The ongoing decline in U.S. home prices continued to abate, with prices down 12.8% and 13.3% for S&P/Case-Shiller's 10- and 20-city home price indexes, a 1.7% improvement from a month ago (i.e. the decline is slowing, but not ended). The group said figures continue to support the stabilization story, "but we do need to be cautious in coming months to assess whether the housing market will weather the expiration of the Federal First-Time Buyer’s Tax Credit in November, anticipated higher unemployment rates and a possible increase in foreclosures." Source: SeekingAlpha, Wall Street Breakfast: Must Know News, Sept. 30, 2009
For the rest of the story watch the following Youtube Link (copy and paste to your browser). It highlights future impending problems that lead to future price declines, though we are near the bottom. More importantly, the analysis points to a long basing period to recovery, i.e. an extended U-shape recovery in home prices.
http://www.youtube.com/watch?v=stVgR0SeiQo&feature=player_embedded
Wednesday, September 30, 2009
Tuesday, September 22, 2009
Strange to Strained Banking
Bank bailout with a twist. Regulators are seriously considering a plan to have healthy banks lend billions of dollars to the FDIC's bank insurance fund, which is rapidly running out of cash amid a wave of bank failures. The plan appeals to banks, because it would forestall yet another across-the-board emergency assessment on them, which could erode $5-10B of their profits. And it appeals to FDIC head Sheila Bair, who bankers say "would take bamboo shoots under her nails" before turning to the Treasury to tap the FDIC's $100B emergency credit line. (Source Seeking Alpha, Wall Street Breakfast, New's You Must Know. Sept. 22, 2009)
Does this point to pending/continued problems with banks? I'd say yes. There is a push by bank and consumers to clean-up their balance sheets. The government can only extend itself for a finite period of time. The current market is a bull rally in a bear secular market. Be very careful.
Does this point to pending/continued problems with banks? I'd say yes. There is a push by bank and consumers to clean-up their balance sheets. The government can only extend itself for a finite period of time. The current market is a bull rally in a bear secular market. Be very careful.
Thursday, September 17, 2009
But Cash Is Earning Zero
The idea of cash earning zero comes up every so often in interviews, in the context of managers needing to put cash to work because of the low yield, or "you don't get paid to sit in cash" or managers needing to get invested ahead of the quarter (window dressing).
This is entirely the wrong context. If you knew that stocks would double over the next year, then a money market yield of zero is bad. If you knew that stocks would be cut in half over the next year, then a money market yield of zero is fantastic.
Obviously no one knows whether stocks will go up 100% (unlikely), down 50% (unlikely) or something in between (likely). People who actively manage portfolios (for themselves or others) probably have an opinion about direction and tilt to that opinion in some magnitude. In this context, cash becomes a tactical tool regardless of the yield. As a tool, it is used in correct proportion for a given period or it isn't, but the idea of "too much cash" is not complete without context.
During the worst of the recent (current?) bear market I met with my firm's primary point of contact at Schwab and he mentioned something about our cash level being high - this, as the market was puking down. To put it in Hussmanesque terms, if risks favor the downside, then having cash - regardless of the yield - becomes the correct tactical decision.
Unfortunately, much of what we see in the media asks the wrong questions or more correctly frames the context incorrectly. "I see you don't like financials" is one example. Actively (so not passive) navigating market cycles can be made much easier (not easy, easier) by weighing risks and rewards of various things you invest in, either broad asset classes, investing at the sector level, country level or however narrow you go.
In too many interviews in the media, maybe as a function of time, the questions asked do not necessarily seek the correct context and the person being interviewed may or may not realize this and add in that context. Anytime you read or hear anyone speak, it is important to realize there could be more context as not every one tells you everything he is thinking, like Jimmy Rogers.
By: Roger Nusbaum, SeekingAlpha.com, http://seekingalpha.com/article/161830-but-cash-is-earning-zero
This is entirely the wrong context. If you knew that stocks would double over the next year, then a money market yield of zero is bad. If you knew that stocks would be cut in half over the next year, then a money market yield of zero is fantastic.
Obviously no one knows whether stocks will go up 100% (unlikely), down 50% (unlikely) or something in between (likely). People who actively manage portfolios (for themselves or others) probably have an opinion about direction and tilt to that opinion in some magnitude. In this context, cash becomes a tactical tool regardless of the yield. As a tool, it is used in correct proportion for a given period or it isn't, but the idea of "too much cash" is not complete without context.
During the worst of the recent (current?) bear market I met with my firm's primary point of contact at Schwab and he mentioned something about our cash level being high - this, as the market was puking down. To put it in Hussmanesque terms, if risks favor the downside, then having cash - regardless of the yield - becomes the correct tactical decision.
Unfortunately, much of what we see in the media asks the wrong questions or more correctly frames the context incorrectly. "I see you don't like financials" is one example. Actively (so not passive) navigating market cycles can be made much easier (not easy, easier) by weighing risks and rewards of various things you invest in, either broad asset classes, investing at the sector level, country level or however narrow you go.
In too many interviews in the media, maybe as a function of time, the questions asked do not necessarily seek the correct context and the person being interviewed may or may not realize this and add in that context. Anytime you read or hear anyone speak, it is important to realize there could be more context as not every one tells you everything he is thinking, like Jimmy Rogers.
By: Roger Nusbaum, SeekingAlpha.com, http://seekingalpha.com/article/161830-but-cash-is-earning-zero
Wednesday, September 16, 2009
Investing and Inflation
Most of us think of the return on our investments in nominal terms, or the stated return on an investment. In periods of low inflation, if you expect a corporate bond fund to yield 5 percent, thinking of this as a 5 percent return may not be particularly harmful.
When inflation increases, however, thinking in nominal terms can be very detrimental, especially to your long-term investment planning. Given recent events, it may be prudent to consider the next stage of the economy. The government has aggressively increased spending, and the Federal Reserve, the U.S. central bank, has increased the money supply. If inflation results from these measures, thinking in nominal terms may reduce the probability of satisfying your needs and goals. Now may be a good time to think about your portfolio return above the rate of inflation, or in real terms, and to prepare for the risk of higher inflation.
Inflation reduces investment returns and needs to be considered in constructing portfolios for different stages of investors’ lives. Most investors want their investment portfolio to preserve and enhance purchasing power. Preserving purchasing power means that investment returns must clear the inflation hurdle.
Investment insight
Nominal return: The stated return on an investment. If you invest $100 and get $102 in a year, that is a 2 percent nominal return.
Real return: The return on an investment adjusted for inflation (or deflation). A 2 percent nominal return in a 2 percent inflationary environment will leave you exactly where you started in terms of purchasing power, unless you are paying taxes on the interest, in which case you are worse off after a year. Your goal should include maintaining purchasing power, or your ability to pay for your future.
Let’s look at different securities in your portfolio to determine whether they are likely to meet the inflation hurdle.
Cash/short-term bond fund
Cash investments, such as savings accounts and money market funds, will often yield less than the inflation rate, reducing your portfolio’s real return. While cash serves a useful purpose, it may be beneficial to consider a high-quality short-term bond fund for some of your liquidity needs.
The somewhat higher yield in a short-maturity bond fund can help to keep pace with inflation. Remember, however, that returns that seem too good to be true often entail unexpected risks, so proceed with caution. Review the latest prospectus to understand the fund manager’s strategy and recent holdings. You may choose to skip a fund that contains securities with unfamiliar characteristics.
Bonds
Medium- and longer-term bonds typically do poorly in periods of higher-than-expected inflation for two reasons. Inflation erodes the purchasing power of a bond’s fixed income stream. In addition, unexpected increases in inflation typically result in rising interest rates, which lower nominal bond prices.
Inflation-protected bonds are an important exception to the behavior of most bond investments in inflationary periods. These bonds protect investors against unanticipated inflation explicitly, because they promise to pay a real rate of return plus actual inflation. In the United States, they are called TIPS (Treasury inflation-protected securities) and can be purchased individually to a target maturity date or within a fund that holds a diverse basket of maturities. Their special properties make them useful for investors who place paramount importance on maintaining purchasing power and desire the safety of a government-guaranteed bond.
While TIPS offer protection against unexpected inflation, they share with conventional bonds the sensitivity to changes in interest rates and market sentiment. Note, however, that hold-to-maturity investors would still receive the payments, including adjustments for inflation, for which they bargained when they bought the security (regardless of changes in the quoted value of the bond). Work with your financial adviser to evaluate the role that TIPS can play within your portfolio.
Investment insight
Treasury inflation-protected securities (TIPS): Treasury inflation-protected securities, or TIPS, protect against inflation. The principal of TIPS increases with inflation (and decreases with deflation) as measured by the Consumer Price Index (CPI). When TIPS mature, you are paid the adjusted principal or original principal, whichever is greater. Speak with your investment adviser about the tax treatment of the annual principal adjustment.
Stocks
Stocks are generally thought of as good inflation hedges over the long run because companies are able to charge higher prices to offset rising costs. Stock returns, however, may lag inflation, especially over shorter horizons. The recent decline in the stock market should underscore that equity investing is not for everyone or for every investment need. Match your goals and risk tolerance with an appropriate mix of investments.
Commodity funds
Sophisticated investors may address concerns about inflation by investing in commodity funds, which have value that fluctuates with prices of physical goods such as agricultural products, metals, and oil. Actively managed funds within this category tend to concentrate on a narrow range of positions, and consequently can experience more volatile results than other fund types. Additionally, some funds invest in companies that produce commodities, while others invest directly in the underlying commodity, which generally offers better diversification benefits. In general, commodity funds may serve the interests of longer-term sophisticated investors, often representing a small percentage of their portfolio.
Investing amid uncertainty
Recent market developments underscore the importance of following the evergreen Scouting principle of “being prepared.” Prudent investment planning suggests constructing a portfolio that will meet your needs and goals over a range of possible scenarios. While it is impossible to know with certainty how damaging inflation will be in your investment future, being prepared for the full range of possibilities, including a period of inflation, can make sense.
Why choose a CFA charterholder wealth manager?
Many investors use specialists for the complex matters of life, and portfolio construction is a good example. Consider using a financial adviser who is a CFA charterholder to assist you in constructing a portfolio that will meet your needs and goals.
Today’s financial markets demonstrate just how important it is to have reliable evidence of your financial adviser’s integrity, experience, and commitment.
No credential is as widely regarded in the global financial industry for its rigorous focus on current investment knowledge, analytical skill, and fiduciary responsibility as the Chartered Financial Analyst (CFA) designation.
A CFA charterholder is:
Credible. Adherence to a code of ethics that puts the client’s interest first and mastery of a comprehensive body of investment knowledge
Committed. Demonstrated professional experience and perseverance to undergo 18 hours of examination
Current. Exams updated with the latest and most relevant knowledge and access to world-class lifelong learning resources
Connected. Membership in a network of more than 100,000 investment professionals in 131 countries
source: CFA Institute Newsletter
When inflation increases, however, thinking in nominal terms can be very detrimental, especially to your long-term investment planning. Given recent events, it may be prudent to consider the next stage of the economy. The government has aggressively increased spending, and the Federal Reserve, the U.S. central bank, has increased the money supply. If inflation results from these measures, thinking in nominal terms may reduce the probability of satisfying your needs and goals. Now may be a good time to think about your portfolio return above the rate of inflation, or in real terms, and to prepare for the risk of higher inflation.
Inflation reduces investment returns and needs to be considered in constructing portfolios for different stages of investors’ lives. Most investors want their investment portfolio to preserve and enhance purchasing power. Preserving purchasing power means that investment returns must clear the inflation hurdle.
Investment insight
Nominal return: The stated return on an investment. If you invest $100 and get $102 in a year, that is a 2 percent nominal return.
Real return: The return on an investment adjusted for inflation (or deflation). A 2 percent nominal return in a 2 percent inflationary environment will leave you exactly where you started in terms of purchasing power, unless you are paying taxes on the interest, in which case you are worse off after a year. Your goal should include maintaining purchasing power, or your ability to pay for your future.
Let’s look at different securities in your portfolio to determine whether they are likely to meet the inflation hurdle.
Cash/short-term bond fund
Cash investments, such as savings accounts and money market funds, will often yield less than the inflation rate, reducing your portfolio’s real return. While cash serves a useful purpose, it may be beneficial to consider a high-quality short-term bond fund for some of your liquidity needs.
The somewhat higher yield in a short-maturity bond fund can help to keep pace with inflation. Remember, however, that returns that seem too good to be true often entail unexpected risks, so proceed with caution. Review the latest prospectus to understand the fund manager’s strategy and recent holdings. You may choose to skip a fund that contains securities with unfamiliar characteristics.
Bonds
Medium- and longer-term bonds typically do poorly in periods of higher-than-expected inflation for two reasons. Inflation erodes the purchasing power of a bond’s fixed income stream. In addition, unexpected increases in inflation typically result in rising interest rates, which lower nominal bond prices.
Inflation-protected bonds are an important exception to the behavior of most bond investments in inflationary periods. These bonds protect investors against unanticipated inflation explicitly, because they promise to pay a real rate of return plus actual inflation. In the United States, they are called TIPS (Treasury inflation-protected securities) and can be purchased individually to a target maturity date or within a fund that holds a diverse basket of maturities. Their special properties make them useful for investors who place paramount importance on maintaining purchasing power and desire the safety of a government-guaranteed bond.
While TIPS offer protection against unexpected inflation, they share with conventional bonds the sensitivity to changes in interest rates and market sentiment. Note, however, that hold-to-maturity investors would still receive the payments, including adjustments for inflation, for which they bargained when they bought the security (regardless of changes in the quoted value of the bond). Work with your financial adviser to evaluate the role that TIPS can play within your portfolio.
Investment insight
Treasury inflation-protected securities (TIPS): Treasury inflation-protected securities, or TIPS, protect against inflation. The principal of TIPS increases with inflation (and decreases with deflation) as measured by the Consumer Price Index (CPI). When TIPS mature, you are paid the adjusted principal or original principal, whichever is greater. Speak with your investment adviser about the tax treatment of the annual principal adjustment.
Stocks
Stocks are generally thought of as good inflation hedges over the long run because companies are able to charge higher prices to offset rising costs. Stock returns, however, may lag inflation, especially over shorter horizons. The recent decline in the stock market should underscore that equity investing is not for everyone or for every investment need. Match your goals and risk tolerance with an appropriate mix of investments.
Commodity funds
Sophisticated investors may address concerns about inflation by investing in commodity funds, which have value that fluctuates with prices of physical goods such as agricultural products, metals, and oil. Actively managed funds within this category tend to concentrate on a narrow range of positions, and consequently can experience more volatile results than other fund types. Additionally, some funds invest in companies that produce commodities, while others invest directly in the underlying commodity, which generally offers better diversification benefits. In general, commodity funds may serve the interests of longer-term sophisticated investors, often representing a small percentage of their portfolio.
Investing amid uncertainty
Recent market developments underscore the importance of following the evergreen Scouting principle of “being prepared.” Prudent investment planning suggests constructing a portfolio that will meet your needs and goals over a range of possible scenarios. While it is impossible to know with certainty how damaging inflation will be in your investment future, being prepared for the full range of possibilities, including a period of inflation, can make sense.
Why choose a CFA charterholder wealth manager?
Many investors use specialists for the complex matters of life, and portfolio construction is a good example. Consider using a financial adviser who is a CFA charterholder to assist you in constructing a portfolio that will meet your needs and goals.
Today’s financial markets demonstrate just how important it is to have reliable evidence of your financial adviser’s integrity, experience, and commitment.
No credential is as widely regarded in the global financial industry for its rigorous focus on current investment knowledge, analytical skill, and fiduciary responsibility as the Chartered Financial Analyst (CFA) designation.
A CFA charterholder is:
Credible. Adherence to a code of ethics that puts the client’s interest first and mastery of a comprehensive body of investment knowledge
Committed. Demonstrated professional experience and perseverance to undergo 18 hours of examination
Current. Exams updated with the latest and most relevant knowledge and access to world-class lifelong learning resources
Connected. Membership in a network of more than 100,000 investment professionals in 131 countries
source: CFA Institute Newsletter
Tuesday, September 15, 2009
Quote of the Day
"The ability to ask the right question is more than half the battle of finding the answer."
Thomas J. Watson
Investors should focus their time on the right question. A rare few do. Hence, the reason for a Coach.
Thomas J. Watson
Investors should focus their time on the right question. A rare few do. Hence, the reason for a Coach.
Monday, September 14, 2009
Louis Navellier's Thoughts on the Market
On the anniversary of 9/11, the Dow closed Friday at 9605.41, ironically just 0.1 below its 9605.51 close on September 10, 2001, the day before the attack on America. In terms of the broader S&P 500, the U.S. market is well below where it was last year and in most of the mid-September marks of the last 10 years (except 2002-03). While some analysts talk about an “overbought” stock market that has risen “too far, too fast,” we are still trading well below where we were a decade ago, with near-record amounts of cash still on the sidelines, pondering the “buy” decision. From a contrarian viewpoint, this is encouraging…
Tuesday, September 8, 2009
Stock versus Bonds
Treasury prices rallied through the summer, but so did stock prices. Can we really have it both ways? In 2008, Treasuries outperformed the S&P 500 by an impressive 53%. From 1900 to 2008, equities have outperformed bonds by an average of 4.2%, but only an average of 2.7% from 1821 to 2008. This suggests the long-term average equity risk premium is in the vicinity of three to four percent.
Source: RGE Monitor, 9-8-09
Source: RGE Monitor, 9-8-09
Thursday, September 3, 2009
Bill Gross - Possible Double Dip
Bill Gross, chief investment officer of Pacific Investment Management Co., said a double-dip recession might result in opportunities to invest in longer-term U.S. government debt. "To the extent that we have had a trillion dollars worth of stimulus, from the standpoint of deficits, and more, the government basically has to continue to do that and to add to that in order to keep the economy chugging along," he said. "To the extent that that's limited, to the extent that they pull back on some of those stimulus programs -- 'Cash for Clunkers' and those types of things -- then the double dip moves into the realm of possibility." CNBC (02 Sep.)
Video link: http://www.cnbc.com/id/15840232?video=1237349639&play=1
Video link: http://www.cnbc.com/id/15840232?video=1237349639&play=1
Tuesday, September 1, 2009
What a Wild Ride the Past 12 Months Have Been
About a year has passed since the financial crisis hit with full force, and investors could learn a few things from the experience. First and foremost, diversification is still a useful concept, but markets are so interconnected that there are limits to the level of security one can achieve from it. Now and then, trends are so powerful that diversification will not work. The Wall Street Journal (30 Aug.)
Full Article: http://online.wsj.com/article/SB125158349559369687.html?mod=dist_smartbrief
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