Archive for March, 2009

We at Alberty Financial enjoy the writing voice of Forrest Simmons at BNY Mellon in ATL:

Since the email I sent on March 9 (see below) the market is up 21%. I received a phone call a few minutes ago from someone who received the email and he said, “Great call. What’s next?” Like I know.

While extreme readings of certain indicators (Investor Sentiment, Volatility Readings) can be useful in measuring short term market tops/bottoms, they are less predictive of the long term. Here 2 things I am looking for that may signal the coast is a bit clearer. As usual these are my thoughts:

1. Change of tone in Washington. When the government stops beating with a rubber hose the executives and companies they have deposited bailout money into it may encourage more private capital to partner with Washington. The failure of the securitization market has removed some $8 trillion of credit from the market, and without private participation it is unlikely the government alone can inject enough liquidity into the system to make credit more available.But what private investor in their right mind would want to participate- if they are successful and help the economy, but make money in the process…well, you know the rest.

2. A coordinated strategy. So far our leaders have tried to fill the tar pit one shovelful of bailout money at a time with very little clarity and consistency.

There are a number of other factors that may indicate the markets are on more stable ground, but my mind can only process 1 or 2 at a time, so these are the 2 big ones for me. I’d be interested to hear your thoughts.

The previous commentary from 3/9/09:

One indicator I pay close attention to is the Investor Sentiment Survey, taken every Wednesday by the American Association of Individual Investors and published each Saturday in Barrons. Ben Graham, Warren Buffett’s mentor and perhaps the greatest value investor of all time, said, “The job of the market is to frustrate the majority.” If you believe his words have credence, you may take heart in the excerpt from Barrons which I cut and pasted below.

AAII
But the most fascinating and historic reading comes to us from the AAII weekly survey. The latest American Association of Individual Investors (AAII) data shows what can only be describe as total and utter capitulation. As of Wednesday (March 4th, 2009) 70% expected the market to continue to fall, while only 19% continue to see better times ahead.
The only data point from the AAII survey that approaches this level of gloom is back in October 19th, 1990 when a paltry 13% of respondents were bullish and 67% were bearish.

Keep reading to see “plan stimulates”:

Wikipedia gives the following definition of a Credit Default Swap:
A credit default swap (CDS) is a credit derivative contract between two counterparties. The buyer makes periodic payments to the seller, and in return receives a payoff if an underlying financial instrument defaults
AIG sold a TON of Credit Default Swaps without posting any collateral. In other words, they agreed to make the buyer of the credit default swap whole if the underlying credit instrument (usually some form of bond) fails, but AIG did not have any assets- pledged or otherwise- to back up their side of the contract. Whoops.
It all makes sense to me now. Click on the PDF AIG Counterparties , go to the 3rd page, and you’ll see who had the other side of the contracts (and had the most to lose) if AIG went south. One of the things I find interesting is that 14 of the top 20 counterparties were foreign banks.

There are a number of great, successful investors that I have a great deal of respect for. Jim Rogers, Marc Faber, Jeremy Grantham. These investors are clear-eyed realists whose thought processes are sound, logical, and based on facts and experience versus hope and blind optimism. They do not get caught up in the froth and frenzy of Wall Street and, instead, make their judgments based on their own independent assessment of the facts.

I tell you all of this in order to reference the following comments from Jeremy Grantham. I get asked virtually every day (like I have some secret answer!) where the bottom of this market is, when is the best time to buy stocks. My stock answer is, “I don’t k now, but let’s have a clear plan and discipline that will gradually get us back into equities.” One of the things we do very well at BNY Mellon is to establish a very clear investment strategy with our clients that helps take some of the emotion out of the decision making process, then sticking with the discipline. If you do not have such a game plan, evidenced in an Investment Policy Statement, let us help you with one.

Now, Jeremy Grantham’s comments:
In his latest market commentary, legendary manager (and longtime bear) Jeremy Grantham of Grantham, Mayo Van Otterloo explains that it’s all too easy for terminal paralysis to set in when faced with a crisis market, and recommends a battle plan.

Key excerpts:

So almost everyone is watching and waiting with their inertia beginning to set like concrete. Typically, those with a lot of cash will miss a very large chunk of the market recovery.

There is only one cure for terminal paralysis: you absolutely must have a battle plan for reinvestment and stick to it. Since every action must overcome paralysis, what I recommend is a few large steps, not many small ones. A single giant step at the low would be nice, but without holding a signed contract with the devil, several big moves would be safer. This is what we have been doing at GMO. We made one very large reinvestment move in October, taking us to about half way between neutral and minimum equities, and we have a schedule for further moves contingent on future market declines. It is particularly important to have a clear definition of what it will take for you to be fully invested. Without a similar program, be prepared for your committee’s enthusiasm to invest (and your own for that matter) to fall with the market. You must get them to agree now – quickly before rigor mortis sets in – for we are entering that zone as I write. Remember that you will never catch the low. Sensible value-based investors will always sell too early in bubbles and buy too early in busts. But in return, you may make some important extra money on the roundtrip as well as lowering the average risk exposure.

For the record, we now believe the S&P is worth 900 at fair value or 30% above today’s price. Global equities are even cheaper. (Our estimates of current value are based on the assumption of normal P/Es being applied to normal profit margins.) Our 7-year estimated returns for the various equity categories are in the +10 to +13% range after inflation based on an assumption of a 7-year move from today’s environment back to normal conditions. This compares to a year ago when they were all negative! Unfortunately it also compares to a +15% forecast at the 1974 low, and because of that our guess is that there is still a 50/50 chance of crossing 600 on the S&P 500

The blog whatdoesgreenmean.net, written by Athens resident Alan Flurry, poses an interesting question, no matter how you apply “green” to your life.

One facet of the question is the transition from paper to electronic financial statements. Today it is possible to receive utility bills, mortgage statements, annual reports, trade confirmations and pretty much any other paper record electronically.

My family and I have subscribed to this new way of life. I wish I could say it was all about protecting our precious Earth, but honestly it is as much about convenience and the desire to eliminate looming piles of paper.

There is one major flaw in the movement toward electronic financial record keeping and it might not be what you think. Security is an obvious concern, but there actually is another equally important issue to address: What happens if you handle the family finances and something happens to you?

Our family had some first-hand experience with this problem as I headed off to Nebraska for two and a half months for a stem-cell transplant. Being a financial planner, it is natural that I handle the family finances. As I prepared for my trip, I began to realize there essentially were no bills coming in the mail anymore. Everything was delivered electronically to my personal e-mail.

We resolved the problem by making a list of accounts, account numbers, location, advisers and passwords. Fortunately, I also have set our accounts to pay automatically so there was very little action required during my trip.

Our experience was a reminder that something suddenly could happen and that there is not always time to prepare the list. Does your power of attorney know where your accounts are and who to contact? Whether you’re figuring out how to lighten your carbon footprint or getting your financial house in order, remember, you should have at least one paper record with your account details.

• Alberty is a certified financial planner and president of Alberty Financial Planning Services Inc.

Originally published in the Athens Banner-Herald on Sunday, March 08, 2009

Not naming a beneficiary to your qualified accounts (IRA, 401k, 403b, etc.) can generate a large tax bill for your heirs. Leaving the beneficiary designation blank or listing your estate as the beneficiary of your qualified accounts will accelerate the distribution of these accounts. Since these types of accounts are subject to income tax at the time of distribution, an accelerated distribution will result in an increase in taxes due.

If the beneficiary is a non person, the account must be distributed over 5 years and income taxes are due accordingly. If the beneficiary is a person, the account is distributed based on a formula associated with the person’s life expectancy thereby minimizing the required distribution as well as the income taxes.

As if the income tax burden were not enough motivation, the sunset provision of the EGTRRA will bring back the estate tax to more of the general population. Combining the potential income and estate taxes due can bring the effective tax rate to a whopping 70%.

The solution to this problem is not only simple, but it is also free. Consider naming a person as a beneficiary to your qualified accounts.

In last month’s column, I mentioned that a cancer diagnosis will change one’s perspective on their directives. I personally made sweeping changes to my legal documents literally 24 hours before getting on the plane for my stem cell transplant.

When I was in my twenties, as a financial planner, I knew I needed to have a power of attorney for business and for health care as well as a living will. My husband and I were newlyweds and it was time to have our documents drafted. Our attorney, Bert Whitmire, took us through the process (one I had been through many times with clients). It was strangely different to go through it myself making these tough decisions about living and dying.

With the stroke of a pen I easily chose not be nourished or resuscitated. I made every choice for myself from a young twenty-something perspective. Not wanting to leave the burden of such choices with my husband or even my parents, who I figured would be long gone before these documents were ever presented. There it was on paper, my wishes to pull the plug.

Ha, in retrospect how brave or naïve was I? So when the day came that these decisions were potentially in the very near future, I realized I needed to make some serious changes to my documents. I DO want nourishment and assistance breathing, whatever it takes to stay alive. I have a child (he was three at the time of my diagnosis) and that changed how I felt about everything.

I went from controlling everything to putting it all in the hands of my husband and my parents who were not only alive and well but also major participants in my health care. I wanted them all to make informed decisions knowing that I did not want to be in a coma for years and years, but that I was open to reasonable care with life sustaining methods. These are all very personal choices, but it is so important to revisit these decisions at the time of any major life change.

Most people would list health and wealth somewhere in the top 5 things that bring them peace of mind. The diagnosis of cancer wreaks havoc on this peace we all seek. As a cancer survivor myself, I have first hand experience with the range of emotions and distress generated by such a diagnosis. The disruption of peace and well being permeates through the patient, their loved ones and even their acquaintances.

Fortunately, as a Certified Financial Planner, our family finances were in order. So I at least had peace of mind regarding our finances initially. But as I continued on the journey that is cancer, I realized that my perspective was changing. With a change in perspective comes a change in directives.

I also realized that maybe I needed to brush up a little bit on health insurance coverage of cancer treatments. Rarely, at open enrollment, does one think “Hmm, will I need a stem cell transplant this year? Will I need two a-days high powered radiation? How much does something like that cost anyway?” Luckily, I was covered. As we are all painfully aware, not everyone is so fortunate.

Now that I have had the good fortune to be healthy again, I would like to do my best to help bring some peace of mind to others who are also navigating the treacherous road of cancer. My plan is to offer compassionate advice about personal finance through the Loran Smith Center for Cancer Support newsletter and one on one private meetings offered on a monthly basis. Please feel free to join me as I continue my journey.