Dion Money Management Blog   Money Management for Retirees and Their Families

The major stock indexes moved above their 50-day moving averages this week and held gains that were triggered by the grand announcements from both the Federal Reserve and the Treasury Department. The latter gains came on Monday following the announcement of the Treasury’s plan to deal with bad assets on bank balance sheets. Dubbed the Public-Private Investment Program, it invites big investors to join with Treasury to buy up bad debts, with much of the financing coming from the government.

The plan has many critics, and there are big questions about whether it can work, but at this point the market pessimists will not be swayed by anything but the greatest and most perfect plan, and many of the pessimists believe doing nothing aside from financial reform is the right strategy. In contrast to them, there are the eternal optimists whose hopes are lifted by every new government plan; each of which thus far has shown little effect. Therefore, some of the market activity probably came from the marginal investor who was unimpressed with previous efforts. However, a recent report on fund flows does show that hedge funds became net buyers of stocks for the first time since last October.

Either way, the market is moving higher. Sellers have not swept in to pull stocks lower, and volume has been higher as of late. Technical traders will grow more confident if stocks remain above their 50-day moving average, and the money being thrown into the economy will have some positive effect on economic statistics due to the sheer size of the spending. This makes going short an increasingly risky proposition, and the rally is likely to restrain early shorts a few more times before it runs out of steam. Although stocks may not reach their 200-day moving average above 1,000 on the S&P 500, another 80 points for that index, or 10 percent, doesn’t seem out of the question.

The problem with any forecast, however, is that the market increasingly moves based on major events and political interventions. While the nation’s financial power center may be moving from New York to Washington, D.C., we can only hope that Wall Street will continue to move to Main Street, and that the individual investor and taxpayer will emerge victorious from this multi-trillion-dollar tale. In next month’s Fidelity Independent Adviser, we will explore some of these issues in more depth.

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When the bad news seems to come in waves, it can be tempting to look elsewhere—anywhere—for a safe place to park your money. Here are three reasons that cash isn’t necessarily king.

1. Cash Is for Short-Term Goals
Moving to cash doesn’t eliminate risk. It may shelter you from a fluctuating stock market, but it’s almost guaranteed to leave you exposed to a risk that’s even more frightening: outliving your money.

There’s nothing wrong with holding cash if you plan to use it in the next few years. But if you’re saving for retirement or other long-term goals, moving to cash does little to help you keep pace with rising prices over time. This can make a big dent in your lifestyle.

Even worse, it robs your portfolio of the growth potential you need to build your wealth for the future. When you’re building your wealth to last, stocks have historically been the engines of growth.

Recent events have reminded us all of the risks of the market’s ups and downs, but a comprehensive investment strategy can provide a cushion against a variety of risks.

Cash tends to buy less over time.
A shopping bag of goods that fed four people in 1980 will feed only one 30 years from now.

In 1980 you got…
1 dozen eggs
1 loaf of bread (20 slices)
4 cups of coffee

In 30 years, you’ll get…
2 eggs
3 slices of bread
1 cup of coffee

2. Don’t Guess…Invest
Stock markets have their ups and downs: sell-offs seem to pop up out of nowhere and so do recoveries. They tend to happen in quick surges that few people see coming. From 1970 through 2008, most stock returns occurred during just 48 of the 468 months.

If you stayed fully invested in stocks throughout that period, your average annualized return would have been 9.5%. If you stayed out of the market for only the 48 best months, your return would have been 0.0%!

This would make a big difference in your ability to build wealth. If you invested $10,000 in 1970 but missed the best months, your investment would have grown to only $10,020 by 2008. If you stayed invested throughout, it would have grown to $340,000!

Now, it’s unlikely that you would have missed every one of the best months, but it’s unlikely that you’d have been able to avoid all of the bad ones, either. Trying to zip in and out of markets, avoiding losses and returning in time to ride the wave simply doesn’t work—it’s better to stay invested as you pursue your long-term financial goals.

3. Historically Markets Bounce Back
We can learn an important lesson from past bear markets: patience is a virtue.

Weak markets can be extremely challenging, but they often set up rapid recoveries. Investors who sell during periods of market stress feel the pain of loss twice: first, they lock in their losses; then, they miss out on the market’s eventual recovery.

Holding on to your investments has traditionally been a better long-term strategy. Investing even more money takes courage, but it’s been the most rewarding strategy historically.

Here’s a fairly recent example: those who doubled their investments at the bottom of the 2000–2003 market cycle would have recovered nearly seven times faster than investors who simply held on to what they had.

In tough times, recommit to your long-term approach because, throughout history, the most effective strategy is to buy low and sell high—not the other way around.

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While much of the country and political establishment was focused on just $165 million of a $170,000 million ($170 billion) bailout of AIG—and ignoring the billions that went out the backdoor to Goldman Sachs, Société Générale, Deutsche Bank, et al—Ben Bernanke was busily pumping cash into the banking system. On Wednesday, the Federal Reserve announced plans to purchase $300 billion of long-dated Treasuries and $750 billion in mortgages. Bonds, stocks, and commodities rallied on the announcement, with gold turning a $30 loss into a $40 gain over the course of a few hours.

More money in the economy should devalue the existing money…and debt. Prices will rise across the board if the Federal Reserve is successful, including real estate. The debt overhang in the housing and financial sectors will shrink relative to income, and the economy can resume its growth path, albeit in a weaker position due to high inflation. We can already see the effects through the eyes of a foreign investor. A European holding an S&P 500 Index fund may have enjoyed the 4.4 percent gain since last Thursday, but the nearly 5 percent drop in the U.S. dollar leaves this investor with a slight loss.
This week’s changes should bring a greater tolerance for risk, luring investors from the sidelines to buy stocks, real estate, and inflationary commodities. Bonds will hold up for a while longer, as the Fed’s action will push rates down even further. As this reduces borrowing costs for individuals and businesses, the pressure to reduce debt will lessen and the credit markets will improve.

Nevertheless, we must not forget that the weak economy is the impetus for the additional policy moves announced by the Federal Reserve. This is not a panacea, nor is it without its own implications. Until the de-leveraging of risk ceases on a longer-term basis and the unemployment picture improves, the headwinds to sustainable market advances persist. The stock market could have another major advance in the coming months, but I have yet to recognize the all-clear signal to know that much greater risk-taking is warranted for anything other than tactical purposes.

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By Bill Schmick, Portfolio Strategist, Dion Money Management

In this economy of growing unemployment and health care costs, the American Recovery and Reinvestment Act (ARRA) addressed one important consideration for individuals and families who have been hit by layoffs. Unfortunately it created as many questions as it did answers.

The Act which was passed this year expanded eligibility and reduced premiums for the Consolidated Omnibus Budget Reconciliation ACT of 1986 (COBRA). This is the long-winded title for a Federal health benefit that permits qualified, terminated (laid-off) employees to continue their health care coverage until they find another job that provides employer-sponsored heath insurance. The COBRA coverage lasts for 18 months (36 months if you are disabled).

The first thing you should know about the ARRA’s COBRA subsidy is that it only applies to individuals who lost their job on or after September 1, 2008 through December 31, 2009. Workers who became eligible for COBRA benefits through other types of qualifying events are not included. So if your hours were cut to make you ineligible for health benefits, or you were divorced from a spouse who had coverage, or you are a dependent child of a parent who meets any of the above criteria then you don’t make the cut. If you earned $125,000 or more annually ($250,000 if married and filing jointly) you are also out of luck. Finally, to qualify, your former employer must continue to provide group health insurance for current employees.

Prior to the act, a COBRA- covered person paid 102 percent of the cost of the health coverage she had been receiving at her company (the 2% goes toward administrative fees). This health coverage can be extremely expensive, reaching $400 or more for an individual and more than $1,200 per month for a family. Remember too, that the individual paying for COBRA benefits is now unemployed. How many of the 8.5 million Americans (the Congressional Budget Office estimate) using COBRA benefits can continue to afford such coverage when they have already sustained the income loss of their major breadwinner?

Under the new act, the government will provide a subsidy for these COBRA premiums for the next nine months, beginning on the date the bill was passed, February 17, 2009. The government will pay 65% of your monthly COBRA bill directly to your ex-employer in the form of a payroll tax credit, once the worker has paid 35% (her portion) of the bill.

There is also an extended election period for those laid-off employees who declined COBRA initially but now, because of the subsidy, may want to reconsider coverage. If so, you only have a sixty-day window starting on February 17 to contact your employer and elect coverage.

Since most of the onus is on the employer to satisfy the regulations of the act, certain actions should be taken immediately if you haven’t already. After determining whether your company has any employees (including dependents) eligible for the subsidy, decide whether the COBRA benefits offered now are the same coverage offered the employee at termination. Many companies have begun offering different and less comprehensive coverage in the last few months to their employees. Finally, establish a tracking mechanism for the nine-month period of the 65% subsidy, for obtaining tax credits for these amounts and also for ending the subsidy.

Bill Schmick is a Vice President and Portfolio Strategist for Dion Money Management, which offers managed account services for your IRA, Roth IRA, 401(k) and other retirement accounts. He can be reached at 800-432-7447, ext. 146 to learn about the benefits of our managed account programs.

Disclaimer

Last week’s peak of pessimism was also a trough in the market, and the long-awaited rally finally emerged on Tuesday. The S&P 500 Index set a closing low on Monday, but its intraday low was set on Friday when it hit the inauspicious 666. Since then, the index has rebounded 12.6 percent, and if U.S. markets follow the Asian and European markets, further gains are in store today.

The potential for a rally had been increasing, and after a false start on March 4, it needed only the right spark. Several positive news items seemed to be what supported the initial move and fueled its momentum. These included supportive comments about Citigroup and the low valuation of bank assets; remarks made by Fed Chairman Bernanke regarding the positive prospects for a 2009 economic recovery; and statements regarding a reinstatement of the uptick rule, which would slow investors’ ability to put downward pressure on falling share prices.

In the past two client emails, I alluded to these rallies and warned of riding the emotional market see-saw. Another note of caution is warranted. The market could run-up much further, but let’s consider the economic reality and popular emotion. Economic facts haven’t improved; the public mood has improved. Citigroup reported an operating profit for January and February, and Chairman Parsons said that Citi won’t need any more government money. This may be a turning point, but we’d be remiss not to consider the company’s total inability to foresee the crisis. Retail sales are “up” in the sense that they aren’t down as much, but this isn’t positive unless it becomes a positive number. Negative growth is bad no matter how small it is. And President Obama, who only a month ago was issuing dire warnings over the economy, now says it’s “not as bad as we think.” He may be reversing excessively pessimistic rhetoric, but the timing has the effect of spreading optimism.

Nevertheless, this rally looks like it will have legs and it is important to remain in the market. As government stimulus spending comes online, economic data will improve. A lot of people, from politicians to bankers, have an interest in lifting the mood of the public, and positive emotion can feed on itself to generate a much longer than expected rise in stocks. The moment of truth will come later this year when an economic recovery should reveal itself in the data points, but the market could be far ahead of that news.

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By Bill Schmick, Portfolio Strategist, Dion Money Management

The daily machinations of the stock markets permeate our lives. Via the radio, the internet, television and print we are bombarded with the market’s daily ups and downs, from the opening bell to the close. No matter how hard we try to ignore it, over time it begins to influence how we think about the economy. With markets making new lows, many forecasters are predicting that where the markets go so goes the economy. Don’t fall into that trap.

I remember one of my graduate school professors stating that the markets have predicted 11 of the last 6 recessions. That’s a fairly accurate statement. Although a lot of space is devoted to analytics, charts, graphs and investment tombs on economies, sectors and stocks, it is my experience that what drives markets are two very human failings: fear and greed. Right now there is a lot of fear out there. Some warranted, much more imagined.

Years ago before tax-deferred savings accounts, company retirement plans and on-line brokerage accounts, Main Street was fairly insulated from the antics of Wall Street. Not so today. With so many Americans having a stake in the daily fortunes of the stock market, a prolonged correction like this one can have a debilitating effect on our attitudes. Combined with some real economic problems and the decline in the worth of our homes, it is easy to start believing that we are heading for Armageddon.

Granted there are some similarities between our financial crisis today and the onset of the Great Depression of the Thirties. Banks are failing (although no where near the number that failed in 1933). There was no FDIC back then so depositors like you and I were wiped out. Some argue that today the fear factor should be higher still because the credit crisis impacts the largest banks in the world. The evidence to date indicates those fears are unwarranted. In every case of a recent bank failure worldwide, depositors have received their money bank. At the same time, governments continue to provide a safety net under the largest of the world’s financial institutions.

Yet, when one reads that Citibank or Bank of America is asking for bailouts it certainly gives one the willies. The problems in the auto industry, in General Electric and other companies that have long been the backbone of American manufacturing also shake our confidence. Yet, the government is even now providing further assistance to the nation’s banks and automakers. Remember too that the true powerhouses of the United States today, companies such as Microsoft, Google, Pfizer, Wal-Mart and McDonalds, are in no danger of failing.

Unemployment also impacts our attitudes. Getting laid off is upfront and personal. As far as you are concerned it is a depression and there are probably few readers who don’t know someone who has been laid off or is in danger of it. As a result, we feel threatened personally. To make matters worse, unemployment is definitely climbing, even our president says it is so.

Many point out that the unemployment rate today is still far lower than the 25% peak rate of 1933. That is true as far as it goes. Back then we only had one method of measuring unemployment: either you had a full-time job or you didn’t. Today we have a whole thicket of measures from U-1 to U-6. The government uses U-3, the total unemployed as a percentage of the civilian labor force. If we use the U-6 measurement, the number doubles.

U-6 is composed of U-3 plus workers who are currently neither working nor looking for work but indicate that they want to, persons employed part-time but want to work full-time and discouraged workers who have given up looking for work. So at an official U-3 rate of 10% (the forecasted peak rate of unemployment during this recession) U-6 would be 20%, not far from 1933’s 25% unemployment rate. Try to convince many people that this is “only a recession.”

The point is that this recession is impacting far more Americans in different ways than any recession in our history. In times past, a typical downturn might hit a particular region or group of sectors and not others. Housing had rarely been clobbered as hard (nor reached such unrealistic heights) as it has in the last few years. Combined with our losses in retirement savings, the typical American has taken several body blows at once. Like Rocky, you may feel the ropes at your back and fear to your front. But no matter what the stock market does in the short term it will not be a knock-out punch to you or the economy even though it may feel like it so hang in there and like Rocky “just go the distance.”

Bill Schmick is a Vice President and Portfolio Strategist for Dion Money Management, which offers managed account services for your IRA, Roth IRA, 401(k) and other retirement accounts. He can be reached at 800-432-7447, ext. 146 to learn about the benefits of our managed account programs.

Disclaimer

We had another difficult week in the markets as investors continue to be surprised by bad news. None of the news out this week was altogether new, but for some, hearing that GM is headed for bankruptcy is still a shock. Bellwether stock GE has also inflicted pain on the confidence of investors, as many awaken to realize the once great industrial giant transformed itself into a financial firm over the past two decades. GE stock has rebounded since falling sharply on Wednesday.

The S&P 500 Index fell 9.3 percent last week and has lost 24.4 percent year to date, as of yesterday’s close. Shares are down 20 percent since President Obama took office, leading Bloomberg to dub it the Obama bear. His budget played a role in the recent slide, due to the huge sell-off it triggered in the previously defensive healthcare sector, and the continuation of ad hoc bailouts does nothing to inspire confidence. Financials and industrials continue to bear the brunt of this year’s selling.

Nonetheless, the reality is that the old economic order is gone. Americans did not save enough for nearly two decades and nothing can change that. All the predictions about how terrible the economy will be if everyone starts saving 10 percent of their income miss the point that Americans must start saving or the outcome will be far worse. If politicians continue to try to force a recovery in housing or financials, they will be disappointed, but they will also prolong and deepen the eventual adjustment process. Unfortunately, this market is unlikely to bottom until additional optimism is wrung out of investors.

As bad as the news can get, there are still a lot of cautiously optimistic investors out there. They will provide support for rallies that can build quickly. Short-covering sparks rapid advances in just one or two days, and bargain hunting can give the move legs. Stimulus spending will affect GDP figures positively, and many people believe in a second half or 2010 recovery; soon they will have their proof as government debt spending lifts economic indicators. Markets don’t move in straight lines, and in order to move significantly lower, investors would have to throw in the towel and give up on a 2010 recovery. We’re still a long-way from that happening.

Just because things look bleak, however, doesn’t mean there won’t be opportunities. Several market gurus were predicting a rally last week, and after this week’s dismal performance, a sharp rally appears even more likely.

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