Feb. 3, 2014

President Barack Obama used his State of the Union speech to roll out a plan to coax low- and middle-income Americans into saving more for retirement. New retirement accounts being set up by the Treasury Department would target workers whose employers don't offer retirement benefits or who haven't started saving yet for old age. The new "starter" savings program is called "myRA" — for "my IRA." Treasury expects to have a pilot program working by the end of the year. The White House does not need congressional approval to start the program.

The plan is a response to a looming retirement crisis. Companies have largely abandoned traditional pensions, which provided workers with guaranteed incomes in old age. Social Security is under strain as Baby Boomers retire. Many Americans lost their jobs or saw their wages stagnate in recent years, leaving them less able to save for retirement.

How would myRA work?

The plan is voluntary. The accounts — which are intended for people who do not now have employer-sponsored savings plans — will operate much like Roth IRA’s, according to Treasury officials. Married couples with modified adjusted gross incomes up to $191,000 and individuals earning up to $129,000 will be able to save up to $15,000 total in after-tax dollars for a maximum of 30 years. The accounts are governed by Roth IRA rules that limit annual contributions to $5,500 — $6,500 for those 50 and older. When the balance reaches $15,000, the savings would be transferred to a private sector Roth IRA.

Savers could have money deducted from their paychecks and put into a retirement fund that pays the same variable interest rate as a retirement fund available to federal workers. They would contribute after-tax dollars into the accounts, starting with as little as $25, or could opt for contributions as low as $5 a paycheck.

Savers can withdraw what they've contributed tax-free at any time. Although the money would be deducted from workers' paychecks, employers won't have to administer the program or contribute to it. Savers could take the accounts with them when they change jobs and could roll the savings over into another private-sector retirement account at any time.

Is this a safe investment?

There will be only one investment option: The Treasury will create a security fund modeled after the federal employees’ Thrift Savings Plan Government Securities Investment Fund, which pays a variable rate.

For the year that ended in December 2012, it had an average annual return of 1.74 percent. It posted an average annual return of 2.69 percent for the five years that ended in December 2012. There are no fees, the Treasury said.

The accounts would be backed by the U.S. government; the principal would be protected from loss. Still, unlike in 401(k) plans, workers also will not have the benefit of potentially higher returns when investing in a diversified portfolio of stocks and bond funds.

What problem is myRA designed to solve?

Americans aren't saving enough for retirement. Boston College's Center for Retirement Research estimates that 53 percent of Americans won't have enough money to maintain their lifestyle in retirement. The National Institute on Retirement Security puts the retirement savings shortfall at a staggering $6.8 trillion — or higher. More than half of workers do not have retirement plans at work, the White House says. Obama's plan is designed to get workers into the habit of saving for retirement by giving them an easy-to-use option that protects their principal.

How much will myRA help Americans prepare themselves for retirement?

It's just a start. It is by no means a solution on its own. The program is voluntary for employers too. And the Obama administration acknowledges that it doesn't yet have a commitment from any employers to offer the program.

Another problem: Most workers won't save adequately for retirement unless they are automatically enrolled in savings programs and forced to opt out if they don't want to save. MyRa is completely voluntary. Moreover, the plan allows participants to withdraw contributions without penalty; the possibility that savers will deplete the accounts before retirement makes MyRa still seem an underwhelming response to the retirement crisis.

Jan. 27, 2014

At the start of every year I like to take the time and sketch out a game plan for the year.  Part of that includes identifying major areas of risk and creating a mental game plan on how to respond.  Two weeks ago, I identified interest rates as being one of my major concerns.  When I speak of interest rates I am really speaking of the FED as their open market operations add or subtract to the economic liquidity which helps set interest rates. Its this liquidity (either too much or little) not only has the effect they desire by controlling interest rates but an unintended consequence is its indirect effect on the prices of other assets, such as stocks. So when I hear the FED is reducing liquidity I become concerned as this move in the past has been the catalyst for a market correction. An article from one the Fathers of technical analysis, Tom Mclellan, came across my inbox recently where he does a wonderful job at capturing this relationship and I thought it worthy of presenting its highlights. There are a lot of different indicators and studies that technical analysts use, and all of those tools came into usage due to some degree of merit.  But the one factor which seems to be trumping everything else lately is what the Fed is doing with its QE program.

The chart below compares the SP500 to the total assets held by the Fed.  The plot is made up from the total of the Fed's Treasury holdings and its mortgage backed securities (MBS), which are sometimes referred to as "agency" debt products.  The agencies which that title refers to are Fannie Mae, Freddie Mac,

Putting the chart together this way helps us see just how important the Fed's purchases have been to the task of sustaining the bull market for stocks.  Whenever the Fed has decided to change the slope of the green line, the slope of the SP500 has also changed in a dramatic way.  That makes it such an important question to contemplate a "tapering" off in the rate of growth of Fed assets, or even an outright end to quantitative easing (QE).

The next chart also helps us see just how critical the Fed's actions were in bringing about the awful bear market of 2007-09.  Back then, the Fed just held Treasuries, and it did not start buying agency debt until January 2009.  The Fed's holdings of Treasury debt peaked in August 2007 at $790 billion, and over the next 17 months the Fed sold off more than $300 billion of those holdings.  That's right, in the middle of the worst liquidity crisis in decades, with banks folding and with Congress handing out tax rebates, the Fed was pulling liquidity OUT of the banking system.

When the Fed finally stopped pulling liquidity out of the system and started adding it back in again in early 2009, the market turned upward, and the banking system and economy started working their way back toward health again.

Given the now obvious importance of the Fed's actions on financial market liquidity, why did they decide in 2007 and 2008 to pull so much money out of the system by selling so much of their Treasury holdings during that bear market?  That will be a great question for the historians to uncover.  But what I can say is that the man who orchestrated and conducted those sales, the former president of the New York Fed, left that job in early 2009 to become the new Treasury Secretary.  So you can draw your own conclusions.

While the FED this month will begin slowing down the rate of stimulus (note I did not say stop completely or begin to withdrawal which has caused problems in the past) investors still must be concerned as one would expect at least some sort of impact to the economic bottom line. One reason to not be overly concerned is the FED understands it’s the rate of change that is most important and they have indicated any actions will be gradual in nature.  Since we are in uncharted territory (QE first started in 2010), knowing how the market will react to future FED changes is anyone’s guess.  As such, being prepared for anything and playing defense should be a top priority.

Jan. 20, 2014

Obviously this post is meant tongue-in-cheek but there actually are those that watch (and invest accordingly) these things … The Super Bowl Indicator holds that any NFC team winning the Super Bowl is bullish for stocks. It’s worked 80% of the time since the Super Bowl began in 1967.  But if you take a close look at the S.B.I.’s performance, you’ll see the stock market LOVES the 49ers. In fact, win or lose, San Francisco has been in the Super Bowl in four of the five best years for the stock market since the big game between the NFC and AFC champs began in 1967. The Niners’ Super Bowl wins in 1985, 1989 and 1995 were followed by annual gains of 27.7%, 27.0% and 33.5%, respectively, for the Dow industrials. From 1967 to last year, only the Pittsburgh Steelers’ victory in 1975 delivered a bigger advance.

Even in 2013, when San Francisco lost to the Baltimore Ravens, the market boomed.

So S.B.I. believers don’t want just any old NFC team to triumph over the AFC champion in the Super Bowl. Under this thinking, it’s best for your portfolio to have the 49ers beat the Seattle Seahawks in Sunday’s NFC championship — and then win the big game itself on Feb. 2. Of course, the Super Bowl Indicator is a classic example of confusing correlation with cause and effect. MarketWatch’s Mark Hulbert took the whole faulty concept to the woodshed in a column last year. As he blasted “spurious correlations,” Hulbert pointed out that Bangladeshi butter production is an even better “indicator” for stocks. Perhaps the S.B.I. should be renamed the B.S.I.

Of the nine years when the  S.B.I. has failed, four involved Super Bowl appearances by the Denver Broncos — who play the New England Patriots on Sunday in the AFC Championship. So you may want to be wary of the Broncos — and also the Patriots. The best performance in years when the Pats won it all was a 3.1% gain in 2004. The worst was a 16.8% drop in 2002. And the Patriots’ loss in 2008 to the New York Giants was followed by Wall Street’s worst year since the Super Bowl began, a 33.8% slide in the Dow.

Seattle’s only Super Bowl appearance in 2006 was a loss to the Pittsburgh Steelers.  The Dow surged that year.  (Although the Seahawks are in the NFC, the Steelers have their roots in the old NFL, and for the purposes of the indicator are deemed to be an NFC team, meaning the indicator is deemed to have held that year.)

Overall, the prediction business is tough. Just ask all those Wall Street strategists who bet that the falling hemlines in last year’s spring collection indicated a bad year for stocks.

Jan. 13, 2014

Last week I posted what Cullen Roche of Pragmatic Capitalism thought was the major risk for 2014. In today’s post I want to list one of the two major risks (excluding any exogenous shock) I see to the investment markets for this year. Because all markets are interlinked and the bond market is so big, it’s easy to think of bonds as the dog and stocks as the dog’s tail. As such, anyone holding equity investments needs to keep a very close eye on the bond market.

Below is a 20 year view of the 30-year US Treasury bond.  As you can see it has been in a very well defined upward (bull market) channel.  Like all investments it moves up and down but during this entire period it has respected its channel boundaries.  In the highlighted areas I have noted major price swings down (corrections) and the time it took to complete each.

An interesting aside is that an astute investor could have purchased the long bond as it neared the bottom of the channel and sold as it approached the top and been handsomely rewarded over the past 20 years with very low risk investment strategy that would have outperformed just buying and holding.

The chart below is the exact same chart as the one above except I am only showing the last 5 years’ worth of data rather than 20. As you can seek the current correction we are in has been going on for well over a year now and if history holds, either has already or is close to completion as it nears the bottom of the channel.  While I continue to stress no one can predict the future, the chart is telling me the decline is very close to being done as positive divergence has formed on our momentum indicators.  This is a heads up that momentum has changed course (up) and price should be not too far behind. While timing is never exact, if we were to fall further one could imagine a decline to the exact bottom of the channel, which is less than 3% away from where we are.

So you are probably wondering what and how this all ties back to the topic of this post, risk to the markets.  At some point the FED will either loosen their reign on interest rates (think taper) or the market will demand higher rates.  If rates rise and go high enough, history says stocks will suffer.  The reason for that is if investors have a much lower risk alternative providing a similar return, they tend to take the path of lowest risk.  If this happens, the nice, well-formed and respected price channel of the past will be breached to the downside.

Nothing lasts forever, so for now and until price tells us otherwise, the channel is still in control but watch out if/when it is violated.

Jan. 6, 2014

Happy New Year everyone. Cullen Roche of Pragmatic Capitalism wrote a thought provoking post regarding investors Biggest Risk in 2014. He writes …

The biggest risk in 2014 is likely to be a common one – recency bias.  Otherwise known as your own brain’s tendency to focus excessively on things that have only just occurred.  Of course, the markets don’t really care much for what’s just occurred.  Most market participants are trying to make decisions based on what they think will occur in the future.  Unfortunately, they often come to these conclusions based on extrapolating the recent past into the future.   This is one of the broader causes of the herd effect and groupthink.  It also contributes to market bubbles.

After a year like 2013 where many markets felt like a “can’t lose” proposition the tendency will be for many people to extrapolate the recent past into the future.  They’ll deviate from their plans, reallocate a bit more aggressively or less aggressively and begin to fall in-line with the herd.  But this is generally a bad idea.  Letting the recent market action excessively influence your long-term plan is what I refer to as part of the multi-temporal problem in portfolio construction.  And when you let your process become dictated by your emotions you generally lose control of your process and your portfolio plan begins to come unraveled.

So beware the recency bias in 2014.

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He brings up a really important issue that all investors face. I would add this bias is alive and well not only this year but all other years for that matter (remember back what you were thinking what would happen in the markets after the 2008 crash).  So while ridding yourself of this bias and all biases for that matter make for much better investment decisions, I feel the greatest risk to 2014 is something much different and I will cover that in its full glory next week.