High Falls Advisors, LLC -- (585) 935-5300

Posted on Friday, December 11, 2009 - by Henry Walter December Roundup Please Note: The below 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 reflect our judgment at this date and are subject to change. 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. MORNINGSTAR'S NEW CORPORATE CREDIT RATINGS Morningstar just announced in December the launch of their corporate credit ratings. This is a welcome addition at a time when traditional rating agencies have been under fire for failing to flag risks of securities that contributed to the global financial crisis. Even if you are not a bond investor, the ratings provide valuable information about the financial health of a company for equity investors. In particular, the “Distance to Default” score could act as a red flag – see below. Morningstar started with ratings on 100 companies, and they will be adding companies in the coming months with an objective of covering 1000 companies within six months. The ratings are free and will appear on both the stock and bond pages. In the first 100, only three made triple-A, Exxon Mobil, Johnson & Johnson and Microsoft, followed by two receiving the next highest rating of AA+, Becton, Dickinson and Bristol-Myers Squibb. The ratings are “issuer ratings”; they apply to the corporate issuer not to any specific bond. We like Morningstar’s approach, their methodology and transparency. For each company, Morningstar calculates four separate scores: Business Risk Score – Assessment of a firm’s Economic Moat and other inherent business characteristics. Cash Flow Cushion – Compares Morningstar’s projection of future cash flow to debt and other financial commitments. Solvency Score – Ratios of current financial performance that have shown a tendency to predict default before it actually occurs. Distance to Default – A metric using option-pricing theory to appraise the risk that a firm’s assets will turn out to be worth less than its liabilities. For example, the following have been given a “Very Poor” Distance to Default Score thus far: Temple-Inland (TIN), Time Warner Cable (TWC), and Western Refining (WNR). Click here for more information YEAR-END TRANSACTIONS With only four weeks remaining in 2009, it’s a good idea to review your financial situation so that you can make year-end adjustments if necessary. Fortunately, those of us who are required to take a required minimum distribution (RMD) do not have to worry this year (2009) as the requirement was suspended for 2009 only. It is a little more complicated if you just turned 70 ½, so talk to your financial professional. You can harvest tax losses through December 31st. There are a number of ways to do this which we covered last year, see our November 30, 2008 article. You may also be able to pick up bargains as other investors dump stocks to harvest their own tax losses. BANK FAILURES Thus far in 2009, the FDIC has seized and sold 128 banks, and analysts expect hundreds more to collapse in the months ahead. In the third quarter the number of “problem banks” that run the biggest risk of collapse was 552, up from 416 in the second quarter. While the standard FDIC insurance limit of $250,000 per depositor will continue until Dec. 31, 2013, collapse of banks is not good news. Not only is it a reflection on the state of the economy but recovering funds from a failed bank is not as easy as it sounds. Also, the FDIC’s Deposit Insurance Fund, which is used to protect depositors, swung to an $8.2 billion loss in the third quarter. Another candidate for a bailout by Washington! EXCHANGE TRADED FUNDS (ETFs) Morningstar has been busy. In addition to their new bond rating service they have created the ETF Analyst Picks list as a complement to their widely used Fund Analysts’ list which covers mutual funds. ETFs have become very popular with investors, but there are currently more than 900 different ETFs and ETNs, so finding the best funds to meet one’s basic investing needs can be overwhelming. Morningstar’s ETF research team has created a list of 35 ETFs and ETNs as their preferred list of funds across a variety of size, style, geographic, and sector equity themes, and the list also includes fixed-income and commodity broad asset classes. Factors considered include expenses, index construction, liquidity and diversification. Since there is no magic formula as to how these factors should be prioritized, the final selection is qualitative. We found the comments section very helpful to provide additional insight as to why a particular ETF was on the list. As an example, SPY is great if you need to trade $20 million on a moment’s notice, but IVV may be a better choice for retail investors. It is a newer product and doesn’t have some of the structural defects of SPY that cause it to lag the S&P 500 returns. The difference is slight, but over many years every basis point counts. These are not “buy” recommendations or a model portfolio but a list to highlight the best available options across a variety of categories. The list does not include funds that use sophisticated strategies. ETF Analyst Picks are free to premium members. You can have access to them and other features of premium membership by taking a free, 14-day trial membership. This is not a promotion, we are simply providing information. ALTERNATIVES TO SHORT-TERM TREASURIES, SHORT-TERM CERTIFICATES OF DEPOSIT, AND MONEY MARKET ACCOUNTS By cutting the federal funds rate to a range of zero to 0.25%, the Fed has made it difficult for investors to earn a decent return on their money from these relatively safe, cash-like investments. Kodak employees and retirees who remained in SIP are fortunate to be able to invest in the Fixed Income Fund with an underlying yield as of November 2 of 4.50%. But even those with funds in SIP, have other funds outside SIP looking for a decent return. Here are a couple of recent articles in Barron’s with suggestions on alternatives. You can access the articles via the Internet. The first article appeared in Barron’s on November 23, 2009, pages 27- 30, titled 10 for the Money - Stocks that pay good dividends can ease one of retirees’ biggest fears – that they’ll outlive their investments. The article includes two tables. Best Bets lists 10 companies with strong businesses, solid prospects, reasonably priced stocks and substantial dividends that look safe for the long haul. Lots of Bench Strength lists the 10 stocks on Barron’s second team which share many of the virtues of the top picks and could easily sub for any equivalent issue among the top 10. We particularly like the fact that each table includes the cover ratio, an important metric. To access, Google 10 for the Money. When you open up the article, you’ll have to click on the links in the text to see the tables. The second article appeared in Barron’s on December 7, 2009, pages 27-30, titled Even Better than Bonds - Investments like utility stocks and convertibles offer fat yields and a bulwark against rising rates or inflation. (Caution - the subtitle may exaggerates the benefits.) The December 7th issue of Barron’s is still on the newsstands. The article covers some of the writer’s favorite investment vehicles like preferred stocks and Master Limited Partnership. This is a great opportunity to educate yourself and improve your knowledge of what is available in terms of income producing securities. To access on the Internet, Google the title. While the investments described in the two articles provide attractive returns, they are not stable-value or risk-free. If companies run into trouble, they can reduce or eliminate dividends and distributions. Higher interest rates generally have a negative effect on income-producing securities. And if we get a double-dip or a depression, all bets are off. NEW RULES FOR ROTH IRAs According to the 2009 Investment Company Fact Book, at the end of 2008 over $3.5 Trillion was invested in traditional IRAs and only $165 Billion in Roth IRAs. The main reason is that higher income investors were ineligible due to income limits. As of January 2010, the IRS income ceiling for Roth conversions disappears. We mention this to alert you to the change. Higher income investors may want to consider converting, and even investors who were eligible in prior years may want to reconsider. We will be covering this topic in future issue, in the meantime talk to your financial professional. If you have read this far, please drop us a note with you comments and suggestions on how we can make the Roundups more useful. In particular, would you like to see more charts and tables similar to those in the November Roundup? Please send your comments to sip@frontiernet.net PS. If you are interested in energy or geopolitics, you may find the chart below of interest. For questions or additional information on this blog entry, please contact us.

Posted on Friday, November 6, 2009 - by Henry Walter November Roundup Please Note: The below 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 reflect our judgment at this date and are subject to change. 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. This month we show some charts and tables we hope you will find of interest. 1. This chart shows the market’s “lost decade”. We have also superimposed a 15-month simple moving average (SMA) on the data. Notice how it keeps one on the right side of the market. Currently, the monthly closes are above the SMA, which is positive. Most investors don’t have the patience to utilize this kind of approach. 2. Note duration and magnitude of the current rally now exceeds any bear market rallies during the Great Depression, leading some to conclude we are in a new bull market. 3. Household liabilities are still high on a historical basis, not a good omen for the stock market. 4. Despite popular belief to the contrary, we have yet to see the worst of foreclosures. (original source Credit Suisse.) 5. Note that global earnings are expected to grow 15.1% in 2010. Emerging markets and Asia will do better, the U.S. and Europe worse, all according to Merrill Lynch. 6. No surprises. Emerging markets and Asia is where the action will be per Goldman Sachs. 7. Population by country. Did you know Indonesia is 4th? Some of the others may surprise you too. Pitcairn Island, where Fletcher Christian landed, has the smallest population at 50. 8. A shortage is looming – again. Demand is picking up especially in Asia, while new discoveries are unlikely to offset the natural depletion at existing oil fields. Some “experts” predict oil at $125/barrel in 2010. 9. Until recently, some advisors were telling their clients that gold was a ‘barbaric relic” to be avoided, while they added gold investments to their personal portfolios. 10. Gold bugs love to point out that the current inflation-adjusted price of gold is way below the price in 1980. Source: Common Wisdom 10/31/09. 11. Planning a trip overseas? It will cost you as a result of the weak dollar. 12. This chart plots the interest rate on the 10-year Treasury note. (Place a decimal point between the two numbers.) When the Fed ends quantitative easing and other tricks, interest rates are likely to rise, so keep your duration low. If we have another depression, all bets are off. For questions or additional information on this blog entry, please contact us.

Posted on Friday, October 23, 2009 - by Henry Walter October 2009 Roundup Please note – 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. 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. OUTLOOK Secretary of the Treasury Tim Geithner says the signs of recovery are “stronger” than expected. If this was truly the case, why are the White House and Congress falling over themselves to introduce new and expand existing stimuli to spend taxpayer’s money and further bankrupt the nation? We don’t know, but maybe it has something to do with the upcoming election in 2010. The automobile “cash for clunkers” program did boost sales while it was in effect, but as soon as it expired sales dropped like a lead balloon-- indicating to some the higher sales were simply borrowed from the future. In November, the housing purchase tax credit will expire and we will see what happens, although it looks like Congress is ready to extend it and even make it more generous. On the business side, most of the programs simply prevented healthy change by supporting zombie banks and corporations. Currently, investors are enjoying the ride but are becoming concerned that the ongoing rally has run too far, too fast, and may be due for a correction. What is driving the rally? Possibly the tidal wave of excess liquidity washing into stock markets as central banks around the world are flooding their economies with money. Or it could be that we have seen the bottom and economic growth is expanding. Or it could be both, or some other forces. Second quarter earnings reports were better than expected, principally due to cost cutting. But now most companies are down to the bone and will have to find other ways to improve results, like increasing revenue. So the next few weeks of earnings reports will be key. If we can get through the third quarter reports without major upsets, we may enjoy the usual seasonal strength towards the end of the year. Don’t count on it; that’s a big if. Investment performance depends to a large extent on investors’ entry and exit points. Tactically, the rally provides an opportunity for investors to reduce risk in their portfolio by taking some chips off the table, and/or shifting from risky assets to less risky assets. What ever you do, don’t become complacent. Short-term the environment for investors may seem to be improving, but longer-term the U.S. faces major problems and the experts tell us most of the growth going forward will be in Asia. STABLE VALUE FUNDS Kodak employees and retirees have large stakes in the Fixed Income Fund, on average approximately 70% of their SIP balances, compared to only 20% for the average participant in a 401(k) plan with the stable value option. As a result, SIP participants are extremely interested in the safety of the fund and we have written on this subject frequently (see bulletins on Oct. 22, 2008, April 3, 2009, and May 5 and 27, 2009). Michael Markov, head of Markov Processes International LLC, which offers quantitative investment tools and technologies, principally to institutional investors, has written some interesting pieces on stable value funds on his blog ( March 5th, 2009). http://5minforecast.agorafinancial.com/: “In all recent cases of alleged fraud including Madoff, Stanford and WG Trading, investors were looking for stable positive returns and were willing to take risks and invest in investment products with no protection and no transparency. Stable Value funds, while providing very similar smooth positive returns, are legitimate registered products but investors have to understand that they carry certain risks. Unlike money market funds, SVF invest in longer-term high grade bonds and, therefore, are exposed to interest rate and credit risk. At the same time, these risks are not visible to investors because SVF are priced at book value rather than market value which allow them to report such stable positive returns. Principal and accrued interest is guaranteed by a number of insurance-wrapper contracts with multiple insurers, AIG included. As of today, almost 20% of all DC assets (defined contributions) or over $400 billion is invested in SVF." To read more on this topic Google “MPI Blog Stable Value a free lunch?” INDEX or ACTIVELY-MANAGED FUNDS It is well known that most actively managed funds lag their comparable index funds over time. A new study by Morningstar further twists the knife. Active management funds suffer even more by comparison on a risk-adjusted basis. Over the past three years, about half of actively-managed funds outperform their respective Morningstar style indexes, but only 37% did on a risk-, size-, and style-adjusted basis. The number is similar for five- and 10-year returns. To read more, check out the Morningstar web site or Google “Active Managers Fail on Performance, Risk”. CHINA According to the IMF’s World Economic Outlook, China could be the world’s second biggest economy as soon as 2010, and the world’s largest in as little as twenty years. China is growing at around 8-9% a year as Japan, currently the world’s second largest economy, will be lucky to grow much faster than 1.7%. Researchers at the Nomura Institute of Capital Market Research estimate that China will pass the U.S. sometime between 2026-2039, depending on the Yuan appreciation. You may recall that 20 years ago every broker was convinced that Japan would be the world’s economic powerhouse, so it pays to be skeptical. In 1988, eight of the world’s ten biggest companies were Japanese, today there are none. The biggest, Toyota, is 22nd. DIVIDENDS While dividend cuts are becoming less common, increases are hard to come by. According to Jim Nelson's blog ( on Agora Financial), "active income investors should look to where the least number of cuts are occurring. And more importantly, which sectors are the few increases coming from?" His conclusion, based on his own research, is that consumer staples, industrials and utilities are the three sectors still increasing their dividends consistently. Financials is a sector to stay away from. OUT OF FAVOR In the July 2009 Roundup we covered the opportunitis in natural gas stocks with some additional comments in the August 2009 Roundup. In a nutshell, industrial demand, which usually represents 35-40% of total demand, fell precipitously as the recession took hold, and supply increased at a rate much higher than in the past, due to new discoveries and improved technology. The combination caused the price of natural gas and natural gas stocks to crater. Already, with winter approaching and industry recovering, albeit slowly, the price of natural gas is up approximately 40%, and all the stocks we mentioned in July have recovered nicely. Industrial energy users are swapping out of relatively high priced oil to relatively low priced natural gas. We still believe there is much more to go on the upside, provided the economy cooperates. OUR THREE BOMBS Thomas L. Friedman, in an OpEd in the October 7 New York Times notes that as a 56-year-old baby boomer, "We grew up in the shadow of just one bomb--the nuclear bomb." He continues, "Today's youth are growing up in the shadow of three bombs--any one of which could go off at any time and set in motion a truly nonlinear, radical change in the trajectory of their lives." The nuclear threat is still with us but can now be delivered by all kinds of states or terrorists, including suicidal jihadists. At least in the cold war the threat was from one seemingly rational enemy, the Soviet Union. "But there are now two other bombs our children have hanging over them: the debt bomb and the climate bomb." To read the complete article, Google "Our Three Bombs." GOLD We commented on gold in the last Roundup, but buying it over $1,000 makes us nervous. So we will take the easy way out and quote an expert. Sean Brodrick of Uncommon Wisdom gives four reasons to buy gold now: Investor demand is strengthening as central banks have cranked up the printing presses and produced a mountain of paper currencies destined to steadily lose value. Gold is one form of money that can't be printed and is universally viewed as an alternative to paper currencies. Central banks are buying. For a decade they have been sellers, but have now turned into net buyers. A big gap is developing in production as exploration budgets dropped by 40%, according to Canada's Metals economic Group. Gold is still cheap. Adjusted for inflation it has a long way to go to match 1980 prices. And don’t forget silver, it might do even better than gold. We expect a sharp sell off one of these days, maybe in conjunction with a correction in the stock market, so patience may be a virtue. MORE BAILOUTS? Here are three organizations that will probably go to the Treasury very soon with hat in hand: FDIC – Its reserve fund will soon be depleted. FHA – It is on the same path as Freddie Mac and Sallie Mae. GM and Chrysler – will need additional funds to make it. For questions or additional information on this blog entry, please contact us.

Blog Archive

September, 2010 (1 entry)

Wednesday, September 1, 2010
August 2010 Notes

August, 2010 (1 entry)

July, 2010 (2 entries)

June, 2010 (2 entries)

May, 2010 (2 entries)

April, 2010 (2 entries)