The Straw That Broke the Camel’s Back

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By Jeffrey Cedarholm, CFP®, ChFC®, CLU®

Chief Investment Officer

It is difficult to know exactly what is causing this abrupt global sell-off in equities, especially in the United States and in Europe.  There has been plenty of bad news since the first of this year:  a third Greek bail-out that was handled sloppily, slowing profit and revenue growth in the US, the threat of rising interest rates, the slowing of GDP globally but especially in China and the emerging markets, along with a few other minor concerns.  But which one was the one too much for investors to take, the one that started a global contagion of selling, the last straw?

The easy answer is all of the above, although I suspect it was a very poor manufacturing production report out of China that was made public last Thursday.  Since 2009, China has been responsible for at least 50% of the world’s growth.  With evidence that the Chinese economy is slowing more than investors thought, a stampede for the exits started last Thursday.  The United States hasn’t had a 10% sell-off since August of 2011.  This is certainly it, and feels like it could get worse.  Our Federal Reserve Bank has done a good job of trying to keep the American economy from falling into a major recession since the crisis in 2008, but the real result has been that they have succeeded in inflating financial assets much more that GDP growth.  What we are experiencing is the convergence of the two lines, with the stock market line coming down very quickly to be more in line with GDP line.

Longview understands and manages portfolios for less risk, primarily because we understand if we don’t lose as much of your capital as the market wants to take back in a selling rout, then we don’t have to take as much risk when the markets eventually turn up.  Often we have talked about our “protect and grow” strategy.  Other than our most aggressive portfolios, we had prepared client accounts for a slowing market, although not the selling tsunami we saw last Friday and Monday.  To the best of our ability, we are assessing how much more we need to protect your portfolios without injuring the potential for future gains.  In these turbulent times, your confidence in our ability has never been more appreciated.

Jeffrey Cedarholm is the Chief Investment Officer at Longview Financial Advisors, Inc.  He is a CERTIFIED FINANCIAL PLANNER™ practitioner with a passion for investment and wealth management. Jeff can be reached via e-mail at jeff@longviewfa.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Investing for Humans

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By Jeffrey Cedarholm, CFP®, ChFC®, CLU®

Chief Investment Officer

Back in 2000, David Swensen, the long tenured chief investment officer of the Yale University Endowment wrote a book entitled “Pioneering Portfolio Management.” The subtitle was “An Unconventional Approach to Institutional Investment” and honestly, it was not only very unconventional, but it was also very successful.  Swensen’s methodology was and still is to use the Endowment’s large size to attract the very best students and employees to work with him, and let them then attract literally the very best investment managers from around the globe.  He doesn’t have these managers invest in traditional stocks and bonds (he handles that in-house), but he has them invest 70-80% of the Endowment’s funds into illiquid investments such as farmland, timber, venture capital, private equity and various hedge funds.  Now defining liquid investments as those you can get “most” of your money back quickly, say within a day or two, illiquid investments would then be those that are contractually tied up for months, or even years, with little hope getting funds back quickly regardless of the nature of global investment markets.  Because Yale’s Endowment has a time horizon of 80 – 100 years, has 20-30% liquidity, and  investment redemptions of staggered terms, this approach worked well from 1985 through 2007.

Swensen’s investment returns were so good during this period of time that most large university endowments at least tried to replicate his methods.  And because his book was so clear as to his methodology, even my peer group tried to emulate his success to various degrees by investing some of our clients’ funds in a similar fashion.  But it didn’t quite work.  Over time, we discovered that there were three major differences between what Dr. Swensen was doing and what we were trying to accomplish.  First, few of us had the inherent talent of David Swensen, and even his own peer group struggled to keep him in sight.  Second, he was using investment vehicles where the most talented managers really make a positive difference.  But last, the difference in his investment horizon of 80 – 100 years is radically different from dealing with human clients where 35 years would be considered lengthy.  During the 2008 crisis, Yale, Harvard and many other well-known Endowments had problems funding normal college obligations, primarily because the bulk of their funds were illiquid.  Our clients too had problems during this time, but getting money out of the market was not one them.

Since that time six years ago, many companies have introduced liquid fund versions of many of the strategies Swensen continues to use, although it is still hard to wrap farmland up into a fund.  With stock markets around the world close to all-time highs and bond markets being extremely expensive because of record low interest rates, these liquid strategies are becoming more appropriate for those of us with investment horizons of less than 100 years.  The liquidity of these newly packaged alternative investments allows capital allocators like Longview the ability to grow and protect our client portfolios in a much broader and richer fashion.  We all need liquidity for purchasing our basic needs.  And those of us who invest will always need liquidity for down payments on a home, for children and grandchildren, for college educations and especially for funding retirement.  As these newly packaged, liquid versions of investments continue to improve, it is our hope that the process of helping clients accomplish their goals will also continue to improve.

Jeffrey Cedarholm is the Chief Investment Officer at Longview Financial Advisors, Inc.  He is a CERTIFIED FINANCIAL PLANNER™ practitioner with a passion for investment and wealth management. Jeff can be reached via e-mail at jeff@longviewfa.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Crude Oil Meets Bond, James Bond.

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By Jeffrey Cedarholm, CFP®, ChFC®, CLU®

Chief Investment Officer

Rule No. 1: Most things will prove to be cyclical.

Rule No 2: Some of the greatest opportunities for gain and loss come when other people forget Rule No. 1. 

-Howard Marks

 

Sounds like a Bond movie to me, cloak and dagger and much intrigue.  Over the last year, the ministers of OPEC have had closed door meetings to discuss America’s upsurge in oil production.  In its December 13 edition, The Wall Street Journal reported that U.S. oil output has grown from 4.8 million barrels a day in 2008 to 8.9 million as recently as this past summer.  The Saudis in particular were worried that in a slowly rising demand environment, the U.S. wildcatters drilling in the Bakken and Eagle Ford shale deposits, would produce a global glut of supply.  They were right; not only is production up and all reservoirs filled, but in late summer, global demand from emerging market economies began to fall sharply.

When commodity supply/demand ratios become unbalanced, even by a small amount, immediate price adjustments follow. When circumstances lead to these ratios becoming widely unbalanced – such as now with too much supply and little demand – the price adjustments are precipitous. You are seeing this play out at your local pump!

Now I have had more than a few clients ask what could possibly be wrong when gas prices are almost half of what they were six months ago. For those economies that are not petroleum producers, and are also  predominately consumer driven, this is a fantastic economic boost, like a giant wind at our backs. Airline and trucking companies have seen an immediate boost to their bottom lines and their stock values. And who could possibly argue with having a few more dollars in your pocket during the holidays? Eventually, the price of oil will rise and stabilize somewhere between $50 and $100. It’s impossible to know the eventual price, but a range of between $60 and $80 per barrel might be a safe guess.

But what seems to be a tailwind to us as petroleum consumers is a headwind to the oil industry and those countries who are commodity exporters. There is a dark cloud on the horizon, always an evil villain in a Bond film. The villain here is a “lack of demand” in many parts of the world. And not just lack of demand for oil and other commodities, but the lack of demand that leads to slow growth, no growth, or negative growth that leads to deflation and eventual recession. The U.S. has been a global business bright spot, but we are not self-contained. We need strong demand from abroad for our exports and without it; our strong level of growth (relatively speaking) may quickly wither.

OPEC is playing a dangerous game of chicken with American producers by not agreeing to cut their own oil production.  They probably have the financial resources (and in the case of the Saudis, according to The Economist, a much lower cost of production) to outlast us and retain their global market share.  There will be much economic pain and suffering in the global energy sector!

Many smaller companies will go out of business, while others will be absorbed into larger, stronger companies. But as oil production begins to fall, that magic supply/demand ratio begins to come back into balance, stabilizing and then slowly increasing oil prices. 

Normality will eventually return to both the commodity and currency markets. Because oil is valued in U.S. dollars, large foreign oil exporters have taken a double financial hit and the recent currency crisis in Russia is a good example. Such a large global dislocation as the drop in the price of oil may create abnormally high market volatility before it eventually evens out. But here’s hoping for smooth sailing through the Holidays. 

Enjoy your eggnog! Shaken, not stirred.

Jeffrey Cedarholm is the Chief Investment Officer at Longview Financial Advisors, Inc.  He is a CERTIFIED FINANCIAL PLANNER™ practitioner with a passion for investment and wealth management. Jeff can be reached via e-mail at jeff@longviewfa.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Probabilities Are Just That!

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By Jeffrey Cedarholm, CFP®, ChFC®, CLU®

Chief Investment Officer

Sometimes it’s nice to take the time on a weekend to just sit and read the newspaper, something fewer Americans seem to do these days, either because of lack of time or interest, or both.  But this past weekend, as I perused the paper, I came across two relevant articles on the same page. The first to catch my eye was an article written by Jason Zweig about his recent conversation with Robert Schiller. You might remember Schiller from my last blog; he is the economist who has developed the “cyclically adjusted price/earnings ratio” or the CAPE ratio for short. This ratio is widely used by investors to determine whether the S&P 500 is over or under valued, compared to historical values dating back to 1871. Lately Schiller says the ratio, at almost 26, is above the long-term average of about 16. The thrust of Zweig’s interview was to question Schiller about the recent market volatility and whether it might be time to cut back on equities. At Longview, we feel the recent pullback is a normal part of owning equities, and that five to ten percentage downdrafts are usually a healthy reset. Schiller’s quote was the CAPE ratio “might be high relative to history, but how do we know history hasn’t changed.”  Bottom line – he is sticking with stocks for now.

The other story, written by Liam Pleven, was about a 61 year old widower, Peter Nelson, who was recently diagnosed with a form of blood cancer. With the diagnosis, Mr. Nelson was seriously weighing all of the pros and cons regarding his current situation. He was very open about whether he should quit his job, accelerate retirement and the spending that is attached to it, while all the time worrying that he may live much longer than the typical man suffering from his condition. It appears that Nelson, after much thought and consultation, decided on a “compromised” or moderate approach.  He decided to work at least through 2015, and to make his portfolio slightly more conservative. He was thinking that after 2015 of slightly “living large” with the funds in his portfolio, and also delaying taking Social Security until age 70 to boost his income in later years. With his longer term health concerns, this “spend a little more now, but with a backup plan” seems to be a prudent strategy.

Both of these juxtaposed stories deal with relevant financial planning concerns – decisions about an unknown future and the inherent probability attached to each decision.  The case of Schiller staying with equities in his portfolio is the easiest case to model. Many, if not most people are still fearful of a repeat of the market crash in 2008. But as I said earlier, market corrections of five to ten percent are normal events, and while these short-term swings are caused by global economic concerns, history has shown that usually the longer term trend is positive. The probability study regarding Mr. Nelson is much more difficult. Not only are you dealing with the market, but also how a disease may affect this man, how much money does he have to start with, how is it invested and how will it be spent! In the past 20 years, Financial Planners have come a long way in their ability to model situational probabilities, which generally leads to better financial decisions for clients. 

Jeffrey Cedarholm is the Chief Investment Officer at Longview Financial Advisors, Inc.  He is a CERTIFIED FINANCIAL PLANNER™ practitioner with a passion for investment and wealth management. Jeff can be reached via e-mail at jeff@longviewfa.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

The CAPE Crusader

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By Jeffrey Cedarholm, CFP®, ChFC®, CLU®

Chief Investment Officer

The purpose of investing is not to simply optimize returns and make you rich.  The purpose is not to die poor.                                                                                                                                       – William Bernstein

“Holy Cow Batman!”  Wait a minute, you have the wrong crusader.  In the world of investing, it’s not Bruce Wayne of Gotham, but Robert Shiller of Yale.  And it’s not Caped, but CAPE (Cyclically Adjusted Price Earnings).  Shiller is a recently named Nobel Laureate, professor of economics, the developer of the Case-Shiller Real Estate  index, the author of the well timed book Irrational Exuberance, and oh yes, the originator of CAPE.

The CAPE valuation method uses per-share earnings normalized over a past 10 year period, which tends to smooth earnings (and then also the price / earnings ratio) over a typical business cycle.  The current valuation is 26 times earnings.  Leuthold/Weeden, a prominent financial research firm, uses a slightly different method calculated over a five year period, and their ratio is currently valued at 21 times earnings.  Both of these P/E valuations are above their respective average value, in both cases above the 80th percentile, at least when the exercise is applied to domestic stocks.

The concern from Shiller, James Montier of GMO and other market pundits is not that the domestic market is just expensive.  It is really that based on past history when the market was this expensive on a CAPE basis, five year future market returns have been flat to negative.  Shiller’s graph, included below, shows that his index has only been more expensive than now in three years, 1929, 2000 and 2007.  Uh oh! Obviously, price / earnings ratios are not the only (or even the best) market valuation tool.  The trailing twelve month P/E ratio is only 18.8, and the forward looking ratio (as if we can predict the future) is even lower.  U.S. corporate earnings have remained persistently strong over the last five years and with a near zero interest rate, some premium in the ratio may be justified.  Our markets have done very well since 2009 compared to other markets around the world, and domestic stocks are now more richly valued.  It does make sense to slowly move away from our high valued stocks into less expensive areas of the world, especially Europe and emerging markets, if one has the stomach for uncertainty.  It may also be prudent to begin to accumulate a little more cash, as we see some of our fund partners doing.  Bottom line:  U.S. stocks have done very well, but are no longer inexpensive compared to most of the world.  Time to be careful out there!

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My many thanks to Robert Shiller, James Montier and William Bernstein for their continued research, and frequent articles and books. I have used and abused their thinking many times over the years. If you want more, be sure to check out Shiller’s website by clicking here.

Jeffrey Cedarholm is the Chief Investment Officer at Longview Financial Advisors, Inc.  He is a CERTIFIED FINANCIAL PLANNER™ practitioner with a passion for investment and wealth management. Jeff can be reached via e-mail at jeff@longviewfa.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.