Wednesday, November 26, 2008

Happy New Year? Not for Some - 403(b) Plans will have fewer investment options

An article in which I am widely quoted on CBS Marketwatch about the new 403(b) regulations.

Scott Dauenhauer CFP, MSFP, AIF

Friday, November 21, 2008

What Now? Is This the Bottom?

Since the Presidential election the stock market has fallen 20% plus, bringing the total carnage to close to 50% domestically (and slightly worse internationally). REIT's are down 60%. As far as I know, this is the first time a stock market has dropped by 50% twice within a seven year period - making it the most difficult time to be a stock investor since the Great Depression. While the economy was not heading off a cliff back in August, the events of September brought everything to a screaching halt.

The failure of Fannie, Freddie, AIG and Lehman (specifically Lehman) was like a freight train running at full speed and suddenly hitting an immovable wall. The train is still there and so is the wall, but there won't be any progress for a long time. Not only does the train (what's left of it) have to be removed from the tracks, but before a new one can be put back on, the tracks have to be repaired, the wall has to be removed and somebody needs to ensure that there aren't any more walls built on a train track.

I believe the problem we are facing is a lack of confidence in any elected leadership. We have nobody who anybody trusts giving us any signs that they have the ability to lead us out of this. My hope is that the President-Elect makes a wise decision with his Treasury Secretary choice - if he does, this will go a long ways toward the process of restoring confidence.

The good news is that oil is down substantially and this will serve as a monstrous stimulus to the American People, their gas prices being cut in half right before the holiday season. The bad news is that we could easily see $4 gas again if we don't address our energy problems.

We have a $10 Trillion deficit and will probably add another $1 Trillion next year. That is small potatoes compared to the $53 Trillion in future deficit we have with Social Security, Medicare and Medicaid.

The problems we face seem insurmountable and for many nations they would be. However, we happen to live in the greatest nation in the history of the world and the people, who have faced much greater adversity and come out stronger will again save this great nation. Our greatness is not derived from our politicians, but from our people.

We are entering a deep recession that may see unemployment rise to 9%, very similar to the 73-74 and 80-81 recessions. Things aren't good, but America has come out of every recession in its history and gone on to become stronger than before. We need to take this opportunity to strengthen our nation fiscally. We need to be careful not to over-regulate and in fact de-regulate some industries. Finally, we need to enact greater regulations on the financial industry that got us into these problems to begin with. Those on Hubris Street (my name for Wall Street) can no longer do whatever they please because they think they are smarter than everyone else in the room, these emperors have certainly been proved to be without clothes.

This all brings us to the question of the day - what now? What do you do with your money that is invested in stocks? Many have started to look at other avenues beside Buy and Hold, they are looking at both Active Management and Market Timers.

I've looked into both and both have failed in their mission at just the moment they were supposed to shine. What follows are how some of the best in the Active Management world have fared:

• Warren Buffett (Berkshire Hathaway): -43%
• Ken Hebner (CMG Focus Fund) -56%
• Harry Lange (Fidelity Magellan): -59%
• Bill Miller (Legg Mason Value Trust) -50%
• Ken Griffin (Citadel): -44%
• Carl Icahn (Icahn Enterprises): -81%
• T. Boone Pickens: Down $2 billion since July
• Kirk Kerkorian: Down $693 million on his Ford shares alone

As for the Market Timers, the number #1 newsletter as ranked by Mark Hulbert for the past ten years is Bob Brinker's and he still had a bullish signal as of November according to a blog that follows Brinker, a quote from that blog as follows:

"Bob Brinker's Marketimer: Bullish. In his most recent issue, which was published in early November, editor Bob Brinker writes: "We continued to believe that there is no risk of a cyclical bear market (a decline of 20% or more as measured by the S&P 500 index (S&P500 chart) in the months ahead ... We expect the stock market to set a series of new record highs into next year." His model portfolios are fully invested.

Mark covers nine of his top market timers and concludes Bob Brinker is not a "lone voice in the wilderness" with his bullishness. "None of these nine top timers is bearish. The average equity allocation among all nine is 83%. This is down only slightly from where this average stood in recent months."
The best news is the worst market timers Mark Hulbert covers are quite bearish with an average recommended equity weighting of only 9%:

This 83% average is good news for the stock market in its own right, of course. But it's particularly bullish relative to the average forecast of the ten stock market timing newsletters with the very worst risk-adjusted performances over the last decade. The average recommended equity exposure among these worst performers right now is just 9%.

In other words, the worst market timers are quite bearish right now, while the best timers are quite bullish. Rarely are we presented with a contrast this stark."

My point - there is no safe harbor from the storm in terms of investing in stocks. They are risky and the only way to capture the total return of them over the long run is to be fully invested in them, not jumping around. Of course, this assumes a diversified portfolio and that you don't have money invested in stocks that you need within ten years.

Bottom line - this is bad, it hurts, its emotional and I have no words that can make you feel any better except that this too shall pass and stocks will rise again, it just might take awhile. Good things come to those who wait and patient, long term investors in stocks have always been rewarded with excess returns.

I'm on a vacation up in Oregon and heading back home this weekend, I'll be available part of Tuesday and all day Wednesday and Friday (no, I won't take calls on Thanksgiving!!!).

If you want to send me an e-mail, I will respond.

Scott Dauenhauer CFP, MSFP, AIF

Wednesday, November 12, 2008

The Bailout...err Rescue...err..We Just Need $700 Billion

On September 29th I wrote about The Bailout and said that I thought the bailout would have a positive affect, obviously in the short term that was wrong. However I was referring to the long term.

I also wrote that buying the "troubled assets" was nothing more than a recapitalization program and that it amounted to overpaying for securities. I argued the banks need more capital and this was a backdoor way to get it. Turns out I was right and instead of buying the securities (which would take forever to do) the government opted for a direct infusion.

Now the government has decided to abandon this program all together - they will not buy troubled securities (which by the way have a market and are traded everyday). Instead they will use the money for other stuff.....perhaps bailing out student loan and credit card lenders....uhh, what is next?

Is it me or did we just spend $150 billion in pork to give a lame duck $700 billion to fool around with?

Perhaps, perhaps not. It is possible that the government is trying to actually get ahead of issues instead of fighting them after they've occurred. The real problem is still not addressed, though there are hints that this money will be used to help guarantee mortgages.....we'll see.

Aren't you glad at least somebody stopped this behemoth and added some oversight (and pork)?

Its time for Paulson to be given the boot......and just where the hell is Bernanke? He's the Depression expert. Paulson will be gone as soon as Obama takes office, given the lack of leadership by Bernanke, I'd be surprised if he gets another term.

I'm starting to think Congress needs to be bailed out......of their jobs.

Scott Dauenhauer CFP, MSFP, AIF

WSJ: Is Now The Time To Buy Stocks?

Contrary to what the title may indicate, this is not a market timing piece. The author goes through a bit of historical data (which you will find interesting) and then gives you different scenario's for who should buy, sell or continue to hold stocks. A very reasoned piece that is well written and timely.

Scott Dauenhauer CFP, MSFP, AIF

Tuesday, November 11, 2008

Hall of Idiots: FHFA & Federal Government

Today the government announced what they hope will be the "standard" for loan modifications in the U.S. The "standard" they set out has formerly given them entrance into my Hall of Idiots (shared by Robert Kiyosaki and Jim Cramer).

With big fanfare, on Veterans day a host of governMental (emphasis on Mental) entities lead by the FHFA announced a plan that will fail. How do I know? Its been tried and is already failing, plus, it doesn't actually solve any problems. What is going on here is that the lenders are trying to get out of these loans with as little pain as possible while portraying themselves as the white knight saviors of our society.

What we have are lenders who made lots of bad loans and now they don't want to share in the losses that these loans will inevitably bring (and already have). You have lenders who made loans to people who had less than $20,000 in income, yet were able to take on a $600,000 mortgage - but they think they shouldn't feel any pain.

Todays announcement amounts to playing "kick the can".

Here is what they want to do:

First, you must be three months behind in your payments.

Second, they will try to work with you to lower your payment by temporarily lowering the interest rate or increasing the term of the loan (to 40 years).

Escrows for real estate taxes and insurance must already be set up.

38% is the threshold debt level.

Must sign an affidavit that you are in a hardship.


The whole program is going to force people who can make payments or are struggling to make payments in order to protect their credit stop making payments and decimate their credit. Anyone who participates will see their FICO score plummet. I know that FICO scores aren't public, but should someone be punished for potentially the next five years in order to get in line for a program that may NOT even help them? This is just stupid.

Temporarily lowering the interest rates to 1 or 2% and or increasing the loan term to 40 years (which doesn't lower the mortgage by much but increases interest by a ton) sounds very similar to the crazy, ridiculous loans that were offered that got us into this situation in the first place. It doesn't solve the problem, it kicks it to the future a few years. What happens when the rate adjusts back to the original rate? This isn't a fix.

Why in the heck would you require that someone already have escrowed real estate and insurance? This makes no sense and I'm hoping its being misreported. Think about it - exclude someone because they chose to pay their taxes and insurance on their own........yeah, real smart. They could simply require that taxes and insurance are escrowed as part of any loan modification.

The last thing is what is really stupid - a signed affidavit of hardship. Listen to the circular logic here:

The economy is in a free fall because of housing. Housing is in a free fall because of foreclosures. Foreclosures are accelerating because housing is in a free fall and people owe a lot more than their home is worth. In order to stop foreclosures and help the economy we've got to help homeowners.......errgo..........lets only help those who will sign an affidavit of hardship.....what?

How about this - owning a home worth half what you paid for it is a hardship - think that is acceptable, they will tell you no.

So if you can make your payment, but are disgusted by the mortgage industry that gave tons of people loans that they never should have been given, which artificially drove up the price of the home you bought in good faith (and could afford) you are not eligible for help. Forget the fact that you could walk away and the lender would be stuck with a huge loss. Forget the fact that these people are more than willing to negotiate, but will walk if ignored and forget the fact that they are the best hope for the lenders long term.

It seems the brightest people in the room are really just a bunch of emperors with no clothes.

When you make a bad loan you should pay the price - that way you don't do it again. The lenders don't seem willing to admit that they are responsible for this mess and its high time they take that responsibility, share some of the loss and start cleaning things up. This "standard" that FHFA put forth is the typical of government standards - Mediocre.

The lenders don't want to face the music and the government is trying to prevent them from facing the music because of capitalization issues.

Today's announcement will be soon forgotten as the government quickly finds its a stupid solution that will put more people even closer to foreclosure. Three months from now they'll put forth another stupid solution, then maybe a year from now they'll actually do what is needed........of course they could just listen to Sheila Bair now.


Scott Dauenhauer CFP, MSFP, AIF