Tag Archives: investment advice

Top 10 Phrases from Bank Lobbyists and their Translation

bear marketMy Comments: On April 6, 2016, rules were introduced into the US financial system that will cause more of us to treat our clients better. At least that’s the plan.

Wall Street firms have been resisting this change for years, and while the following Top 10 Reasons Why are tongue in cheek, there’s a whole lot more truth here than most of us choose to believe.

1) This new standard will limit investors’ choice of retirement options.
“This new standard will definitely limit my choice of yachts.”

2) Investors will “go it alone” and screw up their asset allocation.
“My Wolf of Wall Street theme party will have a totally inadequate seafood buffet.”

3) Rather than provide advice, advisors will sit on their hands for fear of legal reprisals associated with a fiduciary standard.
“Shhh. Don’t tell anyone there is a robust independent advisor ecosystem already available in the economy.”

4) New, innovative products will not be introduced to the marketplace.
“New, highly profitable, poor performing products will not be introduced to the marketplace.”

5) It’s not about the price you pay, but rather, the value you receive.
“It’s not about the price they pay, it’s about the soft dollars, revenue shares, and kickbacks we receive.”

6) Our legislative partners stand ready to protect investors and the middle class.
“We have taken every Congressman out for a lovely steak dinner and we will continue to do so.”

7) We have the best facilities in the world to provide cutting edge research and leading market insights.
“We pay the highest rent in Manhattan and hired a bunch of busted PhD students who can write fancy equations.”

8) Our robust advisor network fully leverages our economies of scale to provide superior service.
“We send our advisors canned reports and shoddy back office services and charge them 50% of their revenues.”

9) We have been in the business for centuries.
“We have been exploiting clients for centuries.”

10) Our clients see the value we provide. They understand that we are well worth the price.
“Please don’t go to Vanguard. Please don’t go to Vanguard. Please don’t go to Vanguard.”

Is Your House A Good Investment?

real estateMy Comments: My first house was in 1967 (I think). Since then I’ve had five more, all in the same town, with the current one a significant “downsizing” from #5. Of the first 5, only #2 was a good investment from a financial perspective. If your definition of “good” is wider, then all of them had a positive outcome on my psyche and my family members, if not my wallet. Whatever the case, these comments are useful food for thought.

By John Waggoner, InvestmentNews, March 28, 2016

For many Americans, a house is a place to lay your head, plant your petunias and evict your raccoons. For many people, it’s their biggest investment, too.

But how good an investment is it? And how do you persuade your clients that when it comes to making a housing investment, bigger isn’t necessarily better?

Many people hold to the belief that a house is a good investment. This is particularly true for high-income people who want to justify buying a big house. While there’s nothing wrong with wanting a nice house, there’s plenty of evidence that it’s not a great investment — and may even be a bad one in a recession.

Let’s start with home prices. The S&P/Case Shiller 20-City Composite Home Price Index peaked in July 2006 at 206.52 and has yet to fully recover. Its most recent reading was 182.75, or about 13% below its all-time high. The national median price of existing homes peaked in July 2007 at $230,400 and currently stands at $210,800, according to the National Association of Realtors.

Our first lesson here is that it takes a long time to recover from a bubble. This isn’t unique to housing bubbles: The Dow Jones industrial average didn’t beat its 1929 high until 1954. Nearly two-thirds of all surviving technology stock funds are still below their 2000 high.

But real estate bubbles are particularly painful since most people borrow to buy. A homeowner with a 20% down payment would have seen his or her entire principal wiped out in a 20% decline. And during the 2006 mania, the normal 20% down payment was a quaint relic of earlier days. (This is, incidentally, a hallmark of real estate bubbles. During the Florida land bubble of 1926, investors actually dispatched with closing on the property, instead trading purchase agreements secured by a nominal good-faith deposit. When the bubble broke, some startled orange farmers discovered they still owned their orange groves, now covered with half-built bungalows.)

Our second lesson is that over the very long term, housing provides modest price appreciation. Yale professor Robert Shiller, co-creator of the Case-Shiller indices, argued in a 2006 paper that houses essentially provide “negligible” real returns.

Your clients may have a hard time believing this. Shorpy.com, a site devoted to historical photographs, had a photo of house in Chevy Chase, Md., that had sold for $17,000 in 1919. According to Zillow.com, the house sold for $2.4 million in 2014.

That’s a lot of money, right? Well, it’s not bad. Over 95 years, it works out to a 5.35% average annual return. That’s much better than inflation, but less than the return from the Dow.

And even that 5.35% is a bit misleading. Houses require continual upkeep, which costs money. We can assume a home built in 1919 had been lovingly coated in lead paint for half a century, and that the same lead paint was expensively removed at some point. We can also assume that lead pipes had been removed, too, as well as any asbestos that may have been used in the floors and furnace. Speaking of the furnace, a house built in 1919 is probably on its fifth one, at least, as well as its fifth roof. And let’s not forget the annual cost of mortgage interest, property taxes and insurance.

Finally, there are other factors to consider when weighing a client’s large home purchase. Like the stock market, the housing market is a fair-weather friend, rising in good times and falling in recessions. Unlike stocks, however, houses are much more difficult to sell in hard times — and that means you might not be able to move to a new area for a better job if your house is underwater. According to the National Bureau of Economic Research, housing busts reduce homeowners’ mobility, on average, by 30%. In other words, if your client buys a large house and loses his job in a Steve Janachowski, a financial planner in Tiburon, Calif., noted that he’s also seeing clients who have too much house already. “They don’t have a lot of liquid assets in retirement and have too much of their resources tied up in their house,” he said.
Eventually, they will have to sell their house and look for a lower-cost place to live. “And they don’t want to,” he said. “They’re already living in their dream house.”

Naturally, there are many plus sides to home ownership: You get to deduct the interest on your mortgage, and when the housing market is rising, leveraging your purchase will amplify your gains. You can paint the living room any color you want without having to ask the landlord. And a paid-off mortgage is a wonderful thing in retirement. Nevertheless, unless you have a fair amount of good timing in your purchase, you can expect only modest price gains.

Many successful people like to own their own homes, and for many of them, a house is a not-so-subtle way to display their wealth. There’s probably not much you can do to dissuade them. But if your client is trying to justify a large house by saying it’s a great investment, in many cases, that just isn’t the case.

Prepare For A ‘Rockier Road Ahead’

bear-market--My Comments: Investing money for the faint of heart is at best, a guessing game. Too much in ‘safe’ bonds and you get hammered when interest rates rise. Too little in ‘risky’ stocks at the bottom of a market trough and you get hammered when the next upturn happens.

As explained here, the ups and downs have been muted for the last few years and that is probably going to change. If your money is not positioned to take advantage of more volatility, you may not lose your money, but you will almost certainly lose purchasing power. Expect interest rates to stay low and inflation to increase.

Richard Turnill, The BlackRock Blog

There’s the old adage that a picture is worth a 1,000 words. I couldn’t agree more. That’s why in my role as BlackRock Global Chief Investment Strategist, I’ll be sharing a chart each week, here on the BlackRock Blog and in my new weekly commentary, that focuses on a key theme likely to shape markets in the weeks ahead.

Here’s this week’s chart below. It helps show why current low levels of stock market volatility look unsustainable; or, in other words, why now is a good time to prepare portfolios for a rockier road ahead.

The Federal Reserve’s (Fed) quantitative easing (QE) program—twinned with liberal doses of QE by other central banks—dulled market volatility to unprecedented low levels between 2012 and 2014. This period of exceptionally low volatility ended last year, as the Fed wound down its QE purchases and began to raise rates.

However, as evident in the chart above, markets have become eerily quiet recently. U.S. equity market volatility, as measured by the VIX Index, is hovering around its lowest level since August 2015 and is well below its long-term average.

This unusual calm follows declining market concerns about sliding oil prices, and the health of European banks and China. I do not expect this calm to last, and I see a return to the higher-volatility regime that was the norm prior to QE.

Why? The future path of monetary policy remains uncertain, and tail risks remain. A big Chinese yuan devaluation isn’t BlackRock’s base case, but it’s still a downside risk. Geopolitics, particularly as Europe confronts terrorism and migration, could also spark volatility. So, too, could rising global and U.S. inflation expectations.

How can you prepare? Gold can be an effective hedge if volatility spikes due to rising U.S. inflation fears, according to BlackRock analysis. I also like Treasury Inflation-Protected Securities (TIPS) and similar instruments. For more on what to watch in the week ahead, be sure to read my full weekly commentary.

The Biggest Force Powering The Stock Market Is Starting To Disappear

roller coasterMy Comments: This is important if your financial future depends to some degree on retirement accounts that include investments in the stock and bond markets. If you think the turmoil is going to end soon, you should perhaps think again.

Bob Bryan March 11, 2016

Since the beginning of the post-crisis bull-market run (2009), the biggest buyer of equities hasn’t been retail investors or institutions but companies themselves.

Companies have been supporting the stock market through buybacks for years.

But according to some analysts, the era of buybacks may be coming to a close.

And this could be terrible news for the stock market.

According to a note from analysts at HSBC, buybacks have been the source of most of the demand for stocks since 2009.

The note said that for each of the past two years, companies in the S&P 500 have bought back nearly $500 billion of their own stock and a total of $2.1 trillion since 2010.

This huge amount of buying has been a massive source of upside for the stock market, said Liz Ann Sonders, chief investment strategist at Charles Schwab.

“There’s no question that by far corporate buybacks have been the source of most of the buying in the stock market,” Sonders told Business Insider on Wednesday. “On a cumulative basis there has not been a dollar added to the US stock market since the end of the financial crisis by retail investors and pension funds.”

Jonathan Glionna, equity strategist at Barclays, laid out just how important this has been to equity markets, comparing the boost from buybacks to the Fed boosting the bond market through quantitative easing.

Read the full article and see the charts HERE

The Monetary Madness of Trump, Cruz and Rubio

CharityMy Comments: On its face, this looks like just another political swipe at the remaining presidential hopefuls on the right. However, as an aspiring economist and financial planner, I appreciate the role played by government in the financial sector and know how critical it is. These comments point to some dubious thinking on the part of some candidates.

Tuesday, Mar. 08, 2016 by Christopher Ragan

Anyone watching the U.S. presidential primaries is seeing a fascinating cast of characters and plenty of energetic debate. The three leading contenders on the Republican side – Donald Trump, Ted Cruz and Marco Rubio – are particularly interesting. They naturally have competing views on many issues, but when it comes to monetary policy, they are remarkably aligned. Unfortunately, they all line up in the wrong direction; each apparently misunderstands why central banks operate the way they do.

Begin with the front-runner, Donald Trump. He argues that the U.S. Federal Reserve should be audited. He is hopefully aware that the Fed’s books are already audited, and available for all to see on the Fed’s website. But what he really appears to mean is that all the Fed’s policy decisions should be brought before Congress and defended, and maybe even subjected to some kind of vote.

This is a very bad idea because it would politicize monetary policy. Central banks all across the world have operational independence from their government masters for good reason. Before such independence was granted, central banks were under political pressure to ease policy before elections, and this led over the years to higher inflation. Eventually, we learned that the way to keep inflation low and stable is to state this objective clearly, grant central banks the operational independence to achieve it and then hold them accountable for their performance. The past 25 years of inflation targeting in many cousntries suggests that the current system is working.

Now, consider the views of Texas Senator Ted Cruz, as reported in November by the Huffington Post: “Instead of adjusting monetary policy according to whims … the Fed should be … keeping our money tied to a stable level of gold.” Mr. Cruz is suggesting that the Federal Reserve go back a century to the days of the gold standard.

This is also a very bad idea. It would tie the Fed’s hands and prevent it from dealing with the impact of large economic shocks. During the Great Depression in the 1930s, when thousands of U.S. banks failed and the economy went into a massive tailspin, the Fed’s strict adherence to the gold standard kept it from acting. It could not extend credit to solvent but illiquid private banks without violating its gold-based rule, and so it chose instead to sit on the sidelines and watch the economic tragedy unfold.

Most economists today look back at that experience and conclude that the Fed’s policy was a major error. They also conclude that if the Fed had been using the same gold-based rules when the global financial crisis began in 2008, the subsequent recession would have been far worse than it was, when the Fed was able to act aggressively.

Florida Senator Marco Rubio also has a problem with the Federal Reserve. At a CNN town-hall event last month, he said the Fed’s job is to “provide stable currency and I believe they should operate on a rules-based system. They would have a very simple rule that determines when interest rates go up and when interest rates go down.”

While simple rules sound appealing, this is also a very bad idea. The job of the Fed is to keep inflation low while promoting growth and keeping financial markets stable. It does this by adjusting its policies, sometimes in response to shocks and sometimes in anticipation of events that are expected to occur. The shocks vary by origin, type, size, duration and impact. The almost countless possibilities mean that policy cannot follow a simple rule – and using one would prevent central bankers from doing their job, resulting in worse economic outcomes.

So far, monetary policy has not figured prominently in the U.S. presidential primaries. Based on these views, this is probably a good thing. But there is still plenty of time before the candidates will be chosen, and who knows what debates will unfold regarding the appropriate behaviour of the Federal Reserve?

The truth is that the processes of economic growth and inflation are complex, and monetary policy is equally complex. We need our central banks to maintain their operational independence and central bankers to continue using their well-informed judgment to keep our economies operating on an even keel.

Let’s hope these three bad ideas disappear soon and don’t threaten the policy coherence at the world’s most important central bank.

Christopher Ragan is an associate professor of economics at McGill University in Montreal and a research fellow at the C.D. Howe Institute in Toronto

Woman Hollering Creek, Texas

I’ve long had an interest in place names and how they came to be. I was reminded of this several weeks ago when driving across Texas and saw a sign on a bridge that read “Woman Hollering Creek”. I imagined a surveyor and map maker coming across yet another creek at the end of the day and wondering what to call this one. Someone in his crew says, “Hey, did I just hear a woman hollering”? So that’s what he named it.

England has it’s share of strange place names. About 50 years ago I was on a tour bus with my aunt somewhere in Scotland. We came to a T junction in the middle of nowhere with a sign by the road that read Lix Toll. No traffic light, no pub, no farm house, no other traffic, nothing; just rain, heather and gorse and rolling hills.

I asked the bus driver about it and he said that centuries ago, it was an outpost of the 59th Roman Legion.

map-southeast_3111559a-largeThis map appeared from somewhere yesterday showing silly place names in England. I was born in Surrey, not far from Dorking, which perhaps explains a few things so I thought I would share it with you. Here’s the link where you can see more and even buy a copy of the map. http://www.telegraph.co.uk/travel/destinations/europe/united-kingdom/galleries/Britains-silliest-place-names/map-full/

6 Charts Suggest a Stock Market Correction Soon

roller coasterMy Comments: Like me, you don’t have a clue what’s going to happen either. But these charts help give you an educated guess.

John Mauldin, Mauldin Economics Dec. 20, 2015

The S&P 500 index is flat for the year, but that hasn’t been due to a lack of volatility. The index has traded within a 259-point range in 2015. This year is shaping up to be a disappointment compared to the stellar returns on stocks in recent years: 13.5% in 2014, 32.2% in 2013,15.9% in 2012.

The outlook for 2016 is even worse.

These six charts make a very compelling case for a stock market correction in the near future.