October 19, 2010
The Next “Greatest Generation”
I was thinking about the passage of the generation whose formative years were in the 1930’s, during the Great Depression. After 10,000 bank failures in just a few years, cash was scarce. People learned to be frugal, devise ways to do more with less, save and generally tough it out. 
From this era came what has been called the “greatest generation”, the men and women who fought and won World War II and then led America into its greatest era of prosperity.
Then I realized that my son Matt, now age 20, and in school, will be growing up in a time that may be pretty lean for many folks, a lot like the 1930’s.
Hopefully he will learn the lesson that a job is something you work to get and work harder to keep, that a penny saved is a penny earned and that a friend is someone you can count on when times are tough.
Adversity breeds greatness, and the optimist in me sees the potential for another “Greatest Generation” being born out of the adversity of our time. Suddenly I feel a lot better about my son’s prospects in life.
As a friend says frequently, “It’s all good.”
The Bank of America Factor Favors Emerging Markets
The Investment View from Prescott, Arizona
Sometimes it pays to be lucky.
Back in 1990 when banks and Savings & Loans were failing in large numbers due to
the collapse of the junk bond market, Bank of America came out relatively unscathed.
Their good fortune was due more to luck than investment acumen, however.
Bank of America had almost failed in the mid-80’s when bonds sold to Latin American countries began to default in large numbers. BofA’s lack of investment discipline had them over exposed to Latin American defaults to the point that regulators were all over them forcing BofA to clean up their books or risk possibly being shut down.
During the years that Bank of America was doing penance for its bad Latin American loans, many other bankers were buying carloads of junk bonds without really understanding the risk. Eventually 747 Savings and Loans failed and brought on the failure of the FSLIC in 1989.
It was primarily because of the heat from the regulators requiring that they reduce risk instead of taking on more, that BofA did not get caught up in this mess.
Now fast forward 20 years to the current debt crisis.
The affluence of the 1980’s-90’s was largely due to the creation of debt. Now it is payback time. Paying off debt is now a big problem for many who took it on and will continue to be until it is paid off. How long will it take to pay off the huge debit overhang the developed world must shoulder? That is the $64 trillion dollar question, isn’t it?
However, debt levels in emerging market countries, such as Chile, Indonesia, Australia, and Brazil are much lower than most developed countries in relationship to their total output of goods and services.
Lower debt levels in a period when carrying debt is becoming a greater and greater problem, give emerging markets a decided economic advantage.
Whether emerging market countries were more disciplined than we were, or were not considered worthy of huge loans by developed countries’ bankers, such as Bank of America in the late 80’s, they got lucky and ended up with low debt, right now, when low debt counts for a lot.
The strong head winds facing investors in developed countries struggling to pay off debts will be felt much less in emerging markets which can divert resources into productive enterprise rather than just having to make debt payments.
Years from now, when history is written, emerging markets ought to have much better investment performance going forward than developed markets – including the U.S.
The U.S. has a still-growing mountain of debt to pay, too, and those dollars are not available to be invested in new factories and technology, and that is a problem.
Riddle:
Q: What is it that when
you take away the whole,
you still have some left over?
A: Wholesome
How’s The Market Doing?
Whenever anyone asks me what I think of the stock market, I usually respond by saying I am X% in the market, or X% out of the market usually with the caveat that they might get a different answer next week.
Right now, all of our portfolios are fully invested for the first time in a long time. That pretty well sums up what I am seeing in the market.
We are entering into the colder months of the year which tend to be the best months of the year for the stock market, and we are also in the strongest market of the 4 years of the presidential cycle.
There is no assurance that one will make money in stocks during these periods but it is nice to have the probabilities tilted a little in our favor.
The stock market advance after the “flash crash” in May and the July low point for stocks, has been of the Goldilocks variety. Not too fast and not too slow. In short, it is the kind of advance that could possibly just keep right on going despite all the negatives the economy still presents.
We have to remember that the economy and the stock markets are two different things, and we are investing in the stock market and it has been going up.
What We Were Saying Back Then
“What the Heck was THAT??” was the title of the article I wrote for my October 14, 2008 newsletter.
“What seemed like the longest week in history for many investors finally came to a close with slight gains Friday afternoon that did little to offset the week’s historic losses. Like many others I find myself wondering what the heck just happened, what comes next, and even more importantly, what should we do next. I’ll tell you what I know.
First let me say The Sky is NOT Falling! It just feels that way to investors who bought into the idea of buy-and-hold investing without understanding the incredible level of risk that entails.
“Continued concerns regarding the now-global credit crisis, a dramatic slowdown in consumer spending, and the prospect of further weakening in the US economy sent the S&P 500** on a wild ride, down 22.9% in just the past 8 trading days. Roller coasters begin to descend slowly before they get to the stomach-flipping, screaming kind of scary. The queasiness many investors felt this week tells us we’ve been through that worst part. You have just lived through the Crash of 2008. History has been made. And if you are reading this, you did survive it. Congratulations.
“This past week also marked the one-year anniversary of the current market downturn. The S&P 500 Index** put in its record high of 1565 back on October 9, 2007. Today, it hit 839, — down 46.3% from its one year old peak. Ugh!”
My purpose in repeating this is not to revive morbid end-of-the-world feelings that were so common two years ago, but to point out that the financial darnage of the Fall of 2008 did not happen out of the blue. We were given a full year to recognize the problem and act to protect investment values.
Lesson #1 – Market crashes don’t happen in isolation. With a month long uptrend underway, the chances of a significant market decline happening right now are greatly reduced.
Lesson #2 – If your investment advisor did not act in time to prevent large losses for you in 2008, I hope you are among those who have already moved accounts to Hepburn Capital, because we did see the crash coming and got out of the way. It is important that you do not wait for the next decline to begin, but act now. After a decline is underway, it is too late. Call now for an appointment if you are not yet a Hepburn Capital client. 928. 778.4000.
What’s Going On In Your Portfolio?
Both our Flexible Income* and Careful Growth* accounts each hold about 20% in gold.
In addition to gold, Flexible Income* accounts hold Inflation Protected bond funds, an Aussie dollar fund and another currency strategy fund, diversified bond funds plus a high yield (junk) bond fund.
Careful growth* accounts hold a lot of growth stocks, heavily weighted toward emerging markets around the world. Chile, Indonesia, India, etc., with some energy stocks added in for good measure.
The one thing in common that most of these investments have is that they are in categories that would be expected to do well if the value of the U.S. dollar declines.
This is my way of protecting your investments in case our government decides to keep printing and printing and printing those dollars, making them worth less over time.
Just in case . . .
Our Spotlight Strategy
With Careful Growth, we strive to out-perform the U.S. stock market over long periods while taking only a fraction of the risk.
* 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.
Balanced Strategy Description and Performance Information
Careful Growth Strategy Description and Performance Information
Flexible Income Strategy Description and Performance Information
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.
