Monthly Archives: June 2012

Weekly Market Commentary 6/25/12

The Markets 

While nobody knows what the future holds, one powerful person came pretty close to accurately predicting the problems Europe is having with the euro – a full 17 years before the current crisis began in 2010.  

Former British Prime Minister Margaret Thatcher strongly resisted having Britain join the single currency and, instead, pushed the country to keep the pound sterling. Her view prevailed. 

Today, the controversial Lady Thatcher is retired from public view, but her take on the common currency of Europe has proved uncannily accurate. 

Paraphrasing her 1993 autobiography, a November 18, 2010 article in the Daily Telegraph said Thatcher argued, “The single currency could not accommodate both industrial powerhouses such as Germany and smaller countries such as Greece. Germany, forecast Thatcher, would be phobic about inflation, while the euro would prove fatal to the poorer countries because it would ‘devastate their inefficient economies.’” 

True to Thatcher’s prediction, the euro zone is suffering from the imbalances caused by a currency shared by countries with dramatically different economic, political, and cultural norms. 

We monitor the euro zone problems because, in our global society, a breakdown in Europe could spread to the rest of the world. And, once again, euro zone leaders are meeting this week to try and solve their structural problems. But, consider this. In the U.S. we have one country and two major parties. In Europe, 17 countries share the euro and each of those countries have multiple major parties. Knowing how hard it is for Democrats and Republicans to agree, imagine how hard it is to get 17 countries and their respective parties to agree on anything! 

Given this difficulty, it’s not surprising that the euro crisis has dragged on and on and on. Eventually, though, Europe will have to make some tough decisions – or the market may do it for them. 


Data as of 6/22/12

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

-0.6%

6.2%

5.3%

14.3%

-2.3%

3.0%

DJ Global ex US (Foreign Stocks)

0.0

-1.5

-17.6

4.6

-7.4

4.8

10-year Treasury Note (Yield Only)

1.7

N/A

3.0

3.7

5.1

4.8

Gold (per ounce)

-3.8

-0.6

0.8

19.4

19.1

17.0

DJ-UBS Commodity Index

-0.4

-8.8

-19.6

2.0

-5.6

2.6

DJ Equity All REIT TR Index

-0.5

10.3

8.7

32.9

1.6

10.0

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable. 

VOLATILE MARKETS HAVE EXPOSED ONE FLAW in the traditional thinking about how to determine an investor’s “risk tolerance.” Traditionally, risk tolerance was thought of in terms of a spectrum moving from very conservative at one end to very aggressive at the other. And, risk was defined as how much of a loss an investor could stomach. That makes sense, but it’s only one part of the risk tolerance story. 

Investors essentially have two types of risk tolerance: 

(1)  Financial risk tolerance – which is an investor’s financial ability to withstand a decline in their portfolio.

(2)  Emotional risk tolerance – which is an investor’s emotional ability to withstand a decline in their portfolio.

Source: The Charles Schwab Corporation

Now, here’s the key – there could be a very large gap between these two levels. For example, some investors may be able to financially withstand a 30 percent decline in their portfolio without it negatively impacting their ability to meet their long-term goals and objectives. However, some of those same investors may be able to withstand only a 20 percent decline in their portfolio from an emotional standpoint. 

The emotional risk tolerance level is effectively your “sleep” level. It’s the level where if your portfolio went down any further, it would affect your ability to sleep soundly at night. 

But, there’s more… 

We also have one other factor to consider here and that’s your time horizon. If you are 10 years away from needing to tap your investment portfolio, then a decline in your portfolio today should not be a cause for alarm. Why? Because you have 10 years to recoup the decline. Remember, today’s stock market prices are only relevant to those who are selling today. 

As your advisor, it’s important for us to know your financial risk tolerance level and your emotional risk tolerance level. With this knowledge, we do our best to manage your portfolio in such a way that we won’t breech either of those levels. After all, we appreciate a good night’s sleep, too! 

Weekly Focus – How to Sleep Better… 

Are you one of the lucky 42 percent of Americans who consider themselves “great sleepers?” If not, try these tips from the National Sleep Foundation: 

  • Set and stick to a sleep schedule by going to bed and waking up at the same times each day.
  • Exercise regularly, but do it in the morning or afternoon.
  • Establish a relaxing bedtime routine such as reading a book or listening to soothing music.
  • When you go to sleep, make sure your room is dark, quiet, and cool.
  • Avoid caffeinated beverages, chocolate, tobacco, or large meals right before bedtime. 

Best regards, 

Margie 

Margie Shard, CFP®
President & Wealth Advisor
Shard Financial Services, Inc. 

P.S.  Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added. 

Securities offered through LPL Financial, Member FINRA/SIPC. 

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.                           

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. 

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. 

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market. 

* Gold represents theLondonafternoon gold price fix as reported by the London Bullion Market Association. 

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998. 

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones. 

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods. 

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. 

* Past performance does not guarantee future results. 

* You cannot invest directly in an index. 

* Consult your financial professional before making any investment decision.

* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject line, or write us at 1537 N. Leroy St., Suite D, Fenton, MI 48430. 

Sources:

http://blogs.telegraph.co.uk/news/peteroborne/100064330/margaret-thatcher-knew-the-single-currency-would-devastate-europe/

http://www.schwab.com/public/schwab/resource_center/expert_insight/todays_market/sonders/sonders_081211.html

http://www.sleepfoundation.org/article/press-release/americans-bedrooms-are-key-better-sleep-according-new-national-sleep-foundatio

 

Weekly Market Commentary 6/18/12

 

The Markets

When central bankers talk, investors listen. 

World stock markets rallied last week on a Reuters report which said major central banks were prepared to take coordinated action if the results of the Greek elections led to market turmoil. 

On top of that, later reports said the European Central Bank was hinting at an interest-rate cut and Britain jumped in with a pledge to flood its banks with cash if needed, according to Reuters. This global show of force suggests the world’s political leaders will do whatever they can to keep the financial markets stable.

Interestingly, last week’s economic news in the U.S. and Europe pointed to continued sluggish growth, according to MarketWatch. Normally, you might expect the stock market to drop on weak economic news as it could lead to lower corporate profits. However, investors seemed to interpret the “bad” news as “good” news for the market because the worse things get, the more likely government may step in with more stimulus. 

There’s an old Wall Street adage that says, “Don’t fight the Fed.” This means when the Federal Reserve starts firing its bullets to stimulate the economy, it tends to spark a rally in the stock market – even if the economic news continues to look weak, according to MarketWatch. The Federal Reserve, along with other central banks, have already fired $6 trillion worth of bullets in the form of money printing since 2008 and, as a result, many of the world’s financial markets have risen sharply since the early 2009 lows, according to CNBC. 

While further stimulus might support the financial markets in the short term, there are two things to consider: 

  1. Additional stimulus is subject to the law of diminishing returns. Just like one chocolate chip cookie tastes great, but 10 may make you sick, too much stimulus may eventually backfire.
  2. Additional stimulus improves liquidity, but does not address the solvency issue. Europe and the U.S. still have a solvency problem of too much debt and this debt needs to either be written off or paid off. Solvency is the harder issue to solve.

Source: Hussman Funds, June 18, 2012 

We’ll know the financial markets are “back to normal” when they can stand on their own without any hint of support from central banks. 


Data as of 6/15/12

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

1.3%

6.8%

5.6%

13.3%

-2.6%

2.6%

DJ Global ex US (Foreign Stocks)

2.0

-1.5

-17.4

3.5

-7.4

4.5

10-year Treasury Note (Yield Only)

1.6

N/A

3.0

3.7

5.2

4.9

Gold (per ounce)

3.2

3.4

6.4

20.4

20.0

17.7

DJ-UBS Commodity Index

0.0

-8.5

-20.2

0.7

-6.1

2.8

DJ Equity All REIT TR Index

0.4

10.9

13.1

30.1

0.9

10.1

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable. 

IS THERE A BUBBLE IN THE BOND MARKET? 

As you know, interest rates are near record lows and that hurts savers who were used to receiving relatively high and mostly risk-free income on their savings. For example, back in 2007, 10-year Treasuries yielded about 5 percent, according to the U.S. Department of the Treasury. Last week, the yield was down to about 1.6 percent. Since bond prices move inversely to yield, this means as yields moved to near record lows, bond prices moved to near record highs. And, now, some analysts are asking if bond prices have reached bubble territory, according to Bloomberg. 

One of the most recent clear-cut cases of a bubble was the technology boom of the late 1990s. Unfortunately, that was followed by the technology stock bust of the early 2000s. You may recall that bubble was based on greed as investors clamored to get in on the internet frenzy and make some “easy” money. 

But, today’s peak in the bond market is just the opposite. It’s based on fear, not greed. Due to economic uncertainty, investors have jumped into bonds to preserve their money and this fear-based demand for bonds has pushed prices up and yields down, according to Bloomberg. 

So, can a bubble be based on fear or are bubbles just reserved for greed-driven extremes? In reality, we’re not as concerned about the definition of the bubble as we are about the possible unwinding of the bubble. 

The technology bubble of the late 1990s and the strong bond market of today are great examples of two things that can drive markets to extremes – greed and fear. In the end, whether driven by greed or fear, extreme movements in the financial market tend to eventually reverse themselves and revert back to the mean. Our job as your financial advisor is to acknowledge these emotions, but not get caught up in them. We do our best to remain rationale and analytical in the face of greed and fear so we can do the best job possible in securing your financial future.  

Weekly Focus – Think About It… 

“Individuals who cannot master their emotions are ill-suited to profit from the investment process.”

Benjamin Graham, investment manager, author, Warren Buffett mentor

 Best regards,

 Margie 

Margie Shard, CFP®

President & Wealth Advisor
Shard Financial Services, Inc.

P.S.  Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added. 

Securities offered through LPL Financial, Member FINRA/SIPC. 

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.                           

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. 

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. 

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market. 

* Gold represents theLondonafternoon gold price fix as reported by the London Bullion Market Association. 

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998. 

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones. 

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods. 

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. 

* Past performance does not guarantee future results. 

* You cannot invest directly in an index. 

* Consult your financial professional before making any investment decision. 

* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with    “Unsubscribe” in the subject line, or write us at 1537 N. Leroy St., Suite D, Fenton, MI 48430. 

http://www.reuters.com/article/2012/06/14/us-markets-stocks-idUSBRE84S0BG20120614

http://www.reuters.com/article/2012/06/15/us-markets-stocks-idUSBRE84S0BG20120615

http://articles.marketwatch.com/2012-06-13/commentary/32196927_1_stock-market-debt-crisis-crises

http://www.cnbc.com/id/47792734/

http://www.hussmanfunds.com/wmc/wmc120618.htm

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/TextView.aspx?data=yieldYear&year=2007

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/TextView.aspx?data=yieldYear&year=2012

http://www.bloomberg.com/news/2012-06-11/bond-bubble-dismissed-as-low-yields-echo-pimco-s-new-normal-1-.html

https://guidance.fidelity.com/viewpoints-workplace/dont-let-fear-2

 

Weekly Market Commentary 6/11/12

The Markets

Add another country to the European bailout list. 

Over the weekend, Spain requested up to $125 billion in bailout money to shore up its ailing banks, according to Bloomberg. Spain’s banks and the country’s economy are reeling from the bursting of a massive property bubble. Things are so bad in Spain that the country is back in recession and nearly 25 percent of the country’s workers are unemployed, according to The Wall Street Journal

Spain matters because it’s the fourth largest economy in the euro zone and if it goes bust, it may create chaos in euro land. 

Fortunately, if all goes according to plan, the new bailout money may be enough to reassure investors that Spain won’t go the way of Greece. Speaking of Greece, the next big event in the ongoing euro zone debt crisis takes place this coming Sunday when Greece holds a new election. Depending on who wins, it could lead to “Grexit”—which means Greece leaving the euro. There is no precedent for a country leaving the euro so if it happens with Greece, we’re in unchartered territory. 

Back in the states, Fed Chairman Ben Bernanke spoke last week and said, “The situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely.” He went on to say, “The Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate.” While he didn’t announce another round of quantitative easing, the markets were somewhat reassured that he might pull the trigger if the economy gets much worse.   

And let’s not forget China. They just announced a surprise interest rate cut which “raised concerns over the state of the economy,” according to MarketWatch. 

So here we are again, monitoring the situation in Europe, worrying about a hard landing in China, and analyzing whether the Federal Reserve will ride to the rescue and print more dollars. It keeps our job very interesting! 


Data as of 6/8/12

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

3.7%

5.4%

4.3%

12.2%

-2.5%

2.6%

DJ Global ex US (Foreign Stocks)

2.0

-3.4

-20.2

2.9

-7.3

4.0

10-year Treasury Note (Yield Only)

1.6

N/A

3.0

3.9

5.1

5.0

Gold (per ounce)

-1.8

0.1

2.5

18.7

19.2

17.2

DJ-UBS Commodity Index

1.6

-8.5

-22.5

0.8

-5.4

3.0

DJ Equity All REIT TR Index

4.5

10.4

8.9

26.9

0.6

10.2

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable.

SOMETHING HAPPENED ON NOVEMBER 18, 2008 THAT HADN’T HAPPENED IN 50 YEARS—what was it and what are the implications for your portfolio? 

Before we get to the answer, we need a brief review of history. Up until 1958, the dividend yield on common stocks was higher than the yield on bonds. This seemed to make sense because stocks were generally riskier than bonds and in order to entice investors to buy stocks, they had to be incented with a higher yield. But in 1958, that flipped. Stock prices rose, the dividend yield fell and the yield on bonds became higher than stocks. For the next 50 years, this relationship remained as bonds continued to out-yield stocks. 

Then, on November 18, 2008, the relationship reversed as stocks delivered a higher dividend yield than bonds. This was just a brief flirtation and the relationship flipped again shortly thereafter and bonds resumed their usual higher-yielding status. 

Now, with the dramatic decline in bond yields, stocks are doing that rare thing and delivering a higher yield than bonds, according to the Financial Times

Here are several thoughts on the implications of stocks yielding more than bonds. 

(1)  Investors are more risk averse. With bond yields extremely low, this suggests investors are more concerned about safety than double-digit returns.

(2)  Bond prices are at an extreme level. With 10-year Treasury yields having recently touched an all-time record low, there may not be much room for them to go lower—since 0 percent is the floor.

(3)  Government intervention may be distorting the normal relationship between bonds and stocks. Heavy bond buying by the Federal Reserve could be artificially depressing bond yields and rendering some of the traditional market relationships moot.

(4)  Investor psychology may change over time. Prior to 1958, investors wanted a higher yield from stocks because stocks were riskier. Then, over the next 50 years, bonds had a higher yield as investors became comfortable with the idea that stocks offered a yield plus a chance for capital appreciation—even with more volatility. And now, we’re back to risk averse investors seeking higher yields from stocks.

Sources: Financial Times, BusinessWeek 

From an investment standpoint, seeing a major change in a long-term trend like the yield relationship between bonds and stocks suggests we may be at an extreme level in bonds and stocks. And while nobody knows how long it may take for this relationship to return to a more traditional level, we’ll try to find ways to profit from it on your behalf. 

Weekly Focus – Think About It… 

“And so with the sunshine and the great bursts of leaves growing on the trees, just as things grow in fast movies, I had that familiar conviction that life was beginning over again with the summer.”

— F. Scott Fitzgerald, author 

Best regards,

Margie

Margie Shard, CFP®
President & Wealth Advisor
Shard Financial Services, Inc.

P.S.  Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.

* Securities offered through LPL Financial, Member FINRA/SIPC.

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. 

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Past performance does not guarantee future results.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision.

* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with    “Unsubscribe” in the subject line, or write us at 1537 N. Leroy, Suite D, Fenton, MI 48430.

Sources:

http://www.bloomberg.com/news/2012-06-10/spain-s-bailout-gives-rajoy-best-chance-to-fix-banks.html

http://online.wsj.com/article/SB10001424052702303768104577458562351966868.html?mod=WSJ_hps_LEFTTopStories

http://www.economist.com/node/21556583

http://federalreserve.gov/newsevents/testimony/bernanke20120607a.htm

http://www.marketwatch.com/story/chinas-economy-continues-to-cool-off-2012-06-09

http://www.businessweek.com/investor/content/aug2010/pi20100831_284999.htm

http://www.ft.com/intl/cms/s/0/d754f94c-a4ba-11e1-9908-00144feabdc0.html#axzz1wIWcUlBO

http://www.goodreads.com/quotes/tag/summer