The Case-Shiller Index

Earlier this year, I received an email from my alma mater saying that Karl “Chip” Case was retiring after 30-plus years of teaching economics at Wellesley. Although I never took one of his classes (which I now regret), I know that he was immensely popular and beloved by his students, and will be greatly missed. One of his enduring legacies is the Case-Shiller Index (technically called the S&P/Case-Shiller Home Price Indices), which he developed with Yale economist Robert Shiller and Shiller’s graduate student Allan Weiss.

The indices are calculated based on repeat sales of single-family homes. Measuring housing prices based on median sales shows the values of different homes selling at a particular point in time, rather than tracking the sales price of the same house over time, which Case believed was a more accurate way of measuring appreciation in housing values.

The indices (now generated and published under an agreement between S&P and Fiserv) are published on the last Tuesday of the month, and have become a media staple during the downturn. The most recent report, published May 25 for data through March 2010, showed that the US National Home Price Index fell 3.2%, but is above the year-ago level. Average home prices are now at levels similar to those in the spring of 2003. Eighteen of the twenty metro areas represented in the 20-city composite showed improvements in annual returns, with the exceptions being Atlanta and Charlotte. Las Vegas was the only city to still post a double-digit decline at the end of March.

Sarah DerGarabedian
Research and Trading Associate

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The Market

Obviously, we are going through a difficult time – again – in the market and investors fear there will be another drop similar to the last one. I read the following in an AP article on the web this morning: “Don’t panic. Think long-term. Corrections are normal.”

The idea to get out of the market when it starts to go down and get back in when it goes up just does not work. The reason it doesn’t work is that despite all the predictions you read and hear out there, no one knows when the market hits the bottom or when it will turn around. Long term investors should not be concerned about short term volatility. You should always keep enough cash for emergencies and have the proper allocation for your situation. You need a long-term plan and you also need to resist the temptation to succumb to the fear that the media generates.

I received a newsletter this week where the title concerned another bubble that is about to explode. They predict that the average $100,000 portfolio will be worth $48,000 at the end. However, if you would only take the bold steps outlined in the report you could turn that $100,000 into $2.4 million. The report is 20 pages long and outlines some compelling evidence and I can see why people would be influenced by reports such as this. If it was so easy to make so much money why is the author writing a newsletter? There are also books – that are best sellers – that are predicting dire things for the economy. There are also books that give a more balanced historical perspective, such as “Manias, Panics, and Crashes” (fifth edition) by Charles Kindleberger and Robert Aliber. While we usually hear “this time is different” the truth is that every time is different, yet surprisingly the same.

Barbara Gray, CFP®

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How to Save Millions in Two Seconds!

I love headlines like that. Tightening our belts is the topic du jour during this economic disaster. While the leading indicators show an improvement, I am sure you know people who are still unemployed, have lost their homes, or are in serious financial straits. We are hardly out of the woods yet. So, I have compiled a list of my favorite tips for saving money:

Protect your credit score. Why?

o You qualify for better interest rates when your credit score is good, which saves you money in the long run.
o Your credit score impacts your property insurance rates.
o A prospective employer may want to check your credit. A bad score could hurt your chances, depending upon the employer.

Everyone knows you should get the free, annual credit report offered through Identity theft is not the only danger, though. Excessive debt and late payments or defaults can damage your score. All your sacrifices and stringent budgeting can be undone by a lousy credit score.

Be thoughtful about all purchases, not just the big ones. I am not talking about your daily Starbucks habit, although that can add up too. A lot of purchases are driven by a perceived need, rather than an actual need.

Don’t fall victim to the “it’s on sale” syndrome. You are not saving money if you really had no intention of buying the item in the first place.

The Internet is a fabulous tool. You can comparison shop without having to leave the comfort of your home.

Tip if you are considering an appliance purchase: Go to Look for the Energy Star Appliance Rebate Program button. The “cash for clunkers” program is being offered for certain appliances this year. Each state has a different budget and rollout date. Our dishwasher died here at Parsec about three weeks ago. We waited for this program to start in North Carolina and saved over $100.

Ask about discounts. Some people will give you a discount, but you have to ask. My vet will match heartworm medicine prices offered by a national catalog retailer. I saved about $50.

Yes, it takes extra work to stretch your dollar these days. Hopefully, these tips can assist you in that task.

Cristy Freeman, AAMS
Senior Operations Associate

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Do December Job Losses Mean “Double Dip”?

This morning we received a disappointing jobs report from the Department of Labor indicating that U.S. employers cut 85,000 jobs during the month of December. Since the consensus of analysts was expecting a loss of only 10,000 jobs, one can only wonder if this disappointing news means the end of positive jobs data.

As we move into this economic recovery we must remember that one piece of data does not a trend make. In fact, we have seen most indicators (leading, coincidental and lagging) improve over the last 6-9 months. When reviewing economic data, it is very difficult to make any conclusion from a single piece of data. Instead, it can be more important to follow the trend of data to get a sense of whether the economy is improving or weakening. During 2009, monthly job losses moderated substantially. Employment losses in the first quarter of 2009 averaged 691,000 per month, compared with an average loss of 69,000 per month in the fourth quarter. In following the recent trend, it is clear that the economy is strengthening.

We must remember that it is the job of the news people to shock us in order to ensure that we “tune in” tomorrow. Buried in today’s headlines, we learned that the US Labor market actually added 4,000 jobs in November rather than losing 11,000 as initially reported. This marked the first job growth in two years. This is excellent news that, along with the current trend, should indicate job growth for quarters to come.

In the early 1980’s we experienced what some call a “double dip” recession. This double dip recession was actually two recessions (Jan. 1980-July 1980 & July 1981-November 1982) separated by a period of rapid economic growth. In fact, the economy recovered so strongly from the 1980 recession that inflation forced the Fed Reserve to increase interest rates to a point that forced the economy into the second recession of 1981-1982. Let’s not forget that the economic period after the recession of 1981-1982 was arguably the strongest period of sustained economic growth in history.

This lesson in history teaches us that a slow and steady recovery may be more sustainable than a quick, inflation driven recovery. Although the trend to economic growth remains intact, the reasonable rate of change may allow the Fed to remain accommodative. This freedom could allow the Fed to raise rates when it feels the economy is stable enough to handle a tighter money supply.

Each and every one of us has either been directly affected or had a friend or family member who has been affected by the worst recession since the 1930’s. Their pain and suffering make us wish for a sharp economic recovery and strong job growth. However, we must not forget that before you can run you must first learn to walk. As long as the trends remain positive we will be running in no time.

Michael J. Ziemer

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Inflation Ahead?

With the extraordinary amount of fiscal and monetary stimulus pumped into the financial system over the last 12-18 months, many investors are concerned with the prospect of future inflation. The large U.S. budget deficit is another potential inflationary factor if it is financed by the government expanding the money supply.

Despite these factors, inflationary expectations in the bond market are quite low. There is even a small but vocal minority of market participants that believe that deflation remains a significant risk. One way to determine the markets’ expectation for inflation over the next ten years is to compare the yields of U.S. Treasury Notes against those of Treasury Inflation Protected Securities (TIPS) of similar maturity. The current yield on the 10-year U.S. Treasury Note is 3.33% as of this writing, while the 10-year TIPS yield is 1.5%. The difference of these two numbers is the implied inflation rate over the next 10 years of 1.83%. If inflation over the next 10 years turns out to be higher than 1.83%, then you would be better off buying the inflation-protected security. Since 1926, inflation has averaged about 3% annually. While we do not believe that there will be a sharp increase in inflation over the next 1-2 years, it certainly is a possibility over the longer term. Therefore, within the fixed income allocations of our client portfolios, we have been avoiding purchases of traditional Treasury securities in favor of TIPS.

 What asset classes would perform better in an inflationary environment? Among fixed income investments, we would expect inflation-protected bonds and high-yield bonds to perform better. Although the short-run impact of inflation on stocks has historically been mixed, stocks typically act as a hedge against inflation over longer time periods. This is particularly true of companies and industries that have the ability to pass along price increases to consumers, or those that have comparatively low levels of fixed assets. Our core strategy of broad diversification and no market timing would remain unchanged, whether the environment is inflationary or deflationary. The main determinant of a portfolio’s return is the asset allocation. Having the discipline to stick with your chosen allocation is more important than the specific allocation that you choose.

Within the equity portion of client portfolios, we may overweight certain sectors or industries that we believe would fare better in a particular inflationary environment. However, since the future is uncertain, our main goal remains to create client portfolios that will perform well in a variety of economic scenarios.

 Bill Hansen, CFA

October 9, 2009

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Things Seem to be Getting Less Bad…

Stocks are up today after comments from Federal Reserve chairman Bernanke that the economy is on the verge of recovery.  We believe that the recession has either ended, or is in the process of ending, although the official date will likely not be known until sometime in 2010.  By the time the end date is officially proclaimed, the recession will be long over, although there are some that believe there is still a risk of a “double-dip” or that a second recession may occur.

 There are a number of factors that contribute to our optimism:

 –Existing home sales reported today were better than expected at +7.2%;

 –The four-week moving average of unemployment claims has been declining from the peak in early April;

 –Investor cash levels, although down from their record high in March (at the recent market bottom), are still equivalent to about 40% of the value of the entire U.S. stock market.  Even a small percentage of this cash entering the market would be a significant positive for stock prices;

 –The level of housing starts is below that needed to absorb the formation of new households, and the level of auto manufacturing is currently below scrappage levels, indicating future improvement in these industries;

However, there is still negative news.  The delinquency rate on home mortgages was reported at 9.2% for the second quarter, 4.3% of which were already in the process of foreclosure. About half of these foreclosures were “prime” borrowers. While future inflation is a risk due to the extraordinary recent fiscal and monetary stimulus measures, we do not see an immediate threat given the current unemployment rate of over 9%.

While the economy is not without its challenges, fear indicators such as the CBOE VIX index (of implied volatility in options contracts) and TED spread (difference between U.S. Treasury bills and interbank interest rates) have returned to more normal levels similar to those before the failure of Lehman Brothers.  We have seen a significant improvement in the overall mood, both in the media and among people we talk to. 

With the stock market up over 50% from the recent bottom on March 9, many are wondering whether the current rally can continue and for how long.  It is important to remember that the S&P 500 index is still 35% below the peak reached in October 2007, which coincidentally is about the peak reached in March 2000.  The current decade is on pace to be one of only three 10-year periods in modern history with negative stock market returns.  Because this decade has been so terrible for investors, we believe that better times lie ahead and that stock market returns will revert upward toward their historical average of 9-10% annually.  Nobody knows for sure when this might happen.  While it is possible that we may retest the recent lows, the improvement in the mood and slowly improving economic news makes us believe that there is significantly more upside than downside from here.

Bill Hansen, CFA

August 21, 2009

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A letter from Bart Boyer, Chairman and CEO

The longest and most severe recession since the Great Depression is coming to an end! GDP for the second quarter was -1% compared to a brutal -6.4% in the first quarter. That momentum should carry the economy into positive numbers the third (current) quarter. That would follow our chief economist, Jim Smith, predicting the recession ended May 15. We won’t know the exact date of the end for months, but it looks over to us. Also, many economists are joining Dr. Smith and are predicting 2-4% positive growth for the third quarter, a normal +3% or so year in 2010 and better yet in 2011!

As we anticipated, the $7 trillion on the sidelines in short term fixed income investments is beginning to flow into the market. A modest move of 5-10% of these balances would have a significant upwards impact on stock prices. Already the S&P is up more than 50% from the March 6 intraday low of 666.79.

We are thrilled that the vast majority of our clients avoided the fear trap and have participated nicely during the recovery. Nothing goes straight up, there will be profit taking corrections for certain, but we believe there is much more to come on the upside.

Over the last 100 years there have been three terrible decades for the economy and stock markets, the 1930’s, 1970’s and the current decade. Unless this year is better than +38.4% (very unlikely), this decade will go down as the worst ever – even worse than the 1930’s. Terrible decades have historically always been followed by well above average outperforming decades (plural). After the 1930’s, the next three decades were outstanding. After the 1970’s we had the 80’s and 90’s, two of the best decades ever, with each having six years of +18% or better returns. We believe it is a high probability that the next 20-30 years will be above average, even with one in every three or four years negative.

Thanks again for your patience and the opportunity to be of assistance. We’ve all just suffered the worst decade in stock market history and are well positioned for better times ahead.

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Unemployment Rate Falls

The big economic news today is that the unemployment rate unexpectedly fell. The rate dropped to 9.4% of the labor force, versus last month’s 9.5%. While any rate in this range is considered high, a move in the downward direction is a very good thing. This is particularly true when that drop is unexpected. In response, the stock market has surged today.

Because the unemployment rate is a lagging economic indicator, one would expect this rate to continue to climb even after the general economy improves. On average, the unemployment rate peaks 4.7 months after the end of a recession. This rate may continue to climb after a brief dip. However, the rate dropping for the first time since April of 2008 is one signal that the recession has ended, or will end in the near future. Good news!

Harli L. Palme, CFP®
Financial Advisor

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S&P credit ratings and GE

In case you are curious, only five companies now have the pristine AAA credit rating by S&P. They are: Automatic Data Processing, Exxon Mobil, Johnson and Johnson, Microsoft, and Pfizer.

The headlines today are that S&P cut GE one notch to AA+. Apparently many analysts have breathed a big sigh of relief fearing that S&P might cut deeper to AA or AA-. Nearing the close, the stock is up 13%.

S&P has indicated that if GE Capital were a stand alone company, its credit rating would be A or smack in the middle of the pack of investment grade debt ratings.

Mark A. Lewis

Research & Trading Associate

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2008 – A Year to Remember

As this year comes to a close everyone is hoping that 2009 will be better, and we think it will be better. Having said that, there are good lessons to be learned from past events and in the long run corporations and individuals will benefit from these difficult times. Spending less, saving more and living within our means should be the mantra going forward for individuals. Corporations and large institutions will need to be more transparent to regain trust from individuals, especially in light of the Madoff scandal. One can only hope there will be more honesty and less greed in the future.

The media is saturated with gloomy, depressing predictions and it is difficult to find any positive news out there at all. It could be worse – gas prices could still be at $4.50 a gallon so we’re thankful those prices have come down. Household net worth in the U.S. is at $45 trillion dollars – not bad. One-third of American households have no mortgage. Interest rates are extremely low and mortgage refinancing will be good for the economy. As quickly as things went sour in the economy they can also stabilize and begin to improve.

We have grown over the years in large part from client referrals and we are thankful for the vote of confidence from our clients. We wish for everyone a better 2009.

Barbara Gray, CFP

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