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.”
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