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  • Ten Stocks To Avoid by John Dorfman

    Ten Stocks I Wouldn’t Touch With a 10-Foot Pole by John Dorfman

    Don’t buy Cablevision Systems Corp. Stay away from Moody’s Corp. and Dish Network Corp. Avoid Qwest Communications International Inc. and Mead Johnson Nutrition Co. Be leery of Pitney Bowes Inc., Delta Air Lines Inc., Morgan Stanley, Coca-Cola Enterprises Inc., and American International Group Inc.

    My reason for giving this advice: These companies, in my judgment, have some of the worst balance sheets in the U.S. The first five companies mentioned above have negative net worth; that is, their liabilities exceed their assets. Among the 727 U.S. companies with a stock-market value of $3 billion or more, only 17 have that unfortunate distinction.

    The next five companies have positive net worth (stockholders’ equity) but their total debt is at least five times equity, a trait shared by 26 of those 727 companies.
    …
    Here’s my take on 10 debt-laden companies to avoid.

    Cablevision, based in Bethpage, New York, has posted annual losses in four of the past seven years. Like all cable operators, it faces potential competition from satellite and wireless technologies.

    Moody’s, a bond rating and financial information firm based in New York, has come under heavy criticism for issuing bond ratings that were too uncritical. I think profits could be hurt by lawsuits alleging biased ratings. Rivals such as Standard & Poor’s, a unit of McGraw-Hill Cos., face similar issues but have stronger balance sheets. Warren Buffett’s Berkshire Hathaway Inc. has been cutting its stake in Moody’s during the past six months…

    Investing in individual stocks is not necessary for a good financial plan but can provide great benefits. However, it does require more vigilance as you must keep an closer eye on your investments and make changes as necessary. Many chose not to include individual stocks in their portfolio, using mutual funds instead. That is fine, I do like to include stocks though. My 12 stocks for 10 years portfolio continue to do well (beating the S&P 500 by 4.8% annually after a 2% annual simulated expense fee reduction). One stock I particularly like right now is Google.

    Related: Investing – My Thoughts at the End of 2009 – Lazy Portfolios Seven-year Winning Streak – Jubak Looks at 5 Technology Stocks

  • Investments of Nobel Prize Economists

    3 Nobel prize winning economists, Robert C. Merton, Robert Solow and Paul Samuelson, took questions about the impending retirement savings crisis from PBS NewsHour correspondent Paul Solman in October 2008. Paul Solman asked them about their personal portfolios in the clip shown above.

    Robert Merton tells his portfolio portfolio is in a Global Index Fund, Treasury Inflation-Protected Securities, and one hedge fund. He said he had been invested in a TIAA commercial real estate fund until recently, but sold in early 2008 when he worried commercial real estate prices had increased too far. He also sold out his Municipal bond holdings.

    Robert Solow says he has no idea of his portfolio.

    Paul Samuelson declined to say. He did offer that timing is not something investors can successfully do. He stated that timing the selling of assets was not as difficult as timing when to get back in. And that markets move very quickly so you can miss out on big gains. 2009 provided a great example of this. Many people sold stocks in late 2008 and early 2009. And most did not get back in. In 2009 the S&P 500 was up 26%.

    Related: Retirement Savings Allocation for 2010 – How Much Will I Need to Save for Retirement? – Gen X Retirement – Many Retirees Face Prospect of Outliving Savings

  • Save Money on Cell Phone Service – Price Reductions

    Well done article on CNET looks at theAT&T-Verizon price war and provides usable information.

    AT&T and Verizon have each reduced the price on their unlimited voice plans. The plans have dropped from $99.99 to $69.99 per month for individuals.
    …
    If I am an existing customer paying a higher fee for my voice service, can I switch to the all-you-can-talk plan without being penalized?
    Yes, AT&T and Verizon Wireless representatives say all you have to do is call a customer service agent to change your plan. You will not be charged any kind of fee for switching. And you will not extend your existing contract by switching to the lower cost plan.
    …
    Each of these plans will cost about $120 a month. Unlimited texting and voice is about $90 a month. And the data service is an additional $30 a month. The price of unlimited voice, text, and data from these carriers previously was about $150, because the unlimited voice service was $30 more expensive.

    Are the data plans really unlimited or is there a 5 gigabyte limit?
    AT&T and Verizon Wireless say their data plans are unlimited for all phone customers. The 5GB limit only applies to customers using their 3G broadband service for laptops.

    Do either AT&T or Verizon Wireless allow tethering phones to laptops for Internet service? How much does this cost?
    AT&T and Verizon Wireless each allow attaching phones to a laptop to get 3G wireless service. Verizon allows tethering on most devices, but not all. For smartphone customers with a voice and data plan, the tethering plan costs an additional $30 per month. For customers wanting to connect their laptops to a feature phone, the tethering plan will cost about $49.99 if you use the new plans. In either scenario, customers are subject to the 5GB limit for tethering usage with 5 cents per MB for overage.
    …
    Sprint’s Simply Everything plan costs $99.99 and includes unlimited voice, texting, and data. This is still $20 cheaper than a comparable unlimited plan for an AT&T smartphone or any Verizon phone
    …
    T-Mobile USA offers an unlimited voice, text, and data plan for $79.99 a month, which is $40 less than the new equivalent plans from AT&T for smartphone devices and Verizon Wireless

    Related: Move to Finland for Cell Phone Service Savings – Kiss Your Phone Bill Good-bye – iPhone + AT&T = Yikes – Customer Service is Important

  • China GDP up 8.7% in 2009

    China’s GDP Growth Accelerates to Fastest Since 2007

    Gross domestic product rose 10.7 percent from the same period a year ago, more than the median forecast of 10.5 percent in a Bloomberg News survey, a statistics bureau report showed in Beijing today. For the full year, GDP gained 8.7 percent, beating Premier Wen Jiabao’s 8 percent target.

    The report may stoke speculation the central bank will start raising its benchmark interest rate and tighten restrictions on the nation’s lenders. Minutes after the release, traders said the People’s Bank of China guided three-month bill yields higher at an auction for the second time in two weeks.
    …
    Fourth-quarter economic growth was driven by an unprecedented $586 billion stimulus package, subsidies for consumer purchases and a credit-fueled investment boom. The property market has rebounded and a 13-month slump in exports ended last month.

    Industrial production grew 18.5 percent in December from a year earlier and retail sales climbed 17.5 percent, the statistics bureau said today.

    In 2008 China’s GDP was up 9.6%. The economy there obviously continues to do amazing things. Also there are plenty of signs of crazy spending building huge amounts of housing and office space that lies vacant and questionable infrastructure projects. There is certainly a risk of bubbles bursting in China but the long term strength of the economy seems real. The danger is first political with financial bubbles being the second risk – I think.

    Related: Japanese Economy Shrinks 12.7% in the 4th Quarter of 2008 – Data on the Largest Manufacturing Countries in 2008 – Oil Consumption by Country in 2007

  • Market Inefficiencies and Efficient Market Theory

    Find below some interesting thoughts on financial markets and the efficient market theory. That theory essentially says the market prices are right given the available information. I think markets are somewhat efficient but there are plenty of opportunities to profit from inefficiencies in the market. Still it is not easy to consistently exploit these inefficiencies profitably.

    Capital Market Theory after the Efficient Market Hypothesis

    People see high returns in a particular sector, and they cannot tell whether the lower returns they are receiving are due to their fund manager’s proper avoidance of risk, or incompetent management. As they increasingly conclude that incompetence is to blame, funds shift to the new sector and this creates a self-reinforcing process where prices are driven above their fundamental values, i.e. a bubble occurs. It seems like such reallocation of investment funds could, if driven by a strong enough incentive, be enough on its own to drive a bubble even without an external source of liquidity.

    Capital market theory after the efficient market hypothesis by Dimitri Vayanos and Paul Woolley

    Capital market booms and crashes, culminating in the latest sorry and socially costly crisis, have discredited the idea that markets are efficient and that prices reflect fair value.
    …
    Theory has ignored the real world complication that investors delegate virtually all their involvement in financial matters to professional intermediaries – banks, fund managers, brokers – who dominate the pricing process.

    Delegation creates an agency problem. Agents have more and better information than the investors who appoint them, and the interests of the two are rarely aligned.
    …
    he new approach offers a more convincing interpretation of the way stock prices react to earnings announcements or other news. It also shows how short-term incentives, such as annual performance fees, cause fund managers to concentrate on high-turnover, trend-following strategies that add to the distortions in markets, which are then profitably exploited by long-horizon investors. At the level of national markets and entire asset classes, it will no longer be acceptable to say that competition delivers the right price or that the market exerts self-discipline.

    Related: Nicolas Darvas (investor and speculator) – Beating the Market, Suckers Game? – Lazy Portfolios Seven-year Winning Streak – Stop Picking Stocks? – Don’t miss future gains just because you missed past gains

  • Retirement Benefits: What to Expect in 2010

    Retirement Benefits: What to Expect in 2010

    No Social Security increase. Monthly Social Security checks for most beneficiaries will not increase in 2010. Retirement payouts are tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers, which fell between the third quarter of 2008 and the third quarter of 2009. Next year will be the first without a Social Security increase since cost-of-living adjustments went into effect in 1975.
    …
    Higher Medicare Part B premiums for some. Most current Social Security recipients will continue to pay $96.40 each month for Medicare Part B medical insurance, the same amount as in 2009. But for new enrollees, Medicare Part B monthly premiums will be $110.50, a 15 percent increase from 2009 prices. Retirees with incomes greater than $85,000 ($170,000 for couples) also will pay higher premiums, ranging from $154.70 to $353.60 each month, depending on the income reported on their 2008 tax return.
    …
    Among Fidelity-administered 401(k) plans, 27 percent of employers that cut contributions to employee retirement accounts have already resumed the match or plan to reinstate it next year. Another survey, by the Profit Sharing/401(k) Council of America, found that almost half (47 percent) of companies that suspended their employee match are planning to restore it within the first quarter of 2010.

    Related: How Much Will I Need to Save for Retirement? – 401(k)s are a Great Way to Save for Retirement – Retirement Savings Survey Results

  • Retirement Savings Allocation for 2010

    I adjusted my future retirement account 401(k) allocations today. I do not have as favorable an opinion of investing in the stock market today as I did a year ago. I would likely have allocated 20% to a money market fund except my 401(k) actually has two options – 1 paying 0.0% and the other paying -.02%.

    They seem to believe they should make a significant profit while providing a horrible return (they are still taking over .5% of assets in fees – even though rates do not cover their fees). Those running funds have very little interest in providing value for 401(k) participants – they are mainly interested in raising fees (though supposedly they are suppose to be run by people with a fiduciary responsibility to the investors). Unfortunately most 401(k)s lock you away from the best options for an investor (such as Vanguard Funds).

    My current allocation for future funds is 40% to USA stocks, 40% to Global stocks and 20% to inflation adjusted bonds. My current allocation in this retirement account is 10% real estate, 35% global stocks, 55% USA stocks. For all my retirement savings it is probably about 5% real estate, 35% global stocks, 5% money market, 55% USA stocks (which is a fairly aggressive mix).

    As I have said many times I do not like bonds at this time. I don’t think the interest nearly justifies the risk of capital loss (due to inflation or interest rate risk). Inflation protected bonds are a much more acceptable option for someone that is worried about inflation (like I am over the next 10-20 years).

    A number of the stock fund (even bond fund) options in my 401(k) have expense ratios above 1%. That is unacceptable. The average fees on the options I chose were .5%.

    With my employee match I am adding over 10% of my income to my 401(k), which I think is a good aim for most everyone. Far too many people are unwilling to forgo luxuries to save appropriately for their retirement. This is a sign of financial illiteracy and an unwillingness to accept the responsibilities of modern life.

    Related: Investing – My Thoughts at the End of 2009 – 401(k)s are a Great Way to Save for Retirement – Saving for Retirement – Managing Retirement Investment Risks

  • USA Spends Record $2.3 trillion ($7,681 Per Person) on Health Care in 2008

    Nominal health spending in the United States grew 4.4% in 2008, to $2.3 trillion or $7,681 per person. This was the slowest rate of growth since the Centers for Medicare & Medicaid Services started officially tracking expenditures in 1960, yet once again outpaced nominal GDP growth (2.6% in 2008). This brings health care spending to 16.2% of GDP. In 2003 the total health care spending was 15.3% of GDP.

    The huge amount being spent continues to grow to an even larger percentage of GDP every year. The damage to the economy of the dysfunctional health care system in the USA is huge. For comparison the total GDP per person in China is $5,970 (the closest total country per capita GDP, to the health care spending per capita in the USA, is Thailand at $7,703 – World Bank data). The average spending by OECD countries (Europe/USA/Japan…) was $2,966 per person in 2007 (the USA was at $7,290). In 2007 Canada spent $3,895; France $3,601; UK $2,992; Japan $2,581.

    • Hospital spending in 2008 grew 4.5% to $718 billion, compared to 5.9% in 2007, the slowest rate of increase since 1998.
    • Physician and clinical services’ spending increased 5.0% in 2008 to $496 billion, a deceleration from 5.8% in 2007.
    • Retail prescription drug spending growth also decelerated to 3.2% in 2008 as per capita use of prescription medications declined slightly, mainly due to impacts of the recession, a low number of new product introductions, and safety and efficacy concerns. Drug prices increased 2.5% in 2008.
    • Spending growth for both nursing home and home health services decelerated in 2008. For nursing homes, spending grew 4.6% in 2008 compared to 5.8% in 2007.
    • Total health care spending by public programs, such as Medicare and Medicaid, grew 6.5% in 2008, the same rate as in 2007.
    • Health care spending by private sources of funds grew only 2.6% in 2008 compared to 5.6 percent in 2007.
    • Private health insurance premiums grew 3.1% in 2008, a deceleration from 4.4% in 2007. Remember many people lost their jobs and did without insurance. Doing so results in reduced spending on health insurance but is far from a good sign.
    • Home health care spending growth decelerated from 11.8% in 2007 to 9.0% in 2008. Expenditures reached $64.7 billion in 2008. You can understand why investors (and companies) are looking to invest in home health care.

    At the aggregate level, the shares of financing for health services and supplies by businesses (23%), households (31%), other private sponsors (3%), and governments (42%) have remained relatively steady over time. Between 2007 and 2008; however, the federal government share increased significantly (from 23 to 25%), while the state and local government share declined (from 18 to 17%).

    Decades ago Dr. Deming included excessive health care costs as one of the seven deadly diseases of western management. We have only seen the problem get worse. Finally it seems that a significant number of people are in agreement that the system is broken.
    (more…)

  • Curious Cat Investing and Economics Carnival #6

    Welcome to the Curious Cat Investing and Economics Carnival: we highlight recent personal finance, investing and economics blog posts we found interesting.

    • 5 Financial Milestones to Aim for By Age 30 – 1. Contribute to a Roth and a Traditional IRA… 2. Build Six Months Worth of Expenses in your Emergency Fund… 3. Make the Credit Card Companies Hate You…
    • USA again the leading manufacturing country, data of the Largest Manufacturing Countries in 2008 by John Hunter – The USA’s share of the manufacturing output, of the countries that manufactured over $185 billion in 2008, 28% in 1990, 28% in 1995, 32% in 2000, 28% in 2005… 24% in 2008. China’s share has grown from 4% in 1990… 10% in 2000… to 18% in 2008.
    • Afraid to stay in but scared to get out? Join the club by James Jubak – “If you have to keep $60,000 in cash so that you can sleep at night knowing that you’ve got your financial bases cover, then the loss of a potential gain on that money is, in my book, worth it. I’ve sold into this rally to sock away my kids’ tuition for 2010 and my 2010 tax payment.”
    • Invented, Completely New Meaning of the “Invisible Hand” by Gavin Kennedy – “In fact, Stigler explicitly criticises ‘legends’ of the ‘naïve doctrine’ that Smith should be associated with notions that ‘whenever a person seeks to serve his own ends, he invariably serves the ends of society’.”
    • The Quiet Danger of Non-Inflation-Adjusted Stock Returns by Stephen Dubner – “the ‘real-real’ value of stocks does make you appreciate how so many people got so jazzed about the spike in housing prices over the last decade: it’’ exciting to see inflation working in your favor day after day…”
    • Think You Don’t Need Health Insurance? Think Again – “Very bad medical problems can and do happen to many of us – maybe even you. Those very bad medical problems can be very expensive and potentially ruin one’s financial future if they do not have adequate health insurance.”
    • Don’t Be Suckered By Stock Market Rally In 2010 – “For those who do not want to invest, it is best to save up your money and wait for better opportunities since valuations are high right now… I suggest fixed deposits as the best option to preserve your principal.”
    • Resolving U.S. Indebtedness: Various Scenarios by Arnold Kling – “Some major technologies, probably either wet or dry nanotech, produce so much economic growth that the ratio of debt to GDP stays under control. I give this a 20 percent chance… Inflate away the debt with moderate inflation… I gives this a 15 percent chance….”

    Related: Curious Cat Investing and Economics Custom Search Engine – Curious Cat Investing and Economics Carnival #2

  • Finding a Credit Union

    NCUA logo

    I have discussed the advantage of using credit unions over trying to cope with a bank since so many banks constantly try to trick customers into paying huge fees. Here are some resources to help:

    • Find a local credit union (site broke link so I removed the link) – with an overview of services offered
    • Find a local credit union from (NCAU) with links to Financial Performance Report data.
    • Credit Unions have National Credit Union Share Insurance Fund (NCUSIF) (“backed by the full faith and credit of the U.S. Government”) instead of FDIC. The limits on the share insurance are the same as the limits on FDIC, currently $250,000 per individual account holder. Use the link to make sure your credit union provides NCUSIF coverage.

    You can also get credit cards through your credit union. In general credit unions are much more interested in trying to provide the customer value instead of trying to stick them with huge fees. But don’t just trust your credit union, check out the rates and fees they charge and comparison shop for the best credit card.

    Related: posts on banking – FDIC Study of Bank Overdraft Fees – Credit Unions Slowly Fill Payday Lenders Void