Costs of Investing in Mutual Funds

Mutual fund costs:
http://personalfinance.byu.edu/?q=node/817

Hidden costs:
http://personalfinance.byu.edu/?q=node/818

Iran goes nuclear

With Iran upping the ante on nuclear weapons, all bets are off on equities--maybe this is the event that triggers end-of-year selling, as mutual fund managers lock in profits to pad their bonuses. With the likelihood of Congress accelerating the repeal of the Bush tax cuts in 2010 instead of waiting for 2011, investors may do the same profit-taking as well, choosing to pay capital gains taxes of 15% instead of 28%.

In other words, the expected annual Santa Claus rally may end up an ugly rout instead. I don't know--I don't have a crystal ball on the stock market overall, and I would posit most people don't either--on the timing or direction. Some may get the direction right--but go broke waiting for the reversal. And very few people can time the markets in the first place.

If Ahmadinejad's regime continues to flout sanctions and conflict breaks out in Iran, Pakistan, and/or India, the shock to oil and eventually gold will make last year's run up seem tame in comparison. Equities worldwide will plummet, as Russia and China have many trade ties with Iran. Wall Street does not appreciate uncertainty.

Any dire consequences will be bullish on oil and gold, even if the initial shock may tank all assets, except the rush to safety toward the USDollar and US Treasuries. Longer-term, this flight to safety will prove wrong-headed, because another military conflict means the Fed has to print even more dollars, debasing the currency further.

Iran is a major oil producer, so any shocks to supply will also drive up the price of oil and precious metals. Let's hope Iran is barking and not biting.

The next shoe to drop...

We've seen the subprime mortgage crisis spill over to the whole residential mortgage industry, causing property values to plummet in many regions. Collateral debt obligations and credit default swaps turned sour have caused a further erosion of asset values and balance sheets across the globe. This has caused a run on several investment and commercial banks, most notably Lehman Brothers and Washington Mutual, respectively. This cascaded over to the stock market, leading to breath-taking declines across all sectors, including industries in hard assets, like oil, natural gas, gold, and the other minerals and commodities. While the Fed dropped its funds rate to 1.0%, and the Treasury turns on the money spigot, we anticipate future inflation. However, due to massive investor redemptions at hedge funds and now mutual funds in an effort to raise cash, individuals and institutions alike are scrambling to de-lever their precarious financial conditions. Deflation--not inflation, is the current concern. The R word (recession) is not a question of if, but how deep and for how long.

So the worst is over and the unknowns are out on the table, right? Wrong. Just as many teaser residential loans have been re-setting, causing a barrage of foreclosures, the commercial real estate market, which has held up relatively well up to this point, is now in real danger of falling off the precipice as well. As companies announce massive layoffs, and as consumers hunker down to save for a rainy day, companies have lowered earnings projections (hence, shares of equities have plummeted). These conditions will be disastrous for commercial real estate values, which are ultra-sensitive to economic conditions. Expect more bankruptcies, vacancies, and foreclosures in the commercial real estate space.