Making Money Alert
Focused on Falling Yields
09/23/2009
Regular readers of the Alert know that I often present charts of key market indicators such as the S&P 500 Index, oil, and exchange-traded funds (ETFs) of leading market segments such as China.
Today, I want to take a look at an equally important, yet not as closely followed market measure, long-term Treasury bond yields. In the chart below, we see a chart of the yield on the 30-Year Treasury Bond.
Yields, i.e., long-term interest rates, took a nosedive as the market fell in November and December 2008. As stocks got their mojo back at the beginning of the year, yields made their move higher as well. But curiously, the stock market and interest rates have diverged a bit since early August. Stocks have continued to power higher, while yields now have fallen below their short-term, 50-day moving average (blue line).
Today's announcement by the Federal Reserve Open Market Committee that it would leave interest rates unchanged will likely be good for the equity markets, but we'll have to see what kind of effect (if any) it's going to have on long-term Treasury bond yields.
I recommend that you continue to monitor long-term yields, along with the major market equity indicators, as a continued divergence between the two may signal a shift in the pending fortune of stocks. Also, by watching yields, you'll get a much fuller picture of the financial markets, and that fuller picture can help you to learn and to understand more about how the markets -- and the economy -- ebb and flow.
The Political Quotient
"Change will not come if we wait for some other person or some other time. We are the ones we've been waiting for. We are the change that we seek."
-- Barack Obama
Change. That's been the rallying cry of candidate Obama, and now President Obama, since he vaulted into the political limelight. Well, one thing you have to give the president credit for is his willingness to stick to his guns. You see, if "change" is what you voted for last November, you should consider yourself served, because that's exactly what you've been given.
In the first eight months in office, the president has initiated the largest expansion of the federal government since World War II. He's spent billions of dollars on corporate bailouts, and run up trillions of dollars in U.S. debt, ostensibly to fight the ravages of his "inherited" economic crisis.
In the first 100 days of his presidency, Mr. Obama signed a $787 billion stimulus bill into law and proposed an astonishing $3.6 trillion budget for the next fiscal year. Some political analysts have called these figures "unprecedented." I prefer another term: dangerous!
Consider the dizzying array of acronyms describing some of the biggest and, in my view, most pernicious government programs. There's TARP, (Troubled Asset Relief Program), TALF (Term Asset-Backed Securities Loan Facility) and the PPIP (Public-Private Investment Program). These mega-dollar programs don't even include the $150 billion for funding green energy sources and $634 billion toward the introduction of universal healthcare.
So, is this too much spending, too fast? Well, I guess that depends on what side of the political aisle you sit.
If you're a Democrat, you may think that the Obama agenda is a good thing. If you're a Republican, you likely think the president is on the wrong track. But regardless of which side you come down on, there's no denying the fact that the president's plans will have a profound effect on the economy, the financial markets and your money for many years to come.
In my humble opinion, the policies and legislation being thrust upon us by the president and a sympathetic Congress are not conducive to the economy, and they will not fundamentally help to right our economic ship.
In fact, I think that the unprecedented intrusion in economic affairs proposed by the president will likely do much more harm than good in the years ahead, and that is why you, the well-informed investor, must be prepared for the reverberations in the economy due to this administration's actions.
But what, precisely, can you do to protect yourself -- and to profit -- from the decisions made in Washington, D.C.? Well, the first thing you can do is to read and to follow the advice that you get in the Alert.
You also should remember that no matter what Washington wants you to do, the beauty of being an American is that you don't have to do it. In fact, your ability to zig when Washington zags is what makes this country so excellent. Of course, the trick is knowing just how and when to make those moves, and what tools are best suited to do the job.
But perhaps the first thing you should do is make sure you are a "survivor." Surviving tough economic times with your capital intact is the first rule of successful money management. This is a lesson my father taught me more than three decades ago, and it's a lesson I will be eternally grateful I learned.
You see, to be a winner in the investing game, you've got to have the money to sit at the table. If you lose a significant amount of your capital by trying to outsmart the market during tough times, you'll wind up either broke or without enough capital on hand to take advantage of the inevitable opportunities that follow the darkest of market downturns.
If you'd like to find out how to make sure you are on the winning side of the investment game, then I invite you to check out my Successful Investing advisory service -- and doing so is as easy as clicking here.
ETF Talk: Change We Can Believe in for Your 401(k)
Although exchange-traded-funds (ETFs) are finding their way into the portfolios of many investors, they have yet to make much headway in 401(k) retirement plans. But that situation could start to change. If current drawbacks to using ETFs in 401(k) plans are resolved, the ETF industry would gain increased working capital, heightened revenues and earnings, and enlarged market share at the expense of mutual funds.
It also would open up the world of ETFs to a much bigger pool of investors. Mutual fund companies recognize the competitive threat and counter that they provide many low-cost, index-tracking funds that essentially perform the same service as ETFs.
It would not surprise me at all if many 401(k) providers were eyeing ETFs to supplement their array of mutual fund offerings. The sheer breadth of ETFs gives asset managers a spectrum of investment possibilities. The vast selection will allow retirement portfolios to be cobbled together that are best suited for the individual circumstances of people across a wide range of ages and income brackets.
Ideally, a retirement portfolio should have access to funds that mirror all types of market indexes, ranging from the S&P 500 to overseas stock exchanges. If there is anything that the bear market of 2008 taught us, it has been to diversify. Just ask any wealthy investor or hedge fund manager who used Bernard Madoff to manage money. In the wake of industry scandals and poor performance by money managers, ETFs that track indexes and stock markets are becoming increasingly attractive.
ETFs still have hurdles to overcome before their use in 401(k) plans becomes commonplace. A correctable weakness for ETFs is that their use in 401(k) accounts involves the payment of fees by plan administrators that -- when used inside a "collective trust" -- can be higher than the fees for mutual funds. However, that current disadvantage is limited to the use of ETFs in 401(k) accounts and can be remedied.
A 401(k) record-keeping company, Invest n' Retire, of Portland, Ore, has developed a technology to trade ETFs cost-effectively in 401(k) plans. The firm's software allows ETFs to be traded in real-time at institutional pricing. Coupled with lower management fees, ETFs are becoming attractive investments in 401(k) plans.
ETFs still retain decisive advantages, compared to mutual funds. For example, ETFs offer intra-day trading to allow their purchase and sale throughout a trading day as share prices change. If an investor decides to trade an ETF, the transaction can be processed within seconds to eliminate market risk. In contrast, mutual funds keep the same price throughout a trading day and only revise it the next day after the market closes. That limitation for mutual funds leaves their investors vulnerable to market volatility during the course of a day. Right now, a growing number of mutual fund investors are pulling out their money -- driving down fund values for the remaining shareholders.
As always, I am pleased to answer any of your questions about ETFs. To send me your questions, please click here. You may see your question answered in a future ETF Talk.
Obama Impact on Your Money, Part II
On Tuesday, Sept. 15, we conducted the second installment of our teleconference on "The Obama Impact on Your Money." Judging by the slew of emails I received, the event was a resounding success. I want to thank everyone who joined us on the call. I know many of you have been interested in the material from this presentation, so if you missed it, all you have to do is click here.
Five Action Steps
For those of you unable to join us, I shared five action steps that I believe are important to implement now if you want to improve your financial results:
1. Circle the wagons around your liquid assets. You must prepare yourself for another deflationary collapse in stock prices. In order to do so, you must complete an inventory and assessment of your current invested positions.
2. Review the number of service providers you are working with. Sometimes investors end up with too many investment providers. This makes money management more difficult than it should be.
3. List all of your stocks, bonds and mutual funds. The purpose of this action item is to determine how much exposure you have to risky assets. You want to know the percentage invested in stocks, bonds and cash, because having the right asset allocation is a key to prevailing during volatile times. In addition, you want to know how your stocks and bonds did last year, because you want to have stop losses on risky assets that may go down again.
4. Know your safe harbors. Money markets, Treasury bills and notes are safe investments during deflationary times.
5. Prepare for a U.S. Dollar crisis. Review the information in this latest presentation on ETFs that you can use if the dollar continues its downward spiral.
So, what's the next step? Put your knowledge to use!
Knowledge without action is powerless.
Now, you need to put to work what you've learned to take care of your money, and the first step toward putting that knowledge into action is to make sure you listen to part II of my teleconference series by clicking here.
NOTE: Fabian Wealth Strategies is an SEC registered investment adviser, and is not affiliated with Eagle Publishing.
Mark Your Calendars
In my line of work, I often get emails that are very gratifying. This month, I thought I'd share one such email with you that you also can be a part of. Here's the text straight from my inbox.
Dear Mr. Fabian:
Thank you so much for making 2009 another very successful year for The MoneyShows.
We truly appreciate your continued support and dedication to educating investors. Therefore, we would like to take this opportunity to invite you to the 2010 MoneyShows.
Below are the dates of the 2010 MoneyShows that we would like to invite you to speak at next year.
As most of you know, we work on our programming four-six months in advance, so please let us know what shows you'd like to do in 2010 at your earliest convenience.
We're looking forward to another year of working together again.
Sincerely,
The MoneyShow Staff
First, let me say that I am honored to be invited back for all three MoneyShows next year, and I have accepted the company's gracious invitation to attend all three. So, if you are going to be in or near any of the above locations at any of the respective dates, I cordially invite you to join me. These shows are always a great time, and I guarantee you'll learn a lot.
So, mark these dates on your 2010 calendar, and I hope to see you there.
The Wise Sound of Dolby
-- Ray Dolby
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. Click here to Ask Doug.