Investment Insights: The Blog
Jan 18, 2013
Beware the dividend yield trap
Just beyond the glorious celebration of dividends as a reliable source of income in a low-interest-rate environment, there is the caveat that too much yield isn't always a good thing for every investor. As dividend-paying stocks continue to draw income-seeking investors, the higher-yielding stocks in this category that is traditionally associated with value have been getting increasingly expensive. “Sometimes the dividend yield gets so high it is the market's way of saying it doesn't believe the prospects for the company are sustainable,” said Christopher Petrosino, manager of the RiverNorth/Manning & Napier Dividend Income Fund (RNDIX). In essence, while a higher yield obviously represents more income it can also be a reflection of a faltering stock price.The most extreme recent example of this was seen at the height of the financial crisis when some bank stocks had fallen so much that the dividend yields were hovering... Read full post
Jan 8, 2013
Will Washington kill the muni tax exemption?
Municipal bond investors might be breathing a sigh of relief knowing that the fiscal cliff deal spared their tax-free income, but the fight rages on because that muni exemption is likely to be on the chopping block as part of the upcoming debt ceiling debate. Logic would suggest that the roughly $45 billion worth of foregone federal taxes from the $4 trillion muni bond market would be small potatoes in the overall budget debate. But the debate is actually more political than fiscal and, politically speaking, the muni bond tax exemption is generally perceived as another perk for greedy rich folks, despite the fact that 51% of muni tax exemptions are claimed by households with annual incomes below $250,000. Thus, the 100-year-old muni bond market that has become instrumental in funding and financing state and local infrastructure projects becomes a populous political football in the endless congressional cat fight. “We view it as a ... Read full post
Dec 13, 2012
Advisers feeling more secure about unsecured notes
If the Fed's ongoing low-interest-rate policy has accomplished nothing else, it has at least given the structured products industry some new talking points for financial advisers and their clients. Apparently, the unsecured debt instruments known as structured notes are poised to surpass FDIC-principal protected structured certificates of deposit in popularity in the year ahead. The forecast comes from the just-released results of a survey of financial professionals, conducted by Incapital LLC, an underwriter of various structured investment products. “We've noticed a shift in investors' appetite that is likely to continue into 2013, as more and more financial professionals are gravitating toward non- or partially-protected notes,” said Glenn Lotenberg, Incapital managing director. While the shifting focus might seem subtle to the casual observer, it is actually a rather sizable step out on the risk curve for investors in... Read full post
Dec 4, 2012
Are Roth IRA assets safe from Washington's revenue hunt?
As Washington wrangles over where and how to hit the electorate with another tax as part of the fiscal cliff debates, one can't help but wonder about the future of the growing pile of assets packaged as Roth IRAs. Granted, in Washington dollars, the $270 billion in total Roth IRA assets is probably seen as small potatoes in the context of the current fiscal mess. However, with lawmakers already threatening to renege on promises made in areas such as muni bond tax exemptions, the handwriting might be on the wall for the future of Roth IRA assets. Keep in mind that the major appeal of the Roth IRA, as originally established in 1997, has been the ability to withdraw assets in retirement tax-free. While it is difficult to imagine Congress pulling the rug out from under investors who are now contributing nearly $20 billion a year to Roth IRA accounts, there is at least one plausible threat to Roth retirement income. Not to sound too... Read full post
Nov 27, 2012
If Uncle Sam taxes munis, munis could tax Uncle Sam
Is it really possible that the federal government will use the threat of the fiscal cliff to take away the tax exemption from municipal bond income? Not if the states have anything to say about it – and it appears they might. According to feedback from some astute readers, individual states have a certain degree of negotiating leverage in the form of the doctrine of reciprocal immunity. Established by the Supreme Court, and introduced along with the first federal income tax in 1913, the doctrine essentially states that as long as the federal government does not tax municipal debt, the local municipalities will reciprocate by not taxing federal debt securities. In other words, if lawmakers decide to try and balance the federal budget by taxing muni bond income, the individual states will have the green light to start taxing the income from Treasury bonds owned by state residents. Of course, as we all know, the individual bond... Read full post
Nov 15, 2012
What Build America backpedal says about safety of Roth IRAs
Of all the fiscal cliff-related issues currently being kicked around, the proposed reduction in the federal subsidy to the Build America Bonds program might be the most telling of how Washington works and how politicians think. And it should be worrisome to investors who have put money into retirement savings vehicles that come with tax-free guarantees. From a pure dollar amount, this piece of the larger sequestration package is relatively small. By cutting the federal government's support of the BAB program by 7.6%, federal funding for the program would be cut by about $250 million annually. Of course, that $250 million annual bill would then have to be absorbed by the state and local municipalities, but that's a problem for another day. Keep in mind that the BABs program, introduced in April 2009 as part of the American Recovery and Reinvestment Act, was designed to help municipalities issue debt for what was described as crucial... Read full post
Nov 7, 2012
Post-election outlook? Rewind to 2008
The crowds might have been smaller this time around and the election results might have been closer, but in the end it seems we are almost back to square one in terms of a market outlook under President Obama. While the S&P 500 Index had a total return of about 50% over the past four years, and one could argue that plenty of ground has been covered over that time, market watchers virtually across the board are singing a familiar post-election tune. As with four yeas ago, the infrastructure sector looks promising because of expected spending to upgrade roads and bridges. Consumer staple retailers should be indirect beneficiaries of extended unemployment programs. And the constant emphasis on healthcare reform bodes well for pharmacy benefit managers, diagnostic labs, and hospital facilities. The anticipated losers? Big banks, health insurers, defense contractors, and energy companies. Tim Leach, chief investment officer at U.S. Bank... Read full post
Nov 6, 2012
New adviser survey doesn't bode well for Obama
Whatever happens with today's election, it's pretty clear financial advisers tracked by Brinker Capital Inc. are hoping for a change in the White House. Nearly 500 advisers surveyed last month as part of the quarterly Brinker Barometer report found that 53% believe the current tax rates are “on target” and another 33% believe the rates are too high. On which candidate will likely make the Bush-era tax cuts permanent, 88% of respondents selected Republican Mitt Romney. Corporate tax rates? As one might have expected, 70% of respondents believe cuts are needed there, too. In terms of the single most important issue determining who they will vote for, 88% of the adviser respondents chose the economy, followed national defense at 5%, and pro-life/abortion at 3%. In case you haven't already gotten the sense that many of these respondents are leaning to the right, more than 80% of respondents believe the best way to manage the... Read full post
Nov 5, 2012
Presidential election definitely a dead heat — or a landslide
In the category of scary possibilities, some of the more creative political analysts have begun floating the notion of an electoral-college vote deadlock that leaves us with Republican Mitt Romney as president and Democrat Joe Biden as his No. 2 Rest assured that it is a low-percentage scenario, but it could happen should the electoral votes end up split at 269 each. More likely, according to Mad Money host Jim Cramer, is that President Obama will win in a landslide, taking 440 of the 538 electoral votes. Of course, Mr. Cramer is really just a financial guy, and a former hedge fund manager, who makes funny noises on his cable show. For something as important as a presidential election we should look to a veteran political pundit like George Will. He has Mr. Romney winning with 312 electoral votes. This line of thinking is supported by the likes of Dick Morris, who brings forth the mixed pedigree of being both a Fox News contributor and ... Read full post
Oct 31, 2012
How to short politicians: Investing when Congress is resting
It has always been easy to poke fun at Congress and elected officials in general, but who knew how much they actually deserved it? According to Eric Singer, who has spent years studying the relationship between the equity markets and what Congress attempts to accomplish, the best time to invest is when Congress is not in session. Mr. Singer's mutual fund, Congressional Effect Investor Ticker:(CEFFX), does exactly that. Beginning in May 2008, Mr. Singer has followed the simplistic and straight forward strategy of holding cash whenever Congress is in session and then allocating to the S&P 500 Index whenever Congress takes a break. If nothing else, the strategy gives investors a chance to feel as though they are sticking it to their elected officials by indirectly voting with their wallets. But it turns out the strategy actually has some merit, and it could have a place in a portfolio as a low-volatility position. From January 2007... Read full post
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