Investing Curiouscatblog

Category: Investing

  • 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 What SIPC would cover is cash fraudulently withdrawn from covered account (if I owned 100 shares of Google and they took my shares that is covered – as I understand it).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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  • Stocks Still Overpriced?

    I don’t actually agree with the contention in this post, but the post is worth reading. I will admit I am more certain of I like the prospect of investing in certain stocks (Google, Toyota, Danaher, Petro China, Templeton Dragon Fund, Amazon [I don’t think Amazon looks as cheap as the others, so their is a bit more risk I think but I still like it]) for the next 5 years than I am in the overall market. But I am also happy to buy into the S&P 500 now in my 401(k).

    Stocks Still Overpriced even after $6 Trillion in Market Cap gone from the Index

    Looking at data since 1936 the average P/E for the S & P 500 is 15.79. The current P/E for the market looking at second quarter data is 24.92. Since that time, the P/E has started to look more attractive but you have to be cautious as to why this is occurring. First, the current P/E ratios are betting that earnings will not take hits in 2009 which they clearly are.
    …
    Even if we assumed a healthy economy, the price is no bargain. Throw in the fact that we are in recession and you can understand why the S & P 500 is still overvalued. We haven’t even come close to the historical P/E of 15.79 which includes good times as well.

    Just to be clear current PE ratios have nothing to do with next year. It would be accurate to say someone making the argument that the S&P 500 is cheap now because of the current PE ratio, is leaving out an important factor which is what will earning be like next year. It does seem likely earnings will fall. But I also am not very concerned about earning next year, but rather earning over the long term. I see no reason to be fearful the long term earning potential of say Google is harmed today.

    Related: S&P 500 Dividend Yield Tops Bond Yield for the First Time Since 1958 – 10 Stocks for 10 Years – Starting Retirement Account Allocations for Someone Under 40 – Books on Investing

  • Nearly 10% of Mortgages Delinquent or in Foreclosure

    The percentage of loans in the foreclosure process at the end of the third quarter was 2.97 percent, an increase of 22 basis points from the second quarter of 2008 and 128 basis points from one year ago. The percentage of loans in the process of foreclosure set a new record this quarter, to 1.35 million.

    Mortgages are counted as delinquent or in foreclosure (once they are in foreclosure they are not counted as delinquent). So the total percentage of mortgages not being paid by the homeowner is 2.97% (in foreclosure) + 6.99% (delinquent) = 9.96%. That is amazingly bad. In February of 2007 I wrote about this and the delinquency rate was 4.7% which sounded pretty bad to me. Amazingly 4.4% is a historic low for this figure. Can you believe 1/25 mortgages is delinquent and that is as good as we ever get? That is pretty shocking to me.

    The seasonally adjusted total delinquency rate is now the highest recorded in the Mortgage Bankers Association survey. The seasonally adjusted delinquency rate increased 41 basis points to 4.34 percent for prime loans, increased 136 basis points to 20.03 percent for subprime loans, increased 29 basis points to 12.92 percent for FHA loans, and increased 46 basis points to 7.28 percent for VA loans.

    The percent of loans in the foreclosure process increased 16 basis points to 1.58 percent for prime loans, and increased 74 basis points for subprime loans to 12.55 percent. FHA loans saw an eight basis point increase in the foreclosure inventory rate to 2.32 percent, while the foreclosure inventory rate for VA loans increased 13 basis points to 1.46 percent.

    Since loans that would have gone into foreclosure in the past are being kept out of foreclosure due to some programs ( ) the rate or seriously delinquent is a useful measure of serious problems. Seriously delinquent mortgages are 90 days past due. The rate increased 52 basis points for prime loans to 2.87 percent, increased 171 basis points for subprime loans to 19.56 percent, increased 62 basis points for FHA loans to 6.05 percent, and increased 45 basis points for VA loans percent to 3.45 percent.

    Compared to a year ago: the seriously delinquent rate was 156 basis points higher for prime loans and 818 basis points higher for subprime loans. The rate also increased 51 basis points for FHA loans and 89 basis points for VA loans.

    Related: Homes Entering Foreclosure at Record (Sep 2007) – Foreclosure Filings Continue to Rise – How Much Worse Can the Mortgage Crisis Get? – How Not to Convert Equity

  • 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.
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    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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  • Google’s Energy Interests

    I believe in the management at Google is doing as good a job as the management at any company. They are not afraid to pursue their convictions even if conventional wisdom says they should not. I believe in Google more than the conventional wisdom. And I have been buying Google stock as it has declined the last 6 months.

    I am perfectly happy for Google’s stock price to continue declining: I will continue to buy. I have no intention of selling for decades. Things could change, that would lead me to sell but right now I am firmly a believer in owning a piece of Google for the long term. I am thrilled to have very smart engineers effectively guiding a company (including sustaining a culture where engineers can provide value without the amount of pointy haired boss behavior found elsewhere) to provide value to customers and users of their services while profiting quite nicely. And at these prices the investment opportunity looks great to me. I still believe in following prudent diversification practices (far less than 10% of my investments are in Google stock)

    Google CEO defiant in defending energy interests

    When he was asked whether financial markets and Google’s shareholders wouldn’t prefer that he focus more on the company’s core businesses, and less on big thoughts on energy use, Schmidt countered, “Why don’t we work on the important problems of the world?”

    He was quick to add that Google has a material interest in lower energy costs to help power its crucial data centers. “We’re going to likely consume more [energy], and we’d like the prices to go down,” he said.
    …
    Schmidt said the bulk of spending on necessary research and development for Google’s ambitious energy plan will have to come from the government. The CEO added that he’s almost certain that an opportunity to tap government largesse is now at hand, as he believes a “stimulus package” will follow the $700 billion Wall Street bailout

    I have written about Google’s focus on energy previously: Google Investing Huge Sums in Renewable Energy and is Hiring – Google.org Invests $10 million in Geothermal Energy – Reduce Computer Waste.

    With most companies I would be very skeptical delving into area pretty far removed from their core business would likely not prove an effective strategy. But I believe Google can be successful with such efforts. Some will certainly fail but Google will manage that fine and have at least one or two payoff in such a large way that all the investments are paid off quite well.

    Related: Google Believes in Engineers – Google’s Underwater Cables – Data Center Energy Needs – 12 Stocks for 10 Years Update – June 2008

  • 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

  • Feds Rethink Rules on Retirement Savings – They Shouldn’t

    Feds Rethink Rules on Retirement Savings

    Amid growing concern over the stock market’s severe drop, government officials are considering last-minute relief from rules requiring millions of Americans who are 70½ or older to withdraw money from their retirement accounts.

    Among the possible changes: allowing taxpayers to delay taking required withdrawals from their individual retirement accounts, 401(k) plans and other similar accounts this year — or at least reducing the amount that must be withdrawn. Also under consideration are various ways to provide tax relief for people who already have made their required withdrawals for this year.

    This is silly. Everyone in the situation of having to make a withdrawal has know about the requirement for years. My guess is this has been the law for over 20 years. Yes, the stock market is down. Yes, being forced to sell now would be bad. And how does providing “tax relief” to those who already made required withdrawals make any sense? Why not just have the treasury send checks to every American, who had a loss on an investment this year, equal to the amount of their loss? (By the way this is sarcasm – they should not really do that). These people have lost any sense of what investing, planning, responsibly… are.

    First, knowing you have required withdrawals from your IRA, you should not hold those assets in stock (I suppose you could have significant cash assets outside your IRA and chose to just use the next option). Second, you can buy the stock outside your IRA at the same minute you sell them in the IRA. What is the big deal: the cost should be about $20 in stock commission for each stock – you save that much each time you fill up your gas tank lately (compared to prices this summer). All that not having to withdraw funds does is let those wealthy enough not to need a small amount of their IRA or 401(k) savings by the time they are 70 1/2 to keep deferring taxes on their investment gains.

    The amount of the distribution is based on the market value of the taxpayer’s account as of the last day of the previous year.

    Therein lies one of the major problems. This year’s distributions are based on Dec. 31, 2007, levels — a time when market prices generally were far above today’s deeply depressed values. As a result, “millions of Americans are forced to withdraw larger-than-anticipated amounts from already-depleted retirement funds,” says David Certner, legislative policy director at AARP, an advocacy group that represents nearly 40 million older Americans.

    What kind of 1984 newspeak is this? I mean this is absolutely ridicules. You have to withdraw the exact amount you knew on January 1st 2008. Nothing about that has changed in almost a year. How can the Wall Street Journal report this without pointing out the completely false claim.
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  • Personal Saving and Personal Debt in the USA

    graph of saving and debt

    The whole sorry mess in one picture (including chart) by Philip Brewer

    Take a gander at that graph. The green line is personal savings. The Bureau of Economic Analysis calculates that. It’s just income minus spending–the obvious way of figuring saving. The red line is debt. The Federal Reserve calculates that value. The value on the graph is the change from the previous year–that is, it shows each year’s new debt, just like the green line shows each year’s saving. Both values are adjusted for inflation–the graph is in billions of (year 2000) dollars.
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    Starting back in about 2005, the American consumer reached the point that they could no longer service ever-increasing amounts of debt. That led to the housing bubble popping. The result is what you can see in the last datapoint on the graph–less new borrowing in 2007.

    Related: $2,540,000,000,000 in USA Consumer Debt – Americans are Drowning in Debt – save an emergency fund – Financial Illiteracy Credit Trap – posts on saving money