MONEY MATTERS, ETC.
May 2009
Investing in the Stock Market
By Otto Frank
It was obvious shortly after retiring that pension and Social Security payments were inadequate for maintaining an adequate lifestyle.
It became necessary to acquaint myself with the workings of the stock market to develop an additional source of income.
After reading a multitude of financial tracts, It seems that it doesn’t seem to matter much what instruments one invests in; over the long haul results will not differ greatly.
Sheer luck or gross stupidity are the principal reasons for results deviating appreciably from major indices.
This raises the obvious question: Is it possible to out-index the S&P 500?
The writer notes-- Referring to a recent FORBES article on Index Funds (April 27, 2009) --that a number of equity specialists have claimed that a value tilted index fund
(using secret formulations of revenue, cash flow, dividends and book value) will beat a plain index fund.
Such programs have been licensed to a number of well known brokerage firms, but in the less than five year they have been in existents these so-called “fundamental research funds”
have not demonstrated that they can outperform a vanilla index fund based on the benchmark S&P 500.
As a matter of fact, for the few years they have done considerably worse.
In the same magazine, another columnist pretty well summarizes investor fallacies which have made professional stock pickers rich and the individual stock picker poor.
- “Send us some money and we will share with you a foolproof system for beating the market “(why give a good system away?).
- The Heisenberg Unpleasantness Principle: Observing a market pattern makes it stop. Market-beating recipes don’t last.
As soon as a pattern gets noticed, the general public will equalize the outcome.
- It has been argued that value stocks will beat growth stocks (Total returns) since most investors are basically conservative. So sell Google and buy Gannett.
- When the famous market-beating impulse formula made famous by VALUE LINE was put to the test
by a fund based on this system, the outcome relative to the indices was disappointing.
- There have been very few funds which have consistently beaten the markets, and those only by a very small margin (with a great deal of computational effort).
Can we do any better creating our own fund by buying individual bonds and stocks, than a commercial fund which is indexed against the S&P 500, or any of the other indices?
There are certainly enough readily accessible resources available to permit such an effort. But how reliable or useful is this plethora of available information?
The Answer: Not very much since most of such information is either confusing, or outdated.
Look at the variation of ratings by research organizations of two companies picked at random.
Variation of Ratings by Research Organizations
| OCCIDENTAL PETROLEUM (OXY) |
COSTCO (COST) |
| Research Org. | Rating |
Research Org. | Rating |
| Ativo Research | outperform | Thomson Financial | hold |
| Bank of America | under-perform | Zacks | hold |
| Ford | hold | Ford | hold |
| Standard & Poor | hold | Channel Trends | outperform |
<
| Market Edge | buy | Standard & Poor | hold |
| Thomas White | hold | Columbine | under-perform |
| Columbine | outperform | Market Edge | buy |
| | Ativo Research | sell |
Looking at more detailed analyses, such as are provided by financial research organization or investment guides, the picture becomes no clearer.
The evaluations by Ativo Research of the above two companies provides only a minimally improved understanding of how they arrived at their recommendations.
Evalutions by Ativo Research
| Company |
OXY |
COST |
| Recommendation |
"Buy" |
"Sell" |
| Expected Shareholder Rtn |
Most Favorable |
Average |
| PE to Expected Growth Ratio |
Most Favorable |
Average |
| Price Momentum |
Average |
Average |
| Qualitative Analysis |
Average |
Average |
| Sales Growth |
Unfavorable |
Average |
| Earnings Surprise |
Favorable |
Average |
| ROI Trend |
Average |
Average |
The information and interpretation you receive via normal channels (e.g. publications or the internet), are already outdated by the time they are received.
To be in possession of the latest information requires a constant face to face contact with your computer,
telephone communication with people intimately involved in a targeted industry, or (illegal) insider information.
And then, maybe, you could have a tiny edge (or not).
So, Let me restate my earlier conclusion. If you are a neophyte investor, or don’t want (or have the time) to do the heavy lifting required to assemble a personal investment fund,
purchase a low expense index fund directly from the issuing company.
And stay away from investment clubs.
For those who are willing to keep up with key industries on a full time basis, it is generally recommended that they buy at least 30 different, well diversified companies to make up their personal fund.
That will give them the assurance that the performance of their fund will at least stay within an acceptable range of the S&P 500 index.
To help improve on such results, I have assembled the stock of several companies that are expected to beat the Dow by at least 7 %.
(Note that 87.4% of all statistics are made up on the spot).
Some Stocks To Consider
| Company |
Industry |
| Chevron (CVX) |
Petroleum |
| Encana (ECA) |
Natural Gas |
| Sanofi-Aventis (SNY) |
Drugs |
| Diageo (DEO) |
Liquor |
| Paychex (PAYX) |
Check Cashing |
| Ormat (ORA) |
Geothermal Energy |
| International Paper (IP) |
Paper Products |
| Mettler-Toledo (MTD) |
Scales |
| Nestle (NSRGY) |
Consumer Staples |
| Exelon (EXC) |
Electricity |
| Spectra (SE) |
Pipelines |
| National Retail Properties (NNN) |
Real Estate |
GOOD LUCK !
Editor's Note: This article was prepared by H/AREA Member Otto Frank who is expressing his Personal Views on Investing in the Stock Market.
Disclaimer:
It should be noted that H/AREA makes this information known as a Service to its Home Page Viewers.
H/AREA does not recommend or endorse any of these Stocks listed in this article.
H/AREA has no financial interest and has no business relationship with any of the Research Firms listed in this article.
March 2009
With our economic picture being so bleak, volatile and unpredictable, I hesitate to write about it, knowing this won’t appear in print for another month. Nevertheless, despite my lack of credentials, I will continue to offer my commentaries as they can’t be any worse than the analysis and advice given us by the financial gurus prior to the beginning of the downturn starting in 2008. In assessing where our country (and each one of us) stands with respect to the economy, it is important to distinguish between the federal deficit and the national debt. The federal deficit is how much deeper we go into debt each year as reflected in the annual Federal Budget. The national debt is the grand total of all of our annual deficits and it is the amount upon which the U.S. pays interest each year. The interest is a significant and growing part of our annual budget. I had trouble reconciling some of the numbers from the Congressional Budget Office with those from the White House Office of Management and Budget (see The Star Ledger, Feb. 27, page 2) but in round numbers I concluded that the Obama administration’s forecast is as follows: From 2009 to 2012 the Federal deficit will be cut in half and the National debt will be almost doubled The foregoing sentence should be read again and noted. I have seen that currently each individual’s share of the national debt is anywhere from $35,000 to $50,000, depending upon where I read it. I applaud Obama for taking decisive action by challenging the congress to address these horrendous numbers and to face the upcoming Social Security and Medicare collapse as well. It’s comical that the Republicans face a moral dilemma in this situation. Whereas the Democrats hope that the Obama Stimulus Package is a great success, the Republicans hope the country recovers from the economic downturn, but if it does, they don’t want the stimulus package to get credit for it. If the recovery goes awry, both the administration and the approach will change and the shoe will be on the other foot and it will become a case of less government instead of more government. For decades our congress has tuned a blind eye to the national debt. It seems to me that sooner or later the U.S. will max out its credit card when China and others will refuse to lend us any more money. That will happen when our creditors’ fear, that the U.S. has become a sub-prime borrower, will exceed their concerns about losing the largest market for their goods. The national debt is a classic bubble in which all of us are involved and we will have to pay the piper sooner or later. Unfortunately, I don’t believe that career politicians who wish to stay in office will ever take the necessary steps to even start paying down the national debt. So, instead of incurring more pain now, the bubble will burst some day. I would love to receive constructive comments about this from our readers. No partisan finger pointing, please. We may or may not print it.
- Money which had been parked in Money Market funds since before Sept. 19, 2008 is protected by a government guarantee program until April 30, 2009. When this column was written, that date had not been extended by the Secretary of the Treasury.
- Timing has such major impact on our lives, yet, in most cases, we have no control over it. My heart goes out to the families, who bought expensive homes several years ago and have seen their equity wiped out, have seen their 401(k) halved and now are being laid off.
- The old maxim, “Buy and Hold”, seems to have lost some of its cachet, think GM and GE. The more preferred terms are now “Balance” and “Safe”. This week the “in” investments are groceries, health care, infrastructure and energy.
Lew Bohn
LewBohn@optonline.net
AREA CONTACT POINT
Honeywell/AlliedSignal Retired Employees Association
P.O. Box 2245
Morristown, NJ 07962-2245
Fax (973) 455-3632
January 2009
- Someone, I think it was Barry Goldwater, said something like, “a million dollars here and a million dollars there and soon you’re talking real money”. My, how times have changed! Today we are talking trillions! Yes, trillions. That’s one million times greater than what Barry Goldwater was talking about. I can get my mind around a million dollars, but one billion dollars is my limit. One trillion dollars is unimaginable. For 6 or 7 trillion dollars we could give one thousand dollars to every man, woman and child on the face of the earth. Now that I think about it, maybe that’s a good idea. Just think how that would boost all of the world’s economies. All we have to do is to add it to everything else we’re putting on the taxpayers’ credit card.
I was raised with the concept that “there is no such thing as a free lunch”. If you couple that with my athletic friends’ credo, “no pain, no gain” you come up with, “someone will have to pay the piper”. My greatest fear is that the payer will be my grandchildren. According to the WSJ, a highly regarded Russian Professor, Igor Panann, is on all of the Russian talk shows, making speeches and appearing before prestigious governmental agencies and think tanks forecasting that the U.S. will collapse and disintegrate in the year 2010. I doubt that, but I do think we’re living in an “emperor has no clothes” world. Our politicians have found the secret to getting reelected is to promise to spend less and tax less, all the while both they and we know that they will spend more. It’s sort of like, “don’t ask, don’t tell”. I see no way out of federal debt other than a roaring inflation in a couple of years enabling the government to pay off the debt with cheap dollars. On that somber note let’s hope that Little Orphan Annie was right, “the sun will come up tomorrow”.
- Financial advisors, analysts and commentators will continue to do what they do even if almost all of it in 2008 was wrong. It’s what they do for a living. It is ironic that financial disclosures have revealed that many of the advisors didn’t follow their own advice. Even so, they lost as much as their clients did. The fourth quarter collapse has overturned so many guidelines, principles and shibboleths that it is hard to set a safe, profitable course. One writer, James Rohrbach, observed that if he had bought an S&P 500 index fund back in 1997, he would now be back exactly where he started from. The website, Marketwatch, headlined his article “Buy and Hold is Dead”. Rohrbach recommends a “trend-following strategy”. It’s really a market timing strategy, but, of course, he can’t use those words as conventional wisdom says that’s a loser’s game. He recommends buying some kind of a market index fund. When it is trending down, sell it. Don’t lose more than 10%. He uses a 30 day moving average to determine a trend. When the trend is up, buy it. Of course you are likely to catch one of those one or two day periods of major declines or you may miss those one or two day periods of major advances which inevitably occur.
- You see a lot about LIBOR. This is the overnight London Interbank offered rate. It is the rate banks charge each other. The lower it is, the more easily banks lend to each other. If it’s high, the banks think lending is risky. When it trends down, the credit crisis may be coming to an end.
- It certainly was reassuring to learn on Dec. 8, 2008 that the Honeywell pension plan was in good shape on Dec. 31, 2007. I guess next December we’ll learn how it’s doing now.
- If you are considering buying bonds, there’s a great website which will tell you all you want to know. It’s Finra.org. Enter what bond rating you want, what term, what interest rate and it will list the bonds which meet your criteria.
- If you converted your IRA to a Roth IRA in 2008 and now owe a bundle of taxes and if your Roth portfolio has plummeted, you can get a “do over” by putting your Roth IRA back into your regular IRA and not owe any taxes. The deadline for doing this is Oct. 15, 2009.
- Hopefully the new administration will improve our ridiculous tax code. The AMT exemption for 2008 is $69,500 for married taxpayers filing jointly (MTFJ) and $46,200 for singles (S) In 2009 it drops to $45,000 for MTFJ and $33,750 for S. I’m sure they will change that. The tax free distribution of IRAs to charities has been extended to 2009 for those over 70½. A new property tax standard deduction of $1000 for MTFJ and $500 for S for those who don’t itemize has been extended to 2009. There are changes to the dividend and capital gains taxes depending on the year taken and your tax bracket. In 2008 the estate tax exemption is $2 million, in 2009 it is $3.5 million. The gift tax exclusion is $12,000 in 2008 and $13,000 in 2009. Tax planning has become difficult because of the complexity and changeability in the tax laws. It goes on and on. Be sure to prepare your returns carefully.
Lew Bohn
LewBohn@optonline.net
November 2008
- Caveat: This was written a month before you received the NEWSLETTER. Every financial expert in the country is now offering advice on what you should do to recoup your losses. Where were they a year ago when the market peaked? Think how helpful it would have been if they had urged us last year to cash out somewhat to preserve gains. One item in the WSJ noted that if, starting 10 years ago, you had started putting $ 100 a month under your mattress, you would be better off than if you had put the same money in any number of mutual funds. As I write this, most gurus believe it will be years before we exceed the highs of Oct. 2007. Housing prices are down 17%. Stock market volatility is at an all time high. Consumer confidence is abysmal. Secretary of the Treasury Paulson is being castigated on every side for being in Wall Street’s pocket, a place to which he will probably return in January upon Obama’s inauguration. Many believe that the government’s intervention in the financial marketplace is a Band-Aid to the credit sector (and maybe the industrial sector, e.g. GM.) and result in a protracted recovery. Many economists say that history tells us that without government intervention the crash would have been more severe but the recovery would have been much quicker. As it is, many of those responsible for the crash are still in place but, at least, many innocents have retained their jobs.
- For those over 65 who use bridges over the Delaware River, there is an EZ Pass discount program. For info call (856) 968 3347 or 3348.
- If you send in a rebate form for a significant amount, e.g. $25, it is worth it to send it by certified mail. Mark the time it is due on your calendar.
- To Roth or not to Roth? That is the question. As you know, the fundamental difference between a Roth IRA and a traditional IRA is that the money you put into a traditional IRA is tax deferred, i.e. money on which you have not paid income taxes. When you pull it out, the full amount is considered income and you pay your full income tax on it, whether or not some of the increase in value results from capital gains. On the other hand, money which is put into a Roth IRA is money on which you have already paid income taxes. When you pull it out, it is completely federal tax free. If you do the math and everything else is equal (which it never is, see below) it doesn’t make any difference which IRA you choose.
Consider these possible differences:
- If you are now in a higher tax bracket than you expect to be when you withdraw it, you’re better off with a traditional IRA, but if you expect income taxes and inflation to increase so that you will be paying at a higher rate you’re better off with a Roth.
- If you don’t want your heirs to have to pay taxes, a Roth is better.
- If you want your money to ride and not be faced with a Required Minimum Distribution when you be come 70 ½ , a Roth is for you.
- If your adjusted gross income exceeds $100,000, you can’t convert a traditional IRA to a Roth IRA until the year 2010.
- If you are retired and over 55, you can switch your 401(k) to a Roth after paying taxes on the amount.
- The funds withdrawn from a Roth will not be included in the calculation of how much of your Social Security is taxable.
If you’re serious about a Roth conversion, consult a professional.
- If your portfolio consists of CD’s, money market, mutual funds, stocks and bonds and if part of your portfolio is in a traditional IRA and the remainder in a taxable brokerage account, it is better to have your growth investments, i.e. stocks and mutual funds, in the taxable account so that you can take advantage of the capital gains tax (now 15%) which is lower than your income tax rate.
- If your broker crashes, $500,000 of your securities and $100,000 of your cash are safe if he is a member of the Securities Investor Protection Corp. (SIPC). Almost all brokers are. To check if your broker is covered, call SIPC at (202) 371 8300 to find out.
- A huge problem that neither McCain nor Obama, nor any other candidate or politician has addressed fully is the potential Social Security collapse, In the next two decades more than 80 million baby boomers will retire. The estimated liability for SS is $74 trillion. If nothing is changed, in less than 10 years payments will exceed revenues and by 2041 SS will be completely broke. Medicare is in much worse shape and this will become evident much sooner. No problem for me but it is for my grandchildren.
- On Sept. 19 the U.S. Treasury put into place a new guarantee for those money market mutual funds which were in place before Sept. 19. New money will not be insured. Bank money market funds were already protected by the FDIC. There is a charge to the mutual funds for this insurance which may diminish your interest slightly. This Temporary Guarantee Program expires in December but can be extended to 2009 if needed.
- NYC’s mayor Bloomberg, a smart investor, feels the stock market will spike in the short run as the credit crisis comes under control. In the long run, however, i.e. for the next several years, he believes the economy will worsen caused by higher unemployment, lower consumer spending, higher taxes, falling consumer confidence and general world-wide belt tightening. He believes market timers should buy now and sell in the spring. Note well that conventional wisdom says that most market timers wind up as losers.
- If you give money to your church or temple a Charitable Rollover may be just the thing for you. It can save you significant money or enable you to give more. You must have an IRA, be over 70 ½ and you can do it only in 2008 and 2009. (It may be extended, but I doubt it.) A check must be sent by your IRA administrator directly to the qualified non-profit entity. There are no tax consequences. This costs you much less than making an IRA withdrawal, paying taxes on the withdrawal and then sending in the money. If you are in the 25% bracket and don’t itemize your deductions, this saves a lot. (You can increase your gift by 33% at no cost to you.) It you itemize, the savings are less but still makes it worthwhile. To make the best use of this, make your 2009 contribution early in December 2008 as the paper work takes awhile. Then do it again at the end of next year for your 2010 contribution. You have to send a letter of instruction to your IRA administrator and then he has to send a letter, with check, to your charity. See IRS publication 590. Check the details with your broker or tax advisor. Send me 10% of your savings or have prayers said for me, depending upon what you do with your savings.
Lew Bohn
September 2008
- Watching the market’s volatility on CNBC is nerve wracking. One day you’re up and the next day you’re down. Most of the seasoned advisors recommend that you turn off the TV and diversify, rebalance periodically and hold for the long run. When you diversify, you invest in different categories. At any one time, one category may be up and another down. They take turns. If you are in to mutual funds, the most commonly cited categories are: Blue-chip (growth) U.S. stocks, Blue-chip foreign stocks, small companies, value stocks, high-quality bonds, inflation-protected bonds and the money market. Of course you must decide your allocation. Early on, it is recommended you go heavy in to stocks. Later in life you increase the bond side of the ledger. With respect to rebalancing, if one category soars, you become over weighted in that category and should lighten up, investing the gains in one of the lower performing categories. Holding for the long run is trying when you see your portfolio decline 20 or 30 %. If you don’t have the time or the inclination to study the market and you believe the market will go up (as it always has in the past), index funds like the S&P 500 (Fidelity, Vanguard, etc.) reflect what the market is doing and the expense is low. If you are willing to spend a little time, check out the other index funds available, such as Russell 2000, NASDAQ, and the Wilshire 5000. If, for some valid reason, you have a “gut feel” that things look bright for a certain business arena, e.g. health care, industrials, biotechnology, etc , then you can invest in “sector” funds. This past year, natural resources, precious metals and energy sectors have done great. Real estate and financials have collapsed. Who knows which sectors will do well next year? The expenses of sector funds are somewhat higher, but if your judgment is correct, the returns can be outstanding. If you want to have fun by being somewhat speculative and if you have the time to study them, micro cap ($200 million or less) companies can offer a good return. This is an area, for the most part, not addressed by mutual funds as they have too much money to bother with them. One source of good info on very small companies, and I have mentioned this before, is the non-profit American Association of Individual Investors (AAII). Their track record is: 7 out of 10 recommendations do well, 3 out of 10 bomb out. A basket of these stocks consistently does well.
- Is this recession different from all others? At this writing, all is doom and gloom for another 18 months. Will Russia become more aggressive, e.g. forbid NATO defense missiles from being installed in Poland, just 150 miles from the Russian border? Will China keep its currency artificially too low which damages our export markets? With the prime rate so low in the U.S., will China cash in their supply of U.S. bonds? Then there is the election. McCain wants to cut spending which, undoubtedly, will negatively impact a number of desirable social programs. Can he cut enough to balance the budget without increasing taxes? Obama has proposed numerous new social programs which will probably increase our taxes. Our massive national debt is a serious long term threat to our economy and our congress doesn’t have the courage to do anything about it. Social Security and Medicare must be addressed. Are we headed into a depression? Your guess is as good as mine. My diatribes are usually written late at night. That coupled with my financial I.Q. being “average” results in my credibility not being too good. My hindsight has been 100%, however. Nevertheless, I have been fortunate in the past few years by taking a contrarian approach i.e. selling when everything looks great and buying when everything looks awful, like now, for instance. Warren Buffet has often said, “Be fearful when others are greedy and greedy when others are fearful”. I wouldn’t presume to give financial advice in this column (Ed. note – I’ll make sure of that) but I sure would like to hear some opinions on financial topics from my avid readers (Ed. note – both of them).
Lew Bohn
June 2008
For your info, here is a summary of candidates’ positions on taxes
- Bush income tax cuts (top bracket was 40 % for those making $ 350,000 or more, Bush reduced it to 35 %)
- McCain – keep them in place at 35 %
- Obama and Clinton – raise the top rate (indeterminate by how much)
- Capital Gains
- McCain – leave it at 15 %
- Clinton – favors 20 %
- Obama - looking at 25 %
- Federal Estate Taxes - currently fewer than 1% of all estates are subject to estate taxes. Current law has estate taxes expiring in 2010 but none of the contenders favor that.
Current law sets the exemption at $ 3.5 million in 2009.
- McCain - wants to increase the exemption to $ 10 million and decrease the maximum rate from 45 % to 15 %.
- Clinton – favors keeping a $ 3.5 million exemption
- Obama - maintain estate taxes, no specifics
- Corporate Taxes – current law has top rate at 35 %
- McCain – lower top rate to 25 % and go after corporate tax subsidies
- Obama and Clinton – leave top rate where it is and go after loopholes
- FICA - The current law taxes 6.2 % of earnings up to $ 102,000 for Social Security and 1.45 % of all income for Medicare. This whole situation must be addressed and also be tied in to new federal medical plans. This is a major issue with no clear overall plan by anyone.
- You have read here and everywhere else how important it is to maintain a balanced portfolio. This concept stems from the work of Harry Markowitz who won the Nobel Prize for developing modern portfolio theory (MPT) which provides a framework for combining various types of investments in ways that protect you; if one class of investment goes down, another should go up and offset your losses. Dr. Ashvin Chabra , who is the chief investment officer at the Princeton Institute for Advanced Study wrote a paper entitled “Beyond Markowitz” which uses MPT to develop a personal financial plan. It’s worthwhile for you to consider. He states that everybody’s financial goals fall into three categories and you should have a part of your portfolio dedicated to each goal. Goal #1 Avoid poverty – put your money in absolutely safe investments. If you have sufficient income from pension plans, bonds or annuities, Goal #1 is taken care of. Goal #2 Maintain one’s current standard of living. Your investments must return more than the rate of inflation. This is where MPT (balanced portfolio) comes in. Goal #3 Become much wealthier. If you have achieved Goals 1 & 2 and have any money left over, then you can make high-risk, high-return investments. The whole point of the foregoing is to reach these goals in numerical order and not to jeopardize goal #1 or #2 by going after goal #3 first.
- Just think, it wasn’t too many years ago that there were plans to merge Honeywell with GE. These plans were aborted by the European Union. At the time, GE stock was at 34 and Honeywell was at 32. At this writing, GE is at 34 and Honeywell has soared to 61. Dave Cote has done a good job despite foreboding when he came on the job. Rumor had it at the time that he was being positioned to take the fall for Honeywell’s anticipated decline.
- Now is a great time to buy a used car.
- Many retirees (including me) can’t wait until Fed Chairman Ben Bernanke starts attacking inflation by raising the Fed overnight rate which is now 2.0 %. Increasing the Fed rate will increase the return on CD’s, bonds, money market, savings accounts and annuities. For many of us our major expenses are food, energy, health care and taxes, all of which are soaring. For many of us, our retirement income is fixed. This can create a problem.
- You often used to hear that Democrats were the “Tax and Spend” party, whereas the Republicans were the “Less Government and Cut Taxes” party. It now seems that both parties are “Tax, Borrow and Spend” parties. In past columns I forecasted that Mike Bloomberg was going to run as an Independent in the presidential election and that his presence would help restore responsible government, especially in our Congress. I was wrong. I guess that was only wishful thinking.
- I believe my economic life cycle may be a prototype of many of our members. The following numbers are for illustrative purposes only. I started out with expenses of $1000 per month and a salary of $900. Life was tough: credit card debt, no luxuries, small TV, 2nd hand car, etc. Then my salary moved up to $1000. I was break even. I could begin to sleep at night. Then it went to $1100. Vacations were taken, debts paid off and a new car was bought. Life was nice. It was so nice we decided to move up a little. We moved to a nicer town and bought a nicer home. All was great except that now our expenses were $1200 and I was still making $1100. Now the entire cycle started all over again and then again and then again...
- When this column was written (mid May) the market was headed down and I heard one guru on TV say that the rise in March and April was a “suckers rally”. Of course on the same day I heard several gurus say the market was showing signs of strength and had “bottomed out”. I’ll go out on a limb and say I think one of them was right.
Lew Bohn
March 2008
- Stagflation, that dreaded and unlikely combination of slow-to-no economic growth and high inflation, is looming. The fed can fight only one of those conditions at a time. It has chosen to first fight slow growth by lowering the federal funds rate. Everyone knows that will further weaken the dollar and will boost the inflation rate beyond the current (March) 4.4%. Or, as the economists prefer, the “core” inflation rate beyond 2.5 % (January). The “core” doesn’t include food or energy, which are both soaring. Once the economy improves, the Fed will tighten up on interest rates. So what do investors do now? The consensus among gurus appears to be, “Stay the course” or “Rebalance”. A few (but not all) recommend investing in “recession proof” stocks such as consumer staples, utilities and healthcare, i.e. products we must have whether there is a recession or not. Having a major portion of my portfolio in cash since last May, I enjoyed a 5+% return on my money until recently. Now the return is around 3.5% which represents a 30% pay cut. The 3.5% portfolio return is less than the 4.4% inflation rate so, though my portfolio is going up in dollars, its real value is declining. Read that last sentence again, it’s important that you understand it. It’s projected to get worse.
- The “thin reed” philosophy derives its name from the observation one makes when looking at a field or body of water containing reeds. Prior to a storm and before any breeze can be felt, the thin reeds begin to bend, thereby being a harbinger of what is to come. Luxury ladies handbags and other luxury items are considered thin reeds in the financial markets. The price of Coach (mfr. of pricey handbags) stock has gone down 30% since last fall.
- Now might be a good time to purchase that timeshare you have always wanted. Make sure you learn about it before putting any money down. For starters subscribe to TimeSharing Today magazine ($14/yr.) and the Timeshare User’s Group ($15/yr.).
- It’s also a good time to consider refinancing you home if you have a large mortgage. Check it out.
- If you had a bad year in the stock market and are considering suing your broker, consider this – the average suit in 2004 was $ 540,000, only 44% of the plaintiffs won the suit and the average award was $ 59,000 before deducting the legal fees.
- Do you know where the cash goes if you have a “sweep brokerage account”? It could go to a bank at a low interest rate but covered by FDIC insurance. Or it could go to a money market account or into CD’s with higher returns but no protection. Find out and change it if it’s not being handled the way you want it.
- Having a problem with a bank or other financial institution? The Federal Reserve is ready to help you at 888-851-1920 (between 9Am to 7 PM, Mon. to Fri.) where you can talk to a consumer service professional or at Federal Reserve Consumer Help where answers to commonly asked banking questions and links to many consumer protection materials and resources can be found. On the web site is a brochure entitled “How to File a Consumer Complaint About a Bank”.
Lew Bohn
January 2008
- Would you like to have a reverse mortgage and still keep your home in the family? This can be done by setting up a family reverse mortgage. Your children would provide monthly payments, or lump sum, with an agreed upon interest. The interest is important because your children will eventually collect that interest in the form of home equity. Because the money is a loan, not income, the money you receive is tax free. The loan agreement can be made flexible enough to accommodate changing financial fortunes, e.g. your child loses his job. This arrangement is ideal for a vacation home which doesn’t qualify for a reverse mortgage. The agreement should be made known to everybody in the family, even those who are not involved. Your will should reflect the arrangement. This arrangement reduces the size of your estate and estate taxes are reduced. Setting it up is complex and requires a lawyer which can run from $1000 to $3000 but is much cheaper than a commercial reverse mortgage which runs $10,000 and up in fees.
- H/AREA member, Bill Bingham, sent a website which tells you a lot about the people in your zip code; income, house values and lots more. Its zipskinny.com
- Now is a great time to get your house central air conditioned. The prices are 10% to 20% lower than if you wait until spring. If your house has forced-air heat, the contractor can use the existing ducts, otherwise you’ll have to install new duct work.
- I’ve mentioned on-line banks before. They are convenient and pay much higher rates of interest on savings, checking accounts and other instruments. The important thing is to check whether they have FDIC insurance, which can be done by checking FDIC.gov . FDIC insurance is good for $100,000 on single accounts, $100,000 for each member of a joint account and $250,000 for certain types of retirement accounts, including IRAs.
- What does a “weak dollar” mean? It means that the dollar has lost value compared to other currencies. It raises the price of imports (or goods when you are in a foreign country) and lowers the price of American goods in foreign countries. It’s good for exporters but bad for importers. To strengthen the dollar, the Fed can raise interest rates, but this drives the stock market down. Warren Buffet worries about foreign investors pulling out of U.S. Treasuries because of the sinking value of the dollar and this, in turn, would further weaken the dollar driving interest rates higher still. The dollar has fallen 36% since 2002, which makes some economists feel that something is wrong. One noted economist believes that when the value of a dollar begins to go back up that it will signal the beginning of a bear market. What should we small investors do ? I haven’t the faintest idea.
- When you get your next real estate tax bill, I recommend that you appeal it. Go to Zillow.com and see what comparable homes are selling for. You may not get as much reduction as you ask for, but you’ll probably get a reduction. Let me know how you make out.
- If you are getting less than 5% on your money market accounts or funds, CDs or short term bond funds, you should look around. Increasing your return from 4% to 5% is like getting a 25% pay raise.
- If you are looking at moving to a retirement community, here are some ball park figures for you. Spend $175,000 plus $200 or so per month and you will get a 1500 sq.ft. condo and a bare bones clubhouse. For $350,000 and up you will get a townhouse or single family home of about 2800 sq.ft. with a brick exterior. For $600,000 plus $550-$1500 per month you will get luxury living with a spacious and customized house in a community with all the extras. Expect to pay a bit more if on the water, in the mountains or on a golf course. And then there is the $2 million house with $2,000 per month fees.
Lew Bohn
LewBohn@optonline.net
November 2007
- H/AREA member Bill Bingham sent me a fascinating item about auto tires being developed by Michelin. They are airless! No valves, no flats, no repairs, no air compressors, etc. Basically, the wheel has a flat steel rim and the rubber is like a wide flat rubber band on the rim. The secret is in the design of the wheel. The portion next to the axle is a flexible steel lace work. Extended from that are flexible spokes. The rim is flexible. When going over a bump, the assembly flexes just like a conventional tire. It will be several years before we see them.
- H/AREA member Herman van de Vaart tells me some of my statements about Money Markets are incorrect. After reading his e-mail, I don't know which ones. He quotes wikipedia as saying, "Money Market funds, also know as principal stability funds, seek to limit exposures to loss due to credit, market and liquidity risks. Money Market funds are regulated by the U.S. SEC Investment Company Act of 1940. This act restricts investments in Money Market funds by quality, maturity and diversity. Under this act the portfolio must maintain a weighted average maturity of 90 days or less and invest (only) up to 5% in anyone issuer, with the exception of Government and repurchase agreement securities. Eligible Money Market securities include commercial paper, repurchase agreements, shot term bonds or other money funds. Money Market securities must be highly liquid and have a stable value."
- H/AREA member Jim Stevenson is restoring his Craftsman style home on Vancouver Island.
When he removed some of the cedar siding he exposed the original Barrett (one of our ancestor companies ) label still attached to the building paper. He believes his house was built around 1916.
- H/AREA member Chuck Hasen has written a book on the history of Bendix Red Bank Tubes which encompasses the Bendix development of the military vacuum tubes that started Eclipse-Pioneer in Teterboro and ended with the Red Bank Aviation Division in Eatontown, NJ. It is available at audioXpress Old Colony Sound Labs, book BKAA71.. Go to Audioexpress.com
- Debit cards are attractive as they don't add debt to your interest charging credit card, they just take money out of your bank account. There are some drawbacks, however. Banks make a fortune on overdrafts. They let the charges on your debit card go through even if there is not enough money in your bank account so they can charge you an overdraft fee (like $30). If you lose a credit card and don't report it immediately, your loss is limited to $50. With a debit card, its $500. Also, if there's a problem, they already have your money and you must wait for them. Tip: make sure you have overdraft protection on your debit card.
- Miscellaneous comments (not "tips"). There's no question that the "Green" movement will offer many golden opportunities as new Green companies are proliferating. Be careful.- Business Development Companies, (BDC's) lend money to private companies of middling quality at high interest. BDC's must distribute all their net income as dividends. BDC's typically yield 9%. The dollar is sinking and our economy looks questionable, but the overall global economy looks great. - Developing country bonds pay a high yield and some countries are relatively safe.
- Who gets what when you die? An interesting article I read gave the following tips:
1. Make a list of who gets what. (This assumes your heirs will obey your wishes.)
2. Have an assessor put a value on everything else.
3. Put similar dollar items in a group and have heirs draw straws.
4. Have each heir prepare a list of the five things they want most and why.
5. Don't allow in-laws to participate in divvying things up.
6. Don't allow anyone to take anything before the heirs get together.
This brings up the topic of all the things of little value in our home. We have lived in our home for over 40 years and both my wife and I are savers. I save important things and she saves -uh-er-other things. Every time I urge her to start thinning out a little, she comes up with a full trash can of my stuff, which I recover, of course. Why does she think the 3 dial phones, the 78 rpm record player, and an old Apple computer could not be useful some day? Or how about the old Sears Roebuck catalogs, the skis with a strap that goes over your shoes, the four pairs of roller skates that clamp on your shoes and mountains of other things my heirs will enjoy? I must admit, though, it would be nice to be able to put our cars in the garage for a change.
LewBohn
lewbohn@optonline.net
September 2007
- My money market portfolio allows me to sleep at night, but I'm sure, like all market timers, I miss the big run up. When to go back in? Who knows? If the Fed decides to loosen up significantly, say 1% that will cause a huge jump in the market. The Fed is very worried about inflation which is why they haven't done this sooner. For those on fixed incomes, who depend on interest payments and price escalation, lowering the Fed rate is harmful. For those who thrive on capital gains, bigger salaries, or are unemployed and looking for a job, lowering the rate is good.
- Speaking of Money markets - are they safe? They're not insured by the FDIC as are bank deposits, CD's etc. (up to $100,000 per account). Nevertheless they're pretty safe. I thought I saw somewhere that the government requires Money Market funds have at least 95% of their investments in either US government bonds or notes or in top grade commercial bonds or equivalents. To me this means that even if the economy collapsed, you would get back 95 cents on each dollar. But somewhere else I saw that Credit Suisse Money Market has 8% in the sub-prime market (as compared with Fidelity Cash Reserves which has 1.5%). I believe the worst likely case would be for some small Money fund, who had put their 5% into sub-prime mortgages, having to "break the dollar" and offer perhaps 99 cents or 98 cents on the dollar. It would be 'front page news. Most of the funds are still paying around 5%. This would become lower if the Fed rate goes down.
- According to some, there's a tidal change in the market. Gains in the foreseeable future will be increasingly in growth stocks (large corporations with high P/E's and mostly included in the Dow Industrial Index) as opposed to value stocks which have lower P/E's and appear primarily in the NASDAQ. I have noted many times in this column over the last three years that the gurus were predicting that growth stock would once again be the market leaders. Now, they say, this is occurring.
- If you have any beneficiary changes due to marriages, birthS, deaths, etc., make sure you change the beneficiaries on your life insurance and annuities as they supersede anything you say in your will.
- In 1990 there were 600 hedge funds with 39 billion invested in them. Today there are over 9,000 funds with over one trillion invested. These are risky investments.
- Exchange Traded Funds (ETFs) are listed on the AMEX and are proliferating. You can buy a package of stocks on practically anything. If, for example, you believe the price of copper is going up and you don't know which copper company to invest in, just buy an ETF which includes all the major copper companies. You can buy or sell any time during the day. There are no ongoing charges as there are with mutual funds but you pay a brokerage fee every time you buy or sell.
- Speaking of copper, with consumption rapidly expanding in countries like China and India, some think investing in commodities like oil, copper, silver, etc. is a good bet.
- The volatility in the market makes everyone nervous. Supposedly there is a resistance level at 12,600. If the market breaks that barrier, there's no telling how low it can go. There are a number of "the coming disaster" books being published but there always are and most of the times they are wrong. No matter what, the authors generally make a profit on the book sales.
- This comes under the ETC. category. Retiree tennis (singles and/or doubles) players are wanted. The group plays from 7 AM to 8 AM and three hours a week at the Twin Oaks Club in Morris Township (1/4 mile from Honeywell) from September to May. During the summer they play outdoors in community courts. If interested, contact H/AREA member, Dave Zudkevitch, at e-mail dzorin@ao1.com.
LewBohn
lewbohn@optonline.net
June 2007
- An interesting new strategy for obtaining better than market returns appeared in the May issue of Smart Money Magazine. It proposes purchasing the top performing diversified equity funds (domestic or international but not sector funds) in the last 12 months. Hold it for 12 months and then sell it and purchase the new No. 1 fund. If the No. 1 fund is closed, buy No.2. Though performance of top ranking funds tend to tail off, they usually don't fall off a cliff. This was back tested on both Vanguard Funds and Fidelity Funds. It delivered 20 percent average annual returns over 10 years, compared with 13.7 percent for the S&P 500. Morningstar found the strategy worked best with domestic stock funds showing a 23 percent return over 20 years beating the broad market's return of 11. 6 percent.
- To give you an idea where your money goes, in fiscal year 2007, the U.S. Government expects to spend (in round numbers) $24,000 per household. The Government will collect $22,000 in taxes. The taxes include income, Social Security, Medicare, gas (18..4 cents per gallon), etc.. The $2,000 per household deficit will add to the current 8 trillion dollar debt. The big ticket items in decreasing order (expressed in dollars per household) are: $8,300 for Social Security and Medicare, $5,000 for defense, $3,500 for antipoverty programs, $2,100 for interest on the debt and $907 for federal employees
(including military) pensions. Note: If interest rates rise, so will the debt payments. Also, antipoverty spending tops 3% of the GDP for the first time ever and the state and local governments add another 2% of the GDP for these programs.
- The National Association of Securities Dealers (NASD) NASD upgraded it's Broker Check feature which lets you see if your broker has any black marks on his record. To get a broker's full history, contact your state's securities commission (find yours at nasd.org) and request a copy of your broker's file.
- Did you know the "core inflation rate" doesn't include the costs of food and energy? As if you didn't know it, food prices are going up at a 7% annual rate. One reason, which will have even greater impact in the future, is the diversion of corn to make ethanol for fuel, taking corn away from feed for poultry, beef and pork. A very rare recent event is the reduction in poultry production due to this diversion.
- Recessions are bad as unemployment increases, profits decrease, the stock market falls, etc. However there are a few silver linings. For those on a fixed income like many H/AREA members are, falling prices and an end to inflation can be helpful.
- The dollar continues its decline against the Euro. It has fallen more than 50% from its October 2000 trading peak and is at a 26 year low against the British pound. This helps exporters as American products become cheaper overseas. It slows down imports which helps the trade balance. Visiting America is cheap for foreigners who bring in much money and also help the travel industry. It's more expensive for us to travel abroad, however.
- You might want to consider online banking. How about earning 4% on a checking account with no fees and no minimums? That's the yield on ING Direct's new paperless checking account. Everything is paid on line or by debit card. If you have to send someone a check, you fill out an online check form: ING creates the check and mails it for you the next day. Schwab's checking account pays 4.25%. Cyberbanks issue ATM cards, offer CD's, mortgages, credit cards, mutual funds etc. Customer savings stem from the low expense of running an online bank; far fewer employees and no brick and mortar buildings. The past couple of years has seen a bank building boom in Morristown. There are seventeen banks now and they're still building more. It doesn't make sense to me.
- If you are into saving money, opt for cremation. At several hundred dollars it's much cheaper than burial by a least a factor of ten (or an order of magnitude for you engineers). If you do go for burial, though, grave liners (vaults) and sealer caskets are unnecessy unless the cemetery requires them. The Federal Trade Commission's Funeral Rule gives you the right to see casket prices before viewing the casket. Get a written explanation of which funeral services are required by law and which are not and then pick and choose what arrangements you want instead of a package deal which will be offered you. Happy shopping!
LewBohn
lewbohn@optonline.net
April 2007
- Wow! The volatility of the market makes timid investors, like me, a nervous wreck. Greenspan makes a few remarks and the market plummets. Bernanke replies and the market soars. The subprime market (lenders to high credit risks) falters and the market plummets again. As a buy and holder, I sit back knowing that for the past 80 years, the market has grown on average 10% a year (8% capital gain, 2% dividend). Though that is an average, many years the market is below average and up cycles and down cycles can last for many years. The last time I felt this way I went heavily into cash and missed the run up, though I must say I was earning 5% in the money market and sleeping better at night. The forecasters are sticking their necks out further than usual with very confident predictions. Unfortunately, half of them are predicting boom and the other half, bust.
- The H/AREA Home Page has a lot of good stuff in it and I recommend it highly. One thing that caught my eye was H/AREA Member Larry Loeffler’s info on cell phones. For example, if you are away from home and have locked you keyless entry keys in the car, call home on your cell phone and have the answerer hold your spare keys next to the cell phone and click “unlock” while you are holding your cell phone a foot from your car’s door. Voila! Your car door becomes unlocked. For some families like mine which don’t have individual cell phones, I recommend a spare, door entry, key. I went to the local locksmith and for $3.50, using my keyless entry key as a template made a door entry key. It’s not a valet key which will start the car, it just gets me into the car where my keys are lying on the front seat. I had him chop most of the top off which makes it fit easily into my wallet. Another item on the Home Page, if your cell battery is low, press the keys *3370# which unleashes reserve power. This reserve gets recharged the next time you charge your cell phone.
- It’s sad when you see companies go bankrupt and the employees lose their pensions. You should know, however, that Uncle Sam guarantees these pensions up to $49,500/year if they retire at age 65. The Pension Benefit Guaranty Corp. (PBGC) handles it.
- A recent AARP article dealt with identity theft of recently deceased people. Whereas you can’t be held responsible for debts run up by these thieves, getting matters straightened out can be a headache. To avoid this problem, they recommend not putting the birth day and month in the obit, just use the year. Avoid using the street address. Contact the state and cancel the driver’s license. Finally, mail copies of the death certificate to the three credit reporting bureaus (Experian, Equifax and TransUnion) and cancel all credit cards.
- Are you frustrated by the “phone trees” you have to go through before reaching a real, live, human being; if you’re lucky, that is? Well go to GetHuman.com and find the secret access codes for finding an agent. Example: to reach an operator at Discover, press the star key four times. Another tool is NoPhoneTrees.com, a site that navigates the phone tree for you and rings you when it gets an agent on the line.
- Stream of consciousness – our grandparents watched as this country switched from an agricultural to an industrial economy. We’re watching as the country is switching from an industrial to a service economy... to go from a good to a better to a best appliance (washer, dryer, stove, refrigerator, etc.) in many cases the manufacturer merely adds another button. They all have the same brain (chip) but more of it is utilized. Average cost of button- 30¢... Blackberry’s, Ipods, MP3’s, Bluetooth, Linux, etc. it’s all becoming too complicated for me. And what’s really scary, the generation younger than I, the Baby Boomers, are retiring... when buying a mutual fund, the fees are critical. Examine closely...Every new law that is passed, provides more employment for lawyers. The U.S. has 60 times as many lawyers, per capita, as do the Japanese.
LewBohn
lewbohn@optonline.net
February 2007
- It’s a new year and a new slate. I’m sure every one of you has rebalanced your portfolio by now. (I will, soon). [Ed. Note: Yeah, sure]. It was not a good year, relatively speaking, for me. I violated a cardinal rule of investing. I tried market timing and missed the run up. Thinking the market was going down in the fall, I cashed out a number of positions and put the money in the Money Market at 5%. I wound up making 11% for the year, whereas the Dow was up 16%, the S&P 500 up 14% and the NASDAQ 10%. As I noted in the last issue, I’m thinking even more seriously about changing this column to “Flower Arranging”.
- Recently, the New York Society of Security Analysts presented their 10th annual forecasts. Most of the speakers believe the market will experience double digit growth in 2007, but one speaker forecast a 20% decline. The consensus was that investors will move toward income producing securities such as dividend paying stocks and/or bonds which may cause a run-up in these.
- Value Line has placed Honeywell at the top of their recommended stocks for 2007.
- Index fund portfolios beat active stock portfolios 80% to 90% of the time. If you buy an index fund, be sure to check out the expense ratio first. Expenses can erode your returns significantly. A 1.5% expense ratio on a fund that rises 10% in a year, chews up 15% of your gain. Expense ratios vary from 0.10 % to 2.0% and that is a huge difference.
- The fees for overdrawing your checking account or exceeding your credit card limit are at an all time high. I added a $ 1000 line of credit to the checking account of a friend of mine [Ed. note: his wife] as she doesn’t balance her check book. It’s free, it’s rarely used, but when it is used, there are no overdraft charges.
- With respect to ATM fees, some banks charge no fees and even reimburse you for out of network charges. It happened to me this summer when we were at the shore. I accessed an ATM in a convenience store. The $ 1.50 charge was credited to my checking account two months later. When you use an ATM overseas, you get a good conversion rate but the fee can be as high as $3.00 unless you can find a branch of the bank you deal with.
- When you buy a house, you must buy title insurance. It’s a rip-off because the title search takes a very short time on a computer, but it’s required. Rather than accepting your broker’s referral, shop around town for other insurers to get a better rate.
- I received a very nice note from an H/AREA member inquiring about some variations in IRA disbursements related to a column I had written. I love to hear from readers but I had to tell him that I’m not expert enough to give him details on the IRS regulations and advised him to get professional advice. I also noted that AARP and VITA (Volunteer Income Tax Assistance) may be able to help him. These are IRS trained volunteers who help with income tax, at no charge, usually from Feb.1 to April 15. Your local newspapers will usually have notes about their location and times of operation. They are usually located in libraries, churches, fire halls, etc.
- There is a new tax law which is scheduled to expire at the end of this year, which allows you to donate directly to a qualified non-profit organization, from your IRA, without having to pay any income taxes on it. If, for example, you want to contribute money to your religious organization, you notify your IRA holder and ask them to make out a check from your IRA and payable to the religious group. The IRA holder will mail you the check without any taxes being deducted. You then give it to the organization. There is a reasonable time limit to when the check is cashed. I haven’t found out, yet, how it is reported and whether is can be part of your required minimum distribution but I’ll find out'
LewBohn
lewbohn@optonline.net