937, President Franklin D. Roosevelt proclaimed Columbus Day a national holiday, largely as a result of intense lobbying by the Knights of Columbus, an influential Catholic fraternal benefits organization. Originally observed every October 12, it was fixed to the second Monday in October in 1971.
Vanguard
If you're old enough to remember the 1970s, you may think inflation is a dirty word. Lately, though, some economists (joined, this week, by the chairman of the Federal Reserve) have dared to utter an even dirtier one: deflation. For the week ended October 15, the S&P 500 Index rose 0.9% to 1,176 (for a year-to-date total return—including price change plus dividends—of about 7.1%). The yield of the 10-year U.S. Treasury note rose 16 basis points to 2.57% (for a year-to-date decrease of 128 basis points).
Bank of America Stock
This is one of a few stocks that I have previously recommended. This recommendation is a result of the company acquiring Countrywide Mortgage and Merrill Lynch Investments during the financial crisis at a bargain basement cost without issuing shares of stock for the purchases. Anytime a company can grow revenue and profit without issuing more shares is very positive for a stock holder. Since the acquisition, additional shares have been issued but not as many as the sum total of the 3 companies.
As far as the item in the news, the delay in foreclosures, it would have been a lot better if we would have had these delays when the loans were being made. So instead of doing due diligence when the loans were issued we are now researching if the loans were done properly, it think this is called looking at the technicalities now instead of looking at the fundamentals when the loan was made. Ultimately, a mortgage loan has to be either paid or the property goes back to the originator as stated in the contract. The best thing for everyone is for economic prosperity to return to our country so that this foreclosure issue goes away and people can pay their loan.
Bank of America stock went down 11% last week because of this issue. The concerns include: higher costs associated with the issue reducing profits, loss of revenue ie. mortgage payments, and uncertainty about the future for these loans. The size of the drop does not make sense to me.
The real question is what does this mean for an investor and the future price of Bank of America stock given that they report earnings in 2 days? Since morgage loans are a fraction of the business and they are not getting revenue anyway from these loans that are in the foreclosure process the impact on earnings will probably not be very large. This looks more like a footnote item rather than a headlline item.
If you are an investor with a short term time horizon that is nervous about the issue then selling on a price rebound makes sense. If you are an investor with a long term horizon then holding and buying more makes sense. I would be much more nervous if Bank of America only did mortgages. An improving economy is always good for a bank stock.
Columbus Day Trivia
A U.S. national holiday since 1937, Columbus Day commemorates the arrival of Christopher Columbus in the New World on October 12, 1492. The Italian-born explorer had set sail two months earlier, backed by the Spanish monarchs King Ferdinand and Queen Isabella. He intended to chart a western sea route to China, India and the fabled gold and spice islands of Asia; instead, he landed in the Bahamas, becoming the first European to explore the Americas since the Vikings set up colonies in Greenland and Newfoundland during the 10th century.
Later that month, Columbus sighted Cuba and believed it was mainland China; in December the expedition found Hispaniola, which he though might be Japan. There, he established Spain's first colony in the Americas with 39 of his men. In March 1493, the explorer returned to Spain in triumph, bearing gold, spices and "Indian" captives. He crossed the Atlantic several more times before his death in 1506; by his third journey, he realized that he hadn't reached Asia but instead had stumbled upon a continent previously unknown to Europeans.
The first Columbus Day celebration took place in 1792, when New York's Columbian Order–better known as Tammany Hall–held an event to commemorate the historic landing's 300th anniversary. Taking pride in Columbus' birthplace and faith, Italian and Catholic communities in various parts of the country began organizing annual religious ceremonies and parades in his honor. In 1892, President Benjamin Harrison issued a proclamation encouraging Americans to mark the 400th anniversary of Columbus' voyage with patriotic festivities, writing, "On that day let the people, so far as possible, cease from toil and devote themselves to such exercises as may best express honor to the discoverer and their appreciation of the great achievements of the four completed centuries of American life."
In 1937, President Franklin D. Roosevelt proclaimed Columbus Day a national holiday, largely as a result of intense lobbying by the Knights of Columbus, an influential Catholic fraternal benefits organization. Originally observed every October 12, it was fixed to the second Monday in October in 1971.
Sunday, October 10, 2010
Refinance Mortgage, US Dollar
I hope you have enjoyed this special day of 10/10/10. This will cover the topics of refinancing a mortgage as well as valuation of the US Dollar. First is the weekly recap from Vanguard.
Vanguard
Despite welcome news that service-sector activity expanded in September, the week ended with a downbeat employment report. Instead of an expected no-growth September, the report showed a weak gain in private-sector jobs wiped out by a decline in public-sector employment, for a net loss of 95,000 jobs. For the week ended October 8, the S&P 500 Index rose 1.6% to 1,165 (for a year-to-date total return—including price change plus dividends—of about 6.1%). The yield of the 10-year U.S. Treasury note fell 13 basis points to 2.41% (for a year-to-date decrease of 144 basis points).
Refinancing a Mortgage
This week the average rate for a 30 year mortgage reached the very low rate of 4.27%. The Federal Reserve has stated that starting in November they may purchase long term US Treasury bonds that may reduce this rate even further. So if you have a mortgage and you have a rate above 4.5% now would be a good time to investigate refinancing it. In fact, this week I refinanced our mortgage and reduced the length of the mortgage using the adage that a bird in the hand is worth 2 in the bush.
Refinancing can be done a couple of ways, traditional and no-cost. The traditional way is to get the very lowest interest rate and pay closing costs which can be expensive. I chose the no cost option and paid a little higher interest rate without paying any cost. The reason for selecting this option is if the Federal Reserve does purchase enough bonds to drop mortgage rates even further I want to take advantage of it.
Conventional wisdom with a traditional refinance is that the interest rate has to drop about 2% to recoup the finance costs. I can not imagine that Federal Reserve buying enough bonds to drop the 30 year mortgage rate to below 3%. I can imagine a 0.25% to 0.5% drop. With the no cost method, I can refinance once again and take advantage of the even lower rate. Even if interest rates do not drop, I am happy with my new lower interest rate.
Valuation of the US Dollar
You may have noticed that the cost of gasoline went up this week. Is the cost being manipulated or is some free market forces at work? The answer is the value of US Dollar dropped this week, especially versus the Euro, causing this increase. While European countries have adopted a strategy of reducing their national budget deficits the US government is continuing to grow its budget deficit. This means that the US is printing more money relative to the European nations which lowers the value of the US Dollar.
Things such as commodities that are purchased internationally, like copper and oil, are going to go up because it takes more US Dollars to buy it. Given the current strategy of continuing to grow the US economy by going further in debt and printing more money this trend will likely continue for awhile. A falling US Dollar is also very good for US manufacturing companies as it lowers the cost of goods sold internationally.
The way to make money with a falling US Dollar is to purchase a mutual fund that invests internationally. Just like commodities going up, so will the value of other things purchased internationally such as stocks. If you know it is going to happen, you might as well take advantage of it.
Vanguard
Despite welcome news that service-sector activity expanded in September, the week ended with a downbeat employment report. Instead of an expected no-growth September, the report showed a weak gain in private-sector jobs wiped out by a decline in public-sector employment, for a net loss of 95,000 jobs. For the week ended October 8, the S&P 500 Index rose 1.6% to 1,165 (for a year-to-date total return—including price change plus dividends—of about 6.1%). The yield of the 10-year U.S. Treasury note fell 13 basis points to 2.41% (for a year-to-date decrease of 144 basis points).
Refinancing a Mortgage
This week the average rate for a 30 year mortgage reached the very low rate of 4.27%. The Federal Reserve has stated that starting in November they may purchase long term US Treasury bonds that may reduce this rate even further. So if you have a mortgage and you have a rate above 4.5% now would be a good time to investigate refinancing it. In fact, this week I refinanced our mortgage and reduced the length of the mortgage using the adage that a bird in the hand is worth 2 in the bush.
Refinancing can be done a couple of ways, traditional and no-cost. The traditional way is to get the very lowest interest rate and pay closing costs which can be expensive. I chose the no cost option and paid a little higher interest rate without paying any cost. The reason for selecting this option is if the Federal Reserve does purchase enough bonds to drop mortgage rates even further I want to take advantage of it.
Conventional wisdom with a traditional refinance is that the interest rate has to drop about 2% to recoup the finance costs. I can not imagine that Federal Reserve buying enough bonds to drop the 30 year mortgage rate to below 3%. I can imagine a 0.25% to 0.5% drop. With the no cost method, I can refinance once again and take advantage of the even lower rate. Even if interest rates do not drop, I am happy with my new lower interest rate.
Valuation of the US Dollar
You may have noticed that the cost of gasoline went up this week. Is the cost being manipulated or is some free market forces at work? The answer is the value of US Dollar dropped this week, especially versus the Euro, causing this increase. While European countries have adopted a strategy of reducing their national budget deficits the US government is continuing to grow its budget deficit. This means that the US is printing more money relative to the European nations which lowers the value of the US Dollar.
Things such as commodities that are purchased internationally, like copper and oil, are going to go up because it takes more US Dollars to buy it. Given the current strategy of continuing to grow the US economy by going further in debt and printing more money this trend will likely continue for awhile. A falling US Dollar is also very good for US manufacturing companies as it lowers the cost of goods sold internationally.
The way to make money with a falling US Dollar is to purchase a mutual fund that invests internationally. Just like commodities going up, so will the value of other things purchased internationally such as stocks. If you know it is going to happen, you might as well take advantage of it.
Sunday, October 3, 2010
Make a Portfolio Safer By Using A Risky Asset
We made it through September, less than 3 months to Christmas. September started off with the experts saying that the economy was bad and people should be fearful of the future. Guidance from some experts was to get out of the stock market. The stock market rose significantly during September, the best September in 71 years. These well paid experts did not do anyone any favors.
This newsletter will include the weekly recap from Vanguard, a section on how to make a portfolio safer by using a risky asset, and some trivia on October.
Vanguard
The economy expanded in the second quarter but remains weak. Manufacturing continues to grow but also at a slow pace. Consumer confidence fell, even as incomes rose and spending increased modestly. For the week ended October 1, the S&P 500 Index fell 0.2% to 1,146 (for a year-to-date total return, including price change plus dividends, of about 4.3%). The yield of the 10-year U.S. Treasury note fell 10 basis points to 2.52% (for a year-to-date decrease of 133 basis points).
Making a Portfolio Safer Using a Risky Asset
Traditional thinking is that if a person wants a conservative portfolio that only conservative investments should be included. These investments include short term bonds and money market funds that typically give a low return.
An alternative approach is to use the principle of co-variance where risky assets that move differently from each other give a better return with a portfolio with the same low risk. The idea is to have an asset that go up when another goes down with each asset going up with time. The normal approaches is to put stock mutual funds and bond mutual funds together in some proportion.
A different approach is to use a risky asset that goes the opposite direction of the stock market. The concept is to purchase a volatility index that goes the opposite direction of the stock market. This volatility index has considerable leverage which moves at a faster rate than the stock market.
A perfect example of how to use this approach is investing during September when the experts are giving advice that now is a good time to take profits. Instead of getting out of the stock market and missing out on the stock market rally the approach is to sell a fraction of stock mutual funds and purchase the volatility index. In this manner, the volatility index acts like an insurance policy. A drop in the stock market is ofset by an increase in the volatility index and the investor maintains balance.
Trivia
October is the tenth month in the Gregorian calendar. It received its name from the Latin numeral “octo” meaning “eight”, because in the first Roman calendar it was the eighth month.
Dayight Savings Time ends every year at 2:00 A.M. local time on the last Sunday of October.
The German Oktoberfest celebration (now held around the world) originally began on October 17, 1810, the wedding day of King Ludwig I.
In merry old England during olden times the month of October was once named “Winmonth”, which meant wine month. It has also been called ‘Teo-monath’ (Tenth month) and ‘Winter-fylleth’ (Winter full moon) in the Old Saxon traditions.
Canada celebrates their Thanksgiving on the second Monday of October.
This newsletter will include the weekly recap from Vanguard, a section on how to make a portfolio safer by using a risky asset, and some trivia on October.
Vanguard
The economy expanded in the second quarter but remains weak. Manufacturing continues to grow but also at a slow pace. Consumer confidence fell, even as incomes rose and spending increased modestly. For the week ended October 1, the S&P 500 Index fell 0.2% to 1,146 (for a year-to-date total return, including price change plus dividends, of about 4.3%). The yield of the 10-year U.S. Treasury note fell 10 basis points to 2.52% (for a year-to-date decrease of 133 basis points).
Making a Portfolio Safer Using a Risky Asset
Traditional thinking is that if a person wants a conservative portfolio that only conservative investments should be included. These investments include short term bonds and money market funds that typically give a low return.
An alternative approach is to use the principle of co-variance where risky assets that move differently from each other give a better return with a portfolio with the same low risk. The idea is to have an asset that go up when another goes down with each asset going up with time. The normal approaches is to put stock mutual funds and bond mutual funds together in some proportion.
A different approach is to use a risky asset that goes the opposite direction of the stock market. The concept is to purchase a volatility index that goes the opposite direction of the stock market. This volatility index has considerable leverage which moves at a faster rate than the stock market.
A perfect example of how to use this approach is investing during September when the experts are giving advice that now is a good time to take profits. Instead of getting out of the stock market and missing out on the stock market rally the approach is to sell a fraction of stock mutual funds and purchase the volatility index. In this manner, the volatility index acts like an insurance policy. A drop in the stock market is ofset by an increase in the volatility index and the investor maintains balance.
Trivia
October is the tenth month in the Gregorian calendar. It received its name from the Latin numeral “octo” meaning “eight”, because in the first Roman calendar it was the eighth month.
Dayight Savings Time ends every year at 2:00 A.M. local time on the last Sunday of October.
The German Oktoberfest celebration (now held around the world) originally began on October 17, 1810, the wedding day of King Ludwig I.
In merry old England during olden times the month of October was once named “Winmonth”, which meant wine month. It has also been called ‘Teo-monath’ (Tenth month) and ‘Winter-fylleth’ (Winter full moon) in the Old Saxon traditions.
Canada celebrates their Thanksgiving on the second Monday of October.
Sunday, September 26, 2010
Basis Points
This blog will be very brief and covers the Vanguard Weekly Recap, a short section on Basis Points, and a quote.
Vanguard Weekly Recap
Good economic news arrived this week, but the nation remained on guard. Although it was announced on Monday that the Great Recession had officially ended more than a year ago, economic growth has been so sluggish that unemployment levels retained a recessionary feel. The Federal Reserve said it would maintain its current monetary policies as the economy continued to struggle. Problems still plagued the housing market, but existing-home sales and new construction both rose in August and new-home sales stayed about the same. The Conference Board's index of leading indicators was up, and the durable-goods report also brought welcome data. For the week, the S&P 500 Index rose 2.1% to 1,148 (for a year-to-date total return—including price change plus dividends—of about 4.5%). The yield of the 10-year U.S. Treasury note fell, 0.13%, 13 basis points to 2.62% (for a year-to-date decrease of 1.23%, 123 basis points).
Basis Points
When dealing with fixed income securities like bonds, the term basis points is constantly stated. Someone a long time ago figured out that when an interest rate changes by a certain percentage that people might get confused. Let me demonstrate, if the interest rate was to change from 4% to 5% it would move 1% (5-4) but on a relative term it moved 20% ((5-4)/4).
So which is correct, it depends on you you look at it. It is clear that having only one answer is important to an investor. The term basis point denotes the change in interest rates, in this example, from 4% to 5%. A 100 basis point is equal 1% so this is a 100 basis point move. The absolute value of the movement, in this example 20% will be stated as a percentage.
Quote
“It is not enough to have knowledge – one must use it as well.” Descartes
Vanguard Weekly Recap
Good economic news arrived this week, but the nation remained on guard. Although it was announced on Monday that the Great Recession had officially ended more than a year ago, economic growth has been so sluggish that unemployment levels retained a recessionary feel. The Federal Reserve said it would maintain its current monetary policies as the economy continued to struggle. Problems still plagued the housing market, but existing-home sales and new construction both rose in August and new-home sales stayed about the same. The Conference Board's index of leading indicators was up, and the durable-goods report also brought welcome data. For the week, the S&P 500 Index rose 2.1% to 1,148 (for a year-to-date total return—including price change plus dividends—of about 4.5%). The yield of the 10-year U.S. Treasury note fell, 0.13%, 13 basis points to 2.62% (for a year-to-date decrease of 1.23%, 123 basis points).
Basis Points
When dealing with fixed income securities like bonds, the term basis points is constantly stated. Someone a long time ago figured out that when an interest rate changes by a certain percentage that people might get confused. Let me demonstrate, if the interest rate was to change from 4% to 5% it would move 1% (5-4) but on a relative term it moved 20% ((5-4)/4).
So which is correct, it depends on you you look at it. It is clear that having only one answer is important to an investor. The term basis point denotes the change in interest rates, in this example, from 4% to 5%. A 100 basis point is equal 1% so this is a 100 basis point move. The absolute value of the movement, in this example 20% will be stated as a percentage.
Quote
“It is not enough to have knowledge – one must use it as well.” Descartes
Saturday, September 18, 2010
Stock Picking
This covers the topic of investing in individual stocks and the value, or lack of value, of analysts. The best article on this subject is written is by Jason Unger, shown below. I hope you enjoy reading it.
Here are the points that I would like you to get from this short article:
1) Investment companies hire lots and lots of analysts that get paid lots and lots of money that we pay in fees.
2) Why would these very expensive analysts be hired? To get people to buy and sell stocks, make transactions, with the idea if an expert says that a stock is a good buy that people will buy it and conversely if an expert says sell then people will sell.
3) The article reports on a contest in the 1990's between professional analysts and people throwing darts at the Wall Street Journal hung on a wall. The contest is to see which group could pick stocks that gave the best performance.
4) A theory taught in an investment class is the Efficient Market Hypothesis. This theory says that since everyone is supposed to have the same information and since nobody can predict the future it is more important to select the right category of investment, like stocks or bonds, rather than individual stocks.
5) If you are investing individual stocks what analysts say does matter in the short-term. Analysts can not predict the future and long-term performance.
6) Analysts select stocks that have higher than normal risk to get a higher return which is good when the market is going up and bad when the market is going down.
7) Some manipulation exists when investing in individual stocks which is why my preference is mutual funds.
8) When an investment company tells you about all of their experts the first thing you should think is how much money is this going to cost. The best way to increase your return is to reduce the amount of fees taken from your account.
God Bless,
Larry
_____________________________________
Can Monkeys Pick Stocks Better than Experts?
by Jason Unger on August 17, 2009 ·
The Wall Street Journal's Dartboard Contest
In his popular personal finance book arguing that investors can't consistently beat the market (A Random Walk Down Wall Street), economist Burton Malkiel says that "a blindfolded monkey throwing darts at a newspaper?s financial pages could select a portfolio that would do just as well as one carefully selected by experts."
Sounds like a challenge.
So, in 1988, the Wall Street Journal decided to see if Malkiel's theory would hold up, and created the Dartboard Contest.
How it worked: Wall Street Journal staffers, acting as the monkeys, threw darts at a stock table, while investment experts picked their own stocks. After six months, they compared the results of the two methods. The WSJ even solicited stock picks from some of its readers, and compared them, too.
After 100 contests, the results were in. From Investor Home's great description of the contest:
On October 7, 1998 the Journal presented the results of the 100th dartboard contest. So who won the most contests and by how much? The pros won 61 of the 100 contests versus the darts. Thats better than the 50% that would be expected in an efficient market. On the other hand, the pros losing 39% of the time to a bunch of darts certainly could be viewed as somewhat of an embarrassment for the pros. Additionally, the performance of the pros versus the Dow Jones Industrial Average was less impressive. The pros barely edged the DJIA by a margin of 51 to 49 contests. In other words, simply investing passively in the Dow, an investor would have beaten the picks of the pros in roughly half the contests (that is, without even considering transactions costs or taxes for taxable investors).
The pros picks look more impressive when the actual returns of their stocks are compared with the dartboard and DJIA returns. The pros average gain was 10.8% versus 4.5% for the darts and 6.8% for the DJIA.
So isn't this a victory for professional stock experts? Malkiel says no. He and a number of other commentators point to a number of factors affecting the results, including:
1) The Announcement Effect: by announcing the stocks to the entire audience of the WSJ, it will artificially inflate the returns (in fact, abnormal gains for the first 2 days after publication scaled back between 15 and 25 days later).
2) Pros picked riskier stocks: Case Western Reserve University professor Bing Liang says that, adjusted for risk, the pros' would have lost 3.8% on the market over the six-month period.
3) The Dartboard stocks continued to do well: After the contest ended, the dart stocks continued to perform, while the pros' picks fell from their initial highs after publication.
Here are the points that I would like you to get from this short article:
1) Investment companies hire lots and lots of analysts that get paid lots and lots of money that we pay in fees.
2) Why would these very expensive analysts be hired? To get people to buy and sell stocks, make transactions, with the idea if an expert says that a stock is a good buy that people will buy it and conversely if an expert says sell then people will sell.
3) The article reports on a contest in the 1990's between professional analysts and people throwing darts at the Wall Street Journal hung on a wall. The contest is to see which group could pick stocks that gave the best performance.
4) A theory taught in an investment class is the Efficient Market Hypothesis. This theory says that since everyone is supposed to have the same information and since nobody can predict the future it is more important to select the right category of investment, like stocks or bonds, rather than individual stocks.
5) If you are investing individual stocks what analysts say does matter in the short-term. Analysts can not predict the future and long-term performance.
6) Analysts select stocks that have higher than normal risk to get a higher return which is good when the market is going up and bad when the market is going down.
7) Some manipulation exists when investing in individual stocks which is why my preference is mutual funds.
8) When an investment company tells you about all of their experts the first thing you should think is how much money is this going to cost. The best way to increase your return is to reduce the amount of fees taken from your account.
God Bless,
Larry
_____________________________________
Can Monkeys Pick Stocks Better than Experts?
by Jason Unger on August 17, 2009 ·
The Wall Street Journal's Dartboard Contest
In his popular personal finance book arguing that investors can't consistently beat the market (A Random Walk Down Wall Street), economist Burton Malkiel says that "a blindfolded monkey throwing darts at a newspaper?s financial pages could select a portfolio that would do just as well as one carefully selected by experts."
Sounds like a challenge.
So, in 1988, the Wall Street Journal decided to see if Malkiel's theory would hold up, and created the Dartboard Contest.
How it worked: Wall Street Journal staffers, acting as the monkeys, threw darts at a stock table, while investment experts picked their own stocks. After six months, they compared the results of the two methods. The WSJ even solicited stock picks from some of its readers, and compared them, too.
After 100 contests, the results were in. From Investor Home's great description of the contest:
On October 7, 1998 the Journal presented the results of the 100th dartboard contest. So who won the most contests and by how much? The pros won 61 of the 100 contests versus the darts. Thats better than the 50% that would be expected in an efficient market. On the other hand, the pros losing 39% of the time to a bunch of darts certainly could be viewed as somewhat of an embarrassment for the pros. Additionally, the performance of the pros versus the Dow Jones Industrial Average was less impressive. The pros barely edged the DJIA by a margin of 51 to 49 contests. In other words, simply investing passively in the Dow, an investor would have beaten the picks of the pros in roughly half the contests (that is, without even considering transactions costs or taxes for taxable investors).
The pros picks look more impressive when the actual returns of their stocks are compared with the dartboard and DJIA returns. The pros average gain was 10.8% versus 4.5% for the darts and 6.8% for the DJIA.
So isn't this a victory for professional stock experts? Malkiel says no. He and a number of other commentators point to a number of factors affecting the results, including:
1) The Announcement Effect: by announcing the stocks to the entire audience of the WSJ, it will artificially inflate the returns (in fact, abnormal gains for the first 2 days after publication scaled back between 15 and 25 days later).
2) Pros picked riskier stocks: Case Western Reserve University professor Bing Liang says that, adjusted for risk, the pros' would have lost 3.8% on the market over the six-month period.
3) The Dartboard stocks continued to do well: After the contest ended, the dart stocks continued to perform, while the pros' picks fell from their initial highs after publication.
Monday, September 13, 2010
5 Little-Known Facts About Social Security
I found a good article on Social Security that is concise and very useful. Feel free to forward as these 5 facts are common issues for everyone. Let me know if you have a question on this very important topic.
________________________________________________________________________________
5 Little-Known Facts About Social Security
by Marilyn Bowden
Monday, September 13, 2010
Most Americans watch their money go into the Social Security trust fund in the form of payroll deductions as soon as they begin working, when retirement seems a long way off. As a result, many go through their working lives without giving it much thought.
Here are a few facts everyone should know about Social Security benefits before making any decisions about retirement.
Who Is Entitled to Retirement Benefits?
Just about anybody who has worked for 10 or more years is eligible for Social Security retirement benefits.
"You need 40 quarters of employment, earning a minimum income of $1,000 per quarter," says Brett Horowitz, principal and wealth manager at Evensky & Katz in Coral Gables, Fla.
The income requirement is so low that "it could be met with seasonal work," says Richard W. Stumpf, principal at Financial Benefits in Wichita, Kan.
There are some exceptions. Most federal employees hired before 1984 aren't eligible to participate, Horowitz says. Stumpf adds that pastors may choose not to pay in.
Also, railroad workers and their families generally get benefits through a separate retirement system.
How Are Payouts Calculated?
The size of your monthly check is arrived at by a series of calculations.
Your primary insurance amount, or PIA -- the benefit you would get at full retirement age -- determines the size of your monthly retirement check. According to the Social Security Administration's website, the PIA is based on the Average Indexed Monthly Earnings, or AIME, as applied to an inflation-adjusted formula. The PIA is then adjusted for whether you take retirement before or after your normal retirement age -- 66 for those now reaching retirement age, but gradually adjusted to age 67 for those born after 1954.
You can begin drawing reduced Social Security as early as 62. For every month you delay after reaching full retirement age, up to age 70, the monthly benefit increases.
According to a recent report of the Senate Special Committee on Aging, for someone with an AIME of $5,000 in 2009, the PIA would total $1,971.
In keeping with the original intent behind Social Security -- a way to lift seniors out of poverty -- lower-wage earners get a higher proportion of their earnings than higher wage earners. The maximum monthly benefit that can be received in 2010 is $2,346.
What Are Spousal Benefits and Widow Benefits?
If one partner in a marriage earns significantly less than the other, the lower-earning spouse can collect spousal benefits rather than payouts based on his or her own earnings history.
"The spouse can get the greater of their own or 50 percent of the other spouse's PIA," Horowitz says. "The lower-earning spouse is not eligible until the higher earner starts getting benefits, but both can start as early as 62."
Stumpf says this option can be a financial planning tool.
"Imagine a high earner whose spouse is his employee," he says. "If they cut her pay and transfer the rest to him, when she reaches retirement age, one-half of his income will be significantly higher than what she earned."
A divorced spouse who was married for more than 10 years and has not remarried can draw against the ex-spouse's work history. Widows and widowers can receive the higher of their own or their spouse's monthly payment, but not both.
"That's why it's important for the higher earner to delay taking benefits for as long as possible," says Horowitz.
How Broke Is Social Security?
According to many studies, the Social Security trust fund will be able to cover its retirement and disability obligations for the next 30 years or so, after which there will be a shortfall of about 22 percent. The Senate Special Committee on Aging figures funds will fall short in 2037.
Stumpf thinks those estimates are optimistic.
"The Social Security trustees assume an annual 2.8 percent inflation rate," he says. "Historic norms are in excess of 3 percent. That's a big difference when you're talking about trillions of dollars.
"We could make small adjustments now and bring it to fully fundable status; if we delay, it will be more painful. In 10 years the shortfall will be significantly bigger; in 20 years it will be through the roof."
Where Do Payroll Deductions for Social Security Go?
In theory, they're held in trust by the government. But it's not as if your money sits there in the Social Security trust fund waiting for you to retire. After current beneficiaries are paid, surplus dollars are used to buy bonds from the U.S. Treasury. So the trust has the bonds, but the money is now in the Treasury, where Congress can use it for any purpose.
"The Social Security trust fund is ... a piggybank holding paper IOUs from Congress," Stumpf says.
This is the first year that Social Security has had to cash in one of those bonds in order to meet its payroll, says Stumpf.
"From this point forward, an increasing number of those bonds will have to be pulled out every year -- and Congress is going to have to find a way to come up with all that money," he says.
________________________________________________________________________________
5 Little-Known Facts About Social Security
by Marilyn Bowden
Monday, September 13, 2010
Most Americans watch their money go into the Social Security trust fund in the form of payroll deductions as soon as they begin working, when retirement seems a long way off. As a result, many go through their working lives without giving it much thought.
Here are a few facts everyone should know about Social Security benefits before making any decisions about retirement.
Who Is Entitled to Retirement Benefits?
Just about anybody who has worked for 10 or more years is eligible for Social Security retirement benefits.
"You need 40 quarters of employment, earning a minimum income of $1,000 per quarter," says Brett Horowitz, principal and wealth manager at Evensky & Katz in Coral Gables, Fla.
The income requirement is so low that "it could be met with seasonal work," says Richard W. Stumpf, principal at Financial Benefits in Wichita, Kan.
There are some exceptions. Most federal employees hired before 1984 aren't eligible to participate, Horowitz says. Stumpf adds that pastors may choose not to pay in.
Also, railroad workers and their families generally get benefits through a separate retirement system.
How Are Payouts Calculated?
The size of your monthly check is arrived at by a series of calculations.
Your primary insurance amount, or PIA -- the benefit you would get at full retirement age -- determines the size of your monthly retirement check. According to the Social Security Administration's website, the PIA is based on the Average Indexed Monthly Earnings, or AIME, as applied to an inflation-adjusted formula. The PIA is then adjusted for whether you take retirement before or after your normal retirement age -- 66 for those now reaching retirement age, but gradually adjusted to age 67 for those born after 1954.
You can begin drawing reduced Social Security as early as 62. For every month you delay after reaching full retirement age, up to age 70, the monthly benefit increases.
According to a recent report of the Senate Special Committee on Aging, for someone with an AIME of $5,000 in 2009, the PIA would total $1,971.
In keeping with the original intent behind Social Security -- a way to lift seniors out of poverty -- lower-wage earners get a higher proportion of their earnings than higher wage earners. The maximum monthly benefit that can be received in 2010 is $2,346.
What Are Spousal Benefits and Widow Benefits?
If one partner in a marriage earns significantly less than the other, the lower-earning spouse can collect spousal benefits rather than payouts based on his or her own earnings history.
"The spouse can get the greater of their own or 50 percent of the other spouse's PIA," Horowitz says. "The lower-earning spouse is not eligible until the higher earner starts getting benefits, but both can start as early as 62."
Stumpf says this option can be a financial planning tool.
"Imagine a high earner whose spouse is his employee," he says. "If they cut her pay and transfer the rest to him, when she reaches retirement age, one-half of his income will be significantly higher than what she earned."
A divorced spouse who was married for more than 10 years and has not remarried can draw against the ex-spouse's work history. Widows and widowers can receive the higher of their own or their spouse's monthly payment, but not both.
"That's why it's important for the higher earner to delay taking benefits for as long as possible," says Horowitz.
How Broke Is Social Security?
According to many studies, the Social Security trust fund will be able to cover its retirement and disability obligations for the next 30 years or so, after which there will be a shortfall of about 22 percent. The Senate Special Committee on Aging figures funds will fall short in 2037.
Stumpf thinks those estimates are optimistic.
"The Social Security trustees assume an annual 2.8 percent inflation rate," he says. "Historic norms are in excess of 3 percent. That's a big difference when you're talking about trillions of dollars.
"We could make small adjustments now and bring it to fully fundable status; if we delay, it will be more painful. In 10 years the shortfall will be significantly bigger; in 20 years it will be through the roof."
Where Do Payroll Deductions for Social Security Go?
In theory, they're held in trust by the government. But it's not as if your money sits there in the Social Security trust fund waiting for you to retire. After current beneficiaries are paid, surplus dollars are used to buy bonds from the U.S. Treasury. So the trust has the bonds, but the money is now in the Treasury, where Congress can use it for any purpose.
"The Social Security trust fund is ... a piggybank holding paper IOUs from Congress," Stumpf says.
This is the first year that Social Security has had to cash in one of those bonds in order to meet its payroll, says Stumpf.
"From this point forward, an increasing number of those bonds will have to be pulled out every year -- and Congress is going to have to find a way to come up with all that money," he says.
Saturday, September 11, 2010
Economy Gaining Traction
This blog will contain the Vanguard Weekly Recap, a section on the economy gaining traction and some questions to see if you are as smart as a 4 year old. As everyone knows, today is the 9th anniversary of a terrorist attack with objectives that included us feeling afraid and impacting our economy. It is appropriate to remember the events of the past and to maintain focus on the important things of life like faith, family, and making each day a better day.
VANGUARD WEEKLY RECAP
As students returned to school, there was at least some encouraging news that prospects for the economy and workers might be brightening. Economic reports during the holiday-shortened week included good news about the improved U.S. trade deficit in July. For the week ended September 10, the S&P 500 Index rose 0.5% to 1,110 (for a year-to-date total return—including price change plus dividends—of about 0.9%). The yield of the 10-year U.S. Treasury note climbed 0.09% to 2.81% (for a year-to-date drop of 1.04%).
ECONOMY GAINING TRACTION
At the end of August, Wall Street Analysts gave their view (buy, hold, or sell) on the value of the US Stock Market and most said hold followed by buy in 2nd place and sell came in 3rd. The percentage who said hold was a record high amount and the percentage who said sell was a record low amount. Normally, a record low percentage for sell would give a record high percentage for buy. Since the economy is in the blahs it means that most of these experts believe that stocks are cheap and are afraid to say buy due to fear of something rising up and hurting the economy.
I believe that economy is gaining traction for the following reasons:
1) Longer term interest rates are rising even though the Federal Reserve are buying long term bonds
2) ^VIX has gone below the 200 day moving average
3) Stimulus money that will give us longer term growth is starting to flow, only 20% had been spent as of the end of August
4) India has recently started allowing imports. Corporations have stated that India shut down imports on January 1, 2010 and now imports are starting to flow
5) A belief by tax payers that government is starting to listen and is acting less crazy.
My view on US Stocks is short-term hold and longer-term buy. Do not let fear in the media, remember that fear sells, get you down.
ARE YOU AS SMART AS A 4 YEAR OLD
Are you smarter than a four year old?
1)How do you put a giraffe in a refrigerator? The answer is - Open the refrigerator, put the giraffe in and close refrigerator.
2)How do you put an elephant in a refrigerator? Open the refrigerator door - remove the giraffe - insert the elephant - close the door.
3)The Lion King is hosting an Animal Conference. All the animals attend except one. Which animal does not attend? Did you say, “The Elephant?” Good! The elephant is in the refrigerator.
4)You come to a crocodile infested river, which you must cross, and you do not have a boat. How do you get across? You jump into the river and swim across. All the crocodiles are attending the Animal Conference.
Enjoy the Simple Things of Life.
VANGUARD WEEKLY RECAP
As students returned to school, there was at least some encouraging news that prospects for the economy and workers might be brightening. Economic reports during the holiday-shortened week included good news about the improved U.S. trade deficit in July. For the week ended September 10, the S&P 500 Index rose 0.5% to 1,110 (for a year-to-date total return—including price change plus dividends—of about 0.9%). The yield of the 10-year U.S. Treasury note climbed 0.09% to 2.81% (for a year-to-date drop of 1.04%).
ECONOMY GAINING TRACTION
At the end of August, Wall Street Analysts gave their view (buy, hold, or sell) on the value of the US Stock Market and most said hold followed by buy in 2nd place and sell came in 3rd. The percentage who said hold was a record high amount and the percentage who said sell was a record low amount. Normally, a record low percentage for sell would give a record high percentage for buy. Since the economy is in the blahs it means that most of these experts believe that stocks are cheap and are afraid to say buy due to fear of something rising up and hurting the economy.
I believe that economy is gaining traction for the following reasons:
1) Longer term interest rates are rising even though the Federal Reserve are buying long term bonds
2) ^VIX has gone below the 200 day moving average
3) Stimulus money that will give us longer term growth is starting to flow, only 20% had been spent as of the end of August
4) India has recently started allowing imports. Corporations have stated that India shut down imports on January 1, 2010 and now imports are starting to flow
5) A belief by tax payers that government is starting to listen and is acting less crazy.
My view on US Stocks is short-term hold and longer-term buy. Do not let fear in the media, remember that fear sells, get you down.
ARE YOU AS SMART AS A 4 YEAR OLD
Are you smarter than a four year old?
1)How do you put a giraffe in a refrigerator? The answer is - Open the refrigerator, put the giraffe in and close refrigerator.
2)How do you put an elephant in a refrigerator? Open the refrigerator door - remove the giraffe - insert the elephant - close the door.
3)The Lion King is hosting an Animal Conference. All the animals attend except one. Which animal does not attend? Did you say, “The Elephant?” Good! The elephant is in the refrigerator.
4)You come to a crocodile infested river, which you must cross, and you do not have a boat. How do you get across? You jump into the river and swim across. All the crocodiles are attending the Animal Conference.
Enjoy the Simple Things of Life.
Monday, September 6, 2010
Understanding Federal Reserve Actions
This blog will have 3 sections: weekly recap from Vanguard, Understanding the Impact of Federal Reserve Actions, and Labor Day trivia.
Vanguard Weekly Recap
The economic news turned somewhat brighter Friday morning, as the Labor Department's unemployment report was better than economists' gloomy expectations. Among the week's other bright spots were better-than-expected expansion in manufacturing, improved consumer confidence, and modest growth in consumer income and spending. But activity in the service sector, a big component of the economy, declined, along with productivity. For the week ended September 3, the S&P 500 Index rose 3.7% to 1,104 (for a year-to-date total return—including price change plus dividends—of about 0.4%). The yield of the 10-year U.S. Treasury note rose 0.05% to 2.71% (for a year-to-date drop of 1.14%).
Understanding the Impact of Federal Reserve Actions
It is important to keep track of the Treasury Yield Curve and the actions of the Federal Reserve. The Treasury Yield Curve shows the interest rate for debt issued by the Treasury Department for durations from 1 month to 30 years. The debt from all other entities within the US follow this yield curve as the Treasury Department is by far the biggest issuer of debt in our country. The growth rate of the economy is linked to interest rate for longer term bonds so as the rate of economic growth increases the yield on longer term bonds should also increase and vice versa.
Recently, the Federal Reserve met in Jackson Hole, WY to do things like review economic policy and communicate to the media. Jackson Hole, WY is a very nice place which shows us that not all economists are boring. The news from this meeting was that the economy was recovering, more Treasury Bonds would be purchased in the future to stimulate the economy, and additional actions would be taken as needed to spur economic growth. Remember that the Federal Reserve has a policy of achieving an annual economic growth rate of 3%.
Since 2008, the Federal Reserve has purchased about $1.75 Trillion in Treasury and mortgage-related debt. Because of this increased demand for Treasury Bonds, the price of these bonds have gone up, using the law of supply and demand, and long term interest rate have gone down. During this period of economic recovery, the 10 year Treasury Bond yield rose to 4%, declined to 2.5%, and is currently at 2.7%.
Typically, the Federal Reserve will also purchase Treasury Bonds from member banks increasing the amount of cash held in reserve. This gives banks more money to make loans increasing the amount of money in the system. Given that the Federal Reserve has purchased $1.75 Trillion in debt, it most likely means that purchases have also been made from both member banks and in the open market.
So where are 10 year Treasury Bond yields going from here? The answer is probably not much lower. During January 2009, when the economy was having a heart attack, (words from an Economics professor) the 10 year Treasury Bond yield reached a low of 2.42%. Since the economy grew 1.6% during April - June it suggests that interest rates should be going up not down. Additional purchases by the Federal Reserve will keep a lid on interest rates.
Who benefits from this policy? Virtually everyone including people who are buying or re-financing mortgages, corporations who are issuing debt, government issuing debt at all level (local, state, and Federal), banks, and investors who understand what is happening.
We will know that the economy has recovered when the Federal Reserve makes a shift in policy and begins to sell these Treasury Bonds. When this happens, the yield on long term Treasury Bonds is going up and anyone who owns long term bonds of any kind is at risk of losing money. Stock markets around the world should react very positively to this news as this indicates faster growth in revenue and profits.
Labor Day Facts
Labor Day, the first Monday in September, is a creation of the labor movement and is dedicated to the social and economic achievements of American workers. It constitutes a yearly national tribute to the contributions workers have made to the strength, prosperity, and well-being of our country.
The first Labor Day holiday was celebrated on Tuesday, September 5, 1882, in New York City, in accordance with the plans of the Central Labor Union. The Central Labor Union held its second Labor Day holiday just a year later, on September 5, 1883.
In 1884 the first Monday in September was selected as the holiday, as originally proposed, and the Central Labor Union urged similar organizations in other cities to follow the example of New York and celebrate a "workingmen's holiday" on that date. The idea spread with the growth of labor organizations, and in 1885 Labor Day was celebrated in many industrial centers of the country.
Vanguard Weekly Recap
The economic news turned somewhat brighter Friday morning, as the Labor Department's unemployment report was better than economists' gloomy expectations. Among the week's other bright spots were better-than-expected expansion in manufacturing, improved consumer confidence, and modest growth in consumer income and spending. But activity in the service sector, a big component of the economy, declined, along with productivity. For the week ended September 3, the S&P 500 Index rose 3.7% to 1,104 (for a year-to-date total return—including price change plus dividends—of about 0.4%). The yield of the 10-year U.S. Treasury note rose 0.05% to 2.71% (for a year-to-date drop of 1.14%).
Understanding the Impact of Federal Reserve Actions
It is important to keep track of the Treasury Yield Curve and the actions of the Federal Reserve. The Treasury Yield Curve shows the interest rate for debt issued by the Treasury Department for durations from 1 month to 30 years. The debt from all other entities within the US follow this yield curve as the Treasury Department is by far the biggest issuer of debt in our country. The growth rate of the economy is linked to interest rate for longer term bonds so as the rate of economic growth increases the yield on longer term bonds should also increase and vice versa.
Recently, the Federal Reserve met in Jackson Hole, WY to do things like review economic policy and communicate to the media. Jackson Hole, WY is a very nice place which shows us that not all economists are boring. The news from this meeting was that the economy was recovering, more Treasury Bonds would be purchased in the future to stimulate the economy, and additional actions would be taken as needed to spur economic growth. Remember that the Federal Reserve has a policy of achieving an annual economic growth rate of 3%.
Since 2008, the Federal Reserve has purchased about $1.75 Trillion in Treasury and mortgage-related debt. Because of this increased demand for Treasury Bonds, the price of these bonds have gone up, using the law of supply and demand, and long term interest rate have gone down. During this period of economic recovery, the 10 year Treasury Bond yield rose to 4%, declined to 2.5%, and is currently at 2.7%.
Typically, the Federal Reserve will also purchase Treasury Bonds from member banks increasing the amount of cash held in reserve. This gives banks more money to make loans increasing the amount of money in the system. Given that the Federal Reserve has purchased $1.75 Trillion in debt, it most likely means that purchases have also been made from both member banks and in the open market.
So where are 10 year Treasury Bond yields going from here? The answer is probably not much lower. During January 2009, when the economy was having a heart attack, (words from an Economics professor) the 10 year Treasury Bond yield reached a low of 2.42%. Since the economy grew 1.6% during April - June it suggests that interest rates should be going up not down. Additional purchases by the Federal Reserve will keep a lid on interest rates.
Who benefits from this policy? Virtually everyone including people who are buying or re-financing mortgages, corporations who are issuing debt, government issuing debt at all level (local, state, and Federal), banks, and investors who understand what is happening.
We will know that the economy has recovered when the Federal Reserve makes a shift in policy and begins to sell these Treasury Bonds. When this happens, the yield on long term Treasury Bonds is going up and anyone who owns long term bonds of any kind is at risk of losing money. Stock markets around the world should react very positively to this news as this indicates faster growth in revenue and profits.
Labor Day Facts
Labor Day, the first Monday in September, is a creation of the labor movement and is dedicated to the social and economic achievements of American workers. It constitutes a yearly national tribute to the contributions workers have made to the strength, prosperity, and well-being of our country.
The first Labor Day holiday was celebrated on Tuesday, September 5, 1882, in New York City, in accordance with the plans of the Central Labor Union. The Central Labor Union held its second Labor Day holiday just a year later, on September 5, 1883.
In 1884 the first Monday in September was selected as the holiday, as originally proposed, and the Central Labor Union urged similar organizations in other cities to follow the example of New York and celebrate a "workingmen's holiday" on that date. The idea spread with the growth of labor organizations, and in 1885 Labor Day was celebrated in many industrial centers of the country.
Saturday, August 28, 2010
Corporate Acquisitions
This week's blog covers the topic of Corporate Acquisitions. The first section is the weekly recap from Vanguard. In the middle is a brief overview of this topic. The last section is a bit of trivia about August for your enjoyment.
Vanguard Weekly Recap
The saying "No news is good news" probably would have served the economy well after another week of dismal economic reports. The government's revised benchmark indicator of economic growth dropped, durable-goods orders slowed to a crawl, and the housing market endured a double-whammy as new- and existing-home sales plunged. For the week ended August 27, the S&P 500 Index fell 0.7% to 1,064.59 (for a year-to-date total return—including price change plus dividends—of about -3.3%). The yield of the 10-year U.S. Treasury note climbed 4 basis points to 2.66% (for a year-to-date drop of 119 basis points).
Corporate Acquisitions
Corporations are once again starting to acquire other companies. I have personal experience with this as CommScope acquired a division of Avaya and moved me and my family to North Carolina about 6 years ago. Here are the bullet points:
* When the economy goes into a recession stock prices drop and acquisitions basically stop.
* As the economy recovers, corporate profits increase with increasing stock price and the numbers of acquisitions increase.
* It is a very positive sign for the economy and the stock market as the company doing the acquiring believes that the value of the company being acquired is cheap looking into the future and their business can afford the additional cost.
* The stock price of the acquiring company goes does because of the cost to acquire.
* The stock price of the acquired company goes up as the Board of Directors will only allow the acquisition if it brings additional value to the stock holders.
* To pay for the acquisition, cost is reduced by eliminating duplicate corporate functions like HR, Purchasing, Accounting, etc.
* The ultimate reason for the acquisition is that it is cheaper to acquire than to grow organically.
* The timing of the acquisition is approved by the Board of Directors who believe that the business climate is improving.
Bottom Line: This recent increase in corporate acquisitions is very bullish for the stock market and reduces jobs increasing unemployment. This continues to lead to a stagnant economy and low interest rates.
August Trivia
The hot and sticky month of August was named after Julius Ceasar’s grandnephew Augustus.
The Roman Senate named a month after General Augustus once he became emperor of the Empire; which happened after his legions defeated Cleopatra and Marc Anthony in battle.
The Senate also changed the number of days in the month to 31, so the month would have as many as Julius Ceasar’s month, July, had. It became the eighth month of the year in the Gregorian Calendar.
The precious stone of August is a Peridot and Onyx. The Gladiolus and Poppy are both known as the August flower.
But did you know August is: Women’s Small Business Month; Admit You’re Happy Month; National Psoriasis Awareness Month; National Sandwich Month; National Catfish Month; Black Business Month; Panini Month; Happiness Happens Month and Inventor’s Month.
Vanguard Weekly Recap
The saying "No news is good news" probably would have served the economy well after another week of dismal economic reports. The government's revised benchmark indicator of economic growth dropped, durable-goods orders slowed to a crawl, and the housing market endured a double-whammy as new- and existing-home sales plunged. For the week ended August 27, the S&P 500 Index fell 0.7% to 1,064.59 (for a year-to-date total return—including price change plus dividends—of about -3.3%). The yield of the 10-year U.S. Treasury note climbed 4 basis points to 2.66% (for a year-to-date drop of 119 basis points).
Corporate Acquisitions
Corporations are once again starting to acquire other companies. I have personal experience with this as CommScope acquired a division of Avaya and moved me and my family to North Carolina about 6 years ago. Here are the bullet points:
* When the economy goes into a recession stock prices drop and acquisitions basically stop.
* As the economy recovers, corporate profits increase with increasing stock price and the numbers of acquisitions increase.
* It is a very positive sign for the economy and the stock market as the company doing the acquiring believes that the value of the company being acquired is cheap looking into the future and their business can afford the additional cost.
* The stock price of the acquiring company goes does because of the cost to acquire.
* The stock price of the acquired company goes up as the Board of Directors will only allow the acquisition if it brings additional value to the stock holders.
* To pay for the acquisition, cost is reduced by eliminating duplicate corporate functions like HR, Purchasing, Accounting, etc.
* The ultimate reason for the acquisition is that it is cheaper to acquire than to grow organically.
* The timing of the acquisition is approved by the Board of Directors who believe that the business climate is improving.
Bottom Line: This recent increase in corporate acquisitions is very bullish for the stock market and reduces jobs increasing unemployment. This continues to lead to a stagnant economy and low interest rates.
August Trivia
The hot and sticky month of August was named after Julius Ceasar’s grandnephew Augustus.
The Roman Senate named a month after General Augustus once he became emperor of the Empire; which happened after his legions defeated Cleopatra and Marc Anthony in battle.
The Senate also changed the number of days in the month to 31, so the month would have as many as Julius Ceasar’s month, July, had. It became the eighth month of the year in the Gregorian Calendar.
The precious stone of August is a Peridot and Onyx. The Gladiolus and Poppy are both known as the August flower.
But did you know August is: Women’s Small Business Month; Admit You’re Happy Month; National Psoriasis Awareness Month; National Sandwich Month; National Catfish Month; Black Business Month; Panini Month; Happiness Happens Month and Inventor’s Month.
Sunday, August 22, 2010
Stocks vs. Stock Mutual Funds
This newsletter also includes the usual info from Vanguard as well as a short segment on stocks versus stock mutual funds.
Vanguard Weekly Recap
The U.S. economy continues in sputter mode. While July saw some improvements in industrial production and housing starts, the most recent initial unemployment claims rose for a third straight week. For the week ended August 20, the S&P 500 Index fell 0.7%, to 1,072 (for a year-to-date total return—including price change plus dividends—of about -2.7%). The yield of the 10-year U.S. Treasury note dropped 6 basis points to 2.62% (for a year-to-date decrease of 123 basis points).
Stocks vs Stock Mutual Funds
The environment for owning stocks has drastically changed since the advent of low cost on-line stock trading. Brokerage houses still desire to make more money each year so that they can grow and pay people very very very nice bonuses. The only way their revenue can grow with this low cost on-line stock trading environment is to get investors to buy and sell a whole lot more often. On Mad Money, Cramer of Cramerica will tell you to Buy Buy Buy or Sell Sell Sell a specific stock and his viewing audience is to follow his recommendation like he has divine knowledge.
It use to be that you bought a stock and held onto it because the environment for stocks was fairly normal, a buy and hold strategy. Today stocks are much more manipulated as an individual or a group of individuals can move a stock up or down in a major way. These brokerage houses have computer programs that execute trades based upon a number of factors including momentum.
So what should you do if you like to own stocks? Do not get married to them, follow them, and be willing to take a profit. Brokerage houses have hired psychologists to study investor behavior and the higher the stock price the more likely an individual is likely to buy it and conversely the lower the stock price the more likely an individual is likely to sell it. The reason is an individual investor tends to get emotionally attached and feels successful when their stock is successful and vice versa. Brokerage houses tend to do analysis, I did read a very thick and boring book on security analysis some years ago, and will tend to do the opposite of the individual investors.
An individual stock can be moved in a fashion that is not logical and is out of your control. It can go to $0.00 and you can lose 100% of your money. It is hard to know if you should buy, sell or hold a stock when you are in a competition with a brokerage house with computer programs that do security analysis and is funding TV shows and analysts to get you to make a trade. In a trade, every seller must find a buyer.
My opinion is that the average investor should only have about 10% of their holdings in individual stocks. A mutual fund that invests in individual stocks has much less risk due to diversification and performance can not be influenced to the same extent by outside forces.
If you find that you have a relatively high loading of stocks, my advice is to use a rebound in the stock market, that is stuck in a trading range, as an opportunity to sell. While it is fun to watch a stock to go up, it makes you feel good, the going down is a terrible ride. A bird in the hand is indeed worth 2 in the bush.
Six Tips For A College Freshman
#1 The first week defines the rest of the year
#2 Organize Study Groups!
#3 Study for tests!
#4 Get involved
#5 If you don’t like your roommate, switch
#6 Go to sporting events
Vanguard Weekly Recap
The U.S. economy continues in sputter mode. While July saw some improvements in industrial production and housing starts, the most recent initial unemployment claims rose for a third straight week. For the week ended August 20, the S&P 500 Index fell 0.7%, to 1,072 (for a year-to-date total return—including price change plus dividends—of about -2.7%). The yield of the 10-year U.S. Treasury note dropped 6 basis points to 2.62% (for a year-to-date decrease of 123 basis points).
Stocks vs Stock Mutual Funds
The environment for owning stocks has drastically changed since the advent of low cost on-line stock trading. Brokerage houses still desire to make more money each year so that they can grow and pay people very very very nice bonuses. The only way their revenue can grow with this low cost on-line stock trading environment is to get investors to buy and sell a whole lot more often. On Mad Money, Cramer of Cramerica will tell you to Buy Buy Buy or Sell Sell Sell a specific stock and his viewing audience is to follow his recommendation like he has divine knowledge.
It use to be that you bought a stock and held onto it because the environment for stocks was fairly normal, a buy and hold strategy. Today stocks are much more manipulated as an individual or a group of individuals can move a stock up or down in a major way. These brokerage houses have computer programs that execute trades based upon a number of factors including momentum.
So what should you do if you like to own stocks? Do not get married to them, follow them, and be willing to take a profit. Brokerage houses have hired psychologists to study investor behavior and the higher the stock price the more likely an individual is likely to buy it and conversely the lower the stock price the more likely an individual is likely to sell it. The reason is an individual investor tends to get emotionally attached and feels successful when their stock is successful and vice versa. Brokerage houses tend to do analysis, I did read a very thick and boring book on security analysis some years ago, and will tend to do the opposite of the individual investors.
An individual stock can be moved in a fashion that is not logical and is out of your control. It can go to $0.00 and you can lose 100% of your money. It is hard to know if you should buy, sell or hold a stock when you are in a competition with a brokerage house with computer programs that do security analysis and is funding TV shows and analysts to get you to make a trade. In a trade, every seller must find a buyer.
My opinion is that the average investor should only have about 10% of their holdings in individual stocks. A mutual fund that invests in individual stocks has much less risk due to diversification and performance can not be influenced to the same extent by outside forces.
If you find that you have a relatively high loading of stocks, my advice is to use a rebound in the stock market, that is stuck in a trading range, as an opportunity to sell. While it is fun to watch a stock to go up, it makes you feel good, the going down is a terrible ride. A bird in the hand is indeed worth 2 in the bush.
Six Tips For A College Freshman
#1 The first week defines the rest of the year
#2 Organize Study Groups!
#3 Study for tests!
#4 Get involved
#5 If you don’t like your roommate, switch
#6 Go to sporting events
Sunday, August 15, 2010
Growth Prediction
This newsletter will cover the recent action in the stock market and look at future direction. The first segment is the weekly recap from Vanguard follow by my perspective on the stock market and lastly some trivia.
Vanguard Weekly Recap
The economy continued to show signs of weakness as the U.S. trade deficit widened at an unprecedented pace, the Federal Reserve announced it would continue its expansionary monetary policies, and deflationary fears continued even though consumer prices rose for the first time in three months. For the week ended August 13, the S&P 500 Index fell 3.8%, to 1,079 (for a year-to-date total return—including price change plus dividends—of about -2.0%). The yield of the 10-year U.S. Treasury note fell 17 basis points to 2.69% (for a year-to-date decrease of 116 basis points).
Growth Prediction
This week it seemed like we were watching baseball with all of the statistics flying around and the way markets reacted to it. It was like getting a batting average for a person to predict if a hit will occur. You know the stuff like batting average in August, against left handers, with a person in scoring position after the 3rd inning when eating oatmeal for breakfast. Okay, I made up the part with the oatmeal.
Data would be released and immediately it would go into a computer algorithm and out would come an answer of the future impact for the stock market and things happened. Forget anything about corporate earnings, they were meaningless unless it was negative and then it was another statistic to use to predict the future. The only thing that mattered was the latest statistic and what it meant in predicting future stock prices.
My favorite statistic was retail sales for July was up 0.4% instead of the expected 0.5% so things must be bad. Given the amount of shopping needed for each person entering the freshman year of college, including us, and my credit card balance, the August retail sales numbers should be huge. Enough has been purchased to fill the minivan and we still have 5 more shopping days to go.
Let's look at some data related to corporate earnings to see if this week made sense. On August 9th the expected 2010 earnings growth rate for the S&P 500 was raised to 35.2% from 33.5% while the expected 2011 earnings growth rate for the S&P 500 was reduced to 14.9% from 17.3%. Putting this into numbers, the aggregate earning for the S&P 500 companies was raised to $81 from $78 for 2010 and reduced for 2011 from $93 to $90. If we use a normal price to earnings ratio of 15 this equates to a S&P 500 index value of 1215 for 2010 and 1350 for 2011. Given that the S&P 500 index is currently at 1079.25 stocks appear to be undervalued.
Another indicator that I follow is the Volatility Index, ^VIX. The current value is slightly elevated, nothing compared to what we saw a few months ago and we are in a downward trend. This means that no big events are lurking like an European Union crisis, or BP oil spill disaster so no big down-draft exists.
So what does all of this mean? It means that in the short term the stock market is probably in a trading range with the Dow between the most recent low and high, about 9,600 and 11,300. Longer term, stocks are undervalued and remain as a good buying opportunity for a person with a longer term perspective.
Friday the 13th Trivia
Friday the 13th occurs when the thirteenth day of a month falls on a Friday, which superstition holds to be a day of bad luck. In the Gregorian calendar, this day occurs at least once, but at most three times a year. Any month's 13th day will fall on a Friday if the month starts on a Sunday. The fear of Friday the 13th is called friggatriskaidekaphobia (frigga meaning "Friday" and triskaidekaphobia meaning fear of the number thirteen), or paraskevidekatriaphobia, a concatenation of the Greek words Paraskeví (Παρασκευή, meaning "Friday"), and dekatreís (δεκατρείς, meaning "thirteen") attached to phobía (φοβία, from phóbos, φόβος, meaning "fear"). The latter word was derived in 1911 and first appeared in a mainstream source in 1953.
According to the Stress Management Center and Phobia Institute in Asheville, North Carolina, an estimated 17 to 21 million people in the United States are affected by a fear of this day. Some people are so paralyzed by fear that they avoid their normal routines in doing business, taking flights or even getting out of bed. "It's been estimated that [US]$800 or $900 million is lost in business on this day".
Vanguard Weekly Recap
The economy continued to show signs of weakness as the U.S. trade deficit widened at an unprecedented pace, the Federal Reserve announced it would continue its expansionary monetary policies, and deflationary fears continued even though consumer prices rose for the first time in three months. For the week ended August 13, the S&P 500 Index fell 3.8%, to 1,079 (for a year-to-date total return—including price change plus dividends—of about -2.0%). The yield of the 10-year U.S. Treasury note fell 17 basis points to 2.69% (for a year-to-date decrease of 116 basis points).
Growth Prediction
This week it seemed like we were watching baseball with all of the statistics flying around and the way markets reacted to it. It was like getting a batting average for a person to predict if a hit will occur. You know the stuff like batting average in August, against left handers, with a person in scoring position after the 3rd inning when eating oatmeal for breakfast. Okay, I made up the part with the oatmeal.
Data would be released and immediately it would go into a computer algorithm and out would come an answer of the future impact for the stock market and things happened. Forget anything about corporate earnings, they were meaningless unless it was negative and then it was another statistic to use to predict the future. The only thing that mattered was the latest statistic and what it meant in predicting future stock prices.
My favorite statistic was retail sales for July was up 0.4% instead of the expected 0.5% so things must be bad. Given the amount of shopping needed for each person entering the freshman year of college, including us, and my credit card balance, the August retail sales numbers should be huge. Enough has been purchased to fill the minivan and we still have 5 more shopping days to go.
Let's look at some data related to corporate earnings to see if this week made sense. On August 9th the expected 2010 earnings growth rate for the S&P 500 was raised to 35.2% from 33.5% while the expected 2011 earnings growth rate for the S&P 500 was reduced to 14.9% from 17.3%. Putting this into numbers, the aggregate earning for the S&P 500 companies was raised to $81 from $78 for 2010 and reduced for 2011 from $93 to $90. If we use a normal price to earnings ratio of 15 this equates to a S&P 500 index value of 1215 for 2010 and 1350 for 2011. Given that the S&P 500 index is currently at 1079.25 stocks appear to be undervalued.
Another indicator that I follow is the Volatility Index, ^VIX. The current value is slightly elevated, nothing compared to what we saw a few months ago and we are in a downward trend. This means that no big events are lurking like an European Union crisis, or BP oil spill disaster so no big down-draft exists.
So what does all of this mean? It means that in the short term the stock market is probably in a trading range with the Dow between the most recent low and high, about 9,600 and 11,300. Longer term, stocks are undervalued and remain as a good buying opportunity for a person with a longer term perspective.
Friday the 13th Trivia
Friday the 13th occurs when the thirteenth day of a month falls on a Friday, which superstition holds to be a day of bad luck. In the Gregorian calendar, this day occurs at least once, but at most three times a year. Any month's 13th day will fall on a Friday if the month starts on a Sunday. The fear of Friday the 13th is called friggatriskaidekaphobia (frigga meaning "Friday" and triskaidekaphobia meaning fear of the number thirteen), or paraskevidekatriaphobia, a concatenation of the Greek words Paraskeví (Παρασκευή, meaning "Friday"), and dekatreís (δεκατρείς, meaning "thirteen") attached to phobía (φοβία, from phóbos, φόβος, meaning "fear"). The latter word was derived in 1911 and first appeared in a mainstream source in 1953.
According to the Stress Management Center and Phobia Institute in Asheville, North Carolina, an estimated 17 to 21 million people in the United States are affected by a fear of this day. Some people are so paralyzed by fear that they avoid their normal routines in doing business, taking flights or even getting out of bed. "It's been estimated that [US]$800 or $900 million is lost in business on this day".
Monday, August 9, 2010
Fees and Mutual Fund Performance
I am copying paragraphs from an article on the Morningstar website concerning the impact of fees on mutual fund performance. You would want to think that if you are paying more money for a mutual fund that you would be getting a higher return. Unfortunately, this is not true with the difference in performance being the additional cost of the fees. The more you pay in fees the worse your performance.
This fits nicely with yesterday's article, "Excessive Fees" that funds with high fees should be avoided because you are only paying a sales charge like a sales tax. This article quantifies the data. Let me know if you have a question.
___________________________________________________
How Expense Ratios Performed
If there's anything in the whole world of mutual funds that you can take to the bank, it's that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds.
Expense ratios are strong predictors of performance. In every asset class over every time period, the cheapest quintile produced higher total returns than the most expensive quintile.
For example, the cheapest quintile from 2005 in domestic equity returned an annualized 3.35% versus 2.02% for the most expensive quintile over the ensuing five years. The gap was similar in other categories such as taxable bond, where cheap funds returned 5.11% versus 3.82% for pricey funds. That same relationship held up dependably in the other time periods we measured. For 2008, the cheapest quintile of balanced funds lost 0.04% over the next two years, while the most expensive shed 1.13%.
The gap was also impressive as measured by the success ratio because high-cost funds are much more likely to have poor performance and be liquidated or merged away. For the 2005 group, we found that 48% of domestic-equity funds in the cheapest quintile survived and outperformed versus 24% in the priciest quintile. Put another way, funds in the cheapest quintile of domestic equity were twice as likely to succeed as those in the priciest quintile. It was a similar story in other categories, although in munis the advantage was greater than 6 to 1. The same basic relationship held up for the other years we looked at. Although I think of expense advantages as taking a long time to compound to your advantage, even the 2008 group saw low-cost funds with nearly a 2 to 1 success advantage.
Given that performance edge, you won't be surprised to hear that low-cost funds also produced better risk- and load-adjusted performance as measured by the star rating. For example, the 2005 group enjoyed a subsequent 3.23 average star rating compared with 2.66 for the priciest quintile in domestic equity. The edge grew in taxable bonds to 3.34 versus 2.3. The edge held up for predicting three-year ratings for the 2006 and 2007 groups.
Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance. Start by focusing on funds in the cheapest or two cheapest quintiles, and you'll be on the path to success.
This fits nicely with yesterday's article, "Excessive Fees" that funds with high fees should be avoided because you are only paying a sales charge like a sales tax. This article quantifies the data. Let me know if you have a question.
___________________________________________________
How Expense Ratios Performed
If there's anything in the whole world of mutual funds that you can take to the bank, it's that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds.
Expense ratios are strong predictors of performance. In every asset class over every time period, the cheapest quintile produced higher total returns than the most expensive quintile.
For example, the cheapest quintile from 2005 in domestic equity returned an annualized 3.35% versus 2.02% for the most expensive quintile over the ensuing five years. The gap was similar in other categories such as taxable bond, where cheap funds returned 5.11% versus 3.82% for pricey funds. That same relationship held up dependably in the other time periods we measured. For 2008, the cheapest quintile of balanced funds lost 0.04% over the next two years, while the most expensive shed 1.13%.
The gap was also impressive as measured by the success ratio because high-cost funds are much more likely to have poor performance and be liquidated or merged away. For the 2005 group, we found that 48% of domestic-equity funds in the cheapest quintile survived and outperformed versus 24% in the priciest quintile. Put another way, funds in the cheapest quintile of domestic equity were twice as likely to succeed as those in the priciest quintile. It was a similar story in other categories, although in munis the advantage was greater than 6 to 1. The same basic relationship held up for the other years we looked at. Although I think of expense advantages as taking a long time to compound to your advantage, even the 2008 group saw low-cost funds with nearly a 2 to 1 success advantage.
Given that performance edge, you won't be surprised to hear that low-cost funds also produced better risk- and load-adjusted performance as measured by the star rating. For example, the 2005 group enjoyed a subsequent 3.23 average star rating compared with 2.66 for the priciest quintile in domestic equity. The edge grew in taxable bonds to 3.34 versus 2.3. The edge held up for predicting three-year ratings for the 2006 and 2007 groups.
Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance. Start by focusing on funds in the cheapest or two cheapest quintiles, and you'll be on the path to success.
Sunday, August 8, 2010
Excessive Fees
Today's Charlotte Observer had an article titled "Lawsuits over 401(k) fees on the rise." It is written by Walter Hamilton of the Los Angeles Times. Here is a short paraphrase of the article and my view on this issue.
Employees of Edison International won a victory when a federal judge, U.S. District Judge Stephen Wilson, ruled that the company's 401(k) fees were excessive and employee's were entitled to recover over-charges. This is one of more than 2 dozen lawsuits filed against U.S. employers, including Wal-Mart Stores Inc., in recent years. The basis for the lawsuit is that the employer selects high-cost investments in exchange for reducing the administrative costs paid by the employers themselves.
This lawsuit claims that an average Edison International employee paid more than $300 per year in unnecessary fees, this does not include foregone investment gains on that money. The Labor Department reported that over a worker's career an extra 1% a year in fees could reduce the eventual value of a 401(k) account by 28%
Perhaps you think this is just in a few 401(k) accounts and you need not be concerned about this issue. This is a very important issue and pays a key role in determining you final account balance. Most investors pay higher fees than necessary and do not even realize it. A 28% reduction in an account balance when you retire is a really big deal.
Here are some ways you can significantly reduce these fees and put more money in your pocket:
1) Buy a no-load mutual fund instead of a Class A, B, or C mutual fund. If you see the word Class it means you will be paying a load.You can easily pay 1% higher in fees with loaded funds. If you see the word Class in a mutual fund, just say no. A load is just a sales charge, view it like a sales tax. Perhaps you are like me and would rather shop during a tax-free weekend and not pay 7.5% in tax.
2) Buy a mutual fund directly from a Mutual Fund Company, like Fidelity or Vanguard, instead of from a bank or insurance company. Ever seen a bad looking bank or insurance company? They get their money from customers, aka investors. Buying wholesale is always lower in cost than buying retail.
3) Do Not Buy a mutual fund made up of mutual funds. An example of a fund of funds is a target fund like a 2020 fund because you pay the fee twice, once for each fund and then for the composition.
4) Only Buy a mutual fund that you can find on the internet at a site like finance.yahoo.com or Fidelity.com. If you can not find it, it normally means that it is a composition of mutual funds. An example is a Growth and Income fund composed of a growth fund and an income fund.
Employees of Edison International won a victory when a federal judge, U.S. District Judge Stephen Wilson, ruled that the company's 401(k) fees were excessive and employee's were entitled to recover over-charges. This is one of more than 2 dozen lawsuits filed against U.S. employers, including Wal-Mart Stores Inc., in recent years. The basis for the lawsuit is that the employer selects high-cost investments in exchange for reducing the administrative costs paid by the employers themselves.
This lawsuit claims that an average Edison International employee paid more than $300 per year in unnecessary fees, this does not include foregone investment gains on that money. The Labor Department reported that over a worker's career an extra 1% a year in fees could reduce the eventual value of a 401(k) account by 28%
Perhaps you think this is just in a few 401(k) accounts and you need not be concerned about this issue. This is a very important issue and pays a key role in determining you final account balance. Most investors pay higher fees than necessary and do not even realize it. A 28% reduction in an account balance when you retire is a really big deal.
Here are some ways you can significantly reduce these fees and put more money in your pocket:
1) Buy a no-load mutual fund instead of a Class A, B, or C mutual fund. If you see the word Class it means you will be paying a load.You can easily pay 1% higher in fees with loaded funds. If you see the word Class in a mutual fund, just say no. A load is just a sales charge, view it like a sales tax. Perhaps you are like me and would rather shop during a tax-free weekend and not pay 7.5% in tax.
2) Buy a mutual fund directly from a Mutual Fund Company, like Fidelity or Vanguard, instead of from a bank or insurance company. Ever seen a bad looking bank or insurance company? They get their money from customers, aka investors. Buying wholesale is always lower in cost than buying retail.
3) Do Not Buy a mutual fund made up of mutual funds. An example of a fund of funds is a target fund like a 2020 fund because you pay the fee twice, once for each fund and then for the composition.
4) Only Buy a mutual fund that you can find on the internet at a site like finance.yahoo.com or Fidelity.com. If you can not find it, it normally means that it is a composition of mutual funds. An example is a Growth and Income fund composed of a growth fund and an income fund.
Saturday, August 7, 2010
Future Retirement Liabilities
This has been another interesting week for an investor with a large move in the stock market on Monday and then concern about the jobs number on Friday. What would happen if the number was not good enough, would the stock market have a big drop? The jobs number was reported on schedule and the private sector grew by 71,000 and the public sector shrunk for a net loss during the month not meeting expectation and investors held their breath. At the end of the day the stock market did drop a little, the VIX also dropped, and we made it through this lagging indicator once again.
What does all of this mean? We are still in a consolidation phase in the economic business cycle and at the end of the fear, VIX, cycle. Let's relax a little already. Now is a great time to refinance a home as well as purchase a home as interest rates are at low levels not seen in 50 years with a 15 year mortgage below 4%.
This newsletter contains the weekly recap from Vanguard, followed by a section on Future Retirement Liabilities, and lastly a short trivia section for your enjoyment. The middle section presents data from www.usdebtclock.org website on the current shortfall for Social Security and Medicare to pay future benefits to us.
Vanguard Weekly Recap
The economy has continued to struggle, shedding 131,000 jobs in July. While the unemployment rate remained at 9.5% last month despite the job losses, this was most likely due to a drop in the number of people seeking work. Most of the other economic news that came out this week was also negative, as factory orders fell, the manufacturing sector lost momentum, and personal income was flat. Two exceptions to the otherwise disappointing news were construction spending and the service sector, both of which showed signs of recovery. For the week, the S&P 500 Index rose 1.8% to 1,122 (for a year-to-date total return—including price change plus dividends—of about 1.7%). The yield of the 10-year U.S. Treasury note fell 8 basis points to 2.86% (for a year-to-date decrease of 99 basis points).
Unfunded Future Retirement Liabilities
The website www.usdebtclock.org provides data on the national debt and other categories. While I can not attest to the validity of the data, it does give a person something to think about concerning our future. The data covered is the future liabilies for Social Security, Medicare Prescription Drugs, and Medicare.
This a calculation of how much money needed today to cover all future liabilities, or a math exercise. It gets a number based upon assumptions like population growth rate, retirement age, longevity, inflation rate, rate for increasing medical cost, and so on. Here are the numbers:
Social Security Liability: $14.5 Trillion
Medicare Prescription Drug Liability: $19.2 Trillion
Medicare Liability: $76.2 Trillion
Total Liability: $109.9 Trillion
Total Liability per US Citizen: $354,530
So what does this mean?
* Things are going to be changing
* The amount of funding going into Social Security and Medicare are going up
* The amount of benefits are going down
* The recently passed health care bill probably is going to be around with little changes
* Experts talk about our debt problems have to do with paying for entitlements. I think that the word entitlement really means these retirement benefits that we are counting on for the future.
* You need to be saving lots more for retirement, it would be good for each of us to have $354,530 set aside at retirement. If you do not, what is your back-up plan?
Trivia
1. The dial tone of a normal telephone is in the key of "F".
2. A group of unicorns is called a blessing. A group of owls is called a parliament.
3. In 1963, baseball pitcher Gaylord Perry remarked, "They'll put a man on the moon before I hit a home run." On July 20, 1969, a few hours after Neil Armstrong set foot on the moon, Gaylord Perry hit his first home run.
4. Kermit the Frog is left-handed.
5. The word "pound" is abbreviated "lb." from the Latin "libra pondo", meaning weight or balance, where the constellation got its name.
6. Mel Blanc, the voice of Bugs Bunny, was allergic to carrots.
7. One of the reasons marijuana is illegal today is because cotton growers in the 30s lobbied against hemp farmers (they saw it as competition).
8. Maine is the only state in the United States whose name has one syllable.
9. At latitude 60 degrees south you can sail the entire way around the world.
10. Isaac Asimov is the only author to have a book in every Dewey-decimal category.
What does all of this mean? We are still in a consolidation phase in the economic business cycle and at the end of the fear, VIX, cycle. Let's relax a little already. Now is a great time to refinance a home as well as purchase a home as interest rates are at low levels not seen in 50 years with a 15 year mortgage below 4%.
This newsletter contains the weekly recap from Vanguard, followed by a section on Future Retirement Liabilities, and lastly a short trivia section for your enjoyment. The middle section presents data from www.usdebtclock.org website on the current shortfall for Social Security and Medicare to pay future benefits to us.
Vanguard Weekly Recap
The economy has continued to struggle, shedding 131,000 jobs in July. While the unemployment rate remained at 9.5% last month despite the job losses, this was most likely due to a drop in the number of people seeking work. Most of the other economic news that came out this week was also negative, as factory orders fell, the manufacturing sector lost momentum, and personal income was flat. Two exceptions to the otherwise disappointing news were construction spending and the service sector, both of which showed signs of recovery. For the week, the S&P 500 Index rose 1.8% to 1,122 (for a year-to-date total return—including price change plus dividends—of about 1.7%). The yield of the 10-year U.S. Treasury note fell 8 basis points to 2.86% (for a year-to-date decrease of 99 basis points).
Unfunded Future Retirement Liabilities
The website www.usdebtclock.org provides data on the national debt and other categories. While I can not attest to the validity of the data, it does give a person something to think about concerning our future. The data covered is the future liabilies for Social Security, Medicare Prescription Drugs, and Medicare.
This a calculation of how much money needed today to cover all future liabilities, or a math exercise. It gets a number based upon assumptions like population growth rate, retirement age, longevity, inflation rate, rate for increasing medical cost, and so on. Here are the numbers:
Social Security Liability: $14.5 Trillion
Medicare Prescription Drug Liability: $19.2 Trillion
Medicare Liability: $76.2 Trillion
Total Liability: $109.9 Trillion
Total Liability per US Citizen: $354,530
So what does this mean?
* Things are going to be changing
* The amount of funding going into Social Security and Medicare are going up
* The amount of benefits are going down
* The recently passed health care bill probably is going to be around with little changes
* Experts talk about our debt problems have to do with paying for entitlements. I think that the word entitlement really means these retirement benefits that we are counting on for the future.
* You need to be saving lots more for retirement, it would be good for each of us to have $354,530 set aside at retirement. If you do not, what is your back-up plan?
Trivia
1. The dial tone of a normal telephone is in the key of "F".
2. A group of unicorns is called a blessing. A group of owls is called a parliament.
3. In 1963, baseball pitcher Gaylord Perry remarked, "They'll put a man on the moon before I hit a home run." On July 20, 1969, a few hours after Neil Armstrong set foot on the moon, Gaylord Perry hit his first home run.
4. Kermit the Frog is left-handed.
5. The word "pound" is abbreviated "lb." from the Latin "libra pondo", meaning weight or balance, where the constellation got its name.
6. Mel Blanc, the voice of Bugs Bunny, was allergic to carrots.
7. One of the reasons marijuana is illegal today is because cotton growers in the 30s lobbied against hemp farmers (they saw it as competition).
8. Maine is the only state in the United States whose name has one syllable.
9. At latitude 60 degrees south you can sail the entire way around the world.
10. Isaac Asimov is the only author to have a book in every Dewey-decimal category.
Saturday, July 31, 2010
Changing Investment Sentiment and Risk of Owning Individual Stocks
What a week, the dog days of summer are here and the action on Wall Street is hot. This newsletter gives a weekly recap from Vanguard, changing investment sentiment, risk of owning individual stocks, and some trivia for your enoyment. You and your investments need to stay cool for the rest of the summer.
Vanguard Weely Recap
The Commerce Department's report on gross domestic product (GDP) for the second quarter confirmed what many had expected: Although the economy has grown for the fourth straight quarter, the rate of growth has slowed. Moreover, the nation's recovery from recession has been tougher than previously thought, based on revised GDP figures indicating that the economy from 2007 to 2009 was weaker than originally estimated. For the week, the S&P 500 Index fell 0.1% to 1,102 (for a year-to-date total return—including price change plus dividends—of about -0.1%). The yield of the 10-year U.S. Treasury note fell 8 basis points to 2.94% (for a year-to-date decrease of 91 basis points).
Changing Investment Sentiment
As you read in the Vanguard Weekly Recap, this week on Friday, it was stated that the economy did not grow as fast as anticipated in the second quarter. The result was a drop in long term interest rates and the stock market yawned. This is the first time this summer that news like this did not send the VIX skyward and the stock market tumbling.
We have a change in investment sentiment and this is positive for the stock market. How did this happen? Thursday night on Bloomberg TV the Finance Minister for France was interviewed and gave a very upbeat report about the future. The statements were that a double dip recession would not occur, during 2011 the global economy would grow by 4%, and employment would grow worldwide. France is working simultaneously to control debt and grow their economy, something badly needed in the USA. I admit that I live a boring life by watching Bloomberg TV.
Risk of Owning Individual Stocks
This week CommScope reported second quarter financial results with revenue and earnings exceeding expectations. The stock was punished for the next 2 days dropping about 25%. Normally, one would think that good news would be rewarded. So what happened? The revenue for the next quarter was forecasted slightly below expectations and some large investors gave a vote of no confidence and ran for the exits. CommScope had top ratings by several investment guidance services such as the Motley Fool.
This points out a few important points about owning individual stocks:
* It is common for stocks to have much larger up and down swings from the rest of the market. We enjoy the large upswings.
* Results for the previous quarter do not matter, investing is about what will happen in the future. You can not invest by looking backward.
* Investment guidance experts do lots of research and select good companies based upon metrics and they can not predict the future just like trying to predict the weather.
Trivia
"Dog Days" (Latin: diēs caniculārēs) are the hottest, most sultry days of summer. In the northern hemisphere, they usually fall between early July and early September. In the southern hemisphere they are usually between January and early March. The actual dates vary greatly from region to region, depending on latitude and climate. Dog Days can also define a time period or event that is very hot or stagnant, or marked by dull lack of progress. The name comes from the ancient belief that Sirius, also called the Dog Star, was somehow responsible for the hot weather.
Vanguard Weely Recap
The Commerce Department's report on gross domestic product (GDP) for the second quarter confirmed what many had expected: Although the economy has grown for the fourth straight quarter, the rate of growth has slowed. Moreover, the nation's recovery from recession has been tougher than previously thought, based on revised GDP figures indicating that the economy from 2007 to 2009 was weaker than originally estimated. For the week, the S&P 500 Index fell 0.1% to 1,102 (for a year-to-date total return—including price change plus dividends—of about -0.1%). The yield of the 10-year U.S. Treasury note fell 8 basis points to 2.94% (for a year-to-date decrease of 91 basis points).
Changing Investment Sentiment
As you read in the Vanguard Weekly Recap, this week on Friday, it was stated that the economy did not grow as fast as anticipated in the second quarter. The result was a drop in long term interest rates and the stock market yawned. This is the first time this summer that news like this did not send the VIX skyward and the stock market tumbling.
We have a change in investment sentiment and this is positive for the stock market. How did this happen? Thursday night on Bloomberg TV the Finance Minister for France was interviewed and gave a very upbeat report about the future. The statements were that a double dip recession would not occur, during 2011 the global economy would grow by 4%, and employment would grow worldwide. France is working simultaneously to control debt and grow their economy, something badly needed in the USA. I admit that I live a boring life by watching Bloomberg TV.
Risk of Owning Individual Stocks
This week CommScope reported second quarter financial results with revenue and earnings exceeding expectations. The stock was punished for the next 2 days dropping about 25%. Normally, one would think that good news would be rewarded. So what happened? The revenue for the next quarter was forecasted slightly below expectations and some large investors gave a vote of no confidence and ran for the exits. CommScope had top ratings by several investment guidance services such as the Motley Fool.
This points out a few important points about owning individual stocks:
* It is common for stocks to have much larger up and down swings from the rest of the market. We enjoy the large upswings.
* Results for the previous quarter do not matter, investing is about what will happen in the future. You can not invest by looking backward.
* Investment guidance experts do lots of research and select good companies based upon metrics and they can not predict the future just like trying to predict the weather.
Trivia
"Dog Days" (Latin: diēs caniculārēs) are the hottest, most sultry days of summer. In the northern hemisphere, they usually fall between early July and early September. In the southern hemisphere they are usually between January and early March. The actual dates vary greatly from region to region, depending on latitude and climate. Dog Days can also define a time period or event that is very hot or stagnant, or marked by dull lack of progress. The name comes from the ancient belief that Sirius, also called the Dog Star, was somehow responsible for the hot weather.
Saturday, July 24, 2010
Financial Derivatives
This blog covers the topic of financial derivates. Also included will be an update on corporate earnings and the weekly update from Vanguard.
Corporate Earnings
My belief has been that corporate earnings will be stronger than anticipated and would be positive for investing in stocks. This week many corporations published earnings and gave guidance on future revenue and earnings. Most corporations exceeded expectations and gave a favorable view of the future stating that an economic recovery was progressing with little concern about a double dip recession. Treasury Secretary Tim Geitner also gave positive comments about economic recovery for the next 18 months. Because of these earnings reports, and an extension of jobless benefits, the stock market did perform well this week. This trend should continue through the earnings season which lasts through about the end of August.
Vanguard Weekly Recap
The speed might resemble that of rush hour traffic, but the economy is still moving. If a breakdown occurs, Federal Reserve Chairman Ben Bernanke said the Fed would take further measures. The news was mostly negative this week, but the long-term recovery still appears to be on course. Both existing-home sales and housing starts were down, mostly because of April's expiration of the federal homebuyer tax credit. The Conference Board's index of leading indicators also fell. For the week, the S&P 500 Index rose 3.5% to 1,103 (for a year-to-date total return—including price change plus dividends—of about -0.1%). The yield of the 10-year U.S. Treasury note rose 6 basis points to 3.02% (for a year-to-date decrease of 83 basis points).
Financial Derivates
A derivative is a financial instrument - or more simply, an agreement between two people or two parties - that has a value determined by the price of something else (called the underlying). It is a financial contract with a value linked to the expected future price movements of the asset it is linked to - such as a share or a currency. There are many kinds of derivatives, with the most notable being swaps, futures, and options. However, since a derivative can be placed on any sort of security, the scope of all derivatives possible is nearly endless. Thus, the real definition of a derivative is an agreement between two parties that is contingent on a future outcome of the underlying.
By contrast, we might speak of primary instruments, although the term cash instruments is more common. A cash instrument is an instrument whose value is determined directly by markets. Stocks, commodities, currencies and bonds are all cash instruments. The distinction between cash and derivative instruments is not always precise, but it is a useful informal distinction.
Referring to derivatives as assets would be a misconception, since a derivative is incapable of having value of its own. However, some more commonplace derivatives, such as swaps, futures, and options, which have a theoretical face value that can be calculated using formulas, such as Black-Scholes, are frequently traded on open markets before their expiration date as if they were assets.
Derivatives are used by investors to
1) provide leverage or gearing, such that a small movement in the underlying value can cause a large difference in the value of the derivative
2) speculate and to make a profit if the value of the underlying asset moves the way they expect (e.g., moves in a given direction, stays in or out of a specified range, reaches a certain level)
3) hedge or mitigate risk in the underlying, by entering into a derivative contract whose value moves in the opposite direction to their underlying position and cancels part or all of it out
4) obtain exposure to underlying where it is not possible to trade in the underlying (e.g., weather derivatives)
create optionability where the value of the derivative is linked to a specific condition or event (e.g., the underlying reaching a specific price level)
The recently passed financial regulation law has placed limits on the use of derivatives for banks and other financial institutions. These institutions are upset as it impacts their ability to make money as well as their ability to hedge against loss in an investment. If financial institutions are using derivatives, how can an individual investor use it?
If an investor is buying individual stocks then an option can be used to cover any loss. This is done by buying a put against the stock that gains in value as the stock declines. I am not a big believer of buying stocks options.
If an investor is buying mutual funds then an Electronically Traded Fund (ETF) can be purchased that tracks the value of future contracts. One such ETF is VXX that tracks the future value of the Volatility Indexes such as the Volatility Index of the S&P 500 (^VIX). A somewhat inverse correlation exists between the S&P 500 and the ^VIX so if one is concerned about future stock prices an individual investor can buy the VXX as a hedge. During the latest recession, while stock prices were dropping by 50% the VXX increased substantially, about 4 times higher.
The use of VXX is something that I am researching as a way to make money when the stock market is in a trading range. A portion of an investment portfolio would be used. This takes advantage of the Warren Buffet statement to be fearful when others are greedy and be greedy when others are fearful. This is how it works:
* when the stock market is acting normally and the ^VIX is low, about 20, VXX would purchased
* when fear hits the stock market and the ^VIX is high about 40, VXX would be sold
* the cycle continues as volatility rises and falls
Corporate Earnings
My belief has been that corporate earnings will be stronger than anticipated and would be positive for investing in stocks. This week many corporations published earnings and gave guidance on future revenue and earnings. Most corporations exceeded expectations and gave a favorable view of the future stating that an economic recovery was progressing with little concern about a double dip recession. Treasury Secretary Tim Geitner also gave positive comments about economic recovery for the next 18 months. Because of these earnings reports, and an extension of jobless benefits, the stock market did perform well this week. This trend should continue through the earnings season which lasts through about the end of August.
Vanguard Weekly Recap
The speed might resemble that of rush hour traffic, but the economy is still moving. If a breakdown occurs, Federal Reserve Chairman Ben Bernanke said the Fed would take further measures. The news was mostly negative this week, but the long-term recovery still appears to be on course. Both existing-home sales and housing starts were down, mostly because of April's expiration of the federal homebuyer tax credit. The Conference Board's index of leading indicators also fell. For the week, the S&P 500 Index rose 3.5% to 1,103 (for a year-to-date total return—including price change plus dividends—of about -0.1%). The yield of the 10-year U.S. Treasury note rose 6 basis points to 3.02% (for a year-to-date decrease of 83 basis points).
Financial Derivates
A derivative is a financial instrument - or more simply, an agreement between two people or two parties - that has a value determined by the price of something else (called the underlying). It is a financial contract with a value linked to the expected future price movements of the asset it is linked to - such as a share or a currency. There are many kinds of derivatives, with the most notable being swaps, futures, and options. However, since a derivative can be placed on any sort of security, the scope of all derivatives possible is nearly endless. Thus, the real definition of a derivative is an agreement between two parties that is contingent on a future outcome of the underlying.
By contrast, we might speak of primary instruments, although the term cash instruments is more common. A cash instrument is an instrument whose value is determined directly by markets. Stocks, commodities, currencies and bonds are all cash instruments. The distinction between cash and derivative instruments is not always precise, but it is a useful informal distinction.
Referring to derivatives as assets would be a misconception, since a derivative is incapable of having value of its own. However, some more commonplace derivatives, such as swaps, futures, and options, which have a theoretical face value that can be calculated using formulas, such as Black-Scholes, are frequently traded on open markets before their expiration date as if they were assets.
Derivatives are used by investors to
1) provide leverage or gearing, such that a small movement in the underlying value can cause a large difference in the value of the derivative
2) speculate and to make a profit if the value of the underlying asset moves the way they expect (e.g., moves in a given direction, stays in or out of a specified range, reaches a certain level)
3) hedge or mitigate risk in the underlying, by entering into a derivative contract whose value moves in the opposite direction to their underlying position and cancels part or all of it out
4) obtain exposure to underlying where it is not possible to trade in the underlying (e.g., weather derivatives)
create optionability where the value of the derivative is linked to a specific condition or event (e.g., the underlying reaching a specific price level)
The recently passed financial regulation law has placed limits on the use of derivatives for banks and other financial institutions. These institutions are upset as it impacts their ability to make money as well as their ability to hedge against loss in an investment. If financial institutions are using derivatives, how can an individual investor use it?
If an investor is buying individual stocks then an option can be used to cover any loss. This is done by buying a put against the stock that gains in value as the stock declines. I am not a big believer of buying stocks options.
If an investor is buying mutual funds then an Electronically Traded Fund (ETF) can be purchased that tracks the value of future contracts. One such ETF is VXX that tracks the future value of the Volatility Indexes such as the Volatility Index of the S&P 500 (^VIX). A somewhat inverse correlation exists between the S&P 500 and the ^VIX so if one is concerned about future stock prices an individual investor can buy the VXX as a hedge. During the latest recession, while stock prices were dropping by 50% the VXX increased substantially, about 4 times higher.
The use of VXX is something that I am researching as a way to make money when the stock market is in a trading range. A portion of an investment portfolio would be used. This takes advantage of the Warren Buffet statement to be fearful when others are greedy and be greedy when others are fearful. This is how it works:
* when the stock market is acting normally and the ^VIX is low, about 20, VXX would purchased
* when fear hits the stock market and the ^VIX is high about 40, VXX would be sold
* the cycle continues as volatility rises and falls
Pension Guarantees
The July AARP Bulletin has an article titled What an Outrage Protector of Pensions on Shaky Ground. This week on CNBC, the Ohio State Attorney General talked about the reasoning for filing a lawsuit against BP and has filed lawsuits in the past against other publicly traded company that saw a dramatic drop in stock price. These are related in that it points to the efforts taken to guarantee a pension. When person receives a pension it is believed to be guaranteed. This is mostly correct and if you are receiving a pension you need to stay current on the status of the pension fund.
Pension Benefit Guaranty Corporation
The Pension Benefit Guaranty Corporation (or PBGC) is an independent agency of the United States government that was created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private defined benefit pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at the lowest level necessary to carry out its operations. Subject to other statutory limitations, the PBGC insurance program pays pension benefits up to the maximum guaranteed benefit set by law to participants who retire at age 65 ($54,000 a year as of 2009). The benefits payable to insured retirees who start their benefits at ages other than 65, or who elect survivor coverage, are adjusted to be equivalent in value.
The PBGC is not funded by general tax revenues. Its funds come from four sources:
1) Insurance premiums paid by sponsors of defined benefit pension plans;
2) Assets held by the pension plans it takes over;
3) Recoveries of unfunded pension liabilities from plan sponsors' bankruptcy estates;
4) Investment income.
Currently PBGC pays monthly retirement benefits to approximately 631,000 retirees of 3,800 terminated defined benefit pension plans. Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, the PBGC is responsible for the current and future pensions of about 1.3 million people. It currently protects the pensions of more than 44 million American workers and retirees in more than 29,000 private single-employer and multiemployer defined benefit pension plans.
The PBGC regularly updates its investment strategy. In 2004, it chose to invest heavily in bonds. Under new leadership, the agency shifted a substantial portion of its assets into stocks. Because of the market decline, PBGC's equity investments lost 23% during the year ending September 30, 2008.
The AARP article made the following statements about PBGC:
* did not effectively safeguard assets
* problem with compliance to laws and regulations
* chronically underfunded with shortfalls in the billions of dollars
* this impacts the pensions in 1 out of 6 Americans
Getting to the questions of why the Ohio Attorney General has filed lawsuits against BP, Bank of America, AIG, etc? The answer is that management company for the Ohio state employees pension fund took some risks in order to gain a higher return and invested in individual stocks at a time when certain individual stocks took a dive. Because this pension fund is now underfunded, the citizens in the state of Ohio now have a liability at a time when tax receipts are down. The lawsuits are filed to protect because of: mismanagement, being underfunded, and a liability when tax receipts are down.
It seems that PBGC and Ohio state pension fund have some similarities. Typically, pension funds for corporations are underfunded because corporations prefer to put money into the operation of the company instead of a pension fund. Because of the recent decline in the stock market, both public and private pension funds need the PBGC more than ever.
Bottom Line: Pensions are a great thing and realize that a risk of underfunding always exists, especially when a stock market declines. If you have a pension you need to stay current on the funding and performance. Also, even if you will be covered by a pension you need to also invest for retirement because things outside of your control influence the ability of the pension fund to meet its future obligations.
Pension Benefit Guaranty Corporation
The Pension Benefit Guaranty Corporation (or PBGC) is an independent agency of the United States government that was created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private defined benefit pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at the lowest level necessary to carry out its operations. Subject to other statutory limitations, the PBGC insurance program pays pension benefits up to the maximum guaranteed benefit set by law to participants who retire at age 65 ($54,000 a year as of 2009). The benefits payable to insured retirees who start their benefits at ages other than 65, or who elect survivor coverage, are adjusted to be equivalent in value.
The PBGC is not funded by general tax revenues. Its funds come from four sources:
1) Insurance premiums paid by sponsors of defined benefit pension plans;
2) Assets held by the pension plans it takes over;
3) Recoveries of unfunded pension liabilities from plan sponsors' bankruptcy estates;
4) Investment income.
Currently PBGC pays monthly retirement benefits to approximately 631,000 retirees of 3,800 terminated defined benefit pension plans. Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, the PBGC is responsible for the current and future pensions of about 1.3 million people. It currently protects the pensions of more than 44 million American workers and retirees in more than 29,000 private single-employer and multiemployer defined benefit pension plans.
The PBGC regularly updates its investment strategy. In 2004, it chose to invest heavily in bonds. Under new leadership, the agency shifted a substantial portion of its assets into stocks. Because of the market decline, PBGC's equity investments lost 23% during the year ending September 30, 2008.
The AARP article made the following statements about PBGC:
* did not effectively safeguard assets
* problem with compliance to laws and regulations
* chronically underfunded with shortfalls in the billions of dollars
* this impacts the pensions in 1 out of 6 Americans
Getting to the questions of why the Ohio Attorney General has filed lawsuits against BP, Bank of America, AIG, etc? The answer is that management company for the Ohio state employees pension fund took some risks in order to gain a higher return and invested in individual stocks at a time when certain individual stocks took a dive. Because this pension fund is now underfunded, the citizens in the state of Ohio now have a liability at a time when tax receipts are down. The lawsuits are filed to protect because of: mismanagement, being underfunded, and a liability when tax receipts are down.
It seems that PBGC and Ohio state pension fund have some similarities. Typically, pension funds for corporations are underfunded because corporations prefer to put money into the operation of the company instead of a pension fund. Because of the recent decline in the stock market, both public and private pension funds need the PBGC more than ever.
Bottom Line: Pensions are a great thing and realize that a risk of underfunding always exists, especially when a stock market declines. If you have a pension you need to stay current on the funding and performance. Also, even if you will be covered by a pension you need to also invest for retirement because things outside of your control influence the ability of the pension fund to meet its future obligations.
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