Greetings! This week, we'll wrap up the big picture of our investments heading into 2012. Again, we'll lean heavily on our economic research teams. For a more complete analysis, contact your advisor! First, here is an important point. No matter how self-servingly confident anyone comes across about how things are going to play out, the truth is that no one (ourselves obviously included) can predict complex macro outcomes with any certainty, and this is especially true given the huge number of variables at play today. Confident predictions may make politicians more "electable" with constituents, but honest investors base their decisions on realistic analysis that accepts that some aspects and time frames relating to the overall environment can be analyzed with confidence and some cannot. We build portfolios that take these many tradeoffs into account, and it is important that clients understand the limitations of the decisions we make and where their own decisions are required. For clients who want (or need) to emphasize protecting capital in the event of a very negative scenario playing out, it is important to choose an appropriately conservative strategy. In fact, we have reduced risk by a greater amount in our more conservative strategies because we believe that capital preservation is more important to clients in these strategies. That same client has to also understand how they will feel if a bad outcome doesn't happen. By choosing a more conservative strategy they will have missed a chance for greater returns and may feel regret. Toward the other end of the spectrum, clients with long time horizons can take some comfort in knowing that even if we see a sharp short-term decline, our analysis gives us confidence that over 10 years and beyond they will earn better returns in our more aggressive strategies, provided they don't bail out if we do see a sharp decline. Overall, our decision to reduce risk across our balanced strategies means that we could underperform our benchmarks in some scenarios that are possible. For example, if European authorities are able to coordinate on action that effectively takes away the perceived risk of larger countries' defaulting, we could see a strong rally in stocks, and if the U.S. economy surprises further on the upside the rally could be even stronger. It's even possible that there's enough positive feedback in the global economy that our optimistic scenario of a return to pre-debt-crisis levels of growth plays out. In these outcomes, we wouldn't look as good for a period of time as we would have by maintaining a more neutral investment position. We accept the risk of trailing under some scenarios for a number of reasons. First, while the odds of a very negative scenario playing out are relatively low, its effects would be highly damaging, and we think our optimistic scenario is even less likely. Second, our most-likely scenario involves no crisis but slow growth for many years, with mediocre returns for stocks, and periods of high volatility that create opportunities to add back stocks at more attractive prices. Third, our process and the decisions that result reflect our commitment to thorough research, intellectual honesty, and discipline, and we believe this kind of process has the best long-term likelihood of success. Finally, although some might conclude we are wrong if these risks don't happen (and we think this is the greater likelihood) it is our job is to make decisions that we believe best serve our clients. We appreciate your continued confidence. If you have any questions, please contact your advisor. |
| Weekly Economic Update | |
JOBLESS RATE DOWN TO 8.3%
Are we seeing a trend here? The unemployment rate has now fallen 0.8% in the last six months. We haven't seen a descent this sharp and swift since 1984. January hiring blew away forecasts: the Labor Department said the economy added 243,000 jobs last month, while economists polled by Briefing.com expected non-farm payrolls to grow by 155,000 positions. The labor force hasn't grown so much in a month since last April, and the numbers are making analysts wonder if the Federal Reserve will tinker with interest rates months ahead of expectations. (1,2)
HOUSEHOLDS SAVE FIRST, SPEND SECOND
Consumer spending was flat in December after gains of just 0.1% in November and October. More significantly, consumer incomes rose 0.5% for December and so did the personal savings rate. People essentially put the extra money in the bank. In related news, the federal government estimated 2011 GDP at 1.7%, about half of the economic growth seen in 2010. (3)
BOTH ISM INDEXES RISE
The Institute for Supply Management's closely watched purchasing manager indexes signaled expanding service and manufacturing sectors in January. ISM's service sector PMI improved 3.8% to 56.8. Its manufacturing PMI advanced 1.0% to 54.1. (4)
CASE-SHILLER INDEX DECLINES AGAIN
This was the third straight monthly dip for the 20-city roundup of residential home prices. The latest available edition (November) showed a 1.3% monthly retreat in prices with a 3.7% year-over-year drop. (5)
NASDAQ TOPS 2,900
The tech-heavy index closed at an 11-year high Friday: 2,905.66. The Dow settled at 12, 862.23 at week's end, its best close since May 2008. The S&P 500 finished Friday at 1,344.90. The weekly gains: DJIA, 1.59%; S&P, 2.17%; NASDAQ, 3.16%.( 1,6)
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| Market Summary |
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% Change |
Y-T-D |
1Yr Chg |
5-Year Avg | |
DJIA |
+5.28 |
+6.63 |
+0.33 | |
NASDAQ |
+11.54 |
+5.51 |
+3.47 | |
S&P 500 |
+6.94 |
+2.89 |
-1.43 |
(Source: cnbc.com, bigcharts.com, treasury.gov, treasurydirect.gov - 2/3/12). Past performance is no guarantee of future results. Indices are unmanaged, and investors cannot invest in them directly. |
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Create a beautiful week!
Karl Frank, MBA, MSF
Certified Financial Planner (R)
A & I Financial Services LLC
303.690.5070
Citations:
(1) - money.msn.com/market-news/post.aspx?post=7c25b3c1-0028-46a6-a114-77f785c12529 [2/3/12]
(2) - www.briefing.com/investor/calendars/economic
/2012/01/30-03 [2/3/12]
(3) - www.mercurynews.com/breaking-news/ci_19853130 [1/30/12]
(4) - www.ism.ws/ISMReport/NonMfgROB.cfm [2/3/12]
(5) - www.latimes.com/business/money/la-fi-mo-home-prices-decline-20120131,0,3490723.story [1/31/12]
(6) - montoyaregistry.com/Financial-Market.aspx?financial-market=common-financial-mistakes-and-how-to-avoid-them&category=29 [2/3/12]
This material has been prepared and is distributed solely for information purposes only. It is not a solicitation or an offer buy any securities or instrument or to participate in any trading strategy. There is no assurance that a particular trading strategy will achieve investment success.
Securities offered through Geneos Wealth Management, Inc., member FINRA/SIPC. Investment advisory services offered through A & I Financial Services LLC, registered investment advisor. |
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| Words for Thought |
"If you would be loved, love and be lovable." Benjamin Franklin |
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Karl Frank In Investor Advisor Magazine |
 | | Investor Advisor - November 2011 |
Investor Advisor Magazine's November 2011 edition features Karl Frank. In the article "Never Satisfied," John Sullivan writes: Passion born of tragedy drives Karl Frank to do all he can to help business owners ensure a legacy for loved ones and heirs. Industrial age publisher and philanthropist Frederick Bonfils said there is no hope for the satisfied man. If that's the case, Karl Frank is full of hope.
"I'm never satisfied," Frank says matter-of-factly when asked about his advisory firm
.....Read More. |
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Karl Frank was interviewed by 9News on January 9, 2012 regarding "Key Questions to ask when picking a financial advisor". | |
Click Here to View Video
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Riddle of the Week |
A lone pine tree stands on a cliff. The wind is blowing from the east through the mountains. Which way do the tree's leaves blow?
Last week's riddle:
It has no crown, yet when the chips are down it is more powerful than a king or queen. What is it?
Last week's answer:
An ace in a deck of cards.
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