Bank CDs are earning .5% on 1-year CDs, money market rates are a paltry .18% and the 10-Year Treasury Bill is paying 1.5%. The chart below shows the 50-year history of the 10-Year Treasury since 1962. The glory days of 1980 with 10-Year Treasuries earning 16% are long forgotten.
Investors still yearning for the good ole days of the 1980 – 2000 Bull Market will be shocked to find out that since 1900 there have been 13 Bear Markets. That’s defined as at lest a 30% decline in the Dow Industrials.
This chart from Chart of the Day, via Barry Ritholtz, shows the rallies from those 13 Bear Markets. Each dot represents a market rally as measured by the Dow. Dates mark the year in which the rally began.
As Barry Ritholtz states:
“There have been 13 major rallies over the past 111 years which equates to an average of one rally every 8.5 years. It is also interesting to note that the duration and magnitude of each rally correlated fairly well with the linear regression line (gray upward sloping line). As it stands right now, the current Dow rally that began in March 2009 (red dot labeled “You are here”) would be classified as well below average in both duration and magnitude.”
What should tell investors is that they need to be prepared for a Bear Market every 8.5 years. Buy-and-Hold does not protect you from these market swings. In a panic, as we saw in 2008, everything goes down.
Each month Formula Folios calculates the strength of the US economy using a math based model called RPA (Recession Probability Analytics). When the number rises above 50 it means the US economy is in the bottom 50% of all historical conditions relative to it history.
While far from perfect, the model has had an uncanny ability to correlate (negatively) with stock market returns. In other words, when the model moves above 50 the S&P 500 has fallen over 25% and when it is below 50 the S&P 500 has risen over 15%. Formula Folios began publishing the model in November of 2007.
Here’s the full history of RPA from inception:
|Date||RPA||S&P 500||S&P Return||Growth of $100,000 if exiting S&P 500 for month after RPA moves above 50|
I have talked to many people who are concerned that they will either not be able to retire or will run out of money in retirement. As a boomer, I can understand these concerns.
The wealth destruction witnessed in 2008-09 was shocking. Too many have seen their assets demolished by outmoded “Buy & Hold” philosophies. Not only did these “believers” destroy client wealth in 2008, many of them got panicked out in 2009, and missed most of the biggest rally in generations.
If you are interested in a money management approach that did not lose money in 2008 but actually made money give us a call. Your funds are held at an independent custodian. You have instant access to your money and can follow your portfolio daily online.
Our conservative portfolio is up 3.5% for the 1st Quarter 2011 with an average annual return of 8.5% for the past five years. Our moderate growth portfolio is up 7.03% for the 1st Quarter 2011 with an average annual return of 20.7% for the past five years. Call for more information on all our portfolios.
PAST PERFORMANCE MAY NOT BE INDICATIVE OF FUTURE RESULTS. Therefore, no current or prospective client should assume that future performance will be profitable, or equal to any corresponding historical index. All returns are net of all investment management fees that would have been charged quarterly in arrears. A copy of our written disclosure statement is available upon request.
For further information visit: www.kilzerwealth.com
Not only did they get out today, but they are running around like Mad hens! The Turkeys in Korea are pecking at each other. The Turkeys at the Hedge Funds are trying to get free lunch. The Turkeys in China are trying to pay less dollars for everything so we all have to pay more for our food.
With all of these Turkeys running around, it is fitting that the markets have stumbled today. There is usually only one thing that happens to all these Turkeys. They get their heads cut off at some point. North Korea, the Hedge Fund insider traders, and the Chinese. The first two will be easier dealt with, the last is running pretty fast so to slow it down, we need to throw a bunch of Ben Franklin’s in their way so they have to hurdle, crouch, and jump from time to time so we might have a chance to catch up to them.
Ultimately, this sell off will weed out the weak. Earnings are still coming in quite strong and the GDP forecast for next year was just revised upward. Look for a bottom around 1140 and then a Santa Claus rally in December at some point getting us near that 1250 mark on the S&P 500.
With all the Turkeys running around, I hope you and your family have a great Thanksgiving as we all still have plenty of reasons to be thankful.
Since the beginning of the year, the stock market has followed a line similar to a round of golf—a lot of movement without going very far. It has crossed above and below even seven times in only 10 months of trading. Each time it went down, it looked like the end of the world was starting all over again. Each time it came back, the market grew with excitement. Traders have been whipsawed.
It has taken the best September since the 1930s to bring the S&P 500 into the black as the third quarter has come to an end. Let’s look at four reasons why the market may break out to higher returns than the 3.85% year-to-date gain at the end of the quarter.
One of the most consistent indicators of an upcoming recession has been the yield curve. It has been consistent enough that the New York Federal Reserve actually calculates the odds of a recession based on the spreads between short- and long-term Treasury yields.
Figure 2 shows the current yield curve compared to the yield curve back in July 2007 at the start of the current recession. The lighter shadow around the curve shows recent history, with the barely visible lighter green being the most recent. You can see that the yield curve has actually been steepening recently—not what you would expect if the bond market were anticipating a double-dip recession within the next 12 months.
The current yield curve is so steep that the Fed actually estimates that the odds of a recession within the next 12 months are only 1.72%. The history of the yield curve as an indicator is shown in Figure 3 with more information at the New York Federal Reserve.
One of the active money managers we work with is CMG funds of Radnor, PA. Steve Blumenthal, President writes a monthly email to advisors and their clients. His thinking on how to construct a balanced portfolio of passive, active and bonds should be required reading for all investors.
(Combining Passive with Active Investment Management)
by Steve Blumenthal, CMG Funds.
“Over the last 10 years, Active Management performed well while Passive Buy-and-Hold Management, like past LT Secular Bear periods, did not. Note that over the last 18 months, Passive Management (Equities and Fixed Income) had an exceptional post crash recovery move; however, Active Management, while positive, underperformed. Does one disregard the positive long-term returns in the Active Management space and chase into Equities or into Bonds? Will stocks move higher over longer periods of time? Yes. Can an investor emotionally stay the path with a 20 year vision? Statistics show that most cannot. So what to do? The idea is to set a plan that will keep you on a path to your longer term goals. I believe a better plan is one of balance that includes a diversified mix of Stocks, Bonds and Active Management.
First, sit down with your advisor (your investment coach), then set an investment game plan that is suitable for your needs and goals, then and perhaps most importantly be prepared to stick to your plan when your emotions want to rule discipline and drive you off course (the best advisors in the business help their clients through the tough emotional periods). If it is an exceptional advisor, many times his/her advice will go counter to what your emotions are telling you. The goal is to set a game plan and have the discipline to stick to that plan. Most investors believe long term but emotions cause them to behave short term. Be different. There will be periods when your Stock bucket will outperform and periods when your non-correlating Active bucket will outperform. The objective is to smooth your return stream to keep from reacting emotionally to every short term move. As reflected in the graph above, the objective is to achieve A B. You’ll tweak allocations from time to time, that makes sense but stay focused on the amount you allocate to each of the three investment buckets (Stocks, Bonds, and Absolute Returns) and tie those weightings to the environment you see ahead.
In LT Secular Bear Cycles consider the following as a base standard: 33% Stocks 33% Bonds 34% Absolute Returns. For your Stock bucket, hold core long-term focused positions but more actively manage your downside risk. Look for Tactical Strategies to compliment your core equity positions, dollar cost into your positions, and/or use inverse ETF’s or option strategies to protect this portion of your portfolio. For the Bond bucket, I recommend you build a short-term laddered tax free bond portfolio with an average maturity of no more than 4 or 5 years. This is to protect your principal against rising interest rates. Be careful about investing in bond mutual funds as they will get hurt when rates move higher. Note: we have a great tax free municipal bond manager I can introduce you to. For the Absolute Return bucket, I’d look to find a number of non-correlating actively managed strategies and actively managed mutual funds. There are a number of mutual funds that are quite effective and we are seeing some interesting new ideas every day. If you are an advisor, we can show you how a blend of our actively managed trading strategies and/or our mutual fund compliments other popular funds like Hussman, Pimco Total Return, TFS Market Neutral, etc. There is a way to build an Absolute Return bucket for your clients in a way that provides you and your clients with daily liquidity, daily transparency, and no K1 hassle. (A quick important disclosure – please note that the above is a general idea and is not a specific recommendation for any individual investor as I have no idea as to your personal needs, goals, level or risk tolerance, and investment time horizon.)”
A presidential commission has proposed simplifying the tax system by consolidating retirement accounts and harmonizing statutory requirements, according to a National Underwriter report. The proposals were part of a 118-page report released by the President’s Economic Recovery Advisory Board (PERAB), chaired by Paul Volcker.
With regard to simplifying saving and retirement incentives, the report put forth eight options:
1) Experts suggested consolidating employer-based retirement accounts and simplifying eligibility and contribution rules.
2) One proposal would allow all workers irrespective of income to contribute to either or both an IRA and an employer-sponsored plan. Nondeductible IRAs could be eliminated because income limits on contributions would be removed.
3) Consolidate and segregate non-retirement savings. For instance, one proposal would consolidate all these non-retirement savings programs, including Section 529 plans (whose rules are set by states and vary widely), Coverdell IRAs, Health Savings Accounts (HSAs), Archer Medical Savings Accounts (MSAs), and Flexible Savings Accounts (FSAs), under a single instrument. Contributions to this instru-ment could be tax-deductible up to a limit, as is currently the case for HSAs.
4) Clarify and improve saving incentives. For instance, designing the Saver’s Credit to be more like a match would increase its salience and its effectiveness as an in-centive to promote saving.
5) Reduce retirement leakage by creating a program whereby upon leaving a job, an employee’s plan balance would be required to be retained in the existing plan or would be automatically transferred to an IRA account or an account with their new employer. This “Automatic Rollover” would ensure that amounts put aside for retirement continue to grow.
6) Simplify rules for employers sponsoring plans. For instance, one option would be to simplify the nondiscrimination test, for example by simplifying the definition of a high-paid employee and to provide a standard safe harbor to avoid these requirements. An alternative proposal would repeal nondiscrimination rules entirely and require all plans to meet a safe harbor standard.
7) Simplify disbursements. For instance, eliminating minimum required distributions for individuals with retirement assets below a threshold would relieve many taxpayers from the burden of these regulations at a relatively small revenue cost.
8.) Simplify taxation of Social Security benefits. Simplifying the formula used to calculate the tax on Social Security benefits would reduce the compliance burden on older taxpayers and improve economic efficiency.
For more information
“The real threat to a robust recovery on the labor side has come from employer and entrepreneurial fears that once the economic environment improves, a Democratic Congress and administration will pass pro-union and other pro-worker legislation that will raise the cost of doing business and cut profits. In this way the obvious pro-union, pro-worker bias of the present government has contributed to a slower recovery, especially in labor markets.”
—Gary Becker, Nobel laureate in Economics, August 1, 2010
“That’s right, over the past thirty years, despite all the millions of jobs destroyed by the rise and fall of companies and industries in our democratic capitalist economy, over forty million net new jobs have been created. Overall personal incomes have increased from $2 trillion to $12 trillion. The net worth of American households (that is, assets minus liabilities such as home mortgage debt) has increased dramatically, from $7.1 trillion to $51.5 trillion. The economy as a whole has expanded mightily. Our standard of living has soared.”
—Steve Forbes and Elizabeth Ames, in their book, How Capitalism Will Save Us
We may be in the Great Recession but corporations are not hurting. They are making as much money as they did before the Dot-Com stock market crash in 2000. As a matter of fact, the recovery for US corporations only took 13 months.
With interest rates so low, there is a refinancing boom in corporate debt. Now how about investors?
For the complete story go to Chart of the Day.