November 2009

November 27, 2009 11:00 a.m.
The Next Shoe?

The tricky thing about a financial crisis is you never know what will trigger it or make it worse. Of those who thought the financial crisis was not over, few expressed the thought that a debt default by Dubai World would trigger the next phase of the crisis. But that may be what is happening. A good review of the situation is here. No doubt this will be fast-moving for at least a few days. We’ve been very cautious about the stock and bond markets, because the basic problem of too much debt hasn’t changed. In the short term at least, we can expect a flight to the safety of the dollar and treasury bills. Everything else should decline. What we don’t know is how long that trend will last and whether this will trigger even more defaults or fear or more defaults.

Here’s another potential trigger to a down leg in the crisis. A judge in New York completely voided a mortgage, because he believed the lender were too harsh and aggressive. The borrower was seeking only to renegotiate the mortgage, but the judge awarded him free and clear title to the home. If this spreads, the credit markets won’t like it.

Here’s an argument for reducing risk in your portfolio, written before the Dubai World problems hit the headlines. The basic argument: Stock prices can’t rise much higher than they have since the March bottom. With a decline more likely than more gains, it makes sense to keep risk low.

We were leaders in identifying and recommending mutual funds that use the same strategies as hedge funds. The practice is spreading, as this article reports. Unfortunately, many investors are seeking only one or two of the funds instead of building a portfolio of funds that interact well together.

There is a lot of debate over whether the latest GDP report was good news, bad news, or no news. I think it was a weak report and indicates the private economy still is not responding to all the government and Fed stimulus. If the stimulus is reduced, the economy will slip back to negative growth. Here’s a good review of the full GDP report.

Should China revalue its currency? China has fixed its currency to the dollar with only periodic revaluations. The consensus is that China fixed its currency’s value too low in order to stimulate exports to the U.S. and other developed countries. In this blog two of our top economists debate the issue and make some surprising points.

The banking crisis is not receiving as much attention and analysis as it used to, but the crisis drags on. Each weekend more banks are closed by the FDIC, and the insurance fund apparently has run out of money and is borrowing to cover insured deposits. Here’s a video of one of the top banking analysts summarizing the current state of the banking crisis.

The housing crisis also rolls on. There is a lot of discussion about whether there is a “shadow inventory” of homes because lenders are hesitant to either foreclose or put on the market homes already foreclosed. Now, here’s a report that Fannie Mae is letting foreclosed homeowners stay in the homes and rent them. It’s a creative way to keep people in their homes, at a lower cost to them, and prevent a neighborhood from having an empty home or one selling at a firesale price. But it indicates housing prices still are in a precarious state.

The bailout of AIG continues to be one of the most expensive and controversial acts in the financial crisis. The complaints are that letting AIG default on its financial insurance contracts would not have endangered the financial system, and even if it would have there was no reason for taxpayers to give the contract holders 100 cents on the dollar. They should have incurred losses on their poor investments. Here’s a good review of the different sides of the debate.

Is the economic recovery all in our heads? Is it simply a matter of optimism taking hold, and then people following a trend. Robert Shiller, renowned economist, says we should consider that possibility. The notion that the recovery is based on fundamentals might not be accurate, and knowing that could affect how you respond and invest.

November 20, 2009 01:45 p.m.
Repeating the Same Mistakes

Back in 1998, I thought people learned a lot from the failure of the hedge fund Long-Term Capital Management. The lesson: Using leverage to invest in thinly-traded securities is not a good idea. The price could fall shortly, triggering a margin call or a requirement to repay the debt. The asset can’t be sold at a reasonable price, because the market for it is so small. Lesson two: Banks shouldn’t lend to investors who didn’t learn the first lesson.

Instead, what banks seem to have learned is they shouldn’t lend to hedge funds who buy illiquid assets with debt. The banks believed they should make those investments themselves.

We’re seeing mistakes repeated now. Today, CNBC’s web site carried a story of a group of folks under 30 who bought a two-unit apartment building for $1 million with almost no money down. They had no money and no assets. Yet, the loan is secured by the FHA, as are most of the loans made today. FHA is lending to homeowners, requiring down payments of 5% or less to prop up the housing market. It also is lending in wealthy neighborhoods, though it is supposed to aid low-income home buyers. No wonder its financial situation is deteriorating. Read about the loan here.

All these government efforts to reinflate the housing bubble don’t seem to be helping. Just when people were saying the residential housing market is turning around, fresh data raised questions about the state of home prices and sales. The latest data is that foreclosures are at record levels, they are set to keep rising, and foreclosures are spreading through prime mortgages of formerly credit-worthy buyers who have lost their jobs.

Is the latest bubble two-year treasury bills? This video makes the argument that cautious investors continue to pour money into this safe haven instead of either stocks or money market funds. In addition, some investors are borrowing short-term at near-zero interest rates to buy slight longer-term two-year treasuries.

What is the link between stocks and gold? Both have been rising since the market bottom in March. Traditional thinking is that gold is an inflation hedge. But its history as an inflation hedge doesn’t support that. Instead, this article argues gold is a currency hedge. People are buying gold because they see the Fed and Treasury deliberating depreciating the dollar and expect that to continue. The good news is this argument indicates stocks have further to reason, because they are benefiting from the dollar depreciation actions.

re you skeptical of the growth numbers for China’s economy? We’ve reported in the past the views of some who doubt China is growing as fast as reported. It is tough to find China skeptics, but here’s another one. Since China’s stimulus program did a lot to push the global economy out of the doldrums, and China’s growth is a major reason commodity prices are rising, it’s an argument worth paying attention to.

November 16, 2009 01:30 p.m.
A Gift to Retirees Who Plan to Move, and more

You may have heard Congress extended the first-time home buyer credit to keep a floor under the housing market. Did you hear it was expanded as well? The expansion makes long-time home owners eligible for a credit up to $6,500 on the purchase of a new home, and that helps those who planned to move in the near future to a new retirement home. I have more about this in the December issue of Retirement Watch, which will be on the web site this week. Until then, you can credit more about it here and here.

Most investors had it beat in their heads that they should be buy and hold investors. Advocates of this rely on a lot of academic research. Now, there is research demonstrating that adjusting your portfolio periodically generates better results than buy and hold investing. We’ve been advocates of changing portfolios for some time, and I think our results show the benefits. The article calls the portfolio changes marketing timing, but I think it refers to periodic portfolio changes and not frequent trading. For some details of the study, read here.

Another reason to make portfolios adjustments is the poor performance of the stock indexes over the last 10 years, when the Dow first topped 10000. This article compares today with those times and argues stocks are a better value today. But it also shows buy-and-hold was not a good idea for the last 10 years.

In the next Retirement Watch I tip you off to some big changes in the income tax forms for 2009 taxes. You also should be aware that because of the way the stimulus tax cuts were handled, some of you will be repaying all or part of the credit when filing your returns. Learn the details here.

Commercial real estate is the latest hot button issue that causes concern among some investors. It’s tough to find good, objective information on the current state of those markets. One good source is here.

The conventional economic analysis the unemployment rate is about to peak. People soon will be returning to work, and that will give legs to the economic recovery. A different forecast, from someone who has been on top of the economic events of the last few years, is unemployment is likely to surge to 12% or so.

Are you ready for another tax increase? Airlines have held fares steady by increased fees, such as for baggage. Someone in Congress believe these are disguised fare increases, but the federal airfare tax doesn’t apply to them. They want to change the law so the tax applies to these fees as well as the fare. Get the details here.

The investment scandals and frauds continue to be unearthed. The details are depressingly similar in all these “mini-Madoffs.” Here’s an interesting tale of a scandal that hasn’t received much attention but is worth reading about.

I never miss a quarterly shareholder letter from Martin Whitman of Third Avenue funds. You shouldn’t either. Here’s the latest, with some important lessons and commentary.

November 6, 2009 03:30 p.m.
The New Bubble Gets Traction

In the November issue of Retirement Watch, released a few weeks ago, I asked whether we are in a new bull market or a new bubble. Now, everyone seems to be asking the question. It received a prominent headline in the Wall Street Journal this week, and that led to a lot of discussions on the cable business networks. I remain convinced that a great deal of liquidity from the Federal Reserve boosted asset prices, but there are few signs this effort is restoring sustainable economic growth. The stock market remains high, indicating most investors don’t agree with me yet.

The banking system certainly is not back on its feet. Bank failures for the reached reached 115 last weekend and will rise again this weekend when the FDIC closes the latest failed banked. The FDIC fund is close to being exhausted. In Great Britain, Royal Bank of Scotland needs new funds despite a major bailout infusion last year. All banks report rising credit card losses. Low interest rates are all that keep many banks afloat. They pay minimal interest on deposits, and invest those deposits in treasuries or other safe, but higher-yielding securities. It is not a positive picture.

Nobel Prize economist Joseph Stiglitz says these are mostly zombie banks. They aren’t making loans and won’t make loans for some time. They are stifling the economy and taking taxpayer money. This is the price we are paying for not taking strong moves, such as failure or nationalization, last year and earlier this year. See his comments here.

Warren Buffett, despite his big purchase of Burlington Northern, doesn’t seem too positive on the economy. He replaced the head of his NetJets subsidiary and jobs have been cut at a number of other subsidiaries of Berkshire Hathaway. Read details here.

Billionaire Wilbur Ross points out that big problems still are coming in commercial real estate. His views are here. A somewhat opposing view is put forth by Marty Cohen of Cohen & Steers. You can watch a video of his views here.

Medicare premiums will rise for higher income seniors while remaining stable for other beneficiaries. I’m quoted in this article in Forbes that highlights the issue.

Longtime readers know that state inheritance and estate taxes are a major concern for those in about half of the states. These states still have such taxes, and they often are imposed on estates much smaller than those hit with federal estate taxes. For a summary of those taxes, see this article. (Subscription might be required.)

As usual, we have another investigative report on what happened behind the scenes to cause the financial crisis. This one I found fascinating. It is a more detailed look at the actions of Goldman Sachs than the others. It shows that Goldman is a tough business competitor and partner. It also reveals Goldman taking private investment bets that seem to conflict with some of its public actions. Read the detailed, multi-part series here.