Rate increase creates more unintended consequences

David MoonBlog

Although successful in its original purpose of saving the US financial system from Armageddon, $3 trillion worth of quantitative easing has mostly benefitted investment bankers and larger borrowers, at the expense of savers. That is, the Federal Reserve has lorded over perhaps the largest shift in wealth from small savers to large companies in the history of mankind. Surely that trend reversed when, on December 16, the Federal Reserve announced a quarter point increase in its Fed Funds rate target—that is, the rate at which banks lend money to each other overnight. Savers who have seen the rates on their … Read More

Local Experts Review Economy

David MoonBlog

To fully understand the health of the economy, I recently surveyed a group of true financial experts: actual people, not economists. Ricky Sizemore was my 10th grade history teacher and football coach. He thinks the Federal Reserve’s efforts to spur inflation by increasing interest rates will be either futile or counterproductive. His largest worry, however, is that young people today don’t realize the connection between education and prosperity. Mechanical engineer Al Bedinger agrees, explaining that the health of our economy and the existence of our constitutional republic depends on a well-educated population. Sterling Henton, the one-man entertainment conglomerate and creator … Read More

Bond investors shocked

David MoonBlog

  In the past week, two bond funds have suspended withdrawals after rapidly declining more than 30 percent, and are in the process of liquidating. I am afraid it may just be the tip of the iceberg. These two funds invest in junk bonds, although you would never know it by their names. The Third Avenue Focused Credit fund and Stone Lion Capital Partners are barring redemptions, preventing investors from accessing their money until the funds can liquidate their holdings. The intersection of $37 per barrel oil and a reckless Federal Reserve interest rate policy set the stage for this … Read More

Chasing Past winners is poor strategy

David MoonBlog

It’s not particularly logical, but many investors evaluate their investments once a year—and they do it each December or January. Other than December 31 being a contrived date with no particular investment importance, annual specific investment reviews too often more heavily depend on recent performance, particularly the performance of the previous calendar year. That is, many investors sell their losers each December and switch to the winners of the preceding 12 months. That’s a pretty good recipe for selling low and buying high. The top performing S&P 500 sector in 2014 was utilities, with that portion of the index increasing … Read More

Bill Belichick, Terrorists and Investment Risk

David MoonBlog

This past Sunday evening, the New England Patriots were leading the Denver Broncos by 7 points with 5:31 remaining in the third quarter. The Patriots were looking at 4th and 1, with the ball on their own 47-yard-line. Statistically, the next play call wasn’t even a difficult decision. New England should have gone for it. A punt would likely result in a touchback, netting the Patriots only 33 yards on the punt. Even if New England had downed the ball inside the 20 yard line, the odds of the Broncos scoring were only marginally greater than if the Patriots had … Read More

Bet the Farm on a Rebound

David MoonBlog

  When temporary bad news hits a well-run leader in an industry with outstanding long-term prospects, compelling buying opportunities can occur.  Such is the case with the agricultural equipment business and John Deere. U.S. farm income is expected to decline 38% this year to $55.9 billion, the lowest level in more than a decade.  Blame it on the weather—it remains nearly perfect.  But ideal growing conditions aren’t always ideal for farmers.  Until last year, the farm industry had been minting money.  Crop prices soared for much of the past decade, driven by drought and rising demand for corn from ethanol processors … Read More

The silly things investors say

David MoonBlog

About once a day I hear an investor (both professionals and individuals) say something completely nonsensical. Here are a few. “It’s a blue chip company; it has to be safe.” (Ask the American Express investors who’ve lost 24 percent this year.) “It’s already gone down 75 percent; it can’t go down much more.” (Wrong; it can go to zero.) “I’m going to wait until it starts going up before I buy any of that stock.” (You’d prefer to pay a higher price?) “They say this stock is going up.” (Who is…“they?”) “This investment guarantees me 8 percent, and I can’t … Read More

Greece has been there before

David MoonBlog

When Greece joined the multicountry economic union, they devised a new system of currency, joining together multiple currencies and economies. Greek overspending and outrageous debt levels, however, soon led to cash shortages, eventually causing the entire geopolitical economic union to collapse. The year was 1868, however, and it was the short-lived Latin Monetary Union, not the European Union. In an eerie foreshadowing of events almost 150 years later, Greece proved itself unable to live within its means and perfectly willing to rely on the work of its partners to subsidize its leisure. Greece was bankrupt in 1893. The Latin Monetary … Read More

Don’t stick with a stupid financial plan

David MoonBlog

When stock price declines create investor anxiety, advisers and commentators often respond with data about previous stock market declines, the futility of trying to time the market, relative valuations, and historical volatility — then punctuate that statistical recitation with the advice to sit tight and remain calm. Having given that advice more times than I like to admit, I have learned that there are at least a couple of problems with that approach. “Sit tight” and “remain calm” are two completely different acts and are sometimes incompatible with each other. The recommendation not to change your investment strategy at a … Read More

Don’t make investment decisions based on headline news

David MoonBlog

Last week’s column ascribing recent stock market volatility to more than just a slowing Chinese economy prompted a number of reader questions about China and how the strength of its economy could deteriorate so rapidly. The Chinese economy actually didn’t begin its slowing all at once. It has been slowing since 2010, but you would never know that by a superficial look at the country’s reported gross domestic product figures. It’s a great lesson in the importance of not making investment decisions based solely on headline news. We were warned. China Premier Li Keqiang has repeatedly said that GDP is … Read More