Thursday, December 31, 2009

2010 Full of Wishes, Hopes and Fears

I hope that all of my clients and readers of this Blog have had a wonderful Holiday Season and that 2010 will be prosperous for all. As usual, those in the money management business take some time to look ahead and try to figure out what the coming year will hold. Those of you who are long time readers of this blog and my previous newsletter know that I’m not shy about making predictions.

Let’s start with the economy. In October the initial Gross Domestic Product (GDP) was reported at 3.5%. In November it was revised down to 2.5% and the final revision in December GDP was further revised downward to 2.2%. My guess is that if they made a January revision it would be further reduced. I have serious concerns that the economy in 2010 will disappoint and the GDP will be lucky to be in the 1.5 to 2% range. Look for increasing cries for another stimulus program to try to create jobs and push GDP. I think the American people are concerned about the exploding deficit and will be strongly opposed to any new spending programs.

Jobs will be the most important issue of the year and the lack of jobs have had ramifications. With functional unemployment at around 18% jobs will be the page one issue until the election. If the economy hasn’t turned up and we do not see significant improvement in unemployment numbers look for a significant voter backlash and a major power shift in not only in the Congress but look for the president to make a move to the middle. (like Bill Clinton moved to the middle when the American voters changed the balance of power)

I think the Democratic Congress and the President will try and front load as much of the legislative changes in policy as they can before the election takes center stage. The heath care bill may well be the first vote on the continuing power of the president and the current Democratic controlled Congress. I do not know for sure if the health care bill will pass. The difference between the House and Senate seems almost insurmountable but we will find out by mid January.

What is the out look for the markets and interest rates? While the S&P 500 is up about 24% on a year to date basis over the last two years the S&P 500 is off about 23%. I do not expect the stock market to produce another 20% plus year in 2010. A return that was flat to up just slightly would be a great year. There has been a great deal of hope in the returns for 2009 and I do not see them carrying over into 2010. I’m looking for a significant correction in the range of 10% to 15% sometime in the first quarter.

My greatest fear is for the near retired and those people already in retirement. The Census Bureau, which by the way will hire 1,000,000 people next year, currently estimates that there are 72 million baby boomers and 32 million people over the age of 65. The boomers have experienced the “Lost Decade” for stocks. The first decade of the 21st century saw the return on the S&P 500 have a negative total return of 23%. The retirement savings of this over 100 million people has been adversely impacted and jeopardized the retirement security of this large segment of America.

The historical decline of interest rates especially short-term savings rates is causing this group of Americans to start spending principal well a head of what would be normal in retirement. I expect this problem to become more acute in 2010 as many of the higher yielding CD’s will be replaced at interest rates one third of the older CD interest rate. As long as unemployment continues above 8% I can find no reason why the Federal Reserve will start raising short-term interest rates. If I’m right that short-term interest rates will stay close to zero well into 2011 then look for increasing examples of retirees being subject to fraud because they are desperately looking for higher income to survive.

The key for survival in 2010 will be income. I expect income producing investments to be in increasing demand throughout all of 2010. If you need income to pay your bills and the cash flow from your investment is meeting your needs then don’t worry about the changes in the price. For my clients who needed income over the last 16 months got their checks. Yes, their principal went down but it recovered. I do think they will see some volatility but I think their income is secure.

One final thought: Look at how much risk you have in your portfolio. See how much of your money is in income producing assets and what percentage of your assets you have in common stock. Take any opportunity in the beginning of 2010 to rebalance your assets towards income assets; you’ll have less downside.

Dan Perkins

Wednesday, December 9, 2009

Did you ever play Hide and Seek as a child?


“Hide and Seek” is a game we played when we were children. Someone was “it” and had to stay at the base and count to 100 while the rest were to try and find a place to hide and not get tagged out. After the seeker finished his count to 100 he started to look for the rest of the players and his job was to tag them before they could safely return to base without being tagged and then they were safe. Depending upon how you played the game the first or last person tagged was “it” for the next game.

So you are asking yourself, how is Dan going to spin this childhood game into something related to investing? For about the last 40 years you could play "Hide and Seek" with your money. If you didn’t like the way the stock and bond markets were acting you could safely Hide your money in a money market account. You could stay hidden as long as you wanted to earn a modest return while you were seeking new investment opportunities.

Many people in or near retirement have been using money market mutual funds and CD’s to not only Hide money from risk but also these accounts have provided supplemental income which has made a real difference in the quality of life for people. Today these money market accounts are providing close to zero return, some you can’t put money in and others you can’t get money out.

US Government Money Market Funds are yielding, in many cases, zero percent return. This past week the government had an auction for $28 billion in 30-Day T-Bills which are typically found in money market mutual funds. The demand or cover ratio was 5.33 times and the yield was zero. The government borrowed $28 billion and is paying no interest to borrow the money.

If you bought some of these T-bills how are you going to pay your bills with no income from your investment? The willingness of people to Hide money from risk in money market accounts or T-Bills at no return tells me they are unwilling to Seek out alternative investments. In a recent seminar I asked the question why keep money at zero return? The answer someone offered was, “zero is better than loosing money in your investments.” Clearly there are millions of Americans who have chosen to play "Hide and Seek" with their money, but they have chosen to only play half the game. These modern day players have hidden their money but are not seeking alternatives.

I asked a person recently what would have to happen to make them move their money from money market mutual funds yielding zero? The answer was, “When interest rates rise.” I asked him if the Fed doesn’t mover interest rates till 2012, how will you pay your bills? He said “I don’t know, I hope the Fed starts raising rates in January 2010.” If the Fed keeps interest rates low till 2012 then many retirees will have to start liquidating assets to pay bills.

There are alternatives that can provide safe and predictable income but in order to find them you have to be will to play the rest of the game and Seek them out. If your Seeking alternatives why not contact me for some of your alternatives.


Dan Perkins