The Commerce Department yesterday reported that corporate profits grew in Q4 of ’05 14.4% over Q3, the strongest rise since 1992, which we recall as the time of the dawn of the greatest bull market in US history. Shaking off the quintuple threats of intense global competition, the most vicious hurricane season ever, rising interest rates, the wars in Iraq and on terrorism, and record levels for commodities prices, especially oil, those inventive Americans still found a way to turn a buck. Clearly this arguers well for our economy, and for stock prices for major US companies, which, as you may have noticed, I expect to be on a tear this year, by cracky!
Monthly Archives: March 2006
FREE report: Grade Your Investment “Advisor”
If you’ve read this blog for any length of time, you’re used to my ranting about the purity of fee-based advice over the product/commission kind. Sadly, the state of the investments industry’s spin-machine is such that most consumers don’t ever get the information they need to tell the difference: most think (and are allowed to believe) they get objective advice, but in reality get severely conflicted product pitches and little real ongoing management. If you already a client of Camarda or another fee-based, non-“Merrill Lynch Rule” investment advisor, you already know the difference. If not, or if you don’t know, I’ve written a report I’m very proud of, called “How to Grade Your Investment Advisor.” This is strictly an academic-grade paper and is not marketing material of any kind. If you would like one for yourself or someone you care about, call us at 800-262-1083, or go to camarda.com, and click on the button that says “Get a FREE Report.” Hope you find it useful!
What do YOU think? Comments, please!
Thanks to all who’ve told me how much you enjoy this blog. I want each of you to know that your comments and feedback are very much encouraged, and I want you to be able to share your thoughts with me and with other readers of the blog. At the end of every post in the gray-shaded area there’s a window (or a shortcut to a window) to add a comment, and these are supposed to show up within a few hours. Jack, I know you told me last night you were having trouble getting your comments to “stick”, so please go to the gray area (sorry) and try again; if it does not work, let me know at jeff.camarda@camarda.com, and I’ll get the tech folks to fix it. If you include your un-post-able-comments in your email, I’ll put them in myself until we get it right. Ditto to other frustrated commentators. And, please, let us know via either channel what you think! We all want to know, and your interaction is what really breathes life into the blogosphere. After all, you can only take so much of my overdry, perennially pugnacious pontifications, without another viewpoint, right? Please, share your thoughts. Thanks.
Real estate sales tips – avoid these pitfalls!
Even a real estate investor with a little bit of experience like me gets lazy and misses a trick every once in awhile, and you may be able to profit from my errors if you plan to sell real property. These unfortunate events transpired during the recent sale of 5 rental properties to be “1031’d” –exchanged tax deferred – into an office building. On two of the rentals, the buyer outright reneged, after stalling for weeks after the deadline, leaving me furiously impotent. On two others (on one of which I expensively replaced a roof unnecessarily at the buyer’s insistence) the buyer’s banks baulked at the very last minute; these closed, but barely. These performance hiccups on the part of these buyers caused us all sorts of expense, angst, make-work, and risk of defaulting on our own buy since the sales proceeds were not forthcoming. Prudently, we had made other arrangements to be sure to be able to honor our commitment. But I learned a few things, again. 1) Be sure to get a large enough deposit to be made whole (like to cover that roof, or lost sales) in the event the buyer bags; too many buyers want to get away with $500 or $1000, and too many sales agents are willing to convince you this is enough; 2) Make sure that you get this money if the deal goes bad; most “standard” contracts protect the sales agents, and deposits go first toward commissions and other expenses, leaving little or nothing for you (who may wind up losing a good buyer while the deal is tied up with a deadbeat); 3) speaking of standard agreements, forget them, as in my experience they are needlessly complicated and rarely protect buyers or sellers properly; get an experienced attorney you trust to provide you with your own template agreement, and use it instead; the agents will grumble, but use it if you insist; 4) read every word, twice, by yourself, not with the agent breathing down your neck; what seems like an OK provision in the heat of deal-making can have serious consequences, which you should consider before getting hitched up.
SPECIAL REPORT: Markets Update
As many of you know from reading my blog or from my personal comments to you, I have developed a great sense of hope that 2006 may prove a huge year for the major US stock markets, and especially for Camarda’s ISIS™ clients.
2005 was a mediocre year at best for the average investor, though Camarda clients fared far better. This was because most investors, DIY or “advised,” concentrate on large US companies, and ignore most else. Well, last year, US large caps did pretty poorly, with the S&P 500 up less than 5% (before any fees or commissions) and with the Dow Jones Industrial Average (what everyone seems to look at) actually down a bit for the year.
Camarda stock investors did much better, nearly twice as well as the S&P 500, and that after all fees and other costs. Those of you who read me often know the reason, and for those that don’t, here’s a synopsis. ISIS™ is based on Modern Portfolio Theory, a proven, Nobel Prize-winning method to reduce risk and enhance returns. The thesis is that if you get enough types of investments or markets (“asset classes”) that move in different cycles, and mix them judiciously, you can get some of the risk to cancel out (since everything should not go down at the same time) but not miss out entirely on hot markets when they find themselves in the best part of their cycles. That judicious mixture is the key, really, and harder to ascertain than it looks, which is why ISIS™ has been blessed to outperform superficially similar programs built by much larger companies on a fairly consistent basis. Their pretty color pie charts may look slicker than ours (but we’re working on it) but at the end of the day risk-controlled performance is really all that matters, and we feel most fortunate with the numbers our ISIS™ has posted (these are updated timely and available at camarda.com).
Anyway, last year, once again, some of the asset classes we use did extremely well, such as international stocks (big foreign companies like ING and UBS), and especially emerging markets (developing countries like India, China, Russia, Mexico, and so on). Large US companies were not among them, but this is likely to change this year, in my view.
Consider:
· US large cap markets have been making news this year, and already done quite well, but are still well off their highs posted at the end of the last major bull market, when me met the millennial bear, who began mauling investors fully six years ago. This is a very long time for an asset class to be down, and the time for new highs – DOW 12,000, 13,000, and well beyond – is near if only for purely technical reasons. (NASDAQ is a special case, as speculative valuations became so detached from underlying economic reality that it will probably take this index much, much longer to even approach its 3-00 highs).
· The US economy is very healthy, and likely to remain so, having been tempered in the fire of the triple impacts of 9/11, war (which ain’t the economic elixir it used to be now that ours is mostly a service economy), and massive increases in petroleum and materials prices.
· Corporate profits are up, stable, and expected to grow. Rational investors buy stocks for the corporate earning power they represent, and large US stocks are still pretty cheap when looked at from this perspective. (Those crazy NASDAQ investors never did, which is why the “special case”).
· The slowly deflating real estate bubble has created an enormous amount of wealth, distributed pretty well across the investing population. A lot of this money will flow out of markets now-well-recognized to have peaked, and it won’t go into 5% CD’s. Large US stocks (for better or worse) are the only stocks known to many investors and the professionals who serve them, and recognized as having the potential (unlike those CD’s) to offer nice returns. That they are cheap and a good place to park capital is slowing dawning.
· The monstrously large baby boom is starting to gray fast, and becoming desperately cognizant of the need for a liquid (unlike real estate) place to grow money and get income. Again, when they think stocks, they think big US companies like GE and IBM.
· Finally, interest rates are quite low from a historical perspective, and likely to remain so for a long time, even as they edge up a bit. The Fed seems satisfied with the inflation outlook, will probably stop raising short term rates soon, and has become less effective in affecting longer term rates in the face of global forces. Given the massive and growing US trade deficit (which I do not think a bad thing), our trading partners have a strong interest (to keep their currencies low relative to the dollar) in buying US investments with the dollars they get in trade, instead of “cashing out” into their local currency (thereby driving their currencies – and the prices of the goods they export to us up) and can be counted on to keep devouring US government bonds, keeping rates low. Even countries not major US trading partners are getting wealthy, fast, and still consider our country to be the very safest place to invest their surpluses, and so for the same reasons can act to keep rates stable. Low rates serve as a double catalyst, both making it easy for corporations to make money and so justify high stock valuations, and keeping low-yield alternatives which compete for capital with stocks, like bonds and CD’s, distinctly unappealing.
· Some of these massive capital flows from offshore will find their way into “big name” US shares, boosting our large caps.
So, I guess you now know where I stand. Since ISIS™ is a strategic system; we will not shift clients’ funds into more heavily into US large caps based on my feelings. For one thing, I could be wrong. For another, our determination to stay the course and not react to the tactics of the day has served us and our clients remarkably well, and we will stay true to the strategy that has performed so well over our entire history. But the majority share of ISIS™’ equity allocation has always been to large US stocks, and I expect these pieces – and hence your ISIS™ portfolios overall, to really shine this year, for many reasons.
My predictions for other major asset classes:
· Emerging markets: continued growth overall, but at a more modest pace. Will lag US large caps. Look for some painful corrections in red-hot markets like India, Russia, South Korea, and so on.
· International: continued growth overall, but at a more modest pace. Will lag US large caps.
· Commodities: continued growth overall after the recent correction, but at a more modest pace. Very subject to the geopolitical uncertainties of petroleum prices, but the insatiable appetites of the new manufacturing titans like China will keep prices growing.
· US small caps: modest growth, but a correction is coming this year or next as these stocks come off their recent record highs.
· US mid caps: modest growth, but a correction is coming this year or next.
· REITS (Real Estate Investment Trusts): continued growth overall, but at a more modest pace. While this may appear in opposition to the softening real estate markets (and my blog’s prognostications of falling prices) remember that for the most part these are companies that actually operate (instead of speculate on) real estate, and should actually do better as consumers of residential and commercial real estate become more fearful of falling prices and elect not to buy and decide to rent instead. The rental market’s prospects are actually quite rosy in my opinion.
· High-Yield (“junk”) bonds: good performance even with slightly higher interest rates as the economy favors profitability for the shakier companies that issue these.
· Investment-grade and Treasury bonds: mild price declines in step with mild interest rate increases. Longer maturities will fare slightly better.
· Money markets: cash rates have already gone up a considerable amount, and will edge up slightly. By definition, there is no principal risk (unlike for bonds).
Once again, I could be completely wrong on every point, which is why we’ll keep our clients’ money astutely spread around, like we always have.
- Jeff Camarda
Some brokers still pitching spitballs
I got an interesting and disturbing call while working one evening at my firm, Camarda Financial; the fellow in question had to get through our phone mail “after hours” system to reach me. He announced himself as working for a stock-brokerage whose name was a single plurality away from a powerful and well-known Federal agency, so he immediately got my attention. “Don’t worry, Jeff Camarda!” he said “I don’t work for the government! I’m calling to let you in on a remarkable investment opportunity that should make you 25-30% per year!” (Mind you he had to get through the phone mail and greeting of “Camarda Financial, Invest In Integrity” first. “Hmmm, that’s interesting,” I said, “is that guaranteed?” To which he responded, “Hey, you don’t sell investments, do you?” “No, I’m not a stockbroker, and we don’t sell anything.” “Well, nothing in life’s guaranteed, you know that, but this is very safe.” “Is there any risk?” “There’s just a little risk” “And you think I can make 30%?” “That’s 30% per year. I’m sure of it!” “OK, send me some information.” “You’re sure you don’t sell investments?” “Yes, my friend, of that I am sure.” When the material arrived, it described an extremely high-risk oil and gas scheme, bearing a high probability of total loss. The risk of loss was clearly lost on the enthusiastic salesman, but hopefully not on this other prospects, who sadly stood – and stand – to lose plenty.
Hurricanes drive homeowners’ insurance rates up across the country
A perfect storm of premium excess seems to have quietly brewed in the wake of two of the most expensive hurricane seasons ever recorded, appearing back to back in 2004 and 2005, and scaring the insurers so silly that some have left the riskiest markets like Florida in large measure, or altogether, and are seeking to spread their pain across the nation. State Farm – still active in Florida – is seeking premium increases in a “majority” of its 49-state markets to help cover costs when the monster storms come. Markets from New York to Nantucket – regions far from probably hurricane tracks – are seeing insurers like Allstate cutting policyholders, citing big risks. And while hurricane activity has clearly risen (and can probably be expected to stay high for awhile) the human tendency to overreact will probably taint this shift in risk management, as well. We will all likely be fleeced, a little, and pay more than will be needed to cover the extra risks. And some companies will abandon hard-won market share in important areas, which they could and should have profitably kept.
The sexy allure of a good health policy
As a light-hearted example of how chilling the healthcare crisis has become in this country, the Wall Street Journal’s center column (where else?) today probed the growing importance of a good health plan in the overall matrimonial criteria hierarchy for those seeking potential mates. Right up there with looks, money, and personality, coverage the newly-wedded can quickly cleave unto is getting to be the right stuff, and prominently featured by the canny in personals ads. It is sad that such a thing is becoming such an economic driver, a clear warning sign of trouble ahead. Not only will the insurance companies quickly catch on and move to block the marry-for-coverage set, but spiraling medical costs and the consequent shrinking supply of affordable coverage – coupled with the huge demand for health care about to hit as the baby boom retires and ages – will bring the issue to a probably bloody head in the very near future.
Don’t prepay long term care premiums
A fundamental tenant of prudent cash management: getting money sooner is better than later, while the reverse is true when it comes to paying. Lately long term care products have been priced with “one-pay” or “limited pay,” premium plans, giving you the privilege of what looks like paying more, sooner, to avoid paying much more, later. Agents – whose commissions are a function of premiums, the bigger the premium, the more they may get paid – may present enticing reasons to pay more now. Don’t fall for it, and pay premiums for long term care slow, as you go. Why? Lots of reasons. You could probably earn more on the extra money elsewhere. You may die and not need the insurance, but your spouse or children might need the extra money. The insurance company might go out of business, taking your money with it. And so much will probably change in both the insurance and health care industries over the rest of your life, that what looks like a “once and done” solution to long term care will probably get creaky after awhile, and you may want to augment or just replace the darn old thing. Keeping as much cash in your pocket for as long as you can gives you more options.
Get used to the estate tax
Early-Bush administration tax reform, with it’s modernization of the estate tax deduction limits (expressed as unified credits) and promise of ultimate repeal around the turn of the decade, has hit a brick wall rapidly being sheathed in steel: the siring administration, increasing mired in strategic mishaps and sinking popularity, is most unlikely to have the political capital to push its tax reform agenda through to the end. What little (and insufficient) support remained will probably continue to wane through the midterm elections, and disappear altogether as L’Orange is served and a new Presidential menu is prepared. Many folks, entranced by the estate tax repeal drumbeat of the past six years, have assumed this is a done deal. It ain’t, and the “repeal” expires in a few years, unless these particular tax cuts are renewed. And what with the quagmire spawned in the colossal, failed promise of Iraq, its engendered, accelerated bloom of worldwide terrorism, the looming time bomb of Iran, and the coalescing perfect storm of Medicare, Social Security, and the aging boomers, the Feds are going to need every nickel, and then some. As with all American taxes, look for these to go up, not vanish, and in spades.