Tag Archives: investment advice

A Mind-melting Number of Galaxies in the Universe

My Comments: Now that Matthew has taken his wind and rain to bother someone else, I can focus my time and energy on less earth-shattering thoughts. I  am very thankful we were spared what happened in Haiti; I can’t imagine the agony those people are living with.

And speaking of not being able to imagine, this post is about the world out there that I’ve been interested in for decades. Perhaps because there is no rational answer to the mystery.

I’ve included the first few paragraphs and hopefully a .gif that if you watch the few seconds shown, will make your understanding of our role in this whole exercise we call life a little clearer. My take is that since I have but a few years left, I better make the most of it.

7 OCT 2016

Of the thousands of photos taken by the Hubble Space Telescope, one stands out as the shot that changed astronomy forever. Called the 1995 Hubble Deep Field, it captures thousands of galaxies in a single shot, and was the first photo of its kind ever taken.

But if all those dots represent entire galaxies – and the Milky Way alone is a whopping 100,000 light-years across – how gigantic must a photo be to fit thousands of them in?

Well, it depends on how you define gigantic.

If you’re comparing it to a selfie, it’s pretty freaking huge. But if you’re comparing it to the Universe itself, even a cluster of thousands of galaxies – each hundreds of thousands of light-years across – is minuscule.

More than a decade ago, astronomers at NASA made the incredibly controversial decision to point the Hubble Space Telescope at nothing in particular for a while.

Fortunately, that expensive gamble paid off, and we now have an entire series of Deep Field photos showing so many galaxies in the one shot, they look like stars.

Each of these Deep Field photos were taken over a period of 10 days, and had exposure times of more than 100 hours.

Read more HERE!

We’re Issuing a Formal Alert: Something Major is Coming in the Markets

My Comments: I know, I know, I said the worm had turned. Well, maybe not.

Phoenix Capital Research/Sep 29, 2016

Time for a reality check.

The market has had nothing but positives for three months now. BREXIT was contained. The Fed failed to raise rates again. The Bank of Japan and European Central Bank are printing a combined ~$180 billion per month (a record pace) and using it to prop the markets up.

And stocks are DOWN. While the bulls and CNBC shills talk about the markets like they’re in some incredible rally, the fact is that the S&P 500 peaked in mid-August. And if you want to go back further it’s gone absolutely NOWHERE since July 9th.

Seriously, if you cannot manufacture a roaring rally with follow through on the last three months’ worth of news, you’re not going to manufacture one ever.

Indeed, Central Banks have never been more aggressive in their easing.

1. Two of world’s FIVE major Central Banks (ECB and BoJ) are printing $180 billion per month and giving it to the banks.

2. One of the FIVE (the Swiss National Bank) is openly BUYING stocks outright.

3. Another of the FIVE (the Bank of England) just cut rates and announce a new QE program.

4. The last of the FIVE, and the only one that is supposed to be tightening policy (the Fed) hasn’t raised rates in nine months and will not do so until December at the earliest.

And the bulls can’t get it done. So… what do you think is coming next?

Invest or Die

My Comments: This reminds me of an old gag by Jack Benny. Well known for being cheap, he was confronted by someone with a gun who said, “Your money or your life!”. Jack took his time and when pressed for an answer, replied “I’m thinking”.

I’m slowly re-evaluating my focus on not losing money, to a reluctant, let’s have more exposure to equities and bonds. But only for those funds that are not critical to your ability to pay your normal, every day bills. For that money, I have another solution.

By Investing Caffeine on September 24, 2016

Seventy-six million Baby Boomers are earning near 0% (or negative rates) and aren’t getting any younger in the process, which is forcing them and others to decide…invest or die. The risk of outliving your savings is becoming a larger reality these days. Demographics and economics are dictating that our aging population is living longer and earning less due to generationally low interest rates.

Richard Fisher, the former Dallas Federal Reserve president, understands these looming dynamics. Fisher has identified how low-interest rates are increasing investor discontent by pushing consumers to save more in order to meet retirement needs. The unintended consequence from low rates, he said, is “you’re going to have to save a hell of a lot more before you consume.”

Besides saving, the other option investors have is to lower your standard of living. For example, you could continually eat mac & cheese and sleep in a tent – that is indeed one way you could save money. However, your kids and/or desired lifestyle may make this way of life unpalatable for all. Rather, the proper approach to achieving a comfortable standard of living requires you to invest more efficiently and prudently.

What a lot of individuals fail to understand is that accepting too much risk can be just as dangerous as being too conservative, over the long run. Case in point, depositing your savings into a CD at current interest rates (near 0%) is the equivalent of burning your cash, as any income produced is overwhelmed by the deleterious effects of inflation. It would take more than a lifetime of CD interest income to equal equity returns earned over the last seven years. Since early 2009, stocks have more than tripled in value.

Given the prevailing economic and demographic trends, investors are slowly realizing the attractive income-producing nature of stocks relative to bonds. It has been a rare occurrence, but stocks, as measured by the S&P 500, continue to yield more than 10-Year Treasury Notes (2.0% vs. 1.6%, respectively). The picture for bonds looks even worse in many international markets, where $13 trillion in bonds are yielding negative interest rates. Unlike bonds, which generally pay fixed coupon payments for years at a time, stocks overall have historically increased their dividend payouts by approximately 6% annually.

With a scarcity of attractive investment alternatives available, investors will eventually be forced to adopt higher levels of equity risk, like it or not. However, this dynamic has yet to happen. Currently, actions are speaking louder than words; risk aversion reigns supreme with Americans tucking over $8 trillion dollars under their mattress, in the form of savings accounts, earning next to nothing and jeopardizing retirements.

Even if you fall into the camp that believes rates are artificially low by central bank printing presses, that doesn’t mean every company is recklessly leveraging their balance sheets up to the hilt. Many companies are still scared silly from the financial crisis and conservatively managing every penny of expense, like a stingy retiree living on a fixed income. Thanks to this reluctance to spend and hire aggressively, profit margins are at/near record highs. This financial stewardship has freed up corporations’ ability to pay higher dividends and implement discretionary stock buybacks as means to return capital to shareholders.

With the dovish Fed judiciously raising interest rates – only one rate hike of 0.25% over a decade (2006 – 2016) – there are no signs this ultra-low interest rate environment is going to turn aggressively higher anytime soon. Until economic growth, inflation, and interest rates return with a vengeance, and the persistent investor risk aversion abates, it behooves all the cash hoarders to….invest or die!

Here’s how bruised bears should approach this resilient stock market

bear-market-bearMy Comments: I’m facing increased criticism for preaching woe and gloom. In spite of a 24 month rain dance to herald the start of a storm, the sky is still clear, if a little overcast. Maybe it is different this time.

That being said, it’s time to stop with the woe and gloom and focus instead on steps to take advantage of the situation. As a friend pointed out yesterday, this stuff cycles and, yes, there will come a bad downturn, and you will be declared right. Meantime, you miss out on all the good stuff and end up stiffing your clients.

So… how do we set ourselves up to be successful? Here’s a start.

by Anora Mahmudova | Published: Sept 27, 2016

It is perfectly fine to be pessimistic about future stock market returns, as long as you’re prepared to think outside the box when it comes to seeking out safe investments, analysts said.

There is no shortage of scary charts and lousy fundamentals that point to equities being risky. But they rarely, if ever, can be used to pinpoint a market top. Indeed, bold bearish calls continue to get rebuffed in this long-running bull market.

Recall that in early January, RBS analysts made their highly publicized call to “sell everything except high quality bonds”.

Barely a month later, when the S&P 500 SPX, +0.64%  dropped to multiyear lows to mark a third correction in less than two years, it seemed the call would be vindicated. But after nine months, it is apparent that heeding it would have been costly as markets soon rebounded and then rallied to records.

Valuations are above historical averages and earnings growth has deteriorated over the past two years—all suggesting that, in the long term, returns are going to be low.

Wouter Sturkenboom, senior investment strategist at Russell Investments, said the current environment has been among the most trying he can recall for market bears.

“Normally, if you feel bearish about the stock market you would be looking for safe bets but right now, all the traditional safe bets are no longer safe,” Sturkenboom said, in an interview.

Even bonds, which tend to rally when things get gloomy, aren’t a reliable wager.

“Bonds are overvalued, which makes exposure to duration risky if inflation rises even by a bit,” he said.

Duration is a measure of the sensitivity of a bond’s price to a change in interest rates. Bonds with higher duration carry more risk.

The first step investors should take now is to accept that future returns will be low, said Michael Batnick, director of research at Ritholtz Wealth Management.

“Stocks are expensive on every metric you take and that means that future returns will be lower. Investors should simply accept it and act accordingly, which means saving more,” he said in an interview..

“The idea you can take lower returns and turn them to get higher returns by timing is ruinous for average investors. It doesn’t work for the vast majority of investors. Even if you knew with precision how much earnings will be next year, you won’t know what multiple millions of investors are going to pay,” he said.

While pessimism about returns is pervasive, there are still ways to invest and build wealth.

Both Batnick and Sturkenboom advocate adding assets with lower valuations while trimming exposure to expensive U.S. large-cap equities.

“For investors looking for safety bets, they should think outside of the box. Safety now comes in cheap valuations and there are several assets that could fit the bill out there,” Sturkenboom said.

Among assets that Sturkenboom prefers are Spanish and German real-estate investment trusts, gold ETFs, Treasury inflation-protected securities, or TIPS, and cash.

While cash gives investors the option to swoop in and sweep up bargains when the market tanks, it requires patience as big drawdowns are rare events, Sturkenboom said.

“Cash is good if you are tracking markets and can deploy it quickly. The past three years have been disappointing for those who held cash and were unable to buy at corrections, because they were very short-lived,” he said.

“But in the current environment it is still worth it to keep cash for the eventual 30%-40% drawdown, the likelihood of which is pretty high over the next three years,” he said.

Batnick is a fan of rules-based planning: “You have to have a plan and stick to it. Allocate to markets that are cheap on relative and absolute terms, but don’t try to wing it,” he said.

“Building wealth through investing in the stock market requires a lot of pain. There will be big drawdowns. But more money has been lost by trying to avoid drawdowns than by staying invested,” Batnick said.

5 Smart 401(k) Moves to Make Now

financial freedomMy Comments: You say you don’t have a 401(k)? Maybe you have a 403(b), or an IRA with exposure to the market. If you are in or close to retirement and your investment portfolio goes to hell, you simply don’t have enough time to hope it recovers and gets back on track. Be defensive for a while and sleep better at night.

by Carolyn Bigda | September 26, 2016


Storm clouds are forming, so take your nest egg off autopilot and steer to clearer skies.

Blissfully, making your 401(k) grow hasn’t been that hard in recent years. Since March 2009, the S&P 500 index of U.S. stocks has more than tripled in value. And thanks to the Pension Protection Act—now celebrating its 10th anniversary—many workers are automatically enrolled in 401(k)s. “Inertia has led to some pretty powerful results,” says Katie Taylor, director of thought leadership at Fidelity.

But inertia works only as long as the winds are blowing in the right direction. Today there are signs that momentum could be shifting. U.S. equities, for one, are as frothy now as they were leading up to the 2007–09 bear market and the Great Depression in 1929. The S&P 500 trades at a price/earnings ratio of 27.3 based on 10 years of averaged profits, a 63% premium to historical averages.

Meanwhile, corporate profits have been declining for five consecutive quarters, the worst such streak since the financial panic. And worried fund managers have amassed large piles of cash, according to a recent Bank of America Merrill Lynch survey.

None of this means your 401(k) needs a major overhaul. This is, after all, your long-term portfolio, meant to endure choppy air from time to time. But a few tweaks now can help ensure that inertia doesn’t work against you—and that you’re still on track no matter what happens in the market.

Get over your fear of bonds

If you haven’t rebalanced your 401(k) in a while, it probably looks different from what you remember. Without rebalancing, a moderate 60% U.S. stock/40% U.S. bond portfolio at the end of the last recession is now closer to an aggressive 80% equities/20% bond mix, according to Morningstar.

The rule of thumb: If your weightings are off-kilter by five percentage points or more from your desired mix, it’s time to take action.

Some investors, though, may be wary of rebalancing into bonds now, notes Maria Bruno, a senior investment analyst in Vanguard’s investment strategy group. That’s in part because fixed-income prices fall when interest rates rise, and the Federal Reserve could lift rates before the year is out.

But “rebalancing helps protect you from short-term volatility,” Bruno notes. Even if fixed-income prices fall, bonds can still serve as a cushion. The worst calendar-year loss for intermediate-term government bonds was 5.1%, in 1994. By contrast, the worst loss for blue-chip U.S. stocks was 43.3%, in 1931.

You can further reduce risk by choosing bond funds with an average “duration” of about five years or less, which are less sensitive to interest-rate moves, says Peter Mallouk, president of Creative Planning in Leawood, Kans. (A duration of five implies that if rates rise one percentage point, the fund could lose 5% in value.) You can look up this figure for your plan’s fixed-income offerings at Morningstar.com. If your 401(k) doesn’t offer a good low-duration option, go with a core fund such as Dodge & Cox Income DODIX 0% , with a duration of just four years, in your IRA. The fund, which has beaten more than 80% of its peers over the past five, 10, and 15 years, is in our MONEY 50 recommended list.
CONTINUE-READING

What All Bubbles Have In Common

My Comments: My brain is tired. Too much political angst, too much monetary crap, not enough positive feedback. And here’s some more monetary crap.

But if you are like me and are not expecting to win the lottery anytime soon, then bubbles become important. And like it or not, they tend to burst and create chaos. Look at this chart and read the article to determine where we are right now. Maybe.

bubbles

Sep. 16, 2016

Summary

  • By far, the main cause of bubbles is excessive monetary liquidity in the financial system.
  • Investors are showing signs of behavior consistent with asset bubbles such as herding, hindsight bias, confirmation bias, anchoring, overconfidence and greater fool.
  • We’re at the final stages of the bubble and the rise in the LIBOR and government bond yields are the first warning signs.

What causes a bubble?

By far, the main cause of bubbles is excessive monetary liquidity in the financial system. Axel Weber, former Deutsche Budesbank President puts it this way: “the past has shown that an overly generous provision of liquidity in global financial markets in connection with a very low level of interest rates promotes the formation of asset price bubbles.” This makes you think about today’s Central Banks’ ultra-loose monetary policy for several years, right?

In fact, when too much liquidity is given to normal citizens, it usually ends up in inflation whereas when that additional liquidity finds its way to the hands of the wealthiest, it usually ends up in bubbles. That is because poor people have a higher propensity to consume than rich people who have a higher propensity to save.

So, an extra buck on a poor guy’s wallet will probably end up in consumption while an extra buck on a rich guy’s bank account will more likely end up in savings. This supports the claim that Central Bank’s monetary policy is not reaching the real economy and is only making the rich (who own assets) even richer.

What about investor’s psychology?

Bubbles also have an emotional component. As Dan Ariely said “humans may be irrational, but they are predictably irrational.” Here are a few common behaviors that lead to the creation of bubbles.

Humans are biologically wired to mimic the actions of the group. While this behavior allows us to quickly absorb and react based on the intelligence of others around us, it also leads to self reinforcing cycles of aggregate behavior. This is called herding and it explains popular investment strategies such as momentum or trend following.

Investors also overestimate their ability to predict the future based on the recent past. This tendency to overemphasize recent performance is called hindsight bias and just like herding is one of the reasons behind the success of momentum and trend following investment strategies.

Both herding and hindsight bias, explain why a growing number of investors use technical analysis alone to make their investment decisions and fewer investors care about fundamental analysis and about the price they pay for a certain asset. This is why, when faced with the warning that valuations are currently at very high levels, many investors say this is not “actionable.” For them, what is “actionable” is 2 moving averages crossing on a chart.

People also tend to seek information that supports their own theories, and usually ignore information that disproves their points of view. This is called confirmation bias and can be found in today’s failed attempts to justify expensive valuations with the fact that stocks earnings yield and dividend yield is higher than government bond yields.

Anchoring consists in investors’ need to have references. So, if a stock trades today at $100, investors will perceive $90 as cheap and $110 as expensive.

People also tend to overestimate their intelligence and capabilities relative to others. For example, a 2006 study showed that 74% of professional fund managers believe they delivered above average performance. This overconfidence grows as the asset prices increase and is usually at its high before the crash. It is just like the story of the turkey whose trust in the farmer grows by the day because the farmer feeds him every day. And when the turkey’s trust in the farmer is greater than ever, that’s when the turkey loses his head.

This year has been all about buying the dips because anytime there were bad news on China (in January), on the US (May jobs report), on Europe (Brexit vote in June) or on disappointing earnings (it has now been 5 consecutive quarters of earnings decline), everyone followed the same reasoning: The ECB will ease further, the BOJ will add stimulus, the Fed won’t hike and/or the BOE will cut interest rates.

But the current selloff is about the Fed raising rates and the BOJ and ECB reducing monetary stimulus. Will anchoring and overconfidence make investors buy this dip?

Finally, there’s the greater fool theory that says rational people will buy into valuations that they don’t necessarily believe, as long as they think there is someone else more foolish who will buy it for an even higher value. Do negative yielding bonds ring a bell here?

In which phase of the bubble are we?

Jean-Paul Rodrigue says every bubble goes through 4 stages: stealth, awareness, mania and blow-off.

The way I see it, the S&P 500  took-off in 2009, went through a bear trap in 2012 and is now somewhere between Delusion and the New Paradigm, if not already at the beginning of the denial.

In Summary

There’s evidence of exceptional amounts of liquidity in the financial system today as investors are showing the behavior we see in the final stages of a bubble.

In fact, there are reasons to believe that Central Bank policy is changing and when that happens, the Bubble will pop. On the one hand, the libor rose to 83 basis points over the summer, the highest since 2009 and surpassing the levels seen at the peak of the European sovereign debt crisis and it seems to have already incorporated a potential 25 basis point rate increase by the Fed. On the other hand, Government bond yields in Germany, Japan and the US have been rising over the summer specially in the longer part of the curve.

A Reverse Mortgage Can Save Your Retirement!

real estateMy Comments: Many of you may react negatively when you hear the term ‘reverse mortgage’. At one time that reaction was a reasonable response, but not any longer.

Reverse mortgages are now a legitimate financial planning tool that advisors like me employ when the circumstances are appropriate. As you will read below, they can be a life saver when cash flow is limited or we’re in the middle of a market crisis and you don’t want to sell your stocks and bonds and lose a ton of money.

They can be a critical element in your efforts to find find financial freedom.

07/31/2016 Robert Mauterstock

Reverse mortgages have been around for a long time. It’s a method that an individual can use to convert the equity built up in their home to a credit line or an income for as long as they remain in the home as their primary residence, without the burden of monthly mortgage payments. But up until recently the fees to establish one were very high. As a result, financial planners (including myself) did not recommend them to clients. In many cases our broker/dealer firms prohibited us from even talking about them.

But recently I met with Bob Tranchell, a senior VP at the Federal Savings Bank. Bob is a specialist in reverse mortgages. He explained to me all the changes that have occurred with reverse mortgages in the last few years. In 2010 and 2013 the federal govt. revised the Home Equity Conversion program (HECM) reduced its costs and made it more secure. Bob showed me how the reverse mortgage could become a very effective tool for aging baby boomers to give them security during their retirement years.

It is estimated that 87 percent of baby boomers will own a home in retirement, but 68 percent of them will still carry a mortgage. Research shows that the foreclosure rate for individuals between ages 65-74 increases by 920 percent. Often seniors who have a reduced income after retirement cannot maintain the payments they made while they were working.

In addition boomers may face the dangers of being in the sandwich generation. They might have to help their aging parents financially at the same time they have to support their children with student loans and no job. A Merrill Lynch survey indicated that more than 60 percent of boomers are considered the family bank, handing out funds to their parents or adult children.

Let’s look at an example of how a reverse mortgage can help a retired boomer. If he or she is at least 62 years old he can take out a reverse mortgage on the value of his home up to $625,000. The percentage available is based on his age, the appraised home value, the lender’s margin and the 10 year LIBOR rate (an interest rate index established by the Fed. Govt.). The 62-year-old will have access to 52.4 percent of the home value or $327,500.

He can take these funds as a lump sum, a fixed income for the rest of his life (Tenure), a term payment (fixed payment for a fixed period) or a credit line. The cost of the reverse mortgage is a 0.5 percent mortgage insurance premium, the loan origination fees and any closing costs. For the $327,500 amount the total costs would be between $6000-$14000 dollars. This can be wrapped into the mortgage. No loan payments are due as long as the individual keeps the home.

Payments that come from the reverse mortgage are received income tax free. If the individual does not tap into the mortgage the credit line increases each year based upon the lender’s margin, a 1.25 percent mortgage insurance premium and the value of the 1 year LIBOR rate. Currently it increases at more than 5 percent a year! Eventually the credit line can exceed the actual value of the home but the heirs of the borrower are only responsible for the value equal to 95 percent of the appraised value of the home. The rest is forgiven! They can chose to sell the home or take out a new mortgage and pay back the reverse mortgage.

Let’s assume the 62-year-old took out a reverse mortgage for $320,000 and didn’t touch it for 20 years. Based on current rates his credit line will have grown to $1,200,000 regardless of the value of the home. Assuming he wants to convert the loan into an income at age 82, he’d receive $10,103 per month for ten years and could still keep $300,000 in reserve as a line of credit (which will grow to $569,391 in another 10 years).

The reverse mortgage can also be used to pay off an existing mortgage and eliminate mortgage payments, pay for long term care or a long term care policy or assist children or parents with financial needs. It cannot be used to purchase an annuity or buy stock. If the borrower is concerned about leaving a legacy to his or her children he and his spouse can buy a second to die life insurance policy and pay the premium with some of the proceeds from the reverse mortgage. When the second spouse dies the kids will receive a tax free death benefit which they can use to pay off the reverse mortgage and own the home debt free.

The possibilities are endless. I have only touched on a few. Key to the program is that payments are received tax free, the loan is unsecured and the heirs are only responsible to pay back a maximum of 95 percent of the home’s value regardless of how much was taken out. It’s a win-win.