We have seen some up moves this month in the stock market and in the US dollar. If this has been profitable for you, congratulations. However, do not throw caution to the winds and consider this to be a turnaround in the stock market.

Look to the bond markets to tell you when the stock market is ready to turn around.

When serious money moves out of bonds and short term investments into the stock market, you should see corporate bond yields fall as a confirmation that there is greater appetite for risk. You should also see money move out of treasury bonds, and drive treasury bond yields rise, as money moves out of this financial parking lot nad into stocks. This has not happened and, until it does, view stock market rallies with suspicion.

In January, I told you that the stock market was in for a bumpy ride, that it wasn’t a time to panic, and that the government would fight a war of words telling you how they have things under control. If you look at the chart of the Dow Jones Industrial Average and the chart of the NASDAQ index, I think you will agree. The Dow is about where it was around the Martin Luther King nosedive, and the NASDAQ is about 10% higher. Over the course of the year, those who didn’t panic had a chance to pick up some bargains and dump some losers.

So where do we go from here?

• Do you think that bond interest rates are headed further down over the long run? Neither do I, so take a look at your portfolio and see if it is a little too bond-heavy.
  • Have you refinanced your mortgage yet? Take a look at historic mortgage rates and you will see that they are as low as they have been since 1963. If you’re paying more than about 7.5 percent, run the numbers and if you can get a no-points refinance for less than 7%, this may be your opportunity, especially if your mortgage is no longer considered a jumbo mortgage under the temporarily raised limits for conforming mortgages.
• There are good companies out there whose share prices have taken a beating along with the rest of the market. At market dips like this, there is opportunity to pick up shares in these companies rather than overpaying in the middle of a market rally.
• Take a look at your debts - are you paying 12% or higher interest rate on any debt you are carrying? This would be a good opportunity to refinance it at a fixed rate, preferably as deductible mortgage interest, but at least at a much lower fixed rate.

Blackberry has released the long awaited Blackberry Bold 9000, starting with the Canadian market, through Rogers. This is the first of a new generation of Blackberry phones, and the improvements introduced in this model include:

• A faster CPU
• A higher contrast, higher resolution screen (320 x 480 pixels, half the size of a low res 640 x 480 PC screen)
• WiFi (modes a, b, and g) AND GPS
• A higher resolution camera (2 Megapixels)
• The ability to record both video and still pictures
• Support for larger memory cards (16GB MicroSD cards)
• 1GB of internal secure memory
• Support for both displaying and EDITING MS Word and PowerPoint ducuments
• A browser that renders web pages like a desktop
• Ability to display full screen video at 30 frames/second
• Support for 3G networks (which will include ATT in the US)
• Talk time of about 4 hours
• Standby time of about 9 to 10 days
• Initially, the phone will be released with quad band GSM/GPRS support (850/1900 MHz and 900/1800 MHz)

A pilot Personal Health Record (PHR) program will be rolled out next year in Arizona and Utah for Medicare patients.  Personal Health Records belong to the patient and are distinct from the records maintained by physicians.  The program will begin in January 2009.  A further announcement in late October 2008 will identify participating vendors who will offer competing PHR systems that patients can choose from.

What Medical Data Will be in Personal Health Records?

• The only thing we can be sure of at this time is that CMS will upload up to 2 years of Medicare claim data. 
• Patients will be able to add supplemental information and authorize access to third parties such as family members.
• It remains to be seen what other information will be integrated, such as prescription drug claims.

What has not yet been announced is how physicians and other providers will be given access to this data, and how, in an emergency, they will know which of multiple systems has the patient’s records, or whether a patient is participating in any of the PHR systems.

Many people complain that they don’t have the time to effectively get all the things done in a day that they are being challenged to accomplish. However, until your responsibilities have been simplified into well defined actions that are clearly understood you don’t really know if that is true.  

Try this simple exercise to understand what I mean. Think of something that is working its way through your mind. Something that you know you have to take care of, but have not gotten a chance to deal with yet. Write it down so that it now exists outside your brain. Next, I want you to read it and think about what it is that you want to change about the situation. How do you want the situation to be different from what it is currently? What is the future result that you would like?  

Once you can clearly define the end result that you are seeking you can determine the very next action that needs to be taken to move you one step closer to that conclusion. Finally, if it will take less then a few minutes to do – go do it. Otherwise, you need to create a way of reminding yourself of the need for action at an appropriate time and in a way that you can trust.  

Now think about all the things that you are currently juggling at work and at home, on and off your mind, distracting you from focusing on any one thing for fear of forgetting, missing, or dropping the ball. If you had one location where everything could be stored, next actions could be planned, and reminders could be trusted, imagine the peace that could be created in your mind. 

Start with the small stuff.One of the most effective places to start is by making use of a notebook or journal to make a simple list of everything. While that may sound contradictory that’s just what I want you to do. Just start writing down 100% of the things that you are currently thinking about. Include everything from the three things you have to pick up at the grocery store to that huge project that if completed would exponentially improve your life. Write everything down until you can’t think of anything else and you have a clear head. 

Now sort out your list pulling from it all the little things that would take just a few minutes to do and write down the next needed action. If it makes sense to do it – then take the time to get those things done. Otherwise write down exactly when you can get it done. Remember that YOU DON’T HAVE TO DO IT ALL YOURSELF!  You will most likely find that many of the things that cloud your mind and distract you through the day are easily completed. By creating a hub or location for all these things to be recorded you can begin to train your mind to only think of things one time and with the right systems in place you can trust that you will be reminded at just the right time to accomplish the task. 

Take the time to go back to the other items as well and define what the next needed action is on each of them. Begin to define your day and week in segments based on what action you need to be taking to get things accomplished. This includes things like attending your son’s soccer game or taking your spouse out for dinner. Because you know you are where you are supposed to be, doing exactly what you are supposed to be doing, your mind can relax, focus, and enjoy the action taking place at just that moment.

The FDIC has taken over the failed IndyMac bank, and identified about 25,000 of the most delinquent mortgage loans that it will offer modified terms as an alternative to foreclosure.  FDIC has advised banks to modify delinquent loans to make them affordable to the homeowner and make them performing loans, and now that it is managing the failed IndyMac bank, it is taking some of its own advice in an attempt to maximize the value of the bank for the benefits of its depositors and creditors, while avoiding the human carnage and impact on neighborhoods and real estate values that would result if it foreclosed on 25,000 seriously delinquent loans.

This may be the largest scale test of the idea that a systematic workout plan can be applied to a large mortgage portfolio to turn most of the seriously delinquent loans into modified but performing loans, which would have a much higher value than if the loans were foreclosed.  If successful, it may start a trend that would result in fewer bank failures and greater stability in real estate prices.

Fannie Mae and Freddie Mac have been in the news this month - here’s the low down about who they are, what they mean to you and your finances, and the opportunities and risks they present.

Who are Freddie Mac and Fannie Mae?
Fannie Mae (FNMA) and Freddie Mac are government-sponsored yet publicly-traded corporations that create liquidity for what are referred to as conforming mortgages. A conforming mortgage is a mortgage that meets certain minimum standards designed to reduce risk to the lender, including mortgage size (note that conforming loan limits were recently increased), down payment, number of dwelling units limited to 1-4, and underwriting standards for verifying creditworthiness of the borrower. Banks and other lenders are able to sell conforming mortgages to Freddie Mac and Fannie Mae. This allows the lenders to replenish their funds and keep making mortgage loans without worrying about raising money to fund those loans. This is a great deal for the lender and the borrower, and has helped to keep mortgage interest rates much lower than they otherwise would be.

What do Freddie Mac and Fannie Mae do with the Mortgages They Buy?
Freddie Mac and Fannie Mae generally do one of two things with the mortgages they buy:

• They package the mortgages into large pools and sell mortgage backed securities that carry a guarantee of full and timely payment of principal and interest. A FNMA pool typically consists of about 7000 mortgages, so the performance of an individual mortgage does not have a drastic impact on the performance of the pool, but the guarantee of FNMA or Freddie Mac protects the investor against even those risks, as long as FNMA and Freddie Mac have the financial strength to cover their guarantees.If the losses on the underlying mortgages are less than usual, then Freddie Mac and Fannie Mae make a profit, but if the losses are heavy, then they take a loss. Like any insurance business, setting underwriting standards and averaging gains and losses across large numbers is supposed to make things predictable. In the current economic cycle, losses have been much heavier than historical averages, leading to severe erosion of Freddie Mac and Fannie Mae’s capital, contributing to the current situation where they have negative net worth. Ironically, if FNMA and Freddie Mac were a bit more conservative and increased their guarantee fee to about 31 basis points instead of being “nice guys”, they would have been making billions in profit instead of taking billions in losses. Now, instead of the having the guarantee costs built in to mortgage rates, they will end up being passed on to the public. The alternative is that the trillions of dollars of liquidity that FNMA and Freddie Mac contribute to the mortgage market would dry up.
• They may choose to hold the mortgages in their portfolio and fund the portfolio by issuing various bonds and notes. Fannie Mae and Freddie Mac are two of the largest issuers of such debt securities. Some of these securities are senior debt, and others are subordinated, which means that other debts will be paid before you are. Since Fannie Mae and Freddie Mac currently have a NEGATIVE NET WORTH measured in tens of BILLIONS of dollars, these securities currently offer yields that are only slightly above US Treasury note and bond rates, because it is assumed that the US Government will bail out Fannie Mae and Freddie Mac through equity investment and by lending them whatever money they need.  The yield premium on 2-year bonds is only about 90 basis points (0.90%) higher than comparable US government securities, reflecting some nervousness in the markets tempered by a belief that the government will do whatever it takes to shore up Fannie Mae and Freddie Mac.

Investment Opportunities

• Mortgage Backed Securities
  • Yields on FNMA and Freddie Mac mortgage-backed securities pay you typical mortgage interest rates, minus the amount that FNMA or Freddie take as their cut for giving you a guarantee (currently this runs about 25 basis points or 0.25%).
  • To the investor, these mortgage backed securities provide income that is significantly higher than US Treasury securities with a guarantee from a corporation that carries the implied backing of the US government.
  • There are actually a few layers of guarantees with a mortgage backed security:
    • The personal guarantee of the homeowner
    • The mortgage on the homeowner’s house
    • The guarantee by Freddie Mac or Fannie Mae
    • The implied backing of the US government

•  FNMA and Freddie Mac Notes and Bonds
  • Before you think about buying notes or bonds that are obligations of FNMA or Freddie Mac, the question you as an investor need to answer is, how strong is the Federal Government’s commitment to stand by them?  Recent events, including decisions by the Federal Reserve and the US Treasury to lend to and invest money in FNMA and Freddie Mac suggest that this is a pretty strong commitment.   Consider the economic, social, and political consequences if they were allowed to fail, and the fact that lesser institutions, such as investment banks, have been allowed to run a tab at the Federal Reserve’s loan window:
    • Confidence in government agency and quasi-government securities would be deeply shaken and interest rates on their securities will be much higher - a cost that could outweigh the cost of bailing out FNMA and Freddie Mac.
    • Mortgage money would be more difficult to find
    • Fixed rate mortgages would be MUCH more difficult to find
    • Mortgage rates would be significantly higher
    • Banks might require you to make 5 or 10 year time deposits to give you decent interest rates (at which you’d have to ask yourself if it is worth bothering dealing with the bank rather than buying notes or mutual funds)
    • More banks would fail as they ride the wrong side of interest fluctuations as the economy runs through cycles of high and low interest rates
  • Like the US Treasury, FNMA and Freddie Mac issue huge amounts of notes and bonds to finance the massive portfolio of mortgages that they hold.  Because US Treasury debt is considered the safest US paper, anything else, including FNMA and Freddie Mac’s debt, is going to pay a higher interest rate.
  • Most FNMA and Freddie Mac debt is non-callable, which means that you can lock in the interest rate for the term of the note or bond.
  • On the other hand, ask yourself how long you want to lock in a relatively low interest rate.  You may want to limit the maturity date on any securities you buy, no matter how safe you think they may be.  For example, FNMA issues discount notes (paying interest at maturity) with maturities of less than a year or non-callable notes with maturities of 2, 3, 5, or 10 years,  all of which you can buy directly in denominations of as little as $2000 without commission.

The Dynamics of Mortgage Backed Securities

• Depending on interest rate trends, a 30 year mortgage historically has been paid off (on average) in less than 15 years, because many people sell or refinance their homes, paying off the existing mortgage in the process. In return for the messiness of receiving monthly payments of both principal and interest, and the uncertainty of the actual maturity of the investment, these securities normally have a higher yield than a comparable bond.
• Remember that those monthly payments are not just interest - part of each payment is a payoff of principal, too.
• When interest rates go up (the most likely scenario over the next 5 to 10 years), people will be less likely to refinance their mortgages, so while part of your principal will be paid off early, there will be a lingering portion of your mortgage backed security that will endure for up to 30 years, locking in a low rate.  At least you will get a share of your principal back every year, which you can reinvest at higher rates, unlike bonds, which make you wait until maturity until they pay your principal back.
• When interest rates go down, more people will refinance and your mortgage backed security will be paid off much faster than usual.  We’ve just gone through a period of historically low interest rates, so unless you are anticipating a deep deflationary recession, you’ve already seen the lows in interest rates.

Stockholders in Fannie Mae and Freddie Mac may not be so fortunate. Shares of common stock in these companies have dropped about 90% in value over the past year, and if the government bails out these companies, the stock may be severely diluted or may even become worthless. This should come as no surprise, as the shares in a company with negative net worth have negative equity and any other company in this position would be pushed into bankruptcy. Earlier this year, FNMA’s stock was named Stupid Investment of the Week by Marketwatch.  Even the preferred stock in these companies, trading at yields of 14% or more, is extremely risky and may turn out to be worthless, depending on the ultimate terms of a government bailout.

Run properly, FNMA and Freddie Mac could be profitable and safe, but it will take some time and lots of Federal cash to repair the damage.

• While FNMA and Freddie Mac can issue bonds and notes paying 2 to 4% interest and use it to buy conforming mortgages at 6% they will pile up huge profits.
• On the other hand, if interest rates on short term securities rise so they get close to long term rates, or exceed long term rates (something that happens occasionally), then they would rack up losses. This is always a problem when you issue fixed rate, non-callable debt to finance assets like mortgages that have uncertain maturities.
• FNMA and Freddie Mac could and should issue more floating rate and callable debt as insurance against interest rate fluctuation rather than entering into interest rate swaps and other derivative deals that have done them more harm than good lately.
• The cut that FNMA and Freddie Mac take in return for their guarantee when creating mortgage backed securities from pools of mortgages needs to be larger, perhaps 33 basis points for a while instead of the low 20s.

Here are some of the key factors to apply when evaluating the funds in your 401(k), or anywhere else, for that matter:

Expense Ratio - The expense ratio of a fund is the percentage of its value that gets taken out of your fund to pay the management company, to pay “distribution costs” (a fancy term for sales expenses), and the other operating costs of the fund. All things being equal, a fund with higher expenses has to take higher risks to deliver the same performance as a competing fund with lower expenses. Funds are required to show their expense ratios in their annual reports.

Portfolio Turnover - An annual turnover rate of 100% means that the entire value of the fund’s portfolio was sold and bought during the year. Some funds have turnover rates that are even higher than this. Generally, high turnover is a bad sign. Frequent trading involves additional costs that are not reported in the fund’s expense ratio and it is usually a sign that your fund manager frequently changes investment strategies. Unless your fund is following some kind of special strategy that you are convinced is inherently profitable, compare the turnover in your fund with comparabl
e funds and favor funds that have lower portfolio turnover.

Compare Performance Against Comparable Funds and the Risks They Take - Morningstar does a pretty good job of rating the performance of mutual funds within their categories and adjusts their performance ratings based on the risks that the funds tak. 5 star funds have the best risk-adjusted performance, and funds with less stars have lower risk-adjusted returns. Don’t obsess over picking only 5-star funds; chasing the 5-star funds is not guaranteed to be a winning strategy. 4-star funds are often just about as good, and may do better when you apply the other criteria mentioned in this article. Remember that you should not try to compare apples and oranges - compare funds that invest in small companies with other funds that invest in small companies, funds that invest in large companies with others who choose the same kinds of companies, and compare long term bond funds with other long term bond funds.

Yield - Too high a yield compared to its peers may mean your fund is taking unusual risks.

Management changes - A new manager for a fund usually means you can throw the fund’s past performance out the window, and that the fund is going to undergo heavy trading activity as the new manager reshapes the portfolio to fit their personal investment ideas. Neither of these things are good for you as a potential investor, so let someone else be the guinea pig for the new manager and pick funds with managers that have at least 5 years tenure.At least you’ll have a meaningful track record to examine. The exception to this rule is when you are using a pure index fund, in which case there really is no manager picking the investments.

Good news if you have significant business travel in your car: The brilliant minds at IRS have figured out that it costs more to drive a car now and have increased the mileage allowance to 58.5 cents per mile, as of 7/1/2008.  This may or may not be adequate compensation for what it actually costs to own and operate your car, you you have a choice: either keep good records of ALL your costs, including fuel, insurance, maintenance, and either depreciation or lease payments, or take the mileage allowance.

If you have a vehicle that you use overwhelmingly for business-related travel, it is worth crunching the numbers to see if you are better off leasing it, financing it and taking that big first-year depreciation write-off (which is especially generous in 2008), or just taking the standard mileage allowance.  Factors that argue in favor of not taking the allowance include: choosing a car that costs more than average, living in an area with high fuel or insurance costs, or having unusually LOW driving miles (which means that all those fixed costs are spread out over fewer miles, driving up your average cost per mile).  Here is an example of where a smart accountant can help guide you to the best choice by looking at your unique personal situation.

Even though the mileage allowance eases the recordkeeping pain somewhat, you are still expected to keep records to document your business use of the vehicle - this usually consists of a trip log, which is essentially a diary of business travel made in your car.

Your credit score and credit history have a big effect on your ability to get credit and how high your interest rate and other terms (like the size of your down payment) will be.

Here are some things you can do to improve your credit score:

1. Get your credit report and check it for errors

• Go to www.AnnualCreditReport.com and get your credit reports.
  Review it carefully for common errors like incorrect addresses, accounts you have paid off or closed that are reported as currently open, and reports of late payments or write-offs that you know are untrue.
• Remember that there are three major credit bureaus (Experian, TransUnion, and Equifax), and though the information they report is generally consistent, you need to at least initially pull your report from each company and check it individually for any mistakes.
• Under American law, you are entitled to one free credit report per year from each credit bureau, and are entitled to another free credit report from a credit bureau if a creditor denies you credit due to information reported by that bureau. The place to order your free annual credit report is www.AnnualCreditReport.com

2. Correct any errors.

• If you catch any errors in one of your three credit reports, follow the procedure given by that company to file a correction. Be sure to provide whatever supporting information is required, or your request will be ignored. If you play by the rules, you can get errors corrected and your credit score can rise significantly. Do not think that you or any company advertising credit repair can eliminate true information from your credit report.
• You are also entitled to explain past credit problems. If you suffered an illness, went through a divorce, or had some kind of personal disaster that explains some prior lapse in your otherwise clean credit history that you have recovered from, some lenders will take note of this when reviewing your credit report and this may mitigate the effect of the past transgression. Just remember that your explanation will stay on your report for a long time so think twice before you file one, and have a trusted friend read it over to see if it sounds professional and will do more good than harm.

3. Keep old accounts open

• Closing old accounts hurts your credit score. Lenders like to see long and happy relationships between you and your other creditors.
• In fact, rather than burying an old card in the back of your sock drawer, take it out every few months, make a small purchase, and then pay it off when the bill comes. This will make the card show up as an active account on your credit report.

4. Don’t open too many accounts

• The flip side of the previous advice is that you shouldn’t carry more than about 3 national credit cards (like Master Card, Visa, or Discover).
• Lenders use more than one formula for computing your credit score and having too many accounts is a red flag under certain commonly-used credit formulas.

5. Don’t use more than a third of your credit limit on any account.
Lenders get upset when they think you are getting close to maxing out your credit limit on any credit line, so here are three ways you can quickly improve your credit score:

• Pay down cards or credit lines where you are close to your credit limit. Aim to get each one down below a third of their credit limit.
• Alternatively, you can ask lenders to increase your credit limit - just don’t take the bait and use this as a license to increase your debt.
• Spread your borrowing across your accounts. A $6000 debt on a $6000 credit limit looks very bad to lenders, but a $6000 debt spread across three cards, each with a $6000 limit, while it is the same amount of debt, makes you look like a solid citizen.

6. Have a mortgage or car loan that you pay on time monthly

• Lenders like to see home ownership. Even if you pay cash for your home, a small mortgage with steady payments is going to give your credit score a big boost.
• If you are a committed renter, then taking out a small car loan and making a few months of payments will give a smaller but similar boost to your creditworthiness.

7. Pay on time.

• Make sure that you always make at least the minimum payment on every account well in advance of the due date so that you are not reported as a late payer.
• If you have a recent late payment, a history of on-time payments will make it start to fade away and your score will recover. However a 90-day late payment is a major black mark that will take longer to heal than a shorter lapse.