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The Independent Investor: Higher Education Just Got More Expensive
By Bill Schmick On: 01:36PM / Friday July 12, 2013
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More than 7 million students and their families depend on Stafford Loans, a federally subsidized loans program, to help them get through college. Barring an eleventh hour compromise, it looks like the interest rates on those loans will double costing new students $1,000 more to fund their educations.
 
The initiative to raise interest rates on these student loans from 3.4 to 6.8 percent was spawned by the GOP-controlled House and passed July 1. Those politicians, who have continued to pursue their bankrupt austerity agenda, argue that, at most, the increase will cost new students $20 extra per month. Given that the vast majority of these same officials make well over $700,000 per year, I can understand why they don't think this should be such a big deal to you and me.
 
Or maybe they feel that since total student debt is now over $1 trillion, another $1,000 or so won't matter. Its peanuts, they argue, for millions of American families in the grand scheme of things. Peanuts to them, but our children's education debt has now surpassed both credit card and auto loan debt, ranking it as the second-largest type of consumer debt after mortgage loans. In the last 13 years alone, the average amount of student loan debt has increased from $17,000 to $27,250 — a 58 percent increase. Tell me another outlay that has jumped that much in so short a time period?
 
Long-time readers of this column know how much I value education of all kinds. Ask yourself how doubling rates on student loans furthers the aspirations and future hopes we have for a better America? Those responsible for this legislation would be quick to answer that this spending cut helps balance the budget, reduce the deficit and therefore puts the country on a sounder financial footing.
 
I believe that is an extremely short-sighted approach to what could be the single most important investment this country can make. Our children are our future. The ability to afford a higher education is a far more important priority than spending billions more on immigration control or the drug war or the dozens of other programs that remain ideologically sacrosanct from these austerity cuts.
 
Unfortunately, my hope that the Democrats in the Senate would be able to overturn this piece of legislation, at least temporarily, was dashed on Wednesday when all 46 Republicans and some Democrat Senators opposed a roll-back. There is still time to come to a compromise, but time is running out. The new legislation will not affect those students already enrolled in college but new students enrolling in September of this year will be.
 
Personally, I liked Massachusetts Senator Elizabeth Warren's initiative the best. In the first bill she has authored since her election, Senator Warren would tie the interest rate on Stafford loans to the rate banks receive from the Federal Reserve Bank. That would lower the student loan rate from as high as 6.8 percent to 0.75 percent, saving our students thousands in interest payments.
 
It is a strange world indeed when the rates that are charged to our banks by the Federal government are considered appropriate, while doubling the rates on student (who are, in essence, America's future), is somehow deemed just and fair.
 
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.


     
The Independent Investor: Gay Marriage Comes of Age
By Bill Schmick On: 11:07AM / Friday June 28, 2013
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This week’s historic Supreme Court ruling could be a windfall for gays married and living in at least 13 states and the District of Columbia. That accounts for about two-thirds of same-sex marriages in this country. For the rest, things are not so clear.

The high court's decision to lift bans on federal same-sex benefits will have repercussions throughout this country and will send corporations scrambling to reassess everything from withholding taxes to fringe benefits.

For those living in the 13 "Free" states where gay marriage has been legalized, they will immediately gain access to more than 1,000 federal benefits, including Social Security and tax law changes. The income tax benefits for "married, filing jointly" will be beneficial, especially for couples with very different income levels. However, wealthier couples will probably pay more in taxes. That will be a small price to pay for many of the 114,100 same-sex couples living together nationally. Other economic benefits, in my opinion, will outweigh the costs.

For example, Social Security benefits for same-sex spouses will now be a reality. Until Wednesday, the Defense of Marriage Act denied them those benefits, which could cost a retired couple $14,484 a year and a surviving same-sex spouse up to $28,968 per year, according to the Center for American Progress, a human rights project.

Additional good news for gay couples is in the estate tax arena. Upon the passing of a spouse, the unlimited marital deduction now applies so all assets can pass to a same-sex spouse tax-free. Gift tax deductions will be legal as well.

Tax-deferred savings plans, such as IRAs and 401(k)s, will no longer be taxed (as they are now) before they are rolled over to a surviving spouse's accounts. Pensions can also be left to same-sex spouses. As such, gay couples will be entitled to survivor benefits under the Employee Retirement Income Security Act, a federal law that governs most retirement plans.

Companies are going to need to re-examine and overhaul many employee benefits such as health insurance coverage and taxes. Until now, the value of a gay spouse's health benefits was treated as taxable income, whereas heterosexual couples paid for spousal benefits from pretax earnings. The ruling could save gay couples thousands of dollars per year. Other benefits, such as flexible spending plans and medical leave, will need to be adjusted in favor of the same-sex couple.

Where uncertainty remains are in 37 states in which gay marriage is not recognized. Generally, federal agencies usually defer to the states in determining marital status. The devil is in the details and that’s where it gets really murky. Let’s say, for example, you were married in a same-sex ceremony in Massachusetts or New York but then moved with your spouse to New Jersey. Some federal agencies will recognize your marriage as legal, while others will defer to the laws of New Jersey where same-sex marriages have still not passed the legislature.

Divorce or establishing legal ties with children may also be dicey in states that do not recognize same-sex marriage. Unfortunately, if you are married, gay and happen to live in a non-Free State, the battles for you will go on. You will continue to face opposition, roadblocks and political obstruction. It will all be perfectly legal, protected by a patchwork of state laws, which will vary from state to state. Unless all 650,000 same-sex couples in this nation move to the Free States, I see years of litigation ahead.

Yet, I am confident that the end result will be as inevitable as that of the Civil Rights movement of the 1960s. To all of my same-sex readers out there, I offer my congratulations for a job well done.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.



     
The Independent Investor: The Fed Speaks
By Bill Schmick On: 10:50AM / Friday June 21, 2013
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You would think the world was coming to an end, given the global investment community's reaction to Fed Chairman Ben Bernanke's press conference on Wednesday. Evidently, we are so addicted to the Fed's multiyear stimulus program that even a hint that the party may be coming to an end is a major cause of concern.

As for me, the end of the central bank's quantitative stimulus program is actually good news. It means that our economy and employment would have finally turned the corner. It means that all the stimulus efforts of the Federal Reserve Bank since 2008 has finally paid off. It means that our financial markets can finally be returned to the private sector where risk and reward are the paramount determinants of returns. Why is that such a bad thing?

The markets are reacting as if the Fed is going to withdraw its entire stimulus immediately and allow interest rates to rise overnight, thereby sending the world into oblivion. Nothing could be further from the truth.

Chairman Bernanke went to great pains to assure investors that they will continue to keep a lid on rates until 2015. The Fed will continue to purchase bonds and mortgage-backed securities until they see unemployment drop to at least 7 percent. After that, they will continue to stimulate until there is enough momentum in the economy to drive unemployment to at least 6.5 percent or lower.

In addition, at any time in the future if either the economy or unemployment appears to be suffering from the withdrawal of the Fed's stimulus, the central bank reserves the right to stimulate again. Yet the market appears to want both the stimulus to continue and the economy to grow at the same time, ever hear of wanting your cake and eating it too? In my opinion, that would lead to a massive inflation problem.

Despite the Fed's continued reminders that they are concerned with a whole host of data points, the financial markets believe that there is nothing more important to the Fed than the health of the stock or bond markets. That is a myopic view. The Fed’s concerns encompass everything from foreign markets, to currencies, to the price of commodities to the actions of the U.S. Treasury, which brings up another issue.

If the current federal taxes and spending rules remain the same, the budget deficit will shrink this year to $642 billion, according to the Congressional Budget Office. That would be the smallest shortfall since 2008. The budget deficit, despite the views of just about every economist, is shrinking quickly. The budget office predicts it will shrink even further over the next two years.

The U.S. Treasury, therefore, will need to sell fewer bonds each month in order to finance the shrinking deficit. The Fed, as readers know, has been purchasing $45 billion a month at these auctions as part of their quantitative easing program. If, as seems likely, the Treasury is going to reduce its issuance of bonds, the Fed is going to be faced with a tough decision.

Either they also taper the amount of buying they are doing each month, or face the unwelcome prospect of crowding out other buyers who are seeking to purchase those same government bonds. If the Fed doesn't taper, we could actually see interest rates on our sovereign debt drop to unacceptable negative rates of interest.

It would be an ideal time to taper bond buying since, with the economy growing and the government's need to issue new debt dropping, the Fed could taper without any appreciative impact on the economy or unemployment. It may take the markets a little while to catch on to these ideas, but when they do the markets will realize they have over-reacted.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.



     
The Independent Investor: A Taste of Things to Come
By Bill Schmick On: 04:34PM / Thursday June 13, 2013
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If you are a bond holder, the last few weeks may have come as a shock. Ever since the Fed raised the possibility of tapering their stimulus program, interest rates have spiked higher. For the first time in years, bondholders actually saw bond prices decline. Get used to it.

If you are a baby boomer, the price declines in all things that yield interest or income since May 22 might have you wondering what happened to your "safe" investments. All our professional lives we were told that bonds were "safe" for "conservative" investors, widows and orphans and for those among us that find the stock market too risky.

That was sage advice, if somewhat misleading. For the last 31 years, interest rates have been declining. As a result, bond prices have moved steadily higher. It wasn't that bonds, as an asset class, were without risk. It was simply that bonds were in a classic bull market. From 1982 to 2012, for example, the average annualized return of U.S. intermediate-term bonds have been 8.82 percent. In contrast, the S&P 500 Index had an annualized return of 11.14 percent.

So while we were telling ourselves that we were being conservative, in actuality we were riding a wave of speculation betting that interest rates would decline further and further and forever. Well, reader, the buck has stopped here. Interest rates can't go any lower. Nor is the natural order of things for interest rates to remain at historical lows forever. Something had to change and in this case it is the Fed.

The U.S. 10-year Treasury note is the interest rate most investors rely on as a benchmark. The rate on that security has spiked from 1.67 percent to 2.27 percent in 22 days. Some traders believe it will climb to 2.50 percent before it takes a breather. In the meantime, everything that provides some kind of interest or dividend payment has been clobbered in price. U.S. Treasury bonds, foreign bonds, both sovereign and corporate, U.S. investment grade and high yield bonds, even preferred stocks and other dividend paying equities have experienced a downdraft in price.

As a result, there has been a general outcry of dismay from legions of supposedly "conservative" investors. They are suddenly discovering that their money-making investments of three decades actually carry risk, specifically interest rate risk. As interest rates rise, bond prices decline. However, not all bonds prices decline at the same rate when interest rates rise. But right now, investors are not in the mood to differentiate which bonds (or stocks) they should hold and which they should sell. It is a classic case of throwing the baby out with the bathwater.

In hindsight, dividend and interest bearing securities have been in a bit of a bubble over the last year or two. Last year, for example, preferred stocks outperformed common stocks registering gains of as much as 17 percent. That is way above normal for a conservative investment. Junk bonds have been on a tear as well, gaining more than many common stocks over the last several years. Dividend paying stocks have had similar results.

Common sense would dictate that these defensive investments should not be outperforming their more aggressive brethren. I suspect that the prices of these securities, bid up to unrealistic levels over the last months, are simply coming back to earth.

It is understandable that, after three decades of gains, many bond investors have been lulled into believing that conservative and safe meant that, although the rate of interest they received from their fixed income investments could decline, the prices they paid for these investments would always be immune from any downside. It is true that if you bought that 5, 10, 20 or 30-year bond at the initial offering price you will receive the par value of that bond at the end of its life.

But between now and then, if interest rates continue to rise, get ready for some volatility that could makes the stock market look tame by comparison.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.



     
The Independent Investor: Retirement, Who Can Afford It?
By Bill Schmick On: 03:09PM / Friday May 31, 2013
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Most Americans' retirement savings are under $25,000. That's old news. The new news is that with Social Security in jeopardy, medical costs skyrocketing and the chances of living longer better than ever, how do you expect to retire in the years ahead?

The short answer is most of us won't. But no matter how long you intend to remain on the job, at some point your legs, knees, back or brain will give out, whether you like it or not. For many baby boomers that time is right now, just when the politicians are telling us the country can’t afford to continue funding Social Security and Medicare. It isn't fair but those are the facts.

Honestly, this boomer generation has had its share of "retirement derailers," a word coined by Ameriprise Financial in its survey on the causes behind the retirement crisis in America. Their survey discovered that 90 percent of Americans, ages 50-70 with at least $100,000 of investible assets, have experienced at least one economic or life event that has gutted their retirement savings.

The average person, however, has had four such traumas. Loss of a job, recessions, stock market declines, periods of low interest rates and lifestyle changes such as supporting a grown child or grandchild are some of the derailers that the survey listed. Other causes listed were making bad investments, taking Social Security before retirement age and disappointment over the worth of pension plans.

Remember, too, that the Retirement Derailers Survey polled those with substantial retirement savings compared to the majority of American savers. The Employee Benefit Research Institute found that 57 percent of Americans have less than $25,000 in household savings and investments (excluding their home and pension benefits). Only half of those polled could raise $2,000 in cash if there was an unexpected emergency. Lessons that many older respondents learned such as saving earlier in their lives, acquiring more knowledge about investment and spending less on vacations and extras seem to be falling on deaf ears

Given these well-known facts, one might have expected the rate of the nation's savings would increase but actually the opposite has occurred. The percentage of people reporting that they are saving more for retirement has declined from 75 percent in 2009 to 66 percent today. Have we given up on saving?

That's the conclusion of a recent report by the Deloitte Center for Financial Services. They found that 60 percent of pre-retirees are convinced that future health-care costs will eat up their savings no matter how much they stash away.  In addition, almost 40 percent believe that investment returns will never be high enough to afford even the simplest retirement no matter how much they save.

One wonders if these polls would have a different result if taken in a growing economy with full unemployment and a robust stock market. Although the economy and unemployment leave much to be desired, the stock market is at record highs. The average 401(K) retirement balance for U.S. workers also hit a record high in the first quarter, up 75 percent since March, 2009. Workers, 55 and older, did even better. Those pre-retirees have seen their average balance nearly double to $255,000 from $130,700 back in 2009.

But those are the exception, not the rule; there are millions of Americans who do not even have an IRA, let alone an employee-sponsored savings plan. If the majority of Americans think at all about retirement, they mistakenly assume that Social Security is the retirement plan of the nation. Unfortunately, it is at best a supplemental program to years of private savings of which most of us have none. If ever there was a Black Swan event lurking in the future surely this would be one.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.



     
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Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



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