According to the World Wealth Report 2012 from Capgemini and RBC Wealth Management, last year was the second most volatile period in the last 15 years. While the number of people with over $1 million of investable assets increased by 0.8% worldwide, the number of ultra-high-net-worth individuals with $30 million decreased by 2.5%, losing 4.9% of their wealth.
The report points out that these higher-net-worth individuals suffered losses because they invested in riskier, less liquid securities, such as hedge funds and commercial real-estate. The same group now seeks capital preservation.
A new survey from Spectrem Group underscores that trend, finding that millionaires are becoming more pessimistic about a strong economic recovery. Specifically, Spectrum’s Affluent Investor Confidence Index plunged 7 points in May to a minus 5 rating, down from a rating of 2 in April and a 5 in March of 2012. Additionally, the firm’s Millionaire Investor Confidence Index fell 5 points to a 3 score, the largest one month decline in nearly a year.
George H. Walper, Jr., president of Spectrem Group, attributes the pessimism to the ongoing European debt crisis. And that may be. However, it is also likely that the pessimism has surfaced due to a frustration with their previously high risk investment portfolios. Especially in times of extreme market volatility, a diversified portfolio gives you the best chance of staying invested in the market to meet your goals.
Monday, July 30, 2012
Tuesday, July 24, 2012
Straight-Up with Chris
On July 12, 2012, I had the opportunity to appear on "Straight-Up with Chris: Real Talk on Business & Parenthood" with Chris Efessiou. Chris is a successful entrepreneur and the author of CDO Chief Daddy Officer: The Business of Fatherhood. The show was titled "Money Management 101: A Family Business Affair." Click on the link below to listen to the broadcast.
Monday, July 23, 2012
Election Cycle Departs from Historical Trends
Did you know that stocks rally in the year leading up to a U.S. presidential election? Although market volatility remains this year’s story, a solid rally has been the historical trend.
In “Trade the Election,” David Keller, managing director of research with Fidelity Asset Management, does a great job of presenting the facts. He reports how Wesley C. Mitchell, co-founder of the National Bureau of Economic Research (NBER), developed the 40-month cycle theory. Mitchell found that, from 1796 to 1923, the U.S. economy fell into a recession every four years on average, excluding the years of four major wars. Later, stock market historian Yale Hirsch connected Mitchell’s four-year pattern to U.S. presidential elections. Hirsch reported that, from 1832 until the 2004 election, the stock market had risen 557% during the last two years of each administration, a rate of 13.6% per year. However, the market posted just an 81% gain during the first two years of a president’s term, a rate of 2% per year. That’s quite a differential. Hirsch has also noted that, since 1965, none of the 13 major stock market lows occurred in the last year of a president’s four year term, while nine downturns happened in the second year.
You’ll notice that 2008 is absent from this cycle analysis. In fact, the 2008 financial crisis resulted in a huge market decline during President George W. Bush’s final year in office. So have the recent recession and the ensuing European debt crisis combined to thwart the presidential cycle? And where does that leave us?
David Keller sums it up this way, “You have to remember that the presidential cycle happens in the context of larger structural market trends, and that secular moves in equities can either enhance or minimize the effect of something like a four-year market cycle.”
I agree that plenty of extraneous factors can affect these cycles. Accordingly, the presidential cycle is more entertaining cocktail conversation than solid investment strategy.
In “Trade the Election,” David Keller, managing director of research with Fidelity Asset Management, does a great job of presenting the facts. He reports how Wesley C. Mitchell, co-founder of the National Bureau of Economic Research (NBER), developed the 40-month cycle theory. Mitchell found that, from 1796 to 1923, the U.S. economy fell into a recession every four years on average, excluding the years of four major wars. Later, stock market historian Yale Hirsch connected Mitchell’s four-year pattern to U.S. presidential elections. Hirsch reported that, from 1832 until the 2004 election, the stock market had risen 557% during the last two years of each administration, a rate of 13.6% per year. However, the market posted just an 81% gain during the first two years of a president’s term, a rate of 2% per year. That’s quite a differential. Hirsch has also noted that, since 1965, none of the 13 major stock market lows occurred in the last year of a president’s four year term, while nine downturns happened in the second year.
You’ll notice that 2008 is absent from this cycle analysis. In fact, the 2008 financial crisis resulted in a huge market decline during President George W. Bush’s final year in office. So have the recent recession and the ensuing European debt crisis combined to thwart the presidential cycle? And where does that leave us?
David Keller sums it up this way, “You have to remember that the presidential cycle happens in the context of larger structural market trends, and that secular moves in equities can either enhance or minimize the effect of something like a four-year market cycle.”
I agree that plenty of extraneous factors can affect these cycles. Accordingly, the presidential cycle is more entertaining cocktail conversation than solid investment strategy.
Monday, July 16, 2012
Eye on Greece
What does the slim victory of Greece’s pro-bailout party mean for the country that has been at the center of the European debt crisis? While Greece has certainly already begun the process of restructuring with strict austerity policies that cut government spending and increase taxes, the newly appointed Prime Minister Antonis Samaras believes more cuts are needed. In fact, his first act was to cut the salaries of his cabinet members by 30%. He’s also asked to renegotiate the terms of Greece’s bailout loans. Lower monthly payments might give economic reforms such as more liberal employment practices time to generate necessary growth. As Charles Goodhart, emeritus banking and finance professor at the London School of Economics, noted at a recent European University Institute (EUI) workshop, “Austerity without growth is a recipe for depression, despair and growing social and political dissonance.”
And while the media focuses on the staggering debts and bailouts in Greece where this year’s GDP may drop by 8%, and unemployment now tops 20%, it’s important to understand the human toll. Aristides Hatzis, a professor at the University of Athens, wrote in the Financial Times, “Almost every day extremist violence breaks out in Athens and beyond. Greek people are disillusioned, miserable, exasperated and very frightened.”
It’s crucial, too, to acknowledge that other European countries, including Spain and Italy are also in serious trouble. In fact, Spain recently requested a loan to help clean up its troubled banking sector. While Eurozone finance ministers must find short-term solutions to bailout Spain’s banks and renegotiate Greece’s two rescue packages, they must also work to develop a long-term plan to integrate the European Union’s finances and banking regulations to prevent future crises.
And while the media focuses on the staggering debts and bailouts in Greece where this year’s GDP may drop by 8%, and unemployment now tops 20%, it’s important to understand the human toll. Aristides Hatzis, a professor at the University of Athens, wrote in the Financial Times, “Almost every day extremist violence breaks out in Athens and beyond. Greek people are disillusioned, miserable, exasperated and very frightened.”
It’s crucial, too, to acknowledge that other European countries, including Spain and Italy are also in serious trouble. In fact, Spain recently requested a loan to help clean up its troubled banking sector. While Eurozone finance ministers must find short-term solutions to bailout Spain’s banks and renegotiate Greece’s two rescue packages, they must also work to develop a long-term plan to integrate the European Union’s finances and banking regulations to prevent future crises.
Wednesday, July 11, 2012
Investment Quiz
The following was taken from Weston Wellington's Down to the Wire dated July 11, 2012. Weston is a Vice President of Dimensional Fund Advisors and his Down to the Wire provides timely commentary and insight in response to prominent financial media headlines and topics concerning investors today.
Investment Quiz
by Weston Wellington
Question:
The twenty-two prominent firms listed below share a common characteristic. What is it?
If you guessed each firm is a constituent of the S&P 500 Index, you would have been close--but wrong. (Weyerhaeuser is not included.) If you guessed that each firm pays a dividend, you were close again--but still wrong. (Berkshire Hathaway has not paid a dividend since 1967.) The correct answer is that the stock price of every firm on the list (and dozens of others) hit a fifty-two-week new high last week.
It is also intriguing to see a long list of homebuilding and building materials firms on the new high list, including nine of the eleven stocks in the Standard & Poor's Supercomposite Homebuilding Sub-Industry Index. If we cheat and include the previous week, M.D.C. Holdings also makes the list, making it ten out of eleven. KB Home is the lone holdout.
Footnotes & References:
* Standard & Poor's Supercomposite constituent.
NYSE New Highs and Lows, Wall Street Journal, (accessed July 9, 2012).
Standard & Poor's Stock Guide, June 2012.
Gordon's Note:
The focus of an investor should be on developing an Investment Plan based upon his or her goal's and risk tolerance, implementing the Plan with diversified asset class investments, and remaining disciplined throughout the various market cycles. Those activities will increase the investor's probability of having a successful investment experience.
Investment Quiz
by Weston Wellington
Question:
The twenty-two prominent firms listed below share a common characteristic. What is it?
- AT&T Inc.
- Abbott Laboratories
- Allstate Corp.
- Altria Group
- Amgen Inc.
- Berkshire Hathaway 'A'
- Bristol-Myers Squibb
- Coca-Cola Co.
- Colgate-Palmolive
- Costco Wholesale
- Hershey Co.
- Hormel Foods
- Johnson & Johnson
- Kimberly-Clark
- Eli Lilly & Co.
- Merck & Co.
- Monsanto Co.
- PepsiCo Inc.
- Union Pacific
- Verizon Communications
- Wal-Mart Stores
- Weyerhaeuser Co.
If you guessed each firm is a constituent of the S&P 500 Index, you would have been close--but wrong. (Weyerhaeuser is not included.) If you guessed that each firm pays a dividend, you were close again--but still wrong. (Berkshire Hathaway has not paid a dividend since 1967.) The correct answer is that the stock price of every firm on the list (and dozens of others) hit a fifty-two-week new high last week.
It is also intriguing to see a long list of homebuilding and building materials firms on the new high list, including nine of the eleven stocks in the Standard & Poor's Supercomposite Homebuilding Sub-Industry Index. If we cheat and include the previous week, M.D.C. Holdings also makes the list, making it ten out of eleven. KB Home is the lone holdout.
- D.R. Horton *
- Hovnanian Enterprises Cl 'A'
- Lennar Corp 'A' *
- Louisiana-Pacific
- Lennox Intl. Inc.
- M.D.C. Holdings *
- M/I Homes *
- Meritage Homes *
- NVR Inc. *
- Pulte Group *
- Ryland Group1 Standard Pacific *
- Smith (A.O.)
- Toll Brothers *
- USG Corp.
Footnotes & References:
* Standard & Poor's Supercomposite constituent.
NYSE New Highs and Lows, Wall Street Journal, (accessed July 9, 2012).
Standard & Poor's Stock Guide, June 2012.
Gordon's Note:
The focus of an investor should be on developing an Investment Plan based upon his or her goal's and risk tolerance, implementing the Plan with diversified asset class investments, and remaining disciplined throughout the various market cycles. Those activities will increase the investor's probability of having a successful investment experience.
Monday, July 9, 2012
With Investing, Stick with What You Know
Peter Lynch, the legendary manager of Fidelity’s Magellan Fund, is famous for advising investors to “invest in what you know.” The Prophet of Omaha, Warren Buffett, also advocates investing within your “circle of competence.” Maybe JPMorgan Chase traders should have followed this sage advice.
I was struck when JPMorgan Chase’s CEO Jamie Dimon recently boldly told the Senate Banking Committee that the trades that led to billions in losses were placed by traders who didn't understand the risks they were taking.
More alarming than that, Dimon suggested the bad trades could not have been prevented by regulations. In fact, when the senators asked Dimon about the Dodd-Frank Act’s Volcker Rule, which would restrict banks’ right to speculate with their own money, he called the yet-to-be-finalized rule “vague” and “unnecessary.”
Instead of federal regulations, Dimon said financial firms need proper capital, liquidity, risk measures and risk controls to succeed. I’d add one thing – an understanding of the securities they trade.
The Wall Street Journal estimates JPMorgan Chase could have lost as much as $5 billion from trading a synthetic credit portfolio that Dimon insists was meant to hedge risks, not to speculate. With the FBI poised to begin an inquiry into this staggering loss, it remains problematic that the company's internal risk management committee did not appreciate just how risky the strategy was, whatever its design.
In short, based on their track record, leaving the JPMorgan Chases of the world to regulate themselves doesn’t seem prudent.
I was struck when JPMorgan Chase’s CEO Jamie Dimon recently boldly told the Senate Banking Committee that the trades that led to billions in losses were placed by traders who didn't understand the risks they were taking.
More alarming than that, Dimon suggested the bad trades could not have been prevented by regulations. In fact, when the senators asked Dimon about the Dodd-Frank Act’s Volcker Rule, which would restrict banks’ right to speculate with their own money, he called the yet-to-be-finalized rule “vague” and “unnecessary.”
Instead of federal regulations, Dimon said financial firms need proper capital, liquidity, risk measures and risk controls to succeed. I’d add one thing – an understanding of the securities they trade.
The Wall Street Journal estimates JPMorgan Chase could have lost as much as $5 billion from trading a synthetic credit portfolio that Dimon insists was meant to hedge risks, not to speculate. With the FBI poised to begin an inquiry into this staggering loss, it remains problematic that the company's internal risk management committee did not appreciate just how risky the strategy was, whatever its design.
In short, based on their track record, leaving the JPMorgan Chases of the world to regulate themselves doesn’t seem prudent.
Fourth of July
Unrelated to this blog I wanted to share some photos I took of the Fourth of July fireworks at our Nation's Capital. You can see the others I took by clicking on this Fourth of July Fireworks link:
Monday, July 2, 2012
Good News - The Bauchus Bill Will Have to Wait
When the House Financial Services Committee recently announced the remainder of its schedule, I was relieved to see that the so-called Bachus Bill was not listed and will have to wait until next session to be debated.
Rep. Spencer Bachus (R-AL), Chairman of the House Financial Services Committee, introduced the Investment Advisor Oversight Act of 2012 last year. If passed, it would create a separate regulatory organization (SRO) to monitor and regulate financial advisors. The bill’s most troublesome provision is that the Financial Industry Regulatory Authority Inc. (FINRA) that now regulates brokers SRO would become advisors’ SRO.
An article in Investment Advisor listed "eight ways in which FINRA oversight will hurt independent advisors and the American public" They are:
Backers of the SRO measure insist that the SEC reviews only about 8% of nearly 12,000 registered investment advisors (RIAs) annually. Other reports indicate that the SEC annually examines 40% of advisors under its jurisdiction. I certainly agree that more investment advisors should be examined each year, but regulating RIAs as if they were broker-dealers is a mistake.
An obvious solution would be to increase the SEC’s budget so they have the resources they need to conduct more advisor reviews with advisors paying a user fee. And, surprisingly, that could happen before the end of this session of Congress. Of course, additional funding for the SEC could, in turn, influence the fate of the Bachus Bill. Stay tuned.
Rep. Spencer Bachus (R-AL), Chairman of the House Financial Services Committee, introduced the Investment Advisor Oversight Act of 2012 last year. If passed, it would create a separate regulatory organization (SRO) to monitor and regulate financial advisors. The bill’s most troublesome provision is that the Financial Industry Regulatory Authority Inc. (FINRA) that now regulates brokers SRO would become advisors’ SRO.
An article in Investment Advisor listed "eight ways in which FINRA oversight will hurt independent advisors and the American public" They are:
- FINRA's exorbitant operating expenses and bloated salaries make them more Wall Street than Main Street.
- FINRA's mandatory membership fees will put many independent financial advisors who offer adviceto middle-class savers out of business.
- The burden of making small business owners pay mandatory fees to fund FINRA salaries is unconscionable.
- FINRA is not subject to Sunshine Laws and doesn't have to hold open meetings.
- FINRA is not subject to the Freedom of Information ACT and is notoriously secret about its books and records.
- FINRA is an organization run by Wall Stree's executives who, with a "wink and a nod" purport to oversee their Wall Street colleagues. This is like ENRON overseeing CPAs or drug companies overseeing your family physician.
- FINRA has no experience working with financial advisors held to the high fiduciary standard. (Gordon's Note: They are accustomed to working with brokers who are hld to the lower suitability standard.)
- FINRA acts like a government authority, but without government accountability.
Backers of the SRO measure insist that the SEC reviews only about 8% of nearly 12,000 registered investment advisors (RIAs) annually. Other reports indicate that the SEC annually examines 40% of advisors under its jurisdiction. I certainly agree that more investment advisors should be examined each year, but regulating RIAs as if they were broker-dealers is a mistake.
An obvious solution would be to increase the SEC’s budget so they have the resources they need to conduct more advisor reviews with advisors paying a user fee. And, surprisingly, that could happen before the end of this session of Congress. Of course, additional funding for the SEC could, in turn, influence the fate of the Bachus Bill. Stay tuned.
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