Fed Rate Hike: September, December or not at all in 2015?

u.s econ

Talk about a rise in interest rates at the Fed’s September meeting has been fueled by hawkish comments from Fed officials. Fed Chair Janet Yellen said that rates were likely to rise this year depending on data, while St. Louis Fed President James Bullard said that there was a better-than 50 percent chance of rate rise in September.

This past week has seen gold prices tumble to five-year lows and U.S. oil prices dip below $50 a barrel for the first time since April. Commodity prices in general have been hurt by weak demand and a rise in the U.S. dollar. Most commodities are priced in dollars, so a rise in the currency makes oil and gold more expensive for holders of other currencies.

This is causing confusion in both the bond & stock markets as investors try to figure out what economic data will trigger a rate hike.

Some analysts claim that the broad selloff in commodities and U.S. dollar strength are disinflationary which points to their argument that the Fed will hold off any rate hikes until December or not at all in 2015. The Fed will wait until the CPI (Consumer Price Index) moves into positive territory. They argue that a stronger dollar will also weaken the export portion of the U.S. economy.

Other analysts say there is another way to look at the selloff in commodity prices. The fall in oil, for instance, puts more money back in the pockets of consumers and businesses, which helps boost growth and reflate the economy longer-term. The bigger picture points to an economy that is recovering, a strengthening labor market and interest rates that are at emergency low levels which are no longer necessary.

As a Canadian, I am somewhat baffled by the move by the Bank of Canada to cut interest rates last week lowering the value of our dollar. A rise in U.S. interest rates in September by the Fed would have had the same effect! Unless, the Bank of Canada thinks that the Fed will hold off raising rates until December or early January. The only other reason for lowering  interest rates is fear of a possible recession in the Canadian economy.

Considering that commodities make up 50 percent of the Canadian economy. A lower Canadian dollar, for example, will help our oil patch. Oil sold at $48.00 U.S. a barrel converts into $63.00 Canadian. The problem lies in the fact that foreign investors don’t want to buy Canadian stocks because the value of our dollar continues to depreciate.

What could happen if the Fed raises rates in September?

  • Price of gold, oil and most commodities will fall in price
  • Bond values would go down and bond yields would rise
  • Interest sensitive stocks would fall in price
  • Canadian & Australian dollar will fall further
  • The Toronto stock market would sell off

Ignoring currency risks can be hazardous to your financial health!

Bank of Mom & Dad, Cutting the Purse Strings

mom & dad

It’s natural for parents to want to help and support their children. But should that help continue well into adulthood? By helping too much, parents run the risk of imperiling their own financial future and creating dependence. The reality is that you are not doing the adult kids any favors  by always bailing them out.

The Great Recession rewrote some of the rules of financial independence for many young adults. With jobs being scarce, student debt soaring and high household debt, it wasn’t uncommon for grown children to take refuge in their childhood homes.

Those were unusual circumstances when even hardworking children found themselves in financial straits. It is okay to help them if they are financially responsible but have fallen on hard times. However, an “open wallet” policy is dangerous for parents as well as children. Always coming to their rescue can jeopardize both your child’s drive and your retirement security.

Tough Love: Teaching Financial Responsibility

The best defense against dependent children is increasing financial responsibility as children grow. You need to start the process when your children are young. Counting on the school system or waiting until after they graduate college can be a costly mistake.

I strongly recommend pushing your young children to get part-time jobs. If they are driving the family car, make them pay for some gas or a portion of the car insurance. Paying for some or all of their cell phone bill is another way to teach financial responsibility. Avoid always acting as their personal taxi service, make them take public transportation once in a while.

My son never wanted to use the family van when going out with his friends while living at home. Going away to university, he spent two years taking public transportation, that experience really changed his attitude. He was so grateful that I gave him our 10-year-old van instead of trading it in.

It’s okay to say no! My eight year old daughter asked for horseback riding lessons. I honestly didn’t take her request seriously. I said that riding lessons are expensive and we didn’t have the money right now. She came back with the job section of our local newspaper. She pointed to an ad that was looking for delivery people. “Is this enough money to pay for riding lessons”? It wasn’t but we said yes to riding if she was willing to give us half her earnings from the paper route. (We invested her money and gave it back when she graduated from university).

The Right Kind of Help

  1. If your children need a car to get to work, consider giving them an old family car that is still reliable. A few repair bills can teach them some added responsibility and give them an incentive to save for a new car.
  2. If your children are paying a high rate of non-deductible interest on their student loans, loaning them money at a lower rate of interest can be helpful. Put all the details of the loan in writing and make sure that your children make regular monthly payments to you.
  3. Some assistance with a down payment for a house is okay as long as your children are willing to disclose their financial situation. Bank of Mom & Dad should ask the same questions as your local banker. Are they paying off their credit card balances every month? What are their fixed monthly debt payments? Add the estimated mortgage payments, property taxes and heating costs to those payments, if it exceed 40% of their gross income then they probably can’t afford to buy the house.
  4. Help your children save for retirement. Deposit money directly into a retirement account that generates a tax refund. The refund gives them a little extra cash but the compounding effect from investing the money early can increase the chances of a successful retirement.
  5. Some children will never be financially responsible, skip a generation and open an education plan for your grandchildren.

As a financial advisor, I encountered financial mistakes made by some of my wealthier clients. For example; a client  gave his newlywed daughter and son-in-law enough money for the entire down payment for a house.  Three years later, they got divorced and the ex-husband walked away with half the proceeds from selling the house including half of the Dad’s down payment.

As a parent, you need to protect yourself, get some legal advice when transferring large sums of money.

tax 1

Gifts vs. Loans

For U.S. citizens there is a gift tax on sums greater than $14,000 or $28,000 per couple. In Canada, there isn’t a gift tax on money given to adult children. However, transferring investments or property to your children can trigger capital gains tax which must be claim on your tax return. Be extra careful transferring investments to a minor, the parent incurs tax on any interest or dividend income from those investments until the minor turns eighteen.

Be aware that the tax man requires a minimum interest rate charge to loans made to family members. The interest rate varies from year to year. The current rate for Canadian families is only 1% with no time restriction regarding payback.

However, Internal Revenue Service rules are different, in March the Applicable Federal Rate was 0.40 percent for loans up to three years, 1.47 percent for loans of three to nine years and 2.19 percent for loans longer than that. If your children don’t pay it back, it becomes a gift.

Keep in mind that a child in their 30s or 40s has lots of options for generating income; a retiree does not.

One Year Anniversary of Smart Money


A really big thank you to all my WordPress & email readers for taking some time out of their busy schedules to visit my blog. I am amazed that people from so many different countries have read at least one of my blog posts. It has been a real learning experience since my first blog post of July 20, 2014. I hope that you have found some useful information in my articles to improve your financial knowledge and well-being.

I can’t believe that I am still blogging. I am much better at answering financial questions then trying to write a financial blog post that people may or may not be interested in. To be honest, I struggle every week to write something that I think is worth reading. Being Italian, I often joke that English is my second language. Please accept my apology for any grammatical or spelling errors that you may find.

There are so many bloggers that have inspired me to write during the past year. The list is just too long to mention. The fact that I have posted one of your articles on my website or made a commented on one of your articles is an indication that you are on that list, thanks for the inspiration!

A special thanks to my daughter, who is the writer in our family, for encouraging me to start blogging. However, the book on my life as an entrepreneur that you want me to write isn’t going to happen. I already spend way too much time on my lap top just trying to write 500 words a week.

Thanks again,  I will continue to write as long as you are willing to read!


The Rise of the Machines: Robo-Advisors


Would you trust a robot to manage your money? New technology is upsetting the financial world with the arrival of the start-up digital-advice firms informally known as robo-advisors. These companies are still small; they are positioning themselves to cater to investors who do not have large enough accounts to meet traditional wealth-management minimums.

Many of these robo-advisor firms use proprietary software to determine how investors should allocate their investments. Using their online questionnaires, investors share information such as their age, risk tolerance, time horizon and investment goals. In return, investors receive an investment plan tailored to their individual needs.

Young investors and robo-advisors seem to be a perfect match. Young people are comfortable using and trusting technology. They have been overlooked by the financial (advice) industry because their account balances are too low to be profitable.

Great selling points for robo-advisors are their low fees, plus very low account minimums and in some cases no minimums at all. Basic advice and access to digital tools are free. Advice from an actual certified financial planner (online or by phone) will cost you extra. Some firms also include tax loss harvesting and portfolio rebalancing into the deal.

Here are a few online investment-management players:

  • Betterment
  • Covestor
  • Future Advisor
  • Motif Investing
  • Wealthfront

Fees at two of these firms, Betterment and Wealthfront, can be as low as a few dollars a month. Betterment’s has a sliding scale that it charges 0.35 % under $10,000, 0.25 % under $100,000 and 0.15 percent annually on assets of $100,000 or more. Wealthfront charges one fee of 0.25% but no management fee on the first $10,000 and a low investment minimum of $500.00

Both Vanguard and Charles Schwab have reacted to this new trend by rolling out their own robo-advisor services. The Vanguard service requires a minimum of $50,000 and charges 0.30%.  Charles Schwab launched its robo platform, called  Schwab Intelligent Portfolios, in March. The service requires a $5,000 minimum investment in order to get access to their personal financial advice.

By and large, robo-advisors have set out to serve the substantial number of people who can’t afford a financial advisor, mostly Gen X and Gen Y investors. Apparently, robo-advisors are also enticing an older crowd according to Jon Stein, CEO of Betterment.

“We had a number of customers who are in or approaching retirement.” These “older” customers make up 20 percent of the Betterment’s assets under management.” “They are starting to ask for advice on how to spend down their assets.”

Having worked as a financial advisor, I am bias and very cynical regarding both human and robo-advisors. The financial service industry has a “cover your ass” mentality. Advisors use asset allocation and diversification within their model portfolios to ensure that the client doesn’t lose any money. Clients losing money is bad for business, they tend to go elsewhere for financial advice and it also generates lower revenue from commission fees.

Unfortunately, most of these model portfolios are based on the average returns of both stocks and bonds over the past 20 years. The “Great Recession” is a game changer! I believe that rates of returns going forward on bonds and even stocks are going to be much lower than historic norms. Most financial experts agree that the 6 year bull market in U.S. stocks has been mainly due to below normal bond yields.

In theory, if you are a baby boomer like me, you should have 60% of your retirement funds in lower risk bonds. According to  life expectancy rates, you have a good chance of living another 20 to 30 years. Many of today’s baby boomers could very easily run out of money because of low bond yields based on current model portfolios.

When it comes to paying for advice, do your homework! The internet has all kinds of free financial information. Investors can access the same technology that financial advisors use to deliver services to their clients. Considering saving your money, use it to pay accountants for tax advice and lawyers for all your legal needs.

 Would you trust a robot to manage your money?

Is $70 Oil Still in the Cards? Think Again!

oil rigs

Oversupply fears hit oil prices last Wednesday, after the U.S. Energy Information Administration reported that U.S. crude-oil stockpiles rose last week for the first time in nine weeks. Followed by data that showed a sharp ramp up in U.S. production in April to levels not seen in decades.

On Friday, Baker Hughes reported the number of rigs drilling for oil in U.S. fields rose by 12, bringing the total to 640. Oil experts had expected the rig count to bottom out soon and then rise by about 100 rigs later in the year.

Plenty of Downside Risks

  1. Greece leaving the Euro zone could strengthen the U.S. dollar which is traditionally negative for oil prices. Another catalyst for a stronger U.S. dollar will come when the Fed’s hikes interest rates, expected to begin later this year or early next year.
  2. Iran’s nuclear deal with global powers will bring more of its crude to an oversupplied market and will put downward pressure on oil prices. If a deal gets done soon, Iran currently has millions of barrels of crude oil in floating storage that could be on the market fairly quickly. It may take some time but Iran also has the potential to add another 700,000 barrels a day to the world oil supply by the middle of next year.
  3. Stock markets have been worried about slower Chinese growth, they just don’t believe the GDP numbers coming out of China. The Chinese  stock market is down 30% recently which  has the potential to hurt the broader population of Chinese investors, a sign that China could be heading into a recession.
  4. A lot of hedge fund money is looking to pile into the short-side of the oil trade. Crude oil is teetering toward a technical bear market, having lost almost 20 percent of its value from a high above $62 just a month ago. More downside momentum could push it to test the six-year low of $42.03 set in mid-March based on technical indicators.
  5. The Alberta government has increased corporate income taxes, doubled the carbon emission tax and is currently reviewing their royalty fees. Three additional reasons to avoid investing in Canadian oil produces.


With the market already oversupplied with 1.5 million to 2 million barrels a day, any sign of movement toward a nuclear deal will be bearish for oil markets, Matt Smith, director of commodity research at Clipper Data Smith said. Iran could release as much as 40 million barrels of oil currently sitting in floating storage into the market.


Put all these risks together, I think that getting anywhere near the $70 mark is a long shot. The question is, does the oil market hold at $50 or do we go back to $40? At some point, investors that have long positions could start bailing, adding further pressure on oil prices. The one year chart of the oil ETF  is getting near its 52 week low of $71.70




When it comes to oil stocks, I am still bearish! Are you a bull or a bear on oil?


Netflix Declares 7 for 1 Stock Split, Time to Buy or Sell?


According to billionaire investor Carl Icahn, it is time to cash out. He announced during an interview on CNBC “Fast Money Halftime” that he sold his remaining 1.4 million Netflix shares. He bought 9.4% of the company nearly three years ago, just in time to own the biggest gainer of 2013 within the S&P 500! Do you consider Icahn was smart to buy shares near the bottom or just lucky?

“Netflix was a no brainer when we first went into it.” Icahn said in a CNBC “Fast Money Halftime interview.” You couldn’t compete with Netflix because they were starting the year with like $2 billion flowing into them, and Reed Hastings did a great job in building it up.”

Icahn also said he believes Apple may be in the same position Netflix was, or maybe even in a better one. “I just don’t see how … you compete with Apple because of the great ecosystem they’ve built.”

By cashing out, Carl Icahn is walking away with an estimated profit of 2 billion dollars. However, you can’t ignore the fact that he may have sold more than half his shares too soon. Mr. Icahn reduced his stake in Netflix from 9.4% to 4.5% in October of 2013. Unloading his Netflix stock at $341.00 a share but the stock has nearly double in less than two years since then.

Keep in mind, this is the same man who bought into Netflix’s rival Blockbuster a few years earlier. Carl later admitted that it was the worst investment that he ever made. His stock price has gone down over the past year. See the one year chart below:


Netflix shares were not cheap when Carl Icahn bought them 3 years ago and are still very expensive today by most valuation methods. There is no reason to believe that the stock price won’t continue to go higher despite the fact that Icahn has sold all his shares.

Wall Street analysts are divided on the stock since it hit fresh highs the day after the stock split announcement. It is hard for some analysts to put a buy rating on a stock that has nearly doubled in price over the past year. While others argue that the company is in a strong position with over 60 million subscribers around the world. They see Netflix expanding into new markets like Japan, Italy, Spain and India within the next year.

First Call Earnings Valuation Report

– 1 day ago

Sell  2 Under Perform    2  Hold    15  Buy  12 Strong Buy       7

The stock split will come in the form of a dividend of six additional shares for each outstanding share, Netflix said. It is payable on July 14 to stock owners of record at the July 2 close. Trading at the post-split price will start July 15.

Netflix will also be reporting their second quarter earnings results on July 15. As a consumer, I am still stuck in the dark ages watching cable, so I have had a hard time buying into Netflix’s growth story. Plus I am a movie buff and I have seen 75% of the movie titles offered by Netflix and the other 25 % don’t interest me. As an investor, I am kicking myself for not buying this stock.

The stock split will make it easier for small investors to buy some shares. Apple did the same stock split back in May of 2014 and its valuation has increased from the $92.00 level to $126.00!

What do you think? Should I buy or are you selling?