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Tom Mongan, CFA
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Tom Mongan, CFA, retired several years ago after 40+ years in the banking and securities industries. Prior to retirement he served as an executive officer of a major bank, focusing on trust and investment management. Following retirement he was a contract analyst with Argus Research in New York... More
  • Depardieu's Message To Washington

    The "soak the rich" tax increase that so many liberals are saying will solve our financial problem is really a straw man argument. A grade school math class could see that the proposed tax hike on incomes above $250,000 would relieve only a few days of our deficit. The effect of the current proposals will be insignificant. Obama knows this. The real effect is to build the allegiance of the general voting public with the idea that someone else is responsible for our problems.

    And why not? The victims in this case will be those 2% of the population in the upper income tier. Who is going to feel sorry for them, especially since they still walk away with more bucks than most people will ever see? The Republicans argue that the higher rates act as a disincentive and will result in a lower flow of revenue to the Treasury. The Dems maintain that the rates don't really matter, and they have economists with data to support that point.

    My personal feelings on the issue lean toward the Bowles-Simpson recommendations. They favor a sharp drop in the corporate tax rate, a simplification of individual income taxes, elimination of most deductions and a defined drop in spending. But after the thousands of hours of diatribe from both parties in the months before the election, I took a new tack. I changed channels. Let Hannity, O'Reilly, Chris Matthews and the others bang heads. I cast my vote in November, and now I'm moving on.

    Apparently I'm not the only one moving on, and one recent example says volumes about the real effect of taxes. Many readers would probably not care that French actor Girard Depardieu recently moved from his French home to neighboring Belgium. Depardieu has been a popular, if often controversial, actor in France for decades. You might expect that this would generate the same non-reaction as if one of our Hollywood stars moved to Canada. At least one prominent Frenchman did not see it that way, especially when the word spread that Depardieu left because of Belgium's lower tax rates. French Prime Minister Jean-Marc Ayrault excoriated the actor for his ungrateful treatment of his home land, the source of both his riches and fame, calling his actions pathetic.

    Some might be intimidated by such criticism. Not Depardieu, who wrote an insightful response to his former leaders. The French Journal du Dimanche printed his response, which the Wall Street Journal and other papers across the U.S. then reprinted. The actor defended his love of France over many years. He said that the reason he moved was because the French government considered that "success, creation, talent . . . must be punished." "I leave, after having paid, in 2012, 85% taxes on my earnings." He then went on to say that he has paid €145 million (approximately $190 million) in taxes over 45 years. He noted that he provides jobs for 80 people in companies that were created for them and that they manage, and he objects to the statement that he is pathetic.

    Does any of this sound familiar? Certainly I am not encouraging anyone in a U.S. upper income group to consider a move to Belgium, even though the people are nice and the landscape is beautiful, but please note that for some folks, taxes matter. At least, as you listen to the appeals from Washington, understand the real reasons for the goals they are setting.

    Dec 21 11:00 AM | Link | Comment!
  • Investing In A Low-Rate Environment

    With concerns about the U.S. fiscal cliff, political discord and the instability of the European Union, talk show commentators do not need to show much imagination to create doomsday scenarios. As a result investors have flocked to money market funds and Treasury bills. Those are safe but expensive choices.

    Alternatives that will work for almost everyone have three objectives: capture cash flow, participate in economic growth and insulate against inflation. Equities satisfy all three while fixed income securities offer predictable cash flow with more price stability than stocks.

    Each investor's risk sensitivity is the key to deciding the percentage mix between stocks and bonds, but equities should play some role in every portfolio. As confirmation of this, consider that trust departments almost universally require equities in their accounts. As fiduciaries their liability far exceeds that of the typical broker. Most will conclude that an equity position that is less than 20% to 30% poses too much inflation risk.

    Bonds are a logical place to look for yield, and bond mutual funds or fixed income ETFs are the simplest choice for most individuals. Many of these charge little or no commission, have low management expense ratios and offer a wide range of quality. Established investment firms such as Fidelity, Vanguard, Janus and many others offer funds along with tutorials on the mechanics of bond investing.

    The caveat is that rates are at historic lows, and bond prices will fall if rates rise. But funds with durations of one to five years such as Janus' Short Term Bond fund, (MUTF:JASBX), Vanguard's Intermediate Term Investment Grade Bond fund, (MUTF:VFICX), and its Short Term Investment Grade Bond fund, (MUTF:VFSTX), pose relatively modest interest rate risk, and have yields ranging from 1% to 4%. Fidelity's Strategic Income fund , (MUTF:FSICX), has a longer average maturity and higher yield but is still investment grade. High-yield funds such as Vanguard's High Yield Bond fund, (MUTF:VWEAX), and Fidelity's High Income Fund, (MUTF:SPHIX), are below investment grade, but that can be appropriate for many portfolios. Both currently have yields of 7% to 8%. With a mix of maturities and a position in high-yield bonds, investors can have good cash returns and still have liquidity. These funds are examples of your available choices; there are many others.

    Equities can also offer good yields. Real estate investment trusts (REITs) offer cash flow and growth potential. Vanguard's REIT Index ETF (NYSE:VNQ) and Cohen and Steers Major Real Estate index ETF (NYSE:ICF) are two examples. Both have SEC yields near 3%.

    Master limited partnerships (MLPs) are another source of income. These are a common structure among oil and gas pipeline companies, and many of these have shown excellent growth in revenues, earnings and dividends. Two examples are Enterprise Product Partners (NYSE:EPD) and Kinder Morgan Energy Partners (NYSE:KMP). Both have excellent long-term records of dividend increases and current dividend yields of approximately 5%. Preferred stocks funds also provide cash flow.

    Nuveen Quality Preferred Income 2 (NYSE: JPS) and Market Vectors Preferred Securities (NYSE:PFXF) have yields above 6%. There also are blue chip stock funds with relatively high dividend yields and a good record of dividend growth.

    Many investors have increased their cash equivalent positions currently because of the economic and political uncertainties. Their trade for less risk is a lower cash flow. As you decide the stock/bond/cash mix that is best for you, remember this, yesterday's yields may not be available anymore, but there is seldom a need to limit your portfolio to money market returns.

    This article first appeared at on August 5, 2012.

    Disclosure: I am long EPD, ICF, VNQ, VYM, JNK.

    Additional disclosure: I also hold mutual funds FSICX, SPHIX, JASBX, VFICX, VFSTX

    Sep 12 3:37 PM | Link | Comment!
  • Know When To Hold 'Em

    The investment results for the first quarter of 2012 were excellent. They helped rebuild both capital and confidence for investors who have seen their net worth decline over the last four years. The S&P 500 increased 12.1% before considering dividends. If we look back to the lows of October, 2011, the gain is 29%. In the wake of last year's flat line, investors who stayed with the market have every right to feel vindicated.

    Now at 1400 the S&P has essentially doubled since the March 2009 lows and is nearing the highs set in October 2007 when the economy began its collapse. Not surprisingly, many commentators are beginning to caution us of a pullback. Their reasoning has merit. U.S. fiscal problems are huge, and the Obama administration, as well as Congress, seems more concerned with a social agenda than economics. The European debt issues are far from resolved and geopolitical unrest is likely to intensify.

    If this were the complete story, we would agree to protect our investment gains. But there is another side to the coin. Despite unimpressive numbers, the U.S. economy is growing and inflation is in check. The Federal Reserve and the Treasury are committed to supporting growth. Corporate balance sheets are very strong, and corporate profits are at all-time highs. Even with the recent gains in stock prices, price-earnings ratios are below the average of 15 times trailing earnings, and market strategists expect future corporate profits to rise by 3% to 5% per year

    Skeptics may question this market's sustainability, but there is reason to think otherwise. As the economic decline progressed over the last four years, investors made a mass exodus from equity mutual funds. Data from the Investment Company Institute show that investors withdrew more than $ 400 billion from these funds. No wonder prices fell. But that trend is beginning to change, and ICI data show that investors now hold $2.6 trillion in money market mutual funds. That's a lot of buying power.

    We know from many studies that the equity market is heavily influenced by economic issues that affect all companies. Next in line is the impact on industry groups and subgroups. Analysts consider ten basic categories: consumer staples, consumer discretionary, finance, energy, health care, technology, utilities, materials, industrial and telecommunications. They do not all move at the same pace or even in the same direction, and in each group there can be multiple winners.

    Finally, according to some theories, overarching issues affect individual companies. This is why index funds can work and why beta is an important measurement for many investors. But we also know that individual stock selection can be effective in isolating those companies that have proprietary advantages. The direction of the U.S. and the global economies may be the overriding force, but that does not mean that stock performance is predestined. Half are above average, half below.

    The case for investing in equities rests in part on the potential of individual companies. Try to forget for the moment the endless Washington criticisms of corporate America and focus on what individual companies are accomplishing. Their earnings gains are partly from the tight expense control that companies initiated over the last few years to protect their margins. The gains are also from their many new products, services and markets, both domestic and foreign.

    With the recent market strength and the losses over the last four years, a market decline of 5% or more is possible. But keep in mind that every sell decision also carries a decision about what to do with the money. Bonds are offering low returns, and their prices will fall if interest rates rise. They are not a good short-term alternative, especially in a rising economy. Cash is safe, but only a temporary solution.

    Active investors can take advantage of any pullback to reinvest at lower prices. But history shows that most investors, even the pros, have poor records at market timing. If you consider yourself in the latter category, you will be in good company if you stay in equities.

    T R Mongan, CFA


    Sep 12 2:31 PM | Link | Comment!
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