I think of today’s video as my “mid-newsletter” thoughts, as I want to be timely in my communication with you.
The stock and bond markets have been more prominent in the news lately, and I want to share with you my analysis.
So, is it jumping off the ledge time, or is this just a part of the cyclical nature of the markets?
Watch my video to find out my opinion.
Hi there. Mike Brady with Generosity Wealth Management, a comprehensive, full service, wealth management firm headquartered right here in Boulder, Colorado and I wanted to send out this video because there’s been a lot of news recently about the global sell off and yields and bonds and China, et cetera, and I wanted to bring you up to speed with where it is and also, just to make sure that we’re all on the same page.
The very first thing is — step away from the ledge. Everything in my opinion is going to be all right and this is a normal thing that happens. The markets are cyclical, which means they go up and they go down. Nobody really worries about things and everyone goes on with their daily lives when things are going up. When it starts to go down a little bit, people really start to freak out but it is part of the natural cycle of the market but this most recent one, I think, has been started by a number of different factors.
The first one is just some concerns about a tightening monetary policy, both in China and in the United States. Over in China, there’s a concern that they’re having a credit crunch and that money will not be loaned out in order to continue their great growth. That has really been harming a lot of the Asian markets, leading over to Europe, which is already sick and then leading to the United States and then Bernanke last week said that he is also putting out a blueprint – an outline for a tightening monetary policy or maybe not so much of a tightening one, but not as loose as it has been, which of course, leads to from that point of view, a tightening, so I’m going to put up on the screen here, if you could look at it, it is normal for there to be a intra-year decline in the unmanaged stock market indexes. That is normal and as you can see, I’ve just focused in there a little bit, and sometimes they’re double digit returns. It does not mean that the end of the year ends negative, okay, so that’s just real important that in an up and down market, things do go down at various points and I do think that this is an overreaction. That’s my opinion.
The next chart that I’ve thrown up there are historical returns by holding period and you’ll notice that in the left hand side is the one year, the range of going back many, many years, going back to 1950 that the range for one year is very high but then as we go up five year, 10 year, 20 year, the ranges have a tendency to get smaller, so the longer a time horizon, historically at least, the smaller those ranges are and it has a tendency to work itself out.
This next chart here are the stock markets since 1900 and you’ll notice that keeping the big picture in mind, there are some times great movement on the upside, sometimes on the downside as well, but you’ll also notice that those little tiny blips, et cetera, are what they are, just blips right there. I think that having a well diversified portfolio, while it does not guarantee any kind of an outcome or an absolute return one way or the other and many times, it has a tendency to go down in a generally trending market. It is appropriate for most people and if you’re my client, we of course, have talked about what portfolio and what managers might best meet you with your goals and your risk levels, et cetera.
Remember at the beginning of the year, I talked about how I felt that this was going to be a trading range type of year to two years and I was surprised by how strong things have looked over the last five to six months. Part of that is being a correction right now. You’ll also remember that I talked about China and Europe being sick and how they might spill over into the United States and I think that we’re seeing some of that right now. What’s interesting is the sharp decline in bonds, which would mean that their yield is going up and we’re just kind of quickly show you a graph there. This is the last five years of the 10-year note and in this case, down on the yield is actually good from a price point of view. Up is actually bad, so it’s kind of a funny chart in that regards. If you’ll notice that most recently it has swung up but – so that means that the price of things going down and so you know that’s just kind of what happens, you kind of see the whole chart there. It does go up and down. I don’t think that we should necessarily freak out. These things do happen but I will keep you informed as things go on.
Mike Brady, Generosity Wealth Management.
Give me a call if there’s anything that I can do to explain a little bit further. The end of the quarter is in just a few days. I’m actually doing this Monday afternoon. The market is down today. It’s very possible that the quarter will be negative, so the year-to-date, hopefully, will be positive but it’s very possible that this quarter will be negative for both the stock and the bond market, et cetera, so we’ll have to see how things turn out. If something dramatic happens later this week, I will send another video out. Otherwise, the next video you receive from me will be my quarter end review and my quarter preview for the third quarter, so anyway. Mike Brady, 303-747-6455. You have a wonderful day. We’ll talk to you later. Bye-bye.
One of the mostly closely watched barometers for Warren Buffett is the level of rail traffic.
He believes that it’s a leading indication of how much productivity is going to happen in the future as goods are transferred across the U.S.
It’s currently still in traditional “expansion” territory, but it’s been weakening over the past year or so.
In my opinion, it’s reflecting the ho-hum economy we’ve all been experiencing. I’ll continue to watch it closely, as one of the variables to what may be in our economic future.
How does this help us? It hopefully will slow the decline that is Europe, even if it’s not going to turn everything around long term until Europe gets the relationship between their debt relative to their GDP in order.
Good morning. Mike Brady with Generosity Wealth Management, a comprehensive full service wealth management firm here in Boulder, Colorado, and I am so pleased to talk with you this morning because we’re going to talk a little bit about the first quarter of 2013. We’re going to talk about the rest of the year. We’re also going to talk about unintended consequences, and I’ll talk about what I mean by unintended consequences in just a little bit.
First quarter of 2013, very good quarter, particularly if you’re 100% invested in the S&P 500 (which you probably shouldn’t be), and very disappointing for you if you’re 100% invested in wheat futures (which you probably shouldn’t be). Realistically you hopefully have a well diversified portfolio of stocks and bonds and cash in US and international, something that fits well with you with your risk tolerance level. If you’re my client, of course I’ve talked with you about that. If you’re not my client, well gosh darnit, you should call me so I can work with you on that.
I’m going to put up on the chart there something that might be a little difficult so I’m going to put a link to it so you can grab the high definition JPEG of it, but you’re going to see across the gamut there, from on the left you’re going to see the S&P 500 all the way to the wheat futures there on the right, all kinds of ranges from – from very good double digits in the positive to for the unmanaged stock impact indexes to double digit negatives for those – those evil wheat futures.
I’m always reminded that like predicting the weather, predicting the economy and predicting the markets, et cetera, is a very complicated proposal. No one is absolutely right, and there’s many different variables that go into it. The older I get, the more humble I become, and at the beginning of the year I said that I thought that this was going to be an up and down couple of years, that it’s going to be a trading range, and I was asked by a client last week if I was surprised by the first quarter strength and the answer is I was surprised but one quarter does not a year make. One quarter does not a two-year time frame make, and I hold to that.
I think that going forward there are so many pieces of data that are negative, there are so many pieces of data that are positive, and that’s normal. When someone says to you, if you see some kind of a TV pundit or an analyst that, well, all these, we have conflicting data. Well, there’s always conflicting data. There’s never 100% way or the other. We have to become comfortable with that type of chaos, and we I think have to take all the data in and say, okay, what does it really mean? And for me it means that it’s going to continue to be that muddle through.
One thing that does concern me from an economy point of view is it feels like a very sluggish economy. The participation rate from an employee point of view, I’m going to throw a chart up there, continues to discourage employees. That being said, I don’t take the complete pessimist view, because we knew this going back that there’s going to be so many baby boomers exiting the work force, so we knew this. Remember that book back in the early 2000s, The Roaring 2000s by Harry Dent, he talked about how around this time frame there are going to be a lot of people exiting the work force and starting to withdraw money from the market. That being said, I think that if you talk with some of your friends and family members, you probably know people who have tried to get a full time job that have decided to go back to school or decided to take something that is less than full employment or what they’re looking for, so it’s a combination of those two, and at various points in time we have a major shift change, and I think that we’re going through that right now and have been for the last two, three, four years, of what does it really mean to be fully employed? What skill levels are we as a society needing in some of those high tech and creative positions? And so that’s what we’re seeing right now. It’s always painful when we go through it, but I’m ultimately an optimist on the US and how we solve things and our ability to weather many things.
Now, I want to talk about unintended consequences. The unintended consequence from August of 2011, remember what we were talking at that point about the down grade of the US from triple A down to double A, and everyone said oh, my gosh, no one’s going to want our treasuries. Well, the exact opposite happened and people basically looked at, investors looked at all of their options and said, you know, this can have a huge impact on some of these other asset classes. I actually want the treasuries which look the best horse in the glue factory, and so that’s exactly what happened. There was a huge rally in the treasuries. I think about, and this is a slight tangent, but I think about Kenya about four or five years ago. I think many of you know that I go to East Africa for two to three weeks a year and do some charity work there, and in Kenya they had a riot after one of the elections and it cut off the whole, you know, Rwanda and Uganda from the ability to get fuel and to get other goods and services because they were coming through Kenya. Well, what was the unintended consequence of that? Now there’s a huge pipeline and rail that’s going through Tanzania that completely bypassed – they’re going to completely bypass and have as a secondary something that’s not Kenyan. That’s really going to long term hurt Kenya, who had a monopoly on getting goods and services in there.
The reason why I bring that up is let’s look at what happened with Cyprus and the European monetary union. Essentially the Cyprus banks decided to treat their depositors as investors in the bank, saying, well we’ve lost all this other money, we can’t – we’re having real difficulty, and the European monetary – European Union is basically saying well, you got us tickets to those uninsured depositors. Now, if you were a depositor of a large amount, you think that’s not going to cause some concern down the road? I mean, I think this is probably the end of the Cyprus banks there, and it also had an unintended consequence of everyone else who is looking at the investing, not investing but depositing banks and European banks is that the European Union said, you know what? This country, the next time Italy comes around, the next time Portugal or Spain comes around, or Ireland, you know, you’re on your own. It’s up to the country. We’re not unified as a European monetary union, unlike what we have here in the United States.
So I think that the unintended consequence of that is a further segregation of the banking system and financial system in Europe that’s just going to speed along what we’ve been talking about for two to three years. Whether all that money that was part there now comes towards the US banks is still to be seen. That being said, I actually think the US financial system is still sick, I mean there seemed to be no consequences for bad action and bad investments even here in the United States, and this is something that we’re going to have to pay at some point as a society and as tax payers, and I don’t know when that’s going to be, whether it’s one quarter, two quarters, two years, or within ten years, but that is something that is going to have to be addressed at some point.
What does this mean for 2013/2014? I continue to believe in the trading range and that we need to be prepared for some up and down movement in the next year and a half, year to year and a half to two years. If you’re my client, of course I’ve talked with you about it. I met with pretty much all the clients in the first quarter and I tried to recommend managers and third party managers that I believe do well in that type of market.
I’m going to put up there on the chart a long term 110-year, 113-year view of the market, and the longer the time horizon that you have as an investor, the happier you’re going to be. If you’re a minute by minute, if you’re an hour, a day, a week, a month, those are hugely short times frames, and what we want to do is have investments that do well on the yearly, the two, the five, and the ten-year time horizon, and if we can have decade time horizon, you’re going to be a very happy, happy camper.
Before I end here, I’m going to throw a couple more charts up to show you what Europe looked like in the first quarter. You’re going to see that Europe was definitely trailing the S&P 500. You’re going to see that the financials trailed all the European stock market indexes, the unmanaged stock market indexes even more, and going forward I think that we need to be prepared for some volatility. We have to remain diversified, and we have to remain consistent with the risk level that we need for the plan that you hopefully have in place. The reason why I say the plan that you hopefully have in place is you’ve got to know where you’re going, you’ve got to have that nice retirement analysis and plan, and what risk level do you need? Because if you only need 2 to 3% a year and you’re taking risks that can get you 10 or 12% in a good year but also lose it in another, why are you taking all of that risk? And so I think that that’s something that you need to keep in mind.
I’m going to wrap up now, because it feels like I’ve been talking for awhile. I’m going to be a little bit more consistent with my videos going forward because gosh darnit, this first quarter was so busy for me as I was meeting with my existing clients and meeting with new people, that I didn’t have – I felt like I was communicating one on one all the time but I wasn’t doing as good of a job with my newsletters and my videos, and I’m going to get back to that, so you’ll see an awful lot going forward.
I am taking new clients. I would love for you to give my name out to your friends and colleagues and family members, et cetera, have them give me a call. We’ll have a conversation whether or not it makes sense for us to sit down and whether I’m the right guy to help them out. What people want, I can’t help everyone, so what they might need might not be what I do, and I’ll be very blunt about that and then very timely of course, but I’ll try to point them in the right direction.
Mike Brady, Generosity Wealth Management, 303-747-6455. You have a wonderful week, wonderful quarter. Thanks, good-bye.
2012 had some ups and downs, but ended up in the positive territory for the un-managed stock market indexes.
My outlook for 2013 is not quite as optimistic as it’s been the past few years for a number of reasons.
In my video, I recap 2012, provide some thoughts on 2013, and discuss my philosophy how different strategies should be considered going forward.
TRANSCRIPT:
Good morning! Mike Brady with Generosity Wealth Management, a full-service, comprehensive wealth management firm headquartered right here in Boulder, Colorado, and I am the President.
Today, I would like to talk with you about 2012, a little bit of a recap. We’ll also talk about the outlook for 2013 and what my analysis and what my opinion might be on 2013. Before I go any further, there will be a discussion here at my office, 45 minutes to 60 minutes, a seminar on the Outlook for 2013 on January 30, 2013, at 6 p.m. If you are interested in coming to that, please RSVP with Cassidy@generositywealth.com or you can call my offices: 303-747-6455. I will be sending out an invitation as well within a week or so.
Let’s look at 2012. I’m going to flip up there on the screen and you’re going to see the unmanaged stock market index for 2012. The first quarter was good. The second quarter was bad. Third was good and fourth pretty much held its own, although November wasn’t looking so good.
For the first quarter what you’ll see is if you missed January, you missed some of that first quarter’s gain and the second quarter was a tough one. That was very uncomfortable at that time. And when things like that happen (I’m going to throw up on the chart there again, there we go.) What you’ll see is it is common throughout the year for there to be declines. This does not mean that the year will end a decline. When those things happen, people have a tendency to get concerned, maybe even freak out. Last year was at 10%. The year before, it was 19% and then it was a16% decline. Three years ago, 28%. It is common for there to be a decline throughout the year.
At the end of the year, we had all of the election discussion. In case you haven’t been paying attention, President Obama did win re-election and then we went right into the fiscal cliff; right at the end of the year.
This video is really not so much about all the intricacies of the fiscal cliff and what was decided there. But in general, most people from a marginal tax bracket were not hit—39.6% for the highest tax bracket, if you’re at $400,000 or $450,000 income or greater, whether you’re single or married.
The capital gains and the dividends stayed the same for most people, except it’s now 20% for those at the highest rate. That does not mean that you are completely avoided any additional taxes. Before I go into that, there’s also a $5,250,000 exemption on estate tax and that rate did go up from 35% to 40%. However, there is a 3.8% tax for ObamaCare and the payroll tax that was 2% about a year ago, kind of a tax break, that was allowed to lapse. The full 6.2% of the employee portion of it is now going to be taken out of your paycheck going forward. You’re still going to see some kind of a tax bite at all the various ranges and income levels.
Last year there was also a little bit of a calming over in Europe but it is still, particularly in the credit market, but it is still disaster over there from a mid- to a long-term.
Let’s start talking about where we are right now in 2013. The last two or three years, I’ve been optimistic. You look back at the videos, you look back to my newsletters and you’re going to see that. I’ve always said that a diversified portfolio, while it does not guarantee a positive return, does not guarantee, particularly, in a generally trending down market that you know the perfect scenario on the outside, I do believe that it is a key ingredient to going from point A to point B in your goal planning.
Goal planning is really going from point A to point B, identifying those financial events that might knock you off and might derail you from getting to what your goal is, whatever that might be, and proactively addressing it and seeing if there is anything you can do to mitigate it.
There are a couple of different strategies from an investment management point of view as I like to think of it. There is sailing, which is like sailing your boat and then there’s rowing, like “row, row, row your boat.” Sailing and rowing.
Sailing is a little bit more passive than rowing and just think about the wind blowing it. If the wind is going in your direction, things are good and it is very forgiving of any errors you might have. The wind stops, you stop; the wind goes the other way, you might be going backwards.
If we’re in a generally upward market, this might be a good way to have your portfolio. The last two or three years, I felt comfortable, depending on the client of course. I am always making sure that it’s an individualized portfolio for them to meet their investment objectives, having less of an active trading strategy in there. Yes, we would move and allocate appropriately as the year unfolded, but it’s been very forgiving of any mistakes.
I believe in 2013 and looking into 2014, we’re going to be more of a trading range and that we might want to add in and complement some of our sailing strategies, some of our diversified asset allocation strategies with some managers who have a good track record of being a little bit more active.
Why do I think that? I think that 2013 and 2014, we’re already seeing that taxes are going up. I already mentioned that earlier. You’ve got the payroll tax, the ObamaCare tax and that is going to lead to some less disposable income.
I’m going to put up here on the chart, we’re going to see what some inflection points are and how things have looked in the last 10 years or so. From a technical point of view, we’ve had a great run in the last three or four years. The question is, are things going to continue to go straight up?
We’ve practically, in an unmanaged stock market index, doubled in the last three or four years. In the next three or four years, are we going to double? Is it going to be quite as easy? I’m a little hesitant to say something like that.
Earnings growth for the fourth quarter has not released, but it’s expected to be down. Manufacturing inventories are up, which is a bad thing. While forward PE ratios* I take with a grain of salt, the price to earnings growth ratio is higher, which is a negative thing which basically means the pricing market in relation to the expected growth.
PE ratios are higher now than they were a year, and even two years, ago. While the debt to GDP ratio for the federal government is about 103% which in my opinion, is in a danger zone. Not to make this into a political video, whether it’s a revenue or a spending problem depending on what your philosophical views are–Democrat, Republican, whatever it might be—everyone is agreeing that having too much debt is a problem. I think that we’re getting into a danger zone, particularly that debt in relation to the Gross Domestic Product (the GDP). That has me concerned.
Profits are good for corporations. They’ve been very efficient and have really cut a lot of their expenses. They are really trying to get “bare bones” in the last two or three years, which I think is great. The amount of cash that they’re holding on their balance sheets is good and high. But the question is with some bumps in the economy going forward, how much of a buffer do they have in order to ride it out? My concern is that they might not have quite as much of a buffer as we would like and what they’ve had in the past to cut expenses than they did in the last two or three years.
One of the big pieces of news in the last month that was really overshadowed by the fiscal cliff discussion was the Fed saying that they would like to phase out some of the quantitative easing in 18 to 24 months. They even pegged that 7.5% unemployment is something that would cause them to change their strategy. Whether or not what they say in their notes and what they’re actually going to do, that could be two different things.
Even Bill Gross, who is the manager of the largest bond fund in the world, he says that you have to pay the piper at some point and that it may lead to inflation. I believe that’s the case as well. I don’t know if it’s going to be inflation in 2013, but I do know that at some point, there will be increased inflation and that’s going to be a damper on some of the stock market. When you have slower growth and you’ve got inflation and when you have prices that have really seen a high rise in the last three to four years- that causes me to question whether or not that’s going to continue going forward.
Getting back to my philosophy, I do believe that there are different types of strategies—both sailing a little bit more passive and a little bit more active ones, more of rowing strategy–and having both of them may make sense in a portfolio for a client.
I’ll be talking with my clients in the next month or so to see what’s appropriate for them. I also think that having income strategies may make sense going forward and so I’ll be talking with my clients about that as well. If you’re going to take some risks, at least get some income as well. That’s one strategy and it may make sense with whatever the particular client might need going forward.
Those are my thoughts. I am going to expand upon them January 30, 2013, at 6 p.m. when I have a seminar here at my office. You’re always welcome to give me a call or an e-mail. Mike Brady, 303-747-6455.
I’m hoping that I’ve got all my notes here. I’m going to quickly look through here. It does look like it and the nice thing is I do videos throughout the entire year. If I’ve forgotten something here, I’ll just catch up with it on the next video.
You have a wonderful week and we’ll talk to you later.
Bye, bye now.
* “PE Ratio” is price to earnings ratio of a stock.
