Market Commentary - 2/22/2013: Stocks Have Been Unloved Until Recently

The following chart illustrates that from 2003-2007, stock mutual funds and ETFs received the majority of investors’ net inflows (contributions – withdrawals). However, from 2008 through last year, bond mutual funds and ETFs received the vast, vast majority of investors net inflows. As a matter of fact, for that four-year time period, stock mutual funds and ETFs actually experienced net outflows (i.e., more money was withdrawn from stocks than invested).

Nonetheless, 2013 has started off with a bang and TrimTabs Investment Research noted that for the month of January investors actually contributed $38 billion to stock mutual funds and ETFs. This is a sign that investors are feeling more comfortable with stocks again. I believe this positive trend will continue, but may face some temporary headwinds or setbacks in the face of the upcoming debt ceiling battle and government budget sequestration.

A minor correction of say 5% to 10% may rattle some investors, but will make stocks much more attractive for the those waiting for better entry points to get back into the market. It is very rare that I ever root for a market downturn, but this one time that I would welcome a short-term pullback. Especially since stocks have been unloved for so long, it would give this current bull market longer legs to run.

Nobody is immune from hackers

Over the years Apple has prided itself on the fact that its computers were quiet resistant to malicious software (malware) and viruses, that have plagued users of Microsoft products. However, just this week, it was reported that Apple employees’ computers were hacked, by what they believe to be the same malware that was discovered previously at Facebook. As a result, the company is releasing software updates to protect Mac users and working with law enforcement to find the source of the malware.

Viruses, malware and hackers are just the risk of today’s Internet. Just as you would not leave your home unlocked when you leave for vacation, we all need to be more vigilant in protecting our electronic residences (i.e., our e-mail and facebook accounts, along with our computers and even our phones). That being said, the following are links to two websites with some steps you can take to protect your computer and your smartphone:

http://www.online-tech-tips.com/computer-tips/how-to-protect-your-computer-from-hackers-spyware-and-viruses/

http://www.pcmag.com/article2/0,2817,2381722,00.asp

Student loans are like prescription medicine

Student loans can be a very helpful tool in getting a degree, just like medication can cure an illness. However, student loan debt can be abused. They need to be used responsibly, because as the name implies, they are loans (i.e., real money that needs to be paid back). Just like medicine, some loans may be okay, but too many of them can be bad for you.

In addition, just as you would not take someone else’s prescription medication, I strongly recommend not co-signing on your child’s, grandchild’s, niece, nephew, boyfriend, girlfriend or anyone else’s student loans. Student loans are specific to each individual’s college expenses and experience. Thus, you could be signing up for someone else’s debt, but have no control over how they spend the funds, let alone their study habits or ability to finish their degree. As a result, upon graduation or not finishing their degree, if the individual you co-signed for cannot find a job that allows them to make payments on their loans, then you are on the hook and the lending companies, or in most cases the U.S. Government, will come after you with a vengeance.

It is one thing for an individual in their early 20′s to take out loans and struggle to pay them back, especially since they have long time frame to overcome this hurdle. It is quite another issue for a parent or grandparent, at a much later stage in life, to face paying back a debt they did not incur. Along these lines, I went onto the Wall Street Journal and entered student loans under the search bar. Several articles came up ranging from Student Loans: Think Twice Before Co-Signing, Third of Student-Loan Debt Belongs to Subprime Borrowers and Deconstructing Student Loan Debt: Total Nears a Trillion Dollars.

As such, the following is a link to an article regarding five things to think about when taking out a student loan.

http://blogs.wsj.com/economics/2012/11/27/5-things-to-know-before-taking-out-a-student-loan/tab/print/?KEYWORDS=a+new+peril+for+older+parents%3A+student+loans+they+co-signed#

Precious metals haven’t been so precious lately!

Believe me, I have not been a precious metals fan for the vast majority of investment career. Basically, it is very hard for me to get excited about investing in bullion (i.e., bar of metal) and expecting it to make me money over time. I am much more apt to purchase gold or silver jewelry for my wife as a gift or a get out of jail offering. Luckily for me, I have a very patient, loving and forgiving wife; otherwise, I’d be the spokesman for Tiffany & Co.

Gold and silver prices have declined in 2013. However, from what I have read and seen in videos is that major hedge funds and traders have been selling, based on price movements (technical indicators) not based upon fundamental economic issues. For the last several years, the U.S. Federal Reserve and its foreign counterparts have been in an intense competition to see who can print the most money. And as we all know, the more you make of something, the less it’s worth.

As such, the U.S. dollar and other foreign currencies are a path to devaluation (i.e., they will decline in value and their purchasing power will diminish). In this economic scenario, precious metals, and especially gold and silver, will not only hold but increase in value when compared to the U.S. dollar or certain other paper currencies. I am not recommending that investors cash in all their investment to purchase gold or silver, whether in bullion or coin form. However, I am beginning to purchase precious metals for client accounts in the coming months.

This is not a short-term trade or contrarian move in the face of lower precious metals prices, but more of a long-term diversification tactic against a devaluing U.S. dollar and only for a small portion of one’s portfolio. Believe me, this is not something I would have ever been a big advocate of in the past, but the actions taken by some of our elected and appointed leaders has changed my opinion.

Quotes

A pessimist sees the difficulty in every opportunity; and optimist sees the opportunity in every difficulty.”

Winston Churchill

The things that will destroy America are prosperity at any price, peace at any price, safety first instead of duty first and love of soft living and the get-rich-quick theory of life.”

Theodore Roosevelt

“The last of our human freedoms is to choose our attitude in any given circumstances.”

Victor Frankel

 

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