Asset Allocation is not supposed to come together like a well planned puzzle rather it should fit more like O.J.’s glove. In fact the whole object of investment asset allocation is to bring uncorrelated sectors under one design. Its like mixing ice cream and ketchup. One normally shouldn’t be with the other. In the case of investment allocation the two or three, or even five or six, assets that an investor brings into a portfolio should all act like polar ends of magnets. Individually they should be the best they could be. Jack Bogle, formerly of Vanguard, keeps it simple and says own the stock market and then own the bond market and simply readjust every year what you own by increasing your bond percentage for every birthday. Most people wouldn’t like that very much. Investors are not shy when it comes to complaining about investment design. For the most part they don’t want all their investments to go down at the same time. The do, however, want all their investments to go up at the same time. They don’t want, usually, to assume the risk of the market but they do want their investments to outperform the market. You can see the conundrum. Investor expectations versus reality are difficult to explain and even more difficult to accept. Ideally a well allocated portfolio should not have all assets go up and down at the same time. That, my friends, is the basic concept behind asset allocation. Mutual Funds by their very nature are asset allocated. 
Critics complain that mutual funds do not perform as well as the index their are matched or compared to. For the most part they won’t. The fluidity of money in mutual funds and the fact that at any given moment there is both cash and bond holdings should tell someone that it is impossible for the fund to match an index unless it happens by pure chance. If someone wants the risk and the return/losses of an index they should buy the index. Asset allocation is designed to reduce risk and in some cases increase return by either minimizing the losses or actually increasing return over other assets in the portfolio. Asset allocation is designed not to hit home runs but to produce moderate returns with less risk than the market.
It’s Just Like Chicken!
Here’s the story-Several years ago I found myself standing in a teller line at my bank. To my left were the ‘suit’ desks and a bank representative was talking to an eightyish woman who was hard of hearing so the rep was talking louder than usual. He was obviously trying to move the woman’s savings from a bank account to an annuity and he said, ‘It’s just like a CD.’ , which of course an annuity is nothing like a bank CD- and if you register for my final fixed income breakfast meeting at Sycamore Hills Golf Course on Tuesday October 16th @9AM I will tell you why. Some people think they know all they need to know about interest rates; and one of the great myths people have is that interest rates are going to soar any day now and when that happens savers will pile on and lock in double digit rates for the next five or ten years. If you believe that I have a bridge or two to Canada I can let you have cheap. 
Yes, interest rates are bound to go up but soar? The problems in Europe and the pledge by the Federal Reserve are reason enough to know rates will remain uber-low over the next three to five years. If you don’t know a dividend from an bond coupon please do yourself a favor and sign up for the final fixed income breakfast meeting. It’s 75 minutes in length, everyone gets my personal workbook and Q&A after the brunch. (see the news on the breakfast meeting in my blogs). Oh, coffee and donuts are on me so I need to know how many will be attending. See my registration form or call me at 586 783 7080. And an annuity is no more like a bank CD than frog legs taste like chicken. 
Monday October 8th WSJ reported by Spencer Jakab that trouble in the stock market comes when you least expect it. 
Caution sign abound as earning season approaches and a consensus is that corporate numbers will be lower. Fidelity says it now manages just as much bond money as it does equities. This matches up with sentiment that is now almost evenly split between bulls and bears. The Citigroup U.S. Economic Surprise Index is a useful contrarian indicator and the last time it was at today’s level, write Jakab, the market began a 10% correction.
Cody Willard said he’s had it with Zynga. The on-line game company has lost value since its IPO, has about $2.40 a share in cash but writing down recent acquisitions and announcing laying off employees. Shares in the company tanked last week and closed at $2.48.
Investment Trading- Brian Lund, wrote a blog 
stating what he thought were the most common traits of investment traders who were unsuccessful. Strange that many of his ideas also translate into life:
- Assuming Expertise in Some Field Will Translate To Trading.
- Having a Know it All Attitude.
- Not Knowing When You’ve Had Enough.
- Not Understanding The Concept of Risk/Reward.
- Being Afflicted With The Babe Ruth Syndrome.
Monday’s Action… Markets closed off their highs. Apple was up over $8 and promptly sank and lost! $7.00. That’s a $15 swing for us mathematically challenged. But Apple has a history of selling off just after new product announcements. Shares drove the Nasdaq down 3 points and the Dow was up 77.
I sat in on a Dorsey Wright Monday webinar and the firm’s CEO reported that they have been bullish since November, 2011. They don’t see a reason to change that anytime soon. 
Here’s a chart of the S&P and you can clearly see the bottom in 2011 and our spring time blip in 2012.
The WSJ reported Tuesday that the debt crisis could be with us for years. The crisis lays bare that how interdependent we are on each other as individual economies are linked into one. From the folks at Schwab who believe that although there are substantial headwinds that this disrespected rally will continue. Not to say that there will be (as the above chart illustrates) pullbacks- and- they caution that investors not to try and time the pullbacks. No one has a clue as to when a rally starts and missing it could be missing the return of the year.
Tuesday’s Markets was more of the same.
The secret of Warren Buffett’s long-term investment success…The guy buys stuff on the cheap. You don’t need to do anything but buy great companies at low prices. Wait for bad news to hit a company like Coca Cola or General Electric and buy shares when they’re low. Right, Mr. Krabs? Coke has split shares yet again.
Every Investor should pin this note to their bathroom mirror so they won’t forget it- ever!
‘The trade of the decade,’ by Doug Kass, ‘is to short bonds.’ I have been preaching this for two years and almost thinking of it as something every investor should do a little of no matter how old or what their investment strategy is.
Whispers- Apple only shipping 5 million units in 2 days. Remember Samsung was their chief supplier and Apple had to re-strategize all their parts with new and different manufacturers after they sued Samsung for stealing their design, parts, works and et al. The five million iPhones was pretty impressive in that light. Plus, Samsung lost $11 billion as Apple’s #1 supplier plus the $1 billion award.
Real Estate is One Year Away from Robust Growth. According to BlackRock’s Fink, ‘We’re in 
a world of moments of euphoria and moments of despair.’ He also went on to say that the housing crisis is 90% behind us. Chris Leavy, CIO, said, ‘ We think that equities are the place to be for the next several years.’ I’m getting that from a lot of other people, too. “We think,’ Leavy said, ‘ they’re priced to return 9-10% a year because of cash generation through dividends and buybacks and modest growth.’ and who said the new normal would be 4-5%?
Sprint blew it- again! The struggling wireless carrier had an opportunity and was considered a golden wireless carrier to make a run at AT&T and Verizon after the AT&T and T- Mobile deal was kiboshed. Shares have been up over 130% in 2012.
A possible deal with rival MetroPCS was rejected by Sprint’s board found a new home at T-Mobile USA. PCS is a relative new company having an IPO several years back and founding low cost cell phones and services for its customers. While issues remain for the merged companies the real deal is what Sprint will do. Suddenly shares in Sprint do not appear to be as attractive as they were just a week earlier.
Markets slightly up on Wednesday across the board…
HP Shares fall on poor earnings. Falling to 9 year lows the computer/printer/ink company said earnings would disappoint and business could get worse before they would get better.
One of the biggest problems according to insiders is the integration of the 2008 acquisition of EDS. Also the government Veteran Affairs Department awarded IBM a 5 year contract away from HP when IBM complained of the award to HPQ.
PIMCO CEO El-Erian, a consistent voice of either caution or doom, spoke at Fortune’s Most Powerful Women summit Wednesday, saying, ‘We’re very worried about the fiscal cliff.’ There is a 40% chance of politicians doing nothing. This would cause for the first time our kids would be worse off than us. However, he does think there is a 60% chance of a stopgap measure to do something but not everything. 
On Bonds El-Erian said that fundamentals are here and valuations are UP here. Any interest rate adjustment is going to impact the bond market. He also thinks that Greece and maybe another country will leave the EU but the euro will survive. End of last month European leaders reached what was thought a crucial agreement to lend money directly to needy sovereign banks rather than making loans directly to governments and overburdening an already nasty situation. But now richer governments are backing away saying certain criteria is not in place. What is feared internationally is that leaders will not implement actions until it is too late and whatever they do do will be not enough.
Quick who owns Skippy Peanut Butter brand? It’s Unilever and the company has put the iconic brand on the market. The company also owns Hellman’s mayo and Ragu.
Overheard on CNBC Tuesday.
-If real estate is poised to boom what banks will really benefit? Those that hold mortgages? Currently many are trading below book value…although as my smarter friends point out book value is not engraved in stone.
Some people eat to live and others live to eat. 
Recently Consumer Reports studied 200 rice products and found elevated levels of arsenic in all of them. Since rice is grown in water it is more prone to absorb arsenic from the ground, fertilizer and pesticides. The FDA insists though levels the of arsenic in rice are at levels not acceptable in drinking water they are at non-dangerous levels in rice. The story became yesterday’s news in a heartbeat almost as soon after it was reported but Consumer Reports is sticking to its guns and wants the FDA to do something. The Food and Drug Administration has a long history of allowing contamination in our food stuffs. Here’s just a partial list of what the FDA consider okay-dokey for American diets:
- Tomato juice may average 20 or more fly eggs per small glass of juice.
- Canned mushrooms may have over 20 or more maggots per average bottle of processed mushrooms.
- Curry powder is allowed to have 100 or more bug bits per 25 grams.
- Cinnamon could have more than 20 rodent hairs in a small shaker before being considered defective.
I won’t bore you with the whole list but needless to say maggots, flies, bugs, pieces of bugs, excreta, rot, insect eggs, parasites, mildew all are natural and acceptable contaminants in our food supply; and now the FDA wants you to believe that elevated levels of arsenic are perfectly fine. Personally I don’t find one maggot acceptable in any dish….And now some of you know why I don’t like dining out…don’t get me started on restaurant kitchens. Investors now can see the value going forward of investing in agriculture and water.
The ROMNEY BOUNCE? 
Thursday markets up across the board as the Republicans gained some new vigor after the debate. According to a person who reads body language Mr. Obama was dismissive of Mr. Romney, thinking that he was insignificant. 
Al Gore has a more …err…substantial reason why the president did not do well- It was the Denver altitude that put the malaise in the president’s presentation. Gore explained that Romney had several days to acclimate himself to the thin air and the president only had a few hours. i know where there’s some thin air….dude…
Bunches of Folks still Out of The Markets. This bit of news courtesy of the Investment Company Institute and the WSJ. Even though facts have shown the resilience of the markets people have left and committed themselves to earning zero percent. Even today investors are bailing using the fiscal cliff as a reason or the re-election of a ‘certain’ party. Fear that the markets will not provide ‘lasting’ gains is another ancillary reason.
published in the WSJ October 5, 2012. Information provided by the Investment Company Institute.
Banks or Cars or Cars & Banks?
2013 is poised to see either and or both run as housing settles in for good. This from conversations on Morning Squawk on CNBC. Shopping Center vacancies have astonishingly found themselves narrowing. A few months earlier only the high end malls were finding themselves 
well occupado. Investing in REITS can still provide income and future potential growth as the economy settles in. Tracking autos and banks may be a good thing going forward.
If History Holds 4th Quarter Markets Should Rise…
Historically Apple has problems with its stock price whenever it announces a new product. 2012 is no different and shares are off $50.00 from their highs. The company has no debt is owed $1 billion from Samsung and has $100 billion in the bank. To give you an idea of how large that amount is the following chart tells you. WSJ whispers that Apple order 10 million mini-iPads for their October launch.
Markets were up Friday on better than expected employment news but slide as traders grasped the news wasn’t as rosy as some would have us believe. 
Jack Welch tweeted that the ‘Chicago boys would do anything to skew numbers.’, meaning that folks loyal to the administration did a one-time pencil whipping to the jobless numbers. He called it a conspiracy and no one can prove or disprove until numbers are reviewed after the election. Investors should know that we need in the neighborhood of 250,000 new hires per month to make a dent in the unemployment numbers. Friday’s 165,000 (or whatever number posted) is not even keeping pace with regular new job hunters. Jobs being offered, even to those educated, qualified and skilled, are of lower pay variety. 
Don’t forget to register for the fixed income breakfast meeting next Tuesday. There are other options other than bank savings and fixed annuities you should consider when using fixed investments.
Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.
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