Target Date Retirement Funds

Target date funds, also known as lifecycle funds, move money from riskier investments like stocks to more conservative alternatives like bonds as an investor approaches retirement.  Last year 7.3 million Americans held target date-funds, according to The Employee Benefit Research Institute's database of 24 million 401k participants.
Investors in some target-date lifestyle funds, supposedly targeted to be more conservative as one approaches retirement, are unaware that fund managers are chasing performance at exactly the wrong time.
The main reason that these funds are chasing riskier yield is because many charge a sales fee of up to 5%.  It is extremely difficult to make that 5% back without taking on more risk then should be necessary for someone entering into retirement.

American Funds 2010 Target Date Retirement Fund
Lost -27.5% in 2008, and the fund sports a 5.75% maximum sales charge.  Both the -27.5% portfolio loss and the sales charge is unheard of for someone entering into retirement.
These funds are doing one thing, making big commissions for the sales staff offering the plans. Target date funds may present greater risks then consumers have been aware of, says Morningstar's mutual-fund research group.  An investor receiving a semi-annual report from Fidelity's Freedom 2010 Fund, for example would need to read through to page 20 to find the allocation in it's high yield fixed-income funds.  The report does not break down the percentages of bonds rated below investment grade.

November Employment Report

The unemployment rate edged down to 10.0% in November from 10.2% in October. Non-Farm unemployment was essentially unchanged down just -11,000 the US Bureau of Labor Statistics reported today. In the prior three months payroll job losses have averaged -(135,000) a month.

In November employment fell in construction, manufacturing and information, while temporary help services and health care added jobs.

The table below gives us a better approximate of what the unemployment rate really feels like to the average Joe on the street. Last row U-6, lower right hand corner, 17.2%.

 



If you count all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off of the unemployment rolls, because their unemployment benefits ran out, you get a closer picture of what the unemployment rate really is. The number is in the last row labeled U-6, and that number is 17.2%.

Bottom Line: Although this report was a step in the right direction, we will have to see some follow through for the December and January unemployment situation reports. Also, would like to see more manufacturing related jobs instead of the lower paying service sector jobs that were added. Thank you for reading. 

US Dollar Index

Today the US Dollar Index fell to a yearly low. What are the implications?
The dollar rises and falls based on the strength of the US economy-and the confidence investors have in it's future. With other economies in Asia and South America growing more rapidly and the outlook for the US economy slowing, the dollar has been weakening.
What does the dollar decline mean for US consumers, and what happens if the dollar keeps sliding?
Americans buy more stuff from other countries then we sell to them. The weaker dollar raises the net cost for a typical Americans shopping basket. Paying more each year for the same basket of goods is the text book definition of inflation. So a weak dollar could push US inflation higher and create another tax on the already overburdened consumer.
A weak currency also comes with an important trade benefit. It makes everything based on that currency much cheaper in the global market place. That tends to help American
companies sell more of their products around the world, which boosts the US economy. That, in turn, should help create more jobs. In theory, all that expanded economic activity should help re-strengthen the dollar.  Thank you for reading.

Stocks and the US Dollar

click image to enlarge

The falling US Dollar against other currencies is what's driving the stock market higher. From the chart above, as the dollar losses value (red line) US stocks gain in value (blue line).

Partly driving this unusual trend is the dollar's newfound status as one of the cheapest currencies to borrow among the developed nations. Thanks to the Federal Reserve's moves to drive interest rates to near zero percent, the U.S. dollar carries a low yield, particularly compared to currencies in Brazil and other emerging markets, where rates are much higher.

With U.S. rates on hold, more investors overseas are engaging in bets that the dollar will decline further -- in other words, taking short positions. Or, they're borrowing in the currency to buy higher-yielding assets just to profit from the difference between them, in what's known as the carry trade.

Other strategies may involve using a stronger currency such as the Euro and funding investments in the US stock market. Another reason for a higher stock market.

Result: We get a higher stock market when the dollar continues to fall. We get a lower stock market when the carry trade unwinds from the dollar moving higher.

Expect plenty of volatility going forward especially if we get a carry trade unwinding. Traders will have to cover their positions if the dollar rallies. To fund their losses or cover their margin call they will have to sell assets such as US stocks. The main reason for the inverse correlation when we see the dollar trend up.

Given what's driving the stock market higher, should you still be invested in this market? Maybe, if risk management strategies are used properly, such as automated hard stops, trailing stops, or portfolio hedging strategies. If a carry trade unwinding does occur, we could see stocks head lower in a hurry.  Thank you for reading.

 

U.S. Dollar Weakness and the Markets

The dollar rises and falls based on the strength of our economy — and the confidence investors have in its future. With other economies in Asia and South America growing more rapidly and the outlook for the U.S economy slowing, the dollar has been weakening.
What does the dollar decline mean for U.S. consumers, and what happens if the dollar keeps sliding?
Americans buy more stuff from other countries than we sell to them, the weaker dollar raises the net cost for a typical American’s shopping basket. Paying more each year for the same basket of goods is the textbook definition of inflation. So a weak dollar could push U.S. inflation higher and become a tax on the already overburdened consumer.
A weak currency also comes with an important trade benefit. It makes everything based on that currency much cheaper in the global marketplace. That tends to help American companies sell more of their products around the world, which boosts the U.S. economy. That, in turn, should create more jobs. In theory, all that expanded economic activity should help re-strengthen the dollar.
A few dollar based charts have alerted me to what’s really driving the overall market and oil higher. Notice the inverse relationship that the dollar and the overall market have taken on.

The dollar and oil have an inverse relationship.

As economic recovery hopes grow, risk aversion trades will diminish, which could also lead to U.S. dollar weakness and higher inverse markets.  Thank you for reading.