Tag Archives: economy

Good Debt, Bad Debt: It’s Mostly Bad For You

After six years, the era of deleveraging household debt is over, according to the Federal Reserve Bank.

Since the fiscal crisis, Americans have reduced their household debt by $1 trillion, from $12.7 trillion in the third quarter of 2008 to $11.7 trillion in the third quarter of 2014.

But in November, the Fed reported that the trend reversed during the third quarter of 2014, when Americans increased their debt by $78 billion, or 0.7%.

While many signs show the economy to be growing, there is enough conflicting evidence to leave Americans uncertain about what 2015 will bring for their financial plans. Given the state of the economy, it’s prudent to reduce borrowing to as close to zero as possible.

When taking on debt, it’s important to remember the basic concept of what it is. It’s borrowing money that you have not yet earned, with the promise to pay it back with interest. The big risk is whether you will be able to pay it back. Should you suffer some kind of financial hardship, such as a layoff or reduction in income, will you still be able to make the debt payments?

“Even if they have a good job, most people have budgets that rely on everything going well,” said Kathryn Moore, certified consumer credit counselor at GreenPath Debt Solutions, a nonprofit consumer credit counseling service based in Farmington Hills, Mich. “But what if something happens that the budget can’t handle? For that reason, pay down the debt to leave yourself flexibility.”

Moore says that even if people don’t lose their jobs or suffer a salary cut, sudden price hikes in necessities such as food, energy, health care or rent may cause them to have trouble paying their bills.

Having too many liabilities, especially credit card debt, can be a symptom of having lost control of the management of one’s household finances.

“When we don’t have control over our money, it causes a lot of stress and anxiety,” said Donna Skeels Cygan, author of “The Joy of Financial Security” and owner of Sage Future Financial, an Albuquerque, N.M., advisory firm. “People need to make a commitment to eliminate credit card debt as quickly as possible.”

Cygan says that people don’t know where to start, so they put their heads in the sand and hope their situation will get better, but it won’t. She recommends that people start by creating a net-worth statement, listing all their assets and liabilities. “Many people have no idea what they have. Looking at the bottom line gets your head out of the sand,” she said.

“There are only two ways to cut the debt,” said Moore. “Either bring in more money with another job, or cut expenses.”

In addition to cutting back on entertainment spending, getting rid of premium cable channels, eating out and going to bars, Moore says that other ways to find money are to stop smoking, refinance a mortgage, lower insurance premiums and cut back on saving for retirement until the debt is eliminated. Cygan suggests not buying any new clothing for the next three months, not replacing technology gadgets for a whole year, keeping a car for 12 years and taking inexpensive vacations within your state.

And, of course, stop using your credit cards.

“The best way to pay off debt is to roll it into cheaper debt, like home equity,” said Adam Thurgood, a managing director at HighTower, a Chicago wealth management firm with $25 billion in assets under management. “But you need the discipline to pay it off. Still, it’s risky, because it allows you the opportunity to rack up more high-interest credit card debt.”

But he opposes using home equity loans to purchase items with short useful lives.

Not all debt is bad. The experts say debt that helps acquire an asset — especially one with a long life or benefit, such as a mortgage, car loan or student loan for college — is good debt. Still, bad choices can be made with these loans.

Thurgood says that mortgages with variable rates around 1.5% have been perfect for the past five years. But, he adds, this “Goldilocks” period is coming to an end, and it now makes sense to transition to a fixed-rate, 30-year loan, even at a higher rate. That’s because interest on adjustable-rate loans could shoot above current fixed-rate mortgages.

Car loans with low rates can be a good move, but if these loans start charging 6%, Thurgood says, it’s better to borrow the money from your portfolio, pay the car loan off and pay yourself back with interest in monthly installments over a four-year period.

For the full story go to Investor’s Business Daily.


T.Rowe Cautiously Optimistic on Stocks

Mutual fund firm T. Rowe Price said now is the time buy equities and predicted that real gross domestic product will grow 2.25% in 2013 at a press briefing in New York today. 

While the U.S. fiscal cliff combined with uncertainty over U.S. policy and regulations, the European debt crisis and China’s hard landing have dampened investor sentiment, John Linehan, T Rowe’s director of U.S. equity, said, the market headwinds will diminish in the coming year. Linehan said there is a “tug of war” between these headwinds and market tailwinds such as strong corporate fundamentals, attractive valuations, decisive monetary policy actions to support economic recovery, improving housing and labor markets and a deleveraging of consumer debt. In the end, he thinks the tug of war will prove positive for stocks. 

The fiscal cliff may cause a small recession in early 2013, but politicians will solve the problem, lowering the deficit and sparking a rebound in the second half of the year, said Alan Levenson, T. Rowe’s chief economist.  He expects the final deal will end the Bush tax cuts for upper income earners, the 2% payroll tax holiday and extended unemployment benefits. Both analysts expect the tax rate on dividends to rise. Levenson said real gross domestic product should grow 1.5% in the current quarter and 2.25% next year. He expects the unemployment rate to fall 0.3 to 0.5 percentage points in 2013. 

Stock chief Linehan points to a few reasons to be cautiously optimistic. He said the price-to-earnings ratio on the S&P 500 is a low valuation of 13. The market’s current low valuations combined with strong corporate balance sheets suggest stocks are poised to perform well from here, he said. 

He also said the heavy net inflows into bond funds since 2007 will reverse as retail investors seek higher returns and begin to embrace risk.  Linehan finds the following investment themes to be attractive:

  • Companies with exposure to emerging market consumers.
  • Derivative plays on the housing recovery.
  • Companies with growing dividend payments. 
  • Providers of new treatments in healthcare.
  • Companies with exposure to mobile and cloud computing.
  • Compelling “sum-of-the-parts” valuations in energy. 


TrimTabs Says Rally Is Over

Charles Biderman, the CEO of TrimTabs Investment Research, tells Yahoo’s Tech Ticker the stock market rally will soon end. He points to a massive amount of selling by company insiders and an expansion of the market’s float.

TrimTabs, which analyzes stock sales and cash flows into the market, says since May “there have been $98.5 billion of secondary stock offerings, mostly by banks, 4.6 times more than the level of new cash takeovers and buybacks. At the same time, there’s been ‘massive selling’ by insiders, to the tune of $3.9 billion vs. just $350 million of insider buying.”

Biderman said that every time since 1987 that the float of the stock market rose to these levels, the market fell sharply, with just one exception. He said most of the demand for the rally has come from under-invested hedge funds and pension funds, that he believes have completed their purchases. However, retail investors are much less enthusiastic about stocks than has been widely reported. Partly, that’s because few retail investors have the cash to put into the market.

Call It a Hunch, We’re In For a Tumble

I don’t have any complicated quantitative models at my disposal. I read, I think, and then I have a hunch. Then I have lunch.

I think the market rose too far, too fast and that we are going to test the March 9 low. The economy is not growing as fast as many had expected.

This morning the Federal Reserve Bank of New York released its’ Empire State Manufacturing Survey. This index of general business conditions fell to -9.41 in June, down from -4.55 in May. Economists expected a slight dip to -4.6 in this measure of regional manufacturing conditions.

It’s midday Monday. After a 40% rally since the March lows, the S&P 500 is down 2.5% today. The Dow, which was just 5 points from breaking even for the year, is down 200 points, or 2.3%. The Nasdaq is down 2.7%.

The Wall Street Journal asks is this a bull or bear market? Signs Suggest Stocks’ Surge Is Blip Within a Bear; Still, There’s Opportunity.

This would seem to prove my theory from last week, when I decided that all the outflows from the large-cap U.S. stocks was a sign that the market had topped. I think we’re going to go back to near 7,000 on the Dow. Good time to take profits and wait for the sale to begin again.

All That Glitters Is Not Gold

In times of economic crisis, investors and regular citizens scared-out-of-their-minds turn to gold. As a gift, I like to say it’s always the right size and the right color. But as an investment, it’s an asset that is supposed to hold a steady value. While demand for gold can push the precious metal’s price higher, it’s value can also rise on a relative basis. Specifically, as the dollar continues to fall in value, it takes more of them to buy the same ounce of gold. So, if you think the stimulus plan might devalue the U.S. dollar and you don’t know where to invest, it may be a good time for gold.

With gold up year-to-date 4.97% as of Feb. 6, compared with 4.32% for all of 2008, ETFGuide compares the 2008 returns of four exchange-traded vehicles (ETVs).

SPDR Gold Trust (GLD) up 2.99%
Market Vectors Gold Miners ETF (GDX) down 26.65%
PowerShares DB Commodity Index Tracking Fund (DBC) down 30.77%
ProShares Ultra Gold (UGL) n/a, launched in Dec. 2008

I look at three more.

iShares Comex Gold Trust (IAU)
PowerShare DB Gold Fund
PowerShares DB Precious Metals Fund

The Gold Trust, up 4.92% this year through Feb 6., did the best because it holds real, solid gold bricks in a vault in London. If you want to own gold and not have to store it, this is the way to go. This or iShares Comex Gold Trust (IAU), which is up 5.11% as of Friday. These are not true funds, but grantor trusts. Shareholders are taxed as if they own the underlying gold, with a long-term gain tax rate of 28%.

The Market Vectors Gold Miners is an ETF that holds stocks. So, even though the commodity gold went up, the stocks fell because they were caught up in the macro downtrend of the broader stock market. The S&P 500 lost about 38% last year, so the rising price of gold helped the ETF’s returns, still beating the S&P 500 by 11 percentage points doesn’t feel so good when you lost 27% of your investment. Gold stocks will give leverage over the commodity, up to three times the percentage gain in the price of gold, but that leverage also works on the way down. Year-to-date Gold Miners is down 26% according to Yahoo Finance. Because Market Vectors holds stocks the current long-term capital gain tax rate of 15% applies.

PowerShares DBC holds futures contracts, but only about 10% is comprised of gold contracts, so it’s not a pure play. But it is a good way to play the broader commodity sector by tracking an index. Obviously, 2008 wasn’t a great year for commodities either. DBC is taxed like futures contracts. Capital gains are taxed 60% at the long-term rate and 40% at the short term rate.

ETFGuide doesn’t look at PowerShare DB Gold Fund (DGL), which holds only gold futures contracts. The DGL rose 3.2% last year and is up 2.61% year-to-date. There’s also the PowerShares DB Precious Metals Fund (DBP), which is comprised of 80% gold and 20% silver. It slid 1.12% last year and is down 3% year-to-date.

The price of one ounce of gold closed at $895 on the London Bullion Market, down from $920 last Thursday.

For a detailed explanation of the gold and all the other ETV tracking commodities check out ETFs for the Long Run: Chapter 8: The ETFs That Aren’t ETFs.

Pedigree, Schmedigree: Re-Evaluating Harvard

In an amazing coincidence, the negative aspects of the concept “the Best and the Brightest,” got a double dose of attention yesterday.

In “The Brightest are not Always the Best,” Frank Rich of the New York Times reminds us to not get all worked up with high expectations about the brand names being appointed to the Obama cabinet. Many of these people are academics, not business people. That means they believe theories, but have little experience with how reality can blow theories apart. Frankie reminds us that when David Halberstam wrote the book, “The Best and the Brightest” about the geniuses who filled out John Kennedy’s cabinet, it wasn’t a compliment, but sardonic. In this famous book, Halberstam describes how some of the best minds of that generation created the Vietnam fiasco, which destroyed Lyndon Johnson’s presidency and brought us the Richard Nixon era.

And for those of you who think it couldn’t happen again, or that history doesn’t repeat itself so quickly, Peter Cohan of BloggingStocks points out that “Five Harvard MBAs Wrecked the Global Economy.” The most famous and probably the most culpable is non-other than President George W. Bush. However, few can be faulted with thinking this guy was one of “the best.” Great quote on Bush’s pathological lying and ability to deny what he just said.

First runner-up goes to Treasury Secretary Henry Paulson, who I feel is as much, if not a greater economic criminal than Bush. Considering he ran one of the firms that sold the credit default swaps, his inability or refusal to see the destructive force they held, as well as how they were affecting the economy, means his actions are either those of an incompetent or a severe case of malevolence. Worse, I think Paulson, after months of saying nothing was wrong, only decided to get involved in September because his old firm, Goldman Sachs was teetering close to bankruptcy. I suspect Paulson fearing his $500 million savings, most of which is in a blind trust filled with Goldman stock, would become worthless if he let Goldman fail, decided to take action rather than face the alternative of spending his golden years living off of a government pension.

Third place goes to Rick Wagoner, the CEO of General Motors. This genius failed to take advantage of profits from huge sales of gas guzzling SUVs to reinvest in GM and turn that dying behemoth around. Instead, this Einstein lost billions of dollars, oversaw the 95% collapse of his company’s stock and is on the verge of destroying one of America’s largest industries. I could have run that company into the group for one-tenth the salary they paid that guy.

Filling out the list is Stan O’Neal, the man who destroyed Merrill Lynch, the world’s largest stock broker and one of the most respected names on Wall Street; and Jeff Skilling, the CEO of Enron, the architect of the biggest fraud in U.S. history. Skilling’s crimes of energy terrorism are well documented, including his being responsible for the near downfall of California and the real downfall of its then governor Grey Davis. Is Skilling responsible for the current mess? Well, he did help create the model and set the standard for destroying the retirement savings of many people. So, even if he isn’t directly responsible, it’s only because he’s already in jail.