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Tuesday, December 16, 2014

Weekly Update 12 13 14

Word for the week is conformity.

"Conformity is the jailer of freedom and the enemy of growth."
 John F. Kennedy

"If you are always trying to be normal, you will never know how amazing you can be."
 Maya Angelou

"The conventional view serves to protect us from the painful job of thinking."
 John Kenneth Galbraith

"Be neither a conformist or a rebel, for they are really the same thing. Find your own path, and stay on it"
 Paul Vixie

"The Stock Market is designed to transfer money from the Active to the Patient."
"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well." Warren Buffett

Some people have the idea I am down on stocks particularly the S and P 500 Index.
I am not down on stocks, but neither can I understand the rush of people to buy what is hot and at a peak.
Alan Greenspan once termed this, "irrational exuberance".
Listening to the media you would think stocks are rising and reaching new heights daily. However, if you look at the broad New York Stock Exchange Composite, you would see stocks basically peaked in April of this year and have not advanced significantly over the past six months.

In fact the NYSE Composite Index is down 2% from six months ago. 



Those who advocate a passive index approach simply don't delve deeply enough into the advantage of seeking value and reducing draw downs.
Those who pile into one area of investing also have not understood the benefit of diversified non-correlated streams of return and risk.

Jumping into the stock market during the Tech Bubble of the late 1990's would leave you far below a well-diversified investment strategy that was regularly rebalanced.



If you like stocks and are willing to live with the risk of one asset class, 
Ari Polychronopoulos of Research Affiliates has written an excellent research 
paper analyzing the use of three different strategies in stock investing.

http://www.researchaffiliates.com/Production%20content%20library/
Building%20A%20Better%20Beta.pdf





Paying attention to value, a diversity of strategies and managing techniques that rebalance portfolios could be very beneficial in helping gain long term outperformance.
Especially valuable is a strategy to reduce extreme periodic draw downs in your investment portfolio. 


It takes a 100% gain to recover from a 50% loss!

Remember past returns are no guarantee of future performance and all investments may lose value.

At Marrs Wealth Management we focus upon investment allocation and wide diversification across seven asset classes and a broad divergence of investment strategies focused upon risk management.


The S and P 500 index trended down last week. -3.52%
The Dow Jones World Index trended down last week -3.61%
The 10 year Treasury Yield index trended up last week.
+8.84%
The US Dollar index trended down last week -1.15%
The CRB Commodities index trended down last week. -3.40%
The Gold Index trended up last week +2.51%
Inflation Linked Bonds trended down last week -1.46%
US Aggregate Bond Index trended up last week +.74%
The International Aggregate Bond Index trended up last week +1.59%

The NCREIF Index is aggregated and reported quarterly and is a total return broad representation including rents and appraisal of non-traded Commercial Real Estate.

2014 1st qtr + 2.74%

2014 2nd qtr + 2.91%

2014 3rd qtr + 2.63%

Stocks lead along with Real Estate.
The ten year treasury yield is down 30.5% year to date.


The above is for informational purposes only and not an offer or recommendation to buy or sell. Past performance is no guarantee of future return. Decisions on making any investment should be made only subsequent to a thorough professional analysis of the overall individual financial picture and the goal for the investments.

Please forward this on to anyone who you think may be interested.
 




Monday, December 8, 2014

Weekly Update 12 6 2014

Word for the week is prudence.


"Prudence is the footprint of Wisdom." Amos Bronson Alcott

"Life has no blessing like a prudent friend." Euripides

"Nothing is more dangerous than a friend without discretion; even a prudent enemy is preferable." Jean de La Fontaine

"Few things are brought to a successful issue by impetuous desire, but most by calm and prudent forethought." Thucydides

"The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs."  Warren Buffett

Every time I think of the word prudent I think of Dana Carvey on old Saturday Night Live skits imitating George Bush. "Not going to do it, wouldn't be prudent." 
  






I have written many times before about the standard of being a Fiduciary to our clients as a Principal of a fee only Registered Investment Advisory Firm.
The standard of care is more stringent than that of an investment professional attached to a broker dealer.

Instead of simply making a recommendation of a suitable product, which may not be the best.
Our standard of care at Marrs Wealth Management falls in line with the Uniform Prudent Investor standard of care.

  • We make sure that the objective is defined for the investments.
  • We determine the best investment portfolio that reflects the part each individual investment plays in optimizing the overall risk and return overall.
  • We monitor and assess continuously the overall portfolio and each individual investment making up the portfolio.
  • We investigate the current strategies and any changes in strategies as they appear.
  • We determine whether investments should be added or removed as new opportunities appear or situations change.
  • We pay close attention to diversification effect in the role of protecting our investment clients from excess declines that could have prudently been avoided.
  • We have a standard of loyalty to do what is the best in caring for our investor clients.
  • We adhere to a standard of being impartial as to the care given to each of our clients.


We are in very unusual times.

The percent of issues above their 200 day moving average has reached the longest period of any time in our history. In contrast liquidity of cash reserves in banks is at a new low. The precarious nature of assets being very much at abnormal levels should lead investors to a greater level of prudence.

Worth repeating.

"The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs."  Warren Buffett



In looking at the level of the US stock market related to historical returns, it is hard to imagine a better time to reduce exposure and take profits at the end of this year.



After rapid decline in October, and immediate bounce back, technical indicators increasingly look like the S and P 500 US stock index is reaching a place of exhaustion and a possible pinnacle point. I wouldn't be surprised to see another significant and rapid decline. Though the market based on sentiment and momentum can reach new heights from here. 






The S and P 500 index trended up last week. +.38%
The Dow Jones World Index trended down last week -.23%
The 10 year Treasury Yield index trended up last week.
+2.11%
The US Dollar index trended up last week +1.07%
The CRB Commodities index trended down last week. -.60%
The Gold Index trended up last week +2.11%
Inflation Linked Bonds trended down last week -2.99%
US Aggregate Bond Index trended down  last week -.57%
The International Aggregate Bond Index trended down  last week -1.31%

The NCREIF Index is aggregated and reported quarterly and is a total return broad representation including rents and appraisal of non-traded Commercial Real Estate.

2014 1st qtr + 2.74%

2014 2nd qtr + 2.91%

2014 3rd qtr + 2.63%

Stocks lead along with Real Estate. 





It pays to stay diversified and not chase prior winners!



Many investors take the wrong approach looking primarily at recent return.



Overall risk measures and managing downside risk play an increasing role in end results.



Investors instead should be focused on managing Dynamic Beta exposure, evaluation of Active Share, Sharpe ratios, Treynor ratios, Sortino ratios and Alpha.



The above is for informational purposes only and not an offer or recommendation to buy or sell. Past performance is no guarantee of future return. Decisions on making any investment should be made only subsequent to a thorough professional analysis of the overall individual financial picture and the goal for the investments.



Please forward this on to anyone who you think may be interested. 



The above is for informational purposes only and not an offer or recommendation to buy or sell. Past performance is no guarantee of future return. All decisions about investments should be made within parameters of risk, time frame, financial position and overall asset allocation.





Tuesday, December 2, 2014

Weekly Update 11 29 2014

Word for the week is thankfulness.


"Gratitude unlocks the fullness of life. It turns what we have into enough, and more. It turns denial into acceptance, chaos to order, confusion to clarity. It can turn a meal into a feast, a house into a home, a stranger into a friend." Melody Beattie

"At times our own light goes out and is rekindled by a spark from another person. Each of us has cause to think with deep gratitude of those who have lighted the flame within us." Albert Schweitzer

"Gratitude bestows reverence, allowing us to encounter everyday epiphanies, those transcendent moments of awe that change forever how we experience life and the world." John Milton

"Gratitude is not only the greatest of virtues, but the parent of all the others." Marcus Tullius Cicero

"I would maintain that thanks are the highest form of thought, and that gratitude is happiness doubled by wonder." Gilbert K. Chesterton


Thankful for a few days with family. 
There is more to life than work, earning and investing.
Invest in one another, in your children; in making a difference.
Thankful for life and freedom.
Grateful for all of you who put your trust and confidence with Marrs Wealth Management.



Strongest performers this week; bonds.


The S and P 500 index trended up last week. +.20%
The Dow Jones World Index trended up last week +.09%
The 10 year Treasury Yield index trended down last week.
-5.23%
The US Dollar index was flat.
The CRB Commodities index trended down last week. -5.47%
The Gold Index trended down last week -2.97%
Inflation Linked Bonds trended up last week +1.29%
US Aggregate Bond Index trended up last week +.50%
The International Aggregate Bond Index trended up last week +.81%

The NCREIF Index is aggregated and reported quarterly and is a total return broad representation including rents and appraisal of non-traded Commercial Real Estate.

2014 1st qtr + 2.74%

2014 2nd qtr + 2.91%

2014 3rd qtr + 2.63%

Stocks lead along with Real Estate. 




It pays to stay diversified and not chase prior winners!

Many investors take the wrong approach looking primarily at recent return.

Overall risk measures and managing downside risk play an increasing role in end results.

Investors instead should be focused on managing Dynamic Beta exposure, evaluation of Active Share, Sharpe ratios, Treynor ratios, Sortino ratios and Alpha.

The above is for informational purposes only and not an offer or recommendation to buy or sell. Past performance is no guarantee of future return. Decisions on making any investment should be made only subsequent to a thorough professional analysis of the overall individual financial picture and the goal for the investments.

Please forward this on to anyone who you think may be interested.
 



The above is for informational purposes only and not an offer or recommendation to buy or sell. Past performance is no guarantee of future return. All decisions about investments should be made within parameters of risk, time frame, financial position and overall asset allocation.

Monday, November 24, 2014

Weekly update 11 22 14

Word for the week is perspective.


"Shadow is the obstruction of light. Shadows appear to me to be of supreme importance in perspective, because, without them opaque and solid bodies will be ill defined; that which is contained within their outlines and their boundaries themselves will be ill-understood unless they are shown against a background of a different tone from themselves."

"Faith gives you an inner strength and a sense of balance and perspective in life." Gregory Peck

It's stunning to me what kind of an impact even one person can have if they have the right passion, perspective and are able to align the interest of a great team.
"A lot of people in our industry haven't had very diverse experiences. So they don't have enough dots to connect, and they end up with very linear solutions without a broad perspective on the problem. The broader one's understanding of the human experience, the better design we will have."


Craig and I were asked to teach an advanced class in Finance at Iowa State University this past week on Risk and Investment Portfolio Allocation.
It was a lot of fun talking with students at Iowa State University.

I asked them between seven investment asset classes which ones were the top performing (in the top three positions of performance over the last twenty years?
Of course I wasn't surprised, nearly everyone said US Stocks. 
This is their experience, they didn't really have a focus on investments in the last twenty years. They were barely walking twenty years ago!
Their perspective on investments is the last three or four years and the US stock market has been an overwhelming leader.

The answer is Real Estate has been the leader, followed by Commodities, Non-US Stocks, and fourth is US Stocks, followed by Non-US Bonds, US Bonds and cash.

Quite a few people are losing the long term perspective. One person this week just absolutely claimed that he has a better track record on his own than working with us.

His reference point was the last two years. Almost everything was in US stocks.
We readily admit we are not trying to keep up with one single asset class and over the last two years have not outpaced the S and P 500 Index return.
The last ten years given our benchmark we have beaten the S & P 500 Index in reducing risk and increasing overall risk adjusted return.

*Disclosure below is a representative picture of our return benchmark. Actual client returns may be different and vary based on risk tolerance, time frame and overall financial position. 
 




*Above chart shows average return and risk as measured by three standard deviations of return over the last ten years ending June 2014.

Past performance is no guarantee of future return and any investments may lose value.
Many investors are losing that perspective and some believe this run up in stocks can continue forever.
We believe it has been prudent to take profits during the last two periods and reduce exposure to stocks.

I need to remind you that a return of one year of positive 40% and another of negative 40% does not leave you at even money. You still have a long ways to go in order to recoup your principal.
Moving averages don't always tell a clear picture. 



The last two periods of unrelenting upward movement in the  S and P 500 index ended badly for many folks. Yet here we are with people believing no downside risk is evident in the stock market.

I also asked the students if they knew what had the highest return over the last 15 years. They answered unanimously stocks.
Many people I know answer the same way.
But the Barclays Capital Bond Index has far surpassed the return of the S and P 500 over the last 15 years. Gold is out of favor now but it also far outpaced the S and P 500 Index.
I don't know the future, but I know enough to not throw all the eggs in one basket. 


Then I asked the students about the Nasdaq 100 Index where quite a few technology companies reside. Yes the technology sector is one of the hot investment areas.

 

Do you know what return you would have holding the Nasdaq Index represented by the Exchange Traded Fund QQQ? 


Assets that get bid up very high, because it is rationalized as a sure thing, often take a great amount of time to recover!
It happened with the Tech Bubble, the Real Estate Bubble and the Credit Bubble.

 

Jeremy Grantham wrote in September of 2007 in Fortune magazine of three certainties.
1.  Profit margins would greatly contract, 2. The housing market would collapse 3. Risk premiums would widely expand with severe consequences to the financial markets.

Grantham and many others are sending out similar warnings about the US market now. Grantham's firm GMO Capital is estimating US stock returns from this point on through the next 7 years at a negative 1.7% annualized.



The article referenced by the above link titled "HOW DOES OUR GLOBAL CREDIT EXPANSIONARY BUBBLE END?
Summarizes the thoughts as follows:

"Summary
  • We are nearing the end of the global expansionary bubble.
  • Major currency devaluations (wars) already underway are primary indicators.
  • Investors should prepare for rising volatility and rising interest rates worldwide."
In this piece they quote the founder of Austrian Economics.

 "It was Ludwig von Mises (1881-1973), the founder of Austrian Economics, that we believe gave us a perspective for what lies ahead. Von Mises famously predicted many decades ago:
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later, as the final and total collapse of the currency itself." 

Also quoted is the great mentor of Warren Buffett.  

"Global investors should be taking action to prepare for the end of the secular credit expansionary bubble. We have been experiencing major asset "busts" and financial crises virtually every 6-7 years since 1973. Now, six years post the Great Crisis of 2008-9, we are in the late innings of yet another major cycle.
We suggest taking to heart legendary investor Benjamin Graham's time-honored advice:
There are two requirements for success in Wall Street. One, you have to think correctly; and secondly, you have to think independently."

Diversification has not paid off in the last two years, much of that may change in the not very distant future!

 

This week energy and materials sectors outperformed. Also gold and commodities were showing strength. This could begin a rotation of leadership within markets?






The S and P 500 index trended up last week. +1.16%
The Dow Jones World Index trended up last week +.94%
The 10 year Treasury Yield index trended down last week.
-.22%
The US Dollar index trended up last week. +.89%
The CRB Commodities index trended up last week. +.87%
The Gold Index trended up last week +.59%
Inflation Linked Bonds trended down last week -1.19%
US Aggregate Bond Index trended up last week +.10%
The International Aggregate Bond Index trended up last week +.82%

The NCREIF Index is aggregated and reported quarterly and is a total return broad representation including rents and appraisal of non-traded Commercial Real Estate.

2014 1st qtr + 2.74%

2014 2nd qtr + 2.91%

2014 3rd qtr + 2.63%

Stocks lead along with Real Estate. 
 


It pays to stay diversified and not chase prior winners!

Many investors take the wrong approach looking primarily at recent return.

Overall risk measures and managing downside risk play an increasing role in end results.

Investors instead should be focused on managing Dynamic Beta exposure, evaluation of Active Share, Sharpe ratios, Treynor ratios, Sortino ratios and Alpha.

The above is for informational purposes only and not an offer or recommendation to buy or sell. Past performance is no guarantee of future return. Decisions on making any investment should be made only subsequent to a thorough professional analysis of the overall individual financial picture and the goal for the investments.

Please forward this on to anyone who you think may be interested.
 




The above is for informational purposes only and not an offer or recommendation to buy or sell. Past performance is no guarantee of future return. All decisions about investments should be made within parameters of risk, time frame, financial position and overall asset allocation.


  

Monday, November 17, 2014

Weekly Update 11 15 2014

Word for the week is productivity.

"The number one benefit of information technology is that it empowers people to do what they want to do. It lets people be creative. It lets people be productive. It lets people learn things they didn't think they could learn before, and so in a sense it is all about potential." Steve Ballmer

"The bottom line is, when people are crystal clear about the most important priorities of the organization and team they work with and prioritized their work around those top priorities, not only are they many times more productive, they discover they have the time they need to have a whole life." Stephen Covey

"The more generous we are, the more joyous we become. The more cooperative we are, the more valuable we become. The more enthusiastic we are, the more productive we become. The more serving we are, the more prosperous we become." William Arthur Ward

"So that the record of history is absolutely crystal clear. That there is no alternative way, so far discovered, of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system." Milton Friedman

Marrs Wealth Management appeared again this past month in the Wealth Management monthly Advisor Confidence Index.

 


I am on the monthly Advisor Panel that fills out a survey on the markets and economy each month for Wealth Management Magazine publications.
Last month I stated, "markets may move sideways with a lot of volatility over the next several months."
That was after a mini crash in October.
This month my comment was "Look out below"! It is a long way down from these lofty heights".
Yes I do believe the heights of the US stock market are in for a correction.
Why?
The long range forecast of three sources tell us historically a correction is well over due.
The Shiller PE is forecasting 10 year future returns on US Equities at below 2% annually, the GMO 7 year forecast for US Large Cap Stocks is at a negative 1.5% annually and Research Affiliates forecasts ten year returns in stocks at around 2.5% annually.

This makes very clear sense when you look at historical long term returns of the S and P 500 index at somewhere between 6.5% and 7.5% annualized.

It is very clear that 1995 to 2010 was not the norm, market returns were inflated by Central Bank policy making and speculation. We could say the same of (2003 to 2007) and (2009 to 2014).

These periods are not the norm they are outlier periods fed by artificially low interest rates and speculative investing based on margin debt.
That is unless this time is different?

"The four most dangerous words in investing are: 'this time it's different.'" Sir John Templeton

US Stocks may continue the steep climb into early next year but it will only be fluff on top and an eventually deeper drop or a longer term string of mediocre return years.
We are remaining widely diversified and underweight equities.



In a recent interview with Jim Grant, Steve Forbes asked some very important questions?

Forbes: Tell us, what is going on? We've had the worst recovery from a sharp downturn in U.S. history. Yet the monetary base has exploded far in excess of what it did in the '70s and yet we haven't had an explosion, at least in the Consumer Price Index. Gold is down from its highs of three years ago. Stocks are at a record high. What you call the taper tantrum, now the markets are in seeming calm about that. So what in the world is happening?

Grant: Well, I think first and foremost the patient is overmedicated. That is, the economic patient. Stimulus, by the bottleful, by the prescription fill, gradually and by degree are (and I guess not so gradually) the Federal Reserve has moved to substitute price administration for price discovery. And it seems to me that the Fed's kind of full-court pressed (to switch metaphors) on financial markets and pricing thereof has induced a deep complacency with respect to financial assets and has also introduced a sharp degree of optimism or what we might call even inflation in the financial markets.

Forbes: Stocks. How much of that is a distortion? People would say some sectors are kind of dicey. But PEs overall, not too out of line.

Grant: Yes. There is such a thing in analysis called the dividend discount model. And it says that the value of an equity is the value of its projected cash flows discounted by a suitable rate of interest. And there's more to it than that, of course.
But if the rate of interest one uses to discount cash flows is itself unsuitable or if it's suppressed, that means the cash flows are exaggerated or inflated. And the price is higher than it would otherwise be. And I think that's the risk in the stock market generally. I understand that many areas of the stock market are not certainly in the neighborhood of valuation where they were in 1999. But that doesn't mean that things are fairly valued. And also I think more broadly, more fundamentally, we are all doing business in a kind of valuation hall of mirrors on account of the suppression of interest rates and the general body English that our federal masters are giving the stock market. They want it higher for the so-called wealth effect. Wealth effect, mind you.





In a recent Seeking Alpha post the following chart shows that we are just below the high in 2000 and above the peak in 2007 looking at Market Capitalization related to overall GDP. 



Also corporate profits as a percentage of GDP are very elevated.
Notice the major peak in 1966 was the end of the Federal Reserve's first experiment in Quantitative Easing!
Then came nearly 20 years of sideways markets.




Dave Stockman writes in a blog on Seeking Alpha, "Well, now. Here we are nearing the end of 2014 and the nation's once and mighty "jobs machine" is fixing to utilize no more labor hours this year than it did way back at the end of the 20th century."
"And, no, that completely unsung fact does not reflect some anomalous quirk owing to the Great Recession. We are now 64 months from the June 2009 bottom and the index of total labor hours in the non-farm business economy stands at about 108--the same level first recorded in Q3 1999. This means that during the 21st century to date the US economy has been bicycling up-and-down an essentially constant amount of labor during the intervals between the serial financial market booms and busts engineered by our monetary politburo."


Production of goods is still well below the pace of 2000. Lower lows and lower highs!



Unemployment numbers continue to improve, but job creation lags. Lower lows and lower highs!










 The S and P 500 index trended up last week. +.39%
The Dow Jones World Index trended up last week +.54%
The 10 year Treasury Yield index trended up last week.
+.35%
The US Dollar index trended down last week. -.05%
The CRB Commodities index trended down last week. - 1.43%
The Gold Index trended up last week +.59%
Inflation Linked Bonds trended up last week +.63%
US Aggregate Bond Index trended down last week -.10%
The International Aggregate Bond Index trended down last week - .34%

The NCREIF Index is aggregated and reported quarterly and is a total return broad representation including rents and appraisal of non-traded Commercial Real Estate.

2014 1st qtr + 2.74%

2014 2nd qtr + 2.91%

2014 3rd qtr + 2.63%

Stocks lead along with Real Estate. 



Another Cautionary Sign

U.S. Sector Returns Year to Date
Defensive Sectors (Healthcare, Utilities, Consumer Staples) and Technology Lead




It pays to stay diversified and not chase prior winners!

Many investors take the wrong approach looking primarily at recent return.

Overall risk measures and managing downside risk play an increasing role in end results.

Investors instead should be focused on managing Dynamic Beta exposure, evaluation of Active Share, Sharpe ratios, Treynor ratios, Sortino ratios and Alpha.

The above is for informational purposes only and not an offer or recommendation to buy or sell. Past performance is no guarantee of future return. Decisions on making any investment should be made only subsequent to a thorough professional analysis of the overall individual financial picture and the goal for the investments.

Please forward this on to anyone who you think may be interested.
 


The above is for informational purposes only and not an offer or recommendation to buy or sell. Past performance is no guarantee of future return. All decisions about investments should be made within parameters of risk, time frame, financial position and overall asset allocation.