Making Money Alert
A Greek Tragedy
12/09/2009
You may not have heard this news, but Greece just had its bond rating cut to BBB by 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 that I believe will take shape in 2010 has to do with large debt defaults from strong corporate and sovereign institutions that formerly were 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 lofty levels 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 likely will 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 than $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 falls 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 that 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. As you can see from the chart above of the SPDR Barclays Capital High Yield Bond (JNK), junk bonds still are enjoying a solid uptrend thus far. 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 protect yourself from the risk of a potentially substantial bond market downturn, then I suggest that you educate yourself by listening to a radio show that I taped last week. To listen to the show, just click here.
ETF Talk: SPY Offers Investment Intrigue
The SPDR S&P 500 (SPY) has an attention-grabbing ticker, but the broad market stock fund’s mission is no mystery. This exchange-traded fund (ETF) is designed to track the performance of the S&P 500 Index, and to let investors benefit from gains in the performance of this benchmark index. The broad-based nature of the fund also offers diversification that helps to reduce overall risk.
The word SPY may conjure up cloak-and-dagger images, but the fund SPY also should create images of intriguing portfolio gains. I recommended this ETF to subscribers of my Successful Investing newsletter last June, and so far, SPY has achieved a double-digit percentage gain. At the close of trading yesterday, the fund was up more than 16% since I recommended it.
However, there is no guarantee that the overall stock market will remain on the ascent. For that reason, diversifying your holdings is a good strategy. Now, a diversified portfolio typically includes exposure to various equities, and SPY provides that diversity for you -- and without the risk that investing in individual companies can bring. If one company melts down due to an unexpected financial crisis, a diversified fund such as SPY is insulated from the worst of the fallout.
As one of the first ETFs ever established, SPY is a proven fund that has a large volume of buyers and sellers each day. For an investor, such a high level of liquidity allows you to enter and exit the position with the confidence that a fluid market exists to establish the fund’s fair value.
To give you a sense of SPY’s diversity, consider that its largest holdings feature companies that are household names, but in very different industries. SPY’s biggest holdings as of December 7, 2009, were Exxon Mobil, 3.65%; Microsoft, 2.38%; Proctor & Gamble, 1.87%; Johnson & Johnson, 1.82%; and Apple, 1.77%. These holdings help to anchor the fund and reward you when the S&P index that it tracks is on the rise. And, their diverse nature helps to spread the risk of loss when one of the companies falters.
If you want my advice about which ETFs to buy and to sell, I encourage you to check out my ETF Trader service by clicking here. Please keep in mind that I am pleased to answer any of your questions about ETFs. To send me a question, simply click here. You may see your question featured in a future ETF Talk.
Why the Next Decade in Real Estate Finance Will Be Different
By John Doan, president, Miracle Mortgage
I frequently speak with people who fondly remember what their homes were worth two, three and four years ago. Many of them actually think their home will soon return to those previous levels of valuation. They talk about how that value inevitably will come back, because “real estate always goes up.”
I recall back in March 2000, when I was buying stocks while the NASDAQ was eclipsing 5,000, that I just knew my investments were going to pay off big time. And, I knew that this was going to be the easiest money I ever made. Today, the NASDAQ sits at 2,172, about 60% below that all-time high.
My point here is that we don’t know if, and/or when, the value of an investment will even stabilize, much less go higher. This uncertainty is particularly true when it comes to real estate. But what we do know is that the next decade will be much different in terms of opportunity. Going into 2010, we have to ask ourselves what history tells us about where the opportunities will exist.
This is what we do know going into the next decade:
- Mortgage rates remain at all time lows with a conforming 30-year mortgage averaging about 4.75%.
- The federal budget deficit is projected to average $1 trillion annually over the next 10 years.
- The federal government will have to issue massive amounts of new debt to both pay off maturing Treasuries and to help fund our enormous federal budget deficits.
- To be able to drum up demand for this debt, the government will have to pay an increased interest rate on these new bond issues to entice investors, both domestic and foreign, to continue buying that debt.
- All of this is occurring as the U.S. dollar incurs one of its worst declines in history. This means foreign governments buying our debt have a greater chance of losing principal when buying dollar-denominated debt with foreign currency.
- Mortgage rates historically correlate closely to 10-year Treasury yields.
- More than 10% of the mortgages in this country will switch from a fixed rate to a variable rate within the next 18 months.
All of these known conditions represent the plain and simple truth that mortgage rates are artificially low right now, and they surely will go up -- and go up substantially -- from where they are now. When will this happen, exactly? No one knows the exact answer, but what we do know is that you can take advantage of the current low mortgage rate situation -- if you act quickly.
If your current mortgage rate tops 5%, or if you have any risk at all of a rate change at any time during the life of your loan, then you should take complete control of your financial well being today and contact us to get a free assessment of your current situation.
Remember, the risk of rising rates and declining home prices is not the main issue facing many of us today. Rather, it’s the risk of inaction that truly is the biggest nemesis.
To contact me for your FREE mortgage assessment, go to my Web site at www.mymiraclelending.com, e-mail me at askjohn@miraclecorporation.com, or call me at (888) 536-3453.
P.S. As a special offer to all Doug Fabian Alert readers, if you qualify and lock in a loan with us in December, all points, fees and costs for that loan will be waived.
ETF Investing Strategies -- What You Need to Hear
The world of ETFs keeps getting better and better. We now can invest in almost any asset class, currency or country in the world with just a few clicks of a mouse. But in order to use ETFs properly, you have to learn a few key concepts.
Here are three important concepts you'll learn by listening to my latest audio presentation:
- 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
During the past several months, I have been sharing my views on how to manage your portfolio during these unprecedented economic times via this teleconference series. If you haven't yet had a chance to listen to this FREE audio presentation, then you can do so now by clicking here.
NOTE: Fabian Wealth Strategies is an SEC registered investment adviser, and is not affiliated with Eagle Publishing.
Something Is Rotten in the State of Denmark
“Alas, how many have been persecuted for the wrong of having been right?”
--Jean-Baptiste Say
On Monday, the big Copenhagen climate change conference got under way. I doubt, however, that we’ll hear much about the questionable science being used to argue in favor of increased regulation on carbon and other greenhouse gas emissions. As Say so profoundly noted, often it’s those who challenge the consensus (in this case, it’s the global warming skeptics challenging the mainstream) that are persecuted for the wrong of being right. I am not a scientist, but I do know a cover up when I see it, and the entire “climategate” scandal is reason enough to think twice before we let bureaucrats from the United Nations alter our industrial civilization.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Alert readers, send it to me at askdoug@dougfabian.com, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars or anything else.