Monday, May 28, 2012

Investing Highlights

1 - The European crisis continues to unfold with Greece at its core. There's no way to know what Greek voters and politicians might decide in coming weeks, much less how world markets might handle a a Greek exit from the euro (the so-called "Grexit" scenario). Below, following This Week's Economic News, is an analysis of what might happen. Most important -- as always -- we need to keep our wits about us.

2 - Our next client event will take place on July 10. It will be a question-and-answer session featuring Steven McNamara, CFA, of Horizons West Capital Partners, who is planning to travel here from his Connecticut office for the occasion. This is not a public event, although clients may to bring up to two guests.

3 - Our office is closed today for Memorial Day. We give reverent thanks to those who have given the last full measure of devotion in our defense.

Have a thankful week!

Here are a few highlights from our May 15, 2012 event, New Realities: Investing. Watch our YouTube channel,, for more complete videos of the major parts of the presentation.

What Happens Here if Greece Exits the Euro?

Another downturn? Or something much less severe?

If Greece leaves the eurozone in the coming months, what kind of financial ripples could reach America?

Nobody can predict the endgame yet; Greece may even stay in the euro, although that is looking less and less likely. The big concern isn't what happens in Greece - it is about what could happen in Spain or Italy as a result of what happens in Greece.

The effects from a Greek default (and eurozone exit) would likely be felt on four fronts in America - but first, an economic chain reaction would almost certainly play out in Europe.

A Greek default could imperil Spain & Italy. If Greece leaves the euro, then Greek bondholders lose their money. A crisis of confidence in the euro could prompt institutional investors to either walk away or demand even higher interest rates on Italian and Spanish bonds. The European Central Bank could then step up and provide emergency lending, bond buying and recapitalization efforts. If those efforts were to fall short, the worst-case scenario would be a default in Italy and/or Spain.

It could also hurt U.S. banks that aren't sensibly hedged. If Italy and/or Spain default, a severe downturn could hit EU economies and U.S. lenders would be looking at a huge potential problem. If they are capably hedged against the turmoil in the EU, they could possibly ride through it without a lot of damage. If it turns out they have made foolishly speculative bets (cf. Lehman Brothers, JPMorgan), you could have a big wave of fear, which in the worst scenario would foster a credit freeze reminiscent of 2008. Would the Fed step in again to unfreeze things? Presumably so. Without its intervention, you could have a Darwinian scenario play out in the U.S. banking sector, and few economists and investors would see benefit in that.

The good news (relatively speaking) is that U.S. banks have cut their exposure to Greece by more than 40% as that country's sovereign debt crisis has unfolded. Pension funds and insurers have joined them.1

Stocks could fall sharply & the dollar could soar. The greenback would become a premier "safe haven" if foreign investors lose faith in the euro. At the same time, a crisis of confidence would imply big losses for equities (and by extension, the retirement savings accounts and portfolios of retail investors).

U.S. companies could be hurt by fewer exports to Europe. Right now, 19% of U.S. exports are shipped to EU nations. If a deep EU recession occurs, demand presumably lessens for those exports and that would hurt our factories. If institutional investors run from the euro, it would also make U.S. exports more costly for Europeans. Additionally, the EU is the top trading partner to both the U.S. and China; as Deutsche Bank notes, the EU accounts for 25% of global trade.2

Our recovery could be hindered. Picture higher gas prices, a markedly lower Dow, the jobless rate increasing again. In other words: a double dip.

In mid-May, economists polled by Reuters forecast 2.3% growth for the U.S. economy in 2012 and 2.4% growth in 2013. These economists also believe that were the fate of Greece not on the table, U.S. GDP might prove to be .1-.5% higher.2

If politicians play their cards right, we may see better outcomes. For example, Greece could elect a new government that decides to abide by the requested austerity cuts linked to EU/IMF bailout money. Greece could remain in the EU and banks in Spain, Italy, Germany and France could ride through the storm thanks to sufficient capital injections. Global stocks would be pressured, but maybe on the level of 2011 rather than 2008. (Maybe the impact wouldn't even be that bad.)

In a rockier storyline, Greece becomes the brat of the EU - a newly radical government rejects the bailout terms set by the EU and IMF, Greece leaves the EU and starts printing drachmas again. The EU, IMF and maybe even the Federal Reserve act rapidly to stabilize the EU banking sector. Early firefighting by central banks results in containment of the crisis after several days of shock, with U.S. markets recovering in decent time (yet with investors still nervous about Italy and Spain).

Containment may be the key. If a Greek default can be averted or made orderly by the EU and the IMF, then the impact on Wall Street may not be as major as some analysts fear - and who knows, the U.S. markets might even end up pricing it in. Greece only represents 2% of eurozone GDP; our exports and credit exposure to Greece are minimal at this juncture. Our money market funds have mostly stopped investing in Europe. So with diplomacy and contingency planning afoot, a "Grexit" might do less damage to the world economy than some analysts believe.2

1 - [5/14/12]
2 - [5/25/12]

Monday, May 21, 2012

New Realities with Expert Affiliation - Horizons West Capital Partners

1 - Last Tuesday's New Realities seminar went very well indeed. About 40 people attended, and I thin everyone had a good time and learned a lot. My sincere thanks to all who attended, and especially to Michele and Juliet for making everything run smoothly.

 2 - In case you missed it, during Tuesday's event we announced our affiliation with Horizons West Capital Partners and principal Steven McNamara. Steve is a highly trained Chartered Financial Analyst; his full time job is researching investments. A staff of seven supports him as he studies economic and investment trends, visits fund managers, and designs model portfolios. We have essentially hired Steve's firm to serve as our research department, and as such, our clients will be able to benefit from a depth and breadth of research beyond what we have previously enjoyed.

3 - Horizons West is a research firm, not a money management firm. While Steve and company will be providing me with information, I will still make the investment decisions for our clients. Our current stance aligns very well with what Steve is seeing in his research, so don't expect any major change of direction.

4 - Steve spoke to the group on Tuesday evening via video link-up from his office in Connecticut. Our connection turned out to be a bit slow, so we cut the conversation short. We hope to have Steve here in person for our Investment Roundtable on July 10.

Have an excellent week!

You may have wondered: What's the difference between a regular (or traditional) IRA and a Roth IRA? The answer lies in how they are taxed. Here's a quick primer on the differences.

Tuesday, May 15, 2012

New Realities: Not Solely Domestic

1 - Last call: our New Realities: Investing seminar is tomorrow at 5:30pm. If you haven't registered yet, we would love to see you there. I promise to make it entertaining, and I even have a little surprise announcement in store. Following the one-hour program, we will enjoy passed hors d'oeuvres by Pat Strother along with casual conversation. This event is open to the public; please attend -- and invite a friend. You can register either online or by calling Michele at 859-7001 (ext. 2). 

2 - Don't look now, but the European crisis is back following recent elections in France and Greece. French voters elected Socialist Fran├žois Hollande as president. He has promised to revisit the Eurozone accord led by German Chancellor Angela Merkel.  Greek national elections resulted in a deeply divided parliament -- and no clear leader. Hold on to your hat; things could get ugly again. See the story below for more info on this unsettling topic.

3 - Many investors put faith in special individuals who can see what the rest of us can't, who know just the right stock to buy at just the right time and price. Those special individuals are known as gurus, and there's always a market for them. There's just one problem: they don't really exist. Check out this week's video for a brief explanation. 

4 - Mother's Day was yesterday, of course. For some of us who no longer have our mothers, the day brings treasured memories of wisdom, discipline, guidance -- and, most of all, unconditional love. A mother is unique among the universe; if you still have yours, treasure her. 

Have a terrific week!


Changes in Europe Bring Fresh Anxiety to Wall Street
Will stocks face further headwinds, or sail strongly ahead?

Eurozone debt issues aren't going away -- in fact, it may be several years before the crisis ebbs. Here in May, we have a new development: leaders in Greece and France have been voted out of office, with the risk of jeopardizing the agreed-upon Greek bailout, the close alliance between Eurozone economic powerhouses France and Germany, and in the worst-case scenario, possibly even the European Union itself.
 U.S. stocks retreated from May 7-11, perhaps in part because of the news from the Eurozone. The concern may be whether we are going to have a replay of 2011 -- a new round of EU squabbling that will increase Wall Street volatility.

Some analysts think U.S. stocks can ride through these anxieties without much damage. Others wonder how "decoupled" we are from the crisis.  

What's going on in Greece? On May 6, Greece held a national election from which no majority party emerged. From May 7-11, three attempts were made to form a unity government; they all failed. Hopefully, by the time you read this, current Greek president Karolos Papoulias will have negotiated his way to a coalition. Or, the nation's next president could turn out to be Alexis Tsipras, leader of the radical-left Syriza party that gained ground with voters on its pledge to fight the austerity cuts that the Greek government agreed to as part of the latest EU/IMF bailout. If no coalition emerges in the Greek parliament, there could be another national election in June.1,2

Greece made a deal with its bondholders months ago: they accepted write-downs on the bonds they held with the promise that those bonds would be swapped for new ones. If Greece backs out of this deal, no one knows what will happen. Some analysts think the hit would be primarily taken by Italy, Portgual and Spain -- investors would probably require higher interest rates on government bonds from these nations, which would push them further into debt. If investors pull their money out of the Spanish and Italian bond markets, Spain and Italy might end up needing bailouts.3

In the most severe scenario, Greece rejects the agreed-upon bailout deal and the euro along with it. That could lead to huge problems. A single rejection of the euro from an EU member might reveal a deeply flawed currency. A perception of a failing euro would hurt the currency and the value of European equities and bank debt; euro-denominated bonds would find fewer investors. So the global currency swap market could be damaged, with a multi-continent recession a possible consequence. Hopefully, things won't go this far.3

What's going on in France? President Nicolas Sarkozy lost a national election to Francois Hollande, a socialist who is widely considered a moderate. Hollande wants to see an economic stimulus for France even with the austerity measures coming, and he has indicated that he will propose the same thing for Germany when he meets with German chancellor Angela Merkel.3

You may recall that Merkel and Sarkozy formed a united front these last couple of years -- affirming their faith in the euro and helping to broker the Greek bailouts. Hollande and Merkel would seem to have immediate philosophical differences about fixing the EU economy, and any difference of philosophy between the leaders of the EU's two most powerful economies doesn't bode well for unity.

Defending the euro may be their most important task. It would be unimaginable to have one of the globe's reserve currencies fall apart. If currency traders see a departing euro, then conditions would be right for another global credit crunch.

What does this mean for Wall Street? If the data stream from our recovering economy can drag Wall Street's attention away from Europe -- and if the EU and IMF leaders successfully hurdle this latest obstacle -- then the impact on U.S. equities might be short-term.

Economists have warned of a fragmented Eurozone before, yet it has held together despite remarkable stress. Common ground was painful to reach, yet a feasible Greek bailout plan emerged from it. Now that common ground must be regained.

Monday, May 7, 2012

A Moment of Truth

1 - Our New Realities: Investing seminar is next Tuesday. (See full information in the Events tab of our website: click here) This event is open to the public; please attend -- and invite a friend. Our list of registrations is growing, so I urge you to register soon. You can register either online or by calling Michele at 859-7001 (ext. 2).

2 - Alan Simpson is an American original. The former 3-term senator from Wyoming and co-chair of the Bowles-Simpson deficit reduction commission has always marched to his own startlingly sensible drummer. I had the privilege of attending a talk with him and his colleague Erskine Bowles at a professional conference a couple years ago, and I'm looking forward to being with them again at a smaller conference next month. He tells it like it is better than anyone I know. If you can spare 20 minutes, this week's video features an entertaining and enlightening interview from Reuters.

3 - If you can spare some more time (and I think all of us should), you might want to read the Simpson-Bowles report, aptly titled The Moment of Truth, in its entirety. As the Senator says in the Reuters interview, "It's 67 pages long, it's in English." I still don't know why the decision-makers refuse to adopt it. Click here to download the report.

4 - Some great quotes from Alan Simpson:

"Pull up a chair, we don't do b.s. or mush."

"Medicare is the mastodon in the kitchen."

"Right now, we're the healthiest horse in the glue factory."

"That's a sparrow belch in the midst of where we are."

"This is a stink bomb at a garden party; it just keeps coming back."

Have a truthful week!


Tuesday, May 1, 2012

When More is Not Better

1 - Our New Realities: Investing public seminar is two weeks from tomorrow. (See full information in the Events section of our website, click here) This event is open to the public; please attend -- and invite a friend. We already have a healthy number of reservations, so I urge you to register soon. You can register either online or by calling Michele at 859-7001 (ext. 2).

2 - Please take two minutes to view this week's video below. It sets forth a major reason why Millard & Company is different from many other investment firms you might be familiar with, and it establishes the basis of the important article I allude to in the following paragraph.

3 - I don't often take a public position on political issues, but today is an exception. As part of the Wall Street reform package that followed the 2008 scandals, a bill known as the Investment Oversight Act of 2012 was recently introduced in the House. While its intention is to enhance consumer protections, I believe its effect would be just the opposite. Below is This Week's Economic News is an article (admittedly a fairly long article) setting forth the ways in which consumers could be harmed by this legislation.

4 - On the lighter side: Working at my office computer, I face the Depot Garden through two large windows. The garden (a pubic park maintained by our friends at the Tryon Garden Club) teems with wildlife. The bird feeder within six feet of my eyes is a center of activity, with many colorful birds vying for its treats. The bird house mounted a few yards away is home to a busy family of bluebirds. And a partially used bag of mulch stored under the building's protective roof overhang is currently sheltering a house wren and four chicks. What a great place to work!

Have a super week!


Congress' Idea of Consumer Protection: Make Everybody a Wall Street Broker

Investment advisers are not the same as investment brokers. There's a big difference - at least for now.

Talk about the fox guarding the hen house....

On April 25, 2012, Rep. Spencer Bachus of AL and Rep. Carolyn McCarthy of NY introduced a bill intended to enhance consumer protection in light of the 2008 market meltdown that took the U.S. economy to the brink of collapse.

The Bachus-McCarthy bill, also known as the Investment Oversight Act of 2012, allows the Securities and Exchange Commission to delegate its oversight of many thousands of independent registered investment advisers (of which Millard & Company is one) to a self-regulatory organization. The self-regulatory organization would be the Financial Industry Regulatory Authority (FINRA), the regulator that oversees Wall Street brokers, and which has Wall Street executives sitting on its board of directors.

Bernard Madoff was under FINRA jurisdiction for his entire career (including its predecessor organization, the National Association of Securities Dealers or NASD), and even served as a member of the board of governors of the NASD as well as on numerous committees.

We do not support handing over expanded regulatory authority to an organization that failed to prevent the flood of toxic mortgage pools and dangerous derivatives, and sat by unconcerned while the Madoff Ponzi scheme dragged on for decades.

Paradoxically, the bill would give Wall Street (through its regulatory arm) control over its most persistent competition: independent advisers who, in contrast to the Wall Street sales culture, must by law put the interests of their clients first when giving financial advice. At a time when Wall Street's credibility is at its lowest ebb, when consumers are walking away from the opportunity to send their retirement dollars into the bloated brokerage industry bonus pools, the bill offers not more transparency, not a change in the culture to put the consumer's interests first, but regulation by an organization that has a miserable track record of preventing abuse.

The cost to advisers would be stifling. The Boston Consulting Group evaluated the expected cost of FINRA regulation on registered investment advisers and concluded that the plan would add $51,700 a year in expenses for the average independent adviser. This is more than twice as much as it would cost to develop enhanced oversight by the Securities and Exchange Commission.

Another point about costs: In 2009, FINRA's leadership used the dues collected from its members to pay its top ten executives $11.6 million, to spend over $1 million lobbying Congress and the SEC, and to spend undisclosed amounts on advertisements in The Washington Post and on CNN touting its record as a regulatory body. One might fairly question the organization's rigorous stewardship of dollars allocated to regulatory efforts.

In addition, consumers and members of the press might be astonished at how little transparency FINRA operates under.

One recent example: just last year, Amerivet Securities president Elton Johnson (a former Green Beret) managed to get seven proxy votes onto the agenda at FINRA's 2010 annual meeting. These initiatives would have required FINRA to do things that any guardian of the public interest would normally do as a matter of course: tell us the compensation paid to its ten most highly-paid employees, disclose FINRA's investment transactions to members and the public, and open up its board meetings or at least provide transcripts of the board's discussions.

All seven of these initiatives passed overwhelmingly, garnering more than two-thirds of the membership vote. The FINRA board of directors debated these measures in a closed meeting, and decided to reject them.

In a cynical bit of irony, the press release accompanying the legislative proposal goes so far as to praise the supposed diligent regulation of broker-dealers and decry the so-called lax regulation of RIAs. This one line offers particular insight into where this legislation is coming from:

"Customers may not understand the different titles that investment professionals use but they do believe that 'someone' is looking out for them and their investments. For broker-dealers that is true, but for investment advisers, it is all too often not true and that must change," concluded Chairman Bachus.

This statement asks us to believe that the RIAs like Millard & Company, who are required by law to live up to a fiduciary standard by putting their clients' interests first in all advice-giving, are the bad guys in the marketplace and must be watched much more vigilantly, while the brokerage firms, which have resisted submitting to this tougher standard behavior, are the good guys who protect consumers.

When you connect the dots on this piece of legislation, it becomes frighteningly clear that the actual agenda is something very different from consumer protection. Yet unless the public learns about this power grab by Wall Street just a few years after it brought the economy to its knees, consumers may find themselves living in a world where everybody who gives investment advice is regulated like a broker. And that would not be good.