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The Beginning of the End
2008-01-07 15:49:00
Another piece of the puzzle fell into place last week as the economy slides into a recession. The manufacturing index fell to 48%, anything below 50 signals an economic contraction. The December jobs report was mixed. 18,000 new jobs were created but the unemployment index rose to 5.0%. Don’t be surprised to see the January or February jobs report turn negative, at which time the last remaining significant economic indicator will have slipped into the red.   The likelihood of further declines in existing home values was reemphasized last week. Housing prices will have to fall 15% to return to their historical relationship with rents – the point at which renters will consider/be able to afford buying a house. Commercial real estate does not suffer from the same speculative excesses of the residential market but some cracks are appearing in commercial properties as well. Unsold houses being rented are impacting apartment owners, we...
More About: Market , Mutual Funds , Recession , The Beginning of the End

Seasons Greetings
2007-12-21 23:03:00
All of us at MUTUALdecision.com and the MUTUALdecision blog wish you and yours a safe and happy holiday season. Our next blog will appear on January 2. We wish you a prosperous New Year.
More About: Seasons , General , Mutual Funds , Seasons Greetings

Investing is like Football: You get Penalized for Holding
2007-12-12 13:35:00
If you get caught holding in football your team loses yards. If you get caught holding in your portfolio you lose money. There is no such thing as a hold investment. Yes, I know, every day hold recommendations are issued by Wall Street analysts but they’re copouts. Every investment recommendation that is not a buy is a sell, regardless of what label’s put on it. There are only two investment decisions: buy and sell. If you own a stock, bond, mutual fund, ETF, house, or car and don’t sell it, you’re making a buy decision. Why? Because you’re continuing to hold the asset and subjecting yourself to all the risk that comes along with it.   The buy/sell decision doesn’t mean you have to keep buying more of an asset but it does mean if you think an asset is fully priced, you should sell it.  It’s okay to hold an investment you’d otherwise buy if you’ve reached your maximum hold size given ...
More About: Football , Investing , Mutual Funds , Holding

Cosmetic Surgery Is a Leading Economic Indicator
2007-12-10 15:49:00
A front page article in Saturday’s Wall Street Journal, Evidence Grows That Consumers are Pulling Back, discussed the slowdown in spending on cosmetic surgery as a harbinger of a recession.  (I’d like to link to the article but The Wall Street Journal doesn’t allow it. Hopefully, Mr. Murdoch will change this now that he owns the paper.)  It seems as if spending on such surgery had previously been recession-proof. Perhaps it fell under the heading of consumer necessities. Now cosmetic surgeons are feeling the economic pain. The article specifically mentions a drop off in corrective eye surgery and breast implants. There used to be a hemline indicator for the stock market. For every decade starting with 1900, the stock market rose and fell following the length of women’s skirts. It would be politically incorrect for me to suggest an implant indicator, so I won’t.    Are we heading for a recession, a...
More About: Economy , Cosmetic , Cosmetic Surgery , Market , Blog

A Euro, a Yen, a Buck or a Pound
2007-12-05 15:12:00
Or a Yuan. (My apologies to all you Cabaret fans.) As a mutual fund or ETF investor you need to be aware of the currency risks you’re taking when investing internationally. Is your fund hedged against the dollar or not? Do you want your fund to be hedged or not? What difference does it make to you? Let’s start with the last question first.   Currencies do fluctuate is value, except for the Yuan.  Its exchange rate is fixed by the Chinese government, but even the Chinese are responding to pressure to let the Yuan float upward in value against the dollar.  The dollar has declined against the major world currencies for the past seven years. Take the Euro , for example. The current exchange rate is about €1.00 = $1.46, a slight decline for the recent record of $1.49, but a big change from the one-to-one exchange ratio in 1999. Any dollar based investor, such as those of us in the good ol’ USA, would have...
More About: Investing , Mutual Funds , Pound , Buck

Surviving A Recession
2007-11-28 14:48:00
When the major stock market averages declined by 10% from their 2007 highs on Monday, we were in official market correction. Sentiment is negative owing to the economic back drop of, at best, tepid growth according to the Fed, or a recession.   Consumers twenty-five year credit binge fueled by home equity loans, credit cards arriving in the mail, subprime and adjustable rate mortgages and automobile leases, appears to be over. Savings rates has plummeted from 14% to 0% (perhaps to a negative number if home values continue to decline). Pile on top of that the banks debt problems, high energy prices, the homebuilding industry’s woes, weak retail sales and declining consumer sentiment, it’s no wonder that many investors believe a recession is in the offing.   Investors face two challenges right now. If the economy is headed into a recession, where do I put my money? And, if the economy avoids a recession will I be in the right investme...
More About: Investing , Mutual Funds , Recession , Vivi

Danger: Recession Ahead, Proceed with Caution
2007-11-26 15:56:00
The Dow hit a low for the year on the day before Thanksgiving, down 9% from its 2007 high. The S&P 500 and the NASDAQ are fairing a little better, down 8% from their 2007 highs. (Significantly, all three averages are up for the year, albeit slightly.) The definition of a market correction is a 10% decline. A 20% decline is to be expected if there is a moderate recession or the expectation of one. Are we headed for a recession? Let’s review the economic facts.   Housing, and related, jobs account for 10% of our total employment.  Single family housing starts fell 7.3% in October and permits dropped 6.6%, to the lowest levels in 15 years. (You can see the ripple effect on the earnings of Home Depot and Lowes.) New housing starts have fallen for almost two years. Every time in post-war history housing has declined for two years, it has been accompanied by a recession. On top of this, the value of existing homes is ...
More About: Market , Mutual Funds , Danger , Recession , Ahead

The CIA's Guide to International Investing
2007-11-20 16:00:00
The world’s second biggest economy is Japan (behind the good ol’ USA). China, India, and Brazil have economies growing at upwards of 10% annually. That’s a lot faster then the roughly 2.5% expected US growth over the next year or so (absent a recession, of course). Together those three economies almost equal the U.S. in GDP.  Add in Japan, and the combined GDP of these four countries exceeds the U.S. The CIA’s World Factbook is an excellent source of country information like this.   A good mutual fund investor would be wise to have at least 25% of his or her assets invested outside the US. Global investing makes sense not only to avail oneself of higher growth rates but also because international investments may respond differently to the same event. Global economies is linked and becoming more so. The stock markets of Western Europe, for example, have an 80% correlation with the U.S. markets.  Makes s...
More About: International , Investing , Guide , Mutual Funds , Guid

Stall Speed
2007-11-19 14:15:00
The stock market took the long way around last week, with a 300 point up and a 200 point down day, to end basically flat. The Dow and S&P were slightly up; some broader averages such as the Russell were slightly down. Volatility is exhausting.     Financials had another rough week and the Transportation Index was down, at least in part, due to FedEx’s tepid forecast. The financials continued to take a pounding, reaching lows not seen since August. The Transportation Index is often thought of as a bellwether for the economy. Fewer goods shipped implies an economic slowdown.  The index’s performance was consistent with another warning from retailers of a weak Christmas selling season. The high price of oil is taking its toll.  Airline ticket prices are rising as are gasoline prices and worries about the price of winter heating bills is setting in. One pundit put the chance of recession at 40%.   There was...
More About: Economy , Market , Mutual Funds , Speed

Hedging Your SUV
2007-10-31 15:13:00
It’s hard to believe with oil approaching $100 per barrel, but the U.S. will consume over 1 billion (that’s 1,000,000,000) more gallons of gasoline in 2007 than in 2006. As a certain President once said, we are energy junkies.  We keep craving more regardless of the price.   Ask yourself this: Are you plugging more stuff into the wall each year? That requires even more oil, natural gas or coal. China, India and the other new economies also consume more energy each year.  Political instability in Nigeria, Iran, and Venezuela could limit supply. And, there’s only so much oil (natural gas and coal) in the ground. I’m not suggesting we’ll run out but it will become more expensive to extract it.   How can you ease the pain every time you fill up? Or better, how can you benefit from higher energy prices? By investing in energy companies. There are two ways to do this. You can bu...
More About: Investing , Mutual Funds , Hedging

Something Old, Something New
2007-10-22 14:01:00
The stock market celebrated the twentieth anniversary of the crash of ’87 with a 2.5% decline on Friday. Unlike 1987, the market averages are still up 6 – 8% for the year. Not surprisingly, the financial sector is the exception, being down about 9% for the year, with many financial stocks trading at prices approaching their August lows. Last week, the market reacted to some old news and some new news.   The old news was financial institutions reporting poor third quarter results. No surprise here. This was expected because of the mortgage, securitization, and residential real estate market problems. And, when a company knows it’s going to have a bad quarter it writes-off/down as much as possible, takes as many reserves as possible, to better position itself foe the future. I suspect this went on with the financials. Caterpillar’s results showed weak domestic demand and strong foreign demand. No surprise here...
More About: Market , Mutual Funds , Some

Recession Investing
2007-10-17 15:07:00
Why could the U.S. be heading into a recession? The most likely reason is the housing market – a multi-faceted subject. There’s the new home building sector.  It’s important because it employs so many people, not just in construction but, by extension, in the industries that supply materials to the homebuilders – lumber, concrete, appliances, and even retailers like Home Depot. Think about all the “stuff’ that goes into a home and how much you buy when you move. A slowdown (or collapse) in new home building has a ripple effect throughout the economy and could drive up the unemployment rate.    Housing market problems are not limited to new home sales. The value of your home and the market for sales of existing homes is falling. By how much and for how long is the big question. But the problem here is the equity we have in our homes is evaporating. Even worse, those of us who have recently pu...
More About: Investing , Mutual Funds , Recession

Christmas in October
2007-10-15 14:26:00
The stock market was flat last week. Not a bad performance given that the popular averages are up between 10% - 14% (S&P 10%, Dow 13%, NASDAQ 14%) thus far this year and the market is wrestling with the question of continued economic growth (and, if so, how much) or recession. Last week, the market digested mixed reports on corporate earnings, more bad news about the housing market, a benign PPI number, a continued low level of business inventories, and record oil prices.   Retail sales were up a surprising 0.6% in September. This increase was posted in spite of unseasonably warm weather (ask Al Gore) which reduced demand for winter apparel. Retailers are already bemoaning anticipated weak Christmas sales. Christmas before Halloween?   What happened to the Christmas selling season starting after Thanksgiving? (The good news is that retailers are setting a low bar for investor expectations.) Retail sales are important, consumer ...
More About: Market , Mutual Funds , October

Mr. Greenspan's Investments
2007-10-03 14:48:00
In The Age of Turbulence, Alan Greenspan outlines his vision for the world, and particularly the United States, between now and 2030. He chose 2030 because that’s when the last of the baby boomers reach age 65 – retirement. And the impact the baby boomers have on the world’s economy as they shift from being producers to consumers of capital is a major theme of his book. (If you don’t want to read it all, chapter 25 summarizes his arguments and predictions.)   In 2030, Mr. Greenspan forecasts the real U.S. GDP will be 75% greater than today. That may sound like a big number but it’s only 2.5% annual compound growth – well within historical norms. That’s the good news. The bad news is forecasted increases in inflation and, correspondingly, long term interest rates. Inflation could rise to the 4-5% level and long term U.S. Treasuries to 8-9% yields due to stresses caused, in part, by rising social securit...
More About: Real Estate , Investing , Mutual Funds , Investments

The Economic Crises of 2008
2007-09-26 14:08:00
The question on every investor’s mind is: are we experiencing a mid-expansion slowdown or are we on the cusp of a recession?   But even a recession would be just a bump in the road when compared to the damage to the economy, and the value of our investments, which would be brought about by a decline in the value of our homes or the huge US trade deficit.     Housing prices nationwide have increase by 50% over the past five years, although some speculative markets, think parts of Florida and California, have shown prices decreases this year. Given the run up in housing prices, a 10% correction is not out of the question but it could put the economy into a tailspin. Why?  Homeowners have been taking out the increase in the value of their homes through home equity loans and/or refinancing with higher principal balances.   If, for example, a homeowner had 20% equity in her home, but the value of the house fell by 10%, 50% o...
More About: Economy , Investing , Mutual Funds , Economic , Recession

On the Rebound
2007-09-24 15:07:00
The major US stock indices are within 2% of their highs for the year (and all-time highs for the Dow and S&P 500). In the past eight weeks they have gyrated from these levels to down 10%, then back up. This illustrates the speed of corrections and price movements in today’s electronic and global markets. It also illustrates the folly of market timing and why, unless you’re glued to your screen every day, you should invest for the long term and not try to outguess the market.   Over the next few weeks the markets may hit new highs, while moving in a choppy sideways pattern. The drivers will be the economy and earnings. The principal economic event to watch is new jobs creation. Secondarily, watch real wage growth and retail sales. These three indicators should begin to line up and tell us whether we’ve had a mid-cycle slowdown or are heading into a recession. Third quarter earnings results will be released during th...
More About: Market , Mutual Funds

Sector Funds: More Than Meets The Eye
2007-09-19 16:22:00
Believe that a part of the economy will be particularly strong or a part of the stock market is undervalued? Sector mutual funds are one way of investing in market niches. Sector funds enable you to pinpoint your investments in areas such as healthcare, biotech, and technology (or financials, after the Fed rate cut). ETFs are another, but have some additional risks. See ETFs: New Wave or Riptide.  The common cautionary note about sector funds is they’re just that: an investment concentrated in one area, where all the companies share similar characteristics and react to macroeconomic or industry events in the same way.  Thus, sector funds offer only limited diversification – within a group but a group where all the stocks will move in the same direction, for the same reason. Sector funds offer the advantage of professional management, the portfolio manager should be able to pick the best stocks in the sector, and are a sound way for...
More About: Funds , The Eye

A Fed Rate Cut Doesn't Matter
2007-09-17 15:11:00
So, what’s the Fed going to do tomorrow? I continue to believe it’s possible there won’t be a cut in the Fed Funds rate. I also believe the stock market will respond negatively, whether or not the Fed cuts rates.   The Fed might not cut rates for four reasons:   The self-correcting mechanisms containing the subprime mortgage/debt securitizations problems are working smoothly.  Pimco, and few organizations know more about debt than Pimco, announced the launch of a distressed debt fund last week. Pimco is the second major financial firm to make such an announcement.  The debt market is correcting itself.  A second reason why the Fed won’t cut rates is fear of inflation as evidenced by rising energy prices. Oil was back at $80 per barrel last week. The economy is still growing. Granted, the last jobs report was weak but one report doesn’t make for a sea change.  Solid retail sales offs...
More About: Market , Mutual Funds , Matter , Recession , Rate

The Calm After the Storm
2007-08-27 14:34:00
Last week was the best week in the stock market since it reached its July peak. The market bobbed up and down along with its perception of the breath of the mortgage crisis. A $2 billion infusion into Countrywide rallied the market. When two mortgage lenders used the “R” word – recession – the market retreated. Then speculation the Fed will cut the key Fed Funds rate at its September 28th meeting took hold and the market rallied.   What to expect this week? A quiet market. There will be a lot of nervous brokers sitting on the beach checking their Blackberrys. (Labor Day week expect to see a surge of Blackberrys in for repair due to sand damage.)  It’s going to take some time for the mortgage market (lenders and buyers of securitized mortgage products) to return to normal. Lending standards will be tighter, especially for subprime mortgages. The related problems in the debt market – priv...
More About: Market , Storm , Mutual Funds , Calm

Breaking Down the Financial Breakdown
2007-08-15 16:13:00
The stock market is gyrating like a yoyo, and with each down stroke it’s heading lower. What’s an investor to do? Let’s start by dissecting the cause – it’s not as simple as a slowdown in housing or defaults in the subprime market, and these are unrelated (for the most part) events.   The housing market was headed for a correction regardless of the events taking place in the subprime market. New home starts were running at twice the historical average during 2003 – 2006. Granted, some of this was fueled by a relaxation (or abandoning) of underwriting standards in the subprime market but it also was the culmination of aging baby boomers buying second homes, low interest rates, and a strong economy.   Speculators in areas such as southern Florida and easy credit just pushed it over the edge. We would be in a housing slowdown regardless of the subprime problem, although this will exacerbate it, and a weak hou...
More About: Financial , Investing , Mutual Funds , Breaking , Fina

Yielding to REITs
2007-08-08 14:58:00
Income is hard to come by these days. Treasuries are yielding less than 5%. The bond market is in disarray, credit spreads are widening (meaning the price of existing bonds is declining) and there are serious liquidity issues (which also impact value).    Have you considered Real Estate funds? Many have current yields in the 5 - 8% range (primarily REIT – Real Estate Investment Trust – funds).  Now, let’s be clear on this. These are equity funds and equity funds carry greater risk, and have greater volatility, than bond funds. (Of course, investors in subprime mortgage funds have found out that debt funds are not without risk!)  However, equity funds also offer the potential for increasing income and capital appreciation (see Too Much Income can be Hazardous for Your Heath).   Real Estate funds cover a lot of territory and you want to make sure you know how your fund invests.   I went to the MUTUALdec...
More About: Investing , Mutual Funds

Portfolio Turnover: Should You Care?
2007-08-01 13:52:00
One of the mantras of mutual fund investing is to look at a fund’s turnover before you buy it. The implication is that a high turnover is bad. (Turn over is the percentage of a fund’s holdings that are traded during a year. Funds can have a turnover greater than 100%, which means that their average holding period per investment is less than one year.) Many mutual fund screening tools have portfolio turnover as one of their filters and you can usually find a fund’s turnover (expressed as a percentage) on the fund’s snapshot page or by doing a little digging on the fund’s website.     Here’s the first argument as to why turnover is bad. Higher turnover results in higher expenses because of higher transaction costs. This is true both for stock and bond funds, although turnover is even more relevant for bond funds. Why?  Transaction costs are greater and trading spreads are wider for bonds (except for...
More About: Portfolio , Investing , Care , Mutual Funds

Chicken Little was Wrong
2007-07-30 15:08:00
It was a stormy week in the market.  The correction I’ve long anticipated, and the biggest one week loss since March 2003, materialized but the sky didn’t fall. The chart below puts the week in perspective.         ;      &nbs p;      &nb sp;      &n bsp;      & nbsp;               ;      &nbs p;      &nb sp;      &n bsp;   Return         ;      &nbs p;      &nb sp;      &n bsp;       Dow Ind      &n bsp;   S&P 500         ; NASDAQ 1...
More About: Market , Chicken , Mutual Funds , Wrong , Litt

Leverage Land Mines
2007-07-25 16:31:00
Financial leverage is like a land mine. You might be unaware of it until it blows up.   Buying stocks on margin is an obvious form of leverage (the mortgage on your home is another) and all of us understand how risky it is to buy on margin. Simply put, leverage magnifies your gain or loss and, since you’re borrowing money which must be repaid, you can lose more than your entire investment (the investment and the loan amount).   Okay, you say, point made, but I don’t leverage my investments. Are you sure?   Did you know that many mutual funds use leverage to enhance their returns?  To illustrate, let’s take a look at two Nuveen municipal bond funds (Nuveen is one of the top municipal bond mutual fund companies): Nuveen Municipal Market Opportunity and Nuveen Municipal Value. Kinda hard to tell how they differ from the names, so let’s look further. Both funds are mostly invested in triple A municipal...
More About: Investing , Mutual Funds , Land , Leverage

The Perfect Storm
2007-07-23 17:43:00
The stock market turned down last week, so did the prices of non-investment grade bonds. The “junk” end of the debt market showed falling prices, widening credit spreads and a dramatic decrease in liquidity. (Conditions that often go hand-in-hand, but are troublesome nonetheless.) Subprime mortgage loans are the primary culprit.  The only surprise is how little attention the press is paying to these events.  Sounds like the perfect storm to me. We could be on the cusp of a full blown credit crisis.   The stock market did pay attention to earnings, as Caterpillar and Google will attest. Caterpillar’s results are instructive. The preeminent maker of construction equipment in the world reported strong international sales, offset by weak domestic demand. I think you’ll see a slowing U.S. economy and continued strong intentional growth repeated in the earnings of other Big Caps.  Slowing earnings growth will...
More About: Market , Storm , Mutual Funds , Perfect , Perfect Storm

A Good Long Term Strategy
2007-07-18 14:35:00
Want to structure your mutual fund portfolio to achieve optimal returns for the next twenty years? Read on (or just skip to the last paragraph.).   There was a great article in the June CFA Institute publication Expected Rates of Return: Back to the Future by Jim O’Shaughnessy.   Mr. O (I can’t call him Jim because I’ve never met him, although I’d like to.) conducts solid research, writes clearly, and (gasp!) makes recommendations.   This unusual combination of talents first came to my attention when I read What Works on Wall Street: A Guide to the Best-Performing Investment Strategies of All Time.  Although the book discusses stocks, Mr. O’s research and conclusions are applicable to mutual funds.   The article published in by the CFA Institute is a synopsis of his work.   Mr. O reminds us that most money mangers lack the discipline to consistently execute strategies. That’s tru...
More About: Strategy , Investing , Mutual Funds , Long , Good

The Glass is Half Full and Half Empty
2007-07-16 14:41:00
Last week was a week of records. The Dow and S&P closed at new highs. The NASDAQ closed at its highest level in six years. Oil closed at $74 a barrel, an 11 month high. The Euro hit an all-time high against the dollar. It now takes over $1.38 to buy one Euro. (My sympathy to all of you vacationing in Europe this summer.)    Twice last week I read/heard commentators saying that rising oil prices are good – they’re a sign of a strong economy. The talking heads glass is half full (and I think it’s filled with something stronger than water). Rising energy prices worry me. They take money out of the consumers pocket, add to inflation and increase our balance of payments deficit, leading to higher interest rates. Sorry, my glass is half empty on this one, but maybe I’m just old school.   Something else happened last week, which received almost no press. Credit spreads widened. This m...
More About: Economy , Market , Mutual Funds , Glass , Full

ETFs: New Wave or Riptide?
2007-07-11 14:23:00
There was an excellent article discussing the pros and cons of investing in ETFs in the July 3rd Wall Street Journal: As ETFs Seek Niches, Risks Rise (unfortunately, The Wall Street Journal doesn’t allow us to link to their articles, perhaps that will change after Rupert Murdoch buys Dow Jones.) There’s over $500 billion invested in ETFs and, I believe, they will either replace open-end index mutual funds or force those funds to lower their expenses. A win for investors. ETFs generally have lower on-going expenses then index mutual funds. You’re charged a commission to buy or sell them, as for a stock, but the commission may be less then the fee charged by your broker, or fund, for buying a mutual fund (consider the share class you’re buying). ETFs are priced, and traded hourly, not at the end of the day as with open-end mutual funds.   ETFs are excellent tracking vehicles for many different kinds of investments. Want to i...
More About: Investing , Mutual Funds , New Wave , Wave , Tide

Earnings Matter
2007-07-09 15:02:00
The S&P 500 is up about 7.5% thus far this year. That’s a good return for just over six months.   Will it keep going up? Consider this. The earnings of the S&P 500 companies are expected to grow by about 5% in 2007, according to a leading Wall Street brokerage firm.  That means if the market was fairly valued at the beginning of 2007 and there were no big changes as to how investors think about the market, the S&P should only go up by 5% in 2007. Hence, game over.  Come back next year.     But wait! Let’s examine each of the above assumptions. Was the S&P fairly valued at the beginning of 2007? Well, for the 12 months ended June 2007, it’s up 22%, so it had a pretty good run in the second half of last year and considering that 2006 was the fourth year of the current economic expansion, it’s likely the S&P was around fair value at the beginning of 2007. Okay, but doesn&...
More About: Market , Mutual Funds , Earnings , Matter , Earning

Halftime
2007-07-02 14:44:00
The stock market put in a great performance for the first half of 2007, the Dow is up 7.6%, the S&P 6.0%, the NASDAQ 7.8%. Almost all of these gains were realized in the second quarter, a very impressive quarter given the uncertain economic and geopolitical backdrop.   The bond market did not fair nearly as well as the stock market. Treasury yields rose approximately 30 basis points across the yield curve, resulting in falling bond prices and one of the worst quarters for fixed income securities in the past few years.   Economic consensus is for continued growth. The housing drag and subprime mortgage problems will be contained, economists say. The consensus is less clear about the outlook for interest rates. The sentiment has shifted in recent weeks from a Fed cut late in the year to an increase, economic strength and inflation containment cited as why.    In the latter stages of an economic cycle interest rates rise and the stock m...
More About: Market , Investing