That Was The Week That Was-1st Week July

  I wish I had a nickel whenever someone complained to me that not all their investments go up at the same time but they ALL go down at the same time. Buying different sectors and/or asset classes in one portfolio is called asset allocation. The concept of asset allocation, if done even moderately correctly, should have non-correlated assets moving one way while others move in another. It’s even okay for some investments to do nothing. The concept is to reduce risk and potentially increase return. Return is maximized by moderating down periods while the minimization of downside maximizes upsides. At least that’s the theory. Famed index fund creator Jack Bogle has preached owning only two assets- the total stock portfolio fund and the bond fund. He has said you can live your entire investment life rather well owning only those two. Unfortunately, in today’s world owning only two asset classes does not please the investment public or their investment managers. There are ‘holes’ to fill where investors and managers ‘think’ they see opportunities, and yes, even weakness.  Equity Markets are being see-sawed today on a regular basis. This is happening  more in times of discontent than perhaps in all the years I have been in this industry. This has frequently caused many equity asset classes to now move in tandem. So, for example, when a large cap value fund goes down along with the small cap growth fund it could mean that both hold similar investments; or both are being liquidated as investors rush to cash. (Apple is owned by various sector funds, for example). Even if an investor stretches their allocation to agriculture, real estate, metals and other more exotic and less correlated assets there is no guarantee of the perfect allocation in today’s world. But if you are complaining when some assets go up and others do not it is a ‘possible’ sign that your allocation is working. In this climate its hard to know for sure.

THE GOVERNMENT HAS FINALLY FIGURED OUT HOW TO TAX PEOPLE FOR DOING NOTHING. i got relations that’ll be awfully sore.

Justice Roberts, ‘ It is not our job to protect the people from the consequences of their political choice.’

White Castle. Home of the slider. The company has offered its employees health care ever since Cal Coolidge was in office. Jamie Richardson, President of the firm, said,’ Just because something is constitutional to us it doesn’t necessarily make it a good idea.’ Insurance premiums for  Nottingham Spirk, the company that makes the disposable SpinBrush electric toothbrush, among other items, was increased by 15%. The insurance company told the firm that the hike was based on anticipation of the new health care mandate.

Two Schools of Thought. Factory activity in the U.S. shrank in June for the first time since July, 2009. (That’s 2009 and not a misprint!) According to WSJ the rest of the world is slowing, too. Momentum is grinding to a halt as this appears to be a definitive proof that the European recession has reached the shores of the United States much like the flotsam from the Japanese tsunami . Not only are we seeing  slowing here but China is certainly slowing, even though they appear to be tossing money at building high quality steel mills in remote areas where nothing is happening. But…according to economist Gary Schlossberg at Wells Capital, this may be a ‘bottoming out’ period and good for the economy. A shortage of skilled workers also shows that businesses could hold off hiring until they get a better take of the future. Also, housing seems to be a bright spot in the U.S economy. Construction spending has increase o.9%, and Schlossberg says it could provide support later this year.  Home Builders according to MarketWatch may be 40% over bought.

Blackrock Called…and I spoke with the inside guy at the firm and we yakked about the abysmal price of oil. In fact the US of A has oil coming out of the wazoo. So much of the stuff is being stored that there is an official glut of oil. However, before you toss the energy funds away this could be a temporary situation. Blackrock explained that the U.S. could very well be a net exporter of gasoline this year. And reliance on foreign oil is slowly falling. But, with a slowdown in Asia and the E.U. the need for oil has slackened while production has slowed. A small but crucial respite  in the price of crude as dividends are still being paid on energy investments and reinvested at lower share prices. The value to investors  will be understood as the economies gradually get healthier. More of the stuff will be needed to fuel transportation and factories. Then as world-wide use increases the prices will rise. The strong dollar contributes to the lower price per barrel, and you should know that.

Fourth of July Eve as Markets Continued Their Ascent. A shortened trading day. It sort of felt like that Price is Right Game with the mountain climber yodeling his way up the hill as a contestant guessed the price of prizes. In other words- slow, steady with no real surprises. Gold for the day was off a bit, as was domestic crude. Brent oil hit a recent high as concerns over Iran saber rattling. The Dow ended up 73 points. David Rolfe of RiverPlace/Wedgewood Fund said in a WSJ interview that it was a good time to own Berkshire Hathaway shares, given their recent under-performance and Apple to $750. This is David… and this is not…

Everyone Who Had Their Power Knocked Off on Tuesday Raise Their Hand….! Not only did the storm race through town, knocking off all my civilized toys, but a new law in Michigan allows any blankety-blank to purchase semi-automatic firecrackers that replicate the sound of the London Blitz and reenact the event under my bedroom window. 

 Book Writer & Money Manager Howard Marks was interviewed by Morningstar’s Jason Stipp. Marks is publishing an illuminated edition of his original book that included his letters to shareholders. He points out that the individual investor may well be better off than the institutional investor for several reasons: Individual is more nimble, and can cut losses or move out quicker. (2) Institutional people have job fears if they do something wrong. (3) Then there is the institutional culture of competing with other institutions. Marks also says that European stocks should be cheaper even if an investor doesn’t know the EU outcome. He offers this as a chance of cutting risk in buying certain industries and stocks.  (Which goes in the face of common knowledge of not buying cheap stocks that could get cheaper or maybe I just didn’t understand the entire interview.)

TEVA –The generic drug giant got a boost Wednesday from Johanna Bennett at Barrons.com. According to Jo Teva stock could return 30% in the next 12 months. This is in the face of the shares dropping nearly 38% since April 201o. The analysis concludes that Teva is a cash machine with about $4 billion a year in free cash flow which would allow it to repurchase stock, boost its dividend (currently 2%) and invest in new drugs. Morningstar gives the stock 4 stars and a value of $55 a share up from its current est. $40.00.

Andy Griffith Museum in Mount Airy, NC.

and…

 

Heard  on the Frank Beckmann radio show….Many small to medium sized Michigan employers may opt out of providing health care insurance for their employees and instead pay the $2,000 per employee penalty, which is far less than the cost of health care. Employer provided health insurance may well be over.

Median Family Income drops 2% in 2012.

LIBOR pronounced lie ber is London interbank offered rate. Barclay’s CEO resigned when it was discovered his bank fudged numbers used in calculating Libor. The Libor number is supposed to mean the rate that banks will lend to each other and what they will charge consumes for loans. Bond rates are also calculated to some degree off the Libor numbers. By fudging numbers banks can charge customers more and themselves less.  It’s a way of making lots of money in plain sight. When asked one economist said the Libor was what banks did not charge each other but used to charge customers. There are eighteen global banking institutions that contribute to the Libor number. Investigators are discovering that there are about a dozen financial organizations that manipulated the Libor and Barclays is only the first in the dock. Experts contend that the cost could exceed one billion dollars, according to Thursday’s WSJ, on July 5th.

CBS News Reported by 2020 China Will Buy 30,000,000 autos a year.

Which brings me to Ford, which got a small bump last week, but nothing of substance. According to David Sterman of Street Authority, he likes the stock to double. Normally, David wrote, he would be a seller of Ford as news of lower earnings caused the stock to fall. But, he isn’t a seller of Ford as he thinks the news is overblown and the company is profitable in North America, and should do even better in the coming quarters. The company will have the new Escape and Focus in showrooms and this should spur new sales. He calls Ford a cash producing machine and believes that the company will have some $31.5 billion in cash in hand by the end of 2014.

Hasbro, Inc., is one of the largest companies in the toy business. Recently I’ve noticed several analysts posting their opinion of the company; and Morningstar gives it a four star rating. The ratings firms reports that they think that Hasbro has a significant lead over their competitors in the digital and entertainment sectors. They give the company a fair value of $43, in addition it pays a 4% dividend. The company also has a stock buyback program and has been increasing its dividend almost 15% over the last five years. With its huge licensing business well established ( Star Wars!), the company has a stable cash flow, according to Morningstar analyst Jamie Katz. 

Hold On! We Got Ourselves A Global Stimulus! Yes, sir, Bob, by gum, reports Friday of ‘coincidental’ bank action by the Bank of England, People’s Bank of China and ECB  that rates on benchmark short-term lending slashed (The ECB to (gulp) zero, the Bank of England to near zero and China cut by 0.31% to 6%). Plus the Bank of England announced an increased bond buyback program to cut long term interest rates. Central Banks in Kenya and Denmark also sought to cut credit costs.  With all that markets virtually ignored the action. On the home front domestic markets fell slightly as most traders were on holiday. Those who were not were waiting for Friday’s jobs report.

Last Year I reported to you about a Hedge Fund that promised Louisiana pension funds a ‘guarantee plus 100% liquidity’. ‘Buddy’ Fletcher ran the Fletcher Hedge Fund. In the early 1990s he reported that his fund earned 300%, and he was then viewed as a market ‘super star’. Hard times followed and the firm has filed for bankruptcy as clients have failed to get the ‘promised’ funds they had invested. No secrets, friends. More news on hedge funds in next week’s blog.

Friday’s Jobs Report Disappointed …as usual. The President has four more reports before the November election. If things don’t get better there could be a new occupant come January in the White House. ‘The’ Donald called the President’s policies, stupid. There have been moments over the past several years when there seemed to be promise of a jobs breakout only to see some global event trigger a regression. The Japanese tsunami and Arab Spring were largely to blame for a lack of economic progress last year.  Kathy Bostjancic, of The Conference Board, said, ‘This economy has no forward momentum and little help from monetary or fiscal policy.’ (I am scratching my head wondering when the last time I heard of any jobs related effort by our elected officials and I have to say Kathy is right.) Markets fell 1% on the news. The NY Times also reported that some companies will hold off hiring until they better understand the health care mandate and how it impacts their bottom line. Also, the Times reports, domestic lawmakers inaction on the upcoming ‘fiscal cliff’ creates uncertainty that is not conducive to hiring.’ …there is a lot of stupid going on in Washington.

Frightening…language Friday…as some internet financial sites deemed it fair to report that ‘Stocks Plunged!’. The concept of something plunging reminds me of 2008 or going over the Niagara Falls in a barrel. Certainly stocks fell but plunge wasn’t a word I’d use. Still stocks came back from their lows to close with the Dow off 124 points and  Naz off 39 and S&P finished  down 13 points. Gold and oil also off. For the week both Dow and S&P down but Nasdaq was slightly positive.  Tech took a beating Friday as did industrials. Global stocks like Cat came under pressure, as did materials. Nervous traders saw Spain’s 10-year note trading back to 7%.

Weak Jobs Could Drag The Fed Back Into The Game… The Ben Bernanke did say the Fed was prepared to do  whatever was necessary. According to the WSJ the more active central bankers believe that more action is justified because the economy isn’t making progress toward unemployment and inflation is low. What the Fed can do is still not clear. Some suggest that the Fed consider purchasing mortgage bonds as a more effective way of lowering a broad range of interest rates. Others suggest recommending not to increase rates until 2015, rather than late 2014. We can only wait and see what the Fed offers in the next few weeks.

Questions? Call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.