The American People Are Keeping This Economy Down

Economies run on consumers and everything they put into it. Sure, we can blame this crisis on banks and the government and all kinds of things. In the end, it is the American people who are keeping this economy down. Pessimism is what is ailing this economy. The government has started laying down the pathway to recovery. However, we have refused to walk down this pathway and have remained in hiding. We are constantly complaining and always pick out something we don't like about government spending and regulation. At this point it isn't us who have a say. We elected leaders to have that say for us. We need to get off this sense of pessimism that this financial crisis and recession will not end soon. The more we complain and refuse to do our duty, the longer we will have to be frugal wondering how much longer we have until our job is taken away.

The consumer confidence index is at historic low. People are not spending money and not wanting to do their part. Take these low rates and refinance your home. Take the stimulus and actually spend it. The sooner we get out of this recession, the sooner our investments go up. The financial markets will not recover if we keep moving money around in it. It all starts with the economy and the American people. At this point we can only help ourselves. Don't be afraid to spend that cash money and do your part.

Bonds: Making the Grade

Fixed income securities are one of the best places to be right now. Why? Because this is one of the safer places to make money, even if it barely outpaces inflation. Every corporate bond has a grade given out by Standard & Poor's and Moody's among others. So when investing in a corporate bond, you should probably consider looking at the grade along with the yield and the debt this company has run into. These grades are separated into two groups: investment grade and non-investment grade. Investment grade bonds are given to companies who have a strong balance sheet and income statement who have the capacity to pay back bondholders. They are the most reliable, stable companies with the highest quality bonds. They are given a grade from AAA to BBB. Non-investment grade bonds, also called junk bonds, are those companies who may be smaller companies with a short track record and are heavily invested in debt or it may be companies who are losing money. These companies are also usually sensitive to economic changes. They are given a grade from BB down to D. C means the company is close to bankruptcy. D means it has defaulted on its obligations. The lower the grade, the higher the yield. Companies who need the money the most will ultimately pay a higher yield. Investors also demand a risk premium for the level of risk they are taking on investing in a weak company.

While in a decent economic environment, it is perfectly acceptable to chase higher yielding bonds with a lower rating. As long as the economy is doing well and people are buying their product, the company should be able to pay back bondholders, even if it is a declining company. So why not go for the higher risk, higher reward. When times are good you can afford to be speculative. However, in times like this it is only the highest graded companies that you should invest in. These are companies that are large, stable, and have dominated their industry for years. These won't yield as much as junk bonds, but at least you will be making some money. We all have seen how reliable the stock market has been lately.

I want to warn you about investing in Treasuries. A lot of international investors and even countries are pouring money into the US government in exchange for bonds. While it is good that these countries are investing in the US, a word of caution. With all the money the government is spending, will they really have enough to pay back these bondholders? It will take years to get back money from the financial institutions we are supporting right now. Let's say things get worse in other countries and they want their money back. Where will we go to give them their money? Taxpayers? We can only print so much money. Right? Could we consider this to be the next bubble? There are only so many places to look to invest in and feel safe about. You should always examine even the most reliable of places to make sure you will be making cash money.

What Makes and Breaks Healthcare

Healthcare is by far the best performing sector and has been for quite a while now. It is important to understand the growth spots in the sector and the risks involved. The best industries to invest in for growth are the pharmaceuticals and biotech industries. These contain the companies that produce new drugs for different ailments. With the elderly as the single largest age group in America right now, healthcare will be strong for years to come. The companies that can come out with the best drugs to help these retirees, will be the companies with huge growth potential.

With these drugs and growth prospects come risks. Coming out with a new drug is a long and tedious process. It all begins with research. Once the company researches current drugs, diseases, and the effects, it will begin testing on animals. If all goes well, the company will submit an application to the FDA to begin human testing. If accepted, the company enters Phase I testing. Phase I involves testing on a handful of healthy individuals. It observes side effects and the overall life of the drug in the body. If Phase I subjects don't suffer any adverse reactions, Phase II research will be approved. Phase II involves only a couple hundred subjects who have a certain ailment or condition. This further researches the side effects and any changes. If these individuals do not suffer any adverse reactions, Phase III will be approved for testing. Phase III involves a few thousand subjects. This is where testing for proper dosage and testing with other drugs takes place. If the drug is effective and safe, the FDA will then put up the drug for marketing approval. If accepted, the drug will then be put on the market.

So where are the risks at? With any highly anticipated drug, there is a risk of approval. If the drug does not pass one of the clinical trials and is rejected by the FDA, the stock price will drop considerably. Another risk is competition. One has to look at any competing drugs or drugs that may arise to compete against said drug. A third risk would be patent expiration. Once a patent expires and that drug is sold OTC, growth and revenue will slow for that drug. So when looking at a pharmaceutical or biotech firm, you have to look at patent expirations, where a drug is at in the clinical trials, and any competition already on the market. If it passes the risk checks, you should probably invest in that company. It just might make you some cash money.

Why We Should NOT Call This the Bottom

The Dow ended the week hitting a 10 year low during Friday's session. Because it hit a 10 year low does not mean it will not go lower. There are many reasons for it to go lower. Until the government comes out with specifics regarding how to reform the financial system, the market will be volatile and uneasy and will pursue the 7000 point mark. Lets think back to the reasons the market is down this far. First, the bursting of the housing bubble and adjustable mortgage rates ultimately ravaged household wealth. Second, the banks are in waist deep debt because consumers can't pay their mortgage or even credit cards. Third, no one is willing to lend and credit has been put on hold. Finally, the economy gets pummeled when no one has money to buy anything.

To be bullish on the economy, financial markets, or anything else, you first have to go back through the reasons we are in this mishap. The government has put out a rescue search for the economy, but every time they find a clue they have to tell everybody about it and then debate on how it helps out the search. We don't have time for this. They need a fast, specific plan on how to use that clue and go on. They are wasting time. Until we get specifics, there will be no bear market or even a recovering economy. If you evaluate the previous mentioned problems, are we even close to fixing them? No. All we have is speculation on how it can be fixed. This market is a death trap until these problems get solved. Keep reevaluating these problems as they eventually should be fixed. However, it will be awhile before this happens. At any rate, it takes time for a bottom to appear in the market. It does not happen overnight. Be patient and wait for the signs before committing to the upswing.

Nationalize Banks and We Will Recover Faster

The Dow has just hit a 10 year low. Why? Fear that the government will nationalize banks. This seems ridiculous to me. We have already given our banks a chance. They got too greedy and took on too much debt. Now we are all paying the price. They had their chances and messed up. Since the govenment has graciously given them our money, why not let the govenmnet have a chance to run it? I mean they have already made banks who accepted bailout money cut dividends. They are also trying to cut pay and bonuses for executives. Seems like they already have, not only a foot thru the door, but most of their body.

Nationalization of banks seems socialistic and scary to most people. Socialism in its purest form should work. However, socialism has never worked and will never work because it is never practiced in its purest form. Why can't the government buy out the shareholders, adjust assets, take care of debt, replace management, and then sell it back to the market? They would have direct control over this crisis and could do a lot more than management is willing to do now at these banks. Taxpayers are running out of money to help banks out. We need to stop taking half measures and just throw the whole battalion at this thing before we end up wasting a decade like Japan did in the 90s. The faster we get things turned around with banks, the faster the rest of the economy and this nation can get turned back around. We need to stop trying to fix everything at once and focus on just one thing at a time. Let's not waste a decade trying to make everybody happy.

Interest Rates and How They Affect You

Interest rates are something often looked forward to in the market. Will the Fed raise rates or pause? Will they surprise and lower? Right now the discount rate is at an astonishing low of 0 - .25%. Low interest rates make it easier for banks to borrow money and lend to consumers. This also tends to spur on inflation. Lucky for us right now, inflation is too low to be worried about. However, if inflation suddenly rose, interest rates might also have to be raised to counter it. Since interest rates stimulate lending, people can buy more goods thus increasing demand. When demand increases, unemployment lowers and GDP increases. This is all cyclical. Right now we are experiencing a reverse effect of this trend.

What does low interest rates mean for us right now? Low interest rates means that it is easier for us to get loans from a bank at a lower rate. Mortgage rates and credit card rates are tied to these interest rates in terms of borrowing. Of course the rate you get is also tied to how risky you may be in terms of credit history and such. Low interest rates also means that you are getting less interest in money market funds and savings accounts. The stock market usually performs well with lower rates. You should probably try to focus on getting your credit card rates adjusted a few notches and maybe even try to refinance that mortgage or car loan before rates go back up. There is always something to take advantage of, you just have to find it.

Decreasing Risk and Maximizing Returns

To be a premier investor, you must learn how to decrease risk and maximize your return. Lets forget about diversification and options. Let me introduce stop loss and limit orders. Say you want to buy Apple at $90 a share. You think it will pull back enough that you can capitalize on a few extra points. While you are at work, you don't know where Apple is at or how close it is getting to the $90 you want to buy at. Limit orders allow you the flexibility of putting in a trade and have it process when you want it to. If I put in a limit order to buy Apple at $90, the order will process as soon as it hits $90. If it doesn't hit on Monday, the order will stay open on Tuesday and for as long as you want until you cancel it. This allows you to let the stock pull back and then order even if you can't be beside the computer when it does.

Stop loss orders help you to sell when a stock pulls back from where you bought it. If you had bought Apple at $90 on that limit order and decided to hedge against any downside, you could incorporate a stop loss. If you set that stop loss at $5 or 5% (can put in either dollar amount or percentage), your Apple shares would be sold if Apple hit $85. This keeps you from hanging on to the stock any longer than you have to and prevents losses from getting too deep. A trailing stop loss would be more recommendable. This keeps the stop loss trailing the stock as it rises. The Apple shares you bought at $90 go to $95. Now your trailing stop loss goes from $85 to $90. So if your shares then fall to $90, it sells.

Using both the stop loss and trailing stop loss maximizes potential. I would buy Apple and then put a stop loss on it to bail me out if the position turns sour. If Apple did indeed go up, I would cancel the stop loss and put in the trailing stop loss. This helps you to retain more profits. We all see a stock go up and then have a huge fall on earnings, yet still keep it thinking it will come back around. Using these stop loss orders, we cash out in the middle of that fall so we can retain some of our profit and keep from getting hurt. These are just a few ways to buy low and sell as close to a high as possible. At any rate it keeps you hedged against any risk of losing massive amounts of money. Too many people fall into the trap of buying more and more as it the stock price goes down or just keeping it while thinking it will come back. Remember, if a stock falls 50% it then has to return 100% to break even.

Invest Your Own Way

Everyone has heard the old versions of "long term investing always beats out the short term" and "value investing returns more than growth." Well I beg to differ. I was doing some of my taxes this afternoon (I actually liked it...maybe a career choice?)and I was putting in all the investments I had done over the past year. I started looking and noticed most of my investments had lasted an average of about 3 months. I had owned very few stocks for more than a year. Then I started comparing the returns. It is nice to be able to look back and see what you invested in after you have been able to view the market as a whole over that period. You get to see where your research was spot on and where you couldn't have been any farther away. My best returns were when I held a stock for a maximum of 3 months. The most fun I have is when I put money into a momentum stock and try to time the market. This is also the worst way to do things and isn't supposed to work at all if you read any books on the market. Experience also trumps book smarts so we are back at the starting line. The most thrilling moment was when I bought Merrill Lynch after Bank of America announced they were going to acquire MER. I kept it for 3 days and made $750. Not too shabby for a teenager having taken no finance courses at the time and had only the experience of watching CNBC everyday.

The better known investors like Warren Buffett and Peter Lynch would have bought value stocks and kept them for several years. At any rate, no one can tell you what type of stocks to buy and how long to hold onto them. If there was a set way of doing these things, everyone would be making money all the time. It just depends on you. Some people like to buy stocks and let them sit there for a while. Other people, not unlike myself, prefer to buy into a rally and sell after the stock reaches a certain point or the momentum seems to be unreal and is about to burst. You can make money regardless. The market is more like a game to me. I prefer to take riskier, yet educated, moves to make money. Of course I could lose a lot at any one point. Remember when you sucked at golf? Remember that one shot that brought you back every week? One stock could keep you coming back every week. Try playing the market the way you want to. Not necessarily how you are told to play it, but the way that would make you come back time after time. Put your kid's Christmas money in a stock and give it a try. If you win, do it again and take your kids to the beach. If you lose, that way obviously wasn't right for you and your kids probably deserved coal anyway.

Why Inflation is the Benchmark to Beat

I know inflation has been depressed recently. Still, inflation will return and will knock down the buying power of our cash over time. So why have I determined that inflation is the benchmark to beat? Lets say that your current annual expenses (bills, food, gas, etc) are $20,000. If inflation rises at an annual rate of 3%, your expenses will turn into $40,000 after 25 years of 3% inflation. Do you see how much inflation can cut on the purchasing power of the dollar? If you hid $10,000 under your mattress and went back after 10 years to get it, how much would it be worth? Given an annual 3% rate of inflation, that $10,000 has become about $7,500. Over time, to keep your money at the same purchasing power, you have to beat inflation.

Currently, inflation is beating stocks, bonds, and most everything in between. So how do you keep up with inflation? By buying hard assets. Hard assets are things like buildings and commodities. I would suggest exploring the realm of commodities and investing in metals. This will not only, theoretically, appreciate over time to match inflation, it will also hedge against any dollar declines. The best way to get into precious metals is to buy an ETF or another fund that invests solely in metals. These prices rise and fall over time, but this is where you want to go for safety from the market.

For the common man, the hard asset of choice is the cow. Think about it. A cow has everything you need: milk and meat. I like to eat cereal...a lot of cereal. So what can I do with my new cow? Take the bowl outside, give that utter a squeeze, and BAM! I now have fresh milk for my fresh cereal. Now you have saved money on buying milk, saved money on the gas to get milk, and saved the opportunity costs to get that milk. I have seen a lot of dogs hobbling around on three legs. Why can't a cow do the same? You want some meat? Take a leg! Now you have all the necessities. By purchasing a cow, you have not lost any money like you would have over the last 6 months. You have actually saved money by having your own milk, meat, and company that doesn't have a whole lot to say.

Which Performed Better Last Year: US or Foreign Markets?

Foreign stocks, the place where everyone wants to go for growth. Emerging markets are supposed to be the next big thing. The idea is to invest in the countries with lots of people who are hungry for new technology. The US is in too bad of shape right now to invest in. Their financial crisis has even weakened the fixed income markets. Now are you ready for the stats?

In 2008, the S&P 500 fell 34%. Germany and France fell 38%, Japan 41%, Brazil 42%, India 52%, Russia 58%, and China 67%. All these markets have dropped even lower since the new year. However, numbers do not lie. The US still outperformed the world. We were essentially the root of the financial crisis and probably the global recession, yet we end up outperforming everyone else. Now why did these other markets fall so much?

I think that as investors, we were hyped up on "growth" potential in emerging and global markets. We saw a lot of countries, specifically those in Asia, with a huge population and little technology or infrastructure. US companies took advantage and started reaping in profits. I don't think the rise in these stock markets were exactly because of growth potential and the opportunities companies brought to these markets. I think the rise in commodities is what really did it. Many of these countries are rich in natural resources and rode the spike in these commodity prices. The main companies on their exchanges were deriving profits from these resources. When commodities plummeted amid a global recession, so did these companies' earnings and essentially their market value.

Foreign markets are cheap, maybe even cheaper than the US. I would wait to start investing in these markets for a while. Why? Well for one, commodity prices have to start rising again before foreign companies can raise earnings guidance. Second, the US is going to have to rebound and start the inflow of cash into foreign markets before they start to rebound. Finally, the US is the safe haven for foreign investors. Foreign investors have been buying US Treasuries to hide from their collapse. Until they start investing in themselves again, how can we throw our own trust, and money, in them?

Oh Those Unknowing Borrowers

This post is going to be sort of a sequel to the previous. My friend and I made a loan calculator earlier today and decided to explore the financial background when buying a house. It just blew my mind when I saw all the incurred interest on conservative pricing. Lets wander back to 2006 when the housing boom was at its peak. You see a nice house in a nice neighborhood in the San Fernando Valley. It's going at $800,000. You get a 30 year, 7% fixed mortgage rate. You put a 20% downpayment on it. Assuming you met your bill each month and never paid more than you had to, at the end of 30 years you would have paid nearly $900,000 in total interest. Over 30 years, you would have paid about $1.7 million for a $800,000 house. That is around $4250 a month. Quite a bill to be held accountable every month for 30 years!

Now lets take this $800,000 dollar house and have a person with a lower credit score apply for a loan. Looking at the higher interest they would have to pay would no doubt catch Freddie Mac's eye. Sure I would love that person to pay me a million dollars in interest spread out over 30 years. This is where the greed set in. People like Washington Mutual lent these kids adjustable loans. They had the luxury of paying very little interest for a set period of time. They thought the idea was amazing. Now they could afford this house that was out of their league. Once that adjustable rate kicks in and that interest jumps to 9.5%, they can't seem to find money to pay for their house anymore.

This started happening all over the place. Short story, defaulted loans and billion dollar write offs have pushed us to a financial crisis never seen before. When I said in the previous post that debt should be the first thing paid off before buying that new car or investing in the market, I think I was onto something. If you pay off the debt and save some of that $900,000 in interest payments, I guarantee you will have enough money in the long run to buy an even nicer car. This does not just apply to mortage payments. Even credit card payments can rack up the interest. Be smart about where your money goes and in the long run, you really can be better off than the Jones'.

Now Is the Time to Invest in Your Own Debt

Investing isn't always about buying stocks or bonds or putting money into a startup company. Sometimes you have to invest in yourself and consequently, your debt. Think about it. Why are we in the middle of a financial crisis? Sure we can point fingers all day long at banks and mortgage federations, but is it all their fault? Most of the evidence says yes. In reality, finance is in most of what we do: setting household budgets, finding a loan on that perfect house, upgrading to a new car. Experience is the ultimate learning tool, but how much different would the economy be if we all had just read that one book on personal finance?

Nothing is for free. A lot of people don't understand that statement. Buying a house with a abnormally low rate for the first 6 to 12 months sounds appealing. However, no one really seemed to look further than that. After that first 6 to 12 months, the adjusted rate kicked in. Now can we really afford that mortgage? Buying a car with a low down payment and 0.9% APR financing. Sure I would like to spread that payment out. But paying a low amount for a relatively expensive would take years. Just imagine all the interest on top of that. Charging things on a credit card. I don't have enough money to pay all of that right now. Let me pay half now and I can make it up next month. How many people really made it up. Now they are getting hit with ridiculously high interest.

These seem like trivial things but look at how common they have become. Now everyone wants to extend those payments a little further once they have the money. Your income needs to pay these statements off ASAP! Not only are people defaulting on all kinds of loans, they are incurring abnormally high interest rates because they have become a risky customer. The market is not the brightest place to invest right now. So why not take that money and pay off your debt. I promise the money you save will be higher than any the common investor could make in the market any time soon.

Has Bailout Money Been Given Out to Those Who Need It or Just Want It?

Goldman Sachs(GS) and Morgan Stanley(MS) are the only two brokerage houses left. Both have been able to keep their balance sheets somewhat in check and are the only ones left standing. While neither one did a whole lot of lending, was either really in as much trouble as those used to surviving solely on lending? Both were given bailout money but now say they can possibly pay it back as soon as the end of this year. Now, in an economy as tight as this, how can they pay that money back and still survive? Few IPOs are coming out, and investing in a market as volatile as this can only make you so much. I mean lets be realistic here. Keeping all your money under your mattress will return you more than you could investing. So how are they going to make money to stand on their own.

If Morgan and Golman really don't need this bailout money, then why accept it? First, that sent a message to the market that even the biggest and best were having trouble and the market prices dropped precipitously. Second, not only will they have to pay back the principal amount but also all the interest accrued over that time period. Third and most importantly, our taxes could have been spent on something to help the economy, not a bank that doesn't even need it. If they really did not need the money, I am ashamed of them. However, if we think investing wise, maybe these two banks are the best and are worth looking at again. If they don't need the bailout, maybe they are doing something right.

What? The Government Has It Right This Time?

The latest controversy surrounding executive pay has the government taking charge of what has become theirs. By injecting cash directly into many banks and buying up assets of others, the government has basically taken a firm hold over these companies. They now own most and will be receiving payments from these companies for years to come. Whose to say they can't restrict executive pay?

The government has made a right choice but restricting pay and bonuses for companies that have taken part in the bailout. Sure bonuses are nice when you have helped your company to higher net income and earnings growth. But with so many companies asking the government for help and still paying out those million dollar bonuses, something just isn't right. You are telling me, "Yes, I would like taxpayers money, not just to deal with debt but to pay our management more money than they deserve." Not one Wall Street firm deserves to hand out bonuses. It was the desire to make money, although not by the best means, that got us into this position. Sure some companies are cyclical and are down for a reason, but not every company is down because of the economy. It is about time the government started acting as a regulator. This needs to continue if we wish to get out of this mess anytime soon.

If You Are In It For Dividends, Think Again

Once considered a haven from the downward spiraling market, dividends aren't looking too hot. Many banks had to cut their dividends to a penny to comply to government bailout regulations. A lot of other companies had to cut dividends to deal with bad debt and other expenses they have been racking up while losing sales. If you are an investor who is hoping to just stay even throught the next several months by investing in high yielding stocks, think again. Do your research. Check out their financial statements. Make sure their dividend will stay at a higher yield and won't fall back like so many others. Look at high yielding healthcare stocks. They are the safest bet in their financial statements as well as their stock price. There are no risk free anything anymore until we get back on our feet and work on our fiscal policy. Everything you want to invest in has its pros and cons. Just be wise.