Archive for July, 2007

Consumer Confidence Soars

Kurt Brouwer July 31st, 2007

In July, consumer confidence hit a six-year high, the highest point we have seen since August of 2001. Now, that’s a milestone when you consider that in September 2001, we suffered the worst terrorist attack in our history, which was accompanies by a steep albeit short recession.

Anne D’Innocenzio, AP Business Writer reports:

‘…The New York-based Conference Board said that its Consumer Confidence Index, rebounded to 112.6, its highest level since August 2001 when it recorded a 114.0 reading…’

“An improvement in business conditions and the job market has lifted consumers’ spirits in July,” said Lynn Franco, director of The Conference Board Consumer Research Center. “Looking ahead, consumers are more upbeat about short-term economic prospects, mainly the result of a decline in the number of pessimists, not an increase in the number of optimists. This rebound in confidence suggests economic activity may gather a little momentum in the coming months.”

This shows that Americans are optimistic despite all the obvious negatives we have experienced in the past year or so.

‘…”It is encouraging in light of high energy prices, volatility of the stock market and the weak housing market that consumers didn’t flinch,” said Mark Vitner, senior economist with Wachovia Securities in Charlotte, N.C. “My general sense is that the economy is finding its footing.”

I have to admit that I have wondered how Americans would respond to high gasoline prices, troubles in Iraq, higher interest rates, home building and financing woes, terrorist threats, the declining dollar and more. Answer: Americans have taken the measure of these negatives and are pretty upbeat and optimistic. Long may it continue.

Is the Market’s Mood Ring Purple or Black?

Kurt Brouwer July 31st, 2007

In a sense, the stock market is a giant mood ring. And now, it’s either purple or black [if you cannot remember your mood ring colors, here they are].

Corporate earnings are coming in better than expected. Yet, stocks are down again today after yesterday’s rally provided a little respite from last week’s downturn. As Tim Annett at WSJ’s MarketBeat Blog reports:

‘…According to Brown Brothers Harriman’s Brian Rauscher, second-quarter profits “in aggregate have been impressive considering the challenging operating backdrop.” With over 300 of the S&P 500 companies having reported, Mr. Rauscher says the ratio of upside surprises stands at 64.3%, “comfortably above the long term average of 54.7% since 1993.”…’

Collectively, the stock market’s mood right now seems to be moody at best or even a bit depressed. Upside earnings surprises are well ahead of the long-term average, consumer confidence hit a six-year high point, yet the S&P 500 actually falls over 1% for the day. The index was up for a while, but bad news on the mortgage front overcame any upward momentum from yesterday. Madlen Read, AP Business Writer, reported:

‘…Early in the session, stocks had soared following strong earnings from General Motors Corp. and Sun Microsystems Inc. and amid somewhat mixed economic data. But stocks pulled back after American Home Mortgage Investment Corp. said Tuesday afternoon it hasn’t been able to tap into its credit lines and has hired advisers to consider its options, including the sale of its assets. Wall Street has been concerned about credit after some loans made to borrowers with poor credit have gone bad, and that anxiety contributed to the market’s big plunge last week…’

We have had over four years of up markets, so it seems we need a little breather. I believe a breather or a pause or really a correction is healthy for the long haul as noted (here and here). A mood ring may be fun at a party, but as an investor it is better to take it off and let the kids play with it.

What Is Core Inflation?

Kurt Brouwer July 31st, 2007

Core inflation. Everyone talks about it, yet what exactly is it? And, is it going up or down? To start, core inflation adjusts the government’s standard inflation numbers to exclude two sectors (energy and food) that you don’t need [just kidding].

Actually, prices in these two sectors fluctuate a lot and, frequently, the fluctuation is seasonal so the government produces an inflation indicator that is more stable. In this report, Rex Nutting, Washington bureau chief at MarketWatch, sheds some light on the subject:

Core consumer inflation increased 0.1% for the fourth consecutive month in June, pushing the yearly gain in core inflation down to the lowest level in three years, the Commerce Department said Tuesday.

Following June’s gain, the core personal consumption price index had risen 1.9% in the past year, the lowest inflation since early 2004, and just within the Federal Reserve’s unofficial comfort zone of 1% to 2% for core inflation. Core inflation excludes volatile food and energy prices. Read the full government report.

Overall inflation also increased 0.1% in June, the lowest monthly inflation since November. Overall inflation is up 2.3% in the past year…’

OK. So, inflation seems to be in the 2% range for the past 12 months. But as soon as the experts agree on what inflation has done, they diverge in their views of what it means and where it is going. The MarketWatch report goes on:

“We continue to expect further disinflation,” wrote Goldman Sachs economists, but RBS Greenwich chief economist Stephen Stanley said core inflation would likely drift above the 2% comfort zone later this year, in line with the Fed’s own forecast…’

Hmm. So, Goldman Sachs sees disinflation-that is a lessening of inflation. But the economist from RBS Greenwich foresees higher inflation.The good news in these two seemingly divergent opinions is that inflation is pretty moderate. Whether inflation goes up a bit or down a bit from here, 2% annual inflation is good by historical standards.

The average annual inflation for the past 10 years (1997-2006) is just under 3%. That means that it would take about $130 to buy today what $100 bought in 1997.

If we go back further-to 1980-the average rate of inflation was well over 3%. For example, you would have to spend $253 today to buy what $100 would have purchased in 1980.

So, the inflation report is good, whether you look at core inflation or overall inflation. The policies the Federal Reserve has pursued for the past 20 years are excellent and we should applaud former Fed chair Alan Greenspan and current chair Ben Bernanke for a job well done.


Hat Tip: BrothersJuddblog

Summer Reading List

Kurt Brouwer July 30th, 2007

I just got two new investment/personal finance books.

WEALTH by Stuart E. Lucas (Wharton School Publishing 2007)

Mr. Lucas is the chair of the Wealth Strategist Network. Previously, he was an executive in several large financial institutions. From the description on the cover, I understand that Mr. Lucas writes from two viewpoints:

1. As an heir to the Carnation fortune

2. As a senior executive in investment management firms.

UNCONVENTIONAL SUCCESS by David F. Swensen (Free Press 2007)

Mr. Swensen is the chief investment officer of the Yale Endowment Fund. He is also the author of a fine book which I read and enjoyed-Pioneering Portfolio Management.

I’ll report back on both books if I like them and think they are worth reading.

Would You Bet Against Tiger Woods?

Kurt Brouwer July 30th, 2007

As we revise our book, Mutual Fund Mastery (Times Business 1997), I periodically re-print a short section or series of sections from the book. This one is part of our Five Laws of Investment Success [I have edited it a bit to take out obviously dated material and improve the flow]:

‘The Second Law: Place Your Money with the Pros, Don’t Best Against Them

Would you play golf against Tiger Woods for every nickel you have? We doubt it…Would you buy a stock that Warren Buffett is selling? Maybe; but chances are you would regret it.

When it comes to placing money with investment pros, one of our clients, Carl Leonard, made this point better than we can. Carl retired as the chairman of a top law firm, Morrison & Foerster, and now he is a consultant to Hildebrandt Associates, giving law firms all over the country the benefit of his years of experience. Carl and I were having lunch on a bright, sunny day, and Carl made a stunningly simple, yet profound point. He said:

Isn’t it great? We’re sitting here enjoying the sun while all those really bright people on Wall Street are working their tails off for us. Buying, selling, researching and racking their brains to come up with ways to make us money, simply because we are using their mutual funds. And, it doesn’t cost us anything to buy in or to sell out. It’s incredible and, even better, it’s legal.

As Carl pointed out, by using no-load mutual funds, you can easily and simply profit from the experience, hard work, and professional acumen of the best brains on Wall Street.

Why Do We Use Mutual Funds? When we started our investment advisory firm in 1987, we had a revelation that no-load mutual funds were the best investment vehicle for most investors. Twenty-two years later, we still believe they are the best. In fact, that belief is now stronger than ever…

Mutual funds offer a package of advantages available nowhere else:

  • Low minimum investment
  • Immediate diversification
  • Professional management
  • Liquidity
  • Audited track records

Our overall vision has not changed, but almost everything else has. The Investment Company Institute’s 2007 Mutual Fund Factbook reports that mutual funds assets now total $21.8 trillion worldwide. Of that total, U.S. mutual funds hold $10.4 trillion. To put that in perspective, consider that in 1997 (the year we published Mutual Fund Mastery), U.S. assets in mutual funds were reported by the Investment Company Institute to be approximately $4.5 trillion and worldwide assets in funds were $7.24 trillion.

The enormous popularity and growth of mutual funds means that the world is willing and eager to put resources to work in this industry-offering new services to investors, attracting top-flight portfolio managers and opening new types of mutual funds…

to be continued…

So, if someone suggests you bet your net worth against Tiger Woods, give it some thought. Let’s see: have I dedictated my life to playing golf? No. Have I been playing daily since age 2? No. Am I in superb physical condition? No. Have I trained my emotions to handle the pressure of championship golf? No. Have I studied for years with the world’s best golf coaches and instructors? No.

I think the same questions hold true with investing. In brokerage firms, banks, money management firms, hedge funds, mutual funds and more, there are talented, full-time professionals who have deep knowledge of almost every market you could invest in . Stocks. Bonds, Real estate. Options. Futures. Currencies. Unless you are willing to devote significant effort to learning just one of these markets, you will be at a disadvantage. This does not mean you cannot do well, but it is important that you recognize the odds against beating the pros at their own game.

Individuals can do a solid job of investing their own money, however it’s important to be realistic. Are you going to follow individual stocks daily? Are you going to analyze them thoroughly? Are you going to be able to follow your investments very closely? Are you suited by temperament to dealing with the ups and downs of individual stocks? If not, then professionally-managed mutual funds have a lot to offer.

Instead of trying to beat them, I recommend placing your money with the pros.

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