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Asia banking bonds capitalism chart China commentary consumer debt Credit Cards credit crisis curiouscat debt economic data Economics economy employment energy entrepreneur Europe Financial Literacy government health care housing India interest rates Investing Japan John Hunter manufacturing markets micro-finance mortgage Personal finance Popular quote Real Estate regulation Retirement save money Saving spending money Stocks Taxes Tips USA

Where to Invest for Yield Today

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

A three month Treasury bill pays just 0.12%. A two-year note pays just 0.79%. Inflation may not be very high at an annual rate of 2.6% for headline inflation (and 1.6% minus volatile energy and food prices) but it’s enough to eat up all the interest from those investments and more. (TIPS, Treasury Inflation-Protected Securities will protect you from inflation but the yields are really low (1.43% for a 10-year TIPS at recent auction) and they only protect you from inflation and not rising interest rates. I-Bonds, a savings bond that pays an interest rate that combines a fixed component, currently 0.3%, with an inflation-adjusted variable rate, current 3.06%, offer a higher yield but since the variable rate is pegged to inflation and not interest rates, the yield on these bonds won’t necessarily go up if interest rates do. You also have to hold for at least 12 months. (After that and until you’ve held for 5 years you lose the last 3-months of interest when you sell.)

You could lock your money up for decades and get 4.56% in a 30-year Treasury bond but 30 years is forever. And besides interest rates have to go up from today’s lows and that means bond prices will be coming down, probably fast enough to eat up all the interest that bond pays and more.
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Not if you remember that interest rates are going up in most of the world (except maybe Europe and Japan) quite dramatically over the next 12 months. A year from now, perhaps sooner, you’ll be able to get yields swell north of anything you can find now.

That pretty much means that you’re guaranteed to lose money two ways by locking it up for the long term now.
…
For the short term you need to put your cash into something that’s as safe as possible but that offers you as much income as possible—and that doesn’t lock up your money for very long.

My choice dividend paying stocks—if they pay a high dividend, are extremely liquid, and are battle tested.

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

March 8th, 2010 by John Hunter | 4 Comments | Tags: Economics, Financial Literacy, Investing, Personal finance, Saving, Tips

Is China’s Recovery for Real?

China’s recovery: Is it for real?

according to John Makin of the American Enterprise Institute, the country’s official economic figures — we’re talking the Chinese government’s numbers here and not those reported by individual companies — systematically overstate the speed of the country’s economic recovery.
…
Investors don’t need to answer or even be interested in those philosophical questions. But they do need to consider the possibility that China’s huge acceleration in its growth rate is merely an artifact of the way the country keeps its books.

Economic data is often messy and confusing. The data itself often has measurement error. The actual aim is often not exactly what people think. And the data is often delayed so it provides a view of the situation, not today, but in the past and guesses must be made about what that says about today and the future.

And on top of those factors many countries feel significant internal pressures to report numbers that make the current economy look good. This is just another factor investor must consider when looking to make investments and evaluate economic conditions.

It seems to me the Chinese recovery does look real. How strong the economy will be 6 months from now is less clear but right now things look positive to me.

Related: posts on economic data – What Do Unemployment Stats Mean? – China Manufacturing Expands for the Fourth Straight Month (Jun 2009) – A Bull on China

August 24th, 2009 by John Hunter | 1 Comment | Tags: Economics, Financial Literacy, Investing

Jubak Looks at 5 Technology Stocks

Jim Jubak’s articles not only provide specific stock picks but also offer a good view on how to analyze stocks. Reading his columns is something I would recommend for anyone interested in investing in individual stocks (in addition to reading excellent books on investing). His latest column is 5 tech stocks full of promise

After that research, you could spend some time thinking about how Cisco fits into the post-recession, slow-growth paradigm that I laid out in my previous column. You’d likely conclude that Cisco would actually gain an edge from that kind of economy, because many of its products — from Internet protocol telephony to Web conferencing to its recent entry into the market for blade servers for data centers — offer customers a way to cut costs while retaining or improving functionality. That’s a solid value proposition in an economy where lots of customers will be looking for value.

Then you’d probably spend some time looking at the price trends in the market. If you did, you’d notice that technology stocks were showing relative strength by hanging above their January highs (in contrast to sectors that are fighting to get back to January highs). You’d also see from your study of the charts that Cisco shares were near resistance levels set by their 200-day moving average and their April high of about $18.50.
…
None of that tells you whether the stock is reasonably priced. To figure that out, you might look at the average P/E ratio of the past five years. Because the average was 21.6, you could conclude that Cisco, at 14.1, was undervalued, since the price in the future will climb until Cisco trades again at something like 21.6 times earnings. Or you could conclude that the lower P/E ratio was a logical reaction by investors to the company’s falling earnings. Wall Street analysts now think Cisco’s earnings will fall 23.2% in fiscal 2009 and 6.3% in fiscal 2010.

Setting a target price isn’t a science. Where your target winds up is a result of the assumptions you make going in. I like to check the range of price targets for a stock and compare that with its current price. For Cisco, the range for a 12-month target price now seems to fall between $16 and $31 a share. At a recent $18.50 or so, Cisco has been trading above the most pessimistic target, but not by a great deal. Depending on your read for the market as a whole, that means Cisco is toward the cheap end of reasonable but not a compelling buy if you think, as I do, that this rally will yield to a correction in the next month or six weeks.

Related: 12 Stocks for 10 Years (March 2009 Update) – 10 Stocks for Income Investors – Dollar Cost Averaging – Does a Declining Stock Market Worry You?

May 1st, 2009 by John Hunter | 2 Comments | Tags: Investing, Stocks

USA Standard of Living in Jeopardy

US living standards in jeopardy by James Jubak

At 2.3% growth, the $14.4 trillion U.S. economy (as of the third quarter of 2008) would produce an increase in economic activity of $331 billion in a year. That activity would generate money we could use to pay off the debt we’ve run up to end the current crisis, to buy better education and health care, to protect the environment, to improve our living standards, to spend and, for a few, to save.
…
the difference would get larger each year as the two rates were compounded. After 10 years at 2.3% growth, the U.S. economy would grow from $14.4 trillion in the third quarter of 2008 to $18.1 trillion, after accounting for inflation. At 3%, however, the U.S. economy would reach $19.4 trillion in gross domestic product.
…
The official unemployment rate hit 7.2% in December. Factor in part-time workers who would like to work full time and discouraged people who have stopped looking for work, and the real rate is more like 13.5%.

Some of those people won’t go back to work even when this recession is over because the relatively meager safety net supporting the unemployed in the United States will have given way beneath them. They will have suffered so much personal and family damage that they will never regain their full pre-recession productivity.

Related: Bad News on Jobs – The Economy is in Serious Trouble – Why Investing is Safer Overseas

January 18th, 2009 by John Hunter | Leave a Comment | Tags: Economics

10 Stocks for Income Investors

Recent market collapses have made it even more obvious how import proper retirement planning is. There are many aspects to this (this is a huge topic, see more posts on retirement planning). One good strategy is to put a portion of your portfolio in income producing stocks (there are all sorts of factors to consider when thinking about what percentage of your portfolio but 10-20% may be good once you are in retirement). They can provide income and can providing growing income over time (or the income may not grow over time – it depends on the companies success).

10 picks for income investors

Strategy #1: Stocks with current yields at 10% or higher where the dividend payout is sustainable at current levels for a decade or more. If the stock market recovers, of course, the dividend yield will drop, but you don’t care. All you want to know is that if you buy $10,000 in annual cash flow now, you’ll get at least $10,000 of annual cash flow in retirement.
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Strategy #3: Buy common stocks with solid dividends and a history of raising dividends for the long haul. That way you let time and compounding work for you. While you may be buying $1 per share in dividends today with stocks like these, you’re also buying, say, 8% annual increases in dividends. In 10 years, that turns a $1-a-share dividend into $2.16 a share in dividends.

3 of this picks are: Enbridge Energy Partners (EEP), dividend yield of 15.5%, dividend history; Energy Transfer Partners (ETP), 11.2%, dividend history; Rayonier (RYN), yielding 6.7%, dividend history.

Of course those dividends may not continue, these investments do have risk.

Related: S&P 500 Dividend Yield Tops Bond Yield: First Time Since 1958 –
Discounted Corporate Bonds Failing to Find Buying Support – Allocations Make A Big Difference

December 11th, 2008 by John Hunter | 2 Comments | Tags: Financial Literacy, Investing, Personal finance, Saving, Stocks

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