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News and Information from Milestone Financial Advisors
Volume 3 Number 1
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January 2010 |
Greetings!
Here is your newsletter for January 2010, including a market recap & preview and an amusing look at some failed market prognostications from the recent past.
This week I am including a quick link from a recent Wall Street Journal article, "The New American Dream", which addresses the impact in one California community of the recession. ("... Thanks to a rare confluence of factors -- mortgages that far exceed home values and bargain-basement rents -- a growing number of families are concluding that the new American dream home is a rental...")
I am currently taking appointments for Q1 financial planning review meetings. In general, phone conferences and in-person meetings may be scheduled between 10AM and 5PM on Mondays, Tuesdays and Thursdays, and between 10AM and 2PM on Wednesdays. Please contact the office at your earliest convenience to schedule your review.
There is usually plenty of metered or two-hour neighborhood parking available, or there is a garage two blocks away on Filbert Street at Columbus.
As always, please feel welcomed to put this newsletter into the hands of anyone you feel would find it useful by clicking on the link below.
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Market Recap and Preview 
With 2009 behind us, and coming off a 10-month run that saw the S&P 500 gain 42% and the Nasdaq add 50%, it may be helpful to apply some perspective to the market's stellar performance over the last three quarters of the year.
Inclusive of an 18.8% gain in '09, the Dow Jones Industrial Average actually finished off the decade with its second worst loss since the 1930s, and only the second loss in the past century. The Standard & Poor's 500 index endured a similar fate, jumping 23.5% last year but experiencing a 24% loss over the past ten years.
Compared to the '80's and '90's especially, the disparity is striking. (See chart, below.)
With the fear of 2008's market collapse fresh in our memories, and with doubts among many economists regarding the pace of recovery, many analysts, advisors and investors seem resolved to the likelihood of a flat market in 2010, to say nothing of volatility. With a rebuilding economy, housing not yet off the ground, the probability of a rise lending rates and inflation, and with little confidence in the ability of the major indexes to perform at their historic levels (roughly a 15% annualized return in stocks from October 1990 through 2009), investors and traders are likely to remain stock-neutral this year, which we would expect to contribute to sluggish growth within the S&P 500 and the other major indexes.
For this reason, Milestone portfolios will continue to reflect broad diversification across all sectors and asset classes, while taking advantage of reinvested dividends, once-a-year rebalancing, and passive investment strategies.
Mixed Opinion Among Economists |
| A recent New York Times article highlighted the growing debate concerning the timing and pace of recovery. Many economists have speculated that we have entered into a sustainable recovery, while others (including Paul Krugman) warn that the recent upturn may instead be a "misleading blip".
These divergent views are being shaped by sometimes ambiguous economic indicators, making it difficult for analysts to reach a consensus. On the one hand, the stock market is up, oil is at a 14-month high, manufacturing is expanding (for the fifth straight month) and jobless claims are dropping. Robert Barbera, chief economist at ITG, estimates the economy may add 2.5 million new jobs in 2010.
Many of these economists believe that these and other positive indicators are not temporary, that they suggests a return to "every day business" following two years of caution in the midst of near economic collapse.
The opposing narrative is equally convincing and centers on the fact that most of the underlying problems that began in 2007 still exist. The debt rate remains at historic highs, home prices are still at their cyclical lows, construction spending is at its lowest level in six years, and hiring is stalled.
Add to this the fact that with lending rates widely expected to rise toward the second quarter, the specter of inflation looms large.
The Times article closes on a high note when it refers to the stock market as a sort of barometer for economic recovery, a "wild card whose resilience cements a still nascent recovery." Not withstanding lingering (and ongoing) investor caution, the performance of the stock market over the past 10 months cannot be discounted when it comes to inspiring consumer confidence. While many stock market participants may still be below cost basis, net worth connected to brokerage assets has surged since March, and investors will be spending that money.
Indications going forward
If any of the above is to be used as a guide (or even if it isn't, come to think of it), it leads us to many of the same conclusions and recommendations I would espouse under any other economic condition: that the most reasonable and time-tested investment methodology continues to involve a multi-layered investment allocation which maximizes asset class exposure and minimizes guess-work. (See article below.)
Most importantly, I believe that the primary financial goal for 2010 (as was the case with 2009 and all previous years) is for your investment program to remain part of an integrated financial plan, one that connects with the other important elements of your life.
You can be asured this will continue to serve as the basis for our financial partnership, this year and beyond. |
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 The Foley of Prognostication
As we enter the new year, we can be certain of the next wave of predictions from "the experts".
It is always amusing at the end of each year to look back at some of the past picks made by market prognosticators and economic forecasters, whose continued employment necessitates their forecasting, and whose credibility ultimately relies upon their ability to interpret and correlate information correctly.
Below are a few notable misses:
"It's the only company in the S&P 500 with sales of more than $30 billion that has double-digit sales growth. 'WorldCom is a must-own large-cap growth stock,' says Salomon Smith Barney analyst Jack Grubman." - Galarza, Keating, "The Twelve Best Investments for 1999."
(WorldCom filed for bankruptcy on July 21, 2002, the largest in U.S. history at that time. Chief executive Bernard Ebbers was convicted of conspiracy and securities fraud on March 15, 2005 and is currently serving a twenty-five-year prison term. In 2002, Grubman agreed to a settlement with regulators that included a lifetime ban from the securities industry.)
"On May 19 [2001], Apple will open a swanky new retail store, the first of as many as 110 nationwide. Since PC retailing gross margins are normally 10% or less, Apple would have to sell $12 million a year in inventory PER STORE to pay for the space. 'I give them two years before they're turning out the lights on a very painful and expensive mistake.'" - Cliff Edwards, "Sorry Steve: Here's Why Apple Stores Won't Work." (Quotation attributed to David A. Goldstein, president, Channel marketing Corp.)
"Apple, all in all, should sell nearly one billion dollars worth of iPods this year. . . . Its shares have risen 51% in the past year to a recent $23. . . . But behind the hype and buzz surrounding the iPod and Jobs, there are problems stewing at Apple. Its core computer business is withering. Apple sold just 3 million computers in its last fiscal year, which ended in September-900,000 less than it sold in 1996. . . . Job's other strategy to boost market share is Apple retail outlets . . . but, so far, the stores have done little to increase market share and could be bleeding red ink. 'Apple will remain a company that is neat from a product and consumer standpoint but c--- from an investor standpoint.'" - Stephen Gandel, "Why iPod Can't Save Apple," April 2004. (Quotation attributed to Chris Bonavico, portfolio manager, Transamerica.)
(For the first time, Apple Inc. ranked #1 in Fortune magazine's annual "Most Admired Companies" survey published on March 17, 2008. A Fortune cover story appearing November 23, 2009 celebrated Apple chief executive Steve Jobs as "CEO of the Decade." Adjusted for splits, Apple shares that sold for $23 in April 2004 closed at $390.86 on December 18, 2009.)
"Stick with storage . . long term, this simple fact is true: A company can postpone buying new PCs or upgrading its network, but it can't stop producing digital data. The stuff must be put somewhere, and it increasingly gets stored in many places. . . Buy EMC Corp. at $44 per share"... "Amazon.com is the exact opposite [of eBay]; it faces and has yet to solve all the problems of offline retailers. Sell Amazon at $12 per share." - Stephanie N. Mehta, "Ten Tech Trends To Bet On", Fortune," March 19, 2001
(EMC shares closed at $17.34 on December 18, 2009, down 60%, while Amazon shares closed at $128.48, up 907%.)
"Washington Mutual's back-to-basics banking and customer service attracts the average Joe and leaves rivals in the dust. . . . That focus has served Washington Mutual and its shareholders well." - Jon Birger, "Leader of the Pack," Money Magazine, July 2002
(Washington Mutual was seized by federal regulators on September 25, 2008.)
There will always be lucky few who guess right, or who successfully exploit information in finding correlations, but history offers compelling evidence that making bets on companies or markets is more likely to result in being blind-sided by actual results that couldn't have been predicted.
Markets have many ways of teaching us the virtues of diversification.
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Please don't hesitate to contact the office to comment on any of the above, provide updates to your financial situation, or to discuss your accounts. |
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Information contained in the above commentary does not constitute formal advice or recommendations by Aaron Winer or Milestone Financial Advisors LLC.
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