Pick whatever economic villain you wish – stubbornly high unemployment, weak housing market, troubles in Europe, deficits, the oil spill, etc. Fear has returned to the stock market (globally), and the temporary shift to bonds has resulted in lower yields. As such, mortgage rates have hit 50-year lows, which may account for why I have heard of individuals refinancing their mortgages at unheard of rates (see headline).
I am aware that not everyone is in a position to refinance their mortgage. However, if you have an outstanding mortgage of over $100,000, a rate over 5.25%, and you don’t plan on moving in the next several years; then you may want to consider refinancing.
Consider the following refinance example:
Current Five years ago someone obtained a $200,000 30-year mortgage at 5.75%. The monthly payment (excluding taxes and insurance) is $1,167 (approximately $890 is interest) and an outstanding principal balance of $185,524.
Refinance The same individual is able to refinance and obtain a new 30-year mortgage at 4.25%. For this example assume closing costs of $2,200. The new mortgage balance is $187,724 ($185,524 + $2,200), and the new monthly payment (excluding taxes and insurance) $923 (approximately $665 is interest). This is savings of $225/month or approximately $2,700/year from lower interest payments. The savings would pay for your closing costs in approximately 10 months.
If you applied the extra savings to your mortgage payment, your home would be paid off in 19.90 years (i.e. 5.1 years or 61 months sooner). The resulting savings from not having to make 61 monthly payments of $1,167 is $71,187 or $3,577/year over the life of the new mortgage.
The following are the links you can use to do the same calculation for yourself or feel free to contact us and we can assist you.
http://finance.yahoo.com/calculator/family-home/hom03
http://finance.yahoo.com/calculator/loans/det02
IIA nor any of its staff are mortgage professionals; however, we do believe that some of you may benefit from this analysis.
Losing faith
Former Fed Reserve Chairman Alan Greenspan stated on CNBC today that the recent stock market decline is “typical” of a recovery and international instability is more a contributor to the decline than problems here at home. Mr. Greenspan believes that this is a “typical” pause in an economic recovery. That being said, in past recoveries small businesses do most of the hiring and start to pull the economy out of a recession. Currently though, small businesses are having a hard time getting loans because smaller banks aren’t lending since they are loaded up with struggling commercial loans.
Historically, the average American and investment professional are overall optimistic. Along this line, capitalists and optimists, not pessimists, created the iPhone, air conditioning, MRI machines, jet airliners, and many other items we take for granted today. Even the Internet, which most businesses and many of us can’t live without, came to be the incredible tool it is today from private investment. If not for healthy competition, we would not have these luxuries today.
Nonetheless, there has been a constant drum beat over the last year or two that capitalism and businesses are bad and greedy. On the other hand, there is an unprecedented dim view of politicians in both parties, and the policies they are promoting. Let’s be honest, capitalism is not inherently evil, but I will admit there are some evil or misguided capitalists that played a part in our economic problems. However, that statement does not carry the same weight when applied to the troubles in Europe. That is a case where lavish governmental programs and benefits far exceeded the respective citizenry’s ability to pay for them. As these European leaders have discovered, you cannot government-spend your way to prosperity. Seriously, they are rioting in the streets because the retirement age is being raised from 60 to 62.
Here in the U.S. I hear various leaders make speeches or statements that I know are patently not true or an incredible stretch, at the very least. Many of you have voiced the same concern – a loss of faith. Recently, foreign leaders from the G-20 conference have chastised U.S. leadership for prodding them to maintain or even increase “stimulus” spending. These foreign leaders realize just like you and I, you can’t spend your way out of a financial problem. In the same vein, businesses large and small realize that the current economic landscape was improving, but potentially higher taxes and regulations are affecting their outlook.
I can’t say it enough – the stock market responds negatively to uncertainty. This is because uncertainty causes businesses to change their practices. Instead of expanding and hiring more workers and going after market share, many businesses, large and small pull in their horns (i.e. cutback). Many entrepreneurs, private equity, institutional, and regular investors react similarly. If they see an extremely uncertain, or in some cases hostile, business environment, (which some have voiced in the Wall Street Journal and other publications and media outlets) then they decide they don’t want to play by what they consider unfair or onerous rules and take their ball (i.e. capital / money) and go elsewhere until they see better conditions. Wall Street is voicing its displeasure on how our economy is being handled, and at some point, those in charge of policy will be forced to listen or voted out.
I hope my comments do not offend anyone; however, I would rather say what I believe needs to be said versus being politically correct. The U.S. economy and stock market should be seeing continued improvement, with temporary setbacks along the way. Yet, if you want to know why there is so much pessimism about the economy, the stock market and portfolio values are down, then it is my job to explain the macro (big picture) events taking place that have a direct impact on your investments and lifestyles.
The average American, along with investors and business leaders, is frustrated and that frustration will not be alleviated until we see some straight-talk and true leadership from our elected leaders (from all parties). The current negative malaise over the economy and stock market is resulting in good, long-term fund managers showing negative, short-term returns. Nevertheless, I trust anyone of the mutual fund managers we’re currently using for your and my personal accounts to do what is in our best interest than the vast, vast majority of our current political leaders (in both parties) and their policies. I believe that this market downturn is not permanent and will result in citizens getting increasingly upset, which at some point will result in U.S. policy being altered for the better via modest tax increases, more aggressive spending cuts, fiscal prudence and growth-oriented policies. Unfortunately, these changes won’t occur in the next 30, 60 or 90 days, but in the months and in the years ahead.
In the meantime, we have choices to make. We can decide to just give up and throw in the towel, or stand by and have faith in the investment strategies we’ve implemented. Remember, a fund’s successful, long-term track record is not reflected in its daily share price, nor does it represent the fund manager’s underlying strategies or tactical moves in the midst of a downturns (i.e., loading up on bargain share prices). Patience or panic will prevail; it just depends on which you choose.
Bonds Versus Stocks – What Do The Experts Say?
Bill Gross of Pimco Funds Group is considered the “bond king” by his peers based upon his stellar, long-term track record. Ironically, the king recently announced in an InvestmentNews June 27, 2010 article that he and others fund managers in his firm believe stocks are a better long-term investment compared to bonds. Why is this important statement? Because when it comes to bond managers, Mr. Gross is the equivalent of Warren Buffett.
Mr. Gross believes the decades long bond rally will come to an end as nations sell record amounts of debt to fund their deficits, spurring a return of inflation and rising interest rates. He believes at some point U.S. Treasury returns will fall, and investors will have to look elsewhere and take more risk with high-yield bonds, equities and eventually real estate.
Mr. Gross stated, “If you’re talking about the next 10, 15, 20 years, there’s certainly the recognition that assets will grow faster in those categories,” he said. “Over the long term, stocks return more than bonds when appropriately priced at the beginning of an investment period.”
When factoring in these comments, which do you believe will offer better long-term results for your money?
- Residential mortgage securities backed by the U.S. government currently yielding around 4.0% to 4.25% as noted above. Knowing that interest rates will go up at some point.
- Or, a diversified investment mix of bonds (government, corporate and convertible), stocks (U.S., international, dividend paying and preferred), real estate, precious metals, commodities, etc.
When the bond/investment experts at Pimco Fund Group begin offering stock funds and inform their clients that stocks may be a better performing and income-producing option for their money in the years ahead, then it is important to listen. We have to break out of the mindset that bonds = safety and income versus stocks = risk and loss of money.
We continue to monitor all holdings and client accounts and will make any changes we deem necessary. If you are concerned, want an update on your portfolio or have questions, please don’t hesitate to call and Sally will schedule a face-to-face or online meeting.
Deserved recognition
It was refreshing to read this week’s InvestmentNews and see investment professionals and fund managers from five of our clients’ top holdings being recognized for their accomplishments.
Jean-Marie Eveillard received InvestmentNew’s Lifetime Achievement Award for his excellent track record at First Eagle Funds. Mr. Eveillard is senior vice president of First Eagle Investment Management, but prior to that he was the lead manager on First Eagle Overseas (SGOIX, SGOVX) and First Eagle Global (SGIIX, SGENX).
Investment advisors voted the following fund managers as the most influential based on the following criteria: knowledge of their industry sector; a clearly articulated strategy for managing assets that they’ve adhered to over time; and consistent outperformance of their peers.
Bruce Berkowitz, manager of the Fairholme Fund (FAIRX)
Bill Gross of Pimco, manager of the Pimco Total Return Fund (PTTRX, PTTDX)
Michael Hasenstab, manager of the Templeton Global Bond Fund (TGBAX, TPINX)
Quotes
“No man can think clearly when his fists are clenched.”
George Jean Nathan, editor and critic
“Instead of waiting for your ship to come in, grab two oars and row out to it.”
Vance Harver, minister
“The only way to deal with fear is to confront it directly – to stop and look at it. Then you can make it go away. Otherwise, you spend your life running from it, and fears always runs at least as fast as you.”
Carl Hammerschlag, M.D., author and speaker
Happy 4th of July Weekend!
Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.
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