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The Independent Investor: It's Your Move America.
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Back in May of this year, in my column ("Gordon Gekko Should Run for Congress"), I pointed out that our nation's elected officials were not subject to the insider trading law that regulated everyone else. As a result, individual politicians and their cronies have profited substantially year after year from the knowledge they picked up in closed door hearings, subcommittees and the like.
This access to insider information has become even more important over the last few years as more and more market moving events are triggered by governmental actions. Just consider how government pronouncements in the U.S. and Europe over the last six months have caused huge market swings.
Efforts to change this law have been going on for years with scant success. News stories such as The Wall Street Journal articles on the subject last year and last month's "60 Minutes" report on the scandal have increased public awareness. I suspect that if their approval ratings were not so low (congress has a historically low 9 percent approval rating) the politicians would simply ignore the heat, as they have done in the past, and continue to profit at our expense.
A month ago only nine congressmen supported the bill that would require elected officials to report all trades over $1,000 within 90 days. After the "60 Minutes" show, that number increased to 180 and more than 20 senators have since jumped on the band wagon.
Today, a cozy relationship exists between politicians, political intelligence firms and big players on Wall Street. There is nothing illegal in a congressman or senator divulging sensitive information to a political intelligence firm which in turn sells that information to Wall Street. The more market-sensitive information that is passed on through the pipeline, the more a particular politician can demand in future campaign contributions from the beneficiaries of that information.
This bill would make it illegal for individuals and "political intelligence firms" to continue that practice. It would also require firms and individuals involved in "political intelligence" to register just like any other federal lobbyist.
Call me a cynic, but I doubt this bill will pass. Not only are lawmaker's potential for using their office for personal gain at stake, but this bill will also jeopardize the pipeline to campaign funds from those special interests we hear so much about.
In a different world, all my readers and everyone in America who cares (the 99 percent), will call or email their representatives in Washington and demand he or she vote for this bill when it comes up for a vote next week. It is your chance to change a lot of what is wrong with Wall Street right now. It's your move, America.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: Central Banks Backstop Global Economies, Again
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Before the markets opened, central banks of the U.S., Canada, England, Switzerland, Japan and Europe announced a plan to provide cheap dollar loans to European banks and other institutions, reminiscent of the actions they took after the Lehman Brothers bankruptcy in 2008. This action, like that of 2008, puts all investors on notice that the world's central bankers have no intention of letting Europe go down in flames anytime soon. It is a lesson we should have learned by now after three years of government intervention in capital markets.
Clearly, the week was shaping up to be another dismal episode in the European crisis, despite Monday's 3 percent rally. The S&P credit agency had lowered the credit ratings on a slew of banks. European sovereign bond prices continued to plummet and rumors abounded of a possible bank failure somewhere in Europe as early as December. The news came in the nick of time.
And time is the one commodity that is most in demand among Europe's leaders. Make no mistake; this latest action by the central banks is a stopgap measure. It is intended to give European nations the time to come up with a solution to their crisis. It is not a panacea that will fix the PIGS, Italy or Spain's faltering economies and enormous debtload.
Think back to our own Federal Reserves' actions over the last few years. The bank has continuously injected liquidity into our market through a variety of tools including lower interesting rates, buying bonds, and delving into the credit and mortgage markets directly. Its efforts continue today and are designed to keep the financial markets from collapsing, giving the government and private sector vital breathing room to dig the economy out of a recession.
How has that worked for us?
In my opinion, their actions avoided a total collapse of financial markets, averted another Great Depression, kept unemployment from climbing even higher than it could have been, and restored confidence among investors. Where the ball has been fumbled is among our private and public sectors.
Our government's inability to respond to slow growth, high debt and high unemployment is a failure of our politicians. Private companies have also failed by hoarding cash, refusing to lend and bolstering profits by avoiding new hiring while working existing employees to death. Bottom line, our leaders have frittered away a lot of the time the Fed has given us.
The question: will Europe repeat the mistakes of our leaders or will they use this time to actually come up with solutions to their economic problems?
The challenges are great and in many ways even deeper and more difficult to solve. Their debt issues are with countries as well as banks. Unlike the U.S. dollar, their currency is in jeopardy. Governments are in far worse shape than they were two years ago and there are serious political and economic contradictions within the European Community.
One might dismiss their chances, given the embarrassing and inept handling of the crisis that has already dragged on for two years. I believe that the central bank actions have granted Europe and world markets a temporary reprieve and I fully expect Europe to respond positively to this gift.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: Best Avenues to Save For Retirement
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Back in the day, before the advent of government-sponsored savings plans, defined benefit pension plans and the odd annuity were the only investment vehicles available to me. As a young stud on Wall Street, it didn't matter. Retirement saving was for others. I would live forever, make millions in the market and retire when I was 30. Fortunately, I woke up to the realities of the real world and started saving early in my career. You should, too.
In fact, the earlier you recognize that saving for retirement regularly is a no-brainer, the easier it will be to retire. So let's say you recognize that and want to start saving. The choices today can seem overwhelming. Start with the obvious: tax deferred plans where the U.S. government gives you a tax break. There are traditional IRAs, Roth IRAs, employee 401(k) s, 403(B)s, 457 plans, deferred annuities and many more. In my opinion, if you have earned income and your employer offers some kind of tax-deferred plan, that is where you should concentrate.
Any financial planner will tell you to try and take maximum advantage of the amount you can save in your tax-deferred plan. That would be $16,600 a year in a 401(k), 403(b) and 457 plan and $5,000 in a traditional IRA or Roth IRA. For those over 50 years old, an additional "catch-up" amount of $1,000 a year in your IRA is allowed and $5,500 in your 401(k), 403(b) and 457.
Yet, few of us make enough to contribute the maximum. Instead, the best place to start is your employer plan, especially if it offers a matching contribution to your own. As an example, let’s say you make $50,000/year and your employer will match 3 percent of your salary ($1,500). It doesn’t take rocket science to figure out that you should put your first $1,500 of savings into your tax deferred employee program since your company is matching that amount as a free employee benefit.
But let's say you want (and can afford) to save even more, possibly an additional $5,000. Should you just put it into your company's 403(b) or 401(k) plan or open a traditional, tax-deferred IRA? In my opinion, you should open an IRA. Here's why.
Both contributions are treated equally (i.e. tax deductible) by the Federal government. However, your company's retirement plan will offer a limited number of investment choices. In addition, the fees you pay for investing in your company’s plan are quite high compared to opening your own IRA. Although you can't contribute as much in your IRA, you have much more control over what to invest in and at a lower cost.
There is one caveat, however, if you are contributing to both your traditional IRA and your company plan: at a certain salary level (above $56,000-$66,000) the amount you can contribute as a single taxpayer to a traditional IRA is reduced. For those married couples who file jointly the phase-out range for deductibility of your salary is higher ($90,000-$110,000). If your spouse does not participate in a qualified employer plan but you do, then the cutoff level for your spouse becomes $169,000 to $179,000 if filing jointly.
You can also put your IRA contribution into a Roth IRA but remember, a Roth is not a tax-deductible IRA. However, qualified withdrawals are tax-free while in traditional IRAs withdrawals are taxed as ordinary income. And like traditional IRAs, the Roth contribution is $5,000 yearly and phase-out salary limits also apply.
I suspect most of you will already be tapped out if you contribute the full Monty to both your employer plan as well as a traditional IRA, but in some cases a Roth might work better for you. If you still have money to save, then I suggest you give me a call and we can discuss how best to deploy it.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
Independent Investor: Who Do We Owe?
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Readers may recall that as a result of the last go-around over the debt ceiling, investors worried that a technical default by the U.S. would create massive negative fallout among the holders of our national debt. "They" (so the story goes) would dump our debt overnight creating a huge spike in interest rates, etc. etc.
So who are "they?"
Let's start with foreign holders. China is often mentioned as a critical investor of U.S. government debt. The horror story most mentioned is that China could use their position as a weapon. They could sell their holdings in our bonds sparking a global financial disaster. As the largest foreign holder of our debt, I do not discount the importance of China's holdings. But as an investor in U.S. Treasuries, China still ranks as a minor player with less than $1 trillion in holdings ($895.6 billion).
China has actually reduced its level of U.S. government debt by $33.4 billion over the last two years. The bond market barely budged as a result. In fact, U.S. interest rates have declined during that period.
For all the talk about China, few know that Japan, considered one of our most reliable economic and political partners, holds only slightly less of our debt at $877.2 billion. The United Kingdom (another ally) is next followed by a global group of oil exporters who use our debt holdings as part of their oil export business. In addition, Brazil, the Caribbean Banking Centers, Hong Kong and Canada hold portions of our debt. None of the above would likely dump our bonds and might even buy more if asked.
It may surprise you to know that over a third of our government debt is held by the United States. The Fed and other intergovernmental holders own $5.351 trillion while state and local governments account for another $511.8 billion (roughly the same amount as Great Britain).
About 60 percent of our debt is in the hands of the private sector. Insurance companies and depository institutions (banks) hold just over half a $1 trillion while a diverse group of investors including individuals, brokers/dealers, personal trusts, estates, savings bond and corporate institutions, among others, hold $1.458 trillion. Mutual funds own $637.7 billion and pension funds another $706 billion or so.
The point is that contrary to popular opinion, the majority of our debt is held in friendly hands. Sure some holders of our debt might sell if our credit rating is reduced again or there is some kind of technical default on U.S. sovereign debt, but those would be marginal sellers. Certainly the U.S. federal, state ad local governments would keep what they owned and possibly buy more.
Most of the private sector holders would also keep their investments. It would be difficult for pension funds, insurance companies and others to find a comparable alternative for their government debt holdings. Despite the possible downgrades, U.S. debt is still the safest investment around.
Finally, any credit rating change to our debt would not occur in a vacuum. Investors will always need to find a suitable replacement and in a world where Europe is teetering on the edge, where emerging economies are slowing and currencies go up and down like yo-yos. Our sovereign debt, while not stellar, still appears to be more appealing than the alternatives.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: The Super Committee
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By now we should be well acquainted with these binary events. You know these do or die, pass or fail decisions that promise to send us all to Nirvana or Armageddon every other week or so. This year we've lived through the U.S. deficit reduction/debt ceiling 11th hour deal, the will-they-or-won't-they credit rating downgrade of our sovereign debt, the two-year-old Greek tragedy, the EU bailout plan and more recently, Italy's antics.
What is really at stake in this Super Committee decision? As readers may recall, the Republican Party originally demanded a deficit reduction package before agreeing to an increase in the country's debt ceiling. In August, an austerity package of cuts worth $2.4 trillion was announced by the Obama administration.
At the 11th hour, both parties agreed to raise the debt ceiling and set up a committee charged with coming up with a deficit reduction compromise by Nov. 23. Failure to do so will automatically trigger cuts of $600 billion in Washington's two sacred cows—defense (Republicans) and entitlements (Democrats) beginning in 2013. But none of these efforts were enough to stave off a reduction in U.S. debt rating by the credit agencies, which happened on Aug. 6.
Many pundits had warned that markets would collapse around the world if and when we lost our triple "A" credit rating. None of that occurred. In fact, markets rallied and rates declined. Yet, party leaders swear up and down that they feel duty bound to uphold the automatic cuts if the Super Committee fails to come up with a deal. At the same time, 100 House members of both parties are urging the committee to "think big" and expand their deficit reduction efforts to $4 trillion or more. It all sounds to me like more of the same — political theatre with little substance — a legacy of this do-nothing congress.
If the worst happens and no Super Committee deal is forthcoming, how bad would it be?
The credit agencies could use that as an excuse to ratchet down our debt rating again. But given the results of the first reduction in our credit rating, I'm not sure that another one will have much impact, especially given the turmoil occurring in the rest of the world.
It was also interesting that the markets declined on the news of a $2.4 trillion austerity deal in August but not on our debt downgrade. That tells me the markets are far more concerned with economic growth and the high rate of unemployment than they are with the nation's deficit. I'm all for reducing the deficit when the economy is strong enough to withstand the hit. But now, while the economy is still floundering, is not the time. I suspect that the deadline will come and go with little in the way of compromise and the markets will disregard the entire exercise.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
