Retiring Boomers

I saw this article today on the large swath of baby boomers who will turn 65 starting next month. The absolute number (10,ooo per day) is huge and the implications for the economy equally so. Everyone by now knows the story- the boomers spent too much, saved too little and made sometimes horrific life mistakes (jobs,divorce,investments,real estate ,etc.). The article ends by saying 40% of these "retirees" plan to work until they drop. I suspect the real percentage is close to double that figure.

44% Per Year

I saw an interview a couple days ago with Virginia Governor Bob McDonnell regarding his plan to require state employees to contribute 5% (they currently contribute nothing) of their salaries towards pension costs. The most interesting part was what the annual investment returns would need to be in order for the Virginia pension system to be fully funded . The answer: 44% per year!! The S&P 500 has never achieved a 44% return in any year (37% a couple times is the closest). Obviously, you can't get there from investment returns alone. We sometimes see individuals make this same mistake, thinking that if only they could obtain a bit more return all would be fine. Usually, the math simply doesn't work.

2011 Issues

I don't like lists of predictions but this one struck me as rational and reasonable. This guy writes mainly on residential real estate issues so that is the primary focus. Down the list some are issues about state budgets and muni defaults which I suspect may be the issue for 2011. Stay tuned.

Stimulus - the Federal/State distinction

Everyone has heard both sides argue about the efficacy of the stimulus . A couple of Stanford economists have an interesting article today in WSJ that traces the interaction between the states and the federal government on this topic. They make the case that the net is about zero.

Making Money in the Markets

This is a nice interview with David Booth, co-founder of Dimensional on market efficiency and related topics. The very last sentence in the article bears a look. This seems very true to me- given all the brokers and funds relying on the "black box theory", everyone isn't going to totally believe in efficient markets. Everyone does believe in making more money in the markets,however, and that is what EMH is all about.

Too Big to Fail

Some of you know of Professor Eugene Fama and his work on the Efficient Market Hypothesis (he actually did the original work on this in the 60's). This is a short video clip on that topic and also on his opinions on the large banks. He states that they are way undercapitalized and this creates huge distortions in the market. Good stuff!

A Growth Agenda

Art Laffer ,who has advised a wide array of folks in political life (from Jerry Brown to Ronald Reagan) wrote a nice article today in WSJ outlining a very specific agenda to regain economic growth. Most of these are familiar but I particularly liked the last one which involves incentive (or performance) pay for members of Congress. That would get some attention !

Reform the tax code and stop regulating

Kevin Warsh, the youngest member of the Federal Reserve Board penned that phrase in a long WSJ piece Monday. Larry Kudlow summarizes the piece here. Both commodities and equities have moved sharply higher in the short term in anticipation of what the Federal Reserve is doing now...BUT the real test (for equities anyway) is corporate earnings which have been good overall. Higher fuel and food prices are surely in the works.

A Stunning Stat on Real Estate Overhang

I saw this article over the weekend and was stunned by the data presented. The article outlines an almost 9 year supply of foreclosure and "shadow inventory" real estate owned by banks. Mortgage rates are at generational low levels and prices have dropped to reasonable levels in many parts of the country but this dramatic amount of supply will likely drive prices lower still. Real estate has utility and should be viewed that way. It might be an ok investment or it might not but either way that should be secondary not primary.

How to Privatize the Mortgage Market

The housing/mortgage market continues to be a huge drag on the economy with no end in sight. Saw this interesting article on how to privatize the mortgage market and simultaneously get rid of the giant albatross that Fannie/Freddie have become. These entities are structurally bankrupt and bear at least a large portion of responsibility for the mess we find ourselves in presently.

A Real Mess Brewing

By now everyone has heard about the group of institutional investors led by mega bond fund Pimco that has notified Bank of America that they want to "put" or sell back about $16 billion of bad mortgages. The attached piece does a good job explaining the mess and initial push back from Bank of America. Some estimate that as much as $150 billion of mortgages may be sold back to the big banks. One of the many problems, however, is the big banks - Bank of America, Citibank, etc. lack enough in reserves to cover this...can anyone spell "bailout"?

Tax Rates- More = Less

A good read from our favorite Harvard economics professor. He does an excellent job tracing higher marginal (meaning at the next dollar earned) rates and their possible impact all the way through being taxed at death. These rates become confiscatory quickly. As someone said recently- we don't really have an income problem, we have a spending (and I would add debt) problem.

Is Gridlock good for stocks?

There have been a number of questions recently about gridlock in Washington and if this is positive or negative for equities. This piece from NYT walks through some of the data. The more recent periods of gridlock (Reagan and Clinton) seem mostly positive but longer term timeframes provide different results. The best paragraph is about halfway in where he quotes some research that says "more than 90% of the price gains in the 108 year history of the Dow Jones Index through 2006 came on days when Congress was out of session". That sounds just about right.

Debt of All Kinds

We are focusing a lot of effort currently on managing the liability side of the ledger for clients . This article on student loan debt is emblematic of what is facing many in their 20's and 30's today. Fun fact- the total of all student loan debt (government backed and private) exceeds $800 billion which is fairly close to the total amount of residential mortgage debt. The big difference of course is on one hand there is an asset (the house) worth something securing the mortgage while with student loans there is only a claim on present/future earnings (which in many cases is insufficient). This is a big looming problem on the horizon that very few even realize exists.

Housing ideas

Saw an excellent article in NYT today on the need for bold ideas to solve the continuing (i.e. not yet addressed in a comprehensive way) problems in the residential housing market. While I certainly see healthy increases in activity , in many places (Nevada, Florida, California) deep fissures remain. The most troubling aspect is the $1 trillion of subprime loans that mostly are non performing that are still on the books of banks . These are toxic and won't likely go away without some of the ideas thrown around in the article.

Saving or Spending

Shawn Tully at Fortune has written an insightful article on the macro economic impact of saving (consumer and business) versus fiscal spending . He makes some valid points which have been mostly ignored by policy makers. He walks through the basic math that says savings end up in GDP as well as spending. Good reading.

Cash for Clunkers- the Unintended Consequences

Saw this article which breaks down the cost and consequences of the Cash for Clunkers program . I thought about this when looking at the year over year decline in car sales since this program was operational last summer . You may have noticed that most brands are down 20% or more from the year ago figures but as this article points out the federal program created some substantial problems that we are living with now.

15 Year Mortgages

A very interesting article on the growing popularity of 15 year mortgages. Good to see home equity being built the old fashioned way...by paying down the debt. Perhaps this signals a change in attitude about housing and debt. Hope so.

When Bad means Good

Industry observer Mark Hulbert writes today about how bad sentiment may actually be a good thing. Maybe so but over-pessimism (or over optimism for that matter) can be a problem in maintaining the balance and discipline needed for a long term focus. People seems to be attracted to doomsday scenarios and prognosticators in skittish times.

Housing...again

We are a country obsessed with housing and home ownership as a fundamental segment of the American dream. This article by John Tamny makes some interesting observations , the most important perhaps being the need "to be untethered". We certainly need a workforce that can move where capital does and that often means renting instead of owning. Houses can be homes for family and friends but usually are not great investments per se. The past 3 or 4 years have certainly taught us that truth.

Huge Risks for Fixed Income Investors

Professor Siegel outlines the very real risks bond investors have in the market today. Investors scared of stocks have rushed into bonds and bond funds that carry a.) low yields and b.) huge capital loss risks. Because so few investors understand the true risks in these "safe" investments the upcoming period could be very traumatic . The proper role of fixed income is to act as a stabilizer or smoother of portfolio volatility. That is how we use it here.

Getting Older,Spending Less

This piece appear in the WSJ over the weekend. 2 very good points- first, that retirees either have to accept lower yields/returns from fixed income or stay in the market which is by definition "riskier". Second, at least the survey quoted indicates that retirement spending is starting to decline in purchasing power (inflation adjusted) terms. That is positive news indeed as spending has widely outpaced inflation from what we see in our practice.

Five Expenses that Add up

This short bullet point piece is one of the best I have seen. The simple rules of thumb are good broad guidelines that I largely agree with. Most people know the house and car ones but the middle two , which I think really are 1 regarding kids and higher education ring so true. We tell folks all the time you (or your kids) can finance college but you can't finance retirement. Good reading .

The Tax Debate

There are numerous opinion pieces out there debating the pending expiration of the Bush era tax cuts. This article is one of the better that I have seen as it addresses the whole issue in context . The end of her article is perhaps the best where solutions are described. I agree- either scrap the whole IRS code and go with a flat tax and no deductions or a consumption tax . As she says at the very end, if you want to remove the money influence from Congress then take the tax code away. Good idea indeed!

spending down, markets up

Saw this article on spending by "the wealthy" which makes some good points. Little doubt that many folks are somewhat frozen in place in terms of financial decisions given the high level of uncertainty. Despite all of this, the month just ended was true to form and posted the best monthly increase since July 09. As we wrote a few weeks ago, historically July is the best month for the stock market while September is the worst. The month we are starting now is about in the middle.

The Past is the Past

This is a very good article from fellow advisor Carl Richards on the topic of mental anchoring . This is known as "stickiness" and has been a big issue in the real estate market over the past couple years as well as the stock market. What you paid for a house or a mutual fund or a stock does not make the price of that asset any different today. We need to realize that and approach our portfolios in current value terms instead of letting the past (what we paid) dictate our behavior.

Financial Non Reform

The latest work product emanating from Washington in the form of the 2300 page Financial Reform bill is now law. Only it does very little to actually reform but rather delivers more power to the very regulatory bodies that failed us in 2007-2008. A great deal has been written about the evil large Wall Street bankers and indeed some of that is justified particularly when it comes to protecting clients and acting in their best interests . Not as much has been written (I looked but could not find a suitable piece to link here) about the abject failure of the existing regulatory regime including many in Congress who crafted this new law.

So, how will it impact markets? No one knows as there will be unintended consequences on virtually every page that likely will outweigh any possible good in the law. What we do know, is Fannie and Freddie are still out there with an unlimited checkbook yet virtually worthless (both were de-listed from the NYSE recently as their stock prices are well under $1/share). Eventually, this is a problem that will have to be solved . Given all of the headwinds from the "legislate by the pound" crowd in Washington, the markets have been quite resilient . Stay tuned.

Stock Market Earnings

The quarterly earnings parade started yesterday and the early signs are positive. Today marks the 6th straight up day in the market (assuming it holds) following 7 straight down days. Remember... markets go up and down, not up and up. For what its worth- July is the best overall month for the S&P 500 for the 1928-2009 timeframe (in case you are curious- September is usually the worst).

This Way or That?

Found a pretty good article espousing the two different views investors are taking at present. These distinctions, of course, are among the main reasons we always want exposure to both the equity and fixed income markets. It is likely not either or but rather both to some degree. Our approach helps relieve the stress and confusion of investing with a clear empirical structure for managing wealth.

List of New Taxes

This is a fairly comprehensive list of new taxes heading our way in 2011 . Depressing to read and I suspect depressing to the larger economy as well.

Corporate Profits Higher

This Bloomberg article provides some much needed good news about corporate profits this year. Ultimately stock prices reflect the profits so this is positive news indeed.

The Biggest Obstacle to Retirement

I saw this short/simple piece and shouted YES! Non- mortgage debt is a tremendous problem in retirement. Heck, 20 years or so ago very few retirees had any debt, mortgage or otherwise. Sure, saving for retirement is generally paltry, expectations unrealistic and timeframes too short but debt indeed is a big issue that can't be easily overcome.

Puffery Personified

This article from the WSJ today quite correctly points out that in the quest to "fix" whatever went wrong, the Financial Regulation bill doubles down by giving the Fed, SEC,FDIC (and creates another agency just for fun) more power . None of these have exhibited anything resembling competency in this "crisis" but never mind these small details. The glaring omission is nary a mention of the real threat to the financial system- the GSE's Fannie Mae and Freddie Mac. The number of unintended consequences per page is likely greater than one (the bill is 2000+ pages of course).

The Human Condition

A very good article in WSJ on how our brains often work against us when making investment decisions. All told, the discipline that we bring to client relationships allows us to temper these sometimes errant urges.

Regulation- the answer or the problem?

This is an even handed article in WSJ today mostly on regulation and the oil spill but also mentions the financial "reform" regulation bill in Congress. As has been said, we have the best government that (the lobbyist) money can buy. Over 1400 former Congressional aides and members themselves are involved in lobbying the current financial regulation legislation. Any wonder the mire just gets thicker. The article makes a very prescient point about the sheer complexity of the regulations and laws (particularly those in the past year or so- mostly 2000 page monsters) and how this works at cross purposes.

The Real Jobs Report

Saw this somewhat light hearted piece today on the May jobs report . Loved the "fake" and "Make believe" description of these reports. The month to month numbers (like the month to month stock market) are very "noisy" and therefore hard to discern much meaning. That aside, even a cursory look at what is behind the numbers portends a disturbing reality. Over 40% of those unemployed have been so for more than 6 months. I suspect some/most of these people may never work again at least in the realm that they were previously. This so called structural unemployment may be a big headwind for the economy for many years to come.

George Will on Tax Reform

Sometimes the obvious has to be "beyond obvious" before change can occur. Our 70,000 page tax code is one such example and George Will has a short article on the topic in Newsweek. Senator Gregg who is referenced in the piece is one of a small handful in the political class that may actually understand the tax/budget axis. Good food for thought.

We continue to pay attention to the scheduled tax hikes for dividends and capital gains in particular that come January 1,2011 . All things equal it seems worthwhile to consider pulling gains and other income forward which will skew (negatively) 2011 economic numbers.

Traders,Investors and Capitalism

The headlines today shout about May being the worst month in a year for stocks. True enough but the implication is that means something. Since the start of 2008 the number of up and down months are roughly equal but gains during the up months have substantially outpaced the losses in the poor months. such is the nature of markets. It bears repeating that day to day and even month to month price movements are largely the result of traders not investors.

I saw a very good 8 minute interview with Dr. Gene Fama (U of Chicago finance professor) that distills quite clearly the essence of capitalism and the efficient market hypothesis (which he is credited with creating). Well worth the time. Here is the link.

Long Term Unemployment

We all know unemployment across the country is at high levels. The segment of those unemployed for more than half a year is huge and trending higher still. This article from NY Post depicts some of the human faces behind this problem . I like her phrase "extend and pretend" which aptly describes the actions of the Congress as they continue to extend unemployment benefits while exacerbating the very problem with their intervention.

There are perhaps no quick fix solutions here and this is an issue that will likely be with us for years.

America's new culture war

This is an excellent (is somewhat long) article in the Washington Post today on our emerging new culture war- free enterprise vs. government control. There are many good points in this piece but since we are concerned about markets and wealth let's focus on two.

In the last sentence of the initial paragraph the author (Arthur Brooks) states that the two competing visions of America are not reconcilable. We must choose. The other point that caught my attention is his statement towards the end of the article about the purpose of free enterprise " human flourishing, not materialism". That indeed is a core belief that is not repeated often enough.

Job Creation

This is a very good piece by John Tamny who writes for Real Clear Markets (a good site that links dozens of market related articles each day). He goes through the simple, yet largely ignored , process of how jobs are created. Despite all the rhetoric, government doesn't create jobs. Government doesn't create wealth, it consumes wealth. John has a keen mind and describes why America will likely continue to be a place of innovation, job creation and wealth building.

Financial Folly

Another good , cogent article on global debt and individual investors by Jason Zweig. 2 or 3 very useful tidbits including the study saying debt levels like ours here in the U.S. erode economic growth by 1% per year (not surprising). Later in the article a quote about these "processes not being linear" is oh so true. Finally, the last sentence where Zweig advises investors to "wring your hands while sitting on them". Agreed.

The Elephant in the Room

A spot on piece in NYT today on the latest from Fannie and Freddie. A very ugly picture indeed. I guess the ability of the politicians to keep this under the radar is owed, in part, to the inability of most Americans to understand what these entities purport to do. I am sure there will be more to come. Stay tuned.

Crisis,Anxiety & Error

A destructive mixture of all the above in Thursday's sharp U.S. stock market pullback. a cogent article in IBD today providing some perspective. While some of the issues yesterday might have indeed been trading errors or even a computer virus , little doubt that the underlying concerns centered on the worldwide debt bombs beginning to explode in Greece(and other European countries).

The S&P 500 is still up about 78% in the past 14 months- one of the best periods in history so some level of pullback is probably good and healthy. Remember our saying around here "markets go up and down, not up and up."

Fannie and Freddie...

A very good easy to read article in WSJ today on just how deep the Fannie and Freddie mess is and the unintended consequences. A real eye opener is how this huge government involvement has not helped us much in terms of home ownership . No one seems willing to address this huge hole in the federal budget (since it is not in the official budget).

Conflict of Interest Revisted

Saw a good article in The New Yorker on how poorly many of the large banks/brokers have performed for their "clients" , yet investors still do business with them. This is one of the real mysteries of life and lends credence to the idea that we don't learn much from history . I guess marketing trumps all else . If this were not so these firms would have been out of business long ago.

Housing risks revisited

We have mentioned several times previously of the (still) somewhat below the radar problems with FHA, Fannie Mae and Freedie Mac- collectively representing government involvement in the residential mortgage market. New home sales and foreclosures have risen in the past few months. The general narrative proffered in the media is that the formerly risky lending by these lenders has all but ceased. NOT!! In 2006 the percentage of loans with low income to payment ratios and weak credit equalled 17% of the total. Today, these type risky loans account for 23% of the total! The upshot is no lessons have been learned and in many if not most areas housing may still have a ways to go before reaching bottom.

Taxes and Uncertainty

This is a very good article on the dangerous combination of uncertainty and higher tax rates. Many economists are concerned about the poor timing of these increases along with ramping up the level of uncertainty which may actually be more destructive. One thing is certain...capital will become much more expensive and simply put we need capital for capitalism to function.

Financial Reform???

Real financial system reform could be codified in a paragraph or two . The first paragraph would deal with fiduciary, something most of Wall Street firms just talk about but don't actually do. If you have any doubt just watch one of the ads running currently by a major stock brokerage firm. The ad uses the word "independent" twice; "unbiased" once and the phrase "putting your needs first". All good but untrue. If Wall Street firms, retail and institutional alike would actually practice as fiduciaries and protect clients, everything else would be fine.

The NYT has an excellent article today on the second of our 2 paragraph reform dealing with treating all banks alike (something the current bills in the Senate and House don't do). The two tiered system put in place by this legislation is plain awful and creates huge disincentives for all but the largest banks.

5% Chance of Success

When we do Sustainable Withdrawal Analysis (SWA) for clients we generally like to see 75% or better success rates based on reasonable assumptions. Just saw a report on state public employee pensions in the U.S. that are underfunded by an estimated $3 trillion. Since numbers that large can be hard to comprehend the author put the number in perspective. He estimates that there is a 5% chance of these pensions being paid as promised (or stated differently a 95% chance they won't be paid as promised). Next to Fannie and Freddie public pensions are likely the largest problems looming on the horizon.

Bond Funds

The Investment Company Institute (ICI) reports that bond funds accounted for almost 80% of the flows into mutual funds over the past 12 months. Since the stock market bottomed about 13 months ago , one might imagine that much of this came out of stock funds before going into bond funds.

This is both interesting and troubling. During this same timeframe the overall stock market has risen by about 70%. Moreover, interest rates have but one way to go . When rates go up, bond prices fall. A real disconnect it seems on the part of many investors.

More on VAT

A good "fair and balanced" article on VAT . The couple paragraphs in the middle of the article on the simple math of our budget mess are quite good.. so is the end of the article. The reason we have an interest are the many unintended consequences .

Economic Recovery...??

This a good quick article on the brewing recovery such that it is. Much of the data have turned slightly positive but there are significant headwinds as the article explains. 2 or 3% growth coming out of a big recession is far too low to stimulate employment. The financial markets are enjoying the moment and many firms have good earnings due to downsizing but that only goes so far.

VAT article

A good short piece on VAT history in Europe. With about 4 decades of experience there it might be worthwhile to examine the outcomes which are 1. less economic growth and 2. dramatically higher tax levels which lead to 3. larger and larger central governments.

Tax Tipping Point?

Today, I saw a couple different stats on the current state of federal taxation. A whopping 47% of 2009 tax returns show no net income tax . Stated differently, 53% of the population is paying all the taxes. We have seen these numbers before but after a little digging I found that only 3 years ago the 47% was 37%. The top 10% of the population pay 73% of the tax. Lots of talk lately about "fairness". With tax day one week away seems like we are close to a tax tipping point.

First Quarter

The quarter that ends today marks the first 1st quarter in 3 years where the broad stock market has shown gains. The S&P 500 Index is up almost 6% for the quarter and the smaller stock indices are up more than that. The NASDAQ Index has been up for 4 straight quarters. From the March 9,2009 lows the S&P is now almost 73% higher. Sadly, many investors have missed this and stayed on the sidelines waiting for the "right " time to buy.

Old Fashioned Investment Advice

A very good article on John Bogle-Vanguard founder in LA Times. His homespun credo- diversify, watch taxes and costs, don't waver. Simple enough and matches what we have preached for 28 years. It all comes down to behavior. We want to micro-manage, out-guess, follow short term trends etc. that take us off the proper path. A good read for uncertain times.

Capitalism& Markets

An excellent article/interview in WSJ today on Professor Gary Becker. He is considered the co-father , along with Milton Friedman of the Chicago School of Economics (at the U of Chicago). In a week where many have been dour and sanguine about the future , Becker is more upbeat. About midway in the article a paragraph that starts "Capitalism has produced..." is the essence of his philosophy.

VAT and other trends

A good piece on VAT particularly the end where the author (Charles Krauthammer) points out that in the U.S. this is likely going to be on top of existing taxes. Little doubt in my mind this is the trend.

Just saw an expose of the student loan nationalization that is a part of the new health care law. Before Tuesday there were 2000+ lenders...now just 1- Uncle Sam. The upshot is students are in effect paying a new tax (by virtue of higher interest rates) to pay for the new law.

One more time

Here is the correct article mentioned in the post below on Social Security. Mea Culpa!

Social Security turns negative

The NYT has a piece on Social Security and how expenditures will exceed receipts this year...6 full years earlier than the most recent appraisal done by the Congressional Budget Office ( in 2008 when Peter Ortzag -now aide to President Obama, headed the office). Seems the economic variables have moved around just too much since then. Doesn't give one much comfort in the numbers coming from these vaulted sources and underscores the depth of financial issues facing the U.S.

New Tax Increases

Economists might disagree about the exact formula for restoring growth but few would support the massive tax hikes coming our way. Starting next year the top marginal bracket increases by 13% (from 35% to 39.6%). Capital gain tax rates increase by one-third (15% to 20%) but once the new health care law unfolds will bump up another 3.8% for a total % increase of 59%! Also, the Medicare tax rate will also move higher by 62%. My guess is even with all of this we are looking square in the face of a national sales tax or VAT to pay for this new entitlement.

Economics Obviated

One of the more interesting aspects of the health care legislation that is about to be signed into law is the role of economics. The allocation of relatively scarce resources is the primary core of economics. To a very large extent, many components in the new law seek to suspend or obviate the natural laws that govern economics by government fiat. History is replete with examples of this being attempted but almost none where it has worked. Markets tend to work and interfering (as we sometimes want to do) with their functions can often lead to nasty unintended consequences.

Our STAT piece this week concerns the 2 stages of life- the savings stage and the consumption stage. There are many things we can't control but one that we can is how much we save for future consumption. In our practice we see many issues ahead because of insufficient savings . A good piece was in Business Week on this recently. The natural laws of economics won't be obviated here either.

Men's overconfidence and investing

One of the more interesting observed outcomes we see with some men is overconfidence about financial/investment topics. A recent article in the NY Times looked at a study by Vanguard of 2.7 million IRA accounts of men in 2008 and 2009. The study found that men tended to react more to market noise and sold at lows as a result. The men bought high and sold low. These findings mirror a study in 2001 by Schwab that concluded men lose almost one percent per year to such behavior versus women. We don't yet know if the reason is biological or something else. Perhaps we will someday but this reflects some of what we have experienced over the years.

Evidence Based Investing

We follow a cogent and coherent philosophy of investing grounded in the science of the markets. This approach is far different than what is proffered by the myriad of brokers and "financial consultants" who cling mostly to the "out-selection/market timing" strategy. I saw a quote recently from the president of Morningstar,Inc. (the mutual fund rating service) where he said "not one fund ever has put together a successful record based on market timing." Yet, the grand majority of investors still ,in whole or in part, follow that path.

We , of course, take a quite different route . Markets work and most of our clients need the long term premium returns available in the market. That is why we provide discipline to stay the course through both good markets and the inevitable bad markets. As we have said before, not being in the market is somewhat akin to financial suicide on the installment plan...you lose more in purchasing power terms with each passing month.

Birthdays- Market bottoms and tops

Today marks the 12 month anniversary of the market bottom for the S&P 500 index. The 70% rise from March 9 last year puts this among the best 12 month timeframes since the index was created in the 1950's. In retrospect, given the overall fragility of the economy this is a feat worthy of celebration.

Of further interest, tomorrow will mark the 10 year anniversary of the Nasdaq index (tech bubble) peak. March 2000 began a 31 month long decline finally bottoming in October 2002 . The Nasdaq is now more than double that bottom but still far off the March 2000 peak.

Job 1...Not Wealth Creation

I have attended many professional meetings over the years where the focus comes down to how to assist clients with wealth creation. Well, on the white board in the conference room at present we have written "Job 1 is NOT wealth creation. Rather , it is helping clients avoid big mistakes". The degree to which we succeed largely depends on how "advisable" the client may be. The holistic and independent perspective we occupy provides us an advantage over most others.

We all are going to makes some mistakes but we must avoid large mistakes , particularly those that result from "big bets" on business and real estate ventures . These tend to be particularly harsh and can have totally wreck an otherwise sound financial plan. Wealth creation...long term wealth creation, is about discipline and diversification. Sometimes the best advice we can provide a client is three simple words "don't do that".

The Fragile Empire

a good piece recently from Prof Niall Ferguson (author of The Ascent of Money) here . He has an interesting, historic perspective . Towards the end of the piece he describes the role that perception plays in the outcome. Extreme? Perhaps...perhaps not.

The Retirement Conundrum

Here is a simple chart from Prof Greg Mankiw's blog (originally from the Economist) that quickly demonstrates the primary problem in funding retirement today. Over the past 40 years or so the period of time in retirement has roughly doubled in the U.S. All of this while savings have declined and lifestyles increased. Not exactly a formula for success.

What is required? Far higher savings both inside and outside retirement plans; postponing retirement until age 70 or so; avoiding huge costly mistakes (big bet business /real estate ventures, divorce ,etc.) ; and maintaining long term discipline.

Fannie & Freddie

Fannie Mae, Freddie Mac and FHA all continue to bleed tons of red ink. Fannie is the largest and recently tapped their unlimited government credit card for another $15.3 billion - the 10th straight quarterly loss. For the whole of 2009 the loss was $74.4 billion - about $200 million per day! These entities, chartered by the government to provide liquidity to the home mortgage market have become perhaps the single largest "time bomb" in the financial sector. The borrowings from the government are "off balance sheet" and therefore not considered part of the collective federal debt numbers that are repeated now with frequency. Yet , even a cursory glance at government bonds in the financial pages show these as government obligations. The companies have a huge negative net worth but guarantee over $5 trillion of mortgages. They have become corrupt political pawns that no one fully understands.

Healthcare Op-Ed in The State

The State paper (Columbia,SC) carried an opinion piece that I wrote (although they edited a good bit) on the possible unintended consequences of turning physicians into technicians following strict government mandated guidelines. It was timely because of the so called health care summit in Washington and the 21% Medicare fee cuts set to go into effect Monday for physicians. We converted the link here

All that Jazz

I came across an article headline yesterday by seasoned financial writer Jim Jubak "Ride this bull,but be ready to jump". The sub-heading was " the stocks you choose and when you buy can make a huge difference". Wow! Really? That is it? Hard to believe that even in the face of several decades of good evidence refuting the timing and stock selection thesis, it is still alive and well in the popular media. Why? Because they have space/time to fill .

Job One in maintaining discipline (the first "D" in the DADS -Discipline/Awareness of Costs/Diversification/Structure philosophy) is to block out the day to day noise. That is much harder today because of the myriad of media outlets pushing drivel out endlessly. Financial science provides powerful guidelines on how to have a successful investment experience. That said, returns are more dependent on investor behavior than stock or fund performance. Long term, disciplined investors have historically done much better than the market timers.

Birthplaces and Birthdays

The birthplace of Western Civilization, Greece, has been in the news lately over their huge debt problems . Today is also Presidents' Day- the ceremonial birthdays of Washington and Lincoln. By the standards of a country like Greece, we are still a young county perhaps just beginning to mature and facing the problems that go along with this process. The whole world is awash in debt and the strictures of heavy taxation have taken their toll in many of these countries such as Greece (along with Portugal, Spain, Ireland, Italy, England and others). Everyone on this side of the pond realizes the federal government here is rapidly approaching a debt crisis as well. My concern at present , however, is on many of the states where huge debt burdens are looming without any of the solutions available to the central government. For instance, California (which has an economy larger than Greece) is running a 22% budget deficit . A number of other states- Arizona, Florida, New Jersey and Illinois to name a few are facing similar issues. As property valuations decline and property tax revenues fall these budgets will be under yet additional stress.

All of this is a backdrop to what is broadly known as "crowding out" in the financial markets and generally creates lower growth for the economy and ultimately lower investment returns as well. Stay tuned.

Clean& Simple vs. Latest& Greatest

NY Times had a good piece this weekend on Professor Burton Malkiel's newest book " The Elements of Investing". The article says Malkiel advocates index funds as the "cleanest,simplest way to invest" and we would agree. He also makes the point that wealthy investors are often hurt by chasing the latest,greatest investment . God knows that is true.

That article quotes some detractors as well . There are many of course as only about 15% of stock investments are through index funds. That means 85% are still trying to out-select and out-time the market despite decades of contrary evidence.

Uncertainty and Outcomes

The underpinnings of our investment philosophy contain the premise that managing wealth need not rely on seers and soothsayers. We don't know what will happen today or tomorrow but have confidence about the longer term. We know that most investors need to remain invested in "risky" (the reason for the quotation marks is the real risk may actually reside in being outside the market ) assets all the time to accomplish their longer term goals. Regardless of what happens in the markets today or this week or this month, the conscious act of staying invested will likely prove to be more important than investment returns. Control the controllable and let the rest ride.

Stock Selection/Market Timing

It is axiomatic that many (probably most) investors believe in stock selection and market timing despite the dearth of evidence . In reality, substantial evidence exists that demonstrates the opposite but huge marketing (along with a good dash of human greed) keep the stock selection myth alive.

We often see individuals that have followed the selection/timing approach for many years before realizing its errancy. In periods like this investors have a tendency to spend inordinate amounts of time chasing performance . This is rarely productive.

We strive to render a couple of "simple" deliverables, diversification and consistency. That is the essence of our refreshing, independent perspective. Investment truths can be hard to find but we strive to communicate these to our clients every day.

The Markets Work...Still

This is a great interview of Professor Gene Fama- (sometimes known as the father of modern asset pricing theory and more particularly the Efficient Market Hypothesis ) in The New Yorker. There have been a number of articles in the financial press of late questioning the veracity of EMH and Fama does a good job fending off the critics.

Dr. Fama discusses the issue (and overused term) of "bubbles" in the early portion of the interview and provides a very interesting perspective. His main point is this term is now thrown around, ex ante, but plenty of investment was being made in these "bubbles" by plenty of smart people.

The best parts of the interview may be towards the end (page 7 in particular) where he repeats the main thesis of EMH- that you can't beat the market (I might add except by chance/luck). The very best dialogue is just after that question where he states" the expected return on stocks is just a price-the price people require to bear the market risk. Like any price,it should vary from time to time. " Vintage Fama and precisely right. Enjoy!

Mutual Fund Inflows

According to industry data, December marked the 5th straight month that mutual fund investors caused net outflows from equity mutual funds. This is interesting since the stock market has been on a tear since early March . Typically, individual investors chase the market as it rises but that does not appear to have been true in 2009. Equity based Exchange Traded Funds (ETF's) also saw net declines in the past year.

There are several ways to interpret this information but it shows how nervous investors continue to be about the markets. Assuming some of the net outflows went into bonds or bond funds (under the illusion that these are "safer" investments) these investors could be very surprised if/when rates rise and the value of these bonds/funds decline. Of course it is possible that much of this money is laying fallow on the sidelines waiting for something to bring them back. Time will tell. It is unfortunate , however, that many investors have capitulated and missed the 65-70% upswing over the past 10 months.

The Value of Perspective

In our work with individual clients we seek to render a "refreshing,independent perspective". It is far too easy today for investors to look at financial decisions in a vacuum without proper consideration of immediate and longer term often unintended consequences. Brokers push stocks, bonds and mutual funds while insurance salespeople peddle annuities . What is usually lacking is a holistic perspective along with a healthy dose of objectivity. That is what we do.

The trademarked consultive wealth management process that we engage clients in (Wealth Rx) is the result of over 28 years of experience . Real (meaning unbiased and holistic) financial planning changes lives . That is our value.

USA,Inc.

The center of the financial universe is no longer New York or London but Washington, D.C. Unprecedented intervention, regulation, taxes and command/control combine to equal a huge amount of uncertainty for individual investors. The overarching assumption is only government can solve our ills. the U.S. government will issue about $2 trillion of new debt this year about 20 times the amount of anticipated aggregate corporate debt for this year. Several states are in very poor financial condition because of the huge mis-match between "fixed" expenses and revenues. Some estimate that the underfunded public pension liabilities could be 4 or 5 times the often cited figure of $400-500 billion. All of this portends difficult decisions ahead .