The Markets
The announcement last week that Hostess Brands, the maker of
iconic treats such as Twinkies and Ding Dongs, was going out of business
highlights the need for investors to have a solid risk management strategy.
As you contemplate making an investment, here are three
things important to know:
1.
The rationale for the investment and
the research behind it.
2.
What constitutes “fair value” for
the investment.
3.
What would trigger you to sell the investment.
Number three above is where many folks trip up – they don’t have a sell discipline.
Although Hostess Brands long ago ceased being a publically traded company, it’s
an example of how a company with well-known brands can run into trouble and fail.
To avoid riding an investment all the way down to zero, it’s critical to have a
system in place to monitor your investments and hit the sell button if there’s
a material change that makes the original investment thesis no longer valid.
Sometimes a risk management strategy causes you to sell an
investment only to see it turn around and go right back up. While frustrating,
that’s better than not having any sell discipline in place and holding on to an
investment that drops dramatically and never comes back.
Viewed another way, it’s better to take a small occasional
loss than to hang on to everything forever and be exposed to a potential big
loss down the road on your irreplaceable capital.
Risk management is back in the forefront as U.S. stocks
continued their post-election slide last week. And, while we would all prefer
to see the market go up, we remain focused on our risk management discipline as
a key component of our overall portfolio management process.
Data as of 11/16/12
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard
& Poor's 500 (Domestic Stocks)
|
-1.5%
|
8.1%
|
9.9%
|
7.0%
|
-1.4%
|
4.2%
|
|
DJ
Global ex US (Foreign Stocks)
|
-2.1
|
4.5
|
2.2
|
-1.6
|
-6.8
|
6.6
|
|
10-year
Treasury Note (Yield Only)
|
1.6
|
N/A
|
2.0
|
3.3
|
4.2
|
4.0
|
|
Gold
(per ounce)
|
-1.4
|
8.8
|
-2.4
|
14.9
|
16.8
|
18.3
|
|
DJ-UBS
Commodity Index
|
0.1
|
0.2
|
-5.5
|
1.2
|
-5.0
|
3.1
|
|
DJ
Equity All REIT TR Index
|
-2.0
|
12.1
|
17.4
|
17.4
|
3.1
|
11.3
|
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, 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.
ARE LOW INTEREST RATES GOOD OR BAD for the stock market? As you are
painfully aware, interest rates in general are very low. There are three main
reasons for this:
1.
Consumer
demand for interest-bearing products is relatively high.
2.
Business
demand for loans is relatively low.
3.
Central
banks in many developed nations are engaged in an “easy money” policy.
Source: The Economist
All three of the
above are associated with the fact that our economy is relatively weak. In
difficult economic times like today, central banks have a vested interest in
keeping rates low. The thinking is low rates will reduce the “hurdle rate” for
businesses to reinvest and, as a result, encourage them to expand and hire new
people. As businesses expand, the economy will grow and begin a new virtuous
circle.
So, let’s see if
this virtuous circle of low interest rates applies to the stock market, too.
Using data from the
Barclay’s Capital Equity-Gilt study, The
Economist took a look at U.S. stock market returns between 1926 and 2011
and sliced the data into periods when the real rate on Treasury bills (the rate
after subtracting inflation) was positive and negative. What they discovered
was startling:
“In
the 33 years where real yields have been negative, the average gain from
equities has been 2.3%; in the years when real yields were positive, the
average gain was 6.2%.”
In other words, low
real interest rates (which we have today) have typically been associated with low stock market returns.
As we all know,
data can often be presented in ways that support whatever position you’re
taking (just like in the past election cycle!). So, putting that aside, the key
is to interpret the data. Since we’ve been in a low rate environment for a long
time, stock prices have likely had time to adjust accordingly. The key now is
to watch for the turning point – the time when rates start a new rising trend.
When rates start to
rise, that could signal the economy is on the mend as businesses start
demanding more money for loans to expand and central banks pull back on the
easy money policy to avoid too much inflation. This would be a “good” reason
for rates to rise. Alternatively, rising rates could signal investors are
losing faith in our country’s ability to pay its bills. This would be a “bad”
reason for rates to rise.
We’re watching
interest rates closely for any sign of a new trend and, importantly, the reason
behind that trend. It’s just one of many indicators we monitor as we keep a
close eye on your investments.
Weekly Focus – Ode to an Icon…
“I love Twinkies,
and the reason I am saying that is because we are all supposed to think of
reasons to live.”
--Stephen Chbosky, novelist,
screenwriter, director, and author of The Perks of Being a Wallflower
Value vs. Growth Investing (11/16/12)
|
-1.42
|
10.14
|
-6.08
|
-3.26
|
11.99
|
9.77
|
1.28
|
|||
|
-1.40
|
10.51
|
-6.52
|
-3.57
|
12.78
|
8.93
|
0.66
|
|||
|
-1.09
|
12.25
|
-4.55
|
-2.08
|
15.51
|
9.48
|
1.85
|
|||
|
-0.94
|
12.69
|
-7.45
|
-5.10
|
11.31
|
9.83
|
1.80
|
|||
|
-2.20
|
6.99
|
-7.44
|
-3.38
|
11.96
|
7.49
|
-1.92
|
|||
|
-1.27
|
9.70
|
-4.49
|
-2.03
|
10.11
|
11.86
|
2.58
|
|||
|
-1.24
|
10.70
|
-3.67
|
-1.67
|
12.53
|
13.76
|
3.93
|
|||
|
-1.10
|
8.98
|
-5.09
|
-3.13
|
5.53
|
11.88
|
1.45
|
|||
|
-1.46
|
9.52
|
-4.62
|
-1.19
|
12.47
|
9.85
|
2.19
|
|||
|
-2.04
|
7.38
|
-5.78
|
-3.37
|
8.84
|
11.59
|
3.33
|
|||
|
-1.97
|
7.20
|
-4.76
|
-3.32
|
8.62
|
10.24
|
2.48
|
|||
|
-1.94
|
5.99
|
-7.12
|
-4.61
|
5.72
|
12.47
|
2.19
|
|||
|
-2.21
|
9.00
|
-5.42
|
-2.13
|
12.27
|
12.06
|
5.28
|
|||
|
-1.18
|
11.62
|
-4.40
|
-2.09
|
14.49
|
10.50
|
2.44
|
|||
|
-1.04
|
11.46
|
-6.97
|
-4.69
|
9.74
|
10.53
|
1.81
|
|||
|
-2.05
|
7.64
|
-6.74
|
-2.86
|
12.07
|
8.29
|
-0.59
|
|||
©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:
William Foster v. PPG Industries, Inc. v. Patricia
Foster
William Foster worked for PPG Industries, Inc.
from 1988 to 1999 and participated in its employee savings plan, a 401(k)
pension plan. The plan required each participant and beneficiary to keep the
Plan Administrator advised of his correct address.
Foster and his wife, Patricia, resided together
in Tulsa, Oklahoma from 1993 until their divorce in 2004. He had received
plan-related documents, including a Summary Plan Description, instructing him
to make sure the current address on file is correct at all times, especially
upon divorce, moving or termination.
His divorce became final in July 2004, but he
never advised his old company that he had moved out of the martial residence or
that his mailing address had changed. In 2005, documents were mailed to the
address on the file that described changes in the way plan participants would
access their savings plan accounts. Among other things, the documents explained
that a User ID created by the participant would replace the participant's
Social Security number for ID purposes.
Patricia Foster received these documents,
created an ID, requested a temporary password, changed the permanent address on
the account to her P.O. Box and made a withdrawal of $4,000 from the account.
Over the next several months, Patricia withdrew all of the available funds
totaling over $42,000.
William Foster sued his former employer,
demanding it pay back the money withdrawn by his ex-wife. Seems like an open
and shut case, right? Wrong. The court ruled that the provisions in the plan
documents made it clear that "any wrongful payment of the Plaintiff's
benefits in this instance (was) due only to Plaintiff's failure to notify the
Plan of his change of address coupled with the conduct of the Plaintiff's
ex-wife."
LESSON TO LEARN:
Make sure you CHANGE the beneficiary form after
life events and update your address. It will help avoid problems such as the
one described above.
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 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.
* Consult your financial professional
before making any investment decision.
