The Good   

• The U.S. Labor Department reported today that private employers added 67,000 workers last month.  However, it also reported an increase in the unemployment rate, but the majority of that increase may be attributed to temporary census positions coming to an end. 
• Yesterday the Institute for Supply Management reported that U.S. manufacturing rose in August and a similar index in China did as well.  This news provided a huge boost to U.S. and international stock markets, and a welcome break from the recent declines and pessimism.   

• The number of buyers who signed contracts to purchase homes rose 5.2 percent in July after hitting a record low in June, according to the National Association of Realtors.   
• Retailers reported better than expected back-to-school sales, which are a sign that the consumer is not only alive and breathing, but spending. 
• I have spoken with two local business owners this week; one owns a professional services firm, and the other is a co-owner of a manufacturing firm.  Both indicated that they have not only navigated through the recession (i.e., survived), but now they are receiving new business orders and spending money to expand (i.e., thrive).  It is encouraging to see small business owners / entrepreneurs taking positive steps and using an uncertain environment to expand and strengthen their businesses.

The Bad 

• I do believe uncertainty still reigns supreme.  As a matter of fact, notes released this week from the Federal Reserve’s August 10^th meeting show that officials concluded that the U.S. “was operating farther below its potential than they had thought, that the pace of the economy had slowed in recent months and that growth would be more modest during the second half of 2010 than they had anticipated.”   Fed officials believe the economy has drifted even farther away from its long-run potential than previously thought.  This conclusion supports what Mr. Michael Boskin, Stanford economics professor and senior fellow at the Hoover Institution, stated in a Wall Street Journal op-ed piece yesterday.  He noted that current economic recovery is quite dismal compared the recoveries in the 1974-75 and 1981-82 recessions. 

Possibly, The Ugly 

• Currency trading has grown substantially over the last several years.  To give you some perspective, U.S. stock trading averaged about $134 billion a day in April of this year.  Whereas, currency trading volume around the world has hit $4 trillion a day.  Much of this is due to investors in the wealthiest nations looking to diversify outside their home markets in times of turmoil, which I can understand.  However, mutual funds and ETFs have picked up on this trend and now offer small investors a chance to get in on the action.  One important aspect to all of this is that currency trading usually involves placing bets with borrowed money.  Currently the Commodity Futures Trading Commission allows investors to borrow up to $50 for every dollar invested, which is down from the prior limit of $100 borrowed for every dollar invested.  As such, regulators are becoming concerned about individual investors’ ability to handle large amounts of leverage, though it has been limited thus far.  Basically, for the vast majority of investors, I am not keen on the idea of investing borrowed money, especially knowing that this type of speculation is what created the recent “Great Recession.”
•  The U.S. Securities and Exchange Commission is investigating “quote stuffing.”  This occurs when a large volume of trades are placed, essentially flooding the market with orders and then the orders being cancelled within fractions of a second.  The concern is large institutional traders are using these nanosecond orders to manipulate stock prices for a quick profit.  Also, this high-frequency trading may have played a part in the “flash crash” which occurred in May of this year and could cause similar events in the future.   
• The second largest municipal bond default this year occurred when Harrisburg, PA (the state’s capital city) defaulted this week on a $3.29 million payment due investors.  There has not been a flood of municipal bond defaults, but this is just a sign of how precarious some states’ and cities’ finances are.

In conclusion:        The first trading day in September started with a bang; however, September historically has been a challenging / negative month for investors.  In addition, last month was the worst August for U.S. stocks since 2001, and some analysts believe that September’s normally negative returns came early this year.  Investor and, in my opinion, consumer sentiment has been so negative that any glimmer of hope or positive news will boost stock prices.  In addition, short sellers, who make bets via selling stocks that they believe will decline, may have purchased back those shares to cover their positions in light of the recent stock rally.  Thus, part of the rally may be short sellers covering their bear market bets versus it being money going into stock purchases for long-term investment purposes.  

For a good portion of this year, the stock markets in the U.S. and around the globe have been volatile and oriented toward short-term trading and not investing.  This combined with all the economic uncertainty has caused, and continues to cause, huge amounts of money to remain on the sidelines or flood into bonds.  

Along these lines, I heard an analyst on CNBC this morning state that he believes that the U.S. and possibly other overseas stock markets may rebound in September, but then back off in the following months.  Personally, I believe this makes sense.  Between now and the end of the year, we may continue to see volatility and the economy remain sluggish, but move in a positive direction.  In addition, investors are clamoring for returns better than the minimal amounts being offered in CDs, savings, checking and short-term bonds.  Thus, once we see some continued positive economic news, that money on the sidelines will begin creeping back into the market.  I have spoken with several CPAs, attorneys, business owners and other professionals, and they all have the same opinion; give me some certainty as it relates to my (individual and firm’s) income tax rates, estate tax laws, and various other regulations and policies, and then I can make plans and feel more comfortable spending and investing money. 

I know I have been somewhat negative in my prior commentaries; however, we are almost three- quarters of the way through this year, and the three major U.S. stock indices (Dow Jones Industrials, S&P 500 and NASDAQ) are all in negative territory.  I may be completely wrong, but I believe the remainder of this year could be somewhat flat for stocks, but 2011 shows promise.  This belief is based upon a picture of companies rehiring, certainty on tax rates, investors willing to take more risk, and consumers finally succumbing to a pent-up demand to spend.  I believe we saw consumers break out their wallets in the beginning of this year, and we saw stock prices react positively.  However, uncertainty returned and caused them to close their wallets and stocks reacted accordingly.  

This past recession has been long and brutal for all.  As such, if we get a glimmer of clearer skies late this year and the beginning of next year, then it can set the stage for a more lasting economic recovery and stock market rally (i.e., bull market).  Let’s hope that in 2011 cash hoarding, bond buying and high-frequency trading / speculation become a passing fad and take a backseat to more traditional / fundamental investing.  Disco and dot.com stocks had their hay days and many considered them to be permanent fixtures of our society.  Well, I believe, in the years and decades to come, many of those individuals or investors who took extreme measures and abandoned diversification and investing in stocks for the long-term will find that investment strategies (in hindsight) will be as popular as a Saturday Night Fever album at a garage sale.       

Quotes          

“Research shows that when we count three blessings a day, we get a measurable boost in happiness that uplifts and energizes us.  It’s also physically impossible to be stressed and thankful at the same time.  Two thoughts cannot occupy our mind at the same time.  If you are focusing on gratitude, you can’t be negative.”

                                    Jon Gordon, consultant and motivational speaker 

“Draw from the past, live in the present, work for the future.”

                                    Abraham Geiger, rabbi and scholar

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.

The “Hindenburg Omen” is the hot indicator of the week, and is flashing that the stock market could significantly correct / decline in the upcoming weeks / months.  On the surface, some of these types of indicators are not only foreboding, but appear to make compelling arguments.  However, as noted in yesterday’s Wall Street Journal, the Hindenburg Omen was created in 1995 and since then significant stock market declines have followed the indicator only 25% of the time. 

That being said, the following comments are from yesterday’s Wall Street Journal from much more astute economic and investment professionals regarding the Hindenburg Omen:  “People are grasping at straws and always looking for someone who might have all the answers,” says Jeremy Siegel, finance professor at the University of Pennsylvania’s Wharton School of business.  Barry Ritholtz, chief executive of Fusion IQ, an online quantitative-research firm, says the Hindenburg Omen is a backward-looking indicator that doesn’t consider causation.  He labels it “recession porn,” contending that investors are attracted to negative commentary and conspiracy theories during skittish markets.

Realistically, I believe we are in a slowing economy and the recovery is losing steam.  As a result, it is not surprising that stock prices have declined in the near term.  Add in the other economic concerns that I’ve discussed in prior commentaries, and it is even more understandable why the stock market is retracing its steps.

As is relates to opinions on the status of the U.S. economy, I don’t mean to be crass; however, this week I asked the managing partner of a local CPA firm what his business clients are telling him about their firms’ prospects and he replied – “it sucks!”  That is not reassuring.  Reinforcing this negative perception was the announcements earlier this week from Congressional Budget Office’s Director, Douglas Elmendorf, who said the U.S. economy faces a tough recovery from the recession.  This is in addition to reports from the U.S. Commerce Department that orders for durable goods (i.e., big ticket or purchase items), excluding a big increase in airline orders from the transportation category, fell as well as business investment.   

The ant and the grasshopper story and potentially massive fraud 

Last week the U.S. Securities and Exchange Commission filed fraud charges against the state of New Jersey for misleading investors who purchased the state’s municipal bonds.  Basically New Jersey was “uniformly dishonest” with its accounting and misrepresented the state’s finances.  New Jersey basically stated that its balance sheet was on a much more solid footing than it actually was.  Ironically, in a settlement this week, the state neither admitted nor denied wrongdoing but promised to not commit such fraud in the future.  Under the same circumstances, individuals or private companies would face huge fines and possibly jail time; however, public / government entities and their representatives get off without even getting their hands slapped.

Unfortunately, this may not be an isolated case.  According to a recent report from the Pew Center on States, no fewer than 21 states have funded 0% for their retirees’ health care and non-pension benefits (see the following link to the article on this subject http://online.wsj.com/article/SB10001424052748704913704575453800747267726.html?KEYWORDS=States+press).

In addition, in April of this year, the New York State Comptroller, Thomas DiNapoli, issued a negative report on that state’s financial practices.  He noted that the state’s budgets increasingly used “financial manipulations” to present a “distorted view of the state’s finances.”  Basically Mr. DiNapoli believes, in his words, the powers that be in New York are playing a “fiscal shell game” that is meant to “mask the true magnitude of the State’s structural budget deficit.”

In today’s Wall Street Journal Opinion section there is an article titled “Public Pensions and Our Fiscal Future” (see attached link http://online.wsj.com/article/SB10001424052748703447004575449813071709510.html).

This article validates that state budgets are completely out of balance, and their true liabilities are not being reported or are being ignored.  California has a real problem when 80% of its tax collections go to employee compensation and benefits.  Additionally, in separate article, a study by the Pew Center on states’ liabilities noted that California is not putting money aside for future retiree benefits.

As a child, most of us read the famous ant and grasshopper story.  As you know, the grasshopper played all summer while the ant spent a good portion of its time working to put food away and make preparations for winter.  Well we all know how that story ended – the ant remained warm, cozy and well-fed during the cold winter months and the grasshopper, let’s just say he didn’t make it to next years Spring Break.

We are consistently told that we need to live within our means and put money aside for a rainy day and for retirement.  However, those running various states’ budgets and programs don’t feel the need.  Maybe because by the time this issue becomes a real problem, they will be retired and will have passed the problem / buck onto someone else.

I sincerely hope the potential fraud previously referenced is not wide spread.  Otherwise, it could be quite tough on municipal bond holders if various states have misrepresented their ability to pay their obligations and aren’t able to and ask to restructure their bonds and interest payments.  Basically, they would ask bondholders / investors to accept much less than what they are owed or possibly nothing.  Otherwise, the states’ other choices are to dramatically raise taxes to collect more revenue to fund their bonds and other obligations.  Either way it’s a lose – lose situation.  The states’ bond holders receive much less than their original investment or money due them, and the states’ tax payers face much higher income taxes leaving them less money for their current living expenses or to set aside for savings / retirement.  To put it bluntly, tell me how you would feel if I told you that at some point in the future you find out that the $250,000 that grandma invested, in what she considered very conservative, in municipal bonds are now only worth $75,000, worthless or won’t be paying her the regular quarterly interest payments she relies on due to budgetary issues.  Basically, it could very easily disrupt a well-planned and previously considered secure retirement.  Grandma may have lived through the Great Depression.  What did she do to deserve this?

By now you may be thinking; ok Tony, enough of the gloom and doom, what’s your point? 

Bottom line, I continue to hear more news about a slowdown in the U.S. and other overseas economies, and less than enthusiastic comments from business owners and executives from all size firms.  Unfortunately, there is enough economic news to support the opinion of a slowing economy, lower corporate profits and possibly even a double-dip recession.  Also, an extended recession may ferret out even more bad accounting practices that thus far have been able to avoid the light of day. 

As such, I am not inclined to take any additional risk with portfolios.  What this means, in my opinion, is that some additional liquidity, short-term and/ or income-oriented investments may be a good option versus adding to growth-oriented investments in the near term.  This is not panic time, and the Hindenburg Omen has nothing to do with it.  It is basically a reaction to a decelerating economy and putting aside some funds for either safety, liquidity, higher income or a better buying opportunity. 

Quotes         

“When the worms are scarce, what does a hen do? Does she stop scratching? She does not. She scratches all the harder. A lot of businessmen have been showing less sense than a hen since orders became scarce. They have laid off salesmen; they have stopped or reduced their advertising; they have simply resigned themselves to inaction and, of course, to pessimism. If a hen knows enough to scratch all the harder when the worms are scarce, surely businessmen … ought to have gumption enough to scratch all the harder for business.”

                                    B. C. Forbes, financial journalist 

“The prudent, penniless beginner in the world labors for wages for a while, saves a surplus with which to buy tools or land for himself another while, and at length hires another new beginner to help him. This is the just and generous and prosperous system which opens the way to all, gives hope to all, and consequently energy, and progress, and improvement of conditions to all.”

                                  Abraham Lincoln, President and statesman                                 

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.

The need for income, economic uncertainty and stock market volatility are various factors of why investors have flocked to bonds.  Bonds can have a place in many investors’ portfolios; however, there is an old saying that too much of anything isn’t good for you.  This is also true as it relates to bonds. 

At the beginning of 2000, stocks were the investment du jour and now 10 years later bonds are. Oftentimes, greed and fear are the primary driving forces and all other fundamental analysis of various investment sectors is ignored.  Along these lines, bonds can provide income, but obtaining the highest income possible should not be the overriding factor.  We need to consider the quality / rating of the bond (i.e., what is its perceived risk of default – see Credit Risk definition below) and the length of time (e.g., how many years) until it matures. 

As it relates to credit risk, lower quality, high-yield or “junk” bonds can be an attractive option for some investors.  The term “junk” bonds is the result of Michael Milken’s infamous role, as a bond trader with Drexel Burnham, in the development of the market for high-yield bonds during the 1970s and 1980s and manipulation of it as well.  For example, let’s look at two sets of 10-year bonds.  The first set being U.S. Treasuries (high quality / minimal default or credit risk) paying 3.0%/year.  The second set being a group of high-yield (lower quality / higher default or credit risk) bonds paying 8%/year and bought at a discount (see definition below)  to their par / maturity value (see definition below).   An additional 5% is tempting, and investors may be willing to allocate some of their money, take a very calculated risk of default and go for the higher yield as offered by the second set of bonds.  In addition there is the potential for appreciation if the high-yield bonds increase in value as they come nearer to maturity or the underlying company’s financial situation improves and the bonds’ ratings are upgraded.  Remember, one man’s trash is another man’s treasure.  That being said, it would be foolhardy to allocate the vast majority of a portfolio to a bond sector that is known for a higher potential risk of default / losses. 

Fixed income / bond analysis can be quite challenging; however, there are bond fund managers who are very astute at finding these bargains and include high-yield bonds in their portfolios to increase the overall yield for their shareholders.  A small percentage of a fund’s overall portfolio allocated to high-yield bonds can noticeably improve the overall yield of the entire fund. 

Also, it is important to remember that bond prices and interest rates have an inverse relationship (See chart below titled Relationship Between Bond Prices and Yields).  If interest rates go up, bond prices go down and vice a versa.  This change in the daily price of a bond does not impact the interest it is paying to the investors that currently own it.  Also, it may not be a factor if the plan is to hold the bonds to maturity.  However, if price fluctuations are a concern or there may be a need to sell the bonds prior to them maturing, then this is something to take into account.  Because the longer a bond or bond fund’s maturity and duration (see highlighted definition below), then the greater price impact (positive and negative on the bond). 

That being said, bonds have been in a long-term bull market due to declining interest rates over time.  Since interest rates are at historic lows (See last chart in this commentary titled History of Interest Rates), it may be helpful to focus on why duration becomes an important component when reviewing the bond portion of a portfolio.  Essentially, a bond or bond fund’s duration is an indicator how it will be affected price-wise by interest rates.  I firmly believe that if inflation and higher interest rates are a concern, then consideration should be given to bonds and bond funds with shorter durations to lower your interest rate risk (see definition below). 

The following equation is a simplistic view of duration’s impact on the value of a bond / bond fund (average duration x % change in interest rates = % change in bond fund’s value).  For example, it may be tempting to invest in a bond fund (A) yielding 9.0% with duration of 10 versus bond fund (B) yielding 7.0% with duration of 4.0.  However, let’s consider all the facts.  If interest rates increase just 1.50% over the course of a year, then bond fund (A) would see its share price drop approximately 13.50% (9.0 * 1.5%) versus bond fund (B) would see its share price decline approximately 6.0% (4.0% * 1.5%). 

Thus, focusing only on current interest income or yield can be deceiving.  This is why I have tried to be diligent in finding bond funds with what I perceive to have decent yields, a good overall mix of bonds, but also reasonably moderate to shorter durations.  I am concerned that at some point in the future (maybe 12 to 18 months) we may see interest rates begin to creep up, and we want to be in funds that are able to better weather this.  Also, let’s not forget the plus side of higher interest rates in that new bonds being issued will pay higher interest, which means more income or cash in hand for the investor.  The higher income from the newer bonds purchased offsets some of the price decline of the overall value of the older bonds within the funds (i.e., you’re getting more income monthly, but the net asset value / price per share of the fund is declining in value).  However, for many investors this positive is often lost when they see their principal go down in the meantime. 

Bottom line, under our current interest rate environment, moderation is important.  As such, government agencies, mortgage backed securities, corporate bonds (high grade to high-yield), foreign government bonds and convertible bonds should all be considered for income-oriented investors, along with shorter to moderate average durations for the bonds being held individually or in a fund. 

Definitions 

Lehman Brothers Aggregate Bond Index:  This index is to bonds what the S&P 500 is to stocks. It is the most widely quoted bond index and provides a good approximation for the performance of the U.S. bond market as a whole.  Not all funds should be judged against the index though, as fund portfolios and strategies can differ dramatically from those of the index. 

Credit Risk:  The risk that a bond will default prior to its maturity.  If a bond defaults, bond owners may receive far less than they would have received had the bond matured.  And even if a bond doesn’t actually default, its value can rise and fall in the marketplace based on investors’ concerns over that eventuality.  In general, lower-rated bonds carry more credit risk than higher-quality issues, but often pay a higher yield to compensate for the greater likelihood of a default.  Bonds that are rated BBB and higher are typically considered investment grade, while bonds rated BB and below are considered high-yield, or “junk,” bonds. 

Interest-Rate Risk:  The risk that a bond or bond fund’s value will decline in a rising-interest-rate environment.  A bond that pays a 5% yield is going to be worth less if interest rates go to 7% than if interest rates go to 3%. 

Duration:   A measure of a fund’s sensitivity to interest rates, duration is expressed in years. For bond mutual funds, duration provides a rough estimate for a fund’s change in value given a 1% change in interest rates. A fund with duration of 6.0 years, for example, would be expected to gain roughly 6% if interest rates dropped 1%, and lose 6% if rates increased 1%. 

Yield:  In its simplest form, yield is the amount of annual income paid by a bond or bond fund divided by the bond or bond fund’s current price.  Investors may come across other yield-related terms, including SEC yield, current yield, and yield to maturity.  SEC yield refers to the annualized yield paid by a fund during the most-recent 30-day period (it is calculated with a formula that requires information on the fund’s individual holdings), while current yield and yield to maturity typically refer to yields on individual bonds. 

Par:  Par value, also known as face value, is the amount a bond owner receives when a bond matures.  Most bonds have a par value of $1,000. 

Premium/Discount:   A premium bond trades at a value greater than its par value, while a discount bond trades at a price lower than its par value.  If current interest rates are lower than a bond’s coupon rate, the bond will typically trade for a premium.  If current interest rates are higher than a bond’s coupon rate, the bond will typically trade at a discount.  Premium bonds are generally less sensitive to interest-rate changes than discount issues, particularly if the borrower has an option to refinance (i.e., the bond is “callable”; see below) at some point in the near future. 

Callable:   A callable bond can be redeemed or repurchased by the borrower prior to maturity, usually at a slightly higher price (the bond’s call price) than the bond’s par value.  For example, if interest rates fall dramatically after a bond is issued, an issuer may choose to call the bond and reissue a new bond with a lower coupon rate. That would serve to cut the issuer’s borrowing costs.  A noncallable bond doesn’t preserve the same option for the borrower.  As a result, noncallable bonds tend to be more sensitive to falling interest rates than callable issues, as their upside potential is not capped by a call price. 

Charts

Quotes                                 

“Increased borrowing must be matched by increased ability to repay. Otherwise we aren’t expanding the economy, we’re merely puffing it up.”     

                                    Henry C. Alexander, banking executive 

“Remember, diamonds are only lumps of coal that stuck to their jobs.”

                                    B. C. Forbes, financial journalist 

“We are all manufacturers-making good, making trouble or making excuses.”

                                    H.V. Adolt           

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.

The economic news over the last few days has been a downer.  Cisco, the maker of equipment that is the backbone for the internet reported earnings below analysts’ expectations.  John Chambers, Cisco’s CEO, noted that “there are some challenges that are contributing to an unusual amount of conservatism and even caution.”  Separately, the U.S. Labor Department reporting that the number of people filing for unemployment benefits for the first time rose last week to 484,000.  Economists expected the number to drop. 

The overriding opinion is that we have a slowing economy here in the U.S., and there are signs that this could be case the in China and other countries.  Unfortunately, this is only one piece of the puzzle.  The other pieces are the almost record high level of distrust and cynicism as it pertains to the stock market, government officials, business leaders, policy, etc.  Which will we eventually become a victim of – inflation, deflation or stagflation? 

Feelings of cynicism & distrust, whether warranted or not, are holding what I believe to be the majority of businesses and consumers from spending money.  They either don’t trust the economic landscape going forward, or they are sitting tight until they see much clearer skies ahead.  Unfortunately, this economic and monetary inertia either prevents or delays spending, building and eventually hiring.  Being only 48 years old, I cannot comment firsthand about what it was like during the Great Depression, the go-go 60’s or depressed 70’s, since they are either before my time or I was not attune to what was occurring.  However, I can honestly say that since entering the professional work force in January of 1985, I have never seen such a sullen, negative, distrustful and fearful overtone in the U.S. 

Regarding inflation, deflation and stagflation, no one knows for sure what lies ahead.  Personally, it is my and others opinion that we may see deflation (i.e., lower prices) in the near term and possibly stagflation longer term.  Stagflation is a combination of a stagnant economy and inflation (i.e., higher prices).  That being said, an opinion is only an opinion, and it would be utter madness to try and reallocate a portfolio weekly based upon what the prevailing opinion of the days is. 

Unfortunately, it seems that daily there is another announcement of some crazy idea being touted.  For example, adjusting the federal tax code so that individuals living in high cost of living areas, such as New York or San Francisco, pay a lower tax rates say than others living in Topeka, KS or Omaha, NE.  You can say what you want, but individuals choose where they want to live, and I don’t believe those living in suburban or even rural (which many consider undesirable) areas should pay higher tax rates than those who choose to live in large cosmopolitan or coastal areas.  Are we to assume that someone living in Aspen or Vail would need to be subsidized for choosing such a “harsh” cost of living locale? 

Another absurdity is employers facing discrimination charges for declining to hire an applicant due to their criminal record and bad credit history.  As a registered investment advisor responsible for the investment of other people’s money, I find it completely unthinkable that an applicant with a criminal record and poor credit history would even be considered.  Bernie Madoff may have conned the SEC and other regulatory authorities, but I have enough common sense to not put myself, associates or clients’ livelihoods in jeopardy. 

I am sorry if you find my comments offensive.  However, I try to be pretty open-minded and if I am taken back by such ideas, then it affects my financial behavior and not for the positive.  As a matter of fact, when I mentioned these “ideas” to Toan and Sally, they cringed.  Take this effect and multiply it millions of times across the U.S. and you begin to create a cynical and distrustful mindset that results in reduced spending and a very short-term and non-committal investor attitude.  I am looking forward to more consumer and investor optimism and commitment, which will result in spending, hiring and economic expansion and improvement for all, but it may be a while before this happens.  

The Fed’s new normal 

The following is a CNBC interview with Mohamed El-Erian, CEO and co-CIO of Pimco.  Mr. El-Erian is CEO of one of the top fund companies and largest bond investors in the world and previously ran the Harvard Endowment Fund.  Thus, he knows of what he speaks. 

That being said, Mr. El-Erian makes a compelling case that there is little more that the Federal Reserve can do to juice the U.S. economy.  In addition to his insightful comments, I have heard other investment professionals basically state that the Federal Reserve is ineffective at this point.  Think about it, you can lower interest rates to practically zero, like they did in Japan, but if individuals are hesitant to spend, then it makes no difference.  A zero percent loan will not lure me to buy a bigger house or new car if I am worried about my personal or firm’s economic future.  What is needed is stability of policies and incentives. Fiscal stimulus as it pertains to tax rates will do much more to stimulate the economy, than the course the Fed has taken in lowering rates. 

I strongly recommend you listen to this five minute segment. 

http://finance.yahoo.com/video/companynews-18928726/el-erian-on-fed-s-quot-new-normal-quot-21329984 

Quotes                                 

“The mint makes it first, it is up to you to make it last.”                                                

                                    Evan Esar, humorist 

“Diligence is the greatest of all teachers.”

                                    Arabian proverb 

“When one door closes another door opens; but we often look so long and so regretfully upon the closed door that we do not see the ones which open for us.”

                                  Alexander Graham Bell, inventor 

“An optimist sees an opportunity in every calamity; a pessimist sees a calamity in every opportunity.”

                                Winston Churchill, statesman 

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. 

• The Labor Department released employment numbers that were less than enthusiastic. 
• As of this Wednesday, over 80% of the S&P 500 stock index companies have reported that earnings were up 46% compared to the prior year.  However, much of these gains were from cost cutting and increased efficiency.  Along this line, it has been mentioned that many of these companies may continue to prioritize cost cutting and efficiency improvements versus hiring additional workers.  As such, this is a counterbalancing equation in that companies may be able to preserve their profit margins, at the expense of lower consumer demand and sustained higher unemployment. 
• I continue to read and hear that many companies continue to struggle with parts shortages.  This may be a continuing sign that some manufacturers or suppliers would rather backlog orders from their customers than hire additional workers. 
• Some retailers are reporting less than robust sales and aren’t overly enthusiastic about the back-to-school shopping season. 

Yes, U.S. and overseas stock markets have rebounded over the last month or so, and some investors may question why they still have some money (i.e., cash) on the sidelines.  It should be noted that the three widely quoted stock indices (Dow Jones Industrials, S&P 500 and NASDAQ) are basically flat for the year, which means lots of emotions (up and down), but in reality no progress.

I believe that we may see signs of softness in the U.S. and some overseas economies in the coming months, which may result in some temporary pullbacks in stock prices.  As a matter of fact, as of mid-day today, the stock market is down as a result of some of the previously noted items.  This is not a horrible event or reaction, because it allows for more opportunistic buying.  For example, I know for a fact that many fund managers have a list of stocks they wish to acquire, but at more favorable (i.e., lower) prices. 

If you are fully invested, you may see some volatility in the months ahead, before you see a continued uptrend.  If you have cash on the sidelines, this volatility will allow you opportunities to put it to work.  As such, I believe a pragmatic attitude, combined with patience, is the key to future investor profits. 

What does IBM know that we don’t about interest rates? 

The Wall Street Journal reported today that interest rates are near record lows, and a good example is IBM’s recent sale of $1.5 billion in three-year bonds with an average yield of 1.0%.  Borrowing money at 1.0% is great for companies or consumers.   But what is interesting about this is that IBM, going as far back at 1979, has an uncanny track record of issuing bonds near lows in interest rates.  Some investment professionals believe that this is a signal that interest rates will raise in the next year.  If this is the case, why didn’t IBM sell the bonds with longer maturities of say 10 – 20 years?  No one knows for sure, but the current low interest environment is a boon to corporations issuing debt and individuals refinancing their homes.  Both are able to cut their interest costs significantly. 

The previously mentioned soft economy keeps the odds of dramatic interest rate hikes by the Federal Reserve a non starter for the foreseeable future, but not forever. 

Quotes                                 

“A father’s words are like a thermostat that sets the temperature in the house.”

                                    Paul Lewis, musician 

“Life is like a game of cards.  Reliability is the ace, industry the king, politeness the queen, thrift the jack:  Common sense is playing to best advantage the card you draw, and every day as the game proceeds, you will find the ace, king, queen, jack in your hand and opportunity to use them.”

                                    Edgar Watson Howe, novelist and editor 

“Life is not about one shining moment.  You can’t just kick back and put your feet up on your desk.”

                                    Peggy Fleming, Olympic skater 

“Happiness is a side effect of living purposefully, standing up for what you believe in, and developing your full potential.”                    

                                    Dan Baker, author           

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.

Hussman is not optimistic 

John Hussman has been a successful fund manager and is familiar with hedging his bets.  He recently stated in a July 27, 2010 InvestmentNews.com article that he sees investors become more risk oriented, even though economic fundamentals are deteriorating.  

Doll takes a tempered position 

Mr. Doll is the Chief Equity Strategist at BlackRock, which is one of the world’s largest asset managers.  He believes that economic uncertainty is easing.  However, this recovery will be a long, tedious grind characterized by continued volatility. 

Three highly successful and experienced advisors with different opinions on the stock market; it will be interesting to see who is right when the year ends.

From trains to taxes 

Norfolk Southern Corp. reported a surge in earnings from increased shipments and prices.  In addition, a company representative announced that it’s brought back nearly all the employees furloughed during the recession and actually is hiring some employees in areas where business is best.  Earlier this month CSX Corp. (eastern railroad) reported positive improved earnings and increased shipments. 

Just recently there has been a difference of opinion in two top U.S. policy officials – Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner.  Mr. Bernanke believes not raising income taxes is one way to continue stimulating the economy.  However, Mr. Geithner thinks otherwise.  One positive note I see is some talk of reconsidering any tax increases, until the economy is a much better position.  Previously, I thought this was not an option.  However, there may be some open minds in Congress to extend the current rates at least for another year. 

I find it encouraging to hear about increased shipments for railroads, because shipping equals business activity.  In addition, I believe any actions taken that can increase consumer confidence, such as extending the current tax rates, may increase spending and ultimately new jobs, which is the most crucial component for an economic turnaround.  More jobs (i.e., more new hires) will result in more tax revenue to the government at all levels (federal, state and local) and ultimately more home buying, which is what is needed to eventually soak up all the excess houses currently on the market.  Any positive employment news is welcome. 

Quotes                                 

“If you think about what you ought to do for other people, your character will take care of itself.”

                                    Woodrow Wilson, U.S. President 

“Make the best use of what is in your power, and take the rest as it happens.”

                                    Epictetus, Greek philosopher 

“We should manager our fortunes as we do our health – enjoy it when good, be patient when it is bad, and never apply violent remedies except in an extreme necessity.”

                                    Francois de La Rochefoucauld, 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. 

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.

Additional good news came from UPS noting higher earnings due, in part, to increased package shipments.  Also, American Express and Capital One both noted increased spending and fewer bad loans from their credit card customers.  Overseas there was positive economic news from the Euro-zone as Germany reported robust growth, which helps offset the weakness of its counterparts such as Greece. 

Offsetting or counterbalancing this good news was the fact that the number of unsold homes in the U.S. is increasing, and the Baltic Dry Index (BDI) just recently rebounded from its longest losing streak in 15 years.  You may ask, what is the BDI and why do I care?  It is important because the index tracks worldwide international shipping prices of various dry bulk cargoes.  The index provides an assessment of the price of moving major raw materials by sea.  Thus a declining (BDI) is representative of lower shipping rates, and reflects lower demand to ship raw materials, which eventually are processed or manufactured into products.  Ironically, the rates for shipping manufactured goods (i.e., container shipping rates) have actually been steadily increasing.  As such, both of these items should be important leading indicators of where global economies are headed.  However, in the short-term, they are sending mixed signals since demand to ship raw materials is weak compared to demand to ship finished or manufactured goods. 

Telling non-for-profits to raise their risk level 

To be a contrarian, and a profitable one at that, one must be able to stick their neck out when others won’t.  This is exactly what Mr. Verne Sedlacek CEO of the Common Fund has recently done in his interview with CNBC (see attached link below – I highly recommend viewing it). 

http://www.cnbc.com/id/15840232/?video=1548330548&play=1 

Mr. Sedlacek’s firm is an advisor to endowment funds, which are long-term oriented and have a goal of earning 5% in excess of the inflation rate.  As such, when it comes to long-term investing for conservatively minded institutions, he knows of what he speaks.  He notes that endowments in his opinion cannot achieve their investment objectives long-term by allocating 100% of their funds to fixed income and bond type investments.  They must consider stocks, real estate, and even alternative investments (that in some cases are not available to the average investor). 

Currently, fear has resulted in investors over-weighted in bonds.  Interestingly, 10 years ago investors were over-weight in technology stocks.  This resulted in stocks being overvalued at the beginning of the last decade.  As compared to now, bonds are considered by many to be overvalued.  It just seems that the herd syndrome just continues, but only to different investment categories. 

I’m not advocating all investors placing 100% in of their funds in stocks or bonds; however, it is interesting to hear Mr. Sedlacek talk about conservatively-oriented, long-term minded endowment funds having as much as 70% – 75% of their allocation in “risk” assets (i.e., stocks, real estate, commodities, etc.).  This type of investment allocation and objective advice from someone who manages tens of billions of dollars for institutions (who want their “nest egg” to continue into perpetuity) seems to get lost on the average investor whose emotions dictate their investment allocations / strategy. 

What history says about what happens after the market bounces off its lows? 

The following chart illustrates that the S&P 500 has been quite resilient for the five-year periods following bear market lows.  Please note, history is no guarantee of future results, but it is reassuring to see that the S&P 500 has averaged 18.95% annually for the five-year period following market downturns of at least 15% and more than 80 days.  This is one case that it would be great if history did repeat!

 I find some the previously noted facts listed in this commentary encouraging, but that doesn’t mean I am not still concerned about some the economic headwinds facing us.  The recovery of the global economies and stock markets are like a marathon.  We’ve made considerable progress; however, we still have the majority of the race ahead of us and some hills to climb. 

Quotes                                 

“As a historian, I think about the past. But, as a parent, I think about the future.”

                            Alice Greenwald, museum director 

“Friends and good manners will carry you where money won’t go.”

                          Margaret Walker, writer poet 

“He who is virtuous is wise; and he who is wise is good; and he who is good is happy.”

                          Boethius, philosopher 

“A single conversation across the table with a wise man is worth a month’s study of books.”

                          Chinese Proverb           

Tony Moeller
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 addition to the above items, China reduced the amount of U.S. government bonds it purchased in May, the financial reform bill has been passed and Federal Reserve officials have noted that they see slower growth in the second half of this year for the U.S. economy.  That being said, some Fed officials have mentioned that additional easing or lowering of interest rates may be necessary if this occurs.  And to top things off, Citigroup and Bank of America both announced this week that they may have made accounting mistakes and misclassified billions of dollars of debt in their attempt to “window dress” (i.e., make things look better than they actually are) prior financial statements.

The director of trading and derivatives at the Schwab Center for Financial Research noted in a web interview that he sees no clear direction to the market currently.  Unfortunately, pessimism has crept back into investors (from individuals to institutions) minds.  Warren Buffett met with the President this week to discuss the economy.  It is being reported that Mr. Buffett warned the President that the recession created a huge overhang of excess capacity in the economy that would simply take time to mop up. Unfortunately this resurgence of pessimism from Wall Street to Main Street can negatively affect spending and possibly put a damper on corporate profits in the near term, which does not help investors. 

Outside of some portfolio fine tuning, what can be done?  When it comes to personal finances, I believe prudence is the word of the day.  Taking steps to review and trim living expenses and keeping an emergency fund on hand are key.  Does this mean ignoring our investments?  No.  What it means is that by having a better handle on our day-to-day financial picture then, we can better allocate funds for short-term, intermediate and long-term needs.  Unfortunately, some are caught realizing that they need additional funds for various reasons, but have not budgeted or set the money aside.  As such, money that was initially intended for longer-term investment purposes is prematurely accessed, and oftentimes in down markets, which compounds the problem.  In no way am I trying to downplay declines in account values.  However, not needing to prematurely access those accounts allow them time to recoup when better times arrive.

Creating and sticking with a well thought out budget, along with an emergency or rainy day fund are two of the best things you can do for yourself.  Separately, refinancing a home mortgage (if lower rates can be obtained) is another.  In regards to this, I have spoken with several clients this week who have either refinanced or in the process of refinancing their mortgage.  Almost universally, they are each saving hundreds of dollars a month.  In turbulent times like these, any additional adjustments to your personal financial picture can help.    

Weird News  

You know you are in strange times when unions are hiring non-union demonstrators to picket.  This was actually reported in today’s Wall Street Journal.  Unfortunately, the unions are not alone.  Other advocacy groups are doing the same.  Thus, some of the unemployed are being paid minimum wage to protest various events.  As such, I appreciate the fact that some of the unemployed are earning something to pay for their living expenses, even if it is minimum wage. 

However, the disturbing part of this equation is that some, and in several cases, the majority if not all the demonstrators / protestors have no connection to the organization they are representing.  I find it very unfortunate that some organizations have chosen to create a fall sense of advocacy or passion for their cause. 

Quotes         

“An empty stable stays clean, but there is no income from an empty stable!” 

                         Poverbs 14:4

“Capital is to the progress of society what gas is to a car.”

                        James Truslow Adams, American writer and historian 

“Increased borrowing must be matched by increased ability to repay. Otherwise we aren’t expanding the economy; we’re merely puffing it up.”

                        Henry C. Alexander, famous bank executive 

“Money is a terrible master but an excellent servant.”

                        P.T. Barnum, circus showman 

“Money doesn’t change men, it merely unmasks them. If a man is naturally selfish or arrogant or greedy, the money brings that out, that is all. Money is like an arm or leg-use it or lose it.”

                        Henry Ford, car factory pioneer           

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.

In the financial debacle of late 2008 through spring of 2009, we avoided a depression similar to what occurred in 1932 (i.e., Great Depression).  However, now that we are out of the woods “economically speaking,” are we on track to see an economic relapse like 1938? The following chart is from today’s Wall Street Journal from an article titled, “Why This Isn’t Like 1938 – At Least Not Yet”

Let’s consider the following similarities and differences.  In 1937 the U.S. economy was in a strong recovery.  However, at the time the political powers that be in D.C. took this for granted and enacted various new policies (social security was just one of them) and consumers faced new taxes to pay for them.  In addition, the Federal Reserve raised reserve requirements for banks, which tightened credit and making it much harder for individuals and businesses to obtain credit.  Also during this period the administration took on a very anti-business attitude and imposed a slew of regulation. 

Granted, excessive borrowing, speculation and overindulgence by some individuals, investors and businesses caused the Great Depression, and action was needed to correct these abuses.  However, some of the actions taken (as previously listed above) were not helpful and actually caused the U.S. economy and stock market to collapse. 

For those who may not agree, consider this analogy.  You live in a small village in an emerging country.  You have a load of wood that you are hauling into town to sell, and your mule is pulling is the cart up the final and steepest hill of your trek.  Midway up the hill your mule starts to struggle.  Now what do you do? 

A.      You could stop and let the animal rest, actually grab the reigns  and  help the animal pull the cart up the hill or remove some wood from the cart and make a second trip with a lighter load. 

B.     You add more wood to the cart and begin whipping the poor animal to encourage it to finish the trek. 

In my opinion, option A is similar to lower taxes, offering economic incentives or reducing interest rates to help revive an economy.  However, option B is analogous to raising taxes, increasing regulations and putting policies in place that make it harder for individuals and businesses.  I would consider the second scenario tantamount to animal abuse, because you are punishing an innocent animal, breaking its spirit and possibly inflicting permanent injury.  Then the same can be said for the vast, vast majority of individuals and businesses that will be harmed by all the current actions being considered by our elected officials. 

When anyone advocates punishing businesses or the “wealthy” via higher taxes and more regulation, then be prepared to surrender part of your IRA, 401(k), pension plan, investment or college savings.  You cannot expect to earn reasonable, let alone increasing investment returns when the government is taking a larger share of the profits via higher taxes and putting costly policies or regulations in place.  That being said, does it mean we need no regulation and criminal actions should go unpunished, absolutely not! 

There are several positives that make me believe that we can easily not repeat history. 

• Historically low lending rates. 
• Record levels of cash available for investment. 
• Considerably lower top tax rates (for the higher income brackets) than those of in the 1930s. 
• Incredible technological advances and business innovations. 
• Much more open and freer trading practices. 
• An increasing number of middle class in emerging economies like China, India, Brazil, etc. 
• Hopefully, a return of frugality and common sense based upon the lessons we learned from the excessive borrowing and spending of the past decade. 

Overall, I continue to be cautiously optimistic based upon all that I read and hear.  However, I do get a case of “economic” indigestion based upon the continued mantra for the need of higher income taxes and more government involvement.  Currently, the International Monetary Fund and various European Union leaders are actually taking much more prudent, business-like or capitalistic approaches to solving their economic problems than we are.

I believe that the current investment climate (i.e., stock and bond markets) offers some good values, if U.S. policymakers don’t take what I consider to be a more restrictive policy.  

Think of it this way.  I am that villager in the prior example, and I am facing a “business- friendly” environment.  As such, I may borrow money or bring on investors so I can buy another or several mules and hire workers to load the wood to take into town.  This is economic boon for all involved – more people are employed, more sales resulting in more taxes being paid and profits being shared with the investors.  However, if I am concerned or believe the economic landscape is “hostile” toward my business, then I will not consider any expansion and may actually work the mule even harder to earn the same net income, and as a result I may end up killing it and going out of business.  In this scenario, no more income taxes are being collected by the government. 

As an investor, you need to seriously consider which economic environment you would rather face with your money.  Do we learn from history and take appropriate and reasonable actions as a nation or do we ignore it and let the chips fall where they may? 

Nice rebound! 

Many consider the recent uptick in the U.S. and overseas stock markets a reaction to the overly pessimistic tone that occurred over the last several weeks.  Does this mean it is bull market going forward?  Not necessarily, it just means that the overly pessimistic tone lead to some bargain hunters nibbling at stocks.  As a matter of fact, corporate insiders increased their buying last week.  The coming earnings releases for the second quarter and companies’ outlooks for the remainder of this year will be the deciding factor for what the market does in the near term.  I believe that there are enough negative opinions regarding the global stock markets and economies, that a roaring bull market is not in the cards.  At best, I think we may see a very gradual recovery with starts and stops along the way. 

Quotes 

“It takes two seconds to tell the truth and it costs nothing. A lie takes time and it costs everything.”

                        Randi Rhodes, talk show host 

“The stupid neither forgive nor forget; the naive forgive and forget; the wise forgive but do not forget.”

                       Thomas Szasz, psychiatrist and academic 

“There is a growing sentiment in America that regular saving should be ignored-that the government will take care of people and give them security when they get beyond a certain age or become old and unable to work, but it must be borne in mind that the people who earn and do save, take care of the government! Were it not for the thrifty and the willing workers, the government would be in a bad way.” 

                      George Mathews Adams, newspaper 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.

I am aware that not everyone is in a position to refinance their mortgage.  However, if you have an outstanding mortgage of over $100,000, a rate over 5.25%, and you don’t plan on moving in the next several years; then you may want to consider refinancing. 

Consider the following refinance example: 

Current            Five years ago someone obtained a $200,000 30-year mortgage at 5.75%.  The monthly payment (excluding taxes and insurance) is $1,167 (approximately $890 is interest) and an outstanding principal balance of $185,524. 

Refinance        The same individual is able to refinance and obtain a new 30-year mortgage at 4.25%.  For this example assume closing costs of $2,200.  The new mortgage balance is $187,724 ($185,524 + $2,200), and the new monthly payment (excluding taxes and insurance) $923 (approximately $665 is interest).  This is savings of $225/month or approximately $2,700/year from lower interest payments.  The savings would pay for your closing costs in approximately 10 months. 

If you applied the extra savings to your mortgage payment, your home would be paid off in 19.90 years (i.e. 5.1 years or 61 months sooner).   The resulting savings from not having to make 61 monthly payments of $1,167 is $71,187 or $3,577/year over the life of the new mortgage. 

The following are the links you can use to do the same calculation for yourself or feel free to contact us and we can assist you. 

http://finance.yahoo.com/calculator/family-home/hom03 

http://finance.yahoo.com/calculator/loans/det02 

IIA nor any of its staff are mortgage professionals; however, we do believe that some of you may benefit from this analysis. 

Losing faith 

Former Fed Reserve Chairman Alan Greenspan stated on CNBC today that the recent stock market decline is “typical” of a recovery and international instability is more a contributor to the decline than problems here at home.  Mr. Greenspan believes that this is a “typical” pause in an economic recovery.  That being said, in past recoveries small businesses do most of the hiring and start to pull the economy out of a recession.  Currently though, small businesses are having a hard time getting loans because smaller banks aren’t lending since they are loaded up with struggling commercial loans. 

Historically, the average American and investment professional are overall optimistic.  Along this line, capitalists and optimists, not pessimists, created the iPhone, air conditioning, MRI machines, jet airliners, and many other items we take for granted today.  Even the Internet, which most businesses and many of us can’t live without, came to be the incredible tool it is today from private investment.  If not for healthy competition, we would not have these luxuries today. 

Nonetheless, there has been a constant drum beat over the last year or two that capitalism and businesses are bad and greedy.  On the other hand, there is an unprecedented dim view of politicians in both parties, and the policies they are promoting.  Let’s be honest, capitalism is not inherently evil, but I will admit there are some evil or misguided capitalists that played a part in our economic problems.  However, that statement does not carry the same weight when applied to the troubles in Europe.  That is a case where lavish governmental programs and benefits far exceeded the respective citizenry’s ability to pay for them.  As these European leaders have discovered, you cannot government-spend your way to prosperity.  Seriously, they are rioting in the streets because the retirement age is being raised from 60 to 62. 

Here in the U.S. I hear various leaders make speeches or statements that I know are patently not true or an incredible stretch, at the very least.  Many of you have voiced the same concern – a loss of faith.  Recently, foreign leaders from the G-20 conference have chastised U.S. leadership for prodding them to maintain or even increase “stimulus” spending.   These foreign leaders realize just like you and I, you can’t spend your way out of a financial problem.  In the same vein, businesses large and small realize that the current economic landscape was improving, but potentially higher taxes and regulations are affecting their outlook. 

I can’t say it enough – the stock market responds negatively to uncertainty.  This is because uncertainty causes businesses to change their practices.  Instead of expanding and hiring more workers and going after market share, many businesses, large and small pull in their horns (i.e. cutback).  Many entrepreneurs, private equity, institutional, and regular investors react similarly.  If they see an extremely uncertain, or in some cases hostile, business environment, (which some have voiced in the Wall Street Journal and other publications and media outlets) then they decide they don’t want to play by what they consider unfair or onerous rules and take their ball (i.e. capital / money) and go elsewhere until they see better conditions.  Wall Street is voicing its displeasure on how our economy is being handled, and at some point, those in charge of policy will be forced to listen or voted out. 

I hope my comments do not offend anyone; however, I would rather say what I believe needs to be said versus being politically correct.  The U.S. economy and stock market should be seeing continued improvement, with temporary setbacks along the way.  Yet, if you want to know why there is so much pessimism about the economy, the stock market and portfolio values are down, then it is my job to explain the macro (big picture) events taking place that have a direct impact on your investments and lifestyles. 

The average American, along with investors and business leaders, is frustrated and that frustration will not be alleviated until we see some straight-talk and true leadership from our elected leaders (from all parties).  The current negative malaise over the economy and stock market is resulting in good, long-term fund managers showing negative, short-term returns.  Nevertheless, I trust anyone of the mutual fund managers we’re currently using for your and my personal accounts to do what is in our best interest than the vast, vast majority of our current political leaders (in both parties) and their policies.  I believe that this market downturn is not permanent and will result in citizens getting increasingly upset, which at some point will result in U.S. policy being altered for the better via modest tax increases, more aggressive spending cuts, fiscal prudence and growth-oriented policies.  Unfortunately, these changes won’t occur in the next 30, 60 or 90 days, but in the months and in the years ahead. 

In the meantime, we have choices to make.  We can decide to just give up and throw in the towel, or stand by and have faith in the investment strategies we’ve implemented.  Remember, a fund’s successful, long-term track record is not reflected in its daily share price, nor does it represent the fund manager’s underlying strategies or tactical moves in the midst of a downturns (i.e., loading up on bargain share prices).  Patience or panic will prevail; it just depends on which you choose. 

Bonds Versus Stocks – What Do The Experts Say? 

Bill Gross of Pimco Funds Group is considered the “bond king” by his peers based upon his stellar, long-term track record.  Ironically, the king recently announced in an InvestmentNews June 27, 2010 article that he and others fund managers in his firm believe stocks are a better long-term investment compared to bonds.  Why is this important statement?  Because when it comes to bond managers, Mr. Gross is the equivalent of Warren Buffett. 

Mr. Gross believes the decades long bond rally will come to an end as nations sell record amounts of debt to fund their deficits, spurring a return of inflation and rising interest rates.  He believes at some point U.S. Treasury returns will fall, and investors will have to look elsewhere and take more risk with high-yield bonds, equities and eventually real estate.

Mr. Gross stated, “If you’re talking about the next 10, 15, 20 years, there’s certainly the recognition that assets will grow faster in those categories,” he said.  “Over the long term, stocks return more than bonds when appropriately priced at the beginning of an investment period.” 

When factoring in these comments, which do you believe will offer better long-term results for your money? 

• Residential mortgage securities backed by the U.S. government currently yielding around 4.0% to 4.25% as noted above.   Knowing that interest rates will go up at some point.
• Or, a diversified investment mix of bonds (government, corporate and convertible), stocks (U.S., international, dividend paying and preferred), real estate, precious metals, commodities, etc. 

When the bond/investment experts at Pimco Fund Group begin offering stock funds and inform their clients that stocks may be a better performing and income-producing option for their money in the years ahead, then it is important to listen.  We have to break out of the mindset that bonds = safety and income versus stocks = risk and loss of money. 

We continue to monitor all holdings and client accounts and will make any changes we deem necessary.  If you are concerned, want an update on your portfolio or have questions, please don’t hesitate to call and Sally will schedule a face-to-face or online meeting.  

 Deserved recognition 

It was refreshing to read this week’s InvestmentNews and see investment professionals and fund managers from five of our clients’ top holdings being recognized for their accomplishments. 

Jean-Marie Eveillard received InvestmentNew’s Lifetime Achievement Award for his excellent track record at First Eagle Funds.  Mr. Eveillard is senior vice president of First Eagle Investment Management, but prior to that he was the lead manager on First Eagle Overseas (SGOIX, SGOVX) and First Eagle Global (SGIIX, SGENX). 

Investment advisors voted the following fund managers as the most influential based on the following criteria:  knowledge of their industry sector; a clearly articulated strategy for managing assets that they’ve adhered to over time; and consistent outperformance of their peers. 

Bruce Berkowitz, manager of the Fairholme Fund (FAIRX)

Bill Gross of Pimco, manager of the Pimco Total Return Fund (PTTRX, PTTDX)

Michael Hasenstab, manager of the Templeton Global Bond Fund (TGBAX, TPINX) 

Quotes 

“No man can think clearly when his fists are clenched.”

                      George Jean Nathan, editor and critic 

“Instead of waiting for your ship to come in, grab two oars and row out to it.”

                        Vance Harver, minister 

“The only way to deal with fear is to confront it directly – to stop and look at it.  Then you can make it go away.  Otherwise, you spend your life running from it, and fears always runs at least as fast as you.” 

                     Carl Hammerschlag, M.D., author and speaker 

Happy 4^th of July Weekend! 

Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074

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