Weekly Market Update through 9/24/10

as of September 24, 2010        
  Total Return
Index 12 months YTD QTD MTD
Stocks        
Russell 3000 12.14% 5.16% 11.93% 9.84%
S&P 500 11.55% 4.54% 11.99% 9.60%
DJ Industrial Average 14.96% 6.26% 11.85% 8.55%
Nasdaq Composite 14.14% 5.72% 13.21% 12.76%
Russell 2000 12.96% 8.24% 10.39% 11.55%
EAFE Index* 0.68% -1.02% 16.06% 9.75%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 7.93% 7.51% NA -0.30%
Barclays Intermediate US Gov/Credit 7.52% 7.04% NA 0.09%
Barclays Municipal  6.33% 6.88% NA -0.11%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $76.78    $73.75
Natural Gas    $3.77    $3.89
Gold    $1,298.90    $1,279.90
Euro    $1.34    $1.30
         
         
RECOVERY!        
  Since 3/09/09      
Index  annualized      
Stocks        
Russell 3000 45.93%      
S&P 500 43.86%      
DJ Industrial Average 42.76%      
Nasdaq Composite 51.78%      
Russell 2000 56.45%      
EAFE Index* 41.87%      
*EAFE index does not include dividends.        

 

Mark A. Lewis

Research & Trading Associate

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What’s the Score?

In some ways, mutual funds are more difficult to evaluate than individual stocks. It’s harder to drill down when there’s so far to go (kind of like deepwater drilling as opposed to land drilling – you have to get past all the water first). We rely primarily on Morningstar for our mutual fund research, and the data is updated monthly. We used to review a section of the mutual fund buy list each week (large caps one week, mid caps the next, and so on), but it took too long to rotate through the list, and we wanted to increase our review frequency to match the Morningstar updates. But how do we sift through that mountain of data monthly? I have no objection to hard work, but I like to spend my time wisely, so we came up with a scoring system.

In short, I load a selection of the new Morningstar data into our buy list spreadsheet each month. We look at total return (for the trailing 12 months, 3, 5, and 10 years), the fund’s percentile rank in its peer category, manager tenure, Sharpe ratio, alpha and beta to the best fit index, 3 and 5 year standard deviation, turnover ratio, gross expense ratio, trailing 12 month yield, and correlation (R2) to the best fit index. The spreadsheet extracts some of that data (3 and 5 year category rank, expense ratio, alpha, beta, Sharpe ratio, and manager tenure) and scores it. For example, if a fund’s category rank is in the 50th percentile or higher, it gets 0 points in that column. If it falls between 25th and 50th, it gets half a point, and if it falls in the 1st to 25th percentile, it gets a full point. There are 7 metrics on which a fund is scored, so the highest point value possible is 7, and the lowest is 0. Funds that score between a 5 and 7 are buys, between 2.5 to 4.5 are neutrals, and 2 and below are sells.

This is just a starting point, however. Once the data is entered and the scores are tallied, I spy with my little eye any calculated scores that don’t jive with the current IPC rating. These are analyzed further to see if an IPC review and vote are necessary. Sometimes, a fund can fall from a buy to a high neutral based on a slight decrease in the alpha, for example; further inspection will show that the alpha (though lower) is still positive, the fund’s long-term record is attractive and all the other fundamentals measure up. In a case like that, we might choose to leave the fund a buy. The scoring system really functions as a first pass, a way to flag changes in the funds from month to month and help focus attention on funds that need more in-depth review.

Sarah DerGarabedian, Research and Trading Associate

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Weekly Market Update through 9/17/10

as of September 17, 2010        
  Total Return
Index 12 months YTD QTD MTD
Stocks        
Russell 3000 8.07% 2.95% 9.58% 7.53%
S&P 500 7.80% 2.42% 9.72% 7.38%
DJ Industrial Average 11.41% 3.79% 9.25% 6.03%
Nasdaq Composite 9.98% 2.79% 10.07% 9.64%
Russell 2000 7.22% 5.07% 7.15% 8.28%
EAFE Index* -3.67% -3.68% 12.94% 6.79%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 7.74% 7.11% NA -0.67%
Barclays Intermediate US Gov/Credit 7.28% 6.61% NA -0.31%
Barclays Municipal  6.78% 6.48% NA -0.48%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $73.75    $73.20
Natural Gas    $3.89    $3.84
Gold    $1,279.90    $1,247.60
Euro    $1.30    $1.27
         
         
RECOVERY!        
  Since 3/09/09      
Index  annualized      
Stocks        
Russell 3000 44.60%      
S&P 500 42.60%      
DJ Industrial Average 41.21%      
Nasdaq Composite 49.80%      
Russell 2000 54.30%      
EAFE Index* 39.97%      
*EAFE index does not include dividends.        

 

Mark A. Lewis

Research & Trading Associate

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Is the Latest Tax Proposal What We Need?

The chatter for tax reform is increasing.  There is more talk of restructuring the tax code to provide a more permanent solution.  There is a bipartisan proposal worth noting…S.3018, by Senators Wyden (D_OR) and Gregg (R-NH). 

The proposal would limit the tax brackets to three.  Couples would pay 15% on the first $75,000 of income, then 25% on the next $65,000 and 35% over $140,000.  Note the 35% bracket starts much lower then the current $373,650 for that bracket.  This proposal would cut the income levels in half for single tax-filers.  They would also like to limit itemized deductions so the standard deductions would increase sizably, up to $30,000 for couples and half that for singles.

This would eliminate the alternative minimum tax and deduction phase outs for those with higher incomes. There is a 35% exclusion on dividends and long term capital gains, which affectively makes the top rate on those items 22.75%.  The proposal would also eliminate deductions on items such as moving expenses and deferred interest on newly issued savings bonds.  Employer provided meals and lodging would be taxed as income to the employee.

It is estimated that the net of all this would be a $200 billion tax hike on individuals over ten years.

However, the proposal would also lower the corporate tax to a flat 24%. That is much lower than the current 35% bracket.  This effectively lowers the corporate tax bill over ten years by $200 billion.  

Wow, that is a revenue neutral move for the government and a tough sell for law makers.  It would allow corporations to spend and invest more, which would allow them to hire more workers, so it could have a simulative effect on the economy.  However, this bill may not come to pass.  It could be turned upside down so that an individual’s taxes could decrease and corporation’s taxes could increase.  We will have to wait and see.  

Gregory D. James, CFP®

Partner

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Weekly Market Update

as of September 3, 2010        
  Total Return
Index 12 months YTD QTD MTD
Stocks        
Russell 3000 13.25% 0.99% 7.49% 5.48%
S&P 500 12.32% 0.41% 7.57% 5.28%
DJ Industrial Average 14.85% 2.12% 7.49% 4.33%
Nasdaq Composite 13.71% -0.93% 6.09% 5.67%
Russell 2000 15.87% 3.71% 5.76% 6.87%
EAFE Index* 1.61% -6.06% 10.15% 4.16%
*EAFE index does not include dividends.        
         
Bond market data not available due to holiday.      
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $  73.20    $  74.67
Natural Gas    $  3.84    $  3.72
Gold    $  1,247.60    $ 1,237.50
Euro    $  1.2749    $  1.2705
         
         
RECOVERY!        
  Since 3/09/09      
Index  annualized      
Stocks        
Russell 3000 44.10%      
S&P 500 42.01%      
DJ Industrial Average 40.93%      
Nasdaq Composite 47.66%      
Russell 2000 54.67%      
EAFE Index* 38.84%      
*EAFE index does not include dividends.        

Mark A. Lewis

Research & Trading Associate

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Positive Thoughts on the Stock Market

Eighteen months ago, in early March of 2009, the stock market reached its low point with the S&P 500 at 667.  Currently it is 1,045, + 57%.  Then the economy was sinking; now it’s growing.  Jobs were being lost, now they are being created.  Inflation is very low.  Interest rates are at an all time low.  Corporate profits are rising rapidly; corporate cash accumulation exceeds $1.8 trillion!

Why is everyone so worried?  Higher taxes coming on a weak economy?  Maybe, maybe not.  They have been much higher before.  Weak housing?  With 4,000,000 young Americans turning 30 each year, how long does anyone really think new housing starts will stay below 500,000 with 4.5% mortgage rates available?  Low job creation?  Expectations are for 1,000,000 – 1,500,000 more jobs this year and more than that next year.  True, 1,200,000 more only holds the unemployment rate level, but at least jobs are being created!

Everyone worries about a surprise decline, and there is always some new worry that could send it down.  Avian flu?  Worried about that pandemic now?  Probably not.  Greece? Worried about that now?  Probably not.  China’s growth rate could decline from 10% to 9%.   Is that really something to worry about?  The Taliban.  Criminal thugs.  From 1910 – 1950 the world suffered WWI with 40,000,000 deaths and then WWII with 60,000,000.  Allied deaths in the Iraq and Afghanistan Wars are very low in comparison, numbering less than 10,000.  Of course we all wish it was -0-; my son Eric is a 2nd lieutenant in the Army and will probably be in Afghanistan next year.   Sadly, there will be more wars and incursions to come.  Thankfully, for the first time in world history there is no super power confrontation.  Britain, France, Germany, Russia, China, Japan and the USA are all pretty friendly and economically cooperative! Each has too much to lose by going to war with another.

Instead of a surprise decline, how about a surprise and massive advance?  It happened 18 months ago, now + 57% from that level.  Estimates for earnings on the S&P 500 for 2011 are $93.  That puts the Price Earnings Ratio (P/E) at 11.2.  The average over the last 100 years is 15-16, with a low of 10 and a high of 20.  When do we get a 20 P/E?  When inflation is low, interest rates are low, and corporate profits and the economy are growing.  Check, check, check and check.  The overall level of GDP will likely be at an all time high in the first quarter of 2011. 

The 3rd year of the Presidential cycle has historically been the best year of the four year cycle, and has been positive every time all the way back to 1939, averaging + 21.6%.  For the 30 years from 1926 – 1955, including the Great Depression, WWII and the Korean War, the compounded annual return on large stocks was + 10.2%, on small stocks was +10%.  Over the last 30 years, even with the terrible 2000 – 2009 decade, annual compounded returns on large stocks were +11.2% and +12.3% on small stocks.  You could buy a 30 year Treasury bond today with a 3.65% yield.    But this is likely to be a very poor investment compared to alternatives.

Where will the market be in early March of 2012, 18 months from now?  We’re mindful that it could easily go down before it goes up, but over the full 18 months we at Parsec are going to predict up.  Maybe WAY up.  A 15 P/E on $105 of S&P 500 earnings in 2012 would be 1,575 on the S&P 500, + 51% from here.  Markets fluctuate, but historically over the longer term they go WAY up.  + 51% over the next 18 months?  It may appear unlikely right now, but more than that happened over the last 18 months.  We’ll keep you posted.

Bart Boyer, CFP

Chairman and CEO

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Weekly Market Update:

as of August 27, 2010  
Total Return
Index 12 months YTD QTD MTD
Stocks
Russell 3000 6.09% -2.80% 3.45% -3.26%
S&P 500 5.36% -3.26% 3.64% -3.15%
DJ Industrial Average 8.87% -0.85% 4.37% -2.67%
Nasdaq Composite 7.22% -4.50% 2.27% -4.37%
Russell 2000 7.02% -0.61% 1.36% -5.16%
EAFE Index* -3.74% -9.68% 5.91% -3.20%
*EAFE index does not include dividends.        
         
Bonds
Barclays US Aggregate 8.96% 7.21% NA 0.71%
Barclays Intermediate US Gov/Credit 8.04% 6.39% NA 0.66%
Barclays Municipal  9.98% 6.88% NA 2.18%
         
         
    Current Prior
Commodity/Currency Level Level
Crude Oil    $   74.67    $   74.12
Natural Gas    $   3.72    $   4.08
Gold    $   1,237.50    $   1,225.50
Euro    $   1.2705    $   1.2697
         
         
RECOVERY!
Since 3/09/09
Index  annualized
Stocks
Russell 3000 41.07%      
S&P 500 39.09%      
DJ Industrial Average 38.75%      
Nasdaq Composite 44.76%      
Russell 2000 51.11%      
EAFE Index* 35.75%      
*EAFE index does not include dividends.        

Mark A. Lewis

Research & Trading Associate

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SDG Market Indicator: Future Nobel Prize Winner?

Every day, it seems someone has a new model that claims to predict the next stock market meltdown or boom.  Two of my colleagues, Mark Lewis and Sarah DerGarabedian, and I had a stock market theory we tested a couple of years ago.  We called it the “SDG Market Indicator.”  

At the time, Sarah’s almost one-year-old son was having some difficulties sleeping through the night.  Whenever she did not get a good night’s sleep, we noticed on most of those days the stock market dropped.  Over a 48-day period, we compared her sleep cycle against the market’s performance.  If she slept well the night before, the market increased 42 percent of the time.  The market was either flat or declined 58 percent of the time when she had an average to bad night’s rest.  

You are probably saying to yourself, “This is the stupidest thing I have ever heard.”  You are right.  Some people accept far-fetched theories like the SDG Market Indicator as sound market guidance, though.  As they chase the next theory’s prediction, they risk losing more than they could potentially gain.  

Market timing statistically does not work.  A study by Morningstar highlights the dangers of market timing.  This study shows that, during the period 1926 – 2009, an investor who invested $1 in stocks would now have $2,592.  The study also shows that if that investor missed the 37 best months during this time frame, but was otherwise invested in stocks, the investment would only be worth $19.66 at the end of 2009. 

At Parsec, we prefer to take the long-term view when evaluating the market.  It is impossible to predict on a day-to-day basis what the market will do.  However, as studies have shown, the market will eventually recover from declines.  It is all part of the cyclical nature of financial markets.  

The next time you see a hot new theory, just think of the SDG Market Indicator.  Now, I am off to force feed Sarah a turkey sandwich and slip an Ambien in her tea.  It is time for a few positive days in the market.

Cristy Freeman, AAMS
Senior Operations Associate

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Market update through 8/20/10

as of August 20, 2010        
  Total Return
Index 12 months YTD QTD MTD
Stocks        
Russell 3000 9.11% -2.34% 3.95% -2.80%
S&P 500 8.55% -2.66% 4.28% -2.55%
DJ Industrial Average 12.25% -0.27% 4.98% -2.10%
Nasdaq Composite 10.61% -3.36% 3.49% -3.22%
Russell 2000 8.80% -1.59% 0.36% -6.09%
EAFE Index* -1.57% -9.48% 6.14% -2.99%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 9.20% 7.33% NA 0.82%
Barclays Intermediate US Gov/Credit 8.31% 6.57% NA 0.82%
Barclays Municipal  9.88% 6.33% NA 1.65%
         
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $        74.12    $      81.19
Natural Gas    $          4.08    $        4.76
Gold    $  1,225.50    $ 1,184.50
Euro    $     1.2697    $    1.3188
         
         
RECOVERY!        
  Since 3/09/09      
Index  annualized      
Stocks        
Russell 3000 42.18%      
S&P 500 40.29%      
DJ Industrial Average 39.91%      
Nasdaq Composite 46.66%      
Russell 2000 50.90%      
EAFE Index* 36.51%      
*EAFE index does not include dividends.        

Mark A. Lewis

Research & Trading Associate

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Too Much Information?

Too much information running through my brain
Too much information driving me insane
–The Police

The more you trade, the worse you do. This has been demonstrated in repeated academic studies over various time frames. Why does it work this way? Because the human brain is wired to do exactly the wrong thing at the wrong time in the stock market.

As our clients know, a core part of our investment philosophy is keeping a long-term perspective. When we purchase a stock, we intend to hold it. While it is difficult to calculate exactly, our average holding period is probably in the 4-6 year range.

Earlier this year, I chuckled when I saw there is now an iPhone application for mobile trading. As I have told some of my friends, do you really need to be able to place trades from your child’s soccer game? And shouldn’t you be watching the game anyway? Is this the type of logical, well-thought out investment decision that will enable you to select and hold a diversified portfolio of assets to help accomplish your financial goals? No! It caters to short-term thinking, which is often destructive.

So imagine my horror when I saw a commercial last week on CNBC for automated trading. Now you don’t even need to initiate the trade from the soccer field. You can select some strategy from a menu, set up your trades, and then go off to work. When you come home, your email inbox will have your trade confirmations and you can see how you did. While you’re at it, why not add some leverage by way of margin to help get wiped out sooner?

As I see it, the underlying problem is the constant media barrage of information telling us that we need to do something. You can watch financial news 24/7 these days, and every channel is urging some sort of action. But these experts are not talking about things like risk tolerance, what mix of assets is appropriate for a particular situation, how much you need to save in order to retire, and how much you can spend from your portfolio in retirement. Your financial plan is at least as important as your specific investment strategy, and perhaps more so.

There are many strategies out there, some good and some bad. But being able to liquidate your portfolio poolside, or trying to trade your way to riches without knowing anything about the companies you are buying sounds like a disaster waiting to happen.

Bill Hansen, CFA
August 13, 2010

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