Asset Planning, Inc Blog

Yesterday, the Federal Reserve announced its plan to buy up to $300 billion of long term government bonds and $750 billion in additional mortgage-backed securities plus they are keeping the federal funds rate between 0% and .25%.  This is likely to produce a drop in mortgage rates.  The rates today are under 5% and might go to 4%.

What does this mean?  Basically, if you have a good job, solid credit and you have 20% equity in your home you should consider refinancing.  You need to consider how much it would cost to refinance – points paid, appraisal fees, title insurance, etc. vs. how much you would save in the long run.  How much longer is the term on your current home? Does it make sense to start a new 30 year term loan?  Every situation is unique.  For example, it makes sense for me.  My current loan is only 3 years old and if I just refinance my current balance (and not take any cash out) I will lower my monthly payments by $1,000/month.  The extra cash flow will be great as my expenses will be increasing as my children get older and enter college in the next few years.  Every situation is unique and should be evaluated as such.

This also is a good time for 1^st time home buyers to take advantage of the low rates and the $8,000 tax credit.  The criteria for getting a loan is much harder because the banks learned their lesson and don’t want to be stuck with bad loans.  This is good because that should keep home prices from rising as dramatically as they did from 2004-2007.  Prices should rise gradually now.

This action by the Fed will also likely weaken the dollar and increase inflation in the future.  Commodity prices will likely rise as investors anticipate the rise in inflation.  Prices for gold and crude oil have all risen sharply since the Fed announcement.

In December, Secretary Paulson made the unilateral decision to guarantee $306 billion of CitiGroup's assets. The guarantee was in addition to the $25 billion Citi had already received in TARP funding. The $306 billion "guarantee" was not part of TARP and was extended without Congressional approval.

$306 billion is equal to what our government spent in 2007 for the departments of Agriculture, Education, Energy, Homeland Security, Housing and Urban Development, and Transportation combined. (The Economist)

Is it fair that Bank Of America made very bad business decisions to buy Merrill Lynch and Countrywide Financial and now the taxpayers are backing their losses? And, management keeps their jobs? Nancy Pelosi said it best when describing the bailout of GM and Ford that their failure and incompetence is being rewarded, instead of their success.

The number of financial institutions (and others) that are applying for TARP money is astounding. Billions of dollars are being handed out, without Congressional approval, and without a tracking mechanism to know what the banks are doing with the funds.

I guess this is how it worked at Goldman Sachs. Paulson's net worth is estimated to be near 800 million. Maybe he could make some loans with his own money.

How did Bernie Madoff mastermind a Ponzi scheme for so long and make fifty billion dollars disappear? How was he able to hide these losses from SEC regulators and his clients? How does a former NASDAQ chairman do this and hide it for so long from the regulators? How do people know if their investments are safe?

A custodian is the firm that actually holds your securities, cash, bonds, and mutual funds.  Mr Madoff's firm was his own custodian. To open an account with him, you made your check out to Bernard Madoff Investment Securities. He allegedly had four sets of books- actually, the man must be exhausted from the moving of money on paper that he did. He made fake statements and falsified the account values on the monthly statements that were sent to his clients. Since the custodian and the money manager were one and the same, the clients had no way of knowing if their account values were correct. There were no third parties involved to catch him. His auditor was not one of the big accounting firms. His niece is married to an SEC auditor. He ran a hedge fund and the government does not regulate hedge funds. There was a lot of movement to get hedge funds to register with the SEC a year ago and the hedge funds won. They stayed unregulated.

If Mr Madoff never deposited the client monies into an account that was insured by SIPC or FDIC, his clients do not have insurance to fall back on. That would only make matters worse.

We use an outside custodian such as TD Ameritrade and Schwab to hold our clients investments. Asset Planning does not take custody of assets- meaning, we cannot ever hold securities on our own. We do not invest, nor have we ever, invested in hedge funds.

When a situation does not have transparency, there is cause for concern. Mr Madoff ran his hedge fund on a separate floor in a locked room where only three people had access. This is where the algorithms were running the money in a black box. No one understood what they were investing in, yet continued to pour millions of dollars into his scheme. The investors were let down by Mr Madoff and by the SEC, who was supposed to protect them from fraud like this.

Sandy

Our government shut down October 1 with both sides vowing to not bend and give in. The last time we had an impasse was in 2008, during the passage of TARP, and the market reacted by falling 777 points. That was enough to get both sides negotiating a bit quicker. We also have the debt ceiling to deal with later this month. Failure to act would be very negative for the financial markets and the world economy. This is really the ordeal to watch- the debt-ceiling extension and our debt ceiling now stands at 16.7 trillion. If we reach an impasse, our debt will default. While the market has reacted in the past, I also believe it is becoming somewhat immune to the actions of our government.

How does this shutdown impact government services and benefits? People will still receive their mail from the U.S Postal Service, Social Security benefits and changes in address, food stamps, school meals, veteran compensation and burial benefits. National parks, museums, federal home loans, VA home loans, IRS suspension of all audit activities and passport operations are all affected by the shutdown and will be suspended until further appropriation of congressional funds. Unfortunately for our economy, it is projected that the shutdown will impact our economic growth by as much as 1.3 % in the 4rth quarter if it continues two weeks.

I hope you enjoy this article regarding the state of bonds  by James A Klotz, President of FMS Bonds, Inc.:

Have you heard the clucking?

It’s the sound of Chicken Little returning to the municipal bond market.

In 2008, he paid a visit during the mortgage crisis. At the time, bond insurers were downgraded when they strayed from their traditional market and ventured into exotic – and toxic – financial products, while major banks, brokerages and hedge funds, which traditionally provided support to the muni market, became net sellers to enhance their own liquidity during the tumult.

Munis themselves were fine, but the chickens clucked, bond prices slumped and too many average investors panicked and sold. Veteran bond investors, meantime, did what they always do: take advantage of the disruptions and feast on fatter yields.

Two years later, Chicken Little reappeared, this time in the guise of a banking analyst whose comments on state and local finances during a TV interview spooked investors and spurred a muni selloff. Nevermind that her warnings of Armageddon were wildly off the mark; many took heed and, as a result, blew a hole in their portfolios.

He’s back

Today, Chicken Little has returned, with the same, equity-oriented pundits warning of a calamitous interest-rate spike and urging investors to shed their bonds.

Which bonds are they referring to? We’re not sure, and due to their lack of expertise in bonds, they’re probably not either. We only hear about Treasury bonds, but we don’t know of a single individual investor who owns any.

And that’s the rub.

Successful tax-free bond investors don’t buy and sell based on prognostications. Their goal is to generate a steady and dependable stream of tax-free income. Because investors know they have a promise to be paid at a specific time – a maturity date – unrealized losses or gains are irrelevant. They know that over the life of their long-term bonds, they will sometimes be worth more than they paid for them and sometimes less. Neither scenario should initiate a sale.

In fact, a substantial number of municipal bond buyers welcome higher interest rates to boost their tax-free income, which is the reason they buy tax-free bonds in the first place.

A buying opportunity

Chicken Little’s most recent cry to indiscriminately sell an entire asset class is reckless and can once again be catastrophic for investors.

Unique opportunities abound as muni bond fund shareholders panic and rush to the exits. This forces fund managers to reluctantly toss good bonds overboard to meet redemptions.

With high-quality municipals now yielding 4.25% or more (a tax-equivalent yield of 6.54% for investors in the 35% federal tax bracket), successful long-term investors hear the shrieks for what they really are: a signal to buy.

For more information follow the link: http://www.fmsbonds.com/News/bond_article.asp?id=444

Neither a Democratic nor a Republican bill aimed at replacing the so called sequester was able to get enough support to win a test vote on Thursday. The budget cuts for fiscal year 2013 will not take effect all at once on Friday. Instead, they will go into effect gradually through the end of the fiscal year on Sept. 30. The sequester would cut about $1 trillion over nine years.

Beginning today:

-Across-the-board cuts under sequestration formally take effect today. The cuts amount to "only" 2.3% of total federal spending.

-Sequestratoin is likely to reduce real GDP growth in 2013 by 0.6%, with the effects concentrated in the second and third quarter.

-Having passed the March 1st deadline to avoid sequestration, the next date to watch will be March 27th when current spending authority expires.

-Social Security, Medicaid, veteran benefits are exempt from the sequester.

U.S markets on Thursday shrugged off the budget drama in Washington. Financial stocks held their ground Friday as investors, with plenty of time to adjust their portfolios, looked past looming federal spending cuts.

The debate about whether to raise the debt ceiling and under what conditions has been loud, harsh and somewhat misleading. The debt ceiling is currently set at $14.2 trillion. They don't admit it, but lawmakers basically agree to raise the debt ceiling every time they vote for a spending hike or tax cut. So when they argue over the debt ceiling they are arguing over whether to pay the bills that have already been incurred. The likelihood of a default is virtually 0%. This is because the government still takes in more tax revenue each month than is needed to pay interest on its debt and the same for Social Security payments.

A great deal of what is happening in the media is political posturing and emotional rhetoric and this creates uncertainty. And uncertainty creates nervousness among consumers. And nervous businesses do not expand or hire. Overall, Corporate earnings for the past 6 months have been positive and the stock market has reacted well to good earnings news, but any gains are tempered by uncertainty of the future. Even though the market has been volatile as of late, we expect positive growth to continue, once the political show comes to an end.

In wake of the horrible earthquake and tsunami that has overwhelmed Japan, investors might be fearful of a prolonged market downturn. We are still optimistic on the market for 2011. Prior to the Japanese crisis, the market was experiencing a correction which was quite normal, considering the rapid pace of the upswing. It is our belief that Japan's natural disaster exaggerated this correction and caused panic selling in the last couple days. We do not believe this crisis will result in a prolonged market downturn. History has shown us that the contrary, in fact, happens in these types of situations. Typically, a natural disaster results in large stimulus spending for reconstruction. As ill-fated as the circumstances are, the Japanese economy and its major trade partners, such as the US, China and South Korea, will likely see growth in wake of what has happened. We continue to hope for the best for the people of Japan as we monitor the situation.