Mamma Mia (the movie) and a recall notice for financial black boxes!
Mamma Mia
The light hearted, musical film Mamma Mia shows the beautiful landscape of Greece and embraces the romantic side its culture. Yes, it’s a fun movie and Greece is a beautiful country. On the other hand, it is a small country of approximately 11 million people; however, you would think it was a major economic power based upon its impact on world stock markets. Not only has the Greek government spent well in excess of its tax collections, the Wall Street Journal reported today that a recent World Bank study ranks Greece as one of the most business unfriendly countries in the world. Its ranking is below Egypt, Zambia, Rwanda and Kazakhstan.
The combination of rich, unsustainable benefits for (unionized) government employees and a hostile business environment is deadly. You cannot offer what some consider luxurious employee and retiree benefits and then take a hostile approach with businesses. Basically, the Greek economic model actually is killing the golden goose (businesses) that it expects to continue to lay golden eggs (income taxes).
The riots in Greece are similar to a child’s tantrum. When Greeks are faced with the need for fiscal discipline, they reject being told no and throw a tantrum. As parents, we all know what happens if you continually give in to tantrums, you get a spoiled child who may grow up to be a juvenile delinquent and who faces even bigger problems as an adult dependent on others to take care of him or her.
Bottom line, Germany or other members of the EU cannot bail out every European country that gets in financial trouble. Thus, drastic steps need to be taken now. Greece defaulting on its debt is not financial Armageddon. However, if this problem escalated and Spain, Portugal, Italy, and other EU members defaulted, then it would be very painful to countries, banks and investors around the globe who are left holding trillions in worthless (government debt) paper.
Steps need to be, and most probably will be, taken so that large financial institutions don’t lose faith in the financial system and start rejecting sovereign debt or other securities as collateral for loans and other financial transactions. We don’t need the credit markets freezing up again.
For more on this issue and great analysis, please see the following two videos. I highly recommend taking ten minutes out of you day to view them (please endure the ten second commercials at the beginning):
http://cosmos.bcst.yahoo.com/up/player/popup/index.php?cl=19604999
http://cosmos.bcst.yahoo.com/up/player/popup/index.php?cl=19605008
What we need to take away from Greece, is that these same problems could occur in the U.S. Separate of our Federal deficits and debt, state budgets are a mess. Illinois has reduced pension benefits and lifted the retirement age for new state employees to 67 from 60. In addition, lawmakers are considering postponing pension benefits for the first half of the fiscal year until January. Similarly, earlier this year New Jersey passed legislation that cuts public employees benefits.
Some public employees are already protesting these changes. I understand that no one likes sacrificing; however, everyone is going to be asked to sacrifice financially. As such, for anyone who is overly relying on a public pension or social security to fund their retirement – don’t! At some point, means testing (i.e., an investigation into the financial well-being of a person to determine the person’s eligibility for financial assistance) may be applied to all public employee pensions. At which point your retirement benefits (i.e., social security or public employee pension) may be taxed and / or dramatically reduced depending on your net worth or income. Let’s not forget that social security benefits are taxed if one’s income exceeds a certain amount. Also, in recent years, the full retirement age for social security benefits has been raised from age 65 to age 67 for people born after 1959.
Believe me, this is only the beginning of reduced benefits. As such, continuing to review one’s budget, live within your means and realizing that you are going to have to rely more on your own retirement savings is crucial. Unfortunately, unless you have millions of dollars, you will not be able to invest all your funds in low-yielding CDs or similar guaranteed investments and live off the interest. You will be forced to either take some risk to produce higher total returns (i.e., interest, dividends, capital gains and appreciation) to cover your current and future income needs, or choose to invest in guaranteed / low-yielding investments and understand that you’re choosing to spend your principal to fund your retirement needs, which could result in you outliving your nest egg. In addition, let’s not forget that potentially higher income taxes reduce what other sources of income you receive.
A recall notice for financial black boxes
The following three charts show the trading pattern of Accenture (ACN – a large global consulting firm), iShares Russell 1000 Value Index (IWD – an exchange traded fund that tracks a stock index) and Proctor and Gamble (PG – a global consumer goods company). In a very short time period (i.e., minutes) the share price of these three stocks cratered. The first two ACN and IWD went from $41/share and $59/share to $.01/share and $.08/share, respectively. The third, PG, dropped 37%. During all of this the Dow Jones Industrials dropped approximately 1,000 points. All three stocks and the Dow rebounded from these lows to end the day with relatively small losses.
The U.S. stock market decline yesterday was triggered by events in Europe and most specifically, Greece. However, a “major” trading error, a computer-generated tsunami of sell orders (at light speed) or combination of both played a major role.
I understand a trading error. Humans make mistakes, and entering an order to sell a billion shares instead of a million shares of a particular security can cause problems. More importantly, Wall Street firms and hedge funds have such powerful computers running sophisticated trading programs (i.e., financial black boxes) that once a sell signal is triggered, they can compound the problem by flooding the market instantly with so many computer- generated sell orders that it is virtually impossible for ample buy orders to offset them. This can result in a security being unable to trade and being priced at zero or an artificially low price, which we effectively what we saw yesterday. As a matter of fact, I spoke with a neighbor of mine regarding this. Yesterday, during all the chaos, he tried buying shares of large telecom company. The prices quoted for stock were changing so rapidly that he could not place a “limit” order to buy it at a certain price.
All the talking heads on CNBC screaming over the activity taking placing on the trading floors only exasperates this problem. Consider this – investing is like chess. A chess match requires level-headedness and a very long-term, unemotional strategy. You don’t see crowds cheering or booing after each player’s move. As such, I believe all the headlines and screeching on TV is distracting and only raises one’s blood pressure, without providing any truly meaningful information at the end of the day.
Why aren’t you being more aggressive?
I have received a few phone calls from clients over the last several weeks asking:
Why is my portfolio not fully invested?
or
Why is my portfolio not keeping pace with the stock market?
or
Why aren’t you being more aggressive?
All are good questions; however, let’s consider the following factors:
In some cases these accounts have a large cash balance that I did not want to put to work all at once.
The particular client is not an aggressive investor. Thus, their account(s) are not 100% invested in stocks because:
- it does not match their risk tolerance,
- of their situation in life,
- they need a monthly income from their account,
- this is the same client who wanted to sell near the market lows of last year
Greed and fear are partners, especially when taken to the extreme. The market is going to fluctuate based upon the news of the day. As such, it is not wise to make conclusions about the long-term performance of the stock market, economy and one’s portfolio based upon today’s leading headlines. I don’t believe Warren Buffet is selling currently. The stock markets around the world have had a huge run up, and a correction of 10% – 15% is not unexpected. One day’s market performance is not an indicator of future economic events – good or bad.
Very few clients have called during this recent correction. However, if you have questions or concerns, please contact the office and Sally can schedule a meeting either face-to-face or online (via gotomeeting). Otherwise, just be prepared for the market to fluctuate and possibly decline as it takes a break. I would be much more concerned if the stock market (for example – the Dow Jones Industrials) was jumping 300+ points a day and was sitting at 14,000. The U.S. and world economies are in recovery mode, and as such, tempered emotions and stock prices are much better than unbridled enthusiasm or fear.
A runaway bull market is a lot like car. If you push the gas pedal to floor and run your car full throttle, eventually you’ll blow the engine (i.e., stock market bubble bursting). Corrections are just the stock market’s way of taking its foot off the gas to avoid overheating. Economic recoveries and bull markets are not sustainable when running at full speed, they required pauses.
Quotes
“No success can compensate for failure in the home.”
David O. McKay, religious leader
“The human race has had long experience and a fine tradition in surviving adversity. But we now face a task for which we have little experience, the task of surviving prosperity.”
Alan Gregg, physician and philanthropist
“Without the strength to endure the crisis, one will not see the opportunity within. It is within the process of endurance that opportunity reveals itself.”
Chin-Ning Chu, author
“Time is the only coin of your life. It is the only coin you have, and only you can determine how it will be spent. Be careful lest you let other people spend it for you.”
Carl Sandburg, writer
Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.
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