Suppose I told you that the consensus among economists this time last year was that GDP would be clicking along at a 4% rate right about now, or that home sales would be on the rise, or that unemployment would be trending lower. If you’re like most people, you wouldn’t bat an eye at these faulty forecasts.

So why is it that the weatherman gets such a bad rap for the occasional missed forecast while the economist-type gets pass after pass for getting it wrong time after time? Worse yet, when one of those blind squirrels lucks into a nut, we parade him/her around like some sort of modern day prophet…

Let’s take a look at some recent suppositions, along with a few from the past, coming from the world’s most followed economists, futurists and fund managers, followed by a friendly warning to bond investors from yours truly:

• New unemployment claims (out last week) were supposed to drop – they grew by 12,000….
• The Philly-Fed Survey was supposed to show a 7% increase in manufacturing – it showed a 7% decline…
• Existing home sales were supposed to fall by 14% – they fell by 27%…
• Q2 GDP was supposed to be revised down to 1.4% – it came in at 1.6%…
• The Fed was supposed to step-up their “quantitative easing” efforts – Bernanke suggests they may not need to…
• The market, according to virtually every analyst I listened to last week, was supposed to end the week in pain over the revised GDP number – the Dow gained 165 points…
• In his late 90’s best-seller The Roaring 2000s, Harry Dent said the Dow was supposed to be pushing 30,000 right about now – it’s at 10,000… His latest book is titled The Great Depression Ahead – the dude’s got guts….
• Dr. Ravi Batra made zillions with his late ‘80s best-seller The Great Depression of 1990 – In Batra’s view the ‘90s certainly wasn’t supposed to be the greatest decade in economic history.
• According to NYU professor Nouriel Roubini, in the spring of ’09, stocks were supposed to drop well below Dow 6,500 (the then bottom) – it’s at 10,000 today…
• In the late ‘90s, technology fund managers were telling us “it’s different this time”, that “in today’s fast-moving internet world stocks were supposed to trade at triple-digit multiples” – then kablam! – the bubble burst! The NASDAQ went from 5k to 2k…
• In the mid ‘00s, real estate fund managers were telling us “it’s different this time”, that “perpetually low mortgage rates and favorable demographics were supposed to keep home prices growing as far as the eye can see.” Then kablewy! – the bubble burst! “Upside down” best describes virtually anyone who mortgaged a home in the mid ‘00s…
• Today, bond enthusiasts are telling us “it’s different this time”, that it’s “a new normal”, that we can suppose that a slow-growth, low-interest rate environment will be with us as far as the eye can see – hmm…

My last bullet point is a biggie, and while I don’t want to sound like a supposer, I must tell you that bonds, like stocks, move in cycles. And in spite of those who would have us believe that a new normal is upon us, I assure you, there will come a day (can’t tell you when) when the big money flees the zero net returns offered by the U.S. Treasury and leaves the unsuspecting little guy to once again face double-digit declines. Only this time in an asset class he thought to be perfectly safe.

Oh, and by the way, the most notable of the “new normal” supposers are the folks who run the largest bond fund complex on the planet. And while they are very smart chaps indeed, I have found that even the exceptional thinker is all-too-often prone to exceptionally wishful thinking.

Have a nice week!
Marty

Speeches have been made, books have been written, documentaries produced – all attempting to explain what caused the greatest recession since The Great Depression. Some fault the Fed, others the politicians, still others Wall Street, while some even point the finger at us lowly consumers.

Who you are, your political affiliation perhaps, or your tendency to feel the victim, or not, or maybe even the particular documentary you happened to watch will determine whether you blame Washington, Wall Street, Walmart or your evicted x-neighbor for bringing on one hellacious recession.

Well my friends, I’m here to help – I’m here to solve this great mystery for you once and for all. And yes I can give you chapter and verse on how a grossly-bloated housing market, and collateralized mortgage obligations sprinkled with subprime debt, and credit default swaps (don’t sweat it, you don’t have to know what they are), and the credit agencies, and etcetera, destroyed Lehman, toppled many a bank, and for a time crippled the credit markets. But, at the end of the day, writing a ten-page commentary when I know you’re probably already done with this one would be a profound waste of time, especially when I can sum up the underlying cause of the recession in four simple words. That’s right, there’s a single common denominator that essentially assigns the blame, not to one, but to all of the aforementioned suspects. And that common denominator is:

SPENDING BEYOND THEIR MEANS!

Yep, I’m afraid it’s that simple… No scientific analysis necessary…

But as we sit here today, thank goodness, the tide seems to be changing: As evidenced by how all but one of these perps have amended their ways, it looks as though the recession ultimately did some good – in that, at least for the moment, with one exception, we appear to have gotten the message.

From the bottom up, here’s what I’m seeing.

• Recent stats show credit card delinquencies are on the decline and the U.S. savings rate is around 6%, which is substantially higher than before the recession. So then, for the moment, your neighbor seems to be changing his ways.
• As for Walmart, my proxy for U.S. companies, corporate balance sheets are sitting on literally trillions in cash and profit margins are stellar. Yes, companies, by and large, managed their affairs marvelously during and now post recession.
• How about Wall Street? The largest firms have paid back the TARP, have returned to profitability and, as for their lending arms, are painstakingly scrutinizing every mortgage app, some would say over-scrutinizing.
• Then we have Washington, and there my friends is where we hit the proverbial brick wall. The previous administration (Republicans no less) spent like drunken fools. And, mindboggingly, the current Administration’s spending, present and, worse yet, projected makes the last look almost miserly.

So there you have it, with one huge exception, we’re on the road to fiscal responsibility.

As for that one huge exception, if their spending habits are any indication, even in the midst of a snail’s-pace recovery, they remain unfettered by the economy. Now pardon my cynicism but you do understand that your average elected official or budding candidate’s objective, first and foremost, is to retain, or win, public office, right? And, all evidence withstanding, be they Democrat or Republican, they’ll spend till the cows come home to make that happen.

And you know, when it’s all said and done, that (political motivation) my friends is one beautiful thing, especially now. Think about it – look again at my four bullet points – everyone except the politician gets it. Which means the politician is clearly out of touch with everyone else. And guess what – everyone else votes!

The pendulum has clearly swung to the extreme (spending), but fear not, it never stops swinging…

Lastly, as the economy suffers through its fits and starts, keep in mind that the equity portion of your portfolio is invested in companies, not economic indicators. And, as I suggested, companies are in substantially better financial shape today than they were pre-recession. While their stock prices will surely react, at times violently (I promise), to the news of the day, the underlying fundamentals look compelling for the patient, long-term investor…

Have a great week!
Marty

In light of all that’s going on these days, I think it’s time we eavesdrop once again on Q and A, our investor/advisor duo. As usual Q is a bit sideways over the stock market and needs to talk.

Please pardon the redundancy, and simplicity, of these conversations. But, in terms of redundancy, just consider how redundant your thinking is every time the market takes a dump. In terms of simplicity, when it comes to investing, simplification breads clarity…

That said, I’ll have something pithier for you on Monday…

Q: Do you understand this market? Cause I don’t and it’s driving me crazy…
A: Of course.

Q: Great, so what’s going on?
A: With what?

Q: With the market!
A: I don’t understand…

Q: You just said you do understand the market…
A: Oh… are you asking why it’s been so volatile lately?

Q: Exactly!
A: And you don’t understand that?

Q: No, should I?
A: Well, I guess not… You see the market’s been volatile because the news has been volatile and the prognosticators have been grossly wrong on what to expect short-term.

Q: What do you mean?
A: Just yesterday for example, new unemployment apps came in with an increase of 12,000, when economists predicted a decline. And a manufacturing index showed a 7% decline when economists predicted a 7% increase. Investors, listening to the experts, expected one thing and got another – thus the 145 Dow point sell-off.

Q: So, since you manage my money, what are you going to do about it?
A: About what?

Q: About the volatile market.
A: What am I going to do about the experts being so wrong with their predictions?

Q: No, what are you going to do, like on Monday, about how all this volatility is affecting my portfolio?
A: Well I was thinking about going fishing, but that has nothing to do with “all this volatility.”

Q: You’re kidding right?
A: What would you have me do?

Q: Well how about checking my investments and making sure I’m where I should be, based on what’s going on… Not friggin fishing for crying out loud!
A: You mean where you should be based on what went on today?

Q: Well yeah, of course!
A: Shouldn’t I base it on what’s going to happen next week instead?

Q: Oh yeah, that’s right, what the economy and the market will be doing in the future.
A: And you think, when the world’s economists have no clue as to what will happen next week, that I do?

Q: Okay, then what good are you to me?
A: Well, I’d say that I keep you allocated consistent with what we do know about the future, which is when you’d like to retire. And that I keep you from making the mistakes most individual investors tend to make. And that I lead by example.

Q: I understand the allocation part; we’ve talked about that a lot. But what do you mean by the mistakes most investors make?
A: Well for one, I mean reacting to the news and losing sight of their long-term goals and strategies. I help you stay on track…

Q: Okay, then what do you mean by leading by example?
A: That would be going fishing.

Q: Huh?
A: Of course I’m not really going fishing Monday, I have lots of work to do; I said that for the effect. It’s just that the market has been volatile since the beginning of time and since the beginning of time no one has ever proven they can predict its next move with any consequential degree of accuracy. In fact, acting on the whim, even a very educated whim, of someone you watch on TV can get your portfolio into real trouble.

Therefore, after we’ve done the fundamentally correct things, you might as well go fishing, go to work, go golfing, go do anything, but don’t go getting excited about the market.

Q: Alright I get it. And now that you mention it, I do have some vacation coming; I think I’ll take Monday off.
A: Really? Hey, do you like to fish?

I have absolutely discovered the secret to successful parenting (i.e., getting my kid to do what I tell him without screaming). I have learned how to motivate my youngest to behave, to work hard in school, and even, without prodding, to do his household chores. And it has nothing to do with instilling values, setting limits, patience, or even inspiring self-confidence. You see my kid loves Rocky Road ice cream, and as long as he does as he’s told, I give him a large helping with every meal. Yeah I know it’s not good for him, but he doesn’t know any better, and at least for now, I get out of him what I want.

The proselytizing politician has absolutely discovered the secret to successful politicking (i.e., getting himself elected/reelected). He has learned how to motivate the average consumer to vote his way. You see the typical voter loves victimhood, and therefore the candidate promises to improve his/her lot by heaping regulations onto businesses and mandating a variety of benefits for all (the presumed victims of the last recession that is), while raising taxes on the wealthy (aka fat cats who make more than $250k/year (small+ business-owners and the like)) to pay for them. Yeah he knows it could cost many of his constituents their jobs (or, at a minimum, severely slow the rate of job growth going forward), but they don’t know any better, and at least for now, he gets out of them what he wants.

In the long run, if I were indeed the buffoon-of-a-parent I just pretended to be, my kid would surely resent me for ruining his health – as the voter would ultimately despise the politician for ruining his fiscal health. The difference is, I’ll be my kid’s dad for life, and I care deeply for his well-being, so I force-feed him a relatively healthy diet, like it/me or not. While your everyday politician only has to survive five years and make age 50 to qualify for his/her pension benefits, and all evidence withstanding, he/she doesn’t give a rip about his/her constituents…

Now before you send me your hate email, defending whom you think I’m referring to; for one, if you’re assuming it’s your guy/gal, well then, your guy/gal is profoundly screwing up, and you might start looking for another guy/gal. In truth, it’s nothing personal, and I’m honestly not politicking. In fact, the older I get, the less I’m inclined to side with either party (i.e., if a conservative were offering up such lunacy I’d be all over him/her, and some). It’s just that you don’t raise taxes coming out of the worst recession in three score and ten, regardless of the side of the aisle you hail from.

But please, let not your hearts be troubled, for in spite of this rocky road we travel, we Americans are a predictable bunch, and, when push comes to shove, our pocketbooks motivate which ovals our #2’s blacken whilst we stand in the polling booth – and believe you me, politicians know this all too well. In other words, long before we reach the point of no return, before our government’s obesity, and our own gluttony, destroys all remnants of good old free-market capitalism, policy will change… just you watch…

Have a great week!
Marty

One day last week:

It’s 7:30am New York time and I’ve already received like a dozen text messages this morning from CNBC. The last one announced that housing starts for June came in less than expected, or was it that England left their interest rates unchanged, or was it that Australia raised theirs again, or was it that Yahoo! is trading lower (in the premarket) after missing its revenue number, or was it that Apple blew its number away, or was it that new home starts came in less than expected, or was it the consumer sentiment reading, or was it that the President signed FINREG, or was it the extension of unemployment benefits, or was it the jobless claims number, or was it that two Dems are lobbying for extending the Bush tax cuts, or was it about the oil spill, or am I dreaming, since it’s 4:30am my time?

Dang, there’s so much information to digest these days. But I don’t sweat it, cause if I miss any of the morning’s headlines, I know they’ll be repeated, countlessly, over the next few hours – plus there’ll be tons more to take in before the end of this run-of-the-mill weekday.

Then there’s the stock market – day before yesterday the Dow was down a hundred points. After the close IBM announced disappointing revenue numbers and the stock tanked after hours. Being that it’s such a big Dow component, the “experts” were predicting a triple-digit decline for yesterday – so of course the index closed up 75…

Oh and speaking of the “experts” – if you’re a CNBC junky, like a few retired folks I happen to know, you’re watching a show called “Fast Money” at 2pm, where a group of stock jockeys offer up their opinions on where to make money tomorrow (not tomorrow in a looking-into-the-future sense, but literally, tomorrow), followed by “Mad Money”, where an ex-hedge fund manager/author/t.v. personality comments on the day’s action and gives his opinion on where the market goes from here (not the best prognosticator by the way) and speaks, I think rather intelligently, about the prospects for a number of individual companies. Buy his books, do your homework (dissect financial statements and such), watch his show daily and trade as directed – while you go to work, raise your kids, exercise your body, take a vacation, enjoy a hobby or two, grow old and die… Yeah that works…

Forgive me, but investing just ain’t that glamorous, let alone that complicated… I’ve illustrated here, ad nauseam over the years, how I think portfolios should be run. But I know that if you’ve read this far, you’re looking for something, some reassurance perhaps that we’re not about to get shoved off the proverbial cliff by profoundly unbusiness-friendly politicking, the likes of which yours truly, having been around the block a few times, has never seen.

So then, out of respect for you, being that you’ve stayed with me for the first 478 words of this commentary, I’m going to tell you the truth about how the world of investing works – not my truth mind you – The Truth…

The market is impossible to predict. The brainiest of all brainiacs, the modern-day Einsteins, got killed by the last bear market. Read The Quants, How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It, and you’ll see what I mean. So don’t you try it…

The economy is cyclical. It expands, it contracts. Expansions last longer than contractions. The greater the expansion, the greater the contraction, and vice versa. So quit worrying…

The economy will make or break any politician. So, whether you lean left or right, quit worrying…

The media feeds you, and feeds on, hyperbole. So forget about it…

When we’re coming out of a recession and corporations are cash-rich, buy tech. Cause that’s what they’re buying…

Higher taxes ultimately mean lower revenue. When you raise taxes on something, you get less of it. Raise taxes on capital gains (as will be the case come 2011, barring a surprise burst of political common sense), you get less investment and therefore less capital gains tax…

When interest rates are at record lows, they’re (eventually) going to rise. And bonds are (eventually) going to get creamed…

When governments pour on the regs, convincing us that legislation can mitigate financial risk, that new “protections” will somehow strengthen our system, we are ultimately weakened. Consider a years-ago study of immune systems; scientists placed a group of chickens in an optimally comfortable environment, perfect temperature, plenty of the best feed, no risk or challenges whatsoever. After a few generations the scientists placed the offspring of these chickens in a normal environment. They all quickly died…

When uncertainty rules, when companies are hoarding cash, when fear’s high, when “experts” argue the end is near – invest like a son-of-a-gun, for the pendulum has swung big time. But, that said, don’t get greedy – invest according to your age and personality.

Have a great week!
Marty

Ever notice how certain fundamental truths seem to transcend multiple industries? Chapter 4 of Super Freakonomics (Levitt and Dubner’s sequel to their best-seller, Freakonomics) cites (and I summarize) evidence from a series of widespread doctor strikes in Los Angeles, Israel, and Columbia, that shows the death rate dropping significantly, from 18% to 50%, in the areas where the doctors stopped working. Similar results, “an across-the-board drop in mortality”, according to the study, occur when large numbers of Washington’s doctors leave town for medical conventions. Their conclusion (well, that of their source); “when there are too many physician-patient interactions, the amplitude gets turned up on everything. More people with nonfatal problems are taking more medications and having more procedures, many of which are not really helpful and a few of which are harmful.”

Note: One could interpret the study’s findings as indicating that doctors have an over-treatment propensity. While I imagine this may at times be the case, you have to consider what a tough spot physicians find themselves in. I.e., patient comes in desperate for attention, so what do you do, tell him it’s all in his head and send him home untreated and litigiously upset, or treat the symptoms – hoping he’s telling the truth in terms of other meds, habits, etc.?

One parallel to this presumed over-doctoring phenomenon would be the apparent over-managing of investment portfolios. For example; studies of long-term mutual fund results suggest that the average fund manager, for all his/her education (Harvard MBA, Wharton PhD, etc. (no kidding)) and the analytical resources at his/her disposal, can’t seem to muster enough net return to beat the plain old S&P 500. A fact that, in recent years, Vanguard’s founder John Vogel has exploited to the tune of the $billions his firm has coaxed into its index funds.

While, as an advisor, I (on behalf of my clients) have had the good fortune of finding a few funds that have consistently outperformed their bogies, I can relate the mutual fund study to my basic (unoriginal) belief pertaining to the individual investor – that the long-term holding (as opposed to market timing) of a diversified group of securities is the most sensible approach to portfolio management. In other words; the failure rate (under-performance relative to an appropriate benchmark, or, more critically, failure to meet the investor’s objectives) of the everyday portfolio, beyond a point, increases in cadence with an increase in activity. When I say “beyond a point” I’m referring to a point beyond normal maintenance, or preventive medicine, if you will. Which would be the periodic rebalancing to a suitable target allocation (an act which forces buying low and selling high (relatively), which, in effect, stymies the buy-and-hold-is-dead argument), the gradual transition to a more conservative target as one grows older, the ongoing investment due diligence (and the consequent adding/removing positions as warranted), and the proper weighting to given sectors. Beyond that, we’re, in essence, “taking more medications and having more procedures, many of which are not really helpful and a few of which are harmful”.

The book states – “most people who are rushed to the ER and think they are going to die are in little danger of dying at all, at least not anytime soon. In fact, they might have been better off if they simply stayed at home”.

So what’s my point? Well, if you happen to be our client, please don’t misunderstand my intent; I absolutely welcome your ‘911’ call anytime you’ve allowed the market to turn you a bit (emotionally) sideways – and I promise you’ll not be dismissed with a take-two-Prozac-and-call-me-in-the-morning. I will in fact be very attentive to your concerns and we will indeed re-explore whether your allocation, etc. is consistent with your world at large. Notice I said “your world at large”… For any adjustments I might recommend will have everything to do with your personal circumstances (time horizon, income distribution rate if you’re retired, etc.) and your comfort level – and virtually nothing to do with today’s headlines…

And one last point: It’s very important that, to maintain your financial health, you perform the necessary maintenance. I.e., just as you do with your personal health (right?), the annual physical and the inconvenient tests that go with it, you succumb to the same in terms of your financial well-being. Which would be, if you happen to be our client, the semi-annual meeting, where we review your situation and consider whether the current protocol remains consistent with your objectives, time horizon and temperament. And please understand, while one’s doctor may prescribe meds to sooth one’s nerves and even enhance other aspects of one’s personal life, when it comes to investing, stress reduction is only achievable through proper planning and the proper mindset (stuff (volatility) happens), and, alas, there’s just no little blue pill that’ll keep your stocks up when the market’s not cooperating…

Have a great day!
Marty