Permanent Value Inc. - Registered Investment Advisor

Weekly Update: October 10 – 14, 2011

The Markets

What happened to the economy?

Less than three weeks ago, it seemed like the economy was falling off a cliff. Firms like the Economic Cycle Research Institute were saying a new recession was on its way and there’s nothing the government could do to stop it, according to MarketWatch. The stock market was sensing economic weakness, too, as it slumped to its lowest level in a year on October 3.

But, now, just two weeks later, the S&P 500 stock index is up a whopping 11 percent since October 3 and trading at the top end of a range that it’s been stuck in for more than two months, according to Bloomberg.

Has the economy suddenly turned the corner? Well, economic reports in the last couple weeks came in better than expected. According to The Wall Street Journal, “Auto sales rebounded to their highest level since April. Chain-store sales posted year-on-year growth of 5.5 percent. The economy added 103,000 jobs, and manufacturing sentiment improved a bit.” On top of that, the Commerce Department said retail sales rose 1.1 percent in September — above the 0.8 percent expected by economists surveyed by MarketWatch.

While the recent positive economic data is encouraging, it would be premature to ring the metaphorical bell for an all-clear signal. The economy still has lots of repairs to make before happy days are here again. In the meantime, we’ll keep doing our job which is to help you meet your financial goals and objectives.  

Returns

Notes: * This newsletter was prepared by Peak Advisor Alliance. * The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. * The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. * The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998. * The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.* Past performance does not guarantee future results.* You cannot invest directly in an index.* Consult your financial professional before making any investment decision.

Looking Back on the Decade of the…

…1930s, which includes the Great Depression, it’s hard to imagine that it may have been, “the most technologically progressive decade of the century,” according to economic historian Alexander Field. And, those advancements — in the midst of our country’s worst economic slump — may have set the stage for our post-World War II boom.

Like our Great Depression experience, could the current economic downturn be laying the seeds for a new American renaissance in the coming years?

In his recent book, A Great Leap Forward, Field argues that technological advancement and innovation flourished during the Great Depression. In a New York Times interview he said, “There is evidence that for some organizations and industries, just as for some individuals, adversity summons reservoirs of initiative and creativity that have long-term positive consequences. And, based on Depression experience, we can be optimistic that when exciting technological paradigms are ripe for exploitation, work will continue on them, slump or no slump.”

If necessity is indeed the mother of invention, then right now there may be exciting new technologies and innovation growing under the radar that will bear fruit in the years to come. As David Leonhardt wrote in The New York Times, the U.S. has several advantages over other countries including, “The world’s best venture-capital network, a well-established rule of law, a culture that celebrates risk taking, (and) an unmatched appeal to immigrants.” Those advantages may be working overtime now creating the next “big thing.”

Don’t forget that 20 years ago, the internet was only known to scientists and academics. Today, it’s ubiquitous and would be hard to live without. Twenty years from now we could be writing about something entirely new that changes the way we work and live — and employs millions of people.

It’s easy to throw up your arms in frustration about the challenges our world faces. And, yes, we do have challenges and many people are experiencing economic hardship. Yet, there is reason for hope. Seeds were sown during the adversity of the Great Depression that bore fruit in the decades to follow. It could be happening again.

It’s never wise to bet against the United States. 

Weekly Focus – Think About It

“The American, by nature, is optimistic. He is experimental, an inventor, and a builder who builds best when called upon to build greatly.”

 –John F. Kennedy

Weekly Update: September 26 – 30, 2011

The Markets

The word “volatile” has been so overused in the media, but it’s hard to find a better way to describe recent movements in the financial markets. On any given day, the markets can rise or fall based on the latest thinking about euro-zone sovereign debt problems, a possible U.S. or Chinese recession, weak banks, inflation, deflation, or poor job numbers.

In the just completed third quarter, uncertainty (there’s another overused word!) was in full bloom as the three major U.S. stock market indices posted double-digit declines, according to Barron’s. Was the market sniffing out a new recession? Possibly. Last week, the respected Economic Cycle Research Institute was quoted in MarketWatch as saying, “The U.S. economy is headed for another recession that government intervention cannot prevent.” Along those same lines, Goldman Sachs said we may be moving from the 2007-2009 “Great Recession” to an upcoming “Great Stagnation.” As quoted by Bloomberg, Goldman Sachs said a “Great Stagnation” would be characterized by “‘high and sticky’ unemployment, an average 0.5 percent growth rate in per capita gross domestic product, and stock markets that underperform historical averages.”

But, not everyone agrees with that assessment. Warren Buffett told CNBC last week, “it’s very, very unlikely we’ll go back into a recession.”

So, who are you going to believe? The market’s jumpiness may reflect the fact that smart people have completely different views of the economy.

Returns

Notes: * This newsletter was prepared by Peak Advisor Alliance. * The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. * The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. * The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998. * The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.* Past performance does not guarantee future results.* You cannot invest directly in an index.* Consult your financial professional before making any investment decision.

What to Watch in the Fourth Quarter

Here are a few things that made the headlines in the third quarter and may affect the markets over the final three months of the year:

• The S&P 500 index dropped 14.3 percent in the third quarter and is now down 10.0 percent for the year.

What to Watch: Third quarter corporate earnings will start rolling in soon and investors will scour them for any sign of weakness. For the past few quarters, strong earnings helped the market recover from the Great Recession. While some earnings weakness may already be priced in the market, we have to wait for the actual earnings to see how the market reacts.

• Commodities and precious metals experienced significant price movements during the quarter. Gold prices finished the quarter up 8 percent, while silver dropped 14 percent, according to MarketWatch. Oil prices declined 17 percent for the quarter, while copper dropped a stunning 26 percent. On the agricultural side, corn prices finished the quarter down 25 percent from their June 10 all-time high, according to The Wall Street Journal.

What to Watch: Recent declines in oil and copper prices are particularly noteworthy because they may presage a slowing worldwide economy. If the declines continue, it may not bode well for stock prices.

• The housing market is still weak and that puts a significant drag on economic growth. According to the most recent S&P/Case-Shiller Home Price Indices, housing prices around the country are back to where they were in the summer of 2003.

What to Watch: Mortgage rates are at a record low yet the housing market is still in the doldrums, according to Bloomberg. Any sign that housing is turning the corner could bode well for the economy and the markets.

• Interest rates on U.S. government securities dropped significantly in the third quarter as the flight to safety continued. The yield on the 10-year Treasury note recently hit a paltry 1.67 percent — the lowest yield since the 1940s. While low rates are good for businesses and our indebted government, it’s bad for savers who rely on interest income to support their living expenses.

What to Watch: If interest rates keep dropping in the fourth quarter, it may suggest investors are still in a fearful state. Ironically, it could be a good thing to see interest rates rise — as long as it’s due to economic growth and not due to money printing by the Federal Reserve.

• Sovereign debt woes in Europe and budget wrangling in the U.S. weighed on the financial markets in the third quarter.

What to Watch: Continued bad news here could be very problematic. However, if there’s any concrete resolution to the Euro-zone debt problems or a credible bi-partisan budget solution in Washington — look out. The financial markets could rally strongly on that kind of news.

Weekly Focus – Think About It

“I wanted a perfect ending. Now I’ve learned, the hard way, that some poems don’t rhyme, and some stories don’t have a clear beginning, middle, and end. Life is about not knowing, having to change, taking the moment and making the best of it, without knowing what’s going to happen next. Delicious Ambiguity.”

–Gilda Radner

Weekly Update: September 19 -23, 2011

The Markets

The Federal Reserve did “The Twist,” but the financial markets ended up in “A Knot.”

In a much anticipated action dubbed “Operation Twist,” the Federal Reserve announced last week it would reshuffle its balance sheet by selling $400 billion of shorter-term Treasury securities and use the proceeds to buy longer-term securities. The Fed said it hopes the action will lower longer-term interest rates and, “contribute to a broad easing in financial market conditions that will provide additional stimulus to support the economic recovery.” 

So far, as it relates to interest rates, the Fed’s action has worked. The yield on the 30-year Treasury bond declined from 3.2 percent the day before the Fed’s announcement to 2.9 percent just two days later, according to data from Yahoo! Finance. That’s a rather dramatic decline for such a short period.

Unfortunately, the stock market failed to respond positively to the Fed’s announcement as the S&P 500 index lost 6.4 percent for the week. The market’s drop, though, went beyond disappointment in the Fed’s action. The following also contributed to the market’s red ink:

• Intensified fears of a Greek default.
• Rising concern of a world-wide financial crisis, with sovereign debt at the epicenter.
• Growing signs of sluggish economic growth in China, which had been one of the few countries immune to economic turmoil.
• A 13 percent drop in the price of copper on Thursday and Friday of last week, which is concerning because the price of copper is often viewed as a proxy for worldwide industrial growth.

Sources: Wall Street Journal, MarketWatch, Bloomberg

With the market’s blood pressure rising, it reminds us of what flight attendants often say, “Ladies and gentlemen, the Captain has turned on the fasten seat belt sign. We are now crossing a zone of turbulence. Please return to your seats and keep your seat belts fastened. Thank you.”

Likewise, as your “Financial Captain,” we know there may be market volatility along the way, but, as always, we’re focused on trying to help you arrive safely at your financial destination. 

Returns

Notes: * This newsletter was prepared by Peak Advisor Alliance. * The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. * The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. * The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998. * The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.* Past performance does not guarantee future results.* You cannot invest directly in an index.* Consult your financial professional before making any investment decision.

An Often Overlooked Aspect of Successful Stock Investing…

… is the importance of dividends. In bull markets, investors tend to focus on price appreciation, meaning, they look for stocks that can increase in price. In heady times like the late 1990s, investors feasted on stocks that would double or triple in a matter of months. Watching a stock go from $20 a share to $40 or $60 a share is exhilarating and makes for good cocktail party chatter. On the other hand, watching a stock sit at $20 a share for several years while you collect and reinvest a 3 percent dividend is rather boring and not worth sharing on the social circuit.

However, just like the old story about the tortoise and the hare, the slow and steady growth of dividends plays a very important role in making money grow over time.

The past 10 years is a great example of how dividends have helped improve the returns of an otherwise disappointing stock market. Here’s the data:

• For the 10 years ending September 23, 2011, the S&P 500 index had a positive average annualized return of 1.3 percent excluding reinvested dividends.
• For the 10 years ending September 23, 2011, the S&P 500 index had a positive average annualized return of 3.6 percent including reinvested dividends.
• As shown above, receiving dividends and reinvesting them added 2.3 percentage points per year to an investor’s return compared to the return generated by price appreciation alone of the underlying stocks in the S&P 500.

Sources: Morningstar, Yahoo! Finance

In today’s environment of low returns, finding a way to possibly eke out an extra 2.3 percentage points of return per year is attractive.

Over a longer period, receiving dividends and reinvesting them has accounted for one-third of the total return of the S&P 500 index over the past 80 years, according to Standard & Poor’s.

Standard & Poor’s also points out the following benefits of dividends:

• Dividends allow investors to capture the upside potential while providing some downside protection in the down markets.
• When bond yields are low, like they are now, dividend paying stocks might be a way to enhance an investor’s current income.

Just like any other investment, though, you need to figure out how dividends fit within your overall investment strategy. Are you looking for dividends to provide stability, income, or growth within your portfolio? Or, perhaps it’s some combination of all three.

Considering how dividends fit within our clients’ portfolios is just one more way that we’re trying to add value.

Weekly Focus – Think About It

“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

–John D. Rockefeller