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Bob's Journal 
What's this?______________________________________________ NOTE FOR MEMBERS: An expanded and more frequent version of Bob's Journal now appears on the members' site at www.RetirementWatch.com. Check in there for more commentary and insights on all the financial aspects of retirement.
October 19,
2007 11:55 a.m. Remember about a year ago when the homebuilding companies wrote off big losses because of the housing downturn? The consensus among analysts and most of the builders was that marked the bottom of the downturn and that all of the losses were recognized. They turned out to be wrong. It looks like the same thing happened with the credit crisis. After the Fed’s rate cut and big write offs by financial services firms, the crisis appeared to pass. Now it is reappearing. There was Monday’s announcement of the $100 billion bailout fund established by three major financial firms. On Thursday, Bank of America announced a big downturn in earnings from the credit crisis. On Friday, Wachovia also announced an earnings disappointment and projected problems going forward. The housing downturn clearly took a big bite out of economic growth. Bridgewater Associates pegs the total impact as 3.5% of GDP and says the downturn is accelerating. One of the factors behind the decline is that households are withdrawing less home equity. The puzzle for many people is that the housing problem plus rising gas prices have not triggered a recession. Total consumer spending essentially is unchanged. Bridgewater contends that households are selling equities and buying fewer bonds to maintain their spending. Two factors could cause a decline in spending. One factor is that homeowners might recognize the decline in their net worth and realize it is not temporary. There usually is a lag in such recognition, which explains why spending usually is robust long after most economists thought it would decline. The other factor is foreign capital flows. If the dollar continues its decline (which is likely given the stronger economic growth elsewhere) foreigners will make fewer investments in dollar assets. That would remove a major source of financing of the excess household spending and bring spending to a sustainable level. It is difficult to know when these events might occur and their magnitude. That is why we stay invested in the markets, but we do so with some hedging. It also is why we have moved significant portions of the Managed Portfolios to international markets.
October 16,
2007 1:55 p.m. The last few days have been full of surprises for investors. They show why we insist on a margin of safety in our investments and kept part of our portfolio hedged, even after most investors were convinced that the Federal Reserve’s rate cut put the problems behind us. Here are a few of the events that increased the pessimism among investors in just a few days. ? There is fighting between Turkey and elements of the Kurdish part of Iraq. This spurred fears that the fighting could expand, though Turkey contends it simply is battling select insurgents. ? Oil hit $85 and appears to be on its way to $100 per barrel. ? Foreign investors fled U.S. dollar assets in August, as the Fed reported a record net sale of U.S. securities by foreigners. There also was a record sale of long-term debt securities. Importantly, foreign central banks and other institutions were net sellers of dollar-denominated assets. That indicates these major holders of the dollar are serious about reducing their holdings of dollars and seeking higher returns elsewhere. If this becomes a trend, the dollar will continue sinking. ? The mortgage meltdown is not over. When financial firms reported large write offs of mortgages at the end of the third quarter, many investors assumed the firms were “clearing the decks” and writing off any mortgage or other debt that was questionable. Instead, it looks like only the beginning. Yesterday major banks announced they set up an $80 billion pool to bail out defaulted mortgages over the next few years. Many analysts take this as a sign that these firms know there is much worse to come. Some are estimating mortgage defaults of up to $200 billion over the next couple of years. One lesson from all this is one we emphasize and that is explained in my book, Invest Like a Fox…Not Like a Hedgehog. It is not sufficient to examine the fundamentals of an investment. Events other than fundamentals, even from outside the market, affect the optimism and pessimism of investors. That in turn affects the price of the investment. The news and events are likely to be those not anticipated or considered by most investors. They surprise investors and cause them to re-evaluate their positions. The other lesson is that because of this we always need margins of safety and hedges for our portfolios. Otherwise we will be hurt by these sudden changes of sentiment based on news from either that is either in or out of the market. All the news is not bad. International markets and economies still seem to be doing well. We also look for such opportunities instead of being centered on U.S. markets.
October 5,
2007 1:25 p.m. Last weekend’s The Wall Street Journal had an interesting front-page article titled “Is Florida Over?” The story picked up on several points we made over the years and stated that those trends are increasing. The article’s thesis was that Florida is attracting fewer new retirees, and more of its retirees are moving elsewhere. The moves often are to states just to the north of Florida, earning those retirees the nickname “halfbacks.” Some of the disadvantages with Florida are longstanding, others are new or becoming worse. Property taxes have been rising. Especially unwelcome to a number of people is a Florida law that limits the annual increases of a current, full-time resident’s property taxes but allows a new home buyer’s taxes to shoot up based on current market value and also does not cap the taxes of part-time residents. This means neighbors with similar homes can have dramatically different tax burdens. Insurance costs also are rising rapidly, thanks to increased hurricane damage in recent years. Florida’s popularity also is one of its disadvantages, pushing up prices in recent years to make homes unaffordable for many retirees, or simply putting prices at levels they do not want to pay. There are shortages of doctors and other key services, according to at least some Florida retirees. Florida has seen pauses in its population growth before only to see the surge resume. But neighboring states are being more aggressive about attracting retirees and part-time residents. Instead of automatically considering a move to Florida prospective retirees should take a look at alternatives.
October 2,
2007 2:25 p.m. Are investors betting on a quick turnaround in the economy and the markets, or are they ignoring bad news? The explosive rally to start the fourth quarter on Monday raised those questions. But there likely are other factors are work. The feared month of September ended, and that brought some investors back into the market. The start of a new quarter also tends to cause a lift for stocks. Also, short sellers probably continue to cover their trades. Other factors propping up stock prices are that corporations continue to buy back shares, and insiders seem to have reduced their selling and increased their buying. There also are fewer new offerings of stocks. Investors seemed to be excited by the large write downs from CitiGroup and UBS. The thinking is that banks and other companies hurt by the housing crisis are recognizing their losses early and putting them on the books. This contrasts with the technology bear market and other times when companies in trouble recognized small portion of their losses steadily over time. That approach increases uncertainty and causes investors to lose confidence in the sector. Big write downs make investors believe that the bad news is out and the bottom is reached. Investors need to keep their seat belts fastened. We probably still are in the middle innings of the subprime mortgage meltdown. There are many mortgages scheduled to be re-adjusted over the next two years. Those mortgages need to be refinanced, or the debtors need to find other ways to make the higher payments. While things have improved in the credit markets, they are far from where they were before the crisis hit in July. Lending standards are tighter in both the mortgage markets and corporate bond markets, especially for corporate takeovers. That means fewer corporate takeovers and continuing slow home sales. I expect that the housing market will stay weak for many months. Investors were encouraged when the buyout of First Data Corp. was completed last week. But there still are over $300 billion worth of bonds that need to be sold to finance deals that were announced in the spring and summer. Investors need to see how those sales go before they can start to think that the worst is over. Our portfolios are positioned to benefit from continued profits in U.S. stocks. But we also are hedged in the U.S. markets and invested outside the U.S. The mutual funds we are suing are run by value-oriented managers who always look for a margin of safety and will hold cash when there aren’t enough investments to meet their criteria. That is how to preserve our capital and earn safe, solid profits over time.
October 2,
2007 2:30 p.m. IRAs used to be simple, powerful tools for investors. The simple formula for IRA management was keep costs low and invest for long-term growth. As investors approach retirement and consider the estate planning implication of IRAs things become more complicated. A key decision for the IRA owner is the choice of custodian. While most people focused on cost and services, there are other factors that become more important as time passes. Vanguard IRA owners recently learned this when they received a letter from the mutual fund giant. The letter stated that all of its IRAs of the same type are required to have the same beneficiaries. The latest beneficiary designation form for any of the IRAs will be applied to all Vanguard IRAs of that type. While this is convenient for Vanguard, it reduces options for IRA owners. The tax law allows separate IRAs and allows different beneficiaries for each IRA. There are many reasons to have different beneficiaries for the IRAs. You might want one IRA to primarily benefit one child, and another for another child. That prevents the children from arguing about the IRAs when they are inherited, or you might want to invest different for each of the children. You also might want to benefit one child more than another. Or a couple might have children from different marriages. Or one IRA might primarily benefit a charity, while the other benefits a spouse or children. The list can continue. Vanguard says it will allow different beneficiary designations if an IRA owner calls and convinces them of the need. But you shouldn’t have to do that. This is just one key question that needs to be asked of IRA custodians before you choose where to place your IRAs. Remember, a custodian does not have to allow the full range of options permitted by the tax law. Questions to ask potential IRA custodians are in my book, The New Rules of Retirement and also in the Archive in the members’ section of the web site at www.RetirementWatch.com.
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The web site and web journal of the editor of Retirement Watch, covering all the financial aspects of retirement and retirement planning, with a few odds and ends thrown in.
E-mail: BCarlson@ Bob's Journal Archives January 2007
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