I hope you had a Blessed Christmas. To everyone in the Midwest, I hope you were safe and warm during the 2009 Christmas Blizzard. This blog will be very brief.
This past week mutual funds have been doing end of year window dressing which means that they are positioning their portfolios with the things that they want their clients to see. This gives a glimpse into what these investment professionals think about the future.
During the week the stock market rose, reaching a high for 2009, and the long term treasury bond yield rose so that the yield spread also reached a high for 2009. The stock market high is normal for this period in the business cycle. The bond yield curve has me a little concerned as one of the bond funds did not perform very well. What this means is that accounts are positioned well except for a particular bond fund that will probably be sold and the money moved to another fund next year.
The economic news this week was good, unemployment and durable good orders were better than expected. In addition the health care reform bill passed the Senate and this is now old news for stock market investors
Saturday, December 26, 2009
Sunday, December 20, 2009
Health Care Reform
The news this past week has been the Senate passing a Health Care Reform bill by Christmas, hopefully a good gift to us but probably not. While many cover the political aspects of this bill, this newsletter will focus on the financial aspects.
A bill will get passed during 2010. Once the Senate passes their bill the process is only about half done. Next a compromise bill will be drafted by the House and Senate committees. This compromise bill will be approved by the House and Senate and then go to the President for signing. Expect this compromise bill to include many of the things that have recently been taken out. A main reason is that only 51 votes are needed in the Senate once it comes out of committee instead of 60 and the more liberal members of the Senate will require things, like the public option, to be added back before giving their approval. People who are more politically astute can give you the rest of the details.
Three underlying themes have existed during the debate: insurance coverage for more people, higher taxes, and reduced Medicare expenditures. These 3 things are going to happen regardless of the final outcome, public option or not. Personally, I am not sure a Republican bill would look much different than what is currently being proposed in the Senate. So what does this mean financially?
Insuring about 30 million more people who are currently not insurable means that most likely your future insurance premiums are going up. Since insurance companies are in business to make money they like to insure healty people who have smaller claims and expensive people tend to get dropped. Personally, I view insurance companies unfavorably for the way they tend to treat people to get bigger bonuses for executives. In essence, expensive people are going to be added increasing the cost of claims and raising rates.
The idea of higher taxes has been a constant theme. What is not known is how it will be done, this is still not visible to us. Expect less visible taxes, like estate taxes, to be raised and deductions to be taken away. This has been a constant theme this year.
Reducing Medicare benefits is not fully known yet. Obviously, the thing that is being touted is elimination of fraud and waste. While this is hopefully true, most likely it means that more expensive Medigap policies will be required to cover expenses once you reach 65 and go on Medicare as Medicare benefits are being reduced.
Bottom Line: This is going to cost you more money, avoid investing in health insurance companies, and be a good steward of your resources. You need to ready yourself, not rely on the government that is deep in debt for help, and be prepared for a future with fewer benefits from government organizations.
A bill will get passed during 2010. Once the Senate passes their bill the process is only about half done. Next a compromise bill will be drafted by the House and Senate committees. This compromise bill will be approved by the House and Senate and then go to the President for signing. Expect this compromise bill to include many of the things that have recently been taken out. A main reason is that only 51 votes are needed in the Senate once it comes out of committee instead of 60 and the more liberal members of the Senate will require things, like the public option, to be added back before giving their approval. People who are more politically astute can give you the rest of the details.
Three underlying themes have existed during the debate: insurance coverage for more people, higher taxes, and reduced Medicare expenditures. These 3 things are going to happen regardless of the final outcome, public option or not. Personally, I am not sure a Republican bill would look much different than what is currently being proposed in the Senate. So what does this mean financially?
Insuring about 30 million more people who are currently not insurable means that most likely your future insurance premiums are going up. Since insurance companies are in business to make money they like to insure healty people who have smaller claims and expensive people tend to get dropped. Personally, I view insurance companies unfavorably for the way they tend to treat people to get bigger bonuses for executives. In essence, expensive people are going to be added increasing the cost of claims and raising rates.
The idea of higher taxes has been a constant theme. What is not known is how it will be done, this is still not visible to us. Expect less visible taxes, like estate taxes, to be raised and deductions to be taken away. This has been a constant theme this year.
Reducing Medicare benefits is not fully known yet. Obviously, the thing that is being touted is elimination of fraud and waste. While this is hopefully true, most likely it means that more expensive Medigap policies will be required to cover expenses once you reach 65 and go on Medicare as Medicare benefits are being reduced.
Bottom Line: This is going to cost you more money, avoid investing in health insurance companies, and be a good steward of your resources. You need to ready yourself, not rely on the government that is deep in debt for help, and be prepared for a future with fewer benefits from government organizations.
Sunday, December 13, 2009
Investing Psychology
This posting will not give an update on the Tiger Woods situation. Instead it covers a key element in investing, psychology of the stock market.
The economic business cycle has 2 aspects, financial statistics and psychology. While financial statistics get the most attention, psychology is also important because the adage of perception is reality is very real. Psychology does influence financial statistics.
At the bottom of an economic business cycle; businesses, consumers, and investors have a mindset that borders on depression. During the business cycle the psychology shifts from depression to normal to euphoria. Because of psychology, financial statistics tend to exceed expectation during the beginning part of the business cycle and tend to miss expectations at the end. It can be viewed as a pendulum swinging back and forth. Success tends to lead to more success while failure tends to lead to more failure.
Since Thanksgiving, we have seen better than expected statistics such as for employment, consumer confidence, and retail sales. In particular, retail sales during the Christmas season has increased 1.6% much better than the 0.6% that was anticipated. Why is an understanding of psychology important? Because it provides opportunity for an investor. Upcoming financial statistics should continue to exceed expectation as business and consumer confidence continues to improve.
Bottom Line: Because of psychology, when sentiment is depressing at the bottom of an economic business cycle it provides a wonderful buying opportunity and when the mood is euphoria it provides a wonderful selling opportunity for stocks.
The economic business cycle has 2 aspects, financial statistics and psychology. While financial statistics get the most attention, psychology is also important because the adage of perception is reality is very real. Psychology does influence financial statistics.
At the bottom of an economic business cycle; businesses, consumers, and investors have a mindset that borders on depression. During the business cycle the psychology shifts from depression to normal to euphoria. Because of psychology, financial statistics tend to exceed expectation during the beginning part of the business cycle and tend to miss expectations at the end. It can be viewed as a pendulum swinging back and forth. Success tends to lead to more success while failure tends to lead to more failure.
Since Thanksgiving, we have seen better than expected statistics such as for employment, consumer confidence, and retail sales. In particular, retail sales during the Christmas season has increased 1.6% much better than the 0.6% that was anticipated. Why is an understanding of psychology important? Because it provides opportunity for an investor. Upcoming financial statistics should continue to exceed expectation as business and consumer confidence continues to improve.
Bottom Line: Because of psychology, when sentiment is depressing at the bottom of an economic business cycle it provides a wonderful buying opportunity and when the mood is euphoria it provides a wonderful selling opportunity for stocks.
Sunday, December 6, 2009
Ready Yourself
The title is from a line in a song from Casting Crowns called Till The Whole World Hears. This newsletter has 3 parts; a quick investing update looking at the Treasury Yield Curve, points on how to ready yourself for retirement, and a helpful story.
Rule #1 for investing is to follow the Federal Reserve. Rule #2 is to follow the Treasury Yield Curve. In particular, follow the shape and the interest rate spread between the 30 year Treasury Bond and the 3 month Treasury Bill. The shape and spread show that the Fed is artificially keeping short term rates low to improve economic growth. This shape and spread is very bullish for stocks and certain types of bonds. The bottom line is to maintain the current investment strategy.
How to Ready Yourself for Retirement:
* Develop a gameplan - Complete a financial analysis
* Determine the savings needed for retirement and then multiply by 1.5 to accommodate the future reduction in Social Security and Medicare benefits
* Run the plan and accumulate resources
* Before retirement get ready by reducing expenses such as paying off the Mortgage
* Before retirement determine the best way to retire to optimize Social Security benefits, timing can be critical
* Put investments into 2 buckets, fixed income to cover expenses and growth. Each bucket has a different investment strategy
* Relax and get ready for the next phase where you can do what you want to create a life. A living is what you do to pay the bills, a life is how you will be remembered.
Sign in a Smoky Mountain camping area:
“Due to the frequency of human/bear encounters, the Smoky Mountains Fish and Wildlife Department is advising hikers, campers, hunters, fishermen and any persons that use the out of doors in a recreational or work related function to take extra precautions while in the field. We advise outdoors persons to wear little, noisy bells on their clothing to give advance warning to any bears that might be close by so they aren’t taken by surprise. We also advise anyone using the out-of-doors to carry “Pepper Spray” in case of an encounter with a bear.
Outdoors people should also be on the watch for fresh bear activity and be able to tell the difference between black bear droppings and grizzly bear droppings. Black bear droppings are smaller, contain many berries, and squirrel fur. Grizzly bear droppings have bells in it and smells like pepper.”
Rule #1 for investing is to follow the Federal Reserve. Rule #2 is to follow the Treasury Yield Curve. In particular, follow the shape and the interest rate spread between the 30 year Treasury Bond and the 3 month Treasury Bill. The shape and spread show that the Fed is artificially keeping short term rates low to improve economic growth. This shape and spread is very bullish for stocks and certain types of bonds. The bottom line is to maintain the current investment strategy.
How to Ready Yourself for Retirement:
* Develop a gameplan - Complete a financial analysis
* Determine the savings needed for retirement and then multiply by 1.5 to accommodate the future reduction in Social Security and Medicare benefits
* Run the plan and accumulate resources
* Before retirement get ready by reducing expenses such as paying off the Mortgage
* Before retirement determine the best way to retire to optimize Social Security benefits, timing can be critical
* Put investments into 2 buckets, fixed income to cover expenses and growth. Each bucket has a different investment strategy
* Relax and get ready for the next phase where you can do what you want to create a life. A living is what you do to pay the bills, a life is how you will be remembered.
Sign in a Smoky Mountain camping area:
“Due to the frequency of human/bear encounters, the Smoky Mountains Fish and Wildlife Department is advising hikers, campers, hunters, fishermen and any persons that use the out of doors in a recreational or work related function to take extra precautions while in the field. We advise outdoors persons to wear little, noisy bells on their clothing to give advance warning to any bears that might be close by so they aren’t taken by surprise. We also advise anyone using the out-of-doors to carry “Pepper Spray” in case of an encounter with a bear.
Outdoors people should also be on the watch for fresh bear activity and be able to tell the difference between black bear droppings and grizzly bear droppings. Black bear droppings are smaller, contain many berries, and squirrel fur. Grizzly bear droppings have bells in it and smells like pepper.”
Sunday, November 29, 2009
California Tuition Protests and Retirement
An event in the news this past week was the tuition fee hike in California Universities. The Youtube title and address is below:
UC Davis Students Protest Fee Hike
http://www.youtube.com/watch?v=yWBa20tygk0
Tuition was raised by about 30% for in-state tuition to about $10,000/year for California State Universites. This increase created a tremendous amount of protest by students as well as teachers. Look at the youtube clip for yourself to get the sense of injustice felt by the people impacted by this decision.
My thought was these protestors are out of touch with reality. Their state is on the verge of bankruptcy paying state workers with IOUs and having emergency sessions on how to balance the budget. If you have to pay someone with an IOU things are pretty bad. Then it struck me that the same thing is going to happen to retirees in the future.
How did California get in this mess? Years ago it use to be that tuition was free for in-state tuition so it became an unrealistic expectation, a right perhaps. Unfortunately, the state went into an economic downward spiral of raising taxes and losing jobs with raising of taxes and losing jobs and the cycle continued. Eventually, reality sets in and the party ends. The bottom line is that many people did not prepare.
Why is this important for retirement planning? Because we as a country are in the same position as California with budget problems, raising taxes, and losing jobs to other countries. The people who will be protesting will be us in the future who are receiving Social Security benefits and Medicare benefits. It is inevitable that benefits will be cut to a level that is inconceivable by economically justified.
Given that neither political party, Republican or Democrat, has stepped up the plate in the last 10 years to solve the problem it is very unlikely that we will avoid this fate. We continue to have more people retire with people living longer and the ratio of the number of people paying into the system relative to the number of recipients continue to decline. Regardless if the Health Care Bill passes or not Medicare benefits are going to be reduced. AARP is in support of the new Health Care Bill so that the organization can sell more Medigap policies, a business decision good for the organization.
What can you do about it? You can prepare and be ready for retirement and you can encourage people who you care about to get prepared. Everyone needs to have a retirement plan.
UC Davis Students Protest Fee Hike
http://www.youtube.com/watch?v=yWBa20tygk0
Tuition was raised by about 30% for in-state tuition to about $10,000/year for California State Universites. This increase created a tremendous amount of protest by students as well as teachers. Look at the youtube clip for yourself to get the sense of injustice felt by the people impacted by this decision.
My thought was these protestors are out of touch with reality. Their state is on the verge of bankruptcy paying state workers with IOUs and having emergency sessions on how to balance the budget. If you have to pay someone with an IOU things are pretty bad. Then it struck me that the same thing is going to happen to retirees in the future.
How did California get in this mess? Years ago it use to be that tuition was free for in-state tuition so it became an unrealistic expectation, a right perhaps. Unfortunately, the state went into an economic downward spiral of raising taxes and losing jobs with raising of taxes and losing jobs and the cycle continued. Eventually, reality sets in and the party ends. The bottom line is that many people did not prepare.
Why is this important for retirement planning? Because we as a country are in the same position as California with budget problems, raising taxes, and losing jobs to other countries. The people who will be protesting will be us in the future who are receiving Social Security benefits and Medicare benefits. It is inevitable that benefits will be cut to a level that is inconceivable by economically justified.
Given that neither political party, Republican or Democrat, has stepped up the plate in the last 10 years to solve the problem it is very unlikely that we will avoid this fate. We continue to have more people retire with people living longer and the ratio of the number of people paying into the system relative to the number of recipients continue to decline. Regardless if the Health Care Bill passes or not Medicare benefits are going to be reduced. AARP is in support of the new Health Care Bill so that the organization can sell more Medigap policies, a business decision good for the organization.
What can you do about it? You can prepare and be ready for retirement and you can encourage people who you care about to get prepared. Everyone needs to have a retirement plan.
Friday, November 27, 2009
Happy Thanksgiving
I hope and pray that you were blessed today and am wishing you a Happy Thanksgiving. Below is my top 10 list of financial things to be thankful for:
10)Waking up to news on the radio that does not include how the overseas markets have dropped
9) Glad to check accounts to see how much they have risen
8) An economy that is growing
7) A 401(k) is now a 401(k) instead of a 201(k)
6) A drop in the stock market is viewed as a buying opportunity
5) Not hearing the phrase "global financial crisis" in the news
4) Low interest rates
3) The word rebound being used other than a basketball game
2) People acting happier wtih less stress
Drumroll please:
1) Clients to help
God Bless and Enjoy Life,
10)Waking up to news on the radio that does not include how the overseas markets have dropped
9) Glad to check accounts to see how much they have risen
8) An economy that is growing
7) A 401(k) is now a 401(k) instead of a 201(k)
6) A drop in the stock market is viewed as a buying opportunity
5) Not hearing the phrase "global financial crisis" in the news
4) Low interest rates
3) The word rebound being used other than a basketball game
2) People acting happier wtih less stress
Drumroll please:
1) Clients to help
God Bless and Enjoy Life,
Sunday, November 22, 2009
Global Economy
About 2 weeks ago, I was an instructor teaching a class on coaxial cable at the International Wire and Cable Symposium in Charlotte, NC. During the symposium top executives from 5 companies, including CommScope, gave their input on the state of their business, the US economy, and the global economy.
The underlying view from the 4 companies that are predominantly US businesses was that the USA and Europe are at half time. While 2009 was not as bad as anticipated it is believed that 2010 will have revenue flat to down slightly with a recovery in 2011.
The company with a global view, CommScope, painted a different picture with overall growth being in the high single digits for 2010. While 2009 was a year to be efficient, 2010 and beyond offer a period for growth. Global wireless demand is growing rapidly with 4.3 billion people using a wireless device and that Africa has more cell phone users than the USA. Africa is a high growth area for Wireless communication with the current focus being a voice call and in the future capability will be added like internet access. WWEE continues in developing countries.
Their overall message was that the US and Europe are flat for 1 more year while globally, especially in developing countries, the stimulus efforts were more effective and things are growing. An organization called the OECD provides information on the global economy. This week, they increased their forecast economic growth projection for 2010 from 0.7% to 1.6% and project a growth of about 3% in 2011. A 3% growth rate would be a relatively normal number.
For the US economy it appears to be a mixed bag. The index of leading economic indicators showed a 0.3% increase for October such that in a 1 year period this index has grown by about 4%. In fact the last time this happened was in 1982 before the stock market made a huge run. While this gives a very positive picture other indicators like the index for coincident and lagging indicators are down about 5% year over year.
It appears that the US economy has some parts that are starting to move. It also appears that given the number of shoppers at stores that this Christmas season will probably top expectations as people feel better about the future.
Commodity prices that have increased during 2009 also indicate that the global economy is growing. These prices will maintain current levels as a foundation and will most likely continue to rise because of higher demand.
What is the bottom line? Owning a mutual fund that invests in developing countries is a good thing to do. The US economy is recovering so relax about the future.
The underlying view from the 4 companies that are predominantly US businesses was that the USA and Europe are at half time. While 2009 was not as bad as anticipated it is believed that 2010 will have revenue flat to down slightly with a recovery in 2011.
The company with a global view, CommScope, painted a different picture with overall growth being in the high single digits for 2010. While 2009 was a year to be efficient, 2010 and beyond offer a period for growth. Global wireless demand is growing rapidly with 4.3 billion people using a wireless device and that Africa has more cell phone users than the USA. Africa is a high growth area for Wireless communication with the current focus being a voice call and in the future capability will be added like internet access. WWEE continues in developing countries.
Their overall message was that the US and Europe are flat for 1 more year while globally, especially in developing countries, the stimulus efforts were more effective and things are growing. An organization called the OECD provides information on the global economy. This week, they increased their forecast economic growth projection for 2010 from 0.7% to 1.6% and project a growth of about 3% in 2011. A 3% growth rate would be a relatively normal number.
For the US economy it appears to be a mixed bag. The index of leading economic indicators showed a 0.3% increase for October such that in a 1 year period this index has grown by about 4%. In fact the last time this happened was in 1982 before the stock market made a huge run. While this gives a very positive picture other indicators like the index for coincident and lagging indicators are down about 5% year over year.
It appears that the US economy has some parts that are starting to move. It also appears that given the number of shoppers at stores that this Christmas season will probably top expectations as people feel better about the future.
Commodity prices that have increased during 2009 also indicate that the global economy is growing. These prices will maintain current levels as a foundation and will most likely continue to rise because of higher demand.
What is the bottom line? Owning a mutual fund that invests in developing countries is a good thing to do. The US economy is recovering so relax about the future.
Sunday, November 15, 2009
Investing and Road to Socialism
The idea for this newsletter came from a recent conversation concerning the leaders of this nation trying to head us down the road to becoming more socialistic. We hear about the health care debate including a public option and get concerned about what it means. In addition, we see an unemployment rate over 10% and wonder what it means. We hear about having a weak US Dollar and wonder what this means. The question is what should we do with our investments?
The answer is to follow the plan of business cycle investing. When all else fails, always remember the #1 rule of business cycle investing follow the lead of the Federal Reserve. The Federal Reserve sets monetary policy that controls the growth rate of our economy. The health care debate, unemployment rate, and strength of the US Dollar have an impact on the actions of the Federal Reserve and monetary policy. Just keep it simple and follow the actions of the Federal Reserve.
How should we be investing right now? We are entering a growth phase in our economic business cycle which means that investments should include: US and International equities, commodities, and short term corporate and mortgage backed bonds.
The previous weekend, the US House of Representatives passed a health care bill, that included this public option, and the stock market rose the next few days. This health care bill had little impact on the US Stock Market prices. It appeared that it was a relief to finally have it over and people were glad that it was not worse.
On Thursday the US Stock Market went down, why? News was published on late Wednesday and early Thursday that Market Breadth had weakened and that the rally was weakening and now was a good time to take profits. However, on Friday the US Stock Market went up almost as much, why? News was published late Thursday and early Friday that we were still in the midst of a bull market rally.
Why did we have these downs and ups? My opinion is that brokerage houses like Ameritrade, Scottrade, etc... need people to trade to make money so news, actually opinions by supposed experts, is published to get people trading. Remember that a brokerage company makes money only if people trade, buy or sell, and works hard to get people to trade regardless if a profit is made. If you follow things on a daily basis and try to rationalize why things to up and down it might just drive you a little crazy.
Rule #1: Follow the lead of the Federal Reserve.
Ignore the noise and keep your focus on the good things of life.
The answer is to follow the plan of business cycle investing. When all else fails, always remember the #1 rule of business cycle investing follow the lead of the Federal Reserve. The Federal Reserve sets monetary policy that controls the growth rate of our economy. The health care debate, unemployment rate, and strength of the US Dollar have an impact on the actions of the Federal Reserve and monetary policy. Just keep it simple and follow the actions of the Federal Reserve.
How should we be investing right now? We are entering a growth phase in our economic business cycle which means that investments should include: US and International equities, commodities, and short term corporate and mortgage backed bonds.
The previous weekend, the US House of Representatives passed a health care bill, that included this public option, and the stock market rose the next few days. This health care bill had little impact on the US Stock Market prices. It appeared that it was a relief to finally have it over and people were glad that it was not worse.
On Thursday the US Stock Market went down, why? News was published on late Wednesday and early Thursday that Market Breadth had weakened and that the rally was weakening and now was a good time to take profits. However, on Friday the US Stock Market went up almost as much, why? News was published late Thursday and early Friday that we were still in the midst of a bull market rally.
Why did we have these downs and ups? My opinion is that brokerage houses like Ameritrade, Scottrade, etc... need people to trade to make money so news, actually opinions by supposed experts, is published to get people trading. Remember that a brokerage company makes money only if people trade, buy or sell, and works hard to get people to trade regardless if a profit is made. If you follow things on a daily basis and try to rationalize why things to up and down it might just drive you a little crazy.
Rule #1: Follow the lead of the Federal Reserve.
Ignore the noise and keep your focus on the good things of life.
Saturday, October 31, 2009
Halloween, Stock Market Acting Psycho
I hope you celebrated and enjoyed today. The Stock Market is certainly acting like it's Halloween. Why is it acting like it is psycho where it goes down even with good news? Normally when this happens some large issue looms in the darkness.
Earning season is in full swing and most companies are reporting better than anticipated earnings and projecting that revenue and earnings will continue to increase as the economy is improving. Almost all companies are upbeat about the future. How did the Stock Market celebrate this good news, mostly by going down, very strange.
On Thursday, the GDP growth for July through September was 3.5%, better than anticipated and the Stock Market rose 2%. On Friday, other economic data is issued that is in-line with expectation and the Stock Market dropped 2.5%. Lots of experts gave their justification for this psychotic behavior, none made sense to me. The only thing that makes sense to me is fear in the overall business environment associated with uncertainty with health care legislation. I am not sure how effective the proposed 1900 page legislation will be but the lack of clarity makes investors nervous.
What does a smart investor do when things get unclear, stay with the plan. Perhaps you saw the news that the average 401(k) account balance has recovered and returned to the level of 2007. The joke of the 401(k) being a 201(k) is no longer true. How did this happen? Investors stayed with the plan, kept buying when things went down, aka on sale, and made lemonade from a lemon.
My guidance during the last few weeks has been that the Stock Market has a floor and that the rate of recovery would be more normal going forward. We are entering the next phase in the business cycle and companies are announcing plans to hire people. The news in the local paper suggests that the unemployment rate will be coming down sooner than later. While the Stock Market may decline further, it will be NOTHING like what we have already gone through, so relax. The Stock Market will recover in the long term and a higher high should be reached in a couple of years.
Bottom Line: Stay with the plan and relax. Keep investing using a business cycle strategy and avoid the noise and you will be rewarded in the long run.
I mentioned WWEE and investing in it. The data from companies in this segment showed this trend is alive and well, wireless traffic continues to grow around the world. Also a recent FCC ruling on Net Neutrality, probably the most significant unreported news this year, that keeps special interest barriers from internet growth will keep this trend alive and well.
Earning season is in full swing and most companies are reporting better than anticipated earnings and projecting that revenue and earnings will continue to increase as the economy is improving. Almost all companies are upbeat about the future. How did the Stock Market celebrate this good news, mostly by going down, very strange.
On Thursday, the GDP growth for July through September was 3.5%, better than anticipated and the Stock Market rose 2%. On Friday, other economic data is issued that is in-line with expectation and the Stock Market dropped 2.5%. Lots of experts gave their justification for this psychotic behavior, none made sense to me. The only thing that makes sense to me is fear in the overall business environment associated with uncertainty with health care legislation. I am not sure how effective the proposed 1900 page legislation will be but the lack of clarity makes investors nervous.
What does a smart investor do when things get unclear, stay with the plan. Perhaps you saw the news that the average 401(k) account balance has recovered and returned to the level of 2007. The joke of the 401(k) being a 201(k) is no longer true. How did this happen? Investors stayed with the plan, kept buying when things went down, aka on sale, and made lemonade from a lemon.
My guidance during the last few weeks has been that the Stock Market has a floor and that the rate of recovery would be more normal going forward. We are entering the next phase in the business cycle and companies are announcing plans to hire people. The news in the local paper suggests that the unemployment rate will be coming down sooner than later. While the Stock Market may decline further, it will be NOTHING like what we have already gone through, so relax. The Stock Market will recover in the long term and a higher high should be reached in a couple of years.
Bottom Line: Stay with the plan and relax. Keep investing using a business cycle strategy and avoid the noise and you will be rewarded in the long run.
I mentioned WWEE and investing in it. The data from companies in this segment showed this trend is alive and well, wireless traffic continues to grow around the world. Also a recent FCC ruling on Net Neutrality, probably the most significant unreported news this year, that keeps special interest barriers from internet growth will keep this trend alive and well.
Sunday, October 25, 2009
US Dollar and Investing
This is the last in the series on the US Dollar and it covers the topic of how to invest to make money as the US Dollar changes. One of the easiest way to invest is in US companies that produce commodities. Commodities are invested using exchanges throughout the world and the price tends to move in unison to prevent arbitrage. Arbitrage is where a commodity is bought on one exchange and sold on another exchange due to exchange differences. As commodity prices change on an exchange the profit made by a US company changes.
In general, as the value of the US Dollar drops global commodity prices rise, including in the US. Vice versa, as the value of the US Dollar rises global commodity prices drop, including in the US. A point to remember is that commodity prices on occasion move by speculation such as the change in oil last year from $140 to $40 per barrel. An example is the oil trader that supposedly earned a $100 million bonus by trading oil futures last year.
The value of the US Dollar has no impact from a currency valuation perspective on a US manufacturer. As US Dollar prices drop and commodity prices increase the US producers have a lot of leverage to make a profit. In an investing class, I found out that a 15% drop in revenue can easily drop profit 40% or a 2.5 times leverage. Likewise, this same 2.5 times leverage exists as revenues increase.
If you want to pursue this idea, you need to invest in US companies. Two of the best companies to use are Exxon Mobil for Oil and Freeport McMoran for Copper. This is for traders not for long term investors.
Have a great week and count your blessings. This is the Pastor Appreciation Month so make sure you tell your Pastor how important they are to you. Let me know how I can help you.
In general, as the value of the US Dollar drops global commodity prices rise, including in the US. Vice versa, as the value of the US Dollar rises global commodity prices drop, including in the US. A point to remember is that commodity prices on occasion move by speculation such as the change in oil last year from $140 to $40 per barrel. An example is the oil trader that supposedly earned a $100 million bonus by trading oil futures last year.
The value of the US Dollar has no impact from a currency valuation perspective on a US manufacturer. As US Dollar prices drop and commodity prices increase the US producers have a lot of leverage to make a profit. In an investing class, I found out that a 15% drop in revenue can easily drop profit 40% or a 2.5 times leverage. Likewise, this same 2.5 times leverage exists as revenues increase.
If you want to pursue this idea, you need to invest in US companies. Two of the best companies to use are Exxon Mobil for Oil and Freeport McMoran for Copper. This is for traders not for long term investors.
Have a great week and count your blessings. This is the Pastor Appreciation Month so make sure you tell your Pastor how important they are to you. Let me know how I can help you.
Sunday, October 18, 2009
US Dollar
Earnings season is in full swing and so far about 3 out of 4 companies are reporting higher than anticipated earnings, this should reduce downward pressure on stock market prices. The current investing direction will be maintained as financial results are consistent with this segment of a business cycle. While the stock market has had a tremendous rise during the past 7 months, the pace of rise will most likely slow consistent with a return to a more normal investing climate. At the end is a short segment on Nebraska Cornhusker Football trivia.
This newsletter continues on the topic of currency investing in particular the impact of a changing US Dollar. The value of the US Dollar is important for foreign trade and earnings from foreign sales. Unfortunately, the value of the US Dollar has no impact on trading with China as the Chinese government currently has a monetary policy of a constant valuation of the Yuan RMB to the US Dollar of about 6.8 to 1.
Who wins and who loses as the US Dollar rises and falls? As the US Dollar rises and falls the value of US made products sold internationally change and the value of internationally made products sold in the USA change. Companies that manufacture in the USA and sell internationally like a weak dollar because they get higher income. If you travel internationally, you want a strong dollar because your spending power is higher. Just like 2 sides exist on a coin, every plus has a minus when considering currency valuation. It is important to remember that a sale is made in the local currency and then converted.
To better understand this, 2 scenarios will be used, a strong US Dollar, 1 US Dollar equal to 1 Euro, and a weak US Dollar, 2 US Dollar equal to 1 Euro. To illustrate the impact on a domestic manufactuer, if a company sells a widget for $10 the cost in Europe is 10 Euro in scenario 1 and 5 Euro in scenario 2. With scenario 2, if a local company in Europe sells this same widget for 8 Euro then the US company can sell it for less such as 7 Euro, can undercut the domestic producer, gain market share, and get paid $14 making 40% more revenue. Kind of sounds like what has been happened to the USA by the Chinese. US manufactuers like weak dollars and international manufacturers like a strong dollar. You can see how this works in reverse for a strong dollar.
For a tourist traveling to Europe, a strong dollar is good. Upon arrival, you convert your US Dollar to Euros and in scenario 1 you get 100 Euro while in scenario 2 you get 50 Euro. Since the transaction is made in Euros the product costs you essentiall twice as much with scenario 2. For tourist to the US, a weak dollar is good for just the same reason where a person gets more of the local currency during conversion.
The talk about we must have a strong US Dollar is good for some and bad for other. A reason for this statement is because of a model that a strong dollar reduces the cost of an imported product and drives down prices with the idea that it keeps inflation low. From a manufacturing job perspective, making more stuff in our country is a good thing creating jobs so quite franky I like in a weaker US Dollar. My perspective says it is better to pay a little more and employ more people getting a money multiplier in the economy than to lose jobs and pay less money. Then again it is all a matter of your perspective.
This newsletter continues on the topic of currency investing in particular the impact of a changing US Dollar. The value of the US Dollar is important for foreign trade and earnings from foreign sales. Unfortunately, the value of the US Dollar has no impact on trading with China as the Chinese government currently has a monetary policy of a constant valuation of the Yuan RMB to the US Dollar of about 6.8 to 1.
Who wins and who loses as the US Dollar rises and falls? As the US Dollar rises and falls the value of US made products sold internationally change and the value of internationally made products sold in the USA change. Companies that manufacture in the USA and sell internationally like a weak dollar because they get higher income. If you travel internationally, you want a strong dollar because your spending power is higher. Just like 2 sides exist on a coin, every plus has a minus when considering currency valuation. It is important to remember that a sale is made in the local currency and then converted.
To better understand this, 2 scenarios will be used, a strong US Dollar, 1 US Dollar equal to 1 Euro, and a weak US Dollar, 2 US Dollar equal to 1 Euro. To illustrate the impact on a domestic manufactuer, if a company sells a widget for $10 the cost in Europe is 10 Euro in scenario 1 and 5 Euro in scenario 2. With scenario 2, if a local company in Europe sells this same widget for 8 Euro then the US company can sell it for less such as 7 Euro, can undercut the domestic producer, gain market share, and get paid $14 making 40% more revenue. Kind of sounds like what has been happened to the USA by the Chinese. US manufactuers like weak dollars and international manufacturers like a strong dollar. You can see how this works in reverse for a strong dollar.
For a tourist traveling to Europe, a strong dollar is good. Upon arrival, you convert your US Dollar to Euros and in scenario 1 you get 100 Euro while in scenario 2 you get 50 Euro. Since the transaction is made in Euros the product costs you essentiall twice as much with scenario 2. For tourist to the US, a weak dollar is good for just the same reason where a person gets more of the local currency during conversion.
The talk about we must have a strong US Dollar is good for some and bad for other. A reason for this statement is because of a model that a strong dollar reduces the cost of an imported product and drives down prices with the idea that it keeps inflation low. From a manufacturing job perspective, making more stuff in our country is a good thing creating jobs so quite franky I like in a weaker US Dollar. My perspective says it is better to pay a little more and employ more people getting a money multiplier in the economy than to lose jobs and pay less money. Then again it is all a matter of your perspective.
Saturday, October 10, 2009
WWEE Update and US Dollar Part 1
Last week's newsletter was on the Worldwide Wireless E-Commerce Explosion, WWEE, and that you need to participate in it. This week the Wall Street Journal had a short article that paints the picture for this country, USA. The title of the article was FCC Looks to Add to Airwaves for Wireless, perhaps you saw it. Below are some points from the article:
1) FCC looking for more ways to make more airwaves available for next-generation wireless networks, underscoring the expanding need sparked by the growing use of iPhones and similar devices.
2) Lack of airwaves available for so-called 4G networks “a looming crisis” that threaten American productivity.
3) Reallocate airwaves for wireless Internet services and speed up paperwork so new networks could be built faster.
4) FCC has approved a 3 fold increase in available spectrum in recent years but projections for data traffic show a 30 fold increase in demand, a 10 to 1 gap.
In this highly technological country we had a 30 fold increase in recent years. This means that Internet and E-Commerce is doubling each year and at a faster rate than the FCC is adding capacity. If you do the math and this doubles each year for the next 5 years, a 30 fold increases to a 960 fold increase, let's round to 1,000 fold increase. Wouldn't you call this an explosion?
A hot financial topic in the newspaper is the strength of the US Dollar. This newsletter will give an overview of the subject and the rest of the story will come next week. Newspapers are talking about how the US Dollar is falling and we want a strong US Dollar. Actually, it all depends on your perspective.
Another class of investment or trading is in currencies. Lots of people buy and sell a currency like the US Dollar, Euro, or Yen. Currency traders have a 24 hour a day, 5 days a week, job because currencies are traded around the globe on exchanges and an exchange is always open somewhere during the work week.
The best measure of the US Dollar strength is the US Dollar index that currently at about 77. This index is a composite index of all world currencies showing the relative value of the US Dollar. This year the US Dollar index has been as high as about 89 to the current low of about 77. To give a broader picture, during the last 10 years the US Dollar index has been as high as about 112 and as low as about 70. A lower number means a weaker US Dollar. It is important to state US Dollar because the term Dollar is also used by some other countries like Australia.
A widely published ratio is the US Dollar to the Euro which is currently about 1.47 US Dollar to 1 Euro or 0.68 Euro to the US Dollar. Earlier in the year the ratio was about 1.3 US Dollar to 1 Euro or 0.77 Euro to the US Dollar. Since the US Dollar has changed from about 0.77 Euro to 0.68 Euro it has weakened and why the newspaper prints about a weakening US Dollar.
Why does the US Dollar go up or down? The economic law of supply and demand rules supreme once again. As more US Dollars are printed relative to other currencies the over-supply lowers the value. When we have a US budget deficit we print money weakening the value. When we had a Federal budget surplus in the late Clinton Administration and the early Bush II administration the US Dollar index rose and was over 100. As we had a Federal budget deficit during the rest of this decade the US Dollar index declined and has been below 100. As our budget deficits grow and we print more money the value of the US Dollar is going to weaken regardless of what is printed in the newspaper.
1) FCC looking for more ways to make more airwaves available for next-generation wireless networks, underscoring the expanding need sparked by the growing use of iPhones and similar devices.
2) Lack of airwaves available for so-called 4G networks “a looming crisis” that threaten American productivity.
3) Reallocate airwaves for wireless Internet services and speed up paperwork so new networks could be built faster.
4) FCC has approved a 3 fold increase in available spectrum in recent years but projections for data traffic show a 30 fold increase in demand, a 10 to 1 gap.
In this highly technological country we had a 30 fold increase in recent years. This means that Internet and E-Commerce is doubling each year and at a faster rate than the FCC is adding capacity. If you do the math and this doubles each year for the next 5 years, a 30 fold increases to a 960 fold increase, let's round to 1,000 fold increase. Wouldn't you call this an explosion?
A hot financial topic in the newspaper is the strength of the US Dollar. This newsletter will give an overview of the subject and the rest of the story will come next week. Newspapers are talking about how the US Dollar is falling and we want a strong US Dollar. Actually, it all depends on your perspective.
Another class of investment or trading is in currencies. Lots of people buy and sell a currency like the US Dollar, Euro, or Yen. Currency traders have a 24 hour a day, 5 days a week, job because currencies are traded around the globe on exchanges and an exchange is always open somewhere during the work week.
The best measure of the US Dollar strength is the US Dollar index that currently at about 77. This index is a composite index of all world currencies showing the relative value of the US Dollar. This year the US Dollar index has been as high as about 89 to the current low of about 77. To give a broader picture, during the last 10 years the US Dollar index has been as high as about 112 and as low as about 70. A lower number means a weaker US Dollar. It is important to state US Dollar because the term Dollar is also used by some other countries like Australia.
A widely published ratio is the US Dollar to the Euro which is currently about 1.47 US Dollar to 1 Euro or 0.68 Euro to the US Dollar. Earlier in the year the ratio was about 1.3 US Dollar to 1 Euro or 0.77 Euro to the US Dollar. Since the US Dollar has changed from about 0.77 Euro to 0.68 Euro it has weakened and why the newspaper prints about a weakening US Dollar.
Why does the US Dollar go up or down? The economic law of supply and demand rules supreme once again. As more US Dollars are printed relative to other currencies the over-supply lowers the value. When we have a US budget deficit we print money weakening the value. When we had a Federal budget surplus in the late Clinton Administration and the early Bush II administration the US Dollar index rose and was over 100. As we had a Federal budget deficit during the rest of this decade the US Dollar index declined and has been below 100. As our budget deficits grow and we print more money the value of the US Dollar is going to weaken regardless of what is printed in the newspaper.
Saturday, October 3, 2009
Worldwide Wireless E-Commerce Explosion
Two weeks ago, the newsletter covered the topic of investing in major market moves. One of the biggest is the Worldwide Wireless E-Commerce Explosion, WWEE. Because of this I have been buying stock in CommScope, CTV. So what is this major market move and why am I talking about CTV?
Governments and companies around the world have stated they are investing in Wireless infrastructure on the magnitude of about $100 billion with a time horizon of 5-10 years. For example, China has announced a $40 billion Wireless investment while India has announced a $30 billion Wireless investment. Most if not all of the emerging and developing countries in the world are actively pursuing Wireless infrastructure. Why now, why Wireless and why CTV?
Why now is easy because of the access to the internet by virtually every mobile device like a laptop computer, cell phone, Blackberry and because lots of business is done on the internet. E-Commerce is huge and growing fast. My wife will tell you that at one point I was addicted to internet access on my cell phone, a point that I still deny. On the internet anyone can do countless things from voice, video, texting, pay bills, banking, you get the picture. Because of evolution of these devices you can do it now and it will only get easier in the future.
A developing country can grow economically by giving more citizens, aka customers, access. It is believed that in 5 years developing countries that have about 1 phone for every 10 people will move to 1 phone for every 2 people. That is a lot of phones and a lot of E-Commerce.
Moore's law of semiconductors states that a computer chip will be half the size, have twice the capabilility, and be half the cost about every 2 years. What this means is that in the future, a Blackberry will have the same capability as your current laptop.
Why Wireless is easy because in a developing country, that does not have infrastructure, Wireless is the most cost effective communication method instead of burying cable everywhere. Wireless speeds have been increasing and this trend will continue. Wireless entails lots of fiber and coaxial cable backhaul systems.
Why CTV is a little more difficult to explain. I am very picky and will not directly invest in a company without US roots which limits my choices, I want to invest in company that has few competitors, and the company must have good financial ratios. Let's look at the components of a Wireless E-Commerce system in China. The largest network equipment provider is Huawei, a Chinese company that ate the lunch of competitors like Alcatel, Lucent, Nortel, and Ericcson, so I am not interested. The largest internet provider in China is Baidu and it is ahead of Google which means that I am not interested. Their is lots of competition for hand held devices and lots of makers of laptop computers which leaves me out. The Wireless antenna, cable, tower, and system makers are the last piece of the puzzle and this area meets my criteria.
The Andrew Corpration was the leader and largest Wireless equipment maker in the world until early 2008 when they were acquired by CommScope. So now CommScope is the leader and largest Wireless equipment maker in the world and is growing and hiring in this area. The reason Andrew was acquired was because they had great growth and great products with a very poor management team which meant they had little profit and a relatively low stock price. CommScope has an excellent management team and knows how to make money. If you look at the 2nd Quarter financial statement for CommScope you will notice the Andrew division now has profitability in line with the rest of the other divisions and the financial ratios are very good. Also the acquisition was done with a relatively few additional shares issued which will give accelerated future earnings growth.
The bottom line is WWEE is here and investing in it is a good idea. I selected CTV as my investment choice. This also means that the economies of developing and emerging countries will grow faster than more established countries like the US and Europe.
Governments and companies around the world have stated they are investing in Wireless infrastructure on the magnitude of about $100 billion with a time horizon of 5-10 years. For example, China has announced a $40 billion Wireless investment while India has announced a $30 billion Wireless investment. Most if not all of the emerging and developing countries in the world are actively pursuing Wireless infrastructure. Why now, why Wireless and why CTV?
Why now is easy because of the access to the internet by virtually every mobile device like a laptop computer, cell phone, Blackberry and because lots of business is done on the internet. E-Commerce is huge and growing fast. My wife will tell you that at one point I was addicted to internet access on my cell phone, a point that I still deny. On the internet anyone can do countless things from voice, video, texting, pay bills, banking, you get the picture. Because of evolution of these devices you can do it now and it will only get easier in the future.
A developing country can grow economically by giving more citizens, aka customers, access. It is believed that in 5 years developing countries that have about 1 phone for every 10 people will move to 1 phone for every 2 people. That is a lot of phones and a lot of E-Commerce.
Moore's law of semiconductors states that a computer chip will be half the size, have twice the capabilility, and be half the cost about every 2 years. What this means is that in the future, a Blackberry will have the same capability as your current laptop.
Why Wireless is easy because in a developing country, that does not have infrastructure, Wireless is the most cost effective communication method instead of burying cable everywhere. Wireless speeds have been increasing and this trend will continue. Wireless entails lots of fiber and coaxial cable backhaul systems.
Why CTV is a little more difficult to explain. I am very picky and will not directly invest in a company without US roots which limits my choices, I want to invest in company that has few competitors, and the company must have good financial ratios. Let's look at the components of a Wireless E-Commerce system in China. The largest network equipment provider is Huawei, a Chinese company that ate the lunch of competitors like Alcatel, Lucent, Nortel, and Ericcson, so I am not interested. The largest internet provider in China is Baidu and it is ahead of Google which means that I am not interested. Their is lots of competition for hand held devices and lots of makers of laptop computers which leaves me out. The Wireless antenna, cable, tower, and system makers are the last piece of the puzzle and this area meets my criteria.
The Andrew Corpration was the leader and largest Wireless equipment maker in the world until early 2008 when they were acquired by CommScope. So now CommScope is the leader and largest Wireless equipment maker in the world and is growing and hiring in this area. The reason Andrew was acquired was because they had great growth and great products with a very poor management team which meant they had little profit and a relatively low stock price. CommScope has an excellent management team and knows how to make money. If you look at the 2nd Quarter financial statement for CommScope you will notice the Andrew division now has profitability in line with the rest of the other divisions and the financial ratios are very good. Also the acquisition was done with a relatively few additional shares issued which will give accelerated future earnings growth.
The bottom line is WWEE is here and investing in it is a good idea. I selected CTV as my investment choice. This also means that the economies of developing and emerging countries will grow faster than more established countries like the US and Europe.
Friday, September 25, 2009
Putting Humpty Dumpty Back Together Again
The title for this newsletter comes from my dear friend and first client, Pastor James Ritch. Humpty Dumpty refers to his IRA account. If you know him, feel free to talk to him about it. Way to go Pastor James Ritch!!!!!
During June 2007, when the Dow was about 13,500, I had the pleasure of having Pastor James Ritch become my first client. During September 2009, when the Dow was about 9,900, his IRA account balance recovered and returned to about the same initial amount. As he explained, his IRA account fell, cracked wide open, was put back together again in better shape, and made it back on top of the wall.
When the Dow reaches about 13,500 in the future, about 35% higher from here, his account will be doing great and I will be smiling. This economic downturn provided a wonderful buying opportunity that turbo-charged his account. Pastor Ritch is a car guy. The end result is a better Humpty Dumpty.
How did this happen? Here are some of the things that were done:
Communication: This was a very turbulent time and we communicated on a regular basis.
Defensive: As the environment change, his account was changed and was repositioned to be more defensive. In hindsight, I should have even been more defensive.
Data: Data was used to determine the bottom of the fall and when to start buying. The use of statistics is very powerful in determining the probability of an event.
Courage: He had great courage and viewed the fall as a buying opportunity. When other investors were concerned and were afraid, he viewed it as a great buying opporunity.
Keep the Portfolio in Balance: As the value of the equities dropped, the percentage of equities reduced below the target level. To get it back in balance, a bond mutual fund that did not perform as well as it should was sold to purchase more of an equity mutual fund.
Aggressive: As the recovery progressed the account was tweaked again to increase the amount in a more aggressive equity mutual fund. In addition, he bought stock for the first time in his life, buying a technology company and a financial company that have done very well.
Performance: This period was great to determine the true performance of a mutual fund. Only highly rated mutual funds with a minimal fee rate were used. Keep the best and leave the average to the rest.
For those who use an investment advisor, I hope your Humpty Dumpty is doing as well. If not, it would be my pleasure to help you.
During June 2007, when the Dow was about 13,500, I had the pleasure of having Pastor James Ritch become my first client. During September 2009, when the Dow was about 9,900, his IRA account balance recovered and returned to about the same initial amount. As he explained, his IRA account fell, cracked wide open, was put back together again in better shape, and made it back on top of the wall.
When the Dow reaches about 13,500 in the future, about 35% higher from here, his account will be doing great and I will be smiling. This economic downturn provided a wonderful buying opportunity that turbo-charged his account. Pastor Ritch is a car guy. The end result is a better Humpty Dumpty.
How did this happen? Here are some of the things that were done:
Communication: This was a very turbulent time and we communicated on a regular basis.
Defensive: As the environment change, his account was changed and was repositioned to be more defensive. In hindsight, I should have even been more defensive.
Data: Data was used to determine the bottom of the fall and when to start buying. The use of statistics is very powerful in determining the probability of an event.
Courage: He had great courage and viewed the fall as a buying opportunity. When other investors were concerned and were afraid, he viewed it as a great buying opporunity.
Keep the Portfolio in Balance: As the value of the equities dropped, the percentage of equities reduced below the target level. To get it back in balance, a bond mutual fund that did not perform as well as it should was sold to purchase more of an equity mutual fund.
Aggressive: As the recovery progressed the account was tweaked again to increase the amount in a more aggressive equity mutual fund. In addition, he bought stock for the first time in his life, buying a technology company and a financial company that have done very well.
Performance: This period was great to determine the true performance of a mutual fund. Only highly rated mutual funds with a minimal fee rate were used. Keep the best and leave the average to the rest.
For those who use an investment advisor, I hope your Humpty Dumpty is doing as well. If not, it would be my pleasure to help you.
Sunday, September 20, 2009
Bank CD
This newsletter will be relatively short. It is my biased view of a Certificate of Deposit at any bank because I do not view a CD as a real investment. To me it is like being held up. At the end are additional tidbits of information.
Once, sometime in the 1980's, I owned a CD from Omaha State bank, it was a 3 year CD that paid me 3 or 4% per year. At the end of this experience, I vowed never to buy one again. So far I have been true to my word. I did like that they did fulfill the contract and paid me interest and my original principle. I did like at the time the idea of FDIC security. That was about all I liked about the experience.
What I did not like about the experience were:
1) My money was locked up for 3 years, kind of like an inverse bank robbery.
2) My rate of return was as good as a money market account so I could have put my money in a money market account, gotten the same return, and had access to it at the same time.
3) What I got paid in interest was only a fraction of what the bank got.
4) A money market fund has the same safety as a CD, since the SEC made whole the only money market fund to ever lose money which did occur last year, the FDIC insurance cost is really a tax eating into my return.
Let's talk about the game the bank is playing. They take the money, loan it out at a much higher rate, and take the difference as gross profit. Wouldn't you be glad to make 6% on the money and only pay out 3% to get it?
A local bank is paying 2% interest on a 24 month CD. The historical average rate of return for a corporate bond or mortgage backed bond is between 5 and 6%. So the bank has a spread of 3 - 4% that they are making on your money. You are a lot better off getting the 5 - 6% interest. An extra 4% interest doubles you money in 18 years. I do not mind someone making money except when they make more money off of me than I make myself, this is just wrong!!!
Once, sometime in the 1980's, I owned a CD from Omaha State bank, it was a 3 year CD that paid me 3 or 4% per year. At the end of this experience, I vowed never to buy one again. So far I have been true to my word. I did like that they did fulfill the contract and paid me interest and my original principle. I did like at the time the idea of FDIC security. That was about all I liked about the experience.
What I did not like about the experience were:
1) My money was locked up for 3 years, kind of like an inverse bank robbery.
2) My rate of return was as good as a money market account so I could have put my money in a money market account, gotten the same return, and had access to it at the same time.
3) What I got paid in interest was only a fraction of what the bank got.
4) A money market fund has the same safety as a CD, since the SEC made whole the only money market fund to ever lose money which did occur last year, the FDIC insurance cost is really a tax eating into my return.
Let's talk about the game the bank is playing. They take the money, loan it out at a much higher rate, and take the difference as gross profit. Wouldn't you be glad to make 6% on the money and only pay out 3% to get it?
A local bank is paying 2% interest on a 24 month CD. The historical average rate of return for a corporate bond or mortgage backed bond is between 5 and 6%. So the bank has a spread of 3 - 4% that they are making on your money. You are a lot better off getting the 5 - 6% interest. An extra 4% interest doubles you money in 18 years. I do not mind someone making money except when they make more money off of me than I make myself, this is just wrong!!!
Major Market Moves
Last week’s newsletter concerned avoiding the trade to catch short term gains. This newsletter is about catching the major market moves and avoiding the noise. Also at the end are 8 additional tidbits of knowledge.
This last week, the Wall Street Journal had an article about how the recent rise in the stock market may be coming to an end. The next day, the Wall Street Journal had the Senior Analysts of Wall Street firms give their prediction for the S&P 500 at year’s end with the consensus being about a 3-4% increase to a level of 1040 – 1050. This is all information good for filling a newspaper and little else. By the way, this level of 1043 was reached this week. Time does fly as you get older.
A book called A Random Walk Down Wall Street had a chapter on the lack of value of following advice from the Senior Analysts paid by Wall Street firms. You may remember a study was done during the 1980’s by the Wall Street Journal to evaluate the stock picking skill for Senior Analysts. In a head to head stock picking competition, stock performance of people selecting stocks by throwing darts at the Wall Street Journal taped to the wall was compared to the stock performance of that picked by Senior Analysts. This study showed statistically that both groups had the same performance. The bottom line is that these Analysts get paid a lot of money, did I mention your money, to make the firm look smart and to justify making moves for clients to generate revenue.
What I have found is that an investor is the most successful when a major market move is identified and followed. When the inflection point is reached then it is time to make an investment change. When you hear an expert on TV stating how the relation of the Euro to the Yen is impacting the stock market you will probably be better off changing the channel.
What are some Major Market Moves? The first is the economy is improving, GDP is growing and this provides growth for stocks in the stock market. Secondly, higher government borrowing is going to increase long term interest rates due to supply and demand.
This last week, the Wall Street Journal had an article about how the recent rise in the stock market may be coming to an end. The next day, the Wall Street Journal had the Senior Analysts of Wall Street firms give their prediction for the S&P 500 at year’s end with the consensus being about a 3-4% increase to a level of 1040 – 1050. This is all information good for filling a newspaper and little else. By the way, this level of 1043 was reached this week. Time does fly as you get older.
A book called A Random Walk Down Wall Street had a chapter on the lack of value of following advice from the Senior Analysts paid by Wall Street firms. You may remember a study was done during the 1980’s by the Wall Street Journal to evaluate the stock picking skill for Senior Analysts. In a head to head stock picking competition, stock performance of people selecting stocks by throwing darts at the Wall Street Journal taped to the wall was compared to the stock performance of that picked by Senior Analysts. This study showed statistically that both groups had the same performance. The bottom line is that these Analysts get paid a lot of money, did I mention your money, to make the firm look smart and to justify making moves for clients to generate revenue.
What I have found is that an investor is the most successful when a major market move is identified and followed. When the inflection point is reached then it is time to make an investment change. When you hear an expert on TV stating how the relation of the Euro to the Yen is impacting the stock market you will probably be better off changing the channel.
What are some Major Market Moves? The first is the economy is improving, GDP is growing and this provides growth for stocks in the stock market. Secondly, higher government borrowing is going to increase long term interest rates due to supply and demand.
Monday, September 7, 2009
Brokerage Companies
Happy Labor Day!!! I hope you have enjoyed the day. This newsletter will be shorter than normal and covers my unfavorable opinion of brokerage companies. I know of some great people who are brokers, it is the brokerage game that has me concerned.
In finance, a broker is someone who simply fills buy or sell orders on behalf of clients and only makes money when a trade is executed either a buy or a sell. The broker and brokerage company makes money on the trade regardless of whether you do. I get concerned when a financial entity exists to create hype to increase the number of trades and invent new ways to trade and do it in a manner that potential buyers do not fully understand the trade or the consequence of the trade.
You might remember that during the stock market crash of 1987, the New York Stock Exchange reached a record volume exceeding 500 million shares in a day. Now, each day the typical volume on the NYSE is about 1.5 billion shares with numbers in the range of 1 to 2 billion shares. Earlier this year, the volume traded on Bank of America stock and Citigroup stock alone in a single day approached 1.5 billion shares.
Each year Wall Street gives out bonuses to their top people, with a $1 million dollar bonus being commonplace. How do these companies get this money? It is from getting people to trade often regardless of whether the stock market is going up or down.
Let’s do a quick math exercise. If 1/10 of a cent, $0.001, is made on each share of stock that gets paid out as a bonus and 500 billion shares are traded in a year, the amount of bonus paid out is $500 million. Obviously this number is low, since we hear about a person who is demanding to get paid his $100 million bonus from last year from a company that got taxpayer money to stay in business.
TV shows like Mad Money and Fast Money are funded by a Brokerage company that tells the listener to buy or sell with a very short term perspective like what you should do tomorrow. Some names of these Brokerage companies include the name trade such as: Scottrade, Ameritrade, Gorilla Trade.
It is okay to use a broker or have an account at a Brokerage company, just don’t get sucked into the hype. Follow the longer term trends of the market rather than the day to day mood swings.
In finance, a broker is someone who simply fills buy or sell orders on behalf of clients and only makes money when a trade is executed either a buy or a sell. The broker and brokerage company makes money on the trade regardless of whether you do. I get concerned when a financial entity exists to create hype to increase the number of trades and invent new ways to trade and do it in a manner that potential buyers do not fully understand the trade or the consequence of the trade.
You might remember that during the stock market crash of 1987, the New York Stock Exchange reached a record volume exceeding 500 million shares in a day. Now, each day the typical volume on the NYSE is about 1.5 billion shares with numbers in the range of 1 to 2 billion shares. Earlier this year, the volume traded on Bank of America stock and Citigroup stock alone in a single day approached 1.5 billion shares.
Each year Wall Street gives out bonuses to their top people, with a $1 million dollar bonus being commonplace. How do these companies get this money? It is from getting people to trade often regardless of whether the stock market is going up or down.
Let’s do a quick math exercise. If 1/10 of a cent, $0.001, is made on each share of stock that gets paid out as a bonus and 500 billion shares are traded in a year, the amount of bonus paid out is $500 million. Obviously this number is low, since we hear about a person who is demanding to get paid his $100 million bonus from last year from a company that got taxpayer money to stay in business.
TV shows like Mad Money and Fast Money are funded by a Brokerage company that tells the listener to buy or sell with a very short term perspective like what you should do tomorrow. Some names of these Brokerage companies include the name trade such as: Scottrade, Ameritrade, Gorilla Trade.
It is okay to use a broker or have an account at a Brokerage company, just don’t get sucked into the hype. Follow the longer term trends of the market rather than the day to day mood swings.
Sunday, August 30, 2009
Municipal Bonds
A municipal bond or municipal bond fund is suitable for an investor that wants income that is free from federal income tax. This is not an acceptable investment for a tax deferred account like a Traditional or Roth IRA. The information in presented in 4 sections: issuers, holders (investors), taxes, and risk.
Municipal bond issuers
Municipal bonds are issued by states, cities, and counties, or their agencies (the municipal issuer) to raise funds. The methods and traces of issuing debt are governed by an extensive system of laws and regulations, which vary by state. Bonds bear interest at either a fixed or variable rate of interest, which can be subject to a cap known as the maximum legal limit. The issuer of a municipal bond receives a cash payment at the time of issuance in exchange for a promise to repay the investors who provide the cash payment (the bond holder) over time. Repayment periods can be as short as a few months (although this is rare) to 20, 30, or 40 years, or even longer.
Municipal bond holders
Municipal bond holders may purchase bonds either directly from the issuer at the time of issuance (on the primary market), or from other bond holders at some time after issuance (on the secondary market). In exchange for an upfront investment of capital, the bond holder receives payments over time composed of interest on the invested principal, and a return of the invested principal itself. Repayment schedules differ with the type of bond issued. Municipal bonds typically pay interest semi-annually. Shorter term bonds generally pay interest only until maturity; longer term bonds generally are amortized through annual principal payments. Longer and shorter term bonds are often combined together in a single issue that requires the issuer to make approximately level annual payments of interest and principal. Certain bonds, known as zero coupon or capital appreciation bonds, accrue interest until maturity at which time both interest and principal become due.
Taxability
One of the primary reasons municipal bonds are considered separately from other types of bonds is their special ability to provide tax-exempt income. Interest paid by the issuer to bond holders is often exempt from all federal taxes, as well as state or local taxes depending on the state in which the issuer is located. The type of project or projects that are funded by a bond affects the taxability of income received on the bonds held by bond holders. Interest earnings on bonds that fund projects that are constructed for the public good are generally exempt from federal income tax, while interest earnings on bonds issued to fund projects partly or wholly benefiting only private parties, sometimes referred to as private activity bonds, may be subject to federal income tax.
Risk
The risk ("security") of a municipal bond is a measure of how likely the issuer is to make all payments, on time and in full, as promised in the agreement between the issuer and bond holder. Different types of bonds are secured by various types of repayment sources, based on the promises made in the bond documents. The probability of repayment as promised is often determined by an independent reviewer, or "rating agency". The three main rating agencies for municipal bonds in the United States are Standard & Poor's, Moody's, and Fitch. These agencies can be hired by the issuer to assign a bond rating, which is valuable information to potential bond holders that helps sell bonds on the primary market.
The only risk is default risk with the issuer being unable to repay the full amount. Bonds issued by California with budget problems, and other states with high unemployment, should be avoided. You can reduce this risk by investing in a mutual fund rather than an individual bond.
Municipal bond issuers
Municipal bonds are issued by states, cities, and counties, or their agencies (the municipal issuer) to raise funds. The methods and traces of issuing debt are governed by an extensive system of laws and regulations, which vary by state. Bonds bear interest at either a fixed or variable rate of interest, which can be subject to a cap known as the maximum legal limit. The issuer of a municipal bond receives a cash payment at the time of issuance in exchange for a promise to repay the investors who provide the cash payment (the bond holder) over time. Repayment periods can be as short as a few months (although this is rare) to 20, 30, or 40 years, or even longer.
Municipal bond holders
Municipal bond holders may purchase bonds either directly from the issuer at the time of issuance (on the primary market), or from other bond holders at some time after issuance (on the secondary market). In exchange for an upfront investment of capital, the bond holder receives payments over time composed of interest on the invested principal, and a return of the invested principal itself. Repayment schedules differ with the type of bond issued. Municipal bonds typically pay interest semi-annually. Shorter term bonds generally pay interest only until maturity; longer term bonds generally are amortized through annual principal payments. Longer and shorter term bonds are often combined together in a single issue that requires the issuer to make approximately level annual payments of interest and principal. Certain bonds, known as zero coupon or capital appreciation bonds, accrue interest until maturity at which time both interest and principal become due.
Taxability
One of the primary reasons municipal bonds are considered separately from other types of bonds is their special ability to provide tax-exempt income. Interest paid by the issuer to bond holders is often exempt from all federal taxes, as well as state or local taxes depending on the state in which the issuer is located. The type of project or projects that are funded by a bond affects the taxability of income received on the bonds held by bond holders. Interest earnings on bonds that fund projects that are constructed for the public good are generally exempt from federal income tax, while interest earnings on bonds issued to fund projects partly or wholly benefiting only private parties, sometimes referred to as private activity bonds, may be subject to federal income tax.
Risk
The risk ("security") of a municipal bond is a measure of how likely the issuer is to make all payments, on time and in full, as promised in the agreement between the issuer and bond holder. Different types of bonds are secured by various types of repayment sources, based on the promises made in the bond documents. The probability of repayment as promised is often determined by an independent reviewer, or "rating agency". The three main rating agencies for municipal bonds in the United States are Standard & Poor's, Moody's, and Fitch. These agencies can be hired by the issuer to assign a bond rating, which is valuable information to potential bond holders that helps sell bonds on the primary market.
The only risk is default risk with the issuer being unable to repay the full amount. Bonds issued by California with budget problems, and other states with high unemployment, should be avoided. You can reduce this risk by investing in a mutual fund rather than an individual bond.
US Treasury Bonds
HISTORY LESSON:
The U.S. government knew that the costs of World War I would be great, and the question of how to pay for the war was matter of intense debate. The resulting decision was to pay for the war with a balance between higher taxes and government debt. Traditionally, the government borrowed from other countries, but there were no other countries from which to borrow in 1917: U.S. citizens would have to fully finance the war through both higher taxes and purchases of war bonds. The Treasury raised funding throughout the war by floating $21.5 billion in 'Liberty bonds.'
TYPES
A United States Treasury security is a government debt issued by the United States Department of the Treasury through the Bureau of the Public Debt. Treasury securities are the debt financing instruments of the United States Federal government, and they are often referred to simply as Treasuries. There are four types of marketable treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS).
Treasury bills (or T-bills) mature in one year or less. Like zero-coupon bonds, they do not pay interest prior to maturity; instead they are sold at a discount of the par value to create a positive yield to maturity. Many regard Treasury bills as the least risky investment available to U.S. investors. Regular weekly T-bills are commonly issued with maturity dates of 28 days (or 4 weeks, about a month), 91 days (or 13 weeks, about 3 months), 182 days (or 26 weeks, about 6 months), and 364 days (or 52 weeks, about 1 year).
Treasury notes (or T-Notes) mature in two to ten years. They have a coupon payment every six months, and are commonly issued with maturities dates of 2, 3, 5, 7 or 10 years, for denominations from $100 to $1,000,000.
Treasury bonds (T-Bonds, or the long bond) have the longest maturity, from twenty years to thirty years. There are 2 types, a coupon bond with payment every six months like T-Notes, or a without a coupon called a zero coupon bond. They are commonly issued with maturity of thirty years. The secondary market is highly liquid.
Treasury Inflation-Protected Securities (or TIPS) are the inflation-indexed bonds issued by the U.S. Treasury. The principal is adjusted to the Consumer Price Index, the commonly used measure of inflation. The coupon rate is constant, but generates a different amount of interest when multiplied by the inflation-adjusted principal, thus protecting the holder against inflation. TIPS are currently offered in 5-year, 10-year and 20-year maturities. This is not good for a long term growth investment.
TREASURY YIELD CURVE
The different time durations have different interest rates and when plotted on a graph form a curve. Some of the rates from yesterday are: 3 month = 0.15%, 6 month = 0.24%, 2 year = 1.06%, 5 year = 2.50%, 10 year = 3.57%, and 30 year = 4.43%. Note that the rate grows with time to compensate for the time risk of holding for a longer time period. This is normal and the shape is called a normal yield curve.
INTEREST RATE CHANGES AND LONG TERM BONDS
The price of the bond changes with the interest rate and the longer the time duration the bigger the change. To best illustrate this point, a 30 year zero coupon will be used. The value of the bond, the price to buy or sell, is shown below for different interest rates.
1% = $749, 2% = $563, 3% = $424, 4% = $320, 5% = $243
6% = $185, 7% = $140, 8% = $107, 9% = $82, 10% = $63
Notice how fast the value drops with rising interest rate. Imagine buying a $1,000 bond with interest rates are at 4%, about like now, and paying $320 and then selling it when the interest rate is at 5% and only having a value of $243 and losing 25% of your money, OUCH. Imagine buying a $1,000 bond with interest rates are at 7% and paying $140 and then selling it when the interest rate is at 5% and having a value of $243 and making 70% of your money, BEAUTIFUL. To get a capital gain you want to buy long bonds when interest rates are falling.
What is the bottom line: With the massive amount of US government spending and having a record deficit, $1.27 trillion so far this year, $180.7 billion in July alone, interest rates are going to go up. DO NOT OWN LONG TERM BONDS NOW, YOU ACCOUNT WILL GO OUCH!!!!!!!!
The U.S. government knew that the costs of World War I would be great, and the question of how to pay for the war was matter of intense debate. The resulting decision was to pay for the war with a balance between higher taxes and government debt. Traditionally, the government borrowed from other countries, but there were no other countries from which to borrow in 1917: U.S. citizens would have to fully finance the war through both higher taxes and purchases of war bonds. The Treasury raised funding throughout the war by floating $21.5 billion in 'Liberty bonds.'
TYPES
A United States Treasury security is a government debt issued by the United States Department of the Treasury through the Bureau of the Public Debt. Treasury securities are the debt financing instruments of the United States Federal government, and they are often referred to simply as Treasuries. There are four types of marketable treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS).
Treasury bills (or T-bills) mature in one year or less. Like zero-coupon bonds, they do not pay interest prior to maturity; instead they are sold at a discount of the par value to create a positive yield to maturity. Many regard Treasury bills as the least risky investment available to U.S. investors. Regular weekly T-bills are commonly issued with maturity dates of 28 days (or 4 weeks, about a month), 91 days (or 13 weeks, about 3 months), 182 days (or 26 weeks, about 6 months), and 364 days (or 52 weeks, about 1 year).
Treasury notes (or T-Notes) mature in two to ten years. They have a coupon payment every six months, and are commonly issued with maturities dates of 2, 3, 5, 7 or 10 years, for denominations from $100 to $1,000,000.
Treasury bonds (T-Bonds, or the long bond) have the longest maturity, from twenty years to thirty years. There are 2 types, a coupon bond with payment every six months like T-Notes, or a without a coupon called a zero coupon bond. They are commonly issued with maturity of thirty years. The secondary market is highly liquid.
Treasury Inflation-Protected Securities (or TIPS) are the inflation-indexed bonds issued by the U.S. Treasury. The principal is adjusted to the Consumer Price Index, the commonly used measure of inflation. The coupon rate is constant, but generates a different amount of interest when multiplied by the inflation-adjusted principal, thus protecting the holder against inflation. TIPS are currently offered in 5-year, 10-year and 20-year maturities. This is not good for a long term growth investment.
TREASURY YIELD CURVE
The different time durations have different interest rates and when plotted on a graph form a curve. Some of the rates from yesterday are: 3 month = 0.15%, 6 month = 0.24%, 2 year = 1.06%, 5 year = 2.50%, 10 year = 3.57%, and 30 year = 4.43%. Note that the rate grows with time to compensate for the time risk of holding for a longer time period. This is normal and the shape is called a normal yield curve.
INTEREST RATE CHANGES AND LONG TERM BONDS
The price of the bond changes with the interest rate and the longer the time duration the bigger the change. To best illustrate this point, a 30 year zero coupon will be used. The value of the bond, the price to buy or sell, is shown below for different interest rates.
1% = $749, 2% = $563, 3% = $424, 4% = $320, 5% = $243
6% = $185, 7% = $140, 8% = $107, 9% = $82, 10% = $63
Notice how fast the value drops with rising interest rate. Imagine buying a $1,000 bond with interest rates are at 4%, about like now, and paying $320 and then selling it when the interest rate is at 5% and only having a value of $243 and losing 25% of your money, OUCH. Imagine buying a $1,000 bond with interest rates are at 7% and paying $140 and then selling it when the interest rate is at 5% and having a value of $243 and making 70% of your money, BEAUTIFUL. To get a capital gain you want to buy long bonds when interest rates are falling.
What is the bottom line: With the massive amount of US government spending and having a record deficit, $1.27 trillion so far this year, $180.7 billion in July alone, interest rates are going to go up. DO NOT OWN LONG TERM BONDS NOW, YOU ACCOUNT WILL GO OUCH!!!!!!!!
Corporate Bonds
As of 2006, the size of the outstanding U.S. bond market debt was $25.2 trillion. Nearly all of the $923 billion average daily trading volume (as of early 2007) in the U.S. bond market takes place between broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market. The New York Stock Exchange (NYSE) is the largest centralized bond market, representing mostly corporate bonds.
For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a pre-determined schedule. But participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase, the value of existing bonds fall, since new issues pay a higher yield. When interest rates decrease, the value of existing bonds rise, since new issues pay a lower yield. Fluctuating interest rates are part of a country's monetary policy and bond market volatility is a response to expected monetary policy and economic changes.
Compared to government bonds, corporate bonds generally have a higher risk of default. This risk depends, of course, upon the particular corporation issuing the bond, the current market conditions and governments to which the bond issuer is being compared and the rating of the company. Corporate bond holders are compensated for this risk by receiving a higher yield than government bonds.
Key Point #1: Companies, such as Moody's and Standard and Poors, rate the risk of the bond. Companies with top ratings of A or better are called investment grade and those rated lower are called junk grade. Junk bonds have more risk and compensate the investor by paying a higher rate. The difference above the investment grade bond is called a spread. Conservative investors will choose to invest in primarily investment grade bonds or a mutual fund that invests primarily in investment grade bonds.
Key Point #2: You can make money by holding the bond to maturity and getting the interest that is paid every 6 months called the coupon payment. You can make money by buying and selling bonds and getting a capital gain on the face value of the bond.
Key Point #3: Normally, when interest rates go up the coupon payment stays constant, and the face value of the bond goes down and vice versa. Another factor, key point #4, is the risk of default can also drop the face value of the bond. Interest rate changes are more important for bonds that have a long time to maturity and less important for a shorter term duration. You can mitigate this risk by selecting short term bonds or mutual funds that invest in short term bonds.
Key Point #4: Bond holders have a risk of not getting paid full value. For example owners of GM bonds got paid about half of the face value. When the economy enters a recession and companies can go out of business the face value drops and the drop can be much larger than the gain from the dropping interest rate. This is what happened in 2008 and early 2009 and why virtually every corporate bond dropped in value.
Key Point #5: An investor needs to know where we are in the Business Cycle when investing.
Bottom Line: Given where we are in the Business Cycle, we have much less risk of a default. Face values that dropped last year should be recovered or recovering. Interest rates are rising so staying on the short time duration to maturity makes sense. A conservative investor should pursue a mutual fund with primarily investment grade bonds while a more aggressive investor should pursue a mutual fund with primarily junk bonds.
For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a pre-determined schedule. But participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase, the value of existing bonds fall, since new issues pay a higher yield. When interest rates decrease, the value of existing bonds rise, since new issues pay a lower yield. Fluctuating interest rates are part of a country's monetary policy and bond market volatility is a response to expected monetary policy and economic changes.
Compared to government bonds, corporate bonds generally have a higher risk of default. This risk depends, of course, upon the particular corporation issuing the bond, the current market conditions and governments to which the bond issuer is being compared and the rating of the company. Corporate bond holders are compensated for this risk by receiving a higher yield than government bonds.
Key Point #1: Companies, such as Moody's and Standard and Poors, rate the risk of the bond. Companies with top ratings of A or better are called investment grade and those rated lower are called junk grade. Junk bonds have more risk and compensate the investor by paying a higher rate. The difference above the investment grade bond is called a spread. Conservative investors will choose to invest in primarily investment grade bonds or a mutual fund that invests primarily in investment grade bonds.
Key Point #2: You can make money by holding the bond to maturity and getting the interest that is paid every 6 months called the coupon payment. You can make money by buying and selling bonds and getting a capital gain on the face value of the bond.
Key Point #3: Normally, when interest rates go up the coupon payment stays constant, and the face value of the bond goes down and vice versa. Another factor, key point #4, is the risk of default can also drop the face value of the bond. Interest rate changes are more important for bonds that have a long time to maturity and less important for a shorter term duration. You can mitigate this risk by selecting short term bonds or mutual funds that invest in short term bonds.
Key Point #4: Bond holders have a risk of not getting paid full value. For example owners of GM bonds got paid about half of the face value. When the economy enters a recession and companies can go out of business the face value drops and the drop can be much larger than the gain from the dropping interest rate. This is what happened in 2008 and early 2009 and why virtually every corporate bond dropped in value.
Key Point #5: An investor needs to know where we are in the Business Cycle when investing.
Bottom Line: Given where we are in the Business Cycle, we have much less risk of a default. Face values that dropped last year should be recovered or recovering. Interest rates are rising so staying on the short time duration to maturity makes sense. A conservative investor should pursue a mutual fund with primarily investment grade bonds while a more aggressive investor should pursue a mutual fund with primarily junk bonds.
Mortgage Backed Bonds
Mortgage bonds are issued by 3 agencies: FNMA, FHLMC, and GNMA also known as Fannie, Freddie, and Ginnie. These are not the names of 3 donkeys.
The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a stockholder-owned corporation chartered by Congress in 1968 as a government-sponsored enterprise (GSE), but founded in 1938 during the Great Depression. The corporation's purpose is to purchase and securitize mortgages in order to ensure that funds are consistently available to the institutions that lend money to home buyers.
The Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac, is a government sponsored enterprise (GSE) of the United States federal government. Freddie Mac has its headquarters in the Tyson's Corner CDP in unincorporated Fairfax County, Virginia.
The Government National Mortgage Association (GNMA, also known as Ginnie Mae) is a U.S. government-owned corporation within the Department of Housing and Urban Development (HUD).
In 1968, the government converted Fannie Mae into a private shareholder-owned corporation in order to remove its activity from the annual balance sheet of the federal budget. Consequently, Fannie Mae ceased to be the guarantor of government-issued mortgages, and that responsibility was transferred to the new Government National Mortgage Association (Ginnie Mae). In 1970, the government created the Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, to compete with Fannie Mae and, thus, facilitate a more robust and efficient secondary mortgage market.
Fannie Mae receives no direct government funding or backing; Fannie Mae securities carry no government guarantee of being repaid. This is explicitly stated in the law that authorizes GSEs, on the securities themselves, and in many public communications issued by Fannie Mae. Neither the certificates nor payments of principal and interest on the certificates are guaranteed by the United States government. The certificates do not constitute a debt or obligation of the United States or any of its agencies or instrument other than Fannie Mae.
Ginnie Mae provides guarantees on mortgage-backed securities (MBS) backed by federally insured or guaranteed loans, mainly loans issued by the Federal Housing Administration, Department of Veterans Affairs, Rural Housing Service, and Office of Public and Indian Housing. Ginnie Mae securities are the only MBS that are guaranteed by the United States government. GNMA securities thus have the same credit rating as the government of the United States and for capital purposes have risk-weighting of zero.
On September 7, 2008, James Lockhart, director of the Federal Housing Finance Agency (FHFA), announced that Fannie Mae and Freddie Mac were being placed into conservatorship of the FHFA. As of 2008, Fannie Mae and the Federal Home Loan Mortgage Corporation (Freddie Mac) owned or guaranteed about half of the U.S.'s $12 trillion mortgage market.
A key point to remember is that only GNMA bonds are guaranteed by the US government which makes them the choice for anyone wanting to invest in mortgage backed bonds. These are good investments for a conservative investor.
The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a stockholder-owned corporation chartered by Congress in 1968 as a government-sponsored enterprise (GSE), but founded in 1938 during the Great Depression. The corporation's purpose is to purchase and securitize mortgages in order to ensure that funds are consistently available to the institutions that lend money to home buyers.
The Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac, is a government sponsored enterprise (GSE) of the United States federal government. Freddie Mac has its headquarters in the Tyson's Corner CDP in unincorporated Fairfax County, Virginia.
The Government National Mortgage Association (GNMA, also known as Ginnie Mae) is a U.S. government-owned corporation within the Department of Housing and Urban Development (HUD).
In 1968, the government converted Fannie Mae into a private shareholder-owned corporation in order to remove its activity from the annual balance sheet of the federal budget. Consequently, Fannie Mae ceased to be the guarantor of government-issued mortgages, and that responsibility was transferred to the new Government National Mortgage Association (Ginnie Mae). In 1970, the government created the Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, to compete with Fannie Mae and, thus, facilitate a more robust and efficient secondary mortgage market.
Fannie Mae receives no direct government funding or backing; Fannie Mae securities carry no government guarantee of being repaid. This is explicitly stated in the law that authorizes GSEs, on the securities themselves, and in many public communications issued by Fannie Mae. Neither the certificates nor payments of principal and interest on the certificates are guaranteed by the United States government. The certificates do not constitute a debt or obligation of the United States or any of its agencies or instrument other than Fannie Mae.
Ginnie Mae provides guarantees on mortgage-backed securities (MBS) backed by federally insured or guaranteed loans, mainly loans issued by the Federal Housing Administration, Department of Veterans Affairs, Rural Housing Service, and Office of Public and Indian Housing. Ginnie Mae securities are the only MBS that are guaranteed by the United States government. GNMA securities thus have the same credit rating as the government of the United States and for capital purposes have risk-weighting of zero.
On September 7, 2008, James Lockhart, director of the Federal Housing Finance Agency (FHFA), announced that Fannie Mae and Freddie Mac were being placed into conservatorship of the FHFA. As of 2008, Fannie Mae and the Federal Home Loan Mortgage Corporation (Freddie Mac) owned or guaranteed about half of the U.S.'s $12 trillion mortgage market.
A key point to remember is that only GNMA bonds are guaranteed by the US government which makes them the choice for anyone wanting to invest in mortgage backed bonds. These are good investments for a conservative investor.
Friday, July 31, 2009
Scorecard & Bonds Part 1
SCORECARD
We have made it through July and the dog days of summer are upon us. Time to see how my advice has done so far this year, so here goes.
#1) Buy Short Term Bonds and Avoid Long Term Bonds: My favorite Short Term Bond Fund = +15.27%, my favorite Long Term Bond Fund = -20.43%. Answer is correct
#2) Buy Mutual Funds that invest in Stocks rather than Gold: My favorite Stock Fund = +34.49%, my favorite Gold Fund = +14.98%. Answer is correct while gold has done better than I had anticipated and I still do not like gold
#3) Better than anticipated corporate earnings will provide support for the US Stock Market: During July, the US Stock Market indexes reached the high for this year and the return during July was the best since July 1998.
Bottom Line: The Business Cycle Investing Strategy is working well.
BONDS PART 1 (FOUNDATION)
If the idea of investing in the Stock Market gives you a headache and you are not happy with the interest rate at the bank what should you do? The answer is to invest in bonds, where you get interest paid for lending your money. The next few newsletters will be devoted to understanding bonds.
Point #1 = The market interest rate of any bond is moved by the US Treasury Yield Curve.
The reason is that the US government continues to auction bonds in time durations from 30 days to 30 years and since this is the most prevalent source of money it sets the interest rate. As you look at this yield curve, the normal shape is to have a higher rate with longer time. Let me explain further. You can purchase US Treasury bonds with time durations including 1 month, 2 months, 3 months, 6 months, 1 year, 2 years, 5 years, 10 years, and 30 years. A normal investor will only buy a longer time duration bond, such as a 30 year bond, if it has a larger return than a shorter term bond, such as a 1 year bond, because of the risk of holding the investment for the longer amount of time. A point of clarification, a short term US Treasury debt is actually called a Treasury Bill while a longer term bond is called a Treasury Bond. This means that normally it means that a better interest rate is obtained by buying longer time duration bonds. The rate for a short term CD rate will typically be close to the inflation rate and be below the interest rate for the same time duration US Treasury bond. To get a higher rate, typically a longer time duration bond needs to be bought.
Point #2 = When the US Treasury Yield Curve changes shape from being normal to flat or inverted it is time to make investment changes
The reason is that when the interest rate on a shorter term bond is the same or higher than a longer term bond it typically means that the economy has reached a top and will be shrinking. Business Cycle Investing says you want to make significant changes.
Point #3 = Bonds are bought and sold in a Secondary Market and you can get a capital gain or loss.
Traders trade everything, including bonds, and many investors buy and sell bonds before reaching the maturity date for a whole host of reasons. Because of this, the face value of a bond can go up or down giving an investor a capital gain or loss. When you sell a bond, the amount of money you make is the difference between your selling price and your purchase price plus any payments, also known as the coupon payment, you received. If you buy a bond and hold it for the entire time duration you get your coupon payments and your money, face value, back. Essentially, you get what you agreed to. When you sell before the entire time duration, you are not guaranteed to get back you face value it could be more or less. An investor will watch interest rates and when an opportunity arises for a capital gain on many occasions will take advantage of it and sell. By the way, Warren Buffet is a master at this and has made lots of money doing this.
Point #4 = Bonds are issued by all types of entities because of the need for money to fund operationsThe reason is that any enterprise has a need for money to operate goes out of business when it runs out of money. This is why the Chief Financial Officer, CFO, or Treasury Secretary makes lots of money because of the risk involved to the business.
We have made it through July and the dog days of summer are upon us. Time to see how my advice has done so far this year, so here goes.
#1) Buy Short Term Bonds and Avoid Long Term Bonds: My favorite Short Term Bond Fund = +15.27%, my favorite Long Term Bond Fund = -20.43%. Answer is correct
#2) Buy Mutual Funds that invest in Stocks rather than Gold: My favorite Stock Fund = +34.49%, my favorite Gold Fund = +14.98%. Answer is correct while gold has done better than I had anticipated and I still do not like gold
#3) Better than anticipated corporate earnings will provide support for the US Stock Market: During July, the US Stock Market indexes reached the high for this year and the return during July was the best since July 1998.
Bottom Line: The Business Cycle Investing Strategy is working well.
BONDS PART 1 (FOUNDATION)
If the idea of investing in the Stock Market gives you a headache and you are not happy with the interest rate at the bank what should you do? The answer is to invest in bonds, where you get interest paid for lending your money. The next few newsletters will be devoted to understanding bonds.
Point #1 = The market interest rate of any bond is moved by the US Treasury Yield Curve.
The reason is that the US government continues to auction bonds in time durations from 30 days to 30 years and since this is the most prevalent source of money it sets the interest rate. As you look at this yield curve, the normal shape is to have a higher rate with longer time. Let me explain further. You can purchase US Treasury bonds with time durations including 1 month, 2 months, 3 months, 6 months, 1 year, 2 years, 5 years, 10 years, and 30 years. A normal investor will only buy a longer time duration bond, such as a 30 year bond, if it has a larger return than a shorter term bond, such as a 1 year bond, because of the risk of holding the investment for the longer amount of time. A point of clarification, a short term US Treasury debt is actually called a Treasury Bill while a longer term bond is called a Treasury Bond. This means that normally it means that a better interest rate is obtained by buying longer time duration bonds. The rate for a short term CD rate will typically be close to the inflation rate and be below the interest rate for the same time duration US Treasury bond. To get a higher rate, typically a longer time duration bond needs to be bought.
Point #2 = When the US Treasury Yield Curve changes shape from being normal to flat or inverted it is time to make investment changes
The reason is that when the interest rate on a shorter term bond is the same or higher than a longer term bond it typically means that the economy has reached a top and will be shrinking. Business Cycle Investing says you want to make significant changes.
Point #3 = Bonds are bought and sold in a Secondary Market and you can get a capital gain or loss.
Traders trade everything, including bonds, and many investors buy and sell bonds before reaching the maturity date for a whole host of reasons. Because of this, the face value of a bond can go up or down giving an investor a capital gain or loss. When you sell a bond, the amount of money you make is the difference between your selling price and your purchase price plus any payments, also known as the coupon payment, you received. If you buy a bond and hold it for the entire time duration you get your coupon payments and your money, face value, back. Essentially, you get what you agreed to. When you sell before the entire time duration, you are not guaranteed to get back you face value it could be more or less. An investor will watch interest rates and when an opportunity arises for a capital gain on many occasions will take advantage of it and sell. By the way, Warren Buffet is a master at this and has made lots of money doing this.
Point #4 = Bonds are issued by all types of entities because of the need for money to fund operationsThe reason is that any enterprise has a need for money to operate goes out of business when it runs out of money. This is why the Chief Financial Officer, CFO, or Treasury Secretary makes lots of money because of the risk involved to the business.
Saturday, July 25, 2009
Earnings, Warren Buffet, Bonds
Last week's newsletter stated that earnings from companies should be positive, beating estimates, and that this should support the stock market. Last week, 78% of the Dow stocks reported better than the estimated earnings and stock markets around the world rose. The Dow rose to a high for the year breaking the 9000 mark, up about 4% for the week. This earnings trend should continue giving support to the stock market this summer.Numerous experts have been giving their opinion about the direction of the stock market based upon a number of reasons.
These experts cause more confusion than providing real guidance. The best thing to do as an investor is to monitor the data and remember that stock prices increase as earnings grow and earnings grow as economic business conditions improve, which is the current situation. Earnings are growing now due mostly to cost cutting measures and improving business conditions. Since cost cutting only goes so far, revenue growth is key for stock prices next year.
I read in Barron's this week that Warren Buffet was asked this week about where to invest now given that the Dow had reached 9000. It was stated that Warren Buffet recommended continuing to own stocks and avoiding long term treasury bonds and cash for long term investments. Since I have been saying the same thing, I think he is rather smart. It was also reported in Barron's that Warren Buffet stated that the best types of bonds right now are mid term corporate bonds.
A bond is a debt obligation where an investor is paid interest and gets back their original investment. Lots of different types of bonds exist including municipal (state and local government), treasury (federal government) and corporate (companies). Municipal bond interest is tax-free which makes it a good choice for any account other than a tax deferred account like a traditional IRA. Corporate bond interest is taxed which makes it an especially good choice for a tax deferred account like a traditional IRA. Corporate bonds are rated by several agencies and can be lumped into investment grade and junk bond, a conservative investor will want mostly investment grade bonds. A junk bond rating for a company does not mean that the company that issue them is junk, they typically are an excellent company.
Bottom Line: The current investment direction of investing in stocks and stock market mutual funds should be maintained for a long term investor seeking growth who is willing to take some risk. Mid-term corporate bond funds that are mostly comprised of investment grade bonds are also an excellent choice for a conservative investor.
These experts cause more confusion than providing real guidance. The best thing to do as an investor is to monitor the data and remember that stock prices increase as earnings grow and earnings grow as economic business conditions improve, which is the current situation. Earnings are growing now due mostly to cost cutting measures and improving business conditions. Since cost cutting only goes so far, revenue growth is key for stock prices next year.
I read in Barron's this week that Warren Buffet was asked this week about where to invest now given that the Dow had reached 9000. It was stated that Warren Buffet recommended continuing to own stocks and avoiding long term treasury bonds and cash for long term investments. Since I have been saying the same thing, I think he is rather smart. It was also reported in Barron's that Warren Buffet stated that the best types of bonds right now are mid term corporate bonds.
A bond is a debt obligation where an investor is paid interest and gets back their original investment. Lots of different types of bonds exist including municipal (state and local government), treasury (federal government) and corporate (companies). Municipal bond interest is tax-free which makes it a good choice for any account other than a tax deferred account like a traditional IRA. Corporate bond interest is taxed which makes it an especially good choice for a tax deferred account like a traditional IRA. Corporate bonds are rated by several agencies and can be lumped into investment grade and junk bond, a conservative investor will want mostly investment grade bonds. A junk bond rating for a company does not mean that the company that issue them is junk, they typically are an excellent company.
Bottom Line: The current investment direction of investing in stocks and stock market mutual funds should be maintained for a long term investor seeking growth who is willing to take some risk. Mid-term corporate bond funds that are mostly comprised of investment grade bonds are also an excellent choice for a conservative investor.
Sunday, July 19, 2009
Economic Business Cycle and Earnings
Data from the Federal Reserve of New York, the same info that the Federal Reserve analyzes to set policy, on the current state of the US economic business cycle is analyzed. As an economy recovers from a bottom stage; industrial production should increase, inventory should decline, and commodity prices should increase. This data is critical to an investment strategist that uses a strategy involving the economic business cycle.
The industrial production data shows that production, which had a very severe decline in 2008, has started to recover. This means that people and other businesses have increased spending. A positive sign.
The inventory data shows a buildup during 2008 and early 2009 that is starting to decline. With increased spending business inventories will decline. Inventories go up as business slows down and vice versa as most businesses sell product through a distribution system. Another positive sign.
The commodity data shows that prices are also starting to increase. This is expected as demand increases for commodities based upon the law of supply and demand. Another positive sign.
What is the bottom line of this data? The economy has moved from the bottom stage to an early growth stage. For an investor, you want to maintaim your current position of owning: stocks, mutual funds that invest in stocks, short term bonds, and avoid long term bonds.
Earnings season is upon us once again and this past week some earnings were reported. It was reported that most companies were reporting better than expected earnings which surprised many experts, so much for expert opinion. Improved earnings are favorble for the stock market and stock market indexes around the world went up last week.
For what it is worth, I will give you my opinion that this trend of better than expected earnings should continue for the rest of this quarter. This should continue to support the stock market. The main reason is that companies project earnings, in a conservative manner, based upon the business conditions that exist at the time of the announcement. Since business conditions improved during the quarter it should also lead to improved earnings. This normally happens as the economy is growing.
When a publicly traded company gives earnings guidance it tends to be conservative in nature for a few reasons including: it is impossible to predict the future and if you miss the earnings number the stock price will drop and executives can lose their job. It is done to manage expectations of the major investors such that if you beat the earnings number you look like smart and if you miss it you look incompetent. The #1 objective of the CEO and Board of Directors, besides keeping their job, is to increase stock price.
I look forward to watching the earnings reports during the next 4 - 6 weeks.
The industrial production data shows that production, which had a very severe decline in 2008, has started to recover. This means that people and other businesses have increased spending. A positive sign.
The inventory data shows a buildup during 2008 and early 2009 that is starting to decline. With increased spending business inventories will decline. Inventories go up as business slows down and vice versa as most businesses sell product through a distribution system. Another positive sign.
The commodity data shows that prices are also starting to increase. This is expected as demand increases for commodities based upon the law of supply and demand. Another positive sign.
What is the bottom line of this data? The economy has moved from the bottom stage to an early growth stage. For an investor, you want to maintaim your current position of owning: stocks, mutual funds that invest in stocks, short term bonds, and avoid long term bonds.
Earnings season is upon us once again and this past week some earnings were reported. It was reported that most companies were reporting better than expected earnings which surprised many experts, so much for expert opinion. Improved earnings are favorble for the stock market and stock market indexes around the world went up last week.
For what it is worth, I will give you my opinion that this trend of better than expected earnings should continue for the rest of this quarter. This should continue to support the stock market. The main reason is that companies project earnings, in a conservative manner, based upon the business conditions that exist at the time of the announcement. Since business conditions improved during the quarter it should also lead to improved earnings. This normally happens as the economy is growing.
When a publicly traded company gives earnings guidance it tends to be conservative in nature for a few reasons including: it is impossible to predict the future and if you miss the earnings number the stock price will drop and executives can lose their job. It is done to manage expectations of the major investors such that if you beat the earnings number you look like smart and if you miss it you look incompetent. The #1 objective of the CEO and Board of Directors, besides keeping their job, is to increase stock price.
I look forward to watching the earnings reports during the next 4 - 6 weeks.
Sunday, June 28, 2009
Acting Smarter
The year is half over and what a year it has been so far in the world of politics, the economy, the banking system, tax law changes, etc. This year will go down as the one of the most pivotal in our nation's history as we try to address every issue on the democratic platform while in a recession. Praying for our leaders is a good thing to do this year.
It was announced this week that personal income rose in May, the 2nd month in a row, much to the surprise of the people who tend to focus on the negative side of life. The stimulus package spending is flowing money into people's pcokets during April and May. Normally this is viewed as wonderful news and the stock market would rally because consumer spending is about 70% of the economy. People are acting smarter in that the savings rate also increased to a level not seen since 1993. The stock market took a dim view of this smart behavior and went down slightly.
Having people save rather than spend is wonderful news for the long term future of our country. We all need to save for the future for things like retirement, major purchases, college, etc. Our Social Security system is headed for trouble as people live longer and jobs move oversees reducing inflows. People need to have additional savings beside just Social Security for retirement. For example, a recent study forecasted that $450,000 more than Social Security benefits is needed by a retired couple for future medical costs alone.
Cash for Clunkers is great for someone who is wanting a new fuel efficient car. You have heard details about it in the media. If you do not have a qualified clunker and still want a new car here is a gameplan. Some people who have clunkers will not be able to take advantage of the program. They will sell them as part of their normal routine of upgrading vehicles. Buy a $1,000 clunker, title, register and insure it then drive it to the dealer. Sell the extra older car yourself to maximize your return.
It was announced this week that personal income rose in May, the 2nd month in a row, much to the surprise of the people who tend to focus on the negative side of life. The stimulus package spending is flowing money into people's pcokets during April and May. Normally this is viewed as wonderful news and the stock market would rally because consumer spending is about 70% of the economy. People are acting smarter in that the savings rate also increased to a level not seen since 1993. The stock market took a dim view of this smart behavior and went down slightly.
Having people save rather than spend is wonderful news for the long term future of our country. We all need to save for the future for things like retirement, major purchases, college, etc. Our Social Security system is headed for trouble as people live longer and jobs move oversees reducing inflows. People need to have additional savings beside just Social Security for retirement. For example, a recent study forecasted that $450,000 more than Social Security benefits is needed by a retired couple for future medical costs alone.
Cash for Clunkers is great for someone who is wanting a new fuel efficient car. You have heard details about it in the media. If you do not have a qualified clunker and still want a new car here is a gameplan. Some people who have clunkers will not be able to take advantage of the program. They will sell them as part of their normal routine of upgrading vehicles. Buy a $1,000 clunker, title, register and insure it then drive it to the dealer. Sell the extra older car yourself to maximize your return.
Sunday, June 21, 2009
Fahers Day, Bucketizing Investments
The wonderful thing about today is it reminds us that the most important things in life are family and relationships rather than investments. The purpose of investing is to help support family and relationship by providing additional resources. Sometimes the world gets the priority backwards.
With that said some retirement planning advice for you to consider so that you have the resources for your retirement and beyond. The principle is to divide resources into 2 parts, income and growth. Ideally it is best to have 2 separate portfolios one designed to provide income to meet day to day needs and the other to grow to keep up with things that grow faster than inflation like medical costs. This is what a financial advisor is supposed to do for you.
The income part matches income to daily expenses. It is a lot easier to have to match income to expenses if expenses are in order. This means it is important to have common sense like having a home mortgage paid off and no lingering credit card debt. The income part is invested in money market funds, CDs, short term bonds, TIPs, fixed annuity, etc. It is a portfolio designed for one purpose to only keep up with inflation and have a guaranteed source of income.
Growth is aimed at riskier investments like long term bonds, US stock mutual funds, Emerging market stock mutual funds, etc. It is a portfolio aimed at providing future value. Even if a repeat of 2008 occurs in the future your ability to meet expenses are not impacted reducing stress. This is where business cycle investing applies to continue growth and maximize long term performance.
You will do well if can put together a gameplan that can bucketize investments into these 2 categories. It reduces stress and provides clarity. If you need help contact me or another financial advisor.
With that said some retirement planning advice for you to consider so that you have the resources for your retirement and beyond. The principle is to divide resources into 2 parts, income and growth. Ideally it is best to have 2 separate portfolios one designed to provide income to meet day to day needs and the other to grow to keep up with things that grow faster than inflation like medical costs. This is what a financial advisor is supposed to do for you.
The income part matches income to daily expenses. It is a lot easier to have to match income to expenses if expenses are in order. This means it is important to have common sense like having a home mortgage paid off and no lingering credit card debt. The income part is invested in money market funds, CDs, short term bonds, TIPs, fixed annuity, etc. It is a portfolio designed for one purpose to only keep up with inflation and have a guaranteed source of income.
Growth is aimed at riskier investments like long term bonds, US stock mutual funds, Emerging market stock mutual funds, etc. It is a portfolio aimed at providing future value. Even if a repeat of 2008 occurs in the future your ability to meet expenses are not impacted reducing stress. This is where business cycle investing applies to continue growth and maximize long term performance.
You will do well if can put together a gameplan that can bucketize investments into these 2 categories. It reduces stress and provides clarity. If you need help contact me or another financial advisor.
Sunday, June 14, 2009
Do As Financial Experts Do
Perhaps you have heard and seen financial experts talking about what to do now with your investments. For example, Jason Zweig, The Intelligent Investor, recently wrote that now might be a good time to take some profits and sell some stocks as the market has risen 30+% in about 3 months. Other experts talk about stocks normally go down to sideways in June any now may be a good time to sell and take some profits.
To understand what to do now, look at the money trail of what category of investments are being bought and sold. We all know that what someone does is more important than what someone says. Barron's reports money flow into mutual funds by category on a weekly basis. For the last 4 weeks an average of $3.1 Billion dollars has gone into Equity, aka Stock, funds while an average of $8.4 Billion dollars has left Money Market Funds. The rest of the money, about $5.2 Billion, has gone into different categories of bond funds.
The numbers say that investors are investing, taking lots of money from money market funds, about $35 Billion over the last month and putting it to work and that they are buying stocks. If you look at the trend over the last 4 weeks, the amount of money going into stock funds is staying stable while the amount going into bond funds are going down by a significant amount.
It is true that stocks tend to do very little in June since typically few companies report earnings in June, the last month of a quarter. With this said, it is very possible for some individual stocks to make significant moves during June. It is true that the stock market has gone up 30+% in about 3 months. This is good information for a trader who is looking to buy and sell fairly frequently instead of a long term investor. The flow of money tells a long term investors that financial experts for all of their talk are putting money from a defensive position and into the stock market.
Investing in gold has also gotten a lot of press lately and people are being encouraged to buy stock in gold mining related companies. A few months ago, I wrote that you should avoid gold for a number of reasons. Since writing this statement, gold has risen slightly while stocks in general have given far superior returns. In my view of the current economic situation, it still is not time to buy gold or shares of gold mining related companies.
To understand what to do now, look at the money trail of what category of investments are being bought and sold. We all know that what someone does is more important than what someone says. Barron's reports money flow into mutual funds by category on a weekly basis. For the last 4 weeks an average of $3.1 Billion dollars has gone into Equity, aka Stock, funds while an average of $8.4 Billion dollars has left Money Market Funds. The rest of the money, about $5.2 Billion, has gone into different categories of bond funds.
The numbers say that investors are investing, taking lots of money from money market funds, about $35 Billion over the last month and putting it to work and that they are buying stocks. If you look at the trend over the last 4 weeks, the amount of money going into stock funds is staying stable while the amount going into bond funds are going down by a significant amount.
It is true that stocks tend to do very little in June since typically few companies report earnings in June, the last month of a quarter. With this said, it is very possible for some individual stocks to make significant moves during June. It is true that the stock market has gone up 30+% in about 3 months. This is good information for a trader who is looking to buy and sell fairly frequently instead of a long term investor. The flow of money tells a long term investors that financial experts for all of their talk are putting money from a defensive position and into the stock market.
Investing in gold has also gotten a lot of press lately and people are being encouraged to buy stock in gold mining related companies. A few months ago, I wrote that you should avoid gold for a number of reasons. Since writing this statement, gold has risen slightly while stocks in general have given far superior returns. In my view of the current economic situation, it still is not time to buy gold or shares of gold mining related companies.
Sunday, June 7, 2009
GM, Fed, Treasuries
This week my top 3 stories are: bankruptcy of GM, message from Ben Bernanke - Federal Reserve Chair, and Treasury bill and bond yield rates. The story that got the most press was GM.
The new GM will be a great company to invest in whenever the new shares are issued in 2010 or 2011. It has most of the debt and pension obligation responsibility removed. It is important to keep track of the winners and losers in this bankruptcy as it gives insight into fiscal policy. The winners are the members of UAW and banks who are kept essentially whole while the losers are bond holders and tax payers who get about $0.50 per $1.00 invested. This means that the administration has placed a priority on the UAW and bank returns over private investors and taxpayers. This means that the investing climate is favorable for banks and not favorable for buyers of corporate bonds. If you as a citizen want to get the rest of your money, you will need to buy some shares of the new GM.
Ben Bernanke made a statement this week that the government needs to have fiscal restraint which means that the Congress and the President should stop passing spending bills. He viewed the stimulus bill and future spending plans as being fiscally irresponsible because the interest payments will become a huge financial burden and the printing of money to fund additional spending will lead to higher inflation and higher prices for imported commodities like oil. The long term impact of living beyond your means is always bad for an individual, a business, and our government. It appears that he made this statement so that people would remember that the Fed makes monetary policy and has nothing to do with fiscal policy and wants to disconnect from the current direction. As an investor this means that the current investing strategy of being in the stock market and having mutual funds that emphasize commodities and avoiding long term treasury bonds makes great sense.
The statement from Ben Bernanke fits well with the next topic, treasury bill and bond yield rates. From an investment perspective, the important news that got very little press was the steepening of the treasury bond curve. Longer term bonds continue to get higher and higher in yield while the yield on short term bills stay very low. Banks really like this environment since they pay little interest on savings accounts and make loans at higher interest rates. The current return for an investor on a 3 month treasury bill is about 0.19%. With the increasing 10 and 30 year treasury bond yield rates investors who are holding them are losing money, about 27% so far this year for the 30 year treasury bond. The reason long term bond yields are going up is an indicator for higher inflation.
The US stock market continues to go up in value while employment rates get worse, does this make sense? Losing a job is terrible for the person and their family. From an investment viewpoint, with the economy improving and companies reducing cost, this will resu;t in higher productivity with higher revenues and higher earnings per share in the future compared to last quarter. Yes it continues to make sense to buy stocks of US companies.
Summer is upon us. Enjoy the good things of life.
The new GM will be a great company to invest in whenever the new shares are issued in 2010 or 2011. It has most of the debt and pension obligation responsibility removed. It is important to keep track of the winners and losers in this bankruptcy as it gives insight into fiscal policy. The winners are the members of UAW and banks who are kept essentially whole while the losers are bond holders and tax payers who get about $0.50 per $1.00 invested. This means that the administration has placed a priority on the UAW and bank returns over private investors and taxpayers. This means that the investing climate is favorable for banks and not favorable for buyers of corporate bonds. If you as a citizen want to get the rest of your money, you will need to buy some shares of the new GM.
Ben Bernanke made a statement this week that the government needs to have fiscal restraint which means that the Congress and the President should stop passing spending bills. He viewed the stimulus bill and future spending plans as being fiscally irresponsible because the interest payments will become a huge financial burden and the printing of money to fund additional spending will lead to higher inflation and higher prices for imported commodities like oil. The long term impact of living beyond your means is always bad for an individual, a business, and our government. It appears that he made this statement so that people would remember that the Fed makes monetary policy and has nothing to do with fiscal policy and wants to disconnect from the current direction. As an investor this means that the current investing strategy of being in the stock market and having mutual funds that emphasize commodities and avoiding long term treasury bonds makes great sense.
The statement from Ben Bernanke fits well with the next topic, treasury bill and bond yield rates. From an investment perspective, the important news that got very little press was the steepening of the treasury bond curve. Longer term bonds continue to get higher and higher in yield while the yield on short term bills stay very low. Banks really like this environment since they pay little interest on savings accounts and make loans at higher interest rates. The current return for an investor on a 3 month treasury bill is about 0.19%. With the increasing 10 and 30 year treasury bond yield rates investors who are holding them are losing money, about 27% so far this year for the 30 year treasury bond. The reason long term bond yields are going up is an indicator for higher inflation.
The US stock market continues to go up in value while employment rates get worse, does this make sense? Losing a job is terrible for the person and their family. From an investment viewpoint, with the economy improving and companies reducing cost, this will resu;t in higher productivity with higher revenues and higher earnings per share in the future compared to last quarter. Yes it continues to make sense to buy stocks of US companies.
Summer is upon us. Enjoy the good things of life.
Friday, May 29, 2009
Things are Acting Fairly Nornally
This week was another interesting week and in the world of investing things are acting fairly normally. In particular, the stock market had the best return during a 3 month period since 2007 and the treasury yield curve set a record. These are 2 good signs that the economic business cycle and investments are acting fairly normally and this is very good.
The stock market is increasing in a fairly choppy manner as it should for an economy that is coming out of a bottom. It should increase as interest rates increase which leads to the 2nd point. The difference in the interest rate of a 10 year treasury bond relative to a 2 year treasury bond reached an all-time record high. The 10 year bond rate increased while the 2 year bond rate has held fairly flat. Since this time, the 10 year bond rate has come down which means that the record was reached due to short term traders rather than investors. The important thing is that the treasury bond yield curve is acting fairly normally.
The bottom line is that we have to persevere and keep things in perspective and in priority. This week some wonderful things happened in my family which was a real blessing and more important than a treasury yield curve or stock market record. It is also good to see account balances grow.
The stock market is increasing in a fairly choppy manner as it should for an economy that is coming out of a bottom. It should increase as interest rates increase which leads to the 2nd point. The difference in the interest rate of a 10 year treasury bond relative to a 2 year treasury bond reached an all-time record high. The 10 year bond rate increased while the 2 year bond rate has held fairly flat. Since this time, the 10 year bond rate has come down which means that the record was reached due to short term traders rather than investors. The important thing is that the treasury bond yield curve is acting fairly normally.
The bottom line is that we have to persevere and keep things in perspective and in priority. This week some wonderful things happened in my family which was a real blessing and more important than a treasury yield curve or stock market record. It is also good to see account balances grow.
Tuesday, May 26, 2009
Memorial Day 2009 Financial Information
Happy Memorial Day to you and your family. It is very important to remember that one of the purposes of this day is to help us keep our priorities in order. We need to remember the people who served our country and the people who are no longer with us that helped shape us into the people God intended for us to become.
The important financial news events last week included the index of leading economic indicators and the 10 year treasury rate. Thest 2 data points suggested that the economy contiues to improve and we are entering into a growth phase in the business cycle.
Numerous economic data gets published on a monthly basis. Some of this data tells us where we have been, lagging indicators, where we are, current indicators, and where we are going, leading indicators. The data is then compiled into the index of lagging indicators, current indicators, and leading indicators. For an investor keeping track of the index of leading indicators has value. For April, the index of leading indicators showed a 1% improvement over March with 7 of 10 components being positive. A 1% improvement is significant number.
The 10 year treasury rate continues to rise and last week the rate had another significant increase. Having this rate continue to increase is a good sign of economic improvement. This economic situation will pass, all we have to do is get through it.
This holiday, remember the important things of life.
The important financial news events last week included the index of leading economic indicators and the 10 year treasury rate. Thest 2 data points suggested that the economy contiues to improve and we are entering into a growth phase in the business cycle.
Numerous economic data gets published on a monthly basis. Some of this data tells us where we have been, lagging indicators, where we are, current indicators, and where we are going, leading indicators. The data is then compiled into the index of lagging indicators, current indicators, and leading indicators. For an investor keeping track of the index of leading indicators has value. For April, the index of leading indicators showed a 1% improvement over March with 7 of 10 components being positive. A 1% improvement is significant number.
The 10 year treasury rate continues to rise and last week the rate had another significant increase. Having this rate continue to increase is a good sign of economic improvement. This economic situation will pass, all we have to do is get through it.
This holiday, remember the important things of life.
Tuesday, May 19, 2009
Business Cycle by Rachel Bleich
The Business Cycle
What is the business cycle? How does it affect me? More and more, we hear about the business cycle in our ever-changing economy, but to fully understand just what we are hearing, we need to dig deeper. Once we comprehend what the business cycle is and what it does, then we can recognize the impact it has in daily life.
The business cycle, by its most common definition, is a period that extends from a peak in economic activity, through a following recession, recovery, and expansion until the next peak in economic activity is attained. The definition could also be looked at as a period extending from a trough in economic activity, through recovery, expansion, a peak, and recession until the next trough, or low point, in economic activity is reached. This cyclical movement is caused by changes in economic forces; one of the most common forces that affects business situations and the business cycle is aggregate demand, which can be looked at through the components of demand that make up the GDP. The relationship that represents aggregate demand is the sum of household expenditures (personal consumptions expenditures and residential investment), business expenditures (nonresidential investment), net exports, and government spending. All of these separate entities work together to create aggregate demand, whose fluctuations affect the macroeconomic forces that affect the business cycle, thus affecting each and every one of us.
The rise and fall in economic activity, also known as the business cycle, affects everyone in their daily life. As economic activity rises and the business cycle is expanding towards a peak, people make more money, invest more money, and feel more capable of spending more money. When the economic activity cycles towards a trough or recession, people make less money with some people losing jobs, and people feel less able to invest and spend money. How the economy is faring determines what we do with our money, which affects what we do, buy, wear, etc. This feeds into the household expenditures factor in aggregate demand, which is further proof of the relationship we have with the business cycle. When business expenditures, net exports, and government spending are thrown into the mix, it is easy to see how each part of demand works to influence the business cycle, and ultimately the average person.
The business cycle is an ever-changing rise and fall in economic activity that affects everyone, but it is also affected by everyone. It lives in a symbiotic relationship with household expenditures, business expenditures, net exports, and government spending as fluctuations occur. The important thing to remember is that no matter where the economy is in the business cycle, the cycle will continue and economic activity will change. So, although we maybe at a low point in economic activity, we will cycle into another expansion. The business cycle: it happens.
What is the business cycle? How does it affect me? More and more, we hear about the business cycle in our ever-changing economy, but to fully understand just what we are hearing, we need to dig deeper. Once we comprehend what the business cycle is and what it does, then we can recognize the impact it has in daily life.
The business cycle, by its most common definition, is a period that extends from a peak in economic activity, through a following recession, recovery, and expansion until the next peak in economic activity is attained. The definition could also be looked at as a period extending from a trough in economic activity, through recovery, expansion, a peak, and recession until the next trough, or low point, in economic activity is reached. This cyclical movement is caused by changes in economic forces; one of the most common forces that affects business situations and the business cycle is aggregate demand, which can be looked at through the components of demand that make up the GDP. The relationship that represents aggregate demand is the sum of household expenditures (personal consumptions expenditures and residential investment), business expenditures (nonresidential investment), net exports, and government spending. All of these separate entities work together to create aggregate demand, whose fluctuations affect the macroeconomic forces that affect the business cycle, thus affecting each and every one of us.
The rise and fall in economic activity, also known as the business cycle, affects everyone in their daily life. As economic activity rises and the business cycle is expanding towards a peak, people make more money, invest more money, and feel more capable of spending more money. When the economic activity cycles towards a trough or recession, people make less money with some people losing jobs, and people feel less able to invest and spend money. How the economy is faring determines what we do with our money, which affects what we do, buy, wear, etc. This feeds into the household expenditures factor in aggregate demand, which is further proof of the relationship we have with the business cycle. When business expenditures, net exports, and government spending are thrown into the mix, it is easy to see how each part of demand works to influence the business cycle, and ultimately the average person.
The business cycle is an ever-changing rise and fall in economic activity that affects everyone, but it is also affected by everyone. It lives in a symbiotic relationship with household expenditures, business expenditures, net exports, and government spending as fluctuations occur. The important thing to remember is that no matter where the economy is in the business cycle, the cycle will continue and economic activity will change. So, although we maybe at a low point in economic activity, we will cycle into another expansion. The business cycle: it happens.
Sunday, May 17, 2009
Stocks and 30 Year Treasuries
What a week in the auto industry. Chrysler, aka Crysler, and General Motors, aka Government Motors, announced the closing of about 2000 dealership. These dealerships were chosen by some reason probably not related to profitability of the individual dealer. Most people associated with Crysler and Government Motors are probably thinking why did we ask the government for money. Be careful what you wish for cause you just might get it.
About 8 months ago, Barrons had a nice article on why GM was a good buy at $25/share. I did not buy the stock then and still do not plan to buy it in the future. The reason for my decision is the metric of pension funding versus shareholder equity which says that funding pensions will cost more than the company is worth. This very smart person had great reasons on the surface but did not get to the real issue. GM hit a 76 year low this week at about $1/share. The moral of the story is be very very selective in buying an stock, I currently like only 4 stocks. You are better off to buy a few that you know very very well than just starting to buy based upon some very smart analyst. Better yet you are probably better off buying a highly rated mutual fund with low fees.
I have been saying that you want to avoid long term bonds. The latest issue of Barrons had an article stating that the 30 year treasury bond has lost 20% this year and this investment should be avoided. The reason is that government spending is causing interest rates to go up and this trend will continue. What does government spending at an annual deficit of a $2 trillion get us:
1) Higher interest rates
2) Losing money on long term bonds
3) Drop in the value of the dollar relative to other currencies
4) Higher prices for commodities that are imported like oil
For someone looking for fixed income, some good alternatives exist in bond funds that invest in corporate bonds and municipal bonds. If you go this route your return will be higher than a money market fund or CD.
About 8 months ago, Barrons had a nice article on why GM was a good buy at $25/share. I did not buy the stock then and still do not plan to buy it in the future. The reason for my decision is the metric of pension funding versus shareholder equity which says that funding pensions will cost more than the company is worth. This very smart person had great reasons on the surface but did not get to the real issue. GM hit a 76 year low this week at about $1/share. The moral of the story is be very very selective in buying an stock, I currently like only 4 stocks. You are better off to buy a few that you know very very well than just starting to buy based upon some very smart analyst. Better yet you are probably better off buying a highly rated mutual fund with low fees.
I have been saying that you want to avoid long term bonds. The latest issue of Barrons had an article stating that the 30 year treasury bond has lost 20% this year and this investment should be avoided. The reason is that government spending is causing interest rates to go up and this trend will continue. What does government spending at an annual deficit of a $2 trillion get us:
1) Higher interest rates
2) Losing money on long term bonds
3) Drop in the value of the dollar relative to other currencies
4) Higher prices for commodities that are imported like oil
For someone looking for fixed income, some good alternatives exist in bond funds that invest in corporate bonds and municipal bonds. If you go this route your return will be higher than a money market fund or CD.
Saturday, May 9, 2009
Business Cycle Investing - Long Term Investor
Articles are being written debating which investment is the best investment for a long term investor. One side of the debate extols the virtues of stocks and having an ownership position. The other side extols the virtues of bonds and having little risk exposure. If you look at Business Cycle Investing the answer is that you want to own both but at different times.
The building blocks of business cycle investing include:1) Any economy has business cycles.2) It is always good to minimize risk and make money.3) In general, the stock market goes us as the economy is growing and goes down as the economy is slowing. The change in the growth rate is also very important.4) The Federal Reserve moves interest rate to keep the economy growing at an annual inflation rate of about 3%.5) The Federal Reserve strongly influences the business cycle by changing interest rates.6) Long term bonds do well as interest rates are dropping and poorly as interest rates rise.
A business cycle has 4 segments: bottom, growing, top, and slowing. The Federal Reserve raises interest rates as the economy is growing at an inflation rate above 3% and reduces interest rates as the economy is slowing at an inflation rate below 3%.During a bottom, where we are now, interest rates are low and the economy is starting to grow. Stocks should be bought and long term bonds should be avoided. You know this phase as the Federal Reserve will publish information that the economy has bottomed and is growing.During a growth period, where we will be, interest rates are rising and the economy is growing. Stocks should be bought and long term bonds should be avoided. You know this phase by the Federal Reserve raising the interest rate.During a top, interest rates are at peak and the economy has stopped growing. Stocks should be avoided and long term bonds should be bought. You know this phase as the Federal Reserve will publish information that the economy has peaked and is slowing.During a slowing period, interest rates are dropping and the economy is slowing. Stocks should be avoided and long term bonds should be bought. You know this phase by the Federal Reserve dropping the interest rate.
An investor that would have followed Business Cycle Investing would have been out of the stock market during most of 2008 and would have been in long term bonds. During 2008 the stock market lost about 40% while long term bonds gained about 40%. An example to put this in terms of real money, a $100,000 account loses about $40,000 in the stock market and gains about $40,000 in long term bonds. You can have an account balance of $60,000 or $140,000. Obviously, it is better to have $80,000 more in your account even if you had to pay some capital gain tax.
The building blocks of business cycle investing include:1) Any economy has business cycles.2) It is always good to minimize risk and make money.3) In general, the stock market goes us as the economy is growing and goes down as the economy is slowing. The change in the growth rate is also very important.4) The Federal Reserve moves interest rate to keep the economy growing at an annual inflation rate of about 3%.5) The Federal Reserve strongly influences the business cycle by changing interest rates.6) Long term bonds do well as interest rates are dropping and poorly as interest rates rise.
A business cycle has 4 segments: bottom, growing, top, and slowing. The Federal Reserve raises interest rates as the economy is growing at an inflation rate above 3% and reduces interest rates as the economy is slowing at an inflation rate below 3%.During a bottom, where we are now, interest rates are low and the economy is starting to grow. Stocks should be bought and long term bonds should be avoided. You know this phase as the Federal Reserve will publish information that the economy has bottomed and is growing.During a growth period, where we will be, interest rates are rising and the economy is growing. Stocks should be bought and long term bonds should be avoided. You know this phase by the Federal Reserve raising the interest rate.During a top, interest rates are at peak and the economy has stopped growing. Stocks should be avoided and long term bonds should be bought. You know this phase as the Federal Reserve will publish information that the economy has peaked and is slowing.During a slowing period, interest rates are dropping and the economy is slowing. Stocks should be avoided and long term bonds should be bought. You know this phase by the Federal Reserve dropping the interest rate.
An investor that would have followed Business Cycle Investing would have been out of the stock market during most of 2008 and would have been in long term bonds. During 2008 the stock market lost about 40% while long term bonds gained about 40%. An example to put this in terms of real money, a $100,000 account loses about $40,000 in the stock market and gains about $40,000 in long term bonds. You can have an account balance of $60,000 or $140,000. Obviously, it is better to have $80,000 more in your account even if you had to pay some capital gain tax.
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.
Saturday, March 28, 2009
Federal Reserve, Bonds, and Mortgate Rates
This week the Federal Reserve started buying long term treasury bonds in an effort to lower mortgage rates and provide stimulus to the economy by having home owners refinance mortgages and have a lower monthly mortgage payment. The strategy is to create more demand for these bonds and increase the price of these bonds which would lower the interest rate. This strategy did not work and provides a good indicator for an investor. Let me explain this in more detail.
First, mortgage rates are linked to treasury bond rates in the following manner. For example, Wells Fargo offers a 15 year mortgage at a 4.625% interest rate to anyone who qualifies. They buy the amount of 15 year treasury bonds in proportion to the amount of the mortgage at a much lower rate, currently about 3%. Money is made by Wells Fargo on the interest rate spread of 1.625%.
Second, interest rates and bond prices on long term bonds go in the opposite direction. The reason is that a bond is purchased at a lower initial purchase price than the value of the bond and full value is achieved when the bond is held to maturity. For example, a 10 year bond with a value of $1,000 is purchased for about $500 and yields an interest rate of about 7%. If the price of the bond increases to $750 the resulting interest rate is about 3.5%. As the price of the bond goes up and down, and the investor gets the resulting lower or higher interest rate.
Third, from a supply and demand perspective the price of anything goes up as demand goes up or supply goes down. Conversely, the price of anything goes down as demand goes down or supply goes up. As we know from the previous paragraph, as demand for bonds goes up the purchase price goes up resulting in a lower interest rate.
This week the Federal Reserve started buying $300 Billion worth of long term bonds in the open market. Since no additional bonds were issued, the price of the bonds should have gone up lowering the resulting interest rates. What actually happened was exactly the opposite, the price of the bonds dropped resulting in increasing interest rates.
What this means is that more investors are selling their bonds than being bought by the Federal Reserve. When investors start selling long term bonds it is an indicator of future inflation and higher interest rates. As an investor, you do not want to follow the direction of US government, you do not want to own long term bonds.
When interest rates are going up it is positive for investors who purchase short term bonds or stocks. A risk averse investor would purchase CDs or Money Market funds. A risk taking investor would purchase stock. An investor can do better by watching interest rates rather than financial experts on TV.
First, mortgage rates are linked to treasury bond rates in the following manner. For example, Wells Fargo offers a 15 year mortgage at a 4.625% interest rate to anyone who qualifies. They buy the amount of 15 year treasury bonds in proportion to the amount of the mortgage at a much lower rate, currently about 3%. Money is made by Wells Fargo on the interest rate spread of 1.625%.
Second, interest rates and bond prices on long term bonds go in the opposite direction. The reason is that a bond is purchased at a lower initial purchase price than the value of the bond and full value is achieved when the bond is held to maturity. For example, a 10 year bond with a value of $1,000 is purchased for about $500 and yields an interest rate of about 7%. If the price of the bond increases to $750 the resulting interest rate is about 3.5%. As the price of the bond goes up and down, and the investor gets the resulting lower or higher interest rate.
Third, from a supply and demand perspective the price of anything goes up as demand goes up or supply goes down. Conversely, the price of anything goes down as demand goes down or supply goes up. As we know from the previous paragraph, as demand for bonds goes up the purchase price goes up resulting in a lower interest rate.
This week the Federal Reserve started buying $300 Billion worth of long term bonds in the open market. Since no additional bonds were issued, the price of the bonds should have gone up lowering the resulting interest rates. What actually happened was exactly the opposite, the price of the bonds dropped resulting in increasing interest rates.
What this means is that more investors are selling their bonds than being bought by the Federal Reserve. When investors start selling long term bonds it is an indicator of future inflation and higher interest rates. As an investor, you do not want to follow the direction of US government, you do not want to own long term bonds.
When interest rates are going up it is positive for investors who purchase short term bonds or stocks. A risk averse investor would purchase CDs or Money Market funds. A risk taking investor would purchase stock. An investor can do better by watching interest rates rather than financial experts on TV.
Sunday, March 22, 2009
Financial March Madness
NCAA Basketball March Madness is underway and going strong. I think the Financial March Madness that occurred this week is even more dramatic.
Here are some of the events:
1) The Congressional Budget Office calculates that the budget deficit will reach $1.85 Trillion this year, yes in 1 year.
2) AIG bonuses were paid worth $165 million, absolutely crazy.
3) The reason AIG executive bonuses get the money is because of a last minute change to the Stimulus Bill drafted by the Treasury Department and agreed to by the Senate Banking Committee, especially Senator Chris Dodd. The House, Senate, and President then approved the bill without properly reading it, since it exceeded 1000 pages in length, even crazier. Quality of legislation is much better than quantity.
4) As any good politician would do in response to public outrage, attempt to place the blame on others. Congress rapidly drafted and passed legislation aimed at AIG, having a tax rate of 90%, without knowing the ramifications of the legislation, even crazier.
5) Former Merrill Lynch executives get $3.5 Billion in bonuses, 20 times greater, without outrage.
It would have been a lot better if our leaders would have written a very short Stimulus Bill giving each citizen $2,600. The AIG bonuses would have been avoided and each of us would have enjoyed spending the money. Instead, newspaper stories exist of how our money is being spent on projects, decided by local politicians, such as on the street outside of Lowes Motor Speedway.
In all of this craziness something WONDERFUL happened, The Federal Reserve agreed to purchase $300 Billion in Long Term Treasury Bonds. This will keep the lid on lower mortgage rates and should reduce rates even further creating a great opportunity to refinance mortgages saving you money. You need to prepare to refinance your mortgage especially if your rate is greater than 5.5%.
These actions taken by the Federal Reserve this week is another positive step in the economic recovery process. This reduces the risk of loss by investing in the US stock market. Next week other positive steps will be taken aimed at the credit crisis and the handling of toxic assets on the balance sheets of financial institutions. This future action makes buying stock in financial institutions much less risky.
If you did not get money directly from the Stimulus Bill, you can get it second handedly by investing in the stock market. As our economy improves, stock prices will improve giving investors capital gains. Bottom Line: NOW is a great time to invest. Contact me if you want help with investing.
Here are some of the events:
1) The Congressional Budget Office calculates that the budget deficit will reach $1.85 Trillion this year, yes in 1 year.
2) AIG bonuses were paid worth $165 million, absolutely crazy.
3) The reason AIG executive bonuses get the money is because of a last minute change to the Stimulus Bill drafted by the Treasury Department and agreed to by the Senate Banking Committee, especially Senator Chris Dodd. The House, Senate, and President then approved the bill without properly reading it, since it exceeded 1000 pages in length, even crazier. Quality of legislation is much better than quantity.
4) As any good politician would do in response to public outrage, attempt to place the blame on others. Congress rapidly drafted and passed legislation aimed at AIG, having a tax rate of 90%, without knowing the ramifications of the legislation, even crazier.
5) Former Merrill Lynch executives get $3.5 Billion in bonuses, 20 times greater, without outrage.
It would have been a lot better if our leaders would have written a very short Stimulus Bill giving each citizen $2,600. The AIG bonuses would have been avoided and each of us would have enjoyed spending the money. Instead, newspaper stories exist of how our money is being spent on projects, decided by local politicians, such as on the street outside of Lowes Motor Speedway.
In all of this craziness something WONDERFUL happened, The Federal Reserve agreed to purchase $300 Billion in Long Term Treasury Bonds. This will keep the lid on lower mortgage rates and should reduce rates even further creating a great opportunity to refinance mortgages saving you money. You need to prepare to refinance your mortgage especially if your rate is greater than 5.5%.
These actions taken by the Federal Reserve this week is another positive step in the economic recovery process. This reduces the risk of loss by investing in the US stock market. Next week other positive steps will be taken aimed at the credit crisis and the handling of toxic assets on the balance sheets of financial institutions. This future action makes buying stock in financial institutions much less risky.
If you did not get money directly from the Stimulus Bill, you can get it second handedly by investing in the stock market. As our economy improves, stock prices will improve giving investors capital gains. Bottom Line: NOW is a great time to invest. Contact me if you want help with investing.
Monday, March 16, 2009
Buying Opportunity in Stocks
Topic: Wonderful Buying Opportunity for Longer Term Investors in the US and International Stock Markets
Last week’s newsletter covered the topic of Irrational Pessimism where investors were acting in an irrationally pessimistic manner to some investment options, such as the stock market. The stock market rebounded about 10% during the week and was higher on 4 consecutive days.
Financial experts on the news channels continue to be rather pessimistic. The current topic being debated is the question was last week’s low in the stock market really the bottom? Having these experts being pessimistic creates a wonderful opportunity for longer term investors in the stock market.
The stock market moves with the growth in the US and global economy rather than the opinion of the financial experts. The best indicators are economic data, the price of commodities, especially copper, and interest rates. Economic data indicates that the economy has changed from a severe contraction to approaching neutral. Commodity prices have begun to rise and copper prices having risen appreciably during the last 3 months also suggesting that the economy has improved. Interest rates have also increased during the last 3 months.
In this economic environment what are the most important things to do in order of importance? First, eliminate revolving credit card debt and get rid of this obligation that has an interest rate of about 20%. Second, refinance your home at a lower interest rate, if the rate is over 5.5%, to improve monthly cash flow. Third, payoff any loans on a liability like a car since it is throwing good money after something that is going down in value. Finally, continue to contribute to a retirement plan.
If you have a short term time horizon or are an extremely risk averse investor continue to put money in a money market account or certificate of deposit. A money market at Fidelity is currently yielding about 3%.
A longer term investor should maintain investments in the stock market and continue to make contributions primarily through mutual funds rather than picking an individual stock. An individual stocks carries considerably more risk than a mutual fund.
Things to avoid buying right now: Gold, Long Term Bonds, and Real Estate Investment Trusts. Each of these options will be covered in future blogs.
Last week’s newsletter covered the topic of Irrational Pessimism where investors were acting in an irrationally pessimistic manner to some investment options, such as the stock market. The stock market rebounded about 10% during the week and was higher on 4 consecutive days.
Financial experts on the news channels continue to be rather pessimistic. The current topic being debated is the question was last week’s low in the stock market really the bottom? Having these experts being pessimistic creates a wonderful opportunity for longer term investors in the stock market.
The stock market moves with the growth in the US and global economy rather than the opinion of the financial experts. The best indicators are economic data, the price of commodities, especially copper, and interest rates. Economic data indicates that the economy has changed from a severe contraction to approaching neutral. Commodity prices have begun to rise and copper prices having risen appreciably during the last 3 months also suggesting that the economy has improved. Interest rates have also increased during the last 3 months.
In this economic environment what are the most important things to do in order of importance? First, eliminate revolving credit card debt and get rid of this obligation that has an interest rate of about 20%. Second, refinance your home at a lower interest rate, if the rate is over 5.5%, to improve monthly cash flow. Third, payoff any loans on a liability like a car since it is throwing good money after something that is going down in value. Finally, continue to contribute to a retirement plan.
If you have a short term time horizon or are an extremely risk averse investor continue to put money in a money market account or certificate of deposit. A money market at Fidelity is currently yielding about 3%.
A longer term investor should maintain investments in the stock market and continue to make contributions primarily through mutual funds rather than picking an individual stock. An individual stocks carries considerably more risk than a mutual fund.
Things to avoid buying right now: Gold, Long Term Bonds, and Real Estate Investment Trusts. Each of these options will be covered in future blogs.
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