Tuesday, March 15, 2011

What To Do With Your Money Right Now

If it were easy to take a long view of investing, everybody would be rich.  How to take a long view of current events, and act rationally while others are panicking.

If someone asks you your opinion of current economic conditions, you're likely to answer in terms of yourself.  That's understandable, but not necessarily accurate.
If you intend to use the answer to invest your money rationally, it's better to take a look at four broad economic categories:
  1. Where we are in the economic cycle (are we growing, peaking our growth, slowing down, hitting a trough in our slowdown)
  2. Monetary policy (is the cost of borrowing cheap, moderate or expensive?)
  3. Sentiment (is everybody more happy or depressed about the stock market?)
  4. Valuation (is the stock market expensive compared to its "normal" price?)
Let's take a look.

Economic Cycle

Industry as measured by output and the amount of available space utilized for that output has been growing steadily for the last five months.  There's plenty of room to grow further.  Orders and consumption are both growing at about 5%. 
The unemployment rate, which peaked at 10.2% in October of 2009, has fallen to 8.9%.  "Normalized" unemployment is approximately 4%, so there's plenty of room for improvement there as well.
The cost to produce goods is growing at 3%, but consumer costs are increasing at only 1%.  This means that producers will soon have to raise prices, or cut their profit margins.
Last year the US grew by 2.7%, higher than the rate of growth in 2006 and 2007, before the real estate bubble burst.
All in all, it looks like we're in the beginning of our growth cycle and have plenty of room to grow further.  When earnings are growing, it is an optimal time to invest, compared with when the economy is slowing and earnings are likely to decrease.

Monetary Policy

The Federal Reserve Bank is spending trillions of dollars buying Treasury Notes and Bonds (US national debt), in order to keep both supply and rates low.  The six month Treasury bill pays .17%.  That means that, for a six month investment, you give the Treasury $9,991.50, and in six months, they'll return $10,000. 
This is called "accommodative" policy (the Fed will accommodate borrowers), and it's being done to keep rates low to increase borrowing by business to stimulate the economy.
Monetary policy is currently positive for investing, as growing businesses will return a much higher long term rate than tiny returns on bonds.


Warren Buffett says, "Be fearful when others are greedy; be greedy when others are fearful."  There is no better explanation of sentiment.
When everybody wanted to buy "dot com" stocks, if you entered the fray, you probably lost money.  When everybody wanted to buy real estate and "flip" it for a fast profit, if you entered the fray, you probably are continuing to lose money.
So, the higher that positive investment sentiment is, the more nervous you should be.  I follow "Consensus Index," but there are others, including American Association of Individual Investors, Market Vane, First Coverage Market Sentiment, and they all point in the same direction. 
Nearly 3/4 of people think that it's a good idea to get into the stock market. 
That makes me very nervous.  I like numbers like 28%, which was what positive sentiment was in 2008, when it most definitely was a good time to buy.


This is the measurement that tells you whether you're overpaying for the market as a whole.  Right now, you're paying $13.56 for every dollar of earnings (sometimes called a P/E, or Price to Earnings multiple).  The average market price is $15.82. 
Not a bad price.  If I hadn't been buying so much in 2008 and 2009, I'd be buying now, especially on days when the market dips significantly (like today).
Another way to look at valuation is to compare investing in the stock market with investing in a long term bond.  I compare to the 10-year Treasury Note, because I don't think anyone belongs in the stock market that doesn't have a 10 year horizon.
Right now, the 10-year Treasury note will pay you 3.46%.  Based on next year's projected S&P 500 earnings of $91.26, the earnings yield (earnings divided by price) is 7.16%.  The potential return is more than twice that of long term bonds.
Another positive sign.

So, evaluating the risk level in these 21 economic indicators that lead me to these conclusions, I conclude that investing approximately 65% of long term (10 years +) investments in the stock market is the most rational asset allocation of risk versus reward in the current environment. 

Women tend to live longer and earn less than men.  These decisions are critical to our long term well-being. How do you make your asset allocation decisions?  What is your opinion of current economic conditions? 

Sunday, March 6, 2011

Portland $548 million school bond: No, but . . . .Part III

During the last two weeks, we've discussed the facts behind Portland Public Schools' request for you to approve a $2500 + increase in total property taxes for:
  • $370 million for needed building upgrades in some of its public schools
  • An extra $178 million (total of $548 million) for building upgrades in ALL of its public schools
  • $0 for teachers or improved curriculum
In spite of the facts that:
  • Portland's latest unemployment rate is almost 10%
  • Portland renters pay less than their homeowners
  • Since 2007, the average Portland property has declined almost 10% in value.
PPS is advertising that the average Portland homeowner's annual increase is only $300.  The Public School system is, as reported last week, using the term "average" incorrectly, neglecting to add in  bond costs like insurance and interest ($77.5 million), and disclosing the increase in annual terms ($300) without giving a total ($2500). 

In other words, PPS appears to be banking on the fact that you aren't very good at math and won't notice that they aren't, either.

One of Portland's local professors, Dr. Eric Fruits, recently presented further findings to the PPS Board.  Based on census data and Journal of Urban Economics, he estimates that "approximately 4,500 people age 50 and older may be driven out of Portland if voters approve the higher property taxes." 

What does the PPS board say? 
  • "Anyone needs a fact-lift after 65 years," says Pam Knowles, co-chair of Portland School Board.
  • Portland School Superintendent Carole Smith is more to the point.  She said it is her goal to persuade voters to approve new construction "until all the schools have received the overhauls the district says they need."
It's interesting that Superintendent Smith does not say that she wants to persuade voters to approve construction that PPS actually needs.  She says that she wants you to vote for overhauls that they SAY they need.  That is relevant here, since $178 million in "added" repairs was tacked on to this bond. PPS' public relations firm said we'd be more likely to vote for it, if we all got a little something.

What do you say?

Since 2007, our economy has suffered a decline surpassed only by the Great Depression.  Federal and State governments are tightening their belts, reflecting the sacrifices made by their constituents.  It is in this environment that PPS asks its homeowners for far more than it needs.

Portland homeowners faced with the need for updates for their homes after a fire like the one at Marysville School would likely be limited to what was covered by insurance.  Superintendent Smith, however, has a different view.  "The total anticipated proceeds from the insurance claim are estimated in the range of $5 - $7 million.  Part of that money has already been spent to re-establish Marysville students and teachers at the Rose City Park location, do partial demolition of fire-damaged building areas and close the damaged building to the weather.  About $4.5 million will be available for reconstruction.
"The insurance does not quite cover the bare minimum to replace damaged areas of the building.  This minimum option means literally touching only those parts of the building that were damaged, not bringing the entire building up to current fire/life/safety or seismic codes, let alone improving basic classroom configurations, building flow, technology, etc."

Unlike Portland homeowners, who must limit repairs to the amount of insurance coverage, Smith wants a complete upgrade for the entire school, upgrades for seven other schools, and a little something in all the schools, whether they need it or not.

It's hard to believe that PPS is so thoroughly disconnected from its community that it asks for a budget of $625.5 million (including interest and insurance) instead of $370 million during a period where the economy is just scraping back from such a brutal recession.  What is possibly more disconcerting, however, is the cynicism inherent in the idea that the electorate will not vote for a school construction bond unless there's something in it for them.

So, in answer to the $548 million (which is really $625.5 million) bond, the answer is no.  But, if PPS asks for only what it needs ($370 million), the answer is yes, regardless of what its public relations firm tells you. 

For the $21,600 PPS paid their PR firm, they could have asked your voters.  We would have happily told you that floating the largest bond in its history immediately following the greatest recession since the Depression was a bad idea.