Keep Saving!

Convertible Bonds

PSF Tax Free Bonds

Derivatives

CPFF?

Quality & Income

Last Minute Update

Today, Tuesday, the market was up almost 890 points in a huge rally.  For now, we believe we have seen an end to the forced selling by over-leveraged hedge funds.  This should give us some type of tradable rally over the near term.  Be careful of overpaying for stocks and look to find laggards in this market.  The biggest moves should be in the commodity plays that have been hit with huge selling.  For fund buyers, we would go with index ETFs over regular mutual funds because, with an ETF, you get current pricing as opposed to end of day pricing so you know what price you will get.

MaxOut Savings Show

When I started the MaxOut Savings Show almost three years ago, we needed a theme and a name for the show; we chose savings and The MaxOut Savings Show with Ted Geoca because savings was the foundation of building up wealth over time.  There were a number of shows that dealt with just investments, but nobody was talking about savings.  After twenty years in the investment business, we have learned how wealth is created; for most people, it was through building their savings over time.  In addition, at the time we started the show, the savings rate had fallen close to zero percent and we were experiencing a national saving crisis.  With this situation in mind, we launched the MaxOut Savings Show and started talking about the saving crisis and the need to save personally.  As you can see from the chart below, our savings rate in the United States has plunged from an average of 8-10 percent over the last 50 years to zero percent.

In the 1990s when Japan suffered a major real estate collapse (remember when the Royal Palace was sitting on land worth more than all of the state of California?), the huge pool of savings on the part of the Japanese people buffered the economic decline in the country.  In this present economic crisis, one problem we have is that we do not have a huge pool of savings to fall back on.  This reality will make this crisis more difficult to solve.  Savings offer protection and stability on a personal level as well as a national level. We believe we will now see the United States’ savings rate begin to rise as consumers cut back spending and pay off debt.  Over the long term, this would be very bullish.  However, the consumer accounts for about 65 percent of United States spending, so in the short term it will manifest itself in the form of a recession as consumers rein in their spending.

It is during trying financial times like these we are now experiencing that you appreciate your savings.  With that being said, it is no fun to see your assets fall in value.  This decline has been so thorough and broad that almost everything has gone down in value.  The key is to stick with the assets that are at least of high quality and reasonably stable. 

Keep Up Your Savings Program!

One of the worst things you can do in this crisis is to panic and stop your savings program.  Now is the time to hang tough with your savings program of 10 percent or more plus the company match.   If you stop your savings or payroll deductions, your savings plan could be set back years.  It could cause you to work later and put off retirement a couple of years.  So if you are really worried, the thing to do is to put new money into the money market or stable demand fund in your company plan.  Let the cash build up over time, then when you are comfortable with the markets, reallocate the money that has built up over time to a stock or bond fund.   Another way to set up your program is to maintain the present savings allocations and just determine that you are dollar cost averaging at lower prices.  We have to think positively and proactively here!  Remember do not let the credit crunch ruin your ongoing savings program.

If you are worried about the financial markets, now is not the time to freeze up.  Now is the time to become proactive.  If you think you have too much risk in these markets, an easy way to reduce the risk is to raise your cash level or increase your bond weighting in your plan.  Cash or money markets will reduce the risk and volatility in your account.  To a lesser extent, bonds or fixed income will archive the same thing.  Regarding bonds, we would stick to shorter term bonds in portfolios because of future inflation risk.  When making changes in these exceptionally volatile times, we would make smaller changes because this market has become hard to predict and a change made in the morning can look great at noon and be a mistake by the market close.  Now is the time to make changes on an incremental basis to prevent a big mistake.  It is not the time for rash or emotionally reactive behavior.  So remember, now is the time to be proactive and take charge of your portfolio.

Convertible Bonds Growth and Income

Many 401-k plans have a convertible bond mutual fund option as one of their asset class or investment choices.  A convertible bond is a bond that pays interest and can be converted into stock in the future at a set conversion price.  In theory, your bond pays interest income and will rise as the stock moves higher.  Most convertible bond mutual funds now have a yield of 4-5 percent.  So far this year, convertible bond mutual funds have performed very poorly as the market declined.  The natural movement to follow the market at a reduced rate was negated by forced selling by hedge funds on leverage.  This hedge fund selling and problems in the corporate bond market have hurt returns this year.  Many “convert” mutual funds are down 35-45% YTD; this is the worse relative performance in history for the sector. This could represent an opportunity as convertible bonds typically move less than the market.  When the market recovers, we should see good returns out of the sector.  Remember convertible bonds have a higher risk than most corporate bonds and, conversely, a lower risk than stocks.  They could be a good way to reduce equity risk by swapping an equity fund for a convertible bond fund. 

PSF Fund Insured Texas Bonds

Texas school district bonds are some of the best investments we have seen in the fixed income market.  Most of them are tax free and guaranteed by the Texas Permanent School Fund or PSF.  In this case, it means all the interest you receive is free of federal income tax.  If a bond is backed by the PSF, it will have an AAA rating because the PSF has an AAA rating from all the ratings agencies.  The fund was established in 1854 to help fund education into perpetuity.  It is written into the Texas constitution and one of the best programs in the country for funding education.  It helped that oil was found under some of the land that was put into the program too.  The PSF is a $22.2 billion fund managed by the state of Texas that backs about $46.0 billion in Texas school district bonds.  This is excellent coverage compared to most bond insurance programs that have less than 3 percent coverage.  Additionally, there have been almost no defaults of Texas school districts.  Most of these bonds are also backed by the taxing power of the local school district.  At the present time, many of these bonds are yielding more than U.S. Treasury bonds; they are tax free and the treasury bonds are not.

Derivatives

We continue to believe that the derivatives markets are having a huge destructive effect on the overall financial markets.  We believe a good portion of the AIG rescue money is being used to pay off derivative contracts related to the Lehman Brothers and Washington Mutual failures.  It is foolish to put taxpayer money into companies only to have that money vanish paying off derivative contracts.  The derivatives market is thought to be $50 trillion in size.  We believe this market is failing and taxpayer money should not be used for a bailout.  If it fails and the government tries to stop it, it will cost trillions of dollars and the money will be gone forever.  We believe new bailout money should be put into the general economy in the form of commercial paper programs and equity injections into financial and industrial companies that provide jobs.

CPFF?

We are seeing this with the new $500 billion commercial paper program the Federal Reserve is starting October 27.  The program called the Commercial Paper Funding Facility, or CPFF, will help corporate America fund commerce throughout the country.  The total size of the commercial paper market is now about $1.4 trillion, down from $2.22 trillion in August of 2007, according to Bloomberg.  With a $500 billion program, this amounts to almost 1/3 of the commercial paper market at its present size.  The Federal Reserve will be working with 10 banks to provide commercial paper lending for corporations throughout the country.  This will allow corporations to sell goods and meet payroll.  Another positive of the program is that it will slow down a huge surge in companies borrowing off their credit lines from banks.  This program will be a great help because most corporations fund some of their short term borrowing through commercial paper.  Commercial paper is short-term borrowing that typically matures in less than 90 days.  This massive program to help the economy will be in place starting this Monday.

Quality and Income

For the overall investment outlook, we are still very cautious.  You should have high levels of cash in your accounts as we have talked about for two years.  We believe the problems with debt and credit in the economy will take several years to work out.   Therefore, we want to seek quality and income in the portfolio.  The income through interest and dividends will generate returns while we wait for a recovery.  We want to be paid while we wait.  Quality is important because we want to be with the survivors that can afford to grow as the economy recovers, not just work their way out of debt.  With the cash, look to buy companies with good cash levels, low debt and good dividends that are selling 50 percent off their highs.  We like the major oils, natural gas companies with low debt, gold and silver miners, healthcare, and cash.   For fixed income, focus on very high quality issues; in lieu of any bonds that are of lower grades, we would stick to mutual funds to diversify the risk of default.  As an asset class, convertible bonds look interesting in here.

Who is MaxOut Savings Advisors LLC?

In these volatile times, investing your retirement funds can be difficult and time consuming.  Hiring the MaxOut Savings Advisors team to manage your money or IRA rollover is a great first step. MaxOut Savings Advisors is a SEC registered, fee-only investment advisor based in Houston, Texas.  Ted Geoca has over twenty year’s investment experience managing clients’ retirement assets. We invest in stocks, bonds and mutual funds for our clients using a value analysis strategy that we have developed over the last twenty years.   We use Fidelity Investments as the custodian for our clients’ assets. If you would like MaxOut Savings Advisors to manage your retirement investments using our value methodology, I would be happy to meet with you.  To schedule an appointment please give us a call at 713-627-0400 or email me at ted@maxoutsavings.com. 

Remember Save Aggressively and Invest Conservatively!

Ted K Geoca                                     Doug Saam                Kellan Caldwell

President

MaxOut Savings Advisors, LLC

Houston, Texas

ted@maxoutsavings.com                                 713-627-0400

Remember to catch:

The MaxOut Savings Show with Ted Geoca on Saturday at 11:00am on KNTH 1070AM!

We have expanded the Show to 1 ½ hours from 11:00-12:30!!!

The MaxOut Savings Show and Report does not give out financial advice.  Any recommendation or idea may not be suitable for all investors.  Moreover, although the information contained herein is believed to be reliable, its accuracy cannot be guaranteed.  MaxOut Savings Advisors, LLc may or may not have positions mentioned herein.  MaxOut Savings Advisors, LLC is a Registered Investment Advisor with the SEC.  You should always make investment decisions based on your own financial situation.

To sign up a friend for our free MaxOut Savings Report or to remove your name off the MaxOut Savings Report list, email ted@maxoutsavings.com.