As the dollar reached new lows last week, threatening a new round of food and fuel price increases, calls grew for action to shore up the U.S. currency. Federal Reserve Chariman Ben Bernanke left the door open for such an action. The question is which central banks would be on board and what the intervention would look like. Click here to read more.
In a fascinating and brief commentary, author William J. Bernstein ponders how investment portfolios will look 50 years from now. Bernstein is an exponent of Modern Portfolio Theory and its emphasis on asset allocation. Some of his conjectures include:
There will always be bubbles and panics
Risk and return will continue to be joined at the hip
Equity investments should continue to offer higher returns than debt
Diversification will become even more important than it is now
Please click here for the full text of his commentary.
Auction Rate Securities (ARS) are long-term, variable rate bonds whose yields are tied to short-term interest rates. While ARS have a long-term nominal maturity, their yields are reset through a modified Dutch auction at predetermined short-term intervals, usually every seven, 28, or 35 days. With the issues' ties to short-term interest rates, many corporations and high-net-worth individuals were sold these securities as juiced-up municipal money market funds with no risk.
The lack of liquidity in the credit markets has highlighted that there are indeed risks in these securities. A recent article by James Churchill, which was featured in Registered Rep, provides good insight into the troubles facing both investors and the brokerage firms that peddled the securities.
Please click here for the article. If you have any questions or comments, e-mail me at bradb@innovestinc.com.
Bob Doll, BlackRock’s Vice Chairman and Global CIO of Equities, recently released a report entitled “What's Ahead in 2008.” His thoughtful and easy-to-read report offers investors a thorough review of the first half of 2008 and presents an economic and investment outlook for the remainder of the year. Please click here for the report.
| Jun-08 | Latest Qtr. | Y-T-D | 1 Year | 3 Year | 5 Year | |
| EQUITY | ||||||
| S&P 500 | -8.43% | -2.73% | -11.91% | -13.12% | 4.41% | 7.58% |
| S&P 400 | -7.03% | 5.43% | -3.90% | -7.33% | 7.45% | 12.61% |
| S&P 600 | -7.56% | 0.40% | -7.09% | -14.67% | 4.10% | 11.60% |
| MSCI EAFE | -8.18% | -2.25% | -10.96% | -10.61% | 12.84% | 16.67% |
| MSCI Emerging Markets | -9.97% | -0.86% | -11.76% | 4.63% | 27.14% | 29.75% |
| FIXED INCOME | ||||||
| Lehman Aggregate | -0.08% | -1.02% | 1.13% | 7.13% | 4.08% | 3.86% |
| Lehman Muni Bond | -1.13% | 0.64% | 0.02% | 3.24% | 2.93% | 3.53% |
| ML High Yield | -2.68% | 1.81% | -1.28% | -2.11% | 4.63% | 6.90% |
| Citi World Government Bond | 0.45% | -4.23% | 5.02% | 17.00% | 6.24% | 6.39% |
| T-Bills | 0.18% | 0.31% | 1.20% | 3.63% | 4.27% | 3.18% |
| OTHER | ||||||
| DJ-AIG Commodity | 9.10% | 16.08% | 27.22% | 41.55% | 19.84% | 18.61% |
| DJ-Wilshire REIT | -11.08% | -5.39% | -3.37% | -15.28% | 4.90% | 14.53% |
The Markets
Despite posting positive returns during April and May, equities in June suffered their worst one-month decline since September 2002. In April, the markets shrugged off skyrocketing oil prices and the ongoing weakness in the economy — especially in the labor and housing markets — and were lifted by upbeat earnings reports and another 25-basis-point cut in the Fed Funds rate. In May, despite renewed credit concerns in the financial sector, the upward revision in first quarter GDP to 0.9%, the Fed’s rhetoric on inflation, and the rising dollar all kept the market advance on track.
There are two home price indexes that garner the most media attention. However, the two indexes report completely different results. An article by Global Insight, available by clicking here, helps to explain the discrepancies.
A recent article in Vanity Fair that details the final days of Bear Stearns, is very interesting and a little disturbing. It portrays the very tight relationships between firms on Wall Street, the involvement of the Fed and the Treasury Department, and the influence of the media -- especially CNBC.
Please click here for the full article.
As the presidential election draws closer, tax legislation is receiving greater attention. While the election's outcome will not be known until November 4, it appears likely that Congress will subsequently debate changes to the tax rates on income, capital gains, dividends and estates.
In the coming months, Innovest's consultants will be discussing with clients the impact of taxes on their investment portfolios and financial projections. Please click here to view a synopsis of our study that compares current tax legislation and proposed changes from Barack Obama and John McCain.
A recent article from the law firm Davis Wright Tremaine highlights the new 403(b) regulations. The authors explore the positives and negatives of subjecting a 403(b) plan to ERISA.
The article is available by clicking here. Please e-mail me if you have any questions at bradb@innovestinc.com.
American Realty Advisors recently published an interesting piece about rising energy prices and their effect on commercial real estate. The key points to consider are:
• The current high price of oil is expected to be more cyclical than permanent, and prices should peak in 2009. High prices eventually slow demand and justify increased exploration and production. However, it may take several years before these factors result in the price of oil falling to premium support levels.
• With respect to usage, real estate's industrial sector is generally the most energy intensive. However, the multi-family and retail sectors are likely to be the most impacted by higher oil prices due to higher operating costs, increased tenant turnover costs, and reduced demand from a slowing economy.
• Rising energy costs suggest that location is more important than ever. Office buildings located in public-transit-dominant central business districts should see more demand growth than suburban office markets lacking public transit access. Multi-family developments located near major employment centers should see increased demand. Warehouse distribution centers in locations that minimize transportation, labor and rent costs should also see increased demand.
• Pricing for older, less efficient buildings is most at risk, as higher operating costs are likely to cut into their net rents more than at newer, more efficient buildings.
Please click on this link to read the entire article.
Recent talk from the Fed has turned tougher against inflation, shifting expectations that the next policy move will be to raise short-term interest rates. In addition, the heads of the central bank have recently spoken in favor of boosting the U.S. dollar.
Click here to learn more about what the central banks are thinking as their focus shifts to higher inflation.
The 2008 Russell Index Reconstitution took place on Friday, June 27. Below are some interesting highlights with respect to the Russell U.S. and Global Indexes.
Russell U.S. Equity Index Changes Due to Reconstitution
--Overall, the U.S. market capitalization has decreased by $2 trillion, from $18.5 trillion at last year’s reconstitution to $16.5 trillion at this year’s reconstitution.
--With respect to the Russell 3000, 276 companies were added, and 169 companies were deleted. The largest addition to the Russell 3000 was Visa Inc. (0.29%).
--Financial service companies led the list of additions, accounting for 21% of new adds, followed closely by healthcare with 19%.
--At reconstitution, the market cap range for the Russell 1000 was $1.4b to $469b, and for the Russell 2000 the market cap range was $167m to $2.8b.
--The largest movers in the indexes were energy and financial stocks.
--The weight of financial services stocks increased in the Russell 2000 (+1.09%) as companies moved down from the Russell 1000.
--The weight of energy stocks declined in the Russell 2000 (-1.54%), as companies graduated to the Russell 1000.
In their July 2008 survey of current business and economic conditions, the executive services firm Tatum concluded that the beginnings of a "modest recovery" have, at least temporarily, "evaporated." Rising inflation fears from the surge in June's crude oil prices have contributed to declining backlogs, rising concerns about financing and flat to lower employment. On the positive side, technology companies and exporters continue to perform well.
The summary of the Tatum survey' is available by clicking here.
Innovest Quarterly Newsletter
The latest version of our quarterly Research Report is available by clicking Download Research Report or at our website (then click on NEW: Download Current Issue (2Q08) of the Research Report).
January 1, 2009 is the effective date for the new 403(b) regulations -- just around the corner. Plan sponsors need to be acting sooner rather than later to ensure their plans will be in compliance. A summary of the new regulations is available from Prudential by clicking here.
If you have any questions, I may be reached at bradb@innovestinc.com.
Investment News makes excellent points about the increasing risk of litigation from disgruntled plan participants due to the LaRue v. DeWolff decision.
Continue reading "Seven ERISA Precepts That Should be Observed" »
I recommend reading "Are Active Managers Active Enough?" from ING Investment Weekly. The author describes a study that separated managers down into four categories: Diversified Stock Pickers, Concentrated Stock Pickers, Closet Indexers/Pure Indexes, and Factor Bets. The study indicates that active, concentrated stock pickers generate higher excess returns.
Please click on this link for the full text of the article.
Warren Buffet, who many consider to be one of history's greatest investors, has made a million dollar wager. He made a bet that the S&P 500 Index will outperform a group of five hedge fund-of-funds after fees at the end of the next 10 years. The bet was with one of the principals at Protege, a hedge fund-of-funds shop. The winnings will go to the champion's favorite charity.
John Mauldin, who writes a very informative weekly newsletter, researched this wager after it was first reported in Fortune magazine. He lays out several arguments for why he believes that Buffet may be left holding the short end of the stick this time. Please click on this link to view the details of this very interesting and intriguing wager.
Since 1988 Harvard University’s Joint Center for Housing Studies has released a report on The State of the Nation’s Housing. Now in its 20th year, the analysis serves as an essential resource for both public policy makers and private decision makers in the housing industry. This year’s report provides a current assessment of the changing housing market, its role in the economy, affordability challenges, and the demographic trends driving long-run housing demand.
Please click here for a fact sheet with key findings from the report.
The
Federal Open Market Committee decided today to keep its target for the Federal Funds rate at 2 percent. Recent information indicates that overall
economic activity continues to expand, partly reflecting some firming in
household spending. However, labor
markets have softened further and financial markets remain
under considerable stress. Tight credit conditions, the ongoing housing
contraction, and the rise in energy prices are likely to weigh on
economic growth over the next few quarters. The Committee expects inflation to moderate
later this year and next year. However, in light of the continued
increases in the prices of energy and some other commodities and the
elevated state of some indicators of inflation expectations,
uncertainty about the inflation outlook remains high.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Voting
for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F.
Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S.
Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M.
Warsh.
Voting
against was Richard W. Fisher, who preferred an increase in the target for the
federal funds rate at this meeting.
Source: Lehman Brothers 2008 Monetary Policy Releases
From The Capital Spectator:
Interest rates are the hot topic once more. The pressing question: when will the Fed hike rates? Inflation chatter has been in a bull market of late, and the bond market is again focused on the risks. The benchmark 10-year Treasury yield is roughly 4.2% as we write, up from March 17's 3.3%, which wasn't far above the generational low of 3.07% set back in June 2003. The run-up in yields should surprise no one in a world where the prices of commodities -- food and energy in particular -- have surged. But the fixed-income set, for all its current fears, hasn't been a reliable and steady barometer of pricing worries. That's not entirely odd, since bond prices (and their yields) are subject to two key drivers that are often in conflict, and the influence of one or the other waxes and wanes.
(Click here to continue reading this post.)
James Swanson, Chief Investment Strategist of MFS, has penned a summary of his views for the economy and financial markets for the second half of 2008. Please click on this link for his concise article on a variety of financial topics.
