Right about now, she’s probably hoping you forgot. Whitney is the analyst who said,

“There’s not a doubt in my mind that you will see a spate of municipal bond defaults…”

She went on to say that there could be 50 to 100 sizable defaults or more and that those defaults would amount to hundreds billions of dollars worth of defaults.

Municipal bond markets reacted by bidding up the yield for muni bonds.

Most experts didn’t buy Whitney’s prediction. Even I wrote a 2011 article about how safe are muni bonds when people kept asking me about it. Of course, none of those stories was a big, inflammatory prediction of doom from a “name-brand” financial analyst.

Analyst Predicts Muni Bond Defaults

Wall Street and the financial markets are a very weird place. Preeminent analysts are created by making market calls or predictions that come to pass, especially when they make calls that no one else saw coming. Ironically, those same analysts aren’t necessarily held accountable when they make bad calls.

Goldman Sachs’ Abbey Joseph Cohen made a name for herself by making ever higher market calls during the technology fueled stock market bubble of the late nineties. When other analysts concluded that there was no rational basis for the stock market to go any higher and predicted a downturn, Cohen was always there with an even higher market prediction, and she was right (for a while).

Unfortunately for the people that listened to Cohen, she was most decidedly not right about when the market would finally turn. Indeed, when the market first began heading down, Cohen predicted a rebound. Listening to her would have cost you much more money that it would have made. In fact, Cohen predicted an UP year for the stock market in EVERY SINGLE YEAR during and after the internet bubble popped, which means she has NEVER thought the stock market would go down.

It’s a sad fact that there is little or no real accountability in the investing world. The bond rating agencies Moody’s, Standard and Poors and Fitch have suffered no negative effects from rating toxic mortgage securities as AAA until long after it was obvious to EVERYONE that there were problems. Many securities went straight from AAA to Junk status, an admission that the AAA rating was either gross incompetence or outright fraud. Either way, all three companies continue to prosper.

Meredith Whitney’s Muni Bond Default Prediction Defaults

Financial analyst Meredith Whitney rose to fame by making a call warning about bank stocks in 2007, before everyone else realized the ship was sinking. Later, she predicted the dividend cut by Citigroup, further cementing her reputation as someone who saw things others could not see.

In mid-December of 2010, Whitney made another call no one was making, that muni bonds were headed for big waves of failures. The reality is that despite a very tough 2011, the end of stimulus dollars flowing from Washington and state and local tax collections below predictions, there have actually been FEWER muni bond defaults in 2011 than in previous years.

The closest thing to Whitney’s prediction were two defaults late in the year when Harrisburg, Pennsylvania and Jefferson County, Alabama defaulted. That $3 billion is a far cry from the hundreds of billions Whitney predicted. A closer looks shows a flawed project and not a tidal wave of financial problems sweeping up an entire county’s finances. Remember, the giant (and very real) financial issues of California led to not one single dollar of California muni bond defaults.

In the real world, Whitney’s credibility should be destroyed. In the world of finance, however, Whitney will lie low for a while before putting a better spin on her remarks. There will be caveats, and things that she said elsewhere in much lower profile that seem to make her bold prediction less of a failure.

The terminally stupid will by into this spin, and use it to defend her. But, the fact remains that when the press was swirling around and her name was in big BOLD headlines, she did not make one remark, give one interview, or say one single thing that suggested she was in any way uncomfortable with how her prediction was being represented. Only now, after she has been proven wrong and it looks bad for her will she suddenly point out the subtle nuances that meant it was all just a big misunderstanding.

For 2012, make your investing resolution to be, “To stop listening to analysts who make their living by making a lot of noise with big predictions.” After all, sooner or later you’ll be listening to Abbey Joseph Cohen call an up year for the markets in 2008, or Meredith Whitney telling you to get out of bonds before all those non-existent defaults in 2011.

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Meredith Whitney Muni Bond Defaults Fails to Materialize originally published at Finance Gourmet

2011 Dow Jones Up

The Dow finished up for 2011 thanks in part to the makeup of the index. The stocks in the Down Jones Industrial Average contain only large U.S. companies. While financial companies make up a significant number of the stocks, their impact is limited because the Dow Jones Average is a price-weighted index. That means that higher priced stocks have more influence on the average than lower priced stocks.

Most financial stocks have very low share prices these days, and as a result, their performance doesn’t drag as heavily on the average. Bank of America was the worst performer in the Dow having lost 58.3 percent for the year.

The Dow Industrials finished up 5.5 percent for the year. That is three consecutive positive years for the Dow, although nobody is dancing in the streets over this year’s performance, where many components had flat or down years.

The top 5 Dow stocks for 2011 were McDonald’s (up 30.7%), IBM (up 25.3%), Pfizer (up 23.6%), Home Depot (up 19.9%) and Kraft Foods (up 18.6%).

2011 S&P 500 Down

For 2011, the S&P 500 Index finished down for the year, although it’s performance was essentially flat, down less than 0.1 percent for 2011.  Unlike the Dow average,t he SP500 index is weighted based upon each stock’s market capitalization. The dismal performance of the financial stocks included in the index have large market caps and weighed heavier, pulling the index down.

For example, IBM’s high share price (around $185 per share) means that it’s positive returns for the year count a lot toward the up side for the Dow versus Bank of America’s terrible performance being only a small impact thanks to its $5 a share price. On the S&P 500 Index, however, Bank of America’s $56 billion market cap gives it much more pull.

NASDAQ 2011 Performance Down

The Nasdaq Composite Index was also down for 2011. It finished the year down about 1.8 percent.

Other Stock Markets in 2011

International markets didn’t do as well as the U.S. In Europe, the growing Euro crisis has engulfed not only Greece and Ireland, but Italy and Spain as well. Britain’s main index, the FTSE dropped 5.6 percent for the year and the main German index, the DAX, was down approximately 15. That is its first down year since 2008.

Elsewhere, the Asian index, the Nikkei was down 17 percent.

For 2011 Gold was up 10.2 percent for the year (down from this summer’s +33 percent peak). Oil was up 8.2 percent for the year.

2011 Market Recap

So, what does the market performance for 2011 mean for investors?

Almost nothing.

The small gains and losses for the year hide the extreme volatility that took place during the year through bone-headed gridlock in Washington, particularly over raising the debt-ceiling, and the building financial crisis in Europe.

Overall, regular investors would be wise to take very little stock of how the markets overall performed during 2011. Instead, investors should focus on finding good companies with strong management since those are the only ones poised to benefit from what looks to be weak economic growth during 2012.

For American’s regular lives, the markets offer no real solution or problem to the ongoing economic issues. Recent economic data suggests that the economy might FINALLY be turning a corner, assuming the current my-party-is-more-important-than-the-country mentality in Washington can either be overcome, or sidelined by a nation that has grown largely disgusted with everything the comes out of the nation’s capital.

If jobs continue to get created and Congress doesn’t break the fragile economy, 2012 might see better investment performance, and more importantly, set the stage for real economic growth and investment performance in 2013.

Happy New Year, Everybody!

Related posts:

1. 2011 Stock Market Update Q3
2. Stock Market 4th Quarter Turn Around

Stock Market 2011 Results originally published at Finance Gourmet

Ironically, most investors are used to getting a so-called “Santa Claus” rally at the end of the year as money managers position their balance sheets and investments ahead of end of year reporting. However, this year, the problems in Europe, their affect on the Euro, and the potential collateral damage in the U.S. markets has kept investors from being in a merry mood.

As the year winds down, trading volume typically declines in the markets. Mutual funds, hedge fund managers and other money managers that are up for the year, sell everything and hold cash through the end of the year to lock in their gains.

Smaller investors, aware of the holidays, also position themselves to have only those investments they wish to hold for the long-term. That not only frees them up from having to watch the markets while at Great Aunt Margret’s house, it also prevents any surprise capital-losses or capital-gains that might upset carefully planned tax strategies.

The final two weeks of the year may produce enough of a rally to push the S&P 500 into positive territory, but it won’t be enough to make anything more than single digits show up in the 2011 column for all of those investor marketing materials and mutual fund prospectuses.

As anyone who lived through it (all of us) can tell you, 2011 doesn’t deserve to go down as a “good year” and it most certainly won’t look that way on paper when the math is all said and done.

Mutual Fund Returns 2011

I thought it would be interesting to see how some of the big mutual funds were doing in light of the single-digit change (positive or negative) likely coming for the S&P 500 index. Keep in mind that many of these funds do not use the S&P500 for their benchmark. However, investors are free to compare their investment returns to whatever they wish, and I always remember that I can have a low-expense S&P500 Index based ETF for much less than any mutual fund, so if they better at least make me feel good about it.

Unless otherwise specified, all funds listed are the “main” share class. Check the ticker symbol listed if you are really interested.

Year to Date Returns as of Market Close Friday, December 16, 2011 according to Morningstar.com.

• PIMCO Total Return Fund (PTTRX)  +3.68%
• Fidelity Contrafund (FCNTX)   -2.47%
• American Funds Growth Fund of America (AGTHX)  -7.19%
• American Funds Capital Income Builder (CAIBX)  +0.28%
• American Funds Income Fund of America (AMECX)  +2.94%
• Vanguard 500 Index Fund (VFIAX)  -1.07%
• Dodge & Cox International Stock Fund (DODFX)  -18.62%
• Dodge & Cox Stock Fund (DODGX)  -6.87%

As you can see, some funds are right there and some are getting hammered. International funds, particularly those with heavy investments in Europe, are understandably volatile. Bond funds are less volatile, although many are not in positive territory either. It’s hard to make much money in bonds when prices are held hostage by a zero percent interest Fed policy.

This year wasn’t necessarily pretty, but considering the state of the economy for much of the year and the slow improvements in the U.S. job market, there really isn’t much reason to think the stock market would react any differently.

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2. 2011 Stock Market Update Q3

S&P 500 Down for Year 2011 originally published at Finance Gourmet

Unfortunately, most people who invest in the S&P 500 Index do so in the same way the index is calculated, capitalization-weighted. That means that you buy more of the bigger companies and less of the smaller ones. There are some index funds and ETFs that allow you to invest in the S&P 500 Equal Weighted Index.

There are actually numerous ways in which this was not a lost decade for investors, most importantly, if you KEPT INVESTING, which is what both savvy and not-so savvy investors did when they did not turn off their 401k contributions through this turbulent decade. Those investors could have much more money today than the beginning of the decade and are primed for a much bigger recovery when the U.S. economy finally pulls out of its doldrums and moves ahead.

More on this later…

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S&P 500 Equal Weight Index Not a Lost Decade originally published at Finance Gourmet

Anyone want to guess how much went to share repurchases and how much went to dividends? If you are thinking 50/50, you aren’t even close.

As The Register points out, the share buybacks are a lot more beneficial for IBM executives hoping to keep the earnings per share, or EPS, growing at the proper rate to "earn" their bonuses than they are for shareholders looking to increase the value of their holdings.

Of course, there is nothing illegal or even unethical about IBM’s giant share buybacks, but it does raise the question, "Can’t IBM come up with anything better to spend its money on than its own stock?" If not, shouldn’t shareholders just get a check instead of the world’s biggest pile of treasury stock?

The company authorized an additional $7 billion dollars to buy its own stock this time around while authoring 75 cents per share for its dividend. In other words, the company will spend $7 billion to buy stock and $900 million paying the "owners" of the company, its shareholders.

On an annual basis, that is $3.6 billion for dividends and $7 billion to buy more of its own stock. As a shareholder, that probably isn’t the split you hope for.

Why Do Companies Buy Back Stock?

Companies buy back stock for two reasons. The first reason is that companies often award stock options to their executives and board members. That stock has to come from somewhere. By buying shares, IBM can then turn around and give those shares to its execs and board members.

The second reason to buy back your own company shares is that you believe that your company’s stock is a good value. IBM clearly ALWAYS believes its stock is a good value, since it has way more shares repurchased than it needs to pay out generous stock options.

Of course, the real reason IBM repurchases so many of its own shares is that it allows the company to massage its financials on a per share basis.

For example, if a company has 1 millions shares outstanding and earns $1 million, then it has an EPS, or earnings per share of $1.

If that same company were to buyback 100,000 shares, then there are only 900,000 shares outstanding. The same $1 million of earnings then becomes $1.11 per share. This is 10 percent growth in EPS, even if it is just an accounting trick that happens on paper.

Giant share repurchases theoretically also increase the value of the remaining shares of stock since some of the supply has been removed from the market. However, the stock market has a funny way of deciding what the right price is for a company’s stock all by itself.

It does work. IBM’s stock price has risen steadily over the past few years. How much of that rise comes from real company performance and how much of it comes from the company spending every extra penny to prop up its own stock is for its investors to decide.

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IBM Boosts Share Buyback Again originally published at Finance Gourmet

Of course, there is a long way to go until the end of the year and pressing economic matters like the debt crisis in Europe, the joint budget cutting committee and an unemployment rate that won’t go down are still to be resolved.

For the time being, non-day trading investors should remember that short-term movements in the stock market are notoriously difficult to predict.

End of Year Portfolio Rebalancing

Many experts recommend rebalancing your long-term portfolios like retirement accounts (IRAs, 401k, and other retirement plans) once a year. Traditionally, many people do it near the end of the year. If you haven’t rebalanced your portfolio since last year, it’s a good time to start thinking about doing it soon.

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1. 2011 Stock Market Update Q3
2. Stock Market 2011 Results

Stock Market 4th Quarter Turn Around originally published at Finance Gourmet

The stock market took a huge dive starting July 21st and has never pulled itself back up. For those of you looking for the culprit, let me help you out. The debt ceiling deal was reached at the end of July, which means the 21st was pretty much the height of the shenanigans. The markets have had no truly good news since to pull themselves back up by.

Outlook for 2011 4th Quarter Stock Market

Don’t expect the news cycle to save the stock market during the fourth quarter of 2011. In the 4th quarter, we’ll see increasingly competitive rhetoric building in the Republican Presidential primary, the product of the debt ceiling committee, which most are projecting will fail, and the start of the holiday shopping season, which will likely get spun in the mainstream media as a disaster early on, no matter how it ends up going in the end. Furthermore, the Fed is out of the picture having approved its latest financial stability plan, “the twist.” And, finally, the European debt crisis has no indication that there will be any sort of grand resolution by year end.

In other words, there is not likely to be any sort of overall good news politically, economically or anecdotally. In fact, most of the news around the stock market will likely be bad news, not good news.

So, what will push the stock market up in 4th quarter of 2011?

The best answer is probably nothing. The markets may move in an upward trend over the last three months of the year if investors starting looking ahead to 2012 and liking what they see. (Remember, the stock market is a leading indicator.)

The other possible savior may come from earnings reports. With the third quarter over, companies will be reporting their 3rd quarter earnings in the coming months. If a sufficient number of companies are able to report good enough earnings, coupled with positive outlooks for next year, the markets could see a significant boost for the end of 2011. In other words, a Santa Claus rally is not out of the question. However, if this market is going to go up for the rest of 2011, it’s going to have to do it on its own.

Stock Market Outlook for 2012

How does the stock market look for 2012? That question isn’t as hard to answer as it may seem.

The news cycle has already punished the stock market, and it will continue to do so for the foreseeable future. The eventual Republican Presidential nominee will do their best to paint the economy as an unmitigated disaster and the short-term impact of billions of dollars of government spending cuts may just make that a self-fulfilling prophecy. (Don’t forget, tax-cuts and lower regulation are not short-term economic boosters, those things take time to work their way into the economy. The impact of government spending, or lack thereof, has an immediate impact, even if the full repercussions aren’t felt for many years.)

In other words, people aren’t likely to be in a big investing mood. On the other hand, most trades on Wall Street are computers talking to other computers and they might start to like what they see.

The U.S economy has been mired in a recession for longer than is typical. The boom (some say bubble) coming out of Silicon Valley may well be the last spark that is needed to push the economy forward and most economists do expect some growth next year, no matter how weak.

In other words, 2012 or 2013 is the start of the next bull market. Long-term investors may as well get in now, or wait until after the stink from the Congressional Joint Select Committee failure clears the air. Either way, buying low means buying when things sound bad but the future looks like the only way is up.

If your investing horizon is longer than the next 12 months, that time is now.

Disclaimer: This is not an offer to buy or sell securities. This is not specific investment advice and should not be relied upon for you investing decisions. Consult a financial professional for financial advice specific to your situation. Consult a tax professional for specific tax advice.

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2. Stock Market 2011 Results

2011 Stock Market Update Q3 originally published at Finance Gourmet

Not long ago, Google offered to buy Groupon for $6 billion. Soon thereafter, Groupon did another round of private equity financing that essentially paid off company founders and early investors such that they have already locked in sizable gains. That might be a very good thing since Groupon seems to be in trouble before it even goes public.

Update: Groupon has updated its IPO filing documents again. Follow the link for the latest.

Groupon’s IPO Filing

Groupon has already had to adjust the documents it originally filed in order to do an initial public offering (IPO) of stock. It de-emphasized a widely mocked financial metric that essentially didn’t count certain expenses. That isn’t a huge thing by itself, although it does potentially show what Groupon thinks of the sophistication level (or lack thereof) of those who would buy Groupon’s IPO.

Groupon’s management took the somewhat controversial step of trying to comment on all the negative publicity its IPO has been getting by sending out a company-wide email to employees saying exactly the kinds of things that you aren’t allowed to say during the SEC mandated “quiet period” before a public offering. Of course, they were shocked, SHOCKED, to find out that the email had been leaked to the media which ensured its wide, very public, dissemination.

No word on whether the SEC will take any action on the matter. (If not, look for plenty of other companies to have “accidental” leaks in the run-up to their IPOs.)

Google Offers vs. Groupon

Next up, Google decided to get into the daily deals / local discount business itself. It started with just a few markets, but recently opened in several others including here in Denver, where Google Offers offered $20 at the popular Tattered Cover bookstore for just $5.

(Disclosure: I bought one of the Tattered Cover Google Offers, although I have no affiliation with Google or the Tattered Cover other than as a customer.)

In other words, the copycats that Groupon has so effectively dismissed in the past are getting bigger and if that IPO doesn’t hurry, there might be some disturbing statistics showing that Groupon is not long for this world as anything other than a takeover target. (Paging Microsoft Bing.) Don’t count on a $6 billion bid, though.

On the other hand, if Google can’t break Groupon’s hold on the market, investors (and retailers) might be convinced no one can, in which case, Groupon stock would be a very good investment.

Which is it? Time will tell, but as I’ve noted before Groupon is too easy to copy. The only real question is has everyone else started worrying about that too, or will Groupon get through its IPO before anyone gets uneasy?

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Is Groupon Public Yet? originally published at Finance Gourmet

Next came the downgrade of US debt by Standard and Poors. Make no mistake, this was a political, public relations ploy. The original S&P U.S. downgrade played up a very high percentage of debt to GDP, and even gave a number at which things would be "good enough" for the United States debt to not get a downgrade. However, when a math error that was big enough to move the number well into "good enough" territory was discovered, S&P downgraded U.S. bonds anyway, making many wonder what S&P bond ratings are even based on.

The company may have damaged its own reputation more than it did the debt of the United States of America. Indeed, the company was so late to downgrade AAA-rated mortgage securities that investors had already lost most of their investment and was so slow to downgrade the debt of Greece that the markets were down significantly before S&P woke up and issued their downgrade. But, now, however, they seem to be chomping at the bit to downgrade U.S. debt early. In fact, none of the other major ratings agencies issued a downgrade.

It seems that S&P wanted to downgrade the debt as a way to institute some sort of power over the U.S. government by chastising them for not reducing the deficit more. Along the way, it made itself the laughing stock of the investing world. How can one rationally say that the U.S. is more likely to default today on its debts than it was one month ago BEFORE Congress was able to pull its highly-dysfunctional state together long enough to come up with ANY plan at all?

Although the markets swooned over 400 points down on Monday, that can be attributed more to continuing uncertainty (of which the S&P downgrade was a part) than to investors taking the S&P seriously. In fact, U.S. Treasury prices actually ROSE in the wake of the downgrade. By Tuesday afternoon, the markets were up over 400 points, essentially erasing the big drop on Monday, in a continuation of a volatile summer where investors are asking whether the economy is slowly recovering or the economy is slowly heading for a double-dip recession. It seems the questions investors are asking have nothing to do with S&P’s attempt at a big splash.

Apple Biggest Stock In World – Briefly

For a short period of time on Tuesday, Apple Inc. became the most valuable company in the world when it’s market cap rose to $341.5 billion to Exxon’s $341.4 billion. However Apple shares slipped back under Exxon shares later in the day. Whether Apple takes over the number one spot for more than just part of a day will depend in large part on the price of oil and how much of premium investors are willing to pay for Apple’s astronomic growth rate.

Federal Reserve

Also on Tuesday, the Federal Reserve announced that it intended to keep interest rates near zero for at least another two years in an effort to remove rising interest rates from the list of potential concerns about the economy.

That’s good news for homeowners with adjustable rate mortgages (ARMs) who may have been worried about rising ARM interest rates pushing up their interest payments. Although most mortgages are tied to a 10-year interest rate index, ultra-low short-term rates will make big upward movements mid-term bond indexes unlikely. If you can make your mortgage payments today, chances are you’ll be able to make them through the next year, and maybe even the year after that.

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Crazy Week for Economy and Investors originally published at Finance Gourmet

With short sales, however, there are a couple of tax tricks to know about how they get reported.

Long-Term or Short-Term Short Sales

The most important thing to understand about short sales, is that they are almost always considered short-term capital gains or losses.

Unlike a traditional investment where you buy and hold the property, with a short sell, you do not own the property at all. You borrow the shares from your brokerage who gives you the proceeds of the sale. You close the sale by buying back the same shares you sold.

It may seem like you determine whether a short sale is long or short-term by the amount of time that passes in between when the short sale is initiated and when it is closed. However, this is not the case.

In order to be a long-term capital gain, you have to OWN the property in question for more than one year. With a short sale, you never own the property. Or, if you prefer, you own the shares for a few seconds between when you execute the buy order and the brokerage takes those shares to repay the loaned shares. In other words, all short sales are short-term capital gains or short-term capital losses.

Long-Term Short Sale Exception

There is a way to have a long-term short sale, although it is not very common. If you don’t do it intentionally, it won’t happen.

Consider an investor who owns 1,000 shares of IBM stock. The investor chooses to sell 1,000 shares of IBM short instead of selling their current holdings. Some brokerages won’t allow this, but it is easy enough to execute via two brokerages.

If you have already owned the IBM stock in question for a period of more than one year, and if, and only if, you use those previously owned shares to close the short sale position, then the short sale may be reported as a long-term capital gain or loss.

However, this will be considered a “constructive sale” and you will have to report the gain as of the date of the short sale and your basis resets.

There is no way for a short sale to be a long-term investment unless you already own what you are selling short.

All of this, of course, assumes that you have not trigged the rules for wash sales.

Reporting Short Sales on Schedule D

Like other investment gains and losses, gains and losses from short sales are reported on Schedule D.

Enter the data from the short sale in the same manner as a regular trade. However, pay attention to what the columns say so that you get the income taxes right.

Column C is the date sold, this is the date you started the short sale, not the day it closed. Column A is when you “acquired” or bought the shares to close the position. Likewise, the Sales Price (Column D) is what you received when you sold short, and Cost Basis is what you paid to close the short.

There is no need to specially mark a short sale. You are the first person to sell a stock short and the IRS is well aware that if the Date Sold precedes the Date Acquired that you have engaged in a short sale. As long as you enter the right numbers in the right columns, all of the math on the form works out the same.

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Reporting Short Sales for Income Taxes originally published at Finance Gourmet