Hot Off the Web- July 13, 2008
Jason Zweig kicks off his new Intelligent Investor column in the WSJ (he is a high profile replacement for Jon Clements whose Getting Going column was a favourite of many readers) with “Learn to love the bear” . He tackles the currently depressed markets head on, encouraging investors not to bail out as that just locks in current losses; instead, investors should look at depressed markets as opportunities to buy on the cheap. As for those pundits who just declared the arrival of the bear market with a 20% drop from the peak, Mr. Zweig reminds his readers that “we have been in a bear market for years; the Dow was almost 600 points higher in early 2000 than it is today.” In fact he expressed the hope that further drops will provide even better buying opportunities. While clearly, for an investor in accumulation stage, his comment “Could things possibly get worse? I don’t know, but I am an optimist — so I certainly hope things do get worse. Nothing else should satisfy an intelligent investor” is a great perspective/advice. However, it may be difficult to convince a decumulating investor in her retirement that follows the “Diversify, buy and hold, keep costs low” approach that another 20-30% drop would be good for them. He points out correctly that an investor’s worst enemy is himself, as suggested by Benjamin Graham after whose book “Intelligent Investor” the column was named.
In a (somewhat) related article the Financial Times’ John Kay thinks that we should “Forget the meltdown, worry about goo and asteroids” . He argues that what we should be worried about is not market meltdown, but truly catastrophic events like meteorites, environmental or seismic events, pandemics, effective madmen (Hitler, Stalin, Mao) and “buy options against them. For each potential catastrophe, we should undertake research to ascertain what we might do if a remote possibility becomes a plausible reality.” (This may be good advice.)
In WSJ’s “The risk of annuities” Janet Paskin reports on concerns associated with highly successful variable annuities which guarantee minimum payments independent of investment performance. In some worst case (market crash)scenarios the insurance companies may be facing risks way beyond what they have factored in. (Sounds like the perfect lose-lose product: their high fees insure that investors are losers in most likely situations, however in some worst case scenarios the insurance company can be a loser too.)
Andrea Coombes in WSJ’s “Retirement by the numbers”  looks at some free retirement calculators available on the web. Some of the tools she refers to can be found at , and . (If you are looking at calculators, also look at flexibleRetirementPlanner
Rob Arnott suggests that Americans should “Prepare for higher taxes and ways to reduce the pain” . According to Arnott this is a near certainty no matter who wins the U.S. election. Historically, income tax levels and increases had little impact on pre-tax return of stock and strong negative impact on bonds. However, when capital gains taxes are increased, stock returns drop significantly. Better factor this into the 2008 investment plans.
Bloomberg’s Sandra Hernandez reports that since the consumer price index underestimates true effect of inflation “TIPS Flunk inflation test as fuel, food overtake CPI”  . TIPS are supposed to protect against increasing inflation due to the adjustment in principal that is supposed to cover its erosion due to inflation. “Traders who expect inflation to increase bet that the gap, or spread, between yields on TIPS and Treasuries will widen. The bigger the so-called breakeven rate, the greater traders’ expectations that prices will go up.” TIPS currently price-in a decrease in short-term inflation from current levels while actual expectations suggest an increase. (But then who knows, perhaps what’s priced-in is a better predictor. What is certain is that the CPI used for adjustments does not fully reflect actual inflation.)
On the real estate front Barron’s cover article is Jonathan Laing’s “Bottom’s up: This real-estate rout may be short-lived”  . After listing all the reasons (continuing price declines, record level of foreclosures, impact on mortgage lenders financial ability to lend) why the market will continue its way further down, he finds sources/reasons suggesting that the bottom may be near (8 of 20 markets covered by Case-Schiller index actually increased slightly, proposed legislature easing situation for lenders and borrowers, dropping sale-price to per capita income, 50% reduction in housing starts). (Lower sale-price to income ratio may not be a good indicator for ability to purchase a second/seasonal home, so FL, AZ, CA, and Carolinas markets may not be as sensitive to this factor; on the other hand boomers will likely still be coming.)
And finally in “A good book is worth a thousand blogs”  Barron’s Gene Epstein lists his recommendations for beach reading this summer. Among his list he included: “Isn’t It Their Turn to Pick Up the Check?”, “Nudge”, “Economic Facts and Fallacies” and Greenspan’s Bubbles”.

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