2011 Market Wrap Up - Much Ado About Nothing



S & P 500 2011

 We No Longer Need Predictions. The 2011 Final Numbers Are In!

The big news is the Standard and Poors Index managed to do something it could not have done if it had tried - after a year of great volatility, the index ended almost exactly unchanged. And this after the Japanese Tsunami, the US debt downgrade, and the Euro crisis.

The Dow Jones Industrial Average finished up 5.5% for the year, probably reflecting investor interest in dividend paying stocks.

International Markets Did Not Fair As Well

But note, all was not as well for the international markets. Britain's FTSE 100 lost 5.6% in 2011, Germany's DAX and France's CAC 40 declined over 15%, and the Hang Seng sank more than 20%.

Stock Market's Flat 2011 May Suggest Booming 2012

Jeffrey Kleintop of LPL Financial points out in his January 3, 2012 Market Commentary report, "There have been four years since WWII when the total return for the Standard and Poors 500 was roughly flat. All three of these years that preceded 2011 were followed by strong gains in the following year, averaging 38%."

While it is interesting to note the historical pattern which suggests that a strong 2012 may follow a flat 2011 (emphasis on may), the LPL Research outlook is for an average gain of about 8-12% in 2011.


Disclosure:  Indexes are unmanaged and investors are not able to invest directly into any index. Past performance is no guarantee of future results.

Book Review: "The Total Money Makeover"



Image: barnesandnoble.com



It's official - I'm a Dave Ramsey fan!

I just finished Dave Ramsey's book, "The Total Money Makeover," and it's one of the best books I've read on personal finance. The book is aimed at the 97% of Americans who are still trying to reach financial independence, and especially at those who are struggling. Dave has a simple message, and he doesn't mince words: "debt is dumb."

Dave's personal story is well known. By the age of 26, he had accumulated a real estate portfolio of over $4 million. A tax law change caused a $1.2 million loan to be called, and he was forced to file bankruptcy. After this experience, he began studying personal finance and teaching courses at local churches. Today, he's a best selling author, and his radio show has over three million listeners per week (I'm occasionally one of them).

The tag line for his radio show is: "The Dave Ramsey show, where debt is dumb, cash is king, and the paid off home mortgage has taken the place of the BMW as the status symbol of choice." In our consumer culture today, who else teaches this kind of stuff? It's a great message whose time has come, and Ramsey deserves credit as the purveyor.

Most Self-Help Books on Personal Finance have Two Flaws

Personal finance books usually have too many recommendations. Imagine a person starting out and struggling to get a handle on their finances. They get a book and it says they need to establish an emergency fund equal to six months of expenses, pay off all debt, get a fifteen year mortgage, fund IRAs, Roth IRAs, 401ks, get disability insurance, life insurance, long term care insurance, and so on. Sounds overwhelming, and it is. Where does one start? Most likely they don't.

Second, such books often over promise - "do this, and you'll be rich." Of course, it ain't so easy.

Dave's Message is Focused on Debt Elimination

Ramsey, by contrast, focuses on one key issue: elimination of debt. Debt, he says, "is not a tool." He has identified indebtedness as the thing holding most people back, and he concentrates on its evils like a laser beam.

Nor does he over promise on the upside. Paying off debt is hard work and no fun. It involves monthly budgeting and cash flow analysis. He recommends driving a used car (and selling your new car if it has a big payment associated with it), getting rid of credit cards, and a very modest mortgage.

Dave's Baby Steps

Dave gives his readers a clear sequential plan, called "baby steps." These are: One, establish an emergency fund of $1,000. Two, pay off junk debt like credit cards, home equity lines, and auto loans using the debt snowball technique. Third, build an emergency fund equivalent to three to six months of expenses. Fourth, defer fifteen percent of income into IRAs and, if you have children, Coverdell Education Savings Accounts. Fifth, pay off the mortgage and become debt free.

My Take

Dave Ramsey has the best plan I've seen for those who are in the early stages of taking control of their finances. Dave writes in a simple style, with a tell it like it is ethic. It's worth noting, "The Total Money Make Over" first came out in 2003, before the 2008 debt crisis. Dave was ahead of his time in his warnings about the danger of debt to personal finances, and this only adds to his credibility.

I highly recommend this book. Those following Dave's "Baby Steps," can supplement the book by listening to his radio show to keep their spirits up during the difficult but rewarding process of becoming debt free.

What is "Scarecasting?"

Scarecasting is a term coined by Alan Abelson in a recent editorial titled, "Beware of Scarecasts."

Abelson writes a weekly opinion piece from perhaps the foremost perch in all of financial writingdom... the first page of Barron's each week. Alan is one of the most skeptical, pessimistic commentators out there - which is why I read his column.

As cynical as Abelson may be, in this column he condemns the practice of scarecasting. Scarecasting is, according to Alan, "dire prognostications which are not forecasts."

He writes, "perpetrators of scarecasts, whose ranks have swelled in recent weeks, insist that their dire prognostications are not forecasts, although they sedulously avoid saying exactly what they are. Something a mean little bird told them? A revelation distilled from a bad dream occasioned by eating bean sprouts for dinner? But let's not quibble—we'll call them scarecasts."

I've been seeing more "scarecasts" these days, likely precipitated by difficult market conditions and national news. It seems to me scarecasting may be a good way to sell books and newsletters, but if the predictions are irresponsible and pander to fear, the purveyors are not doing investors any favors.

"Great Recession" Defined

What is "the Great Recession?" It is yet another new term added to our modern day lexicon courtesy of the general economic downturn which began in 2008 and which is continuing through 2011. By some accounts the phrase was coined by Paul Volker.

I remember first seeing the term used in mid-2009, and I noticed it quickly became popular in the media. The phrase invites comparison of the current recession with the Great Depression of the 1930's.

I was initially doubtful this newly minted phrase would prove accurate for two reasons: I thought it was too early to tell if we were in a recession or a depression; and if it were a recession, would it last long enough to compare with the Great Depression?

Unfortunately, as time has gone on the phrase has not only entered our everyday vocabulary, but has proved accurate. First, the financial system was stressed in 2008 and 2009, but it did not break, meaning we did not have a depression.  Second, the recession has intractably dragged on. While stock and bond markets have recovered to some degree, the recession is all too apparent in the high unemployment rate and depressed real estate market. Here's hoping before long we'll be coining another new phrase, "the Great Recovery."

What is a Stock Market "Melt-Up"?



Photo by Marcus Revertegat


What is a stock market "melt-up?" Like the term implies, a melt up is the opposite of a "melt-down." In a melt-down, stocks fall significantly in a short period of time. In a melt-up, stocks rise significantly in a short period of time.

A recent melt-up occurred on Tuesday, Oct 4, 2011. In the last hour, the market rose almost 400 points, or about 4%, in frenetic, high volume trading - for no apparent reason.

The recent melt-up is significant because it is reminiscent of the flash crash which occurred on May 6, 2010. During the flash crash, the Dow dropped 1,000 points and then recovered within the span of half an hour. (The Dow Jones Industrial Average, DJIA, is comprised of thirty stocks that are major factors in their industries and widely held by individuals and institutional investors.)

It would seem that with rapid fire computer trading and the underlying level of market volatility, we should expect such market events to continue for the foreseeable future.
 

(The DJIA is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of future results.)