Friday, December 26, 2008

And The Answer Is?

At year end I try to figure out what the big themes will be in the coming year. Sometimes I come close and other times I miss by a mile. I think the one question that is on many peoples minds, at the moment is: “What is going to happen to the financial markets in 2009?”

Before I get to the future let me spend a moment on what has happened over the last four months. I have been in this business now for over 35 years and I have seen some pretty ugly markets. What concerns me more than anything else about this correction in 2008 is the fear and panic spread by the financial press. As the market declined, many programs kept using the words “Depression” or “is this the 1930’s again?" At one point I counted in the span of a one hour show the word Depression used over 20 times. That is once every 3 minutes.

I recently heard one reporter make the statement that the Fed was issuing 10’s of trillions of dollars of new debt and then asking how our children will be able to pay off this debt. I call this irresponsible journalism. Let me point out a fact not reported as far as I have seen; the Government invested $250 billion in the “Nine Brothers” and even more in other financial intuitions. They are earning between 5% to 8% on this money. The government is borrowing money at the most, at the moment under 3%. All of the short-term cost of funds to the government is zero percent. If you can borrow at 3% or less and earn 5 to 8 percent, I don’t think you can loose money. Ask yourself, other than here, have you heard this information reported by anyone else?

My point is I don’t want to down play the problems, we have serious problems. I have been writing about the problem in the housing market for the last 2 years. If the media elevates the level of fear by the way it reports what is happening how is that positive? Clearly the press has the right to report, but they also have the responsibility to be fair, balanced, objective, and not create panic.

With that off my chest let me look ahead to 2009. I expect the housing market to stabilize by the beginning of the third quarter. We may well see the cost of a conforming home mortgage at 3.5%. After the first of the year, I would expect to see bank short-term interest rates on money market accounts and CD’s to fall closer to T-Bill rates, zero percent. The banks have been attracting as much capital as they can through deposits as they could before year end. Deposits are a low cost way to strengthen a balance sheet.

The problem is that the banks are paying 2% or more for money market accounts and CD's and not loaning out the money. If they don't start lending they will quickly begin to loose money and will be forced to lower interest rates and to look for positive yield spread opportunities. If the banks are, as reported, unwilling to lend they will be forced to cut the rate of interest they are willing to pay.

The idea that the banks are not lending is bunk. They may not be leaning as much as they had in the past, but they are lending. As another example of misleading press, “Even though mortgage rates are falling, nobody has any equity left in their homes.” If that were a true statement then why are refi applications skyrocketing? If you have been in your house over 5 years you have equity in your house, perhaps not as much as you had, but you have equity to refi and lower your mortgage payment.

The American consumer wallet has benefited from lower gas prices, I do not see them going below one dollar a gallon as many hope. Lower gas prices will increase spendable income. Demand destruction in mortgage interest rates will also increase spendable income for at least half or more of American households if they choose to refi their mortgages.

Therefore, the consumer will save more in 2009. We may in fact bring to an end the negative savings rate that has plagued our economy for many years, if not decades. America will turn into a nation of savers. Even with increased saving I think Americans will spend more than people think they will in 2009. If I’m right on these two items alone the economy will not fall as much as everybody thinks it will in 2009.

My last two items are interest rates and the markets. For interest rates, the question is will this recovery look more like Japan or the typical American economic recovery? I’m going to disagree with the pack and say our recovery will look more like Japan. Interest rates will be low for more than 5 months. I take the Fed Chairman at his word when he said at the last Open Market Committee meeting that he expected interest rates to stay low for an extended period of time.

We will turn into a nation of super savers. In the last 8 years we have had the Internet bust, the real estate bust and the market bust, I think Americans have lost there appetite for risk. So, I expect the stock markets to trade in a fairly wide range, but no new highs or lows for the markets in 2009. Perhaps the largest single opportunity will be the purchase of corporation bonds and preferred stocks. Locked in high rates of interest vs. low interest rates across the yield curve will present significant total return potential.

Dan Perkins

Tuesday, December 23, 2008

Our house has 7 stockings on the fireplace

I realize that this has been a difficult year in terms of the markets and the economy for all of us. I hope that next year will see the return to better times. As I look back at my year, I have many things to be thankful for in 2008. My clients, many who are close friends, who have stayed with me though these most difficult times and my two new daughters are just two examples of the many things that I am thankful for this Christmas.

Last Saturday the 20th, we had a visitor arrive at our house who has changed Gerri and I, forever. That visitor is our granddaughter Charlotte. She will be with us through the 26th and as many of you know, she is the first baby in our house on Christmas in over 25 years.

Yes, we all have a lot on our minds wondering and worrying about what will happen next year. With a baby in the house you change your prospective about life. Charlotte and her parents are the future of American, a future that is full of promise and opportunity. I sometimes cannot see the future as clearly, but it is right in front of our eyes, it is our children and grandchildren.

I hope you have found these blogs helpful. As one client said, "I don't always understand all of what is going on, but I get great comfort knowing you are looking out for our interest." I will continue to write and call things as I see them. We are in this together and I have a responsibility to protect all of our money as best I can. While money is important, as another client said to me after my surgery, "you start with your health and everything else is a bonus."

I want to wish all of you who are clients, friends or just people who just read my blog a Blessed Christmas Season and a healthy and more prosperous 2009.

Dan Perkins

Tuesday, December 16, 2008

Demand Destruction in Reverse

Demand Destruction is a process that causes us to make a change in the way in which we make decisions. This process can be both positive and negative depending on what the consumer is reacting to. When crude oil hit $147 a barrel and gasoline was $4.25 a gallon we experienced “Demand Destruction” in the consumption of oil. At $4.25 a gallon for gas, Americans were forced to change their habits about their consumption of gas. We all know that this shift (Demand Destruction) caused part of the decline in oil prices and in turn the price of gas to the price levels of today.

Today the Federal Reserve cut the Fed Funds interest rate to a range of zero to 25 basis points and they created a new “Demand Destruction” for investors and consumers alike. I wrote recently about two clients who were considering a home equity loan at the prime rate less 25 basis points and more. The prime rate tomorrow will be 3.25% so if you had a home equity line of credit priced at prime less 25 basis points your new rate would be 3%. For most people this will be the lowest rate to borrow in their lifetime.

This unprecedented reduction in interest rates will cause people to destroy their credit card balances. Some people think that all the equity is lost in most American homes. I do not think so. I believe there is still a great deal of equity available, but people have been afraid to borrow money. In difficult times people protect their savings just in case things change at their job. If people are paying 9,10, 11% or more on their credit cards and you can refi that loan for 3% and deduct the interest expense it becomes a no brainer. Look for an explosion of home equity lines of credit marketing from your local bank.

With Fed indication that they were going to start buying mortgages from the agencies along with buying longer dated Treasuries I would expect to see home mortgage interest rates fall through the floor. I think it is possible for 30 year conforming mortgage interest rates to be under 4% by the end of the first quarter 2009. If I am right then virtually every home mortgage is in play to be refinanced. I don’t not think everybody can refi because the banks will be stricter than in the past but millions of Americans will refi and most important of all we have made millions of unsold homes more affordable.

I think the actions announced today may bring us to a bottom in the real estate market sooner than I thought.

Dan Perkins

Monday, December 15, 2008

Sell all of it now before it is all gone!

Some experts are suggesting that you should sell your stocks in the rallies as they come and move all of your money to cash. As of December 9, cash as measured by the 90-day T-Bill was paying zero return and if you had to pay, a fee to buy these T-Bills you would actually have a negative return. A report on Friday the 11th showed that over 500 Treasury-only money market funds were yielding around one-half of one basis point. An additional 45 Treasury-only money market funds had an income of zero. If you sell everything now you may be selling income that, you might never be able to replace in your lifetime.

Let us use an example. My most recent post was called the “Nine Brothers” and it dealt with the purchase of an 8.20% coupon preferred valued at $20 per share with a current yield of 10.25%. This “Nine Brother” preferred was not redeemable until 2045. That means that this “Nine Brother” was going to be paying $2.05 in annual dividends for 37 years.

Let us also say that you, like me, bought that preferred at $25. It is now worth $20. Therefore, on a capital basis you and I who bought the initial position at 8.20% yield, would be down 20% but we are still getting the $2.05 per year in dividends. If we sold this preferred and bought 90 day T-bill both of us will be earning ZERO.

Is there risk, as one reader asked me, that the “Nine Brothers” will go out of business or cannot make the dividend payment? Let me put it to you this way. If the nine largest banks in the United States go belly-up, we have serious problems and our money will not be worth anything. In addition, the Government positions in many cases are junior to other preferred holders. As we have seen recently a great many things we thought could never happen have happened I would never say never but based on what I see at the moment they aren't going out of business.

The point of this Blog is to try to make you stop and think about what you might do out of emotion rather than logic. If I sell the income, how will I live? Ask yourself, "What adjustment will you have to make in your plans if you earn no return or cash/flow on the bulk of your money? How will you have retirement income? You will have to start out by selling assets to produce income.

If your assets produce no cash/flow can you afford to retire? Will you have to work the rest of you life just to make ends meet? I realize these are very scary thoughts. Nevertheless, think about this: the recent CNBC wealth survey across all adult ages and income levels were asked, “Do you feel safe with your money in a FDIC insured banking intuition?” The result of that question was 38% of the time people said no they do not think their money is safe.

Before you throw the baby out with the bath water, you should look at all of your investments as objectively as you can. Separate your investments into to two sections. In one section, list all the investments that pay you a dividend or interest. Look at each investment and try to make a determination as to the ability of the company to continue to make these payments. Look at research reports from brokers and rating services to get the most information you can on the ability of the company to make the payments. Look at the company competitors and see how their stock or bonds are doing relative to yours. If the stock price is much lower than the competitor price then your stock might be a candidate for sale. If you find something that you think has too much risk of the income not being paid then sell it.

As to the other list, these are the ones where you have the most exposure. If you are not getting anything from the stock, (dividends) then you have to have the share price go up in value to make money. Again, look at all the research you can find on the company and then look at how it is doing against its competitors. If the stock has held up well then it probably is a keeper, on the other hand if it is off more that the competitors and the research you have done is not favorable then it is probably is a sale candidate.

When you make a sale try to move the proceeds from the sale from the non-income side to the income side of your ledger. Look at the income investments you already own and if you are keeping them now might be a great time to add to the position from what you have sold. If you have growth stocks, ETF's or index fund that you are keeping you can use some of the cash to expand positions. Before you make any buy decisions look at the balance between cash stocks and bonds, your asset allocation, you might want to re balance your risk profile while you are selling and buying.

Dan Perkins

Tuesday, December 9, 2008

Let me introduce you to the “Nine Brothers”.

You are asking yourself who in the world are the “Nine Brothers” and what is their relevance to making money? Great question! In fact, a question that deserves an explanation. The “Nine Brothers” is my name for perhaps what may turn out to be one of the most significant investment opportunities available right now. I think the “Nine Brother” represent the possibility of at least 50% returns over the next 5 years at a minimum. OK now that I have your attention let me tell you more.

We all should know that the best time to purchase an investment is when nobody wants to own it, like almost everything today. When most people loose their focus then opportunities go by un-acted upon and later when they have started to move then they are discovered. The trick is to find them before anybody else and make a commitment to the investment. The “Nine Brother“ is one of those investments.

The “Nine Brothers” are the original two brokerage firms and seven banks that the Secretary of the Treasury said were too important to fail. Now they are all banks so the "Nine Brothers" are nine banks. They were so important that the United States government invested our money in these “Nine Brothers”. The Government anointed them, as safe places that they were going to keep safe regardless of what happens.

This commitment to the “Nine Brothers” was tested and the government made good on its promise. Citibank is one of the “Nine Brothers” and when all the talk was going around that Citibank was going to fail, what happened? The government stepped in and gave them more money. The government was not going to let one of the “Nine Brothers” fail.

Some of the rest of the “Nine Brothers” are Bank of America, JP Morgan Chase, Wells Fargo, Goldman Sacks, and Morgan Stanley. Secretary Paulson identified these nine institutions as too important to fail. So, what is the opportunity with the “Nine Brothers”?

Many of the “Nine Brothers” have preferred stocks that have a current yield of 10% or more. Today 90 day T Bills were paying one basis point and 30 year T-Bonds were paying 3.13%, not much yield. On the other hand, let us use an 8.20% preferred stock offered by one of the “Nine Brothers”. The current yield is around 10.5% and the stock purchase price, which was originally $25, is now about $20.

If nothing happens over the next 5 years, you would receive over 52% return in dividends. If the rest of the market finds this opportunity then I would expect to see the price rise over the next 12 to 18 month back to its original $25 perhaps higher as demand will be greater than supply.

Why shouldn't I invest outside the “Nine Brothers?” Investing in banks outside of the “Nine Brothers” could have significantly higher risk.

Dan Perkins

Monday, December 1, 2008

What a difference a day makes.

The movement up last week in the markets was a wonderful Thanksgiving gift. Monday rolled around, we had another turkey on our plate, and this one was RAW. The markets had one of the worst performance days in a long time. At the end of the day this is how things stood:

Dow Jones down 680 points -7.70% for the day and down -40% year-to-date

S&P 500 down 80 points -8.03% for the day and down -44% year-to-date

NASDAQ down 137 points -8.95% for the day and down -48% year-to-date

So, you may be asking yourself what changed in one day to make this happen? Most people do not realize that with the close of last Friday all three American stock markets were up 20% or more off their most recent bottom. When you have a run like this, it is normal to expect people to take whatever profits they can if any. While today was not normal the markets the last three months haven't been normal either.

One other factor comes into play at year-end; that is, tax selling as it used to be known. In the past people sold to realize a gain. They were selling to gain a favorable tax rate namely; capital gains taxes, which are lower than ordinary income taxes. Based on what we have heard from the president-elect capital gains tax rates may be higher next year, therefore, if you had a gain you might want to take it this year.

I think there was another factor in the selling today. Those people who saw some price recovery in the value of a stock, sold today, not to take a gain, but to reduce their losses. If a week ago Friday let's say XYZ was selling for $20. Let's also say that you had a cost basis of $30. If last Friday XYZ was at $25, you were only down $5. If you looked at the futures this morning and saw that the indication was for a sharp sell off you might have sold to protect your money.

I expect that the markets still have a little way to go before we stabilize again and try to move higher. The biggest concern this week will be the employment data on Friday morning. As of today, the estimates are for 300,000 additional jobs to be lost this month and the unemployment rate to climb to 6.7%. I think the number of jobs lost might be low and I think that the unemployment rate will be higher than 6.7%. Some of the sell off we saw today was anticipation of bad numbers on Friday. While I think the numbers could be worse that the consensus forecast, there is a part of me that thinks there is a slim chance that the numbers could come in better than expected.

I do believe that some people think the numbers are closer to 500,000 lost jobs and 8% unemployment. If the numbers come in line or a little better than expected I would look for a rally that could start on Friday and carry us into next week. One of the technicals that I look at is the absolute value of the S&P 500. We have tried several times to break and stay above 900 on the S&P. If we could break and hold above 900 on the S&P 500 we could have a nice Santa Claus Rally.

Dan Perkins

Thursday, November 20, 2008

Were you lucky enough to own the S&P 500 index at the beginning of the year then you would only be down 47%.

The problem with this headline is that for many people they are off more than 47% on a year to date basis. Today we broke the previous low put in by the Dow Jones. We had successfully tested the previous low several times, but today we closed at a low equal to October 2002 of 7,550.

The S&P 500 faired even worse closing at an 11 year low. The question should be the old Limbo dance question, “How low can you go?” I don’t know. I do know that things seem to be at their worst. They are not as bad as they were in early October, but for a different reason. In October we were concerned, no scared to death, that the world banking system was about to fail.

The world’s central banks spent trillions of dollars shoring up the commercial banks balance sheets so they could begin lending money. While the central bank wanted the commercial banks to lend and they gave them trillions to do so those banks haven’t started lending, at least not yet.

The credit markets are still showing signs of the demand for US Government Securities regardless of maturity. Today the yield on the 10-year T bond fell to 3.01% yet the 30-year mortgage still stands at 6.05%, more than double the yield on the 10-year T-Bonds.

If you wanted to buy and if you could get them, a 90-day T-bill today would earn .02% yield. I had a client call today asking me if I thought it was a good idea to take out of his unused home equity line and put it in the bank?

I said take the money before the bank pulls the home equity line out from under him. He can borrow money at prime minus ¼ of 1 percent and deduct the interest. In his tax bracket he’ll borrow the money at about 2.4% after tax, this is perhaps the cheapest cost of money he will ever see in his lifetime I think the Fed will cut interest rates another 50 basis points in December if not before. This cut by the Fed will reduce the prime rate to 3.5% and will take his home equity interest rate to just about 2% after taxes. This is the second client in the past week who has called with the same question about a home equity loan.

Will all of these low interest rates and strong dollar make the equity markets more appealing? Over time I think they will. I do see exceptional value in the market. I waited and waited on GE and bought it between $15 and $16 only to see it fall to $13. How smart am I? But one client sent me a note that said he thinks for the long-term GE was a great buy. I hope he is right.

As I sit here to write this blog I ask my self these questions? Have I limited my client’s risk and more importantly how secure is their income? The answer is a resounding yes; they will get their checks and for now I don’t have to sell anything for them to get the income they need. As much as I would like to think I could control the markets I’m just along for the ride.

When we have days like these I spend a great deal of time thinking about you, my clients. We own the same things and as one president once said “I feel your pain.” I don’t like it, but I have to deal with it for you and me alike.

Dan Perkins

Saturday, November 15, 2008

Should GM, Ford and Chrysler and in turn America be allowed to fail?

There is a part of me that cannot believe that people would even consider the possibility of letting the “Big Three” auto makers go into bankruptcy. In the employment report of last week we saw the number of continuing claims just under 4 million people. This is a bad number and most people project that the number of people unemployed will go much higher before it begins to fall. If we allow the "Big Three" to fail then the unemployed numbers could double or even more and I do not want to even think about impact on the markets and your accounts.

If we allow the "Big Three" to fail how many people, will be added to the unemployment roles? Depending upon whom you talk to for every assembly line worker there can be as many as 10 to 20 additional people providing goods and services to the auto industry. The impact on the lost jobs could be terrifying. The most recent number of employees, retirees and family members covered by GM was about 500,000 people. Take that number and use the low end of 10 times and you are looking at over 5 million at GM alone, or more than double the current unemployed.

What would be the additional impact on the economy if labor contracts, health and welfare benefits, and pension payments could no longer be made? I am reminded a quote from Wayne Angel, the former member of the Federal Reserve who said, ‘The failure of Lehman Brother was a terrible mistake and the Treasury should own up and not make that mistake again.”

Letting the "Big Three" go into bankruptcy should not be on the table for many reason. We can discuss the failure to change the product mix, but the product mix can be part of the funding to protect our economy for total collapse. While we are on the subject of product mix, what happened to the need to develop alternative energy sources? When the price of gasoline was $4.25 per gallon, everybody was screaming about alternative energy. Now that it is $2, nobody wants to talk about alternative energy.

The president elect talked about drilling to expand our resources for energy and now he is talking about overturning all of the Executive Orders, including the lifting of the ban on off shore drilling. We have not had an energy policy and it appears that with gas at $2 or less we still will not have a policy.

We chastise the auto companies for not building more fuel-efficient cars and the energy companies for not developing alternative fuel for autos, but at the same time, we will do nothing about the fact that even at these low prices we are still sending over $300 billion overseas to some countries that do not like us very much. It is difficult for me to understand how we can consider letting the biggest employer in the United State fail while at the same time we cannot come up with an energy policy that could create hundreds of thousands of new jobs and help Detroit develop better cars.

Dan Perkins

Tuesday, November 4, 2008

A Tale of Two Cities

As you can see from the chart above the market (Dow Jones) has made a significant advance off it's most recent low. Markets do not go down forever although I was not sure about that during the first half of October. Similarly they do not go up forever either. The stock market action during the month of October was like the Dickens novel, “A Tale of Two Cities”.

The first two weeks were sheer terror when compared to the second two weeks which felt like heaven. We went from an inter day low of about 7,880 on the Dow Jones to a recent high of about 9,650. The almost 1800 points move was about 22% off the bottom with no real correction.

As much as all of us like the feeling of an up market, we must deal with the reality that we have serious problems that need to be addressed. This Friday we have the unemployment data at 8:30 in may be more in the 225,000 to 275,000 range which will signal that the economy in is even worse shape than people suspected.

If I am close to the number, I would expect to see the market sell off because the prospects for recovery will be pushed out further into 2009. There will be more talk about an additional stimulus package to try to get the economy going. I would also expect the bond market to rally because of the feeling that the Fed will have to spend another 50 basis points in interest rates by cutting sooner rather than later.

For those of you that are my clients I am putting on a small position of insurance called the Pro Shares Ultra Short S&P 500 Exchanged Traded Fund (ETF). The objective is to offer some downside protection if the market does correct as I expect. If I am right this investment will go up in value twice as fast as the market goes down. You can get more information on Pro Shares ETF at

I expect that the markets will continue to be volatile and the use of ETF’s will have the potential to add some stability to our investments. These ETF’s are not long-term investments; they are a way to protect some portfolios over the short-term. We have the flexibility to protect on the downside and increase our return on the upside.

I expect that some of you may be asking yourself why don’t we use the ETF’s all the time? This is an excellent question and my answer is that ETF's have extreme volatility and too much exposure could make you sick as being on a roller coaster ride. We want to own high quality investments and now we want own some insurance to reduce overall volatility.

Dan Perkins

Thursday, October 30, 2008

Dollar makes the world go round

The two charts above show what has happened to the value of the dollar when compared to the Pound(top) and the Euro(bottom) over the last 30 days. Just about anywhere in Europe or the British Isles, everything has gotten 20% less expensive over the last 30 days for Americans with dollars. It appears that everybody wants to own dollars at the expense of selling just about everything else they own.

Just imagine that you owned German stocks at the beginning of September and most of your investments outside of Germany were in Euro based investments. As long as your money stayed in Germany, you were fine. However, if you had money invested outside of Germany in Euro’s, you would be down the market fall plus an additional 20% on the currency loss.

The dollar has appreciated a great deal in a short period. I expect that we will get some correction in the dollar in the next month or so. I do believe that the dollar will reassert itself when the European Central Bank and the Bank of England have to lower interest rates considerably to try to stave off recession. I think we could see a dollar value for the EURO at $1.00 and at least $1.25 for one pound perhaps even more, depending on how theses economies fare over the next 12 months.

With increasing demand for dollar dominated investments, American investments are the quickest way for a foreign investor to play the strength of the dollar. They will sell their stocks and bonds and move their money to the United States. These foreign investors have already been big buyers of American Treasuries and they will move into stocks as the EURO and The Pound fall.

Look for the US Markets to outperform the other major markets in the world over the next 12 to 24 months, reversing the most recent 5-year pattern. The rest of the world is finally beginning to understand there is only one currency in the world, THE US DOLLAR.

Dan Perkins

Friday, October 24, 2008

You Thought September Was Bad.

By now, most people have received their September investment statement. The first question is “Did you open it?” Well if you did open it and thought it was shocking in the amount of money you had lost in account value wait until you see your October statement. As of today, the S&P 500 was off just about 24% for the month. If your accounts performed in line with the market for the month of October then $100,000 in account value at the end of September should be worth $76,000 at the end of October. We still have another week to go before the end of the month and we could see some recovery, but only time will tell.

Why is it that some people who have the same investments that they had at the end of September will not be off near as much as the market by the end of the month? There are two basic answers to that question. First, they have a much higher percentage of their assets investing in preferred stocks that pay a high dividend. The second reason is that most of the preferred stocks were in the financial services sector.

When the Federal Government said that the banks were "money good" guaranteeing the banks debt, then the market rallied almost 1,000 points. The big winners then and continue to be the financial sector especially the preferred. I wrote recently about preferred stocks and I pointed out that they are senior to common stocks and therefore should be more stable in price. The government did not bail out other companies so the strength in the preferred stocks of financial companies has regained favor. As the markets finally figure out where the bottom is, the financial stocks will lead the rally.

The fear of recession will cause the Federal Reserve to move their bias towards cutting interest rates as it will state that inflation is no longer an issue in its meeting "statement "next week. It is possible that the Fed may cut 25 basis points and it will, I believe the Fed will take one full percent out of the Fed Funds interest rate before it is done cutting interest rates. As order returns to the markets the financial services preferred stocks could have quite a run.

Here is a test question for you. If your account is off 40% like the markets, how much will the market have to go up for you to recover what you have lost?

A 40%
B 50%
C 65%

Dan Perkins

Answer C

Wednesday, October 22, 2008

I was taken to dinner by clients that had a decline in their accounts and they paid.

I had dinner with clients this weekend and they picked up the tab--perhaps they felt sorry for me. They had two questions that they wanted me to try and answer for them. The first question was, when will all of this turmoil be over and the second question was when would they see the values of our accounts start going up? On the surface, these seem like straightforward questions, but in reality, these are two questions that nobody has answers to now.

I told the clients that I do not have an exact answer because I am not sure that we have enough information to come up with an answer that can be supported by facts. I said that I felt that the greatest risk now is the unknown. It is what we do not know that could have the greatest impact on the eventual outcome of the challenges we are facing today.

There is no doubt that people just went crazy with some of the investment structures that are causing the problems we are dealing with today. I wanted to make my answers as simple as possible so that they could have a foundation of concepts. After you have built a foundation of information then you can begin to answer the questions. I do believe that one word sums up the extent of the problems, that word is transparency.

Clear glass in a window lets in more light than a stained glass window. If try to look through a stained glass window you cannot tell for sure what is on the other side. With a clear glass window, you can see everything. Many of the investment structures we have today have little or no transparency. By example: if you knew that the Reserve Fund had $750 million in Lehman Brothers commercial paper on the Friday before it closed, would you have deposited your money in the fund, probably not.

Under the structure of a mutual fund, you get detailed information every 90 days. What happens to the investments during the ensuring 90 days is not know to you until the next reporting period 90 days later. This is an example of a lack of transparency that exists today. I could give you many other examples, but time and space do not allow. Your understanding of the concept of transparency is most important. If you own a diversified portfolio of stocks then when you get your monthly statement you can see what you own and access the risk of what you own. You have total transparency.

Back to the two questions that need to be answered. I said in my last Blog to watch the movement of one month and three month LIBOR interest rates. (Go to for an excellent explanation of LIBOR.) If one and three month LIBOR interest rates start falling, the banks are beginning to lend money to each other. Since my last posting, three month LIBOR has fallen by about 1.5%. Currently one month and three month LIBOR are 3.28% and 3.54% respectively.
We need three month LIBOR to be within one quarter of one percent of 90-day T-bills. Right now, the difference is two-hundred and fifty basis points (250) or about 10 times higher that it should be normally. As the spread continues to narrow, we will see further rallies in the global stock markets. How long will it take to get the spread to return to a normal rage? My best guess is late this year, but more likely into first quarter 2009.

As a result, I think we are in for volatile time for the balance of the year and into first quarter 2009. Over time, the market swings will be dampened as more stability is added to the markets. As to the second question of recovering account values, my clients have already seen a significant recovery in their account values. The account values are not back to summer values, but have moved closer to the September month end values. As I indicated the things that will lead the market higher would be the assets classes that were the most beaten down in the bear markets.

Take a hard look at what you own and make decisions as to what you want to keep and what has to go. Set a realistic target for selling the ones that have to go and then sell them if they get to the target. If what you want to sell does not move up when the market rallies then sell out at the best price you can get.

The problems we are facing today have their origins way back to the Carter Administration and will take a long-time to rebuild. Return expectations are going to have to be reduced for many years to come. I think we may well see some recovery in account values in the second half of 2009 depending on what happens in the economy.

Dan Perkins

Wednesday, October 15, 2008

And You Thought All the Problems Were Solved.

So, you thought that the market goes up 1,000 points and the worst is over and it is onward and up from here. We Americans want everything solved over night and we get very impatient when we do not get what we want when we want it. I warned you on Monday night that we had a 20% gain form the low on Friday and that it was possible to add another 5% or about 450 points, but then I felt we had to correct. We started Tuesday with a 450 point gain only to close down for the day. Here we are two days later and we have already given back over 450 points of the 1,450 point gain.

I suggested that we might have to prove that the bottom of last Friday was the true bottom in this cycle. I am not convinced that we will test the bottom this time around. I think as I pointed out that I would expect to see selling pressure by people who did not sell on the recent decline, but would take advantage of any rallies to sell and raise cash.

This selling will, at some point in time, exhaust itself and then I think the market will move sharply higher after all the selling is done. Once we have another sharp advance that will be the time to build additional cash. It is after the next sharp rally that I expect the market test the previous low around 7,800 on the Dow.

Let me make one thing clear, these are guesstimates on my part and may or may not happen. I am trying to give my readers some guidelines as to what I think could happen and what action you should be taking if what I think will happen does happen.

On Monday, I suggested that you follow both the one and three month LIBOR interest rates to get a feeling for what is happening in the credit markets. A falling LIBOR interest rate would indicate that money is beginning to flow. As of this morning, the one and three LIBOR interest rates were 4.36% and 4.55% respectively. These LIBOR interest rates are more than 25 basis points lower than they were on Monday. I will post the LIBOR interest rates at the Blog site so you can see what is happening.

I do want to point out something that is important that is going on in the credit markets. All of the trouble we have had revolves around the problems in the mortgage market. As the government issues more debt to deal with the liquidity problems 10 and 30-year interest rates on Treasuries are rising rapidly. It will be difficult to refi mortgages with even higher interest rates. If people cannot afford their current mortgage interest rate, they clearly will not be able to refi at a higher interest rate. This divergence in interest rates tells me that the Federal Reserve Open Market Committee will either cut rates at their meeting at the end of the month or change their bias to cutting rates in the future.

Make sure you are strapped in because it will be a bumpy ride for a while.

Dan Perkins

Monday, October 13, 2008

Columbus discovered, " the market was over sold."

It is surprising what a few trillion dollars can do for the stock markets. We had a big rally today that took us back to the level the market was last Wednesday afternoon. While 1,000 points, just over an 11% increase, was impressive, the credit problems have not been solved. We could go another 5% higher perhaps a little more from this level, but then I think we have to retest the previous low to see if it was a true bottom in the market.

I said last week that I would use the rally to raise some additional cash. I will and you should be looking at positions that do not pay a reasonable dividend as possible sell candidates. Look at stocks that have not shown any movement in today’s market as additional candidates to sell. Keep in mind, as I said last week, the sectors that were the most beaten down would lead the recovery. In todays market rebound the biggest gainers were energy and financial services.

These laggards will probably continue to lead until the rally runs out of gas. The leaders in the rally may be the stocks that sell off to test the previous low. The one thing that has to be taken into the mix is what happened last Friday with the opening sell off and then the spectacular recovery. Last Friday we hit a low in the Dow Jones of 7,782. Today we closed at 9,387 or a 20% move off the bottom in two trading days. As I said, the Market could go another 5% higher from this level.

As I said in Friday’s Blog, watch the one month and three month LIBOR interest rates to give you an indication of the direction of the market. While the US credit markets were closed today, the LIBOR rates issued this morning were off just slightly from Friday’s level. If we were to see LIBOR rates decline by more than 25 basis points tomorrow morning then I would expect the rally to continue. If they do not fall by one quarter of one percent in the morning, I would expect the stock markets to sell off.
We are not out of the wood yet and I think it will take more time than people are willing to wait to bring back confidence in the markets. I expect the volatility of the markets to be event driven; meaning that if a large company announces it is in trouble, the announcement could spook the markets. It is important not be swayed by the hype that now is the best time in your lifetime to buy stocks. Take the rallies as they come to raise cash. Make a stock shopping list with price levels at which you want to buy. When the stock hits the level you have set, commit one third of the amount you want to invest and then wait two weeks and invest the next third and after a final two week invest the remaining third. At each buy point look at what is happening and make a new decision if you see the price lower than your first purchase.

If it is true that this is the chance of a lifetime to make money buying stocks, just remember, “Buyer beware.”

Dan Perkins

Thursday, October 9, 2008

When will the waves of selling stop?

Every day people on Wall Street come into their offices and the market gives them hope and then it just pounds on them to the point that they begin to question if is it really the beginning of the next Great Depression. The whipsaw effect is devastating and makes it hard to keep there head above water.They look back and start playing the “What If” game. What if only I had done this or that, would we be better off than we are at this moment? Brokers start thinking about whether the markets could go to zero. Could the government run out of money? We will get a new president in less than a month, is either of the candidates capable of dealing with a crisis of this magnitude? For that, matter is anybody capable of solving the problem?

These are the questions professionals are asking myself included. even more dire questions about what Americans are askingwill happened to not only their investments but their lives. Do not throw stones at me if I ask “could all of this be signs of a bottom of the market?” People have moved away from thinking they will sell half of their position and build some cash and then buy more at a lower price later. Now they are selling everything thinking they cannot deal with this market situation anymore. The loss of any rational process is also a sign of a bottom. I was a new broker in 1973 and that Bear market felt a lot like this Bear Market today with one very significant difference; if we move away from the financial stocks, we find that the rest of American business has in excess of $1 trillion in cash and cash equivalents on their balance sheets.

I want to make it clear that we have serious problems that need to be solved. We will not solve them overnight, even though Americans historically want quick fixes to their problems, there is no quick fix to this liquidity problem.

I do not think that in the last 30 days we have found a cure for AIDS, yet the company that is the leader in developing AIDS drugs is off 30% in market value. Another example is a company that manages $60 billion dollars of US Government guaranteed bonds which is off 30% in the same period.This is an investment that the timely payment of principal and interest is guaranteed by the US Government and it was off 16% just today. Why? People are selling everything at any price out of fear and panic.

Based on my life experience, for whatever that is worth, we may well be close to a bottom. I am not saying this is or is not the bottom for we will not know for sure until we get a rally and then come back and retest the level. How close are we to a bottom? The worst Bear Market was down about 40%. We are close to that level now. I want to give you something to watch that will be an indicator of the turn in the market. Watch the 30 and 90-day LIBOR interest rate.

As of today, the 90-day LIBOR rate was 4.75% compared to 1.55% for the Fed Funds rate. If we see the spread begin to narrow that will be a sign the money is starting to flow. If money flows, the stock market will begin to rally. You can follow LIBOR at Look for the markets header and go to Rates and Bonds then look left to see Key Rates. Click on Key Rates and you will find 3 month LIBOR.

Dan Perkins

Tuesday, October 7, 2008

If I sell, where do I invest my money?

The question in the above headline is very important and because it is so important, I need to spend some time on the answer. The question that has to be asked is why did you invest your money in the first place? Did you invest because you needed income or did you invest for long-term growth or some of both?

Let us separate the two and look at each individually. You have a need for income as an objective. If you sold an income producing investment, what would you do with the money? Suppose you owned a preferred stock paying 7.5% yield. If you sold it today, you will loose the 7.5% cash flow. If you wanted to be safe, you could invest in ten year Treasury Bonds at 3.4%. If you had $50,000 in the 7.50% preferred you would be receiving $3,750 a year in income. On the other hand, if you sold the preferred and bought a 10-year T-Bond you would get 3.4% income or about $1,700 per year. If you needed the $3,750 per year for living expenses, switching to $1,700 means, you will be short $2,050 in income.

There are only two ways to make up the shortfall in income; reduce your expenses by $2,050 a year or start spending your principal. If you start spending your principal your income will also fall as you liquidate principal. As difficult as it may be to deal with, your need for income is more import than the price changes of the investment. You would not sell the preferred if its price went up because you need the income and you should not sell if the price is down,

If you are investing for long-term growth then the recent declines in the stock market present a buying opportunity through dollar cost averaging. The process of dollar cost averaging is investing the same amount of money in an investment regardless of the current price. By investing, the same amount each time sometimes you will buy more of the investment and sometimes you will buy less. The point is to invest on a regular basis. For readers who are dollar cost averaging now may be the best time in your lifetime to invest.

I know that it is hard to see these markets decline the way they have and in many respects, it is very scary for me, too. In the 35 years, I have been investing in the markets I have never seen such a time as I have seen in the last 30 days.

Things will not turn around over night and it will take time to rebuild the markets. I want to remind you of one very important event that is taking place in all of this turmoil. The United States dollar is skyrocketing against many of the major currencies in the world. When people get scared, there is one place they all want to get their money to, the good old USA. It is a good place for you to have your money invested, too.

Dan Perkins

Monday, October 6, 2008

It is the Darkest Before the Dawn

The world sold off today and there was no place to hide. The baby, the bath water, the tub and all the plumbing in the house were thrown out today in every country of the world that had a stock market. People don’t know what to do so they just sell everything with out any thought of what needs to be done. If you have a stock paying an annual dividend of 8% would you sell it, take a loss and then buy a T-Bill for .46%? If the company looks like it has a chance to continue to pay the dividend, then keep it. If on the other hand if you are not being paid a dividend you really have to look at the prospects of the company if you want to keep the stock.

People are flat out scared about what is happening and trying to figure out what could happen next. Many people wonder what they should do with whatever amount of money they have left. I did get a response from one of my readers to my blog last night, who said, “I liked your comment, IT WILL PASS. That has always been my attitude, but I just hope I do not PASS first.” My reader is over 90, has been investing for many decades and has seen all the bull and bear markets.

I think we can learn a lot from what she is saying. Markets do go up and they most certainly go down. What gets scary is when some of the emerging markets like Russia drop 20% in one day. I was encouraged, yes, I said encouraged, today with the fact that the US markets, which at one point were off over 800 points, finished the day down about 360.

I know that 360 points is a significantly scary drop, but it is a hell of a lot better than the 800 points we were down earlier in the day. The markets on a global basis are trying to deal with the problem of liquidity, they will sort things out, and this will pass. If I knew how long it would take to sort things out I would control a great deal more money than I do today. As I have said many times before, get paid for the risk you are taking.

Over the next few weeks, you will be receiving your 401k, IRA, brokerage or mutual fund statements. Be prepared to be shocked at what has happened through the end of September. I believe that many millions of Americans have no idea how much their accounts have declined in value.

The statements they will be receiving will understate the decline that has already taken place in the first 6 days of October. The panic will increase as people see their statements and they will want to sell, probably selling too late. Ask yourself how much time you have until you will need this money. If you have time then continue to add money and take advantage of dollar cost averaging. If your time horizon is shorter then think about selling some of your positions on any rallies.

I do have one concern that I need to discuss with you. It is your choice as to what you want to do about my suggestion. Perhaps you have read in the papers about the inability of some companies to get cash to pay bills. As I said yesterday, an HMO in Florida had to shut down because it could not get at its money. I think it might be a good idea to have some cash around the house. I can not tell you how much to have on hand but it might be a good idea to have enough to buy two or three weeks worth of food and fuel. After things settle down and you do not need the money, put it back. I hope I do not have to use emergency cash, but I will feel much better if I need cash and have it in hand.

Dan Perkins

Sunday, October 5, 2008

Now that The Congress Passed the “Bail Out,”,What Next?

The “Bail Out” bill was passed by the House of Representatives on Friday and many people, me included, are wondering “What next?” The point of this new legislation was not to drive the stock market higher; clearly it did not on Friday when it was passed. The liquidity problem is in the credit, (bond), markets much more so than in the stock markets. It is true that companies were experiencing liquidity problems because of the credit market lock up.

I read last week that an HMO in Florida had to close because they could not get at its cash in a frozen money market account to pay claims, bills or payroll. In order for our economy to work, companies and people need access to money. If money is hard to get then the economy stops or at least slows down until it can get the necessary money to keep running.

With the new legislation, money should start flowing again; slowly at first, but over time I expect to see the volume of money available to expand our economy increase. We know that the stock markets are off about 25% over the last 12 months and the quarter end statements will be scary. I think there are two questions many people will be asking after they get over the shock of the statements.

The first question is, “Will my account recover?,” and second, “Do I own the right things to recover?” Both of these are excellent questions and I think deserve answers. If we look at the investments that had the biggest decline, they were financial services stocks, preferred, and bonds. These investments all declined because of a lack of liquidity in the credit markets. As money increases in circulation along with new valuation standards I expect the stocks that were the most beaten down will lead the reversal.
As the economy continues to slowdown there will be more pressure on the Federal Reserve to lower interest rates to try to help spur the economy out of recession. I would also expect to see Euroland and The Bank of England lower interest rates to try to preserve their economies. As a result, the level of interest rates around the world will begin to decline. As interest rates decline investments that pay an above market return should out perform other investments.

I want to make it very clear that while we have had a very difficult and scary year because of all the problems in the financial services industry, I expect that the problems in the rest of the world are very far behind the United States in recognizing and dealing with their problems. If, in fact, the rest of the world has yet to deal with their problems as we have in the United States the demand for dollar denominated assets will drive significant demand for US investments including fixed income investment.

Do not look for the US markets to recover quickly. I believe it will take time to rebuild the confidence in the markets. The beauty of what we own is that we are being paid while we are waiting for the assets to recover.

Dan Perkins