Presidential Analysis and the Economy

Joined At The Hip
Economics and politics are intertwined. This analysis is in no way a political statement. To ignore the past/current/future success or failure of the economic policies of Washington would be to ignore reality. As pictured above, neither party can claim that they are better than the other at implementing political decisions that have/may result in better economic outcomes for Americans.

Current Situation
At this point in time, President Obama is likely headed towards an outcome reminiscent of the Carter presidency. Carter was a very likable guy, just like Obama. Being likable does not, however, equal success. Obama has made many of the big decisions he wanted to make and at least thus far, they do not seem to be working. Our economic analysis has the U.S. economy on the brink of either:

a) A double dip back into recession
or
b) Possibly worse

What To Watch For
Between now and 2012, the Obama administration and the House and Senate will need a miraculous turnaround for the U.S. economy to get reelected. Barring a much better second half of the football game, Americans will once again seek change, hoping that change may foster a better economic result. I am on record as stating that of the two choices that were given, Hillary Clinton would have made a much better choice for a host of reasons. These include: More experience, more bipartisan, more pro business, more realistic about what the priorities should be and how much of the apple you can bite off at a time. I have no idea who the Republicans will choose in 2012, but I will not at all be surprised if Hillary breaks rank and runs against Obama.

The Men Above
Of the men pictured above, I could vote for Kennedy, Reagan and Bill Clinton. Nixon could have made the list, if not for Watergate. Bill Clinton, even with some stumbles along the way, gets a pass because he ran the economy very well.
INVESTING LESSON/OUTLOOK
Elections matter. Economic policy matters. Some get lucky; others do not. We can look back years later at our leaders and realize some had skill, while others did not. Only the history books can tell.

Regardless of what party occupies the White House, as an investment manager, I am left to navigate the markets, which I cannot overemphasize are impacted by many other factors than just current politics.

Only by standing against the prevailing winds–selectively, but resolutely–can an investor prosper over time. Such a strategy may underperform during markets that are rising, based upon the momentum of the herd vs. fundamental valuations. Our portfolios at WFG lagged a bit in the past six months as I was too early to reduce our equity exposure, not expecting the market to run up as far as it did. I believe that today, we now sit near the top, looking down the other side of the hill. With that in mind, our reduced equity exposure in our balanced accounts can allow for "shock absorption", if, and when, the footing takes the markets further down.

Support For Why 60% In Stocks Is Too High For Retirees/Pre-Retirees, At This Time

Recent bulletins to clients of my advisory firm, Wade Financial Group, Inc., have focused on why I believe that a 60% allocation to stocks is too high at this point in the economic cycle. The chart below makes a very important point: You must have a VERY long-term time frame for the odds to be in your favor-and that's IF you start retirement from a favorable stock market valuation.

Percentage chance of exceeding a 3% "real return" (return after inflation) with a 60% equity and 40% bonds portfolio (1889-2008)

INVESTING LESSON:
Only by standing against the prevailing winds–selectively, but resolutely–can an investor prosper over time. Such a strategy may underperform during markets that are rising based upon the momentum of the herd vs. fundamental valuations.

Hostess Twinkies and Your Wealth: A Must Read

Seth Klarman is one of the most successful investors of all time. In a recent speech, he indicated that he is more worried now than at any time in his career.Below are several quotes from his speech.

"The possibility that the government will continue to print money to solve our economic problems has left me more worried than at any time in my career. There are not enough dollars in the world to do that, unless we greatly debase them."“A Hostess Twinkie is something that has made many childhoods slightly happier with totally artificial ingredients. That metaphor explains the prevailing environment in the U.S. over the last year, when virtually every market condition was maintained by the government, which kept interest rates at zero, bought up mortgage-backed securities, and installed far reaching lending programs. We don’t know the full extent to which we were manipulated. The government wanted people to buy equities, to invest so that the market would go higher, to build the wealth effect so that people would feel better, and to restore a degree of optimism so that the economy might recover.”

"I am worried about what would happen to the economy and the market if those artificial ingredients were removed and we realize it was in effect a Twinkie."

"That high degree of government involvement continues, with the gargantuan European bailout program, which is not likely to work and merely kicks the can down the road, serving as the latest example. It is one more manipulation tempting people to own things. It’s almost like the government was in the business of giving people bad advice. 'We’re going to hold rates at zero, so please buy stocks or junk bonds that will yield at least five or six percent so you might make something.’ In effect, it is forcing unsophisticated investors to speculate wildly on things that are fully too overvalued.”

INVESTING LESSON:
Only by standing against the prevailing winds–selectively, but resolutely–can an investor prosper over time. Such a strategy may underperform during markets that are rising based upon the momentum of the herd vs. fundamental valuations.

The "Right Math" vs. "Fuzzy Math" of Market Declines

Last week produced a day with a particularly wide swing from low to high on the Dow Jones Industrial Average. What one needs to take into consideration is that although it was a very large swing, the "perceptional impact" of the swing gets distorted.

What I mean is that a 1000-point swing when the Dow was at 5000 would actually be a much worse swing than a 1000-point swing with the Dow at 10,000.

It is kind of like the math of downturns: To make up for a 50% loss,requires a 100% gain, not a 50% gain.

Last week's “bad day” was the 3rd largest in "point drop terms" since 1987. That is certainly attention getting. However, ironically, last week's bad “point swing” day represented only a 9th place finish for bad days in "percentage drop terms" since 1987.

It is this "point drop" effect that tricks the brain into thinking it may have been the worst you may have ever witnessed. When the dust settles, I would take the 9th place worst intraday swing in “percentage terms” on 5/5/10 of -10.2% vs. the -29% swing on 10/19/87.

The following commentary is from Bespoke Investment Group:
For anyone actively involved in the market, we all remember where we were when the market had some of its biggest moves. The crash of '87 and the day Congress voted down the TARP are just two of many that come to mind. Strangely enough, even though Thursday was the third largest intraday point swing in the history of the DJIA and the ninth largest in percentage terms since 1980, it didn't seem to be one of "those days."

Even as the market was falling, there seemed to be a sense of calm in the market. Perhaps, we've all been anesthetized from the declines during the last bear market. Whatever it is, most people will probably be happy to forget it.

INVESTING WISDOM

WFG balanced portfolios are well positioned if the declines this week become a harbinger of things to come. If not, we will wait for our selection to the "all defensive team," at which point in the future the current market cycle has gone full circle.

World Markets Sink on Greece Credit Woes

Please refer to my 4/15/10 blog on the topic of the growing weight of the world's fiscal problems. It looks like today's news on Greece may be treated with more weight than the news on Greece over the past month.



The world financial system is increasingly a "house of cards." At any moment, the bull market party may come crashing down with the camel no longer being able to suffer the collective weight of the world's debt problems.
ACTION PLAN
Investors should retain advisors who can adjust their allocations to reflect the increased sovereign risk of certain countries. At the same time, investors and advisors should embrace the decreased risk from investing in high quality, dividend paying companies, many of which are now awash with liquidity.

Portfolios should also be positioned to defend against the potential weakening of certain currencies and use commodity exposure (via Managed Futures) along with dynamic asset allocation as a way to protect against the possibility of inflation and other market risks.

INVESTING LESSON:
Only by standing against the prevailing winds–selectively, but resolutely–can an investor prosper over time. Such a strategy may underperform during markets that are rising based upon the momentum of the herd vs. fundamental valuations.

Wall Street Wins Again-Dodd Drops Fiduciary Provision

Chalk it up as another win for the insurance and securities industries.

Senator Chris Dodd, Chairman of the Senate Banking Committee, caved to special interests groups in March, removing the requirement for ALL financial advisors to place the interests of the consumer ahead of their own.

Proponents for a fiduciary standard for ALL financial advisors (including this blog author) view the decision as the result of misleading information provided to the committee from the insurance industry and "Wall Street." This is nothing new. Wall Street and the big insurance companies have long been in bed with each other. They both are interested in what products they can sell people that will earn the seller big, fat commissions, with little or no worry as to whether the product is the right fit or not.

Look no further than the U.S. Federal Government this past week slamming JP Morgan with a lawsuit that they misled investors regarding certain mortgage products that they sold. No way. Really? Not a Wall Street brokerage firm. Yes, really.

It seems like Senator Dodd's committee should look again.
"Insurance agents were 'worried about the sales of their high cost and often misleading annuity products,' if forced to be held to a fiduciary standard," said Babara Roper, director of investor protection for the Consumer Federation of America. Well, there you have it, we would not want insurance agents and brokers to have to actually quit earning 10% commissions on products that offer uneducated and uninformed investors a "free lunch."

From the beginning of mankind, the emotions of greed and fear have ruled inside one's brain. As long as investors keep looking for a free lunch, there will be insurance agents and stockbrokers, ready, willing and able to meet the demand.

INVESTING LESSON Same old boring thing: There is no such thing as a free lunch.

NOTE: Regardless of which political party has/is, or will be in control, the lobbying efforts of special interest groups all too often win out over the needs of the U.S. consumer. I am equally confident that had a Republican been in charge, the same poor outcome would have still been the result.

Butler Coach Epitomizes Commitment

For years, we have been living in a world where one's word too often means nothing. The lack of commitment to one's word has seen an appalling decline in college sports especially.

It is now the norm to expect that when a coach signs a good player that there is a significant chance that the player will only stay one or two years. The majority of the large, Division One college basketball players come to play basketball, with little or no concern about getting a degree and actually sticking around for four years to help their school win a championship.

The same lack of commitment is commonplace with the coaches as well. A current example is Minnesota's Tubby Smith. Having been at Minnesota only three seasons and only halfway through his contract, it is common knowledge that Mr. Smith is open to other suitors.

Thank God for the smaller schools with a double thank God to Butler coach Brad Stevens! He just turned down large schools that were willing to pay him over $2 million per year and essentially guarantee him $10 million dollars over the course of a contract. He resigned with Butler for a 12 year contract. Come on, 12 years, can that be true? Fairy tales still exist in my home state of Indiana!

Click this YouTube link that reveals the character of Butler Coach Brad Stevens and that, despite the obituary, there still do exist men of character in college sports.

http://www.youtube.com/watch?v=iCrdk8I_c8g

How Does This Apply To You and Investing? The average tenure for a mutual fund manager is four years. The majority of financial advisors "sell people stuff" and then wash out of the business. Over 80% of financial advisors who enter the career are no longer in the career in 10 years.

For 26 years, I have told clients that they would know where to find me. The majority of those clients have stuck around for the ride, enjoyed the view and still know where they can find me and now my legacy company, Wade Financial Group. This is called mutual commitment!