Investing Curiouscatblog

Category: Financial Literacy

  • Financial Planning Made Easy

    Scott Adams does a great job with Dilbert and he presents a simple, sound financial strategy in Dilbert and the Way of the Weasel, page 172, Everything you need to know about financial planning:

    • Make a will.
    • Pay off your credit cards.
    • Get term life insurance if you have a family to support.
    • Fund your 401(k) to the maximum.
    • Fund your IRA to the maximum.
    • Buy a house if you want to live in a house and you can afford it.
    • Put six months’ expenses in a money market fund. [this was wise, given the currently very low money market rates I would use “high yield” bank savings account now, FDIC insured – John]
    • Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker, and never touch it until retirement.
    • If any of this confuses you or you have something special going on (retirement, college planning, tax issues) hire a fee-based financial planner, not one who charges a percentage of your portfolio.

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  • Fed Cuts Rate to 0-.25%

    Treasury bills have been providing remarkably low yields recently. And the Fed today cut their target federal funds rate to 0-.25% (what is the fed funds rate?). With such low rates already in the market the impact of a lowered fed funds rate is really negligible. The importance is not in the rate but in the continuing message from the Fed that they will take extraordinary measures to soften the recession.

    There are significant risks to this aggressive strategy (and there would be risks for acting cautiously too). But I cannot understand investing in the dollar under these conditions or in investing in long term bonds (though lower grade bonds might make some sense as a risky investment for a small portion of a portfolio as the prices have declined so much).

    The current yields, truly are amazing as this graph shows. The chart shows the yield curve in Dec 2008, 2006, 2000 and 1994 based on data from the US Treasury

    chart of yield curve in Dec 2008, 2006, 2000, 1994

    Related: Corporate and Government Bond Rates Graph – Discounted Corporate Bonds Failing to Find Buying Support – Municipal Bonds After Tax Return – Total Return

  • Securities Investor Protection Corporation

    The Securities Investor Protection Corporation restores funds to investors with assets in the hands of bankrupt and otherwise financially troubled brokerage firms. The Securities Investor Protection Corporation was not chartered by Congress to combat fraud, but to return funds (with a $500,000 limit for securities and under that a $100,000 cap on cash) that you held in a covered account.

    With the recent Madoff fraud case some may wonder about SIPC coverage. What SIPC would cover is cash fraudulently withdrawn from covered account (if I owned 100 shares of Google and they took my shares that is covered – as I understand it). What SIPC does not cover is investment losses. From my understanding Madoff funds suffered both these types of losses.

    And I am not sure how the Ponzi scheme aspects would be seen. For example, I can’t imagine false claims from Mandoff about returns that never existed are covered. Therefore if you put in $100,000 10 years ago and were told it was now worth $400,000, I can’t image you would be covered for the $400,000 they told you it was worth – if that had just been a lie. And if your $100,000 from strictly a investing perspective (not counting money they fraudulently took to pay off other investors) was only worth $50,000 (it had actually lost value) then I think that would be the limit of your coverage. So if they had paid your $50,000 to someone else fraudulently you would be owed that. Figuring out what is covered seems like it could be very messy.
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  • 10 Stocks for Income Investors

    Recent market collapses have made it even more obvious how import proper retirement planning is. There are many aspects to this (this is a huge topic, see more posts on retirement planning). One good strategy is to put a portion of your portfolio in income producing stocks (there are all sorts of factors to consider when thinking about what percentage of your portfolio but 10-20% may be good once you are in retirement). They can provide income and can providing growing income over time (or the income may not grow over time – it depends on the companies success).

    10 picks for income investors

    Strategy #1: Stocks with current yields at 10% or higher where the dividend payout is sustainable at current levels for a decade or more. If the stock market recovers, of course, the dividend yield will drop, but you don’t care. All you want to know is that if you buy $10,000 in annual cash flow now, you’ll get at least $10,000 of annual cash flow in retirement.
    …
    Strategy #3: Buy common stocks with solid dividends and a history of raising dividends for the long haul. That way you let time and compounding work for you. While you may be buying $1 per share in dividends today with stocks like these, you’re also buying, say, 8% annual increases in dividends. In 10 years, that turns a $1-a-share dividend into $2.16 a share in dividends.

    3 of this picks are: Enbridge Energy Partners (EEP), dividend yield of 15.5%, dividend history; Energy Transfer Partners (ETP), 11.2%, dividend history; Rayonier (RYN), yielding 6.7%, dividend history.

    Of course those dividends may not continue, these investments do have risk.

    Related: S&P 500 Dividend Yield Tops Bond Yield: First Time Since 1958 –
    Discounted Corporate Bonds Failing to Find Buying Support – Allocations Make A Big Difference

  • Companies Beg Congress to Allow Them to Avoid Paying Into Pension Funds

    Pension Funds Beg Congress to Suspend Billions in Contributions

    Pension funds at Pfizer Inc., International Business Machines Corp., United Parcel Service Inc. and dozens of other companies have joined the parade of businesses seeking relief from Congress amid this year’s economic meltdown.

    Instead of money, they want legislation to suspend a federal law that would make them pump billions of dollars into retirement plans to offset stock-market losses as many struggle to find enough cash just to stay in business.

    So lets see, you minimally fund the pension plan for your workers and make optimistic projections about investing returns. The market goes down, and you are now so far underfunding your pension that the law requires you to add funds to the pension. Your solution, go cry to the politicians. How sad. If Pfizer or IBM are having cash flow problems that is amazing. They really should be able to manage their cash better than that. Their most recent quarterly reports do not indicate cash flow problems. Yes I understand we have a credit crisis so if GM were having problems I wouldn’t be surprised (but you know what – they aren’t, in this area).

    “Without relief, plan sponsors must shoulder the immediate burden of sudden, unexpected, large increases in plan contributions at a time when cash may be difficult to generate internally or to obtain in the credit markets,” Mercer’s Hartshorn says.
    …
    GM was notably absent from the five-page list of companies and organizations asking Congress for relief from the asset thresholds. GM said its pension plans had a $1.8 billion deficit as of Oct. 31, down from a $20 billion surplus 10 months earlier. At that level, GM’s plans would top the pension law’s 2008 asset threshold.

    I think companies need to meet their obligations. If they choose to minimally fund their pensions without understanding that financial market are volatile, then they will have to pay up as required by law. When times are good you see all these CEOs taking advantage of pension fund “excesses” to reward themselves. They need to learn that you don’t raid your pension funds (either by taking cash out or not funding current investments – because you claim the assets are already sufficient). Pension funds are long term investments and you cannot manage as though the target value is the minimum amount allowed by law (unless you are willing to pay up cash every time your investments don’t meet your predicted returns). This is very simple stuff.

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  • Over 500,000 Jobs Disappeared in November

    Jobless Rate Rises to 6.7% in November

    With the economy deteriorating rapidly, the nation’s employers shed 533,000 jobs in November, the 11th consecutive monthly decline, the government reported Friday morning, and the unemployment rate rose to 6.7 percent.
    …
    The decline, the largest one-month loss since December 1974, was fresh evidence that the economic contraction accelerated in November, promising to make the current recession, already 12 months old, the longest since the Great Depression. The previous record was 16 months, in the severe recessions of the mid-1970s and early 1980s.
    …
    The manufacturing sector has been particularly hard hit, losing more than half a million jobs this year. That is nearly half the 1.2 million jobs lost since employment peaked in December and, in January, began its uninterrupted decline. The cutbacks seem likely to accelerate as the three Detroit automakers close more factories and shrink payrolls even more
    …
    With all this in mind, and particularly the shrinking employment rolls, economists are estimating that the gross domestic product is contracting at an annual rate of 4 percent or more in the fourth quarter, after a decline of 0.3 percent in the third quarter.

    The news was even worse than the anticipated 350,000 losses. And Previous months figures were adjusted from 240,000 losses in October to 320,00 and from 284,000 in September to 403,000. And these numbers are on an already extremely poor job picture the previous 7 years. One of the great strengths of the US economy over the last 50 years has been job creation. We know we are in for serious problems, the question is how serious and how long. One of the most important gages of that will be how many jobs are lost.

    When job losses stop and job gains start (in the aggregate, for the entire economy) it will be a very positive sign. Normally jobs are a lagging indicator, meaning job data lags the actual economy. Job losses will not increases until after the economy starts to grow. Of course, economic data doesn’t always fit the conventional wisdom.

    This is one more piece of evidence that the economy is not looking good. And 2009 is likely to be a bad year for the economy overall.

    Related: Bad News on Jobs (Sep 2008) – What Do Unemployment Stats Mean? – The Economy is in Serious Trouble – Financial Market Meltdown

  • Let the Good Times Roll (using Credit)

    Continuation of: USA Manufacturing is Healthy

    The real problem with the USA economy is that a country cannot live beyond its means forever. Those living in USA have consumed far more than they have produced for decades. That is not sustainable. The living beyond our means is mainly due to massively increased consumption, not shrinking output (in manufacturing or service). One, of many examples, of the increased consumption is average square footage of single-family homes in the USA: 1950 – 983; 1970 – 1,500; 1990 – 2,080; 2004 – 2,349.

    In case it isn’t totally obvious to you. You don’t fix this problem by encouraging more spending and borrowing: either by the government or by consumers. The long term problem for the USA economy is that people have consuming more than they have been producing. Personally, as this continues you reach a point where getting another credit card does not work. The same holds true for the collective health of a country. A country cannot solve the problem of having bills come due from decades of living beyond its means by charging more so that they can continue to live beyond their means.

    Where the USA is in the continuum, is hard for me to judge. For the sack of illustration, lets say a consumer can get to 10 cards before they finally fail. If the consumer reaches the limit on 2 credit cards they have the choice to continue to the party by getting another credit card. Or they have the choice of addressing the situation they have gotten themselves into. If they decide to become responsible they have a challenge but one they can endure with some hardships.

    If they press on to 5 credit cards and then max them out they come to the same decision. Dig themselves deeper in debt to avoid the problem today or live up their past behavior and become responsible. The work they have ahead of themselves is much more challenging than if they had started working on the problem when they only had 2 cards.

    If they press on to 9 cards and now have the decision again. The effort to find a solution may be almost impossible. Borrow more to pay for past mistakes while maintaining some expenditures may be possible (but they will have to live on less than they earn). By the time you are this far down the failed path you have so much going to pay for your past bills you can’t spend even close to what you currently earn on current expenses. Letting yourself get to this point is very bad. And most likely as a person you will go bankrupt.
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  • USA Manufacturing Output Continues to Increase (over the long term)

    When looking at the long term data, USA manufacturing output continues to increase. For decades people have been repeating the claim that the manufacturing base is eroding. It has not been true. I realize the economy is on weak ground today, I am not talking about that, I am looking at the long term trends.

    The USA manufactures more than anyone else – by far. The percentage of total global manufacturing is the same today it was two decades ago (and further back as well). For decades people have been saying the USA has lost the manufacturing base – it just is not true. No matter how many times they say it does not make it true. It is true since 2000 the USA increase in manufacturing output (note not a decrease) has not kept pace with global grown in manufacturing output (global output in that period is up 47% and the USA is up 19% – Japan is down 10% for that period).

    I would guess 20 years from today the USA will have a lower percentage of worldwide manufacturing. But I don’t see any reason believe the USA will see a decline in total manufacturing output. I just think the rest of the world is likely to grow manufacturing output more rapidly.

    Looking at a year or even 2 or 3 years of manufacturing output data leaves a great deal of room to see trends where really just random variation exists. Even for longer periods trends are hard to project into the future.

    Conventional wisdom is correct about China growing manufacturing output tremendously. China has grown from 4% of the output of the largest manufacturing companies in 1990 to manufacturing 16% of the total output in China today. That 12% had to come from other’s shares. And given all you hear from the general press, financial press, politicians, commentators… you would think the USA must have much less than China today, so may 10% and maybe they had 20% in 1990. When actually in 1990 the USA had 28% and in 2007 they had 27%.

    Manufacturing jobs are not moving oversees. Manufacturing jobs are decreasing everywhere.
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  • Dazzling Diversification

    Diversification overrated? Not a chance [the broken link has been removed] by Jason Zweig

    A diversified portfolio always has, and always will, underperform the hottest investment of the moment.

    For anyone with a sustainable ability to identify the hottest investment of the moment, diversification is a mistake. But if you really believe you’ve got that ability, you’re not just mistaken. You need to be hauled off in a straitjacket to the Institute for the Treatment of Investment Insanity.

    Exactly right. As we posted previously Warren Buffett’s diversification thoughts are similar

    If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it’s not your game, participate in total diversification. The economy will do fine over time. Make sure you don’t buy at the wrong price or the wrong time. That’s what most people should do, buy a cheap index fund and slowly dollar cost average into it.

    You have to remember when Warren Buffett says “professional and have confidence” he doesn’t really mean just what those words say. He mean if you are Charlie Munger, George Soros, Jimmy Rodgers and maybe 10 other people alive today (maybe I am too restrictive, maybe he would include 50 more people alive today, but I doubt it).

    Related: Dilbert on Investing – investment risks – Curious Cat Investing and Economics Search Engine

  • S&P 500 Dividend Yield Tops Bond Yield: First Time Since 1958

    S&P 500 Payout Tops Bond Yield, a First Since 1958 (site broke the link, so I removed it):

    U.S. stocks’ dividend yields were lower than the yield on 10-year Treasury notes for half a century. Not any more. Dividends paid by Standard & Poor’s 500 Index companies in the past 12 months amounted to 3.51 percent of the benchmark’s closing value yesterday. In early trading today, the 10-year yield fell as low as 3.42 percent.
    …
    Treasuries routinely had higher yields than stocks before 1958, according to Bernstein. When this relationship came to an end, yields were near their current levels. The S&P 500 dividend yield fell 0.58 percentage point, to 3.24 percent, in the third quarter of 1958. The 10-year yield rose about the same amount, 0.6 point, to 3.80 percent.

    Two explanations later emerged for the reversal, he wrote. One held that the economy’s recovery from the 1957-58 recession showed “investors could finally put to rest the widely held expectation of an imminent return to the Great Depression.” The second was the increasing popularity of investing in growth stocks, or shares of companies whose sales and earnings rose at a relatively fast pace. Because of their expansion, the companies often paid below-average dividends.

    Reversal of Fortunes Between Stocks and Bonds

    Even more telling was the relative movements in stock and bond yields over the years. Bernstein calculates that from 1954 to 1969 — while inflation was relatively low and stable — bond and stock yields moved mostly in tandem. But from 1970 to 1999 — the Great Inflation — bond and stock yields moved inversely. From 2000 on, bond and stock yields have been back in sync.

    Arnott takes it a step further. “In a world of deleveraging, both for the financial services arena and for the economy at large, growth is less certain,” he says. “And with the economy eroding sharply, so is inflation. If stocks don’t deliver nominal growth in dividends and earnings, then their yield ‘must’ exceed the Treasury yield, in order to give us any sort of risk premium.”

    Related: Corporate and Government Bond Rates Graph – Highest Possible Returns – posts on interest rates – investing strategy