Category Archives: Investing News

2007 Economic and Markets Forecast

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The following was released to clients and select prospective clients in January.  I hope you find it interesting!

 

Camarda Financial’s Special Reports:

2007 Annual Investors’ Markets Forecast

Clients and limited select distribution only
Do not post to public assess area of Camarda.com
 
 
The beginning of the year is a wonderful time, for many things.  To reflect on blessings past, present, and for the future, and to try to chart a better course to bring the future blessings for which we hope to be thankful for in years to come.

Since money is such a powerful tool to help make the time for the things we love, and to enhance the quality of the life we wish to have, it is a good time to reflect on the decisions we have made, the places we might want to be, and the strategic changes we might want to make to maximize the opportunities likely to come to pass in the days and months to come. 

It is a popular time for planning, and for predictions.  Here are mine on the capital factors and markets, with the usual caveats that things are NOT likely to unfold as I have foreseen.  Some probably won’t happen, some may, and some may (or not) for reasons different than I may think. While useful and interesting, these should not be relied on as absolute “bet the ranch” divinations of what will transpire.  Rather, you may choose to deeply consider them, along with other sources, before perhaps allowing them to slightly color the well-considered risk control systems you currently use (or should be using) to manage your investment lives.  Hopefully, my research and opinions can help you (and us) squeeze a bit more juice out of your (and our) prudent judgment and investment management decisions.

For those of you that have seem my forecasts before, please do not be swayed by what you may consider to be my uncanny accuracy in the past.  Every day, it’s a brand new world, and the only constant is that unpredictable change can and will befall us. 

That said, here’s what I think.

 

2006 Summary

Let’s begin with a quick review of 2006’s major events.  The US housing market – one of the very central elements driving the American economy – undeniably collapsed into the vacuum of a bubble created by one of the hottest and most protracted real estate markets of a generation.  The Fed, under a new chairman, finally relented from years of steadily increasing interest rates, though, apparently, too late to pump up the housing bubble, at least for 2006.  The war in Iraq, and the other in Afghanistan, became increasingly unproductive, unpopular, and un-winnable, at least in the sense for which they were originally prosecuted. Meanwhile, east across the axis of evil, Iran supported Hezbollah into the first seemingly successful war against Israel ever, while even farther out Kim Jong Il, bane of both President Bush and the North Korean people, had the audacity to both launch (unsuccessfully, thank the maker) a missile with the design-range to reach US territory, and detonate what appears to be a weapons-grade nuclear device. Oil surged, for a time, and the dollar dove. The stock markets plunged through midsummer, and the experts raved that the inverted yield curve presaged recession. The Democrats took control of both houses, and the administration’s stand and staff on war matters quickly softened.

It was a murky, challenging, wrenching year.

But US companies coined money, and the markets soared like they haven’t in three years. On the wind of fear and misfortune, the bull thrust higher through 2006.

What about next year?

The US housing market will continue to suffer.  Foreclosures will increase, roiling the derivatives bond markets, and lenders, predictably, will tighten credit standards (even for those for whom they should not) only now that the horse has fled the barn. Prices will drop, as those wishing to sell make peace with the fact that 2005 is gone and things have changed.  Accelerating price drops, sellers’ anxiety, and lenders’ woes:  buyers will be scarce, frightened, and renting while they “wait and see.”  While northeast Florida, Camarda’s home market, spared much of the bubble’s froth and still a relative bargain, will be far more stable than elsewhere, the pain has already begun and will become more acute before things begin to turn in 2008/09. Buys in single-family housing will emerge for rentals investors later in the year; prices and seller expectations, while beginning to slip, are still too high now. Rents will continue to rise.
 
The US commercial real estate market will plateau and begin to decline. While not nearly so severe as residential, commercial’s been on quite a tear lately, and this trend continues despite flagging rates of return (“cap rates”); investors seem willing to take on more risk in exchange for lower returns, never a good sign.  Unlike for single-family and other “small” residential, long-term leases with high credit-quality tenants in commercial buildings, and apartment rents rising with the demand for housing for those who can no longer afford to buy, can mitigate this to some degree, but risk looms, especially for those investing in investment pools like REIT’s where share prices may increasingly  be disconnected from the economic reality on the ground (sorry, couldn’t resist), at least for a time. Shares in REIT’s are at risk of a severe price tumble. Commercial “cap rates” – essentially expected return – are way down, meaning buyers are willing to take more risk for less return, never a good sign.

 
US interest rates will normalize. Short-term rates (the ones the Fed controls and you hear about all the time) will stay level, then decline as inflation abates and the economy slows in mid-cycle. Long term rates will increase and eventually overtake declining short rates, erasing the current “inverted” yield curve (where short rates are higher than long) that has caused so much nail biting and predictions of recession, and bringing forth a “flat” curve (where shorter and longer rates are about the same) or a more “normal” curve where rates get higher the longer the term.  Please note that I am in the definite minority on this prediction – many predict a flat or still-inverted curve by year-end – and that interest rate predictions are about as complex and unreliable as currency forecasts. But if I am right prices for longer-term bonds will fall. The quality spread – price differences between better and poorer rated bonds – will widen to more normal levels, and prices for bonds of lower quality will fall.
 
The US economy will chug along.  The Fed – after 17 successive interest rate hikes – will have engineered a “soft landing,” and economic growth will continue at a more moderate pace. Inflation will hover near the Fed’s 2% target.  Workers’ real incomes will continue their recent increase, reversing an unhappy near-decade trend, and this will fuel consumption and growth.  Unemployment will remain “safely” above labor-shortage levels, and lost jobs from a higher minimum wage will “help” this. US companies’ torrid profit margins will slow, then rise again as massive cash hoards are deployed in search of corporate growth. “Goldilocks” (an economy of not-too-fast, not-too-slow growth) will smile. Despite protracted trade deficits (which probably no longer accurately measure “balance of ‘trade’” issues, anyway) I believe the US economy to be in remarkably healthy, mature shape. On big benefit of globalization, yet to be widely appreciated is that outsourcing labor and manufacture to emerging markets like China spawns benefits far beyond lower prices for consumer goods; Far beyond cost savings, American companies have learned to transfer the dangerous, cyclical risk of manufacture (demand up, build factories, prices rise, demand down, shutter factories, layoff workers, recession) to foreign companies and workers, whilst still capturing most of the profit!  This has already led, I think, to safer, gentler economic cycles and better, more stable jobs for workers, and the trend will accelerate in my view. This has resulted in far more favorable rates of relative wealth increase– the US is getting richer faster than the countries it is outsourcing its manufacture to – and this may be a better way to measure trade in the modern age. For this and other reasons, US stocks will continue to soar through 2007 and beyond as American and others see great value in our companies and great stability in the dollar.

 
The world will become more dangerous as the fundamentalist-terrorist ethos becomes endemic across the globe.  Iraq will transform into the premier incubator of exported misery, and Afghanistan will regain much of its former stature in this regard.  This problem will spread into formally stable regions like Thailand. New threats will arise in Africa and South America.  Absent a significant nuclear event, this will not materially affect average global economic activity or investment opportunity. China’s rise as a new superpower will become evident; it’s influence and responsibility will wax, even as internal problems increase.

 
Democrats in control of both Congressional houses will increasingly call the tune as a war-beleaguered President approaches the lame duck zone. The minimum wage will leap from $5.15 to $7.25, a whopper of a 41% jump that is sure to cost workers hours and jobs, and add to inflation where the jobs can’t be scaled back, automated, or otherwise eliminated. All hope for estate tax repeal will die, and tax rates on the “rich” will begin to creep up again here as the Democrats pursue expensive social policy, and the massive Social Security deficit crisis looms ever near. Death tax rates will eventually revisit their old pre-reform peaks, as will income taxes, as higher brackets and the AMT squeeze even more from high earners and even those of modest means. IRS audits of high-income filers will rise dramatically as Treasury scrambles to capture more revenue by dredging high-cash-flow targets with fine-tooth combs. This trend was clear in 2006 and will gain unpleasant traction as 2007 unfolds. Odds of audit have gone up substantially, and those selected will face longer and more invasive examinations. Top income tax rates will again approach the Clinton-era’s 40% – before the additional Social Security/FICA taxes are considered.  And the caps on income subject to the Social Security tax – an additional 12.4% split between taxpayers and their employers – will be raised sky-high or removed entirely, extracting from Americans to another $100 billion in taxes for each year alone; sadly, this money will be promptly “borrowed” and spent by the government, rather than used to put a dent in the Social Security welfare system that, due to longevity gains unforeseeable when the New Deal was dealt, has grown massively more expensive and generous than anything ever intended even by FDR. 
 
The dollar will stabilize, then go up. So many factors – the trade accounts with various countries, the efforts of the US and foreign central banks (like China’s, but they all do it) to manage their economic aims via currency trading, the influence of US exporters (who want a weak dollar), US interest rates, US voters (who want good jobs from a weak dollar but cheap imported goods from a strong dollar) and unexpected market forces (like the fact that the dollar has become the de facto world currency, driving demand for greenbacks unrelated to goods/services) make currency predictions and bets fraught with risk.  Still, I’ll stick my neck out a bit and call for a rising dollar against European currencies, and a falling dollar against Asian currencies, especially those other than the yen.  Overall, the dollar will stabilize, and move gradually up. If this happens, non-dollar investments in foreign assets like stocks and bonds will be negatively affected in dollar terms. China and India – clearly new economic superpowers of the new century – will see growth abate as economies mature; the Chinese will allow their currency to rise against the dollar, raising prices for many US consumer goods from the Far East.

 
Commodities prices – especially oil – will decline moderately, as global demand slows from greater efficiencies, sharply curtailed US construction, and especially as overall emerging markets’ (overwhelmingly led by China) appetites contract due to slowing rates of economic growth; many emerging markets will, however, consume more basic goods.  This trend will be exacerbated by diminished speculative fervor, and discovery of both new sources of alternative and in-the-ground resources, and new technologies to exploit these resources. Many countervailing forces will conspire to produce slightly lower prices for commodities.

US Large Cap stocks will continue to rise, based on strong fundamentals and the “rotation” of investor interest.  The Dow will continue to make new highs, and finish 2007 near 14,000.  The S&P 500 will finally break it’s 2000 record and rise to new highs – in the 1600 range – and even the mega-cap-moribund NASDAQ will regain much lost ground and approach it’s 2000 high, but still finish well shy of it.

 
US Small Caps will pause from their record run ups, and see slower share-price growth or even end flat to slightly down, finally yielding to investor rotation and showing lower PE’s.  This will prove temporary, as these growth engines on the cutting edge benefit from a benign US economic environment and easing interest rates. Nonetheless, small caps are due for a breather, and large caps will clearly lead the US markets in my view.

 
Foreign “first world” stocks will show moderating growth, as rotation continues toward US large caps, and the dollar rebounds, cutting returns on international investments from the American perspective. This is despite the fact that valuations of many EAFE (Europe, Africa, Far East – a good foreign index) in many ways can be viewed as less dear – and hence better buys – than US stocks, and so more worthy of investor attention.  The “rotation” factor will reduce US investor demand, as will the higher (probably unjustified) perceived risk of these stocks, and a rising dollar will sodden things more.  Overall, I look for positive but only single-digit growth here.

Select Emerging Markets will continue to soar, offering heady returns with dizzying risk.  Emerging markets – what we used to call “third world” generally refer to rapidly developing economies, from “adolescent” to “young mature,” like post Soviet-bloc East Europe, Southeast Asia, Korea, and China, all of South and Central America, and so on.  This is in contrast to “foreign” which tends to mean developed non-US economies like Britain, Canada, Germany, and Japan. Without question, the future of world growth belongs to these emerging economies as they hurtle, with information-age/globalized-trade speed, to the levels of development enjoyed by countries such as ours. Fortunes to rival America’s gilded age will be made in places like these, and by those investors prescient enough to spot the winners among companies and countries. The emerging world is yet filled with lessening but still staggering risk, and these waters are not to be transversed lightly. If you sail, do your homework, spread your risk, and keep the cannons loaded for pirates.

 
Forecast Summery:  Avoid real estate & REIT’s, long bonds, junk bonds, US small caps, commodities, and foreign stocks. Bet, (if you must), on US large caps, emerging markets, the dollar.  Look to buy cheapening US real estate (buildings, NOT securities like REIT’s, which tend to lag) as the market continues to deteriorate. And remember to smile, as money’s not everything, after all.

 
Forecast Warning: In the end, financial forecasts are somewhat less reliable than long-range weather forecasts, and pundits tend (though not me, dear reader,) to trumpet their successful (lucky?) calls, and downplay (or conveniently forget) their bad ones. Take all you read here, and elsewhere, with a shaker of salt, and make sure to do your research and spread your risk.  Most importantly, if your assets are not unlimited, and you truly care about your long term financial security (and who doesn’t when I put it that way?) use some sort of risk control program (like Camarda Financial’s ISIS® – more at camarda.com if you do not know of it) to balance exposure and hopefully increase the probability of good returns, while at the same time substantially lessening the risk of devastating losses – such as those encountered in the Great Crash of 2000-2003 – from which some investors will simply never recover. Good hunting, and good luck!

 

 

 

4th Secret of Habitually Successful Investors

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When I say safe, I mean how much risk can you reasonably tolerate and still have a high probability of investment success, which we define here as getting reasonable returns, on average, and avoiding losses. First, let me dispel the notion that one can simply ratchet up the level of risk to produce the return required, such as to produce retirement income: this is a recipe for disaster. Straying beyond the rules we’re about to get into dramatically increases the probability of losing big, and the prudent should not go there. The level of risk that can be safely taken without giving up a reasonable likelihood of success is a function of two things: your emotional risk tolerance, and your economic risk tolerance, which I call the “income load.” Emotional is simple: how much risk – in terms of volatility, like seeing prices of the things you own drop precipitously and stay low for awhile – can you (and your spouse) stand without losing control and selling at possibly the worst time, locking in losses and statistically axing the possibility of ever fully recovering? There are many types of little questionnaire “risk tolerance” tests from the investment vendors that will rate you from “conservative” to “aggressive.” Most do a good job, if you answer honestly. The bottom line is you should take no more risk than you can sleep with, or you will wind up hurting yourself. Used in conjunction with the commercial asset allocation models we talked about earlier (and most risk tests will lead to you one) you can get a decent idea of the overall mixes specific vendors feel you can tolerate emotionally. Camarda’s ISIS® uses a proprietary one we developed internally, over many years. Measuring the second factor – economic tolerance or income load – is more complex, and most of the commercial risk tolerance tools we have seen do not address it well, if at all. This is really a pity, because the “economic” part is by far the most important factor in overall risk tolerance. Basically, income load measures how soon you need to take out how much from the portfolio, to spend. The more, the sooner, the less risk you should take; the less, the later, the more risk can be safely taken. Remember, please, in all of this I refer only to the prudent, efficient risk, we talked about above, and not speculative risk. If you need all your money to buy a house in one (or even two or three) years, better put it in the bank, because you should take no risk at all: if you need “X” dollars, you can’t afford the possibility of having to weather bad markets when you might only get less than “X” when you need it. On the other hand, if you are 70 and have $1M invested but no plans or needs to ever spend it (because you have generous pensions and other accounts, say), you can take a great deal of efficient risk because, even with down markets along the way, the odds are excellent that everything will be much, much higher before anyone (like your grandkids, for graduate school) will ever need to dip into it. This is the reason that the commonly-held belief (still widely promoted by the investment vendors) that your risk tolerance should go down as you age is incorrect. It is a ham-handed rule of thumb that assumes you will need to spend more of your portfolio as you age; this assumption is by no means always true, and even where it is, a calculation of the income load and preparation of an appropriate portfolio for it is far more effective in managing wealth than “nothing but bonds after age 65.” In case you did not know it, by the way, you can lose as much in bonds as in stocks, so be informed, and careful. A simple, general rule for income load might state that: “less stocks and more bonds as your income needs increase from more than 1.5% of portfolio value, to all short/mid-term bonds & bank accounts as your income needs exceed 6%.” Again, this is simplistic, and does not address the variable cash flows (0% for 4 years, then 7% for two years until Social Security kicks in, then 3%, and don’t forget that $150K mountain house in 6 years) and risks of inflation that exist in “real life.” Unless you can somehow change your emotional risk tolerance (in which case the income load is all that matters), the most conservative factor – emotional or economic – should have the greatest influence in determining how risky (and probably profitable) a portfolio you can safely have. Camarda’s ISIS® uses a sophisticated mathematical model and computer program that we developed internally to factor in a client’s income load, and then integrates the result with our measurement of the clients emotional risk tolerance to arrive at the controlling risk tolerance and corresponding optimum asset mix. The process is another of our “trade secrets,” so I can’t get into the nuts and bolts of the math here. If you choose to take us up on our no-cost/no-obligation/no pressure offer, we will use it as part of your Confidential Financial Profile© in order to prepare an investment mix that ISIS® determines is most appropriate for you, with the overall rationale clearly explained in a customized Investment Policy Statement that we will give you, along with a copy of the prescribed asset allocation mix, to keep. Again, we are happy to do this work for you at no charge as a way of demonstrating our ISIS® process and competing for your business. Sadly, a major shortcoming of this sort of planning is a simple fact of life: things change, sometimes quickly and dramatically. This requires that your risk tolerance be reviewed and adjusted regularly. At Camarda, we address this through our scheduled quarterly updates, and with our Annual Review Profile, during which we repeat the entire process, to proactively stay on top of the changes that will no doubt occur throughout our clients’ lives. However you choose to go about this process, you should be sure to stay on top of it, too.

2nd Secret of Habitually Successful Investors

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Again, when I say investment success, this is what I mean: maximizing returns while minimizing risk of loss.  In a perfect world, we could make gobs of money and risk nothing.  Sadly, the world is far from perfect, and to make more than a tiny pittance after inflation and taxes are considered (as is the case for guaranteed investments like bank accounts) we need to take some risk.

            Success, in my view, means putting together a portfolio with a very high probability of producing good returns with a low probability of actually losing money. It does not mean taking outlandish risks – where devastating losses are possible or even likely – in hopes of hitting a home run and buying an island with the profits. This sort of activity is speculation – gambling – not investing, and can be likened to playing the lottery, which no one really expects to win. Most investors understand that the lottery is a losing proposition, but don’t have the information to be aware of speculative activity in their portfolios, so they can control it.  While it is true that expected return will go up with risk, it is true only to a very limited point, after which additional risk does nothing for return but predictably increases the odds of loss, to the point where loss becomes certain.

            The great bear market of 2000-2003 is a great example. Many folks lost vast sums because of uncontrolled risk they (and their advisors) never knew were there, losses from which it took them years to recover; and some may never fully recover.  People in risk-controlled portfolios like Camarda’s ISIS® came through this great cataclysm OK, in terms of not suffering devastating losses, and some even made good money along the way.  Not because they or we got “lucky,” but because they owned efficient portfolios.

            The secret is in taking no more risk than is required to produce acceptable returns. Most investors risk far too much for far too little in the way of profits, and for this reason are often disappointed. Investment efficiency is defined as getting the biggest return for the least amount of risk, and is well described by an elegant little measure called the Sharpe Ratio, named for one of the winners of the 1990 Nobel Prize in economics, awarded for Modern Portfolio Theory. It is deceptively simple, and looks like this:

                                                Sharpe Ratio = return/risk

The higher the ratio, the more return and the lower the risk, and vice versa. You want your investments – and the portfolio they build – to have a high Sharpe Ratio, meaning you want the maximum investment “bang” for the cheapest risk “buck.”  Many different units can be used to produce Sharpe Ratios, with historical return/standard deviation of return perhaps most common.  You can get these numbers from many financial data services, such as Morningstar.

            I find the Sharpe Ratio most useful as a yardstick to compare similar sorts of investments – to look for a superior large cap value fund, for instance.  Also, like most metrics used for analysis, it is very much period-dependent:  the five year numbers can look vastly different from the one-year ones.  Look for consistency across periods.  I discourage you from using the Sharp Ratio to compare dissimilar vehicles, like foreign stock funds vs. U.S. government bond funds, because the tendency of dissimilar investment types to move in different cycles – which our second secret looks to profit from – makes accurate comparisons harder.

            One can also use this ratio to evaluate individual issues like stocks and bonds, but the added uncertainties and risks associated with such issues make this far less valuable in my view.  This is because the risks associated with asset concentration – putting a lot of your money into the stocks or bonds of a limited number of companies – take you so close to the speculative realm that the Sharp Ratio is not very useful without tons of other work.  So much can change in a given company’s prospects – the economy in which it operates, government regulations, new competitors, lawsuits, management going brain-dead, and on and on – that the amount of analysis required to find and keep up with a good company in a good industry will strain the interest and ability of most DIY investors.  When one considers that you’d need at least thirty such stocks in at least ten different asset classes (as we shall see in the next secret), it should be clear that keeping on top of some 300 different issues is beyond the ability of even a small team of professional analysts. Remember, diversification is spreading your money around so well that a few things can go bad or go bust without it really hurting you; to do that, you need to own small pieces of a lot of different things. In my opinion, the only safe way to get the diversification you need is by using “pooled” vehicles like mutual funds and ETF’s (Exchange Traded Funds).  At Camarda, we continue to believe – for now, but we reevaluate it regularly – that selecting no-load mutual funds from a universe of thousands (none of whom pay us commissions or charge surrender/redemption fees) offers our ISIS® clients the best way to target the performance and diversification that we believe they both want and need.  

            Not that a great deal of money hasn’t been and can’t in the future be made by picking a few individual stocks hoped to be home runs – in fact, Camarda plans to introduce a hedge fund that looks to do just that.  But such a strategy is not efficient; it’s more of a “swing for the fences,” “go for broke,” risk is in the red zone, than prudent portfolio management, which by far is what most folks need. 

So the second secret is investment efficiency – learn to measure risk, and take no more risk than is required to target acceptable returns.  This is only one piece of the puzzle, however, so before running off to buy the Brazilian stock fund with the highest Sharpe Ratio, you need to know a little more.            

Introduction to the 7 Secrets of Habitually Successful Investors

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            Welcome!  I sincerely hope that the information in this report helps you to build and protect your investment wealth, and to enhance lifestyle and financial security for you and those you care about.  It contains the basics upon which Camarda Financial’s ISIS® portfolio management system was built…and ISIS® documented performance in both good markets and bad truly speaks for itself. ISIS® is Camarda’s own exclusive Integrated Strategic Investment System, developed by us and available only to Camarda clients. It is uniquely ours, and obtainable nowhere else.
            My objective in writing this report is to help you join the ranks of “habitually successful investors.” These folks, in my view, are those who consistently make steady progress toward their financial goals, in good times and bad, and get lots of sleep along the way. They set up and stick to investment programs that control risk – and worry – and through which they can reasonably expect to accomplish their goals of financial security.  In other words, they have the know-how to set up the game so the odds (while never guaranteed) are very much in their favor, and avoid the crazy risks of devastating losses that “ordinary”’ investors unwittingly expose themselves to all the time, over and over again.
            Some folks take the time and effort to do this for themselves, and the basics are here for you to build on if that’s what you want to do.  Others prefer to hire firms like Camarda Financial to do this for them, choosing to spend their time on other things, and perhaps expecting even better results from those with ongoing professional expertise. Later in the report you’ll learn how to take Camarda up on its free Portfolio Plan™ offer, and see exactly what our professionally-customized advice would look like for you – at no cost or obligation. You’ll also see how to get a free Portfolio Stress Test™, and how to use it to uncover danger areas in your current holdings. 
The techniques I’ll share in this report have been well-known to professionals for many decades, but for whatever reason are still needlessly mysterious to the average private investor.  So our purpose in sharing this “uncommonly-used” information with you is two-fold.  First, if you are a serious investor guarding your family’s wealth, you really need to know about it, and may not find it anywhere else. The information is so critically important that it can literally mean the difference between investment success and the unraveling of a family’s financial security; sadly, it is so frequently ignored (even amongst retail advisors) that getting the word out in a report like this has the potential to do a lot of people a lot of good. I hope you are among them.  Second, of course, Camarda is likely to get a lot of new clients out of it, as people learn about the benefits of the methods, but choose to have someone (like us) do the work instead.  
            What follows is a philosopher’s stone of sorts, but one that really works, and has been proven over a very long time.  Like most “alchemy” in the real world, it is really a collection of tools and techniques found to be effective in most situations most of the time, but only when properly applied.  Sadly, unlike the magic of fable, ours requires a bit of work to pull off.  Knowledge is power (or money in our case), but needs three elements to be valuable.  First, it must be understood before it can be applied; read the material a few times, and even do some outside study on your own.  Two, it has to be applied unemotionally, even if your guts (or your broker) are screaming that you should bet the ranch on some hot investment “special of the day.” Finally, it must be consistently maintained; things are constantly changing, and you have to stay on top of the moving pieces and adjust them accordingly.
            Don’t be discouraged; you can do this!  It requires a bit of work and dedication, it is true, but so does a good game of golf or an effective diet.  You may never hit them like Tiger Woods, but you can learn enough to play a competent game.  And even though you may ultimately choose to hire someone like Camarda because you think they can do it better with less effort and time commitment on your part, it is important to know the basics so you can hire competent help.
            So understanding these concepts is also enormously important, whether you choose to go it alone or use a financial professional.  Employing academically-established rules of finance can help you attain wealth and peace of mind.  Ignoring them – like the existence of gravity at the edge of a cliff – can ruin your life.  Even though most of these “secrets” are based on principals that institutional money managers have been successfully using for over half a century, they are still widely unknown by the vast majority of professional advisors like stockbrokers, insurance agents, and financial planners, as well as most do-it-yourselfers.  While you will usually hear a lot of buzzwords like “asset allocation” and “risk tolerance,” the unfortunate reality for most is a superficial vocabulary rather than an effective working knowledge. Since it’s your money, it is incumbent upon you to be sure the principles are at work for you. 
            One final note before moving on to the First Secret.  While things are slowly changing, it is still perfectly legal for an investment products salesperson, working for a brokerage, bank, insurance company, or themselves, to call themselves a “financial advisor,” and to offer advice that amounts to little more than selling products that pay them commissions, for which they have very limited liability to actually get right for your situation. In this arena – in which the vast majority of investors find themselves – it is obviously vital that customers understand the basics of portfolio management, as I try to explain in this report.  “Fiduciary” advisors have a legal duty to know what they are doing, and to put your interests first. Non-fiduciary advisors – again, the vast majority – do not. The best way to tell the difference is by looking at a Federal disclosure document called the “ADV.” If the advisor can not supply one, this is a strong indication that the advice is non-fiduciary.  We will get into this issue in more detail later in the report.

Our firm, Camarda Financial, is a fiduciary advisor who makes its ADV – and its actual track record with client money – readily available on request.

Homes’ Prices Plunge

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Data continues to accrete; the real estate market’s in real trouble. Price declines in August and September were the worst in 38 years, and many experts feel we have yet to see the worst; SunTrust’s chief economist doesn’t expect us to find the bottom until 2008.  (It should be noted that the National Association of Realtors’ chief economist feels that “the worst is behind us” and that it’s time to start buying again; few others share his view). In some markets, the collapse of euphoria to fear is already having ghastly effects:  last week, a waterfront home in Naples brought only $440K at auction, a huge, 36% plunge from its sale price of $690K little more than a year prior.

            A new Wall Street Journal study paints a cloudy-to-bleak picture for Jacksonville: despite its strong employment outlook, Jax had the 7th worst inventory build up of the 27 major metro areas studied (half of those areas with even worse inventory numbers were in Florida; all were in the sunbelt), meaning that homes for sale are stacking up way faster than people are buying them.  Basic supply/demand economics forecasts falling prices, and that is in fact occurring in Jax according to the Journal study. Jax also has the 10th worst “loan payments overdue” score of the group of 27, an ominous sign of more foreclosures to come, which would dump even more inventory on a soggy market, farther depressing both buyers and prices.

            So far the march of carnage is confined to the residential (housing) market, but the first glimmers of trouble on the commercial front have begun to appear as well.

            With few exceptions, this story is playing out across the nation, with a lot of blood yet to be let into the streets of commerce, before optimism and buyers return, and prices start bouncing. US real estate – like NASDAQ before it – had soared to unsustainably overvalued levels by many measures, and the air is rapidly fleeing the balloon; prepare for a nasty landing.

            What to do?  In my opinion, those who must sell (for whatever reason) in the next 2 years would be wise to do so now; swallow your pride, and take what you can get; buyers are getting scarce.  Don’t bemoan that you’ll get less than a year ago; that time’s gone; you’ll still get far more that a few years ago.

            For those who have no need to sell, hang on; prices will dip scarily before eventually rising again; they always do.  Investors should carefully evaluate their “cost of carry” (interest, taxes, maintenance, lost rent/vacancy, and the opportunity cost of what the capital could earn elsewhere if not time up in real estate) before making this determination; adding your carry costs (as you properly should) to what you have “in” the property can give you a very steep price-hill to climb, indeed, to eventually walk away with a profit.

            Those few who still wish, like me, to buy? Stand pat, and keep your wallets dry.  The gettin‘s gettin’ to be a whole lot better. As this thing unwinds, buyers will again wield incredible pricing and negotiating power. You should be able to get a whole lot more for a whole lot less, on your terms.  And make a decent “cash flow” return on the rent, something that has not been  widely possible with the bubble prices we’ve seen over the last many years.

Stocks soar on large cap rotation – a huge 2006?

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I hate to say I told you so (almost as much as you hate hearing it) but, well, I did.  In January of this year (check my forecasts here on this blog) I predicted a resurgence in the major US stock markets, which have for awhile been outpaced by foreign equities, to be led by the largest American listed companies, which have languished these several years past.  Apparently, no longer. The DOW 30 made a new, all-time high on Tuesday, then soundly punched through it to major gains and another record on Wednesday. While the balance of 2006 has yet to unfold, I continue to be wildly optimistic amid a flurry of giddy facts:  1) Even with the new highs, we’re still about where we were way back in January of 2000, nearly seven years ago.  After inflation, we are actually down 20% in real terms. Other major indexes are still behind even before inflation, with NASDQ far behind. It is time for a major move upward.; 2)  Recent economic data  point to balanced, “Goldilocks” growth and lower interest rates on the horizon, along with lower commodities prices (looked at how gas is dropping?) prices, all great for stocks and the economy; 3) We are now looking right down the barrel of the 4th quarter, historically the best time of year for stock gains.  The drivers of points 1 and 2 could really supercharge the Q4 rally that I expect. Of course, I could be wrong, which is why we spread our clients’ investments over many different asset classes, to control risk.  But I expect that I am right, and that it will be a very merry Christmas, and a happy new 2007, indeed. Cheers!

September bull?

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The markets continued to rally right through the fizzle that was Ernesto, bringing us, as of the 9-1 close, to these results, all 2006-year-to-date. DJII, +7%. S&P 500, +5%. Russell 2000, + 7.2%. And while NASDAQ continues to hover at about break-even, foreign (EAFE) keeps on humming, + 12.6%. The Fed’s recent decision to hold rates level – halting inexorable increases announced at each Fed meeting spanning several years – bodes extremely well for both the economy and the markets, and recent data seems to confirm the “enough” decision and heralds a soft-landing” return to the sweet “Goldilocks” times of “not too fast” and “not too slow” economic expansion. The calends of September – historically one of the worst months of the year for the markets – bode well.

American Funds spanked with $5M fine

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American Funds, that darling of many retail brokers, was fined five million dollars by the National Association of Securities Dealers for rule violations “prohibiting mutual fund distributors from directing trading business to brokers as a reward for selling their funds.” The rule dates from 1973.  From 2001 to 2003, American’s parent paid some $98 million in commissions for trading within its mutual funds to brokers; “target commissions” were declared by American and allocated in advance to “top selling retailers” of its funds.  In exchange, the NASD claimed, American Funds “expected to have enhanced access to the broker-dealers’ sales staff, and have its funds listed as ‘preferred’ or ‘recommended’ by the retailers…’precisely what the (NASD’s) rule was intended to proscribe.’”  The gist of all this is that the brokers in question were being paid extra to push this particular vendor’s products, and that “recommendations” were clearly tainted by self-interested compensation elements.  American, of course, is by no means alone in this situation.  The lesson?  Once again, examine conflicts of interest zealously, and be especially vigilant when commissions (which include fee-based arrangements) form any part of an advisor’s compensation. 

Markets Update: Modern Times

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It’s been several weeks since my last post, and much had occurred while I was away.  What is striking is how little impact some quite grave events – Britain’s foiled airline massacre, and the Israeli/Lebanese abyss-teetering – have had on the markets, notably including the stock, gold, and oil markets.  In my view, this only underscores a belief I’ve held for some time:  the markets have learned to discount the dastardly risks that seem a hallmark of the dark times in which we live.  The sad reality is that horror on even a grand scale has notably little impact on economic activity, and the near-certain prospect of more to come – short of a nuclear event – is wisely shrugged off by investors and other participants.  That said, the stock markets have staged a nice little rally in August, bringing us, as of the 8-28 close, to these results, all 2006-year-to-date.  DJII, +5.3%.  S&P 500, +3.6%.  Russell 2000, + 3.9%.  And while NASDAQ continues to languish at –3%, foreign (EAFE) keeps soaring, + 10.7%. 

Autumn beckons, stocks stir?

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As the summer winds down, there’s renewed hope of a typical fall/winter rally, and a powerful finish to the year.  Odds are now strong that the Fed is finished raising rates for awhile, and may actually cut them sometime in 2007; the bond markets continue to cheer this.  Many stocks’ indexes are at nice mid-year levels, with the DOW up nearly 5% YTD, Small Caps (Russell 2000) up over 4%, and foreign (EAFE) almost 12%.  Not so bad, after all.