Introduction
Times are interesting indeed.  As such, I decided to send out a summary of information/observations I’ve been gathering.  Of course, no one knows which direction the US economy will take.  The information below is strictly my understanding of the case that the “bears” are making regarding the future of the US market for equities (stocks).  I’ve found that I increasingly agree with their argument.  I think it is a good idea to err on the side of caution when considering your investments and financial situation.

What’s the Bearish view?
Bears contend that we are in a long term structural bear market, with cyclical upswings.  This means that the market is headed, over an extended period of time, ultimately lower.  There will be several short term, cyclical upswings interrupting this downward trend.  These upswings could last several weeks, months, even a couple of years.  But they do not reverse the overall direction.  The grandaddy of all structural bears in the US occurred during the 1930s.  Go to some site like yahoofinance and look at the Dow from 1930 - 1935 to see a chilling example of this.  I’m not saying we are in for the same degree of downturn, just that the pattern may be similar.

Why?  Isn’t the US economy in recovery? 
The fundamental economic recovery in the US seems feeble at best.  If you look at the pace of employment growth (new jobs creation) and the housing market (mortgage delinquencies, new construction permits, etc.), growth seems at best meager.  We need substantial and sustained fundamental growth to bring the country back to the point where we have stabilized.  

But didn’t the big government stimulus package help?
Whether or not you agree with the politics or theory of the US government fiscal stimulus program, it appears to have helped provide a floor underneath the collapse of 2008.  The basic tenet of this type of (Keynesian) economic policy is for the government to intervene when times are really tough, to help the economy artificially through a particularly rough patch until fundamental economic growth can take over.  

However, the impact of unintended consequences of such a massive intervention may not be known for years.  Unintended consequences are often bad.  

Most importantly, many of the programs related to this package are running out (first time home buyers credit, tax credits, unemployment benefits).   And these expirations are occurring before fundamental economic growth has had time to really catch on.  This leaves the government with the unhappy decision of whether or not they have to go back to congress to ask for another huge dose of intervention, in hopes that this one will work enough this time... a worrisome proposition in light of the deficit. 

What about the Fed?
The Fed has been in charge of the monetary side of this whole intervention.  They’ve reduced interest rates to almost zero.  They have also, via the Treasury, caused a huge amount of dollars to flood into the system.  Their plan was that, in addition to all of the fiscal stimulus referenced above, these monetary actions were supposed to be stimulative.  And, let’s be clear, these actions are massive - unprecedented in magnitude.  This is likely to become inflationary at some point in the future.

Unfortunately, the Fed’s actions haven’t worked either, or at least not enough.  The low rates have helped the big banks more than consumers (banks are hoarding rather than lending, not a good sign, and consumers can’t get a decent rate on deposits).  Also, due to the wisdom of the sausage makers in Washington, the banks are being asked to raise reserve requirements (have more cash on hand to cover deposits and liabilities).  This reduces the money supply, just when the Fed is trying so desperately to increase it.

The biggest argument against the Fed is that during good times, they didn’t fulfill their ostensible most important function of “taking away the punch bowl when the party gets going.”  This means that the Fed has not been diligent enough (going back decades) about slowing things down when they have become too exuberant.  The result is that we have seen many bubbles become created in the economy.  We all know how painful it can be when those bubbles burst.  The worry is that these bubbles have not deflated enough and that the current policies are enabling them to inflate again, this time in the equities and bond markets.

 Shouldn’t we worry about the deficit?
Of course in the midst of all of this, we need to worry about the Federal budget deficit.  There are many angry voters clamoring over the need to be more fiscally responsible.  The legislators and White House are listening and are beating their drums about cutting spending and closing the deficit.  But... it would dampen the economy to work on deficit reduction right now.  This would not be good because of the weak economic recovery.  

This problem shows just how dangerous an activist economic policy can become.  Once we’ve committed to a certain economic policy, it will only work if it is seen all the way through.  However, the time frame needed to see it through is much longer than the election cycles in Washington.  In fact, the deficit hawks in no small way contributed to the massive “double dip” endured during the 1930s (again, I’m not suggesting we’re headed to that severe a scenario... I’m only pointing out similarities).

Does Wall Street have structural problems?
The capital markets seem to be undergoing tremendous stress right now.  Huge banks have not been functioning well ever since 2008 (and before).  These huge banks are not out of the woods yet.  Along with their hedge fund brethren, they are responsible for driving the daily action of the market.  So, we have huge, sick banks hoarding government money and engaging in massive proprietary trading for short term gain.  I worry. 

Beyond this, the exchanges are waving what appear to be clear red flags about their own fundamental health.  Take the “flash crash” for example.  No one has completely explained that yet.  Also, the NYSE has invoked Rule 48 for the second time in a matter of days.  This relatively new rule is to be invoked during times of extreme stress and volatility on the system. 

Finally, there is evidence that the majority of activity on US exchanges is being driven by super fast computer trading on a grand scale.  This is called “high frequency trading” (HFT) and it is responsible, by some estimates, for over 70% of US equity trading volume daily.  Without getting too deeply into it, the problem is that HFT may be the only game in town: there may be HFT firms and funds trading amongst themselves, while everyone else sits out.  The flash crash in early May was an example of the potentially negative consequences of this phenomenon. 

Hasn’t the recent sell-off made stocks cheap?
The sell-off has made stocks cheaper, but not necessarily cheap.  This concerns valuations.  There is always contention about whether stocks are cheap or not.  I like Yale professor Robert Shiller’s valuation model the best.  He uses stock price divided by ten year historical average earnings.  This approach seems to me the least open to gaming and undue optimism (or pessimism for that matter).  By this measure, stocks are still well above their long term average.  And, depressingly, he notes that long term bull markets, such as the one that began in 1982, start from a p/e ratio far below the historic average.  Either earnings would have to go up a lot, or prices have to fall... eventually.  Since the March lows, stocks are up some more than 50%.  

Remember 2008?
One thing we probably all remember form 2008 is the importance of momentum.  Once stocks begin to gather momentum along a trend (especially downward), they seem to ultimately go farther and faster before they reverse trend.  In May 2010, we don’t seem to be in a period of strong momentum either way.  I include this as a cautionary note.   

Do the problems in Europe impact the US very much?
Yes.  In short, it is not a good thing for such an important and interconnected trading partner as the EU go into economic turmoil  While the falling Euro might make some vacations cheaper and some US manufacturers able to sell more in the short run, a healthy European economy is of far more benefit to the US.

Conclusions
So, I apologize for this catalog of such grim news.  We are a nation that is used to assuming that there are always better times ahead.  I still believe that.  The US has too many strengths in too many areas.  The innovation of American entrepreneurs is probably what will ultimately bring the economy back to health.  

The concept of long term structural bear market in mind is a shift of gears for many individual investors, and can take some getting used to.  Again, I may be wrong.  If we’re at the start of another long term bull market, then I’m all for it.  If I am wrong, be my guest to point it out to me in the future: we’ll be in a time of less macroeconomic stress and more wealth for us all.  I’ll be happy to eat crow during prosperous times.


What to do?

• Be decisive: In a structural bear market, buy and hold will likely lead you lower, much lower over time.  If you want to move to the side lines, begin to do so.  Don’t worry that you might miss a rally.  It’s never too late to make your holdings 
• Err on the side of caution.  Your risk is that you miss upside in cyclical rallies.  The risk of losing money in this market might feel much worse.
• Get rid of debt.  Do whatever you can to reduce debt.  Paying it down with cash flow is the best, but if you have to shift some assets around, it is safer to have a lower debt level.
• Remember the basic truisms.  If you have a long term time horizon, then you can consider how and when to invest in stocks.  Invest with caution and buy when prices are low.  If your time horizon is under 5 years, then you’ll need a safer approach.

The Disclaimer:  The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and cannot be invested into directly.

If you're like almost EVERYONE I ever talk to about this topic, you're probably a bit confused about credit reports and credit scores.  Here are some thoughts and resources to help you.


There are three agencies (companies) that track your credit history and assign you a number or "credit score."   The ostensible reason for this score is to help lenders (such as banks and credit card companies and others who might want to lend you money) figure out if you're going to repay the loan or abscond with their money and head to Mexico.  The scores are based on a number of factors: your payment history, your total debt outstanding, type of debt you have, and how long you've been a borrower. 


Each of these three companies (Equifax, Experian, and Transunion) uses their own method for compiling your score.  Together, these three scores are combined to give you your credit report, which will have other information included such as who's been checking your credit and other details.  


So, that's the gist.  At least that's how I understand it.  I'm sure there's lots that some public relations person at one of those firms could tell you that's different.  Which brings me to some other IMPORTANT points about credit scores.  In no particular order:

• Not that I am cynical, but it seems like lenders are always saying that you need to watch out for this or make sure to do that or you'll hurt your credit score.  They may be correct. Or they may be trying to scare you into doing what they want you to do.  I'll write another post on this topic alone soon.  But don't let your credit score be the only thing that drives your decisions.
• Be very careful when you go to look up your score/report.  There are many scams out there.  You are, by law, allowed to receive your credit score from each of the three companies once per year.  But, what you usually need is a combined score and report.  These aren't free.  If they say they're free (as in, if they have silly advertisements on TV and are all over the web about how stinkin' free they are... they aren't.  They will suck you in and are a pain to get rid of... like a nasty virus.
• If you want to look up your scores and reports, here are two good sites:

1. myFICO.com
2. annualcreditreport.com

These two sites have lots of good information.  And, anything you want to buy from them is clearly displayed.  If you just want to look for info, you can poke around these sites for free.  They have lots of great information.  




That's all for now.  I'll post more on this topic later.


Adios

Repeat  the Ritual of Repetition

Once you’re done,you’re only done for now.  The value in this process is found in revisiting it consistently, like a ritual, over time.  


Every year (or every six months, if you have a lot of change going on in your life), take out the plan you’ve made and go through the process again.  That’s right, take out your plan and go through each of the steps again.  But, don’t worry, it gets easier, much easier, each time you do it.  And as you go, you'll learn, see change, grow in the process.

Step Five: Follow the plan

Many many plans end at Step 4.  Problem is, no matter how well-intentioned a plan might be, they can begin to seem less vital once all the hard work of building a plan is done.  

But of course, none of this planning and thinking will mean squatooskie if there is no follow through.  I’ve heard scores of people complain about heavy tome-like financial plans they paid some major brokerage house for (costing $500 or more) only to have the plan gather dust after it was delivered. 

To really do personal financial planning right, you need to act.  If you don't follow through, it doesn’t matter a whit how carefully the plan was prepared.  A sloppy plan that is actually followed is far better than an elegant masterpiece that sits on a shelf.

Step Three - Analyze


Truism: data + context = information


Okay, so you've gathered and organized your data.  The boring part is over.  Now it’s time actually learn.  Look at your statements.  What’s going on?  What do you see?  Take a step back and get an feel for what’s what.


First impression - When I get to this point with a client, I take a quick look at the statements to see if anything jumps out at me.  For example, do things seem out of balance?  Does the net worth statement show that there is a ton of debt?  Are all assets in real estate?  Are there no assets, only debt?  As to expenses, is it really complicated or pretty simple?  Are all expenses concentrated in one or two areas?

Take notes, two or three bullet points of your first impressions.


Then, get up, walk around the block, drink a cup o' jo, go work on some project.  Just do something for a moment to clear your head.  Then go back to the statements and settle in for a deeper look.



A Deeper Look - Scrutinize each line on the statements in detail.  What does each line tell you?  For each line item, is there something that can be changed to make things better?  If so, think about what you'd need to do and how long it would take.  

Continue to write your thoughts and observations in a list.   Some of these bullet points will be discarded later.  Some will form the basis for step 4.  These observations include to do’s, characterizations about what you see, and impressions about risk and opportunities.  Think about what's involved in making changes and how long changes might take to implement.  Don't sweat the little stuff.  If you think of a way to be really meticulous and save yourself two dollars a month, don't bother.  Focus on what will have an impact.
Neaten up your list.  And you're ready for step four!


(by the way, we're entering the zone where most financial plans die deaths of casual neglect... stick with it!)
 

Step Two: Get Organized

If you've gone through Step One, you have written down your goals and fears, and you've gathered hard info such as statements and bills.  If you're like me, you have a fat folder, stuffed with papers.  It’s time to organize this mass of data.  


Essentially, this step is where we take this data organize it into simple format - something you can work with.  There are two primary forms used for personal financial planning: the Income and Expense worksheet and the Net Worth Statement. 

Of course there are lots of ways you could gin up these forms.  You could set them up on a computer, with Excel for example.  Personally, I like to use good ol’ paper and pencil.  Touching it all with my hands makes me feel closer to the data.  Do whatever feels comfortable.


Tools:
Income & Expense Statement 
Statement of Net Worth 

The 6 Step ProcessEveryone in the personal finance biz has a process.  Some have four steps, some many more.  They basically all boil down to something similar to what I have below.  



1.  Gather Information 

2.  Organize 
- Income Statement 
- Cash Flow

3.  Analyze
- First Impressions
- Take a Deeper Look

4.  Make a Plan - To Do’s 
- Immediate 
- Short Term
- Medium Term

5.  Follow the Plan
- What will really work

6.  Return to the Plan
- Like lather, rinse, repeat
- Make it an Annual ritual


The most important thing of all is that you do this.  Have a plan that works for you.  You're wicked rigorous about your creative process, right?  Use that same part of your brain when you work on this plan.  

No change will come immediately.  You might find a few things that you need to address right away.  But the power in this comes when you do this consistently.  Over three years, you can make a difference.  Over five years you can really change things.  Over ten years, you can change your life.  

Good luck!  And Peace! 

When I first came across Health Savings Accounts (HSAs), I thought they seemed like a good way, or at least a decent way, to manage the challenges of health care for the self employed. 


As you probably know, the basic gist with HSAs is that you can put money away into them, pretax (that is, get a deduction) and then use this money to pay for all the things that aren't covered under a high deductible (or "catastrophic") health insurance plan.


But now I wonder.  Why do you have to participate in a health plan in order to qualify for an HSA?  If we really wanted to be free-market-entrepreneurial about it, why not let people have their HSA as a stand alone fund? Entrepreneurs like artists could build up their HSA balance over time and basically self insure for most of their health care needs.  The government could encourage this by letting contributions to these standalone HSAs continue to be pretax.  People could then decide on their own whether or not they wanted to pay for coverage of catastrophic health care needs.


The reason it's not set up this way?  Insurance lobbies of course.  If artist entrepreneurs could have standalone HSAs, even more people would drop their expensive and largely unused insurance plans in favor of building up funds to self insure.


I put "HSA blog" into google, and came up with mostly industry shills.  Places like: www.health--savings--accounts.com/hsa-weblog
hsaguy.wordpress.com
www.hsahealthplans.com/hsablog 


Do I have this wrong?  Can someone set me straight?