Permanent Value Inc. - Registered Investment Advisor

President’s Message

HALF TIME REPORT…

Given that we are half way through the year, it seems appropriate that we would give you a half time report on the world and how we are adapting your financial strategy to reflect what is happening.  (For you NFL and NBA fans, it might be the only half time report you get all year if they don’t solve their labor disputes!)   The first half of the year had mainly been dominated politically by government change in the Middle East and economically by government debt, the debt ceiling, and the annual deficit not only here in the US but overseas as well.  We are in a period of slow economic and job growth but companies seem to be doing a good job at maximizing their profits.  Congress is finally addressing in a meaningful way the question of how much debt is too much and what is being done to not just reduce it but simply to slow down its growth!   Now you might be asking “what does this have to do with my financial strategy?”  In most financial strategies, we are either growing our income sources for future distribution or distributing from our current income sources.   Current and future interest rates have a lot to do with that and the government sets the interest rates.  Because your income is reliant on interest rates, the higher interest rates are the less you have to save to provide your future income.  Given that the government debt is about to top $15 trillion, they are very motivated to keep interest rates down because even at 2% the government has to pay out $300 billion in interest alone every year.

INFLATION…

We have been in a very low interest rate environment for some time and with the federal debt situation it looks like we will continue to do so.  This tells us that we will have to save more and acquire more incoming-producing assets than in years past.  Inflation is also a key factor because the government’s chief tool to keep down inflation is to raise interest rates and it is not able to do so effectively until it starts reducing its debt.   We’ll give some statistics on the state of current inflation in the Planner’s Perspective of this newsletter.

So we have to be aware of inflation in everything we do because it erodes the value of the money we save every year.  In fact, since 1950, the value of the dollar has declined over 90%.*   Taxes are also a key ingredient in this mix because ultimately it’s what you keep rather than what you earn or have saved that is most important.  So the three key factors in long-term investing and your financial strategy are inflation, interest rates and taxes and we have to keep all these in mind with every investment that we make.

*Source: Bureau of Labor Statistics. Web: http://stats.bls.gov/.

SUMMERTIME…FALL…

Understanding the dynamics of how your financial plan navigates these economic forces is crucial to reaching your financial goals.  Your financial strategy is a fluid and dynamic plan that updates and adjusts but doesn’t change its core principles (accumulating or distributing, protection, low volatility or high volatility, etc.).  Every meeting we have together builds upon the foundation we have established to make sure your financial goals are achieved.  We look forward to meeting with you in the fall to discuss your strategy and make any year-end adjustments that will make your strategy more effective given any income and asset changes you have made throughout the year.  Have a wonderful summer and we’ll see you this fall.

Finish Strong

FINISH STRONG…

On April 3rd, I completed my first triathlon, the Lavaman Triathlon in Hawaii and learned a few lessons that I want to share with you.    The first one is that a strong start and especially a strong finish are the key to not only races but many endeavors (particularly financial) in life.   At the start of the triathlon, I was determined to get into a good early rhythm and make sure that things were working as smoothly as possible.   This was all made possible by our coach who prepared us for every possible scenario based on his 30 years of coaching and participation in over 280 triathlons himself during the past 50 years.   We spent five months preparing for the race where I made sure I could complete all three distances but the three days prior to the race on location were by far the most valuable.  I tested swimming in the bay that would be our race course (with and without a wetsuit); biking and running on the actual course as well as what nutrition I would take prior to the race itself.  I was thus fully prepared and had gotten all my mistakes out of the way before the gun (actually a conch shell) sounded for the main event.  This helped me to have a mistake-free race and I even had an unexpected but pleasant surprise when my son Jordan ran with me the last quarter mile to the finish. 

Now how does this apply to my finances you might ask?   Being prepared and getting sound coaching is essential to having a successful financial strategy.  You can take simple steps like making retirement plan contributions automatic and on time, keeping a working budget and establishing a healthy surplus every month.   While I had a head coach and a nutritionist, I also had a separate run, swim and bike coach for each event in the triathlon.  I asked them a lot of questions and always consulted them when I was not getting the results I wanted in training.  You have us, your financial advisor, as your head coach; you also have coaches in estate planning, taxes, and risk management.   You need to see all of them when appropriate, test their advice on your own financial situation and take their advice in a timely fashion to make your strategy the most effective it can be.  Finishing strong is critical in planning because that is when mistakes can have the biggest impact.  If you tested your strategy early in your financial life and are confident in the race you are running you are likely to finish strong.  Having someone to help run you in to the finish and encourage you (like your financial advisor) certainly helps make it more worry-free and pleasant as well. 

SPRINGING INTO SUMMER…

We look forward to meeting with you in the next few months to discuss your strategy so we can help you make all the critical adjustments necessary for you to be successful.  We would like to review all your finances two to three times per year depending on your schedule and will be calling to get your help in gathering the information we need so the meeting can be as efficient and effective for you as possible.   Thank you in advance for your cooperation and have an enjoyable spring and summer.  We look forward to seeing you soon.

First Quarter Review

THE MARKETS

STOCK MARKET RISES SHARPLY

It may not have felt like it, but the stock market, as measured by the S&P 500, rose 5.4% during the quarter. Despite some trying moments, the market rose “amid growing optimism that the recovery from the financial crisis had become self-sustaining, according to The Wall Street Journal. The stock market seems to have taken to heart the U.S. Postal Service commercial that said, “…neither snow, nor rain, nor heat, nor gloom of night, nor the winds of change, nor a nation challenged, will stay us from the swift completion of our appointed rounds.” In this case, the “appointed rounds” was a stock market that went up.

Here are the returns from a few other countries:

First Quarter Country Returns Based on the Dow Jones Global Indexes Ranked by U.S. Dollar Performance

TURMOIL IN THE MIDDLE EAST AND NORTH AFRICA

Political instability in the world’s leading oil-producing region sent shockwaves through the oil market. In fact, during a 13-day period in February, oil prices rose a stunning 25%. For the quarter, they rose 16.8% and settled above $100 per barrel, according to The Wall Street Journal. Should oil prices remain above $100 per barrel for an extended period, it could become a drag on global economic growth and may lead to pressure on stock prices. About the only good news on oil prices is they are still well below the $145 per barrel price reached in 2008.

THE DOLLAR AIN’T WORTH WHAT IT USED TO BE

Pardon the poor grammar above, but the dollar keeps sliding. During the quarter, it lost 5.7% against the euro, 2.4% against the Japanese yen, 2.8% against the British pound, 1.2% against the Australian dollar, and 1.6% against the Brazilian real, according The Wall Street Journal. There was no flight to safety in the dollar during the quarter despite the Middle East problems, the Japanese triple tragedy, and the continuing sovereign debt issues in Europe.

Low interest rates in the U.S. appear to be the main culprit in keeping pressure on the value of the dollar. Low rates make the dollar less attractive relative to other countries that may offer higher rates. The good news is a weak dollar makes our exports cheaper and that may help some of our large, multi-national companies. Analysts are keeping an eye on the Federal Reserve for any sign of a change in monetary policy. Once they start raising rates, which many analysts don’t expect until 2012, it could lend some support to the dollar, according to The Wall Street Journal.

FEAR IN THE MARKET

How scared are investors? One way to measure fear in the market is to look at the CBOE Market Volatility Index — the “fear gauge” known as the VIX. This measure rose significantly during the height of concern over the Japanese earthquake. In fact, it jumped 20% in one day in Mid-March before declining 39% over the next week, according to The Wall Street Journal and Bloomberg. Despite all the gyrations, the VIX ended the quarter roughly flat.

SUMMARY

There’s no shortage of things to worry about in the market, but the strength of the economy and the expectation that corporate earnings will hold up seem to outweigh any nervousness over geopolitical issues or natural disasters. Some key things to monitor over the next few months include commodity prices, interest rates, the status of QE2, and, of course, corporate earnings. As always, we have our hands full!

WEEKLY FOCUS – Think About It

“How much pain have cost us the evils that have never happened.”

–Thomas Jefferson