October 2009

October 30, 2009 12:15 p.m.
Is Retirement Unhealthy? And more…

One of the classic rules of thumb about retirement is that men pass away within three years of retiring. Once their careers end, their lives end, was the explanation. That seems tough to prove, given the steady expansion of life expectancy, and has been considered an old wives’ tale for a while. Yet, there are studies that provide some support. Entrepreneurs and executives do have reduced life expectancy if after retiring they do not seek productive and social activities to replace their careers. Read some details here.

The investment markets probably are nearing a turning point. There either is going to be a sharp correction or another leg up. The debate over where the economy is headed and how this will affect the markets rarely has been this hot. Here are a couple of interesting overviews of the debate. This article is a review of the relatively few analysts who continue to see problems ahead. In this video is a bull vs bear debate on the markets with economist David Rosenberg arguing that at Dow 10000 stocks are about 20% overvalued.

A related question is whether the residential housing market is recovering. The data are mixed and arguments can be made on either side. Robert Shiller, considered one of the housing gurus because of his role in the Case-Shiller Index, makes some interesting points in this video. Basically, he said home prices have stabilized but he wouldn’t be surprised if there is another leg down.

Reports continue to roll out describing how the financial crisis and the responses to it developed. Here’s an interesting piece revealing how the New York Federal Reserve decided that AIG had to be bailed out. Also interesting in this article is that key issues apparently weren’t even discussed, such as why Goldman Sachs and other creditors should be paid 100% on the dollar with taxpayer money instead of taking some losses. There is a two-part series from the Seattle Times describing how bad things really were at Washington Mutual and how they came to be that way. Here is part one and here is part two.

If you are over age 65 and looking for work, you are not alone. The ranks of senior job seekers are larger than ever, according to the New York Times. One major reason is that so many of these seniors took out second mortgages to buy things or pay expenses instead of making a debt-free retirement a priority as previous generations did. See the details here.

Estate planning has been in the news lately. First, the son of the late socialite and heiress Brooke Astor was convicted of criminal acts regarding his mother’s estate, as was one of the attorneys. That prompted an article on lessons to be learned from the events. Of course, Michael Jackson and his estate continue to make news. Fortune published a lengthy piece describing how Jackson’s financial troubles developed, along with some smart money moves he made over the years, and how the managers of his estate are turning things around. Who’d have guessed that Paul McCartney was Jackson’s role model?

October 23, 2009 12:15 p.m.
Estate planning, autos, Lehman Brothers, and more

The stock indexes have had trouble forging ahead since the Dow closed above 10000 again. In the first weeks of this quarter’s earnings season, stocks forged relentlessly higher as earnings exceeded forecasts. Earnings continue to top expectations, but stocks aren’t responding. One reason is the classic “buy on the rumor, sell on the news” adage. Investors who expected earnings to be higher this quarter purchased early and now are taking their profits. Another reason stocks seem to be stalling could be investors are studying the earnings reports. Companies in general are not optimistic about the future. They emphasize the profits are due primarily to cost cutting, they expect the cost cutting to continue, and they have limited ability to raise prices. Here’s a summary.

Estate planning failures are among the most depressing financial events. A number of people are affected when someone fails to have an estate plan or has a bad plan. A classic example, which I have written about before involved Jack Kent Cooke and the Washington Redskins. Read about his son’s perspective and some behind the scenes events here.

Ted Turner has been unusually quiet the last couple of years, and I don’t follow him much. But this interview he gave to Bloomberg is worth reading for the last paragraph.

Long-term care premiums are increasing, at least for some policyholders. Those who bought their policies through the U.S. government’s employee program are up in arms, because John Hancock increased their premiums by 25% for next year. The problem apparently is when the employees originally signed up Hancock promised no premium increases for seven years. Unfortunately, the employees believe the government told them there would no increases ever. Hancock says, as insurers do in these circumstances, that the claims experience was very different from its assumptions at the start of the contract. Read the details here.

Medicare premiums also are rising for 2010, by 15%. But most Medicare beneficiaries won’t pay the higher premiums. They are guaranteed not to pay higher premiums if they don’t receive higher Social Security benefits to offset them. In 2010 Social Security’s inflation-indexing results in a 0% increase in benefits. Here’s a summary of the facts.

Andrew Sorkin’s book on the financial crisis is making headlines and selling well. It fills in a lot of the behind-the-scenes action, if you believe his sources. I linked to an excerpt from the book last week. Here’s another excerpt well worth reading. It attempts to answer the key question of the crisis: Why was Lehman Brothers allowed to fail?

One striking feature of this market rally is the dichotomy between investment managers. A number of managers I learned to respect over the years were very cautious leading up to the crisis and saved their investors a lot of money. These managers almost uniformly remain skeptical about economic recovery and the durability of this stock rally. For the latest interview with one of these managers, click here.

We’ve had a lot of success with our portfolio of “hedge fund” mutual funds. Initially I viewed them as an alternative for people who don’t have the minimum capital needed to get into the “real” hedge funds. But as we learn more about hedge funds, I view our mutual fund as better for all investors. For a summary of some of the negative things happening in hedge funds these days, took a look at this article.

The government took over most of the auto industry earlier this year. For a behind-the-scenes look at one man’s opinion of how bad the auto industry was and why action was needed, read this article by the “auto czar” Steve Rattner.

October 16, 2009 04:00 p.m.
More on the Dollar

This week I listened to a conference call by Jeffrey Gundlach, manager of the TCW Total Return Bond fund and CIO of TCW. The call focused on housing, mortgages, and Gundlach’s funds. He thinks there is more pain to come in real estate and mortgages, but that we are moving from a bottom into recovery. Don’t get too excited yet. He thinks the climb from the bottom will be a long, slow one. The subprime mortgage crisis basically is behind us, but defaults are shifting into higher quality mortgages.

Gundlach also had comments on other markets. Back in March he said to be prepared for a strong bear market rally in stocks. Now, he says that has occurred, and he expects it to reverse course soon, perhaps by the end of the year. He thinks the trigger is likely to be a rally in the dollar. He thinks the dollar’s decline is overdone and about to hit a near-term bottom.

The dollar continues making a lot of headlines, because of its sharp decline. Here’s a good summary of the decline and a range of effects it is having. This article points out an often-overlooked aspect of the dollar’s decline: U.S. stocks are cheaper to foreign investors. A continuing decline in the dollar could prop up stock prices.

Another pair of fund managers worth paying attention to are Van Hoisington and Lacy Hunt of the Hoisington funds. They manage bond funds, especially long-term bonds. Their latest quarterly report is up, and they still are gloomy. Here’s a quote: “This suggests our current ?great recession’ may morph into a more serious and elongated downward business cycle.” They still see deflation as the problem and believe long-term treasury bond rates could decline below 2%.

A legend, at least among institutional investors, is David Swensen of the Yale Endowment. Swensen pioneered the use of alternative assets (hedge funds, commodities, private equity). The move served Yale quite well for many years. There was a lot of pain in 2008. Asked in an interview with the Financial Times if he should have gone to cash or changed his portfolio more in 2008, Swensen replied correctly in the negative. The strategy has been quite profitable for a long time, even after taking last year’s losses into account, and the endowment is not a market timer. The endowment took a more conservative posture in 2007, because it saw difficulties ahead. But it did not see the magnitude and depth of the problems. While it would have been nice to anticipate things perfectly and move to cash or even sell short, over the long term that is not going to be a sustainable strategy. Dramatic changes in portfolio allocations are not successful in the long run.

I wrote about changes in reverse mortgages a couple of months ago. In the short time since, there have been more changes. Scamsters are more attracted to reverse  mortgages. Also, new rules and fees are making them harder to come by and less attractive. Read about it here.

Looking for a place to retire? Wondering how health care is in the places you are considering? Take a look at this summary of the best states for health care.

There’s been a boom in TIPS, as our subscribers know. We profited from them without taking much risk. Here is one of the few summaries you’ll find of what has been happening in that market.

Finally, if you are scouting real estate opportunities, blogs that focus on local housing markets might help you. This article reviews a number of them around the country and identifies those is considers the best.

October 9, 2009 01:30 p.m.
The Dollar, Bill Gross, and More

The decline of the dollar is one of the week’s biggest news items. There were a couple of unconventional articles on the greenback’s slide this week.

I’m not a big follower of conspiracy theories, but here’s an interesting one that asks the question, “Who Sank the Dollar?” The pressures on the currency have been known for a while. But the greenback’s slide accelerated after a weekend news article saying there were secret talks among key governments to develop substitutes for the dollar in international trade. The story is weak on sources and details and denied by all those supposedly involved. So, perhaps the story was planted simply to trigger sales of the dollar. Was it from someone trying to profit from a quick slide? Or was it more nefarious, such as an attempt to undermine the U.S. economy? The article raises questions but doesn’t answer any.

The dollar’s decline harms global investors in U.S. assets and could trigger a flight from U.S. markets. For example, here’s a piece showing how much lower returns in the stock rally are for non-U.S. investors.

 Bill Gross of PIMCO made some unguarded comments at a small investor meeting last week. I suspect he didn’t realize there was a reporter in the room. In this piece, Gross was advising investors to buy PIMCO’s closed-end funds instead of its open-end funds. In the other report Gross indicated bonds might not be a good place to invest now and for the next few years. Seek investments with stable income and growth. He likes high-yielding stocks, such as Verizon.

The books reviewing last year’s financial collapse continue to be issued. The latest is from Andrew Ross Sorkin of the New York Times. An expert is here.

Did you know the car you drive tells people about your personality? That’s what this article says.

It is popular to check medical and health information on the web. But you don’t always know how reliable the source is. This article discusses the issue and makes suggestions of safe health and medical sites.

If you are not retired and thinking of switching jobs, maybe you want to work for one of the best companies to retire from. Fortune says it identified those companies and discusses them here.

October 2, 2009 12:15 p.m.
A Turn in the Economic Data

Stocks finished one of their best calendar quarters ever on September. In the less than two days since, all of September’s gains are gone. This could simply be a pause in a strong rally. Or it also could be a reaction to the latest economic reports. The recent economic data have been below expectations. This contrasts with August, when almost all of the data was much better than expectations. Perhaps investors are realizing that while the economy no longer is getting worse, it also is not getting better. The data also raise questions about how much of the economic recovery is due to government subsidies and whether it can be sustained over time.

Investors also might be shifting their attention from the growth rates to the actual levels of economic data. The rates of change from the depths of the despair last fall through March are impressive. But for the most part they show the economy is declining at a slower rate or is rebounding to a low level of growth. As PIMCO’s Mohammed El-Erian says in this article, the absolute levels of economic data matter. Most data is at the same levels as in 2005 or earlier. Unemployment won’t fall, and the rest of the economy won’t be fixed, until levels of income, production, net worth, and other factors rebound.

The economic decline is adversely affecting the Social Security system. Many people are giving up on finding new jobs. They are retiring and taking their Social Security benefits early. Others are retiring on Social Security disability. The rate of retirement is higher than expected, and Social Security is paying more in benefits than forecast. Without economic recovery, the cash shortage in the trust fund will occur years sooner than anticipated in the trustees’ annual report issued only last May. Some details are here.

One of the themes of my book, Invest Like a Fox…Not Like a Hedgehog, is that investors make mistakes. Sometimes a lot of investors make the same mistake, and that causes the markets to make mistakes. Sometimes prices are too high. Sometimes prices are too low. I presented a theory of the process first developed at Stanford University. Here’s another analogy of how the process works. It’s good to see the theory of “rational irrationality” receiving greater attention.

One of my all-time favorite funds, Longleaf Partners, had a tough time in 2008, and now it is bouncing back in a big way. The story shows the importance of developing an investment process based on long-term factors and following that process. Every investment process won’t work at certain times, especially in the last half of 2008. Money managers need to realize that and not abandon their long-followed and successful strategies at extreme times. Investors also need to stick with them. Read more about Longleaf Partners here.

The investigations and reviews of the mistakes that led to the economic collapse last year continue. The Washington Post recently published a report on why the Federal Reserve chose not to regulate subprime mortgage lending as the housing bubble expanded.