Sushi Money

“Out with the old, in with the new” as the saying goes.  Timely words for welcoming a new year that will hopefully be a far cry from last year, at least financially speaking.    For many of us the new year also means a new commitment to getting rid of debt and increasing savings.  In short, through circumstance or necessity, many of our priorities have changed.  

Jim Citrin looks at Getting Back to Basics in 2009, describing how changing priorities have affected business perspectives:

“The era of unchecked consumerism and financial excess had the insidious effect of devaluing everything. Why save money when you could borrow to get whatever you wanted? Why hang on to clothes and appliances when you could just go to the store and buy new ones? Why make structural improvements to your business operations or deepen customer relationships when you could push more stuff to get the growth that Wall Street demanded?”

“In one fell swoop, these attitudes have ground to a halt. They’ve been replaced by millions of healthier conversations in conference rooms and around kitchen tables about how to save, conserve, and prioritize.”

The article looks for a silver lining, examining how we can reconnect and make the best of the difficult times we live in.  I appreciate his views because it makes the simple point that we have a choice with how to respond to the current economic environment.  Sit around and wring our hands?  No. We need to get up and do something about our situation, and work to improve our lives and fortunes.

Admittedly the really tough part of the economic challenge we face is how far it has reached into people’s lives.  Between housing, the stock market and the credit crunch, the financial challenges have touched every level of the socio-economic spectrum.   For those who have lived too long on debt and excessive borrowing, the money faucet has been turned off.  Now they’re struggling to save, get by and get rid of that debt.  Others are struggling with layoffs and trying to find a job.  And even for those who saved and invested diligently through the years, the stock market’s downward spiral has demoralized investors into wondering why they ever invested in the first place.

A lot of frugal and industrious folks today are wondering if they should have just spent more of their money when they had it, instead of scrimping and saving through the years only to watch it disappear in a few months.

Most of all it’s just hard to feel confident about our choices right now.  And we’re shocked when reading about financial scandals and corruption.  It’s no surprise that many people have moved their assets to cash in CDs and savings accounts, deciding that something is better than nothing.   Nothing wrong with that, especially if you need the money in 3-5 years, or you are already retired and may need that money for healthcare or living expenses.   But the rate of return on those accounts is really low, and most planners will still target a growth or dividend component in the overall allocation mix if possible. 

Dividends are also king right now for investors, and there’s nothing like getting paid to hold a good company in stock.  Fixed income investments also may offer some of the best opportunities in the next few years.  Cash-wise I’m at least putting some money into a good quality high-yield savings account such as with ING, and money market accounts such as Vanguard Prime.  If you want treasuries (who doesn’t!?), Vanguard also has several treasury mutual funds.

And I’m certainly still investing in mutual funds and selective stocks, taking advantage of low prices and increasing savings and investments where I can afford it.  Is that a gamble?  Not for me, since I don’t plan to need the money for 10+ years.  If you feel like it’s gambling, then that should tell you something about your risk tolerance, and you should look for a more conservative asset mix. 

But if you’ve got decades until retirement, there’s no better time than right now to accumulate investment shares.  As long as your financial life is in order of course.  I call it my Big Three, and they remain the central focus of our financial lives:  Cut Spending, Pay down Debt, and Increase Savings.  After the first two are under control, then I think about investing.

If you’re feeling bad about your mutual fund losses, most of us can be glad we didn’t join the Dubious 60% Club, and that’s not 60% up…  Bill Miller was a high-flyer for about 15 years as a leading mutual fund manager, but for the past few years- well mostly last year- he has crashed and burned.   It just goes to show that anyone can make poor choices and lose money in the market.  Does that mean he’s sulking in some corner office, licking his wounds?  Absolutely not.  He’s still in their fighting and even managed to beat the S&P 500 for December 2008.   

As we ring in the new year, there’s a host of excellent pracitical advice out there.  Here’s a rundown on some of my favorites:

• The Wall Street Journal offers an eclectic mix of insight for How to Fix Your Life in 2009.  “Exuberance and excess have made way for prudence and pragmatism. Frugality is, once again, a virtue. To help you settle into this strange new world, our reporters have dug deep into their beats…”

• SmartMoney.com shows us 7 Ways to Save in 2009.   “Reducing monthly expenses and saving more money is the must-make resolution for 2009.”

• Kiplinger.com offers a classic article from a few years go reviewing 8 Keys to Financial Security. “Pay yourself first. Protect your loved ones. Borrow sparingly. And don’t go for the home run…”  What a great, timeless article.

• Laura Rowley takes an heady look at the psychology of Understanding Money Behavior in a Financial Crisis.  “One of the keys to surviving the economic crisis, at least from a psychological perspective, is recognizing what you can and can’t control. And not doing destructive things while you’re powerless.”

I wish you a healthy and prosperous new year for 2009.  Sushi Money is two years old this month, and it’s been a grand experiment in the personal finance blogging world.  I don’t how long I’ll continue to write here, and I may look for a different financial niche.  But its been a lot of fun.  One of my goals includes are greater focus on philanthropy.  I’m in little position personally to make significant philantrophic gifts, but I am very thankful for the time and resources I do have available. Maybe there’s some kind of venture in the making.  

In times like these it’s important not to forget those who are struggling.  The economy will gain traction slowly, but there will be many who are left behind.  As we strengthen our own financial lives, it seems a good time to try and help a few others along the way.

What can you say after weeks of stock market losses?  It’s sad, awful, ridiculous and downright scary for a lot of folks.  And if you’re like most people these days, you’ve just stopped looking at it.  Why bother, right?  Maybe you’re a long term investor, and nothing that happens now really matters over the short term anyway.  Or maybe the words “long term investor” don’t mean very much right now.  Or maybe after feeling stressed from watching days of hundred point losses, it just doesn’t make sense anymore.

So is there anything we can really do about it?   Not unless it bothers you so much that you can’t sleep and your life’s a wreck.  Most people in that situation have already sold out long ago.   Me?  I’m just watching in rapt amazement at the carnage wrought by institutional selling.  Hedge funds, private investors, mutual fund redemptions, tax loss selling- all are putting relentless downward pressure on stocks, dropping indexes  to levels not seen in over 5-10 years.

“The Standard & Poor’s 500 index fell 6.7 percent to its lowest close since April 1997. The Dow Jones industrial average, meanwhile, fell 445 points, or 5.6 percent, to its lowest close since March 2003. The decline brings the Dow’s two-day drop to 873 points, or 10.6 percent, its worst two-day percentage loss since October 1987.”

I don’t know what the market or the economy is going to do in the weeks and months ahead.  If I had some extra cash laying around that I didn’t need for 5 years or more, there are some incredibly cheap stocks out there.  But we are where we are… and like most of you I’m just along for the ride at this point.

So… what did I do today?  I went shopping.  A local grocery chain had a great sale going on and I picked up a 20 pound turkey at .67 cents a pound- almost half price.   Then I filled up the car.  Gas was around $1.69 per gallon.  Is that amazing or what?  And wouldn’t it be nice if gas prices stayed low for a while?   There’ll be a lot of drivers on the road next summer if gas prices stay low- especially with airline fees through the roof.   And since we’re in a cash crunch and consumers have cut back on spending, the stores are also offering all kinds of deals right now.

I’m not advocating spending money you don’t have, or investing in the market in stocks you don’t know.  But if you’re in the market for a house or a car or you like a particular company as an investment, is there a better time to buy?  It’s a buyer’s market out there folks.  How long it stays that way is the real question.

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I took a week off to catch up on, and reflect on, a few things.  Those of us who didn’t vote for President-elect Obama may be feeling a little out of touch these days.  Generally I look at life in a hopeful and constructive manner, living each day in a positive manner. Most of us do, and I don’t think that’s going to change in the months and years ahead.

But I think there are different considerations now, especially if you don’t agree with certain actions or the economic philosophy of our political leadership.  If we’re not careful we may find ourselves caught up in a negative cycle of news and frustration.  Whatever direction the nation takes politically however, I have to believe that the leadership, by and large, has the best interests of the American people at heart.   And even if I don’t want to pay attention, we must stay involved and aware of the changes that will take place ’cause it’s going to affect us most in our wallets. 

The stock market has been wavering dramatically in recent weeks, even ringing up the worst post-election loss in history.  Say what you will, a lot of folks are realigning their portfolios based on perceived (and real) threats of increased taxation at both the personal and the corporate levels.  We have even seen that based on fears of an Obama administration, firearm and ammunition sales have skyrocketed as never before in history.  And why not?  President-elect Obama may not “take our guns away,” but the Democrats in Congress can certainly make it difficult, and very expensive, to purchase ammunition. 

So will potential tax hikes and increases to capital gains and income taxes affect the stock market?  Absolutely.  But hopefully not right away.  Yet the real significance for tax policy at the individual level is the affect it has over the long term on wealth creation and investment. It may not affect the average investor now, or in two years.  But over a working lifetime it’s a huge impact. If there’s one thing President-elect Obama can do to strengthen the nation economically, and the investment climate, it would be to not raise taxes on anyone, anywhere.  Heck, we’re still facing too many uphill financial challenges, so I’m sure the Democrats are smart enough to wait for a while.  Well, I’m not sure but I sure hope so.   

“Speaking in terms of individual taxpayers’ bills, that’s good news for high-income earners. “I don’t think there are going to be any tax increases in the next year or so,” said Len Berman, director of the Tax Policy Center.” 

But you watch- the Democrats and Obama will “cut taxes” in a few months and shout from the rooftops that they’re giving Americans a tax cut for the middle class.  It will be there somehow, even if most of us don’t get it or notice it.  Yet Alan Reynolds from the CATO institute thinks taxpayers have short memories. 

“Armed with that lucrative blank slate as the looming new baseline, a Democratic president and Congress could magnanimously agree to preserve only the fiscally wasteful “feel good” aspects of the original Bush bill–the hugely expensive 10% tax rate and child credit, for example–while letting more than just the top two tax rates go back up, and lifting the estate tax rate, too. All in the name of fiscal responsibility, of course.”

“Higher tax rates always fail to raise the revenue their proponents are counting on. When that happens, we know where Democrats will look to raise more. And that is to reach even deeper into the pockets of any remaining profitable businesses or (even rarer) successful investors.”

“For those looking beyond one year, the biggest risk to both individual and corporate taxpayers is not that the new president will make good on his promises to raise a few tax rates and close a few loopholes. The biggest risk is that he will make good on his grander promises to enact all those tax-based entitlement programs disguised as “tax credits.”

“If millions more voters become accustomed to paying nothing for government (not even for their own Social Security benefits), and instead to receiving a bundle of Treasury checks, it will become almost as difficult for any future president to end those programs as it will be for taxpayers to pay for them.”

And how are we going to pay for those programs over time?!  There’s only one way… those who add spending programs must get the money from somewhere.  That somewhere is the U.S. taxpayer.

Certainly those of us in the middle class may see a tax cut over the next couple of years, at least if you don’t earn too much, or have too many investments, or even entreprenurial thoughts…  Maybe a larger child tax or other credit. But Obama has stated he wants to see an increase of tax on income and dividends from investments.  I’ve read some as high as 40% tax on dividends and income!  Can you imagine?  How will that help folks save and invest for retirement?  Not something we’ll see over the short term, but that’s a “heck of a dinger” for retirees down the road.

“Still, tax hikes are coming - eventually. Obama’s plan is to allow the Bush tax cuts to expire for high-income earners in 2010, but make those cuts permanent for taxpayers in the lower tax brackets. That means the top income tax rate will likely rise to 39.6% by 2011.”

“According to Deloitte’s analysis, a married couple with two children under 17, household income of $1 million ($500,000 of it from capital gains or dividends) could see their tax bill rise by $34,900. “That’s a real increase,” Stretch said, with that couple’s effective tax rate rising to about 28% from about 24% now. “It’s higher than the Bush years but where it was in the Clinton years.”

“Eventually, higher-income taxpayers “will definitely be paying higher taxes,” Baker said. “I can’t imagine [Obama] turning back on that.”

“Obama has also said he’ll increase the capital gains tax rate for higher earners to 20% from the current 15%, though many agree that won’t happen soon. “If he decided to raise capital gains tax rates right now, the financial markets would probably go crazy,” Berman said.

But not raising taxes is not very likely in the years ahead.  Even the Terminator in California is proposing huge tax increases (and spending cuts) because they have to.  Realistically, we’re going to face some large spending cuts and tax increases as well.   Within the next year, President Obama and the Democrats may simply say, “We’ve tried to get by without tax hikes, but we really need to raise them now…”    How will that affect older investors and retirees?  Maybe not much at first, and we could even see some quick action in key areas:

“One tax perk related to the financial crisis is expected soon for retirees: Some form of help to avoid required minimum distributions from their individual retirement accounts. “We think there will be a very serious effort to put some provisions in [a new stimulus bill] to take care of the RMDs,” said Clint Stretch, managing principal of tax policy for Deloitte. “People are very sympathetic to the plight of retirees who are forced to take money out at the depths of the market.”

“Another tax change expected in 2009: The estate tax. Under current law the estate tax completely disappears in 2010, so look for Congress to act in 2009. Lawmakers may opt for a quick solution — a one-year patch that holds this year’s exemption amount and tax rate in place - or they may put in place a permanent estate tax law. Obama’s proposal: A permanent estate tax rate of 45% and a $3.5 million exemption.”

Remember President Bush’s efforts to remove the estate tax altogether?  Forget about it- that’s history.  Kind of a shame in my view, not that I have any reason to benefit from it!  But at least we’ll keep a lot of financial planners, estate tax lawyers and CPA’s in business for years to come.  Somehow I think the tax code is going to become a lot more complicated rather than less complicated over time.  And overall I’m not excited about the direction of economic or tax policy.

Call me crazy, but I can’t help but think that the Democrats economic and taxation policies will provide long term disincentives for entreprenurialism, investment and market gains over time.

Let’s hope the focus of our new political leadership is first and foremost on the economy.  What I’ve read lately however does not inspire confidence.   Giving U.S. dollars to international agencies for “family planning” (i.e. abortions),  giving civil criminal trials to foreign terrorists on U.S. soil, jeopardizing national security through drastically cutting defense spending and procurement… we may see a laundry list of policies and executive orders that a lot of folks were unprepared for. 

Overall, I don’t know how an Obama Administration will affect the average guy on the street, or in the market, but I’m willing to give it the benefit of the doubt for now.  Historically the market has done very well under Democratic administrations, and maybe it will again.  The nation, and the economy, will eventually gain traction and once again the business cycle will return to a more profitable footing, with job gains instead of losses.  Unfortunately that may take a while, and the taxation picture for the years ahead looks pretty bumpy. 

My next goal?  Try to figure out an ideal portfolio and investment strategy that minimizes taxes while protecting (and growing) long term wealth.

Well the market certainly is fickle.  Down a hundred points then up a hundred.  No one really knows the direction right now except that uncertainty makes people nervous. Recession, credit crisis, investment fears, the election… Don’t get me started on the election.  Some experts see lots of downside remaining in the markets, and then maybe a huge bear market rally before the end of the year.   With time and effort, it looks like our vaunted leaders will get a handle on the challenges facing us.  Let’s hope it’s the right handle…

“All human situations have their inconveniences. We feel those of the present but neither see nor feel those of the future; and hence we often make troublesome changes without amendment, and frequently for the worse.”

                                                                     Benjamin Franklin

It’s enough to make most investors toss up their hands and move on to something a little more certain.  Like focusing on work, home and family.  We may not be able to do much about the direction of our investments, but we can certainly influence the direction of our lives.  And that, today, is enough for me. 

“Finish each day and be done with it. You have done what you could. Some blunders and absurdities no doubt crept in; forget them as soon as you can. Tomorrow is a new day; begin it well and serenely and with too high a spirit to be encumbered with your old nonsense.”

                                                                       Ralph Waldo Emerson

Well then.  A day to be in the markets.  Nearly an 11% gain in one day, after losing 18% last week. 

Last week was the worst week ever for the Dow… and Today was the best day ever for the Dow. 

It almost presents some zen-like Yin and Yang investing paradox as we struggle to understand how it affects us.

So what’s it mean really?  Does this mean we’ve hit a bottom?  Is the pain over?  Does our retirement portfolio head back in the other direction?   Questions many of us want to know.  But the market is funny that way.  Not funny “ha ha” but funny as in fickle:  There really are few definitive answers.  As much as we would like to know that it’s time to start investing again, we look the other way and the market has taken off somewhere else. 

So was last week the value investors opportunity of a liftetime?  Or was today really just a bear market rally?

My humble opinion:  Last week was a bottom for the short term.  Much easier calling in retrospect, huh? We may take off on a bumpy ride toward 10,000 or 11,000 on the Dow.  But let’s be realistic- the market was extremely oversold last week, and many companys’ stocks were selling for less than they were worth.   We were due for a rally… BUT!  Does that mean the credit crisis has changed?  No.  The U.S. and other countries throughout the world face many economic challenges ahead.  The landscape has changed just enough to provide hope and encouragement over the short term.  Meanwhile we watch the housing and mortgage markets, the jobs reports and the earnings reports, and we know that we may struggle through a recession or other challenges ahead.

We obviously don’t know what tomorrow brings. But here is an excellent article that shows how Keeping Your Money in the Market is a long term strategy for success.  Stocks have not been this cheap in several decades.  

But knowing that we don’t know what’s ahead, many people have figured out that they are not willing to risk their money in the stock market anymore.  Lots of folks have flocked to CD’s for a safe and sure return.  Nothing wrong with that at all, especially with a 4%-5% yield over 5 years.   

Are you that risk averse?  If investing bothers you that much, then you need to sit down with your advisor or planner and figure out a more conservative asset allocation.  If you’re handling your investments yourself, maybe sitting down with a financial planner can help as well anyway.  A year ago I talked about risk tolerance in the context of real estate investing.  It’s worth examining a little more closely, and better late than never.

The time to decide you are not comfortable losing money in a particular market investment choice is ideally before you put money there! But most of us learn things a little harder, through experience. Knowing our risk tolerance is not hard, but making decisions appropriate to our risk tolerance often is.

Risk tolerance is a very personal thing, and there are few right answers. What is right for you may not be right for me. What is right for your spouse may not be right for you, so you will need to strike a balance or an agreement for your investing goals and allocation. Risk tolerance is also tied to the time horizon for your investment goals.

If you’re saving for a down payment on home, your risk tolerance should necessarily be very low and your assets should be in a savings or money market account. If you’re examining risk tolerance in terms of retirement in 20 years, that presents a whole new perspective. The ancient Greek saying “Know Thyself” is very appropriate. We are trying to work with a level of risk that is appropriate to our goals, time horizon and personal level of comfort.

Many studies have been done to investigate consumer risk tolerance, and basically the studies show that people are normally far more conservative than they think. In other words, we often think we are willing to handle degrees of risk, but when it comes to losing money, we are not prepared for risk at all. Here are some tools you can use to analyze your own tolerance for risk:

• MSN/Money Online Risk Tolerance Quiz: A quick online assessment of risk tolerance.

The following are printable .pdf files:

• Investment Risk Tolerance Quiz: An excellent risk tolerance quiz courtesy of North Dakota State University, by J.E. Grable and R.H. Lytton.
• Risk Tolerance Quiz: This is a useful risk tolerance questionnaire from Richard D. Margarian. Use your answer choice as the points for each question, then total them up at the end.
• Retirement Risk Tolerance: A short analysis form that looks at risk from a retirement goal perspective.

There’s also few things better than a good second opinion. If you want objective advice and a closer examination of risk and asset allocation, find a professional Certified Financial Planner in your area using the Financial Planning Association’s search tool.

And one other note:  If like many people, you’re just not looking at it anymore… well that’s called “The Ostrich Method of Investing.”  Might be okay if you’ve established some long term goals for 10-20 years from now, but it doesn’t always work out the way you might think!   Especially if you need money over the short term. 

For those who really believe the future is pretty bleak for the next 10-15 years, then maybe you do want to find a safe place to keep your money.  But I’m not going to bet against America, or the ingenuity of a whole bunch of folks that love business and capitalism. 

Besides, too many people like finding ways to make money. Greed is a heck of a motivator.  And from my perspective, the stock market is a pretty good long term proxy for the success of our free market economy. 

The past week was the worst ever for stocks in the Dow’s 112 year history with the index falling almost 21% over seven days.  Friday was the eighth down day for the market, unprecedented in scope and duration.   Almost everything has fallen, and there were few refuges for those seeking safety, apart from cash.

“…Until now, the Dow’s worst week was in 1933. Total trading volume of stocks listed on the New York Stock Exchange also hit a record, 11.16 billion shares.”

“The damage has been devastating both to households and to major investment institutions. Investors’ paper losses on U.S. stocks now total $8.4 trillion since the market peak one year ago, based on the value of the Dow Jones Wilshire 5000 index, which includes almost all U.S.-based companies.”

“The blue-chip average is down 40% from last October’s record, its biggest decline since 1974.”

 And that’s the hard part for so many people to understand.  Retirement funds in 401(k)’s and IRA’s are taking an enormous hit, and some folks are throwing up their hands and selling everything.  Think you’re safe with gold?  Not yesterday as gold prices fell Friday after weeks of gains.  

“Gold for December delivery fell $27.50, or 3.1 percent, to settle at $859 an ounce on the New York Mercantile Exchange earlier falling as low as $829. The metal has dropped for two straight sessions, at least temporarily halting a big move upward as investors shifted funds into gold and silver to take advantage of their perceived safe-haven appeal.”

“But as U.S. stocks continue to slide, large institutional investors have been forced to sell gold and other commodities to meet margin calls and other requirements, said Jon Nadler, analyst with Kitco Bullion Dealers Montreal. In a margin call, investors who borrowed money to buy stocks are forced to repay the loans.”

“If stock markets continue their current trend, then there is little doubt that margin call liquidations will continue to negatively impact gold and oil,” Nadler said.

With the wholesale liquidation of stocks and commodities in the market, it also looks like the oil bubble has finally popped.  What does that tell us?  Was there truly so much demand that less than a year ago the price of oil was $147 per barrel with many predicting $200 oil?   And is there really so little demand now that oil is less than $82 per barrel and falling?  

Some are calling it “demand destruction” citing rapidly falling demand for oil by consumers and businesses in recent months.  But the credit crisis has exacerbated the impact of corporations and traders who would borrow money to purchase oil contracts.  However you look at it, speculation and the unwinding of large financial institutional bets in the commodities sectors have played a large role as well.  Have you seen the prices for corn or soybeans?  All down sharply.  

The good news, at least for now, is that gas and food prices should not be rising significantly over the near term, and many prices may fall.  I was looking at the price of three-dozen eggs at a big-box store the other day.  Last year the price rose from $2.99 to $5.99 presumably based on fuel costs.  The price is now down to a more reasonable $3.59 for those same three-dozen eggs.

Not only has the money flow dried up in many areas, consumers are also tigtening their wallets in response to the financial crisis.  All of this has a compounding effect, at least for a while.  My concern however is what happens next?  A few months down the road after this “unwinding” and liquidation of assets by the large institutions, will we face renewed pressure on the prices of goods and services? That’s the view of Jim Rogers and others, citing a pending “inflation holocaust.”  For the short term however, it would seem the threat of slower economic growth is of greater concern than the threat of inflation.

The more important question for many people right now is “What to do?”   That’s a question that every investor, or their financial advisor, must try to answer and to understand the longer term implications for their clients’ goals.  Many of us believe the government is making progress and that with time and increased capital, the markets will stabilize.  How soon that takes place is anyone’s guess.  

There are advisors recommending “sell” and others saying “stay put.”  A bold few are actually buying in the market, picking and choosing among beaten down stocks at bargain prices.   Personally I took the opportunity to sell some losing positions, and reallocate that money among some of those bargain stocks.   In my IRA I sold a portion of a conservative mutual fund to reallocate that money in a growth fund that had fallen sharply.  Am I early?  Maybe so.  We may yet see weeks more of losses, but it’s a bet I’m willing to take with money I won’t need for a decade or more.

I don’t believe the nation is headed towards depression-era times, but we obviously have many challenges ahead.  Some think it could get a lot worse, and it’s worth looking at What History Tells Us About the Market.   Reading that article is a sober wake-up call to how bad it was, and how bad it could be.  For now most of us are just watching, dazed and wondering when it will all turn around.

“The entire nation, it seems, is in the grip of what psychologists call “the disposition effect,” or an inability to confront financial losses. The natural way to palliate the pain of losing money is by refusing to recognize exactly how badly your portfolio has been damaged. A few weeks ago, investors were gasping; now, en masse, they seem to have gone numb.”

But amidst the financial carnage, we also hear what may be the siren song that the other side of crisis is opportunity.

“This collective stupor may very likely be the last stage before many investors finally let go — the phase of market psychology that veteran traders call “capitulation.” Stupor prevents rash action, keeping many long-term investors from bailing out near the bottom. When, however, it breaks and many investors finally do let go, the market will finally be ready to rise again. No one can spot capitulation before it sets in. But it may not be far off now. Investors who have, as Graham put it, either the enterprise or the money to invest now, somewhere near the bottom, are likely to prevail over those who wait for the bottom and miss it.”

History tells us that people tend to buy at the highs, and sell at the lows.  We may not be quite at the lows yet, but selling now is basically the same thing.  If we’ve learned anything in this market it’s that the word “risk” doesn’t mean what we thought it did.   We’ve now discovered how sensitive we are to seeing portfolio losses when the downside really hits.  Risk tolerance has changed for many of us, and a whole host of moderate and aggressive investors are now joining ranks with their conservative peers. 

If you’re dollar cost averaging with retirement funds, or 401(k) contributions, I would certainly continue to do that. The market may trend lower in the months ahead, and dollar cost averaging works in your favor. But my standing philosophy remains:  Cut spending, Pay down debt, and Increase savings.  Focusing on those three things is a prerequisite to financial stability.   If you’ve got those three things under control, then continuing to invest, or increasing investments is worth considering.

How long will it take until we see traction and more stability in the financial markets?  I think it will be weeks rather than months.  However long it takes, I am unapologetically optimistic about the nation’s future and the future of our free-market economy.   Hang in there, and have a good weekend.

***Update***  Prudential warned today stating third quarter earnings will be down on investments, and the company cancelled future planned stock buybacks.  The stock took a beating today, closing down over $10 per share.  But the company remains strong according to the CEO.   In today’s market climate however, investors are running for the exits in a “shoot first, ask questions later” approach to the financial sector.  

“While our results have been negatively affected by current financial market conditions, we are comfortable with our risk profile and believe that we are in a strong position to manage through the current environment,” said Chairman and Chief Executive John Strangfeld.”

*****

It’s a beautiful day outside… sunny and cool, blue skies and calm winds.  But the weather in the markets is still pretty stormy, and a lot of folks are stressed out. So many of us are immersed in our computers or day jobs, with noise and commotion all around us.  Or we sit at home, staring at the same screens, wondering “when” the markets or financial crisis will subside. 

This morning I took a break and went for a walk.  It was not only refreshing, but helped put things in perspective.  I don’t know where the markets or financial issues are headed, but I know there’s a lot of good folks working pretty hard to get it straightened out.  In the meantime I’ll just focus on taking care of business with work and home. 

An amazing stock story this morning was Prudential Financial (PRU).  I watched the stock open around $41 per share after getting hammered the past week.  Here’s a stock that was $60 per share just a few weeks ago.  And before my eyes today I watched it plummet over $16 dollars a share down below $26.   Incredible.  I’m thinking “either something really bad is going on with this company, or the shorts are having a field day.”  

Interesting that the shorting prohibitions against financial institutions were lifted by the SEC effective at midnight last night, October 8th.  Coincidence?  Sure, why not, but Prudential Financial was on the SEC’s short ban list until last night.

 I’m not going to examine the arguments for “market efficiencies” with shorting, but somehow it just doesn’t seem appropriate that in the name of free market capitalism we can allow huge pools of money to step in and destroy a stock over a period of days, or even intraday.   That’s the kind of market action that destroys any sense of the word “investment” for many people, and it makes you wonder how that degree of volatility happens.    

Of course I don’t really know the extent to which Prudential suffered a shorting attack on its shares today, but as I write this even before noon on Thursday, October 9th, Prudential’s share price is already back up to $39.  I’m sure the volatility will continue both ways. 

Admittedly, folks are afraid that the financial contagion might affect the insurers just like banks and other financial companies.  So that volatility is borne of panic and wholesale capitulation in certain areas.  But most of the insurance company stocks are very conservative companies with long term liabilities and strong balance sheets.  Maybe they do have some problems, but not to the extent to which the panic (and short selling) has gripped the markets and their share prices.

All I know is that if the insurers are truly at great risk of failure or default then we’re really in trouble.  These guys manage everything from life insurance to pension funds and annuities.  Their bread and butter is to manage risk very conservatively in case of the exact economic and other financial crisis that we’re seeing today.  Well perhaps the crisis of the past few weeks is indeed unprecedented, but could they have prepared for this?  Yes, to a great extent.  And no, with regard to collateral investments that may have gone south, and cross-party liabilities with companies such as Lehman Brothers.  They may even have to raise extra capital through stock offerings, or even borrow from the government. But my argument is that if the insurers can’t work through this mess, then who can?   Perhaps mom and pop with cash in the mattress… for a little while.

Having said all that I am reminded of a little family history.  My folks grew up through the Great Depression, and lived by and large quite frugally throughout their lives.  The lessons from that hard time were not lost on them.  One of my parents has a life insurance policy that was purchased by their parents.  The policy was called a “nickel policy” back then because each week the insurance representative would come by the house to collect .05 cents to pay for the insurance. 

I am told that on several occassions they didn’t even have a nickel to pay for the insurance, and my grandmother would hide in the house peeking out the window until the insurance rep went away.  One time my Mom, age 4 or 5, answered the door, with her Mom whispering in the background, “I’m not here!” and when asked by the insuance rep, “Honey, are your parents home?” she replied smiling, “Yes, Mommy’s behind the door!”   True story.  

That insurance policy was lost over the years after my grandmother passed away.  Mom didn’t really know about it.  But a few years ago she learned of its existence through a relative, where it was held in trust with a state government.  Lo and behold it was the same policy purchased by her Mom and paid on for many years at a very low price.  She was pleased to find that it was paid up, and worth over $5000 today, having grown in value from pennies to a respectable sum over the course of 70+ years.  What company was it from?  Prudential.  And when she spoke with the company, they assured her the policy was worth every penny.

It may be rough going for a while, but I suspect that if Prudential made it thorugh the Great Depression, the Second World War and many other turbulent times, that they’ll make it through these times as well.  Have a great day.

Do you know why I’m upset with myself this morning?  Because I don’t have enough spare cash on the sidelines to invest in a few stocks I’ve been watching.   We don’t know how deeply the Bear will claw it’s way through the market in the weeks ahead, but there are some amazing valuations out there.   Look at Conoco-Phillips (COP) trading witha P/E just below 6, or Apple (AAPL) down around 90 with a P/E of 18.   Or YUM Brands (YUM) falling to a new 52 week low below 29 with a P/E around 15.   And eBay?  Holy cow… eBay once loved by so many (including me) has fallen to below 18 on earnings warnings, but sporting a too-hefty P/E that just won’t cut it in today’s markets.   But look at Goldman-Sachs (GS) or General Electric (GE) at an 11 year low, to follow Warren Buffet’s lead.

So is this it?  Is this Wall Street falling off the cliff? Are we so totally out of confidence, that there is no interest and no trust for investors to wade back in?   That’s what the bug-eyed folks are saying who are panicking.  And they’re proabably right, at least partly, and at least for the short term.

But if I had more cash to invest with, I would be looking for bargains.  If the market falls more?  I’d be looking for more bargains.  Yes this may be a very difficult investment climate for the next few years.  We may not see returns on money we put in for many years down the road.  But all I know is the “opportunity bells are ringing” loud and clear that if you have extra long-term cash available to invest, this is a great time to pick and choose those companies you’ve always wanted to invest in.

There are few times in our lives when markets offer such opportunity as they do now (and may offer even more tomorrow).  It involves Summoning the Courage to Buy Stocks.  We will long remember these days, as did many of those who came before us. 

“…investments everywhere are priced as if the whole solar system were going out of business. U.S. stocks have lost 24% since Jan. 1; foreign stocks are off 32%; emerging markets, nearly 40%; junk bonds are down 13%; even municipal bonds have fallen almost 10%. Money is pouring into U.S. Treasury debt — so much so that stocks now offer more income than bonds do. The dividend yield on the Dow Jones Industrial Average is currently at 3.14%, higher than the 2.68% yield on the five-year Treasury note.”

“With so many professional money managers afraid to act, with most of the public in the grip of fear and anger, you should put your cash and your courage to work. If you have no cash, use your courage: Rebalance by selling a little of anything that’s gone up and buying more of whatever’s gone down.”

“If you have both cash and courage, make a list of 10 stocks you’ve always wanted to own at “the right price.” Chances are, they are cheap. Better yet, think of an investment category you’ve long wanted to venture into, like emerging markets. Chances are, it is on sale. Just about everything is.”

But there is a catch.  You darn well better not be gambling with money you don’t have.  That’s money you’re going to need over the next 5 years for something else.  Medical bills, a house, a car, food…  Because this market will kill you.  It will slice you up in a heart beat if you’re not sure what you’re doing.  And even if you think you know what you’re doing.

I’ve got one investment down over 50% because I was too stubborn and not disciplined enough to sell.  And I’m not selling now, which means that money is dead for who-knows-how-long.    So you need to think long and hard about investing in this market, and be sure you pick a solid company with a strong balance sheet that can weather the storms ahead.   Because your stomach will be riding right along with it.

Aside from all of that, it’s a beautiful day today.  Hang in there.

It’s a good news, bad news kind of week.  Perhaps mostly negative on the financial front, but will we get a bailout recovery plan this week?  The debate has been heating up while members of both parties in Congress argue about what should be included.   One would think these folks could hammer something out more quickly.  Hard to say what they’re doing, but rather than focus on doing everything why not get some of it passed and move forward? 

Prediction:  If Congress takes too long, the President, Treasury Secretary and Federal Reserve Chairman will move independently to strengthen financial markets in the name of national (economic) security.  And do you know what?  That’s their job.  They’ve gone to Congress to sort out legislation, but if Congress stubbornly continues the political posturing I’m willing to bet the threat of action from the administration will help prod them along.  But any Executive action wouldn’t have the same degree of legislative strength, so that is not the best option.  Let’s hope the financial mess isn’t that bad.  While our political leaders haggle about the details, here’s a round-up of mixed news this week:

Good News:  The FBI has begun probing corruption and fraud at financial firms at the center of the financial meltdown.  The FBI is supposedly looking at 24 firms!  Why is this good news?  Because these businesses have almost destroyed the financial integrity of the nation, and sheer bad luck (or stupidity) cannot be responsible for this mess.   Was there widespread fraud or criminal behavior?  Maybe not.  But we’ve got to clean up the mess, and when any company risks the well-being of the nation and its citizens, they’re going to be looked at under a microscope for any wrongdoing.

Bad News:  Fed Chairman Ben Bernanke sees “grave threats” to the national economy if Congress doesn’t pass legislation quickly.  “Economic activity appears to have decelerated broadly,” Bernanke said today in remarks prepared for a congressional Joint Economic Committee hearing, downgrading the assessment of Fed officials when they met on Sept. 16. “Stabilization of our financial system is an essential precondition for economic recovery.”   He continues describing how recent financial risks ”will make lenders still more cautious about extending credit to households and businesses,” and that “The downside risks to growth thus remain a significant concern.”

Good News:   Billionaire Warren Buffet is investing $5 Billion dollars into Goldman Sachs, and indirectly into the financial markets, especially with GS new status as a bank holding company.  That money is going to be put to work. “I am to some effect betting on the fact that the government will do the rational thing and act properly,” Buffett, one of the world’s richest men and preeminent stock-pickers, told CNBC. “If I didn’t think the government was going to act I wouldn’t do anything this week.”

Bad News:   It looks like the Credit Default Swaps / derivatives markets may be partly (largely?) responsible for the credit crsis unfolding today.  These were bets by competing firms to hedge their risk in other companies and transactions, and they’ve effectively exaggerated risk concerns through a self-destructing downward  spiral.  So these institutions did it to themselves, and now the SEC is stepping in to regulate the mess.  And taxpayers will fund the recovery.

Good News:  Congress (aka the Democrats) are going to let the Offshore Drilling Ban expire!  Hooray!  Does this mean they concede defeat to an issue that most Americans want resolved?  And will it actually help lower oil and gas prices?  Probably not.  The Democrats plan new legislation to regulate any proposed drilling and the States can have their say as well.  It’s sure to be a long process and may not make much difference.  But it’s a start.

Bad News: Vice Presidential Candidate Joe Biden thinks Franklin D. Roosevelt was on television after the stock market crash of 1929.  Uh… television?  The moving picture thingy that few households even had until many years later?  And Roosevelt?  Well Joe Biden may only be 66 years old (6 years younger than Senator McCain), but how can you go on a network news program with pronouncements like that?! 

“When the stock market crashed, Franklin D. Roosevelt got on the television and didn’t just talk about the, you know, the princes of greed. He said, ‘Look, here’s what happened…”  Except, Republican Herbert Hoover was in office when the stock market crashed in October 1929. There also was no television at the time; TV wasn’t introduced to the public until a decade later, at the 1939 World’s Fair.

Good News:  What Franklin Roosevelt did do however was to help bring confidence back to the nation in a time of financial crisis and war.  He did this through his Fireside Chats during the Golden Age of Radio in the 1930’s and 40’s.  One of my favorites:

“After all, there is an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people.”

Franklin Delano Roosevelt - First Fireside Chat “On the Banking Crisis” - March 12th, 1933 

Which sounds very appropriate today, doesn’t it?   As we move forward there are ways to Summon the Courage to Continue Investing.  James Stewart at SmartMoney.com has written an excellent article describing our penchant to give in to fear versus a more rational approach to investing.  Keeping in mind of course, that you have money to invest for the long term, and an emergency fund set aside for 3-6 months of living expenses (6-12 if you can afford it).

“It is time for all of us to summon the courage to invest calmly and rationally and in doing so demonstrate our confidence in the potential of the global economy and in our fellow man.  What, in practice, does this mean?”

“It means continuing to accept and even embrace a prudent degree of risk. No investment is entirely risk-free and the mindless quest for safety is damaging not only to your likely returns but the system as a whole.”

“It means to continue following a disciplined approach to asset allocation and investments such as the one I have long advocated in this column. Despite last week’s wild swings, the market did not reach one of my buying thresholds, which is to buy on 10% dips. Had it done so, (2025 on the Nasdaq) I can assure you I would be buying.”

“It means to continue rebalancing your portfolio, taking profits when positions become overweighted, and adding to those that have fallen below your targets. I expect to continue my gradual additions of financial stocks in the belief that we will weather this crisis.”

“It means considering investment alternatives. I found myself this weekend looking at real estate listings…”

Hmmm… if I had the money to look at distressed real estate, I’d be doing pretty well right now.  But here’s hoping that Congress and the Administration work out a recovery program for the nation, that the news gets better over the next few months and that you have a good news kind of day!

Quite a week coming up again and I can only wonder at the news tomorrow.  As of tonight Treasury officials and Congress are working hard on bailout talks.    Could it be viewed as a rescue plan for the national economy?  Whatever you call it, many Americans are pleased that action is being taken to solve the crisis, at least as a viable short-term response. But we really have no idea of the long-term implications.  Speaking as “Joe MiddleClass” I think we just want order restored and the financial world to get back to whatever “normal” means.  But whereas Friday I thought Congress would be on board quickly, now it doesn’t look like it.

Senator Leahy (D-VT) thinks the administration is trying to put a fast one over on Congress.  Politico is reporting that the “Dems say they won’t get fooled again.”

“We will do something this week — but if we learned anything from right after 9/11, it’s that the biggest mistake is to pass anything they ask for just because it’s an emergency,” Leahy says.
“They can’t get away with what they did in 2001,” Leahy said. “This will be ‘trust but verify.’ The biggest mistake they can make is holding a press conference while we’re negotiating to say there’s going to be a worldwide depression if Congress doesn’t do exactly what we want them to.”

And leave it to Nancy Pelosi (D-CA) to continue the political bashing at the height of a national financial emergency:

“As we proceed to deal with this crisis, this is clear recognition that the party is over for the Bush administration’s anything goes, failed economic policies that have damaged our economy, undermined the middle class and further pointed out the need for a new direction.”

Does it make me feel better that the Democrats are claiming to ”protect the middle class” or some such message they’re preaching?  Certainly we hope taxpayers and the “middle class” are considered in the context of economic decisions by all legislators on both sides of the aisle. But I am disappointed that even when we need our political leaders to act in a bipartisan manner to safeguard the national economy, they resort to political finger pointing.

I’m also all for helping keep people in their homes, and to decrease foreclosures. But some of those delinquent loans are the reason we’re facing this crisis, and just as we don’t want to provide bailouts and incentives for the investment firms that brought this mess on, we don’t want to provide the same incentives to those speculators and home-flippers that took on more debt than they should have, and “bailed out” of their mortgage obligations.

The bottom line right now is to get things moving again.  What was last week all about?  The Shock to the nation’s financial system that forced the government’s hand.  There really wasn’t much choice over the actions taken.
 
I think those Democrats and Republicans who impede progress on the economic front may pay a high price over time.   No one questions that there are disagreements on so many issues. It is important to consider the larger implications of the effect on taxpayers and the national budget moving forward. But our political leaders need to think twice before making this a politicized process.

“Princeton University history professor Julian Zelizer, who has written a history of Congress in the 20th century, says the Democrats will try to extract whatever they can out of Paulson — but must eventually bow to the reality that the perils of not acting quickly are just too devastating, economically and politically.”

So as of today it appears the Democrats want to set their own bailout terms.  What may have been quick action to pass bailout legislation may take until the end of this week.  Maybe that’s not such a bad thing with the $700 Billion price tag going in.  It’s not like the fate of the economy awaits the action of our vaunted leaders… is it?