“If we shadows have offended, Know but this and all is mended. That you have but slumbered here,
While these visions did appear, And this weak and idle theme, No more yielding, but a dream.”
― William Shakespeare, A Midsummer Night’s Dream
Puck delivers these words near the end of A Midsummer Night’s Dream, expanding the theme of dreams into reality. Our financial markets have been in a positively dreamlike state for most of this summer. Will we soon wake up to a sobering slump in the fall? Paraphrasing Hamlet: “The economy doth protest too much, methinks.”
The overall economic recovery has been moving ahead now for three years. More than 5 million jobs have been added during this time. Unemployment dropped again last month to 7.4%. The basics of supply and demand are fueling our resurgence with pent up demand in critical areas such as housing, automobiles, and consumer goods. Based upon a variety of valuation metrics, such as price to book, price to forward earnings, and price to cash flow, stocks appear to be inexpensive today as compared to their long-term averages.
Despite last week’s worst performance of 2013, the three major indices reached their all time highs in August: DOW 15,658, S&P 500 1709, and NASDAQ 3694. Led by small and mid-cap growth equities, the sectors that are up more than 20% this year include healthcare, consumer goods, and financials. A 10-year Treasury bond earns you 2.84% and an average 6-month CD yields 0.27%. Real estate, oil and gas prices are up from a year ago…gold, silver, copper, and corn prices are all down. The average 30-year fixed mortgage is holding pretty steady at 4.56%. Last week’s drop was an alert for investors to keep their confidence in check.
There is risk…and then there is risk. With market prices so high, it is smart to take into account your personal level of risk tolerance. You have several types of risks to consider: economic, political, monetary, short-term, long-term, standard deviation, beta, sector weightings, inflation, etc. This variety of risk factors reminds me of the film “Forest Gump” as Forest’s friend Bubba describes the many ways to prepare shrimp: “You can barbecue it, boil it, broil it, bake it, sauté it. There’s shrimp kebabs, shrimp Creole, shrimp gumbo, pan fried, deep fried, stir fried, pineapple shrimp, lemon shrimp, coconut shrimp, pepper shrimp, shrimp soup, shrimp stew, shrimp salad, shrimp burger, shrimp sandwich. That’s about it.” Incorporating risk and uncertainty into your portfolio should give you shelter against the storm. Here are some ways to mitigate your risk: Know your risk tolerance level from 1-10, stay in balance, rebalance, diversify, keep your costs low, and constantly review your objectives, expectations and time frame.
Art, Jo Ann, Dale, Rande, Judy, Leanore, Marie, Chris, Bob and Jennifer…thank you for introducing us to new people to use our services. Currently, we are accepting new clients exclusively by recommendation. We take pleasure in both the financial work and the personal relationships. If someone is unhappy with their advisor, they are rolling funds from a retirement plan, going through a divorce, or they would simply appreciate a second opinion about their money management, please introduce us. There is no cost or obligation.
Students and parents are getting a break on loans. A new way of setting interest rates for federal education loans was signed into law last week. The rates will now move with the financial markets, meaning lower rates in the coming school year. This is expected to benefit millions of students and their parents who will use federal loans to pay for this academic year. For the coming school year, the interest rate for undergraduates is 3.86 percent, and for graduate students it is 5.41 percent. These rates will lock in for the lifetime of the loan.
Would you be surprised to know that gas stations make more money from food and car accessories than from gas? McDonalds makes more money in rent than selling food. Lucasfilm profits more from toys than movies and auto dealerships make more from financing and service than car sales. Printer manufacturers earn more from ink than printers.
Making money in business is rarely a straight line. IBM was essentially saved from bankruptcy in the ‘90s by CEO Lou Gerstner. Lou saw the writing on the wall. Change or die. As former Chairman of RJR Nabisco, he was not emotionally attached to IBM’s long-suffering products like OS/2. He cut expenses partly with massive layoffs, sold assets, and tied employee compensation to IBM’s overall performance. Lou created new ways to measure results by rewarding teamwork and efficiency. Gerstner changed the culture at “Big Blue”, moved away from hardware sales to “top-to-bottom technology solutions” and saved the day for IBM.
It can be wonderful to give to charity…but not blindly. You should know where the money goes. The Center for Investigative Reporting listed these non-profits with the worst statistics over the last ten years: Children’s Cancer Fund collected $37M, paid solicitors $29M, and a mere 5.3% went directly to aid. American Association of State Troopers collected $45M, paid $36M to solicitors, and sent only 8.6% to aid. Other inefficient charities in the report included National Veterans, Breast Cancer Relief Foundation, Cancer Fund of America, Children’s Wish Foundation International and Kids Wish Network. There is little doubt that these are fine causes with good intentions. However, we should know how much money really arrives at our intended destination. According to Forbes Magazine, the best charities (after expenses) are Brother’s Brother Foundation, Juvenile Diabetes Research, Boy’s and Girl’s Club, International Rescue Committee, and the United Way.
In the last three years following the recession, those who tuned out the political and economic “noise” of disaster have generally prospered. The pulse of our economy is undeniably hooked up to the machinations of the Federal Reserve Board. It is valuable to stay current, to educate yourself…but even more vital to pay attention to the fundamentals of investing: price, profit margins, cash flows, earnings and dividends. It appears to me that some good buying opportunities await us through the summer and soon after Black Tuesday, October 29th.
Today’s the day.
Mitch Fisher