On July 15 a blue-ribbon panel co-chaired by former SEC chairmen Bill Donaldson and Arthur Levitt issued their "Report on Financial Regulatory Reform: The Investor's Perspective" http://tiny.cc/cyFtq. There are many encouraging comments in this report, including on page 14 where we find "In order to improve the quality of advice provided to retail investors and to protect them from abusive practices, the SEC should be empowered to reform compensation practices that create unacceptable conflicts of interest, improve pre-sale disclosures, and subject all those who provide personalized investment advice, including broker-dealers, to a fiduciary duty."
Page 15 of the report addresses the problems associated with "... a series of decisions by regulators over the years allowed brokerages to call their sales representatives "financial advisers," offer extensive personalized investment advice and market their services based on the advice offered, wall without regulating them as advisers.
We hope Congress will carefully consider the matters addressed in this report. Investors will be best served by advisers who are subjected to a fiduciary duty.
Friday, July 31, 2009
Monday, July 27, 2009
Baby Boomers cut spending
An excellent article in BusinessWeek (http://tiny.cc/diOKI) sets out how baby boomers are cutting their spending in this economy. The question becomes "what effect will this lower consumption have on corporate profits". The stock market has rallied recently in part due to optimism about revenue growth at consumer oriented companies like Apple. But the lower consumption may be a long-term trend and some experts believe this would serve to constrain corporate profits and economic growth for years. The BusinessWeek article discusses one such forecast of 2.4% GDP growth over the next thirty years, versus an historical 3.2% annual growth rate since 1965. This is a key consideration all investors will have to measure as they make decisions going forward.
Friday, July 17, 2009
The challenge of setting future return expectations
Periodically our firm will revisit what we believe different asset classes will return over the long-term future. This is important as future return levels are a key assumption in preparing wealth plans that will assist clients in determining when to retire, how much to spend in retirement, and other key issues. We (as have others of our profession) have typically looked at historical return information and historical relationships between different types of investment assets and from this information have set our future return expectations.
After the events of the past year or so, things have changed. A very good discussion of how things have changed can be found in an article titled "Beware of the 'Business as Usual' Mindset" authored by Mohamed El-Erian, co-CEO of PIMCO. You can find the article at http://tiny.cc/eH9Qs. In the article El-Erian sets out 4 key questions:
1. How far will the balance shift away from markets and toward governments?
2. How will governments finance their growing involvement in the economy?
3. To what extent will this alter the role of the U.S. in the global economy?
4. How far will governments go in de-risking the financial system?
You can read how Mr. El-Erian answers each of the questions in the linked article. Our firm concludes that these issues raise the risks for all of us in terms of trying to have the funding to accomplish our key goals. We believe the answer is to have more of a safety cushion in a wealth plan. That may require working longer, spending less, being more flexible on goals or any number of other strategies. Key is to have a wealth plan and in that plan to properly measure what the goals are and what the cushion is to assist in protecting those goals. As the world changes in so many ways, including market changes, such a wealth plan must be updated each year to have continued relevance.
After the events of the past year or so, things have changed. A very good discussion of how things have changed can be found in an article titled "Beware of the 'Business as Usual' Mindset" authored by Mohamed El-Erian, co-CEO of PIMCO. You can find the article at http://tiny.cc/eH9Qs. In the article El-Erian sets out 4 key questions:
1. How far will the balance shift away from markets and toward governments?
2. How will governments finance their growing involvement in the economy?
3. To what extent will this alter the role of the U.S. in the global economy?
4. How far will governments go in de-risking the financial system?
You can read how Mr. El-Erian answers each of the questions in the linked article. Our firm concludes that these issues raise the risks for all of us in terms of trying to have the funding to accomplish our key goals. We believe the answer is to have more of a safety cushion in a wealth plan. That may require working longer, spending less, being more flexible on goals or any number of other strategies. Key is to have a wealth plan and in that plan to properly measure what the goals are and what the cushion is to assist in protecting those goals. As the world changes in so many ways, including market changes, such a wealth plan must be updated each year to have continued relevance.
Monday, July 13, 2009
June 2009 Market Update (Posted to our blog two weeks after sending to clients)
“Face reality as it is, not as it was or as you wish it to be.”
Jack Welch, former CEO General Electric, author, commentator
The quarter ended June 30, 2009 looks like it is going to end with stocks up about 15% (as measured by the S&P 500 index) over the past three months. The S&P 500 index which is 925, as this is written on June 29, 2009, has come a long way from March 9th when it was at 676 amid great concern about the economy, deflation, deleveraging, and a government that couldn’t get its message right. So, what has changed?
For one thing, the economy has stopped dropping like a rock. This can be seen in the endless flow of economic statistics like the May unemployment release that indicated nonfarm payrolls declined 345,000 jobs compared to over 600,000 for each of the three prior months. Experts now think that the U.S. economy, which was dropping at an annual pace of around 6% in 4th quarter 2008 and 1st quarter 2009, has improved to a decline of around 3% in the quarter just ending and will become positive after that.
Another helpful thing has been a continued policy of low interest rates by the Federal Reserve (and central banks worldwide). Rates on savings accounts and other assets seen as riskless are so low that investors have found themselves accepting some risk in order to earn higher returns. Our entire system is based upon the risk/return equation, so it is nice to see the markets become more rational.
Fiscal policy has also helped as stimulus programs of the U.S. and other countries have helped to put money and spending into the economy. China has been the most successful with this as their 4 trillion Yuan stimulus (amounting to 12% of GDP over 2 years) has led to strong recovery as reflected in a 9% increase in May industrial production (as compared to May 2008). The World Bank recently revised its 2009 China growth forecast from 6.5% to 7.2%. Investors in China have been rewarded with a market that is up about 35% so far in 2009 (as measured by the Greater China Fund GCH)—compare this to the S&P 500 up about 4% for the same period.
What matters is where we go from here. For that we return to the key themes we have been developing since last fall. Our themes for how we invest client money include:
The quarter ended June 30, 2009 looks like it is going to end with stocks up about 15% (as measured by the S&P 500 index) over the past three months. The S&P 500 index which is 925, as this is written on June 29, 2009, has come a long way from March 9th when it was at 676 amid great concern about the economy, deflation, deleveraging, and a government that couldn’t get its message right. So, what has changed?
For one thing, the economy has stopped dropping like a rock. This can be seen in the endless flow of economic statistics like the May unemployment release that indicated nonfarm payrolls declined 345,000 jobs compared to over 600,000 for each of the three prior months. Experts now think that the U.S. economy, which was dropping at an annual pace of around 6% in 4th quarter 2008 and 1st quarter 2009, has improved to a decline of around 3% in the quarter just ending and will become positive after that.
Another helpful thing has been a continued policy of low interest rates by the Federal Reserve (and central banks worldwide). Rates on savings accounts and other assets seen as riskless are so low that investors have found themselves accepting some risk in order to earn higher returns. Our entire system is based upon the risk/return equation, so it is nice to see the markets become more rational.
Fiscal policy has also helped as stimulus programs of the U.S. and other countries have helped to put money and spending into the economy. China has been the most successful with this as their 4 trillion Yuan stimulus (amounting to 12% of GDP over 2 years) has led to strong recovery as reflected in a 9% increase in May industrial production (as compared to May 2008). The World Bank recently revised its 2009 China growth forecast from 6.5% to 7.2%. Investors in China have been rewarded with a market that is up about 35% so far in 2009 (as measured by the Greater China Fund GCH)—compare this to the S&P 500 up about 4% for the same period.
What matters is where we go from here. For that we return to the key themes we have been developing since last fall. Our themes for how we invest client money include:
- Developed countries will be faced with weak consumption as consumers deleverage and increase their savings rate to help restore lost wealth.
- Emerging countries have a growth advantage with an emerging middle class, high savings rates (that can be redirected towards consumption) and low government debt.
- High budget deficits will lead to increasing levels of government debt to GDP resulting in a weak U.S. dollar (and weak currencies of most other developed countries).
- There is an increasing possibility of significantly higher levels of interest rates in the U.S. and other countries where government debt to GDP increases materially over the next decade or more.
- There is a risk of much higher inflation (after 2 to 3 years needed to clear excess capacity) if governments worldwide don’t skillfully remove monetary stimulus.
It is important to understand that human behavior results in markets that overdo things on both the upside and downside.
This brings us to “what are we doing now?” Our approach has been to closely monitor worldwide economic and market events to either validate our themes, or cause us to change them. The above themes, which we believe events have validated, have led us to establish significant positions in emerging market equities (we like these for their better growth prospects and the ability to diversify away from the U.S. dollar). We also took sizeable positions in high yield bonds when the price of these went so low (and interest rates so high) as markets reflected the overreaction of investors fleeing risk. Our client portfolios have a reduced level of U.S. equities (as compared to a “normal” level) due to our concerns over a weak economy and a weak U.S. dollar. We continue to consider further diversification away from the U.S. dollar in form of investments like gold or managed futures. Given our concern over possible significant levels of inflation down the road, we are also evaluating a possible return to PIMCO Commodities Real Return fund, which combines a commodity position with Treasury Inflation Protected Securities (TIPS).
As of the end of June we have made no significant changes to client portfolios over the past 30 days. You can see the themes we see developing and some of the investments we are considering to act on those themes, however at present we are content to stay with what we have already done.
We are also very busy on the wealth planning side of our services. The unusual market conditions have created significant opportunity in high net worth scenarios to implement strategies that permit transfer of significant wealth to future generations without the cost of estate taxes that can take 50% from beneficiaries. These same unusual market conditions have created the need for us to help clients clearly evaluate their plans for retirement and other life goals and make changes wherever necessary. Our firm has professionals dedicated to providing these planning solutions and they are working very hard to add planning value where we can.
This brings us to “what are we doing now?” Our approach has been to closely monitor worldwide economic and market events to either validate our themes, or cause us to change them. The above themes, which we believe events have validated, have led us to establish significant positions in emerging market equities (we like these for their better growth prospects and the ability to diversify away from the U.S. dollar). We also took sizeable positions in high yield bonds when the price of these went so low (and interest rates so high) as markets reflected the overreaction of investors fleeing risk. Our client portfolios have a reduced level of U.S. equities (as compared to a “normal” level) due to our concerns over a weak economy and a weak U.S. dollar. We continue to consider further diversification away from the U.S. dollar in form of investments like gold or managed futures. Given our concern over possible significant levels of inflation down the road, we are also evaluating a possible return to PIMCO Commodities Real Return fund, which combines a commodity position with Treasury Inflation Protected Securities (TIPS).
As of the end of June we have made no significant changes to client portfolios over the past 30 days. You can see the themes we see developing and some of the investments we are considering to act on those themes, however at present we are content to stay with what we have already done.
We are also very busy on the wealth planning side of our services. The unusual market conditions have created significant opportunity in high net worth scenarios to implement strategies that permit transfer of significant wealth to future generations without the cost of estate taxes that can take 50% from beneficiaries. These same unusual market conditions have created the need for us to help clients clearly evaluate their plans for retirement and other life goals and make changes wherever necessary. Our firm has professionals dedicated to providing these planning solutions and they are working very hard to add planning value where we can.
Friday, July 10, 2009
Proposal to impose fiduciary standard on broker-advisers heads to Hill - Investment News
Proposal to impose fiduciary standard on broker-advisers heads to Hill - Investment News
In a statement regarding the draft legislation as put forth by the Treasury Department, they said “The legislation outlines steps to establish consistent standards for all those who provide investment advice about securities, would improve the timing and quality of disclosures about investments, and would require greater accountability from securities professionals (our emphasis added).”
We think it is quite remarkable that the administration is clearly saying the fiduciary standard is the preferred way to serve the best public interests. One can only hope that the big brokerage firms and other special interests won't be able to get this removed or watered down in what eventually passes through Congress.
In a statement regarding the draft legislation as put forth by the Treasury Department, they said “The legislation outlines steps to establish consistent standards for all those who provide investment advice about securities, would improve the timing and quality of disclosures about investments, and would require greater accountability from securities professionals (our emphasis added).”
We think it is quite remarkable that the administration is clearly saying the fiduciary standard is the preferred way to serve the best public interests. One can only hope that the big brokerage firms and other special interests won't be able to get this removed or watered down in what eventually passes through Congress.
"Safe" investing in U.S. Treasurys?
When risk assets all over the world collapsed in price in 2008, many took refuge in U.S. Treasury instruments. As a result the 2008 return for the index representing various maturies of U.S. Treasurys was 13.7%. The 2008 return on the Treasury bonds with 30-year maturities was an eye-popping 41.3%.
2009 is a different story. Investors have found that investing in Treasury instruments can have a downside also as interest rates have increased and driven prices down. For the 6 months ended June 30,2009 the weighted index of all U.S. Treasury securities has gone down 4.3%. Even more dramatically, the YTD 2009 return on 30-year maturity Treasurys is a negative 20.3%.
So much for the safety of U.S. Treasurys!
2009 is a different story. Investors have found that investing in Treasury instruments can have a downside also as interest rates have increased and driven prices down. For the 6 months ended June 30,2009 the weighted index of all U.S. Treasury securities has gone down 4.3%. Even more dramatically, the YTD 2009 return on 30-year maturity Treasurys is a negative 20.3%.
So much for the safety of U.S. Treasurys!
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