cash
Written by Dani, February 08th, 2012
This is a podcast summary. For complete details on the items discussed today, please listen to the full audio here.
As we promised yesterday, we’re back today with an update on the European crisis, which is not looking very promising. Greece is on the verge of default, even though most people are not willing to recognize how serious the situation is there. Greece is in the fifth year of a recession and has 20% unemployment.
European Union leaders are asking Greece to follow through on some serious austerity measures – cutting back on public employee pay, pensions, holiday pay and etc. This means a lot more pain to come for the Greek people and we think these measures will also slow the economy in Greece even more.
These problems might soon spread to Portugal and Spain, and as we mentioned last week, the Germans have the power to bail out Greece. However, it looks like Germany has no interest in bailing Greece out, so we expect Greece to default, perhaps as soon as this week. We think that this will have a huge impact on the global economy.
Remember, we’ve said before that our investment strategy is aligned closely with what Mohamed A. El-Erian said in his Wall Street Journal opinion piece a few weeks ago. We are advising that our clients’ portfolios remain “defensive, but agile enough to be offensive when opportunities emerge.”
Tomorrow we’ll look at the final installment of our six-week personal finance series, so come back for more details on how to get your portfolio in shape. (To see the previous five weeks of personal finance tips, look at our blog-post here.)
Written by Dani, January 28th, 2012
For a complete recap of our January teleconference, please click here. We encourage you to listen to the teleconference as well, and you can do that by clicking here.
As we’ve stated before, these are volatile, tricky markets. We still believe that the long-term market trend is heading down even though the short-term might trend upwards. However, we think that Europe and its impending financial crisis will be a key player in any investment, whether you are prepared for it or not.
In the teleconference, I talked about the investment themes of gold and emerging markets, and both of those are showing great promise for the beginning of this year. If you’d like more information on those markets and what our predictions are for them, please listen to this podcast in its entirety and/or the teleconference.
Bonds are still performing quite well and we’re impressed with the action in the bond market. Interestingly, it seems that the bond market is telling us that the economy is weak, but the stock market is telling us that everything is OK. One of these markets obviously has to be wrong, and it will be interesting to see how this plays out this year.
European Update:
Many countries in Europe were downgraded last week, which means that these countries will have higher interest rates for any further borrowing.
Greece has been negotiating the payment of their bonds, and their refinancing negotiations fell through last week as well, which means that they’ve encountered yet another hiccup in getting their financial issues worked out. This is a negative piece of news for Europe as a whole.
Also, Germany is experiencing a slight recession and slow-down at the end of 2011, despite being the strongest economy in Europe.
As we’ve said before, we believe the problems in Europe will affect U.S. investors, so this is something that we are watching closely. If you are concerned about the impact of a European recession on your investments, please listen to the teleconference for a more complete discussion of our strategy in 2012.
Personal finance exercise, part 3:
We believe that the most successful people are on top of the issues of the day and have a plan of success. Being well-informed and staying well-organized will help you to succeed, so for the next few weeks we will be outlining six exercises for you to stay informed and ready to make good decisions. Those six exercises are:
- Making a calculation of your net worth
- Taking inventory of financial assets
- Understanding your cash flow projections
- Examining your expenses
- Making sure you have an updated estate plan and living trust
- Taking stock of all insurance policies – health, life, long term care, annuities, etc.
Two weeks ago, we took less than an hour to calculate your net worth. Last week, we talked about taking inventory of your assets.
This week, we are figuring out how to understand your cash flow projections. Going through these inventories and personal finance exercises will help you to understand what you have and what that means. Also, this will hopefully give clarity to anyone who might have to manage these accounts in the event of a family tragedy or other emergency. It’s just a good idea to look at these things every now and then, and today we’re going to examine our income.
Income can come from a paycheck (W-2 or 1099 income), rental or royalty income, an investment, a pension or some other source. Figure out how much income comes in monthly, whether it actually appears monthly or not. See what those income sources are, and what you expect those income sources to be and produce in the coming year. Cash flow projections is one of the key issues of financial planning – if you’re not happy with your current cash flow, how can you make it better?
Instinctively, we know that cash flow can make or break your wealth management choices, but most people don’t actively try to fix problems with their cash flow. As you figure out how to achieve your cash flow and income goals, remember that we are here to help you make these decisions and work out solutions to your personal financial situation.
Tune in next week for more on Doug Fabian’s Monday Market Update, and the next exercise to preparing yourself for a successful investment future. (Also, if you read this blog and enjoyed it, listen to Doug’s podcast this week for even more details on these topics, and please share this information with others who might benefit from our perspective.)
Written by David, July 20th, 2011
The action in the equity and bond markets so far in 2011 can be characterized by what I call a sort of “nervous uncertainty.” Let’s face it, we’ve had a lot of cause for worry, and we’ve had a lot of reasons to be encouraged. On the bond front, that nervous uncertainty has translated into a big surge in cash holdings among bond mutual funds. Apparently, bond fund managers aren’t in any hurry to purchase new debt, and that comes despite the fact that bond fund inflows are on the rise.
According to mutual fund research firm Morningstar, the average cash stake in the 1,623 funds that the company tracks rose to 9.8% at the end of June from 9.1% at the end of 2010. In dollar terms, that’s about $243 billion. The average bond fund’s cash position was at 10.2% at the end of 2007, and 10.1% at the end of 2008, according to the data.
Meanwhile, investors have been funneling money into bond funds in 2011, adding some $92.8 billion through June 30. That’s the biggest inflow seen in any of the fund categories that Morningstar tracks. In other words, bond fund managers are raking in the cash, and essentially hoarding it.
So, the logical question here is why aren’t bond fund managers investing in new debt right now?
Well, for starters, we can blame that debt-ceiling debate for at least some of the uncertainty. Although I am not sure how to quantify this, I suspect that no bond fund manager wants to get caught with his guard down if the unthinkable does happen, and if the powers that be in Washington drive the nation into default.
Another reason why bond fund managers aren’t gobbling up new debt is the possibility of a credit rating downgrade. Such a downgrade has been threatened by both Moody’s and Standard & Poor’s. Although I suspect that we are in no danger of a downgrade here, the mere discussion of such a negative turn of events for the bond market is understandably spooking bond fund managers.
Then there’s the issue of the Federal Reserve’s follow-up policy to quantitative easing, part 2, or QE2. Will we see another round of money creation in some form or another and, if so, what will be the impact on the U.S. dollar and U.S. Treasury bonds? Nobody knows for certain, and this uncertainty is keeping cash on bond fund books.
Written by David, March 14th, 2011
Do you have idle cash languishing in a savings account or money market account earning less than 1%?
If so, you may be missing out on excellent opportunities to achieve both steady income and capital appreciation generated by your hard-earned assets.
The Federal Reserve and banks around the country have dropped the yield on short-term savings and money markets rates to rock bottom levels in an effort to stimulate the economy. Long-term CDs and Treasury bonds don’t give you the flexibility to keep your money liquid, and as such they represent a hazard if interest rates were to rise.
According to recent government data, the inflation rate in the U.S. is close to 1.6%, which means that your purchasing power is diminishing if you are not able to achieve a total return in excess of this baseline. And that’s the official inflation rate, which doesn’t take into account rising food prices and soaring energy costs.
So, what do you do with that cash on the sidelines that’s earning next to nothing?
You put it in an actively managed income portfolio from Fabian Wealth Strategies.
Now more than ever, you need a conservative investment strategy designed to generate monthly income as well as preserve investment capital. At Fabian Wealth Strategies, our Steady Income portfolio is comprised of highly liquid investments with a balanced mix of dividend-producing stocks and investment-grade bonds.
Our proactive approach to asset management allows us to be flexible with the portfolio in the event that interest rates continue rise, or stocks abruptly turn lower. We accomplish this by monitoring our portfolios on a daily basis to determine what we believe is the best asset allocation mix to achieve your income-generating goals.
We welcome your calls at (800) 391-1118 to discuss how we can help you turn your idle cash into an income-generating machine.
Sincerely,
Doug Fabian
President, Fabian Wealth Strategies
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Fabian Wealth Strategies, Inc. is a registered investment advisor with the U.S. Securities and Exchange Commission. Doug Fabian is a registered investment advisor representative. The information expressed in this email is for educational purposes only and should not be construed as a recommendation to buy, sell, or hold any specific security. Investing involves the risk of loss. Consider the risks, fees, and expenses before making any change to your investment portfolio.
Written by David, April 09th, 2009
I know a lot of readers are committed to having a high cash position during this bear market. So it’s no surprise to me that lately I’ve received a lot of questions regarding cash alternatives. Many of you are understandably not content with the very low rate of return being paid by today’s money market funds.
And while I feel that the money market is the safest, most liquid place to park your serious money during this time of market flux, I do think there are several safe alternatives to your run of the mill money market fund.
One of my favorite money market alternatives is the iShares Barclays 1-3 Year Treasury Bond (SHY). This investment seeks results that correspond generally to the price and yield performance of the short-term sector of the U.S. Treasury market as defined by the Barclays Capital 1-3 Year U.S. Treasury index.
The current yield on SHY is 2.05% as of April 8, 2009, so if you are looking for a good place to get a little more yield than your money market account, check out SHY.
In addition to SHY, there are two other cash alternatives that are worthy of checking out. They are the WisdomTree U.S. Current Income Fund (USY), a fund yielding 0.35%, and the PowerShares VRDO Tax-Free Weekly (PVI), which has a current yield of 1.64%. Both of these decent cash alternatives, although they pale in comparison to SHY in terms of yield.
So, if you are looking to take a little of your money and put it into cash alternatives, here are three solid candidates.
Written by David, March 04th, 2009
Dividends are a great way to earn some extra income. You also can grow your principal through capital appreciation with good dividend-paying equities. One way to gain both of these benefits is through dividend-focused exchange-traded funds (ETFs). But the path to doing so has become increasingly treacherous for investors to follow as once-solid corporations struggle for survival. If you are an income-oriented investor, here are four simple tips on how to select these types of funds.
First, pick ETFs that hold stocks in stable companies with sustainable dividend yields. In this market, even traditional dividend-paying companies such as Bank of America, General Motors and Citigroup, have suspended their dividends because of poor performance. In 2008, 62 companies in the S&P 500 cut their dividends. To protect your capital and enjoy steady income, choose ETFs that invest in companies likely to continue paying dividends.
Second, find ETFs that are invested in cash-rich companies. As I have said many times before, in bear markets, cash is king. Cutting dividends harms the company’s reputation and typically hurts its stock price, as well as your principal. Find ETFs that hold stock in firms with fat cash positions and your dividends likely will keep coming.
Third, beware of ETFs that have too much exposure to any single sector. Take a close look at the financial or energy sectors, since any ETF that follows these sectors could be down more than 50% in the last year — costing you much of your initial investment. Remember, when earnings fall sharply, dividend cuts often follow.
Finally, and possibly most important, do your homework before you buy any ETF. Know its holdings, find out if the fund is leveraged or not, check its past performance and make sure that it is well-diversified.
ETFs are a great and easy way to moderate risk in any portfolio, especially in times of volatility. Several studies have found that dividend-paying stocks held for the long run provide better risk-adjusted returns than low-paying ones. Also consider your appetite for risk and your short- and long-term financial goals. Then, invest accordingly.
Written by David, November 05th, 2008
Now that the election is in the books, Wall Street can refocus on corporate America’s books. Unfortunately, those books aren’t going to be an uplifting read.
All of the major economic metrics will likely be much lower in the fourth quarter, and that’s following an already dismal third quarter. The unemployment rate will likely continue rising, corporate earnings will probably come in well below expectations, and consumer and capex spending is forecast to be the worst it has been in many years.
These recessionary conditions mean one thing for the market—more bearish sentiment, more selling, and a whole lot more risk baked into the investment cake.
In the midst all of the negativity pervading Wall Street right now, there is one theme common to nearly every mainstream investment advisor out there. That theme is a reluctance to embrace what I call the forgotten asset class—cash.
The chart here of the S&P 500 certainly proves that equities aren’t the place for your serious money. Yet despite the pernicious declines in the market, most advisors are still telling their clients to stay the course.
Look at the table below, which outlines the performance of the major indices throughout multiple time frames.
As you can see, no index has been safe from the mass sell-off that’s hammered so many investors for so long. The real problem here, as I see it, is the column here in yellow. That column shows how far below the all-important, 200-day moving average each respective index is currently trading. The fact that equities are so far below the 200-day average means that it will be a long, long time before it’s safe to go back into the equity waters.
Despite the overwhelmingly negative economic metrics, and despite the current state of the major market averages, most advisors are telling clients they have too much cash in their portfolios.
I recently talked with a client that had over $1 million in cash generated from the sale of a home. She told her broker she wanted to stay conservative with the money, but his first reaction was to sell her some kind of product. He told her cash wasn’t a good place for her money. Instead, he sold her corporate bonds, some of which are now worth only 2 cents on the dollar!
This kind of financial malpractice is a symptom of not wanting to embrace the forgotten asset class of cash. Cash is absolutely king when it comes to surviving a big market downturn, and if you haven’t done so already, I recommend you take a serious look at increasing your cash allocation.
So, why do most mainstream advisors avoid cash? Simple, there’s nothing in it for them.
You see, you can’t charge big fees on cash. You can’t charge a commission on a money market fund, and because a broker doesn’t make any money for himself when you are in cash, there is no incentive for him to recommend you stay there.
Fortunately, I don’t have that incentive. My only incentive is to help you safely navigate this market storm. If your advisor does not want to move you to cash, consider another alternative. Fabian Wealth Strategies actively manages client assets using exchange traded funds. We are now accepting new clients in both our growth and income portfolios. Call 800-391-1118 or visit www.fabianwealth.com for more information.
