Thanks! Plus Other Various Topics...

Over the past week, I suddenly received several e-mails telling me stories about how people enjoy my little blog and/or can relate to some of the various items I have written about (credit cards was one) in the past. I truly thank each of you. I do not know everyone's "story," but just getting an e-mail was completely unexpected and welcomed.

Items I am working on

I had an interesting conversation with a client who is a retired educator yesterday. She was asking for my help regarding a tax issue relating to contributions to her Georgia TRS account more than 20 years ago. I am going to do a bit more research then try to pen a post about it.

I am also trying to get a response from the state representative that proposed a bill allowing those in the ORP to reelect back in to the TRS. This really can impact those people who are employed by the Board of Regents, so I am trying to get an answer. Thus far, I have not heard anything back from Representative Bob Smith (sent an e-mail on Monday).

My little state research project is still in the planning stages, but I think I know what sort of direction I am going to go in. I am not at all sure about the timing for it, but we shall see.

I guess that's about it. I just want to reiterate my thanks for your e-mails, and I hope all of you are able to get out and enjoy some of the great Spring weather. This weekend... working in the yard for me!

Paying More for Credit

In case you have not heard, financial institutions are looking to charge you more for you to have the ability to use credit. In the past this has basically been based on your own credit worthiness and score, but now, it is being done across the board.

For example, I received a letter from my credit card company last week letting me know that my prime plus 1% card was going to change to prime plus 3%. Well, I was not happy about it but fine. I don't carry a balance really anyway. Then in the fine print it said the minimum interest rate would now be 11%. For those that don't know, prime is currently at 4.25%. My rate was jumping from 5.25% to 11%!

When I called the bank to ask about it, I was told that "the bank" was doing it to "all cardholders." Even though I have excellent credit and have never missed a payment, "the bank is readjusting their cost structure" due to the "economic environment." I could either keep my card and accept the change, or I could terminate the card, keep my rate, and continue to make monthly payments.

Now I completely understand that those that are a higher risk should indeed have higher interest rates because of the risk in not paying back the funds, but an across the board raise of rates is pretty bad to say the least. It is not only those that have credit issues, but the ones that have good credit are now forced to help "the bank" due to the actions of others.

Financial institutions have also started to lower credit limits. I may have not said before, but in December I received a letter from a home improvement store that I have used over the past few years to do some little remodeling projects here and there. The letter said that they were lowering my credit limit by about 15% or so because of the current economic environment. Additionally, this was a credit card wide change. The funny thing is the only thing I have ever charged on the card has been at zero percent interest (not even near the limit they gave me), and it is always paid back before the promotion expires (thus no financing charges).

I don't think I am the exception, and I believe that some of these practices are just plain ridiculous. By charging higher rates, the firms are actually limiting what most "good" people will spend because somewhere in the back of their mind they are worried about the interest rate. If you couple that with lower credit limits to begin with, you are looking at some consumers that will continue to slow down spending because of the credit costs.

The best thing to do is have a plan on big purchases to pay off the balances and keep your interest rates as low as possible (even when being raised, call the company to question it). Remember that credit card interest is not deductible, so paying that interest is quite literally like throwing money away. Sometimes it is necessary, but definitely look to limit it when and where possible.

Good luck, and I hope the financial institutions skip over your accounts when making changes.

Freedom!!!! Oh, and the market has been good...

Well, I cannot even begin to explain how happy I am that tax season is over. You work 43 out of 47 days, and the freedom to lay around for a day suddenly becomes precious. For those that I promised to get back to after tax season... I am working on your questions.

The Market

As for the market, have you noticed the rebound? Yes, the market has rallied quite substantially, and while there will be some bumps in the road, expect the long term to be positive.

I know I have been saying it for a while, but you really never know when the market has reached the bottom until months later. On March 10, 2000, the NASDAQ hit its all time high... On March 10, 2009, the market started its upward move from a possible bottom. Now, I am a student of history, and there are numerous coincidences in history, but maybe this is a prediction of things to come. Nine years to the day after the NASDAQ's high, the market starts to rally? It is such a coincidence, it is somewhat scary.

As for investing, I continue to preach diversification. All sectors and market caps have been moving and some more than others. Trying to predict anything right now is a bit of a shot in the dark. There is still just too much to factor in. Retail sales, credit markets, housing, unemployment, etc. It will all move at different points.

If you look at growth stocks, the positives are companies with generally very stable balance sheets, lots of cash, and no debt.

If you look at value stocks, the positives are stocks that have been beaten down that could have stabilized and be turning the corner.

Do you pick the stock that has gone from $50 to $11 or the stock that has gone from $50 to $30? Which has the right upward potential? Which will return the most in a year? Five years? Ten years?

I think it is tough to say how long some stocks will take to rebound, so I am trying to spread myself and think long term. Over the next 6 months, who knows where the market will trend, but the long term is positive as we move away from the current recession.

By the way, today is the 20th anniversary of CNBC. Over that time period, a ton of things have changed and billions have been made and lost. One thing I thought was interesting though was the best performing S&P 500 stock over that time period... Danaher (Ticker DHR). It is somewhat out of left field, but you never know which ones will be the winners over the long term.

I hope everyone is doing well, and I thank you for your patience during tax season. It is a joy to see what the sun looks like from outside my office again.

First Quarter News

At the close of a quarter on my firm's daily blog, we will generally write a good breakdown of our feelings on the past and future of the market. Since I thought that this quarter's news goes along with what I have been discussing on here, I made it today's Educator's Retirement post. I think it covers the market and economy, and it does put into perspective some of the current "rants" that have been swirling about in the media.

A few readers have said that they "pass along some (posts) to friends," so this may be one of those to send out. We try to be analytical and not delve into the political fray. I hope you enjoy it.

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April 2009

Some economic and market hope was restored as the month of March drew to a close and the first quarter of 2009 mercifully ended. All hope was not lost as prognostications of “Dow 5000” relented to talk of “Dow 8000” or even “Dow 9000”. What’s 4000 market points between friends? Optimism, albeit guarded, became more fashionable towards the end of the month. The recent upturn in the market most likely signifies a stabilizing economy in the months ahead. Stock markets are a leading economic indicator; therefore a continued rally would suggest real economic growth, as opposed to stability, before the end of 2009.

Stock markets began the quarter breaking the previous November lows, racing to fresh 12 year market lows. After one of the worst investment years of all time, the continued slide after the 1st of the year was just that much more agonizing. Markets erased most of the initial 25% decline for 2009 to close the month off by a “manageable” 11% decline for the year. It’s interesting to note that each time there has been a significant 4th quarter market decline, as we saw in 2008, the market has moved to fresh lows in the following year. In addition that new low (which we may have achieved in March) has also marked the end of a bear market. While we are loath to suggest certainty in this pattern holding true this year, it does give investors some much needed solace.

As we mentioned, the S&P 500 logged a loss of 11% over the first three months of the year, while the Dow Industrial Average dropped 12.5% and the NASDAQ was relative stand out, dropping only 2.8% for the first quarter of 2009. Technology stocks did underperform the overall market in 2008, but the relatively strong balance sheets consisting of little debt, has let the once speculative sector transform into relative refuge for nervous investors.

The developed international markets continued to underperform losing 16.21%, as a resilient U.S. dollar showed continued strength. Some would have expected the U.S. dollar to be weak in the face of enormous government deficit spending. Given the lousy economic environments in the developed economies abroad, the U.S. Dollar is again showing to be a safe haven for reserves.

Emerging market stocks did better, barely posting negative returns of 0.6% during the 1st quarter of 2009. Individually, Brazil and Russia were the big winners posting positive returns of 10.4% and 8.1%, while Chinese shares were even for the 1st quarter. These markets all significantly underperformed the broad U.S. indices in 2008, so some initial outperformance early in 2009 is not surprising.

Financials and Real Estate Investment Trusts were two of the worst performing groups during the first quarter at negative 28.4% and negative 35.8% respectively. These ugly returns would have been far worse if not for a significant bounce over the past few weeks, which actually outpaced the rebound seen by the broader market. The recent market recovery coincided with positive comments from some bank executives, who claimed to have achieved modestly better results in the early part of 2009. In addition the markets were buoyed by anticipation of some relaxation in the mark-to-market accounting rules and some positive response to more details about the government plan to auction off some of the mortgage backed assets on the bank’s balance sheets.

Bonds, on average, were slight losers during the 1st quarter as the aggregate bond index fell by nearly 2%. An encouraging sign to some bond investors was the increased demand in higher yielding corporate bonds. Investors moved out of U.S. treasuries, contrasting with massive flight to safety seen last year. The 10-year treasury yield moved higher by 0.5%, leading intermediate and long term U.S. government bonds to perform poorly during the month posting negative returns of 1.43% and 10.9% respectively. Historically, treasury rates are still extremely low as investors continue to prefer the safety of U.S. backed government debt. Inflation protected bonds performed well, gaining 3.5% for the quarter as inflation expectations rose.

The government continues to dominate the market sentiment as it seems the financial epicenter has moved from Wall Street to Washington, D.C. The Congress and the president continue to steal the economic headlines as stimulus spending has been passed as well as legislation regarding banking and housing fixes are considered. Eventually, the endless debate about the virtue or folly of the proposed, and yet to be proposed, plans will end and investors will be able to make sense of where the government stands on these issues. In the mean time its causes some additional uncertainty for the financial markets.

As a result of the bailout efforts and stimulus spending, some have argued that the amount of debt the government is undertaking us going to cause a great burden in the future. While this is a valid concern, the future burden on “our kids and grandkids” as the Pols cry is not simple to analyze. We are certain that Dr. Evil (Austin Powers’ insidious rival), let alone mere mortals, would be challenged to consider such astronomical figures such as “trillions”.

As World War II came to an end, the U.S. government debt came to a staggering 125% of the GDP at that time. Strong economic growth in the post war period, which outpaced government spending increases, facilitated a reduction in the national debt burden to a more sustainable level of 40-60% of GDP in roughly 15 years. Currently, even after accounting for a massive stimulus plan, the U.S. is carrying a national debt towards the upper range of the 40-60% of GDP level.

We are not necessarily advocating the current debt level, as we would suggest a smaller debt burden to be advantageous. However, we don’t consider the current debt load as an insurmountable challenge to the country itself, as some have opined. Certainly the merits of the stimulus package and other government initiatives are more than debatable, but the amount of debt the government is undertaking should be portrayed in proper context.

Much has been made of the lousy stock market returns of the past decade. Including the recent market tumult, the S&P 500 has produced the worst 10 year track record ever, when adjusting for inflation. However, a well diversified portfolio including international stocks, bonds, real estate and commodities would have significantly enhanced returns for investors over the past 10 years. We continually advocate well diversified portfolios for investors, but given the recent returns on various asset classes we would suggest that U.S. stocks are likely to post very positive results over the next decade.

As we have noted before, stocks historically, have produced returns of 10% on an annualized basis. Should equities continue on their long term historical path, we would suggest that stocks are likely to out-perform these other asset classes over the next decade. The 1970’s, which included a decade of relatively poor stock market returns, ushered in 20 years of significant outsized returns for the S&P 500 during the 1980’s and 1990’s. While investors would rather that stocks produce more consistent results, we are optimistic that the low stock valuations seen today will lead to positive results over the next decade, as the future is not likely to not resemble the past 10 years.

Is History Repeating Itself? - Looking Forward on the Market

For months we have been hearing about all of the problems and sometimes even some solutions (good and bad) to the issues the US and global economy has been facing. We have a Federal Reserve and US Treasury that, believe it or not, have done just about everything possible to stabilize and avert a financial collapse.

A few months back, banks literally stopped lending to each other out of fear that they would not pay the money back. It is one thing to not lend to some companies and individuals, but for one bank to not loan money to another, that is what brought the world's credit markets to its knees. Much of this happened immediately following the collapse of Lehman Brothers, but that is a story for another time.

The Fed stepped in with Central Banks from around the world to start "guaranteeing" various instruments. Here in the US, we had the Fed guarantee money market funds after one (The Reserve) "broke the buck." Essentially, a money market fund is supposed to stay at $1 per share all the time... The Reserve dropped to $0.97. This killed the money market funds. Investors rushed from money markets to government securities sending US Treasuries straight up and the yields straight down.

Panic was everywhere. AIG, IndyMac, Washington Mutual, Wachovia, Citigroup, Bank of America, etc. have all felt the crush of the market, and the weight of the financial world beating down on them. Yet, the world and the financial world did not and has not ended.

I have had numerous conversations with colleagues at various meetings and conferences, and it always surprises me when blame is given for our current issues. It is so convenient to lay it all on former President G.W. Bush, but that is only scratching the surface. Can all of these issues have happened in the last eight years?

Truthfully, there is no one person or President to blame. The seeds of our current financial situation were planted while Jimmy Carter was President (started deregulation). They grew and took root under Reagan and G.H.W. Bush (more deregulation). They started to really expand and blossom under Clinton with an overeager Greenspan directing the Fed (interest rates too low with a rapidly expanding service economy and financial sector), and they finally came to fruition under G.W. Bush (the housing boom ended). One paragraph for 30 years of problems.

Where does that leave us now? First, the Obama administration and Congress will do what every other previous administration and Congress has done in the face of a large problem... over regulate it. This will solve the problem of lack of regulation, but it will have secondary effects in slowing credit for individuals and businesses and making the climb up a little more difficult. More importantly though, let's look to the future of the market and economy by looking in the past.

If you were to go back and look at the history of the economy and stock market, it would show you several things. First, when the Fed and US government start turning on the money, things happen. It might be like turning a cruise ship, but they happen. Second, the market points to a recovery well before the recovery is felt elsewhere.

The stock market is essentially a predictor of the future. It is generally 6-9 months ahead of the economy all the time. The market started to drop in the fall/winter of 2007... the economy started to show some cracks in the summer/fall 2008.

In past large and small recessions, the market has turned up surprisingly earlier than many though. This did not mean it jumped straight up, but it built on momentum. As the economic numbers started to turn positive it reacted even better, and it was generally the Fed that started to apply the brakes by raising interest rates to slow inflation and slow the economy (we don't want it too hot).

Thus, the economy lags the market since it is like that big cruise ship that is slow to turn. As the economy starts to get better, inflation will start to rise, productivity will continue to rise, and profits will rise as well.

One of the last indicators to ever move positive is unemployment. I have heard numerous clients point to unemployment as the reason for everything to continue to go down. This is exactly the wrong thought process. Let's look at it from your average company...

• Company ABC employees 100 people as the economy is growing.
• Sales start to slow, the economy starts to sputter, and Company ABC reduces hours, but hold its workforce because this could be temporary.
• The sales continue to drop, and the company is starting to lose rather substantial amounts of money. To curtail expenses, Company ABC reluctantly lays off 20 employees.
• The Company continues cost cutting measures, but it tries to hold the current staff at these levels.
• Months later, surprinsingly, sales start to rebound. The company starts to loosen some of the measures but holds its current staff.
• The 80 person staff is now firing on all cylinders, and Company ABC is back to making a profit. The staff is a bit overworked, but they are handling the pressure.
• Finally after months of seeing that the pressure on the staff is just too much, Company ABC hires 10 employees to make a staff of 90 as they are now producing more than the previous staff of 100 (more productive and less cost).

This was a very basic example, but it proves the point. Unemployment is the most "lagging" indicator because it was the most lagging indicator on the way in to the recession. Companies hold employees as long as possible, and then they wait as long as possible to hire again.

No one can say that we are there yet until we see it in the rear view mirror, but the positives are starting to show. The market has turned up, the banks have said they will be profitable in the first quarter, and some good economic numbers have started to move positive from the negative slide.

The market is never a smooth ride, but the signs are moving to a direction that makes the future much more acceptable. There will be bumps and drops (there always are), but the long term investor looks to have a brightening future. Just remember the lessons you have learned over the past six months...

- Note - Knowing that unemployment lags a recovery does not make the hurt felt by those that loss their jobs any less. I can discuss the economic side, but the human side is it hurts. Whether you are laid off or the company closes, this does not make you feel any better knowing that this is just part of the economic cycle. I am not trying to be callous, but looking from a purely analytical point of view, this is part of the process. To those that have been and will be affected, I truly do feel for each of you.