Tag Archives: financial advice

4 Reasons Why Not To Go Long The S&P

global investingMy Comments: Some of my responsibility as an investment advisor is to provide warning if I think there are pending changes in market direction. But since I have no idea what I may eat for lunch today, telling folks about the next crash will happen is pure speculation. But…

I compensate for this inability by having as much of their money as possible in accounts that have historically moved away from the markets and into cash and short positions when the signals are strong that a downturn is happening.

I’ve included only one chart from the article here. To the extent you want to see the rest, this link should take you to my source article: http://seekingalpha.com/article/2466765-4-reasons-why-not-to-go-long-the-s-and-p

Jack Foley, Sep. 3, 2014 2:43

Summary
• Many large cap stocks are not making new highs like the SPY. This is a worrying sign.
• Interest rates have to rise in the future which will put downward pressure on the stock market. Veteran trader Steve Jakobsen believes we could drop 30% from here.
• Oil seems to have bottomed and oil has the potential to make the whole commodity sector rally along with it.

The S&P 500 (NYSEARCA:SPY) has broken through the physiological number of 2000, and commentators and speculators alike are predicting higher highs from here. I am ultra short on this market but it is becoming increasingly hard to predict when this market will roll over in earnest. Investors who are short the market are really hurting right now, and it takes a brave investor to stay short in this environment. Nevertheless, the risk is all to the downside so an investor must stay extremely nimble if profits are to be made. Let’s explain why.

First of all, even though the market is making new highs, there are many large cap stocks that are not participating in this move. Look at the General Electric Company (NYSE:GE) to see how far it is below its all-time highs.
14-9-16 General ElectricAlso because we have extremely low interest rates, corporate earnings are inflated. Bonds and stocks have rallied hard for the last few years as these markets have been the benefactors of the US’s low interest rate environment.

Nevertheless, interest rates one day will have to rise. When they do, investors will start shifting their money back into fixed term savings accounts. Bonds trade inversely to interest rates so when rates rise, bonds will come under pressure. The problem with low interest rate environments is that they can create asset bubbles. I believe we have one forming in stocks, in bonds and in certain real estate markets globally. In London, for example, property prices may rise by 30% this year which is unprecedented in a struggling global economy we have nowadays.

Veteran trader Steve Jakobsen believes that we could see a 30% drop in the S&P 500 from these levels. Jakobsen believes that equities is the only asset class that hasn’t been really affected from this ongoing global financial crisis.

Therefore, he believes one day the S&P 500 will revert to the mean which could be as much as 30% lower than where we are now.

Finally, I like the movement oil is making at the moment and I think we have finally found a bottom. Tthe spot price of light crude oil has gone from $108 in June to a rising $95 at the moment. The bottom seems to be in and if oil can rally from here, I believe it will put pressure on the stock market as funds will start to leak into the commodity markets. Oil has the potential to take the whole commodity complex with it when it’s in bull mode, so depressed agricultural commodities such as Corn and Sugar should also benefit. As you can see from the chart below, commodities have struggled as a whole in the last few years as equities have rallied hard.

Yes, equities and oil can rally together and have done so up to January 2013 since 2008 (practically everything rallied once the Fed ran their printing presses) but since January 2013 oil has not participated in the move. Once the Federal Reserve eventually ends all stimulus programs (either voluntarily or by demand), I have no doubt capital will start leaking into the commodity markets and oil. Also if geopolitical tensions in Iraq and the Ukraine escalate, oil will spike and the world stock markets will decline sharply.

To sum up, there are enough warning signals to warrant not being long here in the US stock market. If you still think the rally is not finished, I would advise scaling down your position size.

Central Banks Pump Up the Volume

USA EconomyMy Comments: The US Federal Reserve took a very different approach to helping the economy recover from the financial crisis that began in the fall of 2008. Pushed by Mr. Bernancke, the Fed provided what came to be called QE, which stands for quantitative easing. It kept interest rates low and effectively flooded the economy with cash with the idea it would result in faster recover. This is not to say it was hugely successful.

The European approach was almost the opposite. They avoided the Keynesian approach and instead moved to promote austerity, deprive the economies of liquidity, and force accomodation by governments and business enterprises to take a hit and adjust or disappear. It now appears that austerity was the wrong path. This should have been obvious from the experience of Japan some two decades ago when they took this approach and ended up with what is known as the lost decade. There was virtually no growth for ten years, and while savings accounts grew dramatically, no one spent anything which stymied everything.

Some weeks ago I acknowledged that my personal spending habits, following our crash in 2008, are now part of our problem. If I make money and don’t spend it, my sense of security is increased, as I have money in the bank. But for every dollar that I don’t spend above what is absolutely necessary, about $7 is removed from the local economy. That’s because my $1 represents revenue to somebody else, which in turn means that person can spend it on a new car, or whatever. It’s the multiplyer effect and contributes to the velocity of money.

Now, Scott Minerd says the European central banks are likely to turn the corner and become more accomodating. That means good things for those of you who have money invested in the global economy and growth will be the result.

September 03, 2014 / Commentary by Scott Minerd, Chairman of Investments and Global Chief Investment Officer, Guggenheim Funds

Aggressive central bank accommodation from Europe to Japan and a dovish Federal Reserve bode well for equities and bond prices.

The Federal Reserve’s annual getaway in Jackson Hole is not usually considered a gathering of rock stars, but that’s exactly how the late August event unfolded. The hawks loosened up the crowd with their dark, foreboding lyrics. After that, the doves sweetened the mood, singing a far more melodic and happy tune. Then the event’s two biggest stars—Fed Chair Janet Yellen and European Central Bank President Mario Draghi—hit the stage amid the twin pyrotechnics of easy money and a vision of the future where every worker has a job, and the crowd went wild.

The biggest news was Dr. Draghi’s comments that the ECB may soon have no option but to join the United States and Japan in undertaking more aggressive accommodation through a quantitative easing program, taking up the slack as the Fed ends its asset purchases. “On the demand side, monetary policy can and should play a central role, which currently means an accommodative monetary policy for an extended period of time,” he said, before adding the kicker that the ECB will “stand ready to adjust our policy stance further.”

Reinforcing Dr. Draghi’s outlook was Monday’s dismal data out of Europe’s largest economy. According to Germany’s Federal Statistical Office, German GDP contracted 0.2 percent in the second quarter. As goes Germany, so goes the euro zone, where inflation has fallen to 0.3 percent (its lowest level in five years) and manufacturing is struggling.

It’s not just Europe that could add stimulus. Bank of Japan Governor Haruhiko Kuroda faces similar pressures as Japan’s economy has failed to rebound after a sales tax hike prompted the sharpest economic contraction since the start of 2011.

Back at home, we expect the Fed’s band will keep playing its merry tune for now. The voting members of the Federal Open Market Committee in 2015 will be even more dovish than the current committee. If there is a risk, it is that the Fed will keep monetary policy at a high level of accommodation for longer than previously anticipated.

Financial markets heard the sweet song of easy money from Jackson Hole loud and clear, sending equities up strongly while driving U.S. Treasuries’ prices higher and yields lower. The recent high of the New York Stock Exchange Advance-Decline Line supports this optimistic hypothesis, suggesting that stock prices will continue to reach new highs.

The world’s central banks will be doing whatever is necessary to keep their economies from falling into depression or any other economic malaise. So not to worry: From what we heard in Jackson Hole, the world is a beautiful place and the easy-money band won’t stop rocking.

Being a Stock-Market Bull Just Got a Lot Harder

question-markMy Comments: For over a year now, I’ve been warning my clients that a reversal is coming in the stock market. As a result, we’ve slowly moved into investments that have reacted positively and made money during downturns. Only it hasn’t happened yet.

Consequently, some of them are frustrated and angry with me because while the market has grown considerably in the last eighteen months, their accounts have not kept up, and look rather anemic.

Having been through this kind of thing before, and somehow survived, I continue to promote ideas that have made money for clients, especially 2007-2009 when the last crash happened. While I don’t expect the next one to be as big, it will still be painful. Unless…

By Mark Hurlburt – September 9, 2014

London (MarketWatch) — Making the bullish case is getting a lot harder.

Let’s say that you want to wriggle out from underneath the bearish conclusions of the cyclically adjusted price-to-earnings ratio (CAPE), which for some time now has been very bearish. Sidestepping that conclusion turns out to be a lot harder than you think.

The CAPE is the version of the traditional P/E ratio that has been championed by Yale University finance professor (and recent Nobel laureate) Robert Shiller. Currently, for example, the CAPE stands at 25.69, which is 55% higher than its average back to the late 1800s of 16.55 and 61% higher than the ratio’s median level of 15.95. In fact, there have been only three times since the 1880s when the CAPE has been higher than where it stands today: 1929, 2000 and 2007 — all three of which, of course, coincided with major market highs.

The CAPE isn’t a perfect indicator, as Shiller himself will tell you. There are legitimate reasons to question its approach to market valuation. In addition, the bulls have shamelessly come up with myriad other “reasons” not to pay attention to it.

But Mebane Faber, chief investment officer at Cambria Investment Management, has this to say to all these so-called CAPE haters: “Fine, don’t use it. Let’s substitute in book and cash flows, two totally different metrics.”

Unfortunately for the bulls, the conclusion of looking at the market from those alternate perspectives is almost identically bearish.

Courtesy of data from Ned Davis Research, Faber ranked 43 countries’ stock markets around the world according to their relative valuations according to the CAPE as well as to cyclically adjusted ratios of price-to-book, price-to-cash flow, and price-to-dividend. When ranked according to the CAPE, for example, with top ranking going to the most undervalued country’s stock market, the U.S. is in 41st place. Only two countries are more overvalued according to this indicator.

CAPE = 41
Cyclically-adjusted price-to-book ratio = 37
Cyclically-adjusted price-to-dividend ratio = 39
Cycilcally-adjusted price-to-cash-flows ratio = 36

To argue that the U.S. stock market isn’t overvalued, in other words, the bulls not only have to dismiss the CAPE but also argue why the U.S. market should be priced so richly relative to book value, cash flows and dividends.

That’s not necessarily impossible. But it is clear that the bulls have a lot more work cut out for them.

Furthermore, even if the bearish conclusions of these diverse indicators turn out to be right, you should know that they are long-term indicators, telling you very little about the market’s near-term direction. My favorite analogy to describe the situation comes from Ben Inker, co-head of the asset-allocation team at Boston-based money management firm GMO.

He likens the market to a leaf in a hurricane: “You have no idea where the leaf will be a minute or an hour from now,” he says. “But eventually gravity will win out and it will land on the ground.”

Common Mistakes When Designating a Beneficiary

life insuranceMy Comments: With so many of us getting older, there is an increasing focus on what happens to our money when we die. If we don’t pay attention, large pieces of it may flow to the IRS and into the hands of others simply because we couldn’t be bothered to get it right the first time.

It’s not just retirement accounts and life insurance policies anymore either. I have a number of clients who have identified their non-retirement money as TOD accounts. This stands for Transfer on Death, and its a way to cause regular accounts to be distributed to beneficiaries when the account owner(s) die. It avoids probate and can be changed by the owner(s) at any time before you meet your maker. Of course, this assumes you are considered competent and not just a little goofy.

But whether it’s a TOD form or typical beneficiary designation, if mistakes happen, someone may have a problem later on when you can’t fix it by signing a new form. At this point, you may be gone.

Legal and financial professionals were recently polled and asked to list the most common mistakes that individuals make when completing their beneficiary designations. Here are the top five mistakes:

1. Failing to sign and date the Beneficiary Designation form.

2. The percentages listed next to the various beneficiaries did not total 100%.

3. Attempting to update their designations through wills, incorrectly believing that their wills will override their existing beneficiary designations.

4. A false belief that a divorce or property settlement automatically removes their former spouse as a designated beneficiary.

5. Forgetting to update their beneficiary designations when a major life event occur (eg., birth, adoption, marriage, divorce, or death).

As a general rule, it’s wise for clients to conduct an annual review of their beneficiary designations. For employees, open enrollment is oftentimes an appropriate reminder. Individuals should also back up their beneficiary designations electronically. Finally, if there is a future challenge to a beneficiary designation upon an individual’s death, it’s typically wise to retain former beneficiary designations.

For Retirement Portfolios, a Smarter Glidepath

retirement-exit-2My Comments: I’ve talked in earlier blog posts about the rate used to withdraw money from your retirement accounts. There is a prevailing sentiment that it should be 4% or less. I think that’s too low. On the other hand if I’m wrong, and 30 years later you discover you have run out of money, it’s unlikely I’ll be here to take your blame.

Having said that, I think a 6% extraction rate is more realistic. Only how much more money that actually gives you is hard to imagine. That’s because it’s a function of how fast the money left in your accounts actually grows.

My experience, though thick and thin, meaning good years and bad years, is that you should be able to grow your money at 7 to 8% per year. I’m now using programs that when backtested over the past dozen years, which includes the crash of 2008-09, have grown at 10%.

The argument against that is that as we all know, past performance is no guarantee of future performance. But it is a clue, and with advances in technology and tactical approaches to investing, a higher number is far more realistic, in my opinion.

by Michael Kitces / AUG 25, 2014

One of the core functions of financial planning is setting up clients’ portfolios in retirement so that resources are adequate to sustain the journey — no small feat, given the uncertainties involved and the need to balance stability and safety against the risk of inflation, as well as the need for growth over the potentially long time horizon.

Conventional wisdom suggests that retirees should manage this challenge by having a moderate exposure to stocks at the start of retirement — to help their portfolio grow and be able to keep up with inflation over the long run — and then reduce equity exposure slowly over time as they age and their time horizon shrinks.

But recent research has suggested that the optimal approach might actually be the opposite — start with less equity exposure early in retirement, when the portfolio is largest and most vulnerable to a significant market decline, and then slightly increase the equity exposure each year throughout retirement.

And as it turns out, an even better approach may be to accelerate the pace of equity increases a bit further in the earlier years (from an initially conservative base). After all, a slight equity increase in the last year of retirement isn’t really likely to matter.

For instance, a glidepath might aim to increase equities in just the first half of retirement, until the target threshold is reached, and then level off. Instead of gliding to 60% equities from 30% over 30 years, glide up to 60% over 15 years — then maintain that 60% equity exposure for the rest of retirement (assuming the 60% target is consistent with client risk tolerance in the first place).

Accelerating the glidepath reduces the time when the portfolio is bond heavy — a particular concern in today’s low interest-rate environment. And it may be even more effective to simply take interest-rate risk off the table altogether by owning short-term bonds instead. Such an approach leads to less wealth on average, but in low-return environments, rising-equity glidepaths that use stocks and Treasury bills can actually be superior to traditional portfolios using stocks and longer-duration bonds (say, 10-year Treasuries) — even though Treasury bills provide lower yields.

FASTER GLIDEPATH

In the original research that American College professor Wade Pfau and I collaborated on, showing the benefits of a rising-equity glidepath, we simply assumed that any retiree using a glidepath would make adjustments in a straight line throughout retirement. For instance, gliding equities to 45% from 30% during a 30-year retirement time horizon would require a shift of 0.5% per year.

Gliding to 60% from 30% in the same time horizon would involve shifting 1% per year.
Yet the reality in such situations is that, for someone who is spending down assets, the last 1% change in equity exposure (to 60% from 59%) in the 30th year is not going to impact the outcome. At that point, the retiree has either made it or not.

So we launched a follow-up study, testing the impact of an accelerated glidepath. In this case, instead of moving to 60% equities from 30% over 30 years, the retiree moves there in only 15 years (at 2% per year), and then plateaus.

To test the alternatives, we looked at how they would have performed historically compared with each other with a 4% initial withdrawal rate over rolling 30-year periods in the U.S., starting each year since 1871, assuming a combination of large-cap U.S. stocks and 10-year Treasury bonds that are annually rebalanced.

The results, shown in the “How Fast a Glidepath?” chart below, reveal that the accelerated glidepath over 15 years is superior to the 30-year glidepath. In most years, the difference is fairly small — an improvement of the safe withdrawal rate of 0.1 to 0.2 percentage points — but in the best years, the improvement was as much as roughly half a percentage point.

The accelerated glidepath is ultimately better in all historical scenarios and improves outcomes in both high-return and low-return eras. It’s only a question of how much.

INTEREST-RATE RISK

A commonly voiced concern about our original rising-equity glidepath research was the fact that being more conservative with equities in the early years also means owning more in bonds. That’s not necessarily appealing in light of today’s low interest rates and the fear that rates will rise at some point in the coming years.

Accordingly, in our follow-up research we also tested the impact of taking interest-rate risk off the table, by using portfolios of stocks and Treasury bills, instead of stocks and 10-year Treasury bonds. The benefit of using Treasury bills is that, because they mature in a year or less, they are reinvested annually, avoiding any risk that the retiree will need to liquidate bonds at a loss because of rising rates. The downside, of course, is that shorter-term Treasury bills generally have lower yields over time (at least in any normal, upward-sloping yield curve environment).

As shown in the “Bills vs. Bonds” chart below, there are times when Treasury bills help, and times when they hurt. The difference in outcomes between using Treasury bills and bonds is as much as a half-percentage point improvement in safe withdrawal rate, and as bad as a 2-point decrease. ( No chart here. Please continue reading by clicking HERE )

Social Security Survivor Benefits: What Advisors (and clients) Should Know

My Comments: By now you know that I provide financial advice about Social Security and about ways to maximize your SSA benefits. That all happens when you are alive. Inevitably, someone in a married relationship is going to leave the building, as Elvis did. Then what happens?

 

by Paul Norr / AUG 18, 2014

Social Security survivor benefits have some unique rules which can be especially hard to remember. Survivor benefits can seem similar to other parts of the Social Security system, but they actually have some significantly different features and regulations. Following is a summary of those unique features and and how survivor benefits differ from the more common Social Security benefits.

The formal title of the Social Security program, Old Age, Survivor and Disability Insurance (OASDI) provides an immediate clue that the Survivor program is distinct from the “old age” portion of the system to which most of us are usually referring when we say Social Security. The Disability portion of the program has its own trust fund and is totally separate program. The Old Age and Survivor programs, however, have a hybrid relationship, sharing the same trust fund while operating under some significantly different rules.

OLD AGE VS. SURVIVOR BENEFITS
The differences between the spousal benefits of the Old Age program and survivor benefits are the heart of the issue. Spousal benefits are benefits based on a living spouse’s (or ex-spouse’s) work history. Survivor benefits are benefits based on a deceased spouse’s (or ex-spouse’s) work history.

Here are the primary differences between Survivor and Spousal benefits:

1) Survivor Benefits are much higher, as much as twice as high. Maximum survivor benefits are 100% of the deceased worker’s last Social Security benefit. Maximum spousal benefits are only 50% of the worker’s SS benefit.

2) The worker’s benefit used to calculate benefits could be different in each case. Survivor benefits are based on the deceased’s Full Retirement Age (FRA) benefit plus any delayed retirement credits the worker may have accrued by waiting as late as 70 before filing for their benefits. Spousal benefits are based only on the worker’s FRA benefit and are not enhanced by any delayed retirement credits for the worker.

3) File before the Full Retirement Age (FRA) and either benefit will be reduced, although not in the same way. At the earliest allowable age for spousal benefits of 62 one will only get 35% of the worker’s benefit. A widow claiming survivor benefits at the earliest possible age of 60 (two years younger, another difference) will get 71.5% of the deceased worker’s benefit.

4) The window for a Full Retirement Age at 66 is slightly different. For spousal benefits FRA is formally 66 for people born between 1943 and 1954. For survivor benefits FRA is 66 for people born between 1945 and 1956. If you are born in 1944 or 1955 you will have a different FRA for each benefit.

5) The minimum length of marriage required in order to qualify for either benefit differs, 12 months for spousal benefits but only nine months for survivor benefits. There are different exceptions to each of these.

6) If one is divorced and collecting benefits on the work record of the ex-spouse, remarrying may affect benefits differently. Remarriage will completely nullify any spousal benefits based on the ex-spouse, no matter the age at which the person remarried.

If the ex-spouse has died however, and the survivor remarries after the age of 60, they can keep the survivor benefit even though they are now remarried. This sets up an interesting situation where the remarried person will ultimately have the option of choosing between three benefit options: a survivor benefit on the ex-spouse, a retirement benefit on their own work record or a spousal benefit based on their current spouse.

It may also present some important planning opportunities. For instance, if a woman collecting survivor benefits on her ex-husband is 59 and planning to remarry, she might want to delay the wedding bells until her 60th birthday in order to keep receiving the survivor benefit based on her decrease ex-husband.

Finally, the benefit calculations for the two benefits are independent of each other. For instance, filing for one benefit before FRA will not affect the filing for the other benefit. For instance, a person can apply for survivor benefits before FRA thereby reducing their survivor benefits. This early survivor filing will not affect their application for their own old age retirement benefits. They would still be eligible to collect their full benefit at 66 or even accrue Delayed Retirement Credits by waiting until age 70.

These are most of the important differences between survivor and spousal benefits. It gets confusing and hard to remember so you might want to keep this summary handy. I know that I will.

Paul Norr is a financial planner in Thousand Oaks, Calif. and writes about retirement and planning issues. His website is www.paulnorr.com.

Don’t Fight the U.S. Treasury Rally

USA EconomyMy Comments: We’ve been living in a low interest rate environment for some years now. The general consensus has been that they can’t get any lower and that the Fed will push them up if and when the US economy starts to see any inflationary pressure.

I know that clients, who for years depended on bond yield to satisfy their need for monthly income, have suffered. Folks who want the guarantees offered by Certificates of Deposit have despaired when they know they will only generate about 1% per year. Common wisdom tells many of us that safe investments are government issued bonds. And then they look at the S&P500 over the past few years and decide 20% is normal.

Now here is an article by a respected economist that tells us that interest rates can go lower. This is spite of negative interest rates in Japan where the central bank CHARGES you for buying from them. If you know what’s going on, please let me know.

By Scott Minerd, Chairman of Investments and Global CIO

“U.S. Interest Rates Could Head Significantly Lower”

The consensus among market watchers last September was that, with U.S. interest rates so low and the U.S. Federal Reserve (the Fed) about to withdraw stimulus, interest rates would trend higher. I took a different view, writing in a commentary that “10-year rates may be heading back to 2.25 percent or lower.”

When 10-year Treasury yields ended 2013 at 3.02 percent, some may have thought I had taken the wrong end of the bet. But in early August, 10-year Treasury yields went as low as 2.35 percent and I believe the path of least resistance on interest rates is still lower.

A number of factors have helped push Treasury yields lower. With yields on German 10-year Bunds dipping under 1 percent for the first time and Japanese government bonds yielding around 50 basis points, Treasuries look comparatively attractive. Add to that the perception that both the yen and euro are a one-way bet toward depreciation and it is reasonable to expect that international capital will continue flowing toward the U.S., pressuring Treasury yields down as quantitative easing draws to an end.

Tensions from Ukraine to Iraq have added to a flight-to-quality trade, boosting demand for U.S. Treasuries. With the size of incremental U.S. government borrowing also expected to decline because of shrinking federal budget deficits, Treasury yields could move lower.

Reduce Rate Risk

My original forecast of 2.0 to 2.25 percent still seems reasonable. Nevertheless, markets do not move in straight lines, so yields could retrace to 2.5 percent in the near term. Ultimately, as rates head back toward 2 percent portfolio managers should use the rally to reduce interest rate risk.
2014 gov bond rate history

As anyone experienced in investing in the U.S. mortgage market knows there is a phenomenon that traders call the “refi bid.” When interest rates fall, a larger percentage of mortgages become economically attractive to refinance at a lower interest rate.

Whenever a threshold is breached where a large amount of mortgages make attractive refinancing candidates, prepayments spike up dramatically and portfolios that own mortgages have a sudden surge in cash. This causes portfolio duration to shorten and leads to a need to buy longer duration assets in order to maintain the target portfolio duration. This demand surge can result in a sudden and dramatic decline in rates.

Currently, I estimate that the next “refi level” will hit when the 10-year Treasury yield drops to about 2.25 percent.

An unusual feature of this potential wave of mortgage refinancing is that the vast majority of U.S. mortgages are on the cusp of being candidates for refinancing, given the relative stability of mortgage rates over the past year or so. Additionally, there is one dominant holder of these mortgage securities that has vowed to reinvest in new mortgages as prepayments come in—the Fed.

Traditionally, in a refinancing rally, spreads on mortgage-backed securities (MBS) widen due to increased prepayment risk and expected increases in supply. Spreads will not widen on this occasion to the same extent as during previous refi rallies for a number of technical reasons.

Among those reasons is that the Fed, the biggest mortgage investor on the block, has made clear it will reinvest principal repayments dollar for dollar. Normally, the widening in mortgage spreads mutes the impact of the rate decline on mortgage rates, slowing the pace of refinancing.

This time, advertised mortgage rates are likely to fall more rapidly than in prior refi experiences.