What's Happening?
Yikes! It's a Dow-dropping-subprime-panic-triple A-summer-meltdown. Jim Juback at MSN Money explains the reasons behind the latest Wall Street wipe out in language you don't have to be Ben Bernanke to understand:
How did all this happen? As any good con man will tell you, the success of a con depends on the mark wanting to believe. The victim, in essence, talks himself into getting fleeced.
In this case, the global investment community wanted to believe that Wall Street and other centers of financial engineering could manufacture investment-grade, long-term debt to meet the huge demand of insurance companies, pension funds and central governments for predictable, long-lived and safe interest-paying investments. Because the need for this paper was so great, these marks were willing to suspend belief. They knew in their heads that you can't manufacture investment-grade debt. But in their hearts they wanted to believe. They needed to believe. They had to believe.
Because, you see, it's the only way out for an aging world that's running a huge shortage of the real stuff. So investors were all too willing to buy fake investment-grade paper -- at prices commanded by the real investment-grade stuff -- until finally the con was revealed as assets were marked to market at 50% or less of their assumed value."
So basically it's all old people's fault.
E*Trade Stops Offering HELOCs Below Prime
In another sign that lending standards are tightening fast, starting today E*TRADE Financial Corporation (ETFC) no longer offers home equity lines of credit (HELOC) at rates below Prime regardless of a borrower’s credit rating or equity in the home. This comes just a few days after some less liquid, investment grade mortgage related securities were repriced downward, hurting some safe bond funds... ...read the rest of this article»
Why You Should Worry About Your Bond Funds
Today’s mutual fund investor is offered a broad range of choices covering every imaginable risk level - everything from essentially no-risk money market funds to leveraged sector short funds that can fall 10% or more in a single day.
As long as an investor understands the risks, investing in a risky fund in not inherently any better or worse than investing in a safe fund. With more risk comes more reward.
A risky fund tends to rise faster but fall harder. By researching a fund’s potential upside and downside an investor can make an informed decision whether or not they should invest in that fund... ...read the rest of this article»
Backdoor Men
Some fund managers are the financial equivalent of rock stars - investing idols that pack their famous funds like Springsteen fills Giant Stadium. But as anyone who's ever been stuck in the nosebleeds when attending a concert at a mega-arena can tell you, sometimes smaller is better. Same goes with mutual funds. Rob Wherry at Smartmoney
points out that investors can get more intimate access to some of the biggest names in fund management by investing in their lesser-known offerings... ...read the rest of this article»
MAXadvisor Powerfund Portfolios Update
Note to subscribers of the MAXadvisor Powerfund Portfolios: August's feature article has been posted.
Last week's 585 point drop in the Dow was the worst in five years. What does the market's recent volatility mean for MAXadvisor Powerfund Portfolio investors? Subscribers click here to find out.
The MAXadvisor Powerfund Portfolios is a collection of seven model mutual fund portfolios ranging in risk from very safe to quite aggressive. Each portfolio is made up of a group of terrific, no-load, low-cost mutual funds that are carefully chosen to work together to lower volatility and increase returns. You can learn more about the MAXadvisor Powerfund Portfolios (and sign up for a free trial if you like what you see) by clicking here.
Janus Back In The Game
Just a year or so after we slammed Janus in 2000 as being a fund family to avoid, investors started to withdraw money from the formerly hot fund family. Those redemptions accelerated as Janus' Go-Go growth funds tanked and the run for the exits really kicked in to overdrive when it became known that Janus was tainted in the fund timing scandal.
Apparently Janus just had their first quarter with net new money into Janus-managed funds in six years. While it’s no longer the $10 billion-a-month and up Janus of yesteryear, at least they are back in the game:
Janus reported on Thursday its core funds attracted $1.5 billion in long-term net inflows in the second-quarter, the first quarterly net inflows since 2001. It also posted a 57 percent jump in second-quarter profit, beating analysts' expectations.
Janus, which is focused on the 'growth' style of investing, started to see outflows from its funds when the tech bubble burst in 2000-01 and 'growth' style went out of favor.
The outflows worsened when Janus was caught up in the industry-wide mutual fund trading scandal of 2003-04, leading to a change in management."
These days there are three fund families with around a trillion or so in assets – Fidelity, Vanguard, and American Funds. Fortunately for Janus, strong markets and solid fund performance has carried them back to just under $200 billion. For comparison, Dodge and Cox has almost this much money in just four funds, and Janus had over $300 billion before the fall.
We’ve actually been recommending a few Janus funds in recent years, and list quite a few in our quarterly favorite fund report (free for subscribers of the MAXadvisor Powerfund Portfolios).
Homes Sink Stocks
Yikes! Lately it seems like it takes something along the line of a big drop in the Chinese market or an exotic macro problem to make the market fall fast and furious. Not this time.
Stocks plummeted on Thursday, with the Dow industrials tumbling more than 300 points, on signs of further weakness in the housing market and deteriorating conditions for corporate buyouts....
...The daily drumbeat of bad news on housing on Thursday came from two of the largest home builders, as D.R. Horton Inc and Beazer Homes posted quarterly losses.
Financial shares took a beating on growing evidence that problems in the subprime mortgage market are spreading, making financing the corporate buyouts that drove the market's spring rally more difficult."
This drop was all about the American dream - your house. Apparently all those billions of dollars in loans to people with no money down and questionable finances wasn't such a good idea after all. What will turn a bad situation into a near crisis is the fact that the homes backing up these loans aren't worth anywhere near the housing boom peak.
This past week marked the point where even the economic optimists realized this problem isn't just about subprime loans, and it probably won't stay neatly contained in the housing sector.
Ahhh…That New Fund Smell
New funds have some advantages over larger, older funds, as noted in a recent Fortune article about interesting young funds:
Some of the rookies, though, have genuine all-star potential, whether because of a smart strategy, proven management, or - as you'll find in the funds that follow - a combination of both. Adding to their appeal, new funds can actually have some advantages over their more established counterparts. They tend to be smaller, for example, allowing managers to invest more nimbly."
But while new funds do offer real competitive advantages over their old-fogey counterparts, there is one critical downside for being a Ponce de Leon investor: new funds are often launched to meet ill-timed investor demand. We saw new tech and internet funds launched when fund investors were infected with dot-com mania, new commodity oriented funds after a hot run in oil and gold, and a flurry of international funds after a run of foreign stocks beating the U.S.
A winning fund investor should be open to new and small funds, but ask themselves: is this just a fund being launched to satisfy performance chasing investors...or is this a genuinely good time to buy this type of fund from this manager or company?
EZ way to size up an ETF
Fund experts weigh in on the dangers and opportunities offered by new fangled ETFs (exchange traded funds) in a recent AP story:
Market watchers said, however, that the diversification ETFs can bring doesn't excuse investors from knowing where their money is going.
'Investors should be cautious in these areas unless they have great expertise,' said Tom Roseen, an analyst at fund-tracker Lipper Inc. 'Some of the slicing - for the average retail investors - has become much too narrow.'"
One way to determine if an ETF is the sort that can get you into trouble (or offer you a speculative thrill ride...) is to check out the expense ratio. More broadly focused ETFs tend to have lower fees (sub 0.30%). With ETFs, their is almost a direct relationship between fees and risk.
There you have it. Now you don't have to waste any time looking over gobs of data and analysis at fund oriented web sites. Hey wait a minute. Scratch that last part.
Contact Your Congressperson
We here at MAXfunds.com obviously are pretty fond of mutual funds. After all, we've been encouraging readers of the site to invest in them since MAXfunds began way back in 1999 (though with more than a healthy dose of criticism and contrarian opinion). But while we think mutual funds are the best investment choice for just about everybody, they aren't perfect. One of their biggest drawback is the way investors in mutual funds are taxed.
When you invest in a mutual fund, you are essentially handing your money over to somebody else to invest for you. Because you lose direct control over your investments, you also lose control of your tax situation. If a fund manager sells a stock for a profit and has no losses to counter the gain, you are liable to pay a tax on that profit even if you haven't sold any of your shares in the fund. That means in any given year you could be hit with a monster tax bill clear out of left field - even if you didn't sell a single share of the fund.
Chuck Jaffe from Marketwatch reports on a law pending in Congress that would dramatically change how mutual funds are taxed.
The Generate Retirement Ownership Through Long-Term Holding Act of 2007 -- call it the GROWTH Act -- was introduced in June by Rep. Paul Ryan, R-Wis., effectively rehashing a sound proposal that he has put forth several times since 2003. The bill would allow fund investors to defer capital gains taxes on reinvested distributions until the fund is sold, a change that would simplify personal accounting, make fund investing more attractive and that would put funds on a similar tax plane as stocks."
The effect would be to turn every mutual fund portfolios into a kind of junior Roth IRA:
Allowing an investor to save in a fund without paying taxes on distributions indefinitely effectively creates the "lifetime savings account" that so many politicos have kicked around in recent years. For a buy-and-hold investor, it turns a "taxable fund account" into the equivalent of a traditional IRA, without the contribution limits. (Traditional IRAs require payment of taxes only upon withdrawal but allow investors to trade in and out of securities without generating a tax bill; in an ordinary taxable account, every trade is a taxable event.)"
For fund investors, we think this is a no-brainer. If you agree, why not drop your congressperson a line and tell them to get behind it. For many investors it would be a bigger investing tax break than the recent dividend tax cut.
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