Equity prices are about where they were a decade and more ago—ignoring dividends. Therefore, could it be so easy as to say that no rational investor would ever invest in equities? But, might not a rational investor first inquire about the value of equities now? Might not the rational investor inquire how much higher the earnings and dividends of America’s non-financial companies are now, compared to where they were ten years ago, even as stock prices have, on net, languished?
If not, I guess there was no chance of the article mentioning Jeremy Siegel’s 2009 work on the other thirteen ten-year periods since 1871 in which equities provided no return. He found that no subsequent ten-year period returned less than ten percent after inflation (vs. the average 6.6%). The two ten-year periods of no return before this one—which ended in 1935 and 1974, respectively—ushered in periods of far-above-average returns, for there is nothing in the world as productive as the entrepreneurialism and innovation of American business after it’s been beaten down.
With this permanent increase of deposit insurance coverage to $250,000, depositors with CDs above $100,000 but below $250,000 will no longer have to worry about losing coverage on those CDs maturing beyond 2013. We strongly encourage all bank depositors who have questions about their insurance coverage to go to our Web site at www.fdic.gov
1. Helping Joints Re-grow Themselves – Biomedical engineers at Columbia University Medical Center have implanted a joint-shaped scaffold infused with a growth factor protein that allowed rabbits to begin using their injured forelimbs again in one month. At two months, the animals moved almost as well as similarly aged healthy rabbits. The study is the first to show that an entire joint can be repaired while being used. In the study, the researchers first imaged the damaged forelimb joint and then created a three-dimensional picture of it. They used a bioprinter to “print out” a precisely accurate, three-dimensional copy of the joint, but criss-crossed it with tiny interconnecting microchannels to serve as a scaffold for new bone and cartilage growth. Source: KurzweilAL
2. Intel Turns to Light to Transmit Data Inside Computers – Intel on Tuesday announced it had developed a prototype interconnect that uses light to speed up data transmission inside computers at the speed of 50 gigabits per second. Intel researchers said that the optical technology could ultimately replace the use of copper wires and electrons to carry data inside or around computers. An entire high-definition movie can be transmitted each second with the prototype, the researchers said. Source: PCWorld
The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®. This week, Host Laurie Siebert, CPA, CFP® will be joined by Rod Young, CPA/PFS, CFP to discuss Strategies to Prepare for College Costs. Laurie will take your calls on this subject and other financial planning topics at 610-758-8810. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton/Phillipsburg area; and, it is broadcast on FM 93.7 in the Fogelsville/Macungie area – or listen to it online from anywhere on the internet.
I watched a scary movie this weekend, “Repo Men”. The movie was not hair-raising, frightening, or terrifying in the normal sense. It was alarming because it raised the issue of, in the not too distant future, how will society pay for the medical discoveries that will come. In the movie, consumers are faced with incredibly huge costs to buy life extending medical devices. They agree to outrageous repayment terms in order to purchase an extension on life. The movie reminded me that neither our medical reimbursement system nor our laws are ready for the medical advances available to us in the upcoming decades.
Situation: In 1980, a first-class postage stamp cost fifteen cents. This year, it costs forty-four cents, and the Post Office is asking for permission to raise it to forty-six cents next year.
Thirty years may seem like a long time—and it is. But it’s just about the average joint life expectancy of today’s average retiring couple: a 62-year-old man and woman who don’t smoke. In plain English, that means that one of those two people will need to be drawing an income from her investments thirty years from now…after thirty years of living the reality that every year, just about everything you need to buy will cost more.
My Advice:
Another look at our two imaginary stamps will tell you what the problem is. It’s that, although erosion of purchasing power may be both slow and mild over any year, or even any few years, over decades its compound effects may be very significant.The central problem in modern retirement income planning is the creation of an income that rises through the years at something like the rate your cost of living is rising, so that increased living costs may be largely offset, over time, by rising income. Continue reading for more information about this point.
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How does one go about the creation of an income that rises through the years at something like the rate your cost of living is rising, so that increased living costs may be largely offset, over time, by rising income?
This is a very important point—indeed, there are those of us who think it’s the one critical question—but it begs a couple of more important questions. Namely: what do you think money is, and how do you feel about money?
These may appear to be two ways of asking the same question, but they’re not. How we define money and how we feel about it are two different issues. But they do have one very important thing in common, and that’s that for most of us, the answers are unconscious. They were laid down so long ago, and it’s been so long since we re-examined them, that they form the basis for our essential money attitudes. But what if, through no fault of our own, those old answers have become wrong, or were never right in the first place?
Let’s start with our definition of money. For most of us, our money is the number of units of the currency we own. Our idea of money, therefore, is that it is fixed and unchanging. A dollar is a dollar is a dollar. Many or most people are quite capable of maintaining this attitude, without a flicker of anxiety, even as they look at the two stamps.
But if you drag your definition of money out into the light, while looking intently at the two stamps, you may suddenly not be so sure. Indeed, you may say, “A dollar is a dollar is a dollar until a year from now, at which point (historically) it’s down to about 97 cents. And the next year it’s down to about 94 cents. And so on…”
Once you have this epiphany, you are a pickle, and you can never go back to being a cucumber again. Because what you have intuitively stumbled upon is the realization that,in the long run, “money” is better defined in terms of purchasing power rather than in terms of how many units of the currency you have. In other words, “money” turns out, over time, to be not a number of green pieces of paper, but what they will buy…or not buy.
Where, then, did we get the idea that money and currency were interchangeable concepts? For that answer, return with me now to those thrilling days of yesteryear: 1948, the year AN AVERAGE now-retiring baby boom couple was born. And ask yourself: to whom were they born?
The answer is that they were in all probability the first or second children of a young couple, still just starting out in life after he returned from the war, who were born between, let’s say, 1920 and 1925. And what do we know about those young people? We know that, being between the ages of about five and ten,they were terribly and painfully aware as the Depression enveloped them and their families. It hung on all through their adolescence, and didn’t really loosen its grip until war came.
These were people who knew the value of a dollar. (Indeed, between 1930 and 1932, the value of a dollar would actually rise, in the only three consecutive years of deflation in the twentieth century.) When, in time, their children came along, they were taught the lessons of the Depression: you don’t borrow, you don’t buy stocks, and above all you keep your money “safe” in guaranteed places like FDIC-insured savings accounts, because—just as it did last time—the Depression could come back without warning.
That is, today’s retiring couple was acculturated, from earliest life, to two ideas: (1) a dollar is a dollar is a dollar: money as currency, fixed, immutable and of constant value; and (b) fear—nay, stark, nameless terror—where money was concerned.
Those answers, like all our essentially unconscious fundamental ideas received in childhood, may still be there. If they are, and we leave them unexamined, modern retirement may turn into a world of hurt.
That’s because, given the definition of money as currency and the terrible fear of loss of principal as we grow older, we will instinctively tie up most or all of our retirement capital in the “safest,” most credibly guaranteed fixed-income investments. We will make sure, in 2010, that we will always have enough income to buy a forty-four cent postage stamp—and everything else we need to buy, at 2010 prices.
Then, next year, if the Post Office has its way, stamps will cost forty-six cents. And we may very well find that the prices of most everything we need to buy will have gone up as well. Then, in 2012, this will most likely happen again. And then again. And so on, as we try to cope with rising living costs on a fixed income.
Trying to fight off thirty years of rising living costs with an essentially fixed income isn’t rational. Indeed, that’s the whole point of this little essay. Given the earliest acculturation of today’s retiring baby boomers—equating money with currency, and seeking to protect not our purchasing power but the number of currency units we have (and the essentially fixed income there from)—we may set ourselves on a financial downward spiral. And that downward spiral may go on not for years but for decades.
Had our parents not lived through (and indeed been formed by) that most searing episode of deflation, and if they’d had even an inkling that we might need retirement income for anything like three decades, they surely would have advised us differently. But they couldn’t, because they didn’t. That’s why it’s critically important that today’s retiring boomers revisit these two issues.
That is why, I, as your financial advisor, am there for: not to guess which way the market will zig or zag next, but to empathetically (and even therapeutically, if you will) help you reframe these two critically important questions: how are you defining money, and how do you feel about it? Source: Nick Murray
Feel free to contact me if you or someone you know has this type of situation. Financial Planning advice presented here is general in nature, and individual circumstances make applying these general rules tricky; thus, the above answer cannot be applied to all circumstances because the slightest variation could cause a different outcome.
AT LEAST ONE THING IS CLEAR as August arrives: The threat of a double-dip recession is over.
Stocks ended last week flat, after government data showed U.S. economic growth slowing to 2.4% last quarter from 3.7% earlier this year, and 5% at the end of 2009. But if a double dip is a second recession within a year of the first, then we’re out of the woods—technically.
Of course, the official arbiter of recessions is the National Bureau of Economic Research. But since it strives for irrelevance, pronouncing the start and end to recessions well after the fact and long after people have ceased to care, we must grope for our own markers here. By most accounts, the economy began improving some time in the spring of 2009, but definitely by last summer, as it eked out third-quarter growth of 1.6%. So, unless we’re in a recession right now, a year of growth has passed.
This doesn’t rule out another slump ahead, and lately an entire market seems camped out on Recession Watch. Investors have yanked more than $40 billion from stock mutual funds this summer, and the portion of mutual-fund assets in cash has swelled to 3.8%, the highest since last November. Treasury buyers drove yields to record lows, and companies like McDonald’s (ticker: MCD) and Kimberly Clark (KM) are rushing to sell debt to capitalize on low interest rates. In the stock market, institutional investors are loading up on the kind of discounters that thrive in tougher times, like 99 Cents Only Stores (NDN), while short bets pile up against pricier brands from Abercrombie & Fitch (ANF) to Saks (SKS) and Tiffany’s (TIF), according to an analysis of 190 retailers by Data Explorers.
So far, evidence shows the economy slowing, but not yet contracting. Slower growth by itself won’t spook the market, if it doesn’t catch investors by surprise, so it’s a good thing we’ve been fretting about higher taxes, fiercer regulation and lingering unemployment for some time now. In fact, Strategas Partners’ economist Don Rissmiller says we’re building “a wall of worry around 2% real GDP growth.” And across trading desks, queries are coming in for “QE2″–not the ship, but the best way to position for a second round of quantitative easing to float our sinking economy.
Stocks rebounded from an 11.9% second-quarter drubbing with a 6.9% rally in July, its first monthly gain since April. But it was accomplished on the thinnest of volumes, and the busiest traffic last week was the throngs flocking to watch the Jersey Shore cast ring the opening bell at the New York Stock Exchange. (What next, internships at the Federal Reserve?)
The Dow Jones Industrial Average ended last week up 41, or 0.4%, to 10,466. The Nasdaq Composite Index fell 15, or 0.7%, to 2255, while the Russell 2000 was flat. For July, the monthly gains totaled 7.1% for the Dow, 6.9% for both the S&P 500 and the Nasdaq, and 6.8% for the Russell.
For now, economists’ forecasts for the U.S. economy to grow 2.8% in the second half and 2.9% in 2011 seem too high, and must be cut–as do projections for S&P 500 companies to average a staggering $96 of operating profits in 2011, up from $83 in 2010. But the good news is how the market increasingly discounts these too-good-to-be-true projections.
The adjustment has already begun. So far, three out of four companies have beaten second-quarter earnings estimates, while two out of three are trumping revenue targets. In fact, companies are beating second-quarter profit projections by nearly 11% (or 6% excluding financials)–far better than the traditional 2% margin. Yet forecasts for 2011 are being cut, with earnings for energy and materials companies recently trimmed by 9% and 5.4%, respectively.
It also helps that executives are erring on the side of caution, which lessens future disappointment. ExxonMobil (XOM) saw profits jump 91% as oil prices firmed and refining margins improved, but it issued a modest outlook. Kellogg (K) and Colgate-Palmolive (CL) delivered disappointing sales growth, but Citrix Systems (CTXS), a bullish pick here in February, jumped 15% last week to a decade high, as corporations warm to its cloud-computing and virtualization technology.
Lately, desperate bulls have made a rather fine argument about how corporate profits–and stocks–can still shine even if the economy stinks. After all, companies bracing for a depression in 2008 fired workers and cut costs to the bone. But as the economy recovered, frightened companies remained reluctant to hire and spend. As a result, business productivity has increased at the fastest pace in 50 years, according to Morgan Stanley. Record productivity–a.k.a. an overworked staff–boosts profits, but investors won’t buy stocks if revenues are shrinking. So far, that hasn’t happened.
Profit margins, meanwhile, should stay high “until labor has pricing power,” likely when unemployment falls below 7%, argues global strategist Andrew Garthwaite of Credit Suisse. But when that happens, weakening margins should be offset by a pickup in wages and spending.
So what can extend stocks’ July bounce? Rising Treasury yields and firmer commodity prices will allay deflation fears. A quieter Europe would be nice, as would evidence that China is no longer looking to tighten monetary policy. Cyclical stocks rebounded the most in July, with materials jumping 11.7% and industrials 10%, but utilities and telecom stocks snagged very respectable gains of more than 8%. “We may be witnessing early signs that investors are willing to increase their exposure to risk, notably equities, but in a defensive manner,” says BTIG’s chief market strategist, Mike O’Rourke (Barrons Online).
Foreign Stocks and Bonds both increased this week while U.S. Stocks were little changed. During the last 12 months, STOCKS have substantially outperformed bonds
Returns through 7-30-2010
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
.5
6.5
8.9
7.6
6.0
6.5
US Stocks-Standard & Poor’s 500
-.1
– .1
13.8
– 6.8
– .2
– .8
Foreign Stocks- MS EAFE
Developed Countries
1.5
– 6.7
3.5
-12.8
– .6
– .8
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized. Assumes dividends are not reinvested.
