Monday, February 24, 2014

Thoughts on Current Market Events: Emerging Markets & Stimulus Wind Down

As sexy as "stimulus" sounds, investors are starting to worry what impact the pulling back of quantitative easing (the Fed's way of stimulating the economy by keeping interest rates low) will have on the markets, both in the U.S. and abroad. Easing up on stimulus should be a good thing, a sign that the economy is doing better, that the unemployment rate is improving, that roses are starting to sprout, and the sun is beginning to shine. But, of course, for every action, there is an equal and opposite reaction (thanks, Mr. Newton), so fears abound.

Pulling back on quantitative easing will likely mean an increase in interest rates here in the U.S. Generally, when Treasury rates rise, other interest rates, including mortgage loans and credit cards, go up, too. Part of the fear here is that the U.S. economy is still fragile. For example, while the unemployment rate has fallen to 6.6%, millions of people have been unemployed for so long that they have stopped looking for work; they are not included in that 6.6%. All told, the labor participation rate is only 63%, according to the Washington Post, the lowest it's been in a generation. Home sales are volatile at best. Consumer spending has been on the rise, but is nowhere near what it was pre-recession. The American middle class is slowly dwindling, which is displayed most simply in the consumer sector, where high-end luxury brands such as Kate Spade and Michael Kors, and low-end retailers like Dollar Tree, are vastly outperforming middle-of-the-roads like Abercrombie & Fitch.   

If interest rates rise too quickly, it could send the U.S. economy into a downward spiral. Credit card interest rates are already high, so consumers could be crippled by higher rates. High gas prices will only compound this effect. High food and health care costs would only make things worse.

Globally, the effect of relieving QE was witnessed recently. When the Fed announced its confidence in the U.S., investors fled emerging markets and ran straight into the arms of U.S. Treasuries. The run-up in the U.S. stock market over the past few years has taken a toll on emerging markets. EM stocks lost 5% in 2013, according to MSCI. EM sovereign debt performed similarly poorly. Leaders abroad have expressed concern about what continued easing will do to their countries' currencies, exports, and inflation levels

I like to think of myself as a contrarian investor, as following the crowd rarely leads one to buy low and sell high. That said, I think it's a great time to invest in emerging markets equities while prices are low relative to U.S. stocks. Keep in mind that, as quantitative easing is unwound more and more, EM stocks will likely get more volatile. In the end, I think it will be worth the wait. I'm of the belief that developing countries will not be wiped off the map, that they will continue to grow as time passes. 

I've expressed in previous posts that I don't think the record U.S. stock market levels are sustainable, as they do not reflect the true underlying health (or lack thereof) of the economy. (In fact, the S&P 500 just reached a new high today of 1,853.38.) I expect that they will come down as QE ends. Over time, investments in emerging markets may set off U.S. and other developed markets' losses. 

Monday, October 14, 2013

Shutdown that Debt Ceiling!

Dear Readers,
It's been over a month since I wrote a post -- what a crazy month! I've had several job interviews, so I've been crazy busy preparing for those, and I'm making great strides on the creative writing project I'm working on. That being said, what a crazy time in the markets this past month! Actually, I should state that more accurately: what a crazy time in the government this past month!

The U.S. government officially shut down on Tuesday, October 1 since Congress and the White House couldn't come to an impasse on funding Obamacare (which has already been made a law and been defended by the Supreme Court). This means that a lot of services are not available, national parks are closed, and, most unfortunately, some people are not getting the public assistance they rely on.

The shutdown is a big deal, but the market didn't really react to it, implying that investors don't really think it's a big deal. Consensus seems to be that it's about the egos of the leaders of the Republican party, primarily. I agree with that on one hand; however, the country is not run by Republicans alone, so Democrats are not innocent in this debacle. But, politically, the fallout appears to have wounded the reputation Republicans much more -- it's approval rating is at just 28%, the lowest in the history of Gallup polling (which, to be honest, isn't all that long; they've only been polling this for 21 years). This could certainly favor Democrats in the next round of elections, but that's over a year away. It could have the most positive impact on the Democratic presidential candidate. Favorable buzz is already beginning to swarm around Hilary Rodham Clinton for her possible run in 2016.

But back to the markets. As I said, the markets didn't even flinch at the shutdown. BUT it freaked out at the possibility of the U.S. hitting the debt ceiling and defaulting on its obligations. Default means that interest rates will rise rapidly because, suddenly, the U.S. has become riskier and investors demand to be compensated for risk.

The rest of the world is on edge about how the U.S. will resolve this issue because U.S. Treasury rates effect so many other rates around the world, and many holders of Treasuries live outside of the U.S. Actually, the Chinese government is the largest U.S. creditor, holding $1.3 trillion of Treasuries. As a result, officials in Beijing have stressed, like a mother of arguing siblings, that the U.S. had better figure itself out sooner rather than later.

Congress and the White House have only 3 days, until October 17, to come to a consensus. Needless to say, political agendas should not put the world markets in jeopardy. Now, the world waits to see who will be the bigger person in government.

Tuesday, September 3, 2013

Read My Lips: My favorite books on investing

As any lover knows, there are a ton of books out there covering every subject known to man. Same goes for investing books. I mean, I am amazed at the number of books on investing exist, not even counting the ones that speak about personal finance more generally.
Despite the number of pickings, you definitely shouldn’t cast them all aside – investing greats learned everything they know from the best books written on the topic. So which ones are worthwhile?
The most famous, and arguably the best, book ever written on investing is The Intelligent Investor by Benjamin Graham. Graham was Warren Buffett’s (arguably the greatest investor that ever lived) teacher at Columbia University and investing guru. Graham strongly believed in buying stocks that are undervalued, or selling for less than their assets are worth. The Intelligent Investor breaks down this philosophy in excruciating detail. It’s actually the layman’s version of Graham’s investing textbook, Security Analysis. That said, I’ll admit that it is a bit dry; in fact, one of my best professors in college gave me the book during my senior year (2006) and I’m only just now (2013) getting past chapter 1. Yes, it is dense and academic, but if you’re super serious about investing, it’s a must-read.
The next most famous, in my opinion, is A Random Walk Down Wall Street by Burton Malkiel, a gem that was first published in the 1970s. I’d recommend this to ordinary investors because it covers an exhaustive range of information, but is so well-written and easy to digest. I gobbled it up like a novel. Malkiel purports that there is no point in trying to select individual stocks in order to “beat” the market because, ultimately, the market is going to outperform any manager. That being said, he advises investors to stick to index-based mutual funds. I found his argument very convincing and changed the way I thought about my (well, my husband’s, for right now) 401K allocation.

One that I encountered recently and found very helpful was the Motley Fool’s Million Dollar Portfolio by David and Tom Gardner. The Motley Fool is an excellent website, exploding with investing information, and is very well respected in the industry. Tom and David, the brothers who founded the site, explain portfolio building and management in clear, entertaining terms in MDP. It’s definitely not as long as the Intelligent Investor or A Random Walk, so if you want the juicy bits in a short amount of time, go for it! The tone is friendly and approachable, but it doesn’t just stick to giving basic information. The best part is the corresponding website, which keeps the book current -- definitely a plus among books that recommend specific stocks in this crazy, volatile world. (Unfortunately, the website is not accepting new members, but will soon, hopefully.)
Last, for the risk-averse among us, I’d recommend Zvi Bodie’s Worry-Free Investing. The book is smaller than it looks since the print is humongous and it has lots of graphics to make complex points perfectly clear. It lays out the simplest investment portfolio recommendations I’ve ever encountered in a book, but still covers next-step-up topics like derivatives and Treasury Inflation-Protected Securities. Great for investors who are really only interested in saving for retirement.

Since sometimes you’ll probably want to invest in a single stock, it’s good to know how to read financial statements. While my blogposts (here, here, and here) gave some information, you should become more familiar. For a brief, but in-depth overview of accounting concepts, try Financial Intelligence by Karen Berman. It says it’s for managers who do not work in financial services, but it is simple enough for someone with no business experience to understand.
As you all know, we recently weathered the worst financial crisis since the Great Depression. While there’s plenty of theories out there about who to blame for it, there are some clear sequences of events that led up to it. A great recounting and explanation can be found in Roger Lowenstein’s The End of Wall Street. Lowenstein’s writing style is unintimidating, but can be a little Wall Street-bashing, if you don’t mind that. If you do, I think you’d love Michael Lewis’s Liar’s Poker, the tell-all that reads like a novel and is supposed to be a cautionary tale, but only excites undergrads around the world about joining the ranks of the Street.

Well, those are my picks. What are some investing reads you all have found helpful or even entertaining?

Sunday, August 18, 2013

My Passion, My Life

I recently signed up to volunteer with an organization called Operation HOPE, which teaches kids and young adults across the country financial literacy. It's a great organization, and I can't wait to volunteer!

When the volunteers and I introduced ourselves on our conference call, we were asked to tell what made us interested in volunteering to teach financial literacy. Answers ranged from wanting to meet more people with similar interests to paying forward what was learned from mistakes. While I found myself in both camps, the second resonated with me so strongly, it made me physically tremble.

When I think about why I've so passionately pursued a job in financial services, I remember why I started this blog: I've made financial mistakes in my past, many of which I learned from my family's behavior, and now that I've learned from them, I want to be a positive role model to my friends, family, and the next generation.

I realized that the first step to financial independence isn't getting out of student loan debt. That's definitely one of the first steps, and HUGE, so I'm not counting it out, but there is something bigger that comes before it: dignity. I found it wonderful that Operation HOPE begins by teaching students about dignity, or "the quality or state of being worthy, honored, or esteemed."

If we have never experienced it -- or really seen it -- do we really feel worthy of financial independence?

That feeling of worth is what drives my desire to succeed, which fuels my desire to learn constantly more about investing, which will help me achieve financial independence.

Over the years, as I've learned more about investing, I've seen more of the ways it enhances wealth in all aspects of society, not just for people. Take your favorite museum, for example. Let's say the Museum of Modern Art. It has an endowment, or a massive investment account that helps them fund the operation.

The endowment is run by professional investors whose primary goal is sustaining the museum's wealth, so it can grow its collection and reach more people. Think about the kids who go to MoMA, whose minds are opened to the world's infinite possibilities, maybe even what they can be when they grow up. A trip to MoMA might a temporary moment of escape for a kid from a not-so-great life situation. To think, the endowment managers get to invest and change lives by supporting the arts for a living -- I can't think of a better career!

To me, investing provides not only a door to financial independence, but to a satisfying career. I want to continue creating and maintaining sustainable wealth for institutional and high net worth investors who are changing thousands of lives. Through this blog, I hope to make my own little mark in the lives of my friends and family. :)


In my next post, I'll resume the education: With the bazillions of investing books out there, which ones are actually worth reading?

Sunday, July 28, 2013

'Tis the Season

As investors grow more familiar with the companies in their portfolios, there's a few times a year that build near Christmas-like anticipation: earnings season.

Companies typically report their earnings quarterly. Since they have to get their financial statements audited, checked, and re-checked, there's a slight lag between the end of the quarter (generally the last day of the months of March, June, September, and December) and when earnings are actually reported, so they typically are announced in April, July, October, and January. This is not to say that all companies report during these periods; companies can make up their own fiscal quarters and years if they wish.

Public company earnings are reported, well, publicly. The company CEO or other top management will hold a conference call with investment bankers and institutional investors, and tell them everything the company sold and earned during the quarter. Bankers and investors can ask questions on the call, which can get intense if the company delivers bad news. Retail investors like yourselves can listen to these calls as well, as they might linked to the company's stock listing on Google Finance.

Traditionally, Alcoa, the aluminum producer, is the first company to report, kicking off earnings season for public companies. Investment analysts cling to the company's every word, as they believe that a pattern in Alcoa's reporting may be repeated by other companies, even if they're in a different industry. For example, if Alcoa's earnings go down, and the decline is related to a slowing in construction of homes, analysts can extrapolate that other parts of the economy might slow down, too, from related industries like home improvement retailers (such as Home Depot) or seemingly unrelated ones like PepsiCo (can't forget what sodas come in!).

To that end, earnings season also gives investors an idea of the condition of the overall economy. If companies' earnings are falling across the board, it is likely a sign that consumers are not spending, probably because they can't afford to. If earnings are growing, then the economy is likely on a good curve, going up.

Investors also use a company's earnings announcements to try to predict what's to come in the company's future. For example, Apple's third quarter earnings were announced last week, on July 23. (Click here if you don't have Wall Street Journal access.) The company announced that sales of the iPhone had grown 20% over the past year, but iPad sales dropped 14%. Revenue was basically flat and profits declined 22%. From this information, investors might gather that Apple -- historically an extremely innovative company -- may be losing its edge, especially to competitors like Samsung. Investors show displeasure with earnings results by selling the company's stock, but they didn't sell off Apple very much, showing that they still believe the company can recover.

One thing to note during earnings reports is source, and quality, of earnings. The best reports come from increases in revenues, which lead to increases in net income (profit, or earnings). What we're seeing now overall is companies whose revenues are staying the same, but profits are increasing. This is still good, but could be better. The increase in profits here is coming from decreases in expenses; companies may be cutting back on spending on supplies or even salaries (layoffs!) to save money. This will result in an increase in earnings, but investors want to see growth, not just cost cutting.

While it's not good to obsess or make snap judgments based on one earning's report, I believe that retail investors should pay attention to these announcements and listen to the calls, if possible. If anything, they're a great way to learn more about the company, the closest to an insider's view many of us will ever get. But remember to keep the big picture in the mind: what's going on with the company's competitors? What's going on with the overall economy? In times like these, those questions -- especially the latter -- matter more than anything.

Saturday, July 13, 2013

"Invest in us...Because you're worth it": Alternative Investments

Given the Security and Exchange Commission’s ruling this week that allows hedge funds and the like to advertise publicly, I can’t think of a better time to shine some light on what are known as alternative investments.

Alternative investments are called that because, well, they are alternatives to investing in regular stocks and bonds. Some of the most popular alternative investments include hedge funds, private equity funds, and venture capital funds.

Hedge funds are basically mutual funds for the ridiculously wealthy. A hedge fund pools money from different people or institutions, and invests in stocks on their behalf, but the fund doesn’t typically invest the way a mutual fund would. A hedge fund will invest in derivatives or sell stocks short, for example.

Private equity funds are similar to hedge funds in that they pool money from wealthy people and institutions, but these funds don’t buy or sell stocks that trade on the public markets. They buy whole businesses, sometimes by buying that company’s stock (which is known as “going private”) or buying it from its previous owners. Private equity funds generally invest in businesses with the intention of making them more efficient; after several years, the fund usually sells the company again, hopefully for a significant profit.

Private equity was talked about which a lot during the 2012 U.S. presidential election, as one of the candidates used to work for a large PE firm. Commercials featuring disgruntled employees he had “fired” from the companies riddled the airwaves. My personal opinion is that the attacks on the PE industry were unfounded and the candidate’s work was taken out of context. Rest assured that PE is not evil; it is very complex, but it is not bad.

Finally, there’s venture capital. If you watch the ABC show Shark Tank, you’re already familiar with the concept. Venture capital also pools money from wealthy investors, but these funds invest in companies that are babies, also known as start-ups. VC, as it’s known, is widely considered the riskiest of alternatives because the investments are in companies that are so unsure; many have not even made a profit yet. But the upside is that you can help an entrepreneur fulfill a lifelong dream that may be the next Google or Facebook.

All of these investments could potentially make you A LOT of money. But you know the drill: with high reward comes high risk. These investments are certainly more risky than buying Treasuries, and are generally more risky than investing in a stock index fund. BUT, there are a few other stipulations that make these investments even more out of reach:

  • The minimum investment for these funds is typically $250,000 to $1 million, sometimes more.
  • The fund managers generally get a 20% cut of the profit AND you have to pay about 2% per year to help them run the fund.
  • Only “accredited” investors can play in the sandbox anyway.

That being said, if you start to see ads for alternative investments, most of us can only do just that: watch. But for those who could afford to play, be cautious, as with any investment, and know what you’re getting yourself into.

Friday, July 5, 2013

Mutual Fun(d) Decisions: Part 3, IRA What?

Happy [belated] 4th of July, Readers!

In honor of Independence Day, today, we’ll take a reader question, one that I’m sure more than one person out there has:

Dear Stock Market Chic,
Thank you so much for the great insights! My investing life will never be the same! Anyway, I know you’ve talked in previous posts about 401Ks, but I’ve also heard of IRAs and Roth IRAs. What’s the difference?

IRA, what?

Dear IRA,
Thanks for your question! With so many different investment account acronyms out there, it can be confusing to get them all sorted, so it’s a great question.

A 401K is a retirement savings account sponsored by your employer. Money may be taken from your paycheck pre-tax to help fund it, and the percentage you want to contribute is typically up to you. Some employers require a certain amount; others don’t. Either way, you should save as much as you can. Generally, your employer will match your savings with a certain percentage contribution, too, but those funds may be off limits until the “vesting period” is over; that is, you might have to stay with your employer for a certain amount of time in order to actually get their end of the contribution.
There are limits to how much you can contribute in a year, though. The cut-off varies year to year, but is normally somewhere between $15,000 and$17,000, which is a lot to set aside anyway. You decide how to invest your 401K assets, and none of it is taxed until you take it out of the account. BUT there is a 10% penalty tax if you take the money out of the account before you’re 59 ½ years old, on top of the income tax you’d get socked with (there are some legitimate reasons to not get penalized, though, but they are few and far between). So, to that end, leave your 401K there until you’re ready to retire, or roll it over into an IRA.

For more info on 401Ks, click here.

An IRA, or individual retirement account, is another type of retirement savings account, but is not associated with an employer. You can open an IRA at your local bank or credit union. This account is commonly known as a “traditional” IRA, as opposed to a Roth, which we’ll discuss in the next section. The biggest thing to know about traditional IRAs is that they are tax deferred, so you don’t pay any tax on contributions now, but you will when you withdrawal the funds during retirement.

Let’s say you have a 401K at your current job, but you plan to change jobs soon. You can either keep the 401K where it is or you can roll it over into an IRA. The latter option allows you to keep contributing to it, tax-deferred. The more you can shove into a traditional IRA or 401K now, the lower your taxable income will be, but contribution limits are considerably lower for IRAs, so don’t think you’re getting over on the IRS. In 2013, it’s $5,500 ($6,500 if you’re over 50).

For more info on traditional IRAs, click here.

A Roth IRA is almost the exact same thing as a traditional IRA, except that you contribute to it with after-tax income. Since you’re paying The Man now, you don’t have to pay him in the future! You might still be subject to a penalty when you withdrawal the funds, though, depending on your reason for taking the money out.

That said, there are strict income limits on Roth contributions, but most people qualify easily. Maximum contribution also has a bit of a low ceiling, at $5,000, but you can contribute to a Roth even after you’re retired.

For more info on Roths, click here.

I hope that clears things up a bit! I’m happy to take more questions!

Wishing you rich returns,