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Market Commentary 06/30/2013

Skill (and Luck) on a Sea of Change

This year marked the 25th annual Morningstar investment conference and, as usual, the timing seemed perfect.  The market started the year with a spectacular rally but by the time the conference was taking place, momentum was slowing in the US equity markets and volatility was increasing across the board.  During the conference we had access to some of the most accomplished and skilled investment managers in the industry.  We listened to their thoughts about recent market events and the strategy they are using in the funds they manage.

The message we received from these successful veteran managers was consistent and focused.  While the media and many investors react to each and every word from the Fed, these managers chart a longer term course. They focus on the individual merits of each company or investment they analyze.  In doing this, the manager considers not only how an investment will perform in today’s environment but how the investment should do as conditions change.  In many cases, they have navigated rough seas in the past and are able to put their skill and experience to work.

With more than 40 years of experience, Bill Gross, founder and co-chief investment officer of Pimco, is one of the most seasoned and successful investment managers in the world.  In his recent commentary, he discussed the market’s overreaction to the Fed’s May 22nd mention of tapering asset purchases and Chairman Bernanke’s press conference on June 19th.   The Fed’s comments induced a panic leaving many bond investors looking for lifeboats while Mr. Gross, a bond manager who has sailed some rough seas in the past, saw opportunities.

Some seas were rougher than others for the three months ending on June 30th. The bond market was one of the most volatile places to be with all sectors negative for the quarter.  Those looking to protect themselves from inflation with Treasury Inflation Protected securities were hurt the worst as TIPs lost 7% in the second quarter.  The high yield bond sector was the best performing fixed income category with a loss of 1.4%.  Equities were more of a mixed bag with US equities leading the global arena.   Small and large company US stocks were virtually neck and neck for first place, each within a tick of 3%.  The riskier assets such as commodities and emerging markets were down 8% and 9.5% respectively.  The markets of developed Europe and Asia were each down .7%.

As we measure the performance of funds against these sector benchmarks, we are reminded that quarterly results alone do not tell the whole story.  Michael Maoboussin, a keynote speaker at the Morningstar Conference, gave an address that centered on the role of skill and luck in performance.  He argued that people tend to significantly discount the role of luck in any given outcome. This topic could apply as easily to athletes as to investment managers.   Our brains want to look at recent performance and compare it to a ill-suited yardstick, ranking skill based on that alone.  In reality, however, the player that hit the winning homerun or the investment manager that topped his or her peers for quarterly returns may have been the beneficiary of luck.  This doesn’t mean that athletes or investment managers with standout performance are nothing more than lucky, but it does suggest that it takes time for skill to show itself.  It also means that in an endeavor influenced by luck, finding a consistent and focused process is extremely important.

Looking at our current environment, the one thing we know is that it will change. The timing of a Fed move is unpredictable as is the impact of so many things including change in foreign governments, increasing and changing regulations, etc.  While the timing of these changes are unknown, experience and skill to navigate these changes will determine long term success.  We believe we can put the odds in our investor’s favor by selecting seasoned managers that have a successful process.  These managers or investments will not always be at the top of their peer group or beat their benchmark for each reporting period, but over time have proven to be successful.

As we look to the second half of the year, we are optimistic. Clients may have noticed we have been making some portfolio changes recently.  We are seeing opportunities to diversify fixed income and add to undervalued areas of the market.  As the investment waters change, we believe portfolios are being positioned well – both for the current and the future environment.


Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA       
Asset Manager                                                            Asset Manager


Pimco Investment Outlook: “The Tipping Point”; July 2013; JP Morgan 3Q 2013 Guide to the Markets; Forester Value Fund Quarterly Update, July 2013; Charles Schwab “Schwab Market Perspective: The New, Old Normal”, June 28, 2013; Morningstar Investment Conference “Luck vs Skill: Revelations on How Managers Outperform” June 14, 2013

Market Commentary 03/31/2013

The Great Rotation?

The markets had another spectacular quarter to kick off the year.  This came as a surprise to many who thought politics would get in the way of a good rally.  Returns for most US indices were in the double digits with only a few sectors such as technology and telecom left behind.  With the recent strong returns, individuals who had lost faith in the market or had not been interested before are now beginning to take notice.  New money is coming into equities for the first time in several years.

Is the Great Rotation taking place?  For those unfamiliar with this new catchphrase, some analysts predict that investors will become so disappointed with the relative returns on their bonds and fixed income investments that they will sell them so they can “rotate” the money into stocks.  According to this theory, the flood of new money into the stock market will keep prices rising, all at the expense of bonds.  However, the rotation that is currently happening is different from the one described.

During the first three months of 2013, $52 billion went into the global stock markets.  This was a reversal from the $153 billion taken out of equities over the prior year.  Instead of taking the money out of bond investments, investors put another $53 billion into fixed income.  So a rotation may be taking place, but not as expected.  It seems that investors have gained a new found confidence in stocks but have not lost their affection for bonds.  The redemptions are coming from money on the sidelines.  These are the investors who have parked money in cash and money market instruments and are tired of the nearly zero return (or negative after inflation return) they are getting.  After a strong period of gains, many investors who had avoided stocks are now feeling confident enough to put their money to work in the stock markets.  More than $80 billion has come off the sidelines already this year according to Larry Jeddeloh, chief financial officer of the TIS Group, which produces the Market Intelligence Report.

For individuals that have maintained large cash balances, it’s been hard to watch as the S&P 500 and the Dow hit new all time closing records this quarter.  Even though there have been plenty of worries, the markets have powered forward leaving many cautious investors trying to play catch up.  In a Wall Street Journal article, ‘Mom and Pop Run with the Bulls’, Jonathan Cheng interviews a number of individuals that finally decided they needed to get in the game and put low earning cash in the stock market.  Even though there are concerns over the health of the economy, they are being overshadowed by record levels of corporate profits and a rebounding housing market.

It has long been held that individual investors tend to embrace stocks with enthusiasm only after major rallies, making these investors susceptible to buying at market highs.  We know that the average investor, without the guidance of an advisor, tends to buy and sell at the wrong times.  Karen Dolan of Morningstar sums it up as a clear pattern: Investors tend to buy funds and asset classes following rallies and sell at low points, leaving a lot of money on the table in the process.  At today’s market levels, we might ask ourselves whether this stellar performance is sustainable or simply a momentum based ‘sugar high’.  It brings us back to the classic saying credited to Warren Buffet, “In the short run the market is a voting machine, but in the long run is a weighing machine”.  We believe in the short term the markets will continue to be driven by fear and greed.  Today the momentum is clearly to the upside and can be highlighted by the young actress Mila Kunis announcing that she is now investing in stocks.  If the momentum slows, we believe markets are susceptible to a pullback but even this should be viewed in the context of a longer time horizon.

As your financial advisors, we have constructed a portfolio around your individual time horizon and income needs.  We will reallocate to investments that we believe are the most attractive but always within the context of a diversified investment strategy.  These are interesting times we live in and we look forward to discussing our outlook on the markets and how we have positioned your investments to meet your current and future needs.

Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA      
Asset Manager                                                            Asset Manager
JP Morgan 2Q 2013 Guide to the Markets; Forester Value Fund Quarterly Update, April 2013; Charles Schwab “Schwab Market Perspective: Market Resilience”, March 29, 2013; WSJ “Mom and Pop Run With The Bulls” March 30-31 2013; WSAU, ‘Analysis: Big Inflows into Bonds undercut the ‘Great Rotation’ April 4, 2013; WealthMangement.com, “Investors More Sophisticated, but Still Buying and Selling at Wrong Times” June 28, 2010

Market Commentary 12/31/2012

May You Live in Interesting Times…

This phrase is often referred to as the Chinese curse.  For many headline watchers, this past year certainly would fit the description of “interesting”.  Even as some of the most tragic events in recent history were unfolding, the media couldn’t help but add to the drama.  They kept a running clock counting down to impending doom—in the less serious case, it was the end of the Mayan calendar or in the more serious case, a fiscal cliff.  In either case, it might be time to turn off the TV.

Our hearts go out to the families that have lost loved ones this year or that have had lives completely turned upside down by natural disaster.  Our nation has acted with an outpouring of support to grieving families and to those in need.  Even with a political split, we are still a nation that can pull together for the common good and we believe that there is good that can come out of bad.   We also think there are plenty of reasons to be optimistic going into a new year.

Whether we like it or not, there are massive but subtle shifts taking place that will have a major impact on our lives and our investing.  Some might say we live in an unprecedented time, but as we’ve been reminded, history doesn’t necessarily repeat, but it certainly rhymes.  We are seeing innovations in energy and technology that stand to alter the way we live.  At the annual Schwab conference this past October we listened to Peter Diamondis.  Mr. Diamondis is a visionary entrepreneur who founded and runs the X Prize Foundation.  His organization offers multi-million dollar prizes to inventors who compete and come up with solutions to a particular problem.  His winners have developed complex environmental cleanup systems, created breakthroughs in space travel and are working on solving a number of health related issues.

Mr. Diamondis is also the co-author of Abundance: The Future is Better Than You Think and co-founder of SingularityUniversity.  He speaks about technological innovation and the practical benefits that come along with it. He discusses concepts such as economical desalinization to provide clean and usable water from the 97% of our planet’s water that is salt water.  He talks about the use of technology to raise the living standards of all men, women and children on the planet.  The poorest of the poor, the so called “bottom billion”, are plugging into a global economy and are poised to become “the rising billion”.

As fascinating and immense as some of the wonders he talks about are, the history of our planet is rooted in exactly this kind of revolution.  Revolution brought printed word to the masses, the industrial revolution brought wholesale change to how we work, travel and live. We have seen the internet and smart devices change the way people communicate, organize and work.  These changes sometimes appear subtle but have dramatic impact.  We can look back in history and see that change has not always been easy but it is what propels society.

In reading many of the commentaries from investment firms this year, the focus has almost exclusively been on the fiscal and monetary policies in the US and around the world.  This is an important topic.  There are less painful decisions that can be made now or we can inflict much more pain later – either way, the problem will eventually be addressed regardless of any frustrations we have or comments we make.  This commentary will briefly review the performance of broad market sectors last year and share some of our thoughts for the new year and beyond.  As we mentioned above, we think that there will be some very exciting areas where capital can be put to work in coming months and years, but investors should expect some bumps along the way.

As many who have looked at their statements know, 2012 was a good year in the markets.  The consumer discretionary sector and the financials led US markets with 24% and 29% annual return respectively.  The energy and utility areas were the laggards returning 4.6% and 1.3% respectively.  Overall though, US markets had a very healthy return, with the S&P 500 bringing 16% to investors.  REITs continued their tear returning nearly 20%, and international markets as measured by the MSCI EAFE posted 17%.  Even with these kinds of returns, fund flows dramatically favored bonds as $130 billion was pulled out of domestic equity in exchange for fixed income.  Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, said that 2012 represented one of the most unloved bull markets that she has witnessed in 27 years. Even though government bond yields are hovering near the flat line, the fixed income markets as reported by Barclays did give a reasonable return of 4%. We expected the quarter that just ended to be volatile and it did not disappoint. Elections, fiscal cliff talk and European austerity among other things rattled investors who didn’t seem to know which way to go.  At the end of the day, the S&P 500 ended slightly down while European and emerging markets performed with mid-single digit returns.

ING US Investment Management recently put together their forecast for 2013.  They start out by saying that the global economy is in reasonably good shape.  Other analysts would agree and add that equity valuations remain fair even after the double digit growth of 2012.   ING makes the case, however, that it will be harder to find growing corporate profits in the near term.  Their view is that the wind is no longer in the sails of fundamentals at this time and they highlight the drop in consensus expectations for corporate earnings growth as a sign of slowing profits.    However ING’s paper states “traditional short term forecasts typically ignore trends that are slow moving, hard to measure and/or veiled in their influence on the global economy.” They acknowledge even their forecasts are based on straight line trends and can’t account for revolutionary change.

ING’s report discusses several areas that could bring about a game change for investors.  We think they make an interesting case and have listed them below along with comments made by ING:


  • Technology use is moving from “cost containment and productivity improvement” to “revenue enhancement and business transformation”.  One example is how retailers are leveraging data through ‘omni-channel’ retailing.  Retailers are pinpointing the shopping habits of their individual customers and using mobile devices, brick and mortar locations and catalogs to create a tailored buying experience.
  • Developing nations are gaining access to technology that they’ve never had before.  Ten years ago, less than 1% of the African population had access to landline telephones, now 70% of the population has mobile phones.  Africa’s GDP has increased by 5% on average each year for the last ten years.


  • Increasing natural gas production is expected to bring energy independence to the US by 2020.  This will be the first time the US will have a trade surplus since 1975.
  • Natural gas at $3 replaces oil at $90, a benefit to business and consumers. This gives manufacturers an 80% cost advantage over foreign competitors.

New emerging and frontier economies:

  • The frontier countries are the new emerging economies.  They have younger populations and higher growth trajectories than developed nations.  ‘BRIC’ (Brazil, Russia, India, China) represented the emerging economies over the last 20 years.  ING suggests the new growth will come from ‘PIVOT’ (Peru, Indonesia, Vietnam, Oman and Turkey).
  • The Association of Southeast Asia Nations represents a population of more than 3 billion and GDP of $17 trillion.

These kinds of shifts do not happen overnight, but they have the power to change the way business is done.  We continue to see a global world where businesses that embrace technology are transforming the way they buy, sell and manufacture.  We expect near term bumps but believe that patient investors will be handsomely rewarded.

We believe that in uncertain times, a well diversified portfolio takes into account the temporary shocks that occur in the markets.  Clients that are currently taking systematic monthly withdrawals from their portfolios have a built in cushion to absorb these shocks.  Clients that continue to accumulate assets should continue to buy into these shocks at discounted prices.  We appreciate your understanding of our philosophy of managing money during good times and uncertain times.  Thank you for allowing us the opportunity to help you through all times. We look forward to speaking with you and welcome all questions and concerns that you have.


Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA      
Asset Manager                                                            Asset Manager
 JP Morgan 1Q 2013 Guide to the Markets; Forester Value Fund Quarterly Update, January 2013; Charles Schwab “Taking Care of Business, DC Style, to Avert the Fiscal Cliff, January 2, 2013; ING Global Perspectives ‘2013 Forecast: Good Economy, Challenged Markets’; Peter Diamandis, Steven Kotler ‘Abundance: The Future is Better Than You Think’

Market Commentary 09/30/2012

Markets Climb a Wall of Worry

The wall of worry expression, coined in the 1950s and used often since, has probably never been so true.  We enter the fourth quarter of the year with many of the US stock indices near their all time highs.  The third quarter was a continuation of strong gains made in the first half of the year, but while the market seems to go higher by the day, investors are worrying. As we close in on the fourth anniversary of the financial crisis, we are still confronted with a challenging global economy.  Europe’s financial woes have not been resolved, Asia’s growth is slowing and the US languishes with high unemployment and political uncertainty. Some investors have already decided that the time is right to take money off of the table.  This sentiment is understandable, but history does show us that the longer term view supports holding onto our stocks.

Even right now, when comparing stocks to other investment classes, stocks look relatively attractive.  After a 31 year long bull market in bonds, investors have no memory of the impact of rising rates on bonds.  While rates may not rise quickly, they are bound to go up from their current levels.  At present, a 10 year treasury bond today yields 1.65% versus a 6.46% historical average yield.  If rates go up even modestly, the price of this bond would go down significantly, eating up far more than just the current interest.  As with stocks, the loss would only be realized if the bonds are sold, but holding a bond that pays 1.65% for 10 years when new issue bonds offer rates closer to the historical average doesn’t seem very attractive either. On the other hand, stock valuations for the S&P 500 trade at a historically attractive 12.9 times earnings compared to their 16.2 average P/E ratio for the past 20 years.  The dividend yield alone of 2.1% on the S&P 500 would favor the equity camp over government bonds.

In our last commentary, we pointed out the historical advantage of holding stocks, and we shared some data from JP Morgan and Yale’s Robert Shiller.  Their research concluded that there is strong correlation between valuations and average return over a ten year period.  Historically, a below average P/E ratio on the S&P 500 would provide a very healthy double digit annualized return over 10 years. The JP Morgan strategists and Professor Shiller were quick to point out that the correlation between this valuation ratio and the returns for the upcoming year were virtually non-existent.  So far this year though, the S&P 500 has returned 16.4%.  While it can be argued that much of that return was fueled more by central bank actions than by corporate fundamentals, it is a tough call to “fight the Fed,” simply meaning that our Federal Reserve along with the European central bank are doing everything in their power to increase asset prices and encourage investment.

We are not blind cheerleaders for stocks and wouldn’t be surprised if the market pauses and possibly even takes a step back at some point in the near future.  This being said, we remain optimistic about the long term prospects for equities within the context of a diversified portfolio.  We do believe there are factors that make the current market vulnerable. The announcement of easy money by the Federal Reserve has been welcomed with open arms by Wall Street, but it seems that each of the massive stimulus programs has a shortening benefit period for the equity markets.  We are on round 3 and the market reacted very positively, but we may have already seen this round’s ‘caffeine jolt‘. We are also facing an earnings season that will have a tough time living up to the record profit levels that companies posted in the recent quarters.  Corporations took unprecedented measures to cut costs while recovering from the last economic downturn.  The combination of cost cutting measures and business recovery made their margins very wide.  After cutting to the bone, many businesses are finding that they can’t make further cuts and business growth has slowed.  This makes margin improvement hard to come by.  We believe that these things coupled with the general uncertainty about future tax rates and potential regulatory changes/issues make the market susceptible to bad news that might come along.  However, there is light at the end of the tunnel for investors.

While we believe the market to be somewhat vulnerable in the short term, in many ways things are in a better place now than they have been in for several years.  Overall debt levels in the US have been reduced and employment has recovered somewhat.  Consumer spending remains relatively strong and the economy continues to grow.  In Europe, much of the uncertainty revolves around problems that are now known, rather than estimates of unknown problems.  We have made substantial progress over the past several years, and now the problem is slow growth rather than decline.  It’s also worth noting that if uncertainty is a major driver of the current slow growth, then the election may resolve much of that uncertainty, clearing the way for faster growth.  Even if the election does not fully clarify the situation, it will lay the groundwork for future resolution.

There is another axiom that can be applied to many things, investing included – “Don’t lose track of the forest through the trees”. The last decade has been termed the “lost decade,” where investors saw little growth and incredible volatility.  Few investors alive today had ever personally experienced the extremes of market gyrations that occurred.  Nevertheless, if you look at a longer term chart of the US stock market spanning decades, you will see that there have been several ‘lost’ periods before and they are often followed by strong periods of growth. While the granddaddy of growth was the two decades of the 80s and 90s, even then there were dark days along the way.

Today we believe there is a new “lost generation.” This is the group of individuals that have lost confidence in investing for their future. This group of twenty and thirty-somethings have really never seen consistent market returns and have probably only heard bad stories from their parents or news reports. Unfortunately, this comes at a time when responsibility for their futures has been put squarely in their hands.  This is troublesome and should be a concern for all of us.  Even this has happened before where whole generations lost confidence in investing.   Steve Leuthold of the Leuthold Group reminds us that after the stock price collapses and financial scandals that took place in the 1930s and 1970s, it took years to rebuild confidence.

In the US, stocks just had their 17th consecutive month of outflow, pulling more than $16.5 billion out of equities in September alone.  Where is this money going?  September had flows of well over $30 billion into bond funds.  Investors are choosing the perception of safety in fixed income over equities.  Year to date, investors have pulled nearly $83 billion out of US stocks while funneling over $200 million into bonds.  It is hard to be a contrarian investor and buy when others are selling.  On the other hand, companies in the S&P 500 are on track to buy $429 billion worth of their own shares.  Because companies do not want to buy on the high side, this typically indicates that stocks are undervalued.

Benjamin Graham said it well when he stated that the investor’s chief problem—and even his worst enemy—is likely to be himself.  A consistent and diversified approach to investing rarely puts you on top for any short term period but over the longer term ranks near the top of all asset classes. When investors look at the individual pieces of their portfolios they may see that some pieces perform well and others perform poorly and in no year see their overall portfolio beat the best performing benchmark. Our goal as your investment advisor is not to make all of the pieces beat benchmarks year in and year out, but to deliver a more consistent return in line with your risk tolerance and objectives. Ultimately, we believe this diversified and consistent approach will come out on top.

We look forward to speaking with you and welcome all questions and concerns that you have.


Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA      
Asset Manager                                                            Asset Manager
JP Morgan 4Q 2012 Guide to the Markets; Forester Value Fund Quarterly Update, September 2012; Morningstar Direct, “U.S. Open-end Asset Flows Update” October 2012; The Wall Street Journal “Despite Gains, Many Flee Stock Market” October 5, 2012; The Wall Street Journal “Stocks Finish Strong Quarter With a Flop,” September 30, 2012; The Wall Street Journal “U.S. Stock Investors Look Beyond Rally and See Risks,” October 1, 2012.; Commonwealth Financial Network ‘Up the Wall of Worry’ September 30 2012

Market Commentary 06/30/2012

It’s Déjà vu All Over Again 

   —Yogi Berra

Several weeks ago we attended the Morningstar Investment conference in Chicago.  Each year many of our clients hear us talk about the opportunities at this particular conference to meet and listen to investment managers, economists and leaders in the financial industry.  We get firsthand access to the people who are on the frontline investing on our behalf.  They give us great insight into where they are finding new investments as well as the areas they are avoiding.  At times though, the conference provides its greatest benefit from the tone and the feeling from both the managers and the attendees.

It was summed up well on the main stage by Jeremy Grantham.  Mr. Grantham is the co-founder and chief strategist at GMO (Grantham, Mayo Waterloo), a very successful investor who is not afraid to share his research and his markets conclusions even when they are not so sunny.  Here is a slightly edited quote from his opening remarks “It’s a very strange time, and I get this Groundhog Day effect, as if the news is just replaying and replaying. I just visited…a client, and I read my notes of the year before, and holy cow, nothing has changed at all. Greece was about to collapse, no it wasn’t. Bernanke was thinking about QE 23, and China for two yearswas about to stumble big time into kind of zero growth, and it still looks like that today.”

The pendulum used to swing from fear to greed and back again.  Today it seems we are stuck in the fear mode and have moved into a period of perpetual worry.  From watching the headlines we know the worry is not without merit but this in itself is creating some very good opportunities.  Behavioral finance experts would say that investors are looking at the world’s ongoing troubles, matching them up with what has worked over the last decade and extrapolating those returns indefinitely into the future.  This can be measured by the inflows into mutual funds.  For the first half of 2012, $137 billion poured into bond funds which as a category had a return of twice that of domestic equity over the past ten years.  Compare this with $43 billion of redemptions in domestic equity funds through the second quarter.

This commentary is not meant to ignore the issues that our country faces or those that confront much of the developed world.  The risks are real and the short term fixes that lawmakers have put in place are not adding to the long term stability or the certainty that investors and businesses desire. On many fronts the first half of 2012 is looking a lot like the first half of 2011.  Last year’s first quarter commentary was titled “Investor Optimism Prevails”.  We saw solid equity returns coming from hopes of a sustainable economic recovery only to have a rocky second quarter erase much of those gains as government debt ceilings and austerity programs made the news.    This year got off to a great start recording the S&P 500’s best quarter return in fourteen years.  This last quarter however saw the S&P 500 struggle, ending down 2.8%.  Large company US stocks, even with losses, continued to outperform smaller and mid sized companies which had respective quarterly returns of -3.5% and -4.4%.  For the year though, most sectors of the market are still positive with the broad based S&P 500 up 9.5% followed by small company stocks at 8.5% and mid cap stocks at 8%.  The strongest sector was the telecoms which had a stellar 16.5% return for the first half of the year while energy was the laggard, losing 6% in the quarter and down 2.3% year to date.

The European markets continue to drag down returns losing nearly 7% for the quarter but still positive for the year gaining 3.4%.  European problems have been a global drag on growth as fear of defaults and contagion keep popping up.  The obvious problem is too much debt and too little growth in certain countries.  Unfortunately the European Union ties the European countries together with a common currency but lacks fiscal unity.  Unlike the United   States, where resources can be redistributed by the Federal government to the states that are in need, each European country more or less stands alone.

Dr. David Kelly, Chief Global Strategist for JP Morgan says that the European situation is ugly in its current condition. The good news for investors is that Euro stocks are pricing in “ugly” and anything better may provide a very nice return for investors, or as Liz Ann Sonders, Chief Investment Strategist at Charles Schwab noted, “A bar set low enough, becomes easy to hurdle”.

This leads us to the graph below provided courtesy of the American Funds.  The blue mountain reflects the S&P 500 from March 2009 noting various events making headlines along the way.  Below the chart is a bar graph that represents net flows in and out of stock mutual funds.  What’s telling is that most significant flows happen at peaks and valleys with investors buying at tops and selling at bottoms.

2012 Q2 Chart

Our overall belief remains in a diversified approach based on client risk tolerance and individual cash flow needs.  As we look out at the investment landscape however, we also believe that there are unique opportunities building under our feet.  We are seeing solid overseas companies selling at very attractive prices and technology stocks trading at lower multiples than ‘safe’ utilities.   It is also becoming very expensive to be defensive as investors are bidding up the price of the safest assets to the point of no return…literally no return, as can be seen when looking at treasury yields.  There are still opportunities in fixed income but one must look harder and around the edges to find them.

We appreciate the continued trust you have in us and welcome the opportunity to talk with you about your portfolio.


Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA      
Asset Manager                                                            Asset Manager
Morningstar.com “Grantham Keynote: Investing in a Slower Growth World’ July 2012; Charles Schwab ‘Fat Tails’ June 29, 2012; JP Morgan 3Q 2012 Guide to the Markets; Forester Value Fund Quarterly Update, July 2012; American Funds, ‘Why a 116% advance didn’t feel so good’; Benchmark performance from Standard & Poors, MSCI, Russell.

Market Commentary 03/31/2012

Warm Weather, Hot Returns

Last month was the warmest March on record across half of the United States.  Accuweather.com said that cities in more than 25 states broke records for average daily temperatures.  While outside temperatures were warm, March wrapped up a hot quarter for stocks.  The broad US market finished its best quarter in 14 years. Investments in bonds and large company dividend paying stocks ruled last year, but this year growth stocks propelled the market’s return.

The S&P 500 was up 12.6% for the quarter after a modest 2% return for 2011.  When we look a little closer at the returns by sector, we see the areas that performed poorly last year are showing strong double digit gains this year.  For example, the financials were up 22% year to date after a miserable 2011 loss of 17%.  There was also strong growth in technology related stocks, up 21.5%, as well as consumer discretionary stocks, up 16% for the quarter.

What might be more interesting is the big drop in volatility.  The stock market acted like a roller coaster last year with drops coming on any bad news.  Money flowed into defensive sectors such as bonds, REITs and blue chip names; so far this year, the tide is shifting.   Investors have applauded central banks such as the Federal Reserve, European Central Bank and Bank of Japan for putting more money in circulation.  Investors were especially pleased when the European Central Bank announced that it would inject more than $1 trillion dollars into their banking system in the form of long term refinancing operations (LTRO).   The strong market return coupled with declining volatility is enticing many retail investors back into the market again.

While the US economy is continuing to improve, even if slowly, and Europe seems to be moving from crisis into rehabilitation,  a question one might ask is whether the forward looking market is being too generous with its expectations about the future.

The good news is that US company valuations are still trading below their ten year average. After tax profits as measured by % of GDP hit a new high late last year and operating earnings are estimated to be ahead of where they were pre-recession.  Consumer finances are also looking pretty good.  Consumer balance sheets are improving. They are still not back to their peak levels in 2007, but well above their 2009 lows.  The unemployment rate is slowly improving as well. During the recession 8.8 million jobs were lost but in the last couple of years we have gained back 3.9 million jobs. This has brought the unemployment rate from over 10% to just over 8% currently, which is slowly coming closer to the long term unemployment average of just over 6%.

However, the global economy still faces headwinds.  According to David Kelly, chief market strategist at JP Morgan, Europe is far from out of the woods.  They have done a very good job averting crisis in their governments and banking system, but they are now attempting to make deep cuts to an extremely sick patient.  This new found austerity may be critical for the long term but is coming at a fragile time.   In the US, we are plodding slowly forward but businesses and consumers alike are operating under tremendous uncertainty about their environment.  Businesses tend to be less apt to make plans for the future such as hiring, making large capital improvements, etc. when there are so many unknowns that can have an impact on them. The good news is that the upcoming US election will at least provide some clarity regarding regulatory issues and the extent of tax changes.

Liz Ann Sonders, chief investment strategist at Charles Schwab, reminds us that the global markets have not decoupled.  US markets will be impacted by European recession, a slowing economy in China and we will continue to keep an eye on unrest in the Middle East.   It may also come as a surprise, but the last week of March was the 26th consecutive week of better than expected economic news for the US.  A miss in expectations is probable.  Sonders believes that the medium to long term outlook for the markets is very good but we can be reminded of the saying that markets climb a wall of worry, but the climb rarely continues without a pause.

Clients of Legacy Financial have portfolios that are created around their needs and are diversified to protect against the risks that can affect any individual company or sector.  Diversification doesn’t eliminate volatility, but it does reduce it.  We believe our clients are positioned to make it through the warm and cold seasons.  We welcome results like those of the last quarter but recognize that real world investing doesn’t move in a straight line.  You have shown your resilience by looking to the future and not getting caught up in the present.  We look forward to hearing your thoughts and concerns.


Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA      
Asset Manager                                                            Asset Manager
Charles Schwab ‘Comfortably Numb: Have Investors Become Too Complacent?’ April 2, 2012; JP Morgan 2Q 2012 Guide to the Markets; Forester Value Fund Quarterly Update, March 2012; HuffPost Green, April 5, 2012 ; Benchmark performance from Standard & Poors, MSCI, Russell.

Market Commentary 12/31/2011

Setting the Table while Resetting Expectations

Many investors are feeling short changed right now with the year’s volatile market ending with sideways returns, but it pays to look on the bright side.  The markets have been on a journey of recovery since the Great Recession of 2008-2009.  This journey has not been easy and like anything worthwhile, it is not finished rapidly or even in a straight line. Rather, it is one that requires investors to digest the progress that has been made and reassess the hurdles ahead that stand in their way.

It’s our belief that markets and economies are in the process of setting the table for better times.  This doesn’t mean we may not see rough patches ahead, but it might be time to reset our expectations.   From approximately 1982, equity markets launched into an unprecedented trajectory that created expectations of double digit returns. Dreams were dreamt and investors fantasized what they would do with their soon to be made fortunes.   The hard landing came with the collapse of the technology stock bubble in 2000.  The decade that followed was volatile with go-nowhere returns.  Based on this experience, many investors formed a new expectation of stocks.  It seems the pendulum has shifted to risk aversion where people would rather accept a guaranteed zero return over the returns of a stock investment.

In a unique twist, the current dividend yield on the S&P 500 is now higher than the yield on a 10 year government treasury bond.  This has been rare over the past 30 years but was not uncommon prior to 1970.  It used to be that common stock yields were often higher than even the bond yields of the same company.  These dividends provided an incentive to buy the stock and accept the volatility that comes along with stock ownership.  This is becoming the case again today as dividends pay the investor to wait out the periods of heightened volatility such as we currently face.  There is another measurement that leads us to believe that stocks are positioned to do well for the next decade.  The price to earnings ratio on the S&P 500 is under 13.  This compares with a historical average of 17.  JP Morgan Asset Management has illustrated the average annual market returns for a range of P/E ratios.  They looked at the correlation between stock returns and valuations back to 1952 and found that when stocks are priced below their historical average ratios, they achieve above average returns over the following ten year period.   It’s interesting to note the high degree of correlation between P/E ratios and returns over ten years but when looking out only one year, there is little to no correlation.

We don’t know how the broad markets will fare in 2012.  As we start the year, many of the worries that we faced during the past year are still with us. The recent data on the US economy shows modest improvements though we expect the European issues to continue to make headlines. We think there are a number of areas that look promising and a number of areas that still face considerable pressure.  We will look opportunistically for managers that excel in these times, but know that one year is not a good benchmark of long term performance.  Expectations for returns have gotten so pessimistic that many investors are under-exposed to stocks.  We believe now is the time to reset market expectations.  We don’t think the broad markets are entering another period like the last decade nor a period like the nineties.  Instead, we see overall equities to be priced attractively with the opportunity to outperform fixed income over the next extended period.  Since your portfolio is unique to you, we match your needs and timeframe to the investments we feel are the most appropriate for you.

We welcome the opportunity to meet with you and look forward to speaking with you in 2012.


Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA          
Asset Manager                                                                 Asset Manager



WSJ ‘Where to Put Your Money in 2012’ January 5, 2012; Charles Schwab ‘True Reflections…on 2011 and 2012’ January 4, 2012; JP Morgan 1Q 2012 Guide to the Markets;  Allianz Global Investors ‘Good Defense, Slow Progress a Win for 2011’ January 3, 2012;  CooksonPeirce ‘2011 Year in Review’ ‘2012 Outlook’  January 2012; ‘AAM Weekly Economic Commentary’ January 6, 2012

Market Commentary 09/30/2011

Volatility……Worry Or Opportunity?


This past quarter was the worst quarter for performance that the markets have experienced since 2008. During times of volatility, many investors tend to focus on short-term performance. In an age of nonstop stimuli, it is difficult to put things into perspective and tune out the political and financial information that surrounds us. Investors can become addicted to all of the information that is provided to them and they begin to anxiously await the next dose of news, whether it is good or bad.

Too much information can heighten an investor’s emotional connection with the performance of their portfolio. The saying “less is more” holds true in times of market volatility because focusing on the wrong things can cause an investor to lose sight of their goals and objectives for their accounts. The recent month end statements are the perfect example of what we shouldn’t focus on, the short term. Instead of asking did I make money or lose money this month you should be asking what are my long term and short term needs for this money? We have written in the past about how asset allocation plays an important role in the overall performance of a portfolio. If your portfolio has been structured properly to provide for your lifestyle needs (monthly needs), intermediate needs (lump sum purchases or funding for specific needs), and longer range needs (retirement or leaving a legacy for your family or charity), then the volatility that comes with investing will be easier for you to withstand. Phrases such as ‘Stay the course,’ ‘You are in it for the long run,’ ‘Long term investors are rewarded,’ and ‘Have patience’ come from many sources. They all refer to having an understanding of and confidence in the fact that as long as you have structured the appropriate asset allocation to accommodate your needs and goals for the future, then you will be able to weather the storm of down markets such as these.

Investor emotions and anxiety drive many of their investment decisions. As markets decline, investor moods have a tendency to do the same. Investors know that market declines are all part of investing yet they are still susceptible to the emotions that accompany a downturn. This can drive decisions that are at odds with their goals. According to behavioral economist Dan Ariely in his book, Predictably Irrational, it’s important to understand the surprising power that emotions can exert over our choices. “Although there is nothing much we can do to get our Dr. Jekyll to fully appreciate the strength of our Mr. Hyde, perhaps just being aware that we are prone to making the wrong decisions when gripped by intense emotion may help us.”

“Individuals who cannot master their emotions are ill-suited to profit from the investment process.”

Benjamin Graham, Father of Value Investing

The chart below illustrates what can happen over time when investors move in and out of the market during times of volatility. From 1991-2010, the average stock fund returned 9.9% annually, while the average stock fund investor earned only 3.8%. Waiting for markets to correct will most often result in a higher average return, but the “Investor Behavior” Penalty from moving in and out of the market can result in a much lower return. Emotions can derail an investor’s ability to build and maintain long-term wealth.

2011 Q3 Chart

Source: Quantitative Analysis of Investor Behavior by Dalbar, Inc. (March 2011) and Lipper. Dalbar computed the “average stock fund investor” returns by using industry cash flow reports from the Investment Company Institute. The “average stock fund return” figures represent the average return for all funds listed in Lipper’s U.S. Diversified Equity fund classification model. Dalbar also measured the behavior of a “systematic equity” and “asset allocation” investor. The annualized return for these investor types was 3.6% and 2.6% respectively over the time frame measured. All Dalbar returns were computed using the S&P 500® Index. Returns assume reinvestment of dividends and capital gains distributions.

With the S&P 500 dropping 13.87% for the quarter, it is no wonder investors have become more emotional; more than half the drop came in the last 8-10 days in September alone. Only 54 companies in the S&P 500 saw positive returns during the month of September while 200 dropped at least 20%, TheStreet.com reports. Only 3 out of 94 country indices were positive for the quarter, according to Bloomberg. The average return for the 9,402 mutual funds tracked by Morningstar was a negative 17.8% for the quarter. According to Lipper, international-stock and emerging market funds dropped 20.5% and 23% for the quarter, respectively. Even with all the negative numbers and news, the statistics show that at least our economy is still growing, albeit at a very modest rate. With our country’s debt to Gross Domestic Product (GDP) ratio at 67.6%, we are in much better shape than countries like Greece, with debt at about 150% of their GDP, or Japan, projected to have a ratio of 200%. Studies have shown that once a government lets its debt/Gross Domestic Product (GDP) ratio rise to more than 90%, the economy begins to seriously weaken and government spending starts to spiral as interest payments on the debt grow faster than the economy.


Interestingly, Citigroup’s Panic/Euphoria model, a proprietary combination of nine facets of investor beliefs and fund managers’ actions, has been in “panic” territory since mid-August. Historically, overly bullish territory (Euphoria) generally signals a market correction is on the way, while a recovery is predicted when the sentiment is overly pessimistic (Panic). According to Citigroup the current panic level “generates a near 90 percent chance of higher equity prices in six months and a 97 percent probability of teen-like gains in the next 12 months.” Historically, the average market bounce is 8.9 percent the following six months and 17.3 percent the following year after falling below the panic line. However, you can never bank on a model to make sound investment decisions. The panic level reported in late June should have signaled a rebound but that has yet to come to fruition. Legendary Investor Shelby M.C. Davis, sums up investor worries as follows:

“History provides a crucial insight regarding market crises: They are inevitable, painful, and ultimately surmountable.”

Investors have faced a myriad of crises over the past four decades:

  • In the 1970’s they were faced with stagflation, rising energy prices and the S&P plummeted 44% in two years.
  • In the 1980’s they were dealt the collapse of the major Wall Street investment bank Drexel Burnham Lambert and Black Monday, when the market crashed over 20% in one day
  • In the 1990’s they weathered the Savings and Loan crisis, the failure and ultimate bailout of hedge fund Long Term Capital Management and the Asian Financial crises.
  • In 2000 they experienced the bursting of the technology and telecom bubble, 9/11 and the start of two wars.
  • Now they are faced with the collapse of residential real estate prices, economic uncertainty and turmoil in the financial services industry.

Despite all of the above, the long-term upward progress of the stock market has not been derailed. Yet, the consumer is in a pretty dour mood. The August consumer sentiment index from the University of Michigan hit a level close to where it was November 2008. Prior to that, its lowest point was May of 1980. Sentiment among corporations doesn’t appear much better. In 2000, companies held about 15% of their current assets in cash. Today the level is close to twice that. Even though consumers and corporations are getting a negative inflation adjusted return on cash, they are holding it at unprecedented levels. Given the recent added worries, one positive result of the selloff is that many equities now appear to be priced at attractive levels.


It is hard to find the silver lining in today’s markets unless you do your homework. That is not to say things could not go down before moving up. We still have many headwinds, but more than likely no surprises. Greece may end up eventually defaulting on their debt, no surprise given the financial headlines; we may have some upsets on the political scene in 2012, no surprise; job creation may be slow in recovering, no surprise; housing may take a few more years to recover, no surprise; and stock markets around the world may begin a slow recovery…this may come as a surprise.

We believe there are positive trends that will continue to keep the US economy moving forward over the next couple of years. While the short term is impossible to forecast with any precision, recent statistics have been positive and suggest that the US will avoid slipping into recession. In September we saw a rise in the Chicago Purchasing Managers Index as well as the ISM Manufacturing Index, initial unemployment claims for September fell to the lowest level in six months and same store chain sales are consistently above year ago levels. Rail traffic is up 3.8% from a year ago and hotel occupancy is up 4.1%. We’ve also seen a recent drop in nearly all commodity prices. When the price of oil falls, it immediately translates into more spendable income. To a lesser degree this may also be true of lower prices for grains, cottons and industrial metals. Currently average monthly rents are more expensive than an average mortgage payment. The average mortgage on a new home based on a percent of income is at its lowest point in more than 35 years.

Richard Sylla, a professor and financial historian at New York University’s Stern School of Business has studied market behavior back to 1790. A decade ago, Professor Sylla and two of his colleagues accurately predicted the returns from the stock market from that time to the present. Now Professor Sylla is looking forward over the next decade and predicts betters things ahead. Part of the reason for this view is current valuations on stocks are well below historical averages. The P/E ratio on the S&P 500 is currently at 10.6 times forward earnings. This compares to the March 2000 ratio when it was 25.6 times or even October 2007 when the multiple was 15.2 times. The dividend yield on the S&P 500 is now 2.3%. In many cases, stock dividend yields are higher than the corresponding bond interest.

We believe that America has what it takes to once again prosper and thrive. It’s alright to take pride in our country and reflect on the people that came before us. They worked through many of the same challenges that our country is going through right now. We also understand that many individuals have concerns during these uncertain times. We made shifts in many of our clients’ portfolio which have protected them against some of the recent volatility. We believe that the overall economic environment will continue to improve, but patience will be required. We encourage you to contact us with any questions or concerns that you may have. We appreciate your continued trust and look forward to talking with you throughout the year.


Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA          
Asset Manager                                                                 Asset Manager



U. S. Global Investors, Inc. ‘Can Markets Find the Road Back to Positive Territory’ October 2011; JP Morgan 4Q 2011 Guide to the Markets; Victor Thorson ‘Why Does the Good Life End’ September 30, 2011; AdvisorOne, ‘Wesbury Slams Roubini on Double Dip Fears’ October 5, 2011; Wall Street Journal ‘A Long Term Case for Stocks’ September 12, 2011

Market Commentary 06/30/2011

Government shutdowns, Debt Ceilings and Austerity

The headlines grab our attention as they are designed to do.  They alert us to the debt problems facing Europe, the stalemate in Washington and the costs of a state shutdown.  We are informed of the dire consequences that could result from any of these.  It seems the political rhetoric that runs so hot around these issues was designed for this sound bite information age.  Lawmakers compete against each other like sports teams, each trying to claim a win.  This is happening in government at all levels and around the globe.  In Minnesota, the rhetoric continues past the budget deadline and the state government shut down.  Ultimately, this is costing Minnesotans millions in lost revenue and additional long term costs as the state’s bond rating has been downgraded.  Nationally, the debate about the debt ceiling goes on with parties firmly entrenched along their party lines.  Having already reached the federal debt ceiling in May, officials are now playing a game of chicken that does not have a winner. While we’re told by some that apocalypse looms, the reality is that both the eventual outcome and consequences are unknown.

In any event, planning for uncertainty becomes all the more important.  It’s no doubt that portfolios would be impacted if an agreement is not reached, however the fixed income piece of our client’s accounts have been positioned to withstand the storms.  We do this by simply keeping high-quality, short duration bonds and decreasing exposure to US government bonds.  We, along with most professional investors, believe it is an attribute to avoid knee jerk reactions.  This is the part of the portfolio that allows us to ‘wait out’ the market’s swings. While it’s our belief that the odds favor a resolution that will keep our government making its scheduled payments, the fixed income part of the portfolio makes sure you continue to get your scheduled payments.  With that said, volatility can also be an investor’s friend.  Some portfolio managers are taking advantage of volatility to buy good solid companies that are now less expensive.  However, patience is usually the key to making money during uncertain times.

Markets are often volatile and have periods of poor performance during times of uncertainty. Since the US economy officially entered ‘recovery’ more than two years ago, we might have expected to be enjoying a solid economic recovery by now.  Unfortunately, as Ben Bernanke said in his recent speech, the growth has been ‘frustratingly slow’. In fact, this recovery is moving slower than any since the 1930s.  However, we also experienced the largest recessionary decline since the Great Depression. During this most recent recession we saw real GDP decline by 4.1%.  A significant decline, but thankfully no where near the 26.7% lost from 1929 to 1933.  After two years the economy has grown at only half the pace of previous recoveries.  Instead of a sharp broad snap back, we are experiencing a few bright spots in sectors such as manufacturing and corporate profits amidst a very poor housing and employment market.  In spite of some poorly performing sectors, the US markets turned a small return for the second quarter after a solid first quarter for investors.  The S&P 500 had a three month return of .1% and 6% for the year.  The leading sectors were health care, utilities and consumer staples generating 7.9%, 6.1% and 5.3% respectively for the quarter.  Health care was also the year to date sector leader with 13.9% return.

As we go into the second half of the year, we should expect continued volatility. We still have a set of big macro-economic obstacles to overcome even though the fundamentals of many companies continue to improve.  If austerity didn’t become a part of our 2010 vocabulary it certainly should in 2011.  We must acknowledge the need for fiscal responsibility and deficit reductions, but also realize we didn’t get to our current levels of debt without working very hard at it over the past 30 years.  In this slow growth period of our economy, to make immediate and deep cuts across the board is not prudent. The handoff between business and government, while necessary for sustainable growth, is happening slowly and policies on the outer reaches of either political spectrum will not aid a smooth transition.

We understand that many individuals have concerns during these uncertain times. Our philosophy has always been not to react to news as it is happening, but instead strategically position our clients’ portfolios to take into account negative outcomes that can occur from time to time.  The real question then becomes, do we have the correct allocation that will help sustain cash flow needs during difficult times.  Our philosophy does not change based on current events in the news.  As we have mentioned in our meetings, buying time or building a cushion of bonds/cash within a portfolio for an extended number of years, preferably a minimum of three years, allows you to maintain the lifestyle you have grown accustomed to.  Most importantly, this positioning lowers the volatility in the overall portfolio.  We believe that the overall economic environment will continue to improve during these difficult times.  We encourage you to contact us with any questions or concerns that you may have.  We appreciate your continued trust and look forward to talking with you throughout the year.

Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA           
Asset Manager                                                                 Asset Manager
Schwab ‘Sparks: Are Stocks Telling a Better Story for the Second Half’ July 5, 2011; JP Morgan 3Q 2011 Guide to the Markets; Star Tribune ‘Markets bet against debt default’ July 10, 2011; Wall Street Journal ‘Quarterly volatility spooks investors’  July 1, 2011; Wall Street Journal ‘Inside the Disappointing Comeback’ July 5, 2011

Is it time for a mortgage interest rate checkup?

Although rates have moved up some from their lows, it is still a great time to refinance your current loan or even consider consolidating some debt. Not every home in America is under water, meaning valued less than what you paid years ago. There are many homes that still have equity yet may have a higher interest rate. If you currently have an interest rate above 5.75% on a 30 year loan you may want to consider refinancing because rates today are hovering around 4.7%-4.80%. However, you may want to look into keeping the payment the same by refinancing to a 20 year term. For example, imagine you took out a loan for $200,000 6 years ago for 6%, 30 year loan, your Principal and Interest payment would have been $1,199.10 per month. Today, you owe 24 more years on the present loan remaining of $179,243.76. If you refinanced at 4.80% with closing costs of 2.5% or $4,481.09, you would need to take out a new loan for $183,724.85.

Let’s assume a few financing scenarios:

  1. 30 year fixed rate at 4.80% on $183,724.85 would equal a payment of $963.94. This would result in a $235.06 monthly savings from your previous mortgage. However, you need to take into account the closing costs of $4,481.09 to determine your break even point of making the change. It would take you 19.06 months to recover your cost of refinancing. You would save $68,382.57 in interest payments even though you paid closing costs and added 6 more years to your payoff date.
  2. Using the same assumptions above, now change the term to 15 years and the interest rate to 4.14% your payment would increase to $1,371.72 per month. You would pay off your mortgage in the half the time by increasing your monthly payment by $172.82. You would save $100,073.71 in interest using a 15 year mortgage versus a 30 year mortgage. 
  3. Assume you could not afford to increase your monthly payment and instead opted for a 20 year loan at 4.80% on a loan of $183,724.85. Your payment would be $1,192.30 per month or a savings of $6.80 per month. However, you would save $60,867.54 in interest versus the 30 year mortgage.

Learn More

There are a number of options that Legacy Financial Advisors can help you look into based on your situation. We can even put you in contact with one of a number of independent mortgage brokers we have worked with over the years to help you find the best option. Please contact us if you have questions about what might be best for you or if you have a family member or friend that could use some help evaluating what may be best for them. Give us a call now while rates are low.

Call today to learn what options are available to you! (952) 893-5555

Market Commentary 03/31/2011

Investor Optimism Prevails

While revolutions took place in the countries of North Africa and a natural disaster of epic proportion struck the third largest economy in the world, investors continued to believe in and buy stocks.   Though volatile in March, stock markets were not only resilient but produced healthy returns for investors.  Are these investors ignoring geopolitical and economic crises in an attempt to make up lost ground or are they looking ahead at an economy that they expect will make its move into a full recovery? 

It seems the answer is a bit of both.  The U.S. economy is clearly improving with GDP growth forecasts for the remainder of the year coming in at over 3%.  Dr. David Kelly, Chief Market Strategist for JP Morgan, says the global economy as well is moving back into balance and believes 2011 will provide solid returns for many of the world’s markets.   However, spooked investors that spent 2009 getting out of the market have been flooding back with hopes of capturing some of the market momentum.  In the first quarter alone, $33 billion flowed back into stocks and stock mutual funds.  During 2010, $37 billion came out of these funds and in 2008 and 2009, nearly $243 billion exited from stock investments with most of that finding a home in low paying bond investments.  

Clearly there is still a significant amount of cash on the sideline and we’re seeing the momentum from last quarter continue to move markets ahead year to date.  The fourth quarter of 2010 saw double digit returns for broad market indices in the U.S. with smaller companies outperforming their larger counterparts.  For the first quarter of 2011, large U.S. companies returned 5.9% while small company stocks returned 7.9%.  The disruptions in the Middle East drove energy to the top spot returning 16.8% for the quarter.  The laggards were the consumer staple stocks and the financial sector companies with 2.5% and 3% returns for the quarter respectively.  Internationally the stock markets of the developed countries produced a slightly more modest 3.5% as concerns of fiscal issues and slow Eurozone growth kept much enthusiasm in check.  The emerging markets also saw modest growth of 2.1% for the quarter after returning more than 19% in 2010 and a whopping 79% return in 2009. 

The outperformance in small U.S. company stocks may partially be attributable to smaller companies having less exposure to international markets amid a strengthening U.S. economy. Tony Crescenzi, a portfolio manager at PIMCO, believes in the U.S. “there’s more confidence that the economy has achieved escape velocity.”  In our December commentary, we discussed the government’s stimulus termed QE 2, or quantitative easing round 2.  The Federal Reserve used all of their tools to move the economy out of the doldrums.  The recent economic statistics seem to confirm the stimulus has worked even if the recovery has been much less spectacular than recoveries of the past.  The escape velocity that Mr. Crescenzi refers to is the needed pickup in corporate and consumer spending that is needed to maintain economic growth without the artificial boost given by government stimulus.  We’ve seen personal consumption post a hefty gain in February and the March jobs report showed an impressive pickup in hiring by private companies.  We still haven’t seen any real improvement in real estate and housing but personal and corporate finances are improving.  Personal savings rates are back to nearly 6%, a figure that hasn’t been seen since the mid 1990s and corporate profits have improved dramatically.  Corporations are also holding a record $1.9 trillion that they have available for capital expenditures, business investments and ultimately hiring.

The artificial boost in the form of the Fed’s QE 2 stimulus is scheduled to end in June and there is even talk of raising interest rates by year’s end.  St Louis Fed President James Bullard recently said “If the economy is as strong as I think and hope it will be in 2011, I think it will be time for us to start to reverse our ultra aggressive and ultra easy monetary policy.”  This policy change has already started in Europe with the European Central Bank becoming the first monetary authority in a major developed economy to raise rates since the financial crisis.  However, the decision of when and how much will be crucial.  Withdrawing stimulus too early could reverse the positive statistics coming from the private sector while leaving too much stimulus in the economy can create massive inflation and hamper future growth due to government debt levels.  Thomas Forester, Chief Investment Officer for the Forester Value Fund, illustrates how much government stimulus has been put in the U.S. economy when he says if these levels were implemented during normal times, “it would lead to 10% GDP growth and probably 5-10% inflation. But obviously, these are not normal times.”

We have no doubt there will be rocky patches ahead as the economic baton is handed back to corporations and consumers, but know that the sustainability of recovery cannot rest so heavily on government intervention.  The portfolio managers are taking this time to be opportunistic and are buying companies they see as very attractive.  They also remind us that they invest in companies, not economies, and that you don’t have to be an optimist on the economy to find stocks that do very well in different scenarios.  Keep in mind that you were well balanced before the sub-prime debacle and the precipitous downturn that followed.  You stayed the course and endured the emotional aspect of being a long term investor. There will always be questions as to when does the market run out of gas.  Our philosophy, that you have come to understand, revolves around a total return perspective over periods of time.  The strategy of building a portfolio allocation around your ongoing cash-flow needs has proven to be solid.  We continue to take advantage of raising fixed income during positive markets to build cushion in the portfolio for any rough times ahead.  Although we are not rewarded today as much in fixed income because of low interest rates, we have created a safety net for your peace of mind.  We will continue to focus on finding the best investments that meet your needs and objectives and look forward to working with you throughout the year.

Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA           
Asset Manager                                                                 Asset Manager
WSJ ‘Volatility Slays Market’s Calm’ April 1, 2011; Charles Schwab ‘When Doves Cry: Debates Rage about QE2’s Finale’ April 4, 2011; JP Morgan 2Q 2011 Guide to the Markets; Forester Value Fund Quarterly Update, April 2011; Morningstar, ‘Our Take on the First Quarter March 31, 2011; AAM Weekly Economic Commentary April 1, 2011; TCW 1st Quarter 2011 Review, Outlook and Strategy; Star Tribune ‘Stocks Close Out a Rousing First Quarter’ April 1, 2011; Benchmark performance from Standard & Poors, MSCI, Russell. 

Market Commentary 12/31/2010

A New Year!

As we enter the new year, we look back at a 2010 that certainly did not leave us short of material to talk about. We experienced a stock market ‘flash crash’, a financial crisis in Europe, a conflict in Korea, tax uncertainty, QE 2 and an upset election to name only a few.  In a year that had its share of ups and downs, patient investors did not miss out. The first half ended firmly in a correction as investors tried to digest the meaning of the credit crisis in Greece and what could be expected from the sluggish US economy.  By midyear the Dow Jones had fallen well below 10,000, but a market rally in the third and fourth quarters more than made up the lost ground.  At the end of the year, the S&P 500 was up 15.1% marking the second year of double digit returns.

Most of the broad market’s fourth quarter gain came in December as the government’s stimulus package, which included a second round of quantitative easing and extended tax breaks, gave investors something to smile about.  In the US, small and mid-sized company stocks performed best for the quarter, returning 16.3% and 13.1% respectively, while the large company stocks posted a solid 10.8%.  Among the Standard and Poor’s sectors there were clear winners, including energy and material stocks up 21.5% and 19% respectively.  The laggards included utilities, which returned 1.1%, and healthcare stocks, which returned 3.6%.  Overall the European markets did not fare as well as the US, with Portugal, Italy, Ireland, Greece and Spain dampening the returns even though Germany fared well enough to bring the broad European benchmark up 6.2% for the quarter. 

The emerging market index had another strong year ending up 19.2% but underperformed the US and European benchmarks for the fourth quarter. China’s action to control inflation held the Chinese market back, however, markets in India, Indonesia, the Philippines, Malaysia and Thailand all rose to record highs making the emerging markets one of the most talked about investment themes of 2010.  The gold story was arguably the most popular theme of 2010 after a multi-year run that brought gold over $1400 per ounce.  What hasn’t been talked about as much is that nearly all commodities experienced big price gains.  For the year, gold went up 29%, Palladium rose 95.6% and cotton’s price increased by 91.5%.  We will continue to watch commodities both as an investment theme and in terms of its impact on the developing countries and inflation.  To date, inflation has been relatively tame, but if the cost of commodities continues to rise this fast, it will surely have an impact both on the prices of goods we buy as well as the ability for developing countries to continue their rapid growth.

After two years of strong calendar returns, there is renewed optimism and a consensus that things are pretty good.  Many troubling issues such as unemployment and retail consumption have shown positive trends that made investors feel confident about the economy’s direction. We must be reminded that even with rising markets and stabilizing economies, there are clouds that linger.  Charles Schwab’s Liz Ann Sonders reminds us that there are still elephants in the party room.  She suggests that with investor sentiment leaning so bullish, the market is vulnerable to bad news and notes a pullback is probably overdue.  Robert Doll, Chief Equity Strategist at BlackRock, has a somewhat different opinion of the market.  He believes the economy will plod along. but instead of a market pullback, he forecasts a continued strong run for stocks through 2011. 

There are significant risks that remain and they are well known. We don’t have to look further than the housing market to see a risk to our economy.  Home prices have been largely propped up with buyer incentives that are now expired and low interest rates that will not be with us forever.  A stronger recovery will be held back by the speed of the recovery in this important sector. The other large concern is the debt-laden state of our governments.  One of the reasons we’ve been recommending a portion of fixed income to the global bond sector is the access to countries that don’t have the debt levels of the US and much of developed Europe.  Austerity may be the word of 2010, but it will take time to bring deficits to a sustainable level both here and abroad. 

Investors have many reasons to be optimistic but should be realistic about risk and volatility.  If we look at the chart below, we can see risks over the past forty years that could have kept investors waiting until a better time. Risks in the market are never going to completely go away, and waiting until things improve usually means losing out on return. 



Wally Weitz, the head of the Weitz Funds, wrote his December commentary titled “Changing Changelessness” referencing the fact that no matter how many times prognosticators say ‘this time is different’, patterns of the past re-emerge, or as Mark Twain said, “History does not repeat itself, but it does rhyme”.   There are and there always will be situations that create uncertainty, but there are plenty of opportunities to be found in today’s market.  Our goal is to create an investment portfolio that takes advantage of the market’s opportunities, but even more importantly, we strive to meet your individual objectives. For many clients that means building a portfolio around your cash-flow needs.  Adjusting the allocation enables us to work through the unsettled times.  We will continue to raise cash from time to time to smooth out the bumps.  Our philosophy is to provide a safety cushion no matter which direction the market is heading. We look forward to helping guide you through the many changes in 2011.  

Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA           
Asset Manager                                                                 Asset Manager
Charles Schwab Market Commentary ‘Glory Days: Another Good Year in 2011? January 3, 2011; JP Morgan 1Q 2011 Guide to the Markets; Forester Value Fund Quarterly Update, December 2010; Financial Planning., BlackRock’s Doll:  Economy Will Plod as Market’s Surge in 2011, January 4, 2011; WSJ ‘Meet the Supporting Cast’ January 3, 2011; Weitz Funds ‘Changing Changelessness’, December 6, 2010; Selected Funds ‘The Wisdom of Great Investors’ Benchmarks:  Standard and Poor’s, Russell Investment Group, MSCI

Market Commentary 09/30/2010

The Winds of Change?

The winds were to investors’ backs during September with the Dow Jones Industrial Average having its best performing September since 1939.  This strong performance did more than erase August’s poor performance. It also brought the major stock benchmarks into positive territory for the year.  The outsize September gains came as improving economic data helped ease fears over a double dip recession. According to the National Bureau of Economic Research, the recession that started in December of 2007 officially came to an end in June 2009.  The fact that the recession has been over for more than a year may be a surprise to many, including the approximately 9.6% unemployed individuals or the many struggling to keep businesses afloat.

Though, technically the recession is over, growth is so subtle that few are noticing the small improvements that are happening.  Many blue-chip companies are seeing positive growth yet their stock price remains flat.  We believe that this positive growth is currently being overlooked.  If this past September is an indication of more positive changes to come, it may help change the sentiment of investors and businesses in a broader market sense.  We have also read about an increase in merger and acquisition activity.  For example, a recent Star Tribune article reported that large cash-rich Minnesota companies are starting to loosen their purse strings.  The article named 3M, Donaldson Companies and Polaris as companies that sat on cash but are now beginning to put it to work.  

 Although the figures have been modest, September saw positive trends in the following:

  • US retail sales increased more than expected  
  • US consumer spending and income rose
  • US small business optimism is rising
  • US production is running at ‘expansionary levels’
  • China’s production increased
  • US wages and average work week rose
  • US existing home prices rose in most markets
  • Germany is showing strong growth

What makes this recovery feel different from other post-recessionary periods is its very slow speed.  Currently economic growth is only about 1/3 the rate of previous post-war recoveries. Since World War II, the average recovery has had gross domestic product surpassing the pre-recession high after five quarters of recession.  Today we are sitting at 11 quarters and GDP is still below what it was in fourth quarter 2007.  This anemic growth has not been limited to just the United States but to much of the developed world.   Some investors are viewing this as a sign that the Federal Reserve and other central banks will pursue additional ‘quantitative easing’.  Quantitative easing is essentially when central banks use very low interest rates and asset purchases to increase money supply and jumpstart the economy. 

Ultimately the easy money is designed to get consumers and businesses to open their wallets.  Unfortunately, uncertainty and lack of confidence in the economy is holding many back from spending even with ‘easy money’.  The Labor Department reported in their annual spending breakdown that middle class Americans made their deepest spending cuts in two decades during 2009.  These households reined in spending which reflected a broader retrenching among all consumers.  The importance of the consumer is clear when one considers that they make up 70% of the US economy.  Business spending will also be a critical piece of the recovery.  Many businesses are sitting on the sidelines until they get a better handle on the economy, the markets, taxes and the political situation with the upcoming midterm elections.

Although these uncertainties exist, there continues to be improving sectors of our economy.  If investors develop a level of confidence over the next 6 months, we may begin to see a clearer picture.  We continue to believe that we will see this market slowly get back on track.  Time will tell.  In the mean time we continue to monitor the portfolio allocation in order to keep it in line with your objectives.  None of us like uncertainty, yet we need to be reminded from time to time that uncertainty eventually brings about opportunities.  The changing winds have at least for the moment brought about some fresh air.  We are looking forward to helping guide you through the many changes in 2011. 

Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA           
Asset Manager                                                                 Asset Manager
MFS Strategists Corner, September 15, 2010; JP Morgan 4Q 2010 Guide to the Markets;  Pimco Economic Outlook, October 2010; WSJ ‘Echoes of the Great Depression’ Oct 1, 2020; Minneapolis Star Tribune ‘Holding on to Their Money’ Sept 26, 2010; WSJ ‘Middle Class Slams Brakes on Spending’ Oct 6, 2010

Cost Basis Changes for 2011-2013

Beginning in 2011, financial institutions will be required to report the adjusted cost basis of sold securities to the IRS, including:

  • Equities acquired on or after January 1, 2011.
  • Mutual funds, ETFs and dividend reinvestment plans acquired on or after January 1, 2012.
  • Other specified securities, including fixed income and options acquired on or after January 1, 2013.

It’s still important to save your purchase and sale documentation, including records of any automatic reinvestments, in order to make sure it matches the information financial institutions will report to the IRS. You should also make sure that any other financial provider is reporting using the accounting method of your choice. Even though FIFO (first in, first out) is the IRS default method for both individual securities and mutual funds, most institutions (including Schwab) will report individual securities using the FIFO default method and report mutual funds using the average cost single-category method. You can select the method prior to any future sale.

Note: Any securities purchased prior to 2011 that you had acquired through Schwab, we have the cost basis information for you. If you transferred in any stocks, mutual funds and ETF’s prior to 2011 we are currently auditing our records to make sure that you have provided us with the cost basis information. You may be receiving a request from us in the future asking for additional information if needed.

If you have any questions, please give us a call at 952-893-5555.

The Stock Market’s Bumpy Ride

The powerful rally that lasted into April wasn’t strong enough to overcome worries about the economy and the fiscal and regulatory issues that the US shares with much of the developed world.  We heard a consistent theme during our annual trip to Chicago’s Morningstar conference.  We had access to some of the world’s greatest investors who spoke of the growing disparity between the public sector and the private sector.  While corporations are considered to be in better financial condition than they have been in a long time, government deficits are at levels considered unsustainable.  Even though corporate earnings have been good, the fear that regulation and taxation will effectively dampen future prospects has put the uncertainty back in the market.

This was reflected in the tumbling consumer confidence numbers released from the Conference Board this month. Robert Doll, Black Rock’s chief equity strategist, believes investors have become very gun shy with 2008 still fresh in their mind.  “Therefore, their mentality is to sell first, ask questions later and be content with earning 3% on 10 year treasuries.”  It’s interesting to note that the dividend yield on the Dow Jones Industrial Average is now just north of 3.1% with a number of quality companies yielding much better than that.  This looks more attractive when you consider that a 3 year treasury doesn’t even pay 1% per year.

No matter the fact that many individual companies have strong balance sheets, growing earnings and pay dividends in excess of many fixed income investments, investors have taken their eyes off of the individual investment and have become focused on the macro-economic environment.  A June 12 2010 article in the Star Tribune highlighted a number of local companies and quoted the CEO of AGA Medical saying “Greece blows up and we drop 8 percent, but we may have had our best sales day ever”.  We know that stocks don’t operate in a vacuum and ignoring the operating environment comes with its own peril, but economic winds will change as well as investor sentiment.  The famous investor and mentor to Warren Buffet was Ben Graham.  He viewed stock prices metaphorically as being offers to buy and sell from a business partner called Mr. Market.  He thought of Mr. Market as a neurotic businessman whose mood fluctuated anywhere between cheery optimism to overwhelming dismay.  In one of his manic-depressive phases Mr. Market could wildly depart from its true stock value, but in the long-run the stock will come in line with the business’s true value. This is the basis behind the famous Ben Graham quote, “In the short-term the market is a voting machine, in the long-term, a weighing one.”

In the second quarter, the voting populace’s mood that drove market prices up since March of 2009 changed. The Dow ended the second quarter down 1082.61 points, or 10%, at 9774.02.  The S&P 500 lost 8.2% in May alone as deficit concerns in Greece drove investors to safe havens.   These safe havens are now sitting at record levels.  According to the Federal Reserve as of May 10 there was $9.36 trillion on the sidelines in bank and money market accounts. This is nearly $2 trillion more than in May 2007.

Clearly there are economic headwinds facing stocks in our current environment.  The market attempts to price in the impact of these headwinds but due to emotion or sentiment, it often overreacts and can put prices significantly higher or lower than fair value.  Scott Black, the founder and chief investment strategist of Delphi Management, says, “Right now, the market is fundamentally cheap; the problem is the fear factor is overwhelming the fundamentals.”  His case in point:  The Standard and Poor’s 500 is trading at about 13 to 14 times earnings even though companies’ earnings are up 30% this year.

In our last commentary, we stated that a step back in stock prices was likely before we would move forward.  Stock valuation has become more attractive but we believe that any significant growth in stocks will be reined in until confidence comes back to the markets – and this is unlikely until we see greater improvements in the real estate market and the unemployment situation.  The majority of economists are telling us that the US is in a recovery phase but growth is moving forward slower than previous recoveries.  This could lead to markets trading in a range for the near term but when confidence comes back to the point of money coming off of the sidelines, the impact on equity prices could be dramatic.  The longer term issue is how well the governments around the globe handle their deficits and how well countries transition from their extremely accommodative stance.  The Greece story highlights the debt problems that are widespread in much of the developed world.  The Federal Reserve knows well that the US economy is too fragile yet for the government to drastically pull back stimulus but we’ll ultimately need to reduce the increasing debt burden.  Ideally this is solved by a growing economy fueled by corporate spending on employees and equipment.

In the near term, we are not sure how Mr. Market is going to react next.  The market returns over different time periods are highlighted in the graph below.   It shows the returns on stocks, bonds and cash over 1,5,10 and 20 year rolling time periods.  The best one year return on stocks since 1950 was 51% and the worst was -37%.  The volatility of returns goes down considerably when you extend your time horizon and include fixed income.  A portfolio comprised of 50% stocks and 50% bonds would have averaged 17% per year during its best ten year time period and 2% per year in the worst ten year time period.

The best portfolio allocation is one designed with your time horizon, your risk tolerance and cash-flow needs in mind.  We continue to believe in a philosophy of diversification which has proven over time to be successful for our clients.  As always, we appreciate the trust that you place in us and welcome your questions or comments.

Thomas L. Menzel, CFP®
Asset Manager

Shawn J. Jacobson, CFP®, ChFC, MBA
Asset Manager

Bloomberg Businessweek, May 31;  StarTribune, June 12, 2010; Morningstar ‘Our Take on the Second Quarter’ June 30, 2010;  Wall Street Journal, July 1, 2010; BlackRock ‘What’s Ahead in 2010’ Spring 2010; JP Morgan Asset Management Guide to the Markets, June 30, 2010; www.Conference-Board.org

Market Commentary – Volatility

Fear is, once again, back in our markets.  Even after the S & P 500 rallied 80% over the past fourteen months, there is no question that long-term structural problems have created some volatility.  The past year has been nothing short of stressful for investors, who have become frustrated, anxious and even overwhelmed during these difficult times.  The emotional part of investing can sometimes override the rational thought process as we move through market cycles, and the media’s focus on the negatives often adds fuel to the fire.  We acknowledge that housing remains weak while debt and deficit levels are rising. However, the U.S. is still in reasonably good shape compared to the rest of the world.  As Europe is addressing its issues with governments overspending and a credit crisis, there has been a flight to quality, or more stable investments, and this quality has been found in the U.S. bond market.

There is Good News…..

While this crisis has been raging, economic expansion has been gaining strength.  The U.S. economy has:

  • Logged another solid quarter of 3.2% economic growth
  • Seen private sector payrolls swell by almost 500,000 jobs in April
  • Experienced the strongest year-over-year productivity gains since 1962
  • Seen a very strong earnings season with almost 80% of companies reporting better earnings than expected

Many economists believe we are in an expansionary mode and are not heading for a double dip back into a recession.

Recognizing Volatility

When markets are on the rise investors believe there is no end in sight, but keep in mind that markets never move in a straight line for an extended period of time.  The following chart shows that no matter the crisis at hand, volatility has both a starting and ending point; they are just not the same each time.  For example, the most severe downturn marked the start of the Great Depression, where stocks lost over 80% of their value.  The following recovery period was over 12 years long.  During the early 2000 bear market stocks lost 44.7% of their value.  That recovery period lasted four years, the second longest in history.  During the recent 2007–2009 bear market stocks lost 50.9%.  This downturn lasted 16 months, with the length of the recovery period yet to be determined. Volatility stems from uncertainty and though there are signs that the recovery has begun we are uncertain as to the type of progression it will take.  There will still be headwinds that we face going forward but we are beginning to see slow signs of improvement.

Planning For Volatility

Our investment philosophy revolves around planning for those things we don’t have control of – one of which is volatility.  Developing an asset allocation appropriate for each household depends on their cash flow needs.

In 2000 and 2007, extended bull markets caused investors to abandon fundamental principles of risk management and diversification.  Alan Greenspan, former Federal Reserve chairman, coined the phrase “We are in a period of irrational exuberance.”  In a bull market, asset allocation can quickly shift to overweight equities.  At Legacy Financial Advisors, we focus on cash flow and the importance of diversification to minimize risk factors.  We entered 2008 and 2009 not knowing what to expect from the market.  However, we went in prepared to weather a downturn. In 2006 and 2007, we increased fixed income holdings while the market was still rising and raised cash in portfolios dependent on monthly cash flow in preparation for the next market downturn.

Managing Volatility

As we move forward, our strategy has not changed. We continue to discuss with our clients the importance of buying more time in their portfolios to sustain their monthly cash withdrawals needs.  Since we are able to control the amount of cash and fixed investments available in the portfolios, or “cushion” as our clients refer to it, we shouldn’t have to worry about volatility because we have built in an appropriate amount of time to wait out the fluctuations.  Diversification of equities and fixed positions allows us to create a “sleep at night” formula for difficult times.  Paying attention to cash flow needs and building up fixed and cash allocations buys additional recovery time in advance of a downturn, providing the ability to manage through volatility.  When an investor is prepared to weather the storm before it breaks, the emotional impact can be less stressful.  Building in recovery time means not being forced to sell at the bottom to fund needs, but rather managing volatility as a temporary period of time before the next advance.

Opportunities Ahead

As the credit crisis unfolded in late 2008 and 2009, bonds just like stocks were selling at pricing not seen in decades.  The highest rated (AAA) quality bonds were now selling at historical lows in a matter of months.  Bonds that were not even remotely tied to the subprime debacle plummeted.  We discovered many opportunities that presented themselves after the dust began to settle in the fixed income area.  We started shifting cash in portfolios to intermediate and longer term bonds to take advantage of the higher yield and depressed prices. Our thoughts were at the time: let’s get paid a higher dividend yield while we wait for the bonds to appreciate. Along with the surprise advance in the equity markets the bond markets followed suit.  Since the Federal Reserve has gone on record that they intend to raise interest rates in the future; we recently shortened the duration of the intermediate and long-term bonds to protect gains.  Even after the fourteen month rally since the bottom of the market; according to many of the equity fund managers you own in your portfolio, there are still companies selling at attractive prices.  The recent pull back has created additional opportunities to add to existing holdings as well as discover new additions.

We are very appreciative of the many kind remarks many of you have shared with us over the past few years.  However, it is you, our clients, who should be complemented for staying the course.  Thank you for understanding our investment philosophy which has allowed you to be a successful investor.  We will continue to work hard for you to identify those investment opportunities that present themselves.  Keep the faith as we get through this together.

Thomas L. Menzel, CFP®
Shawn J. Jacobson, CFP®, ChFC, MBA

Jacobson Receives BestPrep Award


Brooklyn Park, Minn, May 20, 2010 – Shawn Jacobson of Legacy Financial Advisors was honored with a 2010 BestPrep Service Award for his outstanding volunteer efforts with BestPrep and commitment to the education of Minnesota youth.  Jacobson was one of 27 individuals who were honored for their contributions with BestPrep, an educational nonprofit with a mission to best prepare Minnesota students with business, career and financial literacy skills through experiences that inspire success in work and life.

“Volunteers are the heart and soul of BestPrep. The time and effort they put forth to educate our kids is truly remarkable,” said Bob Kaitz, BestPrep President and CEO.

Jacobson said, “I’ve greatly enjoyed being a BestPrep volunteer.  I’ve met great new people, both inside and outside my industry as well appreciated seeing firsthand the work that BestPrep does.” 

Jacobson received his BestPrep Service Award at BestPrep’s 34th Annual Luncheon, held May 19, 2010, at the Nicollet Island Inn Pavilion.  More than 425 individuals joined BestPrep at the luncheon honoring the educators, students and volunteers from the business community who have contributed to making BestPrep the premier educational nonprofit organization in the state. 

The event featured a keynote address by featuring Martha Rossini Olson – AKA “Sweet Martha” – of Sweet Martha’s Cookie Jar.  Martha, a St. Paul native and former educator, inspired and entertained with her entrepreneurial success story.

BestPrep offers five innovative programs to educators and students across Minnesota; Classroom Plus, eMentors, Minnesota Business Venture, The Stock Market Game™ and the Technology Integration Workshop.  Founded in 1976, BestPrep annually reaches more than 75,000 students and teachers statewide.  For more information about its programs and services, contact BestPrep at 763-398-0090, or visit www.bestprep.org.

Market Commentary 03/31/2010

Markets climb a wall of worry. This is the stuff that bull markets are made of. 

The rally that started over a year ago is proof of this statement.  We saw the depths of investor sentiment just at the time when markets were positioned to rally.  A year ago, the word ‘great’ was being used to define our recession as we hoped a full blown depression was going to be averted. Now it seems that the worst is behind us, and the Dow Jones Industrial Average is on the verge of 11,000 for the first time in 18 months.

For the quarter, markets continued to move ahead with the S&P 500 returning 5.4%.   Positive returns were broad based as worries of the economy started to fade.  Eight of the ten major sectors had positive returns for the quarter.  The S&P 500 has returned 76.8% since the market low was hit just over one year ago.   However, even after this stunning run there is still no consensus on the market’s direction.

Charles Schwab’s chief investment strategist Liz Ann Sonders believes the rally isn’t over yet citing fair stock valuations and billions of investor dollars still on the sidelines.  Don Robinson, Lockwood Capital Management’s chief investment officer looks at a challenging market environment when factoring in unemployment, default rates and the sustainability of corporate earnings.  Both provide compelling arguments in support of their near term forecasts for the general market and the overall economy.  Even though their near term forecasts differ, they both believe that the uncertainty found in the market offers unique opportunities for investors.

While the uncertainty regarding another deep leg down in our economy has waned, it has been traded for uncertainty regarding government policy, both in the US and around the world.  Investors ask ‘when’ will the Federal Reserve raise interest rates, ‘how’ will we handle our growing national debt, ‘what’ will reform look like in healthcare and financial markets.  The answers to these questions will no doubt have a profound impact on which investments will outperform in the future.  Unfortunately, when clarity comes to these questions, the opportunity will most likely have passed.

A recent letter to the shareholders of Longleaf Partners Funds brings up some interesting points. After the meltdown that took place in 2008, many people asked their investment managers what they learned from the rapid market decline but no one asked what was learned from the rebound in 2009. Even though unasked, they view one of last year’s greatest lessons to be that comfort comes at a high price. They remind us that this point was also made by Warren Buffett in an August 6, 1979 Forbes article entitled, “You Pay a Very High Price in the Stock Market for a Cheery Consensus.” Holding onto stocks in early 2009, like 1979, was very uncomfortable yet patience prevailed.  Their take on the market’s uncertainty in 2010:  global markets have risen rapidly but bargains are still plentiful.

We appreciate the lessons that can be learned everyday in the markets but we also believe that some things don’t change – every investor has different needs and deserves an investment strategy to match.  Our goal is to match your short, mid and long range goals with top tier investment managers that match your timing needs and risk tolerance.  While we would not be surprised to see a market that takes a step back in order to make two steps forward, we believe that our clients are positioned to take advantage of the market gains without jeopardizing their goals.

As always, we appreciate the trust that you place in us and welcome your questions or comments.

Thomas L. Menzel, CFP®
Asset Manager

Shawn J. Jacobson, CFP®, ChFC, MBA
Asset Manager

Lockwood Capital Management March 2010 Review and Outlook; Charles Schwab Market Perspective March 26, 2010; JP Morgan Asset Management Guide to the Markets March 31, 2010; Longleaf Partners Funds Letter  to Shareholders December 31 2009; Alger  2010 Market Outlook February 2010

2010 Required Minimum Distributions

2010 Required Minimum Distributions

Required Minimum Distributions (RMDs) were waived in 2009, but will be required again in 2010. If you suspended any automatic distributions in 2009, the custodian may not automatically reactivate your automatic distributions. We have calculated RMDs and corrected this issue for accounts managed by Legacy Financial Advisors. However, if you have an account that is not managed by Legacy Financial Advisors that will be required to take a distribution in 2010, you should contact your custodian before December 31, 2010 to determine the best way to take your RMD this year.

No Qualified Charitable Distributions in 2010

Congress has ended the IRA Charitable Rollover option beginning in 2010. Individuals will no longer be able to gift up to the maximum $100,000 that congress had approved, which allowed distributions from an individuals’ IRA to be paid to a charity without incurring any income taxes. You can still take out any amount and then gift it to a charity; however, you will have to pay taxes on the amount you withdraw. We can discuss with you, along with your tax accountant, whether this makes sense going forward.

Learn More

If you have any questions, please give us a call at 952-893-5555.

Market Commentary 12/31/2009

The end of a decade was topped off with a rally unparalleled in recent history.  The speed and strength of this upturn came as a surprise to many.  After a gut wrenching market ride that began more than a year prior, investors were ready to throw in the towel by first quarter 2009.  Toss in several Ponzi schemes and an economy that was in shambles and it’s no wonder that many opted to move out of equities.  At the time when investor confidence was at its worst, the stock price pendulum was just about to swing up.  By year end the market returned just over 67% from its March 9th lows.

The S&P 500’s calendar year return was 26.5%.  Large and mid sized growth stocks had the best returns for the year producing 37% and 46% respectively. The best performing sector was technology which was head and shoulders above all other sectors with a 61.7% return. The quarter capped off the year with the S&P 500 returning 6%.  Most of the domestic sectors also had solid single digit growth with technology, health care and consumer discretionary stocks leading with 10.7%, 9.1% and 9.1% respectively. The only negative sector came from financial stocks which had a negative 3.3%.

Globally, European stocks staged their strongest rally in a decade with MSCI EAFE returning 32.5% for the year.   However the strongest performance came from the emerging markets.  The MSCI emerging markets index generated a 79% return for the year.  The story of China continued with a robust growing economy spurred on by a growing middle class and a government with hefty cash reserves.  China’s emerging market counterparts such as Brazil, Russia and India fared equally as well.  Gold hit its all time record high in November at $1,114 per ounce.  Ultimately the metal produced a 24% return for the year after spending much of the preceding two decades stagnant.

Over the past ten years, investors have experienced several bubbles and extreme volatility.  We entered the decade having become accustomed to average annual market returns of 18.2%.  That was the 1990s.  We heard from market prognosticators and TV commentators that technology stocks were leading a paradigm shift into unprecedented growth.  Of course it was later obvious that this was an unrealistic bubble that collapsed on the market.  During this time our country also experienced the horrific act of terrorism that will forever be remembered by the toll taken during the collapse of the World Trade Center.  By the end of 2002, sentiment was very low.  Later we saw this as the beginning of a broad rally that continued through the fall of 2007.  Economic growth was fueled by very accommodative interest rates that brought about another bubble and a new brand of risk taker.  Leverage became a way of life whether it was the neighbor buying a house that would never have been financed in times past or the financial institutions that made the loan and packaged them as a subprime product for investment.  The hyper-leveraged balance sheets of financial institutions and individuals alike started to unwind as payments were missed.

The dominoes started to fall and what initially seemed contained to the financial institutions rippled through nearly every corner of the global economy.  Madoff, Stanford, and Petters became household names as their schemes were exposed by a falling market.  The markets fell hard and governments tried to stem further damage by putting all of their tools to work.  Still many investors fled the markets at this time and opted for risk-free and return-free investments.  Massive government stimulus and deep corporate cost cutting shot adrenaline into the markets causing them to race ahead to finish with a strong double digit return.  It was a positive ending to an up and down decade.

As we enter the new year and new decade, we are confronted with headwinds and opportunity.  The economy is still faced with double digit unemployment, a glutted real estate market, banks that are cautious to lend and mind-boggling national debt.  We are confronted with a changing environment that will see new regulations, new taxes and a global environment where our competitors may just as easily be the other side of the globe as down the street.  These are challenges that can be overcome but will slow down the progress going forward.

On the positive front, many of the negatives just mentioned are showing signs of improvement.  Industries that cut expenses and inventory to the bone are at a point where shelves need to be restocked and technology upgrades that have been on hold are now being considered.  In November, US factory orders went up 1.1% and are seen as a sign of improving GDP.  US automakers ended the year with a 15% rise in sales in December and GM is predicting a profitable 2010 – the first profitable year since 2004.  It also appears that inflation is well contained and should not present any issues until employment and productivity improves.  Opportunities abound globally as well.  The developing countries continue to drive growth around the world.  China’s economic output per person grew at an inflation adjusted 141% over the decade.  The World Bank estimates the global economy could expand in size to $72 trillion by 2030 from $35 trillion in 2005.  As a result, 1.2 billion people around the world may join the middle class – a 300% increase.  This increasing middle class is powerful on many fronts as they tend to be consumers as well as advocates for a more democratic government in developing countries.

As we end this decade, many will note the point to point market returns and will call this a “lost decade.”  We can see from the chart below that the S&P 500 fell for only the second decade since market performance was tracked.

Yearly performance of the S&P 500 index / Performance per decade (Dividends excluded)

1920s………..21.5%                                         1970s………..16.1%

1930s……….-41.2%                                         1980s……….234.2%

1940s………..32.9%                                         1990s……….308.5%

1950s……….259.5%                                        2000s………..-24.1%


The experience of real investors will of course all be dependent on their actual holdings and their timing of investment.  An overview from the Capital Group’s American Funds showed that all of their equity funds had positive returns for the decade, which is consistent with many of the equity mutual funds in Legacy’s client portfolios.  Liz Ann Sonders, Schwab’s Chief Investment Strategist, brings up another point.  Investors dwelling on present circumstances and recent returns might extrapolate them too far into the future.  Human behavior tends to want assets that have had strong past returns and flee assets that have underperformed.  The returns of the 1980s and 1990s brought about an over-confidence with investors.  An Ibbotson study showed that few investors were able to achieve the S&P 500’s returns during this boom time because they would trade in and out in an attempt to time markets- usually buying high and selling low.

We see an investment environment going forward that is not as volatile as it was for much of the last decade.  The broad US market faces a transition as our economy recovers and stimulus is withdrawn, but this is necessary to move forward.  At the same time, there are fantastic opportunities both at home and abroad right now.  Historically markets have “climbed a wall of worry;” now is not the time to let emotions take control. Although we know we can’t completely mitigate the emotions of investors, we can help them understand how to best manage volatility and risk in their portfolios.  Over the past twenty four months you have demonstrated what it takes to be a long term investor.  You have weathered the storm, stayed the course and allowed your portfolios to recover.  You are not among the casualties of this market; instead you will be part of its recovery.  We are extremely grateful that you have allowed us to manage your family wealth and be a part of your successful future.  We look forward to discussing your individual needs and goals in the upcoming months.

Best wishes for a peaceful and prosperous New Year!

Thomas L. Menzel, CFP®

Shawn J. Jacobson, CFP®, MBA

JP Morgan Asset Management Guide to the Markets 12/31/09, Globe Advisor The Lost Decade 1/1/10; Schwab Market Commentary Turn Turn Turn, the Pages to a New Decade 1/4/10; Turner Investment Partner We’re Bullish on the 2010s; WSJ 12/31/09, 1/4/10, 1/6/10

Is Roth Right for You?

Much has been written about the ‘new’ Roth IRA conversion changes that take place next year. For many, it makes a lot of sense – but does it make sense for you?

The rule change that comes about next year says that individuals with traditional IRAs can convert to a Roth IRA regardless of income. The previous income limit for a Roth Conversion was $100,000 of adjusted gross income. The Roth effectively eliminates any taxes going forward and does not require a distribution at age 70½. In most cases, the amount of the IRA converted will be taxed as ordinary income resulting in an upfront tax. However, a special feature allows the tax on the conversion to be spread over the 2011 and 2012 tax years.

Sounds pretty good, right? The real question is how long it will take for the tax advantages of a Roth to make up for the taxes paid upfront on the conversion. If your tax bracket will remain high in retirement, you don’t plan to use the account for income (instead leaving it for your heirs) AND you have outside assets that you can use to pay the upfront tax, a conversion probably makes sense. For most others, the question becomes a little more complicated and depends on your specific situation.

We’ll be talking with you at our upcoming meetings about whether this conversion is the right thing for you. Until then, we welcome any questions or thoughts.

Market Commentary 10/01/2009

Investors enjoyed another strong quarter as markets continued to rebound from the lows of March.  The swinging pendulum that caused so much pain changed direction and moved into positive territory making this quarter the best in more than ten years.

In fact, the Dow Jones Industrial Average had its best third quarter since 1939 up more than 15%. Large company stocks, as measured by the S&P 500, returned 15.6% for the third quarter and 19.3% for the year.  Midsize companies led domestic stocks with returns of 20.6% and 32.6% for the quarter and year respectively, as measured by the Russell Midcap Index.   The financial sector had the quarter’s winning performance generating 25.5%.  This powerful rally that started in March and gained steam over the summer finally put all sectors of the domestic market into positive territory erasing the negative returns of January and February.

After a nearly 60% gain since the March low, has the economy and the markets finally turned a corner?  We wouldn’t be surprised to hear that an official end to the recession has already taken place.  However, we have uncertainty about what will keep the markets moving forward.  There has been stabilization in unemployment, home sales and retail sales but it seems like the momentum has had less to do with fundamentals of the economy than with a rekindled greed.  Merger and acquisition activity has picked up in corporate America and investors, including investment managers, have been buying stocks to avoid being left out.

In short, the psychology of fear and greed (or optimism and pessimism) has been moving the markets to extremes.  It certainly appears that the worst of the crisis is behind us and we believe that the economy is in a healing mode.  However it is concerning that the medicine that kept the patient alive and gave it a jolt of life may have side effects not yet fully realized.  Aggressive corporate cost cutting coupled with aggressive Federal government spending created strong but unsustainable earnings. At some point, the Fed will start peeling back its support, short term stimulus programs will end and corporations will have to rely on revenue growth to fuel earnings.  For long term growth, jobs will need to be created and consumers and companies will need to step forward to replace the government spending.  We’re tempering our enthusiasm for a quick recovery with one that will take time and will likely have bumps along the way.

With that said, there are still considerable opportunities for the patient and particular investor.  Our belief in selecting and utilizing the best and the brightest portfolio managers holds now more than ever.  Trends are emerging that will eventually lead us into the market’s next cycle.  Until then volatility may become the expected constant.  Bill Gross of PIMCO speaks of a ‘new normal’ for investors and the economy.  His ‘new normal’ does not describe a ‘V’ shaped recovery, but rather one that recovers at a slower and uneven pace that may very well be healthier for our nation long term.

As we enter the fourth quarter, we are pleased to see momentum continue.  We will continue to look for opportunities across asset classes both domestically and internationally.  We welcome any questions or concerns that you have and look forward to seeing you in the months ahead.

Thomas L. Menzel, CFP®
Asset Manager

Shawn J. Jacobson, CFP®, ChFC, MBA
Asset Manager

Protecting Your Assets

The Increasing Importance of Long Term Care Insurance

The fastest growing age group in America today is 85 years and up. While our society is enjoying longevity unprecedented in past generations, it has caused an asset protection problem: we are all more vulnerable to outliving our assets. This vulnerability has led to increased discussions about the importance of Long Term Care Insurance. Many Americans believe they will not become one of the less fortunate who may face a health issue requiring long-term care and that Medicare or private health insurance plans will pay for their long-term care needs – but this is simply NOT TRUE. It is important to consider the effects of long-term care and the reality of being forced to spend down our assets in a short period of time. Long Term Care Insurance provides us with a choice that enables us to avoid being a potential burden to the people we love most and to secure a portion of our assets to provide for our desired lifestyle.

Minimizing Losses with Long Term Care Insurance

We are always looking for ways to protect those risk factors that are beyond our control. You can have the best crafted financial plan and investment portfolio allocation, yet risk factors such as the unknown news of a change in health can tip our world upside down. We all choose what financial risk holes to plug and though you may not be able to stop all the leaks in your financial plan, you want to minimize the bleeders. Bleeders – or forced withdrawals from household assets to fund long-term care needs – can be minimized, capped or mostly controlled.

Minnesota Long Term Care Partnership Program

Today, as Minnesotans, we have a new incentive: the Minnesota Long Term Care Partnership Program. This plan is intended to give people greater control over how they finance their long-term care, while also addressing the demographic pressures that are expected to make the current long-term care financing system difficult to sustain in the future.

Learn More

If you would like to learn more about how this may apply to you and the benefits, please give us a call at 952-893-5555. Remember, protecting what you have assures you of the lifestyle that you have planned for and want to enjoy.

Market Commentary 06/30/2009

The second quarter proved to be a welcomed reversal of the market’s downward trend.  It could have been sighting of ‘green shoots’ or a buying opportunity created by ‘irrational pessimism’ that brought equities up more than 35% since March 9.  Either way, many portfolio managers took this as an opportunity to buy stocks at ‘once in a lifetime’ prices. Among individual investors, irrational pessimism was indeed very real.  By the first week in March, many individual investors had reached their pain threshold and sold equities just as domestic markets were hitting 12 year lows.  This set the stage for a textbook rally.

Domestic markets produced their first quarterly gain in a year and a half with the Dow Jones Industrial Average producing its best quarter returns since the fourth quarter 2003.  Despite the scandals that plagued investors and a market that provided few safe havens, this second quarter brought the major indexes into positive territory for the first half of the year.  The S&P 500 returned 3.2% since January 1 and 15.9% for the quarter.  In general, growth oriented companies significantly outperformed those termed ‘value’.  Technology stocks topped the charts with a 24.9% return year to date.  Financials had a strong quarter bouncing 35.7% but still showed a loss of 3.4% year to date.

A recent trip to the 2009 Morningstar conference gave us a firsthand look into the manager’s portfolios and the opportunity to hear their rationale for buying stocks and sectors.  There was also plenty of discussion regarding their outlook for the future.  The general sentiment among the managers was that the worst is behind us but the world in front of us is going to be different.  Different is not necessarily bad, but a time to reset expectations.  Last year was analogous to going off a waterfall as Jeremy Grantham, a long time market pessimist, described it.  In the near term the economy is still moving downstream though beginning to level out.  We see the pace of unemployment and declines in home values starting to slow.  As we’ve mentioned before, these are lagging indicators that traditionally won’t turn positive until after we see a recovery in the markets.

Consumers have always played a significant role in the US economy making up about two thirds of GDP.  Today’s tight credit and uncertain futures have created a new frugality among consumers.  The increase in savings is important to repair the debt-laden individual balance sheets though it doesn’t help retailers or corporate earnings.  As consumer confidence continues to improve and lenders loosen credit, spending too will increase, but hopefully the days of negative saving rates are past.  As Americans work toward a more solid footing, the emerging markets, which typically relied on the American consumer, are now developing their own middle class.  Mr. Grantham described the emerging markets as the new driver of global growth.  While these markets tend to be more volatile, they also hold tremendous opportunity.

In general, the outlook for the global economy appears to be stabilizing with governments willing to do whatever it takes to avert further financial crisis and put stimulus into economies.  Our optimism is tinged with a cautious tone, noting the possibility of another step back before we move two steps forward.  There is one consistent message from the history of investing – no one has the skill to perfectly time the market.  In his May 11, 2009 letter, Dr. David Kelly of JP Morgan wrote “Even as the recent data provided a little stress relief, the smart decision is to renew a commitment to a diversified strategy rather than dabble in a short term tactical game playing the fickle tides of momentum investing”.  We share his sentiment.

We must take this opportunity to thank our clients for their loyalty during this tough time.  We welcome your thoughts and look forward to the next time we speak.

Thomas L Menzel, CFP®
Asset Manager

Shawn J Jacobson, CFP®, ChFC, MBA
Asset Manager

References: 7/1/09 WSJ; JP Morgan 6/30/09 ‘Guide to the Markets’; 5/11/09 JP Morgan ‘Market Bulletin’; 7/5/09 StarTribune; 6/26/09 AAM

Identity Theft in the Cyber Age

Last week, Legacy Financial Advisors, brought you a seminar that addressed ‘Identity Theft in the Cyber Age.’ We feel that it is important to create an awareness of the threats to individual identities and how you can protect yourself against having your identity compromised.  Our presenter for this seminar, Robert Cameron, Special Agent of the Federal Bureau of Investigation, shared with us his experiences investigating these situations.

Agent Cameron used the identity thefts that took place at the Virginia Medical Center and during the Norm Coleman campaign to demonstrate that electronic records and communications are extremely vulnerable, and that organizations, large or small, do not always take the appropriate steps to secure their clients’, patients’ or donors’ personal information.

These threats are increasing in type and creativity.  Agent Cameron identified “Phising”, “Vishing” and “Zer0 day” exploits as several tools used in the identity theft trade.  Social networking sites have also become popular targets.   This month in the United Kingdom, hackers hijacked the Facebook of a Member of Parliament and sent emails to over 1500 people on the MPs ‘friend’ list.  In other situations, identities have been taken over and used to report false emergencies to the police.  Though sometimes used to play pranks, in the majority of cases, perpetrators steal identities for monetary gain.  Thieves create ATM cards and online bank accounts, wire funds overseas, and register new domains with another identity.

Though many individuals think that their anti-virus software protects them from this sort of threat, they may have a false sense of security.  Agent Cameron explained that of 30 anti-virus software products tested, not one identified all threats, leaving individuals exposed to potentially thousands of different viruses.

Even though these threats exist, we do not have to leave ourselves exposed.   There are things we can do to prevent identity theft.  Emails that appear legitimate because they begin with a bank name or other real organization may be misleading; it is the ending of the path which is important.   If an email has .com, .org or other, it does not given any bit of safety.  Nor do “http” sites have security.  The beginning “https” does, on the other hand, indicate a secure socket layer.

Agent Cameron also explained that Microsoft users should not surf the internet as an administrator.  Instead, create limited accounts for each user.   Only log on to the administrator account to update software and applications.   Apple users can also be vulnerable but are targeted less due to internal protections built into the computers’ systems.  However, Apple users should be aware that the manufacturer ships its computers with the firewall turned off.

While anti-virus and anti-spyware software will not protect you against all threats, these programs are still useful.   There are a number of free sites that have quality anti-virus and anti-spyware software, along with free firewalls and uninstallers/cleaners for personal computers.   These tools combined with good practices and common sense will reduce your exposure to cyber identity theft threats that exist today.