That being said, no matter how great a social vehicle Facebook is, insiders are selling a large number of shares when compared to other IPOs. In addition, the odds are great that anyone buying shares in the open market, on the first day, are not going to get a bargain and could incur losses if and when the buying frenzy subsides. 

• The minutes released this week from the last Federal Reserve meeting on April 24-25 show that the Fed is concerned about the strength of the economic recovery and more open to additional easing of interest rates. Whether this occurs or not is unknown; however, mortgage rates are hitting all time lows and refinancing should pick up, which will result in savings for homeowners. This combined with the recent decline in oil and gasoline prices is bringing some relief to consumers, which not only will help boost the economy, but also help offset some of the worries regarding Europe (see below). 
• Here in the U.S. it was good to hear that Deere & Co. is expanding production facilities to meet the global demand for farm machinery, which the company sees continuing for several more years, even though some skeptics see a decline in the near term. Also, GE has finally seen its financial division, GE Capital, actually produced a profit and plans to pay a hefty dividend back to its parent company GE. This is quite positive since this division has been a very sore spot for GE, and the primary reason why the stock is down 38% over the last decade. 
• JP Morgan reported a large loss currently ranging from $2 to $3 billion dollars from one of its global traders nicknamed “The Whale.” Ironically, months ago I read about this trader and how he had placed such large bets that they were impacting the derivatives market, and resulted in his department making a profit to the tune of $450 million in 2011. Unfortunately for JP Morgan, the hedge funds who incurred losses from being on the other side of the trades, were infuriated. As a result, they retaliated via placing large trades/bets counter to the Whale’s in 2012 and resulted in him, or should I say JP Morgan, incurring the previously reported loss. 

Basically, these hedge fund traders got their revenge and much of their money back, plus some, and I have no problem with this. Honestly, these losses are quite minor compared to JP Morgan’s asset base and income. It can easily overcome this issue, even though shareholders are taking the hit in the near term. What is alarming though is that the CEO, James Dimon, could be taken by surprise and unaware of the trading strategy and potential losses.

JP Morgan’s Chief Investment Officer has resigned and now there is talk of pay clawbacks (i.e., taking back her prior compensation package of salary, but mainly stock options). Pay or   compensation clawbacks, I believe, are a great idea, especially as a way to rein in ill-advised,    negligent or downright corrupt actions of all employees, but especially upper management whom   set the standards. Let upper management know that the benefits bestowed upon them are subject to vesting over several years, instead of received in a lump sum manner, as well as subject to    forfeiture if that they are found to have violated some business practice or policy of the firm. 

• Unfortunately, just yesterday I heard an ad on CNBC for books on Amazon called “The Strategic Default Plan: How to Walk Away from Your Mortgage.” Well, I went to the Amazon’s web site and saw the following titles as well; Underwater Home: “What Should You Do if You Owe More on Your Home than It’s Worth?” and “The Foreclosure Survival Guide: Keep Your House or Walk Away With Money in Your Pockets.” Yes, I realize that there may be some individuals who were persuaded (not forced) to buy much more home than they could afford. However, I know several examples, and at least two in my own subdivision, where the homeowners would have never been underwater on their mortgage, if they had not pulled money out via taking on a home equity loan and using the proceeds for other purposes (e.g. cars, trips, home accessories, etc.). 

Whether it be home loans or student loans, at some point, we as consumers need to be responsible for our actions and part of that responsibility is being informed. I honestly feel for those college grads who are facing tough job prospects and have student loans that are now requiring monthly payments. I cannot imagine the angst. However, I remember graduating from college, obtaining a very good position at what, at the time, was a Big Eight CPA firm. I chose to still live at home for a period of time, while I got my financial feet under me. And yes, I did have some student loans. 

My basic premise is, if you are able to pass the various courses to graduate high school, let alone college, then you should have enough common sense or maybe I should say intellectual understanding to realize how much student debt is reasonable for the degree you are seeking. I have heard numerous cases of graduates piling on $50,000 to $100,000 or more of student loan debt to receive a degree in a field that only compensates them $25,000 to $30,000/year starting out. If they would have just taken time to run the numbers, they would see that the net (after- tax) income, or should I say paycheck, is not going to cut it. The ideal single lifestyle of a new car, an apartment and going out for lunch and possibly out with friends a couple times a week or on the weekends is not going to happen. And to act surprised and shocked that one is now in such a financial predicament is somewhat ridiculous. 

Global financial issues are creating anger and angst around the globe 

• Yesterday, A.P. Moller-Maersk A/S, a Danish firm and the world’s largest operator of container ships, reported disappointing earnings for the past quarter and stated that the remainder of 2012 may not be much better due to renewed concerns in Europe regarding Greece and indications of possible slower growth in China. Usually, less shipping equates to lower sales and less corporate profits.  
• Fitch Ratings, a global rating agency and dual-headquartered firm in New York and London with 50 offices worldwide, stated today that it believes the world’s largest banks, which it identifies as the 29 “systematically important financial institutions,” will need to raise a combined $556 billion to meet new capital requirements as outlined in the Basel III agreement. This will amount to a 23% increase on what the banks currently hold in reserve and will most likely reduce return on equity, a critical figure used to gauge a firm’s profitability, Fitch said.  
• The problems in Europe are front page again, due to new leaders being elected in Greece and France and their aversion to the current austerity agreements in place. Thus, the rumors of Greece leaving the Euro and going back to its own currency are growing louder, especially since such an event could temporarily wreak havoc on the financial system in Europe. This is resulting on European banks stockpiling cash reserves and decreasing loans to businesses and mortgages on commercial properties. Another setback is the fact that bank customers, especially in Greece, have been pulling money from their accounts (a run on the banks) in fear of what may occur.   

Global stock markets got off to a strong start in 2012, and now reality is beginning to set in since all of the above items equate to a possible economic slowdown. CNBC reported this week that Wall Streetstrategists are the most negative they’ve been on stocks since the bull market began more than three years ago. The consensus view of U.S. equity strategists from major banks is the lowest allocation for stocks since the market lows of March 2009. In my opinion, this could be a good sign. This is because most investors were overly euphoric for the first four months of this year, and the markets were getting ahead of themselves.

Yes, we do face some real geopolitical and economic issues in the months to come. However, seeing Apple drop approximately 17% from its high and other high flyers being humbled is not bad. There is a ton of “skeptical” money on thesidelines currently and more reasonably price stocks will be enticing at some point and definitely give the market a second wind. Let’s just hope that we can avoid another debt ceiling battle this fall. Unfortunately, it appears that neither side is willing to negotiate a responsible solution to raising the United State’s credit limit. As such, I would not be surprised to see further weakness in the major U.S. stock indices similar to last year. However, any near term pain will only set the stage for a better and longer bull market rally. Especially if corporations are much stronger financially and better able to weather the storm.

Short-term, I am frustrated and disappointed, but definitely not shocked or panicked. Long-term, this recovery is lagging, but does not mean it cannot continue to progress if we get some positive or at least constructive solutions to the problems I’ve laid out above.

Quotes 

“It is amazing what you can accomplish if you do not care who gets the credit.”

                        Harry S. Truman, 33rd U.S. President

“The market always does what it’s supposed to do only never it’s supposed to do it.”

                        Arnold Van De Berg, experienced value investor

Tony Moeller, CPA
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.  

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

In the same vein, the amount of discouraged workers swelled from 865,000 to 968,000, an increase of 12 percent. Those working part-time for economic reasons surged 181,000 to more than 7.8 million.

“In the weakest recovery since the Great Depression, more than four-fifths of the reduction in unemployment has been accomplished by a dropping adult labor force participation rate — essentially persuading adults they don’t need a job, or the job they could find is not worth having,” said University of Maryland economist Peter Morici.

Wall Street does not like what it sees in these numbers and the stock market is slumping as a result. Combine this with announcements this week that in April manufacturing in the U.S. slowed more than expected and workforce productivity fell, along with GM’s and retailers’ disappointing earnings reports, and you can make a case that the Federal Reserve may consider additional measures (Quantitative Easing 3 – QE3), to keep interest rates low and try and boost the economy in the coming months.

Please note, I am not advocating more “quantitative” easing by the Fed, all I am saying is that when you look at the true U.S. employment picture, coupled with the problems in Europe (see below), then it is very conceivable that the Fed will come to the rescue later this year, which traditionally has been a rallying point for stocks. 

Banks: What should we expect out of them? 

The following is an excerpt from a speech that James Grant, author and creator of Grant’s Interest Rate Observer (an independent journal on the financial markets), gave to the New York Federal Reserve Bank on March 12, 2012 and as it appears in today’s Wall Street Journal. I believe Mr. Grant really drives home what needs to be done with our banking system, and especially the “Too Big To Fail Banks.” I strongly encouraged you to click through to this short but very poignant commentary. 

http://online.wsj.com/article_email/SB10001424052702304746604577380330245899936-lMyQjAxMTAyMDAwNDEwNDQyWj.html?mod=wsj_share_email 

The problems in Europe are far from over – The results of the upcoming Greek elections may be described in three words; temporary, volatile and uncertain   

The following is a summary of what was reported in today’s Wall Street Journal regarding Greece and its impact on the Europe Union and respective stock markets.

Greece’s election on Sunday is expected to usher in such political instability that officials from the country’s major parties are planning another possible election within months. That, in turn, could threaten the viability of Greece’s latest bailout package from the European Union (EU) and the International Monetary Fund (IMF) and aggravate the euro zone’s financial woes.

As part of the prior bailout package, the EU and IMF required budget / spending cuts that are to begin in June and will require politically painful decisions, such as closing unprofitable state enterprises and laying off swaths of public-sector employees, finance-ministry officials say.

If Greece doesn’t have a sufficiently stable government by June, to push through controversial cuts, Europe and the IMF are likely to suspend aid payments needed to cover the Greek government’s operating costs, potentially escalating the political and social crisis in the country.

Mounting political instability in Greece would add further uncertainty to the euro zone’s financial and economic crisis, in which a growing number of European leaders are being ousted by parties or voters against a backdrop of public anger over austerity and recession.

To give you a good image of how uncertain and volatile the situation is in Greece, after two years of government cutbacks brought on by Greece’s debt crisis, the signs of social decay are everywhere in Athens and the mood in the capital is despondent. As a matter of fact, downtown Athens today is described as a shadow of its former self. Its streets, formerly once lined with crowded elegant stores and vibrant cafés, are now scarred by shuttered shop fronts, crime, homelessness and periodic rioting.

Businesses are closing at a record pace, and unemployment in the greater Athens area has soared to more than 23%, above the national average. Regular demonstrations have frightened away tourists, and thousands of the city’s hotels and retailers are teetering on the verge of bankruptcy.

Beyond the social turmoil, this new reality presents a particular political problem in that unhappy citizens are going to consider voting for fringe parties of the right (neo-Nazis) and left (Marxists).

For example, the current government, in response to the decline of the city’s center, has implemented increased police patrols, a three-year rebuilding plan and fresh promises to relocate thousands of illegal immigrants to detention camps around the country. But for many Athenians, those promises seem as this is too little, too late.

However, one of these new parties running in the upcoming election has an economic manifesto that includes foregoing all debt repayments, forming “special teams” to investigate corrupt practices, arresting and imprisoning politicians and state servants found guilty of economic mismanagement, nationalizing banks, and returning “to traditional family values.”

Bottom line, Greece is a very small country, but it can have a huge impact if the elections go awry and some fringe elements are elected resulting in all current bailout agreements with the EU and IMF in jeopardy or completely thrown out. Honestly, no one knows the outcome, but I can understand why Germany, the fiscally prudent and economic powerhouse of Europe, has had its fill with Greece and finally says no more (i.e., we’re done bailing your butt out). It would be a very painful economic event in the short-term, but could be the best economic medicine for the rest of the E.U. and global stock markets long-term. 

Reasons to be optimistic about America 

After all the depressing news I previously dumped on you, I thought it would be helpful to give you some “glass is half-full” commentary. Yes, the economic glass may be looking half-empty at times, in the short-term, but the comments listed below are indicative of America’s strength and economic vibrancy long-term. As such, I agree with Warren Buffett, Jeremy Siegel and other investment and economic professionals who have consistently stated not to bet against America in the long run.   

The Daily Ticker is a financial blog that covers business stories of the day — the economy, investing, corporate leadership and politics. Commentators with the Daily Ticker went to Los Angeles to attend the Milken Institute’s annual Global Conference, where many of the world’s most influential investors, economists, CEOs, innovators and policymakers met to discuss some of the most imminent and dire problems facing America and the world. 

For a change of pace, the commentators asked guests to tell them what makes them most optimistic about the America today. They received a wide-range of responses, but many added one caveat to their answer: the hindrance of political dysfunction in Washington and its negative drag on prosperity in America.

Here’s what they said: 

Niall Ferguson
Professor, Harvard University

“The thing that makes me optimistic about the United States is technology and the ability of the United States still to be at the cutting edge. But of course that is quite geographically localized. That is a Silicon Valley story.” 

T. Boone Pickens
Founder, BP Capital

“It’s energy. I mean, today the United States has the cheapest energy in the world. We got the cheapest oil. We got the cheapest gas. And we got the cheapest gasoline.” 

Mitch Daniels
Governor, Indiana

“The resilience of the American economy over time. We still give birth to more new businesses than other places [and] that we still have a core of innovation.”

Raghuram Rajan
Professor, University of Chicago

“I think the strength of corporations [and] how much cleaning up they have done of their balance sheets, their work force and improving productivity is a hidden upside for the U.S. economy. If we can realize that over the years to come, I think there is substantial potential for growth.” 

James Barth
Senior Finance Fellow, Milken Institute

“I would agree (with Rajan) but I think that strength depends upon eliminating a lot of uncertainty. I think that’s the biggest barrier right now to the growth and after all it is an election year and one would expect a lot of uncertainty. There’s much more than there needs to be.” 

Richard Fisher
Dallas Federal Reserve President

“We are growing our population. We have an enormous Hispanic population that’s coming in. We are still the magnet for anybody that wants to work hard in the world. And we create, and we innovate, and we are masters of creative destruction. As long as government won’t interfere with that adjustment, and let the American genius go to work, we’ll win.”

Quotes 

“A good reputation is better than fame.”

                        Louis Dedek, poet and academic

“Beware of best friends presenting you gifts at your 50th birthday celebration!”

                        Tony Moeller, ambushed and now AARP eligible 

Tony Moeller, CPA

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.  

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

In Europe though, concerns continue to mount regarding the lasting impact of the European Central Bank’s (ECB) rescue plan. Basically, the ECB (similar to our Federal Reserve) provided $1.31 trillion dollars of emergency loans to large European Banks. The banks in turn have used the funds to buy their respective government’s bonds, and resulted in interest rates declining and lower borrowing costs for these governments. This produced a sense of calm to the financial markets and translated into a nice boost to for European stock markets. 

However, it appears the vast majority of the emergency loan funds have been spent by the European banks, and thus, they have very little ammunition left to buy their government’s bonds and now must rely on the open market to do so. Unfortunately, the main buyers of these bonds are institutional investors and they are feeling somewhat uneasy. As a result they are requiring higher interest rates on any new purchases. This increase in interest rates creates an additional burden on extremely fragile government budgets and consequently has an adverse impact on their respective economies. This is one of the main reasons why we are seeing volatility returning to the stock market. 

The Wall Street Journal reported today that the delinquency rates for loans held by Spanish Banks rose to a 17-year high in February of this year (see charts below).   

As such, I asked a local bank executive regarding what the impact would be here in the U.S. if our banks were in the same condition as the Spanish Banks. Basically, it was his opinion that not only would the banks be on a regulatory watch list, but we would also be well into our next recession.  

Unfortunately, Greece, Spain and some other countries in the European Union (EU) will continue to be their economic “problem children,” and this is just a sign that the powers that be in the EU have not taken all the necessary or painful steps to resolve their banking problems. 

I’ve been working on the railroad may becoming a welcome tune for investors  

This week Union Pacific and CSX reported better than expected first quarter earnings. Both railroads noted that coal shipments were down, and historically coal is one of their largest volume items. Offsetting the weakness in coal has been an increase in shipments of autos, industrial products, chemicals and agriculture items.

Healthy earnings from Union Pacific and CSX are not just encouraging news for railroads, but it may also be an indication that the overall U.S. economy is still firmly on track for a recovery. Railroad companies are still an extremely important economic indicator, since when railroads are thriving, that’s usually because they are shipping a larger amount of products to retailers and showrooms.

Stephen Dodson, a fund manager in San Francisco, noted in a CNNMoney.com article today that the railroad companies may be hinting at some signs of life for the beleaguered housing market as well. He said there have been some indications of a slight pickup in the shipment of construction materials this year, which could translated into evidence that housing is finally on the mend.

It is understandable that many investors wonder if the recent batch of bad data about the job market is a sign of another U.S. economic slowdown; however, the strength in the railroad business does seem to indicate that worst-case fears about the economy are overblown.

“When you look at rail volumes this year, the prospect of a recession in the next few months seems to be off the table,” Dodson said.

Is this Déjà Vu and it’s the 1970s all over again? 

Personally, I like much of the classic rock music from the 1970′s, but I don’t miss the bell bottoms pants, Clearasil, leisure suits, and pastel prom tuxes (fond high school memories that I am still in counseling over). 

The charts below illustrate why what we’ve experienced in the stock market over the last several years may feel a lot like the 1970s. Back then, it was an ugly economic period with no clear solutions to our problems. However, going forward into the 1980′s the U.S. economy found a way out via very strong economic growth and the stock market responded accordingly. While the current headlines may resemble those of the 1970s, it’s important to remember that every market cycle is unique. Thus, no one truly knows what is ahead, but it is reassuring to know that history does repeat itself and often times long-term economic revivals proceed long periods of historically high economic uncertainty and market volatility. 

In my opinion it may be several years before we truly see some clear resolutions to the economic problems that we are struggling with currently in U.S., Europe and other countries. As such, short-term market fluctuations are going to have an impact on investors’ emotions.  What is comforting to know is that the U.S. and other countries have faced similar, but granted, different, economic and market periods in the past only to return to positive economic and market outcomes. Believe me, in many ways I am just as impatient today as I was as a high schooler in the late 1970′s, but history and life experiences have taught me that the only true lasting rewards (either personally or financially) oftentimes came when one is most exasperated and believes there is no relief in sight.     

Quotes

“The best definition of wealth – the only true definition, I think – is the possession of whatever gives us happiness, contentment, or a sense of one’s significance in the scheme of things.”

                        Ernest W. Watson, artist

“Character is the ability to carry out a good resolution long after the excitement of the moment has passed.”

                        Cavett Robert, professional speaker

“In the confrontation between the stream and the rock, the stream always wins – not through strength but through perseverance.”

                        Author Unknown

Tony Moeller, CPA

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.  

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

Basically, Wall Street and global investors have become reliant on low interest rates and the central banks of various nations coming to the rescue anytime there was a hint of economic downturn or stock market declines over the last two years. However, this is no longer the case. Inflation is a concern, and as such, various central bankers are taking a pause from injecting any monetary easing. That being said, the central bankers are still sending the message that they are prepared to step in and not let things fall apart.

If central banks discontinue their respective sovereign bond buying programs, then the demand for new bonds will need to come from other buyers whom may require higher yields to purchase the bonds, which can lead to higher interest rates.

The declines came despite signs the U.S. economy is improving. Private-sector jobs data showed 209,000 jobs were added in March, per payroll processor Automatic Processing, Inc. and Macroeconomics Advisors, LLC, a consulting firm.

In light of the recent market pull back and negative news out of Europe, one top Federal Reserve official said today that the central bank’s projection of late 2014 for the first likely increase in interest rates sends too pessimistic a signal as the economic recovery strengthens.

“The 2014 language in effect names a date far in the future at which macroeconomic conditions are still expected to be exceptionally poor,” St. Louis Federal Reserve President James Bullard said. “This is an unwarranted pessimistic signal for the (Fed) to send.”

I believe it is a positive sign for the economy and the stock market that one respected Federal Reserve official believes his colleagues are too pessimistic about the U.S. economy over the next two years. Also, he is reiterating what we all know that once inflation rears its ugly head, then the Fed will be forced to respond. And economic growth is a precursor to inflation. 

The market is up for the first quarter, but not much enthusiasm (i.e., buying of stocks). 

Even though the first quarter of this year has been quite good for the stock market and taken many, including me, by surprise, the actually flow of money into stocks has been quite weak. The Investment Company Institute (ICI) is the national trade association for the investment company industry that dates back to 1940. It reported this week, that year-to-date there has been a net outflow from U.S. stock mutual funds, but continued inflows into bond and balanced mutual funds. International stock funds experienced their first week of outflows this year. 

It appears that the current market rally in stocks has occurred without the majority of investors jumping in. Thus, skepticism is still prevalent and there is plenty of money on the sidelines or in bond funds that may be reallocated to stock funds. This is a positive reinforcement for the stock market and equity investors for the remainder of this year.    

Quotes 

“When solving problems, dig at the roots instead of just hacking at the leaves.”

                        Anthony J. D’Angelo, author and education visionary

“Pray as though no work could help, and work as though no prayer could help.”

                        German Proverb

“Empty pockets never held anyone back. Only empty head and empty hearts can do that.”

                        Norman Vincent Peale, minister and author

“The superior man is the man who fulfills his duty.”

                        Eugene Ionesco, Romanian and French playwright and dramatist

Tony Moeller, CPA

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.  

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

• Europe is no longer the daily headline due to temporarily containing their economic fires via a myriad of reforms which, may not meet their targets in the years, let alone months to come. Today the leaders of 25 European countries signed a new treaty designed to prevent the 17 members of the eurozone from living beyond their means and avoid a repeat of the region’s crippling debt crisis. Whether all members actually abide by the treaty is another issue. 
• The U.S. has seen improvement in almost every economic category, with the possible exclusion of housing and energy prices. 
• Yesterday’s rumor of a pipeline explosion in Saudi Arabia and the spike in oil prices is an example that concerns about global geo-political events are still simmering and can come to a boil very quickly. 
• U.S. and world stock prices have rebounded over the last several months.

Believe me, I am glad to see all of any economic or market improvement, especially for those seeking employment. On the other side of the coin, many of the hot economic issues of the day (i.e., U.S and foreign government debt, spending, tax rates and possible reforms, etc.) are being avoided in the near term. This is especially the case in the U.S., due to it being an election year and no one wants to truly get their hands dirty trying to tackle these enormous and controversial issues and possibly upset their voting base. It is no different than the intense house cleaning my wife and I do before we have company over. The orderly facade presented to our arriving guests does not truly represent what our home looks like on a daily basis with three kids and a dog. No, we are not slobs, but our home’s interior appearance, prior to a dinner party, is deceiving when compared to its state when trying to get the kids out the door for school or soccer games. 

As a result, whomever is our next President will face some daunting issues that are slowly undermining what could be a solid economic plan / base for the U.S. economy to start rebuilding from for the next 50 years, not the next eight months or until election day. As such, even though the current news mostly appears positive for the economy and stock market, I still see some big fundamental economic issues over the horizon that could bring volatility, uncertainty back into the picture. 

That being said, I do have some egg on my face, in the sense that I have been somewhat skeptical of the stock markets’ recent surge and have not been “all in” (loaded up on stocks). Maybe I am being too protective, but for a number of my more conservative, income-reliant and/or older clients, I believe my somewhat skeptical / defensive approach may serve us well over the long run.

Quotes

“A lie can travel half way around the world while the truth is putting on its shoes.”

                        Mark Twain, humorist and author

“Ability may get you to the top, but it takes character to keep you there.”

                        John Wooden, legendary basketball coach

“Cut my pie into four pieces, I don’t think I can eat eight.”

                        Yogi Berra, baseball player

Tony Moeller, CPA

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.  

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

• Corporate profit margins could be peaking due to higher costs. With the possibility of higher taxes on the horizon combined with minimal wage increases, consumers will have less to spend as the result of prices increasing at a faster rate than their income. 
• There is an abundant supply of oil and natural gas on the market; however, tensions in the Middle East and Africa continue to threaten supplies and here in the U.S., at the current rate of exploration, cannot make up the slack if there were a disruption. Iran, Syria and Nigeria are just a few cast of characters whom can disrupt some of the world’s oil supply.  Realistically, I would hope and somewhat believe Iran may take a more conciliatory approach with the rest of the world in regards to their nuclear ambitions and threats of closing a huge oil shipping channel, the Strait of Hormuz. Otherwise, the alternatives would result in nasty global economic reverberations in the short-term and detrimental in the longer term to the Middle East. In addition, Syria’s oppressive leader is facing an overthrow at some point, based upon his brutal behavior toward his people. Finally, emerging oil producing countries like Nigeria are seeing their potential being squandered due to political turmoil.

Energy prices could decrease in the years ahead; however, there are several geo-political hurdles domestically and internationally that are delaying such progress. 

Unfortunately, gasoline prices are higher today than they were at this same time in 2008, when oil prices hit their historic highs. The above items noted, combined with a continuing decline in U.S. oil refining capacity may very well result in much higher gasoline prices this year, which is more hurtful to almost every sector of the U.S. economy than tax increases. As such, we need the powers that be in D.C. to come up with workable, long-term energy plan. Otherwise, we will see our access to available, stable supplies of oil from within and in the border nations of the United States either be restricted or rerouted overseas to countries like China. I would much rather make a prudent, permanent push for exploration and transportation of oil within North America, than try and come up with some short-term band-aid, like tapping the U.S.’s strategic oil reserves once the price again hits historic levels. This may sound like a political statement, but high oil prices and depending on politically unstable regions for our supply is insanity. Why continue to buy oil from oppressive regimes, who can reap large profits and push up oil prices by just threatening to disrupt supplies and who subject their citizens to living conditions make the sweat shops in China look like Disneyland, especially when we can take steps now that will allow us to dramatically decrease our dependency on them in the years ahead? China has already figured this out and is purchasing interests in oil and natural gas fields across the globe, including here in the U.S. 

• The S&P 500 and other stock indices domestically and internationally markets have shown great resilience over the last several months, and it appears the U.S. is leading the charge.  However, there is some concern that one or two companies within the S&P 500 can have a disproportional influence on the entire index. For example, AAPL is the envy of the investment world and rightly deserves that status due to the company’s innovative products, and its stock’s performance reflects this. 

However, the following chart illustrates how this one company has grown so large and influential, that it distorts the true economic numbers of the entire index.

 In relation to the technology sector, Apple’s impact is even more distortional. Apple’s makes up 17% of the Nasdaq-100 index, which is more than Google, Intel and Amazon combined. David Kostin, chief U.S. equity strategist at Goldman Sachs, forecasts that the technology sector will increase its earnings by 21% in the fourth quarter of 2011 compared to a year earlier. But that would shrink to roughly 5% once Apple is factored out.

By no means do I mean to demonize Apple, but my objective is to just point out that one, two or just a few companies can distort, positively or negatively, actual or overall trends taking place in corporate profits and stock prices.

In closing, Europe continues to make strides to corral Greece and the other problem economies.  Unfortunately, Germany, which should be poster child of how to revive an economy, can only do so much. Currently various policies are being implemented may calm the markets and this combined with additional good news regarding unemployment will boost our markets in the near term. We should all be aware that true solutions to most of Europe’s problems, and even here domestically, have only been delayed. The true economic medicine may be doled out slowly over time and there will be some negative stock market, economic and standard of living effects as a result. I am not predicting a doomsday scenario by any means, but definitely some economic discomfort. However, this does not seem to be the situation in the near term.

Quotes 

“The test of courage comes when you are in the minority. The test of tolerance comes when you are in the majority.”

                        Ralph W. Sockman, pastor, author and speaker

“There are too many people who get degrees and think that they’re educated.  In order to be a truly knowledgeable person one has got to be engaged in serious, systematic, lifelong learning.”

                        Benjamin Payton, Tuskegee University President

“When you handle yourself, use your head; when you handle others, use your heart.”

                        Donna Reed, actress

Tony Moeller, CPA
 
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. 

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

It is being reported that Greece is nearing a long-delayed deal on its debt, and in this deal bondholders could see losses of 70%. Another EU member, Portugal, is next in line as it relates to debt fears. In the past week, Portuguese’ sovereign debt / government bonds were yielding over 21% and 16% for two and ten-year, respectively. So it is obvious that these fears are not unfounded, and EU members are becoming even more tightly intertwined economically and politically in their attempts to address these problems long-term.

The situation is becoming dire, and Ian Cheshire’s CEO of the U.K.-based Kingfisher PLC, the world’s third-largest home-improvement group, noted in the Wall Street Journal this week that it has come to the point that EU leaders / politicians need to fix Europe or else!

Here at home, some of the worst performing sectors in 2011 were financial stocks and they have been the leaders this year. That being said, many banks, especially large ones, still face a myriad of issues as well as potential penalties and new taxes that will impact their income. In addition, it appears that in the last quarter, S&P 500 firms saw revenues rise at a much better pace than profit margins. This may be the result of costs going up faster than sales, which can hurt profits and can take the wind out of a market rally.

Bottom line, it’s an election year, the Fed is committed to keep rates low, and the Super Bowl indicator says that if the NY Giants win on Sunday, it will be a positive year for investors. Sorry Patriots’ fans, historically, each of these events have been positive indicators for the market. Thus, I won’t be upset if the Giants win. With that in mind, I expect at some point we’ll get some nugget of negative news that will bring back volatility (especially if we see debt ceiling battles on Capitol Hill) and declines in stock prices, however, the overall trend for the year seems positive.

Insightful thoughts 

Stocks are an imperfect asset, superior only to every other investment over long periods.

            Knight Kiplinger, Kiplinger’s Personal Finance, December 2011

Nietzsche famously said “What does not kill me makes me stronger.” The corollary is “What constantly rescues me makes me weaker.” The world will only stop looking for bailouts when policy makers stop handing them out.

            John Hussman, Hussmanfunds.com, December 5, 2011

Many European companies are in better shape than the nations in which they’re based.

            James H. Glassman, Kiplinger’s Magazine, December 2011

The U.S. and the developed world have permanently slowed in their GDP growth. This is mostly the result of slowing population growth, an aging profile, and an over commitment to the old, which leaves inadequate resources for growth. Also contributing to the slowdown, particularly in the U.S. and the U.K., is inadequate long term savings. As I write, the U.S. personal savings rate has fallen once again below 4%.

            Jeremy Grantham, GMO Quarterly Letter, December 2011

China may become an economic powerhouse, but they still have a lot of growing up / maturing to do 

The following are excerpts from the 1/30/2012 Wall Street Journal:

For generations, Chinese men looking for a dose of vigor have sworn by a traditional remedy: fungus harvested from dead caterpillars, known in some quarters these days as Himalayan Viagra.

Now Chinese investors are using the rare fungus to try to boost something else—their investment returns. The fungus has doubled in price over the past two years and the top grade now fetches more than $11,500 a pound, according to Fuzhou-based brokerage firm Industrial Securities. In the same vein, Baijiu liquor of uncertain vintage sold for $8,300 at a December auction.

With Chinese stocks falling, real-estate markets flat and bank deposits offering measly returns, Chinese investors have been looking for help in strange places. Besides traditional medicinal products, they are plowing money into art-based stock markets, homegrown liquors, mahogany furniture and jade, among other decidedly non-Western asset classes.

Newfangled exchanges are sprouting across China to take advantage of the excitement. Nanjing Pharmaceutical Co. set up an exchange last year for trading traditional medicines such as deer antler. In November it extended hours so investors could trade when they get home from work. “Expanding the hours gives investors more time to make a profit,” the exchange said on its website.

I am sure this type of speculation is not representative of all Chinese investors; however, it does show that the Chinese are human beings, who have become disheartened with traditional investments and can be lured into crazy schemes to make money. Unfortunately, I can assure you that whether it be dead caterpillar fungus  or homegrown liquors, these investors will eventually see massive losses and PT Barnum’s belief that “there is a sucker born every minute!” is alive and well today in China. 

Quotes

“A second reason why science cannot replace judgment is the behavior of financial markets.”

                        Martin Feldstein, economist

“A clever person solves a problem. A wise person avoids it.”

                        Albert Einstein, scientist

“Democracy is the worst form of government, except for all those other forms that have been tried from time to time.”

                         Winston Churchill, statesman

“There are two levers for moving men – interest and fear.”

                        Napoleon Bonaparte, military and political leader

Tony Moeller, CPA
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.  

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

• The U.S. Labor Department announced this week that food and energy costs pushed down U.S. wholesale prices (the producer-price index, which measures what manufacturers and wholesalers pay for finished goods) in December, providing some relief for businesses hit by higher costs of other goods. In addition, there was a 0.4% rise in industrial production in December reflecting strength in manufacturing.
• Another positive is an article in today’s Wall Street Journal that spending on home maintenance by homeowners and landlords is forecasted to have increased in 2011 and will go up again in 2012. That would market the first year since 2006 that this has occurred.
• Right or wrong, the Federal Reserve appears to be ready to put additional steps in place to increase monetary easing in the upcoming months depending on several economic scenarios. As controversial as these steps have been, the stock market has reacted positively each time.
• Locally, I attended a bank advisory board meeting last evening. In attendance were several business owners of firms of various sizes. It was nice to hear one professional with a manufacturing firm state that his company is starting to see a pick up in orders. His customers are replenishing their inventory or are more confident about sales in the coming months.

In this same meeting, a local attorney, well-versed in mergers and acquisitions, stated that he has seen an increase in activity. And the bankers themselves had some positive comments regarding loan demand.

All in all, it was insightful to hear professionals from various industries acknowledge some positive signs in the economy. Trust me, no one was breaking out the champagne, but I got the feeling that the consensus view was tilting toward the glass is half full, as it relates to the U.S. economy. 

The other side of the coin

In addition to these positive items, the stock market, and in particular financial (i.e., bank) stocks are performing better. Many analysts have the opinion that for the U.S. economy and stock market to recover long-term, it is necessary for the banking sector to perform better, getter healthier and back to the business of lending money. Improving corporate profits are a necessity as well. That being said, there is some concern about the market’s recent strength and the underlying companies’ earnings. 

S&P 500 companies have already issued more profit warnings ahead of this reporting season than at any time since the fourth quarter of 2008. Yes, it is early in the reporting season, and investors remain optimistic and prefer to focus on positive economic signals instead of Europe’s debt crisis. 

Stocks have burst out of the gates in 2012, surprising investors and pundits alike with the S&P 500 having its strongest start of the year in a quarter century. But the strong pace hasn’t persuaded the skeptics that the rally has legs. The bears point to a number of issues lurking ahead, ranging from corporate earnings to technical signposts that are used to predict the stock market’s direction.

Among investors’ chief concerns: Companies are reporting disappointing profits for the first time in years. Also, some analysts said some indicators are flashing gloomy signals. And a barometer of shipping demand, the Baltic Dry Index, has plunged in recent days, sparking worries that overall economic activity may be stalling.

Bottom line, there seems to be a more positive mood regarding the economy and stock market, even though we are seeing some mixed signals.

Reversal of fortune overseas 

International stocks took it on the chin last year, but are bouncing back smartly. However, emerging countries are benefiting from of the problems facing Europe. Developing countries like Indonesia and Brazil are seeing their borrowing costs drop to record lows. This is a reevaluation of sovereign debt risk where emerging countries are considered more creditworthy and able to issue bonds at record low interest rates and in many cases below what comparable bonds would be for developed countries like Spain and France. As such, companies in these countries should benefit from the lower interest rates, and that can boost their stock prices as well.

The International Monetary Fund and European Central Bank are doing what they can to make sure that European banks have ample liquidity to make loans and carry on their business as usual. Even though a recession is expected in Europe this year, many economists believe it will not carryover to other countries. Thus, as previously noted, European stocks have performed well thus far in 2012, and the Stoxx Europe 600 index is trading at 10.2 times next year’s earnings, which is well below the 13 times long-run average.

The economic storms in Europe are probably not completely over, but there are some rays of sunshine through the clouds and investors are reacting positively to them.

Quotes 

“Intelligence plus character – that is the goal of true education.”

                        Martin Luther King, clergyman and civil rights leader 

“Life is not a problem to be solved, but a reality to be experienced.”

                        Soren Kirkegaard, philosopher and theologian 

“The noblest treasure is the joy of understanding.”

                        Leonardi da Vinci, artist, inventor, etc. 

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. 

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

It’s the start of a new year and the best part of it has been the weather. It’s been in the 60s (degrees that is), which is extraordinarily balmy for the KC Metro area in January. 

Regarding the investment and economic climate, well that forecast is cloudier. It appears that optimism is trying to shine through in 2012. Unemployment is trending down and jobs are being created, even though both are lagging on a historical basis. 

On the other hand, this week, Alcoa, the world’s biggest aluminum company, announced that it is cutting its capacity by 12% due to economic slowdown and uncertainty around the globe. In addition, the Wall Street Journal reported that retail sales during the Christmas season were less robust than expected, and some analysts are forecasting less sluggish earnings in 2012 for companies in the S&P 500. 

Pimco CEO, co-CIO, and fund manager,  Dr. Mohamed El-Erian told CNBC today that the problems in Europe still overshadow any good news domestically.

Three worries trouble the markets, he said:

1) Growth is being driven by an unsustainable drop in the national savings rate.

2) Europe is still dangerous, even though the headline risk has abated in recent weeks.

3) The desire to shed debt will continue to hold back growth. 

All in all, the first several months of 2012 may be a continuation of 2011. However, one thing is for certain, for the next 10 months, be prepared to be overwhelmed by political ads, and especially some of the most negative and slanderous seen in decades or ever. This may sound extreme and having no connection to your investments, but that’s not true. 

I believe all investors (i.e., individual, institutions, large, small, young or older) need to take a deep breath. Otherwise, the negative rhetoric, regardless of the politician or party originating it, may result in you emotionally reacting and making very short-term and unwise investment decisions. My best advice is that when it comes to politics or investing, you need to develop a thick skin. 

We should stand by our beliefs, make economic and investment choices that match our beliefs and specific situations in life and then follow through with whatever game plan or strategy we put in place.  Making economic, investment or lifestyle decisions based upon campaign ads, political debates or poll standings is ludicrous and a recipe for disaster. Voters are fickle and political polls change more frequently than the scores in the recent bowl games. 

I can guarantee you; Bill Self does not change his playbook or starting rotation, McDonald’s does not change its menu, Apple does not adjust the features on the upcoming i-Phone and Proctor and Gamble does not reformulate Crest toothpaste or Duracell batteries based upon which politician or candidate said what or how they are polling. The coach and the three companies previously mentioned have all had great long-term success by committing to a plan/strategy, staying focused on what they can control and not wasting their time, energy and resources on what they can’t. That being said, I sincerely hope the same can be said for investors. I’ve heard it said countless times, activity does not equal to productivity or profits. Thus moving money around, for whatever emotional reasons, may feel good at the moment, but rarely has positive results. 

Quotes 

“Flaming enthusiasm, backed up by horse sense and persistence, is the quality that most frequently makes for success.” 

                        Dale Carnegie, self-improvement lecturer and author 

“Measure yourself by your best moments, not by your worst.  We are too prone to judge ourselves by our moments of despondency and depression.”

                        Robert Johnson, entrepreneur 

“Years teach us more than books.”

                        Berthold Auerbach, German poet 

“Chance generally favors the prudent.”

                        Joseph Joubert, French moralist and essayist

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. 

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

Year-to-date, as of the market close yesterday, the combined average of the Dow Jones Industrials, S&P 500 and NASDAQ was down 1.933%.  This compares quite favorably to the Dow Jones Global Index, which is comprised of 50 countries (including the U.S), being down 12.90%, and the Dow Jones Global Index-ex U.S. (excluding the U.S.) down 18.9%, for the same time period. 

Another example of how the U.S. is not experiencing the same market traumas as other countries would be yesterday’s bond auctions.  The five-year Italian government bonds were issued at 6.47%, while 30-year U.S. government bonds were issued at 2.89%.  To put this into perspective, a 30-year $150,000 mortgage at the previously mentioned Italian bond rate would result in a monthly payment of $945.10 versus $623.50 at the U.S. rate.  Now you can see why high interest rates are crushing European governments’ finances, especially when they have to refinance hundreds of billions, if not trillions of debt each year.

To say that we in the U.S. have been sheltered from what is occurring in other parts of the world is an understatement.  Also, it is an omen of what fiscal steps we need to take here in the U.S. to avoid the same predicament. 

Is my glass half full or half empty? 

2011 has been an emotionally laden, financial rollercoaster no matter how you look at it.  During this year, financial successes or setbacks often took at backseat to other events for many clients’, friends’ and family members’ lives who encountered the loss of a loved one, an illness, etc.  Life is often not picture perfect on a daily basis, and it is ever-changing and cannot be taken for granted.   

As such, 2011 has been a very mixed year of setbacks and blessings.  When it comes to setbacks, it hurts when Toan, Sally or I see you impacted by financial setbacks, an illness or injury, struggling with a wayward child, been laid off, etc..  In no way do I want to make light of what some of you have or are enduring.  However, at this point, I would rather reflect on the blessings.  Everyone at the firm truly enjoys hearing about the blessings occurring in your lives, and it lifts our spirits when you share them with us.

Along these lines, I have been blessed with a great family, devoted associates, a solid mix of clients and friends, who I feel privileged to be a part of their lives.  Also to have an extended network of competent and caring professionals (i.e., CPAs, accountants, attorneys, contractors, etc), and resources available allows us the ability to tap into their wisdom and provide the tools to help us be your advocate.

When we hear about the various events in clients’ lives, we are reminded that our core purposes are:

• To inspire, educate and empower you to achieve your lifetime goals. 
• Be your financial advocate during your inevitable lifetime transitions. 
• Build a strong, enduring firm whose legacy is to make a positive impact on those individuals’ lives we touch.

Based upon my 24 + years in this industry, I can honestly say that I love my job, because it involves people (i.e., you) who I value and care about.  Also, you allow me to be myself.  I would be sick if I had to wear a suit and tie to work every day and spend the majority of my time talking market statistics to try to impress you, while a big screen TV displays CNBC in the background, versus getting to know you personally. 

Bottom line, everyone at IIA is your advocate and will treat you and your family with integrity and respect, and in the same manner we would members of our own families, except of course for crazy Uncle Ernie.

Look, this is not a commercial, and I am not trying to blow smoke at anyone.  I just look back over the past year with all the events happening domestically and globally and realize how my life has been enhanced through being involved with you.  Personally, I’ve had several hospital visits this year for my son and relatives and thankfully everyone is doing well.  However, it really hit me on the day after Thanksgiving, when Luke, my middle child, broke his arm falling from a tree in the backyard, while helping us hang Christmas lights. 

Believe me when I tell you, it was not a pretty break.  We went to two hospitals, incurred an overnight stay and Luke underwent surgery, all within a 24-hour period.   However, he is in a cast and recovering nicely.  Look, I’ve had fractured bones, a dislocated knee and subsequent surgeries, but that all pales in comparison to the feeling of shock and horror I experienced seeing my son injured.  On the flip side of the coin, I also experienced an unbelievable sense of appreciation and thankfulness for the medical care he received.  I must admit, that as a flawed human, it took others caring for my child to make me truly thankful and appreciate all that I have in life.

As a result, I want to say thank you for allowing me, Toan and Sally be a part of your lives.  During the course of the year, we are impacted by the events that occur in your life.  As such, we look forward to hearing more stories about the trips you’ve taken, the accomplishments of your kids, the crazy things your grandkids have said or done, the charities you’re involved in, and the little things in life that make your day. 

This holiday season, thanks for sharing your life stories and let us know if there is anything we can do for you.

Happy Holidays!

Quotes 

“I once bought my kids a set of batteries for Christmas with a note on it saying: ‘Toys not included.’” 
                           Bernard Manning, comedian

“Mail your packages early so the post office can lose them in time for Christmas”
                          Johnny Carson, entertainer 

“Anyone who believes that men are the equal of women has never seen a man trying to wrap a Christmas present.” 
                         Unknown

“In the old days, it was not called the Holiday Season; the Christians called it “Christmas” and went to church; the Jews called it “Hanukkah” and went to synagogue; the atheists went to parties and drank.  People passing each other on the street would say “Merry Christmas!” or “Happy Hanukkah!” or (to the atheists) “Look out for the wall!”
                        Dave Barry, columnist

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. 

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.