Month: December 2013

By MoneyMorning.com.au

What a day for stocks.

What a day for financial stocks.

The Aussie blue-chip index, the S&P/ASX 200, fell 1.4% yesterday.

The S&P/ASX 200 Financials index did even worse. It fell 2%.

Australia’s biggest company, Commonwealth Bank of Australia [ASX: CBA], slid to $75.50. That’s its lowest level since late October.

Not for the first time (nor probably the last) this year it leads us to ask the question: Is this a warning to get out of stocks now or simply another chance to buy on a short term pullback?

We’ll give you our take below…

As you should know by now, the big reason for rising stock prices in 2012 and 2013 was low interest rates.

The big dividend paying stocks benefited the most from this surge.

As the interest rate on bank savings accounts and bonds fell, investors (especially those who derive income from their savings) started looking for investments with a bigger income stream.

Where else should investors look for an income-boosting quick fix than the stock market?

No Chance the RBA Raises Interest Rates

It’s fair to say the dividend rally ran out of puff in March this year when stocks fell. They rallied again into May before running out of steam again. The latest move started in June as stocks again took off, this time hitting a brick wall in October.

So, what can we expect to happen next?

Is this just the latest round in the stock sell-off and rally cycle? Or is it a sign that stocks really are overbought and the market is heading for a crash?

Our position on this is clear: interest rates will not rise in the medium term. Therefore investors will demand assets that pay a higher income than typical fixed or variable interest cash investments.

You only have to look at this week’s statement from the Reserve Bank of Australia (RBA):

‘The Australian dollar, while below its level earlier in the year, is still uncomfortably high. A lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy.‘

There’s not a snowball’s chance in heck of the RBA raising interest rates. That will be true for as long as the Aussie dollar is above US$0.80. That means investors will keep piling into stocks as long as dividend yields stay attractive.

We know, the folks who say that interest rates are bound to rise will call us bonkers. They’ll say that central banks are holding interest rates artificially low and that this can’t last forever.

And that’s true. It can’t last forever. But that doesn’t mean it won’t last for a long time…potentially a very long time.

This is why we see the current fall in stock prices as a great chance to buy stocks. The thing investors need to remember is that the days of 8% or 9% dividend yields are behind them. They also need to remember that the days of 6% or 7% interest rates on savings accounts are behind them too.

So when you come across stocks paying dividend yields in the range of 4% to 6% you’d be foolish to ignore them.

Take Australia and New Zealand Banking Group [ASX: ANZ]. You may not like the banks (we don’t) and you may not like how they’ve benefited from banker bailouts and government support, but based on the current price ANZ is trading on a trailing dividend yield of 5.2%.

If you take into account franking credits and depending on your marginal tax rate, that could turn into a 7% dividend yield. With Australian 15-year government bonds currently paying a yield of 4.8% and 2-year government bonds paying 2.75%, it’s hard to imagine big investors ignoring the big yielding Aussie stocks.

The Greater Risk is NOT Being in the Market

However, it’s a mistake to think the only place you can get yield is in the big stocks.

We’ve focused on the dividend and growth opportunities among the smaller companies on the ASX. In fact, around one-third of the stocks on the Australian Small-Cap Investigator buy list pay a dividend.

And many of these pay better-than-cash dividends too. But that’s not the only benefit. With small-cap dividend plays you also get the potential for stock growth and dividend growth – in many cases these growth rates are better than anything you can get from blue-chip stocks.

Now, this isn’t to say we’re blind to the bigger issues facing the Aussie economy. We get it. But we also ‘get’ what most other people don’t. The market is in a constant panic that the US Federal Reserve will begin cutting back on its bond buying program.

We’ll tell you right now that like the RBA, the Fed won’t do anything that will lead to higher interest rates. At some point others in the market will figure this out. And when they do, like before they’ll head straight back to stocks…and that means higher stock prices.

Until that happens you’ll continue to see volatile markets and stock prices falling during the lead up to Fed meetings (the next Fed meeting is on 17-18 December).

So our take is this: whatever the negative view towards stocks, the stock market is still hands down the best, easiest and most cost-effective way for ordinary investors to build wealth.

This year the market has only given investors two big opportunities to buy stocks before the market has rallied. If our reading of the market is right, this current sell-off could be the third – and last – opportunity this year to buy dividend and growth stocks before prices begin another move higher.

It’s a risk, but in our view settling for lower yields elsewhere is a much greater risk to your long-term wealth building plans than the risk of investing in stocks.

Cheers,
Kris+

Special Report: The ‘Wonder Weld’ That Could Triple Your Money

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By MoneyMorning.com.au

By MoneyMorning.com.au

If the sweeping economic reforms planned by Chinese leaders during the Third Plenum can be our guide, it looks to be a promising decade for global investors. Details released recently confirmed President Xi Jinping’s concerted efforts to move China toward a market-based economy that mirrors the West.

The plan’s comprehensive nature and the level of clarity evidently pleased investors, as many Chinese stocks experienced a pop. We’re pleased US Global Investors’ China Region Fund (USCOX) also participated:

Click to enlarge

We believe the positive effect on the equity markets will not be short-lived or limited. A component of U.S. Global’s investment process is to closely follow government policies because they tend to be precursors to change.
Xi’s policies, if successfully implemented, ‘will undoubtedly have profound long-term implications for the Chinese economy and society at large,‘ spanning economic, political, cultural, social and environmental issues, says BCA.

Some say the sweeping reforms will have an impact similar to the momentous changes following the Third Plenary Session in 1978, when Deng Xiaoping instilled the concept of free markets and ushered in a new economic era.

‘Covering 15 major areas and 60 key points, the [reform] document is specific, substantial, comprehensive and actionable,‘ says Jefferies. The changes are so significant, it ‘rivals that of 1978, when Deng Xiaoping declared the opening of China,‘ says the research firm.

I asked Michael Ding, CFA, portfolio manager of the China Region Fund, to share his thoughts regarding these sweeping changes and the potential effects on the markets.
He has fascinating insight on this subject, as Michael grew up in rural Dalian and is of the same generation as the nation’s leaders. This age group was raised in the era of severe government controls, such as food rations; still fresh in their leaders’ minds was the stagnation of the country.

Improving market inefficiencies is one significant and positive effect, says Michael. Currently, government interventions prevent companies from setting competitive prices. Releasing control should allow the market to decide what prices should be and where labour and capital should be allocated.

BCA says that three areas likely to see improvements in pricing mechanisms include money, resources and land. Changing the pricing mechanism of money influences the exchange rate and interest rates.
The research firm says that ‘the proposed reforms involve freer cross-border capital flows, improved convertibility of the RMB and eventually a market-driven floating exchange rate system.‘ In addition, more liberal interest rates should allow markets to price capital based on risk and supply and demand, says BCA.

When it comes to resources, the government plans to reduce subsidies and ‘administrative meddling‘ in several sectors, including water, petroleum, natural gas, electricity, transportation and telecommunications, which should allow for more competition, according to BCA.
The reforms affecting the pricing mechanism of land will likely allow for the equal treatment of rural and urban lands. Whereas the government formerly seized rural land, people who live in rural areas in the future could ‘monetize the rising value of rural residential land‘ and ease supply shortages in major cities, says BCA.

Included in the considerable social changes are relaxing the one-child policy and reforming the hukou system, which is China’s residency status system.

Now, couples will be allowed to have two children if one parent is an only child. This change wasn’t a surprise to us, as it follows the rise we’ve seen in birth rates in recent years. As you can see below, the number of annual births in China has been increasing since 2011. In many cases, with rising incomes, couples can afford to pay the required fine.

Click to enlarge

Changing the one-child policy could be the beginning of a rising demographic cycle in China, which bodes well for a wide range of companies. The country may see an increase in demand for residential housing and social housing, income protection products, and child-targeted products, such as infant formula.

The change may also boost demand for larger vehicles, such as sport-utility vehicles, and internet companies could benefit from increased users in the years ahead, according to Citi Research.

Demand on resources will be great, as each person requires a huge supply of resources throughout his or her lifetime.

Consider that in the US, over the course of a lifetime, each person needs 72,556 gallons of petroleum, 6.63 million cubic feet of natural gas, 978 pounds of copper, and 27,416 pounds of iron ore, according to the Minerals Education Coalition. Even though China currently uses fewer resources per capita compared to developed countries, the nation is quickly catching up to developed world levels.

The decision to reform the hukou is also equally important for resource investors. The plan will gradually allow rural migrants to become official city residents.
While it may be expensive, ‘the Party has no choice but to provide migrant workers and their families with equal access to education, health care and other urban social services,‘ writes Andy Rothman from CLSA.

We’ve discussed the incredible implications for China. In a previous commentary, I wrote:

‘If the government reforms the hukou, it is estimated that 600 million people might move to the cities over the next 20 years. This includes 300 million migrants becoming ‘new urban residents’ and 300 million rural residents moving to urban areas by 2030, says Citi Research. According to its data, ‘urbanization could bring another 150 million surplus rural laborers to the cities.’‘

With more workers living in cities, property sales in China’s 600 third-tier cities could significantly benefit from hukou reform, as about 100 million migrant workers currently reside in these cities.

Click to enlarge

The Power Couple of the East

Americans recently reflected on the 50th Anniversary of the assassination of John F. Kennedy. His death was devastating, as it essentially ended the Camelot reign full of potential and promise for the country’s future.

Today, Chinese President Xi Jinping and First Lady Peng Liyuan are ushering in a Camelot era for China. Similar to the Kennedys, the couple symbolizes the economic and ever-advancing strength of the country.

Xi, a princeling, is the son of Xi Zhongxun, who was among the first generation of Chinese leadership. His father’s claim to fame was in creating a special economic zone in Shenzhen, transforming the area from a small village to one of the fastest-growing cities in the world and one of the busiest container ports in China.

First Lady Peng is very familiar with the limelight, as she was once more famous than her husband, singing patriotic songs in the People’s Liberation Army. Peng is very different from previous Chinese first ladies, who were typically invisible to the rest of the world.

As the rest of the world gets to know her, the first lady will likely broaden the appeal of China.

Looking ahead, Xi, together with the new leaders, appears to have the ‘confidence and determination to lead the nation,‘ according to Jefferies. We look forward to watching the new leaders put their reforms in place, and agree with Jefferies when they suggest that China could be ‘on the cusp of a massive multiyear bull run.‘

Frank Holmes
CEO and Chief Investment Officer, U.S. Global Investors

[U.S. Global Investors, Inc. is an investment management firm specializing in gold, natural resources, emerging markets and global infrastructure opportunities around the world.]

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By MoneyMorning.com.au

By Moe Zulfiqar for Daily Gains Letter

A few days back, I got a call from my aunt, whom I haven’t spoken to in a while. It was shocking to me—no, not her calling, but rather what she asked me. Before I go into any detail, here’s some background information: as an investor, my aunt has a little experience with the stock market, but gave up because it didn’t suit her low risk tolerance.

“I have been saving money for some time now; it’s been sitting in my bank account and earning next to nothing,” she said to me. She heard on the news that the stock market in the U.S. is going higher and that the S&P 500 has reached its all-time high—she wanted to know what I thought she should buy. “I think it’s about time I take some risk,” she added.

My aunt hasn’t bought stocks in a while; in fact, she has missed out on all the gains made since the stock markets bottomed in 2009.

What does this tell me?

I find this a little scary, as should anyone who has been following the stock markets for a while. What my aunt said makes me skeptical; it shows that the notion of missing out is emerging. In the past, we have seen the stock markets reach their all-time highs, which gave investors the feeling they were missing out on gains. They bought, the key stock indices increased a little, and then the sell-off occurred; they got caught in it and lost a significant amount of their portfolio. Historically speaking, there are many examples of this.

As this is happening, I see the fundamentals deteriorating.

To assess the stock market’s health, one factor I look at is the “surprise rate” of corporate earnings—namely, how much better profits are compared to analysts’ estimates. The higher the surprise rate, the better the move in the stock market is going to be.

Unfortunately, for the past few quarters, the surprise rate of corporate earnings has not been impressive at all. For example, in the third quarter of this year, the earnings surprise rate for S&P 500 companies was 1.7%. Over the last four years, this rate averages out to be 6.5%. If the corporate earnings surprise rate of the S&P 500 companies in the fourth quarter remains the same, then it would be the lowest since the fourth quarter of 2008. (Source: “Earnings Insight,” FactSet web site, November 29, 2013.)

Other factors, such as the margin debt (i.e., stocks purchased with borrowed money), continue to prevail. For example, the margin debt on the New York Stock Exchange (NYSE) stands at $412 billion. This is the highest it has ever been. When the margin debt reached its highest in the past, we saw sell-offs on the stock market. (Source: “Securities market credit ($ in mils.) > 2010 – current,” NYSE Technologies Market Data web site, last accessed December 3, 2013.)

As all this happens, I continue to watch the stock market with skepticism. For now, the irrationality may continue and key stock indices may edge higher, but if the fundamentals don’t improve, reality will start to hit, which could cause a deep market sell-off. For now, investors like my aunt can safely profit from the stock market going higher through exchange-traded funds (ETFs) like the SPDR S&P 500 (NYSEArca/SPY).

See original article: http://www.dailygainsletter.com/wealth-creation-2/what-a-phone-call-from-my-aunt-told-me-about-the-stock-market/2171/

By CentralBankNews.info
    Egypt’s central bank, which earlier today cut its key interest rates for the third time in a row, said there are limited risks to higher inflation in the future due to “the pronounced downside risks to domestic GDP combined with the persistently negative output gap since 2011.”
    The Central Bank of Egypt (CBE), which cut its benchmark overnight deposit rate by another 50 basis points to 8.25 percent for a total reduction this year of 100 points, stressed the downside risks to Egypt’s economy from the challenges facing the euro area and softening growth in emerging markets.
   “Given that the downside risks to the GDP outlook outweigh the upside risks to the inflation outlook, the MPC decided to cut they key CBE rates,” the central bank said.
    Egypt’s headline inflation rate rose to 10.4 percent in October from September’s 10.15 percent, driven by higher prices of domestic food due to supply bottlenecks in the distribution channel despite lower international food prices, in addition to the effects of the Eid festivities.
    The central bank cautioned that inflation could even rise further in November and December despite the expected seasonal slowdown in monthly rates and an unlikely rise in international food prices.

     Egypt’s economy, which has been affected by political instability since the overthrow of President Hosni Mubarak in 2011, was sluggish in the 2012/13 financial year, which ended June 30, on the back of a contraction in the petroleum sector and modest growth in manufacturing, construction and tourism.
    “In the meantime, investment levels remained low given the heightened uncertainty that faced market participants since early 2011 and the weak credit growth to the private sector,” the bank said.
     Egypt’s Gross Domestic Product rose by an annual 1.5 percent in the second calendar quarter, down from 2.2 percent in the first quarter.
     The economy expanded by 2.1 percent in the 2012/13 fiscal year, slightly less than 2.2 percent in 2011/12, the central bank said.

    www.CentralBankNews.info

By Jeff Clark, Senior Precious Metals Analyst, Casey Research

After a 12-year run, it looks like gold’s wave has truly crested, and many bears are arguing that it’s all downhill from here. A quick glance at a long-term gold price chart can certainly seem to confirm this impression.

Gold’s price has fallen by more than a third since its 2011 high. The downturn exceeds the 2008 waterfall selloff. Many technical analysts are saying that the “damage” on the charts is too great for gold to recover. The rout is so bad, even hardened goldbugs have grown quiet lately.

Is it time for gold investors to admit defeat?

Well, if it were true that “damage” on a chart such as we’ve seen signals the end of a bull market, perhaps it might be. But is it so? Or is this just a correction?

One of the greatest bull markets in modern times was the Nasdaq in the 1990s. The Nasdaq composite rose a whopping 1,150% over the span of a decade. But did you know it had a major correction in the middle of that run? The same is true of oil’s big surge in the mid-2000s. Consider this chart of the big corrections oil and the Nasdaq experienced:

After seeing prices crash in both the Nasdaq and oil, most investors assumed those bull markets were over—but they weren’t. Here’s the subsequent rise in each after prices bottomed:

The Nasdaq and oil did recover from their large corrections—despite all the technical “damage” many pointed to as proof that those bull markets were over. Investors who sold their positions during the downdrafts missed out on some fantastic profits.

Given that all the reasons gold rose from 2001 to 2011 are still in force, I am convinced gold’s current correction is the setup for a second big surge—and, ultimately, a true gold mania of historic proportions.

Just because gold doesn’t seem to be reacting to Fed money-printing at the moment doesn’t mean it won’t. Sooner or later, reality trumps fantasy. Reason says that you can’t quintuple your balance sheet in five years and expect no repercussions. The Fed keeps hinting it will taper its money printing, but it still has not. We’ve had QE1, QE2, Operation Twist, and now QE3… none of them has worked, and the new Fed chair wants to print even more money.

It’s pure fantasy to believe there will be no consequences to these actions—and the reality is that whatever else happens, gold will react positively.

Should gold investors admit defeat? I say it’s reckless central bankers who should declare defeat.

A gold recovery is inevitable. Prepare accordingly. Try BIG GOLD risk-free for 3 months to access our GLD put strategy, frequent bullion discounts, and the producers that will respond the strongest once the recovery takes hold. 100% satisfaction, or your money back—click here to get started.

By CentralBankNews.info
    Global interest rates fell further in November as 12 central banks cut their policy rates, most notably the European Central Bank (ECB), Chile, Peru and Thailand, while three banks – Brazil, Indonesia and Pakistan – raised rates to curb inflation.
    The Global Monetary Policy Rate (GMPR) – the average policy rate of the 90 central banks tracked by Central Bank News – fell to 5.47 percent at the end of November from 5.52 percent in October and 2012’s average rate of 6.2 percent, continuing the trend of declining official interests since November 2011.
    During the month of November policy rates were cut by a total of 545 basis points while rates were raised by 125 points for a net decline of 420 points, the second largest monthly fall this year after January’s net drop of 476 points.
    In addition to the ECB, which cut its rate for the second time this year to 0.25 percent, the following central banks cut rates in November: Albania, Angola, Armenia, Chile, Congo, Hungary, Latvia, Peru, Romania, Serbia and Thailand.
    Through the first 11 months of this year, 41 central banks have reduced their policy rates on net basis compared with only eight banks that have raised their rates.
    This year’s top rate cutters remain Sierra Leone, Belarus and Mongolia but Hungary has been moving up the ranking all year and is now the fourth most aggressive rate cutter this year following its 16th consecutive rate cut in November.
    Among the eight central banks that have raised rates this year, Gambia was the most aggressive with a total rate rise of 600 basis points while Brazil and Indonesia occupy the second and third spots with total rate increases of 275 and 175 basis points, respectively.

    www.CentralBankNews.info

London Gold Market Report

from Adrian Ash

BullionVault

Thurs 5 Dec 09:55 EST

The PRICE of gold fell hard Thursday lunchtime in London, giving back all of yesterday’s sudden 3.1% jump to trade back at $1223 per ounce after stronger-than-expected US economic and jobs data.

 European and US stockmarkets fell marginally after the Bureau for Economic Analysis revised its GDP estimate for the third quarter of this year up to 3.6% annual growth, well beating analysts’ 3.0% forecast.

 Ahead of Friday’s Non-Farm Payrolls data for November, last week’s claims for initial jobless insurance then came in below 300,000 for only the second time since 1997.

Gold had already ticked lower from Wednesday’s jump to $1250 per ounce, but then fell swiftly.

Silver held onto a chunk of yesterday’s 5.1% gain, but also traded sharply lower, falling to $19.30 per ounce.

 Neither the European Central Bank or Bank of England made any changes to their record-low interest rates, lending or quantitative easing at their December meetings today.

  Wednesday’s action “formed an outside day reversal warning,” says ScotiaBank’s technical analysis, with gold hitting a new 5-month low but ending US futures trading sharply higher.

 “However, as the daily trend remains bearish, the signal would have to be confirmed by an up day [on Thursday].”

 Following what Commerzbank’s commodity team calls “a sharp reversal immediately” on the release of yesterday’s much-better-than-expected US jobs data from the private ADP payrolls service, “a short covering rally ensued” it says, with bearish traders betting on lower prices forced to close their positions as the market rose.

 Ahead of Friday’s official US jobs data, “The markets are still positioned quite short,” reckons ANZ Bank analyst Victor Thianpiriya, quoted by Reuters.

 “There is going to be a bigger reaction to a weaker-than-expected nonfarm payrolls report than to stronger-than-expected numbers.”

 Looking further ahead, “Tighter monetary policy in the US and rising rates are hanging over the market,” said a note from Bank of America-Merrill Lynch analysts this week.

 “[That] could push gold towards $1100 per ounce in 2014,” it believes.

“Yet while the pause in the bull market may continue, we see several encouraging signs, most notably physical demand from emerging markets, that suggest…gold remains a sound medium-term investment.”

 But “we are seeing continued outflow of gold investment holdings,” counters one Singapore trading desk in a note, “and the physical demand from Asia seems insufficient to halt gold’s decline.”

 Gold achieving “a successful hold above $1180 would…be the best case scenario amidst mounting bearish pressure,” it adds.

  India’s DNA news-site meantime says half-a-tonne of gold is being smuggled into the country each day, citing “top officials” at the Directorate of Revenue Intelligence.

 “Contrast this 15 tonnes per month with finance minister P.Chidambaram’s target of 20-25 tonne [of legal] imports,” says DNA.

Adrian Ash

BullionVault

Gold price chart, no delay | Buy gold online

Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can fully allocated bullion already vaulted in your choice of London, New York, Singapore, Toronto or Zurich for just 0.5% commission.

(c) BullionVault 2013

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Guest Post By Dennis Miller of Millers Money

Since the latter part of 2008, the yield on cash has been so low that sheltering it from taxes didn’t seem to matter. But if—as we expect—high rates of price inflation are waiting in the not-too-distant future, then sheltering interest income will be very important.

There may be lag time, but interest rates generally track the rate of inflation. So if inflation returns to a 1970s-like 14%, a one-year CD might yield near 15%. Don’t get too excited. The real, after-inflation return would still be in the 1% neighborhood, but you would be taxed on the full 15%. So much for your windfall! No one wants to pay taxes on a real yield of 14%, let alone 14% in phantom income. In this high-inflation world, enjoying the safety and readiness of a cash reserve would be painfully expensive.  Unless, of course, you could shelter your interest income from taxes.

Interest rates and inflation won’t also move in lock step. It’s quite possible that interest rates could be 18% while the inflation rate is only 14%. Furthermore, capital markets react to inflation before it filters into consumer prices. There’s a small lag between the two, as bond prices include expectations of inflation rather than historical inflation. Nonetheless, if the spread between inflation and interest rates gets very narrow, investors should take a few steps to optimize their yield holdings.

Retirement Plans

The simplest, most cost-efficient way to shelter interest income is through an IRA, 401(k), or other tax-favored retirement plan. There is no hurry, but when inflation and interest rates start moving up, it’s time to funnel spare cash in to your retirement portfolio.

Of course, even if you are very wealthy, there are limits on how much you can contribute to an IRA, 401(k), or one of their cousins. In the case of a traditional IRA, if it isn’t as big as you would like (compared to the total value of all your investments), there is a way to increase its size by it effectively absorbing assets you already own. You can learn how to do just that in our Yield Book special report.

If IRAs or other retirement plans don’t have enough room for nearly all your cash and near-cash assets, the alternative – a second choice, but in some cases a good choice – is to use a deferred annuity. Besides protecting money from inflation, deferred annuities can be used to invest in foreign currencies and diversify away from a rapidly depreciating dollar.

Deferred Annuities

In a deferred annuity, your income is shielded from taxes until maturity, much like it is in a 401(k). The annuity’s returns are only taxed upon withdrawal.

Though an annuity presents some tax advantages, it’s something to buy only after you’ve weighed all the features. First of all, the annuity is a deal between you and an insurance company. It is not traded on the open market. In the securities market, you almost always get a fair price for any investment instrument, as market watchers will bid up the price of any underpriced asset and will short an overvalued asset. However, with an annuity, it’s impossible to tell how the market might value the deal. The burden is on you to figure out the value. You need to shop.

Second, annuities are difficult to compare. In the bond market, comparing one bond to another isn’t particularly hard. On the other hand, almost every annuity comes has different details on early withdrawal penalties, fees, and interest earnings. On top of that, many annuities have a link to life insurance, making it even harder to assess the deal.

And third, you need to consider the insurance company’s creditworthiness if you’re choosing a fixed annuity. Annuities aren’t FDIC insured. An insurance company earns the money to pay interest on your fixed annuity by making investments of its own – perhaps shrewdly and cautiously, but perhaps not. If its investments don’t work out, it won’t be able to pay you what it promised.

Before buying a fixed annuity, check the insurance company’s credit rating from Moody’s, S&P, and Fitch. Those ratings aren’t infallible, but they help. This is particularly important for fixed annuities. Variable annuities, on the other hand, do not rely on the insurance company’s creditworthiness.

Variable Annuities

The variable annuity is worth mentioning because it is so aggressively sold. Though there are many types of variable annuities, most share a few common characteristics.

Each is purchased with a single lump sum or periodic payments. Each allows contributions to compound tax-free during the accumulation period and also allows the purchaser to determine the date in which the accumulation period ends and the withdrawal period begins.

When the withdrawal period does begin, so does taxation. And prepare to get dinged, because any gain on the amount contributed to a variable annuity (or any other) is taxed as ordinary income.

Expect to also get dinged again on the fees, because variable-annuity fees are generally high compared to other investments. Typical fees include the mortality and expense (M&E) charge, the management fee, and the surrender charge.

The M&E charge covers various selling and administrative expenses. It also compensates the insurance company for taking on some of the risks associated with the contract. For example, if the contract provides guaranteed lifetime payouts, then the insurance company will price the risk of you living too long into the M&E charge: in this case, you might think of it as the “immortality charge.” The M&E fee varies, but the industry average is roughly 1.25%.

The management fee sounds made up, but it isn’t. This fee goes toward the costs associated with managing the investments within the sub-accounts. And sometimes it’s replaced with several smaller fees with kooky names. Regardless of how it’s presented, you can expect to pay around 0.85%; but as always, shop around for the best deal.

The surrender charge – a fee for early liquidation – is the one fee that can and should be avoided just in case of emergency or if a better investment opportunity should present itself. However, any withdrawal before the age of 59.5 will come with an unavoidable 10% tax penalty.

Despite the fee frenzy, the variable annuity is a very popular product, mostly because it does offer some long-term protection from the printing press.

The return on a variable annuity is based on the performance of an underlying basket of securities similar to that of a mutual fund. The purchaser selects the “fund” (called a sub-account) and assumes all the risk associated with the investment. This may not seem like too great a deal compared to a fixed annuity, but higher return comes with greater risk.

Investors seeking to mitigate this downside risk should consider a variable annuity with a living-benefit rider. There are many different types of living-benefit riders to choose from, but they all guarantee some sort of minimum payout. For example, the lifetime withdrawal benefit rider guarantees a certain percent of the original investment will be paid out regularly until the day the grim reaper comes. So even if your account goes to zero, you will still receive a regular income stream for life. But, of course, this guarantee isn’t free.

If you decide the annuity route is the best for you, there’s a lengthy list of factors to consider—too lengthy for one article. That’s why we created Annuities De-Mystified, which will arm you with a variety of strategies to help you determine whether an annuity is suitable for you and how to find one that offers the income stream you want at the best possible price. In it you’ll find our 8-point checklist to unravel whether an annuity is truly a good fit for you and our 9-point plan showing you what to look if it is. The report also includes an important overview of the risks associated with annuities – risks that agents won’t often voluntarily tell you about. Here’s the link for a copy of the report.

Guest Post By Dennis Miller of Millers Money

By George Leong, B.Comm.

It’s hard to believe we are nearing the end of another year. It seems as though the move into 2013 was just yesterday. I was bullish at the start of the year, but I was not expecting the kind of stock market advances we have seen with the NASDAQ and Russell 2000 up more than 30% and the S&P 500 nearing that level with multiple record-highs.

Recently, I wrote about the need to ride the current market higher, as the signs point to more upside moves ahead. (Read “Why Stocks Likely to Head Higher into the New Year.”) But at the same time, I remain nervous about the vulnerability of the stock market.

The soft results from what was pumped up as a killer Black Friday failed to materialize, as sales on the Thanksgiving weekend fell 2.7% year-over-year, according to the National Retail Federation (NRF). The NRF did estimate sales during the next few weeks prior to Christmas could rise 3.9%, but while it may pan out, it will only do so because of heavy discounting to clear inventory.

What continues to linger on my mind is the fact that we have yet to see a correction of 10% or more during this four-year bull market, which began in March 2009. This makes me nervous.

Robert Shiller, who was one of three Americans who just won the 2013 Nobel prize for economics, believes there is a bubble in the U.S. stock market, especially given the run-up in stocks in spite of what has been a fragile economic recovery. (Source: Clinch, M., “Nobel Prize winner warns of US stock market bubble,” CNBC, December 2, 2013.)

While I have also been nervous, saying the stock market is vulnerable to a correction, I continue to advise investors ride the gains but take some profits off the table.

The reality is that the climate of easy money pushed by the Federal Reserve has created this stock market bubble. The Fed should be looking at reining in its monthly bond buying. For instance, the Fed should shave $5.0–$10.0 billion off the top in December to begin, to see how the stock market reacts. This would be a way of cutting the stimulus and avoiding the continued build-up of debt. It would also allow the economy to fend for itself a little more, rather than relying on the overblown stimulus. I hope the exiting Chairman Ben Bernanke or incoming Chairwoman Janet Yellen will start the process.

In the meantime, all eyes will be on the November jobs market report to be released on Friday, which will be the most important economic reading for the Fed to look at prior to its mid-December Federal Open Market Committee (FOMC) meeting. There’s a sense that a reading of more than 200,000 jobs created, like we saw in October, could be enough to drive the Fed to begin tapering in December, but I’m not convinced, since the Fed has created a stock market that feels entitled to cheap money—meaning it’s onward ho with quantitative easing (and market gains) for now.

This article Nobel Prize Winner Confirms My Concerns of Stock Market Vulnerability is originally publish at Profitconfidential

By CentralBankNews.info
    Egypt’s central bank cut its benchmark overnight deposit rate by another 50 basis points to 8.25 percent, its third rate cut in a row.
    The Central Bank of Egypt (CBE) also cut its other main rates, the overnight lending rate, the rate on its main operation and the discount rate by 50 basis points to 9.25 percent, 8.75 percent and 8.75 percent, respectively.
    A statement by the CBE’s monetary policy committee would be issued later, the bank said.
    The CBE has now cut its rates by 100 basis points this year. In March the CBE raised rates due to inflationary pressures but then reversed course and cut rates in August and September.
    Economists had expected the central bank to keep rates steady this month in light of a rise in inflation in October to 10.44 percent from 10.15 percent the previous month.

    The central bank has also been under pressure to keep rates high in order to attract capital and not deplete its foreign currency reserves which the central bank on Wednesday said fell slightly in November from $18.59 billion at the end of October.
   The reserves have also been under pressure since the uprising in 2011 that toppled President Hosni Mubarak. At that point reserves were $36 billion.
    Political instability since then has led to a drop in tourism and made investors nervous.
    Egypt’s Gross Domestic Product rose by an annual 1.5 percent in the second quarter, down from 2.2 percent in the first quarter.

    www.CentralBankNews.info