The problem with the LIQUID capital markets is with investor psychology.  Clients see the negative news and stock market losses everyday.  Clients look online at their accounts and see the current values, and the concern is most definitely understandable.  The media hypes it up making things worse - it gets ratings I guess.

But what if you couldn't see your portfolio value online everyday.  What if you could only see the value once a quarter, once a year, or better yet - once every three years?  Unless there are major updates or changes in your financial profile, needs, time horizon, or goals - you should not let emotion take over the decision making process.

So masses of investors who DO let emotion take over their decision making with their investments sell, then more sell, and more, and so on.   Fear breeds fear, rational thinking goes out the window.

My question to them is first "Did you have a broadly diversified well-balanced portfolio matched to your personal risk tolerance, goals, time horizon and needs?", and if the answer is yes my second question is "So when are you putting your house up for sale?"   You see, just because you don't get daily valuations on your house doesn't mean the market value doesn't fluctuate - and many if not most clients have lost more from their home depreciation than they have in their investment portfolio. 

In fact on a percentage basis if you take into account the leverage used to buy a home it's a FAR greater loss than any investment portfolio for most investors.  So by their standards of "if it drops, sell it", why not sell the house too?  Their investment portfolio, like their home, should be a long term investment.

But they didn't buy their house planning on selling it if the value dropped during an economic downturn.  At least I don't know anyone who did.  You buy a house to live in, typically for at least 5 to 10 years, and usually longer.  So if you won't sell your house because the value has dropped, why would you sell out your long term broadly diversified investment portfolio?

Here's a chart from Dimensional illustrating bull and bear markets, bull markets last on average close to three times longer and comprise the majority of time periods.  Bear markets however, are always felt more because they always feel like the worst one ever.  By most measures, we're already percentage wise about in the worst three bear markets.

http://www.redrockwealth.com/downloads/DFA-Discipline-2.pdf

In every bear market, someone states it’s different this time, causing more fear, more skepticism, more pessimism.  But is it really different this time?

• This is the 10th bear market in US stocks over the last fifty years (on average one of every 5 years we’ll see a bear market, In this case we went 6 years roughly from bear market to bear market)
• A bear market is typically described as a peak to trough decline of 15% or more in the S&P 500
• How does the current downturn compare to those in the past?  Right about in the middle by all statistical measures
• The peak was 10/29/07, and through 9/22/08 (11 months) we’ve lost 22.9% of the S&P’s value
• Ranked by the size or duration of this decline, it ranks 6th among the 10 most recent bear markets

Not to downplay the anxiety most investors are feeling, but there really isn’t much significant (statistically speaking) from this bear market to those over the past 50 years.

Here’s a cover story from 1970 - the worst bear market since the 1930’s and many financial firms went under during this period.  These were scary times to be certain:

The one consistent theme during times like these are the capital markets resilience both at home and abroad.  Capital markets adjust prices according to current events.

Here’s another cover story from 1974:

46% of adults feared depression similar to the 1930’s.  The interesting part is many times these stories make headlines it’s NOT uncommon that the worst has already past.  This issue of Time was dated 9/9/74, the DOW had ALREADY reached it’s low, and the S&P 500 was just a few weeks away from it’s low on 10/3/74.

Here’s another one from Time in 1987:

This headline hit just a few weeks away from the market low on December 4, 87.  The popular press always reports it’s “different” this time, and somehow things will NEVER be the same again.  But risk and return are related - that’s the core belief I follow with investment planning.  And if they are related then nothing really was different at all!  There were different PRICES people were willing to pay for a security, but the fundamental system remained unchanged.

In 1990 when this article had been released, the market bottom had ALREADY been reached!  Definitely a stressful time however, like it is today:

Don’t those headlines sound familiar?

In 1998 we had been conditioned to believe that a buy and hold strategy made sense much of the time, but conditions were so bad and the world was falling apart, it just didn’t make sense this time:

The consensus then was NO RATIONAL PERSON WOULD REMAIN INVESTED IN THESE MARKETS.  These were UNPRECEDENTED events like we had NEVER SEEN!  That headline rung true with nearly every financial publication.

I remember 1998, I had been a financial advisor with Morgan Stanley for 3 years at that point.  I remember thinking the markets as we know them would cease to be the same forever.  The media had clients conditioned to think the same.  I didn’t have the experience at that point to realize we were simply in a statically normal down market cycle, yet my gut told me to stay the course.  I tried to have every client stay the course as well, rebalance, and broadly diversify.  Many clients did, a few didn’t - they were the ones caught up in the “it’s different this time” mentality of fear! 

Those staying the course looked fine a few months later.  In this particular case, in extremely rapid fashion the financial hurricane disappeared, and just a few months later investors with short term memory moved on to cocktail party stories of just how much money they had made trading tech stocks the prior week!

Here’s another headline from Fortune in 1998:

Once again from Fortune Magazine in 1998 - THIS TIME IT’S DIFFERENT!  If ANYTHING was different, it was how QUICKLY the markets recovered, not how long they were in decline!

Another from Fortune in October of 1998 - Could the financials survive?

Don’t those headlines look similar to the ones we’re seeing today?

This particular investment manager in a publication called “Investment Outlook” was and is extremely well known and respected still today.  In September 2002, ONLY A MATTER OF DAYS BEFORE THE MARKET BOTTOMED on OCTOBER 9th, 2002, this manager stated stock prices were NOWHERE near bottom, and DRAMATICALLY overpriced.  He said we should expect another 25%+ drop in the Dow before we see a buying opportunity:

When we talk about resilience, we’ve had many examples of resilience!  We have had an oil crisis before:

Yet we managed to find our way and readjust to the crisis…

Check out Business Week in 1979:

We’ve had periods where inflation was the primary concern, and for long periods of time!  In this situation,  treasury bills outperformed equities for several years.

Or how about the highest interest rates in 150 years?

And further on the topic of resilience, don’t forget the CATASTROPHE’s that are SUPPOSED to appear, that often times fail to happen and become nothing more than a blip on the radar screen:

More recently, I had a client who was convinced the world’s population would be dessimated by the bird flue predictions a couple years back.  He bought gas masks and stockpiled food.  Many people were concerned… the doctors all said it wasn’t a question of IF, but WHEN, and it meant POTENTIAL DESTRUCTION of the world population!

Yet, there is one word to describe this panic and how it played out as well  - Resilience!

Other events are completely unpredictable, and much harder to forget:

The markets reopened days later to staggering losses, yet business still functioned and the economy still moved ahead.

Remember how the SARS virus was not going away and had implications of completely bankrupting the ENTIRE GLOBAL TRAVEL INDUSTRY?

Yet somehow we managed to readjust and move forward…

During all of these headlines and major market events, it may have been possible to add value and avoid the downturns, jumping in at or near the bottom to ride the wave back up - boy, wouldn’t that be nice?  Yet time and time again the concept of timing the market and adding value by shifting in and out has proved ineffective AND detrimental:

In case after case after case we find that NOT ONLY individual investors fail to successfully carry out the timing strategy, but the “smartest” and “most experienced” market professionals are NO BETTER!  In 1991 the market EXPLODED with a huge rally after the missile strike in Iraq - yet most investors, and most professionals, missed it expecting the opposite to occur.

Investment professionals, individual investors, and the like - cannot reliably outperform the market using market timing strategies.  There is always however going to be the exception to the rule, which is pure and simple LUCK.  Statistically, someone will get lucky and think it was genious rather than chance!  I learned that in Statistics 101 (or whatever the course name was roughly 15 years ago).  Pure and simple - statistics says that if a thousand people try to beat the market and time it to avoid losses and enjoy the gains - a few of them will succeed due simply to random chance, or statistical probability!  In fact it’s not really possible that a few wouldn’t be lucky enough to time the markets for some given period of time - it’s just impossible to predict who the lucky ones will be!

If only we had a crystal ball…

And doesn’t this look familiar?  Falling real estate prices and banking difficulties?  This is from 1991, could have been printed yesterday!

This guy was left scratching his head trying to figure out why his forecast for the markets that year had been so terribly wrong!  If you would have gotten scared out of the markets reading the headlines then you would have missed all or a good portion of the 1990’s, one of the biggest bull market runs in history!  Or at best, you would have missed a portion of returns if you would have jumped back in at higher prices…

AND THE BASIC PROBLEM WITH TRYING TO ADJUST YOUR PORTFOLIO IS MARKETS ARE PURELY UNPREDICTABLE!  In many cases, they explode UP or DOWN for no particular reason or on no specific news:

This particular series of events was in mid-October 2002 following the market low on October 9th and it was one of the largest stock market rallies in HISTORY!  This exhibits the fundamental problem with market timing - you have to be right TWICE!  When to SELL, and when to BUY BACK IN!

In this example, investors rushed OUT of stocks at the LOWEST POINT IN 2003 buying fixed income funds at incredibly low yields:

Talk about HORRIFIC TIMING for the masses!  Can you imagine missing the market returns of 2003, 2004, 2005, and 2006?

And what about global conditions?  We can always find reasons NOT TO INVEST, now is always the hardest time TO INVEST!

WHAT HAPPENED? THEY OUTPERFORMEND THE US MARKETS OVER THE LAST 10 YEARS!

And who would want to invest in France - every time you turn around they’re on strike!

WHAT HAPPENED? THEY OUTPERFORMEND THE US MARKETS OVER THE LAST 10 YEARS!

And of course Japan learches from one crisis to another, specifically over the last 10 years!

WHAT HAPPENED? THEY OUTPERFORMEND THE US MARKETS OVER THE LAST 10 YEARS!

The Aussie dollar at one point was outperformed only by the Turkish lira in terms of foreign currencies:

WHAT HAPPENED? THEY OUTPERFORMEND THE US MARKETS OVER THE LAST 10 YEARS!

And let’s not forget about South Korea and other emerging markets, you couldn’t run fast enough to hit the door:

WHAT HAPPENED? THEY OUTPERFORMEND THE US MARKETS OVER THE LAST 10 YEARS!

Also out of India after a political crisis:

WHAT HAPPENED? THEY OUTPERFORMEND THE US MARKETS OVER THE LAST 10 YEARS!

 Brazil at one point looked like a complete train wreck:

WHAT HAPPENED? THEY OUTPERFORMEND THE US MARKETS OVER THE LAST 10 YEARS!

 And let’s not forget about Malaysia:

Malaysia SHOCKED the markets with one of the largest drops in emerging markets in recent history!  WHAT HAPPENED? THEY OUTPERFORMEND THE US MARKETS OVER THE LAST 10 YEARS!

In recent days we’ve seen multiple financial firms on the brink of collapse.  Clearly there are many things to worry about, many things to be concerned about, and extreme pessimism for the future.  Real estate losses, oil prices, inflation, an economic slowdown of global proportions, It’s POSSIBLE these concerns may be of greater magnitude than any of us have seen in many years, or perhaps ever…

So what should investors do in times like these?

Some might say that recent events are SO UNPRECEDENTED, that they call into wisdom the strategy of maintaining any long term equity market investments.  NOTHING COULD BE FURTHER FROM THE TRUTH!

Rather, Recent events offer a ringing endoresement of broad diversification and an consistent investment strategy as the best way to deal with uncertainty.  In this tumultuous year, many individual investors - specifically employees with large positions in company stock, those that didn’t diversify, those that THOUGHT they were diversified, those that made sector bets - suffered catastrophic losses.  We’ve seen a significant number of professional investors turn a bad year into something far worse by making big bets that went the wrong way!  A diversified equity strategy, balanced with solid and short to intermediate term fixed income components, may not be a money maker in a bear market, but it sure beats the alternative. 

Investing is NEVER a sure thing - but the risks (for broadly diversified low cost low transaction portfolios moderated with short to intermediate term high quality fixed income investments) are reduced over long periods of time.  I don’t know any clients who have less than a 5 year window to remain invested, and nearly every client has multiple five year rolling periods to ride out the bear markets.

Investing is never a sure thing, to be sure.  But when we 1) eliminate unnecessary risks (concentrated stock exposure, lack of diversification, an improperly balanced portfolio, an overly aggressive portfolio), when we 2) reduce to the greatest extent possible the unnecessary costs (excessive fees, commissions, trading costs, transaction costs, hiddent management fees and other expenses associated with the commission brokerage world), and when we 3) access the worlds capital markets to put ingenuity and resourcefulness across thousands of companies to develop new ideas, new technologies, and new products - we harness powerful forces to work on the investors behalf and put the odds of success in our favor!

According to the National Association of Real Estate Investment Trusts, through the first three quarters of this year equity REIT’s on average (including dividends) were up approximately 1.8%.  The broader S&P 500 was down 19.3% - a better than 20% outperformance!

In the misery of the capital markets, isn’t it surprising that REIT’s were a lone bright spot?  It just goes to show you market timing doesn’t work - because the time to have been IN REIT’s would have been the first three quarters of this year, when most people were OUT of REIT’s!

Every Red Rock Private Wealth Consulting client has exposure to REIT's, and I've been consistently rebalancing those REIT's in each portfolio as necessary.  Let's hope emerging markets will follow suit as they've had a rough run for a while now also!

Greg

The Dow dropped 700 points intra day when it became clear the plan would not pass, currently we're still down over 500 points.  It's been a horrible year for the capital markets, and the media never cares to show a single positive thing unfortunately helping to create a self-fulfilling prophecy.

What the media seems to forget is bear markets happen, period!  They happen every 4 to 6 years or so and correspond with a bad economic cycle typically.  Someone always says "yes but it's different this time", but someone says that during every bear market.  Is it different this time?  I don't know and don't pretend to know.  In its most simple sense - yes it's different, every bear market is different from the last one!

Bear markets typically last a year or two, and knock off 20% to 30% in the value of the equity markets.  We're (in my opinion) a year into a bear market now, and we've lost 25% to 30% of the equity markets value (depending on how and when you want to calculate it).

You can expect negative GDP shortly.  This next quarter in fact will likely be negative for our gross domestic product - a measure of the strength of our economy.

I've gotten a lot of questions recently about the markets and health of our economy - and client portfolios specifically.  There's absolutely no way to look at a bear market like this and sugar coat the fact that it's just plain BAD!  Yet during my reviews I've found most clients on average are down for the year, yet down roughly only half of what the broader S&P 500 is (some less, some more).  In fact most clients are surprised of this fact as the media would have them believe they've been wiped out completely!  More aggressive clients are obviously down closer to S&P returns. 

This "less than what most clients expected" drop in value is due in part to broad diversification, re-balancing appropriately, and anchoring your portfolio with high quality fixed income investments in varying percentages.  It's never nice to have a paper loss, yet clearly it has proven better to mitigate portfolio risk by the methods we've put in place with your investments - that is evidenced by portfolio performance in a bear market.

Take for example the DFA moderate balanced portfolio - the DFA Global 60/40 (60% globally diversified equity, 40% short term fixed income) portfolio ticker DGSIX.  The fund was down 10.81% through 9/26/08.  A $500,000 portfolio on 1/1/08 would have been worth $445,950 on 9/26/08 - a staggering $54,000 paper loss and certainly a miserable year.

Then take for example what would have happened if you would have put that $500,000 into the DFA Normal 60/40 portfolio allocation in January of 2004 when the fund started (these numbers found at Morningstar.com):

• 2004 - Up 11.1%, ending value $555,500
• 2005 - Up 7.2%, ending value $595,496
• 2006 - Up 13.9%, ending value $678,269
• 2007 - Up 4.9%, ending value $711,505
• 2008 through 9/26 - Down 10.81%, ending value $634,591

Investors are quick to forget the better years when short term fear creeps in.  My point is simple, don't let the short term noise shake your confidence in a long term investment plan.  Your long term performance hinges on a well structured portfolio and TIME IN - NOT TIMING - the market! 

If your investment time horizon or personal financial objectives have changed - we should talk, please contact me as soon as possible!

The economy will survive, we will see better days.  I've already completed mid-year reviews and will start my personal third quarter portfolio reviews next week, but if you'd like to meet to discuss what's going on with your personal portfolio or the economy, please drop me a note or give me a call at (702) 987-1607.

Greg

September 16, 2008

Stock prices sank sharply on Monday in the wake of Lehman Brothers' bankruptcy announcement over the weekend. Other firms perceived to have credit-related worries sank sharply as well: shares of insurance giant AIG fell 60.8%, Washington Mutual was down 26.7%, and Citigroup lost 15.1%. Among the thirty Dow Industrial component issues, only Coca-Cola managed to eke out a gain, closing up 25 cents for the day.

The S&P 500® Index fell 4.71%, its largest one-day percentage loss since September 17, 2001 when the Index fell 4.92% following a four-day trading suspension. Ranked by magnitude of one-day losses for the S&P 500® Index, Monday's decline ranks fourteenth among all trading sessions since January 1950. Although some market breaks are still fixed in our memory, others have faded from view. We suspect few non-professionals can recall what the news background was when stock prices plunged on October 27, 1997; January 8, 1988; or September 11, 1986.

Rank	Date	S&P 500® Close	Change vs. Previous Close
1	October 19, 1987	224.84	-20.47%
2	October 26, 1987	227.67	-8.28%
3	October 27, 1997	876.99	-6.87%
4	August 31, 1998	957.28	-6.80%
5	January 8, 1988	243.40	-6.77%
6	May 28, 1962	55.50	-6.68%
7	September 26, 1955	42.61	-6.62%
8	October 13, 1989	333.65	-6.12%
9	April 14, 2000	1,356.56	-5.83%
10	June 26, 1950	18.11	-5.38%
11	October 16, 1987	282.70	-5.16%
12	September 17, 2001	1,038.77	-4.92%
13	September 11, 1986	235.18	-4.81%
14	September 15, 2008	1,192.70	-4.71%

The S&P data are provided by Standard & Poor's Index Services Group.

Financial journalists will undoubtedly be scribbling energetically in the coming weeks to offer anxious investors an explanation for "what it all means." A sample appears in the most recent issue of Forbes, where three prominent investment professionals offer their views of the future: one is quite bullish, one is quite bearish, and the third is cautious but hopeful. Each offers compelling evidence to make their case. Forbes editors helpfully place each column on consecutive pages, making it easy for readers to determine which pundit is promoting views most similar to their own. The only investors likely to improve their portfolio results by reading such observations are those who were not properly diversified to begin with and become motivated to take action. The world is an uncertain place, and sharp fluctuations in asset prices reflect that uncertainty.

History offers abundant evidence that market economies are resilient. The world will find a way to manage its financial affairs without the advice of Lehman Brothers, and the residential mortgage loan will survive even if Fannie Mae does not. The key issue for investors is to make sure their financial future does not get derailed by events at a handful of firms, and that their portfolios are properly positioned to capture all the rewards the markets have to offer when the next upcycle begins. Recent events have provided an unusually harsh lesson of the importance of diversification. In a matter of days, shareholders of three financial giants—Fannie Mae, Freddie Mac, and Lehman Brothers Holdings—have seen their shares plunge into the penny-stock category. A fourth, American International Group, is scrambling for survival. For well-diversified investors, the financial damage associated with these four firms has been minor; in aggregate, they represented less than 1% of a diversified US equity portfolio on May 31, 2008, and even less for a global strategy.¹ Four or five years from now, these investors may have a difficult time remembering what happened and when.

However, for those with concentrated positions, especially employees with large holdings of company stock, these events are a financial tornado inflicting potentially irreparable damage. One business owner cited by the Wall Street Journal recently purchased 25,000 shares of Freddie Mac at roughly $5 and lost most of his investment in a matter of days. Ironically, he claimed to be through with day-trading strategies, and was seeking a profitable long-term investment. Elsewhere, the Wall Street Journal estimated that the 24,000 employees of Lehman Brothers have seen $10 billion in personal wealth evaporate as the value of Lehman shares collapsed. Many long-time employees of Fannie Mae or Freddie Mac have experienced similarly catastrophic losses. When times are good, the risk of a concentrated portfolio often appears extremely remote. As we pointed out in this column in March 2006, Fannie Mae was once characterized by Money magazine as "America's Safest Stock," with a bulletproof business model that was "as close as you'll get to an invincible earnings machine."

Events of 2008 demonstrate the importance of getting a few big issues right. All the debates about quarterly vs. annual rebalancing or whether to allocate 25% or 30% to foreign stocks appear almost ridiculously pedantic in the face of such overwhelming but avoidable losses.

¹Weights for the US Core Equity 1 Portfolio as of May 31, 2008 are used.

Bajaj, Vikas, Bajaj and Tara Bernard. "Worker Assets Shrink at Fannie and Freddie." New York Times, August 29, 2008.
Birger, Jon Birger. "The Rock." Money, December 2001.
Dreman, David. Dreman. "Get Ready for Rising Prices." Forbes, September 29, 2008.
Fisher, Ken Fisher. "The Unbubble." Forbes, September 29, 2008.
Karmin, Craig Karmin. "Small Fannie, Freddie Holders Take Issue With Washington." Wall Street Journal, September 12, 2008.
Karnitschnig, Matthew, Karnitschnig, Lian Leven, and Serena Ng. "AIG Faces Cash Crisis As Stock Dives 61%." Wall Street Journal, September 16, 2008.
Shilling, A. Gary Shilling. "Worse Is Yet to Come." Forbes, September 29, 2008.
Smith, Randall, Smith and Susanne Craig. "The Lehman Stock Slide Hits Home." Wall Street Journal, September 12, 2008.
Yahoo! Inc. Yahoo! Finance. In www.yahoo.com, accessed September 15, 2008.
 

If you haven't heard or seen the news, Lehman Brothers, one of the major investment banking firms on Wall St. - filed for bankruptcy this weekend.  On top of that, Bank of America paid 50 billion or $29/share for Merrill Lynch.  Adding insult to potential injury is AIG - the worlds largest insurer - seeking capital aggressively to avoid a ratings downgrade by Standard & Poors.

The futures were down near 400 points this morning, as of the time of this post we're down less than 200 points on the DOW.  Calmer minds obviously prevailed, though the concerns are warranted.

It's a difficult time in the markets to say the least!  The financials make up the largest portion of the Standard & Poors index, and there is still great concern going forward as to any other "shoes to drop" so to speak.

The silver lining as I mentioned in the headline is oil is coming down substantially, off over 30% from the highs a few months back.  Interest rates are likely headed lower, and credit spreads for mortgages are tightening.  These are all good things for the economy and specifically the housing market. 

The bill provides an opportunity for homeowners threatened with losing their homes to foreclosure to refinance into government sponsored loan programs - thereby allowing them to remain a homeowner.  This program will be run through the Federal Housing Administration which has 300 billion at its disposal to help homeowners who PROVE they can afford the new financing on their home. 

Sounds like a great deal for struggling homeowners who are on the "fringe" of whether they can remain in their home or not.  For their current lienholders, not so much.  The banks holding their current loans must write down a portion of principal before the refinancing can take place.  So they choose - write down principal and keep the borrower in their house?  Or foreclose, get stuck with yet another property, end up taking a huge principal loss on it anyway, and as we've seen recently with the folding of ANB Bank and Indymac - possibly go out of business!

I think the choice is clear for the banks...

We need real estate stability, lower oil prices coupled with alternative energy development, and controlled fiscal policy coupled with maintaining the Bush tax cuts - and we need those things in short order to put the economy back on track!  This bill is one small step in the right direction towards #1, real estate stability!

Greg

Obviously it's been a horrible month for the capital markets - there simply is no sugar coating that fact.  Through April and May the light seemed to be at the end of the tunnel to some extent at least, but oil prices soaring to record high after record high crushed any positive news for the markets (not that there was much in the way of positive news).

It's clearly going to take stabilization of the real estate market (which in turn should lessen the credit crunch and have a positive snowball effect), a stronger dollar, a stronger economy, and independence from FOREIGN oil (notice I didn't say oil in general, we need our own oil for the next decade or two after which we'll likely all be in a battery powered or similar type of vehicle), while working feverishly toward alternative energy sources such as wind, solar, battery technologies, and especially nuclear power (can't we be at least as bold as the French who derive 80% of their power from nuclear plants?) to get us out of this mess.

If we announced we'd start drilling and producing our own oil tomorrow the speculators and hedge funds would run for cover knowing that the obscene gains they've enjoyed would be coming to an end soon as supply entered the markets over the next few years.  The price of gas would drop quickly because of that fact even though it takes a while to get at, and refine our own reserves.

Higher taxes on the corporations that provide jobs, higher taxes on YOUR capital gains and YOUR income, the inability to allow us to tap the oil beneath our feet and build safe nuclear power plants that reuse spent fuel is not what this economy needs right now.  If something isn't done by our leaders in Washington soon, your taxes will go up!  No way around it, unless we find leadership that recognizes we can't tax our way of of this mess, and leadership that can work together, rather than walk the party line, putting the country's interests above their own. 

I still can't believe our Congressional leaders get a summer break, especially in this economic mess!  Do you get a summer break?  I don't!  Last time I got a summer break was in high school (even college I went to school for summer session).  Our leaders should be serving detention time to fix this mess.

This unusual perfect storm situation has also clearly hobbled the fed.  There's nothing more the fed can do, they've dropped rates substantially, and inflation is on the rise so they most certainly can't drop them any further.  In fact will likely raise them next year.  It's up to our congress to get this done.

All of that being said, it's quite normal to endure an economic slowdown every five to seven years or so.  Economic cycles aren't rocket science, but they're unpredictable as to timing, duration and depth.  That's why we diversify, that's why we re-balance, that's why we stay focused on the broader picture.

So, now more than ever I feel it's important to have an in-depth review of your current situation - the mid year point is a great time to do it!

Please drop me a note (greg@redrockwealth.com) or give me a call at 702-987-1607 to schedule a good day and time in mid to late July to meet (sooner is fine but I may not have the indices on your performance summary reports as they come in towards the end of the first week in July).  I know many clients go on vacation during the summer to escape the heat, so I'm sending out this review and planning meeting reminder before the real heat hits in July and August!

Stay cool and have a great weekend!

Greg

June 09, 2008

Fortune senior editor Carol Loomis has had a special relationship with Berkshire Hathaway chief executive Warren Buffett for many years, both as a personal friend and as the editor of Mr. Buffett's widely read annual letter to Berkshire stockholders. Among many contributions throughout a Fortune career spanning more than fifty years, Loomis has written numerous thought-provoking articles about Berkshire and Buffett.

Drawing on that special relationship, Loomis has revealed to Fortune readers the details of an intriguing bet placed earlier this year by Mr. Buffett that should be of interest to any investor contemplating a commitment to hedge funds.

Buffett has often warned of the potential wealth destruction associated with investment expenses. In a 1999 Fortune article, he pointed out that the long-run return to investors in corporate America cannot be higher than what corporate America earns on its assets and that efforts to earn higher returns by moving money from one business to another ("chair-changing," in Mr. Buffett's lingo) might be successful for some investors but can only penalize results for investors in aggregate. To illustrate this idea, Buffett suggested in Berkshire's 2005 annual report that readers imagine a simplified world in which all American corporations are owned in perpetuity by a single family, the Gotrocks. Succumbing to the promises of various "helpers" from the financial industry, some family members attempt to outsmart their relatives by purchasing some of their shares in various businesses and selling certain others. Other "hyper-helpers" appear to assist in selecting the best helpers (for an additional fee, of course.) The net effect on the Gotrock family wealth can only be negative as the total earnings on American businesses are diminished by the helpers' fees. Buffett argues that the total "chair-changing costs" are substantial, estimating that "the family's frictional costs of all sorts may well amount to 20% of the earnings of American business."

Buffett revisited the issue in Berkshire's 2006 annual report, turning his attention to the fees charged by the typical hedge fund. Referring to the "2-and-20" crowd, Buffett observed that "the inexorable math of this grotesque arrangement is certain to make the Gotrocks family poorer over time than it would have been had it never heard of these 'hyper-helpers.'"

Having made no secret of his disdain for the costs investors bear to move money around, Buffett has gone one step further and put his money—quite a lot of it—where his mouth is. According to Loomis, Buffett had offered two years ago to bet a substantial sum that an S&P 500 Index fund would outperform a group of hedge funds selected by any opponent over a ten-year period. Initially, no one appeared to take him up on the offer, but eventually a prominent hedge fund manager, Protégé Partners, stepped up to take the challenge. After lengthy negotiations, a deal was struck between Buffett (not Berkshire Hathaway) and Protégé Partners (the firm, not its funds). Each put up $320,000 on January 1, 2008, and the combined total was placed in a zero-coupon bond to produce $1 million in ten years. If the five hedge funds of funds selected by Protégé Partners can outperform an S&P 500 Index fund after fees over the next ten years, the money will go to Protégé's preferred charity rather than Buffett's.

Buffett's wager brings to mind a similar bet between John Bogle of Vanguard Group and Robert Markman of Markman Funds for the five-year period ending April 1, 2000. In that instance, Mr. Markman's Multifund Trust underperformed Vanguard's Index Trust, and he was $25 poorer.

Mr. Buffett's stake is substantially higher, and, according to Loomis, he estimates the probability of victory at only 60%. We'll be watching. Prospective hedge fund investors should, too.

Buffett, Warren. 2005 Annual Report. Chairman's letter. Boston: Berkshire Hathaway, Inc., 2005.
———. 2006 Annual Report. Chairman's letter. Boston: Berkshire Hathaway, Inc., 2006.
Lallos, Laura. "Sore Loser vs. the Gloater." Money, August 1, 2000.
Loomis, Carol. "Buffett's Big Bet." Fortune, June 23, 2008.
Loomis, Carol. "Mr. Buffett on the Stock Market." Fortune, November 22, 1999.

• The May unemployment numbers came in at 5.5% - above expectations.  The labor market is slowing - this is a recessionary sign
• 49,000 jobs were lost (non-farm payrolls)
• Oil up a whopping $10.75 - the largest price gain EVER, and the largest increase in 3 years.  Oil was up 8.8% alone this week, and 44% this year.  No doubt you've noticed the gas stations still have a 75$ limit on credit card fill-ups - how smart are they??
• The tech heavy Nasdaq was down 3%
• The broader S&P 500 was down 3.1% - the largest drop in 4 months
• Every single Dow stock was down today as the index lost 3.2% - the worst drop (roughly 400 points) since February 2007

Volatility soared today (the vix was up 26%), it was a wild day in the capital markets for certain.

Days like today are great for bears, bad for bulls, and even worse for those who aren't properly diversified.  Days like today are the reason we allocate between 30% and 50% (for most clients, some more some less) to fixed income products like CD's, municipal bonds, and treasury/agency securities. 

Days like today also illustrate the power of re-balancing a portfolio periodically as triggers are met.  You've no doubt seen the re-balancing and allocation adjustments I enacted earlier this year as many triggers sent a signal it was time.  That process allows us to sell securities higher and buy securities lower (in theory) - a good long term strategy when combined with a solid allocation to bonds and other fixed income products.

Days like today are also the reason equity investors typically get compensated with higher returns over long periods of time.  Volatility equals risk, risk equals higher long term returns typically.

It's always rough to weather the storm, but storms fade and the sun will eventually shine again.  Provided you have charted a solid course - you should reach your destination.  I for one believe strongly the course we have charted together is as solid as they come!  The storm will fade one day, the sun will shine again, and the broad diversification and re-balancing strategies we've employed will help us stay on a path to reach our destination.

Participation in Health Savings Accounts has skyrocketed in the few years since the plans creation.  Last year 4.5 million people had HSA's.  It's a huge trend as more and more people see the benefits of these types of plans for not only health care costs, but retirement savings and the tax advantages that go with these plans.

In a prior blog post I found that www.HSABank.com had a good Health Savings Account offering, per some other Fee-Only Financial Advisor posts on the NAPFA (National Association of Personal Financial Advisor's) forums.

Once again, it's best suited for those who are reasonably healthy in my opinion - as its best nuances can be realized through the long term savings account and retirement planning benefits.  For those who are not in good health it may be a viable option as well, as health insurance costs have skyrocketed and it's likely they'll exceed the maximum out of pocket costs anyway.

These are great plans not only for the reasonably healthy, but for the economy as a whole.  It's puts the consumer of health care services back in control.  As more and more local doctors move to a fee based or retainer type of plan to improve the quality of patient care, the HSA has even become more powerful as the retainer expenses can be paid for from the HSA account.

Without rehashing all of the details of the hour long call, Schwab's senior economists and real estate experts went through graph after chart after graph. It was interesting to say the least. It's no secret the massive amounts of adjustable and teaser rate mortgages (many with prepayment penalties as loan brokers got a “bump” in commission to attach those into the loans) sold to unsuspecting or uneducated borrowers primarily from 2004 through 2006 is the cause of the recent meltdown.Obviously subprime loans contributed to a great extent also, but not as much as the media would have you believe. Buyers were also speculating and "flipping" houses like it was a guaranteed thing, often times using little or no money down.

Those loans went away, the real estate bubble popped, and everyone is suffering because of it. First credit requirements were too loose, now they're too tight, and even qualified borrowers often times find it difficult to refinance or obtain a mortgage.

Interestingly enough subprime, although it completely covers the news, is a very small portion of the overall mortgage market. Subprime adjustable rate mortgages are the worst performers and have the highest default rates, while subprime loans that are fixed ratehave seen foreclosures rise, but not to the same astronomical extent. More interesting is that regular A paper adjustable rate mortgages and fixed rate mortgage foreclosures have NOT seen a substantial increase in defaults (albeit they are up). So the small segment of junk loans, both fixed and variable,has filtered through the economy hurting the value on good property with good loans financing them.

The consensus was that the fiscal stimulus checks just hitting your mailbox (if you get one) now will provide a boost to the economy in Q3 and Q4. That in addition to rates resetting lower due to the monetary policy actions in the last 6 months (fed rate cuts) will help stabilize the real estate freefall. Once we stabilize, we can hopefully begin to rebuild into 2009 and inventories should start dropping.

One thing is for sure, there are some great values out there in the housing market right now!

The Fed's statement illustrated caution however, and most analysts don't see the Fed cutting rates again anytime soon - however the Fed left the door open to supply further liquidity into the credit markets as needed.  The action today will likely stabilize the dollar's dramatic plummet to some extent, and hopefully slow down inflation and the boom in the commodities markets.  it's also expected by the Fed that soaring oil prices will moderate over the coming months.

This is all good news, but expected news as it was pretty much "baked in the cake" already.

Aside from that, the S&P had its LARGEST GAIN SINCE APRIL 2003 - up 4.8%.  If we saw the bottom in Q1 or not remains to be seen, it still feels like a recession even though the "technical definition" has not been met.  However, at the end of the day it was a great month and the fiscal stimulus and Fed rate cuts have yet to be felt throughout the economy.

Through the NAPFA website forums I've found that many other Fee-Only financial advisors are using www.HSABank.com to custody their clients Health Savings Accounts.  One of the primary reasons stated was the investment options and the ultimate custodian of the assets TD Ameritrade.  Many other Fee-Only financial advisors at NAPFA also found the HSA accounts to be highly beneficial for additional retirement planning.

Starting with the simple stuff, Health Savings Accounts - or "HSA's" are an alternative to traditional medical/health insurance.  HSA's allow you to save for your (or your familys) health insurance expenses, earning interest on those savings, and getting tax benefits along the way.  Here are the facts on Health Savings Accounts:

• You must be covered by an HDHP - "High Deductible Health Plan" - or essentially a health insurance plan with a large deductible (typically several thousand dollars) before the benefits kick in.  For this reason, people or families who have greater potential for using healthcare services don't find the HSA plans as advantageous, generally healthier people can benefit more from Health Savings Accounts.  HDHP's are also thought of as catastrophic coverage for this reason.
• You control the money in the HSA account - you decide when to use it and for what qualified expenses.  The money also earns interest while it's there!
• You can get HSA's through banks, credit unions, and other financial institutions.
• Contributions from employer OR employee are made on a pre-tax basis, your money can be withdrawn with no tax penalty to pay for qualified medical expenses.
• Money can typically be withdrawn to pay for those qualified health care costs via checkbook or debit card drawn off the institution you set the plan up with.
• Here's where it gets really interesting, you can withdraw money for any reason, even NOT using it for health care expenses - but withdrawals will be subject to income tax and a 10% penalty UNTIL AGE 65 - THIS MEANS THAT YOU CAN SAVE AND EARN INTEREST, THEN USE THE MONEY WITHOUT A PENALTY IN YOUR RETIREMENT YEARS!  Typically you'll be in a lower tax bracket as well!
• It's important to maintain good documentation on all qualified medical expenses indefinitely.  I've implemented a system of scanning nearly everything financial and filing them on my hard drive with an automatic back up running - it works well and everything is easily accessible anytime.
• Premium payments for High Deductible Health Plans are generally less than regular health insurance plans because the deductibles are so high.
• Since Health Savings Accounts are so advantageous for the right person, offer a great tax advantage, and act similar to a deductible IRA for retirement planning, the IRS limits what you can contribution to HSA's.  The 2008 statutory limits are $2,900 individual and $5,800 family.  There is however a catch up provision similar to an IRA for those 55 and older.

While an HSA may not be right for you, it may be right for someone you know or even family members.  Those who will typically benefit most as I mentioned are those in relatively good health, and especially in higher tax brackets during their working years with the expectation of being in lower brackets in their retirement years.

HSA's can also be used to cover what many local Dr's are doing with their practices now - charging a yearly or monthly retainer fee similar to an attorney.  Several local Dr's have found their reimbursement cut time and time again by the insurance companies, and they find the retainer fee as a great way to provide better service, spend more time with patients, and give more access to better healthcare.  It seems to be a local trend that is here to stay, and the HSA plan may just be the best way to fund your ongoing healthcare expenses with your doctor’s office!

Recently I was interviewed for an article in the Las Vegas Review Journal regarding middle class economics and postponing retirement. My thoughts are detailed very well in Weston's article below, which ironically I received right after the interview.

To the surprise of my interviewer I told her I didn't see much of that at all (questions or interest in postponing retirement) - and in fact if a proper plan for retirement is created why not retire during a bear market? My thought there being "if the numbers work now, typically you'll have much better results throughout the life of your retirement plan because you're already facing some of the worst possible financial scenarios - retirement during or right before a bear market!" The KEY being a properly constructed cash flow plan with broadly diversified and low cost portfolio management.

Here's the article from Weston - Enjoy!

CAN YOU AFFORD TO RETIRE?

A front-page article in yesterday's Wall Street Journal drew a grim picture of fading retirement dreams as the damage to investors' portfolios from the twin forces of slumping stock prices and falling property values—"unprecedented in recent decades"—has prompted millions of baby boomers on the verge of retirement to reassess their plans.

Our initial reaction was that if Americans are indeed shifting their consumption patterns in response to changes in their portfolio wealth, that's a good thing. Imagine what would happen if recently-retired workers collectively decided to spend freely on motorboats and foreign travel while their investment portfolios experienced significant losses or diminished interest income. We would likely see a flood of articles in the financial press scolding retirees for living beyond their means in financial fantasyland. Adjusting portfolio withdrawal rates in response to realized investment results is what thoughtful investors such as David Swensen (chief investment officer of Yale University) recommend to address the inevitable conflict between current spending demands and long-run preservation of purchasing power.

Our second reaction was that the real story has less to do with falling asset prices and more to do with investors making questionable or ill-informed choices. The article cited four examples of people grappling with retirement financing to illustrate the problem:

• A 30-year IBM veteran who has watched his 401(k) and IRA account balance decline 20% for the year to date and put his retirement plans on hold.
• A husband and wife in their fifties who each earned good incomes working for various technology firms. Only two months after retirement, the husband has begun testing the job market, citing worries due to "gloomy economic conditions."
• A Florida dentist and his wife who have put off dreams of retirement aboard a 44-foot catamaran and continue to work.
• A Hewlett-Packard executive who has delayed retirement citing "wave after wave of bad economic news."

We don't find such stories surprising. But if these individuals are representative of most of those confronting problems in planning for their retirement, it appears to us that the principal factors contributing to their distress are inappropriate asset allocation policy and lack of diversification. Based on information contained in the article, all of them could have benefited from better financial decision making.

• The IBM executive who lost 20% in his 401(k) and IRA account has sharply underperformed the broad market. For the first quarter of 2008, total return was -9.45% for the S&P 500® Index and -9.15% for the MSCI All Country World ex US Index. Total return for a globally diversified 60/40 balanced portfolio (which strikes us as more appropriate for someone claiming to be agitated about short-term fluctuations) was -4.68%.1
• According to the article, the software executive is a multimillionaire who scoured numerous retirement planning books for ideas and constructed detailed spreadsheets to compute future spending needs. But spreadsheets can't predict how an individual will feel in response to unexpected events and a single month of poor stock market results (January 2008) was so unnerving for this individual that reading the financial pages of the morning newspaper became a stressful event. Any investor who becomes this anxious after one month of falling prices has the wrong asset allocation policy or a misunderstanding of the behavior of equity markets. The article mentions that he has recently increased his allocation to money market funds. This may be a good decision, but with yields on US Treasury bills recently setting a 50-year low, the potential for diminished income associated with reinvestment risk cannot be dismissed. 
• The Florida dentist purchased two condominiums in 2005 for $800,000 with the intention of selling them in two years to help fund the purchase of an expensive yacht. Based on recent sales activity of similar units, the value of the properties has declined by 20%. We see two problems: purchasing real estate with a two-year time window is best described as speculating, not investing. Moreover, the purchase of a single property type in a single city is the definition of a concentrated investment strategy, and in this case it performed poorly. In contrast, for the period July 2005 through March 2008, total return for a diversified portfolio of income-producing properties was over 19%.2
• The Hewlett-Packard executive whose mutual fund portfolio lost 12% in January 2008 must have owned some volatile ones. Total return in January was -4.49% for the Dow Jones Industrial Average, -6.00% for the S&P 500® Index, -6.82% for the Russell 2000 Index and -9.24% for the MSCI All Country World ex US Index. The single Dimensional mutual fund managing to squeak out a loss in excess of 12% for the month was the Emerging Markets Small Cap Portfolio (by six basis points). Once again, an investor rattled by one-month fluctuations should revisit his allocation policy. 

We don't wish to dismiss investor concerns lightly. The ideal retirement income solution—a generous stream of guaranteed inflation-adjusted annuity payments—does not exist outside the limited scope of the Social Security system. Investors are faced with a series of confusing tradeoffs in an effort to approach this desired result. The examples cited by the Wall Street Journal offer compelling evidence that even among knowledgeable and successful individuals, making expensive mistakes with respect to key financial decisions is all too easy.

Barrett, Emily. "Short-Term Treasury Yields Touch 50-Year Lows." Wall Street Journal, March 21, 2008.
Dow Jones Wilshire data provided by Dow Jones Indexes.
Levitz, Jennifer. "Americans Delay Retirement As Housing, Stocks Swoon." Wall Street Journal, April 1, 2008.
MSCI data copyright MSCI 2008, all rights reserved.
Russell data copyright © Russell Investment Group 1995-2008, all rights reserved.
The S&P data are provided by Standard & Poor's Index Services Group.
Swensen, David F. Pioneering Portfolio Management. New York: The Free Press, 2000.
1DFA Global 60/40 Portfolio Class I.
2DFA Real Estate Securities Portfolio Class I.

Market technicians talk of a double bottom - or what appears similar to a "W" shape in the S&P chart in the last few months. That remains to be seen, as the last leg of the "W" may or may not happen in the near future. I for one hope we're not technically in an "M" with this big run today being the third leg!

Those who were short the market today (short meaning they've borrowed shares to sell betting on the market dropping) had to cover today in a big way. It was truly a beautiful thing for a bull to see! Hopefully they'll continue covering those shorts and buying up shares to stop their bleeding!

One thing I do know is the fiscal stimulus plan will hit the economy in Q3. That's roughly the same time that the real effects of the lower interest rates should actually be felt in the economy (there's a 6 month to 1 year lag in interest rate drops and when they actually start "helping").

Inflation will be the primary concern next year, and possibly even later this year. Commodities continue to soar to an all time high as the dollar slides off a cliff.

Why did we have the biggest gain in roughly 5 years? The Fed finally "got some blood to the muscle that needed it"! The problem is liquidity and confidence, and there hasn't been a whole lot of either lately. The Fed pumped in 200b in liquidity and left the door WIDE OPEN for more and longer terms. This should help give banks the opportunity to start lending again - if all works well!

You can see the effects of a slow economy everywhere you turn nowadays. You don't need reservations for your favorite restaurants, Wall Mart is packed and has had great earnings reported recently - same with McDonalds. Consumer staples are holdings up well - because people can't stop living even if things are tight. But those big ticket items - the LCD TV's and leather couches, the giant SUV's and event tickets - those non-necessary items - are suffering in a big way.

What we need in my opinion? Well I'd sure like to see some stabilization in real estate and housing. Lending standards were TOO LOOSE, now they're TOO TIGHT, and a nice happy medium is where we need to be. We need our currency to stabilize and rebound as well. A weak dollar only helps exports, which is all fine and good but not in the big picture. We also need to be focusing on energy independence as record inflation adjusted oil prices act as a tax on the economy, specifically hitting the "less wealthy". I say drill in Alaska, drill off the continental shelf - pump up our reserves and bring gas prices down - we DO have the technology to do it in an environmentally friendly way. But this only makes sense if we're truly on a path to other forms of energy production.

We need government to control spending and keep taxes LOW. Increasing taxes by any measure in this fragile economy will crush any positives out there. We need the Bush tax cuts to remain in effect - letting them expire will pull money away from the people that are helping prop up the economy by spending, it's Reaganomics, it's trickle down - however unfair it may be in some opinions. I know I can spend my money better than the government can - I think you can too! Better management of earmarks and pork projects will help bring the deficit back under control - so will higher money flow in a growing economy - a direct effect of lower taxes is more money flowing as the consumer buys and spends.

Free market capitalism is the best path to prosperity, it always will be.

We need a lot of things to go right to offset the things that have gone wrong in the last few years. To me time is the only question - how long will it take? I have confidence that in the scheme of a solid long term and well diversified plan - the market drop/bear market/excessive volatility we see on the news every night are simply "market noise". The key though - is that long term and WELL diversified plan!

I don't know the specifics of the case, but this goes to prove once again that plan trustees are fiduciaries to their participants and have an obligation to manage plan assets in the best interests of their participants. This ruling will open the door for further lawsuits, and in a litigious society where anyone can sue for anything - plan sponsors and trustees need to be more attentive to their plans than ever!

Many clients have asked if the fiscal stimulus plan would actually go through and the effect it would have on the economy. While I think it will have a positive impact on the economy, my guess is that by the time the checks are in your hands much of the economic turmoil will have settled a bit. This may even backfire and turn the fed's eyes onto inflationary fears vs. no growth or recessionary fears.

Good idea or bad - remains to be seen. I for one know I'll enjoy the check and do my civic duty of spurring the economy - "I'm going to Disneyland!"...

Congress and Mr. Bush - my children thank you

Per CCH - here's the news story: After two weeks of intense negotiations, Congress passed the Economic Stimulus Act of 2008. “Recovery rebates” reaching as high as $600 for individuals and $1,200 for married couples (with an additional $300 for each qualifying child) are the centerpiece of the $152 billion package designed to jumpstart the U.S. economy. In addition to rebates, the new law includes $44.8 billion in business incentives that include generous expensing and bonus depreciation allowances, as well as additional help for homeowners facing foreclosure because of the mortgage meltdown. President Bush applauded the legislation and said he would sign the bill as soon as it reaches his desk. The treasury Department and the IRS have also indicated that they will immediately begin to prepare to issue the rebate checks. Highlights of the year-end legislation include:

• More than $100 billion in rebates for qualifying taxpayers
• $300 per child payments
• Enhanced small business expensing
• Bonus depreciation
• More help for homeowners in foreclosure

January 28, 2008 Deja Vu?

Commenting on the recent plunge in stock prices, a Barron's columnist made the following observations in his column appearing January 27:

"Poll ratings on President Bush's handling of the economy fell last week among the American voting public. Global investors' opinion of his stance toward Iraq dropped at least as much. With both of these constituencies turning nervous, stocks and the US dollar declined hard in a mutually reinforcing manner, dragging the stock gauges into the red for the young year. . . . Perhaps as worrisome, many company conference calls feature grim talk of slim revenue growth opportunities. Companies such as AT&T, Caterpillar, McDonald's and Merrill Lynch all tempered their outlook for revenues this year- more proof of how tough it is to manage in a low nominal growth economy, in which demand isn't strengthening much and prices are tough to increase. . . . There's something to the idea that the stock market is safer because so many fear it. But in the absence of better economic and profit performance, who's to say how indifferent or fearful investors can get before a lasting market rise emerges?"

Sound a bit fishy? OK, we didn't lie, but perhaps we were economical with the truth.

Although much of the article reads as if it were published yesterday, it actually appeared five years ago on Monday, January 27, 2003. Stock prices at that time had stumbled out of the gate for the new year, alarming those who are convinced that performance in January is a reliable guide for the rest of the year. Over the very short term, the pessimistic tone of the column provided a useful warning - the S&P 500® Index slumped another 7% over the subsequent six weeks, closing at 800.73 on March 11. But that proved to be the low for the year, and the S&P 500® surged 38.86% between March 11 and year-end 2003. Total return with dividends reinvested for the year as a whole was 28.69%. And the four stocks cited as examples of a weakening economy did even better, with an average total return of 45.2%.

There is no assurance that 2008 will achieve a similarly positive result, but the behavior of stock prices in 2003 suggests that fixating on every weekly wiggle can lead to disappointing results for those seeking long-term investment success.

S&P data provided by Standard & Poor's Index Services Group.
Santoli, Michael. "Stocks Tumble Along With Bush Approval Ratings." Barron's, January 27, 2003.
Standard & Poor's. Stock Guide, January 2004.
Yahoo! Inc. Yahoo! Finance. In http://finance.yahoo.com, accessed January 28, 2008.

What does this mean to you? Well, the New York Giants are a team from the original NFL, and the Patriots are from the former AFL. Looking back at history, the two years ('87 and '91) when the Giants WON the Super Bowl, the market averaged an increase of 11.2%.

When the Patriots have won the Super Bowl ('02, '04, & '05) the markets have LOST an average of 4.81%!

While more than 2/3 of the population DON'T believe the Super Bowl indicator, it has held true more than 80% of the time when original NFL teams play former AFL teams (NOT when two original NFL teams play each other like the last two Super Bowls)!

I can't claim credit for the research, you can find it here on CNBC:

http://www.cnbc.com/id/22781437

But it's a fun factoid that might lend a little comedy to a brutal market!

GO GIANTS!!! (No, I'm not really a Giants fan per se, but I will be for this Super Bowl!)

Global markets sold off in big fashion this Martin Luther King Jr. day, as our markets were closed for trading in his honor to celebrate the legacy he left us with. It was likely a good thing our markets were closed, but only delayed the inevitable for one day.

The markets will quite possibly make all of the headlines tomorrow. You'll hear more and more stories of full-blown recession, the 1987 crash, 9/11, etc. The headlines made tomorrow will stick with us for some time to come as things settle out over the coming months and possibly years. No one knows where the bottom is, and those who think they do are merely guessing!

In the end, setting aside near term cash requirements in fixed income investments and money markets, and prudently balancing and diversifying the longer-term portion of investment capital - is still the most prudent course of action (unless of course you have that proverbial "crystal ball"!).

This is also where the re-balancing process really benefits our long-term goals, as it forces re-apportioning cash and money market assets (along with possibly fixed income assets) to growth assets (diversified global equities) when they're depressed in price. This has proven to be a winning strategy throughout our markets history. Who wouldn't want to say they bought growth assets every time the market was beaten down (meaning correction territory or a bear market) in the last 80 years give or take?

I wouldn't be surprised to see Ben Bernanke jump in with a large rate cut (the estimates range from .25% to 1%, but it’s likely it will be .50% or at most .75%) ahead of the scheduled meeting. Even more importantly Congress and the President have more incentive than ever to put aside partisan politics and work together to reduce the damage already done, and moderate the damage coming.

The markets always look well-ahead though, and act as a rubber-band being stretched to its limits before it snaps back - both directions, up to the positive and down to the negative. We saw that stretch to the top, when the down hit that 14,000 territory last year. Unfortunately what we're seeing right now is that stretch, pushed to its limits in the negative direction.

As I mentioned, no one truly knows how far this market will stretch in this downward fashion all I know is missing the snap back in the positive direction is devastating to long-term performance and that’s evidenced statistically by missing out on the best one, two, or even handful of days of market returns over any given historical time period. In fact historically speaking, some of the best market returns came the month after the 1987 crash, the months following the ’73 and ’74 bear markets, and most recently shortly after 9/11.

If you're a homeowner, any documents you've signed in the purchase process may (and in MANY cases are) be available online, including your signature on those documents. I've actually done searches myself and found client signatures online in recorded documents to test this theory.

If you live in Maricopa County, follow this link to your Assessor's office:

https://www.maricopa.gov/Assessor/ParcelApplication/Default.aspx

If you live in Clark County, follow this link to your Assessor's office:

http://www.co.clark.nv.us/assessor/disclaim.htm

Do a search for your name or parcel number and click on the documents to see what's available online. If your signatures are in those documents, I highly recommend submitting a formal request to your assessor to have your signatures removed from all publicly available documents through the internet.

It may take a few minutes of your time, but in the end if it helps protect you and your personal information from falling into the hands of those with ill intentions, it's well worth the effort!

January 14, 2008

Do Insiders Know Best?

Fast food entrepreneur Carl Karcher passed away last week in Fullerton, California at age 90. An Ohio farm boy with an eighth-grade education, the burly extrovert was a classic rags-to-riches story. Newly married and working as a bread truck driver in Los Angeles, he scraped together $326 (almost all of it borrowed) in 1941 to purchase a single pushcart hot dog stand. Sales were brisk, and he soon owned multiple carts. He opened his first full-service restaurant - Carl's Drive-In Barbecue - in 1945 and launched smaller versions of his original restaurant in the mid 1950s, calling them "Carl's Jr." By 1975, there were over 100 restaurants, mostly in California, and today CKE Restaurants Inc. is an NYSE-listed firm with over 3,000 locations in thirteen countries.

Karcher's life offers many lessons - the power of positive thinking, the virtues of thrift and hard work, the importance of family (fifty-one grandchildren!) and the sustenance provided by a strong religious faith. "Everybody loved him," a longtime friend and neighbor observed. "Carl had a very positive, optimistic spirit. He believed things could happen."

Unfortunately, Karcher's investment experience offers a lesson of a different sort. As the outlook for sales and profits at his restaurant firm darkened in 1999, the share price of CKE Restaurants fell sharply from over $42 in 1998 to under $6 in 1999. Karcher had borrowed heavily to buy CKE shares in an effort to increase his stake in the company, and was unable to meet a margin call from Merrill Lynch. As the falling share price eroded the collateral value of the loan, he was forced to sell 875,000 CKE shares in August 1999 at roughly one-third the price they had commanded the previous year. A similar situation four months earlier had forced him to sell over one million shares. The Los Angeles Times reported in August 1999 that the combination of a slumping share price and forced stock sales had slashed the value of Karcher's stake by about 90% compared to the previous year - a loss of over $120 million. In an ironic reminder of the virtues of diversification, a separate story appearing in the Times business section that day reported that the Dow Jones Industrial Average had jumped over 199 points to close at an all-time record high.

The moral of the story: If you want to get rich, start your own business. If you want to stay rich, own a diversified portfolio.

Associated Press. "Carl N. Karcher, 90, Founder of Carl's Jr. Hamburger Chain, Is Dead." New York Times, January 13, 2008.
CKE Restaurants, Inc. CKR.com, accessed , accessed January 14, 2008.
Hardesty, Greg. "Burger Baron Loses over $100 Million with Shares in CKE Restaurants." Orange County Register, August 22, 1999.
Sanders, Edmund. "Carl's Jr. Founder Karcher Sees His CKE Stake Plunge." Los Angeles Times, August 24, 1999.
Standard and Poor's. Stock Guide, January 2001.

Most people who aren't involved in the world of finance don't know exactly what capitulation is or means. The dictionary defines it as an act of surrender - or "throwing in the towel"!

In the capital markets it connotes when the average investor has "just plain had it" with the volatility and decides to pull out, sticking their money under the mattress or in CD's. As you likely do know, the average investor typically makes the wrong moves at the wrong times - hence capitulation in the past has typically been a bullish sign!

Have we seen capitulation in the markets yet? I don't know and would never claim to have such insight. I do know this - there is a lot of money sitting on the sidelines waiting for some stability to come back into the real estate and equity markets! When that money steps back in, the ride will be likely as volatile in the other direction (the upside) - and that's a ride I don't want to miss...

Unfortunately the facts are:

• Foreclosures are up 167% since November of 2006
• Nevada ranks #1 in the nation in foreclosures
• There is 1 foreclosure for every 152 homes in Nevada
• Our foreclosure rate is 4 times the national average

It's just not a pretty picture here in Nevada! Real estate has proven to be a fantastic investment over long periods of time - and real estate here in Las Vegas has also proven to be fantastic from a "big picture" perspective. But as with everything else, what goes up, does have its pullbacks eventually!

In my opinion, we'll see higher economic growth rates in the future than we've seen in the past (this is a rough thing to say in markets like these when everything looks bleak). I say this due to technology, technological advancements, and the subsequent increase in worker productivity (a byproduct of technology).

Just think of how much more productive the average worker is now with new technologies vs. 10 years ago. If you believe the Intel rule that chip processing power for example will double every 18 months, then other technological capabilities will hopefully continue to expand in a similar fashion (and hopefully exponentially) as well.

As the national economy continues to grow over the next 5 to 10 years (not short term, but longer term), we should see the economic slowdown come full circle...maybe twice!

This just goes to emphasize the longer term perspective that's so critical to a successful investing experience!

With the markets where they are today, it only makes perfect sense to bring to light an article written a couple of months ago by Weston. Take a look - it's GREAT stuff!!!! Just goes to show that the popular press doesn't have any more of a clue than anyone else...

Begin Article (PS - now look at the prices of the stocks mentioned in the article!):

November 13, 2007

Is It Really a Bargain?

Many of us eagerly seek out bargains when shopping for airfares or TV sets. Why should stocks be any different? Perhaps the analysis is a bit more complicated, but that's where financial statistics might prove helpful. Or so we hope. The financial press is often eager to help, publishing articles, as Fortune did earlier this year, suggesting that "sophisticated screens help us hook solid companies selling for much less than they're really worth." Financial stocks show up frequently in such surveys of "undervalued" stocks; but as banking and mortgage-related issues have been taking their lumps in recent weeks and months, investors are learning (or being reminded) that a "bargain" price based on careful analysis of company fundamentals and valuation characteristics is no insurance against large losses.

In the following table, Change reflects the price change between the price cited in the article's recommendation and the stock's closing price as of November 12, 2007.

Fund Facts Price Change
Bank of America (BAC) $43.98 -17.5%
"With a fat 4.2% yield, Bank of America is a favorite for income. But the financial services company has also been expanding so fast that it may soon be No. 1, surpassing Citigroup" ($53.32 on December 15, 2006).
Michael Sivy, "Why I'm Sticking with These Two Leaders," Money, February 2007.

Assured Guaranty (AGO) $19.80 -23.8%
"The company hasn't covered one [security] below the triple-A level since 2003. . . . Shares trade at a 21% discount to my $33 estimate of their private market value" ($26 on unspecified date).
John W. Rogers Jr., "Subprime Risks Overblown," Forbes, September 17, 2007.

Citigroup (C) $33.57 -31.5%
"Investors are beginning to recognize that big banks are generating a ton of cash and returning a chunk of it to shareholders" ($49 on unspecified date).
Russell Pearlman, "Where to Invest Now," SmartMoney, July 2006.

MDC Holdings (MDC) $37.51 -31.8%
"Our top pick is MDC Holdings, which owns only a two-year supply of building lots vs. eight for some of its rivals" ($55 on unspecified date).
John Eade, "In a Hot Market, Here's How to Play It Safe," Fortune, June 25, 2007.

Washington Mutual (WM) $20.77 -41.6%
"The stock trades at just ten times 2007 expected earnings and yields 6.3 percent" ($35.58 on August 16, 2007).
Russell Pearlman, "Bargain Bets - Five Stocks That Could Double," SmartMoney, October 2007.

Radian (RDN) $11.15 -53.5%
"The dean of value investing helps us find three stocks that are safe and cheap . . . [Whitman] figures the company has a book value of about $50 per share" ($24.00 on October 5, 2007).
Yuval Rosenberg, "Bargain Hunting with Marty Whitman," Fortune, October 29, 2007.

MGIC Investment (MTG) $21.30 -65.1%
"The stock sells for a little more than book value. [Portfolio manager] Reinhart figures the shares could climb 56% to their $95 per share private market value" ($61.00 on January 25, 2007).
David Stires, "Five Bargain Stocks," Fortune, February 19, 2007.

AND THERE YOU HAVE IT! THE FORBES RECIPE FOR SUCCESSFUL INVESTING

Just what Substantive Action is - who knows??? Does it mean a 50 basis point cut when the Fed meets? The market seems to think more and more that it will happen.

Mr. Bernanke also eluded to the fact that the Fed is more concerned with economic weakening than it is with inflation. This is a double-edged sword in my mind. On one hand it means they're hawking the bad news. On the other it means there is A LOT more bad news about the economy and they are forced to watch that over inflation.

The fact is inflation remains largely out of the Fed's control at this point (as soon as they can control the price of a barrel of oil we'll talk!). Economic weakening remains under the Fed's thumb!

In other bright and shiny news, the retailers have been CRUSHED with the exception of Wal Mart (reading into that one isn't a good thing), the economy has definitely slowed, and all of this talk of will we have a recession or not to me is bunk. We won't even know it until we're mostly through it in my opinion.

Traders do see signs of bottoming in the market, as there are a plethora of sectors that have just been destroyed in the last couple of months and it seems even bad news isn't pushing the big companies down like it did in the weeks and months prior.

Bank of America is in serious talks to buy out Countrywide (the main culprit, or a major contributor, in the sub-prime debacle). This could be great for the sector, but could implode for BofA. They've already lost a ton of money on a prior investment in Countrywide. How this plays out remains to be seen.

In other news there appears to be some talk of consolidation in the airline industry - Delta and Northwest/United are a potential pair-up. This seems to be good news.

I continue to re-balance and re-allocate towards my long term portfolios with every client's unique situation. There's no gambling on sectors, no betting on recession, no trading the market swings. I do the same for my clients as I do for myself and my family - stick with a long term plan based on Modern Portfolio Theory using very low cost passive strategies tailored to each unique risk profile. It's a time tested strategy that, provided you have a 5 year plan, should work quite well!

2007
Under 50 - $4,000
Over 50 (Catch-Up Provision) - $5,000

2008
Under 50 - $5,000
Over 50 (Catch-Up Provision) - $6,000

Now please remember that the amount of a traditional IRA that you can deduct on your taxes may be limited (to zero) by how much money you make. Your eligibility may also be limited to even contribute to a ROTH if your income is too high. So while I wish it was as simple as contribute and let grow, it's not. Please check with your tax advisor before funding any individual retirement accounts.

Thank you IRS!!!

In Q2 of 07 I sent an update to all clients mentioning how we've had 5 years of spectacular growth, moderate volatility, and just plain nice results for pretty much anyone well-diversified in the DFA strategy. I also mentioned get ready for the volatility and the downswings, as the market can't go straight up forever - it just CAN'T!

So far Q3 07, Q4 07, and the first part of 2008 have proven this to be fact. We've had extreme volatility, and mostly to the downside. Real estate has continued to plummet, the consumer is slowing down, and the markets are exhibiting all of those things in their depressed prices.

The reason I ask if you're seasick yet is I look at it as if you're on a boat, in the middle of the ocean, and sailing off into the sunset to your destination of choice, yet the seas get rough - and you get seasick! The "market noise" as I call it is those rough seas. It's enough to make anyone sea sick, captain and passenger alike.

The best way to reduce that sea sickness is to focus on the horizon - just one spot, in the direction you really want to go - a long ways a way. Just as with your portfolio, in times like these it's important to focus on that one spot (your goals) a long way off (the time frame you're investing over or those rolling 5 year periods I talk about so often).

As you catch the snippets on the news or the headlines in your paper and see the "market noise" in real time, just remember your focus is on the horizon, not the rough seas you're currently in! Hopefully, that long term focus will help reduce your current sea sickness!

Over the next several months, I plan on bringing you basic insight and helpful information pertinent primarily to finance and financial planning for retirement oriented individuals. I'm going to tackle current events, what Wall St. doesn't want you to know, what you SHOULD know about investments and cash flow planning, and a host of other items that bounce around the industry periodically.

I'll write my blog from the perspective of sitting down, right there with you in my office across the desk from me - just as if you were my client. You'll get the straight scoop - the exact same beliefs and philosophies I implement on a daily basis to help my clients achieve their personal financial and retirement goals.

In the end, I'm hoping that I can do some good in the world - specifically by helping you tackle those critical issues that face you and your financial well-being. After all, my mission statement says it all, and this is a natural extension of my personal and business goals:

"We add value to our client’s lives by providing exceptional, comprehensive, and independent financial advice and planning services, exhibiting at all times the knowledge, experience, and integrity necessary to create a substantial and positive financial effect"

I hope you enjoy, and please feel free to contact me directly at greg@redrockwealth.com.