Question: Why the uptick in interest rates. I would think with the Fed rate as low as it is, that 30 Year fixed rates would be around 4-4.5%. I see this morning it is around 6.3%.
Answer 1: Short-term interest rates, such as the Fed Funds rate, are rates charged for loans of a year or two or less. Home mortgages, on the other hand, are typically 15-30 year loans, although on average they are paid or refinanced in 8-10 years.
Over the course of ten years the cumulative impact of inflation will be much greater than it will be over just one year. Think about it: if you as a lender are receiving a fixed payment of say $500/month, how much less will that $500 buy you ten years from now than it will today?
You, I and the markets are seeing evidence of increasing inflation every day. It was reported by the government today that wholesale costs for producers and manufacturers increased over 7% over the prior twelve months. That's signficant.
So when inflation is rising, longer term interest rates rise in tandem to compensate lenders for the risk that inflation will make the future payments they receive worth less.
Several things are going on.
Answer 2: First, mortgages are priced off of the 10-year Treasury, which is yielding 4.25%, while short-term rates are set in comparison with Fed Funds, which is 2.00%.
Second, 10-year Treasury yields have moved up as investors became more worried about inflation, and stopped expecting the Fed to keep lowering short-term rates. The 10-year Treasury yield bottomed out at around 3.30% in March, so it is up nearly 100 basis points.
Third, banks aren't all that willing to lend, as they work on fixing their balance sheets. Meanwhile, investors in agency debt and mortgage-backed securities, which help set the interest rate on conforming loans, are requiring more of a risk premium over Treasury yields than they did before the credit "bubble" started to collapse last year.
Finally, while the slope of the Treasury curve has flattened recently, it is still a lot steeper than it was last year in the midst of the credit bubble. In other words, investors are demanding a lot higher yield on long-term debt relative to short-term debt than they did a year ago.
Interesting NY Times article here about the retailers going out of business or closing stores to stay in business.
Figures released on Monday showed that spending on food and gasoline is crowding out other purchases, leaving people with less to spend on furniture, clothing and electronics. Consequently, chains specializing in those goods are proving vulnerable.In short, consumers are still spending money - however we spend so much on gas and food that we don't have much left over for the local shopping mall.
The US trade deficit is shrinking which is good for US producers like GE. However, if the only reason is the weak dollar then this could be bad news for consumers who will have less spending power.
Even then, since imported goods will be relatively more expensive it's not likely to be terrible news for US companies - foreign companies that rely on the US market may be the ones really at risk here.
This article talks mostly about politics but there is a message for investors. You can try to profit from the security bubble but like the dotcom bubble it may not last forever...
Like the dotcom bubble, the disaster bubble is inflating in an ad-hoc and chaotic fashion. One of the first booms for the homeland security industry was surveillance cameras, 30m of which have been installed in the US, shooting about 4bn hours of footage a year. That created a problem: who's going to watch 4bn hours of footage? So a new market emerged for "analytic software" that scans the tapes and creates matches with images already on file.
Bill Walsh wants the government to bail out homeowners in danger of defaulting:
Why is it possible to rescue corrupt S&L buccaneers in the early 1990s and provide guidance to levered Wall Street investment bankers during the 1998 LTCM crisis, yet throw 2,000,000 homeowners to the wolves in 2007?The other side of it is, who wants to spend their tax money helping people who made bad fiancial decisions regardin ARM-type mortgages?
Something that Warren Buffet first said a long time ago (around when Bush first talked about not taxing dividends) is now making the news in a fairly big way: "Mr Buffett said that he was taxed at 17.7 per cent on the $46 million he made last year, without trying to avoid paying higher taxes, while his secretary, who earned $60,000, was taxed at 30 per cent."
It seems that democrats are more willing to take advice from Buffet than republicans considering that at least Bush and Schwarzanegger have ignored Buffet's advice. Does anyone know of any republicans who have followed Buffet's advice or democrats who ignored it?
The housing market is being blamed for the sluggish US economy despite relatively strong consumer spending (strongest in a year). Clearly something is wrong with this picture. Economic growth slows, the value of our homes (for most people their most valuable posession) declines, and we continue spending...
I just read an interesting article on Bush's plan to increase taxes on provate jets and decrease them on commercial airliners.
I'm all for paying less tax and have no trouble passing the bill onto corporations, but there are economic concerns, particularly the effect this will have on rural areas which depend on provate jets.
Warren Buffet's NetJets and similar companies would also be adversely affected. The new taxes for private jets would be substantial:
Under current law, the government collects $2,015 in taxes every time a full Boeing Co. 757-200 jet flies between New York and Florida, according to the Federal Aviation Administration. A General Dynamics Corp. Gulfstream 4 business jet flying a similar route -- and requiring the same amount of attention from air-traffic controllers -- pays $236, agency figures show.Considering that each jet receives the same attention from air traffic controllers, it makes sense to me. And when I think of people flying around in private jets I don't think of people who can't afford to pay a little extra tax. My only concern would be the effects on rural states but I haven't seen any estimates on that one.Under Bush's plan, the operators of the Boeing jet would pay $1,298, and owners of the Gulfstream would pay $837.
Investors need to think about where their money is as Americans are running into legal trouble in places like Indonesia where Richard Ness is about to learn the outcome of his trial:
Foreign investors are already anxious about doing business in Indonesia, which boasts some of the world's largest gold, tin, copper and nickel deposits but is also considered among the most corrupt nations. Red tape and rising prices add to their concerns.There's also trouble in Kazakhstan where Mark Seidenfeld, a 39-year-old American telecommunications executive who's probably more innocent than Richard Ness was jailed in Siberia. Apparently in Kazakhstan the courts work to help locals with connections:
"Of course we have a judicial system that can be abused," said Oraz Jandosov, co-chairman of Ak Zhol, an opposition political party, and the former chief of the central bank. "Our courts are not only corrupt but competence is an issue. Not only can Americans be squeezed but vice versa. It's the natural result of the country's current political system."
Before the US-Korea FTA I said that Korea would not and could not really allow free trade. Now that the agreement has been reached and the various industries have sounded off, I know I'm right.
While South Koreans are busy protesting in the streets and going on hunger strikes, American companies, especially the auto industry are complaining to anyone who will listen (but they aren't in the streets). There are some who disagree:
Unfortunately, Ford and Chrysler don't see the benefits. They, like the United Auto Workers, have said the South Koreans haven't done enough. So have U.S. Sens. Carl Levin and Debbie Stabenow. General Motors is withholding comment.
Of course, GM might be in a better spot than Ford and Chrysler thanks to its acquisition of Daewoo:
GM Daewoo, created in 2002 after GM acquired the now-defunct Daewoo Motor, could be in a unique position to benefit from both ends of the deal. The company accounts for about 13 per cent of General Motors Corp's total group production and exports some models, such as the Aveo, to the United States. The company exported 116,761 vehicles to the US last year.The FTA doesn' really change my stock strategy. It doesn't turn me bullish on US automakers anymore than Ford and Chrysler are bullish on the agreement itself.
Living in Seoul, I see articles on the free trade agreement (FTA) and protesters all over. The other day I was heading into a subway station and there was one guy with an anti-FTA sign shouting about the injustice of it all.
I don't see what Korea could really gain from an FTA. Last year, 4,000 American cars were sold in South Korea, while South Korea exported 800,000 vehicles to the United States. I wanted to buy a Mustang here in Korea but a car that would cost me $22,000 in the US is close to $50,000 here in Korea. America sees a 13 billion dollar deficit and 80% of that comes from cars.
But the people who most oppose the FTA are farmers. Here in Korea where nearly everyone eats rice nearly every meal, you'd expect the people to demand good prices and more competition. That's not the case, however. Rice here sells for 4x the international average. A 4 kg bag of plain white rice is at least $15 bucks in the supermarket.
Han Duk-soo, prime minister-designate of South Korea, said that if the United States insisted on including rice in the deal, "there will be no F.T.A."
I think it's clear that South Korea can't afford free trade. It's not really clear which path will be best for their economy. I suspect that the two sides will get something signed, but that it won't be what American famrs or car manufacturers need to level the playing field.
Here's an interesting article that say China's economy is the world's problem. However, I just finished reading an article that reminds us it creats problems for China as well as for the rest of the world.
It is common knowledge that China buys dollars in order to keep the yaun artificially low, making exports more competitive. Keith Bradsher in the Tues. March 6 International Herald Tribune (Joong Ang Daily group) writes that investing these dollars in US securities (like treasury bonds) helps keep interest rates low for US mortgages and the like.
Bradsher goes on to say that Chinese citizens are unhappy to see the money invested abroad. They would rather see the money invest in say Chinese education. However that would mean selling dollars for Yaun and allowing their currency to appreciate against the dollar. China can't do this because they want to keep their export businesses as strong as possible.
China may be getting ready to diversify, possibly mimicing Singapore's Government Investment Corporation. What effect will this have on China and the world?
Here's an interesting article on Philadelphia's finances. The mayor says they have to cut jobs and that some cuts will necessarily come from layoffs. However he also plans to hire 1,200 new city employees.
I also found the blog of a Philadelphia realtor. If you've been following my Philly real estate posts (Philly #2), this blog may interest you.
I found an old paper from my sociology class back in 1996 or so that I thought would be interesting to share. The teacher was complaining about the disparity between rich and poor and mentioned Warren Buffet's fortune. If he has 4 billion dollars and gets an 8% return, he's looking at $864,000 each day. So in two days of non-work he earns more than most people earn in a lifetime of work. The original source is Hunt and Sherman's Economics.
You don't need a degree in economics to help manage your money but it doesn't hurt.
Following yesterday's richest cities in the world theme, I thought this article on lifestyles and economies of wealthy people in London was interesting.
One thing they mentioned was that rich people go to Dubai for shoping and stay in the Murj, which I was just blogging about on my travel blog yesterday. They also talk about expensive cars, yachts, private jets, and other good stuff.
1. Moscow
2. Seoul
3. Tokyo
4. Hong Kong
5. London
6. Osaka
7. Geneva
8. Copenhagen
9. Zurich
10. Oslo, New York (tied)
Now I've been to three of those cities: I live in Seoul, I've visited Osaka, and I was raised and went to college in the suburbs of New York City. Seoul is by far the cheapest of the 3, so how is it ranked the second most expensive city in the world?
Here in Seoul you can get an apartment for 500-1,000/month easily. You can go out for dinner and spend less that 5.00 easily. I went out for a few meals in Osaka and none came close to 5.00. In New York 5.00 will get you a pastry from Ferrarra's, but not a meal in a restaurant.
I don't know what system they are using, but however they measure the cost of living in these cities has given them laughable results.
A couple of weeks ago I wrote about how Motley Fool says to give them money so they can show you how to be a successful investor like Warren Buffet. Of course that means finding US stocks to invest in.
Today I read an interesting article from Robert Kiyosaki who asks a potent question: are you going to listen to a financial planner or do what Warren Buffet does? Kiyosaki thinks that Buffet is bearish on the dollar because he sees the US economy being managed badly. That's why Buffet is starting to invest overseas.
An interesting news item in the LA Times talks about how some US oil companies like Chevron and ExxonMobil will be affected by Venezuelan President Hugo Chavez, and his quest to recover "sovereignty" over Venezuelan oil.
This doesn't mean the oil companies will stop doing business in Venenzueala:
Energy economist Williams summed up the situation for Chevron and others. "He's taken a majority of the ownership, the taxes are higher, the royalties are higher, and he hasn't given them any money. Now they have to decide whether they want to stay and play."If there is still money to be made, he added, some companies may well opt to "keep their mouth shut and stay."
It's probably impossible for you to ahve missed this "news" but it's equally impossible for me not to comment on it. Oil prices are over 72.00/barrel. I'm quite surprised and have no idea how long it will last. For now, though, companies like Exxon are making more money than ever before (as are their former executives). A few related articles from this blog:
Invest in oil or water?
Value over growth although oil companies seem to be growing at a pretty good clip these days!
Was there really a buying opportunity in February?
Investing in airlines - I'll never do it in today's oil climate.
How long have oil prices been rising? I blogged about how hard it is to find reasonably priced oil companies in 2004!
Here's an intersting article on how water may be more valuable than oil in 2025 that suggests investors take a look at a few companies:
Air Products and Chemicals, which does water treatment; Nitto Denko, a producer of separation membranes for refining and condensing water; Guangdong Investment Limited, a water utility; Pall Corp., which designs and manufactures filtration products.
I try to avoid getting too political here on my investing blog, but sometimes politics, economy, and investing are inseperable. So it is with the national debt clock.
The fact is, Clinton had things somewhat under control. They actually covered the national debt clock for a while (at 5.7 trillion) because it couldn't count backwards as Clinton shrank the defecit. Then came Bush.
Now the clock is expected to crash before Bush leaves office in 2009 because the defecit will have reached 10 trillion dollars. Well, there, that wasn't too political, was it?
Las Vegas is trying to attract business from California in an effort to diversify the local economy (which of course currently relies heavily on gaming). The slow-down following 9/11 drove that point home although Vegas has recovered. In fact, personal income in Las vegas is up 34 percent between 2001 and 2005 and gaming revenue is up 28 percent over the same period.
Back to the main topic: there are a number of reasons for businesses to move to Vegas, and 77 have already left California for Sin City.
California's expensive workmen's compensation insurance, tax structure (corporate tax is 8.84% and personal income tax is 9.3% in California), high cost of living and potentially unreliable power grid are all negative factors for businesses.
Nevada has no corporate or personal income taxes. If you're considering a trip to Las Vegas, for vacation or to scout for a new corporate headquarters, why not check out my new Las Vegas vacation site with information on entertainment, hotels, and more.
James J. Puplava argues that inflation in America is really 6-8% and that the goverment is fudging numbers to avoid increasing socail security benefits (thereby increasing the deficit).
I'm not sure that I agree with anumber as high as 6%, but I do agree that excluding energy makes inflation numbers artificially low. Rising proprty taxes are also excluded. In addition, used car prices are used instead of new car prices, which were going up each year. Rent prices were overweighted even though 69% of households own a home (real estste prices are increasing quickly and appropriate weighting would supposedly lead to higher inflation numbers).
I wonder if a flat tax rate spurs economic growth. For example since adopting a flat tax rate of 13%, Russia's economy has been growing faster than America's economy. Hong Kong has had a flat tax for a long time, and has been the world's fastest-growing economy over 50 years. A flat tax would sure be nice from a personal viewpoint. Every April I have the option of giving 300 or bucks to H&R block or wasting an entire day on my taxes.
What may have had a greater effect on economic growth is that Russia also has reduced the corporate rate of tax from 35 percent to 24 percent. (U.S.-based companies still pay 35 percent, the second-highest corporate tax among industrialized nations). Small businesses also get better treatment. The old system with high tax rates has been replaced by a new system where companies can choose either a 6 percent tax on gross revenue or a 15 percent tax on profits.
Not too long ago, Citi Bank bought one of the largest Korean banks and then quickly ran into problems with the unionized workers. Their demands didn't make sense to a US based company: Don't rename the acquired Korean bank, Pay based on seniority rather than performance, etc.
So I was interested to find an editorial by a Korean on the unions here in Korea. The writer identifies some problems:
"Labor circles are so closed that violence is the only answer whenever social dialogue is mentioned." It's true that strikes turn violent more often in Korea than in America.
"The unions are moving away from the noble cause of protecting and forming solidarity among the socially weak. They are losing their legitimacy." This is because the unions don't protect workers in smaller companies and irregular workers. "In 2002, the hourly wage of irregular workers was 80.5 percent that of regular workers. The rate fell to 70.5 percent this year".
This is closely related to the "crisis of representation":
Among the 5.48 million irregular workers, only 1 percent are members of a union, yet the proportion of unionized workers in big corporations with 500 workers or more is as high as 71.2 percent. Overall, Korean unions are organizations of regular workers in major businesses. That structure makes it impossible for trade unions to represent the interests of all workers.
The soon to retire Greenspan reissued an old warning:
“If . . . the pernicious drift towards fiscal instability in the United States and elsewhere is not arrested, and is compounded by a protectionist reversal of globalisation, the adjustment process could be quite painful for the global economy”.What this means to me is that the US needs to take action to reduce its $668 billion current account deficit. Otherwise, the long term outlook for the US economy and US stocks remains a bit cloudy.
The Washington Post reports that Fed officials unanimously agreed to lift their benchmark federal funds rate to 4 percent from 3.75 percent, for a 12th consecutive hike since June 2004 when the rate was at a four-decade low of 1 percent.
Fed chairman Alan Greenspan and his colleagues on the committee indicated they view the rate as still low enough to stimulate economic activity, and said they would probably keep lifting it at a ''measured" pace, which has come to mean a quarter-percentage point increase at each scheduled committee meeting.
This tells us that the Fed still considers inflation a problem and that the effects of the recent hurricanes are seen as temporary issues as opposed to long term economic setbacks.
Investors took little notice since the biiger news was coming from car manufacturers, and the effect overall should be mild. According to MSN Money Central, banks will raise their prime lending rates, and that will affect credit-card borrowers whose rates float with the prime. Mortgage rates, which have been rising lately, could move higher. Bankrate.com says the national rate on a 30-year fixed-rate mortgage has climbed from 5.25% in early September to 5.76% today.
U.S. light crude oil futures slid 43 cents, or 0.7 percent, to $61.98 a barrel in electronic trading. The market's three-day losing streak has shaved off 3.7 percent.
U.S. data shows a large increase in crude inventories. The cause is believed to be weaker demand as people drive less.
There is no consensus from analysts regarding the future. "The bears need only final confirmation that Wilma will miss the western Gulf of Mexico in order to challenge support at $60," consultancy PFC Energy said in a report. We may find out if they are correct because it seems that Wilma will miss the areas important t the oil industry.
As for the non-bears? Other analysts said tightening supplies of fuels such as heating oil, which fell last week but remain higher than this time in 2004, could spell higher prices as the Northern Hemishere approaches winter, when global demand peaks.
"If a normal or colder-than-normal U.S. East Coast winter were to be thrown into the equation, the situation might become fairly critical," said analysts at Barclays Capital.
Weather people seem to be predicting a slightly colder than normal winter in the US and a very cold winter in Europe so we may find out if they are correct.
Of course it may turn out that both are correct and that oil will decline a couple of more dollars in the next week or two but then rise sharply if a cold winter increases demand for oil.
It's hard not to notice the recent declines of Annaly and Impac Mortgage Holdings, particularly since I'm invested in IMH. Of course, businesses in this sector borrow funds to buy securiti, making them vulnerable to interest rate hikes. Annaly Chief Executive Michael Farrell said that "during the tightening phase of an interest rate cycle our cost of financing will rise faster than the yield on our assets."
On Tuesday, the FED will decide whether to to raise interest rates to 3.75 percent.
"When the Fed stops increasing rates, MBS consumer mortgage REITS should react well," PiperJaffray analyst Robert P. Napoli said in a note to investors, adding that he expects the Fed to stop raising short-term interest rates in mid-2006 at 4.5 percent. "It is possible the Fed could take a break due to Katrina, but we believe the tightening cycle is not yet complete."
Consumer confidence index dropped even more than analysts expected and is the lowest it has been in two years. It dropped 18.9 points in September for a reading of 86.6, down from 105.5. Economists were expecting a reading of 98. The drop was the largest fall from month to month in 15 years.
Investors began selling, but Greenspan calmed investors by emphasizing "the incredible resilience of the U.S. economy in terms of flexibility". Greenspan stated that before policy-makers respond to disasters, markets react through prices, interest rates and exchange rates, which work together to cushion the economy.
I am pleasantly surprised that Greenspan's words insoired so much confidence considering the huge fall in consumer confidence and the importance of domestic spending to the US economy. I'm not conviced that the confidence Greenspan inspired today will keep markets from declining in the next several days, however. We shall see...
Globeandmail writes that Rita is likely to impact oil and gas prices:
By late yesterday, the U.S. government reported that virtually all oil and gas production in the Gulf of Mexico was shut down, while 15 refineries in Texas were also closed.Still, investors were happy to hear forecasts that predict Rita will not hit Houston directly:"It has the potential to significantly disrupt an already fragile energy industry," Mr. Zandi said. With four refineries still out of commission in New Orleans, any further shutdowns would drive gasoline pump prices to new record levels, resulting in higher inflation and further erosion of consumer confidence.
Investors took some relief from Rita's shift in course and reduction in wind speed. On the New York Mercantile Exchange, crude oil futures fell nearly $2.31 to $64.19 (U.S.) a barrel, while gasoline futures fell 5.38 cents to $2.0856 a gallon.
Many investors are predicting that the Fed will not raise rates because of Katrina and it effect slowing the US economy. However most economists predict that the Fed will increase its benchmark borrowing rate by a 0.25 percentage point.
This is supported by the US benchmark gold futures, which are up to a 17-year high of $US463.30 an ounce. If for some reason the Fed did leave rates where they are, I think the market would react very favorably but this scenario seems unlikely.
Oil prices declined slightly as the Wall Street Journal explains:
The impact of the refinery outages may be muted by the International Energy Agency, which Friday agreed to release two million barrels a day of crude oil, gasoline and other fuels to the world market from member nations' strategic stockpiles over 30 days. That is equal to about 2.4% of daily world consumption. In response, gasoline futures fell nearly 23 cents in New York trading on Friday to settle at $2.18 a gallon.They also note that producers and refiners are seeing higher profit margins: "Credit Suisse First Boston raised its estimate for third-quarter U.S. Gulf refining margins -- the gross profit margin earned from refining oil into gasoline and other products -- by 67%, to $15 a barrel from $9 barrel." This is attracting the attention of some politicians: "The governors of five U.S. states issued a letter requesting that President Bush prevent oil companies from profiting at the public's expense. Congress, too, is pressing the matter with hearings on gasoline supplies and other Gulf-related energy measures this week."
There's very little chance of the politicians getting anything done quicly so I imagine that producers and refiners will continue to see strong profits.
Oil over 70.00 a barrel means higher gas prices. Some areas have seen 3.00/gallon and more are expected to, leaving the average consumer with less spending money. This is turn drives stocks down, particularly retailers. As you might imagine, airlines have also been hit as have insurance companies.
Bloomberg.com has a good article on the extent of the damage to US refineries. According to the AP, "Seventy dollar oil is the point where you start to get a bit more nervous," said Ed Keon, chief investment strategist with Prudential Equity Group in New York. He said oil and refinery companies were likely to "invest like crazy" to increase supply, while consumers and companies started using less energy to reduce demand.
"My guess is eventually we'll see prices start to come down again, but I don't know that anyone knows when we'll see that happen," he said.
I've been consistently surprised by rising oil prices. When they were around 53.00 I said they have to come down some time, probably soon. I've rarely been more wrong. I'm still saying that prices ahve to come back down but no longer try to guess when. Anyway, prices did drop a bit thanks to some recent weather reports.
If prices don't drop quite a bit though I have to believe that the world's amjor economies will have to make a few adjustments. Americans may even have to stop buying SUVs...
So I've been reading Robert Kiyosaki's Rich Dad's Guide to Financial Freedom, which is a bit short on specific financial information. It does, however, present some interesting theories.
Kiyosaki argues that the key to financial freedom is to start a business (a successful one generates passive income) and then invest that money (he seems to prefer real estate although he does mentione that investing in other businesses can be fruitful. Interestingly, he argues that specialization is better than diversification.
Anyway, the types of businesses he suggests are interesting: build your own corporate system (this is what Kiyosaki did), buy a franchise, or do network marketing (the option I'm working on and the one Kiyosaki seems to recommend).
The next step is to become a highly educated investor, and while he suggests a few books, this is where the book lacks specific information.
This article was contributed by an anoymous reader and I decided to post it here to reiterate points I've made about investing in metals because they don't (historically) track stock indexes or currencies. Anyway, here's the article (you can submit articles to jtrotta@gmail.com):
The fact that silver is not the most popular precious metal used for jewellery should not deter someone from considering it as an investment option. Silver is the most proficient conductor of electricity, and is used in many products including film, solar cells, thermal windows, silverware, and many decorative items. The list of industrial and technological uses for silver goes on and on. There are many applications where only silver can be used.
Although the price of silver has risen fairly slowly, with some variation, over the past few years, many experts agree that it will continue to maintain a rising trend. With the unstoppable progress of technology, the demand for silver should never decrease, and in fact should increase proportionately.
One of the factors an investor should look at is the fact that the price of silver has not usually swung wildly with the rise and fall of the value of the dollar. Silver has been known to increase in value even when the value of the dollar has fallen sharply. When an investor is looking for safety and consistency, having silver as part of your investment portfolio can seem like the right choice.
There are several options for the investor who is looking to include silver in their investment portfolio. Silver bullion bars, coins, or medallions can be bought as a direct product and stored by the investor. This can pose the question of security, however, and the investor should be sure that there is a safe place for storage. One of the advantages of this kind of silver investment is that conversion into cash can be much faster.
Investments in silver that can be done on paper include silver mining stocks, silver certificates, and silver futures, just to name a few. The investor should check with a financial advisor to find out all the options for investment, and which one would be the right choice.
One thing to consider when investing is how well the company has been able to keep up with its pensions and what effect trying to keep up will have on profit. Bernard Condon writes:
Some of the biggest underfunded companies: Exxon Mobil (nyse: XOM - news - people ), which is $12 billion in arrears and 24 years away from payback; General Motors (nyse: GM - news - people ), which is $8 billion in the hole; and IBM (nyse: IBM - news - people ), which is facing $7 billion in underfunded pensions. The latter two giants need another eight and four years, respectively, to meet their obligations, which themselves are moving, and ballooning, targets.Taking GM for an example, I read somewhere that GM is paying its retirees more than its active workforce. That seems like a competitive disadvantage to me.
Very few economists were predicting oil prices around 60.00/barrel 12 months ago. Now that they have arrived, stocks are suffering:
"People need a good reason to buy stocks, but they always have reasons to sell," John Waterman, chief investment officer at Rittenhouse Asset Management, told The Associated Press. "We're seeing mixed economic data, high oil prices, so where do you put your money? Investors chase momentum, and there's none here."Considering the energy situation, here's a nice look at some energy stocks and the related economic issues in India.
It's interesting to me that with the higher oil prices we see some people calling for a switch from value to growth investing. It seems that some investors think that earings growth will slow overall so that the focus needs to be on the companies with solid growth:
Large growth stocks have been especially weak during the past five years, Conrad Herrmann, manager of the California-based Franklin Flex Cap Growth Fund said during a recent stop in Phoenix."That's where we're finding good opportunities," he added.
Herrmann cites firms such as Pfizer, Johnson & Johnson and Amgen, traditional growth companies that now resemble value plays. Other growth bellwethers with modest p/e ratios include Microsoft, General Electric, Citigroup, Home Depot and Wal-Mart Stores.
Millen cites Johnson & Johnson as an example. The company's per-share profits rose 18 percent in 2004 - the 20th straight year of double-digit increases - and that paved the way for dividend increases.
Although value stocks have enjoyed an edge during the past five years, some observers see the scales tipping back in favor of growth. Herrmann says a slowing economy could be the catalyst.
"I think we've seen the peak in the (overall) growth of earnings," he said. "Investors now will need to focus on companies still able to generate good growth."
In a move that will cost rich countries only 1.2 billion dollars a year, the G8 has agreed to cancel the debt of 18 well-governed but impoverished nations. Critics of the deal are saying more needs to be done and they are absolutely correct. However when trying something new, it's important to move somewhat cautiously.
For example, Germany and Japan share real concerns about how to make sure that the money is being used well. Might debt cancellation encourage reckless spending? Time will tell and that is why this low-risk move is the right one. Certainly, resources should be collected to expand the program quickly as people are suffering and we need to help them soon. I'd just rather see numerous, quick, small steps than one big one.
Looking at precious and not so precious metals is an important step in diversifying your holdings.
Commodity prices are driving higher and higher as more funds add raw materials to their portfolios. Based on the outlook for raw materials and the need for diversification of portfolios after equities and bonds returns decreased, the investment in metals and other raw materials is part of a strategy. Should you attempt the same thing or is it too late?
Unlike equities and bonds, higher interest rates negatively affect the returns from commodity futures. Equities and bonds give income payments through dividend payments or coupons which are better than returns on cash. Commodity futures contracts, on the other hand, provide a negative yield because they provide no income payments.
The influx of money has pushed prices higher than they usually would be, creating a speculative bubble that could burst at any time. This price volatility and risk is especially hard on smaller future contracts which trigger large price falls when funds are withdrawn. Higher prices for basic commodities like gold and silver correspond to higher interest rates which increase the cost of holding commodities.
Base metal prices have risen. The price of copper on the London Metal Exchange was $1,550 per metric ton at the beginning of 2003. In 2004, it rose to $2,350 per metric ton and the beginning of 2005, saw the price at $3,400 per metric ton. Aluminum rose from $1,600 per metric ton in 2004 to $2,000 per metric ton in 2005.
Short term speculative gains for the main metals (especially copper, lead, tin, and nickel) are good because the exchange stocks have declined. The declined stock price suggest that future spikes are imminent which is why short term investments as opposed to long term look good.
This is not a worldwide condition. For example, aluminum stocks are low in the US and north Europe, but supply has outgrown the demand in Asia thanks to Chinese expansion and development. In Asia, exchange stocks of aluminum are going up and physical premiums have gone down. Copper inventories, on the other hand, are not at risk of supply disruption. This means that the price has risen which has decreased the demand in Europe, US, and China.
What does this mean? Some think that a short term investment in a precious metal will be profitable, a medium term investment may or may not be, and long term probably won’t. However there are numerous investors who feel that industrialization in countries like China will cause a large increase in demand for metals like copper. Also, should the overall market decline investors may seek safety in gold and other metals.
If you invest in a fund that has chosen to invest in metals, find out what the strategy behind the decision is and make your decision whether or not to stay in based on that. Personally, I'm invested in gold through CEF and IAG. I had IAG before the merger with WHT, but don't see this as a buying opportunity. CEF tracks the commodities prices closely I don't need to think "Is this company at a good valuation?" I need to think "Will gold and silver become more valuable?". I think so, but even if they don't I need them in my portfolio because they don't track the stock market (diversification is key to safer investing).
It is becoming more fashionable to invest in Japan as the economic recovery in the World’s second biggest economy looks solid. Let’s take a look at the economics in Japan to see why I have chosen not to jump on the bandwagon just yet.
Japan accounts for a large percentage of global output – and its growth is disappointing. The IMF is predicting economic growth in Japan to reach no more than 0.8 percent which is a big drop from the 2.6% increase in 2004. However, IMF is expecting a turnaround in 2006 with a growth of 1.9%.
The Cabinet Office recently reported that Japan, the world’s second largest economy after the United States "is recovering at a moderate pace, while some weak movements continue to be seen." Personal spending, which accounts for half of Japan’s growth annually, was said to be improving slightly due to wage increases. Businesses have been investing in equipment like machinery and computers and the job market has been improving in some industries.
On the negative side, because of high oil prices, steel and other raw materials, the corporate sector shows little sign of improvement anytime soon. China is Japan’s second largest trading partner and relations between the two countries are worse than they’ve been since Japan’s occupation of China between 1931 and 1945. Chinese citizens are protesting the Japanese embassy and attacking Japanese nationals and businesses within their borders – and this doesn’t look like it will improve anytime soon, diminishing Japan’s economic outlook.
An interesting aside, by the way, is the reason for Chinese (and Korean) protests against Japan. Japanese coursebooks to be used in publish schools are thought to be “rewriting” history to gloss over war-time atrocities. Indeed, Japan still has not apologized to comfort women forced to sleep with Japanese soldiers during WWII and the prime minister sometimes visits a war shrine which honors Japanese soldiers including those who have allegedly committed war time atrocities. Japan does not seem ready to appease its neighbors by having students study some of the crueler moments in Japanese history, so it certainly seems unlikely that this conflict will be resolved soon.
With the issues Japan is facing abroad and no significant improvements at home, this is no time to begin investing in the Japanese market. On top of the usual issues and uncertainties associated with investing in foreign markets such as lack of solid research and current information and the language barrier, the predicted outlook is not good enough to be worth the risk.
If investment associated with Japan is the goal, then one possibility is to invest in an American company with holdings in Japan. There are many companies across many industries that fulfill this requirement, all of which have much more accessible information and enough holdings elsewhere to make them a more profitable investment than a Japanese based market.
However, the law of the markets is that what is down now will one day go up. If Japanese investments it must be, then invest now while there is minimal growth potential and the stocks are lower than they might end up. Japan is still a very strong economy with better prospects than most foreign markets.
Not too long ago I wrote that investors need to seriously consider health insurance and the possibility they will lose it when they need it most. Today I have more bad news.
It seems like pensions are becoming less reliable as United recently dumped its pension liabilities after getting the PBGC, the government’s pension insurer, to drop its resistance in exchange for up to $1.5 billion in notes and convertible stock in a reorganized UAL Corp., United’s holding company.
How does this affect workers? It's huge for some of them:
United’s pensions are underfunded by an estimated $9.8 billion, of which the PBGC would guarantee only about $5 billion. The previous largest U.S. pension default was Bethlehem Steel’s $3.6 billion in underfunding in 2002....Now if you're savings can't handle a 50% drop in your pension, you're not safely investing for retirement.The Association of Flight Attendants, which threatened unspecified labor actions if the pensions were struck, will meet to decide its next step, said spokeswoman Dianne Tamuk.
“We feel sold out,” by the action, she said. Tamuk, 49, said her pension will be reduced from $1,700 a month to $800 a month by Wedoff’s ruling.
Because India is the fifth largest economy in the world, has the second largest purchasing power of emerging nations, and holds the third largest GDP in Asia, India offers great market potential in terms of growth, earnings, and possibility.
India is divided into classes and their middle class is growing quickly. Already large, the middle class is what is making the economy in India so strong. The wages are low and many of the workers are overqualified for their jobs, well educated and speak multiple languages including English (there are 17 official languages). This added to the 6 major religions adds diversity to the country which also boosts India’s valuation. Local stocks are rising despite the political problems and the economy is undergoing constant reformation. All of these point to solid market potential, as long as all of this continues the way that it has been.
Unfortunately, the economic growth that has been so good for investors is pushing the infrastructure of India to the edge of its handling capacity. With the economy showing no signs of letting up its growth, great overhauls are necessary to bring the transportation system up to the level it needs to be in order to sustain the heavy expansion and modernization. At least 50% of the country’s roads are unpaved and the ones that are need maintenance. India has a difficult time keeping up with the power demand and only 1.4% of the population have telephone poles.
All of these issues need remedies if the market will continue to gain potential. These are not inexpensive ventures and expense will cost in valuation for the short term while these problems are taken in hand. The bureaucracy is in no rush to update its system to the point of making any process speedy, especially projects as comprehensive and costly as these.
If investing in India is advisable, it is primarily for investors in for the long haul. Stocks will likely see downward movements in the near term as renovations take place and political issues take over the focus from time to time, but eventually the market will win out.
I usually stick to the investing side of personal finance on this blog, but the new bankruptcy laws (and some old information I found while researching them) can seriously affect your investment philosophy as you'll want to keep more liquid assets to cover health related expenses, even if you have health insurance. Here's why, in the words of Elizabeth Warren, a professor at Harvard University:
The link between jobs and health insurance is strained beyond the breaking point. A harsh fact of life in America is that illness leads to job loss, and that can mean a double kick when people lose their insurance. Promising them high-priced coverage through COBRA is meaningless if they can't afford to pay. Comprehensive health insurance is the only real solution, not just for the poor but for middle-class Americans as well.I included more than necessary so that everyone could clearly see that this is a highly opinionated article, but regardless of what you think about the conclusion the facts supported by the Harvard University study suggest that even people with good jobs can face bankruptcy in the face of serious illness. Lose the job, lose your insurance. Lose the insurance, go bankrupt trying to pay your medical bills.Without better coverage, millions more Americans will be hit by medical bankruptcy over the next decade. It will not be limited to the poorly educated, the barely employed or the uninsured. The people financially devastated by a serious illness are at the heart of the middle class.
Every 30 seconds in the United States, someone files for bankruptcy in the aftermath of a serious health problem. Time is running out. A broken health care system is bankrupting families across this country.
Now that was a bad system. The new bankruptcy laws make it even worse. That's why it is critcal when planning your investment strategy to have some liquidity. Be certain that you can pay for health insurance if you lose your job due to serious illness. And of course make sure it is the right kind of health insurance. High co-payments, deductibles, exclusions from coverage and other loopholes are things you have to look out for. To repeat part of the artcile:
A harsh fact of life in America is that illness leads to job loss, and that can mean a double kick when people lose their insurance. Promising them high-priced coverage through COBRA is meaningless if they can't afford to pay. Comprehensive health insurance is the only real solution, not just for the poor but for middle-class Americans as well.The US government will not make sure you get comprehensive health insurance. You have to find it yourself. With the new bankruptcy laws, the US government will make it more difficult for you to declare bankruptcy when medical problems make you poor.
I've recently increased the amount I spend on vitamins and antioxidant supplements. I'm also getting more serious about working out. Getting seriously ill is just not an option for Americans so do everything you can to prevent illness (eat well, get antioxidants, exercise) and make sure your investment strategy is flexible ebough to handle a simultaneous illness/job loss.
The International Herlad Tribune published an article about OPEC's decision to increase oil output. Prices are not expected to change much:
"The effect on the market will be negligible," said Gal Luft, executive director of the Institute for the Analysis of Global Security, a Washington-based company that advises clients on energy policy. "Prices will come down but not dramatically. They will stay within the range of the high $40s and low $50s."The stock market won't rally around a token increase so the bad news from GM (falling way way short of earnings expectations) will drag the market down.
The Korean Central Bank is likely to lose money over the next few years as it tries to prevent the won from getting even stronger than it is currently (around 1,000 won to the dollar):
The sharp rise in monetary stabilization bonds will weaken the bank’s capability of effectively fighting speculative funds attacking the Korean currency. The more bonds it issues, the larger the losses will be.
Warren Buffet is looking for companies to buy, possibly because he doesn't see many good stocks to invest in:
Berkshire ended the year with $43 billion of cash equivalents, something Buffett called "not a happy position." In 2003, Berkshire had nearly $36 billion and the year before that, about $12.7 billion.
Buffett also says that he has been unable to find companies or stocks worth buying, and warns that the large and growing U.S. current-account deficit will lead to further pressure on the dollar, and to other countries owning a substantial share of U.S. assets. As a result, Buffett has $43 billion in cash on the sidelines and has increased his currency bets (something relatively new for him) against the dollar.If you're looking for a fairly safe investment, why not consider Berkshire Hathaway as Motley Fool suggests? Past performance has been strong:
Give it a rest, Buffett. Few investors are going to abandon Berkshire for the vanilla comforts of an index fund, and you have no reason to be ashamed. Over the past 40 years, Berkshire has grown its book value per share at an annualized rate of 21.9%. That's more than twice the S&P 500's 10.4% annualized return in that time, but thanks to the magic of compounding, Berkshire's overall gain in book value per share is actually more than 50 times better than the industry's leading market gauge.
I recently wrote about Vioxx and Celebrex. Class action lawsuits have long been hurting big business, but the question for me is do the businesses deserve it?
Anyone who's watched Erin Brockovitch knows what I'm talking about. How can citizens take on a big corporation? Only by ganging up on the corporation. However a new law, if it's passed, will make class action lawsuits far more difficult.
This would improve the investing climate in America, but I fear that it will leave many Americans who have been hurt by big corporations with no way to seek compensation.
As reserves in the US increase and demand in China decreases, oil has fallen to under 45.00/barrel.
As usual, this price is not necessarily stable as OPEC warned a sharp price increase would trigger production cuts. This instability is one reason why airlines are a risky investment. They have no control over one of their biggest expenses.
Just as the US dollar's fall threatens the Korean economy, it also threatens the European economy. In fact they are calling for the US government to intervene, but will the US fight the dollar's slide?
Probably not. Europe says it's unfair that they have to suffer because of the US deficit. Rob Nichols and John Snow don't seem to be losing any sleep over it:
"It is unacceptable that Europe is paying the bill for some major imbalances in the world economy, especially the current-account and budget deficits in the US," Grasser said.Plus we have to remember that the US treasury doesn't ahve much recent expereince manipulation the strength of the dollar. The dollar has been the world's standard currency for so long that it never seemed to need manipulation. To start now would be something of a major policy change in my opinion.Asked about the European complaints, US Treasury spokesman Rob Nichols said "on the issue of currencies, our views are very well known." Treasury Secretary John Snow said last week the United States supports a strong dollar whose value is set by financial markets and indicated the Bush administration wouldn't act to stop its currency's decline.
"Markets can overshoot and undershoot, and they often do, but the virtue of markets is they're self-correcting," Snow said on December 3. "I'm not going to comment on what we might or might not do, but I will say I've got a deep respect for the way markets perform."
Many countries don't like the US dollar falling as it weakens their exporters. Many of those same countries also need to grow their exports to China to sustain economic growth.
This is particularly true for South Korea; China is its biggest trading partner and the US is next. But with the dollar falling, and Chinese currency pegged to the dollar, South Korea is going to have a hard time finding answers, especially considering that China is not ready to reform its currency system.
As I wrote about a month ago, this does not seem like the time for me to invest in the KOSPI index.
Here's a scary article about how Alan Greenspan and George W. Bush did not prevent the stock market bubble of the late 1990s from turning into a crisis. They only postponed it. The arguments revolove around the budget deficit and household debt.
I wrote previously about Bush, Kerry, and stocks. The election will not only affect US equities; there are fears and mixed signals concerning the US presidential race in Korea. Cho Hying-Kwon writes that the best thing for the markets would be to move on with either candidate. He cites that stocks generally rise after elections but that a recount similar to Florida 2000 would weigh markets down. A clear winner would help reduce oil prices but negatively both candidates are "expected to keep the dollar weak and strengthen trade pressures on Korea."
Of course a weaker dollar means a stronger won and that means less competitively priced exports. America is Korea's second most important trading partner. Since Korea's economic growth is dependent on exports as domestic demand is weak, and China's recent rate hike probably means that exports will slow to Korea's #1 trading partner, Korean exports becoming less competitive in America could mean trouble.
While some analysts think that South Korea's stock market is becoming more resilient, I did read in today's Korea Times (but I can't find the article online) that analysts are expecting stock prices to retreat, possibly testing important barriers around 720 which would be a substantial decline. Another interesting twist is that local investors are said to be more skeptical than foreign investors.
All in all, I'm glad that I'm not in the Korean stock market at the moment. These seem like risky times with many analysts predicting that the indexes will decline. The potential rewards are unlikely to be worth the risk as Korean economic growth is slowing. In the long term, I expect the Korean stock market to do quite well but I expect a better entry point than we have now with the KOSPI index around 835.
Rachel Koning of CBS Marketwatch writes that rising oil prices are making people seriously consider the possibility of a slowdown in the US economy. Economic uncertainty is never good for stocks, but can be good for bonds: "All told, a climate of economic, regulatory and political uncertainty tends to send investors in the direction of lower-risk investments, including government-issued debt securities."
Jack Kemp writes that uncertainty is the main reason for the stock market's three month decline. Interestingly, he argues that the stock market will lose ground if Kerry gains in the polls. However, as I have written previously there are many people who feel Kerry would be better for the markets.
Uncertainty is also causing a decline in the dollar. In this case, the deficit and other factors are also contributing to the dollar's weakness.
In this Bloomberg article on Japanese stocks and currency, there's some interesting information on how the dollar comes into play:
`Although past depreciation of the dollar is still helping to some degree, as the economy grows at a faster rate the deficit will probably tend to worsen....He's the second Fed official this month to make such a prediction. The Fed doesn't set dollar policy, which is managed by the Treasury....San Francisco Fed President Janet Yellen said the current-account gap will expand should the U.S. currency stay near present levels.
Another thing helping the Yen is that the G7 will be looking for ways to reduce oil prices:
``The G-7 will focus on higher oil prices and what to do about global growth, and that benefits the yen,'' said Meg Browne, a currency strategist at HSBC Bank USA in New York.
Simon Brewer, Chief Investment Officer of Morgan Stanley, likes oil, gold, and Asian equities better than US equities and the dollar. Gold is a good hedge against possible declines in US stocks and currency; the US has too much debt, poor demographics, and is overvalued.
He likes oil because of increasing demand in India and China. He likes Asian stocks because the valuations and demographics are better than in the US.
This article about slowing corporate profits, notes that energy costs are key in determining how fast the US economy will grow. Reuters estimates 13% for the July-September quarter.
The slowing rate of economic growth is still considered "respectable" and "not worrisome". Despite this, I wouldn't be surprised to see very choppy markets as their are likely to be more warnings and we've already heard from Intel, Tyson, Novellus, and Krispy Kreme.
This AP article notes that jobs data is not too impressive:
Investors were satisfied with -- but not impressed by -- the Labor Department's latest reading on unemployment, which fell to 5.4 percent from 5.5 percent in July, and the 144,000 jobs created in August was close to the 150,000 Wall Street expected."I think this continues the pattern of decent economic growth," said Ken Tower, chief market strategist for Schwab's CyberTrader. "It's not lighting a fire under anyone, nor is it suggesting the economy is on the edge of a serious contraction.
I'm in a lighthearted mood, as my wife and I are in the airport waiting for a plane to Malaysia where we'll celebrate our third anniversary. Anyway, I found this little article about how important it is for each person in a relationship to see eye to eye about money:
...it's imperative to have true financial intimacy between the two of you, which means that you both truly understand each other's motivations, fears, and goals when it comes to managing money. From that intimate understanding, you can build a financially compatible partnership. But if you go into a relationship without discussing these important issues - or currently find yourself in one full of money stress - I am here to warn you that someday, however much you love each other, the relationship may well end up emotionally bankrupt.
An interesting article about how the market reacted to the terror attack in Spain concludes that selling on news of terrorism and investing where terrorism is unlikely are best ways to protect your investments.
I'm no international security expert, but ti seems that Europe, the Middle East, Southeast Asia, and America are more vulnerable than India. India is more vulnerable than China, Japan, and Korea. Of course Korea has its own issues with North Korea, but I live in Korea and no one seems worried. I hope that's because we have no reason to be...
This one won't help you invest, but it's very interesting if you're at all interested in social problems. This one's about the gap between the rich and the poor. Life expectancy in America is decreasing (Costa Rica beats us). Infant mortality is increasing (Cuba does better than us). This is happening because of the huge number of people who have no health care.
Stocks were down Thursday, largely based on fears that interest rates could be raised in June. I heard on CNBC that many bull markets occur in periods of rising interest rates. And if rising interest rates indicate an economy is heating up, I don't think investors need to be scared of gradual rate increases.
Warren Buffet will join John Kerry's team. It's hard for people not to respect what Buffet has done with Berkshire Hathaway, but his advice doesn't always convince/help politicians.
Bob Kerrey didn't win despite Buffet's support in 1992. More recently, when he told Arnold that California property taxes were too low, Arnold ignored him. I wonder why Hollywood actors are ignoring Warren Buffet on economic issues.
Anyway, I won't ignore Buffets investing advice (too bad I can't afford any Berkshire) about buying companies you understand. Well I bought lifeline biotechnologies which I don't know much about, but other than that...
Greenspan spoke on montary policy, saying that interest rates have to rise some time in the future but giving analysts reason to hope that he's not talking about the immediate future.