Last year I suggested clients talk to their CPAs about the costs of transferring some money from their traditional IRAs into a Roth IRA, because the IRS was going to allow transfers done in 2010 to have the tax on the transfer spread over 2 years.
I see all clients 1 to 4 times a year depending on need and the amount of assets I am managing for them. When I meet with clients along with my normal investment report I have a 2 page sheet showing my concerns and thought about the recent past and coming year. The following is an excerpt from one of today's client meetings.
2. Last year we transferred $12,978 from your IRA Rollover to your Roth IRA. This year your CPA said to move $25,956 from your IRA Rollover to your Roth IRA. We transferred shares (to keep trading costs down) and got a little more than we wanted, $27,883.83. You will be paying taxes on this over a 2 year period of time and this may cause you to pay taxes on and extra $963.92, each year. The extra tax should be approximately $96.39, each year.
3. We transferred this money into your Roth IRA because it will grow tax free, but come out of the Roth IRA tax free; rather than 100% taxable which would be normal when money comes out of an IRA Rollover. The amount to roll over was figures in such a way that you probably will not have to pay any tax on the money transferred. If calculated correctly you transferred money from an account that is 100% taxable when money is removed, into an account that is 100% tax free when money is removed and did not have to pay any tax on the money we transferred. Now that is real MAGIC if it works out correctly.
Pretty cool!
Wednesday, April 21, 2010
Sunday, March 21, 2010
Bonds - Professionals - The Big Short
Compared to stocks, bond investments are pretty simple, right? You lend your money to the U.S. government (Treasuries), or to a state or local government (muni bonds) or a company (corporate bonds) for some period of time (called the "maturity"). In return, they pay you interest and then, at the end of the loan, you get your money back. What could be easier?
It might surprise you to learn that many financial planners think bonds are the most complicated investments they deal in--far more complicated than stocks.
Why? First of all, consider the ratings.
You already know that companies like Moody's Investors Services and Standard & Poors investigate the balance sheets of companies (or municipalities), and assign ratings to their bonds which look a little bit like the grades they give out in high school: AAA, AA, A, BBB, BB, B, CCC and so forth. Shaky companies (or municipalities) get a low rating, which is the rating agency's way of saying the chances of default (tumbling into Chapter 11 and not paying back the bond investors) are higher than for a company (or municipality) that is on sounder financial footing.
Sometimes the bonds issued by shakier companies are affectionately known in the trade as junk bonds, but you don't ever hear the companies issuing them refer to them that way. Who wants to buy junk?
A chart included in a Congressional report on the Municipal Bond Fairness Act of 2008 shows the safety difference between differently-rated bonds about as clearly as anything you'll find. It shows that before 2008, only about half a percent of all corporate bonds rated Aaa (Moody's) or AAA (S&P) have defaulted during their full maturity. But when you get down into the Ba/BB ratings, the default rate jumps to 19.12% (Moody's) or 29.93% (S&P). In other words, at those lower rating levels, one or more percent of your bond holdings might default in an average year. Munis experienced lower default rates, and Treasuries have never defaulted--and are considered by most bond experts to be safe from the danger of default.
The bond agencies don't always get these ratings exactly correct, but in general, the highest-rated bonds are the safest, and therefore pay the lowest interest to borrower/investors. Lower-rated bonds will pay higher rates to compensate you for the added risk of default. In a perfectly efficient market, if you owned a portfolio of lower-rated bonds and experienced some defaults, you'd get paid approximately as much as if you held higher-rated bonds with zero or fewer defaults. The markets are seldom quite that efficient, but that's the general idea.
The difference in yields between AAA-rated bonds and bonds of various lower ratings (the "spread") can be graphed over time, and they will move up or down because people get more or less nervous about default, and because default rates do tend to go up or down as the economy weakens or strengthens. A Moody's study of corporate default rates shows about what you would expect: sharp spikes in defaults in the 1930s and around the 1990 recession; diminishing numbers of defaults during the boom years of the 1990s. Astute bond investors will often evaluate these spreads to determine where the market is offering the best yields per unit of risk.
Of course, these ratings can change. A company that hits a rough patch can be downgraded, which doesn't change the coupon rate, but does lower the bond's value--the price that you could sell the bond for on the open market. If somebody were to buy that downgraded bond from you, they would demand a higher coupon rate by offering a lower price.
The other risk in bond investments comes from up or down movements in interest rates. If interest rates go up, the value of your bond goes down, because people can buy bonds paying more attractive (higher) rates. If interest rates go down, your bond is worth more, because you're getting a better yield than people could buy on the market.
How much do your bonds move up and down? This introduces the most complicated calculation in the bond world: what we call "duration."
The basic idea is not complicated. If interest rates go up, a bond that matures in 2040 is going to drop in value a lot more than a bond that is due to mature in six months. In the former case, you're going to have to live with lower yields for the better part of a generation before you can invest at a higher rate. In the latter, you wait just half a year, redeem the bond for its face amount, and then can turn around and buy the higher-yielding bonds.
You can find a fairly complicated discussion of bond duration in Wikipedia, but it is basically a measure of how sensitive a bond is to interest rate movements, measured in years. To calculate a bond's duration, you look at the present value of all the coupon payments yet to be made plus the payback of the face amount you lent in the first place, and then calculate how that would change if interest rates go up and down by varying degrees. Wikipedia offers a somewhat oversimplified rule of thumb: if a bond has a duration of two years, its price would fall about 2% if interest rates rise one percentage point. If interest rates FALL by one percentage point, then that bond's price would rise by 2%.
To see how this might work in the real world, suppose you bought a bond with a face amount of $1,000, a maturity of 10 years, and a coupon rate of 5%. (Buying at the face amount is called buying at "par.") Suppose interest rates rose by 0.6%. Suppose somebody offers you $900 for your bond. If they buy at that price, they would still be getting the $50 payment, but that yearly return would now be equal to 5.56% of the amount paid. ($50/$900 = 5.56%)
However, you also have to factor in the fact that this person paid $900 for an investment that will (assuming no default) pay a face amount of $1,000 when the maturity date arrives. This raises the effective interest rate, but by how much? If the bond is purchased nine years before the maturity date, the $100 difference would amortized over nine years, producing a lower yearly amount than if it was purchased five years before the maturity date, which, in turn, would be lower than if it was purchased just one year before the bond matures.
Unfortunately, this is not a straight line calculation. That extra yield is assumed to compound from the time of purchase to the time when the bondholders get their money back. Add that to the effective coupon yield, and you get a number that people in the trade call "yield to maturity," which is the number you most often see quoted whenever bonds are traded after issuance.
At this point, you know more about bonds than any layperson you're likely to meet, and more than a few professionals. But if you want to really impress people at cocktail parties, or want to know the more detailed ins and outs of your bond investments, you're invited to read a few more paragraphs.
First, look at the bond market through the eyes of a professional. You notice ever-changing yield spreads between high-quality bonds, junk bonds and everything in between. You also, in another dimension, see ever-changing spreads between bonds of different maturities. In general, the longer the maturities (in the lexicon, the "farther you move out on the yield curve"), the higher the yields, because 20-year maturities expose you to two decades of long-term changes in interest rates and possible default, whereas 30-day T-bills expose you to practically none. Sometimes this yield curve is "steep," meaning there's a big difference between the yields on 30-year bonds vs. 10-year or 1-year issues, and the curve will be steeper in some areas than others.
Sometimes, albeit rarely, the markets deliver what is called an "inverted yield curve," where rates are lower for longer maturities than they are for shorter ones. Why? This can happen if investors think that long-term rates are going to come down, and try to lock in current rates on longer-term bonds. Shorter maturities become less attractive because they don't lock in rates for quite as long.
Professional investors can also watch a third kind of spread: between municipal bonds and Treasuries. As you probably know, munis offer a tax break: their coupon yields are exempt from federal taxes, and if they're issued in your state, you don't have to pay state taxes either. Because of this, they normally pay lower rates than Treasuries, whose yields are taxable at the federal level. A financial planner or accountant would look at your tax rate and calculate the "tax-equivalent yield" by subtracting, from the yield, the various taxes you'd pay on Treasuries. Theoretically, the Treasury bond's tax-equivalent yield would be approximately the same as the the yield on munis of similar quality and maturity. But sometimes concerns about the economy and the possibility of default and downgrades will drive muni yields as high as Treasuries, despite their tax advantages.
There are a few other complexities to consider. One is figuring out how much of a commission the bond trader is taking whenever you buy individual bonds. Unlike stocks, bond prices usually include some built-in compensation (a "markup" or "spread") for the brokerage company selling you the bond, which is usually not disclosed. Markups can vary widely. Unless you're really good at these duration calculations, you would never even be able to estimate how much you paid the broker.
Another complicating factor is that corporate or muni bonds (but not Treasuries) usually have "call provisions." That's a fancy way of saying that if interest rates go down, the company (or municipality) issuing the bond can pay off the note, give you your money back, and issue new bonds at the lower rate--not unlike when you pay off your car loan or mortgage early.
These call provisions can add a LOT of complexity to your evaluation of a bond investment, since the company can snatch the bond out of your hand right when it has gone up in value (due to that drop in interest rates). Meanwhile, if rates go up, the issuer will have no incentive to call, and you'll be stuck with the lower yield--heads they win, tails you lose. Bond traders sometimes talk about the "yield to call," the yield of a bond or note if you were to buy and hold the security until the call date.
Another complexity: with the advent of new derivative and collateralized securities, it has become difficult to evaluate what, exactly, bond-oriented mutual funds are buying on your behalf. The definition of a "bond" has been expanded to include derivative securities that can be highly-volatile, and can lose value faster even than stocks. One often-cited horror story involves certain Morgan Keegan bond funds, including the RMK Select High Income Fund, the RMK High Income Fund, the RMK Strategic Income Fund and the RMK Advantage Income Fund. Recently, Financial Planning magazine has reported multimillion dollar arbitration awards as a result of losses in their bond holdings amounting to between 50% and 67%--in a single year.
Then if you buy or sell bonds on the open market at something other than par, the yield will often be taxed one way, the difference between what you pay and the face amount of the bond (either plus or minus) will be taxed a different way. Meanwhile, zero coupon bonds, which accrue the interest payments to maturity rather than paying them out over time, will trigger taxes on money that you haven't actually received.
Finally, did you see 60 minutes last week-end (March 14, 2010) and the story they did on Michael Lewis and his book The Big Short. His book shows an even more confusing and scarier side of bonds than anything we have discussed so far. In his book Michael Lewis explains how mortgage bonds were misused and misunderstood over the last 10 years or more. He shows that most brokers were caught up in making money much more than taking care of their customers.
If you want to read something really scary, read this book. It will make for some very interesting cocktail party discussions. If you want to be taken advantage of or just give your money away, don't read this book.
It might surprise you to learn that many financial planners think bonds are the most complicated investments they deal in--far more complicated than stocks.
Why? First of all, consider the ratings.
You already know that companies like Moody's Investors Services and Standard & Poors investigate the balance sheets of companies (or municipalities), and assign ratings to their bonds which look a little bit like the grades they give out in high school: AAA, AA, A, BBB, BB, B, CCC and so forth. Shaky companies (or municipalities) get a low rating, which is the rating agency's way of saying the chances of default (tumbling into Chapter 11 and not paying back the bond investors) are higher than for a company (or municipality) that is on sounder financial footing.
Sometimes the bonds issued by shakier companies are affectionately known in the trade as junk bonds, but you don't ever hear the companies issuing them refer to them that way. Who wants to buy junk?
A chart included in a Congressional report on the Municipal Bond Fairness Act of 2008 shows the safety difference between differently-rated bonds about as clearly as anything you'll find. It shows that before 2008, only about half a percent of all corporate bonds rated Aaa (Moody's) or AAA (S&P) have defaulted during their full maturity. But when you get down into the Ba/BB ratings, the default rate jumps to 19.12% (Moody's) or 29.93% (S&P). In other words, at those lower rating levels, one or more percent of your bond holdings might default in an average year. Munis experienced lower default rates, and Treasuries have never defaulted--and are considered by most bond experts to be safe from the danger of default.
The bond agencies don't always get these ratings exactly correct, but in general, the highest-rated bonds are the safest, and therefore pay the lowest interest to borrower/investors. Lower-rated bonds will pay higher rates to compensate you for the added risk of default. In a perfectly efficient market, if you owned a portfolio of lower-rated bonds and experienced some defaults, you'd get paid approximately as much as if you held higher-rated bonds with zero or fewer defaults. The markets are seldom quite that efficient, but that's the general idea.
The difference in yields between AAA-rated bonds and bonds of various lower ratings (the "spread") can be graphed over time, and they will move up or down because people get more or less nervous about default, and because default rates do tend to go up or down as the economy weakens or strengthens. A Moody's study of corporate default rates shows about what you would expect: sharp spikes in defaults in the 1930s and around the 1990 recession; diminishing numbers of defaults during the boom years of the 1990s. Astute bond investors will often evaluate these spreads to determine where the market is offering the best yields per unit of risk.
Of course, these ratings can change. A company that hits a rough patch can be downgraded, which doesn't change the coupon rate, but does lower the bond's value--the price that you could sell the bond for on the open market. If somebody were to buy that downgraded bond from you, they would demand a higher coupon rate by offering a lower price.
The other risk in bond investments comes from up or down movements in interest rates. If interest rates go up, the value of your bond goes down, because people can buy bonds paying more attractive (higher) rates. If interest rates go down, your bond is worth more, because you're getting a better yield than people could buy on the market.
How much do your bonds move up and down? This introduces the most complicated calculation in the bond world: what we call "duration."
The basic idea is not complicated. If interest rates go up, a bond that matures in 2040 is going to drop in value a lot more than a bond that is due to mature in six months. In the former case, you're going to have to live with lower yields for the better part of a generation before you can invest at a higher rate. In the latter, you wait just half a year, redeem the bond for its face amount, and then can turn around and buy the higher-yielding bonds.
You can find a fairly complicated discussion of bond duration in Wikipedia, but it is basically a measure of how sensitive a bond is to interest rate movements, measured in years. To calculate a bond's duration, you look at the present value of all the coupon payments yet to be made plus the payback of the face amount you lent in the first place, and then calculate how that would change if interest rates go up and down by varying degrees. Wikipedia offers a somewhat oversimplified rule of thumb: if a bond has a duration of two years, its price would fall about 2% if interest rates rise one percentage point. If interest rates FALL by one percentage point, then that bond's price would rise by 2%.
To see how this might work in the real world, suppose you bought a bond with a face amount of $1,000, a maturity of 10 years, and a coupon rate of 5%. (Buying at the face amount is called buying at "par.") Suppose interest rates rose by 0.6%. Suppose somebody offers you $900 for your bond. If they buy at that price, they would still be getting the $50 payment, but that yearly return would now be equal to 5.56% of the amount paid. ($50/$900 = 5.56%)
However, you also have to factor in the fact that this person paid $900 for an investment that will (assuming no default) pay a face amount of $1,000 when the maturity date arrives. This raises the effective interest rate, but by how much? If the bond is purchased nine years before the maturity date, the $100 difference would amortized over nine years, producing a lower yearly amount than if it was purchased five years before the maturity date, which, in turn, would be lower than if it was purchased just one year before the bond matures.
Unfortunately, this is not a straight line calculation. That extra yield is assumed to compound from the time of purchase to the time when the bondholders get their money back. Add that to the effective coupon yield, and you get a number that people in the trade call "yield to maturity," which is the number you most often see quoted whenever bonds are traded after issuance.
At this point, you know more about bonds than any layperson you're likely to meet, and more than a few professionals. But if you want to really impress people at cocktail parties, or want to know the more detailed ins and outs of your bond investments, you're invited to read a few more paragraphs.
First, look at the bond market through the eyes of a professional. You notice ever-changing yield spreads between high-quality bonds, junk bonds and everything in between. You also, in another dimension, see ever-changing spreads between bonds of different maturities. In general, the longer the maturities (in the lexicon, the "farther you move out on the yield curve"), the higher the yields, because 20-year maturities expose you to two decades of long-term changes in interest rates and possible default, whereas 30-day T-bills expose you to practically none. Sometimes this yield curve is "steep," meaning there's a big difference between the yields on 30-year bonds vs. 10-year or 1-year issues, and the curve will be steeper in some areas than others.
Sometimes, albeit rarely, the markets deliver what is called an "inverted yield curve," where rates are lower for longer maturities than they are for shorter ones. Why? This can happen if investors think that long-term rates are going to come down, and try to lock in current rates on longer-term bonds. Shorter maturities become less attractive because they don't lock in rates for quite as long.
Professional investors can also watch a third kind of spread: between municipal bonds and Treasuries. As you probably know, munis offer a tax break: their coupon yields are exempt from federal taxes, and if they're issued in your state, you don't have to pay state taxes either. Because of this, they normally pay lower rates than Treasuries, whose yields are taxable at the federal level. A financial planner or accountant would look at your tax rate and calculate the "tax-equivalent yield" by subtracting, from the yield, the various taxes you'd pay on Treasuries. Theoretically, the Treasury bond's tax-equivalent yield would be approximately the same as the the yield on munis of similar quality and maturity. But sometimes concerns about the economy and the possibility of default and downgrades will drive muni yields as high as Treasuries, despite their tax advantages.
There are a few other complexities to consider. One is figuring out how much of a commission the bond trader is taking whenever you buy individual bonds. Unlike stocks, bond prices usually include some built-in compensation (a "markup" or "spread") for the brokerage company selling you the bond, which is usually not disclosed. Markups can vary widely. Unless you're really good at these duration calculations, you would never even be able to estimate how much you paid the broker.
Another complicating factor is that corporate or muni bonds (but not Treasuries) usually have "call provisions." That's a fancy way of saying that if interest rates go down, the company (or municipality) issuing the bond can pay off the note, give you your money back, and issue new bonds at the lower rate--not unlike when you pay off your car loan or mortgage early.
These call provisions can add a LOT of complexity to your evaluation of a bond investment, since the company can snatch the bond out of your hand right when it has gone up in value (due to that drop in interest rates). Meanwhile, if rates go up, the issuer will have no incentive to call, and you'll be stuck with the lower yield--heads they win, tails you lose. Bond traders sometimes talk about the "yield to call," the yield of a bond or note if you were to buy and hold the security until the call date.
Another complexity: with the advent of new derivative and collateralized securities, it has become difficult to evaluate what, exactly, bond-oriented mutual funds are buying on your behalf. The definition of a "bond" has been expanded to include derivative securities that can be highly-volatile, and can lose value faster even than stocks. One often-cited horror story involves certain Morgan Keegan bond funds, including the RMK Select High Income Fund, the RMK High Income Fund, the RMK Strategic Income Fund and the RMK Advantage Income Fund. Recently, Financial Planning magazine has reported multimillion dollar arbitration awards as a result of losses in their bond holdings amounting to between 50% and 67%--in a single year.
Then if you buy or sell bonds on the open market at something other than par, the yield will often be taxed one way, the difference between what you pay and the face amount of the bond (either plus or minus) will be taxed a different way. Meanwhile, zero coupon bonds, which accrue the interest payments to maturity rather than paying them out over time, will trigger taxes on money that you haven't actually received.
Finally, did you see 60 minutes last week-end (March 14, 2010) and the story they did on Michael Lewis and his book The Big Short. His book shows an even more confusing and scarier side of bonds than anything we have discussed so far. In his book Michael Lewis explains how mortgage bonds were misused and misunderstood over the last 10 years or more. He shows that most brokers were caught up in making money much more than taking care of their customers.
If you want to read something really scary, read this book. It will make for some very interesting cocktail party discussions. If you want to be taken advantage of or just give your money away, don't read this book.
Monday, March 01, 2010
U.S. Senate sells American down drain over this week-end!
We in the financial planning community believe that something called a "fiduciary standard" is the very best framework for professionals to work with our clients. That's why we're so angry over something that happened in the Senate over the weekend: Senator Tim Johnson of South Dakota inserted an amendment into the new regulatory reform bill--and, with the casual stroke of a pen, eliminated an important and powerful consumer protection.
This amendment cuts out a part of the original bill that would have required everybody who gives investment advice to the public to act as a fiduciary. Senator Johnson wants the Senate to "study" the issue instead.
Why should you care?
The fiduciary standard is a legal concept, but its core idea is not complicated. To act as a fiduciary means we professionals have to put aside our own financial interests, and also put aside the business/financial interests of any company we work for, and give recommendations that are solely and completely in the best interests of people like you, our customers or clients.
In other words, our recommendations have to be made with only one concern: is this the best thing I (the professional) can do for you, given what I know about who you are and what you want and need?
So what does it mean NOT to be a fiduciary? Imagine that there were two kinds of health practitioners in the world. One group functions much like doctors do today: they work out of independent offices, meet with you, diagnose your ailments, prescribe a medical solution that they believe is the very best course of treatment, and you pay them directly for this service.
The other group of health care providers operates somewhat differently. They're employed in the branch office of a large multinational health conglomerate which requires its employees to recommend certain treatments which are most profitable to the company, so long as these treatments are considered to be "suitable."
These might not be the best treatments, but under a set of very complicated regulations, these less-than-ideal prescriptions are deemed to be legally-defensible ways to address certain medical problems. These other health care providers are paid by the company according to how many of these treatments they can sell.
Now imagine that these larger companies, because of the very high profits they're making on these treatments, are able to gain a lot of influence over the process that decides which treatments are "suitable." In fact, their executives sit on the governing board of the organization that makes these determinations.
Finally, imagine that something went horribly wrong. Several of the most popular treatments that these non-fiduciary medical professionals were eagerly peddling to their "patients" were not at all as their companies had portrayed them. The result: catastrophic consequences, pain and suffering throughout the world. An enormous mess.
To bring the analogy back to the financial world, these terrible treatments (investments) actually DID bring the global economy to the brink of financial collapse, a mess that required our taxpayer money to fix. These companies had become so entwined in the system that the government had no choice but to help them recoup the staggering losses they brought upon themselves.
Not surprisingly, an outraged public demanded that this must never happen again. To the real fiduciary practitioners, the solution is obvious: require everybody to act in the best interests of their customers/clients by imposing a fiduciary standard. No more shady "suitable" treatments.
We were encouraged when Congress drafted legislation which, among other things, would bring every provider of financial advice under a fiduciary standard.
So here's why professional financial services providers are angry. Now that the catastrophic global meltdown, TARP, massive losses in the stock market and the longest recession since the 1930s is beginning to fade from memory, those companies that provide "suitable" non-fiduciary advice have gone back to business as usual--and very quietly, a Senator from South Dakota has now inserted a provision into the reform bill saying that instead of imposing this fiduciary requirement, that instead Congress will "study" the issue.
The Senate has decided to leave fiduciary out of the final bill. Even the Wall Street Journal is outraged--here's a link to a strongly-worded column that clearly explains what happened: http://online.wsj.com/article/SB10001424052748703940704575089413832399630.html
And here's a link to another article which talks about how the legislative process favors the organizations that take the most money out of the pockets of their customers: http://www.financial-planning.com/fp_issues/2010_1/angels-and-demons-2665124-1.html
It would be nice if everybody called their Senator and Congressperson and said that they were just as angry as we are in the professional community. A groundswell of public opinion might make our elected representatives understand that we haven't forgotten TARP and all the rest of it. Right now, the only people lobbying on your behalf are the professionals themselves, and there apparently aren't enough of us to get the attention of the Congressional representatives who may be looking out for their own interests more than ours.
This amendment cuts out a part of the original bill that would have required everybody who gives investment advice to the public to act as a fiduciary. Senator Johnson wants the Senate to "study" the issue instead.
Why should you care?
The fiduciary standard is a legal concept, but its core idea is not complicated. To act as a fiduciary means we professionals have to put aside our own financial interests, and also put aside the business/financial interests of any company we work for, and give recommendations that are solely and completely in the best interests of people like you, our customers or clients.
In other words, our recommendations have to be made with only one concern: is this the best thing I (the professional) can do for you, given what I know about who you are and what you want and need?
So what does it mean NOT to be a fiduciary? Imagine that there were two kinds of health practitioners in the world. One group functions much like doctors do today: they work out of independent offices, meet with you, diagnose your ailments, prescribe a medical solution that they believe is the very best course of treatment, and you pay them directly for this service.
The other group of health care providers operates somewhat differently. They're employed in the branch office of a large multinational health conglomerate which requires its employees to recommend certain treatments which are most profitable to the company, so long as these treatments are considered to be "suitable."
These might not be the best treatments, but under a set of very complicated regulations, these less-than-ideal prescriptions are deemed to be legally-defensible ways to address certain medical problems. These other health care providers are paid by the company according to how many of these treatments they can sell.
Now imagine that these larger companies, because of the very high profits they're making on these treatments, are able to gain a lot of influence over the process that decides which treatments are "suitable." In fact, their executives sit on the governing board of the organization that makes these determinations.
Finally, imagine that something went horribly wrong. Several of the most popular treatments that these non-fiduciary medical professionals were eagerly peddling to their "patients" were not at all as their companies had portrayed them. The result: catastrophic consequences, pain and suffering throughout the world. An enormous mess.
To bring the analogy back to the financial world, these terrible treatments (investments) actually DID bring the global economy to the brink of financial collapse, a mess that required our taxpayer money to fix. These companies had become so entwined in the system that the government had no choice but to help them recoup the staggering losses they brought upon themselves.
Not surprisingly, an outraged public demanded that this must never happen again. To the real fiduciary practitioners, the solution is obvious: require everybody to act in the best interests of their customers/clients by imposing a fiduciary standard. No more shady "suitable" treatments.
We were encouraged when Congress drafted legislation which, among other things, would bring every provider of financial advice under a fiduciary standard.
So here's why professional financial services providers are angry. Now that the catastrophic global meltdown, TARP, massive losses in the stock market and the longest recession since the 1930s is beginning to fade from memory, those companies that provide "suitable" non-fiduciary advice have gone back to business as usual--and very quietly, a Senator from South Dakota has now inserted a provision into the reform bill saying that instead of imposing this fiduciary requirement, that instead Congress will "study" the issue.
The Senate has decided to leave fiduciary out of the final bill. Even the Wall Street Journal is outraged--here's a link to a strongly-worded column that clearly explains what happened: http://online.wsj.com/article/SB10001424052748703940704575089413832399630.html
And here's a link to another article which talks about how the legislative process favors the organizations that take the most money out of the pockets of their customers: http://www.financial-planning.com/fp_issues/2010_1/angels-and-demons-2665124-1.html
It would be nice if everybody called their Senator and Congressperson and said that they were just as angry as we are in the professional community. A groundswell of public opinion might make our elected representatives understand that we haven't forgotten TARP and all the rest of it. Right now, the only people lobbying on your behalf are the professionals themselves, and there apparently aren't enough of us to get the attention of the Congressional representatives who may be looking out for their own interests more than ours.
Tuesday, February 16, 2010
Budget Alarms Go Off Around The World
You've probably been hearing a lot about Greece recently, and before that about Dubai--two countries that were in danger of defaulting on what economic geeks call 'sovereign debt,' which basically means their country's equivalent of Treasury bonds. Dubai's problem was $26 billion in debt issued by Nakheel, its most prominent real estate developer, which was tacitly backed by the government. Order was restored last December when neighboring Abu Dhabi provided Nakheel with a $10 billion loan. Greece, meanwhile, has $28 billion in government debt due in April and May, and as you read this, the European Union is debating when and how to come to its rescue.
What you probably aren't hearing is that Portugal, Ireland, Italy and Spain are having similar troubles, and that in all cases, the problems were visible, and warnings were raised by economists, years before the budget crises came to a head. According to a report by The Economist, Greece's debt is now up to 112.6% of its gross domestic product. Ireland's is 65.8%, Spain's is 54.3%, Portugal's is 77.4% and Italy's is 114.6%. What makes Greece stand out is that suddenly foreign buyers are shying away from its government securities, sending the yield on ten-year notes soaring to 7.1%, and raising the cost of rolling over the debt--sending deficits even higher.
This, of course, is exactly the fear that haunts U.S. economists: that at some point, the world's bond buyers will lose confidence that America will ever get its debt situation under control. It also may be the underlying fear among people who attend the Tea Party rallies around the country. The real deficit problems in the U.S., however, are not found in government spending, per se, but the amount of money promised to future retirees in various forms. Lately, various financial planning conferences have heard presentations by David Walker, former head of the U.S. Government Accounting Office, now president of the Peter G. Peterson Foundation. Walker gives a terrific speech on how America is executing a reverse transfer of wealth from the younger generation and unborn to the Baby Boom generation. He does exactly what economists were doing in Greece for twenty years before the meltdown: tells us that the longer we wait to solve the problems, the more likely we are to face an unsolvable crisis.
Perhaps the easiest example to understand is Social Security, which was enacted during the Great Depression, at a time when the average person's lifespan was 65. 65 also happened to be the normal retirement year, which meant that most citizens collected no Social Security benefits at all; only those who lived an unusually long time would get back the money that was collected into the government retirement system. Fast-forward to today, when the average U.S. life expectancy is 78.2 years, and it is not uncommon for people to live to age 100. The same is true of Medicaid; when it was enacted, people were expected to receive benefits for a year or two, not additional decades. In all, according to "The Complete Idiot's Guide to Economics," 23% of the U.S. budget is spent on Social Security, 12% on Medicare, 7% on Medicaid; recently, Congressman Randy Forbes estimated that mandatory entitlements now represent 62% of all federal spending.
Greece never went through anything like the current wave of Tea Parties and activism. This may be a chance to channel all the anger over budget deficits into a real solution. But, as we are learning from European countries that spent too much for too long, the solution is not anger or warnings, but concrete action that addresses the real sources of fiscal imbalance--and perhaps most importantly, a willingness to sacrifice our way back to a balanced budget. Walker proposes means testing for Social Security recipients, arguing that it makes no sense to send government checks to billionaires. The government will have to ration health care and put it back on a budget. He tells people what you already know, what Greece and some of its neighbors are learning: it doesn't work any differently for governments than it does for people; the numbers are just a lot bigger.
What you probably aren't hearing is that Portugal, Ireland, Italy and Spain are having similar troubles, and that in all cases, the problems were visible, and warnings were raised by economists, years before the budget crises came to a head. According to a report by The Economist, Greece's debt is now up to 112.6% of its gross domestic product. Ireland's is 65.8%, Spain's is 54.3%, Portugal's is 77.4% and Italy's is 114.6%. What makes Greece stand out is that suddenly foreign buyers are shying away from its government securities, sending the yield on ten-year notes soaring to 7.1%, and raising the cost of rolling over the debt--sending deficits even higher.
This, of course, is exactly the fear that haunts U.S. economists: that at some point, the world's bond buyers will lose confidence that America will ever get its debt situation under control. It also may be the underlying fear among people who attend the Tea Party rallies around the country. The real deficit problems in the U.S., however, are not found in government spending, per se, but the amount of money promised to future retirees in various forms. Lately, various financial planning conferences have heard presentations by David Walker, former head of the U.S. Government Accounting Office, now president of the Peter G. Peterson Foundation. Walker gives a terrific speech on how America is executing a reverse transfer of wealth from the younger generation and unborn to the Baby Boom generation. He does exactly what economists were doing in Greece for twenty years before the meltdown: tells us that the longer we wait to solve the problems, the more likely we are to face an unsolvable crisis.
Perhaps the easiest example to understand is Social Security, which was enacted during the Great Depression, at a time when the average person's lifespan was 65. 65 also happened to be the normal retirement year, which meant that most citizens collected no Social Security benefits at all; only those who lived an unusually long time would get back the money that was collected into the government retirement system. Fast-forward to today, when the average U.S. life expectancy is 78.2 years, and it is not uncommon for people to live to age 100. The same is true of Medicaid; when it was enacted, people were expected to receive benefits for a year or two, not additional decades. In all, according to "The Complete Idiot's Guide to Economics," 23% of the U.S. budget is spent on Social Security, 12% on Medicare, 7% on Medicaid; recently, Congressman Randy Forbes estimated that mandatory entitlements now represent 62% of all federal spending.
Greece never went through anything like the current wave of Tea Parties and activism. This may be a chance to channel all the anger over budget deficits into a real solution. But, as we are learning from European countries that spent too much for too long, the solution is not anger or warnings, but concrete action that addresses the real sources of fiscal imbalance--and perhaps most importantly, a willingness to sacrifice our way back to a balanced budget. Walker proposes means testing for Social Security recipients, arguing that it makes no sense to send government checks to billionaires. The government will have to ration health care and put it back on a budget. He tells people what you already know, what Greece and some of its neighbors are learning: it doesn't work any differently for governments than it does for people; the numbers are just a lot bigger.
Monday, February 01, 2010
A letter to yourself:
No one will ever know you as well as you know yourself. Here is an interesting way of taking advantage of that fact. Write a letter to yourself, more specifically, a letter from your future self to you, today.
Come again? Imagine yourself in five or ten years, assuming everything has gone more or less as you hope it will. You're healthy, in good financial health and--well, you know your hopes much better than I do. The point is that the You-In-The-Future is writing a letter of thanks to the You-Today. Future You might thank Today You for exercising regularly, because Future You is healthy, fit and looking good. Future You might thank you for being thrifty and watching your budget, because in that future date, you're on track to retire or already retired comfortably.
Future You might thank you for taking the time to smell the roses along the way, for maintaining close relationships with friends and family; for spending a little more time accomplishing goals like writing a book, starting a business, traveling or helping other. Rather than spending a lot of unproductive time in front of the TV.
Whatever it is, you are thanking yourself for taking these actions, and be specific about what you did. Then look over the letter, and know that these are all things which you will thank yourself for someday, make a commitment to do them, and save the letter.
Every week or two take the letter out and take another look at it. Are you on course? Are you earning the thanks that Future You gave you?
The point here is that you want your future life to be as good as it can be, as full of fulfillment and happiness, joy and prosperity as possible, and your actions between now and then will, or will not make that happen. The letter to yourself is a fantastically powerful reminder you that you're really counting on yourself to take care of yourself in the future.
Meanwhile, in between the times you spend with the letter, you can get to know a variety of Future Selves (You-Next-Week, You-Next-Year, You-Five-Years-In-The-Future), and begin to ask these future versions of you about decisions you make now. How much of the money you earn should be given to your future self for retirement? What would you, a week from now, like to have cleared off your desk? Would you like to have learned a new foreign language by this time next year? Are there things which are hard to do now, but which you will wish you had done? Chances are, you know what that person who will be you would really like you to be doing now, which lets you navigate through the complexities of your life with very clear vision.
And if you can do that, you could be one of the few who arrives in the future with no regrets about how you spent the precious, irreplaceable hours of your life. Where others will have muddled through their days, weeks, months and years and still be left wondering why the other guy (Future You) is always so lucky and able to accomplish so much.
Ted Feight, CFP® is a fee-only personal asset, financial, life and wealth manager. He started is firm Creative Financial Design in 1984. Learn more about Ted at www.creativefinancialdesign.com .
Come again? Imagine yourself in five or ten years, assuming everything has gone more or less as you hope it will. You're healthy, in good financial health and--well, you know your hopes much better than I do. The point is that the You-In-The-Future is writing a letter of thanks to the You-Today. Future You might thank Today You for exercising regularly, because Future You is healthy, fit and looking good. Future You might thank you for being thrifty and watching your budget, because in that future date, you're on track to retire or already retired comfortably.
Future You might thank you for taking the time to smell the roses along the way, for maintaining close relationships with friends and family; for spending a little more time accomplishing goals like writing a book, starting a business, traveling or helping other. Rather than spending a lot of unproductive time in front of the TV.
Whatever it is, you are thanking yourself for taking these actions, and be specific about what you did. Then look over the letter, and know that these are all things which you will thank yourself for someday, make a commitment to do them, and save the letter.
Every week or two take the letter out and take another look at it. Are you on course? Are you earning the thanks that Future You gave you?
The point here is that you want your future life to be as good as it can be, as full of fulfillment and happiness, joy and prosperity as possible, and your actions between now and then will, or will not make that happen. The letter to yourself is a fantastically powerful reminder you that you're really counting on yourself to take care of yourself in the future.
Meanwhile, in between the times you spend with the letter, you can get to know a variety of Future Selves (You-Next-Week, You-Next-Year, You-Five-Years-In-The-Future), and begin to ask these future versions of you about decisions you make now. How much of the money you earn should be given to your future self for retirement? What would you, a week from now, like to have cleared off your desk? Would you like to have learned a new foreign language by this time next year? Are there things which are hard to do now, but which you will wish you had done? Chances are, you know what that person who will be you would really like you to be doing now, which lets you navigate through the complexities of your life with very clear vision.
And if you can do that, you could be one of the few who arrives in the future with no regrets about how you spent the precious, irreplaceable hours of your life. Where others will have muddled through their days, weeks, months and years and still be left wondering why the other guy (Future You) is always so lucky and able to accomplish so much.
Ted Feight, CFP® is a fee-only personal asset, financial, life and wealth manager. He started is firm Creative Financial Design in 1984. Learn more about Ted at www.creativefinancialdesign.com .
Tuesday, January 26, 2010
New Home Buyer Credits by the Numbers
Lately, Congress has been obsessed with encouraging people to buy houses. The Economic Recovery Act of 2008, the American Recovery and Reinvestment Act of 2009 and the Worker, Homeownership and Business Assistance Act of 2009 all included tax credits for people who buy a home, each one more generous than the last.
The most recent credit, passed last November, would give any person who hasn't owned a home for the past three years a tax credit equal to 10% of the purchase price, up to $8,000, so long as 1) the contract is signed before May 1 of this year and 2) the buyers subsequently live in the house as their principal residence for at least three years.
Of course, this is all subject to income restrictions. The full credit is available to single taxpayers with income of less than $125,000; joint filers earning up to $225,000; it phases out altogether at incomes above $145,000 and $245,000 respectively.
There's a smaller $6,500 credit for anybody who has owned and lived in the same home for five consecutive years during the eight years before buying a new residence. This credit might be appropriate for families who are looking to move into a larger home, or retired persons who might want to downsize their residence. (They, too, must live in the purchased house for the next three years in order to claim the credit, and the same income restrictions apply.)
There seems to be a rule in Congress that no tax initiative can ever be simple. To qualify for the credit, you can't buy a house from a relative, and you can't claim the credit if you can be claimed as a dependent on another person's tax return. The buyer or buyer's spouse must be at least 18 years of age, and the price of the home being purchased cannot exceed $800,000--which won't be a problem for people living in Youngstown, OH (median home price: $70,700, according to the National Association of Realtors) or Saginaw, MI ($61,400 median price), but might cause discomfort for some people living in San Jose, CA ($566,000) or White Plains, NY ($450,000). Another complexity: if you qualify for the credit, you can claim it on your 2010 tax return, or jump in the time machine and and claim it on your 2009 return.
If there is more than one buyer, and they are not married, the IRS allows them to give the full credit to whichever buyer qualifies for it. Thus, parents who earn more than the threshold income can buy a house for their son or daughter. If the kids pay something toward the purchase price, they'll be able to claim the full credit on their tax returns.
If you extend this trend a year or two, it's easy to imagine that eventually Congress will be buying everybody a nice house with taxpayer dollars. But is further stimulus necessary? Mortgage rates are near record lows, and home mortgage interest is still deductible. The National Association of Realtors, which tracks home sales, found that existing home sales were up 5% in 2009 over 2008; overall market activity is up 21% from the bottom. According to statistics from the Department of Housing and Urban Development and the U.S. Census Bureau, a supply of 7.2 months worth of new homes is available for purchase--close to the 6 month level that is normal for a healthy market. The average sale price dropped 12% last year, but gained 1.5% in December, which means your home may finally be gaining in value again, as buyers finance their purchases with tax dollars.
The most recent credit, passed last November, would give any person who hasn't owned a home for the past three years a tax credit equal to 10% of the purchase price, up to $8,000, so long as 1) the contract is signed before May 1 of this year and 2) the buyers subsequently live in the house as their principal residence for at least three years.
Of course, this is all subject to income restrictions. The full credit is available to single taxpayers with income of less than $125,000; joint filers earning up to $225,000; it phases out altogether at incomes above $145,000 and $245,000 respectively.
There's a smaller $6,500 credit for anybody who has owned and lived in the same home for five consecutive years during the eight years before buying a new residence. This credit might be appropriate for families who are looking to move into a larger home, or retired persons who might want to downsize their residence. (They, too, must live in the purchased house for the next three years in order to claim the credit, and the same income restrictions apply.)
There seems to be a rule in Congress that no tax initiative can ever be simple. To qualify for the credit, you can't buy a house from a relative, and you can't claim the credit if you can be claimed as a dependent on another person's tax return. The buyer or buyer's spouse must be at least 18 years of age, and the price of the home being purchased cannot exceed $800,000--which won't be a problem for people living in Youngstown, OH (median home price: $70,700, according to the National Association of Realtors) or Saginaw, MI ($61,400 median price), but might cause discomfort for some people living in San Jose, CA ($566,000) or White Plains, NY ($450,000). Another complexity: if you qualify for the credit, you can claim it on your 2010 tax return, or jump in the time machine and and claim it on your 2009 return.
If there is more than one buyer, and they are not married, the IRS allows them to give the full credit to whichever buyer qualifies for it. Thus, parents who earn more than the threshold income can buy a house for their son or daughter. If the kids pay something toward the purchase price, they'll be able to claim the full credit on their tax returns.
If you extend this trend a year or two, it's easy to imagine that eventually Congress will be buying everybody a nice house with taxpayer dollars. But is further stimulus necessary? Mortgage rates are near record lows, and home mortgage interest is still deductible. The National Association of Realtors, which tracks home sales, found that existing home sales were up 5% in 2009 over 2008; overall market activity is up 21% from the bottom. According to statistics from the Department of Housing and Urban Development and the U.S. Census Bureau, a supply of 7.2 months worth of new homes is available for purchase--close to the 6 month level that is normal for a healthy market. The average sale price dropped 12% last year, but gained 1.5% in December, which means your home may finally be gaining in value again, as buyers finance their purchases with tax dollars.
Friday, September 04, 2009
Finding your own buried treasure!
There was a time when U.S. savings bonds ruled. For members of the baby boom generation in particular, U.S. savings bonds were ubiquitous. Boomers received them as birthday or graduation gifts, and they bought them using Savings Stamps at school or through payroll savings plans at work. Indeed, millions of boomers are holding bonds.
These bonds were popular because they were the quintessential safe investment: a government-guaranteed return on investment.
The problem is that many bond holders were not careful with their bonds. As a result, many got stuck in a desk drawer or placed in a safe deposit box, never to see the light of day again. That's why the Department of the Treasury today has more than $16 billion worth of fully matured savings bonds on its books that are no longer earning interest for their owners.
These Series E bonds, which were bought in varying denominations between 1941 and 1979, are worth a minimum of four times their face value.
Sometimes they are worth even more. A $100 Series E bond bought for $75 in April 1960 would be worth more than $700 today. But since that bond--and any bond over 30 years old--has stopped earning interest, bond holders are losing money to inflation by not cashing in.
The Treasury has begun a campaign to raise awareness about this potential windfall. At a time when the government's own finances are stretched, why is the Treasury urging Americans to find their matured bonds? First and foremost, it is the right thing to do. After all, it is the consumer's money. Moreover, in these troubled times "found money" can significantly help bond owners who may be struggling financially.
The Treasury has created the website, www.treasuryhunt.gov to facilitate the search for unredeemed bonds.
If the bonds were bought in 1974 or later, holders don't even need to know the bonds' serial numbers. They can just enter the Social Security numbers of people in their family who may have purchased bonds, and the data base will match the numbers against matured, unredeemed savings bonds. The website includes a calculator to tell you how much unredeemed bonds are worth, and it provides instructions for finding bonds issued prior to 1974.
Here are low-tech tactics you can use:
-- First complete a financial inventory of all of your assets. Carefully
check the information provided. If you have unredeemed bonds, we
encourage you to redeem them now, when "found money" would be
especially welcome.
-- Here are some places you can look for bonds: a safe deposit box, home
safe, or a special "hiding place" such as an old chest of drawers in
the basement or attic. Baby boomers might find savings bonds tucked
away in a scrap book with their old report cards.
-- We encourage you to talk with relatives at family events about old
bonds.
Once the bonds are found, cashing them in is relatively easy. For small amounts, it's more cost-effective for you to redeem the bonds yourself. You can cash your matured savings bonds at most local banks.
Treasury doesn't maintain a list of local banks that redeem bonds, so you should be sure to check with your local bank branch. When you present the bonds at the bank, you will be asked to establish your identity. If you have an account at the bank, you can redeem an unlimited dollar amount of bonds. If you do not have an account at the bank, you may be limited to $1,000 worth of bonds at a time.
If the savings bonds are held in the name of a deceased relative, the bonds can still be redeemed for their full value. The heir or legal representative merely has to fill out a form, provide the required documentation, and send the notarized materials to the Treasury Department. There are different forms for different situations, but all can be found at www.treasuryhunt.gov .
One of the biggest concerns some people have is the tax liability associated with matured bonds. Obviously, individual situations will vary, but for the vast majority of Americans, cashing the bonds will not affect tax rates and will provide extra after-tax money. Federal income taxes are due only on the interest earned by the bonds, and U.S. savings bonds are exempt from state and local income taxes. The Treasury Department provides an IRS Form 1099-INT either at the time of redemption or, in most cases, at the end of the tax year.
Finally:
I want to thank you all for your courage and patience you have shown during one of the most difficult bear markets of our lifetime. We are honored by your decision to retain and keep us as your trusted financial counsel during this period of time.
Although there are no guarantees, it appears that the majority of you have been rewarded for your decision and it shows in your current Schwab statements. I am almost afraid to make this next statement, but it appears most of you are in position to make some of the best returns of your lifetime, if the stock markets continue to react as positively as they have so far. In my estimation, that includes a stock market pull back in September and possibly part of October, at which time we hope to invest the rest of your investable assets.
As always, when you are done with this newsletter, please pass it on to someone you think would benefit from it. If you know of someone who might benefit from our counsel, please give them a copy of this newsletter and have them contact us. We are still looking for four or five good new clients.
These bonds were popular because they were the quintessential safe investment: a government-guaranteed return on investment.
The problem is that many bond holders were not careful with their bonds. As a result, many got stuck in a desk drawer or placed in a safe deposit box, never to see the light of day again. That's why the Department of the Treasury today has more than $16 billion worth of fully matured savings bonds on its books that are no longer earning interest for their owners.
These Series E bonds, which were bought in varying denominations between 1941 and 1979, are worth a minimum of four times their face value.
Sometimes they are worth even more. A $100 Series E bond bought for $75 in April 1960 would be worth more than $700 today. But since that bond--and any bond over 30 years old--has stopped earning interest, bond holders are losing money to inflation by not cashing in.
The Treasury has begun a campaign to raise awareness about this potential windfall. At a time when the government's own finances are stretched, why is the Treasury urging Americans to find their matured bonds? First and foremost, it is the right thing to do. After all, it is the consumer's money. Moreover, in these troubled times "found money" can significantly help bond owners who may be struggling financially.
The Treasury has created the website, www.treasuryhunt.gov to facilitate the search for unredeemed bonds.
If the bonds were bought in 1974 or later, holders don't even need to know the bonds' serial numbers. They can just enter the Social Security numbers of people in their family who may have purchased bonds, and the data base will match the numbers against matured, unredeemed savings bonds. The website includes a calculator to tell you how much unredeemed bonds are worth, and it provides instructions for finding bonds issued prior to 1974.
Here are low-tech tactics you can use:
-- First complete a financial inventory of all of your assets. Carefully
check the information provided. If you have unredeemed bonds, we
encourage you to redeem them now, when "found money" would be
especially welcome.
-- Here are some places you can look for bonds: a safe deposit box, home
safe, or a special "hiding place" such as an old chest of drawers in
the basement or attic. Baby boomers might find savings bonds tucked
away in a scrap book with their old report cards.
-- We encourage you to talk with relatives at family events about old
bonds.
Once the bonds are found, cashing them in is relatively easy. For small amounts, it's more cost-effective for you to redeem the bonds yourself. You can cash your matured savings bonds at most local banks.
Treasury doesn't maintain a list of local banks that redeem bonds, so you should be sure to check with your local bank branch. When you present the bonds at the bank, you will be asked to establish your identity. If you have an account at the bank, you can redeem an unlimited dollar amount of bonds. If you do not have an account at the bank, you may be limited to $1,000 worth of bonds at a time.
If the savings bonds are held in the name of a deceased relative, the bonds can still be redeemed for their full value. The heir or legal representative merely has to fill out a form, provide the required documentation, and send the notarized materials to the Treasury Department. There are different forms for different situations, but all can be found at www.treasuryhunt.gov .
One of the biggest concerns some people have is the tax liability associated with matured bonds. Obviously, individual situations will vary, but for the vast majority of Americans, cashing the bonds will not affect tax rates and will provide extra after-tax money. Federal income taxes are due only on the interest earned by the bonds, and U.S. savings bonds are exempt from state and local income taxes. The Treasury Department provides an IRS Form 1099-INT either at the time of redemption or, in most cases, at the end of the tax year.
Finally:
I want to thank you all for your courage and patience you have shown during one of the most difficult bear markets of our lifetime. We are honored by your decision to retain and keep us as your trusted financial counsel during this period of time.
Although there are no guarantees, it appears that the majority of you have been rewarded for your decision and it shows in your current Schwab statements. I am almost afraid to make this next statement, but it appears most of you are in position to make some of the best returns of your lifetime, if the stock markets continue to react as positively as they have so far. In my estimation, that includes a stock market pull back in September and possibly part of October, at which time we hope to invest the rest of your investable assets.
As always, when you are done with this newsletter, please pass it on to someone you think would benefit from it. If you know of someone who might benefit from our counsel, please give them a copy of this newsletter and have them contact us. We are still looking for four or five good new clients.
September is usually the worst month of the year!
No, I do not think September will be the worst month of 2009. The worst should be far behind us. However, the stock markets have gotten far ahead of themselves. Those of you that I have met with in the last six weeks know I have been standing on one foot and then the other, because the stock markets have been recovering and I felt I should be investing the second half of clients' investable money. Yet, historically, September is the worst month of the year for the stock market. So I have been waiting and biding my time until September got here.
Since the majority of you have been out of the markets for most of 2008 and early 2009, we are far ahead of the October 11, 2007 to August 20, 2009 stock market returns. As the markets recover, you stand to make some very nice returns that those who rode the stock markets all the way down can only dream of. That is, if I get the rest of your money back into the markets. Up until now for 2009, we have been beating DJIA and S&P 500 indexes and the Nasdaq index has been beating us. I am very competitive and would love to beat all of the indexes. However, this is not only impossible but, at this point, it may be taking your risk tolerance levels beyond what you want.
Most everyone I have visited with recently has agreed the prudent thing to do is wait for September. So we wait for a few more days to see what September will bring us.
Since the majority of you have been out of the markets for most of 2008 and early 2009, we are far ahead of the October 11, 2007 to August 20, 2009 stock market returns. As the markets recover, you stand to make some very nice returns that those who rode the stock markets all the way down can only dream of. That is, if I get the rest of your money back into the markets. Up until now for 2009, we have been beating DJIA and S&P 500 indexes and the Nasdaq index has been beating us. I am very competitive and would love to beat all of the indexes. However, this is not only impossible but, at this point, it may be taking your risk tolerance levels beyond what you want.
Most everyone I have visited with recently has agreed the prudent thing to do is wait for September. So we wait for a few more days to see what September will bring us.
Friday, July 03, 2009
Sell in May and go away?
June has been a very busy month, stay with me here. I spent the first week in Washington, D.C. trying to fill my head with as much knowledge as I could, from people who I am not sure had a good handle on what they were trying to say. Does anyone in Washington really read all of their bills, understand all of their jobs and/or really mean what they say?
The second week I got back to working with clients and trying to understand what in the world was going on in the stock markets.
June 13th was Kathy's and my 40th wedding anniversary and, as most of you know, I almost always take this week off to be with Kathy. We went to the lake, rode bicycles, visited with friends and took a trip to Mackinaw City site seeing. We pretty much lay around and lowered our blood pressure during the third week.
The fourth week found us back in the office with appointments, two funerals and a trip to Chicago for some strategic planning. I was also elected President of the National Association of Personal Financial Advisors' Midwest Board of Directors. It means I will have to do a little traveling, but is a big honor and will help clients by exposing me to new and helpful information from some of the very best and brightest advisors in the world. I am not sure the best and the brightest are always the same people, but don't quote me on that.
Now I am back for the last two days of the month and the beginning of the next month, working with clients and getting ready to head back to the lake for the 4th of July week-end.
So why is this important enough for me to be wasting your time on it, because this is the normal life of most Americans, including investment professionals, during the summer months. It is also where the saying "Sell in May and stay away" came from. During the summer months the volume of investments is usually very low. It does not take a lot of trading to create a move up or down and most trends are short term.
I had expected the current stock market down turn to have occurred at the beginning of June when Chrysler and General Motors were in Chapter 11. I was actually disappointed that it did not happen then. Well, people seem to have been on vacation and too busy to do it then, so they are doing it now.
I don't mean to sound cold, withdrawn or unfeeling. This is just the way most summers go. If the stock markets would have reacted to the Chrysler and General Motors filings and gone down, I was ready to invest the other half of our clients' money. There are no guarantees, but since the markets have done what they have, I actually expect them to drift or trade within a range for the rest of the summer. Then I expect them to give us some real direction. The chart below shows what the markets have done so far this year and how our current investments have fared. It shows that March 9th was probably the low point of the year for the stock markets, and, unless we retest those lows, I am not too worried. It also shows the level of the stock markets when we started investing again, when they hit their 2009 high on June 15th and where we are today. It shows we are better off than we might have thought, but not as well as we probably wanted to be. It shows we may be starting into that summer range-bound trading area. Once the kids are back in school and vacations are over, traders will get more serious and will give us some direction.
Finally, it still looks like this decade will go down as the worst in history. The first decade of the 21st Century will not be over until the end of 2009; however, through December 31, 2008, the S&P 500 has lost a total of 32.9%, for an average annual rate of return of -4.4%. For every $100,000 invested January 1, 2000, investors would have $67,251 on December 31, 2008. The S&P 500 will need to have a return in excess of 41.7% in 2009, and that does not appear likely, in order to avoid it becoming the worst investment decade on record. Be thankful that our stops worked last year and got us out of our investments. The normal asset allocation's buy and hold did not work during this decade.
God bless!
The second week I got back to working with clients and trying to understand what in the world was going on in the stock markets.
June 13th was Kathy's and my 40th wedding anniversary and, as most of you know, I almost always take this week off to be with Kathy. We went to the lake, rode bicycles, visited with friends and took a trip to Mackinaw City site seeing. We pretty much lay around and lowered our blood pressure during the third week.
The fourth week found us back in the office with appointments, two funerals and a trip to Chicago for some strategic planning. I was also elected President of the National Association of Personal Financial Advisors' Midwest Board of Directors. It means I will have to do a little traveling, but is a big honor and will help clients by exposing me to new and helpful information from some of the very best and brightest advisors in the world. I am not sure the best and the brightest are always the same people, but don't quote me on that.
Now I am back for the last two days of the month and the beginning of the next month, working with clients and getting ready to head back to the lake for the 4th of July week-end.
So why is this important enough for me to be wasting your time on it, because this is the normal life of most Americans, including investment professionals, during the summer months. It is also where the saying "Sell in May and stay away" came from. During the summer months the volume of investments is usually very low. It does not take a lot of trading to create a move up or down and most trends are short term.
I had expected the current stock market down turn to have occurred at the beginning of June when Chrysler and General Motors were in Chapter 11. I was actually disappointed that it did not happen then. Well, people seem to have been on vacation and too busy to do it then, so they are doing it now.
I don't mean to sound cold, withdrawn or unfeeling. This is just the way most summers go. If the stock markets would have reacted to the Chrysler and General Motors filings and gone down, I was ready to invest the other half of our clients' money. There are no guarantees, but since the markets have done what they have, I actually expect them to drift or trade within a range for the rest of the summer. Then I expect them to give us some real direction. The chart below shows what the markets have done so far this year and how our current investments have fared. It shows that March 9th was probably the low point of the year for the stock markets, and, unless we retest those lows, I am not too worried. It also shows the level of the stock markets when we started investing again, when they hit their 2009 high on June 15th and where we are today. It shows we are better off than we might have thought, but not as well as we probably wanted to be. It shows we may be starting into that summer range-bound trading area. Once the kids are back in school and vacations are over, traders will get more serious and will give us some direction.
Finally, it still looks like this decade will go down as the worst in history. The first decade of the 21st Century will not be over until the end of 2009; however, through December 31, 2008, the S&P 500 has lost a total of 32.9%, for an average annual rate of return of -4.4%. For every $100,000 invested January 1, 2000, investors would have $67,251 on December 31, 2008. The S&P 500 will need to have a return in excess of 41.7% in 2009, and that does not appear likely, in order to avoid it becoming the worst investment decade on record. Be thankful that our stops worked last year and got us out of our investments. The normal asset allocation's buy and hold did not work during this decade.
God bless!
Wednesday, June 10, 2009
Don't underestimate President Obama
President Bush and Treasury Secretary Paulson took a lesson out of Alan Greenspan's book "The Age of Turbulence" when they set up the bailouts of AIG and the banking system. In his book the Ex-Federal Reserve Chairman explains how bailouts like this were done several times in the past. The first time the Fed was happy just to get close to breaking even but, after that, the Fed actually started to make a profit from such bailouts.
In 2008's original plan, the government would buy troubled assets in the banks, bundle them and then sell them in auction, similar to how the government bailed out Mexico's loans back in the early 1990s. The original TARP program did not include the government holding stock or having any control over the banks. However, October 14, 2008, Secretary Paulson and President Bush revised the program to use the TARP money to buy non-voting Tier 1 preferred stock and warrants in the banks. They also put restrictions on how the banks could do business and on senior executive compensation.
Many economists argued that this plan would be ineffective in inducing banks to lend money, since it appeared that the bank would be paying more interest on the government loans than what they could charge customers. Here again, this was exactly what Alan Greenspan had done to Mexico and why Mexico ended up paying these loans back early.
Earlier this year some banks wanted to pay back the TARP money, to get the government restrictions removed from their companies. President Obama put this off by requiring bank stress tests.
Ten of these banks bought back $68 billion of these shares yesterday. That has given the government a 5% profit on that part of the transaction in a very short period of time. Now these banks may still have to buy back warrants worth approximately $5 billion more to completely free themselves from government restrictions.
President Obama and his team, being the shrewd politicians that they are, put the banks off long enough to insure that the banks were strong enough to survive and to make sure that the government came out of the process with a handsome profit. In doing so, they also gave notice that they are going to be a force to be reckoned with now and in the future.
So why did the banks want to pay this money back so very much? First, the executives did not like the government telling them how much and how they could get paid. Second, if someone gave you $100 at 7% interest and told you to loan it out at 3% or 5%, what would you do?
Now some people will say that the government has no place making a profit from something like this. I think they are damn lucky to still be in business.
I think Nassim Nicholas Taleb,author of the Black Swan, put it best. I will paraphrase what he said: The U.S. economy is broken, but not beyond repair. It does not necessarily need more regulation, but more intelligent regulation. Plus, we should let companies like Citibank and General Motors fail once they become too big and cumbersome and act irresponsibly. Nothing should be allowed to get too big to fail. What is fragile should break early while it is still small. People who drove a school bus blindfolded and crashed it should never be given a new bus.
To read more of what Taleb said go to http://tiny.cc/zHfEU
In 2008's original plan, the government would buy troubled assets in the banks, bundle them and then sell them in auction, similar to how the government bailed out Mexico's loans back in the early 1990s. The original TARP program did not include the government holding stock or having any control over the banks. However, October 14, 2008, Secretary Paulson and President Bush revised the program to use the TARP money to buy non-voting Tier 1 preferred stock and warrants in the banks. They also put restrictions on how the banks could do business and on senior executive compensation.
Many economists argued that this plan would be ineffective in inducing banks to lend money, since it appeared that the bank would be paying more interest on the government loans than what they could charge customers. Here again, this was exactly what Alan Greenspan had done to Mexico and why Mexico ended up paying these loans back early.
Earlier this year some banks wanted to pay back the TARP money, to get the government restrictions removed from their companies. President Obama put this off by requiring bank stress tests.
Ten of these banks bought back $68 billion of these shares yesterday. That has given the government a 5% profit on that part of the transaction in a very short period of time. Now these banks may still have to buy back warrants worth approximately $5 billion more to completely free themselves from government restrictions.
President Obama and his team, being the shrewd politicians that they are, put the banks off long enough to insure that the banks were strong enough to survive and to make sure that the government came out of the process with a handsome profit. In doing so, they also gave notice that they are going to be a force to be reckoned with now and in the future.
So why did the banks want to pay this money back so very much? First, the executives did not like the government telling them how much and how they could get paid. Second, if someone gave you $100 at 7% interest and told you to loan it out at 3% or 5%, what would you do?
Now some people will say that the government has no place making a profit from something like this. I think they are damn lucky to still be in business.
I think Nassim Nicholas Taleb,author of the Black Swan, put it best. I will paraphrase what he said: The U.S. economy is broken, but not beyond repair. It does not necessarily need more regulation, but more intelligent regulation. Plus, we should let companies like Citibank and General Motors fail once they become too big and cumbersome and act irresponsibly. Nothing should be allowed to get too big to fail. What is fragile should break early while it is still small. People who drove a school bus blindfolded and crashed it should never be given a new bus.
To read more of what Taleb said go to http://tiny.cc/zHfEU
Thursday, May 28, 2009
The average Joes aren't paying close enough attention
The following is not meant to be a political article, but intended to defend free markets.
On May 1st, the rule of law, the bedrock of our legal and economic systems was chipped. Instead of company ownership being redistributed based on the provider's place in the legal capital structure, as the law requires, Chrysler's redistribution of assets took place based on a very subjective criterion. By shafting bondholders and undermining the bankruptcy system, the legal system may change the way investors view different investments and the risk of those investments.
Using the public's economic fear of the current recession as a weapon, the government took Chrysler from its rightful owners: Secured loan holders (banks, stockholders, mutual funds, hedge funds and pension funds). They gave it to struggling, very sympathetic, $40-an-hour earning blue collar workers, who will now be earning $15 an hour (Chrysler's employees and the United Auto Workers Union). Chrysler was stolen from its rightful owners.
Bond investors spend time studying bond covenants, which spell out how assets are disbursed in the event of a bankruptcy. Secured senior lenders get the secured assets; unsecured, junior bondholders and loan-holders follow (as a part of leveraged buyout, Chrysler had no unsecured outstanding bonds or loans); unions and employees are next in line; and equity investors get whatever is left, which in this case would be almost nothing.
For 200 years the United States has had a well functioning bankruptcy-court system that was designed to make sure that division of assets is equitable. That system has now been threatened.
For the rest of this article go to: http://www.creativefinancialdesign.com/Level1/contactus.html and request a free copy of our newsletter.
On May 1st, the rule of law, the bedrock of our legal and economic systems was chipped. Instead of company ownership being redistributed based on the provider's place in the legal capital structure, as the law requires, Chrysler's redistribution of assets took place based on a very subjective criterion. By shafting bondholders and undermining the bankruptcy system, the legal system may change the way investors view different investments and the risk of those investments.
Using the public's economic fear of the current recession as a weapon, the government took Chrysler from its rightful owners: Secured loan holders (banks, stockholders, mutual funds, hedge funds and pension funds). They gave it to struggling, very sympathetic, $40-an-hour earning blue collar workers, who will now be earning $15 an hour (Chrysler's employees and the United Auto Workers Union). Chrysler was stolen from its rightful owners.
Bond investors spend time studying bond covenants, which spell out how assets are disbursed in the event of a bankruptcy. Secured senior lenders get the secured assets; unsecured, junior bondholders and loan-holders follow (as a part of leveraged buyout, Chrysler had no unsecured outstanding bonds or loans); unions and employees are next in line; and equity investors get whatever is left, which in this case would be almost nothing.
For 200 years the United States has had a well functioning bankruptcy-court system that was designed to make sure that division of assets is equitable. That system has now been threatened.
For the rest of this article go to: http://www.creativefinancialdesign.com/Level1/contactus.html and request a free copy of our newsletter.
Wednesday, May 20, 2009
News that lulled the markets:
Monday, May 18, 2009: As in most weeks before a holiday, there appears to be little earth shattering news. However, with the lack of bad news, the markets made their own news by posting stellar one day returns: DJIA +2.85%, Nasdaq + 3.11%, S&P 500 +3.04% and EAFE +0.37%. Oh those international guys never seem to be in step (EAFE).
The best news of the day for me was being on the cover of Lansing State Journal's Business Weekly, at http://tiny.cc/a5swA .
Tuesday, May 19, 2009: The Supreme Court agreed to hear a potentially significant appeal from Conrad Black., the jailed former newspaper CEO who was convicted under the broadly worded anti-fraud law that makes it a crime to deprive someone of honest services. Black was prosecuted for skimming millions of dollars from Hollinger International and the Chicago Sun Times.
His attorney says the vaguely worded criminal prohibition allows prosecutors to charge corporate executives and public officials with crimes, even without proving they wrongly took money for themselves.
This sounds, to me, like something that should be used on some of the CEOs from the banks and companies that screwed up the economy last year.
Another item Tuesday was an article on Ford adapting the EcoBoost system that BMW and Audi have used to create more energy efficiant cars. They are going to use it in their Lincoln MKS and MKT, Ford Taurus and Flex crossovers. In 2010 they plan to put it into their vehicle of choice for the Millionaire Next Door, the Ford F-150 pickup.
The EcoBoost combines turbocharging with the direct injection of gasoline to allow Ford to replace larger engines like V8s with smaller, more fuel efficient V6 engines without giving up much performance. http://tiny.cc/tLNtp
Wednesday, May 20, 2009: The Vex, a stock market confidence gauge, is showing investors are more comfortable and think they see more clarity in the stock markets than earlier this year. These same investors have less fear of the stock markets and are less panicked.
All this is as we appoach the General Motors chapter 11 filing deadline. Is it just me or does this look like a possible train wreck going somewhere to happen?
The best news of the day for me was being on the cover of Lansing State Journal's Business Weekly, at http://tiny.cc/a5swA .
Tuesday, May 19, 2009: The Supreme Court agreed to hear a potentially significant appeal from Conrad Black., the jailed former newspaper CEO who was convicted under the broadly worded anti-fraud law that makes it a crime to deprive someone of honest services. Black was prosecuted for skimming millions of dollars from Hollinger International and the Chicago Sun Times.
His attorney says the vaguely worded criminal prohibition allows prosecutors to charge corporate executives and public officials with crimes, even without proving they wrongly took money for themselves.
This sounds, to me, like something that should be used on some of the CEOs from the banks and companies that screwed up the economy last year.
Another item Tuesday was an article on Ford adapting the EcoBoost system that BMW and Audi have used to create more energy efficiant cars. They are going to use it in their Lincoln MKS and MKT, Ford Taurus and Flex crossovers. In 2010 they plan to put it into their vehicle of choice for the Millionaire Next Door, the Ford F-150 pickup.
The EcoBoost combines turbocharging with the direct injection of gasoline to allow Ford to replace larger engines like V8s with smaller, more fuel efficient V6 engines without giving up much performance. http://tiny.cc/tLNtp
Wednesday, May 20, 2009: The Vex, a stock market confidence gauge, is showing investors are more comfortable and think they see more clarity in the stock markets than earlier this year. These same investors have less fear of the stock markets and are less panicked.
All this is as we appoach the General Motors chapter 11 filing deadline. Is it just me or does this look like a possible train wreck going somewhere to happen?
Wednesday, May 13, 2009
News to ponder:
Saturday, May 9, 2009: 9 out of 13 banks going through the Federal Governments's stress test did not need to take more money.
Monday, May 11, 2009: Over the last 10 years, nearly 2 out of 3 actively managed mutual funds underperformed their category benchmarks after fees and taxes.
Tuesday, May 12, 2009: President Obama's top antitrust official announced that the administration would restore an aggressive enforcement policy against corporations that use their market dominance to elbow out competitors or to keep them from gaining market shares. This is a direct reverse of President Bush's administration's approach, which strongly favored defendants against antitrust claims. It returns to a policy that led to the landmark antitrust lawsuits against Microsoft and Intel in the 1990s.
Many smaller companies complaining of abusive practices by their larger rivals were so frustrated by the Bush administration's antitrust policy that they went to the European Commission and to Asian authorities. May 13, 2009, the European Union regulators slapped Intel with a $1.45 billion fine today for unfair antitrust actions undermining rival chip maker AMD.
Wednesday, May 13, 2009: April home foreclosures shocked everyone with a 32% increase over the year before and 1% higher than last March's record breaking levels. There was a record 342,000 foreclosures. More than 1.3 million homes have now been foreclosed on since the market meltdown began in August 2007. The top 10 states were in order highest to lowest: Nevada, Florida, California, Arizona, Idaho, Utah, Georgia, Illinois, Colorado and Ohio. Hooray, Michigan is not #1 in something!
The stock markets lost money for the last 3 days. It will be very interesting to see how the stock markets react as we get closer to General Motor's Chapter 11 filing deadline, June 1, 2009. I plan to be very careful for the next 4 weeks.
Monday, May 11, 2009: Over the last 10 years, nearly 2 out of 3 actively managed mutual funds underperformed their category benchmarks after fees and taxes.
Tuesday, May 12, 2009: President Obama's top antitrust official announced that the administration would restore an aggressive enforcement policy against corporations that use their market dominance to elbow out competitors or to keep them from gaining market shares. This is a direct reverse of President Bush's administration's approach, which strongly favored defendants against antitrust claims. It returns to a policy that led to the landmark antitrust lawsuits against Microsoft and Intel in the 1990s.
Many smaller companies complaining of abusive practices by their larger rivals were so frustrated by the Bush administration's antitrust policy that they went to the European Commission and to Asian authorities. May 13, 2009, the European Union regulators slapped Intel with a $1.45 billion fine today for unfair antitrust actions undermining rival chip maker AMD.
Wednesday, May 13, 2009: April home foreclosures shocked everyone with a 32% increase over the year before and 1% higher than last March's record breaking levels. There was a record 342,000 foreclosures. More than 1.3 million homes have now been foreclosed on since the market meltdown began in August 2007. The top 10 states were in order highest to lowest: Nevada, Florida, California, Arizona, Idaho, Utah, Georgia, Illinois, Colorado and Ohio. Hooray, Michigan is not #1 in something!
The stock markets lost money for the last 3 days. It will be very interesting to see how the stock markets react as we get closer to General Motor's Chapter 11 filing deadline, June 1, 2009. I plan to be very careful for the next 4 weeks.
Thursday, May 07, 2009
News you can use:
Monday, May 4, 2009: Warren Buffett says he sees the economic slide ending, but won't put a timetable on recovery.
He believes Treasury Secretary Paulson and Fed Chairman Bernanke acted honorably and intelligently when they forced Bank of America to close the Merrill Lynch acquisition. Considering the fragile situation at the time, had Bank of America been allowed to invoke a major adverse change clause and back out, it may have been disastrous for the financial system. And although they have sympathy for Wells Fargo's complaints about being forced to accept TARP money against its will, by and large they believe the government handled the financial crisis well.
Inflation: The aggressive stimulus policies will have consequences, and might produce inflation. The US borrows from the rest of the world and will have an incentive to reduce the cost of that debt by inflating the currency. It is the easiest way out, and therefore the most likely. Incidentally, US revenue from taxes this year is going to be lower than last year; and so the people actually paying for the AIG bonuses and all those other expenditures we had recently are the Chinese and other foreigners who are buying US government bonds. They will see their purchasing power erode, perhaps substantially. The impact of foreign exchange rates is unclear since other countries are doing even worse than we are, running even larger deficits per GDP in order to offset falling demand.
Future of the world's economy: While Buffett has no idea what the near future holds, he believes that, over time, people will live better. We are able to produce today much more than our ancestors did, even though they had the same inherent intelligence and natural resources we have. But our system unleashes human potential and that process has only just started. There will be greed and fear, but the trend will be improving. Despite all the horrors of the 20th century, with two world wars, political turmoil, a Great Depression and several recessions, US standard of living improved sevenfold. Our enormous human potential will generate much more progress, despite occasional hiccups.
Tuesday, May 5, 2009: Inflation: Kraft Foods, Inc., the world's second largest food maker, said first quarter profits gained 10% on price increases and cost savings. Net income advanced to $660 million from $599 million a year earlier.
I waited to post this week's blog for one day, because I wanted to know more about the following two items. They are the real news of the week.
Thursday, May 7, 2009: Associated Press: Some of the nation's largest banks will be scrambling to demonstrate that they can raise capital after results of government stress tests leaked out, showing many need more funds. The Treasury Department will officially release results later Thursday. The tests were designed to gauge whether any of the nation's 19 largest banks would need more capital to survive a deeper recession. It turns out many of the banks do: Wells Fargo & Co., Citigroup, Inc. and Bank of America Corp. all need billions more, regulators have told them. Citigroup will need to raise about $5 billion; Bank of America will need to raise $34 billion; Wells Fargo needs between $13 billion and $15 billion; GMAC, the lending arm of beleaguered automaker General Motors, is said to need $11.5 billion; Morgan Stanley is looking at between $1 billion and $2 billion. The Journal said at least seven of the banks will need a combined $65 billion. The entire group is deemed to need around $100 billion combined. Officials have said they will not let any of the 19 institutions tested fold.
The first test scenario envisioned unemployment reaching 8.8 percent in 2010 and housing prices dropping another 14 percent this year. The second imagined unemployment rising to 10.3 percent next year and homes losing another 22 percent of their value this year. But economic assumptions have changed since the tests were designed in February. Unemployment already has surpassed the 8.4 percent the test's first scenario predicts for 2009, which leaves some analysts wondering whether the tests were harsh enough.
General Motors, which faces a June 1 deadline to cut debt and expenses or else file for bankruptcy protection, on Thursday said it lost $6 billion in the first quarter. GM is losing $113 million a day. It had $11.6 billion in reserve as of March 31, 2009, but I think we have seen that would probably be gone by the end of June.
Thursday, May 7, 2009: General Motors, which faces a June 1 deadline to cut debt and expenses or else file for bankruptcy protection, on Thursday said it lost $6 billion in the first quarter. GM is losing $113 million a day. It had $11.6 billion in reserve as of March 31, 2009, but I think we have seen that would probably be gone by the end of June.
Many people were surprised that President Obama forced Rick Wagner to resign as the Chairman of General Motors. I was not. I believe that Mr. Wagner knew General Motors was going to file chapter 11 bankruptcy when it took the $15.4 billion from the federal government. I also believe President Obama found out about this and gave Mr. Wagner a choice of resigning or going to jail.
I can see no other option for General Motors than filing chapter 11 bankruptcy on or before June 1, 2009 and that, as I pointed out last week, is going to test the strength of the current stock market rally.
He believes Treasury Secretary Paulson and Fed Chairman Bernanke acted honorably and intelligently when they forced Bank of America to close the Merrill Lynch acquisition. Considering the fragile situation at the time, had Bank of America been allowed to invoke a major adverse change clause and back out, it may have been disastrous for the financial system. And although they have sympathy for Wells Fargo's complaints about being forced to accept TARP money against its will, by and large they believe the government handled the financial crisis well.
Inflation: The aggressive stimulus policies will have consequences, and might produce inflation. The US borrows from the rest of the world and will have an incentive to reduce the cost of that debt by inflating the currency. It is the easiest way out, and therefore the most likely. Incidentally, US revenue from taxes this year is going to be lower than last year; and so the people actually paying for the AIG bonuses and all those other expenditures we had recently are the Chinese and other foreigners who are buying US government bonds. They will see their purchasing power erode, perhaps substantially. The impact of foreign exchange rates is unclear since other countries are doing even worse than we are, running even larger deficits per GDP in order to offset falling demand.
Future of the world's economy: While Buffett has no idea what the near future holds, he believes that, over time, people will live better. We are able to produce today much more than our ancestors did, even though they had the same inherent intelligence and natural resources we have. But our system unleashes human potential and that process has only just started. There will be greed and fear, but the trend will be improving. Despite all the horrors of the 20th century, with two world wars, political turmoil, a Great Depression and several recessions, US standard of living improved sevenfold. Our enormous human potential will generate much more progress, despite occasional hiccups.
Tuesday, May 5, 2009: Inflation: Kraft Foods, Inc., the world's second largest food maker, said first quarter profits gained 10% on price increases and cost savings. Net income advanced to $660 million from $599 million a year earlier.
I waited to post this week's blog for one day, because I wanted to know more about the following two items. They are the real news of the week.
Thursday, May 7, 2009: Associated Press: Some of the nation's largest banks will be scrambling to demonstrate that they can raise capital after results of government stress tests leaked out, showing many need more funds. The Treasury Department will officially release results later Thursday. The tests were designed to gauge whether any of the nation's 19 largest banks would need more capital to survive a deeper recession. It turns out many of the banks do: Wells Fargo & Co., Citigroup, Inc. and Bank of America Corp. all need billions more, regulators have told them. Citigroup will need to raise about $5 billion; Bank of America will need to raise $34 billion; Wells Fargo needs between $13 billion and $15 billion; GMAC, the lending arm of beleaguered automaker General Motors, is said to need $11.5 billion; Morgan Stanley is looking at between $1 billion and $2 billion. The Journal said at least seven of the banks will need a combined $65 billion. The entire group is deemed to need around $100 billion combined. Officials have said they will not let any of the 19 institutions tested fold.
The first test scenario envisioned unemployment reaching 8.8 percent in 2010 and housing prices dropping another 14 percent this year. The second imagined unemployment rising to 10.3 percent next year and homes losing another 22 percent of their value this year. But economic assumptions have changed since the tests were designed in February. Unemployment already has surpassed the 8.4 percent the test's first scenario predicts for 2009, which leaves some analysts wondering whether the tests were harsh enough.
General Motors, which faces a June 1 deadline to cut debt and expenses or else file for bankruptcy protection, on Thursday said it lost $6 billion in the first quarter. GM is losing $113 million a day. It had $11.6 billion in reserve as of March 31, 2009, but I think we have seen that would probably be gone by the end of June.
Thursday, May 7, 2009: General Motors, which faces a June 1 deadline to cut debt and expenses or else file for bankruptcy protection, on Thursday said it lost $6 billion in the first quarter. GM is losing $113 million a day. It had $11.6 billion in reserve as of March 31, 2009, but I think we have seen that would probably be gone by the end of June.
Many people were surprised that President Obama forced Rick Wagner to resign as the Chairman of General Motors. I was not. I believe that Mr. Wagner knew General Motors was going to file chapter 11 bankruptcy when it took the $15.4 billion from the federal government. I also believe President Obama found out about this and gave Mr. Wagner a choice of resigning or going to jail.
I can see no other option for General Motors than filing chapter 11 bankruptcy on or before June 1, 2009 and that, as I pointed out last week, is going to test the strength of the current stock market rally.
Tuesday, April 28, 2009
Week's News That moves the Markets
- Monday April 27, 2009, The top story has to be the Swine Flu and it over shadowed the very poor restructure program laid out by General Motor's CEO Fritz Henderson. I was Twittering with a reporter who was checking out what will probably be the first case of Swine Flu for Michigan Monday night.
- Tuesday April 28, 2009, The restructuring of the UAW contract with Chrysler may put off the fall of Chrysler for a few years, but it can't save it alone. Thursday's Government deadline will become crucial to the markets this week! The Government says Bank of America and Citi need to up their bank's capital after the acid tests. Commercial Bank of China and Honda post profits.
- Wednesday April 29, 2009, Swine Flu is still part of what is moving the markets but, during the first two days of the week, it was the fear of the unknown that wreaked havoc on the markets. Now that we have become more knowledgeable, the markets are having a better day.
- Wednesday April 29, 2009, More companies appear to be showing profits for the quarter and this is helping the investment markets. CEOs worth their salt should have been able to, and/or should now be able to shed problems caused by last year's economic meltdown and get their quarterly profits in order during this quarter or next.
- Thursday, April 30, 2009, I will be coordinating the Your Money Bus (www.yourmoneybus.com) stop at the Detroit Public Library, 5201 Woodward Avenue, Detroit, Michigan. The nonprofit group is giving out TOTALLY FREE personal financial planning information to anyone who stops. We will be there from 10:00 a.m. to 3:00 p.m.
- Friday Morning, May 1, 2009, I will be coordinating the Lansing stop of the Your Money Bus (www.yourmoneybus.com). We will be right in front of the State of Michigan's Capitol Building, 100 North Capitol, Lansing, Michigan from 9:00 a.m. to 1:00 p.m. We will be giving out TOTALLY FREE personal financial planning information to anyone who stops by.
- Friday afternoon, May 1, 2009, I will be coordinating the Grand Rapids stop of the Your Money Bus (www.yourmoneybus.com). We will be at the President Ford Museum, Rosa Park Circle, Market Street and Monroe Avenue, in Grand Rapids from 2:30 p.m. to 6:00 p.m. We will be giving out TOTALLY FREE personal financial planning information to anyone who stops by.
Tuesday, April 21, 2009
Notable News of the Week
- Monday April 20, 2009: 67% of all companies reporting in the 1st 2 weeks of this quarter reported positive earnings. A far change from that of the last few quarters.
- Tuesday April 21, 2009: Bank losses have not hit bottom yet! As banks post quarterly reports Bank of New York posts a -51% loss, Comerica posts a -92% loss and Huntington Bank went from a $ .35 gain to a $6.79 loss for the quarter.
- Wednesday April 22, 2009: McDonald's profit rises on breakfast and drinks, Wells Fargo profit climb 53%, Morgan Stanley wider than expected loss. Stock's earnings are mixed but better than a few months ago.
- Wednesday April 22, 2009: Advertising has changed drastically, over the past few years local and national newspapers, magazines, radio, television and cable stations have had a hard time making enough money from advertising to be profitable and many have had to file chapter 11 bankruptcy. Now Yahoo and other internet advertising firms, who took the business away from the others, are also having earnings problems with their advertising.
Monday, April 13, 2009
Notable News of the Week
- Monday April 13, 2009: Governor Jennifer Granholm would support a graduated income tax. Now you all know I have supported Governor Granholm many times when others have not, but this is insane. Ted's comment: According to an article in Forbes magazine within the last 30 days, Michigan is the #5 most taxed state in the country. Now the Governor wants to raise the taxes even higher? Does she want to be able to say we are #1, the highest taxed state in the country? I would not want that title. Last year we had 2.5 million people leave Michigan and that number is not slowing down. Isn't it time our governmental bodies realize that we cannot support the State's current services. That, rather than raise taxes to cover the costs, it is time to start cutting back services, combining governmental bodies including state, county and city to reduce taxes, not increase them. Governor Granholm, if you keep raising taxes, anyone with money will simply leave the state.
- Tuesday April 14, 2009 Bloomberg: The U.S. government is considering swapping some of the $13.4 billion General Motors Corp. owes it for an equity stake in a stripped-down version of the car maker. Then 2 hours later Reuters UK: GM bankruptcy fears drag down auto stocks. Ted's Comments: Well, what do you expect after last year's Fannie Mae and Freddie Mac fiasco, where the government asked (told) them to make loans and provide liquidity to the markets and then took them over; causing the stocks to lose 80% of their value? Now they are about to do the same thing to an almost nonexistent GM stock value. If that is not enough, has anyone looked at how many jobs GM going into chapter 11 is going to cost this country? According to Fortune in 2006 GM had 335,000 employees, in 2007 GM had 266,000 employees and the 2008 estimates were 243,000 employees. Under the chapter 11 program GM will end up with less than 133,000 employees and it will probably affect another 500,000 employees of suppliers. That is a loss of over 702,0000 jobs in the last three years and that is probably low. No wonder the country is in a funk! Best not have all our money invested before the June 2009 GM chapter 11 deadline. We are going to want to see how this plays out.
- Wednesday April 15, 2009 Bloomberg: Analysts estimate that profits at S&P 500 companies decreased for the seventh straight quarter in the January to March Period, the longest stretch of declines since at least the Great Depression. Ted's comments: This either means that we will start out of the mess we are currently in or we are out to set a 100 year record. For now we are slowly getting back into investments. However, we are very worried about the June 1, 2009 deadline for GM and will wait to put all our eggs back into investments until we see how that plays out.
Wednesday, April 08, 2009
Mid-Week News to Watch
I download articles into my computer and have the computer read them to me as I get ready for work in the morning. I am going to start posting the articles I feel are noteworthy at least once a week.
- Richard Fisher, President of the Dallas Federal Reserve Bank, said Wednesday that the first "green shoots" of recovery can be seen in the U.S. economy, Dow Jones Newswires reported. (Mr. Fisher has been a person I have listened to and agreed with, for the 11 years I have watched him.)
- U.S Wholesale inventories in February fell by the most ever even as sales rose modestly, according to a report that suggested businesses were getting control of their stocks of goods. (This is important because wholesale inventories have to dry up before factories will be forced to gear up.)
- The commission is expected to unveil the proposal to reinstate the "uptick" rule, that was repealed in the summer of 2007. The rule had been in effect since the early 1930s and was long considered a "circuit-breaker" and/or "tap on the brake" when markets started falling too fast, like last fall. It had kept hedge funds from piling on and causing excessive market sell offs. The SEC will vote Wednesday on which type of rule they intend to propose. (We really need this back, write your Congressperson and Senators.)
- Discounter Family Dollar Stores shares jumped 4.8%, after it said Wednesday that its second-quarter profits rose 33%. (We are starting to get some good quarterly reports, but the majority are still very bad. This is, usually, the sign that we are trying to bottom.)
- Preliminary figures showed auto sales in China reached about 1.03 million in exceeding U.S. auto sales for the third month in a row, accounting for 90% of all auto sales. (Now you know why we want to invest in China first when we go back into our investments.)
Friday, April 03, 2009
Redesigned Web Site and Earth Day
Friday, April 03, 2009 BlogFor those of you who have been following my blog who are not clients I apologize, but the March newsletter will not appear in this blog. Some things are only for paying clients.
We do have two new announcements:
First, we have opened a new office in Portage, Michigan. Many of you know we have been approached to open offices in Las Vegas and Phoenix, but we decided that would take too much time away from our current clients.
Second, our completely redesigned web site is now up and running. It took six months and a lot of time and money, but the new web site has a lot more to offer.
- For the Gen-X type, we have a free financial planning software program available on the left side of the home page. I believe you will find it very user friendly, life orientated, thorough and, as I mentioned, free.
- There are a lot of flash videos, MP3 player audios and Power Point presentations.
- The In The News area shows most of the WLNS television news clips we have been in over the last 12 months and articles we have been in from Business Week, The Wall Street Journal, Los Angeles Times to the Peruvia news (Peru, South America) and more.
- There are areas showing frequently asked questions, our privacy policy, contract, fees, disclosure and more.
- Under What Clients Can Expect is our new Planning Tenets. This should be interesting to even our long-time clients.
- Finally, there is a new password-protected Client Links area.
- That helps clients access their Charles Schwab accounts.
- There is an access to MoneyGuidePro, a very thorough Life, Financial and Wealth Planning program that is only for client use.
- There are links to the Internal Revenue Service, Social Security, Student Aid information, the Special Needs Alliance and other client oriented areas.
- We are hoping that, by next year, clients will be able to store their valuable paperwork like tax returns, wills, trusts, medical directives, and powers of attorney. They will be able to access their investment reports, 1099 forms and average cost basis forms whenever they wish, via their own computer.
$ Ways to Go Green and Save Green $
With Earth Day just around the corner, you might want to think about ways you can help Mother Earth while helping yourself save some money. Here are just a few small ways you can modify your own hapits to help the environment and your wallet:
- Recycle. Everything from cell phones to computers can now be recycled or reused. Most computer manufacturers now have recycling programs, and cell phones can be donated to a number of charities.
- When you need a new monitor, get an LCD. Flat-screen LCDs use less energy than plasma monitors, and they're now Energy Star rated.
- Reduce "vampire power" with a smart power strip. Many of the devices you use every day pull a fair amount of current even when they're not turned on. A smart power strip can detect when devices are shut off and prevent the flow of current to those devices. Some can also be set to automatically power down peripheral devices, such as printers, whenever the main device (like your computer) shuts off.
- Buy electronics that use rechargeable batteries. You'll have to buy fewer disposable batteries, and fewer disposable batteries will end up in landfills.
- Don't buy it if you don't need it. A lot of people replace their cell phones, MP3 players, and other gadgets as soon as the newest version comes out. If you stick with the old version through a new product release or two, it saves you money and reduces landfill waste.
Friday, February 20, 2009
February 2009 Newsletter Text
It has been beyond frustrating to watch what we believe to be the raping and pillaging of America by a privileged few who rotate between the executive suite of the largest investment firms and the top tiers of regulatory agencies and the administration. You, our clients, came to Creative Financial Design with dollars, hopes, dreams and fears in hand, asking for help; and we put our lives, experience, and training on the line to help you do well and help you make good decisions about your present and future. Then we get to watch while a select group of (words my mother taught me not to say) destroy institutions and wreak havoc on stocks, options, and the trust and confidence of the American people. On top of that, we watch while politicians use this opportunity to maximize their personal benefit under the guise of a proposed bailout, promising security that is purchased at the price of our grandchildren's future.
I suspect this bailout will benefit those executives. I suspect it may even end up making money for taxpayers. But current sentiment is certainly justifiable, and there is a clear danger that these same executives may do more lasting damage than just the financial crisis they brought down upon us.
But, in the meantime, I think it's fair and natural that all of us look back at the global meltdown, at the lockup of capitalism itself, at a mess that will take perhaps a trillion taxpayer dollars to fix, and recognize that the people who engineered the mess received millions in individual bonuses that will never have to be paid back, and were favored by tax regulatory oversight even as they were arguing that fiduciary planners, like myself, are under-regulated.
I think it's appropriate to vent some of this anger and frustration to you, the press and our elected representatives. It may be time to start making sure we never have to go through something like this again.
This next issue is very interesting and complicated. I greatly regret all the damage that has been caused to the American people by the corporate meltdown; however, some good may come out of it in the end. For the first time I see millions of Americans are waking up to the idea that:
The fact that millions of people have reformed their spending habits is part of what has created this economic downturn. Our economy, after all, is heavily dependent on consumer spending, and every ec9onomic stimulus package is passed in hopes that taxpayers will spend every dime of it rather than pay down their debt.
I don't know what the answer is here, but it seems to me that our economy has to find a solution to this dilemma:
I want to thank the many clients who have expressed their concern about my mental and physical state during this period of time. I want to especially thank you for the praise for the work that we have done. Many of you have said things like, "Thank you for caring about me," "Thank you for worrying," "I trust you to do the right thing," "I know you have an overall plan for me," "I'm so worried about you and your staff," etc. Absolutely amazing! My very favorite comment from clients (and it has been said by many) is, "Thank you for not letting us lose as much as we might have!"
The thing that strikes me the most throughout this mess is the absolutely essential value of the "financial plan". This is our road map that we have developed with clients, that is supposed to reflect their values, that should take into account emergencies or disasters along the way (whether it is a worldwide financial meltdown, a sudden illness, a catastrophic weather related incident, a job loss, the collapse of a company or industry). So far our financial plan has worked. Our stops on our investments have reduced our losses and worked as advertised.
I will admit that I am tired. It is hard to sleep through the night sometimes with all that is running around in my mind. However, now is going to be the most critical time for us to be sharp. For now we are approaching the time to take action.
How to Survive a Bear Market
It is hard to watch 500 and 1,000 point drops in the Dow; these last few months have been brutal on all of us. It was even harder to watch our portfolios fall with it. The Dow was off 46.36% from its October 11, 2007 high, and the more diversified S&P 500 was off 51.84%. Invested alongside you in the very same investments, we certainly felt your pain. And we feel it even more professionally that we do for our personal portfolios. We did not have a crystal ball to tell us how bad it was going to get, but our sell signals did warn us and help us avoid the majority of the meltdown. The ironical part of all this is that one of our biggest clients fired us last March, because they no longer believed in our signals. I have wondered how much money they lost, but it is more important now that I worry about taking care of all of you.
Other planners are telling their clients, "Going to cash would have been guessing and you did not hire us to 'guess' with your investment portfolio." "You need to ride out the market's ups and downs."
Well, we called this market and got you out of it long before the real meltdown. Now, unfortunately, these same advisors may be right if we are not careful. They are also telling their clients that, "These 'experts', who get you out of the market during bad times, usually remain too fearful to get back into the market, at their clients' expense."
As I have always said, the time to get back into investments is at the point of maximum fear, when there is blood in the streets, and that time is coming.
Waiting out a bear market in cash sounds like a great idea but, without a crystal ball, it is among the worst possible investment advice. Investment gains are made in just a few days out of the year. Yet another study (this one by consulting firm SEI in 2002) showed that investors who cashed-out during a bear market and waited until the market "recovered" before getting back in, jumped in too late and lost out on double digit gains. Investors who held on through the last 12 bear markets gained an average of 32.5% in the first year following the market's recovery. Investors, who jumped back into the market just 3 months late, gave up over 17% of the market's gains and it took them an additional 1 1/2 years to recoup their losses.
Investors Who Gain----------------------------After 1 Year-----------Broke Even
Rode the Markets Down & Back Up------------32.50%---------------1.5 Years
Jumped back in 1 week too late-----------------24.30%---------------2.5 Years
Jumped back in 3 months too late-------------14.80%---------------3.0 Years
This bear market will end, and it will do so when we least expect it. Remember, recoveries are only labeled thus in hindsight. By the time the headlines scream 'recovery,' it's too late -- investors who do not reinvest will have missed out. Worse yet, they will have made the classic investing mistake of "sell low and buy high." Well not so low, but almost all of us have to make up some ground.
You hired us to develop a thoughtful investment strategy and keep you out of the FOG. We did that and got you out of the markets for the majority of the 2008 economic meltdown. We did this by looking at our buy sell signals. Our clients who took our advice in 2007 and 2008, who had accounts containing only ETFs, were down between -3.42% to -17.38%.
Today's market is the same market, but the flip side of the coin. We are now getting buy signals. Oil has been giving us a buy signal since the market bottomed in November. We have waited for a confirming signal and expect to get it soon. Fear has gripped most of us and it is going to take courage, but it is about time to buy back into the markets before we lose out on the gains.
You're In or Out!
There are really only two ways to invest in the market...position yourself for when it goes up, or for when it goes down. The market goes down roughly 30-40% of the time (depending on the time periods). Why bet against it? Remember: For investment portfolio growth, it is more important to be IN the market when it rises and OUT of the market when it falls. Keep in mind that the huge markets' swings during 2008 were due to leverage. If an investment bank had to unwind a position that was leveraged 30 or 50 to 1, it had to sell an awful low of securities to do so, resulting in the point tumbles. Now that leverage appears to be about out of the markets and the government appears to have done all the damage it can do. So now the markets should get back to what they do best.
What Should You Do?
There is no question that we are in a recession. Even after the credit markets start to recover, we still have several quarters of negative growth ahead of us. Recovery from this bear market will likely take years, not months, and we have to retest our bottoms. Common sense needs to replace fear. This is a time to spend less and save more. It is a time to focus on family and friends and less on material things. Make sure your cash reserve is adequate. Reduce debt if you have any. Turn off the 'fear mongers' on television and remember that you are in this for the long haul.
"Markets are capable only of creating temporary declines. Only people can create permanent losses."
Now it is time for us, Creative Financial Design, to do our thing for you. There are no guarantees; but it is time to rely on the buy and sell signals that took care of us in 2008 and got us out of the markets to tell us when to get back in. That time is not today, but I think it is getting closer. For now we sit in cash and bonds, but soon it will be time to get back into the markets.
Finally, for those of you who had accounts under $50,000, with annuities, variable life insurance, 401(k) accounts or chose not to take our advice, I am sorry you did not do better. You lost between -15.78% to -40.17% in 2008. In August of 2006 when our first sell signal showed up, I suggested, in many cases, you cash in your annuities or combine accounts you had with other advisors to raise the value of your accounts with us, so they were large enough that you could use our ETF and stop formula. If you had done this, your losses would have been much less. I do not say this now to make you mad at me. I bring it up because I believe the recovery that is coming will work much better within our system than with your current investments. Plus, market meltdowns seem to be happening more often than in the past and, because of the increasing speed of computers, these meltdowns appear to be going much deeper than in the past. The markets are going to recover. They always do but, they are also going to have another meltdown and, I want you to fare better in future meltdowns than you did in this one.
Thank you for your courage and patience during these difficult times. We take nothing for granted, and are honored by your trust in us. When you are done with this newsletter, please pass it on to someone you think would benefit from it. If you know of someone who might benefit from our counsel, please give them a copy of this newsletter and have them contact us; for, as all businesses during this time, we are looking for new business.
God bless!
Ted Feight
I suspect this bailout will benefit those executives. I suspect it may even end up making money for taxpayers. But current sentiment is certainly justifiable, and there is a clear danger that these same executives may do more lasting damage than just the financial crisis they brought down upon us.
But, in the meantime, I think it's fair and natural that all of us look back at the global meltdown, at the lockup of capitalism itself, at a mess that will take perhaps a trillion taxpayer dollars to fix, and recognize that the people who engineered the mess received millions in individual bonuses that will never have to be paid back, and were favored by tax regulatory oversight even as they were arguing that fiduciary planners, like myself, are under-regulated.
I think it's appropriate to vent some of this anger and frustration to you, the press and our elected representatives. It may be time to start making sure we never have to go through something like this again.
This next issue is very interesting and complicated. I greatly regret all the damage that has been caused to the American people by the corporate meltdown; however, some good may come out of it in the end. For the first time I see millions of Americans are waking up to the idea that:
- It is important to live within your means.
- Taking on debt makes you vulnerable.
- Consumer purchases may be less valuable than contributions to savings.
- Just maybe some of this new found thrift might find its way to the government policymakers as well.
The fact that millions of people have reformed their spending habits is part of what has created this economic downturn. Our economy, after all, is heavily dependent on consumer spending, and every ec9onomic stimulus package is passed in hopes that taxpayers will spend every dime of it rather than pay down their debt.
I don't know what the answer is here, but it seems to me that our economy has to find a solution to this dilemma:
- The behavior that is good for the consumer is bad for the corporate world.
- The behavior that is good for the corporate world is bad for the consumer.
I want to thank the many clients who have expressed their concern about my mental and physical state during this period of time. I want to especially thank you for the praise for the work that we have done. Many of you have said things like, "Thank you for caring about me," "Thank you for worrying," "I trust you to do the right thing," "I know you have an overall plan for me," "I'm so worried about you and your staff," etc. Absolutely amazing! My very favorite comment from clients (and it has been said by many) is, "Thank you for not letting us lose as much as we might have!"
The thing that strikes me the most throughout this mess is the absolutely essential value of the "financial plan". This is our road map that we have developed with clients, that is supposed to reflect their values, that should take into account emergencies or disasters along the way (whether it is a worldwide financial meltdown, a sudden illness, a catastrophic weather related incident, a job loss, the collapse of a company or industry). So far our financial plan has worked. Our stops on our investments have reduced our losses and worked as advertised.
I will admit that I am tired. It is hard to sleep through the night sometimes with all that is running around in my mind. However, now is going to be the most critical time for us to be sharp. For now we are approaching the time to take action.
How to Survive a Bear Market
It is hard to watch 500 and 1,000 point drops in the Dow; these last few months have been brutal on all of us. It was even harder to watch our portfolios fall with it. The Dow was off 46.36% from its October 11, 2007 high, and the more diversified S&P 500 was off 51.84%. Invested alongside you in the very same investments, we certainly felt your pain. And we feel it even more professionally that we do for our personal portfolios. We did not have a crystal ball to tell us how bad it was going to get, but our sell signals did warn us and help us avoid the majority of the meltdown. The ironical part of all this is that one of our biggest clients fired us last March, because they no longer believed in our signals. I have wondered how much money they lost, but it is more important now that I worry about taking care of all of you.
Other planners are telling their clients, "Going to cash would have been guessing and you did not hire us to 'guess' with your investment portfolio." "You need to ride out the market's ups and downs."
Well, we called this market and got you out of it long before the real meltdown. Now, unfortunately, these same advisors may be right if we are not careful. They are also telling their clients that, "These 'experts', who get you out of the market during bad times, usually remain too fearful to get back into the market, at their clients' expense."
As I have always said, the time to get back into investments is at the point of maximum fear, when there is blood in the streets, and that time is coming.
Waiting out a bear market in cash sounds like a great idea but, without a crystal ball, it is among the worst possible investment advice. Investment gains are made in just a few days out of the year. Yet another study (this one by consulting firm SEI in 2002) showed that investors who cashed-out during a bear market and waited until the market "recovered" before getting back in, jumped in too late and lost out on double digit gains. Investors who held on through the last 12 bear markets gained an average of 32.5% in the first year following the market's recovery. Investors, who jumped back into the market just 3 months late, gave up over 17% of the market's gains and it took them an additional 1 1/2 years to recoup their losses.
Investors Who Gain----------------------------After 1 Year-----------Broke Even
Rode the Markets Down & Back Up------------32.50%---------------1.5 Years
Jumped back in 1 week too late-----------------24.30%---------------2.5 Years
Jumped back in 3 months too late-------------14.80%---------------3.0 Years
This bear market will end, and it will do so when we least expect it. Remember, recoveries are only labeled thus in hindsight. By the time the headlines scream 'recovery,' it's too late -- investors who do not reinvest will have missed out. Worse yet, they will have made the classic investing mistake of "sell low and buy high." Well not so low, but almost all of us have to make up some ground.
You hired us to develop a thoughtful investment strategy and keep you out of the FOG. We did that and got you out of the markets for the majority of the 2008 economic meltdown. We did this by looking at our buy sell signals. Our clients who took our advice in 2007 and 2008, who had accounts containing only ETFs, were down between -3.42% to -17.38%.
Today's market is the same market, but the flip side of the coin. We are now getting buy signals. Oil has been giving us a buy signal since the market bottomed in November. We have waited for a confirming signal and expect to get it soon. Fear has gripped most of us and it is going to take courage, but it is about time to buy back into the markets before we lose out on the gains.
You're In or Out!
There are really only two ways to invest in the market...position yourself for when it goes up, or for when it goes down. The market goes down roughly 30-40% of the time (depending on the time periods). Why bet against it? Remember: For investment portfolio growth, it is more important to be IN the market when it rises and OUT of the market when it falls. Keep in mind that the huge markets' swings during 2008 were due to leverage. If an investment bank had to unwind a position that was leveraged 30 or 50 to 1, it had to sell an awful low of securities to do so, resulting in the point tumbles. Now that leverage appears to be about out of the markets and the government appears to have done all the damage it can do. So now the markets should get back to what they do best.
What Should You Do?
There is no question that we are in a recession. Even after the credit markets start to recover, we still have several quarters of negative growth ahead of us. Recovery from this bear market will likely take years, not months, and we have to retest our bottoms. Common sense needs to replace fear. This is a time to spend less and save more. It is a time to focus on family and friends and less on material things. Make sure your cash reserve is adequate. Reduce debt if you have any. Turn off the 'fear mongers' on television and remember that you are in this for the long haul.
"Markets are capable only of creating temporary declines. Only people can create permanent losses."
Now it is time for us, Creative Financial Design, to do our thing for you. There are no guarantees; but it is time to rely on the buy and sell signals that took care of us in 2008 and got us out of the markets to tell us when to get back in. That time is not today, but I think it is getting closer. For now we sit in cash and bonds, but soon it will be time to get back into the markets.
Finally, for those of you who had accounts under $50,000, with annuities, variable life insurance, 401(k) accounts or chose not to take our advice, I am sorry you did not do better. You lost between -15.78% to -40.17% in 2008. In August of 2006 when our first sell signal showed up, I suggested, in many cases, you cash in your annuities or combine accounts you had with other advisors to raise the value of your accounts with us, so they were large enough that you could use our ETF and stop formula. If you had done this, your losses would have been much less. I do not say this now to make you mad at me. I bring it up because I believe the recovery that is coming will work much better within our system than with your current investments. Plus, market meltdowns seem to be happening more often than in the past and, because of the increasing speed of computers, these meltdowns appear to be going much deeper than in the past. The markets are going to recover. They always do but, they are also going to have another meltdown and, I want you to fare better in future meltdowns than you did in this one.
Thank you for your courage and patience during these difficult times. We take nothing for granted, and are honored by your trust in us. When you are done with this newsletter, please pass it on to someone you think would benefit from it. If you know of someone who might benefit from our counsel, please give them a copy of this newsletter and have them contact us; for, as all businesses during this time, we are looking for new business.
God bless!
Ted Feight
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