December 15th, 2011
Knowing how others are reacting to the market is sometimes the most effective approach to personal investing. Right now oil traders/speculators have placed unhistorically large and polar opposite options and futures trades on oil reaching either $150/barrel or $50/barrel over the next year. They are placing these trades based on tail risk (a really BIG bad or good outcome that is unlikely) in the oil markets for 2012. It is not often that the market place has two completely different directional bets occurring simultaneously.
Traders believing the turmoil in the Middle East will heighten (oil embargo from Europe on Iranian oil, Israel bombs Iran etc.) are in the $150/barrel camp. On the opposite side of the spectrum are those in the $50/barrel camp; they are focusing on the collapse of Chinese growth (due to over indebted banks from real estate loans) and the collapse of the Euro and/or a major recession in Europe (caused by the austerity measures suggested by the Germans to get European countries back to fiscal prudence). The options market has seen more protection/speculation for an increase than a decrease in oil prices (meaning buying protection/speculating on the downside is cheaper than doing so on the upside). Since traders and/or speculators have placed such huge bets on these two potential oil price outcomes, any changes in oil prices will be magnified.
Bottom line: Investors should be prepared for major swings in oil prices, up and down, and have plans on how this will affect their portfolios.
Always Asking, Never Assuming™
Christopher Holtby
Tags: futures, gas, middle east, oil, options, recession
Posted in International, Investments | No Comments »
October 31st, 2011
There appears to be a perfect storm, of sorts, with those considering a college education: 1) college costs have risen dramatically; 2) job opportunities are declining ; and 3) student debt levels are at historical highs.
Data from the College Board suggests that $100 billion was taken out last year in student loans and that debt is to hit $1 trillion for the first time ever this year. According to Mark Kantrowitz, publisher of FinAid.org, 40 percent of college graduates can’t afford to make their student loan payments and are delinquent, deffering or in default. He says that the real issue for borrowers is the lack of jobs available after graduation, and those who have jobs are underemployed. Today students are borrowing twice the amount in student loans than they did just ten years ago with tuition costs rising faster than inflation. The College Board reports that the cost of in-state tuition at a four-year public university has jumped 8.3 percent in the past year. Universities have unfairly raised education prices greater than what students could earn after graduation. Many students leaving college today have degrees without a clear application to the workforce. In the current environment with lower GDP growth than in the past, students and/or parents should consider how much to spend on a college education and for what purpose. Some parents can afford $220,000 for a philosophy degree from Princeton (true story) but most cannot.
Obama’s loans initiative attempts to alleviate the student loan debt crisis by forgiving student debt after 20 years as compared with 25 years under current law. In addition, the cap on student loan payments will be lowered to 10% of disposable income, decreasing it from the current cap of 15% of disposable income. Critics say that this plan is simply a new version of the old plan and some accuse Obama of passing this bill in order to regain the dwindling support from young people, who were instrumental in his 2008 presidential election.
Before a parent or student decides on whether a college education is worth the expense and effort perhaps everyone should consider some version of this question: How does the college education machine work and how am I am going to profit and/or be happy from it after graduation? Egos should be set aside. Biases should be set aside. Just an analysis of the facts, the current/future economic environment, student’s goals and student’s/family budget constraints.
Bottom line: A college education can be worthwhile if the decisions are made looking forward while accepting responsibility for your actions.
Always Asking, Never Assuming™
Christopher Holtby
Posted in College Planning | No Comments »
September 23rd, 2011
The controversial Affordable Care Act proposes many changes to Medicare including the following to Medicare Advantage:
- Additional Provider Choices
- Providers must limit out-of- pocket costs.
According to the website www.healthcare.gov, Medicare pays insurance companies offering Medicare Advantage over $1k per person than is spent per person in the original Medicare, resulting in increased premiums for all Medicare beneficiaries, including the 77% of beneficiaries who are not currently enrolled in a Medicare Advantage Plan. The new law plans to level the playing field gradually by eliminating the discrepancy. People enrolled in Medicare Advantage plans are still supposed to receive all the guaranteed Medicare benefits, and the law is to provide bonus payments to Medicare Advantage plans that provide high quality care.
Some additional changes intended to positively impact Medicare include the following:
- Increased Medicare coverage for preventative treatments (to begin on or after September 23, 2010)
- Move to an electronic system for medical records (to begin October 1, 2012)
In addition, the Act intends to close the donut hole in Medicare Part D.
- An estimated four million seniors reached the gap in Medicare prescription drug coverage, also known as the “donut hole” in 2010. Each eligible senior received a one-time tax free $250 rebate check.
- The first checks were mailed in June, 2010, and continued monthly during 2010 as seniors hit the coverage gap.
- In 2011, seniors who reach the coverage gap will receive a 50% discount when purchasing Medicare Part D brand-name prescription drugs (last year Part D paid for the first $2,840 in costs and then picked back up after costs exceeded $6,440).
- Over the next ten years, seniors will receive additional savings on brand-name and generic drugs until the coverage gap is closed in 2020.
- In addition, there will be higher Part D premiums for individuals who have income above $85k ($170k for couples).
- Exemptions for higher premiums can be filed at a local SSA office for those who have received a lump sum from their retirement/401(k) disbursement.
Planners should also be aware of the following:
- Early Retirement Reinsurance Program- Under the new law, people who retire between ages 55 and 65 are to be able to continue to receive healthcare coverage from their last place of employment until they are eligible for Medicare due to the $5 billion program to provide financial help for employment-based plans to meet this need. This program is intended to extend until 2014, at which point the Exchanges are said to be in place to make more affordable coverage available to these retirees.
Proponents of the Act say it allows for more people to be able to have access to affordable health care coverage, and will prevent insurance companies from dropping people who get sick or denying people coverage with pre-existing conditions.
Critics of the Affordable Health Care Act say that the costs are too great for the American people as it not only is proposed to raise government spending by trillions of dollars, but also increase health insurance premiums for millions of Americans. In addition, the Act is said to be cutting more than half a trillion dollars from Medicare, which could, in fact, jeopardize care for seniors.
Bottom Line: The Act proposes many changes to healthcare affecting current and future retirees, some of which are already in the works, however, it is difficult to say how our healthcare system and Medicare will be impacted by the Act going forward, as the potential for new leadership to enter the White House nears.
Always Asking, Never Assuming™
Christopher Holtby
Posted in Wealth Management | No Comments »
June 23rd, 2011
In the dark days of the financial crisis the Federal Reserve was forced to create more money to aid the American financial system. This was accomplished by crediting money into its own account (yes-out of thin air). The Federal Reserve then purchased financial assets including government and corporate bonds from banks such as Wells Fargo, Frost, JP Morgan, Goldman Sachs, etc. As a result, those firms had additional money to lend, to loan, to trade and/or to keep in reserves. The first round of Quantitative Easing began on March 18, 2009. It was a resounding success (S&P500 increased 54% until the program ended). The second round of Quantitative Easing began on November 3, 2010. It has not been so successful (stock gains were less, spending by consumers slowed considerably, real personal disposable income has also declined).
The issue for the Fed is when the official short-term interest rates are close to zero, the only option to ignite growth is to borrow more money which, long-term, does not allow America the opportunity to emerge from its lingering debt situation. Without a third round of quantitative easing the US economy will likely have alternating economic periods of strength and weakness. Utilizing quantitative easing to jump-start the economy is comparable to having to use jumper cables to start your car. If the battery is bad, or the electronics in the car are faulty, draining the battery faster than normal, at some point the battery needs to be replaced or the faulty electronics repaired. Long term it does not make sense to be dependent upon quantitative easing to keep the economy going as it doesn’t make sense to need the assistance of jumper cables each time you start your car.
The markets, stock, bond, commodity, and currency, will experience more periods of volatility (think jumpiness) as the second round of quantitative easing concludes. Investors should carefully consider the quality of their assets, the risk/return trade-off of those assets and the timeline of their goals.
Bottom line: Every country that has experienced and successfully recovered from a financial credit crisis has done so by cutting expenses and raising revenue (e.g. Sweden, Canada, and Finland circa 1990). Another round of quantitative easing is not worth the price. It would be like giving an alcoholic smaller amounts of liquor to attempt to end their drinking problem.
Always Asking, Never Assuming™
Christopher Holtby
Tags: bonds, dallas, economics, fee-only, financial planning, fort worth, investment management, north texas, quantitative easing, sovereign debt, wealth management
Posted in Investments | No Comments »
June 17th, 2011
Wall Street does not like the term “junk bonds;” they prefer to refer to them as ”high yield bonds.” Junk bonds are debt securities rated below Investment Grade by the three major rating agencies (defined as a Nationally Recognized Statistical Rating Organization such as S&P). Over the last 20 months investors have been investing a significant amount of money into junk bonds in search of yield. With Treasury and corporate bonds experiencing abnormally low yields, investors are getting desperate and greedy for more income.
Below is a table from Oaktree Capital Management, L.P. on the history of junk bond yields and the differences over US Treasury bonds ( 100 basis points is 1%, so 1773 basis points is 17.73%). What is noteworthy is how investor yields are declining and the yield difference compared to US Treasury bonds is also shrinking. This means that junk bond investors are currently taking on more risk and receiving less return.
| |
Yield to Maturity |
Spread vs. Treasurys |
| “Normal” – Dec 31, 2003 |
8.2% |
443 b.p. |
| Bubble peak – June 30, 2007 |
7.6% |
242 |
| Panic trough – Dec 31, 2008 |
19.6% |
1773 |
| Recovered – March 31, 2010 |
9.0% |
666 |
| Shrinking again – April 30, 2011 |
7.5% |
492 |
Junk bonds swing from greatly overvalued to undervalued. The middle ground does not last a long time. From 2005 to 2007, investors in junk bonds focused on the risk of missing opportunities rather than analyzing the junk bond as offering a good balance of risk vs. reward. Then came the financial crisis. Today investors can see evidence of some of the excesses from the bubble years creeping back – payment-in-kind bonds, covenant-lite debt, rising leverage ratios of completed buy-out deals and more leveraged buy-out activity. Although the irrational exuberance exemplified in the financial markets between 2005 and 2007 is not representative of today, in a low interest rate environment investors should be careful not to make “handcuffed” investment decisions (people making decisions on the belief they have no choice.) Investors always have a choice. Additionally, many of the companies that were responsible for leveraged buy-out deals occurring in the 2005-2007 time frame are re-issuing their junk bonds, and these junk bonds are not necessarily being issued on “investor-friendly” terms. Consequently, those deals also find their way into junk bond funds.
Bottom line: Junk bonds are no-longer a “cheap” investment . Investors allocating money into junk bonds in today’s low interest rate environment should be cognisant of what is occurring with private equity restructurings and deals in the leveraged buy-out space.
Always Asking, Never Assuming™
Christopher Holtby
Tags: bonds, CDO, CDS, CLO, credit, dallas, Estate Planning, fee-only, financial advisor, financial planning, investment management, LBO, leverage, north texas, private equity, texas, wealth management
Posted in Investments, Retirement Planning, Wealth Management | No Comments »
June 9th, 2011
Investors basically have two choices when investing in commodities: 1) companies that mine, extract or farm commodities and/or 2) the price of the commodity itself in the futures markets. Both have advantages and disadvantages.
The futures markets allow investors or speculators to make or lose money based on the direction of a commodity. The term commodity in the futures markets can vary from US Treasury interest rates or currency rates to oil, corn, iron ore, etc. For purposes of this discussion, commodities will relate to non-financial commodities. Commodities trade on today’s price and prices on various dates in the future. Those prices in the future are sometimes lower or higher than today’s price. When it is higher, anybody invested in a passive commodity ETF can lose money even if today’s price is rising consistently. That is because the commodity ETF investments mature at $100 for example and the commodity has to invest into the future at a higher price of $103, let’s say, thus losing $3 from day one. This occurs even while today’s price is rising everyday. When the future prices are declining the ETF does not have this problem. However, don’t investors invest in commodity ETFs to make money when commodity prices are rising? There are active commodity ETFs which use blackbox strategies to solve this problem but investing with blackbox strategies creates a new set of problems. Hedge fund managers take advantage of the manadatory investments made by passive commodity ETFs each month, manipulating commodity prices to their benefit, which can be detrimental to the passive commodity ETF investor.
Companies who produce, farm, and extract commodities are generally publicly-traded companies where investors purchase their stock. Generally, if the current price of the commodity is increasing, the stock price will increase. However, there are other factors impacting the stock price such as the quality of earnings, the difference between the extraction/production price of the commodity versus the current price of the commodity, and the general interest in commodity companies. The risk for investors is that a 100% correlation does not exist between the increase in the value of the commodity and the increase in the price of the stock.
Since the late 1990′s large pension funds have been investing in passive commodity indices. This was due to a study by Goldman Sachs showing uncorrelated movements between commodity prices and stocks-the great diversifier( source: Index Investment and Financialization of Commodities; Ke Tang and Wei Xiong). Well, 20 years later everybody is doing this type of investing. The commodity futures markets are now being influenced by the “passive indexers.” Stock and commodity prices are now moving closer together. This is a bad diversifier.
Bottom line: Warren Buffet said investing in an investment that does not produce earnings or cashflow is speculative. Speculation is the hope somebody will pay more tomorrow for the same investment you purchased today without considering earnings or cash flow. Although commodities can provide value in a portfolio, as with any other type of investment, it is important to understand the level of risk involved.
Always Asking, Never Assuming™
Christopher Holtby
Posted in Hedge Funds, Investments, Retirement Planning, Risk Management, Wealth Management | No Comments »
June 2nd, 2011
Clients have asked me why they should pay an estate planning attorney $2,000 to $4,000 or some similar amount to get their estate plans in order when Legalzoom.com offers a basic Will for $69. What services is an estate planning attorney providing that Legalzoom.com cannot? How complicated is a Will?
Using words to express a thought or to follow instructions is an inexact science. How many people feel Help Manuals are easy to understand? An estate planning attorney has to combine all the goals, objectives and philosophies of a client with all relevant state and federal law, including all applicable state and federal tax law, to create one document. The drafting of the Will is the simple part. Understanding the law and it’s subtleties with respect to the wishes of the client can be quite complicated. However, the most difficult part is providing sound advice, which requires both knowledge and experience.
Legalzoom.com or other do-it-yourself websites require users answer a string of questions using a “decision tree” form of logic. These sites do not offer assistance on a question that would be considered legal in nature. Their documents assume a mother and father with illiquid assets, no special needs children, and harmonious heirs is the same as a mother and father with liquid assets (stocks and bonds), a special needs child and a highly combative family. These do-it-yourself website tools treat all families and situations alike.
Bottom line: Why would anyone be “penny wise and dollar foolish” on an estate planning document? Mistakes can cost hundreds of thousands of dollars or more if the documents are drafted poorly. An estate planning attorney has the ability to tailor estate planning documents to adhere to a client’s unique circumstances, whereas, do-it-yourself websites, such as Legalzoom.com, are unable to provide this level of customization or advice.
Always Asking, Never Assuming™
Christopher Holtby
Posted in Estate Planning, Investments, Legacy Planning, Retirement Planning, Taxes, Wealth Management | No Comments »
May 25th, 2011
Fifty, thirty, heck even fifteen years ago, investors invested in an economy, government and financial system which was relatively solvent and stable. There are very clear rules how you can make long-term decisions in that sort of system. Over the last ten years culminating with the credit/financial crisis of 2008/2009 the system changed – for the worse. The rules have changed.
Imagine you own a farm with lots of debt, tepid uncertain growth and desire for better times. What sacrifices would you make? How would you earn money from the farm’s assets? How would you allocate the farm’s assets to maximize growth with that debt overhang? That is the situation the US government and it’s citizens find themselves in today after a debt collapse.
There are mountains of professionals trying to figure the timing for the changes forthcoming in our new situation which has taken seventy years to create. A vast majority of these solutions involve math, highly complex math that depends on x leading to y causing z to happen. As with all mathematical strategies, like complex derivatives Wall Street creates, they work until they don’t.
Learning from past credit, currency and financial bubbles (e.g. Canada, Sweden and Finland in 1990′s) history provides guidance. Investors in those countries allocated their investments dollars to investments that provided transparent, measurable cash flow and earnings (e.g high quality stocks or bonds). They kept their investments simple and easy to understand. They focused on how those investments might not work and how that would affect their goals. They understood their investments existed in a different, de-leveraging environment compared with a leveraging system of the past. Today, investors are investing in a de-leveraging environment (people, companies, states, municipalitites are borrowing less).
Bottom line: There is nothing wrong with taking risk or investing in uncertain de-leveraging times, just make sure you are being correctly rewarded against your goals.
Always Asking, Never Assuming™
Christopher Holtby
Tags: bonds, commodities, dallas, deflation, devaluation, economics, fee-only, financial advisor, financial planning, fort worth, investment advisor, investment management, leverage, north texas, texas, wealth management
Posted in Investments | No Comments »
May 16th, 2011
Howard Hughes, worth billions at his death, did not have a properly executed Last Will and Testament. Though there were 30 purported Wills offered for probate, not one of these Wills was actually admitted to probate. As a result, state law determined how the wealth would be distributed, costing his estate hundreds of millions in state and federal estate taxes, which could have been avoided. Unfortunately, Howard Hughes’ beloved Howard Hughes Medical Institute was not a beneficiary of his estate, which could have allowed Hughe’s estate to pass estate tax free due to the unlimited charitable deduction that would have been available.
The late U.S. Supreme Court Chief Justice, Warren Burger, from the highest court in America, wrote his own Will in 176 words. As a result, his estate paid a few hundred thousand dollars in additional taxes and probate costs. Why? Chief Justice Burger was a brilliant attorney, but did not master estate planning 101.
Heath Ledger had a well drafted and properly executed Will. However, he forgot to update his Will after the birth of his daughter, Matilda. Fortunately, Heath’s parents have assured she will be taken care of and under the law she will become a pretermitted heir, which means that she will ultimately be a beneficiary of his estate. However, Heath wasn’t able to establish the terms surrounding Matilda’s receipt of the money. In addition, Matilda’s mother will most likely not be provided for since there are no legal provisions in place for unmarried partners.
Michael Jackson’s Will paid an unnecessary $100 mm in taxes due to poor structuring of his assets and drafting of his Will.
Bottom Line: A Will encapsulates your legacy. Cutting corners, not paying attention to the details, not reviewing it regularly and updating it when necessary, or doing it on the cheap may result in negative unintended consequences.
Always Asking, Never Assuming™
Christopher Holtby
Tags: dallas, Estate Planning, estate tax, fee-only, financial advisor, financial planning, fort worth, investment advisor, investment management, texas, wealth management
Posted in Estate Planning | No Comments »
January 26th, 2011
The municipal bond market has been in a state of turmoil since the fall fo 2008. It started with the short-term auction rate preferred muni’s, then companies insuring municipal bonds went into bankruptcy (late 2008 and early 2009) and finally the credit quality of municipalities themselves came into question (late 2009). Starting in late 2010, individual investors (the main buyers of municipal bonds) awoke to the realization that there is real credit risk to municipal bonds. Credit risk is rating the ability of the municipality to pay the interest and principal as promised.
Apart from Build American Bonds, a program offered thru the US Treasury Department which no longer exists, municipal bonds provide tax exempt income. There are exceptions relating to AMT bonds, private activity bonds and a few other types. Individuals buy muni bonds in 3 ways: 1) ETFs, 2) mutual funds (open and closed) and 3) individual bond purchases (mostly done thru professional money managers for the benefit of individuals). There has been a ton of research, publicly available starting in late 2010, about the credit risk in muni bonds. Subsequently, there has been billions of dollars withdrawn from muni bonds especially in the long and intermediate maturities space. Interestingly, ETFs and especially mutual funds, have been providing long lists of muni bonds they want to sell to meet the sell requests of individual investors. Around 30% of the muni bonds on those lists get sold (industry source). These lists generally show muni bonds that have the highest quality and liquidity. This means two things: 1) muni investors in high quality bonds have seen the larger declines compared to lower quality bonds; and 2) municipal bond mutual funds are now sitting with shorter maturity and lower quality bonds.
Bottom line: Investors are lumping good and bad municipal bonds together. They are demanding liquidity (via their sell orders) and the liquidity providers (those buying the muni bonds) are extracting a higher and higher price for that liquidity (via a lower price of the bond itself). History provides great examples of what happens when liquidity providers have the upper hand over liquidity demanders (think supply and demand).
Always Asking, Never Assuming™
Christopher Holtby
Tags: bonds, credit, dallas, debt, deflation, fee-only, financial advisor, financial planning, fixed income, fort worth, fx, inflation, liquidity, north texas, risk, texas, wealth management
Posted in Investments | No Comments »