Positive Notes

Well, there isn't much point in restating what everyone already knows. What the market has experienced over the past two months and over the past year is unprecedented. All the bad news is out there--no need to recap here. What I want to focus on are a few (very few) positive things. First, inflation readings are actually negative. For anyone who has filled their gas tank the past month, WOW what a nice surprise from last spring. That's extra money in your pocket to spend, save or pay down debt. This is a huge help to consumers during these difficult economic times. Second, the economic recession officially started last December. The average recession has historically lasted 16 months--I do believe we are at the tail end of this rather than the beginning or middle. I know history has not been a good gauge lately but all this money the government is putting into the economic system will have a continued positive effect. Lastly, from a pure valuation standpoint, there are bargains to be had in both the bond markets and the stock market. Remember, bear markets mark a time when you should be taking more risk rather than becoming more conservative which is the exact opposite of what human behavior would dictate.

Words of Wisdom

In Monday's WSJ page A19, Opinion page, Burton Malkiel wrote a piece titled "Keep your money in the market". Mr. Malkiel is a professor of economics at Princeton University and best known as author of "A Random Walk Down Wall Street", a book that is fundamental reading for anyone interested in the art of investing. He writes, "A century of investing experience, as well as insights from the field of behavioral finance, suggest that investors who bail out of equities during times like theses are almost always making the wrong decision". He mentions that "the herd instinct is extraordinarily powerful": we think other people must be smarter than us, that's why they are selling and that's why we should sell. He suggests, that regular rebalancing and review of a portfolio occur on an annual basis and at that time, changes are made, rather than as a response to fear and despair over market conditions.
In Wednesday's WSJ, James B. Stewart compares bubbles and panics and how similar they are as they both measure extremes in the market. He chronicles the anxiety he felt entering a buy order when the market was tanking and then watching the market go down even more---not a good feeling, I know, I did the same. But I know as does he, that in the long term, markets go up. A financial crisis is about courage and about discipline of staying the course. If I knew when the market was going to hit a high to sell and when it hits a bottom to buy, I would be a very rich person today. Truth is, it is virtually impossible to time the markets, to know when to get in and when to get out. You set your course, structure your portfolio and make changes as life and circumstances dictate. I am here to help you stay the course.
Today, there are more fantastic investment opportunities available than we have seen in a decade. Municipal bonds are cheap, closed end funds are cheap stocks are cheap commodities are cheap--the only one thing that is not cheap are treasury bills and bonds. Everything else is on sale!!
Just thought it would be nice to counter what we hear on the TV all day long.

3rd Quarter in the Red

87% of all mutual funds posted losses for the year ending 9/30/2008, this according to an article in the Washington Post which you can find here: http://www.washingtonpost.com/wp-dyn/content/article/2008/10/04/AR2008100400157.html
I think the worst part of this horrible bear market we are in and probably how it is the most dissimilar from previous bears, is that nothing seems to be doing well--except maybe Treasury bonds. Commodities, international, small cap, real estate...asset classes that are normally not perfectly moving in sync with the large cap equity markets, are all down....no safe havens. There are a few silver linings here, at least that I can see: the VIX which is a measure of volatility and often dubbed the "Fear Index" is at a very high level. This high level indicates an extreme in the market, which usually doesn't last too long. The S&P 500 right now is at 1048.9 which is down -28.8% year to date and down -32.98 from the high reached last October. The average downside for bear markets is in the -30% to -35% range.....we just need a few more people, besides Warren Buffet to see that there is value in the market and begin to buy. Notice however, that Mr. Buffet sees this debacle as a buying opportunity, not a selling opportunity, which is what made him a very wealthy person. Buffet is 78 years old and has seen many decades of different types of markets. Like him, I have faith in the markets and am optimistic.

A note on money market funds

A few people have asked me about money market funds and whether we should start worrying about their safety. Last week's news of the Prime Reserve fund "breaking the buck" added to the worries of the week's unfolding disasters. This fund in particular wrote down the market value of some Lehman securities it owned which resulted in a 3 penny loss in net assets value from $1 to $.97, or a 3% loss. An investor who held the fund for a year probably had earned about 4% in interest payments over the course of the year and so netted against the 3% loss is still up about 1% for one year. In the whole scheme of things, this isn't the worst thing that could happen. However, money market funds' $1 net asset value (NAV) is held sacred by investors and money market providers alike. In the past when a money market fund faced the predicament of losing value, usually the mutual fund provider injected capital to make up for any loss. Presently, this option may be difficult given the current liquidity crisis in the fixed income markets. However, I believe that mutual fund companies like Vanguard, Fidelity and TRowe Price in particular would be in a position to infuse capital to one of their money funds if necessary as they have escaped many of the problems that have plagued the banks and investment banking firms who have been writing off bad mortgage loans and bonds backed by bad mortgage loans. To safeguard any further issues with losses in money market funds, the government has made insurance available for purchase by any provider that wants it--up to 50 billion in insurance is available. All of the steps taken by both the Treasury and the Federal reserve have been done to restore confidence in the financial system. So be confident.

On another note, the SEC has banned short selling on 799 financial stocks until October 2, 2008. While some (especially short sellers) think this step draconian, I do think it is the right action at this time. Hopefully the SEC will reinstate the uptick rule which forces anyone who wants to sell any stock short to wait for an uptick in price before selling. This does mitigate downward spiral of stock price in a bear market as it just "slows down" trading and pessimism. The uptick rule was eliminated last year---I don't know why. The short sellers are I believe partly to blame for this fiasco because lower stock prices mean that companies, like AIG, cannot raise adequate capital in the equity markets: their stock price is too low.

I think we are headed in the right direction with the Treasury trying to get Congress to pass a bill that will ultimately buy all of these bonds that no one seems to want. What this will cost to US productivity and economic growth in the long term remains to be seen. It is kind of like trying to put out a 5 alarm fire and worrying about what the water damage will be--can't worry about that now, let's just put out the fire.

Better days are coming...may they get here soon.

AIG Annuity holders

In response to the worsening news on AIG today, I wanted to publish a link to the Life Insurance Company Guaranty Corp which provides insurance (similar to FDIC) for insurance policies, including annuities. The link is http://www.nolhga.com/policyholderinfo/main.cfm/location/questions#six
Each state has their own rules however most cover policies from $100,000 up to $300,000 and a few have higher limits. On this website is a link to your specific state's rules that you can review.

Market Turmoil

I just wanted to briefly comment on yesterday's news of Merrill being bought out by Bank of America, Lehman Brothers filing for bankruptcy protection and AIG seeking liquidity. I know the news is bad and lends to feeling anxious in a market that is already fragile, but this is not a time to panic. The truth is when we look at markets historically, it has always been plagued by one disaster or another and somehow the markets manage to march on. If anyone remembers the Savings and Loan crisis of the 90's, bad news was a daily experience, in some ways as bad if not worse than what we are living through now.

I also know that questions arise as to the protection of assets at an institution that has been purchased or has filed for bankruptcy. Generally speaking, brokerage accounts are held in custody for clients and are therefore protected from bankruptcy or sale. Anyone with a Merrill account will soon have a BofA account. In addition, the government insures brokerage accounts for up to $500,000 and most of the large brokerage firms have additional insurance to protect even larger amounts. However, this insurance does not protect against loss in account due to the market going down!!!

Bank deposits are insured for up to $100,000 per account per bank by FDIC insurance. This includes CDs ,checking accounts and savings accounts.

Misery loves Company?

A new bulletin out by Employee Benefit Research Institute is reporting the survey results of savings of Americans aged 19-39. 67% reported having savings, including employer retirement plans, of less than $20,000. Check out the link at http://www.ebri.org/publications/facts/index.cfm?fa=fastfacts.

Summer 2008

Well, July did not prove to be the month that the market makes it's turnaround. The S&P500 was down 1%, the DJIA up a paltry .3% and the Nasdaq impressed with a positive 1.5% Year to date numbers are all negative, double digit numbers and still down over 20% from the Fall 2007 high. The only bright spot is small cap stocks. Small-value posted a whopping 5% return for July (still down 5% YTD) beating large cap stocks which were negative in July. Many long time investors view this as a positive sign. Small and mid cap stocks tend to be leaders when the economy rebounds. In fact, the market, over several previous recessions usually begins to turn up about six months before the recession is officially ended. Ever the optimist, I do think the worst is over. For all of you sitting with cash or bonds--who didn't check with me first before selling stocks, it is time to get back to your long term asset allocation. My favorite saying is: no one rings a bell when the market has bottomed--which means, no one can time the market effectively. Buying and holding a well diversified portfolio is the only way to earn real wealth over long periods of time. Interesting fact, the average mutual fund has returned 8 or 9% on average over time but the average mutual fund investor has earned around 3% over time. Why? Because the average investor buys high and sells low. Seasoned investors watch the behavior of retail investors to gauge when the market has bottomed or hit a top--by whether Mom & Pop are buying record amounts or selling record amounts. Guess where we are now? That's right, the retail investor has much of his/her assets in bonds and money market funds and is pulling money out of equity funds. You'll never build wealth following the pack--you need to stick to your plan.

Market volatility does create opportunity. Right now, it appears that municipal bonds are quite the bargain. When you can buy bonds that in some maturities offer higher yields than treasury bonds, investors in the highest tax brackets should strongly consider it. While buying individual bonds can be treacherous for the retail investor, there are some notable bond funds worth looking into.

Moving on to another important subject: the CDC National center for health statistics announced that death rates are falling and that life expectancy at birth hit a new record high. Why is this important? As you know, longevity risk is one of the major risks facing retirees today--that is, the risk of outliving your assets. As advances in medicine progress, this risk will become more pronounced. Anyone just starting out on his/her career should try to save as much as is feasible. This money will compound over decades preparing you for retirement. For anyone who hasn't saved enough, keep in mind that the IRS allows for catch up contributions of an additional $5,000 over and above the $15,500 that is currently allowed to be contributed to a 401k/403b plan.

I hope you are enjoying your summer. Thanks for reading.

Second Quarter 2008

It was a pretty bad week last week. The DJIA was down 4.2% last week and down 19.9% from the October high. Here are some year to date returns for various market caps: large cap stocks down -10.84%, mid cap stocks -6.5% and small cap -6.36%. Large cap growth did better than value but the opposite is true for small and mid caps with value outpacing growth stocks. International stocks are down -11.3%--equity income funds are down -12.5% and even balanced funds, which are meant to hold up well in declining market environments are down -6.42% year to date. The only thing that has held up in here are commodities. For example, oil as measured by the ETF USO is up 46% year to date.

Here is the big problem facing the Fed with what to do with interest rates: CPI (a widely used measure of inflation) is up 4.2% year over year--core inflation (which excludes food and energy prices for those of us that don't eat or use fuel) is up 2.3% year over year. These numbers, particularly the total CPI, is much higher than it has been in years. Slowing economic growth coupled with rising inflation is a real dilemma for the Fed.

I have started reading a very interesting book called Simple Wealth, Inevitable Wealth by Nick Murray available only at www.nickmurray.com. Murray is a consultant to financial advisors but wrote this book for clients. He has been in the financial services industry for 41 years and has seen a lot. I really like to read and hear the wisdom of people who have been involved in the markets for a long time--they seem to make so much sense and they don't get pulled into the over zealous media's negativity. What Murray says is when the markets are down is the time to buy more shares of your favorite stocks or funds or just index funds as part of your long term investing plan--Warren Buffet once said that the only thing Americans won't buy on sale is stocks! Well, they are 20% off now!! As investors, we all must invest with rationality not emotions. History has shown that the stock market has always gone up over the long term--don't believe anyone who says it is different this time--the details may be different, but the cycles remain the same.
Thanks for reading.

Financial Education

I often come across really interesting information I like to share. There is an organization called the National Endowment for Financial Education that puts out some great research and has developed age appropriate financial education programs to be used at all grade levels within the school environment. The website is http://www.nefe.org/. One article particularly useful addresses the topic of raising a money smart child.

Read here :http://www.smartaboutmoney.org/nefe/pages/popups/1770.asp?resource=227



There are other tons of articles available at http://www.smartaboutmoney.org/ especially for those friends who do not work with a financial planner who maybe should be considering it.



Another great resource is the Mature Market Institute at http://www.metlife.com/ under the "brokers & consultants" tab which addresses issues of retirement, longevity, long term care insurance, social security and medicare.



There is so much information available on the internet--it's nice to have a guidepost. If anyone else has found helpful websites, please post so we can all take a look.

Thanks for reading.

April Update

WOW, thank heavens that quarter is over! One of the worst quarters ever in the the market's history. Let's recap what happened: S&P500 down 9.92%, NASDAQ down 14.07%, Large Cap Growth -10.18% and Value -8.72%. Small caps lag with Growth down 12.83% and small cap value -6.53%. International sector was down 8.82%. The only thing that was up were commodity funds and bonds.
The good news is for anyone with HELOCs, rates have come down. The Prime Rate is at 5.25% and LIBOR is 2.71%. Mortgage rates have not come down as much. The published rate for 30 year fixed mortgages is at 5.37% and for jumbo mortgages (amounts greater than $417,000) the published rate is 7.19%.
One interesting article I read recently discussed the investment allocation of endowment funds. This topic is always one of fascination because many of the larger endowment funds have had excellent long term returns and so the managers investing these assets are usually held in high regard. The article pointed out that some endowment funds (Yale in particular) have reduced if not completely eliminated their exposure to fixed income securities arguing that historical bond returns can not be supported given the current low level of rates. How then, is one to diversify risk? The answer is in the long-short funds. A long-short fund essentially eliminates market risk buy being long some stocks and being short other stocks. One fund that has done well with this strategy is the Hussman Strategic Growth fund. Since 2001, the fund has had positive returns every year, including so far this year. While past performance is not guarantee of future results, this track record gives me a strong inclination that the manager, John Hussman, knows what he is doing.
On a non financial note--a recent University of Michigan study indicates that having a husband creates an extra seven hours of housework each week for women and that getting married saves a man about an hour a week in housework. It's nice to know there is an actual study that affirms what I have known to be true for a decade.
Thanks for reading.

Information about brokerage accounts

It's hard to believe we are nearing the end of the first quarter--not a fun first part of the year. It always amazes me to watch the market behave in completely irrational fashion. Bear Stearns worth $2 a share? OK so apparently, the firm was 30 times leveraged but c'mon....the building alone is worth way more than that!
Let's focus on what we have learned here, not a new lesson by the way. Shall we consider that once again, lifetimes of earnings and savings have basically disappeared. One third of Bear Stearns' stock is owned by employees. Granted, employees had their hands tied in so far as how much and when they could sell their shares. Please be careful to those of you who own company stock in your 401k, are awarded stock options, and stock grants in your bonuses and also own stock via ESPPs. You are probably quite over weighted in company stock. Where you have the ability to cut back, IE. those vehicles of ownership than are optional, look at paring your exposure.
Another interesting thing that has come up is what happens to client accounts should a brokerage firm go bankrupt? There have been a few articles lately in the WSJ addressing this very issue. Here, one can take solace in the fact that most large brokerage firms are covered by SIPC insurance (similar to FDIC) for up to $500,000. In addition, most firms have additional insurance to increase coverage amounts. However, it is important to know that brokerage firms must keep client accounts separate from the company's assets--as such, the accounts are held in custody. So in the case of bankruptcy, client accounts should be protected. The only real issue with brokerage accounts is if you have an account with a rinky dink little firm and there is embezzlement or other foul play. Even in the case of a criminal act, SIPC would pay, as long as the brokerage firm was covered under SIPC. So, in short, no real need to worry about brokerage accounts at a firm that is in trouble.
On the market, except for commodities, most of the equity market is down anywhere from 10-13% year-t0-date. Actually, Nasdaq is down about 27% from it's high and the S&P is down almost 18% from it's high--which leads me to believe, the worst may be over. This belief certainly doesn't mean we will turn around on a dime and start going straight up--it will take some time to develop a base. However, anyone sitting with a lot of cash should seriously consider putting some of it to work.
Lastly, while I could write at length what has happened in the market these past six months, I will keep it brief and try not to lambaste the media too much. Let's be very clear about one thing: what is going on in the financial markets is not about the weakness in the real estate market. It is about the unwinding of excessive levels of leverage (borrowing) funded by very cheap money and lots of liquidity for years. I believe the Fed is doing everything right to bring normalcy back to the capital markets but it will take time to restore confidence. Whatever the problem is, the answer is always liquidity and accommodation on the part of the Fed, at least that is what history has shown us.
Thanks for reading....

U-G-L-Y

The best way to describe this market. Year to date as of Friday Jan 18th, the market was down anywhere from 10 to 12% with small caps being the worst performers. The real problem with this kind of sharp downturn in the markets is that no one sector has been spared. The whole notion of portfolio diversification goes out the window because in times of crisis, everything goes down.
The Fed has reduced the Fed Funds rate by 3/4% to 3.5%. This will directly affect anyone with a HELOC and adjustable rate mortgages. However, the impetus for such a move by the Fed, which to lower rates outside of an FOMC meeting is unusual and significant, is to raise the level of confidence of market participants. As of right this minute, the market has been open for 4 minutes and it is down tremendously--Nasdaq is down 5%.
While it is difficult not to feel emotional about losing money--it is times like this that we need to maintain rationality. While no investment is making money right now, we must feel confident in the fact that portfolios are well balanced and have been constructed to achieve long term financial goals and thus we are all long term investors.
I always wonder during times of crisis where opportunities may exist. Is there anything in the portfolio that I would like to own that I should be buying? General valuations seemed reasonable when the market was 20% higher, it has to be even more reasonable now.
As for what I am doing today, I am going to call my mortgage lender to see if I could lock in my adjustable rate (4.5%) for another five years--wish me luck.
I am available if anyone wants to talk.

A New Year

2007 may have marked the end of the bull run that began mid 2003. For the year, the DJIA was +8.9% but the S&P500 was only up 5.5%. The growth style of investing finally came back to life after years of under-performing. Large cap growth was up 14.2%, mid cap growth up 16.5% and small cap growth was up 8.8%. Small caps were the under-performer of the year with a "core" strategy posting loses of 1% and small cap value losing 5.5%. This is unusual since over long periods of time, small cap value has actually outperformed other size and style classes. As you know in investing, not every year is the same.
The great winner for 2007, once again, was international equity investing, up 12.4% and emerging markets up a whopping 36.4%--WOW.
I like to look at what the market is doing right now, rather than try to guess what the market could do in the future--most people don't guess very well, and it remains just that, a guess. Right now, the market is in a correction phase. Volatility has been rising which indicates fear and uncertainty in the market. The ECRI index of leading indicators has reached a six year low indicating real economic weakness ahead. However, bear in mind, the Fed has already injected quite a bit of liquidity into the markets via lower rates and availability of funds to corporate borrowers. They are also clearly committed to continuing in this way as economic growth (rather than inflation) has become their primary concern.
An interesting article in the Wall Street Journal makes a valid point about the market being a discounting mechanism and compares the current economic environment with the last recession in 1990-1991. At that time, the Fed was also very diligent about lowering rates and stocks went down early on, but the equity market actually turned around once it was apparent the recession would be quick and mild. The article didn't say that would be the case this time, nor am I, but a diligent Fed can make the difference in mitigating the severity of slowing economic growth.
The most important thing to remember is to be a long term investor. A proper and well balanced asset allocation which produces a long term average expected return that will allow you to achieve your financial goals is really all we are concerned about. But the market sure is fun to talk about!
Please let me know if you have any questions or concerns.