Author Archives: efrancque2014

We Should Be Talking About Money With Our Partners — Here’s Where To Start (source: Yahoo finance)

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In the realm of romantic etiquette, financial soul-baring is hardly sexy first-date banter. In fact, spewing information about your mounting credit card debt or your penchant for purchasing $19 celery smoothies for breakfast can seem like a surefire way to dampen the mood, no matter your relationship status.

This is not unique to our romantic conquests: For the most part, we’re still reluctant to speak frankly about matters of money as a whole. But in truth, communicating about our finances feeds directly into the intimacy we want in our relationships — and it’s time we stopped dancing around the subject.

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Wall Street slips as big bank results disappoint (Reuters)

Screen Shot 2019-03-18 at 9.20.09 AM(Reuters) – Wall Street’s main indexes fell on Monday, following a rally in the previous session that put the S&P 500 within striking distance of its record high, as underwhelming results from Goldman Sachs and Citigroup pressured financial stocks.

The sector fell for the first time in four sessions, down 0.75%, dragged lower by a 3.2% tumble in Goldman Sachs Group Inc and a 0.7% dip in Citigroup Inc after the banks missed revenue estimates.

The S&P banking index fell 1.12%, also weighed down by a 1.6% drop in JPMorgan Chase. Bank of America dipped 1.4% ahead of results on Tuesday.

“With less-than-stellar Goldman results, despite the bottom-line beat, it’s not necessarily surprising to see financials pulling back a little bit,” said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles.

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Whether Intentional or Not, Fed’s Flattening of the Yield Curve is Bad News

MarketCommentary2016-croppedWe have been warning about the potential dangers of a flat yield curve ever since late 2016. That’s when the Federal Reserve first started raising short-term interest rates again after holding them to near-zero for seven years in conjunction with quantitative easing (QE). So, when the yield curve finally did completely flatten in March, we certainly weren’t surprised that it happened. However, we were surprised by how it happened—and are deeply concerned about what it could mean for investors still carrying too much stock market risk in their portfolios. 

First, a little review. There are only two ways the Fed could create a flat yield curve: by raising short-term interest rates too high or by manipulating long-term rates downward until they are even with, or lower than, short-term rates. Now, there would seem to be no logical reason for the Fed to intentionally create a flat yield curve; not only is it a well-known symptom of a coming recession, but it can also be the cause of a recession, which we will explain more later. 

So, throughout 2018, it was a relief that, each time the Fed announced it was planning another short-term rate hike, the bond market seemed to accommodate the move. Bond yields would increase slightly with each announcement, giving the Fed just enough room to implement its marginal increases without flattening the yield curve. That all changed in December when the bond market (which is often said to be smarter than the stock market when it comes to economic forecasting) seemed to say, “Enough is enough.” This time, long-term rates didn’t rise ahead of the Fed’s short-term hike, essentially forcing the Fed to put the brakes on its planned rate increases for 2019—which it did. 

Strange Move 

That’s what makes what happened on March 20th so strange. On that day, the Fed reiterated its commitment to keeping additional short-term rate hikes on hold.* This was good news since, with the current Fed funds rate at 2.5% and the yield on the 10-Year Treasury rate only at 2.54% on that day, the yield curve was already nearly flat. However, in that same announcement, the Fed also mentioned it was planning to discontinue its “unwinding” of quantitative easing this year. Although few market analysts seemed to take note, we were stunned by the announcement! 

Why? Because it was almost as if the Fed was saying: “Since we’re no longer able to raise short-term rates, we’re going to flatten the yield curve by driving down long-term rates!” Remember, the whole QE unwinding effort was meant to manipulate long-term rates upward by selling back all the trillions of dollars in bonds the Fed purchased during three rounds of QE. The strategy was to increase the supply of bonds, thereby decreasing the price and increasing long-term yields. By stopping this process, the Fed is saying it will cease increasing the supply of bonds, which means if demand remains the same, prices will rise, and yields will come down. 

Sure enough, soon after the announcement, the yield on the 10-Year Treasury rate dropped by 30 basis points. Long-term rates across Europe also fell, some into negative territory. Currently, the yield on the 10-Year Treasury is at 2.4%, while short-term rates are hovering around 2.4% and 2.5%.

So, why did the Fed make what seems like a blatant move to flatten the yield curve? Well, one can only speculate, of course, but the contentious relationship between Fed Chairman Jerome Powell and President Trump is certainly no secret. Trump has been openly critical of Powell and the Fed overall, blaming them for much of the historic stock market volatility that occurred last year. Could the creation of a flat yield curve be payback; a way to dramatically increase the risk of a recession and major stock market crash ahead of the 2020 elections? 

Well, we are not one for conspiracy theories, but even if we were, that explanation would sound far-fetched. We think it’s more likely that these incredibly smart people at the Fed have become so focused on reading data that they’ve lost sight of the Big Picture—which is not uncommon. 

In 1972, a famous accident occurred in the Florida Everglades. Eastern Airlines Flight 401 went down because its entire crew had become so focused on a burnt-out bulb on their landing gear indicator that they didn’t realize their autopilot had put the plane into a gradual descent. By the time they did notice, it was too late. Despite all their training and intelligence, they were too focused on reading one gauge to notice the bigger problem.

Symptom or Cause 

We think that may be a fitting analogy for what’s happening with the Fed. They’ve become so focused on data and details (and so comfortable with the idea that they can artificially manipulate anything) that they’ve lost sight of the bigger picture. They’re so caught up reading their charts, graphs, and dot-plots that they’ve forgotten to simply look out the window and, metaphorically speaking, fly the plane.

That concerns us because with the yield curve now flat, “the plane” may already be in a descent. Yes, there may be some aspects of the flat yield curve that actually create a temporary spike for the stock market, but long-term the situation is perilous. As we have explained many times, banks need a spread in interest rates in order to make money on loans. Without it, odds are they’ll have to tighten up their underwriting standards and lend less money. When that happens, a domino effect toward recession usually isn’t far behind. Fewer homes and cars are purchased, people start spending less, companies start laying off, and on it goes. That’s how this flat yield curve could quickly change from a symptom of a possible recession to a major cause.

Naturally, a recession would be the worst possible news for the stock market, and with the third major sustained drop of our current secular bear market cycle still to come, it could be very bad news for investors over 50 who haven’t yet reduced their stock market risk!

*“Fed Holds Line on Rates, Says No More Hikes Ahead This Year,” CNBC, March 20, 2019

Wall Street opens lower as global growth fears persist (Reuters)

Screen Shot 2019-03-25 at 9.15.47 AM(Reuters) – U.S. stocks opened lower on Monday, weighed by technology shares, as investors worried about global growth fears.

The Dow Jones Industrial Average fell 11.60 points, or 0.05 percent, at the open to 25,490.72.

The S&P 500 opened lower by 4.70 points, or 0.17 percent, at 2,796.01. The Nasdaq Composite dropped 23.68 points, or 0.31 percent, to 7,618.98 at the opening bell.

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S&P, Nasdaq open flat; Boeing drags on Dow (Reuters)

Screen Shot 2019-03-18 at 9.20.09 AM(Reuters) – U.S. stocks opened mixed on Monday, following the S&P 500 and Nasdaq’s strongest weekly gain in 2019, while the Dow was pressured by shares of the world’s largest planemaker Boeing Co.

The Dow Jones Industrial Average fell 46.99 points, or 0.18 percent, at the open to 25,801.88.

The S&P 500 opened higher by 0.13 points, or 0.00 percent, at 2,822.61. The Nasdaq Composite gained 7.85 points, or 0.10 percent, to 7,696.38 at the opening bell.

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How Investing for Income is a ‘Permission Slip’ to Enjoy Retirement

By Sam McElroy, PsyD, NSSA
and Tad Cook, NSSAMarketCommentary2016-cropped

There’s a question that sometimes comes up regarding our income-based approach to retirement planning that we’d like to address in a couple of different ways. The question is basically this: what if I don’t need more income? That’s simplifying it a bit, but there are instances in which we’ll help a couple assess their income needs, and it appears they’ll be able to meet those needs without changing their portfolio to focus more on protection and income.

We stress “appears” because obviously there are no guarantees when it comes to investing, and circumstances can change dramatically—especially in today’s unprecedented age of economic uncertainty. That, in fact, is the first point we make when addressing the original question: investing for income isn’t just about protection; it’s about overprotection. It’s about having an extra layer of security against the kinds of major market drops that have devastated investors twice so far this century, and against the risk of cannibalizing your portfolio when it comes time to take your required minimum distributions or pay for a major medical event. 

That extra layer of security exists with the investing for income model because it shifts the focus of your total investment returns from growth (which comes in the form of capital appreciation) to income (which comes in the form of interest and dividends). While capital appreciation depends on market growth (which sometimes turns to shrinkage), the income portion of your total return is, with the right strategies, achievable at the same competitive rates regardless of market conditions. 

In other words, overprotection is possible without sacrificing return. Investing for income is simply an alternative way to get a competitive return with less risk. Thus, our first response when faced with the question, “What if I don’t need more income?” is to ask a question of our own: “If you can achieve that same level of return with less risk, doesn’t it make sense to do so now that you’re retired or near retirement?” 

Some people see the practicality and common sense in that idea right away, and quickly take steps to lower their risk. Others may see the sense, but they don’t feel emotionally driven to act. Change of any kind is daunting and a little scary, and it’s rarely motivated by logic alone. Emotion is what really drives the decision-making process. So, with that in mind, here’s a little story we sometimes share with people who feel they “don’t need more income” that helps motivate them emotionally to make a change. 

‘Permission Slip’

We recently heard about a classic car auction where many iconic models from the 1970s were being sold for between $40,000 and $70,000. It occurred to us that these were the same cars many folks our age probably dreamed about owning when they were in high school. Then we asked ourselves: how many of these same folks would likely feel comfortable spending that much money on their dream car now, even if they had a sizable portfolio? The answer, we realized, was not many—and the reason was probably that most of them were invested in traditional financial strategies that didn’t allow them to see their retirement income as a renewable resource. 

Put yourself in the place of one of these individuals and think about it: if you had $500,000 in a mutual fund and it went up, you might feel happy; but would you be likely to sell shares to make an impulsive major purchase, like a restored ’72 Mustang convertible? Probably not, because you’d realize that right after you did, the market might go up, and that withdrawal might never be recovered—and, consequently, your spouse or partner might be a little upset with you! You’d realize, in other words, that your mutual fund is not a renewable resource. 

Now, by contrast, think about that same $500,000 invested in bonds and bond-like instruments, reliably generating $25,000 in income this year and every year for the life of the bond. Think about the fact that your $500,000 is guaranteed to be returned to you if you hold the bond to maturity and there is no default. Now think about this: in just two years, this investment could have generated enough income for you to buy your dream car in cash! In other words, it would be like having a permission slip from your partner or spouse to spend the money because you’d both know that, with this strategy, the income is a renewable resource, much like wind or solar power.

The point is, by making income a renewable resource, income-based strategies can give retirees permission to do what they want financially, not just what they think they need to do. For many people, that realization can be emotionally powerful. 

Clear Conscience

By the same token, investing for income offers people a way to better enjoy their income with a clear conscience and peace of mind. That’s based on the psychological reality that most people won’t change their goals or plans when faced with good financial news, but they will change them when faced with bad news. For example, a $500,000 mutual fund increasing by $250,000 probably wouldn’t change your life or motivate you to take a big trip; but that account dropping by the same amount might—indeed—prompt you to curb your spending or even cancel an expensive trip or major purchase. That’s true even if the trip was already set to be paid for with income generated through Social Security or a pension, and really had nothing to do with the savings account. It’s simply human nature: psychologically, you would still feel compelled to be cautious. Even if you did take the trip, you probably wouldn’t enjoy it as much because you’d simply “feel poorer” as a result of the reverse wealth effect.

So, if you have friends or loved ones who feel they “don’t need more income” but may still be carrying too much risk in their portfolio, we encourage you to share some of this information. Explain that investing for income is not just a way to ensure you’ll have the income you need to meet your retirement goals, it can also be a “permission slip” to enjoy that income with a clear conscience!

This Stock Market Rally Has Everything, Except Investors (NY Times)

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By Matt Phillips
New York Times – February 25, 2019

Armchair investors have been selling stock.

So have pension funds and mutual funds, as well as a whole other category of investors — nonprofit groups, endowments, private equity firms and personal trusts.

The stock market is off to its best start since 1987, but these investors are expected to dump hundreds of billions of dollars of shares this year.

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