Schwartz Financial Weekly Commentary 6/18/12

The Markets

When central bankers talk, investors listen.

World stock markets rallied last week on a Reuters report which said major central banks were prepared to take coordinated action if the results of the Greek elections led to market turmoil.

On top of that, later reports said the European Central Bank was hinting at an interest-rate cut and Britain jumped in with a pledge to flood its banks with cash if needed, according to Reuters. This global show of force suggests the world’s political leaders will do whatever they can to keep the financial markets stable.

Interestingly, last week’s economic news in the U.S. and Europe pointed to continued sluggish growth, according to MarketWatch. Normally, you might expect the stock market to drop on weak economic news as it could lead to lower corporate profits. However, investors seemed to interpret the “bad” news as “good” news for the market because the worse things get, the more likely government may step in with more stimulus.

There’s an old Wall Street adage that says, “Don’t fight the Fed.” This means when the Federal Reserve starts firing its bullets to stimulate the economy, it tends to spark a rally in the stock market – even if the economic news continues to look weak, according to MarketWatch. The Federal Reserve, along with other central banks, have already fired $6 trillion worth of bullets in the form of money printing since 2008 and, as a result, many of the world’s financial markets have risen sharply since the early 2009 lows, according to CNBC.

While further stimulus might support the financial markets in the short term, there are two things to consider:

1.   Additional stimulus is subject to the law of diminishing returns. Just like one chocolate chip cookie tastes great, but 10 may make you sick, too much stimulus may eventually backfire.

2.   Additional stimulus improves liquidity, but does not address the solvency issue. Europe and the U.S. still have a solvency problem of too much debt and this debt needs to either be written off or paid off. Solvency is the harder issue to solve.

Source: Hussman Funds, June 18, 2012

We’ll know the financial markets are “back to normal” when they can stand on their own without any hint of support from central banks. 

Data as of 6/15/12	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	1.3%	6.8%	5.6%	13.3%	-2.6%	2.6%
DJ Global ex US (Foreign Stocks)	2.0	-1.5	-17.4	3.5	-7.4	4.5
10-year Treasury Note (Yield Only)	1.6	N/A	3.0	3.7	5.2	4.9
Gold (per ounce)	3.2	3.4	6.4	20.4	20.0	17.7
DJ-UBS Commodity Index	0.0	-8.5	-20.2	0.7	-6.1	2.8
DJ Equity All REIT TR Index	0.4	10.9	13.1	30.1	0.9	10.1

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable.

IS THERE A BUBBLE IN THE BOND MARKET?

As you know, interest rates are near record lows and that hurts savers who were used to receiving relatively high and mostly risk-free income on their savings. For example, back in 2007, 10-year Treasuries yielded about 5 percent, according to the U.S. Department of the Treasury. Last week, the yield was down to about 1.6 percent. Since bond prices move inversely to yield, this means as yields moved to near record lows, bond prices moved to near record highs. And, now, some analysts are asking if bond prices have reached bubble territory, according to Bloomberg.

One of the most recent clear-cut cases of a bubble was the technology boom of the late 1990s. Unfortunately, that was followed by the technology stock bust of the early 2000s. You may recall that bubble was based on greed as investors clamored to get in on the internet frenzy and make some “easy” money.

But, today’s peak in the bond market is just the opposite. It’s based on fear, not greed. Due to economic uncertainty, investors have jumped into bonds to preserve their money and this fear-based demand for bonds has pushed prices up and yields down, according to Bloomberg.

So, can a bubble be based on fear or are bubbles just reserved for greed-driven extremes? In reality, we’re not as concerned about the definition of the bubble as we are about the possible unwinding of the bubble.

The technology bubble of the late 1990s and the strong bond market of today are great examples of two things that can drive markets to extremes – greed and fear. In the end, whether driven by greed or fear, extreme movements in the financial market tend to eventually reverse themselves and revert back to the mean. Our job as your financial advisor is to acknowledge these emotions, but not get caught up in them. We do our best to remain rationale and analytical in the face of greed and fear so we can do the best job possible in securing your financial future.     

Weekly Focus – Think About It…

“Individuals who cannot master their emotions are ill-suited to profit from the investment process.”

--Benjamin Graham, investment manager, author, Warren Buffett mentor

Value vs. Growth Investing (6/15/12)

Name	1-Week	YTD	4-Week	13-Week	1-Year	3-Year	5-Year
US Market	1.08	7.52	0.53	-4.41	7.24	16.09	-0.07
Large Cap	1.41	8.34	1.35	-3.31	9.74	15.07	-0.31
Large Core	1.54	8.40	1.19	-3.27	10.41	15.10	1.19
Large Growth	0.43	11.70	0.24	-4.03	14.59	17.03	1.93
Large Value	2.23	5.23	2.65	-2.65	4.19	13.07	-4.28
Mid Cap	0.16	5.43	-1.76	-7.48	0.73	18.60	0.16
Mid Core	-0.03	6.50	-1.55	-6.60	4.57	20.56	1.07
Mid Growth	0.29	6.04	-2.06	-7.94	-1.52	18.12	0.86
Mid Value	0.23	3.78	-1.69	-7.93	-0.92	16.99	-1.77
Small Cap	0.08	4.71	-1.57	-7.19	0.29	18.59	0.85
Small Core	-0.16	4.47	-2.07	-8.05	-2.62	17.03	-0.51
Small Growth	0.36	4.74	-1.25	-6.69	0.82	17.76	1.40
Small Value	0.07	4.93	-1.34	-6.73	2.93	21.01	1.39
US Core	1.13	7.78	0.45	-4.22	8.39	16.44	1.22
US Growth	0.40	10.06	-0.32	-5.01	10.20	17.40	1.74
US Value	1.67	4.93	1.47	-4.04	3.04	14.40	-3.36

©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

Office Notes:

A Careful Look at Beneficiaries

For most people the choice of beneficiaries is simple: Spouse first, then children. For others it may not be that simple—or not stay that simple. Let’s see what we can learn.

The most common cases requiring beneficiary designation are on wills and trusts and on financial accounts like qualified retirement plans, annuities, etc. Some provide for “transfer on death,” which accom­plishes essentially the same thing.

Most people assume that if they die without designating a beneficiary, assets automatically go to their spouse, and then to their children. This may prove true, but the determination can require a costly, unnecessary probate process, tying up money in court for many months. It’s better to avoid that result.

Events like divorce and remarriage, and having children from two or more marriages can compli­cate beneficiary designations.  If you remarry, do you want all your assets to go to the new spouse, and then to the spouse’s children—perhaps some of them biologically yours, others not—rather than or in addition to your children from the previous marriage? Do you want to include step­children? If you have not remarried, do you want to include your ex-spouse?

Moreover, two types of distributions to children exist: per capita and per stirpes.

Per capita—literally, “per head” in Latin—divides assets equally to each individual at the time of distri­bution. Unless otherwise specified, default distribution is almost always per capita.

Per stirpes—“per root”—divides equally by person at one generation and then maintains that division by branch in those person’s offspring. For instance, $10,000 divided per stirpes between a brother and sister would be $5,000 each if they are both alive at the time of distribution. But if they are both gone, and the brother had 10 children and the sister 2, his children would get $500 each and hers $2,500 each. If one of the 10 had died leaving 4 children, they would share $500, receiving $125 each.

The difference becomes important if you want to include grandchildren and even great-grand­children in an inheritance.

I hope this brief general survey is enough to get you thinking about your own beneficiary desig­nations.

If I can help you with updating or changing any of your financial arrangements or if you have questions, as always feel free to contact me.

Best regards,     

Michael L. Schwartz, RFC®, CWS®, CFS

P.S.  Please feel free to forward this commentary to family, friends, or colleagues.  If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added. 

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This information is provided for informational purposes only and is not a solicitation or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed.  Any opinions expressed herein are subject to change without notice.  An Index is a composite of securities that provides a performance benchmark.  Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment.  Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly.  Past performance is not a guarantee of future results.

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. 

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Past performance does not guarantee future results.

* You cannot invest directly in an index.

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