Is Your Retirement Money Safe?

This week, readers continue to search for answers to their most pressing financial questions. Here are the ones that I felt could benefit a cross-section of our readers:

Question #1
My wife and I are both retired and have our retirement savings in the Alabama RSA1 and federal TSP programs, both of which claim to have low expense ratios. Is it safe to have our retirement tied up in government sponsored programs? J.L.
J.L. is referring to Retirement System of Alabama’s deferred compensation plan which is available to state employees and the federal thrift savings plan which is similar to a 401k plan but for federal employees. Thousands of Alabamian’s are participating in these plans and I suspect many folks have heightened concern about how safe their money is in the aftermath of Jefferson County’s $3 billion default on their sewer bonds. Both programs do a great job of keeping expenses low and both plans are a ‘safe’ place for your money if you are concerned about a default or bankruptcy of some sort. What you should be concerned about under either plan is the type of investments you have chosen. Both programs offer a range of investment options including stock, bond and fixed rate-oriented securities. Both bond and stock-oriented investments can fluctuate significantly so J.L. should review his allocation and make certain it’s appropriate under his and his wife’s retirement status.
Question #2
A few weeks ago I answered a reader’s question about whether, since he is retired, should he keep his 401k with his former employer or roll it over to an IRA? I suggested he could possibly cut expenses and certainly increase his investment options by doing the rollover. Another reader asked this follow up question:
“Are they equally protected legally?  I believe a 401-k is classified as a pension and hence not subject to legal suits.  Is an IRA? I am retired, and understand that only an active employee can get a loan from a 401-K, so that means no advantage over an IRA as to taking a loan out.” M.G.

M.G. does bring up a good point. Defined contribution plans such as 401k’s and 403b’s; Simplified Employee Pension Plans (SEP) and SIMPLE IRAs; defined benefit pensions and profit sharing plans all fall under the Employee Retirement Income Security Act (ERISA) of 1974 and are fully protected against legal judgments except the Internal Revenue Service or a judgment in a divorce (called a qualified domestic relations order or QDRO). Historically, traditional IRAs have fallen under state law for purposes of legal protection. In 2005, congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act which provides that up to $1 million of traditional IRA (or Roth IRA) funds are protected under federal law if you file bankruptcy and 100% of funds rolled over from an ERISA plan are protected as well. However, if you don’t file for bankruptcy, it appears that state law will determine the level of protection for your IRA. State laws can vary widely. For example, according to a bankruptcy attorney I spoke with, Alabama provides for protection for a traditional IRA but not for a Roth IRA (legislation is pending for Roth IRA protection). So, depending on your state laws, leaving your money in your 401k may offer better asset protection. One suggestion is to review your umbrella liability policy and consider increasing the amount of coverage.

If you’d like to have your financial question answered, email me at stewart@getrichonpurpose.com and place Bhm News in the subject line.

Best Social Security Strategies

Eighty million Baby Boomers are headed for retirement and for many, Social Security will be the centerpiece of their retirement income plan. Today, I’ll reveal three little-known strategies that just might put thousands of dollars in your pocket.

First, let’s begin with a few basics. If you were born between 1943 and 1954 you can claim a full Social Security benefit at age 66. Beginning at age 62, you can take a reduced benefit equal to 75% of your full benefit. If you choose to wait beyond your full benefit age, your benefit increases 8% per year until age 70 (called Delayed Retirement Credits). A spouse can choose to receive his or her own benefit based on his or her own work record or he or she can choose to receive a spousal benefit equal to one-half of his or her spouse’s benefit. It’s worth noting that a divorced spouse, who was married at least ten years, also retains both of these options. Finally, a widow or widower may receive his or her deceased spouses’ benefit or he or she may elect to receive his or her own benefit based on his or her own work record. This widow/widower benefit can be taken as early as age 60. It’s within these multiple choices that lay the secret strategies.
Strategy #1: The Widow/Widower Strategy. By way of an example, let’s assume we have a couple where the husband is age 62 and the wife is age 60 and both have worked and therefore each has Social Security benefits. Assume the husband dies at age 62. Should the wife claim a widow benefit or wait and claim benefits based on her own earnings? As a widow she is eligible for 100% of her husband’s benefit if she waits until his full retirement age (age 66). She could begin her widow benefit as early as age 60 but the benefits will be reduced.
She should consider taking her widow benefit, perhaps as early as age 60 and then switch to her own benefits once she turns age 70. This strategy allows her to begin receiving income early while delaying her own benefits thus allowing her own benefit to increase to the maximum amount. It also allows her to make use of both her husband’s benefit and her benefit verses just her benefit.
Strategy #2: The 62/70 Strategy. In this example, let’s assume that our couple is both age 62 and we anticipate that both will live until or beyond their normal life expectancy. Instead of each taking their own benefit early at age 62 or waiting until their age 66 full benefit, the wife takes her early benefit at age 62 and the husband takes a spousal benefit at age 66. Once he turns age 70, he switches to his full benefit and she switches to a spousal benefit equal to one-half of his age 66 full retirement benefit or she continues her benefit, whichever is higher. Remember that if the husband were to die first, the wife would then step-up to 100% of the husbands age 70 benefit! Under these case facts, the earliest the husband can take a spousal benefit is age 66.
Strategy #3: The File and Suspend Strategy. In this example, let’s assume only the husband worked while the wife stayed home to raise the children. Here, the husband could begin his full benefit at age 66 then immediately ‘suspend’ his benefit. The wife then begins a spousal benefit equal to one-half of his full (but suspended) benefit. At age 70, he ‘un-suspends’ his benefit which has now grown to the maximum benefit amount including the 8% per year ‘Delayed Retirement Credits’ from age 66 to age 70.
It’s important to note that in each case example, the individual facts are vital to choosing the best strategy. Particularly in strategies one and two, case facts might drive you to reverse the order of which spouse’s benefit you choose to begin first. You need to ‘run the numbers’ under various options or have your financial advisor assist you in making this decision. Making the right choice could mean tens of thousands of dollars of additional Social Security benefits.
If you’d like to have your financial question answered, email me at stewart@getrichonpurpose.com and place Bhm News in the subject line.

401k’s Dirty Little Secret

In these turbulent financial times, people have lots of questions about their personal finances and investing their money. Here’s one reader’s question:

I have a 401K of a high six figure account and I am thinking of rolling it over to an IRA.
I am retired and feel that this may give me greater options.  I would appreciate your advice.  We do not use this for income.
Thank you for your response,  L.R.
It is often the case that a retiree will leave his or her retirement account with their prior employer after they retire. The reason most often given boils down to inertia…or rather the lack of inertia. If you’ve never opened a new brokerage account and initiated a transfer of funds from one account to your new account you might think the task is daunting, however it is quite easy. The new brokerage firm will help you through the process from start to finish.
The two best reasons for moving your account are reducing expenses and increasing your investment options.
Reduce expenses. What most employees don’t know is that there can be a lot of expenses associated with an employer 401k plan. First are the expenses imbedded in any mutual fund. Known as the expense ratio, they range from a low of about two-tenths of one percent, typically for index mutual funds, to a high of about 2% with the average being 1.3% to 1.5%. In addition to mutual fund expenses, there are also plan administration fees related to required record-keeping as well as, in some cases, consulting fees. In the old days, the employer paid these fees but many companies today pass these fees along to plan participants and these fees can dramatically affect your end results. If our reader, L.R., had $750,000 in his 401k plan and the ‘added’ expenses were one-half of one percent per year, the negative impact could exceed $300,000 over 25 years! If you want to know just what fees you’re paying in your 401k plan, you may find it difficult to get a straight answer because often all of that information may not be available in one place. By rolling your 401k plan over to an IRA, you can eliminate the administrative fees and you’re in a position to choose mutual funds with low expense ratios. Or you could buy individual stocks and bonds and further reduce your ongoing expenses. Be sure to consider a discount broker such as Charles Schwab (www.Schwab.com) or Vanguard (www.Vanguard.com). As I’ve written about many times in this column, I like blue chip dividend-paying stocks where you invest in great companies and hold them as long as they remain great; companies like Southern Company, AT&T, Exxon and Kimberly Clark. These companies have a history of paying good dividends and raising their dividends over time. You’ll need a minimum of ten to twenty companies for a diversified portfolio.
More investment options. Today, most 401k plans do a pretty good job of providing participants a relatively robust list of diversified mutual fund investment options. Still, the list is limited to a few dozen options. Once you rollover to an IRA, you’ll expand that list thousands of options. With investing, more options is a better strategy and you will have expanded your choices beyond mutual funds to include a wide variety of investments including individual stocks and bonds.
So I encourage L.R. to rollover his 401k plan to an IRA and either build his own retirement portfolio or seek the guidance of a professional.
If you’d like to have your financial question answered, email me at stewart@getrichonpurpose.com and place Bhm News in the subject line.

Ask Stewart: Retirement & College Funding Questions

I recently wrote about investment alternatives for retirees who are seeking higher income in today’s challenging investment environment. A younger reader wrote me with a question from his age group’s particular perspective:

“My question is what do you recommend for someone that still has around 25 years left in the workforce. I’m maxing out my 401(k) at work. However, I’ve just had my third child and have not yet started a 529 college fund for any of my children (ages 8, 5, and 6 weeks). 
Basically, I’d like to know your recommendation on maximizing my funds’ growth over my remaining working life for retirement (I am weighted heavily in equity stocks in my 401(k) currently with some balance of bond funds) and what 529 plan / funds do you recommend? There was a time over 5 years ago that Utah’s 529 fund was all the rage, but I’m now seeing some recommendations for Alabama’s 529 plans.”
Signed: Saving for Retirement and Kids’ Education
First, I want to applaud ‘Saving for Retirement’ for thinking well ahead about the important issues of retirement and college funding. Most families don’t do this and the results, particularly related to retirement, are devastating with less than 5% of all retirees being financially prepared. On the education front, many parents realize too late the mammoth costs of putting a child through college. Four years of in-state college can easily cost $80,000 in today’s terms and you can expect at least $160,000 for a four-year private college. While this reader did not provide his retirement income goals, if he wanted to maintain an inflation adjusted retirement income based on $75,000 in today’s dollars, he’d need approximately $3,000,000 of investment capital at retirement. Most people are very surprised by the size of these numbers and one of the keys to success is developing a success strategy as early as possible so that you have time working on your side.
To answer this reader’s questions, I’ll start with the college funding. Yes, we used to recommend the Utah 529 Plan to our clients but last summer Alabama adopted a new plan run by Vanguard which is as competitive as any in the nation and you’ll receive a state income tax deduction of up to $10,000 per year for new deposits, including transfers from other plans. Currently, for Alabama residents, we recommend all new deposits go to the Alabama 529 Plan and we are systematically transferring in money from out-of-state plans to capture the $10,000 state income tax deduction. In particular, we often recommend one of Vanguard’s Age-Based investment options. These plans automatically become more conservative by shifting money out of stocks into bonds as your child approaches college age. Visit the Resource Center at www.WelchGroup.com; click on ‘Links’; the ‘College Costs Calculator’ and run projections on how much you’ll need to invest to fund your child’s college education. For more information on the Alabama 529 Plan, visit www.CollegeCounts529.com.
As to the question about retirement, I would start with a retirement analysis in order to get some idea of how much you’ll need to be investing in order to reach your retirement goal. Visit the Resource Center atwww.WelchGroup.com; click on ‘Links’; then ‘Retirement Planning Calculator’ for a quick estimate. If you are investing primarily through your company’s 401k plan, I think you’re on the right track having your investments weighted heavily towards stocks. If your goal is large and you have 25 years, we might typically recommend 80% to stock mutual funds with the balance in bond funds. The last decade in stocks has been quite challenging but I expect stocks to outperform bonds over the next five years or more. If you are investing additional money outside your 401k, you could consider a similar no-load mutual fund strategy. If you’re inclined towards individual stocks versus mutual funds, I still like blue chip dividend-paying stocks. As the 80 million Baby Boomers retire over the next dozen or more years they’ll seek income investments with an opportunity for conservative growth….and these stocks are a near perfect fit.

Ask Stewart: 401K’s Dirty Little Secret

In these turbulent financial times, people have lots of questions about their personal finances and investing their money. Here’s one reader’s question:

I have a 401K of a high six figure account and I am thinking of rolling it over to an IRA.
I am retired and feel that this may give me greater options.  I would appreciate your advice.  We do not use this for income.
Thank you for your response,
L.R.
It is often the case that a retiree will leave his or her retirement account with their prior employer after they retire. The reason most often given boils down to inertia…or rather the lack of inertia. If you’ve never opened a new brokerage account and initiated a transfer of funds from one account to your new account you might think the task is daunting, however it is quite easy. The new brokerage firm will help you through the process from start to finish.
The two best reasons for moving your account are reducing expenses and increasing your investment options.
Reduce expenses. What most employees don’t know is that there can be a lot of expenses associated with an employer 401k plan. First are the expenses imbedded in any mutual fund. Known as the expense ratio, they range from a low of about two-tenths of one percent, typically for index mutual funds, to a high of about 2% with the average being 1.3% to 1.5%. In addition to mutual fund expenses, there are also plan administration fees related to required record-keeping as well as, in some cases, consulting fees. In the old days, the employer paid these fees but many companies today pass these fees along to plan participants and these fees can dramatically affect your end results. If our reader, L.R., had $750,000 in his 401k plan and the ‘added’ expenses were one-half of one percent per year, the negative impact could exceed $300,000 over 25 years! If you want to know just what fees you’re paying in your 401k plan, you may find it difficult to get a straight answer because often all of that information may not be available in one place. By rolling your 401k plan over to an IRA, you can eliminate the administrative fees and you’re in a position to choose mutual funds with low expense ratios. Or you could buy individual stocks and bonds and further reduce your ongoing expenses. Be sure to consider a discount broker such as Charles Schwab (www.Schwab.com) or Vanguard (www.Vanguard.com). As I’ve written about many times in this column, I like blue chip dividend-paying stocks where you invest in great companies and hold them as long as they remain great; companies like Southern Company, AT&T, Exxon and Kimberly Clark. These companies have a history of paying good dividends and raising their dividends over time. You’ll need a minimum of ten to twenty companies for a diversified portfolio.
More investment options. Today, most 401k plans do a pretty good job of providing participants a relatively robust list of diversified mutual fund investment options. Still, the list is limited to a few dozen options. Once you rollover to an IRA, you’ll expand that list thousands of options. With investing, more options is a better strategy and you will have expanded your choices beyond mutual funds to include a wide variety of investments including individual stocks and bonds.
So I encourage L.R. to rollover his 401k plan to an IRA and either build his own retirement portfolio or seek the guidance of a professional.
If you’d like to have your financial question answered, email me at stewart@getrichonpurpose.com 

What are the Best Investment Income Options for Retirees? Part 2

Part 2

Any investor who is seeking cash flow from their portfolio is likely feeling a great deal of frustration about the current investment environment. The Federal Reserve has orchestrated historically low interest rates in an effort to stimulate our anemic economy. Retirees have been especially hard-hit as CDs purchased before 2008 are maturing and similar investments are yielding a fraction of their previous returns. Last week, I discussed a range of fixed income (money market, CDs, bonds and bond funds) investment options and what was painfully obvious was that if you stick with high quality, you’re going to get a low rate of return. This week I’ll review a range of equity strategies that retirees could consider in order to boost their cash flow along with their ‘risk’ category.
Medium Risk
High Yield Bond funds. Now I realize that these are bonds but because of their more equity-style volatility, I typically include them as part of an equity allocation. These funds hold large baskets of non-investment grade (junk) bonds. Because of the higher risks, investors demand higher yields. If our general economy improves going forward, these type funds will tend to do well because of reduced defaults; if we roll into a second recession, they’ll struggle until the economy rebounds. Examples and their respective yields include: Vanguard High Yield Corporate (7.2%); or the Exchange Traded Fund HYG (8.0%).
Blue Chip Dividend-Paying Stocks. There are over seven thousand stocks traded on the various exchanges here in the U.S. but only a small percentage of these would be considered ‘blue chip’. And an even smaller number have consistently paid dividends to their shareholders. With blue chip dividend-paying stocks you get paid to wait until the economy gets back on track and stock prices rise. Examples, along with their current dividend yield includes: Southern Company (4.4%); AT&T (6.0%); Verizon (5.4%); Altria (6.2%); and Consolidated Edison (4.2%). You’ll want to own a basket of at least twenty of these type stocks to reduce ‘single-company risks’ or you can own a large basket by investing through an Exchange Traded Fund such as DVY (3.8%). These types of stocks are around 15% to 30% less volatile than the broad stock market. Under current law, the federal tax rate on dividends is limited to 15%.
Higher Risk
Oil & Gas Master Limited Partnerships (MLPs). These MLPs are essentially oil and gas pipelines that charge a ‘toll’ for moving product from one location to another. Good examples of major players and their respective yields include Kinder Morgan Energy Partners LP (6.8%); and Plains All American Pipeline LP (6.8%); or you can invest in a basket of MLPs through an Exchange Traded Note such as AMJ (5.5%).
Real Estate Investment Trusts (REITs). Think of a REIT as a company that owns a basket of investment real estate properties. Some invest broadly across types of properties such as apartments, office buildings, retail properties and are geographically diversified while others may focus primarily in one area such as apartments and are more geographically restrictive. REIT examples include the broadly diversified Vanguard REIT ETF yielding 5.4% and Weingarten Realty (symbol WRI) yielding 4.9%.
Each of these investments provides current cash flow to their investors along with the possibility of long-term appreciation as our economy recovers from the recent recession. If our economy falls into another recession, each would likely experience losses until a new recovery gets underway.
Be sure to consult your financial advisor before purchasing these investments.

What are the Best Investment Income Options for Retirees?

I recently received a letter from a Birmingham News reader signed, “A Frustrated Retiree”. In the letter he describes his frustration with the CD rates currently being offered by the banks and wants to know when rates will rise and what should he do with his money now in order to get more income.
There are no easy answers to his question. As he points out in his letter, the banks don’t seem to want your money. We recently contacted a local bank looking for their best interest rate on a $1 million deposit and the best offer we got was four-tenths of one percent. Much of the blame originates with the big banks that were at the forefront of the financial crisis that erupted in 2008. However, the current low interest rates we are experiencing have been orchestrated by the Federal Reserve lead by Chairman Ben Bernanke. The fed lowered short-term rates to near zero in an effort to stimulate our economy and encourage banks to lend money to businesses. In addition, congress gave the big banks $700 billion in stimulus money to shore up their balance sheets and encourage lending. The banks didn’t use the money to lend to businesses and businesses began storing up cash versus borrowing money to expand operations. Now the Federal Reserve is taking action (Operation ‘Twist’) to drive down longer-term interest rates as well. It’s working. The 10-year treasury is currently yielding about 2%. This is a deplorable situation for retirees who depend on investment income to help pay their bills.
To help Mr. Frustrated Retiree, I outline a range of investment options along with their relative income payouts and risks:
Low to No Risks
  • Money market accounts. Money market accounts are generally paying less than two-tenths of one percent but by shopping you may find rates as high as approximately 1%. Visitwww.BankRate.com.
  • Bank CDs. A national search for the highest yields on CDs indicates that you can earn between 1% and 2% for investments of between one and five year duration. Again, visit www.BankRate.com for competitive rates.
  • Treasury Bonds. One year treasuries are yielding one-tenth of one percent while the 10-year treasury is yielding about 2%. The 30-year treasury is yielding 3%. While there’s little to no credit risk with a treasury, as you lengthen the maturity, you take on interest rate risk. For example, if you invest $10,000 in a 30-year treasury and interest rates rise 1%, the value of your bond will drop nearly 20%. Of course if you hold your bond until maturity, you’ll get all your money back.
Low to Moderate Risks
  • Investment grade bond funds. As long as you stick with investment grade most of your risks will be attributed to the average maturity of the bonds held by the fund. Excellent examples include Vanguard Short-Term Investment Grade fund yielding 2.8% with an average maturity of 3 years; Vanguard Intermediate-Term Investment Grade fund yielding 4.4% and an average maturity of 6.8 years; and Vanguard Long-Term Investment Grade yielding 5.28% and an average maturity of 24 years.
  • Muni bond funds. If you are in a relatively high income tax bracket, you might consider muni bonds or muni bond funds. Examples of high quality muni bond funds include Vanguard Limited Term Tax Free yielding 2.1% and an average maturity of 2.6 years; Vanguard Intermediate-Term Tax Free yielding 3.6% and an average maturity of 6 years; and Vanguard Long-Term Tax Free yielding 4.2% with an average maturity of 8.7%.
  • GNMA funds. Ginnie-Mae funds invest in pools of home mortgages backed by the full faith and credit of the US government. Vanguard’s GNMA Fund is currently yielding 3.1% with an average maturity of 5.3 years.
As you can see from these examples, there’s not much opportunity to increase your income by investing in high quality fixed income investments and these yields are not likely to improve significantly for two to five years as Fed Chairman Bernanke has promised to keep rates low for a minimum of two years.
Next week I’ll review a number of options for increasing your income by investing in equity type securities.

Weekly Market Commentary

“Stocks Gain Driven by European News”
September 19, 2011
 
Up to date in less than 2 minutes:
Last week, U.S. stocks gained driving the Standard & Poor’s 500 Index to the third-biggest weekly gain since 2009, as government officials and central bankers took steps to ease the European debt crisis. On the week, the Dow, S&P 500, NASDAQ, and Russell 2000 all dropped -2.2%, -1.7%, -0.5%, and -1.4%, respectively.

 

Equity Performance Table
Last Week
Year to Date
Last 52 Weeks
Dow Jones Industrial
+4.7%
-0.6%
+8.5%
S&P 500 (Large Caps)
+5.4%
-3.3%
+8.0%
NASDAQ (Technology)
+6.3%
-1.2%
+13.2%
Russell 2000 (Small Caps)
+6.0%
-8.8%
+9.7%
International Stocks (EAFE)
+2.2%
-13.4%
-5.6%
Dow Jones Total Stock Market (Broad Market)
+5.4%
-4.1%
+8.5%

 

 

Interest Rates
Prime Lending Rate
3.25%
Interest Rate Bias
Short-Term = Neutral; Intermediate Term = Neutral; Long-Term = Higher
90 T-bill Rate
0.00%
90 Day LIBOR
0.35%
TED Spread
0.35%
30-Year Mortgage Rate
4.18%
15-Year Mortgage Rate
3.36%
5-Year Adjustable Mortgage Rate
2.98%
30-Year Treasury Yield
3.31%
10-Year Treasury Yield
2.05%
5-Year Treasury Yield
0.91%
2-Year Treasury Yield
0.17%

 

 

Notable Dividend Increases – 2011
Lockheed Martin (“LMT”)
19.1%
NextEra Energy (“NEE”)
10.0%
United Technologies (“UTX”)
12.9%
Proctor & Gamble (“PG”)
9.0%
Abbott Labs (“ABT”)
9.1%
Clorox (“CLX”)
9.0%
Colgate Palmolive (“CL”)
9.4%
Chevron Corp (“CVX”)
8.3%
General Mills (“GIS”)
8.9%
International Business Machines (“IBM”)
15.4%
Union Pacific Corp (“UNP”)
25.0%
Intel Corp (“INTC”)
33.0%
McDonalds Corp (“MCD”)
10.9%
Kimberly Clark (“KMB”)
6.1%

 

 
Now, all the details……………………
Last week, the S&P 500 climbed +5.4% to 1,216.01, trimming its 2011 loss to -3.3%.  The Dow Jones Industrial Average increased 516.96 points, or +4.7%, to 11,509.09, leaving it down -0.6% year to date. “It looks like the various political leaders and finance leaders are getting together and working in a consorted fashion, which is what’s necessary to get through this situation,” Peter Jankovskis, who helps manage about $2.6 billion at Oakbrook Investments in Lisle, Illinois, said in a Bloomberg telephone interview. “The equity market is likely to move higher here, and I think we will see a rally by year’s end.” The S&P 500 climbed to the highest level since August 31 after European Central Bank President Jean-Claude Trichet pressed euro-area governments yesterday to take decisive action to halt the debt crisis.  Two days ago, the ECB bought more time by extending an emergency lifeline to banks, driving the week’s biggest advance in the stock market.  French President Nicolas Sarkozy and German Chancellor Angela Merkel said they are convinced Greece will remain in the euro zone.
“Headlines from Europe are certainly driving the short-term direction of the market,” Peter Vanderlee, a money manager at ClearBridge Advisors, a unit of Baltimore-based Legg Mason Inc., said in a Bloomberg telephone interview.  Legg Mason manages about $640 billion.   “We don’t have a magic bullet for solving Europe’s woes, but against that backdrop, having a portfolio with companies that tend to be more quality-based, have international exposure, it dampens a lot of that volatility.”
Companies most-tied to the economy rallied last week, with the Morgan Stanley Cyclical Index advancing +5.5%.  Intel Corp. (“INTC”), Home Depot Inc. (“HD”) and General Electric Co. (“GE”) led gains in the Dow, increasing at least +8.2%. Technology shares rose the most among 10 S&P 500 industries, led by EBay Inc. (“EBAY”), the world’s largest online marketplace.  The shares climbed +18% to $33.69.  Dell, the second-largest personal-computer maker, added +8.8% to $15.20.  Dell added $5 billion to its stock repurchase program, citing a resurgence in cash flow.
“Valuations in that (tech) space are exceedingly attractive,” Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which manages $54 billion, said during a September 16 Bloomberg Television interview.  “And of course we know that business investment and spending on software and hardware has been the one bright spot in terms of economic activity over the last couple of quarters.”
Technology companies in the S&P 500 index are trading at 12.3 times estimated 2011 income, according to data compiled by Bloomberg. That compares with the average price-earnings ratio using analyst estimates for the current year of 15.4 between March 9, 2009, when the bull market began, and April 29 of this year, when the S&P 500 peaked.
Netflix Inc. (“NFLX”), the mail-order and online film-rental service, fell the most in the S&P 500 after cutting its U.S. subscriber forecast following a price increase. Netflix slid -24%, the most since October 2004, to $155.19.
The MSCI EAFE Index (broad developed international index) rose +2.2% last week. The Americas rose +4.6% with Brazil up +2.6%, Mexico up +4.1%, and Canada down -1.0%. Europe rose +2.5% with Germany up +7.4%. Asia-Pacific dropped -0.4% with Australia down -1.1%, China down -0.6%, Hong Kong down -2.1%, India up +0.4%, Taiwan down -0.4%, and Japan up +1.5%.
Treasuries dropped in price with the 10 year yield rising to 2.05% from 1.92%.
The Baltic Dry Index, which tracks transport costs on international trade routes and may be a good leading indicator of economic activity, ended the week at 1,814, down from the prior week’s level of 1,838. The index reached a high of 11,793 on May 20, 2008 and a low of 663 on December 5, 2008. The index reached a recent peak of 4,661 set on November 11, 2009.
The TED spread measuring the difference between LIBOR and Treasury bill rates, which rose as high as 464 basis points during the liquidity crisis of 2008, is currently in more of a normal range of 35 basis points, but has increased as of late due to Euro bank concerns. The TED spread is a gauge of the willingness of banks to lend to one another. The lower the TED spread the more willing banks are to lend with each other. The TED spread fluctuates over time but generally has remained within the range of 10 and 50 bps (0.1% and 0.5%) except in times of financial crisis. A rising TED spread often presages a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn.
Last week, oil was up +0.8% and closed at $87.96 per barrel. Year-to-date oil is down -3.7%. The average price of unleaded gasoline dropped -1.7% last week to end at $3.588 per gallon per September 18th data provided by AAA. Year-to-date, unleaded gasoline is up +16.8%. Natural gas was down -2.7% last week and closed at $3.809/MMBtu. Year-to-date, natural gas is down -13.5%.
Last week, gold dropped -2.4% closing at $1,812.10 per troy ounce. Year-to-date, gold is up +27.5%. The dollar was down -0.8% last week as measured by the U.S. Dollar Index with that index closing at 76.599. Year-to-date, the U.S. Dollar is down -3.1% as measured by the Dollar Index. The Euro was flat against the U.S. dollar closing at $1.38/Euro. Year-to-date, the Euro is up +3.2% against the U.S. Dollar.
In the coming week, look for corporate earnings from Oracle (“ORCL”), Adobe Systems (“ADBE”), General Mills (“GIS”), Bed Bath and Beyond (“BBBY”), CarMax (“KMX”), Fed Ex (“FDX”), and NIKE (“NKE”). Look for economic reports this week on housing, building permits, home sales, FOMC interest rate decision (no change in short-term rates expected), and weekly jobless claims data.
Sources: Bloomberg, The Wall Street Journal, Barron’s, The New York Times, ValueLine.

Are Blue Chip Stocks a Good Investment Now?

The case for Blue Chip Stocks:  The current economy stands at what I call ‘slack tide’…that point at which there is little or no movement. The next major decision out of Washington (or possibly other parts of the globe) will determine whether our economy begins to rise or whether it recedes into a secondary recession. Regardless, if you have money to invest, it behooves you to ask the question, “Where is the best place to invest right now?” Assuming you won’t need to tap this money for a minimum of five years, I believe that one of the best choices for conservative investors is dividend-paying blue chip stocks. Here’s why:
  • Relative high yield. The 10-year treasury recently dipped below 2% for the first time in history; most money market accounts are paying well below 1%; and bank CDs, even with a 5-year term, are struggling to pay 2%. Federal Reserve Chairman, Ben Bernanke, recently stated his intention to keep rates low for a minimum of two years. Compare this to a basket of blue chip stocks. We are currently using a 30-basket of blue chip stocks whose composite yield is over 4%. Companies such as Intel, AT&T, Chevron, Nextera and DuPont have strong balance sheets and a long history of never missing a dividend.
  • Reagan era PE’s. Review the past 50 years and you’ll find that the average stock price was 16.4 times corporate earnings (known as the P/E ratio). Currently the P/E for the S&P 500 is 12.9, a ratio last seen during the Reagan era and lower than the ten economic contractions since 1949, according to Bloomberg. What this suggests is that, in historical terms, stocks represent a good value today. Obviously, they may become an even better value before we see them reach new highs but if you are receiving good cash flow in the form of dividends, you can afford to wait.
  • Strong balance sheets. Virtually every corporation in America has used the Great Recession of 2008 as an opportunity to cut the fat from their balance sheets and many have stored up huge stockpiles of cash that they are eager to deploy to expand their operations once they are confident that they understand the rules of engagement. What’s holding them back is the uncertainty of how they will be regulated and taxed. Once this is settled (the 2012 elections?), you can expect to see a mass of activity.
  • Baby Boomer dynamics. Eighty million Americans are headed for the retirement exit door over the next couple of decades. What are they going to be looking for? I would suggest that their two primary objectives will be a rising income for bill paying and inflation and conservative growth. Blue chip stocks are tailor-made for these Baby Boomers.
I realize that it’s a bit scary to invest in the stock market in the middle of these crazy economic times, but when you rationally consider all the alternatives, by owning dividend-paying blue chip stocks, you’re being well paid while you wait for the economy to recover and the stock market to reach new highs.

Is Gold a Good Investment?

Gold. For centuries the yellow metal that runs in veins along rock walls has sparked the imagination of men seeking to strike it rich. Even today, investing in gold remains one of the hottest topics of investors worldwide. Gold recently eclipsed $1800 per ounce for the first time as part of its remarkable run over the past few years. I continue to receive lots of questions about investing new money in gold at these loftier prices.
First, let’s begin with a historical perspective of gold as an investment. Gold prices have risen as follows: 50% over the past 12 months; 25% over the past 5 years; 20% over the past 10 years. With this history of success, gold begins to look like the proverbial ‘sure thing’.    But if we rewind a bit further, you’ll see a very different picture. In January of 1980, gold peaked at $850 per ounce. Had you been a buyer on that date, you would have seen your investment erode 43% over the next three months to $480 per ounce. Even more astonishing, in October of 1999, your twenty-year investment was worth $252 per ounce.
The purpose of this bit of history is to remind us that gold is far from a sure thing. So before you go piling into gold as an investment, ask yourself these questions:
  • Why am I buying gold? People often invest in gold because they think our world is about to come unglued…a financial or economic Armageddon.   It’s true that both America and many other countries face serious challenges but collapse of the U.S. or world economies is very unlikely. As the world begins to work through these problems, you could see interest in gold fade rapidly.
  • From this point in time what’s more likely to happen first: gold doubling to $3600 per ounce or dropping in half to $900 per ounce? In other words, as gold reaches ever newer highs, the risk of a big fall increases. Don’t forget the lesson for those 1980 investors.
  • What’s your exit strategy? If you’re a buyer of gold, what’s your long-term plan? Will you hold no matter what or do you plan to sell at some point? Remember that gold doesn’t throw of cash as would bonds (interest) or some stocks (dividends). How will you eventually convert it to something you can use to pay for retirement expenses?
  • How much should I own? I’ve heard of some people having invested all of their savings in gold. This, by any professional advisors perspective, would be highly speculative. My own perspective would be if you want to own gold, limit holdings to approximately 5% of your portfolio. I’ve heard of other professionals recommending up to 20% (Jim Cramer).
  • How will I own gold? If you decide to buy gold, you have several choices. A few of the most common include gold coins, stock in gold mining companies, Exchange Traded Funds or gold bullion. Each strategy has its own set of pros and cons. Gold coins are pretty easy to buy and store but the mark-up/mark-down can easily be 5% or more, meaning if you bought coins today and sold them tomorrow, commissions could total 10% or more. With gold mining companies, you’re going directly to the source but there’s typically an element of speculation similar to investing in an oil drilling operation in a known oil field. You also have management expertise as an element of risk. The most popular Exchange Traded Fund (ETF) is offered under the symbol GLD. What you are buying here is your pro-rata share of gold bullion. If you choose to purchase bullion directly, shipping, insurance and storage fees can be very costly.
As with any investment, you want to make certain that your strategy is based on thoughtful consideration of your particular facts and fits into an overall plan that accounts for multiple possible outcomes. This is where the advice of a professional can be invaluable.