COUNTERCOLUMN: All Your Bias Are Belong to Us

There's a bipartisan effort afoot in Congress to pry open and audit the Fed's books.

I say, beware the law of unintended consequences.

One of the reasons the federal reserve's discount window operations are effective in preventing bank runs and collapses when member banks encounter short-term liquidity problems is because discount window operations are confidential. If we blow this, we take away an important arrow in the Fed's quiver.

Large depositors are very careful with their investors' money - and are not protected by FDIC. They maintain a watchful eye on bank strength and solvency.

If discount window transactions are not confidential, then the mere act of seeking much-needed assistance at the fed discount window is likely to create a run on the banks, thereby creating the liquidity disaster that the fed discount window was designed to prevent.

Congress is playing with fire, and not more than a handful of them know how big that fire is, or even that they've got matches in their hands.

Splash, out

Jason

Labels: banking, Congress, Economics, economy, finance, investing, The Federal Reserve

There were 31 dollars worth of insider stock sales last month for every dollar's worth of insider buys.

I'd like to know if that's accompanied by a spike in volume or not. And I'd expect there to be some profit-taking after this. I'm advising clients that tax rate increases are coming - as are most financial advisors, I'd imagine, and so some of this might be an attempt to realize capital gains this year, rather than give the revenue-desperate Congress a chance to hike capital gains taxes effective Jan 1.

But still, not a bullish sign at all.

Splash, out

Jason

Labels: economy, finance, investing

These contracts are abortions, and I'd like to personally adjust the actuarial outlook for any of these Wall Street scumwads trying to push these.

After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.

The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

Why? Well, we have insurable interest laws for a reason. Do you really want a sociopath like Bernie Madoff owning a substantial interest in wanting you dead?

But let's put aside the obvious perversity in granting Wall Street a windfall when they kill you. Let's just look at the math- the math the New York Times misses:

The primary purpose of life insurance is death benefits. DEATH BENEFITS. Why? To protect widows, orphans, and business partners. That's it.

When an insurance company sets its premiums on a block of business, they have to take into account the expected lapse rate. A certain percentage of all life insurance contracts will never pay a death benefit - because they either lapse or get cashed in well prior to the death benefit. Indeed, term insurance is DESIGNED to lapse without paying a claim. This is part of why term is so cheap... the premiums are well below the expected mortality for any given age group. Because of lapse rates. This is part of why young families and small businesses can afford the protection they need.

When you have third parties buying up life insurance... parties whose primary interest in the insured is identical to that of a corpse-eating zombie - they will keep policies in force that would otherwise have lapsed or surrendered. Lapse rates will fall. Premiums will rise. Life insurance will become less affordable. And families and small business will have to make do with less protection. Dividends fall on par whole life contracts. further raising premiums neccessary for a given level of protection. Seniors will have to pay longer before dividends offset premiums. Some won't be able to. And we will have forgotten why we have life insurance to begin with: To protect future widows, orphans, and dependents of small business owners from unexpected financial catastrophe due to death.

This is one asset class we can definitely do without.

Splash, out

Jason

Labels: Crime, finance, insurance, investing

If Obama and his Administration gave a good god-damn about retirement security, they could start by reigning in obscene spending so we won't have to inflate American's retirement savings into oblivion, or tax the bejeezus out of distributions from 401(k)s, 403(b)s IRAs, SEPs, and annuities, in order to have a prayer of paying off our debt.

Instead, our Dear Spender proposes replacing cash refunds with taking on even MORE government debt.

If he really wanted to help people, he would push for waiving the 10% withdrawal penalty on 401ks and IRAs for people under 59 1/2 who are unemployed, or for the purpose of starting a new business (and hiring!). All that's needed is to expand the definition of qualified hardship withdrawals to include unemployment income.

But he won't.

Instead, he screws around the edges. Unused vacation pay?? Sounds like an idea only someone who's had his head so far up the Union's ass for years would love.

He wants to put long term retirement savings in government savings bonds, of all places? With interest rates at historic lows???? If he were in private practice, he'd get sued nine ways from Sunday.

And then, Dear Leader wants to send the paper savings bonds directly to the workers? So they can stuff them in a drawer somewhere? No third party administration? No transfer agent to keep track of beneficiaries? This sounds like a banana republic plan.

I'm all for having a default 'opt-in' for retirement plan participation. That's been a good idea for a long time - though there are a lot of details to work out, including figuring out a reasonable 'safe-harbor' solution for plan sponsors who don't want liability for taking either too much risk or too little risk with the money. There are ERISA headaches when a plan sponsor's executive class gets a 6% return over years because of a reasonable allocation to equities, while the worker bees get 2% returns because the worker bee assets were deposited into money markets. Lots of companies have declined to offer retirement plans precisely BECAUSE of this kind of ERISA liability.

(Incidentally, an automatic opt-in provision helps executives, who can't max out their own plans, under "top hat" rules, unless they meet participation requirements among the rank and file.)

The plan to issue savings bonds instead of tax refunds? It's a massive screwing of the working and middle class. With interest rates low, massive spending and inflationary expectations, such a deal is a very bad one for workers (and a great one for the IRS!).

It's also a massive redirection of spending power from main street USA to K Street, Washington. All it does is ensure government bureaucrats once again take the first cut of any tax refund checks.

(What gets me is that libtards will, if pressed, and in the same breath, argue at once that we need increased participation in 401(k)s but we shouldn't partially privatize Social Security because equities are too risky to rely on for retirement savings.)

All in all, I'm thoroughly unimpressed with Obama's proposal.

Why the Hell is he wasting bandwidth on this garbage, anyway? He ought to be pressing the case for his abortion of a health care reform package, or mustering up public sentiment to fight and win in Afghanistan. (That's the one he thought was important, remember?)

Instead, he's blowing political capital on these distractions, impaling himself against the Republican pikes over health care reform, and letting the Afghanistan war effort shrivel and die for lack of rhetorical oxygen and leadership from the President.

The likely result is that Obama will fail at all three initiatives.

I want him to fail on health care reform. Utterly. I do NOT want him to fail to win in Afghanistan.

Splash, out

Jason

Labels: Afghanistan, finance, investing, Obama, Politics, retirement

I get bragging rights: I called it precisely.

Here's what I wrote more than a year and a half ago:

The problem isn't that Mozilo cashed out a lot of stock options. That's entirely legitimate, and no one is alleging that he failed to disclose his trading in accordance with company policy and the law.

This is the most widely predicted and predictable bubble in a generation. Mozilo would be a fool not to have lightened up (though he still should have maintained a significant long position out of principle. My issue is that as far as I can tell, he has no long position.)

The real problem is that even as Mozilo was quietly unloading his own shares, Countrywide was loading up the company with debt to buy by back millions of shares at prices management obviously thought were inflated (around 40 bucks).

Actually, that buyback program was initiated almost exactly at the same time that Mozilo began selling.

Oh, and you also read it here on Countercolumn.


I am not long Countrywide, except via Weitz Value.

It's tempting. It trades at 5x official earnings (I mentally adjust that to more like 8 to 9 times "real world" earnings, and trades at 20 to 30 percent off book value. It is less than 10% into subprimes. It is about 40% into adjustables, but those adjustables are spread across the United States, and not concentrated in California (in contrast to someone like Wells, which is a western franchise, and even Washington Mutual, which is overexposed to California, which surprised me to learn.)

Countrywide also recently executed a large buyback of shares around the 40 dollar mark last year. Shares are now trading at around 18.

It's very tempting - with a nice dividend in the meantime to pay me for waiting for a recovery.

But I look at their CEO, and he is selling shares as fast as his options vest. He doesn't seem to be retaining any of them personally, and therefore I distrust him as an owner-manager.

I know. Please. Try not to gush.

What's more, it is this seeming mismatch between the CEO's own trading actions and the COMPANY BUYBACK ITSELF that will expose Mozilo and the directors to legal liability. The buyback is a key option, because it's the buyback, not the insider sales, that arguably represent a violation of fiduciary duty to shareholders.

Here's the headline today:

SEC charges ex-Countrywide CEO Mozilo with fraud and insider trading

From the story:

Mr. Mozilo set up four executive stock sales plans for himself in the last three months of 2006, all the while aware of the company’s fate and that of its loan portfolio, the SEC charged.

Between November of that year and August 2007, he exercised more than 5.1 million stock options, raking in about $140 million, bailing himself out while Countrywide and its investors crashed and burned, according to the charges.

Aside from the fraud charges, the SEC also wants the three men to pay up their ill-gotten gains, plus financial penalties, and for the trio to be barred from becoming officers or directors at publicly held companies.

Richard H. Moore, former state treasurer of North Carolina, wrote a letter in 2007 to then-SEC chairman Christopher Cox, asking him to investigate stock sales that Mr. Mozilo had made.

Ben Graham, you magnificent bastard, I read your book!!!

Splash, out

Jason

Labels: Countrywide, finance, investing, mortgages, personal

Things have come to pass much as I had predicted.

From last October:

Forward P/Es are down around the 13 level, according to the Morningstar data on the Vanguard 500 fund, which I'm using as a quick proxy, with a dividend yield of around 2.47%.

Not too bad, but those forward-looking estimates were assuming normal times, and I would have to regard them as obsolete. I think the actual earnings next year will be quite a bit less than projected, and the real P/E is closer to 20x earnings right now, looking forward. So forward multiples will expand (because of declining earnings), or stocks will continue to fall until the the ACTUAL P/E, looking forward, is 12 or less (based on dividends of 2.5% or less.)

A big chunk of dividends will disappear, as financial services companies...most of them dividend payers themselves, struggle to recapitalize by retaining earnings.

Nevertheless, look at Bank of America, now trading at 11.5x earnings, with a yield of 12.27%! Very tempting, although that yield I suspect will fall, as BofA shores up its balance sheets. It may stop altogether for a while. And of course, as every stock investor should ALWAYS keep in mind, it COULD go to zero!

And from March of 2007:

Looks like bonds will be under pressure. Real estate will be under pressure. International stocks will be under pressure (actually, already are). Growth stocks will be under pressure. Is this the Perfect Storm?

I can't wait.

Labels: economy, investing, personal

Alright, troops, listen up!

Been deployed to a hostile fire zone for part of the last year? Did you qualify for the combat zone income tax exclusion?

If so, then check out the W-2 you get from Uncle Sam. You can do that on MyPay. Chances are pretty good your adjusted gross income is artificially low. Yeah, you got paid for the duty. But your TAXABLE wages are artificially low for being in a combat zone.

That being the case, you may be able to qualify for the Saver's Credit.

That means the government will give you free money (in the form of a tax credit) for saving for retirement.

From the IRS's Web site:

The saver’s credit can be claimed by:

Married couples filing jointly with incomes up to $53,000 in 2008 or $55,500 in 2009;
Heads of Household with incomes up to $39,750 in 2008 or $41,625 in 2009; and
Married individuals filing separately and singles with incomes up to $26,500 in 2008 or $27,750 in 2009.

Restrictions:

You gotta be 18.
You can't be a full-time student.
You can't be a dependent on someone else's tax return.

How do you claim it? Follow the instructions on IRS Form 8880

Yes, the Thrift Savings Program qualifies, as do Roth IRAs, IRAs, SIMPLEs, 401(k)s and 403(b)s.

Of these, I would usually steer troops toward the Roth IRA for this purpose. Why? Because the other plans are all tax-DEFERRED. But with the combat zone income tax exclusion, you're effectively contributing with pre-tax dollars anyway. But the Roth IRA grows tax-FREE, with TAX FREE distributions in retirement, and none of those pesky Required Minimum Distributions the government requires you to take when you get older. (Yeah, most of you aren't worried about those now, but trust me. You will be, and you will hate them.)

With a Roth IRA (or a Roth 401(k) if your employer offers one), you get the FULL benefit of the combat zone tax exclusion, thus contributing with tax-free dollars. Your money compounds tax free. Tax-free income in retirement. (The government thinks you paid taxes on money going in. But since you were in a combat zone, you didn't.)

Combat veterans thus have the opportunity to take advantage of the most tax-advantaged retirement program the tax code allows. And the Savers' Credit just sweetens the deal with some free money from Uncle Sam.

(Aww. the gang at Military.com hasn't picked up on the story yet. Kids, don't try this at home.)

(Caveat: If your employer matches your contribution in a SIMPLE or 401(k), you may want to contribute enough to snag the free matching money. Plans vary, so your mileage may vary as well.)

Now, to kick the whole thing into overdrive: Do you own a small business? Follow the instructions on IRS Form 8881. The Government will give you free money - in the form of a tax credit of up to $500 dollars, tp start up a qualified retirement plan (provided it also covers at least one non-highly compensated employee.

Splash, out

Jason

Labels: finance, investing, soldiers' issues, taxes

The UK can't sell new debt.

Liquidity isn't infinite. The only reason the US and UK and other sovereign governments have been able to float as much debt as they have is because assets have been fleeing equities, real estate, mortgage pools, structured debt, and other asset classes as fast as they can go, in a massive flight to safety.

When the owners of capital perceive that other asset classes are more appropriately priced, that process will reverse. Government debt prices will fall, yields will rise, and Obama and his crew will find less and less capital available to fund the massive new debt he is committing to.

When yields fall, capital could leave the government bond markets pretty quickly, as traders seek to avoid being the last guy holding the bag.

There's no way out of that problem, and we can't inflate our way out of it. If we try to inflate our way out, then bond prices will fall and interest rates on new debt will rise as markets build future inflation assumptions into interest rates. (Real interest rates cannot stay negative for very long.)

Watch for a steepening of the yield curve if this should happen, combined with an overall rise in yields. We've already seen one. The other will come.

Labels: economy, finance, investing

FDIC Chief says bank guarantee fund could be insolvent by year-end.

You read it here first:

Typically, the FDIC's been able to carve out 50 cents on the dollar of saleable assets from banks it has had to shut down. But that's in an environment where asset prices were overinflated and there were buyers available. It wouldn't get anywhere close to 50 cents on the dollar today. Meanwhile, there would be all kinds of family-friendly entertainment as the FDIC struggled to sell its own assets (mostly treasuries) and rescue what was left of its cash and cash equivalents in its reserve fund to pay off depositors.

The FDIC was designed to pick up the occasional local bank failure, and one or two larger banks, so long as they didn't happen too close to one another.

It cannot absorb the Citigroups. It cannot absorb the Bank of Americas. One of these would wipe out the fund. Once FDIC was wiped out it would cause a run on the others. Congress would have to authorize another 500 billion or a trillion overnight to make good on FDIC promises and recapitalize FDIC. They would HAVE to. And then pray that there were still treasury buyers out there. If there is still a market for treasuries, it's going to be at the expense of the money markets, as public debt crowds out private.

The FDIC promise is paper thin.

Splash, out

Jason

Labels: banking, economy, finance, investing, mortgages, stupid

UPDATE/CORRECTION: Reader Dan points out an error I made in writing this post earlier. I thought of it, too, driving around today, but couldn't get back to a computer in time to amend.

The error is this: Taxable distributions represent capital gains to the fund, but are taxed as income to the fund shareholder, not as capital gains. If the Bush tax cuts expire, the point still stands, because Bush cut taxes for all income levels - not just the top brackets. Obama has stated that he supports limiting tax increases to those making over a certain amount. We'll see what actually gets passed and signed into law.

Original post follows, as written.

...............................................

Obama would like to increase capital gains taxes on anyone making more than 250,000 dollars per year.

So who would that affect? ANYONE who holds mutual funds outside of a qualified plan.

That's not just going to screw the rich. That's going to hurt any diligent saver who invests excess capital in mutual funds.

Why? Because when a mutual fund sells a holding at a gain, that constitutes a taxable event, which they then pass on to shareholders in the form of taxable distributions. Mutual fund shareholders at all income levels are on the hook for this tax, and short of selling their shares (at a captal gain/loss), there is nothing they can do to avoid it, if they own the stocks at the time the distribution happens.

Once again, when Obama targets the rich, he winds up hurting the little guy. (News flash: The rich are in life insurance, annuities, and managed accounts, not mutual funds.)

To add insult to injury, if you bought into a mutual fund high, and the fund had redemptions going into the bear market of the last year, forcing it to sell stocks it had held for a long time, you could eat a taxable exemption, get handed a nasty tax bill, and have to pay taxes ON A FUND THAT LOST YOU MONEY!

Splash, out

Labels: economy, finance, investing, taxes

26 February 2009: WASHINGTON (AP) — President Barack Obama's budget proposal would shift much of the tax burden from middle- and low-income families to the wealthy, while increasing taxes on many businesses.

Today: Dow hits lowest value in 12 years, dropping more than 3% before lunch.

The market move on Obama's plans for tax increases is entirely rational. Stock prices reflect nothing more than the present value of future dividends and capital gains for a fractional share of a company. If capital gains taxes go up, then the expected future value of any taxable security declines by the proportionate amount.

Labels: Economics, economy, finance, investing, Obama, stupid

... and we simply sell the weak banks to the strong.

Sounds good on paper. Except that we can't.

Why? Because even the strong banks are going through a ton of stress right now. Even if they could establish a reliable and fair price for these assets at arm's length (and nobody can put a reasonable valuation on them at this point), they simply don't have a lot of capital available with which to purchase them.

Eventually, though, that will work itself out, and in the long run you don't need government intervention.

But "in the long run" we are all dead. "In the long run" is a huge, huge problem.

Here's why:

The whole scheme relies on the FDIC actually being able to pay off depositors. The problem is they can't. They just can't. There isn't enough capital to do that. As of the end of 2007, the guarantees of $4 thousand billion in insured deposits were perched precariously on a capital reserve of less than 1.25 percent of the total.

That's a lower capital margin than the banks themselves were required to operate with. A lot lower.

And that 1.25% reserve was before IndyMac.

Meanwhile, the FIDC INCREASED its deposit guarantees from $100,000 to $250,000, without any increase in reserves.

Typically, the FDIC's been able to carve out 50 cents on the dollar of saleable assets from banks it has had to shut down. But that's in an environment where asset prices were overinflated and there were buyers available. It wouldn't get anywhere close to 50 cents on the dollar today. Meanwhile, there would be all kinds of family-friendly entertainment as the FDIC struggled to sell its own assets (mostly treasuries) and rescue what was left of its cash and cash equivalents in its reserve fund to pay off depositors.

The FDIC was designed to pick up the occasional local bank failure, and one or two larger banks, so long as they didn't happen too close to one another.

It cannot absorb the Citigroups. It cannot absorb the Bank of Americas. One of these would wipe out the fund. Once FDIC was wiped out it would cause a run on the others. Congress would have to authorize another 500 billion or a trillion overnight to make good on FDIC promises and recapitalize FDIC. They would HAVE to. And then pray that there were still treasury buyers out there. If there is still a market for treasuries, it's going to be at the expense of the money markets, as public debt crowds out private.

The FDIC promise is paper thin.

Splash, out

Jason

Labels: economy, finance, insurance, investing

Megan McArdle links to this story about Meaghan Cheung, the SEC investigator who missed the Bernie Madoff scheme, despite being tipped off to it in writing.

"Why are you taking a mid-level staff person and making me responsible for the failure of the American economy?" an upset Meaghan Cheung, with eyes tearing up, told The Post...

Megan feels bad for her. Well, not too bad:

No one's blaming Ms Cheung, I hope, for the collapse of the entire American economy, but it's hardly crazy to blame her for the failure of the Madoff investigation, given that she signed off on it.

Who's to say? Watch the video of the interview, and judge for yourself.


My take: One of Megan's commenters got it right: The SEC is made up of lawyers, not quants. They are simply not equipped to do deep due diligence on funds with complex trading strategies: It would take an advanced degree in statistics and a hellacious amount of number crunching to pull that off, and I haven't met the lawyer yet who is equipped to do that on his or her own... nor are the people who can do such things inclined to work for the SEC, or in journalism, for that matter, because the money isn't good enough.

On the other hand, I have met very few lawyers who truly understood the limitations of their field of expertise and circle of competence... an observation buttressed by the many stupid attempts to legislate from the bench. Or from the legislature, for that matter.

It is entirely within the realm of possibility that Cheung was a faithful and industrious public servant who did the level best she knew how, given the resources at her disposal and the fund of information she had, or reasonably could have had. The fault very properly lies with higher-ups who knew her expertise was in law, and not quant, and who failed to adequately supervise her, by providing her with the staff expertise or access to outside knowledge she needed to carry out an investigation of this nature.

I think she's being scapegoated. But on the other hand, it's not like the SEC has ever gone after anyone else for "failure to supervise," either.

Besides, regulators were far, FAR to busy trying to make sure competent insurance agents weren't suggesting people diversify out of home equity, stocks, or other ridiculously inflated assets and into safe, secure, fixed vehicles that would have saved their retirements and their family fortunes over the past several years.

Splash, out

Jason

Labels: Economics, economy, finance, Humor, investing

So hedge fund operator and former Nasdaq chief Bernard Madoff somehow bilked investors of $50 billion in a gigantic Ponzi scheme. (If you don't know what a Ponzi scheme is, it's pretty much like Social Security, except in the long run, less destructive.)

The idea that this guy can raise so much money, so easily, just by working the country clubs around Long Island and Palm Beach, doesn't speak too well for the financial acumen of our socialite class, all of whom just heard what they wanted to hear.

The first imperative of investing - the prime directive - is to provide for the return of capital. Anything else is speculation. Establishing a small position in an opaque hedge fund for a low correlation to more standard asset classes is one thing. But anyone who was ruined by this man is a fool.

I don't know what it is about Florida and Boca Raton that makes people so gullible. But speaking as a legit financial services guy myself, it's frustrating as hell to see this kind of thing happening again and again.

Due diligence, and the safe return of capital. Do not risk what you and your family have and need for something you and your family do not have and do not need. No less an investment mind than Warren Buffett said that.

Why these wealthy individuals would be taking stupid risks with someone who can't guarantee their principal back, when it's so easy to do, is beyond me.

How to do due diligence on fund managers? Read my pre-Countercolumn piece for Registered Representative here.

Splash, out

Jason

Labels: Crime, finance, investing

Buffett's going long!

If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

Yes.

That said, Buffett can afford to be wrong. Your mileage (and mine) may vary. My own belief is that those nearing retirement should not be 100% equities, and people Warren's age with limited nest eggs should not be 100% equities.

Look...Warren can take a 5% bath in equities, and continue to draw his customary 100k in income each year and do just fine. He's not running a 4 or 5 percent spend down ratio on his assets each year simply in order to make basic living expenses. His vast personal wealth allows him to be more aggressive with his portfolio than you can.

My own approach - and again, your mileage may vary - is to maintain roughly the same asset allocation I had before the bear market. Which also means selling some fixed income and cash assets in order to purchase deeply discounted equities (I use indexes primarily right now, but that may change).

My personal situation is quite a bit different as I have some investments to make in my own business before I can pick up these bargain stocks, but for the most part, I still agree with a robust insurance foundation against disability, catastrophic illness, death, or the need for long term care, and then for the accumulation portion of a portfolio, a conservative split between stocks and bonds with a healthy emergency fund set aside.

Don't panic. Adjust the helm to put you on the course you were charting prior to the crash.

Your destination didn't change, so neither does your bearing. The only thing that may have changed is the speed with which you will reach your goals.

Splash, out

Jason

Labels: economy, finance, investing

I called a bear market in almost everything in sight back in March of last year.

Here's what I wrote:

Looks like bonds will be under pressure. Real estate will be under pressure. International stocks will be under pressure (actually, already are). Growth stocks will be under pressure. Is this the Perfect Storm?

I can't wait.

Yep. Pretty exciting for a long guy, but now that it's here, I can't say I'm terribly enthused about it. Forward P/Es are down around the 13 level, according to the Morningstar data on the Vanguard 500 fund, which I'm using as a quick proxy, with a dividend yield of around 2.47%.

Not too bad, but those forward-looking estimates were assuming normal times, and I would have to regard them as obsolete. I think the actual earnings next year will be quite a bit less than projected, and the real P/E is closer to 20x earnings right now, looking forward. So forward multiples will expand (because of declining earnings), or stocks will continue to fall until the the ACTUAL P/E, looking forward, is 12 or less (based on dividends of 2.5% or less.)

A big chunk of dividends will disappear, as financial services companies...most of them dividend payers themselves, struggle to recapitalize by retaining earnings.

Nevertheless, look at Bank of America, now trading at 11.5x earnings, with a yield of 12.27%! Very tempting, although that yield I suspect will fall, as BofA shores up its balance sheets. It may stop altogether for a while. And of course, as every stock investor should ALWAYS keep in mind, it COULD go to zero!

Remember, though...last year's earnings are not this year's earnings. Foreclosures will rise if there is a recession, forcing mortgage holders out of work or forcing upside-down homeowners to relocate to find employment. So again, I see that 11.5x earnings as closer to 16x or so. Maybe even higher.

I had zero in equities going into the fall, outside of retirement money I won't need for 25 years, though that was pretty heavy in stocks, so I got stung on paper. But I had gone entirely to cash outside of retirement, having sold the last of my non-qualified stock funds about a month ago.

Because I was super prescient?

No. Nobody's that precient. Because of the career change and I needed to cover living expenses while training, ramping up, etc.

Long term, I like the buying opportunity. But ONLY with long term money as I still smell a downside in the short term for stocks. Long-term, however, I think the upside exceeds downside potential now.

No, this is not advice. This is just my take on things for now. YMMV.

Splash, out

Jason

Labels: business, economy, investing, personal

One bit of fallout from the recent rash of federal outlays: I think we can kiss goodbye any hopes that the estate tax exemption is going to remain at $2 million. That sucker is back down to $500,000 if Obama wins, before you can say "Patriotic."

And if McCain wins, that's going to be the first bone he throws to a likely Dem congress in order to get even a smidgeon of his agenda passed. Either way, I think it's very unlikely you can bank on a continued $2 million estate tax exemption.

So what does this mean?

Well, like the AMT, it's going to have a disproportionate effect on the blue states...property values in red states (Florida and Arizona excepted) did not inflate as much as properties along the coasts. So to an extent, it's a poison pill for the Dems. But a lot more people are going to need to look long and hard at how their assets are going to be passed on to the next generation.

Incidentally, the increased estate tax burden is going to fall disproportionately on another Democrat constituency: same-sex couples. Why? Because married couples enjoy an unlimited estate tax exemption to the surving spouse. Unless a same-sex couple is legally married, though, even a will is not going to help. Andy Sullivan's long-time companion can pass away (BECAUSE HE WANTS TO!!!!) and even if they own a house jointly that puts them over the 500k exemption, Sully's going to have to find some way to raise enough cash to cover an amount equal to up to 47% of the estate's value over and above the $500k exemption.

It's going to be great for insurance salespeople, of course, since the time-honored way to pay for the estate tax without having to liquidate assets (like a home) is to take out a life insurance policy sufficient to cover the estate tax. The number of people with a new life insurance need is far, FAR higher with an estate tax exemption of $500,000 than it is with an exemption of $2,000,000. Further, I would posit that at the lower exemption amount, the chief asset that will need to be sold to make the exemption is going to be the family home. This is a much bigger deal at a 500k exemption than at the 2 million level, because in many cases, a much larger chunk of the exemption is likely to be the one asset that is most difficult and painful to liquidate in time to pay the estate tax: the home.

Look for a jump in life insurance sales (to cover the increased estate tax liability), annuities (to get money OUT of the estate and convert it to income), and reverse mortgages (to get the house out of the estate).

Now, this is going to be a painful effect for the upper middle class, because they will be forced to weigh the desire to keep a home in the family against the need for retirement income - and they've undersaved to begin with.

I wouldn't rely on pensions for a lot of them. And, quite frankly, unless they've done a terrific job planning ahead, the life insurance premiums it is going to take to cover, say, $300,000 to $1.5 million in increased estate tax liability is not going to be affordable for people in their 50s and 60s, let's say, whose chief asset is in their home, which is not readily convertible to cash to pay a premium.

And this is not even including the cost of providing for their own long-term or nursing home care.

The libtards think they can "soak the rich" by lowering that estate tax exemption back down to $500,000 from $2 million.

I'm here to tell you... they have a funny idea of what "rich" means. The more I learn about family finances, the more I see that this is a pretty ugly development for an awful lot of families.

Splash, out

Jason

Labels: finance, insurance, investing, Real Estate, taxes, The Left

Watch out for libtard attempts to hang McCain's support for a private account option for Social Security around his neck like an albatross. Actually, they're already doing it...and the financial illiterates in the media are buying into it.

But verily I say unto you: the lower equity prices go, the more sense it makes to allow workers to route their earnings toward private accounts.

It's the paradox of public stupidity: People make decisions by looking in the rear view mirror. The more attractive equities become, and the lower P/E ratios become and the higher dividends become, the more difficult it will be to sell the public on private accounts. The unwashed masses only want to invest in equities at the worst times, AFTER stocks have been soaring. And they want to get out of stocks only AFTER the market lurches downwards.

But remember folks, we are looking at dollar cost averaging contributions over a period of decades. Equity prices at any given time is simply statistical noise. Look, the market ended UP this week, anyway!

What's really important is what kind of earnings can you get per dollar, and how stable and reliable that stream of earnings becomes. There is nothing else that can support a reliable pension, in the long run...and that is equally true, regardless of whether short-term price volatility has ZERO EFFECT on the long-term earnings of any given security. The only thing price volatility can do is affect your expected return, which is a function of expected earnings and current price. Further, the longer the time horizon, the smaller the effect of the current price.

Now look at things the other way round: As people flee to safety and drive down yields on bonds...especially treasury securities, that will ALSO have the neccessary effect of depressing the internal rate of return of Social Security contributions.

So the market events of the last couple of weeks are actually an argument FOR some form of privatization, not an argument against it. The worse things look, and the further down investors drive treasury yields as they run screaming to safety, the lower the expected returns on the bonds held in the Social Security Administration portfolio. Should the rate of inflation outstrip the yield, and we have negative real returns on Social Security, the difference will have to be made up out of the general fund, anyway. We are still beholden to make up COLA adjustments. If Social Security is limited to a bond portfolio, AND we remain in an extremely low interest rate environment, it gets very ugly very fast for the Social Security Portfolio.

Splash, out

Jason

Labels: economy, finance, insurance, investing, Social Security

I still haven't found a mass market book on insurance planning that's worth a damn. Even great investment types routinely and totally blow it when discussing insurance. Or, more commonly, they'll devote 15 chapters to the finer points of ekeing out an extra 50 basis points on an investment portfolio and one chapter on insurance planning. Or they'll write as if we live in a tax vacuum, all small closely-held businesses have ready buyers upon the owners' death, nobody pays income taxes on pensions, nobody will pay an estate tax, and all investors who buy term and invest the difference will actually realize the 10% return projected in mutual funds (HA!). Or they'll write as if the taxation of insurance proceeds is subject to legislative risk while capital gains taxation of mutual funds and income taxation of assets drawn from retirement accounts are not.

More on this, to come ...at least while I can still write freely about this stuff.

Splash, out

Jason

Labels: insurance, investing, The media

From time to time, I get a request for my favorite investment and finance books, which I usually answer via email.

I'm always afraid to post this list publicly, because as my own understanding evolves, my list of favorites changes, and some books that were my early favorites would not make the list now.

Nevertheless, here goes. It will be interesting to me to look back at this list some years hence and compare and contrast it.

For mass consumers

The Millionaire Next Door - I give this as a gift to young people just starting out. Essentially, the authors interviewed thousands of wealthy people to find out how they got that way. The results aren't what many would think.

Eric Tyson's Financial Planning for Dummies. Nothing fancy, and I haven't read it in years. But well-presented, basic stuff to get you started.


For investing enthusiasts

The Intelligent Investor, by Benjamin Graham. Written in the 1970s. Get the updated version, edited by Jason Zweig, who illustrates Graham's timeless principles with recent examples.

Common Sense on Mutual Funds, by John C. Bogle. The founder of the Vanguard group, and the guy who brought index funds to the world, fills you in on why mutual funds, in the aggregate, must fail to beat their indexes over time by the amount of their costs. The solution: Cut expenses, using index funds! For years I was a dedicated Boglehead. Not so much now... I can see a place for active management and active manager selection, and I've written as much here on this blog from time to time. But I think before playing the active game, I think everyone should first have a firm grasp of the beauty and logic of passive management.

A Random Walk Down Wall Street - by Burton Malkiel. An efficient markets guy, Malkiel continues Bogle's thesis and introduces you to the math and logic behind it.

The Superinvestors of Graham and Doddsville. Not a book, but a speech by Warren Buffett.

The Warren Buffett Way - by Robert C. Hagstrom. There are a lot of books on Buffett, and I've actually read most of them. Short of plowing your way through Security Analysis (see below) and the Chairman's Letters from Berkshire Hathaway themselves, this one is the best I've seen at actually cracking open the fundamentals of the companies that Buffett has chosen in the past (note: in the past), and exploring why Buffett may have selected them. The others are much better at portraying Buffett's character. But for the individual who's asking himself "well, how do I actually apply these ideas?" Hagstrom does a pretty good job, I'd say.


For advanced readers and people with a serious interest in finance and economics (but not serious enough to read the trade journals)

Security Analysis, by Benjamin Graham and Chris Dodd. 1934 edition. It takes discipline to read, but it's pure gold. A great next step after reading The Intelligent Investor. Learn about the investing approach that made Warren Buffett famous and many others wealthy. The Internet bubble, technology, the mortgage crisis, junk bonds...Graham and Dodd forsaw everything in 1934 and described it to a T. Brilliant. Drop the cash and keep it on your book shelf. The Intelligent Investor also belongs in this list. Just because it's relatively accessible doesn't mean it isn't brilliant!

The Intelligent Asset Allocator. William Bernstein. Explores the math behind diversification! Surf the efficient frontier by mixing asset classes with low correlation coefficients. Is there a such thing as a "free lunch" after all?

The New Financial Order, by Robert Shiller. Rather than investing, Shiller places his focus on risk management - and completely turned around my thinking from an investment/mutual funds focused writer to an insurance and risk management focus. Shiller explores ways that the individual and family and small business, with next to no capacity to absorb financial and economic shocks without disaster, can transfer risk to the capital markets, which can absorb those risks.

People I would NOT recommend: Kiyosaki. Dave Ramsey for anything other than people on a debt reduction plan and budgeting advice. Suze Ormond, for serious thinkers, though I have gifted her book to young women just starting out, on the theory that the mediocre book that gets read is better than the perfect book that doesn't.

My favorite columnists:

Jason Zweig, Jean Chatsky, Eric Joffe, and Sandra Block. Mark Hulbert. Alan Ableson. Stanley Bing is very good. Greg Carlson at Morningstar (a good friend, former colleague, and straight up guy - and a devoted mutual fund analyst.) And Nancy Opiela at the Journal of Financial Planning.

Hope this helps get you started!

Splash, out

Jason

Labels: Books, investing, money