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Posted by in News

July 21, 2019
By J. André Weisbrod  

Summary:

Ø  At 8 years, this is the second longest Bull Market in modern history.

Ø  Since the major market peak in March of 2000 (over 17 years), the S&P 500 has only returned 5% per year.

Ø  Buying the S&P 500 today is like spending $39,000 on a car with a normal sticker price of $25,000.

Ø  Like him or not, the “Trump Effect” on stocks is a recognition that some of the things he intends to do are actually good for  business and the economy.

Ø  Low interest rates have actually increased portfolio risk.

Ø  Systemic risks need to be addressed before a disaster is triggered.

Ø  Companies and real property ARE the economy, the backbone of our practical living.

Ø  We are seeking knowledge, wisdom and alliances that will serve you better.

Remembering the title of a funny movie… Yes, “It’s a Mad, Mad World.”  Whether it is volatile markets, geopolitical unrest, terrorism, road rage or discouraging partisan politics, there is much that can create doubt and concern, and even fear.  At times it appears the whole world has gone mad.

We are constantly researching and reviewing, seeking insight and wisdom.  Frankly, clarity is too often lacking and human behavior baffling.  Here are some bullet point thoughts to help you understand our thinking and, as always, please call with any questions or concerns.

·         We are eight years into a bull market that has had few significant downward drops.  And almost daily the headlines tell us that the markets have hit new all-time highs.

·         A Bull Market is defined as one that is not interrupted by a drop of 20% or more.  And this one has had only four corrections (drops of 10% or more).

·         It is the second longest in modern history.  Only the 1991-2000 bull was longer.

·         This Bull is a bit below average on a total return basis.  If you were 100% invested in the S&P 500 at the 2009 market bottom, and you had no expenses, your annualized total return would be about 13.8% per year compared to almost 19% for the average bull.  But few people were 100% invested in stocks then or since.  Therefore actual returns for most portfolios have been a good bit less.  

·         An interesting note:  If you had invested in the S&P 500 (and assuming unrealistically that you had no expenses) at the market peak in October 2007, your total return with dividends reinvested would be 7% annualized. And if you had invested at the peak in March of 2000 your total return would be only 5% per year.  Considering this, along with historically low interest rates, it is no wonder many people have been disappointed in their long term portfolio performance.

·         For financial planning, managing expectations going forward is extremely important.  If we are near a market peak, then it may be wise to assume no more than a 5%-7% return for large company stocks going forward.  And with bonds and CDs only making 1-3%, a balanced portfolio might not be expected to make more than 4%-6% annually.  Small companies and International stocks might or might not do better.  In today’s world the uncertainties are legion.

·         Today the relative values of the majority of stocks are much higher than average.   For the S&P 500 the average long term PE (Price/Earnings) ratio is between 14.5 and 17, depending on how you frame your time periods.  The current estimated PE ratio is over 25.5. That is extremely high for this late in a bull market.  This means investors are paying more for their stocks.  Think of it this way:  It’s like paying $39,000 for a new automobile that normally would have a sticker price of $25,000.

·         The below average returns can be compared to the more modest recovery of the entire economy, which has grown only a bit more than an average of 2% per year.  We have gone over 10 years (a record) without 3% GDP growth.   

·         The higher the stock market goes without increased economic growth, the riskier it gets.  Especially if company earnings don’t grow fast enough to keep the PE ratios lower.

·         One of the primary reasons stocks keep rising is because interest rates continue to be so low that there is little chance of getting a real after-tax return above inflation. 

·         There is also the “Trump effect.”  Whether you like him or not there are some things he said he would do that are positive for many companies and sectors.  Lowering corporate taxes and simplifying personal income taxes (hopefully emphasizing relief for the burdened middle class and not the extremely wealthy – I don’t care whether you are Democrat, Republican or Druid, you can’t like the current personal income tax system).  Reducing the ridiculous and strangling amount of counter-productive rules and regulations burdening small businesses.  Freezing and/or lowering wasteful government spending.  We can argue about details, but in principal these are all good for the health of our economy.  And investors have recognized this.  I may go into this in detail in another article.

·         Over the years most of our client’s objectives and risk tolerance require a more “balanced” approach to investing, which includes bonds and cash.  In a low interest rate environment this ensures a lower return while reducing volatility and risk.

·         Low interest rates have actually increased portfolio risk.  If inflation increases and interest rates go up two percentage points, 10-15 year bonds could lose 20% of their value.  That is stock market kind of risk.

·         Which brings me to the tremendous systemic risk present in our national addiction to debt.  Most news stories put the national federal debt at around $20 trillion.  Our total GDP (Gross Domestic Product is estimated at just over $18.5 trillion.  Using those numbers, the debt is just under 1.1 times income.   In personal terms, that is like a family with $100,000 annual income having total debt of $110,000.  Very manageable.  In fact such an income can reasonably support $300,000 to $400,000 of long and short term debt, including a home mortgage.  But wait a minute.  The $20 trillion amount does not include unfunded liabilities such as Social Security and federal pensions.  Add all liabilities and the total national debt is over $120 trillion!  That is like having almost $600,000 of debt supported by $100,000 of income.  And as inflation and interest rates rise the risk increases.  (Note that I haven’t even mentioned the burgeoning debt at the state and local levels.  Our governments have been irresponsible and we have failed to hold them accountable.  Continued failure will bring about a painful crisis.  I think of the Biblical wisdom of Deuteronomy 28:12 that exhorted Israel to “… lend to many nations, but you will not borrow…”  And Proverbs 22:7 that observes, “… the borrower is the slave of the lender.”)

·         In my opinion a 4% GDP growth rate coupled with aggressive spending controls would be necessary to reduce the systemic debt risk as well as support higher stock prices. 

·         Given the trend toward higher interest rates, we have reduced bond and CD maturities to an average around 1.5 to 2.5 years in most portfolios.  (We were actually a couple years early as the Federal Reserve has kept rates artificially low longer than anticipated)  While this is less risky, it means accepting lower interest rates and less income for a season.

·         As risks increased over the last few years we also have grown more conservative with the stock markets, and therefore our returns in most portfolios have been less than they could have been.  Hindsight is a tyrant.

·         However, we have participated in the increase and have generally achieved returns above inflation, which is the real goal.

·         A recent headline proclaimed that 86% of traditional portfolio managers failed to meet or beat indexes.  That and other articles noted that many experts recommend just putting your money into index funds, which have fewer expenses.  The last time I remember such rhetoric was in 1999 just before the Dot Com frenzy ended and the NASDAQ lost almost 80% of its value in 30 months!  The S&P 500 lost 49%.  (Note that in 2008-09 the S&P 500 lost 56.4% in just over one year with over half the losses happening in just four months.)

·         But please understand:  We believe in ownership of good companies and property for the long haul.  If companies don’t survive, your bank accounts and bonds will be worthless.  Treasury bills and bonds will be funny money.  We could become Venezuela.  Companies and real property ARE the economy, the backbone of our practical living.  The difficulty right now is choosing companies and sectors that offer the best probability of surviving the next downturn, maintaining dividend income and creating a long term total return above inflation. 

·         Unfortunately we have markets significantly driven by short-term thinking.  They are driven not by fundamental traditional values but by huge blocks of money being “day-traded” or bought and sold short-term with computer algorithms.  That is NOT investing.  According to Barrons, only 6% of stock traded today appear to be bought and sold based on fundamental analysis.  The buy and hold philosophy is out of favor.  But it is not invalid.  Eventually a company must be worth more or less than it is now on its fundamentals.  If I was “benevolent dictator, I would take a huge amount of risk out of the markets by instituting a single rule: “Whatever you buy, you must own for at least 24 hours.”  Anything less is not investing.  It is gambling.  I maintain that today’s stock markets are to a great extent rigged casinos that are not adequately regulated and disciplined.   They favor huge institutions and enormously wealthy individuals and hurt you and I.

·         But there doesn’t have to be a huge disaster.  If some of the “Trump effect” actions mentioned above can be accomplished effectively and the ineffective and unwise proposals tabled or changed, it would provide a boost.   Couple those with reducing or eliminating many non-productive government activities and a return to more individual responsibility and productivity.   We need to demand that our politicians stop the hateful partisan bickering and find ways to creatively work together to come up with the best solutions for our problems.  Stop the discouraging and destructive personal and political rhetoric and treat each other with more respect and grace.  It would go a long way toward healing.   Perhaps the economy could gain momentum, even to a 4% growth rate that could cure a lot of ills.  We can hope, and we can do our small part.  The question of the 1960’s is always relevant: “Are we part of the problem or part of the solution?”

·         Finally, our goal is not to create and manage portfolios just to beat any one or more indexes.  Our goal is to create and manage portfolios that have a reasonable probability of meeting our specific clients’ objectives.  It is a balancing act addressing projected spending, income needed to support spending and enough growth to keep pace with inflation, all while paying attention to risk management.  To that end we are seeking knowledge and wisdom and forming alliances with other advisers who can add perspective and wisdom.

Hopefully this has given you insight into our thought processes and actions on your behalf.  We do not pretend to be perfect or make claims or offer assurances about performance.  There will be good times and hard times.  Times when investments rise and times when they fall.  We do not have any crystal balls.  We cannot guarantee success.  What we can do is help you plan and manage your finances with sound principles, a bit of wisdom and sincere caring for your well-being as we deal with a Mad, Mad World.   If you want to discuss this or any other matter, please call.

*******************************

If you need help managing your personal or business economic trends, we are here for you.  Call 412-367-9076 to set up a no-cost, no-obligation consultation in person or by phone.  STAAR Financial Advisors, Inc. offers wealth creation, management and utilization opportunities for people, families, businesses and organizations at all stages of life.  We provide planning, business consulting and investment management, including private equity opportunities for accredited investors.

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Copyright 2017, STAAR Financial Advisors, Inc, 604 McKnight Park Dr, Pittsburgh, PA 15237.  All rights reserved.  No publication or dissemination of the contents, either electronically, via internet or physical printing is permitted without written consent of STAAR Financial Advisors.  Subscribers and clients may copy or print for their own use.  Quotes and links may be used according to accepted convention as long as proper attribution and credits are made.

Investing involves risk.  When investing in stocks, bonds, mutual funds, real estate or even many so-called guaranteed investments, the future value of your account(s) can be worth more or less than when you first invest.  Past performance is no assurance or guarantee of future results.  Before making investment decisions you should consult the appropriate investment, financial planning, accounting and tax professionals. You are responsible for all decisions you make as a result of using the SFAMoney web site or any materials and information provided by STAAR Financial Advisors, Inc. either on this site, via email or any other conveyance methods.

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Posted by in News

May 8, 2017

By J. André Weisbrod

Do you regret some major financial decisions?  Most people do.

In 2016 Bankrate.com published results of a survey that found only 17% of Americans said they had no financial regrets.  The biggest regrets were:

·         Not saving for retirement early enough

·         Not saving for emergency expenses

·         Taking on too much student loan debt

·         Taking on too much credit card debt

·         Not saving enough for children’s’ educations

·         Buying a bigger house than you could afford

I have heard many people express regrets over these actions as well as others, including spending too much on vacations, too much on cars, buying the wrong or too expensive insurance, and making bad investments.  None of us is perfect and I imagine most of us – even the 17% in denial above – would change some financial decisions if we could.

Living in the past doesn’t do much good.  But learning from it is very good.  The younger we get this the better.   But no matter our age or situation, we can take actions to improve our financial condition.  I submit seven major actions:

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Posted by in News

March 30, 2017

By: J. André Weisbrod

Every year around this time a nationwide consternation builds up regarding taxes.  This is especially true for investors with diversified portfolios, and even truer for investors who own private investments, including partnerships, small corporations and LLCs.

I think people often get more agitated than they need to be.  Understanding the processes can help us relax a bit.

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Posted by in News

January 16, 2017

Dear Reader,

I am reaching out to you in this blog letter because I care about you.  It’s not just business. 

There is a lot of information, disinformation and misinformation out there about financial matters.  A lot of sales people are hyping various products that are supposed to solve problems.  Many make claims that are not substantiated by facts and/or audited figures. 

I submit to you that the biggest issue we all face is wise planning.  Someone once said… 

“Failure to plan is tantamount to planning to fail.” 

I agree.  First let me talk a bit about the past year and why many have a poor understanding of what happened and why expectations for many were not met and why reactions to disappointment could expose you to significant financial mistakes. 

I recently wrote an article published exclusively in Seeking Alpha Pro.  It will be available to all readers in early February.  (If you want to read a wide variety of articles on investing and markets, I encourage you to visit the Seeking Alpha site.)  A few introductory points were these: 

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Posted by in News

By J. André Weisbrod

October 31, 2016

In part 1 I described the types of investments that can produce retirement income.  To make good decisions we need to understand how they work and apply practical math in order to compare possible and probable results. 

I made the case for dividend-producing stocks over bonds and CDs.  Interest rates are just too low to get a real return above inflation and taxes.  While many retirees will prefer balanced portfolios that contain 20-40% in Bonds and CDs, they will have to keep their spending lower to make it work.  My comparison today will be between an income-equity portfolio of Stocks and Real Estate Investment Trusts (REITS) and a Single Premium Deferred Annuity with a 6% payout “for income purposes.”

I actually did a 35 year analysis going out to age 101.  I compared the results of both alternatives using the following assumptions:

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