What is it about a plunging market that puts me into such a good mood? Maybe it’s a throwback to the old options trader in me—you know, with volatility, especially on the downside, comes opportunity; and with opportunity, comes money-making potential! I have found that some of my best trades have occurred when everyone around me is panicking, so why not root for a little anxiety attack every now and again?
Perhaps you were busy re-reading War and Peace yesterday, so let me recap what happened. A day after stocks rallied on the heels of a Federal Reserve quarter-point interest rate cut, investors sold off stocks in a big way. Yes, there was a downgrade of Citigroup and below-forecast earnings from Exxon Mobil, but I think that the essence of the sell-off was investors worrying that maybe the Fed would not keep cutting rates as expected. All three major indexes lost more than 2% of their value, with selling accelerating late in the day. The Dow Jones Industrial Average fell 362.14, or 2.6%, to 13567.87; the S&P 500 fell 40.94, or 2.6%, to 1508.44; and the NASDAQ fell 64.29, or 2.3%, to 2794.83.
There is no positive spin on the day—it was pretty rotten. Except if you’re like me and can convert those sour lemons into tasty lemonade. Of course, you can only take advantage of market gyrations if you have cash on hand. That’s why when people ask why they should allocate any of their money in the money market fund in their retirement accounts; I respond “you never know when you are going to want to do something!”
If you are always fully invested or mostly invested in risk assets, when the market moves, you can’t do anything but watch and pray that your positions don’t get beat up too much. I have always believed that a nice tidy pillow of cash, augmented by the warm blanket of government bonds, can cushion downward moves perfectly. Maybe you won’t even make a trade, but sometimes that cash/bond position is just enough to remind you that panic is for the other suckers, not for you, Mr/Mrs/Ms Diversified Investor!
What do you lose by employing a diversified approach to investing? The only thing you don’t get is bragging rights. When the market rises, you will not see your portfolio increase by the same margin as the overall market. Then again, when the tears are flowing as the market gets crushed, you can calmly assess the situation and determine if any action is warranted. At the very least, you’ll have many more good nights of sleep, so come on and root for the down days—you’ll see how freeing it is!
Friday, November 2, 2007
Thursday, November 1, 2007
Are they going too far?
In an effort to "forestall some of the adverse effects on the broader economy that might otherwise arise" from the summer credit crunch, the Federal Reserve cut its target for short-term interest rates a quarter of a percentage point to 4.5% yesterday. This action comes six weeks after the Fed’s ½ point cut in September.
While the cut was anticipated, the accompanying statement was a bit more surprising. In an apparent attempt to rein in market expectations of further action, the statement noted that the Fed now sees the risks of weaker growth and higher inflation as "roughly [in] balance." Almost immediately, stocks and bonds sold off, as investors pondered the idea that perhaps Ben Bernanke’s Fed would not serve up a series of reflationary rate cuts. But then cooler heads prevailed and stocks closed on the highs of the session. It is Bernanke, after all, and the housing market is in the can, so that statement seemed more like a warning with a wink: “don’t count on us, but don’t worry, we’ll be there for you.”
The more interesting action was taking place in the commodities pits, where crude oil touched a record-high $94.74 after an Energy Department report showed that U.S. inventories fell to a two-year low. Dec crude finished the day up $4.15 or 4.6% at $94.53, which makes October’s gain a staggering 16%! For those history buffs, we have just over $7 before we reach the April, 1980, inflation-adjusted record of $101.70. Additionally, Dec gold added $7.50 to $795.30.
After examining those results, one might take away a bit of concern over inflation gurgling up. Before we get into one of those nutty arguments about how inflation is measured, let’s agree that the CPI is not perfect. That said, although raw materials prices have been on the move for five years or so, we have not experienced a huge impact on finished goods prices—that’s one of the many wonders of globalization. It would take far more price-push for core inflation to become a problem. Indeed, the CPI has been coming down from its cycle high 4.7% in September 2005 to the recent approximate 2% level.
As I noted yesterday, weaker US growth caused by a continued housing recession should increase economic slack and thus compress pricing power even further. This effect should translate into low core inflation, which is why I don’t think that the Fed has gone too far—at least not yet!
While the cut was anticipated, the accompanying statement was a bit more surprising. In an apparent attempt to rein in market expectations of further action, the statement noted that the Fed now sees the risks of weaker growth and higher inflation as "roughly [in] balance." Almost immediately, stocks and bonds sold off, as investors pondered the idea that perhaps Ben Bernanke’s Fed would not serve up a series of reflationary rate cuts. But then cooler heads prevailed and stocks closed on the highs of the session. It is Bernanke, after all, and the housing market is in the can, so that statement seemed more like a warning with a wink: “don’t count on us, but don’t worry, we’ll be there for you.”
The more interesting action was taking place in the commodities pits, where crude oil touched a record-high $94.74 after an Energy Department report showed that U.S. inventories fell to a two-year low. Dec crude finished the day up $4.15 or 4.6% at $94.53, which makes October’s gain a staggering 16%! For those history buffs, we have just over $7 before we reach the April, 1980, inflation-adjusted record of $101.70. Additionally, Dec gold added $7.50 to $795.30.
After examining those results, one might take away a bit of concern over inflation gurgling up. Before we get into one of those nutty arguments about how inflation is measured, let’s agree that the CPI is not perfect. That said, although raw materials prices have been on the move for five years or so, we have not experienced a huge impact on finished goods prices—that’s one of the many wonders of globalization. It would take far more price-push for core inflation to become a problem. Indeed, the CPI has been coming down from its cycle high 4.7% in September 2005 to the recent approximate 2% level.
As I noted yesterday, weaker US growth caused by a continued housing recession should increase economic slack and thus compress pricing power even further. This effect should translate into low core inflation, which is why I don’t think that the Fed has gone too far—at least not yet!
Wednesday, October 31, 2007
Fed Candy
Someone over at the Fed has a strange sense of humor. The “second most important FOMC meeting of the year” is due to convene today, which as we all know is Halloween. Before you get too spooked by the occasion, remember that the Fed has already blinked by cutting short-term rates one-half a point to 4.75% when the central bank last convened in September.
It is expected that there will be a quarter-point rate-cut (today, this will be known as “Fed Candy”), taking the fed funds rate to 4.5%. But the Fed is going through a very delicate balancing act between providing enough liquidity to keep the big US economic engine running smoothly, but not too much so as to create inflation. And of course any action or inaction will be poured over by investors, who seek guidance about the future of the economy and the Fed’s intentions. I keep thinking about the situation as a tug of war between rotten housing/looming mortgage resets on one side and the forces of inflation on the other.
The recent data on housing indicates that sales of new and existing homes will likely soften as tighter lending standards depress demand and choke off activity. But thus far, the impact of housing on the broader economy has been somewhat muted. Similarly, despite signs of healing in the credit markets (commercial paper spreads have narrowed, and 3-month Libor has dipped below 5%), the news out of the nation’s large investment banks continues to beg the question whether we truly know the actual losses incurred.
I am guessing that we’ll see a ¼ point cut simply because the market seems to be forcing the Fed’s hand, and policymakers are offering little resistance. Although the Fed does not want to be seen as cutting too fast and fostering a moral hazard (it’s OK to invest significant sums into risky assets because if the trade goes bad, you count on the central bank to bail you out), nor does the Fed want to be seen as fanning the inflation flames, especially as the US dollar is making new lows, but the fear of recession seems to be more dominant, so get your bag ready for the candy! (They can counter the inflation concerns by citing weaker US growth and specifically housing, which should increase economic slack and thus compress pricing power. Low core inflation should give the Fed latitude to ease monetary policy further.
In the end, it will be important for the Fed to articulate the case for cutting in the accompanying statement. Most expect that the language will be similar to September’s, stressing the uncertain economic outlook and a desire to forestall the potential spillover effects associated with the ongoing correction in housing. Concurrently, the Fed will have to pay lip service to inflation, noting that “some inflation risks still remain”. In the end, the Fed will need to manage expectations by not saying either too much or too little. If you had to choose a Halloween costume for the Fed, I would suggest a mime, or if you have a sense of humor, there’s always Harpo Marx. Enjoy your Fed candy—it sure tastes sweet, especially when reviewing your investment statements.
It is expected that there will be a quarter-point rate-cut (today, this will be known as “Fed Candy”), taking the fed funds rate to 4.5%. But the Fed is going through a very delicate balancing act between providing enough liquidity to keep the big US economic engine running smoothly, but not too much so as to create inflation. And of course any action or inaction will be poured over by investors, who seek guidance about the future of the economy and the Fed’s intentions. I keep thinking about the situation as a tug of war between rotten housing/looming mortgage resets on one side and the forces of inflation on the other.
The recent data on housing indicates that sales of new and existing homes will likely soften as tighter lending standards depress demand and choke off activity. But thus far, the impact of housing on the broader economy has been somewhat muted. Similarly, despite signs of healing in the credit markets (commercial paper spreads have narrowed, and 3-month Libor has dipped below 5%), the news out of the nation’s large investment banks continues to beg the question whether we truly know the actual losses incurred.
I am guessing that we’ll see a ¼ point cut simply because the market seems to be forcing the Fed’s hand, and policymakers are offering little resistance. Although the Fed does not want to be seen as cutting too fast and fostering a moral hazard (it’s OK to invest significant sums into risky assets because if the trade goes bad, you count on the central bank to bail you out), nor does the Fed want to be seen as fanning the inflation flames, especially as the US dollar is making new lows, but the fear of recession seems to be more dominant, so get your bag ready for the candy! (They can counter the inflation concerns by citing weaker US growth and specifically housing, which should increase economic slack and thus compress pricing power. Low core inflation should give the Fed latitude to ease monetary policy further.
In the end, it will be important for the Fed to articulate the case for cutting in the accompanying statement. Most expect that the language will be similar to September’s, stressing the uncertain economic outlook and a desire to forestall the potential spillover effects associated with the ongoing correction in housing. Concurrently, the Fed will have to pay lip service to inflation, noting that “some inflation risks still remain”. In the end, the Fed will need to manage expectations by not saying either too much or too little. If you had to choose a Halloween costume for the Fed, I would suggest a mime, or if you have a sense of humor, there’s always Harpo Marx. Enjoy your Fed candy—it sure tastes sweet, especially when reviewing your investment statements.
Tuesday, October 30, 2007
Benefit Bonanza
The Fed is meeting this week in what is being called “the second most important FOMC meeting of the year” (last month’s was the most important); third quarter Gross Domestic Product (GDP) is set to be released this morning; reports on personal income and spending tomorrow; then the October employment results on Friday, all of which are interesting, but do you no good as you sit before the open enrollment benefits folder that is begging your attention.
Corporate America uses the month of October to scare you into making some important decisions for the year ahead. While economic data certainly impacts your life, the specific benefits that you choose are likely to help you save or make money with far less energy than is required for studying the economy and adjusting your portfolio accordingly. Still, you may find yourself befuddled be by the number of decisions that you are facing, so let’s make sure you take advantage of the benefits bonanza.
Let’s start with the easiest one: retirement plan enrollment. I still can’t recommend a better way of saving for retirement than through an employer-sponsored plan. You should attempt to maximize your contribution to the plan limit, assuming that your cash flow can absorb it. If things are a bit tight, then at the very least, contribute the amount that will provide you with your employer’s match. If you are new to the company, you will also need to choose an allocation for your retirement plan contribution. Most plans default to the lowest risk option if you do not choose one, which is probably not the best choice for a long term investor. If you are unsure how to allocate, most plans will provide a risk assessment tool to guide you. Additionally, many plans now have “destination”, “target retirement” or “lifestyle” funds, which generally do the allocation work for you, based on either the type of investor you are or when you plan to retire.
OK, next is the health insurance plans. For this choice, you need to anticipate what your needs will be, including whether your doctors are part of a specific plan, how much money you are likely to spend on prescription drugs and how often you see physicians. Remember that changes in your life, like marriage, the birth of a child, or the diagnosis of a chronic disease, could change your needs from year to year. It is important to note that employees tend to focus more on health benefits than anything else. But other insurances are equally important. While you may receive a standard 1-2 times your salary for life insurance, many employers allow you to purchase up 7 times, at a reasonable group rate. Additionally, check out whether long term disability or long term care insurance is available-both of these are expensive when purchased privately.
If your company offers a way to save on a pre-tax basis for any of your benefits, than use it. But remember that these plans are “use it or lose it,” so be careful how much money you set aside. Finally, many large employers have expanded benefits to include commuting costs, adoption assistance and even low-cost legal assistance. While the universe of expanding benefits can seem daunting, utilizing them can help you achieve many of your long term financial goals.
Corporate America uses the month of October to scare you into making some important decisions for the year ahead. While economic data certainly impacts your life, the specific benefits that you choose are likely to help you save or make money with far less energy than is required for studying the economy and adjusting your portfolio accordingly. Still, you may find yourself befuddled be by the number of decisions that you are facing, so let’s make sure you take advantage of the benefits bonanza.
Let’s start with the easiest one: retirement plan enrollment. I still can’t recommend a better way of saving for retirement than through an employer-sponsored plan. You should attempt to maximize your contribution to the plan limit, assuming that your cash flow can absorb it. If things are a bit tight, then at the very least, contribute the amount that will provide you with your employer’s match. If you are new to the company, you will also need to choose an allocation for your retirement plan contribution. Most plans default to the lowest risk option if you do not choose one, which is probably not the best choice for a long term investor. If you are unsure how to allocate, most plans will provide a risk assessment tool to guide you. Additionally, many plans now have “destination”, “target retirement” or “lifestyle” funds, which generally do the allocation work for you, based on either the type of investor you are or when you plan to retire.
OK, next is the health insurance plans. For this choice, you need to anticipate what your needs will be, including whether your doctors are part of a specific plan, how much money you are likely to spend on prescription drugs and how often you see physicians. Remember that changes in your life, like marriage, the birth of a child, or the diagnosis of a chronic disease, could change your needs from year to year. It is important to note that employees tend to focus more on health benefits than anything else. But other insurances are equally important. While you may receive a standard 1-2 times your salary for life insurance, many employers allow you to purchase up 7 times, at a reasonable group rate. Additionally, check out whether long term disability or long term care insurance is available-both of these are expensive when purchased privately.
If your company offers a way to save on a pre-tax basis for any of your benefits, than use it. But remember that these plans are “use it or lose it,” so be careful how much money you set aside. Finally, many large employers have expanded benefits to include commuting costs, adoption assistance and even low-cost legal assistance. While the universe of expanding benefits can seem daunting, utilizing them can help you achieve many of your long term financial goals.
Monday, October 29, 2007
Teddy’s Birthday
There are a number of interesting things that have occurred in the past week or so that reminded me of my grandfather, Theodore R. Schlesinger (“Poppy Ted”). It all started with an innocent visit to Sagamore Hill, the Oyster Bay, NY summer home of Theodore Roosevelt, 26th President of the United States (he held office from September 14, 1901- March 3, 1909).
During my visit, I realized that President Roosevelt was born October 27, 1858 in New York City. Fifty years later--to the day--my grandfather was born in New York City. The funny thing is that only late in his life did my grandfather tell us that his middle initial “R” actually stood for Roosevelt—he was born in 1908, at the end of Roosevelt’s tenure in the White House. Poppy would have been 99 years old this past weekend and given all of these coincidences, it only seems appropriate to write about him.
Ted Schlesinger was intense and bright. Like his namesake, he attended college and law school, although not Harvard and Columbia, but City College and Fordham, where he put himself through law school while working full time as a department store stock boy. His success was not to be measured in money, but in stature. He worked for forty-six years in one company, Allied Stores, where he embodied the American Dream. He literally went from the stock room to the board room over the course of his career. The poor boy from 138th Street in Manhattan landed on the cover of Forbes Magazine in August 1966. He retired from Allied as CEO in 1973, but continued to serve on many boards, including Mutual of New York, American Broadcasting Company, Marine Midland Bank and Eli Lilly.
In thinking about Poppy’s namesake, I started to poke around the web for more information about President Roosevelt. Interestingly enough, I found some quotes by Roosevelt himself that sounded remarkably like they could have been said by or about my grandfather. My favorites include:
During my visit, I realized that President Roosevelt was born October 27, 1858 in New York City. Fifty years later--to the day--my grandfather was born in New York City. The funny thing is that only late in his life did my grandfather tell us that his middle initial “R” actually stood for Roosevelt—he was born in 1908, at the end of Roosevelt’s tenure in the White House. Poppy would have been 99 years old this past weekend and given all of these coincidences, it only seems appropriate to write about him.
Ted Schlesinger was intense and bright. Like his namesake, he attended college and law school, although not Harvard and Columbia, but City College and Fordham, where he put himself through law school while working full time as a department store stock boy. His success was not to be measured in money, but in stature. He worked for forty-six years in one company, Allied Stores, where he embodied the American Dream. He literally went from the stock room to the board room over the course of his career. The poor boy from 138th Street in Manhattan landed on the cover of Forbes Magazine in August 1966. He retired from Allied as CEO in 1973, but continued to serve on many boards, including Mutual of New York, American Broadcasting Company, Marine Midland Bank and Eli Lilly.
In thinking about Poppy’s namesake, I started to poke around the web for more information about President Roosevelt. Interestingly enough, I found some quotes by Roosevelt himself that sounded remarkably like they could have been said by or about my grandfather. My favorites include:
- “The best executive is one who has sense enough to pick good people to do what he wants done, and self-restraint enough to keep from meddling with them while they do it.”
- “Character, in the long run, is the decisive factor in the life of an individual and of nations alike.”
- “Courtesy is as much a mark of a gentleman as courage.”
- “Do what you can, with what you have, where you are.”
- “Speak softly and carry a big stick; you will go far.”
For all of his accomplishments, my grandfather was a quiet, dignified man (OK, so I didn’t inherit the quiet part!), who is best remembered for his loyal and honest business conduct, and, most importantly, his unabashed love for my grandmother, Alma. (My mother fondly labeled them “The walking advertisement for marriage”). Poppy died on July 2, 2001 but left a wonderful legacy of hard work, education and class, which I try to incorporate in my life every day.
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