That Was The Week That Was-3rd Week July

  We’ve come a long way as investors. Twenty years ago many people were frightened to death of buying foreign mutual funds or foreign stocks, such as Nestle’. Today investors go where the action and returns are. Emerging Markets is one of my favorite sectors. Most people associate emerging markets with the BRIC countries: Brazil, Russia, India and China. In actuality there are more 150 countries on the list which include Malaysia. Latvia, Israel and Slovakia, to name just a few. The definition of emerging countries are those that are undergoing rapid growth and industrialization. This was coined by World Bank economist Antoine W. van Agtmael in 1981. There is a difference between all the emerging market countries; the most senior is called Advanced Emerging Markets and  the others are termed as Secondary Emerging Markets. Advanced markets in 2010 were Brazil, Hungry, Mexico, Poland, South Africa and Taiwan. India, China and Russia are on the secondary market list. But there is another market that many investors have either not heard of or think too risky and that is Frontier Markets. These are countries that are just getting a foothold into the world’s economies and many just starting to move into the 21st century. Most African countries, outside of South Africa, according to source Mark Mobius at Franklin-Templeton, are considered to be frontier markets. He reports that a misconception is that Frontier countries’ growth is based on commodities. While that may be somewhat true it is not for all countries. For example Nigeria is dependent on oil exporting, Kenya is more of an agricultural society. Frontier economies are one way to allocate portfolios. Some emerging market funds did well in the first half of 2012 the same couldn’t be said of the frontier markets. Hard hit was the MSCI Frontier Market index which lost over 8% so far in 2012. Kenya, Nigeria and Bahrain were up while Bulgaria was down over 25% and the Ukraine fell over 35%, Still  while the growth in the United States is expected around two percent that of Frontier markets average around six percent. They usually do not move in correlation with our domestic markets. For more information on my favorite emerging and frontier market investments and how they could possibly fit in your portfolio call or write me.

 I got a phone call last week from a woman who introduced herself working for a company that was appointed to do marketing for a local credit union.  She said someone  would be in my neighborhood  and ‘dropping off’  information on the credit union. Okay, I know the game and who these folks are and they sell fixed high commission annuities. This ‘insurance’ agency (which she didn’t tell me she worked for but I know she does),  has been in hot water before selling high redemption annuities to seniors. I interviewed the attorney representing one of their victims on my radio show years back. And there was a channel 7 television investigation into their methods of gaining access to people’s homes. Of course I knew who she really represented but no mention of the affiliation out of her mouth. If you live in Michigan and get a call from someone with a similar pitch or someone wants to save you money on car insurance, or drop off some senior coupons, be..ware!

Experts See Signs of Pickup. Last week CNBC reported that Mark M. Zandt, the chief economist for Moody’s Analytics, who said, ‘ I do think the economy is stronger than what the numbers show.’ Some economists point to private forecasts showing a stronger June than the one depicted in government reports.  One such survey showed that the job creation was really 175,000 and not the DOL number of only 80,000. Some economists question if DOL made a big mistake.

Frustration With Washington, Banks, The Economy and The Stock Market Have Investors Looking For Answers. More than at any other time I am seeing sales people, with no experience in securities, counseling individuals to buy fixed annuities or equity-indexed annuities with extra-ordinary redemption charges and little opportunity for real economic growth. If you don’t know what you are investing in ‘ask someone!’ Once your money is gone- it’s gone. Don’t think you can sue them for your lack of knowledge or experience.

More Investment Myths. Here’s a few common thoughts you should know are not true.

• Bank savings are free- False -The bank uses your money to invest, pay their bills (including overhead and employees), and calculates how much ‘interest’ to pay customers depending on how long they can get them to lock up their money. A friend of mine was an officer at one of the major banks and bragged that at some branches a 1% return on the money on deposit was enough to pay all expenses for that branch.  Buying furniture or jewelry probably has less fat and commissions than a bank savings account. 
• Insurance Companies Are A Safe Place to Put Your Money – Maybe. It all depends on the insurance company. Unlike FDIC all money with the insurance company is guaranteed by the insurance company. If the company goes bust or is taken over some or all rules are re-written. That’s why its important to check the claims paying ability of the insurance company. Plus rules are different with insurance companies. Some of the rules are so odd that people cannot believe they invested and turned over their hard-earned money to an insurance company. In some cases redemption charges plus penalties before age 59 1/2 are exorbitant.
• Managed Investment Accounts Are More Efficient & Cheaper- And I have a bridge I’d like to sell you. Managed accounts use no-loads or load waived funds, ETFs and other vehicles with no up-front charges. There are still fund fees that are charges to reimburse expenses to the fund or Exchange Traded Fund -plus each account has an annual account fee that is deducted quarterly. The managed fee typically runs 1% to 3% annually depending on the company, the representative and how wide-awake the client. A lot of managed accounts are just as expensive, some more so, than if you buy a mutual fund and park it. In some instances the constant buy and sell of the manager is more for show than for actual account value. Some Managed accounts are also a good place to hide lousy funds just to keep them going. Don’t be fooled by the managed account story. Like anything else there are good ones and lousy ones. No secret here.
• Target Date Funds will get an investor from here to there with no worries. Let me see the plans to that bridge again. All Target Date funds are not equal and lately several companies have gotten out of the Target Date Biz. The Target Date concept is to invest in a fund that is more aggressive in the early years and gets more conservative, and stays that way, as you reach retirement. So today a Target Date fund invests in equities if you are young and as you age it’ll buy bonds. In other words today you’ll get the best of the worst worlds in one investment. The bond bubble should be well on its way by the time many are retiring and that’s where the assets will be invested. Most investors can do better.

Be Pro-Active. The days of invest and forget are gone. Don’t think that there is a product or concept that’s going to take you to the promised land with little work or effort on your behalf. Thankfully my clients are pro-active but there are a lot of seniors I meet that I wonder how they ever managed to accumulate a dime. If you don’t know something- hire someone. If you’re not sure of the person you hire- get someone else. It’s cheaper than losing your entire nest-egg. Don’t guess or think someone won’t take advantage of you and your money.

Robert Pollack, of the WSJ, knocked on George Shultz door a few weeks back… Shultz, former Treasury Secretary, who is 91 reminded us that when ‘Ronald Reagan took office inflation was in the teens, the prime rate was in the 20s, and the economy was going nowhere.’ Shultz also reminded us that the bailing of the autos was a political bankruptcy and not a rule following bankruptcy (as anyone who owned a GM corporate bond will tell you). The unions were paid off, Shultz said, and the regular creditors didn’t. (Bondholders are first in line as creditors but were left out of the negotiations.). In answer to what policies promote growth he answered, ‘ We need another round of the 1986 tax act. That is clean out the preferences and lower the rates.’ He also said that ‘like in sports people want to know what the rules are. Today business leaders are asked to play the game but not told what the rules are, or told that the rules will be made up as  they play.’

The Euro’s Fate: Randall W. Forsyth writing for Barrons  examined the difference between European leaders and Americans and how they are attacking the economic crisis. In America the central bank will print as much money as necessary to keep inflation low and promote job growth. In Europe the idea of printing more Euros is unseemly. Instead they Europeans promote tax hikes and spending cuts to solve their economic problem.Forsyth concludes that not only is that philosophy overseas not going to work, it could lead to a disaster. Instead he offered a thought that reducing the euro to equal the dollar in value (a across the board devaluation), would accomplish what we’re doing here without having the printing presses work overtime over there. An investment against the euro could be in order. In an interview Warren Buffett commented that the Euro couldn’t survive under the present rules.

Gold Buggy? 

Central banks have been buying gold by the ton. (Actually its by the tonne- which is 1000 kilograms, not exactly a ton and a substantial difference when calculating cost of gold per ounce.) In 2011 they bought 455 tonnes. Here are some of the purchases supplied by the World Gold Council. During the last 12 months the net purchases have averaged almost 20% of total annual supply. Russia added 15.5 tonnes in May and its reserves now stand at 911.3 tonnes. Thailand has raised its holdings by more than 80% since mid-2010. The Philippines have been quietly buying their own production and have added 32 tonnes in March. Central banks, excluding China and nations that don’t report gold purchases, have, according to the World Gold Council, added a net of 1,290 tonnes of gold since 2008. That would be a lot of gold except its off from what Central Banks held around 1980. If you were worried about a gold bubble there doesn’t seem to be an indication of one just yet. I also still like the gold ETF GLD as the most efficient way to buy and sell the metal. If you need help adding metals to your portfolio and wonder best entry points E or call.  Gold fell Tuesday as stocks moved higher after the Ben Bernanke testimony.

Speaking of Medals… Bloomberg’s BusinessWeek Etc. Department gives the lowdown on Olympic Medals. It takes 8 tons of gold, silver and copper to make the 4,700 medals for the Olympic and Paralympic Games.

• There is $325 of silver in the silver medal which has 92.5% silver and the rest copper.
• There is $660 of gold in the gold medal which  has only 1.34% of gold and the rest is silver.
• Each medal weighs almost 1 pound.

If You’ve Been Holding Oil… low prices were good for consumers- ‘cept consumers were not spending the gift of lower gas prices because gasoline prices lagged the lower oil prices. Investors, on the other hand, who owned oil stocks and funds were getting hammered as prices fell (partially due to a strong dollar). Reinvestment of dividends always helps while we wait for the correction. Now we’re seeing a slow but steady return to higher oil prices according to bloggster and investor Tom Bowley.

He draws the above parallel & Darn if the chart of the S&P 500 Index and Crude show a similar pattern. The argument is that the chart is illustrating higher long term bullishness in oil and equities as we go forward this year.

Barton Biggs Dies at 79. Once heading Morgan Stanley’s Investment Management division and founder of  hedge fund Traxis Partners when he left MS Biggs was known as a visionary. He called the Tech Bubble before it burst but was ignored in 1999. He was wrong on the 2008 market collapse but he was in good company on that one. Biggs was one of those people that when he talked you had to listen.

Cookie!? No- Donuts! Krispy Kreme.  The first time I heard about Krispy Kreme was reading Bob Talbert in the Freep. Talbert was from the south where Krispy Kreme called home and was as popular there as fried chicken. When the brand came to Michigan I knew why ‘ Shut my mouth’, Krispy’s were the donut of choice down south. Hard times followed the brand but now Stephens gives the stock an Overweight. They like shares to $9.00 from the current $6.52 close last Monday.

Cops and Robbers – Essentially. From the Libor scandal where 18 banks concocted a global conspiracy to fix interest rates in order to deceive regulators that all was well with the global economies, to the recent news that HSBC has become almost the bank of choice for money launderers and cartels, to the JP Morgan ‘opps trade’; banks have been in the news doing what banks shouldn’t be doing-which is stealing in one fashion or another. Now the snootiest of them all, Goldman Sachs, is building a private wealth unit to loan money and do business with the uber-rich and moneyed corporations. The war chest is estimated by the WSJ to be about $100 billion. Goldman is joining the ranks of Bank of America and JP Morgan Chase who do have wealth units in place, along with their retail trade. A weakness in European banking has prompted this entrance into the wealthy and corporate private area. Warren Buffett’s favorite bank, on the other hand, is Well Fargo – he said that he’s been a buyer almost every month of shares.

In Politics…In a tight Senate race Lyndon Johnson directed his campaign manager to slur his opponent with a particular nasty accusation. When the campaign chief said that both he and Lyndon knew it wasn’t true Johnson said, ‘I know. I just want to hear him deny it.’  Some things never change.

Fred Smith, founder of Federal Express, said, ‘Our tax code favors the financial sector, speculation and leverage at the expense of the  capital intensive or the industrial sectors.’ Smith advocates a territorial tax system which would only tax domestic, rather than worldwide income, bringing U.S. practice in line with most other rich countries. He also advocates more tax benefits for businesses to spend on equipment and software.   Fair to say that both Obama and Romney favor reducing the corporate tax rate.

Chuck Schummer (D-NY) told The Ben Bernanke last Tuesday to do whatever it was he and the Fed could since Congress wasn’t and wouldn’t be of any help. It’s as if the ghost of mean Chucky Colson invaded Washington and allowed Congress to allow the people of the United States to ‘dangle in the wind’. Bernanke pled with Congress to act on taxes before it was too late. He made it clear that he wasn’t lecturing Congress but needed help to turn around the economy. Bernanke’s words fell on deaf ears. Brian Kelly, founder of Shelter Harbor Capital, said after the Bernanke testimony, ‘Now you have to be long stocks.’ Kelly, as well as other market pro’s, according to CNBC, believe that Bernanke telegraphed that QE3 must be factored in all trades. Kelly also said, ‘Whatever comes along next is going to be big,’ and you want to be in stocks when that happens.

Get the feeling we are simply trading between government stimulus and forgetting investment basics. Seems you can toss asset allocation into the dustbin along with anything else of fundamental value.

Weekend Worries… I told an associate I worry about weekends even when there doesn’t seem to be any news on the horizon. The weekend ended Monday as more worries about Greek default and Spain’s weakness caused Wall Street jitters. World markets were down Monday morning as I was driving home about 3:30 ayem from a short two day mini-vacation up north. Bloomberg news shed light on the perils of the Eur0, the possibility that Greece would leave the EU  and in six months we’d be talking about higher oil prices and inflation along with EU worries. On the local front Bloomberg reported that most reporting domestic companies did better than expected but lowered forward guidance as they expect consumer economic slowdown.

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