Fagan Associates Archive for May, 2009

America, these days, is infatuated with anything that is out of the ordinary. Scandal sheets and blogs sell like hotcakes while one newspaper after another enters bankruptcy. Hair dyes have migrated from burnt auburn to psychedelic purple. Sometimes, as boring as it may seem at the time, it is good to settle down with the tried and true. Investing is no different.

From the low set at the close this past March 9, the more beaten down sectors have rallied dramatically. Emerging market funds are up 30% with India and Asia leading the way. The financials have doubled and in some cases, even tripled. Bank of America, under $3 per share at one point, now trades at around $11.50. Seeking a quick pop, many investors are ignoring solid companies with impeccable fundamentals to try and recoup their losses as quickly as possible. These are the companies that weathered the storm the most easily and, in many cases, despite the more than fifty percent drop in the broad stock market averages, saw their stock prices decline much less.

A company like a Pepsi has barely budged since mid-March. With its 3.5% dividend and a stock price still 30% from its 52-week high, the company makes sense in any economic environment. In addition to its namesake, its product line, one with global reach, includes Quaker Oats, Gatorade and Frito Lay. Investors have lost their appetite for this company despite its solid balance sheet and recession resistant offerings.

Johnson and Johnson has also been an underperformer as of late as investors have sought riskier offerings. Like Pepsi, Johnson and Johnson sports a 3.5% dividend and a stock price that has barely budged in the latest market upswing. J&J, the maker of Listerine, Stayfree and Sudafed, is a multinational health care conglomerate that sports an AAA credit rating.

A mutual fund worth noting in this environment is the Oakmark Fund. A large-cap oriented no-load mutual fund it has delivered returns in line with the S&P 500 over the past 5 years but has recently jumped dramatically ahead of its peers. A fund with a bent toward value-investing, its top holdings include Intel, JP Morgan and Walgreen. For those investors preferring mutual funds, this could be an attractive alternative.

The BOTTOM LINE. Don’t invest as if you can get all of your losses back overnight. Certainly, you wish to overweight those areas that you think will outperform in this current market environment. However, having slow, steady investments that you can rely on during good times and bad also make dollars and sense!

Last, but certainly not least, we wish to thank all the men and women who have served our country in the U.S. Armed Forces as we commemorate them this Memorial Day Weekend. Many have sacrificed and continue to sacrifice so that we remain free. Once again, thanks to all of you and for those that gave their lives for this country, we pray for you.

Conspicuous consumption is about as welcome in 2009 America as a houseguest straight from a Mexican vacation. Frugality is in. Americans are returning bottles for the deposit instead of sipping Grey Goose on the rocks and after decades of spending more than we earn, we are actually saving more than we are spending.

We applaud this newfound American penny-pincher but think, to a certain extent he is short lived.

Both stock and bond markets are sensing an improving economy and acting accordingly. Yields on ten-year U.S. Treasury Notes have risen dramatically over the past two months. These notes, that at one point in time over the past year yielded less than two percent, have now climbed more than fifty percent to yield north of three percent. Up until recently, U.S. Treasury bills, notes and bonds, an appealing investment for the risk-adverse, had been in strong demand. However, given the much talked-about “green shoots” of perhaps signaling a turnaround in the economy, investors have begun to look at other investments either within the fixed income area or back into equities. This reallocation of assets has reduced demand for treasuries, at a time when additional supply in order to service the ballooning U.S. budget deficit has come on to the market, a combination that has sent yields higher, as noted above.

A further indicator that, at least temporarily, things are looking up is the nearly thirty percent rally in the U.S. stock market. After an abysmal start to 2009, stocks are basically flat for the year.

Regular readers of our column will note that we nearly always proponents of investors striking a balance between risk and safety. We continually talk about taking measured moves, thinking long-term and not getting caught up in the emotions of the investment world. Now is no different. At the current time, our research indicates that the small, retail investor is underinvested in the riskier areas of the market. He is clinging to money markets, cash and Certificates of Deposit, accepting low returns for peace of mind and a perception of safety. These are parking places and not historically an area that will help you achieve your financial objectives.

Ironically, we believe that the gulf has never been wider between what investors are most comfortable doing and what they should be doing.

THE BOTTOM LINE. The stock market has come a long way in a short time so investors should be careful “taking the plunge” in a wholesale fashion. Use pullbacks of more than ten percent to add to mutual funds or individual securities. That said, many opportunities abound for investors with a two or five year horizon. Although possibly quite modestly, we believe that the American economy is getting ready to grow again, perhaps as early as the third quarter of this year. Prior to this, the stock market will move, as it generally anticipates changes in the direction of the economy by six to nine months. After that perhaps, we can say goodbye to the “frugal” American. Candidly, it was no fun while it lasted.

During the early part of this past October, along with others we were asked by WRGB Channel 6 to be a part of their “Answers Team,” a group of individuals in the financial services industry put together to meet most Wednesday evenings from five until seven p.m., answering questions of callers, helping them get through these tough economic times. Our job was to field calls that generally pertained to investing and financial planning. We have met continually through the heart of this recession, the past seven months or so, fielding hundreds of calls. With this in mind, we thought it might be a good idea to relate some of the questions we received to our readers, hoping that perhaps the answers to these questions might help you navigate through this difficult economic period. Please note that the questions are paraphrased and italicized. The responses are not italicized and are for general information purposes only. All individuals should check with their investment advisor, tax advisor or financial planner prior to making any decisions.

Given the fact that my investments in my 401(k) has declined by so much, is it a good idea to stop contributing? No, unless there are extenuating circumstances such as debt that you are unable to service, it is a very bad. In addition to the federal and state tax deduction you are receiving on your contributions, you are also dollar cost averaging (saving a consistent amount on a regular basis) into your plan for retirement. Too many people focus on the day-to-day fluctuations in the stock and bond markets, thus losing sight on their ultimate goal, financial independence. For many, the decline in the stock market has offered them the ability to buy low over time. Take advantage of it.

I have credit card debt totaling $25,000. The interest rate was just bumped up from ten percent to twenty-five percent. What are my options? If you are unable to pay the monthly required amount, you have to determine if there are other sources of assets available to pay off the credit card(s)? Do you have equity in your home that you can tap? Do you have investments that you can liquidate? Are there assets available for a loan from your 401(k) or 403(b)? Perhaps you have to look for a second job. If you are able to pay the monthly required amount, start with the lowest card, pay that one off as quickly as possible, paying the minimum on the other cards. Then, once that first one is paid take the amount that you were paying on that one and now add that to the new card with the lowest balance and work on paying that one off. Continue on this path until all are paid off. Do not get into this mess again.

I currently receive Social Security. Do I qualify for a stimulus check and, if so when will it arrive? All of the approximately fifty-two million people receiving Social Security payments will receive a one-time check in the amount of $250 beginning in early May and continuing through early June, 2009.

When do you think is a good time to refinance my mortgage? Will interest rates go lower? With interest rates on both the fifteen and thirty-year mortgages below five percent, NOW is the perfect time to refinance, convert from an adjustable-rate to a fixed or consolidate your primary and home-equity into a new mortgage. Sure, interest rates may go a bit lower, but there is a greater chance that over the next year or two they will move higher, much higher. Look at the risk you are taking relative to the potential reward. Refi now!