Archive | Economy and Markets

RSS feed for this section

A Grumpy Old Man’s Guide to 401k Investing

Perhaps I’ve been spending too much time with my young kids, but I’ve gotten to be quite good at wagging my finger and speaking in a stern, fatherly voice. I love my kids dearly, but at times the rascals need a little discipline. And chances are, when it comes to making full use of your 401(k) plan, you do too. So, as my glasses slide down my nose, I’m going to put on my slippers, roll up my Financial Times newspaper and shake it in your general direction.

So, you – yes, you there! Sit down and listen up because this is important. And don’t you dare delete this email. What I’m about to tell you is for your own good.

If you’re not taking full advantage of your 401(k) plan… well, shame on you. Those things aren’t free, you know. Your employer spends a lot of money administering the thing… for your benefit. So if you can’t be bothered to log in or fill in the forms to participate… you’re just a derned fool. Do you know how many starving children in Ethiopia would love to have a 401(k) plan like yours?

At my first job, we didn’t have 401(k) plans. I had to settle for the measly $2,000 I was allowed to contribute to an IRA at the time. Well, I maxed out that IRA… and I loved it! But what I wouldn’t have done for a proper 401(k) plan. So show some gratitude, would ya!

I know, I know. Money saved in a 401(k) plan is money you can’t spend on some new fangled gewgaw. But if you make decent money, a huge chunk of it is just going to end up going to the tax man.

Stop and use your head for a minute. If you’re in the 28% tax bracket – and if you’re still single (at your age!), you’re in the 28% bracket at an income of just $91,150 – then you effectively earn a 28% “return” on every dollar you contribute, as of day one. Would you rather that 28% go to the gummint? Yeah, that’s what I thought.

You can save $18,000 in a 401(k) plan in 2017. If you get started now, that’s $692 per paycheck. You can do that. Your grandmother used to feed a family of 7 growing kids on $692 per year and never complained. So stop your whining, log in to your plan or call your HR department now and get your contributions on track.

Don’t make me come over there and swat you with this newspaper.

And matching… don’t even get me started on matching. When I was your age, I was lucky if my cheapskate boss matched me even 2%. These days, I’ve seen companies match as much as 6% or 7%. If you’re too big of a sissy to contribute the full $18,000 in salary deferral to your 401(k) plan, then for crying out loud, at least contribute enough to get the full matching amount from your employer. If you don’t, you’re leaving money on the table. And I don’t know about you, son, but I don’t have a money tree in the backyard. When someone offers me free money, I take it.

Ok, I’m going to unroll the newspaper and push my glasses back into place for a moment. In all seriousness, this is the time of year to make changes to your 401(k) plan. If you’re not already maxing out your 401(k) plan for the full $18,000 (or $24,000 if you’re 50 or older) you should really make that a priority. Even if the stock market fails to return a single red cent, the tax savings and employer matching alone make it more than worthwhile.

I realize that not everyone can realistically defer $18,000 of their annual pay. If you’re young, recently started a family or have a non-working spouse, that might not be an attainable goal. But here are a few tips to get you closer.

If you got a raise to start the year, I strongly encourage you to allocate the difference to your 401(k) plan. You were already surviving at your previous pay rate; continue to live your current lifestyle a little longer, and push the salary increase into your retirement plan. Years from now, you’ll be happy you did.

If you generally get large tax refunds every year, consider chatting with your HR department about increasing the number of exemptions you claim. This will cause you to withhold less in taxes, which will boost your paychecks. You can then use higher effective pay to contribute more to your 401(k) plan.

And finally, consider living more modestly. If you rent an apartment, consider getting a roommate or downgrading to a cheaper apartment. Money spent on rent is effectively money wasted. It’s better to use that money to build your future.

Listen to me, son. It’s for your own good.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

Read full story · Comments { 2 }

How to Make a 9.4% Yield in Today’s Market

16649992368_db950a90a2_z

Earlier this month, I wrote that tax-free closed-end bond funds were ripe for the picking, and this is still the case today. In my income-driven newsletter Peak Income, we currently have three open recommendations yielding a fat, tax-free 6%.

But, as nice as tax-free income can be, the world of closed-end funds (“CEFs”) is much wider. There are CEFs that invest in taxable bonds… stocks… REITs… commodities… There are even CEFs that do nothing but invest in other CEFs.

So today, we’re going to take a look at some of these different fund types, and examine their pricing after the post-Trump bond yield spike. I covered muni funds in my last article, so let’s start with their taxable cousins.

That 90-Cent Dollar: Investment-Grade Taxable Bond Funds

The taxable bond fund space tends to be one of the largest and most actively traded, and there are good reasons for that. Because CEFs juice their returns with borrowed money, it makes sense to use lower-volatility investments like bonds. When the investments in question don’t fluctuate in value all that much, you can more safely add juice to the portfolio via leverage.

Bonds are also fairly illiquid and don’t trade all that regularly. So, by putting a portfolio of bonds into a CEF, you effectively convert illiquid assets into something that’s a lot easier and cheaper to buy and sell.

Taxable bond ETFs generally trade at a slight discount to NAV, but at times those discounts can get extremely wide, which is generally the best time to buy them. This is the time when you can get that elusive 90-cent dollar.

Right now, you can take your pick of investment-grade bond CEFs trading at discounts to NAV of 8%-10%, or even more, and sporting dividend yields well in excess of 6%.

In this bond market, that’s not half bad.

Fed Proof: Loan Funds

You’re probably aware of how the mortgage market works. The bank that made your mortgage loan probably didn’t hang onto it. It’s far more likely that they sold it to Fannie Mae or to some other institutional investor who, in turn, lumped it together with thousands of other loans and turned it into an investment product.

Bank loans often work the same way. Corporate loans are less standardized and harder to package as investments than mortgages, but it can be done. And there are CEFs that specialize in this field. I recommended one to my Peak Income readers this month and another to my Boom & Bust readers, and both are performing even better than expected!

And why might that be? I’ll give you a one-word answer: the Fed!

Bank loans generally have floating rates, so they’re considered to be “Fed proof.” An aggressive Fed means a higher payout, so these funds have avoided the beating that most of the rest of the income world has taken.

All the same, there are still bargains out there. You can put together a portfolio of loan CEFs trading at modest discounts to NAV and yielding 6% or more. Again, that’s not bad in this market.

Fantastic Bargains: Equity Funds

There are also plenty of stock CEFs to choose from, though these can look a lot different than the traditional stock mutual funds you’re accustomed to. Because CEFs tend to be income focused – and because they employ leverage – equity CEFs are inclined to concentrate in utilities, telecom and other low-volatility, high-yield sectors. But there are also specialty equity CEFs that focus on specific corners of the market, and that’s what get me excited.

Right now, Peak Income has two open recommendations in REIT funds and two more in MLP funds.

Real estate stocks have gotten absolutely hammered since the presidential election. REITs have come to be seen as a bond substitute, so rising bond yields (and falling bond prices) means rising REIT yields (and falling REIT prices). And this has created some fantastic bargains for us.

As an example, one of our REIT CEFs is trading at a 12% discount to its NAV… and the NAV itself has been depressed by the selloff in REITs. So, we have a fund trading at a deep discount to an already deeply discounted sector… and it’s yielding over 8% to boot.

MLP funds are also looking good right now, particularly because of the tax issues that can come with owning individual MLPs. Rather than the standard brokerage account 1099, unitholders of MLPs get a separate K1 tax form for every MLP they own… plus they can’t hold the MLPs in an IRA account without risking major tax complications.

But owning MLPs via a CEF eliminates these problems and allows for stress-free IRA ownership. Because of this, MLP CEFs often trade at a premium to NAV rather than the discount that you see in most of the rest of the CEF world. Yet today, many MLP CEFs actually trade at deep discounts, as investors dumped the sector a year ago and have yet to fully return.

To give a perfect example, one of my favorites MLPs – which happens to be a Peak Income holding – is currently trading at a 12% discount to NAV and is yielding 9.4%. And if that doesn’t pique your interest, then I’ll leave you with this to think on…

Do you expect the stock market, as elevated as it is, to return anything close to these numbers long-term?

I didn’t think so.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

Read full story · Comments { 0 }

Closed-End Bond Funds are Ripe for the Picking

canstockphoto0240992

You really can’t beat getting a dollar for 90 cents. Unless, of course, you manage to find one for 85 cents.

While deals like that really shouldn’t exist in the real world, they’re actually pretty common in the closed-end fund (CEF) space. And today, some of the best bargains are to be found among the safest and most conservative CEFs – those investing in tax free municipal bonds. Right now, you can put together a portfolio of funds offering an immediate 6% tax-free yield plus the opportunity for respectable capital appreciation.

Before I get into that, let’s do a quick review of what exactly CEFs are… and how they work.

CEFs are a type of mutual fund that trades on the NYSE stock exchange, so they look and feel a little like their cousins, exchange-traded funds (ETFs). With a traditional open-ended mutual fund, you invest by sending money directly to the management company, who in turn invests your cash in a portfolio of stocks or bonds. When you want your cash back, the managers sells of a small piece of the portfolio and sends you the money.

But with CEFs and ETFs, you have no direct transaction with the managers. They raise capital like a stock, via an initial public offering, and after that point they trade freely on the NYSE. So you buy from or sell to other investors rather than to the manager.

And here’s where it gets fun. ETFs can never deviate too far from their net asset values (NAV) because large institutional investors have the ability to arbitrage those profits away. For example, if an ETF’s share price were $20 per share but its underlying portfolio of stocks or bonds were worth $25 per share, the large institutional investor could buy a ton of ETF shares for $20, break the ETF apart, and sell the underlying investments for $25, making a risk-free profit of $5 per share.

With CEFs, that creation/redemption mechanism doesn’t exist, so share prices can – and often do – deviate wildly from their underling NAV. And on top of that, CEFs generally have the ability to borrow, and it’s pretty normal for them to be leveraged 20% – 40%. Funds with more conservative portfolios – such as those that hold muni bonds – tend to be leveraged a little heavier than those that hold more volatile securities like stocks.

So, let’s get back to those 90 cent dollars.

The election of Donald Trump has been great for the stock market so far. But it’s been an absolute death sentence for bonds… and particularly tax-free muni bonds. Bond yields were rising before the election, and they’ve shifted into overdrive in the weeks that have followed in the believe that Trump’s policies will stoke inflation and that his proposed tax cuts make the tax savings of muni bonds less attractive.

Well, rising bond yields mean falling bond prices. So, we’ve seen the NAVs of bond CEFs get absolutely clobbered, with many down by around 10%.

But remember, CEF prices often deviate from NAV… and that’s certainly been the case of late. Many bond CEFs have seen their share prices drop by as much as 15%-20%. CEF investors have done what they usually do… massively overreact to market moves. And as a result, they’ve set us up for a fantastic opportunity. If you believe, as I do, that bond yields have gone too far, too fast and that yields are likely to ease in the coming weeks, then we could be looking at an ideal trading setup.

Let’s play with the numbers. Today, you can put together a portfolio of muni bond CEFs yielding about 6% — tax free. If you’re in the 35% tax bracket, that amounts to a tax-equivalent yield of over 9%.

Now, let’s say that bond prices recover half of their losses in the coming months. I think it is likely they recover more than that, but we’ll be conservative. In that case, we’d be looking at something in the ballpark of 5% in underlying portfolio appreciation and probably a good deal more.

And here’s where the 90-cent dollar comes into play. When investors see that bond prices have stabilized, I expect them to pile into CEFs again. After all, where else are they going to find a safe 9% tax-equivalent yield in this market?

When they do, you should see that discount to NAV shrink or even disappear completely. That would add another 5%-10%.

So between the dividends, appreciation of the portfolios and a shrinking of the discount to NAV, I believe total returns in the ballpark of 20% over the next year are likely.

And if I’m wrong?

Well, I console myself by collecting that tax-free dividend check every month.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

Read full story · Comments { 0 }

Life’s Too Short to Fight in a Walmart Parking Lot at 3:00 in the Morning

black-friday

I like saving money. A lot.

In fact, I’m a cheapskate and actually take pride in my stinginess.

But you won’t see me fighting the crowds on Black Friday. Not going to happen. Life is far too short to explore the depths of human misery that I see on display the Friday after Thanksgiving every year. Lines forming the night before… elbows flying… fighting over boxes with fellow shoppers… the vulgarity of it all.

No, whatever money I would save isn’t worth the lifetime of bad karma I’d provoke fighting for a space in the mall parking lot.

Still, if you’re in the retail business, Black Friday matters because it gives you an indication of what to expect for the remainder of the holiday shopping season. Nearly a third of all retail sales happen in the month between Thanksgiving and Christmas. So if sales bomb on Black Friday, it can be a bad sign of things to come.

Interestingly, “Black Friday” is something of a changing concept these days. Stores desperate for a finite number of customer dollars have been opening earlier and earlier, and now Thanksgiving Thursday itself is a major shopping day. And of course, internet shopping has also taken some of the sense of urgency out of the whole endeavor.

Nevertheless, you’re going to be blasted with Black Friday news stories over the next several days. Black Friday sales growth has been somewhat sluggish since 2008, but if 2016 to date has been any indication, then I’d expect some surprises this year. With a new president promising to “make America great again,” consumers might – just might – open their wallets a little wider this year.

But I’d be very careful about drawing meaningful conclusions from any reports you read between now and Christmas. Because while Black Friday spending is a big deal for mall retailers, it’s overall effects on the economy are a lot smaller than you might think.

Much of what gets purchased during the holiday shopping season is fairly cheap and disposable. We’re talking about clothes, toys and consumer gadgets that tend to get used for a year or two and then tossed. But what really supercharges the economy are big-ticket items typically purchased on credit.

Think about it. When you buy something on credit, you’re essentially spending tomorrow’s money today. So big-ticket items are like gasoline on the fire.

Well, growth in this segment of the market has been tepid for a long time. Consider the following chart, which tracks orders of consumer durable goods. These are items expected to last three years or more, such as appliances, furniture, large electronics, etc. As you can see, growth was robust and steady throughout the 1990s, eased during the 2000-2002 slowdown, and then rocketed even higher until 2008. Of course, orders absolutely collapsed during the Great Recession that started in 2008. But the most interesting part is what happened after that.

fredgraph

Durable goods orders enjoyed a nice recovery once the economy came out of deepfreeze. But then in 2012, they flatlined. And they’ve been grinding sideways ever since.

What’s the story here?

Part of it is housing. The housing boom of the 2000s created massive demand for applicances. You have to have something to fill up that massive McMansion, after all. And as home buying has been sluggish since 2008, so has been buying of consumer durables.

But there’s a much bigger factor at work here, and that is demographics. The Baby Boomers are done buying durables. Sure, they might replace a broken refrigerator now and then. But few of them are furnishing a new house. In fact, many are actually downsizing and are giving away furniture they no longer need.

Meanwhile, the Millennials have been slow out of the gate to start families and buy homes of their own. And Millennials that are starting families tend to be more fiscally conservative than prior generations. For all the flack that Millennials take – and hey, a lot of it is deserved – their fiscal conservatism is actually pretty admirable.

The problem, as I wrote a few weeks ago in The Paradox of Thrift, is that what is good for the individual family – discipline and thrift – is bad for the economy as a whole, at least in the short term. So Millennial reluctance to spend like adults is still major headwind for the economy… and a reason that growth has been so lackluster for several years running. And we’re probably a good five years away from that materially changing.

So regardless what Black Friday looks like this year, try to keep a level head. We’re not likely to enjoy pre-2008 levels of growth any time soon.

And as for Black Friday itself… don’t debase yourself by fighting with the unwashed masses for that last bargain-basement blender on the shelf. That’s no way to live your life. Stay at home, eat some pumpkin pie and spend some time with your kids. Or at least relax and watch some football.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

Read full story · Comments { 0 }

My Housekeeper Has a Nicer Car Than Me

442683262_d8784d0ba7_z

My housekeeper has a nicer car than me.

Now, granted, 75% of America probably has a nicer car than me. I’m driving a car that, while only four years’ old, looks like it’s going on 20 because my kids have utterly destroyed it. The entire backseat looks like a Jackson Pollack painting of assorted stains and magic marker doodling.

On the flip side, the car is paid for so I refuse to pay a single nickel to get it fixed up until my kids are older. I don’t even like paying to have it cleaned because I know that it will be filthy again by the end of the day.

So I wouldn’t necessarily find it odd that my housekeeper has a nicer car than me… except for the fact that she drives a black Mercedes Benz (the only color a Mercedes Benz should ever be!).

Now, I’ll never fault a person for having good taste in cars. I rather like Mercedes… and I might buy one for myself once my kids are at an age where bodily excretions are no longer likely to soil the upholstery.

But I’ve done the back-of-the-envelope math, and I also know that the monthly payment on that car consumes a huge chunk of her income. It’s phenomenally bad for her personal finances to own a Benz… but it’s great for the dealership that sold it.

And that brings me to one of the more interesting concepts in economics:

The paradox of thrift.

In a nutshell, it’s good for an individual family to be frugal. You have more savings to tide you over when times get tough, and you build wealth for the future. But if everyone gets frugal at the same time, the economy grinds to a halt and there’s less wealth for everyone.

(For the wonks out there, this is an extension of the fallacy of composition, the error of assuming that what is good for the individual must also be good for the group.)

I save a little over a third of my after-tax income. That’s fantastic for me and my family. We’re a lot less likely to get booted out of our house or be denied credit if or when we need it, and I’m able to sleep a lot better at night.

But if everyone did what I did, our economy would probably be back to the Stone Age. Every cable company would be out of business (I cut the cord years ago). And there wouldn’t be a lot of people shopping at the Mercedes dealership either.

The problem is, there are a lot more people like me these days, either by choice or necessity, which is a big reason why the economy has been stalled out in a slow-growth funk for the past decade.

Roughly 10,000 baby boomers enter retirement age with every passing day, and most of them aren’t even remotely close to prepared for it.

According to the Federal Reserve’s latest Survey of Consumer Finances, the median American household, with the head of the household aged 65-74, has a net worth of only $232,000, which would include home equity. (Interestingly, the same survey reported that only 53% of American households save any money at all; the rest apparently live paycheck to paycheck.)

$232,000 isn’t going to get you very far in retirement, as Rodney discussed in the October issue of Boom & Bust (he also offered some solutions to boost your personal savings, and I added an income gem to the model portfolio).

Assuming the standard 4% annual withdrawal, you’d be looking at an annual income of $9,280. The boomers know this, which goes a long way to explaining why their spending isn’t what it used to be.

But their children, the millennials, aren’t exactly big spenders, either. Entering their careers with mountains of student debt, they’re marrying and buying cars and homes much later in life than the generations that came before them.

Again, all of these people are doing the right things on an individual level. It makes sense to pay down debts and to save for retirement. But collectively, this tightfistedness throws a massive wet blanket over the economy… which is why we’ve had years of aggressive monetary policy by the Fed, and political movements to raise the minimum wage and to forgive student loan debt.

Now, I’m not here to bash anyone’s pet political issue. But let’s just say I wouldn’t expect any policy move to have much of an impact on consumer growth. Raising the minimum wage by a couple of bucks or forgiving some portion of student debt isn’t going to compensate for the retirement of 10,000 people per day.

So we need to set realistic expectations.

The economy has grown at about 1.8% per year since 2009. That’s probably about what we should expect for the next several years as well, and that’s assuming we have no major crises (on which point, I wouldn’t hold my breath if I were you ).

So back to that whole “paradox of thrift” thing… I recommend you stay frugal and focus on debt reduction over the next few years.

It’s bad for the rest of us… but it’s a lot better for you.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

Read full story · Comments { 0 }