The Markets
If it feels like the stock market has been volatile this year, you’re right. Here are a few examples:
• Three-month historic volatility for the “fear” gauge known as the VIX hit a record on October 31, surpassing the prior peak from December 2008.
• Intraday swings in the Dow Jones Industrial Average have averaged 261 points since August 1, an exceptionally large number.
• On four consecutive days back in August, the Dow Jones Industrial Average alternated between gains and losses of more than 400 points, the longest streak ever.
Source: Bloomberg
All this volatility and the lack of a clear, sustained direction in the market have frustrated many investors.
The problems in Europe and the budget wrangling in the U.S. have kept investors in a risk-on, risk-off mode throughout much of this year. As a result, many stocks have traded in herd-like fashion without much regard to individual company fundamentals, according to investment manager Duke Buchan, III.
At times like this, it’s important to have patience and as Warren Buffett says, wait for that “fat pitch.”
WHAT IS THE PRICE OF ECONOMIC GROWTH in China and how does it affect us in the U.S.? Ever since 1978 when Chinese leader Deng Xiaoping laid out a vision of economic reform, China has been on a growth spurt of massive proportion. However, that growth comes with a huge price in the form of limited freedom. Last week, Chinese leaders clamped down again on freedom of speech in an effort to control the spread of social unrest.
In China, the government blocks access to the microblog service “Twitter” and, instead, a Chinese version called “Weibo” has become popular. In total, more than 300 million Chinese people use microblogs, with Weibo the most popular, according to Bloomberg.
Regarding last week’s clampdown, Chinese officials announced that users of Weibo in Beijing will have to register their real names and be verified by government authorities before posting on the service. In addition, users are banned from posting anything that could lead to disrupting the social order, according to The Wall Street Journal.
This isn’t the first government crackdown on freedom of speech. Earlier in the year, the government blocked citizens’ access to searches on the “Arab Spring” that was rumbling through the Middle East. Prior to that, the government blocked access to Facebook, YouTube, and Google.
What’s the government’s problem with freedom of speech?
As the “Arab Spring” uprising in the Middle East demonstrated, social media can enable millions of people to communicate and mobilize in short order. China seems to be very afraid of letting its citizens have this capability for fear that a popular uprising could lead to chaos in a sprawling country of 1.3 billion people.
With China still a major growth engine for the world economy, we have to pay close attention to any social trends affecting the country. If the government clamps down too hard and its citizens rise up, it could quickly morph from a social/political movement to one that has major worldwide economic implications. On top of that, China is gearing up for a once in a decade leadership change in 2012 and, given the country’s history, a smooth transition is not guaranteed.
When investing money, you have to consider possible “black swan” events that have a low probability of occurring, but, if they do occur, could wreak havoc. A Chinese uprising could be one of those and we want you to know that it’s on our radar.
Weekly Focus – Think About It
“If the freedom of speech is taken away then dumb and silent we may be led, like sheep to the slaughter.” --George Washington, U.S. President
Our mission is to be dedicated to enhancing the quality of our clients' lives as we address their wealth to help them achieve their long-term goals and dreams. With our unmatched, quality service and guidance, we build strong relationships as we help simplify our clients' financial affairs, allowing them to focus on those areas that give their life meaning and purpose
Monday, December 19, 2011
Monday, December 12, 2011
Weekly Commentary December 12th, 2011
The Markets
What’s more important to the U.S. stock market, economic growth or the value of the U.S. dollar?
On the surface, economic growth would seem to be the logical answer since as the economy grows, earnings should grow, too. But, digging a little deeper, the answer is not so clear cut.
What muddles the answer is that large U.S. multinational companies generate about 47 percent of their revenue from outside the U.S., according to Standard and Poor’s. When that revenue is translated back into U.S. dollars, the revenue could vary significantly depending on whether the dollar is strong, weak, or neutral.
For example, if the dollar is strong, then foreign revenue translates into fewer dollars which reduces a U.S. company’s reported revenue. Lower revenue could lead to lower profits and possibly lower stock prices. The reverse is also true. If the dollar is weak, then foreign revenue translates into more dollars which increases a U.S. company’s reported revenue and could lead to higher profits.
We’re talking about the value of the dollar today because of the uncertainty surrounding numerous world currencies. The euro, in particular, is on the radar because it might soar or plunge depending on how Europe cleans up its sovereign debt problem. And, with Europe accounting for 22 percent of our total exports so far this year, any major change in the value of the euro could significantly affect U.S. corporate revenue and profits, according to the Commerce Department.
That’s why Christopher Wood, strategist for CLSA Asia-Pacific Markets says, “The key variable for the U.S. stock market is not the U.S. economy, but the U.S. dollar.”
In a globally based economy, the value of the dollar matters. It’s one more variable that could affect stock prices and bears monitoring.
What’s more important to the U.S. stock market, economic growth or the value of the U.S. dollar?
On the surface, economic growth would seem to be the logical answer since as the economy grows, earnings should grow, too. But, digging a little deeper, the answer is not so clear cut.
What muddles the answer is that large U.S. multinational companies generate about 47 percent of their revenue from outside the U.S., according to Standard and Poor’s. When that revenue is translated back into U.S. dollars, the revenue could vary significantly depending on whether the dollar is strong, weak, or neutral.
For example, if the dollar is strong, then foreign revenue translates into fewer dollars which reduces a U.S. company’s reported revenue. Lower revenue could lead to lower profits and possibly lower stock prices. The reverse is also true. If the dollar is weak, then foreign revenue translates into more dollars which increases a U.S. company’s reported revenue and could lead to higher profits.
We’re talking about the value of the dollar today because of the uncertainty surrounding numerous world currencies. The euro, in particular, is on the radar because it might soar or plunge depending on how Europe cleans up its sovereign debt problem. And, with Europe accounting for 22 percent of our total exports so far this year, any major change in the value of the euro could significantly affect U.S. corporate revenue and profits, according to the Commerce Department.
That’s why Christopher Wood, strategist for CLSA Asia-Pacific Markets says, “The key variable for the U.S. stock market is not the U.S. economy, but the U.S. dollar.”
In a globally based economy, the value of the dollar matters. It’s one more variable that could affect stock prices and bears monitoring.
IT’S NOT JUST HOW MUCH A COMPANY EARNS, but how much of an earnings multiple investors put on those earnings that helps determine stock prices. To illustrate this, let’s assume it’s your lucky day and you have the ability to inherit one of the following five companies. Based on the data given in the following chart, which of the five companies would you choose to inherit?
| Company | 2010 Annual Revenue | 2010 Operating Profit |
| Ford (car company) | $128,954,000,000 | 6,658,000,000 |
| DuPont (chemicals) | 32,733,000,000 | 3,711,000,000 |
| Honeywell (manufacturer) | 33,370,000,000 | 3,134,000,000 |
| eBay (e-commerce) | 9,156,000,000 | 2,054,000,000 |
| VMware (software) | 2,857,000,000 | 428,000,000 |
Source: Morningstar
Just looking at the numbers, you might think Ford would be the obvious choice. Its revenue was nearly four times the next closest company and its operating profit last year was nearly 80 percent higher than the next closest company.
Interestingly, the stock market can tell us how it thinks these five companies stack up against one another. It turns out that as of last week, the market value of these five companies (stock price times shares outstanding) was between $40.5 billion and $41.9 billion. In other words, the stock market valued these companies at basically the same price.
That may seem strange since the financial metrics of these five companies differs significantly. How can Ford, with $129 billion in annual revenue and $6.7 billion in operating profit be worth about the same as VMware, a company with just $2.9 billion in annual revenue and an operating profit of only $0.4 billion?
This highlights the point that in the long run, earnings do drive stock prices; however, the value that investors place on those earnings can vary significantly from one company to the next at any point in time. So, what causes investors to value a small company like VMware at about the same market value as the much larger Ford? Ah, that’s the million-dollar question which keeps investment analysts gainfully employed!
We mention these five stocks not as a buy or sell recommendation, but simply to point out that numerous factors affect the valuation of stock prices. It’s not as simple as saying those with the most profits win.
Weekly Focus – Shuffling Cards
Playing cards is about as American as baseball, hot dogs, and apple pie. So here’s a trivia question for you. How many times must you shuffle a deck of 52 playing cards in order to ensure it is truly scrambled?
Mathematicians have studied this problem and determined that even after six shuffles you can still find patches of non-random sequences. It’s the seventh shuffle that does the trick. At seven shuffles you reach a tipping point and the deck turns into chaos, according to the book Magical Mathematics by Persi Diaconis and Ron Graham as reported in The Wall Street Journal. So, if you are concerned that one of your table mates is a skilled cheat, make sure you shuffle at least seven times!
Monday, December 5, 2011
Weekly Commentary December 5th, 2011
The Markets
Politicians may struggle to work together, but at least the world’s central bankers can.
At 8:00 a.m. EST on November 30, the Federal Reserve released a statement that sent worldwide financial markets skyrocketing. Here’s the first paragraph of the statement:
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.
The U.S. Federal Reserve went on to say that should liquidity conditions continue to deteriorate, it has “a range of tools available” and “is prepared to use these tools as needed.” For many investors, this move meant world central banks “get it” and are ready to pull out “the big guns” to keep the worldwide economy from grinding to a halt.
Investors rejoiced and, by the end of the day, stocks had soared as the Dow Jones Industrial Average rose 4.2 percent, according to The Wall Street Journal.
While the central banks’ moves were welcome, they don’t solve the economy’s underlying problem. Certain European countries (and the U.S., too) suffer from too much debt and too little growth. The banks’ moves were akin to taking ibuprofen -- they mask the pain, but don’t provide a cure.
The cure likely won’t happen until European politicians agree on a credible and enforceable, “long-term regime of fiscal discipline,” according to The Wall Street Journal. While European leaders meet frequently to discuss policy solutions, they unfortunately suffer from the old truism, “When it’s all said and done, a lot more gets said than gets done.”
WHO WANTS TO BE A BILLIONAIRE? Ever wonder how billionaires got to that level? Here are 10 success tips shared by four billionaires on a recent episode of the news show “20/20:”
1. Figure out what you're so passionate about that you'd be happy doing it for 10 years, even if you never made any money from it. That's what you should be doing.
2. Always be true to yourself.
3. Figure out what your values are and live by them, in business and in life.
4. Rather than focus on work-life separation, focus on work-life integration.
5. Don't network. Focus on building real relationships and friendships where the relationship itself is its own reward, instead of trying to get something out of the relationship to benefit your business or yourself.
6. Remember to maximize for happiness, not money or status.
7. Get ready for rejection.
8. Success unshared is failure. Give back -- share your wealth.
9. The truth is cold and hard, but it's the first point on the path to hope and salvation.
10. Successful people do all the things unsuccessful people don't want to do.
Even if you’re not focused on becoming a billionaire, these are some pretty good tips to live by. Which ones resonate with you?
Weekly Focus – Fun With Math
It’s been said that compound interest is the eighth wonder of the world. Compound interest simply means that you get “interest on your interest” instead of just interest on your original principal. Here are a couple math questions that display the power of compounding.
A typical piece of copy paper is 0.004 inches thick. If you were able to fold this piece of paper in half everyday for 10 days (i.e., double the thickness each day), how thick would your paper be after 10 days?
Taking this a step further, how many times would you have to fold your paper in half in order for your piece of paper to be as thick as the average distance between the earth and the moon? Here’s a hint: the average distance between the earth and moon is 238,857 miles.
Are you ready for the answers? After 10 days, your paper would be 4.1 inches thick. And, to reach the moon, you’d have to fold your paper in half each day for just 42 days. Surprised?
The power of compounding also makes a good case for reinvesting your dividends so you can get a “return on your return.”
Politicians may struggle to work together, but at least the world’s central bankers can.
At 8:00 a.m. EST on November 30, the Federal Reserve released a statement that sent worldwide financial markets skyrocketing. Here’s the first paragraph of the statement:
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.
The U.S. Federal Reserve went on to say that should liquidity conditions continue to deteriorate, it has “a range of tools available” and “is prepared to use these tools as needed.” For many investors, this move meant world central banks “get it” and are ready to pull out “the big guns” to keep the worldwide economy from grinding to a halt.
Investors rejoiced and, by the end of the day, stocks had soared as the Dow Jones Industrial Average rose 4.2 percent, according to The Wall Street Journal.
While the central banks’ moves were welcome, they don’t solve the economy’s underlying problem. Certain European countries (and the U.S., too) suffer from too much debt and too little growth. The banks’ moves were akin to taking ibuprofen -- they mask the pain, but don’t provide a cure.
The cure likely won’t happen until European politicians agree on a credible and enforceable, “long-term regime of fiscal discipline,” according to The Wall Street Journal. While European leaders meet frequently to discuss policy solutions, they unfortunately suffer from the old truism, “When it’s all said and done, a lot more gets said than gets done.”
WHO WANTS TO BE A BILLIONAIRE? Ever wonder how billionaires got to that level? Here are 10 success tips shared by four billionaires on a recent episode of the news show “20/20:”
1. Figure out what you're so passionate about that you'd be happy doing it for 10 years, even if you never made any money from it. That's what you should be doing.
2. Always be true to yourself.
3. Figure out what your values are and live by them, in business and in life.
4. Rather than focus on work-life separation, focus on work-life integration.
5. Don't network. Focus on building real relationships and friendships where the relationship itself is its own reward, instead of trying to get something out of the relationship to benefit your business or yourself.
6. Remember to maximize for happiness, not money or status.
7. Get ready for rejection.
8. Success unshared is failure. Give back -- share your wealth.
9. The truth is cold and hard, but it's the first point on the path to hope and salvation.
10. Successful people do all the things unsuccessful people don't want to do.
Even if you’re not focused on becoming a billionaire, these are some pretty good tips to live by. Which ones resonate with you?
Weekly Focus – Fun With Math
It’s been said that compound interest is the eighth wonder of the world. Compound interest simply means that you get “interest on your interest” instead of just interest on your original principal. Here are a couple math questions that display the power of compounding.
A typical piece of copy paper is 0.004 inches thick. If you were able to fold this piece of paper in half everyday for 10 days (i.e., double the thickness each day), how thick would your paper be after 10 days?
Taking this a step further, how many times would you have to fold your paper in half in order for your piece of paper to be as thick as the average distance between the earth and the moon? Here’s a hint: the average distance between the earth and moon is 238,857 miles.
Are you ready for the answers? After 10 days, your paper would be 4.1 inches thick. And, to reach the moon, you’d have to fold your paper in half each day for just 42 days. Surprised?
The power of compounding also makes a good case for reinvesting your dividends so you can get a “return on your return.”
Monday, November 28, 2011
Weekly Commentary November 28th, 2011
The Markets
“It’s a small world after all.”
Living in an age of jet travel, the internet and mobile communication have its advantages. It makes our world of 7 billion people seem a bit smaller since we’re just one plane ride or “one boot of the computer” away from connecting with anyone in the world.
But, along with the good comes the bad.
Worldwide interconnectedness not only connects us socially, it also connects us economically. What happens in China, for example, doesn’t necessarily stay in China. A collapse of their real estate market or a revolt against the government could have repercussions around the world.
A bit closer to home, the sovereign debt problems in Europe are helping keep a lid on stock prices in the U.S., according to MarketWatch. As the debt problem spreads from the peripheral euro-zone countries to the core in Germany -- which had a failed bond auction last week -- the U.S. is caught in the cross fire.
What’s disappointing about being joined at the hip with Europe is that the U.S. economy is actually performing okay. Consider these positive points:
• Our trade deficit declined for the third month in September, thanks to rising exports.
• Industrial production rose strongly in October.
• Residential building improvements are touching record highs.
• October car sales hit the highest level since February.
• Consumer sentiment in November rose to the highest level since June, according to data from the University of Michigan and Thomson Reuters.
• Personal income in October showed the largest increase since March.
• Black Friday sales rose sharply from a year ago.
Sources: Economist; MarketWatch
Granted, these improvements are coming off a low base and are so fragile that the modest recovery in the U.S. could get derailed if the euro-zone situation continues to deteriorate. Our small world is now focused on Europe and whether it can pull out of its debt debacle. Time to do so is running out for our friends across the pond.
“It’s a small world after all.”
Living in an age of jet travel, the internet and mobile communication have its advantages. It makes our world of 7 billion people seem a bit smaller since we’re just one plane ride or “one boot of the computer” away from connecting with anyone in the world.
But, along with the good comes the bad.
Worldwide interconnectedness not only connects us socially, it also connects us economically. What happens in China, for example, doesn’t necessarily stay in China. A collapse of their real estate market or a revolt against the government could have repercussions around the world.
A bit closer to home, the sovereign debt problems in Europe are helping keep a lid on stock prices in the U.S., according to MarketWatch. As the debt problem spreads from the peripheral euro-zone countries to the core in Germany -- which had a failed bond auction last week -- the U.S. is caught in the cross fire.
What’s disappointing about being joined at the hip with Europe is that the U.S. economy is actually performing okay. Consider these positive points:
• Our trade deficit declined for the third month in September, thanks to rising exports.
• Industrial production rose strongly in October.
• Residential building improvements are touching record highs.
• October car sales hit the highest level since February.
• Consumer sentiment in November rose to the highest level since June, according to data from the University of Michigan and Thomson Reuters.
• Personal income in October showed the largest increase since March.
• Black Friday sales rose sharply from a year ago.
Sources: Economist; MarketWatch
Granted, these improvements are coming off a low base and are so fragile that the modest recovery in the U.S. could get derailed if the euro-zone situation continues to deteriorate. Our small world is now focused on Europe and whether it can pull out of its debt debacle. Time to do so is running out for our friends across the pond.
DOES IT MAKE SENSE to invest outside of the United States U.S.
| % of World Equity Market Capitalization | |||
| Country | 5 Years Ago | Mid August 2011 | 5-Year Change |
| 1. | 36.05% | 29.14% | -6.91% |
| 2. | 1.36 | 7.87 | 6.52 |
| 3. | 10.93 | 7.73 | -3.20 |
| 4. | 7.76 | 6.43 | -1.33 |
| 5. | 2.98 | 4.88 | 1.90 |
| 6. | 3.25 | 4.20 | 0.96 |
| 7. | 4.95 | 3.33 | -1.62 |
| 8. | 3.35 | 2.80 | -0.55 |
| 9. | 1.43 | 2.77 | 1.35 |
| 10. | 1.34 | 2.72 | 1.37 |
Source: Bespoke Investment Group, August 22, 2011; New Forces in the World Economy
by Brad Roberts
The above chart shows some interesting trends:
· The U.S.
· China
· Japan , UK , France , and Germany join the U.S.
· Emerging countries such as Hong Kong , India , and Brazil
· Although not shown on the chart, back in the late 1980s, Japan
As the world turns from developed countries to emerging ones, we are keeping our eyes open and our pencils sharpened for the investment opportunities that might arise beyond our borders.
Weekly Focus – Think About It
“We live in a wonderful world that is full of beauty, charm and adventure. There is no end to the adventures we can have if only we seek them with our eyes open.”
--Jawaharial Nehru, First prime minister of independent India
Wednesday, November 23, 2011
Triad Financial Strategies announces a strategic alliance with Viridian Investment Management
We are delighted to announce that as of 11/15/2011 Triad Financial Strategies has entered into a strategic alliance with Viridian Investment Management. It is our shared vision that the two companies will be able to offer every client additional team members with specific skills and capabilities that will allow us to better and more effectively take care of your investment management and financial planning needs.
By partnering with a firm that shares our philosophies around investment management, financial planning and most importantly client service; we believe that every client will truly feel the benefit from the additional staff and capabilities of this partnership. In addition to additional staff we will also be able to offer several different office locations depending on your specific needs.
Seattle: 1001 4th Ave, Suite 4400, Seattle
Snohomish: 21 Avenue A, Suite C, Snohomish
Issaquah: 22525 SE 64th Pl, Suite 200 (New Location as of 1/1/12)
To learn more about our strategic partners and the full team, please go to the link below.
http://www.viridianinvestments.com/ourteam.htm
On a related note, we will be moving our Issaquah office over to the Meadow Creek Complex (across the street from Home Depot) towards the end of December and will be using it as a location to meet with our eastside clients for scheduled appointments as of 1/1/12 and beyond. Otherwise, I will be using all three locations throughout the week, but will always be available to connect via phone or email.
We are looking forward to working alongside one of the premier wealth management firms in the Puget Sound area and are very happy that you will benefit through the additional services, skills, and capabilities they bring.
As always please do not hesitate to call if you have any questions. We look forward to serving you better as a result of this strategic alliance.
The financial consultants of Viridian Investment Management are affiliated with LPL Financial.
Sincerely,
Tait Lane, President Brent Decker
Triad Financial Strategies
By partnering with a firm that shares our philosophies around investment management, financial planning and most importantly client service; we believe that every client will truly feel the benefit from the additional staff and capabilities of this partnership. In addition to additional staff we will also be able to offer several different office locations depending on your specific needs.
Seattle: 1001 4th Ave, Suite 4400, Seattle
Snohomish: 21 Avenue A, Suite C, Snohomish
Issaquah: 22525 SE 64th Pl, Suite 200 (New Location as of 1/1/12)
To learn more about our strategic partners and the full team, please go to the link below.
http://www.viridianinvestments.com/ourteam.htm
On a related note, we will be moving our Issaquah office over to the Meadow Creek Complex (across the street from Home Depot) towards the end of December and will be using it as a location to meet with our eastside clients for scheduled appointments as of 1/1/12 and beyond. Otherwise, I will be using all three locations throughout the week, but will always be available to connect via phone or email.
We are looking forward to working alongside one of the premier wealth management firms in the Puget Sound area and are very happy that you will benefit through the additional services, skills, and capabilities they bring.
As always please do not hesitate to call if you have any questions. We look forward to serving you better as a result of this strategic alliance.
The financial consultants of Viridian Investment Management are affiliated with LPL Financial.
Sincerely,
Tait Lane, President Brent Decker
Triad Financial Strategies
Monday, November 21, 2011
Weekly Commentary November 21st, 2011
The Markets
“Printing money is really just a softer method of default, because it effectively converts the meaning of default from ‘getting less than 100% of the currency you were owed’ to ‘getting all the currency you were owed, but ending up with less than 100 percent of the purchasing power you expected.’”
--John Hussman
They say money doesn’t grow on trees, but, for some governments, it metaphorically does. Earlier this year, the U.S. Federal Reserve completed a $600 billion “quantitative easing” program, which is a fancy way of saying “money printing,” according to Forbes. Similarly, the Bank of England recently announced an additional 75 billion pound sterling quantitative easing program on top of an earlier 200 billion program, according to The Wall Street Journal.
These programs are designed to help reduce long-term interest rates and boost the economy. Critics say they may lead to hyperinflation.
Now, some folks are saying a similar money printing program is the only way to solve the eurozone debt crisis.
As the sovereign debt crisis spreads in Europe, government bond interest rates are rising above what’s considered a sustainable level. Rates are rising because bond buyers are scarce; they’re concerned that certain governments may default on their payments so they demand a higher rate to compensate for the risk of default.
If demand for government bonds drops too much, then some countries may have to default because they won’t have enough money to pay their bills. That’s where the European Central Bank (ECB) may have to step in.
The ECB is the central bank for 11 national central banks, each serving its own country. Those 11 national central banks are the original members of the Eurozone, according to CNBC.
As a highly respected organization, the ECB could step in and say it will back its member countries’ debt and buy that debt in unlimited quantities to keep interest rates down. If it did, then the current crisis would likely abate (at least temporarily) and give the troubled countries some breathing room to implement reforms and restart economic growth, according to Reuters.
So far, though, the ECB has declined to make such a statement for several reasons:
1. It might undermine its independence from politics and its price stability mandate.
2. It could push up eurozone inflation.
3. It would reduce pressure on wayward countries to cut spending and implement growth-boosting structural overhauls.
Sources: Reuters, The Wall Street Journal
In short, it’s “politics as usual” in Europe. Meanwhile, as Europe fiddles, the markets remain unsettled.
HERE ARE A FEW QUOTES from top investors that are worth pondering:
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”
--Warren Buffett
“In investing, what is comfortable is rarely profitable.”
--Robert Arnott
“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
--Sir John Templeton
“Your success in investing will depend in part on your character and guts, and in part on your ability to realize at the height of the ebullience and the depth of despair alike that this too shall pass.”
--John Bogle
“You make most of your money in a bear market, you just don’t realize it at the time.”
--Shelby Cullom Davis
“To achieve long-term success over many financial market and economic cycles, observing a few rules is not enough. Too many things change too quickly in the investment world for that approach to succeed. It is necessary instead to understand the rationale behind the rules in order to appreciate why they work when they do and don't when they don't.”
--Seth Klarman
Weekly Focus – Think About It
“It is one of the paradoxes of success that the things and ways that got you there are seldom those that keep you there.”
--Charles Handy, Irish author/philosopher
“Printing money is really just a softer method of default, because it effectively converts the meaning of default from ‘getting less than 100% of the currency you were owed’ to ‘getting all the currency you were owed, but ending up with less than 100 percent of the purchasing power you expected.’”
--John Hussman
They say money doesn’t grow on trees, but, for some governments, it metaphorically does. Earlier this year, the U.S. Federal Reserve completed a $600 billion “quantitative easing” program, which is a fancy way of saying “money printing,” according to Forbes. Similarly, the Bank of England recently announced an additional 75 billion pound sterling quantitative easing program on top of an earlier 200 billion program, according to The Wall Street Journal.
These programs are designed to help reduce long-term interest rates and boost the economy. Critics say they may lead to hyperinflation.
Now, some folks are saying a similar money printing program is the only way to solve the eurozone debt crisis.
As the sovereign debt crisis spreads in Europe, government bond interest rates are rising above what’s considered a sustainable level. Rates are rising because bond buyers are scarce; they’re concerned that certain governments may default on their payments so they demand a higher rate to compensate for the risk of default.
If demand for government bonds drops too much, then some countries may have to default because they won’t have enough money to pay their bills. That’s where the European Central Bank (ECB) may have to step in.
The ECB is the central bank for 11 national central banks, each serving its own country. Those 11 national central banks are the original members of the Eurozone, according to CNBC.
As a highly respected organization, the ECB could step in and say it will back its member countries’ debt and buy that debt in unlimited quantities to keep interest rates down. If it did, then the current crisis would likely abate (at least temporarily) and give the troubled countries some breathing room to implement reforms and restart economic growth, according to Reuters.
So far, though, the ECB has declined to make such a statement for several reasons:
1. It might undermine its independence from politics and its price stability mandate.
2. It could push up eurozone inflation.
3. It would reduce pressure on wayward countries to cut spending and implement growth-boosting structural overhauls.
Sources: Reuters, The Wall Street Journal
In short, it’s “politics as usual” in Europe. Meanwhile, as Europe fiddles, the markets remain unsettled.
HERE ARE A FEW QUOTES from top investors that are worth pondering:
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”
--Warren Buffett
“In investing, what is comfortable is rarely profitable.”
--Robert Arnott
“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
--Sir John Templeton
“Your success in investing will depend in part on your character and guts, and in part on your ability to realize at the height of the ebullience and the depth of despair alike that this too shall pass.”
--John Bogle
“You make most of your money in a bear market, you just don’t realize it at the time.”
--Shelby Cullom Davis
“To achieve long-term success over many financial market and economic cycles, observing a few rules is not enough. Too many things change too quickly in the investment world for that approach to succeed. It is necessary instead to understand the rationale behind the rules in order to appreciate why they work when they do and don't when they don't.”
--Seth Klarman
Weekly Focus – Think About It
“It is one of the paradoxes of success that the things and ways that got you there are seldom those that keep you there.”
--Charles Handy, Irish author/philosopher
Monday, November 14, 2011
Weekly Commentary November 14th, 2011
The Markets
Greece and Italy just dumped their political leaders and are hoping that new leadership will calm the financial markets and drive important structural reform.
One of the insightful bits of investing wisdom is that you don’t have to recoup a loss using the same investment that caused the loss. In other words, it’s okay to sell a loser and redeploy the money in another investment that may have a better chance of going up in value. That seems to be what Greece and Italy are doing with their leadership change.
Greece is now counting on Lucas Papademos and Italy is counting on Mario Monti to lead their countries out of their debt mess.
If these guys take swift action and gain credibility, it could help the markets. As Barron’s pointed out this past weekend, “In the absence of new and nasty headlines or evidence of acute market stress, the default mode of stocks – at least for now – is to hang firm or to climb a bit.”
As of last Friday, the S&P 500 index turned positive on a year-to-date basis. We’ll have to wait and see if political change in Europe is enough to kick start the markets.
RIP VAN WINKLE SLEPT FOR 20 YEARS AND AWOKE TO DISCOVER that his world had changed dramatically. The U.S. stock market has been “asleep” for about 13 years now and in another seven, we may find our world is much different, too.
In the nearly 13 years between January 11, 1999 and last Friday, the S&P 500 index rose as high as 1,565 and dropped as low as 676. During that volatile period, we witnessed numerous impactful events including the following:
• The bursting of the dot-com bubble
• The rise of the euro
• 9/11
• The war on terrorism
• The rise and fall of the real estate bubble
• The spectacular rise of the price of gold
• The Southeast Asia tsunami and the Japan tsunami
• The rise of social media
• The Great Recession
• The sovereign debt crisis
Yet, with all those world events and the tremendous moves in the S&P 500 – both up and down – during those nearly 13 years, guess how much the S&P 500 price changed between January 11, 1999 and last Friday?
Exactly zero!
That’s right. The S&P 500 closed at 1,263 on January 11, 1999 and at 1,263 last Friday, according to data from Yahoo! Finance.
Does this mean you should never invest in the stock market because it’s been flat for so long? No. Here are five things to understand from this long market malaise:
1. Dividends matter. While there was no price change between these two time periods, reinvesting dividends or owning investments that pay dividends may have generated a positive return.
2. Diversification matters. The S&P 500 was flat, but some other asset classes did fine over the past 13 years, so it’s important to search far and wide for investment opportunities.
3. Perspective matters. It’s easy to get caught up in the large day-to-day swings in the market, but understanding the broader trend or context of the market is important to help prevent day-to-day volatility from causing you to make bad investment decisions.
4. Patience matters. As long-term investors, we’re more like the tortoise than the hare. Short-term, rapid traders create a lot of noise and may lead the pack from time-to-time, but we’re focused on winning at the end, not at each checkpoint.
5. Valuation matters. The bubble-like values placed on some companies in the late 1990s were so out of whack with normalcy that it’s taken the market many years to work off those excesses. So, while patience is important, it’s also necessary to understand that valuation at the time you make your investment could have a major impact on how long it takes to get a return on your investment.
Nobody knows if the market will remain “asleep” for another seven years to match Mr. Van Winkle. Regardless, the world will be different and we’ll keep searching for ways to help you reach your destination without nightmares.
Weekly Focus – Think About It
“Rip Van Winkle, however, was one of those happy mortals, of foolish, well-oiled dispositions, who take the world easy, eat white bread or brown, which ever can be got with the least thought or trouble, and would rather starve on a penny than work for a pound.”
--Excerpt from Rip Van Winkle by Washington Irving
Greece and Italy just dumped their political leaders and are hoping that new leadership will calm the financial markets and drive important structural reform.
One of the insightful bits of investing wisdom is that you don’t have to recoup a loss using the same investment that caused the loss. In other words, it’s okay to sell a loser and redeploy the money in another investment that may have a better chance of going up in value. That seems to be what Greece and Italy are doing with their leadership change.
Greece is now counting on Lucas Papademos and Italy is counting on Mario Monti to lead their countries out of their debt mess.
If these guys take swift action and gain credibility, it could help the markets. As Barron’s pointed out this past weekend, “In the absence of new and nasty headlines or evidence of acute market stress, the default mode of stocks – at least for now – is to hang firm or to climb a bit.”
As of last Friday, the S&P 500 index turned positive on a year-to-date basis. We’ll have to wait and see if political change in Europe is enough to kick start the markets.
RIP VAN WINKLE SLEPT FOR 20 YEARS AND AWOKE TO DISCOVER that his world had changed dramatically. The U.S. stock market has been “asleep” for about 13 years now and in another seven, we may find our world is much different, too.
In the nearly 13 years between January 11, 1999 and last Friday, the S&P 500 index rose as high as 1,565 and dropped as low as 676. During that volatile period, we witnessed numerous impactful events including the following:
• The bursting of the dot-com bubble
• The rise of the euro
• 9/11
• The war on terrorism
• The rise and fall of the real estate bubble
• The spectacular rise of the price of gold
• The Southeast Asia tsunami and the Japan tsunami
• The rise of social media
• The Great Recession
• The sovereign debt crisis
Yet, with all those world events and the tremendous moves in the S&P 500 – both up and down – during those nearly 13 years, guess how much the S&P 500 price changed between January 11, 1999 and last Friday?
Exactly zero!
That’s right. The S&P 500 closed at 1,263 on January 11, 1999 and at 1,263 last Friday, according to data from Yahoo! Finance.
Does this mean you should never invest in the stock market because it’s been flat for so long? No. Here are five things to understand from this long market malaise:
1. Dividends matter. While there was no price change between these two time periods, reinvesting dividends or owning investments that pay dividends may have generated a positive return.
2. Diversification matters. The S&P 500 was flat, but some other asset classes did fine over the past 13 years, so it’s important to search far and wide for investment opportunities.
3. Perspective matters. It’s easy to get caught up in the large day-to-day swings in the market, but understanding the broader trend or context of the market is important to help prevent day-to-day volatility from causing you to make bad investment decisions.
4. Patience matters. As long-term investors, we’re more like the tortoise than the hare. Short-term, rapid traders create a lot of noise and may lead the pack from time-to-time, but we’re focused on winning at the end, not at each checkpoint.
5. Valuation matters. The bubble-like values placed on some companies in the late 1990s were so out of whack with normalcy that it’s taken the market many years to work off those excesses. So, while patience is important, it’s also necessary to understand that valuation at the time you make your investment could have a major impact on how long it takes to get a return on your investment.
Nobody knows if the market will remain “asleep” for another seven years to match Mr. Van Winkle. Regardless, the world will be different and we’ll keep searching for ways to help you reach your destination without nightmares.
Weekly Focus – Think About It
“Rip Van Winkle, however, was one of those happy mortals, of foolish, well-oiled dispositions, who take the world easy, eat white bread or brown, which ever can be got with the least thought or trouble, and would rather starve on a penny than work for a pound.”
--Excerpt from Rip Van Winkle by Washington Irving
Monday, November 7, 2011
Weekly Commentary November 7th, 2011
The Markets
This Europe problem just won’t go away and it’s keeping the financial markets on edge.
Despite an October 27 agreement that strengthened the bailout of Greece, the “Greek Tragedy” continues as the country’s government is a mess, Prime Minister George Papandreou is reportedly stepping down and the populace is protesting. And, with each day of delay, Greece is running out of money and European leaders are running out of patience.
Meanwhile, across the Ionian Sea from Greece, Italy is quickly becoming the next problem. Its 10-year government bond yield rose to a euro-era record of 6.4 percent last Friday. The Wall Street Journal says, “The 6% mark on the 10-year bond is seen as crucial because a breach of that level in the past has portended a sharp rise in bond yields of other fiscally frail countries.”
When bond yields rise dramatically, it increases a country’s borrowing costs and suggests investors are losing faith in that country’s ability to pay its bills.
Even though Greece is grabbing most of the headlines, Italy is much more crucial to world markets than Greece because Italy’s government bond market is the third largest in the eurozone behind Germany and France. If Italy goes the way of Greece, that would elevate the European crisis to a whole new level.
Ultimately, there’s just too much debt in the worldwide monetary system. Until it gets cut to a manageable level, the markets may behave erratically.
ONE OF THE CORE BELIEFS OF MODERN INVESTING TURNED OUT TO BE not so true. Investors have long believed in “stocks for the long run” and that stocks outperform bonds over a long period of time. Well, we need to re-evaluate that old truism.
New data shows that for the 30 years ending September 30, 2011, long-term government bonds outperformed stocks. During that period, bonds rose by 11.5 percent a year on average, beating the 10.8 percent increase in the S&P 500, according to Jim Bianco, president of Bianco Research in Chicago, as reported by Bloomberg. That’s the first time bonds beat stocks over a 30-year period since the Civil War!
Here’s some long-term historical data on how stocks and bonds have performed relative to each other:
Period # of Years Winner
1803 – 1857 54 Bonds
1803 – 1871 68 Tie
1857 – 1929 72 Stocks
1929 – 1949 20 Bonds
1932 – 2000 68 Stocks
1981 – 2011 30 Bonds
Sources: Bloomberg, October 31, 2011; Index Universe; Ibbotson SBBI
Is this an argument for dumping stocks and just owning bonds? No. The recent outperformance of bonds over stocks was partially a function of the starting point and the “lost decade” for stocks. Specifically, in 1981, long-term government bonds yielded in the 13 to 15 percent range while, last Friday, the yield was down to 3.1 percent, according to data from Yahoo! Finance. As the yield drops, the price of the bond rises, thus, giving investors a capital gain on top of the interest return.
With yields so low now, you won’t get the same capital gain boost from bonds that we experienced over the past 30 years. In fact, Professor Jeremy Siegel, author of Stocks for the Long Run, says, “It’s absolutely mathematically impossible for bonds to get any kind of returns like this going forward.”
Bonds also benefitted from the “lost decade” in stocks as stocks experienced two bear markets in the past 11 years.
This historical data does two things for us:
1. It suggests that there are no “absolutes” when it comes to investing, except, perhaps, that there are no absolutes. Key takeaway – be flexible.
2. It suggests that there is a time and a place for each asset class and placing each asset class within historical context is important. Key takeaway – know history.
Oh, we should add a third key takeaway from this data – be a continuous learner!
Weekly Focus – Think About It
“I'm interested in the way in which the past affects the present and I think that if we understand a good deal more about history, we automatically understand a great more about contemporary life.” --Toni Morrison, Nobel Prize and Pulitzer Prize-winning American novelist, editor, and professor
This Europe problem just won’t go away and it’s keeping the financial markets on edge.
Despite an October 27 agreement that strengthened the bailout of Greece, the “Greek Tragedy” continues as the country’s government is a mess, Prime Minister George Papandreou is reportedly stepping down and the populace is protesting. And, with each day of delay, Greece is running out of money and European leaders are running out of patience.
Meanwhile, across the Ionian Sea from Greece, Italy is quickly becoming the next problem. Its 10-year government bond yield rose to a euro-era record of 6.4 percent last Friday. The Wall Street Journal says, “The 6% mark on the 10-year bond is seen as crucial because a breach of that level in the past has portended a sharp rise in bond yields of other fiscally frail countries.”
When bond yields rise dramatically, it increases a country’s borrowing costs and suggests investors are losing faith in that country’s ability to pay its bills.
Even though Greece is grabbing most of the headlines, Italy is much more crucial to world markets than Greece because Italy’s government bond market is the third largest in the eurozone behind Germany and France. If Italy goes the way of Greece, that would elevate the European crisis to a whole new level.
Ultimately, there’s just too much debt in the worldwide monetary system. Until it gets cut to a manageable level, the markets may behave erratically.
ONE OF THE CORE BELIEFS OF MODERN INVESTING TURNED OUT TO BE not so true. Investors have long believed in “stocks for the long run” and that stocks outperform bonds over a long period of time. Well, we need to re-evaluate that old truism.
New data shows that for the 30 years ending September 30, 2011, long-term government bonds outperformed stocks. During that period, bonds rose by 11.5 percent a year on average, beating the 10.8 percent increase in the S&P 500, according to Jim Bianco, president of Bianco Research in Chicago, as reported by Bloomberg. That’s the first time bonds beat stocks over a 30-year period since the Civil War!
Here’s some long-term historical data on how stocks and bonds have performed relative to each other:
Period # of Years Winner
1803 – 1857 54 Bonds
1803 – 1871 68 Tie
1857 – 1929 72 Stocks
1929 – 1949 20 Bonds
1932 – 2000 68 Stocks
1981 – 2011 30 Bonds
Sources: Bloomberg, October 31, 2011; Index Universe; Ibbotson SBBI
Is this an argument for dumping stocks and just owning bonds? No. The recent outperformance of bonds over stocks was partially a function of the starting point and the “lost decade” for stocks. Specifically, in 1981, long-term government bonds yielded in the 13 to 15 percent range while, last Friday, the yield was down to 3.1 percent, according to data from Yahoo! Finance. As the yield drops, the price of the bond rises, thus, giving investors a capital gain on top of the interest return.
With yields so low now, you won’t get the same capital gain boost from bonds that we experienced over the past 30 years. In fact, Professor Jeremy Siegel, author of Stocks for the Long Run, says, “It’s absolutely mathematically impossible for bonds to get any kind of returns like this going forward.”
Bonds also benefitted from the “lost decade” in stocks as stocks experienced two bear markets in the past 11 years.
This historical data does two things for us:
1. It suggests that there are no “absolutes” when it comes to investing, except, perhaps, that there are no absolutes. Key takeaway – be flexible.
2. It suggests that there is a time and a place for each asset class and placing each asset class within historical context is important. Key takeaway – know history.
Oh, we should add a third key takeaway from this data – be a continuous learner!
Weekly Focus – Think About It
“I'm interested in the way in which the past affects the present and I think that if we understand a good deal more about history, we automatically understand a great more about contemporary life.” --Toni Morrison, Nobel Prize and Pulitzer Prize-winning American novelist, editor, and professor
Monday, October 31, 2011
Weekly Commentary October 31st, 2011
The Markets
After 14 summits in 21 months, have European leaders finally solved their sovereign debt problem? Judging by the stock market’s reaction, you might think the answer is yes.
In marathon sessions last week, European leaders agreed on a new, three-point deal to stave off a deeper debt crisis. The deal includes:
1) A commitment by banks and other private bondholders to accept a voluntary 50% writedown on Greek government debt.
2) A boost in the lending power of the euro-zone bailout fund.
3) A 106 billion euro ($148 billion) recapitalization of European banks.
Source: MarketWatch
Even though details were still a bit sketchy, investors threw caution to the wind and bid up stock prices. U.S. stock prices rose 3.8 percent last week and 14 percent for the month with just one trading day left, according to Bloomberg.
With Europe’s debt crisis tempered for the moment, attention now turns to the U.S. On the positive side, the U.S. economy grew at a 2.5 percent clip in the third quarter, which was the fastest pace in a year. In addition, third-quarter earnings are still coming in strong as about 75 percent of the companies reporting so far have beaten expectations, according to Bloomberg.
Looming on the horizon, the congressional supercommittee has about one month left before making its recommendations on how to cut at least $1.2 trillion from the federal budget. If the supercommittee fails, then across the board budget cuts of a like amount would ensue.
As of last week, investors were happy to breathe a sigh of relief that Europe seems to have dodged a disaster (at least for now) and the U.S. economy still has some life.
THE WEATHER AND THE STOCK MARKET HAVE A LOT IN COMMON – they’re both very unpredictable! This past weekend, the Northeast got walloped by a surprisingly strong snowstorm that dumped as much as two feet of snow in parts of Massachusetts. Central Park in New York City even set an October record with 1.3 inches of snow. And, this all happened before Halloween!
Likewise, the stock market has a habit of surprising investors with its ability to rise or fall dramatically in short periods of time. For example, remember the “Flash Crash?” On May 6, 2010, the U.S. stock market plunged for no apparent reason and briefly erased $862 billion from stock values in less than 20 minutes, according to Bloomberg. It then quickly rebounded.
As it relates to weather, we always know what season we’re in. One look at the calendar tells us whether its winter, spring, summer, or fall. And, depending on where you live, you have a pretty good idea – based on history – of what to expect for each day’s temperature. But, just like the Northeast experienced, you can have an “out of season” experience that messes up your best-laid plans.
The stock market doesn’t have four seasons, but it does have bull and bear markets, which are further divided into secular and cyclical. Market analysts have some general criteria that they use to categorize the markets into these buckets. Yet, like the weather, you could be in a bull market, but still have a nasty market drop that temporarily derails the path of the bull.
Bottom line, just like weather forecasters, market analysts may have a sense for general conditions in the market, but surprises still happen.
Weekly Focus – Think About It
“Sunshine is delicious, rain is refreshing, wind braces us up, snow is exhilarating; there is really no such thing as bad weather, only different kinds of good weather.”
--John Ruskin, leading English art critic of the Victorian era
After 14 summits in 21 months, have European leaders finally solved their sovereign debt problem? Judging by the stock market’s reaction, you might think the answer is yes.
In marathon sessions last week, European leaders agreed on a new, three-point deal to stave off a deeper debt crisis. The deal includes:
1) A commitment by banks and other private bondholders to accept a voluntary 50% writedown on Greek government debt.
2) A boost in the lending power of the euro-zone bailout fund.
3) A 106 billion euro ($148 billion) recapitalization of European banks.
Source: MarketWatch
Even though details were still a bit sketchy, investors threw caution to the wind and bid up stock prices. U.S. stock prices rose 3.8 percent last week and 14 percent for the month with just one trading day left, according to Bloomberg.
With Europe’s debt crisis tempered for the moment, attention now turns to the U.S. On the positive side, the U.S. economy grew at a 2.5 percent clip in the third quarter, which was the fastest pace in a year. In addition, third-quarter earnings are still coming in strong as about 75 percent of the companies reporting so far have beaten expectations, according to Bloomberg.
Looming on the horizon, the congressional supercommittee has about one month left before making its recommendations on how to cut at least $1.2 trillion from the federal budget. If the supercommittee fails, then across the board budget cuts of a like amount would ensue.
As of last week, investors were happy to breathe a sigh of relief that Europe seems to have dodged a disaster (at least for now) and the U.S. economy still has some life.
THE WEATHER AND THE STOCK MARKET HAVE A LOT IN COMMON – they’re both very unpredictable! This past weekend, the Northeast got walloped by a surprisingly strong snowstorm that dumped as much as two feet of snow in parts of Massachusetts. Central Park in New York City even set an October record with 1.3 inches of snow. And, this all happened before Halloween!
Likewise, the stock market has a habit of surprising investors with its ability to rise or fall dramatically in short periods of time. For example, remember the “Flash Crash?” On May 6, 2010, the U.S. stock market plunged for no apparent reason and briefly erased $862 billion from stock values in less than 20 minutes, according to Bloomberg. It then quickly rebounded.
As it relates to weather, we always know what season we’re in. One look at the calendar tells us whether its winter, spring, summer, or fall. And, depending on where you live, you have a pretty good idea – based on history – of what to expect for each day’s temperature. But, just like the Northeast experienced, you can have an “out of season” experience that messes up your best-laid plans.
The stock market doesn’t have four seasons, but it does have bull and bear markets, which are further divided into secular and cyclical. Market analysts have some general criteria that they use to categorize the markets into these buckets. Yet, like the weather, you could be in a bull market, but still have a nasty market drop that temporarily derails the path of the bull.
Bottom line, just like weather forecasters, market analysts may have a sense for general conditions in the market, but surprises still happen.
Weekly Focus – Think About It
“Sunshine is delicious, rain is refreshing, wind braces us up, snow is exhilarating; there is really no such thing as bad weather, only different kinds of good weather.”
--John Ruskin, leading English art critic of the Victorian era
Friday, October 28, 2011
European Rescue Package
The European summit on October 26, the fourteenth in 21 months, finally produced a deal in a late-night negotiating session. European leaders announced a deal that was close to what had been carefully leaked over the prior weeks of deliberations and had helped the S&P 500 Index to rally off of the lows of the year. From the closing low on October 3, the Index has climbed nearly 17% in just three and a half weeks and is on pace for the largest monthly gain since 1987.
Overall, the statement confirms the view that the risk of a 2008-like financial crisis erupting in Europe, which has been the focus of global markets in recent months, has been taken off the table. However, over the long term, concerns remain about the outlook for economic growth in Europe and the ability of some peripheral countries to meet budget targets. While the statement does not clarify all the details, it does lay out the three most important aspects of the rescue package:
• Reducing Greece’s debt. The package cuts Greece’s debt burden with a 50% “haircut” on Greek bonds. Private investors, including banks, will swap their Greek bonds for those with half the face value, but higher quality given an additional 30 billion euro cushion provided against further losses.
• A bigger buffer against bank losses. Overall, European banks will be required to raise 106 billion euros to temporarily maintain a higher buffer against additional losses on their bond holdings. Banks will be given the opportunity to raise this capital on their own and plug any gaps with funding from their own government and the ability to tap the European Financial Stability Facility (EFSF) as a last resort.
• Insurance against loss on European government bonds. The EFSF will provide guarantees against the first 20-25% of losses on about one trillion euros of European government debt.
The concerns may be shifting from a crisis to a recession in Europe, as it is likely that Europe will experience a mild recession next year. However, European growth could be even weaker in light of the spending austerity and potential for less lending by the banks. The next step in a successful plan to stabilize Europe is for the European Central Bank to cut interest rates soon and reverse the two rate hikes they made earlier this year to promote growth and lending.
While the devil of the European plan remains in the details, the deal could shift investor focus to U.S. markets where economic growth and corporate profits continue to chug along. Third-quarter economic growth, as measured by gross domestic product (GDP), was recently reported at 2.5%, nearly double the pace of growth witnessed in the first two quarters of the year combined. Within the S&P 500, 75% of the companies that have reported third-quarter earnings thus far have exceeded expectations and the companies, in aggregate, are tracking to 15% year-over-year earnings growth, surpassing the 12-13% growth rate that was forecast. Given the current backdrop, we adhere to our forecast of a moderate upside from current levels for the S&P 500 Index in 2011, though we expect the market to remain volatile between now and year-end. As always, I encourage you to contact me with any questions.
Best regards,
____________________________________________________________________________
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult me prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
International and emerging markets investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
This research material has been prepared by LPL Financial.
Overall, the statement confirms the view that the risk of a 2008-like financial crisis erupting in Europe, which has been the focus of global markets in recent months, has been taken off the table. However, over the long term, concerns remain about the outlook for economic growth in Europe and the ability of some peripheral countries to meet budget targets. While the statement does not clarify all the details, it does lay out the three most important aspects of the rescue package:
• Reducing Greece’s debt. The package cuts Greece’s debt burden with a 50% “haircut” on Greek bonds. Private investors, including banks, will swap their Greek bonds for those with half the face value, but higher quality given an additional 30 billion euro cushion provided against further losses.
• A bigger buffer against bank losses. Overall, European banks will be required to raise 106 billion euros to temporarily maintain a higher buffer against additional losses on their bond holdings. Banks will be given the opportunity to raise this capital on their own and plug any gaps with funding from their own government and the ability to tap the European Financial Stability Facility (EFSF) as a last resort.
• Insurance against loss on European government bonds. The EFSF will provide guarantees against the first 20-25% of losses on about one trillion euros of European government debt.
The concerns may be shifting from a crisis to a recession in Europe, as it is likely that Europe will experience a mild recession next year. However, European growth could be even weaker in light of the spending austerity and potential for less lending by the banks. The next step in a successful plan to stabilize Europe is for the European Central Bank to cut interest rates soon and reverse the two rate hikes they made earlier this year to promote growth and lending.
While the devil of the European plan remains in the details, the deal could shift investor focus to U.S. markets where economic growth and corporate profits continue to chug along. Third-quarter economic growth, as measured by gross domestic product (GDP), was recently reported at 2.5%, nearly double the pace of growth witnessed in the first two quarters of the year combined. Within the S&P 500, 75% of the companies that have reported third-quarter earnings thus far have exceeded expectations and the companies, in aggregate, are tracking to 15% year-over-year earnings growth, surpassing the 12-13% growth rate that was forecast. Given the current backdrop, we adhere to our forecast of a moderate upside from current levels for the S&P 500 Index in 2011, though we expect the market to remain volatile between now and year-end. As always, I encourage you to contact me with any questions.
Best regards,
____________________________________________________________________________
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult me prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
International and emerging markets investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
This research material has been prepared by LPL Financial.
Monday, October 24, 2011
Weekly Commentary October 24th, 2011
The Markets
“Good news is good and bad news is bad, but a lack of bad news can be good, at least for investors,” so wrote Vito Racanelli in the current issue of Barron’s.
Since the recent October 3 low, the S&P 500 index has risen 12.6 percent on the back of “a lack of bad news,” according to data from Yahoo! Finance.
Here’s what we could classify as a lack of bad news in the past few weeks:
• Corporate earnings are coming in okay so far this quarter as 75 percent of the 118 companies that reported earnings have beaten estimates, according to financial data provider FactSet.
• Economic news has generally supported the idea that the economy, while soft, is not collapsing.
• European leaders, after months of tough talk, but little action, may finally be on the verge of taking “comprehensive” action to quell (at least temporarily) the sovereign debt crisis, according to Phil Orlando, chief equity market strategist at Federated Investors.
Whether this “lack of bad news” turns into good news or bad news going forward, remains to be seen. Either way, we’ll work hard to profit from it.
THE WORLD’S POPULATION IS EXPECTED TO HIT 7 BILLION on October 31, according to the United Nations’ population division. That’s up from 2.5 billion in 1950. To put 7 billion people in perspective, see if you can correctly answer the following question.
If 7 billion people stood shoulder to shoulder, which of the following geographic areas is the smallest that could accommodate them?
A) Zanzibar (about 650 square miles)
B) Maui (about 727 square miles)
C) Rhode Island (about 1,033 square miles)
D) Sicily (about 9,925 square miles)
E) Cuba (about 42,845 square miles)
F) New Zealand (about 103,733 square miles)
The answer… in a moment.
Here are some interesting facts regarding the rate of growth of the world’s population.
It took…
• 250,000 years for the world to reach a population of 1 billion (hit in 1804)
• 123 years for the next billion (2 billion in 1927)
• 33 years to reach the next billion (3 billion in 1960)
• 14 years to reach the next billion (4 billion in 1974)
• 13 years to reach the next billion (5 billion in 1987)
• 12 years to reach the next billion (6 billion in 1999)
Sources: The Economist; United Nations World Population Prospects: The 2000 Revision, Volume III: Analytical Report
And, the growth continues… we’re projected to hit 9.3 billion by 2050.
For decades, experts have argued over whether or not our planet can handle this growth. What is not up for debate, though, is the fact that a growing population will affect the demand for goods and services. Food, of course, is high on the list.
The World Bank says, “Between 2005 and 2055 agricultural productivity will have to increase by two-thirds to keep pace with rising population and changing diets.” Okay, this is interesting, but why should we pay attention to this type of information?
As financial advisors, we want to monitor trends that could impact the demand for goods and services, which, in turn, may suggest areas ripe (no pun intended!) for investment. By keeping a finger on the pulse of long-term trends -- like the rising world population -- we might get an early read on investment opportunities.
Getting back to the population/geography question, The Economist says the answer is A) Zanzibar. Does that surprise you?
Weekly Focus – Think About It
“The investor of today does not profit from yesterday's growth.” --Warren Buffett
“Good news is good and bad news is bad, but a lack of bad news can be good, at least for investors,” so wrote Vito Racanelli in the current issue of Barron’s.
Since the recent October 3 low, the S&P 500 index has risen 12.6 percent on the back of “a lack of bad news,” according to data from Yahoo! Finance.
Here’s what we could classify as a lack of bad news in the past few weeks:
• Corporate earnings are coming in okay so far this quarter as 75 percent of the 118 companies that reported earnings have beaten estimates, according to financial data provider FactSet.
• Economic news has generally supported the idea that the economy, while soft, is not collapsing.
• European leaders, after months of tough talk, but little action, may finally be on the verge of taking “comprehensive” action to quell (at least temporarily) the sovereign debt crisis, according to Phil Orlando, chief equity market strategist at Federated Investors.
Whether this “lack of bad news” turns into good news or bad news going forward, remains to be seen. Either way, we’ll work hard to profit from it.
THE WORLD’S POPULATION IS EXPECTED TO HIT 7 BILLION on October 31, according to the United Nations’ population division. That’s up from 2.5 billion in 1950. To put 7 billion people in perspective, see if you can correctly answer the following question.
If 7 billion people stood shoulder to shoulder, which of the following geographic areas is the smallest that could accommodate them?
A) Zanzibar (about 650 square miles)
B) Maui (about 727 square miles)
C) Rhode Island (about 1,033 square miles)
D) Sicily (about 9,925 square miles)
E) Cuba (about 42,845 square miles)
F) New Zealand (about 103,733 square miles)
The answer… in a moment.
Here are some interesting facts regarding the rate of growth of the world’s population.
It took…
• 250,000 years for the world to reach a population of 1 billion (hit in 1804)
• 123 years for the next billion (2 billion in 1927)
• 33 years to reach the next billion (3 billion in 1960)
• 14 years to reach the next billion (4 billion in 1974)
• 13 years to reach the next billion (5 billion in 1987)
• 12 years to reach the next billion (6 billion in 1999)
Sources: The Economist; United Nations World Population Prospects: The 2000 Revision, Volume III: Analytical Report
And, the growth continues… we’re projected to hit 9.3 billion by 2050.
For decades, experts have argued over whether or not our planet can handle this growth. What is not up for debate, though, is the fact that a growing population will affect the demand for goods and services. Food, of course, is high on the list.
The World Bank says, “Between 2005 and 2055 agricultural productivity will have to increase by two-thirds to keep pace with rising population and changing diets.” Okay, this is interesting, but why should we pay attention to this type of information?
As financial advisors, we want to monitor trends that could impact the demand for goods and services, which, in turn, may suggest areas ripe (no pun intended!) for investment. By keeping a finger on the pulse of long-term trends -- like the rising world population -- we might get an early read on investment opportunities.
Getting back to the population/geography question, The Economist says the answer is A) Zanzibar. Does that surprise you?
Weekly Focus – Think About It
“The investor of today does not profit from yesterday's growth.” --Warren Buffett
Tuesday, October 18, 2011
Weekly Commentary October 18th, 2011
The Markets
What happened to the economy?
Less than three weeks ago, it seemed like the economy was falling off a cliff. Firms like the Economic Cycle Research Institute were saying a new recession was on its way and there’s nothing the government could do to stop it, according to MarketWatch. The stock market was sensing economic weakness, too, as it slumped to its lowest level in a year on October 3.
But, now, just two weeks later, the S&P 500 stock index is up a whopping 11 percent since October 3 and trading at the top end of a range that it’s been stuck in for more than two months, according to Bloomberg.
Has the economy suddenly turned the corner? Well, economic reports in the last couple weeks came in better than expected. According to The Wall Street Journal, “Auto sales rebounded to their highest level since April. Chain-store sales posted year-on-year growth of 5.5 percent. The economy added 103,000 jobs, and manufacturing sentiment improved a bit.” On top of that, the Commerce Department said retail sales rose 1.1 percent in September -- above the 0.8 percent expected by economists surveyed by MarketWatch.
While the recent positive economic data is encouraging, it would be premature to ring the metaphorical bell for an all-clear signal. The economy still has lots of repairs to make before happy days are here again. In the meantime, we’ll keep doing our job which is to help you meet your financial goals and objectives.
LOOKING BACK ON THE DECADE OF THE 1930s, which includes the Great Depression, it’s hard to imagine that it may have been, “the most technologically progressive decade of the century,” according to economic historian Alexander Field. And, those advancements -- in the midst of our country’s worst economic slump -- may have set the stage for our post-World War II boom.
Like our Great Depression experience, could the current economic downturn be laying the seeds for a new American renaissance in the coming years?
In his recent book, A Great Leap Forward, Field argues that technological advancement and innovation flourished during the Great Depression. In a New York Times interview he said, “There is evidence that for some organizations and industries, just as for some individuals, adversity summons reservoirs of initiative and creativity that have long-term positive consequences. And, based on Depression experience, we can be optimistic that when exciting technological paradigms are ripe for exploitation, work will continue on them, slump or no slump.”
If necessity is indeed the mother of invention, then right now there may be exciting new technologies and innovation growing under the radar that will bear fruit in the years to come. As David Leonhardt wrote in The New York Times, the U.S. has several advantages over other countries including, “The world’s best venture-capital network, a well-established rule of law, a culture that celebrates risk taking, (and) an unmatched appeal to immigrants.” Those advantages may be working overtime now creating the next “big thing.”
Don’t forget that 20 years ago, the internet was only known to scientists and academics. Today, it’s ubiquitous and would be hard to live without. Twenty years from now we could be writing about something entirely new that changes the way we work and live -- and employs millions of people.
It’s easy to throw up your arms in frustration about the challenges our world faces. And, yes, we do have challenges and many people are experiencing economic hardship. Yet, there is reason for hope. Seeds were sown during the adversity of the Great Depression that bore fruit in the decades to follow. It could be happening again.
It’s never wise to bet against the United States.
Weekly Focus – Think About It
“The American, by nature, is optimistic. He is experimental, an inventor, and a builder who builds best when called upon to build greatly.” --John F. Kennedy
What happened to the economy?
Less than three weeks ago, it seemed like the economy was falling off a cliff. Firms like the Economic Cycle Research Institute were saying a new recession was on its way and there’s nothing the government could do to stop it, according to MarketWatch. The stock market was sensing economic weakness, too, as it slumped to its lowest level in a year on October 3.
But, now, just two weeks later, the S&P 500 stock index is up a whopping 11 percent since October 3 and trading at the top end of a range that it’s been stuck in for more than two months, according to Bloomberg.
Has the economy suddenly turned the corner? Well, economic reports in the last couple weeks came in better than expected. According to The Wall Street Journal, “Auto sales rebounded to their highest level since April. Chain-store sales posted year-on-year growth of 5.5 percent. The economy added 103,000 jobs, and manufacturing sentiment improved a bit.” On top of that, the Commerce Department said retail sales rose 1.1 percent in September -- above the 0.8 percent expected by economists surveyed by MarketWatch.
While the recent positive economic data is encouraging, it would be premature to ring the metaphorical bell for an all-clear signal. The economy still has lots of repairs to make before happy days are here again. In the meantime, we’ll keep doing our job which is to help you meet your financial goals and objectives.
LOOKING BACK ON THE DECADE OF THE 1930s, which includes the Great Depression, it’s hard to imagine that it may have been, “the most technologically progressive decade of the century,” according to economic historian Alexander Field. And, those advancements -- in the midst of our country’s worst economic slump -- may have set the stage for our post-World War II boom.
Like our Great Depression experience, could the current economic downturn be laying the seeds for a new American renaissance in the coming years?
In his recent book, A Great Leap Forward, Field argues that technological advancement and innovation flourished during the Great Depression. In a New York Times interview he said, “There is evidence that for some organizations and industries, just as for some individuals, adversity summons reservoirs of initiative and creativity that have long-term positive consequences. And, based on Depression experience, we can be optimistic that when exciting technological paradigms are ripe for exploitation, work will continue on them, slump or no slump.”
If necessity is indeed the mother of invention, then right now there may be exciting new technologies and innovation growing under the radar that will bear fruit in the years to come. As David Leonhardt wrote in The New York Times, the U.S. has several advantages over other countries including, “The world’s best venture-capital network, a well-established rule of law, a culture that celebrates risk taking, (and) an unmatched appeal to immigrants.” Those advantages may be working overtime now creating the next “big thing.”
Don’t forget that 20 years ago, the internet was only known to scientists and academics. Today, it’s ubiquitous and would be hard to live without. Twenty years from now we could be writing about something entirely new that changes the way we work and live -- and employs millions of people.
It’s easy to throw up your arms in frustration about the challenges our world faces. And, yes, we do have challenges and many people are experiencing economic hardship. Yet, there is reason for hope. Seeds were sown during the adversity of the Great Depression that bore fruit in the decades to follow. It could be happening again.
It’s never wise to bet against the United States.
Weekly Focus – Think About It
“The American, by nature, is optimistic. He is experimental, an inventor, and a builder who builds best when called upon to build greatly.” --John F. Kennedy
Monday, October 10, 2011
Weekly Commentary October 10th, 2011
The Markets
Sometimes a little spark is all you need.
At one point last Tuesday, October 4, the S&P 500 index dropped below 1,091, which represented a 20 percent decline from the April 29 closing high, according to MarketWatch. That’s a key number because many investors consider a 20 percent decline to signify a bear market. But, lo and behold, just when it looked like the market might go from bad to worse, the Financial Times (FT) published a story that hit the internet that afternoon and the U.S. stock market staged a massive positive reversal.
The FT story said, “European Union finance ministers are examining ways of coordinating recapitalizations of financial institutions after they agreed that additional measures were urgently needed to shore up the region’s banks.”
That story prompted a huge 3.7 percent rally in the S&P 500 index in the last hour of trading on Tuesday, according to Bespoke Investment Group. Interestingly, the reversal propelled the index well above the key 1,091 level and prevented us from starting a new bear market in the U.S.
The key point about the late day reversal on October 4 is not so much that it saved us from printing a new bear market – although that’s good! Rather, the amazing thing is the key reversal was prompted by mere “talk” of another plan to help save the euro-zone from sovereign debt abyss.
Last week’s market action reinforced the notion that macro issues like the sovereign debt problem – rather than company-specific news – are still a significant driver of the overall stock market.
Until the macro issues get resolved, we should be prepared for major market moves – both up and down – based on the latest headlines.
THREE KEY IDEAS FROM STEVE JOBS
With the passing of Steve Jobs, we wanted to share three of his ideas that you may find helpful.
Steve Jobs' business career is remarkable by any standard. His ability to go from boy wonder co-founder of Apple Computer, to Chairman and CEO of Pixar, to the largest individual shareholder of The Walt Disney Company, to ousted executive who returned to save Apple and turn it into a seemingly unbeatable brand, is simply amazing. While he made plenty of mistakes in his youth, he matured into a very successful businessman with some insightful thoughts on success. Here are three of his ideas worth sharing:
“Connect the dots.”
Over time, all of us have incredible life experiences – some positive, and some not. Regardless of the outcome, they ultimately shaped the person you are today. Everything that has happened to you in your past has the ability to positively affect you in the present – if you connect the dots.
At a 2005 Commencement address at Stanford University, Jobs told a story about how on a whim, he dropped in on a calligraphy class while attending Reed College back in the early 1970s. At the time, he found the class utterly fascinating, but totally useless. It wasn’t until 10 years later, when he was designing the Macintosh computer, that he was able to connect the dots. The result: the Macintosh became the first computer with beautiful typography and it became a huge hit in the desktop publishing industry.
Think for a moment about some of your life experiences. What lessons have you learned? What stories can you create from these lessons that you can share with your family, friends, or business associates? Stories are one of the best ways to connect with people so consider connecting the dots of your life experiences and turn them into a meaningful message.
“Say no.”
There is no shortage of opportunities in life. However, there is often a shortage of conviction. Rather than trying a little bit of everything and successfully completing nothing, Jobs did the opposite. He was an obsessive focuser on a small number of things that were truly important to him.
Apple sells essentially just four products: the Macintosh computer, the iPod, the iPhone, and the iPad. With just four main product lines, Jobs led Apple to the world’s most valuable company with a $350 billion market value, according to The Wall Street Journal. Despite the temptation, Jobs resisted the call to offer a multitude of lower-end products and milk the company’s great brand. He said, “It’s only by saying no that you can concentrate on the things that are really important.”
Ask yourself, what can you say “no” to in your personal or business life so you have room to say “yes” with complete conviction to something else that’s more important?
“Quality, not quantity.”
At Pixar, where Jobs built the firm from peanuts into a company that he sold to The Walt Disney Company for $7.4 billion, there is no 80/20 rule. It’s more like the rule of 100—every effort gets 100 percent support. Accordingly, Pixar delivered an average of only one movie every 18 months; a weak pace by major movie studio standards. However, the result was anything but weak. Pixar has generated more than $7.0 billion in worldwide box office receipts since 1995 – and they’ve had no bombs, according to The Numbers.
Like Pixar, life is not about quantity. It’s about quality. When you spend more time focusing on quality – such as in relationships – life satisfaction will multiply.
In a 2004 BusinessWeek interview, Jobs reflected on his personal growth that resulted from him successfully bouncing back from cancer. He said, “I realized that I loved my life. I really do. I’ve got the greatest family in the world, and I’ve got my work. I love my family, and I love running Apple, and I love Pixar. And I get to do that. I’m very lucky.”
By following these simple ideas – connecting the dots, saying no to the unimportant and focusing on quality, not quantity – you, too, can end up with a life you love. Do that and you’ll be one of the lucky few in this life who can look back at the end of their days and say with great conviction, “It was a life well lived.” RIP.
Weekly Focus – Think About It
“I want to put a ding in the universe.” --Steve Jobs
Sometimes a little spark is all you need.
At one point last Tuesday, October 4, the S&P 500 index dropped below 1,091, which represented a 20 percent decline from the April 29 closing high, according to MarketWatch. That’s a key number because many investors consider a 20 percent decline to signify a bear market. But, lo and behold, just when it looked like the market might go from bad to worse, the Financial Times (FT) published a story that hit the internet that afternoon and the U.S. stock market staged a massive positive reversal.
The FT story said, “European Union finance ministers are examining ways of coordinating recapitalizations of financial institutions after they agreed that additional measures were urgently needed to shore up the region’s banks.”
That story prompted a huge 3.7 percent rally in the S&P 500 index in the last hour of trading on Tuesday, according to Bespoke Investment Group. Interestingly, the reversal propelled the index well above the key 1,091 level and prevented us from starting a new bear market in the U.S.
The key point about the late day reversal on October 4 is not so much that it saved us from printing a new bear market – although that’s good! Rather, the amazing thing is the key reversal was prompted by mere “talk” of another plan to help save the euro-zone from sovereign debt abyss.
Last week’s market action reinforced the notion that macro issues like the sovereign debt problem – rather than company-specific news – are still a significant driver of the overall stock market.
Until the macro issues get resolved, we should be prepared for major market moves – both up and down – based on the latest headlines.
THREE KEY IDEAS FROM STEVE JOBS
With the passing of Steve Jobs, we wanted to share three of his ideas that you may find helpful.
Steve Jobs' business career is remarkable by any standard. His ability to go from boy wonder co-founder of Apple Computer, to Chairman and CEO of Pixar, to the largest individual shareholder of The Walt Disney Company, to ousted executive who returned to save Apple and turn it into a seemingly unbeatable brand, is simply amazing. While he made plenty of mistakes in his youth, he matured into a very successful businessman with some insightful thoughts on success. Here are three of his ideas worth sharing:
“Connect the dots.”
Over time, all of us have incredible life experiences – some positive, and some not. Regardless of the outcome, they ultimately shaped the person you are today. Everything that has happened to you in your past has the ability to positively affect you in the present – if you connect the dots.
At a 2005 Commencement address at Stanford University, Jobs told a story about how on a whim, he dropped in on a calligraphy class while attending Reed College back in the early 1970s. At the time, he found the class utterly fascinating, but totally useless. It wasn’t until 10 years later, when he was designing the Macintosh computer, that he was able to connect the dots. The result: the Macintosh became the first computer with beautiful typography and it became a huge hit in the desktop publishing industry.
Think for a moment about some of your life experiences. What lessons have you learned? What stories can you create from these lessons that you can share with your family, friends, or business associates? Stories are one of the best ways to connect with people so consider connecting the dots of your life experiences and turn them into a meaningful message.
“Say no.”
There is no shortage of opportunities in life. However, there is often a shortage of conviction. Rather than trying a little bit of everything and successfully completing nothing, Jobs did the opposite. He was an obsessive focuser on a small number of things that were truly important to him.
Apple sells essentially just four products: the Macintosh computer, the iPod, the iPhone, and the iPad. With just four main product lines, Jobs led Apple to the world’s most valuable company with a $350 billion market value, according to The Wall Street Journal. Despite the temptation, Jobs resisted the call to offer a multitude of lower-end products and milk the company’s great brand. He said, “It’s only by saying no that you can concentrate on the things that are really important.”
Ask yourself, what can you say “no” to in your personal or business life so you have room to say “yes” with complete conviction to something else that’s more important?
“Quality, not quantity.”
At Pixar, where Jobs built the firm from peanuts into a company that he sold to The Walt Disney Company for $7.4 billion, there is no 80/20 rule. It’s more like the rule of 100—every effort gets 100 percent support. Accordingly, Pixar delivered an average of only one movie every 18 months; a weak pace by major movie studio standards. However, the result was anything but weak. Pixar has generated more than $7.0 billion in worldwide box office receipts since 1995 – and they’ve had no bombs, according to The Numbers.
Like Pixar, life is not about quantity. It’s about quality. When you spend more time focusing on quality – such as in relationships – life satisfaction will multiply.
In a 2004 BusinessWeek interview, Jobs reflected on his personal growth that resulted from him successfully bouncing back from cancer. He said, “I realized that I loved my life. I really do. I’ve got the greatest family in the world, and I’ve got my work. I love my family, and I love running Apple, and I love Pixar. And I get to do that. I’m very lucky.”
By following these simple ideas – connecting the dots, saying no to the unimportant and focusing on quality, not quantity – you, too, can end up with a life you love. Do that and you’ll be one of the lucky few in this life who can look back at the end of their days and say with great conviction, “It was a life well lived.” RIP.
Weekly Focus – Think About It
“I want to put a ding in the universe.” --Steve Jobs
Monday, October 3, 2011
Weekly Commentary October 3rd, 2011
The Markets
The word “volatile” has been so overused in the media, but it’s hard to find a better way to describe recent movements in the financial markets. On any given day, the markets can rise or fall based on the latest thinking about euro-zone sovereign debt problems, a possible U.S. or Chinese recession, weak banks, inflation, deflation, or poor job numbers.
In the just completed third quarter, uncertainty (there’s another overused word!) was in full bloom as the three major U.S. stock market indices posted double-digit declines, according to Barron’s. Was the market sniffing out a new recession? Possibly. Last week, the respected Economic Cycle Research Institute was quoted in MarketWatch as saying, “The U.S. economy is headed for another recession that government intervention cannot prevent.”
Along those same lines, Goldman Sachs said we may be moving from the 2007-2009 “Great Recession” to an upcoming “Great Stagnation.” As quoted by Bloomberg, Goldman Sachs said a “Great Stagnation” would be characterized by “‘high and sticky’ unemployment, an average 0.5 percent growth rate in per capita gross domestic product, and stock markets that underperform historical averages.”
But, not everyone agrees with that assessment. Warren Buffett told CNBC last week, “it’s very, very unlikely we’ll go back into a recession.”
So, who are you going to believe? The market’s jumpiness may reflect the fact that smart people have completely different views of the economy.
WHAT TO WATCH IN THE FOURTH QUARTER
Here are a few things that made the headlines in the third quarter and may affect the markets over the final three months of the year:
• The S&P 500 index dropped 14.3 percent in the third quarter and is now down 10.0 percent for the year.
What to Watch: Third quarter corporate earnings will start rolling in soon and investors will scour them for any sign of weakness. For the past few quarters, strong earnings helped the market recover from the Great Recession. While some earnings weakness may already be priced in the market, we have to wait for the actual earnings to see how the market reacts.
• Commodities and precious metals experienced significant price movements during the quarter. Gold prices finished the quarter up 8 percent, while silver dropped 14 percent, according to MarketWatch. Oil prices declined 17 percent for the quarter, while copper dropped a stunning 26 percent. On the agricultural side, corn prices finished the quarter down 25 percent from their June 10 all-time high, according to The Wall Street Journal.
What to Watch: Recent declines in oil and copper prices are particularly noteworthy because they may presage a slowing worldwide economy. If the declines continue, it may not bode well for stock prices.
• The housing market is still weak and that puts a significant drag on economic growth. According to the most recent S&P/Case-Shiller Home Price Indices, housing prices around the country are back to where they were in the summer of 2003.
What to Watch: Mortgage rates are at a record low yet the housing market is still in the doldrums, according to Bloomberg. Any sign that housing is turning the corner could bode well for the economy and the markets.
• Interest rates on U.S. government securities dropped significantly in the third quarter as the flight to safety continued. The yield on the 10-year Treasury note recently hit a paltry 1.67 percent -- the lowest yield since the 1940s. While low rates are good for businesses and our indebted government, it’s bad for savers who rely on interest income to support their living expenses.
What to Watch: If interest rates keep dropping in the fourth quarter, it may suggest investors are still in a fearful state. Ironically, it could be a good thing to see interest rates rise -- as long as it’s due to economic growth and not due to money printing by the Federal Reserve.
• Sovereign debt woes in Europe and budget wrangling in the U.S. weighed on the financial markets in the third quarter.
What to Watch: Continued bad news here could be very problematic. However, if there’s any concrete resolution to the Euro-zone debt problems or a credible bi-partisan budget solution in Washington -- look out. The financial markets could rally strongly on that kind of news.
With the above issues looming, you can see why the markets are a bit nervous. Yet, even if the market swoons in the fourth quarter, it could make valuations so compelling that it sets the stage for the next bull market.
Weekly Focus – Think About It
“I wanted a perfect ending. Now I’ve learned, the hard way, that some poems don’t rhyme, and some stories don’t have a clear beginning, middle, and end. Life is about not knowing, having to change, taking the moment and making the best of it, without knowing what’s going to happen next. Delicious Ambiguity.” --Gilda Radner
The word “volatile” has been so overused in the media, but it’s hard to find a better way to describe recent movements in the financial markets. On any given day, the markets can rise or fall based on the latest thinking about euro-zone sovereign debt problems, a possible U.S. or Chinese recession, weak banks, inflation, deflation, or poor job numbers.
In the just completed third quarter, uncertainty (there’s another overused word!) was in full bloom as the three major U.S. stock market indices posted double-digit declines, according to Barron’s. Was the market sniffing out a new recession? Possibly. Last week, the respected Economic Cycle Research Institute was quoted in MarketWatch as saying, “The U.S. economy is headed for another recession that government intervention cannot prevent.”
Along those same lines, Goldman Sachs said we may be moving from the 2007-2009 “Great Recession” to an upcoming “Great Stagnation.” As quoted by Bloomberg, Goldman Sachs said a “Great Stagnation” would be characterized by “‘high and sticky’ unemployment, an average 0.5 percent growth rate in per capita gross domestic product, and stock markets that underperform historical averages.”
But, not everyone agrees with that assessment. Warren Buffett told CNBC last week, “it’s very, very unlikely we’ll go back into a recession.”
So, who are you going to believe? The market’s jumpiness may reflect the fact that smart people have completely different views of the economy.
WHAT TO WATCH IN THE FOURTH QUARTER
Here are a few things that made the headlines in the third quarter and may affect the markets over the final three months of the year:
• The S&P 500 index dropped 14.3 percent in the third quarter and is now down 10.0 percent for the year.
What to Watch: Third quarter corporate earnings will start rolling in soon and investors will scour them for any sign of weakness. For the past few quarters, strong earnings helped the market recover from the Great Recession. While some earnings weakness may already be priced in the market, we have to wait for the actual earnings to see how the market reacts.
• Commodities and precious metals experienced significant price movements during the quarter. Gold prices finished the quarter up 8 percent, while silver dropped 14 percent, according to MarketWatch. Oil prices declined 17 percent for the quarter, while copper dropped a stunning 26 percent. On the agricultural side, corn prices finished the quarter down 25 percent from their June 10 all-time high, according to The Wall Street Journal.
What to Watch: Recent declines in oil and copper prices are particularly noteworthy because they may presage a slowing worldwide economy. If the declines continue, it may not bode well for stock prices.
• The housing market is still weak and that puts a significant drag on economic growth. According to the most recent S&P/Case-Shiller Home Price Indices, housing prices around the country are back to where they were in the summer of 2003.
What to Watch: Mortgage rates are at a record low yet the housing market is still in the doldrums, according to Bloomberg. Any sign that housing is turning the corner could bode well for the economy and the markets.
• Interest rates on U.S. government securities dropped significantly in the third quarter as the flight to safety continued. The yield on the 10-year Treasury note recently hit a paltry 1.67 percent -- the lowest yield since the 1940s. While low rates are good for businesses and our indebted government, it’s bad for savers who rely on interest income to support their living expenses.
What to Watch: If interest rates keep dropping in the fourth quarter, it may suggest investors are still in a fearful state. Ironically, it could be a good thing to see interest rates rise -- as long as it’s due to economic growth and not due to money printing by the Federal Reserve.
• Sovereign debt woes in Europe and budget wrangling in the U.S. weighed on the financial markets in the third quarter.
What to Watch: Continued bad news here could be very problematic. However, if there’s any concrete resolution to the Euro-zone debt problems or a credible bi-partisan budget solution in Washington -- look out. The financial markets could rally strongly on that kind of news.
With the above issues looming, you can see why the markets are a bit nervous. Yet, even if the market swoons in the fourth quarter, it could make valuations so compelling that it sets the stage for the next bull market.
Weekly Focus – Think About It
“I wanted a perfect ending. Now I’ve learned, the hard way, that some poems don’t rhyme, and some stories don’t have a clear beginning, middle, and end. Life is about not knowing, having to change, taking the moment and making the best of it, without knowing what’s going to happen next. Delicious Ambiguity.” --Gilda Radner
Subscribe to:
Posts (Atom)