That Was The Week That Was –4th Week November

• Just finished reading, ‘The Monster’,a new book on predatory lending and how deregulation let Wall Street Bankers and lenders run wild. ‘Questionable loans flooded the mortgage pipeline and one appraiser went to check a subdivision where Argent Mortgage had made loans. The appraiser called and asked to double check the address as he was standing in a corn field. The entire subdivision did not exist!’ Lenders didn’t worry as they said all loans would be bundled and sold as securities 20 minutes after the loan was made. The problem would be for investors to worry about. 
• GM’s IPO grew to $23.1 billion making it the 2nd largest (in common stock) behind Visa as underwriters exercised their rights to buy a big ‘chunk’ of stock.
• While the U.S. has borrowed itself to the eyeballs it is safe to say that the stocks of America’s businesses are doing just fine, thank you. In 3rd quarter earnings the S&P 500’s increase over last year was a massive 31% and 47% of those gains in 2009 were generated outside the United States.
• Markets ended mixed Monday. Tech’s provided some upside. IBM seems to have found some vigor and is significantly higher.
• Tuesday saw problems overseas with North Korean shelling a disputed South Korean inhabited island and Irish woes continuing. Traders sold off to be on the safe side. Triple digits.
• GDP revised Up. Not enough to slow the slide on Tuesday.
• Beginning January 1st HSAs get a makeover as new rules require prescription for reimbursement on over-the –counter drugs. Exceptions include insulin, eyeglasses, contact-lens solution, bandages, dental care and test kits. Doctors will be placed in awkward situation if they believe something unsafe or unwarranted.
• Jobless claims fell to a 2 year low-consumer spending increased for the 4th straight month.
• Kinder-Morgan is a –coming public- again. Kinder Morgan, an oil company, was taken private in 2006 in a management buy-out that included Goldman Sachs and 2 hedge funds. This should be one of the largest oil patch IPOs ever offered.
• Insider Trading investigation by the FBI has widened. The WSJ reported that even Goldman Sachs has been questioned. Janus Capital was involved in after hour trading scandal in the early part of the decade, now this investigation. Wellington provides investment management to many firms including Vanguard. Insider trading is acting on information that is not known outside of the firm or firms involved and is highly illegal contrary to Gordon Gekko.
• From the ‘Looking Into My Crystal 8- Ball Department: Phil Gramm, Vice Chairman of UBS Investment Bank (Yes, that Phil) predicted all Bush tax cuts would be extended and in 2011 a compromise on the estate or death tax would be made. Mellody  Hobsa, President Ariel Investments said, ‘ If you have courage and cash in this market…it’s fat city.’ (I like the way she rolls, what do you think, dear reader? I picked that up from you know who. )
• According to Mark Hulbert at MarketWatch.com there is no correlation over the past 114 years between how well retailers do on Black Friday and the stock market. The myth has been if sales are robust on BF than the markets will respond but for the last decade the reverse has been true.
• Del Monte (I love their Blue Lake green beans) agrees to a $4 billion buyout to KKR and a consortium of hedge fund investors. FYI Del Monte also sells Kibbles and Bits, Meow Mix and Milk Bone. You can expect cost cutting and have the company brought back for IPO in the not to distant future.
• Consumer sentiment UP, joblessness down, spending UP but factory orders down. All that shows the American economy improving – slowly.  However new home sales tumble while personal income rose; as reported by the Commerce Department.
• The Ben Bernanke must be slamming his head against a wall as the European crisis keeps the dollar supreme. His buying of US debt was supposed to weaken the dollar but the crisis with Ireland has flowed over to Portugal and Spain causing the euro to weaken instead. Traders target those two countries with bearish bets on their bonds. The cost for insuring $10 million of Irish debt is an astonishing $605,000. The cost to insure the same of Spain’s debt is $300,000.
• With saber rattling in Korea and worries over defaults in Europe the markets lost ground in an abbreviated session Friday.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.

Tax Cutting Strategies for Year-End

Tis the season to do some year-end tax planning and possibly slash your tax bill. I am not an accountant, nor do I practice accounting but there are a few tips I picked up over the years that may make a difference in your income tax bill next year. As always I suggest you discuss any and all tax related questions with your tax professional. 

1. Now is an excellent time to sell off both stock and mutual fund winners and losers. Lock in gains with stocks that have made you money and get preferential tax treatment and cull your losers and get losses moving forward. This is a great maneuver if you think you are going to be changing investment strategies in 2011. 
2. No matter if you’re selling winners or losers make sure you have the cost basis for all your investments. Waiting until next March-April will not give you enough time to get numbers from various fund and brokerage firms.
3. Bulk up your 401k-403b retirement plan if you haven’t already. Check and see what you need to add to max out your contribution and get it done before the end of December. 
4. Talk to your boss and see if you can push income into 2011 instead of getting paid this year. If you work for a small firm the boss may appreciate your generosity.
5. Make a charitable deduction. This is the time when charities need you and you need them.  Don’t forget to get receipts.
6. Required Minimum Distribution from your IRA or if you inherited an IRA – make sure that you take the required amount for 2010. The IRS allowed participants to skip 2009 but the RMD is back in 2010. The penalty is severe- 5o% of the amount required to be withdrawn.
7. Any tax deductions coming due in January write the checks in December for this year. This includes mortgages with interest deductibility, taxes on property and business expenses. 

That’s it-only seven but if a nudge got you thinking and you did just one it could save you a lot of tax dollars. For more ideas call your tax professional.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.

 

That Was The Week That Was – 3rd Week November

•   Monday last started off great guns, ignoring European and Asian modest losses, and perched to break a triple digit upside on better than expected retail news, especially positive results from the autos, when the sell-off shredded any gains for the day. Fears of a China slowdown  and European bank worries may have been to blame or simply investor wariness.
• ‘Take the bailout!’ and Irish banks resist and there lays the European mess. Possibly Spain and Portugal may need assistance but first the Irish who say they need no new money. In the meantime markets labor under lack of clear guidance and information.
• Both WSJ and Barrons.com reported on how billionaire investors are modifying their portfolio holdings. Warren Buffett sold all shares in Home Depot, Car Max and reduced stake in Nike, Ingersoll- Rand and Fiserv. Buyout specialist Bill Ackman sold off Yum Brands and reduced stakes in Kraft and Target. David Einhorn of Greenlight Capital bought more shares in Apple, Ingram Micro and Verigy.
• Buy and Hold Forever for Warren Buffett- don’t you ever believe that!
• Hedge Fund billionaire Paulson, as reported in same publications, reduced stake in Citigroup, Inc., Bank of America and J.P. Morgan Chase with no investment in Goldman Sachs Group. Telling?
• Awful Tuesday as a global wave of selling hit markets. The Dow off some 200 points settled around 175 points down along with every major index including metals. Investors everywhere wondering if the markets had ended their run with worries over China’s inflation woes and Irish banks.
• WSJ last Wednesday reported EU preparing more money to stabilize Irish banks and Christian Thwaites, chief executive of Sentinel Investments in Montpellier, Vt said, ‘…the markets have over- reacted…China is strong enough to grow through any anti-inflation steps.’
• ‘China may have surprised people, but I think the markets have overreacted,’ said Christian Thwaites of the recent global sell-off.
• If this doesn’t boil your turnips I don’t know what will. If you headed, or were an exec, at a failed U.S. bank the FDIC is conducting a criminal investigation and this means jail, fines, sayonara to lattes and long walks on the beach. The pressure is on to identify and prosecute bankers that contributed to the largest number of failures in 20 years. But – the hundreds of bankers bailed out including: Wells, State Street, Bank of America, Citi, JP Morgan –and the rest, get to skate! Again, it’s the small bank, usually community bank CEO, caught in the crosshairs of a meltdown and unable to get bailout funds who’ll end up in jail and probably spending all their savings on legal fees.  Not that I’ll lose sleep, a crooks a crook, but the big banks are different from everyone.
•  From the Department of: It Ain’t Supposed to Work That Way- Bond Yields have been expected to fall with the buying of Treasury debt but the opposite has been happening.  (see chart above) Last Monday the yield on a 7-year rose to 2.14%, a 2 month high, despite the Fed’s buying $7,2 billion of same that ayem. Quantitative Easing 2-so far phooey.
• Am I the only boomer who is embarrassed by conservative Palin while she says she’s considering a run for the presidency with such founding father homilies as, ‘I just tweet, that’s just the way I roll…’ from the recent NY Times interview… (Take me now, Lord!)
• 
• Wednesday last markets ended mixed with the Dow off 15 and all other indices up. Barry Diller added to his Coke shares as a strong buy on the stock was issued by Esther Kwon analyst at S&P’s Equity Research. Diller has been a director at Coca-Cola since 2002.
• Banks were chop-blocked on Wednesday’s trade as the Federal Reserve said they had to go through another stress test before paying dividends to shareholders.
• What the Street took away Tuesday it gave back Thursday on the IPO of General Motors. GM stock opened to us lesser mortals at $36 and promptly fell to close at $34.  While Street talk was about how well the shares did if you bought in the morning  the fact is you were a loser by dinner.
• The good news was all indices did well and the markets swallowed the GM story and motored on like brave soldiers. (Ya’ll wait for the Chrysler IPO a-coming next year, maybe.) Fiat bringing Italian styling to the House in Auburn Hills.
• Speaking of…Housing still stuck at depression levels and Gabriel Stein of Lombard Street Research in London isn’t surprised. Most Americans are underwater on their mortgages and have high levels of debt. Moving or selling is not in the cards and Gabriel estimates that it won’t be until 2o16 before this inventory is cleared and people move on.
• The Ben Bernanke talked back to critics on Friday and told them not to call quantitative easing quantitative easing but rather ‘securities purchases’. I only wish The Ben Bernanke would have told the world that a long time ago that and it would have saved this writer from explaining over and over again what exactly the Ben Bernanke was doing.
• Markets ended the week UP a skosh, which this writer would like to explain is the technical term for not very much or a smidgen.
• Finally, have a safe and relaxing Thanksgiving!

Questions call Paul @877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.

Hot Tips

The so called free hot tip is costing amateur investors oodles of money.  In my 40 plus years in the business I cannot count how many tips, whispers and suggestions of stock and other investments I’ve heard, read and ignored. In today’s internet age it doesn’t take much of a stretch to Google a chat room or web site that touts a stock or even have a penny tip come right to your e- mail. There have been suspicions that many of the financial magazines have been complicit in spreading a tip by quoting a ‘respected’ economic source. However, most of the time the origin of the tip is so anonymous that Colombo would throw his hands up in frustration trying to find out who started it. Still amateur investors routinely invest hard earned money at these fables and usually end up sorry but most often none the wiser. Whenever you ask someone who told them about the so-called ‘off-brand' investment they’ll say something like, ‘I got it from my wife’s brother who got it from his golf buddy who heard it from a reliable source at the car oil change garage…’

It’s pretty hard to dissuade people from throwing money at these tips. I remember when K-Mart filed for bankruptcy and people got very angry with me when I told them their money would be worth nothing when the company emerged from bankruptcy. It was as if I was trying to stop folks from getting rich. The same was true with General Motors and Woolworth. (You do remember Woolworths, the world’s largest retail chain until 1997?)

A dentist I went to see about his investments proudly told  me his entire retirement plan was invested in Woolworth’s second mortgages. Should I say how well that turned out or can you guess?

Even the pros are wrong a lot of the time. To prove my point I found an old Smart Money magazine. There was an article that offered up the only 10 stocks one had to buy for the next decade. Buy these ten, the article boasted, and forget about buying anything else. Maybe the timing was wrong since this piece was written in 2007 a year before the markets went poof. Still  you can’t use that as an excuse for every investment since in the real world many stocks have recovered and others have surpassed their pre-recession price.

Without boring you with my research out of the Smart Money list of 10 stocks touted : 4 stocks lost money,  2 were relatively even and 4 were up. One company was bought by another at a hefty premium shortly after the article was written and subsequently the acquiring firm’s stock price has fallen.

And, in the same issue there was a mock debate that centered on Apple and if the stock, at the time trading around $88 a share, had seen its best days. Today the shares are north of $300.

It’s not only the experts that can get it wrong there are family members who’ll hit you up so you to get in on the ground floor of a fountain pen that’ll write under whipped cream or a perpetual motion machine; and for the few thousand that’s collecting dust in your seat cushions you could be a billionaire.  In most cases you’d be better off loaning the relation the money and having them sign a note so you can write off the eventual loss.

Most amateur investors expect hefty returns as soon as they plunk down their money into a specific stock or investment. Alas, dear reader, even the best professional money manager doesn’t get it absolutely, positively right and that’s using computer programs, technical assistance and decades of experience. 

The point is most hot tips end badly but here’s a checklist of things to do before you invest your money:

• Credentials of the Tip Giver. Is it a Buffett or someone at the water cooler who thinks he’s a Buffett.
• What’s the motivation? Is there a finder’s fee or a relation somewhere in the mix? Or is it simply that misery loves company?
• What is the background of the investment? Is the potential investor given all the facts such as risk and history?
• How liquid is the money invested? Can you bail at a reasonable time?
• What are the fees and expenses and how do they stack up with other investments.
• Is the investment registered and conforms with the state Blue Sky Laws or is it a under the table type of investment? One call to the state can save you money.
• Finally, can you afford to lose all the money without having a detrimental change in your lifestyle?

And if you cannot do the above get a second opinion from someone you trust like your CPA or financial advisor. The money they’ll charge is small potatoes compared to how much you may lose.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.

 

Longevity Insurance- Solving The Income Needed For Living Too Long Problem

Detroit Lion 1950s football star quarterback Bobby Layne once said his retirement plan was to die when his money ran out. He was pretty much right on and died a relatively young and close to broke man.One of the most difficult things for investment professionals to create for clients is a lifetime income plan that meets all their needs. The two biggest hurdles to consider are creating sufficient immediate income and the possibility of needing that income over a very long period of time.

In the past it was acceptable to create a systematic withdrawal plan from mutual funds or use dividends from common stock to illustrate a consistent income stream. The 2008 market meltdown taught us that events not in our control could disrupt the best conceived plan. Both planners and clients discovered they needed to be a bit more cautious in their income plan design. Any sudden market implosion could slice years off the assets needed for income. A drastic drop in the markets plus an aggressive withdrawal plan is a doubly whammy to disrupt any plan.

Blue chip global stocks with a history of paying increasing dividends are not immune from abandoning shareholders and eliminating dividends.

Fixed annuities are also little help during periods of low interest as insurance companies need higher yields to provide more attractive fixed long-term income. 

Finally, even during relatively benign periods of consumer prices increases fixed income plans are at the mercy of cost of living hikes. A simple 2% annual inflation rate can compound and reduce the purchasing power of a dollar in as short a period as a decade by as much as  twenty-five percent.

The partial answer for long-term income seems to be longevity insurance. While this writer is not a great lover of the insurance industry they seem to have arrived with a product that solves some of the problems of a client living too long. Longevity insurance is basically a fixed deferred annuity with a starting date far into the future.

The mechanics are simple enough. A client who is age 65 desires to ensure that he will receive $1,000. a month for life beginning at age 85. For that agreement he pays a one time premium (currently with some companies less than $20,000. for the $1,000 a month). This amount is not only cheaper but about 10% of the amount of a single premium immediate annuity. If the client wants income for his spouse there is a separate policy that has to be purchased.

I like this for several reasons: (1) A retiree can get a bit more aggressive with creating more immediate income. (2) A retiree does not tie up a tremendous amount of money to buy a deferred income annuity. (3) It’s an actuarial product that doesn’t 100% depend on current interest rates.

Before you decide to buy this product you need to do some homework: You have to ensure the company who is issuing the product is currently in great financial shape. The reason is that the guarantees are with the company and not an independent outside firm.

Next you have to answer if  there is a history of living a long time in your family? If all your relation’s lifespan only make it to the national average the chances of getting value is little and none.

Do some immediate income planning. How much do you think you need now and if spending down assets how much income will you need down the road. Run the inflation calculation using one of the calculators at my web site at www.primaryplanner.com.

And finally, if you neglected to buy long-term care insurance and everything else being equal you may be able to fund a self-created income stream for exactly that future purpose. 

As always call me for direction and assistance.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.

 

Roth IRA- The Conversion Question

The Roth IRA provides an opportunity of investing after-tax money and allowing it to grow tax-free. Rules for taking money out of the plan are more liberal and there is no required minimum distribution at age 70 1/2. Taking advantage of tax-free money to some investors is like a free steak and lobster dinner. It is an event enjoyed only a few times a lifetime. And while I have no issue with an investor opening a Roth either individually or through a 401k plan I do have problems associated with converting a perfectly good tax-deferred IRA into a Roth IRA and paying taxes on the conversion.

This year wealthy investors were given the opportunity  of converting their IRAs into Roth accounts. This is a once in a lifetime occasion and has spilled over to the average investor who has given serious thought about converting their tax-deferred account into a tax-free IRA.

Investors who convert from regular IRAs to a Roth need to come up with a substantial amount of money to pay the normal income tax created by the conversion. The money to pay the tax usually comes from after tax savings and a $10,000 tax payment would cost an investor about $13,000 in earned money. In some cases the conversion also creates a higher personal income tax bracket altering the total amount of taxes on the year’s earned income. The argument is that today’s taxes may be cheaper than tomorrow’s income taxes. The fact is we don’t know that. In fact a few decades back investment wizards were all spouting that interest rates would be in the mid double digits by the turn of the century and look where we really are. Taxes may well be much lower or tax brackets changed to reflect the economy in the future. We don’t know and there is no reason to pay taxes now when we do not have to.

The other argument calls for paying the taxes from the tax-deferred account assets. The problem is that causes the portfolio to drop considerably and there is no guarantee that future investment growth will bring the new Roth account close to where it was when it was a regular IRA. Certainly it took years to grow assets in the tax-deferred IRA and there may be less years to do the same.

The rush to pay taxes when you do not have to is a phenomenon not understood by this writer and his tax professional friends.

The regular IRA tax deferred account has many benefits including spousal rollover and a beneficiary tax-deferred benefit that can preserve assets far down the road.

Advocates of a Roth conversion also fail to discuss the loss of purchasing power through inflation. Those investors who don’t convert but pay taxes on the required minimum distribution are doing it with cheaper tomorrow dollars because of inflation. A dollar a  few years  down the road, or even next year, is cheaper than today’s dollar.

Don’t rush into a Roth conversion just because you hear or read that the rich are doing it. The rich may be getting some darn poor financial advice.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.

 

That Was The Week That Was-2nd Week November

• Monday last was just the beginning of the markets back tracking giving up 37 points on the Dow as the dollar strengthened against all currencies except the yen and gold kept on a climbing.
• What metal if you missed the gold rush? How about silver, according to CNBC. Seems silver, which has more uses than gold in manufacturing, is trailing historical values.
• In my inflation blog November 8th I wrote the  QE2 Fed policy wasn’t making us any friends overseas and seems I was  right. The prez got an earful on his visit to India from world leaders who own U.S. dollars and/or seeing the price of oil pop. Germany, who else, is at the head of this parade.
• From a Morgan Stanley recent report reprinted in MarketWatch.com November 9th: ’ Our analysis indicated that China’s economic shift toward domestic consumption and away from investment is beginning and will likely prove a mega-trend through 2020, supporting our economist’s views that China is entering a golden age for consumption.’  Get this? 
• Wedge Partners analyst Brian Blair issued a stunning forecast on Apple’s prospects in 2011. Boiled down he said he thinks Apple is the best positioned company in the tech sector and thinks the firm can sell 100M iPhones and 48M iPads next year. Mama mia! ‘
• WSJ weekend edition extolled the virtues of utilities. The experts say money managers and investors are snapping up shares as they’ve finally realized the growth potential in a ‘green world.’ We’ve been saying that for over a year and have been buying utility mutual funds & stocks for our clients.
• 
• Longevity in your family? The Bobby Layne Retirement Plan called for him to die when the money ran out. But, new products called longevity insurance can guarantee income starting at age 85. You don’t get anything now but at a certain senior age you start getting fixed income checks for the rest of your life. Watch my coming blog for more details on this very interesting product.
• Tuesday markets off 60 points on the Dow as concerns over European banks. Ireland stand first to fall as the WSJ reports that bad loans dominate at what were once sleepy banks lured into a world of bad debt and speculation. Expect more through the holidays. Dollar strengthens.
• Same day same WSJ report commodities continue to surge as strong demand from emerging markets are pushing prices higher. Copper, gold and cotton at all time high’s while the U.S. Department of Agriculture cut its harvest estimates for soybeans and corn. This is just the beginning, dear reader. 
•   Reason #1 I don’t cruise. For four days last week Carnival luxury liner without power being towed to nearest port. Passengers eating pop tarts and Spam. ‘nuff said?
• Is Bernanke’s QE2 over before it starts? Seems many traders believe it is. The engine to spur the markets may have pooped out.
• Wha’s with Cisco? The tech giant posts big numbers and then gives glum guidance. CEO Chambers said the company would power through what the company believes are short term challenges. After the weak guidance 13 tech companies saw their stock price lowered.
• Let me see if I have this right. A bunch of nitwits in government and banking threw the global economy into the toilet and the Administration of both parties bailed them out. Now a Deficit Panel has a White Paper that demands the American public pay for it by slashing Social Security, increasing the gas tax and eliminating the deduction of mortgage interest.  (Sounds fair to me, how about you?)
• China’s markets fall 5% as fears of rate increases to combat inflation spook investors. Fallout will continue until sense returns.
• Mark Hulbert reports in MarketWatch.com that Cisco’s stock spanked for reporting sales to grow more slowly. Price of share now undervalued according to Prudent Speculator editor Buckingham. (If this doesn’t define 2010 markets I don’t know what does.)
• Silver, according to ETF Tremds, the hot metal du jour.  
• The prez can’t get a trade agreement with S. Korea. Restrictions by the Koreans only allowed 6000 U.S. cars to be sold while the Koreans sold close to 500,000 in the United States.
• Gee-20 says manana to deal with economic imbalances such as currency wars. Leaders at the Seoul conference brushed off the president and agreed to next years summit to develop an imbalance assessment. (Can someone tell me why else they were there? Anyone?)
• Markets fell hard Friday on China growth worries (it’s always something), as all stocks and commodities took a substantial hit. Still stocks look like the only game in town according to Zacks.com as corporate earnings were positive almost 4-1 over companies that did not meet expectations, the S&P is trading at a modest PE of 13.1; the bond rally appears to be ending and signs that the small investor is coming slowly back is always encouraging.
• The General Motors stock offering expects to issue 365 million shares or raise $10 billion. According to James Stewart at WSJ.com at the stated high end of the IPO the shares are a great deal. Even China’s car maker SAIC is finalizing a plan to buy shares at the IPO price.
• Finally, it was a lousy week that started that way and just got worse. The Koreans gave the president the bum’s rush using his recent election losses to renege on a deal that would have allowed more cars to be sold in their country. Traders got gutless as China’s rate hike and metals sold off more than expected. Even Saturday Night got into the act making fun of the president and the Koreans in the opening set.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.

 

The Failure of Modern Portfolio Theory

When  my father started investing in the mid- 50s there were only a few mutual funds and most people bought individual stocks and bonds. This was a nothing fancy investing style. (Don’t get me wrong, there was plenty of misdirection and junk being peddled then as now.) The money management style that most amateur investors used back in the day was either a recommendation by someone who worked in the investment business, an understanding of a particular business or industry or searching for high yield interest or dividends. There wasn’t any discussion about risk, beta, alpha or asset allocation

Yes, there were people like John Templeton and Benjamin Graham that were carving their own niche but were pretty much unknown outside the wealthy and professional investor.

It wasn’t until about 20 years ago that asset allocation and portfolio management was openly discussed with the average retail investor.

One thing that is different today from the 1950s is there is so much more  information available to the average investor that it is overwhelming. People have a difficult time keeping up with the flood of stuff that keeps pouring out of investment houses, publications, on-line web sites and cable television. The reason for all this info is to assist investors to make as much money as possible and reduce the possibility of mistakes.

Today almost everyone has either heard of or is in some fashion a student of asset allocation. Some investors are actual fanatics believing that one cannot be allocated enough. Asset allocation is just one part of Modern Portfolio Theory. The concept of asset allocation is to buy and own different investments that act in opposite to each other. In theory bonds should do the opposite of stocks. It is part of the ‘don’t put all your eggs in one basket’ investment philosophy.

MPT was pioneered by Harry Markowitz who was awarded the Nobel Prize for devising and explaining the relevance of investing using an efficient frontier for optimizing investment portfolios. The funny thing is that some of the most successful money managers don’t believe in MPT.

Warren Buffett doesn’t believe in MPT, neither does Jack Bogle of Vanguard fame when it comes right down to it.

Harry himself doesn’t follow his own theory but owns a hodge-podge of stocks, funds and investments that he has trouble explaining. Asset allocation is a part of MPT and sometimes you hear Jimmy (Ze Mouth) Cramer bragging about his educational Trust that is perfectly allocated. 

Managed accounts are set up using asset allocation. There are fund companies that use asset allocation in their portfolio design. Asset allocation is for many the sun, the stars the Holy Grail.

The problem is that when asset allocation and MPT needed to step up to the plate in 2008 and prove itself it fell on its Nobel Prize  winning fanny. It just didn’t work. You lost as much money if you were due diligent and followed asset allocation as if you were trading dot com stocks or  throwing quarters against a wall with Knuckles Kowalski.

Jack Bogle, who practically invented the entire ETF and index business, believes all you need is to own a bond fund and a stock fund and own as much in bonds as years you have on earth. That’s not MPT nor is that much of an asset allocation.

Warren Buffett doesn’t believe in MPT. What Warren believes in is owning the best thing there is at the cheapest price. He is a value investor buying great company stocks or entire companies when they’re cheap.

When the markets collapsed Warren lost value in Berkshire Hathaway just like everyone else but Warren then went on a shopping spree adding companies that had fallen in price but which had great value. Not many investors did that as they hunkered in their bunkers waiting for the next shoe to drop.

Today some investors are looking at their total portfolios differently. Investors have been bloodied and understand that nothing they can do can save their portfolio in the event of a global economic pandemic. Understanding that  other than cashing out at whatever price one can get investors are starting to invest and think strategically. Rather than investing in a totally asset allocated plan they are looking at parts of their portfolio and breaking it into risk sections.

• Cash- money you need now.
• Bonds- high yield intermediate money
• Medium term- 5-10 years out funds, stocks and ETFs.
• Risk – the which could include real estate, precious metals, currencies.

By modeling a portfolio using different buckets for different times and needs an investor can parse the best in each risk class. Obviously this doesn’t work if you have $50,000 -$250,000 of assets. An individual should have a minimum of $500,000 to implement a risk adjusted plan. For the rest of us the plan Jack Bogle devised may work just as well as anything we’ve seen in four decades in the business.  Keep it simple, earn as much as the market gives and reduce volatility by increasing our percentage in bonds equal to our age. By doing this you can complain all you want how much you could have made when the markets soar but you’ll never lose sleep when the markets collapse. (Unless, of course, rates start rising.)

If you have questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.

 

Diversification- A Reason Against

 

Warning do not attempt this without knowing and understanding that this could be a zero sum game.

Almost everyone I know wants to get filthy stinking rich. They would do just about anything to get there except risk any of their money.

When it comes to getting rich the average investor sneaks up on it in the same way as they buy a lottery ticket. ‘Here’s a dollar, make me rich.’

In order to get rich in the stock market investors have to do the very opposite of what they have been taught to do. The single most important rule to ignore is using diversification as a method of money management.

Diversification, the cornerstone of investment planning, reduces risk and, most importantly, return. Yes, dear reader, diversification, the fundamental that every financial talking head tells people to do reduces return on investment. No one will ever make a bundle by diversifying.

Aggressive investors are better off to ignore diversified investment portfolios such as mutual funds and ETFs and concentrate on buying a handful or maybe just one or two stocks. Now before you light torches and march up my driveway for being a financial heretic allow me to explain.

Jack Bogle of Vanguard fame believes in diversification – sort of. He thinks you should own an equity fund for growth and a bond fund for age protection when markets go poof. You’ll never make a lot of money following Bogle but you won’t lose any sleep worrying about your investments either.

Warren Buffett who manages the huge Berkshire Hathaway with approximately $47 billion in assets has only 37 positions as of June, 2010. To put this in perspective the Fidelity Contra fund has over $55 billion dollars of investor money but it is spread over 482 issues. Obviously Warren Buffett doesn’t believe in diversification. Warren is all about maximizing return on his investor’s money. If a company stock is really compelling Warren will just buy the entire company. About 25% of Berkshire Hathaway money is invested in Coca Cola. Not a one of my clients has 25% of their money in one asset unless you count their homes.  (No, I am not telling you to buy Coke! But, you see my point about buying a company with a great franchise, a wide moat and owning it for a very long time.) It is also easier to monitor a few holdings versus a portfolio that resembles a weekend ‘honey-do’ list.

Jack Bogle does not manage investments, nor did he ever. Everything Jack tells us has a bias because of his role at Vanguard creating low cost index funds and the fact he is an investor just like you and me. Jack’s equity philosophy is to match index returns not to exceed them. Warren Buffett, on the other hand, is both an investor (he eats his own cooking) and portfolio manager. Over the years he has made his investors, and himself, a lot of money.

Warren is all about making as much money as possible while Jack is about preserving what you own. Warren is not a trader. Once he owns a stock he generally keeps it forever. He also does not buy anything he doesn’t understand. (Yes, he does sell what falls out of favor or reduces his holdings.)

Common sense tells us that if you are an active investor there can be only one investment that is the best performer for the moment. Every additional investment  decreases your total return.  The more you own the less your total return.

The average investor diversifies and allocates their portfolio into producing mediocre returns.

The truth is most of us are uncomfortable owning only one or two investments. The majority of investors are not trying to hit home runs but returns that are slightly better than inflation and taxes combined.  But for the ultra-few who are looking to hit four or five baggers owning one or a handful of stocks is just the ticket to either riches or the poor house.

One place for the uber-aggressive investor to start is the company 401k. In the past advisors cautioned against owning too much company stock because of the weakening economy and the rich valuations. Now with the economy getting traction and many stocks below their all time highs investors just may find rewards right where they work.

If you’re inclined here’s a few more ideas to get you started:

• Make sure you have enough years left to overcome any mistakes you make now.  Trust me – you will.
• Define who you are: Aggressive-Trader or Aggressive-long-term investor.
• Because you’re trying to get rich it’s okay to invest all your money into one stock. Remember: Buying more than one reduces your return .
• Cut losses quickly. Make a promise and keep it.
• Know when to sell and book your profit. If you’re trading pick a target number and stick to it.
• Don’t chase a hot stock.
• Don’t be afraid to lose money.
• Learn all you can about the what you want to buy, the overall market, technical side of investing, options and leverage.
• Study your stocks before you buy.
• Don’t buy on tips, because you have a gut feeling or you like the stock for some unexplainable reason. (It’s like betting on a horse because of the length of its tail.)
• If you buy and sell in your retirement account you lose valuable tax benefits.
• Buy what you know and only after doing your homework.
• Don’t try aggressive investing as a part-time hobby. Markets move quick and you have to be there to make decisions.
• Finally, if it seems like work then quit and buy some funds, kick back and let someone else manage your money.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.

 

 

That Was The Week That Was – 1st Week November

• Last Monday on election eve, markets soared and then petered out and barely closed positive. Nervous traders took money off the table not sure of the election and concerns over the Fed’s decision to print more money and buy Treasuries to lower interest rates and, hopefully, stimulate the economy.
• The government may reduce stake in GM (see chart last week’s blog) to 50% from 35%, a basically symbolic number. Stock price will be set November 17th and the sale will be on the 18th.  It’s expected that GM will sell 24% of all shares or about $10 billion.
• Commodities rule, according to Barrons.com. Corn, cotton and crude oil are moving higher and the Reuters CRB index has reached its highest level since July 2008.According to Barrons.com the prices are closing in on levels that 2 years ago were called speculative frenzy but that sentiment is nowhere to be found today. (Much more room to run.)
• Investors looking for winners in emerging markets should look to countries who have already hiked their interest rates, according to Andrew Freris an Asia investment strategist at BNP Paribas in Hong Kong.
• Markets closed up on election day.
• Home real estate markets are unsettling. Irwin Kelliner at MarketWatch.com wonders what buyers are waiting for when: real estate is at 1990 levels, mortgage interest is at 1950s levels and real estate commissions have fallen to 4% from 6% and in some cases into the category of negotiable. Falling car, computer and cell phone prices have not stopped people from buying those items but real estate has the experts baffled.
• The GM IPO seems too low, according to Barrons.com. The pre-sales is drawing lukewarm attention from institutional investors. WSJ estimates fair value of GM at $44 a share.
• GM could be free of taxes for years. In a doc filed with regulators the car maker won’t have to pay $45.5 billion in taxes on future profits.
• Bush tax cuts don’t appear to be rolled backed this year with the huge Republican win. Expect things to remain as is…for a while. (whew!)
• Autos had a grand month with Ford, Honda and Nissan each reporting sale increases in excess of 15% with Chrysler stating sales were up 37% from a year earlier. Toyota’s sales declined.
• ‘Another sign this recovery is real!’, according to Seeking Alpha pundit Calafia Beach, it’s the auto sales surging (still low by historic standards) but the upside is positive with increased confidence in the future.
• In India investors are being told to buy Indian securities rather than gold. Gold, as you know, is a huge commodity in India. However, according to Swapnil Pawar, chief investment officer of Karvy Private Wealth Management in Mumbai, ‘Gold has not been a high-return investment over the long term. (Indian) stocks,’ he says, ‘could deliver 15% per annum over the next few years.’  Dear reader, in the USA we call Indian stocks as emerging markets.
• The Fed plans on spending $600-$700 billion of bonds, mainly in the 5-6 year maturities. The purpose is to keep interest rates low, or lower, and a stronger economic environment to create an inflation of 2% per year. There is much debate whether this strategy will work, weaken the dollar even more or do anything to increase employment.
• On CNBC.com supposition on a stronger stock and commodities market going forward with QE2. From their lips…
• The most fun I’ve had in a long time Thursday last with markets soaring over 200 points I just wanted to walk around town asking, ‘Is it good for you?’ The Dow closed at its highest level since September 2008 just before the Lehman Brothers collapse.
• GM touting its IPO in preparation of Nov 18th.  Execs predict pre-tax profit (when markets at strongest) of $17-19 billion with 9%-10& profit margins.
• Food prices increasing and manufacturers and retail stores reluctant to pass higher costs on to consumers. But chains like Kroger and Safeway have said they’ll pass supplier increases on. Reason for increases is rising demand from emerging markets such as China and India. This with moderate inflation.
• Last week ended with a sigh as the markets took a nap for most of the day only to awake at the close to end slightly up. They ended the week at 2-year highs.  The Dow climbed 2.9% for the week while the S&P rose 3.6%. This all on better jobs report.
• Finally, the week ended with 143 banks closed beating last year’s 140.

Questions call Paul@ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.

Inflation Is A Coming & What You Should Do

I’ve written about this before and I know you know this but sometimes singing to the choir twice is not as silly as it sounds. What I don’t want to happen down the road is have clients adamant in not becoming proactive in moving to assets that will benefit them from inflation and a cheaper dollar. I understand why people don’t like change because I don’t like change anymore than anyone else. ‘Why, should I get rid of a  bond mutual fund that made me money for so many years just to go and buy an exchange traded fund that shorts Treasuries?  Life is getting complicated when all I want is simple. Yes, I know this and so do you but things change and owning Amalgamated Buggy Whips is not what you want in a world of Google.

First we have to understand what is going on and the game the Fed is playing. Our government is determined to reduce the purchasing power of our dollar and the result is having countries who buy our  bonds screaming bloody murder. Those countries who bought our yesterday debt at yesterday prices are rewarded to see the Fed go about devaluing those very dollars they bought just a few short weeks ago. And with QE2 this is only the beginning of the Fed plan. Over the next 6-9 months the Federal Reserve will be doing their best to get the dollar down even more, inflation up and interest rates less than they are right now. And when they decide enough is enough what? No one, including the Fed, seems to have the answer. That is why smart investors are buying emerging market funds, investing in blue chip global companies that pay solid dividends and moving money into commodities. The signal is that there is little faith in today’s dollar and probably a lot less in tomorrows.

Fed chief Bernanke has said that inflation is low and for us not to expect it to increase exponentially any time soon. ‘Well, Mr. Chairman, I don’t know when the last time you filled your tank with gas or bought food at the grocery store but those items have increased dramatically and will continue to go up as you go about buying more and more of of our debt.’ 

Already we’ve seen cotton prices surge and copper is moving higher as emerging markets are coming of age and using this metal for their infrastructure. Agricultural prices will soar even more as more countries demand better food and nutrition. Morocco is becoming one of the most wealthy countries with huge deposits of potash, a fertilizer additive that is becoming more dear in the rest of the world. In the last few months we have seen extraordinary interest in potash producing companies as companies position themselves in a world where food becomes more expensive.

But the sharpest investor of all China is moving over half their Treasury purchases to hard assets because they simply know what they need in a few short years.

The Chinese buying spree will not abate in 2011 from hard assets, namely commodities. Their shift from U.S. Bonds is telling. Obviously our government is not and will not be pleased with the Chinese buying but you and I can take a lesson as the Chinese load up on iron, oil, potash lumber and copper (according to November 6th Barrons.com).

The Chinese are now the world’s largest consumer of copper, tin, steel, coal, aluminum, iron ore and second largest consumer of oil.

Taking a lesson the American investor should now be placing a portion of their assets into commodity funds simply to protect their dollar’s from inflation.  Most investors only know of the metals markets and completely ignore the rest of the commodity index which includes agriculture, metals and oil.

The inflationary stage in our markets will not simply pop up one day. It will be a slow and insidious growth, eating away at our portfolios and paychecks until realization of what we have to do is too late. At that point owning cash, unlike 2008, would be one of the worst things an investor could do.

Over the next few months investors should review what they own and look to make room to own commodity funds either through ETFs or mutual funds. As always, if you have questions or need more information do not hesitate to call.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.

Sometimes It Makes Sense Not To Rollover Your 401(k)

Many financial prestidigitators will have you believe that everyone who leaves an employer must rollover their IRA. This is not true. There are many instances, especially in today’s economic times, that leaving the 401k at the employer makes sound financial sense.

I should explain that there are many more good reasons why someone should roll over their 401k and keep their money close to them.  A few of those reasons are: In most cases there are greater investment choices, lower costs, estate planning considerations and eliminates the corporate uncertainty of plan and investment menu changes.

The two prime reasons why someone should not roll their 401k over are (1) Early Retirement Income withdrawals available in most plans at age 55 with no 10% penalty and (2) the ability to borrow from a 401k plan up to 50% of the assets and payback over 5 years.

Anyone who needs income or access to cash prior to age 59 1/2 may be better off keeping their plan at their previous employer.

Once someone rolls their 401k into an IRA they are unable to take a systematic income out of their plan without paying a 10% penalty if they are under the age of 59 1/2 unless they are disabled or if they construct a 72(t) plan. There are no borrowing choices available in an Individual Retirement Plan.

It is always a bad idea to dip into retirement plan money before retirement. However, having the ability to start systematic income without a penalty or being able to borrow funds and payback when things get better makes sense.

While most plans do have early retirement and loan features it is essential to confirm this. Of course there are a different set of significant problems once someone starts taking early retirement income or a loan and then wants to rollover their 401k plan. Investors should only do this after getting all the facts from the plan administrator and personal financial advisor.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.

 

That Was The Week That Was –4th Week in October

• Monday last the markets extended their winning streak. According to Wayne Whaley of futures firm Witter & Lester who reported that this continued rally does not have doom written all over it as some would think. Whenever the markets advanced at least 10% without at least a 2% pullback only once in 22 times was the market down a month later. (From your lips, Wayne.)
• Balancing the budget officials are looking at eliminating deductions on mortgage interest, the child tax credit and the ability of employees to pay their portion of their health-insurance tab with pre-tax dollars. (I have no idea what these idiots are drinking but they’re as serious as cancer about this. Can you say, This is another sure way to kill housing forever.)
• The Government latest TIPS auction went well as the Treasury sold $10 billon of the inflation-protected bonds with a ‘negative’ yield. If inflation heats up to 5% over the next 5 years those TIPS will bring an averaged yield of 4.45% and if the CPI declines to 2% investors will get 1.45%. In either case investors win.
• Financial advisors still prefer American Funds and Blackrock, Inc. However, Franklin Templeton has doubled in preference from a year ago.
• Opps on Tuesday as trading flattened. Coach, Ford and Bank of America gained while DuPont fell. At the closing bell DJIA, S&P and Nasdaq finished slightly up.
• Some of America’s money managers, in Sunday’s Barrons.com, say stocks are cheap and the economy will keep growing. They’re bullish on tech and bearish on Congress. The chart reflects their thoughts.
• IBM buying back $10 billion of its stock. Quick- what does that generally mean for a bellwether stock like IBM? (You are right, dear reader.)
• Due to a stronger yen Toyota plans to increase price on several of its models in 2011. Ford aims to decrease debt to zero. Shares have doubled in the last 12 months.
• BarronsTake was bullish on Ford in June and is still bullish at current levels in excess of $14 a share.
• Someone manipulating the price of silver? Seems one regulator at the Commodity Futures Trading Commission is putting pressure for an investigation. Four market players own in excess of 24% of all net bearish bets in the silver market. These include HSBC and J.P. Morgan. Zounds! Retro Nelson Bunker Hunt and his brother who tried to corral the same market.
• As long as we’re into alliteration –zoom, zoom – as the Fed gears up to start buying Treasuries this week, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, said that the monetary policy was a ‘bargain with the devil.’ The Fed’s aim is to push down yields and drive up prices on bonds in order to spur more investment and spending.
• GM gearing up (get it?) for IPO road show. Banks are pressuring Treasury to maximize number of shares to offer at IPO. While not disclosing details some money managers report they would be leery of GM stock at levels being discussed. Expect shares to be offered around Thanksgiving.
• 
• Speaking of IPOs there are some hot ones in the pipeline: Harrah’s Entertainment, HCA, Inc., Nielsen Holdings, Skype.
• Bill Gross of PIMCO declares the death of the Bond Bull market by the Federal Reserve. Yes, indeed, Bill, the Fed wants bonds to be pushed down to levels where the only other direction will be up.
  • Unemployment numbers decreased unexpectedly last Thursday. That’s a lot of un’s in one sentence. Here’s the deal- no second recession or double dip. Equities will outperform bonds going forward and the economy will get slowly better and better and better.  Don’t be sitting in cash is the object lesson here.
• Stocks ended mixed Wednesday as investors considered the Fed easing as being ‘not enough’.
• Microsoft edged up on great news as it posted a 52% profit. According to MSFT general manager of investor relations Bill Koefoed, ‘Businesses are spending money.’ MSFT is still under April 2010 highs.
• Consumer uncertainty is still in driver’s seat as Sketchers USA, Jones Apparel Group and Whirlpool all were disappointed with sales of their products last week. Inventories are causing fourth quarter concern.
• Kohls, on the other hand, and according to Bloomberg BusinessWeek, plans on hiring 40,000 part-time employees for the holiday season.
• In the same Bloomberg’s BW issue prediction of a strong 2011 with a projected 3% GDP by the 4th quarter up 50% from this quarter of 2%.
• China plans on more than halving the number of state-owned businesses by 2015. Expect more IPOs & investment opportunities. Industrial & Commercial Bank of China, Ltd., the world’s largest bank and 70% owned by the Chinese government just bought Prime Dealer Services a U.S. broker/dealer with only 75 customers from Fortis Securities, a French firm.
• So who did what for the month? The S&P was up 3.7% as was gold. The dollar fell 3.6% and the Nasdaq was up 5.9%.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares.

Exchange Traded Funds

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One of the most popular investments, to the tune of $820 billion, and least understood is the exchange traded fund. While I have written about them in past blogs I have not defined their value to the average investor.

Exchange Traded Funds have been around in the United States since 1993 and in Europe since 1999. Unlike mutual funds an investor cannot buy an ETF direct but has to purchase one or more of the thousand plus ETFs that are available from a brokerage firm. How much it costs an investor in commission is dependent on the services and the firm. A few discount brokers offer free trades on a select few ETFs but not all. ETFs are also available in some 401k plans and in fee managed accounts.

Don’t confuse ETFs with ETNs. ETNs are Exchange Traded Notes and the difference is one of credit risk. ETNs are structured products and if the organizer of the investment goes bankrupt the possibility exists that the investor in the ETN may not be made whole.

ETFs, or exchange traded funds, have their own mystique and I’ve gotten calls from clients who want to invest in an ETF because they heard you can get filthy rich by doing so. The fact is ETFs can either make or lose money just as any other investment.

Exchange Traded Funds combine the features of a mutual fund (diversification) with the liquidity of a stock where it can be bought and sold throughout the business day. The price of the ETF during the trading day is not exact but more or less close to its net asset price. The actual price isn’t calculated until at the end of the business day.

Commissions are charged just like a stock both on the buy and the sell. There is also an expense fee, just like in a mutual fund, that compensates the ETF manager and organizer. This expense fee varies from one fund to the other. There are 64 exchange traded funds that mimic the S&P 500 index. It not only gets confusing but an investor does need to know what he or she is doing before investing. For example, ETFs are not systematic investment friendly like mutual funds. The commission charged on small purchases will severely reduce potential growth on investment.

The mechanics of an ETF are pretty much simple and straightforward. Just like a stock an investor can short an ETF or even buy an ETF that shorts an index or sector all by itself. There are ETFs that are double and even triple leveraged both on the long and short side of a trade. In other words if you feel small caps will fall you could invest in a triple leveraged ETF that shorts the small cap index. There are commodity ETFs that invest in gold, silver, metals and oil. You can buy ETFs that invest in agriculture. In a previous blog I have written about ETF risk which in some ETFs is called contango where investors can almost be assured of not keeping up with the actual representative commodity because the ETF manager is buying and selling options rather then the actual commodity. (There is a new ETF that says it has solved the contango problem but I have not examined it as yet.)

The true value of an ETF is for an investor to be able to buy and trade a diversified index or sector anytime throughout the day. This ability to be in and out provides mutual fund and institutional managers a convenient option to hedge or diversify a position. It also gives the average investor an opportunity of buying investments that they normally would not have available to them. I am writing specifically about precious metals and commodities. Finally it gives investors the liquidity to sell during the day instead of waiting until 4PM which they have to do with their mutual funds. When markets go south some investors want to get out quickly and not wait for their holdings to possibly fall farther. The ETF gives investors that liquidity. Investors may also set stops on their ETF holdings, decreasing their loss limits.

The positive value of the ETF is for an investor to be able to buy into a position when markets news makes an specific investment very attractive. The ETF also removes the guesswork out of which specific stock to buy  because of its sector or index diversification.

Until 2008 all ETFs were indexed or not actively managed. The SEC authorized the creation of actively managed ETFs that year and today there are several. However, because there has not been sufficient time these actively managed ETFs cannot be historically reviewed, compared and analyzed.

The most critical disadvantage of using ETFs in a portfolio are the unknown, untested indexes used by many ETFs.

Still many of my clients can benefit from buying ETFs because:

• Lower cost than mutual funds.
• Buying & selling flexibility.
• Low to no capital gains because of their low portfolio turnover.
• Market specific exposure and diversification.
• Complete transparency of portfolios.

Because of the wide breadth of products now available clients and others should call their advisor or this office to discuss specific ETF needs and solutions.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.