Dion Money Management Blog   Money Management for Retirees and Their Families

Just one week after setting new annual lows, the major stock indexes are significantly higher this week after a four-day, record-setting rally. Once stocks declined far enough to coincide with other bear-market levels, investors rushed in to bid prices much higher. The Dow Jones Industrial Average, for example, rose 1,174 points, or 15.6 percent, over the course of four days. Not only have we not seen a four-day spurt since April 18, but this rally was the largest point rise ever for the Dow and its biggest percentage point gain since August 1932, which is approximately when the historic bear market turned a corner.

One measure that is set to surpass the extremes of that historic crash is volatility, which peaked at 68 percent during the crisis. S&P volatility for the past three months has already reached 66 percent and could easily outpace the worst financial turmoil in the past century. The presence today of hedge funds and the growing use of exchange traded funds to time the market has undoubtedly elevated volatility during this downturn. But savvy investors will look past this and realize that such fear spells opportunity, because no matter where the bottom rests, there is value for the taking in this market. In fact, the Chicago Board Options Exchange volatility index, or VIX, is widely used to measure fear among investors, and the VIX has begun to decline.

Stocks gained widespread support from additional government bailouts this week. Citigroup is the latest bank to receive a major injection from the government, which announced it would infuse $20 billion of new capital into the company and absorb as much as $249 billion in potential losses in poorly performing securities tied to real estate mortgages.

Also this week, US officials agreed to pump an additional $800 billion into ailing credit markets. Unlike previous plans—which all told are now approaching $4 trillion in financial commitments—a good portion of these funds will come from the Federal Reserve rather than the Treasury. The Fed will purchase $600 billion of debt from government agencies (e.g. Fannie Mae, Freddie Mac, etc.) and in conjunction with the Treasury will provide $200 billion to investors buying securities that are tied to consumer debt, such as car, student, and entrepreneurial loans. All of this activity has taken the Fed far beyond its traditional role of setting interest rate policy and transformed it into an enormous lender.

All of these bailouts are expected to weaken the dollar once the dust settles, and that argument must have gained attention last week. Gold, a store of value during difficult times, jumped to $820 per ounce after a five-day run that ended Wednesday. Although there has been no lack of panicked stock-selling among the broader market in recent months, gold bullion and gold stocks had so far failed to live up to their safe-haven status during much of this period. Gold bullion had maintained enough of its value to outperform other commodities, however, but it had succumbed to selling with each upward move in the US dollar index. One portfolio holding with significant exposure to gold stocks is Federated Market Opportunity (FMAAX).

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By Bill Schmick

No matter how hard I try to avoid it, the onslaught of depressing news, dire forecasts and plummeting markets beats down upon my head like a winter thunderstorm.  Thanksgiving is around the corner. I don’t even care. All I worry about is how to cut corners, make-do and pray that the pink slip doesn’t show up a week before Christmas.
But today I am not going to add my voice to the chorus of doomsayers.  Sure, this country has problems aplenty but instead of repeating them in an endless litany, I thought I might suggest a couple of home grown solutions.
Let’s start with this week’s most pressing problem: the auto industry. Congress failed to appropriate the additional $25 billion the Big Three said they needed to survive.  Setting aside the blame game as to why they are in this predicament, the fundamental problem as I see it is simple—people are not buying cars. What can we do to change that?
How about making interest payments on auto loans tax deductible?  It would work just like mortgage interest on homes.  At the same time, Congress could insist that in order to qualify, the auto companies must sell their vehicles at the employee discount price.  Now this could be a temporary program, say for five years to match the average auto loan period.  I think a lot of people would jump at that offer.  I know I would. Sure some kinks would need to be worked out but at least it would be a win-win for the consumer, auto companies and even your local banks.
Another issue is confidence.  Many of those who are charged with solving the credit crisis say that confidence is one of the thorniest problems we face.  Neither lender nor borrower has any faith in the system. In addition, the consumer has no faith in the future so they are not spending; ditto the business manager.  Is it any wonder unemployment is climbing?  It is a vicious circle that if left to its own devices could result in a recession-like span of several years. Fortunately, I believe a solution to that problem is already waiting in the wings: Barak Obama.
Whatever you may think about our next president, most people would agree that he is a great communicator along the lines of Ronald Reagan, JFK or possibly even FDR.  His message of change resonates within all of us.  We may not all agree on the direction of this change but we agree that we need it.  His message, I believe, is exactly what we need to restore confidence in ourselves and our country.  We need a leader who leads, restores confidence and hope, and who can get across his ideas something sadly lacking throughout the crisis of the last year.
Finally, there are some on Capital Hill who are talking about another stimulus plan although it failed to get much support in the Lame Duck Congress.  I believe it will be resurrected in the new administration. It should be far larger than the previous plan, something along the order of $300-500 billion.  It may or may not have a direct cash-to-taxpayer element within it.  Clearly, the last stimulus package had at most a temporary impact on the economy with many Americans choosing to save the extra cash rather than spend it. That turned out to be a wise choice by Joe Six Pack.
This time around the money could be directed in a more focused approach, for example, jobs creation via infrastructure projects like re-building bridges, dams and highways.  God knows this country’s need for such repairs is desperate.  Money spent in this way would have a multiplier effect changing hands several times and thus providing further economic growth.  It works like this: the government pays the builders who buy materials and tools, which pays the workers who spend at the supermarket, etc. etc. That kind of spending would provide a real boost to the economy as well as helping Main Street.
Finally, a tax cut (income or capital gains or both) would also boost spending and growth and could be one of the first things Barak Obama does when he reaches the White House.  Wouldn’t that be a hoot!   The candidate accused of being a socialist turns around and does the very thing that made Ronald Reagan a hero.  Well stranger things have happened, dear reader. So you see, just because the media is feeding you a steady diet of discouragement does not mean you have to be discouraged.  It’s your choice to see the cup half full or half empty.

Berkshire-based Dion Money Management, managing over $500 million for middle class Americans from coast to coast. Bill Schmick is a licensed investment advisor representative and portfolio strategist as well as a registered financial planner. Direct your inquires to Bill at 1-877-850-7942 ext. 146 (toll-free) or e-mail him at wschmick@dionmm.com.

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The markets contended with more dire economic forecasts and some renewed trouble in the financial sector, causing the S&P 500 to sink to a decade-low level this week; the index has now lost 50 percent of its value since its October 2007 high. This decline not only exceeds the 1987 crash, but it is in line with the bear market fall between 1973 and 1974. Given that equity valuations were lower this time than they were during each of those two periods, has the market gone beyond predicting a normal recession to something much worse economically?
Stocks now offer the highest dividend yield versus interest rates in 50 years—the yield on the 10-year Treasury is trading lower than the S&P 500 dividend yield—this market action, if not already overdone, is most certainly approaching oversold levels.
I continue to focus on those concerns that have weighed most heavily on stocks in recent months—the dislocations in the short-term credit markets, the uncertainty of corporate earnings, the presidential election, the forced liquidation of mutual funds and hedge funds—because these are problems that have either improved or resolved themselves this month.
Furthermore, the latest economic data this week supports a fall in consumer prices, the biggest one-month decline since 1947, in fact, when records began. The stunning reversal in energy prices was the root cause of the turnaround, while other prices across the board declined in tandem. These reductions will provide Americans with a much needed stimulus.

There is a lot in the news about hedge funds unwinding large complicated positions involving leverage and other risky investments. This, combined with institutional buying of Treasuries, means that there is an enormous amount of cash on the sidelines that will be deployed once the market stabilizes, setting the stage for a powerful rally that could erase much of what the market has lost this year.

This week, along with account representatives, I have continued work with new and existing clients to devise a portfolio that suits their time horizon and tolerance for risk. It is imperative to stay focused on the long term. We are working with some of the most experienced fund managers in the business, and I am confident that together we can weather this storm.

I am finding that more and more of my new clients have moved away from the large-firm models dominated by banks and brokers with their sales and product-driven processes, because they prefer the independent and objective approach that we bring to financial advisory matters. If there are family members or associates within your network that you feel could benefit from our services, I would be happy to have a preliminary discussion with them. In the meantime, I would like to wish everyone a very Happy Thanksgiving!

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Enter “401(k)” in any internet search engine and hundreds of thousands of pages will pop up. The sheer volume of advice out there on how much to contribute, what kind of funds to invest in, and how to stay on the right side of the IRS and avoid penalties can be overwhelming. Your company’s plan documents may not be much help either. They’re long, complicated, and filled with legal boilerplate. More often than not, you’ll find that your harried human resources staff doesn’t know much more than you do about complex issues like hardship withdrawals or borrowing against your vested balance.

We’ve put together a list of answers to some frequently asked 401(k) questions that come up when employees leave their current jobs to seek opportunities elsewhere.

1.    Can I just leave my money in my old employer’s plan? That’s up to your employer. While many employers will allow you to keep your 401(k) savings invested in their plans after you leave, most employees prefer to move their money into a new account called a Rollover IRA. These accounts typically offer 401(k) investors more investment options than employer-sponsored plans. Once you find a new job, you can usually move the money from your Rollover IRA into your new employer’s 401(k) plan.

2.    If I move my money out of my employer’s 401(k) plan, will I incur any fees or penalties? Not if you arrange for a “direct” rollover of funds into a Rollover IRA. It’s a simple process. First, open the Rollover IRA at a custodian like Charles Schwab or Fidelity. Next, tell your former employer that you want to do a direct rollover of your 401(k) assets into an IRA. It’s extremely important that your old employer make out the check to your custodian (on your behalf) and not directly to you. You have 60 days from the day your old employer issues the check to fund your Rollover IRA.

3.    What happens if my old employer makes out the check directly to me or I fail to fund my Rollover IRA within the 60-day window? If you are younger than 59 1/2, the IRS considers either of these situations an early withdrawal of assets from your 401(k) account and will assess a 10 percent early-withdrawal penalty. Regardless of your age, the Internal Revenue Code would require your old employer in this situation to withhold 20 percent of your account balance for taxes.

4.    Can I contribute new funds to my Rollover IRA? If you want to preserve the option of moving your Rollover IRA funds into a new employer’s 401(k) plan, then you should open a traditional IRA for any additional retirement savings while you’re between jobs. Only funds from a qualified employer-sponsored retirement plan can be rolled into your next employer’s plan. A Rollover IRA, however, is a good vehicle for consolidating several different 401(k) accounts.

5.    Can I borrow against my Rollover IRA? Yes. You may withdraw funds from your Rollover IRA tax- and penalty-free as long as you replace the money within 60 days. Note that “Day 1” is the day after you’re in receipt of the check from your custodian, and weekends and holidays count. If you fail to return the funds within 60 days, the IRS will assess taxes and could treat the loan as an early withdrawal. You may only borrow against your Rollover IRA once every 12 months.

Dion Money Management offers managed account services for your IRA, Roth IRA, 401(k) and other retirement accounts. Call one of our Portfolio Strategists at 1-800-432-7447, ext. 191 to learn about the benefits of our managed account program.

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As I mentioned recently, the economic news would most certainly worsen before it improves. Although at times it is important to separate the economy and the stock market, the two are inextricably linked, and the unprecedented financial events of September and October are working their way into the economic data, putting additional pressure on stocks. The pre-election presidential rally, which brought the S&P 500 more than 18 percent higher, was pulled back toward annual lows this week as a barrage of bad news streamed in from every direction.

In fact, the bad news seemed to get worse by the day: unemployment increased, retail sales declined, and the financial crisis widened to threaten a collapse of Russia’s currency. Retailers cut earnings forecasts in anticipation of a difficult holiday season and reduced 2009 forecasts. Even Wal-Mart, which has thrived during these hard times, lowered its outlook for next year. Over the past month, consumer spending and industrial production declined, a direct result of the financial strain we all endured in October.

Yet we must not forget that much of this news is largely anticipated, and with so many market participants discounting such a pessimistic economic scenario, there is an even greater chance of a sustainable rally before year’s end. Some key indicators and events to watch include the current G20 meeting this weekend. Announcements and sound bytes emanating from this meeting may provide an indication of how policy makers intend to influence or control financial markets in the future. Also, the credit markets will continue to provide insight to the health or stress of institutions and the financial system overall. So far we have seen a slight improvement since the credit crisis inflicted its tremendous financial strain on all investments.

Finally, I will continue to watch the real estate market and housing prices for evidence of stability, as well as improvement in both consumer and business confidence indicators. Governments around the world are undertaking vast macroeconomic and fiscal stimulus programs that will provide both the private and public sectors with the tools they need to weather the storm; this will support aggregate demand growth over the next 12 months.

I urge you to continue to seek our advice during these difficult times. Each of your situations is unique and each must be addressed personally. Some of you may be focused on your personal debt and near-term financial obligations, while others may be focused on attaining your long-term financial goals. Please contact your representative to discuss your portfolios, your personal situation, and our outlook in detail.

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Does anyone seriously believe that Congress is not going to bail out the auto industry? After all, a lot of labor money has been funneled into various political campaigns throughout the years. Detroit auto workers also vote and who wants 3 million unemployed voters casting their ballots against you in two years. Even the president-elect isn’t going to buck that kind of voting power.

Yes, I know I’m cynical and yes I’ve heard all the arguments about why the auto industry is critical to our nation’s manufacturing capacity. Others in favor of Federal assistance argue that the last time the government bailed out one of the auto companies it turned out to be a profitable investment.

Back in 1979 Chrysler was the nation’s tenth largest company and on the verge of bankruptcy. They had bet the farm on producing large, gas guzzlers only to hit a brick wall when OPEC jacked up oil prices. Americans shunned their products (does this sound familiar?) and both management and union leaders begged the government for $1.2 billion in subsidized loans. That was big money in those days. Under the charismatic leadership of Lee Iacocca, Chrysler used the money to re-create itself with the K-line of smaller vehicles like the Dodge Aries and the mini-van as well as the forerunner to the popular SUV. By the mid-eighties not only had the company repaid the loan but the government made a profit.

So here we are almost three decades later ready to “play it again Sam” with our favorite uncle, the government. Although they have already been promised $25 billion to make their cars more fuel-efficient, the three companies want another $25 billion. They claim without it they will burn through their existing cash within months. So Congress is scurrying to the rescue. Now our leaders are assuring us that there will be guidelines, and restrictions and demands so that we the tax payers will be protected. They said that about the $700 billion rescue plan too, remember?

Yet riddle me this Detroit. Why are you, the auto industry, now exactly where you were almost thirty years ago? Why do we think that simply throwing money at the same old managements and business models will do any good at all? If it were up to me I would have a few of my own demands. How about for starters we fire top management of all three and then merge the companies into one. Let’s call it GFC. Sure that would mean redundancies, painful job cuts especially in management but it would also produce economies of scale, modernization and hopefully an industry that could not only survive but thrive in today’s competitive marketplace. It might even improve our manufacturing capacity.

Did you know that there are a number of healthy auto manufactures in this country who are doing quite nicely in this environment? We could pick off some of their top managers to run the new GFC or get someone outside the industry that has experience re-organizing big companies.

“But what about our auto workers?” cry the outraged union bosses.

The evidence indicates that for the most part workers employed by foreign car manufactures located in the South are making as much as those in Detroit and their benefits are similar. The largest difference, in my opinion, between foreign and domestic automakers is decision making flexibility. Today, every decision on the Gm, Ford and Chrysler assembly lines requires union input. This is a result of hard-won labor negotiations over several decades. But times have changed as have manufacturing processes Regardless of changing times and circumstances, this inch-thick book of rules, guidelines and regulations have literally stifled entrepreneurship, inventiveness and productivity in our factories. Those issues are missing from America’s non-union competitors.

Now, I’m not bashing labor anymore than management here. Both bear the blame for the problems within our auto industry. These problems did not arrive overnight. General Motors management and union officials has been in place since 1995 watching gas prices increase and losing market share year after to year to more innovative and fuel conscious competitors. Our U.S. companies look even worse when you consider that the dollar has declined continuously making our vehicles even cheaper for overseas buyers and their imports more expensive. And still we lost market share.

Bob Nardelli, after his spotted career at Home depot and huge $210 million retirement payoff, is now in charge of Chrysler. I’m not sure why. So far his track record is less than stellar. Maybe his bank account is so fat that money no longer motivates him. Ford does seem to be on the right track however so maybe there is a little hope for Detroit after all.

Next week, I suspect that Detroit will get what it wants. Sure there will be some face-saving demands that the auto makers improve the fuel efficiency of their products. By now even the densest of managers realize if they want to sell more cars they better do that anyway. Outside of that it will be business as usual. The bosses will keep their jobs. Foreign companies will continue to take market share and the Little Three will be back in Washington next year for more money. They may even try to restrict imports since it worked in the eighties under the Reagan Administration.

But I’ll tell you what. I’m not buying another American made car until they truly can offer a product comparable to their foreign competitors. And I think that will take a long, long time.

Bill Schmick is a licensed investment adviser representative and portfolio strategist as well as a registered financial planner with Berkshire-based Dion Money Management, which manages more than $500 million for middle-class Americans from coast to coast. Direct your inquires to Bill at 1-877-850-7942, Ext. 146, (toll-free) or e-mail him at wschmick@dionmm.com.

After several days of continuous selling we had hit a level of the S&P 500 where the market had bounced twice before. When we reached and then broke that level (839) investors panicked and dumped stocks. As the first burst of selling petered out, other investors decided the markets had finally reached that magic number and the upside stampede began. Within two hours the markets gained over 6%. Of course, the next day those latest to jump in have been burnt once again as the stock markets promptly sold off.

As long as investors keep looking for a bottom, it will elude them. Bottoms are made when despair and despondency give way to neglect; when no one cares because everyone is convinced that the markets are never, ever going to come back in our lifetime. So stop looking for a bottom.

October’s economic numbers are coming in every bit as bad as I feared. Retail sales were down by a record amount, unemployment was worse, confidence weaker, new layoffs higher and Best Buy said they had never seen business this bad since starting the company. Its competitor Circuit City when belly up at the same time.

This weekend president Busch plays host to an international Group of Twenty nations who will converge on Washington to deal with the global meltdown and how to prevent one in the future. No one is looking for anything much out of this shindig. But it will present an opportunity for other nations to point their fingers at the U.S. and tell the media how it was us that got them into this mess. Although it will play well back home in whatever Hood they come from, it won’t do much to solve the world’s pressing problems or develop a formula for coordinated action.

Next week we will also hear the verdict on the bail-out of the Big Three automakers. Detroit, which has already been promised one $25 billion loan, is asking for another $25 billion or so from the government (see my column “Why the Big Three Should become the Big One”). Although many in Congress are sympathetic to their request, there is a group of dissenting members that appears to be growing. As of the close on Friday, I don’t believe there are enough votes to approve a bail-out. However, you can bet there will a lot of lobbying going on over the weekend so anything could happen.

So how did the markets end up today? All three major indexes finished in the red giving back over half of yesterday’s gains. As for next week, expect more of the same. One small technical matter concerning yesterday’s “bottom” concerns me. The 839 intra- day low was actually broken and yet another new low was established. All year long we have had a series of lower highs and lower lows. Nothing in this week’s action indicates to me that we have broken this pattern. And that usually means more downside.

Bill Schmick is a licensed investment adviser representative and portfolio strategist as well as a registered financial planner with Berkshire-based Dion Money Management, which manages more than $500 million for middle-class Americans from coast to coast. Direct your inquires to Bill at 1-877-850-7942, Ext. 146, (toll-free) or e-mail him at wschmick@dionmm.com.

An Election Day rally turned into a post-Election Day rout as investors reversed course following the election results. The rally was not a one-day phenomenon, however; it started a week earlier. From a low of 848.92 to a high of 1,005.75, the seven-day revival netted 18.47 percent for the S&P 500 Index.

America voted for sweeping change this week, and there will indeed be policy changes as a result. What matters most for investors, however, is the economy, and economic indicators still point to global weakening. Several companies announced lower earnings or lowered their fourth quarter projections this week. The world’s largest steelmaker, Arcelor Mittal, had a hand in deflating the rally when it doubled its fourth quarter production cuts to 30 percent. Shares lost more than 20 percent on the announcement and were down another 15 percent this yesterday. After the market close on Wednesday, Cisco warned that revenues could fall as much as 10 percent this quarter, but its stock was only down about 2 percent.

These numbers should not have surprised the market—negative economic data has rolled in steadily for weeks. Market bottoms are reached before the bad news ceases because it takes time for a recovery to show up in the statistics. If investors have not factored lower earnings into their decisions, they will sell stocks on bad news, even if they are already undervalued. For this reason, long-term, patient investors may be presented with several opportunities to invest at fire sale prices in the fourth quarter, as investors focused on the rear-view mirror will heavily discount future profits.

Many of the concerns that have weighed on stocks in recent weeks—dislocations in the short-term credit markets; the onset of the current earnings season; the 2008 Presidential election; and forced liquidation of mutual fund and hedge funds alike—are either problems or questions that are beginning to resolve themselves.

Now that Barack Obama is our President-elect, much of the uncertainty caused by this heated Presidential Election is behind us. If you would like to learn more about Barrack Obama’s stance on energy, healthcare, taxes, and the financial markets, please view the latest Dion Money Management Web video, in which Phil Orlando, chief equity market strategist at Federated Investors, and I discuss the implications of an Obama presidency for clients.

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Stock market corrections can be painful, especially when they’re either more frequent or steeper than many of us would like to remember. Since 1926, the S&P 500 has posted 23 annual declines, and the Dow Jones Industrial Average lost more than a quarter of its value on October 16, 1987. According to Fidelity research, there have been 13 bear markets since 1926—periods when the stock market declined 20 percent or more from peak to trough—which averages out to approximately one every six years.

The markets hit their most recent peak on July 19; since then, the Dow and the S&P are down 34.7 and 38.7 percent, respectively, and the Nasdaq Composite Index is off around 38 percent. It may seem sensible at times like these to dump stocks and head for the safety of U.S. Treasury bonds or even cash. But turbulence in the markets represents an opportunity for the well-prepared investor. Below are some tips for managing trepidation and profiting from the recent market volatility.

1. Ignore the sideshow
In the age of high-speed internet and 24-hour financial reporting, market-moving news spreads around the globe almost instantaneously. While it can certainly be entertaining to listen to the gurus of high finance expound on their views or argue with one another about what the Federal Reserve should do next, don’t let this guide your investment decisions. What happens from day to day in the markets is far less important than what happens over the months and years that your money is working for you in your well-constructed portfolio.

2. Stick to your plan!
This can be the hardest thing to do when the markets turn south. You’ve built your portfolio based on your goals, your age, and risk tolerance. As you move closer to your investment goals—an early retirement, a second home, a well-funded college education for your children or grandchildren—you will likely increase the ratio of bonds to stocks in your portfolio. Bonds tend to decrease overall portfolio risk but decrease returns. Whatever you do, do it systematically, and in accordance with your overarching investment plan. Reacting to the markets is a surefire way to wreck a carefully-constructed portfolio.

3. Rebalance
It is just as important to rebalance after a downswing as it is after a significant run-up in the markets; both events can leave your original asset allocation out of whack. In the current market environment, stock, REIT, and commodity funds have all suffered corrections. If you have set targets in these asset classes, then you may find yourself well below them when you conduct your regular portfolio review. Rebalancing now forces you to sell out of the funds that have been performing well and buy funds that have been hammered by the markets—the classic strategy of ‘buy low, sell high.’

4. Know yourself
Warren Buffett famously said that “success in investing doesn’t correlate with IQ.” Rather, “what you need is the temperament to control the urges that get other people into trouble in investing.” It’s often difficult for us to be objective when it comes to examining our own motives for making a trade. Are we acting rationally, in accordance with an asset allocation strategy, or is emotion driving us? Behavioral finance studies have shown that people will take on much more risk to avoid a monetary loss than they will for the equivalent gain. The clear implication is that fear often dictates many of our financial decisions.

5. Get some perspective
We all have a lot riding on our investments, and it can be tempting to take a “head in the sand” approach to our portfolios during periods of heavy market volatility. Sometimes we just don’t want to review those brokerage account statements. If you find it difficult to rebalance during a down market—and perhaps realize losses on some of your investments—a financial professional may be able to help put things in perspective. Indecision can often be just as harmful to our portfolios as the wrong decision.

Dion Money Management offers managed account services for your IRA, Roth IRA, 401(k) and other retirement accounts. Call one of our Portfolio Strategists at 800-432-7447, ext. 191 to learn about the benefits of our managed account program.

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