Sushi Money

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.

Is there a subtle change taking place in the direction of the markets, and maybe the economy?  I’ve noticed a few writers here and there that are looking ahead, rather than dwelling on the banking crisis and every negative event that may affect the economy.   During any overzealous expansion there’s going to be contraction.  But there’s still many who have jumped on the doom and gloom bandwagon and are still focusing on what’s “wrong” with everything.  

It’s pretty evident that we face some stark challenges right now.  Between housing, industry layoffs, lending woes, and energy and commodities prices, the American consumer is taking it on the chin.  I tend to be very supportive of our elected officials intentions, even if they don’t get very much accomplished at times.  But with escalting gas and grocery prices, I really wonder if everyone from the President on down really understands how these challenges are affecting families across the nation this year.

Certainly it’s not a typical year.  It’s an election year for the nation’s highest offices, and we’re going to continue to hear what’s “wrong” with the direction of the country for many more months.   But even with the challenges we face, I think smart money looks a little more forward than that, and plans for days of positive growth and opinion once again.

We’ve seen some forward thinking recently with strong upward moves in the markets in recent weeks.  Leading indicators have not been all bad and equity valuations in some areas have become so attractive that investors are looking for bargains and positioning funds for the years ahead.  Donald Luskin says the Recovery is Already Underway and that “the worst is over.”

“Industrial production was reported as rising 0.3% last month, when it was expected to have declined. That’s a key recession indicator ” and it’s just not indicating. The high-tech component of industrial production has been especially strong, currently at all-time highs.  And then there are the markets themselves. Since the panic bottom a month ago yesterday, the S&P 500 has returned 7.1%. The best-performing sectors have been financials, energy and materials, indicating that the credit crisis is mending and that fundamental forces of growth are strong.”

“The bears hang onto every little scrap of evidence coming out of the financial and housing sectors to bolster their case that we’re already in a recession and headed for a depression. Doesn’t any of this good news count for anything?”

Laura Rowley takes a more historical look referencing economic research that sees the current economic downturn as a normal response to a financial crisis.  While she indicates we may have some time still to get through it, long term investors should stay the course:

“What does history imply for individual investors, who are more worried than ever about making it through retirement? “If you’re there for the buy-and-hold, long-term view, it’s a very different world,” says Reinhart. “These booms and busts do happen, but unless you really invested very poorly you do have the ability to ride these things out.”

Of course if you’re facing great changes in your life such as trying to pay for the mortgage, looking for a new job, or looking at retirement sooner than later, then it’s hard to sit on the side of optimism right now.   But I think it’s important to be rational and pragmatic, as opposed to letting the stress of worry and fear of the unknown influence your life.

The media doesn’t help with all the catastrophic announcements of doom and chaos, and story after story of people going through hard times.   Is it really that bad for everyone?  No.  But it is bad for some people, and we empathize and try to help where we can, while doing our best to keep our own financial lives in order.

For those of us facing retirement in the short term, keeping the financial house in order may take more effort than we thought.   Laura Bruce from Bankrate.com provides a good overview of the retirement perspective in Retiring in a Bad Economy: Are You in Trouble?   While the intro is a little alarmist, it probably increases readership.  That’s actually a good thing because this article has some excellent insight for both younger and older workers.   The article focuses on the fear and concern that many people have while seeing the banking crisis or a possible recession unfold.  What is a typical reaction for most of us?  We either use our savings to get by, increase our savings if we can, or try to put some extra cash in our retirement accounts to help support us in case we need it.

“But many people don’t have the money needed to give them that cushion; whether due to a lack of income or financial planning. Juetten, who doesn’t require people to have a certain amount of money before he’ll take them on as clients, estimates that only about one in five of the people who come to see him have done a really good job of planning for retirement.”

“First, we deal with the human side. Fear and concern are normal. The news is all around us and it’s hard to ignore. People going into retirement are the ones who are most aware of their financial situation because all of a sudden it’s right in front of them. Second, we talk about the short-term cash needs and, third, we look at the portfolio.”

“If you haven’t done a good enough job preparing for retirement, your options are fairly limited. You can work longer, live on less or work in retirement.”

And that’s a tough pill to swallow.  As we get older, we may have less time to accumulate financial assets.  One troubling statistic shows that 401(k) loans are on the rise.  If more people are borrowing from their retirement plans while working, what are they going to do when it’s time for retirement?  Do you just throw in the towel and assume you’ll keep working?   While working longer is a constructive option, it’s important not to have a deafeatist attitude because there are things we can do.  Living on less is very important, as many of us are finding out with higher gas and grocery prices.   (I don’t know about you but we’re really cutting back in some areas, and we just aren’t splurging on some of the convenience items we may have purchased in the past).

But some of the biggest lessons that financial planners and clients have learned is to save enough money during the working years to provide necessary cash flow in times of trouble.  Some view this as saving for an emergency fund to support three years of living expenses- whether before or after retirement.  Does your 401(k) count as this emergency fund?  Nope.  Those are retirement funds.  We need to save money in other accounts to serve as that emergency fund. 

As we get close to retirement we may find ourselves increasing our savings and investments to provide a stream of cash flow that can support us if desired.  Many retirees don’t use the cash flow that their portfolio could provide, investing it back in the portfolio instead.  But if something does happen to challenge your ability to make ends meet, a portfolio that generates income can be the foundation that carries the day.  Getting there financially is what it’s all about. And that’s a lesson that younger workers should really take note of.

“Younger people who have time to save for retirement have an opportunity to learn from these economic cycles and avoid the frayed nerves that so many older people are experiencing.”

A lot of us look back 10-15 years and realize we could have done a lot more to increase our financial position.  Without beating ourselves up or giving in to fear however, we can also use that knowledge to make new goals and take positive, constructive steps to improve our financial futures.   We may not win the lottery or invent the next million-dollar gizmo, but with disciplined effort, we can patiently accumulate savings and investments that will help support a sound retirement. 

And there’s another realization that many are just waking up to:   As the nation goes tumbling through the economic briar patch, we’ve got to pull ourselves up and work our way out of the tangle.  Nobody else is going to do it for us.

Great article out this week from Laura Rowley.  She says Don’t Fiddle Away Your Financial Independence and uses the analogy of the old fable about the Ant and the Grasshopper to describe the current financial challenges we face.  Even more interesting are the comments from many folks across the country.  Real people share their stories and feelings about saving and investing, the economy, bailouts, mortgage and foreclosure issues, etc. 

Maybe for some the difference is easily seen.  But I wonder how many of us have been both at times?  I know I’ve hopped around like a spendthrift Grasshopper many times in my life. The older I become, the more I appreciate the steady, disciplined approach to saving and investing.  

The Ant and the Grasshopper

     In a field one summer’s day a Grasshopper was hopping about, chirping and singing to its heart’s content.  An Ant passed by, bearing along with great toil an ear of corn he was taking to the nest.

“Why not come and chat with me,” said the Grasshopper, “instead of toiling and moiling in that way?”

“I am helping to lay up food for the winter,” said the Ant, “and recommend you to do the same.”

“Why bother about winter?” said the Grasshopper; “We have got plenty of food at present.”  But the Ant went on its way and continued its toil.  When the winter finally came the Grasshopper had no food, and found itself dying of hunger, while it saw the Ants distributing corn and grain every day from the stores they had collected in the summer.  Then the Grasshopper knew:

 It is best to prepare for the days of necessity.

Some excellent personal finance and investing articles out there this week.  CNN/Money’s Walter Updegrave replies to an anxious investor while discussing Investing for the Long Haul.  Can’t say it any better than that right now, and so much of investing depends upon your time horizon.

If you’re really anxious, the government has just the thing on April 7th when you can invest in all kinds of Treasury securities in amounts as little as $100.  You can do that through a broker of course, but it may cost less by going right to the source at treasurydirect.gov.

Still working on taxes?  The IRS released its list of the Top 2008 œDirty Dozen Tax Scams this month.  Peace of mind with taxes really helps, and it’s always nice to know what to look out for.

Even though the markets have looked pretty good over the last week, don’t expect the volatility to ease anytime soon.  MSN’s Jim Jubak takes a thorough look at the challenges impacting global market stability and some Safer Ports in the Market’s Storms.  

Of course if you want to become anxious again, he presents a hard dose of reality in Retirement Crisis: From Bad to Worse.

But there’s nothing like a little Zen Economics to help you relax, and make you wonder if you really know anything at all. 

Working with a financial professional can be very helpful.  Whether that’s a Financial Planner or simply a local broker, do some homework and make sure you’re comfortable with the relationship.  A good planner can make all the difference however, especially with a longer time horizon. 

What a day in the stock market. The last few months haven’t been easy, and just yesterday we were looking for the bottom, and waiting for a rally. I didn’t think we would see it so soon, but today we finally had a reason for one as stocks advanced in their biggest gain since 2002. What was the impetus? Investors loved the news about the Federal Reserve’s plan to make guaranteed funds available to banks and financial insitutions, in fact allowing many to exchange risky debt such as mortgages for US treasury bonds.

“Since the coordinated actions taken in December 2007, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures in funding markets. Pressures in some of these markets have recently increased again…

“The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS”

“In addition, the Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB).”

This is the plan the institutions and financial markets have been waiting for in my opinion. A bold, strong move by the U.S. Federal Reserve (with global collaboration) to shore up financial institutions, and the economy. In my opinion it says,

“We’re going to do whatever it takes to ensure the smooth flow of funds between institutions, and we’re not going to let the major banks or lending companies fail.”

Or the economy of course. On days like this I wish I had more cash to invest… but I’m also glad to be a long-term investor. If you’re in and out of the markets, how do you time something like this? Most people don’t.

That’s not to say it’s going to get any easier this year. The economy is still struggling and the credit markets have a long way to go to restore confidence among a lot of folks. But at least a few experts believe the U.S. will not see a recession this year.

“In its fourth quarterly report of 2007, the UCLA Anderson Forecast holds steadfast to the basic tenet of a forecast they have been making throughout the year, that the national economy is not technically in a recession, nor is there a national recession on the economic horizon.“

We’ll still have to wait and see on that one, but by June we should know the answer. With more uncertainty removed over time, the markets may really have a reason to rally this year.

The last few months can really make investing seem like a losing proposition. While reading the message boards for a particular stock today I saw that one gent asked for honest advice about selling versus hanging in there on a stock that was dropping day after day. He was down over 50% in the last two months. The reply:

“Well, look at it this way. One insider alone owns 20 million shares and isn’t selling! He has seen his portfolio drop close to 1.5 billion in the last 3 months. If someone tells you they would give you 50 cents on the dollar for your home would you give it to him? The only difference is that you get to see a quote on your stock. Sit back and be an investor…”

Interesting analogy, and it may be very good advice. Or it may not. Personally, my home isn’t an investment, and I don’t “live in my stocks” (even if it feels like it sometimes). What really matters is the context of that “investor’s” life and investing situation. All things being equal, if he doesn’t need the money in the next 5-10 years, and he’s chosen a solid, profitable company that’s just out of favor right now, and he’s okay with sitting on it for the long term, then yes- maybe he should stop checking his stock quotes every day and just ride out this downturn.

But maybe he “invested” money that he really needs over the short term. Maybe he’s so worried because he has been making short-term bets with money he doesn’t have. Maybe he really shouldn’t be investing in growth stocks without professional advice because he simply doesn’t have enough knowledge. Maybe his risk tolerance just isn’t suited for investing in stocks at this point and he worries too much to sleep well at night. Maybe, maybe, maybe…

You’ve got to decide where you stand. And for how long. Sometimes selling is the only thing that brings your sanity back. Even if it is the wrong decision. But sometimes you’ve got to say “What the hell…” and just leave things be for a year or two.

Most of the time I try to “sit back and be an investor.” Sometimes it’s pretty damn hard to do.

So who’s going to be better for the country next year? How will Republicans or Democrats affect the economy or your portfolio? Asking those questions is a little like opening pandora’s box, but I can’t go into that voting booth without really looking at the candidates. Yet when it comes right down to it there’s a likeability factor that has to be there too. If I can’t identify with a candidate in some fashion, then it’s really hard to try and understand their views or beliefs on the issues.

Right now for example, a lot of folks have been swept away with the Obama movement. But are they really looking at the issues? Personally, I don’t think so. And neither does Matt Gonzales who writes The Obama Craze: Count Me Out. His expostion is one of the best examinations of Sen. Obama’s views and voting history that I’ve read to date. And I find myself appreciating his conclusions:

“Once I started looking at the votes Obama actually cast, I began to hear his rhetoric differently. The principal conclusion I draw about œchange and Barack Obama is that Obama needs to change his voting habits and stop pandering to win votes. If he does this he might someday make a decent candidate who could earn my support.
For now Obama has fallen into a dangerous pattern of capitulation that he cannot reconcile with his growing popularity as an agent of change. I remain impressed by the enthusiasm generated by Obama™s style and skill as an orator. But I remain more loyal to my values, and I™m glad to say that I want no part in the Obama craze sweeping our country.”

I just figured out today why he has shared those thoughts, considering Ralph Nader has asked Gonzales to be his running mate.  He sounds like a very principled individual however, and I appreciate his views.

Honestly, I do want to know what “change” means, not only for the economy but also personally. I want to understand how a potential candidate will affect my family’s future financial well-being over the next decade as much as the nation’s economic strength.   And admittedly I want to know how my portfolio could be affected by changes in tax law.

On the investment side, Mick Weinstein put together a brief summary of viewpoints on how investors might fare under the next White House leadership. Lots to consider but the comments were pretty interesting too. One reader named “Gianni” writes:

“I think Obama represents hope and change. Fidel Castro represented hope and change. He got the change part alright, but he ruined Cuba. President Jimmy Carter represented hope and change, and sure enough he changed a lot of things for the worse. The American economy was in the toilet while he was president and it took Reagan a few years to straighten things out. So hope and change sound good, but think carefully before you invest in hope and change. And consider the possibility that those big evil corporations are doing a fine job of providing us with our high standard of living…”

Think I prefer a more analytical approach to the issues, but I also agree that if the Democrats are elected we’ll probably see much higher taxes on both income and capital gains. Tax law just isn’t clear for 2009 and beyond. Will the next administration be investor friendly? Will individuals and families pay a lot more taxes? Of course any legislator thinking of raising taxes when the country is on the verge of a recession, inflationary pressures and housing bottoming out would be asking to be voted out of office.

Tax increases are on the horizon for a host of reasons including social security and medicare funding shortfalls as thousands of Boomers enter retirement for the next two decades. But if we think economic conditions are challenging right now, just wait until congress decides to raise individual and corporate taxes. It would be far better to do everything possible to make investing and growth favorable for business here in the U.S.A.

Whichever political party wins the election this year, they’ll also have an incredible opportunity and responsibility for affecting the nation’s economic future. All things being equal I favor a conservative approach to business and tax climate.

But change is certainly in the air. I’m just not sure what all that change means at this point.

We need an administration that constructively supports investment and growth over the long term. If the Democrats are elected, I only hope they think long and hard before saddling the nation with an enormous tax burden that will take years to overcome.

Whichever candidate takes the helm in 2009 will face an enormous balancing act. If they can succeed with a balanced, functional approach over the next few years, then that will be a real change. Who knows… we could even see the launch of a new bull market that will bring incredible opportunity for a decade or more.

Where’s your financial focus lately? Are you concerned about the economy? The stock market? Gas or food prices? Housing? Okay, for most of us- yes, all of that and more. It’s been a tough year so far and not easy to stay focused or optimistic in terms of financial goals.

Certainly the challenges in our life, or our perceived challenges, can really influence our psychological approach to each day. For many of us that’s especially true when it comes to money. And that’s also why consumer sentiment is something that economists (and investors!) watch closely. One of the most important indexes used is the University of Michigan Consumer Sentiment Index based on the Survey of Consumers. This index samples a number of households each month and asks about current and expected economic conditions. The type of questions asked are fairly broad, ranging from the individual’s personal economic conditions to his/her impressions of the overall business climate in the nation. Wikipedia shows that the Index is published with the following objectives:

• Obtain near time assessment of consumer attitudes on business climate, personal finance, and spending.
• Create capability for understanding and forecasting changes in the national economy.
• Provide means to directly incorporate empirical measures of consumer expectations into models of spending and saving behavior.
• Forecast the economic expectations and the future spending behavior of the consumer.
• Judge the level of optimism/pessimism in the consumer™s mind.

Lots of research mumbo-jumbo, but very important data. Bottom line- the survey of consumers and index data presents a wealth of information that helps economists and investors ascertain public confidence in the economy. Which has a direct correlation on spending and the strength of business throughout the business cycle. It’s interesting to look back and see how consumer sentiment has compared with past recessions, as well as with another trend such as federal interest rates. Here’s a chart of the same going back 30 years:

It’s not hard to see why so many people believe we’re facing a recession. But how does this affect us personally and what does it have to do with optimism? Over the past year my psychological investing mentality has shifted from optimistic to very defensive/ conservative. Does that mean anything practically speaking? Not really. Simply that I’ve become a little more risk-averse, but have continued to invest over time while shifting a little more money to cash and balanced funds while considering strategic opportunities. Overall I’ve stayed in the market investing in a diversified, low cost portfolio for retirement.

Does the word “optimism” signal unwarranted emotion that should be absent from any decision or action we make when speaking of investing? Some might say so, and if you’re trading I can understand a need for calculated neutrality. But I think optimism, and our psychological approach to investing is just as significant as it is to living our lives each day. I think it can be part of a fundamental approach to finding opportunity among chaos. It may be an inappropriate word for the short-term when talking about the economy or a particular stock. But optimism has to more with a mindset for how we approach life each day.

œA pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.

Sir Winston Churchill

Admittedly it has been tough to stay optimistic at times over the past year. When most of us perceive challenge or pessimism we try to focus on more positive or constructive subjects. I think that’s a natural human trait, and very important in making constructive choices about the future. Equally however, when that happens it’s also important to make sure one is not simply ignoring the reality of a situation. There is a difference between a proactive choice to act positively for the future, versus wearing “blinders” without acknowledging risks or negative situations and doing something about it. In the face of so many negatives lately it has been a little tough find constructive choices.

But we can “stay the course” and maintain our goals. Sometimes that means doing nothing, and other times it means putting a little extra money aside for a rainy day and building up that emergency fund. It might even mean making a considerable investment in a key opportunity where others see nothing. For me it means “staying the course” with our goals. By “staying the course” I mean that I remain committed to saving and investing regularly via the 401(k), IRA, stocks and mutual funds. And no, I’m not a trader.

Many experts do predict continued economic weakness this year, but unless you think the financial world is coming to an end (and some do), stock valuations really have become very attractive throughout the market, with the long term price-to-earnings ratio as low as it’s been in decades.

With stocks of course, the short-term means very little. If we’re not in a bear market right now, we’re very close. But Walter Updegrave has written an excellent response to a question about the long term returns of stocks versus other asset classes. And he’s right- so much depends upon your measure of time for comparison of returns. Ten years isn’t enough in my book, especially considering that the long term historical average return from stocks is about 10% since the mid-1920’s. Personally I think 7% is a better number going forward. The comment trail on that post is excellent by the way, and “Jim” puts a rational face on our financial pursuits:

“There are several ways to make money. One adage is to buy low and sell high. There are lots of high quality stocks that are good deals right now. And if you add in the dividend, then you make money even when the stock is down. I™m taking those dividends and buying more stocks with good dividends. It just keeps compounding regardless if the stock is up or down. When the stock is down, I can buy more. The more things change, the more they stay the same. I remember the 90™s with the new economy. Everybody said that this time it was different. But it wasn™t . Same thing with the recession in the early 90™s. Everyone said it was different, but it wasn™t. Some recessions are more severe than others. But the economy goes in cycles. It always has, and it always will.” Posted By Jim

‘Ole Jim is right! As hard as it is to stay upbeat in the face of recession fears, housing challenges, a down stock market, etc it’s simply the cycle we’re in right now. We also see that some economic pundits are now worried about Stagflation? I haven’t heard that term in a long time. Some of these folks see a lot of parallels with the 1970’s. I remember as a kid waiting in the car in a long gas line for our turn at the pump. People didn’t drive nearly as much back then, but there were real fuel shortages across the nation. Can it get that bad today? Maybe so, but if we get to that point again we’re really in trouble.

We do face challenges, there’s no question about it. One area of the economy that has been crazy over the past year is food prices. When food prices strike the average consumer as excessive, then inflation has become a real factor in the economy. The other day I was in Costco and the price of eggs has almost doubled in the last month! What’s up with that? Something to do with grain and other commodity prices I’m sure. Nationally I’ve read the price of a dozen eggs has risen from an average of $1.19 to $1.92 per dozen over the past year. Costco sells a double pack of 36 total eggs that used to be $2.99. A good price, but not exceptional for Costco. Yet as of Tuesday this week those same 36 eggs cost $4.99! Holy omelet Batman! At this rate it may be time to buy a few chickens.

Of course as Laura Rowley discusses, everything is relative:

“Relativity makes us do weird things,” Dan Ariely of MIT says. “We might not think twice about paying $3,000 to upgrade to leather seats in a $25,000 car, but we won’t spend $3,000 on a new leather sofa — even though we might actually spend more time couch surfing than driving. We’ll add $200 to the cost of a $5,000 renovation project for upgrades, but also clip a 25¢ coupon for a $1 can of soup.”

Is it the same way with eggs? Sure. What about stocks? Absolutely… it’s just that I want my retirement to be relatively comfortable. To get there I need to stay on track, keep saving and make constructive choices. I think keeping an optimistic mindset helps us do that, especially among the uncertainty of the challenges we face.
I strongly believe in the long-term strength of our nation and economy. We set financial goals and do our best to minimize debt and keep saving money. We’re getting there, although sometimes it seems like one step forward and two steps back. But it’s all learning isn’t it?

“What is important is to keep learning, to enjoy challenge, and to tolerate ambiguity. In the end there are no certain answers.” Martina Horner

Maybe there are no certain answers to the questions we ask. But in uncertain times, we can choose to do something about our future! Best regards-

So this is how it’s going to be… the markets start the year off with steep losses. Many analysts predict we’ll see a 10% correction (or more) before the market regroups, and we’re well on the way. Obviously a lot of factors influence the market action, and it’s not simply “jobs data” or the recession bogeyman. Even oil at $100 a barrel was a fluke by someone out to grab a piece of history. Of course we may see oil at $100 again, but its effect on the economy is not as large as some may think. It does however show how there’s a host of traders and specialists sitting on the edge of their seats waiting for news- mostly negative news. And you know what? It seems like Emerson’s quote: “Be careful what you set your heart upon, for you will surely have it.”

I’m not saying that a bunch of investment professionals really want the market to crash per se… but I think a whole bunch of folks wouldn’t mind a little clarity. If we’re going to have a recession… then let’s have it and be done with it. If the market’s going to correct, then let’s get going. And if the credit markets are all screwed up, then… well, uh… Oh. Maybe we just don’t know if all the bad news is out there, and that’s part of the problem. Once we identify problems, our nature is to fix them. So far there has been little progress in identifying and “fixing” anything regarding the credit and subprime mess. The market indeed hates uncertainty, so that’s the biggest issue even in the face of challenging real estate markets across the nation.

By the way, Briefing.com has written an excellent Market Outlook for 2008 with a clear-minded view of the issues the economy faces. It’s a cautious view overall, but I appreciate the pragmatic approach taken by Dick Green in weighing the challenges ahead.

My view is much the same- I think it just takes time. With time, we’re going to get tired of the negative news… it’s going to fade and change will happen. And a whole bunch of people and companies are going to look for ways to make more money than they’re making right now. Best of all, this is an election year! A few of the presidential hopefuls are going to make a real impact on the hearts and minds of Americans. And that’s not a bad thing… a little hope and idealism goes a long way. Huckabee and Obama? Sounds like a pretty good race to me.

The news on the U.S. economy has seemed like a dogpile of negatives lately. I can’t help but wonder if perception is worse than reality in so many ways, and just maybe the economic tide is turning? There’s still a lot of negative news, but it’s not all bad lately. Even some realtors and tech execs think next year is looking better. And a few more institutions are looking ahead with predictions for a solid 2008 for the market.

I can’t pinpoint it of course but I think the worst (housing, mortgage, and credit issues) are behind us from a macro perspective. Here’s a great quote from an optimistic Bloomberg article that sums it up pretty well:

“A crisis leaves in its wake a wonderful rally cocktail of lower interest rates, lots of liquidity injections, cheaper stocks and a lot of pessimism,” said James Paulsen, 49, who oversees about $200 billion as chief investment strategist at Wells Capital in Minneapolis. “The period of greatest uncertainty or angst often begets the next ride.”

Tomorrow the Fed may cut rates again- my guess is a quarter point. If they hold steady the market won’t like it much however. And I’m not much of a heavy metal guy, but a little gold in the portfolio would have been helpful this year. If things turn positive next year we may be near the top for gold. Investing in the oil/energy sector has helped ease the “pain at the pump,” and at least oil prices have stabilized the past couple weeks. I was long in an energy fund from ‘04 to ‘06 and got out after huge gains… not a very smart move, but it looked like the top at the time. Should have known better… there is no top for oil near-term! Learned from that one and bought a couple of energy stocks to hold long term, which are doing just fine, thank you.

Forbes says San Francisco is the most expensive city in the U.S. to buy gas for your car, exceeding $3.50 a gallon. Ouch… of course those “most expensive places” also have about the highest salaries in the nation. But Houston or Dallas is averaging around $2.90 and St. Louis is about $2.74 this week.

By the way- do you drive an economy car or a hybrid? No hybrid here, but we do have a 45 mpg little Metro that earns its keep after the ‘99 sedan conked out in the garage. I haven’t thought much of flex-fuel vehicles that use the ethanol E-85 blend yet, but I stopped by a Wal-Mart with an E-85 pump and it was .60 cents cheaper than regular unleaded per gallon! I filled up and realized I would have saved almost $12 bucks if I was putting in E-85. I’m not keen on the fact that the U.S. government is subsidizing the production and sale of E-85, but when I think of the alternative and dudes like Chavez trying to milk us for every dime, then I think again. Speaking of milk, the government subsidizes dairy producers as well as host of other agricultural production anyway. Might have to look at flex and alternative fuels in the future.

Hard to tell where the economy will be in 6-12 months, but I’m a sucker for a come-from-behind win. Like Dallas last night… (how about Romo to Witten in the final seconds!). And I cheer on the underdog… which is how the international media has portrayed the dollar over the past year. Somehow I don’t think things are going to be quite as bad as some folks predicted back in June. Personally I made some long moves last week to get ready for the next leg up. Have a great week.