| Join Our List
|
|
|
|
| What Price Safety? |
|
by Timothy Waymire
Apparently, the answer to the above question is zero. As in 0.00% return. That is the return that was enjoyed by investors in three month U.S. Treasury Bills during the latter part of the fourth quarter of 2008. U.S. Treasury obligations are considered "riskless" assets. Historically, in times of economic and credit market uncertainty, the demand for such assets rises. This increased demand resulted in a flight to safety that drove yields on U.S. Treasury securities of all maturities to new lows. The chart below tracks the yield on the ten year U.S. Treasury note for the fourth quarter of last year.
The rate on the ten year note moved irregularly lower through mid-November, with the decline accelerating to just over 2% at the end of the year. The Federal Reserve Board, at their last meeting of 2008, lowered the target range for the federal funds rate to 0% to ¼%. This action was taken in response to the weakened economic outlook and credit markets that remain "strained". This was just the latest stimulus among a myriad of both monetary and fiscal stimuli undertaken by Congress, the Federal Reserve, FDIC, and the U.S. Treasury Department to address the weakness in the economy and the dislocations remaining in the credit markets. The unusually low interest rates on Treasury obligations have created, in our opinion, some interesting opportunities for fixed income investors.
The flight to safety mentioned above left other sectors in the fixed income markets woefully short of buyers. This has resulted in yield spreads, the difference in yield between a corporate or municipal bond and a similar maturity Treasury obligation, that are exceptionally wide. High quality municipal bonds look particularly attractive in today's environment. The yield offered on municipal bonds is typically lower than that offered on Treasury obligations because of their tax exempt status. Occasionally, longer term municipals might be equal to the yield on longer term Treasuries. However, yields that are ½%-2% over and above Treasuries are common for high quality municipal bonds in the current environment. The biggest challenge for us has been finding enough of these bonds to satisfy our demand for them. On a relative basis, high quality, investment grade corporate bonds also look attractive at current levels. As we look for opportunities in the fixed income markets, we are focusing on credit quality first and foremost. |
| The Surprises Keep Coming |
|
|
The stranger-than-fiction ending to the slow motion financial train wreck that we call 2008 was the stunning and deeply troubling admission by Bernard Madoff that he had been running a $50 billion Ponzi scheme. Marketed as a legitimate and highly successful investment management operation, the magnitude of the losses and the number of people devastated by its collapse will not be fully known for months. History has shown that investments and gullibility often attract one another. Sadly, education and sophistication are no defense against a well-executed fraud. While everyone would do well to pay close attention to how their money is kept, the following list spells out some important ways that our business differs from the one run by Mr. Madoff.
Madoff vs. Northstar: why we're different
1. Northstar Investment Advisors is not a custodian. Northstar client assets are held by a third party - whether a bank trust department or a brokerage firm such as Charles Schwab, Northstar never has direct access to your money - we act as your agent when we direct investments. When you fund your account at Northstar, your check or wire is always made out to the third party custodian. The custodian's job is to audit and confirm all positions and transactions in your accounts on a daily basis. One result of this separation of custodial and investment functions is that you receive trade confirmations and monthly statements that are generated by the third party custodian. Now you know why you receive so much paperwork. It is for your protection.
Mr. Madoff's operation had no independent custodian. The Madoff Company included a privately held brokerage firm through which all money intended for investment in the various Madoff funds was fed.
2. SEC oversight - as an SEC-registered investment advisory firm, Northstar has been subjected to two full SEC audits over the course of our 14 year history. Madoff's mix of businesses under one roof - brokerage, hedge funds and advisory, made for more complexity and much more difficult regulatory oversight.
3. You always know what you own. Each month and quarter you receive a detailed list of investments as well as transactions for the period. Madoff's 'clients' were never given a list of their individual investments. They were told that they were invested in one or another of Madoff's funds.
4. Your investments generally track the major indexes because your assets are invested in real stocks and bonds. Your investment objective and individual asset allocation determine actual returns. Madoff's returns were in fact too good to be true.
As shocking as this episode is at the end of an otherwise dismal year, the vast majority of money managers are honest, hard working professionals with your best interests at heart. Government oversight is effective and does work. Our financial system operates on trust backed up by regulation. Unfortunately both failed in the case of Bernard Madoff.
Here's to a prosperous 2009. |
| Wall Street's Failures Offer Good Lesson for Retired Investors |
|
By Charlie Farrell
You may be surprised to learn that Wall Street investment banks and retired investors have a lot in common. In both cases, the parties must live off the return on their investments. Retired investors can learn some important portfolio survival skills from the collapse of Wall Street.
Debt Spells Trouble.
Wall Street banks got themselves into trouble because they simply carried too much debt. When you must live off the return from your investments, the more debt an investor carries, the higher the probability is that the obligation to repay the debt will cause problems for the investor during a financial crisis.
When the value of Wall Street's mortgage investments declined, the debts they incurred to buy those assets of course did not change. As loan payments came due, Wall Street firms were forced to sell their declining mortgage assets to create cash to pay off their loans. The firms that borrowed the most were forced to sell the most, and some went bankrupt.
The lesson for individuals is that it is important to retire without any significant debt. This provides investors with the ability to handle the volatility in the financial markets. If portfolio values decline, but you don't have to pay the bank before you pay yourself, you can adjust your distribution needs to get through the bad cycle. This allows you to preserve your capital and live to fight another day in the markets.
Complexity Spells Trouble.
The more complex an investment strategy, the more likely it is to fail in a crisis. Complex strategies have many moving parts based on multiple assumptions about how the world should work and how investors should react.
Wall Street banks used complex computer models to make elaborate assumptions about the returns from domestic and international stocks, commodity prices, real estate values, mortgages, currencies and derivatives. They assumed that when one investment went down, others would go up, and thus offset the risks they were taking. As Wall Street found out, many of these assumptions didn't hold up in the crisis, which meant that the firms ended up taking on far more risk than they thought.
For retired investors, a simple strategy that focuses on the fundamental split between diversified stocks and high quality bonds is likely to work better.
For instance, at the time of this writing, the S&P 500 is down about 45% from its October 2007 high, and the bond market is actually up about 1% over the same time frame. Investors can manage the risks in their accounts by simply dialing up or down the allocation to diversified stocks and high quality bonds.
Alpha is meaningless.
Alpha is a term used in the investment community that is meant to measure the excess return provided by an investment strategy when compared to the overall market. For instance, if the S&P 500 returned 10% for a year, and a stock portfolio returned 10.5%, we would say the stock portfolio provided 0.5% of alpha.
The problem with alpha is that it can be very fleeting. A strategy may work for a number of years, and then collapse when the markets change. Thus, alpha is somewhat meaningless because excess returns can evaporate very quickly.
Wall Street got itself into trouble because the investment banks spent most of their time aggressively pursuing alpha, or excess returns. To be successful at this, Wall Street needed to consistently zig when everyone else is zagging. Unfortunately, they "zigged" right into a world of hurt. When the problems emerged, they were big and happened fast. Before Wall Street knew it, a large percentage of their investment holdings had been destroyed.
While it is nice to beat the markets, the objectives are different when you are trying to live off your money. Retirement income management is primarily about managing global financial risks so that you don't end up in the poor house from the "once in a thousand year financial crisis" that seems to happen every five years.
Instead of more offense and little defense, think more defense and a little offense. | |
Please be sure to visit our website at www.northstarinvest.com for links to Northstar in the news. For reprints of the articles referenced, please call or send us an email at Northstar@northstarinvest.com Our team has been working hard to add to the ways that we can help you achieve your financial planning and investment objectives. |
|
Northstar Investment Advisors, LLC
303-832-2300
800-204-6199
fax - 303-832-0034
|
 Shown left to right; Moses Taylor, Dick Kopp, Fred Taylor, Tim Waymire, Bob Van Wetter, and, Charlie Farrell |
|
|
