Our Recent Commentaries
Bernie's Commentary
December 16, 2009
As 2009 comes to a close, our economy seems to be improving, albeit very slowly. At this time last year, many were unsure that our financial system was even going to stay afloat. We are thankful that the system hasn’t fallen off a cliff. As many of you know throughout our conversations and recent commentaries, we do not believe the recent run up in the markets to be a signal of the beginning of the next great bull market. While we hope it is smooth sailing from here, we are not overly optimistic in the short-term. Expectations should be kept in check as we do believe our economy has a long way to go.
We want to take this time to thank you for the trust and loyalty you’ve shown us, especially over the last 12-18 months. We look forward to focusing on your goals and objectives as we plan for 2010 and beyond. Our entire staff wishes you and your family a Happy and Healthy Holiday Season!
Bernie’s Commentary
November 1, 2009
I thought this was a good time to discuss our interpretation of the signals we are receiving from the economy. The million dollar question still remains, what will the recovery look like? Some are predicting a powerful recovery that will create new wealth. Others are predicting a slow return to growth that could be spoiled by a “double-dip” or “W-shaped” recession. At Bernard R. Wolfe & Associates, we do not have a crystal ball, but we highly doubt the powerful recovery theory and truly hope we do not see a “double-dip” recession.
One thing we know for certain is that investors are still hurting. The US and global economies are still in serious condition, but they are no longer in “grave” condition. More than likely, this is the reason behind the recent stock market surge rather than the idea of a booming recovery. A large part of our professional role as wealth management advisors is to manage expectations. No investor should expect the returns that we all experienced in the good old days. We believe there has been a significant break in the growth pattern investors may have enjoyed in the past. Bill Gross of PIMCO says it is due to “DDR” delevering, deglobalization and reregulation. The consumer savings rate is nearing an all-time high and their spending is on the way down1 - this usually results in a slower growth rate for our economy. Credit is still difficult to get, and along with the increased savings by the consumer, a delevering process of our economy has begun. This also lowers the growth rate of the economy. The laissez-faire attitude has been replaced by the iron fist of the government. The government in the past has been the referee. Today they are in the game. Don’t get me wrong, we believe that there was no other viable solution. However, if our government overstays its welcome, there could be serious consequences for future growth opportunities. Some say we are on the path for deglobalization – a more US-centric economy. If so, this could lead to protectionism. Typically, high tariffs have never been a positive for growth.
Here at Bernard R. Wolfe & Associates, we are proceeding with caution. The asset allocation models we utilize are now a combination of “rowing” and “sailing” strategies. We believe this flexibility allows us to better navigate through a volatile environment. Simply put, there are “sailing” markets when the prevailing economic winds drive strong bull market returns, as well as “rowing” markets when bear market headwinds and choppy waters require more active management. If we had the magic formula and knew what the future held for all of us in regards to investment results, we would be able to go all sailing or all rowing. The investment portfolios we utilize are tailored and structured to the needs of each individual client, rather than trying to beat an arbitrary index such as the S&P 500 over a period of time. In our opinion, those financial advisors who continuously focus on trying to outperform certain indices often take far more risk than necessary. This can be very dangerous in this type of economy. We are more interested in helping you reach your personal financial goals.
Going forward, we may still be in a secular (long-term) bear market, with an occasional cyclical (short-term) bull market mixed in. We subscribe to the idea that less volatility no longer means lower returns. In this type of market, less volatility may lead to higher returns.
These remain volatile times, and we will continue watching the situation closely here at Bernard R. Wolfe & Associates in order to respond quickly to any changes in the outlook. As always, we appreciate the trust you have placed in our firm. Our entire team is here to help you work towards your wealth management goals. If you have any questions, please do not hesitate to get in touch with us.
1- Bureau of Economic Analysis, US Department of Commerce website & Wall Street Journal “Savings Continue to Be High” March 27, 2009
Bernie's Commentary
October 20, 2009
We received a lot of feedback on our last eNewsletter, which mentioned the topic of Roth-IRA conversions and the rule changes beginning in 2010. This subject presents an opportunity for your financial professionals to coordinate, work together, and help you make an appropriate decision.
In fact, a conversion of certain retirement assets may represent an excellent opportunity for many of you. At the same time, a conversion may not be appropriate for other individuals.
Some of the questions you may want to ask yourself in anticipation of an analysis are as follows:
- Do you have cash set aside outside of retirement plans to pay the tax upon conversion?
- Do you expect your tax rate to be higher or lower over the next few years?
- What are, or what will be, your retirement income sources?
- Do you have major short, intermediate or even long-term expenses to consider?
- Who will be the eventual beneficiary of the IRA account(s) from the standpoint of estate planning?
Other factors allow us to look at the decision from an investment standpoint. As financial professionals, we analyze how these assets are positioned as well as how they are expected to perform1 in both up and down markets.
Either way, there is certainly a lot to think about. The decision to convert does not have to be all or nothing. A partial conversion may be appropriate for some. We encourage you to call us to discuss this issue in more detail in the coming months leading into 2010.
1. Past performance does not guarantee future results.
The Power of Momentum Plays
By Brad Glickman, CFP ®
It is human nature to jump on the bandwagon. After all, few people like to be left outside in the cold. In the investment world, if one sees an opportunity to take advantage of a trend and personally benefit, he or she will likely do it.
We experienced this firsthand in the late ‘90s with technology focused Internet companies. People were buying those stocks simply because the prices were rising; it was based on pure momentum. But the truth is that momentum has nothing to do with fundamentals. It’s the “herd mentality.” And like all trends, the momentum inevitably comes to an end. In the spirit of the new NFL season, I liken this to one of my favorite pastimes—fantasy football.
The Aaron Rodgers analogy
Consider the quarterback for the Green Bay Packers, Aaron Rodgers. In fantasy football, the number of touchdowns and passing yardage measures the success of a quarterback. This year in particular, Rodgers is being hyped as another Dan Marino. But in my financial planner’s mind, I think of him as the wildly popular AOL stock of the mid-‘90s. His “stock” is mostly hype.
Sure, Rodgers has a strong arm, plays in a passer-friendly system, and is throwing the ball to an above-average receiving corps. He also had a productive 2008 season. But, he was selected second overall in one of my drafts.
My guess is that people are banking on the fact that he had an unbelievable preseason. To steal a thought from NBA pro Allen Iverson, “We are talking about preseason (practice).”
The fact is that for players trying to make a team, preseason is their chance to shake off the rust from the offseason and get their timing down in preparation for the regular season—when it actually counts.
Consequently, you cannot place too much stock in the preseason because in many cases, the opponents do not have their best players on the field, and the speed of the game is noticeably dialed down. Either way, many so-called NFL experts are predicting an MVP season from Aaron Rodgers in 2009.
The bottom line
Similar to how I would not select Rodgers too early in my drafts, I try to stay away from these kinds of “momentum plays” in the investment world. The hot asset class one year is more than likely destined to be a laggard soon thereafter. In certain markets, a buy and hold strategy works best. In other markets, the exact opposite may be the case. Like the Aaron Rodgers preseason, this type of growth is unsustainable.
While managed futures may be appropriate for certain high net-worth investors, and certainly as a low correlation diversification2 play, we are not recommending that our clients completely abandon their traditional portfolio holdings.
Here’s why
Even though these traditional portfolio holdings (stocks and bonds) had a horrible year in 2008, it is rarely a good idea to change lanes and overweight portfolios in the hot asset classes based on recent success. In constructing portfolios and focusing on asset allocation, it is usually a mistake to go “all-in” on one strategy.
Choosing one specific strategy usually falls outside of the desired risk/reward spectrum. Especially in these uncertain times, we recommend investing in four or five different investment strategies, with access to several different asset classes. Using this philosophy, we may not be kicking ourselves if our number two overall pick performs below our expectations.
2. Diversification and asset allocation do not protect against the loss of principle due to market fluctuations. They are methods used to help manage investment risk.
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Bernie's Commentary
Are we and our economy finally out of the woods?
September 14, 2009
We are getting this question over and over. For those of you who have known me for a long time, you probably know that I usually have a very optimistic outlook. This time though, I still have some concerns. Before I explain my worries, I am confident that the collapse of the financial markets (that had seemed very possible through February of this year) was indeed averted. In fact, we even see some stabilization. Just yesterday, the Treasury announced that the guarantees they had provided on money market funds will end on schedule next month. The guarantees did not cost the taxpayers a penny, but instead, actually earned the treasury a billion dollars from fees paid by the participating mutual fund companies. This was a very nice return and clearly a step in the right direction.
The stock market rally has been very impressive. The S&P has rallied 54.62%, the Dow is up 45.28% and the NASDAQ is up 61.07% since March 9th, 2009.1My concern is that this could be a “head fake.” We feel this rally has more to do with people feeling thankful that the financial world will survive and not necessarily because of great corporate earnings and/or expansion of our gross national product (GNP). In fact our team here at Bernard R. Wolfe & Associates refers to this rally as the “No Armageddon Rally.” For those of you who have not seen the movie, we are simply saying that the financial world is not coming to an end.
With that said, a positive economic outcome is anything but a sure thing. For this reason, we have made changes in the allocations of certain portfolios in the event we have a possible “W-shaped” recession.
We are concerned that this recovery may be more of a putt-putt recovery than a boom-boom recovery. We think the economy may slow further as the fiscal stimulus fades and the tax cuts that were enacted in 2001 and 2003 are set to expire. Further, consumers have increased their savings rate from .01% in 2008 to nearly 7% so far this year.2 While this may sound like a positive, it is not good for the economy which relies on the consumer for 70-75% of the GNP number.2 Consumers are not spending as they were prior to the recession. In fact, many people have been de-leveraging in an effort to improve their balance sheet. The current pace of spending by the government cannot continue. It is inevitable that at some point policy makers will make the painful decision to eliminate the budget imbalance, putting fiscal policy back on a more sustainable track. Our government’s spending for fiscal 2009 is projected to be 28% of GNP. Only 1944 and 1945 were higher in the last 150 years. 3 What happens to the growth rate of our economy when the government stops pumping in money coupled with the consumer’s lack of spending? We feel the recent changes we have made to our portfolios take these possibilities into account. While there are never any guarantees, we feel very comfortable with our current strategies regardless of what our economy has in store for us. Our objective is always to strive to match our clients’ goals and risk tolerance with the appropriate blended strategies.
As always our entire team is here for you and we welcome any comments or questions.
Best regards,
Bernie
Bernard R. Wolfe, CFP®
1 – Google Finance – September 11, 2009
S&P 500 – An unmanaged index of 500 stocks which is considered representative of the US stock market
Dow – The Dow Jones Industrial average is an index of 30 industrial stocks which is considered representative of the US stock market
NASDAQ – The NASDAQ is an index of all stocks traded on the NASDAQ stock exchange
2 – The Washington Post “Opening their Wallets, Emptying their Savings”, Blaine Harden, July 30, 2009
3 – Morningstar Perspectives “Now Comes the Hard Part”, Reed Conner & Birdwell, August 18, 2009
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The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by NFP Securities, Inc. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by NFP Securities, Inc. for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results. Asset allocation does not guarantee against loss of principal.
Securities and Investment Advisory Services offered through NFP Securities, Inc., a Registered Broker/Dealer. Member FINRA/SIPC and Federally Registered Investment Advisor.
Bernard R. Wolfe & Associates is an affiliate of NFP Securities Inc. and subsidiary of National Financial Partners Corp., the parent company of NFP Securities, Inc. 9/2009
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