Thursday, June 26, 2008

It Ain't All Roses, But It Ain't All Bad

I know all my english professor clients are cringing over my use of "Ain't" in the title of this piece, but it just felt appropriate.

A few weeks ago I wrote that the pain in the financial services sector is far from over, June has proven me right. The dow is down 300 points today and the reason is bank downgrades.

The problem is two-fold, the banks have on their books a bunch of loans that are worth a lot less than they say they are, if they recognize this problem they face a possible capital crunch. Thus they are unwilling to face the problem. Secondly, they may be on the hook for many more loans that they failed to properly vet and these loans may come back onto the books (see the article I posted the other day - mortgage crisis Act II). Our Financial system will survive, it will end up stronger, but it will be painful in the short term.

I don't expect stocks to do great for the rest of the year, but then again I have no idea and no real outlook, except that five or ten years from now it won't really matter.

Our economy is not doing great, but it has been exceptionally resilient to a number of massive shocks that would have cratered most nations. We survived 9/11, Katrina, the tech bubble and now we are trying to survive midwest floods, oil spikes, and inflation. Keep in mind that interest rates are still low (but they need to rise), unemployment is still very low and we are having a boom in exports due to the weak dollar.

My confidence in our long term prospects has not dimmed, everyday I am amazed at what free people living in a capitalist society are able to come up with. The ingenuity that we possess is astounding and we are on the brink of technological advances that will make the last 100 years seem like the stone age (like bugs that eat agricultural waste and excrete oil- see my other story on oil). This will of course cause disruption and pain, but in the long run we will be better off.

Looking at the markets and paying nearly $5 a gallon for gas is tough. It is easy to fall in with the doom and gloom crowd, I urge you to resist. This is not to say that things are rosy, our economy has structural problems that need to be addressed sooner than later - oil being the most recent.

I've spoken to many people this year who are discouraged to see that all the money they put into their 401(k) or 403(b) accounts appears to have evaporated. I understand their frustration and while the truth is that they are buying more and more shares at lower prices (which will help them immensely when the market inevitably recovers) it still doesn't make them feel good.

My advice today is no different than it was six months ago or six years ago (when the market was much, much worse) - diversify, don't take too much risk and hold on during these difficult downturns - you will be rewarded. Remember that stocks wouldn't provide higher returns if they didn't have correspondingly higher risk. The downs of the market are the price you pay for the ups in the market and fretting about if the Dow will fall to 10,000 is short sighted - it might, but ten years from now you'll be kicking yourself for not staying invested.

I posted an article the other day on "Investors behaving badly", it details how an investors behaviour is the number one determinant of your returns. Don't give into the doom and gloom, hold steady.

The stock market is down, you've lost money, this is par for the course and too be expected. Keep your head up, don't worry, the cycle will come back at some point.

For my clients - if you feel like you need to talk about anything happening in the market, I am alway available for you.

Scott Dauenhauer, CFP, MSFP, AIF

Tuesday, June 24, 2008

Investors Behaving Badly

A great article about how most investors don't behave correctly when investing and how the returns the fund earns can be vastly different than the returns that investors earn. Those investors who don't switch in and out of funds, but stay put, generally do the best. Those that hop around do poorly.

Great article.

Scott Dauenhauer, CFP, MSFP, AIF

The Truth Behind Hidden Fees in 401(k) Plans

An excellent video series by Bloomberg TV on 401(k) plans and how to watch out for hidden fees.

Scott Dauenhauer, CFP, MSFP, AIF

The Mortgage Crisis...Act II

On June 4th I wrote that the "credit crunch and housing bubble" aren't over yet. My timing, though unintended turned out to be right on, the markets have since stumbled largely due to ongoing concerns with financials. Keep in mind that I am not advocating getting out of the market, quite the contrary. My point is simply that the problems in banking are not over and will not be for quite some time, real estate will not recover in the hardest hit area's for awhile - perhaps 12 - 18 months and the recovery will not be monumental.

The article I linked to above basically echoes what I've been saying but with additional detail (rather long for my taste, but good info).

The world is not going to collapse, America will continue its march onward and upward, but in the short term there will be some more pain to come. For those who have the fortitude to stick it out, your rewards will be waiting for you.

Scott Dauenhauer, CFP, MSFP, AIF

Thursday, June 19, 2008

Rich Paying More Taxes - Poor Paying Less

Despite what you might be hearing from the political campaigns, the rich are paying more taxes under the Bush tax cuts and the poor are paying less. Here are the latest stats:

Taxpayers in the top 5% paid 60% of all individual income taxes (they account for 36% of all income)
Bottom half of taxpayers tax share is expected to fall from 3.1% from 3.4%
Top half expected to climb to 39.1% from 38.4%

Tax receipts as a percentage of GDP have GROWN from 16.3% in 2004 to 18.8% last year.

Interesting facts to consider.

Scott Dauenhauer, CFP, MSFP, AIF

Wednesday, June 18, 2008

Something's Got To Give

Health Care Costs
Credit Crisis
...interest rates?

It seems the world is spinning out of control, it isn't, but it sure feels that way. The good news is that it is now affordable to buy a house in a lot of places, the bad news is it is tough to get a loan, there aren't many jobs in those area's thus you must commute to buy that house........which will completely defeat the purpose as it costs $4.50 for a gallon of gasoline. Assuming you travel 50 miles to work and can get 25 miles to the gallon, you are spending about $400 per month on gasoline, if both family members commute (married couple) you are close to $800 per month. When gas was $1.50 per gallon - this was doable, it isn't for most people now. These area's need good jobs. Many people are now trying to live closer to where they work, this will in the short term cut down on oil consumption.

While housing is decreases, which doesn't benefit most people who already own, everything else is increasing. I'm going to spend nearly $14,000 this year on health care for a family of four (and that's with half my family in an HMO). This is ridiculous. When I fill up at the pump I get stopped out at $75 (many stations limit the amount you can pump with one slide of the card), this doesn't fill up my car (ok, its a truck)! This is ridiculous. Every time I look at how the dollar is doing, it is dropping against the Euro, this is ridiculous in a country that has publicly stated for years that we have a strong dollar policy. If you thought the Europeans were upset with us because of Iraq, they weren't nearly as upset as they are now that we've in essence slapped a 50% tariff on their goods and services........of course it is making it cheap to buy U.S. goods - which helps exports (keep in mind that you can't export your way into a good economy).

Food prices are soaring for a number of reasons: the falling dollar, the use of our food for oil, and because of the price of oil.

This is all leading to the dreaded word - Inflation. Year over Year inflation was 4.2%, I read that wholesale inflation hit 7.2%. This is not surprising considering the price of oil. The Federal Reserve apparently is not all that interested in stopping inflation - instead they are still focusing on the credit crunch and keeping rates low. If the fed continues this policy we will see continued weakness in the dollar (which may leader to even higher oil prices) and inflation spiraling out of control.

I hate to say it, but something has to give and I believe that something has to be interest rates. If you're earning 4% on a treasury bond (which you'll only earn if you buy a 10 year one) and inflation is at 4.2% - after taxes you are guaranteed to lose money. You should earn enough in bonds to at a minimum cover inflation, and in reality you need to be compensated over and above inflation - this is not happening. Just like in the early 80's, the fed is going to have to raise interest rates. At a minimum the market is going to have to start repricing bonds to yield a higher rate.

While it seems the world is spinning out of control and for the first time in a long time Americans are really feeling it in their pocketbooks, there is some good news.

First, America always fixes it problems and it will this time as well. Employment, though weakening is still strong. Exports are booming. For borrowers who can borrow - interest rates are good. People are changing their oil consumption habits, this will at some point have an effect. Congress is actually seriously considering drilling for oil in America (while that may not sound good to many people, it can be done in an environmentally friendly way - just ask the people from Holland). American's are still at the forefront of innovation. We are about to embark upon a period of technological and biological breakthroughs that none of us could have ever imagined.

Things aren't great - we need long term fixes to our energy problems, we need long term fixes for health care, we need a healthy mortgage market (which means congress needs to stop trading favors with them), and we need to get inflation under control as it wipes out the incomes of retired folks. There are fixes for all these problems.

I want to encourage all of you who feel the Gloom and Doom out there to remember that things aren't as bad as they seem, we've been through this before and we'll get through it. In the meantime, jumping out of the stock market in an attempt to possibly miss out on losses is a mistake. Holding on during the tough times will pay off when things correct themselves (as they inevitably do).

Scott Dauenhauer, CFP, MSFP, AIF

Tuesday, June 17, 2008

Pick a Planner Who Can Spell ‘Fiduciary’

Great article on how to pick a planner and WHY it is important to pick one who is a Fiduciary. The article also explains what a Fiduciary is.

I act as a Fiduciary for my clients.

Scott Dauenhauer, CFP, MSFP, AIF

'Brainwashing 101 for Dummies' (and investors!)

Paul Farrell identifies 11 reasons why passive investors fall prey to Wall Street's hype. This is really a piece on Behavioral Finance and it is written in an entertaining way that allows people who really can't stand this kind of stuff to learn something easily!

The premise is that our minds are pre-programmed to work against us when it comes to investing - Jason Zweig, another journalist has done a lot of work bringing this topic to the masses as well.

Scott Dauenhauer, CFP, MSFP, AIF

Monday, June 16, 2008

Expensive Oil Days Are Numbered

With oil flirting with $140 per barrel there are a lot of people worried....not to mention a little ticked. It might surprise you to know that some of those who are the most upset are oil executives and oil producing nations. Why? When oil is at $50 a barrel there is little incentive to spend money to develop new sources of drilling or to produce viable alternative fuels - there is little real competition from alternative fuels and thus the oil industry is happy to make a little less money in the short term if it means they can continue selling oil in the long run. However, at $140 per barrel there is a HUGE incentive to find other fuels or to drill for new oil or to find oil in places no one ever thought of. The high price of oil gives the oil companies and oil producing nations huge profits in the short term, but incentivices (have no idea how to spell that word) competition which will in the long run make them (oil companies) obsolete. They dislike $140 oil as much as you do.

Necessity is the mother of all invention, but big profits also drive people to innovate - both forces are now combining and new ideas are being thought up of everyday that could knock oil off its perch in the long run. A few examples?

A few weeks ago I posted a story about the Bakken Formation - it is in the US and could have 200 billion barrels of oil - up till now it was expensive to drill for it, now their is enough money in producing oil that the investment in new technology can be justified and the drilling for that oil is under way.

It also may surprise you to know that in the Rocky Mountains we have 3 (Three) times the amount of oil than all of Saudi Arabia...we don't yet have the will to drill for it. We also have tons of oil off of our coast which we won't drill for, yet one of the most "green" countries in the world - Norway - is the 10th largest producer of oil.....they drill off-shore.

Aside from drilling for oil where can we can we get oil? Bugs......yep, you heard that right, this link will take you to a story about some silicon valley scientists who have genetically modified bugs to excrete oil - after eating agricultural waste. Hmmm, bugs that turn waste into oil that we can put in our cars......never would have occured to me (and this idea would never see the light of day in a communist regime). Will bugs be the future of oil? I have no idea. The point is that there will be a future fuel that will power our lives.

Last year a scientist figured out that he could burn water by shooting radio waves through......who'd have thought.

A car company out of Japan, Genepax is getting set to produce a car that runs on...........Water. Here is a link..

Our energy crisis will not be over soon, but it will in all likelihood lead to more oil (an consequence unintended by environmentalists who desire high oil prices) and more alternatives that no one ever dreamed of.

Finally, who's to say that car companies won't find a way to increase Miles-Per-Gallon substantially? What if we could get twice the mileage as we do now? That would drop our real price per gallon in half, an affordable price for most people.

Will Oil hit $200 per barrel? Who knows, if it does it will be the beginning of the end and it will not last.

Now there is one caveat - Oil could reach $200 a barrel even with massive supply additions if the US Government doesn't watch its "dollar" policy. High oil prices are not simply a function of production - they are a function of the government pushing a soft-dollar policy.

Scott Dauenhauer, CFP, MSFP, AIF

Wednesday, June 04, 2008

Credit Crunch and Housing Bubble Update: Ain't Over Yet

This is mostly an anecdotal post, but I don't think that housing is going to recover until at least 2010 in most of the hardest hit area's. Out in Riverside, CA there are places where you can drive and in a one block stretch see 10 homes for sale and 10 more in foreclosure. There are still a lot of people living in homes that they won't be able to afford very soon. In the Riverside and San Bernardino area there are many people who moved out their for a lower priced home and commuted into Los Angeles, Orange County or San Diego - that commute is now costing them in many cases over $1,000 per month in gas bills. These people are upside-down in their home and don't have much to loose by walking away - most of this is not reflected in bank balance sheets. I owe probably $150,000 more on my home than it is worth......I'm still making my payment and will continue to do so - I love my home and my neighborhood.....but what if suddenly my great neighbors all moved away? If you don't think there are a lot of people out there who can make their payment, but don't feel it is worth staying because they are so upside down (and still paying top dollar in real estate taxes) you might soon be in for a surprise. What if these good credit risks walk? These are people who have good credit, can make the payment, but simply can't stomach the fact that their home is worth so much less than what it is worth. They just might walk - the banks are on the hook.

I called the housing bubble - but still got caught in it. I probably didn't lose as much money out here in Murrieta as I would have had I bought the same home in Orange County - but the % decline has been steeper.

What if the run up in housing wasn't our fault? What if we were duped? We paid higher prices for homes only because there were buyers in the market that never should have been there in the first place - thus creating a false demand and higher prices. This was all fed by people who had no stake in the process - Mortgage Brokers, Appraisers and Lenders to repackaged and sold the loans as quickly as they could. There was no grand conspiracy - just a lot of money to be made....unfortunately the mechanisms that should have been in place broke down.

Should you be worried? Probably not. The markets may swoon again or they may not, but we'll all eventually make it through. I don't know if the stock market will go down due to a second "credit crisis", but I wouldn't be surprised - though I wouldn't take my money out of the market betting on it. What I do believe is that stocks will be higher in years to come than they are now as our inevitable march of progress continues. Housing booms and busts will happen again and we'll find that we never learned our lesson in the first place. Who knows, perhaps we are in our next bubble already - Commodities (and Treasuries).


Tuesday, June 03, 2008

Interview with Ken French: The Cost of Active Management

Famed researcher and professor Kenneth French has a new study out quantifying the cost of investing in actively managed investment options - about .67% per year or $100 billion.

Thats a lot of money left on the table each and every year.....there is a better a way.

Scott Dauenhauer, CFP, MSFP

Ken French The Cost of Active Investing Study