Category: Investing

Labor Day Stock Market Thoughts

Labor Day Weekend is prime time for big-picture discussions in the financial press. With the cultural end of summer, and the heightened feeling of NYSE-Mod-Small seriousness of the back-to-school and back-to-work season, Labor Day is a good time to review where we are and where we are going. Also, articles on broad topics can be written far in advance so that journalists can take the weekend, or entire week, off.

Thus, The Wall Street Journal recently treated us to a spate of pieces on basically the same topic, the wisdom of investing in the stock market.

Brett Arends kicked off this festival of tea leaf reading mid-week with Why Stocks Still Aren’t Cheap. Then over the weekend we got Is It Time to Scrap the Fusty Old P/E Ratio?, covering some of the same ground as Arends but with a less bearish spin, and Thinking Outside the Stocks, discussing off-beat non-stock investments.

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Deflation in August

With a coordination that I am sure both found embarrassing, The New York Times and The Wall Street Journal both ran stories on Saturday with tips on how to deal with a bout of deflation.Chicklet-currency

This raises several questions. Do we expect deflation? If so, why? What is deflation, anyway? Why is it so bad? Is the advice from these two giants of the mainstream any good? And what was it about last weekend that inspired them to write about, of all things, deflation?

That’s a long post’s worth of rhetorical questions. So, without further ado, let’s dive right in. Personally, I do not expect deflation in the near term, at least not enough to notice. Whether or not it is expected, or even seriously worried about, in the larger investment community is a harder question to answer.

The WSJ opens its piece telling us that “The markets are signaling that a bout of deflation may be coming.” But the only market indicator cited is a rally in bonds. True, the yield on 10-year Treasuries is down this year, although it is up from where it was at the end of 2008. And yet a rally in bonds is not exactly an unambiguous statement about deflation. The bond market goes up and down all the time. Why is this rally a deflation prediction?

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Young People Become Risk Averse

SmartMoney carried an item the other day about how, according to a new survey, those crazy kids have found another way to act foolishly. They are NYSE-floor taking less risk with their investments.

The factual basis for believing that younger people are taking less risk is a little thin, a single question on a survey of affluent Americans (Aflo-Americans?) done by Merrill Lynch. Still, it confirms my previously held beliefs and even fits into predictions of the future I made more than a year ago, so I am going to go with it.

52% of those under 34 described themselves as having a low risk tolerance. That is more than either the 35 – 50 age group (45%) or 51 – 64 group (46%). Only the oldest, and presumably retired, 64+ group came in at a higher rate of low tolerance, at 55%.

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Luck Has a Lot to Do With It

I seem to be on a niceness streak lately. Yesterday brought another item written by somebody other than me which I nevertheless liked. Try as Investors Might, So Much Depends on NYSE-Mod-SmallChance, from The Wall Street Journal, tells us that a person’s lifetime of investment returns is dependent primarily on  accidents of birth rather than skill.

We spend a lot of time wrestling with investment selection angst. This mutual fund or that one, active or passive, 20% in bonds or 50% in bonds, and so on. Those are important and hard questions, but there is a forest-for-the-trees danger here.

The biggest driver of long-term investment returns is not an investor’s skill but the overall market returns over the period. In other words, whether you wind up living large or living modestly at 70 is largely luck.

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The Mysterious Cash-In Refinance

Today I am going to explain something complicated, so pay attention. Particularly if you write for the Wall Street Journal. My topic has to do with theTwo-story_single-family_home exotic topic of homeownership.

Many homeowners owe money on a special type of loan collateralized by the house, called a mortgage. Sometimes, they “refinance” these mortgages, often to take advantage of a lower interest rate. Generally, that is no more complicated than paying off lender A with money borrowed from lender B.

However, and here is where it gets really confusing, sometimes the money from lender B is not the exact same amount owed to lender A. If more money comes from lender B, then the refinancing is termed “cash-out.” It is called that because the borrower actually leaves the closing with more cash than they had previously.

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