Saturday, October 31, 2015

'You Better Shop Around' for ObamaCare ... Whether Signing Up or Renewing

The 1960 song 'Shop Around' by Smokey Robinson and The Miracles was one of the great hits. It was then and remains now one of my all time favorites.

In addition to the great music of the 60s, the song contained a huge amount of common sense wisdom delivered by a mother to her young son. She simply told him "You better shop around" before settling down and getting married.

But the song applies to more than marriage. In fact, the mother's timeless advice should be heeded today when we are making informed marketplace driven decisions about college, debt, credit cards, auto loans, 401(k) savings and investments, home mortgages, health care coverage and numerous other matters.

We'll focus on health care herein as most of us are still relatively unfamiliar with the numerous quite confusing details and workings of ObamaCare. But regardless of that lack of familiarity, we're being faced right now with important choices about renewing our health care coverage under the law.

Obamacare Shopping Is More Important Than Ever has this timely summary for the otherwise perhaps too trusting and unwary among us:

"When some premiums increased last year, a lot of Obamacare customers were able to find good deals by switching to a new health plan. New calculations from the federal government suggest that many consumers will need to do the same to find the best price in 2016.
That means, once again, that the marketplace will offer customers a tough choice: stick with the plan you have and pay more, or switch to a new one to pay a lower premium. The savings may be substantial. Instead of simply renewing, the average returning customer who chooses the best deal in the same category as an old plan could find one costing $610 a year less, say analysts for the Department of Health and Human Services. About eight in 10 returning customers on can find a cheaper premium by switching.

Customers will be able to start signing up for new plans on Sunday. And people interested in window shopping can already do so in many states. Early information about premiums suggests that the total prices of plans in many states are going up by a lot, though the structure of government subsidies will insulate most customers from the changes.
Obamacare uses a market instead of a single government provider to offer health insurance to middle-income people. For that reason, the main mechanism it uses to keep insurance affordable is market competition: Customers can pick a new plan every year, and, the thinking goes, insurers will have an incentive to keep their prices as low as possible or risk losing customers.

This year . . . about half of all returning customers shopped around before settling on a health plan — and a full quarter switched. Those numbers were much higher than many experts expected. A government report on Wednesday confirmed that those switchers were looking for a better deal. The people who picked different health plans this year chose those costing an average of $490 less a year. For people switching within the same category — a more common occurrence — the savings were about $400.
The numbers strongly suggest that price-sensitive customers in many markets may need to switch plans for a third time this year. . . . But the change is sure to be inconvenient and may disrupt people’s health care. Many of the lowest-cost plans in the marketplace limit the doctors and hospitals they cover.
That means that patients may have to change not just their insurer but also their doctor if they want to find a cheaper plan. Many customers in these markets are healthy and haven’t used the medical system much, so they may be able to easily weather those changes. But for people with complex needs and established relationships with doctors, the switching can be more difficult.
Over time, the need for annual switching may diminish as the market becomes more stable. Insurers have been jostling around to get customers in the last few years, and many made pricing mistakes — charging less than it cost to provide care, or charging too much to attract customers. As the insurers get a better idea of what it costs to provide care to marketplace customers and how much money they wish to earn from them, the swings in prices between one plan and another may become less substantial."
Summing Up
When government subsidies and grants are a major part of the marketplace pricing equation, the charges to both consumers and taxpayers invariably are very high.
That high price government controlled equation is equally applicable to both the cost of health care and college.
And that's because ObamaCare and college costs are heavily taxpayer subsidized. Accordingly, government is heavily involved and calling most of the shots at every step in the process.
Thus, the mother's warning to her free-to-choose son to 'Shop Around' applies to both ObamaCare and college selection.
And taking sufficient time to become properly informed and 'Shop Around' before buying applies to every other important life altering decision as well.
That's my take.
Thanks. Bob.

Friday, October 30, 2015

New U.S. Budget Deal Continues to Discourage Private Sector Pensions .... Wrongheaded Government Legislation Enables Taxpayer Guaranteed and Underfunded Public Sector Pensions to Continue Unabated

In 1974 new federal pension legislation was enacted. ERISA became the popular name for the Employee Retirement Income and Security Act. It was established because the corrupt Teamsters Union Pension plan was underfunded --- by a whole lot, but that's another story for another day.

An important part of that legislation stated that private sector companies with 'defined benefit' (guaranteed amount at retirement) pension plans would be forced to pay a $1 per employee annual insurance premium to government. This was supposed to insure the risk and fund the promised benefits for employees of those companies that would later fail and be unable to pay earned pension benefits. {NOTE: It also was a convenient way for government to provide 'off-budget' financing by requiring solid companies to pay mandated 'contributions' to government for benefits that their own employees would never receive --- government financing for free, in other words. Sounds like ObamaCare for the overcharged young, doesn't it?}

Partly as a result, many companies then began the transition from 'defined benefit' to 'defined contribution' plans. The difference is simple and stark for both employers and employees. Under defined benefit pension plans, the individual is guaranteed a defined benefit in the form of a monthly pension payment upon retirement. Under a defined contribution plan (profit sharing, 401(k) or IRA), a funding contribution is still made by the company but there is no guaranteed retirement benefit for the employee. In one plan there's a possible shortfall to be made up by the employer, and in the other there's never a shortfall, because there's never a guaranteed pension benefit.

Government excluded itself and public sector employees from the mandates of the pension legislation, of course, so pensions have continued to dominate in the public sector. Meanwhile, defined contribution plans have largely replaced defined benefit pensions in the private sector. Taxpayers are the guarantors of public sector pensions.

Now it's 2015 and there has never been enough money in the ERISA private sector payment fund to pay the benefits. Along the way, many companies have discontinued their pension plans and adopted 401(k) plans in their place. That eliminates the necessity to pay the insurance premiums and the necessity to guarantee pension benefits as well.

The government's 1974 ERISA legislation has made pension plans for companies a bad idea for many companies. Now it's making it an even worse idea.

U.S. Budget Deal Dings Corporate Pensions provides this update:

"Companies with corporate pensions will end up paying a price if a sweeping budget and debt deal proposed by Congress becomes law.

The House of Representatives is expected to pass legislation as soon as Wednesday that would eliminate the risk of a government default until after 2016 and increase government spending for the next two years.  But the plan proposes steep increases to fees that companies pay to the nation’s pension insurer, to help fund the added budget spending.

According to the proposed budget, companies that have defined benefit pension plans would have to increase the fees they pay to the Pension Benefit Guaranty Corp. by about 25%. Companies with pensions will pay $80 per person in their plan by 2019, up from $64 in 2016.

“The increases are tough,” said Alan Glickstein, a senior retirement consultant at consulting firm Towers Watson & Co.

Those fees will apply to companies regardless of funded status. . . .

All told, the fee increases will yield roughly $1.7 billion in revenue for the government, according to the Congressional Budget Office’s analysis.

“The total PBGC fees that a pension plan sponsor is facing over the life of the fund, is now material,” said Caitlin Long, head of the pension solutions group at Morgan Stanley . “Most executives do not expect that this is the last increase.”

As CFO Journal reported last year, higher fees have been pinching companies and are encouraging them to shed their pension obligations."

Summing Up

From $1 per employee  in 1974 to $80 per employee in 2019 --- that's just the way our government has long worked. Get the legislation enacted by falsely promising affordability and then raise the needed money by raising the funding requirements later. (And now we have ObamaCare.)

And that increase from inception in 1974 to 2019 will represent an increase in 'insurance' premium payments of approximately 20 times the growth in the overall inflation rate. Such a deal!

The government's plan has long been to make good companies pay more and more for the benefits promised but not paid by failing companies.

But good managers of good companies will react, as they already have over the past 40+ years, by discontinuing their pension plans and opting for 401(k) plans instead.

It's just one more example of our government at work doing the wrong thing and making things tougher for all Americans.

That's my take.

Thanks. Bob.

Thursday, October 29, 2015

'Risk Is' ... Want to Triple Your Existing Home Equity 'Cash' Investment in Less Than 15 Years? ... Here's One Way

Let's assume that our 40 to 50 year old home owner has $200,000 in home equity and has fifteen or more years to work before he will need money to supplement Social Security retirement income.

Finally, while he's not a reckless sort, he does recognize that that you can't steal second base without first removing your feet from first base. He's a thoughtful prudent individual. He knows that there is always risk is doing something, just as there is always risk is doing nothing.

In other words, he realizes that risk is very much a part of everyday life, and that risk and reward go together. Risk is, in other words.

So he borrows $200,000 in the form of a 30 year mortgage loan at less than 4% interest and invests that money in blue chip dividend paying stocks. These stocks currently yield almost 4%, and he will use those dividends to pay the mortgage interest on his new mortgage loan.

Then he sits back while 'time in the market' does the heavy lifting for him. Within the next 12 years or so, his home equity will double to $400,000 at an average rate of appreciation of 6% annually. The stocks will return an average of 9% annually, and the cash dividends will be used to pay down the mortgage loan. That will leave 6% annually for average share price appreciation.

At the end of the 12 years, the house is now worth $400,000 and the stocks are also worth $400,000. He pays off the $200,000 loan and has $600,000 more in assets than he did 12 years earlier. The $200,000 turned into $600,000.

That's a triple. And that's how leverage and stock ownership, coupled with money to invest, makes old age an easy financial trip.

With rates so low, should you pay off your mortgage? says this in part about borrowing to pay off the mortgage:

"While it’s an appealing idea to hold onto a predictable monthly mortgage payment and plow into retirement savings the money that would otherwise go to a home-loan payoff — the thinking is that you come out ahead if you can earn more in the markets than you’re paying to borrow the money — some say that even at ultralow interest rates, it often makes more sense for people to pay off their mortgage before they retire. . . .

That said, these days you wouldn’t need the financial markets to yield much to top the cost of money borrowed to buy a home. In all but one of the first nine months of 2015, the average rate on the 30-year-fixed mortgage was less than 4% (the exception was July’s 4.05% rate). . . .

So why not hold onto that low-rate mortgage and try to make a higher return on your money by investing it? In a word: certainty.

“Do we know that markets are guaranteed or what’s going to happen? No. . . . the decision of whether to carry a mortgage into retirement will vary widely depending on individual circumstances, including, among many other things, whether the mortgage still offers deductible interest and whether the retiree plans to downsize eventually (in which case, perhaps consider doing it sooner than later) . . . .

Don’t forget that the question of whether to pay off the mortgage or invest the money goes beyond a purely financial calculation.

But if you set aside the psychological benefits of paying off that debt, on a purely financial basis it might make sense to hold the home loan, Jennings said. If your mortgage rate is 3.5% or 4% and you believe you can earn 6% to 7% consistently on your investments, maintaining a mortgage for a period may make sense for individuals who are willing to take that risk . . . .

Of course, taxes come into play, on both mortgages and investments. If you’re far enough along on your home loan such that your mortgage-interest tax deduction isn’t worth much, and you plan to invest the money through a tax-qualified account such as a Roth IRA rather than a taxable account, that may skew the numbers in favor of investing over paying down the mortgage — assuming you’re fairly certain about your market returns.

Summing Up

For risk averse individuals who have sufficient financial assets and are on track for a secure retirement, borrowing home equity and buying stocks with that money may not make sense. The same is true for those in or near retirement.

But for those thoughtful and responsible 40 to 50 year olds who believe that for investing purposes cash is trash, taking the equity from a home and converting it into blue chip dividend paying stocks may make sense.

Planning on a rising stock market over a long period of time is an absolute winning approach for individual savers and investors. Planning to hold cash or cash equivalents is a loser. And home equity is a cash equivalent.

In today's low inflation economy, low interest rates and growing cash dividends on stocks have created an opportunity to refinance our home and use the money to buy a solid portfolio of dividend paying stocks.

Time is very much on our side when investing for the long haul, and the ability to borrow at an effective interest rate of zero (cash dividends less mortgage interest = zero) is very appealing.

So if we have an investment horizon of at least ten to fifteen years, what is now $1 in home equity will in all likelihood become $3 --- and $3 is 50% greater than $2.

Hitting an investment triple is better than a double. All that said, 'risk is.'

And that's my mathematical take.

Thanks. Bob.

Wednesday, October 28, 2015

Breaking News ... New Tax Increases in Chicago to Pay Teachers, Firefighters and the Police ... That Won't Be the End of It

There's breaking news concerning the ongoing Chicago financial debacle. It's contained in the story of Chicago City Council Passes Largest Tax Increase in City History.

The article is subtitled 'Property-tax increase would raise additional $543 Million phased in over four years:'

"CHICAGO—The Chicago City Council passed a historic tax increase Wednesday to shore up the pension systems for police officers and firefighters, aiming to stabilize the troubled finances of the nation’s third-largest city.

The property-tax increase, which has been described as the largest in modern history, would raise an additional $543 million phased in over four years. When fully in place, estimates show homeowners would see their total property tax bill rise by around 12% from current levels.

The property-tax rise was part of the larger Chicago city budget, which included additional revenue increases such as expanded trash fees and added taxi and ride-sharing fees. The spending plan pushed by Mayor Rahm Emanuel passed overwhelmingly.

“The city council today, and therefore the city of Chicago, acted with decisive and determined action of righting the financial ship,” Mr. Emanuel said. “For decades, these decisions have been deferred.”

The council vote was a victory for Mr. Emanuel who has faced a deteriorating fiscal picture here, including Moody’s Investors Service cutting Chicago’s credit rating to junk earlier this year. The mayor warned of deep layoffs in the police and fire departments and a rollback in city services including tree trimming and graffiti removal if the tax increase didn’t pass.

Even with the new revenue, Mr. Emanuel faces a series of challenges ahead. He needs help from state lawmakers and Gov. Bruce Rauner to phase in a sharp rise in payments due to the police and firefighter pension systems and an infusion of hundreds of millions in state dollars for city schools in the face of a projected shortfall. However, Illinois is nearing its fifth month without a budget and no agreement is emerging between Democratic legislative leaders and Mr. Rauner, a Republican."

Summing Up

The expensive Chicago saga continues.

As does the Illinois one as well.

For that matter, too many other cities, states and even our nation as a whole are in the same leaky boat.

That's my take.

Thanks. Bob.

Per Person Annual Income of $50,000 versus $23,000 Is Why A Resumption of the Historical U.S. Economic Annual Growth Rate of 3.5% Must Be Job #1

It's the 3.5% growing economy, Stupid!

Or at least that's what should be on the minds of Americans these days.

Tonight the Republican candidates for the presidency will debate the economy on national TV.

Hillary Clinton, the sure to be crowned Democratic nominee, probably won't have a lot to say about economic growth anytime soon. Besides, what difference does it make?

Well, here's what difference it makes, Hillary. As Winning 2016: A GOP Focus on Growth clearly points out, 'Hillary Clinton and the Democrats can't defend Obama's indefensible economy' says this:

"Republicans will need a unifying message, and voters of all stripes want to see faster economic growth that will produce more jobs and higher wages. Mrs. Clinton will have to distance herself from Mr. Obama’s economic record of slow growth and increased income inequality while also appealing to his core supporters. . . .

Between 1950 and 2000, the U.S. economy expanded at an average annual rate of 3.5%. Since 2000, it has grown at about half that rate, just 1.7%. Stanford economist John Cochrane wrote this week on his blog that “if the US economy had grown at 2% rather than 3.5% since 1950, income per person by 2000 would have been $23,000, not $50,000.” Mr. Cochrane argued that robust economic growth is essential to meeting America’s coming challenges. “The amount of tax revenue our government has available to pay off debt and to pay the ballooning Social Security and health care expenses depends almost entirely on economic growth,” he wrote. “Larger tax rates can’t come close to raising that much money.”

Summing Up

Facts are stubborn things.

We can't expect the politicians to be successful by borrowing, taxing, spending or redistributing our way to prosperity.

Neither can we expect to achieve greater national prosperity and less income inequality without a strong and job creating domestic economy.

Growing the public sector and blaming the rich won't help the poor and middle class get jobs.

Only the innovative and competitive private sector can make that happen in any lasting way.

Income per person of $50,000 is greater than $23,000.

That's my take.

Thanks. Bob.

Parents Should Play a Huge Role in Deciding Which College Their Kids Attend, as Well as How to Responsibly Finance That 'Higher Education'

Experience is a great teacher, albeit often a prohibitively expensive one. Thus, the knowledge of others is the best experience from which we can learn. And that begins with learning what our parents can teach us through their many life lessons, some good and some bad, but all potentially beneficial.

As we age, we accumulate many useful if unheeded life experiences. Ignoring reality and following the sentiment contained in the lyrics of the old country song "I wish I didn't know now what I didn't know then" isn't a good way to make choices.

Much of what we learn too late applies to effort, showing up, education and debt. We really can't 'write our own ticket' if we get that degree, and borrowing excessively to do so absolutely will not 'pay for itself.'

Let's face facts. Most colleges are sellers that want to 'fill up' their educational 'factories' by getting as many paying butts in the seats as possible. That means prospective students are targets of the selling. But unlike buying a car or TV, the government, both in the form of student loans and grants, provides most of the money to close the sale.

And with the exception of highly prestigious and heavily endowed colleges such as Harvard, Stanford, Duke and Yale, the more expensive the college, the more it takes an all hands on deck mission to recruit the all too often financially unsophisticated, unknowing and unsuspecting eager beaver teenagers and their families.

As a result, college recruiters, unknowing students, and freely available but super expensive government loans represent a life changing and often devastating financial experience for the unsuspecting new enrollees each academic year.

And that's precisely why there's an urgent and compelling need for necessary if sometimes unwelcome parental guidance to be an integral part of the college attendance decision making picture.

The depressing reason families are having this important conversation says this:

"The ways in which a college degree from a prestigious private school might affect her future weren’t lost on Anna Brackett’s daughter, who is 18 years old. Well before the Brooklyn teen received acceptance letters from state universities and pricier, private ones, her parents had laid bare the consequences of choosing the more expensive school.

“I was up front with my daughter about how going into life with a huge amount of debt on your shoulders is something that you cannot take lightly,” Brackett said. So when her daughter got the letters and looked at the bottom line, she couldn’t find a way to justify taking on tens of thousands in debt, when she had the option to graduate debt-free. Her daughter ultimately chose Binghamton University, part of the State University of New York system. . . .

About 85% of parents said they spoke with their child about paying for college and got into the nitty-gritty of their own family contribution, student loans, scholarships and part-time jobs, according to a survey of 2,000 parents released by Credit Sesame, a credit monitoring company, published this week.

The Credit Sesame survey adds to the growing body of evidence that a chat about college finances is simply becoming part of growing up. Half of parents talk with their 7 to 12-year-olds about saving for college, according to a 2014 survey from Sallie Mae.

Though it’s arguably good for parents and their kids to discuss college costs in depth — these conversations can help students avoid mountains of debt after graduating or attending a school they later regret as a bad investment — the rising cost of college and families’ increased reliance on debt to fund higher education may be underpinning parents’ openness with their kids. Brackett, 49, noted that members of her generation largely weren’t forced to grapple with tough financial questions when choosing a school.

Parents and students enter into an often complicated and opaque process when trying to secure financial aid, making some kind of financial discussion essentially a requirement for anyone hoping to successfully pay for college, said Mark Huelsman, a senior policy analyst at Demos, a left-leaning think tank. . . .

More than 60% of parents plan to contribute up to $10,000 to their children’s college, the Credit Sesame survey found. With wages stagnant over the past several years, that nest egg can be hard to build, but it amounts to little more than a drop in the bucket when it comes to the price of college. Tuition, fees, room and board for one year at a four-year public school for an in-state student cost $18,943 a year on average during the last academic year, according to the College Board.

Forced to find a way to make up the rest of the cost — whether it’s working longer in the case of parents (40% of those surveyed by Credit Sesame said they plan to do this) or taking a part-time job during school in the case of students — it’s no wonder families are taking the time to discuss it, said Stew Langille, Credit Sesame’s head of brand. “It’s hard to figure out what the right financial decision is,” he said. “It’s a big issue.”

Abigail Myer, Brackett’s daughter, said she doesn’t regret opting for a cheaper public school instead of the small liberal arts colleges she was considering in upstate New York. . . . And she knows that graduating debt-free will give her the freedom to choose a job based on its merits, not on how much it pays."

Summing Up

Family conversations about the cost of college and the total investment required of the family in terms of time, effort and money are absolutely essential before the college decision is made.

Money borrowed will have to be repaid, and the less borrowed the better life after college will be.

Before the college choice is made, many families and their kids need to know much more than they do about the all-in costs of higher education and the value associated with getting that coveted degree.

In turn the new crop of college graduates will be better prepared, both academically and financially, when their days in the classroom are finished.

We simply can't expect or rely on the self interested education community or government officials to properly guide, inform and advise our families and kids on the most responsible course of action.

That very important job of engaging in a worthwhile and before-the-fact-cost-benefit analysis is for each family, and for each of us as individuals, to undertake.

Sadly, it's being done too infrequently.

That's my take.

Thanks. Bob.

Tuesday, October 27, 2015

What Individuals Should Do in Our Slow Growth, Low Interest Rate and Low Inflation Economy ... Too Much Money in Cash and Too LIttle in Stocks Is Not a Good Plan for Retirement Savings

We live in a low interest rate, low inflation and slow growing U.S. and global economy. For those who remember the high interest rate, high inflation and slow growing troubled world economies of the 1970s, things are certainly different. And so should be our individual approach to saving and investing.

Pension plans are fewer in number, and the IRA and 401(k) plans are and will continue to be the norm. Finally, Social Security is troubled financially, so individuals should plan accordingly.

Cash invested pays virtually zero and bonds aren't much better. Today cash dividends on blue chip stocks pay as much as or more than interest payments on government bonds.

Over time stock prices will increase and cash dividends will increase as well. That's not going to happen to any significant extend with either cash investments or government bonds. As an investment cash is trash, and bonds aren't much better.

Putting our savings to work by owning blue chip dividend paying stocks represents the winning formula for long term oriented savers and investors.

Baby Boomers Hugely Underestimate What They Need for Retirement says this about the dilemma facing too many soon-to-be-retirees:

"When it comes to saving for retirement, there’s a huge gap between what Americans say they want and what they’re doing to make it happen.

A new survey from BlackRock on attitudes about money and financial goals found Americans are holding nearly twice as much cash as they think they ought to in order to reach their retirement goals. Fewer than a quarter of them regularly set aside money into long-term savings or investment plans—yet 74% said they feel financially secure and “prepared to pursue their dreams.”

Baby boomers, who are retiring in droves, face a staggering shortfall. People ages 55 to 64 who responded to the online survey said they expected to have about $45,000 in annual income in retirement. But the amount they had saved would only provide an estimated $9,129—a potential $36,371 gap.

Even affluent retirees—those earning more than $250,000 a year—hadn’t set aside enough to generate the income they said they needed to meet their retirement expectations.
“The amount of money you need to generate a certain level of income is a lot higher than it used to be,” said Russ Koesterich, BlackRock’s global chief investment strategist.

Even if an investor has saved diligently for decades, the amount that a nest egg can generate is much smaller, especially with interest rates so low . . . .

The problem is especially acute for younger workers, who will likely spend decades in retirement–much longer than their parents or grandparents. . . .

The BlackRock survey . . . also suggests that the emotional scars of the financial crisis may be holding back some potential U.S. investors.

Nearly four in 10 people surveyed said they want to make sure they have enough cash saved as a security blanket for an emergency before they save for retirement. And the vast majority said they find it difficult to keep up with bills and save for retirement at the same time. . . .

More than a third . . . said investing money felt risky, and . . . a full 72% said they did not see investing as a way to help them reach their financial goals.

Millennials were especially concerned: Nearly half of people ages 25 to 34 agreed that “what you might earn investing isn’t worth the risk of losing your money,” the most of any other generation.

Two out of three agreed that “investing is like gambling.” And despite having decades to save for retirement, 70% of their portfolios are in cash or cashlike investments, according to BlackRock.

In an environment where cash is paying nothing, and bond yields are well below where they were for the past 40 or 50 years, Mr. Koesterich argued younger workers will need to embrace the volatility of the stock market if they want to generate the returns they need to live comfortably for decades in retirement.

“The math is what it is, and it’s hard to get around it,” he said."

Summing Up

Stocks outperform all other asset classes over time.

They always have and always will.

Time invested is the essential ingredient in successful long term investing.

So buy stocks early and keep putting cash in stocks, regardless of the many intermittent short term and highly volatile market gyrations.

It's the absolute best and safest way to prepare for a secure financial future.

That's my take.

Thanks. Bob.

Monday, October 26, 2015

College and Graduate School Scams ... Federal 'Direct Plus' Loans Are a Minus ... Truth Telling and Free Speech

Yesterday we wrote about the absence of free speech on college campuses and that this scary trend is being encouraged by politicians and college officials. And the fact is that many unthinking students are in favor of limiting free speech as well.

Yet free speech is a great way to learn what we don't know but need to know. If we aren't willing or able to listen to views other than our own, we'll be ignorant about many things that we later wish we would have known --- such as knowledge about government granted Direct Plus student loans, for example. And then there's the related topic of free speech puffery versus truth telling in advertising.

When the federal government and complicit schools loan money to attendees, it's not always intended to benefit the students. It's primarily to allow the colleges to charge outrageous amounts in order to pay college teachers, administrators and other employees non-market determined salaries. For the most part, colleges then are able to pay their employees what their employees want to be paid and not what a free market would allow. It's that simple.

As a result, students and taxpayers are being ripped off, and government and college officials are doing the ripping. Why we don't teach our kids, beginning in high school, the reality of why educational institutions are so expensive has long been and continues to be a well kept secret.

Since the federal 'Direct Plus Loan Program' is especially costly, we'll use the example of a Florida based law school to tell the bigger story. The school's apparent purpose is to get and keep 'butts in the government enabled expensive seats.'

The Law School Debt Crisis provides an instructive example of what far too many college, law, MBA and other students aren't learning:

"In 2013, the median LSAT score of students admitted to Florida Coastal School of Law was in the bottom quarter of all test-takers nationwide. According to the test’s administrators, students with scores this low are unlikely to ever pass the bar exam.
    Despite this bleak outlook, Florida Coastal charges nearly $45,000 a year in tuition, which, with living expenses, can lead to crushing amounts of debt for its students. Ninety-three percent of the school’s 2014 graduating class of 484 had debts and the average was almost $163,000 — a higher average than all but three law schools in the country. In short, most of Florida Coastal’s students are leaving law school with a degree they can’t use, bought with a debt they can’t repay.
If this sounds like a scam, that’s because it is. Florida Coastal, in Jacksonville, is one of six for-profit law schools in the country that have been vacuuming up hordes of young people, charging them outrageously high tuition and, after many of the students fail to become lawyers, sticking taxpayers with the tab for their loan defaults.
Yet for-profit schools are not the only offenders. A majority of American law schools, which have nonprofit status, are increasingly engaging in such behavior, and in the process threatening the future of legal education.
Why? The most significant explanation is also the simplest — free money.
In 2006, Congress extended the federal Direct PLUS Loan program to allow a graduate or professional student to borrow the full amount of tuition, no matter how high, and living expenses. The idea was to give more people access to higher education and thus, in theory, higher lifetime earnings. But broader access doesn’t mean much if degrees lead not to well-paying jobs but to heavy debt burdens. That is all too often the result with PLUS loans.

The consequences of this free flow of federal loans have been entirely predictable: Law schools jacked up tuition and accepted more students, even after the legal job market stalled and shrank in the wake of the recession. For years, law schools were able to obscure the poor market by refusing to publish meaningful employment information about their graduates. But in response to pressure from skeptical lawmakers and unhappy graduates, the schools began sharing the data — and it wasn’t a pretty picture. Forty-three percent of all 2013 law school graduates did not have long-term full-time legal jobs nine months after graduation, and the numbers are only getting worse. In 2012, the average law graduate’s debt was $140,000, 59 percent higher than eight years earlier.

Sunday, October 25, 2015

'Unfree' Speech on College Campuses and Throughout America ... Teaching and Learning the Wrong Things About American 'Exceptionalism'

Long ago Evelyn Beatrice Hall wrote these timeless words, "I may not agree with what you have to say, but I'll defend to the death your right to say it."

Freedom of expression, including speech, is the right of every American citizen as embodied in, and guaranteed by, the U.S. Constitution.

But that's no longer the case. For example, today many colleges are restricting the right to say what we want when we want to say it. They are doing this by limiting the freedom of expression on campuses throughout the nation.

And that's not all there is to the story as free speech is under attack elsewhere In America as well. Almost all of our politicians don't dare to speak freely for fear of losing elections.

A new survey reveals that college students by a margin of 51% to 36% are in favor of further restricting freedom of expression. They favor instead such things as 'trigger warnings' by professors in an effort to make students more 'comfortable' in college classrooms. That's alarming.

Unfree Speech on Campus says this in pertinent part:

"Williams College (Tuition and fees: $63,290) has undertaken an “Uncomfortable Learning” Speaker Series in order to provide intellectual diversity on a campus where (like most campuses) left-leaning sentiment prevails. What a good idea! How is it working out? The conservative writer Suzanne Venker was invited to speak in this series. But when word got out that an alternative point of view might be coming to Williams, angry students demanded her invitation be rescinded. It was. Explaining their decision, her hosts noted that the prospect of her visit was “stirring a lot of angry reactions among students on campus.” So Suzanne Venker joins a long and distinguished list of people—including Ayaan Hirsi Ali, George Will, and Charles Murray—first invited then disinvited to speak on campus. It’s been clear for some time that such interdictions are not bizarre exceptions. On the contrary, they are perfect reflections of an ingrained hostility to free speech—and, beyond that, to free thought—in academia.

To put some numbers behind that perception, The William F. Buckley Jr. Program at Yale recently commissioned a survey from McLaughlin & Associates about attitudes towards free speech on campus. Some 800 students at a variety of colleges across the country were surveyed. The results, though not surprising, are nevertheless alarming. By a margin of 51 percent to 36 percent, students favor their school having speech codes to regulate speech for students and faculty. Sixty-three percent favor requiring professors to employ “trigger warnings” to alert students to material that might be discomfiting. One-third of the students polled could not identify the First Amendment as the part of the Constitution that dealt with free speech. Thirty-five percent said that the First Amendment does not protect “hate speech,” while 30 percent of self-identified liberal students say the First Amendment is outdated. With the assault on free speech and the First Amendment proceeding apace in institutions once dedicated to robust intellectual debate, it is no wonder that there are more and more calls to criminalize speech that dissents from the party line on any number of issues, from climate change to race relations, to feminism and sex."

Summing Up

More and more, less and less of what made America great is on display.

Throughout too many of our institutions of 'higher learning' that are financed by taxpayers, including those of us who embrace the constitutional and inalienable right to speak our minds, free speech has become 'unfree.'

In fact, many politicians, teachers and other self-proclaimed leaders are even afraid to say that "All lives matter."

This growing American tendency toward greater government sanctioned intolerance coupled with fewer individual freedoms is alarming.

That's my take.

Thanks. Bob.

Saturday, October 24, 2015

401(k) and IRA Investors Need Solid Long Term Oriented Investment Advice ... Not Commissioned Brokers or Robo Advisors

Too many individuals don't save and invest adequately or responsibly during their working years. As a result, they are not prepared financially for their retirement years.

Instead they borrow and spend excessively on interest charges throughout adulthood, and end up needlessly financially ill prepared at the end of their earning years.

And for those few who do manage to save and invest adequately while working, most either (1) don't own enough stocks or (2) trade excessively and expensively on the advice of conflicted commissioned brokers.

So when the market swings widely from time to time, which it inevitably does, they are likely to sell and then later buy back those same or similar shares after the dust has settled and share prices have recovered. Either that or they just decide to stay away from investing in stocks forever.

Individuals use lawyers and doctors when appropriate, and they do this out of  necessity. The same logic applies to saving, investing and borrowing. But in the case of financial management, it's an ongoing process where solid advice on a continuing basis is essential to the individual's long term financial well being.

And that brings us to today's dilemma. Most individuals don't have financial advisors because (1) the advice offered is sporadic, (2) costs too much or (3) isn't appropriate for long term oriented individual savers and investors.

That's too bad, but that's the truth. It's become a damned if you do and damned if you don't problem with huge ramifications.

Burt Malkiel knows why investment costs are falling fast has this to say about some positive trends developing on the cost front:

"Burt Malkiel has been around stock markets a long time. He has seen money managers and investing styles come and go, lived through crashes and recoveries and written bestselling books on investing along the way.

He's learned one thing for certain, he says. Costs hurt. "The only thing I'm sure about in investing is the lower the fee I pay, the more there's going to be for me," says Malkiel, author of the classic A Random Walk Down Wall Street . . . .

Investment costs are still falling, as Malkiel recently pointed out. "Fees have come down, on average, because fees for index funds are so much lower than active funds, and people have moved to them," he told The New York Times.

Morningstar recently weighed in on the trend, noting that asset-weighted expense ratios across all funds — not just index products but certainly including them — hit 0.64% in 2014, compared to 0.76% five years ago. This was being driven by investor choice, they noted.

However, the researchers concluded, the lion's share of the cost savings was to the benefit of the funds, not necessarily investors. The clear implication is that investment fund fees have room to fall by even more.

Plain disclosure

The winner in all of this has been Vanguard Group (Malkiel was once a board member there). How long before the brokerages and big fund providers that compete with Vanguard throw in the towel and cut costs deeply to keep up?

Competition is a fantastic force for good in the retirement business. For decades upon decades, stock brokers have blithely lifted a third or more of retirement savers' returns in the form of fees.

The conflicts of interest have been obvious for a long time. Only now is Washington preparing to do something about it, namely by proposing to make the fiduciary standard common to all retirement advisors.

We're not against money-management fees, naturally. But we do believe that fees and commissions should be plainly disclosed and that advisors should be required to act in the best interests of their clients.

And we believe that the real value of a financial advisor is not picking funds or picking stocks. "This wouldn't hold if active funds were getting a higher post-fee return," Malkiel said. "But the evidence is abundantly clear that they're not."

On track

So why pay fees at all? For portfolio construction, rebalancing and actual financial guidance — if you feel having an advisor will keep you on track. We recognize that some investors are fine with so-called "robo" advice. Others, however, will want a human partner along the way.

But nobody should be pay high fees in hopes that someone can beat the market for them. As Malkiel would say, the data doesn't support the effort — and certainly not the added investment costs."

Summing Up

Some people can outperform the market. Most can't.

Having a cost conscious and trustworthy individual financial advisor is a money making idea but not for the purpose of 'beating the market.'

A great deal of money can be not spent and thereby saved and earned by individuals making the simple and right moves and non-moves from time to time.

By acting rationally and intelligently over time --- not emotionally or because the commissioned broker urges panic buying or selling, or the neighbor or co-worker has a hot tip that 'can't miss' --- the individual saver and investor can end up with that 'pot of gold' --- except it won't be gold.

It's the long haul that matters for individuals and that begins with education and knowledge, including financial education and knowledge.

So team up with someone you know and trust, and who knows the score financially.

Then make the effort to learn and know what's what. It's not that hard to do. In fact, it's both fun and profitable.

That's my take.

Thanks. Bob.

Friday, October 23, 2015

America's Unaffordable and Underfunded Spending on Entitlements and Education ... A Look at Brazil

America as a whole is both getting older and becoming indebted sooner.

We're living longer and retiring earlier at one end of life while at the other end of life, we're staying in school longer and taking on heavy debt loads to do so. Meanwhile, in the middle too many of us have low paying part time jobs and are applying for and receiving questionable Social Security disability payments from the soon-to-be-out of money Social Security disability fund.

Of course, medical costs are now government 'controlled' and escalating at a much higher than inflation pace as we live longer and experience better but more costly health care treatment. And on top of that, Medicaid pays for most of the cost incurred for stay in our nation's extended care facilities for the elderly.

Meanwhile, we import much of what we buy as consumers and enjoy fewer high paying domestic jobs as a result.

All in all, we have a long term problem in need of a thoughtful long term solution. But thoughtful long term solutions aren't even being seriously discussed in our ongoing political circus called the 2016 national elections.

Instead the political discussion about the presidency is about Hillary's e-mails (not her character and lying about Benghazi as reported in She All Knew Along) and the walls with Mexico that 'The Donald' promises to build with Mexican money.

As a nation, we're 'officially' $18 trillion in debt. While that's admittedly a big number, it's not even in the ballpark of being close to the real American indebtedness. That streak of honesty, were it ever to appear, would add another several hundred trillion dollars to the debt pile.

For example, there's another $200 trillion or so in underfunded entitlement obligations for Social Security, Medicare, ObamaCare and unfunded pension obligations for various city, state and other public sector employees (including members of state legislatures and the U.S. congress, K-12 and college teachers, policemen and fire fighters), to mention just a few of the financial burdens we're putting on the backs of future American generations.

So how bad must it get before we start paying attention to reality?  Maybe a quick look at what's happening in Brazil would be instructive as to where we're headed, given our political situation and unwillingness as citizens to tell it like it is and deal with our problems while there's ample time to do so.

An Exploding Pension Crisis Feeds Brazil's Political Turmoil tells the troubling story of Brazil, a country in both economic and political turmoil:

"SÃO PAULO, Brazil — When Rosângela Araújo turned 44, she decided that she had worked long enough.
    So Ms. Araújo, a public school supervisor, did what millions of others in their 40s and 50s have done in this country: She retired, with a full pension.
“I had to take advantage of the benefit that was available to me,” said Ms. Araújo, now 65. Her government pension stands at about $1,000 a month, five times the minimum wage. . . .

Brazilians retire at an average age of 54, and some public servants, military officials and politicians manage to collect multiple pensions totaling well over $100,000 year. Then, once they die, loopholes enable their spouses or daughters to go on collecting the pensions for the rest of their lives, too.....

“Think Greece, but on a crazier, more colossal scale,” said Paulo Tafner, an economist and a leading authority on Brazil’s pension system. “The entire country should be frightened to its core. The pensions Brazilians obtain and the ages at which they start receiving them are nothing less than scandalous.”. . . .

But a rebellious Congress voted this year to significantly expand pension benefits. . . . Officials had expected a major shortfall in 2030, but they now say that could happen as soon as next year.

Brazil is enduring its sharpest economic downturn in decades, hemorrhaging jobs and depleting contributions to the pension system. The Federal Revenue Service said such payments plunged 9 percent in August.

Then there is Brazil’s plummeting fertility rate — which recently dropped to 1.77 children per woman, below the rate needed for the population to replace itself — which will eventually put even more pressure on a pension system already under intense strain.

This shift partly reflects higher living standards in recent decades and broader availability of birth control, but it will result in fewer young people to support a much larger older population. As recently as 1980, Brazil’s fertility rate was 4.3 children per woman, according to the United Nations.

And the average life expectancy in Brazil has climbed to 74.9 years in 2013, from 62.5 years in 1980, according to government statistics. Instead of building a surplus now to prepare for an onslaught of new pension obligations, scholars say, Brazil is squandering a demographic bonus that will soon fade.

Economists note that Brazil already spends more than 10 percent of its gross domestic product on public pensions, similar to what southern European countries with much older populations have recently spent, according to the Organization for Economic Cooperation and Development. Unless changes are made, an even bigger shock is expected here, given that the population of people 60 or older is expected to reach about 14 percent of the overall population in just two decades, up from about 7 percent now.
But the biggest challenge that political leaders across the ideological spectrum face is one they helped create: the generosity of Brazilian pensions. . . .

The pension system can ease extreme poverty. For instance, rural workers can retire five years before others even if they have never contributed to the public pension system, receiving a monthly payment equal to the minimum wage, about $210 a month.
But the system also perpetuates inequality by providing special benefits to hundreds of thousands of government employees and their families. . . .

With Rio’s pension obligations soaring, that means fewer resources for basic services like schools, hospitals, policing and sewage systems. Rio is planning to spend about $4.5 billion this year on pension benefits, compared with about $3.6 billion on the state’s public education and health systems, officials said.
“Brazil has three very clear options to prevent large increases in pension spending: Increase contributions, increase the retirement age, or decrease pensions,” said Mariano Bosch, a labor markets specialist at the Inter-American Development Bank. “All of those options are very unpopular.”. . .

So far, political leaders do not seem prepared to embrace any of those options. . . .
Well-organized pensioners’ unions are rejecting calls to scale back benefits. . . .

“Public pensions in Brazil have long been a slow-motion disaster,” said Raul Velloso, a specialist on public finances. “The difference now is that the debacle is accelerating, revealing to our children the political cowardice and irresponsibility our leaders are bestowing on them.”"

Summing Up

U.S. government spending continues to grow.

One huge and seemingly insoluble problem is that government promises for spending on education, retirement and health care costs are just that -- promises, albeit unfunded promises.

And those seriously underfunded promises will be paid by future generations.

Of course, we're not Brazil. At least not yet.

But don't hold your breath waiting for the politicians to begin a realistic and honest discussion about the problems and realistic solutions.

As the article says, the three options for entitlements are to (1) increase contributions, (2) raise the retirement age, or (3) decrease benefits.

The correct course of action would be to embrace all three options for entitlements, and then also implement a free choice individually controlled voucher system for education.

To fail to do so is to continue to penalize unfairly both current and future American generations.

And that's not fair.

That's my take.

Thanks. Bob.

Thursday, October 22, 2015

Individual Investing Styles ... Horizontal vs. Vertical ... The Horizontal Way is the Winning Way

{NOTE: We recently argued against investing in bonds for those seeking to be successful long term individual investors. For the first time in a long time, current dividend yields on blue chip stocks exceed the interest rate paid on government bonds. And to make an already good thing an even better thing, the (1) cash dividends and (2) share prices of high quality stocks will increase over time, unlike the interest payments and principal amount of bonds. See our Tuesday, October 20 post titled "Investing in 'Safe' Bonds Now Is Neither a Safe nor a Good Long Term Investment Strategy for Individuals ...."

Historically, stocks have returned an average of ~10% annually. In a low inflation scenario, we've used 8% in the examples below. Investing in bonds, interest and principal combined, may earn zero or a little more than zero for the next several years. At least that's the 'planning' estimate I'm using.

Failing to plan is the same as planning to fail, and if we don't know where we're going, any road will take us there.

I'm an owner of individual stocks and trade them only occasionally. In my younger days while still employed, my investments primarily consisted of regularly buying low cost S&P 500 Index funds and getting the company match.

Payments to intermediaries subtract from earnings on stocks. Thus, minimizing transaction and advisory expenses is always a good idea. Successful individual investors make an effort to get what we pay for, in other words.}

I've long considered myself to be an objectively oriented horizontal investor.

Many if not most people, however, are what I refer to as emotionally oriented vertical investors.

Let me explain what I mean by the comparative benefits of horizontal as opposed to vertical investing. One approach works extremely well for long term oriented individual investors, and the other works primarily to benefit the stock selling intermediaries, aka brokers.

Long term oriented horizontal investing is safer than vertical investing, and it's vastly more profitable as well. Yet it's neither commonly practiced nor internalized by most individual buyers and sellers of stocks.

Horizontal is all about time in the market and vertical is all about market moves, up or down.

Time is the horizontal investor's friend. For example, a 20 year old who has $1,000 to invest and then earns an average annual return of 8%, will see that saved and invested money double five times, or each and every 9 years (9 years X 8% = doubling the one time initial investment, aka the rule of 72) during his working career. At age 65 it will have grown to $32,000. At age 56 - $16,000, at age 47 - $8,000, at age 38 - $4,000 and at age 29 - $2,000.

On the other hand, if the investing doesn't begin until age 47 and $1,000 is invested, at age 65 it will only grow to $4,000.

$32,000 is eight times greater than $4,000. It's simply the total-time-in-the-market factor at work.

That's why successful individual investing is all about taking a long term oriented horizontal approach. The earlier we start and the longer our money works for us, the more we accumulate.

On the other hand, vertical investing concerns itself with the short term market movements. Individuals believe they make money when the market goes up and that that they lose money when it goes down. But they're wrong about that. Money is only made or lost when the initial investment is sold and converted into cash.

Daily, weekly, monthly and annual price fluctuations and movements are only important when the shares bought are finally redeemed for cash. And long term investors won't redeem those shares for decades, assuming they allow the horizontal nature of successful investing to work for them.

Accordingly, buying low and selling high is the basis of horizontal investing. And the earlier we begin buying, the longer timeframe we have to enjoy average market returns over several decades.

It's that simple. It really is.

So be a horizontal investor and don't get scared out of the market when it moves down. And don't cash out of the market when  it moves up. Stay the course for days, weeks, months, years and decades.

It all comes down to this --- horizontal investing is intelligent investing. So be a smart investor of a diversified basket of blue chip dividend paying stocks by 'buying low and selling high.'

That's long been my approach, and still is very much my plan.

And one more thing --- our 'Beloved Cubbies' made it four in a row in the loss column last night. Congratulations to the Mets. For Cub fans everywhere, it's just another typical 'Wait 'til next year' end of the baseball season. And so it has gone in Cubbieville each year since 1908.

That's my take.

Thanks. Bob.

Wednesday, October 21, 2015

In Government We Should Trust? ... Lessons to be Learned from Ongoing Government Caused Cost Inflation for Health Care and Education Compared to Private Sector Free Market Competition

Medical costs are continuing their inflationary increases of the past several decades.

Medicare, ObamaCare, Medicaid and other 'benefits' provided by government in essence have no real incentive to control costs. It's a cost plus world of pricing, just like education.

On the other hand, the private sector is governed by supply and demand competition where consumers are in charge. It's the difference between a government monopoly and market competition, pure and simple.

And that's why the cost of health care, including Medicare costs and premiums, will always show sizeable increases, even when energy, food and shelter prices aren't growing and perhaps are contracting. See How the Latest Inflation Data Plays Into the Fed's Thinking.

With that in mind, retirees shouldn't look for any increase in Social Security benefits in either 2016 or 2017. However, they should anticipate that Medicare and health costs will continue on their upward escalator.

Why Social Security Checks Likely Won't See a Big Increase in 2017, Either has this news for the long term planners among us:

"Falling consumer prices over the past year means Social Security payments for seniors and other recipients could be little changed in 2017 as well, even if prices for everything from food to gasoline to drugs increase at a modest clip.

The Social Security Administration said . . . recipients will see no cost-of-living increase in January.
Any increase in 2017 will be based on how 2016 prices compare to the level in the summer of 2014, not 2015. The government doesn’t lower benefit payments when prices fall. But it does take into account decreased costs in determining future increases by setting the scale based highest price level from the third quarter of any year.

In other words, price increases in the next year will have to overcome the past year’s decline before benefit checks will see a bump.

To determine the annual cost-of-living adjustment, the Social Security Administration assesses how an inflation measure called the Consumer Price Index-Urban Wage Earners and Clerical Workers, or CPI-W, changes from a year earlier. CPI-W is a slightly different calculation than the more widely reported Consumer Price Index-All Urban Consumers, or CPI-U.

Social Security looks at the average price level in the third quarter to calculate the change. Average CPI-W fell 0.4% this year from the third quarter of 2014.

So if overall inflation advances 1.7% during the next 12 months–the annual average since the recession ended–the January 2017 cost-of-living increase would be about 1.3%. If prices increase 0.4% or less, there could be no increase in 2017.

A similar scenario played out in 2011. Prices rose 1.5% in the third quarter of 2010 from a year earlier, but there was no adjustment because prices fell 2.1% in 2009 from 2008, during the depths of the recession. Because the 2009 decline was so deep, it held back the living-cost adjustment in 2012.

The results show how deflation can be self-reinforcing on two levels. Since other kinds of payments, including some union wages and housing benefits, are tied to inflation measures, a big decline one year can hold back increases for the next several.

What’s more, without bigger benefit payments, millions of Social Security recipients might be reluctant to increase spending. That would weaken demand, give businesses less leeway to increase prices, and therefore mute inflation pressures."

Summing Up

Health care costs, education costs and other government controlled monopolies aren't subject to market competition.

If energy prices remain low and the U.S. dollar stays strong, then prices paid for energy related and imported consumer goods will remain well under control.

And in the slow-go U.S. economy, consumer spending won't increase by much next year, thus further restraining private sector prices.

Meanwhile, the 'as usual' increasing cost of government will see no let-up as it continues its wasteful and monopolistic ways in areas such as health care and education spending.

Thus, oldsters should plan on a zero or only nominal increase in Social Security benefits for both 2016 or 2017.

That's my take.

Thanks. Bob.

Tuesday, October 20, 2015

Investing in 'Safe' Bonds Now Is Neither a Safe nor a Good Long Term Investment Strategy for Individuals --- Unpopular Blue Chip Stocks, Including Energy and Financial Stocks, Are Better Buys for the Long Term

For the first time in decades, blue chip stocks (such as Boeing, Exxon, GE, JP Morgan, Intel, Microsoft, Merck, Pfizer and Wells Fargo) currently pay higher dividends than the interest paid on 'safe' government bonds.

I expect that 'aberration' of premium dividend yields to interest rates to continue to be the case for several more years. In addition, those cash dividends will grow and today's share prices will increase. The interest paid on bonds won't change and at the expiration date of the bonds, no premium will be paid on the principal amount invested.

Bonds aren't a good place for a major portion of the individual's IRA. In fact, individual 401(k) and IRA long term investors should consider a 'no bonds' strategy and substitute blue chip dividend paying and growing stocks for the traditional bond portion going forward.

The popular belief is that bonds are safe long term investments. Everybody knows that. Except that both today and for the foreseeable future, they aren't and won't be.

And in today's low interest rate, weak global economy, and strong dollar scenario, financial stocks and energy stocks are supposed to be poor long term investments. Just like the 'bonds are safe' story, everybody knows that to be the case. But that's not true either.

Long term investors who prefer to buy when good companies are temporarily out of favor and therefore 'on sale' will take a close look at investing for the long haul in out-of-favor companies like Exxon (XOM), Wells Fargo (WFC) and JP Morgan (JPM). They are all great companies that pay solid regular cash dividends which will grow over time. Their share prices are currently 'on sale,' having fallen as energy and financial stocks have declined this year.

But their cash dividend yields are currently higher than the interest rate paid on bonds, and the share prices of these quality companies will almost certainly appreciate over the years, unlike bonds. In fact, bond prices will almost certainly fall as interest rates rise over time.

In short, my considered investment belief is that bonds will be a bad investment for at least the next decade.

And now that the share price levels of quality energy stocks and financials are down significantly this year, they are both good buys for the long haul.

Bond-Market Blues: Where Did My Income Go? is subtitled 'Fixed income market is running dry on a vital attribute: income:'

"If there is one area where low interest rates have propelled growth, it has been in the fixed-income market. But increasingly, income is the one thing that is hard to find.

For investors, that marks a further transformation in the fundamental characteristics of bonds, away from steady income to vehicles for capital gains. What investors should remember: this can also lead to capital losses.

The bond market has boomed in the wake of the financial crisis. Governments led the way, borrowing as budget deficits yawned wide; companies followed, first switching away from fickle bank financing and then lured by historically low rates to add debt to balance sheets.

The Barclays Global Aggregate, a broad investment-grade bond index, now contains over 16,900 securities with a face value of $39.8 trillion, up from $25.3 trillion at the end of 2007.
But low rates mean bonds aren’t throwing off as much cash. . . . Low rates are providing a subsidy of hundreds of billions of dollars from lenders to borrowers. . . .

The problem now is how long ultraloose monetary policy has persisted: more and more low-coupon, long-dated debt has been and is being issued. If interest rates are permanently lower, that will change investor behavior. . . .

Some . . . forecast 10-year U.S. Treasury yields at 1.5% at the end of 2016 . . . . 

Coupon-clipping might not be an exciting investment style, but over time coupon payments—and crucially, their reinvestment—matter. Their diminution distorts the bond market and creates a whole new kind of risk for investors."

Summing Up

Interest rates have been on the decline for more than 30 years.

And while energy prices have been on a roller coaster, they have been falling hard the past year.

Meanwhile, financial stocks are currently priced as if interest rates will never increase.

Thus, my long term investing point of view is that bonds are and will remain bad places to place long term money. On the other hand, blue chip energy and financial stocks will pay good and growing dividends and also show solid share price appreciation over time.

When everybody else is buying bonds for mistaken 'safety' reasons, it's time for long term investors to consider selling.

And when everybody else is selling energy and financial stocks because they have fallen recently, it's time for long term investors to consider buying.

In other words, the best time to buy is when the 'good stuff' is on sale. And blue chip dividend paying and growing stocks represent 'good stuff' to long term investors.

That's my take.

Thanks. Bob.


Monday, October 19, 2015

Responsibility and Responsible Individuals vs. Groupthink and Conformity

The following book review is absolutely worth taking the time to read and reflect upon in today's America. A careful reading of the entire book titled 'Christ Stopped at Eboli' may even be appropriate. We report: you decide.

In any event, When Individual Responsibility Is Exiled has a message with meaning for each of us:

"The forced removal of a person accused of crimes against the state to a remote and unhealthy region dates to antiquity, but it was the tyrants of the 20th century who meted out the punishment on an industrial scale. In Fascist Italy, Mussolini sent more than 13,000 dissenters into confino—internal exile—mostly to backwaters in the south.

Seventy years ago, a book appeared documenting one man’s 10-month exile, in 1935 and 1936, to the malaria-ridden province of Lucania. The author was Carlo Levi, and his “Cristo si è fermato a Eboli” (1945), translated into English as “Christ Stopped at Eboli” (1947), is a compellingly unclassifiable work . . . on the limits of human rationality. The book carries a timeless message, which no doubt explains why it has never gone out of print in Italy and the U.S.

Levi, a doctor-turned-painter born in 1902 into a prosperous assimilated Jewish family and raised in the cultured northern city of Turin, developed firmly rooted democratic convictions from an early age and felt it his duty to involve himself in politics after Mussolini assumed dictatorial powers. In the 1930s, he played an integral role in the clandestine Giustizia e Libertà organization that advocated the Duce’s overthrow and the creation of a republican democracy, which led to his arrest and exile.

When his confino ended in 1936, Levi emigrated to France. But in 1941 he returned to Italy, where he became a wanted man. In 1943 he hid out in a friend’s apartment in Florence. There he spent six months writing about his exile in Grassano and Aliano, two tiny Lucanian villages—work that culminated in “Christ Stopped at Eboli.”

Much of Levi’s memoir portrays the peasants of the two towns, who sought out Levi for his medical knowledge. He describes the lives of simple people who believed in irrational forces (such as demons and gnomes) and displayed a complete indifference to life beyond their “arid and lonely settlements, remote even from neighboring villages, and so backward and impoverished that…Christ never came to them; Christ stopped farther north, at Eboli.”

He sketches memorable portraits: the pig doctor, the town crier, the gravedigger, the village witches and, above all, the long-suffering peasants. And he also wryly ridicules Fascism as embodied in the town’s officious mayor: a statist “parasite,” whose main accomplishment was to build a massive public toilet used by no one except animals. Levi justifies the peasants’ disdain for authority, noting that for them the state consisted only of jailers, soldiers and policemen: “To the peasants ‘Rome’ was a name rather than a power; its authority had no real hold on them, and the regime was certainly uninterested in their fate.”

Levi came to Lucania as an enlightened rationalist. But his experience there changed him. At the heart of Levi’s portrait is a strong critique of liberal progressivism: namely, of the belief that Fascism was the product of ignorance and that any problem brought before the bar of reason could be solved. Levi argued that an “eternal fascism” was embedded in each person’s soul and that Fascism had triumphed because of a widespread fear of taking responsibility and of individual self-determination, an innate human desire to stand with and not apart from the group. In this respect, Levi pointed to similarities between the supposedly “barbarous” Lucanian peasantry and Rome’s supposedly “civilized” Fascists.

The Lucanian peasants surrendered their individuality by believing in magic and mystical powers; Rome’s Fascists surrendered their individuality by believing in the power and beneficence of Il Duce and his absolutist state. Joining in collective worship of the state is, in its own way, as irrational as living “outside of time” in an animal-like collectivity, immersed in tribal rites and believing in witches. . . .

Italy and the world have obviously changed in the age of globalization. But human irrationality, humans’ reluctance to engage as responsible individuals rather than going with the collectivist flow of mass entertainment or mass political movements, continues unabated. Think, for example, of the recrudescence of anti-Semitism in European politics today. As Levi noted, there is “a Lucania in each of us” that we need to accept but be vigilant against."

Summing Up

The book tells a compelling story about individuals and our perceived helplessness and willingness to conform to group standards.

Our belief in government as the answer is the most dangerous issue confronting a free and prosperous future America.

The future is in each of our own hands.

That's my take.

Thanks. Bob.