Summer Musings

It’s late summer and still hot here in Texas; but the markets are drifting and the public mood is hardly what one would call euphoric. There’s the problem of terrorist activities and, of course, the thing that’s on very few people’s minds, but heavy on the media’s front burner - the national elections. Many Americans are skeptical about the recovery of the economy. What explains the disconnect between how the economy is doing and how people think it’s doing? It’s the old story that there is a difference between perception and reality.

While publicly traded companies are generating record profits, workers are not benefiting as much. Even though employment has improved and wages have risen, workers have not done as well as the stock market or corporations. Many companies are seeing significant double digit earnings growth, while for workers, the average hourly earnings are up only 2% year-over-year and disposable income is up 3.9%.

Recently, the Fred Alger Management Company pointed out that if income is growing less than 4% a year, but people expect their wages to grow 10% a year, they will feel they aren’t doing well. This is simple psychology, and it’s been demonstrated time and again.

The same thing applies to the stock market, if during those heady bull market years of the 90’s, the market was rising 18% to 23% a year, and now we’re getting a nominal return of 8% or 9%. We are disappointed because of the recent experience of these double digit returns. As an example, if you earn a hundred dollars and are expecting $90, you will probably feel pretty good. If you earn a hundred and were anticipating $150, you’ll probably feel lousy. And if you know that some group or organization is doing better than you, you will probably feel even worse.

SO WHAT ELSE IS BAD?

Another nagging problem today is the global labor situation. Companies are using information technologies to find production capabilities and labor overseas where it is least expensive; extending that to services as well as to manufacturing.

Over the past two years, (as the economy has recovered) large corporations representing one quarter of national income have been responsible for nearly 50% of the growth, while workers have accounted for something less than that. This is hardly unprecedented. In 1890, after a period of technological innovations, and business upheavals (sound familiar?), the richest 1% of American families owned half of the national wealth. Today, there is a far more even distribution.

In the past, the imbalance between labor and capital has always been temporary; now that chasm has become wider and is beautiful fodder for any political party that is out of power.

While all that is happening, as you take a macro look at the whole economy, (if you are a free market advocate) you’ll realize that markets finally stabilize and business goes to where it is profitable. As witness: the resurgent American car industry. When the manufacturers were forced to compete with the Japanese, they built automobiles which gave many more miles per gallon, and also competed in price and styling

To Sum It Up…

Even in a period of multiple contraction and earnings expansion (which is the story of the last months) successful investors can do well in the markets as we enter a period of high “noise” (elections, national security, market uncertainty). But “noise” has a limited capacity to alter a company’s fundamentals. And those fundamentals are what our managers are paying attention to.

The free market system assures us that economies will go through cycles; and while we are all attentive to market movement, we still must have the faith and confidence that the people managing our money are smarter, have more courage, and have a longer outlook possibly than we do.

If it were easy, everybody would do it.

Things Found While Looking Up Other Things.

Investors have filed a class-action suit against Salomon Smith Barney for allegedly breaching its fiduciary duty between March 1999 and March 2004, by claiming its financial advisors were selling mutual funds objectively when in fact they were steering them into the firm’s “inferior” proprietary family of more than 220 funds… A spokeswoman for Salomon Smith Barney said the firm believes the suit is without merit and plans to vigorously contest it. ….There are now 7.7 million people world wide with financial assets of at least $1 million dollars, including 2.27 million in North America… More than three-quarters of Americans (77%) believe that being a father translates into better performance on the job, according to the “Dads At Work” survey by professional staffing firm Ajilon Finance. Moreover, nearly three-in-four say that lessons learned in the workplace actually make one a better father, including skills such as providing motivation, having patience and mentoring. Nearly half the survey respondents believe it would be more difficult for a stay-at-home father (vs. 37% for a stay-at-home-mother) to find a job after taking time off to help raise the family.… I’m sure you’ve heard of rebalancing a portfolio. Well, one definition of rebalancing is “selling your good ones and buying your bad ones”…. We’ve read many articles which attempt to tell us how to deal with the survivor who has lost a spouse or partner. Following is a list of documents that should be located before a person dies!

• Wills or Trust
• Health Insurance Policies
• Most Recent Income Tax Return
• Life Insurance Policies ( sometimes the only evidence of them is statement or bills)
• Social Security, and or Veterans Administration Information
• Credit Cards
• Bank and Investment Statements, including IRAs and retirement plans
• Titles to homes, autos, boats, etc.
• Loans or mortgage information
• Insurance policies on homes, autos, and boats
• Location of and keys to any safe deposit boxes

We could all help our family after we’re gone having these located prior to our passing… In June, the SEC and NASD issued a joint report assigning a large number of investor complaints about the sales of variable annuities. This report pointed out that there were brokers who recommended annuities to senior citizens, and who advise people who couldn’t afford them to mortgage their homes. The reports sited failures to disclose fees, risks, and tax consequences. According to Melanie Waddell, in the July issue of Investment Advisor, among the firms that have been fined: Nationwide Investment Services and American Express Financial Advisors…. Waddell and Reed is under NASD investigation for recommending 6,700 variable annuity exchanges without accessing the suitability of the transactions… Don’t you think it’s about time that the states’ attorneys general take a closer look at sales abuse such as this, rather than worrying about whether the chairman of a mutual fund board is an independent outside individual?... …. The July 26 issue of Business Week notes that today’s 60 year old has a high probability of living to age 90 or more. This means the money in their retirement portfolio has to last a long time. How long? Business Week shows how an early retiree with $1.3 million in retirement funds would have to take between $60,000 and $90,000 dollars a year, at most, in income per year. That would amount to only 35% to 45% of her pre-retirement earnings which may be enough, but certainly not enough to fund her previous life style… some good advice might be to wait a few years to retire as you boost your contribution to Social Security and add some more money to the retirement portfolio… … and finally, Business Week scores again by talking about how traumatic it can be to retire. They advise people to think hard about what they’re going to do after they quit work, and the answer may well be: don’t quit all together, since work defines people’s identity, builds their self-esteem and makes you relevant in the world. The magazine talks to people who are phasing into retirement by cutting back on their current work. Some companies even offer phased retirement where older employees stay on to assist less experienced workers on a part time or project-by-project basis… it might be that a person preparing to retire should decide where he can make the biggest contribution and have the most fun…. Maybe a good idea for Homeland Security would be to furnish every voting place in the country that uses electric voting machines with portable generators… Can you imagine the confusion that would follow a terrorist attack on power grids on election day, say in California?.... And finally we all watched as Martha Stewart was sentenced to 5 months in prison. At the same time Hillary was sentenced to introducing Bill Clinton at the Democratic convention…

Other Voices…Other Places

Occasionally friends and colleagues send me newsletters, emails, and various other communication pieces which we feel are important to pass on to our readers.

George Bates of Bates Financial Services in Rockford, IL, always comes up with something quite interesting. George, thanks for your research. Here are some of the things he said in a recent newsletter:

OUR OPINION

George’s article leads us to step back and take a look at the bigger picture rather than the short term view that most newspaper columnists, magazine writers, and politicians take. As our country moved into the industrial age, the agricultural industry lost many jobs. As we move into the technology world, from the industrial/manufacturing world, it will be necessary to have a newly trained workforce.

Make no mistake about it, if manufacturing jobs can be done overseas, at a lower cost than in this country, those jobs are going to move overseas. Whether we want to admit it or not, we are in a global economy.

We saw that by imposing penalties on companies importing steel into our country during President Bush’s first term, we have created threats by other countries which hurt the exporting of our manufactured goods overseas. As always, politicians look for the quick fix and short term result. Catering to the steel worker vote by closing our markets to low cost steel did not pay off.

Companies that deliver top-quality products and services will be the winners. It doesn’t matter where they are based or where the work is done. That is the beauty of a free market system. It takes time to transition; if you don’t believe it, just ask those guys who used to make buggy whips!

We are going through a long-range change in transitioning into a technological and information global society. It will not be painless; it will not be quickly accomplished; but it will vastly improve the world’s standard of living.

That’s our take… yours is welcome.