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Schwartz Financial Weekly Commentary 12/23/13

The Markets

To borrow a word from the legendary Gomer Pyle: G-o-l-l-y!

In 1955, just five years before The Andy Griffith Show became a big hit, William McChesney Martin, Jr., then Chairman of the Board of Governors of the Federal Reserve System, made an often-quoted speech in which he said, “The Federal Reserve, as one writer put it, after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”

Last week, Fed Chairman Ben Bernanke didn’t confiscate the punch. He simply modified the recipe by adding a lower proof of spirits when he announced the Fed would begin to taper its bond buying program. Starting in January, the Fed will spend $10 billion a month less on bonds (the amount will be evenly split between Treasuries and mortgage-backed securities). Taking away the punch bowl would have entailed ending all bond purchases and increasing the discount rate. The Fed has indicated it will not change the discount rate for some time.

After an initial dip on the news of impending tapering, many markets around the world moved higher. The Dow Jones Industrial Average and the Standard & Poor’s 500 Indices pushed to record highs. Britain’s FTSE 100, Germany's Dax, and France's CAC indices all pushed higher on Wednesday, as did Japan’s Nikkei 225 Index. In the bond market, U.S. Treasury yields rose and then fell on the day of the announcement.

The beginning of the end of quantitative easing wasn’t the only news that drove markets higher last week. On Friday, the U.S. Commerce Department reported that U.S. gross domestic product (GDP) – a measure of our nation’s productivity – accelerated faster than originally thought during the third quarter. The reasons for the upward revision were increased consumer and business spending.

Life may have been simpler in fictional Mayberry R.F.D. – and they certainly had fewer choices as consumers – but economics and the responsibilities of the Federal Reserve weren’t any less complicated.   

Data as of 12/20/13	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	2.4%	27.5%	26.0%	13.4%	15.8%	5.2%
10-year Treasury Note (Yield Only)	2.9	NA	1.8	3.4	2.1	4.2
Gold (per ounce)	-3.0	-29.4	-27.6	-4.7	7.1	11.3
DJ-UBS Commodity Index	1.2	-8.3	-8.2	-6.7	2.9	-0.5
DJ Equity All REIT TR Index	1.9	2.5	2.6	10.7	18.0	8.6

Notes: S&P 500, 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.

in the EARLY DAYS OF BANKING IN THE wild west, there weren’t too many rules about what banks could and couldn’t do. According to The New York Times, in the early1900s:

“…Commercial banks established security affiliates that floated bond issues and underwrote corporate stock issues. (In underwriting, a bank guarantees to furnish a definite sum of money by a definite date to a business or government entity in return for an issue of bonds or stock.) The expansion of commercial banks into securities underwriting was substantial until the 1929 stock market crash and the subsequent Depression.”

After the crash, thousands of banks failed.

In 1933, Congress passed the Glass-Steagall Act (a.k.a. the Banking Act). The Act defined the difference between commercial and investment banking activities. Commercial banks primarily took deposits and made loans while investment banks helped companies issue stock and invested in securities. The Act prohibited commercial banks from participating in investment banking activities. It also created the Federal Deposit Insurance Corporation (FDIC) whose job was to protect commercial banks’ clients’ deposits up to a certain amount.

In 1999, after years of financial prosperity, Congress changed its mind and passed the Gramm-Leach-Bliley Act (GLBA) which effectively repealed the parts of Glass-Steagall that prevented commercial banks from participating in investment banking activities. Some believe the change in rules played a significant role in the global credit crisis during which commercial banks suffered billions of dollars in losses because of their investment banking activities.

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in response to the global credit crisis and subsequent government bailout. The 953-page Volcker Rule is part of the Act and was passed by regulators in December of this year. It establishes a set of rules that are intended to prevent FDIC-insured banks from making risky bets with customers’ deposits. In particular, banks that rely on taxpayer guarantees are largely prohibited from proprietary trading and hedge fund investments. We’ll know more when regulators decide how the rules will apply and who will enforce them.

George Bernard Shaw said, “We are made wise not by the recollection of our past, but by the responsibility for our future.” Let’s hope when it comes to U.S. banking law, he proves to be right.

Weekly Focus – Think About It

“As a child my family's menu consisted of two choices: take it or leave it.”

--Buddy Hackett, American comedian

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

Name	1-Week	YTD	4-Week	13-Week	1-Year	3-Year	5-Year
US Market	2.48	30.88	2.50	6.79	29.46	15.96	18.79
Large Cap	2.39	29.59	2.24	6.92	28.06	15.92	17.33
Large Core	2.21	32.64	1.00	5.48	30.45	17.73	17.65
Large Growth	2.66	30.13	4.21	9.13	29.18	16.04	20.70
Large Value	2.27	26.45	1.43	6.07	24.93	13.98	13.90
Mid Cap	2.62	33.95	3.05	6.22	32.67	16.09	22.54
Mid Core	3.00	30.85	3.11	6.87	29.61	16.81	23.21
Mid Growth	2.62	31.75	3.84	4.43	30.72	14.08	22.52
Mid Value	2.25	39.39	2.17	7.41	37.80	17.29	21.80
Small Cap	3.03	35.61	3.47	7.12	34.90	15.65	22.81
Small Core	2.64	34.06	3.40	7.35	33.93	14.48	22.35
Small Growth	3.77	39.73	3.31	5.54	39.24	16.37	23.09
Small Value	2.62	33.20	3.70	8.66	31.69	16.15	22.95
US Core	2.40	32.32	1.60	5.89	30.47	17.35	19.11
US Growth	2.73	31.03	4.07	7.88	30.09	15.69	21.27
US Value	2.29	29.51	1.75	6.54	27.98	14.80	16.10

 ©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:

Dickens Saves Christmas

Have you ever wondered where we get our Christmas traditions?  Why do we put up a tree? Why do we sing Christmas carols?  Why do we give gifts?  Most of these answers lay in one of the most popular books of all time, A Christmas Carol, by Charles Dickens. 

Most people aren’t aware that Christmas, as we know it, was almost extinct.  For a period of about 15 years, from 1645 to 1660, the Puritans successfully passed laws that literally banned Christmas in England.  Mince pies, mistletoe, holly, and other Christmas staples were outlawed along with Christmas caroling and public celebrations.  This sentiment extended across the Atlantic as well.  Many of our country’s first settlements frowned upon excessive celebration at any time of year, and especially at Christmas. Celebrations returned in England after the ban was lifted, but the excitement surrounding the holiday had declined.

For the next century the holiday’s popularity steadily declined.  By the 1800s only the wealthiest celebrated Christmas.  However, most were not able to celebrate.  The world was in the beginning of the industrial revolution, workers worked long hours for low pay, and since most employers wouldn’t sacrifice a day of work, most people just didn’t have time.  Additionally, the overall cost of hosting a celebration full of feasting and gift giving was just too expensive. More and more frequently, the only jobs to be found were in the cities.  Many people left their traditional country lifestyles and flocked to the cities, leaving many of their traditions behind.

In October, 1843, Charles Dickens was visiting his sister in Manchester. Dickens was touched by the spirit and enthusiasm of his sickly nephew, who is presumed to be the inspiration for Tiny Tim. Dickens was struck with the idea for the story and almost immediately went to work.  He wrote at a feverish pace and finished the entire story in six weeks.  Three weeks later, on December 19, the book was published. The book was an instant success. All 6,000 copies of the original printing were sold in four days.  Within six weeks, the story had been adapted for the stage and shows were already in progress.  The show ran consecutively for over forty nights before transferring to New York’s Park Theater.  By May, 1844, the seventh edition of the book had already sold out.

The story was both a literary and a social success.  It’s credited with playing a major role in reviving (and reinventing) the Christmas holiday.  Without, A Christmas Carol, we wouldn’t have the phrases “Bah! Humbug!” or even “Scrooge.”  Dickens took outdated Christmas traditions and infused them into his tale, making them feel as if they had always been a part of our Christmas traditions.  For example, caroling was not common at the time, but Dickens added this activity to the story, as if it were normal, and common to meet a traveling choir during the holiday season.  It wasn’t. 

While less obvious, but perhaps more significant, Dickens’ portrayal of a Christmas celebration was vastly different from the norm of his time.  Typical celebrations during the era were normally community celebrations in churches, taverns, and town halls. Dickens’ representation was much different.  He shows the Cratchits gathered together, celebrating as a family. This is perhaps the single biggest change that Dickens had on Christmas traditions, turning the holiday into a small, intimate, and private family affair.  This change allowed for every family to celebrate according to their means.  If they were wealthy they could hold a feast.  If they were poor they could gather together, sing songs, and share stories, while enjoying the holiday in accordance with their means.

It’s probably incomprehensible for most of us to think that the holiday we know almost became a footnote in the history books.  Were it not for the influence of Charles Dickens, the celebrations might be vastly different, if they existed at all.  For many of you, I expect Christmas is one of your favorite times of year, and I can’t imagine your life without it.

God bless us, everyone.

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. 

Michael L. Schwartz, RFC®, CWS®, CFS, offers securities and advisory services through Independent Financial Group, LLC., A Registered Broker/Dealer,  Member FINRA-SIPC. 

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.

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