Making Money Alert
Election Aftermath -- The Risks Keep Multiplying
11/09/2006
The votes are almost all in, save for Virginia and Montana, and the result, as President Bush said in a news conference today, was a "thumping" for his Republican party. The Democrats easily took control of the House of Representatives and they nearly have sealed control of the Senate, as well.
The president's comments on yesterday's election outcome came as he announced the resignation of Secretary of Defense Donald Rumsfeld. Mr. Rumsfeld will be replaced by former CIA Director Robert Gates (pending Congressional confirmation). Gates headed the CIA during the George H.W. Bush administration.
So, what does all this change mean for the markets? Well, first of all, the market opened the session lower on the uncertainty of a new Congress and what that portends for the future. But right after the Rumsfeld resignation, stocks gained some ground and moved into the plus column. It seems that Wall Street may be signaling its approval of a likely change in direction when it comes to the strategy and tactics in what has become a very messy military action in Iraq.
What this whole election result has brought to light for those of us who are chiefly concerned with the stock market is growing risk. Now, when I say risk, it is helpful for us to first understand the type of risk.
Then there is market risk. This risk is the macro side of the equation and it refers to risk such as a slowdown in the economy, recession, a hike in interest rates, and other macro factors influencing the market as a whole. When market risk is high, there are very few opportunities for investors to make money.
The type of risk coming into play today, and nobody knows quite how to evaluate that risk accurately at this point, is called regulatory risk. This is the risk of change in various policies by the people who are responsible for establishing regulations on commerce.
This risk includes the risk of change in tax laws, i.e., and a possible increase in the tax burden on individuals and corporations. It also includes new laws regulating business and industry. In short, it is the risk of a change in the goals of lawmakers. One thing is for sure. With yesterday's Democratic sweep of control of the House and likely the Senate, it's virtually certain that some industries and companies are going to face a heightened sense of regulatory risk.
One of the sectors I see as a potential target of this new Congress is the pharmaceutical sector.
As you can see from the above chart of the Pharmaceutical HOLDRs (PPH), the sector took a dive in today's trading. In fact, after a few recent days of buying, the sector dropped down below its 50-day moving average in just this morning's trading.
Democratic lawmakers have made no bones about their intention to try and regulate the price of certain drugs in the marketplace and that kind of a policy change could spell trouble for this sector going forward.
Of course, that trouble could turn into opportunity in these stocks once the dust settles and once the sector comes down to attractive levels for buyers. I know I will be watching this sector, as well as many other sectors, for the opportunities associated with a new Congress and the accompanying new regulatory risk the companies face.
Do you want to equip yourself with the armor to combat any kind of risk?
Subscribers to Successful Investing have been navigating the seas of risk for nearly 30 years. Now more than ever, you need the tools to protect yourself against the uncertainties that can scramble your nest egg.
To find out how to get started with Successful Investing, click here.
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5 STEPS TO YOUR "FREEDOM POINT"
By Josh Lewis, the "Making Money" Mortgage Expert
Last week, Doug introduced you to a concept called the "Freedom Point." Your Freedom Point is simply the point in time where you have enough assets to pay off your mortgage, if you choose to. Conventional wisdom says you should pay off your mortgage as quickly as possible. This outdated thinking is not only wrong but dangerous. Paying off your mortgage too early can prevent you from accumulating the assets needed to enjoy the retirement you want.
In an effort to help my clients increase cash flow, maximize wealth and reach their Freedom Point as quickly as possible, I have developed a 5 Step Process for managing your mortgage. Let's take a quick walk through the steps.
Step 1 -- Insure your mortgage does not expose you to excess risk. With the explosion of new mortgage products in the last decade, many homeowners have taken on way too much risk. Adjustable rates, 100% financing, interest-only and negative amortization pick-a-payment loans are the primary culprits. I start by insuring that the level of risk in your loan is appropriate for your circumstances.
Step 2 -- Create a Cash Cushion. Far too many homeowners live paycheck to paycheck, without enough liquid assets to pay for life's little emergencies. I recommend that every homeowner have at least two months of living expenses in an accessible account. The water heater could go out or your transmission might fail. Without a cash cushion, you will be forced to turn to credit cards -- decreasing your cash flow and your ability to save.
Step 3 -- Become a Cash Consumer by Getting Debt Free. Many homeowners come to me with good credit, solid incomes and a lot of equity. Sadly, many of these homeowners have very little cash flow because of their dependence on credit. I help homeowners reposition their debts to maximize cash flow to allow for greater long-term savings.
Step 4 -- Build Significant Liquidity. Thanks to the real estate boom, a lot of folks are house rich and asset poor -- especially when it comes to retirement savings. I help homeowners rebalance these positions and catch up on retirement saving, while increasing liquidity and tax write offs.
Step 5 -- Reach Your Freedom Point. Using this simple but effective system, homeowners are able to reach their Freedom Point in seven-to-15 years. This strategy is intended to give you tremendous peace of mind -- letting you know that there will be no mortgage hanging over your head as you head into retirement.
5 Steps to Your Freedom Point, and about how you can benefit from a custom tailored Mortgage Master Plan, I invite you to join Doug and me for a Making Money University Tele-Seminar on Thursday, Nov. 16, at 6:30 PST. To register, please click here. Space is limited, so don't delay.
The first 20 people to register this week will receive a FREE copy of a new study by the Federal Reserve Board of Chicago that shows how homeowners benefit by investing in "offset accounts" instead of mortgage principal prepayment.
DOUG GOES YOUTUBE
The technological advances just never cease! You now can catch a video stream of my live market updates; just click here. This outreach effort is just another way for us to interact with you. Sign up at the web site to comment on my videos, send me a message, and get updates when we post new episodes. I broadcast a market update Monday through Saturday, which is uploaded by 5 p.m. PST. If you want to check out past shows, go to our video archive. Don't forget, you also can listen to the show through our podcast and live streaming whenever it's convenient for you. It's all at the site. It is just another way we are helping you to stay on top of your money.
LESS GOVERNMENT, LESS TAXES?
"I will vote for those who promise less government and less taxes, and then will monitor them to see that they do that."
This timely quote was sent to us by Alert reader Dave Cranston Sr. of Pittsburgh, Pa.
However, I think the goal of less government and less taxes might be on the backburner with our new Congress. Only time will tell, but suffice to say that it isn't a great day for those who advocate a laissez-faire approach to the economy.
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, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars, or anything else.