This week the Federal Reserve issued a policy of maintaining low interest rates for another 3 years, until 2015. It is very important to undertand the implications of this policy. The first section is from Vanguard. The last section is titled One of 7 Billion which should get us thinking about the future.
Vanguard
Amid some encouraging signs that the economy continues to grow modestly, Federal Reserve officials gave an unprecedented look at the details of their economic expectations. In a report issued Wednesday, the Fed signaled that it expects growth to remain modest enough to allow short-term interest rates to remain near rock bottom for even longer than it had projected in recent months. For the week ended January 27, the S&P 500 Index rose 0.1% to 1,316 (for a year-to-date total return—including price change plus dividends—of about +4.8%). The yield on the 10-year U.S. Treasury note fell 12 basis points to 1.93% (for a year-to-date increase of 4 basis points).
Implications of the Federal Reserve Actions
The Federal Reserve sets monetary policy for the US so when a policy statement is given it is a very important event. This week the Federal Reserve stated that interest rates would be maintained at this current low level for 3 more years, until 2015. So what are the implications of this policy?
First, this means that interest rates will be less than the rate of inflation. This means that a Certificate of Deposit will not keep up the inflation and relatively it will lose spending power. The better solution is to invest in a high quality mutual fund that invests in corporate bonds.
Second, it means that this is being done to help the housing market and capital equipment that involves a long term loan. The interest rate for mortgage will continue to stay low. The philosophy is that we will only have an economic recovery when the housing market recovers. It also means that now is a good time to purchase a new automobile if you are secure in your job.
Third, this is good for the stock market as stock valuations tend to rise with low interest rates. The reasons are stock buyers like a stable environment and stocks can be bought that yields a higher dividend than bonds. A stock valuation equation is the annual dividend rate divided by the difference between the growth rate and interest rate. An improving economy gives a higher growth rate and with low interest rates this gives higher stock values.
Lastly, it means that the Federal Reserve is projecting that it will take 3 years to fully recover. For an investor with a time horizon of at least 3 years, owning stocks makes good sense. It also suggests that owning stocks could be somewhat choppy for the next 3 years.
ONE OF 7 BILLION
Today, you are one of 7 billion people on Earth. Global population is expected to reach 8 billion by 2025, according to the United Nations. It also has many wondering whether the Earth can support so many people. About half were added just in the past 40 years, and 3 billion more are expected by 2100.
Where Western powers ruled the world in 1920, today the West is aging and dying, and much of the world is on fire with anti-white and anti-Western resentment after 500 years of European domination. In 1920, Western people were nearly one-third of mankind. Today, Western man is down to one-sixth of the world's population, shrinking to one-eighth by 2050, and not even one tenth by century's end.
Global population has swelled in record time since 1987, when it hit 5 billion. At this time, world population is growing at the most rapid pace in history. In 1900, we were at 1.6 billion. In 99 years, we flipped the numbers to 6.1 billion. The world is adding more people in less time but the annual population growth rate is slowing down — from 2.1% in the late 1960s to 1.2% today — reflecting lower birth rates.
In 1999, when we passed the 6 billion mark, the world economy was in overdrive, In October 2011, we grew to 7 billion, in a recession and an economic atmosphere of pessimism. Recessions and depressions slow population growth, especially in developed nations. Currently, growth is highest in poorest countries where health care advances are keeping people alive longer while birth rates are still relatively high. The result is a yawning age gap. The share of the population 65 and older is at 21% in Germany and 23% in Japan. In countries such as Gambia and Senegal, only 2% are in that age group.
As many more people are added in the next century, more will live in cities. Even in developing nations, a growing share of the population lives in urbanized areas, a shift that is leading to denser living conditions and creating more pressure to reduce energy use and build new infrastructure.
Saturday, January 28, 2012
Sunday, January 22, 2012
Decision Time
2012 is starting off very well for investors and accounts are starting to grow. It was about 6 months ago when we last saw the Dow Jones Industrial Average at this level. This means that it is decision time for investors, more on this later. First is the weekly recap from Vanguard. At the end is something that I found on preparing for retirement.
Vanguard
The economy continues its modest forward pace, without stoking higher inflation. In fact, this week's data show price increases decelerating, easing fears for the moment that the Fed's accommodative monetary policies are sowing the seeds of high inflation down the road. For the week ended January 20, the S&P 500 Index rose 2.0% to 1,315.38 (for a year-to-date total return—including price change plus dividends—of about +4.7%). The yield on the 10-year U.S. Treasury note rose 16 basis points to 2.05% (for a year-to-date increase of 16 basis points).
Decision Time
Since the Dow Jones Industrial Average has approached the previous high from July 2011, this suggests that investors have a decision to make. The decision is to either take some profits at this time or to let it ride. An investor probably has about 1-2 weeks to make this decision as the news of positive earnings report tends to move stocks for about a month.
To make this decision an investor has to answer 1 question. Is the stock market in a trading range or a new leg up? This is a relatively simple question to ask but perhaps difficult to answer as it depends on risk level, time horizon, and perception of the future. If you believe that it is a trading range then you want to take some profits and smile. If an investor believes that it is a new let up then it is time to stay put.
I will be asking some clients this question this week.
Five Things Before You Retire (Tom Lauricella | The Wall Street Journal EG)
1. Start keeping close track of your spending.
During the planning phase for retirement finances, much of the math was based on guesswork. Now is the time to get real.
Start by going back over the past few months of bills and expenses to get a detailed picture of your spending and expenses. Plan on keeping close tabs on a continuing basis, remembering that some spending may be seasonal — such as holiday presents or greens fees for golf.
Budgeting tools, such as Mint.com, will enable you to highlight certain spending that won't continue after retirement, such as commuting costs.
Keep in mind this will be a work in progress even once you stop working. For many people "it's going to take a year or so before you really get the hang of it, knowing what you are spending your time doing, how you are spending your money," says Jonathan Guyton of Cornerstone Wealth Advisors in Minneapolis.
2. Fine-tune your income expectations.
Recent years haven't been kind to savers. A lousy decade for stocks has been compounded by interest rates that are at historically low levels and seem likely to remain low for years.
Unfortunately, 401(k) calculators typically don't rely on current yields when projecting your income during retirement. Instead, they usually rely on historical patterns.
That means some people nearing retirement may be in denial about how much money they can earn from safe investments such as bonds or certificates of deposit, says Lawrence Glazer, a managing partner at Mayflower Advisors in Boston. "You have to be realistic about today's income environment," he says.
3. Start thinking about Social Security.
Central to your income planning will be Social Security benefits. You won't know the exact size of the check until the first one arrives, but the Social Security Administration can provide an estimate that should be relatively close. You can get an estimate at SocialSecurity.gov, on the phone or in person at your local office. Be sure to check if you're due additional benefits if you are widowed or divorced.
All this leads to one of the most important decisions regarding retirement planning: when to start taking Social Security benefits. Delaying benefits means larger checks in the future, but it may require eating into your savings upfront. Sit down with an adviser to do the math.
4. Build a cash reserve.
One thing you want to avoid in retirement: being forced to sell during a steep selloff in the stock or bond markets in order to raise cash to pay bills.
The solution is to keep enough cash on hand that you can sell investments when you are comfortable. Many advisers recommend at least a year's worth of money.
At Evensky & Katz in Coral Gables, Fla., advisers have long recommended that retirees hold two years of money in a separate account. A retiree then cuts himself a "paycheck" once a month which goes into a checking account for day-to-day living.
"In a perfect world, an investor would begin developing the reserve prior to retirement," says Harold Evensky, president of Evensky & Katz.
A dedicated cash reserve is especially important if you are delaying taking Social Security. "The idea is that this is a bridge account that will deplete itself by the time Social Security kicks in," says Mr. Guyton.
5. Get emotionally ready.
Amid the focus on financial planning, don't lose sight of the fact that for most people, retirement is a completely new and different experience that can be challenging on an emotional level.
While many people can't wait to get out of the 9-to-5 grind, there are those for whom a career was more than a job. It was an identity.
"You've got the executive who has worked 24-7... and has always identified his self worth with that paycheck," says Mayflower's Mr. Glazer. "Without that paycheck, he feels a little empty."
Cornerstone's Mr. Guyton urges those approaching retirement to think in terms of "retiring to something" and not "retiring from something."
"If your definition of retirement is framed in terms of what you are leaving, you are setting yourself up for a much more difficult transition emotionally," he says. "Even if it's just some relatively small thing that you are energized about and this is something you get to do right now…you generally do much better."
Vanguard
The economy continues its modest forward pace, without stoking higher inflation. In fact, this week's data show price increases decelerating, easing fears for the moment that the Fed's accommodative monetary policies are sowing the seeds of high inflation down the road. For the week ended January 20, the S&P 500 Index rose 2.0% to 1,315.38 (for a year-to-date total return—including price change plus dividends—of about +4.7%). The yield on the 10-year U.S. Treasury note rose 16 basis points to 2.05% (for a year-to-date increase of 16 basis points).
Decision Time
Since the Dow Jones Industrial Average has approached the previous high from July 2011, this suggests that investors have a decision to make. The decision is to either take some profits at this time or to let it ride. An investor probably has about 1-2 weeks to make this decision as the news of positive earnings report tends to move stocks for about a month.
To make this decision an investor has to answer 1 question. Is the stock market in a trading range or a new leg up? This is a relatively simple question to ask but perhaps difficult to answer as it depends on risk level, time horizon, and perception of the future. If you believe that it is a trading range then you want to take some profits and smile. If an investor believes that it is a new let up then it is time to stay put.
I will be asking some clients this question this week.
Five Things Before You Retire (Tom Lauricella | The Wall Street Journal EG)
1. Start keeping close track of your spending.
During the planning phase for retirement finances, much of the math was based on guesswork. Now is the time to get real.
Start by going back over the past few months of bills and expenses to get a detailed picture of your spending and expenses. Plan on keeping close tabs on a continuing basis, remembering that some spending may be seasonal — such as holiday presents or greens fees for golf.
Budgeting tools, such as Mint.com, will enable you to highlight certain spending that won't continue after retirement, such as commuting costs.
Keep in mind this will be a work in progress even once you stop working. For many people "it's going to take a year or so before you really get the hang of it, knowing what you are spending your time doing, how you are spending your money," says Jonathan Guyton of Cornerstone Wealth Advisors in Minneapolis.
2. Fine-tune your income expectations.
Recent years haven't been kind to savers. A lousy decade for stocks has been compounded by interest rates that are at historically low levels and seem likely to remain low for years.
Unfortunately, 401(k) calculators typically don't rely on current yields when projecting your income during retirement. Instead, they usually rely on historical patterns.
That means some people nearing retirement may be in denial about how much money they can earn from safe investments such as bonds or certificates of deposit, says Lawrence Glazer, a managing partner at Mayflower Advisors in Boston. "You have to be realistic about today's income environment," he says.
3. Start thinking about Social Security.
Central to your income planning will be Social Security benefits. You won't know the exact size of the check until the first one arrives, but the Social Security Administration can provide an estimate that should be relatively close. You can get an estimate at SocialSecurity.gov, on the phone or in person at your local office. Be sure to check if you're due additional benefits if you are widowed or divorced.
All this leads to one of the most important decisions regarding retirement planning: when to start taking Social Security benefits. Delaying benefits means larger checks in the future, but it may require eating into your savings upfront. Sit down with an adviser to do the math.
4. Build a cash reserve.
One thing you want to avoid in retirement: being forced to sell during a steep selloff in the stock or bond markets in order to raise cash to pay bills.
The solution is to keep enough cash on hand that you can sell investments when you are comfortable. Many advisers recommend at least a year's worth of money.
At Evensky & Katz in Coral Gables, Fla., advisers have long recommended that retirees hold two years of money in a separate account. A retiree then cuts himself a "paycheck" once a month which goes into a checking account for day-to-day living.
"In a perfect world, an investor would begin developing the reserve prior to retirement," says Harold Evensky, president of Evensky & Katz.
A dedicated cash reserve is especially important if you are delaying taking Social Security. "The idea is that this is a bridge account that will deplete itself by the time Social Security kicks in," says Mr. Guyton.
5. Get emotionally ready.
Amid the focus on financial planning, don't lose sight of the fact that for most people, retirement is a completely new and different experience that can be challenging on an emotional level.
While many people can't wait to get out of the 9-to-5 grind, there are those for whom a career was more than a job. It was an identity.
"You've got the executive who has worked 24-7... and has always identified his self worth with that paycheck," says Mayflower's Mr. Glazer. "Without that paycheck, he feels a little empty."
Cornerstone's Mr. Guyton urges those approaching retirement to think in terms of "retiring to something" and not "retiring from something."
"If your definition of retirement is framed in terms of what you are leaving, you are setting yourself up for a much more difficult transition emotionally," he says. "Even if it's just some relatively small thing that you are energized about and this is something you get to do right now…you generally do much better."
Sunday, January 15, 2012
Stocks and Bonds
The Monday January 9, 2012 Wall Street Journal had a article titled "Stocks or Bonds? The Pros Say..." This article gives great info on the historical performance and future of the S&P 500 Stock Index and Long Term US Treasury Bonds. I will add my comments on why an investor would own US Stocks or long term US Treasury Bonds. At the end is a short story titled The Tennessee Preacher that seems appropriate for this year.
Vanguard
Sluggish retail sales data were announced this week following a report that consumer borrowing increased in November by the highest amount in a decade. This suggests that while spending isn't particularly strong, consumers are nonetheless continuing to spend and provide moderate support for the overall economy. For the week ended January 13, the S&P 500 Index rose 0.9% to 1,289.09 (for a year-to-date total return—including price change plus dividends—of about 2.6%). The yield on the 10-year U.S. Treasury note fell 9 basis points to 1.89% (for no change year to date).
Future of US Stocks versus US Treasury Bonds
Here is the information from the WSJ article:
1) Over the past 30 years the S&P 500 index had an average annual return of 11.03% and long term Treasuries had an average annual return of 10.98%.
2) From 1926 through 2011 the S&P 500 index had an average annual return of 9.8% and long term Treasuries had an average annual return of 5.7%.
3) From 1926 through 2011 the S&P 500 index was 6-7% higher than the inflation rate and long term Treasuries was 2-3% higher than the inflation rate.
4) From 1956 through 1981 the S&P 500 index had an average annual return of about 10% and long term Treasuries had an average annual return of about 2.5%.
If we compare these time periods we see that the S&P 500 index was more consistent than long term Treasury Bonds. During the last 30 years, long term Treasury Bonds returned about twice the return since 1926 and about 4 times the return during 1956 to 1981.
So why did this happen? About 30 years ago, during a period of stagflation, the long term Treasury interest rate was about 18%. Leading up to 30 years ago, long term Treasury rates rose significantly which hurt performance. During the last 30 year period was an unprecedented drop in interest rates. It is interesting that the last time long term Treasury Bond rates were this low was about 60 years ago.
So what does this mean for the future of the S&P 500 index and long term US Treasury Bond rates? The data suggests that the S&P 500 index will continue to increase. Since long term US Treasury Bond rates are at a 60 year low it means that these rates will go up which will hurt performance.
So why would an investor own a mutual fund of US Stocks? The answer is higher growth with some volatility. So why own a mutual fund that invests in long term US Treasury bonds. The answer is that I would not instead I would ownn other types of bonds. A blend of US Stocks and bonds does give a blend of growth and more consistency.
The Tennessee Preacher
An old Tennessee country preacher had a teenage son, and it was time the boy should give some thought to choosing a profession. Like many young men his age, the boy didn't really know what he wanted to do, and he didn't seem too concerned about it. One day, while the boy was at school, his father tried an experiment. He went into the boy's room and placed four objects on his son’s desk.
1. A Bible.
2. A silver dollar.
3. A bottle of Jack Daniels whisky.
4. A Playboy magazine.
“I'll hide behind the door,” the old preacher said to him-self. “When he comes home from school, I'll see which object he picks up. If it's the Bible, he's going to be a preacher like me, and what a blessing that would be! If he picks up the silver dollar, he's going to be a businessman, and that would be okay, too. However, if he picks up the bottle, he's going to be a no-good drunken bum, and Lord, what a shame that would be. And worst of all if he picks up that magazine he's going to be a skirt-chasing womanizer.”
The old preacher waited anxiously, and soon heard his son's footsteps as he entered the house and headed for his room. The boy tossed his books on the bed, and as he turned to leave the room, he spotted the objects on his desk. With curiosity in his eyes, he walked over to inspect them. Finally, he picked up the Bible and placed it under his arm. He picked up the silver dollar and dropped it into his pocket. He uncorked the whiskey bottle and took a drink, while he admired the centerfold in Playboy.
“Lord have mercy,” the old preacher whispered disgusted-ly. “He's gonna run for Congress.”
Vanguard
Sluggish retail sales data were announced this week following a report that consumer borrowing increased in November by the highest amount in a decade. This suggests that while spending isn't particularly strong, consumers are nonetheless continuing to spend and provide moderate support for the overall economy. For the week ended January 13, the S&P 500 Index rose 0.9% to 1,289.09 (for a year-to-date total return—including price change plus dividends—of about 2.6%). The yield on the 10-year U.S. Treasury note fell 9 basis points to 1.89% (for no change year to date).
Future of US Stocks versus US Treasury Bonds
Here is the information from the WSJ article:
1) Over the past 30 years the S&P 500 index had an average annual return of 11.03% and long term Treasuries had an average annual return of 10.98%.
2) From 1926 through 2011 the S&P 500 index had an average annual return of 9.8% and long term Treasuries had an average annual return of 5.7%.
3) From 1926 through 2011 the S&P 500 index was 6-7% higher than the inflation rate and long term Treasuries was 2-3% higher than the inflation rate.
4) From 1956 through 1981 the S&P 500 index had an average annual return of about 10% and long term Treasuries had an average annual return of about 2.5%.
If we compare these time periods we see that the S&P 500 index was more consistent than long term Treasury Bonds. During the last 30 years, long term Treasury Bonds returned about twice the return since 1926 and about 4 times the return during 1956 to 1981.
So why did this happen? About 30 years ago, during a period of stagflation, the long term Treasury interest rate was about 18%. Leading up to 30 years ago, long term Treasury rates rose significantly which hurt performance. During the last 30 year period was an unprecedented drop in interest rates. It is interesting that the last time long term Treasury Bond rates were this low was about 60 years ago.
So what does this mean for the future of the S&P 500 index and long term US Treasury Bond rates? The data suggests that the S&P 500 index will continue to increase. Since long term US Treasury Bond rates are at a 60 year low it means that these rates will go up which will hurt performance.
So why would an investor own a mutual fund of US Stocks? The answer is higher growth with some volatility. So why own a mutual fund that invests in long term US Treasury bonds. The answer is that I would not instead I would ownn other types of bonds. A blend of US Stocks and bonds does give a blend of growth and more consistency.
The Tennessee Preacher
An old Tennessee country preacher had a teenage son, and it was time the boy should give some thought to choosing a profession. Like many young men his age, the boy didn't really know what he wanted to do, and he didn't seem too concerned about it. One day, while the boy was at school, his father tried an experiment. He went into the boy's room and placed four objects on his son’s desk.
1. A Bible.
2. A silver dollar.
3. A bottle of Jack Daniels whisky.
4. A Playboy magazine.
“I'll hide behind the door,” the old preacher said to him-self. “When he comes home from school, I'll see which object he picks up. If it's the Bible, he's going to be a preacher like me, and what a blessing that would be! If he picks up the silver dollar, he's going to be a businessman, and that would be okay, too. However, if he picks up the bottle, he's going to be a no-good drunken bum, and Lord, what a shame that would be. And worst of all if he picks up that magazine he's going to be a skirt-chasing womanizer.”
The old preacher waited anxiously, and soon heard his son's footsteps as he entered the house and headed for his room. The boy tossed his books on the bed, and as he turned to leave the room, he spotted the objects on his desk. With curiosity in his eyes, he walked over to inspect them. Finally, he picked up the Bible and placed it under his arm. He picked up the silver dollar and dropped it into his pocket. He uncorked the whiskey bottle and took a drink, while he admired the centerfold in Playboy.
“Lord have mercy,” the old preacher whispered disgusted-ly. “He's gonna run for Congress.”
Sunday, January 8, 2012
2012
The first week of the year is behind us and the initial economic indications look pretty good. The topic is the investing game plan for 2012 and the reasoning behind the decision. The first section is the weekly recap from Vanguard. The last section is titled Watches which is an interesting story about an entrepreneur.
Vanguard
The U.S. economy kicked off 2012 with encouraging employment numbers resulting in the lowest unemployment rate since February 2009. Combined with economic reports that beat analysts' expectations in the areas of construction spending, manufacturing, and factory orders, the first week of 2012 showed signs of hope for the long-struggling economy. For the week ended January 6, the S&P 500 Index rose 1.6% to 1,278 while the yield on the 10-year U.S. Treasury note rose 9 basis points to 1.98%.
2012 Investing Game Plan
We know that the US deficit will continue to grow which means that spending on entitlements has to go down in the future. This means that Social Security and Medicare benefits are going to come under pressure in the future. It is prudent for everyone who has the ability to continue to prepare for the future and contribute to a retirement plan.
The growth rate of the US Economy has returned back to the level of April 2011 before the earthquake and tsunami that hit Japan and tornadoes that hit Alabama, Missouri, and other parts of the country. Because of this, I am looking to adjust accounts back to normal when US Stock indexes reach this April 2011 level.
Many smart people have given their 2012 forecast with a diversity in predictions. I am not smart enough to make an accurate prediction. The only thing that I am sure of is that each forecast is wrong the question is how far wrong? What we know is the US government will continue with a fiscal policy that is pro-growth and will continue to have an annual deficit of about $1 Trillion. The Federal Reserve will do everything they can to get the economy growing and interest rates will stay low. The Chinese government has agreed to allow their currency, Yuan RMB, to appreciate by 4% during the year which will help US manufacturing and increases inflation. All of this means that we have a presidential election year and the Obama administration is doing everything to improve the economy and get re-elected.
With an improving economy, low interest rate, improving housing market, pro-growth fiscal policy, pro-growth monetary policy, improving automobile market, improving employment rate, and positive consumer confidence one would think that the US Stock market would be going up, interest rates would be going up, commodity prices would be going up, and the news would be happy. The anvil on this helium filled balloon of good economic news is the European crisis and a concern about slower growth in China. If you can predict when the European crisis will get better then you can predict when the US Stock market goes up, interest rates go up, and commodity prices go up.
For a long term investor, take advantage of the situation and buy at these low US Stock prices and make some larger purchases at these low interest rates. Enjoy the lower cost of natural gas, gas, and oil. For a short term investor, take advantage of higher US Stock prices to take profits. The overall strategy is to use an Investment Cycle strategy to determine when to make investment changes.
Watches
If you were in the market for a watch in 1880, would you know where to get one? You would probably go to a store, right? Well, of course, you could do that, but if you wanted one that was cheaper and better than most of the store watches, you went to the local train station! Sound a bit funny? For about 500 towns across the northern United States, that's where the best watches were found.
Why were the best watches found at the train station? The railroad company wasn't selling the watches. The telegraph operators sold them. Usually the telegraph op-erator was located in the railroad station because the tele-graph lines followed the railroad tracks from town to town. The rail line had already secured the shortest dis-tance between towns and the right-of-ways.
Most of the station agents were also skilled telegraph op-erators as that was the primary way they communicated with the railroad. They would know when trains left the previous station and when they were due at their next station. In fact, for a period of nine years the telegraph operators sold more watches than all of the retail stores combined.
A telegraph operator named Richard arranged all this. He was on duty in the North Redwood, Minnesota train station when a load of watches arrived from the East. It was a huge crate of pocket watches. No one came to claim them.
Richard sent a telegram to the manufacturer and asked them what they wanted to do with the watches. The manufacturer didn't want to pay for the return freight, so they wired Richard to see if he could sell them. Richard sent a wire to every agent in the system asking them if they wanted a cheap, but good, pocket watch. He sold the entire case in less than two days and at a handsome profit.
That started it all. Richard ordered more watches from the watch company and encouraged the telegraph opera-tors to set up a display case in the station offering high quality watches for a low price to all the railroad passen-gers. It worked! It didn't take long for the word to spread and, before long, people, other than travelers, came to the train station to buy their watches.
Richard became so busy that he had to hire a professional watchmaker to help him with the orders. That person was Alvah. And the rest, as they say, is history.
Their business took off and they expanded into many other lines of merchandise. Richard and Alvah left the train station and moved their company to Chicago -- and it's still there. It’s a little known fact that for a while in the 1880's, the biggest watch retailers in the country were train stations.
It all started with a telegraph operator - Richard Sears and his partner - Alvah Roebuck! Sears & Roebuck Co.
Vanguard
The U.S. economy kicked off 2012 with encouraging employment numbers resulting in the lowest unemployment rate since February 2009. Combined with economic reports that beat analysts' expectations in the areas of construction spending, manufacturing, and factory orders, the first week of 2012 showed signs of hope for the long-struggling economy. For the week ended January 6, the S&P 500 Index rose 1.6% to 1,278 while the yield on the 10-year U.S. Treasury note rose 9 basis points to 1.98%.
2012 Investing Game Plan
We know that the US deficit will continue to grow which means that spending on entitlements has to go down in the future. This means that Social Security and Medicare benefits are going to come under pressure in the future. It is prudent for everyone who has the ability to continue to prepare for the future and contribute to a retirement plan.
The growth rate of the US Economy has returned back to the level of April 2011 before the earthquake and tsunami that hit Japan and tornadoes that hit Alabama, Missouri, and other parts of the country. Because of this, I am looking to adjust accounts back to normal when US Stock indexes reach this April 2011 level.
Many smart people have given their 2012 forecast with a diversity in predictions. I am not smart enough to make an accurate prediction. The only thing that I am sure of is that each forecast is wrong the question is how far wrong? What we know is the US government will continue with a fiscal policy that is pro-growth and will continue to have an annual deficit of about $1 Trillion. The Federal Reserve will do everything they can to get the economy growing and interest rates will stay low. The Chinese government has agreed to allow their currency, Yuan RMB, to appreciate by 4% during the year which will help US manufacturing and increases inflation. All of this means that we have a presidential election year and the Obama administration is doing everything to improve the economy and get re-elected.
With an improving economy, low interest rate, improving housing market, pro-growth fiscal policy, pro-growth monetary policy, improving automobile market, improving employment rate, and positive consumer confidence one would think that the US Stock market would be going up, interest rates would be going up, commodity prices would be going up, and the news would be happy. The anvil on this helium filled balloon of good economic news is the European crisis and a concern about slower growth in China. If you can predict when the European crisis will get better then you can predict when the US Stock market goes up, interest rates go up, and commodity prices go up.
For a long term investor, take advantage of the situation and buy at these low US Stock prices and make some larger purchases at these low interest rates. Enjoy the lower cost of natural gas, gas, and oil. For a short term investor, take advantage of higher US Stock prices to take profits. The overall strategy is to use an Investment Cycle strategy to determine when to make investment changes.
Watches
If you were in the market for a watch in 1880, would you know where to get one? You would probably go to a store, right? Well, of course, you could do that, but if you wanted one that was cheaper and better than most of the store watches, you went to the local train station! Sound a bit funny? For about 500 towns across the northern United States, that's where the best watches were found.
Why were the best watches found at the train station? The railroad company wasn't selling the watches. The telegraph operators sold them. Usually the telegraph op-erator was located in the railroad station because the tele-graph lines followed the railroad tracks from town to town. The rail line had already secured the shortest dis-tance between towns and the right-of-ways.
Most of the station agents were also skilled telegraph op-erators as that was the primary way they communicated with the railroad. They would know when trains left the previous station and when they were due at their next station. In fact, for a period of nine years the telegraph operators sold more watches than all of the retail stores combined.
A telegraph operator named Richard arranged all this. He was on duty in the North Redwood, Minnesota train station when a load of watches arrived from the East. It was a huge crate of pocket watches. No one came to claim them.
Richard sent a telegram to the manufacturer and asked them what they wanted to do with the watches. The manufacturer didn't want to pay for the return freight, so they wired Richard to see if he could sell them. Richard sent a wire to every agent in the system asking them if they wanted a cheap, but good, pocket watch. He sold the entire case in less than two days and at a handsome profit.
That started it all. Richard ordered more watches from the watch company and encouraged the telegraph opera-tors to set up a display case in the station offering high quality watches for a low price to all the railroad passen-gers. It worked! It didn't take long for the word to spread and, before long, people, other than travelers, came to the train station to buy their watches.
Richard became so busy that he had to hire a professional watchmaker to help him with the orders. That person was Alvah. And the rest, as they say, is history.
Their business took off and they expanded into many other lines of merchandise. Richard and Alvah left the train station and moved their company to Chicago -- and it's still there. It’s a little known fact that for a while in the 1880's, the biggest watch retailers in the country were train stations.
It all started with a telegraph operator - Richard Sears and his partner - Alvah Roebuck! Sears & Roebuck Co.
Monday, January 2, 2012
2011
Happy New Year!!! We have returned from a very enjoyable trip to Nebraska. I hope you also had an enjoyable holiday.
The topic for this week is a review of investing during 2011. The first paragraph is from Vanguard. In the middle is a 2011 review. At the end are some quotes for December for your enjoyment.
Vanguard
The slim gain of about 2% posted by the S&P 500 Index for 2011 (including price changes plus dividends) belied the stock market's extreme gyrations during the year. The index was up by about 9% in April on hopes that the U.S. economic expansion was starting to gain traction. By early October the index had tumbled by about 20% from its peak for the year on news about the U.S. debt ceiling and a widening of the sovereign debt crisis in Europe. In the year's final months, the stock market regained ground on brighter macroeconomic data. Despite Standard & Poor's downgrade of U.S. long-term debt, U.S. Treasuries rallied as anxious investors sought shelter from turbulent stock markets. Over the year, the yield of the 10-year U.S. Treasury note fell 141 basis points to 1.89%. For the week ended December 30, the S&P 500 Index fell 0.6% to 1,258 while the yield on the 10-year U.S. Treasury note fell 14 basis points to 1.89%.
2011 Year in Review - Investing Upside Down
Wow, what a year full of events: Congressional stalemate, European crisis, Egypt, Libya, Syria, end of Iraq War, Federal Reserve QE3, etc. We had periods of joy and fear, that created lots of volatility that created a feeling of a whiplash. Overall, we have a recovering global economy with an exception in Eurpoe and an improving US economy.
Stocks: An improving economy should be positive for stocks. When a period of fear would arise the stock market would drop. Once the fear wave passed stocks would recover. In general, the stocks of large companies outperformed the stocks of small companies. This is upside down as stocks should have done better and small companies typically grow faster than large companies. Stocks are currently under-valued.
Interest Rates: The 10 year US Treasury bond rate of 1.89% makes no sense as it is below the current inflation rate and the expected inflation rate for 2012. This rate should be much higher from an improving economy perspective. This rate is being influenced by the Federal Reserve and European Central Banks. It is very difficult to envisioin this rate staying at this level for the long term. Make sure you have taken advantage of this and re-financed your mortgage.
Hedge Funds & Risk: This is the year where investors in hedge funds that took risk and guessed wrong got punished. The best example is MF Global and the missing $1.2 Billion. The average hedge fund went down during the year. Also, if you owned individual stocks you probably lost money as the ratio of advance to decline favored declining stocks.
Gold: This rose to above $1900 per ounce and then dropped to below $1600. The driver is the purchase and sale by European Central Banks. The price rose as fear rose and dropped as the level of fear declined. The price of gold still looks high.
Some Quotes About December
“How did it get so late so soon? Its night before its afternoon. December is here before its June. My goodness how the time has flewn. How did it get so late so soon?” – Dr. Seuss
“God gave us memory so that we might have roses in December.” – James Matthew Barrie
“How like a winter hath my absence been. From thee, the pleasure of the fleeting year! What freezings have I felt, what dark days seen, What old December’s bareness everywhere!” – Shakespeare
The topic for this week is a review of investing during 2011. The first paragraph is from Vanguard. In the middle is a 2011 review. At the end are some quotes for December for your enjoyment.
Vanguard
The slim gain of about 2% posted by the S&P 500 Index for 2011 (including price changes plus dividends) belied the stock market's extreme gyrations during the year. The index was up by about 9% in April on hopes that the U.S. economic expansion was starting to gain traction. By early October the index had tumbled by about 20% from its peak for the year on news about the U.S. debt ceiling and a widening of the sovereign debt crisis in Europe. In the year's final months, the stock market regained ground on brighter macroeconomic data. Despite Standard & Poor's downgrade of U.S. long-term debt, U.S. Treasuries rallied as anxious investors sought shelter from turbulent stock markets. Over the year, the yield of the 10-year U.S. Treasury note fell 141 basis points to 1.89%. For the week ended December 30, the S&P 500 Index fell 0.6% to 1,258 while the yield on the 10-year U.S. Treasury note fell 14 basis points to 1.89%.
2011 Year in Review - Investing Upside Down
Wow, what a year full of events: Congressional stalemate, European crisis, Egypt, Libya, Syria, end of Iraq War, Federal Reserve QE3, etc. We had periods of joy and fear, that created lots of volatility that created a feeling of a whiplash. Overall, we have a recovering global economy with an exception in Eurpoe and an improving US economy.
Stocks: An improving economy should be positive for stocks. When a period of fear would arise the stock market would drop. Once the fear wave passed stocks would recover. In general, the stocks of large companies outperformed the stocks of small companies. This is upside down as stocks should have done better and small companies typically grow faster than large companies. Stocks are currently under-valued.
Interest Rates: The 10 year US Treasury bond rate of 1.89% makes no sense as it is below the current inflation rate and the expected inflation rate for 2012. This rate should be much higher from an improving economy perspective. This rate is being influenced by the Federal Reserve and European Central Banks. It is very difficult to envisioin this rate staying at this level for the long term. Make sure you have taken advantage of this and re-financed your mortgage.
Hedge Funds & Risk: This is the year where investors in hedge funds that took risk and guessed wrong got punished. The best example is MF Global and the missing $1.2 Billion. The average hedge fund went down during the year. Also, if you owned individual stocks you probably lost money as the ratio of advance to decline favored declining stocks.
Gold: This rose to above $1900 per ounce and then dropped to below $1600. The driver is the purchase and sale by European Central Banks. The price rose as fear rose and dropped as the level of fear declined. The price of gold still looks high.
Some Quotes About December
“How did it get so late so soon? Its night before its afternoon. December is here before its June. My goodness how the time has flewn. How did it get so late so soon?” – Dr. Seuss
“God gave us memory so that we might have roses in December.” – James Matthew Barrie
“How like a winter hath my absence been. From thee, the pleasure of the fleeting year! What freezings have I felt, what dark days seen, What old December’s bareness everywhere!” – Shakespeare
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