What a week in the auto industry. Chrysler, aka Crysler, and General Motors, aka Government Motors, announced the closing of about 2000 dealership. These dealerships were chosen by some reason probably not related to profitability of the individual dealer. Most people associated with Crysler and Government Motors are probably thinking why did we ask the government for money. Be careful what you wish for cause you just might get it.
About 8 months ago, Barrons had a nice article on why GM was a good buy at $25/share. I did not buy the stock then and still do not plan to buy it in the future. The reason for my decision is the metric of pension funding versus shareholder equity which says that funding pensions will cost more than the company is worth. This very smart person had great reasons on the surface but did not get to the real issue. GM hit a 76 year low this week at about $1/share. The moral of the story is be very very selective in buying an stock, I currently like only 4 stocks. You are better off to buy a few that you know very very well than just starting to buy based upon some very smart analyst. Better yet you are probably better off buying a highly rated mutual fund with low fees.
I have been saying that you want to avoid long term bonds. The latest issue of Barrons had an article stating that the 30 year treasury bond has lost 20% this year and this investment should be avoided. The reason is that government spending is causing interest rates to go up and this trend will continue. What does government spending at an annual deficit of a $2 trillion get us:
1) Higher interest rates
2) Losing money on long term bonds
3) Drop in the value of the dollar relative to other currencies
4) Higher prices for commodities that are imported like oil
For someone looking for fixed income, some good alternatives exist in bond funds that invest in corporate bonds and municipal bonds. If you go this route your return will be higher than a money market fund or CD.
Sunday, May 17, 2009
Saturday, May 9, 2009
Business Cycle Investing - Long Term Investor
Articles are being written debating which investment is the best investment for a long term investor. One side of the debate extols the virtues of stocks and having an ownership position. The other side extols the virtues of bonds and having little risk exposure. If you look at Business Cycle Investing the answer is that you want to own both but at different times.
The building blocks of business cycle investing include:1) Any economy has business cycles.2) It is always good to minimize risk and make money.3) In general, the stock market goes us as the economy is growing and goes down as the economy is slowing. The change in the growth rate is also very important.4) The Federal Reserve moves interest rate to keep the economy growing at an annual inflation rate of about 3%.5) The Federal Reserve strongly influences the business cycle by changing interest rates.6) Long term bonds do well as interest rates are dropping and poorly as interest rates rise.
A business cycle has 4 segments: bottom, growing, top, and slowing. The Federal Reserve raises interest rates as the economy is growing at an inflation rate above 3% and reduces interest rates as the economy is slowing at an inflation rate below 3%.During a bottom, where we are now, interest rates are low and the economy is starting to grow. Stocks should be bought and long term bonds should be avoided. You know this phase as the Federal Reserve will publish information that the economy has bottomed and is growing.During a growth period, where we will be, interest rates are rising and the economy is growing. Stocks should be bought and long term bonds should be avoided. You know this phase by the Federal Reserve raising the interest rate.During a top, interest rates are at peak and the economy has stopped growing. Stocks should be avoided and long term bonds should be bought. You know this phase as the Federal Reserve will publish information that the economy has peaked and is slowing.During a slowing period, interest rates are dropping and the economy is slowing. Stocks should be avoided and long term bonds should be bought. You know this phase by the Federal Reserve dropping the interest rate.
An investor that would have followed Business Cycle Investing would have been out of the stock market during most of 2008 and would have been in long term bonds. During 2008 the stock market lost about 40% while long term bonds gained about 40%. An example to put this in terms of real money, a $100,000 account loses about $40,000 in the stock market and gains about $40,000 in long term bonds. You can have an account balance of $60,000 or $140,000. Obviously, it is better to have $80,000 more in your account even if you had to pay some capital gain tax.
The building blocks of business cycle investing include:1) Any economy has business cycles.2) It is always good to minimize risk and make money.3) In general, the stock market goes us as the economy is growing and goes down as the economy is slowing. The change in the growth rate is also very important.4) The Federal Reserve moves interest rate to keep the economy growing at an annual inflation rate of about 3%.5) The Federal Reserve strongly influences the business cycle by changing interest rates.6) Long term bonds do well as interest rates are dropping and poorly as interest rates rise.
A business cycle has 4 segments: bottom, growing, top, and slowing. The Federal Reserve raises interest rates as the economy is growing at an inflation rate above 3% and reduces interest rates as the economy is slowing at an inflation rate below 3%.During a bottom, where we are now, interest rates are low and the economy is starting to grow. Stocks should be bought and long term bonds should be avoided. You know this phase as the Federal Reserve will publish information that the economy has bottomed and is growing.During a growth period, where we will be, interest rates are rising and the economy is growing. Stocks should be bought and long term bonds should be avoided. You know this phase by the Federal Reserve raising the interest rate.During a top, interest rates are at peak and the economy has stopped growing. Stocks should be avoided and long term bonds should be bought. You know this phase as the Federal Reserve will publish information that the economy has peaked and is slowing.During a slowing period, interest rates are dropping and the economy is slowing. Stocks should be avoided and long term bonds should be bought. You know this phase by the Federal Reserve dropping the interest rate.
An investor that would have followed Business Cycle Investing would have been out of the stock market during most of 2008 and would have been in long term bonds. During 2008 the stock market lost about 40% while long term bonds gained about 40%. An example to put this in terms of real money, a $100,000 account loses about $40,000 in the stock market and gains about $40,000 in long term bonds. You can have an account balance of $60,000 or $140,000. Obviously, it is better to have $80,000 more in your account even if you had to pay some capital gain tax.
Sunday, April 19, 2009
Business Cycle Investing
Last year my Pastor, good friend, and client Pastor James D Ritch mentioned in a Sunday Worship Sermon that he had a dream about his sermon being broadcast to the entire world. He said that in this dream his sermon was broadcast via satellite to the rest of the world. This is now possible by using the internet and a digital video camera. I recorded portions of 2 sermons and just finished putting them on the internet at the website youtube.com.
If you are not familiar with youtube.com just ask any teenager and you will get a quick education. Go to youtube.com and type in Pastor James Ritch in the Search box and then click on the Search button. Now anyone in the world can see his sermons. For those who know Pastor James D Ritch, help him reach his dream and let others know about these videos.
Every adult has a dream and typically to achieve it takes financial planning. It really does not matter if you own a business, work at a business, are in school, are retired, etc. you want to fulfill a dream. A role of a financial planner or investment advisor is to help define and execute a financial plan, including investment strategy, to achieve your dream.
A topic in the press is what is the best investment strategy for a long term investment? Some of the strategies being discussed are Buy and Hold, Active Stock Trading, Modern Portfolio Theory or Diversification, Value Investing, Growth Investing and Avoiding Stocks. If you look at for the last 80+ years none of these strategies gave the optimum performance.
The best strategy that I found involves matching investments to the economic business cycle or Business Cycle Investing. I have yet to see this style of investing published. As an economy goes through the 4 phases of a business cycle: growth, top, decline, and bottom the economic growth rate and interest rate change in a predictable manner. Since we are at a bottom in the economic business cycle, now is a good time to avoid long term bonds and buy stocks. In fact the last 6 weeks have been fun for an investor who owns stocks.
If you are not familiar with youtube.com just ask any teenager and you will get a quick education. Go to youtube.com and type in Pastor James Ritch in the Search box and then click on the Search button. Now anyone in the world can see his sermons. For those who know Pastor James D Ritch, help him reach his dream and let others know about these videos.
Every adult has a dream and typically to achieve it takes financial planning. It really does not matter if you own a business, work at a business, are in school, are retired, etc. you want to fulfill a dream. A role of a financial planner or investment advisor is to help define and execute a financial plan, including investment strategy, to achieve your dream.
A topic in the press is what is the best investment strategy for a long term investment? Some of the strategies being discussed are Buy and Hold, Active Stock Trading, Modern Portfolio Theory or Diversification, Value Investing, Growth Investing and Avoiding Stocks. If you look at for the last 80+ years none of these strategies gave the optimum performance.
The best strategy that I found involves matching investments to the economic business cycle or Business Cycle Investing. I have yet to see this style of investing published. As an economy goes through the 4 phases of a business cycle: growth, top, decline, and bottom the economic growth rate and interest rate change in a predictable manner. Since we are at a bottom in the economic business cycle, now is a good time to avoid long term bonds and buy stocks. In fact the last 6 weeks have been fun for an investor who owns stocks.
Saturday, April 11, 2009
Congratulations, You Have Survived the Worst Business Cycle of Our Generation
From an investment viewpoint, you have survived the worst business cycle of our generation. It will be wonderful when the ecomony begins an upswing and we start the next business cycle. Congratulations, you have one more thing to be thankful for this Easter!
This week the US stock market recorded the best 5 week return, of about 30%, in the last 70 - 80 years. It is very doubtful that another 30% return will occur in the next 5 weeks. Since the economy is improving, is also very doubtful that the stock market will return to the low seen 5 weeks ago.
What is important to learn is that it is important to be a disciplined investor. Let's go back 5 weeks, most of the experts on TV talked about how bad things were and to avoid investing in the US stock market. As an investor, you were better off to maintain discipline and continue with your gameplan. Anyone who put money into the US stock market during the past 5 weeks had to have courage and overcome fear.
Now what does an investor do since the US Stock Market has rebounded? Follow your gameplan and maintain investing discipline. Noboby knows what will happen to the US Stock Market in the short term. In the longer term, the stock market increases as the economy improves.
Enjoy your Easter! Your Christian faith and relationships with Family and Friends are the most important things you have!
This week the US stock market recorded the best 5 week return, of about 30%, in the last 70 - 80 years. It is very doubtful that another 30% return will occur in the next 5 weeks. Since the economy is improving, is also very doubtful that the stock market will return to the low seen 5 weeks ago.
What is important to learn is that it is important to be a disciplined investor. Let's go back 5 weeks, most of the experts on TV talked about how bad things were and to avoid investing in the US stock market. As an investor, you were better off to maintain discipline and continue with your gameplan. Anyone who put money into the US stock market during the past 5 weeks had to have courage and overcome fear.
Now what does an investor do since the US Stock Market has rebounded? Follow your gameplan and maintain investing discipline. Noboby knows what will happen to the US Stock Market in the short term. In the longer term, the stock market increases as the economy improves.
Enjoy your Easter! Your Christian faith and relationships with Family and Friends are the most important things you have!
Sunday, April 5, 2009
Changing Investor Sentiment
The stock market has increased for the last 4 weeks while unemployment rates have gone up. This seems rather unusual at first glance. Why would the stock market continue to increase with bad unemployment data? The answer is shifting investor sentiment.
Four commonly used investment categories are stocks, short term bonds such as money market funds and bank CDs, long term bonds, and gold. Last week, investors started shifting from long term bonds, as these rates increased, and gold as the price of gold continued to decline. The question is will this trend continue? My answer is yes and here is why.
Last week's blog covered the direction for long term interest rates and bonds. Long term rates should continue to increase which will drive investors to sell long term bonds and give money to invest in other investment categories.
Gold has once again dropped below $900 per ounce. While some financial experts forecast gold to continue to rise above $2,000 per ounce, this makes no logical sense. Gold prices increase in periods of financial uncertainty, as a hedge against inflation, when investors shift into commodities, or a shortage of supply. Let's look at each point.
Four commonly used investment categories are stocks, short term bonds such as money market funds and bank CDs, long term bonds, and gold. Last week, investors started shifting from long term bonds, as these rates increased, and gold as the price of gold continued to decline. The question is will this trend continue? My answer is yes and here is why.
Last week's blog covered the direction for long term interest rates and bonds. Long term rates should continue to increase which will drive investors to sell long term bonds and give money to invest in other investment categories.
Gold has once again dropped below $900 per ounce. While some financial experts forecast gold to continue to rise above $2,000 per ounce, this makes no logical sense. Gold prices increase in periods of financial uncertainty, as a hedge against inflation, when investors shift into commodities, or a shortage of supply. Let's look at each point.
- Since this bank induced financial crisis is being resolved, this should be a factor to reduce gold prices.
- Since we are in a recession, a period of deflation, this should be a factor to reduce gold prices.
- Last summer investors generally shifted away from all other commodities like oil, gas, and copper with one exception being gold. This also should be a factor to reduce gold prices.
- Since gold has been at elevated levels for an extended period this would cause gold producers to increase supply with time. This should also be a factor to reduce gold prices.
From a fundamental perspective, gold prices should continue to decline which would incent investors to sell and give money to invest in other investment categories. The 2 remaining investment categories that should benefit from this shift are stocks and short term bonds such as money market funds and bank CDs. Risk taking investors will continue to shift money into the stock market with time. Now is a good time to sell you broken and unwanted gold jewelry to raise cash.
Enjoy the important things of life. Avoid listening to the news. Contact me if you have any financial questions or if you want to invest.
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