December 6, 2011
Domination or Dominoes?
The Investment View from Prescott, Arizona
Once again, Europe is dominating the investment news. Last week the US engineered another big bailout of European banks, providing them a boatload of dollars.
Apparently no one is loaning any Euros over there, and they need something with which to carry on commerce. They chose dollars. So much for the death-of-the-dollar scenario that gets talked about so frequently.
I found it interesting that the countries that made this decision did not include France or Germany. Maybe it was just because all those two countries deal in is Euros and it was dollars that were needed. I’ll admit that I’m not completely clear about what went into the decision about who would participate.
Germany seems to be in the strongest financial position of all the Euro-zone countries, and they are beginning to flex their financial muscles. Recently, I read that the Germans had said that if they were expected to keep bailing out weaker countries they would like to suggest “changes” to the European Union charter. Uh-oh.
I’m sure those changes would impose German-like discipline, over financial decisions at least, and I am equally sure that the other European countries are not eager to be dominated by Germany after a couple of bad experiences with that idea over the past century.
Germany “seems” so be strong financially, but they actually have a very high ratio of national debt to annual economic output (GDP, specifically). In fact, out of 133 nations rated, Germany has the 16th largest amount of debt in relation to the size of their economy – 83%, according to the CIA World Factbook.
Of course, Greece, Italy, Portugal, Iceland, Ireland and Belgium are all in worse shape than Germany, which underscores the fragility of the European Union as a whole, and makes watchers worry about a “domino effect” should one of those country’s financial crises spiral out of control.
Surprisingly, Russia is in much better shape than almost all countries at #123 on the list, with total debt only up to 9% of their economic output. Ironically, while other countries were lining up for loans, no one would give the Russians any. Dumb luck for them.
If you are curious, the US was at #29, with debt equal to 62.9% of GDP.
Perhaps the biggest surprise on the list was Japan, limping along at #2 (behind Zimbabwe) with almost twice as much debt as annual economic output. Next year’s financial disaster, probably.
Interesting times, these.
A Slice of Life
Acker Night: A Favorite
One of my favorite events of the year is Acker Night, a Prescott Christmas celebration.
Over 100 Stores and venues in downtown Prescott will be filled with musicians of all kinds. The sidewalks will overflow and streets will be closed off to accommodate the revelers. If you have not experienced an Acker Night, mark your calendar now for Friday, December 9th from 5:30 to 8:30. It is a unique experience.
My wife, Cathleen will be singing at City Hall from 7:00 to 8:30, and Acker Night’s newest group is the Prescott Ukulele Band, started by several good friends after our trip to Hawaii last summer, which will perform at the Prescott Chamber of Commerce starting at 7:00. One of my favorite acts is the Kiwanis Jug Band with their uniquely local, usually very irreverent, musical satire at the beautiful Elks Theatre.
I’ll hope to see you downtown on Friday night.
Just Do the Laundry, Please!
By Bryan Jarman, CFA
Twice a week is the dreaded laundry day at the Jarman household, and with five children this is no small task. As I routinely attempt to help my wife with the chore, I wonder where all these clothes have come from and what we need to do to get it all done.
Occasionally, one of us is tempted to just kick the dirty clothes under the bed putting off the task to another day, but the pile would only grow in size and probably in its aromatic quality, too.
The government has a tendency to kick its financial messes under the bed, trying to buy time while the free markets whittle the problem down to size. Lately our government has been helping Europe cover up its dirty laundry, too. However, the aromas coming from under the European bed are getting a bit distracting – at least to the financial markets.
Not to overly simplify, but isn’t it time we take care of our dirty laundry both nationally and globally? The debt crisis is complicated. Projects and programs du jour add more dirty laundry to the already overwhelming pile. Raising debt limits, reducing borrowing rates and re-prioritizing obligations are just air fresheners for the smell wafting through the room.
At the end of the day my family will have several neatly folded piles of warm clothes waiting to be put in their proper place. Wouldn’t it be nice if the governments of the world would do their laundry for a change?
Think of the money we could save on air-freshener!
Q: How much dirt is in a hole that is 6 feet deep and 6 feet wide?
A. None. That’s why we call it a hole.
How’s The Market Doing?
The stock markets have changed direction more times this year than any year I can remember. If a picture is worth a thousand words, a graph is worth a thousand numbers. This one shows the S&P 500 and its 12 direction changes through the end of November.
To put this in perspective, 2009 had only 3 direction changes, plenty of time to identify a trend and ride it for a while. The 1990s had several up-trends that lasted for years at a time. That was back when buy and hold worked.
Buy and holders, especially of index funds, have seen the effects of these changes as they lost half of their money twice since 2000. This year, even more nimble trend followers have frequently found themselves on the wrong side of the markets, as about the time a new trend is identified it changes.
The HCM Safety Net indicator, shown in the last edition of this newsletter, is our response to this phenomenon. It is designed to be a very fast responder when a downturn starts getting ugly in a hurry.
What’s Going On In Your Portfolio?
The stock markets do not like uncertainty, and with all the uncertainty over the European financial crisis, we are currently out of the stock market. If we dip our toe into stocks it will be just that. We aren’t going to be jumping in with both feet for a while yet.
Portfolios hold a mix of bonds, strong dollar funds and gold.
There was a sharp spike upward in the stock market last week, but as of this writing on December 4th it has not shown me the type of uptrend likely to last, so we are just waiting patiently with our growth allocations sitting in the relative safety of a money market fund.
Flexible Income accounts hold a mix of conservative bond funds, strong-dollar funds and gold.
Growth Portfolios hold only cash and gold at the moment. For a few weeks, gold drifted downward to a point where the market forces had buoyed it up several times before, and although we were tempted to quickly cut the slight losses we were showing, we decided to wait and see if this “support” level held. Gold did not disappoint us, and has bounced nicely over the last week.
Rydex Proxy Notices
The money market fund we use to hold your money when it is not invested is the Rydex US Government Money Market Fund. Rydex had mailed out proxies for some routine items, such as selection of auditors and election of directors, but did not get enough replies to make up a quorum of shareholders.
My recommendation is to vote as recommended by the Rydex Directors. This is all routine business, and if I were concerned about any of their recommendations we would use another fund. Sorry for any inconvenience.
If you are asked to vote by phone, please take a minute and do so in order for Rydex to finish its annual business. Thank you.
Our Spotlight Strategy
We are completing a realignment of our investment strategies, making existing (Flexible Income, Balanced and Careful Growth) strategies more responsive to the challenges of the current market environment and adding a more conservative bond strategy and a more aggressive growth strategy to our lineup.
Strategy offerings, in order of risk, lower to higher, are:
All stock holdings may be reduced when the HCM Safety Net indicator starts flashing red.
Investors wanting municipal (income tax free) income may request that within our Traditional Income strategy.
Existing accounts may notice that the strategies being employed are a little more conservative than before as we recognize that the more conservative strategies and investments have been doing better than growth oriented ones.
I will make adjustments within the strategies as mentioned above as part of my normal work, but I cannot change the basic risk category of your account management you selected when we opened your account(s) since that determines how much (or how little) risk I am to take on your behalf, and only you can change that instruction.
If you would like to review and possibly change the strategies we use on your behalf please call for an appointment.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market. Investors cannot invest directly in the S&P 500 Index.
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.