The Mutual Fund Money Market Fund Dilemma

$3.5 Trillion dollars earning almost zero.

In my comparison to the 1981 economy I noted how savers were paid to save not spend. The dilemma for today's savers is what to do with over $3.5 trillion dollars earning almost zero sitting inside Money Market Mutual Funds. In 1981 you could have locked in a 5 year CD earning 12%. Today you would be lucky to get 3.4%. This is just another reason contributing to the 55% rise (with only small temporary pull backs) in the American stock market since its march lows. Now that the major 10% pull back you were waiting for never came what do you do? Now you feel it's just too risky moving into the stocks that have risen the most.

What to do now is the dilemma. Here are some possible options cautious conservative investors can consider. These options were researched by Glenn Rogers a longtime contributor for BuildingWealth.ca and Seekingalpha.com.
Dividend ETFs

There are some relatively low-risk ETFs where you could park some money while we see how all this plays out. For example, take a look at these three funds, all of which are designed to track baskets of U.S. companies that offer respectable dividends.

The three are the iShares Dow Jones Select Dividend Index (NYSE: DVY), the Vanguard Dividend Appreciation ETF (NYSE: VIG), and the Power Shares High Yield Dividend and Equity Achievers (NYSE: PEY). Although all three of these ETFs have the same general goal, it's somewhat surprising to find that their performance has varied greatly. At the time of writing, DVY was down 12% year-to-date, VIG was flat, and PEY was down almost 20%. So, interestingly, these issues have not participated in the market rally so far, which may make them have much less down side risk if a 10% market correction does come in October.

Take a look at the holdings of these three baskets you'll notice some fairly dramatic differences. PEY is made up of the 50 highest yielding companies with at least 10 years of consecutive dividend increases. DVY is composed of companies that have provided relatively high dividend yields on a consistent basis over time while VIG looks a lot like the Dow Jones 30 Industrials to me.

Currently, PEY has a trailing 12-month yield of 5.3%, based on last Friday's closing price of $7.45. However, I should note that the monthly payments have dropped off significantly this year and I would expect the yield will be lower over the next 12 months. This ETF has the most diverse collection of holdings among the three, split between industrials, materials, utilities, telecommunications, and a few healthcare, media, and consumer goods stocks. About 40% of the fund is in the financial services sector. The portfolio emphasis is weighted heavily towards small to mid-cap companies, which explains why this fund fared worse than the other two in the market meltdown. However, it also appears to have more upside potential if the rally continues. The Management Expense Ratio (MER) is 0.59%.

The iShares ETF (DVY) has 101 positions and is a mix of large, medium, and smaller companies. Some names in the portfolio are immediately recognizable such as Kimberly-Clark, Chevron, and Dow Chemical. Others will only be known to dedicated stock-watchers, Watsco Inc., PPG Industries, and Scana Corp. among them. Distributions are paid quarterly and the last two have been about 39c a share (figures in U.S. currency). The trailing 12-month payout totalled $1.79 which would translate into a yield of 4.4% based on Friday's closing price of $40.78. But based on the payouts for the last two quarters, I suggest it is more realistic to expect distributions in the $1.60 range over the next year for a projected yield of 3.9%. The MER is 0.4%.

The Vanguard ETF (VIG) is the most conservative play. It is designed to track the Dividend Achievers Select Index, which is administered exclusively for Vanguard by Mergent, Inc. There are 186 securities in the portfolio with a focus on large-cap stocks. Top holdings include Wells Fargo, IBM, Coca-Cola, PepsiCo, Wal-Mart, and Johnson & Johnson. As I said, it looks a lot like the Dow 30 Industrials, only bigger. It pays quarterly distributions which have recently been running at about 23c a unit. The trailing 12-month payout is 99.5c for a yield of 2.26% based on Friday's closing price of $43.99. My yield projection for the next year is around 2%. The MER is a very low 0.24%.

Bank of America preferreds

If you are looking for higher yields and are prepared to take more risk, consider the preferred shares of Bank of America. They were downgraded to junk status last winter amid fears that BoA might not survive, however Moody's announced last month that it is reviewing their B3 rating with a view to a possible upgrade now that the company is profitable again.

The Series J issue, which trades on the NYSE under the symbol BAC.PR.J. This is a fixed-rate, non-cumulative preferred that pays a 7.25% dividend based on its issue price of $25. That works out to $1.81 a year so based on Friday's closing price of $21.50 the yield is 8.4%.

These preferreds traded for as little as $4.02 last February at the height of the credit crunch and the U.S. banking crisis. Obviously, they have recovered strongly since then as confidence in the banking system was restored by the massive U.S. government bail-out. The high yield indicates there is still some concern about BoA's future, but at this stage I think the company is recovering well and that the dividend is safe. There is also some capital gains potential here. The preferreds are not callable until Nov. 1, 2012.

Naturally holding only one bank preferred stock is more risky than a basket of dividend paying stocks so this is for more aggressive investors looking for more yield. However, note that they are very thinly traded so enter a limit order.

PowerShares Financial Preferred Portfolio

If you prefer more diversification, consider the PowerShares Financial Preferred Portfolio (NYSE: PGF) currently trading at $16. It is based on the Wachovia Hybrid & Preferred Securities Financial Index, which tracks the performance of about 30 U.S. listed preferred shares issued by financial institutions. At least 90% of the assets are normally invested in these securities.

As you are aware, the U.S. financial sector has gone through an extremely rough period and it is not clear that the full extent of the damage is known even yet. As a result, preferreds issued by the banks, insurers, etc. have been beaten down in price and are offering unusually high yields. The situation is not dissimilar to the one we saw in Canada late last year, except it is more extreme in the U.S.

This has resulted in preferred share yields that have never been seen before and may never be seen again. Currently, this ETF is paying monthly distributions of 11c to 12c a unit. Projecting this forward for 12 months, using the 11c figure, we could be looking at a cash yield of 8.25% based on last Friday's closing price of $16. But a word of caution: the distributions are not eligible for the Canadian dividend tax credit and will be subject to a 15% withholding tax if paid into a non-registered account in Canada. (The same holds for the BoA preferreds.)

PGF units dropped all the way to $5.16 but have since rallied strongly. However, they are still well below their 2006 issue price of $25 and I believe there is upside potential here in addition to the handsome payout. Top holdings include preferreds from Bank of America, Wells Fargo, Barclays, and JPMorgan Chase. About 69% of the assets are rated BBB or better by Standard & Poor's. The MER is 0.74%. This is my top pick for this month and we are adding it to the IWB Recommended List.

All the above are fairly defensive plays given the uncertain market we are likely to have over the next few weeks. Generally, I think the trend will continue higher after a correction, but it is wise to protect yourself on the downside, play a little defense, and add some more yield your portfolio. So hold your breath for the next few weeks. It's going to be an interesting October.

Here is are the highest paying FDIC insured CDs

7 dividend stocks you can count on

The 80's vs 2009 Economy

Did you think a 6.5% mortgage rate was high? How would you like a 1981 18.5% mortgage rate?

You can bet those 1981 Paul Volcker (Treasury Secretary) induced interest rates prevented the housing bubble created by the 2001-2005 monetary policy.

This chart is for all those not old enough to experience truly high interest rates and those who forgot how we earned 9-12% risk free in our Bank CD's back in 1981. Back then it paid to take no investment risk.

Today there is around $3.5 trillion dollars inside mutual fund MMFs earning just a speck more than zero (1/4%). Today is the inverse of 1981. The savers are subsidizing consumer spending, business borrowing and the big federal government bail-outs for the financial industry.

So, if you happen to be in this boat, go find yourself a good dividend paying mutual fund or portfolio of high quality dividend paying stocks in different industries. Stocks like Lilly (LLY) or Verizon (VZ) which both pay 6% yields and give you the possibility of appreciation. Neither of these two stocks have not participated in the markets 55% because they were considered defensive stocks by money managers.

Here are some recent articles on dividend paying stocks worth reading.

Dividend stocks for low excitement, high returns

The World's Best Dividend Stocks

Seeking Alpha dividend stock articles

disclosure: On 9/23/09 I invested in Lilly and Verizon.

Eleven Reasons These Charts Are Worthless

Recently an individual (who unfortunately liquidated most of his stock holdings close to the market lows) ask me to explain how it was possible for the Stock Market to go up 55% when he had these two charts as proof (in his mind) it should be back to 1945 levels with earnings so low and P/E's at such an outrageous levels.

He showed me a "Blogger" he followed had also advised selling everything after posting these charts and his commentary. The "Blogger" saw these (among other information) as clear and present doom the market would fall back to the March lows by August. Yes, last last month we were to have a 3,000 point drop. Why didn't it happen he's wondering. Perhaps, he's more upset about the reality he missed the explosion up.

After I ask what formal investment education and experience the "Blogger" had he said he had no idea only that he like his postings (more like he like his rants). It's best I skip my response to that response and get right down to and example of the valued "Blogger" words of wisdom below:

"Forget hoping for the rally to continue and forget "buy and hold" for the long term. Without earnings to support them over the next year, stocks are toast. And where are the earnings going to come from while banks are failing in increasing numbers (yes, it's getting worse not better), unemployment is rising (no, it's not stabilizing), and the residential and commercial real estate crash continue unabated (no, they're not stabilizing either)? If a business is not part of the fascist keiretsu business model that has evolved in this country, that business is likely to be in trouble.
.....
It's official: Gold Versus Paper is calling the top in the stock market (I think it was yesterday and today confirmed it).....next comes a re-test of the March lows before mid-August (i.e. at least a 25-30% drop in less than 12 weeks). General stocks, corporate bonds and commodities are going to get shellacked.....Now I am not saying the March lows will hold in the general stock markets - there's a good chance we go right through them. But this is a minimum downside target for the major indices....This bear is hungry for some bull meat. GRRRRRrrrrrrrr!"

Now aside from the GRRRRrrrrr ,which I thought was cute, I hope no one gets hurt by this type of financial entertainment.

Now, to be fair, I've heard many non-financial professionals with excellent educational backgrounds and desire to be viewd as a "guru" with thousands of followers, give similar commentary. Commentary on why these charts are proof the market is not rational and must fall to 1945 levels now. Over the last three months they keep modifying their perdictions to: "any day now".

You can bet, if I didn't know what I'll share with you these charts would have caused me to not have invested any money into the market during November Q4 2008 and February Q1 2009 too. But ask yourself why no Goldman Sachs type analyst hasn't published the same warning using these charts? Perhaps they can not afford www.chartoftheday.com charts? Oh, there free. Well, maybe its a world wide conspiracy? No, then lets get into more plausible explanations.

I've learned if the market is not responding to my logic maybe there is something I don't know.I'll give you eleven detailed reasons why the these charts have caused so many people to be wrong. Wrong because they do not understand the accounting of the numbers and wrong because they do not understand how interest rates and inflation and foresight not hindsight impact investment decisions.





1. The way S&P computes its PE is open to honest debate. Famous Finance Prof. Siegel (later joined by another Famous Finance Prof. Shiller) brought this up in February, creating a debate.

2. The often-quoted "earnings of the S&P 500" is a highly massaged number. There is no GAAP or annual audit process by an independent outside auditor. Not that an Accountant would understand Voodoo Math. It is not the actual total earnings (which are available on a separate page in the S&P spreadsheet, labeled "Issue Level Data"). S&P has to massage the numbers so that, when they replace a stock in the index, it doesn't create a discontinuity in the index's value. You know when comparing an apple to an orange you fell better if the orange is painted red.

3. S&P has replaced about 40 companies in the last 12 months. Most of the companies responsible for the biggest earnings losses have been removed from the index. e.g. GM, Fannie Mae, AIG. So when you replace companies with no earnings with other companies with earnings the smart money knows the future S&P EPS will be better than those who only follow trailing earnings expect. No fair you say...the accountants principle of consistency is broken. Your comparing an apple to an orange. L.O.L. You need to understand Wall Street is a jungle and without a guide you may get eaten alive.

4. Therefore, many of the companies presently in the index did not contribute to the TTM "earnings" that S&P uses in computing its own current PE. They do not go back and restate past earnings to reflect later changes in the index's companies. Once they close out a quarter's "earnings," that number is locked in forever. So if you getting the picture comparisons to the past are difficult at best and at worst worthless.

5. Wall Street analyst know that the current P/E in this chart is grossly distorted by the Q4 2008 banks that had to take massive write-offs against toxic loans. But two points: 1) many of those companies are no longer in the index. and 2) If you're smart enough to understand accounting, finance and math you know the financial sector was the largest sector in the index and at the market peak FAS 157 require banks use market-to-market models for mortgage valuations.

6. FAS 157s impact makes comparisons to periods prior to 2007 almost impossible without a team of CPAs and MBAs restating S&P EPS and P/Es back to 1938 when it was banded (you can guess why). Much has been debated about the role mark-to-market accounting rules played in driving down the values of financial services companies, including many large life insurers. Mark-to-market accounting was prohibited in 1938, but the Financial Accounting Standards Board reinstated and strengthened it through actions in 1993 and in 2007. Forbes magazine publisher Steve Forbes has been particularly outspoken about the 2007 action. Some analysts, even insiders, say banks like Citigroup and Lehman Brothers marked down some of their C.D.O. exposure by more than 50 percent when the underlying mortgages wrapped inside the C.D.O.’s may have only fallen 15 percent. Bob Traficanti, head of accounting policy and deputy comptroller at Citigroup, said at a conference last month that the bank had “securities with little or no credit deterioration, and we’re being forced to mark these down to values that we think are unrealistically low. Who's right or wrong is not the point. The point is how it impacts the math going forward and makes comparisons to the past periods to difficult.

7. It is a philosophical or mathematical question what the PE of an index should be, anyway. Should it be the median PE of all companies in the index? The arithmetic average? Should it be weighted in the same way that S&P weights the companies in computing the index itself? Should it be equal-weighted? All of these could have arguments made for them.

8. In computing the P/E, S&P substitutes the value of the index for "P," price. So you have a derivative number, the index value, standing in for P, and another derivative number, the massaged "earnings," standing in for E, in the equation P/E. You see the simple becomes complex enough to require a math genius to figure if it has an value for comparing one period to another.

9. The P/E is based on TTM "earnings" and current "price." It is backwards-looking. Wall Street makes investment decisions for the future based upon forward-looking EPS estimates. When someone says the P/E is not sustainable, or has not dropped to the typical lows of 8 or 10 seen in the 70's and early 80's recessions, that's an uninformed statement (to be polite). They also forget the financial sector earnings

10. Using the logic the chart implies with its lines you should do what? Buy when market trailing P/Es average 7 or 10 ? Can you name me a time in the last 20 years when P/Es on the S&P averaged 7? No. 10? No. So, this person would be waiting 20 years for something that's not going to happen for a reason they do not understand. The problem with these charts is they don't come with a team of financial analyst to figure this out for you. www.chartoftheday.com is in the daily cranking out of charts and Internet hits not making or losing money on stock market investments business. And if you had used a P/E cut off of say 20 you would have sold Apple Shares at $25 instead of $150 or Google at $100 instead of $500.

11. Last one and most important point, if it were not for the preceding ten points: You can't compare a $1 of earnings in a 1975-82 environment of 10-15% annual inflation and 10-20% Paul Volcker induced prime rates to a $1 of earnings in an under 5% inflation environment of the 90's or under 1.5% with a discount rate of almost ZERO in 2009.

Now you know why your wait for average P/Es on the S&P 500 to hit 7 to 10 like they did in the 70's and 80's caused you to just miss the greatest Bull Market or Bear Market rally of our life time.

Three Point Bottom Line:

1. A mediocre investment plan consistently executed in good times and bad is worth more to you over 20 years than any chart you'll every use to make investment decisions. Combine this with a strategic asset allocation plan and semi-annual reviews and focus on your profession, not the market. People do not plan to fail they fail to plan.

2. Time in the market is better than timing the market if you lack experience and training.

3. Research constantly shows just a few months of the year account for the majority of the gains. Now I've never know a person smart enough to consistently be right on that prediction. GRRRRRrrrrrrrr will come to that conclusion too, in about 20 years.