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| Coming Soon - The MUTUALdecision Newsletter! |
| 2008-01-09 06:31:00 |
To provide our readers with even more informative content, we have created the MUTUALdecision Newsletter. The Newsletter will replace our Blog and will be emailed to you for FREE on a weekly basis starting on February 4, 2008.
In our Newsletter we will continue to provide insightful commentary on mutual fund investing and market outlooks that you found in our Blog. In addition, we will feature our Top Mutual Funds sections based on data from the MUTUALdecision Academic Models and abstracts of leading academic research on fund investing.
Thank you for reading our Blog and we hope you continue to enjoy our articles and information in the MUTUALdecision Newsletter. ...
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| The Beginning of the End |
| 2008-01-07 08:49:00 |
Another piece of the puzzle fell into place last week as the economy slides into a recession. The manufacturing index fell to 48%, anything below 50 signals an economic contraction. The December jobs report was mixed. 18,000 new jobs were created but the unemployment index rose to 5.0%. Don’t be surprised to see the January or February jobs report turn negative, at which time the last remaining significant economic indicator will have slipped into the red.
The likelihood of further declines in existing home values was reemphasized last week. Housing prices will have to fall 15% to return to their historical relationship with rents – the point at which renters will consider/be able to afford buying a house. Commercial real estate does not suffer from the same speculative excesses of the residential market but some cracks are appearing in commercial properties as well. Unsold houses being rented are impacting apartment owners, weak retail sales are effecting shopping centers and an economic downturn will effect office rents.
Companies are revising their 2008 earnings forecasts downward or issuing cautionary statements, except for the U.S. auto industry. That’s odd since the auto companies biggest sellers are pickup trucks, followed by SUVs, and the demand for trucks is weakening. Oil hitting $100 a barrel last week doesn’t help the auto industry. Although, the $100 mark is a noteworthy psychological level, the different between $92, $95, $98 a barrel oil is immaterial. Rising food prices, driven by crops being planted for biofuel, is a more significant inflationary worry.
It’s no wonder that the Dow and S&P are down 4% for 2008 and the NASDAQ is down 6%. Hopes of a Fed rate cute may temporarily buoy the stock market but a rate cut, or cuts, won’t enable the U.S. to avoid a recession. Financial firms and banks have to loosen credit and the...
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| 2008 Economic and Investment Outlook |
| 2008-01-02 08:07:00 |
The economy faces serious challenges in 2008: 1. New home sales are at a 16 year low and may go lower; 2. Inflation will be high for the next few months as energy and food prices work their way through the economy; 3. Retail sales will be weak, as evidenced by the Christmas season; 4. Illiquidity in the credit markets will spread from mortgages to auto loans and credit cards due to financial companies tightening their lending standards; 5. Adjustable rate and subprime mortgage problems will continue; 6. Corporate profits will turn negative. These factors will contribute to, but not cause, the 2008 recession and they will be somewhat mitigated by strong export demand (thanks to the weak dollar) and, at least for the time being, good unemployment numbers.
The decline in the value of existing homes is what will cause the 2008 recession and cause it to be the most severe recession since the early 1980s (although not all that bad by historical standards). The bulk of the average American’s savings is in their home and their net worth is decreasing. There will be far fewer mortgage refinancings and home equity loans to monetize housing values. Declining housing values will cause/force consumers to cut back spending.
Existing home prices were down 3.3% for the twelve months ending in November. Although sales were up slightly in November, they’re still down 20% from a year ago. Record levels of foreclosures and mortgages which rates adjust in 2008 make it unlikely the November up tick will be sustained. There will no economic recovery until housing prices bottom. The Fed will cut rates to combat the economic downturn but financial institutions stricter lending standards will mitigate the impact of the Fed’s actions. Thus, we should expect up to four quarters of negative economic growth.
Morgan Stanley, in their Decembe...
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| Seasons Greetings |
| 2007-12-21 16:03:00 |
All of us at MUTUALdecision.com and the MUTUALdecision blog wish you and yours a safe and happy holiday season. Our next blog will appear on January 2. We wish you a prosperous New Year....
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| Investment Tax Strategies for the Holiday Season |
| 2007-12-19 12:58:00 |
The countdown to the New Year has begun but before the ball drops, actually before 4 PM EST on that Monday, review your investments and place your sell orders for tax-driven transactions. For stocks and other securities, make sure your order is placed in time for it to be executed. This is particularly important for thinly traded stock and bonds. Taking a loss will offset gains and you can take an additional $3,000 of losses (on a joint return; $1,500 on a single return) in excess of capital gains as a deduction on your income tax returns. For the maximum advantage, try to offset short-term gains with short-term losses and long-term gains with long-term losses.
For mutual fund investors, even if you haven’t sold any funds this year, you still many have a taxable capital gain. Mutual funds must pass through their net capital gains or losses, and income, to their holders. Give your fund a call if you haven’t heard from it about its 2007 distributions. And, as a general rule, sell a fund before its announced distribution date and buy a fund after that date. This avoids your having to pay taxes on its distributions.
If you’re selling your entire position in a fund or security skip to the next paragraph, but if you’re selling a portion of your holding you need to specify the tax lot(s) you’re selling or the First In, First Out (FIFO) rule will apply. The potential trap here is if you hold a fund or security which you bought at various times, the cost basis of each transaction could be very different. Make sure you specify the most advantageous tax lot to sell. Mutual fund investors have a third option which is to use the average cost of their holding. Note: Before you make any tax-based decisions you should consult your tax adviser.
It’s not too late to make, or maximize, your 2007 IRA and 401-K contributions. Why make them? Becau...
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| Vicious Circles |
| 2007-12-17 14:10:00 |
For the week, the Dow was down 2.1%; the S&P and NASDAQ were off about 2.5%. The new news was inflation. The Producer Price Index increased by 3.2%, in November and 7.2% for past twelve months. The Consumer Price Index was up 4.2% for the same twelve month period. The primary culprit was energy. Gasoline prices increased 35% last month. The only reason the CPI wasn’t up as much as the PPI is that energy companies have been reluctant to pass along price increases for fear of government backlash. Energy prices have been rising, in part, due to a declining dollar. With a $60 billion monthly trade deficit, the world is awash in dollars. This puts further pressure on the dollar, driving up the cost of imports, particularly energy. This is a vicious circle.
The old news last week was the housing and financial issues. The financial crisis has tightened credit standards for all potential mortgagees. (These tough new lending standards are spreading to auto loans and card cards.) Tight credit slows down the demand for homes, both new and used. The result is more homes on the market and for a longer time. This puts pressure on housing prices which reduces, or wipes out the homeowners equity, making refinancing or moving more difficult. This is another vicious circle.
The international central bank coordination announced by the Fed last week doesn’t address any of the above problems nor does the cut in the Fed Funds rate. The Fed can’t force financial institutions to lend and lending won’t return to normal levels until banks balance sheet problems are cleaned up. And, in view of the recent inflation numbers, the Fed finds itself in a difficult situation because further lowering interest rates to stimulate the economy will also stimulate inflation.
Investors were talking about subprime mortgage problems back in April, yet it took until Augus...
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| Investing is like Football: You get Penalized for Holding |
| 2007-12-12 12:35:00 |
If you get caught holding in football your team loses yards. If you get caught holding in your portfolio you lose money. There is no such thing as a hold investment. Yes, I know, every day hold recommendations are issued by Wall Street analysts but they’re copouts. Every investment recommendation that is not a buy is a sell, regardless of what label’s put on it. There are only two investment decisions: buy and sell. If you own a stock, bond, mutual fund, ETF, house, or car and don’t sell it, you’re making a buy decision. Why? Because you’re continuing to hold the asset and subjecting yourself to all the risk that comes along with it.
The buy/sell decision doesn’t mean you have to keep buying more of an asset but it does mean if you think an asset is fully priced, you should sell it. It’s okay to hold an investment you’d otherwise buy if you’ve reached your maximum hold size given risk tolerance levels or portfolio diversification considerations. Saying an asset is a good investment but its fully priced is really saying that it’s peaked in value and it’s time to sell.
There are two exceptions to the buy/sell rule for taxable investors. If you have a short term gain which will turn into a long term gain if your hold for a few more days – and the operative word is days – then it would be worth considering holding the investment. Holding may also be worth it if you’re approaching the end of one tax year and by holding for a few days you can push the gain into the following year. This one’s particularly relevant right now, since most of us are on a calendar tax year. There’s a knee jerk reaction to make investment decisions based on minimizing taxes. Minimizing taxes is good but what’s even better is maximizing your net worth. Calculate how much you’ll save in taxes ...
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| Cosmetic Surgery Is a Leading Economic Indicator |
| 2007-12-10 14:49:00 |
A front page article in Saturday’s Wall Street Journal, Evidence Grows That Consumers are Pulling Back, discussed the slowdown in spending on cosmetic surgery as a harbinger of a recession. (I’d like to link to the article but The Wall Street Journal doesn’t allow it. Hopefully, Mr. Murdoch will change this now that he owns the paper.) It seems as if spending on such surgery had previously been recession-proof. Perhaps it fell under the heading of consumer necessities. Now cosmetic surgeons are feeling the economic pain. The article specifically mentions a drop off in corrective eye surgery and breast implants. There used to be a hemline indicator for the stock market. For every decade starting with 1900, the stock market rose and fell following the length of women’s skirts. It would be politically incorrect for me to suggest an implant indicator, so I won’t.
Are we heading for a recession, and a 15% decline in the stock market from its present levels? Plastic surgeons might say yes. Last week, though, the stock market said no. The popular indexes were up close to 2%. The past two weeks rally has moved the S&P and the NASDAQ close to their 2007 highs. The Dow has lagged somewhat, positioned approximately halfway between its 2007 high and low. The market responded positively to an anticipated Fed rate cut. We’ll find out on December 11th what the Fed intends to do, but a ¼ point cut seems baked into the market and some expect a ½ cut. After that’s out of the way, the market will again be left to ponder the likelihood of a recession. On the plus side, the Q3 productivity number was excellent and Friday’s report of 94,000 new jobs created, although slightly below the magic 100,000 number, was encouraging.
The not so good news for the week was delinquent mortgage payments hitting thei...
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| A Euro, a Yen, a Buck or a Pound |
| 2007-12-05 14:12:00 |
Or a Yuan. (My apologies to all you Cabaret fans.) As a mutual fund or ETF investor you need to be aware of the currency risks you’re taking when investing internationally. Is your fund hedged against the dollar or not? Do you want your fund to be hedged or not? What difference does it make to you? Let’s start with the last question first.
Currencies do fluctuate is value, except for the Yuan. Its exchange rate is fixed by the Chinese government, but even the Chinese are responding to pressure to let the Yuan float upward in value against the dollar. The dollar has declined against the major world currencies for the past seven years. Take the Euro, for example. The current exchange rate is about €1.00 = $1.46, a slight decline for the recent record of $1.49, but a big change from the one-to-one exchange ratio in 1999. Any dollar based investor, such as those of us in the good ol’ USA, would have seen substantial appreciation in his or her Euro dominated investments – European stocks and bonds – made a few years ago just based on currency movement (assuming the currency wasn’t hedged). The European investor who bought dollar dominated US stocks or bonds wouldn’t have been so lucky. The Dow at 13,000 would have brought little joy to the Euro investor’s heart since most of his or her gains would have been offset by the deprecation of the dollar versus the Euro.
There are ways to protect yourself against currency swings. You can make you international investments through a mutual fund which hedges – tries to eliminate or minimize the currency risk. No hedge is prefect and all hedges cost money which reduces your return, but a currency hedge factors out one risk, leaving you with the underlying risk of the investment, i.e., the performance of the stocks or bonds in the mutual fund portfolio. Mutual funds dis...
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| The Bobbing Cork |
| 2007-12-03 13:16:00 |
The stock market rebounded this week like a cork popping up after a fish wiggles off the hook. The Dow opened the week below 13,000, declined to 12,725, then railed 647 points to close on Friday at 13,372. The S&P and NASDAQ turned in similar performances. From a 10% correction, fears of a meltdown in the financial sector and recession the preceding week, the market rallied for four consecutive days and closed at its high for the week. What caused this swing? Equity investments in Citicorp and e*Trade demonstrated that capital was available for the financial sector and the financial stocks rallied on the news. Treasury Secretary Paulson proposed a moratorium on rate adjustments for certain subprime mortgages and Fed spokespersons, including Chairman Bernanke, hinted at the possibility of another rate cut in December. And, overshadowed by all the good news in the financial sector, oil closed at $88.70 a barrel, below $90 for the first time in weeks.
Has the economic outlook improved that much to justify an almost 5% move in the stock market? No. The only change was the infusion of capital into the financial sector. That’s good and the financials responded, although I think their lows will be re-tested, but it doesn’t solve their problems. Neither does the government program. The proposed rate freeze for selected mortgages is a band aid which will benefit some homeowners but does not address the underlying problems facing mortgage lenders. The mortgage industry is in for a period of contraction due to the economic slowdown, slowing new home construction, a slowing re-sale market for existing homes and the ability of homeowners to meet their payment obligations, particularly if the employment picture weakens. Interrelated are the tighter lending standards which the major mortgage originators have implemented. Reality will set in when the initial euphoria wears off.
&n...
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| Surviving A Recession |
| 2007-11-28 13:48:00 |
When the major stock market averages declined by 10% from their 2007 highs on Monday, we were in official market correction. Sentiment is negative owing to the economic back drop of, at best, tepid growth according to the Fed, or a recession.
Consumers twenty-five year credit binge fueled by home equity loans, credit cards arriving in the mail, subprime and adjustable rate mortgages and automobile leases, appears to be over. Savings rates has plummeted from 14% to 0% (perhaps to a negative number if home values continue to decline). Pile on top of that the banks debt problems, high energy prices, the homebuilding industry’s woes, weak retail sales and declining consumer sentiment, it’s no wonder that many investors believe a recession is in the offing.
Investors face two challenges right now. If the economy is headed into a recession, where do I put my money? And, if the economy avoids a recession will I be in the right investments...
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| Danger: Recession Ahead, Proceed with Caution |
| 2007-11-26 14:56:00 |
The Dow hit a low for the year on the day before Thanksgiving, down 9% from its 2007 high. The S&P 500 and the NASDAQ are fairing a little better, down 8% from their 2007 highs. (Significantly, all three averages are up for the year, albeit slightly.) The definition of a market correction is a 10% decline. A 20% decline is to be expected if there is a moderate recession or the expectation of one. Are we headed for a recession? Let’s review the economic facts.
Housing, and related, jobs account for 10% of our total employment. Single family housing starts fell 7.3% in October and permits dropped 6.6%, to the lowest levels in 15 years. (You can see the ripple effect on the earnings of Home Depot and Lowes.) New housing starts have fallen for almost two years. Every time in post-war history housing has declined for two years, it has been accompanied by a recession. On top of this, the value of existing homes is dec...
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| The CIA's Guide to International Investing |
| 2007-11-20 15:00:00 |
The world’s second biggest economy is Japan (behind the good ol’ USA). China, India, and Brazil have economies growing at upwards of 10% annually. That’s a lot faster then the roughly 2.5% expected US growth over the next year or so (absent a recession, of course). Together those three economies almost equal the U.S. in GDP. Add in Japan, and the combined GDP of these four countries exceeds the U.S. The CIA’s World Factbook is an excellent source of country information like this.
A good mutual fund investor would be wise to have at least 25% of his or her assets invested outside the US. Global investing makes sense not only to avail oneself of higher growth rates but also because international investments may respond differently to the same event. Global economies is linked and becoming more so. The stock markets of Western Europe, for example, have an 80% correlation with the U.S. markets. Makes sens...
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| Stall Speed |
| 2007-11-19 07:15:00 |
The stock market took the long way around last week, with a 300 point up and a 200 point down day, to end basically flat. The Dow and S&P were slightly up; some broader averages such as the Russell were slightly down. Volatility is exhausting.
Financials had another rough week and the Transportation Index was down, at least in part, due to FedEx’s tepid forecast. The financials continued to take a pounding, reaching lows not seen since August. The Transportation Index is often thought of as a bellwether for the economy. Fewer goods shipped implies an economic slowdown. The index’s performance was consistent with another warning from retailers of a weak Christmas selling season. The high price of oil is taking its toll. Airline ticket prices are rising as are gasoline prices and worries about the price of winter heating bills is setting in. One pundit put the chance of recession at 40%.
There was so...
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| Making Exchange Traded Funds (ETFs) Work for You |
| 2007-11-14 13:06:00 |
Exchange traded funds are index funds which have advantages over open-end index mutual funds. ETFs trade all day long on the stock exchanges, may be purchased through any broker, have lower fund expenses than mutual funds, and have less likelihood of generating unwanted taxable gains than mutual funds. (See The ABCs of ETFs – Exchange Traded Funds).
There are a number of reasons, which we’ll discuss, for investing in index funds (ETFs or mutual funds) but let’s start with the fact that the S&P 500 index beats 80% of all actively managed funds. (And, an index fund has lower expenses than an actively managed fund, further enhancing its net return.) If you can invest in an index fund and be in the top 20 percentile of fund returns, that’s a pretty good place to start.
You can construct a well-diversified portfolio entirely out of ETFs. There are ETFs for almost every type of investment you can imagi...
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| What a Difference a Month Makes |
| 2007-11-12 06:29:00 |
Ugly describes the stock market last week. The Dow and S&P were down approximately 4% and the NASDAQ was down 6.5%. The Dow and S&P are approaching their lows for the year, reached during the August credit crisis. It’s hard to believe that just a month ago the Dow and S&P were at record highs and the NASDAQ was at its highest level since 2000. Market sentiment is decidedly negative or, to reuse my opening word, it’s just plain ugly out there. It wouldn’t surprise anyone if the market hit a new low for the year this week.
October High August Low Nov. 9 Close
Dow 14,1...
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| The ABCs of ETFs - Exchange Traded Funds |
| 2007-11-07 08:38:00 |
Every investor should consider Exchange Traded Funds (ETFs). The younger brother of open-end index mutual funds is growing up fast and showing greater versatility.
ETFs defined
ETFs are open-end index mutual funds that trade like stocks (and closed-end mutual funds).
Types of ETFs
There are three legal structures of ETFs: Open-end mutual fund (the difference between the ETF structure and a open-end mutual fund is the ETF is exchange traded, whereas the traditional mutual fund is purchased and redeemed by the fund itself), Unit investment trust and Grantor trust. The open-end mutual fund structure has a diversification requirement, mandated by the Investment Company Act of 1940, which limit how it mimics some smaller or specialized indices and could result in a tracking error. The other principal difference for the investor is that other than the open-end mutual fund, dividends must be paid out in cash to investors (of course, ...
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| Climbing a Wall of Worry |
| 2007-11-05 07:42:00 |
The S&P and the NASDAQ were flat last week. The Dow was down about 200 points, the result of its 300 + point sell-off on Thursday. Citigroup was the culprit. Its bigger than expected write-downs cost the Dow and cost its CEO his job. With the CEO of Merrill losing his job at the beginning of the week, it turned out to be a very bad week for financial company CEOs. (Is the CEO of Bear Stearns next?) All the financial stocks suffered as a result of Citi’s and Merrill’s woes but the cause of their woes is old news. We already knew about the subprime and collateralized debt problems and we knew the third quarter was going to be bad for banks and their brethren.
The Fed cut rates by ¼ point. Cuts in Fed Funds rates usually boost financial stocks. Not last week. The jobs report on Friday was tremendous. 166,000 new jobs were created, twice the estimate, and well above the 100,000 mark, a ...
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| Hedging Your SUV |
| 2007-10-31 09:13:00 |
It’s hard to believe with oil approaching $100 per barrel, but the U.S. will consume over 1 billion (that’s 1,000,000,000) more gallons of gasoline in 2007 than in 2006. As a certain President once said, we are energy junkies. We keep craving more regardless of the price. Ask yourself this: Are you plugging more stuff into the wall each year? That requires even more oil, natural gas or coal. China, India and the other new economies also consume more energy each year. Political instability in Nigeria, Iran, and Venezuela could limit supply. And, there’s only so much oil (natural gas and coal) in the ground. I’m not suggesting we’ll run out but it will become more expensive to extract it.
How can you ease the pain every time you fill up? Or better, how can you benefit from higher energy prices? By investing in energy companies. There are two ways to do this. You can buy a...
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| Hitting the Curve Ball |
| 2007-10-29 07:25:00 |
The market enjoyed a good week last week with the popular averages increasing by more than 2%. The market focused on good earnings growth from technology companies, continued strong international demand, and reassuring news about the mortgage morass. The market shrugged off $90 oil and forgot about its principal worry of the preceding week – Structured Investment Vehicles (SIVs). Energy and SIVs are serious concerns. Squeezed refiners margins, and fear of government action, have limited the increases in the price of gasoline but how long can that continue? Further increases in the price of oil will have to be passed along, if not now, next spring when gasoline demand begins its seasonal increase. Even more worrisome is the impact of cold weather on home heati...
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| Indexing for Passive Aggressive Investors |
| 2007-10-24 07:18:00 |
Let’s dispel the notion once and for all that index funds are only for passive investors. Sure, the original index funds tracked the S&P and were meant for investors who either believed you couldn’t beat the market or didn’t want to try. Since their beginning, index funds have expanded their breath. You can find a fund which tracks any of the major indices and most industry sectors, such as health care and technology. The first cousin of index funds, Exchange Traded Funds (ETFs), do the same thing – they track indices. Between index funds and ETFs you can mirror any major index, small index, industry sector, industry sub-sector (i.e., biotech or software), global region or individual country. You can ...
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| Something Old, Something New |
| 2007-10-22 07:01:00 |
The stock market celebrated the twentieth anniversary of the crash of ’87 with a 2.5% decline on Friday. Unlike 1987, the market averages are still up 6 – 8% for the year. Not surprisingly, the financial sector is the exception, being down about 9% for the year, with many financial stocks trading at prices approaching their August lows. Last week, the market reacted to some old news and some new news.
The old news was financial institutions reporting poor third quarter results. No surprise here. This was expected because of the mortgage, securitization, and residential real estate market problems. And, when a company knows it’s going to have a bad quarter it writes-off/down as much as possible, takes as many reserves as possible, to better position itself foe the future. I suspect this went on with the financials. Caterpillar’s results showed weak domestic demand and strong foreign demand. No surprise here, e...
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| Recession Investing |
| 2007-10-17 15:07:00 |
Why could the U.S. be heading into a recession? The most likely reason is the housing market – a multi-faceted subject. There’s the new home building sector. It’s important because it employs so many people, not just in construction but, by extension, in the industries that supply materials to the homebuilders – lumber, concrete, appliances, and even retailers like Home Depot. Think about all the “stuff’ that goes into a home and how much you buy when you move. A slowdown (or collapse) in new home building has a ripple effect throughout the economy and could drive up the unemployment rate.
Housing market problems are not limited to new home sales. The value of your home and the market for sales of existing homes is falling. By how much and for how long is the big question. But the problem here is the equity we have in our homes is evaporating. Even worse, those of us who have recently purchased homes or have taken money out of our homes, through refinancing or home equity loans, may have no equity left. A reduction in home values reduces homeowners net worth, causing them to pull back on spending.
The mortgage market mess is the last, but the not least, of the housing market issues. The big problem is not subprime mortgages, it’s adjustable rate mortgages. Bumps in mortgage payments due to contractual provisions or an increase due to a rising LIBOR rate – most mortgages are tied to this rate and it may rise even if interest rates fall in the U.S. – will force consumers to cut back spending in other areas. Lastly, will more stringent lending standards exacerbate the new home construction and/or existing home value problems?
There are other economic concerns as well – consumer spending (beyond the impact of the housing market), rising energy prices, the U.S. balance of trade deficit (are jobs being exported as a result?) So, if you’re concerned about the possibility of a recession, and who shouldn’t be, how do you invest?
The stock market, according to classical wisdom (or folklore) anticipates a recession by six to nine months. Since it’s currently at record highs (at least the Dow and S&P) this suggests a recession is not in the offing. But the market could change direction at any time. There’s a saying that the stock market has predicted ten of the last five recessions. So maybe it’s not such a perfect predictor after all. The stock market also anticipates economic recoveries. Add to the mix the psychological difficulty of investing in stocks when things are the bleakest (the best time to buy) and it demonstrates the difficulty (impossibility, for most of us) of trying to time the market.
Most investors should be in the stock market to take advantage of growth in principal value and income which comes through the long term ownership of equities. Stocks which do best in recessions are those of the strongest companies and companies whose products consumers must keeping buying (think toilet paper not cars). The stocks to focus on are big cap companies, consumer staple products and health care. There’s an overlap between many big cap stocks and consumer staples and health care companies. I’d also add to this list companies with significant international sales. (Did you know that a majority of McDonald’s, and many other U.S. companies, sales are overseas?) There’s also a substantial overlap between big cap and international sales. You can find many good mutual funds which focus on these areas.
Will this investment strategy provide a positive return during a recession? Not necessarily but it will keep you in the stock market with a minimum amount of risk and the long term investor will be well positioned if there is no recession or for the upturn in stocks after the recession occurs.
What about bonds, you ask. Don’t they do well during a recession? Yes, if interest rates decline as a result, but that may be occurring just when stocks are beginning to rally again. With long term U.S. Treasuries yielding below 5% (some good money market accounts have higher yields) how much lower can interest rates go, so how much higher could bond prices go? Focus your risk-taking investments on the stock market and keep the rest of your capital in cash. ...
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| Christmas in October |
| 2007-10-15 14:26:00 |
The stock market was flat last week. Not a bad performance given that the popular averages are up between 10% - 14% (S&P 10%, Dow 13%, NASDAQ 14%) thus far this year and the market is wrestling with the question of continued economic growth (and, if so, how much) or recession. Last week, the market digested mixed reports on corporate earnings, more bad news about the housing market, a benign PPI number, a continued low level of business inventories, and record oil prices.
Retail sales were up a surprising 0.6% in September. This increase was posted in spite of unseasonably warm weather (ask Al Gore) which reduced demand for winter apparel. Retailers are already bemoaning anticipated weak Christmas sales. Christmas before Halloween? What happened to the Christmas selling season starting after Thanksgiving? (The good news is that retailers are setting a low bar for investor expectations.) Retail sales are important, consumer spending comprises two-thirds of our economy. The key to continued consumer spending will be what happens to home and energy prices. If home prices continue to decline, consumers will retrench in response to their declining net worth.
Oil hit a record high of $83.60 last week. Anyone who doesn’t think there’s a global energy shortage should read South American Nations Face Energy Crunch in the New York Times, October 13th. Our economy has been remarkably resilient to rising (soaring) energy prices, unlike our experience in the 1970’s. At some point rising energy costs will force the consumer to cut back spending in other areas. In the meantime, rising energy prices worsen our balance of trade deficit and force us to keep looking over our shoulder for signs of inflation.
The stock market is priced at a reasonable forward P/E of 14. As I talked about last week (See The Government was the Last to Know), assuming the consensus corporate earnings growth for 2008 and no recession, the stock market should work its way some 8% higher over the next few months. A very handsome return. Suppose thought that you want to be in the market but are worried about a recession. How should you invest? Come back on Wednesday and I’ll tell you....
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| International Investing in The Age of Turbulence |
| 2007-10-10 13:36:00 |
Alan Greenspan writes extensively about the global economy in The Age of Turbulence.
He believes there are common dominators to economic success. One is a cultural desire for growth, which includes government integrity, the acceptance of a certain amount of income inequality, incentives to take risk and the willingness to let market forces determine supply and demand. Markets are the antithesis of government decision making. The fall of Russian communism showed the fallacy of central planning. The socialism of Western Europe and the populism of Latin America are lesser forms of substituting the wisdom of government for the marketplace. Western Europe (India and elsewhere) suffers from bureaucracies with extensive approval processes which slowdown change and bureaucrats who substitute their judgment for the market. Restrictive work rules imposed on employers drive up costs and reduce the incentive to take risk, resulting in lower growth and, perversely, higher unemployment.
A second factor in economic growth is education. It speaks for itself. A third is a young, or growing, population. Workers who save money (accumulate capital) and contribute to their heath and retirement plans aid economic growth. Non-workers, such as retirees, who consume these services, which have been promised to them by their government but have not been funded, place a strain on economic growth. As the ratio of workers to retirees shifts, due to the aging of the baby boomers and increases in longevity, the burden of these transfer payments on an economy/society increases.
The last determinate of economic prosperity is a strong rule of law, defined as a protection of property rights (and, by extension, individual rights). This is a major theme of Mr. Greenspan’s. Property rights include real estate, intellectual property, goods and, broadly, commercial transactions. A strong rule of law is not a dictatorship, in fact, it’s just the opposite. Individuals/companies will take risk, and invest for the future, if they can see a clear and consistent set of rules. As a corollary, risk premiums will be lower in this environment, meaning the cost of capital will be lower, promoting growth.
We can extrapolate from Mr. Greenspan’s thinking as to the best international areas for investment. So let’s go for an around the world tour. Western Europe has a strong rule of law but their bureaucracies, aging population, restrictive immigration which could otherwise offset an aging population, and expensive social services means their economic growth will be limited. Eastern Europe is on its way to a well developed rule of law and does not suffer from the problems of Western Europe (yet). It’s overcoming its Communist legacy and production costs are low.
Russia has inconsistently applied laws which vary with the whim of its rulers. It also has the Western European population demographics. A currency inflated by the high price of oil and gas exports is another limiting factor. However, abundant natural resources, an entrepreneurial spirit, and burgeoning consumer market are positives. Russia has great potential but equally great obstacles to overcome.
Japan has greater population problems than Western Europe in terms of age and immigration and a bureaucracy structured to prevent companies from failing, limiting imports, and preventing foreign companies from operating in Japan. Yes, it has a strong rule of law but it is very Japan-centric. Is it any wonder that the Japanese economy has been stagnant for the last 15 years? Mr. Greenspan says that it will no longer be the world’s second largest economy by 2030.
China is the global wildcard. Its growth has been impressive and it has moved towards a comprehensive rule of law. But a Western-style rule of law and the personal freedom which it, and economic growth, brings are in conflict with a ruling autocratic party. One or the other will have to give way at some point. Mr. Greenspan believes that China’s growth will continue, and although he doesn’t come out and say it, China will surpass Japan in GDP by 2030.
India has a strong rule of law but a bureaucracy which makes Western Europe’s look like a Ferrari. Its growth has been impressive but it hasn’t kept up with China due to severe infrastructure problems and cultural crosscurrents preventing its markets from freely functioning. Latin America is cursed with populism (take a look at Venezuela), Brazil being the possible exception. Severe income inequality, education and rule of law (government instability and corruption) problems abound.
Emerging economies, Mr. Greenspan cites Vietnam, are where the biggest money will be made. Of course, they carry great risk. Nonetheless it will be exciting to see new economic hotspots emerge as the world looks for low cost production areas and certain counties seize the opportunity. Lastly, the United States looks pretty good by comparison to the rest of the world, despite our problems. Mr. Greenspan predicts we’ll still be the biggest and the best in 2030, although a smaller part of a bigger global pie.
How do you invest globally? Stick with Mr. Greenspan and go with a strong rule of law. Invest in Europe, East over West and, if you can take more risk, invest in China and India. Constantly look for changes in law, or a shift in attitude towards a change, and watch for emerging gems.
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| The Government was the Last to Know |
| 2007-10-08 14:05:00 |
There were 110,000 new jobs filled in September, slightly above forecast and a good showing. The July and August numbers were revised upwards. The August revision was startling, going from a net loss of 4,000 jobs to 89,000 new jobs created. The discrepancy was due to the underreporting of jobs filled in the government sector. Gives you a lot of confidence in the government and their reports, doesn’t it? It also shows the danger of reacting to one month’s data, i.e., August’s initial report. The three months taken together suggest continued, albeit slow, economic growth.
The stock market, as usual, anticipated the stronger than thought economy. It had recovered almost all of its losses since its July high and, on Friday, the S&P 500 and Dow both had record high closes. Goes to show, you shouldn’t try to out guess the market and the wisdom of investing for the long term.
With new jobs creation receding into the background, at least until next month, the primary driver of the market becomes third quarter corporate earnings reports. Analysts are looking for a down quarter overall, due to the August credit market problems. If the aggregate results exceed expectations it will be a positive for the market. Given current earnings projections for 2008, and assuming no recession looming, the Dow and S&P should work their way higher by about 8% between now and late-spring of next year. Add in the dividends you receive on your stocks, and your return will be greater. If this market movement occurs over the next six months, with dividends, it could approximate a 20% annualized return, very respectable when compared to a sub-5% annualized yield on Treasuries and a 2 – 3% annual inflation rate. So, the stock market is the place to be.
We’ll still watch retail sales, the price of oil and the monthly trade numbers but, for now, our primary focus will be on earnings reports and whether analysts adjust their 2008 projections up or down as a result. Assuming the status quo, the stock market will gradually work its way higher in a saw tooth pattern....
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| Mr. Greenspan's Investments |
| 2007-10-03 14:48:00 |
In The Age of Turbulence, Alan Greenspan outlines his vision for the world, and particularly the United States, between now and 2030. He chose 2030 because that’s when the last of the baby boomers reach age 65 – retirement. And the impact the baby boomers have on the world’s economy as they shift from being producers to consumers of capital is a major theme of his book. (If you don’t want to read it all, chapter 25 summarizes his arguments and predictions.)
In 2030, Mr. Greenspan forecasts the real U.S. GDP will be 75% greater than today. That may sound like a big number but it’s only 2.5% annual compound growth – well within historical norms. That’s the good news. The bad news is forecasted increases in inflation and, correspondingly, long term interest rates. Inflation could rise to the 4-5% level and long term U.S. Treasuries to 8-9% yields due to stresses caused, in part, by rising social security, Medicare and other federally mandated health care payments. Mr. Greenspan also points out that if Treasury yields rise (today, 30 year Treasuries are yielding less than 5%), risk premiums on other investments, such as stocks and real estate, will increase. If such adjustments were to occur rapidly, it would result in deceasing prices for those assets. Occurring over a longer period of time, the investments would grow in value but not as quickly as if the risk premium remained unchanged.
What do Mr. Greenspan’s predictions mean for investors? Stocks, real estate, and short-term bonds. Assume the risk premium for stocks increases, and using Mr. Greenspan’s parameters, the forward P/E on the stock market could fall from its present 15 to 12. However, the real growth in GDP will more than offset this decrease. In 2030, the stock market would still be 60% higher than today in real terms. In normal dollars the market would be even higher because it reflects moderate rates of inflation. Sounds like a good place for long term investors.
Real estate also does well in periods of real growth and moderate inflation. The value of residential (notwithstanding the current downward adjustment in that market) and commercial real tend to track real growth. Hard assets, such as real estate, also increase in value due to inflation. You can lose money if you own a home or building in a declining area (Detroit comes to mind) but overall real estate investors will fare well under Mr. Greenspan’s scenario. I suggest you invest in commercial real estate through real estate funds which focus on real estate investments trusts (see Yielding to REITs).
Long term bonds should be avoided. They go down in value when interest rates rise. Of course, you can hold a bond until maturity and get your principal back but its real value will be reduced by the amount of inflation that occurred over your holding period. And, if the coupon/interest payment doesn’t provide an after-tax return in excess of inflation, that’s a double whammy. The current yield curve is essentially flat. Treasury yields are approximately: One moth, 3.40%; 5 year, 4.00% and 30 year, 4.80%. We will see a much steeper curve if inflation and interest rates are expected to, or do, rise. With the current flat yield curve, and Mr. Greenspan’s expectations, the only safe fixed income investments are those with short maturities, TIPs (Treasury inflation-protected bonds) and, for the higher risk investor, collateralized loan and adjustable-rate mortgage pools.
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| Marking Time |
| 2007-10-01 13:43:00 |
Last week we received further evidence that the August credit crisis is resolving itself in orderly fashion. The First Data buyout went through and investors eagerly snapped up the debt to finance it. The buyers of Harman and Sallie Mae reneged on their purchases. The prices were just too high in today’s rational debt world. Credit market problems and subprime mortgages are old news. As I’ve written about before, adjustable rate mortgages that re-set based on LIBOR will be a problem (see The Economic Crises of 2008 and On the Rebound), so the housing/mortgage market isn’t out of the woods yet.
New homes sales dropped to their lowest level in seven years (still, not bad compared to the long term average for annual new homes sales) and the sales prices dropped by 8%. This is a cyclical slowdown in the new homes market and is separate from any mortgage problems, but if it is coupled with a decline in value of existing homes it likely will plunge us into a recession. Further Fed cuts won’t prop up home values, what will mitigate it is a growing economy and that brings us to our final point.
This Friday, the September jobs report will come out. (Remember, August’s was a disappointing 4,000 new jobs created.) The preliminary indication is 100,000 new jobs created in September, a number sufficient to suggest that the economy will keep growing, albeit slowly.
The market is craving economic news so it can determine if we’re heading for a recession or continued economic expansion. Housing values and mortgage rate adjustments will play out slowly over the remainder of the year. This week, the market will focus on Friday’s jobs report and will market time until then....
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| The Economic Crises of 2008 |
| 2007-09-26 14:08:00 |
The question on every investor’s mind is: are we experiencing a mid-expansion slowdown or are we on the cusp of a recession? But even a recession would be just a bump in the road when compared to the damage to the economy, and the value of our investments, which would be brought about by a decline in the value of our homes or the huge US trade deficit.
Housing prices nationwide have increase by 50% over the past five years, although some speculative markets, think parts of Florida and California, have shown prices decreases this year. Given the run up in housing prices, a 10% correction is not out of the question but it could put the economy into a tailspin. Why? Homeowners have been taking out the increase in the value of their homes through home equity loans and/or refinancing with higher principal balances. If, for example, a homeowner had 20% equity in her home, but the value of the house fell by 10%, 50% of her equity would be wiped out. (Don’t believe it? Run the numbers. This is the downside of leverage.)
A downturn in the housing market could exacerbate a decline in home prices. New homes construction has slowed, there’s a backlog of houses and condos purchased by speculators to be worked off, mortgage rates could go higher, and mortgage terms are getting tighter as a result of the subprime debacle. Why would mortgage rates go higher since the Fed is cutting rates, you ask? The answer is that many mortgages, including adjustable rate mortgages, are priced off of LIBOR, a London-based rate. Interest rates in Europe and elsewhere outside of the US are going up (and US interest rates could go higher, as discussed below). The result of a decline in housing prices and/or increasing mortgage rates will be a reduction in consumer spending that could plunge the US economy into a recession.
The annual US trade deficit has ballooned from approximately $100 billion in 1997 to an estimated $800 billion in 2007. What does the world do with all those excess dollars? It invests some back in the US stock market, buys American companies, real estate, and US Treasury securities. Foreigners buying US Treasuries is good for us because it helps us finance our domestic budget deficits. The 2007 deficit is estimated to be in the $200 billion range.
Along with trade and fiscal deficits, the value of the dollar vis a vis other major currencies has been declining. Compared to the Euro (and a market basket of Western European currencies prior to the Euro), the dollar has depreciated in value by 38% over the past ten years. You’ll only hold a depreciating currency if the return on your investment exceeds its decline in value. In other words, the yield on US Treasuries has to compensate a European, for example, for holding a security whose principal value declines each year as the dollar declines, and provides a net return equal or greater than the return on Euro dominated government bonds.
The bigger our trade deficit, the bigger becomes the problem of recycling dollars. By the way, our single biggest import is oil and oil is priced in dollars. Thus, as the dollar declines in value, the price of oil will increase, adding to our trade deficit (and inflation). A vicious circle if there ever was one. Will the world keep accepting US dollars? Probably, but at a price. Foreigners will demand higher interest rates on US Treasuries to compensate them for the dollar risk. This will have a ripple effect through our economy, driving up the cost of corporate borrowing, home mortgages, and causing a decline in stock prices as returns adjust to higher interest rates.
The government lacks the tools to quickly address either a housing value or trade deficit problem. Lowering interest rates further to ease the homeowners/mortgage holders plight would increase the fiscal deficit and create inflationary pressures. Let’s hope for a soft landing here. The only cure for a trade deficit is further depreciation of the dollar, a likely scenario, and a solution to our dependence upon foreign energy, an unlikely scenario in the near term. Let’s hope foreigners will be happy to hold more dollars at the current interest rates. But, it’s just that – a hope.
A decline in housing values or a trade deficit-induced crisis could throw the US economy into a recession of the depth not seen since the 1970s. Interest rates would go higher, unusual in a recession, and the stock market could correct by 40%. Invest cautiously. ...
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| On the Rebound |
| 2007-09-24 15:07:00 |
The major US stock indices are within 2% of their highs for the year (and all-time highs for the Dow and S&P 500). In the past eight weeks they have gyrated from these levels to down 10%, then back up. This illustrates the speed of corrections and price movements in today’s electronic and global markets. It also illustrates the folly of market timing and why, unless you’re glued to your screen every day, you should invest for the long term and not try to outguess the market.
Over the next few weeks the markets may hit new highs, while moving in a choppy sideways pattern. The drivers will be the economy and earnings. The principal economic event to watch is new jobs creation. Secondarily, watch real wage growth and retail sales. These three indicators should begin to line up and tell us whether we’ve had a mid-cycle slowdown or are heading into a recession. Third quarter earnings results will be released during the latter half of October. These will give us an indication of the impact of the recent credit problems on corporate America as well as providing another clue as to the strength of the economy.
Two other areas to watch are housing/mortgage and energy. The subprime mortgage problem is both old news and contained. New housing starts are running at 1.3mm annually, a number which is getting a lot of press because it’s so low. That’s true if you compare it to the 2.2mm starts in 2005, but it’s around the long term average. New housing starts aren’t the problem. Adjustable rate mortgages tied to LIBOR, as I wrote about last week, are the problem. LIBOR, right now, is decoupled from US Treasury rates and is heading higher because of the strength of global economies. This will take dollars out of consumers pocketbooks. Energy prices are rising, oil is at record highs and there’s every reason to expect it to continue to climb, particularly because oil is priced in dollars. As the dollar weakens, and it’s at a record low against the Euro and the Pound, oil producing nations increase their price to maintain the real monetary value of their oil. With our trade deficit, there’s no reason to assume the dollar will reverse direction anytime soon.
Where does this leave us? Let’s return to our first point: we can’t time the market. So, don’t pull out money waiting for it to go down, and don’t stop investing. But, review your investments, particularly, those that worried you during the correction. This isn’t the time to be taking a lot of risk, either. ...
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| Sector Funds: More Than Meets The Eye |
| 2007-09-19 16:22:00 |
Believe that a part of the economy will be particularly strong or a part of the stock market is undervalued? Sector mutual funds are one way of investing in market niches. Sector funds enable you to pinpoint your investments in areas such as healthcare, biotech, and technology (or financials, after the Fed rate cut). ETFs are another, but have some additional risks. See ETFs: New Wave or Riptide. The common cautionary note about sector funds is they’re just that: an investment concentrated in one area, where all the companies share similar characteristics and react to macroeconomic or industry events in the same way. Thus, sector funds offer only limited diversification – within a group but a group where all the stocks will move in the same direction, for the same reason. Sector funds offer the advantage of professional management, the portfolio manager should be able to pick the best stocks in the sector, and are a sound way for an investor to participate in sectors where they wish to invest a small portion of their assets but don’t want the risk of having to select a single stock – avoiding the needle in the haystack theory.
The hidden risk of sector funds, or more than meets the eye, is that mutual funds in the same sector may have very different investment philosophies and/or definitions of what comprises suitable investments. To illustrate this point, let’s look at two top ten funds from the Utility and the Natural Resource sectors. (For a list of the best mutual funds in these and other sectors, see MUTUALdecision’s Top Ten Funds List.)
The JHT Utilities Trust (JEUTX) and the Fidelity Select Utilities Growth fund (FSUTX) are both top ten ranked utility funds but they’re different. JHT defines utilities to include telephone companies, such as A&T, and has a foreign stock among its ten largest holdings. The Fidelity fund is focused on power generation and delivery companies. The two funds only have three stocks in common among their ten largest holdings. The same is true for the Blackrock Global Resources fund (SGLSX) and the Vanguard Energy fund (VGELX). Blackrock’s top holdings are focused on exploration, drilling and coal. Vanguard owns more of the traditional large integrated oil companies. They have no stocks in common among their top ten holdings.
Neither strategy in our examples of top performing utility and natural resource funds is right or wrong, they’re just different. That’s the point. Before investing in any sector fund (or any mutual fund), review its stated investment objectives and its top holdings. Then you’ll really understand the nature of the fund and if it’s the right fund for you. Sector funds have their place in your portfolio, not as core holdings, but as a diversified way of making targeted investments in selected niches. Lastly, don’t forget sector funds carry more risk than broadly diversified (investing across many sectors) mutual funds....
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| A Fed Rate Cut Doesn't Matter |
| 2007-09-17 15:11:00 |
So, what’s the Fed going to do tomorrow? I continue to believe it’s possible there won’t be a cut in the Fed Funds rate. I also believe the stock market will respond negatively, whether or not the Fed cuts rates.
The Fed might not cut rates for four reasons: The self-correcting mechanisms containing the subprime mortgage/debt securitizations problems are working smoothly. Pimco, and few organizations know more about debt than Pimco, announced the launch of a distressed debt fund last week. Pimco is the second major financial firm to make such an announcement. The debt market is correcting itself. A second reason why the Fed won’t cut rates is fear of inflation as evidenced by rising energy prices. Oil was back at $80 per barrel last week. The economy is still growing. Granted, the last jobs report was weak but one report doesn’t make for a sea change. Solid retail sales offset the jobs numbers (at least for now). Lastly, US exports are strong because of strong global demand and that buoys our growth.
Whether or not the Fed cuts rates, I expect the market to react in the same way – it will go down. This will be a short term reaction but it’s based upon the assumption that if the Fed cuts rates, it will be fulfilling the market’s expectation and the old adage of buy on rumor, sell on fact will hold true. If the Fed doesn’t cut rates, (some) investors will be disappointed and the stock market will decline. It will only be a brief sell off, then the market will resume trying to figure out the fundamentals, so let’s take a look at them.
The big question is whether there’s a recession in the offing. The answer to that will become clear over the next 30 - 45 days as we get additional information on employment, retail sales and, in October, third quarter earnings reports. Stay tuned. Right now, it is anyone’s guess as to whether we’ve in a mid-cycle slow down or on the cusp of a recession. If a recession is coming, expect the stock market to decline by 15% from present levels.
The mortgage debacle has been picked over but one aspect of it which hasn’t received enough attention is that most adjustable mortgages are re-set based upon LIBOR (London Interbank Offered Rate), not a US interest rate index (and certainly not the Fed Funds rate). LIBOR is a global index, impacted only in part by what’s going on in the US. Because of stronger economies, central banks around the world are tightening rates. Thus, there’s upward pressure on LIBOR. The result may be an unpleasant surprise for US home owners who discover that their mortgages rate has been re-set higher, rather than lower, even if US interest rates decline. This could be the ticking time bomb that pushes the US economy into a recession.
For now, let’s use any market correction as a buying opportunity, all the while having identified our sale candidates if future economic news is not good....
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| AI: Alpha and Index Funds |
| 2007-09-12 17:54:00 |
A current theme among Wall Street wealth managers is for individual investors to have index funds as their core holdings and to focus the remainder of their assets in high alpha investments, which will produce returns not correlated with the market.
A quick digression for those of you who aren’t familiar with alpha and beta. In traditional finance, the return not correlated with a broad market index, such as the S& P 500, is referred to as alpha. The return which is correlated to the market is beta. An index fund should have the same return (positive or negative) as the index it mimics. (One of the controversies surrounding some ETFs is their performance has not tracked their underlying index.)
The theory behind Alpha and Index Funds is multifold: 1. the major indices are a good place for an investor to be, both from a risk and return perspective; 2. you can’t outperform the major indices, so don’t waste your time; 3. find those investment niches with high alphas to increase your return and reduce the overall risk in your portfolio. Even if you don’t subscribe to this theory, you might find it an interesting exercise to review the alphas -- every investment has one -- of your current holdings. They will tell you something about the correlation and diversification of your portfolio.
Where to focus your alpha energy? Investments in real estate, commodities, and energy are less correlated with the stock market (although I’ve never thought commodities were suitable for individual investors). The Wall Street pros also recommend stock fund mangers who have unique strategies and can demonstrate a high alpha relative to the market (and, of course, positive relative performance). Ask your investment advisor for suggestions. The alphas for individual mutual funds (and individual stocks) are available from some brokers and online premium services.
Alpha and index fund investing makes a great deal of sense. You know what to expect in terms of risk and return when you invest in an index fund. Having a portion of your portfolio in index funds leaves you free to concentrate your investment time and energy (think alpha waves) on those investments which can make a difference. Picking high alpha investments, which by their nature are less correlated with the stock market, should reduce the risk/volatility of your portfolio and, depending upon the investment, provide above market returns. ...
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| Living for the Moment |
| 2007-09-12 03:43:00 |
The stock market was living for the moment last week. It rallied in response to strong retail sales, then took a 250 point nose dive at the end of the week over a poor jobs report. Problems with the subprime mortgage market and securitized debt of all types lurk in the background. The big question is what will the Fed do next Tuesday? An article in the New York Times over the weekend said a rate cut of 25 basis points is a sure thing. The only question is whether the Fed would cut fifty.
The New York Times has a much larger circulation than this blog and many times the number of reporters (I have only me), but I think they’re wrong on this one. Mr. Bernanke is not going to cut rates to placate a bunch of wealthy Wall Street types who are crying because they’re no longer minting money. So I’m going to that the other side of the bet.
The Fed will not cut rates next week. The US economy is strong, the world...
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| The Tail Wagging the Dog |
| 2007-09-05 15:00:00 |
Which of your investments worried you most during the recent market correction? If it was one of your smaller holdings, you’re not alone. But, we all have only so much time and so many brain cells to devote to investing. If you’re focusing yours on a tiny portion of your investments, the majority of your net worth is going unwatched.
Many investors I speak with are focused on only one or two of their investments or, worse, are fixated on the one they sold which has since gone up in price. Have you ever taken a flyer? Bought a few shares of something on a tip? Stop and ask yourself: suppose this purchase doubles or triples, what impact will it have on your net worth? It will be insignificant. And, any change to your net worth will be dwarfed by the movement of your primary investments.
Let’s put some numbers to this. If you have a stock or mutual fund which is 1% of your total portfolio and it ...
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| Gut Check Time |
| 2007-08-29 14:25:00 |
The recent events in the stock and bond markets drew everyone’s attention. No doubt you took a look at your investments and, perhaps, worried about one or two. Maybe, you made some changes to your portfolio. Let’s take a look at your experience and see if there are some lessons to be learned.
Did you lose sleep, literally or figuratively, over any of your investments? This is the gut check measure of risk tolerance, not quantifiable, but accurate nonetheless. Investing is not an emotional decision, it takes hard work and discipline, but if you worry too much about an investment, it isn’t right for you. One of the hardest parts of investing is keeping your emotions out of it (i.e., taking a loss or selling your “favorite” mutual fund). Emotion will only cause you to buy at the market highs and sell at the lows. But, did your gut tell you to sell anything during the recent market correction? Rule n...
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| The Calm After the Storm |
| 2007-08-27 14:34:00 |
Last week was the best week in the stock market since it reached its July peak. The market bobbed up and down along with its perception of the breath of the mortgage crisis. A $2 billion infusion into Countrywide rallied the market. When two mortgage lenders used the “R” word – recession – the market retreated. Then speculation the Fed will cut the key Fed Funds rate at its September 28th meeting took hold and the market rallied.
What to expect this week? A quiet market. There will be a lot of nervous brokers sitting on the beach checking their Blackberrys. (Labor Day week expect to see a surge of Blackberrys in for repair due to sand damage.) It’s going to take some time for the mortgage market (lenders and buyers of securitized mortgage products) to return to normal. Lending standards will be tighter, especially for subprime mortgages. The related problems in the debt market – private...
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| Speculate For Growth, Not For Income |
| 2007-08-22 15:33:00 |
There’s an old adage in the brokerage community that you should speculate for growth, not for income. Speculation isn’t the right word, but the broker who coined it (pun intended) probably wasn’t an English major (most brokers aren’t). The point is that you should take risk with investments which you expect to increase in value, i.e., stocks, but not with investments made to generate current income, i.e., fixed income securities. This is an essential maxim if you are dependent on that income.
Greater income (return), always entails greater risk. It’s the way the world works. One rule of thumb is to compare your investment to others in the same class. There’s a reason a money market fund has a higher yield than its peers – it’s taking more risk. The same is true for any bond fund. A second rule of thumb is to stick with quality. Buy funds which invest in government se...
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| The Fat Lady Has Sung |
| 2007-08-20 15:16:00 |
Actually it was a dapper middle aged male with a neatly trimmed beard who spoke. When the Fed chief cut the discount rate Friday morning, the market breathed a sigh of relief. The implication is that Fed will take additional action, if necessary. The liquidity crisis will be contained. Earlier last week, the major averages retreated 10% from their July highs (and all-time highs for the DJIA and S&P 500), an “official” market correction.
The market may bump along for a while, September and October are typically the worst months of the year for the market (although this was not true in 2006). High volatility will be the norm and the market may well test the lows it reached last week, but there will not be another leg down. We should expect more bad news from hedge funds and other participants in the junk mortgage and securitization markets but the damage will be limited to those players and will not drag down the rest of the marke...
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| Breaking Down the Financial Breakdown |
| 2007-08-15 16:13:00 |
The stock market is gyrating like a yoyo, and with each down stroke it’s heading lower. What’s an investor to do? Let’s start by dissecting the cause – it’s not as simple as a slowdown in housing or defaults in the subprime market, and these are unrelated (for the most part) events.
The housing market was headed for a correction regardless of the events taking place in the subprime market. New home starts were running at twice the historical average during 2003 – 2006. Granted, some of this was fueled by a relaxation (or abandoning) of underwriting standards in the subprime market but it also was the culmination of aging baby boomers buying second homes, low interest rates, and a strong economy. Speculators in areas such as southern Florida and easy credit just pushed it over the edge. We would be in a housing slowdown regardless of the subprime problem, although this will exacerbate it, and a weak housin...
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