Archives for May 2009

Take Me To Your Leader

The most useful economic indicators for identifying turning points in an economic cycle are considered “leading” indicators because they tend to identify emerging trends.  For instance, housing permits are a leading indicator of housing activity because builders must register for permits prior to beginning construction.  Other categories of economic indicators are less valuable because they either describe what going on now (coincident), or what has happened in the past (lagging). 

A familiar group of leading indicators are the 10 sub-components of the Conference Board’s Leading Economic Index (LEI).  During the past 2 months, a meaningful proportion of these indicators have become less negative, signifying a slower pace of economic decline (note the Recent Trend column).  Below is a summary chart:

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Of course, there are no guarantees regarding the timing or magnitude of any potential economic recovery, but historical analysis of leading indicators shows that owning stocks in the early stages of an economic upturn often has led to favorable results.  Certainly, investors should be cautious of waiting for all indicators to give a green light as this usually has occurred at or beyond the end of recessions, and after a considerable percentage of a bull market’s gains have been recorded. 

~Tony

Source: MARE group

Nation of Inflation?

The definition of inflation is the rate at which the general level of prices for goods and services rise, and subsequently, purchasing power is falling.  As inflation rises, every dollar will buy a smaller percentage of a good.  For example, if the inflation rate is 2%, then a $1 pack of Skittles will cost $1.02 in a year.

Inflationary pressures in the US are currently muffled due to recent government efforts to jumpstart the economy (e.g. the US government’s recent $787 billion spending legislation).  This has fueled and raised the prospect for higher inflation in the coming years. 

So, what asset classes does an investor want to look for in an inflationary environment?  Three that come to mind:

  • Commodities – generally, real assets (i.e. things that are tangible, like gold, oil, or timber) tend to perform well during inflationary periods.  This is a result of inflation of prices being associated with the real assets.
  • Inflation-Adjusted Debt Securities – a.k.a. TIPS (Treasury Inflation-Protected Securities) can be attractive as the bonds are structured to provide returns that adjust for inflation.  Principal value is adjusted semi-annually based on CPI (Consumer Price Index, a widely quoted measure of inflation).  The coupon rate for TIPS is constant, but generates a higher level of interest when the inflation-adjusted principal rises, thus protecting the holder against inflation.
  • REITs – Real Estate Investment Trusts generally own physical structures and property that maintain value during inflationary periods.  Apartment buildings, office towers, and shopping malls tend to be less influenced by rising inflation than paper-based monetary assets.

Why didn’t stocks make the cut?  In short, as a whole, they don’t do as well in an inflationary environment.  However, let me be clear, there are a lot of stocks that do perform well in inflationary periods, it just takes some discernment as to which ones.  Proper research must take place, and probably a professional money manager should be consulted. 

We must all be aware that while there are signs that alert us that inflation MIGHT occur, it isn’t a guarantee.  It is simply on the horizon (I’ve heard perhaps a 2-5 year time frame).  That is a lot of time for some leading experts to come up with ways to combat it, and of course, for our government to weigh in on the topic…joy joy.

Ultimately, diversification is key, in any market phenomenon.  Building positions gradually in a basket of multiple, non-correlated assets that historically have offered some protection against accelerating or high inflation may help reduce the performance drag that often accompanies these periods.

~Tony

Sources: MARE group, www.investopedia.com

The Silence is Deafening…

According to a Boston Consulting Group survey of 6,000 consumers from six countries, more than 70% of consumers around the globe heard nothing from their financial institutions – asset managers, bankers, and insurers – about the financial crisis late last year.  And they’re not happy!

Half of respondents report confusion, lost trust, and uncertainty about whether and where to invest.  On the flip side, those who have been contacted by their financial services providers show significantly higher levels of contentment.  Of US consumers, 71% of people contacted by their primary investment advisers about the crisis report being satisfied, versus 34% of those not contacted.

Of the pool, only 5 percent of consumers complain of hearing too much.

Since the dawn of the crisis last fall, our firm has pushed a contact to our clients 13 times.  When you include this blog (which a large number of our clients and prospects subscribe to) the number surges to 48.

If you know someone who is in the 70% of those who haven’t been contacted during this crisis, I’d invite you to forward this blog to them and let them know that Freedom Financial Solutions is committed to client service, intellectual honesty, and candid communication, no matter what crisis or bull market we might find ourselves in.  Our clients have come to expect nothing less from us.

~Tony

Source: Journal of Financial Planning, May 2009

The irony of it all…

With approximately 13 million people currently out of work in the US one would think there are very few jobs for the taking. Ironically, there are nearly 3 million jobs that employers are actively recruiting for but unable to fill. A lack of flexibility and training are contributing to the problem. Many unemployed workers who own homes they can’t sell are unable to relocate. Also, many unemployed workers come from industries where their skills don’t fit those industries looking to hire, such as education, accounting and healthcare.

With such dire news out there, I’m sure very few of us ever heard there were 3 million jobs available currently. While I certainly don’t want to downplay the situation (as my family has been personally affected by this), I just wanted to offer a glimmer of hope that there are starting to be some sizable job openings in the American economy. This is a leading indicator of recovery.

~Tony

Source: BusinessWeek, First Trust Advisors

Money Takes Silver in the “Good Life”

Turns out, money isn’t as important to people as your local news program would have you believe.  According to the Journal of Financial Planning:

 

The “good life” for middle-aged and older Americans is equated with spending time with family and friends, not piling up wealth, finds a study by the MetLife Mature Market Institute.

The Institute interviewed 1,000 Americans ages 45-74.  “We found through this research that people who make valuable use of their lives through meaningful work, time to socialize, personal interests and travel, and care for this physical and spiritual health are more likely to have contentment and purpose in their lives.” said Sandra Timmermann, Ed.D., director of the Institute.  “Having enough money to be comfortable, a different standard for everyone, remains important as well, but it’s not the only, or even the most important, focus.”

When asked to select from a list of 13 activities that contribute to living a purposeful life, 86% chose friends/family and 63% cited their physical care.  The good life also is less an issue of “more” of things, whether friends or financial security or health, but a balance and alignment of these factors.

Of several types of people defined by the value they place on the core components of their lives – money, medicine, meaning, and place – the “meaning minded” were the happiest and the “financially focused” were the least happy.

 

We take the burden off of our clients having to be financially focused so that you can attain the good life.  Financial focus is our responsibility.  Your responsibility is to the priorities of your good life.  Have you told your friends/family that you love them today?

~Tony

Source: Journal of Financial Planning, April 2009

Have You Heard The News?

The Dow Jones Industrial Average was up 7.45% in April. We just saw the Dow’s best two-month percentage increase in seven years!

I don’t encourage investors to fixate on short-term performance. However, I haven’t heard much about this good news, so I thought I’d share it with you:-)

So, does this mean we hit a bottom for this bear market on March 9th? Nobody knows. Short-term market and economic forecasting is difficult to get right. The odds of successfully predicting the precise bottom are as good as flipping a coin. Odds are that you will be right about half the time. Over the next six months the stock market will either be up or it will be down…your guess is just as likely to be right as ours. Predicting when things will get better is worthless because nobody knows. What we do know is that the economy doesn’t usually turn until after the stock market bottoms. In other words…the stock market is usually a leading economic indicator.

Looking longer term we do have much more confidence in forecasting the direction of the market. We believe that the next 10 years should be better for investors than the last 10. We believe that now is a good time to invest if you are truly a long-term investor .

~Adam