Friday Financial Five – October 26th, 2012
Friday, October 26, 2012
Rhode Island’s economic recovery zooms past snails
The two areas in Rhode Island most in need of good news, unemployment and housing, both got small doses of optimism. The unemployment number, still second worst in the nation, is down to 10.5% while housing inventories continue to decrease. With housing stabilizing, there needs to be focus on increased employment and wage growth. The nation as a whole continues deleveraging, with national household debt as a share of disposable income decreasing from 134 percent in 2007 to 113 percent today, according to the Federal Reserve. It’s a slow, painful process that will take years to complete, but it’s necessary.
The presidential election, as is normally the case, will come down to a referendum on the economy. We hear about the president’s influence on employment numbers and deficits but rarely about stock market performance. Interestingly, when Democrats hold the presidency, the market has produced excellent results over the last century. CMC Markets Group calculated the total S&P 500 return with Democratic presidents as double that of the GOP. Three of the top four highest total S&P returns were during the terms of FDR, Bill Clinton, and President Obama. Ronald Reagan’s first term was robust, as was George Bush Sr.’s four years in office. G.W. Bush has the inglorious distinction of markets producing negative returns in both of his terms. This begets the question: would focusing on this statistic make Democratic candidates appear too pro-business or do they just realize that what goes up must come down?
What type of investor are you?
The type of investor you are can influence the amount of sleep you’re getting at night. Styles we’ve seen over the years include ‘set it and forget it’, ‘impulse trader’, and ‘sideline sitter’. The ‘set it and forget it’ investor will pick a few funds, normally ones that performed well last year, and then never open a statement until they retire. The ‘impulse trader’ follows investments and news very intently and tries to figure out when to get in and out of the market. The ‘sideline sitter’ typically lost money in 2008 and doesn’t trust the market despite recent success. As a rule of thumb, investing should involve developing a style that works for you and sticking with it. Only you can decide what will allow you to sleep at night.
Domestic equity portfolios are broken down into large, medium and small company stocks. Small growth stocks are comprised of companies with a market capitalization of less than $1 billion and higher price-to-earnings ratios. In choosing small companies to invest in, the objective is to find small companies that will eventually turn into big companies, while trying to minimize volatility in the process which isn’t easy. Income isn’t a factor with this type of investment, as the companies are trying to utilize all available funds to grow, not pay dividends to their investors. Year to date, the Russell 2000 Growth index has returned just over 9%.
Bank of America’s no win situation
Bank of America’s purchase of Countrywide, widely regarded as one of the worst moves in financial history, is the gift that keeps on giving. The company continues to write down bad loans and now the cherry on the sundae is the United States’ recent lawsuit alleging mortgage fraud. With the government threatening to assess triple damages (estimated at more than $3 billion), BOA isn’t going to have many options. The problem here is figuring out which loans were put through because of fraudulent acts by Countrywide employees and which were simply bad loans that met the lax standards of Fannie Mae and Freddie Mac.
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