Making Money Alert
Revising the Slowdown
11/01/2006
If you take a look at all three major indices, the Dow, S&P 500 and NASDAQ Composite, you will see that there has been a steady giveback in stocks since last Wednesday's Alert. And while this giveback hasn't been extremely drastic, it could be a sign that the market is beginning to top out here after its remarkable run of the past few months.
So, what's driving the recent cooling in stocks? Well, one thing could be the recent economic data showing a deep slowdown in the economy. Last Friday, the Commerce Department reported that the economy grew at its slowest pace in more than three years.
And what was the cause of the recent quarter's economic anemia? Surprise! It was the housing sector. Economic growth during the July-to-September period came in at an annual rate of just 1.6%, as investment in homebuilding was cut by the largest amount in 15 years.
As you probably already know, I am a bear with respect to housing and today's figures help buttress my thesis that more pain is ahead for housing, the economy, and the stock market.
In fact, this kind of slowdown in the economy and housing is just the kind of risk that I've been worried about and it underscores the reason why I've been so cautious in my positioning to the market at this time.
One interesting note is that on the very same day those economic figures were released, an article appeared on the news site Bloomberg.com which hypothesized that the economic numbers actually would have been even slower except for a "statistical fluke." Without that irregularity, stemming from an increase in auto production last quarter, the U.S. economic growth would have come in even weaker than it did.
In the Bloomberg article, one former Commerce Department economist said that without the increase in motor vehicle production, the real annual economic growth figure would have been just 0.9%.
It's always interesting to find out how things really are in the economy. By all of the numbers I've seen, the economy certainly is cooling rapidly. What will this situation mean for stocks and bonds going forward? We'll all find out together soon enough.
SPOTLIGHT ON ETFS
Throughout the past week I have highlighted five exchange-traded funds (ETFs), one each day, on my radio show Making Money with Doug Fabian. The majority of these funds have been in the natural resources sector -- an area which I think has a vast amount of investment opportunity going forward.
So, for those of you who didn't get a chance to listen this week, here are the five ETFs we talked about from last Thursday's show through today's show.
Market Vectors Gold Miners (GDX) -- This ETF seeks to replicate the performance of the Amex Gold Miners Index. GDX includes the common stocks and ADRs of selected companies involved primarily in the mining of gold and silver. The fund boasts a very low expense ratio of 0.55%.
streetTRACKS Gold Shares (GLD) -- The objective of this ETF is for its shares to reflect the performance of the price of gold bullion. When you buy GLD, you basically are betting on the price of the actual precious metal, gold. GLD's expense ratio is just 0.40%.
Claymore/BNY BRIC ETF (EEB) -- This ETF seeks investment results that correspond generally to the performance of the BNY BRIC Select ADR Index. The acronym BRIC stands for Brazil, Russia, India, and China. With an expense ratio of 0.60%, this ETF is a very inexpensive way to get foreign equity exposure.
PowerShares Listed Private Equity Portfolio (PSP) -- This interesting fund seeks to replicate the Red Rocks Listed Private Equity Index, which includes more than 30 U.S. publicly traded companies with direct investments in more than 1,000 private businesses. At an expense ratio of 0.60%, you'd be hard pressed to find an easier or less costly way into the private equity market.
United States Oil Fund (USO) -- The United States Oil Fund is an ETF designed to track the movement of light, sweet crude oil, which also is known as West Texas Intermediate. The portfolio will consist of listed crude oil futures contracts and other oil-related futures, forwards, and swap contracts. Its low expense ratio of 0.50% lets virtually anyone play with the big oil boys in Texas and on Wall Street.
Interested in keeping tabs on all of these hot new ETFs? Every Friday my Successful Investing advisory service provides you a complete list of ETFs, showing you their past and present performance and how they compare with each other.
But not only do we give you the raw data, we also provide you with a strategy to determine how to use ETFs in both bull and bear markets. Want to find out how? Then check out my Successful Investing advisory service.
Subscribers to Successful Investing have been achieving market-beating returns for nearly 30 years and, now with the power of ETFs at our disposal, the sky's the limit for future performance.
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DO YOU KNOW WHEN YOU WILL REACH YOUR "FREEDOM POINT"?
I had never heard the term "Freedom Point" until very recently. If forced to guess, I might have said it had something to do with immigration or the end of a prison term. But in the realm of home ownership, the Freedom Point is actually a critical wealth-building concept that can mean the difference between retiring wealthy or working well beyond age 65.
Josh Lewis, my mortgage expert, introduced me to this concept. It simply refers to the point at which you have enough assets to pay off your mortgage if you so choose. To illustrate the power of this concept, Josh relayed the story of his father. At age 50, Josh's dad took out a 15-year mortgage. He took this step so he could retire with no house payment. In fact, he made extra principal payments and paid his loan off in 10 years. This strategy had unintended consequences. When the loan was paid off, Mr. Lewis was in the highest earning years of his career. Without a mortgage, he had lost his mortgage interest deduction. That reality meant he lost out on more than $3,000 per year in tax deductions. For most people, this mortgage tax write-off is the biggest deduction the government offers.
What could he have done differently? A home owner using the concept of the Freedom Point would have focused on accumulating enough assets to eliminate his or her mortgage before retiring. Mr. Lewis used his cash flow to aggressively pay his mortgage off. It's a small but important difference. You see, his 15-year loan had a 5.5% interest rate. In a combined tax bracket of 30%, the effective rate was closer to 3.85%. By aggressively prepaying his loan, Mr. Lewis limited himself to a 3.85% return on his money. Even the most conservative index funds produced a far greater return over that time period.
The safe, predictable way to grow your net worth is through a mortgage "offset account." This is any investment account where you would place extra cash flow each month instead of pre-paying your mortgage. This approach lets you keep your liquidity and maximize your tax benefits. If Mr. Lewis had used a 30-year mortgage, he would have had an additional $730 per month to invest PLUS another $225 in tax savings for a total of $955. With just a 6% return on his offset account, he would have accumulated $156,000 before retirement. If he chose to pay his loan off when he stopped working, he could have done so and had $31,000 left over. If his offset account had earned 8%, the cash remaining would have been closer to $50,000.
Listen folks, I think it is critical that you have a plan for eliminating your mortgage when you retire. What I want you to understand is that simple strategies such as this one can make the difference between living well in retirement and just getting by. Imagine if Mr. Lewis had started at age 40 instead of 50. What if your mortgage is closer to $400,000 instead of $150,000? We are talking about a difference of hundreds of thousands of dollars in retirement.
This subject is so important that I have asked Josh Lewis to join me in a FREE Tele-Seminar to discuss his unique 5-Step Mortgage Management process and how it can accelerate your wealth building. I invite you to join us on Thursday, Nov. 16, at 6:30 p.m. PST, to learn how you can benefit from these wealth building concepts. To register for this FREE event, email askdoug@fabian.com with "Tele-Seminar" in the subject line. Be sure to include your name and address so that we can provide you the information to join the call. I hope to have you there!
DOUG GOES YOUTUBE 5
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JUST SAY NO TO THE NANNY STATE
"The big government nanny-state is based on the assumption that free markets can't provide the maximum good for the largest number of people. It assumes people are not smart or responsible enough to take care of themselves, and thus their needs must be filled through the government's forcible redistribution of wealth. Our system of intervention assumes that politicians and bureaucrats have superior knowledge, and are endowed with certain talents that produce efficiency."
--Ron Paul, Republican Congressman, Texas
We'll all be going to the polls on Tuesday to determine the fate of the next Congress. But whatever the outcome next week, remember that there is nothing superior to the free market when it comes to providing the maximum amount of good for the largest number of people. Politicians don't know what's best for you -- only you know what's best for you. Trust yourself.
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.