I had a recent, well not so recent now, request on what to do with a 401k consisting of S&P index funds and GE stock.  Should she move her money to new investments, keep it where it is or go cash.

To be honest, this is a tough call right now.  I do think the market is likely to go down more, as we are in a once in a generation economic tsunami.  Unfortunately, it is impossible to tell how far down it will drop, making it extremely difficult to predict anything with certainty.

GE

I will say that I love GE at the current price and I will be putting an order in tomorrow.  Seriously, an 8% dividend from one of the most diverse companies in the world is spectacular.  I can sit on that 8% dividend for years waiting for the big jump.  There is always the danger they cut the dividend, but they have stated they have won’t and they have plenty of cash right now, so it’s not highly likely they will cut it any time soon.  Even if they do cut the dividend it’s not a big deal.  Let’s say they hammer it down 50%.  This would still give anyone who purchases it now a 4% return, which isn’t a bad historical return.

Of course, all of this does not answer the question, “should a current owner keep GE?”  I’m leaning towards yes, as you have already ridden it down more than 50% if you bought it a year ago.  If you bought it two years ago…..ugghhh.  I feel for you. 

The one thing that current owners and potential owners of GE need to realize is that it is quite possible it goes down further.  Capital spending is slowing and GE gets a big chunk of their earnings from companies improving existing operations (such as airlines buying the Boeing Dreamliner, which has engines made by GE.).   However, there are few places you can earn a good return on your money and still get a good chance for capital gains, with low risk of bankruptcy.

S&P Index Fund

I have huge issues with index funds.  I won’t bore you with them right now, but if you are interested in some reasons not to own index funds here is a decent article The Death of Index Investing.  I will definitely be writing more about why I hate index funds in the future.

Ignoring my dislike of mutual funds let me answer the real question, “should you continue to hold index funds now and wait for the rebound?”  Personally, I would rather be in individual stocks and few well managed mutual funds (such as CGM Focus - huge risk so make sure you know what you are getting into.  Also, this is not a buy and hold fund!!!), but I like risk.  If you have no desire to actively manage your money, then holding your index funds might be the prudent choice if you aren’t going to retire in the next 5-10 years.  It is highly likely you have already seen most of the pain, so selling now and trying to time the market at this point is a fool’s game. 

Ok, here is your answer, well it’s two answers:

• 1. If you know you won’t sell if it drops another 10%, 20%, 30%, etc. then hold.
• 2. If you think you will panic and sell if it drops another 20% then you might want to think about getting out. This is not the best option, but it is better than selling after you lose more.

Above all think for yourself and get help from a fee only financial planner if you aren’t comfortable managing your money.  By the way, none of this advice is for anyone in retirement or within 5-8 years of retirement. 

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 NYT

We are still below the high reached after the tech bubble collapse, which suggests we still have a long way to go.  At that time the major problem was a decline in stock prices.  This time we have a larger decline in stock prices along with a financial sector that has been destroyed.  What are the odds we don’t set new highs?

Unrelated Note:  The site for Millionaire Mommy Next Door was hacked and has been moved

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Anyway, it’s good to see the market is exactly where I left it, which is completely out of control.  Because of that, let’s go over what we should be doing in a market like this:

• Do not buy on up days, like yesterday. The market is not all of a sudden going to take off for a 2,000 point run. Plus, it’s highly likely these up days will be matched by down days in the future. Wait for a good down day that comes close to recent lows or re-tests recent lows.
• Note that many mutual funds give you the price the market finishes at on that day, not the price of the market when you place the order. This means when you buy at noon on a 500 point drop you won’t get that price unless the market is still down 500 at the end of the day.
• If you are buying individual stocks you still need to pay attention to the market, as the current madness will influence most stocks one way or the other.
• Identify a small list of individual high quality stocks and review their performance daily, so you can find a good entry point. Two I am currently looking at, as I have mentioned before, but have not bought yet, are Boeing and Apple.
• Identify a high risk/high return stock and consider investing a small amount. Nothing wrong with swinging for the fences every now and then.

Personal finance rules during this market:

• Do not buy a house in most markets. Inventory levels are only starting to come down. Give the market another 6 months to fire more people, adjust to a new U.S. President and shake off some of this recession.
• Do not withdraw your money from your bank and hide it in the closet. There is plenty of money to fund FDIC.
• Do not pull money from your 401k. You just lost money and now you are going to pull it out before the market can give you back what you lost? Not a good idea.
• If you have a solid source of income/job and you need a car, this might be the time. Even Toyota is offering zero percent financing.

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Bank Dividends

It appears that any bank that takes government money to recapitalize is not allowed to pay dividends until the borrowed government money is repaid.  Take a look at the Big Picture for more detailed info.

Baby Food

Wal-Mart is seeing spikes in baby food purchases based on when people are paid.  Per Infectious Greed this is the first time Wal-Mart has seen this event.  This suggests people are running along a financial razor’s edge.  If they can’t buy baby food until they get their paycheck, how can they buy any type of luxury item (iPod, new cell phone, flat screen, new car, etc.)?  They can’t.

Housing Foreclosures

Housing foreclosures for September dipped by 12% from an August high.  This is an artificial reduction, as some of the hardest hit states have changed laws to slow down foreclosures. 

“Much of the 12% decrease in September can be attributed to changes in state laws that have at least temporarily slowed down the pace at which lenders are moving forward with foreclosures,” Realty Trac CEO James Saccacio said in a statement.

For instance, California - one of the states hardest-hit states in the housing crisis - has a new law that requires banks to contact struggling homeowners at least 30 days before delivering a notice of default. That’s helped to drastically slow the number of foreclosure filings in the state.  -  CNN

Unfortunately, this is just postponing the inevitable. 

Circumstances in Massachusetts illustrate his point. That state enacted a law back in May requiring lenders to give troubled homeowners 90 days notice before initiating foreclosure, which pushed the number of foreclosure filings it reported way down for several months. But in September, when the law expired, filings spiked.

Weekend

Looks like another good weekend.  The beer of choice this weekend, especially Saturday night for the Penn State vs. Ohio State game, is the Troegenator from Troegs Craft Brewery in Harrisburg, PA.  Enjoy.

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When the amount of government debt and consumer debt is shaking the very foundations of trust and confidence in the strongest and wealthiest country to ever exist, nothing is implausible.  When you add in a healthy dose of corruption (AP IMPACT: Mortgage firm arranged stealth campaign):

“WASHINGTON - Freddie Mac secretly paid a Republican consulting firm $2 million to kill legislation that would have regulated and trimmed the mortgage finance giant and its sister company, Fannie Mae, three years before the government took control to prevent their collapse.

In the cross hairs of the campaign carried out by DCI of Washington were Republican senators and a regulatory overhaul bill sponsored by Sen. Chuck Hagel, R-Neb. DCI’s chief executive is Doug Goodyear, whom John McCain’s campaign later hired to manage the GOP convention in September.

Freddie Mac’s payments to DCI began shortly after the Senate Banking, Housing and Urban Affairs Committee sent Hagel’s bill to the then GOP-run Senate on July 28, 2005. All GOP members of the committee supported it; all Democrats opposed it.

In the midst of DCI’s yearlong effort, Hagel and 25 other Republican senators pleaded unsuccessfully with Senate Majority Leader Bill Frist, R-Tenn., to allow a vote.

“If effective regulatory reform legislation … is not enacted this year, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole,” the senators wrote in a letter that proved prescient.

Unknown to the senators, DCI was undermining support for the bill in a campaign targeting 17 Republican senators in 13 states, according to documents obtained by The Associated Press. The states and the senators targeted changed over time, but always stayed on the Republican side.

In the end, there was not enough Republican support for Hagel’s bill to warrant bringing it up for a vote because Democrats also opposed it and the votes of some would be needed for passage. The measure died at the end of the 109th Congress.

McCain, R-Ariz., was not a target of the DCI campaign. He signed Hagel’s letter and three weeks later signed on as a co-sponsor of the bill.

By the time McCain did so, however, DCI’s effort had gone on for nine months and was on its way toward killing the bill.”

Then of course:

“McCain’s campaign manager, Rick Davis, or his lobbying firm has taken more than $2 million from Fannie Mae and Freddie Mac dating to 2000. In December, Freddie Mac contributed $250,000 to last month’s GOP convention.

Obama has received $120,349 in political donations from employees of Freddie Mac and Fannie Mae; McCain $21,550.”

Corruption is one of the major indicators a government is creating an atmosphere of anti-competitiveness.  There is always some corruption.  The real question is how much and how pervasive is it in our government?

By the way, don’t think that governmental officials are the only guilty ones.  The enablers, us, are also guilty.  We sit on our couches chomping down Doritos and slurping up diet Coke, while we let these guys destroy the greatest country to ever exist.  At least, concsiously, pick a side.  Be Darth Vader or be Luke, ok, maybe Han Solo, but conciously choose DAMN IT!

Note:  I have to thank my friend Brandon for tossing me this article.

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I saw this Baltic Dry Index (BDI) graph on The Big Picture.  It is fascinating, but before I get into what this means let me give you a brief definition of what the BDI represents:

Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. However, since the demand for shipping varies with the amount of cargo that is being traded in the market (supply and demand) and the supply of ships is much less elastic than the demand for them, the index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as cement, coal, iron ore, and grain.

Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as a good economic indicator of future economic growth and production, termed a leading economic indicator because it predicts future economic activity.  -  Wikipedia

Ok, so basically this graph shows how active the shipping companies are.  As you can see, these companies have taken a seat on the coach, opened up a couple bags of potato chips, ordered a pizza and are on their way to putting away a six pack.  They are doing nothing.

What does this mean?  It comes back to what I have been writing about recently.  Christmas will be terrible.  I know I keep bringing this up, but there are just too many actual facts showing how bad Christmas will be this year.

How am I playing this?

I will keep getting back in the market a bit at the time, as I have plenty of time.  All the negative financial data pointing to a bad Christmas suggests the markets will provide plenty of opportunities to invest in the near term.

I bought last Friday and sold about half of it on Tuesday of this week for a nice return.  I saw no reason to continue to hold with a nice gain after only 3 business days.  I took it and now I’m looking to get back in on another drop.  I don’t usually trade like this, but the volatility in this market almost ensures what goes up must come down.   So, why not use it.

What’s on Tap this Weekend

Well, it’s still college football season, so I will be catching a game or two.  However, there aren’t nearly as many good games this weekend as last.  Thus, you really need to pick a good beer to ensure the experience is top notch.  I would suggest Allagash Black.  A rare Belgian stout, which makes it lighter than most stouts…enjoy.

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 Retail sales came out today:

The Commerce Department reported Wednesday retail sales decreased 1.2 percent last month, nearly double the 0.7 percent drop that had been expected. It was the biggest decline since retail sales fell by 1.4 percent in August 2005.  - Chicago Tribune

Retail sales were down for three straight months ending with a 1.2% drop for September.  Doesn’t sound too bad, right?  Well, this is the first time since 1992 this has happened.

The real downer is the time period these numbers are from.  They come from before the huge stock market downturn in October.   If consumer confidence was shaken before the market fell off the cliff, it will be utterly destroyed now.  Anyone who thinks sales will pick up as we head towards Christmas is completely fooling themselves.

Welcome to the recession ladies and gentlemen.

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How can the markets make these extreme swings, and what do you need to know?

Extreme Market Swings

Market sentiment is extremely volatile right now.  Why?  Because, no one, including the professionals, has any idea what the rules of the market are.  Will the government unvail a new trillion dollar bailout for the auto companies in 2 weeks?  Will it let them fail?  Will another industry be on the verge of being Death Star’d in a month?  It’s impossible to tell, as no one is confident in the value of the financial companies’ assets, as no one has any idea how many home owners can’t afford to pay their mortgages. 

On top of this, no one has any idea when they will know the answers to these questions, but they do know they won’t know it any time soon.  Thus, the massive variables will continue to play havoc with the market for some time.

What do you need to know?

There will be good buying days and bad buying days.  The problem is most people just let their 401k dump money in at specific times each month, without concern for what is going on.  This can seriously reduce your return in a market like this.  Take a look at My Open Wallet’s anger at the Monday rally, and you will see what I mean.

At times like these, it’s best to have your 401k deposited into a money market type investment and then wait for a dip to buy equities.  Market volatility is so high, that it’s almost guaranteed the market will come off it’s Monday bounce in the next 1-3 weeks, and the drop is almost guaranteed to be at least a 3-5% move. 

Of course, you are thinking to yourself, “This goes against everything I have been told.”  Of course it does, because everything you have been told is to make it as easy as possible to invest.  They aren’t concerned with returns, only with getting you into the market.  Once they get you into the market they know they will be receiving money from you every few weeks, which will increase their fees.  On top of this, if it doesn’t work, they can just point to every other financial planner and say, “See everyone is giving this advice, so I have to be right.”  This strategy reduces the risk to them, not necessarily to you.

My Strategy

I will continue to deposit my investment money into a money market/savings type account and wait for dips to buy.  It is money I would be investing anyway, so why not control when it goes in the market to improve my returns.  Will I always buy at the bottom…NO.  However, I can assure you I won’t be buying at the top.  This takes more work and adds more risk, but the risk I’m adding is negligible in a market that is already incredibly risky. 

What’s the difference if I fall from 800 feet or 900 feet?  I’m still in a world of hurt.

Of course, all that being said, there may come a point when all of my data suggests this will get worse.  At that point, I will be pulling my money out.

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The federal government announced an extraordinary and historic investment in the nation’s banks early Tuesday - the biggest bet ever made with taxpayer dollars on the U.S. financial system.

As a start, the Treasury will pump $250 billion into financial institutions. Nine of the nation’s largest banks have already agreed to take the capital and in return will give preferred shares to taxpayers and limit on executive pay. It is widely expected that half of the $250 billion will go to those nine banks. - U.S. pulls the trigger

This is much better than buying up the bad debts.  This is closer to a deal Mr. Buffett would get than a deal you and I would get.

Another important aspect of this announcement that will go unnoticed by most analysts:

The president also announced insurance on all deposits in non-interest bearing bank accounts, a move that allows businesses to no longer worry that their payroll and checking accounts exceeding the limits backed by the Federal Deposit Insurance Corp. And the government will also back most new bank debt. - U.S. pulls the trigger

 Hopefully, this will allow businesses to ratchet down their nerves a little.

At least all of this money is going in before all these banks go down.  The sooner it goes in the better, as the longer they wait the more it will be.  If we are going to do it, let’s go all in and make it count.

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Today is a big positive, but by no means signals a V-shaped recovery.  Everyone needs to remember that the bond/credit markets are closed today (holiday), and these markets have been the drag on the equity market.  On top of that Europe has increased their government intervention in the financial markets, and there are rumors the U.S. will match this increase.  This is a lot of good news or neutral news, so this bounce is not surprising considering the pounding equities took last week.

I’m more interested to see how the markets react next week, after all of this is old news, and consumer companies begin to show how much pain they are feeling.

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