This blog will be very brief and covers the Vanguard Weekly Recap, a short section on Basis Points, and a quote.
Vanguard Weekly Recap
Good economic news arrived this week, but the nation remained on guard. Although it was announced on Monday that the Great Recession had officially ended more than a year ago, economic growth has been so sluggish that unemployment levels retained a recessionary feel. The Federal Reserve said it would maintain its current monetary policies as the economy continued to struggle. Problems still plagued the housing market, but existing-home sales and new construction both rose in August and new-home sales stayed about the same. The Conference Board's index of leading indicators was up, and the durable-goods report also brought welcome data. For the week, the S&P 500 Index rose 2.1% to 1,148 (for a year-to-date total return—including price change plus dividends—of about 4.5%). The yield of the 10-year U.S. Treasury note fell, 0.13%, 13 basis points to 2.62% (for a year-to-date decrease of 1.23%, 123 basis points).
Basis Points
When dealing with fixed income securities like bonds, the term basis points is constantly stated. Someone a long time ago figured out that when an interest rate changes by a certain percentage that people might get confused. Let me demonstrate, if the interest rate was to change from 4% to 5% it would move 1% (5-4) but on a relative term it moved 20% ((5-4)/4).
So which is correct, it depends on you you look at it. It is clear that having only one answer is important to an investor. The term basis point denotes the change in interest rates, in this example, from 4% to 5%. A 100 basis point is equal 1% so this is a 100 basis point move. The absolute value of the movement, in this example 20% will be stated as a percentage.
Quote
“It is not enough to have knowledge – one must use it as well.” Descartes
Sunday, September 26, 2010
Saturday, September 18, 2010
Stock Picking
This covers the topic of investing in individual stocks and the value, or lack of value, of analysts. The best article on this subject is written is by Jason Unger, shown below. I hope you enjoy reading it.
Here are the points that I would like you to get from this short article:
1) Investment companies hire lots and lots of analysts that get paid lots and lots of money that we pay in fees.
2) Why would these very expensive analysts be hired? To get people to buy and sell stocks, make transactions, with the idea if an expert says that a stock is a good buy that people will buy it and conversely if an expert says sell then people will sell.
3) The article reports on a contest in the 1990's between professional analysts and people throwing darts at the Wall Street Journal hung on a wall. The contest is to see which group could pick stocks that gave the best performance.
4) A theory taught in an investment class is the Efficient Market Hypothesis. This theory says that since everyone is supposed to have the same information and since nobody can predict the future it is more important to select the right category of investment, like stocks or bonds, rather than individual stocks.
5) If you are investing individual stocks what analysts say does matter in the short-term. Analysts can not predict the future and long-term performance.
6) Analysts select stocks that have higher than normal risk to get a higher return which is good when the market is going up and bad when the market is going down.
7) Some manipulation exists when investing in individual stocks which is why my preference is mutual funds.
8) When an investment company tells you about all of their experts the first thing you should think is how much money is this going to cost. The best way to increase your return is to reduce the amount of fees taken from your account.
God Bless,
Larry
_____________________________________
Can Monkeys Pick Stocks Better than Experts?
by Jason Unger on August 17, 2009 ·
The Wall Street Journal's Dartboard Contest
In his popular personal finance book arguing that investors can't consistently beat the market (A Random Walk Down Wall Street), economist Burton Malkiel says that "a blindfolded monkey throwing darts at a newspaper?s financial pages could select a portfolio that would do just as well as one carefully selected by experts."
Sounds like a challenge.
So, in 1988, the Wall Street Journal decided to see if Malkiel's theory would hold up, and created the Dartboard Contest.
How it worked: Wall Street Journal staffers, acting as the monkeys, threw darts at a stock table, while investment experts picked their own stocks. After six months, they compared the results of the two methods. The WSJ even solicited stock picks from some of its readers, and compared them, too.
After 100 contests, the results were in. From Investor Home's great description of the contest:
On October 7, 1998 the Journal presented the results of the 100th dartboard contest. So who won the most contests and by how much? The pros won 61 of the 100 contests versus the darts. Thats better than the 50% that would be expected in an efficient market. On the other hand, the pros losing 39% of the time to a bunch of darts certainly could be viewed as somewhat of an embarrassment for the pros. Additionally, the performance of the pros versus the Dow Jones Industrial Average was less impressive. The pros barely edged the DJIA by a margin of 51 to 49 contests. In other words, simply investing passively in the Dow, an investor would have beaten the picks of the pros in roughly half the contests (that is, without even considering transactions costs or taxes for taxable investors).
The pros picks look more impressive when the actual returns of their stocks are compared with the dartboard and DJIA returns. The pros average gain was 10.8% versus 4.5% for the darts and 6.8% for the DJIA.
So isn't this a victory for professional stock experts? Malkiel says no. He and a number of other commentators point to a number of factors affecting the results, including:
1) The Announcement Effect: by announcing the stocks to the entire audience of the WSJ, it will artificially inflate the returns (in fact, abnormal gains for the first 2 days after publication scaled back between 15 and 25 days later).
2) Pros picked riskier stocks: Case Western Reserve University professor Bing Liang says that, adjusted for risk, the pros' would have lost 3.8% on the market over the six-month period.
3) The Dartboard stocks continued to do well: After the contest ended, the dart stocks continued to perform, while the pros' picks fell from their initial highs after publication.
Here are the points that I would like you to get from this short article:
1) Investment companies hire lots and lots of analysts that get paid lots and lots of money that we pay in fees.
2) Why would these very expensive analysts be hired? To get people to buy and sell stocks, make transactions, with the idea if an expert says that a stock is a good buy that people will buy it and conversely if an expert says sell then people will sell.
3) The article reports on a contest in the 1990's between professional analysts and people throwing darts at the Wall Street Journal hung on a wall. The contest is to see which group could pick stocks that gave the best performance.
4) A theory taught in an investment class is the Efficient Market Hypothesis. This theory says that since everyone is supposed to have the same information and since nobody can predict the future it is more important to select the right category of investment, like stocks or bonds, rather than individual stocks.
5) If you are investing individual stocks what analysts say does matter in the short-term. Analysts can not predict the future and long-term performance.
6) Analysts select stocks that have higher than normal risk to get a higher return which is good when the market is going up and bad when the market is going down.
7) Some manipulation exists when investing in individual stocks which is why my preference is mutual funds.
8) When an investment company tells you about all of their experts the first thing you should think is how much money is this going to cost. The best way to increase your return is to reduce the amount of fees taken from your account.
God Bless,
Larry
_____________________________________
Can Monkeys Pick Stocks Better than Experts?
by Jason Unger on August 17, 2009 ·
The Wall Street Journal's Dartboard Contest
In his popular personal finance book arguing that investors can't consistently beat the market (A Random Walk Down Wall Street), economist Burton Malkiel says that "a blindfolded monkey throwing darts at a newspaper?s financial pages could select a portfolio that would do just as well as one carefully selected by experts."
Sounds like a challenge.
So, in 1988, the Wall Street Journal decided to see if Malkiel's theory would hold up, and created the Dartboard Contest.
How it worked: Wall Street Journal staffers, acting as the monkeys, threw darts at a stock table, while investment experts picked their own stocks. After six months, they compared the results of the two methods. The WSJ even solicited stock picks from some of its readers, and compared them, too.
After 100 contests, the results were in. From Investor Home's great description of the contest:
On October 7, 1998 the Journal presented the results of the 100th dartboard contest. So who won the most contests and by how much? The pros won 61 of the 100 contests versus the darts. Thats better than the 50% that would be expected in an efficient market. On the other hand, the pros losing 39% of the time to a bunch of darts certainly could be viewed as somewhat of an embarrassment for the pros. Additionally, the performance of the pros versus the Dow Jones Industrial Average was less impressive. The pros barely edged the DJIA by a margin of 51 to 49 contests. In other words, simply investing passively in the Dow, an investor would have beaten the picks of the pros in roughly half the contests (that is, without even considering transactions costs or taxes for taxable investors).
The pros picks look more impressive when the actual returns of their stocks are compared with the dartboard and DJIA returns. The pros average gain was 10.8% versus 4.5% for the darts and 6.8% for the DJIA.
So isn't this a victory for professional stock experts? Malkiel says no. He and a number of other commentators point to a number of factors affecting the results, including:
1) The Announcement Effect: by announcing the stocks to the entire audience of the WSJ, it will artificially inflate the returns (in fact, abnormal gains for the first 2 days after publication scaled back between 15 and 25 days later).
2) Pros picked riskier stocks: Case Western Reserve University professor Bing Liang says that, adjusted for risk, the pros' would have lost 3.8% on the market over the six-month period.
3) The Dartboard stocks continued to do well: After the contest ended, the dart stocks continued to perform, while the pros' picks fell from their initial highs after publication.
Monday, September 13, 2010
5 Little-Known Facts About Social Security
I found a good article on Social Security that is concise and very useful. Feel free to forward as these 5 facts are common issues for everyone. Let me know if you have a question on this very important topic.
________________________________________________________________________________
5 Little-Known Facts About Social Security
by Marilyn Bowden
Monday, September 13, 2010
Most Americans watch their money go into the Social Security trust fund in the form of payroll deductions as soon as they begin working, when retirement seems a long way off. As a result, many go through their working lives without giving it much thought.
Here are a few facts everyone should know about Social Security benefits before making any decisions about retirement.
Who Is Entitled to Retirement Benefits?
Just about anybody who has worked for 10 or more years is eligible for Social Security retirement benefits.
"You need 40 quarters of employment, earning a minimum income of $1,000 per quarter," says Brett Horowitz, principal and wealth manager at Evensky & Katz in Coral Gables, Fla.
The income requirement is so low that "it could be met with seasonal work," says Richard W. Stumpf, principal at Financial Benefits in Wichita, Kan.
There are some exceptions. Most federal employees hired before 1984 aren't eligible to participate, Horowitz says. Stumpf adds that pastors may choose not to pay in.
Also, railroad workers and their families generally get benefits through a separate retirement system.
How Are Payouts Calculated?
The size of your monthly check is arrived at by a series of calculations.
Your primary insurance amount, or PIA -- the benefit you would get at full retirement age -- determines the size of your monthly retirement check. According to the Social Security Administration's website, the PIA is based on the Average Indexed Monthly Earnings, or AIME, as applied to an inflation-adjusted formula. The PIA is then adjusted for whether you take retirement before or after your normal retirement age -- 66 for those now reaching retirement age, but gradually adjusted to age 67 for those born after 1954.
You can begin drawing reduced Social Security as early as 62. For every month you delay after reaching full retirement age, up to age 70, the monthly benefit increases.
According to a recent report of the Senate Special Committee on Aging, for someone with an AIME of $5,000 in 2009, the PIA would total $1,971.
In keeping with the original intent behind Social Security -- a way to lift seniors out of poverty -- lower-wage earners get a higher proportion of their earnings than higher wage earners. The maximum monthly benefit that can be received in 2010 is $2,346.
What Are Spousal Benefits and Widow Benefits?
If one partner in a marriage earns significantly less than the other, the lower-earning spouse can collect spousal benefits rather than payouts based on his or her own earnings history.
"The spouse can get the greater of their own or 50 percent of the other spouse's PIA," Horowitz says. "The lower-earning spouse is not eligible until the higher earner starts getting benefits, but both can start as early as 62."
Stumpf says this option can be a financial planning tool.
"Imagine a high earner whose spouse is his employee," he says. "If they cut her pay and transfer the rest to him, when she reaches retirement age, one-half of his income will be significantly higher than what she earned."
A divorced spouse who was married for more than 10 years and has not remarried can draw against the ex-spouse's work history. Widows and widowers can receive the higher of their own or their spouse's monthly payment, but not both.
"That's why it's important for the higher earner to delay taking benefits for as long as possible," says Horowitz.
How Broke Is Social Security?
According to many studies, the Social Security trust fund will be able to cover its retirement and disability obligations for the next 30 years or so, after which there will be a shortfall of about 22 percent. The Senate Special Committee on Aging figures funds will fall short in 2037.
Stumpf thinks those estimates are optimistic.
"The Social Security trustees assume an annual 2.8 percent inflation rate," he says. "Historic norms are in excess of 3 percent. That's a big difference when you're talking about trillions of dollars.
"We could make small adjustments now and bring it to fully fundable status; if we delay, it will be more painful. In 10 years the shortfall will be significantly bigger; in 20 years it will be through the roof."
Where Do Payroll Deductions for Social Security Go?
In theory, they're held in trust by the government. But it's not as if your money sits there in the Social Security trust fund waiting for you to retire. After current beneficiaries are paid, surplus dollars are used to buy bonds from the U.S. Treasury. So the trust has the bonds, but the money is now in the Treasury, where Congress can use it for any purpose.
"The Social Security trust fund is ... a piggybank holding paper IOUs from Congress," Stumpf says.
This is the first year that Social Security has had to cash in one of those bonds in order to meet its payroll, says Stumpf.
"From this point forward, an increasing number of those bonds will have to be pulled out every year -- and Congress is going to have to find a way to come up with all that money," he says.
________________________________________________________________________________
5 Little-Known Facts About Social Security
by Marilyn Bowden
Monday, September 13, 2010
Most Americans watch their money go into the Social Security trust fund in the form of payroll deductions as soon as they begin working, when retirement seems a long way off. As a result, many go through their working lives without giving it much thought.
Here are a few facts everyone should know about Social Security benefits before making any decisions about retirement.
Who Is Entitled to Retirement Benefits?
Just about anybody who has worked for 10 or more years is eligible for Social Security retirement benefits.
"You need 40 quarters of employment, earning a minimum income of $1,000 per quarter," says Brett Horowitz, principal and wealth manager at Evensky & Katz in Coral Gables, Fla.
The income requirement is so low that "it could be met with seasonal work," says Richard W. Stumpf, principal at Financial Benefits in Wichita, Kan.
There are some exceptions. Most federal employees hired before 1984 aren't eligible to participate, Horowitz says. Stumpf adds that pastors may choose not to pay in.
Also, railroad workers and their families generally get benefits through a separate retirement system.
How Are Payouts Calculated?
The size of your monthly check is arrived at by a series of calculations.
Your primary insurance amount, or PIA -- the benefit you would get at full retirement age -- determines the size of your monthly retirement check. According to the Social Security Administration's website, the PIA is based on the Average Indexed Monthly Earnings, or AIME, as applied to an inflation-adjusted formula. The PIA is then adjusted for whether you take retirement before or after your normal retirement age -- 66 for those now reaching retirement age, but gradually adjusted to age 67 for those born after 1954.
You can begin drawing reduced Social Security as early as 62. For every month you delay after reaching full retirement age, up to age 70, the monthly benefit increases.
According to a recent report of the Senate Special Committee on Aging, for someone with an AIME of $5,000 in 2009, the PIA would total $1,971.
In keeping with the original intent behind Social Security -- a way to lift seniors out of poverty -- lower-wage earners get a higher proportion of their earnings than higher wage earners. The maximum monthly benefit that can be received in 2010 is $2,346.
What Are Spousal Benefits and Widow Benefits?
If one partner in a marriage earns significantly less than the other, the lower-earning spouse can collect spousal benefits rather than payouts based on his or her own earnings history.
"The spouse can get the greater of their own or 50 percent of the other spouse's PIA," Horowitz says. "The lower-earning spouse is not eligible until the higher earner starts getting benefits, but both can start as early as 62."
Stumpf says this option can be a financial planning tool.
"Imagine a high earner whose spouse is his employee," he says. "If they cut her pay and transfer the rest to him, when she reaches retirement age, one-half of his income will be significantly higher than what she earned."
A divorced spouse who was married for more than 10 years and has not remarried can draw against the ex-spouse's work history. Widows and widowers can receive the higher of their own or their spouse's monthly payment, but not both.
"That's why it's important for the higher earner to delay taking benefits for as long as possible," says Horowitz.
How Broke Is Social Security?
According to many studies, the Social Security trust fund will be able to cover its retirement and disability obligations for the next 30 years or so, after which there will be a shortfall of about 22 percent. The Senate Special Committee on Aging figures funds will fall short in 2037.
Stumpf thinks those estimates are optimistic.
"The Social Security trustees assume an annual 2.8 percent inflation rate," he says. "Historic norms are in excess of 3 percent. That's a big difference when you're talking about trillions of dollars.
"We could make small adjustments now and bring it to fully fundable status; if we delay, it will be more painful. In 10 years the shortfall will be significantly bigger; in 20 years it will be through the roof."
Where Do Payroll Deductions for Social Security Go?
In theory, they're held in trust by the government. But it's not as if your money sits there in the Social Security trust fund waiting for you to retire. After current beneficiaries are paid, surplus dollars are used to buy bonds from the U.S. Treasury. So the trust has the bonds, but the money is now in the Treasury, where Congress can use it for any purpose.
"The Social Security trust fund is ... a piggybank holding paper IOUs from Congress," Stumpf says.
This is the first year that Social Security has had to cash in one of those bonds in order to meet its payroll, says Stumpf.
"From this point forward, an increasing number of those bonds will have to be pulled out every year -- and Congress is going to have to find a way to come up with all that money," he says.
Saturday, September 11, 2010
Economy Gaining Traction
This blog will contain the Vanguard Weekly Recap, a section on the economy gaining traction and some questions to see if you are as smart as a 4 year old. As everyone knows, today is the 9th anniversary of a terrorist attack with objectives that included us feeling afraid and impacting our economy. It is appropriate to remember the events of the past and to maintain focus on the important things of life like faith, family, and making each day a better day.
VANGUARD WEEKLY RECAP
As students returned to school, there was at least some encouraging news that prospects for the economy and workers might be brightening. Economic reports during the holiday-shortened week included good news about the improved U.S. trade deficit in July. For the week ended September 10, the S&P 500 Index rose 0.5% to 1,110 (for a year-to-date total return—including price change plus dividends—of about 0.9%). The yield of the 10-year U.S. Treasury note climbed 0.09% to 2.81% (for a year-to-date drop of 1.04%).
ECONOMY GAINING TRACTION
At the end of August, Wall Street Analysts gave their view (buy, hold, or sell) on the value of the US Stock Market and most said hold followed by buy in 2nd place and sell came in 3rd. The percentage who said hold was a record high amount and the percentage who said sell was a record low amount. Normally, a record low percentage for sell would give a record high percentage for buy. Since the economy is in the blahs it means that most of these experts believe that stocks are cheap and are afraid to say buy due to fear of something rising up and hurting the economy.
I believe that economy is gaining traction for the following reasons:
1) Longer term interest rates are rising even though the Federal Reserve are buying long term bonds
2) ^VIX has gone below the 200 day moving average
3) Stimulus money that will give us longer term growth is starting to flow, only 20% had been spent as of the end of August
4) India has recently started allowing imports. Corporations have stated that India shut down imports on January 1, 2010 and now imports are starting to flow
5) A belief by tax payers that government is starting to listen and is acting less crazy.
My view on US Stocks is short-term hold and longer-term buy. Do not let fear in the media, remember that fear sells, get you down.
ARE YOU AS SMART AS A 4 YEAR OLD
Are you smarter than a four year old?
1)How do you put a giraffe in a refrigerator? The answer is - Open the refrigerator, put the giraffe in and close refrigerator.
2)How do you put an elephant in a refrigerator? Open the refrigerator door - remove the giraffe - insert the elephant - close the door.
3)The Lion King is hosting an Animal Conference. All the animals attend except one. Which animal does not attend? Did you say, “The Elephant?” Good! The elephant is in the refrigerator.
4)You come to a crocodile infested river, which you must cross, and you do not have a boat. How do you get across? You jump into the river and swim across. All the crocodiles are attending the Animal Conference.
Enjoy the Simple Things of Life.
VANGUARD WEEKLY RECAP
As students returned to school, there was at least some encouraging news that prospects for the economy and workers might be brightening. Economic reports during the holiday-shortened week included good news about the improved U.S. trade deficit in July. For the week ended September 10, the S&P 500 Index rose 0.5% to 1,110 (for a year-to-date total return—including price change plus dividends—of about 0.9%). The yield of the 10-year U.S. Treasury note climbed 0.09% to 2.81% (for a year-to-date drop of 1.04%).
ECONOMY GAINING TRACTION
At the end of August, Wall Street Analysts gave their view (buy, hold, or sell) on the value of the US Stock Market and most said hold followed by buy in 2nd place and sell came in 3rd. The percentage who said hold was a record high amount and the percentage who said sell was a record low amount. Normally, a record low percentage for sell would give a record high percentage for buy. Since the economy is in the blahs it means that most of these experts believe that stocks are cheap and are afraid to say buy due to fear of something rising up and hurting the economy.
I believe that economy is gaining traction for the following reasons:
1) Longer term interest rates are rising even though the Federal Reserve are buying long term bonds
2) ^VIX has gone below the 200 day moving average
3) Stimulus money that will give us longer term growth is starting to flow, only 20% had been spent as of the end of August
4) India has recently started allowing imports. Corporations have stated that India shut down imports on January 1, 2010 and now imports are starting to flow
5) A belief by tax payers that government is starting to listen and is acting less crazy.
My view on US Stocks is short-term hold and longer-term buy. Do not let fear in the media, remember that fear sells, get you down.
ARE YOU AS SMART AS A 4 YEAR OLD
Are you smarter than a four year old?
1)How do you put a giraffe in a refrigerator? The answer is - Open the refrigerator, put the giraffe in and close refrigerator.
2)How do you put an elephant in a refrigerator? Open the refrigerator door - remove the giraffe - insert the elephant - close the door.
3)The Lion King is hosting an Animal Conference. All the animals attend except one. Which animal does not attend? Did you say, “The Elephant?” Good! The elephant is in the refrigerator.
4)You come to a crocodile infested river, which you must cross, and you do not have a boat. How do you get across? You jump into the river and swim across. All the crocodiles are attending the Animal Conference.
Enjoy the Simple Things of Life.
Monday, September 6, 2010
Understanding Federal Reserve Actions
This blog will have 3 sections: weekly recap from Vanguard, Understanding the Impact of Federal Reserve Actions, and Labor Day trivia.
Vanguard Weekly Recap
The economic news turned somewhat brighter Friday morning, as the Labor Department's unemployment report was better than economists' gloomy expectations. Among the week's other bright spots were better-than-expected expansion in manufacturing, improved consumer confidence, and modest growth in consumer income and spending. But activity in the service sector, a big component of the economy, declined, along with productivity. For the week ended September 3, the S&P 500 Index rose 3.7% to 1,104 (for a year-to-date total return—including price change plus dividends—of about 0.4%). The yield of the 10-year U.S. Treasury note rose 0.05% to 2.71% (for a year-to-date drop of 1.14%).
Understanding the Impact of Federal Reserve Actions
It is important to keep track of the Treasury Yield Curve and the actions of the Federal Reserve. The Treasury Yield Curve shows the interest rate for debt issued by the Treasury Department for durations from 1 month to 30 years. The debt from all other entities within the US follow this yield curve as the Treasury Department is by far the biggest issuer of debt in our country. The growth rate of the economy is linked to interest rate for longer term bonds so as the rate of economic growth increases the yield on longer term bonds should also increase and vice versa.
Recently, the Federal Reserve met in Jackson Hole, WY to do things like review economic policy and communicate to the media. Jackson Hole, WY is a very nice place which shows us that not all economists are boring. The news from this meeting was that the economy was recovering, more Treasury Bonds would be purchased in the future to stimulate the economy, and additional actions would be taken as needed to spur economic growth. Remember that the Federal Reserve has a policy of achieving an annual economic growth rate of 3%.
Since 2008, the Federal Reserve has purchased about $1.75 Trillion in Treasury and mortgage-related debt. Because of this increased demand for Treasury Bonds, the price of these bonds have gone up, using the law of supply and demand, and long term interest rate have gone down. During this period of economic recovery, the 10 year Treasury Bond yield rose to 4%, declined to 2.5%, and is currently at 2.7%.
Typically, the Federal Reserve will also purchase Treasury Bonds from member banks increasing the amount of cash held in reserve. This gives banks more money to make loans increasing the amount of money in the system. Given that the Federal Reserve has purchased $1.75 Trillion in debt, it most likely means that purchases have also been made from both member banks and in the open market.
So where are 10 year Treasury Bond yields going from here? The answer is probably not much lower. During January 2009, when the economy was having a heart attack, (words from an Economics professor) the 10 year Treasury Bond yield reached a low of 2.42%. Since the economy grew 1.6% during April - June it suggests that interest rates should be going up not down. Additional purchases by the Federal Reserve will keep a lid on interest rates.
Who benefits from this policy? Virtually everyone including people who are buying or re-financing mortgages, corporations who are issuing debt, government issuing debt at all level (local, state, and Federal), banks, and investors who understand what is happening.
We will know that the economy has recovered when the Federal Reserve makes a shift in policy and begins to sell these Treasury Bonds. When this happens, the yield on long term Treasury Bonds is going up and anyone who owns long term bonds of any kind is at risk of losing money. Stock markets around the world should react very positively to this news as this indicates faster growth in revenue and profits.
Labor Day Facts
Labor Day, the first Monday in September, is a creation of the labor movement and is dedicated to the social and economic achievements of American workers. It constitutes a yearly national tribute to the contributions workers have made to the strength, prosperity, and well-being of our country.
The first Labor Day holiday was celebrated on Tuesday, September 5, 1882, in New York City, in accordance with the plans of the Central Labor Union. The Central Labor Union held its second Labor Day holiday just a year later, on September 5, 1883.
In 1884 the first Monday in September was selected as the holiday, as originally proposed, and the Central Labor Union urged similar organizations in other cities to follow the example of New York and celebrate a "workingmen's holiday" on that date. The idea spread with the growth of labor organizations, and in 1885 Labor Day was celebrated in many industrial centers of the country.
Vanguard Weekly Recap
The economic news turned somewhat brighter Friday morning, as the Labor Department's unemployment report was better than economists' gloomy expectations. Among the week's other bright spots were better-than-expected expansion in manufacturing, improved consumer confidence, and modest growth in consumer income and spending. But activity in the service sector, a big component of the economy, declined, along with productivity. For the week ended September 3, the S&P 500 Index rose 3.7% to 1,104 (for a year-to-date total return—including price change plus dividends—of about 0.4%). The yield of the 10-year U.S. Treasury note rose 0.05% to 2.71% (for a year-to-date drop of 1.14%).
Understanding the Impact of Federal Reserve Actions
It is important to keep track of the Treasury Yield Curve and the actions of the Federal Reserve. The Treasury Yield Curve shows the interest rate for debt issued by the Treasury Department for durations from 1 month to 30 years. The debt from all other entities within the US follow this yield curve as the Treasury Department is by far the biggest issuer of debt in our country. The growth rate of the economy is linked to interest rate for longer term bonds so as the rate of economic growth increases the yield on longer term bonds should also increase and vice versa.
Recently, the Federal Reserve met in Jackson Hole, WY to do things like review economic policy and communicate to the media. Jackson Hole, WY is a very nice place which shows us that not all economists are boring. The news from this meeting was that the economy was recovering, more Treasury Bonds would be purchased in the future to stimulate the economy, and additional actions would be taken as needed to spur economic growth. Remember that the Federal Reserve has a policy of achieving an annual economic growth rate of 3%.
Since 2008, the Federal Reserve has purchased about $1.75 Trillion in Treasury and mortgage-related debt. Because of this increased demand for Treasury Bonds, the price of these bonds have gone up, using the law of supply and demand, and long term interest rate have gone down. During this period of economic recovery, the 10 year Treasury Bond yield rose to 4%, declined to 2.5%, and is currently at 2.7%.
Typically, the Federal Reserve will also purchase Treasury Bonds from member banks increasing the amount of cash held in reserve. This gives banks more money to make loans increasing the amount of money in the system. Given that the Federal Reserve has purchased $1.75 Trillion in debt, it most likely means that purchases have also been made from both member banks and in the open market.
So where are 10 year Treasury Bond yields going from here? The answer is probably not much lower. During January 2009, when the economy was having a heart attack, (words from an Economics professor) the 10 year Treasury Bond yield reached a low of 2.42%. Since the economy grew 1.6% during April - June it suggests that interest rates should be going up not down. Additional purchases by the Federal Reserve will keep a lid on interest rates.
Who benefits from this policy? Virtually everyone including people who are buying or re-financing mortgages, corporations who are issuing debt, government issuing debt at all level (local, state, and Federal), banks, and investors who understand what is happening.
We will know that the economy has recovered when the Federal Reserve makes a shift in policy and begins to sell these Treasury Bonds. When this happens, the yield on long term Treasury Bonds is going up and anyone who owns long term bonds of any kind is at risk of losing money. Stock markets around the world should react very positively to this news as this indicates faster growth in revenue and profits.
Labor Day Facts
Labor Day, the first Monday in September, is a creation of the labor movement and is dedicated to the social and economic achievements of American workers. It constitutes a yearly national tribute to the contributions workers have made to the strength, prosperity, and well-being of our country.
The first Labor Day holiday was celebrated on Tuesday, September 5, 1882, in New York City, in accordance with the plans of the Central Labor Union. The Central Labor Union held its second Labor Day holiday just a year later, on September 5, 1883.
In 1884 the first Monday in September was selected as the holiday, as originally proposed, and the Central Labor Union urged similar organizations in other cities to follow the example of New York and celebrate a "workingmen's holiday" on that date. The idea spread with the growth of labor organizations, and in 1885 Labor Day was celebrated in many industrial centers of the country.
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