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.

DOES IT MAKE SENSE to invest outside of the United States? The concept of diversification suggests that you own a diverse group of investments that have uncorrelated return characteristics. One of these diverse groups of investments could include non-U.S. stocks. That might make sense because, as the following chart shows, the U.S. stock market captures less than one-third of worldwide stock market value based on market capitalization.

 

% of World Equity Market Capitalization
Country	5 Years Ago	Mid August 2011	5-Year Change
1. U.S.	36.05%	29.14%	-6.91%
2. China	1.36	7.87	6.52
3. Japan	10.93	7.73	-3.20
4. UK	7.76	6.43	-1.33
5. Hong Kong	2.98	4.88	1.90
6. Canada	3.25	4.20	0.96
7. France	4.95	3.33	-1.62
8. Germany	3.35	2.80	-0.55
9. India	1.43	2.77	1.35
10. Brazil	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. is still, by far, the largest market in the world, but it has declined substantially in the past five years. 

·         China has catapulted to second place with dramatic growth in the past five years.

·         Japan, UK, France, and Germany join the U.S. as developed countries that have lost ground over the past five years.

·         Emerging countries such as Hong Kong, India, and Brazil have shown strong relative growth.

·         Although not shown on the chart, back in the late 1980s, Japan’s stock market represented 45 percent of world equity market capitalization. Now, it’s less than 8 percent due to a 20-year bear market.

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

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

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

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

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