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Edward Jones to Host Open House

Edward Jones to Host Open HouseBrian Henning, a local financial advisor for the financial services firm Edward Jones, invites the public to attend an open house from 5:00 p.m. to 8:00 p.m. on Thursday, May 29, 2014 at 95766 Amelia Concourse (just before North Hampton).

“We are happy to be part of the Fernandina Beach/Yulee community and would like to express our appreciation for the confidence and support we receive year-round,” Henning said.

Refreshments will be served.

Henning may be reached at (904) 261-9392.

Edward Jones provides financial services for individual investors in the United States and, through its affiliate, in Canada. Every aspect of the firm’s business, from the types of investment options offered to the location of branch offices, is designed to cater to individual investors in the communities in which they live and work. The firm’s 10,000-plus financial advisors work directly with nearly 7 million clients to understand their personal goals, from college savings to retirement, and create long-term investment strategies that emphasize a well-balanced portfolio and a buy-and-hold strategy. Edward Jones embraces the importance of building long-term, face-to-face relationships with clients, helping them to understand and make sense of the investment options available today.

Edward Jones is headquartered in St. Louis. The Edward Jones interactive Web site is located at www.edwardjones.com, and its recruiting Web site is www.careers.edwardjones.com.

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2 New Year’s Resolutions You can Take to the Bank

2 New Year's Resolutions You can Take to the BankHere are two New Year’s resolutions you can take to the bank.

1) Make sure that your bank and/or credit union is strong
2) Ensure that your CDs are earning as much as possible.

Keeping both these resolutions won’t cost you a penny and is as easy as visiting www.bauerfinancial.com.

Based on BauerFinancial’s independent analysis, over 70% of the nation’s federally-insured banks and credit unions are currently earning recommended ratings (5-Stars or 4-Stars). While the numbers vary by state, fewer than 10% nationwide are “Troubled or Problematic” (rated 2-Stars or below).

Some states were hit particularly hard by the “Great Recession” and have not turned the corner quite as quickly. This makes checking your banking relationships even more important. (You know who you are.) Even so, there is a large pool of recommended institutions from which to choose. And it’s simple!

Just click on “Bank Star Ratings” or “Credit Union Star Ratings” at bauerfinancial.com, select your state and choose from the abundance of recommended institutions. (All institutions rated by BauerFinancial are federally insured.)

While you’re on the site, click on “CD Rates”, then select “Consumer CD Rates”. You will see some of the best consumer CD rates in the country. You can choose to open a CD with any of the banks listed there, or use the page as a negotiating tool to get a better rate locally.

Two painless resolutions that will help you sleep better and help your wallet get fatter. And both are absolutely FREE.

…because peace of mind matters.

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Tips for Improving Your Credit Scores

Yes, responsible behavior with a CC works well

Americans have become more informed about certain aspects of their credit scores, but many still don’t know enough about the risks associated with low scores and alleged “credit repair” services.
While a majority of consumers know some of the basics about credit scores, many are still unclear about some of the most important facts. For example, a majority of respondents in a recent survey knew that mortgage lenders and credit card issuers use credit scores. However, less than 40% knew that many other service providers also use these scores, including landlords, home insurers, utility companies and cell phone companies. A sizable minority also falsely believe that credit scores are influenced by their age (43%) and marital status (40%).

What You Can Do

A typical credit score will range between 300 and 850 points. Although all lenders make decisions based on the particulars of the lending situation, generally speaking, the higher your score, the lower the perceived risk to the lender, and the more attractive the interest rate you will be offered. A score of 680 or lower will make it more difficult for you to get approved for credit and will probably increase the interest rate you are offered.

Here are some tips for raising or maintaining a higher credit score:
¥    Pay your accounts on time. Lenders are looking for a proven track record of making timely payments. Payment history determines about 35% of your credit score.
¥    Keep your balances low. About 30% of your score is determined by what the industry refers to as your “credit utilization ratio,” which is the amount you owe in relation to the amount of credit available to you. If that percentage is more than 50%, your score will be lower.
¥    Open a credit card account. While many Americans are turning to prepaid credit cards or debit cards to help them better manage their finances, this can work against your credit score. Without any credit history, you could be considered “unscoreable” and may have difficulty in obtaining credit.
¥    Don’t open too many credit lines in a short period of time. Each time you apply for a loan or credit card, the lender will make an inquiry into your credit score, which typically knocks points off of your score.
¥    Hold on to older, unused accounts. The longer an account has been open and managed successfully, the higher your score will be.
¥    Don’t default on your payments. If you default on a loan — such as when you file for bankruptcy or a bank forecloses on your home — it can knock up to 100 points or more off of your credit score.
¥    Maintain a diversified credit mix. If you hold an auto loan, a home mortgage, and credit cards that are well managed, you will generally have a higher credit score than someone whose credit consists mainly of finance companies.
¥    Beware of credit repair companies. The Consumer Federation of America warns consumers away from these companies, saying that they over promise, charge high prices, and perform services, such as correcting credit report inaccuracies, that consumers could do themselves by simply contacting the lender and the credit bureaus.

Class Offered: Investing in Today’s Financial Markets

Investing in Today's Financial MarketsFSCJ Betty P Cook Nassau Center to Offer “Investing in Today’s Financial Markets” Class

Instructor Steve Nicklas is returning to the Betty P. Cook Nassau Center in Yulee to offer his popular Investing in Today’s Financial Markets class. The 4-week class will cover important aspects of the stock and bond markets, including popular investment vehicles such as mutual funds, annuities, and investment and retirement planning.

Tuition for the class is $36.00; the class meets each Tuesday nights from 6:30 PM to 8:00 PM beginning October 8 through October 29, 2013.

For additional information or to register for the class please call the Nassau Center at (904) 548-4432.

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The Big Gold Sell Off Puzzle

Gold rush

Keep your gold close; maybe not this close!

Extra, extra!!! Big meltdown in the gold market! Some Wall Street pundits are saying the bear is here to stay, and it’s time to sell everything gold-related and look for greener pastures elsewhere, preferably the stock market obviously. Others are claiming this is the buying opportunity of the decade, and it’s time to go “all in.”

Both groups are forgetting to abstract and analyze all aspects and personally I think a third reason is at play. Just like in 2008 here in the States, lots of Europeans are now facing the reality that they have to sell their gold to meet their other financial obligations.

It really goes beyond me that there are still so many conventionalists in the new world economy that listen to a guidance published by Goldman Sachs. Why anybody would listen to those guys after all they’ve been wrong about, at taxpayers’ expense, is beyond me.

Now, I do admit that the European sell off may only be part of the puzzle, but human nature dictates that once a selloff starts pushing investors into panic mode, that negative momentum can seem to take on a life of its own and move asset classes down way beyond reality.

I have always been a proponent of treating gold for what it is, a very long term fundamental safety net asset, a retirement account if you wish, not a speculative instrument. Gold preserves wealth. If you need proof, history is loaded with more or less valid comparisons.

For all the years that I have been encouraging people to buy precious metals, my advice now is to stick with your plan. Buy consistently and try to lower your dollar cost average. The reason why we haven’t collapsed here in the US yet is, because the US dollar, with all its currency debasement is still the most leveraged buy in a world of financial misery, because governments around the world, like ours, are still printing up trillions of dollars’ worth of new currency units in order to try to avoid an inevitable currency crisis. Until now, much of that new paper money is basically just sitting in the financial system. But at some point it will enter into the economy and cause the higher prices for consumer goods I have been pointing at. Consequently we are going to see an enormous amount of asset bubbles, one of them being precious metals and especially gold and silver.

Ad when that happens you’d better have diversified yourself politically and financially, because Executive Order 6102 will see a repeat.

Granted, all investments are dangerously risky these days. There are very few bargains anywhere, in any market, in any country. Governments around the globe are completely out of control and using all their assumed power to rid you of your nest eggs, even your pension funds. For the last decade or so Social Security has been pointed at in terms of unfunded government liabilities, without ever taking real action to work on solutions. Now the US government is eying US Pensionfunds drowning in $2.5 trillion of unfunded liabilities.

On January 17, Bloomberg reported that the US Consumer Financial Protection Bureau is exploring “helping” Americans manage the $19.4 trillion they have in retirement savings. The reason brought forward is to more “fairly” redistribute pensions and privately held retirement funds. If the government goes through with this plan, and I don’t see any reason why they wouldn’t (other Western Governments have already done this so precedence is created), you’ll lose control of any money that’s invested in a US-based retirement fund.

Yes gold still remains high on my asset list, just make sure you are protecting yourself from an increasingly greedy government.

Get Involved with America Saves

Get Involved with America SavesHere are 5 Easy Ways to Get Involved in America Saves and save successfully! This article is by America Saves Communications Manager Katie Bryan Week.

America Saves Week, February 25 – March 2, 2013, is chance for individuals to assess their own saving status and take financial action. Studies reveal that having a savings plan with specific goals can have beneficial financial effects, even for lower-income families.

Here are 5 easy ways to get involved in America Saves Week:

    1. Take the America Saves Pledge: Those with a savings plan are twice as likely to save for emergencies and retirement than those without a plan. Join over 310,000 people who have already committed to save. Pledge or re-pledge today!
    2. Share Your Savings Goal: People save more successfully when they have a goal in mind. That’s why we’ve created posters so you can put your savings goal into perspective and, share it.
    3. Assess Your Savings: Find out if you are saving in all the right places with this 12 step savings assessment.
    4. Test Your Savings Knowledge: Take this savings quiz to reveal how much you understand about the realities of savings in America.
    5. Share Savings Tips and Advice with Family and Friends: On Twitter and Facebook? Share these social media posts with your friends and followers to encourage them to save.

America Saves Week is coordinated by America Saves and the American Savings Education Council. Started in 2007, the Week is an annual opportunity for organizations to promote good savings behavior and a chance for individuals to assess their own saving status.

Visit the website, America Saves, for more information.

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How to Painlessly Pay Off Your Mortgage

Paying off your mortgage early requires financial discipline

Paying off your mortgage early requires financial discipline

There’s an eternal debate about whether you should use an unexpected amount of free cash (bonus?  inheritance?) to pay down your mortgage or put the money into a retirement investment account.  The numbers on a spreadsheet tend to favor investing the money if the investment returns are higher than the mortgage interest rate (currently in the 3.5% range).  But of course there is absolutely no guarantee that this will happen.  And some people sleep better when they’re debt-free.  Can you put the value of THAT on a spreadsheet?

A more interesting discussion is whether you can use some of your lifestyle expenses to pay down your mortgage–and what the value of even small budget cuts would be over time.  You can explore this surprisingly fascinating subject on a new website: www.mortgagenudge.com, which lets you look at relatively modest shifts from the expense side of your ledger to your mortgage, and see the long-term results.

As an example, suppose you have a $250,000 mortgage at a 4.5% interest rate.  You enter this information into the website, along with your monthly principal and interest payment.

Then you move a little slider that determines how much extra you might be willing to put down on your mortgage each month.  For instance, suppose you discover that you’re spending $60 a month at Starbucks, when you could be brewing moderately decent coffee at home before your commute to work.  Let’s say you want to kick the habit gradually, so you start out putting $20.29 extra on your monthly mortgage payment.  You agree to find an additional $20.29 a month the following year, which means a little over $40.50 will be paid monthly the next year.  Your Starbucks habit will be gone in the third year, when you find those same additional savings to pay down your mortgage.  If you get a raise the following year, some of that is added to this payment, and so forth.

When the slider moves, you discover that this modest diversion of lifestyle dollars, over time, pays off your mortgage 7 years and 9 months early, saving you $48,531 in total interest.  If you want to be more aggressive, and start off with $26.29 a month–with graduated increases thereafter–your mortgage is paid off nine years and a month early, at an interest savings of $57,131.  The slider takes you all the way up to an aggressive $64.29 additional monthly payment in the first year, with increasing payments thereafter.  That cuts the 30 year mortgage almost in half, saving more than $92,000 in interest.

The key to making this interesting exercise work in the real world, of course, is discipline; making those additional payments each year like clockwork.  You can take some money out of eating out, or the cost of an unnecessary cable TV premium channel that you never watch, or some other service you no longer use–or, instead, when you receive an increase in salary, you can put some of that on the monthly mortgage check.  The point here is how substantial some of these smaller incremental adjustments can become over time; a few pennies saved can become big dollars later on.  Big dollars that can help you enjoy a nicer lifestyle in retirement, for instance.

Opposite Day Investing

A stock market of apples and oranges

Apples or Oranges?

When the stock market rises, as it mostly has since early 2009, the overall wealth of investors goes up, sometimes by billions or even trillions of dollars.  When the stock market falls, you read that investors lost billions or even trillions of dollars in aggregate.

Have you ever wondered where that money comes from when people get wealthier?  Or where it goes when the market turns south?

In an interesting essay, mutual fund manager John Hussman -who has an economics background -offered a great explanation.  He started by talking about investment choices.  Let’s say you want to buy a $100 bill ten years from today.  You decide that you’re willing to pay $46.31 now for the chance to take that bill home with you in late 2022.  Using simple math, Hussman calculates that you have bargained for an 8% annual return on your investment.

Suppose the market for $100 bills ten years in the future gets a bit more competitive, and people are willing to pay higher prices.  Let’s say you join the bidding, and eventually agree to pay $67.56 for that future $100. You have now bargained for a 4% annual return.

In a highly-competitive bidding frenzy, when everybody and his sister is frantic to buy those future $100 bills, you find that you have to pay $84.49 today for $100 ten years from today. You are now an investor in 10-year Treasury securities, which are currently yielding 1.7% a year.

This is how security prices work.  People bid for the right to own a set of expected future cash flows, a more complex version of that $100 bill.  In bull markets and market rallies, people are willing to pay more for that future cash; in bear markets, people have to be coaxed into the market with lower prices and higher anticipated returns.

The interesting thing about this dynamic is that the expectations of the people who are doing the bidding are often just the opposite of what mathematics tell us.  Meaning?  When the market has gone up dramatically, people expect more of the same and bid prices up even higher.  They pay such high prices that the difference between the purchase price and the future cash flows–the value of that $100 bill–will be an investment return in the low single digits.  Of course, they’re expecting the market to give them double-digit returns as it has in the past.  In grade school terms, they are experiencing “opposite day.”

Over time, as they get closer to claiming that $100 bill, they receive the (predictable) single digit returns that they paid for.  Meanwhile, the herd of investors who we call “the market” recover from their frenzy and realize that paying eighty dollars today for $100 in ten years is not a bargain.  They reduce their bids accordingly, and the investor who paid eighty dollars is now looking at a market that is willing to pay fifty, tops.

Now you can see where the money comes from in a bull market, and where it goes when the market heads south: nowhere.  The investments purchased at higher prices were never actually worth what people paid for them at the top of the bull market, so the loss of wealth was built into the original purchase price, even though it only shows up on the investor’s balance sheet when the market returns to normal pricing.  The lower prices that people pay at the dismal bottom of a bear market, when everybody seems to expect the losses to go on forever, allow you to purchase more future cash flow per dollar invested.  When the market recognizes what a bargain this was, and bids up the price, that is no more than a reflection of the value built into the original price.

There is, of course, another way to invest: steadily, over time, with an eye to bargains when they’re available.  The goal there is simply to accumulate future cash flows at the best current price available, to buy as many future $100 bills as you can at a variety of prices, which will, over time, average out to an average valuation which is probably pretty close to a fair price.  Meanwhile, you participate in the growth of a range of companies, and steadily benefit from the work and innovation and value that is produced by millions of people who get up in the morning and go to the factory floor or the office and do their jobs effectively–probably a lot like you do (or did).

As the markets rise and fall, you’ll experience paper gains and paper losses that will feel real, but will actually be nothing more than a reflection of our collective emotional state.  Somewhere under all the noise, under wealth that daily appears out of nowhere and vanishes back where it came from, there is the underlying growth of the business enterprises that you own, the growth in earnings, the new factories, new products, increased sales.

That value is real.

Stop, Drop and Rollover Retirement Assets – Carefully

Mark Dennis gives input on Retirement Assets: sit, stay or rollover?

Mark Dennis gives input on Retirement Assets: sit, stay or rollover?

Have you switched jobs recently and are wondering what to do with the retirement plan assets at your previous employer? You could roll them over into your new employer’s plan, but a rollover IRA may be a better choice. A rollover IRA can provide you with the broadest range of investment choices and the greatest flexibility for distribution planning, and can typically be operated with fewer restrictions.

For example, a rollover IRA gives you:

• More control: As the IRA account owner, you make the key decisions that affect management and administrative costs, overall level of service, investment direction, and asset allocation. You can develop the precise mixture of investments that best reflects your own personal risk tolerance, investment philosophy, and financial goals. You can create IRAs that access the investment expertise of any available fund complex, and can hire and fire your investment managers by buying or selling their funds. You also control account administration through your choice of IRA custodians.

• More flexibility: IRAs can be more useful in estate planning than employer-sponsored plans. IRA assets can generally be divided among multiple beneficiaries in an estate plan. Each of those beneficiaries can make use of planning structures such as the Stretch IRA concept to maintain tax-advantaged investment management during their lifetimes. Beneficiary distributions from employer-sponsored plans, in contrast, are generally taken in lump sums as cash payments. Also, except in states with explicit community property laws, IRA account holders have sole control over their beneficiary designations.

Efficient Rollovers Require Careful Planning

One common goal of planning for a lump-sum distribution is averting unnecessary tax withholding. Under federal tax rules, any lump-sum distribution that is not transferred directly from one retirement account to another is subject to a special withholding of 20%. This withholding will apply as long as the employer’s check is made out to you — even if you plan to place equivalent cash in an IRA immediately. To avert the withholding, you must first create your rollover IRA, and then request that your employer transfer your assets directly to the custodian of that IRA.

Keep in mind that the 20% withholding is not your ultimate tax liability. If you spend the lump-sum distribution rather than reinvest it in another tax-qualified retirement account, you’ll have to declare the full value of the lump sum as income and pay the full tax at filing time. In addition, the IRS generally imposes a 10% penalty tax on withdrawals taken before age 59½.

Also, if you plan to roll over the entire sum, but have the check made out to you rather than your new IRA custodian, your employer will be required to withhold the 20%. In that event, you can get the 20% refunded if you complete the rollover within 60 days. You must deposit the full amount of your distribution in your new IRA, making up the withheld 20% out of other resources. When you file your tax return for the year, you can then include a request for refund of the lump-sum withholding.

If you have after-tax contributions in your employer plan, you may opt to withdraw them without penalty when you roll over your assets. However, if you wish to leave those funds in your retirement account in order to continue tax deferral, you can include them in your rollover. When you begin regular distributions from your IRA, a prorated portion will be deemed nontaxable to reimburse you for the after-tax contributions.

Potential Downsides of IRA Rollovers

While there are many advantages to consolidated IRA rollovers, there are some potential drawbacks to keep in mind. Assets greater than $1 million in an IRA may be taken to satisfy your debts in certain personal bankruptcy scenarios. Assets in an employer-sponsored plan cannot be readily taken in many circumstances. Also, you must begin taking distributions from an IRA by April 1 of the year after you reach 70½ whether or not you continue working, but employer-sponsored plans do not require distributions if you continue working past that age.

Remember, the laws governing retirement assets and taxation are complex. In addition, there are many exceptions and limitations that may apply to your situation. Therefore, you should obtain qualified professional advice before taking any action. Talk to a Certified Public Accountant or your local Certified Financial Planner™ professional about retirement plan assets.

Doughnuts, Diversity, and Market Volatility

Comfort food until it becomes detrimental to your 'financial' health

Comfort food until it becomes detrimental to your 'financial' health

In the midst of both an election year and more tension in the Middle East, it can be tempting to avoid making any investment decisions at all these days, given the heightened levels of market volatility and uncertainty. Interestingly, a plate full of doughnuts can teach us a lot about investment strategy in stressful times. Although a diet of sugar and carbs may seem comforting at the moment, it will eventually upset our systems, keep us awake at night, and lead to undesirable outcomes. So too, can an investment diet that is out of balance with our long term objectives.

As investors, we are exposed to financial risk, or volatility, in two general ways: company-specific risk and market risk. Long-term investors can reduce exposure to company-specific risk by diversifying among many different stocks within the same asset class.  Market risk can be managed, but not eliminated entirely, by holding investments in several different investment categories, or asset classes. It’s the familiar theme of not keeping all our eggs in one basket.

Correlation is the Key

Longer term, the market risk associated with an individual asset class, such as stocks, may be reduced by allocating a portion of a portfolio’s assets to other types of investments that historically have reacted differently to market and economic events.  A statistic known as correlation measures the tendency of two investments to move together. A correlation close to zero indicates that two investments are largely independent of each other. The closer a correlation is to 1.00, the greater the tendency two investments have had to move in tandem.
Below are four assets that have had relatively low correlations with U.S. stocks during the past decade (Sources: S&P Capital IQ Financial Communications; Barclays Capital). Remember, past performance does not guarantee future results; there is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio, and diversification does not ensure against all market risk. However, having an imperfect strategy is generally preferable to having no strategy at all.
• Commodities  (0.33)
• Cash  (-0.07)
• Investment Grade Bonds  (-0.06)
• Home Prices  (0.14)

Managing Single-Security Risk

Modern portfolio theory is founded on the assumption that investment markets do not reward investors for taking on risks that could otherwise be eliminated though diversification. A 2003 study found that at least 50 stocks may be required in one’s equity portfolio to provide sufficient diversification.

Fortunately, there are many strategies available for diversifying a stock portfolio. Investors can allocate portions of a portfolio to domestic and international stocks, which may take turns outperforming depending on circumstances in various global economies. An allocation to small-cap, midcap, and large-cap stocks also provides exposure to companies of various sizes. Although there are no guarantees, smaller companies may be nimble enough to exploit untapped market niches and capitalize on growth potential.

Dividend Strategies

In addition, equity investors looking to reduce volatility may want to consider dividend-paying stocks. Although a company can potentially eliminate or reduce dividends at any time, a dividend may provide something in the way of a return even when stock prices are flat or declining. When evaluating dividend-paying stocks, it may be worthwhile to review how long a company has paid a dividend and whether the dividend has increased over time. According to a study by Standard & Poor’s, firms that had increased their dividends for the past 25 years outperformed the S&P 500 and also were less volatile during the 5-year, 10-year, and 15-year periods ending December 31, 2011. (Past performance does not guarantee future results!)  When investing in dividend-paying stocks, be aware that tax rates on qualified dividends are scheduled to increase in 2013 unless Congress acts to avoid the impending fiscal cliff and changes the tax laws.

When the markets get jumpy and investors seek shelter from high volatility, the temptation is strong to pull out everything and run to cash, even though interest rates are at or near zero. Furthermore, trying to successfully time re-entry into the markets without missing a quick upward recovery can be practically impossible.  For the long-term investor, asset allocation with low-correlation investments, diversification, and dividend-paying stocks are all noteworthy methods worthy of consideration in an uncertain world.

Hot Air Stimulus from the Fed

QE3 is making some financial traders smile

Another hot air round of stimulus is rising up

Traders and people who try to predict the short-term movements of the stock market–that is, every market participant except real investors–pay a lot of attention to every utterance from the Federal Reserve Board. They eagerly try to read between the lines of the opaque comments in the Federal Open Market Committee minutes, hoping to see if the Fed plans to stimulate the economy a bit further and give stock prices a temporary boost.  Imagine their excitement last week when they read this obscure piece of FOMC wordsmithery:

“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

Okay, maybe that wasn’t exactly ‘plain’ English, but it’s about as clear as the Fed gets to saying that if the economy doesn’t get busy and start recovering at a faster pace, we’re going to get some stimulus come September.

The first surprising thing about this is that jobs growth was surprisingly strong in July–163,000 new jobs were created in a month when many people are on vacation.  Meanwhile, the National Association of Realtors reported that sales of previously-owned homes jumped 2.3% in July, 10.4% over the pace seen in July 2011.

The second surprise is that it seems like the Fed has already done just about everything it CAN do to encourage economic growth.  A quick check shows that if interest rates get much lower, banks will be paying you to borrow from them.  The government is already experiencing this happy state.  In a Treasury auction around this time last year, the government’s Inflation-Protected Securities sold at an aggregate negative interest rate–meaning that borrowers were paying their Uncle Sam for the privilege of lending him their money.

In fact, there are several possibilities.  One is for the Fed to cut the interest it pays to banks who are parking their excess reserves, to encourage a lot of lazy money to get off the couch and get itself lent out to households and businesses.  The Fed could also engage in a third round of Quantitative Easing.  Under QE3, the Central Bank would invest its own money in longer-term Treasury Bonds, forcing down long-term interest rates.

But this might actually be an example of a more effective stimulus: hot air.  That is, the Fed can depart dramatically from its normal circumlocutions and include, in its minutes, a direct statement about how serious it is about boosting economic growth.  That gets traders and short-term opportunists excited. With such easy-to-read tea leaves in front of them, they call in trades, buy stocks, boost the market, generate a bit more optimism in the corporate sector–and the economy gets a quick jolt without the Fed having to reach into its pocket.  It hasn’t worked so far, but Fed Chairman Ben Bernanke will make a widely anticipated speech on Friday–his second shot at creating a hot air stimulus for the U.S. economy.

Sometimes A Little Spark Is All You Need

The difference between a Spark and a Jolt defines intensity

At one point last Tuesday, October 4, the S&P 500 index dropped below 1,091, which represented a 20 percent decline from the April 29 closing high, according to MarketWatch. That’s a key number because many investors consider a 20 percent decline to signify a bear market. But, lo and behold, just when it looked like the market might go from bad to worse, the Financial Times (FT) published a story that hit the internet that afternoon and the U.S. stock market staged a massive positive reversal.

The FT story said, “European Union finance ministers are examining ways of coordinating recapitalizations of financial institutions after they agreed that additional measures were urgently needed to shore up the region’s banks.”

That story prompted a huge 3.7 percent rally in the S&P 500 index in the last hour of trading on Tuesday, according to Bespoke Investment Group. Interestingly, the reversal propelled the index well above the key 1,091 level and prevented us from starting a new bear market in the U.S.

The key point about the late day reversal on October 4 is not so much that it saved us from printing a new bear market (although that’s a good thing!).  Rather, the amazing thing is the key reversal was prompted by mere “talk” of another plan to help save the euro-zone from the sovereign debt abyss.

Last week’s market action reinforced the notion that macro issues like the sovereign debt problem – rather than company-specific news – are still a significant driver of the overall stock market.  Until the critical macro issues get resolved, we should be prepared for major market moves – both up and down – based on little more than the latest headlines.

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Stock Dividends – the Rodney Dangerfield of the Investment World

Rodney Dangerfield RIP

Stock Dividends Can't Get Any Respect

An often overlooked aspect of successful stock investing is the importance of dividends. In bull markets, investors tend to focus on price appreciation, meaning, they look solely for stocks that can increase in price.  Like the late comedian Rodney Dangerfield, who often complained, “I get no respect, I tell ya,” dividends are often underrated or even ignored by growth-oriented investors.

In heady times like the late 1990s, investors feasted on stocks that would double or triple in a matter of months. Watching a stock go from $20 a share to $40 or $60 a share is exhilarating and makes for good cocktail party chatter. On the other hand, watching a stock sit at $20 a share for several years while you collect and reinvest a 3 percent dividend is rather boring and not worth sharing on the social circuit.
However, just like the old story about the tortoise and the hare, the slow and steady growth of dividends plays a very important role in making money grow over time.
The past 10 years is a great example of how dividends have helped improve the returns of an otherwise disappointing stock market. Here’s the data:
• For the 10 years ending September 23, 2011, the S&P 500 index had a positive average annualized return of 1.3 percent excluding reinvested dividends.
• For the 10 years ending September 23, 2011, the S&P 500 index had a positive average annualized return of 3.6 percent including reinvested dividends.
• As shown above, receiving dividends and reinvesting them added 2.3 percentage points per year to an investor’s return compared to the return generated by price appreciation alone of the underlying stocks in the S&P 500.
Sources: Morningstar, Yahoo! Finance
In today’s environment of low returns, finding a way to possibly eke out an extra 2.3 percentage points of return per year is attractive.
Over a longer period, receiving dividends and reinvesting them has accounted for one-third of the total return of the S&P 500 index over the past 80 years, according to Standard & Poor’s.
Standard & Poor’s also points out the following benefits of dividends:
• Dividends allow investors to capture the upside potential while providing some downside protection in the down markets.
• When bond yields are low, like they are now, dividend paying stocks might be a way to enhance an investor’s current income.
Just like any other investment, though, you need to figure out how dividends fit within your overall investment strategy. Are you looking for dividends to provide stability, income, or growth within your portfolio? Or, perhaps it’s some combination of all three.

Financial Markets Tied in Knots as Fed Does “The Twist”

Operation Twist on Search Amelia

Twist long enough and you're left with half a dollar

In a much anticipated action dubbed “Operation Twist,” the Federal Reserve announced last week it would reshuffle its balance sheet by selling $400 billion of shorter-term Treasury securities and use the proceeds to buy longer-term securities. Although broader financial markets were not impressed, the Fed said it hopes the action will lower longer-term interest rates and, “contribute to a broad easing in financial market conditions that will provide additional stimulus to support the economic recovery.”

Regarding interest rates only, the Fed’s action has worked. The yield on the 30-year Treasury bond declined from 3.2 percent the day before the Fed’s announcement to 2.9 percent just two days later, according to data from Yahoo! Finance. That’s a rather dramatic decline for such a short period.

Unfortunately, the stock market failed to respond positively to the Fed’s announcement as the S&P 500 index lost 6.4 percent for the week. The market’s drop, though, went beyond disappointment in the Fed’s action. The following also contributed to the market’s red ink:

•    Increased fears of a Greek default.
•    Rising concern of a world-wide financial crisis, with sovereign debt at the epicenter.
•    Growing signs of sluggish economic growth in China, which had been one of the few countries immune to economic turmoil.
•    A 13 percent drop in the price of copper on Thursday and Friday of last week, which is concerning because the price of copper is often viewed as a proxy for worldwide industrial growth.

With the market’s blood pressure rising, it reminds us of what flight attendants often say. “Ladies and gentlemen, the Captain has turned on the fasten seat belt sign. We are now crossing a zone of turbulence. Please return to your seats and keep your seat belts fastened. Thank you.”  In the event of a financial water landing, though, will your seat cushion be enough to keep you afloat?

Sources: Wall Street Journal, MarketWatch, Bloomberg

The Changing Future of Debit Cards

Debit or Credit Cards maybe obsolete with personal Phone Scanners

Debit Cards have become a way of life for many of us, a fact I am reminded of every time I slide a card at a check out counter when the clerk asks: Debit or Credit? Today card transactions are 60% debit and 40% credit. A new swipe charge that will go into effect on October 1, may however hold some surprises in store.

I’m particularly offended by the opening sentence in Wikipedia where it explains the advantages of using debit cards as it states a gross assumption: “A consumer who is not credit worthy and may find it difficult or impossible to obtain a credit card can more easily obtain a debit card, allowing him/her to make plastic transactions.”

After cutting up my credit cards (8) exactly 25 years ago this month, entirely directed by reasons of philosophical economic doctrine, I went totally cash for awhile, which admittedly was quite easy down in the Caribbean Islands since many establishments had cash only policies. Plane tickets for travel were bought at the local airline counter with a check or cash and only renting a car in faraway destinations could be a problem without a credit card. But not enough of a problem to make me want to have one again as Traveler Checks accomplished the same result. But then the Worldwide Web came along with online payment systems, shopping online and reservation systems that required some form of financial guarantee, the use of debit cards rose manifold in just a short number of years.

My first debit card was the EuroCard, attached to a Dutch bank account and it worked well on the island of St.Martin and obviously in Europe. Even though the first debit cards saw daylight in Seattle Washington in 1978, it took another 20 years before debit card use outnumbered check usage around the world.

My preference for debit cards comes from the fact that I find debiting money directly from my checking account(s) not only keeps me living within my preset budgets, having several debit cards to several accounts, gives me most of the benefits of credit cards without the hassle every month of verifying and administering the use versus the time it takes to pay 8 or more different credit cards. My monthly statement provides a good snapshot of how much I spend per month and where it’s going.

So why are people still using credit cards? Well three main reasons: You can spend more than you have — and you typically get better rewards and better protection than you do with debit cards. The first reason is part of why we are now living in a credit crunch economy. The second reason is at best an incentive financed by the fact that credit card use is highly profitable and to encourage the use, financial institutions gift reward programs. Bu the third reason is what bothers me: credit cards get a much better protection than debit cards, mainly because you’re using someone else’s money to purchase a desired lifestyle. And as we know financial institutions have a special place in Washington’s heart as Federal law protects you if you need to dispute charges on a credit card, but not if you use a debit card.

A Dying Tradition?

Over the years I’ve come across debit card traps that can hurt you financially if you’re not aware or on the alert. Here’s what I’ve learned about protection and when to use my Debit Cards as Credit Cards.

Identity theft
When your debit card number is stolen, unlike credit cards, debit cards hit you with fraudulent payments and fees immediately. To protect yourself from this debit card trap, make sure your bank will not only dispute the fraudulent charges and carry an investigation on your behalf, but that your checking account will be credited the amounts immediately. Bear in mind that this credit will be provisional, pending the outcome of the investigation. Rule of thumb is if lost or stolen debit cards are reported within 48 hours, cardholders are not responsible for more than $50 of fraudulent use. If reported two to 60 days afterward, cardholders could be held accountable for up to $500 of fraudulent charges. After 60 days, though, consumers face unlimited loss.

Credit cards, by contrast, face a $50 maximum liability, regardless of when reported. Research indicates that credit cards are nearly twice as likely to fall prey to card fraud.

Overdraft Fees
As of August 15, 2010, the Federal Reserve has prohibited banks from charging overdraft fees on debit card purchases with insufficient funds in the account. Instead, the charge will be rejected. You may opt-in to your bank’s overdraft protection, which will either extend you a line of credit or tie your checking account to your savings account. This said, you may still find yourself trapped into paying bank charges every time you overdraw your account under the Protection Plan your bank includes in your debit card agreement. Avoid this debit card trap by keeping a close eye on your checking account through online banking or don’t fall for the trap of overdraft fees by simply instructing your bank to not pay for a transaction if the money is not in the account.

Pre-Paid Debit Cards
Debit cards with preloaded amounts are becoming more and more popular, especially with parents who prefer to give their teens or college students a pre-set amount instead of a credit card with a large credit line. However, pre-paid debit cards carry monthly fees, activation fees, transaction fees and even a re-activation fee after a year has elapsed. At times, pre-paid debit cards may become overdrawn when the fees continue to apply on an empty card. Avoid this debit card trap by setting up a checking account without overdraft protection, to prevent purchases when the account has insufficient funds.

Free Offers with Strings Attached

Don’t use a debit card for free giveaways. Many magazines offer one free issue, but you must respond within 15/30 days to cancel the future membership tied to the promotion. This is true of free books and CD giveaways, free gym memberships, free samples and any giveaways that require you to provide your debit card number, while the vendor assures you that you will not be charged for the freebie. To avoid having your bank account hit with unexpected charges, use your debit card as a credit card in such cases or forgo the promotion altogether.

Recurring Payments
If you sign up for a membership at a shopping club, gym, or any other club that collects monthly, by-yearly or yearly dues, your debit card will be kept on record for recurring membership payments or any other fees, which you may not be fully aware of. This may cause your checking account to be hit “unexpectedly”. Even after you cancel your membership, your checking account may be debited for one or two months, often due to clerical errors. You can avoid this by paying with a personal check and providing a credit card for future payments.

Utility Auto Billing
Experience has taught me to forego the convenience of using my debit card to set up auto billing with my utility companies. For one thing, monthly charges may go up unexpectedly due to increased consumption or the expiration of a promotional rate. In addition, erroneous charges for canceled services will not be credited until the next billing cycle, and even then the credit will apply to the utility account, not my checking account. To avoid this debit card trap, make the payments online, after verifying that you have sufficient funds to cover the charge.

Future Concerns
In the first half of this year, every time you used your debit card the merchant was charged a fee of $0.44 to $0.47, even if you only bought a pack of gum. After 7 months of back and forth where The Federal Reserve initially proposed capping this fee at $0.12, the regulation imposed last June ended up being a total of $0.26 with financial institutions with $10 billion or less in assets, governmental benefit cards, and certain prepaid cards being exempt. As banks like JPMorgan, Bank of America and other lenders already indicated their intention to supplement this loss of revenue by adding new checking account fees, this issue is far from over which may make using your debit card more expensive in future.
When the Fed’s first announcement on Debit Card Fees came out on December 17, 2010, swipe fees were proposed at $0.07 per swipe and the headline said:
“Fed Proposal Would Cut Debit Card Fees by 70%!”
There were no headlines when the actual fees that will go into effect on October 1 were cut by”only” 40%.

Consumer Impact Warning

Although less likely under the current cap of $0.26 than under the previous proposal of $0.12, it’s still very possible that some issuers and merchants will:
• start charging debit card fees
• favor one payment method over another
• limit free checking accounts in favor of fee based accounts
• issue prepaid cards as their way to deal
• make rewards programs a dead issue
• put pressure on the Feds to set a minimum payment amount such as $10 for credit card purchases.

In any case, nothing in this entire exchange of opinions, is benefiting the consumer and once again displays how Washington and Wall Street play ping pong (tit for tat?) with your money. In any case, technology is going so fast that soon all sorts of cards and wallets are obsolete and replaced by personal smartphone scanners with security keyed account protections. We’re living in interesting times.