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Breaking Down the Financial Breakdown 2007-08-15 09:13:00 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 Read more:Breaking
, Financial
Speculate For Growth, Not For Income 2007-08-22 08:33:00 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 Read more:Growth
, Income
The Fat Lady Has Sung 2007-08-20 08:16:00 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
Gut Check Time 2007-08-29 07:25:00 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 Read more:Check
The Calm After the Storm 2007-08-27 07:34:00 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 Read more:Storm
The Economic Crises of 2008 2007-09-26 07:08:00 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 h Read more:Economic
On the Rebound 2007-09-24 08:07:00 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 l Read more:Rebound
Sector Funds: More Than Meets The Eye 2007-09-19 09:22:00 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 Read more:Funds
A Fed Rate Cut Doesn't Matter 2007-09-17 08:11:00 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
AI: Alpha and Index Funds 2007-09-12 10:54:00 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 IndexFunds
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 yo
Living for the Moment 2007-09-11 20:43:00 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 Read more:Living
, Moment
The Tail Wagging the Dog 2007-09-05 08:00:00 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
Marking Time 2007-10-01 06:43:00 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
International Investing in The Age of Turbulence 2007-10-10 06:36:00 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, perverse Read more:International
, Investing
The Government was the Last to Know 2007-10-08 07:05:00 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 Read more:Government
Mr. Greenspan's Investments 2007-10-03 07:48:00
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, Read more:Investments
Recession Investing 2007-10-17 08:07:00 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 purch Read more:Investing
Christmas in October 2007-10-15 07:26:00 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 spe Read more:October
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 Read more:Something New
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 heating costs. SIVs are off balance sheet investments (remember Enron), so nobody really knows what going on with them but its safe to say that the question of the quality of their investments hasn&rs Read more:Hitting
, Curve
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 also try to outguess the indices if you want. For example, you can buy a S&P index fund which weights all 500 stocks equally or one which weights them by market cap, and so on. (Note to investors: make sure you know wh Read more:Indexing
, Passive
, Aggressive
, Investors
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 Read more:Hedging
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,
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
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 Read more:Month
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 Read more:Exchange
The CIA's Guide to International Investing 2007-11-20 09:00:00 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 Read more:Guide
, International
, Investing
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 Read more:Stall
, Speed
Surviving A Recession 2007-11-28 07:48:00 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 Read more:Surviving
Danger: Recession Ahead, Proceed with Caution 2007-11-26 08:56:00 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 Read more:Danger
, Caution
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