Right now, the Federal Reserve is in the market because the economy would not be able to grow without its involvement. We have a situation where interest rates are artificially low and so people are wondering what to do with their savings accounts and CDs – how do you make money on your savings without interest?
We continue to believe in the bond market for investors, but we know that it’s tempting to get into stocks because of dividend yields. Many investors are afraid of a bond market bubble and so hesitate to invest in bonds. However, we will say it again – we believe that bonds are the place to be for the majority of your portfolio.
Even if bonds do decline, you’re still getting an income stream and you are not exposed to risk and losses like in the (right now, very volatile) stock market. There are decent income streams available in the bond market, you have to be wise about what you buy and why. Also, you don’t have the downside risk in bonds that you have in the stock market.
For more information, please check out this excellent article and presentation by Jeff Gundlach. We think that he makes some excellent points and we encourage you to take this advice seriously. If you have questions about how to use bonds in your portfolio, please call our offices at 800-391-1118.
This is a podcast summary. For more information, please listen to the entire broadcast here.
This is a recap of our recent teleconference (Tuesday, November 13, 2012) titled: The Election, Your Money, Your Future. If you missed the presentation, we encourage you to listen to the audio recording and download the handout, as well as read this blog for more information.
The purpose of this teleseminar is to help you with a thoughtful investment process. This is for general information and education, not personal investment advice.
Here are the main points we want investors to think about in this season:
The elections are over, and it’s time to remove politics from your investment thinking.
Think before you act. Make good investment decisions, follow good strategies.
Avoid speculation. No one can predict, guess or bet on what will happen next. There’s a lot of noise out there, so be wary of fear-mongers.
Think about solid investment ideas to build upon.
First, let’s discuss the things that we are certain of, that will absolutely affect our money and our decisions:
Obama re-election, Congress remains the same.
Obamacare implementation, taxes, and regulation.
Higher taxes
Recession in Europe is worsening
Recession in Japan
New leadership in China
Next, examine those things which we are less sure of. These are not news items we should be speculating about or making decisions based on, because we simply do not know their outcome. Be aware of these items but not panicky about them:
Fiscal cliff outcome
Greece to exit the euro and deal with current cash needs
Spain also has severe cash needs
New policies from China
Potential global recession
Again, we are not making investment decisions based on things we don’t know. We need to be prepared for worst-case scenario, but not investing our of fear or an end of the world scenario. For your continued education and information, we will be having another teleseminar on Tuesday January 15, 2013 in order to update these uncertainties and continue moving forward, so mark your calendar!
Fixed-Income Review and Outlook
Bond market uptrend still in place, which makes bonds a good place for your money right now. There are a lot of people predicting bond market collapse, but we think this is inappropriate speculation, and we want our clients to know that we believe the bond bull market to be still intact.
(Click on chart to enlarge – Key to charts: AGG = Aggregate tripleA rated bonds, LQD = Large corporate bonds, TFI = National municipal bonds, EMB = Emerging market bonds)
Speculation continues that interest rates will rise in the next year, but for right now, these price trends are clearly in place. Obama being elected is an affirmation of Ben Bernanke and the Federal Reserve’s monetary strategy, which is keeping interest rates low. We want to dispel the myth that worries about the strength of the U.S. dollar right now. We believe that the dollar is doing just fine, currently in a short-term uptrend, and is stable. We are monitoring it and global faith in our currency, but we are not seeing anything to worry about in that area right now.
U.S. Indices Review and Outlook
(Click on chart to enlarge – Key to charts: DIA = Dow Jones Industrial Average, QQQ = Nasdaq 100, SPY = S&P 500, IWM = Small-cap stocks)
The longer we stay below the 200-day moving average, more probability of a longer and more serious correction in the markets. We believe that there is still a great deal of short-term risk in the market, but that this will present good opportunities for smart investors. We are defensive with our portfolios but looking for opportunities, and hoping to be buyers in this climate.
International Review and Outlook
(Click on chart to enlarge – Key to charts: EFA = 800 stocks of large international companies (no U.S. exposure), IEV = Europe, EEM = Emerging markets, FXI = 25 largest companies in China)
Opportunities for Income and Growth Investors
Income:
Mortgage backed security strategies
Emerging market bonds
Invest in securities that create a monthly income stream
Dividend equities (could be a good opportunity for purchase in a panic)
Growth
Equities that pay income stream (we like utility stocks and real estate investment trusts right now)
China
Precious metals, mining.
We want to remind our listeners and readers that position size is very important when making investment decisions. We are in defensive positions right now, but alert to buying opportunities. We are not speculating or panicky, but wise and ready for our next investment move.
Personal Finance Post-Election Strategies
Taxes
With President Obama, tax issues are coming in 2013. California taxpayers, Prop 30 is retroactive, so there will be a large tax bill coming to California taxpayers that you need to be aware of and prepared for. Obamacare taxes will begin, as will fiscal cliff negotiations, and this all means that you should look closely at your taxes and meet with your CPA so that you can be prepared for the impact of this political and fiscal climate.
Income
This is the investment area where most people make big mistakes. Before you do anything, declare the kind of investor you are, and make a plan for that investment goal. The mistake that income investors most often make is chasing yield. We encourage you, do not chase speculative or volatile investments in order to get higher yields. It’s not worth it. Your entry point is critical, and it’s important to pay attention and put your money to work at the right price and right time.
Growth
We’re in a secular long-term bear market. Have a shock absorber for volatility. Look for equities that pay income and avoid risk.
Legacy
Everyone is going to die at some point, and how do you plan to take care of your spouse, family, heirs and other causes when that happens? Do you have a relationship with a competent investment adviser? You need professional help in order to insure that your goals and dreams are realized, both for you and your loved ones.
To close, we have some essential takeaways for all investors:
Know that short-term risk is high.
Revisit investment objectives.
Revisit asset allocation.
Prepare for buying opportunities.
As a thank you for participating in our seminar we would like to offer you a free consultation to discuss your portfolio and strategies to achieve your financial goals. This includes an in-depth analysis of all the holdings in your portfolio. We will share with you the unique strategies we are using for our clients right now and how active portfolio management can be of benefit to you.
This offer is available for goal-oriented investors with more than $250,000 in their investment portfolios. Contact us for a brief introduction and to schedule an appointment to review your accounts.
To schedule your free Portfolio Assessment, call us at 800-391-1118.
QE3 (Quantitative Easing, number three) is bigger and bolder than the programs that came before. It has three objectives:
The first goal they have is to hold down long-term interest rates, specifically mortgage rates. This is done by an open-ended program where they will purchase mortgage-backed securities.
Next, they want to see real estate prices stabilize and start to rise. There will probably be another wave of foreclosures coming up and they want to make sure there will be money available for the purchase of those homes.
The third part of the plan is the most controversial. The Federal Reserve’s intention is to keep the stock prices as high as possible. While this is viewed by the stock market as a positive, we have concern about an entity like the Federal Reserve artificially holding up stock prices. This is an unprecedented move that was a surprise to many around the world.
After announcing the plan, the Federal Reserve put up a poll to see how people felt about it – and the number one response was that it would be a long-term disaster for the United States. This program, unlike the ones preceding it, is coming at a time when the stock market is at a high. This has never been done before and people have a lot of questions. The one weak spot of the program is what happens if interest rates go up?
We are also seeing a large and complex geopolitical scene unfold. There are the issues in the Middle East and tensions between China and Japan. Any escalation can be a marker for volatile markets, and even with the highs in the stock market we think it is still a risky time for investing. We recommend that you be prepared for the markets to become even more erratic.
There is a lot coming up in the next several weeks and there will be more many investing opportunities in the months and years ahead. We will be here to help you through and we welcome any questions you have on how to navigate these unusual and difficult times.
There has been a coordinated effort by central banks to address the slowing economy – according to the Wall St. Journal:
Central banks in China, the euro zone, the U.K. and other countries took new steps to bolster growth amid mounting worries about the global economy, but the moves didn’t appear to reassure investors.
We encourage you to read the full article, but here is the key issue: central banks hope that cheaper credit will induce businesses and households to borrow and spend. However, most people are increasing savings and paying down debt, because they see uncertainty in the markets and the economy and want to prepare. Saving and paying down debt are both great strategies for your personal finance, but not for economic growth, which is why you hear so many politicians and central bankers calling for more borrowing and spending. We don’t fault people for being conservative, however, especially when you get economic news like our latest jobs report and you see the kind of global uncertainty we’re seeing now.
Also, as you know, Fabian Wealth Strategies is located in California, and we have several cities in our great state that are in deep financial trouble: Victorville, Stockton, Vallejo and Mammoth Lakes. Unfortunately, these kinds of money problems for cities (and states, and countries, unfortunately) are not uncommon and we think they will continue to bubble up. There is not enough economic growth or tax revenue to service the debt all over the world, which is why we see major problems in Greece and other parts of Europe. Domestically, it’s not an urgent problem for investors right now, but we do think that this is an important issue to be aware of.
Another factor in the debt discussion is this: bad or subprime borrowers pay a lot more in interest then prime borrowers do, and economic activity grinds to a halt when there is high interest rates. (Hence the central bank action we talked about in the beginning of this post.) Confidence is also a big factor in economic, as many people see this uncertain economic news as a reason to stay put and not invest, hire, borrow or spend.
These are all things to be aware of as we manage our portfolios and investment strategies. These are unusual circumstances, but with good education, advice and sound principles, we think that investors will have great investment opportunities later this year. If you have questions about your current portfolio positions or want to be sure you’re prepared for the risks and opportunities to come, give us a call at (800) 391-1118. Our initial conversation will cover your goals, your objectives and your current invested positions. It will also cover what Fabian Wealth Strategies can do for you.
To wrap up, here are a few reminders:
Our next live teleconference will be Tuesday, July 17. Stay tuned for sign-up information and more details.
Doug will be presenting at the San Francisco Money Show on August 24 – 26, 2012. He will be offering four presentations, and we encourage investors to consider attending, as it is a great experience.
Have questions or comments for us? Send an email to Doug: askdoug(at)dougfabian(dot)com
This is a podcast summary. For more complete details, please listen to the full podcast here.
There were no surprises in today’s decision by the Federal Reserve to leave interest rates unchanged, and at nearly zero. The Fed said that “low rates of resource utilization and a subdued outlook for inflation” are the reasons why interest rates will remain what they call “exceptionally low” until at least the middle of 2013.
Although the Central Bank stood pat on interest rates, it did give Wall Street a slightly more encouraging view of the economy. “Economic growth strengthened somewhat in the third quarter,” according to the FOMC statement, which added that, “Household spending has increased at a somewhat faster pace in recent months.” Of course, the Fed hedged here by citing the “continuing weakness in overall labor market conditions.” It also mentioned the “elevated” unemployment rate as a headwind facing the economy.
Markets pulled back somewhat after the Fed failed to announce any new stimulus, but I still think that if things get worse economically we could see the central bank move to do what it does best—pump more money into the economy. I don’t know what, precisely, the Fed would do to accomplish this task, but it’s proven in the past that it can be creative when it comes to manipulating monetary policy. Case in point is the Fed’s current commitment to the so-called Operation Twist.
As the old saying goes—don’t touch that dial! The Fed drama and the struggling economy are far from over.
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.
Over the course of the last several years, I’ve been telling you about the threat that deflation (as opposed to inflation) may pose to your serious money. Well, it seems as though now I am not the only money manager concerned with the threat of inflation.
According to an article in The Wall Street Journal aptly titled, “Big Investors Fear Deflation,” many prominent investors now are becoming concerned over the prospect of deflation and how it could take a bite out of investor wealth. The article specifically calls out PIMCO bond-fund manager Bill Gross, investment manager Jeremy Grantham and hedge-fund managers David Tepper and Alan Fournier as among the best-known investors preparing for a potential deflationary wave.
The article also points out that these investors are growing increasingly concerned that relatively weak economic data, along with a general consensus that global policy makers are unable to take further steps to stimulate their respective economies, will bring about a new deflationary future.
“Deflation isn’t just a topic of intellectual curiosity, it’s happening,” Bill Gross told The Wall Street Journal. I respect Mr. Gross’ opinion on just about every economic issue, even when I don’t agree with him. On the deflation issue, however, I find myself unable to object to his logic. That logic includes the citing of an annualized 0.1% decline over the past two years in the U.S. consumer-price index. This kind of aggregate price decline may not seem like much, but as Gross points out, “It’s an uncertain world that’s tipping toward deflation.”
Now, you may remember that after the 2008 financial crisis, many people feared a deflationary spiral would take hold of the global economy. That didn’t happen, of course, and part of the reason why is because governments around the globe infused the financial system with hordes of new capital. But like these investors in the article point out, how long are governments going to be able to prop up their respective economies before the whole house of cards come crashing down?
Before we go any further, I must say that I do not think we are on the precipice of disaster or on the verge of a deflationary meltdown in the global economy. If I truly thought that, then I wouldn’t own any stocks in any of my investment advisory services.
What I am saying is that there is a growing chorus of some very smart minds out there that have now become aware that deflation is no pie-in-the-sky abstraction or fear-mongering rant designed to scare you into a bunker. Rather, deflation is a potentially dangerous scenario, not just for global policymakers but for anyone who is trying to manage their serious money.
I know I am going to continue monitoring economic conditions so that I can identify any warning signs of a pending deflationary wave.
Join Doug Fabian for his first investment conference of the New Year. On Saturday January 9, 2010 at 12:00 pm (noon) Pacific, Doug will be discussing the investment landscape for 2010.
Doug has been writing on the subject of stocks, interest rates, commodities, and currencies for decades and he is presenting a unique opportunity to learn from his expertise. He believes that 2010 will present an entirely new list of winners and losers in the investment markets, but you must be on the call to act on Doug’s advice.
This one hour tele-seminar will be held exclusively for the first 800 registrants. Early registration is your best way to ensure you will have a seat for Doug’s thoughts on the the investment markets.
Five important keys you’ll learn:
His opinion on the direction of stocks in the New Year.
What sectors Doug believes show the most potential for profits.
What you can do to hedge your portfolio against rising interest rates.
His thoughts on Gold for 2010.
Which commodity ETFs deserve your attention right now.
The live teleconference will reach capacity because we’ve built an enormous following for this learning series. We urge you to take advantage of this opportunity and reserve your spot today.
You may not have heard this news, but Greece just had its bond rating cut to BBB from Moody’s. Now, you may be asking what the big deal is. After all, what does Greece’s credit rating have to do with my investments here at home? Well, just like you, countries have credit ratings. They issue bonds and borrow from banks just like a large corporation does. A downgrading of a country’s sovereign debt means they are likely in fiscal difficulty, and that’s never good.
One of the investment themes I believe will take shape in 2010 has to do with large debt defaults from strong corporate and sovereign institutions that were formerly considered bulletproof. Now, many people here in the United States think we have the worst debt levels in the world. That’s in part why we are seeing the rush to own gold, and the rush to put money to work in international markets. Sure, we do have our debt problems in this country, but they are far from the level of dangerous debt many other countries hold.
A widespread sovereign debt crisis could rock the world’s stock markets, and it could even cause a stampede back into the U.S. dollar. I will be watching this Greek tragedy unfold in the weeks and months ahead, and I promise I will let you know if I think it will affect your investments here at home.
If we do see a sovereign debt meltdown, the crisis it will likely show up first in the bond market. In last week’s radio show, I talked about how investors need to start paying attention to risk. Most people are aware of the risk in the stock market, but when it comes to the bond market, somehow people think that they can’t lose money.
So far this year, investors have poured more then $230 billion into bond funds. This is a huge amount of money, especially when you consider that only a net $2 billion was funneled into stock funds. This tells me that investors now are thinking that they are more properly diversified than they were last year. They reason that if stocks take a hit again, at least their bonds will buoy their portfolio. Well, I think this line of thinking is a big mistake.
Bonds can get hurt in two primary ways. First, if interest rates rise, the value of bonds go down sharply. A 1% rise in long-term interest rates will send bonds down 7-15%, depending on the type of bond. Second, there is credit risk. As I mentioned earlier, we are starting to see things happen in the bond market that rarely happen. A Sovereign country going into default is a risk nobody has really planned for, and a blowup in this market could really send the value of all sorts of bonds lower.
As of right now, the bond market is holding up fine. If, however, interest rates rise, and/or if countries around the world continue having their credit ratings slashed, it could spell bond market trouble.
One indicator of early bond risk is the trend in high-yield corporate bonds, otherwise know as junk bonds. So far junk bonds still are enjoying a solid uptrend. But if this uptrend begins to falter, and if bonds start to lose their luster, then even those “safe” bond positions could be at risk.
If you want to find out how to prepare yourself from the risk of a potentially substantial bond market downturn, then I suggest listening to my radio show last week for more details. To listen to the show, just click here.
In my third installment of the five-part series, The Obama Impact on Your Money, I share with you three simple strategies to grow and protect your wealth using exchange traded funds. The world of ETF’s keeps getting better and better. We can now invest in almost any asset class, currency or country in the world.
Three important keys you’ll learn:
How to get defensive with your stocks and mutual funds.
How to prepare for rising interest rates and how to profit from them.
Which commodity ETF deserves your attention right now and how much of your portfolio to invest in them.
