Sunday, August 28, 2011

Investing Tug of War


I hope you are doing well and are enjoying life as August comes to a close. For an investor, a good way to describe this past week is to think of the game Tug of War. I will illustrate this in the middle section. The first section is from Vanguard. The last section is more trivia on the subject of the Tomb of the Unknown Soldier.

Vanguard Weekly Recap

The march to extreme caution quickened its pace this week led by more disappointing news for the fragile economy. Key reports on housing, new orders, and national output indicate that the economy, still buffeted by slow growth and persistent joblessness, remains far from reaching a sustained recovery. Amid this discouraging environment, Federal Reserve Chairman Ben Bernanke—in widely anticipated comments on Friday from Jackson Hole, Wyoming—said the central bank stands ready to help dig the economy out of the doldrums but didn't indicate what tools he would use to do so. For the week ended August 26, the S&P 500 Index rose 4.7% to 1,176.80 (for a year-to-date total return—including price change plus dividends—of about -5.2%). The yield on the 10-year U.S. Treasury note increased 12 basis points to 2.19% (for a year-to-date decline of 111 basis points).

Tug of War

I think the best way to describe investing for this year is to use the game of tug of war. As you recall, in this game each side is pulling against each other to move a rope a distance so that a team can win. Normally, during the game the number of players on a team are fixed.

For investing the teams for this tug of war are gold and US Treasury Bonds on 1 side and Stocks on the other side. As gold and US Treasury Bonds go up, stocks go down and vice versa. What makes this game unique is that investors have no loyalty and are either switching sides on a continual basis or putting their money in cash and leaving the game all together.

Who will win this tug of war during 2011? My money is on Stocks since Corporate profits are at an all time record high, about 10% higher than the previous peak in 2006 while the price of gold and US Treasury Bonds are inflated, making absolutely no sense.

Just watch for yourself this week the price of gold, the interest rates on the 10 year US Treasury Bond, and the S&P 500. Since this tug of war exists, this is why a balanced portfolio has both stocks and bonds.

Tomb of the Unknown Soldier Trivia

• Originally called “The Tomb of the Unknown Soldier” it is now called “The Tomb of the Unknowns.” (This change has not been ratified by Congress.) This is the result of WWII, Korean War and the Viet Nam War.

• The guards are called “sentinels” not guards. The sen-tinels wear no insignia of rank on their uniforms so as not to outrank the “unknowns” buried there.

• The sentinels stop on the 21st step, do a ninety-degree turn and face the Tomb for 21 seconds, turn ninety de-grees again hesitate 21 seconds before beginning their return walk. This walk is done on a black mat.

• Why are the sentinels gloves wet? Their gloves are moistened to prevent losing their grip on the M14 rifles, which are unloaded, but kept ready for use at all times and always have a bayonet fixed.

• How many women have served as sentinels? Three.

• Do the sentinels carry their rifle on the same shoulder all the time? No. They always carry their rifle on the shoulder away from the tomb. After they walk 21 steps across the mat, they execute a ninety-degree turn and move the rifle to their outside shoulder.

• How often are the sentinels changed? Sentinels are changed every thirty minutes during the summer – (April 1 – September 30) - and every hour during the winter (October 1 – March 31.) During the hours the cemetery is closed, the sentinel is changed every two hours. The Tomb is guarded twenty-four hours a day, 365 days a year. There has been a sentinel on duty every minute of every day since July 2, 1937. Currently the sentinels work on a three Relief (team) rotation. 24 hours on, 24 hours off, 24 hours on, 24 hours off, 24 hours on and 96 hours off.

• What are the physical characteristics of all sentinels? For a person to apply for sentinel duty they must be be-tween 5’ 10” and 6’ 4” tall and their waist size cannot exceed 30 inches. They are assigned to Relief Teams by height. This is done so that each team will look as identical as possible.

Sunday, August 21, 2011

Should I Be In The Stock Market?

For the average investor, this week was like going to the dentist office, something that I did this week. This week was filled with news media hype about how bad things are and computer program trading that gyrated investments. This week, I was asked this question by my favorite client. First is the info from Vanguard. Last is some trivia on the Tomb of the Unknown Soldier.

What was very significant this week but not reported was something that probably will never happen again. This event was the 10 year US Treasury Bond went below 2% which suggests that we are on the verge of a depression, which does not make sense.

To answer the question, it depends. A short term investor, less than 6 months, the answer is to always be out of the stock market and in cash. For a longer term investor the answer is yes. I will explain below. The key to the answer is that an investor must invest in something that beats inflation.

Vanguard

Volatility in the financial markets dominated the news, as the U.S. economic outlook and Europe's fiscal woes weighed on investors. Economic reports didn't help matters—two regional manufacturing surveys reported glum results, housing remains in the doldrums—despite positive news about national production and future economic activity. For the week ended August 19, the S&P 500 Index fell 4.7% to 1,124 (for a year-to-date total return, including price change plus dividends, of about –9.5%). The yield on the 10-year U.S. Treasury note slipped below 2%, its lowest level since at least the 1960s. Stressed investors often flee to Treasury securities, which has the effect of lowering yields. The note's yield for the week dropped 17 basis points to 2.07% (for a year-to-date decline of 123 basis points).

Should I be in the Stock Market - Long Term Investor

My answer is that the Stock Market is one of the only places to invest. Let's look at the options and remember that a long term investment must beat inflation, historically 3%.

Treasury Bonds: With bonds below the historical inflation rate it does make sense to invest unless the inflation rate for the next 10 years is going to be negative, illogical. Currently, the inflation rate is about 2% per year. Also, a stock that pays a dividend of 3% is a better option right now.

Gold: At $1850 per ounce this seems like an unsustainable level.

Cash or Money Market Funds: At less than 1% it is lower than the inflation rate. An investor will only stay in cash for a short period when fear is prevalent.

The bottom line: When the craziness ends, cash will come out and invest. The only place that makes sense for it to go is the Stock Market for a rational long term investor. My belief is that prudent long term investors are buying stock not acting in fear.

Tomb of the Unknown Soldier - History

On March 4, 1921, the United States Congress approved the burial of an unidentified American serviceman from World War I in the plaza of the new Memorial Amphi-theater. The tomb’s design was selected in a competition won by architect Lorimer Rich. The sculpture was by Thomas Hudson Jones.

The white marble sarcophagus has a flat-faced form and is relieved at the corners and along the sides by neo-classical pilasters set into the surface. The stone was quarried in Marble, CO from the Yule Marble Quarry. The tomb was fabricated in Proctor, VT. In the east panel that faces Washington, DC are sculpted three Greek figures repre-senting Peace, Victory and Valor. Inscribed on the western panel are the words – “Here rests in honored glory an American soldier known but to God.”

The six wreaths carved into the North and South sides of the Tomb represent six major battles of WW I - Ardennes, Belleau Wood, Château-Thierry, Meuse-Argonne, Oise-Aisne and Somme. West of the Tomb are the crypts of Unknowns from World War II, Korea and Viet Nam. The Unknown from Viet Nam was later identified in 1998 through DNA and was removed and buried in his hometown. This crypt remains empty.

Because of age and weathering, cracks have begun to ap-pear on the Tomb. In 2009, it was announced that the long 28.4-foot and the 16.2-foot cracks would be re-paired.

Friday, August 12, 2011

Emergency Fund

This past week was filled with events that made the calmest investor a little nervous. I have been sending out updates this week so this one will be relatively short.

Vanguard

Market tensions overflowed this past week as economic prospects appeared to dim, doubts about European solvency deepened, and policymakers struggled to forge remedies. The volatility added to signs suggesting a higher risk of another U.S. recession, though the consensus view remains that the economy will continue its slow and fitful recovery. After diving and spiking throughout the week, stocks regained some of their poise by Friday, but their recent performance has been downward. "Market volatility is always high when investors' expectations about the economy take a sudden turn," said Vanguard senior economist Roger Aliaga-Díaz, who noted that economists now expect slower growth in the second half of the year and that consumer and business confidence has slipped amid heightened uncertainty over economic and fiscal policy. For the week ended August 12, the S&P 500 Index fell 1.7% to 1,178.81 (for a year-to-date total return, including price change plus dividends, of about -5.1%). The yield on the 10-year U.S. Treasury note fell 34 basis points to 2.24% (for a year-to-date decrease of 106 basis points).

Importance of an Emergency Fund

Some age old advice is always be ready for a rainy day. This adage has been changed to always have an emergency fund. A rule of thumb is to have up to 3 months of income in cash or money market funds. The past 6 weeks in my life illustrates why this is important.

During July and August my family has made 2 trips to Omaha, took care of tree damage, fixed 2 cars, fixed a plumbing problem, fixed a refrigerator compressor, and fixed an air conditioning compressor plus A coil. Now you have had this same type of experience already. If you have not you have a good chance of it happening to you in the future as these are all man made things.

The reason for the emergency fund is to prevent from racking up credit card debt at a very high interest rate. View it as money to allow you to sleep easy at night. Do not think of it as I am only getting a small interest rate on my money. Do think of it as I can sleep at night and avoid credit card issues.

Trivia

We will not see another July like the one we just expe-rienced for 823 years! This past July had 5 Fridays, 5 Saturdays and 5 Sundays.

This year of 2011, we will experience four unusual dates – 1/1/11, 1/11/11, 11/1/11 and 11/11/11. Take the last two digits of the year in which you were born – now add this number to the age you currently are or will be this year. The results will be 111 or 11 for everyone in the world.

August is National Catfish Month

Sunday, August 7, 2011

A Manufactured Crisis

Wow, what a week for an investor. Three weeks ago, the US Stock Markets were about at the high for the year and the economy was good. Now, the sky is falling and the future is terrible. So what happened in 3 weeks? I think that President Obama stated it best last week that this debt ceiling crisis was A Manufactured Crisis.

My view is that for 3 weeks the news media has stated over and over again that the US, Europe, Middle East, China, Japan is in a crisis of one form or another. After stating that we are in crisis enough times sooner or later people will believe it even if it is not true. During these 3 weeks some things have been constant. Our economy is still in a recovery phase, our government is still printing money to feed the economy, interest rates are low due to the actions of the Federal Reserve, corporate profits are still growing, and jobs are still being created.

So this week when the stock market was supposed to have a relief rally and interest rates would be steady it kept thinking about the word crisis and had an emotional decline. This decline reduced the 10 year treasury bond interest rate below 2.5% for the 3rd time in my life-time. More on this in the middle section. First is the recap from Vanguard. The end is a quote from a former US President that seems very appropriate.

Vanguard

A week that began with the federal government striking a deal to avert defaulting on the nation's debts ended with the release of better-than-expected unemployment numbers. The week also saw the largest one-day drop for the Dow Jones Industrial Average since autumn 2008. Consumer spending fell for the first time in nearly two years, while service industry expansion slowed to its lowest rate of growth in 17 months. For the week ended August 5, the S&P 500 Index fell 7.2% to 1199 (for a year-to-date total return—including price change plus dividends—of about -3.6%). The yield on the 10-year U.S. Treasury note fell 24 basis points to 2.58% (for a year-to-date decrease of 72 basis points).

A Manufactured Crisis

This week the US Treasury 10 Year Treasury Bond dropped to 2.47%. The next day the rate rose to 2.58% making it only the 3rd time it went below 2.5% in my life-time. The previous time was when it reached 2.38% during a 2 week period between September 27 to October 12, 2010. The only other time was when it reached 2.13% during a 6 week period between December 8, 2008 and January 26, 2009.

So the question to ask is the economy better today than last year and 3 years ago? The answer is clearly yes by looking at a number of economic indicators.

We know that a correlation exists between the US Stock Market and the US Treasury 10 Year Treasury Bond. As this bond interest rate goes up this means that these bonds are being sold and the money has to go somewhere and a good portion of it goes into purchasing US Stocks.

My bottom line is that this crisis creates a good opportunity to purchase stocks for the long term investor. Since this crisis is being fed by the news media it is hard to predict what happens in the short term.

REPUBLICANS VS. DEMOCRATS – US President Dwight D. Eisenhower

“It is quite clear that the Federal government cannot avoid or escape responsibilities which the mass of the people firmly believe should be undertaken by it. The political processes of our country are such that if a rule of reason is not applied in this effort, we will lose everything – even to a possible and drastic change in the Constitution.

“This is what I mean by my constant insistence upon moderation in government. Should any political party attempt to abolish social security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history. “There is a tiny splinter group, of course, that believes you can do these things. Among them are H. L. Hunt…a few other Texas oil millionaires, and an occasional politician or businessman...Their number is negligible and they are stupid.”

– From a letter from former US President Dwight D. Eisenhower (Republican) to his brother, Edgar - November 8, 1954