Many people are drawing parallels between this current market selloff and the credit crisis that nearly ended in depression a few years ago.  I don’t see any.

The downgrade of the US AAA rating is nothing like the collapse of Lehman Brothers, Bear Sterns, or any of the other firms that went under.

The credit crisis of 2008 was systemic.  It was the culmination of the housing bubble and the realization that that every bank had been lending gobs of money to absolute idiots in order to fund the purchase of houses they couldn’t afford.  And this had been going on for years.

The entire world suddenly woke up and found that there were bonds rated AAA but comprised of junk quality mortgages.  Nobody knew which investment was quality and what was toxic, and nobody wanted to own anything-  At all.

The market crashed.  Business, and the economy, nearly came to a complete halt .

Corporations laid off 3,000,000 people in 2008-09.      Then came Tarp, QE1, QE2…the economy was on life support.

Flash forward to today: 

If you want to buy a house in 2011 you need to have sparkling credit, 10 years of income history, 20% down, and the ability to lend the bank more money than you are trying to borrow.

Corporate America cut every wasteful expense, reduced inventories, curtailed spending, and today’s companies are lean operating machines.  That is why earnings beat expectations in the first 2 quarters of 2011.

Today we are adding 150,000 jobs per month. True, it will take a long long time to gain 3 million jobs back at that rate, but we are going in the right direction.

Additionally, interest rates are still low and inflation is still relatively tame.

This market selloff/crash is all about fear.  There is no more stimulus- zero – and that is scary.  But zero stimulus is a good thing; now we get to see the economy stand on its own.  Couple the removal of stimulus with several other potential bogey monsters that loom on the horizon (Greece, inflation, rising interest rates) and fear is understandable.

But these monsters are not new. Things are not substantially different than they were 2 weeks ago.  Fear and greed are what make the markets move, and right now fear is winning.  In 6 months this market swoon will be a distant memory.

On a Sunday night two months ago, Meredith Whitney went on 60 minutes and scared the hell out of muni bond investors with her talks of doomsday defaults across the country’s state and local governments.

Now congress is requesting Whitney’s testimony and an explanation of her research.

Whitney declined.

This morning, in the Philadelphia Inquirer I saw yet another article about her call.  I get a ton of questions from clients about what to do.  Here are a few responses that I found interesting, from various sources:

• My b/d, Commonwealth responds:  Day of Reckoning or Business as Usual
• Philadelphia inquirer: Analyst Says Now is the Time
• Vanguard: California is not Greece
• New York Times A seer on banks raises a furor on bonds
• MarketWatch: The Great Muni Panic
• Business Insider: 12 Reasons Meredith Whitney is Wrong
• and here is PIMCO’s commentary on the current muni market

Just in case you missed the original interview, here is the segment.  From the 60 minutes interview with Meredith Whitney on December 19, 2010:

2010 Interest Rates on 10 Year Bonds

1.      In 2010, bond yields have moved 1.7% from peak (4.0%)  to trough (2.3%)

2.      In 2010 the Fed has changed rates ZERO times.

Interest rates move up and down in small increments all day, every day.  Over time these small movements can have tremendous effects on your investments.  

It is imperative to understand that rate movements are determined by the market, not the Fed.  This is contrary to the way most people think of interest rates.  Rates can start moving up without any decision from the Fed, and that should negatively effect your portfolio. 

We’re coming out of a declining interest rate environment that lasted for 30 years!  This has been a friendly climate for fixed income investments.  What will the next 30 years be? 

How susceptible is your portfolio?  If you would like to review your investments, please don’t hesitate to call.

Remember: The purchase of bonds is subject to availability and market conditions. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income.

It was 2 years ago this week (10/16/08) that Warren Buffet wrote his “Buy America, I am.”  Op-ed article in the New York Times.  Buffett encouraged investors to “be fearful when others are greedy, and be greedy when others are fearful.”  In the 2 years since the article was written, the S&P500 has gained +29.1% on a total return basis through the close of trading last Friday (10/8/10).

Buffet is clearly a natural at removing any emotional connection to investing.  In May 2009 I wrote about the risks of investing based on your emotions in Buy Low, Sell High.  Where are we now?, and I still find the chart a valuable resource in analyzing the emotional analysis of where we are in the market any given day.

In my daily conversations, I ask everyone I talk to what they think of the economy and where they think the markets are going.  In summary: There  is not a lot of greed in today’s environment. 

If you ask me, I would point directly between HOPE and RELIEF on the chart.  What do you think?

take the emotions out of investing

It’s time to consider municipal bonds. 

Especially if you think tax rates are going up.  As your tax bracket goes up, so does your TEY. 

Last year I wrote about the power of municipal bonds here: 2 reasons to love munis.  Below are the updated rates and TEY’s.

 Rates as of 9/27/2010. 

Remember: it’s not what you earn, it’s what you keep.

Did you know…

• Municipal Bond interest is Federal income tax-free, but may be subject to state and local taxes, and interest income may be subject to federal alternative minimum tax (AMT). 
• As interest rates rise bond prices fall because rates are inversely related to bond prices
• Nobody knows where interest rates are going in the future.  A bond ladder can strategically balance current income needs while reducing the risk of reinvesting at tomorrow’s interest rates. 
• The purchase of bonds is subject to availability and market conditions
• Some bonds have call features that may affect your income.

The topic of the article is Estate Planning 101.  Check it out for some estate planning tips.

Click the logo below to read the article from ABCnews.com:

Inflation is a silent killer of wealth.  2009 saw an enormous increase in the money supply, as well as a massive expansion of US government debt.  This combination is a recipe for inflation, and there are few economic forces as damaging to your wealth as inflation. 

There is no silver bullet to protect your portfolio, but here are 7 investments we believe can  help prepare your portfolio for an inflationary world:

1)      Commodities/ Hard Assets:  Hard assets such as metals and foods should maintain their value relative to today’s prices.  How to invest:

1. Mining/Agriculture stocks
2. Gold bars and jewelry

2)      Energy: Oil and Gas are commodities, so it goes without saying that these assets should rise in value.  How to invest:

1. Energy stocks
2. Numerous oil/gas investments

3)      Real Estate:  There are two components to real estate that have benefitted from inflation: The value of debt diminishes: mortgage payments are fixed and therefore decrease relative to the dollar, and the value of property (hard asset) increases.  How to invest:

1. Rental property

4)      Inflation Protected Securities: Transfer Risk of inflation to governments, investment banks, or insurance companies.  How to invest:

1. US Government: Treasury Inflation Protected Securities (TIPS).  Remember, Government bonds or U.S. Treasury Bills do not eliminate market risk.)
2. Insurance company: Annuity with COLA (Cost Of Living Adjustment)

5)      Bonds- interest rates have risen in inflationary environment.   Remember, the purchase of bonds is subject to availability and market conditions.  There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa.  Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income How to invest:

1. Floating rate bonds: These are bonds with variable rates.  As rates increase, so will the interest payments. 
2. Step-up bonds: Bonds that have a pre-defined schedule of interest rate increases over the life of the bond, regardless of interest rates today.  Be aware of call features that could redeem these bonds early.

6)      Currencies.  How to invest:

1. There are a number of investment products that track the relationship between the dollar and another currency (i.e. Euro, Yen).  If you believe the dollar is going to get stronger or weaker based on an inflationary environment this may be your easiest way to invest in currency.

7)      Equities.  How to invest:

1. US Stocks- Historically, stocks have done well in an inflationary environment relative to bonds.  Stick with companies that have global businesses.

Past performance is no guarantee for future results.

We work with a lot of small business owners. A popular topic of conversation lately has to do with the fact that the markets have recovered so fast over the last few months yet their business has not improved nearly as much. Business owners just don’t get it, and find it hard to believe in this market. There is a divide between Wall Street and Main Street, and it is growing.

On Wall Street, companies are much larger and have the ability to trim inventories and personnel more efficiently than many of these small businesses. Trimming these excesses squeezes every juicy penny out of every last dollar and it all drops to the bottom line. The market sell off was extreme, outlooks became dire, and earnings expectations from Wall Street were drastically reduced. It has become easy for companies to meet and even beat such a low earnings bar.

Main St is a very different picture. Unemployment is still high and budgets are still tight. People are learning what it is like to live within their means for the first time in a very long time. Most are adjusting- frivolity is out, and bag lunches are in. It is not an ideal world, but there is a sense of comfort and confidence now that talk of an actual depression is a fading memory.

In our opinion, market levels are hardly excessive, and the outlook continues to improve. We are still 25-30% off of the highs of 2007. I think we may be at a comfortable place for the market, with some continuing upside due to excess cash and high levels of money market balances. Profits could and should continue to surprise to upside and credit conditions are still below ‘normal’. Additionally, policy makers are continuing a supportive monetary environment.

This is the concern going forward; when this loose monetary policy starts to tighten and dollars are slowly vacuumed up from the economy…then what? Will the fed get it done before inflation runs where the wild things are or will it put a new stranglehold on the economy. Addition concern lies in the comfort with riskier investments that is sought by investors in a zero interest rate environment.

It is easy to forget how scared everyone was of any kind of risk back in the 1st Quarter of this year. Where do you think we are now?

As if the tax-free income isn’t enough of a reason, here are 2 more reasons that Tax-Free municipal bonds may become even more attractive in the future.

 1.                 Tax rates are going up [probably]

Tax-free muni bonds have always been an attractive investment for their combination of high quality, low default rates, and Taxable Equivalent Yields (TEY). The TEY represents the amount of yield you need before taxes to realize the equivalent income of a tax-free.  The TEY goes up as your tax bracket increases making tax free income more powerful if you are in a high tax bracket.  The greater your tax bracket is, the more interest you keep when compared to a taxable investment. 

 Therefore if tax rates go up, after tax yields shown above will be going down Read more…

Several years ago the most desirable municipal bonds were AAA and insured.  In today’s muni-bond market, insurance ain’t what it was.  Many bond insurers are no longer reliable, and you need to know the quality of your bonds.

Here’s how bond insurance used to work:

Municipal bonds are issued by state and local authorities, many of which have average credit, at best.  In lieu of paying higher interest rates, there are Bond Insurance companies that allowed a municipality to ‘purchase’ their AAA rating in return for a fee, which is much cheaper over the long run than paying a higher interest rate to investors.  Thus, an A-rated municipality could buy insurance and issue bonds at coveted AAA-rated interest rates.

Unfortunately, these insurance companies got greedy, and started looking for more and more of those lucrative fees.  They began insuring Mortgage backed bonds as well, many of which were AAA rated by the rating authorities.  Now the same mortgage bonds are known as ‘toxic’ investments, and the insurers obligations are beyond anyone’s comprehension.

What this means for your Muni bonds:

Your bonds are only as good as the municipality’s underlying credit quality- their own ability to pay back your bond.  This often depends on the Read more…