Your Will can have a major impact on your family (including your spouse), friends, and favorite causes after you're gone. It is all too common for someone to die without a will, ensuring that their wishes aren't honored in death. Wills allow individuals to specify how they want their assets divided up after they are gone and can greatly impact the individual's legacy - assets distributed smoothly and in accordance with the individual's wishes, or squabbling and legal challenges that can cause hurt feelings and ill-will among your loved ones.
A second common mistake is making surprise decisions on who gets what, which can also lead to hurt feelings and family conflicts. Most people do not want spouses, children and other relatives fighting over their assets when they are gone, but that is exactly what can happen if they don't take the time to explain to their heirs what they plan.
Cutting out a spouse is surprisingly common, but unless you have a prenuptial agreement, your spouse is entitled to receive up to one-half of your estate, whether you write it into your will or not. Have your spouse sign a waiver before your death or expect your estate to face claims afterwards.
At the other end of the spectrum are those individuals who are in a second marriage and leave everything to their spouse. The children from the individual's first marriage can end up with nothing after the spouse dies if he/she has remarried in the interim. One solution is to set up a marital trust within your Will that holds assets for your spouse and then transfers them to your children after your spouse's death, ensuring that your assets stay in the family rather than going elsewhere.
Another common error is forgetting about Insurance/IRA designations. Separate beneficiary designation forms control the distribution of retirement accounts, annuities and life insurance after death. It is critical to complete beneficiary forms for these assets if you wish to avoid probate court, and the costs and publicity that goes with the probate process. Assets titled in your name, as opposed to jointly held with rights of survivorship, without designated beneficiaries will be distributed according to the general instructions in your Will, possibly triggering taxes much sooner than otherwise would be the case.
Please feel free to call or email with questions!
Tuesday, August 23, 2011
Friday, August 5, 2011
Market Update
The market topping process we wrote about Tuesday is now complete. The stock jockeys bounced the market hard on Wednesday in an effort to avoid a close below the March 16th low (1249), which would have put the top in place and brought in more short term selling. Unfortunately the Wednesday bounce was short lived and itchy trading fingers started pushing buttons on Thursday, pounding the market lower. The S&P 500 basically opened at its high and closed at its low on big volume - just about as negative as you can get from a technical stand point. We will likely get an oversold rally starting either late today or more likely early next week as the speculators (which is almost everyone these days) try to jam the market back into its six month trading range (1249-1370). The rally is likely to fail and further downside testing (perhaps all the way to the low 1100s) is likely by the fall. We continue to think the market will likely rally into year end, following this sell off, with the onset of the real bear market not occurring until sometime next spring. Our best-guess scenario is predicated on the Federal Reserve and/or the Administration coming up with yet another ill-conceived, short term program to support the market, delaying, but not preventing, the inevitable bear market that lurks out there in our future.
Our longer term forecast is unchanged - a bear market within the next 12-18 months that takes the S&P 500 down 20%-40% from its 1370 high. The bear market's underlying causes will include the simple fact that S&P 500 fair value is only about 900, making it an expensive investment currently. Additionally, record net profit margins will revert to their long run mean at some point as the economy continues its slide back into recession, resulting in disappointing earnings from the S&P 500's constituents.
Biechele Royce Advisors continues to buy good companies at great prices as we find them, but has been carrying extra cash in client portfolios and favoring more defensive investments in anticipation of the selling we are now experiencing.
Our longer term forecast is unchanged - a bear market within the next 12-18 months that takes the S&P 500 down 20%-40% from its 1370 high. The bear market's underlying causes will include the simple fact that S&P 500 fair value is only about 900, making it an expensive investment currently. Additionally, record net profit margins will revert to their long run mean at some point as the economy continues its slide back into recession, resulting in disappointing earnings from the S&P 500's constituents.
Biechele Royce Advisors continues to buy good companies at great prices as we find them, but has been carrying extra cash in client portfolios and favoring more defensive investments in anticipation of the selling we are now experiencing.
Tuesday, August 2, 2011
Recession and the Bear
Last week was a big down week for equities, with most major averages down around 4%. DJIA lost 4.24%, S&P500 down 3.92%, and NASDAQ fell 3.58%. The S&P 500 was down 2.2% for July. Treasuries rallied for the week, with the 10-yr. yield lower at 2.79%. Some of the economic highlights to go with the weak stock market action were:
Q2 GDP disappoints…Q1 revised lower.
U.S. economy grew by only 1.3% in Q2, and Q1 was revised down to a mere 0.4% growth rate.
(Weakness in consumer spending suggests that higher prices for certain food / energy items have played a role in restraining spending.)
0.1% increase in personal spending was the lowest since Q2 2009 in the midst of the recession.
Budget cuts in state/local government contributed to a 3.4% drop in government spending.
It appears that sub-par growth continues to be the path of the economy for the second half.
GDP growth has now decelerated to a level below the 2% threshold that has been a predictor of recession in the past. Jobs and housing are closely linked and both remain a drag on the economy. New home sales fell in June as potential buyers pulled back from the market amid job uncertainty and tough lending standards. Canceled home transactions in June jumped to 16%, way above the 4% level seen in May and the 9-10% range of the last year. Tight appraisals and tough loan underwriting scrutiny are to blame, according to the media. Most of the activity in the housing market are distressed sales.
Technically, the market has broken the uptrend begun on 7 July 2010 and continues the topping process begun 18 February 2011. A drop below the 16 March low of 1249 would put the top in place and sharply increase the likelihood that the secular bear market is resuming. We continue to think it more likely that a retest of the 1 July 2010 low at 1011 won't occur until sometime next spring but a fall retest is a possibility. Regardless, we continue to maintain a defensive posture in client portfolios given that S&P 500 fair value is around 900 and that the economy is clearly slowing.
Q2 GDP disappoints…Q1 revised lower.
U.S. economy grew by only 1.3% in Q2, and Q1 was revised down to a mere 0.4% growth rate.
(Weakness in consumer spending suggests that higher prices for certain food / energy items have played a role in restraining spending.)
0.1% increase in personal spending was the lowest since Q2 2009 in the midst of the recession.
Budget cuts in state/local government contributed to a 3.4% drop in government spending.
It appears that sub-par growth continues to be the path of the economy for the second half.
GDP growth has now decelerated to a level below the 2% threshold that has been a predictor of recession in the past. Jobs and housing are closely linked and both remain a drag on the economy. New home sales fell in June as potential buyers pulled back from the market amid job uncertainty and tough lending standards. Canceled home transactions in June jumped to 16%, way above the 4% level seen in May and the 9-10% range of the last year. Tight appraisals and tough loan underwriting scrutiny are to blame, according to the media. Most of the activity in the housing market are distressed sales.
Technically, the market has broken the uptrend begun on 7 July 2010 and continues the topping process begun 18 February 2011. A drop below the 16 March low of 1249 would put the top in place and sharply increase the likelihood that the secular bear market is resuming. We continue to think it more likely that a retest of the 1 July 2010 low at 1011 won't occur until sometime next spring but a fall retest is a possibility. Regardless, we continue to maintain a defensive posture in client portfolios given that S&P 500 fair value is around 900 and that the economy is clearly slowing.
Wednesday, June 22, 2011
Laddered Bond Portfolios
I received a call from a Dow Jones newspaper reporter yesterday asking me my thoughts on laddered bond portfolios as a strategy for income in retirement. She was under the impression that I was not in favor of them - possibly from something I'd written in the past (although she wasn't able to quite recall what she'd read and I wasn't able to quite recall what I might have written). Anyway, we had a very pleasant half hour conversation about laddered portfolios, fee-only versus fee-based (brokers) advisors, variable annuities, and properly diversified multi-asset portfolios...among other investment topics.
But I thought I ought to pass on my thoughts on laddered bond portfolios to my readers, since it was the primary reason she called.
I think a laddered bond strategy makes quite a bit of sense for retirees, but only as a part of a properly diversified multi-asset portfolio. I am not in favor of single asset portfolios for anyone, let alone a retiree. Putting your eggs all in one basket is never a good idea, even if it is in the supposedly safe basket of Treasury bonds, which I personally believe carry quite a bit of risk currently. (Bill Gross of Pimco is on the same page by the way as his firm - the largest bond investor in the world - is currently completely out of Treasury bonds according to statements the bond king has made in recent months).
Bonds were known as certificates of confiscation back in the early 1980s, before the great bond bull market kicked off in 1982. Bond investors had lost their shirts over the prior 15 years or so as interest rates had risen steadily along with inflation. Negative real rates eroded bond wealth steadily for better than a decade. However, Paul Volcker's Federal Reserve changed all of that by committing to sound monetary policy designed to bring down inflation and restore the stability of the dollar as a store of value. Bonds have proven a splendid investment ever since... until now.
It is highly likely that inflation will continue to rise and, with it, interest rates over the next decade. We may have another year or two to wait before the trend really gathers steam, but without drastic changes in U.S. monetary and fiscal policy, the odds of a long bond bear market are high. A laddered dollar bond portfolio is not where you want all of your assets in such an environment. Yes bonds will mature yearly and can be reinvested at higher rates, but the bonds in you portfolio will lose value. Any sales necessitated by unexpected cash needs will result in losses. And generating capital losses in bond investing is a cardinal sin. Even more dangerous is the strategy of attempting to "ladder" a bond mutual fund portfolio, given that bond mutual funds have a perpetual duration - duration is a measure of bond price sensitivity to changes in interest rates. The longer the duration the bigger the price moves in a bond, and perpetual is as long as you can get.
Far better to build a properly diversified multi-asset portfolio for our retiree that might include a laddered bond portfolio to go with the high-quality dividend paying blue chip stocks, the dollar diversifying international assets, and the inflation hedging tangible assets (real estate and commodities primarily).
The S&P 500 is rallying short term after moving into oversold territory, but is likely to at least retest the recent low at 1256. It is still too early to tell if the correction is merely the pause that refreshes on the start of a topping process that will ultimately lead to the next downleg in the ongoing secular bear market. We reiterate that fair value for the S&P 500 is in the 900 area and that the economy is now showing clear signs of slowing - a combination that would suggest prudence is the better part of valor at the moment.
But I thought I ought to pass on my thoughts on laddered bond portfolios to my readers, since it was the primary reason she called.
I think a laddered bond strategy makes quite a bit of sense for retirees, but only as a part of a properly diversified multi-asset portfolio. I am not in favor of single asset portfolios for anyone, let alone a retiree. Putting your eggs all in one basket is never a good idea, even if it is in the supposedly safe basket of Treasury bonds, which I personally believe carry quite a bit of risk currently. (Bill Gross of Pimco is on the same page by the way as his firm - the largest bond investor in the world - is currently completely out of Treasury bonds according to statements the bond king has made in recent months).
Bonds were known as certificates of confiscation back in the early 1980s, before the great bond bull market kicked off in 1982. Bond investors had lost their shirts over the prior 15 years or so as interest rates had risen steadily along with inflation. Negative real rates eroded bond wealth steadily for better than a decade. However, Paul Volcker's Federal Reserve changed all of that by committing to sound monetary policy designed to bring down inflation and restore the stability of the dollar as a store of value. Bonds have proven a splendid investment ever since... until now.
It is highly likely that inflation will continue to rise and, with it, interest rates over the next decade. We may have another year or two to wait before the trend really gathers steam, but without drastic changes in U.S. monetary and fiscal policy, the odds of a long bond bear market are high. A laddered dollar bond portfolio is not where you want all of your assets in such an environment. Yes bonds will mature yearly and can be reinvested at higher rates, but the bonds in you portfolio will lose value. Any sales necessitated by unexpected cash needs will result in losses. And generating capital losses in bond investing is a cardinal sin. Even more dangerous is the strategy of attempting to "ladder" a bond mutual fund portfolio, given that bond mutual funds have a perpetual duration - duration is a measure of bond price sensitivity to changes in interest rates. The longer the duration the bigger the price moves in a bond, and perpetual is as long as you can get.
Far better to build a properly diversified multi-asset portfolio for our retiree that might include a laddered bond portfolio to go with the high-quality dividend paying blue chip stocks, the dollar diversifying international assets, and the inflation hedging tangible assets (real estate and commodities primarily).
The S&P 500 is rallying short term after moving into oversold territory, but is likely to at least retest the recent low at 1256. It is still too early to tell if the correction is merely the pause that refreshes on the start of a topping process that will ultimately lead to the next downleg in the ongoing secular bear market. We reiterate that fair value for the S&P 500 is in the 900 area and that the economy is now showing clear signs of slowing - a combination that would suggest prudence is the better part of valor at the moment.
Monday, June 13, 2011
Correction
The market is finally starting a correction that could eventually turn into a full fledged bear market, depending on what policy decisions the administration, the Federal Reserve, the ECB, and the Chinese make in response to a slowing economy in the U.S. and rising inflation overseas. The S&P 500 has lost 7.7% since its 2 May peak of 1370.58 (5.3% of that loss coming in June). The next key support is 1249 - the 16 March low. Selling pressures sufficient to take out the 1249 support level would sharply increase the likely of further significant downside testing. There is strong support for the S&P 500 from 1150 down to 1000 however, making the onset of a full blown bear market unlikely in the next few quarters. Tops take time to form and it is more likely that a bounce off of 1249, or perhaps off of 1220 support (10.9% pullback) will see the S&P 500 rally into year end and finish somewhere near the May 2 high of 1370.
Nevertheless, a renewal of the secular bear market this year can't be ruled out. S&P 500 fair value is in the 900 area, net profit margins are at record levels (and will certainly fall going forward), and the U.S. economy is showing signs of slowing. As well, the Chinese are tightening monetary policy and the ECB is talking about tightening monetary policy - both entities would like to deflect inflation away from their shores.
On the other side of the ledger is the President's desire to win re-election. It is very likely that Obama will take steps to bolster the economy short term (and by extension the stock market) in order to win re-election. No post WWII incumbent has won re-election with unemployment above 7.2%, which means Obama must do something fairly quickly to light a fire under the jobs market if he hopes to serve a second term.
Likewise, Ben Bernanke continues to send signals that QE2 will not be the end of his monetary largess. He apparently remains determined to use every monetary policy tool in his tool box to keep the stock market afloat while the banks continue to repair their shattered balance sheets. Bernanke is likely to trot out another initiative immediately on the heels of QE2's end on 30 June. Our forecast is still for a resumption of the bear market sometime in the next 12 to 18 months, but we continue to believe that we are more likely to feel the Bear's bite in 2012 than 2011.
We continue to look for high-quality dividend paying blue chips to buy. We also continue to invest in shorter duration fixed income investments, given the likelihood of rising interest rates in coming years. Finally we continue to invest in nondollar assets that will provide a hedge against purchasing power loss as the shortsighted policies pursued by politicians (on both sides of the aisle) and the Federal Reserve all but ensure rising inflation over the next decade.
Nevertheless, a renewal of the secular bear market this year can't be ruled out. S&P 500 fair value is in the 900 area, net profit margins are at record levels (and will certainly fall going forward), and the U.S. economy is showing signs of slowing. As well, the Chinese are tightening monetary policy and the ECB is talking about tightening monetary policy - both entities would like to deflect inflation away from their shores.
On the other side of the ledger is the President's desire to win re-election. It is very likely that Obama will take steps to bolster the economy short term (and by extension the stock market) in order to win re-election. No post WWII incumbent has won re-election with unemployment above 7.2%, which means Obama must do something fairly quickly to light a fire under the jobs market if he hopes to serve a second term.
Likewise, Ben Bernanke continues to send signals that QE2 will not be the end of his monetary largess. He apparently remains determined to use every monetary policy tool in his tool box to keep the stock market afloat while the banks continue to repair their shattered balance sheets. Bernanke is likely to trot out another initiative immediately on the heels of QE2's end on 30 June. Our forecast is still for a resumption of the bear market sometime in the next 12 to 18 months, but we continue to believe that we are more likely to feel the Bear's bite in 2012 than 2011.
We continue to look for high-quality dividend paying blue chips to buy. We also continue to invest in shorter duration fixed income investments, given the likelihood of rising interest rates in coming years. Finally we continue to invest in nondollar assets that will provide a hedge against purchasing power loss as the shortsighted policies pursued by politicians (on both sides of the aisle) and the Federal Reserve all but ensure rising inflation over the next decade.
Friday, May 27, 2011
Stocks For The Long Run?
There are at least a few academics who argue that stocks are too risky for retirement portfolios and that an all bond portfolio is more appropriate for retirement portfolios, given the much more predictable return streams of bonds versus stocks. Bond portfolios can be constructed to ensure that cash flows match known cash needs throughout a retirement plan. Unfortunately, bonds are not particularly good at preserving purchasing power when inflation unexpectedly makes an appearance (Biechele Royce is forecasting rising inflation over the next 10 plus years). Stocks, then, are a necessary evil for investors who fail to save enough during their accumulation years - the vast majority - to make it possible to survive in retirement on an all bond portfolio.
Okay, okay time out.... You are puzzled because I'm dissing stocks for the long run aren't you? I mean, the baby boomers grew up in the stock friendly world of the 1980s and 1990s. We were told that stocks always deliver a superior return over the long run and that most of us should just forget about bonds and pile into stocks as long as we were looking at a 10-year plus time horizon. We were told that we'd end up with far more wealth in retirement by sticking with the superior long run returns of stocks. Well.... we weren't really getting the whole story when it comes to stock returns versus bond returns as it turns out.
The fact is that bonds have far outperformed stocks over the last 10 years, to the tune of 5.23% per annum, and have kept up with stocks over the last 20 and 30 year periods with far less volatility. The fact is that investors over the last 30 years would've been far better off sticking with bonds ONLY. But that must be a very unusual occurrence right? Not really. It turns out that there have been a number of very long periods during which bonds were superior to stocks. The period 1803-1857 comes to mind - bonds trounced stocks handily and it wasn't until 1871 that stock investors managed to break even. Stocks failed to match bonds once again from 1929 -1949 and stocks didn't manage to break even until the early 1960s. We've had a huge bull market in bonds since 1982 and it may not be quite over yet.
But it is probably coming to an end, given that nominal interest rates aren't likely to fall much further absence outright deflation - something that Federal Reserve Chairman Ben Bernanke says isn't possible if a central bank is willing to keep printing money, as ours clearly is. So back to stocks for the long run then? We don't think so given the tremendous over valuation that currently exists. It is hard to get excited about loading up on stocks when they are trading some 45% above fair value.
And that leaves us with a conundrum - neither stocks nor bonds are particularly attractive for the long run right now, making it a difficult time to be an investor. I am holding cash and gold stocks personally, along with a position in a single stock. I have a list of companies I intend to buy when the next big sell off hits, likely sometime in the next 12-18 months.
Biechele Royce Advisors builds properly diversified portfolios (mine is not) and is currently overweighting nondollar assets, tangible assets, and big blue chip dividending paying U.S. companies. We continue to buy good companies at great prices as we find them.
Okay, okay time out.... You are puzzled because I'm dissing stocks for the long run aren't you? I mean, the baby boomers grew up in the stock friendly world of the 1980s and 1990s. We were told that stocks always deliver a superior return over the long run and that most of us should just forget about bonds and pile into stocks as long as we were looking at a 10-year plus time horizon. We were told that we'd end up with far more wealth in retirement by sticking with the superior long run returns of stocks. Well.... we weren't really getting the whole story when it comes to stock returns versus bond returns as it turns out.
The fact is that bonds have far outperformed stocks over the last 10 years, to the tune of 5.23% per annum, and have kept up with stocks over the last 20 and 30 year periods with far less volatility. The fact is that investors over the last 30 years would've been far better off sticking with bonds ONLY. But that must be a very unusual occurrence right? Not really. It turns out that there have been a number of very long periods during which bonds were superior to stocks. The period 1803-1857 comes to mind - bonds trounced stocks handily and it wasn't until 1871 that stock investors managed to break even. Stocks failed to match bonds once again from 1929 -1949 and stocks didn't manage to break even until the early 1960s. We've had a huge bull market in bonds since 1982 and it may not be quite over yet.
But it is probably coming to an end, given that nominal interest rates aren't likely to fall much further absence outright deflation - something that Federal Reserve Chairman Ben Bernanke says isn't possible if a central bank is willing to keep printing money, as ours clearly is. So back to stocks for the long run then? We don't think so given the tremendous over valuation that currently exists. It is hard to get excited about loading up on stocks when they are trading some 45% above fair value.
And that leaves us with a conundrum - neither stocks nor bonds are particularly attractive for the long run right now, making it a difficult time to be an investor. I am holding cash and gold stocks personally, along with a position in a single stock. I have a list of companies I intend to buy when the next big sell off hits, likely sometime in the next 12-18 months.
Biechele Royce Advisors builds properly diversified portfolios (mine is not) and is currently overweighting nondollar assets, tangible assets, and big blue chip dividending paying U.S. companies. We continue to buy good companies at great prices as we find them.
Monday, May 16, 2011
Presidential Cycle
The S&P 500 sold off two weeks ago, losing 1.72%. Energy was the hardest hit, declining close to 7%, followed by materials, which was down 3.77%. Defensive sectors such as Staples and Telecom were flat or only down slightly. The overall market traded basically flat last week until a Friday sell off closed it out near its recent lows.
So much for the very short term action. Longer term the S&P 500 is trading 45% above fair value, according to Jeremy Grantham of GMO ($108 billion under management), who pegs fair value at 920 for the S&P 500. Grantham’s estimate of fair value gibes with both Tobin’s Q and Shiller’s P/E (very good long term measures of stock market fair value). All of which means equity investors are still playing with fire. Hide out in bonds? Not Treasury bonds, at least not according to Bill Gross of Pimco fame. Bill has informed the world that Pimco has sold all of its Treasury holdings ahead of the end of QE2 (set to finish up at the end of June).
Grantham had thought that the combination of QE2 and the third year of the presidential cycle could push the S&P 500 back to between 1400 and 1600 by October of this year – putting it back into bubble territory. (Grantham is a student of bubbles in various asset classes throughout history and measures them against average valuations. He uses a two standard deviation divergence from long-term fair value to mark a bubble – what is supposed to be a once in 44 year event). Grantham now thinks it much less likely that the S&P 500 will reach the 1400-1600 level by fall, given its failure to advance farther by now. Historically, the market has advance 20% in the first seven months of the third year of the Presidential cycle (started last October). The entire return, on average, for the 48 month cycle is only 21%, meaning investors can expect a whopping 1% return from the S&P 500 over the next 41 months based solely on the Presidential cycle. Of course, these are only averages for the Presidential cycle and don’t take into account things like the current overvalued state of the market or the current jobless recovery (negatives for likely future returns.)
Bottom line for investors (and yep I know I’m starting to sound like a broken record) is that the market remains very overpriced and a dangerous place to be right now. Healthy levels of cash will ensure that any 20% to 30% decline from current levels in the next few years will make it possible to buy cheap assets that will provide above market rates of return going forward.
Biechele Royce Advisors continues to buy good companies at great prices as we find them. We are holding extra cash in clients’ portfolios for the inevitable rainy day that is coming, likely in the next 12 to 24 months.
So much for the very short term action. Longer term the S&P 500 is trading 45% above fair value, according to Jeremy Grantham of GMO ($108 billion under management), who pegs fair value at 920 for the S&P 500. Grantham’s estimate of fair value gibes with both Tobin’s Q and Shiller’s P/E (very good long term measures of stock market fair value). All of which means equity investors are still playing with fire. Hide out in bonds? Not Treasury bonds, at least not according to Bill Gross of Pimco fame. Bill has informed the world that Pimco has sold all of its Treasury holdings ahead of the end of QE2 (set to finish up at the end of June).
Grantham had thought that the combination of QE2 and the third year of the presidential cycle could push the S&P 500 back to between 1400 and 1600 by October of this year – putting it back into bubble territory. (Grantham is a student of bubbles in various asset classes throughout history and measures them against average valuations. He uses a two standard deviation divergence from long-term fair value to mark a bubble – what is supposed to be a once in 44 year event). Grantham now thinks it much less likely that the S&P 500 will reach the 1400-1600 level by fall, given its failure to advance farther by now. Historically, the market has advance 20% in the first seven months of the third year of the Presidential cycle (started last October). The entire return, on average, for the 48 month cycle is only 21%, meaning investors can expect a whopping 1% return from the S&P 500 over the next 41 months based solely on the Presidential cycle. Of course, these are only averages for the Presidential cycle and don’t take into account things like the current overvalued state of the market or the current jobless recovery (negatives for likely future returns.)
Bottom line for investors (and yep I know I’m starting to sound like a broken record) is that the market remains very overpriced and a dangerous place to be right now. Healthy levels of cash will ensure that any 20% to 30% decline from current levels in the next few years will make it possible to buy cheap assets that will provide above market rates of return going forward.
Biechele Royce Advisors continues to buy good companies at great prices as we find them. We are holding extra cash in clients’ portfolios for the inevitable rainy day that is coming, likely in the next 12 to 24 months.
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