Posted on Tuesday, April 14, 2009 - by Henry Walter
Weekly Roundup, April 14, 2009
1. Minutes of meetings are generally boring and unread. But it is a good idea to pay attention to those of the Federal Reserve and its Federal Open Market Committee (FOMC). According to the minutes of their March 17-18 meeting, just released, a significantly worsening economic outlook caused the Fed to commit to buy up to $1.25 trillion in long-term government debt to stimulate the economy and prevent a slide into deflation. This unconventional approach, used unsuccessfully by Japan, is known as quantitative easing, described by detractors as creating money out of thin air, and is now being utilized in Euroland, the UK, Canada and others. The danger is that it will eventually result in very high inflation.

2. Jeremy Grantham of GMO, a well-regarded investment manager over in Boston, is gradually becoming more optimistic. In his March 2009 review he observes, with partial tongue in cheek, “Life is simple: If you invest too much too soon you will regret it. On the other hand, if you invest too little after talking about handsome potential returns and the market rallies, you deserve to be shot.” (For the full article Google “Jeremy Grantham March 2009 Review.”) But Nouriel Roubini, the New York University professor who predicted the financial crisis, in a recent Bloomberg Radio interview, says bank takeovers deepen the financial crisis. “The institutions are insolvent,” he said, “you have to take them over and you have to split them up into 3 or 4 national banks, rather than having a humongous monster that is too big to fail.”

3. President Obama sees a ‘glimmer of hope’ but warned that ‘the economy is still under severe stress’. Economists, in a recent Wall Street Journal survey (April 10, 2009, page A3), forecast the recession will end in September of this year, but these are the same folks who told us all was well in mid-2007. Finally, highly-respected InvesTech Research, to which the writer subscribes, is seeing a gradual, but steady, improvement in the technical picture, and is stepping up its allocation to equities to 60%.

4. Moody’s just downgraded Berkshire Hathaway, which leaves only 5 firms with the triple-A grade, Exxon, Microsoft, Johnson & Johnson, Pfizer and Automatic Data Processing. In 1979, 61 were ranked triple-A, including AIG! With Pfizer’s purchase of Wyeth, there may soon be only 4. We should add that increasingly the triple-A rating is becoming irrelevant to many investors. On a related subject, Moody’s also assigned a negative outlook to all U.S. municipalities, the first time the agency issued a broad report on all munis. Lower revenue from income taxes, property taxes and sales taxes is creating major challenges for local governments. To read more, Google “Moody’s Assigns Negative Outlook to U.S. Local Government Sector”. The report itself is $150, but there are plenty of comments and quotes on the Web.

5. The official U.S. unemployment rate was 8.5% in March 2009. This is the headline rate and is designated U-3 by the Bureau of Labor Statistics (BLS). As bad as it is, it leaves out whole categories of workers such as marginally attached workers, discouraged workers, etc. The total unemployment rate including all these other categories is designated U-6, and in March 2009 was at 15.6%. To make matters worse, the figures quoted above are seasonally adjusted. The not seasonally adjusted figures are 9.0% for U-3 and 16.2% for U-6. Seasonal adjustments can be inaccurate and are easy to manipulate. Finally, the government data is often flawed and John Williams of www.shadowstats.com regularly analyzes government data and reports his conclusions to his many subscribers. His latest estimate of the total U.S. unemployment rate in March is 19.8%. Keep in mind that the unemployment rate is a lagging indicator. BLS data can be found at www.bls.gov/news.release.

6. Where is all the money for the bailouts coming from? Here’s what former Treasury Secretary Paul O’Neill said in the documentary I.O.U.S.A.: “The federal government doesn’t have any money that it doesn’t first take from the people.”

7. If you have been investing for some time, you have probably heard of Richard Russell who has been publishing the Dow Theory Letter since 1958! In early April, a tribute dinner was held in California and over 400 showed up from as far away as Europe and South Africa. A veritable “who’s who” of newsletter writers. You may not want to hear what he had to say, but we’ll tell you anyway. “I lived through the Great Depression. I remember people standing in bread lines. It was hard to get a job, any job, back then. But now, you see restaurants are still full. People are still spending money. They may be worried and they are beginning to save, but there’s no sense of urgency. And there’s a rally on Wall Street. You know, every bear market produces a rally. You can expect the market to retrace its steps by one- to two-thirds. And every bear market has a surprise. I think the surprise is that this is going to be a lot worse than people expect.”

8. If you want to get your own back on bankers try CRUNCH. According to the New York Times (April 7, 2009), “Inspired by the credit crisis, a new satirical card game in Britain invites players to take the role of banking executives, secretly embezzle their bank’s assets, pay themselves gigantic bonuses and use government bailouts to secure as much personal wealth as possible while ensuring their customers’ trust.” It is set to reach independent toy retailers in the U.S. in July. Its Web site is www.crunchthecardgame.com.

N.B.The above information has been taken from trade and statistical sources which we deem reliable. We do not represent that it is accurate and it should not be relied upon as such. Any opinions expressed herein are not the opinions of High Falls Advisors.

For questions or additional information on this blog entry, please contact us.

Posted on Wednesday, April 8, 2009 - by Henry Walter
Weekly Roundup April 8, 2009
• The Money Market Funds Guarantee Program, originally set to expire on April 30, 2009, has been extended to September 18, 2009, as announced by the Treasury Department.

• While most of the media’s attention has been on the $65 billion Bernie Madoff Ponzi scheme, the SEC has brought charges in more than 75 other such schemes in the past two years.

• A nuclear-powered US Navy submarine, the USS Hartford, collided with another US warship, the USS New Orleans, in the narrow Strait of Hormuz on March 20, 2009. The nuclear-powered sub was severely damaged although the nuclear power plant was not affected at all, according to a Navy spokesman. Something like 40% of all the oil in the world that is shipped by tanker goes through the narrow strait. Don’t be surprised if one of these days there is a major accident choking off the transport of oil and sending oil prices into orbit.

• The average yield to maturity on the Fixed Income Fund at the close of business on March 2, 2009, was 4.29%. About 88% of the fund is invested in synthetic GICs yielding 4.02% and 12% in traditional GICs yielding 6.56%.

• To check on the world population open http://math.berkeley.edu/~galen/popclk.html

• On a longer term basis the exponential growth of the population is likely to put pressure on prices and availability of natural resources. This could lead to many undesirable outcomes like social unrest, wars, epidemics, etc.

• To check out the enormous growth in the U.S. national debt, open www.usdebtclock.org

• While the effect is debatable, it is probably safe to say it is not positive and will lead to inflation, higher interest rates and ultimately to a lower standard of living.

• Here are a couple of interesting ETFs that caught our attention. We recommend neither but will be following them with interest.

• The first is the IQ Hedge Multi-Strategy Tracker ETF (symbol QAI). Its objective is to replicate the returns of several hedge fund styles, including long-short, global macro, market-neutral, event-driven, fixed-income arbitrage, and emerging markets. The fee at 1.09% is high compared to other ETFs, but low compared to the 2-and-20 fee charged by many hedge funds.

• The other is the United States Gasoline Fund (symbol UGA) which directly tracks gasoline prices. So if you want to protect yourself against another surge in gasoline prices, this ETF could be for you.

The criteria for membership in the Standard & Poor’s Dividend Aristocrats Index is that payouts have increased each year for at least 25 years and the company is in the S&P 500. The number meeting the criteria peaked at 64 in 2001, and last year there were 52. With major companies like GE, Gannett, Pfizer, U.S. Bancorp and State Street dropping out, there is a danger the number will fall below 40 for the first time since 1992. S&P has indicated that to keep 40 companies they would lower the requirement for annual dividend increases to 20 years or fewer. The index is used as a basis for a number of dividend ETFs.*

*You should consider a fund’s investment objectives, risks, and charges and expenses carefully before you invest. The fund’s prospectus contains this and other information about the fund, and should be read carefully before investing.

For questions or additional information on this blog entry, please contact us.

Posted on Tuesday, April 7, 2009 - by Henry Walter
Target-Date Funds - Oversold?
Participants in 401(k) and similar plans have significantly increased their investments in target-date funds for a number of reasons. They are simple and offer one-stop shopping. But a major reason is that employers have encouraged them to do so since the Department of Labor added target-date funds to the short list of approved default investments. From 2007 to 2008, the share of plan sponsors using money market funds or stable-value funds as their default option dropped to 19% from 35%, while the share of plans using target-date funds as their default jumped from 35% to 53%. (Source: Greenwich Associates’ “U.S. Defined Contribution Pension Plan Research Study”.) Kodak’s SIP uses target-date funds as their default, the one closest to the participant’s 65th birthday.

At last count there were over 260 target-date funds sold by 34 mutual funds, and during the recent bull market few questions were asked about the safety and risks associated with these funds, and their suitability for inexperienced investors. But now that we are in a severe downturn, and the funds have suffered large losses, many are questioning their basic structure and allocations, and whether they were oversold to unsophisticated investors saving for their retirement.

The issues, which we will describe briefly below, are judged important enough that Congress will hold hearings and likely new regulations and legislation will result. A number of fund families have issued statements defending their strategies, which is to be expected. They can’t exactly say that in hindsight they should have used a different strategy. That would be a recipe for class action law suits from disgruntled investors.

Here are some of the issues.

1. Target-date funds are attractive products for mutual fund companies. Not only do they generate fees and commissions, but investors tend to stay “in house” regardless of the sometimes high fees and poor performance of individual funds in the portfolio. As a result, there is an incentive for funds to adopt a more aggressive strategy to crank up performance and attract sponsors and investors. This strategy backfires in a long, drawn-out bear market such as we are in today. Stock allocations vary widely. For example, according to Morningstar, there are about thirty 2010 retirement funds. In 2008, the best fund lost 3.5%; the worst fund lost 41.3%. Quite a range for funds with only one year to normal retirement (www.http//morningstar.com).

2. The funds are inflexible. But one-size does not necessarily fit all. Even investors of similar age have different goals, risk tolerance and financial resources.

3. Buy and forget can be dangerous. Putting your savings plan on automatic pilot gives a false sense of security. Whatever arrangements you make to manage your money, you need to stay involved. Even if you don’t do it yourself, you should understand the strategy. Target-date funds encourage lack of attention.

4. Target-date funds may be the way to go for some investors. It is better to utilize an imperfect vehicle than not plan for retirement at all.*

If you have investable assets outside your S.I.P. Plan, take a look at the so-called Lazy Portfolios (just Google Lazy Portfolios). Don’t be put off by the name. Most of the portfolios are designed by prominent and successful portfolio managers, such as David Swensen at Yale, and utilize Vanguard funds. We will post an article on Lazy Portfolios in the near future.

*You should consider a fund’s investment objectives, risks, and charges and expenses carefully before you invest. The fund’s prospectus contains this and other information about the fund, and should be read carefully before investing.

For questions or additional information on this blog entry, please contact us.