Market Update through 4/15/12

as of April 15, 2012        
  Total Return
Index 12 months YTD QTD MTD
Stocks        
Russell 3000 5.27% 9.79% -2.72% -2.72%
S&P 500 6.53% 9.63% -2.63% -2.63%
DJ Industrial Average 7.59% 5.95% -2.66% -2.66%
Nasdaq Composite 10.25% 15.94% -2.55% -2.55%
Russell 2000 -1.98% 7.88% -4.05% -4.05%
EAFE Index* -14.03% 5.34% -4.21% -4.21%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 8.34% 1.11% n/a 0.81%
Barclays Intermediate US Gov/Credit 6.41% 1.22% n/a 0.61%
Barclays Municipal  12.74% 2.39% n/a 0.64%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $102.88    $102.58
Natural Gas    $2.02    $2.09
Gold    $1,652.30    $1,667.70
Euro    $1.30    $1.32

Mark A. Lewis

Director of Operations

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“Two-percent Real Estate Ownership Interests”

From time to time, I am asked about vacation ownership programs.  They come in a number of different forms, ranging from fixed-week, floating period, points, and term / period use.  For the sake of simplicity, I use the generic term “timeshare” to describe vacation ownership programs.

Generally speaking, I do not consider the timeshares a “financial investment”.  Perhaps the primary reason is that it can take years or decades for the “investment” to break-even.  There is also an issue of affordability.  Aside from the upfront cost to purchase the unit, which can range in the thousands to tens of thousands, there are annual maintenance and association fees.  The fees are to pay for real estate tax (this is typically deductible, by the way), utility bills, insurance, reserve (for future maintenance and upkeep), and fees to the management company. It’s noteworthy to mention these yearly fees can often cost as much as renting a similarly equipped and located condo within reasonably close proximity to the unit under consideration. Novice buyers can sometimes underestimate the true cost of ownership.  Instead, they are sold on the slick presentation and the ability of the sales agent to close the deal.

Timeshares are typically illiquid, meaning it can take years to resell the unit.  To some, this is the largest drawback to timeshare ownership.  Meanwhile, the annual maintenance fees are still required and a legal obligation that must be paid. 

However, there are some benefits to vacation ownership.  For instance, some people fall in love with the location and amenities of a particular resort.  In their mind, they have resolved to make that particular place their summer vacation spot and will enjoy it for many years. 

Some people are better suited to taking a vacation during a designated time of the year.  However, in the case where a vacation cannot be taken in a particular year, the unit can usually be rented or traded.  Renting the unit can help the owner get some of the maintenance fees back.  Alternatively, when an owner participates in an exchange program, they may have the opportunity to visit other destinations in the US or abroad.

In my opinion, the best reason for owning a timeshare has little to do with return on investment.  Instead, owners should focus on the reasons for a family to reconnect, rejuvenate, and build priceless memories together. 

Neal Nolan, CFP(R)

Financial Advisor

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Market Update through 3/31/12

as of March 30, 2012        
  Total Return
Index 12 months YTD QTD March
Stocks        
Russell 3000 7.10% 12.87% 12.87% 3.08%
S&P 500 8.34% 12.59% 12.59% 3.29%
DJ Industrial Average 9.90% 8.84% 8.84% 2.15%
Nasdaq Composite 12.54% 18.98% 18.98% 4.28%
Russell 2000 0.20% 12.44% 12.44% 2.56%
EAFE Index* -8.76% 9.97% 9.97% 0.91%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 7.71% 0.30% n/a -0.55%
Barclays Intermediate US Gov/Credit 6.09% 0.61% n/a -0.36%
Barclays Municipal  12.07% 1.75% n/a -0.65%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $102.58    $108.87
Natural Gas    $2.09    $2.47
Gold    $1,667.70    $1,721.60
Euro    $1.32    $1.33

Mark A. Lewis

Director of Operations

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Is It Priced In?

In our investment process, we often have to ask ourselves this question.  Something bad has happened to a company or market; does the current price reflect the news?

Years ago, when I was an undergraduate finance student, the Efficient Markets Hypothesis (“EMH”) was popular and taught at virtually every university.  The debate wasn’t about whether it applied or not, but rather to what extent.  I have summarized the three “forms” of the EMH below:

Weak Form:  Stock prices reflect all historical information.  This means that past prices give no predictive information as to future prices.  The implication is that technical analysis, such as studying chart patterns, or the “support” and “resistance” levels you hear about in the media, are worthless.

Semi-Strong Form: Stock prices reflect all publicly available information.

Strong Form:  Stock prices reflect all information, whether publicly available or private (i.e. insider).  In a strong form world there would be no such thing as insider trading.  Why? It would not be profitable, since all information has already been reflected in the current stock price.

In my classes, pretty much everyone agreed that the weak form held, and that charts were worthless.  The debate was between semi-strong and strong.  At the time, my personal view was that reality was somewhere in between the two. 

After the last two stock market crashes, many began questioning the EMH and whether it is valid at all.  Today, high frequency traders make millions of trades per day based on computer models driven largely by past data.  If the weak form of the EMH held, there would be no profit in this type of strategy.  Now I believe there is another factor to the EMH:  time.  Markets are reasonably efficient in the long run, however, prices may become disconnected from the underlying value of a company or market for a period of time.

Stock prices adjust almost instantaneously to news.  Markets are forward-looking, meaning price changes really are about changes in future expectations.  Company XYZ reports earnings ahead of consensus expectations, but the stock price falls.  Why is that?  Management may have adjusted future earnings guidance lower or just sounded more pessimistic about the next few quarters in the future.  This causes market participants to adjust their expectations (and the price) downward.   Some companies have grown tired of this short-term focus, and refuse to even give guidance regarding their earnings.

So is it priced in?  The answer is sometimes.  The art is in determining when this is the case and when the consensus is wrong.  We address this by having a disciplined investment process focused on fundamental data, and ignoring short-term noise.  Our focus is on financially strong companies that are likely to have rising earnings and dividends over time.  However, working with our clients to determine an appropriate asset allocation that suits their individual situation and having the discipline to stick to it is even more important to investment success.

Bill Hansen, CFA

Managing Partner

March 30, 2012

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Market Update through 3/15/12

as of March 15, 2012        
  Total Return
Index 12 months YTD QTD MTD
Stocks        
Russell 3000 11.03% 12.49% 12.49% 2.74%
S&P 500 11.80% 12.06% 12.06% 2.81%
DJ Industrial Average 14.85% 9.16% 9.16% 2.45%
Nasdaq Composite 15.83% 17.60% 17.60% 3.07%
Russell 2000 6.54% 12.49% 12.49% 2.61%
EAFE Index* -1.96% 10.85% 10.85% -0.12%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 6.92% -0.04% n/a -0.89%
Barclays Intermediate US Gov/Credit 5.24% 0.31% n/a -0.65%
Barclays Municipal  11.04% 1.49% n/a -0.91%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $105.91    $108.87
Natural Gas    $2.31    $2.47
Gold    $1,655.50    $1,721.60
Euro    $1.31    $1.33

Mark A. Lewis

Director of Operations

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Angry, Party of One?

On Wednesday, an executive for Goldman Sachs posted an op-ed piece in the New York Times detailing why he was leaving the firm after 12 years of service.  In case you missed it, here is a link: 

http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html

His post certainly reinforces the negative impression everyone has of the financial industry.  Stories of such avarice seem to be the norm rather than the exception in large Wall Street firms.

As I read the article, I thought about my own career here at Parsec.  In May, I celebrate my 20th anniversary.  (Yes, I joined the firm when I was twelve.)  When I look back over those years, would I say that the culture at Parsec was like Goldman’s?

I cannot say that Mr. Smith’s comments would apply here.  Beyond the usual revenue discussions every business has, I have not heard anyone make comments like those Mr. Smith mentions in his post.  We do not earn commissions from any trade we recommend.  No advisor scores a monster bonus because he/she recommended a high-performing security.  That sort of unbiased advice breeds a culture that is more client-focused than revenue-focused. 

We continue to tweak our processes and procedures so that we can provide better service.  For example, each client has two advisors – a primary and secondary.  This provides continuity of service in the event an advisor is out of the office or retires. 

This year, our clients will see changes to the quarterly report package they receive.  We are in the midst of a major software upgrade that will provide us with greater reporting capabilities and better access to client information.  These improvements should give our clients greater insights into their portfolio holdings and performance.

We are also continuing our commitment of giving back to our communities in Asheville and Charlotte.  Our firm gives at least 1 percent of its annual revenue to charity.  Employee donations are also matched to a certain amount.  Several employees volunteer with these charities.  By the way, we kept this commitment even during the Great Recession.  That meant a lot to the charities – and it meant a lot to us too.  Of all the things we do, I personally think the commitment to charity is the coolest.

So, when I read Mr. Smith’s article, I cannot say I feel the same sense of disillusionment.  Sure, there have been – and always will be – times when I have an argument with my co-workers or long to win the lottery so I can stop working.  Thankfully, the culture we have here at Parsec remains client-focused.  I wish Mr. Smith well in his search for new employment and hope his next job does not leave him with the same feelings of dissatisfaction and moral conflict. 

Cristy Freeman, AAMS
Senior Operations Associate

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Buying When Things Look Scary

Buying When Things Look Scary

 

March 9, 2009 is a date I will always remember.  It turns out that it was the date that the stock market closed at the lowest level it would see for the foreseeable future.  In other words, it was the day the market hit bottom.  The bottom of the market is a wonderful thing because it means that if you are fully invested, you will finally start making up the money you’ve lost, and then some (eventually, hopefully). 

But March 9, 2009 was not a happy day.  It was terrible.  I was at home with a newborn, on maternity leave and fretfully watching the market drop, imagining what may happen if the market continued its brutal descent.  Of course, the market (S&P 500) did not continue downward; rather, it went up for the next three years.   Today the stock market is roughly 110% up from its 2009 low.  It is just 4% below it’s 2007 high.

If you had the foresight to see this upward market climb in March of 2009 you would have begged, borrowed and stolen to find money to invest in the market.  But approximately 1% of my clients had this inclination.  Everyone was shuttered in, wondering how much worse it was going to get. 

You always hear that you are supposed to buy low and sell high.  March 2009 is exactly why this is easier said than done.  By the time things look better, you’ve missed part of the rally.  The Euro-region is a good example of this now.  The best time to buy would have been late November last year, when things looked their bleakest.  Since then the EAFE is up nearly 8%.  There is still much uncertainty surrounding that area of the world and things could indeed get worse.  Having the nerve to buy when things look terrible may mean getting in too early and suffering part of the decline.  You have to take a big step back and see that even if when you are buying isn’t an absolute low, it still may be a low relative to intermediate-term future prices.

One way we manage this is by setting strategic target allocations.  If we want a portfolio to have an international allocation of 20%, we will rebalance that portfolio to its target as the international markets fall.  By necessity, we will sell from something that has done better in the portfolio (sell high) and use the proceeds to buy international funds (buy low).  This fixed allocation takes the crystal-ball reading out of the equation and keeps us disciplined.  It makes buying low less of an emotional decision, and more of a strategic one.  

 

Harli Palme, CFP®, CFA

Financial Advisor

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Fill ‘er Up

So, what’s up? Oil prices, for one. Food prices, too. As Americans, we have gotten used to cheap fuel, both for our cars and our bodies. Recently, there have been calls to repeal federal subsidies to the oil industry, in hopes that it will encourage development of alternative sources of energy and lead to long-term relief from oil prices. Some believe that such an action would have the effect of raising gas prices in the short term, and they’re probably right.  I would think that the oil companies have to recoup losses somehow, and it usually winds up being the consumer who pays. As someone wedged smack in the middle of the middle class, I know I’m feeling the pain of higher gas and higher food costs, and I can’t say that I like it very much.  But if I step back and observe the situation in a more impartial light, I have to question the use of subsidies in both industries.

I’m no econ genius, to say the least. I remember the graphs showing supply and demand curves, and some mysterious shaded portion ominously called the “deadweight loss.” And there was something in there about subsidies being a negative, as they prevented markets from functioning at equilibrium levels because they artificially distort market prices. In the US, growers of certain crops receive government subsidies, which have the effect of encouraging farmers to grow a few primary crops in large quantities. These crops (mostly corn, soybeans, and wheat) are the building blocks of much of our processed, inexpensive foods, which are taking the place of more nutritionally dense foods in our diet. Large quantities of inexpensive food sounds like a good problem to have, and I’m sure the original intent of these subsidies was benevolent. However, the alarming growth rate of obesity and related diseases in our country may be due in part to an increase in readily available and affordable processed foods derived from our primary crops. In many cases, food’s affordability and nutritional value have an inverse relationship, so it would seem that we are, in fact, doing ourselves a disservice by making it easy to load up on nutritionally deficient food.

Subsidies to the oil industry are another head-scratcher. We know that fossil fuels are a natural resource in decline – we can’t wait around for organic matter to decompose over millions of years and create more hydrocarbons. Why are we always so surprised when the price of oil goes up? The Europeans laugh at our outrage over $4/gallon gas prices, which is nothing compared to what they’ve been paying for ages. Maybe we do need to take away the subsidies in order to feel the pain and provide the incentive to take the next steps and make the right choices. I’m not a big fan of paying more for gas and groceries, believe me, but I think it’s crucial to look at the big picture and take the long-term view.

Sarah DerGarabedian, CFA

Director of Research

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Market Update throught 2/29/12

as of February 29, 2012        
  Total Return
Index 12 months YTD QTD February
Stocks        
Russell 3000 4.45% 9.49% 9.49% 4.23%
S&P 500 5.12% 9.00% 9.00% 4.32%
DJ Industrial Average 8.83% 6.55% 6.55% 2.89%
Nasdaq Composite 7.78% 14.09% 14.09% 5.59%
Russell 2000 -0.15% 9.63% 9.63% 2.39%
EAFE Index* -10.37% 10.98% 10.98% 5.44%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 8.37% 0.85% n/a -0.02%
Barclays Intermediate US Gov/Credit 6.45% 0.97% n/a -0.05%
Barclays Municipal  12.42% 2.41% n/a 0.10%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $108.87    $101.64
Natural Gas    $2.47    $2.54
Gold    $1,721.60    $1,718.20
Euro    $1.33    $1.30

Mark A. Lewis

Director of Operations

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I Hate Debt

Don’t we all??  I worry about placing myself in a situation where an unexpected event (car accident, illness, et cetera) could create a financial disaster.  As a result, I carefully monitor the level of both short- and long-term obligations I have. 

With interest rates at historic lows, I decided to take a closer look at refinancing my house.  I have refinanced two times already; should I do it again?  Some of you may be considering the same thing, so I thought I would talk a bit about how I made my decision.

It is important to understand what you are trying to accomplish.  In my regard, I want to pay off my house within 15 years, while keeping the monthly payment at a reasonable level.  Others may want to tap home equity so that they can pay down loans with higher interest rates or do some repairs to the home.  If this is the case with you, calculate in advance how much you need. 

The next step is to take a look at your credit report.  Some people have had some dings from the Great Recession.  Resolve any reporting issues in advance of applying for a loan.  It will save you a lot of aggravation later.

Now, let’s figure out if it is feasible to refinance.  I used the calculators that are available on the bankrate.com website.  Here is a link:  http://www.bankrate.com/calculators.aspx. They have a great mortgage amortization calculator that shows you total interest paid over the life of the loan.  You can also see the impact of extra amounts paid toward principal. 

Using this tool, I entered my current interest rate and loan terms.  I analyzed the impact of the extra payments I have been making toward principal each month.  Then, I entered a 15-year term but with a lower interest rate. 

I compared the total interest expense with my current rate vs. a lower estimated rate.  The difference in total interest paid for my current loan vs. the lower interest rate loan is about $5,000, as long as I continue to make extra payments toward principal.  Closing costs and refinancing fees add up, so I suspect that net difference between the two loans would be much lower. 

As long as I continue making extra payments toward principal, I will accomplish my goal of paying off the loan within 15 years.  The lower interest rate loan would also require a larger monthly payment.  I am not comfortable with that.  With my current loan, I can keep my lower payment amount, giving me some security in the event of a serious financial crunch. 

Lower interest rates can be very enticing.  In the long run, though, you could sacrifice financial peace-of-mind just to save a few dollars.  A careful analysis of your personal situation can help you make the right decision.  If all of this seems overwhelming, we are always here to help.  Your financial advisor is just a phone call away.

Cristy Freeman, AAMS
Senior Operations Associate

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