Asset Class Moves Feb 25 2013

Stocks were down strong, down -1.83%
Bonds were up strong 0.32%
US Dollar was up strong 0.32% versus a basket of world currencies, and up an extraordinary amount 0.83% versus the Euro.
Asian and European stocks were generally up, but US markets interpreted European finance news negatively today.
Gold was up strong, acting I was would expect on a strong downward moving stock day.
Oil was understandably down, -0.89%

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Commentary:

While overall, stocks YTD are still performing similar to recent years’ price patterns for the first quarter, today was a significant break from the upward trend of the last few months.

In domestic economic news, manufacturing activity in Chicago declined and activity in Dallas grew less than expected.

Stocks peaked at 1531 this year so far.  They closed today at 1487.  If they hit 1470, that will mean stocks will have dropped about 4% from their YTD highs.  That will also mean most investors could have made money from the sale and buyback of stocks (even after increased short term tax consequences).

I have no idea where stocks go next.

It is understandable that stocks would go down from these high levels – with no little or no regard to the outcome of Italy’s elections.

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Disclaimer:  These posts are not written by a professional or licensed financial advisor.  There’s nothing for sale here.  This is just a discussion forum.  No one should make any decisions based on representations made on this informal blog.  These posts are just one layperson’s opinions, concerns, and observations about asset classes – a part of larger, never-ending discussions.  Any signigicant financial decisions should be discussed with at least a few trusted and experienced financial advisors before acting.

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Asset Class Moves Feb 22 2013

Stocks were up 0.88%
Bonds were up 0.05%
US Dollar was nearly unchanged versus a basket of world currencies and the Euro.
Asian and European stocks were up.
Gold was nearly unchanged
Oil was up 0.56%

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Commentary:

As you can infer from the combination of numbers above, today was a good day to be invested in US assets.  The base US currency rose.  US Bonds rose.  US Stocks rose.

Knock on wood.

Stocks

Foolish or wise, I have not reduced my asset allocation invested in stocks in the last several months.  So, understandably, Wednesday and Thursday of this week were no fun.

Gold

I don’t understand why gold is getting beaten up currently, trading around its 52 week low price, but I’ve come to respect the technical chart “death cross,” when the 50 day moving average price of something passes below its 200 day moving average price. That is sometimes a near term bearish sign.

Having said that, I could see gold recovering in May, from wherever it is at in May. Why is my timing expectation so specific?  That’s complicated. But even though the “death cross” suggests downward price likelihood for a while, I don’t think that will be for a long while. I expect that if stocks fall drop in May, Gold will more likely conversely rise.

With nearly all the world’s governments devaluing their currency, I’m bullish on gold in the long term.  Having said that, I own no gold investments currently . . . not yet.

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Disclaimer:  These posts are not written by a professional or licensed financial advisor.  There’s nothing for sale here.  This is just a discussion forum.  No one should make any decisions based on representations made on this informal blog.  These posts are just one layperson’s opinions, concerns, and observations about asset classes – a part of larger, never-ending discussions.  Any signigicant financial decisions should be discussed with at least a few trusted and experienced financial advisors before acting.

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Understanding Definitions And Intents Of Asset Classes

Stock Shares:

The stated intent of a share of company stock is:  It is intended to represent a small percentage of ownership in something, usually a company.  A company’s articles of incorporation, the primary rules governing the management of a corporation in the United States, almost always specifically state the intent of the company is to make a profit, and one of the required duties of the company’s officers and management is to improve each individual share’s value (through increasing the company’s earnings per share).

Why am I talking about something that seems fairly basic and commonly known?

I’ll explain by comparing stock shares to the US Dollar:

The US Federal Government, in comparison, has no expressed or implied duty to see that the US Dollar maintains or increases in value.  This is also true for almost all other governments.

Why is this distinction valuable to understand?

Stock companies, at the least, are designed to improve share value.

The US Government, at the least, does not have a duty or strong interest to increase the value of a US Dollar.

Some stock companies are better than others at improving the value of their shares.  But most major stock companies, over the long term, improve their share’s value.

Neither the US Government, nor any government, has a similar interest to maintain or improve the value of their currency unit.

So, it makes sense, that over the long run, individual company stock shares have appreciated in price much more than the US Dollar.

So, if stocks clearly increase in value better over the long term, why not just use all your dollars to buy stocks?

From time to time, and sometimes for long periods of time (a decade or more), even the best-performing asset classes (like stocks) are overvalued and lose value compared to lesser-performing asset classes, like cash or bonds.

Why doesn’t the government have an interest increasing the value of their individual currency unit?

The answer to that question is extremely complex.  A starting concept to consider is:  The US Government is not running a business for profit.  For example, the US Navy has yet to finish one fiscal year where it turned a profit.  The US Government, whether we like this concept or not, is more analogous to running a household that has two parents, two-aging grandparents, a live-in security guard, a housekeeper, and six children, one who is special needs and another who is alternately-enabled.  In that “household” of 12 people, 4 of them are not even capable of working enough to “earn a profit.”

The US Government’s higher priorities are to use its currency to enable:  a) more profitable activity in the marketplaces and b) improve the country’s percentage of employment.  Additionally, when the dollar devalues, the country’s old debts are effectively reduced, because the new, lower-value dollars are paying off debts based on older, higher-valued dollars.

So, while you may have a reasonable hope or trust your government will provide Social Security and other safety net programs, you should not have any expectation they intend to keep the price of their currency strong.

This is true for nearly all national governments.  They are all weighing the question of “how fast to allow their currency to devalue?”  That is why you will rarely find countries whose currency is worth more now than it was 20 years ago.  It rarely, if ever, happens.

Does this mean a person should have most of their cash invested in stocks?

No.  Again, there are periods of times when stocks lose value, when stocks are overvalued.

Nevertheless, to understand the world of assets and investing, it is good to know the US Government has little interest in maintaining or appreciating the value of the US Dollar.

The US Government does not want to devalue its currency quickly, for many reasons.  High inflation wreaks havoc on asset trading and fixed wage employees and fixed income retirees (those last two groups make up a majority of the population).

So what does this mean practically?

If inflation is 2% per year, and you’re getting only 1% interest return on your FDIC insured CD, then understand you are losing value, losing purchasing power each year.

This is what makes the current QE programs so interesting.  The US Government, through its policies, is essentially making it unprofitable for the average person to “play it safe” and save their money.  Instead, the US Government is creating a paradigm where it is effectively saying:  If you even want to keep the value of your existing assets and savings, you won’t be able to do it in simple CDs.  Instead, you’ll have to invest in other assets classes – to even have a chance to keep the value of your assets, let alone to increase the value of your existing assets.

And that is why understanding how assets are valued, how they might gain value, and why they may lose value is maybe as important as ever.

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Disclaimer: These posts are not written by a professional or licensed financial advisor. There’s nothing for sale here. This is just a discussion forum. No one should make any decisions based on representations made on this informal blog. These posts are just one layperson’s opinions, concerns, and observations about asset classes – a part of larger, never-ending discussions. Any signigicant financial decisions should be discussed with at least a few trusted and experienced financial advisors before acting.

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Could Bonds Currently Be Kind Of Like The Titanic?

Titanic Bonds Feb 2013

Stocks were up strong 0.73%, the S&P 500 hitting a 5 yr high close above 1530.
Bonds were down -0.05%
US Dollar was down -0.20% versus a basket of world currencies, and down -0.28% versus the Euro
Asian stocks were slightly down, but European stocks were up strong.
Gold continued its recent slide, down -0.31%, trading near 6 month lows.
Oil was up 0.83%

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Commentary:

The asset classes performed as I expected today.  Stocks did a little better than I expected.  And Bonds, even with their decline today, did a little better than I expected bonds would do today.

If bonds do decrease in value significantly more this year (or next year), I will probably perceive their decline as somewhat tragic.  I don’t cheer or hope for one asset class to do better than another.

If bonds lose value, the tragedy will not be that bonds lost value.  The tragedy will be that many investors (investors who rotated to bonds during the last 15 years because their retirement account “risk calculator” told them they should have a majority of their life savings allocated to bond investments) lost money while attempting to do what was “right,” what was “conservative,” what was supposed to be a safer, more risk-averse investment for their money.  If bonds lose significant value, it will be tragic for me to observe – because the warning signs and bells were signaled well ahead of their decline.

When Bill Gross (one of the heads of PIMCO – a huge bond fund company) tells people that bonds are “bubbled” in valuation and returning negative real returns (like he did in the 4th quarter of 2012 and again in the first quarter of this year), and people keep buying bonds, or stay invested in long-term bonds thereafter, then it is a little like the captain of the Titanic printing out an itinerary to all the would-be passengers, before leaving port in the Southampton, UK, an itinerary that said:

“During our voyage, we plan to scrape an iceberg several hours away from the coast of Newfoundland in the near-freezing waters of the Atlantic Ocean while traveling as fast as our engines can bear.”

I can see the passengers sitting on the dock, mulling over the decision, with luggage in hand, looking up at the massive Titanic, looking at the thousands of other passengers who intend to board, debating to each other:  “Oh my, that would be exciting – to see all of that up close, leisurely watching from the comfort of our deck chairs.  That boat sure looks big and safe.”

If bonds continue to lose value this year, it may happen like the Titanic’s sinking:  an awful, slow-developing tragedy – where everyone kind of knew it could happen, but there were so many forces going in that direction, so many people involved that it took too much to get everyone adapting, it took too long to slow down or change course.

Bonds, at this moment in investing history, may kind of be like the Titanic.  The current amount invested in existing bonds, bonds that have a historically low yield return, is immense.  It may be a long time before retirement account investors check their bond investment returns, and see the slow leak that is continuing.

It took a long time for the Titanic to sink, very slow at first, but with increasing speed thereafter.

I don’t know what’s going to happen to bonds this year or next year.  If I had to predict, I’d predict they continue to decline between now and mid April.  But I don’t know how bonds will do in the next few years.  If interest rates rise, that could really hurt bond investment returns.  That’s a big “IF.”

But I neither know enough about bonds, nor do I have enough confidence in them, to have very much invested in them currently.  Therefore, in the last 2 months, I have taken significant steps to reduce my family’s investments in bonds.

If bonds fall in value, they will not lose all value.  That is one comparative area where the “Titanic” analogy does not work.  But just like any asset class, if bonds lose value, investors will lose money – and in this case, that would be tragic.

If these issues are of concern, discuss them with your financial advisors.

It’s not the near term fluctuations in bond prices that concern me as much as the long term historical interest rates that concern me.

There may be a time, several years from now, where I will increase my investments in bonds.  But I don’t see that time being anytime soon.

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Disclaimer: These posts are not written by a professional or licensed financial advisor. There’s nothing for sale here. This is just a discussion forum. No one should make any decisions based on representations made on this informal blog. These posts are just one layperson’s opinions, concerns, and observations about asset classes – a part of larger, never-ending discussions. Any signigicant financial decisions should be discussed with at least a few trusted and experienced financial advisors before acting.

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What Is Potentially The Most Imminently Valuable Stock Price Pattern I Could Show You?

Here are the stock price patterns for the S&P 500 for the last 3 years:

2010 S&P 500 Performance

2011 S&P 500 Performance

2012 S&P 500 Performance

In each year, stock prices:  a) peaked temporarily in late April each year, b) then declined shortly thereafter, c) then eventually rose to new highs later in that year or in the next year.

Question:  Will this pattern re-occur in 2013?

Answer:  I have no idea.  There is no way to know if this pattern might re-occur in 2013.

Question:  Why have stocks gone up consistently from January to after mid-April the last three years? 

Answer:  There are literally millions of forces that can alter stock prices.  One possible contributing factor that may explain why stock prices have gone up in the last 3 years, from January 1 to after mid-April is:  In the last 3 years, stock advisors were generally predicting stock prices would go up by the end of each year.  Investors, who wanted to invest in stocks, may have made both:  a) that year’s retirement account contributions and b) the previous year’s retirement account contributions (the previous year’s IRA contributions can be made up until April 15th of the following year) in the first part of each year, in the time period between January 1 and April 15th (tax day).  If those contributions were a significant enough contributing inflow, that stock investment inflow may have contributed to stocks’ price rise in the January through after April 15th time period each of the last four years, including this year so far.

Question:  If this pattern were to re-occur in 2013, how could a stock investor profit from knowing the pattern?

Answer:  I’m not going to answer this question.  But if you’re curious about the answer to this question, I recommend you discuss it with a financial advisor or two.

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As I’ve said recently, I don’t like buying stocks at the high end of their moving average price range.  So, to be clear:  For any short term investors, I don’t recommend buying stocks at these current prices.

But there is a legitimate question when any asset class is trading above its long term average rate of price appreciation.  That question is:  When do you sell some of your assets, even in an asset class that has historically appreciated well over the long term?  That is a worthwhile question to consider.

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Friends, I wouldn’t be writing about my observations about assets if I didn’t think the observations might be profitable, safeguarding, or beneficial to consider.

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Disclaimer:  These posts are not written by a professional or licensed financial advisor.  There’s nothing for sale here.  This is just a discussion forum.  No one should make any decisions based on representations made on this informal blog.  These posts are just one layperson’s opinions, concerns, and observations about asset classes – a part of larger, never-ending discussions.  Any signigicant financial decisions should be discussed with at least a few trusted and experienced financial advisors before acting.

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Why Did Warren Buffett Offer To Buy Heinz At A 20% Premium?

heinz_ketchup

Stocks were up 0.07%
Bonds were up 0.12%
US Dollar was up strong, up 0.35% versus a basket of world currencies, and up very strong 0.66% versus the Euro.
Asian stocks were up, but European stocks were down on news their economies contracted in the 4th quarter of 2012.
Gold was down -0.53%, to a new 6 month low.
Oil was understandably up 0.40% – after new positive economic news in the US.

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Commentary:

Good US Economic News

This morning it was reported that recent US residential home foreclosures and jobless claims fell more than expected.

Berkshire Hathaway Offers To Buy Heinz

Warren Buffett, today in offering to buy Heinz at a price 20% over its previous market price, is likely saying Heinz’ previous share price was undervalued.

If you did not know, Buffett has a history of buying and owning companies that make specialized sugar-delivery products to consumers. Berkshire Hathaway, has previously purchased and still owns major positions in Wrigley’s, Coca-Cola, and See’s Candies.

How can an average person profit from learning something about Buffett’s decision today? What can be inferred that might help an average person become wealthier?

Contrary to what today’s investing headlines’ questions’ imply, I don’t think the move suggests the entire stock market is undervalued. I don’t know whether Buffett thinks stocks in general are undervalued.

The move more likely supports Buffett’s long-held, and handsomely-rewarded belief that: Companies that can add value to fairly simple ingredients, through effective formulation, packaging, supply-controlled branding, and marketing will tend to compound in value much faster than the US Dollar over the long run.

If that inference is correct, then owning stocks in those kinds of companies, should create more financial return for investors over the long run, more than simply holding onto cash.

Another valuable principle Buffett’s purchase implies to the average person is a principle I’ve emphasize with friends and family before: Buffett today didn’t buy a “low priced” stock share, hoping it would become a “high priced” stock share over the long term. Equally or more important:

Buffett bought a controlling interest in the company.

By owning a controlling interest in the asset (company) he purchased, if the fundamentals of that industry or that specific company change, he can control how the company adapts and he can even control how, or to whom, his interest in the company is sold.

This is an important “ownership principle” for any person: Controlling the liquidity and use of the assets you “own” are key rights of ownership. If you “own” an asset, but cannot control its use or how it is sold, then you don’t fully (and possibly effectively) own the asset; rather, in that case, you “own” the liabilities for the asset without “owning” the ability to respond to developing liabilities.

Buffett believes that with the ability to control Heinz, the profitability of Heinz, even at a price 20% more than its previous share price, will continue to increase faster than cash.  He bought it because he anticipates the company, as a profit engine, will keep sufficient pace with the other companies within Berkshire Hathaway.

Berkshire Hathaway, after spending over $20 billion on this Heinz acquisition, is still not cash poor. Berkshire still has billions (and constantly growing) in cash, looking for their next acquisition.

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Disclaimer: These posts are not written by a professional or licensed financial advisor. There’s nothing for sale here. This is just a discussion forum. No one should make any decisions based on representations made on this informal blog. These posts are just one layperson’s opinions, concerns, and observations about asset classes – a part of larger, never-ending discussions. Any significant financial decisions should be discussed with at least a few trusted and experienced financial advisors before acting.

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Creating Wealth Principles #1: Ally With Others Who Seek To Create Common Wealth

At my law school graduation ceremony, I remember the commencement speech had this theme:  Now that you have your degree, you need to go out there and get your hands dirty, fighting in the dirt, on behalf of your clients, to get the dirty work done, because that is where your clients need your help.

I remember thinking at that time:  That is poor advice.

Better advice might be:  If someone wants you to fight with them in the dirt, then surpass them, run past them, and move on to the next thing.  Find people who want to build things together.  Don’t be dumb and put yourself in the dirt or into a fight.  Instead, find people who are building things for the common good.

And if someone, who is in a fight in the mud, needs your help, first help them out of the mud – then you can help them address the issues.

A person might think, “Oh, that makes common sense.  Everybody does that.”  But surprisingly, many people don’t realize they are getting into regular adversarial interactions unnecessarily.

Adversarialness creeps into everyday interactions like water slowly boiling around a frog.  It’s not that a frog chooses to jump into hot water;  rather, the frog doesn’t realize how the water around them has slowly become overheated.

Consider your past conflicts at work or in relationships.  Did you spend a tremendous amount of time, resources, and energy trying to work with someone who clearly was not intent on seeking your good and their good?  Might you have created more wealth if you had conceded sooner that the two of you were not seeking each other’s common vision or common good?

One of the key first steps to creating wealth is allying with people to the degree you both are seeking your common good.  The better your ally is at seeking the common good, the more likely you will create common wealth.

And unfortunately, the inverse principles are also true:  The less your ally is interested or able to seek the common good, the more likely your time, focus, and energies spent with them will not create wealth.

As an attorney, making a lifetime of observations on these topics, my experience and perceptions suggest:  The people who are very interested in bringing lawsuits are generally not people creating great wealth for themselves and others.

People who create great wealth tend to focus more on making connections with others who wish to create great wealth.  In contrast, people who want to get into a legal fight, which places the outcome of the conflict largely into the hands of a third party judge, tend to be aiming for the wrong objectives and targets.

At every point when and where you can choose your allies, choose allies who are interested and able to create common wealth.  If you can choose exceptionally intelligent and talented allies, you will save yourself years of work and prevent great frustrations, losses, and heartaches.

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Disclaimer:  These posts are not written by a professional or licensed financial advisor. There’s nothing for sale here. This is just a discussion forum. No one should make any decisions based on representations made on this informal blog. These posts are just one layperson’s opinions, concerns, and observations about asset classes – a part of larger, never-ending discussions. Any significant financial decisions should be discussed with at least a few trusted and experienced financial advisors before acting.

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