Wednesday, September 2nd, 2009
As we head into the fall and we look forward toward next year, it is important to take a look at the general econimc landscape, assess the data that we have access to, and develop our views on the performance of our investments going forward.
The following are three high-level economic data points that we can use, along with our other tools, to further assist us determining our views on equity market investments.
1.) U.S. Housing
As the root of the credit crisis, healing in the U.S. housing market is a precondition for sustainable recovery. Recent data has confirmed that the worst is behind us and the residential real estate market is stabilizing.
The inventory of unsold houses while still high is heading in the right direction towards clearing and sales of existing homes have recently turned positive on a year-over-year basis. And an index which measures year-over-year price changes of houses in 20 major U.S. cities (the S&P/Case-Shiller Home Price Index) plunged 33.6% from its June 2006 peak to the April 2009 trough, but has now climbed 1.9% over the past two months.
2.) The U.S. Consumer
The resurgence of the U.S. consumer will be key to watch as recovery unfolds since consumption is 70% of the American economy. Despite the ‘hit’ that the housing crisis has exacted on their net worth, American household balance sheets are still in relatively better shape than they’ve been in the past due to the tremendous growth net worth over the last decade.
However, the process of deleveraging (winding down debt) has begun and this will impact spending patterns in the near-term.
3.) The U.S. Manufacturing
The level of manufacturing has historically followed an inverse path to the Fed funds rate but on a 6-month lagged basis – as the fed funds rate drops, six months later, manufacturing activity picks up.
However, in fall 2008, although rates declined to historically low rates, the credit crunch intensified and that typical relationship between low interest rates and increased manufacturing activity did not materialize. More recently, credit channels have opened up and the ISM (gauge of manufacturing activity) has improved, indicating the economy is finally responding to massive stimulus after a long lag.
And further improvement just yesterday with the latest ISM level better than expected at 52.9 – the first reading above 50 since January 2008 and hit the highest level since June 2007. This is further indication that while not yet normal, the economic environment is normalizing.
These are three key areas of the market to watch when assessing the high-level economic situation and it’s relationship to the stock market trends and valuations.
Of course this isn’t the be all and end all of data you should include in your due diligence, but it certainly plays a role as you calculate your risk tolerance moving forward.
Posted in Investment News | 1 Comment »
Thursday, July 17th, 2008
While I am convinced that some (read: very few) people in the world have the ability to time the market, you and I are not them. That is not meant to be an insult to you, but if you could successfully time the market then you certainly wouldn’t be reading this article.
The Market Moves Mysteriously
Yesterday the American stock market had one of the best days in recent memory. The returns of the major indexes were as follows:
- Nasdaq – 3.12%
- Dow – 2.52%
- S&P 500 – 2.51%
Why do I tell you this today?
You see, yesterday was a great day to be invested in the stock market. However, you would not have known it if you had been listening to the so called “experts”.
Here are some of the morning headlines from major investment news sources:
(Heresy is a dislocation of some complete and self-supporting system of belief)
Fed Worried About Rising Inflation at June Meeting – CNBC
Unemployment rise at 16-year high – Financial Times
Dollar Declines Against Yen as US Banks May Report Losses – Bloomberg
Fed Chief Gives Gloomier Outlook On US Economy – CNBC
Inflation Data Tame Stock Futures – Investors Business Daily
Recession Under Way? – Morningstar
Seeing Bad Loans, Investors Flee From Bank Shares – New York Times
Is Your Cash Safe at the Bank? – TheStreet.com
What Does This Mean?
No, I am not saying that just because I said to stay the course and keep investing in equities yesterday that I am any better at predicting the future than the authors mentioned above. Heck, for all I know the market could lose yesterday’s gains and then some in today’s session!
What I do know, however, is that being a long-term investor is a better option for me than being a short-term trader.
What I am also suggesting is that we have to develop our own investment plans that work for us and stick with the plan. We can’t be bothered by the hype in raging bull markets, nor the doom and gloom sentiment in bear markets. I know as well as you that what I propose is easier said than done, but it is for our own financial well being that we develop an investment plan that makes sense to us and stick to it. Once we start straying from what we know, we are more likely to get burned.
Remember, the above authors get paid to sell papers not to invest your money! Those headlines make them money, but you don’t have to let them lose your money.
Just think about it.
Posted in Investment News | No Comments »
Monday, March 17th, 2008
Each year I contemplate what I should do with my tax refund check from the government, and each year I go back and forth between a couple of options. It is interesting how I can talk myself out of buying almost anything.
Understanding the Tax Refund
In all reality, getting a refund on your taxes is actually the worst thing that could happen to you. I would rather have to pay the government a few hundred dollars each year than get a couple of thousand in return. To the average person this sounds crazy, but it is absolutely true.
You see, the government only returns money to you if you have already paid too much tax throughout the course of the year. In essence, you have given the government an interest free loan in the amount of your tax return! When is the last time you received an interest free loan?
Look At Taxes This Way
What if you could keep all of the money that you pay to the government in taxes for the entire year and invest it? If you were savvy enough to invest this money in a high interest savings account at ING or the like, you could actually earn interest on the government’s money all year long and then make one lump sum payment at tax time – keeping the earned interest for yourself. That sounds better doesn’t it?
What I just mentioned is exactly what the government does with your tax refund dollars. Because you paid too much in taxes over the course of the year, the government gets to invest that money (your money) and earn a return on it.
When you submit your tax return they say…oops! Here you go, this is the amount of money that you over paid in taxes – but they keep the earned interest.
What to Do
Now, I believe that we should go on paying taxes as usual through deductions from our regular pay checks because most of us are not financially astute enough to save the money for a year for the purpose of paying taxes. However, if you are consistently getting large refunds, ask your employer to withhold less from each check.
Wouldn’t you rather have the money in your savings account earning you money instead of giving the government an interest free loan until April?
Each year when I receive my tax refund, which is usually just a couple of hundred dollars no that I have adjusted the amount withheld from my pay, I contemplate what to do with it.
Part of me wants to spend it on something frivolous like a small plasma television for the basement family room or a camcorder to record family events etc. On the other hand, I think I should invest it in a speculative stock that I have been looking at on the chance that it will return 10X over.
I’m still not certain what I will do this year, so it will sit in my savings account for now.
What will you do with your tax refund?
Posted in Taxes | 1 Comment »
