You May Want to Save But the Government Wants You to Spend

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The United States used to be a nation of savers.  For significant periods of time in the 1970’s and 1980’s we saved more than 10% of our collective income.  In the early 1980’s the United States was the greatest creditor nation that the world had ever known.

Beginning in the 1980’s, we became increasingly enamored of spending.  Not only did we begin to spend a greater portion of our incomes, we discovered the fun of borrowing to spend even more.  The rapid proliferation of credit cards made borrowing easy and, at least initially, painless.  In due time, we transitioned from being the largest creditor nation in history to the largest debtor nation ever.  Instead of owning our domestic assets plus a portion of assets around the world, we deteriorated to a position in which people in other countries owned not only their assets but a portion of ours as well.  In recent years more and more U.S. assets have been transferred to foreign hands.

Less than two years ago, before stocks and real estate plummeted, the people of this country saw no need to save at all.  For a brief period of time, we spent more than we earned, resulting in a negative personal savings rate.  The sudden decimation of personal net worth in 2008 and 2009, however, brought about a dramatic change of behavior.  When the stock and real estate markets imploded, the personal savings rate jumped to about 6%, as people realized that growth in the value of investment portfolios and homes could no longer be relied upon to meet tomorrow’s needs.

The sharp stock market rally since the March 2009 lows has lessened the urgency to save, and the personal savings rate has fallen back to the 3% level.  Over the past half century, the stock market has, on average, produced negative returns when savings are as low as they are today.

Clearly what’s needed for the long-term good of our savings-starved populace and for the country as a whole is to build our savings and decrease our reliance on foreign funding.  At the same time, ironically our government is doing everything in its power to induce us to spend — cash for clunkers, tax incentives for first-time home buyers, possibly cash for appliances in the fall and who knows what else they might think of.  America’s economic fragility and its inability to endure a double-dip recession is forcing the government to promote spending today, while worrying about tomorrow tomorrow.  The government has dug itself into a debt hole so deep that it feels compelled to keep on digging.  Not only is it digging the debt hole deeper, it’s accelerating the pace of digging.  Can you imagine waking up with a hangover from too much drinking and forcing yourself to drink even greater amounts to eliminate the problem?  It’s hard to imagine that the eventual outcome would be favorable.

Nor can we know the ultimate outcome of our economic dilemma either.  We can’t know whether we will ever find our way out of the debt hole, but it would be foolish not to recognize the potential that our securities markets may behave in far from typical fashion in the years ahead.  We strongly urge our readers to abandon a fixed allocation investment strategy.  The flexibility to respond to unpredictable economic and market conditions may be a necessity in the decades ahead.


Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.

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QUARTERLY COMMENTARY Third Quarter 2009

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As we were writing our first quarter commentary just six months ago, economists and market analysts were speculating about whether the proposed government rescue efforts would succeed in keeping the financial system from collapse.  Over the ensuing two quarters rescue money has significantly reliquified the banking system.  The Federal Reserve has in essence dropped short-term interest rates to zero, which has allowed banks to take the free money and loan it back to the U.S. Government by buying Treasury notes and bonds.  The difference between the zero cost and the yield on the Treasury paper is contributing to profit and rebuilding the banks’ capital.  Banks, hedge funds and any other financial entity able to borrow and lever up their investments can make this simple transaction highly profitable as long as the government makes taxpayer money available at essentially no cost.  It is one major reason why so many complain that government efforts to date have rescued Wall Street with little benefit having filtered through to Main Street.

 Admittedly, there is little potential for a broad-based economic recovery unless we have a functioning financial system.  Because the rescue efforts have also improved investor attitudes, stock and bond prices have soared over the past seven months.  This surge improves the likelihood that Wall Street firms will remain healthy, even if that same good fortune fails to extend to a broader list of companies.

 An open question remains as to whether or not the economy will continue to improve once government stimulus stops and, worse yet, begins to be withdrawn.  Optimists point to normal recoveries from past recessions that demonstrate consumer and business confidence growth as the recession memory fades.  They anticipate that the worst is already over and that strong foreign demand, especially from emerging market countries, will supplement a normal domestic recovery and extend the positive growth cycle for a couple of years or more. 

 Pessimists argue that it’s different this time.  Notwithstanding government entities’ questionable ability ever to get financial planning right, the bigger concern is whether or not the U.S. consumer will pick up the slack when the government ceases to serve as the buyer of last resort.  What unintended consequences will government efforts leave behind?

 We are in the camp of those who doubt the consumer will bounce back this time as readily as after prior recessions.  The stock market losses of the past decade combined with the tremendous recent decline in residential real estate have carved a huge hole in the net worth of the average consumer.  That consumer has been badly burned and has lost his/her long-held belief that investments only grow in value.  Personal savings rates have begun to rise, and it is highly probable that erstwhile consumption will find its way into savings in the years ahead.  Double-digit unemployment rates obviously impact spending by those who have lost jobs.  The fear of unemployment in those still working will likely decrease their willingness to spend.  And the need to rebuild nest eggs by boomers nearing intended retirement will almost certainly dampen their spending intentions.

This is not a typical recession, and the U.S. consumer is highly unlikely to bounce back in a normal fashion.  Those who point to the Chinese or the Indians as the world’s ultimate economic saviors are making a huge leap of faith.  The Asian economies have grown and developed world-class strength as net exporters, not importers.  It is unlikely that in the near term they are ready to replace the U.S. consumer as the buyer of last resort.

 Worldwide government stimulus has slowed the economic decline and has led to improvements in most financial statistics.  Many of those improvements, however, are in the form of slower declines, not actual advances.  Overall economic levels remain extremely depressed.

 On the heels of dramatic rallies, stock and bond prices are far from cheap.  U.S. Treasury bond yields remain only slightly above half-century lows.  Corporate and municipal bond yields have declined dramatically.  We believe that numerous potential defaults in those latter categories make current bond prices highly suspect.  By all traditional measures of value, common stocks are very expensive and are pricing in many quarters of strong corporate earnings growth.  With tremendous fragility remaining in the financial system, we think this is a very dangerous time to pay a premium for assets that have already rallied strongly off their lows.

 The past twelve months have seen some of the most remarkable stock market action in our lifetimes.  Massive declines were followed by an essentially uncorrected rally that has seen most major stock market indexes climb by about 60% from their March lows.  For the full twelve months, the S&P 500 recorded a loss of 6.9%.  We avoided most of the drama, and our portfolios earned small positive returns.  We protected assets well through the period of plummeting prices, then sold most of our equity holdings into this year’s rally.  That leaves us with an ultra-conservative position right now.  While over the next several weeks we would trail a rally that continues without corrections, we are extremely well positioned to react to potentially sharp economic or market changes.  In a highly uncertain and still dangerous environment, it is our preferred position.

 A number of clients have indicated their appreciation of the investment updates I began to provide this quarter on ThomasJFeeney.com.  Unlike most blogs, I am not dialoguing with readers.  If you enjoy reading these quarterly commentaries, I invite you to review the blog site.  On no set schedule, but at least weekly, I comment on economic or market conditions, offering our often non-traditional viewpoints, which are fully grounded in an understanding of what has represented good value throughout market history.  Take a look.


Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.

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Calling Into Question Long-Held Beliefs

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Serious losses over the past two years have led investors, investment managers and commentators to ask:  How could so many of “the best and the brightest” have gone so far wrong?  Over the past several days Financial Times has run a series of articles on The Future of Investing (see www.ft.com/investing ) in which they outline a number of changed attitudes and practices that have flowed from the greatest loss of portfolio value in history.

In his October 2 article on risk management, John Authers describes how risk is no longer being looked at as “beta” or “standard deviation,” traditional measures of portfolio volatility, but rather as “the risk of outright loss.”   Why beta and standard deviation were so steadfastly seen as appropriate measures of risk can perhaps be explained only by statisticians who needed a quantifiable measure of risk.  I have long contended that these concepts were flawed substitutes for an understanding of real risk – the potential for loss or of failure to take advantage of significant opportunities for gain.

As a guest lecturer in investments at the University of Notre Dame in the late 1970s I spent the better part of one lecture ridiculing the use of beta as a measure of portfolio risk.  That was before standard deviation had an appreciable industry following, or it would have been included as well.  When working with clients in developing their statements of investment objectives and policies over the past few decades, I’ve had numerous opportunities to address the question of what represents an appropriate measure of risk.  I have frequently asked members of client boards if they even knew what beta and standard deviation meant and, more relevantly, whether any of them ever used those concepts as measures of risk in their own lives.  I’m still looking for the first person to apply those concepts away from portfolio analysis.  They are, in fact, more misleading than helpful.

John Authers’ article also called into question the modern consulting approach of selecting specialists to fill numerous style boxes in investment programs that employ relatively fixed asset allocation structures.  Ironically, that practice effectively makes the consultant more responsible for portfolio success than the individual portfolio managers.  Given the relative skill sets of the two groups, that’s putting the most crucial of the investment decisions, asset allocation, in the hands of the less market-savvy group.

In former decades, when I wore a consulting hat, I was a strong advocate of finding managers with a real understanding of value, who could successfully choose among a variety of asset classes.  These were managers that typically fell into the tactical asset allocator category.  That category virtually disappeared in the late 1990s because any allocation away from equities in that period detracted from portfolio performance.  Former tactical asset allocators became closet indexers, varying allocations slightly above or below relatively fixed benchmark allocations.  With terribly unfortunate irony, tactical asset allocation became nearly extinct just as its skills were most needed when the tech stock bubble burst at the turn of the century.  The belief of consultants and their clients in a substantial permanent allocation to equities became dominant just in time to lead to massive equity losses in the two major bear markets so far in the new century.

I have been a strong believer throughout a 40 year career that the most successful managers understand well the concept of value and can find value (and balance risk) in a variety of asset classes.  It is what we at Mission and Marathon attempt to do.  We are not shy about varying allocation percentages dramatically in our attempt to protect and grow client assets.

I have long urged investors to concentrate on absolute, not relative, performance.  You can’t spend relative performance, as many learned in 2008.  Investment programs with fixed asset allocations did relatively well if they lost only 15% last year.  It was faint consolation that many similar portfolios declined from 20% to 30% over the same time period.  Our controlled risk flexible allocation portfolios (most of our clients) have always pursued absolute returns.  We succeeded in producing a positive return in each of our first 22 years through 2007.  Despite the trauma in the equity markets last year, we came into December with the potential to keep that unblemished record alive.  Unfortunately we couldn’t find enough in those last few weeks to put a plus sign in front of the full year’s results.  The average decline for that destructive year, however, was just under 1%.  We hated to lose even that small amount, but it kept our portfolios essentially whole and able to resume growth in 2009 and beyond.

 

 
Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.

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Bet Against Investor Expectations

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The third quarter closed Wednesday up more than 15%, as economic statistics continue to come in less bad than they were months or quarters ago.  As we have stated in recent postings, stock prices are extremely expensive relative to earnings, dividends, book value or virtually any other commonly employed measure of value.  For stock prices to stay at current levels or to rally further, almost certainly we will soon need to see real growth in reported economic statistics, not just smaller levels of loss.

The remarkable stock market rally from the March lows extended to more than 60% at the September 23 highs without a single correction of even 10%.  Over the past eight market days, however, the market’s tone has changed a bit, as the major averages have fallen by a little over 5%.  Volume, which had been quite lethargic in the latter stages of the advance, increased as the market sold off, adding a note of uncertainty for the bulls.  Where the market goes from here is an open question.

For more than two years the stock market has done its best to confound most investors.  Few anticipated imminent danger in mid-2007 with the Dow Jones Industrials at all-time highs.  Less than two years later, bulls were virtually non-existent after stock prices had declined to less than half of their earlier peak values.  Investors have doubted the sustainability of this year’s rally almost all the way up from the bottom.  Only now that prices have risen 60% have large numbers of investors come to believe that a further rally is likely.  Clearly the path to greatest profits over that span of time was to do the opposite of what felt most comfortable and what most people believed.

On a fundamental basis, the economic outlook is highly uncertain.  As indicated earlier, most economic conditions are getting less bad, but almost none is getting good.  Investors are pricing in a recovery that they expect will get progressively better for a considerable period to come.  At current prices, should future economic statistics or upcoming corporate earnings announcements disappoint, this year’s gains could disappear quickly.  Because the prospect for success of a program of economic progress through unprecedented government stimulus is unknowable, we can’t know what the economic and corporate picture will look like in 2010, much less in years further out.  We are paying historically very high prices for stocks in a remarkably uncertain economic environment.

On a technical basis, conditions look somewhat more favorable.  Whether or not the current pullback ultimately becomes a 10% or larger correction, the odds favor at least one more run toward new market highs for this rally.  Of course, that’s what most investors expect, and the expectations of the majority, as pointed out earlier, have been highly flawed over the past few years.

What surprising market patterns could unfold?  Despite the increase in volume in the current decline, perhaps buyers will resurface next week and the market will proceed even higher, denying latecomers the opportunity to buy into the expected correction.  Alternately, perhaps we have seen the best we are going to see in this rally, and prices may head back to test last March’s lows.  Either scenario would surprise the majority’s expectations, although the latter would be considered a shocker.

We do not have a strong conviction about the market’s near-term direction.  We would add individual equities if we can find some that meet our valuation-based purchase criteria on any further pullback.  On the other hand, with market prices as high as they are, we will not chase equities if we experience no further pullback.  With fundamental conditions as uncertain as they are, we will err on the conservative side until valuations become more attractive.


Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.

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Why Not Buy Bonds?

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The tremendous stock market rally since March has attracted the lion’s share of financial headlines.  One of the most dramatic advances in U.S. history fully deserves that favorable attention.  Far less well publicized was the fact that most other asset classes have similarly provided remarkable six-month gains.  In fact, the best performers have been the poorest quality assets like the lowest rated junk bonds.  In most cases the extent of the bounce in the rally is inversely related to the extent of the preceding decline.  Nonetheless, most equity indexes remain below where they were a year ago. 

A number of clients have asked why we are not more enthusiastic about both corporate and municipal bonds.  Frankly, if we had foreseen that investors would have been so quick to reaccept high levels of investment risk, we would have made substantial commitments to both the stock and non-government bond areas.  Unprecedented amounts of government stimulus have succeeded in reassuring investors in both the equity and debt markets.  Simply stopping the bleeding from the credit crisis a year ago has gone a long way toward bringing us back to a more normal business environment.  That we have experienced no similar large scale disasters since has fed the growing positive investor attitude.  We are not, however, out of the woods.

Serious strains remain in this country’s financial system.  Many of our largest banks are alive only because of government assistance.  We can’t know yet how well the system will function once the government’s assistance is withdrawn.

A great many municipalities are severely strapped because of declining tax revenues.  Many are likely to default on their tax exempt bonds in the next few quarters. 

While corporate earnings have fallen precipitously from their peaks, sharp cost cutting has prevented an even more significant decline in earnings per share.  It will be much tougher to replicate such cost cutting in quarters to come.  Further enthusiasm for stocks will flow only from improvement in earnings — likely only if revenues start to grow.  With unemployment yet increasing and consumers still exhibiting frugal tendencies, growing revenues may prove elusive.  As Warren Buffett has warned, a great many corporations have derivative-laden balance sheets that do not adequately reveal the level of risk assumed.  If business conditions slow as the effects of government stimulus fade, we anticipate a series of corporate defaults, which would likely damage corporate bond prices even for stable companies.

Some people have suggested buying corporate bonds with just a few years to maturity.  That could prove to be a sound approach, but we prefer to wait at least several more months.  The stock market will not grow to the sky without at least occasional meaningful corrections.  We anticipate that when some of the current exuberance fades, we will simultaneously experience an expansion of the spread between the yields of corporate and government bonds.  If the economy does not fall into a second leg of this recession, we may indeed find some attractive corporate or municipal bond investments, especially those with relatively short maturities.

Bond prices may fluctuate with the fortunes of the U.S. dollar, which is significantly oversold.  There is virtually unanimous opinion that the dollar can only decline from here.  Unlike most investment managers, we expect at the very least a meaningful technical rally soon, even if the dollar is fated to go lower in the longer term.  Since most asset classes have rallied as the dollar has declined in recent months, we think likely that a surprise dollar rally would put pressure on the prices of stocks, bonds, oil, gold and other commodities.  We will take another look at short maturity bonds once we see how they behave in their first pullback phase, which could coincide with a dollar rally.


Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.

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Tough Short-Term Decisions for Investors

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As we have said repeatedly over the years, markets can take on lives of their own.  In the short term confirming fundamentals are not required.  Market prices, however,  can’t diverge from fundamentals indefinitely.

Other than the solidly entrenched problems with unemployment, most economic measures are improving, and a great many economists opine that the recession might be over.  Except for people directly affected by unemployment, as a country we are breathing a collective sigh of relief.  We feel that conditions may have bottomed and started to rise.  Investment analysts have seized on that change of direction and are celebrating the dramatic percentage improvement in a great many economic measures.  The equity markets have rejoiced in the turnaround as the 60% gain from March 9’s bottom is close to the largest six-month advance in U.S. history.  In past recession recoveries, stocks have never achieved such a percentage gain until the economy had been out of recession for many quarters and all question of possible relapse had been put aside.

In this current attempt at recovery, despite improving economic statistics, there is no proof yet that the recession has ended.  With unemployment still worsening and tremendous fragility remaining in financial institutions, the potential certainly remains for the economy to dip again.

It is important to evaluate properly the strong percentage improvements we’ve seen in select economic statistics.  Most of the bounces are off severely depressed levels, so the percentage improvements may be misleading.  A look at multi-year graphs of various economic data show a common pattern.  For example, an index may have declined from 10 to 2 from peak to trough.  A bounce from 2 to 3 since the trough is a very impressive 50% improvement, but it leaves the index still severely depressed from its earlier strong levels.

Recent headlines celebrated a $2 trillion improvement in household net worth.  Much of that came from the stock market surge, and is good news.  On the other hand, household net worth had declined by $14 trillion in the prior decline, so we are not even close to having repaired our collective balance sheet.

There is great speculation that Asia will lead the world out of its current slowdown.  Asian economies have grown in recent years largely with an export orientation.  The U.S. consumer has been the buyer of last resort.  We are strong believers that the U.S. consumer’s behavior has been altered for years to come.  A recovery based on the expectation of a rapid resumption of historically normal consumer behavior is likely to be surprisingly weak. Once the bounce initiated by government stimulus and inventory rebuilding has to rely on the consumer, its forward progress may slow considerably.

While they may have little effect in the short run, these issues should call into question longer-term stock market potential.  Assuming high levels of risk over the past few months has been the surest path to profits.  The lowest quality junk bonds, for example, have outperformed almost all other asset classes.  That performance won’t continue indefinitely, but no one can forecast the top with certainty.  The broad rally’s ability to continue higher depends mostly on investor confidence, which feeds on itself as the market pushes higher.

Although markets are significantly overbought in the short term, most technical measures point to even higher prices.  At current valuation levels, however, we dwell in the realm of the trader, not the investor looking for sound fundamentals in his/her portfolio holdings.


Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.

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A Quick Friday Update

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This was a week spent mostly on the road, leaving little time to write. For equity investors it was simply more of the same. It looked like a replay of last week, with most markets moving unspectacularly but steadily upward. Bonds, on the other hand, essentially gave back the gains they made last week.

Continued longer term strength in both stocks and bonds offers clear testimony to the belief that the economy and corporate profits have seen their bottoms and that each is headed higher with no strong risk of inflation. Investor behavior apparently anticipates successful germination of the green shoots into beautiful flowers. It could happen, but there remain a great many threats to the full maturation of those blooms.

Investors pouring massive sums into risk-free Treasury bills – at the end of the week yielding a miniscule 0.08% – are sounding a loud note of discord. They are accepting a mere eight basis points, virtually zero, for the privilege of lending their money to the U.S. Government for three months. They are willing to accept no return for the assurance that they will receive 100 cents on the dollar when they want their money back.

Behavior of stock and bond investors demonstrates an increasing appetite for risk assumption. The retreat of the Treasury bill yield back toward zero, however, shows that a growing segment of the investor universe does not share the confidence of the risk bearers. As we pointed out in our August 18 posting, because of the unforeseeable outcomes of many determinative events, the range of possible outcomes is tremendously broad.

With all traditional measures of value at extremely high levels, it is an expensive bet that the green shoots will all survive and continue to grow. Our country remains burdened with unprecedented levels of debt and a fragile financial system. The similarly unprecedented stimulus efforts of government officials and central bankers must prove successful without serious unintended negative consequences for still rising stock prices to make fundamental good sense – a major speculation.


Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.

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Thoughts for a Friday

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Stock prices around the world continue to climb.  Most economic indicators are rising from severely depressed levels.  Central banks on balance remain committed to stimulus.  Although consumer balance sheets remain depressed, and employment statistics lend little encouragement, government-induced liquidity appears to be trumping any negative conditions, and cash continues to flow into common stocks.

Such positive market action can continue as long as investor confidence remains elevated, so there is no necessary ceiling to the current rally.  We repeat the warning from our August 27 posting, however, that while speculative equity positions may yet prove profitable, stocks are clearly not cheap.  The Standard & Poors Corporation projects the price-to-earnings ratio on operating earnings (everything but the bad stuff) for its S&P 500 to be 27.1 for the almost completed third quarter.  Using reported earnings, which include the past year’s massive write-offs, the PE multiple is an unprecedented 195 for the year ending this month.  Although not as extreme, all other commonly used measures of value are historically very high.  Stockholders have to hope that the green shoots blossom into gorgeous flowers.  They could, of course, but the cost to play in that botantical sweepstakes is extremely high.

Interestingly, the enthusiasm for stocks, presumably because of a positive outlook for business conditions, has not precipitated any fear of inflation in the bond market.  Intermediate and long U.S. Treasury yields have fallen substantially from their recent highs.  At the very short end of the curve, the 90-day Treasury bill yield of 0.14% shows that fear remains a dominant emotion.  Investors are willing to loan money to the government for essentially no return.  Such a miniscule yield suggests that the fear is certainly not of inflation, but perhaps of deflation or some kind of systemic implosion.

Another interesting question:  Despite the huge growth in the Chinese economy, why is China pumping up its M2 monetary measure at an almost 30% year over year rate?  What is China afraid of? Apparently not inflation, at least not yet.  We’ll continue to evaluate these questions in future postings.

Have a great weekend.


Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.

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Is the Government Buying Stocks?

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A segment of the investing community believes the government has been a player in the equity markets for years. That the Plunge Protection Team stands ready to support sagging equity prices is a long-held conviction by many. At the same time, a number of very knowledgeable, experienced people including Art Cashin, UBS’s director of floor operations, scoff at the idea.

I have no information that would support either view, but logical inferences lead me to ask, “Why not?” When stock prices were plunging from 2007 highs, the monetary authorities made it clear that direct asset purchases were to be weapons in the recovery arsenal. While direct purchases of fixed income securities have been the only type publicly acknowledged so far, I have neither read nor heard of the government disavowing the possibility of adding common stocks to its shopping list.

In addition to supporting bonds, the government has added its buying power to real estate, automobiles and soon refrigerators and washing machines. Of course, it has openly taken equity stakes while bailing out several failed financial companies. Clearly the government is attempting to increase the volume of business transactions, hoping the salutary effects will ripple through wider and wider segments of society. A second objective in every government intervention is that of elevating consumer and investor confidence. What better way to boost investor confidence than to push stock prices higher?

There might be no increased suspicion about government interference if the market had not been extraordinarily persistent in its rally from the March lows. Suspicion grows, on the other hand, when the market finds support following technical breakdowns that normally lead to increased selling, not buying. Of course, unforeseen support need not necessarily come from the government. There are several huge financial firms whose interests might be best served by the prevention of a market decline that could further damage already wounded balance sheets. It’s simply that the government has more wherewithal than any other organization, and such market support would be completely in line with its many similar attempts to stimulate and support the ailing economy.

Those of us who value the concept of free markets pray that politicians or government employees don’t fall victim to the government’s desire to provide short-term market support at the potential long-term cost of confidence in our markets. Investors around the world look with suspicion at the Chinese market because of potential government interference. The United States has developed its reputation for top quality investment markets over more than a century. If short-sighted, self-interested government officials should put that reputation at risk, the damage could be incalculable.


Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.

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Disaster Foreseen

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With 20/20 hindsight we know that July and October 2007 marked a rough double top for common stocks with the Dow Jones Industrials just over the 14,000 level in both months. With perfect foresight that would have been a brilliant period in which to lighten equity allocations. All major stock market indexes fell by more than 50% over the subsequent year and a half, so any significant reduction in equity exposure in 2007 saved investors huge amounts of money.

The stock market reached that 2007 peak after rallying for four full years without so much as a single 10% decline. Investor sentiment had skyrocketed to dangerously euphoric heights. Our quarterly commentaries written in April, July and October of 2007 issued warnings that, if heeded, led prudent readers to reduce their common stock exposures. Portfolios under our management reflected that caution and were appropriately light on equities as we went into the worst market decline since the Great Depression. The performance of our Controlled-Risk Flexible Allocation portfolios (most of our clients) proved the success of that approach. (Click here to review.)

Let’s review several of the comments and forecasts that we made in those crucial commentaries.

In April 2007 with the Dow near 13,000 and still ascending to its peak, we indicated the potential for a continuation of the rally by pointing out that “… positive momentum had been reestablished … and that … momentum … dictates the short-term path of least resistance.”

At the same time, we made it clear that we did not share the enthusiasm of investors who were aggressively bullish: “Our reticence is based on an evaluation of the potential stock market rewards at this point relative to the risks that would have to be assumed to obtain those rewards.”

We concluded our April 2007 commentary as follows: “We urge the investor to be cautious. The speculator can take his/her chances, but we would suggest an eye be kept on the exits. We anticipate at least one more major stock price decline, possibly from higher levels, before the long weak cycle that began in 2000 eventually concludes. Remember, too, that aggressive equity allocations from here will prove more profitable than risk-free income only if the stock positions are sold before such a major decline or if the markets never again get back down to today’s levels. We believe both scenarios to be unlikely.”

About 1000 Dow points higher, we wrote in our July 2007 commentary: “[U]nique conditions … provide a framework for potentially explosive stock market moves … in the months and quarters ahead. Current conditions should force all investors to examine carefully their personal appetites for speculation.”

We went further and highlighted some potential specific causes of future economic and market difficulties: “A compounding of the problems in real estate or increased concern with the ability of hedge funds to repay their loans could … restrict the availability of loans. Just as the expansion of liquidity contributed to rising asset prices, a restriction of that supply could depress prices.”

Eleven weeks before the October market peak we accurately forecasted that: “… a broader catastrophic unwinding of leverage in a debt default environment could lead to the greatest loss of asset value in world history.” We continued: “This is not a ‘normal market’ question like: Will I make 15% this year if things go right, or could I lose 5% if things go wrong? It is rather a question of whether you could make explosive returns if, in fact, we have entered a new era in which central bankers can provide massive liquidity with no negative consequence. Off-setting such a prospect, if things go very wrong, is the specter of a violent unwinding of unprecedented debt levels with huge, unpredictable financial consequences. Because of the massive intricate chains of derivatives that wrap around the world, which regulators admit they can neither quantify nor get their arms around, a major financial accident could produce its consequences overnight.”

Countering the common belief in the “buy and hold for the long run” approach, we concluded: “Because of the giant levels of debt and leverage in the system, allocations that have historically been considered prudent for investors may in fact today involve far greater levels of speculation than ever before.”

These thoughts were offered long before the collapse of stock prices, the demise of Bear Stearns and Lehman Brothers and the emergency rescue of the financial system by our Fed and Treasury and the other central banks of the world.

We wrote our third quarter of 2007 commentary just days after the October stock market peak which preceded the horrific decline that persisted into the first quarter of this year. We concluded that commentary as follows: “If the uncertain outcomes to the housing decline and/or the credit crisis should lead to a change in investor attitudes, a resulting stock market decline could be magnified greatly by unprecedented levels of leverage.” That is, in fact, exactly what happened.

We invite our readers to review these commentaries in their entirety. Toward that end we are archiving all prior commentaries on this site. We are working our way from most recent to older documents, developing an index as we go. Those interested in researching our thinking over the long term will find that we have anticipated the unfolding economic and market stories with considerable accuracy. While past performance does not necessarily foretell future success, we continue to apply historically sound principles in our evaluation of evolving economic and securities market conditions. We hope that it will result in continuing strong portfolio performance results for Mission and Marathon clients.


Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.

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