Weekly Commentary September 29th, 2014

The Markets

Last week offered some lessons in career management, economics, and investor impulse, among other things. Derek Jeter, the well-loved Yankees shortstop, finished the final home game of his career by smacking a game-winning hit. Throughout his last season, ticket prices for Yankees games soared on the secondary market with $16 bleacher seats selling for more than $200. By the end of the season, ticket vendors were asking as much as $11,000 a seat.

On the other coast, Bill Gross, renowned bond guru, did not retire. Gross left the firm he helped found for a smaller money manager. Shares of stock in his new company rose about 43 percent as investors anticipated the potential inflow of new assets. They also anticipated an outflow of assets from his old firm, according to Barron’s, which caused yields on Treasuries and corporate bonds to move higher on Friday, pushing prices south.

Gross’s shifting alliance wasn’t the only thing churning bond markets last week, however. Trepidation about global economic growth and geopolitical matters (e.g., Russia vs. Ukraine, etc.) had investors fleeing to “safe assets” earlier in the week. That pushed Treasury yields lower and prices higher. Barron’s reported:

“Thursday’s markets were all about a flight from risk, in part because of reports of a Russian draft law to confiscate foreign-owned assets in retaliation for Ukraine sanctions. More important is the message from “Dr. Copper,” suggesting weakness globally, whether in faltering Europe or slowing China. All of which suggests it will be an even more “considerable time” until the Federal Reserve raises interest rates.”

Volatility may be the name of the game for a while. Bloomberg suggested looking backward for guidance about the future. In 2013, Fed Chairman Ben Bernanke suggested tapering could begin sooner than expected. Treasury yields leapt by 1 percent as the market threw a “taper tantrum.” Just last week, Chairwoman Janet Yellen warned markets the Federal Open Market Committee statement was not a promise about the timing of rate hikes. Bloomberg said investors remained complacent. Apparently, they weren’t concerned unexpected economic strength in the United States could move the timetable forward.

At the end of the week, the Commerce Department reported economic growth was more robust than originally thought during the second quarter. The economy grew at the fastest rate in more than two years.

do you have what it takes? If you’re about 74 inches tall, have a deep voice, and have run a marathon, you may. The Economist’s recent article, Look of a Leader, found, “It is remarkable, in this supposed age of diversity, how many bosses still conform to the stereotype.” The article included a mixture of studies describing the characteristics of chief executive officers (CEOs) and other leaders:                                             

·       30 percent of Fortune 500 companies’ CEOs are 74 inches or taller (less than 4 percent of Americans are that tall).

·       Voice quality was more important than content when people were asked to evaluate executive speeches.

·       Male CEOs with the deepest voices earn $187,000 more each year, on average.

·       Companies with CEOs who had finished marathons were worth about 5 percent more, on average, than those with CEOs that had not.

 Don’t worry. All is not lost. Those who have not been gifted with height, athleticism, and lower voice registers can give themselves a leg up by adopting power poses. Amy Cuddy, a Harvard professor (who delivered an exceptionally popular TED talk in 2012), has found non-verbal expressions of power dominance (body language) can influence other people’s perceptions and our own well-being:

“There’s one very important thing everyone should do before heading into a job interview, giving a big speech, or attempting an athletic feat... Everyone should spend two minutes power posing. What, you ask, is power posing? It is adopting the stances associated with confidence, power, and achievement – chest lifted, head held high, arms either up or propped on the hips.”

 These poses can change body chemistry. High-power poses increase levels of testosterone and decrease levels of cortisol (a stress hormone), helping people feel more confident. Low-power poses, on the other hand, increase cortisol levels, causing people to feel more stressed. If you’re after an executive-level position competing with equally qualified candidates, power poses could give you an edge.

 

Weekly Focus – Think About It

 “Your image isn’t your character. Character is what you are as a person.”

--Derek Jeter, New York Yankee’s recently retired shortstop

 

Weekly Commentary September 22th, 2014

The Markets

About 25 years ago, Peter Jennings interrupted General Hospital to tell the nation Coca-Cola had decided to bring back its original recipe. The nation was thrilled and sales soared.

The Federal Reserve’s impending rate hike is about as popular as the New Coke; however, no soap operas were interrupted last week when the Open Market Committee statement indicated rates would remain in “the current target range” for a “considerable” period of time after quantitative easing ends.

Investors embraced the news pushing both the Dow Jones Industrial Average and the Standard & Poor’s 500 Index up more than 1 percent for the week.

On the surface, it appears everything is in perfect order. However, experts cited by Barron’s warned investors to pay attention to the subtleties of the Fed’s statement which seems to indicate monetary policy may be tightened faster than markets expect:

“Investors should keep an eye on the nuances of the Fed statement... The Fed's estimates for the funds rate moved up again to a median of 1.38 percent, instead of 1.13 percent at year-end 2015, and rose also for 2016 and 2017. Such rises suggest that Fed Chair Janet Yellen might face increasing dissent from both rate hawks and centrists on the Fed's Open Market Committee.”

Also of note last week, the Organization for Economic Cooperation and Development (OECD) reduced its economic growth forecasts for the United States and other advanced economies and recommended various economic policy changes suited to the needs of each country.

Reuters reported the organization has also recommended the implementation of measures designed to prevent multinational firms from shifting profits to low-cost tax countries. The topic was a point of discussion at the G20 summit last weekend. The measures could help countries recoup billions of tax dollars and potentially affect the balance sheets of companies targeted.

A Pharmacist has a headache. Does she choose the name brand aspirin or the store brand? That’s the subject of a working paper (Do Pharmacists Buy Bayer? Informed Shoppers and the Brand Premium, August 2014) written by a pair of economics professors at the University of Chicago Booth School of Business and their co-authors. The team found:^{(Page 24)}                                           

“More informed shoppers buy more store brands and fewer national brands. Consumer information plays a quantitative role in health categories where our estimates imply that expenditures and market shares would change significantly if all households behaved like expert shoppers. By contrast, the role of consumer information is smaller in food and drink categories where our estimates suggest much smaller gaps between expert and non-expert shopping behavior.”

How much less would Americans spend if everyone were an expert shopper? Currently, we pay about $196 billion for packaged consumer goods (medications, juice, frozen foods, etc.) each year. If we bought store brands rather than name brands, we’d save about $44 billion dollars annually.^{(Page 2)} That’s quite a chunk of change.

So, why do we buy premium brands? It may be because we believe they’re better. Freakonomics Radio recently held a peanut butter and jelly (PB&J) sandwich taste test. Tasters were told one sandwich was made with premium brands of PB&J and the other with store brands. The tasters universally preferred the premium-brand sandwich. As it turns out, both sandwiches were made with identical store-brand ingredients.

Consumers’ inclination toward national brands may reflect advertising-induced misinformation, according to some economists; other economists suggest premium products may indeed offer greater value to consumers. The working paper concluded, “…A more informed population of consumers might change whether and how much firms choose to advertise their products as well as which products are introduced to the market.”^{(Pages 2 and 24)}

Now, getting back to the original question, it turns out 92 percent of pharmacists buy store- brand headache remedies. Just 74 percent of the rest of us do (although that statistic is somewhat skewed since doctors, nurses, and other healthcare professionals tend to buy store brands more often than other people). Either way, it’s a big difference.

 

Weekly Focus – Think About It

“Oh yeah, I’ll always buy the most expensive golf ball, because if there’s even the tiniest chance that there’s a little magic in there, then I want that magic.”

--Steve Levitt, Co-author of “Freakonomics”

Weekly Commentary September 15th, 2014

The Markets

If you’re familiar with fairy tales, you’ve probably encountered a story or two that involves the granting of wishes. Usually, these are cautionary tales. Well, there was some wishing going on around the globe last week and, if the wishes come true, the outcomes may be less beneficial than anticipated.

In the United States, some folks wish Chairwoman Janet Yellen and her peers at the Federal Reserve would set a timetable for rate hikes. Barron’s offered the opinion that abandoning a data-driven process in favor of a calendar-driven one would be a mistake. Recent improvements including a slight spike in consumer confidence, somewhat stronger consumer spending, and a generally improving job market remain mired in residue of the Great Recession. For instance:

“Housing remains in the doldrums as potential buyers cite insufficient savings, excess debt, poor credit scores, and, yes, their incomes as stumbling blocks on the road to home ownership. Higher rates won't fix any of those problems, and even setting a schedule for rate hikes could create head winds if it causes loans to become harder to get in anticipation of the change.”

Across the pond, the United Kingdom of Great Britain and Northern Ireland (U.K.) may cover a lot less territory if Scotland wins independence in next week’s referendum. Until recently, few thought the measure had enough support to pass, but the latest polls say that it may happen. While independence may seem like a reasonable objective, there are economic and other challenges attached that could profoundly affect the new country. These include:

·         What currency will the Scots adopt? (U.K. leaders have said Scotland cannot keep the Pound.)

·         How will the U.K.’s national debt be divided? (By population? By gross domestic product?)

·         How will markets respond to Scottish independence? (Will Scotland establish its own stock market? Will companies relocate to England?)

·         How will the remainder of the United Kingdom be affected?

There is an adage that may prove appropriate here: Be careful what you wish for because you just might get it.

Beware unpaid internships! For decades, internships have offered opportunities to learn new skills and find gainful employment. However, a rise in of lawsuits involving unpaid interns and the companies where they worked has focused new attention on the subject. In an article on the topic, The Economist offered some information worth pondering:

“Banks and accountancy firms now hire more than half of their recruits through their internship programs; careers in politics, medicine, the media, and many other fields nearly always begin with an internship. Two-thirds of American students have at least one internship under their belts before they leave college. But they are often badly compensated: nearly half the internships in America are completely unpaid. How do unpaid internships exist in countries that have minimum-wage laws?”

It’s an interesting question and one that’s answered in Fact Sheet #71 from the U.S. Department of Labor. The sheet sets forth six criteria that must be met for interns to work without pay. In broad terms, unpaid internships:

1.      Must be similar to training provided in an educational environment

2.      Must benefit the intern

3.      Must not displace regular employees

4.      Must not provide immediate advantage to the employer

5.      Do not necessarily end in employment

6.      Are clearly understood to be unpaid by both employer and intern

So, which internships, paid or unpaid, are most likely to help someone land a job? A recent study from LinkedIn examined the availability of internships by field as well as the likelihood of an internship leading to a full-time position. The best bets for prospective interns were accounting, computer networking, semiconductors, aviation and aerospace, investment banking, design, and consumer goods.

 

Weekly Focus – Think About It

“Individual commitment to a group effort – that is what makes a team work, a company work, a society work, a civilization work.”

--Vince Lombardi, Coach of the Green Bay Packers (1959-1967)

Weekly Commentary September 8th, 2014

The Markets

It’s déjà vu all over again!

Last year, pundits and analysts tried to discern when the Federal Reserve might begin to end quantitative easing by reading economic tea leaves. For months, bad economic news proved to be good news for stock markets. This year, investors are seeking signs which might indicate when the Fed will begin to raise interest rates and, once again, bad news has become good news. Last week’s weaker-than-expected unemployment report helped push U.S. stock markets higher, according to Reuters, because it was interpreted to mean the Fed would not raise rates soon.

The week before, the Commerce Department announced household spending slowed during July. Consumer spending was up just 3.2 percent annualized through mid-summer which is the smallest increase in spending in five years. As it turns out, spending fell because Americans are saving more. During July, households set aside 5.7 percent of income, on average. While that’s good news with respect to American households’ financial security, it’s not such good news for U.S. gross domestic product, according to Barron’s:

“Unfortunately for the U.S. economy, a penny saved is not a penny earned. While the decision by Americans to cut back on their profligate ways isn't necessarily a bad thing – it was spending beyond our means that helped spur the Great Recession in the first place – it's only consumer spending, not saving, that counts when computing gross domestic product. So when consumers spent less in July than they did in June, it caused economists to ratchet down their third-quarter economic-growth forecasts which now sit below 3 percent.”

Some experts say slower growth is good news because economic expansion may last longer. While that’s all well and good, Robert Shiller, Sterling Professor of Economics at Yale, suggested in The New York Times that U.S. stock markets are looking a little pricey by some measures. He suspects the reason investors remain interested in buying highly-priced shares may ultimately be found, “…in the realm of sociology and social psychology – in phenomena like irrational exuberance, which, eventually, has always faded before.”

if you live in the United States, No matter where you reside, you are NOT in the top 10 when it comes to the world’s most ‘livable’ cities. The Economist Intelligence Unit’s Global Liveability Ranking and Report was published in August 2014. It relies on 30 factors such as safety, healthcare, educational resources, infrastructure, and environment to determine which of 140 cities around the world are the most livable. The burgs which top the rankings tend to be “mid-sized cities in wealthier countries with relatively low population density.” They include:

1.    Melbourne, Australia

2.    Vienna, Austria

3.    Vancouver, Canada

4.    Toronto, Canada

5.    Adelaide, Australia

6.    Calgary, Canada

7.    Sydney, Australia

8.    Helsinki, Finland

9.    Perth, Australia

10. Auckland, New Zealand

The names on that list haven’t changed since 2011; however, the average global livability rating has fallen 0.7 percent since 2009. The change is due to a decline in stability and safety (down 1.3 percent) among other things. More than 50 of the cities surveyed have seen their ratings move lower during the past five years. This year, the cities that ranked worst for livability included Damascus, Syria; Dhaka, Bangladesh; Port Moresby, Papua New Guinea; Lagos, Nigeria; and Karachi, Pakistan.

The good news for Americans is Washington D.C., Los Angeles, and New York City remain relatively highly ranked and haven’t experienced any change in their livability rankings. None of these is the most livable city in the United States, though. The top honor, here at home, goes to Honolulu (26^th) followed by Pittsburgh (30^th).

 

Weekly Focus – Think About It

“If you want your children to turn out well, spend twice as much time with them, and half as much money.”

--Abigail Van Buren, American advice columnist

Weekly Commentary September 2nd, 2014

The Markets

There is no substitute for mental preparedness. Just ask any professional athlete or Navy SEAL. One essential aspect of metal preparation is situational awareness – being able to identify, process, and understand what is happening around you at any given time.

That’s been a challenge for bond investors this year. 2014’s Treasury market rally took economists (and everyone else) by surprise:

“Treasury yields lurched higher in May 2013, when the Fed first sketched out a timetable to wind down its bond-buying program, even though it didn't actually begin the winding down until seven months later. Yields were expected to keep rising this year as that program ended and the Fed turned its attention to raising its short-term policy rate but, instead, yields have fallen as investors still seem enamored of bonds.”

A Bloomberg survey (August 8-13) found economists’ median forecast projected 10-year Treasury yields would be 2.7 percent by the end of September. The yield on 10-year U.S. Treasuries finished last week at 2.34 percent.

It’s likely bond market surprises may continue during the next few months. In fact, bond investors may want to mentally prepare themselves for a rough and bumpy ride. It’s likely analysts and investors will try to anticipate the Federal Reserve plans for increasing interest rates, and it’s not all that hard to imagine the type of volatility that could ensue. All you have to do is think back to the ups and downs that punctuated guesses about when the Fed might begin to end its bond-buying program.

Barron’s offered the opinion the first rate hike won’t happen until March of 2015, but that won’t stop anyone from speculating it could happen earlier. Conjecture, rumor, and supposition are likely to begin before the Federal Open Market Committee meeting on September 16, 2014.

No matter how markets twist during the next few months, investors should keep their wits about them. Being mentally prepared may help.

life expectancy has been increasing by 15 minutes every hour for the last 50 years or so in the richer countries around the world, according to The Economist. That’s an increase of about 2.5 years per decade.

Longer lifespans are a mixed blessing. On the one hand, people may enjoy longer lives. On the other, the longer people live, the greater the chance that longevity risk – the possibility that life expectancy will exceed expectations – could negatively affect people, companies, and governments around the world.

One way to measure longevity risk is by estimating the cost of an aging society. The International Monetary Fund’s (IMF) 2012 Global Financial Stability Report calculated the potential cost of providing everyone in the world, age 65 and older, with the average income necessary to maintain his or her standard of living at its preretirement level. By 2050, assuming a replacement rate of 60 percent of preretirement income, the cost would be about 11.1 percent of gross domestic product (GDP) in developed economies and 5.9 percent of GDP in emerging economies – and that doesn’t include increases in health and long-term care costs. If longevity increases by three years, the estimated costs go up by almost 50 percent!

Insurance companies, employers with defined benefit (DB) pension plans, and governments are exposed to significant longevity risk. Insurers offer products designed to provide lifetime income. Employer-sponsored DB plans promise lifetime payments to employees who meet specific criteria. Governments with pension programs have made similar promises to citizens.

Many entities are looking for ways to effectively reduce their exposure to longevity risk. One way to manage longevity risk is to share it. An example would be to develop a “liquid longevity risk transfer market” where,

“…The “supply” of longevity risk would meet “demand” for that risk. That is, the risk would be transferred from those who hold it, including individuals, governments, and private providers of retirement income, to (re-) insurers, capital market participants, and private companies that might benefit from unexpected increases in longevity (providers of long-term care and healthcare, for example). In theory, the price of longevity risk would adjust to a level at which the risk would be optimally spread through market transactions.”

The overall longevity risk market could be sizeable. According to Risk.net, current global annuity and pension-related longevity risk exposure is between $15 trillion and $25 trillion.

 

Weekly Focus – Think About It

“Some cause happiness wherever they go; others whenever they go.”

--Oscar Wilde, Irish writer and poet