Hill's Personal Finance

Hill Asset Management Reading List

Since we are still in eerie times, I have compiled some valuable articles for you to get a feel of what is actually going on out there:

• CEO Compensation vs. Total Return Two things that have nothing to do with each other
• Biggest Market Cap Changes for 2009  Who has been the biggest winners and losers so far this year
• What is the Real March Unemployment Number I think it speaks for it's self
• Mike Mayo and his banking report rocked the market today; this twofer hopefully will sort it out Mike Mayo's Seven Deadly Sins and The Worse is yet to Come for Banks
• Pension Funds and Toxic Assets: Good Idea or Unconscionable Risk They are wrong for banks, but politicians think they are right for state retirement plans...go figure?

Capital Adviser's March 2009 Outlook

This month our fearless money manager points out, ".. all we have to fear is fear itself". We still have pain , but we are working our way out of it.

Download March 2009

Warren Buffet's Annual Shareholder Letter

Last week, Bershire Hathaway had its annual shareholders meeting in Omaha, NE. Along with the economic surge this brings to Omaha, the shareholders and, eventually, the investing world gets Warren Buffet's state of the corporation and things concerning speach and letter. This years letter is 22 pages long and filled with sage advice for anyone trying to grow their nest egg. It should be recommeded reading for Congress, so they can get a clue. 

Bill Gross Investment Outlook March '09

Bill Gross of PIMCO Investments is one of the best "Bond Guys" in America. This month he explains to "Congress" on whats wrong and what they need to do.

Diversification Isn't Just About Market Risk

There are other risks we sometimes don’t think about.

When an investor or financial advisor thinks about diversification, it is generally with market risk in mind. It’s worth remembering that there are other potential risks to your money – and diversification can be valuable in helping you cope with them.

Business risk. Even today, there are people who have worked for one company for many years and who own great amounts of corporate stock, perhaps as a significant portion of their 401(k) investments or overall portfolio. Are you one of them? Here’s a word for you: Enron. It is risky to link your financial future to the health and viability of one company.

Investment advisor risk. We can be thankful, as investors and as a society, that Bernie Madoff represents an unfortunate aberration in the financial services industry. Financial advisors, investment advisors, money managers – hundreds of thousands of them work by strict legal, ethical, and moral standards. If they don’t, they risk losing their livelihoods, or worse. But, very rarely, you do read stories of financial services professionals who have proved charlatans. One way to combat this risk is to check out the advisor. You can do it through the free Broker Check record search offered by the Financial Industry Regulatory Authority (finra.org/brokercheck), and through your state securities administrator. This risk, although thankfully rare, does give one pause to think about the value of having a strong cash position and diversification beyond the standard investment vehicles.

 

Brokerage risk. At mid-decade, if you had walked around Manhattan saying Lehman Brothers would go bankrupt, few would have paid you any mind. But it happened – not just because of the financial climate, but because of decisions management made.

 

Of course, brokerages only handle your investments; they are prohibited from tapping into your assets or lending them out when they get in a jam. The Securities Investor Protection Corporation protects up to $500,000 of your assets at a brokerage – including stocks, bonds, money market funds, and cash up to $100,000.¹ In the 39-year history of the SIPC, just 349 brokerage account holders have failed to get their entire portfolios back.² But SIPC coverage doesn’t cover everything - fixed annuity contracts, commodity futures contracts, and certain investment contracts such as limited partnerships aren’t protected.¹ Additionally, there have been a few brokerages that have lost their SIPC membership, for a variety of reasons. Again, it pays to be vigilant, and to diversify.

Political risk. Americans don’t always link politics and financial pressures, except when it comes to oil and gas prices. Yet earlier this decade - I don’t have to tell you the date - the financial markets were rocked by an unimaginable human tragedy and a new kind of global threat. The plunge was temporary, and it was a bear market at the time. But the DJIA fell 685 points in a day and 14.26% across the succeeding week.³ These risks, too, make you think about the value of diversification.

Currency risk. Many investors don’t incorporate this factor into risk assumptions. But fluctuating exchange rates do present a risk element. If you have stocks in Canada that gain 6% but the Canadian dollar loses 6% of its value relative to the U.S. dollar, so much for that return.

Inflation risk. Inflation – even moderate inflation - effectively reduces your purchasing power over time. This is why growth investing is a priority in retirement.

Bottom line: be diversified. Have many baskets, not one. Speak to a qualified financial advisor to examine the financial options before you. There may be many more ways to invest your assets than you realize.

Citations.

¹ sipc.org/pdf/SIPC_English_2008.pdf             [2008]

² money.cnn.com/2008/09/15/pf/broker_leak.moneymag/index.htm?postversion=2008091513               [9/15/08]

³ the-privateer.com/chart/dow-long.html         [12/31/08]

Capital Investment Council December Outlook 2008

What is the most recession proof business?  Is it tobacco?  Is it alcohol?  I would have to say those two take a distant second to jolly Saint Nick.  Each year $2,255,750,000 is spent on photos with Santa at the mall.   Think about it!

 

Looking back over the last three months, the market decline has been more volatile than usual.  Why?  Is there any one underlying cause of this?  Let’s narrow down the list of usual suspects and focus on LEVERAGE.  One of the goals of investing is to create “alpha”.  Alpha is defined as a return in excess of the risk taken.  Over the past several years many hedge funds were thought to be creating alpha.  In hindsight, they were not creating alpha at all: they were simply using leverage to create the illusion of alpha.  For example, this illusion was facilitated by hedge fund managers investing in an exotic asset and locking in a small gain let’s say of 2%.  The “magic” occurred when those 2% returns were levered up with debt ratios of up to 30 to 1.   The result is a 60% return.

 

 Even Goldman Sachs, the “king of Wall Street”, was levered at 26 to 1.    A high leverage strategy may work well with the following conditions: 1. low volatility and 2. Banks who are willing to provide trading capital to hedge funds at low interest rates that do not account for the risk being taken. 

 

The old saying in private equity is that “genius” is using leverage in a rising market.  Now that the market has fallen, there seems to be a lot fewer geniuses out there.   Maybe the takeaway is that low volatility and outsized returns do NOT go hand in hand.  The old relationship between risk and reward has NOT been cracked by the hedge funds, and it appears that to make truly outsized gains, one might have to take more risks.  These facts are not new; it’s just that the market has been reminding us of them lately. 

 

 A high leverage strategy is similar to juggling - as long as the leverage was cheap, traders could afford to keep their balls in the air.  Many hedge fund loans are based on LIBOR (London Inter Bank Offering Rate).  Is it any wonder that oil finally fell precipitously when LIBOR rates soared earlier this year?  As interest rates rose, it became more and more expensive to maintain trading positions.  At some point the margin interest paid out weighted the potential gains and the selling in oil began.  Excess leverage is one reason I feel it is taking so long for the market to find a floor.  Each rally is met with a fresh wave of selling and much of this selling is driven by leveraged investments.  However, since the second week of December, the market seems to be changing character.

 

Slowly but surely, stocks appear to be pricing the current economic situation.  Although the data we are seeing is marginally worse, the market is shrugging off that bad news and seems to be rallying on the news.  Let's look at two examples.  1.  The stock market's rally of 12% during the Thanksgiving Week was the 2nd best weekly gain on record.  The fact that it came on the back of bleak economic numbers is even more impressive.  Example two happened on the first Friday of December.  The jobs report on that day was the worst seen since 1974.  The market had sold off on Thursday and it opened down hard on the actual day of the report.  However, the Dow improved steadily throughout the morning to actually close up on the day.  In my opinion, the market’s ability to ignore bad news will ultimately be the factor that turns prices higher for a SUSTAINED rally.

 

    As we noted in the Columns last month, the average recession lasts between 10 and 16 months.  Our current recession began in December of 2007 which puts us 12 months in.  Given the past data, it would not be surprising that the market is putting in lows near our current levels.   The S&P 500 recently closed over its 21 day moving average for the first time since October’s rally attempt.  The 21 day average is used by many traders as the first hurdle on the road to recovery.  A sterner second test waits at the 50 day moving average.  The 50 day average is currently around 1% above our current levels.  The market seems to be (finally) done with testing the October lows.  This successful (so far) test of those levels could provide the launching pad for a rally that perhaps could last well into the first quarter of 2009.  At that point, we will reevaluate and reallocate our holdings for the road ahead.

 

            There is an old Wall Street classic called One Way Pockets.  It was written by a Wall Street insider back in 1917.  Many things have not changed in the intervening 91 years.  One key takeaway is how often the public gets their timing and sentiment wrong.  “John Q. Public” often wants to be a trader at the bottom of the market cycle but an investor at the peak of the cycle. That’s incorrect.  Six months ago, oil was $140 a barrel and pundits were calling for $300 a barrel in the near future.  Fast forward to the present and oil is $40 a barrel and $25 a barrel is not out of the question.  The time to be cautious and nimble was six months ago not now.  The same applies to stocks.  One can buy the cream of the crop for a PE ratio of roughly 10 or 11.  It has been my experience that these types of valuations can lead to a successful multi-year buy and hold strategy simply because the prices are so attractive and it will take time for the market to potentially unlock the future values.  The best buy or sell decisions are often the most uncomfortable.     

 by Hal Eddins, Managing Director, Cpaital Investment Council

 

            With valuations on most asset classes dropping, it’s nice to see that some “businesses” are doing better than ever.  The “business” I’m talking about is NCAA football.  With their record, it’s difficult to believe that Notre Dame is the most valuable football franchise in the NCAA.  2008 has been a horrible year for the Fighting Irish, but replacing Coach Charlie Weis would cost roughly $17.5 million in buy-out dollars.  One positive for Notre Dame is that the football operation, currently worth $100 million, is run by the University itself.  This means that more of the TV money and gate receipts go to helping out the average student at ND.  The

University

of

Texas

sits in the number two slot with a value of $90 million.  UT is located in

Austin

and the local county sees a revenue boost in excess of $9 million for each game.  Additionally, UT is the most profitable NCAA team: they earn a net profit of 50%-I guess all those years at UNC-Chapel Hill rubbed off on Mack Brown.  Unfortunately, all that money couldn’t buy them a chance at the National Championship.  As

Oklahoma

and

Florida

square off in early January, we can all be glad that

Ohio

State

isn’t involved this year!

Are You still Practicing Patience?

2008 is just one (bad) year in stock market history.

Before it ends, you can still make moves to improve financially.

A time for perseverance. This is the type of financial climate that separates disciplined investors from impatient ones. Barring an amazing Santa Claus rally, 2008 will end up as the worst year for stocks in about 35 years. That’s what you have to remember: we’ve witnessed a once-in-35-years kind of year.

Chances are, 2008 will represent a severe abnormality in stock market history. The story of the stock market is the story of a long rise interrupted by inevitable downturns. Is the current downturn historic? By some measures, yes.

During 2008,

• Powerful Wall Street giants and thrifts failed or merged
• GM, Chrysler, and Ford faced possible insolvency
• Fannie Mae, Freddie Mac and AIG all had to be rescued
• Oil prices topped $145 per barrel
• Yields on Treasuries reached all-time lows
• The Dow traded in 500-1,000 point ranges on some market days

Not a normal year. It might even stand as a once- or twice-in-a-century year in the annals of U.S. economic history.

We all have to be patient for a while longer. We stand at an interesting time right now: we could be waiting for another shoe to drop, or we could be slowly returning to some normalcy over the next 12 months.

The panic atmosphere of fall seems to be gone. The market is again responding to traditional indicators instead of outright fears. This year, the Dow sank to a low of 7,449.38.¹ We are in the mid-8,000s at present, and hopefully that 7,449.38 represents a trough.

A new administration brings new optimism, and even with the ups and downs of this year and the sorry state of the real estate sector, a bullish, opportunistic mindset is alive and well on Wall Street. This is, in the eyes of many, an ideal time to buy stocks and get in position for the next bull run.

The National Bureau of Economic Research’s recent announcement of a recession gives us hope that we could be halfway (or who knows, even more than halfway) through the worst of it. Most post-WWII recessions have lasted 18 months or less.² In other words, don’t expect this downturn to last forever.

Don’t invest by the headlines. The nightly news seems to only focus on the stock market when it is either ferociously healthy or in crisis. “Business as usual” doesn’t merit much coverage. But much wealth has been built in this country through slow and steady investing across calm markets.

Look beyond momentary declarations and keep your eye on your long-range financial objectives, not the latest headline. If you base your investment strategy on headlines, tips, the pulse of day trading, and stock picking, there is a very good chance you will end up confused, frustrated, and far away from the solid long-term strategy you started with. In your impatience, you may miss the best market days to come.

Consider how stocks rebounded from the last bear market earlier in this decade. On June 30, 2003 the DJIA closed at 8985.44, the NASDAQ at 1,622.80, and the S&P 500 974.50. Four years later, a bull run had taken those indices 27-43% higher.³ This ground was lost, but it could be gained again when this recession ends.

You can’t stop investing. Or rather, you shouldn’t. Mathematically speaking, you aren’t going to retire on the money you save today for retirement; you’re going to retire on the interest and compounding earned over time on the money you’re saving. Time and continuing investment contributions promote growth; withdrawals and inactivity do not.

Now, some year-end ideas for improvement … in your financial situation, that is.

Harvest capital losses. December is a good time to sell loser investments. You might consider practicing a little tax loss harvesting and getting rid of stocks or mutual funds that are underwater. The capital losses can be used to offset capital gains and to effectively lower your tax bracket; any such losses over $3,000 can be carried over to next year.

Put idle cash to work. Do you have tens of thousands of dollars earning 1% or less annually in your checking or savings account? Could it get a better return in a short-term CD or a Treasury? Yes, yields are low, but probably still higher than what your savings or checking account offers you.

Have you fully funded your traditional IRA, 401(k) or 403(b) plan? Why not see to that before 2008 ends? That can help you to lower your current taxable income and put more money toward your retirement savings.

You could make a charitable gift. Check with your tax advisor to see if it makes sense for you. You could get an immediate tax break for your contribution, and if you gift stocks or other appreciated assets, you’ll avoid having to pay the capital gains tax you would if you just sold the asset. In addition, you are removing that asset from your taxable estate.

How about paying your January mortgage payment this month? If you are in a position to do it, you might want to talk to your tax advisor and consider it, because it can give you a bigger deduction on your mortgage for your 2008 taxes.

Have you used 100% of the money you set aside in your FSA? If you have a flexible spending account at work, you might as well. That is use-it-or-lose-it money. Spend it on qualified medical expenses or medications if you can.

Do the little things, keep the right attitude. Talk to your tax and financial advisor and prepare for 2009 in a financially savvy way. Remember that you are investing for tomorrow, not this moment, and that time is on your side.

 

Citations.

¹ money.cnn.com/data/markets/dow/                [12/15/08]

² cnbc.com/id/20510977       [9/4/07]

³ money.cnn.com/quote/historical/historical.html?pg=hi&close_date=7%2F1%2F03&mode=add&symb=DJIA               [12/15/08]

³ money.cnn.com/quote/historical/historical.html?pg=hi&close_date=6%2F30%2F03&mode=add&symb=COMP           [12/15/08]

³ money.cnn.com/quote/historical/historical.html?pg=hi&close_date=6%2F30%2F03&mode=add&symb=SPX              [12/15/08]

⁴ smartmoney.com/personal-finance/taxes/a-down-stock-market-offers-tasty-tax-breaks/                       [10/29/08]

 

Dollar Cost Averaging In A Down Market

This investment technique may help you take advantage of the downturn.

 

The central idea: buy low, and sell high. It’s the oldest stock market adage, and in the wake of the recent selloff, dollar cost averaging may give you a method to capture lower prices today and come out ahead tomorrow.

How it works. Dollar cost averaging is a long-term investment strategy. It means investing in small increments. Through scheduled investments of as little as $50 or $100 per month, you buy investment shares over time, as opposed to pouring a big lump sum into the market. The method is often recommended to younger investors with longer time horizons, and investors who don’t yet have great wealth.

 

Why it is worthwhile in a bear market. First of all, when the market drops, the investor practicing dollar cost averaging isn’t hurt as much as the lump sum investor – as the lump sum investor holds many more shares of the declining fund or stock.

 

Second, a stock market downturn produces a kind of “clearance sale” environment. Picture Wall Street as a department store, with signs everywhere announcing 20% or 30% off. You have a chance to buy into some top-quality companies “on sale”. As a consequence of dollar cost averaging, you can now buy in at a lower price – and buy more shares for your money.

 

So what happens when the market recovers? As the market rebounds, you can pat yourself on the back. You were able to buy big at the bottom of the market, and as the market rises, you will have a lower cost basis and you can enjoy the associated gains. All the while, you continue contributing to a winning fund or stock. (Of course, the fact is that a lump sum investor may profit even more from a market rebound, as he or she may hold comparatively more shares than you.)   

 

Perhaps most importantly, you stay invested. Dollar cost averaging gives you a regular, passive investment strategy as opposed to market timing. In a volatile market, the active investor can quickly become a frustrated casualty of his or her impulses – and foolishly “abandon ship”.

 

You might call this a tortoise-and-the-hare analogy. The active investor sprinting all over the place for spectacular gains is the hare; you, through dollar cost averaging, emulate the tortoise. It may not be the “sexiest” way to invest, but in a down market, it is a long-term approach well worth considering.

 

Learn more. We have witnessed a huge downturn in stocks. The question is … how are you positioning yourself to take advantage of the markets when things rebound? This is a good time to meet with a financial advisor – to review or rebalance your portfolio, to look past the headlines of the moment and toward your long-term objectives. If you’re not currently practicing dollar cost averaging, you may want to talk about the concept with your advisor.

 

Capital Adviser's September 2008 Market Commentary

This month our trusty money manager pontificates on the greed of Lehman Brothers, Merrill Lynch, and AIG.

Download september_20081.pdf

Hedge Funds Causing Volatility!?

Doug Kass at the Street.com posted an interesting piece today about the highly leverage hedge funds are unwinding their positions regardless are the fair value of their positions. Maybe the bigger fool in this market are the highly leveraged hedge fund operators and the money center banks that lent to them using mortgage backed obligations as collateral.