I Hear You, Stock Market Futures, but I am Not Listening

Every morning I come into work and set about reading the morning news. Whether it is the Wall Street Journal online, MarketWatch News, or Bloomberg.com, I peruse the stock market and business news to see what kind of rollercoaster the day will be. One thing that strikes me as ironic is how the daily stock market futures article gets my blood racing, at the same time that I write it off completely.

Speculators and hedgers enter into stock futures contracts in order to hedge against an existing asset or liability exposure, or often, to profit off of the direction of the stock market. To the parties of the futures contract there is either a payoff, or amount owed, depending on the subsequent direction of the stock market. Stock futures prices indicate if investors on the whole believe that the stock market will be higher or lower. What investors believe will happen changes by the second, as evidenced by the fluctuating stock market index futures.

Stock market futures indicate what direction stocks will go at the open of the market. But this is often then extrapolated into the general investing world as the tell-tale sign of what is to come for the remainder of the day and into the near future, many times turning out to be incorrect. If you come into the office every morning, every Monday through Friday of your life and read these articles, you can’t help but see the fickleness of the investors. One day the market is sure to drop into the abyss, other days it is off to the races. And no matter what is predicted, the journalist writing the article can always find some money manager somewhere to agree with what the stock futures may predict and give his or her reason for that.

Day after day the articles regarding stock futures are always the same, in that they always change. This is not to say that long-term, large macroeconomic forces do not affect the market, they most certainly do. But as a long-term investor it is my job to look beyond the day-to-day fluctuations, plan for broader market swings, and stay grounded, not letting emotions take over. However, the sentient being that I am makes this difficult, as I worry about my client’s money, emotions, and financial needs. So the article of the day, whether good or bad, gets my heart pounding a little, even though I realize its relevance is small in the big picture.

This represents to me perfectly what is so inherently frustrating about the stock market. Day to day the movement of stocks is uncertain, but you feel confident based on the news of the day of how stocks will move. You are sure you should be buying. But the next day the news leads you to be sure that you should be selling. Your emotions are high. Logically, academically, statistically, you know that the daily, weekly and monthly predictions are irrelevant and that the long-term outlook is what will have the greater impact on you financially if you are a well-diversified long-term investor. So if you feel unsettled or excited by the daily news, read for interest or understanding, then close the web browser and choose not to make sweeping changes to your portfolio that day.

Harli L. Palme, CFP®
Financial Advisor

Share this:

Is Buy and Hold Dead?

I was reading The Wall Street Journal the other day, and an article caught my eye (“More Investors Say Bye-Bye to Buy and Hold,” April 8, 2009).  The premise was that some investors are beginning to trade more frequently for a variety of reasons, from attempting to recoup losses to trying to profit from short-term price movements in individual issues. 

This reminds me of the infamous Business Week cover story “The Death of Equities,” which ran in 1979.  Over the next 20 years, the stock market had a total return of +17.9% annually, the highest in modern history.  People who changed their approach out of frustration or panic, or after reading that article, missed out on substantial gains over the following years.

In down markets, people are understandably worried, and all sorts of investment strategies appear out of the woodwork.  As of the end of 2008, large company stocks had the worst 10 year returns since 1926, when the Ibbotson data series begins.  This includes the Great Depression.  In such an environment, some people are tempted to abandon long-term investing in favor of some different, often self-destructive, approach.

At Parsec, we do not engage in market timing, or dramatic shifts in our clients’ asset allocation based on the mood of the day.  We do believe in a low-turnover approach, but our portfolio strategy is more sophisticated than a pure buy and hold.  A buy and hold strategy does not answer the important question, “When do I sell?”  There are two primary types of trades that we make in client accounts:  trades at the block level and trades at the individual client level.

In a block trade, we are selling a particular security across all client accounts.  Our conviction regarding that security’s merit as a long-term investment has changed.  The trade may be at a profit or at a loss, but our Investment Policy Committee has determined that there are better opportunities elsewhere.

The second type of trade we make is at the individual client level.  When we review client portfolios, we ask ourselves “How can I make this portfolio better?” This may encompass reducing an individual stock position that is overweight, or correcting an overweighting or underweighting in a particular economic sector.  When an individual stock exceeds 5% of a client’s portfolio, it is our policy to reduce the position unless there is a client-specific reason not to do so.  There may be an opportunity to improve diversification, to add a new investment idea, or to increase portfolio income.  If there is no trade that we find compelling, then we take no action.  Although it can be difficult, oftentimes the right thing to do is to do nothing at all. 

We believe that a buy and hold strategy combined with a sell discipline, broad diversification and avoiding market timing will allow our clients to prosper over the years ahead. 

Bill Hansen, CFA

May 15, 2009

Share this:

Our Investment Process – A Behind the Scenes Look

As a Parsec client, you receive quarterly statements from us which list your individual holdings – stocks, bonds, mutual funds, exchange traded funds, and other securities, combined in a way that is appropriate for your individual situation. But how did we select those particular securities, and what is our ongoing review process? You may be surprised to find out that Parsec has a dedicated team of people who are involved in the day-to-day process of identifying, reviewing, and selecting the securities that you see on your statements. In this article, we will focus on individual stocks, as they constitute the majority of our clients’ assets.

Our process is heavily rooted in fundamental analysis, which means that we look at an individual company’s earnings, cash flow, debt, and profitability measures, compared to similar companies operating in the same industry. These data come directly from the company’s financial statements, and are combined to form various ratios such as price to earnings (P/E), price to free cash flow (P/FCF), debt to equity (D/E), and return on equity (net income/equity). We also use consensus estimates (for measures such as 5-year earnings growth rate forecasts), third party research (Value Line, Standard and Poor’s, Argus, Credit Suisse), recent news, and regulatory filings to flesh out the quantitative data.

In general, we look for financially strong companies that are market leaders, with high-quality balance sheets, stable earnings growth, above-average profitability, and sound management. We compare each company to others in the same industry, as well as to an industry average, so that the fundamentals can be evaluated in the context of that particular type of business.

Based on our research and analysis, we have compiled a list of securities from which an advisor builds your portfolio. We monitor the prices of the securities on this list throughout the day, as well as any news regarding these holdings. In addition, every security in our coverage universe is formally reviewed at least 3 to 4 times a year, and more often if circumstances dictate. Each week, Mark Lewis and I (collectively known as the Research and Trading department) gather information for a group of companies in a particular sector. We analyze the data and submit it to the other members of the Investment Policy Committee (IPC) for review.

Parsec’s IPC consists of eleven members, nine advisors and two research and trading associates (the latter are non-voting). Committee terms are for one year at a time, but advisors may remain on the committee for longer if they wish (the two research and trading associates are permanent members, as are the CEO and one of the managing partners). Every Tuesday morning, the committee meets to discuss each company and vote on a recommendation: buy, sell, or neutral. If the committee votes to sell a stock, the Research and Trading department initiates a block trade across all discretionary client accounts so that the committee’s convictions are effected on a firm-wide basis in an orderly and timely fashion. When the trade is executed, all accounts participating in the trade receive the same price.

Over the past year, as the credit crisis has unfolded, the economy has worsened, and markets have exhibited abnormal volatility, you may have noticed more trading activity in your portfolio as we seek to implement our convictions in response to rapidly-changing conditions. However, of the approximately 80 buy-rated securities that we cover, there are many companies that have been rated a ‘buy’ for a long time and are considered core holdings. You are undoubtedly quite familiar with their names, as you see them on your statements quarter after quarter, and you may have wondered what we do in the way of ongoing research and due diligence. Hopefully, this glimpse into our investment process assures you that we are reviewing those companies as well as the ones garnering more media attention, and will continue to do so, day in and day out.

Sarah DerGarabedian

Research and Trading Associate

Share this:

Living Trusts

You’ve heard you might need a Living Trust and have no idea what it is or how it could be of benefit. Relax; you are not alone.

The trust world can be very intimidating and complex with its own confusing acronyms. So instead of delving deep into that world, I’ll speak to three benefits of a Living Trust. Please know that your advisor can work individually with you to help determine if you and your family can benefit from one.

First, it provides continuity. Initially, you control and manage the assets in your trust. Should you become incompetent, incapacitated or die, your Successor Trustee can step in immediately to manage the assets as you have instructed. This prevents unnecessary court involvement, saving time and expense. And, it allows for quick intervention, minimizing interruption of asset management for you or your heirs.

Second, it provides privacy. At the time of your death the assets will be managed or distributed as you have directed and are shielded from public view. This is different from a will which at death is probated and becomes a public document. Therefore, anyone can go to the courthouse, pay a fee and get a copy of a probated will. A Living Trust will never become a public document.

Third, it avoids probate. This saves time, court expense and involvement, and shields it from public view as discussed. Since a trust never “dies,” it isn’t subject to probate and the associated time consuming court involvement and expense.

Although these are not the only reasons to utilize a Living Trust, they are important ones. Please call us if you would like more information.

Michael E. Bruder, CFP®, CTFA
Senior Financial Advisor
Senior Trust Advisor

Share this:

E-Mail Security

We have all read countless stories about the ever-present threat of identity theft. We all know by now that we should shred confidential documents instead of tossing them, intact, into the recycling bin. We dutifully avoid releasing personal information to strange people. We guard our social security numbers. What about e-mail communications, though?

It is easy to forget that e-mail is rarely a secure communications medium. A few moments of your time can save you hours and hours of frustration later if your identity is stolen. Here are a few tips:

• Never open unsolicited e-mails.
• Never use links in e-mails to go to other sites. Instead, use the web address you know to access the vendor’s site.
• Use anti-virus and firewall software. Regularly run virus scans on your computer.
• Never send confidential information via e-mail.

The last bullet point is very important. We have received e-mails from clients that contained account numbers, dates of birth, and social security numbers. While we may ask you in an e-mail to send the information, we also ask that you call us with it. Please do not hit “reply.”

In turn, we will not e-mail similar information to you. We will call you with the information. For your convenience, we sometimes e-mail account documents to you. We will remove account numbers and other confidential information from the document before sending the information to you. We take the security of your information very seriously.

Cristy Freeman, AAMS®
Senior Operations Associate

Share this:

Dividend Discount Model

Part of my job here at Parsec is to perform due diligence on the securities we cover, and I was just in the middle of reading up on Colgate when I thought to myself, “How can I possibly put this off for a little while longer? I know! I’ll write something for the blog.” I think I’ll talk about a little term people in the investment biz love to throw around – “undervalued” (and its sinister twin, “overvalued”).

I’m currently in the midst of studying for Level II of the CFA exam (I believe Dante includes this in the ninth circle of hell) which focuses heavily on security valuation. I’ve noticed that the answer to just about every question is, “discount the future cash flows.” The basic premise is that a security (or a company, or a capital project) should be worth the present value of its future cash flows. Present value means that, thanks to inflation, a dollar ten years from now will be worth a lot less than a dollar today. I guess that’s why my mom could ride a bus, see a movie, eat a hot dog, and buy her first house for just a nickel way back when. Therefore, a security (let’s take a dividend-paying stock, for example) should be worth something equivalent to all of its future cash flows (i.e., dividends) adjusted to today’s value.

How in the world do you calculate this, you wonder? Until recently, I thought it was a matter of going to the Bloomberg terminal and typing in a few commands. Thanks to my exam prep, I have learned that it can actually be calculated with something called a “pencil.” There are many ways to calculate fair value, one of which involves the dividend discount model, or DDM. The DDM requires several inputs, among them our good friend beta, swirls them all around and spits out a price. If the price (also called intrinsic value or fair value) is higher than the security’s current market price, the stock is undervalued. That means that the value of its future dividends in today’s world is higher than what you’d pay for it in the market. It’s like finding a pair of Manolos on Ebay for $100 when you know they retail for a good $400 more (I am still kicking myself with my cheap Payless shoes for letting those slip away). Conversely, if the DDM gives you an intrinsic value lower than the current market price, the security is overvalued. As with any mathematical model, the output is only as good as the input, and the resulting value estimation is sensitive to changes in any of several assumptions (EPS and dividend growth rates, beta, the market risk premium, etc.).

Well, I better get back to my Colgate research. I think it looks undervalued, but I need to do some more analysis. If anyone needs me, I’ll be under my desk discounting future cash flows.

Sarah DerGarabedian
Research and Trading Associate

Share this:

IRA Rules for 2009

There is some tax relief for IRA account holders over the age of 70.5 this year. The Worker, Retiree, and Employer Recovery Act, initiated in late 2008, suspended required minimum distributions (RMDs) from IRAs for 2009. This means that the government is not requiring those over the age of 70.5 to withdraw any money from their IRA, thus not forcing a taxable event on the IRA account holder. It also prevents unnecessarily liquidating equities at prices that may be currently low. The suspension only applies to the year 2009.

The temporary allowance of Qualified Charitable Distributions (QCD) from an IRA has been extended through 2009. This law permits IRA account holders over the age of 70.5 to distribute up to $100,000 a year from their IRAs directly to their chosen charity without paying tax on those distributions. For those who would not spend from the IRA otherwise, this essentially eliminates the tax burden of the RMD. Further, it is gets money out of the IRA tax-free, thereby reducing the IRA level and therefore reducing future RMDs and associated taxes.

Things to consider regarding the QCD in 2009, now that RMDs are not mandated:

• If you only want to make a Qualified Charitable Distribution for the sake of eliminating the current RMD tax burden, there is no need to do so in 2009. Donations may be made from other sources.

• If you take the standard deduction on your tax return (do not itemize), there is no tax benefit for charitable contributions. In this case, donating money from the IRA may be appealing to you simply as a means of getting money out of the IRA tax-free.

• If you intend to live off of your IRA investments throughout retirement, these strategies may not make sense for you. Always consult with your tax advisor to see how such scenarios might affect you personally.

Share this:

Article in Wall Street Journal, March 20, 2009

Some “Other” Wall Streets Embarrassed

ASHEVILLE, N.C. — Bart Boyer’s financial-planning firm, located at 6 Wall St. here, is a few doors from a custom sandal shop, bead store, New Age church and three restaurants that buy ingredients from local farms.
It is a long way from the Wall Street that has become synonymous to many Americans with reckless greed and pushing the economy off a cliff.
“They’ve caused us a lot of distress, ruined a lot of lives,” says Mr. Boyer, chairman and chief executive of Parsec Financial Management Inc. In the first two months of 2009, the firm’s revenue fell 22% from a year earlier.
Anger over runaway trading, financial engineering and compensation by financial companies has a strong resonance along at least 955 country roads, suburban streets and downtown blocks named Wall Street or something close to that. From Abilene, Texas, to south Los Angeles to Zeeland, Mich., these residents and business are wrestling both with the recession and the ignominy of a truly fallen address. (Never mind that most Wall Street financial firms aren’t literally located on Wall Street, nor is The Wall Street Journal.)
“My father’s always joked: ‘My daughter works on Wall Street,'” says Robin Campbell, owner of Dolce Vita, an eclectic boutique halfway on Asheville’s Wall Street that is stocked with handbags, earrings and wine. “Now he doesn’t joke about that.”
On Wall Streets throughout the country, the dominant view is that their New York cousins deserve their ruined reputation.
“If I ran this restaurant like the bankers ran their business, I would no longer have a job,” says Celinda Knight, manager of the Wall Street Bar & Grill, on East Wall Street in Midland, Texas, childhood home of former President George W. Bush.
“They have no idea what’s going on on the ground,” says Ken Olson, principal of Poko Partners, which has a real-estate project under way to revitalize Norwalk, Conn.’s Wall Street, located in a depressed downtown area. “These are people I don’t know, and that’s part of the problem.”
As for more than $165 million in payouts to an American International Group Inc. unit that crippled the insurer, “it’s absolutely beyond disgusting,” says Mr. Boyer, whose firm’s 1,000 clients include doctors and retirees. Parsec’s assets shrank to $749 million at the end of 2008 from slightly more than $1 billion a year earlier.
Last month, Mr. Boyer sent a letter to President Barack Obama suggesting limits on compensation for bank executives.
Asheville’s Wall Street is a one-way, two-block-long lane in the heart of this small city (pop. 73,875) in the Blue Ridge Mountains, about 690 miles by car from New York. During the late 1800s and early 1900s, Asheville flourished as the Vanderbilts, Henry Ford and other luminaries flocked here for its ostensibly curative mountain air. Enduring signs of that heyday include George Vanderbilt’s Biltmore Estate, now a popular tourist attraction and winery.
Named for a stone wall built to retain a hill in the bustling center of town, the Wall Street in Asheville began as a delivery alley. It evolved into an artery of offices, jewelry stores and other small shops. A Flatiron Building, shaped just like the one in Manhattan, housed offices and shops at one end of the street.
The Great Depression brought an abrupt halt to Asheville’s early boom. A new shopping mall in the 1970s further clobbered downtown. When Barry Olen bought an annex to the Flatiron building in 1978, Wall Street and nearby areas were blighted, full of “sleazy bars and pool halls,” he recalls.
Mr. Olen, who believes AIG employees should turn over their bonuses to “people who lost money from their efforts,” helped gradually transform Wall Street into a bohemian enclave and gathering spot for artists, retired baby boomers and other refugees of faster-moving America.
In 1987, Mr. Boyer moved Parsec from a home office to 6 Wall St., several doors down from shops owned by Mr. Olen and his wife. The street name was part of the attraction to the squat 1892 building. “We thought it would be sort of cute to be on little Wall Street,” Mr. Boyer says.
Parsec grew to 29 employees and has clients in 40 U.S. states. In contrast to former Merrill Lynch & Co. Chairman John Thain’s controversial office renovations, Mr. Boyer says he never spent more than $5,000 decorating his own office.
We shampoo the carpet once in a while,” he notes.
“This is the real Wall Street, right here … the one that’s based in reality and has some foundation in sanity,” says chef Mark Rosenstein, sharpening knives and slicing onions in the Market Place, a restaurant he moved into a 5,000-square-foot renovated space in 1990.
When Mr. Rosenstein hands out his business card while traveling, he is quick to explain that his address is “not quite like ‘that’ Wall Street.” AIG’s bonuses are “unconscionable” and “reward failure,” he adds.
As much as people on “other” Wall Streets want to distance themselves from the one known around the world, they can’t escape its economic reach. In January, Asheville’s unemployment rate hit 8.7%, up from 4.4% a year earlier. Tourism, the area’s most important business, is slowing. Once-red-hot mountain real-estate developments are dormant.
At the Market Place, revenue is down about 25% from a year ago. Mr. Rosenstein has given up his salary and offers a three-course meal for the cut-rate price of $29.
On a recent Saturday morning, Early Girl Eatery owner John Stehling said he and his wife had to cut employee hours and took home less than $30,000 last year after closing another restaurant they owned.
“I’m slavin’ away … just to make ends meet,” he says.

Share this:

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

Share this:

Article from Associated Press, Feb 24, 2009

I read this article the other day and thought it relative to the current market situation so I am passing it on in this blog. Hope you find it interesting.
Q: How does this drop compare with others?
A: At its low on Monday, the Standard & Poor’s 500 index was down 52.5 percent from its October 2007 peak. That makes it the third worst bear market since 1929. But the speed of the fall is the real story. In the past, it’s taken 21 months for stocks to fall this far. This time it only took 13 months.
The drop in stocks has also been playing out all around the world.
“The swiftness and the severity of this bear market I think were unprecedented — partly the global nature of it,” said Sam Stovall, chief investment strategist at Standard & Poor’s.
Q: The drop was fast but it still feels like stocks just can’t pull higher. Is this downturn longer than normal?
A: Since 1932, this is the longest time stocks have spent near a market bottom, according to Marc Reinganum, director of quantitative research and senior portfolio manager for Oppenheimer Funds.
Q: What has needed to happen in the past to turn a slumping stock market around?
A: Wall Streets need some source of hope. It could be as simple as one bit of news that acts as a catalyst for a rally. Investors will pounce once they believe the economy is poised to turn higher. But first, pessimism has to be running so high that many investors simply want to walk away.
Because many investors are laying bets for the months ahead they often look beyond the news of the day. So the market can recover well before the economy as a whole.
In the past 60 years, the S&P 500 has hit its low a median five months before the recession has ended and nine months before either corporate earnings have hit bottom or unemployment has peaked, according to S&P.
Q: What are the signs of a bottom?
A: A market bottom can bring punishing drops in prices, heavy trading volume and a large number of stocks that hit new lows. The cathartic sell-off is like a brush fire that drives many investors from the market but clears room for a recovery.
“Bear markets don’t end in whimper. They usually end with a crash,” Stovall said.
Q: What might a recovery look like?
A: That’s the good part. History shows that the rallies coming out of a bear market are far stronger than most advances.
Curtis Teberg, portfolio manager at the Teberg Fund, likens the market’s fall and recovery to a basketball thrown hard at the ground: The ball’s ascent is fastest right after it begins its bounce and its climb slows as it gets higher.
“The biggest bounce will come immediately and whoever is there will get to participate,” he said.
In bear markets since 1932, the S&P has gained an average of 46 percent in the 12 months after stocks hit bottom. The gains range from 21 percent to an incredible 121 percent.
Q: The slide has been so unnerving. Should I even bother to wait for a rebound?
A: Sticking around can pay off for those with the time. In the first year of a recovery investors have recouped an average of 82 percent of what they lost in the entire prior bear market, according to Stovall.
“Unless you believe that the world economy will stop and that all stocks will go to zero, one of these days this bear market will end,” he said.
Nervous investors should decide how soon they need the money. Stocks are for long-term investing. For those who can wait, cashing out at the market’s lows will only lock in the losses.
“It certainly is not the time to say ‘OK, I’m going to put everything in today,'” said Teberg. Instead, he recommends investors put one foot in the market at a time with money they won’t need right away. That way they can take advantage of deals on beaten-down stocks without risking too much at once.
Teberg is less nervous about the market at these levels than when stocks were at their peak in late 2007.
“At some point in time we will again see the market at those levels, which means there is a 100 percent gain for those who are willing to get into the market.” Investors just have to be willing to wait, he said.
“This market has never gone straight up or straight down forever.”

Barbara Gray, CFP®
Partner

[Advisor] is a registered investment advisor. This Article is being provided for informational purposes only, does not constitute investment advice and does not necessarily represent the opinions of [Advisor]. Nothing in this Article should be interpreted as implying the performance of any client accounts, or securities recommendations. [Advisor].does not provide any guarantee, express or implied, that the information presented is accurate or timely, and does not contain inadvertent technical or factual inaccuracies. The past performance of securities is no guarantee of their future result. The value of an investment may fall as well as rise, and investors may not receive the full amount of their principal at the time of redemption if asset values have fallen.

Share this: