“I am an optimist. It does not seem too much use being anything else.”
– Winston Churchill
Quarterly Commentary
"Shop When It Drops?"
(April 1, 2008) - The markets have had a wild ride since their peaks in October
2007. November and December were brutal, and there has been little relief in this
first quarter of 2008. The media continues to spread gloomy forecasts, but a closer
look at reality is quite reassuring.
If you ignore the banks and other financial companies, the remaining members of
the S&P 500 index are enjoying quite healthy worldwide growth. Their earnings
are up, and many of them are increasing their dividend payments. Their balance sheets
are clean and they are working diligently to eliminate any credit problems. The
growth of small companies that need cash has faltered during this credit shutdown.
Small companies have generally led the way out of recessions, however, so their
time will come again.
In the final release of numbers for the fourth quarter of 2007, US GDP rose 0.60%,
so we are not technically in a recession but the numbers for this first quarter
will likely be negative. The media and many consumers are already acting as if a
deep recession is in place. For many of us with jobs, or stable retirement incomes,
unless you are directly affected by the real estate, banking and mortgage woes,
it may be difficult to believe all the media hype. We are all affected somewhat
in our pocketbooks by unwelcome spikes in prices at the pump, food, and transportation
increases, and certainly job reductions have been announced – but no more than in
the last few years as outsourcing and technical innovation have affected employment.
The Denver housing market has been relatively stable – but then we did not experience
5 years of 40% increases (as in Nevada or Arizona) – more like 5% increases in property
prices. After suffering foreclosures a couple of years ago, we are now #7 in the
nation for good housing results! Again, Colorado is early in trouble and early to
rebound.
With all the interest rate reductions, injections of liquidity into the markets
and salvaging of counterparty risks, the markets are forecasting a poor second quarter,
but a robust second half of the year. It surely must be a coincidence that the economy
will start to look really good again prior to election time!
As you can see from the above chart, all asset classes suffered during the quarter,
with the exception of quality bonds.
Bad markets however tend to be very good for long term investors. When the news
is gloomy and the markets react negatively, we can smile, knowing that things will
rebound and we should take advantage of the opportunities to buy at sale prices!
Welcome to our new employees. Kim Spaulding has successfully passed her CPA and
CFP exams. She will add some much needed help to our Financial Planning team. Tammy
Durnford joins us as Manager of Client Relations. With a masters degree and lots
of experience in marketing, public relations, and business communications, she too
will add to the depth of our team. She plans to start the CFP courses in June.
Office Closing: We traditionally close our offices early on Friday afternoons between
Memorial Day and Labor Day to take advantage of the Colorado Summer. Of course we
will be available should you need us, but we would appreciate your calls on Friday
morning if possible.
Sharkey, Howes & Javer Inc.
Information presented is not designed to be tax, legal or investment advice and
is subject to change at any time. All investments contain risks, including the loss
of principal. Past performance is no guarantee of future results. Consult with Sharkey,
Howes and Javer to learn more about the strategies and information presented herein.
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"Economic Respect"
(January 1, 2008) - The New Year is a good time to reflect on the past twelve months
and prepare for 2008. The media has been reporting doom all year, and has even questioned
the stability of money funds! The media is slowly realizing that consumer spending
and housing markets are dependent on each other. A much needed restructuring of
banking and mortgage lending seems inevitable. This will help restore health to
the credit markets and economy as a whole, but the alphabet soup of strange funding
vehicles that need to be altered or removed will be time consuming and painful for
those trying to buy or refinance houses and businesses.
To coin a phrase from the late Rodney Dangerfield, “The economy just does
not get any respect.” The economy is amazing, complex and global, but no one truly
understands it or can accurately predict its direction. While the economy is slowing,
the majority of the world economy has been strong all year and is forecasted to
continue growing in 2008. In the U.S., employment opportunities are still high in
most areas and consumers are generally happy with the availability of goods and
services.
Our own Federal Reserve has been active along with other central bankers around
the world in easing the credit crunch while keeping a wary eye on inflation. These
people do respect the economy. During their regular meetings and even during some
unscheduled ones, they have reviewed the present state of affairs and made alterations
providing incentives to help grow the economy in as measured a way as possible.
We should take a cue from the “Fed” and look at our own state of affairs. It is
always prudent to make sure that you have sufficient cash to take care of immediate
needs. At this time of year, you should also consider taxes that need to be paid,
vacations to be planned and perhaps cars or major appliances to be replaced – all
requiring extra cash. Beyond that, your money should be at work in the world taking
advantage of what our economy will give us and earning its keep.
As you can see, (with the exception of bonds) the fourth quarter was a tough quarter.
We do not believe this trend will continue into the first quarter. The markets for
2007 were generally positive and in line with our expectations. Value names began
lagging in 2007 and, after a 6 year hiatus, more growth-oriented companies moved
to the forefront. Real estate investment trusts (REITs) took it on the chin this
year but to mitigate its impact, we broadened our approach to include international
real estate. Commodities, on the other hand, are running ever higher and we expect
them to continue to do so.
With recession on the minds of many, a growth economy is not what one would expect,
but it shows that the market is forward looking and why it is important to have
a diversified portfolio. To accommodate the changing economy, we have been increasing
the growth-oriented positions within your portfolio.
TAX ALERT:
At the end of January, we will send a separate mailing clearly marked TAX INFORMATION
for taxable accounts, where losses and gains are reported. Please look for and save
this report for your tax preparation.
Occasionally mutual funds revise their original tax information. You will be notified
of any changes by mid-March. We recommend that you proceed with your tax preparation,
but do not file your tax return until early April. This strategy should eliminate
the need to file an amended return.
Information presented is not designed to be tax, legal or investment advice and
is subject to change at any time. All investments contain risks, including the loss
of principal. Past performance is no guarantee of future results. Consult with Sharkey,
Howes & Javer to learn more about the strategies and information presented herein.
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"Two Minute Warning"
(October 1, 2007) - In the final minutes of the fourth quarter of an NFL football
game there is an announcement of the two minute warning. This seems to be a rallying
cry for the teams to focus and play even harder, concentrating on the successful
outcome and avoiding mistakes.
We are in the fourth quarter of the year and from a financial standpoint, approaching
our own final minutes for 2007. So far the game has been a roller coaster – with
a loss of points in February (to the Chinese players) and July/August (to the Mortgage
Maniacs) and great scores in the rest of the year as the American, and indeed the
world, economy played both offense and defense well.
In this fourth quarter the Federal Reserve’s recent interest rate reduction
will affect the exchange rate of the dollar, as well as markets around the world.
The "game plans" of speculators, hedge fund managers and the media will
undoubtedly increase volatility. We can neither predict the future, nor prevent
these manipulators from playing. We can only focus on our own strategic planning,
remembering that wealth is about relationships, friends and family, not always dollars
and cents or beating the market.
What are the financial things we can focus on in the short term? Year-end tax planning,
revisiting resolutions we made earlier to organize our lives and see if progress
can be made. Did you promise to find the cost basis on a stock? Throw out or shred
all the old investment paperwork cluttering the files? Update your wills and trusts?
Something else? How about planning for a wonderful holiday season, before the referee
blows the whistle and regardless of whether the markets come in disguise as St.
Nick or Scrooge! The time clock on our financial game is measured in decades, not
minutes. While we may enjoy brief moments of heart-stopping excitement, we prefer
to increase the enjoyment of our lives as well as the value of our portfolios by
playing professionally and profitably for the investor.
The results this past quarter have been up with the one exception being the small
company value style. Year to date, returns are primarily positive in the high single
digit or low double digit range with the exception of small cap value stocks.
IF you have taxable accounts and IF they have gains or losses so far this year,
your statement will include Green Sheets showing gains and losses to date for you
to share with your tax preparer. This will help you determine whether to do any
year end tax planning. Please let us know if we need to change your strategy to
defend against the taxman for 2007 or 2008!
In January, as always, everyone with a taxable account will receive the Green Sheets
for the entire year showing capital gains and losses. These will be mailed separately
in an envelope clearly marked “Tax Information.” Please put this with your tax files.
Information presented is not designed to be tax, legal or investment advice and
is subject to change at any time. All investments contain risks, including the loss
of principal. Past performance is no guarantee of future results. Consult with Sharkey,
Howes and Javer to learn more about the strategies and information presented herein.
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"Adapting to Change"
(July 1, 2007) - To quote Charles Darwin: “It is not the strongest of the species
that survives, nor the most intelligent that survives. It is the one that is the
most adaptable to change.”
Recently Toyota surpassed General Motors in automobile sales by using forward thinking
to build better automobiles. The Apple iPhone brings new technology and capabilities
to communication; and although we continue to hear predictions that the consumer
is tapped out, almost 90% of initial sales were for the higher cost 8 megabyte phone
($599) versus the lower cost phone ($499).
Change is omnipresent in our lives and in the investment markets. Interest rates
this past quarter, as represented by the 10-year US Government Treasury Note, spiked
from 4.60% to as high as 5.20% over concerns of rising inflation and the possible
evaporation of the Federal Reserve’s anticipated rate reduction. This spike had
a negative effect on bond mutual funds because rising rates cause the value of bonds
to decrease. However, the most recent Federal Reserve meeting maintained the Fed
Funds’ rate at 5.25% for the twelfth month in a row and calmed the bond market.
Normally, while interest rates rise, the stock market declines. However, this quarter
brought a major increase in the broader stock market, with the S&P 500 finishing
with a 7% year-to-date gain after a benign first quarter. This best January- June
performance since 2003 reinforces what we have been writing about for several years:
the economy is doing much better than most economists and financial writers have
expressed.
Big changes in the investment environment are occurring in several areas. Hedge
funds continue to attract huge inflows, though some are imploding. Regular and sub-prime
mortgages and higher risk bonds, used to take companies private, are being structured
and packaged for sale. The risks are high with these newly minted pools of money
and several are likely to fail.
ETFs (short for Exchange Traded Funds, which look like mutual funds but can be bought
and sold like a stock anytime during the day) are proliferating by slicing and dicing
the stock market as never seen before. We are evaluating these ETFs and will use
them as appropriate in your portfolio.
We are adapting to the changing investment world and taking advantage
of the opportunities presented while avoiding those that are “too good to be true.”
It is not always easy to change but investing requires looking forward. We will
continue to invest your money in stocks, bonds and mutual funds that have bright
prospects for the future, not just those that have done well in the past. We happily
assume this challenge to assure that your portfolio continues to perform so that
you can reach the financial goals that are most important to you.
Information presented is not designed to be tax, legal or investment advice and
is subject to change at any time. All investments contain risks, including the loss
of principal. Past performance is no guarantee of future results. Consult with Sharkey,
Howes and Javer to learn more about the strategies and information presented herein.
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"Spring Storms"
(April 1, 2007) - China has a large population and a growing demand for everything
from oil to jeans to cement. Hence, if the world suspects China’s demand for goods
is slowing, the effects will be felt broadly. China’s market capitalization is only
$1.7 Trillion compared to the USA at $26 Trillion, but the shift in sentiment on
February 27th had global implications with world-wide markets declining 2%-4% and
then another 2%-4% over the next few days.
Domestically, the wild round-trip ride you experienced these last few months is
reminiscent of the volatility we saw in 2006. Last year, in the second quarter,
the Dow Jones Industrial Average suffered an 8% downturn. In the 3rd and 4th quarters
the DJIA had 29 record high closes to end the year with a 16% gain. The loss of
416 points on February 27th was the 8th largest in absolute terms since 1900, but
it ranked 237th in percentage terms – and we are already back to where we were before
it happened. We expect significant volatility throughout 2007. Your portfolios are
well diversified to withstand any temporary downturns as well as capture much of
the upside market returns.
Everyone has different opinions about the severity of problems in the real estate
market and their effects on growth. The market for existing homes is 7 times larger
than that for new homes and sales are up 3%. Obviously, the sub-prime loans that
are in the headlines will affect those buyers and it’s too late to say that they
never should have been allowed to buy the homes in the first place. We will see
foreclosures and displacements, for months if not years, but this is a very small
part of the overall real estate market.
After encouraging us to worry about everything from world-wide bird flu
(167 cases so far) to dominance by Japan (no longer a threat), Y2K and the dollar,
we have grown accustomed to the media focusing primarily on negative news. We hope
that the media will be distracted by the Presidential hopefuls and leave the markets
alone for a while.
Although it is difficult to avoid being influenced by the media, it is important
to remember that no-one else has exactly the same financial resources, cash flow
needs and tolerance for risk that you have. It is truly dangerous to follow the
herd, reacting emotionally to changing daily headlines and allowing yourself to
be affected by those with investment goals far different from yours.
Our chart shows results in the different asset categories for the first quarter
of the year.
You can clearly see the difference in performance between International and Domestic
asset classes.
Information presented is not designed to be tax, legal or investment advice
and is subject to change at any time. All investments contain risks, including the
loss of principal. Past performance is no guarantee of future results. Consult with
Sharkey, Howes & Javer to learn more about the strategies and information presented
herein.
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Clients of Sharkey, Howes & Javer receive commentary, written by Eileen M. Sharkey,
with every quarterly statement. Feel free to forward to a friend.