What Should You Do With $1,000?

With the holiday season finally behind us and the year of 2012 dead ahead, a reader asked me, “Stewart, What would you suggest I do with a $1,000?” You may have year-end bonus money, be expecting a tax refund or simply just have a few bucks burning a hole in your pocket. To get a broad spectrum of answers, I turned to my associates for their suggestions and just to make it fun, I offered to buy lunch for anyone whose idea I used. Here are their responses:
  • Invest in a 529 college savings plan. This is my vote if you plan to help a child or grandchild pay for college. Your investment grows tax deferred and withdrawals for qualified education expenses are tax free…and you control the money the entire time. Yep, I’ll buy my own lunch!
  • Update your wardrobe. Beth suggested updating your professional wardrobe keeping in mind to ‘Dress for the job you want, not the one you have’. She also suggested taking a course that will help advance your current career or help you get that job you want.
  • Get in shape. Beth, Hugh and Michael all opted for investing in better health by hiring a personal trainer and joining a gym. Medical research indicates that even being moderately overweight is a leading cause of many health problems and health problems are a leading cause of financial problems!
  • Add to your emergency fund. Melissa and Michael both thought it is important to build emergency reserves in what continues to be a shaky economy. You’ll want to keep this money safe by investing in a money market account, credit union savings account or short-term CDs even though you’ll earn near-zero interest.
  • Help a charity. If there’s a charity you are passionate about, Melissa suggested not waiting until the end of the year to give, rather, “Do it now!” It’ll be your first tax deduction for the New Year!
  • Invest in a Roth IRA. Hugh, Michael and Woodard all liked the idea of investing in a Roth IRA if you qualify (couples filing jointly with modified adjusted gross income in excess of $179,000 for 2011; $183,000 for 2012 and single filers with MAGI of $122,000 for 2011; $125,000 for 2012 are not eligible for a Roth IRA contribution). Michael points out that, “You never have to pay taxes!” Woodard adds a twist suggesting that if you have a young child with earned income, consider contributing to a Roth IRA for him or her. A $,1000 contribution today for a 19-year-old earning an average of 8% would be worth over $50,000 at his or her age 70…a nice start to retirement!
  • Capture a tax credit. Kimberly reminded us that joint filers with incomes less than $56,500 (single filers with less than $28,250) may be eligible for a 2011 tax credit of up to $2,000 ($1,000 for single filers) for contributions to your IRA, Roth IRA, 401k, and certain other retirement plans. It’s called the Savers Credit.
  • Pay down a credit card. Hugh and Woodard both recommended paying down on credit card debt. In this low interest rate environment, paying down a high interest credit card balance represents an equally high return on your investment. They suggest applying all the money on the card with the highest interest rate.
  • Make an extra mortgage payment. Ramona would like to make an extra mortgage payment. If you can find a way to do this every year, you’ll cut years off your mortgage schedule and save thousands in interest payments.
  • Pay down your student loans. Kelly says she uses any extra money to reduce student loans. Even though the interest rate might be relatively low, the psychological benefits are great!
  • Save for your daughter’s wedding. Wedding expenses were on Wendy’s mind since her daughter’s engaged to a soon-to-be Navy Seal. Most people don’t plan for wedding expenses and even a modest wedding can put a serious dent in your future finances.
  • Create a lasting memory. Melissa suggested you could do something you’ve never done before like take a balloon ride!
Use these suggestions to get your own creative juices flowing and make a decision what to do with your ‘found’ money. If you don’t make a conscious decision, you will likely find that it ‘vanished’ over the next several weeks or months.

Stocks Drop, Europe Continues to be Drag

Up to date in less than 2 minutes:
Last week U.S. stocks fell as European leaders struggled to solve the region’s debt crisis and the Federal Reserve refrained from additional stimulus. For the week, the Dow, S&P 500, NASDAQ, and Russell 2000 all dropped -2.6%, -2.8%, -3.5%, and -3.1%, respectively.

 

 

Equity Performance Table
Last Week
Year to Date
Last 52 Weeks
Dow Jones Industrial
-2.6%
+2.5%
+3.3%
S&P 500 (Large Caps)
-2.8%
-3.0%
-1.9%
NASDAQ (Technology)
-3.5%
-3.7%
-3.3%
Russell 2000 (Small Caps)
-3.1%
-7.9%
-7.4%
International Stocks (EAFE)
-4.0%
-17.3%
-15.5%
Dow Jones Total Stock Market (Broad Market)
-2.9%
-4.2%
-3.1%

 

 

Interest Rates
Prime Lending Rate
3.25%
Interest Rate Bias
Short-Term = Neutral; Intermediate Term = Neutral; Long-Term = Neutral
90 T-bill Rate
0.00%
90 Day LIBOR
0.57%
TED Spread
0.57%
30-Year Mortgage Rate
3.92%
15-Year Mortgage Rate
3.27%
5-Year Adjustable Mortgage Rate
2.84%
30-Year Treasury Yield
2.85%
10-Year Treasury Yield
1.85%
5-Year Treasury Yield
0.80%
2-Year Treasury Yield
0.22%

 

 

Notable Dividend Increases – 2011
Lockheed Martin (“LMT”)
33.3%
NextEra Energy (“NEE”)
10.0%
United Technologies (“UTX”)
12.9%
Proctor & Gamble (“PG”)
9.0%
Abbott Labs (“ABT”)
9.1%
Home Depot (“HD”)
16.0%
Clorox (“CLX”)
9.0%
Colgate Palmolive (“CL”)
9.4%
Chevron Corp (“CVX”)
8.3%
Emerson Electric (“EMR”)
15.9%
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”)
14.8%
Kimberly Clark (“KMB”)
6.1%

 

 
Now, all the details……………………
Last week, the S&P 500 fell -2.8% to 1,219.66, breaking a two-week streak of gains.  The Dow Jones Industrial Average sank 317.87 points, or -2.6%, to 11,866.39. “The market continues to be driven by headline stories about Europe, although the economic news has been more positive with respect to the U.S.,” John Carey, a Boston-based money manager at Pioneer Investments, said in a Bloomberg telephone interview. The firm oversees about $220 billion.  “On alternate days, people are either paying attention to those improving fundamentals or worrying about what’s going on in Europe.”
Stocks slumped on December 12th as Moody’s Investors Service said a European Union summit failed to produce “decisive policy measures” and Fitch Ratings said a comprehensive solution has not yet been offered.  The S&P 500 rebounded from a three-day slump on December 15th after Labor Department figures showed initial jobless claims fell by 19,000 to 366,000 in the week ended December 10th, the fewest since May 2008, and two reports showed manufacturing in the New York and Philadelphia regions expanded more than forecast in December.
Energy producers posted the biggest declines last week as a group, falling -4.9% as oil posted the biggest weekly loss since September.
Intel (“INTC”) tumbled -7.1% to $23.23 last week, pacing declines with technology companies which had the second-biggest decline as a group in the S&P 500.  The world’s largest maker of semiconductors cut its forecast for fourth-quarter revenue, saying supply shortages for hard drives are prompting computer producers to cut orders for other components.
First Solar Inc. (“FSLR”), the world’s largest maker of thin-film solar panels, had the biggest decline in the S&P 500, falling -30% to $31.91.  The company reduced profit estimates for this year and next and said it will cut about 100 jobs as it closes a California research center.
The MSCI EAFE Index (broad developed international index) dropped -4.0% last week. The Americas dropped -3.2% with Brazil down -3.7%, Mexico down -3.2%, and Canada down -3.3%. Europe dropped -2.8% with Germany down -4.8%.  Asia-Pacific dropped -2.4% with Australia down -1.0%, China down -3.9%, Hong Kong down -1.6%, India down -4.5%, Taiwan down -1.6%, and Japan down -1.6%.
Treasuries rose in price with the 10 year yield dropping to 1.85% from 2.06% in the week earlier.
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 1,888, down from the prior week’s level of 1,922. The index reached a high of 11,793 on May 20, 2008 and a low of 663 on December 5, 2008. The index last peaked at 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 57 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 down -5.9% and closed at $93.53 per barrel. Year-to-date oil is up +2.4%. The average price of unleaded gasoline dropped -1.6% last week to end at $3.221 per gallon per December 18th data provided by AAA. Year-to-date, unleaded gasoline is up +4.8%. Natural gas was down -5.7% last week and closed at $3.127/MMBtu. Year-to-date, natural gas is down -29.0%.
Last week, gold dropped -6.8% closing at $1,595.60 per troy ounce. Year-to-date, gold is up +12.3%. The dollar was up +2.1% as measured by the U.S. Dollar Index with that index closing at 80.256. Year-to-date, the U.S. Dollar is up +1.6% as measured by the Dollar Index. The Euro was down -0.6% against the U.S. dollar closing at $1.3035/Euro. Year-to-date, the Euro is down -2.5% against the U.S. Dollar.
In the coming week, look for corporate earnings from companies such as General Mills (“GIS”), Oracle Corp (“ORCL”), CarMax (“KMX”), and Bed Bath & Beyond (“BBBY”). Look for economic reports this week on housing starts, home sales, durable goods orders, 3rd Quarter GDP, personal income, personal spending, and weekly jobless claims data.
Sources: Bloomberg, The Wall Street Journal, Barron’s, The New York Times, ValueLine.

 

Are Bonds More Risky than US Stocks & Is Bernanke In Trouble?

Here are three questions from our readers:

Question: Are investment grade bonds riskier than the stock market? V. F.

This reader commented, “As we all know the stock market has both gyrated and gone sideways in the last decade. Yet when I seek to invest in A to BBB corporate bonds I am asked if I am aware of how risky my (Bank of America, Genworth, BP, Southwest Airlines etc.) bonds are. My reply is, ‘You wouldn’t tell me that my investment was risky if I invested in an S&P 500 Index mutual fund.’ I find this more risky than BBB bonds in the current environment. To me the risk in these relatively high yield (yet investment grade) bonds are primarily that of default. What’s wrong with my thinking?”

Answer: This reader is correct in thinking that, theoretically, investment grade bonds are less risky than investing in the stock market.  As with any investment, it’s important to diversify your holdings so that you don’t have too much money in any one bond or stock.  There have been plenty of cases where investment grade bonds have, in fact, defaulted and the investors lost all of their money.  I would be particularly concerned about holding bonds of the big banks as it appears investors are not being fully informed of their true financial condition as I discussed in last week’s column.

Question: What’s the best tax strategy for the Alabama 529 plan? R. J.

This reader has about $50,000 in the New Mexico 529 plan and understood that if he transferred the funds to the Alabama plan, he’d receive a tax benefit of $500.  His idea was to transfer all of the money before the end of the year.  His question was, “Is that the right thing to do?”

Answer:  The great news is that Alabama now has one of the best 529 college savings plans in the country when you use Vanguard as your option as the custodian.  Alabamaalso provides a tax incentive in the form of a state tax deduction for the deposit or transfer of up to $10,000 per year.  My advice to this reader is to transfer $10,000 before the end of this calendar year; then transfer another $10,000 in January of next year; then $10,000 each following January until all the funds have been moved.  By doing this, he’ll increase his tax benefits from $500 to $2,500 or more.

Question: Is Federal Reserve Chairman Ben Bernanke in trouble?  G.C.

In last week’s column, I discussed that the Federal Reserve had secretly loaned the big banks $7.7 trillion of bailout money in addition to the $700 billion granted by Congress.  One reader was outraged and asked, “What is being done about this situation and is (Federal Reserve Chairman) Bernanke in trouble over this situation?”

Answer:  First, I do not believe Chairman Bernanke exceeded his authority even though this was by far the greatest extension of lending in the Federal Reserve’s history…so he’s not in any legal trouble.  By keeping the loans a secret from members of Congress, he may very well be in political trouble and his days may be numbered.  In truth, he may have saved the world from a global financial meltdown.  What’s most troubling is that the big banks took advantage of the near interest-free loans to ensure their way of life was essentially unchanged and today they’re one-third bigger than when they were ‘too big to fail’.  Finally, don’t expect our congressional representatives to do anything about this until there is a very public outpouring of outrage or until there is another crisis.

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

Stocks Rebound to Best Week Since March 2009

Up to date in less than 2 minutes:
Last week U.S. stocks rose, sending the Standard & Poor’s 500 Index to its biggest weekly rally since March 2009, after central banks took action to ease Europe’s debt crisis and American Thanksgiving retail sales set a record. For the week, the Dow, S&P 500, NASDAQ, and Russell 2000 all rose +7.0%, +7.4%, +7.6%, and +10.3%, respectively.

 

Equity Performance Table
Last Week
Year to Date
Last 52 Weeks
Dow Jones Industrial
+7.0%
+3.8%
+5.6%
S&P 500 (Large Caps)
+7.4%
-1.1%
+1.6%
NASDAQ (Technology)
+7.6%
-1.0%
+1.4%
Russell 2000 (Small Caps)
+10.3%
-6.2%
-2.8%
International Stocks (EAFE)
+9.1%
-13.1%
-10.9%
Dow Jones Total Stock Market (Broad Market)
+7.6%
-2.1%
+0.6%

 

 

Interest Rates
Prime Lending Rate
3.25%
Interest Rate Bias
Short-Term = Neutral; Intermediate Term = Neutral; Long-Term = Neutral
90 T-bill Rate
0.00%
90 Day LIBOR
0.53%
TED Spread
0.53%
30-Year Mortgage Rate
4.00%
15-Year Mortgage Rate
3.35%
5-Year Adjustable Mortgage Rate
2.94%
30-Year Treasury Yield
3.03%
10-Year Treasury Yield
2.03%
5-Year Treasury Yield
0.91%
2-Year Treasury Yield
0.25%

 

 

Notable Dividend Increases – 2011
Lockheed Martin (“LMT”)
33.3%
NextEra Energy (“NEE”)
10.0%
United Technologies (“UTX”)
12.9%
Proctor & Gamble (“PG”)
9.0%
Abbott Labs (“ABT”)
9.1%
Home Depot (“HD”)
16.0%
Clorox (“CLX”)
9.0%
Colgate Palmolive (“CL”)
9.4%
Chevron Corp (“CVX”)
8.3%
Emerson Electric (“EMR”)
15.9%
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”)
14.8%
Kimberly Clark (“KMB”)
6.1%

 

 
Now, all the details……………………
Last week, the S&P 500 climbed +7.4% to 1,244.28 snapping a two-week decline to trim its 2011 loss to -1.1%.  The Dow added 787.64 points, or +7.0%, to 12,019.42 and is up +3.8% for the year. “This week’s move was sparked by the global coordinated efforts by central banks and the greater clarity provided by European policy makers on plans to stabilize the debt situation,” Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel Nicolaus & Co., which oversees more than $116 billion in client assets, said in a Bloomberg telephone interview. “U.S. retail sales reports provided greater confirmation of stability within the U.S. economy.”
The S&P 500 surged after the Federal Reserve and five other central banks lowered the cost of dollar funding and China cut the proportion that banks need to hold as reserve capital. Germany and France are leading a push for tougher enforcement of euro-area budget rules to counter the debt crisis now in its third year.
The S&P 500 stock index has rebounded more than +13% from its 2011 low on October 3rd.  Improving U.S. economic data has helped alleviate concern that the world’s largest economy will relapse into a recession as Europe’s debt crisis threatens to derail the recovery. U.S. retail sales during the Thanksgiving weekend increased +16% to $52.4 billion, the National Retail Federation said, citing a survey conducted by BIGresearch.  The average shopper spent $398.62, up from $365.34 a year earlier.  Another report last week showed that consumer confidence snapped back more than forecast in November as Americans turned less pessimistic on the outlook for jobs.
Jobs data released by the Labor Department last week showed that payrolls climbed 120,000, with more than half the hiring coming from retailers and temporary help agencies, after a revised 100,000 rise in October that was more than initially estimated.  The median estimate in a Bloomberg News survey called for a gain of 125,000.  The jobless rate declined to 8.6%, the lowest since March 2009, from 9%.
“Except for Europe, the rest of the world economy is doing pretty well,” the hedge-fund manager said December 2nd during an interview on Bloomberg Radio’s “Surveillance” with Tom Keene and Ken Prewitt.  “There’s too much bearishness, and equities — particularly U.S. equities and emerging-market equities – are very cheap relative to fixed income, Treasury bonds, high yield, and other financial assets.”
All 10 groups in the S&P 500 rose last week, led by a +10% rally in energy producers as crude oil had its first gain in three weeks.  The Morgan Stanley Cyclical Index surged +9.6% amid easing concern about global economic growth. Financial shares rose +9.5%, the second-most among the 10 industries in the S&P 500.  A gauge of European banking shares climbed +14%, the second-best performance among 19 groups in the benchmark Stoxx Europe 600 Index.
The MSCI EAFE Index (broad developed international index) increased +9.1% last week. The Americas rose +7.8% with Brazil up +5.5%, Mexico up +6.3%, and Canada up +5.4%. Europe rose +8.7% with Germany up +10.7%. Asia-Pacific rose +7.5% with Australia up +7.6%, China down -0.8%, Hong Kong up +7.6%, India up +7.3%, Taiwan up +5.3%, and Japan up +5.9%.
Treasuries dropped in price with the 10 year yield rising to 2.03% from 1.97% in the week earlier.
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 1,866, up from the prior week’s level of 1,807. The index reached a high of 11,793 on May 20, 2008 and a low of 663 on December 5, 2008. The index last peaked at 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 53 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 +4.3% and closed at $100.96 per barrel. Year-to-date oil is up +10.5%. The average price of unleaded gasoline dropped -0.6% last week to end at $3.276 per gallon per December 4th data provided by AAA. Year-to-date, unleaded gasoline is up +6.6%. Natural gas was up +1.2% last week and closed at $3.584/MMBtu. Year-to-date, natural gas is down -18.6%.
Last week, gold rose +3.7% closing at $1,747.00 per troy ounce. Year-to-date, gold is up +22.9%. The dollar was down -1.2% last week as measured by the U.S. Dollar Index with that index closing at 78.625. Year-to-date, the U.S. Dollar is down -0.5% as measured by the Dollar Index. The Euro was up +1.9% against the U.S. dollar closing at $1.3487/Euro. Year-to-date, the Euro is up +0.9% against the U.S. Dollar.
In the coming week, look for corporate earnings from companies such as Dollar General (“DG”), AutoZone (“AZO”), Toll Brothers (“TOL”), and Costco Wholesale (“COST”). Look for economic reports this week on non-manufacturing (services) activity, factory orders, trade balance, and weekly jobless claims data.
Sources: Bloomberg, The Wall Street Journal, Barron’s, The New York Times, ValueLine.

Stocks had their WORST Thanksgiving Week Since 1932

Up to date in less than 2 minutes:
Last week, U.S. stocks tumbled in the worst Thanksgiving-week loss for the Standard & Poor’s 500 Index since 1932 as concern grew that Europe’s debt crisis will spread and American policy makers failed to reach agreement on reducing the federal budget. For the week, the Dow, S&P 500, NASDAQ, and Russell 2000 all dropped -4.8%, -4.7%, -5.1%, and -7.4%, respectively.

 

Equity Performance Table
Last Week
Year to Date
Last 52 Weeks
Dow Jones Industrial
-4.8%
-3.0%
+1.3%
S&P 500 (Large Caps)
-4.7%
-7.9%
-2.6%
NASDAQ (Technology)
-5.1%
-8.0%
-3.7%
Russell 2000 (Small Caps)
-7.4%
-15.0%
-9.1%
International Stocks (EAFE)
-5.7%
-20.5%
-15.8%
Dow Jones Total Stock Market (Broad Market)
-4.9%
-9.0%
-3.7%

 

 

Interest Rates
Prime Lending Rate
3.25%
Interest Rate Bias
Short-Term = Neutral; Intermediate Term = Neutral; Long-Term = Neutral
90 T-bill Rate
0.02%
90 Day LIBOR
0.52%
TED Spread
0.50%
30-Year Mortgage Rate
4.02%
15-Year Mortgage Rate
3.38%
5-Year Adjustable Mortgage Rate
2.97%
30-Year Treasury Yield
2.92%
10-Year Treasury Yield
1.97%
5-Year Treasury Yield
0.93%
2-Year Treasury Yield
0.28%

 

 

Notable Dividend Increases – 2011
Lockheed Martin (“LMT”)
33.3%
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%
Emerson Electric (“EMR”)
15.9%
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”)
14.8%
Kimberly Clark (“KMB”)
6.1%

 

 
Now, all the details……………………
The S&P 500 has fallen for seven days, the longest streak in four months, and has tumbled -7.6% so far in November. U.S. equities erased an early advance on the final session last week as S&P lowered Belgium’s credit rating and Reuters reported that Greece is demanding private investors accept larger losses on their debt. “We’ve resumed focus on the European debt issues,” Terry L. Morris, senior equity manager at Wyomissing, Pennsylvania-based National Penn Investors Trust Co., said in a Bloomberg telephone interview.  His firm manages about $2.2 billion.  “The situation in Europe doesn’t seem to be improving, which makes the market defensive,” he said.  “Spending cuts kicking in the U.S. will be a negative too because it will be a drag on economic growth.”
The cost of insuring European sovereign bonds against default rose to a record last week as Germany failed to find buyers for 35% of the bonds offered at an auction.  German Finance Minister Wolfgang Schaeuble said market turbulence sparked by the euro region’s sovereign-debt crisis will last for “a few months.” U.S. Congress’s special debt-reduction committee failed to reach an agreement last week, setting the stage for $1.2 trillion in automatic spending cuts and fueling concern that economic-stimulus measures that are set to expire will not be renewed. Still, S&P reaffirmed it would keep the U.S.’s credit rating at AA+ after stripping the government of its top AAA grade on August 5th.
Stocks fell last Tuesday, November 22nd as revised Commerce Department figures showed that gross domestic product climbed at a 2% annual rate in the third quarter, less than projected and down from a 2.5% prior estimate.  U.S. stock exchanges were closed on November 24th for Thanksgiving and closed three hours early on November 25th.
All 10 groups in the S&P 500 fell last week, led by a -6.2% slump in energy producers and a -5.8% drop in financial shares.
The MSCI EAFE Index (broad developed international index) fell -5.7% last week. The Americas dropped -5.1% with Brazil down -3.2%, Mexico down -4.7%, and Canada down -3.6%. Europe dropped -4.6% with Germany down -5.3%. Asia-Pacific fell -4.5% with Australia down -4.6%, China down -1.5%, Hong Kong down -4.3%, India down -4.1%, Taiwan down -6.2%, and Japan down -2.6%.
Treasuries rose in price with the 10 year yield dropping to 1.97% from 2.01% in the week earlier.
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 1,807, down from the prior week’s level of 1,895. The index reached a high of 11,793 on May 20, 2008 and a low of 663 on December 5, 2008. The index last peaked at 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 50 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 down -0.9% and closed at $96.77 per barrel. Year-to-date oil is up +5.9%. The average price of unleaded gasoline dropped -1.7% last week to end at $3.295 per gallon per November 27th data provided by AAA. Year-to-date, unleaded gasoline is up +7.2%. Natural gas was up +6.8% last week and closed at $3.542/MMBtu. Year-to-date, natural gas is down -19.6%.
Last week, gold dropped -2.3% closing at $1,685.50 per troy ounce. Year-to-date, gold is up +18.6%. The dollar was up +2.1% last week as measured by the U.S. Dollar Index with that index closing at 79.686. Year-to-date, the U.S. Dollar is up +0.8% as measured by the Dollar Index. The Euro was down -2.1% against the U.S. dollar closing at $1.3238/Euro. Year-to-date, the Euro is down -1.0% against the U.S. Dollar.
In the coming week, look for corporate earnings from companies such as Tiffany (“TIF”), Big Lots (“BIG”), Guess? Inc. (“GES”), and Barnes & Noble (“BKS”). Look for economic reports this week on new home sales, consumer confidence, manufacturing, unemployment rate, and weekly jobless claims data.
Sources: Bloomberg, The Wall Street Journal, Barron’s, The New York Times, ValueLine.

Stocks Continue Rally on European Bailout News – October 31, 2011

Up to date in less than 2 minutes: Last week, U.S. stocks rose driving the Standard & Poor’s 500 Index toward the biggest monthly gain since 1974, after European leaders agreed to expand the region’s bailout fund and American economic growth accelerated. For the week, the Dow, S&P 500, NASDAQ, and Russell 2000 gained +3.6%, +3.8%, +3.8%, and +6.8%, respectively. Equity Performance Table Last Week Year to Date Last 52 Weeks Dow Jones Industrial +3.6% +5.6% +10.0% S&P 500 (Large Caps) +3.8% +2.2% +8.6% NASDAQ (Technology) +3.8% +3.2% +9.2% Russell 2000 (Small Caps) +6.8% -2.9% +8.2% International Stocks (EAFE) +6.3% -2.9% +0.0% Dow Jones Total Stock Market (Broad Market) +4.2% +1.2% +8.4% Interest Rates Prime Lending Rate 3.25% Interest Rate Bias Short-Term = Neutral; Intermediate Term = Neutral; Long-Term = Neutral 90 T-bill Rate 0.00% 90 Day LIBOR 0.43% TED Spread 0.43% 30-Year Mortgage Rate 4.20% 15-Year Mortgage Rate 3.45% 5-Year Adjustable Mortgage Rate 3.00% 30-Year Treasury Yield 3.38% 10-Year Treasury Yield 2.32% 5-Year Treasury Yield 1.13% 2-Year Treasury Yield 0.29% Notable Dividend Increases – 2011 Lockheed Martin (“LMT”) 33.3% 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”) 14.8% Kimberly Clark (“KMB”) 6.1% Now, all the details…………………… Last week, the S&P 500 rose +3.8% to 1,285.09, the highest since August 1st. It has rallied four straight weeks, the longest streak since January, and added +14% in October. The Dow gained 422.32 points, or +3.6%, to 12,231.11. Stocks gained after the European rescue fund was boosted to 1 trillion euros ($1.4 trillion) and investors agreed to a voluntary writedown of 50% on Greek debt. The S&P 500 had fallen five consecutive months, driven lower by concern the European debt crisis would curb global growth. “The crisis atmosphere has lessened,” Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, which oversees more than $38 billion, said in a Bloomberg telephone interview. “European policy makers have bought more time,” he said. “It’s not a permanent solution, but it limits the immediate risk to the market.” Equities also climbed after the U.S. economy expanded in the third quarter at the fastest pace in a year, as gains in consumer spending and business investment helped support a recovery on the brink of faltering. Separate data showed that consumer confidence unexpectedly rose in October, while fewer Americans filed for unemployment assistance. Last week, raw-material producers gained +7.9%, the most among 10 industry groups in the S&P 500, after a report from HSBC Holdings Plc and Markit Economics showed China’s manufacturing may end the longest contraction since 2009. The report, along with Japanese data showing exports exceeded economists’ forecasts, signaled that Asia’s two largest economies are withstanding Europe’s sovereign debt crisis. Last week, financial shares in the S&P 500 rose +7%, the biggest advance since July 2010, as 76 of 81 companies rose. Morgan Stanley (“MS”) soared +13% to $19.31. JPMorgan Chase & Co. (“JPM”) jumped +9.8 to $36.69. Bank of America (“BAC”), which has dropped -45% this year for the worst performance in the Dow, surged +14% to $7.35. Companies most-tied to the economy gained as the Morgan Stanley Cyclical Index advanced +7%. Caterpillar (“CAT”) increased +11% to $96.85. The world’s largest construction and mining-equipment maker posted higher-than-expected third-quarter profit and sales and said 2012 revenue will gain as the U.S. and global economies improve. Last week, 189 companies in the S&P 500 reported quarterly results. Approximately 75% of the companies that reported earnings since October 11th beat analysts’ projections, according to Bloomberg data. Earnings have surpassed estimates by an average +5.8%. Third-quarter corporate earnings “show things aren’t as bad as the market thought,” Terry Morris, who manages $2.2 billion at National Penn Investors Trust Co. in Wyomissing, Pennsylvania, said in a Bloomberg phone interview. “Maybe things will be kind of quiet in Europe now and we can get back to fundamentals.” The MSCI EAFE Index (broad developed international index) rose +6.3% last week. The Americas rose +4.7% with Brazil up +7.7%, Mexico up +4.8%, and Canada up +4.8%. Europe rose +4.2% with Germany up +6.3%. Asia-Pacific rose +7.1% with Australia up +5.1%, China up +6.7%, Hong Kong up +11.1%, India up +6.1%, Taiwan up +5.0%, and Japan up +4.3%. Treasuries dropped in price with the 10 year yield rising to 2.32% from 2.22% in the week earlier. 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 2,018, down from the prior week’s level of 2,153. The index reached a high of 11,793 on May 20, 2008 and a low of 663 on December 5, 2008. The index last peaked at 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 43 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 +6.8% and closed at $93.32 per barrel. Year-to-date oil is up +2.1%. The average price of unleaded gasoline dropped -0.2% last week to end at $3.443 per gallon per October 30th data provided by AAA. Year-to-date, unleaded gasoline is up +12.0%. Natural gas was up +2.5% last week and closed at $3.923/MMBtu. Year-to-date, natural gas is down -10.9%. Last week, gold rose +6.8% closing at $1,746.20 per troy ounce. Year-to-date, gold is up +15.1%. The dollar was down -1.6% last week as measured by the U.S. Dollar Index with that index closing at 75.067. Year-to-date, the U.S. Dollar is down -1.6% as measured by the Dollar Index. The Euro was up +2.9% against the U.S. dollar closing at $1.4158/Euro. Year-to-date, the Euro is up +5.9% against the U.S. Dollar. In the coming week, look for a slew of corporate earnings from the likes of Humana Inc. (“HUM”), Emerson Electric (“EMR”), Consolidated Edison (“ED”), Vulcan Materials (“VMC”), CenturyLink (“CTL”), MasterCard (“MA”), and Berkshire Hathaway (“BRK/B”). Look for economic reports this week on manufacturing and non-manufacturing activity, ADP employment change, FOMC rate decision (no change expected), October unemployment, and weekly jobless claims data. Sources: Bloomberg, The Wall Street Journal, Barron’s, The New York Times, ValueLine.

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.

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.