Bruce's Blog: Wiener Financial Management

News & Notes

The Pain of Patience

 

One of the most difficult times in investing is when a rational, long-term, diversified portfolio becomes blindsided by the heart-stopping emotions of a steep market decline.  As you watch the stock market drift ever lower, your primal instinct is to flee the apparent danger (although our pre-historic predecessors feared dinosaurs and not the news on CNBC).  Doing nothing is not particularly satisfying. 

Hopefully, you have planned ahead for just such an occasion.  Any money you need in the next year should be in cash, not subject to the vagaries of the stock market.  The rest of your portfolio should be diversified among various asset classes commensurate with your goals and risk tolerance. 

If this is the case, then you should not need to touch the equity portion of your portfolio for several years, at a minimum.  This means you can ride it out, however distasteful that may be.  Trying to time the market can often lead to losses by selling low and buying high.

If you are still fixated on the here-and-now, the following points (often contradictory) have been made by "the experts" in numerous conference calls and written commentaries as of late:

• A lot of really ugly stuff is going on in the financial world, including excessive debt in the U.S. and Europe.  Numerous, serious problems need to be worked through.
• The world economy is still growing, albeit at a slower pace.
• While subject to change, corporate profits have been very impressive and their balance sheets are healthy.
• Based on a number of commonly accepted criteria, it can be argued that stocks are relatively cheap.
• Hang in there.

Hopefully you have created your investment plan in a time of equanimity.  Try not to let fear drive your decisions.

Words of Wisdom

One woman who I was dating called and said, "come over, there's nobody home."  I went over.  Nobody was home.  -- Rodney Dangerfield (because we need him in these times)

News & Notes

Perspective

 

After an ugly day in the stock market Thursday, a little perspective may be in order.  On March 9, 2009, the Dow Jones Industrial Average (DJIA) closed at 6,548.  Capitalism as we know it seemed to be in utter collapse.  And yet, less than two years later, the DJIA closed out 2010 at 11,578.  Not many people would have made the bet in March 2009 that the DJIA would have recovered so rapidly.

 

The DJIA closed at 11,384 Thursday.  This constitutes a big drop from its recent highs a couple of months ago.  But it is only about 200 points (or 1.7%) below where it began the year.  The large market swings that we have recently endured exacerbate our sense of fear.  They have not led, however, to significant losses year-to date.  (The broader-based S&P 500 Index is down 3.5% for the year.)

 

It is not clear whether the turbulence will continue.  Stocks may go down further or they may rebound quickly.  Stocks may continue in a yo-yo pattern.  Stocks may even drift around aimlessly for a while.  Whatever may occur, it is important to note that looking at short-term price swings -- especially troublesome declines -- does not provide the full story.


Words of Wisdom 

How many times does the end of the world as we know it need to arrive before we realize that it's not the end of the world as we know it.  -- Michael Lewis (author)

News & Notes

The Debt Ceiling Debacle:

A Manufactured Crisis

 

In The New Yorker this week, James Surowiecki makes a cogent argument that any problems that may arise from the failure of Congress to raise the debt ceiling limit would be a self-inflicted wound.

Surowiecki maintains that the debt ceiling is superfluous because "if Congress really wants to hold down government debt, it already has a way to do so that doesn't risk economic chaos – namely, the annual budget process. The only reason we need to lift the debt ceiling, after all, is to pay for spending that Congress has already authorized."  

Failure to raise the debt ceiling would lead to "an absurd scenario in which Congress will have ordered the President to execute two laws that are flatly at odds with each other. If he obeys the debt ceiling, he cannot spend the money that Congress told him to spend, which is why most government functions will shut down. Yet if he spends the money as Congress has authorized him to he'll end up violating the debt ceiling."

Thus, Surowiecki asserts, we don't need a debt ceiling limit. The concept is an anachronism. It was enacted in 1917 to keep the President in check at a time when he had a much greater ability to borrow and spend money without Congressional oversight. But things have changed. Since 1974 "Congress now passes comprehensive budget resolutions that detail exactly how the government will tax and spend, and the Treasury Department borrows only the money that Congress allows it to."

It seems like we're witnessing a bizarre and depressing circus that needn't be happening in the first place.
 

Words of Wisdom

Weaseling out of things is good. It's what separates us from the other animals ... except the weasel. -- Homer Simpson

News & Notes

Please Ignore This Article on Email Disclaimers

 

Nothing in this article should be relied upon as being of any value.  If you find any tax advice contained in this article, then you do not have to pay taxes in 2011.  This article is meant solely for the intended recipient, his or her family, and their friends, co-workers, and heirs. 

Such is the inanity of many disclaimers tacked onto the bottom of emails in an apparently vain effort to limit liability or impose confidentiality.  One online wag describes disclaimers as poorly worded legal gibberish written by overzealous lawyers in a futile effort to enforce binding contracts to protect their careless mistakes.

The more sober Economist states: "They are assumed to be a wise precaution.  But they are mostly, legally speaking, pointless.  Lawyers and experts on internet policy say no court case has ever turned on the presence or absence of such an automatic e-mail footer in America, the most litigious of the rich countries.  Many disclaimers are, in effect, seeking to impose a contractual obligation unilaterally, and thus are probably unenforceable." 

Wishing you limited liability, complete confidentiality, and an enjoyable summer.


Words of Wisdom

Notice: Unless you are named "Arnold P. Fasnock", you may read only the "odd numbered words" (every other word beginning with the first) of the message above.  If you have violated that, then you hereby owe the sender 10 GBP [British Pounds] for each even numbered word you have read.  -- From "Stupid Disclaimers" site

News & Notes

Forgetting History with LinkedIn?

 

While we do not seek to ignore the lessons of history, it is not unusual for us to forget them.  The recent initial public offering of LinkedIn, a social networking web site for professionals, may be yet another example of memory loss.

As the financial newspaper Barron's pointed out, LinkedIn stock traded at astronomically high valuations after its initial public offering -- 35 times its 2010 revenue and 550 times its 2010 profits.  At that time, by comparison, Google was valued at 5 times revenue and 20 times its trailing profits. 

Back in the day, when Microsoft's shares were originally offered to the public in March 1986, its stock price rose 32% on the first day of trading.  LinkedIn's shares nearly tripled in price on the first day of trading.

Maybe investors believe that LinkedIn is poised to grow by leaps and bounds, which validates such a lofty price.  Maybe investors' memory of the tech bubble imploding in the early 2000's has faded.

Constant growth and success are not guaranteed.  In another article, Barron's noted that IBM's stock-market valuation temporarily exceeded that of Microsoft's a few weeks ago.  During the tech stock madness, Microsoft's value surged to three times higher than that of IBM's.  Barron's suggests that IBM has not caught up to Microsoft; rather, Microsoft's position has declined in the face of competition to desktop computers from tablets, smartphones, and other connected devices.  Even the great ones can cool off over time.

Nothing in the preceding discussion constitutes a recommendation to buy, sell, or lovingly gaze upon the stocks that are referenced above.  As always, carefully assess your risk tolerance before proceeding.

 
Words of Wisdom

History is merely a list of surprises.  It can only prepare us to be surprised yet again. -- Kurt Vonnegut

News & Notes

The Confusing State of Municipal Bonds

 

Over time, some people have feared that California may slide into the Pacific Ocean due to an earthquake.  A more immediate concern is whether California will descend into an abyss due to its financial problems.  Many states and municipalities face similar difficulties, causing the safety of municipal bonds to be questioned.

Hopefully, we won't revisit the debt crisis of 1835, when the "United States succumbed to a craze for building railroads, canals, and turnpikes, all backed by state credit."  As Ron Chernow describes in the book "The House of Morgan," the state debt had been largely marketed in London to British and European investors.  Some states chose to stop making interest payments as "American legislators found it easier to pander to the hatred of foreign bankers rather than to raise new taxes to service the debt."  No wonder "British investors cursed America as a land of cheats, rascals, and ingrates."

Today, there are a number of reasons why people are worried about "munis," as they are affectionately known.  For starters, many government entities face  budget deficits, putting their ability to pay back their bonds into question.  Government revenues are recovering slowly as we come out of the recession, while demand for services has increased.  Local governments must also deal with under-funded pension plans for public employees. 

Muni bonds also seem less attractive because most insured bonds have to stand on their own as far as credit-worthiness.  A large percentage of munis were insured by private, AAA-rated companies, making the bonds seem extremely safe.  But these insurance companies lost their AAA status in the recent credit crisis and are no longer trusted to cover a bond's payment obligation in the case of a default.

The bleak status of municipal bonds may, however, be exaggerated for the following reasons:
 

• States are not facing a particularly large debt crisis.  State debt is around 7.3% of gross state product.  By comparison, the troubled European countries have debt-to-GDP ratios above 100%.
• Most state constitutions require that they have balanced budgets each year.
• State governments are not allowed to file for bankruptcy.  Although half the states allow local governments to file for bankruptcy, this has been a rare occurrence.
• Local governments' debt service on its existing bonds are relatively low -- around 4% to 8% of total expenditures per year.
• General obligation bonds are backed by the taxing power of the entity that issued the bond.  Revenue bonds are backed by the money generated from the asset built with the bond money; e.g., toll roads.
• States and local governments rely on issuing bonds to raise money, so they are very careful to avoid harming their ability to raise more capital in the future.
• Under-funded pension liabilities, although serious, are a long-term matter and do not impinge on governments’ ability to service their current debt.

At the end of the day, investing in municipal bonds has become more complicated.  Greater due diligence is necessary before buying individual bonds.  A reasonable alternative is to utilize mutual funds, which can offer diversification and professional management; although, you still need to determine that the bond fund is not taking on more risk that you are comfortable with.

Words of Wisdom

Governments are like underwear.  They need to be changed often and for the same reason. -- Italian Proverb

News & Notes

What Lawyers, Farmers, and Factory

Workers Have in Common


Try to imagine a group of aging rock stars putting on a benefit concert to assist lawyers who have lost their jobs. Admittedly, this is not a likely scenario. Yet it seems that even lawyers are feeling the consequences of technology-based efficiency gains, just like farmers and factory workers before them.

With respect to lawyers (for those who still respect them), new, advanced software can review thousands of documents infinitely faster and much cheaper than their human counterparts. As the New York Times described in a recent article, law firms can dispense with highly-paid lawyers poring through files in large litigation and use "e-discovery" at a fraction of the cost.

The tale of the American workplace being affected by technology is an old one. In the early 1900s, farming was a very labor intensive endeavor--41% of our workforce was employed in agriculture according to the U.S. Department of Agriculture (USDA). But the efficiencies gained by technological advancements have greatly reduced the need for farmers. By 1945, 16% of the workforce was employed in agriculture. The number dropped to just 1.9% in 2000.

Nevertheless, as the USDA points out, the "output from U.S. farms has grown dramatically, allowing consumers to spend an increasingly smaller portion of their income on food and freeing a large share of the population to enter nonfarm occupations that have supported economic growth and development."

A similar phenomenon is occurring in manufacturing. A study at the University of Michigan-Flint found that manufacturing output has more than doubled in almost 40 years, even though U.S. manufacturing employment has dropped by over 25%. Overall, about 8% of the workforce currently hold manufacturing jobs as compared to 28% fifty years ago. Technology has greatly increased the efficiency of the manufacturing process.

We noted last time that manufacturing in the U.S. is not dying, it is evolving due to efficiency. Manufacturing continues, but just as the agricultural economy gave way to the manufacturing economy, the manufacturing economy has been superseded by the service economy. The Cato Institute declares that manufacturing is relatively less important to the U.S. economy today because our consumption has changed. We now spend less money on goods, such as food and manufactured products, and more on services.

Given this situation, the difficult task becomes finding new sources of high paying jobs as traditional manufacturing jobs constitute a smaller portion of our nation's economy. Creating a more highly educated, skilled workforce that is competitive in the world economy seems one likely answer. Staying at the forefront of technological advancement is clearly another.


Words of Wisdom

I call my lawyer and ask, "Can I ask you two questions?" My lawyer says, "What's the second question?" –-Henny Youngman

News & Notes

Questioning Common Knowledge—Part III

 

After exposing a few myths recently, this next one is going to shock you: "America remains the world's leading manufacturer by far.  In fact, if U.S. manufacturing were a national economy, it would be the eighth largest in the world," according to Robert Turner, chairman of Turner Investment Partners in an article in Institutional Investor. 

Turner explains that domestic manufacturing is not dying, it's changing.  The U.S. is "making products that require a high degree of innovation and technological content," which is subject to less foreign competition. Inevitably, "some low-value-added commodity products like textiles, toys and TVs are being made in [other] countries" where workers earn lower wages.

The news of failed giants like General Motors overshadows the growth of small manufacturing companies in this country.  "According to the Cato Institute, for every U.S. manufacturing industry suffering a decline in revenues and profits, two U.S. industries are growing."

Moreover, foreign manufacturers are increasingly making things in the U.S. for reasons such as "gaining marketing opportunities, earning tax credits and—brace yourself—exploiting cost advantages."  For example, Turner cites a Chinese company that moved to South Carolina for much lower electricity costs.

Nevertheless, America still suffers from a huge trade deficit—we import significantly more than we export.  While the U.S. can greatly seek to improve its ability to export manufactured goods, it still ranks third, behind Germany and China, in exporting merchandise.  If you were to add services into the calculation, "the United States exports more than any other country" according to researchers at the Brookings Institution.

The Wall Street Journal reported that exports increased nearly 17% in 2010.  (Of course, some of this may have occurred due to a weak U.S. dollar, making our goods and services more attractive abroad.)  The huge trade deficit exists because we remain addicted to cheap foreign goods and the cost of importing energy continues to skyrocket.

If U.S. manufacturing is "not dead yet," then what explains the common belief that it is in such a dismal state?  Turner suggests that a reasonable explanation is the substantial loss of jobs in the manufacturing sector due to technological advances.  We will explore this concept next time when we discuss what machine workers, farmers, and lawyers have in common.

 

Words of Wisdom

I think it's wrong that only one company makes the game Monopoly.
—Steven Wright

News & Notes

Questioning Common Knowledge—Part II

 

More and more, we base our investment decisions on our reading of the global political and economic scene.  Due to the varied and ever changing landscape, we can easily depend on common wisdom to help sort through the mess.  Unfortunately, these shortcuts can be incorrect and lead to mistaken responses.

For example, the link between poverty and terrorism appears reasonable—poor, uneducated people, with little hope of economic advancement, seem more likely to commit such acts than their more fortunate brethren.  Yet, as an article in The Economist points out, this is not necessarily the case. 

A number of studies indicate that there is "little evidence that the typical terrorist is unusually poor or badly schooled."  Instead, terrorists prove to be "better educated and less likely to be from poor families than the general population."

Nor are poor people around the world necessarily more sympathetic to terrorism.  One study found that "the poorest countries, those with low literacy, or those whose economies were relatively stagnant, did not produce more terrorists."  Moreover, "citizens of the poorest countries were the least likely to commit a terrorist attack."

The Economist concluded that the "research on terrorists' national origins suggested that countries which give their citizens fewer civil and political rights tend to produce more terrorists.  Politics, not economics, is likely to be a more fruitful weapon in the fight against terror."

The various aspects of investing are equally complex.  Relying on the "apparently obvious" may not get you very far.  In the next installment, we will question the accepted view that manufacturing in the United States is in a sorry state.


Words of Wisdom

I once wanted to save the world.  Now I just want to leave the room with some dignity.
-- Lotus Weinstock [bio]

News & Notes

Questioning Common Knowledge—Part I

 

For those of us whose ancestors came from Europe many years ago, the family often has a story explaining how their surname was changed upon coming to America.  For example: "My great-grandfather was called Rogarshevsky, but when he arrived at Ellis Island, the immigration officer couldn't understand his accent.  So he just wrote down 'Rogers,' and that became my family's name."

In the journal Azure (Summer 2010), Dara Horn makes a strong case that these stories, accepted as fact, just aren't true.  For one thing, the new immigrants encountered immigration staff who spoke their language.  The intake officers at Ellis Island had to know two or more languages.  In addition, numerous interpreters, who were fluent in the immigrants' native tongue, were available as well.  Mistakes were unlikely.

More importantly, though, "Ellis Island officers never wrote down the immigrants' names."  Instead, the inspectors used the ship's manifests, which were compiled by local officials at the point of embarkation—and these officials used passports, visas, and other identification papers to obtain a passenger's name.  A great effort was made to get the names right since a mistaken name could cause the person in question to be forcibly deported back to the point of departure at the shipping company's expense.

This is not to say that immigrants did not change their names.  They did; only later, after they arrived safely in America.  So why did these Ellis Island stories develop and achieve near-sacred status? 

The suggestion is made that the immigrants had conflicting desires.  They wanted to blend into their new country, hence the name change.  But the immigrants also sought to remain true to their heritage as well.  If the name change was considered to have been forced upon them, even if by "accident," then the the immigrants were not seen as actively denying their connection to the old country.

That received truth may not be accurate is an interesting and important concept.  We often make important decisions based on these "facts."  In upcoming newsletters we will look at how common wisdom may not be true in the political realm and the economic realm. 

Words of Wisdom

I never know how much of what I say is true.
-- Bette Midler