Thursday, June 30, 2005

Financial Porn Can Seriously Distract

Financial Porn Can Seriously Distract:

I'd love to reprint this article in this space so you don't have to go to another link - but alas that would be copyright infringement and we wouldn't want that (yes, I pay for my downloaded music)!

Click the above link and read a great article about the pornograhpy that is fed to you everyday by the financial press. It's a very interesting article that should tickle your fancy!!!

Scott

www.research-finance.com

�John P. Scordo, Esq. - www.research-finance.com

For those of you who like to read some of what I read to keep up to date on the latest in investment research, the above link to www.research-finance.com should prove fascinating.

Scott

Wary of Stocks? Property Is an I.R.A. Option - New York Times

Wary of Stocks? Property Is an I.R.A. Option - New York Times

This is not a recommendation, purely an FYI. Real Estate in an IRA can be good for the right people, but it comes with a few headaches and rather high fees.

Scott

Thursday, June 23, 2005

Betting Against the House

Betting Against the House

From one end of the spectrum to another. This guy sold his house and is renting, betting on prices to fall.

Scott

Larry Kudlow on the Tax-Advantaged Housing Market 2005 on NRO Financial

Larry Kudlow on the Tax-Advantaged Housing Market 2005 on NRO Financial

Another take on real estate, one worth reading. Contrast this with the following article from the LA Times in the post before this one.

My point is not that there is or isn't a real estate bubble, simply that there are plenty of points of view and we don't know who will be right. The future is truly unpredictable, of course in some areas housing prices are down right ridiculous.

Scott

Ameritrade to buy rival TD Waterhouse

Ameritrade to buy rival TD Waterhouse

For those clients of mine who I manage for this news is important. I had hoped that Ameritrade would acquirer TD Waterhouse as opposed to Ameritrade being acquired by E-Trade. I think this will be a good combination and we will all benefit from expanded services. If you have questions on this merger please don't hesitate to call or e-mail me.

Scott

Wednesday, June 22, 2005

The Many Evils of Inflation - Mises Institute

The Many Evils of Inflation - Mises Institute

I don't know anything about the Mises Institute or their politics, please don't recieve this posting as a political statement. What I want you to focus on with this article is the devastating effects of inflation on your money and how government mismanagement of money is a leading factor in the loss of purchasing power over time.

Inflation is your enemy in life and retirement, unless you are a debtor, then it is your friend. Since most of us are debtors until our later years inflation looks good, but when we hit those retirement years it can wipe out your money, though it does it silently and over time, inflation is slick. Most people fear losing money in the stock market, but ignore the losses they are racking up each year through the loss of purchasing power.

Happy Readings!

Scott Dauenhauer, CFP

Tuesday, June 21, 2005

There Are No Guarantees & The Future is Impossible to Predict

Every time I turn around these days I see old financial products and new financial products being hawked by using the most emotional word in the english lexicon "Guarantee." As if by saying the word guarantee it makes it so. The fact of the matter is that guarantees don't really exist. A guarantee implies no risk, if you doubt that I challenge you to type "no-risk guarantee" into google.

If I say that there is no such thing as a guarantee when it comes to financial products, why is it that we always see this term used? It is used because marketers know that it gives their prospective buyers a "warm fuzzy" when they hear the word - it makes them feel safe and protected. To most people what is being guaranteed and what they think is guaranteed are two different things.

The most important concept in money is purchasing power, yet most people have no idea of what it means. Purchasing power refers to the amount of goods and services an individual can buy at any given moment in time. An example of a guarantee not actually being a guarantee is with insurance companies who issue immediate annuities. An immediate annuity is basically an income stream that you can't outlive. You hand the insurance company some money and they hand you a monthly check till you die, guaranteed.

Sure the monthly check is guaranteed by the insurance company, but what if they go out of business? The state will most likely come in and rescue you, thereby making you whole, but what if the state doesn't have the money to rescue you and what if the federal government refuses to rescue you - your income is gone, it's not really guaranteed. Of course, the likelihood of these events happening are small, but that doesn't mean they won't happen. More importanly however is that the guaranteed income stream provided by the insurance company isn't really what you thought you were purchasing, thus who cares about the guarantee. What good is an income stream if it doesn't buy you anything? Have I lost you yet?

Let me give you an example. Say you gave an insurance company $100,000 today and in exchange they will pay you $500 per month for the rest of your life. Today, that $500 buys you groceries for two months, no problem. However, ten years from now the $500 monthly income stream will only buy you 1.5 months of groceries. Twenty years from now the income stream will only purchase you 1 month of groceries.....half of what the money bought you the day you started. Thirty years from now your $500 will buy you about three weeks worth of groceries....better make them last. The point is that though you thought you were buying a guaranteed income that would buy you the same amount of goods and services each year, in reality you were simply buying $500 dollars a month in advance for the rest of your life, the fact that the $500 buys you less and less each month was not part of the sales pitch and "purchasing power guarantee" was never mentioned.

The same goes for government bonds. They are safe in that you will never lose your dollars, but if your dollars buy you less and less YOU ARE LOSING MONEY. A guaranteed return of dollars is different from a guaranteed return of purchasing power and purchasing power is what you should be focusing on.

Given that nobody can consistently predict the future there are no scenarios in which a guarantee can really be called a guarantee, of course this is mostly sematics. My point is that you should ignore the snake oil salesman who tout "guarantees" as a way to sell their products, they do so because they know that their product is so weak it can't be sold unles it is guaranteed (Think Hyundai's ten years ago). Forget about guarantees for a moment and focus on what is important, your purchasing power.

Finally, realize that there is no investment on earth that can guarantee your purchasing power under all circumstances and no product can ever be developed to guarantee purchasing power. Inflation-protected bonds do a decent job if you can accept an extremely lower rate of return, but overall there is nothing that can guarantee your income will grow with inflation. We expect that many assets will hold their purchasing power and those should be incldued in your portfolios, but always remember that even though a guarantee sounds great and makes you feel Warm and Fuzzy, there is really no such thing as a guarantee.

ScottyD

Friday, June 10, 2005

MSN Money - Why there is no housing bubble - Jubak's Journal

MSN Money - Why there is no housing bubble - Jubak's Journal

I guess somebody had to make the arguement.....

This is a bit of a wierd article because he says there is no bubble and then describes how the bubble would "pop". Again, I don't believe there is a national housing bubble, but there are certainly areas that at any interest rate are priced ridicously. A townhome not two miles from my office that is only 1300 sq ft is on the market now for $500,000 - does this sound like a reasonable price?

Scott

Smartmoney.com: Breaking News: Citigroup to Settle Enron Suit for $2 Billion

Smartmoney.com: Breaking News: Citigroup to Settle Enron Suit for $2 Billion

This is the second settlement for Citigroup/Smith Barney, the other with Worldcom. What this article leaves out is that Citigroup has $6.7 billion in litigation reserves which will fully cover the settlement.

Is it me or is it wierd that a company has nearly $7 billion in litigation reserves? Did Citigroup make that much money in the 90's that it can so easily pay such huge settlements? I am not against profit, don't get me wrong, but Citigroup had a hand in some of the biggest scams of the century (Worldcom and Enron) and they are just going on like business as usual. Did they really learn a lesson? Did they even lose money after all the fines and settlements were paid? I am not a corporation basher, but I worked for the large wall street firms for several years and the one thing that came out of that work was that they do not have your best interest at heart.

How long will it be until Citigroup has a hand in another multi-billion dollar fiasco? I guess I don't really have a point here, just pointing out some recent developments and putting out a warning.

ScottyD

Wednesday, June 08, 2005

Morningstar.com - PIMCO's Bill Gross Is Worried

Morningstar.com - PIMCO's Bill Gross Is Worried

This is an interesting article where a major bond guru predicts long term rates to remain low and to get even lower......what?

Who knows he might be right, he might not be. I don't buy into some of his fears about the American economy, I believe the economy will be good long term and that stocks will outperform bonds. But in the short term anything can happen - even 3% 10 year treasury yields.......

Scott

NPR : Getting Americans to Save More

NPR : Getting Americans to Save More

An interesting audio from NPR and the Wall Street Journal yesterday. You will need an audio player to listen.

Scott

Monday, June 06, 2005

County pension fund's rate to stay same - The San Diego Farce

SignOnSanDiego.com > News > Metro -- County pension fund's rate to stay same

The San Diego County Pension fund continues to refuse to come to reality. When the board was faced with lowering expectations for investment returns to 8% from 8.25% they refused. You may wonder why this is a big deal?

The San Diego County Pension board and boards across the United States are using investment return assumptions that are unrealistic so that they don't have to use current funds to make stable their pension funds that have overpromised and will underdeliver. This almost guarantees that at some point in the future San Diego will find itself in the same position as West Virginia - being forced to issue bonds to fund liabilities that cannot be met with current state revenues (they just issues $5.5 billion and now have one of the highest debt ratios in the country).

A typical pension plan has an allocation that is 60% stocks and 40% bonds, assuming this allocation will earn 8.25% going forward is absolutely ridiculous.

The Wall Street Journal asked several economists earlier this year what they thought future returns on the stock market would be after inflation - the most optimistic was 6.5%, if we assume only 3% inflation we would get about 9.5% for a total return on a portfolio fully invested in stocks. Since only 60% is invested in stocks we can assume that the portfolio will earn about 7.7% before fees and inflation - this is being optimistic. A reasonable assumption would be 7.5%, yet the board wouldn't even consider lowering it to 8%. Clearly this board is not considering the long term best interest of the participants in the plan or the taxpayers of San Diego who will eventually be the ones making up the shortfall. This plan will continue to get worse and waiting a decade or two to fix it will hurt much worse than fixing it now.

There may be some pain to fix this pension now, but it is nothing compared to the pain that will be felt a decade from now. The board appears to looking at their own tenure and career in politics, not looking at the tough problems and finding solutions.

San Diego is not alone - this is a widespread problem and issuing bonds to fix the problem is not an acceptable solution.

ScottyD