Mon Jun 15, 2009
June Commentary
We would all love to have the magic glass that would let us see when the markets are going to move up or down. We would then be famous for knowing just how to time the market. Even the experts, or those people that a Washington Post article referred to as 'America's finest financial engineers' are having a hard time making predictions in today’s market (Quinn, Jane B. 'Absolute-Return' Funds Aren't So Definite. The Washington Post, March 01, 2009; F01.)
Clifford Asness, whose firm AQR Capital Management LLC lost billions from 2007-2008, said in a Wall Street Journal article on May 26, 2009 ('A Hedge-Fund King is Forced to Regroup'), 'We got more wrong than right last year.' According to this article, 'AQR’s flagship Absolute Return Fund, or ARF, fell about 45% in 2008.' 'The market’s chaos last year made a hash of the mathematical models used by quantitative hedge funds such as AQR.'
Hedge funds, as well as many other mutual funds, have been using hedge techniques for years. They practice 'shorting' (betting on a stock falling and then borrowing against it), leveraging various securities, as well as using 'models' that tell them when to move in and out of the market. While different in design, various mathematical formulas were also used to define the derivatives market that was a primary ingredient in this recession. The derivatives were based on securities built on the mortgages that were bundled and sold. We know where that led us.
Additionally, the pressure the "short sellers" put on the market place was also evident in March of this year. This pressure is believed to be responsible, in some part, for pushing the market down to it’s low. To correct this, the SEC will be making changes to the "short selling" rule because of how it managed to disproportionately affect the March market. We expect those changes to come out this month. However, these changes will not affect how our firm rules our portfolios, because we do not 'short sell' or use the various hedging techniques described. We do not use them because these techniques have the ability to "double down" a return. That is like being on the table in Vegas. You could double your money up OR down.
We are now seeing the industry start to try to build some new styles of funds. The newest nickname is "long/short" funds. This involves a play to two sides of the market place. The lesson in this story is that even the "timers" got it wrong and now they are trying to make up for it. Will these be more successful than existing funds?
Back in the 80's, there were under 1,800 mutual funds, and now there are over 20,000. In recent years, there have been more mergers, fold-ups, and changes than ever before. This is, in some part, due to the large universe of funds that now exists. We went back and tried to find successful funds in 2008, and the pickings were slim. Over the last 10 years, it seems new is not necessarily better. We ran a "back test" and found that our client portfolios would have had to have been almost 100% in short bonds to have not had a loss. The problem with mathematical models seems to be that they cannot incorporate the human element in the equations.
ECONOMIC NEWS
May, 2009 has shown less volatility than previous months. In view of the weakness in the overall economy, this is a positive sign. We have observed the credit spreads narrowing substantially, particularly since October of last year. To give you a comparison, in October, when the credit markets froze, lending rates were over 4%. Now they are down below 1%. Credit markets froze in October because financial firms did not want to pay the higher rate. We can see why. Although banks and financial firms still have a long way to go to rebuild their balance sheets, we have seen some positive progress. Some banks managed to sell stock to raise capital, and others are trying to give TARP monies back. This is good news. While everything is not yet well, there is some healing going on.
General Motors is also a big player in the current economic news. While the market has absorbed the numbers on Chrysler, it has yet to integrate the affect of General Motors going into Chapter 11 bankruptcy. We will watch how things roll out throughout the coming months and give you an update if things show some significance.
PORTFOLIO IDEAS
Risk questionnaires are being returned, and many folks appear comfortable with their allocations. Remember, these questionnaires were not meant to suggest to you that you needed to change things. They are a tool to make sure that we have you allocated in such a way as to meet your risk tolerance or risk capacity at this time. As many articles have pointed out, concepts such as dollar cost averaging (DCA) and asset allocation are not dead. They have existed as a tool for decade upon decade, through all kinds of recessions, and are still being used. State pension plans, trusts, and company pension plans all use asset allocation. Many of these also suffered under last years onslaught, and I have not heard of any State Pension plan or trust changing from asset allocation to "timing" the whole pension plan into and out of the market. If those plans had gotten out of the market they would have missed the recent rally.
EARLY WITHDRAWALS ON IRA'S and IRC SECTION 72(t)
Some folks have been laid off short of age 59 1/2, the age at which you can normally take money from your IRA without the 10% early withdrawal penalty. If you intend to make an early withdrawal of IRA funds, the following information may be helpful.
Internal Revenue Code (IRC) Section 72(t) gives you some alternatives to paying the early withdrawal penalty. To avoid the penalty, you may be able to take your distributions each year in a series of substantially equal period payments (SEPP's). This means annuitizing your early withdrawals over a 5-year period, or until you reach age 59 1/2, whichever is longer. The three calculations that can be used are (a) annuitization, (b) amortization, and (c) a minimum distribution method based on your single life expectancy. Each yields a different result in terms of monthly payments, and once started they must remain the same each month. The code changed several years ago to allow for a "one time" adjustment if the choice taken results in a "draw down" on the account.
Other exceptions to the 10% penalty include: disability; inheritance of an IRA; using the funds for excessive medical expenses, health insurance, or educational expenses; buying, building, or rebuilding a first home; as well as a few others. None of these methods avoids the tax on the income you receive, but it does cut out the 10% early withdrawal penalty that would otherwise be imposed. If you would like more information on IRA’s, please see the following IRS publication (Publication 590: Individual Retirement Arrangements) at: http://www.irs.gov/pub/irs-pdf/p590.pdf
UNEMPLOYMENT
While unemployment continues to rise, we can take some comfort in the fact that Richmond's unemployment is lagging behind many other cities across the country. Unfortunately, it is still hitting home for some of our clients. Your children may have been laid off from their jobs, or even some of you are experiencing lay-offs first hand. It is hard to be spared from the difficulties circulating throughout this economic situation. If you have been laid off and are at the right age, you may wish to try to take advantage of a 72(t) .You may also have to consider what to do with your 201(k) (does your 401(k) looked like half of what it used to be?).
Remember that our firm does not sell investment products. Our advice over the years has been within industry standards, to be unbiased and free from any conflicts of interest. You or your child deserves this type of advice, not just a sales loaded group of mutual funds or an expensive insurance product. We will gladly provide this same honest approach to anyone you know that is uncertain about just what to do during this type of transition. Let us know if we can be of service.
Kevin P. Deckert CFP
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Mon Jan 26, 2009
The Current Financial Crisis (Frequently Asked Questions)
The following link takes you to report published by Protiviti, a global business consulting and internal audit firm, that does a pretty good job of laying out questions and answers to what's been going on.
I think you will find it very useful.
http://www.protiviti.com/downloads/PRO/pro-us/Global_Financial_Crisis_011409FAQs.pdf
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Thu Sep 25, 2008
Important Client Communication on the Financial Markets From Kevin
September 25, 2008
To all Deckert Leahy Clients,
"These are the times that try men's souls."
The last 9 months have been tumultuous to say the least. The stock market has affirmed that the economy has slowed. The news we are being bombarded with refers mostly to the credit markets involving banks, mortgage companies, and investment bankers. There is NO question that the credit markets are a mess. The Federal Reserve Chairman, (Bernanke) and the Treasury Secretary (Paulson) are working on getting a plan through Congress to stabilize the credit markets and provide an outlet for these kinds of companies to get rid of their bad debt. Whether we approve of our government bailing out private business or not, at the end of the day it becomes the responsibility of our government to make sure our country's financial and lending systems do not fail. The result would be catastrophic. I believe the financial men in charge realize how serious this scenario is and will not fail us. It will take some time for our financial systems to heal, but in the end they will do so. They did after the tech bubble burst, the savings and loan crisis, the junk bond crisis, and even after the "crash" of September 1987.
Many of you are uncertain of the course of action to take in this environment. Allow me to offer some perspective. The answer lies more in the field of psychology than economics.
After all, in most economic activities, people buy more when prices are lowered and less when prices are raised. For example, retailers often announce lower prices in the form of a sale as a way of getting more customers to come into their stores. With stocks, however, the opposite is true. As prices rise, people tend to invest more. When prices fall, they want out. Reviewing the fund inflow/outflow charts of the past decade show us some important information. Money has POURED into the markets after periods of good returns when prices were high, with inflows reaching a record level just before the crash in 2000. Then as prices came down, money flows slowed dramatically as fearful investors became more cautious close to the bottom in 2002, just before the markets dramatic rise in 2003.
The cost of this self-inflicted wound is enormous. Investors consistently invested more after prices went up and got out after prices fell. The result is that over the last 20 years the average stock fund returned almost 12%, but the average stock fund investor earned only 4.5%. **
One way for investors to do better is to identify the forces that lead to this costly behavior and then try to avoid them. Chief among these forces is the media. When prices rise, the media rarely warns of a bubble and when the prices fall, they rarely declare a bargain. On the contrary, the media tends to amplify whatever is happening. Just as 2005 when real estate prices neared their peak, a Time magazine cover in June 2005 showed a man hugging his house next to the headline "Home $weet Home."
As the earlier information shows, in this battle between head and stomach, the stomach often wins out. As investors rush for the exit, prices fall, creating bargains for those who can keep their head and resist going with their gut. While avoiding the timing penalty does not mean that you will achieve the goal of buying low and selling high, at least it ensures that you will avoid the opposite.
Please realize the next 12 months are going to be rocky to say the least. The good news about capitalism is that one company does business with another because it wants to, not because it has to. In order for companies to do business with one another, they are going to HAVE to clean up their assets, or nobody will do business with them. It won't happen overnight, but eventually it will begin to improve.
Remember that asset allocation is diversifying your investments so that you are not hurt (or helped) by just one category of investment. The different categories will slow down some of the impact and volatility of the markets on your portfolio, i.e. the more conservative you are, and the less volatile your portfolio will be. A more conservative portfolio will, of course, also affect a rate of return. How you design will be the determiner of how return goes either up or down.
If you positively cannot sleep at night or have ANY questions of us, please talk to us, and we'll help guide you through these days.
A quote from Shelby Davis, a tremendously skilled investment manager who died in 1998:
"To sail across the ocean, you must balance making progress in fair weather with the ability to withstand the inevitable storms. Those who think only of the storms will never leave the shore. Those who think only of fair weather will never reach the other side."
Kevin Deckert CFP
President
*Source: Quantitative Analysis of Investor Behavior by Dalbar, Inc (July 2008) and Lipper.
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