MaxOut Savings Show Report
With Ted Geoca & KNTH 1070AM
MaxOut Savings Advisors, LLC
02/10/2007
SAVE AGGRESSIVELY AND INVEST CONSERVATIVELY!!!
The Next Phase
2008 IRA Changes
ETFs
The Castle
Opportunity
Next Phase
Grain Inflation
2008 IRA Changes
As we come into tax season
it is IRA contribution time for many people. The first thing to remember is to
choose an IRA that has no annual fee. At MaxOut Savings Advisors we use Fidelity
Investments for our IRA plans although many other companies also offer no fee IRA plans.
Next, pick a plan that has numerous IRA investment choices. The IRA program
should offer the ability to invest in stocks, bonds and mutual funds allowing you to shift your investment strategy as conditions
change. Contribution limits for 2008 have been increased for both IRAs and Roth
IRAs. Remember you have until April 15, 2008 to make your contribution for the
2007 tax year.
IRA & Roth IRA Contribution Limits
2007 Contribution over age 50
2008 Contribution over
age 50
$4000
$5000
$5000
$6000
Income limits for full deductibility of traditional
IRAs have been increased for 2008 as well.
Traditional IRA MAGI (Modified Adjusted Gross
Income) limits for full deductibility:
Full Deductibility of IRA Contribution
MAGI (Modified Adjusted Gross Income)
2007
MAGI
2008 MAGI
$52,000 single
$53,000 single
$83,000 joint
$85,000 Joint
Spousal IRAs
Deductibility for working or nonworking spouses
not covered by employer sponsored plan:
2007 MAGI
2008 MAGI
$156,000
$159,000
Roth IRAs
The income limits to make a Roth IRA contribution:
2007
2008 _
Single Filer $99,000
$101,000
Joint Filers $156,000
$159,000
ETFs
The ETF has become a popular
way to invest in the stock and bond markets. An ETF is a security that represents a legal ownership of part of a basket of
stocks or bonds. They trade on the stock exchanges and are bought and sold just
like a regular stock. You typically pay a commission to by the ETF, but other
than that they are no-load. In addition, an ETF has much lower fees than most
mutual funds and that has made them very popular. Another advantage of
an ETF is that you get the pricing as soon as you put in the order as compared to a mutual fund in which prices are set at
the end of the day. This can be a big advantage in these volatile markets. The ETF baskets are composed of indexes or groups of stock in certain industries or
sectors. They are an excellent way to invest in an industry you think will do well and at the same time reduce individual
stock risk. Some of the industries
that are represented are technology, oil & gas, drugs, healthcare, financials, etc.
The ETF is also a great way to allocate assets using different indexes or styles such as large cap growth or small
cap value.
There are several sources
of information on ETFs; the best is www.etfconnect.com as well as http://finance.yahoo.com/etf. With both of these sites, one can compare
different ETFs and run screens to show choices in different sectors. Some
ETFs are closed-end funds that will trade at a discount or premium to the markets. In
the closed-end sector the fixed income or bond holds a bigger part of the market due to the difficulty of putting together
baskets of the same bonds on a daily basis. As the closed-end bond funds trade
at a discount, it opens up some good opportunities.
Gold and Silver ETFs
On the MaxOut Savings Show
we often get questions about investing in gold and silver. ETFs are one of the
best ways to own gold or silver. This is especially true in IRA and qualified
plans where there are restrictions on holding physical gold—with the exceptions of the US Gold & Silver Eagles. We first wrote about gold in the MaxOut Savings Report back in December of 2001 where
we predicted “gold was about to start off a major bull market that would last over a decade.” At the time, gold was priced at under $280. It is now over
$900 and we believe gold will go higher as the US Dollar decline resumes. If
you want to own physical gold it can be purchased in two forms: bullion and coins or ETFs (exchange traded funds).
There are 3 Gold
ETFs on the stock exchanges: streetTracks Gold Trust (GLD), iShares Comex Gold Trust (IAU) and PowerShares DB Gold (DGL). The streetTracks (GLD) and the iShares (IAU) are gold trusts that own the physical
gold in vaults. The PowerShares (DGL) owns no physical gold, but creates exposure
through the commodity futures market by owning futures contracts and has excess funds in the Treasury Bills. This method could reduce expenses as the T-Bills pay some interest and you receive a dividend. We prefer
the gold trusts (GLD and IAU) because they own the physical gold and are not subject to the uncertainties of the futures markets.
The silver market offers
the same opportunity to invest in silver on the stock exchanges through ETFs. There
are two ETFs for silver: iShares Silver Trust (SLV) and PowerShares Silver Fund (DBS).
The iShares (SLV) are a silver trust and own the physical silver in vaults. The
PowerShares (DBS) use the futures market to “hold” the silver. The
PowerShares (DBS) can pay some dividend due to the T-Bills. Again we prefer the
iShares (SLV) because it is a silver trust and owns the metal.
When purchasing the physical
metal you can also invest in gold and silver coins and bullion. The coins are
generally the better way to go when saving gold in the safety deposit box because they do not generally need to be assayed
when they are resold. At times, though, there is an assay charge to confirm that
bullion is what it states it is. Coins are much more easily bought and
sold and the fees are generally lower. Stick with the American Eagle, Canadian
Maple Leaf, Chinese Panda, and South African Krugerrands. These coins are sold
on metal weight and not historic value; therefore, you are paying for the metal only. The American Eagle gold and silver coins
also can be placed in an IRA. Given it can be invested in an IRA, it is the best
coin to buy as it could sell at a premium in the long term.
Do You Have A Castle?
In Europe for the last 1000
years they have built castles. There are castles in England, France, Germany
and most counties in Europe. Why were all the castles built in the first place? The castles were built for two reasons; one, Europe was a very dangerous and unstable
place. The main reason was that the castle owners had wealth and they wanted
to protect their wealth from attack. Today we have developed a whole wealth industry
around telling people not to worry about protecting their wealth just leave it in the stock market and everything will be
fine. This is ridiculous; you invest to make money not be “in the market.” When times turn perilous that is not the time to listen to the TV talking heads and
put your head in the sand. That is when you should retreat to the Castle and
watch the index fund crowd be pillaged by the Huns or in this case Attila the Sub-prime. We now have a major credit crisis
and you should be retreating to the castle as the credit Huns attack. Remember
the first rule of wealth and retirement plans is to try to protect them from attack.
So when we ask, “do you have a castle?” ask yourself; do you have a defensive plan for your investments?
When it comes to a defensive
plan for this credit crisis take a look at your investments to make sure you are properly diversified using various asset
classes. If everything is “diversified” in an S&P 500 index fund
you have a problem. With high energy prices here in Houston many people are over-weighted
in the energy sector in one oil company or a group of 5-10 energy companies. It
is all the same thing. What happens to your retirement plan if oil drops to $55
per barrel? If this happens, you could lose half your retirement plan. Not that this is what we think will happen, but it is something to think about.
Cash, Quality and
Opportunity
We have often written about
the value of cash in an investment account for two reasons—it stabilizes the account and you have money to buy investments
when they are dirt cheap. You cannot buy when there is the proverbial “blood
in the streets” if you do not have any money. Another good sector
to be in is fixed income, which often moves counter to the stock markets. For
now, we like agency mortgage and high quality corporate bonds short to mid term in maturity length. We like the shorter term maturities because we think long term rates will move up from here. We are also sticking with foreign currency bonds and money markets.
In the stock markets, we would still overweight the large cap sector to take advantage of the sector’s overseas
growth and strong balance sheets. We would start to underweight the overseas
stock markets though. Remember in an economic slowdown and credit crunch you
want to be very targeted with your investments to ensure you are in things that will make money.
Credit Bubble
For the last two years in
the MaxOut Savings Report we have worked to highlight the severe credit problems the United States faces and the dangers to
your investment portfolio. We have pointed out that we are in a credit bubble and that when it collapses, it will cause a
recession. The following is a list of the titles of our MaxOut Savings Report
over the last year.
Sub-prime Lending Problem 1/09/07
Bill Gross & Sub-prime
6/26/2007
End of the Credit Bubble: A Time for Caution 7/31/2007
The Eye of the Storm 8/24/2007
Credit Storm
The Rise of the Dollar Vigilantes Part II 10/18/2007
How Are You Protecting Your Retirement Savings? 11/14/2007
As you can see we have been extremely concerned
about the investment markets and the credit bubble for over a year. Now after
the stock markets have fallen over 15% we see experts that have been wrong all year, suggesting investments in the financial
sectors. We would still avoid the financial sector as the US consumer slows down
and credit losses increase as the year goes on. As was the case in Japan during
the 1990s, we believe that it will take several years for the financial sector to work through its problems.
Brokerage
Firm Debt Bubble (update #2)
During
an economic crisis, investment companies’ debt levels should decline as they seek to reduce risk. Ominously, the New York investment firms continue to take on debt as this crisis unfolds. We wrote the following in the July 2007 MaxOut Savings Report: “In
our March 07 MaxOut Savings Report we highlighted the huge amounts of debt taken on by the major investment banks. As can be seen from the updated chart below that debt has grown dramatically over the last 6-9 months. Some of this money has been lent out to hedge funds that are now in trouble. In our opinion the debt levels at these brokerages have risen so quickly that it could
destabilize if we had a major financial problem. We would avoid brokerage firms
bonds. This debt could be at risk in the sub-prime meltdown that we have often
talked about.”
|
Company |
Q4
2007 LT & ST Debt |
Q1
2007 LT & ST Debt |
2006
LT Debt |
2000
LT Debt |
|
Bear Stearns |
78 up 4% |
75 |
76 |
17 |
|
Goldman Sachs |
291 up 24% |
234 up 15% |
202 |
31 |
|
Lehman Bros. |
146 up 28% |
114 up 26% |
90 |
29 |
|
Merrill Lynch |
291 up 45% |
199 up 15% |
173 |
51 |
|
Morgan Stanley |
205 up 6% |
193 up 21% |
159 |
42 |
|
Citigroup |
365 up 27% |
|
288 |
|
(Figures in billions of dollars)
Since 2000 the debt levels
of many of the brokerage firms have more than quadrupled. As an example, Bear
Stearns has a $21 billion market capitalization and over $76 billion in debt. Bear
Stearns and Morgan Stanley look much better off because the debt has not risen like some of the others. These numbers
do not include certain off balance sheet derivative items that show the actual debt to be much higher. We bring this up to point out the huge credit growth on Wall Street.
This credit could turn bad quicker than most people realize as it is backing financial instruments, derivatives and
credit default swaps. We would not be a buyer of brokerage firm debt.
The Next Phase of
Crisis: Debt
At MaxOut Savings Advisors
we believe the high debt levels at the investment banks will lead to a new phase of the crisis in the fixed income markets. The next phase of the credit crisis should be a re-pricing in the corporate bond market
downward in price and upward in yield. We think that there will be a new leg
down in the value of the LBO (liquidated buy-out), high-yield, junk and high debt bond markets. These areas of the fixed income markets have not fallen as much as they could have because the treasury
yields have fallen rapidly as investors flee to safety during the credit crisis. Most
bonds are priced off the US treasury yields;
this provided a false bid under the lower quality corporate bond markets. Now
that treasury yields have stabilized and are starting to move up, the low quality market is overpriced given we now appear
to be in a recession. This will lead to two things. The banks will be forced to take further write-offs in the bond market, which will thereby lead to more
selling of those bonds by the banks. We are also looking for an acceleration
of debt problems in credit card and auto loans. This should open up a great buying
opportunity in corporate bonds later this year.
Grain Inflation
The following weekly price chart of wheat http://futures.tradingcharts.com/chart/CW/W shows inflation continues to be a problem. Wheat inventories are now at 60 year
lows and there is talk the United States
may have to import wheat. Wheat has now broken out to a new high of over
$10.90 per bushel. It has been up “lock limit” for 3 days on the
commodities exchanges. We are seeing the same thing happen with many of the grains
because of world wide demand and ethanol production.