The chart is a YTD look at the Financial Sector SPDR (XLF) and several European banks. The declines are truly eye popping.Anyone who is a market participant knows something of what has been going on with US and European financials. The level of knowledge/interest varies but everyone knows there is serious trouble.
This of course leaves many wondering what do about financial stocks in their portfolio, this question is asked dozens of times a day on stock market television and in print. There has been an unprecedented parade of writedowns, crises and questions of simple viability--and if not unprecedented then certainly the vast majority of us have not navigated these waters before.
So what is the answer? What should be done? This question is asked continually (repeated for emphasis) and there aren't too many answers. To steal a line from the very funny show Pardon The Interruption; a special Random Roger Investigation has revealed that the fundamentals for US and European banks stink. They stunk a year ago. The stunk two years ago. They stunk in 2008. They started deteriorating several years before then. Not only that, they are going to stink for several years to come, if not many years.
How do we know they will stink for a long time? Well one clue is the guessing about what all these sovereign defaults that might mean to these banks. How bad is it going to be is a pretty good tell that we are a long way from healthy.
As I have said all along there will be great trades to be had but they will not be good investments for quite a while. A great way to smooth out the ride for a diversified portfolio is figuring out what to avoid and (repeated from many past posts) figuring what to avoid is easier than figuring what to own but it also helps with figuring what to own. I cannot rule out good luck with having figured this out with financials but it has made my job much easier during the ongoing economic/financial event we are still enduring. Ditto, avoiding Japan.
On an unrelated note, a few weeks ago I mentioned that our refrigerator was slowly dying and that we would need a new one soon. Well the patient's condition deteriorated rapidly this weekend so Joellyn hit up the stores on Sunday, bought a new one and it came early Monday morning.
When we were in the tire kicking stage (before things got desperate) one of the sales people told my wife that refrigerators only last six or seven years now. While I take that with a huge grain of salt, it could be true. If it is true then it creates a serious, and relatively frequent, one-off expense. The nature of our doorway and ramp into our cabin is such that we cannot buy a refrigerator that exceeds 20 cubic feet (19.7 is the actual number) so we are not spending a lot (I don't think) on a relative basis. Including the undercoating, I mean extended warranty, it was $1540.
Consider a retired couple in the enviable position of a $5000 monthly lifestyle with $2000 coming from social security and $3000 coming from a $857,000 portfolio (that number assumes a 4.2% withdrawal rate not 4.0%). Obviously one-offs come along every now and then (just about every month as we've talked about before) but $1500 (or more) for a new refrigerator this month, $2000 next month on a transmission for the car, $1200 the month after for some sort of plumbing catastrophe, a $600 veterinary bill one month later and this seemingly enviable retirement situation looks a little shaky.
This stands to turn a lot of plans upside down but I don't think gets enough attention which is why I've written about it so often. There are many ways to address the issue. For some it might mean getting the planned withdrawal rate down to 3%, for others it might mean padding the monthly budget by some dollar figure, yet another answer for some will be continuing to work part time (hopefully something you love and would otherwise do for free), a combo of those three or something altogether different.
9 comments:
I have been having one off expenses for the last 30 years. I expect to have them in retirement. Nothing is different in that respect.
Those who could budget their money and one offs before retirement will be able to after retirement. Those who can not budget for one offs in retirement most likely never budgeted we before retirement.
Those seven year lifespan refrigerators made in China will only last three years once they move production to a union plant in Michigan. Of course, you may find some unused drugs in the condensor cage!
The FIRE sectors grew too large and were the primary driver of the credit crisis so it is natural the sectors should shrink and get sold down. The bigger problem as many are discovering is that large-scale deleveraging in a fiat money system means disintermediation and the tangled web of finance/credit we wove and/or allowed to be woven is connected in ways we hardly suspected (including the political).
In a more personal and practical vein, while shorting the very devil out of the FIRE sectors in '07/08 -- mainly mortgage REITS (remember New Century?) but also some banks and insurers -- I learned enough to become a (very selective) buyer of some financials and RE after the final '08 crash; it can be terrifying but the thing about a really major smash-up is that the good gets trashed with the bad and for those with some cash to spare that leads to some very good deals.
I have been setting up for a repeat performance recently.
PS: Never listen to sales or jack wagons. Average lifespan of an American-made refrigerator is 14 years; the small, dorm-size refrigerators only last 5-7 years on average (maybe the kid selling the frig spent too long in college). Buying an extended warranty, which is usually a third-party insurance policy (depends on the 3rd party, not the manufacturer), is rarely cost effective because manufacturing defects typically show up in the first few months and the standard 1-year (or longer) manufacturer warranty covers that fully. After that, decent maintenance does the trick.
I wouldn't totally write off the financial stocks at this level, as they could offer fantastic upside over the next few years. I know it sounds crazy, but one day the tide will turn.
I am still using a 1951 Gibson refrigerator. It is on it's second compressor, but other than that it works great. Old American metal.
$1540 sounds really high for a 20 cu ft refrigerator. Something very special? Consequences of country living? In central NJ, without actually going out and looking, I suspect you should be able to get a nice 26 cu ft stainless steel model for about that, maybe even a drawer freezer. Our plain white 16.5 cu ft model (a second refrigerator) was about $350.
Regarding the point of the story, that's life, and we must live with it. I never found these types of things to be a problem. But then I would consider most of the things mentioned to be maintenance items that I would fix myself.
Rich
EPA energy star requirements force manufacturers to make them with light weight components to meet the energy efficiency requirements. The light weight parts are over stressed and fail early. So they only last 7 years now.
EPA is to stupid to include the energy wasted in building new refrigerators. Same problem with air conditioners.
Anon 2:54, lifespan reduced to 7-years due to EPA regs? Sounds like BS, got a reference? Latest data from appliance survey's sure don't agree; e.g., http://tinyurl.com/68322nv
well it is a freezer on the bottom :-)
and many parents are having their
one offs move back home..
Post a Comment