Schwartz Financial Weekly Commentary

September 6, 2011

The Markets

Two four-letter words -- “debt” and “jobs” -- are hanging over the economy like a noose that keeps tightening. 

This is not news; we’ve known for several years that debt is too high and jobs too scarce. Unfortunately, they’ve become intractable problems with no solution in sight.

Last week, the government reported the U.S. economy had a net gain of zero new jobs in August. On top of that, the unemployment rate remained stuck at a disappointingly high 9.1 percent and the number of unemployed people rose to 14 million -- including more than 6 million workers who have been out of work for 27 weeks or longer, according to MarketWatch.

With jobs hard to come by, consumer confidence is suffering, too. The Conference Board reported its consumer-confidence index for August fell to the lowest level since April 2009, according to MarketWatch.

The weak economy and uncertain outlook have led to a dramatic decline in interest rates. The yield on the 10-year Treasury dropped to 2.0 percent last week and the 30-year Treasury yielded just 3.3 percent, according to Bloomberg. This decline in longer-term interest rates is, “a sign of heightened fears about a recession in the U.S. and more actions from the Fed,” according to The Wall Street Journal.

When you put the pieces of the economic puzzle together, it starts to paint a picture that a new recession may be looming. While we’re not in the business of making projections like that, we do monitor the economy and, right now, it’s sending unsettling signals.

Whether a new recession is coming or not, we continue to do our job of helping you reach your financial goals regardless of what the market and economy may put in our way.

Data as of 9/2/11	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	-0.2%	-6.7%	6.3%	-2.8%	-2.2%	0.4%
DJ Global ex US (Foreign Stocks)	2.9	-9.9	3.1	-2.6	-2.0	5.0
10-year Treasury Note (Yield Only)	2.0	N/A	2.6	3.8	4.8	5.0
Gold (per ounce)	4.9	33.0	50.2	32.9	24.5	21.2
DJ-UBS Commodity Index	0.9	0.1	21.7	-4.0	-1.0	4.8
DJ Equity All REIT TR Index	0.5	0.6	7.9	0.0	-0.5	9.6

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 or not available.

THERE’S THIS PESKY LITTLE THING CALLED THE P/E RATIO and changes in this number could have a big effect on whether stock prices rise or fall. Normally, stock prices are driven by earnings. As earnings rise, stock prices tend to rise and vice versa. Granted, it’s not a straight-line relationship. Instead, it tends to come in sync over time -- even though “over time” could mean several years.

We now have some great examples of how changes in the P/E ratio can dramatically affect the returns on certain stocks.

First, a definition. The P/E ratio is simply the price of a stock divided by its previous 12 months earnings per share. For example, if XYZ Company earned $1 per share in the past 12 months and its stock is selling for $15 per share, then it has a P/E ratio of 15.

For a real example, let’s look at Microsoft. Ten years ago, on August 23, 2001, Microsoft stock traded at $26.60 per share. Ten years later, on August 23, 2011, Microsoft stock traded at $24.72 per share. As you can see, the stock price actually declined over that 10-year period. However, during those 10 years, Microsoft’s earnings per share actually skyrocketed by 193 percent, according to a September 3 Barron’s article.

The obvious question is, “How can Microsoft’s earnings nearly triple in 10 years while the stock price drops during that period?” The answer is… the P/E ratio declined dramatically.

The next obvious question is, “What causes the P/E ratio to change?” Ah, that’s the million-dollar question. Barron’s pointed out that back in 2001, companies like Microsoft were viewed as exciting growth companies and investors were willing to pay a higher than normal premium for each dollar of earnings. Flash forward 10 years and Microsoft did indeed grow its earnings dramatically. But today, Microsoft is viewed more as a “steady Eddie” and the multiple on each dollar of earnings that investors are willing to pay is less, hence, the slight decline in its stock price over the past 10 years.

There are a couple lessons here for investors.

First, when you buy a stock, it’s important to know the P/E ratio. If it’s higher than the market average, then you need to be extra careful. You could run into a Microsoft situation where the earnings actually rise, but the stock price doesn’t. 

Second, buying a stock with a low P/E ratio is not necessarily a bad thing. Using Microsoft again as an example, its P/E ratio is currently low relative to 10 years ago. If the ratio starts to expand, then the stock price could actually rise faster than its earnings over the next few years. Microsoft is mentioned as an example and not meant as a buy or sell recommendation.

Nobody said investing was easy and figuring out the direction of a stock’s P/E ratio is one reason why.

Weekly Focus – Remembering 9/11

“Time is passing. Yet, for the United States of America, there will be no forgetting September the 11th. We will remember every rescuer who died in honor. We will remember every family that lives in grief. We will remember the fire and ash, the last phone calls, the funerals of the children.” --President George W. Bush

Value vs. Growth Investing (9/2/11)

Name	1-Week	YTD	4-Week	13-Week	1-Year	3-Year	5-Year
US Market	-0.18	-5.65	-6.58	-10.80	10.60	-0.06	0.56
Large Cap	-0.25	-5.00	-5.98	-9.45	10.30	-0.93	-0.10
Large Core	-0.28	-5.26	-5.07	-9.60	8.67	-1.26	1.21
Large Growth	0.07	-3.94	-5.93	-7.13	16.04	0.93	1.92
Large Value	-0.56	-6.19	-7.18	-11.91	6.49	-2.47	-3.67
Mid Cap	0.29	-6.43	-7.66	-13.82	11.40	2.02	2.19
Mid Core	0.05	-6.41	-7.95	-13.70	11.98	2.37	2.49
Mid Growth	0.62	-3.80	-7.51	-12.94	17.28	2.14	3.96
Mid Value	0.21	-9.13	-7.48	-14.85	5.18	1.42	-0.17
Small Cap	-0.79	-10.52	-9.94	-15.92	10.63	1.85	1.83
Small Core	-1.02	-10.71	-10.33	-16.26	10.80	1.10	1.00
Small Growth	-0.55	-8.46	-9.37	-15.58	15.97	1.38	2.77
Small Value	-0.78	-12.40	-10.07	-15.98	5.10	3.00	1.39
US Core	-0.27	-5.82	-5.96	-10.85	9.57	-0.18	1.60
US Growth	0.14	-4.11	-6.48	-8.94	16.49	1.29	2.46
US Value	-0.41	-7.26	-7.45	-12.82	6.09	-1.32	-2.60

©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:

Ten Years This Week

This September 11^th marks the solemn 10-year anniversary of that fateful day when terrorist acts changed this country forever.

September 11, 2001 began as a bright morning in many regions of the United States. But suddenly that was all shattered as a plane crashed into the World Trade Center. Everyone seems to remember where they were when they heard this news. As tragic events continued to unfold that day, it became more and more surreal, as if time was standing still. The days that followed seem to be etched into our consciousness, and its effects are still being felt across the globe.

This day has since been referred to as “The Day the United States once again became United,”⁽¹⁾ and “The Day the World Changed.”⁽²⁾ Americans truly banded together and we seemed to become one in purpose to help rescue and comfort. Many of the first responders, our heros, became victims as well. Heartfelt sentiments and condolences were sent from many nations around the world.

On September 11, 2011, a decade later, the world will be watching as the National September 11 Memorial Plaza opens on the site of the former World Trade Center complex. I thought it would be nice to share what I have learned about this memorial.

The memorial will be dedicated on September 11, 2011, and open to the public on September 12, 2011. This memorial features two enormous waterfalls and reflecting pools, each about an acre in size. The names of the nearly 3,000 victims of the September 11, 2001, and February 26, 1993 terrorist attacks will be inscribed on bronze panels lining the two pools. It will be a special place for remembrance and reflection. The surrounding plaza will be filled with oak trees, and one callery pear tree. This tree is known as the Survivor Tree, which was nursed back to health after surviving the 9/11 attacks.

The 9/11 Memorial Museum is being built in this plaza also, and will open a year later in September 2012. The entrance to the Memorial Museum will be a large pavilion with a glass atrium housing two enormous tridents within its glass atrium. The Twin Tower “tridents” (two beams each crowned with three prongs) are artifacts from the steel façade of the original 1 WTC, also known as the North Tower. Even though the pavilion will be inaccessible to visitors this year, these majestic tridents will be visible from the plaza at the anniversary commemoration.

The museum will provide visitors with the opportunity to learn about the men, women, and children who died. The Museum plan calls for visitors to enter the exhibition along a corridor in which portrait photographs of the nearly 3,000 victims form a “Wall of Faces,” intended to communicate the scale of human loss.

Historic rebuilding will also be taking place in the plaza of four new towers rising just beyond the northwest and southeast corners. Millions of visitors are expected during this first year, and free visitor passes are available online and by phone.

As you reflect with your loved ones on this anniversary, let’s remember to always be united as a nation, and a world, and never forget … never.

Best regards,     

Michael L. Schwartz, RFC®, CWS®, CFS

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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.

* Consult your financial professional before making any investment decision.

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