Schwartz Financial Weekly Commentary 7/16/12

The Markets

Should the Federal Reserve raise interest rates to fire up the economy?

For the past few years, the Fed has been on a mission to lower rates as much as possible. The thinking is lower rates will spur economic growth by making it less costly for businesses and consumers to borrow money.

Unfortunately, it hasn’t quite worked as planned.

Short-term interest rates are near zero and 30-year mortgages are at a record low, yet the economy is still just muddling along, according to Barron’s. Now, some investment managers are saying the Fed should reverse course and raise interest rates.

Last week, prominent money manager David Einhorn went on CNBC and said, “I think having very low zero rates is depressing to people. I think it deprives savers of reasonable incomes, the ability to forecast a reasonable income, and it cuts down on consumption.” He went on to say low rates drive up food and oil prices and lower standards of living.

Folks relying on a stream of income from their fixed investments can probably relate very well to what Einhorn is talking about. As recently as July 2007, $100,000 worth of 1-year Treasuries would have generated about $5,000 of annual income (a 5 percent yield), according to data from the Federal Reserve. Now, it would generate only about $200 (a 0.2 percent yield).

The Fed may be in a classic Catch-22, according to CNBC. With sluggish economic growth, it’s certainly hard to justify a rate hike, yet, low rates are increasingly ineffective. CNBC says a growing number of analysts suggest the best course of action is to allow “the cash-rich private sector to sort out its own problems without the government's interference.” However, they acknowledge it “likely would be painful, but could be the only sustainable path to recovery.”

With the Fed on the record as saying they plan “to keep interest rates at their historically low range of 0 to 0.25 percent through late 2014,” investors shouldn’t expect the Fed to raise rates any time soon, according to Fox Business. Only time will tell if this low rate strategy is the right medicine for the economy.

Data as of 7/13/12	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	0.2%	7.9%	3.1%	14.6%	-2.7%	4.0%
DJ Global ex US (Foreign Stocks)	-1.1	-0.2	-17.4	5.7	-7.9	5.2
10-year Treasury Note (Yield Only)	1.5	N/A	2.9	3.4	5.1	4.6
Gold (per ounce)	0.5	1.3	1.1	20.7	19.1	17.5
DJ-UBS Commodity Index	2.5	-0.2	-14.8	7.2	-4.3	3.5
DJ Equity All REIT TR Index	0.9	17.3	12.7	34.8	2.3	11.6

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.

HOW DO YOU TURN A PENNY INTO 1.25 BILLION DOLLARS? Sounds like a magic trick, right? Well, there’s really no magic other than the law of large numbers.

Here’s how it works and how it may benefit our economy.

A report from the Federal Highway Administration shows Americans traveled approximately 2.94 trillion miles in motor vehicles for the 12 months ending April 2012. Now, when you figure how many gallons of gas that burns up, you get a really big number! Moody’s Economy.com chief economist Mark Zandi has done the math and, by his reckoning, each penny change in the price of a gallon of gas equates to, you guessed it, about $1.25 billion over the course of a year, as reported by CNBC.

With the wild swings we’ve seen in the price of gas, the savings – or cost – can add up quickly. A recent check with AAA showed the average price for a gallon of regular gas dropped by about $.25 over the past year. So, multiply $1.25 billion by 25 and you get, to quote Carl Sagan, “billions upon billions” of additional coin in consumer’s pockets. And, that coin could fuel further growth in consumer spending. 

You’ve heard the old saying, “A penny saved is a penny earned.” Today, a few pennies saved on gas can add up to billions!

Weekly Focus – Did You Know…

There’s about $1.1 trillion of US dollars in circulation today – an all-time record high. However, most of it is not “floating” around in everyday transactions. About 75 percent of the $1.1 trillion is in $100 bills which don’t circulate much. On top of that, about 50 to 66 percent of U.S. cash is held abroad. Despite the proliferation of credit cards and debit cards, we still seem a long way away from a cashless society.

Source: CNNMoney

 

Value vs. Growth Investing (7/13/12)

Name	1-Week	YTD	4-Week	13-Week	1-Year	3-Year	5-Year
US Market	0.01	9.01	3.50	-0.77	3.97	17.63	-0.09
Large Cap	0.31	9.67	3.34	-0.13	6.45	16.35	-0.36
Large Core	0.62	10.32	4.00	0.52	8.63	16.22	1.25
Large Growth	-0.10	13.26	3.19	-2.26	8.94	18.15	1.78
Large Value	0.45	5.78	2.79	1.33	1.67	14.71	-4.34
Mid Cap	-0.75	6.81	3.38	-3.28	-2.59	20.69	0.04
Mid Core	-0.71	7.48	2.89	-2.44	1.11	22.45	0.96
Mid Growth	-0.83	7.71	4.09	-4.50	-6.09	20.66	0.51
Mid Value	-0.71	5.25	3.15	-3.03	-2.84	18.84	-1.65
Small Cap	-0.96	8.22	5.62	-0.29	-2.63	21.25	1.39
Small Core	-0.32	8.17	5.85	-0.75	-5.40	20.24	0.02
Small Growth	-1.28	8.14	5.77	-0.67	-3.06	19.79	1.70
Small Value	-1.28	8.35	5.26	0.57	0.89	23.79	2.20
US Core	0.30	9.64	3.92	-0.12	6.22	17.85	1.28
US Growth	-0.32	11.76	3.53	-2.61	4.91	18.87	1.57
US Value	0.09	5.85	3.03	0.38	0.66	16.16	-3.33

©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:

Be Kinder than Necessary

A friend of mine shared this story with me. I found it so touching that I wanted to pass it along.

It is frequently copied on the Internet as anonymous. If you happen to know the author, please call or write me. I’d really like to give credit where it’s due!

Just up the road from my home is a field with two horses in it.

From a distance, each horse looks like any other horse. But if you stop your car, or are walking by, you will notice something quite amazing ...

Looking into the eyes of one horse will disclose that he is blind. His owner has chosen not to have him put down, but has made a good home for him. This alone is amazing.

If you stand nearby and listen, you will hear the sound of a bell. Looking around for the source of the sound, you will see that it comes from the smaller horse in the field.

Attached to the horse’s halter is a small bell. It lets the blind friend know where the other horse is, so he can follow.

As you stand and watch these two friends, you’ll see that the horse with the bell is always checking on the blind horse, and that the blind horse will listen for the bell and then slowly walk to where the other horse is—trusting that he will not be led astray.

When the horse with the bell returns to the shelter of the barn each evening, it stops occa­sionally and looks back, making sure that the blind friend isn’t too far behind to hear the bell.

Sometimes in life we are the blind horse being guided by the ringing bell. At other times, we are the guide horse helping others find their way.

Whenever I have the opportunity in your life to be your guide horse, I hope you listen for my bell. I’ll certainly listen for yours when the situation is reversed.

And remember … be kinder than necessary—everyone you meet is fighting some kind of battle. You don’t want to give aid and comfort to their enemy.

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. 

Michael L. Schwartz, RFC®, CWS®, CFS, offers securities through First Allied Securities, Inc., A Registered Broker/Dealer,  Member FINRA-SIPC.  Advisory Services offered through First Allied Advisory Services, A Registered Investment Advisor.

Schwartz Financial Service is not an affiliate of First Allied Securities, Inc.

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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