New Money
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Signs the Recession May Be Past its Peak
Continue reading… 4 CommentsHere's some optimistic market commentary to help offset today's gloomy market (from BlackRock's global CIO of equities, Bob Doll). Bold is mine:
On the broader economic front, there have been some signs that the economic recession may be moving past its peak. Lately, housing, retail sales and durable goods orders all have come in at better-than-expected levels, and the Federal Reserve’s recent announcement of its bond purchase program has helped drive up the levels of mortgage refinancing. Additionally, we anticipate two major tailwinds for consumer spending for the remainder of this year: Tax cuts start to take effect on April 1, and the opportunities for home refinancing should continue. Outside the United States, there are signs that conditions may be starting to improve (or at least are not becoming worse). Both Japan and Korea recently announced multi billion dollar jobs packages, and there is increasing evidence of an economic rebound in China.
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Why Young Investors Should Double Down
Continue reading… 5 CommentsEarlier today, I talked 401(k) investing strategy with John Carl of the Retirement Learning Center. His big tip for 20- and 30-somethings? Invest as much as you can bear: "Double-down your contributions if you can possibly afford it," he says. "If you're younger, focus on accumulating more shares--don't focus on the dollar amount."
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MIT Professor: Stocks are Too Risky
Continue reading… 0 CommentsThere are many who say now is the time to buy stocks. The time to double-down, in fact!
And there are others who say sell. MIT Sloan School of Management's visiting professor Zvi Bodie is in that camp:
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The Dow's Jump: Just Another Bear-Market Rally?
Continue reading… 9 CommentsThe Dow jumped nearly 7 percent yesterday, firing up investors (including me, as I just put more money in index funds. I'm taking a break from ETFs--here's why.) The rally, following news about the government's toxic asset plan, was the biggest in five months. So...does this represent a turning point?
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What's a Reverse Stock Split?
Continue reading… 3 CommentsCitigroup today announced that it's going to seek approval from shareholders for a reverse stock split on its common shares. So how does a split work, and what does it mean for shareholders? Here's a quick run-down:
According to the SEC, a reverse stock split reduces the number of shares outstanding, but increases the share prices proportionally.
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Why Investors Fall for Ponzi Schemes
Continue reading… 3 CommentsReading the big Madoff news today might make you wonder not only how he made off with $50 billion of investors' money, but why investors fell for the scam in the first place.
It's unclear exactly how Madoff charmed these investors, but there are a handful of likely possibilities. Using telephone transcripts of fraudsters working their magic, the Financial Industry Regulatory Authority came up with five psychological tactics that are often used:
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Forbes Rich List Includes 'Poor' Billionaires, Mexico's Most Wanted Man
Continue reading… 6 CommentsForbes' annual list of the world's billionaires is leaner this year (the world now only has 793 of them, compared with 1,125 a year ago, and their average net worth is $3 billion, down 21 percent.)
With $40 billion, Bill Gates recaptured the title of world's richest from Warren Buffett, whose fortune fell to $37 billion. Once again, telecom tycoon Carlos Slim took the third spot, with $35 billion this year.
The year's biggest eyebrow-raiser is #701 on the list, Joaquin "Shorty" Guzman, whose source of fortune is listed as drug trafficking. Forbes' description:
Mexico's most wanted man, "El Chapo", or Shorty, heads the Sinaloa cartel, one of the biggest suppliers of Cocaine to the U.S. In 1993 was arrested in Mexico on homicide and drug charges. Escaped from federal prison in 2001, reportedly through the laundry, and quickly regained control of his drug trafficking organization, which he still controls today. In 2008 Mexican and Colombian traffickers laundered between $18 billion and $39 billion in proceeds from wholesale shipments to the U.S.
Shorty, an alleged tunnels expert, is believed to have directed anywhere from a third to half of that during the past 8 years.
Guzman, who is five feet tall and apparently extraordinarily charismatic, isn't the first alleged drug trafficker to make the list. In 1989, Pablo Escobar ranked at #7, according to the BBC.
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Defining a Depression: Myths and Facts
Continue reading… 3 CommentsHow on-spot are all these comparisons between the Great Depression and the current recession?
Let's start with how you define a depression. Interestingly, there's no formal definition, Calculated Risk points out today, but many experts agree that it's a prolonged slump with a 10 percent or more decline in real GDP. However, there's disagreement over the definition of a "prolonged slump." CR concludes that while this recession is exceptionally nasty, it's only about one-third of the way to a depression (see charts that back his analysis.)
More analysis of what makes a depression comes from Mark Hulbert via Barron's. He dispels three myths:
1. "It took 25 years for the stock market to recover its losses from the high reached just before the stock market crashed in October 1929." Hulbert (referencing Jeremy Siegel): When you take inflation and dividends into account, it took less than eight years. Another big factor that explains the gap: IBM was removed from the Dow.
2. "If we're playing out a 1930s script, now would be a bad time for long-term investors to get into the market." Hulbert (again citing Siegel data): "if the stock market were to exactly adhere to a 1930s-like script, equities would provide a handsome return over the next five years."
3. "The stock market's recent extraordinary volatility provides a clue to the wild ride that lies ahead if we're playing out a 1930s-like script." Hulbert: Recent volatility doesn't hold a candle to Great Depression-era volatility (here's why.)
Want to hear more? Here's why Morgan Stanley's economics team firmly believes the Great Depression comparisons are misplaced.
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The Low-Down on the Uptick Rule
Continue reading… 3 CommentsToday, Rep. Barney Frank, head of the House Financial Services Committee, said he expects the SEC to bring back the "uptick" rule--which was eliminated in June 2007.
So what's this uptick rule? Here are the basics:
- The rule essentially put constraints on short-selling (read more about how short-selling works here.) It calls for short-sellers to sell at a price higher than the previous trade.
- The uptick rule was originally put in place following the Great Depression, to keep short-sellers from piling on and quickly driving the price of a stock up or down.
- The SEC killed the rule in 2007 on grounds that it didn't prevent market manipulation.
- Some think the rule's elimination fueled the market's plunge by pushing battered stocks down even further. One critic went so far as to say it was an "aphrodisiac for volatility."
- The idea is that reinstating the uptick rule will help calm the markets.
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Moody's Bottom Rung: The Grim Reaper of Corporate Bankruptcies
Continue reading… 8 CommentsCredit-rating firm Moody's released a list today called The Bottom Rung, which includes 283 companies it believes are at risk of corporate bankruptcy. The companies span sectors of the economy (ZDNet breaks it down with a pie chart and lists a few dozen companies that made the list, including AMD, Blockbuster, Orbitz, and Sirius XM.) Not surprisingly, industries that make up the biggest pieces of the pie include autos, casinos, retailers, and media companies.
What's odd about this list, says MarketPlace's Ashley Milne Tyte, is that ratings agencies have traditionally highlighted only companies with a low likelihood of default.
It's worth pointing out that Moody's has come under fire for dragging its feet on cutting the ratings of bonds backed by subprime mortgages.
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Strategist: We've Hit the Worst of the Recession
Continue reading… 1 CommentPessimism is pretty rampant in the market today, as this recession is on track to be the longest in the post-war era.
For glass-half-empty folks, Charles Schwab just reported these survey results from a poll of 1,200 investment advisers (via The Wallet):
When asked to predict how long they thought the current recession would last, 41% said it would wrap up in December of this year and 41% said December 2010. When it came to their clients’ portfolio’s recuperating, 35% said that their clients until December 2014 to fully recover. 32% thought client recovery would come in December 2011, 18% by December 2010.
Now, here's some market commentary from a glass-half-full strategist--BlackRock's Bob Doll, global CIO of equities:
In our opinion, we are in the midst of the worst of the recession. We expect a sharp contraction in first-quarter gross domestic product (GDP) as demand remains weak and businesses work through built-up inventories. Looking ahead, we would expect the rate of economic decline to lessen in the second quarter, GDP to flatten out in the second half of 2009 and growth to return to positive (although subpar) levels in 2010.
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Are You Ready for This? A Nationwide Tax Day Tea Party
Continue reading… 82 CommentsOn the heels of the Chicago tea-party protests that grew out of Rick Santelli's recent rant on CNBC, anti-stimulus folks are planning to kick it up a few hundred notches with a Nationwide Tax Day Tea Party.
The Tea Party HQ already has a list up of organizers in 24 cities, and is trying to recruit more with a how-to list with details on coordinating, obtaining permits, etc.
On a related note, Santelli denied his affiliation with the tea party movement in a blog post on CNBC's web site this week, claiming the outburst was spontaneous. He wrote:
As a financial reporter I have never shied away from trying to promote discourse and dialogue of the important issues that affect markets and therefore our lives. The one spot in particular that occurred on February 19th at roughly 8:15 est time and maybe lasted for a minute probably wasn't even in my top 5 in terms of intensity, energy, or controversy. It was unique in that it obviously struck a chord with the public thus inciting what can only be described as a groundswell of feedback from the public, the White House, the Internet, and the media at large.
Santelli also missed an opportunity to make light of the situation on The Daily Show by bailing out of a planned appearance. Check out Jon Stewart's reaction here.
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Berkshire Hathaway: A Screaming Buy?
Continue reading… 0 CommentsBerkshire Hathaway just reported its worst year ever. Meanwhile, the company's A Shares, trading around $74,000 today, are flirting with six-year lows.
Daily Markets' rekindles the often heated discussion of whether Berkshire's stock is actually "cheap," by writing that the stock at this level is an "incredible buying opportunity" for anyone with tens of thousands of dollars on the sidelines. Why? Because Buffett's annual report--released last weekend--doesn't discuss private companies Berkshire bought or loans negotiated.
A few months ago on this blog, I posed the question of how to value Berkshire Hathaway (it was trading around $77,000 at the time.) The post includes hedge fund manager Whitney Tilson's lengthy case for why the stock was a bargain at $84,000.
Also worth checking out is the Berkshire Hathaway Intrisivaluator.
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Why Index Funds Still Make Sense
Continue reading… 2 CommentsIt's an age-old investing debate: Are index funds better than actively managed funds? There are pros and cons for each: Indexing--a form of passive investing--means low turnover among holdings. That leads to lower taxes. Index funds are also dirt cheap compared with active funds. And in a market like this, every penny you give up in fees counts.
On the active front, managers have the ability to weed out stocks they think are more attractive than others. They can also shift their portfolio to take advantage of market conditions. For example, managers might keep a portion of the portfolio in cash when the market's jumpy.
Many financial advisers I talk with use both active and index funds in clients' portfolios. For example, Jeff Layman, CIO of BKD Wealth Advisors in Springfield, Mo., uses index funds for wide diversification and tax management, then mixes in active funds as "satellite" investments, which can contribute to diversification and add value if the manager is skilled.
In a recent interview with Steve Forbes, Morningstar's managing director of research, Don Phillips, weighed in:
...I'm a big fan of index funds. I put a lot of my own money into index funds, and interestingly the index funds in our star-rating system consistently show up as four-star and occasionally even five-star investments. So they score very well in our system because it looks again at long-term performance and at cost.
So indexes are great building blocks for investors. But there is the possibility that you can do better than the market. And there are certain funds that are more specialized and may fit a certain niche in an investor's portfolio. But I think for most investors, starting with a broad-based index fund as the core of their portfolio makes all the sense in the world.For those interested, here are some pointers from Morningstar on picking the best index fund.
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Bartering is the New Black
Continue reading… 0 CommentsIn these dire economic times, it's not totally surprising that old-fashioned bartering is making a comeback. These days, it applies to everything from remodeling to hair cuts and pedicures to dental cleanings(!)
According to this story, bartering on Craigslist has increased 100 percent versus this time last year. A recent search of the barter listings in my area included tattoos for plumbing; a camcorder and paintball gun for Xbox 360 parts; and face painting for an Ikea table. Other services offered for exchange included drywalling, tennis lessons, and carpet installation.
All this bartering talk reminds me of a bartering opportunity missed in college, when I turned down body piercing from a girl in my dorm (she was in training) in exchange for unspecified goods. But on the other hand, a good friend of mine used barter in exchange for yoga lessons, which sounds like a good idea, especially since yoga lessons can run $15 or more per class.
Unfortunately for barterers, such exchanges are considered taxable by the IRS (see Form 1099-B.)
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Why Obama's Bullish on Stocks
Continue reading… 9 CommentsIt seems pretty unusual for a president to weigh in on Americans' investing decisions. But today--a day when the S&P touched down below 700 for the first time since 1996--Obama said we should all consider investing in the stock market. Via ABC News:
"What you're now seeing is...profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you've got a long-term perspective on it."
Obama's smart investor move: Not focusing on the "day-to-day gyrations" of the market. He compared the Dow's wild swings to daily tracking polls in the political world.
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TALF: The Long and Short of It
Continue reading… 8 CommentsTARP, TALF: how do you make sense of this alphabet soup?
Here's the scoop on TALF (the Term Asset-Backed Securities Loan Facility), which the Fed released more details on today:
The goal is to get lenders lending again by loosening up money for consumer, auto, student, and small-business loans (TARP, in contrast, was created to bail out banks.) TALF aims to do this by encouraging big investors to buy up AAA-rated securities that are backed by assets like auto loans and student loans. In return, those investors will get up to $200 billion in low-interest loans. The intended result is to stir up enough investor confidence--and therefore lending--to eventually generate up $1 trillion in lending.
Interested in more specific details? Here's the official statement.
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The 100% Stock Portfolio: Still a Good Idea?
Continue reading… 0 CommentsFor a while, many financial advisers have been telling young investors to allocate most of their money--usually 401(k) money--to stocks. The idea: With decades of tax-free growth ahead, compound interest can work its magic and market dips won't matter over such a long period of time. Some even go as far as to recommend a 100 percent stock portfolio [read more about mine here.]
But lately, a growing chorus of financial gurus--including Andrew Lo, director of MIT's Laboratory for Financial Engineering--are saying the all-stock plan isn't the best idea going forward (Lo believes that portfolios need more asset classes than just stocks and bonds.)
Recently, I asked two financial advisers for their thoughts on the 100 percent stock portfolio.
- Jeff Layman CIO of BKD Wealth Advisors, a wealth management firm headquartered in Springfield, Mo., says it all depends on the person. "100 percent equity will get you a pretty big bang for the buck. Obviously with stocks trading at half the levels of 14 months ago, there's a much stronger argument for equity now. But there's benefits in adding other asset classes in small doses. It's important to remember that the last 10 years show that you can have some tough periods over an extended amount of time." Layman recommends using bonds not just to dampen risk, but also as a diversifier. REITs and commodities don't appear on the menus of most retirement plans, so bonds are probably the best diversifier in 401(k)'s, he says: "It would be practical to put 20 percent in bonds as a diversifier."
- Dean Barber, president of Barber Financial Group in Lenexa, Kan., says because the economic landscape today doesn't resemble anything we've seen in the past, the stay-the-course route doesn't necessarily apply anymore: "The long term doesn't look OK. A year ago, we started getting much more conservative, and now most of our client portfolios don't have more than 15 percent exposure to the overall market. My advice is that people need to understand the true risks of investing. Unfortunately, people who cut their teeth between 1982 and 2000--they had 18 years with one negative year--people think that's the way it goes, but that's an anomaly." Today is the reality: protect first, grow second. Barber cautions against hoping for a quick recovery. (Keep in mind that the client portfolios Barber alludes to are generally those of older, high-net-worth individuals.)
