Permanent Value Inc. - Registered Investment Advisor

President’s Message

LAST YEARS’S FORECASTS

Lone Ranger -

10 Wall Street equity strategists forecasted where the S&P 500 would finish 2011.  9 of the 10 prognosticators predicted the S&P 500 would end the year at 1325 or higher (note that the index ended 2010 at 1258).  Douglas Cliggott of Credit Suisse was the lone dissenter from the majority belief, forecasting a 1250 year-end value for the S&P 500.  The stock index finished 2011 at 1258.  (The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market.) (source: 12/20/10 issue of Barron’s).  

Big Surprise -

13 Wall Street bond market forecasters predicted on 12/20/10 where the yield of the 10-year Treasury note would be on 12/31/11.  12 of the 13 strategists believed the yield, which was 3.29% as of 12/31/10, would be at least 3.50% as of 12/31/11.  The actual 12/31/11 yield was 1.88% (source: Barron’s). 

Humble Pie -

Bill Gross, portfolio manager of the world’s largest bond fund, said on 2/15/11 that “inflation will go up and bond prices go down.”  As of 2/28/11, Gross had sold all of his fund’s holdings in US Treasury debt in anticipation of rising interest rates.  The yield on the 10-year Treasury note was 3.42% on 2/28/11.  The yield on the 10-year Treasury note was 1.88% on 12/31/11.  The yield on the 30-year Treasury note was 4.42% at the start of last year and 2.89% at the end of 2011.  (source:  Financial Times). 

Never is a Long Time -

Treasury Secretary Tim Geithner was asked on 2/07/10 whether the USA could ever lose its top credit rating.  Geithner responded “that will never happen to this country.”  S&P downgraded the United States from AAA to AA+ on August 5th , 2011.  The USA had been AAA-rated for 70 years (source:  ABC News).    

So what impact does this have on our investments you might ask?   Since we invest in US Treasury bonds and certain segments of the S&P 500 from time to time, we thought you might be interested in how the “expert’s” forecasts turned out.   Funds around the world continue to buy US debt (source: Wall Street Journal) and overall the stocks ended up about where they began.   We have made ETFs the core of your portfolio so we can have the flexibility to adapt to what is happening in the economy and the world markets based on what you need, not what the experts are predicting.    We also continue to execute our Advance and Protect strategy for you so that we focus on protection and our disciplined sell strategy rather than just buy and hold and hope for the best.   I heard from an investment advisor that “the market will do the opposite of what the majority of people think it will do at any one time,” and that’s what we have to be prepared for today.

YES, IT’S AN ELECTION YEAR….

As you may know by now, we are in a Presidential election cycle and voters are going to be asking themselves “Am I better off economically than I was four years ago?”  While there are many factors and issues that go into voter preferences, this is the major determinant in how Americans will vote in 2012.   During the last cycle, it looked like the economy was slipping but there was no incumbent running for reelection.  Towards October and November of 2008 it dived into a full power slide which in turn may have impacted the election significantly.  This time, employment and growth figures seem to be picking up momentum so we will see where that leads us.

We wish you and your families all a very Happy New Year and look forward to seeing and talking to you as we review your 2012 budgets and plan ahead for the year.

President’s Message

UNCERTAINTY BREEDS VOLATILITY…

We are currently in a very uncertain economic environment.  Not many people would disagree with that statement.    While picking which way the market is going from day to day is next to impossible, we like to give you a long-term general sense of the market.   The recovery after the recession of 2007-2009 has been so slow in terms of economic and job growth,  and this is why it’s hard for investors to ascertain where markets are going so they can choose whether to participate in economic growth and or prepare for another recession (according to Warren Buffett, it is “very unlikely” the US economy will go back into a recession.)   That is why you keep seeing such volatility in stocks, bonds, gold, and currencies whenever there is another pronouncement from Europe or Washington.   

This past quarter the federal debt limit was a big part of the news.   There is a lot of misinformation about the debt out there so I wanted to give you a few facts about what is happening.  One of the issues that have to be addressed is not only the sheer size in dollar figures but also the debt as a percentage of our economy.   Authors Carmen Reinhart and Kenneth Rogoff have written a paper (“This Time is Different: Eight Centuries of Financial Folly”) on sovereign debt and its impact on a country’s ability to grow.  The authors conclude that a country’s growth slows substantially once the country’s level of public debt exceeds 90% of the size of its economy (source: Peterson Institute for International Economics, Harvard University).   The USA’s public debt is projected to be 71.2% of the size of our economy in 2012 (source: Congressional Budget Office) which led ulitmately to a downgrade of the Federal Government’s debt by Standard and Poors.   

So what impact does this have on our investments you might ask?   Since we invest in US Treasury bonds from time to time we thought we share a few numbers with you.  The yield on the 10-year Treasury note was 2.57% on 8/05/11, the day that S&P announced a downgrade of the USA from AAA to AA+.  Now 8 weeks later, the yield on the 10-year Treasury note closed last Friday (9/30/11) at 1.92% as funds around the world continue to buy US debt (source: Treasury Department).    Another result of the downgrade was a significant drop in the stock market over the past quarter and in fact the S&P 500* lost 7.0% (total return) in September 2011 [alone], its 5th consecutive down month.  The S&P 500 has experienced 5 consecutive down months only 3 times since 1990 including the negative stretch that ended last Friday (9/30/11).    This all took place in light of corporate profits being significantly higher than when the recession started in 2008.   In fact, the earnings projected to be generated by the companies in the S&P 500 stock index in calendar year 2012 are more than 6 times as large as the actual earnings of the 500 companies during calendar year 2008 (source: S&P).               

*The S&P 500 is an unmanaged index of 500 widely held stocks generally considered representative of the US stock market (source: BTN Research).   

What has a government that is set up to spend more than it saves (politicians don’t get elected on $ they save; they get elected on the $ they bring home to their districts/states) done about the federal debt you ask?    On 2/14/11 President Obama proposed $1.1 trillion of deficit reductions over the next 10 years.  On 4/13/11 he proposed $4.0 trillion of deficit reductions over the next 12 years.  On 9/19/11 he proposed $4.4 trillion of deficit reductions over the next 10 years (source: White House).  So forget about ten years, how is this year going to look?   Fiscal year 2012 (10/01/11 to 9/30/12) began a week ago Saturday.  The most recent projection (released on 8/24/11) for the fiscal year by the government anticipates $2.6 trillion of revenue, $3.6 trillion of spending, and a deficit of $973 billion (source: Congressional Budget Office).

All of this news requires us to be more vigilant than ever so that we can preserve, protect, and ultimately grow your money.  We look forward to meeting with you to discuss your strategy and make any year-end adjustments that will make your strategy more effective.

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.