Posted on Monday, May 18, 2009 - by Henry Walter
May 2009 Roundup
1. The new title reflects the fact that starting this month we will be posting only one article each month. If there are important developments in the financial arena, particularly if they affect SIP, we will cover them in special postings as required. The views and opinions expressed in this article are those of the writer and do not necessarily reflect the views and opinions of High Falls Advisors, LLC.

2. Hopefully you are feeling a little better about your SIP or retirement portfolio after the explosive rise in the stock market since March 9. On March 9, you may recall, the market was off about 25% year-to-date and more than 50% since the high in 2007. As we write (May 10), the market is up for the year with the exception of the Dow at -2.3%. Elsewhere, the S&P 500 is +2.9%, NASDAQ +10.3%, Russell 2000 +2.5%, the World (EAFE) +2.3%, DJ Americas (which includes Latin America) +6.7%, Europe (DJ Stoxx 600) +6.4%, and DJ Asia-Pacific +7.5%, with China up 44.2%. The problem we all have is deciding whether this is a suckers’ rally, or the start of a new bull market. So far the current rally is smaller in duration and magnitude than the average rally during the bear market from 1929-1932. It is also worth noting that the resurgence in the S&P 500 has been driven so far by three sectors, consumer discretionary, materials and technology, with a fourth, financials, kicking in recently. Also, the lowest quality and most speculative stocks are rising the most.

3. When it comes to forecasting the economy and stock market, you have plenty of choices, as always. Fed chairman Bernanke is telling Congress that recovery is ahead and housing near a bottom. Ever optimistic Abby Joseph Cohen of Goldman Sachs sees the S&P 500 gaining at least 20% in 2009, and Bill Miller of Legg Mason is similarly bullish. On the other hand, Nassim Nicholas Taleb, author of the “Black Swan”, told a recent conference in Singapore, “This is the most difficult period of humanity that we’re going through today because governments have no control”, according to Bloomberg. And New York University professor Nouriel Roubini, who predicted the crisis, told Bloomberg News that analysts expecting the U.S. economy to rebound in the third and fourth quarter were “too optimistic. Certainly the rate of economic contraction is slowing down from the freefall of the last two quarters (but) we are going to have negative growth to the end of the year, and next year the recovery is going to be weak.” Finally, Jim Stack, proprietor of InvesTech Research headquartered in beautiful Whitefish, Montana, just raise his equity allocation from 60% to 80%. P.S. He’s usually right.

4. The financial news last week was dominated by results from the Fed’s bank stress test. It appears that the Fed caved. As an example, on Monday of last week, Citigroup’s shortfall was set at $35 billion. By Thursday the final number was $5.5 billion, raising questions about the credibility of the whole process, according to the Wall Street Journal. Initially investors liked the results driving the KBW Bank ETF (KBE) up 35% for the week. A better way to judge the health of the banking industry, according to Alan Abelson in Barron’s (May 11, 2009), is to look at the data gathered by Institutional Risk Analytics, which is free of government spin. On a regular basis they run their own stress tests on 7,600 small, medium, and large banks, and compile an index. The benchmark equals 1 set in 1995. At the end of 2008, the index stood at 1.8, and at the end of the first quarter, 2009, at 5.57. Their latest report goes on to comment that it’s “pretty clear that the condition of the U.S. banking industry is continuing to deteriorate, and we are still several quarters away from the peak in realized losses for most banks.” Don’t worry, however, the government is here to save us.

5. It seems like there are two types of equity investors today, those who want a pullback so they can get in, and those who are already in and want the rally to continue ad infinitum. And then there is a third type, like your writer, who is partially in. What should they wish for? Also, you have the money managers who have to put up good numbers in 2009 after a dismal 2008, to make their bonuses or keep their jobs. There is an old Wall Street adage, which we certainly are not recommending you follow, to the effect that when in doubt, wait it out. At any rate, there are a lot of anxious buyers out there fearful that they have missed the train, but with some bad news they could disappear rapidly.

6. According to Standard & Poor’s Index Services, between 2004 and 2008, the S&P 500 outperformed 71% of actively managed large-cap funds. In addition, the S&P MidCap 400 Index outperformed 76% of mid-cap funds, and the S&P SmallCap 600 Index outperformed 86% of small-cap funds. Critics maintain that there are serious flaws in S&P’s methodology, but we’ll leave that to the statisticians to sort out.

7. Robert Reynolds, president and CEO of Boston-based Putnam Investments, is in Washington to ‘help’ Congress revamp the 401(k) industry after several trillion dollars of retirement assets have been destroyed by the market meltdown. Keep in mind that Mr. Reynolds and the industry will be pushing their own agenda, not your agenda. It is too bad the industry did not do something before the meltdown. Some of you may remember the four Putnam funds that used to be part of SIP and crashed and burned in 2000. Well, they crashed and burned again in 2008. The worst performer, the Putnam OTC Emerging Growth Fund, was finally discontinued at the end of 2008.

8. Gold bugs were delighted to hear that China’s gold reserves now total 1,054 metric tons, up from 600 in 2003, or a 76% increase in five years. Here are the top holders of gold (at least those reporting) with the percent of reserves in parenthesis: USA 8,133 metric tons (78.9%), Germany 3,412 (71.5%), IMF 3,217, France 2,487 (72.6%), Italy 2,452 (66.5%), GLD, a gold ETF, 1,104, China 1,054 (1.6%), Switzerland 1,040 (41.1%), and Japan 765 (2.2%). Those who are bullish on gold point out that China and Japan have a long way to go to bring their reserves up to what seems to be normal. Other countries with low reserves include Russia and India.

9. The Doug Fabian Lemon List of mutual funds for the period ending 3/31/09 was just released. The concept is fairly simple. To make the list, a fund must under perform its peer group average for the last 12 months and for the last three- and five-year periods. The new list includes 2,337 funds. The 10 largest mutual funds on the list are as follows: Dodge & Cox Stock, American Funds Bond Fund, Fidelity Magellan, Davis New York Venture A, Fidelity Equity-Income, Dodge & Cox Balanced, T. Rowe Price Equity-Income, Franklin Income C, Fidelity Freedom 2010 and Fidelity Investment Grade Bond. Note that Fidelity has four on the list of the largest, and that T. Rowe Price Equity Income, a long-time favorite of participants in Kodak’s SIP, is also on the list.

10. The debt clock is ticking faster than ever. According to Money and Markets, the total tally of the government’s bailout operations and commitments is $14.7 trillion. But only $2.5 trillion has actually been spent or lent so far. Sounds inflationary to us. Meanwhile, in 2008 alone, U.S. households lost $12.8 trillion using Fed data to make the calculation.

11. The ‘crediting rate’ of a stable-value fund like SIP’s Fixed Income Fund is the yield an investor receives. When you buy and sell a stable-value fund you do so at the ‘book’ value, rather than ‘market’ value. The key to assessing the health of a stable-value fund is to look at the market-to-book-value ratio. As we understand it, funds must disclose the ratio in their financial reports at least once per year. The ratio was not in the recently issues 2008 SIP Annual Report, so we called Kodak and asked for the ratio, and are waiting for a response. If anyone has a number please let us know. For more on safety, we recommend you read the following article which appeared in the Wall Street Journal on May 4th, “When Safe Places No Longer Feel So Safe”. Just Google the title.

12. An easy-to-use Morningstar mutual fund rating tool is now available. Currently it is free. It’s hidden, so here is how to reach it. Google ‘Morningstar spy home page’. Click on ‘Spy Homepage’. Choose ‘Spy Selector’ tab. Type ticker in box. Hit ‘Get Score’. Before you do anything else, add the page to your favorites so next time you don’t have to go through this rigmarole again.

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

Posted on Tuesday, May 5, 2009 - by Henry Walter
Stable Value Funds
The ink was hardly dry as we posted an article on April 3rd with the title “How Safe is the Fixed Income Fund? An Update” when new articles appeared in both the Wall Street Journal and Barron’s on stable-value funds.

We think both articles are worth reading if you have a big stake in the Fixed Income Fund. Fund D may be perfectly safe, but you should be aware of some of the issues cropping up in stable-value funds in general. (Frankly, we don’t know how safe the fund is, so we regularly remind participants that all investments entail risk, and that it is unwise to have all your eggs in one basket.) Here is how you can access the articles.

The Wall Street Journal article was in the Friday, April 3rd, 2009 issue, on page C1. The title was “Stable Value? Chrysler Fund Shows Woes Still Lurking”. Either go to your local library or Google the title.

The Barron’s article was in the April 6, 2009 issue, page 26. The title “Don’t Judge This Strategy By Its Name”. You can buy Barron’s at Wegmans and other fine stores or Google the title.

In the past it has been difficult to analyze the Fixed Income Fund because of its lack of transparency. We learned a lot about how stable-value funds operate from these two articles.

We are often asked for alternatives to the Fixed Income Fund, a question difficult to answer, but we did make some suggestions in our posting on October 22, 2008.

Here is a different point of view from Charles Kirk a well-known trader and publisher of The Kirk Report ( www.thekirkreport.com ) .

“I don’t own any stable-value funds because I have never wanted to ‘trust an insurance company’ to stay in business for me to have a good retirement. I use CDs, TIPS, GNMAs, Treasuries and a total bond fund for my core and explore portfolios. Why take excessive risk in the fixed income part of your investment portfolio when your rewards are only a few extra points of return above the safe investments I prefer? I take the risk in the stock market where the upside is unlimited!”

One final note. Investors with most of their money in Fund D since mid-2007 must feel pretty good as they compare their performance (say +5%) to those who invested in a diversified portfolio (maybe -20% or worse). But don’t confuse safety and performance.

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

Posted on Friday, April 24, 2009 - by Katie Tkaczyk
All About Variable Annuities
The Securities and Exchange Commission has published a very helpful discussion of Variable Annuities: what they are and how they work. If you would like to look into them, here is the link: www.sec.gov/investor/pubs/varannty.htm.

If you find you have further questions, please feel free to ask me or Scott Klatt for some explanation. Just click on our contact line, under Advisors. We hope to hear from you.

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