A RECENT SURVEY

A recent survey of large US based producers found more than one third of them plan to bring work home from China.  Toaday’s Wall Street Journal highlights a Michigan television producer who has done just that.  The headline states “Detroit’s Wages Take On China’s.”

 

“CHINA”

My feeling right now about “China” is that there is both a negative and a positive aspect.  On the negative side, there is a fear that we owe China so much money with them holding our Treasuries.  But on the positive side “made in America” is a new impetus for marketing which will reflect stocks of retailers because it implies “not made in China.”

An example of companies making such a bet is Stanley Furniture in High Point, NC.  The company has been making baby cribs for over 80 years and a  few years ago was in such danger of shutting down that it shifted its crib manufacturing to China: cheap labor.  Now they have brought back the crib manufacturing to High Point proudly advertising cribs “made in the USA.”

Even though the Chinese lookalike import sells for $400, the US made crib marketed under the name “Young America” sells for $700.  I believe Stanley’s bet will be a success.  I think we will be seeing more and more companies bringing production back into the US in the future.  That should be good for their stocks.

 

REITs

The different real estate sectors have been extremely attractive to investors recently.  Apartment buildings, one of the best performing sectors in the commercial real estate market in recent years, are now starting to lose some of their appeal for investors’ attention.  The overall argument for apartments remains sound.  People have to live somewhere and as foreclosures on homes increase, apartments will always be attractive.

Dow Closes Above 13,000

Well, here we are after four years – the Dow Jones Industial Index is over 13,000!  This is the first time since May 2008 when the financial crisis and global slowdown sent the markets reeling.  There is mixed economic data which gives conflicting directions and yet there seems to be a psychological feeling of euphoria.

Although unemployment is still high, the bigger picture still seems to show some sort of continuing improvement in consumer confidence.  Of course, I am sure there will be continued volatility expecially with the political undercurrents.  Nevertheless, I think those who don’t take advantage of the market will probably regret their hesitancy.

Certain areas continue to look good such as the high-yield bond funds and the REIT funds.  There also seems to be more and more confidence in the dividend paying stock funds.  The solution needs to be comprehensive Financial Planning to know how to navigate these times.

Gold Prices and Gold Stocks

Gold prices and gold stocks have historically shown a high positive correlation, which is not the case right now.  Investors are seeing their gold stock funds decrease in value at the same time that the price of gold bullion is increasing.  Why? Should investors continue to be invested in gold stocks?

 

A gold mutual fund manager gave us the following possible reasons for this short-term underperformance of gold stocks:

1. Higher energy, equipment, and labor costs have increased mining company costs.  With the higher price of gold and lower oil prices, some gold companies will be in a position to deliver strong earnings in the second half of 2011, if gold prices stay high.
2. Strong demand for all kinds of commodities is driving up the cost of developing new mines.  Early-stage producing mining companies, where all the land has not yet been explored, provide the best opportunity.  Successful exploration can lead to low cost expansion opportunities which enable a company to grow its business faster and more profitably than the gold industry as a whole.
3. Gold companies sell their gold in US dollars but their costs are in the local currency where they operate.  In several countries, such asSouth AfricaandAustralia, the local currency has strengthened against the dollar over the last 3 or 4 years.  This squeezes the company’s profit margin.  The reversal of this trend over the last few weeks has produced a currency loss for US investors but improved margins as a result could benefit share prices.
4. There is a positive relationship again between the direction of gold stock and the stock market in general.

 

Gold stocks still show strong characteristics and should be a part of a diversified investment portfolio:

1. Gold company profit margins are stronger now and improving with higher gold prices.
2. The current difference between the price of gold bullion and gold stocks gives investors an opportunity to buy the gold stocks at a discounted price.
3. Despite concern over higher expenditures, gold companies in general have been generating high levels of free cash which they can use to initiate or raise their dividends.

 

WHAT IS A MUNICIPAL BOND?

Municipal bonds are tax-free guaranteed IOUs from municipalities. The State ofNorth Carolinaand individual cities issue municipal bonds. Tax-free bonds are always guaranteed by the issuing municipality but the question is, if they are guaranteed, doesn’t that mean they are safe?  Unfortunately, we are seeing many municipalities and cities around the country that are facing bankruptcy and states that are not able to pay their IOUs.  The whole world of municipal bonds is now being faced with new strategies.  The credit quality of issuing municipalities is no longer something to be ignored. Credit rating companies like Moody’s, Fitch Ratings, and Standard & Poor’s are changing their rating calibrations. 

 

You can also get into municipal bonds by going into mutual funds of municipal bonds, closed-end municipal bond funds, and also ETFs which are popular right now.  Each of these pools of tax-free bonds is safer than buying the individual bonds.  You should not go into municipal bonds to play the market because you are competing with all sorts of experts and you don’t have the knowledge.  You should not hold them right now and do nothing because that is very dangerous.  You don’t do two things in my opinion:  (1) you should not be holding just a portfolio of bonds right now yourself and (2) you shouldn’t play the market because the whole world of municipal bonds has shifted.

WHAT IS A SECURITY?

In the investment world a security is usually a stock or a bond.  The investment world is divided between owners and lenders; between ownership and loanership; between stocks (equity) and bonds (debt).  You buy a company’s stock and or you buy a company’s bonds.  Stock represents equity or ownership in a company.  Bonds are a loan to a company (a debt) in exchange for interest income and the promise to repay the loan at a future maturity date.

MUTUAL FUND FEES

A mutual fund is a company just like IBM that has a manager who works on a salary.  The fund has expenses such as rent and utility costs in addition to the manager’s salary.  The manager buys and sells through a brokerage firm so he has to pay a commission. All of this is happening inside the fund. The mutual fund itself reports its income and expenses. The fee for managing what is happening inside the fund (the management fee) is one of the expenses. 12b-1 fees are also assessed. All of these are the expenses you pay each year as a percentage of the value of your investment. The ongoing expenses of the fund are disclosed in the prospectus. You should be working with a Certified Financial Planner, taking you into the prospectus and showing you what these fees are. You need to be comparing expense ratios as well as turnover ratios. That is something we do in our office.

 

You should be careful when you are working with mutual funds. The highest up front load or sales charge right now for mutual funds is 5.75% but most clients, at least the clients who come to our firm, end up paying much less or nothing at all because of larger investment amounts.  Mutual funds have breakpoints.  Virtually, nobody ends up paying the 5.75% because of these breakpoints – as your investment amount increases, the sales charge decreases as you pass each of these breakpoints. Working with a Certified Financial Planner will help you make sure that you are paying low fees and taking advantage of the breakpoints.

 

In my opinion, you should really look past the fees and look at the manager and what is happening with the manager’s performance when choosing a mutual fund.  Your financial advisor would be the manager of the fund managers, helping you evaluate the track records of each manager as you put your portfolio together.

UNDERSTANDING CHARITABLE TRUSTS

If you put property inside a Charitable Trust, the Charitable Trust can sell the property tax free meaning there is no capital gains tax.  The Charitable Trust is controlled by you because you become the trustee.  That’s the beauty of the Charitable Trust.  You avoid the capital gains tax and you never lose control.  The one problem with Charitable Trust is you cannot transfer property that has debt on it over into the Charitable Trust.  Once the property is transferred into a Charitable Trust, the money can be reinvested in a matter of weeks afterwards to where it is immediately paying a monthly check for the rest of your life on the entire amount.  You can find mutual funds inside the Charitable Trust that have averaged 8% for the last fifteen years.  The key to the Charitable Trust is the savings of all the capital gains tax.  Once you set the payout rate, if you put it let’s say at 6% or 7%, that is paid out every year on the entire amount.  That is still the best deal going.

WHO IS THE PERSON YOU ARE CALLING YOUR TRUSTED ADVISOR?

Investment professionals are supposed to give independent advice and judgment.  Warren Buffet says, “To be fearful when others are greedy and to be greedy when others are fearful.”  Put that into portfolio language and you are talking about rebalancing.  For “financial advisors,” one of the most important functions is to encourage clients to rebalance or sell what has gone up and buy what has gone done.  According to recent research, “financial advisors” have been unbalancing instead of rebalancing their clients’ accounts.  “Advisors” may have actually ended up exposing their clients to more risk rather than less risk.  Ever since October, 2007, many “advisors” have been letting clients go into bonds.  Those of us that know what may be coming would say “no, don’t do that; you need to go the other way.”  But “advisors” are afraid to be strong with their clients.  The question to be asked is what might account for this “sheepish behavior?”  Sheepish behavior is everybody being like sheep.  Why are they so cautious?  The “advisors” are afraid to encourage their clients to take more risks by going from bond funds to stock funds, which is what they should be doing. 

 

The second thing the research showed was that “advisors” are feeling, “when clients are strong-headed in one direction and they insist on being that way, just go and do what they want to do.  If not, you are going to probably lose a commission.”  “Advisors” are afraid to really tell their clients the truth and be strong with them because they are afraid they will lose commissions.  Well, those are not “advisors” are they?  They are representatives of brokerage firms.  They also offer funds but they are still brokerage firms.  The public is still seeing their so called “advisor” as an “advisor” instead of a broker.  The broker is paid commissions.  The “advisor” gets paid for advice.  That is the real problem here.  We are actually asking the question:  Why are so many of these “advisors” afraid to go ahead and set their clients straight?  The answer is they are afraid they will lose their commissions.  That is what it was all about. 

 

It is important to have a comfort level and your comfort level should be that your “advisor” will advise you properly.  If you are working with a fee-based “advisor”, doesn’t he have a fiduciary responsibility to put your interest ahead of his own?  That’s right.  In this particular case, the fiduciary should be pointing you to rebalancing.  The point is to work with a fee-based “advisor” that will recommend rebalancing as appropriate.  When things are going the wrong way according to what the “advisor” thinks is right, he needs to tell them, “No!  You don’t want to keep going in that way.  You are going to get yourself hurt.  You need to go ahead and listen to me.  I am your “advisor” and I want you to protect you by rebalancing.”