The current economic downturn has been called a housing crisis, a financial crisis and a debt crisis, but now, according to nearly everyone running for office, we are in a jobs crisis. Politicians currently talk of vague jobs plans, filled with serious-sounding phrases and little real meaning.
Think about it, when has a corporate CEO ever been rewarded for hiring people who aren’t absolutely required. Most companies hire only when its workforce can no longer keep up with the demand for its products.
The government’s ability to create jobs is pretty disappointing and that’s ok. The most popular types of jobs programs involve state tax breaks or subsidies that seek to move a company from one state to another. These policies don’t add to overall employment so much as they just shuffle jobs around.
John Maynard Keynes’s view is that government can create jobs by spending a lot of money. The stimulus, however, has to be borrowed, and it has to be huge — probably something close to $2 trillion — to fill the gap between where the economy is and where it would be if everyone was spending at pre-recession levels.
Many Republicans follow the more fiscally conservative University of Chicago School, which argues that Keynesian stimulus can’t heal a sick economy — only time can. Chicagoans believe that economies can only truly recover on their own and that policy interventions only slow the recovery.
Of course, Republicans can’t say, “wait this thing out while we cut taxes and regulation.” These policies may make the economy healthier in 5 to 10 years, but the immediate impact would require firing a large number government workers.
The U.K., as part of its austerity measures, is in the process of firing about 500,000 government workers under the notion that the private sector would expand (lower taxes and regulation) and employ all those laid-off. But this isn’t happening. The British economy continues to grow slowly, if at all and few government workers have found new jobs in the private sector.
The second area of agreement is the most important: an economy is truly healthy only when its people know how to make and do things that others will pay them a decent amount for. Jobs are not the cause of a healthy economy, they’re the product.
The economy that emerges from this recession is going to be different. Without the distortion of a credit bubble, it is clear that far too many Americans don’t know how to do anything that the world is willing to pay them a living wage for (Kardashians excepted).For confirmation, look to the aptly named rustbelt and also look at the negative correlation between education and unemployment.
An economic downturn is the time to learn new skills – move forward and learn about something that can help produce a paycheck. Those who can’t find a job where they live should consider moving to places where there are more jobs than applicants.
With Europe plugging the nearly insolvent country dyke that seems to spring a new leak every six months and until the U.S. economy, somewhat mired in mud, gets unstuck, emerging economies will be a beacon to investors.
Take for instance, The Matthews Asian Growth and Income Fund, the Fund invests in dividend-paying common stock, preferred stock and other equity and convertible securities of companies located in Asia – it’s paying a 3.4 percent current dividend. Investors are becoming increasingly aware of the attractive demographics and strong economic growth that exist in the region.
Over the last 15 years the Fund has delivered risk adjusted performance (alpha) of 7.24 percent ABOVE the index. And during this period of economic volatility, the Fund was able to accomplish one of its main aims—to offer a degree of downside protection—and cushion shareholders from the worst of the sell-off.
To index is smart when the market is terribly efficient. Managers cannot consistently outperform in highly efficient markets as prices instantly change to reflect new public information. This is true of the Treasury market and may be true of the domestic large cap stock market. In inefficient markets a good manager can exploit this to the shareholders advantage. Small cap stocks and emerging markets currently fall into this category. Indexing in these markets may not be as profitable over the long-term.
CBlakely CFP®. CTFA 11/2011
Sources: PlanetMoney – Adam Davidson, Bill Gross-PIMCO, Matthews Asia
Thursday, November 10, 2011
Friday, October 7, 2011
Before Investing in Foreign Stocks, Read This!
It is generally not advisable to hold foreign dividend-paying American Depositary Receipts (ADR's) in IRAs and other non-taxable accounts since you cannot recover the taxes paid to a foreign country.
However, there are two notable exceptions. First, Germany charges a 26.4 percent tax on dividends on stocks held in taxable accounts. But due to the tax-treaty between U.S. and Germany, Germany does not deduct any taxes on dividends paid by German firms to U.S. investors who hold the stock in their IRA and other qualified pension accounts. Second, Canada charges a 15 percent tax on dividends held in non-taxable accounts. But due to a policy change in 2009, dividends and interest income are exempt from this 15 percent tax if the investments are held in IRA or 401(K) accounts. So U.S. investors can hold stocks in say Canadian banks such as Royal Bank of Canada or other Canadian dividend-paying stocks in your IRA’s for the long-term without worrying about taxes on dividends.
The Netherlands has a statutory tax rate of 25 percent. But due to the special tax treaty with the United States, American investors in Dutch companies are charged only 15 percent. The following countries have tax-treaties with the U.S. which also allow for favorable treatment of dividends earned by US investors investing in those countries:
Australia, Austria, Belgium, China, Denmark, Finland, France, India, Ireland, Israel, Italy, Japan, Korea, Mexico, Netherlands, New Zealand, and the United Kingdom. This is a partial listing highlighting countries with the biggest and most developed economies.
While foreign stocks (or funds) deserve a place in a diversified portfolio, as always, consult with your investment advisor before taking investment action.
CBlakely CFP, CTFA 10/2011
Source: IRS.gov
However, there are two notable exceptions. First, Germany charges a 26.4 percent tax on dividends on stocks held in taxable accounts. But due to the tax-treaty between U.S. and Germany, Germany does not deduct any taxes on dividends paid by German firms to U.S. investors who hold the stock in their IRA and other qualified pension accounts. Second, Canada charges a 15 percent tax on dividends held in non-taxable accounts. But due to a policy change in 2009, dividends and interest income are exempt from this 15 percent tax if the investments are held in IRA or 401(K) accounts. So U.S. investors can hold stocks in say Canadian banks such as Royal Bank of Canada or other Canadian dividend-paying stocks in your IRA’s for the long-term without worrying about taxes on dividends.
The Netherlands has a statutory tax rate of 25 percent. But due to the special tax treaty with the United States, American investors in Dutch companies are charged only 15 percent. The following countries have tax-treaties with the U.S. which also allow for favorable treatment of dividends earned by US investors investing in those countries:
Australia, Austria, Belgium, China, Denmark, Finland, France, India, Ireland, Israel, Italy, Japan, Korea, Mexico, Netherlands, New Zealand, and the United Kingdom. This is a partial listing highlighting countries with the biggest and most developed economies.
While foreign stocks (or funds) deserve a place in a diversified portfolio, as always, consult with your investment advisor before taking investment action.
CBlakely CFP, CTFA 10/2011
Source: IRS.gov
Friday, September 30, 2011
401(k) Investors Who Use Professional Help Outperform Those Who Don't
Investors who relied on professional help in the form of managed accounts and advice earned nearly three percentage points more than those that did not, according to an analysis of eight large defined contribution plans between 2006 and 2010 by Aon Hewitt and Financial Engines. The plans covered 400,000 participants with a total of $25 billion in assets.
The study found that in those five years, workers who received some form of professional advice experienced higher returns, averaging 2.92 percentage points, net of fees, than those individuals who managed their 401(k) on their own. According to Aon Hewitt and Financial Engines’ projections, a 45-year-old participant who invests $10,000 and receives professional help will have a portfolio valued at $71,400 at age 65, compared to $42,100 for someone who doesn’t get any help.
The study also found that 30 percent of participants were using help in 2010, up from 25 percent in 2009. It also found that younger investors with smaller balances were the most likely to use target-date funds (ouch - the most expensive and worst performing funds offered in plans - usually), and younger investors with larger balances preferred online advice. For those nearing retirement, managed accounts are the favored investment vehicle.
“This research shows the concrete value of professional retirement help during a variety of market conditions, and across age groups,” said Christopher Jones, chief investment officer at Financial Engines. “The help that employers have made available is having the desired effect of keeping participants in diversified portfolios and avoiding costly mistakes.”
The study also found that 38 percent of do it yourself participants have excessive risk levels, and 18 percent have risk levels that are too low. In contract, participants using professional help maintained more diversified allocations with appropriate risk levels, and also employed a rebalancing strategy.
“Exacerbated by continued market volatility, workers not using help are clearly making significant investment mistakes,” Jones added. “Their inefficient portfolios and skewed risk-taking is hurting results—and as the numbers show, the cost is very high.” Indeed very high! High enough to make a significant difference in how you live during your retirement.
CBlakely CFP, CTFA 09/30/11
Source: excerpted from a recent article from Money Management Executive
The study found that in those five years, workers who received some form of professional advice experienced higher returns, averaging 2.92 percentage points, net of fees, than those individuals who managed their 401(k) on their own. According to Aon Hewitt and Financial Engines’ projections, a 45-year-old participant who invests $10,000 and receives professional help will have a portfolio valued at $71,400 at age 65, compared to $42,100 for someone who doesn’t get any help.
The study also found that 30 percent of participants were using help in 2010, up from 25 percent in 2009. It also found that younger investors with smaller balances were the most likely to use target-date funds (ouch - the most expensive and worst performing funds offered in plans - usually), and younger investors with larger balances preferred online advice. For those nearing retirement, managed accounts are the favored investment vehicle.
“This research shows the concrete value of professional retirement help during a variety of market conditions, and across age groups,” said Christopher Jones, chief investment officer at Financial Engines. “The help that employers have made available is having the desired effect of keeping participants in diversified portfolios and avoiding costly mistakes.”
The study also found that 38 percent of do it yourself participants have excessive risk levels, and 18 percent have risk levels that are too low. In contract, participants using professional help maintained more diversified allocations with appropriate risk levels, and also employed a rebalancing strategy.
“Exacerbated by continued market volatility, workers not using help are clearly making significant investment mistakes,” Jones added. “Their inefficient portfolios and skewed risk-taking is hurting results—and as the numbers show, the cost is very high.” Indeed very high! High enough to make a significant difference in how you live during your retirement.
CBlakely CFP, CTFA 09/30/11
Source: excerpted from a recent article from Money Management Executive
Tuesday, August 23, 2011
Recession Par Deux?
Are we slipping back into recession? The answer may be yes and while it may last awhile, there is no evidence to support that this recession will be as catastrophic as the last one that began in 2007. Unemployment remains stubbornly high. Actually, it feels as if the new normal in HR jargon is increased productivity not new jobs. The 5-year Treasury rate is less than 1 percent, which is a recessionary signal. Real gross domestic product - the output of goods and services produced by labor and property located in the United States - increased at an annual rate of 1.3 percent in the second quarter of 2011, according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent. The "second" estimate for the second quarter, based on more complete data, will be released on August 26, 2011. July economic numbers looked ok, but consumer confidence and retail sales are trending lower. Stock markets have been routed in August.
While both gold and Treasury securities have more room to run, buyers should hold off at current prices as both are overdue for a pullback. The ten-year Treasury yields about 2 percent currently. If you believe in mean reversion (I do) then the overnight funds to ten-year treasury rate spread currently at 2 percent, should fall to the long-term mean of 125 basis points. Since overnight rates are effectively zero that means there is room for the ten-year to rally.
There's no reason to be completely out of equities, but prudence suggests underweighting the amount of equities relative to what you would own in a cyclical bull market, which this assuredly is not (this mirrors recent suggestions regarding stock weightings in the portfolios we're managing).
For the DIY type, the equities you do own ought to be defensive in nature, not cyclical, they should have good earnings visibility and growing dividends and a decent dividend yield. These screens are readily available to retail investors.
The government, which has little in the coffers to provide a multiplier impact, could consider energy policy, which may be one of the last policy bullets available. A natural gas infrastructure build-out for example would put thousands upon thousands of Americans to work and could eventually lead to much lower energy prices for consumers (think of it like a tax cut) leading to a higher amount of disposable income.
Let’s hope we get a narrative from Washington or the private sector that trends this economy upward and to the right (that’s demand curve not political view).
CBlakely CFP®, CTFA 08-2011
Source: Bureau of Economic Analysis
While both gold and Treasury securities have more room to run, buyers should hold off at current prices as both are overdue for a pullback. The ten-year Treasury yields about 2 percent currently. If you believe in mean reversion (I do) then the overnight funds to ten-year treasury rate spread currently at 2 percent, should fall to the long-term mean of 125 basis points. Since overnight rates are effectively zero that means there is room for the ten-year to rally.
There's no reason to be completely out of equities, but prudence suggests underweighting the amount of equities relative to what you would own in a cyclical bull market, which this assuredly is not (this mirrors recent suggestions regarding stock weightings in the portfolios we're managing).
For the DIY type, the equities you do own ought to be defensive in nature, not cyclical, they should have good earnings visibility and growing dividends and a decent dividend yield. These screens are readily available to retail investors.
The government, which has little in the coffers to provide a multiplier impact, could consider energy policy, which may be one of the last policy bullets available. A natural gas infrastructure build-out for example would put thousands upon thousands of Americans to work and could eventually lead to much lower energy prices for consumers (think of it like a tax cut) leading to a higher amount of disposable income.
Let’s hope we get a narrative from Washington or the private sector that trends this economy upward and to the right (that’s demand curve not political view).
CBlakely CFP®, CTFA 08-2011
Source: Bureau of Economic Analysis
Tuesday, August 16, 2011
Stories Sell
Happy Ending?
The stories our leaders tell us matter, nearly as much as the stories our parents tell us as children, because they orient us to what is and to what could be. Our brains evolved to expect stories with a particular structure, with good guys and bad guys, a hill to be climbed or a battle to be won.
In that context, Americans needed their president to tell them a story that made sense of what they had just been through, what caused it, and how it was going to end. We are all scared and angry. Many have have lost their jobs, some their homes. This was a disaster made by Wall Street’s best educated, who speculated with our assets and therefore our futures. It was caused by politicians like Phil Gramm who told us that if we just deregulated we would be more competitive. Unabashed greed and recklessness were the unintended consequences.
We are suffering from the same ending we experienced 80 years ago, when the same people sold our grandparents the same bill of goods. Can we draw on their wisdom?
Like most Americans, at this point, I have no idea what the President believes on virtually any issue. The president tells us he prefers a “balanced” approach to deficit reduction, one that marries “revenue enhancements” (a weak way of describing popular taxes on the rich and big corporations that are evading them) with “entitlement cuts” (an equally poor choice of words that implies that people who’ve worked their whole lives are looking for handouts).
When 400 people control more of the wealth than 150 million of their fellow Americans, when the average middle-class family has seen its income stagnate over the last 30 years while the richest 1 percent has seen its income rise astronomically, it bodes ill for the U.S. economy. Now that Standard & Poor’s has downgraded the U.S.’s AAA credit rating, it is important to respond boldly and, at the same time, lower expectations.
The first step is for our political leaders to frankly acknowledge the problems at hand: The U.S. economy will face a hard slog for an extended period; the political system is polarized; and, under current policies, the budget deficit will remain large.
Expect Slow Growth
We can expect sluggish economic activity for years, not quarters, and we face the risk of another recession. Those who in January were predicting growth of 4 percent or more for 2011 did not sufficiently appreciate the evidence from economists that foretell what most often comes after a systemic financial collapse is a decade of weak growth. (Read “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises.”) Two years ago Bill Gross of PIMCO called it the “new normal.” I sense he was right.
The Executive branch needs to lead us again with a simple but strong narrative repeated over and over to keep our attention focused on the slog ahead and importantly the light at the end of the tunnel.
This correction is likely near a bottom and therefore, valuations in the U.S. are now attractive on a long-term basis. Price to earnings ratios on forward (future) earnings for most major U.S. stock market averages are under ten. On an earnings yield basis, stocks look remarkably attractive relative to bonds.
On a relative basis, stocks are about as cheap as they have ever been compared with bonds.
Hard Assets - It’s too late to buy gold and other precious metal safe havens for this cycle. In the long-run no one knows. But, a price drop would happen quickly, if at all.
Bonds - Keep your powder dry. Shorten bond durations and look to corporate notes for a little yield, or Canadian or German government bonds if you must own sovereign debt. There is very little value left in the U.S. Treasury curve at this point.
Equities - Financials have completely broken down, but have dropped to extremely attractive long-term values. Consumer staples and utilities act defensively during market downturns, but leadership usually shifts to other sectors at the bottom of the market. Consumer discretionary, industrials, materials and tech should lead as the economy finds stable footing.
CBlakely CFP, CTFA 08/2011
Sources: This Time is Different: A Panoramic View of Eight Centuries of Financial Crises, Reinhart, Rogoff: The New York Times Sunday Op-ed page July 2011, Bloomberg LP. PIMCO
The stories our leaders tell us matter, nearly as much as the stories our parents tell us as children, because they orient us to what is and to what could be. Our brains evolved to expect stories with a particular structure, with good guys and bad guys, a hill to be climbed or a battle to be won.
In that context, Americans needed their president to tell them a story that made sense of what they had just been through, what caused it, and how it was going to end. We are all scared and angry. Many have have lost their jobs, some their homes. This was a disaster made by Wall Street’s best educated, who speculated with our assets and therefore our futures. It was caused by politicians like Phil Gramm who told us that if we just deregulated we would be more competitive. Unabashed greed and recklessness were the unintended consequences.
We are suffering from the same ending we experienced 80 years ago, when the same people sold our grandparents the same bill of goods. Can we draw on their wisdom?
Like most Americans, at this point, I have no idea what the President believes on virtually any issue. The president tells us he prefers a “balanced” approach to deficit reduction, one that marries “revenue enhancements” (a weak way of describing popular taxes on the rich and big corporations that are evading them) with “entitlement cuts” (an equally poor choice of words that implies that people who’ve worked their whole lives are looking for handouts).
When 400 people control more of the wealth than 150 million of their fellow Americans, when the average middle-class family has seen its income stagnate over the last 30 years while the richest 1 percent has seen its income rise astronomically, it bodes ill for the U.S. economy. Now that Standard & Poor’s has downgraded the U.S.’s AAA credit rating, it is important to respond boldly and, at the same time, lower expectations.
The first step is for our political leaders to frankly acknowledge the problems at hand: The U.S. economy will face a hard slog for an extended period; the political system is polarized; and, under current policies, the budget deficit will remain large.
Expect Slow Growth
We can expect sluggish economic activity for years, not quarters, and we face the risk of another recession. Those who in January were predicting growth of 4 percent or more for 2011 did not sufficiently appreciate the evidence from economists that foretell what most often comes after a systemic financial collapse is a decade of weak growth. (Read “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises.”) Two years ago Bill Gross of PIMCO called it the “new normal.” I sense he was right.
Government Opportunity
We should take this opportunity to reconsider what government should properly do. We need to invest more in roads, bridges, railroads and the like, and the best way to do this would be to create a new infrastructure bank in the same mold as the Tennessee Valley Authority. The Executive branch needs to lead us again with a simple but strong narrative repeated over and over to keep our attention focused on the slog ahead and importantly the light at the end of the tunnel.
Our Opportunity
Rahm Emanuel, the former White House chief of staff, once famously remarked that one should never let a serious crisis go to waste. It may be time to make nuanced shifts in your portfolio.
This correction is likely near a bottom and therefore, valuations in the U.S. are now attractive on a long-term basis. Price to earnings ratios on forward (future) earnings for most major U.S. stock market averages are under ten. On an earnings yield basis, stocks look remarkably attractive relative to bonds.
On a relative basis, stocks are about as cheap as they have ever been compared with bonds.
Hard Assets - It’s too late to buy gold and other precious metal safe havens for this cycle. In the long-run no one knows. But, a price drop would happen quickly, if at all.
Bonds - Keep your powder dry. Shorten bond durations and look to corporate notes for a little yield, or Canadian or German government bonds if you must own sovereign debt. There is very little value left in the U.S. Treasury curve at this point.
Equities - Financials have completely broken down, but have dropped to extremely attractive long-term values. Consumer staples and utilities act defensively during market downturns, but leadership usually shifts to other sectors at the bottom of the market. Consumer discretionary, industrials, materials and tech should lead as the economy finds stable footing.
CBlakely CFP, CTFA 08/2011
Sources: This Time is Different: A Panoramic View of Eight Centuries of Financial Crises, Reinhart, Rogoff: The New York Times Sunday Op-ed page July 2011, Bloomberg LP. PIMCO
Monday, July 18, 2011
A Huge Bust (economic)
How many books, articles, blogs, and news stories are out there attempting to explain why the economy can’t leave the Great Recession in the dust and start adding large numbers of jobs? The deficit is too big. The stimulus was flawed. China is crushing us. Businesses are overregulated. Wall Street is under-regulated. The list goes on.
My sense is these are all symptoms of something else, something bigger. The main culprit is a tremendous economic bust and we are still in the middle of it. It isn’t simply a housing bust. It’s a deflation of the great consumer bubble, decades in the making. (Only the very wealthy and very poor are unaffected.)
For example, the auto industry is on pace to sell 28 percent fewer new vehicles this year than it did 10 years ago — and 10 years ago was 2001, when the country was in recession! Sales of ovens and stoves are on pace to be at their lowest level since the early 90’s. Home sales over the past year have fallen back to their lowest point since the crisis began. And big-ticket items are hardly the only problem.
The Federal Reserve Bank of New York recently published a report on what it calls discretionary service spending, a category that excludes housing, food and health care and includes restaurant meals, entertainment, education and insurance among others. Going back decades, such spending had never fallen more than 3 percent per capita in a recession. In this slump, it is down almost 7 percent, and still has not really begun to recover.
Retail sales were weaker than expected, and consumer confidence fell, causing economists to downgrade their estimates for economic growth yet again. It’s a familiar routine. Forecasters in Washington and on Wall Street keep saying the recovery’s problems are temporary — 10 years is temporary if your time horizon is 500 years, mine is not.
If you’re looking a reasonable explanation for the terrible job market, it is this great consumer bust. Business executives are only rational to hold back on hiring if they do not know when customers will fully return. Consumers, for the most part, are coping with a loss of wealth and an uncertain future (pushing back durable goods purchases). Both consumers and executives are panicky given the latest economic problems.
We are feeling the deferred pain from 25 years of excess, as people try to rebuild their depleted savings. This pattern is a classic one. The definitive book about financial crises has become “This Time Is Different: Eight Centuries of Financial Folly,” Surveying hundreds of years of crises around the world the authors conclude that debt is the primary cause and that the aftermath is “deep and prolonged,” with “profound declines in output and employment.” On average, a modern financial crisis has caused the unemployment rate to rise for more than four years and by 7 percentage points. (We’re now at almost four years and 5 percentage points.) The recovery takes many years more.
The notion that the United States needs to begin moving away from its consumer economy — toward more of an investment and production economy, with rising exports, expanding factories and more good-paying service jobs — has become so commonplace that it’s a cliché. It’s also true. And the consumer bust shows why. The old consumer economy is gone, and it’s not coming back anytime soon.
Sure, house and car sales will eventually rebound, as the economy slowly recovers and the population continues expanding. But consumer spending will not soon return to the growth rates of the 1980s and ’90s. They depended on income people didn’t have. (I might suggest underweighting the consumer discretionary sector for the near term and not for the reasons you would think, with a P/E over 19X for the sector it’s a too expensive and may be overdue for a correction considering where we are in the business cycle.)
The choice, then, is between starting to make the transition to a different economy and enduring years of fits and starts in the economy.
The easy thing now might be to proclaim that debt is the devil and ask everyone to get thrifty. History, however, has a different verdict. If governments stop spending at the same time that consumers do, the economy can enter a vicious downward cycle (see the Great Depression for details).
But the debt-ceiling debate doesn’t have to be yet another problem for the economy. The right kind of agreement could help soften the consumer bust and also speed the transition to a different kind of economy.
Politics, of course, makes many of the current ideas being discussed unlikely to happen anytime soon. Unfortunately, though, these debt-ceiling talks won’t be the final chance for Washington to help the country recover from the great consumer bust. That’s the thing about consumer busts - they can last for a long time.
CBlakely CFP®, CTFA, CMFC 07-2011
Sources: New York Times, Federal Reserve Bank of New York, “This Time Is Different: Eight Centuries of Financial Folly” - Carmen M. Reinhart, and Kenneth S. Rogoff
My sense is these are all symptoms of something else, something bigger. The main culprit is a tremendous economic bust and we are still in the middle of it. It isn’t simply a housing bust. It’s a deflation of the great consumer bubble, decades in the making. (Only the very wealthy and very poor are unaffected.)
For example, the auto industry is on pace to sell 28 percent fewer new vehicles this year than it did 10 years ago — and 10 years ago was 2001, when the country was in recession! Sales of ovens and stoves are on pace to be at their lowest level since the early 90’s. Home sales over the past year have fallen back to their lowest point since the crisis began. And big-ticket items are hardly the only problem.
The Federal Reserve Bank of New York recently published a report on what it calls discretionary service spending, a category that excludes housing, food and health care and includes restaurant meals, entertainment, education and insurance among others. Going back decades, such spending had never fallen more than 3 percent per capita in a recession. In this slump, it is down almost 7 percent, and still has not really begun to recover.
Retail sales were weaker than expected, and consumer confidence fell, causing economists to downgrade their estimates for economic growth yet again. It’s a familiar routine. Forecasters in Washington and on Wall Street keep saying the recovery’s problems are temporary — 10 years is temporary if your time horizon is 500 years, mine is not.
If you’re looking a reasonable explanation for the terrible job market, it is this great consumer bust. Business executives are only rational to hold back on hiring if they do not know when customers will fully return. Consumers, for the most part, are coping with a loss of wealth and an uncertain future (pushing back durable goods purchases). Both consumers and executives are panicky given the latest economic problems.
We are feeling the deferred pain from 25 years of excess, as people try to rebuild their depleted savings. This pattern is a classic one. The definitive book about financial crises has become “This Time Is Different: Eight Centuries of Financial Folly,” Surveying hundreds of years of crises around the world the authors conclude that debt is the primary cause and that the aftermath is “deep and prolonged,” with “profound declines in output and employment.” On average, a modern financial crisis has caused the unemployment rate to rise for more than four years and by 7 percentage points. (We’re now at almost four years and 5 percentage points.) The recovery takes many years more.
The notion that the United States needs to begin moving away from its consumer economy — toward more of an investment and production economy, with rising exports, expanding factories and more good-paying service jobs — has become so commonplace that it’s a cliché. It’s also true. And the consumer bust shows why. The old consumer economy is gone, and it’s not coming back anytime soon.
Sure, house and car sales will eventually rebound, as the economy slowly recovers and the population continues expanding. But consumer spending will not soon return to the growth rates of the 1980s and ’90s. They depended on income people didn’t have. (I might suggest underweighting the consumer discretionary sector for the near term and not for the reasons you would think, with a P/E over 19X for the sector it’s a too expensive and may be overdue for a correction considering where we are in the business cycle.)
The choice, then, is between starting to make the transition to a different economy and enduring years of fits and starts in the economy.
The easy thing now might be to proclaim that debt is the devil and ask everyone to get thrifty. History, however, has a different verdict. If governments stop spending at the same time that consumers do, the economy can enter a vicious downward cycle (see the Great Depression for details).
But the debt-ceiling debate doesn’t have to be yet another problem for the economy. The right kind of agreement could help soften the consumer bust and also speed the transition to a different kind of economy.
Politics, of course, makes many of the current ideas being discussed unlikely to happen anytime soon. Unfortunately, though, these debt-ceiling talks won’t be the final chance for Washington to help the country recover from the great consumer bust. That’s the thing about consumer busts - they can last for a long time.
CBlakely CFP®, CTFA, CMFC 07-2011
Sources: New York Times, Federal Reserve Bank of New York, “This Time Is Different: Eight Centuries of Financial Folly” - Carmen M. Reinhart, and Kenneth S. Rogoff
Thursday, June 30, 2011
Why You Should Invest for Dividends
As a bond maven I get that coupon income dominates total return. The same is true with equities, even more so, dividends have dominated stock market returns historically and are likely to continue dominating future returns.
We buy stocks because we think they will "go up" and we can sell them for a gain. But think about it. Stocks go up presumably because the business is worth more. A business is necessarily worth more if it has large and rising distributions of cash (dividends) to company owners (stockholders). Unless you subscribe to a vast greater-fool theory - wherein someone is always willing to pay you more than you paid for a stock regardless of its "worth" - the final buyer has to be buying with the expectation of holding it in perpetuity based on its intrinsic value. If you are holding a stock with little expectation of selling it , the biggest value it generates is the cash dividend you receive from it. In the daisy chain of buyers and sellers, it mostly comes down to cash!
The point of investing in stocks may be access to cash streams in the form of a dividend, but the reality is that throughout the history of the modern markets speculation in stocks has made up a significant portion and at times the majority of market activity - this is true currently. Viewing the stock market as a casino where you can come away a winner overnight has been an all to common fallacy to many investors. Its the same logic that leads people, otherwise rational, to habitually buy lottery tickets.
The mack daddy of value investing, Benjamin Graham, devotes the entire first chapter of "The Intelligent Investor" to differentiating between investing and speculating. For him, "an investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." Graham necessarily set the bar high,:" investment is serious business - everything else is speculation."
Dividends dominate the components of total return. Total return, in any given measurement period, is the combination of the income received in the form of a dividend plus the change in the asset value - the stock price movement - both divided by the starting asset value. Whether looking a data going back over the last 80 years or longer, about half the average annual return from from stocks (about 4.5 percent) comes directly from the dividend. The other half come from capital appreciation, a rise in the price of the stock. And what is the reason for the capital appreciation, or at least the lion's share of it? Increased dividend distributions! The market's aggregate dividend distribution has grown at a compound rate of 4.4 percent since 1926. That is, of the markets' total return of 9.7 percent since 1926, about 80 percent of it came from dividends. Basically stocks go up because dividends go up!
How do you invest for dividends? First, determine whether to do it yourself or pay a professional. A lot of basic research is available on the Internet and discount brokers provide decent research and the ability to buy and safekeep your securities at a modest cost. There are several good books you can use to educate yourself and help build a proper portfolio. With that said and only partly out of self-interest, do I earnestly recommend the latter course of action. As full-time managers of dividend focused products we have substantial human resources and technology at our disposal. This is no guaranty of making a lot of money but due to risk controls and systems put in place over the last several years the chances of losing money are low.
CBlakely CFP, CTFA 06/2011
Sources: Manias, Panics and Crashes: A History of Financial Crises, The Intelligent Investor, Shiller database, Yale Univ. http://www.econ.yale.edu/shiller/data.htm
We buy stocks because we think they will "go up" and we can sell them for a gain. But think about it. Stocks go up presumably because the business is worth more. A business is necessarily worth more if it has large and rising distributions of cash (dividends) to company owners (stockholders). Unless you subscribe to a vast greater-fool theory - wherein someone is always willing to pay you more than you paid for a stock regardless of its "worth" - the final buyer has to be buying with the expectation of holding it in perpetuity based on its intrinsic value. If you are holding a stock with little expectation of selling it , the biggest value it generates is the cash dividend you receive from it. In the daisy chain of buyers and sellers, it mostly comes down to cash!
The point of investing in stocks may be access to cash streams in the form of a dividend, but the reality is that throughout the history of the modern markets speculation in stocks has made up a significant portion and at times the majority of market activity - this is true currently. Viewing the stock market as a casino where you can come away a winner overnight has been an all to common fallacy to many investors. Its the same logic that leads people, otherwise rational, to habitually buy lottery tickets.
The mack daddy of value investing, Benjamin Graham, devotes the entire first chapter of "The Intelligent Investor" to differentiating between investing and speculating. For him, "an investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." Graham necessarily set the bar high,:" investment is serious business - everything else is speculation."
Dividends dominate the components of total return. Total return, in any given measurement period, is the combination of the income received in the form of a dividend plus the change in the asset value - the stock price movement - both divided by the starting asset value. Whether looking a data going back over the last 80 years or longer, about half the average annual return from from stocks (about 4.5 percent) comes directly from the dividend. The other half come from capital appreciation, a rise in the price of the stock. And what is the reason for the capital appreciation, or at least the lion's share of it? Increased dividend distributions! The market's aggregate dividend distribution has grown at a compound rate of 4.4 percent since 1926. That is, of the markets' total return of 9.7 percent since 1926, about 80 percent of it came from dividends. Basically stocks go up because dividends go up!
How do you invest for dividends? First, determine whether to do it yourself or pay a professional. A lot of basic research is available on the Internet and discount brokers provide decent research and the ability to buy and safekeep your securities at a modest cost. There are several good books you can use to educate yourself and help build a proper portfolio. With that said and only partly out of self-interest, do I earnestly recommend the latter course of action. As full-time managers of dividend focused products we have substantial human resources and technology at our disposal. This is no guaranty of making a lot of money but due to risk controls and systems put in place over the last several years the chances of losing money are low.
CBlakely CFP, CTFA 06/2011
Sources: Manias, Panics and Crashes: A History of Financial Crises, The Intelligent Investor, Shiller database, Yale Univ. http://www.econ.yale.edu/shiller/data.htm
Tuesday, June 7, 2011
Useful Mutual Fund and Annuity Facts!
A study by Dalbar, a mutual fund research firm in Boston, found that in the 20 years ended December 2010,the average stock fund investor had annualized returns of 3.8 percent, compared with 9.1 percent for the Standard & Poor's 500-stock index. The average person would have been better off, much better off buying an index fund and holding it for 20 years. This again makes the case for professional management or at least index investing if you are a diy type. Why do we keep listening to Sam Waterston?
Why is it when questioned about retirement, nearly everyone prefers the certainty of guaranteed income, like a defined benefit plan, commonly referred to as a pension? But when offered the chance by buying an annuity, nearly everyone declines. Economists call this the "annuity puzzle." Using standard assumptions, economists have shown that buyers of annuities are assured more annual income for the rest of their lives, compared with those who self-manage their retirement assets. There is the term "self-manage" again. Professional advice is invaluable.
Buying an annuity can be scary, make a mistake and there is usually a large upfront penalty in the form of a surrender charge.There are psychological ramifications as well. Rather than view an annuity as insurance against living a very long life, they are viewed as a gamble, in which you have to live a certain number of years to break even. And they can be very expensive - guaranteed income for life, sounds like it should be an expensive option to me. Are they good or bad? Yes and no. It depends on your income needs and investment objectives and risk tolerance. Also, if you can, buy direct from the insurer, it's the least expensive way to purchase an annuity.
CBlakely CFP, CTFA 6/2011
sources: Dalbar, Richard Thaler - NYT
Why is it when questioned about retirement, nearly everyone prefers the certainty of guaranteed income, like a defined benefit plan, commonly referred to as a pension? But when offered the chance by buying an annuity, nearly everyone declines. Economists call this the "annuity puzzle." Using standard assumptions, economists have shown that buyers of annuities are assured more annual income for the rest of their lives, compared with those who self-manage their retirement assets. There is the term "self-manage" again. Professional advice is invaluable.
Buying an annuity can be scary, make a mistake and there is usually a large upfront penalty in the form of a surrender charge.There are psychological ramifications as well. Rather than view an annuity as insurance against living a very long life, they are viewed as a gamble, in which you have to live a certain number of years to break even. And they can be very expensive - guaranteed income for life, sounds like it should be an expensive option to me. Are they good or bad? Yes and no. It depends on your income needs and investment objectives and risk tolerance. Also, if you can, buy direct from the insurer, it's the least expensive way to purchase an annuity.
CBlakely CFP, CTFA 6/2011
sources: Dalbar, Richard Thaler - NYT
Tuesday, May 3, 2011
Are We Wired For Mobile Learning?
Because of the proliferation of new technologies, our children are outgrowing traditional forms of education – pencils, chalkboards, textbooks and graphing calculators. Whether in the car, on the train, at work, or in a classroom, mobile technology in particular is giving us the ability to learn on-the-go. See the infographic below to learn why we are wired for mobile learning, and how we can use mobile technologies to educate ourselves. Visit voxy.com for more info.
Via: Voxy Blog
Via: Voxy Blog
Sunday, February 27, 2011
The 14 Percent Solution
Bond Mavens United
Stock analyst Meredith Whitney grabbed headlines recently with her perilous prognostications for the U.S. Municipal bond market. Hundreds of billions in municipal defaults will plague the country over the near term is essentially what she has been saying to the media.
While I disagree with her headline grabbing prediction (as do most reasonable analysts), many purveyors of municipal debt have said the effect of this will be to move municipal rates up thereby creating a buying opportunity for tax-free income investors. It is true municipal rates have jumped over the last few months, but is this a buying opportunity? I don’t think so.
Currently, the major risk with municipal debt (corporate and government included) is not credit risk but interest rate risk. Yields have recently increased but are still deep in the pygmy range. That is what will eventually hurt you (your net worth specifically).
James Grant, a leading authority on interest rates and bond markets, along with Bill Gross from PIMCO and others have essentially been saying the same thing. Stargazers beware; a bear market in bonds is in the offing - a secular move from decreasing interest rates to an environment of sustained interest rate increases.
Central bankers have lowered the cost of money for 30 years now, following global disinflationary forces downward, but also allowing for increased leverage due to lower real interest rates. Today however, yields have less to do with disinflation and more to do with providing fuel for an asset-based economy. 10-year real interest rates fell from over 5 percent in the early 1980s to just less than 1 percent recently.
But the tide is at the turn. U.S. Government debt has experienced recent price declines (yield increases) as the European Central Bank said monetary policy has to be monitored, and if needed, corrected. China’s central bank raised reserve requirements for lenders for the second time this year to counter inflation and curb property-price gains. German producer prices are increasing at the fastest pace in more than two years.
Inflation will be a dominant theme as we look ahead, global inflationary forces will generally push rates higher around the world. A Morgan Stanley gauge of stocks such as Archer Daniels Midland Co. and Deere & Co. meant to rally when inflation expectations match Federal Reserve targets added 46 percent since August 2010, almost double the Standard & Poor’s 500 Index. While emerging-market equities beat developed countries every year in the past decade, except in 2008, you should not count on that now as Brazil, Russia, India and China battle higher food and commodity inflation.So what is one to do? Confront the risk and reward tradeoff, look hard at alternative strategies. Shorten the average maturity (duration) of your fixed income investments. Look at alternatives, such as a high quality mortgage REIT like Annaly Mortgage (NLY). This company greatly weathered the great recession, ROE looks good and using measured leverage has kept the stock in a fairly tight range, all while paying a 15 percent dividend. Buy blue chip stocks that pay higher dividends. There are options to explore that can mitigate the deleterious effects of higher interest rates and inflation.
C Blakely CFP®, CTFA 02/2011
Sources: Grant’s Interest Rate Observer, PIMCO, Bloomberg LP
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