Brighton Perspective

Buy Stocks Now -- and Hold Them - Kiplinger.com

Buy Stocks Now -- and Hold Them - Kiplinger.com.

I am generally optimistic about equity market performance but skeptical of any calls made by "pundits" who present themselves as experts. Case in point, Jeremy Siegel. Siegel is brilliant, well-read and has been "right" in the past but he severely damages his own credability in this article.

"Making predictions about short-term market moves is extremely hazardous, as Siegel well knows. Like me, he failed to predict the collapse in the financial system last September and its impact on the markets. "I didn't see the balance sheets of these banks and investment banks," Siegel says. "I didn't realize they held so many subprime mortgages."

To me, he'sacknowledging that he, in fact, had not done his homework. He made his call without properly analyzing ALL of the relevant data and was dead wrong. Consequently, anyone that listened to him paid a severe penalty.

The lesson learned - don't listen to the pundits when they make these kind of calls. Always remain at least somewhat skeptical and ask Why? For example, Siegel believes the equity markets could do 10 to 12% this year and double digits on average for the next decade. Why? History tells him so, but as we all know "past performance is not indicative of future performance". More important than history is the current economic environment. I won't make a prediction but will suggest that the current economic environment does not appear supportive of double digit returns in the near term. Siegel may be right in the end but following his lead could be painful in the present.

Weekly Update

Market Week: June 29, 2009

The Markets Investor indecision ruled as the major indexes gyrated but ended essentially flat for the week--except, of course, for the Dow, which slid more than 1% for the second week in a row. Trading volume continued to remain relatively restrained as the end of the quarter approached and investors wondered when signs of a slowing decline would turn into signs of an actual recovery. A large auction of U.S. Treasuries saw enough demand to push down bond yields. Market/Index 2008 Close Prior Week As of 6/26/09 Week Change YTD Change DJIA 8,776.39 8,539.73 8438.39 -1.19% -3.85% NASDAQ 1,577.03 1827.47 1838.22 +0.59% +16.56% S&P 500 903.25 921.23 918.9 -0.25% +1.73% Russell 2000 499.45 512.72 513.22 +0.1% +2.76% Global Dow 1,526.21 1,633.70 1633.36 -0.02% +7.02% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 2.24% 3.79% 3.51% -28 bps +127 bps Last Week's Headlines May saw the second straight month of increased sales of existing homes. The National Association of Realtors said sales were up 2.4% from April--no doubt helped by sales prices that averaged 16.8% less than last year. However, foreclosures and short sales represented only 33% of those sales (compared to almost half earlier in the year), and the percentage of first-time home buyers (29%) also was lower. New-home sales were more problematic; they were down slightly in May after increasing in April, though the median price rose to $221,600--the highest since November. Move along, nothing to see here: The Federal Reserve Open Market Committee forecast no changes to interest rates for "an extended period" and maintained its existing pace for purchases of Treasury and asset-backed securities. It also left deflation out of its discussion, and continued to see any potential inflation as "subdued for some time" because of ongoing slack in the economy. The next day the Fed extended some of its financial liquidity assistance programs (the ones with all the acronyms) into early 2010 but cut back on others, citing improvements in financial markets. Preliminary estimates of big-ticket orders were up in May for the third straight month, and by more than expected. Orders for durable goods such as computers, machinery, and business equipment rose 1.8% from the previous month, though they are still down 27% from last year. However, shipments of durable goods continued to decline. Gross Domestic Product (GDP) for Q1 declined by 5.5%, slightly less than the 6.1% of earlier estimates. Payroll tax credits and one-time Social Security stimulus checks in May boosted household income by 1.4%; without the stimulus, the figure would have been 0.2%. Spending also has risen 0.3% since April, the first increase in three months. However, Americans also continued to sock away a bigger portion of that income. The personal savings rate reached 6.9% of income in May--a level not seen since Clinton's first year in the White House. Private payrolls decreased by $12.4 billion in May, compared to April's $0.7 billion drop--doubtless one reason for the increased interest in saving. The International Monetary Fund forecast that global recovery would be slower than expected, and that the world economy would shrink by 1.3% this year rather than the 0.5% growth it forecast in January. Next year's projected 1.9% growth rate also would be two-thirds of its January estimate. Eye on the Week Ahead As the quarter comes to a close, last-minute transactions at large institutional investors could affect the equity markets, though many also may leave the trading floor behind early for a long holiday weekend. Thursday's monthly unemployment figures also will be of interest. Key data releases: Consumer confidence (6/30); construction spending, manufacturing (7/1); unemployment, factory orders (7/2). Data source: Includes data provided by Forefield, Inc. and Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Real Time Economics - WSJ

Real Time Economics - WSJ.

Personal income and spending exceeded expectations today and this article breaks down why. Of particular interest, almost all of the increase came from a one-time $250 stimulus related payment. That's good, right? But wait, most of it wasn't spent, thus personal savings increased to a 15 year high. Why was it not spent? Because if consumers anticipate having to pay that money back they will save it rather than spend it. Why would they anticipate having to pay it back? Because the government hasn't made it clear yet how it intends to fully pay for that payment. This suggests to me that most consumers expect to have to pay it back via higher taxes. They'll save the money so they can pay the tax later. Kinda makes it self-defeating doesn't it! Which is just what a lot of economists have been saying all along.

2009's Best and Worst 529 Plans - Morningstar Advisor

2009's Best and Worst 529 Plans - Morningstar Advisor.

I am a proponent of 529 plans. They offer several advantages over competing options such as taxable investment accounts, UTMAs and UGMAs and alternative financing options. First, tax deferral of investment gains can help the account balance increase more quickly than taxable accounts. Second, ownership of the 529 remains with the account holder (most often the parent) and that provides greater flexibility of use relative to UTMAs and UGMAs. Third, as the assets in the 529 are considered those of the parents for FAFSA purposes, they have less impact on financial aid calculations than UTMAs and UGMAs.

It is important to remind yourself of the purpose of the 529, that is, to pay for educational expenses for the beneficiary. Don't be aggressive when choosing the age based portfolio - ie choosing a 7 to 9 year old portfolio which will be heavily in equities for a 15 year old child, in an effort to play catch-up or to get ahead. Choose the portfolio that fits the beneficiary age best. You still have risk because of the long-only nature of the portfolios, don't take on more than necessary (one of the commandments of investing).

Econbrowser: The leading economic index

Econbrowser: The leading economic index.

I've noted before that expectations can be more important than reality.

Op-Ed Contributor - Our Crisis of Regulation - NYTimes.com

Op-Ed Contributor - Our Crisis of Regulation - NYTimes.com.

Once again, the issue is not the need for more regulation but better enforcement of the existing regulations.

FT.com / Comment / Opinion - Inflation - the real threat to sustained recovery

FT.com / Comment / Opinion - Inflation - the real threat to sustained recovery. Many like to hold Greenspan singularly responsible for the global recession caused by the housing bubble of 2002-2006. Personally, I believe he's a critical player but still just one of many who contributed rather significantly to the meltdown.

In this article, however, he highlights the clear and growing inflation risk facing the U.S. and, probably, the global economy, in the coming years. Several points are worth highlighting:

1) The strong, lagged correlation of inflation with money supply. If the Fed is not capable or willing to reduce the money supply as the economy recovers, we will face very strong inflationary pressures.

2) The role of expectations - he expects inflation to surface in 2012, sooner if expectations of inflation pick up. I've said numerous times, expectations are as dangerous as reality.

3) The damaging role of fiscal stimulus - public sector debt will not sustain long-term economic growth. It must come from the private sector.

Inflation remains the greater risk to long-term recovery than deflation.

Robert J. Samuelson - Both Corporate, Public Welfare Are Endangered - washingtonpost.com

Robert J. Samuelson - Both Corporate, Public Welfare Are Endangered - washingtonpost.com.

Another well-written piece. Please read!

How to Get The Fed Out Of Its 'Box' - WSJ.com

How to Get The Fed Out Of Its 'Box' - WSJ.com. I've made the same argument for a while now here but Mishkin does an excellent job of clarifying why the stimulus is likely to be problematic.

I think Bernanke has done the best job of all of the government players in either administration but he's got a tough road ahead of him containing inflationary expectations.

Weekly Update

Market Week: June 22, 2009

The Markets

Profit-taking across the board and Friday's quadruple-witching options expirations helped eclipse the Dow's brief moment in the sun and sent it back into negative territory for the year. The S&P briefly dropped below the closely-watched 920 level but struggled back by week's end. The NASDAQ also lost ground but is still up 44% since its early March lows. Light volume in recent weeks could mean investors are already heading out for their summer vacations/staycations.

Market/Index	2008 Close	Prior Week	As of 6/19/09	Week Change	YTD Change
DJIA	8,776.39	8799.26	8,539.73	-2.95%	-2.70%
NASDAQ	1,577.03	1858.80	1827.47	-1.69%	+15.88%
S&P 500	903.25	946.21	921.23	-2.64%	+1.99%
Russell 2000	499.45	526.84	512.72	-2.68%	+2.66%
Global Dow	1,526.21	1694.76	1,633.70	-3.60%	+7.04%
Fed. Funds	.25%	.25%	.25%	0 bps	0 bps
10-year Treasuries	2.24%	3.79%	3.79%	0 bps	+155 bps

Last Week's Headlines

• Inflation continues to remain at bay. The Consumer Price Index (CPI) increased 0.1%--less than expected--in May as higher gas prices offset lower food prices. It was the first increase in the CPI in three months, though the inflation gauge was 1.3% lower than last year. Wholesale prices also increased in May (up 0.2% from April), but are still down 5% from last year.
• U.S. manufacturing continued to be weak in May; industrial production dropped 1.1% from April and manufacturing facilities operated at only 68.3% of their capacity.
• Builders launching multifamily projects led to a 17.2% increase in May housing starts compared to April; however, that was still only about half of the pace at the same time last year. Single-family starts also rose from the previous month, by 7.5%, and building permits increased as well.
• The Conference Board's index of leading economic indicators had its best month in more than five years, increasing 1.2% from April. The improvement was widespread; six of the index's eight components were up, leaving employment-related data points as the only weaknesses.

Eye on the Week Ahead

The Federal Reserve Board meets midweek; any change in interest rates would come as a major surprise, but any suggestions about future levels of Fed purchases of Treasury bonds will be of interest.

Key data releases: Existing home sales (6/23); new home sales, FOMC meeting, durable goods orders (6/24); revised GDP for Q1 (6/25); personal income and spending (6/26).

Data source: Includes data provided by Forefield, Inc. and Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Antonio Fatas and Ilian Mihov on the Global Economy: Update on the difficulty of building counterfactuals

Antonio Fatas and Ilian Mihov on the Global Economy: Update on the difficulty of building counterfactuals.

I am not a big fan of government intervention in financial markets and this post highlights one of the reasons why. Everyone makes projections (forecasts) and these forecasts are almost always inaccurate and subject to future revision. Government intervention is sold on the premise that the government forecasts somehow contain more certainty than private market forecasts.

The stimulus was presented as the "only" answer. Without it unemployment would peak at 9.0% or thereabouts, while with it, unemployment would peak at 8%. Both forecasts were wrong. Fiscal policy takes a long time to work itself into the economy and financial markets and a lot can change during that lag period. Things can get worse, as appears to be the case here, or better without any governmental assistance.

I believe the singular role of government in the financial markets is to ensure the integrity of the markets (something it failed to do over the past decade). I still believe that the economy will recover without governmental assistance and that the long-term result of the stimulus will be higher inflation.

Stop Blaming Efficient Market Theory For The Crisis

Stop Blaming Efficient Market Theory For The Crisis. While we're at it, stop blaming asset allocation. The efficient markets theory asserts that only investors with inside information can consistently beat the collective financial markets (yes, trading on inside information is illegal). Therefore, passive investing is the way to go. The writer comments that much of the market activity of the last 5 or 6 years was driven by investors who, in fact, believed they could beat the markets and thus were, arguably, not adherents of the EMT. I've long believed that markets tended to be rational over the longer-term (more than 5 years) but that markets were driven by behavior over the short-term. There is a tremendous amount of noise in shorter-term markets as well as a constant internal battle among investors as to whether the guy on the opposite side of the trade knows something I don't. This emotional reaction can cause investors to trade in non-rational patterns and disrupt the EMT.

There is another piece out over the last several days by Brad Setzer that notes a white paper which discusses the role of Emerging Market central banks. Essentially, these banks placed significant assets in U.S. Treasuries, which helped drive down rates. That resulted in investors stretching for higher returns and helped to create the 03-07 bubble. This is another aspect of the behavioral issues - the desire (and the need) to outperform.

Asset allocation has also been beaten up as a "failure" because asset allocation didn't prevent investors from losing money in the last half of 2008 or earlier this year. However, that isn't the point of asset allocation and thus is a poor argument for defining its failure. The intent of asset allocation is to reduce the overall volatility of a portfolio and, thus, minimize the deleterious effects of poor performance. The key is "minimize" not eliminate. Long-only strategies (no shorting of securities) can't fully hedge downturns. If you own a security that goes down in price, you can either sell it and suffer a cash loss or hold it and suffer a paper loss. You have a loss either way. In 2008, you would have had to move entirely to cash to avoid a loss or been fortunate enough to hold the 3 or 4 equities that didn't decline.

Bottom line is that neither the EMT nor asset allocation are "failures". Both have flaws which were laid bare in 2008. What should be done now is to use this crisis as an opportunity to re-examine your own approach to portfolio management. I have argued before that investors, to the extent possible, should focus more on absolute return rather than relative return (to any index or peer). This approach incorporates asset allocation and can incorporate EMT but removes the long-only constraint by necessity. I'll write more on this in future posts.

A Complete Toolkit for Fighting Inflation - Morningstar - Research Affiliates

A Complete Toolkit for Fighting Inflation - Morningstar - Research Affiliates.

More people are thinking about deflation rather than inflation these days but inflation is a real and likely risk in the near future, read less than 24 months. Preparing for the possibility of inflation makes sense from a longer term investment perspective. Give some thought to adding inflation hedging asset classes to your portfolio such as those mentioned in this article.

Fund Times: A Manager Says the Market Rally Is Pure Junk - Morningstar - Fund Times

Fund Times: A Manager Says the Market Rally Is Pure Junk - Morningstar - Fund Times.

This is a common phenomenon in sharp market rallies - "junk" stocks moving more than higher quality stocks. Frequently, institutional investors are unable to invest in these companies because of tightly written investment policy statements and investment management agreements. However, mutual fund prospectus are so loosely written you can drive a truck through it (so to speak!). This kind of statement is common among institutional managers but rare among mutual fund managers.

These smaller, poor quality stocks are typically very illiquid which makes it difficult for most larger managers to invest. Given their assets under management, they simply can't take meaningful positions without disrupting their portfolios. Managers will look at the percentage of average daily volume they would own if they took what they consider to be a meaningful position. If this number translates into owning more than 1 full day of trading volume, many will pass. As that number increases, the manager gains more "de facto" control of the company and most do not want to run companies, they want to invest in companies.

This rally in junk probably represents a re-pricing to reflect the reduced probability of these companies going bankrupt. Most certainly, they were significantly affected by the 4Q08 market decline as these are primarily companies highly susceptible to economic weakness and credit market contraction. Most don't have the cash flow generating ability to operate without debt. These stocks often move quickly and sharply higher but will then bleed that return back to the market as the rest of the market recovers. It's a market timing segment and one most investors should leave alone.

The Long, Ugly Decline in Stocks Has Ended - Kiplinger.com

The Long, Ugly Decline in Stocks Has Ended - Kiplinger.com.

I'd like to say I agree but I remain skeptical though not pessimistic. There are still very significant negative drivers which have the potential to depress stocks. Unemployment remains high, consumer and corporate balance sheets are still contracting and these same groups are unlikely to reverse the contraction in the near future. Remember, U.S. GDP is comprised of 3 principal elements - consumer spending, corporate spending and government spending (as well as the net of imports-exports). For corporate earnings to recover significantly, we need consumer and corporate spending to increase.

Recent market gains likely simply brought equities back toward fair value. Think of market movements as similar to a rubber band stretched and snapped. The band will overshoot in the opposite direction before eventually settling to a resting position. The equity markets (and fixed) overshot and then bounced back to a resting position. Going forward, expect gains to be driven by upward earnings revisions and results. This presents the challenge however. Early improvement will be the result of draconian cost-cutting by Corporate America which was probably needed. The issue is cost-cutting driven earnings improvements are not sustainable. As market participants come to expect earnings growth, it will have to come from top line growth. That requires spending and not government spending. I don't see that improving dramatically until 2010. So, earnings could pull back and equity prices could pull back at some point later this year before meaningful spending and earnings growth show up next year.

I've been an advocate of dollar-cost-averaging and remain so. I believe this approach will help investors manage their portfolios through the volatility we can expect will continue in the near future.

Fed Data

The Fed released the 1Q09 flow of funds data yesterday. Below are several charts I've created from the variety of data available.

The first one shows borrowing by sector and clearly highlights the dramatic shift from consumption to savings by consumers and businesses over the course of 2008 and early 2009. Essentially the only borrowing now is being done by local, state and federal governments.

Not surprisingly, debt growth has also plummeted with the sharpest decline in foreign debt over 2008 (now back to 10% growth). Again, clearly highlighting consumers and businesses are not borrowing and consuming now. Note that consumer credit has fallen sharply. Many are concerned that credit cards are the next credit default danger, and that may be true, but it appears consumers are already curtailing their credit activity and thus may be better positioned to pay down rather than default on these debts. Finally,

this chart clearly shows the rapid increase in cumulative debt outstanding over the last 35 years with sharp increases in financial, business and home mortgage debt. Not surprising as these are commonly known facts. Of interest, is the relatively small consumer credit debt outstanding. It is still important, don't get me wrong, but today total consumer credit is just 1/4th the amount of home mortgage debt outstanding. So a 100% default of consumer credit would be the equivalent of a 25% default on home mortgage debt (down from 49% in 1974). Still very worrisome but I'd remain more concerned about mortgages.

The bottom line appears to be that consumers and businesses are currently committed to improving their balance sheets by cutting consumption. This suggests continued weak economic recovery and earnings results. Exposure to equities should be selective and should favor companies with a demonstrated ability to consistently generate positive earnings and cash. This should actually always be your equities exposure but its critical now. This "junk" rally will end when investors recognize these companies cannot meet heightened earnings expectations in a weak economy. The more durable companies will gain attention at the expense of the weaker stocks doing so well now. Be patient and favor good value over junk going forward. Also continue to consider alternatives to equities such as commodities, natural resources, alternative strategies to diversify your portfolio.

planadviser - Americans See Favorable Tax Treatment As Best Road To Retirement Funding

planadviser - Americans See Favorable Tax Treatment As Best Road To Retirement Funding.

I've discussed similar findings in the past. In this post - 86% of respondents don't know what their retirement income will look like yet 58% believe they're at least "fairly well-prepared" for retirement. If you don't have an idea what you'll need how can you possibly believe you're prepared!

Don't neglect retirement planning. Contact an advisor and get started now regardless of how close you may be to retirement. The younger, the better.

Get Ready for Inflation and Higher Interest Rates - WSJ.com

Get Ready for Inflation and Higher Interest Rates - WSJ.com.

Paul Krugman recently wrote an article in the NY Times in which he said, essentially, that the current crisis is Ronald Reagan's fault. This article in today's WSJ is written by the man to whom Reagan listened 30 years ago.

Whether you agree or disagree with either economist, Laffer makes a compelling argument here for at least preparing for inflation. Keep in mind, in economics, expectations are as important as reality. If enough people expect inflation, it will likely happen.

A Tax Break for Sending the Kids to Camp - Kiplinger.com

A Tax Break for Sending the Kids to Camp - Kiplinger.com.

Summer is almost here and school is almost out. If you haven't signed your children up for camps, here's an article to keep in mind when looking for good camp options.

planadviser - Small-Business Owners Worry About Keeping 401(k) Match

planadviser - Small-Business Owners Worry About Keeping 401(k) Match.

Many small businesses are feeling the pinch of the economic downturn. Consequently, many are postponing establishing a retirement plan and/or are cutting back on their employee match in an effort to save money. When critical, it must be done, but if the option is available, small businesses should make every effort to cut costs elsewhere saving the employee match for worst case scenarios. The match is a significant employee benefit and a meaningful retention tool. Cutting the match is a signal, whether intentional or unintentional, to employees regarding the well-being of the firm and/or management's "respect" for employees.

This survey also noted that many small businesses are desirous of working with advisors. Obviously, I fully support that desire. While retaining an advisor does not eliminate the small business owner or management's fiduciary duty, it does help the owner or management meet this responsibility and should help make business life easier for all involved.

Weekly Update

Market Week: June 8, 2009

Courtesy of Forefield, Inc.

The Markets Close but no cigar: The Dow closed for the week a millimeter away from breaking even for 2009. The S&P 500 hit a new closing high for the year on Tuesday, and the Nasdaq continued to outpace the other indexes. However, by week’s end, investor optimism seemed to be tempered by concern that any economic green shoots might also lead to higher inflation and Fed action on interest rates. A sell-off, particularly in shorter-term bonds, drove Treasury yields back to the levels of last September. Market/Index 2008 Close Prior Week As of 6/5/09 Week Change YTD Change DJIA 8,776.39 8,500.33 8,763.13 +3.09% -0.15% NASDAQ 1,577.03 1,774.33 1,849.42 +4.23% +17.27% S&P 500 903.25 919.14 940.09 +2.28% +4.08% Russell 2000 499.45 501.58 530.36 +5.74% +6.19% Global Dow 1,526.21 1653.06 1,680.43 +1.66% +10.10% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 2.24% 3.47% 3.86% +39 bps +1.62% Last Week’s Headlines Consumers had more income in April, but they seemed to be saving instead of spending it. Personal income rose 0.5% in April from the month before, when income fell 0.2%, and the percentage of disposable income that went into savings rose to 5.7%--the highest in 14 years and almost a full percentage point higher than the March figure. As a result, consumption fell 0.1%. That’s good news for personal balance sheets, not so much for the current economy. May’s unemployment rate hit 9.4%, the worst level since 1983. However, new job losses in May continued to be less than expected: 345,000 compared to April’s 504,000 (the fewest monthly losses since September). And the weekly tally of continuing unemployment claims fell for the first time since Jan. 3, dropping by 15,000 to 6.735 million. The National Association of Realtors’ index of pending sales of previously owned homes rose in April for the third straight month, by 6.7%; even better, it was 3.2% above the April 2008 level. Auto sales figures (announced the day after GM surprised no one by filing for bankruptcy) fell 34% in May from the same time last year, but for GM, Ford, and Toyota, May still represented their best month of 2009. Construction spending rose a scant 0.8% in April. Though it’s still down 10.7% from a year ago, it was better than the 0.9% decline that analysts had expected. Private-sector spending, both residential and commercial, led the monthly increase; federal, state and local construction fell. Another green shoot made an appearance in the Institute for Supply Management’s May report on U.S. manufacturing. It was the first month since November 2007 in which new orders were up. However, employment and inventories led to continued contraction in the sector, though at a slower pace than in April. Exit GM and Citigroup, enter Cisco and Travelers: As of June 8, the Dow Jones Industrial Average boots a bankrupt company that had been part of the index since 1925, and replaces another component with one of its spinoffs. Both the European Central Bank and the Bank of England kept their interest rates unchanged, at 1% (ECB) and 0.5% (BoE). Eye on the Week Ahead Investors will watch the U.S. Treasury’s scheduled midweek auction of long-term bonds to gauge ongoing demand for U.S. sovereign debt. Data on May retail sales will give another indication of consumer mindset. Key data releases: Balance of trade, wholesale trade (6/10); retail sales, business inventories (6/11); import prices (6/12). Data source: Forefield, Inc. Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The Nasdaq Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Ballmer Says Tax Would Move Microsoft Jobs Offshore (Update3) - Bloomberg.com

Ballmer Says Tax Would Move Microsoft Jobs Offshore (Update3) - Bloomberg.com.

This is useful as a counter balance to the generally positive economic and market data we've seen lately. The administration is searching for revenue to offset the increase in debt and has proposed changing tax rules related to offshore activity of U.S. companies. Microsoft has responded here by stating they'll move to other countries. Keep in mind, that higher corporate taxes are passed through to consumer via higher prices. So higher corporate taxes can lead to higher prices (inflation) and fewer jobs. Not good. Microsoft is surely posturing to a degree but some job movement is very possible particularly for companies which already have an offshore presence.

Ballmer also notes that the Dow would likely drop as a result of lower earnings. Companies won't be able to push higher taxes through quickly or fully, so net earnings will be lower as a result. It's a natural assumption that lower earnings will translate to lower stock and index values. Again, a useful counterbalance to the otherwise generally good news we've had lately.

Moving over the 200 day SMA

I've mentioned several times a research paper which discusses a simple tactical asset allocation approach of moving between equities and cash based on the index level relative to its 200 day simple moving average. The theory is that when the index level moves above the 200 day SMA, it's time to buy and when it moves below it's time to sell.

Well...

All three indexes are now trading over their 200 day averages and their not alone...

Commodities are also trading over their 200 day average after being absolutely hammered in 2008 and..

long bonds are trading over their 200 day average (this is a call option on rising yields).

The economic news continues to be on the better side so expectations are continuing to rise. We still have big issues to address such as the increasing national debt so I'm not overly exuberant. Being skeptical and conservative, I'd watch the indexes for another week for more confirmation and I'm still thinking investors take their time averaging into positions. Continued good news on the economic front and continued good investment performance will certainly help investor confidence and that's just as valuable to improving conditions as real economic improvement.

When It Pays to Hire a Financial Professional - Morningstar - Specialists

When It Pays to Hire a Financial Professional - Morningstar - Specialists.

There are many individuals more than capable of managing their own money. In fact, most people are more than capable. The challenge is finding the time to manage your own money while also managing a full-time job, or multiple jobs, managing the kids academic, athletic and social schedules and managing your own non-work related schedules. For many, this is impossible and the financial plan fails. For others, managing their finances is complicated because of wealth and/or life events (such as divorce). Finally, as noted in the article, if you're a business owner, establishing and managing your own retirement plan can be challenging.

Thus, there are a number of situations in which retaining an advisor can and does make sense. If you are discovering you don't have the time or the inclination to properly manage your investments and your financial plan, you should consider hiring an advisor. If you run a business and have or want to establish a retirement plan, you should hire an advisor. In both situations, the advisor will serve as your chief investment officer. His/her responsbility will be to ensure your investment portfolio, financial plan and/or retirement plan are designed with your (or your plan participants) best interests at hand and to ensure the effort is on target.

I've written before about the tendency of many to believe they have it all worked out yet don't have any idea how much they need to live in retirement. This is a behavorial finance concept known as over-confidence. Yes, most of these individuals (if not all) are very smart and very capable of handling their own finances. Yet, most don't do so well because they don't make it a priority. Don't fall into this trap. If you want to manage your own financial plan and investments, do so, but make it a priority not a spare time thing. If you can't or won't out-source to someone who will.

Weekly Update

This is a new item I intend to post weekly.

Market Week: June 1, 2009

The Markets

Despite a shiver after a post-auction spike in Treasury bond yields, the equity markets regained their footing by the end of the week. That made May the third straight month in which the major indexes have ended up. The S&P 500 has risen 25% since February--its best three-month performance since 1938--and the Dow's 20% gain is its best three-month stretch since the market peak in October 2007. The Nasdaq was up almost 29% in the same time and continues to be the best performer this year.

Market/Index	2008 Close	Prior Week	As of 5/29/09	Week Change	YTD Change
DJIA	8776.39	8277.32	8500.33	2.69%	-3.15%
NASDAQ	1577.03	1692.01	1774.33	4.87%	12.51%
S&P 500	903.25	887.00	919.14	3.62%	1.76%
Russell 2000	499.45	477.62	501.58	5.02%	0.43%
Global Dow	1526.21	1604.53	1653.06	3.02%	8.31%
Fed. Funds	0.25%	0.25%	0.25%	0.00%	0.00%
10-year Treasuries	2.24%	3.45%	3.47%	0.02%	1.23%

Last Week's Headlines

Consumers surveyed in May by both the Conference Board and the University of Michigan were feeling nearly as chipper as they were at the beginning of September 2008. The Conference Board's index has doubled from 26.9 to 54.9 since March.
According to the Mortgage Bankers Association, new foreclosures on first mortgages hit 1.37% in Q1 2009, and the percentage of homeowners either in foreclosure or at least one payment behind rose to 12.07%--both records. Prime fixed-rate home loans represented more than half of all new foreclosure proceedings.
Foreclosures and short sales continued to drive April sales of existing homes, which the National Association of Realtors said rose by 2.9% from March. Inventories of existing homes on the market rose 8.8%, representing a 10.2-month supply, and the median price was down 15.4% from last year. Sales of new homes rose a scant 0.3% in April, and are still down 34% from last year.
The March S&P Case/Shiller Index of home prices in 20 metropolitan areas showed a 2.2% drop from February and a 19.1% quarterly decline from Q1 2008--the steepest drop in the index's 21-year history. Nationally, that means prices are roughly where they were at the end of 2002. It was the 12th straight month in which every region showed a year-over-year decline.
Durable goods orders for such items as metals, machinery, and cars were stronger than expected in April--up 1.9%. Though they can vary widely from month to month and are frequently revised, durable goods orders are seen as a leading indicator of the economy's health.
Key bondholders agreed not to fight a GM bankruptcy after the federal government offered to lend the company an additional $30 billion and then swap most of its total $50 billion in GM loans for a post-reorganization 60% ownership of the automaker.
The revised measure of Gross Domestic Product for Q1 2009 held not-so-bad news: a 5.7% drop rather than the 6.1% originally estimated.
Oil hit a six-month high of $66.31 a barrel, and U.S. oil inventories were lower than expected after falling for a third straight week. As the dollar swooned to its lowest level against the euro this year, silver completed its best month in 22 years, and gold hit a three-month high.

Eye on the Week Ahead

As GM drops the other shoe on filing for bankruptcy, Chrysler may start to emerge from its own speed-of-light Chapter 11 reorganization. Snapshots of income and spending also are on tap, as well as data on the engine behind them: employment. The Treasury will announce the size of the following week's auctions of long-dated securities.
Key data releases: Personal income and spending (6/1); construction spending (6/1); home, auto sales (6/2); factory orders, oil inventories (6/3); unemployment rate, consumer credit (6/5).

Data source: Forefield, Inc. Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The Nasdaq Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are un-managed and are not available for direct investment.

How We Can Escape This Mess - Kiplinger.com

How We Can Escape This Mess - Kiplinger.com.

This article is an interview with Robert Shiller, author of several well-known investment books and creator of the S&P/Case-Shiller Home Price indexes. He makes several excellent points in the article, of which I both agree and disagree:

1) The government needs to run up a big deficit to counter the lack of spending by consumers. He claims this didn't happen during the Depression because the initial stimulus failed making additional efforts politically difficult. This is a classic Keynesian argument that the government must increase spending during a recession. However, Keynes also believed that spending should be reduced during an expansion. As a skeptic of government, I find it difficult to imagine a scenario under which expanded spending now is effectively curtailed in the future.

2) He believes in additional programs to help homeowners avoid foreclosure. He portrays homeowners as being misled by government (or displacing their responsibility on the government, you choose) into buying a home. I'm sure this is true for many, but I'm also sure many, many more fully understood what they were doing and proceeded to over-leverage anyway.

3) Housing prices have not increased in real terms in 100 years. This is a valuable point - always assume your home will appreciate at the rate of inflation and no more. Assuming you've leveraged your home (via mortgage) roughly 5 to 1 (20% down) and are paying regularly on a 15 year mortgage, your home will be worth roughly a little more than 1.5 times what you originally paid at the end of 15 years. However, you'll have gone from 20% equity to 100% equity during that time so the asset will have a meaningful value to you.The return on equity is roughly 14.5% annually. Consider, a $300,000 home would be worth $467,000 in 15 years at 3% appreciation (assumed inflation rate based on historical average). You put down $60,000 and 15 years later that original $60,000 is worth $467,000. I know you've made payments and paid interest so the IRR won't be as high. Yet, at the end of 15 years you have an asset worth almost half a million. The point is having your own home and an asset that appreciates at a rate similar to inflation is worthwhile, just be sensible about the initial economics. Buy one you can afford.

4) The markets may be fairly valued but its difficult to confirm."The feeling that the market is not safe is a major cause of it not being safe". Yep.

5) Inflation is a risk - "I see a scenario in which inflation picks up because people start to expect it". Absolutely - expectations about the future drive the economy and markets much more so than actual results.

6) Treasuries may be the next bubble. I have no reason to argue with that statement.

Click on the link above to read the whole story.