Yields are staying amazingly low today. Due to the credit crisis the federal reserve is shifting hundreds of billions of dollars from savers to bankers to allow banks to make up for losses they experienced (both in losses on bad loans and huge cash payments made to hundreds of executives over more than a decade). For that reason (and others) yields are extremely low now which is a great burden on those that saved and counted on reasonable investment yield.

Don’t be fooled by apologist for those causing the credit crisis that try and excuse their behavior and act as those paying back the bailout payments means they paid back the favors they were given. They have received much more from the policies of the federal reserve that has taken hundreds of billions of dollars from savers and given it to bankers. It has the same effect as a direct tax on savers being paid to bankers.

What is an investor/saver to do? James Jubak provides some excellent advice.

How to maximize what your cash pays even when nothing is paying much of anything now

Whether you agree with his suggestions in the article is up to you. But even if you don’t he provides a very good overview of the options and risks that you have to navigate now as an investor seeking investments that provide a decent yield. I agree with him that interest rates seem likely to rise, making bonds an investment I largely avoid now myself.

Related: posts on financial literacy – Jubak Picks 10 Stocks for Income Investors – S&P 500 Dividend Yield Tops Bond Yield: First Time Since 1958 – Bond Yields Show Dramatic Increase in Investor Confidence

The delinquency rate for mortgage loans on one-to-four-unit residential properties fell to a seasonally adjusted rate of 9.5% of all loans outstanding as of the end of the fourth quarter of 2009, down 17 basis points from the third quarter of 2009, and up 159 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey. The non-seasonally adjusted delinquency rate increased 50 basis points from 9.9% in the third quarter of 2009 to 10.4% this quarter.

The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the fourth quarter was 4.6%, an increase of 11 basis points from the third quarter of 2009 and 128 basis points from one year ago. The combined percentage of loans in foreclosure or at least one payment past due was 15% on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey.

The percentage of loans on which foreclosure actions were started during the fourth quarter was 1.2 percent, down 22 basis points from last quarter and up 12 basis points from one year ago.

The percentages of loans 90 days or more past due and loans in foreclosure set new record highs. The percentage of loans 30 days past due is still below the record set in the second quarter of 1985.

The data is far from good but it could well signal the situation is improving. The next few quarters seem poised to start showing better results. Granted given how bad these results are we have a long way to go before the data is actually good. “We are likely seeing the beginning of the end of the unprecedented wave of mortgage delinquencies and foreclosures that started with the subprime defaults in early 2007, continued with the meltdown of the California and Florida housing markets due to overbuilding and the weak loan underwriting that supported that overbuilding, and culminated with a recession that saw 8.5 million people lose their jobs,” said Jay Brinkmann, MBA’s chief economist.

“The continued and sizable drop in the 30-day delinquency rate is a concrete sign that the end may be in sight. We normally see a large spike in short-term mortgage delinquencies at the end of the year due to heating bills, Christmas expenditures and other seasonal factors. Not only did we not see that spike but the 30-day delinquencies actually fell by 16 basis points from 3.79% to 3.63%. Only three times before in the history of the MBA survey has the non-seasonally adjusted 30-day delinquency rate dropped between the third and fourth quarter and never by this magnitude.

“This drop is important because 30-day delinquencies have historically been a leading indicator of serious delinquencies and foreclosures. With fewer new loans going bad, the pool of seriously delinquent loans and foreclosures will eventually begin to shrink once the rate at which these problems are resolved exceeds the rate at which new problems come in. It also gives us growing confidence that the size of the problem now is about as bad as it will get.

“Despite the drop in short-term delinquencies, foreclosure rates could continue to climb, however, based on the ability of borrowers 90 days or more delinquent to solve their problems. A sizable number of the loans in the 90+ day delinquent bucket are in loan modification programs. They are carried as delinquent until borrowers demonstrate they will make the payments agreed to in the plans.

Related posts: Mortgage Delinquencies Continue to Climb (Nov 2009) – USA Housing Foreclosures Slowly Declining (Dec 2009) – Nearly 10% of Mortgages Delinquent or in Foreclosure – How Not to Convert Equity (Jan 2006)
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There was a $1 trillion gap at the end of fiscal year 2008 between the $2.35 trillion states had set aside to pay for employees’ retirement benefits and the $3.35 trillion price tag of those promises, according to a new report released by the Pew Center on the States. The shortfall, which will have to be paid over the next 30 years by state and local governments, amounts to more than $8,800 for every household in the United States.

The figures detailed in Pew’s report, The Trillion Dollar Gap, include pension, health care and other non-pension benefits promised to both current and future retirees in states’ and participating localities’ public sector retirement systems.

Pew’s numbers likely underestimate the bill coming due because the most recent available data do not account for the second half of 2008, when states’ pension fund investments were particularly affected by the financial crisis. Additionally, most states’ accounting methods spread the investment declines over a period of time–meaning states will be dealing with their losses for several years.

“While the economic crisis and drop in investments helped create it, the trillion dollar gap is primarily the result of states’ inability to save for the future and manage the costs of their public sector retirement benefits,” said Susan Urahn, managing director, Pew Center on the States. “The growing bill coming due to states could have significant consequences for taxpayers—higher taxes, less money for public services and lower state bond ratings. States need to start exploring reforms.”

In fiscal year 2008, states’ pension plans had $2.8 trillion in long-term liabilities, with more than $2.3 trillion reserved to cover those costs. Overall, states’ pension systems were 84 percent funded—above the 80 percent funding level recommended by experts. Still, the unfunded portion–$452 billion–is substantial, and states’ performance is down slightly from an 85 percent combined funding level in fiscal year 2006. Pension liabilities have grown by $323 billion since 2006, outpacing asset growth by almost $87 billion.

Retiree health care and other non-pension benefits, such as life insurance, create another huge bill coming due: a $587 billion total liability to pay for current and future benefits, with only $32 billion–or just over 5 percent of the cost–funded as of fiscal year 2008. Half of the states account for 95 percent of the liability. Because of a 2004 Governmental Accounting Standards Board rule, the full range of non-pension liabilities was officially reported in fiscal year 2008 for the first time across all 50 states.

Many state and local governments continue to provide very large pay to state and local government employees and often use very generous retirement packages as a way of disguising the true cost of the pay packages they provide.

Related: NY State Raises Pension Age to Save $48 Billion – True Level of USA Federal Deficit – Charge It to My Kids – USA Federal Debt Now $516,348 Per Household – Politicians Again Raising Taxes On Your Children – Consumer Debt Reduced below $2.5 Trillion
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TIPS Drive Away Biggest Bond Bulls Seeing Inflation

I believe that the risks of inflation are so low that TIPS are not a good way to invest some of your investment portfolio. At these low rates I agree TIPS are hardly a wonderful investment but I think it is worth sacrificing some yield to gain if inflation does return in a few years. But the argument for not buying TIPS is also sensible I think.

Related: Bond Yields Show Dramatic Increase in Investor Confidence – Who Will Buy All the USA’s Debt? – Retirement Savings Allocation for 2010 – posts on bonds

Many people find personal financial planing boring. Building a cash safety net is an important part of your personal finances even though it isn’t exciting. I have written previously the very simple idea that you can just not buy what you can’t pay for. If you can’t pay for it this month, don’t buy it.

But that leaves out one thing. Even if you do have the cash you should be building up a cash reserve before buying luxuries. The typical advice is to build up 6 months of expenses in cash (rent or mortgage, food bills, utilities, health care, etc.). Now actually building up to that level can take awhile and forgoing all non-mandatory expenses until you have that saved is not usually reasonable. But as part of your personal finances building up an cash reserve is important (even if it is boring). And I believe you really should aim at a higher level – say building to 1 year.

A significant portion of downward spirals in personal finances are started when people have emergency expenses and have to borrow that money (since they don’t have cash reserves). And even worse when they start racking up huge fees for late payments, increased interest rates on outstanding debt, health care expenses if they fail to keep health care insurance…

If you are over say 26 and don’t have a cash reserve yet saving for it should be part of your monthly budget. How quickly you build that up is a personal decision but I would say a 2% of the target amount (so if you are aiming for a cash reserve of $20,000 then $400/month). If you have next to nothing saved now start aiming at 6 months. As you get 3 months saved up start aiming at 9 months. As you get 6 months saved up start aiming at 1 year. And you have to also be saving for other needs – you shouldn’t raid your emergency fund savings for other things (a new car, a vacation…). This takes real discipline but it is much easier than the challenges our ancestors had to face of billions of people face financially today. So yes it is not easy, but really those that feel sorry for themselves need to realize they shouldn’t expect that they are so special the world owns them financial riches with little effort.

Doing something is better than nothing so do what you can (even if it is less than 2% of you target). But realize that is one of the weaknesses in your personal finances and try to fix that as soon as possible.

Very important personal financial allocations for you to put first include: current needs (food, car payment, rent/mortgage, utilities…), insurance, creating a cash reserve, retirement savings, saving for future purchases. Then there are luxuries and treats, such as: eating out, vacations, cable TV… Many people put current needs, luxuries and treats fist and then say they don’t have the ability to do what is responsible (check how rich you are – before making such claims yourself).

Related: How to Protect Your Financial Health – Save Some of Each Raise – Buying Stuff to Feel Powerful – Consumer Debt Down Over $100 Billion So Far in 2009 – posts on basic personal finance matters

Excellent post by James Jubak, Get your portfolio ready for the profitless global economic recovery

Both Google and Cisco have been long term investments in my 12 stocks for 10 years portfolio. Jubak’s blog is excellent: the best investing blog I know of. He does trade quite a bit more than I do but his performance has been exceptional.

Related: Jubak Looks at 5 Technology Stocks – Why Investing is Safer Overseas – 10 Stocks for Income Investors – Tesco: Consistent Earnings Growth at Attractive Price

Some statistics from the Kauffman Foundation

• From 1980–2005, firms less than five years old accounted for all net job growth in the United States.
• More than half of the companies on the 2009 Fortune 500 list were launched during a recession or bear market, along with nearly half of the firms on the 2008 Inc. list of America’s fastest-growing companies.
• Contrary to popularly held assumptions, the highest rate of entrepreneurial activity belongs to the 55–64 age group over the past decade. The 20–34 age bracket has the lowest.
• Only 16 percent of the fastest-growing and most successful companies in the United States had venture investors.
• More than a quarter of technology and engineering companies started in the United States from 1995 to 2005 had at least one key founder who was foreign-born.
• Foreign nationals residing in the United States were named as inventors or co-inventors in 25.6 percent of international patent applications filed in the U.S. in 2006.

Related: Y-Combinator’s Fresh Approach to Entrepreneurship – Entrepreneur Results – Kiva Fellows Blog: Nepalese Entrepreneur Success

Ten Stocks I Wouldn’t Touch With a 10-Foot Pole by John Dorfman

Investing in individual stocks is not necessary for a good financial plan but can provide great benefits. However, it does require more vigilance as you must keep an closer eye on your investments and make changes as necessary. Many chose not to include individual stocks in their portfolio, using mutual funds instead. That is fine, I do like to include stocks though. My 12 stocks for 10 years portfolio continue to do well (beating the S&P 500 by 4.8% annually after a 2% annual simulated expense fee reduction). One stock I particularly like right now is Google.

Related: Investing – My Thoughts at the End of 2009 – Lazy Portfolios Seven-year Winning Streak – Jubak Looks at 5 Technology Stocks

3 Nobel prize winning economists, Robert C. Merton, Robert Solow and Paul Samuelson, took questions about the impending retirement savings crisis from PBS NewsHour correspondent Paul Solman in October 2008. Paul Solman asked them about their personal portfolios in the clip shown above.

Robert Merton tells his portfolio portfolio is in a Global Index Fund, Treasury Inflation-Protected Securities, and one hedge fund. He said he had been invested in a TIAA commercial real estate fund until recently, but sold in early 2008 when he worried commercial real estate prices had increased too far. He also sold out his Municipal bond holdings.

Robert Solow says he has no idea of his portfolio.

Paul Samuelson declined to say. He did offer that timing is not something investors can successfully do. He stated that timing the selling of assets was not as difficult as timing when to get back in. And that markets move very quickly so you can miss out on big gains. 2009 provided a great example of this. Many people sold stocks in late 2008 and early 2009. And most did not get back in. In 2009 the S&P 500 was up 26%.

Related: Retirement Savings Allocation for 2010 – How Much Will I Need to Save for Retirement? – Gen X Retirement – Many Retirees Face Prospect of Outliving Savings

Find below some interesting thoughts on financial markets and the efficient market theory. That theory essentially says the market prices are right given the available information. I think markets are somewhat efficient but there are plenty of opportunities to profit from inefficiencies in the market. Still it is not easy to consistently exploit these inefficiencies profitably.

Capital Market Theory after the Efficient Market Hypothesis

Capital market theory after the efficient market hypothesis by Dimitri Vayanos and Paul Woolley

Related: Nicolas Darvas (investor and speculator) – Beating the Market, Suckers Game? – Lazy Portfolios Seven-year Winning Streak – Stop Picking Stocks? – Don’t miss future gains just because you missed past gains