An Issue of Trust

Who can you trust with your money? 
If you ask the individual investor, the answer is "no one."  Not after the likes of Bernard Madoff, Allen Sanford and, now, Goldman Sachs, the crown jewel of investment banks.  So, if you follow the thinking of the individual investor by measuring "Investor Sentiment," you would have drastically cut back in stock investments in December, 2008, and you would not have returned to the stock market yet. 
In other words, you would have sold near the market low.  No wonder Warren Buffett cautions, "Be greedy when others are fearful; be fearful when others are greedy."
I follow a proprietary investment model that measures twenty one economic indicators.  I've built this model over a period of over twenty years, and use it exclusively for two purposes:

1. It is my model, and I use only data from apolitical, independent sources for analysis.  That keeps me protected from data that may have been skewed by someone who has a vested interest in whether I choose to invest or not;
2. It removes all emotion from investment decisions.  If it says that I should be 70% invested, I'm 70% invested.  No panic.  No euphoria.  No need to trust anyone but me.

 When I invested money for other people, it was an invaluable tool.  If my clients wanted to sell low, I showed them that they were doing just that.  If they wanted to buy high, again, I showed them that was a less than stellar strategy.
Discussing each indicator, and how it relates to the overall decision was the subject of a semester's work in an advanced class at UCLA for professional financial planners who chose an emphasis in investment.  Mostly geeks.  I will, however, discuss one part of this analysis, Investor Sentiment, and tie that discussion to the general feeling of mistrust that is currently pervasive with the individual investor.
If you had followed Investor Sentiment as discussed above, you would have sold when the S and P 500 was at 888.61.  It is now at 1192.13.  As reflected above, you'd have sold low and, if you buy back in, it will undoubtedly be higher. 
If, on the other hand, you would have read Investor Sentiment as a negative indicator, i.e., you did the opposite of what it suggested, you would have enjoyed a 34% increase.   Hmmm.  I'm reminded of what my grandmother said when I based my plea to do something on, "Everybody else is doing it."  Her familiar response was, "If everybody jumped off a cliff, would you do it, too?"
So, now we have both Warren Buffett and my sweet little Meema advising us to think for ourselves, and even consider doing the opposite of what others are doing.  In the particular case of the last market correction, that would have been good advice.  But, does it hold true most of the time?
As it turns out, yes.  Investor Sentiment is the most predictive of all twenty one of my indicators, if you do the opposite of what it says to do.  And, I will add, that the stock market is nowhere near the bargain it was in March, 2008, when its cost (P/E)  was about its long term average of $15.82 for every dollar of S and P 500 earnings, but even though the market has come back 75% from its low (25% lower than its high), the individual investor is still not buying.
Back to trust.  Yes, Bernie Madoff is a thief.  Yes, Allen Sanford appears to have bilked thousands of investors out of their money, touting "safe" international CDs.  Yes, it looks like Goldman Sachs took both sides of the bet that the housing bubble would burst.  But does that mean you should keep your money in the bank?  Let's take a look at how that will work for you in the long term.
The best rate I could find for a two and one-half year insured CD was 2.1%.  To calculate your "real return," that is, your return after inflation and taxes, subtract from that 2.1% the current inflation rate, or 2.1%.  Now you're at zero, but you still have to pay taxes on your interest.  For most people,  your marginal tax rate is about 16%.  16% tax on 3% is .48.  So, tax of .48 plus inflation of 2.1 is 2.58.  2.1 - 2.58 = -.48  You're losing about 1/2% annually.
If you're a woman with $100,000 that must last you for 30 years, at that rate, this money will produce about $3100 per year.  On the other hand, if you were to invest in the stock market, using its long term average return of 9%, this money will produce about $9,700 per year.
We live longer.  Inflation hits us harder.  We can put our money in "safe" investments that are guaranteed to lose money over the long term, or we can listen to Warren Buffett and my sweet little Meema.
The choice is yours.

The Most Important Financial News You Haven't Heard

Health care costs are 17% of our Gross Domestic Product, and growing at 12% per year.  At this rate, in 10 years, health care will be 50% of our GDP.  No health care legislation on the horizon.
The biggest contraction of GDP since the Great Depression just took place, and caused a worldwide recession.  No financial reform legislation on the horizon.
This is the story that may be bigger than either of those.
I.  National Debt in Perspective
You'd have to be a recluse not to have heard the Tea Party movement raving about government spending.  Do they have a point?
According to the latest Congressional Budget Office report, the US will spend $1.35 trillion more than its revenues this year, slightly less than the $1.4 trillion deficit in 2009.  Our accumulated deficits (plus interest), or our National Debt is $12.38 trillion. 
US debt is currently 86.7% of our Gross Domestic Production, and is projected to be 94.27% by the end of this year.  How does that compare to our historic levels of Debt/ GDP?
A.  Post-War Years
Since 1792, our average level ratio of Debt/GDP was 28.32. 
Our lowest levels were from 1835 - 1842 (less than 1%), and our highest were 1945 - 1947 (averaging 114.34%), and 1948 - 1950 (averaging just under 92%).  Note that the highest years were post World War II, when fears that military spending decreases would cause another Depression subsided, as growth in housing, cold war military spending and industrial production in automobiles, aviation and electronics increased throughout the 1950s.
B.  The 1960s and 1970s 
In the 1960s, the Kennedy Administration increased government spending and cut taxes, but the level of Debt/GDP dropped from 67.9% in the 1950s to 45.3%. 
In the 1970s, a combination of increased inflation and a stagnant economy (coined "stagflation") resulted in high unemployment, and Debt/GDP dropped to 33.7% during that decade.
C.  The 1980s 
Beginning the decade with a brutal recession, the Reagan Administration responded with tax cuts and spending increases, much like the 1960s.  The difference was government spending for social programs was slashed, and military spending increased dramatically.  During this decade, Debt/GDP rose to 42.2%.
D.  The 1990s and beyond
Economic growth brought deficits down to zero in the 1990s, but a growing debt primarily due Social Security and other social programs increased Debt/GDP to 63.7%.  Continued growth in social programs (including the Medicare Drug Program), the Afghanistan and Iraq wars, and the housing bubble (with its ensuing world-wide financial crisis) increased the Debt/ GDP ratio to 64.6% during the decade ended 2009.
II.  US Spending by Category
National Defense 19.9%
Human Resources (Including education, training, employment, social and veteran's services) 65.2%
Physical Resources (Including energy, environment, commerce, housing, transportation and community/regional development) 8%
Net interest on National Debt 3.8%
Other Functions (Including international, science, space and technology, agriculture, justice and general government) 5.6%
Undistributed Offsetting Receipts -2.3%
Clearly, the vast majority of  US spending are in Human Services (65.2%), and almost half of that spending is Medicare and Social Security.  Social Security spending alone is about equal to National Defense.
Spending on Health Care, as mentioned earlier, is 17% of GDP, and is growing at 12% per year.  Left unabated it will be half of our GDP in 10 years.
III.  The Big Untold Story
China is no longer the largest foreign holder of US debt, having recently reduced their holdings by $34.2 billion.  Japan, who now holds more of our debt than any foreign holder, also reduced their holdings by $11.5 billion.  Overall, foreign holders of our debt dropped by $53 billion, the largest drop in history.
With our debt increasing, and foreign lenders less willing to buy it, the Treasury Department will now have to attract investors with higher rates of interest.
The 3.8% of our budget we use to pay interest on our debt will increase.  While $136 billion may seem a paltry amount in today's vernacular, we derive absolutely no benefit from it, and it is now equal to the amount we spend on education. 
With foreign governments finding our debt less attractive, the amount we spend on interest will surely increase to attract other borrowers.
We haven't had the will to fix health care costs that will be 1/2 of our total output in a short 10 years if we do nothing.
We haven't the will to enact financial reforms after the biggest recession since the Great Depression.
Will we find the will to make the sacrifices necessary to cut spending? 
Warren Buffett suggested that he will pay higher taxes and forego Social Security payments, regardless of the fact that he's paid into the system all his life.  Admittedly, he's a lot weathier than we are.
Nevertheless, maybe he's on to something.

The Economics of What Happened Last Year in Plain English

Most economic news is reported by someone with a vested interest in what you think.  I don't care what you think, but I do care that you get all the information you need to draw your own conclusions.
I.  2009 US Economy
Industrial output fell by 10%, after having fallen 3% in 2008.  Less demand for goods.  No surprise here.
Unemployment grew  from 7.2% in 2008 to 10% in 2009.  To get some historical perspective, in the last comparable recession, July, 1981 - November, 1982 (16 months), the average unemployment rate was 9.09%.  When President Reagan took office in January, 1981, the unemployment rate was 7.5%.  When the recession began in July of that year, it had fallen to 7.2%.  At the end of the recession in November, 1982, it was at 10.8%, and stayed over 10% for the next seven months.
Consumer Confidence fell nearly 30%, after having fallen 45% in the prior year.  Again, no surprise. 
Inflation averaged under 1/4 of 1% last year.  With less demand, both the price of commodities (like oil, lumber, etc.) and consumer goods fall.  Current inflation is virtually non-existent.
Inventories fell by 6.75%.  This contributed to our Gross Domestic Product, and many think this growth is artificial.  I do not share this point of view because the opposite (growth in inventories) is subtracted from GDP.  When you think of inventory building as wholesalers buying goods that sit on shelves (which does not contribute to growth), then depleting those inventories by selling them makes more sense as contributing to growth.
Orders for "big ticket" items fell by 20% from the previous year, but increased from  $160.1 billion in January to $167.9 billion in December.
Leading economic indicators, which include measurements that generally predict either growth or contraction in the future, fell 8% from the previous year, but increased from 98.9 in January to 106.4 in December.
You can see, with the exception of employment, that these important economic indicators all fell from the previous year, but are improving.  These are the data that economists generally consider when they say things like, "We're stabilizing, but are far from healthy."  As you can see, history shows that unemployment lags most other economic measurements after a recession, likely due to the reticence of employers to hire until they're sure than the economy is really on solid footing.
II.  Monetary Policy
You know that the Federal Reserve Bank has cut interest rates nearly to zero - .25% to be exact - in order to lower the cost of borrowing money for businesses.  Any who save money know that a six month Treasury Bill returns about the same, .25%. 
Many investors gauge whether the stock market is expensive by comparing the return on the 10 year Treasury Note with the expected earnings for the Standard and Poor 500 Index.  Right now, the yield on the T-Note is 3.66% and expected earnings for the S&P 500 are 4.5% of its current price - about a 20% premium. 
30 year Treasury bonds are paying 4.42%, good news for anyone who is buying a home because this is the rate mortgages are based upon.  Now, all you have to do is find a bank that's not too scared to make a loan.
III.  Sentiment
Investor sentiment is my favorite indicator because it is simple and more reliable than any other I review.  As Warren Buffet often says, "Be greedy when others are fearful, and fearful when others are greedy."
That's exactly how this measurement works.  When it's high, everybody wants to buy stock.  Bad sign.
When it's low, everybody is scared to death to buy stock.  It's cheap.  Good sign.
In 2007, the reading averaged 63.  In 2008, it was 28.  As you know, if you bought stock in 2009, you show quite a profit.  In 2009, it averaged 41, with a current reading of 58. 
The market is not the bargain it was in 2008, as we'll see below.
IV.  Valuation
This is a measurement of how much stocks cost.  To get some historical perspective, since 1926, the stock market as measured by the S&P 500 had an average cost of  $15.82 for every dollar it earned. 
Right now, it's at $18.29, up from $17.97 last year. 
Not cheap, but not expensive.  It depends on whether you think businesses will earn more money next year.  Standard & Poor's projects earnings of $58.71 for the S&P 500 in 2010, up from $50.70 (a 16% increase). 
So there you are.  Based on that information, your opinion is as good as anyone's.

Mid-November Economic Outlook

Some very smart women I know noted recently that some women financial columnists, not unlike some of their male counterparts, sway their commentary toward a political point of view.  In my opinion, that does justice to neither financial analysis, which one would hope would lead where the data follow, nor politics, which one would hope to be policy-driven.  Whatever our point of view, data show both parties have contributed to the deficits we currently have. 
In this column, I endeavor to give financial information as it is, and put it into some historical context, in order that we might understand our best individual financial strategies and which governmental policy decisions one would support which are consistent with a given outcome.
I.  Unemployment
The unemployment rate rose to 10.2% last month.  Anyone who read the July 13 column was expecting this rise, when comparing the recent recession to that in the early 1980's, wherein I noted "the average unemployment rate in the last five months of the recession ended Nov, 1982 was 10.18%, and it averaged 9.8% for the year after that recession was over." 
Although this was expected, it is not good news.  Coupled with the fact that consumer confidence is trending lower, it does not bode well for any sector of the ecomony reliant on discretionary spending.
II.  Other Economic Indicators
Here, the outlook is inconsistent. 

• Housing is trending upward
• Manufacturing is improving
• Non-manufacturing sectors look questionable
• Car sales have slowed after the "cash for clunkers" program ended
• Discount and luxury retail sales are moving slightly upward
• Corporate profits are improving

III.  Conclusion
Economy as a Whole
Given these general economic conditions, it is unlikely that the US Gross Domestic Product will match previous 3.5% growth in the fourth quater.  Given current data and trends, it appears that the year will close with a 2% - 2.5% quarter, and possible decline to 2% at the beginning of 2010.  As the year progresses, if pos-recession employment trends hold true, growth will likely rise to 3% as 2011 approaches.
Investors
Investor sentiment has been very positive of late.  My macroeconomic analysis includes 22 indicators, and of all of them, I think sentiment is most predictive.  It is, however, a negative corollary, i.e., the higher the sentiment, the worse the outcome.  It's not the bargain it was before it rose 50%, and I'll quote Warren Buffett, "Be fearful when others are greedy: be greedy when others are fearful." 
I've started hearing, "Get in before you miss the boat."  That always makes me want to jump ship.

Greed and Fear

I was just looking over a list of the cities where the highest percentage of homes was "under water," i.e., the mortgage is higher than the house is worth. 
And a light went on in my head.
I used to manage money.  I heard people throw around the words "greed and fear" almost every day.  When markets were expensive, EVERYBODY wanted to buy.  When they crashed, you couldn't give stock away.
So, back to mortgages, more than half of the people in these cities owe more on their houses than they can get from a buyer.

• Bakersfield, CA
• Riverside, CA
• Fort Meyers, FL
• Fairfield, CA
• Orlando, FL
• Reno, NV
• Port St. Lucie, FL
• Phoenix, AZ
• Stockton, CA
• Modesto, CA
• Merced, CA
• Las Vegas, NV

That's over 1.8 million households, with houses worth about what they were sometime between 1998 and 2003.  Some of these people had to buy their homes for a new job, etc.  But most, I imagine, saw housing prices go straight up during that period and bought or refinanced, thinking they could make money when they sold.  Now, unfortunately, the majority of people in these cities are on the "fear" side of "greed and fear."
The return on investment for investors in the stock and real estate market, over the long term, is very similar.  Apparently, so is the motivation to buy.  We know, as investors, we should strive to "buy low and sell high," or as Warren Buffett says, "Be greedy when others are fearful: be fearful when others are greedy."  But that's not what we do.
Back to the stock market, you may have noticed it's going up.  A lot.  Let's take a look at that for a moment.
First of all, it's up about 50% from its low.  It came down 50% from its high.  So, does that mean we're back where we started?  Far from it.
Since we're near Thanksgiving, let's use the example of pie.  If we put a pie on the table, and the kids eat half of it, it's easy to visualize what's left: half a pie.  If we increase that half a pie by 50%, we add a quarter of a pie.  We've got 3/4 of a pie, or 25% less than the full pie that we put on the table.
So, if the market is down 25% from its high, does that mean that it's cheap?
If we look at history, the average price investors pay for every dollar the S&P 500 earns is $15.82.  Right now, you'll pay about $21 for next year's earnings.  At the market low, you'd have paid under $11.  So, it's more expensive than its average price, but that's not surprising, since it's roared back over 50% from last March.  Does that make you feel greedy (I've got to get in before I miss the boat) or fearful (I should have bought when it was down, and now it's probably due for a correction).
The best way to feel, in my opinion is emotionless.  Being rational, rather than greedy or fearful, is the best strategy.  One very good strategy is to review your spending, put some money aside every month and invest it no matter where the market is, making sure, of course that what you invest is long term money.  That means you won't be using it for ten years or so.
This constant investing strategy is called "dollar cost averaging," and will result in you buying sometimes when the market is low, and sometimes when it's high.  Overall, you'll average out the peaks and valleys and invest rationally - for the long term.
Then you can leave greed and fear for the drama queens.

The Female Retirement Dilemma

Issues involved with planning for retirement are different for women than they are for men.  And understanding them can be the difference between comfort and poverty in our old age.

I.  By Saving the Same Percentage, We Retire with Less Than Half Than Men

Let's look at the result of both men and women putting aside 10% of their earnings for retirement.

First, women current earn, on average $.80 for every dollar men earn.  So now, for every $.10 in men's retirement accounts, women have $.08 - 20% less.

Next, women spend an average of eleven years of their productive working lives as an unpaid caregiver for a family member.  Assuming a work life from college graduation at 22 to retirement at 65, that unpaid absence lessens our earning years by another 25%.  That reduction in lifetime earnings, added to the fact that we lower salaries, results in us having $.06 for every $.10 men save for retirement - or 40% less.

So, if we assume average annual earnings of $60,000 during their careers, men will save $258,000 and women, $154,800, assuming that those savings are invested in assets that keep up with inflation. 

At 65, a man will need ten years of retirement income from savings of $258,000.  Invested in assets that keep up with inflation and taxes, he will have $25,800 per year for ten years. 

A woman, because of her additional life expectancy will have a sixteen year retirement with savings of $154,800.  Invested in assets that keep up with inflation and taxes, she will have $9,675 per year.

No wonder twice as many women than men live in poverty.

II.  What To Do

First, homemakers who care for children or parents should have Spousal IRA accounts funded on their behalf every year.  Considering that replacing all the functions provided would total approximately $30 thousand per year (Source:  http://www.womenwork.org/resources/tipsheets/valuehomemaking.htm), it is only reasonable that your retirement is funded while you provide these services at no charge.

Second, women must learn to invest their retirement assets in a way that will maximize growth without taking an inordinate amount of risk.  The two long term investments that provide the highest return are stocks and real estate.

In the last few years, we have witnessed the volatility both these investments have.  But, let's put this into perspective.  The stock market high was in August, 2007.  Just over two years later, the market is down about 30% from its high.  There are two considerations we must make:

• These are long term investments, intended for use in ten years or more.  In the 30+ years since I've been in the business, I've witnessed a years-long 50%+ correction in the 70's, a heart-stopping drop in the '80's, a precipitous fall in the 90's, the dot com bubble bursting in the early part of this decade and the current correction.  These are predictable, and those who have made wise stock investments and held them have fared far better, even at this point, from those who put their money in so-called "safe" investments, like money market accounts, Treasury Bills and insured savings accounts, which fail to stay ahead of inflation and taxes.  Note that there were two times billionaire investor Warren Buffett publicly admitted to buying stock in US companies:  once, during the correction in the 1970's; and the other, from March to year end, 2008.
• Even at retirement, we have life expectancies that mandate we stay ahead of inflation and taxes, and therefore advise consideration of keeping at least a portion of our long term portfolios in capital markets.
• Conversely, our short term (five years or less) cash flow needs must be kept in safe investments, so that our expenses are met and we are not tempted to sell our long term investments during market lows. 

Third, we've seen the outcome of abdicating responsibility for our financial lives with the likes of Madoff, Stanford, Enron, WorldCom and others.  There is no one who will take more of an interest in our financial health that ourselves.

It requires only that we gain the knowledge to take action and the willingness to provide for our future.

Important Pricey Leather Handbag Information

I.  Gender Marketing says. . .

Men identify deeply with their jobs.  They're hardwired for task orientation.  When they lose their jobs, they tend to lose their identity.

"Women are . . . worried about their jobs, but not to the extent that they feel their . . .existence is being threatened, and so they are in the mood to buy despite the crisis," gender marketing expert Diana Jaffe told Reuters recently. 

So, do we conclude that men face the current economic slump by questioning their identity and cutting back on spending, and women make themselves feel better by shopping for pricey leather handbags?

II.  Why do we buy?

Maybe watching "Madmen" has hurled us back in time and made us behave as though we were living in far less liberated 1960's.  Maybe we are taking the ostrich approach to managing our money, and, like Nero, are fiddling while Rome burns.  Maybe, in this particular case, we should behave more like men - but for very different reasons.

We need not define ourselves by the way we earn a living in order to face our current economic situation.  We can continue to be well-rounded human beings who know that our net worth and our self worth are very different.  But in order to pursue the things that bring us happiness, we'd best ensure we have a roof over our head and food on our table in our old age before we buy "pricey leather handbags."

Yet, the fashion industry send us messages - four times a year, via preposterously thin teen-age girls - that we "need" what they offer.  Do we?  Does spending money on handbags and shoes really make us feel good enough to forego providing for our long term needs?

III.  Put Yourself First

If you have put aside enough for yourself to live comfortably for the rest of your life and you need a handbag, by all means buy one, as long as you have the money.  But if you have not provided for your long term security, exactly what do you accomplish by buying something that you truly cannot afford? 

The appearance of wealth is nothing.  It is for someone else.  It speaks to others - not you.

IV.  You Say

Times are difficult.  Current times are more difficult than the grueling recession that took place in the 1970's, when I began working in finance.  It was a time when wealth was lost in a grinding market correction that took place over years and cut portfolios in half.  Inflation was out of control and job losses made the national mood grim.  It was also the time when Warren Buffett invested heavily in the stock market and earned wealth that is measured only slightly less than that of Microsoft founder Bill Gates.

It is your right to buy whatever you want, whenever you want.  You can be tempted by the fashion industry to buy gladiator shoes, designer bags or whatever it is - as long as it speaks to your authentic self.

You can also decide to put that money aside in investments that will outperform the ravages of inflation, like stocks and real estate, which will provide for you for the rest of your life. 

One in four of us will live to age 95.  Elderly and destitute with a pricey handbag in my closet, is not the choice I make for myself.  I invite you to join me in defying gender marketing research, and investing your time and resources in investing in your future.

A Disturbing Trend

As the discussion about health care reform drones on, the current emphasis seems to be focused on how we pay doctors, and whether that pay structure is an incentive to our long term health care goals. Before you stop reading, by the way, this is NOT a discussion of health care. It is a discussion of payment for services, how we structure those payments, and whether that structure pays people to do what we value most.
It seems we pay surgeons an average of about $600,000 per year, and doctors who practice family medicine about $160,000 per year. In other words, we think the doctors who perform lap band surgery to shrink our stomachs after we're morbidly obese are more valuable than the ones who tell us to eat healthier diets.
I'm not in medicine, but that seems weird.
I do, however, have some experience in the world of money management, and can point to an interesting commonality with the medical field. We pay stock brokers a fee every time they buy or sell a security for us, yet countless studies - particulary those in the field of "value" investment (that philosophy practiced by Warren Buffett as a desciple of Benjamin Graham) - show that a "buy and hold" strategy is more appropriate for the investor than buying-and-selling-all-the-time.
Yet, if a broker practices the latter philosophy, she will be paid far less than those who are hopping in and out of stocks, racking up high commissions, and leaving clients with additional short term capital gain payments. That's higher taxes, in plain English.
Why are we paying higher fees to doctors who operate on us than those who keep us healthy, and higher commissions to brokers who buy and sell all the time rather than buy and hold, which, in the case of the vast, vast majority of clients, will result in a higher return on investments?
Hmmmmm. It seems we value people who give us short term solutions to our problems more than those who act in a way that address our long term goals.
We certainly pay them more.
Well, that's all for now. I'm going back to being angry with the current administration for not solving our problems in seven months. What's taking them so long? I want long term solutions -and I want them NOW. Who CARES how much it costs?
Oh, I see now. When I think that way, doctors fees and broker commissions make much more sense.