Making Money Alert
Investment Themes for 2009
01/07/2009
It's time to start looking at the roadmap. The roadmap that I am speaking of here is the financial roadmap for 2009. Unlike planning a road trip, knowing where you are going to turn before you start doesn't apply to investing. Nobody can predict all of the twists, turns, and forks in the road named Wall Street. We can, however, look ahead and see where the mile markers are, and where the key sites of interest reside.
Another way of saying this is that what you want to do now that 2009 has arrived is to start developing the investment themes that you think will come to pass this year. I've identified a few of my own, and here's a rundown of each:
1) Cash is still king. If you haven't figured it out already, cash is your best hedge against a deflationary environment. In my advisory services and for my managed clients, we will be using cash accounts as a safe haven in times of market duress. Please don't make the mistake of thinking that getting a small return of 1% or less is a reason not to hold cash. Money markets are still the best safety net in times of turmoil, as they are liquid, they accept deposits, and they allow withdrawals whenever you need your money.
2) Muni bonds. I think muni bonds could be huge in 2009, and they are particularly suitable for high-net-worth investors. Municipal bonds were a disaster in 2008, with the muni bond indexes down 12%, while some high-yield muni bond mutual funds were down 30% or more. For more on munis, see today's ETF Talk.
3) Bear market rallies. I think we are currently in the midst of a bear market rally. When it stops, nobody knows, but we'll do our best to make the right call for you. During bear market rallies, you are best served by shortening your investment time horizon to weeks, rather than months or years.
The chart here of the S&P 500 Index tells the tale of the bear market rally that began in late November and is still going on strong. How much more juice does this rally have left in it? Only time will tell.
4) Bear market sell offs. Despite the recent bear market rally, we are, in fact, still in a bear market. That means there likely will be plenty of shorting opportunities ahead when those bear market rallies run out of steam.
5) Commodity bear market rallies. It's no secret that oil, gold, basic materials and precious metals are all way oversold right now by historical standards. That means there likely will be plenty of bear market rallies in these individual commodity-related sectors. I think energy is one of the great opportunities destined to emerge from the market rubble of 2008.
6) Rising interest rates. The governments of the world have promised their citizens a whole lot of economic stimulus in 2009, and those promises are going to require a lot of funding. Expect interest rates to rise, i.e., bond yields to rise, in 2009.
7) Currency plays. We could see a lot of action in the dollar vs. rival foreign currencies this year. We also could see a further rally in the dollar going into 2009, or a complete collapse of the greenback. I think the fate of the U.S. currency all depends on confidence. We have a new administration, new Congress -- and the prospect of bigger and bigger budget deficits. Will the world continue to invest in America, or will confidence in our financial system be lost in 2009? Watching the direction of the currency will help us answer these questions definitively in 2009.
To find out more about how you can exploit these seven investment themes in 2009, check out my Successful Investing advisory service by clicking here.
Why You Should Read the Alert Every Week 2
During one of the holiday parties I attended recently, I had a man ask me a curious question. He asked me why it was so important to read the Alert every week. I never really thought about this before, but when forced to answer I came up with what I think is a great set of responses.
This man must have thought they were good responses too, as he promptly gave me his e-mail address and asked me to add him to the list of Alert subscribers. Here are a few of my off-the-cuff reasons why he -- and you -- should read the Alert every week.
1) Our bear market call in 2008. Yes, we got it right, and we got it right early. Nearly a year ago, we told you that this market was getting ugly, and to make sure you had stop losses in place and a high cash position. I think the reality that followed vindicated this call beautifully.
2) Ongoing ETF education. Each week, we give you invaluable information about what's happening with the hottest and, in my view, best investment tool in your arsenal, exchange-traded funds.
3) Pinpointing dangerous sectors. There are a lot of minefields out there, and we've proven that we can keep you away from the most perilous. A case in point was our recommendation to steer clear of financial stocks early on in 2008.
4) Empowering you with analysis. The purpose of the Alert is not only to educate, but to empower. By knowing about the market, and by applying rational analysis to a sometimes irrational business, you can put reason on your side. And reason, held firmly in her seat, empowers everyone.
5) Our new video content. Even if you have limited time to read the Alert, you can always click on my video update, which will give you a good sense of the most important happenings in the market each week. The inclusion of a new video in every issue is another great reason to read the Alert every week.
I hope this clears up any issues regarding the why of this publication.
ETF Trader Ranked No. 4 in 2009
The Hulbert Financial Digest just published its list of the Top 10 performing newsletters of 2008, and I am proud to report that my ETF Trader advisory service came in fourth overall!
Our +13.2% total return bested nearly 200 other newsletters and trading services to capture the number four spot on the prestigious list. In terms of dedicated ETF services, ours topped the list. To read the MarketWatch article, click here.
I must admit that this is an enormous source of pride for my team and me. In a year when the S&P 500 was down nearly 40%, and in one of the toughest market environments in history, double-digit percentage returns are almost unheard of. Yet, that's what we managed to accomplish with a little sound judgment, some tight stop losses, and some great timing.
In this oh-so-difficult year, it's nice to be recognized for thinking unconventionally, and for some solid money-making moves.
If you'd like to find out how to make money using my ETF Trader advisory service, simply click here.
ETF Talk: Munis to the Rescue?
As the economy slows, one reasonably safe sector that you may want to consider is municipal "muni" bonds. Muni bonds are issued by cities, states and other local governments to raise money for all kinds of public sector construction initiatives, such as schools, roads and bridges.
With the ongoing recession, cities around the United States need to raise money. By early November of 2008, states and cities were selling nearly $6 billion in debt, including Houston's $423 million and New York City's $400 million. The need for cash is sparking a municipal bond rally that could be extremely profitable for ETF investors.
I think muni bond exchange-traded funds (ETFs) are definitely instruments worthy of consideration, especially given the renewed interest by President-elect Obama and his administration's plan to beef up the nation's infrastructure.
The competitive yields now offered by muni bonds make them extremely attractive to investors. Since the interest yielded on these bonds is usually exempt from federal taxes, and maybe even state and local taxes if the investor is a resident of the state or city that issues the bonds, you have an investment offering a one-two punch of solid yields and excellent tax savings.
However, there are certain facts about the muni bond market that investors should understand. The market for muni bonds is huge, with more than one million individual bonds and 50,000 issuers, making it more fragmented than the corporate and Treasury markets. Muni bonds usually fall into two categories. First, general obligation bonds use tax revenue to repay the debt. Second, revenue bonds are repaid by the revenue generated by the project that the bonds funded.
Both types of bonds potentially can offer high yields. By using ETFs to trade in these bonds, you will have much more flexibility, as well as lower fees than the conventional muni bond mutual funds, which have an average expense ratio of 1.10%. The chart below shows one of the better muni bond ETFs we track each week, the SPDR Lehman Municipal Bond (TFI).
Of course, muni bonds also carry risk. For example, muni bonds typically offer less transparency in pricing and are not very liquid, since such bonds usually are bought and held over a period of time by the purchaser.
Another risk is that the governments behind certain muni bonds pay companies to insure them in an effort to gain a higher rating for the debt from ratings agencies. The insurance companies themselves are at risk in the current market because of their exposure to the subprime crisis. Yet despite these risks, muni bonds have a good record for avoiding defaults.
In my view, we could be on the cusp of a significant muni bond rally. Although I am not currently recommending any muni bond ETFs, the Fed's recent interest rate cuts have boosted bond prices. Now may be a good time for you to begin exploring how muni bond ETFs could fit into your portfolio.
As always, if you have any questions about ETFs that you'd like me to answer in an upcoming ETF Talk feature, please click here.
Cashing in on a Life Well Lived 2
How an early life settlement can put money directly into your pocket.
By Kevin Yurkus, President, Fairway Capital
The data is in, and it's not pretty.
On Dec. 1, 2008, we got news that the U.S. economy officially had slipped into recession. Unfortunately, that recession began a full year earlier. According to the National Bureau of Economic Research, the economic expansion that began in November 2001 reached its climax in December 2007.
To this I say: tell me something I don't know.
The fact is that during the past year, anyone reading a newspaper, watching the news or just plain awake knows the kind of dire straits the economy and the financial markets have been mired in for the entirety of 2008.
The problems in the economy and the concomitant decline in the equity markets -- with many of the major market indices down over 40% on the year -- has many investors scratching their heads in search of some kind of positive cash flow. And while there isn't too much you can do about the troubled asset class that is equities, there is one asset class you probably already own that could put a nice chunk of cash directly in your pocket.
No, I'm not talking about the old gold jewelry you have lying around that you no longer wear. I am talking about something I suspect you already have -- a term life insurance policy.
According to industry estimates, approximately 73 million Americans currently have life insurance policies. I doubt, however, that many people realize just how powerful a weapon your policy can be in the battle for maximum wealth appreciation. Fortunately, there is a strategy you can use to help get you through the current market malaise, and it involves what I call "maximizing" your term life insurance policy.
If you're like me, I suspect that you have a low-cost, term life insurance policy sitting in your desk drawer. In most cases, those term policies expire without paying a benefit. When the term is up, we simply allow our policies to cancel. After all, what other option do we have?
Fortunately, that term policy doesn't have to be a melting asset. In fact, did you know that you have the option of selling an expiring term policy for cash? That's right; there are firms out there that will buy your term policy from you.
Thanks to a burgeoning secondary market for term life policies, where Wall Street institutions such as Deutsche Bank, Credit Suisse, Berkshire Hathaway and others actually pay policy holders cash to purchase their life insurance policies, you can take an expiring asset and transform it into cold, hard cash.
My firm, Fairway Capital, helps investors sell their life insurance policies in the open market. Now, some of you likely have heard of these so-called "life settlements," but you may think that they are only aimed at a certain elderly demographic.
While it is true that traditional life settlements are aimed at older policy holders, we now have what is called an "early life settlement," which is aimed at younger term life insurance holders who wish to convert their policies into cash.
And what kind of money can an early life settlement put in your pocket?
Well, the answer varies, but the range for payment on an early life settlement is between 1% and 3% of the face value of the policy. Let's look at a few real-world examples to see how these early life settlements work.
I recently worked with a 58-year-old gentleman who had a 30-year term policy that was about to expire. The face value of the policy was $750,000, which he purchased largely to cover the cost of his mortgage.
He had three options to deal with this expiring policy. First, he could let it expire. Not a very satisfying option, I agree, but the most common. Second, he could convert the policy into a universal life insurance policy. The only problem with this option is that he'd have to pay premiums that are about eight times greater than what he had been paying. The third option was to sell his policy via an early life settlement, which he did, and in doing so he put $7,500 straight into his pocket.
In another case, I worked with a 63-year-old man with a $3 million term policy designed to cover his business, as he was the key man in his organization. This gentleman had retired recently, sold his business, and therefore no longer possessed the need for the $3 million death benefit.
Initially, he was just planning on letting the policy expire. But with an early life settlement, he was able to sell the policy for $60,000.
Finally, I had a 68-year-old client with a $1 million policy designed to protect his family and replace any loss of income in the event of his death. The policy was set to expire in about two years. But due to the current economic environment, this gentleman was in need of an immediate cash infusion. My company was able to show him the power of life insurance as an asset by facilitating the sale of his term policy for $30,000.
You don't have to be a particularly savvy investor to realize that sometimes it just makes sense to transform your life insurance policy into a tangible financial asset.
The fact is that these days, thanks to early life settlements and the growing secondary market for life insurance policies, your policy doesn't have to be a wasting asset. And let's face it, given the current decline in traditional asset investment instruments such as stocks and mutual funds, now could be the best time ever to turn your term insurance policy into cash.
About the Author:
Kevin Yurkus is the president of Fairway Capital, a leading life insurance and financial services firm based in Newport Beach, Calif., serving clients nationally and internationally. Fairway Capital specializes in innovative solutions tailored to high net worth senior citizens, ranging from estate planning to life settlements. Contact Kevin at 800.338.1035 or see the firm's Web site.
New Radio Show Time Slot 2
First of all, let me take this opportunity to thank all of you who listen to my radio show every week. I truly love being on the radio, and your support helps keep me there. With that said, I want to announce a new time slot for my Saturday show in Phoenix, Ariz.
Doug Fabian's Wealth Strategies radio will now air at 11 a.m. Mountain Time on KFNN, 1510 AM in Phoenix, and 10 a.m. Pacific Time on KRLA 870 AM in Southern California.
If you're not in one of these markets but still want to listen to the show live, you can do so online. Just click here for details on how you can listen live.
I am looking forward to another great year on the air, and I invite all of my Alert readers to join me.
Jedi Master Wisdom
"Named must your fear be before banish it you can."
--Yoda, Star Wars: The Empire Strikes Back
Are you spooked about putting money to work in 2009 after the disaster that was 2008? I don't blame you if you are, but there is no reason to be. The first step in getting over your fear is to name it. By first identifying why you are afraid to invest -- e.g., lack of market understanding, fear of taking losses, fear of being wrong -- you can banish it from your being and begin the path toward, as Jedi Master Yoda might say, the light side of the Force.
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.