The Markets
A trillion here, a trillion there and, pretty soon, you have a nice market rally.
Through a program called quantitative easing, central banks around the world have flooded the world economy with the equivalent of trillions of U.S. dollars. Quantitative easing involves central banks making large-scale purchases of debt – usually government or mortgage debt – and paying for that debt by creating money out of thin air, according to The New York Times. The hope (and remember, hope is not an investment strategy) is that with more money sloshing around the global economy, interest rates will drop and that will stimulate demand and increase economic growth.
If all goes according to plan, the economy will recover and then the central banks will sell the bonds they purchased and “destroy” the money they received for selling the bonds. When the whole cycle is completed, the net effect is no new money is created, according to the BBC. Optimists say this is an appropriate activity for central banks when the economy faces major hurdles. Pessimists say the central banks are unlikely to turn off the spigot and we could end up with runaway inflation.
And, yes, it’s a big spigot. Just between the U.S. and the United Kingdom, more than 2.5 trillion dollars of new money has been created since 2008, according to Reuters and the BBC.
On top of that, the European Central Bank made more than 1 trillion euro available to banks in the form of cheap three-year loans in just the past few months. The hope (there’s that word again) is that banks will use this money to lend and invest, and, thereby, boost the economy, according to Bloomberg.
All this “easy money” has helped fuel a strong start to many of the world’s stock markets this year. The big question is, will this easy money be the bridge that gets the world economy back on a self-sustaining growth path or is it simply keeping the patient addicted to an unsustainable monetary policy?
Effectively answering questions like this keeps our job very interesting!
QUANTITATIVE EASING HAS LED TO A STEALTH “TAX” ON SAVERS in what’s been called “financial repression,” according to Bloomberg. As mentioned above, one goal of quantitative easing is to lower interest rates. On that score, it’s succeeded since interest rates are super low all along the yield curve. Unfortunately, there’s a problem with that – interest rates on many bonds and savings accounts are lower than the rate of inflation. This means savers are losing purchasing power (the stealth tax) while debtors are able to pay back their debts in inflated (i.e., “cheaper”) dollars. Savers are effectively being “financially repressed.”
The public debt of the U.S. is more than $15 trillion, according to the Treasury Department. The annual interest expense on that mountain of debt is more than $400 billion. Not surprisingly, the government wants to keep interest rates low because that will keep their interest payments low. Also, by tolerating some inflation, that debt pile can be paid back in inflated dollars. So, who loses in this deal? It’s the diligent American saver who lives below their means and has to endure very little interest on their savings.
Government policy makers are well aware that their actions are, to some extent, helping debtors at the expense of savers. They also know that in this complicated, global economy, there’s no easy way to make everybody happy and still get us out of the fiscal hole we’re in. Knowing that, we’ll keep doing our best to help you prosper.
Weekly Focus – Just for Fun
If you could spend one year traveling around the U.S. and Canada, how many different bird species do you think you could see? Well, there’s actually an informal competition that does just that and it’s called a Big Year. Last year, a movie starring Steve Martin, Jack Black, and Owen Wilson chronicled the Big Year exploits of three men who tried to set a new Big Year record in 1998. Sure enough, one of the men set a new record of seeing 748 bird species that year. Check out the movie and you’ll never look at birding quite the same.
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, March 26, 2012
Monday, March 19, 2012
Weekly Commentary March 19th, 2012
The Markets
It was a busy week on Wall Street with numerous big moves and key milestones hit. Here are a few of the highlights:
• The S&P 500 index and the Dow Jones Industrial Average had their biggest weekly gains since last December.
• The S&P 500 closed at its highest level in nearly four years and the NASDAQ index closed at its highest level in more than 10 years.
• Yields on U.S. government bonds rose substantially on the back of “steady albeit moderate economic expansion,” according to Barron’s.
• Gasoline prices continued to rise and are now up 18 percent since December and pump prices topped $4 a gallon in many parts of the country.
• Employment is looking better as initial claims for U.S. unemployment benefits matched a four-year low.
Sources: Barron’s, The Wall Street Journal, MarketWatch
In addition, the Federal Reserve released a policy statement last week that was well-received by the markets. MarketWatch wrote, “The central bank seems keen on stressing that it will do everything it can to keep rates low and allow the economy time to heal.” Economist Ian Shepherdson commented that the Fed, “is clearly shifting its stance away from blanket gloom to something more realistic.”
And, to add even more bubbly to last week’s rosy news, Apple stock briefly pierced an all-time high of $600 per share on enthusiasm for the new iPad. This isn’t a buy or sell recommendation for the stock, but merely an indication of the market’s recent bullish enthusiasm.
While the market may be in a giving mood now, it can take it away quickly and without ringing a bell. Either way, we remain diligent in doing the best we can on your behalf.
WHY IS MONGOLIA ONE OF THE WORLD’S FASTEST GROWING ECONOMIES and is there a lesson to be learned from them? While the U.S. economy languished at a 1.7 percent growth rate in 2011, Mongolia – a landlocked country sandwiched between China and Russia – grew a staggering 17.3 percent, according to The Wall Street Journal.
Blessed with an abundance of natural resources such as copper, gold, and coal, Mongolia’s growth has been turbocharged by foreign investors seeking to exploit its still largely untapped commodities.
Now, here’s where it gets interesting. The Organization for Economic Co-operation and Development (OECD), just released a study that shows there is, “a significant negative relationship between the money countries extract from national resources and the knowledge and skills of their school population.” Another way of saying this is countries with very few natural resources (think Japan or Hong Kong) tend to have highly educated students.
The OECD said countries with few natural resources tend to realize that “the country must live by its knowledge and skills and that these depend on the quality of education.” By contrast, resource rich countries (with some exceptions), tend to take the path of least resistance and generate wealth through digging up their resources. Often, they then fail to convert this wealth “into the human capital that can generate the economic and social outcomes to sustain their future.”
It remains to be seen if Mongolia will learn from history and turn its resource riches into long-term educational dividends.
The U.S. is fortunate because we have do have abundant natural resources. However, there’s always room for improvement in taking the spoils of these resources and converting them into positive economic and social outcomes that can propel us well into the future.
As the OECD wrote, “Knowledge and skills have become the global currency of 21st century economies. But, there is no central bank that prints this currency, you cannot inherit this currency, and you cannot produce it through speculation, you can only develop it through sustained effort and investment by people and for people.”
Weekly Focus – Think About It
“We do not inherit the earth from our ancestors, we borrow it from our children.”
--Native American proverb
It was a busy week on Wall Street with numerous big moves and key milestones hit. Here are a few of the highlights:
• The S&P 500 index and the Dow Jones Industrial Average had their biggest weekly gains since last December.
• The S&P 500 closed at its highest level in nearly four years and the NASDAQ index closed at its highest level in more than 10 years.
• Yields on U.S. government bonds rose substantially on the back of “steady albeit moderate economic expansion,” according to Barron’s.
• Gasoline prices continued to rise and are now up 18 percent since December and pump prices topped $4 a gallon in many parts of the country.
• Employment is looking better as initial claims for U.S. unemployment benefits matched a four-year low.
Sources: Barron’s, The Wall Street Journal, MarketWatch
In addition, the Federal Reserve released a policy statement last week that was well-received by the markets. MarketWatch wrote, “The central bank seems keen on stressing that it will do everything it can to keep rates low and allow the economy time to heal.” Economist Ian Shepherdson commented that the Fed, “is clearly shifting its stance away from blanket gloom to something more realistic.”
And, to add even more bubbly to last week’s rosy news, Apple stock briefly pierced an all-time high of $600 per share on enthusiasm for the new iPad. This isn’t a buy or sell recommendation for the stock, but merely an indication of the market’s recent bullish enthusiasm.
While the market may be in a giving mood now, it can take it away quickly and without ringing a bell. Either way, we remain diligent in doing the best we can on your behalf.
WHY IS MONGOLIA ONE OF THE WORLD’S FASTEST GROWING ECONOMIES and is there a lesson to be learned from them? While the U.S. economy languished at a 1.7 percent growth rate in 2011, Mongolia – a landlocked country sandwiched between China and Russia – grew a staggering 17.3 percent, according to The Wall Street Journal.
Blessed with an abundance of natural resources such as copper, gold, and coal, Mongolia’s growth has been turbocharged by foreign investors seeking to exploit its still largely untapped commodities.
Now, here’s where it gets interesting. The Organization for Economic Co-operation and Development (OECD), just released a study that shows there is, “a significant negative relationship between the money countries extract from national resources and the knowledge and skills of their school population.” Another way of saying this is countries with very few natural resources (think Japan or Hong Kong) tend to have highly educated students.
The OECD said countries with few natural resources tend to realize that “the country must live by its knowledge and skills and that these depend on the quality of education.” By contrast, resource rich countries (with some exceptions), tend to take the path of least resistance and generate wealth through digging up their resources. Often, they then fail to convert this wealth “into the human capital that can generate the economic and social outcomes to sustain their future.”
It remains to be seen if Mongolia will learn from history and turn its resource riches into long-term educational dividends.
The U.S. is fortunate because we have do have abundant natural resources. However, there’s always room for improvement in taking the spoils of these resources and converting them into positive economic and social outcomes that can propel us well into the future.
As the OECD wrote, “Knowledge and skills have become the global currency of 21st century economies. But, there is no central bank that prints this currency, you cannot inherit this currency, and you cannot produce it through speculation, you can only develop it through sustained effort and investment by people and for people.”
Weekly Focus – Think About It
“We do not inherit the earth from our ancestors, we borrow it from our children.”
--Native American proverb
Wednesday, March 14, 2012
Weekly Commentary March 14th, 2012
The Markets
An important key to support the stock market is starting to fall into place.
You may have guessed that key is JOBS. Last week, the Labor Department reported an increase of 227,000 new jobs in February. Over the past six months, 1.2 million new jobs have been created – the highest six-month total since 2006. More jobs could lead to more spending which could boost corporate sales, earnings, and, possibly, stock prices.
While the recent employment numbers look pretty good, leave it to Fed Chairman Ben Bernanke to rain on the parade. In testimony to Congress on February 29, he said, “Notwithstanding the better recent data, the job market remains far from normal: The unemployment rate remains elevated, long-term unemployment is still near record levels, and the number of persons working part-time for economic reasons is very high.”
On a different note, last week marked the three-year anniversary of the March 9, 2009 stock market low. Since the low:
• The S&P 500 index has risen just over 100 percent
• Corporate operating earnings per share have risen just under 100 percent
• Corporate revenue per share has risen a meager 1 percent
Source: Barron’s
So, how can corporate earnings nearly double while corporate revenue barely budges? The answer… cost cutting – and a big chunk of the cost cutting came from whacking jobs. Even though we’ve added over a million jobs in the past six months, we’re still down about six million jobs from the peak, according to Barron’s.
The good news is the recent spurt in job growth may suggest that corporations have about reached the limit of cutting jobs and now have to add staff to support even small gains in revenue growth.
THE AGGREGATE NET WORTH OF U.S. HOUSEHOLDS WAS $58.5 TRILLION at the end of last year, according to data from the Federal Reserve Flow of Funds report. To put that number in context, household net worth peaked at $66.8 trillion in the third quarter of 2007. It hit a five-year low of $50.5 trillion in the first quarter of 2009 – the same quarter as the bear market low, according to Bloomberg.
The aggregate net worth of U.S. households is still $8.3 trillion below the all-time high set back in 2007.
Net worth is the difference between total assets and total liabilities. Investment holdings and real estate typically account for the bulk of households’ assets so any change in the financial or real estate markets can cause big swings in net worth.
Parsing the data a bit further shows these two interesting numbers:
1. Household debt as a percent of disposable income fell to 113 percent at the end of last year. This ratio peaked at 130 percent in 2007 and has been steadily declining. It’s good to see this number drop because it means households are deleveraging and have more income to support their debt level, according to The Wall Street Journal.
2. Debt payments as a percent of households' after-tax income (the debt-service ratio), fell to a 17-year low of 11.1 percent. Again, a lower number is better because this means consumers are allocating less of their monthly income to pay off debts. With more money left over, they can spend it on things that could propel the economy.
Some of the decline in these debt ratios may be due to the debts being written off as opposed to consumers actually having the money to pay them off. Either way, household balance sheets seem to be improving.
We don’t want to get too caught up in numbers here because that can distract from the key point which is this – consumers are deleveraging, they’re spending less of their income paying off debts, and that may bode well for the economy.
Weekly Focus – How to Innovate
Some of the most innovative new ideas are developed by simply connecting an existing idea to something new says author Jonah Lehrer. For example, the Wright Brothers were bicycle manufacturers whose first plane was akin to a bicycle with wings. Johannes Gutenberg used his knowledge of wine presses to create the printing press. And, more recently, the founders of Google took the existing idea of ranking the importance of academic articles by the number of citations and applied it to their search engine algorithm. The result – web pages that have lots of other web pages linking to it tend to score high in a Google search.
The next time you need to come up with a creative solution to a problem, try taking an idea from an unrelated field and apply it to your situation. Who knows, it might become the next billion-dollar idea!
An important key to support the stock market is starting to fall into place.
You may have guessed that key is JOBS. Last week, the Labor Department reported an increase of 227,000 new jobs in February. Over the past six months, 1.2 million new jobs have been created – the highest six-month total since 2006. More jobs could lead to more spending which could boost corporate sales, earnings, and, possibly, stock prices.
While the recent employment numbers look pretty good, leave it to Fed Chairman Ben Bernanke to rain on the parade. In testimony to Congress on February 29, he said, “Notwithstanding the better recent data, the job market remains far from normal: The unemployment rate remains elevated, long-term unemployment is still near record levels, and the number of persons working part-time for economic reasons is very high.”
On a different note, last week marked the three-year anniversary of the March 9, 2009 stock market low. Since the low:
• The S&P 500 index has risen just over 100 percent
• Corporate operating earnings per share have risen just under 100 percent
• Corporate revenue per share has risen a meager 1 percent
Source: Barron’s
So, how can corporate earnings nearly double while corporate revenue barely budges? The answer… cost cutting – and a big chunk of the cost cutting came from whacking jobs. Even though we’ve added over a million jobs in the past six months, we’re still down about six million jobs from the peak, according to Barron’s.
The good news is the recent spurt in job growth may suggest that corporations have about reached the limit of cutting jobs and now have to add staff to support even small gains in revenue growth.
THE AGGREGATE NET WORTH OF U.S. HOUSEHOLDS WAS $58.5 TRILLION at the end of last year, according to data from the Federal Reserve Flow of Funds report. To put that number in context, household net worth peaked at $66.8 trillion in the third quarter of 2007. It hit a five-year low of $50.5 trillion in the first quarter of 2009 – the same quarter as the bear market low, according to Bloomberg.
The aggregate net worth of U.S. households is still $8.3 trillion below the all-time high set back in 2007.
Net worth is the difference between total assets and total liabilities. Investment holdings and real estate typically account for the bulk of households’ assets so any change in the financial or real estate markets can cause big swings in net worth.
Parsing the data a bit further shows these two interesting numbers:
1. Household debt as a percent of disposable income fell to 113 percent at the end of last year. This ratio peaked at 130 percent in 2007 and has been steadily declining. It’s good to see this number drop because it means households are deleveraging and have more income to support their debt level, according to The Wall Street Journal.
2. Debt payments as a percent of households' after-tax income (the debt-service ratio), fell to a 17-year low of 11.1 percent. Again, a lower number is better because this means consumers are allocating less of their monthly income to pay off debts. With more money left over, they can spend it on things that could propel the economy.
Some of the decline in these debt ratios may be due to the debts being written off as opposed to consumers actually having the money to pay them off. Either way, household balance sheets seem to be improving.
We don’t want to get too caught up in numbers here because that can distract from the key point which is this – consumers are deleveraging, they’re spending less of their income paying off debts, and that may bode well for the economy.
Weekly Focus – How to Innovate
Some of the most innovative new ideas are developed by simply connecting an existing idea to something new says author Jonah Lehrer. For example, the Wright Brothers were bicycle manufacturers whose first plane was akin to a bicycle with wings. Johannes Gutenberg used his knowledge of wine presses to create the printing press. And, more recently, the founders of Google took the existing idea of ranking the importance of academic articles by the number of citations and applied it to their search engine algorithm. The result – web pages that have lots of other web pages linking to it tend to score high in a Google search.
The next time you need to come up with a creative solution to a problem, try taking an idea from an unrelated field and apply it to your situation. Who knows, it might become the next billion-dollar idea!
Tuesday, March 6, 2012
Weekly Commentary March 5th, 2012
The Markets
It may not feel like it, but the U.S. stock market is off to its best start to the year since 1991, according to CNBC.
With a rise of 8.9 percent for the year, the S&P 500 index has now risen eight of the last nine weeks. Some analysts cite improving economic data, solid corporate earnings, and a stronger job picture for the bubbling stock market, according to Reuters.
But, before we get too carried away, the S&P 500 index would still need to rise about 15 percent to match its all-time record high of 1,565 hit back on October 9, 2007, according to The Wall Street Journal. The gap is not as wide if you reinvested dividends since October 2007. On that score, the S&P would be just 3.5 percent below its all-time high.
If you look at the broad stock market as measured by the Wilshire 5000 index, which tracks more than 3,700 U.S. stocks, we’re at a record high. That index eked out an all-time record high last week assuming reinvested dividends, according to The Wall Street Journal. So, from the market’s peak in October 2007 to the trough in March 2009 and back to the peak in March 2012, it was a long and winding road of about 4½ years.
We talk about the importance of thinking long-term and this market cycle round-trip is a great example of what we mean. Things looked bleak near the bottom in early 2009, but here we are three years later and the market has surged and the economy seems to be healing. Patience is indeed a virtue.
CAN WE LEARN FROM OTHER PEOPLE’S WISDOM? The answer to that question is yes since no one of us is as smart as all of us. With that in mind, here are eight tidbits of investment advice from Jeremy Grantham, the co-founder and chief investment strategist of GMO, a $97 billion global investment management firm.
1. Believe in history. While past performance is no guarantee of future results, we should pay heed to history and avoid using the words “this time is different.” As the old Wall Street saw goes, “history doesn’t repeat itself, but it rhymes.”
2. “Neither a lender nor a borrower be.” Don’t borrow money to invest. If you do, “it will interfere with your survivability.”
3. Don’t put all of your treasure in one boat. This is investing 101 and it’s a basic tenet of sound investment practices.
4. Be patient and focus on the long term. Another piece of sound advice that is easier said than done – but it is well worth striving toward.
5. Try to contain natural optimism. While optimism may be a good survival characteristic, it can get in the way of good investment results. How? If you’re too optimistic, you may dismiss bearish news and go down with a sinking ship while those who had their eyes and ears open reached out for the lifeboat.
6. But on rare occasions, try hard to be brave. There may be times when it makes sense to be bolder than normal. If the odds look stacked in your favor, Grantham says it might make sense to be brave.
7. Resist the crowd: cherish numbers only. It’s easy to get caught up in the euphoria of a crowd – that’s how manias get rolling. But, as an investor, you have to put your analytical hat on, ignore the crowd, and sharpen your pencil (or calculator or computer!).
8. “This above all: to thine own self be true.” In order to succeed as an investor Grantham says, “It is utterly imperative that you know your limitations as well as your strengths and weaknesses. If you can be patient and ignore the crowd, you will likely win. But to imagine you can, and to then adopt a flawed approach that allows you to be seduced or intimidated by the crowd into jumping in late or getting out early is to guarantee a pure disaster. You must know your pain and patience thresholds accurately and not play over your head.”
While there are many top 10 lists of how to be a better investor, these eight from Grantham are a nice place to start.
Weekly Focus – Think About It
“Risks must be taken because the greatest hazard in life is to risk nothing.”
--Leo Buscaglia, Ph.D., professor, New York Times bestselling author
It may not feel like it, but the U.S. stock market is off to its best start to the year since 1991, according to CNBC.
With a rise of 8.9 percent for the year, the S&P 500 index has now risen eight of the last nine weeks. Some analysts cite improving economic data, solid corporate earnings, and a stronger job picture for the bubbling stock market, according to Reuters.
But, before we get too carried away, the S&P 500 index would still need to rise about 15 percent to match its all-time record high of 1,565 hit back on October 9, 2007, according to The Wall Street Journal. The gap is not as wide if you reinvested dividends since October 2007. On that score, the S&P would be just 3.5 percent below its all-time high.
If you look at the broad stock market as measured by the Wilshire 5000 index, which tracks more than 3,700 U.S. stocks, we’re at a record high. That index eked out an all-time record high last week assuming reinvested dividends, according to The Wall Street Journal. So, from the market’s peak in October 2007 to the trough in March 2009 and back to the peak in March 2012, it was a long and winding road of about 4½ years.
We talk about the importance of thinking long-term and this market cycle round-trip is a great example of what we mean. Things looked bleak near the bottom in early 2009, but here we are three years later and the market has surged and the economy seems to be healing. Patience is indeed a virtue.
CAN WE LEARN FROM OTHER PEOPLE’S WISDOM? The answer to that question is yes since no one of us is as smart as all of us. With that in mind, here are eight tidbits of investment advice from Jeremy Grantham, the co-founder and chief investment strategist of GMO, a $97 billion global investment management firm.
1. Believe in history. While past performance is no guarantee of future results, we should pay heed to history and avoid using the words “this time is different.” As the old Wall Street saw goes, “history doesn’t repeat itself, but it rhymes.”
2. “Neither a lender nor a borrower be.” Don’t borrow money to invest. If you do, “it will interfere with your survivability.”
3. Don’t put all of your treasure in one boat. This is investing 101 and it’s a basic tenet of sound investment practices.
4. Be patient and focus on the long term. Another piece of sound advice that is easier said than done – but it is well worth striving toward.
5. Try to contain natural optimism. While optimism may be a good survival characteristic, it can get in the way of good investment results. How? If you’re too optimistic, you may dismiss bearish news and go down with a sinking ship while those who had their eyes and ears open reached out for the lifeboat.
6. But on rare occasions, try hard to be brave. There may be times when it makes sense to be bolder than normal. If the odds look stacked in your favor, Grantham says it might make sense to be brave.
7. Resist the crowd: cherish numbers only. It’s easy to get caught up in the euphoria of a crowd – that’s how manias get rolling. But, as an investor, you have to put your analytical hat on, ignore the crowd, and sharpen your pencil (or calculator or computer!).
8. “This above all: to thine own self be true.” In order to succeed as an investor Grantham says, “It is utterly imperative that you know your limitations as well as your strengths and weaknesses. If you can be patient and ignore the crowd, you will likely win. But to imagine you can, and to then adopt a flawed approach that allows you to be seduced or intimidated by the crowd into jumping in late or getting out early is to guarantee a pure disaster. You must know your pain and patience thresholds accurately and not play over your head.”
While there are many top 10 lists of how to be a better investor, these eight from Grantham are a nice place to start.
Weekly Focus – Think About It
“Risks must be taken because the greatest hazard in life is to risk nothing.”
--Leo Buscaglia, Ph.D., professor, New York Times bestselling author
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