January 20, 2009
The Solution is Here, Now
One look around tells us that this recession is a hum-dinger. Local building supplier Foxworth Galbraith has gone from 205 employees to 30. Being in construction, they are at the epicenter of the economic contraction, but that is still a lot of jobs lost.
The Federal government’s historic intervention has succeeded in keeping the money center banks open, those central to the government’s ability to create and regulate the money supply. We need that to grease the wheel of business. Without money circulating everything in the economy may really seize up.
The next big ticket item will be a stimulus package focused on rebuilding infrastructure, roads, bridges, etc., and in the process putting a few million workers back on the job.
But the real source of the problem, falling home prices, needs to be dealt with before the economy can truly find firm footing again. We can fix everything else, but every new foreclosure – whether caused by job loss or by mortgages so out of sync with reality that homeowners feel forced to walk – will extend the downward spiral in prices and put more pressure on the next batch of homeowners and businesses.
What is needed is a multi-pronged approach:
1. We need a prolonged period where low interest mortgages are available to allow time for all the adjustable rate mortgages to be refinanced at attractive, fixed rates. To do this, the industry needs to attract a large and reliable flow of new money into the mortgage markets. The way to attract money in this environment is for the government to guarantee the principal in return for the lenders accepting a low rate of return, say 2 or 3%.
As mortgage holders refinance into fixed-rate mortgages from ARMs at these attractive levels, their disposable income increases and becomes more stable which should help consumer confidence. This also means that we will be building a solid foundation for economic recovery.
2. We also need a mechanism to remake existing mortgages to keep them affordable and reduce the number of future foreclosures. The issue here is that most mortgages have been put into trusts, split into pieces and sold off, so there are multiple people with ownership interest in each mortgage. No one person can say “yes” or “no” to changing the terms of an existing mortgage.
And, the government cannot arbitrarily take value from existing mortgage owners by saying, “we have decided that borrowers don’t need to repay 1/3 of your principal”, or “your interest rate is now cut in half.” The few mortgages ever made under that kind of cloud, would carry very high rates of interest to compensate for the added risk of government decree.
The Feds could, however, offer mortgage holders a government guarantee of a portion of their principal, say 75%, in return for a fixed, reduced rate of interest, perhaps 2%. With many mortgages not able to be re-sold even for 75% of their face value due to uncertain levels of default risk, a government guarantee of even part of the principal would put a floor under mortgage pricing at current levels and restore much needed faith in the credit markets.
Fannie Mae and Freddie Mac, can be the mechanism the Federal government needs to accomplish this type of intervention in a constructive way. And the Feds now own Fannie and Freddie. This is doable.
Legislation would also be needed to protect trustees who accept the government offer from lawsuits from the ultimate owners of the various pieces of the mortgages. That could easily be done by Congress.
So the good news is that the pieces of the puzzle needed to fix the housing crisis are right there. Unfortunately, “there” is in Washington.
2009 IRA Contribution Limits
The 2009 IRA/Roth IRA contribution limits remain at $5,000 with an additional catch up contribution for those 50 and older of $1,000 for a total of $6,000. Keep in mind that you have until April 15th 2009 to make your 2008 IRA contribution if you have not already done so. Other retirement plan limits have also increased. Call the office at 778-4000, if you have questions on any of them.
Fed Says IRA Owners Can Keep Their Money
The 2008 Recovery Act provides a one year suspension of the Required Minimum Distribution (RMD) rules affecting investors over the age of 70½ for 2009. Specifically, no minimum distribution is required for calendar year 2009 from Individual Retirement Accounts and defined contribution retirement plans (such as 401(k) plans). The exemption also applies to 457(b) deferred compensation plans. Thus, any annual minimum distribution for 2009 from these plans is not required to be made. The next RMD will be for calendar year 2010. This relief (referred to as the “2009 RMD waiver”) applies to life-time distributions to employees and IRA owners and after-death distributions to beneficiaries.
This laws helps retired taxpayers who are financially comfortable and do not need to rely on their RMDs for living expenses. By not making the RMD for 2009 (or withdrawing less than the RMD) from their retirement plan accounts they will wind up with less taxable income for 2009 and a little more money in their IRA next year.
A Little Relief
My last newsletter cautioned that the most conservative money market funds, those that invest in US Government backed bonds, were coming under pressure due to the very low rates of interest one can earn on those types of bonds right now.
Indeed, the new year has been met with a flood of announcements that many US Treasury money market funds are closing to new investors.
Hepburn Capital clients have been using the Rydex US. Government Money Market fund at our main custodian, National Financial Services, so we were also facing some hard choices.
Imagine my relief, the day after my newsletter on this topic was published, when Rydex made this announcement. “Due to current economic conditions resulting in low yields, Rydex Series U.S. Government Money Market . . . will begin waiving fund fees, including but not limited to 12b-1, service plan and investment advisory fees, as applicable, to maintain positive net yields.”
This move will cost Rydex significant revenues, and it was encouraging to see them voluntarily step up to the plate and share some of the financial pain that is going around. I think we are in good hands.
I was flattered in an odd sort of way when a client asked if any of our money was caught up in Bernie Madoff’s $50 billion investment scam that has recently come to light. The answer is no. We had zip, zero, nada exposure to his Ponzi scheme.
To protect clients from this type of scam, I only invest in registered securities, never vaguely described pools of money.
Unlike Madoff’s (I pronounce it “made-off”) operation, none of my client’s money is held by me. It is all held at custodians that are covered by Securities Investor Protection Corporation (SPIC), my industry’s version of FDIC. SIPC will not protect an investor from market risk; that is why you hire me. But it does protect you from fraud or financial failure on the part of anyone involved with your money.
For more information about SIPC coverage and to obtain a copy of the current SIPC brochure, please visit www.sipc.org or call (202) 371-8300.
I can find little to like these days about economic prospects. I’m just glad that the economy and the stock market are two different things and that the stock market begins to improve long before there is any visible reason in the economy.
Despite the market’s week-long dive in early January, I can find little to dislike about the way the stock market is acting. The stock market bottom on November 20th has now held up for two months. With all the pessimism among investors, it is hard to believe that the market is in a two month uptrend, but it is.
Rather than trying to understand why everything is the way it is, I try to focus on recognizing what is actually happening so that we can take advantage of it. I have no idea how long the current uptrend will last, but I accept that the trend is still up. This focus on recognizing trends is what allowed me to avoid most of last year’s steep decline. That same approach will get us back into the market early in a new uptrend.
Our growth models* are currently hedged to the equivalent of only 32% invested. Our Flexible Income models* are fully invested with a mix of high quality and high yield corporate bonds, with some emerging market government bonds