Paper Chase: Financial Advisor?
Federal Reserve Chair Janet Yellen testified in front of the House and Senate saying that the economy is improving though there is a long way to go. As we have discussed ad nauseum, this signals to the markets that interest rates will remain low for long term which has been good for equity markets.
Janet Yellen’s comments are consistent with the fed’s actions. The only inconsistency has been market reaction to them. There is certainly a fragile market psychology from the crisis, but there has been nothing surprising on the part of the Fed. They have said and ensured an extremely loose, accomodative, easy, supportive policy though not quite as much as as bond buying is concerned. That’s what they have been saying and keep saying, but the market does not seem to digest it.
Why the Contradiction?
The Fed is threading a needle. While it wants to acknowledge the economy is improving to justify scaling back on buying treasuries and expanding the balance sheet. They have to justify this tapering without sounding too upbeat for the market may worry that the Fed is going to raise rates sooner than they may have suggested. The idea is to be happy, but acknowledge more work needs to be done. A strong jobs report changes nothing for the Fed.
The market is certainly thinking about higher rates when looking at short term indicators and short term futures markets. Their levels are consistent with the suggestion that the first hike will happen in the middle of 2015 with very gradual increase in short term interest rates beyond that.
Bubble in the Bond Market?
The whole bubble question is ubiquitous and seemingly surfaces when anything goes up or goes down more than what is expected. This is more market psychology as people are bubble hunting. People feeling they were burned in 2007,8,9, are looking at this market as being indicative of missing risk. The fact is, rates are going to stay low for a very long time. Normal based on a 20th century does not mean a return there for this market. We could be in a low rate environment for 5 years, 10 years, or maybe even forever.
Slowdown In Housing Market
We can say for sure that it was not just weather as housing data has not improved as weather improved. There are fundamental factors against headwinds in a housing market including slow grind, tight mortgage conditions leading to difficulty for 1st time buyers because of student loan debt. Affordability has come down because of rate increases which has led to a rebound in prices. We likely won’t see the strength nor the double digit price gains this year we saw in 2013.
Like housing, you don’t want stocks to lead overall economic activity. Investing is, for the most part, tapping into the most potent part of our economic lives. These are larger companies operating globally that can pick their own markets while not bearing the costs of being alive. They don’t have to build roads, educate children, or care for the elderly. This is why stocks and equity markets can do better than national economies. They need to be decoupled from one another for they are not working under the same dynamics. This is why equity markets can be up while we are only seeing 2-3% of economic growth. The market is strong not just because of added liquidity from the Fed. The economy is on solid ground and companies are positioned to make money in subdued demand environments. The fundamentals exist to support the strength of the equity market.
With thousands of corporations in existence, some will be poorly run or run mainly for self-interest. Is there a correction or should there be one?
High Frequency Trading (HFT)
We talked about high frequency trading here but to recap HFT uses powerful computers to transact a large number of orders at very fast speeds. Typically, the traders with the fastest execution speeds will be more profitable than traders with slower execution speeds. These traders have cleverly gained an advantage, and they really do the rest of the market no good at all. They have been described as the functional equivalent of rats in a grainery.
It’s clear that they do not add much value. When liquidity is needed, it is not guaranteed to be there. It is not a liquidity provider though it does create more volume. A natural advantage is gained by speed in figuring out how the system works in getting there first. That in and of itself adds nothing to gdp or real output, goods and services. The small investor has never had it so good and HFT costs them virtually nothing.
We talked about the Ukraine and pressures on business here. Disputes in the global economy between countries like in Europe, dependency on Russian gas will not discourage enduring economic pain to support political points.
The idea by many is we should sell ours to those european countries. I don’t think we should export natural gas or oil. We should use oil slower and perhaps even discover oil at a slower pace, but over the course of centuries or even milleniums, the ability to produce energy that takes care of national defense under all circumstances is paramount; however, in terms of sustainability, why would it not make more sense to use foreign oil?
Pricing The Market
Relative to interest rates, equities are still a bargain. Central banks worldwide are stimulating economies as best they can. The gas pedal being pushed to the floor as far as stimulus is concerned “is just what it is”. Bill Gross’ new normal suggests that while common stocks may not do as well as they have the last 100 years, it does not mean that people are going to sell stocks now to buy them back cheaper later on. The future of equities remains bright. In a choice between owning equities and owning fixed dollars, I think it’s pretty clear that you want to own equities now.
Most people probably need some sort of a financial advisor. A third party coming in telling you what to do and helping you stay on your financial plan is necessary though about 40% of people invest “on their own”. Sticking to goals and reaching their objectives are things those 40% often miss.
How To Find A Financial Advisor?
Like a doctor, lawyer, or any other professional you should scout around. Ask a couple of people particularly those whom you think are financially successful and seek out referrals. You can also look at the Financial Planning Association or the National Association of personal Financial Advisors.
How Do Financial Advisors Get Paid?
They are paid in a variety of ways including an hourly rate, flat fee, commission or a combination. While they should answer this question if you ask them directly, you can find out at the securities and exchange website by looking them up by form ADV part 2 where they have to list their fee structure.
Benefits Of A Financial Advisor
Index funds are fine in an up market, but in a weak market you may want someone who knows something or will do the homework that you can’t do when it comes to picking stocks or adopting other strategies. Additionally, as you get more assets, you may want to have alternative investments which are needed long term. These asset classes can be very difficult for individual investors to get on their own.
Thinking Outside The Box
A good financial advisor should be a certified financial planner (CFP) so they can help you plan for various life stages or goals that you have. These include having a child and starting a family, saving and paying for college, saving for retirement, and leaving a legacy of financial strength through estate planning. The difference between a CFP and a financial advisor is a special designation for planning for certain events as opposed to just a broker who will sell securities or give financial advice.
Disclaimer: Killing The Breeze is not a registered investment advisor or advisory service. It does not tell or suggest which securities or currencies should be bought or sold. The employees or affiliates of Killing The Breeze may hold positions in the stocks, currencies or industries discussed here. There is a very high degree of risk involved in the market. Killing The Breeze assumes no responsibility or liability for any trading or investment results. All content posted is for educational purposes only and independent advice should be sought from a professional to confirm validity and accuracy of any claim made.
The information should only be a starting point for doing additional independent research in order to allow you to form your own opinion regarding trading decisions. You should ask the firm with which you deal about the terms and conditions of the specific securities which you are trading and associated obligations. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment.