Monday, November 30, 2015

Advising New Advisors

Purportedly, it is an old mafia axiom that you should - keep your friends close and your enemies closer.  If true, doesn't that also mean that - your enemies are closer to you than your friends?

Over the decades, I've had clients who were older and younger than myself, although most have been older.  I've had both male and female clients, although most have been male.  I've had clients who were Republicans, Democrats, Libertarians, Anarchists, and even genuine Independents.  I've had clients who earned their money, that inherited their money, and that married their money.  I've had clients who were atheists, Protestants, Catholics, Jews, Muslims, Hindu, and even one Sikh in McLean.  But, the most difficult clients-of-all are . . . family.

Don't ask me why?  It just is!  Maybe, the better question is why do you keep a family member as a client?

It is never fun to fire a client.  Besides the minor loss in income, there is a real feeling of failure, because you really want to help every client.  While firing any client is difficult, it is even agonizing to fire a client who is also a family-member!  It is also more legally complicated.  A contractual relationship exists between an advisor and a client.  Firing a family-member-client may end the contractual relationship but does not change the family relationship, legally.  They are still in your family, just not in your book-of-business.

A family-member-client is like a tar-baby.  The more you do, the more stuck with them you are.

Hello, young advisors out there -- when asked to take a family member as a client -- RUN!


Saturday, November 28, 2015

Investor Types

Some investors just want to make a profit and pay little attention to the number or the amount of risks taken.  They want to buy stocks and sell them quickly for a profit.  I call them "gunslingers."

Some investors just want a stable income and pay nominal attention to the value of their portfolio.  They accept a volatile portfolio value but not a volatile amount of income.  I call them "retirees."

Some investors have too much cash for FDIC guaranties and must expose some of the assets to the stock market.  They don't love profits as much as they fear losses.  I call them "depositors."

Some investors want "good" companies and then hold them "forever."  Because they don't sell, they pay little attention to taxes.  I call them "Buffett-babies."

Some investors want their portfolios diversified across various asset classes, which is re-balanced on a periodic basis.  They follow the textbooks.  I call them "theory-lovers."

Some investors want their portfolios diversified across various asset classes.  They believe re-balancing is over-rated and allocate some satellite portion of their portfolios to their strong convictions.  I call them "smart investors."

Some investors want "wholesome" companies that don't sell tobacco, alcohol, sugar, or other products that have hidden costs to society.  Called Socially Responsible Investing (SRI), doing good is as important to them as doing well.  Some advisors call them cry-babies.  I call them "conscientious."

Now, former Vice President Al Gore, of all people (?) is popularizing "sustainable investing."  It is different from the standard SRI.  He argues that the value of the stock must reflect the sustainable value of the product.  For example, sugar is instrumental to worldwide obesity.  At some points, governments will overcome the sugar-lobby and start taxing the product to pay for increased healthcare costs, thus driving down the value of sugar companies.  It is just a matter-of-time, they say.  Another example would be oil companies, who carry vast oil reserves on their books at market prices.  However, since that amount of oil will never actually be pumped out and sold, when fossil-fuels are obsolete, the value on the books is too high.  Normally, I would call all this "pollyanna-ish."

But, give the Nobel Peace Prize winner credit for this -- his investment firm has placed #2 in the U.S. over the last ten years!  I call that "impressive, very impressive, indeed!"

Friday, November 27, 2015

Life Imitating Ayn?

While the Bible remains the best-selling book in history, the second best-selling book has long been Atlas Shrugged by the late Ayn Rand, the iconoclastic mother of Libertarians.  The premise of her classic is that America's business leaders keep disappearing.  Conspiracy-lovers suspect the government is kidnapping them, swooping them away in black helicopters.  As it turns out, however, they have all fled to a secret hiding place, because they can no longer tolerate governmental control of every minute detail in their lives, especially in their businesses.

As much as I enjoyed the book when I read it some 50 years ago, I found the premise implausible, because the "government" is not competent enough to accomplish much of anything and certainly not anything as complicated and far-flung as a mass kidnapping.

However, something is happening in China!  Many of their top business leaders have recently disappeared.  Some have reappeared but without explanation.  Some may have disappeared forever.  Li Hejun was chairman of energy giant Hanergy who unexpectedly failed to show up at the annual meeting in May, causing the stock to drop a stunning 47% in one hour.  The CEO of China Aircraft has also disappeared.  There is some speculation that CEOs are disappearing due to the government's anti-corruption drive.  Maybe . . .

But, many of the disappearances have been among bankers and brokers.  For example, the CEOs of both the China Minsheng Bank and Guotai Junan International have also disappeared.  There is some speculation that the central government is seeking to punish anybody who may have contributed to the Shanghai market crash in August.  Maybe . . .

The Chinese do not hesitate when executing "wrong-doers."  But, there have been no reports of CEOs being executed, just disappearing.  At least, not yet . . .

Would you like to be the CEO of a Chinese company?

Wednesday, November 25, 2015

Thankful For . . .

I am thankful that jobless claims fell by 12,000.

I am thankful that durable goods production rose 3%.

I am thankful that worker pay rose 0.4%.

I am thankful that worker spending rose 0.1%.

I am thankful that the savings rate rose to 5.6%.

I am thankful I don't have to merely guess about the economy.

I am thankful for the numbers that guide my forecasts.

I am thankful for all the geeks who produce those numbers.

I am thankful for the freedom of information, so I can have numbers.

I am thankful my parents gave birth to me in America.

I am both thankful and proud to be an American!

Monday, November 23, 2015

Waiting For Janet Godot

Sixty-six years ago, Samuel Beckett wrote the great existential play Waiting For Godot.  In that play, several travelers are waiting for a very long time for the arrival of Godot.  The story focuses on the interrelationships while they wait . . . and wait.  Things get increasingly testy between them as they wait . . . and wait.

Waiting for the Fed to raise interest rates has become like Waiting for Godot.  To be clear, there is no economic reason for the Fed to raise interest rates.  Their dual mandates are to control both inflation and unemployment.  Guess what:  Neither is a problem, and neither needs to be controlled!  Neither inflation nor unemployment provides an excuse to raise interest rates.

However, the cry to "normalize" interest rates has become deafening, by both conservatives and investors.  The conservatives argue that the Fed has taken extraordinary steps to make a Democratic president look good.  I believe, however, that the Fed has taken extraordinary steps in monetary policy to prop up the economy while fiscal policy remains impotent, and I believe they would have done the same if a Republican was president.  Regardless, this complaint has become increasingly shrill.

Investors also want interest rates to rise because they are tired of living under the guillotine.  If the Fed raises rates rapidly, the stock market is clearly over-valued.  If the Fed raises rates slowly, the stock market is probably fairly-valued.  This uncertainty is a serious worry for investors.  After the Fed declined to raise rates in September, the stock market fell, because the market was expecting the level of uncertainty to decrease, but that didn't happen.  If the Fed doesn't raise rates during its meeting next month, I expect stocks to fall again.

Madam Chair, please raise our interest rates once and then go away!

Tuesday, November 17, 2015

The Market That Didn't Bark

Just as Sherlock Holmes attached significance to a dog that didn't bark, the stock market is usually telling us something when it doesn't over-react.

Most pundits expected the stock market would be down sharply on Monday morning following the Friday terrorist attacks in Paris.  However, by Sunday night, the futures market has actually turned slightly positive.

When the market opened on Monday morning, it started sinking, not badly but sinking.  About eleven o'clock, there were rumors that the French air attack on Syria had destroyed oil facilities, and the price of oil started rising.  This focused the market's attention that reducing the oil glut would be good for most every economy.  Stocks began to soar.

So, why didn't the stock market tank?  First, it would have been more likely to tank, if the terrorist attack had occurred on U.S. soil, instead of foreign soil.  Second, since the attack was on Friday, investors had a two-day weekend to adjust.  Third, and I hate to say it, we have become more sanguine about terrorism.  There have been attacks, and the economy labored on.  There will be more terrorist attacks, and the economy will continue to labor on.  The economic cost of terrorist attacks is not as great as the emotional costs.

Saturday, November 14, 2015

20/20 Hindsight

Was Saddam Hussein a bad man?  Absolutely!  Did he deserve to die?  Absolutely, as slowly and painfully as possible!  Is the world a better place without such a monster in it?  I'm not so sure anymore.

But, how could the world not be a better place without such a sick, degenerate monster in it?  If his presence in this world kept other even-worse monsters out of it, the world would be better off with Saddam in it.

Iraq sits on the great fault line between Sunni Muslims and Shiite Muslims.  Although a Sunni, Saddam didn't care about the tribal warfare inside his religion.  He executed both with equal indifference.  Iraq existed as a terrible police-state, where the people had no rights and lived in constant fear of the authorities.

Was Iraq a bad place to live?  Absolutely!  But, isn't it even a worse place now, with open warfare between the Sunni ISIS and everybody else?  Saddam shot lots of people.  But at least, he didn't behead them.  The Iraqi people have suffered greatly, since the execution of Saddam

His death opened the gates of Hell for all the demons of Islam to escape.

I keep remembering General Colin Powell's mention of the "Bed, Bath & Beyond" rule:  If you break it, you own it.  Last night, France made another payment on that purchase.  I am so sorry for them!

Friday, November 13, 2015

Peeking Into 2016

While I cannot recall ever hearing anybody say that the legendary investment bank of Goldman Sachs was kind or charitable or even decent, I have often heard people say respectful things about the research department of Goldman Sachs.  Therefore, I try to follow their research closely.  Here are some of their latest expectations:

1.  World GDP growth will pickup from 3.2% this year to 3.6% next year.  GDP growth in the U.S. will slow slightly from 2.4% this year to 2.3% next year.  China will continue to slow from 6.9% this year to 6.4% next year.  The Euro-zone will increase from 1.6% to 1.8%, while England will increase from 2.7% to a respectable 3.0%.

2,  The S&P 500 will be flat over the next twelve months, while European stocks will rise 6.7% and Japan could rise a whopping 12.3%.

3.  Interest rates (10-year) will rise 80 basis points (0.8%) over the next twelve months in both the U.S. and Europe.  (I don't believe this.)

4.  The dollar will continue to rise, compared to the euro or pound.  They expect the euro to breach parity and "break the dollar."  Specifically, they expect the euro to drop another 13.6% to only 95 cents.  The pound could drop another 5.2%.

5.  Commodities will continue to get crushed by the lack of global growth.  Gold will drop another 8.1% over the next twelve months.  (Don't you know Goldman hates to say avoid gold?)  Copper is sometimes called "Dr. Copper" because of its track record in predicting the global economy, and it is expected to drop another 12.4% over the same period.

Interestingly, Goldman believes now is a good time for Buy-Write funds, which are mutual funds that own stocks for growth but also sell call options against those stocks for income.  All I can add is -- Amen!

Thursday, November 12, 2015

Forgiving and Forgetting

How long does it take to "let bygones be bygones?"  Years ago, I heard a minister preach that you should forgive and forget when you are young.  When you are older, the forgetting gets easier but the forgiving gets harder.  That may be true.

In January of 1970, I was discharged from the Army and returned to Old Dominion University to finish up my first degree.  With my short hair and rippling muscles (yes, long ago!), I walked into the Student Center for the first time.  On the left side was a long table with 7-8 students sitting around it, when one tall, lanky student with dirty long hair and ratty jeans pointed at me and said "Look, a baby-killer!"  The students at his table laughed and turned away from me.  Being tightly-disciplined, I ignored his comment and let him live.  But, I still remember him, even after 45 years, especially on Veteran's Day.

I have no idea whatever happened to him.  Even after letting my hair grow and becoming a lazy college student myself, I rarely returned to the Student Center before I graduated.  But, if the Good Lord would let me pistol-whip one person on this planet, I would have to track down that hippie-punk.  Perhaps, I could then let bygones be bygones and put it behind me.

Until then, I will just remember those veterans I was honored to serve with . . .

Tuesday, November 10, 2015

Fear Not The Reaper

One of the few affable economists in this nation is the highly-regarded Jeremy Siegel of Wharton.  Last week, he made two comments that, at first, appear incongruent.  First, he said the latest jobs report practically assures an interest rate increase when the Fed meets next month.  Second, he predicted the Dow could reach 20,000 next year, up 13.5% from yesterday's close.

In other ways, he is predicting a nice healthy bull market despite a rising interest rate environment.  Many investors find the two conditions incongruent.  That's why the market almost always drops when the Fed threatens to raise rates.  However, history teaches us something different.  The stock market normally rises until the third or fourth interest rate increase -- but only if the market thinks more increases are not imminent.

Even if last week's job report does push the Fed to raise rates in December, instead of March, there is no reason to suspect the Fed will launch a long series of rate increases.  Given the lack of inflation and given the relatively weak world economy, I still expect the Fed to raise rates once, just to silence its many critics.  The American economy can easily afford a minor interest rate increase, even though large multinational export companies will be hurt somewhat from the strengthening dollar, which results from an interest rate increase.  (The bigger problem is below everybody's radar screen --  with $18 TRILLION in debt already, a quarter point increase in interest costs will blow a $45 billion hole in our Federal budget and add to our national debt -- go slow, Janet!)

Dr. Siegel teaches us that an interest rate increase by the Fed is not to be feared.  He's right!

Saturday, November 7, 2015

Little Problems

I have problems.  You have problems.  Everyone has problems.  But, not everyone has the same problems.

Once a year, the Financial Planning Association teams up with the National Council of Mayors to host pro bono financial planning in twenty cities across the country, by CERTIFIED FINANCIAL PLANNER (TM) Professionals, for those people who cannot afford such individualized attention.  Today was that day.

One person was a 64-year-old taxi driver, still without Obamacare, but with surgery for bladder cancer this coming Friday.  He doesn't have the luxury of waiting for Medicare.  I hate it when I have to recommend bankruptcy.  Another was a 62-year-old women whose husband deserted her AFTER he punched out her front teeth.  Even without those teeth, she somehow found a low-paying job and survived by maxing-out her credit cards.  Now, she has a job -- but way too much credit card debt.  And, to top it off, she also has problems with the IRS now.  I steered her into credit counselling and explained the OIC process or offers in compromise with the IRS.  She seemed grateful for my advice, or maybe she was just grateful that somebody actually listened to her problems.  I don't know.

Yes, I have problems . . . little problems.  I hope your problems are also little.  I wish nobody had big problems.  But, they do!

When I sit down for Thanksgiving Dinner this year, I will indeed be very thankful for my problems . . . my little problems!

Friday, November 6, 2015

Short Term Myopia

The most watched economic data point has always been the monthly "jobs report" published by the Department of Labor on the first Friday of each month.  Today, that report was just GREAT!

Last month, 271 thousand jobs were created, far more than the 182 thousand that was expected.  The previous two months were revised higher by another 12 thousand jobs.  The traditional unemployment rate dropped to only 5%.  The more important U-6 level of unemployment, which includes those forced to take part-time jobs when they want full-time jobs, fell to 9.8%, the lowest in seven years.

The reason this data point is so closely watched is that it is thought to be the best "real-time" indicator of the economy.  In an economy where almost 70% of all spending is spending by consumers, the health of the consumer is critical, and that depends on the health of the job market.  Therefore, a good report should push the stock market higher, right?

In a normal economy, that would be true.  When the report was released this morning, Dow futures quickly dropped 40 points - why?  Because good news is bad news, when the stock market is obsessing over the Fed raising interest rates.  The Fed's job is to depress both unemployment and inflation.  If unemployment goes too low, many economists believe that inflation will result.  The Fed must balance both priorities.

It is time for the Fed to "normalize" interest rates and begin raising them.  Unfortunately, that pushes the dollar up, which hurts our exports and our biggest industrial companies.  That short-term reality scares the market.  I expect the market will drop dramatically if the Fed does raise rates next month, before rebounding.  Logic only prevails in the long-term, not the short-term.

A great jobs report should be enjoyed, not feared.  So . . . ENJOY!

Tuesday, November 3, 2015

Investing Religions

There are religions in the investing world.  One example is the Warren Buffett religion, that preaches you should buy what you like and keep it forever.  Another is the Benjamin Graham religion, that preaches you should not buy anything until you have exhaustively studied all financial information, all public information, and maybe a little private information as well.  Another religion is Modern Portfolio Theory, which argues investment returns can be maximized while investment risks are minimized -- the Holy Grail -- if your portfolio is carefully diversified across many asset classes, not just many stocks.  Then, there is also the passive religion, which preaches you should just buy an index of the stock market, like the S&P 500, and then go to sleep, trusting the resilient American economy to make you healthy in the long run.

I'm attending a conference on another investing religion, called "chartism" or technical analysis, which preaches you can base your investment decisions on graphs alone.  Some adherents don't even know the names or businesses of the stocks they buy and sell.  They simply stare into computer screens,searching for graphs that appear to relate to each other.  This seems to have some magical hold on the adherents.  After all, sunspots do impact the stock market, you know!

Like all religions, it does have some merit.  Graphically illustrating the relationship between stock market and interest rates or price-earnings ratios, for example, is quite helpful in teaching concepts but should have no magical hold over investors.

Like all religions, it also has fanatics. Deep in the confines of my suspicious mind, I sometimes wonder if chartists would even know when to use the restroom without a graph to tell them.  Frankly, I find that making decisions by looking at a chart is merely a crutch for lazy investors.