November 2011 Issue 33
 
Greetings!    

October turned out to be the Bear Killer we hoped it would be and broke the five-month negative streak.  Here are the numbers:    
                             Open                    Close                Diff

DJIA                   10,913.38              11,955.01         + 1,041.63      

NASDAQ            2,415.40                2,684.41          +    269.01        
S&P 500               1,131.42               1,253.16          +    121.74

This is proof again that timing the market is extremely difficult.  How many of us looked at that September end-of-month, end-of-quarter statement and wanted to just sell everything and move to cash?  That would have been very costly. 

The stock markets are pricing mechanisms that attempt to value individual stocks based on future earnings.  Over the summer it was extremely difficult to imagine or predict where the world's economy would be in four to six months and when the market experiences a lack of vision--or uncertainty--it reflexively pulls back.  In October some of that uncertainty was reduced, things became a little more visible and investors thought there were some good deals available and they bought.  It was as simple as that. 

How many people gave up in September?  Who knows, but I guarantee there are more than a few people kicking themselves for not sticking to their plan.  Not everything is peaches and cream and we're not sounding the all-clear signal.  Especially since as I write this the markets are off to a pretty bad start in November. 

What made October different than September was the European debt crisis.  And that crisis is also what's got November off to a bad start.  In October the EU leaders gave the Greek government a fabulous gift: they essentially wrote down Greek Sovereign debt to 50-cents on the dollar.  If only we could be that lucky.  But wait, today in what could only be called looking a gift horse in the mouth, the Greek Prime Minister George Popandreou said he is going to put the deal up for referendum and let the Greek voters decide, in JANUARY!  Link to Reuters' Article

Well, quite frankly, I doubt Mr. Popandreou will still be PM in January, heck I doubt he will make it long enough for this email to get through my compliance section.  Either way, this has once again muddied the settling waters and this is why the markets are back to their negative ways these first two days of this week.              
 
This will pass--just hold on and watch as Greece and Europe goes through another tortuous week. 

Marty

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

 

Drop the Zeros

Ran across a little blurb on Yahoo a while back when the U.S. Congress was battling over budget cuts and how they were really getting serious about spending cuts.  The title of the unattributed article was "Drop 8 Zeros".  As some long-time readers may remember I wrote a couple years ago that I think the problem with our federal budget and our gigantic deficit is that people have no way of conceptualizing how big it really is.  A trillion is not only a big number--it is unfathomable--and we owe 14 plus of them.   

 

Drop 8 Zeros did such a good job of adding perspective to the issue I printed it off and put it in my tattered old yellow folder with Newsletter written on the top.  The article was dated 8-11-11.  To summarize, the premiss is that we can't wrap out mind around numbers with so many zeros.  U.S.tax revenue collected in 2011 is estimated at $2,170,000,000,000 and the spending is estimated at $3,820,000,000,000, resulting in expenditures $1,650,000,000,000 more than revenue thus adding another trillion and a half to our debt making it about $14,271,000,000,000.  Due to this disparity in spending and revenue and a "new wave of fiscal responsibility" washing over DC our Congress decided to put its collective foot down and cut $38,500,000,000 from spending.  Besides taking up a lot of my writing space all those zeros cloud the enormity of the issue.   

 

So lets drop eight zeros!  And to make it clearer yet the author showed the numbers as the budget for a mythical Jones family.  The end product looked something like this:

 

Total annual income for the Jones family:  $21,700

Amount of money the Jones family spent:  $38,200

Amount of new debt added to the credit card: $16,500

Outstanding credit card debt: $142,710

Amount cut from the budget due to tightening: $385.       

 

I'm so glad we have put our foot down.   For a disturbing website see the US debt clock in real time.  

 

Marty    

Investing 101
De-leveraging

Leverage in financial matters is a euphemism for borrowing money to buy something.  Like a lever can use a small amount of weight to move large objects, borrowing money allows a small amount of cash buy big things.  Without leverage it is unlikely many of us would ever be able to buy our homes.  Not many people have that kind of cash sitting around so we take on mortgages and use a small down payment to buy our house.  Or, we use little or no money down and take out a student loan to enable us to go to college.  Before student loans only rich people could afford college.

We love leverage when we want something and we hate leverage when we have to repay.  During the last few decades we as a country and as individuals have levered-up.  And we loved it!  As individuals we are now in a de-leveraging phase and we hate it.  Our country and most developed countries are still levering up and the mere idea of de-leveraging is cause for social disorder and rioting in the streets. 

But according to the U.S. Department of Commerce the average American family is paying down debt. Link.  Personal savings are going up and debt is going down.  Dave Ramsey should be proud.  Dave Ramsey Website

Like Dave Ramsey, I strongly believe de-leveraging is a good thing.  Lately it has been blamed for the low-growth of our economy and we should be OK with that.  A family living above its means is not healthy for them or society.  I get the sneaky suspicion though that many of our politicians and businesses wish we would hit that home-equity line-of-credit a few more times.  I mean really, how can anyone watch TV on a mere 42" flat screen TV; there is a perfect 55" super plasma HD unit on sale right now--just plop down that credit card.         

Whether to borrow or not to borrow is a personal decision and it really matters where you are in your life.  My two 20-something year-old daughters both have very little debt but in the next few years they will transition out of school and into the working world and I expect they will need plenty of leverage to get the home, car and other essentials they will need to join the working world.  That is the beauty of leverage!

As we hear more and more about leverage and de-leveraging in the news I suggest you look at your own personal balance sheet and think of the stage of life you're in--should you be taking on more debt or paying down what you have?  Most people my age should be de-leveraging.   The 42" will have to do!      
 
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®
410-810-0735
800-994-0221
Fax: 410-810-3422


Marty with best friend
Duncan!
 
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