October 2011 Issue 32
Greetings!    

September continued summer's decline, making it the fifth straight month of negatives.  Here are the ugly numbers:    
                             Open                    Close                Diff

DJIA                   11,613.53              10,913.38         -700.15     

NASDAQ            2,579.46                2,415.40          -164.06        
S&P 500              1,218.89                1,131.42          -  87.47

October as a stock market month is known as a bear-killer according to Jeff Hirsch, editor of Wiley's Stock Trader's Almanac and we are in need of a bear-killing now.  Hirsch, in an interview by Barron's editorial staff noted that 11 post-war bear-markets ended in October.  October is also the last month of the worst six months of the year for the market May through October with November starting the best six months of the market (November through April). 

More upbeat news on the calendar from Baron's "Review and Preview" Oct. 3, 2011; the third quarter of 2011 saw the S&P 500 decline 14.3%.  Since 1964 there has been 15 quarters that have lost more than 10%, and in 12 of the quarters that followed the markets have rallied with an average gain of 10%.  I would welcome a 10% gain in the forth quarter.  

Now not many people are jumping for joy about how the investment markets have performed in the last decade but that is not an excuse for not saving something for when you can no longer work.  We will all grow old and at some point we will be too worn out or just plain fatigued to work.  Failure to plan for that time now (when you are working) is not a good option. 

It is easy to look at your monthly statement and think you're not getting anywhere--but you are saving and investing not for this month or next month but for a time in the future when you will really need the money.  If you're already in the distribution phase of your investment life chances are we have money set aside in relatively safe investments to carry you to that time five or ten years down the road when the market has rewarded you for patience.  It is smart to have your immediate needs protected in safe investments, it is not smart to have all of your investments in risk-free asset classes.  Remember, without some risk there is little return.       

Greek defaults, riots, protestors and governments cannot rid ourselves of the need to prepare for the future.  There is only so much a social safety net can do for the irresponsible in a meritocracy.          

The world is not going to end and our relatively small country still has the largest and most vibrant economy in the world.  Despite all the hyperbole we see in the media tomorrow morning 90 people out of a 100 in this country will go to work and try to make their company or office better.  And when this current set of problems are resolved there will be other problems that take their place--that is just life so don't let temporary conditions change long-term plans. 

Marty

(Yahoo Finance. Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.)   

 

Creative Destruction

 

I was reminded of Creative Destruction last week as I watched Eastman Kodak's (EK) share price drop below a buck a share.  Does anyone buy film anymore?   I'm not saying that EK's failure to adapt to new technology is their only problem but it makes for a good example of Creative Destruction.   

 

I don't personally own or currently buy anything made by EK today.  I do remember owning a Kodak camera and used to buy their film all the time.  Now my phone takes all my pictures--who saw that coming?  .  

 

At the turn of the 19th century if you owned the best horse-drawn buggy company in the world--excellent customer service, brilliant operations, great cash flow and a loyal and skilled workforce, you were suddenly out of business the minute Henry Ford began rolling Model T's off the assembly line.  The horse-drawn buggy companies were victims of Creative Destruction and it looks like EK is heading that way.      

 

Creative Destruction happens all the time and if there were one thing our Politicians could do that I think would actually help our economy it would be to encourage and reward innovation.  Every day labor and management need to look at the processes we use, the products we design and find ways to improve.  If you own a company or have input in to one you should look for opportunities to encourage and reward innovation.  It is either innovate or die as a company or a country.  

 

Footnote:  I wrote the above four paragraphs on Wednesday, October 5, 2011; when I got home that night I learned that one of the world's greatest innovator and visionary had died--Steve Jobs, CEO of Apple.  He was just fifty six years old and he changed the world.  

    

Marty   

Investing 101
Recession

An old quip about the difference between a Recession and Depression is when your neighbor loses their job it's a recession, but when you lose your job it's a depression.  The country has had a couple Depressions (the last in 1929) but many, many Recessions.  And with everyone talking about recession and whether we're in one, or going in one, or double-dipping back in to one, I thought it might be a good time to give the official definition.  

First of all, not just anyone is allowed to say we're in a recession--it's not a real recession until the National Bureau of Economic Research (NBER) calls it a recession.  Just who is NBER?  In short, they are a private, non-profit, non-partisan research organization dedicated to helping the world understand Economics. (NBER link)  It's not controlled by the Government, politicians, bankers, or the media.  They are just a bunch of economists and researchers (a very exciting group I'm sure)--but they are the only authority that people recognize as the declarers of recessions.

Generally, the NBER needs two straight quarters of negative GDP growth to declare a recession.  So far, since the last one ended in June 2009 we haven't had one quarter of negative GDP--but we've been close.  The Department of Commerce reported GDP growth this year at an annual rate of just 1%  (Link)

By the way, GDP stands for Gross Domestic Product and includes private and public consumption, government outlays and exports minus imports.  GDP is basically the sum of all economic activity in a country during a specific time period.  It is a macro-measure of a country or region's productivity.  When that productivity shrinks for two straight quarters the NBER will more than likely declare that time period a recession.  (And they usually only do it in hindsight.)   

And as a side note, according to the CIA Factbook, (Link) the US has the world's second highest GDP in the world at about $14.660 trillion US$--behind only the European Union with $14.8 Trillion US$.  The old saying was when the US sneezed the rest of the world caught a cold--well, these last two summers we could say that Europe sneezed and the rest of the world caught the cold.   
 
Thanks, Marty
   

 
(Material in this newsletter is provided for general information and is subject to change without notice.  Every effort has been made to compile this material from reliable sources; however no warranty can be made as to its accuracy or completeness.  All illustrations shown are hypothetical in nature and do not represent any real investments or tax situations. Actual results may vary.  The S&P 500 index is an unmanaged group of securities considered to be representative of the stock market in general.  You cannot invest directly into an index.)

 


Chesapeake Investment Advisors Inc.
 Martin Knight, MBA CFP®
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