Tag Archives: financial advice

Markets Up or Down Next Five Years?

global investingMy Comments: Here’s another cautionary tale to put somewhere in a mental box to look at when you start thinking again about your financial reserves. That another crash will happen is almost certain. What is not certain is when it will happen, so all you can do is decide whether you want help to figure out a solution before it happens or whether you are willing to do it yourself. Either way is OK.

My recommendation is to get several opinions to get an idea how people solved the last crash, or allowed their money to go down the tubes and had to simply wait for it to recover. I have a personal solution that I can share with you but this is not the forum to get into details.

MarkHulbert / Aug 26, 2014

CHAPEL HILL, N.C. (MarketWatch) — At some point in the next five years, the U.S. stock market is likely to be more than 30% lower than where it stands today.

That is the frightening conclusion in a recent study by Swiss economic and financial consultancy Wellershoff & Partners. The company, whose chief executive is former UBS chief economist Klaus Wellershof, found a strikingly strong inverse correlation between the stock market’s valuation and its maximum drawdown over the subsequent five years.

The reason this finding is such bad news for U.S. stocks: As judged by the cyclically adjusted P/E (CAPE) ratio that is championed by recent Nobel laureate Robert Shiller, the U.S. stock market’s current valuation is at one of its highest levels in history. The latest CAPE reading is 25.69, which is 61% higher than its historical median of 15.95 (and 55% higher than the historical mean of 16.55).

Wellershoff & Partners found that, since 1900, the average five-year decline following CAPE levels as high as current readings is between 30% and 35%. In contrast, when the CAPE has been below 15, its average drop over five years was below 10%.

Furthermore, the study found that there is little basis in the historical record for thinking the market will somehow be able to sidestep a big decrease during the next five years: “Going back to 1900, there has been only one instance when the valuation levels we see today were not followed by drawdowns of 15% or more over the subsequent five to six years. Thus, at least for the U.S. market, it seems fair to say that the risk of losing capital is substantial.”

To be sure, this recent study is not the first to point out the bearish implications of the above-average CAPE level in the U.S. But what is unique is that it focuses not on overall returns but on drawdowns. That’s important because long-term averages mask how volatile the market may be along the way, which, in turn, is related to how likely it is that we’ll bail out of stocks at some point in the next few years. The bailout point is usually at the point of maximum loss.

Imagine, for example, that the stock market will provide an inflation-adjusted return of 1% to 2% annualized over the next decade. That’s consistent with some analyses of what today’s high CAPE reading means. While that return is mediocre, it may still be high enough to convince you that it’s worth remaining invested in stocks, especially given the bleak outlook for long-term bonds.

But what if, on the way to producing that modest longer-term return, the market at some point plunges 35%? Many investors would find that loss intolerable and, therefore, bail out of stocks — which means they would not participate in any subsequent recovery that produces the net longer-term return of 1% to 2% annualized.

Note carefully that this study, by focusing on a drawdown that may occur at some point over the next five years, sheds no light on when it might occur. But if the study’s conclusions are right, the bulls are playing a very high-risk game.

Do you really want to play that game with your retirement assets?

Short-Term Optimism, Longer-Term Caution

profit-loss-riskMy Comments: You by now know that I’m expecting a signficant market correction in the near future. However, when I say that, one has to wonder what I mean by “near”. An analogy I sometimes use is a comment by a currency trader I knew years ago. His idea of “near” was in the next 24 hours; for him a long term hold has 3 or 4 days.

U.S. stocks will likely move higher as pension fund managers go bargain hunting in an effort to put seasonal cash inflows to work.

October 23, 2014 Commentary by Scott Minerd, Chairman of Investments and Global Chief Investment Officer, Guggenheim Investments

Last week’s investment roller coaster was something we had been expecting—U.S. stocks delivered their usual bout of seasonal volatility right on cue. For now, recent spread widening in high-yield bonds and leveraged bank loans seems to be over, and it also appears that equities have regained their footing after a turbulent week.

With the anticipated seasonal pattern of higher volatility in September and October now largely fulfilled, we anticipate more positive seasonal factors over the next two months. Over the last 68 years, the S&P 500 has averaged monthly gains of 0.9 percent in October, followed by even stronger increases of 1.2 percent in November and 1.8 percent in December.

The current dark cloud that hangs over Europe is a serious threat and something that investors should closely monitor. If the anticipated seasonal strength—which is typically driven by an influx of cash into pension funds that their managers are keen to put to work—is not forthcoming, investors should seriously question how much further the current bull market can run. As of now, we remain cautiously optimistic as we await some crucial economic data.

Economic Data Releases / U.S. Housing Market Data Is Solid

  • Existing home sales rose 2.4 percent in September to an annualized rate of 5.17 million homes, the highest in one year.
  • Housing starts rose 6.3 percent in September to an annualized pace of 1.02 million.
  • Most of the gains were driven by a 16.7 percent jump in multi-family starts.
  • Building permits increased by a modest 1.5 percent to 1.02 million in September.
  • The FHFA house price index rose a better-than-expected 0.5 percent in August, a five-month high.
  • University of Michigan Consumer Confidence rose to 86.4 from 84.6 in the initial October reading. The reading was the highest in seven years and was driven by better consumer expectations.
  • Initial jobless claims rose off a multi-year low for the week ending Oct. 18, increasing to 283,000, the fourth lowest reading this year.
  • The Leading Economic Index expanded by 0.8 percent in September. Nine of 10 indicators were positive.
  • The Consumer Price Index was unchanged on a year-over-year basis at 1.7 percent in September. The core CPI also remained at 1.7 percent. Falling energy prices were offset by higher food and shelter costs.

Seasonal Factors Ready to Turn Positive

S&P500-1993-2014My Comments: This post is about investments and what may happen to your money going forward.

My gut told me the downturn in the markets over the last three weeks suggested it was the start of the market correction that all of us expect. You only have to glance at this chart of the S&P500 over the past 20 years to conclude it is inevitable. However…

Here are comments from someone far better attuned to the markets than I am who suggests there is still a lot of upside left. I guess it just means the inevitable downturn will be more dramatic and painful. You had better have a parachute when it happens.

October 17, 2014 / Commentary by Scott Minerd, Chairman of Investments and Global Chief Investment Officer, Guggenheim Partners

After a volatile week in markets, U.S. equities are now oversold and investors should be alert for seasonal factors that should soon turn positive.

The yield on 10-year U.S. Treasury notes this week broke below 2 percent intraday for the first time since June 2013, fulfilling a view I expressed in commentaries published in September 2013 and again in August. With this yield achieved, I don’t see an imminent rise in rates and view market talk about possible continuing quantitative easing by the Federal Reserve as overblown.

The recent decline in yields has less to do with U.S. economic fundamentals, which remain sound, and more to do with technical forces driving rates lower as a result of capital flows out of Europe. With inflation expectations falling, U.S. 10-year Treasury yields still look attractive even at close to 2 percent, relative to comparable German bunds at around 80 basis points and Japanese sovereign debt at around 50 basis points. In reality, U.S. long-term yields should continue to be well supported, with limited room to rise higher and the possibility that they could move lower.

In U.S. equities, the market is going through its usual seasonal gyrations and now appears to be oversold. The seasonal patterns of higher volatility in September and October that we anticipated have largely been fulfilled and seasonal factors should shift dramatically over the next two months. The buy signal for stocks normally coincides with the first game of baseball’s World Series (Oct. 21 this year), and between then and year end we will likely get a U.S. equities market rally.

The S&P 500 Index today reminds me of 2003, when stocks fell 4.2 percent in September before strong data pushed stocks 15 percent higher by June of 2004. The S&P then lost about 7 percent between June and August of 2004, when the Fed hiked interest rates, before gaining more than 15 percent in the next year.

In the coming months, a number of indicators will offer signals about how long the rally in U.S. stocks and bonds that began in 2009 can continue. One such indicator will be the so-called Santa Claus rally. As the old adage goes, “If Santa Claus should fail to call, bears may come to Broad and Wall.” While it is too early to say, the coming rally in U.S. equities may be the one to sell into.

Stop Tinkering With Your Retirement Portfolio

InvestMy Comments: I can’t tell you how many times over the past 40 years that a client has talked with me suggesting something is wrong with his investments. It usually comes after a long run up in the markets and he or she thinks his portfolio is lagging. And almost every time we’ve made a change, it has resulted in something worse. We moved away from good stuff into bad stuff.

That’s not to say that changes should never be made. Some changes are for the best, like when you think the markets are likely to crash and you want some assurance that the manager you’ve chosen has the ability to move to cash when the you know what hits the fan. Most of them use the tactics described below.

My management team of choice these days will definitely miss some of the upside. But they will also miss most of the downside. That’s why they are my team of choice. If you want guarantees, you have to move your money to insurance company products, and for that you will pay a price in restricted access. But for some of your money, it’s very OK, as it allows the rest of your money to go with the flow.

By George Sisti, CFP (oncoursefp.com ) / Oct 9, 2014

Having just attended the annual convention of the Financial Planning Association, I think it’s appropriate to compare goal focused financial planning to the market focused, no-plan, portfolio tinkering strategy that most investors employ.

Good financial planning starts with the assumption that the future is uncertain, future rates of return are unpredictable and that diversification is the essential element of any prudent investment strategy.

Good financial planning takes time. Gathering and analyzing client data, discussing financial goals and developing a plan to attain them shouldn’t be rushed. An analysis of risk tolerance, insurance coverage, income, expenses and employee benefits should precede any portfolio allocation recommendations. Finally, clients should receive an Investment Policy Statement which summarizes what has been accomplished and explains the investment strategy being employed.

Upon completion of this process I am often asked, “How often will you look at my portfolio?” Many clients are bewildered when I answer, “As infrequently as possible.” The never ending babble coming from the financial media leads many investors to believe that their portfolios require constant tinkering. Most don’t realize that allowing their adviser to tinker with their portfolio will likely do more harm than good.

Perhaps it would sound more reassuring if I answered, “As often as I look at my own.” My portfolio consists solely of index exchange-traded funds, ETFs, and is designed to meet my financial goals at an acceptable level of expected volatility. Consequently, I never tinker with it and ponder its allocation only during its annual rebalancing.

You can control your portfolio’s inputs but not its performance; which will be determined primarily by its asset allocation. Its growth will be directly proportional to how well it was funded and inversely proportional to how much you tinkered with it. Like a good employee, it shouldn’t require continual oversight.

I can compare this to two automobiles I have owned — a 1974 Chevrolet Vega and a 2007 Acura. By 1978, the Vega was burning a quart of oil every 250 miles. I had my head under its hood every week to add oil or tinker with something that wasn’t working. Thankfully, those days are over. I’ve never opened the Acura’s hood. It runs flawlessly and has had no mechanical problems. About once a year, I take it to the dealer for service. He opens the hood and tinkers as required. I drive the car home and am content to keep the hood closed for another year.

Unless there are major changes in your personal circumstances, an annual portfolio review and rebalance should be sufficient. For the next 12 months you can concentrate on the more important and enjoyable things in life. Excess portfolio peeking leads to excess portfolio tinkering which inevitably leads to lower portfolio performance.

To many investors this sounds too simple, too good to be true. (It is simple, but it isn’t simplistic — there’s a difference.) Many believe that stock investing is a rigged game. Institutional money managers use elaborate software and powerful computers that constantly monitor a multitude of market indicators to generate buy and sell orders.

Misguided investors believe that they have to adopt similar strategies to level the playing field. But whether you count on your fingers or use sophisticated software, attempting to predict the market’s next move is a loser’s game — for both amateur and professional investors.

Instead of goals based financial planning, many financial advisers offer products and trading strategies that turn retirement investors into short-term speculators. This despite the fact that study after study shows that more frequent trading leads to lower returns. Too often the big winners in the “outsmart the market” game are, in John Bogle’s words, the croupiers in the Wall Street Casino.

Today, many investors are frightened and confused by the noise and conflicting advice emanating from the financial media. Consequently many are underfunding or poorly allocating their retirement accounts. A good financial plan containing a comprehensible investment strategy is the best defense against our natural tendency to make shortsighted, emotional investment decisions. Most financially secure retirees will admit that they rarely looked at their portfolios during their accumulation years.

Like it or not, most of us are our own pension plan managers. It’s a difficult task that few investors are capable of accomplishing without professional help. Unfortunately, this professional help is rarely client focused. Too often it is market focused and characterized by frequent portfolio tinkering based on forecasts of questionable value. It’s time for investors to say, “Enough already!”

You need a personal financial plan; one containing a comprehensible investment strategy that is based on your personal goals, not what the market did yesterday or what someone thinks it will do tomorrow. Take a pass on the continuing barrage of new products offered by the Wall Street Promise Machine.

Use low-cost index funds to create a diversified portfolio. By doing so, you’ll give less money to Wall Street’s asset eating dragon; you’ll have more working on your behalf and maximize your chances of attaining a comfortable retirement.

Why Public Investment Really Is a Free Lunch

US economyMy Comments: The author of this article, which appeared in the Financial Times, is no stranger to economists, investors, and politicians.

My first reaction, however, was that it tends to endorse Keynesian economics, from a source that up to now has argued that the way to achieve economic recovery and more jobs, is for there to be much less government, lower taxes, strict austerity. This is strongly echoed by our national politics with the Tea Party on one side and the Democrats on the other.

Europe has to a great extent followed the Austrian model, the antithesis of the Keynesian model. Today, there is strong evidence Europe is experiencing signs of recession once again, while our approach is steadily moving toward recovery and growth. What follows is an argument that it is within our ability to further boost our recovery and by extension, our standard of living.

By Lawrence Summers / October 6, 2014

The IMF finds that a dollar of spending increases output by nearly $3

It has been joked that the letters IMF stand for “it’s mostly fiscal”. The International Monetary Fund has long been a stalwart advocate of austerity as the route out of financial crisis, and every year it chastises dozens of countries for their fiscal indiscipline. Fiscal consolidation – a euphemism for cuts to government spending – is a staple of the fund’s rescue programmes. A year ago the IMF was suggesting that the US had a fiscal gap of as much as 10 per cent of gross domestic product.

All of this makes the IMF’s recently published World Economic Outlook a remarkable and important document. In its flagship publication, the IMF advocates substantially increased public infrastructure investment, and not just in the US but much of the world. It asserts that when unemployment is high, as it is in much of the industrialised world, the stimulative impact will be greater if investment is paid for by borrowing, rather than cutting other spending or raising taxes.

Most notably, the IMF asserts that properly designed infrastructure investment will reduce rather than increase government debt burdens. Public infrastructure investments can pay for themselves.

Why does the IMF reach these conclusions? Consider a hypothetical investment in a new highway financed entirely with debt. Assume – counterfactually and conservatively – that the process of building the highway provides no stimulative benefit. Further assume that the investment earns only a 6 per cent real return, also a very conservative assumption given widely accepted estimates of the benefits of public investment. Then, annual tax collections adjusted for inflation would increase by 1.5 per cent of the amount invested, since the government claims about 25 cents out of every additional dollar of income. Real interest costs, that is interest costs less inflation, are below 1 per cent in the US and much of the industrialised world over horizons of up to 30 years. So infrastructure investment actually makes it possible to reduce burdens on future generations.

In fact, this calculation understates the positive budgetary impact of well-designed infrastructure investment, as the IMF recognised. It neglects the tax revenue that comes from the stimulative benefit of putting people to work constructing infrastructure, as well as the possible long-run benefits that come from combating recession. It neglects the reality that deferring infrastructure renewal places a burden on future generations just as surely as does government borrowing.

It ignores the fact that by increasing the economy’s capacity, infrastructure investment increases the ability to handle any given level of debt. Critically, it takes no account of the fact that in many cases government can catalyse a dollar of infrastructure investment at a cost of much less than a dollar by providing a tranche of equity financing, a tax subsidy or a loan guarantee.

When it takes these factors into account, the IMF finds that a dollar of investment increases output by nearly $3. The budgetary arithmetic associated with infrastructure investment is especially attractive at a time when there are enough unused resources that greater infrastructure investment need not come at the expense of other spending. If we are entering a period of secular stagnation, unemployed resources could be available in much of the industrial world for quite some time.

While the case for investment applies almost everywhere – possibly excepting China, where infrastructure investment has been used a stimulus tool for some time – the appropriate strategy for doing more differs around the world.

The US needs long-term budgeting for infrastructure that recognises benefits as well as costs. Projects should be approved with reasonable speed. The government can contribute by supporting private investments in areas such as telecommunications and energy.

Europe needs mechanisms for carrying out self-financing infrastructure projects outside existing budget caps. This may be possible through the expansion of the European Investment Bank or more use of capital budget concepts in implementing fiscal reviews.

Emerging markets need to make sure that projects are chosen in a reasonable way based on economic benefit.

What is crucial everywhere is the recognition that in a time of economic shortfall and inadequate public investment, there is for once a free lunch – a way for governments to strengthen both the economy and their own financial positions. The IMF, a bastion of “tough love” austerity, has come to this important realisation. Countries with the wisdom to follow its lead will benefit.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary

Social Security Cost-of-living Adjustments Projected to Increase Slightly in 2015

Social Security cardMy Comments: Those of us old enough to be taking SSA benefits have experienced minimal increases in the last few years. That’s because the ‘official’ numbers for inflation have been low. There is an argument they should be even lower as a way to keep the so-called SSA reserves from going to empty. In my opinion, that would be a stupid way to correct the problem.

Most of us who are interested in this issue know there are much less painful remedies available. With the SSA system now in place for over 80 years, much of the US economy has adjusted with large segments of the population relying on it as we age. To disrupt that could have dramatic consequences.

If you are near 62 or beyond and have not yet signed up for benefits, get in touch with me for a comprehensive analysis of how and when to put yourself on the receiving end of a monthly check. You’ll be surprised how big a mistake it can be if you do it wrong.

By Mary Beth Franklin / Oct 1, 2014

Social Security benefits are likely to increase by 1.7% in 2015, slightly more than this year’s 1.5% increase but still well below average increases over the past few decades, according to an unofficial projection by the Senior Citizens League.

The Social Security Administration will issue an official announcement about the 2015 cost-of-living adjustments for both benefits and taxable wages later this month.

Based on the latest consumer price index data through August, the advocacy group’s projection of a 1.7% increase in Social Security benefits for 2015 “would make the sixth consecutive year of record-low COLAs,” Ed Cates, chairman of the Senior Citizens League, said in a written statement. “That’s unprecedented since the COLA first became automatic in 1975.”

Inflation over the past five years has been growing so slowly that the annual increase has averaged only 1.4 % per year since 2010, less than half of the 3% average during the prior decade. In 2010 and 2011, benefits didn’t increase at all, following a 5.8% hike in 2009.

Although the annual adjustment is provided to protect the buying power of Social Security payments, beneficiaries report a big disparity between the benefit increases they receive and the increase in costs. The majority of Social Security recipients said that their benefits rose by less than $19 in 2014, yet their monthly expenses rose by more than $119, according to a recent national survey by the advocacy group.

Social Security beneficiaries have lost nearly one-third of their buying power since 2000, according to a study by the organization. Low COLAs affect not only people currently receiving benefits, but also those who have turned 60 and who have not yet filed a claim. The COLA is part of the formula used to determine initial benefits and can mean a somewhat lower initial retirement benefit.

A 1.7% increase would increase average Social Security benefits by about $20 next year and boost the maximum amount of wages subject to payroll taxes by nearly $2,000 above this year’s $117,000 level.

Despite the fact that Social Security benefits are not keeping up with inflation, COLA reductions remain a key proposal under consideration in Congress to reduce Social Security deficits. A leading proposal would use the “chained” consumer price index — which grows more slowly — to calculate the annual increase.

The group warned that the “chained COLA” proposal may come under debate again soon. The Social Security Trustees recently forecast that the Social Security Disability Trust Fund is facing insolvency by 2016, and that changes to the program will have to be made to avoid a reduction in disability benefits.

The organization supports legislation that would provide a different measure of inflation by using the Consumer Price Index for the Elderly, which would likely result in higher annual increases than under the current method.

Why Income Inequality Is a Drag On Economies

money mazeMy Comments: I’ve written before that it’s my belief that at some point, if income inequality between the haves and the have nots gets too large, social chaos will follow. The spread or relative level of spendable income between these two groups is continuing to widen. So it becomes just a matter of time until national leadership makes an effort to reverse the trend, or we as a people will make it happen. And it probably won’t be pretty.

Now I find there is a current economic cost for this inequality. Which means that to some extent a cost is being paid today by all of us, you and I and our families. It’s not somewhere down the road, it’s NOW. If this concerns you, you should make your concerns known.

By Martin Wolf / September 30, 2014

Big divides in wealth and power have hollowed out republics before and could do so again

The US – both the most important high-income economy and in many respects, the most unequal – is providing a test bed for the economic impact of inequality. The results are worrying.

This realisation has now spread to institutions that would not normally be accused of socialism. A report written by the chief US economist of Standard & Poor’s, and another from Morgan Stanley, agree that inequality is not only rising but having damaging effects on the US economy.

According to the Federal Reserve, the upper 3 per cent of the income distribution received 30.5 per cent of total incomes in 2013. The next 7 per cent received just 16.8 per cent. This left barely over half of total incomes to the remaining 90 per cent. The upper 3 per cent was also the only group to have enjoyed a rising share in incomes since the early 1990s. Since 2010, median family incomes fell, while the mean rose. Inequality keeps rising. The Morgan Stanley study lists among causes of the rise in inequality: the growing proportion of poorly paid and insecure low-skilled jobs; the rising wage premium for educated people; and the fact that tax and spending policies are less redistributive than they used to be a few decades ago.

Thus, in 2012, says the Organisation for Economic Co-operation and Development, the US ranked highest among the high-income countries in the share of relatively low-paying jobs. Moreover, the bottom quintile of the income distribution received only 36 per cent of federal transfer payments in 2010, down from 54 per cent in 1979.

Regressive payroll taxes, which cost the poor proportionally more than the rich, are projected to raise 32 per cent of federal revenue in fiscal year 2015, against 46 per cent for federal income tax, the burden of which falls more on higher earners.

Also important are huge increases in the relative pay of executives, together with the shift in incomes from labour to capital. The Federal Reserve’s policies have also benefited the relatively well off; it is trying to raise the prices of assets which are overwhelmingly owned by the rich. These reports bring out two economic consequences of rising inequality: weak demand and lagging progress in raising educational levels.

The argument on demand is that, up to the time of the crisis, many of those who were not enjoying rising real incomes borrowed instead. Rising house prices made this possible. By late 2007, debt peaked at 135 per cent of disposable incomes.

Then came the crash. Left with huge debts and unable to borrow more, people on low incomes have been forced to spend less. Withdrawal of mortgage equity, financed by borrowing, has collapsed. The result has been an exceptionally weak recovery of consumption.

It makes no sense to lend recklessly to those who cannot afford it. Yet this suggests that the economy will not become buoyant again without a redistribution of income towards spenders or the emergence of another source of demand. Unfortunately, it is not at all clear what the latter might be. Government spending is constrained. Business investment is curbed by weak prospective growth of demand. It is also unlikely to be net exports: everybody else wants export-led growth, too.

American education has also deteriorated. It is the only high-income country whose 25-34 year olds are no better educated than its 55-64 year olds. This is partly because other countries have caught up on the US, which pioneered mass college education. It is also because children from poor backgrounds are handicapped in completing college.

The S&P report notes that for the poorest households college graduation rates increased by only about 4 percentage points between the generation born in the early 1960s and that born in the early 1980s. The graduation rate for the wealthiest households increased by almost 20 percentage points over the same period. Yet, without a college degree, the chances of upward mobility are now quite limited. As a result, children of prosperous families are likely to stay well-off and children of poor families likely to remain poor.

This is not just a problem for those whose talents are not fulfilled. The failure to raise educational standards is also likely to impair the economy’s longer-term success. Some of the returns to education may just be the reward to obtaining a positional good: the educated do better because they have won a zero-sum race. Yet a better educated population would also raise everybody to a higher level of prosperity.

The costs to society of rising inequality go further. To my mind, the greatest costs are the erosion of the republican ideal of shared citizenship.

As the US Supreme Court seeks to bend the constitution to the will of plutocrats, the peril is to the politically egalitarian premises of the republic. Enormous divergences in wealth and power have hollowed out republics before now. They could well do so in our age.

Yet even for those who do not share such concerns, the economic costs should matter. The “secular stagnation” in demand, to which Lawrence Summers, the former US Treasury secretary, has referred, is related to shifts in the distribution of income.

Equally, the transmission of educational disadvantages across the generations is also a growing handicap to the economy. A debt-addicted economy with stagnant levels of education is likely to fare ill in future.