Something To Know About Mortgage Refinancing And Something To Forget About Stock Prices

In The News...

Another month in the books in 2017.

The U.S. market, per the S&P 500, gained +1.0% in April. It was a nice bump higher considering stocks had been slipping over the six-week stretch from March 1st to mid-April. The last two weeks was a nice bounce that helped the market finish positive for the month.

Seattle housing laps the nation: Home prices rose slightly in February and by an average of +5.8% annually, according to the latest S&P/Case-Shiller housing report. Seattle continues to dominate real estate, where prices are up +2% month-over-month and +12% over the past year. Seattle housing growth has doubled the national average in recent months and maintains a sizable lead over the #2 housing market, Portland, where prices have risen +9.7% annually. Here is a complete city-by-city look at the 20 major markets:

(source: S&P/Case-Shiller Home Price Index)

Seattle has thrived thanks to the success of Amazon and Boeing, the reemergence of Microsoft and the ongoing technology migration. I would suspect that home values will level off a bit next year, meaning a slower pace of price increases. That would channel a pattern already experienced by San Francisco, where prices led the nation for a very long time before the pace of growth began to slow a bit in late-2016.

In The Market...

The S&P 500 gained +1.4% last week. Let's look under the hood...

(data source: Yahoo Finance)

Stocks: Stocks sprang higher to start last week and held those gains the rest of the way. Health Care, Technology and Consumer Discretionary led while only Real Estate lagged.

Bonds: High-yield bonds and preferred stock steadily rose again. Treasury bonds sold off, causing interest rates to jump. Despite last week's decline, I actually believe we may see interest rates fall again here in the next few weeks. If you are interested in knowing why, let me know -- I am happy to share my analysis.

Earnings bonanza! As of Friday, April 28th, roughly half (58%) of the 500 companies in the S&P index had reported quarterly results. Both revenue and earnings growth are the highest since 2011, as sales and profits are up +7.5% and +12.5%, respectively (per Factset). Sales and profits have risen across all 10 stock sectors, which reflects broad market strength rather than leadership by a few, concentrated sectors. Forty percent of S&P 500 companies have yet to report, so while impressive, these numbers are still preliminary.

In Our Opinion...

Stock price does not matter. Let me explain.

Amazon stock price recently surpassed $900. A lot of people would consider this expensive. To think that $900 would only get you one Amazon share does not feel as worthwhile as buying a bunch of shares of a much cheaper stock.

All else being equal though, price does not matter.

Instead of buying Amazon, let's say you use $900 to buy 10 shares of Kraft (currently priced around $90). If the price of Kraft goes up 10% to $99, will you earn more or less than if your one share of Amazon goes up by 10% from $900 to $990?


A 10% gain is a 10% gain, regardless if you own one share that costs $1,000 or 1,000 shares that cost $1 apiece. You will cumulatively earn the exact same dollar amount. I prefaced this with "all else being equal" because, clearly, no two companies are alike. Amazon and Kraft are entirely different businesses whose stock prices have separate supply and demand characteristics.

"Yeah, but what if the higher-priced stock splits and I double my shares?"

That is fine, but on paper there is no benefit to a stock split. Your equity does not change. The stock price proportionally adjusts to the size of the split.

2-for-1 split? The share price is cut in half.
3-for-1 split? The price is slashed by one-third.

There is some merit to believing that a lower stock price will enable and encourage more investors to buy the stock, which increases demand and subsequently its price. While that may be true in theory, it is pure speculation. If you buy a stock in hopes that it will split, or continue holding it for only that reason, you may want to rethink your decision.

We put zero emphasis on a stock's price in terms of the number of shares that can be purchased. Neither should you.

In Our Portfolios...

Stocks: No changes this week.

Bonds: We bought an investment-grade bond fund (LQD) for our conservative and moderate accounts.

Q&A/Financial Planning...

I am helping a client refinance their home mortgage, which will allow them to lower their interest rate, as well as lock in a fixed percentage and dispose of their current, variable rate.

We often think about refinancing as "saving money". On the surface this is true. If you go from a 5.0% 30-year fixed rate to a 4.3% 30-year fixed rate you are saving on interest once you get passed what I call the break-even date. Since it costs you something to refinance, I like to calculate the number of months it will take to make that money back through interest savings. I find the break-even date by dividing the interest dollars saved per-month into the cost to refinance.

But there is another thing to remember, especially the closer you are to retirement. If your new loan term is longer than the remaining years on your existing loan, your loan payoff date gets pushed out. This is quite common, as many people will be 5 or 10 years into their existing mortgage and choose to refinance into a 30-year fixed loan. It has been especially popular the past few years, as interest rates have fallen and homeowners have recovered equity post-2009.

Pushing out your payoff date is not a problem if you have the right plan. It is something to be aware of, particularly if your goal is to pay off your mortgage by a certain date. If you are refinancing then presumably your monthly payment is going down (unless you are taking on a shorter-term loan). You want to be responsible with the newfound "savings". Consider using that extra money to do one of the following:

  1. Make an additional, lump-sum mortgage payment each year
  2. Pay off other debts - either non-productive debts (e.g. credit cards) or those with higher interest rates compared to your mortgage
  3. Invest the extra cash to help save toward retirement, which also enables you to make a greater lump-sum mortgage payment in the future
  4. Sock it away as cash to build up a cushion for emergencies

Let me know if you have questions. Our friends at North Pacific Mortgage can help if you are interested in refinancing. I always advocate considering what options are available to you, but it is equally important to understand the ramifications before doing so.

What's New With Us?

We have begun setting up accounts at TD Ameritrade. Once most accounts are established, I will send you a second round of Docusign forms to e-sign. This will include the account transfer request, as well as a form for making contributions or distributions (if applicable). Let me know if you have any questions about this process. My goal is to have most accounts transferred by the end of May.

Have a great week!


Brian E Betz, CFP®

Worst Week Of 2017... What's Next?

In The News...

If the past year has taught us one thing, the narrative matters. Lets use last week as an example:

The market had its worst week of the year, sliding -1.3%.


The market slipped a little more than -1%, just the third weekly loss of 2017.

Two opposing ways to explain last week. Each portraying a different story. When we want or expect something to turn out a certain way, that anticipation shapes our evaluation of it. I say this because people continue to wait for the market to face-plant. A number of clients and non-clients have said as much to me over the past month. So when the market strings together a few losing days the chirping becomes louder and angst rises.

Here is the reality: It is common for the stock market to fall ~10% (or more) at some point every year. Keep that in mind, especially coming off a week when the market was down roughly -1%. I have said for a few weeks that I wouldn't be surprised to see the S&P 500 flatten out, but that does not mean the sky is falling.

In The Market...

The S&P 500 was down -1.3%. Let's look under the hood:

(data source: Yahoo! Finance)

It was a crummy week for most stock sectors, evidenced by the sea of red above. Utilities, arguably the most defensive sector, were up more than +1% and is a sector that I would like to add in the near future (some portfolios already own it).

Remember what I said in my last post about how long-term interest rates behave after the Federal Reserve raises short-term rates? If you don't, here is a reminder... What I showed was how long-term interest rates actually fell the previous two times the Fed raised rates. Sure enough, following the Fed's third rate hike rates declined yet again due to increased bond demand.

Bonds had a nice week as a whole. This often occurs when stocks are down because investors sell stocks and buy bonds (hence the increased bond demand). It is also a bit ironic that Financials were the worst stock sector, considering that financial stocks would seem to benefit most by the Fed rate hike, but lets not beat a dead horse...

In Our Opinion...

The market is essentially always open, Monday through Friday, when you consider overseas markets and the trading activity that happens within the U.S. market outside of normal hours via the "futures" market that opens at 5 p.m. PST. I bring this up because the U.S. market opened this new week nearly -1% lower than it finished last week, and with it came references connecting the market loss to investor fear surrounding health care reform and the latest bill that flamed-out last Friday.

Simply put, that is B.S.

It is a nice alibi, but it is wrong. To my earlier point, any potential market declines that occur in the near future may just be due to the fact that the market does not go up 100% of the time. If you are positive about the market then any declines might present a good buying opportunity. If you are negative about the market then you certainly did not arrive at that conclusion because of the vote surrounding a health care bill (I hope).

Bad news travels faster than good news, so be prepared for big, scary headlines if the market remains choppy here for a bit. There will be all sorts of explanations that try to reason with what occurs. This is not to say that we won't feel the need to sell or become more defensive. But it does mean that we will rely on our disciplined approach in making such decisions, tuning out the noise and allowing our analysis to guide the way.

In Our Portfolios...

Stocks: No changes last week.

Bonds: We added preferred stock (PFF) to certain accounts. Due to the risk characteristics of preferred stock, we treat this asset class as a bond for portfolio allocation purposes because it tends to be a happy medium between common stock and more conservative types of bonds.

Q&A / Financial Planning...

I had an interesting conversation last week with my friend & colleague Phil Painter of North Pacific Mortgage. Phil has come across an increasing number of new clients who have interest-only mortgages or lines-of-credit. We speculated why this is and arrived at two conclusions:

  1. Many interest-only mortgages/debts were the result of challenges posed by the 2008 recession.
  2. Conversations about interest-only loans are resurfacing over concern that the string of recent Fed rate hikes will cause these adjustable rates to balloon.

Even if the second conclusion does not materialize, do not be lulled to sleep by your mortgage, particularly if you are in an interest-only loan. We preach that financial goals are unique, but paying off your mortgage - for most people - is one that deserves a plan. If you are only paying interest then it becomes tougher to build equity (unless you are effectively leveraging your money by investing funds elsewhere, which few actually do). More importantly, you may delay the principal pay-down into retirement, a time when most want to limit expenses to accommodate other things, such as health care or travel.

It is easy to overlook the bigger picture. Life gets busy and we get into routines. If you own an interest-only loan, even if it is a smaller line-of-credit, tackle it head-on today. If you want a professional opinion, I highly recommend Phil Painter. He is a great guy and someone I trust immensely. Contact us if you would like an introduction, but at the very least explore your options to learn how a refinance could benefit your long-term financial plans.

What's New With Us?

We will begin migrating to TD Ameritrade in early/mid April. Gale or I will be in touch regarding the forms we'll need to complete. We will make the transition as smooth as possible.

Have a great week everyone!


Brian E Betz, CFP®

Fed Raises Interest Rates - What It Means And How Fed Policy Is Misinterpreted

In The News...

To my surprise, #3 came earlier than I expected.

The Federal Reserve raised interest rates for the third time since it began "normalizing" rates back in Dec. 2015. This latest rate increase was another quarter-point rise in the Federal Funds Rate, boosting it from 0.50% to 0.75%. Following 7 years where rates were essentially 0.00% the Fed has begun slowly increasing them. Here is a look at how historically the Fed Funds Rate was:

(source: Federal Reserve Bank of St. Louis)

I emphasize Fed Funds Rate because people err by ambiguously saying "rates" anytime they refer to Fed policy. It does not represent all interest rates. The Fed Funds Rate is the short-term lending rate set by the Fed, which big banks use to lend to one another. That target rate trickles down and ultimately steers the interest rates banks apply to savings accounts and short-term loans. But there are two pretty big misconceptions about Fed policy in relation to interest rates, which I detail in the Opinion section below.

The Fed has two jobs: Manage our money supply and manage inflation. Raising interest rates is one way the Fed strives to temper inflation. In textbook economics terms, the Fed will raise rates as the economy expands. This promotes steadiness and prevents economic overheating, or worse, market bubbles. In 2008 we saw the reverse, where the Fed aggressively lowered interest rates in order to encourage lending and borrowing at time when the economy needed it to stave off recession.

Few entities have a tougher job than the Fed. Amidst the NCAA Tournament games happening right now the Fed is like a referee, where doing a good job is defined by making the calls everyone expects while remaining largely unnoticed. The only difference is that even if the Fed makes what appear to be the right calls, such as whether to raise rates, it's popular to go back and blame Fed officials if the market does not respond as anticipated. The Fed has an immensely tough and thankless job.

In The Market...

The S&P 500 gained +0.2% last week. Let's look under the hood:

Most sectors were positive last week, yet the S&P 500 was up minimally as a whole. Bonds and dividend-heavy stocks fell leading up to the Fed announcement as it was presumed that interest rates would go up. Investors do not like owning bonds if they believe they can obtain a higher interest rate in the near future. The funny part is that investors jumped back into bonds and dividend stocks immediately after the Fed announced the rate hike at 11 a.m. last Wednesday.

There is meaningful context relating to how long-term interest rates react following Fed rate hikes. Below is a chart of the 10-year Treasury yield, which differs from the short-term Federal Funds rate, but is more relevant when talking investments. Notice how the 10-year Treasury yield reacted following the previous rate increases, in Dec. 2015 and Dec. 2016. The 10-year rate yield actually went down

(courtesy of

If history repeats itself, this would be the third-straight time that long-term rates fall after the Fed announces a rate hike. Is this another coincidence or more of a trend?

In Our Opinion...

There are two misconceptions about how long-term interest rates behave in light of Federal Reserve policy.

Misconception #1: Fed policy directly influences home mortgage rates.

All rates are not created equal. The Federal Funds Rate best compares to a 1-month U.S. Treasury bill. A typical 30-year mortgage rate is going to channel the rate movement of a 10-year U.S. Treasury bond. Here is how closely the 10-year Treasury yield and 30-year mortgage rate move in tandem:

(sources: Federal Reserve Bank of St. Louis, Freddie Mac)

The correlation between the two is undeniable. If you look closely, notice that while the average 30-year fixed mortgage rate has risen a bit since the Fed began raising rates in Dec. 2015, the rise has been pretty tame. In fact, mortgage rates actually fell for the better part of six months after the Fed raised rates for the first time in 2015, as shown on the prior chart of the 10-year Treasury yield. How can this be?

Misconception #2: Interest rates are set by the Federal Reserve and that's that.

Interest rates, namely long-term ones, are driven by investor demand for bonds. They are not set by some monetary overlord. The Fed has a hand in guiding short-term rates, but investors collectively determine whether long-term rates go up or down, as bonds are traded within the market and subject to those forces of supply & demand.

Here is how... Traditionally we think of buying a bond, earning its interest payment each year ("coupon rate") and receiving our full principal amount back at the end of the bond term (5 years, 10 years, etc). However, the bond market is more complicated than that. Bonds are traded every day in the market. As old bonds mature, new ones are offered through U.S. Treasury auctions, but not before being bought and sold along the way.

Let's suppose you buy a bond and the next day investor demand is weaker for the same type of bond you purchased. Weaker demand means your bond is now worth less than what you paid. The interest you earn remains constant because the coupon rate is fixed at the time of purchase, but the yield fluctuates over time. In this case, your yield goes up because the value of your bond went down.

(Fixed coupon interest payment) / (Lower bond value) = Higher interest rate yield

The opposite is true as well. This is why bond values and their interest rate yields move in opposite directions. If demand increases for your type of bond in the future, the value of the bond you own rises. This means you now have a lower yield. It's this type of ongoing supply & demand that drives long-term interest rates. The Fed plays a role, but investors truly determine whether rates rise or fall.

In Our Portfolios...

Stocks: No major changes last week, although we did tweak some positions in certain accounts where funds were recently added.

Bonds: We sold one of our high-yield bond funds (ANGL) within smaller accounts and accounts that previously held both high-yield positions we use (the other being HYG).

Q&A / Financial Planning...

Staying on theme, a couple people asked last week whether to lock in their mortgage rate before the Fed announcement. My feeling is always the same -- do not base the timing of your home purchase loan or refinance loan off of Fed policy or how you think rates will behave. Lock in the loan when you need it.

In the case of a refinance, if you can save money and the math all ties out, just lock it in rather than getting greedy. Pigs get fat and hogs get slaughtered. I do think rates will slowly rise over time but they won't spike overnight or in the course of weeks. Again, investor supply & demand should keep them in check.

What's New With Us?

If you have trouble logging in to Morningstar, it is because the original login request timed-out (due to security reasons). No worries though, just let me know if you need your access reset. You will have 24 hours to login from the time you receive the password reset email from Morningstar. If you do not do so within 24 hours we will reset it again.

Have a great week!


Brian E Betz, CFP®