Wise Money Decisions

The latest going-ons in “big law” are starting to draw interest from the mainstream press. 

This week Yahoo Finance put up an article about big firms asking their incoming first-year associates to defer their start date, in some cases up to a year.  Many firms are paying a partial salary or stipend to retain their associates through the deferment.  Reportedly some stipends are as high as $80,000, which would be half the first-year salary at most big firms.

In many cases the associates do not have a choice.  But suppose you did.  Which would you rather, $160,000 to work as a “big law” junior associate, or $80,000 to do your own thing for a year? 

As a former big law associate, let me assure you there is only one right answer.  Defer for a year, and then see if you can get them to defer you a few more years.  Thirty would be ideal. 

Jim O’Shaughnessy of O’Shaughnessy Asset Management.

A few excerpts:

The 40 years ending February 2009 were the second worst 40-year period for equities since 1900, with only the 40 years ending December 1941 doing worse! …

We are talking about an event so rare, that most of us alive today will never see such an opportunity again.

Many will say that I got bullish too early, writing that stocks were a screaming buy in Fall 2008 and that they have only declined since then. That’s true. Yet major stock market bottoms are seldom defined by a single point in time. Stocks began presenting great opportunities in the fall of 2008, and those opportunities have improved even more since then. Disciplined long-term investors learn to take advantage of these broad market valleys and continue putting money to work as long as the huge opportunity remains.  

Now is the time for all investors to do the same — for young investors, this is perhaps a once in a lifetime gift, and they should do their best to open and make maximum contributions to their 401(k)s and other tax advantaged plans. 

For middle-aged investors like myself, I recommend increasing the equity allocation of your portfolio to 70 percent and consistently moving money into stocks over the coming months.

And for investors who are already retired, now is the time to increase your allocation to stocks, particularly if you are significantly overweight bonds. If you are 70 years old, the actuarial tables say you will live another 13 ½ years — and a robust portfolio will help you enjoy your remaining years more fully.  

I believe that this time will be no different and that investors who take advantage of currently depressed stock prices will be delighted with the outcome five to ten years from now. 

Nothing we don’t already know, but it’s good to get a reminder that stocks have followed historical long-term trends that tend to overwhelm the shorter-term trends, such as that of the last 18 months.  

And he has some very interesting charts about 40 year returns to back up his main point.   It’s worth clicking through just to see the charts.
 

Today the House and Senate agreed to a final version of the latest stimulus package.  The final package comes in at $789 billion.   Round it to $1 trillion.

In response Senator Joseph Lieberman said:

“This represents the beginning of turning our economy around.”

Wait a sec….. the beginning?    

I know it’s hard to keep track of things, but didn’t we pay about a trillion just a few months ago to turn our economy around? 

Or am I confusing that trillion with the trillion that we gave away for no reason?

The latest Jeremy Siegel column is one of the better summaries of the “Morton’s fork” faced by policymakers dealing with the problem of an undercapitalized banking sector.

Lately we have heard several proposals intended to relieve the banks of their “bad assets.”  The idea is the banks would be more able to meet their capital requirements, and therefore in a better position to lend, if they were not burdened with the bad assets.

The basic idea behind most of the proposals is that the federal government (read: taxpayers) put up money to relieve the banks of these bad assets.  In some proposals the government:

• Acquires the assets directly (the TARP program as originally proposed); 
• Becomes a debtholder (the actual TARP program in which the goverment holds preferred stock); or
• Becomes a shareholder (the government would hold common stock, or warrants in the case of the actual TARP program). 

Each scenario involves the participation of the government, the banks, and the banks’ stakeholders (shareholders and debtholders). 

Under any scenario the parties must determine an appropriate price for the bad assets.  However, people much smarter than I have assured me that it is very difficult to determine a market price for these assets because they are not trading in the market.

It boggles my mind that no one can figure out a suitable valuation method.  While the bad assets may not be trading now, they were trading before.  They were trading for several years.  There were valuation models.  The models may not be accurate with hindsight.  But with all the smart minds working on this problem, and with the benefit of all we’ve learned over the last few years, we should be able to come up with more accurate models that will help us peg a market value to these assets. 

On a related note, is it just me or does the so-called subprime meltdown seem like one of those stories where a man-made computer develops artifical intelligence, overthrows its creator, and turns on humanity. 

Very smart people created financial models and products that took on a life of their own.  Now no one can figure out how to stop them from destroying humanity. 

From a study released today by Javelin Strategy & Research:

• Identity theft was up 22% in 2008 over 2007.
• The cost per incident is less than $500.  That surprised me.  I thought it would be higher.
• A category they term “crimes of opportunity,” such as stolen wallets or purses, are responsible for 43% of the cases.  That surprised me.  I thought it would be lower.
• Online access accounted for 11% of cases.  That surprised me.  I thought it would be higher.
• Women are 26% more likely to be victims than men.  That surprised me.  I thought more men would be victims because criminals would target men with the thought that men are more likely to have control and access over household finances.  But that is apparently not the case.  The study surmises that more women are victims because they are more likely to have lost or stolen information during in-store purchases.
• More than 10% of victims know the perpetrator.
• Finally, victims are discovering cases more quickly.  That’s not surpring with all of the focus on identity theft the last few years.

From today’s Wall Street Journal Online article by James B. Stewart:

For the young and middle-aged, the sharp drop in their net worth is at worst irrelevant, and at best cause for celebration. Their peak earning years still lie ahead of them. They should be saving as much as they can now and putting it into the stock market at these depressed levels. Given the sharp drop that has already occurred, the long-term outlook for stocks and many other riskier assets is better than it’s been in years.

The latest Jeremy Siegel column defends his earlier column “Why Stocks are Dirt Cheap” in which he argued that the S&P500 was “extraordinarily cheap.”   Both columns are worth the read.

In the earlier column he stated:

No one can guarantee the future of the stock market. But I believe that stock prices are now so extraordinarily cheap that I would be very surprised that if an investor who bought a diversified portfolio today did not make at least 20% or more on his investment in the next twelve months.  

It’s not exactly a prediction, but even so it belongs in the Prediction Tracker. 

In the later column he responds to critics and concludes:

The low level of stocks today is not a result of investors expecting current depressed levels of earnings will persist, but rather a result of record risk premiums in the debt and equity markets. When these extraordinary risk levels return to normal, we can expect much higher stock prices. 

My portfolio hopes he’s right.

The mainstream press provides more bad financial advice than good, so it’s important to highlight the good advice when it appears.  

From Ron Lieber at the New York Times:

“It’s a question we’ve all asked in our darker moments of late: Why not just put all of our investments in cash, 100 percent, just for a little while, until things calm down?…

“By fleeing for the comfort of safe and insured, however, investors with a time horizon beyond a few years may be doing real damage to their long-term finances. If you’re tempted to make a big move to cash right now, you’re doing something called market timing. It’s an implied statement that you’ve figured out the right moment to get out of stocks - and will also know the right time to get back in.

“So let’s dispense with the first part straightaway. The right time to move out of stocks was a year or so ago, before various stock indexes the world over fell by one-third or more.

“If you missed that opportunity, you’re hardly alone.

“But if you sell now, you’ll be locking in your losses. And once you’re in cash, there isn’t much upside. In fact, with interest rates low, you’re likely to lose money in cash, because inflation will probably eat up the after-tax returns you earn from a savings or money-market account.”

One of the credit reporting agencies, Trans Union, recently settled a class action lawsuit.  They are accused of misusing consumer information for marketing purposes. 

Included in the class is anyone that “had a credit card, loan or credit account” anytime in the last 21 years.   So, everybody.

Here’s where it gets to be like a game show, as Wallet Pop points out.  You can choose one of four remedies:

• Six months of their credit monitoring service and possible cash payment;
• Nine months of their credit monitoring service (no cash payment);
• Possible cash payment;
• Do nothing and preserve your right to sue individually.

You guessed it, no one knows what the cash payment will be.  Don’t you love these things?

I’m signing up for the 9 months.  The credit monitoring service includes your credit score, not just your credit report.  From what I understand, you can check your credit score every day if you want. 

I want to see how my credit score fluctuates from day to day and month to month as I incur debt, pay bills, sign up for new credit, etc.   Having a first hand look at how the credit score works is worth way more than the 35 cents I may or may not get from the cash payment option.

You must sign up here or by phone (1-866-416-3470) by September 24, 2008 if you want to be included in the class.

Some interesting California statistics:

Domestic migration outflow: 49th highest out of 50 states. 

According to ”Rich States, Poor States” by economists Arthur Laffer and Stephen Moore, the Californians leaving for elsewhere are our ”highest achievers and those with the most wealth, capital and entrepreneurial drive.” 

Highest maximum tax rate: 2nd highest out of 50.

Highest corporate tax rate: 15th highest out of 50.

Highest taxed population: 12th out of 50.

Best business climate as ranked by the Tax Foundation: 47th out of 50. 

Most expensive state to do business according to CNBC: 3rd out of 50.

Best state to do business according to Forbes magazine: 40th out of 50.

State requiring special credentials or licensing of most occupations: 1st out of 50.

California has credential or licensing requirements for 177 occupations.  Including mine.

Highest workers’ comp costs: 2nd out of 50. 

Highest gas taxes: 1st out of 50.

Highest unemployment rate: 3rd out of 50.

Highest foreclosure rate: 1st out of 50.

Housing affordability: 50th out of 50. 

Highest average public school teacher salaries: 1st out of 50.

Highest average compensation for state employees: 1st out of 50.

Highest welfare grant level: 2nd out of 50.

Highest state and local government spending per capita: 4th out of 50. 

Highest eighth grade math scores: 42nd out of 50.

Highest eighth grade reading scores: 45th out of 50.

Highest fourth grade math scores: 46th out of 50.

Highest fourth grade reading scores: 48th out of 50.

Highest level of violent crime: 10th out of 50.

Worst traffic: 1st out of 50.

Highest cost to repair and expand transportation infrastructure: 1st out of 50. 

Depending on your political leanings, you may find a few of the numbers encouraging.  But most of them are discouraging no matter which side of the aisle you’re on.

The statistics come from an article by Dave Cogdill, the Minority leader in the California Senate.