Mortgages –Buying, Selling, Investing and Just Stuff You May Never Thought Of.

Angelo Mozilo the former CEO of Countrywide Financial, once the largest mortgage lender in the country and now owned by Bank of America, is standing trial in Los Angeles for allegedly providing sweetheart mortgage deals for members of Congress and other influential individuals. Immediately after this trial ends the SEC is scheduled to step in with their civil-fraud case and then  the U.S. attorneys are waiting in the wings to see what happens and possible indict with their criminal allegations. Mozilo may be spending a good portion of his retirement visiting various courtrooms around southern California.

Mozilo, who looks more like a 1960s Las Vegas pit boss then a corporate CEO, has offered no comment about his fall from grace. It was but a few years earlier that Mozilo was a regular blabber mouth, often a guest on CNBC as a mortgage rate expert and heading one of the most successful mortgage factories.

In cahoots with Countrywide was the FHA which insured the mortgages that Mozilo and company originated.  The pledge by government officials and politicians was to make home ownership attainable and realistic for all Americans. This philosophy was just one part of the 2008 financial meltdown.

Today the FHA is doing a 180 and making it more expensive to borrow. In the good old days if someone had a pulse, even if on life support, they qualified for a mortgage. Today it’s a different story. The quasi-government agency expects this year to ensure 30% of all originated mortgages. FHA down payments on home loans are the lowest at 3.5% as opposed to the normal 20% required by banks but require higher monthly fees which can be as much as 1.5% of the loan. The FHA is also demanding a credit score, something in its 76 year history it has never required. They also want to weed out sellers who artificially inflate the sales price of the property by limiting them to a seller contribution of 3% of the selling price  from a current six percent. In the past this bit of tomfoolery allowed sellers to artificially prop up their selling price while paying for, or a portion of, closing costs or points or both.

Those potential buyers with a substantial down payment that are looking for competitive traditional mortgage rates and a faster turnaround time may well avoid the big banks and concentrate on smaller local banks and mortgage brokers. According to the WSJ, August 15th,  small banks pay their people on commission, and sometimes on thinner margins simply to get a higher volume and the loan completed.

Profit margins at the smaller banks and originators has fallen from $1,088 in 2009 to $600 today. Rates are also lower and buyers may see mortgage interest rates drop even further before this year is over.

If you’re shopping for a mortgage and don’t know where to turn one resource is www.bankrate.com. Currently the best rate for a 30-year mortgage is 4.4%. This, of course, is for the best most pristine credit rating and with ample equity – something many homeowners do not have.

As an investor looking for ways to increase yield you may want to consider mortgage backed security mutual funds that have outperformed the equity indices but are seeing recent tougher sledding with rates falling. However, according to MarketWatch.com, while MBS have under-performed Treasuries for the past week many fund managers may be able to cherry pick attractive securities and ride out this temporary cycle.

Over the long-haul mortgage backed security funds have outperformed Treasuries with much of that income coming with government support. If you’re building a fixed income portfolio this may be an asset class you can add as long as you do your homework which includes researching a fund manager that has been through several economic cycles.

This is a specialty fund that may complement your domestic, global and high yield funds you currently own. Make sure you understand all risks before you buy.

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.

That Was The Week That Was –2nd Week September

• China’s CPA jumped at its fastest rate in 2 years. The index gained 3.5% from a year earlier and matches Wall Street analysts targets and pushes the return on deposit, currently 2.25% significantly negative, according to MarketWatch.com.
• Dividends account for 43% of the S&P 500 stock index gains over the past 20-years.
• Remember the 90s when there wasn’t a stock an analyst didn’t like? Today more than 54% of ratings in U.S., U.K. Japan and Brazil are holds. This is the highest level since Bloomberg began tracking the data in 1997.
• There’s a new insurance people can buy –WedLock, a new type of casualty insurance that gives the unhappily married policyholder a payout after he or she is unhitched. The cost is $16 a month for each $1,250 of coverage. According to the firm some of their customers are spending more than $1,000 a month for the coverage.
• Markets fell Tuesday as the excuse du jour was the weakness in European banks. Rising yen and worries about undercapitalized banks in Europe took their toll.
• What stocks work well in deflationary times? According to Ned Davis Research, a quantitative research firm, large cap stocks with low debt/equity ratios seem to work best. Small caps lag the large caps by about 13%. Consumer staples and health care seem to be the sectors best suited.
• The Fed survey, called the Beige Book, Wednesday called the economy cooling and the U.S recovery slowing. Traders ignored the news because on the other side of the coin Portugal bonds were sold and THAT made US feel better. Go figure. Market was up as was oil and gold.
• Not with anyone’s money am I thinking of gold at these levels. One wrong trade and someone can be underwater for months.
• The Fed, according to Chris Reed at Reuters, is expected to raise rate by .75% from an initially expected 1.25% in the 4th quarter of 2011.
• Burning books, any books, unless its a truckload of Suze Orman vintage prose, shouldn’t be allowed. I am wondering if any of this would be happening if initially the press and internet simply ignored him.
• Corporate blue chips are borrowing by the bushel basket and investors cannot get enough even at the low rates being offered. Last week HP and Home Depot issued $33 billion at less than 4%. Patrick Spoor at American Beacon Advisors said, ‘Investors definitely have more money than companies need.’
• Okay, better jobs report. You think? Not so fast, HR. Barrons.com provided a bit more insight. All the employment gains were part-time. Full time employment, according to Household Survey, plunged 254,000. Those working part-time had no choice. Of the 67,000 rise in private-sector jobs, 10,000 reflected returning construction workers who had been on strike. (I don’t get it either).
• Thursday markets finished up with oil and gold off. Dow closed way off its highs. Bears seem to be gathering.
• MarketWatch reported banks slowly closing down their proprietary trading. This accounts for 15% of profit.
• Michael Kahn, technical analyst for Barrons.com, bearish both technically and fundamentally, at least for several months. (Until the window- dressing ‘bonus’ months!). Kahn reports in his 9/9 column that the bulls miss public participation in the market. Still room for gold and Treasuries.
• The week ended with all indices positive with gold pulling back off its highs. The President clarified his reach across the aisle on tax cuts stating he wanted the tax benefits for the middle-class and eliminate any tax savings for the wealthy.
• For those that loved the 90s and looking for the next Bull market leading sector Barrons.com reported on all rallies since 1974 and examined the 10 leading sectors. And, the consensus is….foreign company stocks, especially those investments concentrating in emerging markets.
• CNBC reported on the Byron Wien annual summer conference with high net individuals, which included more than 10 billionaires at this year’s meeting. The purpose of the get-together is to get an idea where the wealthy think the economy is going and exchange investment ideas. The consensus in 2010 is the really rich are just as pessimistic as you and I. Real change, they feel, is months maybe years away. No one, according to the report, had a super investment idea to share, sell or buy.
• From the Department of Just Plain Silly: A Diamond (like in jewel) ETF is on the drawing board and available soon.
• Bank #119 in Florida closed by the FDIC Friday.

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

Life Insurance Premium Games

If you bought a life insurance policy in the 1980s you very well may have bought a Universal Life policy. The agent, in all good intentions, probably told you that it had flexible premiums, a death benefit that could increase or decrease and it was the last policy you would ever need. It was term and savings with premiums that you could modify depending on your financial condition. You may have thought it was swell.

Back in the 80s interest rates were high. Money market  funds were paying 8% and  everyone thought that rates could only go higher. What happened was just the opposite. Today money markets earn nothing and we hope to see 1% sometime late in 2011. People are not upgrading or buying more insurance but keeping what they have and counting on it as their only death benefit. Life insurance sales are down.

The original whole life cash value (old fashioned as a buggy whip) insurance policy had a fixed premium, a guaranteed cash value and the possibility of varying interest earned on the cash value. The important thing is that both the cash and the premiums were fixed and once the policy was issued nothing could change that unless the policyholder cash surrendered or the owner did not pay premiums on the policy. It was a policy that was fundamentally solid like a rock.

The Universal Life contact was and is not like that. In fact the cash value could and would be used to pay premiums if the insurance company did not earn a certain rate of return. In addition the premiums could be increased by the company if the cash did not make up the difference. This small print provision was passed onto policyholders who only believed that rates would stay the same and interest rates had only one route to go and that was up. Few people thought that rates would fall as far as they have.

Recently an 80-some year old client called and told me that a policy he bought back in the 1980s just doubled in premium and could theoretically double in premium again. What, he asked, could he do? He could barely afford the original premium let alone the increase.

Unfortunately my friend and client is not of the age and health he once was and so buying a new policy is out of the question. I told him if he needed insurance he could call the company and reduce the face amount which would reduce the premium. It would not, however, stop the company from raising rates on the policy in the future. He could also cancel the policy or use whatever cash was in the policy to buy a paid up contract. This last suggestion would only net him only a few hundred dollars of paid insurance.

The lesson I am passing on is that if you bought a life insurance policy in the 1980s it wouldn’t be a bad idea to get the policy out and see what type of a policy it is. If it is a Universal Life check the premium schedule and see what the maximum the company can increase your premiums. You may already be getting charged a higher rate and the future may hold even higher costs. The older you get the less the chance of buying a new policy, or at a price you can afford if you want to get a stable premium.

If you still have a need for life insurance there may be time to do some planning on costs and benefits. Call me if you have questions. Don’t wait for the insurance company to force you to do something.

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

 

 

Investment Risk –What Matters What Doesn’t

 We live in interesting times. John F. Kennedy said and the origins are believed to be a Scottish curse. (Some say it’s  Chinese but I prefer Scottish). But, it’s true, these are interesting times. If we could only kick back, slip on the headphones and chill while all the weird stuff happens around and about us without really having it impacting our lives most of us would be happy and slightly entertained. The problem is that we’re all in this whether we like it or not. 

Today it’s all about uncertainty. It probably always was only we didn’t think too much about it.

When most of us started investing we didn’t expect that we’d be responsible for our own future. We thought we’d be supported by the company store like our parents and grandparents before us. We also figured the few bucks we salted away would be enough to put the cherry on the retirement sundae and let us take a cruise, a few extra trips to Vegas or summers at a cottage by a lake. No one explained that this was going to be life and death, eat or starve. Interesting times.

For better or worse we’re here and need to understand stuff. Let’s make one thing clear, no matter where you put your money it all has risk. Bury it in the backyard or at the neighborhood bank and you have inflation risk and loss of future purchasing power risk.

If you take a step up and buy a certificate of deposit or fixed annuity you have interest rate risk. The possibility of interest rates increasing while you’re locked into a lower rate.

You have company stock risk; owning too much of one company. There is equity risk, dividend risk (the loss or decrease, hello, BP?, Ford Motor?), allocation risk, portfolio risk, inflation risk, political risk, tax risk, currency risk, foreign risk and the grand daddy of them all- domestic economic risk.

In the old days investors only had a few risks they had to be concerned about but things have changed. Today an investor cannot buy a stock, fund, bond or exchange traded fund without knowing or unknowingly accepting a bushel basket of risk. It’s like ordering a steak, and you want the steak, but it comes on the plate with all the trimmings. You didn’t order the mushroom cap, the frizzy fried onion ring and that leaf of parsley that you don’t care to imagine where it’s been. You wanted steak but you got it all.

Today, as an investor,we have Greece risk, or the worries about countries we do little or no business with defaulting on their debt and that would impact countries we do do business with that would crush our global economy stocks. There is currency risk. Yesterday, unless you were traveling to Canada or Mexico for dinner, few of us worried about currency risk. Now we’re all talking the talk about the euro versus the yen and should we short one or go long the other and most of us don’t know what the hell we’re talking about even if someone explained it to us using a laser pointer and overheads.

We have BP risk and the possibility of a completely changing landscape and lifestyle for generations down south. No one knows what the oil spill will do and it’s a real concern and new risk that will impact investments that hold oil and oil service company stocks.  And, let’s not forget real estate, tourism, agriculture. Then you have possible defaults on city and state bonds along with highway, hospitals and schools. The list goes on.

Loads of investors are still sitting on the sidelines and licking their wounds and refusing to come back to the market until the canary doesn’t keel over. Of course by that time the markets will be where they were before the crash and all those folks will still be underwater and wondering what to do to catch up.

The investors who stuck it out and are 30% below their portfolio high are frustrated that they don’t have as much as they did 2 years ago and want it back as soon as possible. The markets are toying with them, going up one day and two steps back the next. It’s ugly, frustrating and a learning lesson.  There is something called the VIX along with consumer sentiment risk.

There is also frustration risk that creates desperate investors. The thinking is that there is someone somewhere making money and they, as investors,  should be there and not here.

The bottom line is that investing is fraught with risk. No matter where you save your money you will have short term volatility and risk. It always was and will always be.

In order to get through this without finding  yourself fitted for a canvas coat with long sleeves that wrap around and tie in the back start thinking the way professional investors think –unemotionally. One idea is to buy quality bonds with short maturities or put more money into dividend paying stocks simply to park money and get paid to wait this mess out. You can always go to cash but the problem is, as many have found, when to come back to the market and where. Plus, having money in cash earns you nothing. Most people with large cash holdings are no happier then those folks with stocks, bonds or mutual funds. In many cases less so.

If risk, of any kind is unappealing, I have no idea what you can do with your money except spend it all. In this very imperfect world there is no perfect answer.

If you have questions call Paul at 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 September

•   August ended as the worst August for the stock market since 2001.
• Markets started the day last Monday off and never did get traction. European and Asian markets finished generally higher but never convinced the cousins.  It was drip, drip, drip all day until the close when someone opened the tap and the markets flushed 140 points. Late in the day the  Nasdaq broke the 50 and 200 day moving average technically predicting a lower day ahead.
• 3M, along with other major cash rich corporations, is on an accelerated acquisition hunt. With over $3 billion in cash the company bid for Cogent a fingerprint recognition tech company. A spokesman for 3M said acquisitions by major corporations in the 4th quarter are going to be phenomenally active. (Companies do not acquire knowing the economy will be miserable far into the future. They are taking advantage of a rare buying opportunity).
• Hello, health problem? Taking meds? New jewelry is going high tech linking your med information either to a flash drive, which you can carry, or very nice high end jewelry. Of course there is the MedicAlert bracelet but now companies such as MedInfoChip sell a flash drive one can carry. Another company called Invisible Bracelet allows members to upload information and simply carry a fob or card like your grocery discount plastic you can carry in your wallet or key chain. Not a bad idea.
• It isn’t all bad news out there. Mark Hulbert reports that corporate insiders have cut back on the amount of shares their selling and picked up the pace on buying their company stock. The sell to buy ratio is now exceedingly bullish. In fact, Hulbert writes, you have to go back to April 3, 2009 to find a more bullish period. Of course insiders can be wrong but over the last several decades they have been more right then wrong.
• Home-prices increased for the 3rd straight month but not all areas of the country shared in the boost. The biggest gain was the San Francisco area with a 22% increase.
• Not all banks are healthy reports the FDIC. Over 800 banks are ailing but not to the point of being shut down.  Tuesday markets ended mixed. Oil fell.
• BOND POTENTIAL BUBBLE NEWS: How much is too much? According to the latest data investors have poured about $550 billion into U.S. bond mutual funds and ETFs. So when does it become a bubble? Looking back to the last bubble and counting from Fed Chairman Greenspan’s warning about ‘irrational exuberance’  to the peak of the NASDAQ there was over a trillion dollars flowed into equities before the ‘pop’. Gives us room. If there does become a bubble remember the Japan bond bubble lasted 20-years.  
• Burger King puts itself up for sale. Poor sales during the financial crisis have caused the firm to seek a buyer. Unlike McDonalds which has seen sales increase by over 4% BG has seen sales decrease over the same period by close to 3%.  (But isn’t a Whopper a better burger?)
• Wednesday stocks soared on obscure news. Traders now latching onto any bit that they claim suggests a strong recovery. Investors dumped Treasuries and snapped up commodities and other risky assets, according to Thursday’s WSJ. The gains were the biggest in 2 months and marked the strongest start to September since 1998. Boola!  According to Anthony Chan, chief economist at JP Morgan Private Wealth Management, ‘Investor sentiment was so negative that any flicker of light was going to move sentiment with quit a roar, and that’s what we got.’ Tony is telling us not to be spending this rally.
  • Old news – GM IPO reportedly to price on November 16th and for a November 18th public debut.
• The coming app bubble? According to Cody Willard, who write The Cody Word, its a coming. In less then a decade from now over one billion people will be using smart phones with apps. Smart phones are going mainstream and with it the app business. The key is to figure out how to invest in the new commerce. According to Cody the potential for apps is going to change how we consume telephone, video and social networking services.  Stay tuned.
• The above pic from MarketWatch and the Mark Hulbert piece on numbers that make September a cruel month for investors. Over the past 110 years, Hulbert reports, September has produced an average loss of 2.7% whenever the stock market has lost ground in August. 110 years!!! But, so far so good as Thursday was a good day all indices up including oil and gold. 
• American companies, according to JP Morgan Chase, are sitting on $1.05 trillion of cash-$3.2 trillion if you include banks. Which means that they have the means to hire and spend.  As the chart below illustrates that’s not the case.

• Unemployment holding steady at 10% and no one it seems can reduce it. Pundits on the right blame the government and others say it is the high level of productivity being squeezed out of today’s workers. The answer is probably in the middle, as always. Fear of health care costs and higher taxes are looming over small to medium size business owners while large corporations are minting profits with increased worker productivity. Until this is solved expect the recovery to slowly grind on.

• Finally, the week ended upbeat with over 100 on the Dow as the markets took back 1/2 of August losses. There still is, according to Michael Kahn at Barrons, an exodus from equities to bonds as the above chart shows a trend line that continues to go lower. Unless the bulls can mount a sustained advance with significant inflows, writes Kahn in his technical column, there is no reason to think about a new bull market. And don’t expect yields to perk up anytime soon. Kevin Daly at Aberdeen Asset Managers in London said, ‘…with US growth indicators softening and the Fed likely to be on hold throughout 2011, U.S. Treasury yields are unlikely to climb anytime soon.’

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.

 

Poo-Poo The Price Earnings Ratio

Value investors have traditional viewed the P/E ratio as an integral part of their stocks analysis. Now, according to a recent WSJ article, investors are shying away from using P/E ratios only because of the future uncertainty of company profits.

According to WSJ write Ben Levisohn, three months ago analysts expected companies in the S&P 500 index to boost profits by 18% in 2011. Today they predict an increase of 15%. Mutual fund, hedge fund and other money managers put the increase closer to 9%, according to a recent Citigroup survey while others put it around 7%.

Howard Silverblatt, an index analyst at S&P said, ‘ The  sustainability of earnings is in doubt.’ This is an attitude that seems to be universal in the investment management world. Fund managers and others are hesitant to put money to work if the future is murky.

P/E ratios dropped during the inflationary 1970s and fell during the deflationary 1930s. The two things those eras had in common was unpredictable economic performance.

So what is a P/E ratio? It is simply a measure of the price paid for a stock (or the current trading price) relative to the annual net income or profit. If the P/E is high that means the price of the stock is expensive in relationship to the profit it earns. A reasonable P/E for the S&P 500 index is 14.  Currently the S&P index P/E is 13.

How does that match up with history? The historical S&P Price/Earnings over the past 15 years has ranged between 11-28 times. The current P/E makes it a compelling number signaling the market is not expensive. The P/E is actually at 1970s levels while interest rates are at 1930s levels. Even inflation is negligible.

This would make a persuasive case for stocks if it were not for jobs, government uncertainty and housing. Until one or all are clarified and investors see easing the markets will continue to trade in their narrow range even with the current attractive price to earnings ratios.

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.

Revisiting Benjamin Graham

The founder of financial analysis, Benjamin Graham, published his book, ‘The Intelligent Investor,’ in May, 1949. His disciples include Warren Buffett and Jason Zweig as two people most recognizable to the average investor. In fact Buffett worked for Graham until Graham retired and Buffett set off on his own. Their working relationship was stormy as Graham and Buffett differed on the finer points of investing. Graham demanded an extremely wide moat before he purchased a stock while Buffett believed the firm was losing out to some potentially valuable purchases by being so stringent. Graham was a true  value investor and if he were around today he’d be happy-happy at what was happening in the markets.

In the depths of the 1974 market crash Graham gave a speech where he predicted that it would be many years  in which stock prices languished. He surprised his audience by saying this was a good thing.  He explained it allowed investors time to accumulate and take advantage of a long bear market.

It was from Mr. Graham that buy and hold became a mantra carried on by Warren Buffett who then expressed it as buy right and hold forever. Graham was a student of literature, mathematics and philosophy and viewed investing from a standpoint of eternity and not day- to -day. His philosophy can be read even today as The Intelligent Investor is still in print and can be purchased on Amazon or at any leading bookstore. This is over 60 years in print, a remarkable length of time for a book that does not entertain or titillate.

This value investor approach should appeal to some of my clients as many companies are trading at low price to earning multiples, pay solid dividends and have strong balance sheets. With huge discounts, dividends that exceed the 30 year bond yield we can buy quality cheap, hold and get paid for the wait. Graham was also a devotee of dividends and thought that public companies should pay their shareholders part of the profits.

The most important lesson Graham passes on is the one investment method in which many ‘modern’ traders and investors scoff. It is called dollar-cost averaging. This simple but basic tool that evens the playing field for the small investor takes the guesswork out of money management. This method of buying systematically, a set amount on a regular basis, takes advantage of long Bear markets. The problem, as many of us have learned, is the courage it takes to continue to buy into a market that gobbles up value. Those that have and did were and will be handsomely rewarded.

But Graham had reservations that all investor could stomach the fluctuations of the market and take advantage of them by consistent buying into a falling market. Graham said, ‘…the dollar-cost averaging investor must be a different sort of person from the rest of us…not subject to the alternations of exhilaration and deep gloom that have accompanied the gyrations of the stock market for generations past.’ 

We do not have to be a Benjamin Graham or Warren Buffett to build a portfolio that will provide income and comfort for us and our family. All we need is the courage  to believe in that success. In the depths of gloom that often is the hardest thing of all.

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.