Last week, I saw 2 commercial on TV involving gold. The first commercial was to turn in your gold jewelry for cash. The second commercial was to buy gold as you could make lots of money since gold was going to rise to $2,000 per ounce.
Which one is most likely correct? If you have gold jewelry that you no longer need convert it for cash. Little justification exists for having gold at $900 from a supply demand or commodity price perspective. Gold is at this level because investors need a place to invest as investors are currently avoiding the stock market and get no return by investing in short term bonds.
Once the investing environment changes money will flow from gold to other more reasonably priced alternatives.
It makes no sense to believe that all other metals and commodities can drop by at least 50% and think that gold can maintain this elevated price.
Sunday, February 1, 2009
Financial Change is Coming
More changes to Personal Finance rules will occur during the first 100 days of the Obama Administation than any other time in our countries history. The governmental entities that impact personal finance rules: Federal Reserve, Treasury Department, House of Representatives, Senate, and the President.
This week was very busy and events are unfolding that will impact your future. Here are some of the highlights:
1. Federal Reserve: Their big announcement was to buy long term treasury bonds to lower long term interest rates. The intent is to lower mortgage rates with a goal of having a 30 year mortgage rate of 4.0%, a rate not seen since the 1950 - 1960 era. This is done to stimulate the economy by having people refinance their home and have more spending money as well as to encourage people to purchase a new home. What does this mean: Get ready to refinance and use the savings to shorten the length of the loan rather than spend it.
2. Treasury Department: Yes we have a tax challenged Treasury Secretary. It is beyond me how someone this smart can somehow forget to pay taxes and then get special treatment by the government. Treasury has $350 Billion to spend, the other half of TARP. This will be used to help the banks get undesirable assets off of the books in some fashion and this helps the bank loan more money. This also helps to lower mortgage rates as it should reduce the spread between the long term treasury rate and the mortgage rate.
3. House of Representatives: The Democrats literally ignored every Republican request and passed a Democratic only designed $819 Billion Spending bill. For some reason the Republlicans were upset and voted against it. This bill significantly increases government spending and will provide growth to the economy. The auto industry is working to have people buy new cars where people will get a tax deduction for buying a new car. One option is a program called cash for clunkers.
4. Senate: It is their turn on the spending bill. The bill gets modified somewhat because of a higher ratio of Republicans and eventually something will get passed. It will be good to see what happens.
5. President: Is talking bipartisanship and actions say that his agenda is the only game in town. What is not in the news is the health care agenda and other campaign promises. Franklin Roosevelt would certainly be proud.
What does this mean for us? Get ready to refinance your mortgage. Make no major purchases in the near term as the government will be giving incentives on cars and other major purchases. The economy will grow with $1.2 Billion going into the economy with an emphasis on new autos and homes. The stock market will rise as the economy grows.
This week was very busy and events are unfolding that will impact your future. Here are some of the highlights:
1. Federal Reserve: Their big announcement was to buy long term treasury bonds to lower long term interest rates. The intent is to lower mortgage rates with a goal of having a 30 year mortgage rate of 4.0%, a rate not seen since the 1950 - 1960 era. This is done to stimulate the economy by having people refinance their home and have more spending money as well as to encourage people to purchase a new home. What does this mean: Get ready to refinance and use the savings to shorten the length of the loan rather than spend it.
2. Treasury Department: Yes we have a tax challenged Treasury Secretary. It is beyond me how someone this smart can somehow forget to pay taxes and then get special treatment by the government. Treasury has $350 Billion to spend, the other half of TARP. This will be used to help the banks get undesirable assets off of the books in some fashion and this helps the bank loan more money. This also helps to lower mortgage rates as it should reduce the spread between the long term treasury rate and the mortgage rate.
3. House of Representatives: The Democrats literally ignored every Republican request and passed a Democratic only designed $819 Billion Spending bill. For some reason the Republlicans were upset and voted against it. This bill significantly increases government spending and will provide growth to the economy. The auto industry is working to have people buy new cars where people will get a tax deduction for buying a new car. One option is a program called cash for clunkers.
4. Senate: It is their turn on the spending bill. The bill gets modified somewhat because of a higher ratio of Republicans and eventually something will get passed. It will be good to see what happens.
5. President: Is talking bipartisanship and actions say that his agenda is the only game in town. What is not in the news is the health care agenda and other campaign promises. Franklin Roosevelt would certainly be proud.
What does this mean for us? Get ready to refinance your mortgage. Make no major purchases in the near term as the government will be giving incentives on cars and other major purchases. The economy will grow with $1.2 Billion going into the economy with an emphasis on new autos and homes. The stock market will rise as the economy grows.
Investing and the Impact of Obama Stimulus Package
The Obama Administration and the Democractic Senators and Representatives are rolling out a $825 Billion stimulus package. Since investing is about making decisions based upon financial events, what moves if any should be done?
This amount is roughly equal to $3,000 for each citizen. I doubt that my family will see $12,000. Who will get the money? Businesses and banks will be the primary benefactors rather than directly to the citizens.
In order to share in this money you need to buy stock in businesses and banks.The next question is should the stimulus package increase stock price? Stock price is a function of interest rate and growth rate. Stock prices increase as the growth rate is higher than the interest rate. Currently, stock prices are at a negative growth rate indicating a future deep recession. The stimulus package will increase the growth rate of business and banks which means that the long term impact of the stimulus package should raise stock price. Virtually all segments of our economy will get money, kind of like putting butter on toast. Companies that provide infrastructure products will do really really well, such as basic materials, electrical power infrastructure, and wireless communication.
Another result will be higher interest rates. The risk from the stimulus package is to create inflation which would result in an interest rate above the growth rate. Higher interest rates are great for short term bonds such as a money market fund and kills long term bonds. Stocks should be balanced with short term bonds and long term bonds should be avoided.
Stock prices around the world are linked to the US economy as we import more than we export. We are the biggest consumers of any other country in the world. Global stock prices will rise as our stock price rise. This means that a portfolio of US and International stocks should do well in the future.
This amount is roughly equal to $3,000 for each citizen. I doubt that my family will see $12,000. Who will get the money? Businesses and banks will be the primary benefactors rather than directly to the citizens.
In order to share in this money you need to buy stock in businesses and banks.The next question is should the stimulus package increase stock price? Stock price is a function of interest rate and growth rate. Stock prices increase as the growth rate is higher than the interest rate. Currently, stock prices are at a negative growth rate indicating a future deep recession. The stimulus package will increase the growth rate of business and banks which means that the long term impact of the stimulus package should raise stock price. Virtually all segments of our economy will get money, kind of like putting butter on toast. Companies that provide infrastructure products will do really really well, such as basic materials, electrical power infrastructure, and wireless communication.
Another result will be higher interest rates. The risk from the stimulus package is to create inflation which would result in an interest rate above the growth rate. Higher interest rates are great for short term bonds such as a money market fund and kills long term bonds. Stocks should be balanced with short term bonds and long term bonds should be avoided.
Stock prices around the world are linked to the US economy as we import more than we export. We are the biggest consumers of any other country in the world. Global stock prices will rise as our stock price rise. This means that a portfolio of US and International stocks should do well in the future.
Sunday, January 25, 2009
Investing Gameplan
It's possible to strike a balance between checking your investment account every morning (and tempting yourself to make inopportunely timed changes) and complete and utter portfolio neglect. The following steps should get you on your way.
Step 1: Do your own heavy lifting. Whether you're talking about home prices or the stock market, forget the days when rising prices did all the heavy lifting for us. Most people who have amassed real wealth in this world did it the hard way: They deferred spending today in order to save for tomorrow.
Step 2: Get a plan. Investors need a blueprint--an overarching view of how much they should have invested in stocks, bonds, and cash given the age at which they hope to retire, how much they're saving each year, and their risk tolerance. Instead of getting a big-picture view of how they should be investing, many investors proceed straight to picking individual funds, often basing important decisions on the meager information their employer and plan provider have given them.
Not having a target asset-allocation mix can leave you feeling particularly adrift at a time like this, but there are some basic rules of thumb for determining the appropriate stock/bond mix. A common one is to subtract your age from 100% to determine how much you should have invested in stocks and stock funds. That's better than nothing, and holding at least a little in bonds would've helped many portfolios hold up much better than they did in 2008.
Step 3: Make sure you have a rock-solid core. Because many plans offer a long menu of choices, it's tempting to fill up on a little bit of this and a little bit of that. But the biggest favor you can do is to stay away from the niche offerings and instead build out a solid core of rock-solid funds. Such holdings should make up 75% to 80% (or more) of your portfolio.
Step 4: Avoid the big mistakes. Last, but not least, vow that you'll do your part to avoid the big mistakes that can bedevil investors by loading up on company stock. The demise of Lehman Brothers, where many employees had also invested heavily in company stock, provides an updated case study.
Step 1: Do your own heavy lifting. Whether you're talking about home prices or the stock market, forget the days when rising prices did all the heavy lifting for us. Most people who have amassed real wealth in this world did it the hard way: They deferred spending today in order to save for tomorrow.
Step 2: Get a plan. Investors need a blueprint--an overarching view of how much they should have invested in stocks, bonds, and cash given the age at which they hope to retire, how much they're saving each year, and their risk tolerance. Instead of getting a big-picture view of how they should be investing, many investors proceed straight to picking individual funds, often basing important decisions on the meager information their employer and plan provider have given them.
Not having a target asset-allocation mix can leave you feeling particularly adrift at a time like this, but there are some basic rules of thumb for determining the appropriate stock/bond mix. A common one is to subtract your age from 100% to determine how much you should have invested in stocks and stock funds. That's better than nothing, and holding at least a little in bonds would've helped many portfolios hold up much better than they did in 2008.
Step 3: Make sure you have a rock-solid core. Because many plans offer a long menu of choices, it's tempting to fill up on a little bit of this and a little bit of that. But the biggest favor you can do is to stay away from the niche offerings and instead build out a solid core of rock-solid funds. Such holdings should make up 75% to 80% (or more) of your portfolio.
Step 4: Avoid the big mistakes. Last, but not least, vow that you'll do your part to avoid the big mistakes that can bedevil investors by loading up on company stock. The demise of Lehman Brothers, where many employees had also invested heavily in company stock, provides an updated case study.
Investing Rules
Two rules of investing to follow.
Warren Buffett said that the two rules of investing are: #1: Don't lose money, and #2: Don't forget rule number one. He then explained some more basics: When you buy a share do so as though you are becoming a partner in the business; Make sure you use the market to serve you, not to instruct you; And before buying be certain there is a sufficient margin of safety, a cushion of comfort between the price you are paying and the value of the company.
I want to add one more: Make sure the company can stay in business. That's sort of a corollary to part three, about the sufficient margin of safety, but it's more dramatic. And in these times, you need to figure this part out first before you begin working on all other valuation metrics.
For example, value investors look for low P/E (price to earnings) ratios, high cash positions, low debt, low price to book, preferably less than half, etc. They're looking for the margin of safety Buffett recommends.
The second important factor is access to capital. That is, the ability to raise capital when needed. Large companies with strong balance sheets can do this now, especially in the debt markets. Not so much in the equity markets. No matter how large or strong the company is at the moment, it's almost impossible to raise equity unless it's a special arrangement like a private placement or preferred stock. Common equity is not accepted because investors appetite for risk is almost zero now. They don't want just equity. They want some income (hence the preferreds have a better chance). But only companies with strong balance sheets qualify.
When looking for a specific stock the most important to analyze is cash management. A good company that exemplifies this is CommScope.
Warren Buffett said that the two rules of investing are: #1: Don't lose money, and #2: Don't forget rule number one. He then explained some more basics: When you buy a share do so as though you are becoming a partner in the business; Make sure you use the market to serve you, not to instruct you; And before buying be certain there is a sufficient margin of safety, a cushion of comfort between the price you are paying and the value of the company.
I want to add one more: Make sure the company can stay in business. That's sort of a corollary to part three, about the sufficient margin of safety, but it's more dramatic. And in these times, you need to figure this part out first before you begin working on all other valuation metrics.
For example, value investors look for low P/E (price to earnings) ratios, high cash positions, low debt, low price to book, preferably less than half, etc. They're looking for the margin of safety Buffett recommends.
The second important factor is access to capital. That is, the ability to raise capital when needed. Large companies with strong balance sheets can do this now, especially in the debt markets. Not so much in the equity markets. No matter how large or strong the company is at the moment, it's almost impossible to raise equity unless it's a special arrangement like a private placement or preferred stock. Common equity is not accepted because investors appetite for risk is almost zero now. They don't want just equity. They want some income (hence the preferreds have a better chance). But only companies with strong balance sheets qualify.
When looking for a specific stock the most important to analyze is cash management. A good company that exemplifies this is CommScope.
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