Another worthwhile read comes from a speech recently delivered by the president of the Federal Reserve Bank of San Francisco, rather prosaically titled “The Federal Reserve and the Economic Recovery.” In it, John C. Williams discusses the policy responses of the Fed to the recent economic crisis and dispells a number of myths regarding the Fed’s policies and the impact of actions taken to avert disaster.  Williams goes on to explain why the subsequent recovery has been so weak and why “economic prospects are brightening.” 

We have completed the portfolio update we recently wrote about with the addition of the DFA Emerging Market Core fund to all client portfolios.  If you haven’t already done so, you can review our reasons by reading “The Case for Emerging Markets,” and/or spending 23 minutes with our recorded presentation “Review and Outlook, 2011-2012.”

 Upcoming Events
March 29: Virginia Office Client Open House
June – July: Elissa and Dave’s one-month sabbatical

Best wishes to you and yours!

The Yeske Buie Team

Current and Future Market Share

As a consequence of rapid and accelerating growth among the major emerging economies, their share of the world stock market has grown to 12%, a proportion that is becoming too large to ignore.

And it’s not just the current share that emerging stock markets have attained that demands attention, it’s their trajectory.  As an example, consider four of the most prominent emerging markets, Brazil, Russia, India, and China, collectively referred to as the BRIC countries. 

Together, these four countries represent 25% of the world’s land mass and 40% of the world’s population.  Most importantly for this discussion, they are also among the world’s fastest growing economies. In fact, a recent paper by Goldman Sachs predicted that the BRICs will account for 41% of world market capitalization by 2030.   This segment of the global stock market is therefore becoming ever harder to ignore and the question becomes less about  ”if” we should expand our exposure and more about “when.”  The events of the past year would seem to have answered that latter question by presenting us with what appears to be an attractive entry point.  Here’s a summary of returns by market segment and region for the past year and prior years:

While all non-US stock markets had double-digit losses in dollar terms, the emerging market losses were the deepest, creating what we hope is a ”reasonable” entry point.

As far as how we will integrate more emerging market exposure in our portfolios, we have decided to replace the Wisdom Tree International Mid-Cap Value fund with the DFA Emerging Market “Core” Portfolio (see below).

This will effectively raise the emerging market share of our stock portfolios to 8%, with the DFA Emerging Market Core Portfolio receiving a 7% allocation and the other 1% coming from the Vanguard Total International Stock Index fund, 1/10 of which is devoted to emerging markets (this is before accounting for the bond allocations).  While 8% will still underweight emerging markets compared to their current 12% of the world stock market, we feel it’s a prudent step in the right direction. And since we’ve been focusing on the BRIC countries, it’s worth noting that 42% of the new DFA portfolio is devoted to the BRICs.

To construct this fund’s portfolio, DFA starts with the total stock market across 20 emerging markets.  They then dial up the share of small company stocks relative to large company and value stocks relative to growth. The first chart below shows the neutral market weighting of size and value categories in these markets while the second chart shows how DFA weights those same size and value categories within the portfolio.

You can readily see the significant tilt toward mid-cap, small-cap, and value stocks in the DFA portfolio relative to the neutral market weighting for these factors.  This kind of tilt toward small cap and value stocks is also present in our portfolios as a whole.

We will be implementing this change in all client portfolios by the end of January.

• Global stock market performance in 2011
• Economic conditions in the US and the Eurozone
• Relative market valuations across countries and implications for future returns
• The role of Emerging Market Equity in a globally-diversified portfolio

When you click on the link below, a new window will open.  The presentation may take several seconds to load, so please be patient.  There is an Adobe Acrobat version of the slides linked below the recorded presentation.

Recorded presentation: Review and Outlook 2011-2012

Slides only: Review_of_2011_and_2012_Outlook-slides

Note to iPad and iPhone users: this is an Adobe Flash presentation.  Unfortunately, the Safari browser on iPads and iPhones won’t play Flash presentations.  Consider buying the Photon browser from the App Store, which does play Adobe Flash.  Remember to click the lightning bolt button at the top of the Photon browser when you wish to view an Adobe Flash site.

Consider harvesting capital gains. With tax rates set to go up in 2013, many advisers say investors should consider selling stocks, funds and other investments in which they have a gain in 2012 to lock in the tax at this year’s lower rates. If they still want to own the investment, they can immediately buy it back.

This is the opposite of a more common strategy known as tax-loss harvesting, which involves selling assets in which you have lost money to lock in a tax loss. The loss can be used to offset gains in other investments sold the same year. If your realized losses for the year exceed your realized gains, you can use up to $3,000 in excess losses to reduce your ordinary income and carry any remaining losses forward to offset taxes in future years. One hitch with this strategy is that if you sell an asset at a loss and buy it back within 30 days, you cannot claim the tax loss. This wash sale rule does not apply to capital gains.

“I can sell something for a gain and instantaneously go back into it” without impacting the tax treatment, says Dave Yeske, managing director with investment firm Yeske Buie in San Francisco.

But there’s no reason to do it early in the year versus later. “We will wait until it’s pretty unambiguously clear which way (the tax rate) is going to go,” Yeske says.

David Yeske, managing director at financial planner Yeske Buie in Vienna, Va., said that this year and last he was “very aggressive” about harvesting gains to lock in the current long-term gains rate. That will likely dominate his thinking next year, too, he said. With the prospect of the Bush tax cuts expiring at the end of next year, the federal long-term capital gains rate may go up for most taxpayers by a third, “a serious bump,” says Yeske.

“We’re far less concerned with harvesting losses and more concerned with when and how we’re going to harvest long-term gains,” he said. “Most of our people are sitting on embedded gains, notwithstanding the craziness of the last six months. We think resetting the cost basis higher at a low tax rate is going to make sense for our clients in the long run.”

1.Casey Anthony Trial
2.Japan Earthquake and Tsunami
3.Royal Wedding
4.Death of Osama bin Laden
5.Unemployment
6.Arizona Shooting
7.Death of Amy Winehouse
8.Arab Spring
9.Libya/Death of Moammar Gadhafi
10.Occupy Wall Street

We went a step further by copying Yahoo’s opening article reviewing the year 2011 into a website called Wordle (www.wordle.net), which analyzed the text and created an image that displays the key words, adjusting the size of each word to reflect its dominance.  This is the first image below.  We then fed our website (www.yebu.com) into Wordle, which generated the second image.  Suffice to say that we like ours a lot more.

Here’s wishing you and yours a restful New Year’s break and a happy and prosperous new year!

The Yeske Buie Team

Whatever the prospects for relief in Europe, however, we live in a reality-TV culture that feeds on drama.  The Eurozone crisis has proven no exception, with breathless headlines amping up every development. As an antidote, we thought we’d offer our own selection of recent headlines.  This exercise isn’t meant to suggest that there aren’t still economic and financial problems to be ironed out all over the world, but merely to counteract the natural human tendency to focus on the scariest news (not to mention the media’s tendency to favor the negative over the positive).

New York Times
Jobless Rate Dips to Lowest Level in More Than 2 Years
In the midst of global economic turmoil, the American unemployment rate unexpectedly dropped last month to 8.6 percent, and the nation’s employers added 120,000 jobs.

Businessweek
Leading Economic Indicators in U.S. Rise More Than Forecast
The Conference Board’s gauge of the outlook for the next three to six months rose 0.9 percent, the biggest jump since February, after a 0.1 percent September increase, the New York- based research group said today. The median forecast of 56 economists surveyed by Bloomberg News projected the gauge would advance 0.6 percent.

Fast Company
Here’s Some Good Economic News: U.S. Manufacturing Is Rising Once Again
Despite what you may have heard, we’re still a nation that makes good stuff, says RKS Design’s Ravi Sawhney.

Marketwatch
Good News at Last for Euro-Zone Bonds
The bond markets offered brief respite for euro-zone economies as auctions for countries and the European Financial Stability Facility went well.

New York Times
New Data Offers Some Positive Signs for the Recovery
The number of Americans filing new claims for jobless benefits fell to a 3 1/2-year low last week, and factory activity in parts of the Northeast gained speed in December, suggesting a further strengthening of the economic recovery.

San Francisco Chronicle
Stocks, Euro Gain as Spanish, Italian Bonds Rally
Stocks gained, paring weekly losses, while the euro rose and Spanish and Italian bonds rallied amid optimism the European Union will meet a Dec. 19 deadline for funding a crisis-fighting package.

Reuters
Inflation eases, creates space for Fed stimulus
U.S. consumer prices were flat in November as Americans paid less for cars and gasoline, a further sign of a cool down in inflation that could give the Federal Reserve more room to help a still-weak economy.

Marketwatch
Weekly jobless claims drop 19K to 366K, better than expected
New applications for US unemployment benefits fell last week by 19,000 to a seasonally-adjusted 366,000, the Labor Department said Thursday, putting claims at the lowest level since May 2008.

Economists surveyed by MarketWatch expected claims to rise by 9,000 to 390,000 in the week ended Dec. 10.

The Telegraph
World Power Swings Back to America
The American phoenix is slowly rising again. Within five years or so, the US will be well on its way to self-sufficiency in fuel and energy. Manufacturing will have closed the labour gap with China in a clutch of key industries. The current account might even be in surplus.

We hope you have a restful weekend and a peaceful holiday season!

The Yeske Buie Team

Of course, the real purpose of our Thanksgiving Day observation is to give ourselves the opportunity to reflect upon and be thankful for all the good things in our lives. And in contemplating this most important aspect of Thanksgiving, amidst a world of economic uncertainty, we find ourselves thinking about the Live Big List.  The Live Big List came into existence on March 25, 2009, shortly after the financial markets and our collective spirits had hit their ultimate low point.  The List was an attempt to refocus on the things that mattered most in a world of financial turmoil.  As we put it then, “if we can find the place of gratitude for what we have, we can find joy in the most mundane of places, and, hopefully at least get our minds off of how scary the world can feel at times.”  Here are a dozen entries from the 88 items now on the list.

- Walk the dog (borrow one if you don’t have one of your own)

- Hug someone (be careful, in general it should be someone who you know)

– Teach a teenager to balance a checkbook

– Read all those books you’ve been accumulating, meanwhile drinking all that tea that has accumulated in your cupboard

– Watch “It’s a Wonderful Life” or “Love Actually” or some other feel good movie

– Write an old fashioned letter to someone

– Give a stranger a compliment

– Throw a Board Game Night at your house for friends, family, neighbors

– Put a puzzle together

– Take a leisurely walk around a new neighborhood in your city – be a “tourist”

– Call a friend and tell them you value their friendship

- Make a charitable contribution

You can read all 88 entries on the Live Big List (and add your own) here: What it means to Live Big in these trying times.

We find it interesting to note that, even though the general level of economic anxiety sometimes seems little changed since then, by many measures we’ve made considerable progress.  The Dow Jones Industrial Average, along with the average Yeske Buie portfolio, is up more than 50% since the original appearance of the Live Big List, a nearly 19% average annual rate of return.  We decided to chart the course of the US market over that intervening time and an unexpected pattern emerged, which we’ve reproduced below.

Wishing you a peaceful and joy filled Thanksgiving Day celebration!

The Yeske Buie Team

Many consider 11/11/11 to be a particularly propitious date and couples will be tying the knot in record numbers today.  Some, on the other hand, have apparently concluded that the Mayan Long Count calendar suggests that this is a day of doom.  As in so many things, it’s all a matter of perception and whether one chooses to focus on the positive or the negative.

Which puts us in mind of the heightened anxiety that continues to hang in the air and color our perception of all things financial and economic. 

We thought we’d offer a little exercise based on the behavior of the Dow Jones Industrial Average in recent months and years.  The Dow, of course, is a less than perfect model for what’s happening in a diversified portfolio, which will tend to outperform the index in the long run, but it will serve nicely to illustrate our point.

We’ve illustrated the point-to-point performance of the Dow over the last two months and the last two years below, followed in each case by a day-by-day line.  As you can see, the day-by-day movements provide no clue as to where we’re going to end up, they’re merely “noise” (or the dog versus the dog walker if you recall our LBD from the end of August). Noise, however, can be very anxiety-inducing.  A good alternative to watching the markets might be to spend a few minutes with a mind-body meditation devised by our good friend Jane Cunningham called “Cultivating Calm in a Crazy World.”

Here’s what the last two months look like if you just observe the starting and ending point:

Now we’ll add in the daily price moves (aka, the “noise”):

Pretty clear why people have been so anxious.  Now let’s do the same thing for the past two years:

And, again, we’ll add the daily moves:

Are you going to watch the dog or the dogwalker?

In any case, the next time you start to feel unsettled by the latest financial headlines, remember the old Wall Street saying: The market climbs a wall of worry.

Have a great weekend!  The Yeske Buie Team

More Good News
Another positive note was sounded in the Wall Street Journal today, where Justin Lahart reports that economic forecasters have been rushing to raise their estimates of US economic growth for the third quarter and beyond.  This after having universally lowered estimates in the face of stock market declines and growing consumer pessimism.  It turns out that American consumers weren’t putting their money where their mouth was, so to speak, but were busy spending it instead.  The monthly survey conducted by Macroeconomic Advisors showed forecasters raising their estimates for third quarter growth to 2.7% from the 1.7% reported in September.  Some are even projecting annualized growth in excess of 3%. Now, admittedly, these are not growth rates that will quickly reduce unemployment, but they do suggest that we’re a long way from a double-dip recession.  Concludes Lahart: “So far, for all its woes, the U.S. economy has proved remarkably resilient amid the blows it has taken this year.”  Amen brother!  Read the full article here.

Dave has a LifeLock moment
As many of you know, we’ve always recommended a multi-pronged approach to safeguarding your credit, starting with good habits like choosing secure passwords and making liberal use of your shredder. We also think it makes sense to employ a service to track credit and identity risks. We’ve often recommended LifeLock for this role based on the relatively comprehensive approach the company takes.  We had not, however, had any experience of what it’s actually like to work with LifeLock when a risk is detected. Until now, that is.

A few weeks ago, Dave received an email alert from LifeLock, informing him that someone had applied for a car loan using his Social Security number and date of birth.  He immediately called the service desk and was told that the application had gone through a company called Credco Auto. The LifeLock member service rep noted, however, that Credco finances more than just cars and asked if Dave had applied for credit in any other form.  He had not.  So a case was opened and Dave was promised a follow up call as soon as the investigation was complete.  A few days later, Dave received a call from a representative named Kari, who, after confirming his identity (using the security questions he had previously chosen), indicated that she would be calling Credco with Dave on the line so that he could authorize the company to reveal the full details of the application.  After a few minutes on hold, Kari came back to say that she had obtained the information she needed (the name of the car dealership that had submitted a credit request to Credco, a dealership that Dave had dealt with but not for more than a decade) without requiring Dave on the line and that she could continue her investigation with the dealership without taking up any more of his time.  A little while later, Kari called back to report that she had talked to the sales manager at the dealership and was able to confirm that no loan had been obtained using Dave’s personal information.

Such false alarms are apparently not unusual, often the result of keying errors — though we suspect in this case the dealership may have been trying to pre-qualify an old customer while bypassing the traditional credit agencies. What was most impressive about the incident was the high quality of service that was delivered in response to the alert.  Anyone who’s ever dealt directly with the credit reporting agencies knows that you’ll never get a human being, let alone a human being as friendly and responsive as the LifeLock reps Dave interacted with.  And all for $110 per year (less if you use the discount code Yeske Buie obtained for its clients: YESKEBUIEEMP).  We should hasten to add that we have no financial relationship with LifeLock, they’re simply the service provider we currently recommend.  For more information on protecting against identity theft, meanwhile, check out the guide on our website.

Take care and have a wonderful week!

The Yeske Buie Team