Schwartz Financial Weekly Commentary 3/17/14

 

Schwartz Financial Weekly Commentary

March 17, 2014

 

The Markets

Russian President Vladimir Putin sure has stirred up a hornets’ nest. Why is annexing the Crimean peninsula and, possibly, Ukraine such a priority for the Russian leader? When asked, Putin has indicated Russia’s military influence is necessary to protect Russian-speaking populations in Ukraine. However, The Economist has a different take on Putin’s actions:

 

“Russia’s economic stagnation has exposed the limits of Mr. Putin’s political and economic model, which relied on rising oil revenues and allowed him to buy the support of the elite and the acquiescence of the population at large. Real disposable incomes, which rose by 12 percent in 2007, on the eve of the war with Georgia, are forecast to rise by 3 percent this year. The Kremlin faced a choice between political liberalization and mobilization of the country by the means of war and repression. Mr. Putin has chosen the latter. Confrontation with the West is one of the main goals of Mr. Putin’s operations. Any sanctions imposed will allow him to blame Russia’s economic downturn on the West, though that may not placate the ruling class, with its cash stashed abroad in property and bank accounts.”

 

No matter what Mr. Putin’s motivation really is, he faces clear opposition from the international community. Last week, a United Nations Security Council resolution was introduced which stated Sunday’s referendum in Crimea – a vote to determine whether Crimea would remain part of Ukraine or join Russia – had no validity and could not form the basis for any alteration of the status of Crimea. The resolution was supported by 13 of 15 member nations. China abstained from voting and Russia vetoed the resolution.

 

Perhaps more importantly, the economic consequences of Russia’s actions have been quite harsh. According to Barron’s, the ruble has fallen to a record low against the U.S. dollar. As a result, the Russian central bank has spent $28 billion to support the currency and has increased short-term interest rates by 1.5 percentage points, pushing yields on 10-year bonds to nearly 9.75 percent. In addition, capital is fleeing Russian markets. During the past three weeks, the MICEX equity index, in U.S. dollar terms, has lost about one-third of its value relative to its 2013 high.

 

Russia’s failure to back away from Crimea unsettled U.S. markets last week and gave the Federal Reserve pause when its holdings of U.S. Treasury securities for foreign and official accounts fell by more than $100 billion (for the week ended Wednesday). Since Russia had threatened to sell its U.S. Treasury bonds if sanctions were imposed, some believe the drop was Russian muscle-flexing. Others suggest Russia hasn’t divested itself of its U.S. holdings; it simply moved them outside of the United States so the assets wouldn’t be vulnerable to sanctions.

 

Data as of 3/14/14	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	-2.0%	-0.4%	17.8%	12.4%	19.6%	5.2%
10-year Treasury Note (Yield Only)	2.6	NA	2.0	3.4	3.0	3.8
Gold (per ounce)	3.7	15.3	-12.7	-0.9	8.5	13.3
DJ-UBS Commodity Index	-0.9	7.3	-2.4	-6.1	4.7	-0.9
DJ Equity All REIT TR Index	0.0	7.9	3.7	11.1	29.3	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.

 

How quickly do we adopt new technology? More quickly all the time, it seems. MIT Technology Review looked at the time it took for nine different technologies to fully saturate the U.S. market. They started back in 1876 and looked through 2010, breaking the process into three phases:

 

• Traction: The period from consumer availability to10 percent market penetration
• Maturity: The period from 10 percent to 40 percent market penetration
• Saturation: The period from 40 percent to 75 percent market penetration (the point at which new demand typically slows)

 

Some innovations, like the original telephone and electricity, took time to saturate markets. Alexander Graham Bell’s patented telephone took 25 years to gain traction, another 39 years to reach maturity, and almost a full century before the market for landlines was saturated. Electricity also was slow to reach saturation. Both technologies were hampered by infrastructure issues, like running enough cable and wire to provide services to businesses and homes.

 

Newer technologies have been and are being adopted far more rapidly. Television took more than a decade to gain traction, but progressed through maturity to saturation in less than a decade. The mobile phone caught on a lot faster than landlines, becoming mainstream in less than half the time. That’s nothing compared to smart phones which took about 10 years to reach maturity. Tablets appear to be catching on even faster. In fact, in a separate 2012 article, MIT Technology Review pointed out, “Mobile devices outsold PCs last year for the first time, and top smart-phone apps need little more than a year to win the kind of audience it used to take technologies decades to reach.”

 

The mobile revolution is progressing rapidly, and some businesses still need to prepare. According to Forrester Research, as reported via CSO.com, about 15 percent of employees are accessing sensitive data that may include client information, non-public financial data, intellectual property, or corporate strategies from their own devices rather than those provided by their employers. As a result, many firms need a more scrupulous identity management strategy, not to mention a chief mobility officer.

 

Weekly Focus – Think About It

 

“Success is not final, failure is not fatal: it is the courage to continue that counts.”

--Winston Churchill, British Prime Minister

Value vs. Growth Investing (3/14/14)

Name	1-Week	YTD	4-Week	13-Week	1-Year	3-Year	5-Year
US Market	-1.89	0.55	0.58	4.81	21.10	15.13	22.87
Large Cap	-1.93	-0.10	0.18	4.04	20.06	14.91	21.11
Large Core	-1.58	0.49	1.01	4.15	20.93	16.79	22.55
Large Growth	-2.25	0.72	-0.33	5.25	24.97	16.21	22.37
Large Value	-1.94	-1.58	-0.09	2.62	14.45	11.77	18.40
Mid Cap	-1.82	2.58	1.38	7.11	23.99	15.74	27.28
Mid Core	-2.08	3.16	1.09	7.82	21.61	16.34	27.68
Mid Growth	-1.90	3.23	1.01	7.81	24.62	14.24	25.39
Mid Value	-1.46	1.30	2.08	5.65	25.60	16.53	28.86
Small Cap	-1.74	1.60	2.60	6.46	23.88	15.37	28.35
Small Core	-1.44	2.51	3.49	6.99	23.67	14.32	27.70
Small Growth	-2.54	0.54	1.97	5.92	27.22	15.88	26.89
Small Value	-1.24	1.74	2.33	6.37	20.93	15.98	30.61
US Core	-1.67	1.15	1.20	5.06	21.17	16.56	23.96
US Growth	-2.19	1.22	0.09	5.82	25.03	15.80	23.33
US Value	-1.80	-0.78	0.51	3.48	17.14	13.02	21.29

 ©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:

 

Happy St. Patrick’s Day!!!

 

Happy St. Patrick’s Day! As you may know, St. Patrick’s Day can mean many things to many different people. At its heart, the day is to honor the death of Saint Patrick, one of the most important figures in Irish history. More recently, we’ve come to associate the holiday with a celebration of Irish culture in general. But while the day has taken on new traditions over the centuries, one thing that hasn’t changed is how fun it can be. That’s especially true for Irish-Americans, who even long ago wouldn’t hesitate to drop everything to revel in their heritage.

 

One of the most notable examples of this took place in 1863, during the darkest days of the Civil War. The Union Army had just suffered one of its most horrific defeats at the Battle of Fredericksburg. Following the battle, the soldiers spent a month enduring a horrendous winter in the increasingly cold and muddy hills of the Virginia countryside. Morale was at its lowest point.

 

Abraham Lincoln himself wrote, “If there is a worse place than hell, I am in it.”

 

But a man named General Thomas Meagher had a plan to raise the army’s spirits. Meagher had personally lost almost one thousand men during the aforementioned battle, and was also nursing several injuries. He probably felt as low and depressed as anyone, but he still had one place to turn to for strength: his Irish heritage.  Meagher was born in Waterford City, Ireland, and had been a well-known Irish nationalist in the 1840s. He was captured by English authorities and sentenced to death, only to be transported to a penal colony near Australia. His imprisonment was meant to last for life, but Meagher had other plans. He escaped in 1852 and fled to the United States. When the Civil War began, he had only lived in his adopted country for nine years. But nine years was enough. He promptly volunteered for the Union army, channeling his fervent Irish nationalism into American patriotism. Before long, Meagher rose to the rank of Brigadier General.  His command was a group of other Irish Americans known as the Irish Brigade.

 

After such a devastating defeat, Meagher felt that “the morale of his troops would not be injured by a little wholesome amusement.”1 To raise their spirits and provide some distraction from the horrors of war, Meagher decided it was high time to celebrate—you guessed it—Saint Patrick’s Day. So on March 17th, 1863, that’s exactly what he did.

 

It was one of the most famous St. Patrick’s Day celebrations in American history, and may have contributed to the way we see the holiday now—as a time for good drink and laughter. Meagher and his Irish Brigade made sure to do it properly. They erected stands for onlookers, built race courses, and brought out the whisky. The area was festooned with both Irish and American flags.

 

Over 20,000 men from all over the Army came to watch or participate in the festivities. There was horse racing, foot racing, and wheelbarrow-racing, with the winners all set to receive a $5 prize. There were wrestling matches, music, and even a competition to see who could capture a greased pig. But the biggest event was an enormous “steeplechase” that turned into what some onlookers described as a “stampede,” with hundreds, maybe even thousands of soldiers participating.

 

It was a day those soldiers, previously so tired and spent, would never forget. All thanks to the Irish.  The celebrations were widely covered by newspapers all around the country and became famous for a long-time after. You can still read an article published by the New York Times® just days after the event.  Saint Patrick’s Day isn’t just a day for Catholics. It’s not just a day for the Irish. It’s a day for people everywhere to forget their troubles and enjoy themselves … even if, as it was for those soldiers, only for a short while.

 

I hope you and yours have a wonderful Saint Patrick’s Day, full of fun and laughter. (But you have my permission to forego anything that involves a greased pig.)

 

Happy St. Patrick’s Day!

 

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, a registered principal offering securities and advisory services through Independent Financial Group, LLC., A Registered Broker/Dealer and Registered Investment Advisor,  Member FINRA-SIPC  Schwartz Financial and Independent Financial Group are unaffiliated entities.  

 

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.

 

* Consult your financial professional before making any investment decision.

 

* To unsubscribe from our “market commentary” please reply to this e-mail with    “Unsubscribe” in the subject line, or write us at “mike@schwartzfinancial.com”.