Investing Curiouscatblog

Category: Investing

  • Madoff ‘victims’ do math, realize they profited

    Madoff ‘victims’ do math, realize they profited

    The many Bernard Madoff investors who withdrew money from their accounts over the years are now wrestling with an ethical and legal quandary. What they thought were profits was likely money stolen from other clients in what prosecutors are calling the largest Ponzi scheme in history. Now, they are confronting the possibility they may have to pay some of it back.

    The issue came to the forefront this week as about 8,000 former Madoff clients began to receive letters inviting them to apply for up to $500,000 in aid from the Securities Investor Protection Corp. Lawyers for investors have been warning clients to do some tough math before they apply for any funds set aside for the victims, and figure out whether they were a winner or loser in the scheme.

    Hundreds and maybe thousands of investors in Madoff’s funds have been withdrawing money from their accounts for many years. In many cases, those investors have withdrawn far more than their principal investment.
    …
    Jonathan Levitt, a New Jersey attorney who represents several former Madoff clients, said more than half of the victims who called his office looking for help have turned out to be people whose long-term profits exceeded their principal investment.

    I discussed this aspect last month, the SPIC covers actual losses, not losses based upon false gains you didn’t have, I don’t think. So if you invested $100,000 and were told (falsely) it was worth $300,000 after years of gains you are not covered for $300,000. And I certainly hope the SPIC fund doesn’t payoff people who already had gains based on false accounting from Madoff.

    This whole situation also points out the value of diversification. Diversification is important not just in asset classes (stocks, bonds, cash, real estate…) but in the accounts and companies with which you are dealing (I have always been a bit paranoid in this feeling, compared to others that think this level of diversification is not really needed but this is an example of the risks investments face that diversification can help manage). This is a very difficult situation for investors that had counted on assess they believed they had earned but in fact they had not.

    Related: Bail us Out, say Madoff Victims – How to Protect Your Financial Health – Real Free Credit Report – identity theft links

  • Stock Markets Down $30 Trillion for 2008

    $30.1 trillion in stock market valuation was wiped out last year – Journal of a Plague Year: Faith in Markets Cracks Under Losses:

    The price tag has been transcendent, too. Global stock markets lost about half of their value in 2008, or $30.1 trillion dollars. In the U.S., $7.2 trillion of shareholder value was wiped off the books, as the Standard & Poor’s 500 Index fell 39 percent through Dec. 30 and the Nasdaq Composite Index dropped 42 percent.
    …
    Lehman Brothers Holdings Inc., with assets of $639 billion, filed the largest bankruptcy in U.S. history on Sept. 15. Its creditors may have lost as much $75 billion, the firm’s chief restructuring officer said.

    Bear Stearns Cos. was taken over by JPMorgan Chase & Co. in March after a funding crisis triggered by losses from subprime- mortgage investments. Merrill Lynch & Co., facing a crisis of its own, sold itself to Charlotte, North Carolina-based Bank of America Corp. And the last two major investment banks, Goldman Sachs Group Inc. and Morgan Stanley, converted to bank holding companies and got capital injections from the U.S. government.

    2008 was quite a memorable year in the markets. What the markets will do this year is hard to know. But the economy is likely to be very weak. Job losses will increase. If we are lucky the economy will be picking up by the end of the year. A huge problem is we have been living well beyond our means for decades. And now we are selling out even more of our children and grandchildren’s future to pay for the extravagance of those last few decades. How costly our credit-card-like financing of government bailouts is going to be is the most important issue I believe.

    There is nothing wrong with spending money you saved for a raining day when that day comes. There is a big problem (for your future) taking our more credit cards to spend money you didn’t bother to save. You might have to do so, but the costs you are heaping on your future is very high (and for the economy overall many of those costs will be borne by children not yet born).

    Related: The Economy is in Serious Trouble – Crisis May Push USA Federal Deficit to Above $1 Trillion for 2009 – What Should You Do With Your Government “Stimulus” Check? – Over 500,000 Jobs Disappeared in November

  • Bail us Out, say Madoff Victims

    As I suspected those (who are not earning minimum wage you can be sure) that have lost money on the Madoff case would expect others to bail them out: well paid lawyers (I am sure) are making their case for just such a bailout of their wealthy clients.

    Lawyers representing the victims of Bernard Madoff’s alleged $50bn fraud are calling on the US government to bail them out with billions of taxpayers’ dollars.
    …
    The SIPC has little more than $1.6bn of funds and has promised $500,000 to each Madoff victim who had an account with his firm in the past 12 months.

    The debate needs to be about what is the proper role for government. Not about this instance. What type of losses do we want secured? How large of payments do we want to insure? That amount has been $500,000 if we are changing the rules after the fact for a few is that really the best course of action)? How should these payments be funded? Do we really want to raise taxes on our grand children (many of which who will earn less than the equivalent of $50,000 today)? I don’t think so. This SIPC fund should be paid for by fees on investments just like the FDIC is paid for based on fees on covered deposits (as the SIPC is now – but no taxpayer funding should occur).

    If we decide we want to pay back people several million each then the fees just need to be raised to fund such a system. Just as with the FDIC if we want the government to backstop the fund by guaranteeing they will loan the fund money if it runs short of cash is fine with me. Then the SIPC fund just pays back the taxpayers with interest.
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  • The Power of Compounding

    Compounding is the Most Powerful Force in the Universe

    A talking head with some valuable info. I remember my father (a statistics professor) getting me to understand this as a small child (about 6 years old). The concept of growth and mathematical compounding is an important idea to understand as you think and learn about the world. It also is helpful so you understand that statistics don’t lie but ignorant people can draw false conclusions from data.

    It is unclear if Einstein really said this but he is often quoted as saying “compounding is the most powerful force in the universe.” Whether he did or not, understanding this simple concept is a critical component of numeracy (literacy with numbers). My guess is that people just find the concept of compounding amazing and then attribute quotes about it to Einstein.

    I strongly encourage you to watch at least the first 2 segments (a total of 15 minutes). And then take some time and think about compounding in ways to help you internalize the concepts. You can also read his book: The Essential Exponential For the Future of Our Planet by Albert Bartlett.

    Understanding the benefits of compound interest can help you become a much more successful investor. And understanding the principles of compounding can help you see the excess of bubbles cannot continue. You still have to overcome psychology that can be a powerful force leading you to believe never ending growth is possible. But at least you will have the mathematical understanding to help.

    Related: Curious Cat Investing and Economics Search – Playing Dice and Children’s Numeracy – Saving for Retirement (compound interest) – Bigger Impact: 15 to 18 mpg or 50 to 100 mpg?

  • How Much Will I Need to Save for Retirement?

    Retirement Myths and Realities provides some ideas from former Boeing President, Henry Hebeler:

    Hebeler says all Americans should become self-educated about retirement issues, even if they have a financial planner.
    …
    My father used to tell me to save 10 percent of my wages all the time for retirement. And so I did. I never looked at any retirement plan; we didn’t have retirement planning tools in those days.
    …
    I think the number is closer to 15 (percent) to 20 percent — that’s from the time when you’re a relatively young person, say, 30 years old or something like that.
    …
    A retiree’s inflation rate is about 0.2 percent higher than the normal Consumer Price Index. When you retire, you have medical expenses that continually increase. You have more need for this service and the unit cost is increasing much faster than inflation.
    …
    Now, if you’re going to retire at 80 years old, you could actually have a bigger number than 4 percent. If you’re going to retire around 65 or so, 4 percent is not a bad number. Some people are now saying 3.5 percent instead of 4 percent. If you’re going to retire at 55, you’d better spend a lot less than 4 percent because you’ve got another 10 years of life that you’re going to have to support.

    He makes some interesting points. I agree it is very important for people to become financially literate and take the time to understand their retirement plans. Just hoping it will work out or trusting that just doing what someone told you are very bad ideas. You need to educate yourself and learn about financing your retirement.

    I am not really convinced by his idea that you need to start saving 15-20% for retirement at age 30. But that is a decision each person has to make for themselves. Of course there are many factors including how much risk you are willing to accept, when you plan on retiring, what standard of living you want in retirement…

    Related: How Much Retirement Income? – posts on retirement – Saving for Retirement – Our Only Hope: Retiring Later

  • Low Mortgage Rates Not Available to Everyone

    The lowest 30 Year fixed mortgage rates in 37 years is great news for those looking to buy a house or to re-finance. However, that truth (the lowest rate) masks another truth, that it is available to a somewhat limited pool of borrowers. The rates for jumbo 30 year fixed mortgages and for regular 30 year fixed mortgages, for those with lower credit ratings, are not at the lowest rates they have ever reached. And getting mortgage rates that don’t require a 10-20% down payment and fully documented financial position are not as low as they have ever been. 15 year fixed rates are also low, but are not at all time lows. FHA loans still allow very low down payments, but others have moved away from this practice (which is a wise move).

    Current rates, national average, from Bankrate: 30 year fixed 5.26%, 30 year fixed jumbo 6.96% (a full 170 basis points higher rate), 15 year fixed 5.07%. Jumbo rates have been less than 40 basis points higher than conventional rates most of time (based on my memory – I am looking for a source to confirm). The site does not present the credit score but my guess is these rates are based on a credit score of 700, or higher. Last week the jumbo rates increased by 11 basis points and regular 30 year rates fell by 3 basis points.

    Related: Jumbo v. Regular Fixed Mortgage Rates: by Credit Score – historical mortgage rate chart – Nearly 10% of Mortgages Delinquent or in Foreclosure – misinterpreting data

    Changes in the Market For Jumbo Mortgages

    During the period May 4, 2007 to November 7, 2008, the spread in wholesale interest rates between a $417,000 loan eligible for purchase by Fannie Mae and Freddie Mac, and a $418,000 loan that is not eligible, increased from 0.28% to 2.97%.
    …
    On Nov 12, 2008 I shopped for an $800,000 30-year fixed-rate mortgage on Mortgage Marvel, an on-line site that I reviewed earlier in 2008 (see A Look at Mortgage Marvel). The mortgage companies on the site quoted rates of 8.125% to 8.375%. The credit unions and banks, in contrast, quoted rates ranging from 5.875% to 7.875%. I have never before seen rate differences on the same transaction this large. They no doubt reflect wide differences in lender access to funding, which is symptomatic of a market in turmoil.

    Mortgage Q&A

    For example, I see from today’s rate sheet that a homeowner with 40 percent equity and an excellent credit score of 740 would receive a quote of 5.125 percent with no points or origination fees for a 30-year fixed-rate mortgage. A borrower with a credit score of 670 who has 20 percent equity would receive the same rate but would be charged two points. On a $300,000 loan, this makes the 5.25 percent rate $6,000 more expensive. If the homeowner with the lower credit score wanted to pay zero points, the rate would be well north of 6 percent.

  • Lowest 30 Year Fixed Mortgage Rates in 37 Years

    We now have the lowest 30 year fixed mortgage rates since data has been collected (37 years) in the USA. Is this due to the Fed cutting the discount rate? I do not think so. As I have said previously 30 year fixed rates are not correlated with federal reserve rates. But this time the government is actively seeking to reduce mortgage rates.

    U.S. Treasury Secretary Henry Paulson said the Bush administration was looking at ways to lower mortgage rates because it was essential to stem the drop in home prices to foster an economic recovery.

    Mortgage Rate Hits 37-Year Low

    The benchmark 30-year fixed-rate home mortgage in the U.S. fell to a national average of 5.17% this week, the lowest since Freddie Mac began its weekly rate survey in 1971.
    …
    The 15-year fixed-rate mortgage averaged 4.92%, down from last week when it averaged 5.20%. A year ago the 15-year loan averaged 5.79%. The 15-year mortgage hasn’t been lower since April 1, 2004, when it averaged 4.84%.

    Homeowners refinance, put savings under mattress

    This time around, lenders say up to a third of the callers seeking to refinance simply can’t. And if they can, the future savings are headed straight for the piggy bank.

    These rates sure are fantastic if you are in the market. I was not in the market, but I am considering re-financing now. You need to be careful and not just withdraw money because you can. If you can refinance and reduce your payments it may well be a wise move though. One problem can be extending the date you will finally be free of mortgage debt. If you re-finance a current 30 year loan, that you got 5 years ago, you will now be paying 5 more years. One option is to see if you can get a 25 or 20 year loan. Or if you can make a 15 year loan work, do that (15 and 30 year fixed rate mortgages are common).
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  • Investing – What I am Doing Now

    The economy (in the USA and worldwide) continues to struggle and the prospects for 2009 do not look good. My guess is that the economy in 2009 will be poor. If we are lucky, we will be improving in the fall of 2009, but that may not happen. But what does that mean for how to invest now?

    I would guess that the stock market (in the USA) will be lower 12 months from now. But I am far from certain, of that guess. I have been buying some stocks over the last few months. I just increased my contributions to my 401(k) by about 50% (funded by a portion of my raise). I changed the distribution of my future contributions in my 401(k) (I left the existing investments as they were).

    My contributions are now going to 100% stock investments (if I were close to retirement I would not do this). I had been investing 25% in real estate. I also moved into a bit more international stocks from just USA stocks. I would be perfectly fine continuing to the 25% in real estate, my reason for switching was more that I wanted to buy more stocks (not that I want to avoid the real estate). The real estate funds have declined less than 3% this year. I wouldn’t be surprised for it to fall more next year but my real reason for shifting contributions to stocks is I really like the long term prospects at the current level of the stock market (both globally and in the USA). The short term I am much less optimistic about – obviously.

    I will also fully fund my Roth IRA for 2009, in January. I plan to buy a bit more Amazon (AMZN) and Templeton Emerging Market Fund (EMF). And will likely buy a bit of Danaher (DHR) or PetroChina (PTR) with the remaining cash.

    Related: 401(k)s are a Great Way to Save for Retirement – Lazy Portfolio Results – Starting Retirement Account Allocations for Someone Under 40

  • 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