Tuesday, April 30, 2013

Buy A Company's Bonds or Buy Its Stock? ... The Apple Example

Apple is going to borrow $17 billion in various maturities.

Apple stock has been going up in a straight line for the past week.

Which is the better decision, to buy Apple bonds or Apple stock, and why?

It's a no-brainer. Buy the stock for higher current cash payments in the form of dividends, higher future cash payments in the form of growing cash dividends due to future earnings growth, and a future higher stock price due to both higher future earnings and a newly enhanced $60 billion stock repurchase program by the company.

Should you buy Apple bonds? has this summary of the situation:

"Apple’s first bond sale in more than a decade is sure to get attention. But pros say most investors will want to stick with the stock.

The maker of iPads, iPhones and Macbooks made headlines Tuesday saying it planned to sell $15 billion to $17 billion worth of bonds as part of its strategy to return profits to shareholders. Apple’s devoted customers have shown a willingness to buy almost anything that company offers. But with yields on high-quality corporate bonds so meager, many financial advisers think investors should be wary of adding more of these to their portfolios.

Market chatter reported by the Wall Street Journal suggested Apple’s bonds would pay about 0.9% to 0.95% more than 10-year Treasurys. But yields on those benchmark bonds recently fell to 1.64%, their lowest of the year. By comparison inflation is about 1.5%.

“While the credit quality is excellent, the yield is still very low.” says Brian Kazanchy, a wealth advisor with RegentAtlantic in Morristown, N.J, which oversees $2.5 billion. “It’s not something I would be particularly interested in.”

To be sure, Apple’s bonds have some attractive features. They will be rated Aa1 by Moody’s and AA+ by Standard & Poor’s—just a notch below these agencies’ top ratings. One key reason: Despite operating in the fickle personal computer business, Apple’s $140 billion cash hoard makes even $17 billion look easy to repay. . . .

A bigger problem, however, is the broader interest-rate environment. While the Federal Reserve has been holding rates down to spur economic growth, that won’t last forever. When rates climb, bond prices fall, meaning investors in Apple bonds could lose money even if the company’s next big product is as big a hit as the iPhone or iPad. . . .

With Apple’s stock at roughly $444, a third below its high of more than $700 last fall, many say the company’s stock has more upside for investors. Indeed, John Kozey, a senior analyst for Thomson Reuters, says he thinks Apple’s shares still deserve a price tag of more than $700. “Apple remains a very powerful cash generator,” says Kozey."

Summing Up

Being an owner is preferable to being a lender.

An owner participates in the upside earnings of a company, including increased cash dividends and higher share prices.

A lender just gets the agreed upon interest rate during the loan's duration and then his money back when the loan is repaid.

For individual investors, owning stock in a company beats owning a company's bonds.

The current Apple situation proves the case. Apple's current cash dividend yield is higher than the interest it will pay on its ten year bonds.

To repeat, it's a no-brainer. At least that's my take.

Thanks. Bob.

What Causes Success?

Listen up, my young friends. And maybe some parents may find what follows somewhat helpful as well.

We're going to take a quick look at which is more likely to result in success --- innate ability or sustained effort?

"Raw" intelligence or "emotional" intelligence?

In my view, it pretty much comes down to setting goals and then working hard to achieve them, aka sustained effort. Although admittedly trite, it's also true that the harder we work, the luckier we get.

And one more thing is the most important of all -- recognizing that life is a 99 rounder and that developing the 'habit of improvement' through perseverance are the keys to accomplishing whatever goals we establish for ourselves, aka emotional intelligence.

But don't just take my word for it. Let's listen to an "expert" on the subject of success.

The Success Myth says this about success:

"Quick: Think of a successful person. Someone who is really good at what they do.

Now, in a word or phrase, tell me why that person has been so successful. What makes them so good?

Obviously, I can’t hear your answer. But I’d be willing to wager that it had something to do with innate ability.

“He’s so brilliant.”

“She’s a genius.”

“He’s a natural leader.”

These are the kinds of answers people — particularly Americans — tend to give when you ask them why certain individuals have enjoyed so much success.

Pro athletes, tech whizzes, bold entrepreneurs, accomplished musicians, gifted writers: We marvel at their extraordinary aptitude, assuming they must have won the DNA lottery to be so good at what they do.

Deep down, many of us believe that the key ingredient to success is innate ability. So, naturally, we try to stick to doing the things that come easily to us, while avoiding wasting time and energy on the things that don’t. (How many times have you heard someone say “I’m just not a math person”? How many times have you said it?)

This would all be fine, if success really were all about innate ability.
But it isn’t. It isn’t even mostly about innate ability.

When you study achievement for a living, as I do, one of the first things you learn is that measures of “ability” (like IQ) do a shockingly poor job of predicting future success. Intelligence, creativity, willpower, social skill aptitudes like these are not only profoundly malleable (i.e., they grow with experience and effort), but they are just one small piece of the achievement puzzle.

So, what does predict success? Research tells us it’s using the right strategies that leads to accomplishment and achievement. Sounds simple, but strategies like being committed, recognizing temptations, planning ahead, monitoring your progress, persisting when the going gets tough, making an effort, and perhaps most important believing you can improve, can make all the difference between success and failure.

The problem with thinking that success is all about ability, is that it can lead to crippling self-doubt. When something doesn’t come easily, we assume that we “just don’t have what it takes,” and we stop trying. We close doors, robbing ourselves of opportunities to realize our full potential.

By contrast, studies show that people who believe that their skills and abilities can grow not only succeed more, but they also enjoy their work more, cope more effectively with challenges, and experience less anxiety and depression.
So the next time you find yourself thinking, “I’m just not good at this,” remember, you’re just not good at it yet.

Heidi Grant Halvorson is Associate Director of the Motivation Science Center at Columbia Business School. She is the author of Succeed and Nine Things Successful People Do Differently."

Summing Up

Makes sense to me.

Rings true to me as well.

We're all capable of developing our talents and achievements to accomplish extraordinary feats.

As 5'7" NBA dunk champion Spud Webb put it, "If you can dream it, you can do it."

But doing "it" requires lots of time on task, perseverance in the face of adversity and defeat, and developing and maintaining the habit of continuous and rapid improvement.

In other words, to my young friends out there, what we do with our lives is largely, albeit not entirely, up to us.

That's my take.

Thanks. Bob.

Thinking Through the Value of Pursuing a College "Education" ... The Value of Bachelor's Degrees versus Those of Two Year Community Colleges

Everybody 'knows' that a college degree is worth the investment of time and money. But is that always the case? And when isn't it a good investment or the right thing to do?

In my view, the correct answer to whether a college education is a good investment is often a complicated one. Its value very much depends on what we learn while in college, whether we graduate, and how much it costs us to get that degree, both in time and money. Finally, is it necessary to prepare or credential us for what it is that we want to pursue as our life's work?

As a college graduate, I can attest to the fact that not all that much work or worthwhile learning is necessary to attain a degree. It's pretty much an endurance contest.

That said, getting "credentialed" properly is necessary for many types of positions, and learning is available to those who make the effort. Accordingly, the individual would-be student is best able to judge for himself whether a college education is important.

In any case, there is now growing evidence that a two year community college associates degree is not only both cheaper and less time consuming to secure than a four year degree, but it's also often worth considerably more in the marketplace. That fact alone should be enough to make more of our young people think things through a little more carefully before jumping on the college bandwagon.

The Diploma's Vanishing Value is subtitled 'Bachelor's degrees may not be worth it, but community college can bring a strong return:'

"May 1 is fast approaching, and with it the deadline for high-school seniors to commit to a college. At kitchen tables across the country, anxious students and their parents are asking: Does it really matter where I go to school?

When it comes to lifetime earnings, we've been told, a bachelor's degree pays off six times more than a high-school diploma. The credential is all that matters, not where it's from—a view now widely accepted. That's one reason why college enrollment jumped by a third last decade and why for-profit schools that make getting a diploma ultraconvenient now enroll 1 in 10 college students. But is it true that all colleges sprinkle their graduates with the same magic dust?

With unemployment among college graduates at historic highs and outstanding student-loan debt at $1 trillion, the question families should be asking is whether it's worth borrowing tens of thousands of dollars for a degree from Podunk U. if it's just a ticket to a barista's job at Starbucks. When it comes to calculating the return on your investment, where you go to school does matter to your bank account later in life.

Not surprisingly, research has found that a degree from a name-brand elite college, whether it's Harvard, Stanford or Amherst, carries a premium for earnings. But the 50 wealthiest and most selective colleges and universities in the U.S. enroll less than 4% of students. For everyone else, the statistics show that choosing just any college, at any cost for a credential, may no longer be worth it. . . .

Think a community-college degree is worth less than a credential from a four-year college? In Tennessee, the average first-year salaries of graduates with a two-year degree are $1,000 higher than those with a bachelor's degree. Technical degree holders from the state's community colleges often earn more their first year out than those who studied the same field at a four-year university.

Take graduates in health professions from Dyersburg State Community College. They not only finish two years earlier than their counterparts at the University of Tennessee at Knoxville, but they also earn $5,300 more, on average, in their first year after graduation.

In Virginia, graduates with technical degrees from community colleges make $20,000 more in the first year after college than do graduates in several fields who get bachelor's degrees. Yet high-school seniors are regularly told that community colleges are for students who can't hack it on a four-year campus.

That's how Tom Carey landed at Radford University in Virginia as a business major, though his real love was working on cars. "There was definitely pressure" to go to a four-year school, he told me. "I had no interest in whatever degree I was getting at Radford."

After two years, Mr. Carey, who is from Reston, transferred to be closer to home and enrolled in the automotive-technology program at Northern Virginia Community College. He is now working at a Cadillac dealership and outearns business graduates from Radford's undergraduate program by several thousand dollars. That small difference grows considerably when you take into account that a community-college degree is a fraction of the cost of a bachelor's degree and that these students enter the workforce two years earlier.

Even if Mr. Carey had stayed at Radford, graduates of the undergraduate business administration program there make an average $10,000 less their first year after graduation than those from George Mason University, though both schools charge about the same in tuition.

Given these differences in postgraduate earnings, the size of your student loan is not the only number you should worry about when weighing the college decision. Will you make enough to pay off your loan? What are your chances of graduating on time?

In recent months, two tools have been released that allow families to better compare colleges with respect to return on investment. The U.S. Education Department's College Scorecard website helps you figure out where to get "the most bang for your educational buck" by compiling federal data collected from colleges. from the Chronicle of Higher Education allows for quick and easy comparisons between colleges on measures families should weigh during their search. It includes early-career salaries for college graduates from, which are self-reported by users of the site.

Colleges don't like being measured by the earnings of their graduates. Defining value in such a narrow way, they argue, obscures the broader benefits of higher education. They point out that first-year salaries often have no bearing on earnings later in life. It's true that those with bachelor's degrees typically earn more over a lifetime than those with a two-year degree, but that's little consolation to those who are discouraged from going to community colleges and end up dropping out of a four-year school without a degree. . . .

For decades, U.S. colleges have promoted the economic benefits of higher education. But now that they can no longer ride the coattails of the national averages—which obscure the value of individual schools and make everyone look good—higher-education leaders suddenly think salary is too narrow a measure.

Students who pick their major based solely on postgraduation salaries, as opposed to passion for a field, will in all likelihood struggle in both school and career. But without salary information, many more students will make bad choices. They will go deep into debt without ever knowing that they pursued a degree without a chance at a career or a job to pay off their loans."

Summing Up

As my parents used to tell me, death and taxes are the only two sure things in life.

So that's about all I really know for sure.

However, I believe that some things we choose to do because we enjoy doing them are much more likely to work out to our long term enjoyment, fulfillment and financial advantage than other choices will.

The best way to be prepared to do anything is to acquire the appropriate knowledge, skills and training concerning what it is that we're learning to do.

Today the unaffordable burden of student loans and the difficulty of getting a good job make the college decision a difficult one for many of our young people. Accordingly, it's important that the prospective student (and his family) looks before leaping and that if he does decide to attend college, that he has first resolved to make the effort to graduate in a timely and cost effective manner with a degree that has considerable value in the job market.

So when considering college, think it over carefully. The decision to go or not go, and then to graduate or not graduate, what degree to pursue, and how many, if any, student loans to assume is a biggie.

The decision is a 'game changer,' in other words.

That's my take.

Thanks. Bob.

Monday, April 29, 2013

An Apple for Grandpa ... Apple is a Dividend Paying Value Oriented Investment for This Grandpa DIYer

I'm a Grandpa. I'm also a long term DIY investor in quality blue chip dividend paying stocks.

That brings me to technology. Among others, I've owned shares in Microsoft and Intel for several years. Microsoft has a current dividend yield of 2.89% and Intel has a yield of 3.851%.

And that brings me to Apple. Its cash dividend yield is near 3% and cash dividends are likely to increase over the next several years. {So is the price of Apple stock which is up another ~3% this morning.}

As a comparison, ten year U.S. Treasury bonds yield 1.67%.

And Apple has also increased its share price supporting stock buyback program to $60 billion from its former level of $10 billion. Apple is now a stock for value investors and that's what Grandpas either are or probably should be.

Rethinking Apple: Growth Stock, Value Play -- Or Both? says this about Apple's transition from a growth stock to a value oriented, high dividend paying investment:

"If you're an Apple stockholder, there's good news and bad news.

The good news is the stock is once again an attractive investment—especially after plunging from September's $705 peak all the way down to $417. The bad news is that many of its most loyal fans might be holding it for the wrong reasons.

Many people still think of Apple as an exciting "growth" stock, promising hockey-stick returns. They're wrong. These days the company is better viewed as a so-called value stock—a slightly dull one that should be owned for the cash flow and dividends it generates, much like, say, a Johnson & Johnson.

Investors in both camps own it. Those still hoping for big growth were disappointed this week when Chief Executive Tim Cook failed to unveil a new breakthrough product. In preceding weeks the rumor mill had been churning as usual, talking of Apple watches, or a new iPhone with a bigger screen, or an upgrade to the iPad Mini. . . .

Instead, Mr. Cook announced plans to ramp up Apple's moves to return cash to investors through higher dividends and by repurchasing some of the company's stock. In total, Mr. Cook said, the company would return $100 billion through the end of 2015.

Wall Street analysts are divided on stock repurchases. Many times, they argue, these repurchases aren't the best use of a company's money. Yet a look at Apple's finances shows why Mr. Cook's plan makes sense and is likely to benefit investors.

There are 950 million Apple shares in existence. At $417 each, the entire company is valued at $396 billion. Yet Apple is sitting on net cash, investments, inventories and receivables, minus all liabilities, worth $110 billion. So, on a cash-free basis, the "enterprise" value of the company is just $286 billion, or about $301 per share.

That is less than eight times forecast per-share earnings of about $40 in the fiscal year ending this September and seven times the $44 forecast in the subsequent year. By contrast, the Standard & Poor's 500-stock index, the most common benchmark for the overall stock market, trades at about 14 times forecast per-share earnings.

The challenge for Mr. Cook and the Apple board is to return a substantial amount of that cash pile to investors, compensating them for holding the stock. To be sure, there are complications. Some of Apple's cash is parked offshore and would first be taxed at U.S. corporate income-tax rates if returned to stockholders. The company instead plans to borrow cash to help pay for buybacks, avoiding the tax hit.

Right now that money is earning very little interest. Using it to buy back stock and reduce the share count will increase the earnings per share for those investors who don't sell. Apple will also spend some money raising dividends by 15%, to $3.05 per quarter. The annual yield, meaning dividends divided by the stock price, is now 2.9%. That is much higher than the 2.1% yield on the S&P 500. . . .

Apple isn't a perfect value stock. It operates in a more volatile industry than. say, utilities or food companies. . . .

However, while competition and changing consumer tastes might put pressure on the company's earnings, there is also plenty of potential growth to offset that, say analysts. The markets for smartphones and tablets are still growing quickly. Sales remain comparatively small in big markets overseas, especially in Asia, they say.

Apple might yet launch new innovative products as well. . . .

Once upon a time, Apple stock was as exciting and dynamic as an iPhone. Today Grandma owns an iPhone. She can also own some Apple stock."
Summing Up
While I don't own an iPhone, this past week I did buy some Apple shares. I intend to buy more and own them for a long, long time.
It looks like a great long term dividend paying and share price appreciating blue chip investment to me.
Thanks. Bob.

More On Investing in Bonds, Bond Funds and Even Target Funds ... Stay Away

Fixed income investing is an important topic for individual DIY investors, so it only makes sense to periodically share what knowledgeable people are saying about this. And that's especially true when there are are reasons to question this long followed practice and traditional advice of diversifying our investment funds for retirement and other investing purposes by owning bonds, bond mutual funds or target mutual funds.

In fact, the whole idea of bonds and fixed income as 'safe investments' which will return income and protect the principal on an inflation adjusted basis is a wrong one today and will be for the foreseeable future as well.

That's been my expressed firm view for some time now, of course, but don't just take my word for it. Let's listen to what a real expert has to say.

10 investing rules for the coming bond crash is subtitled 'Warning: Your bond funds could lose 25%:

"“The best piece of advice I could give long-term investors today is don’t own bonds. And if you do own them, you probably ought to move out of them,” warns Charles Ellis, acclaimed author of the classic “Winning the Loser’s Game: Timeless Strategies for Successful Investing.”
Get it? Do not own bonds. Sell. Move out now. . . .

Here are the numbers: “Right now the Federal Reserve is set on keeping rates down,” explains Ellis, because “the yield on a 10-year Treasury bond is under 2%. When yields go back to their historical average of 5.5%, an intermediate bond fund could go down 25% in value.”. . .

Investors will get hit hard: Ellis says “people who are putting their retirement money into [so-called] safe-bonds can get hurt badly,” . . . when the bond bomb goes off.”


Forget individual stocks, buy index funds

. . . “So they should be buying stocks?” Ellis was emphatic: Not stocks. “They should absolutely invest in a low-cost index fund ... forget about stock-picking.”

Why no individual stocks? Very simple: The fact is that most investment advisers are losers. Or as Ellis more delicately puts it: “Most active managers underperform because of the fees.” In fact, 80% of all investment advisers lose money for their clients because “after fees, their returns end up being below the market.”

Yes, they are losers. They are losing their investors’ hard-earned retirement money. Solution: Investors should switch to index funds to save 30%. But year after year they remain in denial and just keep throwing away their hard-earned retirement money. . . .

10 rules: Winning the loser’s game is no sell-bonds one-trick-pony

Main Street’s long-term investors need to look (at the book written by Ellis) “Winning the Loser’s Game: Timeless Strategies for Successful Investing,” which is coming out with a sixth edition soon. Ellis originally wrote it in the mid-1970s.

The legendary management guru Peter Drucker calls it “the best book on investment policy and management.” And Jack Bogle credits Ellis’s book as the inspiration for his first index fund at Vanguard in 1976. . . .

Ellis says the winning strategy for Main Street investors playing in Wall Street’s casino against killer pros is being patient, minimizing mistakes. Yes, follow his 10 rules and you can win the “loser’s game:”

1. Never speculate

Yes, the financial press acts like Nascar cheerleaders. One says jump on board now, this market is a “muscle car mired in the mud,” soon to get “unstuck.” Another tells investors to gamble: “For higher returns, you need to get into riskier investments.” No wonder Ellis coined the term, “Loser’s Game,” it’s accurate.

2. Your home is not a stock

You live in it. Today many mistakenly assume that rising equity values mean you don’t have to save for retirement. Or that you can use a home-equity loan to buy stuff. Or worse yet, use that money to buy more properties and start condo-flipping. Warning, when the bubble pops it will be too late for you to exit the loser’s game.

3. Save lots more regularly

“Savings glut” is the latest euphemism invented by happy-face economists and politicians. America’s savings rate has dropped from 10% two decades ago to zero, and has only recently started back up. Out-of-control consumption means importing and running trade deficits,. Meanwhile China recycles our dollars into Treasurys. This game is ending. Not saving now won’t help you later. Most retirees have too little set aside.

4. Brokers aren’t your friends

There is an inherent conflict of interest between you and every broker in the world. Even if they’re your neighbor and best friend. Bottom line: They make their living on fees and commissions, and that reduces your returns. They win and you lose. Think index funds.

5. Never trade commodities

Yes, you may want to add a small allocation of energy, metals or other commodity index funds to your long-term portfolio. But short-term trading is a loser’s game, and a fast one. . . .

6. Avoid new and exciting deals

Right now, with all the turmoil and risks domestically and globally, chasing hot stocks and exotic opportunities is an instant replay of the irrational exuberance that got us all in trouble with dot-coms in the 1990s, real estate around 2005-2008.

7. Bonds also ride up and down

. . . you increase your chances of winning the loser’s game remembering that as soon as the Fed increases rates, bond values will crash.

8. Never invest for tax benefits . . . .

9. Write your goals ... and stick to them . . . .

10. Never trust your emotions

Behavioral economics was launched when Ellis wrote the first edition of “Winning the Losers’ Game.” This new science makes it clear investors are their own worst enemy. We’re not rational. We’re too optimistic in spite of impossible odds.

The pros own the game, insiders own the casino, rig the tables. They have more information, get it faster than you do, got more chips to play with, and they spend all day playing ... while you work for a living. You’re an amateur, at the loser’s tables, playing by their rules."

Summing Up

Most of the so-called investing pros are traders in disguise looking to generate fees and commissions for themselves. They do that by selling their services and taking money from amateurs like us.

Accordingly, we amateurs need to be informed savers and investors. Along those lines, we should know enough to recognize 'what's up' and be proud of the fact that we're self interested amateurs and not self interested pros. We do that by not buying what the 'pros' are selling.

If we take the time to learn the simple basics of saving and investing, we can save paying the fees and commissions, ignore the short term volatility of the market movements and look to the benefits of long term ownership in the shares of quality companies.

And since it doesn't take much ongoing effort or 'time-on-task,' we can do so and still have lots of time to spare.

In other words, staying tuned and staying informed doesn't mean staying glued to the short term ups-and-downs of the market.

So here's the deal for DIY individual investors who don't want to spend a lot of time and money on planning, saving and investing for the long run.

Save a substantial percentage of your earnings regularly, invest those savings continuously, buy an S&P 500 index fund or similar passive investment, and enjoy the LONG TERM ride to a comfortable retirement income based on the rule of 72 DIY stock ownership investing.

That's my take.

Thanks. Bob.

Sunday, April 28, 2013

The Home Ownership Decision ... To Rent or Buy, That is the Question

As Shakespeare might have put it, to rent or not to rent, that is the question. Or would it have been, to buy or not to buy?

Accordingly, how about simply asking ourselves if it's better to rent or to buy when making a decision about our housing needs?

My simple answer is that it depends on whether you're planning to stay put for ten years or longer. If so, then go ahead and buy.

That's because interest rates are at historic lows and monthly payments will compare favorably to renting. But if mobility is in your future plans, then maybe you should rent.

In other words, don't make this personal decision from the view of the mortgage lender. The banker will only be interested in the creditworthiness of the borrower and whether the loan's principal amount will be protected in the event of a future default. And to protect his interests, the banker will require a sufficient down payment and probably even transfer the responsibility of loan repayment to a government agency such as Fannie Mae, Freddie Mac or the FHA.

Looked at in another way, creditworthiness is a separate decision from whether to buy or not, and creditworthiness is only important if the potential buyer has first decided the time is right to make a purchase and is ready to take out a loan to do so.

Unlike the lender, the buyer's primary concern isn't his own creditworthiness. It's how long he'll likely stay put in his new home, and that's because the home's resale value is subject to market prices falling in the future. Because if prices don't rise or perhaps even fall, and factoring in the real estate commission on resale, the buyer turned seller may be unable to recoup even the amount of the initial down payment. Any risk of a loss on the home's resale value is the initial buyer's alone.

So don't buy a home as an investment is the best advice to any prospective home buyer. That said, if it's a nice house in a nice neighborhood, and you can comfortably afford the monthly payments and intend to make it your home indefinitely, now's a good time to buy.

Today's Dream House May Not Be Tomorrow's says this about renting versus buying:

HOUSES are just buildings, but homes are often beautiful dreams. Unfortunately, as millions of people have learned in the housing crisis, those dreams don’t always comport with reality.
Economic and demographic changes may severely impair the value of a home when it’s time to sell, a decade or more in the future. Will a particular home still be fashionable then? Will social and economic shifts tilt demand toward new designs and types of communities —even toward renting rather than an outright purchase? Any of these factors could affect home prices substantially.
An ever-changing economy requires constant geographical repositioning. In the 19th century, for example, housing was often built near factories and warehouses, with apartments or houses containing numerous small rooms intended to accommodate many people per structure. In those days, before air-conditioning, these buildings often had large porches for access to cooling breezes.
Early in the 20th century, many houses were built around streetcar routes. Then, when the Interstate Highway System started in the 1950s, suburbs bloomed along the path of superhighways. With cheaper cars and relatively cheap gasoline (despite spikes in the 1970s and after 2005), housing developments became more dispersed. A culture that prized privacy and individuality left many neighborhoods without sidewalks or nearby community gathering places. Houses were cheaper to build this way, and they grew larger.
In the last century, shifts like these helped explain why inflation-corrected prices for existing homes typically changed by plus or minus 15 percent in a decade, even without national bubbles.
Further changes are inevitable, but hard to predict. . . .
Attitudes toward renting have also been changing. A MacArthur Foundation survey, conducted by Hart Research Associates in February and March, asked Americans if they thought that, “given our nation’s current situation,” buying a home had become more or less appealing. Fifty-seven percent said it had become less so, with only 27 percent saying it had become more appealing. When asked if they agreed with the statement, “For the most part, renters can be just as successful as owners at achieving the American dream,” some 61 percent agreed; 28 percent did not. . . . 
In the wake of the housing crisis, and amid shifting demographics, it’s plausible that a broad change in thinking is ahead, reducing demand for large suburban homes. After all, the national psyche has absorbed the tribulations of the millions of people who have been living in homes worth less than their mortgages, struggling to make payments and yet unable to sell. Smaller living quarters may become more socially acceptable. . . . 
Forecasting is indeed risky, because of factors like construction productivity, inflation, and the growth and bursting of speculative bubbles in both home prices and long-term interest rates. The outlook is so ambiguous that there is no single answer to the question of housing’s potential as a long-term investment.
If you want to settle down for a quiet life and watch your children grow up in a nice neighborhood, you might well act now to lock in an ultralow mortgage rate. Then again, if you’re restless, ambitious and determined to be mobile, it might be sensible to rent rather than own. Calculating the best economic return may not even be possible, given the uncertain investment potential.
Instead, it may be wisest to choose the housing that best meets your personal needs, among the choices you can afford."
Summing Up
As is the case with all important personal financial decisions, what we should do about borrowing or not depends on what our concrete plans for the future may be.
When considering where to live, the likelihood of staying put or moving on should be a very big part of the individual's buy vs. rent decision.
That's my take.
Thanks. Bob.

"Social" Assets versus Personal Assets ...Generational Theft and Class Warfare ... It Is What It Is

Here's today's series of quiz questions: What's an asset? And specifically, is there such a thing as a "social asset," and if so, what is it?

The simple definition of an asset is something OWNED that can be exchanged or converted into CASH, although cash itself is an asset, too. Assets represent the value of ownership and are therefore property.

But a "social asset" is no such thing. In fact, it's merely a claim of some citizens against future taxpayers which is granted to those citizens by government, and therefore it can also be taken away by that same government.

If everybody owns something, nobody owns anything. If we can't sell or exchange what we own, we don't own it. So with that simple set of facts in mind, let's take a closer look at what some call "social assets" and their claims for retirement income.

We know how little people save and have available for their retirement years.

We also know how unaffordable and expensive our government based entitlements programs have become.

Those two things put us squarely between a rock and a hard place as a nation and will require a combination of more savings, higher taxes, lower benefits, fewer beneficiaries or greater investment returns on the monies which fund the future benefits.

As a nation, we emphasize the virtue of self reliance yet we aren't self reliant financially.

And even though we aren't self reliant financialy, our government doesn't do a good job of taking care of us financially, because that's not the way governments work. OPM isn't a good substitute for MOM. Never has been and never will be.

Your biggest assets are Social Security, Medicare is subtitled 'Elites want to cut them because they don't need them' is a slanted view of the situation, to say the least. That said, and disregarding whether the so-called 'elites' want to cut government benefits or find a way to properly pay for them, let's see what the article has to say:
The value of Social Security and Medicare benefits is far greater than the all the other wealth most families have accumulated over a lifetime of work.

"The powerful and wealthy elites who run this country are shocked that not everyone is jumping on their bandwagon to cut Social Security and Medicare benefits.

They view these benefits as abstractions. After all, if you are worth millions, social insurance programs aren’t going to matter very much to you.

But a large majority of the American people have a very different view. To them, Social Security and Medicare aren’t an abstraction but personal.

They know — without ever quite articulating it in this way — that Social Security and Medicare are the most valuable assets they possess. That’s why they are so protective of these programs, despite the best efforts of some to persuade them that the nation’s future depends on pruning them back.

For most people, the value of the pensions and health care they’ll get in retirement far exceeds the value of all the rest of their wealth, including the equity in their homes, the money they have in the bank, and any funds they’ve been able to sock away in retirement accounts.

We’re conditioned to think of wealth as only what we own personally. But we also have access to a lot of resources that are owned socially, like Social Security.

Unfortunately, almost all the data collected on the subject are limited to personal wealth; social wealth isn’t even counted . . . .

The latest data on household wealth show just how little personal wealth most Americans have, and why Social Security and Medicare are so vital to their retirement.

At the end of 2011, . . . the typical American household had just $67,000 in net worth (assets minus debts). That’s the median; half of households had more, and half had less. Excluding the equity in homes, the median net worth was just $15,000.

People beginning retirement had more personal wealth but not that much more — certainly not enough to maintain a middle-class standard of living for more than a year or two. The median household headed by someone 65 to 69 had $171,000 in personal wealth and just $43,000 excluding home equity.

Such families would be destitute without social wealth in the form of Social Security, Medicare and their defined-benefit pensions. The present discounted value of their lifetime Social Security benefits was about $315,000 . . . , and the value of their lifetime Medicare benefits was about $190,000 . . . . About half of these families also had a defined-benefit pension, worth, on average, $140,000.

If we add up all the wealth, personal and social, the typical household beginning retirement has about $850,000 in assets. That sounds pretty good, but most of the wealth (76%) was held socially, in Social Security, in Medicare or in defined-benefit pensions. Just 5% of the wealth was liquid.

These families rely almost exclusively on the benefits earned in a lifetime of working that were held in trust for them by the government or by a company or union pension plan. (These defined-benefit plans are rapidly disappearing, and few workers are saving enough elsewhere to make up for the loss.)

The fact that so much of this wealth is social wealth, not personal wealth, is a good thing in many respects. Social wealth is a form of insurance. The risks are spread out among many people, not just a nuclear family unit. It insures against longevity risk (the possibility of outliving your assets), market risk (the value is largely unaffected by the temporary ups and downs of the market), and inflation risk (Social Security and most defined-benefit pensions have a cost-of-living adjustment). It also insures against disability.

On the other hand, having so much social wealth leaves these households exposed to political risk (the possibility that politicians will cut their benefits) and solvency risk (the possibility that the pension plan will go bankrupt). And social wealth (other than limited survivor benefits) cannot be passed down at death. Once you die, it’s gone."
Summing Up

Here's how to solve the "elite" problem. Simply remove the "elites" from the Social Security and Medicare rolls by 'means testing' benefits. In other words, if somebody is capable of providing for his own retirement income, he shouldn't receive government 'assistance.'

Let's have a limited government that encourages people to take care of themselves but also is there for those who can't.
What the above referenced article fails to acknowledge is that this "social wealth" is essentially made up of claims by one generation of citizens against future generations of taxpayers.
There are no assets in the "fund," and the "social wealth" consists solely of government issued claims by one generation on the earnings of successive generations.
We should also ask ourselves how well the government "invests" our assets. Where does the money go that's deducted from our paychecks? Are the bureaucrats better stewards of our money than we would be? Is OPM management preferable to MOM?

Is "Big Brother" governance really the answer?
We need to ask where all the contributions we and our employers make to Social Security (12.4% on income up to $113,700) and Medicare (2.9% on all earnings) during our working years have disappeared. They certainly haven't been invested properly and aren't sufficient to pay the benefits to which we're "entitled."
Maybe "social assets" are just a farce.
That's my take.
Thanks. Bob.

Saturday, April 27, 2013

The Retirement Gamble ... 401(k) Investing Made Simple ... PAINLESSLY SO!

An enormous issue facing Americans is financing our retirement years. And it's a problem that needs attention from the moment we become adults. Unfortunately, it's also an area where hardly any education about how to go about it has been given to our young people.

This failure to educate the young doesn't stop there and continues throughout life. We know that Social Security is inadequate yet we don't know exactly what to do about supplementing those benefits.

It's a failure of our society that has to be addressed and solved for future generations. We can't afford any longer to ignore this huge elephant standing squarely in the middle of our American room.

So if you have 53 minutes to spare this weekend, "The Retirement Gamble" is very much worth approximately one hour of your time. It's sobering summation of where we are, how we got here and what we need to do now is both an accurate history and informative guide to the future as well.

John Bogle of Vanguard makes the simple mathematical case that we can all be good investors as DIY owners of passive index funds. He also points out that for individual investors over a period of fifty years, an investment which earns 7% annually results in dramatically different endings for a DIY investor compared to one who uses a financial 'expert.'

For the person paying the 'expert', assuming total annual charges 2% for management fees and mutual fund commissions, the individual will end up with two thirds less of a nest egg than that same individual would have earned had he been a basic DIY investor.

That's right. Three times more retirement funds for the DIY investor. That 2% annual difference is simply the compounding rule of 72 working over a long period of time.

And by the way, it works that way too when bonds earn considerably less than stocks over time, which they have done and will continue to do for years to come. {See yesterday's post "Interest Rates Likely to Remain Low . . . . ."}

401(k) documentary refuffles feathers has the overview as well as a link to the Frontline story on PBS as well:

"The PBS “Frontline” documentary “The Retirement Gamble” debuted on Tuesday night, and it made for a sobering introduction to the American savings crisis. If you’ve got 53 minutes to spare, and you’re the kind of person who’s galvanized by bad news, you can watch the entire report online at this link. I recommend it as a concise introduction to the biggest shift in the retirement landscape in our lifetimes – the migration from a corporate pension model to a self-funded model that depends on personal savings and investments. . . .

The second half of the program focuses on the problem of high fees and hidden expenses in retirement plans, and this, as you might expect, has ruffled some feathers in the financial-services community. In an interview with MarketWatch’s Robert Powell this week, Stuart Ritter, a senior financial planner at T. Rowe Price, suggested that its focus on 401(k) fees being excessive was missing the forest for the trees. (You can watch their interview here.)

“I think what’s even more important than that issue is how much people are saving,” Ritter told Powell. “The biggest driver of your ability to have enough money to maintain your lifestyle in retirement is how much you save. It’s totally within your control. You know exactly how much it is.

And people should be focusing on that…The one [question] I’m hoping they are starting with is, ‘Am I saving that 15%?’ Because that’s the biggest thing within your control.”

When asked whether self-inflicted asset allocation and investment mistakes cost 401(k) plan participants more than 401(k) fees, Ritter had this to say: “There are a lot of things that affect what the results are. I’m going to keep coming back to that one thing: Not enough people are saving enough. Saving 3% for retirement is like going to the gym for six minutes. We can have conversations about cardio vs. weight bearing and which way I do my bicep curls but until I’m in the gym for a long enough period of time, it’s premature to talk about those things. So get the savings rate to 15%.”

As Powell notes: “To be sure, Americans saving 15% per year will put more fees in the pockets of mutual funds firms. But it will also put more money in American nest eggs. And that, regardless of how much money Wall Street skims off our nest eggs, is a good thing, yes?”"

Summing Up

To repeat, it's worth taking an hour to watch the documentary .

It's then worth a great deal more than that -- perhaps up to three times as much or more -- if you decide to be an informed DIY passive index fund investor during your working years.

That's the simple effect of basic DIY investing over a long period of time, and we can all learn to do it.

That's my take.

Thanks. Bob.

Friday, April 26, 2013

Interest Rates Likely to Remain Low for Another Decade ... A Muddle Through Economy is in Our Past, Present and our Future, Too

Many people today with savings and money to invest are wondering what to do about low interest rates.

The first thing to realize is that in a period of stable to increasing interest rates, fixed income instruments of substantial duration are a bad deal for savers and investors. In other words, don't buy 20 year bonds or even bond funds if you think interest rates are likely to rise during the period of the bond's duration. And that's exactly what's likely to take place during the next several years.

Bonds are a bad deal in a period of rising interest rates because of two simple mathematical facts: (1) bonds owned become worth less than their face value as interest rates rise; and (2) the coupon or yield on the bonds owned becomes less than current interest rates on bonds of similar duration as interest rates rise.

Thus, all things considered, parking your money in cash or money market funds beats buying bonds or bond funds in a rising interest rate environment. But since cash deposits and money market funds pay virtually nothing today, what's a saver to do?

It looks like we just need to "get used to it," with "it" being many years ahead of slow growth and fighting off deflation and/or inflation here in the U.S. and around the world as well. We need to treat blue chip dividend paying stocks as the fixed income part of our long term investing portfolio for at least the next several years.

In the U.S. as well as much of the rest of the world, we're currently in debt up to our eyeballs, and government spending has grown bigger than ever. The failed policies of a "progressive" welfare state are becoming more evident with each passing day, and the government knows best gang is not taking the necessary actions to get solid private sector driven economic growth on an upswing. As a result, we're going to be "muddling through" the financial mess we're in for at least several more years.

Yes, this time really is different, and the free lunches are over. It's time to clean up our act, and the sooner we start, the quicker we'll finish.

In the meantime, we can expect a prolonged period of anemic economic growth, high unemployment and low interest rates accompanied by low inflation. At least that's the way I see things developing.

So does a Federal Reserve official in Very Low Rates Could Persist for a Decade:

"A Federal Reserve official said . . . interest rates are likely to stay very low for years to come, which raised the prospect that chronic financial instability risks will dog the economy for a long time.

Federal Reserve Bank of Minneapolis President Narayana Kocherlaktoa said, “For many years to come, the FOMC will have to maintain low real interest rates to achieve its congressionally mandated goals. Unusually low real interest rates should be expected to be linked with inflated asset prices, high asset return volatility and heightened merger activity,”. . .

Mr. Kocherlakota’s comments came from the text of a speech that was to be presented at a conference held in New York by the Levy Economics Institute of Bard College. . . .

In his speech, the central banker said that the low interest rate world that could persist for “possibly the next five to 10 years” is in part the result of Fed actions over the course of the financial crisis and its aftermath. But the central banker said that other forces are also conspiring to keep rates very low.
The three that are most important beyond Fed policy are tighter credit availability, increased worry about economic risk and uncertainty surrounding the outlook for U.S. government finance, he said.

These factors are causing investors, households, and firms to keep their money where it is safest, and it is also causing them to save more. At the same time, those who need better yields will go into riskier assets, creating the risk prices for those markets could go haywire, the official explained.

In as much as Fed policy has helped create the low returns savers are wounded by, so too have market forces, Mr. Kocherlakota said.

“I often hear that the FOMC has created a low interest rate environment that is harmful for savers and others,” he said. “That seems about as compelling as blaming me for creating winter in Minnesota by putting on my long johns,” Mr. Kocherlakota said.

The official said in his speech he expects unemployment to fall “only slowly,” and he said “inflation pressures are muted.”"

Summing Up

The U.S. economy is in slow growth mode and will be for a very long time.

This signals that short term interest rates are likely to remain at historic lows as the Fed attempts to get our economy moving again and stave off deflation.

In the meantime, the risk is that inflation will rear its ugly head before the economy is able to escape stall speed and fly on its own.

Let's hope that the politicians don't do anything else to give We the People cause to have even less confidence in the government knows best gang than we already have.

We the People need to have confidence in the future, and we need less government intrusion at the same time.

It's going to be a muddle through economy as far as the eye can see, and the "good old days" are a long way off. But they'll be back.

That's for sure.

Thanks. Bob.

Thursday, April 25, 2013

Government Playing Games ... Airports, Unions and Government ... Politics Sucks

Government waste is on display all the time and in every part of America. Yet government officials choose to ignore it.

That's the real story behind the story of the sequester. That and the fact that the government knows best gang, led by President Obama, thinks and acts as if We the People are stupid. And that raising spending levels by increasing taxes on the "rich" will "save" the middle class.

The arrogance of unions and their government allies in the Democratic Party is on full display in connection with the air traffic controllers and the sequester.

President Obama wants to make it as painful as possible for the flying public in hopes that enough pressure will be brought to bear on our elected officials to stop the sequester. His plan isn't working, if only because it's ridiculous. And here's why.

Government wastes billions of dollars. If a family or a company had a spending problem, it would curtail its wasteful spending and prioritize. But President Obama refuses to do that or at least has until now.

But his plan to stick it to We the People and resume government spending at unsustainable and unaffordable levels now appears to be backfiring, and that's a good sign. If so, score one for We the People and less waste in government.  For that reason alone, maybe having the sequester in effect isn't so bad after all.

Senators Seek Way to Ease FAA Cuts says this in part:

"Complaints about air-travel delays in recent days have prompted Democrats in Congress to reconsider their strategy for dealing with across-the-board spending cuts.

This week, the Federal Aviation Administration began furloughing air-traffic controllers to comply with the required cuts, known as the sequester. Airlines and some lawmakers have said the FAA is taking a rigid approach to the cutbacks, applying them in a way that has led to flight delays across the country, especially at airports in the Northeast.
The FAA and the controllers' union agreed to distribute furloughs evenly among all controllers, whether they were at busy or quiet airports.

Now some Democrats are gathering behind bills aimed at easing the air-travel problems, putting them at odds with party leaders, who say any response should blunt the overall impact of the sequester, rather than target individual problems such as the flight delays. . . .
Passengers at Los Angeles International Airport on April 24.

Any new bill aimed at the air-travel woes would likely come to the Senate floor shortly after lawmakers return from next week's recess, a Senate Democratic aide said.

Some Democrats think the Senate should act sooner.

"It is better to do a big deal. But as we work toward it, we have to admit that some things are very problematic," said Sen. Amy Klobuchar (D., Minn.), who on Wednesday introduced a bipartisan bill with Sen. John Hoeven (R., N.D.) designed to give the Department of Transportation more flexibility to manage the cuts with the goal of reducing furloughs at the FAA.

The bill would give the FAA the flexibility to transfer funds between accounts to reduce furloughs and give the Department of Transportation the authority to move funds from other areas of its budget to the FAA. The Department of Transportation administers the FAA. . . .

"The public's going to be furious when they find out that this could have been prevented," said Sen. Dan Coats (R., Ind.), who supports the bipartisan proposal to give the Department of Transportation more flexibility in dealing with the FAA cuts. . . .

The National Air Traffic Controllers Association, which represents the 15,000 civilian controllers, says it asked the FAA to implement furloughs evenly. "The National Airspace System is integrated," a union spokesman said in an email."


But even air traffic controllers are now speaking out about the politics of the situation. Let's listen to what they have to say in The FAA Strikes Again, the FAA Brags:

"The Federal Aviation Administration claims the sequester spending cuts are forcing it to delay some 6,700 flights a day, but rarely has a bureaucracy taken such joy in inconveniencing the public.

Though the FAA says it is strapped for cash, the air traffic control agency managed to find the dollars to update its interactive "command center" tool on its website so passengers can check if their airports are behind schedule due to what it calls sequester-related "staffing" problems. Oklahoma Senator Tom Coburn noticed this rare case of FAA technological entrepreneurship and fired off a letter Wednesday protesting what he called the agency's "full blown media rollout" to hype the flight delays.

That had zero impact on FAA bosses, who were on Capitol Hill rationalizing their dereliction. But after Mr. Coburn published his letter on his website, FAA regional employees wrote to blow the whistle on their bosses. As one email put it, "the FAA management has stated in meetings that they need to make the furloughs as hard as possible for the public so that they understand how serious it is."

Strategies include encouraging union workers to take the same furlough day to increase congestion. "I am disgusted with everything that I see since the sequester took place," another FAA employee wrote. "Whether in HQ or at the field level it is clear that our management has no intention of managing anything. The only effort that I see is geared towards generating fear and demonstrating failure.""

Summing Up

And so it goes in the hallowed halls of U.S. government as We the People are viewed as pawns whose comforts and votes are to be managed and manipulated for political gain rather than served by our elected "public servants."

Someday, and I hope someday soon, We the People will stop taking this crap from these unworthy clowns.

We're not only not stupid; we're in charge around here. Let's act like it.

That's the real American way.

Politics sucks.

Thanks. Bob.

Twinkie is Back in Business ... Unions and Their Members Aren't

Hostess went broke and entered bankruptcy after being unable to persuade the bakers union to accept new work rules and make financial concessions needed to maintain the company's viability as a going concern.

So now the bankruptcy process has been completed, and new ownership has taken over. Twinkie will be back in business. But not the unions that represented Hostess employees previously.

New Twinkie Maker Shuns Union Labor has the story:

"The company that bought the Twinkie, HoHo and Ding Dong brands out of bankruptcy is gearing up to reopen plants and hire workers, but it won't be using union labor.

Hostess Brands LLC—Metropoulos & Co. and Apollo Global Management LLC's   new incarnation of the baking company that liquidated in Chapter 11—is reopening four bakeries in the next eight to 10 weeks, aiming to get Twinkie-deprived consumers the classic snack cake starting in July.
A worker entered Hostess's Schiller Park, Ill., bakery in November.

Chief Executive C. Dean Metropoulos said the company will pump $60 million in capital investments into the plants between now and September and aims to hire at least 1,500 workers. But they won't be represented by unions, including the one whose nationwide strike sparked the 86-year-old company's decision to shut down in November.

"We do not expect to be involved in the union going forward," Mr. Metropoulos said in an interview Wednesday.

Hostess Brands Inc., the company that filed for bankruptcy protection in January 2012 and eventually sold off its brands and plants to several buyers, was once powered by 19,000 workers, 15,000 of whom were represented by unions. The company's largest union, the Teamsters, had agreed to a new labor contract following a contentious bankruptcy trial. But the second-largest union, the Bakery, Confectionery, Tobacco Workers & Grain Millers International Union, launched a work stoppage after the company imposed new labor terms on the union's members. Hostess said the strike crippled its operations, forcing it to shut down.

A Teamsters spokeswoman declined to comment. A spokeswoman for the bakers union couldn't be reached for comment Wednesday.

In February, before the $410 million sale to Metropoulos and Apollo was finalized, the president of the bakers union expressed confidence that his thousands of out-of-work members would find opportunity at the Hostess facilities once they were reopened by their new owners. President David Durkee said the strike had left the union in "a position of strength," and he expressed confidence its workers would get a better deal from the new owners than Hostess offered during the bankruptcy case, its second in recent years.

He added that the only way for the brands to have a "seamless restart" would be to hire back unionized bakers. "Only our members know how to get that equipment running," Mr. Durkee said. "A work force off the street will not be able to accomplish that."

But Mr. Metropoulos and his son, Daren, the co-CEO of Pabst Brewing Co. who is also heading up the reborn Hostess's marketing strategy, expressed confidence they would be able to find skilled, nonunion workers near the four plants, which are in areas with high unemployment.

"We're trying to find the most qualified people in these local markets to come work for the company," Daren Metropoulos said.

The new Hostess is firing up plants in Columbus, Ga.; Emporia, Kan.; Schiller Park, Ill.; and Indianapolis, Ind. It's also considering whether to reopen a fifth plant it purchased, in Los Angeles.

Previously, the Hostess products that Metropoulos and Apollo bought were made at 11 plants, but the elder Mr. Metropoulos said those plants were running at less than 50% capacity under the old model. . . .

The new Hostess plans to use third-party drivers and an outside sales organization. It will also switch distribution models, delivering Hostess Twinkies and Cup Cakes directly to supermarket warehouses instead of individual locations. . . .

The company also aims to increase distribution to locations that Hostess couldn't reach before, including smaller convenience stores and dollar stores."

Summing Up

Twinkie is back in business under new ownership and thousands of former Hostess employees have lost their jobs.

These former employees are seeing first hand the predictions of the president of the bakers union for better jobs, or even any jobs at all, go unfulfilled.

While the union members have lost their jobs, the union's leadership will go right on 'leading' its other members and collecting dues.

For unions, at least in the private sector things are changing. MOM's involved.

Soon unions will have to change their ways in the OPM centric public sector, too.

That's my take.

Thanks. Bob.

Unemployment, Full-Time vs. Part-Time Work, ObamaCare and the Law of Unintended Consequences

We need more jobs in the U.S. We also need more full time jobs. And we need more high paying jobs such as those that would be provided if President Obama finally approved the Keystone XL Pipeline's construction, as an example.

To be more precise, we need government not to continue to discourage new investment and related hiring in the private sector in a failed effort to increase payrolls through such things as minimum wage hikes and newly enacted legislation like ObamaCare.

Some Chicago fast food workers went on strike for higher wages yesterday. See Chicago fast food, retail workers strike today. What the striking employees may not realize is that ObamaCare's enactment will make it even harder for workers like them to secure full-time employment, let along higher wages.

It seems like the law of unintended consequences is alive and well in America, and that government knows best attempts to make things better for American workers is actually and unfortunately accomplishing the opposite. Meanwhile, we blame the employers while refusing to pay higher prices for what they're selling.

Here's my question. Where will the money come from to employ more people and pay them higher wages, if not from a stronger and more successful private sector?

Part-Time Work Becomes Full-Time Wait for Better Job has the story:

"The American economy has generated 30 straight months of job growth. But for millions of people looking for more work and greater income, that improvement provides little solace.

In March, 7.6 million Americans who want more hours were stuck in part-time jobs, about the same as a year earlier and three million more than there were when the recession began at the end of 2007.

These almost invisible underemployed workers do not count toward the standard jobless rate of 7.6 percent. A broader measure, which includes the involuntary part-timers as well as people who want to work but have stopped looking, stands at 13.8 percent.
“There’s nothing inherently wrong with people taking part-time jobs if they want them,” said Diane Swonk, chief economist at Mesirow Financial in Chicago. “The problem is that people are accepting part-time pay because they have no other choice.”
Even for those who have been able to take advantage of the better job market, the opportunities have not been good. Since the economy began to recover almost four years ago, hiring has been concentrated in relatively low-wage service sectors, like retailing, home health care, and food preparation, and in contingent jobs at temporary-hiring companies. For example, nearly one out of every 13 jobs is at a restaurant, bar or other food-service establishment, a record high.
Household incomes have been stagnant throughout the recovery, and actually fell in the latest report, according to Sentier Research. As a result, economists and policy makers have been expressing concerns about not only the pace of hiring but the quality of new jobs as well. . . . 
Part-time work rose rapidly in the recession and early parts of the recovery, and it has not let up much. Today, 19.1 percent of workers say they usually work part time, defined as fewer than 35 hours a week, versus 16.9 percent when the recession started.
Essentially all of the gains in part-time employment have been among people who are reluctantly working fewer hours because of slack business conditions for their employer or an inability to find a full-time job. . . . 
Holding a part-time job when a full-time one is desired is frustrating for workers, and not only because fewer hours means less income. Like temp workers, part-timers are also less likely to get benefits and are more likely to be stuck with unpredictable schedules that make it hard to plan for child care, transportation or even a second part-time job. . . . 
Part-timers also generally earn less per hour than their full-time counterparts.
There are multiple reasons for an increased reliance on part-timers, primarily continuing low demand and uncertainty about the economy. . . .
Paul Dales, senior United States economist for Capital Economics, said, “There is another reason to believe that part-time employment will stay higher for longer, namely the incentives to employ part-time workers created by Obama’s health care reforms.”
Starting in 2014, employers that had an average of at least 50 full-time employees in the previous calendar year will have to provide health insurance or face penalties. Some companies and franchise locations, like Darden Restaurants, which operates brands like Red Lobster and Olive Garden, suggested last year that they might seek to limit full-time staff to avoid activating this mandate.
Confusion about the law and its requirements abounds, and even some small businesses that will not be affected may be changing their behavior because of it.
“Operators can’t be as casual about workers’ total hours as they could before because there are fines and penalties and costs associated with it,” said Scott DeFife, executive vice president for policy and government affairs for the National Restaurant Association. “You can’t accidentally let them become full time without a specific purpose.”
There may be other cost and efficiency pressures for employers to shift more of their workers into part-time jobs, independent of either public policy or the business cycle.
Peter Cappelli, a management professor at the Wharton School of the University of Pennsylvania, said it was much easier to fit workers’ schedules to fill longer hours of operation and meet the ups-and-downs of customer demand if they were part time.
“Trying to efficiently schedule full-time workers in McDonald’s shifts requires some real brain power, some sophisticated math or software scheduling to make that work,” Professor Cappelli said. “If on the other hand you can do it with part-time workers, it’s a piece of cake.”"
Summing Up
The law of unintended consequences is alive and well with the enactment of ObamaCare and will further work to the detriment of employees seeking full-time steady employment and an accompnaying package of "fringe" benefits.
The facts are simple. The more expensive it is to hire full time workers, the more part-time workers there will be.

And in today's slow growing economy and lousy employment environment, there are plenty of people for employers to choose from when hiring.
Thus, in the uncertain economy that exists today, high unemployment and the enactment of ObamaCare both make it likely that companies will continue to hire part-time workers, especially in jobs where customer traffic fluctuates and work schedules can be arranged to accommodate fluctuating and uncertain consumer demand.
All in all, our U.S. unemployment situation is bad and won't see much improvement the rest of this year. The introduction of ObamaCare won't make things any better for employees seeking full-time work.

That's for sure.
Thanks. Bob.

Wednesday, April 24, 2013

DIY Stock Investing ... Redefining Risk ... Cash and Bonds are Out ... Blue Chip Dividend Paying Stocks are In

Bonds and cash are safe, and stocks are too risky. That's what we've all been taught. But it's wrong.

And it will be even more wrong in the future. Blue chip stocks with dividends are safer investments than cash, bonds and even government debt, assuming we're interested in enhancing our purchasing power over time and protecting the value of our hard earned savings from inflation. 

Dow 16,000! is Barron's cover story this week and predicts that the stock market will rise to 16,000 in another year or so. {NOTE: My own long term point of view is that the market should reach 20,000 by 2020 and 30,000 by 2030 or so. It will also continue to pay inflation offsetting cash dividends all along the way.}

But admittedly I'm no 'pro,' so let's look closer at what the investment 'pros' have to say:

"The stock market isn't the only thing that has set records this spring. Barron's semiannual Big Money poll of professional investors also is setting a record -- for bullishness, that is. In our latest survey, 74% of money managers identify themselves as bullish or very bullish about the prospects for U.S. stocks -- an all-time high for Big Money, going back more than 20 years. What's more, about a third of managers expect the Dow Jones industrials to scale the 16,000 level by the middle of next year . . .


The bull market is hardly in its infancy, our respondents acknowledge, but neither is it "game over."

"The amount of money that's playing defensive is astronomical," says Robert Lutts, president of Cabot Money Management in Salem, Mass. "Main Street isn't yet in Wall Street. It is still scared to death. In the past couple of years, the professional money started to flow in. This is just the beginning of new flows that will push indexes even higher.". . .

WHAT WOULD SEND STOCKS SHARPLY higher in coming months? The managers cite rising corporate earnings, first and foremost, followed by any sign in Washington of progress toward a bipartisan budget deal. . . .

Fortunately, perhaps, only 16% of managers say their investment decisions are heavily influenced by U.S. fiscal policy. . . . Small wonder the Big Money folks finger political dysfunction as one of the biggest challenges facing the market, along with Europe's problems, potential earnings disappointments, and a possible deceleration in economic growth.

Even so, the managers aren't just bullish on U.S. stocks, but on equities generally. Some call it the TINA trade, for "there is no alternative" to stocks in a slow-growth, ultralow-interest-rate world.

Eighty-six percent of poll respondents are bullish on stocks for the next 12 months, and a whopping 94% like what they see for the next five years. Real estate has similar approval ratings. . . .


The managers are split in their near-term assessment of commodities, but bullish longer-term. . . . As for bonds and cash, they have few fans at the moment. Nearly all of the managers expect fixed-income assets to be a bad bet in the next five years. . . .

ALTHOUGH MOST BIG MONEY MANAGERS are stockpickers, the macroeconomic outlook helps shape their investment decisions. It looks decent, but hardly great, to them. Seventy-two percent of poll respondents expect the U.S. economy to keep plodding along in the next year at an annual rate of 2% to 3%, while 44% predict that the growth rate of gross domestic product will average the same 2.5% in the next 10 years that it has for the past 25. That said, 37% see the economy growing at a slower pace in the future.

Inflation worries the U.S. money managers as much as it worries the folks at the Fed, and 60% of our respondents think it will be a bigger threat in the next 12 months than it is now. Excluding food and energy, the consumer price index rose by an annualized 1.9% in March, below expectations. But the Big Money crowd sees CPI jumping 2.51% next year. . . .

The managers show little enthusiasm for Europe, which has been grappling with sovereign-debt losses and economic crises. Sixty-five percent of respondents proclaim themselves bearish on European stocks for the next 12 months, and 75% believe it will take five to 10 years for the euro zone to resolve its problems. . . .

THE BIG MONEY MANAGERS see subdued growth for corporate profits of 5% to 6%, both this year and next. They expect the market's price/earnings ratio to hold steady at 15.7. The managers plan to reduce their cash and fixed-income positions in coming months, and to invest more in stocks and alternative assets.

One thing is for sure: This has been a tough year for active money managers. Only 59% of our pros are beating the S&P 500 in their client accounts, and even fewer are doing so with their own money.

Here's a final prediction for 2013: The market will continue to surprise."

Summing Up

It's easy to pick the long term direction of stock prices. It's up.

But things don't look bad for the short term either based on valuations, the economic outlook and the historically low level of interest rates today. It's time to redefine risk and throw out the old rules of investing 'safely' in bonds, CDs and similar fixed income instruments. And it's time to replace them with blue chip dividend paying stocks in order to hedge against and offset future inflation.

With respect to the near term, the decided majority of professional money managers, aka the investing experts, are forecasting that the Dow will reach 16,000 in another year or so.

My own admittedly amateurish and long term optimistic view is that the Dow is likely to reach and surpass ~20,000 by 2020 and then climb to as high as or higher than ~30,000 by 2030. And on top of the higher stock prices, the shares will pay increasingly higher cash dividends all along the way. Lots of reasons to like the market's prospects going forward.

That said, how many gut wrenching and volatile ups-and-downs there will be along the way, and when they'll occur, I have no clue. Nor does anybody else, no matter what the experts may say.

But what we can say with confidence is that share prices over time will reflect the actual performance of companies and how much they grow their sales and earnings. And we can also say that increasing earnings will depend on companies achieving higher sales while simultaneously controlling their unit costs. They do this by being competitively successful in the marketplace, and that simply means satisfying the wishes and demands of their customers.

And there's one very big ADDITIONAL reason to be optimistic about economic performance of U.S. companies during the next several years and beyond -- energy independence. In this regard, the U.S. is perhaps the best positioned of all the nations to be the leader in energy exploration, development, refining and distribution opportunities.

North America's opportunity in the next several years to achieve lasting energy independence is real, and all that needs to be done is to turn the private sector loose to make it happen. Becoming energy independent will set us apart from Europe and China, as examples, and doing so will mean that our U.S. economy as well as our export base will become second to none.

Achieving energy independence will position our manufacturing companies well to compete effectively on overall costs with anybody in the world, including the Chinese. And it will make our nation secure and provide our government with needed revenues from a rapidly growing tax base as well.

Finally, We the People have another global competitive advantage, and although it's not often discussed, it's by far the biggest asset and competitive differentiator that we have. It's our rich U.S. history and tradition of encouraging entrepreneurialism, innovation and risk taking by free people operating in free markets.

Simply put, an unwavering belief in the benefits of capitalism has long been the American way, and this has afforded our citizens with the highest standard of living the world has ever known. And it's no time to stop now. In fact, it's time to step on the gas.

As for stock market investing, individual DIY investors will be well advised to invest in U.S. companies for the long haul.

That's always been the case, and it is even more so now.

That's my take.

Thanks. Bob.