Outside Economics

Since the housing bubble popped five years ago, mortgage lenders have been reluctant to lend. The banks held on through the devastating loses and are now cautiously finding themselves in a position to begin lending again. One of the reasons for banks being so cautious in mortgage lending now is that Freddie Mac, Fannie Mae and the FHA have been pressing lenders to buy back home loans that went bad after the crisis.

Another reason lenders remain cautious is in part because of financial reform rules. Under the 2010 Dodd-Frank law, mortgage borrowers must meet eight strict criteria including earning enough income and having relatively low debt. If the borrower doesn't meet those hurdles and later defaults on a mortgage, he or she can sue the lender and argue the loan should never have been made in the first place.

Those kinds of rules have helped build a wall between prime and subprime borrowers. Lenders have been soliciting consumers who are legally easier to serve, and avoiding those with weaker credit scores and other problems. Subprime borrowers accounted for 0.3 percent of new home loans in October, compared with an average of 29 percent for the 12 months ended February 2004, according to Mark Fleming, the chief economist of CoreLogic (CLGX).

As part of these rules, the lender must collect and verify a borrower's financial information. The lender has to check the information using reliable documents, such as a W-2 or a paystub. The lender generally must consider eight types of information:           

1. Current income or assets.

2. Current employment status.

3. Credit history.

4. The monthly payment for the mortgage.

5. Monthly payments on other mortgage loans borrowers get at the same time on the same property.

6. Monthly payments for other mortgage-related expenses (such as property taxes)

7. Other debts.

8. Monthly debt payments, including the mortgage, compared to monthly income (“debt-to-income ratio” which cannot be more than 43% or $43 for every $100.) The lender may also look at how much money is left over each month after paying debts.

Thanks to the Consumer Financial Protection Bureau, some other new rules that became effective in January include:

Restrictions on dual tracking. In the past, borrowers dealing with mortgage troubles sometimes found that their mortgage servicer had moved forward to foreclose on their home at the very same time it was working with them on a potential loan modification. That’s called “dual tracking” and the new rules set up clear guidelines that restrict this practice.

More help for troubled borrowers. Too often borrowers have had to apply over and over again for programs that might help them keep their homes, being asked to send in the same paperwork repeatedly. The new rules require mortgage servicers to evaluate a borrower who files a complete application for help for all the options that are available to that borrower. That means no more multiple rounds of applications and wasting of precious time and resources for the homeowner seeking help!

No more runarounds and missing documents. The rules require mortgage servicers to train their people to answer borrower's questions and, if the borrower does run into trouble, the servicer has to assign people to help them. The servicer also has to have policies in place to make sure they don’t lose their paperwork.

As mortgage revenue continues to decline, lenders such as Wells Fargo are now even considering borrowers with credit scores as low as 600 - in the past, 640 was the lowest they would consider. Lenders have plenty of incentive for reaching lower on the credit spectrum now; since the middle of last year, interest rates for mortgages have been rising and are expected to reduce the total U.S. Mortgage lending for 2014 by 36%- down to $1.12 trillion. According to the Mortgage Bankers Association, this is due to a large drop in refinancing.

A recent report from the Urban Institute and Moody's Analytics argued that a full recovery in the housing market "will only happen if there is stronger demand from first-time homebuyers. And we will not see the demand needed among this group if access to mortgage credit remains as tight as it is today."

To be sure, credit is still only trickling down to subprime borrowers. Jamie Dimon, chief executive of the second-largest U.S. mortgage lender JPMorgan Chase, said on a conference call last month that he didn't envision a "dramatic expansion" of mortgage credit because of a continued lack of clarity from the government agencies on their repurchase demands.”

But smaller, non-bank lenders are making more loans. One such company, ACC Mortgage in Maryland, is offering a "Low Credit Score Debt Consolidation Program" as well as a "Second Chance Purchase Program." Low credit scores don't matter, neither do bankruptcies, foreclosures nor short sales.

While it is good to see the lenders starting to come back to the table, there is yet another factor that needs to be considered: Will the borrowers come to the table - and more specifically, the first-time home buyers who are essential to the housing market recovery? The pundits believe that there is a large amount of pent-up demand for housing that will boost economic growth for quite some time into the future. While this may be the case in theory, it is based upon assumptions that "past is prologue". However, given the current economic dynamics of stagnant wage growth, the structural employment shift, as well as the unknown consequences of the Affordable Care Act that seems to be paralyzing small businesses, it is unlikely that the consumer will be able to re-lever their budget as in the past.

The rising risk to the housing recovery lies in the Fed's ability to continue to keep interest rates suppressed. It is important to remember that individuals "buy payments" rather than houses. Every increase in the mortgage rate results in an increase of the monthly mortgage payment. With wages remaining suppressed, 1 out of 3 Americans no longer counted as part of the work force, or drawing on a Federal subsidy, the pool of potential buyers remains constrained. While there are many hopes pinned on the housing recovery as a "driver" of economic growth in 2014, the data suggests otherwise; the real driver of an economic recovery is full time employment that leads to rising wages and savings.

So while there have been many changes made to the mortgage industry, many favoring the borrower and ensuring that the problems that lead up to the collapse don't happen again, without the other economic factors in place securing a borrower’s ability or stability, it is unlikely that the banks and the housing market will see the kind of rebound that they are needing.

Recently I was told that there are 3-4,000 people per month in the Dallas Metro area who turn 65; the baby boomers are entering retirement in full swing. That is a lot of folks who are now descending on the local social security offices to collect the long awaited benefits, for, which they contributed many years.

Many folks wonder if they will ever receive any benefits, due to the financial state of the country and in particular the Social Security Administration (SSA) Trust Fund. I have always told people that the money may not be there, but you will be paid. After all, when have you known the government to shutter an agency and send over 68,000 government workers out on the street to find another job? It just doesn’t happen.

At times, when I find a really good cartoon, I cut it out of the paper, like the one attached. This says drawn in winter 1990, 24 years ago when the baby boomers were in their early 40’s. Fast forward to 2014 and it seems nothing has changed!

So now, that we have established that Social Security will be there, now comes the question of how or when to take the benefit? There are several strategies to the challenge of maximizing the Social Security payment, while keeping the tax man at bay.

Here is one idea. Most people don’t know that they can “file and suspend”, meaning that they can file for the benefit and then immediately suspend receiving the benefit until they are a few years older. This strategy may be best used when one spouse has a higher income than the other. The spouse with the higher income files and immediately suspends receiving the benefit, while the lower-earning spouse files and receives half of the benefit.  While the one benefit is suspended it continues to grow until the suspension ends.  Once the higher-earning spouse reaches age 70, both can collect their own benefits in full.

While many people continue to work during the early years of retirement, they will want to watch how their income is paid to them so they can minimize the taxes on their Social Security. They may want to take money from their IRA’s first before receiving Social Security, thus reducing the taxable income from that source early on. This may help keep Social Security payments from being taxed if payments are put off for a few years.

How are you planning for your Social Security? Are you using any strategies to get the most benefit you can?

2013 was an amazing year for the Stock Market the S&P 500 ended up 30 points and the Dow made over 50 record highs. Over all it was a terrific year. For the past month the prognosticators have been lining up to forecast 2014.

The WSJ reported the average prediction is that the market (the S&P 500) will only go up 7%. A month earlier the prediction was 10%. It's interesting to note that the 10% prediction is about the average gain the S&P has had over its history.

As we all know when in the business of making predictions, the lunch menu always has crow for its main course. Because the interesting part, the WSJ further reported that the average strategist error was 11.8%. So the average error can wipe out the average prediction pretty quick, making me wonder the value of the predictions in the first place.

In a meeting this past week one of the presenters, questioned the sanity of the market that rose over 30% while the average earnings per share rose only 6%. He exclaimed that the fundamentals are gone! Now we all know that things just get crazy in the markets and perhaps this is the one time that is true.

So what to do in 2014? This is where portfolio management comes into play. A portfolio that uses well diversified funds (or ETF’s) across several asset classes is a solid strategy. The portfolio should have breadth and depth in the funds and asset classes. In this kind of portfolio each asset class will behave independently, but collectively risk is reduced. Some funds may be highly correlated, while several may not. One key is to have an overall low correlation between the funds.

One strategy is the 7Twelve® portfolio model, which provides this type of breath and depth in a portfolio. It utilizes 7 asset classes, with 12 different funds. The seven asset classes have over 40 years of data to provide an historical perspective on their behavior in different market cycles. The 7Twelve® portfolio model was developed by Professor Craig Israelson of who taught at Brigham Young University.

If the market goes up or down this next year, which we know based on the above averages it’s going to move one direction or another, having a diversified portfolio is a good plan. How is your portfolio situated? Is it an all-weather portfolio?

Auto sales in the past year have taken off – setting new records; the same is true with auto debt under the hood. So it’s time to get a new one but what and how to pay for it? Do you pull money out of savings and pay for it with cash or borrow money and incur more debt?t. I know you are thinking, the old car just isn’t what it used to be, not as stylish, a dent here, component lights not working any more, electric door locks stick and the thing-a-ma-jig makes a funny rattle 

Merry Christmas to everyone who happens to read this blog. I hope that the joy of the birth of the baby Jesus brings peace to your hearts in the coming year. His birth is truly one of the most significant events in all of human history. For it ushered in the atonement that he performed on our behalf, which allows each of us to be forgiven of our sins. He also brought about the resurrection from the dead, now what had been prophesied for thousands of years was now a reality.

I hope through this year that each of us will work a little harder to be a better of a person, a little kinder, more civil, more polite, a little more loving to everyone we may meet. Kind patient acts may be just the thing that turns someone’s life around for the good. Perhaps a little slower to anger too. The older I get the less I see a need for anger.

I do hope that everyone has had a wonderful Christmas and that they will have a happy safe New Year. And I hope that your plans for next year are the best and most successful of all your years. May God bless each of you in your endeavors. And don’t forget to take a little time to count your blessings and to be thankful for what you have; you don’t have to wait until Thanksgiving to show gratitude for our many blessings.

When talking about annuities, over the years I have met with many people who get a glazed look on their faces and ultimately they throw their hands up and say, “I am so confused”. I will admit that some investments are confusing. But here is one that almost anyone can get their arms around – a retirement income contract, commonly known as an annuity. (Say "an annuity" 10 times really fast!)

 

 

Basically, an annuity is an income contract with an insurance company. You pay the insurance company money, either in a lumpsum or in payments over time. In return the insurance company contracts to pay you an income for a period of time, typically based on a set number of years or until death. (In this way you cannot out live the income benefit.)

Annuities are primarily used for funding retirement income, so they are a long-term savings vehicle. Depending on the annuity contract, the point at which they begin paying the income is up to you.

There are three basic types of annuities: fixed, indexed and variable. A fixed annuity behaves much like a CD (Certificate of Deposit). On the contract anniversary, the insurance company establishes a new interest rate the company will pay over the next twelve months.

The advantage is that the interest earned, growth and dividends compound income tax deferred.

A variable annuity is also an income contract, rather than investing in the fixed assets of the insurance company and receiving a fixed rate of return, you may invest in a combination of sub-accounts.

These sub-accounts behave almost identically to mutual funds. They can have many of the same objectives as investing in mutual funds, such as, US large cap stock, US bonds, non-US stock, non-US bonds, real estate, etc. Some mutual fund companies have created partnerships with insurance companies to offer copy-cat funds inside variable annuities. Most variable annuity contracts also have a fixed account that will work similar a fixed annuity.

All of these accounts grow tax deferred. It’s like having a tax deferred mutual fund. The tax deferral will result in a greater amount of available funds at retirement, which can greatly increase your income.

Because an annuity is a retirement income contract, it is subject to early distribution penalties by the IRS, similar to an IRA. Making a withdrawal before age 59 ½, creates a 10 percent income tax penalty.

And the risk? People rightly associate mutual funds with risk – after all, aren’t they invested in the stock and bond markets? Can’t I lose my money? Yes, but no more than you would in regular mutual funds. That is why investors should be wise in how they are managed. Never invest and leave the money there and forget about it.

This prompts a discussion about the indexed annuities – these annuities are good investment vehicles. One client had much of his retirement money in an indexed annuity before the market meltdown of 2008. Many of his neighbors lost thousands (maybe millions) during that time a few lost their homes. He was just fine, did not lose a nickel as he says.

An indexed annuity pays a fixed rate of return based on the returns of a particular investment index like the S&P 500. If the index goes up the annuity earns a percentage of the amount it increases. So if the index goes up 10 percent, the annuity may earn 6 percent. But when the index drops and goes down below a certain level the account value does not follow it down; the annuity simply earns 0% that period. Many people would rather earn nothing than lose money.

With an indexed annuity you get the upside but not the down side.

Each type of annuity has its place for different investors. You may consider each one for a part of your retirement nest egg.

One thing to be mindful of is the insurance company that is offering the contract. Each one may be a little different and their fees for managing the annuity contract may vary. One annuity contract may charge a low flat monthly fee of as little as $20 and another as much as three percent. It is important to read the information about the contract and ask questions so you understand; don’t end up confused! Do you own an annuity?

Americans these days talk a lot about retirement, what they want to do, when they want to retire and where they dream about living. While there are many issues in planning a comfortable retirement, the most important is having enough money.

One fear these days is that a retired person may outlive their money. With people living longer, the 10 year retirement plan that worked for our grandparent’s generation no longer equals security.

To be on the proverbial save side, plan for at least 25 years of retirement. This puts an

Following the markets are a challenge pure and simple. It is always interesting to me how people predict the future. In this case it is a prediction based on history; if something is moving in one direction then chances are it will continue for a while in the same direction, with the caveat that it could change direction at any point in time, thus covering the prediction.

The idea of predicting never set well with me so, as an active Boy Scout, my feeling is to simply “Be Prepared”. That seems to be the better road to travel, do all you can to be prepared and let the chips fall where they may. It may be even less stressful to be prepared then to predict.

I remember listening to a stock picker once telling the audience that they only hoped to be right 51% of the time, if so they had a profitable year. I will gladly stick with a core portfolio design, with a little left over for exploring if the client wants to explore a little to try and find the 51%. Hence, the term “core and explore”.

Having a core portfolio as the foundation of the investment portfolio is a more conservative investment strategy, which then allows for greater risk in other areas. It is with the core portfolio that success can be achieved over time. Nothing in a core portfolio happens short-term, patience is required.

Barbara Kollmeyer did a great job reporting on Goldman’s predictions for next year, so I am presenting her article in full for you to read below. I am interested to see how close Goldman comes next year. It will be a very dicey year, with more of Obamacare coming into full effect, more Dodd Frank being implemented, and other regulations that are geared to choke business a little more. 

Goldman: S&P 500 could drop 10% sometime during 2014
November 21, 2013, 5:00 AM

Goldman Sachs has released its its top ten market themes for 2014. It’s calling for U.S. growth to accelerate to 3% and another “solid year” for equities, notably in developed markets, with some caveats of course.

In a separate note released Wednesday, Goldman’s David Kostin and other strategist laid out their S&P 500 SPX +0.31% forecasts for next year, reiterating an end-2014 target of 1,900, a gain of 6% — its fair value estimate. (Note, that’s a little more sunshiny than that 12-month S&P target of 1,840 from Morgan Stanley, aka Bob Marley.)

Here are the caveats though. Goldman says given the big run in the S&P 500 — some 26% year-to-date — the index could fall 6% in the next three months and 11% over the next 12 months, to levels of 1,700 and 1,600, respectively. And the investment banks sees a 67% probability of a 10% drop at some point in 2014.

While multiple expansion was the name of the game for stocks in 2013, next year’s returns will depend on earnings and money flow rather than further valuation re-rating, says Goldman. And valuation is the biggest wildcard. Goldman says its year-end 2014 price target reflects a slight multiple contraction to a p/e of 15.2 forward EPS.

Durability of the expansion matters, says Goldman, and if above-trend growth continues past 2014, the output gap will narrow and the cost of equity will fall, with both trends supporting a higher P/E multiple. Goldman sees forward P/E for the S&P 500 of 16 times, with the index reaching 2,100 by the end of 2015 and 2,200 by the end of 2016.

So where to go with all that? Here is Goldman’s four recommended strategies for next year:
1.     Growth over value. Russell 1000 Growth  RUI -0.36% should beat Russell 1000 Value as slowing earnings growth, falling equity risk premium and higher bond yields will benefit growth.
2.     Firms investing in capital expenditure. Companies that have under-invested in recent years, but have high return on invested capital that Goldman thinks will spend more in 2014 should create a platform for future growth.
3.     Companies with high buyback yields. Goldman’s sector-neutral basket of 50 stocks with the highest share-repurchase yield should benefit as firms return more cash to shareholders.
4.     Stocks with high operating leverage. Economic growth will boost sales and firms with a high degree of operating leverage will benefit most in terms of a lift to EPS.

As for sectors, Goldman is re-shuffling its pro-cyclical sector allocation, recommending overweights in IT, consumer discretionary, industrials vs. underweights in consumer staples, utilities and telecom services. Financials, materials, energy and health care are market weights.

Here’s more tidbits from Goldman’s crystal ball on the S&P 500:
1.     Operating EPS forecasts for the S&P: $108/2013, $116/2014, $125/2015, $132/2016, $138/2017. Technology will generate 40% of S&P 500 EPS in 2014.
2.     Revenue forecast for the S&P : Up 5% in both 2014 and 2015, in-line with consensus. Every 100 basis point shift in 2014 U.S. GDP translates into a swing of roughly $5 per share in 2014 EPS.
3.     Margins: Will return to the previous high of 8.9% in 2014, 9% in 2015. Goldman says its profit-margin forecast is the “greatest investable gap relative to consensus expectations.” Bottom-up consensus sees margins establishing a record high of 9.5% in 2014 and 10.1% in 2015. Every 50 basis point swing in net margins equals around $5 per share shift in 2014 EPS.

And show me the money?
1.     $150 billion to flow into U.S. stocks in 2014, from individuals, investors and companies.
2.     Net household outflows will total $430 billion next year as direct ownership of stocks falls, but $130 billion is expected to flow into ETFs next year.
3.     Net equity inflows of $225 billion from mutual, pension funds and life insurers.
4.     International investment outflows of $25 billion, following on from what was seen in 2013. U.S. investors are expected to buy $200 billion of non-U.S. stocks during 2014.
5.     Total capital usage by S&P 500 firms will rise 18% to $2.2 trillion in 2014, and allocate 55% of capital spending for growth and return 45% to shareholders via buybacks and dividends.

– Barbara Kollmeyer

Once my mother asked me about long-term care insurance, she had obtained a policy through AARP, which was short on benefits, or peace of mind. I was early in my career and visiting my mother when the conversation started. Now my mother was an amazing women, she was a retired school teacher, served a church mission, tore down an old dilapidated house and built a new one in its place, and finally settled into a comfortable retirement, she raised seven children in Los Angeles in the 50’s through the 70’s.  

We looked at a some options and settled on one that was a little more expensive (maybe $25 per month), but it had more than twice the benefits. Today’s policies are even better.
When you are in good health and life is clicking along smoothly, it seems that a long stay in a nursing home or even home health care is something that happens to the other guy! Similar to the young folks who are newly married, maybe with one or two kids, and thinks that life insurance is for people who live riskier lives. This is simply denial!
In today’s world with the higher standard of care, medications, diets, etc., the need for long-term care is more likely than not for our older and wiser population. Families find it more difficult to provide the necessary level of care that our aging population needs. Providing for long-term care is a necessity.
So the problem becomes, which assets are mom and dad going to sell/liquidate in order to provide the care? The family home? The retirement account? The family business? And how will the remaining spouse survive when one enters a care center?

About ten years ago my mother, who was in great health, was diagnosed w