Monthly Archives: October 2012

Weekly Market Commentary 10/30/2012

Weekly Market Commentary
October 29, 2012
 
The Markets
 
Who’s right, consumers or businesses?
 
As it relates to the U.S. economy, consumers seem to feel optimistic about it while businesses are hunkering down.
 
This split showed up in last week’s release of the first estimate of third quarter gross domestic product (GDP), defined as the output of goods and services produced by labor and property located in the United States. The government said GDP grew a modest 2.0 percent. How we got to the 2.0 percent growth rate is where it gets interesting.
 
For background, GDP consists of 4 major components:
 
1)      Personal consumption expenditures
2)      Business investment
3)      Government spending
4)      Net exports of goods and services
Source: Department of Commerce
 
Of these four components, the first one – personal consumption expenditures – typically accounts for about 70 percent of the total. So, if consumers are optimistic and in a shopaholic mood, that bodes well for economic growth. And, in the third quarter, they were as consumer spending accounted for most of the 2.0 percent increase in GDP.
 
Businesses, on the other hand, were rather subdued. Capital spending actually declined in the third quarter as, “Slower world growth and worries about a budget crisis at home have spurred U.S. business to take a more cautious stance on hiring and investment,” according to MarketWatch.
 
Now, all we have to do is get businesses to drink the same Kool-Aid as consumers and we’ll be off to the races!
 

Data as of 10/26/12

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

-1.5%

12.3%

13.7%

9.8%

-1.7%

4.7%

DJ Global ex US (Foreign Stocks)

-1.7

7.9

3.0

0.2

-7.0

7.2

10-year Treasury Note (Yield Only)

1.8

N/A

2.2

3.6

4.4

4.1

Gold (per ounce)

-1.2

9.0

0.1

17.6

17.1

18.5

DJ-UBS Commodity Index

-2.3

1.7

-2.9

1.9

-4.6

3.2

DJ Equity All REIT TR Index

-2.5

14.6

19.6

20.3

2.1

11.8

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.
 
DO YOU PREFER TO BUY THINGS when they go on sale or do you prefer to pay full price? Now, before you snicker, consider that many people do prefer to pay full price. Why? Take clothing as an example. If you want to be trendy, you’ll likely pay full price since most clothing stores don’t put the latest fashions on sale.
 
Other folks, while still “fashion conscious,” prefer to wait until an item goes on sale so they can get it at a “bargain” price. And, chances are, if you’re patient, you can get that desired piece on sale as the store makes room for the next season’s clothes.
 
How people shop for clothes can be very instructive in how to invest successfully in the financial markets. Here are several comparisons to think about:
 
1)      Buy what’s on sale. Like clothing, investments occasionally drop to a point where they seem like a bargain. Just as smart shoppers like to buy clothes on sale, shrewd investors like to buy securities they believe are temporarily out of favor.
2)      Buy at full price. Well, maybe not. It’s fine to buy trendy clothes at full price because of the psychic rewards of being sharply dressed. But, investors should focus on making money, not on having bragging rights at the cocktail party about owning the latest high-flying, change-the-world Internet company.
3)      Buy only what you need. Consumer’s closets have limited space so most clothes shoppers have a limit on how many suits or coats they buy. Likewise, investors should buy only what they need to help meet their goals and objectives. Specifically, there’s no need to take extra risk if a lower-risk portfolio has a reasonable chance of helping you meet your goals.
 
Interestingly, investors often think very differently about how they approach buying clothes and making investments. With clothes, many people prefer to wait for a sale and are apt to buy more if they can get them at a deep discount. Conversely, when investments go “on sale,” meaning, their price has dropped, investors often shy away.
 
As an advisor, part of our job is to help make investing more like bargain clothing shopping. We look for investments that are on sale, that meet your needs, and will last for more than one season. Unlike tie-dyed shirts, we think this type of investment strategy will never go out of style.
 
Weekly Focus – Think About It…
 
“You don’t want too much fear in a market because people will be blinded to some very good buying opportunities. You don’t want too much complacency because people will be blinded to some risk.”
–Ron Chernow, American biographer
 
Best regards,
 
Margie Shard, CFP®
President and Wealth Advisor
 
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  Shard Financial Weekly Market Commentary  please reply to this e-mail with    “Unsubscribe” in the subject line, or write us at 1537 N Leroy Street, Suite D, Fenton, MI  48430.
 
Sources:
http://online.wsj.com/article/SB10001424052970203922804578080410508606912.html?mod=WSJ_hp_LEFTWhatsNewsCollection
http://content.govdelivery.com/attachments/USESAEI/2012/10/26/file_attachments/170654/Gross%2BDomestic%2BProduct%2528THIRD%2BQUARTER%2B2012%2528ADVANCED%2BESTIMATE%2529%2529.pdf
http://www.marketwatch.com/story/us-economy-speeds-up-in-third-quarter-2012-10-26
http://www.brainyquote.com/quotes/quotes/r/ronchernow290825.html
 

Weekly Market Commentary 10/22/12

Weekly Commentary
October 22, 2012
 
The Markets
 
Twenty-five years later, are there any lasting lessons from the October 1987 stock market crash?
 
You may recall that on October 19, 1987, the Dow Jones Industrial Average plummeted 22.6 percent. This drop was far steeper than the 12.8 percent decline on October 28, 1929, the day many consider the start of the Great Depression and it “immediately raised fears of an international economic crisis and a recession in the United States,” according to the Los Angeles Times.
 
Although the crash was mind-boggling and is firmly etched in investment lore, on a long-term performance chart, it shows up as just a blip. In fact, in the first eight months of 1987, the Dow rose more than 40 percent, and, despite the crash, the Dow – amazingly – finished the year with a gain.
 
With the benefit of 25 years, here are a few investment lessons to remember:
 
  1. Don’t panic. The crash was painful, but the market was back to breakeven just two years later.
  2. Valuation matters. Traditional valuation metrics such as price earnings ratios and dividend yields were flashing red back in 1987 which suggested the market was ripe for a fall – so pay attention to valuation.
  3. Stay diversified. Even though correlation among asset classes tends to rise during times of market stress, it’s still important to own a variety of asset classes as over time, it may help balance your portfolio.
  4. Invest responsibly. People who borrowed money to invest in the stock market or made high-risk bets got burned when the market crashed. Always invest within your risk tolerance so a repeat of 1987 won’t put you out of business.
Sources: Los Angeles Times; The Motley Fool; Forbes
 
When asked what the stock market will do, the great banker J.P. Morgan replied, “It will fluctuate.” Indeed, as October 1987 shows, stocks do fluctuate – sometimes dramatically. Knowing that and remembering the four lessons above could help make you a better investor.
 

Data as of 10/19/12

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

0.3%

14.0%

18.5%

9.3%

-0.9%

4.8%

DJ Global ex US (Foreign Stocks)

1.9

9.8

6.6

0.0

-6.4

7.4

10-year Treasury Note (Yield Only)

1.8

N/A

2.2

3.4

4.4

4.2

Gold (per ounce)

-1.7

10.3

5.1

18.3

17.9

18.7

DJ-UBS Commodity Index

-0.4

4.1

1.0

2.3

-4.0

3.3

DJ Equity All REIT TR Index

1.5

17.4

29.5

20.6

3.2

12.2

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.
 
HOW GOOD ARE YOU at predicting the future? Well, despite a bazillion bits of information at our fingertips and unbelievable computing power, humans are still pretty bad at it.
 
Let’s use an example that gets to the heart of the financial crisis. As described in Nate Silver’s book, The Signal and the Noise, back in 2007 Standard & Poor’s Corporation (S&P) gave investment ratings to a particularly complex type of security called collateralized debt obligation (CDO). For CDO’s that were rated AAA – the highest rating possible – S&P said the likelihood that a piece of debt within those CDO’s would default within five years was a miniscule 0.12 percent. That’s about one chance in 850.
 
Now, you probably know where this is going. Guess what the actual default rate was? According to S&P, it was around 28 percent. Simple math says the actual default rate was more than 200 times higher than S&P predicted and, as Silver wrote, “This is just about as complete a failure as it is possible to make in a prediction.”
 
It’s easy to poke fun at bad predictions; however, there is a larger point here. First, we can’t predict the future so we always need a plan B. And, second, we need to differentiate between risk and uncertainty.
 
Economist Frank Knight said risk involves situations where we can calculate the probability of a particular outcome. For example, actuaries can calculate the probability of a 60-year old male dying within 10 years because they have historical mortality statistics that don’t change much from year to year.
 
By contrast, uncertainty has no historical data to use as a solid basis for making a prediction. For example, predicting the outcome of war in Syria is not knowable because there’s no set of historical data or probability distribution on which to base the prediction.
 
It’s just our luck that the financial markets seem to contain elements of risk and uncertainty. However, we can try to use that to our benefit by being cognizant when the risk/reward seems to be in our favor while at the same time, having plan B in case uncertainty tries to spoil the party.
 
Weekly Focus – Think About It…
 
“It is a truth very certain that when it is not in our power to determine what is true we ought to follow what is most probable.”
Descartes, French philosopher, mathematician, writer
 
Best regards,
 
Margie Shard, CFP
President  & Wealth Advisor
 
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  Shard Financial Weekly Market Commentary please reply to this e-mail with    “Unsubscribe” in the subject line, or write us at 1537 N Leroy Street, Suite D, Fenton, MI  48430.
 
Sources:
http://www.marketwatch.com/story/another-stock-crash-like-1987s-is-inevitable-2012-10-17?link=MW_story_popular
http://articles.latimes.com/1987-10-20/news/mn-14689_1_stock-market-wealth
http://online.wsj.com/article/SB119239926667758592.html?mod=mkts_main_news_hs_h
http://www.npr.org/2012/10/18/163152720/black-friday-haunts-market-25-years-on
http://www.fool.com/features/1997/sp971017crashanniversary1987timeline.htm
http://www.forbes.com/sites/investor/2012/10/19/lessons-from-black-monday/
http://investmenttrivia.com/
http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCIQFjAA&url=http%3A%2F%2Fwww.hks.harvard.edu%2Fm-rcbg%2Fstudents%2Fdunlop%2F2009-CDOmeltdown.pdf&ei=RSh_UI66CsT30gHuloGICA&usg=AFQjCNGc5ViO6QgBxq-s43hcfZtozK-wqg&cad=rja
http://www.standardandpoors.com/products-services/articles/en/us/?assetID=1245214438884
http://hbr.org/2006/01/a-brief-history-of-decision-making/ar/1
http://probweb.berkeley.edu/quotes.html

 

Weekly Market Commentary 10/15/12

Weekly Commentary
October 15, 2012
 
The Markets
 
Two widely watched indicators just hit five-year extreme levels – and that’s a positive for the economy.
 
Consumer sentiment hit a five-year high in the preliminary October reading, as measured by the University of Michigan-Thomson Reuters sentiment gauge. This gauge “covers how consumers view their personal finances as well as business and buying conditions,” according to MarketWatch. Higher levels of sentiment could translate into higher consumer spending and help propel the economy.
 
And, the second indicator, housing foreclosure filings, hit a five-year low in September, according to RealtyTrac. Foreclosure filings include default notices, scheduled auctions, and bank repossessions. In September, there were 180,427 foreclosure filings. By contrast, that number was above 350,000 in mid-2009, so, yes, foreclosure filings have improved significantly over the past few years.
 
And, for good measure, let’s throw in a third indicator – weekly jobless claims – which fell to their lowest level in more than four years for the week ending October 6, according to Bloomberg. Lower claims “may mean employers are seeing enough demand to maintain current staff, a necessary first step to bigger gains in hiring,” according to Bloomberg.
 
While these three indicators look good, “Earnings pessimism among U.S. chief executive officers is climbing to levels last seen when the Standard & Poor’s 500 Index was mired in bear markets,” according to Bloomberg. In fact, analysts are now forecasting a 0.9 percent decline in corporate earnings for the just completed third quarter, according to Bloomberg.
 
Good news, bad news, what’s an investor supposed to take from this? Well, like the movie by the same title, it’s complicated. The economy continues to recover and rebalance from the Great Recession and this leads to some indicators looking good, others looking bad, and some looking just plain normal. 
 

Data as of 10/12/12

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

-2.2%

13.6%

18.3%

9.9%

-1.8%

5.4%

DJ Global ex US (Foreign Stocks)

-1.8

7.8

4.6

0.1

-7.0

7.8

10-year Treasury Note (Yield Only)

1.7

N/A

2.2

3.4

4.7

3.8

Gold (per ounce)

-1.0

12.2

5.0

18.6

18.7

18.7

DJ-UBS Commodity Index

-0.6

4.4

0.6

3.7

-3.7

3.3

DJ Equity All REIT TR Index

-0.7

15.7

29.2

20.3

1.4

12.3

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.
 
DO YOU WANT TO KNOW THE SECRET to Warren Buffett’s remarkable investment success?
 
First, some background. Buffett partially owns a company called Berkshire Hathaway and he uses this as his vehicle for making investments in other companies. So, when people say Buffett is a great investor, they’re looking at the performance of Berkshire Hathaway stock which, in turn, tends to reflect the performance of the companies Berkshire owns.
 
Further, a recent academic paper by Andrea Frazzini, David Kabiller, and Lasse H. Pedersen, titled Buffett’s Alpha, said, “Buffett’s performance is outstanding as the best among all stocks and mutual funds that have existed for at least 30 years.”
 
Now, here’s the secret to Buffett’s spectacular returns according to the paper’s authors:
 
We find that the secret to Buffett’s success is his preference for cheap, safe, high-quality stocks combined with his consistent use of leverage to magnify returns while surviving the inevitable large absolute and relative drawdowns this entails.
 
Let’s look at each of those components:
 
1)         Cheap: defined as value stocks with low price-to-book ratios
2)         Safe: defined as stocks with low beta and low volatility
3)         High-quality: defined as stocks of companies that are profitable, stable, growing, and have high dividend payout ratios
4)         Leverage: perhaps shockingly, the authors discovered that Berkshire magnified its returns by leveraging its capital by 60 percent financed partly using insurance float with a low financing rate
Source: Buffett’s Alpha paper
 
This is not a buy or sell recommendation on Berkshire Hathaway stock, rather, it shows Buffett latched on to a good strategy early in his career, used leverage to magnify his returns, and stuck to the strategy even when it suffered large declines.
 
Now that we know “how” Buffett achieved his outstanding return (including the surprising leverage), does this in any way diminish his results? No. In fact, it’s probably just the opposite. Buffett figured this strategy out more than 30 years ago and researchers are just now catching up with him!
 
Weekly Focus – Think About It…
 
“Research is to see what everybody else has seen, and to think what nobody else has thought.”
–Albert Szent-Gyorgyi, Hungarian biochemist
 
Best regards,
Margie Shard, CFP
 
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  Shard Financial Weekly Market Commentary please reply to this e-mail with    “Unsubscribe” in the subject line, or write us at 1537 N Leroy Street, Suite D, Fenton, MI  48430.
 
Sources:
http://www.marketwatch.com/story/consumer-sentiment-jumps-to-five-year-high-2012-10-12
http://www.realtytrac.com/content/foreclosure-market-report/september-and-q3-2012-us-foreclosure-market-report-7424
http://www.bloomberg.com/news/2012-10-11/jobless-claims-in-u-s-fall-to-four-year-low-as-quarter-starts.html
http://www.bloomberg.com/news/2012-10-11/profit-pessimism-highest-since-09-as-intel-fedex-cut-forecasts.html
http://www.econ.yale.edu/~af227/pdf/Buffett%27s%20Alpha%20-%20Frazzini,%20Kabiller%20and%20Pedersen.pdf
http://thinkexist.com/quotation/research_is_to_see_what_everybody_else_has_seen/193718.html