2011

Happy New Year!!! We have returned from a very enjoyable trip to Nebraska. I hope you also had an enjoyable holiday.

The topic for this week is a review of investing during 2011. The first paragraph is from Vanguard. In the middle is a 2011 review. At the end are some quotes for December for your enjoyment.


Vanguard

The slim gain of about 2% posted by the S&P 500 Index for 2011 (including price changes plus dividends) belied the stock market's extreme gyrations during the year. The index was up by about 9% in April on hopes that the U.S. economic expansion was starting to gain traction. By early October the index had tumbled by about 20% from its peak for the year on news about the U.S. debt ceiling and a widening of the sovereign debt crisis in Europe. In the year's final months, the stock market regained ground on brighter macroeconomic data. Despite Standard & Poor's downgrade of U.S. long-term debt, U.S. Treasuries rallied as anxious investors sought shelter from turbulent stock markets. Over the year, the yield of the 10-year U.S. Treasury note fell 141 basis points to 1.89%. For the week ended December 30, the S&P 500 Index fell 0.6% to 1,258 while the yield on the 10-year U.S. Treasury note fell 14 basis points to 1.89%.


2011 Year in Review - Investing Upside Down

Wow, what a year full of events: Congressional stalemate, European crisis, Egypt, Libya, Syria, end of Iraq War, Federal Reserve QE3, etc. We had periods of joy and fear, that created lots of volatility that created a feeling of a whiplash. Overall, we have a recovering global economy with an exception in Eurpoe and an improving US economy.

Stocks: An improving economy should be positive for stocks. When a period of fear would arise the stock market would drop. Once the fear wave passed stocks would recover. In general, the stocks of large companies outperformed the stocks of small companies. This is upside down as stocks should have done better and small companies typically grow faster than large companies. Stocks are currently under-valued.

Interest Rates: The 10 year US Treasury bond rate of 1.89% makes no sense as it is below the current inflation rate and the expected inflation rate for 2012. This rate should be much higher from an improving economy perspective. This rate is being influenced by the Federal Reserve and European Central Banks. It is very difficult to envisioin this rate staying at this level for the long term. Make sure you have taken advantage of this and re-financed your mortgage.

Hedge Funds & Risk: This is the year where investors in hedge funds that took risk and guessed wrong got punished. The best example is MF Global and the missing $1.2 Billion. The average hedge fund went down during the year. Also, if you owned individual stocks you probably lost money as the ratio of advance to decline favored declining stocks.

Gold: This rose to above $1900 per ounce and then dropped to below $1600. The driver is the purchase and sale by European Central Banks. The price rose as fear rose and dropped as the level of fear declined. The price of gold still looks high.


Some Quotes About December

“How did it get so late so soon? Its night before its afternoon. December is here before its June. My goodness how the time has flewn. How did it get so late so soon?” – Dr. Seuss

“God gave us memory so that we might have roses in December.” – James Matthew Barrie

“How like a winter hath my absence been. From thee, the pleasure of the fleeting year! What freezings have I felt, what dark days seen, What old December’s bareness everywhere!” – Shakespeare