Permanent Value Inc. - Registered Investment Advisor

Weekly Review: February 27 – March 2, 2012

The Markets

It may not feel like it, but the U.S. stock market is off to its best start to the year since 1991, according to CNBC.

With a rise of 8.9 percent for the year, the S&P 500 index has now risen eight of the last nine weeks. Some analysts cite improving economic data, solid corporate earnings, and a stronger job picture for the bubbling stock market, according to Reuters.

But, before we get too carried away, the S&P 500 index would still need to rise about 15 percent to match its all-time record high of 1,565 hit back on October 9, 2007, according to The Wall Street Journal. The gap is not as wide if you reinvested dividends since October 2007. On that score, the S&P would be just 3.5 percent below its all-time high.

If you look at the broad stock market as measured by the Wilshire 5000 index, which tracks more than 3,700 U.S. stocks, we’re at a record high. That index eked out an all-time record high last week assuming reinvested dividends, according to The Wall Street Journal. So, from the market’s peak in October 2007 to the trough in March 2009 and back to the peak in March 2012, it was a long and winding road of about 4½ years.
  
We talk about the importance of thinking long-term and this market cycle round-trip is a great example of what we mean. Things looked bleak near the bottom in early 2009, but here we are three years later and the market has surged and the economy seems to be healing. Patience is indeed a virtue.

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.

CAN WE LEARN FROM OTHER PEOPLE’S WISDOM?

The answer to that question is yes since no one of us is as smart as all of us. With that in mind, here are eight tidbits of investment advice from Jeremy Grantham, the co-founder and chief investment strategist of GMO, a $97 billion global investment management firm.
 
1. Believe in history. While past performance is no guarantee of future results, we should pay heed to history and avoid using the words “this time is different.” As the old Wall Street saw goes, “history doesn’t repeat itself, but it rhymes.”

2. “Neither a lender nor a borrower be.” Don’t borrow money to invest. If you do, “it will interfere with your survivability.”

3. Don’t put all of your treasure in one boat. This is investing 101 and it’s a basic tenet of sound investment practices.

4. Be patient and focus on the long term. Another piece of sound advice that is easier said than done – but it is well worth striving toward.

5. Try to contain natural optimism. While optimism may be a good survival characteristic, it can get in the way of good investment results. How? If you’re too optimistic, you may dismiss bearish news and go down with a sinking ship while those who had their eyes and ears open reached out for the lifeboat.

6. But on rare occasions, try hard to be brave. There may be times when it makes sense to be bolder than normal. If the odds look stacked in your favor, Grantham says it might make sense to be brave.

7. Resist the crowd: cherish numbers only. It’s easy to get caught up in the euphoria of a crowd – that’s how manias get rolling. But, as an investor, you have to put your analytical hat on, ignore the crowd, and sharpen your pencil (or calculator or computer!).

8. “This above all: to thine own self be true.” In order to succeed as an investor Grantham says, “It is utterly imperative that you know your limitations as well as your strengths and weaknesses. If you can be patient and ignore the crowd, you will likely win. But to imagine you can, and to then adopt a flawed approach that allows you to be seduced or intimidated by the crowd into jumping in late or getting out early is to guarantee a pure disaster. You must know your pain and patience thresholds accurately and not play over your head.”

While there are many top 10 lists of how to be a better investor, these eight from Grantham are a nice place to start. 

Weekly Focus – Think About It

“Risks must be taken because the greatest hazard in life is to risk nothing.”
–Leo Buscaglia, Ph.D., professor, New York Times bestselling author

Weekly Review: February 20 – 24, 2012

THE MARKETS

It’s been rather calm in the stock market lately.

For the past couple years, the euro zone debt problems and the “will we or won’t we relapse into a recession” worry have been on center stage. Now, Europe’s immediate liquidity issue has been patched and the U.S. economy seems to be on firmer footing. Accordingly, the stock market has responded to these developments and, last week, the S&P 500 index closed at its highest level in more than 3½ years, according to The New York Times.

Fear has declined, too. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended last week at about 17. That’s down from 48 reached last August and well below the 22-year average of 20.6, according to CNBC and Bloomberg. A low VIX suggests investors are less fearful of near-term market volatility.

Are there any worries on the horizon that could upset this calm?

Oil prices are one thing to keep an eye on. They rose 6 percent last week and closed at nearly $110 per barrel. Geopolitical tensions in the Middle East contributed to the rise as Iran is reportedly within sight of creating a nuclear bomb. That, of course, creates major headaches not only for the Middle East, but for the world in general.

On top of that, “There’s also an oil pipeline dispute between Sudan and South Sudan in northeastern Africa; unrest in Syria, Yemen, and Nigeria; varying levels of tribal infighting in Iraq and Libya; and the possibility of leadership issues in Venezuela, where the president is undergoing his third surgery for an undisclosed type of cancer,” according to The Milwaukee Journal Sentinel.
 
So far, the stock market hasn’t flinched in the face of these flashpoints. However, an unexpected turn for the worse in any of these areas could trip the markets. And, since the S&P 500 index has more than doubled in value since the March 9, 2009 low, according to The New York Times, it might not take much to trigger a market correction.

As a financial advisor, we know that there is always something to worry about. Frankly, it’s our job to worry about what could go wrong so you don’t have to. The good news is, as a country we always seem to find a way to overcome whatever obstacle is thrown our way.

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.

INVESTORS TEND TO GET CAUGHT UP IN THE DAY-TO-DAY NOISE…

… of the financial markets even though the markets often move in long secular cycles that can last more than a decade. For example, let’s look at interest rates.

At the end of 1964, the 10-year U.S. Treasury note yielded 4.2 percent. Over the following nearly 17 years, the yield rose until it peaked at 15.8 percent in September 1981, according to Bloomberg. During that span, the yield fluctuated significantly (the noise), but the long-term secular trend was a rising interest rate environment.

Since that peak in September 1981, the yield on the 10-year Treasury has been in a more than 30-year long-term secular decline. In fact, the yield was a slim 2.0 percent last week – well below 1964’s 4.2 percent. This decline was interrupted by numerous interest rate increases along the way (the noise), but the long-term trend was a decline in rates.

Turning to the stock market, it also exhibited significant moves during these two interest rate cycles.

From the end of 1964 to the end of 1981, the Dow Jones Industrial Average rose from 874 to 875. That’s no misprint. Over that 17-year period, the Dow rose exactly 1 point. In other words, it went nowhere. However, during that period, it rose as high as 1,052 and dropped as low as 578, according to Bloomberg. Here, the long-term secular trend in the equity market was to move sideways with lots of noise in between.

Fast forward to 1982. From its low in August that year, the Dow Jones Industrial Average took off on a 17+ year secular bull market that saw the Dow rise 15-fold, according to Bloomberg. And, yes, there was lots of noise during that 17-year bull run including the 22 percent decline – in one day on Black Monday – October 19, 1987.

Here’s the takeaway – markets are very noisy. While we monitor what happens in the short-term, we want you to focus on the long-term. Day-to-day fluctuations may top the headlines, but it’s the long-term trends that you should pay attention to. 

Weekly Focus – Think About It

“Only put off until tomorrow what you are willing to die having left undone.”
–Pablo Picasso, Spanish painter, draughtsman, and sculptor

Weekly Review: February 13 – 17, 2012

THE MARKETS

Valentine’s Day is over, but there’s still a “whole lotta love” swirling around the stock market these days.

The Dow Jones Industrial Average closed last week at its highest level since May 2008 while the S&P 500 is knocking on the door of its highest close in almost four years, according to The Wall Street Journal. The gains were driven by optimism that Greece will get another bailout and better-than-estimated data on jobless claims, manufacturing, and housing, according to Bloomberg.

Even though the market has been rising, potential party spoilers abound.

You may have noticed the last time you filled your car gas prices are on the rise again. In fact, CNBC reported gas prices are at a record high for this time of year. The report says gas prices could hit an all-time record high this spring.

Gas prices aren’t the only thing on the rise. Tensions in Iran and the Middle East are stoking a rise in oil prices. Together, higher gas and oil prices could take a bite out of consumer and corporate wallets.

Over the weekend in Asia, China announced a change in its banking system reserve ratio in an effort to spur lending and economic growth. This monetary easing comes on the heels of a report that shows housing prices declined in 47 out of 70 major Chinese cities in January. Housing has been a strong economic engine for China for years and any slowdown there could cause problems.

Across the pond, new numbers show that Italy, Greece, Portugal, the Netherlands, and Belgium are now officially in recession, according to The Wall Street Journal. Even mighty Germany saw its economy slightly contract in the fourth quarter of 2011 compared to the third quarter.

Despite these negatives, the market seems to be climbing the proverbial “wall of worry.” Whether it will scale this wall and stay on top or fail to reach the top and retreat remains to be seen.

 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.

HOW MUCH INCOME WOULD YOU NEED …

…to feel “rich?” Gallup recently conducted a poll and discovered that the median income needed by Americans to feel rich was $150,000. That is three times the roughly $50,000 median annual household income of Americans.

Probing a little deeper, the survey results revealed the following interesting points:

1) 15 percent of the respondents said they needed to earn $1 million or more to feel rich while 30 percent said $100,000 or less would make them feel rich.

2) Women said they needed $100,000 per year to feel rich while men needed $150,000.

3) College graduates needed $200,000 to feel rich while non-college graduates needed $100,000.

In a separate question, Gallup asked Americans how much net worth they would need to feel rich. The median response was $1 million.

So there you have it – to feel rich in America the average American needs either $150,000 in annual income or $1 million in net worth.

Now, let’s contrast that with our tax laws. The highest marginal tax rate starts when single filers or married couples filing jointly reach $379,150 in taxable income. That’s quite a bit above the median $150,000 number that was reported by Americans to make them feel rich. 

According to Gallup, “The question of the point at which someone becomes rich certainly has policy implications in the United States. Gallup finds Americans now about evenly divided on whether the rich, broadly speaking, should be heavily taxed.”

You can expect to hear a lot more about tax policy during the upcoming elections later this year.

WEEKLY FOCUS – Think About It

Did you ever notice that when you put the words “The” and “IRS” together, it spells “THEIRS?”
–Author Unknown