Archives for 2012

January 2012 - Page 183 of 185 - Money Morning - Only the News You Can Profit From

These Four Investing Lessons Mean Everything Today

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Talk about information overload…

There's so much news and data, so many opinions about events and data points, so many financial publications, so many shows, so many stocks, mutual funds, exchange-traded funds (ETFs), futures, options, derivatives, so many opposing points of views about everything, it's enough to make your head explode and your investing comfort level implode.

Most people tend towards like-minded analysts and economic analysis that confirms what they're seeing and thinking. There's a kind of comfort zone there, where "We're in this together and if we're wrong, well, I wasn't alone; but if we're right, boy am I smart."

Then there are the "skittish" investors who think they know what they're doing – that is, until they hear a different opinion from someone, anyone, they think has a leg up on them. And what do they do then? They usually ask, "Really?" Meaning, "Do you know something I don't know?" Chances are, at that point, they are going to panic.

And, of course, there are those investors who know they are right, and stick by their convictions and positions all the way to, well, you know where.

Maybe you've been there.

I was there myself when I started trading professionally on the floor of the Chicago Board of Options Exchange (CBOE) in 1982.

But I quickly distanced myself from all the noise that distracted me from being a successful trader.

There is no magic bullet to being a successful investor; that's the bad news. The good news is that it's a lot simpler that everyone makes it out to be.

Here are the four most important trading lessons I have learned:

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An Options Strategy That Will Save You Some Money

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Whether you credit a Santa Claus rally, an early January Effect, or some other driving market force, there's no disputing the strong finish posted by stocks in 2011 – or the healthy 2012 opening advance added in the first week of January.

To be specific, stocks – as measured by the Standard & Poor's 500 Index – rose from 1,204.00 at the close on Monday, Dec. 19, to 1,257.60 on Friday, Dec. 30, then jumped to 1,280.15 at midday yesterday (Monday), a gain of 6.32% in just three weeks. The Dow Jones Industrial Average did almost as well, climbing from 11,751.96 on Dec. 19 to 12,398.29 in Monday trading, a 21-day gain of 5.50%.

While those short-term moves are certainly impressive, they're hardly unique in today's volatile market environment. Three similar advances have occurred in the past five months alone – in late August, early October and late November – but each was followed by a sharp short-term pullback that wiped out much of the value gained in the rallies.

And, while few things in the market are certain, there's a strong probability this current market advance will also be followed by a sizeable retracement in the very near future.

So, how do you protect your most recent gains?

One answer is to turn to the options market.

A Defensive Options Play

As veteran Money Morning readers know, two of the most effective and often-used strategies involving options are writing covered calls to bring in added income and buying put options as "insurance" against possible price pullbacks.

As such, investors would typically look to the latter strategy – buying puts – for protection in the present market situation. However, there are times when unusual conditions can force investors to take an alternative approach to option strategies – and that has certainly been the case recently, thanks to the market's extreme short-term volatility.

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How the U.S. National Debt Could Drain Your Savings

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Now that Congress has allowed the U.S. national debt to grow bigger than the American economy, it won't be long until the American public suffers the consequences by losing most of its savings to inflation. Figures for last year show the national debt officially exceeded 100% of the nation's gross domestic product (GDP). According to […]

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Can "Santorumnomics" Clinch Another Second Place Finish in the
New Hampshire Primary?

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The battle for second place is heating up ahead of the New Hampshire primary tomorrow (Tuesday), testing whether Rick Santorum and his "Santorumnomics" ideas supporting tax cuts and credits can win over voters.

The former Pennsylvania senator snagged second place in the Iowa caucuses with 24.5% of the vote. Mitt Romney is expected to again capture first after winning Iowa by a narrow 0.1% margin.

Another second-place finish for Santorum in the New Hampshire primary is far from a sure thing, with various polls showing fellow presidential hopefuls Ron Paul, Newt Gingrich and Jon Huntsman Jr. gaining support for the runner-up spot.

Santorum's better-than-expected performance in Iowa's election kickoff last week has led many voters to become more familiar with his economic policy – "Santorumnomics," as Bloomberg's editors referred to it – ahead of the New Hampshire primary. Instead of heading straight to South Carolina, where there are more of Santorum's target demographic of social and religious conservatives, since Iowa Santorum has been campaigning hard in New Hampshire.

Tomorrow will determine if those efforts worked, or if Santorum's Iowa finish was just a lucky start.

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Wealthy Congressmen Don't Feel Your Pain

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When you're as wealthy and comfortable as members of Congress are, it's tough to identify with people who are barely making ends meet.

The median net worth of Congress soared 15% from 2004 to 2010, with the average Congressman worth $913,000. Meanwhile, the median net worth of all Americans fell 8% over the same period to $100,000.

Nearly half of the members are millionaires.

Even America's richest 10% haven't fared as well as the typical member of Congress – their net worth in that time span has remained about even.

"There's always a concern that they can't truly understand or relate to the hardships that their constituents feel – that rich people just don't get it," Sheila Krumholz, executive director of the Center for Responsive Politics, told The New York Times.

In fact, the trend of Congress members growing disproportionately wealthy stretches more than two decades.

According to a Washington Post study of Congressional financial disclosures, the median net worth of a member of the House – excluding home equity – more than doubled between 1984 and 2009, from $280,000 to $725,000. Meanwhile, the comparable wealth of the average American fell from $20,600 to $20,500.

The Post excluded home equity because it is one of several items not reported, or underreported, in congressional disclosure forms.

For example, members need only disclose a maximum of $1 million of assets belonging to a spouse, regardless of how much that spouse may be worth.

Take John Kerry. His wife, Teresa Heinz, inherited the vast Heinz family fortune estimated at about $500 million. That figure never appears higher than $1 million on his disclosure form.

And members don't have to disclose at all the value of their government retirement accounts and any personal property not considered an investment, such as automobiles and artwork.

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Paul Krugman is Dead Wrong: Debt Matters

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Paul Krugman, the Princeton University economics professor, Nobel Prize winner, and regular New York Times op-ed contributor says, "Debt matters, but not that much."

Not only is he off the reservation on this one, but he's completely fallen off his high horse.

In the real world, debt actually matters a lot.

In a Houston Chronicle opinion piece last week, Krugman, riding his horse – whose name might as well be Liberal Conscience – trampled conservatives under the guise of an economics lesson that derided "deficit-worriers" for wrongly seeing "America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments."

According to Krugman, that's a bad analogy and "the way our politicians think about debt is all wrong, and exaggerates the problem's size."

Decide for yourself. Either debt matters a lot, or not that much…

The World According to Paul Krugman

Professor Krugman calls all the conversation in Washington about debt and deficits a "misplaced focus" and says all of the economic experts "on whom much of Congress relies have been repeatedly wrong about the short-run effects of budget deficits."

He derides the fears that deficits will cause interest rates to soar by pointing out that they haven't moved.

What he doesn't say is that they haven't moved because they're not free to move.

The fact is that the U.S. Federal Reserve has corralled the free market in interest rates by knocking short-term rates to almost zero through successive open market operations and extraordinary quantitative easing measures.

Mr. Krugman mocks those waiting for rates to rise and notes that while they wait "rates have dropped to historical lows."

Maybe what he doesn't realize is that the Fed's actions themselves have been nothing short of historical.

The crux of Mr. Krugman's supposition that debt doesn't matter much is based on his bashing of the popular analogy comparing America's debt problems to those of a mortgaged homeowner.

All of which Krugman claims is "a really bad analogy in at least two ways."

He says, "First, families have to pay back their debt. Governments don't – all they need to do is ensure that debt grows more slowly than their tax base."

"Second," he says, "an over-borrowed family owes the money to someone else; U.S. debt is, to a large extent, money we owe ourselves."

He goes on to say that the debt from World War II was never repaid and didn't make postwar America poorer.

In fact, the Professor points out, "the debt didn't prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation's history."

Krugman is Flat Out Wrong

First off, the homeowner analogy is excellent–not irrelevant.

Mr. Krugman is wrong when he says that homeowners have to pay back their debt. The truth is they don't have to.

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All I Need to Know About Johnson & Johnson (NYSE: JNJ) I Learned 30 Years Ago

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All I need to know about Johnson & Johnson (NYSE: JNJ), I learned at my first job at a broker dealer.

To this day, the firm I worked at is one of the largest assets under management (AUM) shops in the world. And while there I had a mentor, who I will call "Joe" to protect his anonymity

Joe was something of a stereotype. He was freaky with math, loved chess, never married, and wore a really bad toupee.

He was also the happiest person in the building.

You see, Joe was worth more than pretty much everyone else who worked on our floor – all upper-management included. He never feared the stock market and would whistle while others cried over their 401k performances.

Joe's secret to success was that he owned a position in Johnson & Johnson. He had worked for the company in the past, and he'd built up a nice-sized block of stock while he was there. Better still, he added to this single position with every dividend.

In a business that preaches diversification, Joe did the exact opposite in his personal life – and it worked for him. I would never suggest an investor fixate on a single investment the way Joe did, but in his context it was amazingly rewarding.

Joe called Johnson & Johnson a once-in-a-lifetime investment – and in a way it still is.

Johnson & Johnson has split at least three times in the last twenty years, and has grown its dividend during that time. It is currently yielding about 3.5%, which is head-and-shoulders above what U.S. Treasuries and bank accounts are paying.

And while the stock has not gone up much in the last decade, the dividends have been pouring in, buying new shares, and in the process compounding the real rate of return on invested capital.

So it's time to buy Johnson & Johnson (NYSE: JNJ) (**).

We may never be like my friend Joe, with a zero average cost basis on a growing pile of shares, but we can still enjoy some of the slow and steadily growing dividend from this AAA-rated company.

Here's how.

125 Years of Excellence

Johnson & Johnson's positive attributes include [To continue reading, please click here…]

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The Truth Behind the U.S. Labor Department Employment Report

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The U.S. Labor Department employment report released today (Friday) showed a better-than-expected payroll jump to 200,000, and the unemployment rate dropped to 8.5%. However, the numbers aren't nearly as promising as they seem. The payroll increase was double the revised 100,000 rise in November, and about 30% higher than the projected 155,000 increase. Private companies […]

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Let's Play Insights &
Indictments Jeopardy!

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Today I want to play a special game I call Insights & Indictments Jeopardy!

It's based on the classic T.V. game show where contestants vie to pose the correct "question" to the answers that are revealed in an array of categories.

For example, let's say the category is "Federal Agencies."

The first "answer" happens to be: "This new organization holds primary responsibility for regulating consumer protection in the United States."

If you ring your buzzer first and shout out the question, "What is the Consumer Financial Protection Bureau?" you would be right.

Got it?

Okay, let's play Jeopardy!

Today our category is actually going to be the Consumer Financial Protection Bureau (CFPB); see how many you can get right…

  1. The CFPB was founded as a result of this July 2010 Wall Street reform and consumer protection act, which was meant to save America from being used and abused by Wall Street crooks and bankers in the future.
  2. In a sign that the GOP mostly opposes new powers being granted to the CFPB, this is the number of Republican Senators who actually voted to enact the reform and consumer protection act.
  3. When the president nominates an appointee as director of the CFPB, the same act requires this kind of confirmation.
  4. This man's appointment yesterday as CFPB director is controversial because he is being seated without the above confirmation
  5. This CEO of the American Bankers Association said Obama's move to install the director without the required confirmation complicates efforts of banks, and puts the bureau's actions "in constitutional jeopardy."
  6. This Harvard law professor was the principal architect of the CFPB when she was an aide to President Obama and the Treasury Department.
  7. Interestingly, the director of the CFPB also gets a seat on the board of this powerful government-backed corporation.
  8. In the alarming situation I've just described, S.O.S. stands for this.

Got your answers? Let's see how you did…

Give yourself half credit if you got any part of the long explanation correct and 100% credit if you got most of it right. If you get most of these, but stumble on the last one, don't feel bad. (And you won't, when you find out what it is.) But if you did get the last one right, and even if you didn't get any of the other questions right, congratulations… you are the new champion.

Here are the correct "questions" (along with some explanations).

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Hidden Mortgage Tax Gives Congress Another Way to Pick Your Pocket

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Americans had better enjoy the extra $40 they'll continue to get in their biweekly paychecks for the next two months, because most of them will be paying for it many times over in the form of higher mortgage costs.

Lost in the contentious debate over the payroll tax cut extension – a 2% cut in U.S. workers' Social Security tax – was the devious way Congress devised to pay for it.

The law that Congress passed – and U.S. President Barack Obama signed – included a provision that will increase a guarantee fee that finance companies Fannie Mae and Freddie Mac charge to mortgage loan originators – a fee that will get passed on to borrowers as a slightly higher interest rate.

"We understand the desire by Congress to extend the payroll tax [cut] because so many Americans are hurting right now," David Stevens, president of the Mortgage Bankers Association, told the Los Angeles Times. "But the cost of that is going to be directly paid for by a whole other set of Americans who use Fannie Mae and Freddie Mac for their mortgages."

The 0.1% increase doesn't sound like much – it would add $11 a month to the payment on a $200,000 loan and $18 a month to a $300,000 loan. But it adds up over the life of a 30-year mortgage.

A $200,000 loan would end up costing $3,863 more, while a $300,000 loan would cost $6,246 more. That's quite a premium to pay for an average payroll tax cut benefit of less than $200, and most people will never even know they're paying it.

The hidden tax, which goes into effect April 12, will affect most people buying or refinancing a home, as Fannie Mae and Freddie Mac account for about 60% of the U.S. mortgage market.

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