Friday, August 31, 2007

Four Tips for Riding a Seesaw Market - Laura Rowley

This is the first article I've posted by Laura Rowley, its a good one. No in depth analysis of credit markets and no predictions, just good, down home advice on how to act and react if you hold a diversified portfolio of stocks and the markets start to wobble. Excellent article.

Scott Dauenhauer, CFP, MSFP, AIF

Siegal On Bernanke - Why Bernanke's Critics Have It All Wrong

Excellent recap of what happened in the financial markets in August and how our Federal Reserve Chief, Ben Bernanke reacted. Many have criticized Bernanke, Siegel believes this criticism is misplaced and I agree.

Scott Dauenhauer, CFP, MSFP, AIF

Bogle's advice to investors: Pay less heed to stock market - MarketWatch

Bogle's advice to investors: Pay less heed to stock market - MarketWatch

John Bogle dispenses wisdom that most people never hear. The link gives you a short article, then provides a link to an interview that you can listen to between CBS MarketWatch's Chuck Jaffe and John Bogle.

I encourage you to listen.

Scott Dauenhauer, CFP, MSFP, AIF - Surviving a market correction - Surviving a market correction

A great article by Don McDonald, who works with Paul Merrimans company, Merriman Berkman Next, Inc. Its exactly what I would have said had I wrote it!!

Investing is about behaviour, enjoy this great article.

Written by Don McDonald
Wednesday, 29 August 2007
When it comes to investing, you can count on two things. In the short run, the value of securities will fall, while over the long haul they tend to rise. Understanding these basic truths should make investing a simple process. Except for Wall Street, it might be. More on that later. If you invest in the stock market, there will come a time when you unexpectedly lose money. There is no way to know in advance when stock prices will fall as they did this August. Anybody who could reliably predict the market’s short-term ups and downs would be wealthy beyond belief. Such a person certainly would have no reason to give such information to investors like you and me. (Remember this next time you’re watching CNBC’s gurus confidently predict the market and prescribe what investors should do immediately.)

On the other hand, I am confident that if you remain invested long enough, you will eventually make money in the stock market. But in the meantime, this means you must take risks if you want to make your money grow. Investments that entail little or no risk are doomed to provide little or no gain. Government-guaranteed savings accounts pay less than the rate of inflation. The guarantee applies to the number of dollars, but not to these dollars’ purchasing power.

Wall Street brokers would like us to believe that only they have the rock-solid advice we need in order to get ahead. They spend a fortune on advertising to convince us that they know which stocks to buy and when to buy them. Now and then they even claim to know when and what to sell, but that advice usually comes only after a stock has fallen precipitously.

Brokers favor products with high commissions and fees, sometimes ensuring a loss of principal on the first day an investment is made. Rarely do brokers take the time to try to build a diversified portfolio designed to meet an investor’s long-term needs and address the topic of risk. Do you ever recall a broker asking you how much money you were willing to lose?

In my years at a brokerage firm that is now part of Morgan Stanley, I cannot recall a single instance where Wall Street set its own interests aside to do what was best for a client. I don’t recall any training session or class devoted to teaching us how to help clients build portfolios to weather bear markets.

One of the best ways to weather bear markets, of course, is to stay put. But that’s not necessarily what brokers want their clients to do. Portfolio turnover is profitable for brokerages, which make money on commissions when we buy and again when we sell. I remember well the rallying cry during the weekly cold-calling sessions I attended: “Churn ‘em, burn ‘em!”

Wall Street likes to boast that it has found ways to reduce risk while increasing returns. The returns to brokerage houses usually materialize. But for investors, it’s often a different story.

Once upon a time, a home buyer needed real income to get a mortgage – and needed a down payment to buy a house. Then Wall Street got involved. Brokerage firms created complex securities of mortgage pools, supposedly to benefit everybody. Suddenly the standards were relaxed, and just about anybody could get a home loan. The effect of these efforts is the root of today’s credit crisis.

This isn’t the first time Wall Street has created a series of complex mortgage-backed products that blew up in investors’ faces. In 1994, the collateralized mortgage obligation (CMO) market collapsed, costing businesses and governments billions of dollars.

Eventually the current panic and the stock market’s reaction to it will wane. The economy will grow again. Stock prices will start to rise again, as excess fear gets washed out of the market. This is what happened after the bear market of 1974-1975, again after the crash of 1987 and again after the bear market of 2000-2002.

The investors who will do the best job of weathering this and future storms are those who have built diversified portfolios knowing they are bound to lose money along the way and who can stick with it. If you cannot tolerate any losses, you must expect to get low returns.

I think the best way to stay within your comfort level is to put the right percentage of fixed-income investments into your portfolio so that it is not likely to sustain calamitous losses. Fortunately, this isn’t terribly hard to do if you can be honest with yourself about the losses you can tolerate. Paul Merriman’s article “Fine-tuning your asset allocation” tells you how to do that. However, don’t count on doing this with the help of a brokerage firm. This is not what they do.

Once you have set up your portfolio properly, my advice is to ignore as best you can the short-term moves in the market and the news about them. Resist the temptation to abandon your careful strategy and buy into something new that you hear about on the radio, see on the TV or read about in the press.

The investors who consistently make money are those who remain consistently invested. Keep the big picture in your mind: The economy of the world has steadily grown over time and is likely to continue to do so. Smart investors diversify globally in low-cost equity funds and keep volatility at a comfortable level with the right amount of high-quality fixed-income funds.

If you do that and manage your emotions properly, your chances of long-term success are very high.

Are Subprime Loans Bad For Homeowners and Homeownership?

Wharton Professor Jack Guttentag tackles a study stating that Subprime loans have a net negative impact on homeownership. Jack feels otherwise and is probably right. Interesting article that has implications for future subprime lending.

I guess my only disagreement (and perhaps its because I am not fully understanding his statement) is that subprime lending represents a socially useful purpose. I don't like this "socially useful purpose" because it gets in the way of good lending practices and opens the door to the government to prop up the failures of certain lenders out of "social concerns". I don't believe the government should you my tax dollars to bail out somebody who made poor decisions - whether it be a family or an institution. This impedes the free market and leads to more risky loans by institutions who believe they can offer better loan terms and not bear the risk.....the government and hence you and I the taxpayer will bear them. This is good business, but bad for the economy.

Scott Dauenhauer, CFP, MSFP, AIF

Monday, August 27, 2007

Stock Pullback Is Buying Opportunity, Not Meltdown

Stock Pullback Is Buying Opportunity, Not Meltdown (Goldman Sachs, Bank of America, Countrywide Financial) |

A few weeks ago I posted an article by Don Luskin, this is a good follow up. Things aren't as bad as the press would have you believe, however, it doesn't really matter anyway. The long term investor has to realize that stocks are going to fluctuate wildly, this is normal. We are down about 6%, not much compared to history. If you want to hold stocks, but the last few months have you hiding under your bed......perhaps you should rethink whether or not you should be holding stocks.

Scott Dauenhauer CFP, MSFP, AIF

Friday, August 24, 2007

Thursday, August 16, 2007

Equity Indexed Annuity Backlash

I don't like to post articles that are subscriber only, but this an important article to read. Especially the last sentence.

Backlash Hits
Annuities Tied
To Stock Market
Wave of Lawsuits Take Aim
At Sales Practices, Suitability
Of Equity-Indexed Products
August 8, 2007; Page D1

Equity-indexed annuities are among the hottest products sold through seminars, infomercials and free-dinner events that target older adults with investment pitches. Now, insurers that sell them are facing growing legal claims from investors and state regulators who allege that the companies or their agents are using deceptive marketing or targeting consumers who are too old to benefit from the products.

Equity-indexed annuities can be complex. Here's what to consider:
• Make sure you understand how gains will be calculated.
• Check for hidden penalties for early withdrawals.
• These annuities may not be suitable for older adults because funds may be locked up for several years.

In the biggest such case, the Eighth U.S. Circuit Court of Appeals in St. Louis last month upheld the class-action status of a lawsuit that covers more than 400,000 investors who bought equity-indexed annuities from Allianz Life Insurance Co. of North America, a unit of Munich-based Allianz SE and the top seller of this type of annuity in the U.S. More than a dozen federal lawsuits against a number of insurers also are seeking class-action status in courts across the country. Meanwhile, attorneys general and regulators in Illinois, Minnesota and California are pursuing claims against insurers selling the products.

"Equity-indexed annuities have emerged as the vehicle of choice for unscrupulous insurance agents," says Roxanne Rehm, assistant general counsel for the Florida Department of Financial Services. Older investors, she contends, "don't realize they're long-term investments, and once they realize they can't access the funds, it's usually too late."

An equity-indexed annuity, as the name indicates, is one whose performance is tied to the stock market. A person invests a lump sum, or makes a series of payments during a "deferral period" that is often five to six years, and is guaranteed a minimum return based on changes in an equity index (like the Standard & Poor's 500-stock index). If stock prices rise, returns can increase; if stocks fall, investors at worst realize no gains. When the deferral period ends, investors can take either a lump-sum payment or "annuitize" the account, meaning they would get a series of payments over a set period, or for life.

The promise of potential gains and little downside risk has fueled sales of equity-indexed annuities, which climbed to $25.3 billion in 2006 from $6.5 billion just five years earlier, according to Advantage Compendium Ltd., a consulting firm that tracks annuity data.

But critics say equity-indexed annuities do, in fact, carry risks, especially for older investors who may need access to their money before the investment's term ends. Some of these annuities are structured to provide only a small portion of market-index gains; carry high surrender, or early withdrawal charges (12.5% for some of the more popular products) that can last for much or all of a contract's term; and often involve relatively rich sales commissions that regulators say can make it tough for consumers to get unbiased advice.

Like some other types of annuities, equity-indexed annuities can be useful for investors seeking guaranteed income. But equity-indexed products also offer some potential for gains tied to the stock market. It's important for investors to understand such terms as how the interest will be calculated and if there are hidden penalties. There is controversy whether equity-indexed annuities are appropriate for older people because their money is typically locked up for several years.

Some advisers suggest investors compare returns on equity-indexed annuities with other products such as certificates of deposit, which can yield around 5% these days, and variable annuities with guaranteed minimum income benefits, which offer a similar downside safety net.

The big class-action case against Allianz centers on the marketing of so-called immediate bonuses that are paid to people when they buy an annuity, typically an amount between 5% and 10%. Plaintiffs say investors actually have to wait years for the money, if they can get their hands on it at all; Allianz responds that the bonuses are immediate because their value is credited to investors' accounts the day they buy the annuity, meaning they can start earning interest based on a bonus's value right away.

In September, Michael Altschul, a 60-year-old sales representative in Laguna Niguel, Calif., paid $250,000 for an equity-indexed annuity from Allianz after hearing it described in a radio infomercial. "The protection of principal was a huge draw for me," he says, as was the $25,000 bonus. Mr. Altschul says the agent who sold him the policy told him he could withdraw 10% of his initial investment each year for 10 years, and then withdraw the balance.

But in June, he noticed an online article about the Allianz product he bought, posted by a financial planner, and realized he can withdraw 10% a year only for the first five years, although this would cut into his gains. After that, unless he annuitizes the balance for 10 years, he would lose the promised bonus and much of the interest his money could earn, and could be subject to hefty surrender charges. "That was news to me," he says.

An Allianz spokesman says that privacy laws prevent the insurer from discussing Mr. Altschul's individual situation, but the materials the insurer provided "at the point of sale clearly explain the product," and the insurer encourages customers with concerns to "contact us so that we can conduct a thorough review."

A lawsuit filed by Illinois Attorney General Lisa Madigan last year in Sangamon County Circuit Court alleges that "deceptive" mailers sent to older people offering help with estate planning and Medicare were used to schedule appointments with agents selling annuities for American Investors Life Insurance Co., now part of Aviva PLC. Mary Menges, a 70-year-old retired nurse in Collinsville, Ill., says she responded to a postcard offering help in "understanding your money situation" two years ago and was persuaded to move her individual retirement account, $170,000 in mutual funds, into an equity-indexed annuity.
[Sure Thing?]

"I didn't know this was an insurance company at all," she says. After her son learned about the move and explained the restrictions on withdrawals to her, the mother and son wrote a letter to the company and also reported her experience to the attorney general's office. She got her money back, she says.

Michael Vaughan, a Kansas City, Mo., attorney representing American Investors, says the company has "seen no evidence that this is a broad-based issue." He declined to comment further.

The California Department of Insurance has taken a close look at Allianz's marketing to older people, specifically examining sales to 126 people who were at least 84 years old, and who replaced existing annuities with equity-indexed or immediate annuities. Elderly customers incurred new surrender charges in more than 100 such cases from Jan. 1, 2004, through July 31, 2005, the department says in a regulatory filing.

Allianz says age is only one of a number of factors involved in determining whether an annuity is appropriate for a customer, and that its "business conduct was proper."

Insurers selling equity-indexed annuities are starting to face challenges from securities regulators as well. Debate has raged for at least two years among securities regulators, insurance departments and industry trade groups over who should have oversight. So far, the Securities and Exchange Commission hasn't weighed in, but it could deem the products securities if it chose to do so.

In December, Massachusetts's top securities regulator, Secretary of the Commonwealth William F. Galvin, fined Investors Capital Corp., a unit of Investors Capital Holdings Ltd., $500,000 for allowing its representatives to use "unregistered investment advisory services to sell equity-indexed annuities to unsuspecting elderly customers." Steven Preskenis, Investors Capital Corp.'s chief operating officer and general counsel, said in a statement the company was pleased to resolve the issue and take part in restitution, and it looked forward to working with state officials to improve "oversight, understanding and education of these financial products."

And Joseph Borg, director of the Alabama Securities Commission, has found a new approach: "If the agents are advising people to sell mutual funds or get out of 401(k)s, they are acting as investment advisers. And in my state, being an unregistered investment adviser is a felony." In "dozens" of equity-indexed annuity sales the state has investigated in the past few years, he says, insurers have "paid the money back, plus 6% interest."

Write to Kelly Greene at kelly.greene@wsj.com1
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Wednesday, August 15, 2007

Get Ready for Lower Money Market Rates

An interesting thing has happened in the past few weeks. Short term interest rates have dropped, in some cases significantly. The one month treasury bill yielded 5.05% at the beginning of the month, as of today's close (8/15/07) it yielded 4.18 (dropping .44% today). The three, six, one year, and two year have also come down, though not quite as much. The effect of this drop will be felt in about a month. Money Market rates will, if rates don't change start dropping from above 5% to below, in some cases significantly below.

We just might be seeing a change in where the sweet spot on the yield curve is, I'll keep you posted.

Scott Dauenhauer CFP, MSFP, AIF

Is The Mortgage Market Headed For A Meltdown?

Wharton Prof and Yahoo!Finance Columnist Jack Guttentag corrects the record on the recent panic you've heard about in the press (yes, the same panic that is affecting the stock market) about mortgages.

Jack argues that the Mortgage Market is not "melting down", in fact he argues just the opposite. The mortgage market is still lending, it has just "repriced" its risk and adjusted its parameters for lending.

While this will cause a lot of pain for those who are looking to buy (and for those selling....les buyers), it is more than healthy as the mortgage industry was making loans that were pricing risk incorrectly.

Let me give you an example, In February a person with a good credit score could have gotten a loan (conforming) at a rate of 6.25%, the ten year treasury was at about 4.7%. Today, that same loan, with the 10 year treasury trading around the same point could cost as much as 7%, though most likely around 6.675%. Nothing has changed, but the risk has been repriced - meaning the lender requires a higher interest rate to do the loan.

The days of ultra cheap easy to get mortgage loans appear to be over (at least until the next cycle) and this is spilling over to other credit markets which spills into the stock market.

Long term you will forget this even happened, but in the short term there will be some pain.

Those who live with the pain will endure.

Scott Dauenhauer CFP, MSFP, AIF

Should Stated-Income Loans Be Barred?

Jack Guttentag is becoming one of my favorite new columnists. He is a professor at Wharton who specializes in the Mortgage industry. His latest columns provide some very good information during a time when a lot of misinformation is being spewed by the media.

In this column Jack talks about Stated Income Mortgage Loans, which are loans in which the applicant's income is not verified by the lender. While on the surface this may seem crazy, in reality there is nothing wrong with it if done correctly. Contrary to popular opinion, it is not stated income loans that are causing the problems in the mortgage market.

If you are interested in learning about the recent problems in lending and how the industry works, Jack's articles are great. This article in particular will give you an easy to read, concise view of the debate about Stated Income Loans. Scott Dauenhauer, CFP, MSFP, AIF 949-916-6238

Friday, August 10, 2007

Should You Be Worried?

It's been a volatile year to say the least. This is the third time this year I've felt that I should make a post addressing the recent gyrations of the market, something I rarely do.

I think I've instilled into my clients the notion that in the short term stocks are risky and that they will fluctuate, sometimes a lot, sometimes a lot in a short period.

No matter how much or how many times I communicate this message, it occasionally will get lost during an extended bull market. This year, if anything will hopefully reinforce my communications that stocks can be risky in the short term.

Most of you are probably hearing panicked reports in the media about the sky falling in the Sub-Prime mortgage market. Most probably don't even know what "sub-prime" means (that is o.k.).

Most people are familiar with the "Prime Rate", it is the rate that banks give their most credit-worthy customers (at least in theory). "Sub-Prime" represents those borrowers who are not the most credit-worthy, in fact they have bad credit. It used to be that people with poor or bad credit could not get a loan. However, as the real estate market marched ever higher the ability to borrow from banks became easier - the thinking by the banks being that even if the borrower couldn't make the payments there would still be equity in their home and a foreclosure wouldn't likely happen. In addition, banks would sell their loans that they made to "sub-prime" borrowers (they sell most loans). These loans would end up in portfolio's of hedge funds, insurance companies, and in some cases, everyday Joe's in the form of Mortgage Backed Securities (we won't get into these right now).

Basically, borrowers with bad credit could get credit again and it wasn't difficult. This created more home buyers which led to more homes being purchased and ever higher home prices. The problems began when short term interest rates started heading higher and the adjustable mortgages that Sub-Prime borrowers had been sold, began to adjust too payments they couldn't afford. This combined with the fact that because short term rates were higher, there were less borrowers and less buyers. Also, real estate prices can only go so high, at some point (sometimes a ridiculous point) people won't pay an additional dollar for a home (try a $600,000 townhome in Orange County that is less than 1,000 square feet and over $10,000 a year in property taxes....).

Home prices stagnated, borrowers who had just taken loans had no equity and as their payments begin to adjust they can't make the payments. Suddenly foreclosures start to spike, panic sets in and borrowers stop lending to bad borrowers, which creates an even worse affect - more foreclosures and more panic.

All of this was easily predictable (in fact predicted by me several times).

So that is how we got into this mess, but is the mess really that big?


Sub-Prime doesn't represent a major portion of our economy, the problem is how Wall Street has reacted to it. They have shut off the credit to even good borrowers out of fear (sometimes justified, but mostly not) that the good borrowers will go bad.

This has hurt the markets in the past few months and it may continue to hurt the markets, I don't know.

What I do know is that the Dow Jones Industrial Average started the year at 12,500 and is in the 13,000 range right now. In other words, despite all the problems, we are still higher than we were at the beginning of the year. Of course, that could change in a single day, but the reality is that the global economy is still strong and stocks aren't overvalued (like they were in 2000).

Stocks will fluctuate, that is what they do, if they didn't we wouldn't get higher returns.

My advice is to not panic, simply go on with your daily life and don't waste time worrying about the day to day gyrations of the stock market. It will work itself out in the long run and those who don't panic will emerge the winners.

Scott Dauenhauer CFP, MSFP, AIF

When It Comes to Rebalancing, a Little Means a Lot

When It Comes to Rebalancing, a Little Means a Lot - New York Times

A great article on the value of rebalancing a portfolio. Most people fail to rebalance their portfolios and end up taking on more risk than they intended too. Studies have shown that rebalancing a portfolio sacrifices little in return, but cuts fluctuation by a lot.

A good advisor will monitor your portfolio and keep it rebalanced.

I encourage you to read this article, it is short and well written, a real joy.

Scott Dauenhauer CFP, MSFP, AIF

Monday, August 06, 2007

Time To Swap Piggybanks?

Time To Swap Piggybanks?

If you have your kids money in a UTMA or UGMA you need to read this article. It outlines some new tax laws that do not favor these accounts.

Scott Dauenhauer CFP, MSFP, AIF

How Speculators Exploit Market Fears

Once again, Ben Stein puts the recent market meltdown into perspective. If last month has bothered you, I'd suggest reading this column.

Scott Dauenhauer CFP, MSFP, AIF

Reassessing REITs: Are real estate investment trusts finally poised for a tumble-or are the bears crying wolf?

Reassessing REITs: Are real estate investment trusts finally poised for a tumble-or are the bears crying wolf?

I've been a bear on REITS for quite some time and I've been wrong. It's been tough, but I am finally beginning to look correct. If anything, it goes to show that I have no ability to predict the future. While I think I'm right on REITS, I see to have been way to early.

REITS are having a bad year and it may continue. This article gives you a good background on where REITS have been and where they may be headed.

I like REITS in a portfolio long term, but have cut back quite a bit. If REITS fall enough, I will begin buying again.

Scott Dauenhauer CFP, MSFP, AIF

Thursday, August 02, 2007

Siegal: How To Play The Market Sell Off

As always, Wharton Professor, Jeremy Siegal gives us a great perspective on the recent sell off. Mr. Siegal gives us a background of last weeks selloff as well as his thoughts on the stock markets future, a must read.

Scott Dauenhauer CFP, MSFP, AIF

Taking a Mortgage Into Retirement

Another great article by Jack Guttentag via Yahoo!Finance. An individual asks the questions - should I use my assets to pay down my mortgage or keep them invested as I retire. Jack answers...........

Click the link to view the article.

Scott Dauenhauer CFP, MSFP, AIF