Disclaimer: I am not a Certified Public Accountant (CPA), tax advisor or tax lawyer. Please talk with your CPA, tax advisor, or tax lawyer before making any investment decisions that may have tax consequences for your investments. One of my investment rules is know the tax ramifications of any investment that you plan to make before you make it, and make it tax efficient, whether under current tax laws or forecasted future tax changes. Taxes and/or government fees will be increasing over the next 5 years to help pay for the federal, state and local government deficits and future government entitlement programs (for example, health care). For example, to pay for the new health care plan high income earners in 2013 will experience an increase in Medicare payroll tax (.9%) and an additional tax (3.8%) on qualified dividends and capital gains.
Former President George W. Bush’s tax cuts (BTC) were intended to expire at the end of 2010, reverting to the previous tax code for long-term capital gains and qualified dividends, reviving the estate tax and restoring the top marginal bracket of 39.6% at the beginning of 2011. On December 17, 2010 President Obama and the US Congress extended Bush’s tax cuts for another 2 years (ending January 1, 2013), made changes to the estate tax and added a 2% reduction of the payroll (social security) tax. This will be one of largest stimulus packages for the US economy ever – approaching $1 trillion US.
Long-term capital gains tax (on assets held longer than one year): The current tax rate of 0% for taxpayers in the 10% and 15% tax brackets as of 2008 and 15% for everybody else will not change for the next two years. The pre-BTC rates were 10% for the 15% tax bracket and 20% for everybody else.
Qualified dividends: Qualified dividends will continue to be taxed at a maximum rate of 15% for the next two years. The pre-BTC rate was ordinary income based on your highest tax bracket. For example if you were a high income earner and your tax bracket was 39.6% your qualified dividends would have been taxed at 39.6% (this could be as high as 43.4% in 2013).
Top income tax bracket: Bush’s tax cuts eliminated the top income tax bracket of 39.6% making the 35% the highest tax bracket and created a new 10% bracket for low income earners. Congress and President Obama extended 35% as the highest tax bracket and the 10% tax bracket for the next 2 years.
Revival of the estate tax: In 2010, as a result of several unusual circumstances, there is no limit on the size of an estate that is exempt from federal estate taxes. Starting in 2011 (and ending in 2013) the exemption will be $5 million per person and for a married couple up to $10 million will be exempt from federal and gift taxes. The top tax rate applied to the portion of estates exceeding those limits will be 35%, the lowest tax rate in 80 years.
Payroll tax decrease: Wage earners received a social security tax reduction of 2%, making the tax rate 4.2% up to the cap of $106,800 in 2011 (the cap will increase in 2012). If your wage income is at or over the cap, this will result in savings of $2,136, or about $40 per weekly paycheck. Congress did not renew the Making Work Pay tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns (this was up to a maximum adjusted gross income level). Consequently, working individuals who earn less than $20,000 ($40,000 for married taxpayers filing jointly) will have less money in their paycheck starting in 2011.
The tax rate on long-term capital gains and qualified dividends which are most important to investors will stay the same for the next two years. All these tax changes will revert to their pre-BTC tax rates on January 1, 2013. With President Obama, all of the House of Representatives and 1/3 of senators up for reelection at the end of 2012, expect the US tax rates to be a major campaign issue in the 2012 election.
A good strategy is to always keep interest/ dividend-paying and non-tax efficient investments in your non-taxable accounts. Also, any investments for which there is a high degree of difficulty determining the tax liability, i.e. trading stocks, future contracts, exotic ETFs, etc., should be invested through your non-taxable accounts.
Between the extended Bush tax rates and payroll tax decreases (costing the US government almost $1 trillion in revenue over the next two years) and Quantitative Easing 2, the US government has created the largest stimulus ever in its quest to grow the economy and reduce a persistent US unemployment rate hovering close to 10%. If this stimulus does not lead to job growth and reduce the unemployment rate, the issue will become: how do you reduce structural unemployment issues which take a long time period to resolve? This will be difficult to resolve in the current US political environment which everything is short focus on the next election.
Please chime in with your comments on 2011 tax rates, tax efficient investments, or anything else.
© 2010
Paul Cusick
Tuesday, December 28, 2010
Sunday, December 19, 2010
Quantitative Easing 2 (QE 2) Update and Analysis
On November 3, 2010 the US Fed (Federal Reserve) announced the policy of Quantitative Easing (QE) 2. The stated goal of the policy was to decrease interest rates in order to jump start the economy and reduce the US’s persistent unemployment rate of just under 10%. The major side effects of QE 2 are that it would devalue the US currency and make commodities more expensive since they are valued in US dollars. At the same it would make US manufactured goods cheaper for companies and customers outside the US which should lead to an increase in US exports, at the same time making imports more expensive thus decreasing imports.
After six weeks (as of December 18, 2010), what has been the effect of QE 2?
US Treasury interest rates - The interest rate yield has increased on the 10, 20 and 30 year treasury bonds. The 10 year has increased 33%, the 20 year has increased 16% and the 30 year has increased 9%. Mortgage rates track the yields on the 10-year Treasury note. For example, if you add 150 (1.5%) Basis Points (BPS) to 160 BPS you will get the 30 year fix mortgage rate. The current national 30 year fixed rate is 4.83%; on November 5, 2010 it was 4.24% (an increase of almost 60 BPS). With the increased cost of borrowing for companies and consumers, it will reduce their spending on goods and resources. This will have the effect of decreasing economic growth.
US unemployment rate - The November 2010 (December rate will be announced January 7, 2011) unemployment rate was 9.8%. I will need to review the unemployment rate over the next 6 months.
Commodities prices - Almost all commodities prices have continued to increase after the announcement of QE 2. For example, the US national gasoline price has increased over $.17, oil (Brent) has increased $5 a barrel, copper increased 9% and wheat has increased 9%. This increase in commodity prices will increase the price of goods, food for example, and decrease companies’ and consumers’ ability to spend more on goods and services. It could also lead to inflation.
US real GDP (Gross Domestic Product) - The real GDP rate for the third quarter was 2.5%. I will continue to check back on the real GDP rate over the next 6 months.
US imports / exports – The August 2010 US 12 month trade balance was negative $621.4 billion. I will review the 12 month trade balance periodically over the next 6 months.
US dollar - The US dollar has decreased by 5% compared to the Euro and 4% compared to the Japanese Yen. This should increase US exports (they will be cheaper) and decrease imports (they will be more expensive).
Currently the primary issue with QE 2 is that interest rates are increasing, which leads to increased cost of financing which could in turn slow the growth of the economy, counter to the intent of QE 2. This should, however, be neutralized by the large tax decrease and stimulus approved by Congress and President Obama on December 17, 2010.
© 2010 Paul Cusick
Paul
After six weeks (as of December 18, 2010), what has been the effect of QE 2?
US Treasury interest rates - The interest rate yield has increased on the 10, 20 and 30 year treasury bonds. The 10 year has increased 33%, the 20 year has increased 16% and the 30 year has increased 9%. Mortgage rates track the yields on the 10-year Treasury note. For example, if you add 150 (1.5%) Basis Points (BPS) to 160 BPS you will get the 30 year fix mortgage rate. The current national 30 year fixed rate is 4.83%; on November 5, 2010 it was 4.24% (an increase of almost 60 BPS). With the increased cost of borrowing for companies and consumers, it will reduce their spending on goods and resources. This will have the effect of decreasing economic growth.
US unemployment rate - The November 2010 (December rate will be announced January 7, 2011) unemployment rate was 9.8%. I will need to review the unemployment rate over the next 6 months.
Commodities prices - Almost all commodities prices have continued to increase after the announcement of QE 2. For example, the US national gasoline price has increased over $.17, oil (Brent) has increased $5 a barrel, copper increased 9% and wheat has increased 9%. This increase in commodity prices will increase the price of goods, food for example, and decrease companies’ and consumers’ ability to spend more on goods and services. It could also lead to inflation.
US real GDP (Gross Domestic Product) - The real GDP rate for the third quarter was 2.5%. I will continue to check back on the real GDP rate over the next 6 months.
US imports / exports – The August 2010 US 12 month trade balance was negative $621.4 billion. I will review the 12 month trade balance periodically over the next 6 months.
US dollar - The US dollar has decreased by 5% compared to the Euro and 4% compared to the Japanese Yen. This should increase US exports (they will be cheaper) and decrease imports (they will be more expensive).
Currently the primary issue with QE 2 is that interest rates are increasing, which leads to increased cost of financing which could in turn slow the growth of the economy, counter to the intent of QE 2. This should, however, be neutralized by the large tax decrease and stimulus approved by Congress and President Obama on December 17, 2010.
© 2010 Paul Cusick
Paul
Saturday, December 4, 2010
Best Investment Strategies for Quantitative Easing (QE2)
On November 3, 2010 the US Federal Reserve announced its second round of Quantitative Easing (QE 2), a program through which it intends to buy an additional $600 billion of longer-term treasury securities by mid 2011. This equates to $70 billion per month. In this week’s blog I will be discussing what investments are best for the QE 2 environment, focusing on commodities, precious metals, gold and US companies that export.
The major impact of QE2 is that it will inject $600 billion directly (by printing money) into the economy. Theoretically this will facilitate the Fed’s stated policy to grow the economy and increase job growth. It will have the outcome (if everything goes according to plan) of decreasing interest rates and devaluing the dollar, which will have the following effect on investments:
· Since most commodities are valued in $US QE2 will drive up the cost of commodities.
· QE2 will have the positive effect of making US exports cheaper (it is a positive for companies that export and should help their stock price) for companies or consumers outside the US. It will have the opposite effect with imports which will become more expensive for US companies or consumers to buy.
· Interest rates may decrease which will in theory help to grow the economy. For example, for REIT companies that need to refinance their properties every 5 to 7 years this will lower their interest costs.
As for myself, I don’t tie my whole portfolio to my macroeconomic forecast or the forecasted economic environment. I could be wrong, so I tilt some of my portfolio (10 - 20%) to take advantage of the QE2 economic situation and the rest elsewhere. It helps to hedge so that, if my forecast is wrong, I am not forced to sell assets that have lost value. Today many people are finding themselves in the unfortunate position of needing to sell their houses to raise cash to pay debt and living expenses. You never want to be forced to sell an asset that has lost value. A well-diversified portfolio is key – you never put all your eggs in one basket.
As routine due diligence I will review all of my investments against the current economic conditions to determine whether any are no-no’s for the forecasted economic environment. For example, if I was invested in a company that used commodities for the majority of their products, and it is not possible for the company to raise their prices, I will decrease or eliminate my investment in that company.
Also, always understand the tax consequences of your investments, how the investment works and what your exit strategy will be.
The following are methods for investing in commodities, precious metals, gold and companies that export:
1. Commodity producing companies. Examples of commodity producing companies are coal and Natural Gas (NG) producer Consol Energy Inc. (CNX) and gold, silver and copper producer Goldcorp Inc. (GG). Consol Energy is the biggest coal exporter to China for steel production. Canada Goldcorp is one of the largest gold producers in the world. I own the following commodity producing companies:
Lundin Mining Compnay - LUNMF.PK
Advantage Oil and Gas Ltd. - AAV
Pegrowth Engery - PGH
Penn West Engery - PWE
2. Future Based Commodity ETFs. Before you buy future based commodity ETFs you may want to read the following article “Commodities are a Rock in a Hard Place”: http://www.morningstaradvisor.com/articles/article.asp?docId=17924.
Before buying a future based commodity or commodity index you need to understand the contango and backwardation effects (you should also understand the tax consequences of a taxable account). Two famous future based commodity ETFs are States Oil (USO) and United States Natural Gas (UNG). These funds have been influenced by the contango effect in the future energy market. UNG lost over 50% of its stock value in the last year. A worthwhile article on the contango effect on UNG is “What’s Wrong With UNG?” http: http://etfdb.com/2009/whats-wrong-with-ung/.
3. Exchange Traded Funds (ETFs) or Mutual Funds (MF) index of commodity producing companies. For a very good article on ETFs of commodity producing companies indexes see
http://seekingalpha.com/article/195688-the-benefits-of-equity-commodity-etfs.
You can buy selector based ETFs, for example metals and mining (XME), global coal (PKOL), steel (SLX), etc.
4. ETFs index of commodities. Before you buy a commodities index ETF in your taxable account you should read the following article about tax consequences of ETFs:
http://www.investopedia.com/articles/exchangetradedfunds/08/etf-taxes-introduction.asp.
The following are 2 examples of commodities index ETFs:
Powershare DB Commodity Index Tracking Fund - DBC
Dow Jones AIG Commondity Index Fund - DJP
These ETFs have about 20 commodities in the index. They include, for example, oil, NG, heating oil, gold, corn, wheat, etc. These ETFs have large total assets of over $2 billion and at the same time large bid / ask spreads (also very high fees for ETFs). These funds all use future contracts and may also be affected by contango.
5. ETFs or MFs index of commodity producing countries. These also have currencies implications. I own the following ETFs and MFs indices of commodity producing countries (each of these funds has about 50% commodity stocks within its index):
S & P BRIC 40 SPDRS - BIK
Claymore/BNY BRIC - EEB
DWS Latin America - SLA
6. Real commodity assets (owning a forest or mine). If you have a lot of money like the Yale Endowment Fund (http://www.yale.edu/investments/Yale_Endowment_09.pdf) you may want to buy real assets such as a forest, large commercial building, or oil or natural gas fields. The Yale portfolio manager, David Swensen, one of the top investors in the world for the last 25 years, has been increasing his holdings in real assets over the last 3 years. It is an investment category through which you can take advantage of pricing efficiencies. One of the best ways for the average investor to buy real assets is by buying Real Estate Investment Trust (REIT) companies. For example, timberland has been one of the best investments for the last 20 years. Its return during the past two decades has been 12.8%. There are a number of timberland REIT companies that own extensive timberland acres. For example, Plum Creek (PCL) owns over 7 million acres and has a yield of 4.3%.
7. Companies that export a majority of their sales from the US. QE2 should have a positive effect on US companies that export a majority of their products. Their products should cost less and be more competitive in the world marketplace. This should increase their revenue and profit and should have the effect of increasing their stock price. This will not work if the products they sell have a large component of commodities (since commodity prices will be increasing).
Please chime in with comments about the QE 2 investment strategy. What investments do you are think best for QE 2? Future blogs that I will be writing:
Income generating bucket of money
Investing in possible buyout companies
Investing in Brazil
Using Fisher’s 15 points for researching companies to evaluate one company
Reviewing 2011 tax changes
© 2010 Paul Cusick
Paul
The major impact of QE2 is that it will inject $600 billion directly (by printing money) into the economy. Theoretically this will facilitate the Fed’s stated policy to grow the economy and increase job growth. It will have the outcome (if everything goes according to plan) of decreasing interest rates and devaluing the dollar, which will have the following effect on investments:
· Since most commodities are valued in $US QE2 will drive up the cost of commodities.
· QE2 will have the positive effect of making US exports cheaper (it is a positive for companies that export and should help their stock price) for companies or consumers outside the US. It will have the opposite effect with imports which will become more expensive for US companies or consumers to buy.
· Interest rates may decrease which will in theory help to grow the economy. For example, for REIT companies that need to refinance their properties every 5 to 7 years this will lower their interest costs.
As for myself, I don’t tie my whole portfolio to my macroeconomic forecast or the forecasted economic environment. I could be wrong, so I tilt some of my portfolio (10 - 20%) to take advantage of the QE2 economic situation and the rest elsewhere. It helps to hedge so that, if my forecast is wrong, I am not forced to sell assets that have lost value. Today many people are finding themselves in the unfortunate position of needing to sell their houses to raise cash to pay debt and living expenses. You never want to be forced to sell an asset that has lost value. A well-diversified portfolio is key – you never put all your eggs in one basket.
As routine due diligence I will review all of my investments against the current economic conditions to determine whether any are no-no’s for the forecasted economic environment. For example, if I was invested in a company that used commodities for the majority of their products, and it is not possible for the company to raise their prices, I will decrease or eliminate my investment in that company.
Also, always understand the tax consequences of your investments, how the investment works and what your exit strategy will be.
The following are methods for investing in commodities, precious metals, gold and companies that export:
1. Commodity producing companies. Examples of commodity producing companies are coal and Natural Gas (NG) producer Consol Energy Inc. (CNX) and gold, silver and copper producer Goldcorp Inc. (GG). Consol Energy is the biggest coal exporter to China for steel production. Canada Goldcorp is one of the largest gold producers in the world. I own the following commodity producing companies:
Lundin Mining Compnay - LUNMF.PK
Advantage Oil and Gas Ltd. - AAV
Pegrowth Engery - PGH
Penn West Engery - PWE
2. Future Based Commodity ETFs. Before you buy future based commodity ETFs you may want to read the following article “Commodities are a Rock in a Hard Place”: http://www.morningstaradvisor.com/articles/article.asp?docId=17924.
Before buying a future based commodity or commodity index you need to understand the contango and backwardation effects (you should also understand the tax consequences of a taxable account). Two famous future based commodity ETFs are States Oil (USO) and United States Natural Gas (UNG). These funds have been influenced by the contango effect in the future energy market. UNG lost over 50% of its stock value in the last year. A worthwhile article on the contango effect on UNG is “What’s Wrong With UNG?” http: http://etfdb.com/2009/whats-wrong-with-ung/.
3. Exchange Traded Funds (ETFs) or Mutual Funds (MF) index of commodity producing companies. For a very good article on ETFs of commodity producing companies indexes see
http://seekingalpha.com/article/195688-the-benefits-of-equity-commodity-etfs.
You can buy selector based ETFs, for example metals and mining (XME), global coal (PKOL), steel (SLX), etc.
4. ETFs index of commodities. Before you buy a commodities index ETF in your taxable account you should read the following article about tax consequences of ETFs:
http://www.investopedia.com/articles/exchangetradedfunds/08/etf-taxes-introduction.asp.
The following are 2 examples of commodities index ETFs:
Powershare DB Commodity Index Tracking Fund - DBC
Dow Jones AIG Commondity Index Fund - DJP
These ETFs have about 20 commodities in the index. They include, for example, oil, NG, heating oil, gold, corn, wheat, etc. These ETFs have large total assets of over $2 billion and at the same time large bid / ask spreads (also very high fees for ETFs). These funds all use future contracts and may also be affected by contango.
5. ETFs or MFs index of commodity producing countries. These also have currencies implications. I own the following ETFs and MFs indices of commodity producing countries (each of these funds has about 50% commodity stocks within its index):
S & P BRIC 40 SPDRS - BIK
Claymore/BNY BRIC - EEB
DWS Latin America - SLA
6. Real commodity assets (owning a forest or mine). If you have a lot of money like the Yale Endowment Fund (http://www.yale.edu/investments/Yale_Endowment_09.pdf) you may want to buy real assets such as a forest, large commercial building, or oil or natural gas fields. The Yale portfolio manager, David Swensen, one of the top investors in the world for the last 25 years, has been increasing his holdings in real assets over the last 3 years. It is an investment category through which you can take advantage of pricing efficiencies. One of the best ways for the average investor to buy real assets is by buying Real Estate Investment Trust (REIT) companies. For example, timberland has been one of the best investments for the last 20 years. Its return during the past two decades has been 12.8%. There are a number of timberland REIT companies that own extensive timberland acres. For example, Plum Creek (PCL) owns over 7 million acres and has a yield of 4.3%.
7. Companies that export a majority of their sales from the US. QE2 should have a positive effect on US companies that export a majority of their products. Their products should cost less and be more competitive in the world marketplace. This should increase their revenue and profit and should have the effect of increasing their stock price. This will not work if the products they sell have a large component of commodities (since commodity prices will be increasing).
Please chime in with comments about the QE 2 investment strategy. What investments do you are think best for QE 2? Future blogs that I will be writing:
Income generating bucket of money
Investing in possible buyout companies
Investing in Brazil
Using Fisher’s 15 points for researching companies to evaluate one company
Reviewing 2011 tax changes
© 2010 Paul Cusick
Paul
Monday, November 22, 2010
Quantitative Easing (QE) 2
This week’s blog is about the US Fed’s (Federal Reserve) announced policy of quantitative easing 2. On November 3 the Fed announced that it intends to buy an additional $600 billion of longer-term treasury securities by mid 2011, which equates to about $70 billion per month. The Fed will continue to review the size of its overall securities purchases and the overall size of the program; after reviewing incoming data, they will adjust the program as needed to increase employment and keep prices stable.
Why is the Fed doing Quantitative Easing 2? The US continues to experience persistently high unemployment. Job growth of between 150,000 and 200,000 per month is required just to absorb the new employees entering the job market. The current GDP growth rate is around 2% and the inflation rate is less than 2%. Over the last 2 years the Fed and the US government have tried a number of programs in their attempts to jump start the economy and increase employment.
Examples of programs the US government and the Fed have tried over the last 2 years:
Fed fund interest rate: The Fed has decreased the fed fund interest rate to a historic low of .25% (it was 4.75% in 2007). It can only go down to 0%. At this level the Fed cannot use this to kick start the economy and increase employment. Home mortgages are at a record low.
Large federal government stimulus: In 2009 Congress passed and President Obama approved a $787 billion stimulus package to help stimulate the overall economy and employment growth. With the enormity of the budget deficit and the Republican Party taking over the House of Representatives there is little or no political will for a new federal government stimulus in 2011.
QE 1 (2009): The Fed started quantitative easing 1 back in March 2009 when it began a program of outright purchases of treasury coupons, GSE debt and mortgage-backed securities. QE1 lasted about 1 year and the Fed increased the money supply by about $600 billion.
This was not the first time the US government used cutting fed fund interest rates and large stimulus programs to stimulate the economy. For the first time in US history it has not been successful. Without the ability to lower the fed fund rate (it could go to 0%) and without Congress having the will to approve a new large stimulus program the Fed thinks the only arrow left in the economic stimulus policy quiver is to carry out QE 2 to help the economy grow and increase employment.
What is Quantitative Easing (QE) 2? In very simple terms, it is injecting (printing) money directly into the economy. This is supposed to lower interest rates and increase the money available for lending. How are the Feds doing this? The Fed will distribute new money at a rate of $70 billion per month and go to financial institutions to buy $70 billion of government bonds at a higher rate than others will pay for them. In a perfect world the financial institutions will then lend out money to companies or people who will in turn invest or spend it. This should pave the way toward overall economic growth.
Issues and problem with QE 2: The major problem with quantitative easing is that it will devalue the US currency. This has the positive effect of making US exports cheaper (it is a positive for companies that export and should help their stock price) for companies or consumers outside the US. It will have the opposite effect with imports which will become more expensive for US companies or consumers to buy. This can lead to currencies wars with countries that export to the US since their products will be more expensive which would tend to decrease demand for them. They may need to devalue their currencies to be able to sell in the US. Since most commodities are valued in $ US it will drive up the cost of commodities. This may have a negative effect on poor people around world since they spend a greater percentage of their money on commodities such as food, fuel, etc.
The positive effect of QE 2 is that interest rates may decrease which will in theory help to grow the economy. This will assist consumers or companies that need loans, for example to refinance their homes (and have more money to buy goods), buy homes, cars, etc. and for companies to purchase new equipment. This has a positive affect for people that need to borrow money and negative effect for people or companies that save money (they will receive lower interest yields and their dollars will be devalued).
Is it working? It is still early to determine if QE 2 is working. Since it was put into effect on November 2 all the Fed treasury bills, notes and bonds yields have increased (as of November 19th). For example, 7 year and 10 year treasury notes have increased 33 basis points (a basis point is .01%) and 30 year bonds have increased 32 basis points. The reason for this might be that investors perceive quantitative easing 2 will feed inflation in the future. Success may also be subverted if financial institutions will only lend money to consumers with high credit worthiness (unlike pre financial crisis when almost anybody could get a mortgage).
Please chime in with comments about QE 2. Do you think it will help the economy, will it lead to currencies wars and stagflation, increase commodity prices, etc. Future blogs that I will be writing:
Income generating bucket of money
Investing in possible buyout companies
Investing in Brazil
Using Fisher’s Common Stocks and Uncommon Profits and Other Writings
15 points for researching companies to evaluate one company
Best investments for Quantitative Easing (QE) 2
Paul
© 2010 Paul Cusick
Why is the Fed doing Quantitative Easing 2? The US continues to experience persistently high unemployment. Job growth of between 150,000 and 200,000 per month is required just to absorb the new employees entering the job market. The current GDP growth rate is around 2% and the inflation rate is less than 2%. Over the last 2 years the Fed and the US government have tried a number of programs in their attempts to jump start the economy and increase employment.
Examples of programs the US government and the Fed have tried over the last 2 years:
Fed fund interest rate: The Fed has decreased the fed fund interest rate to a historic low of .25% (it was 4.75% in 2007). It can only go down to 0%. At this level the Fed cannot use this to kick start the economy and increase employment. Home mortgages are at a record low.
Large federal government stimulus: In 2009 Congress passed and President Obama approved a $787 billion stimulus package to help stimulate the overall economy and employment growth. With the enormity of the budget deficit and the Republican Party taking over the House of Representatives there is little or no political will for a new federal government stimulus in 2011.
QE 1 (2009): The Fed started quantitative easing 1 back in March 2009 when it began a program of outright purchases of treasury coupons, GSE debt and mortgage-backed securities. QE1 lasted about 1 year and the Fed increased the money supply by about $600 billion.
This was not the first time the US government used cutting fed fund interest rates and large stimulus programs to stimulate the economy. For the first time in US history it has not been successful. Without the ability to lower the fed fund rate (it could go to 0%) and without Congress having the will to approve a new large stimulus program the Fed thinks the only arrow left in the economic stimulus policy quiver is to carry out QE 2 to help the economy grow and increase employment.
What is Quantitative Easing (QE) 2? In very simple terms, it is injecting (printing) money directly into the economy. This is supposed to lower interest rates and increase the money available for lending. How are the Feds doing this? The Fed will distribute new money at a rate of $70 billion per month and go to financial institutions to buy $70 billion of government bonds at a higher rate than others will pay for them. In a perfect world the financial institutions will then lend out money to companies or people who will in turn invest or spend it. This should pave the way toward overall economic growth.
Issues and problem with QE 2: The major problem with quantitative easing is that it will devalue the US currency. This has the positive effect of making US exports cheaper (it is a positive for companies that export and should help their stock price) for companies or consumers outside the US. It will have the opposite effect with imports which will become more expensive for US companies or consumers to buy. This can lead to currencies wars with countries that export to the US since their products will be more expensive which would tend to decrease demand for them. They may need to devalue their currencies to be able to sell in the US. Since most commodities are valued in $ US it will drive up the cost of commodities. This may have a negative effect on poor people around world since they spend a greater percentage of their money on commodities such as food, fuel, etc.
The positive effect of QE 2 is that interest rates may decrease which will in theory help to grow the economy. This will assist consumers or companies that need loans, for example to refinance their homes (and have more money to buy goods), buy homes, cars, etc. and for companies to purchase new equipment. This has a positive affect for people that need to borrow money and negative effect for people or companies that save money (they will receive lower interest yields and their dollars will be devalued).
Is it working? It is still early to determine if QE 2 is working. Since it was put into effect on November 2 all the Fed treasury bills, notes and bonds yields have increased (as of November 19th). For example, 7 year and 10 year treasury notes have increased 33 basis points (a basis point is .01%) and 30 year bonds have increased 32 basis points. The reason for this might be that investors perceive quantitative easing 2 will feed inflation in the future. Success may also be subverted if financial institutions will only lend money to consumers with high credit worthiness (unlike pre financial crisis when almost anybody could get a mortgage).
Please chime in with comments about QE 2. Do you think it will help the economy, will it lead to currencies wars and stagflation, increase commodity prices, etc. Future blogs that I will be writing:
Income generating bucket of money
Investing in possible buyout companies
Investing in Brazil
Using Fisher’s Common Stocks and Uncommon Profits and Other Writings
15 points for researching companies to evaluate one companyBest investments for Quantitative Easing (QE) 2
Paul
© 2010 Paul Cusick
Sunday, November 14, 2010
Common Stocks and Uncommon Profits by Philip A. Fisher
This week’s blog is a review of the classic investment book written for both the nonprofessional and professional investor, Common Stocks and Uncommon Profits
by Philip A. Fisher (Investor Ken Fisher’s father). This classic financial / investment book was written in the 1950s. Common Stocks and Uncommon Profits had a great influence on Warren Buffet’s investment philosophy (as did the investment books penned by Benjamin Graham). This is a book that should not be read just once; it should be read over and over until you have a complete understanding of its content. It is the ‘bible’ of growth stock investing – sill utterly relevant 50 years after it was written.
Mr. Fisher’s strategy was simple; invest in a small portfolio of companies (around 15) which will continue to grow revenue and profit over the years. Using his investment methods if a company is correctly selected you may never have to sell the company and at the same time will make large gains over time (i.e. 5 to 10 times return on investment). He is the father of growth stock investing. Mr. Fisher was always looking for superlative companies that he could buy and hold for an extended period.
Mr. Fisher developed a list of 15 points to research before buying a stock to help him select superlative companies. This list is still valid 5 decades after he wrote it. Some of the points, however, do need to be modernized. Examples of the 15 points:
• Point 1: Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
• Point 2: Does the management have a determination to continue to develop products or processes that will further increase total sales potential after the growth potentials of currently attractive products lines have largely been exploited?
• Point 4: Does the company have an above-average sales organization?
• Point 6: What is the company doing to maintain or improve profit margins?
• Point 14: Does the company have a management of unquestionable integrity?
Examples of the points would need to be adapted for the present time:
• Point 4: Does the company have an above-average sales organization? Today a large number of companies no longer have salespeople (if they do it is still valid point), I would expand the research to determine if the company has positive (high) brand recognition, customer satisfaction, page ranking of the company website, etc. There are many surveys on the best global brands in the world and customer satisfaction (for example the customer Net Promoter Score). You can you use Google’s page rank checker tool to check the page rank of a company’s website.
• Point 7: Does the company have outstanding labor and personnel relations? Mr. Fisher talks about developing good relations with a company’s labor unions. Most private companies in the US and around the world no longer have unions. I would review surveys of ‘best companies to work at’ (Fortune magazine does a very good survey every year of US companies). By googling ‘best companies to work at’ I quickly found surveys for Brazil, England, India and other countries.
Mr. Fisher also gives 10 more don’ts for investors. For example, don’t assume high price is an indication of future growth, don’t buy stocks because you like the tone of the annual report, don’t overstress diversification, don’t be afraid of buying during a war scare (or any scare), etc.
The scuttlebutt method is one Mr. Fisher used for researching companies. He did not rely on Wall Street research or newspaper or magazine stories for his research. If he was living today he would not be watching CNBC or Fox Business for his information, only for entertainment. With the scuttlebutt method you talk with people that can give you information about a company. For example, you talk with the companies that compete with the company that you are researching. You would find out what company they believe will be their most important competitor currently, in the future, etc. Another example: you would go talk with their customers to determine what the customer thinks about the company. You would go talk with the industry experts, suppliers, the company management, employees that left the company, people in the academic field, etc. Mr. Fisher did not spend much time looking at financial reports on any company in which he was interested.
If he were alive today, Mr. Fisher would be partial to companies that continue to develop new products which would contribute to the growth of sales revenue. He would break down revenue by the year the contributing product was introduced to the marketplace. This would show that the company had outstanding research and technical effort and they can work well with the marketing, production and sales organizations to develop products that customers want. Mr. Fisher also liked companies to have organic growth (growth within) and would limit how many companies he bought.
I would include Philip A. Fisher’s Common Stocks and Uncommon Profits in any financial library. It is the classic reference book on growth stock investing. If you own only two investing books buy Common Stocks and Uncommon Profits and Security Analysis
: the 1936 or 1940 edition by Benjamin Graham and David Dodd. Security Analysis is the classic reference book on value investing.
Please chime in with comments about Common Stock and Uncommon Profits. Would you use Mr. Fisher’s 15 points for buying / selling stocks in today’s financial environment? In a future blog I will utilize Mr. Fisher’s 15 point method to evaluate 1 or 2 companies. Future blogs that I will be writing:
Income generating bucket of money
Investing in possible buyout companies
Investing in Brazil
Using Fisher’s 15 points researching companies to evaluate one company
Best investments for Qualitative Easing (QE) 2
© 2010 Paul Cusick
by Philip A. Fisher (Investor Ken Fisher’s father). This classic financial / investment book was written in the 1950s. Common Stocks and Uncommon Profits had a great influence on Warren Buffet’s investment philosophy (as did the investment books penned by Benjamin Graham). This is a book that should not be read just once; it should be read over and over until you have a complete understanding of its content. It is the ‘bible’ of growth stock investing – sill utterly relevant 50 years after it was written.Mr. Fisher’s strategy was simple; invest in a small portfolio of companies (around 15) which will continue to grow revenue and profit over the years. Using his investment methods if a company is correctly selected you may never have to sell the company and at the same time will make large gains over time (i.e. 5 to 10 times return on investment). He is the father of growth stock investing. Mr. Fisher was always looking for superlative companies that he could buy and hold for an extended period.
Mr. Fisher developed a list of 15 points to research before buying a stock to help him select superlative companies. This list is still valid 5 decades after he wrote it. Some of the points, however, do need to be modernized. Examples of the 15 points:
• Point 1: Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
• Point 2: Does the management have a determination to continue to develop products or processes that will further increase total sales potential after the growth potentials of currently attractive products lines have largely been exploited?
• Point 4: Does the company have an above-average sales organization?
• Point 6: What is the company doing to maintain or improve profit margins?
• Point 14: Does the company have a management of unquestionable integrity?
Examples of the points would need to be adapted for the present time:
• Point 4: Does the company have an above-average sales organization? Today a large number of companies no longer have salespeople (if they do it is still valid point), I would expand the research to determine if the company has positive (high) brand recognition, customer satisfaction, page ranking of the company website, etc. There are many surveys on the best global brands in the world and customer satisfaction (for example the customer Net Promoter Score). You can you use Google’s page rank checker tool to check the page rank of a company’s website.
• Point 7: Does the company have outstanding labor and personnel relations? Mr. Fisher talks about developing good relations with a company’s labor unions. Most private companies in the US and around the world no longer have unions. I would review surveys of ‘best companies to work at’ (Fortune magazine does a very good survey every year of US companies). By googling ‘best companies to work at’ I quickly found surveys for Brazil, England, India and other countries.
Mr. Fisher also gives 10 more don’ts for investors. For example, don’t assume high price is an indication of future growth, don’t buy stocks because you like the tone of the annual report, don’t overstress diversification, don’t be afraid of buying during a war scare (or any scare), etc.
The scuttlebutt method is one Mr. Fisher used for researching companies. He did not rely on Wall Street research or newspaper or magazine stories for his research. If he was living today he would not be watching CNBC or Fox Business for his information, only for entertainment. With the scuttlebutt method you talk with people that can give you information about a company. For example, you talk with the companies that compete with the company that you are researching. You would find out what company they believe will be their most important competitor currently, in the future, etc. Another example: you would go talk with their customers to determine what the customer thinks about the company. You would go talk with the industry experts, suppliers, the company management, employees that left the company, people in the academic field, etc. Mr. Fisher did not spend much time looking at financial reports on any company in which he was interested.
If he were alive today, Mr. Fisher would be partial to companies that continue to develop new products which would contribute to the growth of sales revenue. He would break down revenue by the year the contributing product was introduced to the marketplace. This would show that the company had outstanding research and technical effort and they can work well with the marketing, production and sales organizations to develop products that customers want. Mr. Fisher also liked companies to have organic growth (growth within) and would limit how many companies he bought.
I would include Philip A. Fisher’s Common Stocks and Uncommon Profits
in any financial library. It is the classic reference book on growth stock investing. If you own only two investing books buy Common Stocks and Uncommon Profits and Security Analysis: the 1936 or 1940 edition by Benjamin Graham and David Dodd. Security Analysis is the classic reference book on value investing.Please chime in with comments about Common Stock and Uncommon Profits
. Would you use Mr. Fisher’s 15 points for buying / selling stocks in today’s financial environment? In a future blog I will utilize Mr. Fisher’s 15 point method to evaluate 1 or 2 companies. Future blogs that I will be writing:Income generating bucket of money
Investing in possible buyout companies
Investing in Brazil
Using Fisher’s 15 points researching companies to evaluate one company
Best investments for Qualitative Easing (QE) 2
© 2010 Paul Cusick
Wednesday, November 10, 2010
Investing in Brazil
In this week’s blog I will investigate whether Brazil is a good investment opportunity that would serve to diversify my investment portfolio with an emerging economy / country, and add growth potential to my overall portfolio. This week I will focus on a summary of the Brazilian economy and review investment vehicles. In a following blog I will focus on investing vehicles and opportunities.
One of the four BRIC (Brazil, Russia, India and China) countries, Brazil will have the seventh largest economy by Gross Domestic Product (GDP) by the end of 2010. Their GDP will be over $2 trillion US in 2010. Projecting 3 to 5 years out, they may become the fifth biggest economy by GDP, overtaking France and the United Kingdom.
The following are reasons why Brazil will be one of the leading economies of the 21st century:
Some segments of Brazil’s economic growth have been stunning:
· Since the 1970s Brazil has transformed itself from a food importer to one of the biggest food exporters in the world. In a ten year period from 1996 to 2006 they increased the total value of their crops from $23 billion to $108 billion. Brazil has more farmland (only 25% is in use) and renewable fresh water than any other country in the world. They are the biggest exporter in the world of the following agricultural commodities: Orange juice, sugar, chicken, beef and coffee and second for maize and soybeans. Given the ever growing world population and the increasing economic power of China and India, the two largest countries by population, Brazil will have a continuously expanding marketplace for their food products.
· In 2007 Brazil Petrobras (the government controls 40% of the stock with 50% of the voting stock) discovered potentially the fourth biggest oil field in the world estimated to hold over 40 billion barrels of oil. In the last 3 years they have discovered sources thought to potentially contain over 50 billion barrels of oil. Petrobras has announced the world’s largest capital-expenditure program – worth $175 billion US – over the next 3 years. To help with the cost-expenditure program they had the biggest stock offering ever in September 2010 raising $70 billion US. In the future Brazil will become the fifth largest oil producing country in the world.
· Brazil was selected to host the 2014 soccer World Cup and 2016 Summer Olympics. These events will require Brazil to make large infrastructure improvements including new roads, mass transit, housing, etc. that will contribute to improving the overall economy in the future.
Other interesting economic facts about Brazil:
· Brazil is the second largest (the US is first) bio-ethanol producer (using sugar or starch based material) and largest exporter to other markets.
· Fourth largest road network in the world (by miles)
· Second largest iron producer in the world
· Ninth largest steel producer in the world
· Sixth largest motor vehicle producer in the world
· Brazil Embrarer is the third largest maker of passenger jets and the biggest producer of mid-range passenger jets in the world.
· In 2008 and 2009 it was the world’s fastest growing marketplace for cars.
In some ways Brazil is still an emerging economy. It has unwieldy labor and tax laws (which have led to a very large informal economy). It can take years to fire an employee. In a recent World Bank survey on conducting business, Brazil ranked 150th out of 183 countries on how easy it was to pay taxes. Business contract disputes can be almost impossible to resolve as there can be virtually endless appeals of any court decision. Brazil may have the fourth largest road network in the world but only 12% of it is paved. This makes it difficult, time consuming and costly to move goods within the county and export. Brazil had the ninth highest murder rate in world in 2009 (although it has been decreasing over the last 5 years).
When you invest in Brazil you are looking for a return on investment and at the same time hedging against your own country’s currency (unless you are from Brazil). For example, if a Brazilian bond fund yields 5% in 2011 and the Brazilian Real gains 10% against the US dollar in 2011, your total return will be 15%. With the US Treasury Department entering into a 2nd period of quantitative easing (QE2) starting the week of November 1, 2010, it will drive the Brazil Real higher versus the US dollar over the next year (and other currencies). At the same time it will increase the price of Brazil’s exports (and other countries’) which would in turn reduce their ability to export products.
Some possible investing vehicles for Brazil:
· BRIC ETFs
· Regional ETFs (i.e. Latin America)
· Brazil ETFs
· Individual stocks (i.e. the 5 largest companies in Brazil)
· Brazil government bond funds
· Brazil bond funds
· Brazil Certificates of Deposits (CDs)
Disclosure: I have the following investments in Brazil:
· DWS Latin America Equity Fund (SLAFX) - 67% of the portfolio composition is invested in Brazil
· Guggenheim ETF (EEB) - 55% of the portfolio composition is invested in Brazil
· SPDR S&P BRIC 40 (BIK) - 25% of the portfolio composition is invested in Brazil
Please chime in with comments about the economic future of Brazil. Should I increase my investments in Brazil? What are the best investments to make in Brazil? What are your favorite financial and investment books, ideas for future blogs, etc.? Future blogs that I will be writing:
· Income generating bucket of money
· Investing in possible buyout companies
· What Investments to make in Brazil
· Reviewing the classic financial book (written in the 1950’s): Common Stock and Uncommon Profit by Philip A. Fisher
· Using Philip A. Fisher’s stock picking methods to analyze stocks
© 2010 Paul Cusick
One of the four BRIC (Brazil, Russia, India and China) countries, Brazil will have the seventh largest economy by Gross Domestic Product (GDP) by the end of 2010. Their GDP will be over $2 trillion US in 2010. Projecting 3 to 5 years out, they may become the fifth biggest economy by GDP, overtaking France and the United Kingdom.
The following are reasons why Brazil will be one of the leading economies of the 21st century:
Some segments of Brazil’s economic growth have been stunning:
· Since the 1970s Brazil has transformed itself from a food importer to one of the biggest food exporters in the world. In a ten year period from 1996 to 2006 they increased the total value of their crops from $23 billion to $108 billion. Brazil has more farmland (only 25% is in use) and renewable fresh water than any other country in the world. They are the biggest exporter in the world of the following agricultural commodities: Orange juice, sugar, chicken, beef and coffee and second for maize and soybeans. Given the ever growing world population and the increasing economic power of China and India, the two largest countries by population, Brazil will have a continuously expanding marketplace for their food products.
· In 2007 Brazil Petrobras (the government controls 40% of the stock with 50% of the voting stock) discovered potentially the fourth biggest oil field in the world estimated to hold over 40 billion barrels of oil. In the last 3 years they have discovered sources thought to potentially contain over 50 billion barrels of oil. Petrobras has announced the world’s largest capital-expenditure program – worth $175 billion US – over the next 3 years. To help with the cost-expenditure program they had the biggest stock offering ever in September 2010 raising $70 billion US. In the future Brazil will become the fifth largest oil producing country in the world.
· Brazil was selected to host the 2014 soccer World Cup and 2016 Summer Olympics. These events will require Brazil to make large infrastructure improvements including new roads, mass transit, housing, etc. that will contribute to improving the overall economy in the future.
Other interesting economic facts about Brazil:
· Brazil is the second largest (the US is first) bio-ethanol producer (using sugar or starch based material) and largest exporter to other markets.
· Fourth largest road network in the world (by miles)
· Second largest iron producer in the world
· Ninth largest steel producer in the world
· Sixth largest motor vehicle producer in the world
· Brazil Embrarer is the third largest maker of passenger jets and the biggest producer of mid-range passenger jets in the world.
· In 2008 and 2009 it was the world’s fastest growing marketplace for cars.
In some ways Brazil is still an emerging economy. It has unwieldy labor and tax laws (which have led to a very large informal economy). It can take years to fire an employee. In a recent World Bank survey on conducting business, Brazil ranked 150th out of 183 countries on how easy it was to pay taxes. Business contract disputes can be almost impossible to resolve as there can be virtually endless appeals of any court decision. Brazil may have the fourth largest road network in the world but only 12% of it is paved. This makes it difficult, time consuming and costly to move goods within the county and export. Brazil had the ninth highest murder rate in world in 2009 (although it has been decreasing over the last 5 years).
When you invest in Brazil you are looking for a return on investment and at the same time hedging against your own country’s currency (unless you are from Brazil). For example, if a Brazilian bond fund yields 5% in 2011 and the Brazilian Real gains 10% against the US dollar in 2011, your total return will be 15%. With the US Treasury Department entering into a 2nd period of quantitative easing (QE2) starting the week of November 1, 2010, it will drive the Brazil Real higher versus the US dollar over the next year (and other currencies). At the same time it will increase the price of Brazil’s exports (and other countries’) which would in turn reduce their ability to export products.
Some possible investing vehicles for Brazil:
· BRIC ETFs
· Regional ETFs (i.e. Latin America)
· Brazil ETFs
· Individual stocks (i.e. the 5 largest companies in Brazil)
· Brazil government bond funds
· Brazil bond funds
· Brazil Certificates of Deposits (CDs)
Disclosure: I have the following investments in Brazil:
· DWS Latin America Equity Fund (SLAFX) - 67% of the portfolio composition is invested in Brazil
· Guggenheim ETF (EEB) - 55% of the portfolio composition is invested in Brazil
· SPDR S&P BRIC 40 (BIK) - 25% of the portfolio composition is invested in Brazil
Please chime in with comments about the economic future of Brazil. Should I increase my investments in Brazil? What are the best investments to make in Brazil? What are your favorite financial and investment books, ideas for future blogs, etc.? Future blogs that I will be writing:
· Income generating bucket of money
· Investing in possible buyout companies
· What Investments to make in Brazil
· Reviewing the classic financial book (written in the 1950’s): Common Stock and Uncommon Profit by Philip A. Fisher
· Using Philip A. Fisher’s stock picking methods to analyze stocks
© 2010 Paul Cusick
Wednesday, October 27, 2010
Rule of 72, Apple (APPL) and Netflix (NFLX)
I just got back from a trip to Cornell University in Ithaca, New York (beautiful time of the year to visit.) This week’s blog is a hodgepodge of topics: Rule of 72 for young adults (inspired by throngs of enthusiastic Cornell students), should Apple pay a dividend, and Netflix’ third quarter financial announcement.
Rule of 72 for young adults: The rule of 72 and an overview of other basic financial information should be taught in every high school and university in the world. A short definition on how the rule of 72 works: it is 72 divided by the investment yield which equals the number of years required for the investment to double. With an investment yield of 6% your investment will double in 12 years (72 / 6 = 12). For example, if you invest $10,000 and the investment yield is 6% in 12 years you would have $20,000. Why is this vitally important for young adults to know? Here’s why: had I invested $10,000 at the age of 22 (I decided to buy a used car and not a new car) and the investment yield was 7% I would have $233,290 at the age of 67. If I postponed the decision to save or invest money until the age of 40 (leasing expensive cars, etc.), with the same investment of $10,000, by age 67 I will only have $66,182. If you understand how the rule of 72 (compounding) works you will be much more likely to start investing at a young age. Another hypothetical example, you are getting married at 22. Your parents give you up to $30,000 to spend on the wedding, or you could reduce the cost of the wedding and invest the difference. You decide to cut back the cost of the wedding and invest the difference. Let’s use the following example: the wedding cost $10,000 and you invested $20,000 with a yield of 7%. At the age of 67 you will have $466,580. The better you understand the rule of 72, the more likely you are to become an investor and not a consumer (and in debt). You will “get” why you should start investing at a young age and pay yourself first (this means you save a certain amount of money from every paycheck you receive). If all young people bought in to this way of thinking, it would go a long way toward helping the US become a nation of savers and not spenders (and increasingly in debt). Likewise it will also help the US become a net exporter (like China and Germany as examples) and not a net importer nation (forever increasing national debt).
Should Apple pay a dividend? Apple paid a dividend from June 15, 1987 to December 15, 1995. The lowest dividend payout was $.06 and the highest was $.12. If Apple were to have a 4% dividend yield (assuming the stock price was $300) it would require a $12 yearly dividend payout ($3.00 per quarter). Apple’s reported fourth quarter results (October 18, 2010) indicated profits of $4.31 billion and free cash flow of $5.7 billion. Apple has 914 million shares outstanding; to pay a $3 quarterly dividend it would require Apple to distribute $2.742 billion to shareholders each quarter. This is 48% of the quarter’s free cash flow number. The dividend payout ratio (dividends per share / earnings per share) would be ($3 / $4.64) 65%. Apple should have no problem paying a 4% dividend payout as they have approximately $50 billion dollars of cash or cash equivalent on-hand (Apple is in the top 5 non-financial companies in the world for amount of total cash or cash equivalent on-hand). A company can do the following with its cash or cash equivalent on-hand:
• Increase Research and Development (R&D), sales force, etc.
• Start or increase dividend payout
• Increase capital or infrastructure expenditures
• Buy companies
• Invest the cash
• Buy back shares to increase the price of the stock
(If you are interested, for a more detailed discussion, please see the following blog: http://paulsgang.blogspot.com/2010/09/investing-in-possible-buyout-companies.html)
In my opinion, Apple should again start paying a dividend. With a 4% dividend yield they can still accumulate cash (around $2.5 billion per quarter) and it may spur an increase in the number of people willing to buy the stock. What is your opinion? Please add a comment if you think Apple should or should not pay a dividend to their shareholders.
Netflix third quarter financial announcement: I had a record number of visits to Paul’s Gang from last week’s blog on Netflix and received plenty of positive feedback. Netflix announced their third quarter financial results October 20, 2010. What was good about the Netflix financial announcement was: over 2 million new subscribers for the quarter, 66% of subscribers using streaming video (subscribers will watch more content on streaming video than DVDs in the fourth quarter) and 31% revenue growth year over year. What was not so good was: there are over 1 million free (non-paying – trial customers) subscribers (the percentage of which has been increasing), gross margin decreased by 1.7% from the second quarter (number of free subscribers or increasing cost of content?) and overall free cash flow was only $7 million. Overall it was maybe an above average but not great financial announcement. Stock price did increase by over $19. What did you think of Netflix’ third quarter financial announcement? What do you think will be the high and low stock price in the fourth quarter?
Please chime in with comments about the rule of 72 for young adults, should Apple pay a dividend and Netflix’ third quarter financial announcement. What are your favorite financial and investment books, ideas for future blogs, etc.? Future blogs that I will be writing:
• Income generating bucket of money
• Investing in possible buyout companies
• Investing in Brazil
• Reviewing the classic financial book (written in the 1950’s): Common Stock and Uncommon Profit by Philip A. Fisher
• Using Philip A. Fisher’s stock picking methods to analyze stocks
© 2010 Paul Cusick
Rule of 72 for young adults: The rule of 72 and an overview of other basic financial information should be taught in every high school and university in the world. A short definition on how the rule of 72 works: it is 72 divided by the investment yield which equals the number of years required for the investment to double. With an investment yield of 6% your investment will double in 12 years (72 / 6 = 12). For example, if you invest $10,000 and the investment yield is 6% in 12 years you would have $20,000. Why is this vitally important for young adults to know? Here’s why: had I invested $10,000 at the age of 22 (I decided to buy a used car and not a new car) and the investment yield was 7% I would have $233,290 at the age of 67. If I postponed the decision to save or invest money until the age of 40 (leasing expensive cars, etc.), with the same investment of $10,000, by age 67 I will only have $66,182. If you understand how the rule of 72 (compounding) works you will be much more likely to start investing at a young age. Another hypothetical example, you are getting married at 22. Your parents give you up to $30,000 to spend on the wedding, or you could reduce the cost of the wedding and invest the difference. You decide to cut back the cost of the wedding and invest the difference. Let’s use the following example: the wedding cost $10,000 and you invested $20,000 with a yield of 7%. At the age of 67 you will have $466,580. The better you understand the rule of 72, the more likely you are to become an investor and not a consumer (and in debt). You will “get” why you should start investing at a young age and pay yourself first (this means you save a certain amount of money from every paycheck you receive). If all young people bought in to this way of thinking, it would go a long way toward helping the US become a nation of savers and not spenders (and increasingly in debt). Likewise it will also help the US become a net exporter (like China and Germany as examples) and not a net importer nation (forever increasing national debt).
Should Apple pay a dividend? Apple paid a dividend from June 15, 1987 to December 15, 1995. The lowest dividend payout was $.06 and the highest was $.12. If Apple were to have a 4% dividend yield (assuming the stock price was $300) it would require a $12 yearly dividend payout ($3.00 per quarter). Apple’s reported fourth quarter results (October 18, 2010) indicated profits of $4.31 billion and free cash flow of $5.7 billion. Apple has 914 million shares outstanding; to pay a $3 quarterly dividend it would require Apple to distribute $2.742 billion to shareholders each quarter. This is 48% of the quarter’s free cash flow number. The dividend payout ratio (dividends per share / earnings per share) would be ($3 / $4.64) 65%. Apple should have no problem paying a 4% dividend payout as they have approximately $50 billion dollars of cash or cash equivalent on-hand (Apple is in the top 5 non-financial companies in the world for amount of total cash or cash equivalent on-hand). A company can do the following with its cash or cash equivalent on-hand:
• Increase Research and Development (R&D), sales force, etc.
• Start or increase dividend payout
• Increase capital or infrastructure expenditures
• Buy companies
• Invest the cash
• Buy back shares to increase the price of the stock
(If you are interested, for a more detailed discussion, please see the following blog: http://paulsgang.blogspot.com/2010/09/investing-in-possible-buyout-companies.html)
In my opinion, Apple should again start paying a dividend. With a 4% dividend yield they can still accumulate cash (around $2.5 billion per quarter) and it may spur an increase in the number of people willing to buy the stock. What is your opinion? Please add a comment if you think Apple should or should not pay a dividend to their shareholders.
Netflix third quarter financial announcement: I had a record number of visits to Paul’s Gang from last week’s blog on Netflix and received plenty of positive feedback. Netflix announced their third quarter financial results October 20, 2010. What was good about the Netflix financial announcement was: over 2 million new subscribers for the quarter, 66% of subscribers using streaming video (subscribers will watch more content on streaming video than DVDs in the fourth quarter) and 31% revenue growth year over year. What was not so good was: there are over 1 million free (non-paying – trial customers) subscribers (the percentage of which has been increasing), gross margin decreased by 1.7% from the second quarter (number of free subscribers or increasing cost of content?) and overall free cash flow was only $7 million. Overall it was maybe an above average but not great financial announcement. Stock price did increase by over $19. What did you think of Netflix’ third quarter financial announcement? What do you think will be the high and low stock price in the fourth quarter?
Please chime in with comments about the rule of 72 for young adults, should Apple pay a dividend and Netflix’ third quarter financial announcement. What are your favorite financial and investment books, ideas for future blogs, etc.? Future blogs that I will be writing:
• Income generating bucket of money
• Investing in possible buyout companies
• Investing in Brazil
• Reviewing the classic financial book (written in the 1950’s): Common Stock and Uncommon Profit by Philip A. Fisher
• Using Philip A. Fisher’s stock picking methods to analyze stocks
© 2010 Paul Cusick
Wednesday, October 13, 2010
Netflix (NFLX)
In this week’s blog I evaluate Netflix Inc.: current and future business strategy, financials and what would be a reasonable buy price for the stock. To quickly summarize Netflix business, customers can view TV shows and movies by video streaming over the internet and playing on TVs, computers, smart devices (cell phones, game consoles), iPads and other devices. The customer can also get DVDs delivered by mail (depending on the product level/delivery method the customer selects upon subscribing). There are no late fees, no due dates or shipping fees with any of their delivery methods (this was one of the key factors that helped drive Blockbuster, one of their major competitors, to bankruptcy). Currently Netflix have over 12 million subscribers in the US.
Netflix built its company and reputation on mailing DVDs to households and a recommendation engine that suggested videos based on consumers’ viewing history. As Netflix expands beyond North America, this delivery method will not be available to international customers, although the streaming option will still suggest shows or movies based upon your preferences.
The long range plan of Netflix is to reduce the number of DVD subscribers (DVDs shipped per day number over 2 million) and enlarge the customer base that uses video streaming. Half of their cost of goods sold or COGS ($1.4 billion in 2009) goes to the cost of postage and handling of DVD shipments. They paid the United States Postal Service over $600 million per year just to ship DVDs. It costs $1 every time Netflix sends a DVD to a customer versus less than 5 cents to stream video content.
Another long term goal is to expand internationally with video streaming only. In September 2010 Netflix launched in Canada a video streaming delivery method, charging a flat fee of $7.99 (CD) per month, for which the customer can view as many TV shows or movies as they wish. It’s similar to a franchise business, such as McDonalds, which can continue to grow revenue and profits by expanding its business into new countries. Canada has a higher broadband penetration than the US with over 70 percent of households receiving the service. There are 13 million households in Canada, so the number of potential customers for Netflix’s streaming video delivery method would be 9.1 million households. More than 10% of households in the US subscribe to Netflix’s products (DVD and video streaming). If we assume that 10% of Canadian households will have become Netflix subscribers by January 1, 2014, the revenue generated would come to around $87 million. Netflix’s current net income is 7.25 percent (this includes the high-cost DVD delivery method which will not be part of international Netflix offerings). If we assume that revenue will be 1.5 times higher for the international business, the international net income would be about 11 per cent (this is a conservative estimate – it could be higher). The Canadian business would contribute $9.5 million to Netflix’s annual net income. Another example: if Netflix decides their next expansion target will be Great Britain, and there are 3 times the broadband equipped households in Great Britain as there are in Canada, the estimated net income would be approximately $29 million per year. Netflix’s current number of outstanding shares is 52.36 million. If Canada and Great Britain contributed $38.5 million in net income, it would add $.73 to the earnings per share (EPS). This estimate is low; I would think with the low cost of streaming video the net income could be 14.5 percent which would add at least $1 to Netflix’s EPS.
There are over 500 million households globally that have broadband and that number will continue to grow over the next 10 years. Netflix is well positioned for the future to expand the brand, revenue and profit by expanding globally.
Currently the market for internet streaming video has 3 segments: video-on-demand (user pays $5 for a movie), ad supported (you see ads before viewing the content) and subscription, like Netflix. Examples of VOD competitors would be Amazon, Apple and cable companies (i.e. Comcast). Ad supported competitors include Hulu and YouTube. Netflix is the primary provider in the subscription segment. Other competitors will enter the market as consumer demand for video streaming continues to grow. Netflix will have the following advantages over its competitors in the subscription segment:
· Video streaming technology that has the ability to scale streaming video worldwide
· Revenue stream that allows it to continue adding to its movie and video content
· Excellent consumer brand recognition (like Apple and Google)
· Superior user experience
· Personalized merchandizing and technology to enhance the user experience
· Advanced technology and operational efficiency
· Expanding number of supported devices
Netflix is not an inexpensive stock. It currently sells for around $150 with a 52 week high of $174.40 and a low of $45.94. It has a current price earnings (PE) of 61 and an estimate for next year of 40. Netflix can continue to grow their brand, revenue and profit margin by expanding to international markets. Since they can deliver video streaming to your home, office or mobile device, they could also deliver other content, for example, music, magazines, e-books, etc. By expanding their product offering, they could gain market share, increase the subscription price and charge more for the added features. Netflix has one of the best consumer brands in the US. It has very high consumer ratings for customer service, delivery, ease of use, movie and TV information, personalized information, etc. With their growing scale and revenue Netflix can continue to scale video streaming and buy content for the worldwide market. I think Netflix has a lot potential and can continue to grow revenue and profits by expanding globally; after the worldwide recession subsides, they should be able to raise their subscription prices. If the stock pulls back to between $110 and $120 I will put in a buy order.
The following are some of Paul’s Gang recommended financial and investment books. If you are interested, you can select the link and get a review of the books from the Amazon website:
The Ascent of Money: A Financial History of the World
The Big Short: Inside the Doomsday Machine
Common Stocks and Uncommon Profits and Other Writings (Wiley Investment Classics)
Die Broke: A Radical Four-Part Financial Plan
The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History
The Intelligent Investor: The Classic Text on Value Investing
The Millionaire Mind
One Up On Wall Street : How To Use What You Already Know To Make Money In The Market
Security Analysis: The Classic 1934 Edition
Please chime in with comments about NetFlix. What buy price would you look for? What are your favorite financial and investment books, ideas for future blogs, etc.? Future blogs that I will be writing:
Income generating bucket of money
Investing in possible buyout companies
Understanding the Rule of 72 and why it is important for young adults
Investing in Brazil
© 2010 Paul Cusick
Netflix built its company and reputation on mailing DVDs to households and a recommendation engine that suggested videos based on consumers’ viewing history. As Netflix expands beyond North America, this delivery method will not be available to international customers, although the streaming option will still suggest shows or movies based upon your preferences.
The long range plan of Netflix is to reduce the number of DVD subscribers (DVDs shipped per day number over 2 million) and enlarge the customer base that uses video streaming. Half of their cost of goods sold or COGS ($1.4 billion in 2009) goes to the cost of postage and handling of DVD shipments. They paid the United States Postal Service over $600 million per year just to ship DVDs. It costs $1 every time Netflix sends a DVD to a customer versus less than 5 cents to stream video content.
Another long term goal is to expand internationally with video streaming only. In September 2010 Netflix launched in Canada a video streaming delivery method, charging a flat fee of $7.99 (CD) per month, for which the customer can view as many TV shows or movies as they wish. It’s similar to a franchise business, such as McDonalds, which can continue to grow revenue and profits by expanding its business into new countries. Canada has a higher broadband penetration than the US with over 70 percent of households receiving the service. There are 13 million households in Canada, so the number of potential customers for Netflix’s streaming video delivery method would be 9.1 million households. More than 10% of households in the US subscribe to Netflix’s products (DVD and video streaming). If we assume that 10% of Canadian households will have become Netflix subscribers by January 1, 2014, the revenue generated would come to around $87 million. Netflix’s current net income is 7.25 percent (this includes the high-cost DVD delivery method which will not be part of international Netflix offerings). If we assume that revenue will be 1.5 times higher for the international business, the international net income would be about 11 per cent (this is a conservative estimate – it could be higher). The Canadian business would contribute $9.5 million to Netflix’s annual net income. Another example: if Netflix decides their next expansion target will be Great Britain, and there are 3 times the broadband equipped households in Great Britain as there are in Canada, the estimated net income would be approximately $29 million per year. Netflix’s current number of outstanding shares is 52.36 million. If Canada and Great Britain contributed $38.5 million in net income, it would add $.73 to the earnings per share (EPS). This estimate is low; I would think with the low cost of streaming video the net income could be 14.5 percent which would add at least $1 to Netflix’s EPS.
There are over 500 million households globally that have broadband and that number will continue to grow over the next 10 years. Netflix is well positioned for the future to expand the brand, revenue and profit by expanding globally.
Currently the market for internet streaming video has 3 segments: video-on-demand (user pays $5 for a movie), ad supported (you see ads before viewing the content) and subscription, like Netflix. Examples of VOD competitors would be Amazon, Apple and cable companies (i.e. Comcast). Ad supported competitors include Hulu and YouTube. Netflix is the primary provider in the subscription segment. Other competitors will enter the market as consumer demand for video streaming continues to grow. Netflix will have the following advantages over its competitors in the subscription segment:
· Video streaming technology that has the ability to scale streaming video worldwide
· Revenue stream that allows it to continue adding to its movie and video content
· Excellent consumer brand recognition (like Apple and Google)
· Superior user experience
· Personalized merchandizing and technology to enhance the user experience
· Advanced technology and operational efficiency
· Expanding number of supported devices
Netflix is not an inexpensive stock. It currently sells for around $150 with a 52 week high of $174.40 and a low of $45.94. It has a current price earnings (PE) of 61 and an estimate for next year of 40. Netflix can continue to grow their brand, revenue and profit margin by expanding to international markets. Since they can deliver video streaming to your home, office or mobile device, they could also deliver other content, for example, music, magazines, e-books, etc. By expanding their product offering, they could gain market share, increase the subscription price and charge more for the added features. Netflix has one of the best consumer brands in the US. It has very high consumer ratings for customer service, delivery, ease of use, movie and TV information, personalized information, etc. With their growing scale and revenue Netflix can continue to scale video streaming and buy content for the worldwide market. I think Netflix has a lot potential and can continue to grow revenue and profits by expanding globally; after the worldwide recession subsides, they should be able to raise their subscription prices. If the stock pulls back to between $110 and $120 I will put in a buy order.
The following are some of Paul’s Gang recommended financial and investment books. If you are interested, you can select the link and get a review of the books from the Amazon website:
The Ascent of Money: A Financial History of the World
The Big Short: Inside the Doomsday Machine
Common Stocks and Uncommon Profits and Other Writings (Wiley Investment Classics)
Die Broke: A Radical Four-Part Financial Plan
The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History
The Intelligent Investor: The Classic Text on Value Investing
The Millionaire Mind
One Up On Wall Street : How To Use What You Already Know To Make Money In The Market
Security Analysis: The Classic 1934 Edition
Please chime in with comments about NetFlix. What buy price would you look for? What are your favorite financial and investment books, ideas for future blogs, etc.? Future blogs that I will be writing:
Income generating bucket of money
Investing in possible buyout companies
Understanding the Rule of 72 and why it is important for young adults
Investing in Brazil
© 2010 Paul Cusick
Tuesday, October 5, 2010
Non Tradable (Non Traded), Non Exchange Traded or Private REITs
This week’s blog is about non tradable Real Estate Investment Trusts (REITs). These also go under the names: non exchange traded REIT and private REIT. My family inherited a non tradable REIT, Inland American Real Estate Trust, Inc. and that raised the question in my mind: is this a good investment for your income generating bucket of money (a relatively risk free source of income)?
The non tradable REITs have the same qualifications as exchange traded REITs (REIT blog: http://paulsgang.blogspot.com/2010/07/reits.html).
The following are the major qualifications of REITs:
• Pay dividends of at least 90% of the REIT’s taxable income
• Have shares of transferable certificates of interest
• Owned by 100 or more persons
• At least 75% of their total investment must be in real estate
• Have at least 95% of gross income from dividends, mortgage income or property income
• Derive at least 75% of gross income from mortgage interest or rents
The major difference between tradable and non tradable REITs is the first are traded on a stock exchange and the second are not. You can sell tradable REITs like any other stock which makes them liquid. You know the value of your investment at any time.
The first major problem with non tradable REITs is they are not traded on stock exchanges which make them illiquid. You can only sell non tradable REIT shares to the REIT company that you bought them from if they have a stock repurchase program, or on a secondary market. If a non tradable REIT has a stock repurchase program, it may impose restrictions that can make it barely more liquid than a REIT without a stock repurchase program. Such restrictions might include: you can only sell the shares after a number years of owning them, some non tradable REITs will only buy back a percentage of outstanding shares (for example 5%) and they can stop the stock repurchase plan at any time. During the current real estate financial crisis many of the largest non tradable REITs have suspended their repurchase programs. Inland American is one of the non tradable REITs that have done this. The only way you can sell your shares in on the secondary market.
The second problem is that non tradable REITs have high upfront cost (sales commission). The upfront cost can be as high as 15% (on the other hand the purchase cost of tradable REITs can be as little as $5 per trade). For example, if you purchase $100,000 of a non tradable REIT, your financial advisor just made $15,000 (it is very difficult to be unbiased when you are being paid a very high commission).
Inland American is the eighth largest retail real estate owner in the United States, located in 47 states with managed assets of $25.3 billion. Currently they pay a 5% dividend yield, reduced from a 6.2% dividend yield in January 2009. Inland American stopped their stock repurchase plan in March 2009. The Inland American shares were bought for $10 in 2005. After checking several non tradable REIT secondary market companies, the highest price they were willing to pay for the shares was $4. In 6 six years the investment has taken a 60% ‘haircut’ (loss) in the value of Inland American shares. The company that buys the shares on the secondary market would get a 12.5% dividend yield.
There are much better investments for your income generating bucket of money for example, short term (duration) bond funds, annuities (for example a gift annuity that includes a tax free portion), etc. An illiquid investment carries higher risks than a liquid one; this becomes exacerbated during times of financial problems/crises. The investment becomes much more difficult to unload, or you can only do so by losing a lot of money on it. The high upfront cost is another problem - it is hard to swallow paying somebody 15% for their ‘financial advice’ (how unbiased can you be when you are getting such a hefty commission?).
You should be very careful when you invest in non tradable REITs and - like all investments - you need to understand the advantages and disadvantages of the investment. In 6 six years the value of the Inland American investment dropped 60% for a 5% dividend yield. I question if my relative’s ‘financial advisor’ ever talked about the disadvantages of non tradable REITs, my assumption is he only talked about the 6.2% dividend yield.
The following are some of Paul’s Gang recommended financial and investment books. If you are interested, you can select the link and get a review of the books from the Amazon website:
The Ascent of Money: A Financial History of the World
The Big Short: Inside the Doomsday Machine
Common Stocks and Uncommon Profits and Other Writings (Wiley Investment Classics)
Die Broke: A Radical Four-Part Financial Plan
The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History
The Intelligent Investor: The Classic Text on Value Investing
The Millionaire Mind
One Up On Wall Street : How To Use What You Already Know To Make Money In The Market
Security Analysis: The Classic 1934 Edition
Please chime in with comments about non tradable REITs. What are your favorite financial and investment books, ideas for future blogs, etc.? Future blogs that I will be will be writing:
• Evaluating NetFlix stock
• Income generating bucket of money
• Investing in possible buyout companies
© 2010 Paul Cusick
The non tradable REITs have the same qualifications as exchange traded REITs (REIT blog: http://paulsgang.blogspot.com/2010/07/reits.html).
The following are the major qualifications of REITs:
• Pay dividends of at least 90% of the REIT’s taxable income
• Have shares of transferable certificates of interest
• Owned by 100 or more persons
• At least 75% of their total investment must be in real estate
• Have at least 95% of gross income from dividends, mortgage income or property income
• Derive at least 75% of gross income from mortgage interest or rents
The major difference between tradable and non tradable REITs is the first are traded on a stock exchange and the second are not. You can sell tradable REITs like any other stock which makes them liquid. You know the value of your investment at any time.
The first major problem with non tradable REITs is they are not traded on stock exchanges which make them illiquid. You can only sell non tradable REIT shares to the REIT company that you bought them from if they have a stock repurchase program, or on a secondary market. If a non tradable REIT has a stock repurchase program, it may impose restrictions that can make it barely more liquid than a REIT without a stock repurchase program. Such restrictions might include: you can only sell the shares after a number years of owning them, some non tradable REITs will only buy back a percentage of outstanding shares (for example 5%) and they can stop the stock repurchase plan at any time. During the current real estate financial crisis many of the largest non tradable REITs have suspended their repurchase programs. Inland American is one of the non tradable REITs that have done this. The only way you can sell your shares in on the secondary market.
The second problem is that non tradable REITs have high upfront cost (sales commission). The upfront cost can be as high as 15% (on the other hand the purchase cost of tradable REITs can be as little as $5 per trade). For example, if you purchase $100,000 of a non tradable REIT, your financial advisor just made $15,000 (it is very difficult to be unbiased when you are being paid a very high commission).
Inland American is the eighth largest retail real estate owner in the United States, located in 47 states with managed assets of $25.3 billion. Currently they pay a 5% dividend yield, reduced from a 6.2% dividend yield in January 2009. Inland American stopped their stock repurchase plan in March 2009. The Inland American shares were bought for $10 in 2005. After checking several non tradable REIT secondary market companies, the highest price they were willing to pay for the shares was $4. In 6 six years the investment has taken a 60% ‘haircut’ (loss) in the value of Inland American shares. The company that buys the shares on the secondary market would get a 12.5% dividend yield.
There are much better investments for your income generating bucket of money for example, short term (duration) bond funds, annuities (for example a gift annuity that includes a tax free portion), etc. An illiquid investment carries higher risks than a liquid one; this becomes exacerbated during times of financial problems/crises. The investment becomes much more difficult to unload, or you can only do so by losing a lot of money on it. The high upfront cost is another problem - it is hard to swallow paying somebody 15% for their ‘financial advice’ (how unbiased can you be when you are getting such a hefty commission?).
You should be very careful when you invest in non tradable REITs and - like all investments - you need to understand the advantages and disadvantages of the investment. In 6 six years the value of the Inland American investment dropped 60% for a 5% dividend yield. I question if my relative’s ‘financial advisor’ ever talked about the disadvantages of non tradable REITs, my assumption is he only talked about the 6.2% dividend yield.
The following are some of Paul’s Gang recommended financial and investment books. If you are interested, you can select the link and get a review of the books from the Amazon website:
The Ascent of Money: A Financial History of the World
The Big Short: Inside the Doomsday Machine
Common Stocks and Uncommon Profits and Other Writings (Wiley Investment Classics)
Die Broke: A Radical Four-Part Financial Plan
The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History
The Intelligent Investor: The Classic Text on Value Investing
The Millionaire Mind
One Up On Wall Street : How To Use What You Already Know To Make Money In The Market
Security Analysis: The Classic 1934 Edition
Please chime in with comments about non tradable REITs. What are your favorite financial and investment books, ideas for future blogs, etc.? Future blogs that I will be will be writing:
• Evaluating NetFlix stock
• Income generating bucket of money
• Investing in possible buyout companies
© 2010 Paul Cusick
Sunday, September 26, 2010
US IRA Withdraws, Financial and Investment Definitions and Books
This week’s blog is a hodgepodge of financial topics: US Individual Retirement Accounts (IRAs), several financial and investment definitions and some favorite financial and investment books that I have read and recommend.
I don’t like to write US-centric blogs (about 40% of my readers are outside the US), but I have been reading lately in newspapers and internet articles about older US workers (50 or older) who have lost their jobs and need to take money out of their traditional IRAs just to be able to pay their living expenses (to pay their mortgage, buy food, support their families). They are having to pay a 10% penalty fee for making an early withdrawal before reaching 59½ years of age. Many of these articles talk about the problem but will not tell you the methods you can use to withdraw the money from your traditional IRA without incurring the penalty fees. The following are some methods to get around the early withdrawal penalty:
• You can withdraw money toward qualifying school cost. For example, you need to go back to school to increase your job skills or your child is in college. You could use your traditional IRAs to pay for the school expense and use non-IRA money for your living expenses.
• There are a number of hardship cases for penalty-free early withdrawals from your traditional IRA, for example:
◦ Total and permanent disability
◦ Payment of medical insurance while unemployed
◦ Medical expenses that exceed 7.5% of adjusted gross income
For example, you could use your traditional IRAs to pay for your medical insurance payments and your non-IRA money for your living expenses.
• The IRS has a rule called 72T. Using rule 72T eliminates the 10% early withdrawal penalty for traditional IRAs. The withdrawal must continue until the age of 59 ½ has been reached or for a minimum of 5 years, whichever comes last. For example, by using a 72T calculator (http://www.dinkytown.net/java/Retire72T.html) you can see that if you are single, 56 year old and have $500,000 in your traditional IRA using the fixed amortization method your yearly payout would be $25,168 (monthly payout of $2,097).
Please consult with your tax advisor or the IRS before deciding on what is the best method for you so you won’t have to pay the 10% early withdrawal penalty. You will still need to pay income tax on the withdrawn money. The major drawback is you are depleting your retirement accounts and will have less money for when you retire.
Paul’s Gang financial and investment definitions:
Quality of Profit: High quality of profit means a company is increasing profits by increasing revenue (sales) and controlling cost. Low quality of profit means a company is increasing profit only by decreasing cost and not by increasing revenue. Methods of decreasing cost include decreasing labor cost (reducing the labor force), capital cost, Research and Development (R&D), etc.
Company worth more in its parts than the whole: If a company sold its parts (business units) it would be worth more than its market capitalization. For example, if a company has one business unit that is losing money, possesses high liabilities, has slow growth (compared to the overall company), etc., it could be decreasing the stock price of the company (which would decrease the market capitalization). The company could sell the business unit and increase the stock price and market capitalization. Another example could be that the company has a very profitable and fast growing business unit as compared with the rest of company; that business unit may be worth more than the original company market capitalization. The company could sell the business unit or could do an Initial Public Offering (IPO) to create a new company separate from the business unit.
Arrow in my Quiver: When you find a high quality investment opportunity, stock, ETF, etc. but the micro and/or macro economic factors are not favorable to the investment, you put the investment into your quiver waiting for the right economic environment. When economic factors change you check your quiver to see if you have any investments that are favorable to the new economic environment. If they are you pull the arrow from your quiver and make the investment.
In closing, Paul’s Gang recommends the following financial and investment books. If you are interested, click on the link to get a review of the books from the Amazon website:
The Ascent of Money: A Financial History of the World
The Big Short: Inside the Doomsday Machine
Common Stocks and Uncommon Profits and Other Writings (Wiley Investment Classics)
Die Broke: A Radical Four-Part Financial Plan
The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History
The Intelligent Investor: The Classic Text on Value Investing
The Millionaire Mind
One Up On Wall Street : How To Use What You Already Know To Make Money In The Market
Security Analysis: The Classic 1934 Edition
Please chime in with comments about early traditional IRA withdraws, what are your favor financial and investment books, future blog ides, etc.
© 2010 Paul Cusick
I don’t like to write US-centric blogs (about 40% of my readers are outside the US), but I have been reading lately in newspapers and internet articles about older US workers (50 or older) who have lost their jobs and need to take money out of their traditional IRAs just to be able to pay their living expenses (to pay their mortgage, buy food, support their families). They are having to pay a 10% penalty fee for making an early withdrawal before reaching 59½ years of age. Many of these articles talk about the problem but will not tell you the methods you can use to withdraw the money from your traditional IRA without incurring the penalty fees. The following are some methods to get around the early withdrawal penalty:
• You can withdraw money toward qualifying school cost. For example, you need to go back to school to increase your job skills or your child is in college. You could use your traditional IRAs to pay for the school expense and use non-IRA money for your living expenses.
• There are a number of hardship cases for penalty-free early withdrawals from your traditional IRA, for example:
◦ Total and permanent disability
◦ Payment of medical insurance while unemployed
◦ Medical expenses that exceed 7.5% of adjusted gross income
For example, you could use your traditional IRAs to pay for your medical insurance payments and your non-IRA money for your living expenses.
• The IRS has a rule called 72T. Using rule 72T eliminates the 10% early withdrawal penalty for traditional IRAs. The withdrawal must continue until the age of 59 ½ has been reached or for a minimum of 5 years, whichever comes last. For example, by using a 72T calculator (http://www.dinkytown.net/java/Retire72T.html) you can see that if you are single, 56 year old and have $500,000 in your traditional IRA using the fixed amortization method your yearly payout would be $25,168 (monthly payout of $2,097).
Please consult with your tax advisor or the IRS before deciding on what is the best method for you so you won’t have to pay the 10% early withdrawal penalty. You will still need to pay income tax on the withdrawn money. The major drawback is you are depleting your retirement accounts and will have less money for when you retire.
Paul’s Gang financial and investment definitions:
Quality of Profit: High quality of profit means a company is increasing profits by increasing revenue (sales) and controlling cost. Low quality of profit means a company is increasing profit only by decreasing cost and not by increasing revenue. Methods of decreasing cost include decreasing labor cost (reducing the labor force), capital cost, Research and Development (R&D), etc.
Company worth more in its parts than the whole: If a company sold its parts (business units) it would be worth more than its market capitalization. For example, if a company has one business unit that is losing money, possesses high liabilities, has slow growth (compared to the overall company), etc., it could be decreasing the stock price of the company (which would decrease the market capitalization). The company could sell the business unit and increase the stock price and market capitalization. Another example could be that the company has a very profitable and fast growing business unit as compared with the rest of company; that business unit may be worth more than the original company market capitalization. The company could sell the business unit or could do an Initial Public Offering (IPO) to create a new company separate from the business unit.
Arrow in my Quiver: When you find a high quality investment opportunity, stock, ETF, etc. but the micro and/or macro economic factors are not favorable to the investment, you put the investment into your quiver waiting for the right economic environment. When economic factors change you check your quiver to see if you have any investments that are favorable to the new economic environment. If they are you pull the arrow from your quiver and make the investment.
In closing, Paul’s Gang recommends the following financial and investment books. If you are interested, click on the link to get a review of the books from the Amazon website:
The Ascent of Money: A Financial History of the World
The Big Short: Inside the Doomsday Machine
Common Stocks and Uncommon Profits and Other Writings (Wiley Investment Classics)
Die Broke: A Radical Four-Part Financial Plan
The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History
The Intelligent Investor: The Classic Text on Value Investing
The Millionaire Mind
One Up On Wall Street : How To Use What You Already Know To Make Money In The Market
Security Analysis: The Classic 1934 Edition
Please chime in with comments about early traditional IRA withdraws, what are your favor financial and investment books, future blog ides, etc.
© 2010 Paul Cusick
Sunday, September 19, 2010
Investing in Possible Buyout Companies #2
This is the second in my series of blogs on investing in possible buyout companies. I did a lot of work data mining financial data this past week (market cap and dividend yields are for the week of September 6, 2010). I started by reviewing companies that would be in a position to buy companies because they have sufficient cash. I evaluated the top 50 companies listed on US stock exchanges by total amount of cash or cash equivalent on-hand based on their latest filings, deleting all financial companies for example, insurance providers, banks, etc.
I found some interesting data on the top 50 non-financial companies:
• Total market cap: $3.75 trillion
• Total cash: $628.5 billion
• Total debt: $852 billion
• Average dividend yield: 1.70% (the dividend yield is less than the S&P 500 index yield of 1.91%).
Table 1 - Top 15 non-financial companies by total cash or cash equivalent. This list includes 7 technology companies, 4 healthcare companies, 2 energy companies and 2 companies with part of their business in financial services (Ford and General Electric).
Company Name Market Cap Total Cash
(US $ billion) (US $ billion)
1. General Electric (GE) 165.07 73.85
2. Cisco Systems (CSCO) 117.06 39.86
3. Microsoft (MSFT) 207.34 36.56
4. Google Inc. (GOOG) 148.01 30.06
5. Ford Motor Company (F) 40.58 30.05
6. Apple Inc. (AAPL) 235.53 24.29
7. Pfizer (PFE) 131.27 19.27
8. Johnson & Johnson (JNJ) 161.69 18.90
9. WellPoint (WLP) 20.95 18.59
10. Oracle (ORCL) 121.96 18.47
11. Intel (INTC) 100.89 18.30
12. Hewlett-Packard (HPQ ) 92.69 14.72
13. Amgen Inc. (AMGN) 50.33 14.52
14. Exxon Mobil (XOM) 308.31 13.27
15. Chevron (CVX) 154.92 13.22
Table 2 - Top 15 non-financial companies by total cash or cash equivalent minus total debt. This list includes 10 technology companies, 3 healthcare companies, 1 consumer company and 1 energy company. It’s interesting to note that the top 5 companies are technology companies.
Company Name Market Cap Total Cash - Debt
(US $ billion) (US $ billion)
1. Microsoft (MSFT) 207.34 30.59
2. Google Inc. (GOOG) 148.01 30.06
3. Cisco Systems (CSCO) 117.06 24.58
4. Apple Inc. (AAPL) 235.53 24.29
5. Intel (INTC) 100.89 15.89
6. WellPoint (WLP) 20.95 9.29
7. QUALCOMM (QCOM) 65.12 8.69
8. Johnson & Johnson (JNJ) 161.69 7.25
9. Dell Inc. D(ELL) 23.96 7.18
10. Humana Inc. (HUM) 8.61 6.97
11. Amazon.com (AMZN) 61.45 4.98
12. eBay Inc. (EBAY) 30.88 4.90
13. Motorola (MOT) 18.27 4.79
14. Nike (NKE) 35.75 4.56
15. The AES Corp. (AES) 8.73 4.31
Table 3 - Top 10 non financial companies by percentage of total cash minus debt dividend by total market cap. This list includes 7 technology companies, 2 healthcare companies and 1 energy company.
Company Name Market Cap Cash - Debt/Market Cap
(US $ billion)
1. Humana Inc. (HUM) 8.61 80.95%
2. The AES Corp. (AES) 8.73 49.31%
3. WellPoint (WLP) 20.95 44.34%
4. Dell Inc. D(ELL) 23.96 29.96%
5. Motorola (MOT) 18.27 26.22%
6. Cisco Systems (CSCO) 117.06 21.00%
7. Google Inc. (GOOG) 148.01 20.31%
8. eBay Inc. (EBAY) 30.88 15.86%
9. Intel (INTC) 100.89 15.75%
10. Microsoft (MSFT) 207.34 14.75%
These are very interesting tables. The first and second tables show companies that have the cash to buy other companies. The third table is also very interesting in that it shows companies that could be bought by other companies for their cash (or they could use their cash to buy companies). If you review these tables it shows why most financial analysts expect technology, energy, healthcare and commodities companies to lead the buyout surge in the coming years. These sectors are shielded more from the current financial downturns, depending less on discretionary consumer income.
The overall weak economy will aid companies that want to buy companies for 2 major reasons. The first reason is that many companies are undervalued (pre current financial downturn) and companies with high credit ratings can get very low-cost debt financing. Companies with a lot cash and low debt have high credit ratings (just like consumers). For example, in early August 2010 IBM issued a $1.5 billion note. The 3 year note had a coupon rate of only 1%. On August 4, 2010, a 3 year US government treasury note interest rate was .86%. For the risk of buying a IBM 3 year note you only get an additional 14 (.14%) basis points of interest rate versus the risk free 3 year US treasury note (the US treasury has a printing press to print money and IBM does not). This is one of the reasons that IBM’s CEO said IBM will be an aggressive buyer of companies over the next 5 years, spending around $20 billion to acquire companies.
In a future blog I will be reviewing companies that have a history of buying companies. For example, Cisco and Intel have been very active in acquiring companies in the past couple of years as opposed to Apple which historically has not acquired companies. I will also review what companies are possible buyout candidates by business sector, market cap size, etc.
Please chime in with comments about what companies will buy out other companies, what companies / business sectors will be good buyout candidates. Is this a good investment strategy?
© 2010 Paul Cusick
I found some interesting data on the top 50 non-financial companies:
• Total market cap: $3.75 trillion
• Total cash: $628.5 billion
• Total debt: $852 billion
• Average dividend yield: 1.70% (the dividend yield is less than the S&P 500 index yield of 1.91%).
Table 1 - Top 15 non-financial companies by total cash or cash equivalent. This list includes 7 technology companies, 4 healthcare companies, 2 energy companies and 2 companies with part of their business in financial services (Ford and General Electric).
Company Name Market Cap Total Cash
(US $ billion) (US $ billion)
1. General Electric (GE) 165.07 73.85
2. Cisco Systems (CSCO) 117.06 39.86
3. Microsoft (MSFT) 207.34 36.56
4. Google Inc. (GOOG) 148.01 30.06
5. Ford Motor Company (F) 40.58 30.05
6. Apple Inc. (AAPL) 235.53 24.29
7. Pfizer (PFE) 131.27 19.27
8. Johnson & Johnson (JNJ) 161.69 18.90
9. WellPoint (WLP) 20.95 18.59
10. Oracle (ORCL) 121.96 18.47
11. Intel (INTC) 100.89 18.30
12. Hewlett-Packard (HPQ ) 92.69 14.72
13. Amgen Inc. (AMGN) 50.33 14.52
14. Exxon Mobil (XOM) 308.31 13.27
15. Chevron (CVX) 154.92 13.22
Table 2 - Top 15 non-financial companies by total cash or cash equivalent minus total debt. This list includes 10 technology companies, 3 healthcare companies, 1 consumer company and 1 energy company. It’s interesting to note that the top 5 companies are technology companies.
Company Name Market Cap Total Cash - Debt
(US $ billion) (US $ billion)
1. Microsoft (MSFT) 207.34 30.59
2. Google Inc. (GOOG) 148.01 30.06
3. Cisco Systems (CSCO) 117.06 24.58
4. Apple Inc. (AAPL) 235.53 24.29
5. Intel (INTC) 100.89 15.89
6. WellPoint (WLP) 20.95 9.29
7. QUALCOMM (QCOM) 65.12 8.69
8. Johnson & Johnson (JNJ) 161.69 7.25
9. Dell Inc. D(ELL) 23.96 7.18
10. Humana Inc. (HUM) 8.61 6.97
11. Amazon.com (AMZN) 61.45 4.98
12. eBay Inc. (EBAY) 30.88 4.90
13. Motorola (MOT) 18.27 4.79
14. Nike (NKE) 35.75 4.56
15. The AES Corp. (AES) 8.73 4.31
Table 3 - Top 10 non financial companies by percentage of total cash minus debt dividend by total market cap. This list includes 7 technology companies, 2 healthcare companies and 1 energy company.
Company Name Market Cap Cash - Debt/Market Cap
(US $ billion)
1. Humana Inc. (HUM) 8.61 80.95%
2. The AES Corp. (AES) 8.73 49.31%
3. WellPoint (WLP) 20.95 44.34%
4. Dell Inc. D(ELL) 23.96 29.96%
5. Motorola (MOT) 18.27 26.22%
6. Cisco Systems (CSCO) 117.06 21.00%
7. Google Inc. (GOOG) 148.01 20.31%
8. eBay Inc. (EBAY) 30.88 15.86%
9. Intel (INTC) 100.89 15.75%
10. Microsoft (MSFT) 207.34 14.75%
These are very interesting tables. The first and second tables show companies that have the cash to buy other companies. The third table is also very interesting in that it shows companies that could be bought by other companies for their cash (or they could use their cash to buy companies). If you review these tables it shows why most financial analysts expect technology, energy, healthcare and commodities companies to lead the buyout surge in the coming years. These sectors are shielded more from the current financial downturns, depending less on discretionary consumer income.
The overall weak economy will aid companies that want to buy companies for 2 major reasons. The first reason is that many companies are undervalued (pre current financial downturn) and companies with high credit ratings can get very low-cost debt financing. Companies with a lot cash and low debt have high credit ratings (just like consumers). For example, in early August 2010 IBM issued a $1.5 billion note. The 3 year note had a coupon rate of only 1%. On August 4, 2010, a 3 year US government treasury note interest rate was .86%. For the risk of buying a IBM 3 year note you only get an additional 14 (.14%) basis points of interest rate versus the risk free 3 year US treasury note (the US treasury has a printing press to print money and IBM does not). This is one of the reasons that IBM’s CEO said IBM will be an aggressive buyer of companies over the next 5 years, spending around $20 billion to acquire companies.
In a future blog I will be reviewing companies that have a history of buying companies. For example, Cisco and Intel have been very active in acquiring companies in the past couple of years as opposed to Apple which historically has not acquired companies. I will also review what companies are possible buyout candidates by business sector, market cap size, etc.
Please chime in with comments about what companies will buy out other companies, what companies / business sectors will be good buyout candidates. Is this a good investment strategy?
© 2010 Paul Cusick
Sunday, September 12, 2010
Investing in Possible Buyout Companies
Over the next several blogs I will be looking at how to invest in companies that are possible buyout candidates. Excluding the financial service companies, the world’s 1000 biggest companies by market capitalization have almost $3 trillion (with a ‘t’) of cash or cash equivalent on-hand based on their latest filings. The buyout deals in August 2010 totaled over $285 billion, the largest month of 2010 (over 68% of the deals were cash only). There is lot cash available to buy companies over the next several years.
What can companies do with their cash?
• Increase Research and Development (R&D), sales force, etc.- For example, companies could increase their R&D budget to develop and improve existing products by hiring new employees, hire more sales people to increase their market share / revenue, etc. Companies are very reluctant to hire new fulltime employees in the current micro/ macroeconomic environment.
• Start or increase dividend payout – Companies could start paying dividends or increase their dividend payout to investors with their excess cash. For many tech companies for whom buying companies has not gone well in the past this may be a better use of the cash. In the US starting in 2011 the tax rate could more than double for high earners whose dividend payouts are in taxable accounts.
• Increase capital or infrastructure expenditures – Spend money to get new hardware/software, build a new office building, buy new equipment, etc. to increase the efficiency of the company workforce, expand the business etc.
• Buy companies – Buy companies which can improve a company’s overall business.
• Invest the cash – Companies could continue to invest their cash or equivalent in this period of historic low interest rates. In the US there has been talk that the federal government may start taxing their excess cash to encourage the economic recovery. This would force the companies to invest their money for example in capital or infrastructure expenditures, hire new employees, etc.
Why do companies buy other companies?
· Increase market share of current business
· Increase overall revenue and revenue growth
· Eliminate a competitor
· Get into a new business sector
· Acquire the company’s assets - For example, key technology, management talent, customer list, support contracts, etc.
I will be researching what companies have the most cash available to buy other companies and have a history of doing so, what sectors (type of business) and what type of companies (for example market capitalization size), are possible buyout candidates and writing blogs on what I find out.
This is an exciting investment area that may have the best investment return opportunities over the next two or three years. I will use a limited amount of my investment portfolio to invest in possible buyout candidates (around 5%). Please do your own research before making an investment. Maybe I should start a hedge fund looking for possible buyout candidates?
Please chime in with comments about what companies will buy out other companies, what companies / business sectors will be good buyout candidates. Is this a good investment strategy?
© 2010 Paul Cusick
What can companies do with their cash?
• Increase Research and Development (R&D), sales force, etc.- For example, companies could increase their R&D budget to develop and improve existing products by hiring new employees, hire more sales people to increase their market share / revenue, etc. Companies are very reluctant to hire new fulltime employees in the current micro/ macroeconomic environment.
• Start or increase dividend payout – Companies could start paying dividends or increase their dividend payout to investors with their excess cash. For many tech companies for whom buying companies has not gone well in the past this may be a better use of the cash. In the US starting in 2011 the tax rate could more than double for high earners whose dividend payouts are in taxable accounts.
• Increase capital or infrastructure expenditures – Spend money to get new hardware/software, build a new office building, buy new equipment, etc. to increase the efficiency of the company workforce, expand the business etc.
• Buy companies – Buy companies which can improve a company’s overall business.
• Invest the cash – Companies could continue to invest their cash or equivalent in this period of historic low interest rates. In the US there has been talk that the federal government may start taxing their excess cash to encourage the economic recovery. This would force the companies to invest their money for example in capital or infrastructure expenditures, hire new employees, etc.
Why do companies buy other companies?
· Increase market share of current business
· Increase overall revenue and revenue growth
· Eliminate a competitor
· Get into a new business sector
· Acquire the company’s assets - For example, key technology, management talent, customer list, support contracts, etc.
I will be researching what companies have the most cash available to buy other companies and have a history of doing so, what sectors (type of business) and what type of companies (for example market capitalization size), are possible buyout candidates and writing blogs on what I find out.
This is an exciting investment area that may have the best investment return opportunities over the next two or three years. I will use a limited amount of my investment portfolio to invest in possible buyout candidates (around 5%). Please do your own research before making an investment. Maybe I should start a hedge fund looking for possible buyout candidates?
Please chime in with comments about what companies will buy out other companies, what companies / business sectors will be good buyout candidates. Is this a good investment strategy?
© 2010 Paul Cusick
Sunday, September 5, 2010
High Dividend Yielding Stocks
I am on the hunt for high dividend yielding stocks like the five Natural Gas (NG) and Oil producing Canada Trust companies (thanks Fullstacks and Mr. C.) that I started buying in 2004. For example, Penn West Energy Trust (PWE) and Pengrowth Energy Trust (PGH) were paying a 16% dividend in 2008. In less than five years the dividend payout would have exceeded your purchase price of the stock (rule of 72). After several years of paying a high dividend, two of my Canada trust companies were bought out for cash that exceeded my purchase price by over 50%. With the decrease in price of NG and Oil and the change in the Canada Trust tax law decreeing that, beginning in 2011, they will be taxed like other corporations, they have either lowered their dividend yield or stopped paying them (if they have become corporations). Currently PWE’s dividend yield is 8.8% and PGH’s yield is 8.3%. Starting in January 2011 with the change in the Canada tax law they’ll no longer be required to pay out 90% of their profits every month in dividends (this is similar to US Real Estate Investment Trust).
The following are my criteria for selecting companies that are paying high dividend yields (that shouldn’t be forced to reduce or stop dividend payout in the future and might be potential buyout candidates):
• Stock market capitalization greater than 2 billion US dollars. This would be defined as a mid cap company.
• Current dividend yield greater than 4.5%. Current Dow Jones Index (DIA) yield is 2.68% and S&P Index yield is 2.03%.
• Growth of dividend yield over the last 5 years greater than 6%. The company is continuing to increase their dividend payout over a defined number of years.
• Earnings Per Share (EPS) projected over the next 5 years should be greater than 8%. A trend indicating profit in the future will allow them to increase their dividends.
• Revenue growth over the last 3 years should be greater than .5%. This will indicate whether the profit growth is ‘quality’ profit growth (they are increasing revenue and controlling cost and not just reducing expenses to increase profits).
• Dividend payout ratios and insider (employees) percent of stock ownership. Dividend payout ratios (lower is better) is a good indicator of the company’s ability to continue to increase dividend payouts in the future. If insiders own a larger percent of the stock they are much more likely to continue to pay dividends since they get the same payout as you. The higher the insider ratio the better it should be for the stockholder.
• Industry sector. I am excluding Financial and REITs companies from the analysis so as to concentrate on companies in industries that can continue to grow with the current or future micro and macro economic conditions.
I utilized stock screeners to select companies to review. After trying a large number of stock screeners I chose the Fidelity stock screener (you need to have a Fidelity account to use it). It could perform each of my criteria except for dividend payout ratio (I will need to conduct research on the companies selected using the other criteria). The following companies were selected (listed from the highest rated by the Fidelity tool to the lowest):
· Compania Cervecerias Unidas S.A. (CCU) - The current dividend yield is 3.7%. There has been large increase in the stock price over the last 2 months at the end of the second quarter (June 30, 2010) the stock price was $43.09 and is currently around $58 (the stock screener tool used the end of second quarter dividend yield of 4.66%). CCU is headquartered in Chile and is a beverage company that principally engaged in beer production and distribution in Chile and Argentina. It also produces and sells wine, soft drinks, mineral water and other beverages. CCU has had 15% revenue growth over the last 3 years and dividend growth over the last 5 years of 20%. Its dividend payout ratio is outstanding at 38% and 21% of shares are owned by insiders. With future EPS growth over the next 5 years of 14% CCU should be able continue to increase its dividend payout. This was the highest rated selection by the Fidelity stock screener tool.
· Veolia Environnement (VE) – The current dividend yield is 5.2% and the stock price is around its 52 week low. VE is a France based company that provides environmental management services to individual, government and commercial customers worldwide. Its dividend payout ratio is high (not good) at 95% and 11% of its shares are owned by insiders. VE has had 10% revenue growth over the last 3 years and forecasted EPS growth of 10% over the next years.
· Paychex, Inc. (PAYX) - The current dividend yield is 5.2% and the stock price is around its 52 week low. PAYX provides payroll, human resource and benefits outsourcing solutions for small to medium size businesses in the US and Germany. By outsourcing to PAYX, their customers avoid employing fulltime employees to perform the activities. This is a growing trend in US business. Its dividend payout ratio is high (not good) at 94% and 10% of its shares are owned by insiders.
· Westar Energy Inc (WR) The current dividend yield is 5.2% and the stock price is around its 52 week high. WR is an electric utility company that is based in Kansas, US. It produces electricity from various sources, for example coal, natural gas and wind. Its dividend payout ratio is 78% and 1% of its shares are owned by insiders. Its EPS growth over the next 5 years is forecasted at 9%.
· RPM International Inc. (RPM) - The current dividend yield is 4.9%. RPM conducts manufacturing, marketing, and sales of various specialty chemical products to industrial and consumer markets worldwide. Its dividend payout ratio is 59 %( which is good) and 1.5% of its shares are owned by insiders. With future EPS growth over the next 5 years of 10% RPM should be able to continue to increase its dividend payout.
· Alliant Energy Corp. (LNT) - The current dividend yield is 4.5% and the stock price is around its 52 week high. Alliant Energy Corporation operates in electric and gas utility businesses in the United States. The company, through its subsidiary, Interstate Power and Light Company, engages in the generation and distribution of electric energy; and the distribution and transportation of natural gas in Iowa and southern Minnesota. Its payout ratio is 169% and 1% of the shares are held by insiders. This was the lowest rated company.
CCU’s business is staple goods such as beer, wine, water, etc. Staple goods sales and earnings growth tend to remain constant in good or bad economic times. During the current recession staple goods companies’ revenue and profit will remain stable (this can be used as a hedge against recession). Argentina’s and Chile’s forecasted 2010 and 2011 GDP growth is two times the US and this will help to continue to drive CCU revenue and profit growth. They have had a high ‘quality’ of profitability, their profit is growing at the same time their revenue has grown (their revenue has not remained the same; they have increased profit by cutting expenses, i.e. workers). At this time I will not buy CCU but I am putting it on my watch list waiting for a pullback of the stock price. The stock price is at a record high and has doubled in less than 20 months. In the event of a stock price a pullback I will re-evaluate my position. CCU could be a possible buyout candidate in the future.
I love water companies and VE provides water environment management services around the world. VE’s business is a growth industry around the world and especially in the emerging countries like Brazil, Russia, India and China (BRIC countries). The demand for safe and fresh drinking water will only continue to grow since currently there is a shortage. Clean fresh water is becoming blue gold (I used to use “blue oil” before the BP fiasco). There will continue to be large demand worldwide for years to come. I have owned United Utilities (UUGRY.PK) for the last 7 years and it’s currently paying a dividend yield of over 8%. UUGRY.PK is a water utility in England and also provides water management services worldwide. I will need to do more research on VE since it is at a 52 week stock price low.
You should research each of the companies that I talked about yourself before you making any decisions to buy the stock.
If you are planning to make your high paying dividend investment in a taxable account you should be aware of possible changes to qualifying dividend tax rate in the US in 2011. See my blog: http://paulsgang.blogspot.com/2010/07/investment-us-tax-changes-for-2011.html. In 2011 qualifying dividends will revert to their pre-Bush tax rate i.e. ordinary income based on your highest tax bracket. Bush’s tax cut of 2003 changed the qualified dividends tax rate from ordinary income (your highest income tax bracket) to the same as capital gains (15% for most people). Your tax rate could be as high as 39.6% if you are a high income earner. Congress could change it to be the same as long-term capital gains – 20% for most taxpayers – but I think it’s more likely they will not take action and it will return to the ordinary income rate of your highest tax bracket.
Please chime in with comments about the high dividend yielding stocks that I wrote about in my blog. Which ones, if any, would you buy or wait for a pullback in price? If you have any ideas about future blogs please add a comment. If there is any interest I could write about the 12 stock screener tools that I used with a quick evaluation of them. I am also starting to think about companies that would be good buyout candidates and in which sectors they might be (i.e. cloud computing). Companies in the US have over $2 trillion cash in the bank available for buying companies, capital improvements, increasing dividends payouts, etc.
© 2010 Paul Cusick
The following are my criteria for selecting companies that are paying high dividend yields (that shouldn’t be forced to reduce or stop dividend payout in the future and might be potential buyout candidates):
• Stock market capitalization greater than 2 billion US dollars. This would be defined as a mid cap company.
• Current dividend yield greater than 4.5%. Current Dow Jones Index (DIA) yield is 2.68% and S&P Index yield is 2.03%.
• Growth of dividend yield over the last 5 years greater than 6%. The company is continuing to increase their dividend payout over a defined number of years.
• Earnings Per Share (EPS) projected over the next 5 years should be greater than 8%. A trend indicating profit in the future will allow them to increase their dividends.
• Revenue growth over the last 3 years should be greater than .5%. This will indicate whether the profit growth is ‘quality’ profit growth (they are increasing revenue and controlling cost and not just reducing expenses to increase profits).
• Dividend payout ratios and insider (employees) percent of stock ownership. Dividend payout ratios (lower is better) is a good indicator of the company’s ability to continue to increase dividend payouts in the future. If insiders own a larger percent of the stock they are much more likely to continue to pay dividends since they get the same payout as you. The higher the insider ratio the better it should be for the stockholder.
• Industry sector. I am excluding Financial and REITs companies from the analysis so as to concentrate on companies in industries that can continue to grow with the current or future micro and macro economic conditions.
I utilized stock screeners to select companies to review. After trying a large number of stock screeners I chose the Fidelity stock screener (you need to have a Fidelity account to use it). It could perform each of my criteria except for dividend payout ratio (I will need to conduct research on the companies selected using the other criteria). The following companies were selected (listed from the highest rated by the Fidelity tool to the lowest):
· Compania Cervecerias Unidas S.A. (CCU) - The current dividend yield is 3.7%. There has been large increase in the stock price over the last 2 months at the end of the second quarter (June 30, 2010) the stock price was $43.09 and is currently around $58 (the stock screener tool used the end of second quarter dividend yield of 4.66%). CCU is headquartered in Chile and is a beverage company that principally engaged in beer production and distribution in Chile and Argentina. It also produces and sells wine, soft drinks, mineral water and other beverages. CCU has had 15% revenue growth over the last 3 years and dividend growth over the last 5 years of 20%. Its dividend payout ratio is outstanding at 38% and 21% of shares are owned by insiders. With future EPS growth over the next 5 years of 14% CCU should be able continue to increase its dividend payout. This was the highest rated selection by the Fidelity stock screener tool.
· Veolia Environnement (VE) – The current dividend yield is 5.2% and the stock price is around its 52 week low. VE is a France based company that provides environmental management services to individual, government and commercial customers worldwide. Its dividend payout ratio is high (not good) at 95% and 11% of its shares are owned by insiders. VE has had 10% revenue growth over the last 3 years and forecasted EPS growth of 10% over the next years.
· Paychex, Inc. (PAYX) - The current dividend yield is 5.2% and the stock price is around its 52 week low. PAYX provides payroll, human resource and benefits outsourcing solutions for small to medium size businesses in the US and Germany. By outsourcing to PAYX, their customers avoid employing fulltime employees to perform the activities. This is a growing trend in US business. Its dividend payout ratio is high (not good) at 94% and 10% of its shares are owned by insiders.
· Westar Energy Inc (WR) The current dividend yield is 5.2% and the stock price is around its 52 week high. WR is an electric utility company that is based in Kansas, US. It produces electricity from various sources, for example coal, natural gas and wind. Its dividend payout ratio is 78% and 1% of its shares are owned by insiders. Its EPS growth over the next 5 years is forecasted at 9%.
· RPM International Inc. (RPM) - The current dividend yield is 4.9%. RPM conducts manufacturing, marketing, and sales of various specialty chemical products to industrial and consumer markets worldwide. Its dividend payout ratio is 59 %( which is good) and 1.5% of its shares are owned by insiders. With future EPS growth over the next 5 years of 10% RPM should be able to continue to increase its dividend payout.
· Alliant Energy Corp. (LNT) - The current dividend yield is 4.5% and the stock price is around its 52 week high. Alliant Energy Corporation operates in electric and gas utility businesses in the United States. The company, through its subsidiary, Interstate Power and Light Company, engages in the generation and distribution of electric energy; and the distribution and transportation of natural gas in Iowa and southern Minnesota. Its payout ratio is 169% and 1% of the shares are held by insiders. This was the lowest rated company.
CCU’s business is staple goods such as beer, wine, water, etc. Staple goods sales and earnings growth tend to remain constant in good or bad economic times. During the current recession staple goods companies’ revenue and profit will remain stable (this can be used as a hedge against recession). Argentina’s and Chile’s forecasted 2010 and 2011 GDP growth is two times the US and this will help to continue to drive CCU revenue and profit growth. They have had a high ‘quality’ of profitability, their profit is growing at the same time their revenue has grown (their revenue has not remained the same; they have increased profit by cutting expenses, i.e. workers). At this time I will not buy CCU but I am putting it on my watch list waiting for a pullback of the stock price. The stock price is at a record high and has doubled in less than 20 months. In the event of a stock price a pullback I will re-evaluate my position. CCU could be a possible buyout candidate in the future.
I love water companies and VE provides water environment management services around the world. VE’s business is a growth industry around the world and especially in the emerging countries like Brazil, Russia, India and China (BRIC countries). The demand for safe and fresh drinking water will only continue to grow since currently there is a shortage. Clean fresh water is becoming blue gold (I used to use “blue oil” before the BP fiasco). There will continue to be large demand worldwide for years to come. I have owned United Utilities (UUGRY.PK) for the last 7 years and it’s currently paying a dividend yield of over 8%. UUGRY.PK is a water utility in England and also provides water management services worldwide. I will need to do more research on VE since it is at a 52 week stock price low.
You should research each of the companies that I talked about yourself before you making any decisions to buy the stock.
If you are planning to make your high paying dividend investment in a taxable account you should be aware of possible changes to qualifying dividend tax rate in the US in 2011. See my blog: http://paulsgang.blogspot.com/2010/07/investment-us-tax-changes-for-2011.html. In 2011 qualifying dividends will revert to their pre-Bush tax rate i.e. ordinary income based on your highest tax bracket. Bush’s tax cut of 2003 changed the qualified dividends tax rate from ordinary income (your highest income tax bracket) to the same as capital gains (15% for most people). Your tax rate could be as high as 39.6% if you are a high income earner. Congress could change it to be the same as long-term capital gains – 20% for most taxpayers – but I think it’s more likely they will not take action and it will return to the ordinary income rate of your highest tax bracket.
Please chime in with comments about the high dividend yielding stocks that I wrote about in my blog. Which ones, if any, would you buy or wait for a pullback in price? If you have any ideas about future blogs please add a comment. If there is any interest I could write about the 12 stock screener tools that I used with a quick evaluation of them. I am also starting to think about companies that would be good buyout candidates and in which sectors they might be (i.e. cloud computing). Companies in the US have over $2 trillion cash in the bank available for buying companies, capital improvements, increasing dividends payouts, etc.
© 2010 Paul Cusick
Saturday, August 21, 2010
Managing Cash in 2010
In this week's blog I will discuss managing cash in an environment of record low interest rates. Federal Reserve chairman Ben Bernanke has told congress that record low interest rates are needed to stimulate the economy and to help reduce the high unemployment rate. What are your cash options in such an environment? Dare we dream that it gets like Switzerland in the late 1970s when investors bought negative interest rate Swiss treasury bonds because of the strength of the Swiss franc? (Investors also paid a withholding tax if they had savings in Swiss francs in Swiss banks. This was done to discourage foreigners from holding Swiss francs.)
My intent is to manage my short-term cash reserve which would serve, for example, as my emergency fund (6 to 9 months of my salary), pay for college expenses due in the next 6 to 9 months, or be earmarked for a new car or house that I will buy in the next 6 months. I would like to try to get the best rate of return with little or no risk to my investment. For this blog let’s use the following example, I have a $50,000 cash emergency fund to help pay my expenses if I were to lose my job. How do I get the best return with little or no risk? Should I have just one investment vehicle or several diversified investment vehicles? This is not the mid-2000s when you could get a 5% interest rate from e-Trade for an investment account (i.e. savings) that was risk free since it had FDIC insurance (and you did not exceed $100,000 in the account).
Let’s review different investment types (all rates from the week of August 9, 2010):
• Savings account: For Bank of America's (B of A) Growth Cash Maximizer program ($5,000 minimum daily balance required) the standard interest rate is .15% for less than $10,000 and .4% for $25,000 up to $50,000. If you do certain transactions with B of A you can be in the rate bonus plan that will pay you .65% interest (compounded daily and credited monthly). With the standard program, just doing quick math, my return would have been $200.40 on the $50,000 savings account for 1 year. The positive is that it would be risk free since it has FDIC insurance (up to $250,000 per account) and you can get the money quickly - it is only an ATM machine away. The negative is that it is not keeping up with inflation and you'd be losing ‘real’ money every day (investment return is less than inflation). Fullstacks sent me the following URL that gives the highest paying interest rates in the US for checking accounts (there are a number of restrictions on these accounts and you need to read the full details): https://www.checkingfinder.com/search/95008. There are some that have interest rates over 3%.
• Money market funds: Before the financial crisis of 2008 and the Lehman Brothers bankruptcy, money markets always paid back your principal. For every share, the net asset value was $1. With the Lehman Brothers bankruptcy a few money market funds had net asset values under $1 (it was called ‘breaking the buck’ for individual investors). There would have been more money market funds ‘breaking the buck’ but at least 20 companies spent billions to prop up their funds (the US Treasury started to guarantee the $1 net value in September 2008 and it only lasted 1 year. The Treasury did not want a run on money market funds like the run on the savings banks during the Great Depression.). The goal of money market funds is to invest in only high-quality (by today's standards) short-term securities to maintain the net asset value of $1. I checked the Vanguard website and their Vanguard Prime Money Market Fund (VMMXX) is paying .13% (the 5 year average was 3.01%). This fund has outperformed the money markets funds benchmark average over the last 5 years. If I invested my $50,000, my total return would be around $65 (ouch! - I remember when money markets were paying 15% in the early 1980s). The positive is that it is relativity low risk (unless we have another financial crisis) and with most money market funds you can write checks to get your money. The negative is that it is not keeping up with inflation and you would be losing ‘real’ money every day. And the net asset value could go lower than $1 if we have another financial meltdown (the US Treasury stopped the $1 net value guarantee after September 18, 2009).
• Certificates of Deposit (CD): The highest 3 and 6 month CD coupon rate that I could find was .2% on the 3 and 6 month CDs on the Fidelity and Schwab websites. If I use a CD ladder using 3 and 6 month CDs my total return for the year would be around $102 for my $50,000 investment. The positives are that it would be risk free since it has FDIC insurance (up to $250,000 per account) and that the interest rate is guaranteed for the maturity of the CD. Again, the negative is that it is not keeping up with inflation, you would be losing ‘real’ money every day and if you needed the money before 1 of the CDs matures, you'll pay a penalty (using CD laddering you would always have some cash available).
• Treasury Bills (TBs) - maturity up to 52 weeks: Checking the US Treasury website, the 13 week treasury interest rate is .15% and the 26 week rate is 19%. If I ladder the 13 and 26 week TBs, the return on my $50,000 investment would be around $70 for the year. The positive is that US Treasuries are backed by the printing press of the US Treasury (as long as they can buy paper and ink they are guaranteed). And they could be sold on a secondary market. TBs carry the lowest risk of losing your money. The negative is that it is not keeping up with inflation and you are losing ‘real’ money every day.
• I-Bonds / Treasury Inflation Protected Securities (TIPS): Maturity for I-Bonds and TIPS is 5 years or greater so they will not work for my emergency cash management strategy. I-Bonds and TIPS have penalties if you do not hold them to maturity.
• Short Duration Bond Exchange Traded Funds (ETFs): Two examples of short duration bond ETFs are the following: Vanguard Short Term Bond Fund (BSV), the1 year return on which was 5.06% and average duration was 2.6 years and iShares Barclays 1-3 Year Credit Fund (CSJ) the 1 year return on which was 6.15% and the average duration was 1.94 years. The positives are that you get much higher yields than savings accounts, money market funds, CDs and TBs, your cash investment will keep up with or exceed the inflation rate, you can sell your investment at any time (just like stocks) and if interest rates go down your investment will increase. The negative is if interest rates go up your investment will decrease (the shorter the duration, the less your investment will decrease). If you are interested in bond duration and interest rates effects on bond funds, read the following blog: http://paulsgang.blogspot.com/2010/02/bonds.html. Using CSJ as an example, if interest rates go up by 1% your investment would decrease by 1.94% (CSJ duration X interest rate increase); it has the opposite effect if interest rates go down.
• ‘High Quality’ Dividend Paying ETFs: Two examples of ETFs that pay dividends you could use in your cash management strategy are: SPDR S&P Index (SPY) which currently yields 2.03% (the index of the S&P 500 companies) and iShares Dow Jones Select Dividend Index (DVY) which currently yields 3.89%. The positives are: you get much higher yields than savings accounts, money market funds, CDs and TBs; your cash investment will keep up or exceed the inflation rate; you can sell your investment at any time (just like stocks); and if the stock price of the ETF increases your investment will also increase. The negative is that dividends are not guaranteed (companies can stop or decrease their dividends at any time) and the ETF stock could decrease which would decrease your investment.
You cannot use your ‘Dad’s’ or pre-financial crisis (pre-2008) cash management strategy to make a fair return on your emergency cash fund with relativity low risk. You can no longer just put your emergency cash fund in a savings account and short term CDs. The interest rate for a 26 week TB was over 5% in 2007 (.19% today), savings account interest rate was over 5% in 2007 (around .2% today), 6 month CD interest rate was over 5.5% in 2007 (now .2%) and money market funds were over 15% in the early 1980s (today around .13%). You are going to have to diversify your emergency cash fund investments. The following is one sample cash management strategy: savings account $17,000, short duration bond ETF $17,000 and ‘high quality’ dividend paying ETF $16,000 (total $50,000).
• B of A Growth Cash Maximizer program - interest rate .20%: $34
• iShares Barclays 1-3 Year Credit Fund - return 6.15%: $1045.50
• iShares Dow Jones Select Dividend Index - yield 3.89% $622.40
The total 1 year return was $1701.90 with a 3.4% yield. The yields from the examples are much better than you are going to get from savings accounts, money market funds, CDs , and treasury bills alone. For protection with the short duration bond and ‘high quality’ dividend-paying ETFs, you could use trailing-stop orders to protect yourself from losing a percent of your cash investment.
Please chime in with comments about my cash management strategy for 2010. What is your strategy to get a ‘fair’ return with low risk? If you have any ideas about future blogs please add a comment.
© 2010 Paul Cusick
Paul
My intent is to manage my short-term cash reserve which would serve, for example, as my emergency fund (6 to 9 months of my salary), pay for college expenses due in the next 6 to 9 months, or be earmarked for a new car or house that I will buy in the next 6 months. I would like to try to get the best rate of return with little or no risk to my investment. For this blog let’s use the following example, I have a $50,000 cash emergency fund to help pay my expenses if I were to lose my job. How do I get the best return with little or no risk? Should I have just one investment vehicle or several diversified investment vehicles? This is not the mid-2000s when you could get a 5% interest rate from e-Trade for an investment account (i.e. savings) that was risk free since it had FDIC insurance (and you did not exceed $100,000 in the account).
Let’s review different investment types (all rates from the week of August 9, 2010):
• Savings account: For Bank of America's (B of A) Growth Cash Maximizer program ($5,000 minimum daily balance required) the standard interest rate is .15% for less than $10,000 and .4% for $25,000 up to $50,000. If you do certain transactions with B of A you can be in the rate bonus plan that will pay you .65% interest (compounded daily and credited monthly). With the standard program, just doing quick math, my return would have been $200.40 on the $50,000 savings account for 1 year. The positive is that it would be risk free since it has FDIC insurance (up to $250,000 per account) and you can get the money quickly - it is only an ATM machine away. The negative is that it is not keeping up with inflation and you'd be losing ‘real’ money every day (investment return is less than inflation). Fullstacks sent me the following URL that gives the highest paying interest rates in the US for checking accounts (there are a number of restrictions on these accounts and you need to read the full details): https://www.checkingfinder.com/search/95008. There are some that have interest rates over 3%.
• Money market funds: Before the financial crisis of 2008 and the Lehman Brothers bankruptcy, money markets always paid back your principal. For every share, the net asset value was $1. With the Lehman Brothers bankruptcy a few money market funds had net asset values under $1 (it was called ‘breaking the buck’ for individual investors). There would have been more money market funds ‘breaking the buck’ but at least 20 companies spent billions to prop up their funds (the US Treasury started to guarantee the $1 net value in September 2008 and it only lasted 1 year. The Treasury did not want a run on money market funds like the run on the savings banks during the Great Depression.). The goal of money market funds is to invest in only high-quality (by today's standards) short-term securities to maintain the net asset value of $1. I checked the Vanguard website and their Vanguard Prime Money Market Fund (VMMXX) is paying .13% (the 5 year average was 3.01%). This fund has outperformed the money markets funds benchmark average over the last 5 years. If I invested my $50,000, my total return would be around $65 (ouch! - I remember when money markets were paying 15% in the early 1980s). The positive is that it is relativity low risk (unless we have another financial crisis) and with most money market funds you can write checks to get your money. The negative is that it is not keeping up with inflation and you would be losing ‘real’ money every day. And the net asset value could go lower than $1 if we have another financial meltdown (the US Treasury stopped the $1 net value guarantee after September 18, 2009).
• Certificates of Deposit (CD): The highest 3 and 6 month CD coupon rate that I could find was .2% on the 3 and 6 month CDs on the Fidelity and Schwab websites. If I use a CD ladder using 3 and 6 month CDs my total return for the year would be around $102 for my $50,000 investment. The positives are that it would be risk free since it has FDIC insurance (up to $250,000 per account) and that the interest rate is guaranteed for the maturity of the CD. Again, the negative is that it is not keeping up with inflation, you would be losing ‘real’ money every day and if you needed the money before 1 of the CDs matures, you'll pay a penalty (using CD laddering you would always have some cash available).
• Treasury Bills (TBs) - maturity up to 52 weeks: Checking the US Treasury website, the 13 week treasury interest rate is .15% and the 26 week rate is 19%. If I ladder the 13 and 26 week TBs, the return on my $50,000 investment would be around $70 for the year. The positive is that US Treasuries are backed by the printing press of the US Treasury (as long as they can buy paper and ink they are guaranteed). And they could be sold on a secondary market. TBs carry the lowest risk of losing your money. The negative is that it is not keeping up with inflation and you are losing ‘real’ money every day.
• I-Bonds / Treasury Inflation Protected Securities (TIPS): Maturity for I-Bonds and TIPS is 5 years or greater so they will not work for my emergency cash management strategy. I-Bonds and TIPS have penalties if you do not hold them to maturity.
• Short Duration Bond Exchange Traded Funds (ETFs): Two examples of short duration bond ETFs are the following: Vanguard Short Term Bond Fund (BSV), the1 year return on which was 5.06% and average duration was 2.6 years and iShares Barclays 1-3 Year Credit Fund (CSJ) the 1 year return on which was 6.15% and the average duration was 1.94 years. The positives are that you get much higher yields than savings accounts, money market funds, CDs and TBs, your cash investment will keep up with or exceed the inflation rate, you can sell your investment at any time (just like stocks) and if interest rates go down your investment will increase. The negative is if interest rates go up your investment will decrease (the shorter the duration, the less your investment will decrease). If you are interested in bond duration and interest rates effects on bond funds, read the following blog: http://paulsgang.blogspot.com/2010/02/bonds.html. Using CSJ as an example, if interest rates go up by 1% your investment would decrease by 1.94% (CSJ duration X interest rate increase); it has the opposite effect if interest rates go down.
• ‘High Quality’ Dividend Paying ETFs: Two examples of ETFs that pay dividends you could use in your cash management strategy are: SPDR S&P Index (SPY) which currently yields 2.03% (the index of the S&P 500 companies) and iShares Dow Jones Select Dividend Index (DVY) which currently yields 3.89%. The positives are: you get much higher yields than savings accounts, money market funds, CDs and TBs; your cash investment will keep up or exceed the inflation rate; you can sell your investment at any time (just like stocks); and if the stock price of the ETF increases your investment will also increase. The negative is that dividends are not guaranteed (companies can stop or decrease their dividends at any time) and the ETF stock could decrease which would decrease your investment.
You cannot use your ‘Dad’s’ or pre-financial crisis (pre-2008) cash management strategy to make a fair return on your emergency cash fund with relativity low risk. You can no longer just put your emergency cash fund in a savings account and short term CDs. The interest rate for a 26 week TB was over 5% in 2007 (.19% today), savings account interest rate was over 5% in 2007 (around .2% today), 6 month CD interest rate was over 5.5% in 2007 (now .2%) and money market funds were over 15% in the early 1980s (today around .13%). You are going to have to diversify your emergency cash fund investments. The following is one sample cash management strategy: savings account $17,000, short duration bond ETF $17,000 and ‘high quality’ dividend paying ETF $16,000 (total $50,000).
• B of A Growth Cash Maximizer program - interest rate .20%: $34
• iShares Barclays 1-3 Year Credit Fund - return 6.15%: $1045.50
• iShares Dow Jones Select Dividend Index - yield 3.89% $622.40
The total 1 year return was $1701.90 with a 3.4% yield. The yields from the examples are much better than you are going to get from savings accounts, money market funds, CDs , and treasury bills alone. For protection with the short duration bond and ‘high quality’ dividend-paying ETFs, you could use trailing-stop orders to protect yourself from losing a percent of your cash investment.
Please chime in with comments about my cash management strategy for 2010. What is your strategy to get a ‘fair’ return with low risk? If you have any ideas about future blogs please add a comment.
© 2010 Paul Cusick
Paul
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