Which political party is better for the market?

Have the markets performed better with Democrats or Republicans in office?  You may be surprised!  Check out this article by Jerry Webman, Chief Economist at Oppenheimer Funds:

http://blog.oppenheimerfunds.com/2012/09/04/which-party-is-better-for-the-markets/

Want some of the highest quality written commentary (without all the TV screeching monkeys) on the economic, financial and investment challenges ahead? Check out Pacific Investment Management (PIMCO). These guys are trusted pros and members of our inner circle of advisors:

Pacific Investment Management Company (PIMCO)

Ride the Bull!

By Dr. Jason White
Family Investment Center

We all still carry the scars of the grizzly bear market that ran from October, 2007 to March, 2009. It will be etched into our investment consciousness for some time, which is a good thing if we choose to rededicate ourselves to the goal of building long-term family wealth.

I believe the worst of the bear market and the economic recession is mostly behind us. Economic activity is picking up nicely, and job growth will follow in the months and years to come. This recession was a 2-1/2 year demonic slide, and it will probably take nearly that long to dig ourselves out and return our economy to full employment again, which is generally defined as an unemployment rate of about 5-percent nationally. We are currently just a tick below 10-percent.

The Federal Reserve is taking the first steps toward tightening relaxed monetary policy to prevent price inflation as the economy and the employment picture improves in the United States and around the world. The discount rate rose a quarter-point and all the signals are for continued rising rates as the economy strengthens.

For these reasons, and the ones that follow, I believe we are in the heart of a bull market rally that will likely continue for several years into the future, if not even longer. A simple reversion to the mean in stock prices would be a rise of nearly 40-percent from existing market levels for the average company in the S&P 500.

Many companies are starting to report rising earnings from operations that have been generated from top-line (sales) strength, rather than earnings generated from cost-savings and job cutbacks. This is a big positive indicator of things to come.

In addition to top-line revenue growth, American business has rung much expense excess out of their profit-and-loss statements. This should provide for many upside-earnings surprises in 2010 and 2011.

States are starting to see modest increases in some tax revenue streams, particularly in sales tax, and property taxes are stabilizing as most of the depreciation in the market value of housing stock has already been realized.

Companies that have been running very lean-and-mean inventories are now having to restock more often and to higher levels. This will help the manufacturing sector in 2010 and beyond.

The federal government fiscal stimulus for 2010 is large and growing larger. Yes, I lamented the size of the President’s proposed budget deficit as too much for our rebounding economy in last week’s column, and I still hold to that position. That said, the fiscal deficit spending stimulus will still have a short-run positive effect on economic growth and employment until we reach full employment, which as I said earlier may take a couple of years.

Take the bull by the horns. If you have been on the sidelines waiting for some normalcy to return to the markets, I think this is a good re-entry point for you. Market-timing is generally folly, but if you have taken some equity weight out of your portfolio, I think it is time to saddle up that bull and ride again.

The challenge of tinkering with capitalism

By Dan Danford

A friend of mine (and a very bright guy) was recently pondering the merits of socialism. I think he’d concede that Cold War ideologies carry little influence today, and that capitalism easily won that battle (not so easy for citizens behind the Iron Curtain, however). Yet, I also think he’d like to soften capitalism, and make it friendlier and more compassionate. He’s a sensitive guy, and he likes to help as many folks as possible.

Capitalism got us here. No doubt, socialism could never create the living standards we all take for granted today. No rewards for creativity or innovation results in neither of those things, and they've been responsible for myriad advances in everything from safety to medicine.

But, he’d recognize that war as already won, and suggest that today’s world calls for a different model, somewhere between yesterday’s extremes. A different point along the capitalizm/socialism continuum.

Unfortunately, creativity and innovation swing somewhere in that balance, too. Personal recognition and reward for exceptional effort are the very essence of capitalism. I’d suggest that many Americans who aspire to creativity and innovation do so precisely because they've been freed from challenges inherent to earlier socialistic regimes.

Compare the relative accomplishments under both systems in the 40s, 50s, and 60s - especially the standards of living among middle classes. There's no real comparison where it really counts: how the typical, usual, or normal citizens live their daily lives. The human quest to see result for our efforts - in a nicely manicured lawn or a well-prepared family meal - extends into the public and workplace.

Noted financial journalist C.W. Barron once noted that "everything can be improved," and I agree with that. Society keeps evolving and the problems and solutions are increasingly complex. I don't tout capitalism because it's morally superior, but because it's done more for more folks than any other contemporary system. Certainly, it could be better, but it's just as certainly been better than socialism.

Corruption is always a problem. Corruption exists under every social system (damn it!), but capitalism stands alone as the only system that has raised so many people out of poverty and despair worldwide. It's frustrating, perhaps, but capitalism mostly works.

Personally, I’ve grown quite weary of the whole "corporate greed" theme. I suppose it is inevitable, given the situation with bank bailouts and Wall Street shenanigans. Most of us work for decent companies, though, which exist to serve customers. They are profit-making organizations, but those profits fuel our entire system.

Basic economics. At its simplest, there are just two basic types of economic activity. Producers and consumers. Producers are farmers and businesses, and maybe some professionals. They are, in essence, the people who create, grow, manufacture, or provide valuable services for a profit.

Everyone else is a consumer. All of us consume things, of course, but many people work in jobs that consume, too. Take public education, for instance. There’s no question that teachers do meaningful work, and contribute mightily to society. So do judges, and fireman, and legislators. Still, it’s important to note that they all are paid with tax money.

The same thing goes for other government workers, social agencies, non-profit and charitable groups. The money that flows to them in taxes or other support originates from society’s producers. Those groups, in turn, pay their workers who pay their taxes and consume more goods. But the spigot of money flows directly from farmers, and businesses, and other people and firms who support them.

According to a recent article on federaltimes.com, the single largest employer in Kansas City, Missouri, is (are you ready for this?) the Federal Government. Think about that for a second. Now think about this: no producers, no taxes, no money. Wages and taxes from producers and their employees cover the entire cost of education, social agencies, and government.

I don’t make excuses. I despise criminal or unethical behavior, but - although numbers in the news often seem quite large – crime is such a wee part of corporate America. Yet, some folks think every business is bad and every MBA is a crook. Often, these mistaken souls are teachers, social workers, and civil servants who live and work (one way or another) downstream from corporate profits.

No easy answers. I understand my friend’s points. There's clear need for regulatory and government activity, and unhampered capitalism can be dangerous. There’s a definite role for government and a need for balance.
But I also fear unintended consequences. Some of our most regulated activities – medicine and public education, to name just a few - display ample reasons for concern. Regulation itself can create massive barriers to entry, and monopoly status (check out the pharmaceutical industry). Consumer pricing, access, and service suffer because well-intentioned regulations favor incumbent vendors. Incentives for creativity and innovation fall idle.

Personal recognition and rewards are the very essence of capitalism. They are the key elements missing from socialism. Until those statements are reconciled, there is little hope for success in socialism.

Investing in gold is not a solid idea

On Mondays, we answer questions from readers. If you have a question, post it in the comments section.

QUESTION: With the recent downturn in the stock market, I’m looking at investing in gold or other precious metals. What do you think of this strategy?

ANSWER: I always try to be diplomatic, but this is dumb, dumb, dumb. There are always a group of folks selling this stuff and they rise to new levels anytime a general panic occurs. The theory is that gold (or any of this stuff) has "intrinsic" value - that is, when the world goes to hell and people stop using paper money, you'll be able to swap your gold for groceries. C'mon. If our currency collapses, do you really think that the corner gas station or Wal-Mart is going to set up a "precious metals desk" at the check-up lane?

Even with the recent run-up in prices, gold has been a poor long-term investment. The price per ounce can (and has) stagnated for decades at a time. I guess it's okay to note that prices jumped hundreds of percent in short order, but it's also important to realize that they sat silent for years before that. In my opinion, this is a classic case of opportunistic marketing. Economic things look rough, so we'll scare people into buying gold.

At best, gold or other precious metals - even other commodities - could be a tiny part of a diversified investment portfolio. There are times when price increases in hard assets might - I said might - offset losses in other securities. But larger stakes in something as emotional as gold are really just a gambler's bet. And the people selling it are making an emotional appeal at your most vulnerable moment. Stick to mainstream investments and your opportunities for long-term success increase.

Success in this market? Strategy plus behavior equals long-term success

We know you've been watching the markets, as we have been, too. We thought this was a good time to discuss our strategies with you, giving you a glimpse into how we think and how that strategy affects buying, holding, and selling. If you have questions about what you read here, please don't hesitate to contact us. We're always happy to talk with you, particularly when times are tough.


From Jason T. White, Ph.D. Principal/Director of Investments:

With those of us who practice a long-term strategy, it's easy to think that we spend our time monitoring the market, but not much buying or selling. I want to take some time to address this idea because that's the furthest thing from the truth. At Family Investment Center, we regularly review our mutual funds, stocks and other holdings on behalf of our clients and make changes whenever necessary. The managers of the funds that we own also do their own buying and selling. There's nothing passive about our strategy.

With the March Morningstar updates, I am reviewing detailed reports of common managers who manage mutual funds held by many of our clients. I'm betting that I find 50 percent or more annual turnover rates in domestic and international stock funds, and a smaller but still significant level of turnover within bond funds. While we may hold a fund for a long time, within the fund, there is often plenty of movement, with the concept being to make sure the fund continues to meet its objectives. So what sometimes appears to be a passive buy-and-hold strategy really is not, with the notable exception of index funds, which are built to simply mirror the market.

We screen funds and managers, making long-term investment decisions, and adjust those holdings when tenure, expenses, performance or other factors warrant. Within the funds, active management, including buying and selling, is taking place every single day. It just is not immediately transparent to our clients. Some taxable clients may intuit this is going on when they receive their capital gain/loss 1099s, but probably most of these folks don't either.

At the core of our strategy is a long-term, buy-and-hold, low-cost commitment to indexing large- and mid-cap stocks. Our belief is that in most cases, with a few notable exceptions, there is little reason to trade mid-to-large companies, since they are widely followed and the markets are so efficient. But, in the case of smaller, international, bond and other mutual funds, our managers are very active in the markets everyday, working hard to achieve positive alpha, solid returns with acceptable risk, and 4- or 5-star Morningstar ratings. We hire and fire firms with the long-term big picture in mind. When an occasional fund crisis happens, we react swiftly and with certitude.

Plagued by a financial and banking crisis, a sea-change in political norms, and an uncertain global economy, I award high marks to UMB Scout, PIMCO, Dreyfus, Schwab, Sit, Oppenheimer, and other families and funds we own. We have stayed the course, continuing to keep long-term objectives in mind for our clients. I believe this to be a virtue of our system. If I didn't, I would change our "starting lineup" immediately.


From Dan Danford, MBA, CRSP Principal/Chief Executive Officer:

In our marketplace, there is an urgent need for professional advisory services. But it's not totally performance-oriented. People tend to dismiss performance claims as rubbish, anyway (with good reason). Noted author Nick Murray says that more than 80 percent of financial success is behavioral. Saving, investing, and spending are at least four times as productive as choosing the "right" funds or (for that matter) CDs. His argument is that people usually make bad choices when left to their own devices, and those bad choices can't be offset by stellar investment performance. Human nature often responds to greed and fear, unless someone (us!) interrupts it.

We get paid for managing client money - but Murray would argue that our other services are far more valuable. This is a bad time to evaluate, but five or ten years from now, I'm betting that our clients still in the market today will be much better off than the few folks who liquidated, simply because many of those folks will never enter the markets again and, if they do, it will be long after the rally has started.

Now, a few people who got out of the market over the past year might argue that they are much better off today because they ignored our advice. And, that's true. But it's still the wrong measure because their overall financial success isn't properly determined over 2008-2009; it's measured over their entire lifetime. And, if we continue to believe what we have in the past, future bull markets will more than make up for this (horrendous) bear. But you have to be there to recover.

The challenge is to help our current and prospective clients weather this market and come out the other side ready for the future that they wanted. We want to help our clients continue towards their financial goals. We'd love feedback from you on how we can help you meet your goals. What would you like from us? How can we help? If it's a one-on-one consultation, that's why we're here.

We love to see comments from folks we know and are open to answering questions in this space. Our readers benefit from seeing questions answered - many others may have the same questions you do.

Remember, you've got friends with expertise in the market. And when this is all said and done, we'll still be here, still in the market and still someone you can count on for solid, bias-free advice. When you can't count on much else, count on that.

So what are your thoughts? What are your questions? How can we help?

A great sale on equities

If you could buy today’s car at prices from 23 years ago, would you do it? Absolutely, you’d answer, if it was the same car with today’s options for a much cheaper price. Who wouldn’t want that discount?
That’s exactly the type of sale we’re experiencing in the stock market. The market’s downward slide doesn’t mean that some of the companies aren’t solid, or that they are bad investments. Terrific companies are getting hammered by the guilt-by-association prevalent in the market right now. It’s driving down prices to what they were almost a quarter of a century ago.
The pack mentality makes this a great time to buy solid companies with strong track records. You’d be hard-pressed to find another time in recent history that equals the steep discount we’re seeing in the market, particularly this week.
At the Family Investment Center, we recently had the opportunity to host B.D. Horton, a certified financial planner and certified public accountant who is Vice President of Territory Sales for American Century Investments, to speak to our friends and clients. Horton’s research shows that when a bear market ends, the rebound is steep and plentiful. Within one year of the end of a bear market, the stock market has been up, on average, 36 percent. In examining consumer confidence, he showed that at nearly every point when the level has dipped low, as it has now, it begins to rebound.
The average bear market runs about one-fifth in length of the average bull market. Further, the average bull market grows by over 100 percent, while the average bear loses a third of that. So, by the averages, it makes sense to wait out the bears to profit from the bulls.
I know this market continues to challenge all of us - our sanity, our philosophy, our fears, our concern for friends and ourselves. But I believe economic fundamental forces of good are gathering. If I had a chunk of money to put to work, I would do it in equities without hesitation.
A recent biography of Warren Buffet called “The Snowball” has captured the our attention right now. There are lots of pearls of wisdom there. Buffet maintains that the stock market is like a voting machine in the short-run, and a weighing machine in the long run. Clearly, Wall Street is highly skeptical of our new President Barack Obama, the Democrats, the stimulus and bailouts in general. The stock market is voting its skepticism, not necessarily on real facts about our economy.
The current forward price to earnings ratio of the S&P 500 is at 1986 levels. If you can weigh this dispassionately, it doesn't take long to see that you can buy 2009 companies at 23 year discounts. What a value play! Looking back in a few years, we will recognize this as the great buying opportunity of our generation.

Putting the market in perspective

In overheard conversations, I sometimes hear someone say they’d like to take all of their money out of the market or their retirement fund or even their bank and bury it in the backyard, or perhaps tuck it under the mattress. I get the sense that while they’re laughing, they’re not all that far from being serious.
We’re seeing some serious panic now among consumers, many of whom haven’t seen a big recession in some time. It’s to that end that the Family Investment Center invited B.D. Horton, a certified financial planner and certified public accountant who is Vice President of Territory Sales for American Century Investments, to speak to our friends and clients. Horton is a smart guy who works for a well-respected company, and we think highly of him. As we thought he would, he gave some terrific perspective for the financial crisis we’re now in.
First, he traced the roots of the crisis. We got here because of many falters in the financial system, but the primary driver of the recession is the sub-prime mortgage mess. As I think most folks know by now, financial institutions routinely loaned money when they should not have to people who clearly didn’t have the means to pay it back. In many cases, the cards were stacked against them. Interest-only loans that never allow someone to build any real equity in their home and loans that require gigantic balloon payments after a few years were going to work in very rare instances. It was a system that was designed to fail. On top of that, mortgage-based securities put investments at risk when those mortgages failed. There were also all other types of credit problems that really are tediously distracting, so we won’t get into those here.
What really grabbed my attention was the next slide Horton showed us. This looked at the length of recessions in months, going back to 1945. The most recent recession was in 2001, and lasted eight months. The two lengthiest recessions were in the early 1980s and the mid-1970s. Psychologically, that makes this recession tough for many to stomach. If you do the math, many of today’s late 30s to 40-year-olds were only born in the late 1960s to early 1970s. They’ve never managed money inside of a recession. So to them, this is particularly terrifying.
Horton traced his way through the many things that have happened inside our current recession. It’s just about too depressing to repeat. So let’s not. Instead, let’s get right to why he’s optimistic about the recession of 2009. Horton’s research shows that when a bear market ends, the rebound is steep and plentiful. Within one year of the end of a bear market, the stock market has been up, on average, 36 percent. In examining consumer confidence, he showed that at nearly every point when the level has dipped low, as it has now, it begins to rebound.
The average bear market runs about one-fifth in length of the average bull market. Further, the average bull market grows by over 100 percent, while the average bear loses a third of that. So, by the averages, it makes sense to wait out the bears to profit from the bulls.
It can be tempting to try and time the market by pulling money out and putting it back in when it is at the lowest point. But be careful. Horton told us that for the 20-year period ending December 31, 2007, the S&P 500 has an average annual return of 11.8 percent. The average equity investor has a return of just 4.3 percent annually during that same 20-year period, or only about one-third of the average annual return of the S&P 500. Think about the long-term average – the life of the investment, not the short-term. Look at what it’s done in 10 years, not 10 months.Horton noted that the time of greatest opportunity is often right about now. Stock is on sale – the question is always which stock, and how much is it really worth? That’s the million dollar question, meaning if I knew that, I’d be the next Warren Buffet. Stick to the principles that have long-guided you in investing. Remember, there is always risk to investing. Set your goals, and work towards them.
I'd love to hear from you - what are your plans for your investments? Have you pulled out of the market? Are you thinking about it? Are you buying?

Want to put the markets in perspective? This is your chance

We're hosting what promises to be a terrific, informative event later this week at the East Hills library in St. Joseph. If you want to look at the larger picture, you won't get much better than the expertise offered at American Century. Here's our press release about the event.
Event set for Thursday
Investors have spent the past year watching the markets fall and worry about their future, or current, retirements. American Century Investments is ready to help investors try to make sense of the market’s downfall and put it into perspective.
Family Investment Center is providing an evening of educational enrichment for investors this week that will present a knowledgeable and intelligent take on the markets. The program will be presented by B.D. Horton, a certified financial planner and certified public accountant who is Vice President of Territory Sales for American Century Investments. He has been in the financial services industry for more than 10 years.
The presentation topic will be “Putting Today’s Market in Perspective.” The presentation will take place on February 26, 2009 at the St. Joseph, Mo., East Hills Library, 502 N. Woodbine Road, in the Basement Auditorium. Refreshments will be available at 6:30 p.m. and the presentation will begin at 7 p.m.
B.D. brings a unique and fresh perspective that his clients appreciate and enjoy as he works with them to accomplish their goals.
For more information about this event, please call the Family Investment Center at (816) 233-4100.

Financial Lessons from the Wealthy

We often hear that the rich keep getting richer, and that’s a common refrain in America. I usually enter this fray by noting that the educated keep getting richer, and that the best economic solution seems to be further education.

This is particularly true of financial education. I’ve been managing money since 1983, and I’ve noticed some important gaps in the typical family’s financial knowledge. Simply put, wealthy people behave differently, and we can learn some important lessons from them.

The stock market isn’t a casino. Many middle-class people think it is. It’s true, buying a single stock is risky. Buying many stocks, though, is prudent.

Millionaires own stocks, but they aren’t frequent traders. When Dr. Tom Stanley and Dr. Phil Danko wrote The Millionaire Next Door (Longstreet Press, 1996), they discovered that fewer than one percent of interviewed millionaires traded stocks on a daily basis. Another one percent traded on a weekly basis. In fact, more than 40 percent hadn’t traded a single stock in the year prior to interview. Clearly, millionaires are investors, not gamblers.

The heart of wealth management is the idea of thoughtful diversification. This scientific basis for portfolio theory won a 1990 Nobel Prize in Economics (several, actually). In essence, risk is reduced and performance enhanced by owning a wide variety of investments. There’s a lot more to it, but that’s the basic concept.

Many so-called safe options collapse to genuine evaluation. Low interest rates, inflation, and taxes eat much of the gain from bank deposits or government bonds. Comfort comes at a very high price, and a bit of education about stocks and diversification can put a mind at ease.

Not all debt is bad. “Neither a borrower or lender be,” Ben Franklin advised. It’s become a sort of holy middle-class mantra. Despite Ben’s advice, there are different kinds of debt, and not all debt is bad. Borrowing for consumer goods such as furniture is almost always bad. Borrowing to buy a nice house in a nice neighborhood is almost always good, so long as the terms of the loan are reasonable. We all know by now that sub-prime mortgages, interest only loans and 50-year mortgages are bad debts.

Many quality advisors recommend against paying off a mortgage early, and there is solid evidence supporting this approach. Nevertheless, many middle class folks want to pay off their residence as quickly as possible.

They think they’re doing the right thing, but money for paying down a mortgage comes from somewhere, and it’s no longer available to invest. That can be counterproductive. Our wealthy friends understand the difference between good and bad debt and aren’t always in a big hurry to pay off their mortgage.

Do-it-yourself isn’t the best choice. Wealthy people know where they excel. Many own a business that relates to their strongest skill.

They also know their weaknesses. They probably don’t try to save money by fixing their own cars because they know a mechanic can do it better, and in the end, they’ll save money by hiring an expert the first time around, rather than to repair mistakes.

When it comes time for a new roof on their home, they pay someone to do it for them, so that they won’t spend their time cleaning up leaks.

And you’d better believe when it comes time for surgery, these are not folks picking up instructions off of the Internet to replace their own knees.

The point is, hiring professionals is often the best path. Consider this the next time you’re looking over your retirement fund or other investments.