Category Archives: Investing

Homes’ Prices Plunge

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Data continues to accrete; the real estate market’s in real trouble. Price declines in August and September were the worst in 38 years, and many experts feel we have yet to see the worst; SunTrust’s chief economist doesn’t expect us to find the bottom until 2008.  (It should be noted that the National Association of Realtors’ chief economist feels that “the worst is behind us” and that it’s time to start buying again; few others share his view). In some markets, the collapse of euphoria to fear is already having ghastly effects:  last week, a waterfront home in Naples brought only $440K at auction, a huge, 36% plunge from its sale price of $690K little more than a year prior.

            A new Wall Street Journal study paints a cloudy-to-bleak picture for Jacksonville: despite its strong employment outlook, Jax had the 7th worst inventory build up of the 27 major metro areas studied (half of those areas with even worse inventory numbers were in Florida; all were in the sunbelt), meaning that homes for sale are stacking up way faster than people are buying them.  Basic supply/demand economics forecasts falling prices, and that is in fact occurring in Jax according to the Journal study. Jax also has the 10th worst “loan payments overdue” score of the group of 27, an ominous sign of more foreclosures to come, which would dump even more inventory on a soggy market, farther depressing both buyers and prices.

            So far the march of carnage is confined to the residential (housing) market, but the first glimmers of trouble on the commercial front have begun to appear as well.

            With few exceptions, this story is playing out across the nation, with a lot of blood yet to be let into the streets of commerce, before optimism and buyers return, and prices start bouncing. US real estate – like NASDAQ before it – had soared to unsustainably overvalued levels by many measures, and the air is rapidly fleeing the balloon; prepare for a nasty landing.

            What to do?  In my opinion, those who must sell (for whatever reason) in the next 2 years would be wise to do so now; swallow your pride, and take what you can get; buyers are getting scarce.  Don’t bemoan that you’ll get less than a year ago; that time’s gone; you’ll still get far more that a few years ago.

            For those who have no need to sell, hang on; prices will dip scarily before eventually rising again; they always do.  Investors should carefully evaluate their “cost of carry” (interest, taxes, maintenance, lost rent/vacancy, and the opportunity cost of what the capital could earn elsewhere if not time up in real estate) before making this determination; adding your carry costs (as you properly should) to what you have “in” the property can give you a very steep price-hill to climb, indeed, to eventually walk away with a profit.

            Those few who still wish, like me, to buy? Stand pat, and keep your wallets dry.  The gettin‘s gettin’ to be a whole lot better. As this thing unwinds, buyers will again wield incredible pricing and negotiating power. You should be able to get a whole lot more for a whole lot less, on your terms.  And make a decent “cash flow” return on the rent, something that has not been  widely possible with the bubble prices we’ve seen over the last many years.

Stocks soar on large cap rotation – a huge 2006?

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I hate to say I told you so (almost as much as you hate hearing it) but, well, I did.  In January of this year (check my forecasts here on this blog) I predicted a resurgence in the major US stock markets, which have for awhile been outpaced by foreign equities, to be led by the largest American listed companies, which have languished these several years past.  Apparently, no longer. The DOW 30 made a new, all-time high on Tuesday, then soundly punched through it to major gains and another record on Wednesday. While the balance of 2006 has yet to unfold, I continue to be wildly optimistic amid a flurry of giddy facts:  1) Even with the new highs, we’re still about where we were way back in January of 2000, nearly seven years ago.  After inflation, we are actually down 20% in real terms. Other major indexes are still behind even before inflation, with NASDQ far behind. It is time for a major move upward.; 2)  Recent economic data  point to balanced, “Goldilocks” growth and lower interest rates on the horizon, along with lower commodities prices (looked at how gas is dropping?) prices, all great for stocks and the economy; 3) We are now looking right down the barrel of the 4th quarter, historically the best time of year for stock gains.  The drivers of points 1 and 2 could really supercharge the Q4 rally that I expect. Of course, I could be wrong, which is why we spread our clients’ investments over many different asset classes, to control risk.  But I expect that I am right, and that it will be a very merry Christmas, and a happy new 2007, indeed. Cheers!

September bull?

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The markets continued to rally right through the fizzle that was Ernesto, bringing us, as of the 9-1 close, to these results, all 2006-year-to-date. DJII, +7%. S&P 500, +5%. Russell 2000, + 7.2%. And while NASDAQ continues to hover at about break-even, foreign (EAFE) keeps on humming, + 12.6%. The Fed’s recent decision to hold rates level – halting inexorable increases announced at each Fed meeting spanning several years – bodes extremely well for both the economy and the markets, and recent data seems to confirm the “enough” decision and heralds a soft-landing” return to the sweet “Goldilocks” times of “not too fast” and “not too slow” economic expansion. The calends of September – historically one of the worst months of the year for the markets – bode well.

American Funds spanked with $5M fine

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American Funds, that darling of many retail brokers, was fined five million dollars by the National Association of Securities Dealers for rule violations “prohibiting mutual fund distributors from directing trading business to brokers as a reward for selling their funds.” The rule dates from 1973.  From 2001 to 2003, American’s parent paid some $98 million in commissions for trading within its mutual funds to brokers; “target commissions” were declared by American and allocated in advance to “top selling retailers” of its funds.  In exchange, the NASD claimed, American Funds “expected to have enhanced access to the broker-dealers’ sales staff, and have its funds listed as ‘preferred’ or ‘recommended’ by the retailers…’precisely what the (NASD’s) rule was intended to proscribe.’”  The gist of all this is that the brokers in question were being paid extra to push this particular vendor’s products, and that “recommendations” were clearly tainted by self-interested compensation elements.  American, of course, is by no means alone in this situation.  The lesson?  Once again, examine conflicts of interest zealously, and be especially vigilant when commissions (which include fee-based arrangements) form any part of an advisor’s compensation. 

Markets Update: Modern Times

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It’s been several weeks since my last post, and much had occurred while I was away.  What is striking is how little impact some quite grave events – Britain’s foiled airline massacre, and the Israeli/Lebanese abyss-teetering – have had on the markets, notably including the stock, gold, and oil markets.  In my view, this only underscores a belief I’ve held for some time:  the markets have learned to discount the dastardly risks that seem a hallmark of the dark times in which we live.  The sad reality is that horror on even a grand scale has notably little impact on economic activity, and the near-certain prospect of more to come – short of a nuclear event – is wisely shrugged off by investors and other participants.  That said, the stock markets have staged a nice little rally in August, bringing us, as of the 8-28 close, to these results, all 2006-year-to-date.  DJII, +5.3%.  S&P 500, +3.6%.  Russell 2000, + 3.9%.  And while NASDAQ continues to languish at –3%, foreign (EAFE) keeps soaring, + 10.7%. 

More Tales from the Boiler Room

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A client was recently prospected by a CFP®-holding rep from the securities arm of a major financial institution, who purported to offerfee-based, fiduciary advice in competition with my firm, Camarda Financial.  When we pealed back the covers, we found profound lack of disclosures, inappropriate and misleading performance comparisons, offers of commission-paying products infee-basedclothing, and other improprieties. What was presented (and purchased by the client) as a “tax-free 7 day money market account” turned out to be a fairly complicated bond-derivative arrangement that could be liquidated “immediately”, later translated as “just as soon as we find another buyer” for the client’s position. When this was pointed out, the client said “I’d have never bought it if I’d had known that.”  The securities rep (read commission salesperson) posted on the trade confirmation was not the CFP® who brought the “idea” to the client, and the client said they had not heard of this rep; his appearance on the ticket confirm is a mystery.  When softly questioned, the CFP® claimed all advice was fiduciary and without commission interest.  Perhaps in his mind, but the facts might argue otherwise.  And the muck goes on…

Summer storms for markets

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After June rallies that erased much of the second-quarter’s dips, markets have headed lower again through the first half of July, again wiping out 2006’s gains for many indexes.  While it is disappointing that the impressive rally with which the year began seems to have sputtered, it is important to remember that for most of us, this merely means that we are close to break-even in most markets for the year, which is not such a bad thing, after all, and not so unusual for the midpoint in a trading year.  As we head into the laziest part of the year’s trading cycle, it is good to keep this in mind, along with our hopes for yet another fall rally to drive 2006’s results into the happy end of the record-book.

Tales from the Boiler Room

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I was recently required to take some continuing ed, and the online exam contained a number of inaccurate and industry-biased questions and answers, the worst of which was this:

 
“Your client is interested in hearing about how a permanent life insurance policy can help cover her son’s college education in 12 years. Which selection best explains the basis to this popular use of life insurance?

  1. Federal law permits up to 10 percent of a taxpayer’s total life insurance death benefit amount to be withdrawn from the policy to cover college tuition expenses.
  2. Interest realized on the cash value may be distributed to the contract owner for college funding purposes.
  3. In addition to the premium, a contract owner may pay an extra amount that is diverted to a special tax-free savings account.
  4. Favorable tax law permits borrowing from the cash value without incurring income tax liability, in most cases.”

 
The “correct” answer is “4.” But both the question and answer wrongly imply that a life insurance policy is an appropriate funding vehicle for college, when in fact such insurance is only appropriate for funding death benefits.  It also wrongly implies a likely “profit” after “only” 12 years. It is sad that such biased study programs are not only approved but actually required by at least the government of the state of Florida.

PE’s plunge, stocks on sale

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In yet another indication that US stocks may be ready to run, the “quality of earnings” of stocks seems to be trending up as midsummer approaches, tipping the markets closer toward the bargain category than they have not seen by this measure since 2002 – the worst year of the bear market, and the year before the momentous run-ups of 2003 (which still stand as the best year of the century).  Earnings “quality” or “purity” means that the profits come more from the repeatable, core operations of the business, and less from tangential factors like real estate sales or accounting tricks. Coupled with the fact the average price/earnings ratio of the S&P 500 stands now at about 14 – compared with a historical average of something like 18 – this may mean that stocks are getting cheap indeed:  the lower PE means you get more earnings per dollar invested, and the higher quality of earnings means the earnings are worth more than they have been in the past – which lowers the effective PE even more.  All of this argues for sharply higher prices for US stocks, despite higher interest rates, as Camarda has been expecting since early this year. 

God, how I hate annuities!

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Clients’ recent business sale – for some pretty big bucks – gave me cause to take a hard analytic look at an annuity, for the first time in a couple of years. In prudently checking out several options for the stewardship of the newly-liquid substantial wealth, they wound up speaking to a broker from a major wirehouse, who presented three proposals for consideration:  a commission mutual fund, a fee-based program, and a modern variable annuity.  In the course of analysis, I found issues with all three proposals – largely dealing with the difference between “incidental” and “fiduciary” investment advice, as explored by this blog before – but the annuity numbers really set my wig to spinning. The annuity product is manufactured by a major insurance company, and of course came slickly-packaged and smelling, at first whiff, even better than sliced bread. I found a number of expense, tax, and management caveats, as expected, but at the last moment, when about to put the whole folio into my briefcase for the weekend, was for some reason moved to run some of the proffered  “hypothetical” projection numbers myself.  This hypo used some pretty optimistic (and I think unrealistic) investment return assumptions, and I wanted to see what would happen if they used those and the same withdrawal assumptions in a non-life insurance contract environment.  Predictably, I was appalled. Each year of the 27-year run, they had far, far less money under the annuity than if they had used even very expensive mutual funds – and this before the higher taxes imposed by annuities. This was significantly true even after considering the additional “value” of the annuity death benefit, which, by the way, you have to die to “enjoy.”  Best case?  After 5 years, 41% worse, alive, 17% worse, dead.  10 years, 33% worse, dead or alive.  15 years?  49% worse, dead or alive.  20 years, 60% worse – that’s 400K instead of a million – dead or alive.  At the 27 year end of the projection, the annuity provided some 74% less value, with the dead actually slightly worse off from a dollar perspective. These are major differences, far too profound to ignore, though sadly, in today’s world of gee-whiz spreadsheet marketing, far to easy for even the wise to easily catch. To be fair, annuities do offer some protections related to the life insurance nature of the contract, but these protections come at much too high a price, and can be pretty simply duplicated if desired in other ways.  The bottom line?  Take annuities pitches with a sack of salt:  the cloths have changed for the modern age, but the wolf remains the same.