Trovena Weblog

The Morgan Report: 2Q 2010 Review

Report Entry: Tuesday July 6th, 2010

A definition of perspective is as follows: 

“The appearance of things relative to one another as determined by their distance from the viewer.” 

Volatility in the market has more than doubled since mid-April as measured by the VIX index (measures the volatility of the S&P 500).  I’m sure that was something most investors knew without looking at VIX.  

According to the Bureau of Economic Analysis, real gross domestic product the output of goods and services  increased at an annual rate of 2.7 percent in the first quarter of 2010. In the fourth quarter of 2009, real GDP increased 5.6 percent.  There was a deceleration in real GDP in the first quarter primarily reflected decelerations in private inventory investment and in exports, a downturn in residential fixed investment, a deceleration in nonresidential fixed investment, and a larger decrease in state and local government spending that were partly offset by an acceleration in personal consumption expenditures.

Recent market declines followed reports that showed the U.S. pending-home sales plunged 30% in May right after the homebuyer tax credit expired, and that the Institute for Supply Management’s June manufacturing index dropped more than expected.  There have been further concerns about recent increase in jobs claims, European and U.S. debt concerns, and a very strong “June Gloom” in San Diego.  

On the flip side, value or contrarian investors will see these price declines as an opportunity to purchase lower priced stocks following the principle of buying low and selling high. And, there are countering signals in different sectors indicating stabilization and potential growth.

So the market is reflecting the concern that we may be in for a long haul recovery and potentially a double dip recession.  As an investor, these are no small matters as we continue to evaluate what to do with our hard earned money.  

What is the best thing to do today? Every day we are overwhelmed with ‘great’ ideas.  Gold, currencies, options, bonds, China, Brazil, plastics; you get the picture.  Also, friends usually have some ‘smart’ person they know who has the secret to beating the market consistently; their personal version of Bernie Madoff.  (continued)

A Positive Outcome

 

This morning I woke up thinking about some emails I needed to get out, then scanned the Wall Street Journal. Oil spills, market volatility, political scandals, iPads, and military maneuverings hovered on the computer screen daring me to crawl into my hole.  I remembered how all this news can be daunting especially for clients who have put their trust in all of us here at Trovena, to help them with their lives.  My next thought was that I was sure everyone could use a break from all this and should have a nice three day weekend to enjoy.  What to do?  Beach, barbecue, time with family, I’m looking forward to it. 

So I will do all that, and enjoy it.  I will also spend a moment honoring my dear friend, roommate in flight school for two years, hero, thinker, leader, and jokester, Lt. Patrick K. Connor.  I cannot even scrape the surface of the unique bond we had as friends and fellow Naval Flight Officers.  But I can tell you we worked hard, played hard, and we were once young and invincible.  On February 2nd, 1991, Pat was shot down along with his pilot LCDR Barry T. Cook in their A6 Intruder in the Persian Gulf during a strike mission against Iraqi warships.  One of the highest honors I’ve had was the privilege of speaking about him at his memorial service.  The best figure I could paint of Patrick at that time was that of Marcus Aurelius.

Last year I had breakfast with his father, mother and brother.  It was a fine reunion, warm and stoic.  It brought home a couple of lessons that I have lived through.  You never know what will happen today, and whatever does happen, life will go on.  On that note, it’s best to be prepared for yourself and those you love.  It’s tempting to look at the news and get paralyzed with an overwhelming perception of doom and gloom but life will go on and we all can help create a positive outcome. So, I will enjoy this Memorial Day weekend, recharge the batteries, and get back to the business at hand on Tuesday; helping people create a positive outcome. I hope you do the same as well. 

The European Bailout

European Bailout Synopsis:

The European Union in cooperation with the International Monetary Fund announced a €750 billion ($955 billion) bailout plan to contain the sovereign debt crisis in Europe. This came on top of a €110 billion bailout package for Greece announced last week. The European Central Bank simultaneously unveiled a plan to purchase public and private debt to “ensure depth and liquidity in those market segments which are dysfunctional.” If necessary, the US Federal Reserve has promised additional support in the form of US dollar swap lines to reduce strains in short-term dollar funding markets globally.

 

The Breakdown:

 

I.    €60 billion from an EU emergency fund –the European Stabilization Mechanism– funded by all 27 European Union members.

II.     €440 billion of loans and guarantees from the 16 members of the Euro Zone who share the common currency.

 

III. €250 billion from the International Monetary Fund (IMF).

IV. Purchasing of public and private debt by European Central Bank (ECB) –no amount specified.

V.     US Federal Reserve reopening US dollar swap lines with foreign central banks –no amount specified, but original swap lines were nearly $600 billion US dollars.

 

 

Whoops! My Bad. Typo. Meant 'M' not 'B'

I received a phone call from a friend of mine asking me if I was concerned about the market drop today.  I told him, "No, in fact I did not look at the markets today."  He then asked, "Well, don't you guys worry about that stuff?"  So I then explained to him the distinctions between speculative market timing and investing as a fiduciary.  The research tells us that prudent investing in well diversified portfolios with low expenses will help add value to investors. Also, market timing is a two headed dragon, you need to know when to get in and when to get out.  Daily market movement is usually noise in the long run and focusing on it can cause undue stress and lead to bad decisions. 

So, I peeked at the markets and scanned online for an explanation; here's what I found:

According to multiple sources, a trader entered a "b" for billion instead of an "m" for million in a trade possibly involving Procter & Gamble [PG  60.75    -1.41  (-2.27%)   ], a component in the Dow. (CNBC's Jim Cramer noted suspicious price movement in P&G stock on air during the height of the market selloff.

(Full story here: Stocks Plunge As Investor Fears... )

Lesson learned: Make sure you have someone review important decisions before you push that mutton.   (editors note: he meant button)

Professional Charity: Strategic Trusted Advisors Roundtable (STAR)

I read something the other day that reminded me about life's reality; Life is more 'Learn by Doing', than 'Learn by Thinking'. 

Dr. Carl Sheeler, a San Diego Business Valuation Expert with Allison Appraisals, and Russ Davis, San Diego Daily Transcripts Top Attorney Corporate Law (and runner up Employment Law) for 2009 with San Diego Business Law, are two examples of professionals that have embraced this golden rule.  Just last year, the three of us decided to start an organization to help others help themselves by creating a business organization; Strategic Trusted Advisors Roundtable (STAR). I believe this group is on it's way to attaining the goals we envisioned because we focused on how we could help others, rather than how we can help ourselves. The three of us and the rest of the executive board (see STAR link below) have learned a lot by thinking for sure, but we also realize that at some point, action and helping professionals create relationships is a fulfilling cause.

The first thought that comes to my mind when I hear the word 'charity', is a local non-profit that may need help with leadership and fundraising.  But I am also convinced that helping a community of professionals create connections and depth of relationships is a noble cause as well. It's a good feeling to know that you had a small part in helping a CPA, Financial Advisor, Banker, Attorney (the list goes on) be more successful.  You know at the end of the day, this can have a positive effect on their business, their family life, and ultimately their clients.  

If you conduct yourself responsibly and professionally in these types of organizations, you will most likely see rewards as well but the key is giving without the expectation of anything in return.  Your not going to find gold on a silver plate, but you will gravitate towards people that you'll find you can help, and will help you.  

With that in mind, think about finding a business organization that you can support and one that is a good fit for you. Whether it be STAR or any number of outstanding groups in town, put your best foot forward and let the chips fall where they may.  Ultimatley, it is all up to you; learn by doing.

If you are interested in learning more, please feel free to visit the STAR website.

  Strategic Trusted Advisors Roundtable

Just a Little Return Makes a Biiiiiiig Difference

DFA's Weston Wellington helps put long-term compound returns in perspective.

- Christopher

March 31, 2010

The Millionaire Next Door

The Chicago Sun-Times recently reported that Grace Groner, a long-time resident of Lake Forest, Illinois, passed away in January at age 100, leaving a $7 million bequest to her alma mater, Lake Forest College. Although Groner lived in one of the country's wealthiest communities, she hardly fit the profile of a trust-fund socialite. An orphan at age twelve, she was cared for by neighbors and attended college, earning an English degree in 1931. She went to work as a secretary for nearby Abbott Laboratories in Chicago where she worked for forty-three years. She never married, never owned a car, and lived for much of her life in an apartment before moving to a tiny one-bedroom house willed to her by a friend.

Her $7 million estate was the fortuitous result of a lifetime characterized by frugality, simplicity, and a large dose of good luck. She had purchased three shares of Abbott stock for $60 each in 1935, reinvested the dividends, and never sold them. Over the subsequent seventy-five-year period, her three shares multiplied to well over 100,000, and her $180 initial investment grew over 38,000-fold to approximately $7 million.

Pure Zen Investing

The best part of guiding my clients through the noise of investment decisions is when they have an “Ah Hah” moment. Sometimes a comment of clarity so insightful hits my ears that I have to stop and smile.  I smile not only because I realize I have just helped someone become a more successful investor, but also, they helped me by stating the obvious in such a simple way.

Real Estate Applications

I don't know if you have been shopping for residential real estate lately, but if you have, and you aren't using the Zillow or Trulia mobile apps, you are missing out. (You may also be missing out on some great deals!)

Imagine pulling up in front of any home and instantly accessing photos, price history, comparable recent sales, and contact information. You can do that now on your phone as you cruise your favorite neighborhood. No more calls to realtors or printing sheets of information prior to your drive. It's all right at your fingertips. You can call the realtor after you've narrowed your search considerably.

You may also want to see what zillow.com and trulia.com have to say about your house. If any information is incorrect, you can "claim" your home and update the information. When it comes time to sell, you'll be glad you did it.

- Christopher

Home Buyers Check Out Apps

Smart-Phone Tools Use GPS Technology to Provide Local Housing Information

Just in time for the spring house-hunting season, smart-phone applications that provide information to home buyers are proliferating.

Real-estate firms have long vied to have the most engaging Web site to attract people searching for homes. Now they also feel compelled to have an "app" for Apple Inc.'s iPhone and other smart phones. Rather than being moneymakers—brokers tend to offer their apps for free—the apps are seen as a tool to make the home-buying process easier.

Read the rest at WSJ.com ...

The Lesson Learned

This is a nice article by Mr. Zweig who says that bubbles don't do much for investors but have latent benefits for the economy. The one thing I take from this is that the thing to do with any bubble asset (Be it tech stocks, real estate, or bonds perhaps) is to sell it using a systematic, disciplined re-balancing investment process. Simple as that. 

- Christopher

Ten years ago, investors knew that technology would change the world, and they were right. But you can be 100% right about the future and end up with zero to show for it if you overpay in the first place.

When Bubble Burst: Companies Won, Investors Lost

On March 10, 2000, the Nasdaq Composite index closed at a record of 5048.62, up 24% since the beginning of the year, after an 86

% gain in 1999. And many were calling for the Nasdaq to hit 6000 within a year or two.

It closed Tuesday at 2340.68.

What went wrong? Looking back with 20-20 hindsight, you might think that millions of investors had gone insane. Americans in every walk of life—barbers, taxi drivers, waiters, air-traffic controllers—were convinced that they could get rich quick by trading Internet stocks.

Read the full WSJ article "When the Bubble Burst" »

Wall St. Out of the Gambling Closet

Well, many of you who know me have heard me say that Wall St. firms are really analogous to casinos. Like Vegas casinos, these firms (Merrill, Smith Barney, Goldman....etc.) don't really care if you make money.

They merely want you to take a bet so they can take a small piece of the action (on billions of transactions of course) After all, if gambling or stock picking worked, they would be sitting at terminal or card table with you taking their own advice.

Finally, they have taken off their disguises and are entering the casino fray in earnest...

- Christopher

Whether Bonds or Touchdowns, They're Still a Gamble
Firm Engineers Vegas Wedding Between Wall Street and Sports Betting

By ALEXANDRA BERZON

M Resort

The betting area at M Resort was designed to look like a trading floor.

LAS VEGAS—Investors are sometimes accused of treating the stock market like a casino. Now, one Wall Street firm wants to treat casinos like the stock market.

Bond-trading specialist Cantor Fitzgerald in March took over the management of sports betting at the M Resort, a new 390-room hotel and casino on the Strip's southern edge.

Read the full article here....