Sushi Money

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 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.

Lots of thoughts out there on the Bear market we’ve entered.  Historically bear markets last about 14 months and see 25% to 30% declines from the previous top.  But maybe this all started around October 2007?  We’ve danced around a 20% decline for a while now, but will it go further?  And does that mean we’re going to see 14 months of dwindling stock indexes from here?  Maybe.  But maybe we’ve only got about 6 months left to go on that historical average and next year, post U.S. election, everybody wants to turn this economy around.

Some folks think the oil futures markets have been manipulated, and that others have jumped on the speculation bandwagon to produce unsustainable returns.  Maybe in other commodity markets too.   And just maybe this is one giant bulge of excess that’s about to deflate.  

What happens to that excess of money? It has to go somewhere.  Maybe it’s like a sector rotation, and that money will have to be put somewhere else in bargain priced assets.  Could stocks be the beneficiary of all that money?  Maybe.

We’re starting to see a mass of negative public opinion concerning the inflationary storms affecting the global economy.  And folks also think becoming energy independent is not such a bad idea after all, even if it does involve a little drilling.  The politicians have to do something of course, usually to excess, that influences current market dynamics.  And eventually, the oil bubble is going to pop. 

Sure we’re going to see higher oil prices in the years ahead, but right now the oil markets are out of balance.  Once excess speculation is reigned in and oil producers have greater access to supplies, oil prices will fall.  How much?  Who knows, but at some point we’ll be closer to an equilibrium reflecting a more realistic supply and demand situation. 

And maybe the dollar gets a lot stronger over time.  Maybe the U.S. or some other country intervenes in currency trading in a big way.  Maybe the U.S. backs new exploration and drilling or refinery operations.  Maybe we help automakers shift to alternative energy vehicles faster than expected.  Maybe there’s just too much oil out there waiting in the wings anyway.  

And maybe equity markets, piled high with enormous short positions, will rally.   Maybe.  But hey, it’s all just pure speculation.  If it does happen?  There’s going to be some huge moves in a short timeframe.  Maybe both ways.  But when this beast turns around you don’t want to miss out.

 Even with a challenging economy and dynamic swings in stock prices, the market has begun to advance over the last couple of months.  While the U.S. economy teeters on the edge of recession, is it really that bad out there? That certainly depends on your individual situation, but for the most part we’re managing to get by, even with gas and commodity prices that are out of control.  Interest rates have dropped quite a bit and that’s provided some relief to homeowners with ARM loans.

But is the Fed finished cutting rates?  Many experts believe so, and that from here will be a long pause to allow the economy to work its way back into growth mode.  Maybe the Fed Has Bought Enough Anti-Recession Insurance for now.  But we’ve got to put our money to work somewhere, and for most of us that means staying invested even in difficult times.

The amount of negativity about the economy and markets have been amazing this past year, and Jason Zweig’s near-contrarian view offers some good advice for Why Acting Bearish is a Dumb Move.

“This has been one ferocious stock market. Not only has Wall Street been flirting with a bear market – conventionally defined as a 20% decline in the major indexes – but we’re now in “the second-worst eight-year period for stocks since the 1930s,” says money manager Martha Ortiz of Aronson Johnson & Ortiz in Philadelphia.”

“…a growing chorus of bears thinks that the worst is yet to come and that investors should get out of the market. After all, everyone knows stocks will keep sagging since it’s obvious the economy is sinking into recession, right?”

“Even if the economy is headed for real trouble, don’t assume that your portfolio is too. Larry Swedroe, director of research at Buckingham Asset Management, notes that the U.S. economy has experienced 11 recessions since World War II. From the first day of those economic contractions to the last, stocks still managed to deliver average gains of 7.1% vs. 5.1% for cash.”

Bottom line?  Stay invested, stay long, and focus on living positively each day.  It’s not always easy to do, but I try to tune out the economic noise, and remember what’s important at home and with family.   If there’s something I’ve learned from this almost-recession and high gas and grocery prices, it’s that we really don’t need a lot of the things we spend money on.

Cutting back spending and becoming more frugal isn’t that difficult.  I don’t know about you, but when I save money or do something more efficiently, it really makes me feel good in other areas of my life.  It helps me to focus on the important aspects of life, and the goals I have for personal growth.  I’m not tied to worries or stress about the market, and how my retirement funds are doing.  

It’s about improving the quality of our lives and experience versus the quantity of something that is always changing.  

Laura Rowley describes it very well as feeling blessed. 

“Money can certainly buy us a measure of freedom or security, but money itself is none of those things. If we think money is security, we’ll never amass enough to feel secure. If we think it’s freedom, we’ll never earn enough to be free.”

“Once we remove the emotional baggage, we can acknowledge that money is just one component to achieve our goals instead of an all-encompassing solution. If freedom is a value, we have to ask which people, qualities, and experiences have made us feel most free in the past: Where do I need to live to be around those people? What should I do for my work, and how should I spend my leisure time? How much money do I need to help me create a life with those qualities and experiences? Being as specific as possible about how to manifest these qualities in our lives will keep us from running on the hedonic treadmill.” 

“… long-term flourishing requires discipline, persistence, hard work, faith, and, most important, pursuing goals that are close to your heart and based on your personal gifts.”

When we take time to appreciate what we do have in our lives, we begin to understand more about ourselves, our relationships and where we want to go.  It’s an essential part of the process of discovery, not only for whatever personal gifts we possess, but for the direction of the journey itself.  

Is money the reason for the journey?   Not by a long shot.  But it certainly helps.  A little balance and reflection helps even more.  Growing our money, like growing our lives, takes time and staying invested.  Money provides a lot of things in life, but it can’t buy long term happiness.  Money is simply a tool to take along the journey.  Sure it’s important, but if we forget our goals and what’s important in our lives, then we really haven’t gone anywhere have we?

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.

Sounds like the title of a newspaper with all the recession talk these days. While millions of U.S. airline travelers are stranded across the nation, the rest of us are paying the highest prices we’ve ever seen for a gallon of gas. But Carol Sottili of the Washington Post’s Travel Section shares a discussion about what travelers can do in the face of so many airline cancellations. It’s finally bad enough that some politicians are talking about airline re-regulation again. The cost of cancellations certainly hurts airlines and passengers, but with the price of fuel skyrocketing, maybe a few extra planes on the ground doesn’t hurt their business either.

What chance many of us thought for avoiding a recession here in the U.S. is now all but certain. Many experts believe we’re already in a recession and that company earnings reports are going to get worse before getting better. Others think that understanding the recession dynamics is really pretty simple. I certainly agree that it’s all about people. I also think it’s all about people’s response to economic challenge, and these days the economic challenges have continued to grow. So if the recession is here, what do we do about it? Matt Callow shows us how to profit from the global recession.

Is it really that bad out there? While some economists think the worst of the credit crunch is behind us, some folks think that a Worldwide Depression is a Real Possibility. That sounds alarmist to me, but as Ronald Reagan once said,

“A recession is when a neighbor loses his job. A depression is when you lose yours.”

He was pointing out that it can be a matter of perspective. Are we going to see a depression? I can’t imagine it, but if gas prices don’t start retreating it’s going to get a lot harder for the U.S. economy. Business week shows us that as with much in life, how bad it is out there depends on whom you ask. But it’s a wake-up call for many as recent data shows that Americans recorded the largest-ever plunge in retirement confidence in 18 years of polling.

The markets continue to wander with many investors wondering if it’s time to step back in the pool. But The Big Picture presents some interesting data and says stocks are really not cheap yet.

As to valuations: “Its hard to really say that stocks are cheap here. At best, I believe we can argue that — assuming that historically high earnings do not fade — that stocks are not terribly expensive. But that is very different than saying they are cheap.”

It’s hard to say what’s cheap or not these days while we hang on every snippet of bad news. But for a little perspective, I like Minyanville’s 35 Signs the Market Hasn’t Hit Bottom Yet.

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. 

The market is soaring today and seems to like the recent aggressive action by the Federal Reserve, and that they may drop the Fed Funds rate by a full point or more today.  I sensed a change by several commentators that instead of the Fed being behind the credit crisis the past few months, they are actually now way in front leading the charge to solve the financial problems.   Which is good.  Maybe it’s not all doom and gloom.  Although there’s still a lot of disagreement about the Fed’s course of action to solve these problems over the long term.

But Fed Chairman Ben Bernanke is well-versed in Depression era financial lessons, and did a great deal of academic research on the same.  So he has studied the causes and influences of the financial problems of the 1930’s and is working to prevent the same thing from happening now.

Apparently the banking and lending industries have just about shut down over the past weeks as everyone is afraid of  doing business with another company that may go bankrupt.  Some of those fears have eased today after Lehman Brothers (LEH) and Goldman Sachs (GS) both reported earnings that were not quite as bad as many have thought, with higher estimates going forward. 

That’s all the market really wants right now… clarity for the road ahead.  And with today’s Fed rate cut, as well as earnings announcements over the next few weeks, we may have a lot more of it.   Still going to be pretty volatile, but I honestly think we’re starting to put the worst of this behind us.

“What?!” I can hear a lot of folks saying…  because it just doesn’t seem that way right now.  There’s lots of fear and near-panic in some sectors, and with housing still down and oil and commodities through the roof a lot of folks are worried.

But this isn’t the Great Depression.   Unemployment right now is pretty strong, although that doesn’t mean anything if you’ve lost your job recently.  I wish those of you the best if you’re looking for work.  Many folks are rightly concerned about where their money is and if it’s safe.  For money you can’t afford to lose- it should be in FDIC insured bank and money market accounts.

What if you’re worried about your portfolio?  Make no bones about it, I’m a long term investor with a 10+ year horizon investing for retirement.   The LA Times has a good Q&A article that tells Investors to Take Deep Breath Amid the Storm.I just think it’s not that bad, and it’s not going to get much worse. It’s like the negative press and commentary has reached a crescendo, and just when everybody finally “buys in” to the storyline about how bad it is, the market’s going to turn. 

Somewhere there’s going to be a guy on a street corner with a sign… ‘THE WORLD’S GOING TO END!” and he’ll be standing there by himself looking around wondering where everybody went.   Back to work my friend, trying to make their lives better.

Some pros even see the markets headed higher by the end of 2008.   That’s the camp I’m sitting in.  I remember the recession of ‘90-’91 timeframe.  Many politicians and folks running for election cried that it was the worst economy in 50 years.  And then it picked right up again the following year, leading to a huge run of growth through the 1990’s.  Is it different this time? I doubt it.

We’re in an election year right?  One side is going to gnash their teeth and cry about every aspect of the economy. Lately they have good reason to unfortunately.  I sure wish some of these folks would talk about what’s good in the nation and the economy once in a while, instead of everything wrong with it.  You don’t lead by shrill complaint… you lead through inspiration.  Probably why Sen. Obama attracts a lot of folks?   But one of these days the markets will turn around with conviction (today?) when the news is not quite as bad as before.   Smart money is even buying strategically right now.

“But what about the dollar?” I hear others say.  Well, let’s just say there’s a few companies here at home that really benefit from a low dollar.  But it’s too low right now, and is part of the problem with higher oil prices.  Overall however, the dollar’s going to rebound over time- just watch and see.  I wouldn’t bet against Uncle Sam any time soon.  All the press about this or that country shunning dollars. Hogwash.  Wait until the least crisis in their own country or region- guess where the money will flock to?   Right back here…  and we’ll step up to the plate and do what we’ve always done.  We’ll help them get through it too.

*** Update: Late today JP Morgan Chase announced it’s buying Bear Stearns for $2 a share (yes, 2 bucks) in a deal already approved by U.S. regulators… ***

Get ready for a tough week ahead. As corporate earnings come in, especially from financial companies, we’re going to hear a lot of negative stories about the economy. Some think we’re close to seeing a market bottom, but volatility may be huge this week as well. CNN/Money sees danger ahead, but the Federal Reserve is doing everything it can to reassure financial markets.

Expect the Federal Reserve to cut the Fed Funds Rate once again on Tuesday of this week. Lower Fed rates have not had much impact on lowering mortgage rates however, because banks are trying to make money by widening the spread between what they pay and what you pay to borrow money.

Treasury Secretary Hank Paulson has made the rounds of the media circles and also states that the government will do what it can to help:

“The government is prepared to do what it takes to maintain the stability of our financial system,” he said. “That’s our priority.” …From the beginning I have said, as we work through this period, if this was like other times in the past, there are going to be bumps in the road. There are going to be unpleasant surprises. You are going to find that an institution or so has problems. And when they do have problems, you work to deal with it,” Paulson said.

Is the government and our political leaders taking American’s concerns seriously enough? Many think so, but many do not. Perhaps it depends on if you’re the guy with the good-paying, secure job or the one who is struggling or recently laid off. Unfortunately we’re seeing more of the latter these days.

Secretary Paulson’s words are good, but I would like to see more reassurance out of the government. Not in the form of handouts or taking control. But in the form of leadership. Standing tall and telling Americans the straight story. Even the President could acknowledge the challenges a little more- and ask the nation to buck up and work together.

I said it six months ago and I’ll say it again-we’re looking at Financial Confidence In Absentia. I think the President could learn a few lessons from Franklin Roosevelt:

œAfter 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 œOn the Banking Crisis – March 12th, 1933

It’s one thing to speak from the pulpit, but it’s another to get out there and really understand what’s going on, and help people understand how we’re going to move forward. President Bush is meeting with top financial experts and economists tomorrow. I hope that meeting charts the course for a new future, and brings realization that rhetoric is not enough.