Dear Clients and Friends,
And the good news is;
Hiring has increased in the
temporary help area, the job loss pace is slowing, the stock
market gains are helping to increase household wealth, the
economy grew at a 3.5% annual rate in the 3rd quarter and
the “Fed” used the word “optimistic” and said that they
believe that the economy continues to improve.
http://money.cnn.com/2009/10/14/news/economy/fed_minutes/index.htm?postversion=2009101415
However, my concerns are;
Looking ahead, we still have the
impact of the pending defaults in the commercial real
estate market and the effects that will have on the
banks (just last week the FDIC seized nine US banks
including Park National Bank). So far the FDIC has closed 120
banks this year.
http://online.wsj.com/article/SB125754689337434619.html
In addition we have the news of the
unemployment rate rising to 10.2% but it is really 17.5%;
“There was another 7.3% of the workforce described as
“discouraged.” An overall unemployment rate of 17.5%
combines the monthly unemployment rate with the percentage
of those who have stopped looking for jobs, having despaired
of ever finding them, and those who want to work full-time
but can find only part-time jobs. This means that, in the
U.S. nearly 20 out of every 100 workers are unemployed.”
(November 6, 2009 The Wall Street Journal,
Jim Murphy)
We have seen significant gains in the
market since March but we are still in need of caution.
There are risks of another shock to the economy which will
ultimately affect the markets. These risks are unlikely, but
still possible; a double dip recession, a military
confrontation between the US/Israel and Iran, and the
unraveling of the highly leveraged US dollar funded carry
trade. (November 1, 2009,
Financial Times, Roubini).
Explaining the “carry trade” in laymen’s terms; it starts
with the weak dollar relative to other currencies, traders
have been shorting the US dollar and then investing in
global assets on a highly leveraged basis. They (these
traders) not only make money as the dollar weakens, but they
make money on the assets as well. So what happens when the
dollar reverses? Traders will need to cover their “shorts”
and dump the global assets. “This may not occur soon
The Group of 20 (finance ministers and central bank
governors) Met over the weekend and signaled that while they
continue their loose monetary stance, it would not be
imminent. “Not this year...and not next year either? James
Bullard, the head of the St. Louis Fed, in an interview to
the Financial Times over the weekend. “But if (when) it
happens, the bubble will burst leading to a massive sell off
in global securities.”
(November
5th, 2009, CNBC, Jeff Cox)
The risk for the U.S. is that, absent a
sustainable and robust resumption of growth (driven by
genuine private sector activity rather than stimulus and
inventory cycles), the underlying economic and financial
conditions are getting more unstable and not less – in other
words, the Fed runs the risk of inadvertently pursuing
short-term stability at the cost of longer-term instability.
(November 4, 2009, PIMCO, Mohamed El-Erian
CEO and co-CIO)
My recommendations;
Caution and diversification is the
key to investing now. Instead of going for the big returns,
shift strategy and invest conservatively. In US markets, I
believe dividend paying stocks and technology should hold up
well. For added safety, there are some well managed funds
that hedge a portion or all of their portfolios against
another market plunge. The cost of this risk is around 1/2%
of the funds return. And you should sleep better.
Emerging markets continue to shine due to their significant economic growth and the weak US dollar. My favorite is India followed by China and Brazil. However, the stocks within the emerging markets are expensive by many valuation standards, and quite volatile. Never the less, they continue to perform. Be cautious as these stocks (along with commodities and other asset classes may be subject to the carry trade bubble as discussed earlier).
Commodities have been a high performing asset class for multiple reasons; the weak dollar, China’s aggressive buying of many commodity companies, infrastructure building (which uses commodities) and their recognition as a hedge against inflation.
Although gold’s price is high, this might be the time to add a little more to your portfolio. Should 2010 be a year that the economy does not meet its growth rate and companies do not start producing top line performance, consider gold for insurance purposes.
As for fixed income, without the near term threat of interest rates rising, I recommend intermediate term high quality bonds more for their diversification and their low correlation to stocks. You might want to consider adding a global bond fund for the higher yields and where the returns benefit from the weak dollar.
And don’t forget taxes!
Estate Death Taxes are the
latest worry. Illinois has yet to make the necessary
changes to come in line with the Federal deductions.
http://online.wsj.com/article/SB125694593227919879.html
“I would argue that recent changes in the Illinois estate tax law and the current status of the federal estate tax law make it more critical than ever for clients to make sure their estate plans are up-to-date". Read more here. Kimberly S. Coogan, Bellock & Coogan
“Donating appreciated stock is a great tax saver. If you’ve owned the shares for over a year, you can deduct the full value and not pay tax on the appreciation”. Kiplinger Tax letter October 30, 2009
Active management vs. Passive
management
The ongoing debate about whether
an active manager, (one that selects the underlying stocks
for clients-often through a mutual fund) can outperform its
benchmark equivalent index which can be invested through an
ETF (exchange traded fund) is reflected again in this recent
research by Morningstar. “Style Indexes have outperformed
their active counter-parts in five of the nine domestic
styles over the past one-year and three-year periods as of
June 30, 2009. After accounting for risk, size, and
style, only 37% of active funds beat the respective
Morningstar Style Index over the past three years”.
http://corporate.morningstar.com/us/asp/area.aspx?xmlfile=6565.xml. It looks like purchasing the low cost
index for your portfolio in many asset classes, particularly
the large capitalization stocks, beats out paying an
expensive mutual fund or stock picker to manage your assets.
Please call if you would like to talk further or if I may be
of help.
Regards,
Susan Templeton
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