Wealth...Uncomplicated

How Good is Your Advisor?

In an article from FORTUNE, research was exposed that basically says that financial advisors are yes-men and -women.  Having been in the advisor community for over a decade, I can assert that these findings fall in line with my observations throughout my career.  While there are many reasons for this that range from advisors simply not knowing their business to advisors wanting to be well liked by their clients by avoiding confrontation, the bottom line is that advisors say 'yes' far too often.

In the most recent decline, many advisors found their clients' portfolios poorly positioned, following a trend of investors without advisor relationships that invested too heavily in equities.  Obviously this led to a great deal of turnover for advisors as clients sought out more conservative advisors to hopefully 'avoid making the same mistake twice'.  What has actually happened for most of these investors is they've traded one mistake for another.

When the market was moving ever higher, many clients thought their advisors were doing a great job.  When the market tanked, their advisors were worthless.  Those that have changed advisors are doing nothing more than finding another yes-man or -woman to make them feel comfortable.  This is a problem - a big problem.

As the market rebounded, these investors that found another advisor to confirm their beliefs (even if the beliefs are wrong) re-positioned assets into more conservative asset classes.  The result was a missed rebound that cost investors a great deal of money.

So, how good is your advisor?  If he or she was fighting tooth and nail to keep you invested through the downturn and subsequent rebound, give them credit where credit is due.  If he or she had you selling after the market collapse only to miss the rebound, fire your advisor today.  The value of an advisor is not in making you feel good about what's going on, it's about helping you make smart decisions along the way.

When the market's hot, a good advisor will call clients and tell them that the market run-up presents an opportunity to rebalance.  When the market is in free fall, a good advisor will help you to hang on.  The very best advisors are those that educate, communicate, and stand tall in their convictions.  A simple yes-man or -woman is nothing more than an expensive anti-depressant - they make you feel good, but ultimately don't work and cost a lot of money.

We Could Learn from the Irish - how they're handling a tough economy and hefty deficits

Most of the world is experiencing tough times just like us, but not everyone is handling things the same way.  Take the Irish for example.  Instead of spending massive amounts of cash, their finance minister is doing everything he can to get the economy back to growth and reducing the budget deficit.  Us, on the other hand, we're spending big bucks in the hopes that a couple of trillion dollars will bring us out of recession faster and that productivity gains (the long term antidote to all economic problems) will sustain us.

There's merit to both approaches, and I would bet that our approach will end up accomplishing our short-term goals of moving back to healthy GDP growth, but there are a few things I really like that the Irish are doing and that we are not.  Namely, making deep cuts in public employees' compensation.

Rather than going on a firing rampage, they're simply cutting salaries.  How much?  For most employees, salaries have been reduced by 7% and for more highly compensated employees, the pay cuts are around 15%.  By cutting salaries, Ireland will be able to put a pretty good sized dent in their budget deficit which will ultimately lead to a healthier government and economy.

Our Congress' Salaries

Since our Senators are currently receiving about $174,000 each year, why not start with cutting their pay?  If you'll recall, our original representatives collected no salary and I'd argue they did a much better job than the folks on Capitol Hill today.  After all, they're supposed to be serving a 'higher' purpose by being in public service.

While the Senate continues to get their fat salaries and untold dollars through the connections and power they wield by being Senators, I think it's time to take a page out of the Irish play book by delivering a swift, deep cut in pay.  It's my belief that anyone should be able to build a pretty good life with an annual income equal to twice the median household income.  This can vary from state to state, region to region, but nationally it's just under $50,000.

This means I'd like to see most Senators and other highly compensated public servants have their salaries cut down to size.  In the Senate alone, we could shave $7.4 million off the federal deficit.  Oh, and how about the House of Representatives?  There's a lot more Representatives than Senators, right?  With 435 Representatives, we could save $32.2 million.

Tens of Billions Saved

Since Congress is big on what things cost over 10 years, we could immediately shave $322 million off of the budget deficit with a cut in pay that still leaves Congressmen earning twice the median household income.  If you take cuts like these and apply them throughout our government, I think we'll be looking at tens of billions of dollars saved.  Of course, that's not going to happen anytime soon.

More on Ireland's Deficit Response

Calculating When Your COBRA Subsidy Will End - from eHealthInsurance.com

    With millions of Americans out of work, COBRA is an acronym that all too many are familiar with.  While the cost of extending coverage is exorbitant, the federal government does allow for a subsidy to help families with keeping these costs within the realm of reason.  To aid individuals and families that are now using COBRA health insurance, eHealthInsurance.com has created a widget to help in calculating when your COBRA subsidy will end.  This calculator is provided below:

In the event that you are not affected by a layoff or using COBRA, let me give you an idea of what these individuals and families are facing.  This year, our health insurance provided by my wife's employer will cost us $4,020 in premiums out of our pockets.  In addition, her company contributes another $6,000 to subsidize our premiums for a grand total of $10,020 annually.  This doesn't include a deductible of $4,000 or co-insurance of 30% after the deductible is met.

If you consider the average household with $50,000 in earnings for a year, COBRA is great because you can get coverage, but the costs are outlandish.  Again, the government has setup a subsidy to help offset these costs, but keep in mind that even with the subsidy, many households still cannot afford it.    

To learn more about COBRA, click here.

To read more about the COBRA subsidy, click here.

I Bond Yield Update - November 2009 through April 2010

I Bonds are back into positive territory with the Consumer Price Index getting back to inflationary numbers from a slight decline in prices in the previous measurement period.  As a result, I Bonds now yield 3.36% through April 30, 2010 that is comprised of a fixed rate of 0.30% and a 3.06% rate for inflation.  This represents an increase in both the inflation and fixed components that make up the I Bond Yield.  (For more information on how the yield is calculated, click here.)

Back in May, I suggested that you wait to purchase any additional I Bonds until the new yields were announced because for the period May through October of this year, you would have received exactly zero yield as a result of a low fixed rate (0.10% from last period) and a brief period of deflation.  At this point, Treasury has increased the fixed rate modestly to 0.30% and inflation, though tame, is enough to put yields well above money market accounts and 'high yield' savings accounts.  As a result, if you are filling out an emergency fund or looking for a nice, safe place for cash reserves, I Bonds are back to being your number one option.

Quick Stats on I Bond Fixed Rate Component

• Average Fixed Rate:  1.74%
• Median Fixed Rate:  1.35%
• Standard Deviation:  0.01155
• Lowest Rate:  0.00% (May 1, 2008 to October 30, 2008)
• Highest Rate:  3.60% (May 1, 2000 to October 30, 2000)

To learn more about I Bonds or to start an account with Treasury Direct, click here.

College Grads Beware - you're screwed

Watching Peter Orszag, the Director of Office Management and Budget, with Charlie Rose, there was a very interesting, but little discussed statistic.  On the program, he states that on average, for every 1% increase in unemployment, a college graduate can expect to earn about 6% less in annual income.  While 6% may not seem like a big difference, it is.

Immediate Impact

Considering unemployment was let's say 5% before the sky fell and will go up to 10% or more, that equates to a 30% difference in income for new college graduate.  This means that new grads will earn 30% less in starting wages than those who graduated during more normal economic times.  Of course, the 30% can be overcome, but on average, our latest edition of young professionals will be earning less than the overwhelming majority of their predecessors.

Compounding the Problem

Adding to this wage disparity is the fact that over time, the gap will be compounded.  The reason for this is that if you start with a lower wage, when you receive pay increases, your increase is based off of an artificially lower wage.  For example, let's say that Armand takes a job upon graduation at $25,000 that a couple of years ago was paying $35,000.  When Armand gets a promotion or changes jobs to have a higher salary, he and his prospective employer will be considering his salary increase based on the $25,000, NOT the $35,000.  

Net Present Value of the Problem

So what does this gap really cost?  The answers vary from one study to another, but it's about $100,000 in net present value.  If you consider that the average 401(k) balance at retirement is around $105,000, this tells us that college graduates today will be at a decided disadvantage both today and over the long run.

Takeaways

While this information is pretty bleak, it doesn't mean that an enterprising college graduate is doomed to earn less their entire career.  There will always be a group on the right side of the bell curve, so how do you overcome the averages?  You have to be smarter with your financial decisions to maximize your resources - income and assets.  Here are some things to do now:

1. Get Experience - unless you want to have the lowest of low entry level positions, or even be shutout of your field, it's important to get some experience in the industry you want to pursue.  This could be an internship, a co-op, working part-time, or whatever, just get some experience.
2. Be Smart with Debt - graduating college is a major accomplishment and one that only 36% of the population has experienced.  However, that 36% also can tell you all about their student loan debt.  It's important to try to accelerate your debt repayment even if the loans are at 'good' interest rates.  The less debt you carry, the more options you'll have, the better your life will be.
3. Don't Fear the Boomerang - there was a concern with Boomerang Kids (twenty-somethings that returned home to live with mom and dad), but today it's something that has a new name - cocooning.  Don't be afraid to move back in with mom and dad until you can get on top of your debt with a decent income.  Who knows, with the market crash and unemployment figures, mom and dad might need you as much as you need them.
4. Delay Major Purchases - rather than go out and get a new car as soon as your first paycheck arrives or trying to buy a house out of the gate, put off these purchases for at least a couple of years.  During that time period, act as if you had these payments going out and see how the budget holds up.  This should give you enough time to accumulate a decent emergency fund.
5. Start Saving for the Long-term - the reason that the average 401(k) balance is only $105,000 at retirement is because the older generation failed to start saving early.  It has never been easier to start saving for the long-term with the proliferation of employer based retirement plans and individual retirement accounts (IRAs).  Just putting in 5% will put you well ahead of the game.
6. Get Something on the Side - whatever your job might be after graduation, try to find something to do on the side that will make some money.  It needn't be a lot of money, but try to do something that will further your career.  As an example, if you're a public relations nut, try to do some work with smaller companies on your own.  It could be as simple as setting up press release accounts for businesses or connecting them with simple solutions to create a web presence.

Bottom Line:  The numbers say you're screwed, but it doesn't need to be true for you.

Healthcare Reform is NOT Optional - stats from NCHC report

With the debate on healthcare reform continuing and finally moving forward, it's important to remember that doing nothing is NOT an option.  Based on the information in a report from the National Coalition on Health Care, it is painfully apparent that reform is desperately needed.  The simple fact is that whether or not we have a public option, cover everyone, or keep the system as is, we are already on an unsustainable pace when it comes to the costs of healthcare.

Report Highlights

Here are some quick statistics from the report that are worth reviewing every time you think you might not want reform:

• General Inflation - up 28%
• Workers' Earnings - up 38%
• Health Care Costs - up 131%
• Employee's Share of Costs in 1999 - $1,543
• Employee's Share of Costs in 2009 - $3,515
• Up to $650 Billion Wasted on Healthcare Costs Compared to Other Countries Annually
• 62% of All Bankruptcies in 2007 were Caused by Medical Expenses
• 80% of These Filers had Health Insurance
• 1.5 Million Lose Homes to Foreclosures Annually Due to Medical Expenses
• Employers Spent an Average of $13,400 Annually to Provide Health Insurance to Families of Four

Umm, you might say that these numbers are alarming and you'd be right.  To drive this home, let's consider a couple of sides of the equation:  (1) the average family and (2) the average employer.

The Average Family

Based on information from the government, the median household income is floating around $50,000.  Assuming this number doesn't plummet, an employee's share of the cost at $3,515 represents 7.3% of their annual income.  Assuming that rates over the next decade hold to last decade, here's what we can expect by 2019:

• Median Household Income - $69,000
• Cost of Healthcare for a Family of Four - $33,033
• Employee's Burden - $8,120 or 11.8%

This also assumes that employers don't push more of the cost over to employees which we see happening more and more every year.

Now here are the key questions to ask yourself:

1. If you're not saving anything or very little today, when healthcare costs eat up 11.8% of your income or 4.3% more than today, what are you going to give up in exchange for healthcare?  Vacation?  Retirement savings?  College funding?
2. If you don't have health insurance today because you can't afford it, do you think you'll have it when it costs more than 50% more in a decade?
3. If less people have healthcare, is that going to put a drag on communities, families, and the social structure of the country?

The Employer

Beyond this, let's consider the employers' side of the debate.  Obviously they continue to push more costs over to employees, but even with this measure, they're still paying more money in health insurance costs each and every year.  Consider these questions if you were a small or mid-sized firm (the kinds of firms that provide the bulk of the jobs in the United States):

1. I need a full time employee at $30,000 annual salary, but the real cost to me is going to be closer to $43,000 because I provide health insurance.  Am I going to be quick to hire or will I delay this as long as I possibly can?
2. My employees had a miserable year health-wise and the insurance company increased our premium by 50%.  We can't afford that during the recession and still stay in business.  Should I (1) cancel health insurance, (2) terminate some employees, or (3) close my doors because I can't win this fight?

Status Quo = Serious Consequences

These are very real scenarios that are playing out all over the country and a scene that will progressively get worse the longer we continue to let costs run rampant.  It's not an easy debate and any solution will be far from perfect, but there is a very real, palpable need to reform our healthcare system and to do it as soon as humanly possible.

As the issue becomes more hotly debated and politicized, just remember that what we have right now is on track to be the undoing of our economy and lasting consequences will result.  This isn't a joke, and I'm definitely not being overly dramatic.  It is the greatest problem we face and if it isn't dealt with properly, we're all going to be up a creek without a paddle.

By the way, it's a very, very tough task because the three elements that are needed to form a sound healthcare system don't exactly live in harmony:

1. Coverage for All - expensive
2. High Quality of Care - expensive
3. Affordable - oh, that part

From WSJ: Where to Hide if Bonds Fall

In this article from The Wall Street Journal on October 14th, Larry Light does a very good job of explaining where to take cover in the event that bond prices fall as a result of inflation.  The problem with inflation is that when it starts to get higher than the Fed likes, they will typically raise interest rates as high and as fast as they deem appropriate to choke off inflation.  With the money supply still incredibly loose and government spending on the greatest bender in half a century, this is a timely article.

Interest Rates Up, Bond Prices Down

There is a great illustration that has been used countless times to drive this fundamental relationship home to investors and professionals alike.  It is the old see-saw picture of interest rates, bond prices, and maturities and I've grabbed a copy for your enjoyment below:

 

As the picture so adequately demonstrates, when interest rates rise, there is an opposite effect on bond prices - they drop.  The amount that they drop is largely dependent upon the amount of time until the bond matures.  The further away from the center of the see-saw, the more sensitive a bond is to changes in interest rates.  Conversely, the closer to the center, the less sensitive a bond is to rates.

Historical Context

Now that we've mastered the fundamental relationship between bond prices, maturities, and rates, let's take a quick look at where we are with respect to interest rates.  This is a nice graph showing interest rates on 10 year Treasury notes:

 

As the graph very clearly points out, we are near the bottom of where interest rates have been historically, and my wicked good intuition tells me that rates will eventually move up.  When that will happen, I haven't a clue, but they will sometime sooner than later.

What to Do Now

At present, there is no evidence that would suggest that rates would increase significantly in the next three months.  This means that you can feel relatively safe holding intermediate to long maturity bonds without fear of getting crushed with an interest rate hike.  Until the economy shows that it is solidly out of recession (and this will happen even as unemployment increases), it is unlikely the Fed will be in a position to raise rates.

Side Note:  The Fed must first make sure the recovery will last before raising rates because if they raise rates too soon, too fast, or too much, we will have a double dip recession which is an untenable situation.  Think Japan's Lost Decade.

What to Do When Rates Rise

When rates rise, and this is the point of The Wall Street Journal article, there are three places to go that will shorten your maturities and thereby reduce your risk of getting crushed in your bond portfolio.  These are (1) short-term bond funds, (2) certificates of deposit, and (3) stable value/money market funds.  Any of these three will do, but it's usually a good idea to be around a three year average maturity or less.

Three More Places to Look

Beyond this, I'd also like to add three other places to go when interest rates flare up from inflation concerns.  The first are I Savings Bonds which currently yield 0%, but are tied to inflation rates.  If inflation does start to pick up, I Savings Bonds will pay the then current inflation rate plus a certain fixed percentage based on when the bond was issued.  I Savings Bonds purchased today will pay inflation plus 0.10% (the next rate posting is due next month).

The next place to go is into TIPS or Treasury Inflation Protected Securities.  These are very similar to I Savings Bonds, but instead of posting interest earned, TIPS price will increase based on the inflation readings.  These are typically the best place to go to find a true hedge against inflation as they are pegged to inflation anyway.

Finally, if inflation does spark higher interest rates, you can go to some of the newer commodities basket ETFs and mutual funds.  While accredited investors (really rich folks) can get access to more of these kinds of funds, owning some commodities isn't a bad idea to hedge against inflation.  After all, inflation is an increase in the cost of goods and commodities either are or are a part of the production of these goods.

Out of the six possible places to go, there isn't a one size fits all answer.  Usually a good mix of all of these will work to your advantage when rates are increasing.

By the way, one of the very interesting stats in the WSJ article is that for every 1% that the 10 year Treasury increases in yield, there is a corresponding loss of 8.5% in the price of the bond.

From WSJ: Wall Street on Track to Award Record Pay

In this article that appeared in The Wall Street Journal on October 14th, it is clear that compensation at major financial services companies is on the rise, even on pace to top 2007's record pay.  With many still hurting from the financial collapse of 2008, it does beg the question as to whether or not this is a good thing.  On the one hand, these employees (past and current) did play a significant role in the collapse, but on the other hand, top talent demands top pay - whether it be from here in the U.S. or elsewhere.

Is There No Shame?

We all recall when people were picketing on Wall Street and the cries from Congress, the Oval Office, and throughout the country, but those days have largely passed by.  These 'overly' compensated employees obviously had no shame in taking such enormous paychecks in 2007 and some even during a tumultuous 2008.  Yet, after a one year hiatus, super-sized paychecks are back.

Pay for Profits

The bottom line with compensation is that at upper levels of responsibility, it should be determined based on profits.  If a company is profitable and delivering handsome returns to its stakeholders (mind you that's not just shareholders), pay employees whatever makes sense for the business.  When a company's profits are in the tank or losses are heavy, spread the pain as much as is reasonable.

Let Business be Business

Last time I checked, we still live in a capitalist economy (technically it's a mixed economy that leans towards capitalism, but I digress), so we should let businesses handle their business.  It's worked incredibly well over the last couple of hundred years so I don't think we need any major overhauls anytime soon.  Just in the last 50 years, we're still looking at huge gains in real income, productivity, and overall quality of life, so let's keep going.

Let Government be Government

Generally speaking, less government is a good thing for everyone involved.  There are fewer and lower taxes, more money goes into the economy, and each of us gets to stretch our own dollar instead of having the government do it for us.  With that said, government plays a critical role in regulating markets - particularly complex financial markets.

While it would be terrific if we were all smarter than investment bankers and financial engineers, we aren't.  For that reason, we have to depend on government to not only protect consumers from firms and firms from other firms, but to protect firms and consumers from themselves.  Often, one of the negative consequences of competition and free markets is the potential to have overly competitive situations where individuals and firms reach too far to create wealth and profits, respectively.

Consumers got greedy in the 1990s chasing tech stocks and in the first half of this decade with real estate.  Firms were crazy greedy in financing the real estate boom.  So where are we now?  Well, we have essentially the same rules as we did before.  Oh, I forgot we have a Compensation Czar.

Forget Czars, Give Us Some Real Regulation

This is where dumb government or more accurately, polically motivated government flunks the test.  The real problem was not compensation, but the rules of the game that create profits.  If you look back in business history, we find many fine examples where industry overstepped its bounds and the government stepped in to create regulations.  If you're having trouble, think anti-trust laws, environmental protection, insider trading rules, capital requirement for financial institutions, FDIC, FSLIC, FCUA, and the list goes on.

In this last mess, we had under-regulation (in many cases, no regulation) of the derivatives market.  The result was painful, and instead of some hefty new regulations, we get a compensation czar.  Are you kidding me?  Granted, more regulation is coming, but it's not been quick enough.  Then again, after the 1929 crash, it was four years later that Securities Act was created, five years until the Exchange Act, eleven years for the Investment Adviser Act, and twelve years for the Glass-Steagal Act.

Bottom Line

Let Wall Street maximize their profits and operate their businesses accordingly, but we absolutely need to set some clear and intelligent boundaries inside of which financial companies must operate.  Capitalism is an evolving experiment, but it's been a good one if we can simply update the regulatory environment in which business exists.  This is something that needs careful review as just like technology evolves, so too do the tools of finance.

Mint and Intuit - a marriage made in heaven?

It's official, Mint has mopped the floor with Quicken's old, weathered arse, and as is the case with all situations where a well endowed #1 gets knocked off the top, the old adage of, "If you can't beat 'em, buy 'em" comes into full effect.  I was at TechCrunch50 (the same event that got Mint off the ground in 2007) when the news broke last week that Intuit had agreed to pay $170 million for Mint, and as a developer of a competing solution, I wasn't sure exactly how this would alter the competitive landscape.  After all, if you could plug Mint into Intuit's TurboTax and QuickBooks, that'd be one bang up personal finance solution.

If the companies are able to say their vows and have a happy marriage, I think they have what will become the best personal finance management software (or in this case, webware) on the planet.  Patzer is a crazy smart guy and Intuit has resources galore with an annual research and development budget of over $600 million.  The Mint team was able to knockout Quicken in less than two years with a team of only 33 employees, so the additional resources could produce a quantum leap in benefits to consumers.

Of course, not all marriages last, and in business, the numbers are even worse than that of our traditional human marriages.  But alas, they are off to a good start by putting Patzer in charge of the entire personal finance division, and if Intuit's top brass can simply stay out of his way, I feel pretty confident that this marriage will benefit their customers.  In addition, this will also force other solutions like Wesabe, Thrive, Geezeo, and others to look for cross-platform partnerships to keep up with this new beast in personal finance.

While there will be skeptics and naysayers, I for one, believe this is going to be a very good thing for all consumers.  Of course, many details will need to be ironed out and going from startup to being part of a large corporation is a difficult challenge to overcome, but Mint's good enough, smart enough, and dog gone it, people like them.

Dancing is Like Magic

Last night I watched the season finale of So You Think You Can Dance and was delighted to have my favorite dancer be crowned 'America's Favorite Dancer'.  About a month or so ago, I took notice of Jeanine Mason's talent and her continuing improvement on the show.  She certainly has talent and to be frank, I am a true believer that those that can dance at the level seen on the show are something awfully close to magic.

The reason I believe something as absurd as this is that it is far beyond my capabilities to dance in any way other than horribly.  In fact, I won't dance at all...at least not without a dozen or more cocktails in the bloodstream.  Ultimately, I enjoy and revere dance for the simple fact that it is an endeavor that I shall never master or even perform reasonably well for an average guy.

Beyond this, SYTYCD is an exercise not in one's ability to dance in one particular style, but to be able to perform at a high level across a wide swath of styles.  Ms. Mason demonstrated herself to be more than able to perform any task that was given to her.  For many, she was the Dark Horse that just kept coming until finally she won the title.

But was this really magic?  Is it natural born talent that some will be able to dance at this levels and others, like me, not so much?  Obviously the answer is no.

Often when I have met with clients, friends, or colleagues, they too believed that what I did was some sort of magic.  Sometimes it's walking someone throught the Alternative Minimum Tax (AMT) and reducing their tax burden by thousands, other times it's setting up an estate plan that would eliminate estate taxes, but in all cases, it's simply being able to do what others cannot.

The quiet truth is that we all admire when others can do something we believe important that we ourselves cannot.  For me, it's dance.  For my clients, it's financial planning.

Fortunately, you don't need an ounce of talent to become a master of your finances.  You need only what anyone needs to become a magician at what they do--time, work, and patience.

See, the back story with Jeanine Mason is that she wasn't born to dance.  In fact, she admits that there were many times when she wanted to quit dancing altogether, but her mother pushed her through.  She didn't start dancing last year, but as a child.  She put in thousands of hours at the dance studio, worked hard when she was there, and stayed with it until the ultimate payoff last night.

Often times, I'm amazed that we have financial planners today.  Really, money is as essential as language or mathematics, but somehow we ignore the study of it with many never truly understanding the major money issues, let alone the subtle nuances of our financial system.  It is this fact that we as a nation do not put in the time needed to study our finances; we don't work hard enough at maximizing our financial position; and we certainly don't have the patience to position ourselves responsibly.  In short, we seem to ignore financial education, hate working hard on our money (keep in mind, this is NOT the same as working to earn an income), and ultimately lack the patience to sustain the activities that lead to financial success.

So what do we end up with?  A lot of broken financial homes and the appearance that those who succeed somehow possess magic powers--otherwise, how could they possibly have become wealthy?

Let's face reality for a moment.  Most of us with our finances are just like me when it comes to dance--never have, never will.  With this reality in mind, what is one supposed to do?  I mean, we all want financial security at some level, but how do we put in the time, work, and patience to actually achieve this worthy goal?

Simple.  Technology.

Just as things like the microwave have made us better cooks than the average housewife of the 17th century, we are seeing new innovations in technology that can deliver the magic that we need at a fraction of the cost.

Think about it.  What would it cost to have a personal chef?  A lot, right?  What does it cost to use a microwave?  Not much.  In both cases, you can satisfy your hunger and while a personal chef is going to deliver a better meal, you don't need the best, you just need good enough.

This is where financial services technology is going--satisfying a need by delivering 'good enough'.  Most of us don't need, nor can we afford a $200 an hour financial planning wizard, but what if you could get that kind of advice delivered at say $10 a month?  Would you want to check it out?  Would it make your life better?  Of course it would.

Over the next five years, there will be more independent financial sites like Mint, Thrive, Wesabe, and Quicken that will be delivering more technology to make money mastery seem less like magic and more like a simple non-issue....the way it should be.  Ultimately, financial services technology aims to make you more productive with your time and smarter about the management of your money.

For now, most of these solutions focus on budgeting and cash management, but over time, they will evolve to be much broader solutions.  Five years from now, I fully expect this technology to blossom to the point that many out there will think, "Man, I love my finance website; it's like magic".  And let's face it.  Everyone loves magic.

Manufacturing, The Auto Industry, and GM

Over the last few decades, we have moved from a manufacturing to a services economy and with GM's bankruptcy finally having come to pass, the U.S. auto industry can officially be written off as just another part of the whole.  Sure, the industry continues to supply thousands of jobs, but that's really no different than any other industry.  What is important to understand is that manufacturing, particularly anything outside of high end manufacturing (think aerospace, defense, medical devices, etc.), is dead in this country.

The reason that lower end manufacturing cannot survive in a highly developed globalized economy is there are better options to have the work completed elsewhere in the world.  Many will immediately point to cheap wages as the driver for sending manufacturing jobs overseas, but it's a lot more than that.  In fact, sending a manufacturing job (particularly on the lower end), makes an awful lot of people better off.

The short list of beneficiaries to off-shoring lower end manufacturing jobs are:

1. Domestic Consumers - by having goods produced at a lower price, consumers can use spread their dollars across more goods and services.
2. Domestic Businesses - businesses that offshore manufacturing jobs are able to more effectively compete in their respective industries meaning greater profitability is more likely with a lower cost of goods sold.
3. Foreign Businesses - in developing countries, these manufacturing jobs have an enormous positive impact on their economies and their workers.
4. Foreign Consumers - while the influx of more jobs at higher wages can spark inflation, it also means that more consumers have the money to buy goods and services.
5. Global Economy - when it comes to economics, globalization is more or less a means of efficiently utilizing resources.  Efficiency helps all participants in the long run.

Obviously there is a great deal of benefit to off-shoring and that's why we see it happen time and time again.  But what about the domestic workers whose jobs were off-shored?  Don't they get hurt?  Yes or no.  That's right, yes OR no.

It really depends on the individual.  In the very near term, just about all of those whose jobs were off-shored will lose, but over time, it's up to the individual.  A 40-something worker isn't just going to sit at home the rest of his or her life.  They will have the opportunity to move into another job.  What that job pays will depend on their actions.

If they decide to go back to school, get more training and knowledge, they will likely come out better off than before.  If they do nothing, then the odds are stacked against them.  The reason is simple:  we reward skills and the more sought after the skill, the greater the reward.

So it really is an OR proposition.

Getting back to the bigger picture, low end manufacturing jobs simply won't exist in our country over the long run because to move forward economically, we simply cannot afford to pay the high wages and benefits that are demanded by American workers.  The only exceptions to this are for industries that are considered important to our national defense infrastructure.  We will never have highly classified nuclear arms components made by foreigners.

This doesn't mean that manufacturing will be completely dead either.  As we continue to move forward technologically, there will be a consistent influx of high end manufacturing jobs available.  Some areas where this will be available are alternative energy, nano technology, biological agents (yes, algae could become an alt-energy source), cutting edge composits, and the list goes on.  The important point is that the names of these manufacturing job creating industries will continue to change.  As new tech becomes old tech, jobs will be off-shored.  However, there will always be new tech and new manufacturing jobs but they will require workers to re-tool themselves and continually increase their skills.

That's why the auto industry will never be what it once was and it's also why alternative energy looks like it could be the next major evolution in manufacturing.  The demand for energy will continue to grow globally.  If we are at the lead in producing cost-effective energy solutions, we will have plenty of high paying jobs for those displaced from old line manufacturing industries.

While it's somewhat sad to see a big name company like General Motors move into bankruptcy, it doesn't mean that manufacturing will ever completely go away.  Besides, it's already been proven that great autos can be made in America--ever heard of Toyota or Honda?  The difference is that the successful manufacturers don't have a ball and chain attached to their ankles like GM, Ford, and Chrysler.  But that's a story for another day.

The Not So Curious Case of Missing Millionaires

In an article yesterday from The Wall Street Journal, it was revealed that Maryland's attempt to increase taxes on the rich (those with million dollar incomes) failed miserably.  In their moronic attempt to increase tax revenue and have much of it paid for by ultra-high income earners, they found that nearly one-third of their targeted taxpayers were no longer on the books in the state.  The reason?  A good number of them simply left the state.

While federal attempts to soak the rich can be somewhat effective, state attempts to do this simply can't and don't work.  See, when you move from one state to another, you still live in the United States--meaning that federal tax increases stick whereas state tax increases are a mere nuisance.  If your current state of tax residence raises your rates, you can choose not to participate by changing your tax residence.

Since million dollar income earners have a great deal of financial resources, they typically can move to a new home or simply move to their other home.  Many in this group own multiple houses and they are usually not in the same state as their primary residence.  As a result, state attempts to grab more cash from this small, wealthy group are futile.

Here are the numbers as reported by The Wall Street Journal:

• 2008 Taxpayers with $1 million incomes:  3,000
• 2009 Taxpayers with $1 million incomes:  2,000
• Reduction in taxes collected from 2008 to 2009:  $100,000,000
• Amount of taxes to be raised to cover the gap from those not making $1 million annually:  $100,000,000

Obviously Maryland's cash grab didn't work out so well.  There's an old story about taxes, beer, and people that really captures the essence of Maryland's story and it goes something like this:

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this: 

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that’s what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20.”

Drinks for the ten now cost just $80

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share?’ 

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay! And so…

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now paid $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings. 

“I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man, “but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than I!”

“That’s true!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!” The nine men surrounded the tenth and beat him up. 

The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill! 

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics, University of Georgia

I guess you could say that the 10th guy stopped showing up in Maryland.

The RNC Argument Against Gay Marriage - health insurance???

I think of myself as fiscally conservative and socially liberal and as such, I'm a bit confused about the Republican National Committee's (RNC) recent stand against gay marriage.  It's not so much that they're opposed to it morally, I get that, but the latest argument involves cold, hard cash.  Frankly, I don't think it holds much water.  The RNC is now opposing gay marriage on the grounds that it would overburden small businesses as a result of increased health insurance premiums.  Uh, I doubt it.

While I didn't do a lot of business as a health insurance agent (worked primarily with corporate execs instead of small biz owners), what I do know is that the cost that small businesses pay for health insurance is largely up to them.  The owners and/or management will determine a certain amount that they will cover of their employees' health insurance premiums leaving the employees responsible for the difference.  It is not a set requirement for small businesses to offer health insurance and there is no minimum amount of money they must pay to offset employees' healthcare costs.  The very idea that the RNC is trying to push across makes little sense when you know the realities of selling health insurance to employers.

I'm not here to vote one way or the other on gay marriage, but I am a firm believer that if you are in the GLBT community, there should be additional legal protections afforded--the same types of protections given to married couples.  You can call it what you want--civil unions, gay marriage, whatever--but the bottom line is that there are a number of inefficiencies by not allowing equal rights with health insurance being one of them.

Let's take an example of what I'm talking about using eHealthInsurance as our quotes provider and we'll do a little math to demonstrate how ridiculous the RNC argument really is.  Here's what is looks like for a 33 year old male:

The Blue Access Plan 1 costs $62.38 per month and the Blue Access Economy $2,500 costs just $68.43 each month.  If we add another 33 year old male, here's what we get:

Blue Access Plan 1 costs $118.50 and Blue Access Economy $2,500 is $130.10 per month.  These are the same health insurance policies and if you do the math, you see that it actually costs less to have the second person insured.  The reason?  Simple.  The insurance company saves some money on administrative expenses and passes the savings on to the consumer.  Keep in mind that these are individual health insurance plan quotes that I used to illustrate the fact that it doesn't cost more per person, but in fact, it costs less per person.

Now, let's get to the small business owner's issue with providing coverage to a larger number of employees.  Yes, the total cost of the plan will increase based on the number of people that are covered.  However, the cost per person will typically go down, not up.  In addition, with the additional person covered in a civil union/gay marriage, the premium to the employee is also increased--offsetting the increased cost of coverage as a whole.

Last time I checked, when the wife and I completed our benefits enrollment last year, it wasn't the same cost to select 'family' as 'individual'; it was a helluvalot more expensive!  This is the same thing that a gay couple would experience.

Besides, the number of gay couples in the United States sits at roughly 1.6% of the population.  So if the RNC wants to say that allowing gay marriage would break the backs of small businesses when the community only comprises 1.6% of the population, give me a break.

Rudder's Mistake

The personal finance web world has been coming along at a phenomenal pace with companies like Mint and Wesabe leading the way.  The core of their technology relates to account aggregation, a process that pulls data from multiple financial institutions and puts it on a single page.  This service is very valuable to individuals as it allows them to see the entire landscape of their finances.  Unfortunately, Rudder, a smaller company in the account aggregation space, made what could be a catastrophic mistake--they exposed hundreds of user accounts.  While this wasn't a result of a security breach, it is a mistake that has touched off a renewed debate about security and privacy on the web.  

What happened was Yahoo! Mail was screening out legitimate emails from Rudder so the company added a patch to their email delivery system so their emails would no longer be kicked to the spam box.  Unfortunately, someone at Rudder made a mistake and the individual emails became aggregated emails with hundreds of user's financial information being exposed.

Keep in mind that Rudder has read only access so there isn't any risk to the financial accounts.  However, some users are now very well informed about 700+ other users' financial circumstances--a bad situation to be sure.  The company's response time was slower than what it should have been, and as of this posting, there is still no indication of the issue on their homepage--a move that should have already been within their contingency plans.

Regardless, the company is responding by offering identity theft services to all affected users which is a similar response to what major financial institutions have done in the past.  The tech world is all over this story with many techies proclaiming, "I told you so".  I'm not sure why this is so exciting or even such a big news item.  After all, they didn't get hacked like Citibank did a few years back.  It was a goof on the company's end, not a failure of this kind of technology.

My bottom line on this is, does it really matter?  Seriously, I just received a new debit card a couple of months ago because my account data was compromised and stories of these kinds of things are out there pretty consistently.  Many want to believe that the internet or even software can be made perfect, but it simply isn't.  It's made by humans who make mistakes and screw up on occasion.

In this instance, there was someone at Rudder keying in the changes so that they could serve their users better.  Perhaps Yahoo! gave them poor specs on the adjustment or maybe someone at Rudder simply keyed it in the wrong way.  Regardless, it was an error, there were some problems for users, and Rudder is doing what they can in cleaning up.

It's my hope that the company survives this incident, as they actually have a pretty strong offering in the PF Web App space, but they're certainly looking at a major setback today.  In the coming hours, days, and weeks, Rudder's management will make or break the company with their handling of this situation.  I wish them the best of luck.

I Bond Yield Update

For a number of years, I have consistently recommended I Bonds for emergency funds beyond the first couple of months' worth of expenses.  The reasoning is simple.  I Bonds are pegged to semi-annual inflation readings and typically offer a fixed rate above inflation.  Unfortunately, the yield on the current lot of new I Bonds has fallen to 0.00%.  That's right, zip, zero, nada, zilch.

Though the current yield is zero, the bonds do pay a fixed rate of interest above inflation.  Once inflation returns the yield will improve.  To illustrate this, here is the current calculation:

     -5.56% inflation rate  +  0.10% fixed interest rate  =  -5.46% tentative yield

Since the yield is below zero, the current yield will be set at zero because I Bonds cannot yield negative returns.  The principal is guaranteed directly by the U.S. Government and the bonds are structured to keep pace with inflation while remaining flat during deflation (what we have right now).

When inflation returns, the fixed rate for I Bonds purchased today will remain the same at 0.10%.  As an example of what this looks like, see the following:

     4.15% inflation rate  +  0.10% fixed interest rate  =  4.25% yield

The above assumes an inflation rate closer to the historical average, but with all of the money being printed to bring us out of recession, it's plausible that we could be heading for another period of stagflation.  In the event that stagflation comes calling, an I Bond purchased today might look like this:

     10.65% inflation rate  +  0.10% fixed interest rate  =  10.75% yield

Now you know how this batch of I Bonds look today, during normal inflationary periods, and in a high inflation environment.  Note that the real return (ignoring taxes) will remain at the fixed interest rate of 0.10%.  This means that your purchasing power will pickup just one-tenth of one percent in real terms each year.  This isn't great, but for an emergency fund that has the ultimate in credit quality, it's a very good deal.

Taking all of this information into account, here's my recommendation:

• If you own I Bonds, keep them
• If you don't own I Bonds, keep your money in high yield bank savings and money market accounts until October.  If inflation picks up by then, make a small purchase into I Bonds so you can get familiar with them.  If inflation doesn't pick up by then, keep your money where it is.  To monitor inflation, click here.
• Long-term, don't forget about I Bonds.  This deflationary period is a very rare occurrence with our economy and should we go through a significant inflationary period, you'll be very pleased that you own them.

For more information on I Bonds, go to TreasuryDirect.gov.

Related Post:  Yield Update for November 2009 through April 2010

Dirty Details Beginning to Surface

It's about time these dirty details started getting some run in the press.  In an AP article, we finally have the story behind Bank of America's takeover of Merrill Lynch.  If you were following this at the time, the professional community was scratching their heads thinking, "Why take on the risk and a horrible balance sheet?"

Well, as we now know, it's because the government pulled out a gun (figuratively, of course) and put it to B of A CEO, Ken Lewis' head, and told him to acquire Merrill or his career was over.  Of course, this was one of many extreme measures that the government implemented during a time when the economy was teetering on the brink of complete failure.

While I'm glad that we didn't go Iceland and have our financial system completely fail, I'm also a little perturbed with the way in which we averted disaster.  Threatening the leader of a private company with his livelihood simply isn't right and for my conservative friends, this certainly smacks of socialism.  Heck, it even sounds a little Cold War Soviet Union.

However, I'm not one to cry over spilled milk and I'm not a Bank of America shareholder, so my qualms are on principle and have no financial consequences.  Overall, I probably benefited from this action, but for the many folks that hold Bank of America stock, they have a very legitimate gripe in the fact that their company was forced to takeover an enormous pile of debt.  So what are they going to do?  Nothing...it's the government after all.

Several years from now, there will be a slew of interesting books written about the closed door meetings that took place last year when the financial crisis very nearly became our undoing.  There will be more detailed accounts of bullying, shady accounting, and of course, greed.  When these details emerge, don't count on public upheaval, but you can bet they'll make the bestseller list.  

All in all, the government did what was necessary and it was ugly, but you can count me as pleased the outcomes weren't worse.

Congratulations to Kevin Kabat of 5/3rd Bank...

...for appearing in April's Smart Money as overpaid CEO of the month.  His compensation?  How does $866,534 in salary, $3 million in cash, and $2.2 million in stock grants and options.  Tally it up and Mr. Kabat is doing quite well with over $6 million in total compensation this past year while shares of the company closed today at $2.40, down over 90% from a year ago.

I don't really have a problem with his salary or the stock and option grants, as these are necessary to (1) pay the guy for his position and (2) create a substantial incentive to bring the company back to profitability.  However, the $3 million in cash might be pushing things a bit.  When a company falters, even if the current CEO wasn't responsible, the realities of a company's situation should demand cuts in cash compensation.

Overall, I'd like to see CEO cash compensation limited to a multiple of average wages paid by the company or a small fraction of profits.  The remainder can be paid in stock options or restricted stock that gives the CEO a major incentive to lead the company effectively.  While this wouldn't address the problems of golden parachutes, it would be a far more meaningful compensation arrangement for all concerned.

When Did I Move to Ancient Rome?

The AIG witch hunt that's been tattooed on every media outlet in the developed world has me thinking that somewhere along the line, I moved to Ancient Rome.  I'm not sure how this happened, but the AIG bonus saga smacks of the gladiator battles of old.  The Roman Republic was crumbling under weak leadership; war had exhausted the treasury; taxes were raised; and the top brass turned to gladiator fights to distract the public from the real issues at hand.

Think about it.  For weeks, all I've seen are AIG bonus stories at a time when we're considering legislation for the largest budget in the world's history along with a few trillion dollars going out to salvage the financial system.  All of this press for what?  $165 million?!

Sure, this is a pretty good chunk of change, but compared to the real issues of today, it doesn't even register as a material line item.  Let's take a quick look:

$4,000,000,000,000.00

               vs.

     $165,000,000.00

If you're part of the majority of people that are really irate over these bonuses, I want to point out a few facts that should really make your day.

1. The bonuses paid out to AIG are 0.004% of the total expected spending between this year's budget and the costs of the collective bailouts.
2. The cost of the budget and bailouts is 24,242 times more than the bonuses paid out to AIG

To put this another way, take your anger and frustration over the AIG bonuses and multiply it by 24,242 to get a better picture of how angry and frustrated you should be over the government's failure to regulate the financial industry.

What about the media?  They should be running the spending bills as a top story for the next 509,082 days (that's more than 1,393 years) to give these stories proportionately equal coverage.

Why don't they give equal coverage to these stories?  Because we're people and just like the Romans, we love to see a bloody fight.  Of course, we're more civilized now.  We order business executives to appear before Congress so we can see a good old fashioned flogging in the public square.

By the way, who were the geniuses that gave financial companies Carte Blanche to create and trade horrifically leveraged unregulated securities?  I think it was that same group of Congressmen that were looking down their noses at Mr. Liddy.  Why aren't they working for a dollar?  Why haven't they surrendered their pensions?  Oh, that's right, they have Congressional Immunity...or something.

Ahh, my time in Rome...I think I'll pop open a nice Barolo cheap Chianti to celebrate put out the flames.

Suburbia R.I.P. from FastCompany.com

I just picked up this article from Yahoo! Finance and found it to be another in a long line of myopic pieces extolling the death of suburban life and the resurrection of the city.  With the collapse of the housing market and the financial meltdown following it, there are vast tracts of land that were slated for development in suburban America that are now sitting idle.  This represents many billions of dollars in losses for developers and will no doubt cause the demise of many small and even mid-sized builders, but it does not represent the death of suburbia.

The Swinging Pendulum

In the bigger picture, there is always a pendulum that swings from one extreme to another going unnoticed until it changes directions.  This moment in time has the pendulum swinging from suburbia to urban areas and has produced this article from FastCompany.com.  The change in direction is no more than a correction towards the more efficient utilization of resources in our capitalist system.

To clarify, these areas that are laying idle are not what real estate investment professionals consider true suburbs.  These areas that are far from city centers are more commonly referred to as the exurbs and were a product of a growing economy that sprouted numerous business districts outside of the city center.  As urban areas began their decline, folks moved out to the suburbs to improve the quality of their lives.  This group then established businesses outside of the downtown areas with some developing into major business hubs.  In effect, business areas resembling that of city centers were moved out into popular suburbs.

This allowed for the establishment of exurbs because people could work in nearby business centers in the suburbs rather than the more distant downtown areas.  As the economy continued to grow, these areas were built up and the exurbs were filled with larger homes on larger lots with, of course, larger mortgage payments and greater overall expenses.  The real estate boom compelled builders to continue to scale up operations in the exurbs and purchase large tracts of land to accommodate expected future growth.

Now, with the economy contracting, many builders have and will go under, strip malls will be vacated and remain so for some time, and more people will seek out housing that is less expensive and closer to work in order to reduce their living expenses.  The swinging pendulum has finally reversed itself as a result of the deepening recession.  While the article from FastCompany.com is correct in projecting a trend towards city centers, it uses a myopic lens to observe these trends.

Over the next several years, the housing, retail, commercial, and industrial real estate markets will correct themselves to be closer to the right size.  We've thrown billions of dollars into saving the housing market, but it was just a simple matter of overbuilding.  When this happens, supply and demand must eventually return to equilibrium.  This is also true of geographic housing locations.  The pendulum that is swinging back to the city will someday swing back to suburbia again--though several years will pass in the meantime.

Suburbia and city centers don't die, they just hibernate.  Knowing this should help you make some better decisions in the future--when anything is overdone change will be coming soon.  We overdid the exurbs and change is underway.

Prediction:  Sometime down the road, city centers will be overbuilt once again.  Look for an overabundance of retail outlets and residential housing in downtown areas.  When occupancy rates are running near 100% for established locations and rents move up at paces beyond that of economic growth rates (for retail/commercial space) and personal incomes increases (residential), you can bet the pendulum is due for another swing.

FDIC Bank Takeover on Video - from bargaineering.com

If you've never seen a bank get taken over by the FDIC, this video will make you feel pretty good about the process that's in place.  While this is in the forefront today with the financial crisis, I recall a couple of banks over the last decade in my area that have received 'raise capital' letters from the FDIC.  Fortunately, all of them did.

At any rate, checkout this video from Bargaineering.com.

Life Insurance - expect higher premiums, lower returns

With an atrocious stock market over the last sixteen months combined with unquantifiable risk in large segments of the debt market, life insurers are struggling to maintain their reserves and their all important credit ratings.  What this means for consumers is that an increase in premiums and a reduction in interest paid on cash value policies can be expected.

If you're not familiar with how a life insurance company works, the simple way to think of it is that they collect your premium dollars and invest it in the manner that they see fit.  If you die, they pay the death benefit from their general fund that contains the pooled premiums from all of their policy holders.  The way that this money is invested has traditionally been somewhat more conservatively than most pension funds.

Even with relatively conservative investment management, life insurance companies have been hit with investment losses that are to the point that many will be forced to increase premiums sooner than later.  For some insurers, they are getting out of the business altogether.  As an example, Hartford announced they were looking into selling off large portions of their life insurance arm as they attempt to preserve their credit rating.

What all of this means for you is that if you need life insurance today, you should put in the application sooner rather than later.  In addition, paying careful attention to credit ratings will be important as well.  Some insurers stayed away from the worst of the 'toxic assets' and have no risks to their reserves from these risky assets; these insurers will likely pick up market share during this downturn.

If you need life insurance, I suggest NetQuote--a website that takes your information and sends it to local agents to compete for your business.

Read This Now - Jim O'Shaughnessey's Generational Opportunity

In the October 22nd issue of CiN Weekly, I wrote about getting greedy like Buffett because the market was looking very attractive.  Almost five months later, Jim O'Shaughnessey makes the same argument, but with far more historical data than I could present in print.  If you read nothing else this year, please take the time to read this article.  It is as solid an argument as I've seen for buying stocks and while we're not completely out of the woods yet, the market is at a generational opportunity level as O'Shaughnessey so adequately points out.

When 2 Equals 10 - education pays

Last Sunday, I gave you President Obama's message on education that asks every American to commit to at least one more year of education or job training.  While I can't emphasize enough the importance of furthering your education and improving your job skills, I took a few minutes to find a clear cut example of how education pays.  In this post, we'll take a look at the world of nursing which is a high demand field that continues to offer excellent wages that are dictated in large part by education level.

Three Tiers of Nursing

Loosely speaking, there are three major tiers of nursing:  (1) Licensed Practical Nurse or LPN, (2) Registered Nurse or RN, and Nurse Practitioner or NP.  These tiers are dictated by educational attainment and industry certifications.  As a nurse moves through the progression from LPN to RN to NP, he or she can expect to be compensated on an increasing scale.

Nursing Salaries

Based on information obtained from Salary.com, the following are the expected salary ranges for nurses from the 25th to 75th percentile in Cincinnati, Ohio:

• Licensed Practical Nurse:  $35,561 to $42,651
• Registered Nurse:  $55,508 to $66,867
• Nurse Practitioner:  $74,702 to $88,020

In light of the fact that the average hourly wage in February of 2009 as reported by the Bureau of Labor Statistics is $18.41, nurses entering the workforce can expect a wage that is above the national average.

Education Requirements

For hopeful nurses, the amount of education required depends on the end goal.  Generally speaking, the following is a quick view of the time required to obtain the educational credentials for each tier of nursing:

• LPN - 2 years, Associate's Degree
• RN - 4 years, Baccalaureate Degree
• NP - 6 years, Master's Degree

If you're starting out with no college experience, becoming a Nurse Practitioner may seem like a long slog to go through six years of school.  However, if this is broken down into say four years up front and two years at a later date, it's not nearly as daunting a task.

Two Years = Ten Years

The most common argument I hear against going back to school to increase personal income and better one's life is that it takes too much time.  We're already pressed for time as it is and many feel that it's impossible to squeeze even one more thing into an already busy schedule.  This couldn't be further from the truth...if you understand the long view anyway.

If you look carefully at the information I've already presented, you will see the the difference in income between each tier of nursing equates to about $20,000 in annual earning.  As an example, a 35 year old LPN could go back to school for two years to become an RN.  Over the course of 20 years, he or she would expect to earn about $400,000 more than by simply staying the course as an LPN.

This $400,000 in additional earnings equates to more than 10 years of earnings as an LPN!  In essence, two years of additional education adds up to 10 fewer years of work.  Do you get what I'm saying here?

President Obama is asking all of us to further our education to better our lives and the country, and as this post points out, it makes all too much sense.  The fact remains, however, that only a few will heed the President's call, and for those few, they will be richly rewarded with a far better chance at finding lasting financial security.

To learn more about how to go about going back to school and the special tax credits made available in February, click here.

If you'd like to see what various jobs are paying, click here.

Two Positives Amid Gloom - resources for a turnaround are in place

If you don't read The Good News Economist, you probably haven't seen any good news about our present economic condition.  There were two positives I saw recently that Liz Ann Sonders from Chuck Schwab discussed.  The first was that the U.S. personal savings rate went from being below zero a couple of years ago to over 5% today.  The second was that for the first time in memory, Americans paid down their personal debt in consecutive quarters.  

What this means is that a good deal of purchasing power to push the economy forward is available, but being directed towards cleaning up personal balance sheets.  This is a good thing for all of those households that are carrying far too much debt because they will eventually pay off their debts and have free cash flow to put back into the economy on a continuous basis.  Depending on how long this trend continues, it could make for a strong recovery if spending habits return and savings rates decline or a slower but more steady recovery should savings rates remain at their current levels.

Either way, we know that there is a great deal of cash on the sidelines and in precious metals, households are putting their incomes towards savings and debt, and this means that the resources exist for the market and the economy to turnaround.  The key piece of this puzzle is a return of confidence to the consumer to shift assets into the markets and incomes into the economy.  When this will happen, I don't know, but it will be sooner than later...likely when it's least expected.

Obama's Message on Education

A week ago today, I wrote about the educational tax incentives put together by the Obama Administration and signed into law as part of the American Recovery and Reinvestment Act.  Today, I ask if you have taken any steps towards making this a reality.  The link between education and prosperity is undeniable, and to help you understand the broader scope of this, here are some words from our President as delivered in his initial speech to Congress a few weeks ago.

     "The third challenge we must address is the urgent need to expand the promise of education in America. 

In a global economy where the most valuable skill you can sell is your knowledge, a good education is no longer just a pathway to opportunity -- it is a prerequisite. 

Right now, three-quarters of the fastest-growing occupations require more than a high school diploma. And yet, just over half of our citizens have that level of education. We have one of the highest high school dropout rates of any industrialized nation. And half of the students who begin college never finish. 

This is a prescription for economic decline, because we know the countries that out-teach us today will out-compete us tomorrow. That is why it will be the goal of this administration to ensure that every child has access to a complete and competitive education -- from the day they are born to the day they begin a career. (Applause.) That is a promise we have to make to the children of America. (Applause.) 

Already, we've made an historic investment in education through the economic recovery plan. We've dramatically expanded early childhood education and will continue to improve its quality, because we know that the most formative learning comes in those first years of life. We've made college affordable for nearly seven million more students -- seven million. (Applause.) And we have provided the resources necessary to prevent painful cuts and teacher layoffs that would set back our children's progress... 

...It is our responsibility as lawmakers and as educators to make this system work. But it is the responsibility of every citizen to participate in it. So tonight, I ask every American to commit to at least one year or more of higher education or career training. This can be community college or a four-year school; vocational training or an apprenticeship. But whatever the training may be, every American will need to get more than a high school diploma. And dropping out of high school is no longer an option. It's not just quitting on yourself, it's quitting on your country -- and this country needs and values the talents of every American. (Applause.) That's why we will support -- we will provide the support necessary for all young Americans to complete college and meet a new goal: By 2020, America will once again have the highest proportion of college graduates in the world. That's is a goal we can meet. (Applause.) That's a goal we can meet. 

Now, I know that the price of tuition is higher than ever, which is why if you are willing to volunteer in your neighborhood or give back to your community or serve your country, we will make sure that you can afford a higher education. (Applause.) And to encourage a renewed spirit of national service for this and future generations, I ask Congress to send me the bipartisan legislation that bears the name of Senator Orrin Hatch, as well as an American who has never stopped asking what he can do for his country -- Senator Edward Kennedy. (Applause.) 

These education policies will open the doors of opportunity for our children. But it is up to us to ensure they walk through them. In the end, there is no program or policy that can substitute for a parent -- for a mother or father who will attend those parent/teacher conferences, or help with homework, or turn off the TV, put away the video games, read to their child. (Applause.) I speak to you not just as a President, but as a father, when I say that responsibility for our children's education must begin at home. That is not a Democratic issue or a Republican issue. That's an American issue. (Applause.)"

Have you committed to at least one more year of education?  Are you walking through the door of opportunity?  I'm tellin' you folks, opportunities don't get much better than this.

UBS Hit by IRS Crackdown on Offshore Accounts

In the ongoing saga between the IRS and Swiss bank, UBS AG, the government learned today that UBS actually services 47,000 accounts held by US citizens who are not paying taxes on their offshore accounts.  This is far more than the 19,000 number that was given up in July of last year.  Out of these 47,000 accounts, UBS AG is giving up only 300 of the account holders to the IRS.  What is interesting about this case is the dilemma that is created between the Swiss laws of bank secrecy and the just taxes that should be paid by their account holders.

Many of you are likely unfamiliar with offshore accounts and their purpose, so let's clear that up right away.  Offshore accounts are part of an invaluable asset protection strategy that effectively seals assets from claims made in the United States from lawsuits, creditors, and others that would desire to take away your hard earned money.  Though they are intended to shelter assets from personal liability, they are not intended to be tax havens.

National Laws, International Business

The problem that this situation poses is a classic case of national laws versus international business.  The IRS on the one hand has a right and obligation to collect taxes that are due, but on the other hand, the Swiss bankers are bound by bank secrecy laws that forbid disclosing client information--even if compelled by a foreign government as powerful as the United States.  So what's the right course of action?  The account holders owe taxes and know it; the banker is bound to secrecy; the IRS knows it's getting the short end.  In short, there is no answer.

The bottom line is that UBS AG will wind up divulging a small portion of the tax evading accounts that the IRS likely already knows about, but there is no way to compel the Swiss to give up the other account holders without taking unprecedented action.  While this is a grudge match that won't end anytime soon, the U.S. Government could forbid UBS from conducting any further business in the United States until they come clean.  The likelihood of this is pretty remote, but if the government wishes to push this, they certainly have the power to force UBS into choosing to give up their clients' account records or face shutting down operations in the U.S.

Lesson to Learn

This example of offshore misuse can teach us a valuable lesson--do not setup an offshore account with a company with operations in the United States.  Again, offshore accounts are part of a very effective asset protection strategy, and it is imperative that those pursuing this strategy understand that even a bank in a jurisdiction with tight secrecy laws can be compelled to divulge information if they have business interests in the account holders' tax jurisdiction.  Open your offshore account with purely foreign entities and skip the larger multi-nationals.

By the way, if you want to open an offshore account, plan on putting up $100,000 or more to open the account and it'll cost you anywhere from $10,000 to $50,000 in legal fees to setup a proper offshore trust and related accounts.  I remember a firm down in Florida that worked with the Royal Bank of Canada to setup offshore trusts and accounts in the Cayman Islands.  Their fee?  $25,000.  Minimum account size?  $1,000,000.

Financials, Buying Opportunity or Fool's Gold?

I am a value investor at heart and that usually means that when a stock is battered, bruised, and even near death, I'm interested.  With that in mind, the idea of buying big name financials now is a supremely high risk proposition.  There is the opportunity to make substantial profits or to lose your entire investment through bankruptcy.  As a result, buyers of financials must be very aware of not only the survivability of a the financial company involved, but also how a total loss will impact their individual situation.

Stock Analysis

If you're looking at some of the highest risk stocks in the sector such as Citigroup, Bank of America, Fannie Mae, or Freddie Mac, be aware that while the shares are cheap, they are cheap for a reason.  The reason for this is the much talked about 'toxic assets' that these banks possess.  Some argue that they are undervalued because of mark to market rules that require them to record these 'toxic assets' at current market prices.  Since the market has discounted these assets, their shares are trading at below realistic prices.

On the other side of the argument is the fact that these assets have an unquantifiable risk.  Because of the complicated nature of securitizing mortgages through what are known as collateralized debt obligations (CDO), there is no way to know what kind of default risk is involved.  

Core Problems

To better understand this, let's review the process by which a CDO is created.  First, individuals go to a bank or mortgage loan company to acquire a mortgage.  After the bank or mortgage company has loaned out a certain amount of money through mortgages, they will then package them up and sell them to another--typically larger--bank or mortgage company based on criteria such as average credit score, loan-to-value ratios, and other factors.  This is where the securitization process takes place and also where the acquirers of the CDOs will lose any readily ascertainable risk assessment.  Once the mortgages that originated at the individual level are securitized, they can be traded in the secondary market (the bond market) many times causing the splintering of the original CDO.  Meanwhile, the individual that is paying the mortgage could be experiencing a job loss, disability, death in the family, devaluing of their home, or any number of other issues--all of which the subsequent debt owner will have no idea about.

The result is two-fold for our uses:  (1) there is no way of knowing the risk and (2) unknown risk makes for fewer buyers.  You combine these factors and you have the significant decline in value of these debt obligations.  The effect to the bank holding them is they own investments that were worth X and are now worth considerably less than X.  This means they become thinly capitalized--meaning they can't lend as much money and need to find cash to cover the missing value.  Under normal circumstances, they could get a loan against the value of the stock, but with share prices down the toilet and nearing the treatment plant, this is near impossible.  Thus the financial crisis.

My Answer

Getting back to the question at hand, only time will tell whether or not an investment in this sector will be profitable or a hard lesson in high risk investing.  Some will no doubt weather the storm and one day thrive again, but as last year showed us, even seemingly strong institutions can collapse.

This brings me to the most important part of the discussion.  If you have an adequate emergency fund, are maxing out your retirement savings opportunities, and have a high tolerance for risk, there's no reason you can't take a flier on some of these companies.  However, if you're not in a financially strong position, you may want to work on the other areas of your finances first.

For me, the risk/reward trade-off on the high risk end of the sector isn't favorable.  With the entire market on sale right now, I'd much rather take my chances with strong companies with strong balance sheets where I don't have to evaluate their chances of remaining solvent.

Bottom line:  One of my core investment rules is when everything is cheap, buy the market.  When everything is expensive, search for values.  Heck, with this market, you can be an ape throwing darts at the stock pages and you'll look smart ten years from now...as long as you throw enough darts.

Don't Forget Your $10,000 from Uncle Sam

This is some good stuff.  I just saw a classified ad that read:

     "The Federal Government is sending out checks for $10,000 to any American that desires to increase their earnings potential, improve their quality of life, benefit their community, set an example for their children, and generally get ahead in life.  To qualify, you can't be rich and you can't be lazy."

Alright, it wasn't a classified ad, I made it up...sort of.  While my ad is seemingly ridiculous, it's a pretty good translation of one of the provisions in the recently enacted American Recovery and Reinvestment Act that President Obama signed into law on February 14th.  In essence, the Act provides a $2,500 tax credit for up to four years of post-secondary education--a.k.a. college.

In order to claim your tax credit, you must be enrolled in college, earn less than $80,000 if you're single or married filing separately or $160,000 if you're married filing jointly, and your education must cost at least $4,000 annually.  The way the credit is worded is that $2,000 is a 1 for 1 offset against the costs of your education.  The next $500 in credit is on a 1 for 4 offset on the next $2,000 of costs.  In other words, spend $4,000 and you get $2,500 back through the tax credit.  This is a very, very good thing.

If you're not sure how to take advantage or what all the right steps are to go back to school, don't fret, just keep reading.

Step 1:  Select and Enroll in a Program

In selecting a program, pick one that meets at least these three criteria:  (1) something related to what you want to do, (2) something that you have the skills to complete, and (3) attend a properly accredited institution.  If you follow at least these three guidelines, your educational experience will give you enjoyment, confidence, and respect.

If you're not sure what you want to do, don't worry.  Most people don't figure this out until very late in their careers, if at all.  Even if you aren't completely sure, try to find something that you could see yourself doing day in and day out for the next decade or more.

As for your current skills, think about what you are good at.  Some are great communicators and will do well in sales.  Some are very good with their hands and might make good mechanics.  Still others are great at organization and would be very good administrators.  Something that you should note is that whether you are in sales, auto repair, or administration, there are jobs for those with low skills that pay $25,000 annually and there are also those in each of these fields making six figures.  The difference in pay is related to education being translated into job performance.

After you've selected a program, go ahead and complete an enrollment application.  This is usually a simple form and most colleges will require a small fee to accompany the application.  For adult learners, exams such as the SAT or ACT are often not required so you need not fear such things.  If you are going back for an advanced degree, the LSAT, GMAT, or GRE may be required, but you should consult with your selected school's office of admissions.

Step 2:  File Your Tax Returns

Murphy's Law--one of them anyway--says before you can do something, you have to do something else first.  In this case, before you can submit your Free Application for Federal Student Aid (FAFSA), you should first file your tax returns.  To do this, I recommend FreeTaxUSA.com whose banner is below.

Step 3:  Submit FAFSA and Financial Aid Paperwork

The FAFSA is actually a pretty simple form to complete if you have all of the documents you need.  These documents include the following:

• Social security number
• Driver's license or state issued ID
• Your 2008 federal tax return
• Your parents' 2008 federal tax return, if you are still a dependent
• Current bank and investment statements
• Alien registration or permanent resident card, if not a U.S. citizen

Having these documents available will help you finish the application quickly and relatively painlessly.  When you're ready to begin, click here to reach FAFSA's website.  Please note that there are important deadlines for federal and state financial aid so be sure to know when the FAFSA is due.

In addition to the FAFSA, you should also complete any financial aid paperwork required by the financial aid office at your school of choice.  By completing the FAFSA and your school's financial aid application, you can be sure that federal and state aid will be credited to you properly.

Step 4:  Finance the Gap

Even if you qualify for federal or state grants, there will still be a significant gap that will need to be paid somehow or another.  This gap can be filled in many ways depending on your situation.  In order of best to worst, here is a list of how to finance your education:

1. Federal and state grants - if you qualify, you will be notified through the financial aid process at your school.  There are a wide range of grants available, but most are reserved for low income households and the disadvantaged.
2. Tuition reimbursement - if you're fortunate enough to work for an employer that will pay for your education, take advantage of it.  Employers offer these benefits because studies have shown that employees typically stay longer and are more productive if tuition benefits are paid.  One caveat:  most require a minimum tenure after completing your courses so be sure that you'll want to stick around for that length of time.
3. Scholarships - there are billions of dollars in scholarships and anyone that is willing to put in the time can be confident that some money will flow in.  One of the amazing things about scholarships is that they are available to a wide range of individuals and some are as simple as having the right last name.  To complete a search, use FastWeb or ScholarshipExperts.  Both services make finding scholarships easy.





4. Cash - the next best source of funding is cash out of your own pocket.  While it will certainly put a cramp in the budget, it beats paying interest.  Use it if you have it.
5. Federal student loans - there are two kinds of federal student loans bearing the Stafford name.  Subsidized means that interest will be suspended during while you are enrolled in school while unsubsidized means that interest will accrue from the time the loan is disbursed.  Start with SimpleTuition.com.



6. Private student loans - if you are attending a pricey institution (I would question whether this is a good idea or not), you may need to obtain a private student loan to fill the gap.  These loans are typically at higher rates and have less favorable terms than Stafford loans.  However, if it is necessary, then a private student loan through a big name bank can take care of the difference.

Step 5:  Translate Your Education

The English word education has its roots in the Latin word educo which means to foster or draw out.  The single most critical factor in increasing your earnings as a result of education is how well you translate your education into useful, on the job skills.  This factor is why traditional college graduates enter the workforce in their early twenties and have a difficult transition.  It is also why I typically suggest traditional graduates go back to school later to earn a Master's degree.

If you are able to take what you learn in school and apply those learnings properly to your career, you will increase your earnings as a result.  While the academic world can sometimes seem like a parallel universe to the real world, the lessons that are taught are valuable if, and only if, they can be translated to the job.  To put it another way, if you're going there to get good grades, but can't translate it into the real world, don't bother going--or become a professor.

Summing Up

Education is one of the core tools that helps people increase their earnings.  Formal education through colleges and universities serves the purpose of teaching valuable lessons that can be applied to your career and those that understand this and take advantage of it will have a far easier path to financial security than those that do not.

If you know you should go back to school, but don't do it under these tax incentives, you're crazy.  Think about it.  When was the last time the federal government told you, "We have a check for $10,000 with your name on it."  The answer:  NEVER!

Please Remain Calm, This is Normal

October 9, 2007 - The Dow Jones Industrial Average reaches a new all time high closing at 14,164.53

February 20, 2009 - The Dow Jones Industrial Average hits its lowest level in eleven years closing at 7,365.67

16 months and 11 days isn't a very long time by anyone's standards, but during that span of time, we went from feeling pretty good about ourselves to believing the sky may actually fall.  What changed?  Everything...and nothing.

Since the most recent market peak, we've discovered that the real estate bubble has considerably more fallout than originally expected.  The breadth and depth of the problems related to real estate has rippled through our economy, and we still do not know the full extent of the damage.  Over a trillion dollars has been expended by our government to try to minimize the fallout, but even this will likely fall short.

Illustrating Normal

The fact is that we are facing an unprecedented problem that is bigger than anyone could have predicted.  As a result, the stock market has lost nearly half of its value and will likely fall further in the coming months.  However, this is normal.

To illustrate this, take a good look at the chart below and you will see what I mean.

The truth is that our markets and our economy go through long term cycles that are far larger than the short-term bull or bear, expansion or recession.  In fact, our markets have 12 to 25 year cycles that either stagnate or demonstrate exponential growth.  The problem we face today is that we're in the midst of a normal stagnant cycle, but most investors are reacting as if this is the first time a massive market decline has happened.  In fact, it truly is the first time for most of us.

Story Time

Consider the case of a 22 year old college graduate today.  She might know that the economy is bad because finding a job is difficult.  However, she's used to being poor and finding a low paying job wouldn't cause a great deal of discomfort since she has no dependents and is accustomed to a meager lifestyle.  Also, she has read the headlines that the stock market has plummeted, but since she has no investments, she really doesn't care a whole heckuvalot.  As a result, this experience will largely be lost to her in later years.

Fifteen years later, at the age of 37, she's working at a good paying job, is married, and has two children to support.  The market and economy are doing well after coming out of the slump of the early part of the century.  Things are going well, and she and her family are quite comfortable.  She saves regularly for retirement and college, and her investments are worth about $50,000.

Fifteen years later, at the age of 52, she's still working to payoff the student loans for her kids, is earning more than ever before, and the economy has been doing well for the last decade and a half.  'Suddenly', the market collapses and the economy goes into a deep recession.  Her home value drops by 20% and her retirement nest egg that was worth $500,000 before the decline is now cut in half.  Unemployment rises and with her high salary and long tenure with the company, she is asked to take an early retirement package.  She struggles to find a new job, and begins to take money out of her retirement--compounding her financial problems.

Changing Perspectives Over Time

What changed?  Everything...and nothing.  At age 22, she was young, hopeful, responsibility free, and oblivious to investing.  At age 37, she had responsibilities, started learning the market, was doing well and feeling confident.  At age 52, her investments were worth more than her income, retirement was within sight, but the market and economy dealt a surprising and stunning blow.  Everything changed in her life, but the long-term market cycles didn't change a bit.

Sounds familiar, doesn't it?  You could rewind this story to 1968 or 1929 and find a similar picture unfold.  Unfortunately, we don't have a chart that goes back to the 1800s, but you would see these long-term cycles play out again and again.

Welcome to Capitalism

While the politicians, economists, marketeers, pundits, and other talking heads disect this messy economy, at least you now know that capitalism can dole out some pretty nasty punches, but at the end of the fight, those that can position their income and assets properly in light of the long-term realities of capitalism, will be standing victorious in the end.

Preventing the Pain

So how does this translate to action?  Follow these basic rules and you will fare rather well compared to your peers:

1. Live on 70% of what you make after taxes
2. Avoid all debt except an 80% or lower loan-to-value fixed rate mortgage
3. Insure all of your risks including your health, property, life, etc.
4. Maintain an emergency fund that starts at two months' worth of expenses at the beginning of your career and expands to two years' worth of income by the end of it
5. Maximize savings into tax preferred accounts such as 401k/403b plans, IRAs, etc.
6. Maintain a balanced mix of investments and reduce risk over time starting with all stocks at 25 years or more until retirement and moving to 25% to 50% stocks by the time you retire
7. Never, never, never think you are impervious to the ups and downs of capitalism
8. Never, never, never lose hope in a better tomorrow

Number 8 is perhaps the most important part of this equation.  Hope is what drives capitalism and is why our breed of capitalism has been so successful over the years.  It is hope that feeds ideas that make our lives better and it is hope that allows us to persevere when faced with hard realities.

A Consumer Staple - Netflix

When the economy tanks, there are a number of 'defensive' industries where stock investors seek refuge.  Among them are consumer products, food, and now, movie rentals.  Netflix reported a profit increase of 45% on revenue growth of 18% year over year.  This strong performance amid a recession shows that movie rental companies are officially a consumer staple; when times are tough and wallets tighten, movies at home become an inexpensive entertainment substitute.

To illustrate this, take a look at the following chart:

As you can see, Netflix was up about 30% in the last two years while the Dow Jones Industrial Average lost almost 35%.  While this is just one company in the right industry and doing the right things, examining the consumer staples sector versus the same index, we see a similar picture:

While the industry as a whole lost money, it didn't lose nearly as much as the broader market.  In fact, the Fidelity Advisor Consumer Staples Fund A lost about half that of the Dow.

What can be learned from this news story is that stocks in the consumer staples market aren't sexy, but they are comparatively sturdy.  In building a conservative, all-weather portfolio, consumer staples funds will help you during times of trouble.  Don't worry about scrambling to add this to your portfolio, as many mutual fund managers will overweight to this sector anyway, but if you want to buy some old line, boring companies, that don't lose as much during downturns, consumer staples is a good place to start.

For Future Reference:  Overweight Consumer Staples during declines and underweight them during ascents.

Barack Obama's Economic Legacy

Congratulations to Barack Hussein Obama II for his election to the world's highest office.  As President of The United States, he will be the most powerful and influential person on earth and when he takes office today, he will also be the owner of the most complicated and difficult job ever created.  It is my belief that his Presidency is likely to be remembered as one of the best in our history because of the depth and breadth of the problems we face today.

Problems Inherited

Obama inherits a shaky economy that includes a financial system still on life support, a sour job market that continues to get worse, enormous budget deficits at the federal and state levels, national debt in excess of 10 trillion dollars, a poorly conceived and even more poorly funded Social Security System, and is generally fighting the most difficult economic battle since the Great Depression.  In other words, the potential exists for President Obama to preside over one of the greatest economic comebacks in our history.

Leadership Matters

During more normal economic times, the President has relatively little impact on the economy.  However, we are not in the midst of anything resembling normal and as a result, leadership at the top is absolutely critical.  When looking for leadership, one needs no other reference point than FDR.  His strong bi-partisan leadership was responsible for leading our country out of the Great Depression and he may be the best model that Obama can make himself after.

Already, we can see some similarities between FDR and President Obama.  For starters, both are high communicators.  Just as FDR used fireside chats, President Obama is using the latest technology to keep the public informed--the internet.  His webcasts are something new to the Oval Office and keeping the public updated through every means available will be key to gaining broad support for his forthcoming initiatives.

Another striking likeness between them lies in their presence.  Both men possess a calm, confident demeanor and face the hard realities in their speaking.  In listening to some of FDR's fireside chats, one can hear the great leader of old speak with a quiet confidence and acute awareness of the great problems of his time.  With Obama, we can hear much of the same.  While the times are different, their presence is equally powerful, equally reassuring.

The Long Road Back Starts with Confidence

Barack Obama's first 100 days in office will see the largest stimulus package in our nation's history be passed with a clear mandate from Congress.  It is this kind of action that will begin the long road to economic recovery by instilling confidence in the American people that they have a president that is able to act boldly and resoundingly.  This stimulus package is unlikely to see much resistance other than the token complaint that government spending is out of control.

This first important step won't by itself salvage our economy, but it will be the first of many steps.  Once the package is approved, it will take several months for it to have a direct impact on the economy.  This begs the question of why economists believe that the economy will return to growth in the second half of this year.  To answer that question, we need to understand that the $700 billion being deployed into the financial system will reach its maximum effect later this year.  Assuming that the TARP funds are fully allocated in the next few months, the financial system should be in the clear in late summer or early autumn.

Once the financial system is deemed as being in relatively good shape, the equity markets will begin their recovery ahead of the overall economy.  The stock market is a leading indicator that is generally six to nine months ahead of actual economic news.  With the stabilization of the financial sector coupled with strong leadership and a major economic stimulus package, consumers will gain in confidence and begin spending once again.

Confidence Begets Confidence

As consumers gain confidence, the economy can then begin to grow through non-governmental avenues.  Corporations will begin to hire more employees and get back to a growth mentality compared to the survival mode that most executives have been enduring over the last year or so.  This upward spiral of confidence will take place over a period of anywhere from nine to eighteen months and it will see corporations working hard to capture market share from weaker competitors. 

As an example, Best Buy will certainly benefit from Circuit City's demise this past week.  By eliminating their biggest competitor, Best Buy executives can sleep better at night knowing that they will emerge from this recession in a stronger relative position than when the recession began.  This almost certainly leads to economic stabilization as Best Buy will have less need to close stores and could lead to growth as Best Buy works to fill the void left behind by Circuit City.  Multiply this effect over a number of industries and you can see how confidence begets confidence.

The Market Works Just Fine

While recessions are no fun for anyone, the market works just fine.  This recession is a formidable one that does require government intervention, but over time, the market will recover on its own and only needs that initial spark of confidence.  It is this spark that President Obama is needed to provide.  From there, however, his role will become far less important and the role of the billions of participants in the global economy will move back to the top of the heap.

Obama's Economic Legacy

As a result of the difficult problems inherited by Obama as well as the bold actions he is taking, his economic legacy is almost certain to be a glowing one.  In fact, once the economy recovers and returns to growth, Obama finds himself in a unique situation that will allow him to be remembered as one of the greatest of our presidents, a legendary leader.  No doubt that he will have an important hand in crafting this recovery, but will it be completely his doing?  Of course not, but part of any legend is embellishment anyway, right?

At any rate, I wish the President the best of luck and hope to see things turnaround sooner than later.

Prognostications for 2009

In order to prepare you for the upcoming year, here is a list of my prognostications in seven key areas of personal finance for you to use in planning your money:

• Economy - the economy will begin its recovery in the latter part of 2009 with this recession coming to an end before March 31, 2010.
• Interest Rates - the Federal Reserve will hold rates steady for the first part of the year, and as the economy shows signs of stabilizing, will begin to raise rates near the end of the year.
• Inflation - with the global recession in full swing, inflation will remain tame for the entire year with only mild spikes in commodities prices.
• Deflation - a month or two of declining prices may occur, and these numbers are more likely to produce sensationalized headlines in the media than cause real duress for the economy.
• Stock Market - equities will lead the major asset classes with positive returns in excess of 10% for the year.
• Fixed Income Market - corporate bonds will lead the way as bondholders realize many of these bonds have been unfairly beaten down in the marketplace and double digit returns are not out of the question.
• Cash Equivalents - I bonds will continue to be the best place for cash equivalents with high yield FDIC insured bank accounts in second.

What this translates into is that the economy is going to recover meaning that job opportunities will begin to spring up toward the end of the year.  I always advocate improving job skills on a continuous basis through formal and informal education and training.  

In addition, if you've survived with your job intact during this recession, you may want to consder where you want to be when the next recession comes.  Do you want a change in career, a higher position in your company, start a new company, etc.?  Once you answer that, make a plan for your career over the next five years or more.

Interest rates are critical because they affect lending rates.  Since interest rates are at all time lows and should remain near these levels for the year, you should use fixed rate mortgages ONLY and try to eliminate as much variable rate debt as possible.  If you're living with variable rate debt, when interest rates increase in the coming years, you have the risk of being buried under interest charges.

Inflation that was a major concern prior to the financial meltdown last year will be relatively tame.  This means that there should be no hurry to make major purchases this year, even though companies will be pushing product at significant discounts throughout 2009.

Deflation is a somewhat rare occurrence in the United States, but if you take a look across the Pacific to Japan, you can see that it is a problem that has yet to be solved.  In Japan, they've had years of deflation and if you pull up a long-term chart of the Nikkei, you will be appalled at the sight of it.  We may have a small patch, but I have faith in the American consumer to get back to the old habit of spending.

The stock market should return 10% or more this year, but what's more important to understand is that we are near the bottom established in 2008.  This means that you should be contributing to retirement plans and other accounts and buying the market while it's still incredibly cheap.  In my estimation, staying on the sidelines is far riskier than buying the market at current levels.

Last year, many companies filed bankruptcy, leaving bondholders with virtually worthless junk bonds.  At the same time, good companies' bonds were unfairly beaten down and are priced very attractively.  As a result, once the economy shows signs of firming, these higher quality bonds will produce returns from their stated interest rates and through an increase in principal value.

I bonds remain very attractive through May 1st when the next interest rate change is scheduled, and under normal circumstances, they would likely lose out to high yield bank accounts.  However, since the Federal Reserve has reduced rates to near zero, I bonds should slightly outperform high yield bank products on balance for the year.

While these are only projections, I can tell you that it is far easier to see the bottom than it is to see the top.  When times are tough, fear seems to eventually dissipate into apathy, but when times are good, greed seems to have no limits.