Dividends Falling Means S&P 500 Is Still Expensive
A total of 288 companies cut or suspended payouts last quarter, the most since Standard & Poor’s records began 54 years ago, when Dwight D. Eisenhower was president. While the S&P 500 is trading at the lowest price relative to earnings since 1985 and all 10 Wall Street strategists tracked by Bloomberg forecast a rally this year, predictions based on dividends show shares are overvalued by as much as 46 percent.
Just last November the S&P 500 dividend yield topped the bond yield for the first time since 1958. Yields often rise as stock prices fall on future prospects and companies announce dividend cuts after stocks have already fallen (due to the deteriorating conditions the company faces). So you always must be careful not to count dividends before they are paid. As an investor you need to look into the future and see how secure the dividends are likely to be.
Related: 10 Stocks for Income Investors – 10 Stocks for 10 Years – Curious Cat Investing Books
I do not like the actions of many in “private equity.” I am a big fan of capitalism. I also object to those that unjustly take from the other stakeholders involved in an enterprise. It is not the specific facts of this case, that I see as important, but the thinking behind these types of actions. Which specific actions are to blame for this bankruptcy is not my point. I detest that financial gimmicks by “private capital” that ruin companies.
Those gimmicks that leave stakeholders that built such companies in ruin should be criticized. It is a core principle that I share with Dr. Deming, Toyota… that companies exist not to be plundered by those in positions of power but to benefit all the stakeholders (employees, owners, customers, suppliers, communities…). I don’t believe you can practice real lean manufacturing and subscribe to this take out cash and leave a venerable company behind kind of thinking.
How Private Equity Strangled Mervyns
When those firms bought Mervyns from Target for $1.2 billion in 2004, they promised to revive the limping West Coast retailer. Then they stripped it of real estate assets, nearly doubled its rent, and saddled it with $800 million in debt while sucking out more than $400 million in cash for themselves, according to the company. The moves left Mervyns so weak it couldn’t survive.
Mervyns’ collapse reveals dangerous flaws in the private equity playbook. It shows how investors with risky business plans, unrealistic financial assumptions, and competing agendas can deliver a death blow to companies that otherwise could have survived. And it offers a glimpse into the human suffering wrought by owners looking to turn a quick profit above all else.
Too much debt is not just a personal finance problem it is a problem for companies too. Continue reading on my original post on the Curious Cat Management Blog.
Related: Leverage, Complex Deals and Mania – Failed Executives Used Too Much Leverage – posts on debt
How Should Parents Teach Teens About Credit Cards? by Nancy Trejos
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there are prepaid cards targeted specifically at teens, such as the Visa Buxx card. With such a card, Bellamkonda would be able to log in and monitor his daughter’s spending online
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Bill Hardekopf, chief executive of LowCards.com, said parents should pull out their own credit card bills and talk their children through them. Explain the interest rate, minimum payments, grace period and finance charges. If they’ve had late fees or payment problems, they shouldn’t hide them. “Use these as teaching examples,” he said. “Getting a teenager a credit card while she lives in your home is a great teaching opportunity on finances.”
I agree it is wise to explain the use of credit cards to teenagers. I also agree it is wise to have them actually use their own card, assuming they aren’t unreasonably immature and have shown an understanding of personal finance.
Books: Money Sense for Kids – Growing Money: A Complete Investing Guide for Kids – The Motley Fool Investment Guide for Teens – Raising Financially Fit Kids – A Smart Girl’s Guide to Money: How to Make It, Save It, And Spend It
Related: Teaching Children About Money Matters – Student Credit Cards – Majoring in Credit Card Debt
Retirement Myths and Realities provides some ideas from former Boeing President, Henry Hebeler:
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My father used to tell me to save 10 percent of my wages all the time for retirement. And so I did. I never looked at any retirement plan; we didn’t have retirement planning tools in those days.
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I think the number is closer to 15 (percent) to 20 percent — that’s from the time when you’re a relatively young person, say, 30 years old or something like that.
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A retiree’s inflation rate is about 0.2 percent higher than the normal Consumer Price Index. When you retire, you have medical expenses that continually increase. You have more need for this service and the unit cost is increasing much faster than inflation.
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Now, if you’re going to retire at 80 years old, you could actually have a bigger number than 4 percent. If you’re going to retire around 65 or so, 4 percent is not a bad number. Some people are now saying 3.5 percent instead of 4 percent. If you’re going to retire at 55, you’d better spend a lot less than 4 percent because you’ve got another 10 years of life that you’re going to have to support.
He makes some interesting points. I agree it is very important for people to become financially literate and take the time to understand their retirement plans. Just hoping it will work out or trusting that just doing what someone told you are very bad ideas. You need to educate yourself and learn about financing your retirement.
I am not really convinced by his idea that you need to start saving 15-20% for retirement at age 30. But that is a decision each person has to make for themselves. Of course there are many factors including how much risk you are willing to accept, when you plan on retiring, what standard of living you want in retirement…
Related: How Much Retirement Income? – posts on retirement – Saving for Retirement – Our Only Hope: Retiring Later
We now have the lowest 30 year fixed mortgage rates since data has been collected (37 years) in the USA. Is this due to the Fed cutting the discount rate? I do not think so. As I have said previously 30 year fixed rates are not correlated with federal reserve rates. But this time the government is actively seeking to reduce mortgage rates.
Mortgage Rate Hits 37-Year Low
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The 15-year fixed-rate mortgage averaged 4.92%, down from last week when it averaged 5.20%. A year ago the 15-year loan averaged 5.79%. The 15-year mortgage hasn’t been lower since April 1, 2004, when it averaged 4.84%.
Homeowners refinance, put savings under mattress
These rates sure are fantastic if you are in the market. I was not in the market, but I am considering re-financing now. You need to be careful and not just withdraw money because you can. If you can refinance and reduce your payments it may well be a wise move though. One problem can be extending the date you will finally be free of mortgage debt. If you re-finance a current 30 year loan, that you got 5 years ago, you will now be paying 5 more years. One option is to see if you can get a 25 or 20 year loan. Or if you can make a 15 year loan work, do that (15 and 30 year fixed rate mortgages are common).
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Scott Adams does a great job with Dilbert and he presents a simple, sound financial strategy in Dilbert and the Way of the Weasel, page 172, Everything you need to know about financial planning:
- Make a will.
- Pay off your credit cards.
- Get term life insurance if you have a family to support.
- Fund your 401(k) to the maximum.
- Fund your IRA to the maximum.
- Buy a house if you want to live in a house and you can afford it.
- Put six months’ expenses in a money market fund. [this was wise, given the currently very low money market rates I would use "high yield" bank savings account now, FDIC insured - John]
- Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker, and never touch it until retirement.
- If any of this confuses you or you have something special going on (retirement, college planning, tax issues) hire a fee-based financial planner, not one who charges a percentage of your portfolio.
Treasury bills have been providing remarkably low yields recently. And the Fed today cut their target federal funds rate to 0-.25% (what is the fed funds rate?). With such low rates already in the market the impact of a lowered fed funds rate is really negligible. The importance is not in the rate but in the continuing message from the Fed that they will take extraordinary measures to soften the recession.
There are significant risks to this aggressive strategy (and there would be risks for acting cautiously too). But I cannot understand investing in the dollar under these conditions or in investing in long term bonds (though lower grade bonds might make some sense as a risky investment for a small portion of a portfolio as the prices have declined so much).
The current yields, truly are amazing as this graph shows. The chart shows the yield curve in Dec 2008, 2006, 2000 and 1994 based on data from the US Treasury
Related: Corporate and Government Bond Rates Graph – Discounted Corporate Bonds Failing to Find Buying Support – Municipal Bonds After Tax Return – Total Return
The Securities Investor Protection Corporation restores funds to investors with assets in the hands of bankrupt and otherwise financially troubled brokerage firms. The Securities Investor Protection Corporation was not chartered by Congress to combat fraud, but to return funds (with a $500,000 limit for securities and under that a $100,000 cap on cash) that you held in a covered account.
With the recent Madoff fraud case some may wonder about SIPC coverage. What SIPC would cover is cash fraudulently withdrawn from covered account (if I owned 100 shares of Google and they took my shares that is covered – as I understand it). What SIPC does not cover is investment losses. From my understanding Madoff funds suffered both these types of losses.
And I am not sure how the Ponzi scheme aspects would be seen. For example, I can’t imagine false claims from Mandoff about returns that never existed are covered. Therefore if you put in $100,000 10 years ago and were told it was now worth $400,000, I can’t image you would be covered for the $400,000 they told you it was worth – if that had just been a lie. And if your $100,000 from strictly a investing perspective (not counting money they fraudulently took to pay off other investors) was only worth $50,000 (it had actually lost value) then I think that would be the limit of your coverage. So if they had paid your $50,000 to someone else fraudulently you would be owed that. Figuring out what is covered seems like it could be very messy.
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Financial Markets with Professor Robert Shiller (spring 2008) is a fantastic resource from Open Yale courses: 26 webcast (also available as mp3) lectures on topics including: The Universal Principle of Risk Management, Stocks, Real Estate Finance and Its Vulnerability to Crisis, Stock Index, Oil and Other Futures Markets and Learning from and Responding to Financial Crisis (Guest Lecture by Lawrence Summers).
Robert Shiller created the repeat-sales home price index with Karl Case that is known as the Case-Shiller home price index.
Related: Berkeley and MIT courses online – Open Access Education Materials – Curious Cat Science and Engineering Blog open access posts – Paul Krugman Speaks at Google
George Soros published his most recent book in May 2008 – The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means. Yesterday Bill Moyers Interviewed George Soros:
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This current economic disaster is self-generated. It was generated by the market itself, by getting too cocky, using leverage too much, too much credit. And it got excessive.
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The financial system is teetering on the edge of disaster. Hopefully, it will not go over the brink because it very rarely does. It only did in the 1930s. Since then, whenever you had a financial crisis, you were able to resolve it.
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the sort of period where America could actually, for instance, run ever increasing current account deficits. We could consume, at the end, six and a half percent more than we are producing. That has come to an end.
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Right now you already have 10 million homes where you have negative equity. And before you are over, it will be more than 20 million.
Related: Soros Says Credit Crisis Will Worsen Before Improving (April 2008) – Warren Buffett Webcast on the Credit Crisis – Rodgers on the US and Chinese Economies – – Personal Investment Failures