New Kid On The Block. Or In Town. Whatever.

October 24, 2012

Least apt company spokesman ever

 

If you’ve paid even scant attention to the financial news in the last few weeks, all you’ve heard about is QUANTITATIVE EASING this and APPLE STOCK MOVEMENT that. Meanwhile the Dow switched out a component, something it does less than annually on average, and it barely made a sound.

At the risk of insulting our readers who already know this, the Dow Jones Industrial Average is nothing more than the share prices of 30 particular major stocks, added together and multiplied by a constant. The 30 companies represented aren’t precisely the 30 largest in the nation, but they’re close enough. When Dow Jones & Company determine that a company is no longer fit or worthy to comprise part of the DJIA, that company gets booted and another one replaces it.

Recent companies to get demoted from the DJIA include taxpayer charity cases American International Group and General Motors. The most recent company to fall off the index had a legitimate extenuating circumstance, however.

Kraft Foods replaced AIG 4 years ago. Earlier this year Kraft, maker of everything from Jell-O to Miracle Whip to Maxwell House coffee, announced that it would be splitting itself in two. To summarize and greatly simplify the restructuring, the international unit is now called Mondelez. The American grocery business maintains the Kraft name. Both companies now trade on NASDAQ.

Which left a vacancy, to be filled by UnitedHealth. (Yes, Microsoft Word, we did spell it correctly. It’s not our fault that medial capitals are unavoidable these days.) UnitedHealth is a managed-care company out of Minneapolis, founded 35 years ago. By revenue it’s the 22nd-biggest public company in the United States, almost twice the size of the formerly 50th-place Kraft. By profit, UnitedHealth is 29th (the erstwhile Kraft was 43rd.)

Why a boring HMO parent and not something cool like Apple? The chairman of the index committee says that technology stocks are “well-represented” already. He might have a point – there’s IBM, Microsoft, Cisco, and maybe you can consider AT&T and Verizon to be technological. Even the beleaguered Hewlett-Packard, whose stock is at an inflation-adjusted 20-year low, remains part of the Dow.

What does this mean for the ordinary investor? (That’s you, Sweet Boy or Babycakes.) Well, among other things it means that certain stock funds that mirror the Dow now have to have a position in UnitedHealth. But UnitedHealth is a mammoth corporation that said funds probably already had a piece of anyway. UnitedHealth has gained about 10% since it joined the Dow last month, but as we all know, or should know, a 10% change in price over so brief a period means almost nothing. UnitedHealth has been aggressive since joining the Dow, recently spending $5 billion to buy the largest health insurer in Brazil.

Which you can interpret as a tiny bet on Mitt Romney winning the presidency and, if we’re to believe his campaign promises, proposing to have Congress repeal ObamaCare. Or you can interpret it as a bet on President Obama being reelected, which would mean that American managed health care companies are going to need to expand into foreign markets as socialism does to their industry what it’s done to every industry it’s ever touched.

UnitedHealth went public in 1990 and enjoyed the kind of steady, constant growth that most prudent executives would love to see their companies emulate. The stock topped out in late 2005, lost 2/3 of its value by 2009, and has since rebounded to near that previous high. UNH trades at about 11½ times earnings, which is slightly less than contemporary Cardinal Health (13). The “target estimate” for UNH’s stock price is a 20% increase next year, but then the “target girlfriend” for your average World of Warcraft player is something more grandiose than what reality might offer up.

Net income for UNH has increased from year to year, and the company currently boasts a 5% profit margin. Cardinal Health’s is 1%. Retained earnings are high and increasing, albeit not at a tremendous rate – certainly not as fast as revenues and profits. The company has no treasury stock to speak of. On balance, taken together those are slightly positive signs for investors looking to buy and hold.

But you’re not going to buy UnitedHealth stock anyway, are you? No, you’re going to keep funding your 401(k) and electing to receive the employer match if yours offers it. That’s fine, too. UnitedHealth’s biggest single shareholder is Fidelity Investments, which owns 7½% of the company. That’s $4.4 billion worth of UnitedHealth, which is an awful lot to be distributing among Fidelity’s various funds. And among those, Fidelity’s Low-Priced Stock Fund holds the most – about 30% of Fidelity’s UnitedHealth holdings. UnitedHealth is also the biggest component of said fund, which is a slightly different superlative. And, the Low-Priced Stock Fund is up 26% from a year ago. It’s doubled since 2009 – just like the stock market itself. Will investing in a fund that predominantly features UnitedHealth make you rich? Probably not. Becoming one of UnitedHealth’s approximately 16,000 shareholders of record might.

Filed Under: Investments, Making Smart Choices Tagged With: , , ,

A Message To Financial Professionals

October 19, 2012

“Yeah, yeah. Keep talking. I’m listening.”

 

Specifically, ones who submit to the Carnival of Wealth.

Dude, look at you in your Paul Fredrick shirt and snappy tie. Nothing personal, but writing isn’t your forte. Either farm that out, or learn to communicate.

We received a post from Scott Skyles at Mortgage 1a for Monday’s CoW. It’s got a valid and helpful point or two, but expecting readers to mine them out of the dross that surrounds them was too much work. Plus Mr. Skyles finds some industry terms necessary to define, but not others, with no apparent consistency.

Instead of being just another entrant in the CoW, this warranted its own, follow-up post. Here’s our CYC version of Scott’s explanation of the difference between FHA vs. conventional mortgages, followed by the impenetrable original, followed by our comments.

Should you get a mortgage backed by the Federal Housing Association, or a conventional one not insured by the federal government?

With the latter, you’ll have to put up 1/5 of the purchase price. You can put up less, but you’ll have to pay something called private mortgage insurance every month until you’ve paid off 1/5 of the principal.

With an FHA loan, you can put down as little as 3½%. The tradeoff is that you still have to pay the FHA’s version of private mortgage insurance, either for 5 years or until you’ve paid off 22% of the appraised value – whichever comes later.

And now, Mr. Skyles’s original:

While conventional and FHA (Federal Housing Association) mortgages have some similarities, there are distinct differences between the two and it is important for anyone who is considering taking out a mortgage to understand the differences in order to borrow in a way that best suits their specific financial and home buying needs.

Conventional Mortgages

A conventional mortgage is defined as any type of mortgage that is not insured by the Federal Government. Conventional mortgages are offered by credit unions, banks, and mortgage companies and brokers. The largest secondary market organizations that offer conventional mortgages are Freddie Mac and Fannie May. Conventional mortgages will usually require a down payment of around 20 %, but in today’s real estate and mortgage market, there are programs that may allow for a lower down payment if the borrower meets certain qualifying criteria.

With conventional mortgages, borrowers that are allowed a lower down payment are required to pay private mortgage insurance, also known as PMI. Once their loan-to-value amount is under 80%, they are no longer required to pay PMI insurance. It sounds complicated, but it is actually quite simple, as the LTV can decrease as the mortgage is paid down, as well as if the value of the home increases during the length of the loan. Conventional mortgages also take a borrower’s credit very seriously. In today’s market, if a credit score has blemishes or considered a possible risk, their application could be turned down.

FHA Mortgages

The FHA is not a direct lender, so their terms and conditions differ as far as credit and insurance. They insure FHA- approved lenders, and they are very specific about their terms. They take a classic approach to lending and they do not offer boutique loans. FHA-approved lenders are restricted to offering fixed rate loans, and the adjustable rate mortgages that they do offer are very conservative, which allows home buyers to easily understand their mortgage terms and manage their payments and insurance accordingly. For the first five years of an FHA loan, the borrower is charged an insurance premium that is added to their monthly payment. This payment is required until the borrower’s LTV decreases by at least 78%.

The down payment required for an FHA mortgage can be as low as 3.5 %, and the lenders also make their final lending decision using the “old fashioned” standards. Credit is still a consideration, but an FHA lender will also consider employment and rental payment history as part of the borrower’s profile. They will also give the borrower a chance to explain why their credit score may be less than satisfactory. FHA lenders consider the whole package, and this can be very helpful for first time home buyers, as well as anyone who may have experienced a run of bad luck due to the troubled economy.

Making an Informed Decision

While conventional and FHA loans both offer reasonable terms, it is ultimately up to the borrower to decide on the best type of mortgage to suit their specific needs. Buying a home is a big step, and it is important for borrowers to be educated on their options before signing on the dotted line. First time home buyers may benefit by consulting with a financial expert who can advise them on the various specifics of the two mortgage programs, and it may also be helpful to consult with a knowledgeable real estate agent or broker. By taking the time to weigh out the differences, home buyers can make an informed decision on their borrowing options.

You still awake? Of course you aren’t.

We shrank that to 1/6 of its original size and didn’t lose anything. This is why most people find personal finance and related topics so freaking boring. Most of the people who fancy themselves experts in the field couldn’t convey a thought to save their lives.

Which is why you should buy our book. 326 easy-to-read and informative pages that start with the assumption that you’re smart and value your time, but that you know nothing about money. We start with your standard checking account, and by the time you get to the end you’ll know

  • How to do your taxes
  • How to do your taxes without getting screwed, which is something quite different
  • How to invest, buy stocks, buy mutual funds, buy a car, buy a house, finance house, and more
  • How to start your own business so that you’re not at the mercy of some soulless boss who will shove you out the door the moment you become less profitable than a replacement might be.

No interminable paragraphs, we promise. Order it on our site (link up and to the right) and we’ll throw in one of our killer ebooks, too.

Filed Under: Book Promotion, Investments, Making Smart Choices, Net Worth Tagged With: , , ,

College Is Too Cheap

October 17, 2012

You can tell when someone’s speaking from the heart from the size of his index card

 

UPDATE, 10/17/12: In our haste to post this, we missed some details. Reader Brad Hutchings points out that the subject of our post studies exercise science at Adelphi University.

 

Yes, too cheap. If it were more expensive, say 3 times as much across the board, maybe people would then step back and ask themselves the education cost-benefit question they’ve been avoiding all these years.

 

Against our better judgment, yesterday we watched an uncomfortable-looking Statistic (his name escapes us) ask the two men vying for the presidency a question related to the price and importance of college. (Every American should have the opportunity to go to college, don’t you know.)

As a 20-year-old college student, all I hear from professors, neighbors and others is that when I graduate, I will have little chance to get employment. What can you say to reassure me, or more importantly my parents, that I will be able to sufficiently support myself after I graduate?

Because both men want to get elected, they each delivered a variation on “You worked hard, you deserve a good job, college should be more affordable for all Americans, and my 5-point plan will ensure that…” It’ll ensure that our attention switches to the competing baseball game on another network, is what it’ll do.

Neither Mitt Romney nor President Obama asked the awkward and uncomfortable young man with the bad posture any of the following questions:

  • What are you majoring in?
  • What are your grades?
  • Can you read and write, or if I go on your Facebook page will I see a grammatical killing field?
  • Are you grinding, or do you drink a lot and smoke a lot of pot?
  • No, seriously. Come on. You get drunk a couple nights a week, don’t you?

But the candidates didn’t even have to respond to the question with questions of their own. They could have been more direct:

“I can’t. I’d like to think that the job market will improve by the time you graduate, but your future employment is not my concern. Honestly, it’s not. It’s your concern. And your parents’, it seems, but if you want to be an adult entrusted with the responsibility of voting then maybe you should be standing on your own.

“Kid, the real world is unforgiving. 8% of Americans are out of work, thus 92% have jobs. The odds are in your favor. Lots of people in your graduating class are going to get hired. The ones who don’t are going to be the least employable ones.

“So, all this reduces to whether you’re hirable. You obviously don’t have any real world experience, so it’s going to take grades and specialized knowledge to make money.

“You’re probably a liberal arts student. No, that’s not a comment on your nebbishness and your demeanor. Nor is the word ‘nebbishness’ a comment on your palpable Judaism. The reason I think you’re a liberal arts student is that you’re worried about your future. Go ask the kids majoring in engineering and math if they’re concerned about getting hired. It’s like the old joke, ‘What do you call the guy who graduates at the bottom of his med school class?’ ‘Doctor.’

“So let’s assume you’re majoring in English, sociology, something like that. Then you’re screwed. But I’m older and smarter than you, and I live a pretty comfortable life, so I must know a little something about this. Listen to my advice. You’re almost certainly not going to act on it, but at least I’ll have answered your question.

“Get out. Get out now. Drop out of school immediately. You go to school where, Hofstra? That’s like $32,000 a year. Drop out and find yourself a trade school. There’s one in Chicago that practically guarantees its students jobs. These students are getting hired before they graduate.

“The catch is that you have to give up on your dream of being a professional nothing-in-particular, and commit to something more concrete. The kids in question are getting hired as machinists. You don’t appear to be the kind of person who likes working with his hands, but as you pointed out, the job market is rotten. And the most satisfying lives are often the ones that diverge from the original plan.

“Best of all, it costs next to nothing to go to that school. $89 per credit hour for people who live in the district. You’re from Long Island, so you can probably find a similar and similarly priced college close to home. Hell, you can live with your parents. Work part-time to cover the $89 per credit hour, and you can emerge from this with

  • No debt
  • A well-paying job waiting for you.

Conservatively speaking you could make $45,000 out of the gate, and tons beyond that with overtime. After a couple years, you’ll be making a lot more.

I’ll say this again: you’ll be carrying zero debt, notwithstanding what your parents have already thrown away on college tuition. Read the example from the guy at the end of that last story, the father with a son who’s a budding machinist and a daughter who’s a teacher with a 4-year education degree. Her student loan debt is 15 months’ wages.

But yeah, the son’s collar is blue. And he never had the ‘opportunity’ to go to college. So he’s the loser in this scenario, by some crazy measure. Meanwhile his sister will be in debt for the rest of her life. Well, maybe not her life. But even with the most diligent financial planning – which she hasn’t exactly executed up until this point – it’ll take her at least 5 years to pay off those student loans. After that, she’ll be…a teacher. Not a profession with a lot of room for financial growth.

That, or you could fix airplanes or learn to operate machine tools. You know, actually make tangible stuff with a tangible benefit. Get rewarded handsomely, if not richly, and make yourself employable for life. And, one more time, no debt. Believe me, personal debt will affect every step you take as an adult. The deeper it goes, the worse it’ll get for you. Avoid or minimize it now, and you’ll breathe that much more freely than your counterparts. You’ll be able to build future wealth – investments, etc. – that the Hofstra anthropology class of ’14 won’t be able to. Because they’ll still be paying down student loans while working service jobs.

Does that answer your question?”

Filed Under: Healthy Living, Making Smart Choices Tagged With: , , , ,
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