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.

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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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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.

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The Story of Beta

 

You may be familiar with the term beta as it’s used in valuing investments. At the very least, if you’re at all comfortable with the Internet (and I assume you are, as you’re reading this blog) you can look it up and find out that it’s a measure of systematic risk. Great! That’s like my husband telling me that bike part over there is a derailleur. Now I know what it is, but I have no idea what it does or how it works with the rest of the bike (though I do know how to spell it, which is no small accomplishment). You may have even been at a party talking investments with someone (whose returns are “fabulous”) when they start tossing out terms like beta. You find yourself nodding along, silently wishing you could clock the guy with your derailleur.

 

So, what is beta? Well, it’s the Greek letter “b”, which you may remember from college. Not because you took Greek in college, but because your school had a “Greek system” (which is how institutes of higher learning keep you from graduating on time and therefore make more money). As I mentioned earlier, in the context of valuing investments, beta measures systematic risk. Unsystematic risk refers to risk that you can diversify away – industry risk, for example. If you had all your money invested in bank stocks last year, please accept my condolences and go fix yourself a nice, strong drink. If, however, you had a diversified portfolio of financials, consumer goods and services, healthcare, energy, industrials, etc., the returns in sectors such as healthcare and consumer goods would have mitigated (to some degree) the losses in the financial sector. The other type of risk is systematic, or market risk, which cannot be diversified away. Recessions (as we are painfully aware) affect the entire market regardless of business type, industry, and country, and even a properly diversified portfolio cannot escape all risk.

 

Beta is a number that measures market risk for a particular security. As a baseline, the market has a beta of 1. If a security has a beta of 1, its price is expected to move with the market. If it is less than 1, the price is expected to move less than the market. If it is greater than 1, the price is expected to move more than the market (for example, a beta of 2 indicates a security should move about twice as much as the market).

 

So now you know what it is and what it measures. The insatiably curious may also want to know how these numbers are derived. For all two of you out there, I will try to make the explanation as short and sweet as possible. Basically, it’s calculated using something called linear regression, which is nothing more than trying to make a straight line out of a bunch of data points that look like buckshot. If you regress the returns of a security against the returns of the overall market, you will get an equation for a line that represents the “best-fit” line through the data points. Beta is the coefficient in the equation that makes it all work.

 

I hope that was illuminating, and that you haven’t fallen asleep on your keyboard. If you have any questions involving derailleurs, please contact my husband.

 

Sarah DerGarabedian

Research and Trading Associate

 

 

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Fiduciary Services

Parsec Financial is a fiduciary, as such we are required to place the interests of our clients in front of all else.   It is a special role that we play, blending together trust, confidence and responsibility in our obligations to our clients.   Many of our competitors are not fiduciaries because of conflicts of interest, either transactional based compensation or revenue sharing agreements from the products they recommend. 

While we are a fiduciary for all our clients, it is very pertinent to our trust clients and retirement plan trustees.  Trustees come to us for help with the procedural prudence that is necessary for them to control their fiduciary liability and obligations.  

The strength of our service resides in our objectivity.  The Fee-only model allows us to embrace the fiduciary standards.  Our credentialed professionals are here to assist you with all aspects of trust and retirement planning. 

Rick Manske, CFP

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Compliance and the Securities Industry

As the compliance officer for Parsec, it is apparent to me that the compliance officers for Madoff were not doing their job. In 2006 the SEC required every securities firm to name a specific person as Chief Compliance Officer. The CCO is required to monitor the firm’s activities and ensure that the business is complying with the various securities regulations.

We have a software system that monitors all e-mails sent and received by employees which are then archived for record-keeping purposes. We are not allowed to electronically send personal client information which would include social security numbers, date-of-birth, account numbers, etc. The software alerts us to suspect e-mails.

Employee trades are carefully monitored and must be pre-approved before any trades are made. Employees must wait until block trades are finished for clients before executing any trades in their own accounts. Parsec receives statements on all employee accounts, including household members, and trades are double-checked each quarter to ensure compliance.

Portfolios are given specific composites (growth, growth and income or balanced, for example) based on the client’s investment objective, and then must be diversified according to guidelines established by our Investment Policy Committee. Sample portfolios from each advisor are reviewed periodically for compliance. If the portfolio is out-of-balance, the advisor is given a certain timeframe to get the portfolio back in compliance. We screen for stocks that are over a 5% weighting and if there is a reason for the overweight position it must be documented in the client’s electronic data file.

All advertisements and correspondence sent to more than one client must be reviewed and approved and a file is kept on all of those items. If we give statistics or certain facts we must have documentation on file to prove those facts. We also must retain records such as trade confirmations and account statements in order to be able to substantiate the performance figures sent to our clients.

Many other areas are routinely checked and a year-end compliance report is a requirement with documentation and “work papers” on the various testing procedures during the year included. I have attended compliance conferences every year and Parsec also retains a compliance consulting firm. We take this matter seriously and we maintain a culture of compliance. If a Ponzi scheme was going on at Madoff Securities and the compliance officer was unaware, he was a compliance officer in name only.

 

 

Barbara Gray, CFP

Partner

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More on Parsec’s Investment Process

This week’s post will focus on some sample questions regarding how we buy and sell stocks.

 

Q:  What factors do you look at when selecting individual stocks?

A:  We review many different pieces of fundamental data as well as published research from a variety of sources.  We then combine and analyze this data in order to draw our own conclusions.  Once we add a company to our coverage universe, we monitor it daily and also review company news, earnings reports and SEC filings as needed. 

 

Q:  You bought XYZ Company and it went down.  Why don’t you sell it?

A:  Stock selection is not an exact science. Sometimes we review a company and the fundamentals look great, then it goes down anyway due to some piece of company-specific news or general market conditions.   In a diversified portfolio, something will virtually always be down.  We do not believe that a short-term adverse price movement by itself is a reason to sell if our investment conviction about a company has not changed.  Although it runs contrary to human nature, many times the right thing to do in the stock market is to not do anything.  We favor low turnover, since academic studies have repeatedly demonstrated that the more investors trade the worse they do. Frequent trading also drives up your transaction costs and creates short–term gains, which are taxed at higher rates.

 

Q:  What would cause Parsec to sell a particular stock?

A:  Sometimes it’s one reason, and sometimes it’s a combination of factors.  Deteriorating fundamentals, loss of confidence in management, increasing debt, declining margins are several potential reasons.  We also look at relative P/E, or the price earnings ratio of a particular stock relative to both the overall market and the company’s own historical range.  We prefer to buy stocks near the low end of the relative P/E range and sell them near the high end.  Our favorite reason to sell part or all of a position is to take profits.

 

Bill Hansen, CFA

Managing Partner

January 30, 2009

 

We have a correction to our most recent newsletter.  I had indicated the size of the upcoming fiscal stimulus program in the millions.  While I wish this was true, the package being debated is $825 billion, many apologies for this over-sight.

 

Rick Manske, CFP

Managing Partner

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Your Credit

With mortgages rates reaching all time lows many people are choosing to refinance. The 30 year fixed mortgage rate is below 5% which is a deal too good to ignore! Your credit score is an integral part of getting lower rates. Consequently, it is also important to continually stay on top of your credit report and your credit score. You are allowed a free credit report every 12 months and I would encourage everyone to check their report and ensure there are no mistakes. You can order the report online at http://www.annualcreditreport.com or call 877-322-8228. This is the only organization that will give you a report for free.

If you have been a victim of identity theft you can place a fraud alert on your file by calling one of the three consumer credit reporting companies:

Equifax: 1-877-576-5734
Experian: 1-888-397-3742
TransUnion: 1-800-680-7289

Barbara Gray, CFP®
Partner

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Investment Good News

The title alone should peak your interest! In the past, taxpayers who had adjusted gross income over $100,000 could not convert their IRA to a Roth IRA. That income limitation has been lifted for 2010. Of course, you will have to pay taxes on the amount you convert but you will be allowed to spread that tax burden over a two year period. Roth IRAs grow tax free as regular IRAs do, but the proceeds are tax free upon any withdrawals – AND there is no required minimum distribution on a Roth. One tactic for retirement spending is to have several pots of money to draw from (other than social security): investment assets taxed at the capital gains tax rate, IRA assets fully taxed at your income tax rate, Roth IRA assets not taxed. If you don’t need the Roth assets in retirement they can be left to your beneficiaries for them to take out over their lifetime, tax free. If you have earned income you can do a non-deductible regular IRA for 2008 and 2009 and then covert those assets over tax free.

Congress has rescinded the IRA required minimum distribution for 2009 for those ages 70 ½ or older in order to allow the accounts time to recover from the stock market decline. Consequently, nothing has to be sold while it is temporarily at a low.

Barbara Gray, CFP®
Partner

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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
Partner

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