A Way To Re-Set Your Perspective

1 - The stock market (or at least the Dow and NASDAQ) recovered enough last week to put it back in positive territory for the year. We have some tricky ground to cover between now and year-end, so we shouldn't start counting chickens just yet.

2 - Speaking of the stock market, you may notice that the 10-year total return average of the S&P 500 is only 1.23%. That's what pundits are talking about when they bemoan the "lost decade." Ten years is a long time to go with measly returns. That is why we're always seeking sources of investment returns not tied to stocks. In keeping with that quest, we are adding another asset class: Market Neutral Strategies. Although the name may be unfamiliar to you, it is a strategy I have employed successfully for over a decade. I was under the impression that it had become unavailable, but it turns out we can still access it, so it will be showing up in client portfolios over the next few reporting cycles.

3 - While there are quite a few economists who believe we may be headed for a second recession, the data doesn't completely support that assertion. Read the article below for a few bits of good news.

Double-Dip Recession? Don't Be Too Sure.

Key indicators point to an economy (slowly) on the mend.

This year, assorted economists and journalists have contended that the U.S. is on the edge of a new recession. Yet recent indicators hint that the economy is doing a bit better than some analysts think.

U.S. retail sales were up 1.1% in September. This is the kind of monthly number that you might expect during a typical recession recovery, and it surpassed the +0.7% consensus forecast of economists polled by Bloomberg News. Additionally, the Commerce Department revised August retail spending (formerly flat) to +0.3%. The year-over-year numbers in the September report really impress: we see annual gains of 7.9% for overall retail sales, 10.1% for online retailers, 6.9% for the restaurant and nightlife component, 7.6% for clothing shops and 6.5% for home and garden stores.^1,2,3

As Credit Suisse economist Jonathan Basile told CNBC.com, "The fear of recession recedes when you see a retail sales report like this." Basile said he was revising Credit Suisse's 3Q 2011 GDP forecast for the U.S. north from +2.5% to +2.9%.⁴

GDP did improve in the second quarter. Real GDP was +0.4% in the first quarter of 2011, but the third and final real GDP estimate for the second quarter from the Bureau of Economic Analysis was +1.3%.⁵

"As of today, the recovery is still underway," Berkshire Hathaway CEO Warren Buffett commented at an October 4 Fortune Magazine conference. "Our railroad carried 200,000 carloads last week," he said, referring to the Burlington Northern Santa Fe company. "That's the highest total in three years. And that's stuff moving around the country, supplying merchants and doing all kinds of things."⁶

Other signs of growth & stability can be seen. Here in October 2011, many corporations appear to be in better shape: U.S. non-financial firms have $15 trillion of potentially liquid cash or investments on hand compared to $13.7 trillion a year ago. American residential investment spending is up by $9 billion since a low-water mark last spring; existing home sales rose 7.7% in August and the backlog of homes for sale fell to an 8.5-month supply from the previous 9.5-month inventory. The Institute for Supply Management's twin purchasing manager indexes still show ongoing sector expansion; the service sector has grown for 22 months.^7,8,9

The continued vitality in consumer spending and other encouraging factors points to a recovery. It may seem unimpressive or frustrating, but it doesn't indicate a recession. 

Have a wondrous week!

~ Andy

My wife Sharon and I recently visited Yosemite, Kings Canyon and Sequoia National Parks in California where we took these photos. Such timeless majesty tends to place the moment's financial news in its proper perspective.  

One of the many breathtaking vistas in Yosemite Valley.

A Giant Sequoia, 30 feet wide, as tall as a 14-story building
and over 3,000 years old.

A sliver of the 360-degree view from Moro Rock.

Fond Farewells

1 - It was with a mixture of pride and excitement tinged with sadness that we said good-bye last week to our able and fun event coordinator -- and dear friend -- Libbie Johnson. In case you haven't heard or read it in the paper, Libbie was named Executive Director of Polk County's Economic and Tourism Development Department at last week's Polk County Commissioners' meeting. Libbie is definitely the person for that job. I knew when I offered her our position back in May that we might lose her to bigger and better things, and is was definitely worth it to have her with us for a while. Libbie has committed to helping see us through the rest of this year's events, and we will be following her new role with supportive attention.

2 - Steve Jobs died last week. What an amazing mind he was. He was one of those rare creative geniuses who was able to marry art, functionality, and good business. As chairman and CEO of a company that made just a few products, all of which worked seamlessly together, he demonstrated how focusing on doing one thing extremely well can lead to great things, both for the creator and for the user. And he was an example of the great American comeback story: after being kicked out of the company he co-founded, he was invited back 16 years later. Applying the wisdom of age and experience -- and defying plenty of naysayers -- he turned Apple into the powerhouse it is today. He was a very special man, and he will be sorely missed.

3 -Last week, iIn keeping with its recent roller-coaster pattern, the stock market again reversed its pattern of the prior week, this time gaining a couple percentage points. The market is always unpredictable, and we won't be surprised if the topsy-turvy disorder continues for some time to come.

Enjoy your week!

-Andy

Stepping into the New Normal

1 - The third quarter of 2011 has mercifully come to a close. The U.S. stock market (as measured by the Russell 3000) fell more than 15% during the months of July through September. Other ownership asset classes performed poorly as well, while bonds came close to breaking even--and in some cases even managed a small gain. As is usually the case, things are not quite as bad as they may seem, despite what you may hear on TV. We are preparing quarterly client reports and will be sending them out later this week.

2 - One of the interesting speakers at the recent FPA Charlotte Symposium was Rod Greenshields of Russell Investments. His talk, entitled "Investors Behaving Badly," explored the reasons that cause smart investors to make not-so-smart decisions. My report on the session is below:

Investors Behaving Badly  

   

An executive summary of Rod Greenshields' talk at the FPA Charlotte Symposium 

At the Financial Planning Association of Charlotte's annual two-day symposium last week, Rod Greenshields of Russell Investments gave a timely presentation entitled "Investors Behaving Badly." Here are some of the highlights from the notes I took during the talk:

Investors consistently underperform the markets. The problem is in their decision making.

• Human beings are wired to detect patterns even when they don't exist. We are psychologically wired for a world of limited and poor information. Example:  a simple coin flip. If I flip a coin five times and get 5 heads in a row, what do I expect next? Of course I expect tails. But in reality, the chance of tails is still only 50/50. I want to make a pattern where there isn't one.
• Another example is the lottery, which Greenshields calls "a tax on the mathematically challenged." The odds of winning the PowerBall are 1 in 80 million. Although you're much less likely to win than you are to die from flesh eating bacteria, a dog bite, or a lightning strike,  people still keep playing, expecting their chances to improve with each ticket purchased.
• Over short periods of time, great strategies can deliver losing results; that doesn't mean that we should abandon the strategy. Even rats and pigeons understand this concept better than humans do. Studies have been performed using a simple system whereby the subject can push a red button or a green button. The red button results in a reward 80% of the time, the green button only 20% of the time. The rats and pigeons learn quickly to simply select the red button every time, thereby "winning" 80% of the time. The humans, on the other hand, try to guess which button will give the next reward, reducing their success rate to around 64%.
• Consider the problem of soccer goalies and penalty kicks. Goalies almost always dive for the ball because they don't want to look stupid standing still, but they stop the ball much more often when they do stay still.
• Despite what many people think, a long-term investment study shows that it doesn't make a tremendous amount of difference whether you invest at the bottom of the market, six months before the bottom, or six months after. Your long-term rate of return is about the same.

Greenshields gave the advisors in attendance the following suggestions as to how to improve investor behavior:

• The first thing to do, according to Greenshields, is to clarify some definitions. Define what "success" means. In reality, it means achieving your goals. There are plenty of books purporting to tell investors how to "beat the market."  Likewise, CNBC and other news outlets create a lot of drama with which to fill their air time. But you need to resist letting these strangers define success for you. In other words, successful investing is not the same as beating the market.
• Here's another important term to define: Risk. While we may be tempted to define risk as the short-term loss of principal, a bigger-picture definition is more meaningful and realistic: running out of money before running out of life. Surveys indicate that 61% of baby boomers are more afraid of running out of money than of dying. That brings the concept of risk down to a very concrete and personal level.
• The speaker recommended setting up systems that make it easier to make good decisions, and he used the concept of a diversified portfolio as an example. Greenshields recommends a portfolio based on a rigorously diversified investment approach. As asset classes and percentage allocations have evolved over time, the concept and practice of diversification has changed.  (As you might suspect, I very much agreed with this part of the presentation.)
• An investor should look at their advisor as a personal trainer for his or her financial life. He emphasized the familiar (and true) precept that meaningful financial planning involves making sure the client is advancing toward his/her goals.

As he closed, he made the important point that staying the course is not the same as doing nothing. And he illustrated it with a quote by Edward Gibbon: "The winds and waves are always on the side of the ablest navigators."

3 - As mentioned last week, Juliet and Bonnie spent two days last week in a TD Ameritrade Operations Workshop in Washington, DC. They learned a lot, and Juliet reports that the trip was very much worthwhile. They even found time to visit some national landmarks, including the Washington Monument. On the day they were there, the National Park Service affixed a contraption to the top of the obelisk by which some intrepid inspectors rappelled down the four sides of the structure, inspecting the monument for damage caused by the recent earthquake.

4 - We plan to begin implementing our new portfolio models this month. If you're a client who didn't attend one of our portfolio resetting workshops and haven't taken the time to view the DVD of the presentation, this would be a good time to do so. We want clients to be fully informed and to have an opportunity to discuss the changes with us.

Enjoy this beautiful fall week!

-Andy

Risks in Chasing Yields

Three reasons to be wary of chasing dividend yield for income

Rod Greenshields of Russell Investments discusses why "not invading principal" involves hidden risks that many investors don't recognize.