A Year in Review


As the year comes to a close we can all breathe a sigh of relief that it is over; 2008 will go down in history as one of the worst investing environments ever seen.  Obviously, the stock market was terrible; both domestic and international, but so was real estate and most all bonds outside of the treasury market.  Even the commodity prices crashed with prices on oil, gas, soybeans, wheat and corn. dropping precipitously during the second half of 2008.  As we enter 2009, we can be hopeful that we have seen an end to the bubble theme of the last nine years.  As you recall we first had a stock market bubble in the late 90s, followed by a real estate bubble in the mid decade, then finally the commodity bubble in 2007-2008.  Unfortunately for some it appears to us that another bubble is inflating in the treasury market as the flight to quality has brought the yield on the ten year treasury down to levels not seen since the end of World War II.  When credit markets stabilize and the panic subsides we could see a spike in inflation with the big increase in monetary supply; this would be a bad situation for someone locking in 2.8% for ten years.  It would be nice to get back to some normal markets. 


The year saw a number of stock market records broken.  The largest monthly decline, the biggest ever point gain and point advance, the worst year in modern history.  The amount of bad economic news feels almost unprecedented.  All the tell tale attributes of a bad recession abound: rising unemployment, multi-decade lows in industrial production, sagging real estate prices, and record home foreclosures.  The equity markets have sold off for all of these reasons and more.  Seemingly stocks are beginning to take bad news in stride.  Expectations are so reduced and markets are so sold out that any sign of a lessening of of the crisis will be met with a strong stock market rally. 


You have to look carefully but there are some positives for us all to consider:


  • The declining price of oil, natural gas, home heating oil is saving consumers billions of dollars every month.
  • The governments of the world are making sound and coordinated policy decisions, injecting trillions of dollars into the credit markets.
  • Mortgage rates have been in a falling pattern, stoking the refinance opportunity and allowing people to begin buying excess inventory in housing.
  • Dividend rates on stocks are higher than bonds for the first time in decades.


The reality is that the economic and financial conditions have changed markedly in the last three months of 2008.  However, the long-term objectives of investors have not.  We all still want to retire and spend in retirement according to our lifestyle.  The need to grow wealth is as important today as ever before.  There is only one way to grow wealth and that is through ownership.  Ownership of real estate and businesses (public and private) represents equity and over the long-term the owners of equity will see their wealth grow.  Bonds, CDs and cash do not grow wealth.  They do play an important role in protecting and preserving wealth, but they do nothing to grow wealth.  We feel strongly that investors that have left the real estate and stock market will return when prices begin to rise.  Many people will fail to get back in or will at much higher prices than when they got out.  We and our clients will have seen the bottom and by definition will be in place to get the full recovery when it comes. 


Rick Manske, CFP

Managing Partner



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Tax Loss Selling

We will be busy between now and the end of the year doing tax loss harvesting in our client’s taxable accounts.    With such a broad market decline this past year it isn’t hard to find some losses – in some cases, many losses.   There are a few tactics that can be used in tax loss selling.  A security can be sold for the loss and then bought back in 30 days.    If you want to take the loss, but think the market might have a rally in the next 30 days, you can double up on the stock and then sell the original lot in 30 days.   That way you get the loss and you don’t miss out on the gain.    However, there are many securities trading below what we believe to be their fair value, so reinvesting the proceeds immediately in something else is also prudent. 


Mutual funds typically pass on capital gains to their shareholders in December.  You may have a large loss in a mutual fund and also be burdened with capital gains.   Since so many mutual funds have also had losses (almost all of them) we will be reviewing them for tax loss selling as well. 


Capital gains can be offset by capital losses.  If you do not have any capital gains a couple can deduct $3,000 of losses on Schedule D of their tax return, a single person can deduct $1,500.  You can carry forward an unlimited amount of losses for use in later years.   If there is an upside to a down market it’s that most of us should not be paying capital gains for 2008.


Barbara Gray, CFP


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November Pain

Recently we have experienced one of the most severe market sell offs in history.  The S&P 500 is now down over 22% since the start of November.  This sell-off would be clearer if there was a specific tangible event that we could grasp onto to justify this market move.  Instead, this market is being driven down by investor panic, a lack of buyers and huge redemptions at hedge funds and mutual funds. 


Our economy and stock market has survived a number of stock market crises and panics.  First, take the crash of 1962.  In this panic, the stock ticker ran four hours late.  Then in the 1973-1974 bear market, the S&P 500 fell 48% and the average stock fell 70%.  In October of 1987 the market fell over 20% in a single session, more than twice as much as the largest daily decline during October 2008.  Then, of course, there was the 2002 “tech bubble” with the S&P 500 down 49% and tech stocks down over 75%.


As I write this email, the S&P 500 is down over 48% in the 2008 calendar year.  If we finish the year at these levels, 2008 will go down as being the worst performing stock market since 1926 (with the prior worst being 1931 with a return of -43.3%).  As of October 27 the Emerging Countries were down an average of 66% (China down 75%).  Like the previous bear markets cited above, now is absolutely the wrong time to bail out of the market.  Emotion is an investor’s greatest enemy, be it greed, or in this case fear.


Consider the following:  The global liquidity crisis, the probable cause of the last half of the current decline, has peaked and is now easing thanks to the concerted efforts of governments around the world, including new support from China, Russia and the Middle East.  Economies in the U.S., Europe and Japan are now in recessions with the U.S. recession getting under way about a year ago (in hindsight).  The stock market, being a leading economic indicator, typically turns positive about midway into a recession.  If the U.S. recession lasts 20 months (which would make it the longest since WWII – with the average being approximately 12 months), one would predict that the stock market could begin to rebound in December of 2008. 


Although it seems extremely difficult to believe that the market could rebound under the current dreary economic cloud, markets typically begin advance while economic news is getting worse.  In our view, this is a terrible time to reduce or liquidate stock market holdings.  Since 1900, the market rebounded an average of 47% in the 12 months following a bear market bottom and 60% over the next two years.  Although this constant drumming we are taking in the market on a daily basis is hard to bear, we must visualize how difficult it will be if we sell at these levels and watch the market advance to levels much higher. 


What can we do?  We can all revisit our budget and look for ways to reduce spending during these difficult times.  We can harvest tax losses in order to make sure we do not pay any more taxes (this year and in the future) than necessary.  We can reallocate our portfolio into higher dividend yielding stocks (which there are currently many) in order to maximize portfolio returns (or minimize losses) while we wait for market and economic conditions to improve.  We can stay strong and not allow the daily panic to lessen our confidence in the fact that ownership in companies and real estate are the only proven way to build long-term wealth. 


Michael J. Ziemer, CFP®

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What it Means to be Credentialed

You’ve heard the pundits on TV signaling doomsday and seen the depressing headlines plastered across every newspaper and magazine.  The word is out that times are tough and no one is denying it.  What’s an investor to do?  You’ve heard us say it before and you will hear it again:  there is no crystal ball and no way to predict the severity or length of a recession or a bear market; all you can do is control your own actions.  Having a financial advisor can help you navigate these difficult times.  That is where we come in.


One of Parsec’s core values is that our financial advisors are credentialed.  Every one of our advisors has the training and expertise needed to give quality advice, and each one has at least one related professional designation to back this up.  You may often see the various designation initials and wonder exactly what those initials mean.  You can visit the “team” page on our web site to read more about individual advisors.  Below is a list of the credentials our advisors have.


Series 65 License

This license is held by all of our financial advisors, and is required by the SEC in order to give investment advice.  Investment advice is considered the central area of expertise of our advisors, though all advisors have additional areas of expertise.



This denotes a certified financial planner and is held by the vast majority of our advisors.  The areas of knowledge for this designation include investments, insurance, tax planning, retirement planning and estate planning.  Certificants are considered generalists in these areas who can review your entire financial picture and highlight areas of concern specific to your needs, then direct you to the appropriate expert if necessary.



This refers to the Chartered Financial Analysts designation.  This designee specializes in investment analysis, portfolio management, ethics in the investment profession and financial market analysis.



This represents an individual whose expertise focuses on fiduciary services related to trusts, estates and guardianships, as well as individual asset management.



This designation is specifically for CPAs who specialize in personal financial planning.


JD and CPA

We also have advisors who are accountants and attorneys.  This strengthens their knowledge base in various professional matters, but as financial advisors they do not practice law nor give professional tax advice.  They can however discuss considerations you may have in these areas and point you in the appropriate direction should you need more specific tax and legal advice.


Harli L. Palme, CFP®

Financial Advisor

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Here We Go Again

Here we go again.  After having the biggest ever advance on an election day, the S&P 500 experienced another gut wrenching sell off with the biggest two day decline since 1987 – Wednesday and Thursday of this week.  Clearly the market is still digesting the bout of bad economic reports, including payrolls which indicate the highest jobless rate since 1994 at 6.5% and a 4.6% decline in the sales of existing homes.  Both reports were worse than expectations.  The news out of Detroit is particularly bleak, with the big three burning cash at an astonishingly high rate, as vehicle sales cratered in the last two months. 


With such horrendous news in the economy one would be led to believe that the stock market would be teetering on the edge of another precipitous decline.  This is not necessarily true.  As we have said, the stock market is a leading economic indicator.  The market is down tremendously over the last year, during a period of economic growth.  As the economic clouds darken, the stock market is forward looking towards the horizon for the slightest sign of a break in the clouds, at which time we could experience a sizable and unexpected rally in the midst of the storm. 


Take this time to focus on the things you control.  Review your family cash flow statement with an eye towards reducing discretionary expenditures.  If you are in an accumulation phase, increase your savings rate, and buy stocks when they are cheap.  If you are in the distribution phase, rebalance your portfolio by increasing your dividend income and improving diversification.  Most of all keep a clear head and don’t let the emotions overwhelm your decision making.


Rick Manske, CFP

Managing Partner

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What is Parsec’s Process for Choosing Securities?

We are calling this market “Mr. Toad’s Wild Ride” so it might be of interest to explain about our investment process and how we determine what to buy and what to sell, particularly during times like these.  We have a buy list with securities, mutual funds, index funds and ETFs.  Each security is “vetted” by our Investment Policy Committee, which reviews the securities’ fundamentals before being placed on our buy list.


We have two dedicated research and trading associates who compile the research material necessary for our analysis.  Some of the standard fundamental measures of the companies we review are:  debt-to-equity ratios, P/E ratios (price-to-earnings), PEG (price-to-earnings relative to growth), cash flow measures, operating expenses and profit margins, and dividend yields.  The information is compiled for the committee to review, focusing on a different sector each week.  Our goal is to pick the strongest companies within each market sector and add these to our buy list.  Sometimes a security’s metrics change our opinion about that security, and we downgrade it to a neutral or a sell.  According to firm policy, advisors are prohibited from buying anything that is not on our buy list, though we can buy securities if the client directs us to do so.  All exceptions must be documented.  


On a broader scale, we have portfolio guidelines that give us the allowable range of assets in any particular sector.  For instance, a growth-oriented portfolio is allowed to have between 4 – 8% of equity holdings in the software sector, and between 12 – 25% of equity holdings in international companies.  Individual securities cannot be over a 5% weighting of the total portfolio.  Our Financial Planning Committee spot checks a sample of each advisor’s portfolios for compliance purposes on a monthly basis.  Some clients do have favorite securities over the 5% weighting that they don’t want to sell for a number of reasons, such as tax sensitivity.  All out-of-compliance items must be documented in the client file.  In this way, we ensure that each client’s assets are managed in accordance with Parsec philosophy and guidelines.


Many clients ask how often we look at their portfolio.  In fact, our buy securities are on a spreadsheet that we all look at on and off all day long.  Any unusual price changes dictate a full fundamental metric review, while other securities get a full analysis on a regular basis in our Investment Policy Committee.  Individual client portfolios are reviewed on a weekly or monthly basis, depending on the specific client’s situation.


Lately the view has been grim, and as with the market as a whole, many of the securities we buy for our clients have been beaten down far beyond where company-specific fundamental analysis suggests they should be.  The opposite occurred with the technology boom in the late 90s when fundamentals did not support the high prices of many stocks.  This time securities are undervalued, which we view as a good time to invest.  Focusing on good quality companies, with good fundamentals, will serve you well over the long term. 


Barbara Gray, CFP®


Chief Compliance Officer

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Current stock market volatility

Welcome to the first posting of the Parsec blog.  This is something new that we are trying in order to share some of our thoughts on various topics such as the economy and our investment philosophy.  We are committed to posting updated content each week on Friday, and possibly more frequently depending on market conditions.  A number of us are involved in writing the posts, so you will have a chance to read a variety of perspectives.  We welcome your feedback, whether positive or negative.

At the risk of sounding too technical, today let’s talk about volatility.  As of yesterday’s close, the S & P 500 was down 38.2% for the year.  When I arrived this morning, S & P 500 futures were down another 6.5%.  We have recently seen several intraday swings on the Dow of 800-1100 points.  This type of volatility is distressing to both us and our clients, but one of our core principles is not to let random short-term market movements distract us from our long-term goals.  We are currently suffering the second worst year in stock market history, and are flirting with taking the crown for the worst year ever (currently held by 1931, -43.3%).  This is not the type of environment in which to be a seller of stocks.

A recession has not been officially declared yet, but if we assume that we are currently in one, there are many companies that we cover that still have rising earnings and dividends.  Over time, stock prices follow rising earnings and dividends.  In the current negative market environment, focusing on quality companies with low levels of debt, and rising earnings and dividends, is even more critical than under less volatile market conditions.

Over the long-term, the market has had average annual returns of about 10% since 1926.  The current decade has had negative returns, and is the worst in modern history including the 1930’s.  We continue to believe that these negative returns cannot persist.  Two of the best years in stock market history were 1933 and 1935, which nobody at the time would have predicted.

We have heard a number of arguments that “it’s different this time.”  This argument was used to justify unsustainable valuations of technology companies earlier in the decade, and is now being used to support the thesis that the market will continue to decline.  Throughout history, there have been many panics and bubbles that were unthinkable and unprecedented at that particular point in time.  Now nobody even remembers when they occurred or what caused them.  It’s like trying to remember who won the Super Bowl two years ago.  I don’t even know who played.  We have data going all the way back to 1815, and the consistent theme is that there have been many more up years than down years. We have endured the panic.  Let’s stay in position for the eventual recovery.

Bill Hansen, CFA

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