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Posted on Thursday, January 21, 2010 - by Henry Walter
January 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. - Review of 2009
- Review of the Decade
- Forecast for 2010
- What to watch for
- Steady Savers come out ahead
REVIEW OF 2009
After a precipitous fall in the first two months of the year, the market made a stunning comeback, and finished with its best annual gain since 2003.
Specifically, the S&P 500 was up 23% for the year, after rallying 65% from its March 9th lows. The chart below graphically shows the path. The other major indexes followed a similar pattern with the Dow Industrials up 19%, the NASDAQ Composite up 24%, and the Russell 2000 up 25%.
Foreign markets performed even better with the Europe, Australia, and Far East (EAFE) index up 28%. But the real action was in the developing markets with Russia (RSX) gaining 138%, Brazil 83%, India 81% and China 80%. Note these are all the so-called BRIC countries. To illustrate, below is a chart of China’s Shanghai Composite.
REVIEW OF THE DECADE
The 2000s were not a good decade for most investors. On the chart below you can see that the S&P 500 (SPX) closed well below where it started in January 2000. The annualized return over the ten years was -0.7%. However, investors in commodities like gold and oil did very well.
The following chart shows the performance of the Dow by decade, and you will note that the performance in the 2000s was the worst since the 1930s. By some measures, the performance in the 2000s was the worst since records were kept. Adjusted for inflation it is the worst, because inflation in the 2000s was positive, while deflation reigned during the 1930s. According to Charles Jones, finance professor at North Carolina State University, adjusted for inflation, during the 1930s, the average annual gain of the S&P 500 was 1.8%, while during the 2000s the S&P 500 lost 3.3% per year on average. (Source: “Investors Hope the ‘10s beat the’00s” by Tom Lauricella, Wall Street Journal, December 21, 2009.
Mutual fund investors might be interested to know that the best fund of the decade was Ken Heebner’s very volatile CGM Focus, while Fairholme, one of the writer’s favorites, was 5th.
FORECAST FOR 2010
There is a temptation for those who write investment columns to issue a forecast for the New Year. Maybe they think that if they nail it they will become famous! Any way, we resisted the temptation and will rely on Kopin Tan, who writes the Trader column for Barron’s, for some insight. In the December 28th issue, (Stocks Hit ’09 High and a Critical Milestone) he reported that he found three striking things as he plowed through thousands of pages of Market Outlooks issued by Wall Street firms.
The first observation that struck him was how quickly a consensus has formed that 2010 will get off to a strong start but a feeble finish. Those with a contrary persuasion take note.
The second striking thing was the range of divergent, fierce forecasts for both inflation and deflation. Tan’s comment, “But if the masochistic market exists to thwart the greatest number of people, perhaps neither inflation nor deflation will burgeon in 2010.”
And his third striking thing was how many people like gold. Again, contrarians take note.
So we don’t disappoint those who like hard number, below is a table put together by the Bespoke Investment Group. It is updated from time to time, so check in at www.bespokeinvest.typepad.com.
WHAT TO WATCH FOR
Rising interest rates generally have a negative effect on fixed-income investments like bonds, bond funds, and other securities that pay a fixed amount of interest. Rising interest rates also make it more expensive for individuals and corporations to borrow. At the beginning of 2009, the 10-year Treasury note, as shown below, yielded 2.21%. At the end of the year it was 3.84%. A significant and sustained move above 4.0% could be troublesome.
Similarly for the price of oil. The U.S. no longer drives the price of oil, all the growth in demand comes from the developing countries. The rapidly growing middle classes in China, India, and other developing countries want to enjoy the same standard of living enjoyed in the West. Here are some numbers that show the potential demand for oil. Automobiles per 1000 population: USA 765, Taiwan 200-300, Indonesia 21, China 17, India 12. We show Taiwan because it is culturally similar to China. If oil prices continue to rise, as predicted by many economists, it could dampen global economic growth or even abort the recovery.
It is a good idea to keep an eye on gold prices as shown below. An increase to new highs tells a lot about global investors’ confidence or rather lack of confidence in fiat money, and the ability of policy-makers to manage the global economy.
There are a host of other things to worry about such as the second wave of mortgage defaults likely in 2010 and 2011, unemployment, commercial real estate, to name a few.
STEADY SAVERS COME OUT AHEAD
The chart below was prepared by Vanguard and included in an article by Ron Lieber (“For Savers it Was Hardly a Lost Decade” in the January 2, 2010 issue of the New York Times. It demonstrates that making regular contributions and rebalancing annually can produce good results even in a poor decade. But most of the gains came from contributions, you may ask? Yes, but think about the great results this approach would deliver in a good decade like the 1990s. For the full story Google “Steady savers still come out ahead by Ron Lieber, New York Times”.
In the decade ahead there will undoubtedly be a multitude of crises, but also many opportunities for those that don’t slavishly follow the crowd, are flexible, and think for themselves.
We wish all our readers a happy, healthy and prosperous New Year.
For questions or additional information on this blog entry, please contact us.
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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.
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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.
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