Recent Commentary
Recent Commentary•
on January 26th, 2012•
We thought it was time to check in with another edition of the Live Big Digest to brighten your day. The title of this issue of the LBD is inspired by a recent New Yorker article by Wisdom of Crowds author James Surowiecki called “Year of the Yo-Yo.” Surwiecki, noting the economic turmoil of last year, suggests that “you might think that volatility would allow people with superior information and market sense to get ahead.” Of course, you know what comes next: active mutual fund managers, in fact, almost universally fell short of their benchmarks in 2011, with some of the superstar managers producing the worst results. Bruce Berkowitz, named one of the “managers of the decade” by Morningstar, steered his flagship mutual fund to a 30% loss. John Paulson, meanwhile, who was credited with the “greatest trade ever” for his bet against mortgage-backed securities a few years ago, saw one of his funds fall by 50%. Beating the market by being nimble requires the kind of perfect foresight that no human can possess. Any time it looks like someone does, just wait a while and subsequent events will reveal that what appeared to be skill was just luck. In the end, building resilience into one’s portfolio – indeed, into all of one’s financial arrangements – is the only sure way to succeed over the long-run.
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
Recent Commentary•
on January 20th, 2012•
When we examine sources of risk and return in the market, we conclude, among other things, that there is no systematic return associated with geographic allocation. One of the practical results of this conclusion is that we always aim to be “geographically neutral” when assembling a global portfolio. So, while we may dial up our exposure to small cap and value stocks, taking them well beyond their relative share of the overall market, we allocate across countries and regions in a manner that is proportional to their share of the world stock market. For example, with the value of the US market representing 47% of the value of the world stock market, we allocate half of our portfolio to US stocks (so, not EXACTLY neutral, since we allocate 50% rather than 47%, but close). The one exception to this principle has been emerging market stocks, which are significantly underweighted in our equity portfolios. Our reasoning for doing this has been that stock markets in emerging economies lacked the transparency and efficiency found in more developed markets, and that the depth and breadth of tradable securities was insufficient for the level of diversification we seek. While this situation has been steadily improving, valuations in recent years have also become very high, which left us hesitant to dive in to what appeared to be an overheated sector. Having said that, several factors now lead us to believe that the time has arrived to incorporate a larger share of emerging market equities into our portfolios.
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.
Recent Commentary, Webinars•
on January 13th, 2012•
Join us for a review of economic and market conditions in 2011 and a discussion of the implications for global investors in 2012 and beyond. This 23 minute presentation covers the following topics:
- 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.
Recent Commentary•
on December 30th, 2011•
This being the last business day of the year, we thought we’d squeeze in one more Live Big Digest before the calendar ticks over to 2012. It’s still too early to know what 2011 will most be remembered for, but economically and financially it was a veritable Jekyll & Hyde. The first half saw soaring optimism drive the stock market higher, while the second half was dominated by doubts about the U.S. recovery and the unfolding drama in the Eurozone. There are now growing signs that cause for optimism is again on the rise, for the U.S. economy anyway. But it turns out that matters economic and financial were not actually the top news stories. As reported by Yahoo News, these were the top ten news stories:
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
Recent Commentary•
on December 16th, 2011•
We thought we’d check in once again on this cold December Friday with another edition of the Live Big® Digest to help keep you warm. As you will not fail to have noticed, markets have continued to seesaw in recent weeks with every whiff of good news or bad rolling out of Europe (for a refresher on the cause of the crisis, you can refer back to our discussion in October: Live Big Digest – Beware Greeks Bearing Gilts edition). While some progress has been made since then, a final solution is not in place. This, combined with the severe consequences if the Eurozone falls apart, have left markets in their current twitchy state. Our best estimate is that Eurozone political leaders will ultimately agree to a plan that ends the crisis in the short-run and puts EU governments on a more sustainable fiscal path going forward.
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
Recent Commentary•
on November 23rd, 2011•
On the eve of another Thanksgiving Day, we thought we’d check in with another Live Big Digest, knowing that “Eat Big . . . Digest” is what will really be on your mind in the coming days.
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
Recent Commentary•
on November 11th, 2011•
We thought we’d celebrate this numerologically-significant Veteran’s Day with another edition of the Live Big Digest. While this is the day in which we all pause, reflect, and give thanks for the service and sacrifice of those in our armed forces, it also happens to be a day that many think significant for its numerological value.
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
Recent Commentary•
on October 24th, 2011•
We have a number of things to share with you today, but the inspiration for sending this particular Live Big Digest comes from an article just sent to us by a client. The article, “World power swings back to America,” was written by Ambrose Evan-Pritchard, who covers economics and finance for the UK newspaper The Telegraph. In his most recent offering, Evan-Pritchard identifies a number of emerging trends — from growing energy independence to a resurgence in manufacturing — to make the case that the narrative of America’s inevitable decline is as misplaced today as it was in the late-eighties. As with all economic phenomena, emerging trends must be extrapolated with caution, but betting against the dynamism and resilience of the American economy and people has never been a winning proposition. Or, as Evan-Pritchard puts it, “The 21st Century may be American after all, just like the last.“ Check out the full article.
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
We just wanted to check in and remind you that a recording of our recent webinar, “Economic Vomitility and Financial Planning as Dramamine” is now available on the website . You can access both a Windows Media recording and a copy of the presentation in pdf format from the following link (http://www.yebu.com/resources/webinars/)
Also, we’d like to thank everyone who attended the open house at our San Francisco office last week. It was great to see you!
The Yeske Buie Team
Recent Commentary•
on October 6th, 2011•
I’m sure it doesn’t surprise you that I’m writing again to chat about the chaotic world in which we live, but before I get to that, I wanted to remind you that recorded version of our webinar “Economic Vomitility and Financial Planning as Dramamine” is now available for viewing.
Now back to our regularly scheduled broadcast . . .
It has not gone unnoticed by many that stock markets everywhere have had a bad couple of months, giving up most of what they’d gained since last September in a very short period of time. While we think it’s worth noting that, as of today, markets are generally back in the black for the 12 months just ended (albeit barely), we also know that it’s not where we stand in relation to a year ago that has everyone unsettled, it’s the suddeness of the recent adjustment.
The two most apparent sources of the recent turmoil are an ongoing “sovereign debt crisis” (aka “government debt crisis”) in Europe, largely centered around Greek problems, and the slowing pace of economic growth in the US. The fist issue is one that may not seem like an obvious source of trouble, so we thought we’d take a moment to explain why the markets care about what happens in Greece.
Our story begins with the Greek government’s unsustainable spending spree of the past few years, which was financed by selling government bonds. This is not the first time a country has done that, and it undoubtedly will not be the last. Historically, when such a period of binge spending reaches its limits and the government can neither borrow more from private investors nor repay earlier ones, it solves the problem by “printing money.” This involves the country’s central bank buying government securities, increasing the money supply in the process and, if pursued with enough vigor, triggering higher inflation. One consequence of a rising inflation rate is that the value of outstounding debts shrink in “real” (inflation-adjusted) terms. However, everything else in the economy continues to rise, including wages and government tax receipts. The net result of this process is that the government gets to pay off the outstanding debt with a now inflated currency. While this sounds like a happy ending, there are many economic dislocations caused by high interest and inflation rates, so this is not a path policy-makers will choose if they’re prudent-minded. The real point is that, for some countries, there is a path through such a crisis that doesn’t necessarily involve defaulting on outstanding debt.
Everything changed for Greece, however, when it became part of the EU’s monetary union and adopted the Euro as its currency. The Euro is controlled by the European Central Bank (ECB), which will not do the bidding of a progligate EU member by buying up its debt. Having ceded control of its monetary policy to the ECB, Greece no longer has the option of inflating its way out of trouble, it must either find a way to pay its debts (with or without restructuring), or go into default. Why does the world care whether or not the Greek government defaults on some or all of its outstanding debt? It’s because so much of that debt is held by banks. These banks are in many cases still on shaky ground after the economic meltdown of 2008 and a Greek default would further shrink already slender reserves. This in turn would lead to a contraction in lending and holds the potential for creating another credit crunch.
European leaders are not unmindful of the hazards. While they began with inadequate half measures at the beginning of the crisis, they have recently ramped up both their financial commitments and their rhetoric in order to calm markets. Jean-Claude Juncker, head of the eurozone finance ministers, said on Monday that “everything will be done to avoid that (Greek default) and it will be avoided.” While the final shape of the solution isn’t completely clear, it will probably involve a combination of financial support to Greece and a restructuring of its debt, including mandatory writedowns by European banks. As the outlines become clearer, the market volatility of recent weeks should begin to abate and we can look for something new to worry about.
We’ll end on a brief note related to the pace of economic recovery in the US. While it’s true that the pace of recovery declined during the first half of this year, slowing to barely one percent, such is not at all unprecedented. Recoveries from financial crises are typically slow, as households retrench and rebuild balance sheets. And American households are doing just that: spending less, saving more, and paying down debt. While this is an extremely healthy trend at the level of the individual household, it unfortunately leaves the wider economy with weak consumer demand and an anemic rate of growth. We think it would be a mistake to extrapolate this trend too aggressively into the future, however, as American consumers have proven their resilience again and again. Pessimism is not their natural state and any shift toward optimism will have a powerful impact on the pace of economic recovery.
Be well and beware Greeks bearing gilts (*the British term for government bonds)!
The Yeske Buie Team
