Posted on Tuesday, April 21, 2009 - by Henry Walter
Weekly Roundup, April 21, 2009
1. The Dow just completed the best six consecutive weeks since 1938, regaining the 8000 level, and is up 26% from the March 9, 2009 low. Year-to-date the market is still down with some exceptions. As of the close April 17, the Dow was -7.3%, the S&P 500 -3.7%, NASDAQ Comp +6.1%, the Russell 2000 (small stocks) -4.0%. 1

2. Overseas, the larger markets in Europe are down year-to-date, but Israel is +21.2% and Sweden +15.6%. In South America, Brazil, a component of BRIC (Brazil, Russia, India and China) is +21.9% and Venezuela +25.7%. Asia continues to be the strongest region with China +37.5%, India +14.3%, South Korea + 18.2% and Taiwan + 25.4%. 2

3. How’s business? Well Ben Bernanke has seen ‘green shoots’ and President Obama ‘glimmers of hope’ supposedly indicating that the pace of economic declines is leveling off. Last week the Federal Reserve released its beige book which describes the economic landscape in the Fed’s 12 districts. While the reports described continuing economic woes in all districts, in 5 of the 12, the downward slide was described as slowing. The beige book is notoriously optimistic, perhaps because the president of each district is well aware of the old adage, “The truth will set you free and may put you on unemployment”. We should also note that “hope” is not generally considered a viable investment strategy. One particularly disturbing report was that capacity utilization fell in March, to 69.3%, the lowest level in the 42 years the government has been keeping track. Over in China, the economy grew 6.1% in the first quarter, the worst quarter in nearly two decades, although there is some question as to whether China is fudging the data.

4. There seems to be a renewed interest in bonds, and SIP participants have a wide range of choices, probably too wide. In Tier II you have the Barclays Aggregate Bond Index Fund. It invests in investment-grade bonds but unlike a money market fund its price and yield will fluctuate. In Tier III there are at least 12 bond categories, not counting munis. Here are some of the categories that may be of interest: Intermediate-term bonds, short-term bonds, multi-sector bonds, and the more speculative high yield bonds and emerging markets bonds. Outside SIP you can invest in bonds through ETFs. Currently there are at least 58 choices. Google “Bond ETFs” to see the list. 3

5. Here are some of the things to consider when picking a bond fund. First is credit quality. You probably will want to stick to investment grade bond funds. Second would be the expense ratio. As Jack Bogle, founder of Vanguard, and others have pointed out repeatedly, low expenses are critical for long-term performance in a bond fund. It is hard to beat the Vanguard funds for low, low fees. Third is duration, which measures the sensitivity of bonds to interest rate movements. Quoted in years, it is the approximate percentage by which the value of a bond or bond fund will fall for a 1% per annum increase in market interest rates. For example, if a bond fund has a duration of 7, the price of the fund would fall approximately 7% if interest rates increase by 1 %. Similarly, the fund would rise 7% if interest rates fall by 1%. Finally one needs to consider the diversification of a bond fund. Some bond funds have heavy weightings in financial bonds which may not be desirable in terms of risk control. As a starting point, you may want to stick with Vanguard bond funds or their equivalent ETFs. Since the avowed objective of the Fed is to re-inflate the economy, you may also want to keep your duration low. Talk to your financial adviser but realize that not all financial advisers are knowledgeable about bonds. 4

6. Oil inventories just hit an all-time high which is keeping oil prices down, at least in the short-term. As a result, oil companies around the world are making substantial reductions in their budgets for exploration, drilling and just about every other aspects of the energy business. When the global economy recovers there is likely to be a shortage of oil, and if that is the case, prices for oil and oil stocks will spike again.

7. The battle between inflation and deflation continues and no one knows how it will end, although every one has an opinion. Former Fed chairman Paul Volcker was appointed by President Obama to chair the president’s Economic Recovery Advisory Board which has yet to meet. According to a report in the Wall Street Journal, “Paul was surprised at the failure to consult him, particularly on issues of financial rescue after his dominant role in resolving financial crises in the 1980s, says one person who has spoken to Mr. Volcker recently.” And Allan Meltzer, the Fed historian and professor of political economy at Carnegie Mellon says the current rescue efforts will end in tears. Inflation “will get higher than it was in the 1970s” he says.[Unclear?]

8. In spite of the title, this book is worth reading: The Ultimate Survival Guide: Protect Your Savings, Boost Your Income, and Grow Wealthy Even in the Worst of Times, by Martin D. Weiss (Amazon $15.37). Published on April 6, 2009, it is already #1 on Amazon’s Investing, Management & Leadership and Personal Finance categories. Overall it is #11. Thus far 11 customers have reviewed the book, and all 11 gave the book 5 stars. Check out the reviews at www.amazon.com.

9. All eyes are on the consumer. Frugality is in, frivolity out. Spending is down and savings up to as much as 5% of income. Savings were actually negative a few years ago. None of this is surprising given that consumers are spooked by the financial crisis, foreclosures and job losses, either actual or feared. Of course the austerity does not help the economy, something economists call the Paradox of Thrift. There are dozens of web sites springing up to help consumers become more frugal. Here are a few: www.stretcher.com, www.allthingsfrugal.com, and www.frugalmom.net.

10. On tax day (April 15) there were more than 750 Tax Day Tea Parties to protest government spending and high taxes, and just to have a good time. We liked the sign seen at a tea party in Annapolis, “Bring back the Brits – they taxed us less!”

11. The case of the orphaned month. Goldman Sachs lost a lot of money in December 2008. But that loss was not included in the results for the last quarter of 2008 or the first quarter of 2009, making Goldman’s results look better than they were and paving the way for a $5 billion sale of new stock. According to the Washington Post (April 15, 2009) the firm was required to shift to a calendar year as a result of its decision in September to become a bank holding company. Previously, its fiscal year ended in November. How convenient.

12. According to Morningstar, mutual fund expense ratios were flat to slightly lower in 2008, but are likely to be higher in 2009. It is not that fund managements are raising fees, rather mutual fund assets are down sharply from the beginning of 2008, and there are automatic breakpoints in the fee structure for many funds. For example, a management fee might be 70 Basis Points (BP) for the first billion, 65 BP for $1 billion to $5 billion and 60 BP for all sums above that. So as assets decline, higher fees apply to a greater proportion of the total assets of the fund. For instances, the Vanguard U.S. Value (VUVLX) recently saw a 9 BP hike in fees to 0.46%. 5

1. Past performance is not a guarantee of future return. The above referenced indexes are unmanaged and cannot be invested in.

2. Past performance is not a guarantee of future return. Risks of foreign investment include currency fluctuations, economic, political or social instability. These risks may be significantly higher in emerging markets.

3. The information provided is not specific financial advice or a recommendation to buy or sell. We must review your profile, needs and accounts specifically to determine what is right for you.

4. You should consider an Exchange Traded Fund’s investment objectives, risks, 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. A prospectus may be obtained from your adviser or from the fund company directly.

5, 6. 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. A copy of the prospectus can be obtained from the fund company directly.

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 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.