You know what your mother always said – every cloud has a silver lining. With financial markets out of freefall, you are hopefully a comfortable distance from the ledge. Therefore, now would be a good time to examine how the news of the week might positively impact your life.
Gifts from Uncle Sam: The big news out of DC yesterday was the announcement of the fiscal stimulus plan, which is due to hit President Bush’s desk by mid-February for signing. There are three components: tax rebates, business write-offs and expanding the limits on conforming mortgages. The one garnering the most attention is the rebate.
$300 checks will go out to almost everyone earning a paycheck, including low-income folks who earned at least $3,000 in 2007, but may not have paid income taxes. Families with children would receive an additional $300 per child, while those paying income taxes could receive rebates of up to $600 ($1200 for working couples). The full rebate would be limited to individuals earning $75,000 or less and couples with incomes of $150,000 or less, but a partial rebate would go to individuals earning up to $87,000 and couples earning up to $174,000.
OK, the checks are nice, but the part of the package that really caught my eye was the expansion of limits on conforming mortgages. The plan will raise the limit on Federal Housing Administration loans from $362,000 to $725,000. Boosting the cap on loans that Fannie Mae and Freddie Mac can buy from $417,000 to $725,000. That should vastly improve the wounded jumbo mortgage market and help those who live in areas where real estate is still expensive. Finally, to help spur business investments, there will also be so-called bonus depreciation and more generous expensing rules.
Buying Low: It’s always hard to force yourself to buy low, but if you are investing in your employer-sponsored retirement plan through payroll deductions, then you are doing just that! Think of it as being one of the first into a store when everything is marked down. This does not mean that you should change your allocation—the old mantra of a well-diversified portfolio is still imperative. Given that the markets have fallen dramatically from the highs, now is a good time to get your IRA or Roth money to work.
Refinancing: Although the Fed rate cuts do not directly affect mortgage rates, the yield of the 10-year Treasury has dropped substantially, allowing many homeowners the opportunity to refinance at 30-year fixed rates that we have not seen in years.
Adjusting in the right direction: Those who have adjustable rate mortgages, home equity lines of credit or adjustable credit cards have suffered a great deal as interest rates went up. There is finally good news---the interest rate on your loan is tied to the Fed funds rate so the result of the Fed slashing rates on Tuesday us that you should see your monthly payments drop.
Now all of that is some good news to take you into the weekend!
Friday, January 25, 2008
Thursday, January 24, 2008
The Dragon Coaster
I will never forget the first time I rode the Dragon Coaster at Rye Playland. After the very big first dip, my father said, “hold on---there’s more than one of those drops on this trip!” That’s kind of how I felt yesterday, when the stock market reversed a morning drubbing and finished the day with gusto on the upside.
The day felt both scary and exhilarating, not unlike the ol’ Dragon Coaster. The Dow Jones Industrial Average saw a 631.86-point intraday swing, its biggest since July 2002—a time that was close to one of the low points of the three-year bear market in stocks. You will hear folks saying that there have been just nine days with 500-plus point swings since 1995, many of which occurred at major market turning points. Then again, with the index at higher levels, the point swing is less important on a percentage basis. Still, after an anxiety-ridden couple of days, the frenzied buying was a welcome relief and left the Dow at 12270.17, up 298.98 points, or 2.5%, but still down 7.5% on the year.
So what happened? Well, there have been many that pointed to oversold conditions, but the true catalyst was a rumor…and you know the old trading mantra, “buy the rumor, sell the fact!” Stocks were trading higher when whispers started leaking out about a meeting that was transpiring between insurance regulators and some key Wall Street firms to discuss ways to stabilize and potentially bail out big bond insurers, the latest casualties of the sub-prime fiasco.
Most bond insurers have encountered problems because of their exposure to securities tied to sub-prime mortgages. Prior to the meeting, it was even rumored that some of these firms would have to fold as a result of the losses. Now maybe you think that they should go out of business, but the regulators are concerned that if bond insurers are the next pillar to be toppled in this credit crisis, it would severely harm the broader financial system because these firms insure tens of billions of dollars in bonds, many of them held by Wall Street firms. In other words, this is another case of government intervention, where the theory is that the broader good is served by avoiding failures --- moral hazards be damned!
Who knows what today will bring, but I’m thinking that my Dad’s advice might be worth repeating for all investors: hold on---there’s more than one of those big drops on this trip!
The day felt both scary and exhilarating, not unlike the ol’ Dragon Coaster. The Dow Jones Industrial Average saw a 631.86-point intraday swing, its biggest since July 2002—a time that was close to one of the low points of the three-year bear market in stocks. You will hear folks saying that there have been just nine days with 500-plus point swings since 1995, many of which occurred at major market turning points. Then again, with the index at higher levels, the point swing is less important on a percentage basis. Still, after an anxiety-ridden couple of days, the frenzied buying was a welcome relief and left the Dow at 12270.17, up 298.98 points, or 2.5%, but still down 7.5% on the year.
So what happened? Well, there have been many that pointed to oversold conditions, but the true catalyst was a rumor…and you know the old trading mantra, “buy the rumor, sell the fact!” Stocks were trading higher when whispers started leaking out about a meeting that was transpiring between insurance regulators and some key Wall Street firms to discuss ways to stabilize and potentially bail out big bond insurers, the latest casualties of the sub-prime fiasco.
Most bond insurers have encountered problems because of their exposure to securities tied to sub-prime mortgages. Prior to the meeting, it was even rumored that some of these firms would have to fold as a result of the losses. Now maybe you think that they should go out of business, but the regulators are concerned that if bond insurers are the next pillar to be toppled in this credit crisis, it would severely harm the broader financial system because these firms insure tens of billions of dollars in bonds, many of them held by Wall Street firms. In other words, this is another case of government intervention, where the theory is that the broader good is served by avoiding failures --- moral hazards be damned!
Who knows what today will bring, but I’m thinking that my Dad’s advice might be worth repeating for all investors: hold on---there’s more than one of those big drops on this trip!
Wednesday, January 23, 2008
Step Away from the Ledge, Part 2
When I wrote yesterday’s article, it was Friday, practically another century from where we are now. I had no idea that overseas markets would stage a two-day collapse on fears that the US may be in a deep recession. From India to China to Europe, there was a sea of panic-selling that swept across the globe. The only reprieve came when markets closed.
The US markets could not avoid the problems, although our stocks had already fallen more than those of other countries. It is difficult for reason to prevail when euphoria propels financial markets higher and when fear throttles them lower. That’s why the anticipation of yesterday’s market action had many worried about the worst case scenario. Fortunately, the day was not as bad as feared, because the Fed stepped in with an emergency ¾ point rate cut. Still, the Dow Jones Industrial Average fell 128.11 points, or 1.1%, to 11971.19; the Standard & Poor's 500-stock index shed 14.69 points, or 1.1%, to 1310.50; and the Nasdaq Composite Index dropped 47.75 points, or 2%, to 2292.27.
It took about two seconds for people to look back to 1987’s crash, when the Dow Jones Industrial Average lost 22.6% on October 19. To put that into today’s terms, we would have needed to see a one-day plunge of over 2700 points today to match that gut-wrenching day. Still, there are some similarities between 1987 and yesterday’s drubbing. The 1987 crash followed a multi-year bull market; leading up to the day, there was pressure on the US dollar; the US was running deficits; oil was rising; stocks reached an all-time high in the summer; then sold off and recovered into October. In 1987, the crash then occurred on a single day, while today, the sell-off from the top has been more orderly. Through yesterday, the large stock indices are down between 15-19% from the October highs.
Before you sell the farm, here are some significant differences: in 1987, the price to earnings ratio of stocks was far higher than it is today; Fed policy makers were tightening interest rates in 1987, while today they are easing them; and most importantly, bonds were yielding over 10% in 1987 and today they are below 4%. Even if the selling continues today, you may be heartened by the fact that in 1987, the stock market regained its footing after October 19th. The crash marked the low point for stocks in 1987 and by year-end, the Dow actually showed a gain for the year! Within nine months, stocks recovered all of the losses incurred on October 19th and the US economy never went into a recession as a result of the crash. That may or may not happen this time, but in any event, my prescription is to step away from the ledge and remember your long term goals.
The US markets could not avoid the problems, although our stocks had already fallen more than those of other countries. It is difficult for reason to prevail when euphoria propels financial markets higher and when fear throttles them lower. That’s why the anticipation of yesterday’s market action had many worried about the worst case scenario. Fortunately, the day was not as bad as feared, because the Fed stepped in with an emergency ¾ point rate cut. Still, the Dow Jones Industrial Average fell 128.11 points, or 1.1%, to 11971.19; the Standard & Poor's 500-stock index shed 14.69 points, or 1.1%, to 1310.50; and the Nasdaq Composite Index dropped 47.75 points, or 2%, to 2292.27.
It took about two seconds for people to look back to 1987’s crash, when the Dow Jones Industrial Average lost 22.6% on October 19. To put that into today’s terms, we would have needed to see a one-day plunge of over 2700 points today to match that gut-wrenching day. Still, there are some similarities between 1987 and yesterday’s drubbing. The 1987 crash followed a multi-year bull market; leading up to the day, there was pressure on the US dollar; the US was running deficits; oil was rising; stocks reached an all-time high in the summer; then sold off and recovered into October. In 1987, the crash then occurred on a single day, while today, the sell-off from the top has been more orderly. Through yesterday, the large stock indices are down between 15-19% from the October highs.
Before you sell the farm, here are some significant differences: in 1987, the price to earnings ratio of stocks was far higher than it is today; Fed policy makers were tightening interest rates in 1987, while today they are easing them; and most importantly, bonds were yielding over 10% in 1987 and today they are below 4%. Even if the selling continues today, you may be heartened by the fact that in 1987, the stock market regained its footing after October 19th. The crash marked the low point for stocks in 1987 and by year-end, the Dow actually showed a gain for the year! Within nine months, stocks recovered all of the losses incurred on October 19th and the US economy never went into a recession as a result of the crash. That may or may not happen this time, but in any event, my prescription is to step away from the ledge and remember your long term goals.
Tuesday, January 22, 2008
Step Away from the Ledge!
Investors sure needed a day off yesterday to gather thoughts and step away from the ledge. It was an awful week as investors were beaten down by an almost continuous flow of bad news. There was almost no place to hide, except government bonds and cash (the two asset classes often shunned when I mention them as alternatives).
Here is a snapshot of the damage: the Standard & Poors 500 Index lost 5.4% on the week at 1325—the broad measure of US stock performance is now off 9.75% for the year. The Dow Jones Industrial Average closed at 12,099, a 4% for the week and down 8.79% for the year. The Dow now stands less than 800 points from a 20% decline of its October 9th record close, the technical definition of a bear market. The NASDAQ composite fell 4.1% on the week to close at 2340, off 11.77% for the year. The tech-heavy index is down 18.2% since its October high. If you are a fan of small stocks, the news is worse: the Russell 2000 Small Cap Index is already technically in a bear market, down 21.3% from its July peak.
These numbers are likely to get you close to the ledge without putting context around them. That’s what I told my client “Betty”, who was concerned about the state of the financial markets and her portfolio value. Betty said that she had lost $75,000 since the beginning of the year, which “is a great deal of money!” I wouldn’t sneeze at $75,000, but I pointed out that the $75K represented a loss of approximately 5% in her growth-oriented $1.5 million portfolio; a pretty good performance when compared to the 9% drubbing the S&P had taken in the same time.
I know—it’s still seventy-five grand, but to be an investor, you must compare how you are doing against the appropriate benchmark. If Betty were down far more than the index, then I would be worried that she had assumed too much risk, but that wasn’t the case. She is a growth investor, who will not need to access her money for at least ten years. (She is also the person who asked me to put her into a more aggressive portfolio a year ago, which I thankfully counseled against!) This of course is the investor’s dilemma: in order to try to earn more money than your local bank CDs, you must be willing to endure these painful times in the market.
I suspect that in the short-term, I will have more of these conversations. I usually remind folks that markets can not possibly move in a straight line. With all of the negativity swirling about, it’s hard not to get caught up in the noise, but if you have a diversified portfolio, you should be able to weather the current market volatility and step away from the ledge.
Here is a snapshot of the damage: the Standard & Poors 500 Index lost 5.4% on the week at 1325—the broad measure of US stock performance is now off 9.75% for the year. The Dow Jones Industrial Average closed at 12,099, a 4% for the week and down 8.79% for the year. The Dow now stands less than 800 points from a 20% decline of its October 9th record close, the technical definition of a bear market. The NASDAQ composite fell 4.1% on the week to close at 2340, off 11.77% for the year. The tech-heavy index is down 18.2% since its October high. If you are a fan of small stocks, the news is worse: the Russell 2000 Small Cap Index is already technically in a bear market, down 21.3% from its July peak.
These numbers are likely to get you close to the ledge without putting context around them. That’s what I told my client “Betty”, who was concerned about the state of the financial markets and her portfolio value. Betty said that she had lost $75,000 since the beginning of the year, which “is a great deal of money!” I wouldn’t sneeze at $75,000, but I pointed out that the $75K represented a loss of approximately 5% in her growth-oriented $1.5 million portfolio; a pretty good performance when compared to the 9% drubbing the S&P had taken in the same time.
I know—it’s still seventy-five grand, but to be an investor, you must compare how you are doing against the appropriate benchmark. If Betty were down far more than the index, then I would be worried that she had assumed too much risk, but that wasn’t the case. She is a growth investor, who will not need to access her money for at least ten years. (She is also the person who asked me to put her into a more aggressive portfolio a year ago, which I thankfully counseled against!) This of course is the investor’s dilemma: in order to try to earn more money than your local bank CDs, you must be willing to endure these painful times in the market.
I suspect that in the short-term, I will have more of these conversations. I usually remind folks that markets can not possibly move in a straight line. With all of the negativity swirling about, it’s hard not to get caught up in the noise, but if you have a diversified portfolio, you should be able to weather the current market volatility and step away from the ledge.
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