Is the Dow Jones Industrial Average Still Useful?

This was originally posted in February 2008.  I decided to move it back up to the top of the list given that the DJIA is being changed again.  This time Citigroup and General Motors are being removed from the list, effective June 8, 2009, to be replaced by Travelers (insurance carrier and previously a division of Citigroup) and Cisco Systems.

PREVIOUSLY POSTED FEB 2008:

The Dow Jones Industrial Average (DJIA) is an index of 30 of the largest blue-chip American companies.  It was created as a list of 12 stocks in 1896 and grew to 30 in 1928.  The editor of the Wall Street Journal is responsible for periodically changing DJIA components in an effort to better match the average with the overall economy.  Yesterday it was announced that two companies on the list, Altria Group and Honeywell, would be replaced with Bank of America and Chevron.  The changes will take place next Tuesday, the 19th (2008).

Although the DJIA is arguably still the most watched market index, a number of points can be made that the index is outdated:

1. The index is somewhat arbitrary.  DJIA components don't necessarily accurately represent the broader market.  Why hasn't Bank of America been on the list before?  Disney, McDonald's, Coca-Cola and Home Depot are on the list, but Apple, Google, Cisco and Starbucks are not.  How come?  Even Warren Buffett's Berkshire Hathaway, a Fortune 20 company, is not on the list.

2. The index is price-weighted.  This means they simply add up the stock prices of the 30 components and divide it by a factor that takes into account stock splits, changes in the index, etc.  As a result, a change in a $100 stock is treated the same as in a $20 stock. 

As an example, let's say IBM is at $100 and Intel is at $20 per share.  IBM is down $5 today while Intel is up $5.  The DJIA doesn't change because the +$5 is offset by the -$5.  However, if you owned $100 worth of each stock (1 share of IBM and 5 shares of Intel), you would be up by $20 (IBM down by $5 and Intel up by 5 shares x $5).  So you are up 10% on your investment but using a price-weighted average says you are break-even.

3. Why just 30 stocks?  30 stocks may have been adequate 80 years ago, does it really represent a reasonable cross-section of the 11,000+ stocks currently traded in the U.S.?  Seems to me that the S&P 500 and other major market indices better reflect our economy.

4. The DJIA ignores dividend payments.  This is not unique to the DJIA average but certainly is an important aspect to investing in stocks.  According to Stanford researchers, DJIA dividend payments have averaged nearly 5% since 1928, ranging from under 2% to nearly 10%.  The DJIA does not give a complete reflection of total shareholder returns as a result.

Still, I will continue to check out the day to day gyrations of the DJIA out of sheer habit and interest as will most of you!

What to Do With Old Cell Phones and Other Electronics

We have 3 cell phone users in our house and a bunch of old cell phones lying around.  The kids get tired of playing with them and they are basically non-functional (though they do work successfully as paperweights).  Are they worth anything?  For the most part, no.  So the best bet is to take them to a recycler that has been approved for taking e-waste.

If you prefer to rid yourself of these items via mail, the USPS is piloting a recycling program, where they provide postage-paid plastic envelopes for recycling old cell phones, PDAs, MP3 players, digital cameras and up to 4 inkjet cartridges.  Call your local post office at 800.ASK.USPS to see if they have these bags.  I know they carry them at 2150 Pickwick Drive, Camarillo as I plan to use a few myself.

So does your old cell phone and other old electronic equipment have any value?  You could spend time on eBay and try to sell your old equipment.  But you could also check out Gazelle.com, which allows you to type in information about your equipment and they tell you how much they will pay you for it. I found out that I could fetch a whopping $17 for my 6 month old LG phone while my old Nokia has no value.  But they also buy old laptops, gaming consoles, digital cameras, MP3 players, etc.  I found out our ancient Nintendo 64 also has no value :<

Click this link:  Get Cash For Your Gadgets at gazelle.com! so that Conejo Joe gets credit if you do happen to sell something to Gazelle.  Whatever I make I will donate to local charities!  Go on, start uncluttering your house of old electronic stuff!

Where Do I Invest Money When Interest Rates are So Low?

My mother is retired and is doing her best to live off of her retirement savings and Social Security payments.  She prefers to invest in conservative CDs and bonds as she doesn't have a lot of money and doesn't want to risk losing money.  However, the rates are so low today she is wondering what to do.  CDs are earning a measly 1.5% to 2.5% depending on duration.  Corporate bonds aren't much better.

The April 2009 issue of Kiplinger's Finance has some good alternatives for those willing to put some money in stocks that pay decent dividends.  While investing in stocks certainly has downside exposure as we've all experienced recently, if you are investing for the long haul, consider some of the following:

• Altria (Symbol: MO) at its current price of $17 generates a 7.9% yield (I don't like smoking but I don't mind profiting from those who do).
• BP plc (BP) at $38 has an 8.8% yield! Nice!
• Aflac (AFL) at $15 has a yield of 7.5% (though the stock price has been completely hammered down 80% over the past year...not for the faint of heart)
• Eli Lilly (LLY) at $31 has a yield of 6.5%
• GlaxoSmithKline (GSK) at $29 yields 6.8%
• Nicor (GAS) at $29 has a yield of 6.4%
• Merck (MRK) at $27 (was $24 yesterday) yields 6.3%
• H.J. Heinz (HNZ) at $33 yields 5.1% - ketchup on some nice dividends!
• Kraft Foods (KFT) at $23 yields 5.2%
• Coca-Cola (KO) at $41 yields 4%

Other stocks that I like for their dividends and what I believe to be are solid future prospects are:

• AT&T (T) at $24 a share yields 6.7%
• Verizon (VZ) $28 yields 6.8%
• Southern Co. (SO) at its current low point of $27 yields 6.3%
• Johnson & Johnson (JNJ) today is at $51 and yields 3.8%
• Kimberly-Clark (KMB) of Kleenex, Huggies and Depends fame at $46 yields 5.3%
• Microsoft (MSFT) at its current low price of $17/share yields 3.1%
• Bristol-Myers Squibb (BMY) at its current $21 price yields 6%
• Even Procter & Gamble (PG) at $47 is now yielding 3.5%
• I also like the iShares Investment Grade Corporate Bond ETF (LQD) which invests in high yielding corporate bonds and currently yields 5.8%

These yields look good now but things can change...both dividend payments and stock prices can drop (case in point...GE and all the financial stocks).  But stock prices have already dropped so much that I'm willing to take my chances on many of these.

Our New State Budget: The Feds Giveth as California Taketh Away

Easy come, easy go.  Last Tuesday, the 17th, we heard the latest economic stimulus will bring $800 in Federal tax savings this year for married couples ($400 for single).  Three days later the California budget stalement was settled, bringing with it a variety of "temporary" tax increases.

California's budget has grown by $50 billion in 10 years (from Gray Davis' first budget in 1999-2000 to Arnold's budget today).  But revenues haven't kept up, to the tune of $42 billion.  Part of the plan to make up this difference is to 1) raise income taxes, 2) raise sales taxes, 3) reduce dependent tax credits, and 4) raise vehicle license fees.  OUCH x 4!

Let's see how much this is gonna cost us:

1. Income Taxes:  Increases .25% immediately. But if the state gets $10 billion in Federal stimulus funds, the increase halves to .125%.  The median household income in Ventura County is $85K...which translates into a tax increase of $106 to $212 per year.

2. Sales Taxes: Effective April Fool's Day (no joke), sales taxes increase by 1 percentage point, from 7.25% to 8.25% in Ventura County (our friends in the L.A. County portion of Westlake Village, Agoura, etc. will chew on a meaty 9.25% sales tax).  For a typical family spending $20K/year on taxable products, say buh bye to another $200 per year.

3. Dependent Tax Credits:  This one hurts families and single parents.   The Dependent Tax Credit on your California tax return has been sliced from $300 to $100 per dependent.  Thus a family of 5 like Conejo Joe's clan is nailed for another $600/year in damage.  Heck, I guess I shouldn't feel so bad...the OctoMom, with her 14 kids, is down $2800 in tax credits!

4. Vehicle License Fees (VLF):  Effective 5/19/09, the VLF increases from .65% to 1.15% of your car's value.  So let's say you have 2 cars with a value of $20K apiece.  There goes another $200 down the drain.

So overall a California family of five with $85K in taxable income will be down by $300 to $400 per year, even with the one-time Federal stimulus.  This is not stimulating.

But hey, what about that new Federal New Car Sales Tax Deduction!  Buy a new car by 12/31/09, you get to deduct sales taxes on the car.  So let's say you buy a new car for $25K.  If you buy it before 4/1/09, you owe $1812.50 in taxes in Ventura County.  At a 25% income tax rate you will save $453 in Federal taxes.  That's not too shabby.  But if you wait until after 5/19/09, your sales taxes increase by $250 and your VLF increases by $125, rendering the Federal new car stimulus pretty meaningless.  Bottom Line: If you buy a new car this year, consider buying it on 3/31, the last day of the 1st quarter...when dealers are hungriest to sell AND you avert the coming tax increase(s).

California Home Buyer Tax Credit: California did come out last week with an interesting home buying incentive.  Buy a brand new, never occupied home between 3/1/09 and 3/1/10, take a 5% income tax credit, up to $10K!  There are NO income limits and you DO NOT need to be a 1st time homebuyer!  There is some fine print on this however: 1) the tax credit is spread out over 3 years from the date of purchase, 2) the house must be your primary residence for 2 years, and 3) the state has allocated $100 million towards the credit.  First come, first served, once the $100 million (or roughly 10,000 new homes costing $200K or more) is used up, the credit is gone.

Brief Overview of How the Latest Stimulus Package Can Help You and Me

The $787 billion American Recovery and Reinvestment Act (ARRA) of 2009 was signed into law by President Obama today, February 17th. For full details about this 1100 page act, visit www.recovery.gov.  I'm impressed that this website was up and running so quickly.  The site indicates it will provide detailed, transparent information about where the stimulus funding goes.

So we've seen how the bank bigwigs got their fat bonuses from previous stimulus packages.  How will this latest stimulus impact us regular guys, gals and bunnies?

Some Money Back in Our Pockets

Well those of us who still have jobs will be eligible for the cleverly named "Making Work Pay" tax credit, which will give us Federal money back of 6.2% of our 2009 wages up to a maximum of $400 (single) and $800 (married).  The credit phases out if your earnings are between $75K and $95K (single) and $150K to $190K (married).  You get the money back either by reducing your tax withholdings or by taking a credit on your tax return.  Seemed odd that the unemployed don't get this credit, but they get their own stimulus (below).

THE CALIFORNIA 2009-2010 BUDGET HAS BEEN SIGNED, WHICH EFFECTIVELY RENDERS THE FEDERAL "MAKING WORK PAY" TAX CREDIT FUTILE AS MOST OF US WILL SPEND OUR TAX SAVINGS ON CALIFORNIA TAX INCREASES.  BUMMER!  CLICK HERE TO READ MORE.

Helping the Unemployed

The unemployed will receive some help from ARRA.  Unemployment benefits will temporarily increase by $25 per week.  The first $2400 of unemployment payments will be free from Federal taxes in 2009.  Unemployment benefits will be extended for longer periods for many people (I don't have the details on this as of yet). 

Lastly, anyone who has been canned from their job between 9/1/08 and 12/31/09 is eligible for a subsidy of 65% of the cost of up to 9 months' COBRA medical insurance premiums.  It phases out if your income is $125K to $145K (single) and $250K to $290K (married).  This is a nice benefit but, with all due respect, does a family earning $250K a year really need this subsidy?  Our tax dollars hard at work.

First-Time Home Buyer's Credit

Well this is quite a nice incentive to buy a house!  $8000 refundable tax credit if you buy a house between 1/1/09 and 11/30/09.  Technically the credit is 10% of the purchase price of the house, up to $8,000.  CLARIFICATION; This credit is for anyone who has not owned their own home for 3 years up to the purchase date of the new home.  This is an outstanding incentive to buy a home this year and basically get most of your closing costs covered by a tax refund!  The credit phases out when your income reaches $75K to $95K (single) and $150K to $170K (married).

Last year's 1st timer tax credit was $7500 and it has to be paid back like a loan over a 15 year period.  Oddly, the period for that program (4/9/08 to 6/30/09) overlaps the new credit.  So any of you who took advantage of the "old" credit last year, you're out of luck and will not be eligible for the new credit.  That's the breaks I guess.

Help With Education

The American Opportunity Education Tax Credit is a tax credit of up to $2500 a year for tuition and other college expenses in 2009 and 2010.  You claim 100% of the first $2000 spent and 25% of the next $2000 to receive the full credit.  This phases out for incomes over $80K (single) and $160K (married). This tax credit replaces the Hope Credit for the next 2 years unless it is extended past 2010.

Tax Preparers' Economic Stimulus

I've just covered some of the key aspects of ARRA above...there's a lot more!  Probably the biggest recipients of this latest economic stimulus package are professional tax preparers, who no doubt will be busier than ever interpreting and implementing the new tax laws.  Any of you watch the stock market today?  It was down 4% but H&R Block was only down 2%...hmmmm...maybe a safe haven stock for these Stimul-laden times.

$250 One-Time Payment to Social Security and Other Federal Benefits Recipients:  CLICK HERE

The Economy and its Impact on Us

All right, folks, Conejo Joe here.  I've been on a week long trip to San Diego with my family and am back in action. 

The economy has been a major concern and drag on all of us.  What a year.  Gas prices rising to over $4 a gallon and now we're seeing prices below $2.  The stock market has been hammered over 50% from its highs and it has hit all of us hard in our retirement savings.  We've seen dozens of companies filing bankruptcy or scaling back.  Foreclosures all over the place.  Real estate prices are way way down.  Unemployment rates are sky high.  It has certainly been a stressful year.

But you know what?  We are resilient and we will come back.  We are all in this together and we have seen this cycle before.  We have a broad, diversified economy and somehow, some way, we will all make it through these economic doldrums.

Our trip gave me hope.  We visited Legoland, Sea World, Downtown San Diego and we saw lots and lots of people out there, experiencing life, enjoying themselves, spending money, regardless of the bad economy.  Heck, we even had to stand in lines!!  There are too many things in life to live for and enjoy.  Why let a little recession ruin the fun!? 

If you are unemployed, there are still plenty of jobs out there!  They may not pay exactly what you want, but sometimes we need to step back to move forward.  Check out Monster.com, Craig's List, the local newspapers.  Network in LinkedIn and other social networking sites.  Make something happen.  Our country needs each and every one of you.  There are jobs out there for everyone.  They don't always hit you in the face.  You need to take action and FIND them!

OK, OK, Mervyns went bankrupt, Linens & Things went bankrupt, Sharper Image went bankrupt, Circuit City just filed for bankruptcy and the banking industry changed so much that we hardly recognize it.  But ya know what, I HATED Mervyns, Linens & Things, Sharper Image and Circuit City.  Last time I visited Circuit City I waited 20 minutes for help and there were no customers in the store.  Mervyns was never exactly enjoyable.  Times change and some businesses can't keep up with change.  (I do like the Janss Marketplace very much and hope that the void left by the loss of Mervyns and Linens & Things is filled quickly).

In the meantime, The Oaks mall has been through a major upgrade and a large new Nordstrom store opened in September.  And a high-end Muvico movie theatre is slated to open at The Oaks in early 2009.  The U.S. Government has stepped in and provided a backstop for large financial institutions like Citigroup, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley and JP Morgan Chase by investing in these companies.

So bottom line is this.  We live in a very cyclical, dynamic and changing world.  Don't overreact.  Don't not act.  Now is the time to start investing in your future.  Make things happen.  Everything is a two-edged sword.  Real estate and stock prices have tumbled.   But perhaps that gives us the buying opportunity of a lifetime.  Your company went bankrupt and you are out of a job.  Well maybe you hated that job and this gives you the opportunity to find what you enjoy.  Or become a consultant.  Or start your own business!

We have seen how quickly things can change.  TAKE ACTION!  Don't just sit there!  Don't wait for the "perfect" opportunity or situation.  Now is the time.  If you snooze, you lose!  Try something new!  Don't rely on others to make it happen for you.

There is too much to enjoy in life to sweat the current economic situation we face.  As the Resident Rabbit of this website of local goings on, I can tell you that hundreds of hundreds of events and activities take place locally each year and thousands upon thousands of us participate.  Yeah, yeah,  Conejo Valley Days may be history, but you know what, there are dozens upon dozens of other events that have taken its place.

So in this holiday season, enjoy yourselves, have FUN and remember...we are all in this together.  After all is said and done, our goals are all similar.  We want to live happy, healthy, loving lives.  Let's work together and make it happen!

Mortgage Meltdown Musical Chairs

As I type this post on a windy Columbus Day holiday in Ventura County, the stock market is up over 11%, thanks in part to an announcement that the U.S. Treasury may buy some bank stocks!  Talk about a volatile market!  Stocks were down 18% last week, 24% over the last 2 weeks and 40% over the last year! 

What prompted me to write this was that my wife mentioned we have a savings account at Washington Mutual.  There have been so many banking changes that I couldn't even remember who now owns WaMu (it is now JP Morgan Chase)!  So here's a high level compilation of some of the major events of the year...so far!

10/13/08 (today):  The Federal Reserve approved Wells Fargo's purchase of Wachovia.  This deal is expected to close by the end of the year.  Wachovia is (soon to be was) the 4th largest bank in America.  Originally Citigroup tried to buy Wachovia but Wells Fargo offered more $$.

10/3/08:  FDIC deposit insurance limits are temporarily raised from $100K to $250K per account until 12/31/09.  Now if they could just tell me where I can get this much money fso I can utilize these limits.

9/25/08:  Washington Mutual is shut down by the Office of Thrift Supervision and FDIC (the largest bank failure in U.S. history), only to be immediately sold to JP Morgan Chase that same day.  JP Morgan Chase now claims to be the largest U.S. bank.

9/16/08:  Bank of America bought Merrill Lynch for $50 billion (way to go, B of A!).  The deal will close sometime in Q1 2009.

9/15/08:  Lehman Brothers files Chapter 11.  Sorry guys, no bailout for you!  But the next day, Barclay's Bank bought Lehman's businesses and assets.  So Lehman is still around.

9/7/08:  The Government takes over Fannie Mae and Freddie Mac.  Maybe they should upgrade their names to something like Angelina and Brad or other more popular names.

9/6/08:  The Government steps in and saves AIG from its liquidity issues by taking the equivalent of an 80% stake in the company.

7/11/08:  IndyMac, with local branches in Thousand Oaks, Camarillo and Ventura, is the 2nd largest bank failure in history (now the 3rd largest, thanks to WaMu).  But that's o.k., they are now owned and operated by the Feds and all's fine.  Anyone wanna buy a bank?  How about McDonald's?  Rename it BigMac bank and pay interest in french fries??

7/1/08:  Countrywide officially becomes owned by Bank of America.  So now the big question is...when are they gonna change it to the Thousand Oaks Civic Arts Plaza's "Bank of America Performing Arts Plaza"??

5/31/08:  JP Morgan Chase bought Bear Stearns.  They opted against calling the new entity JP Morgan Chases Bears.

Well let's all hope that we are headed in the right direction!