Permanent Value Inc. - Registered Investment Advisor

Weekly Review: February 6 – 10, 2012

THE MARKETS

Who should you believe, Warren Buffett or Bill Gross?

Buffett and Gross are generally recognized as two of the world’s greatest investors. Buffett made his name in equities while Gross made his name in bonds as the head of Pimco, a trillion-dollar money management company. Both have outstanding multi-decade track records and both are billionaires.

Yet, today, they disagree on the merits of investing in “currency-based investments” such as money-market funds, bonds, mortgages, bank deposits, and other instruments.

Buffett says these investments “are among the most dangerous of assets. Their beta may be zero, but their risk is huge.” Further, he says, “Right now bonds should come with a warning label,” according to a February 9 Fortune magazine article.

His beef with currency-based investments is they do not protect you from the risk of inflation. You may get your principal back plus interest, but, in times of high inflation, your “real” return may not keep up with inflation and you could lose purchasing power.

Gross, on the other hand, has piled into bonds in a big way.

After dumping all of his U.S. government debt securities in early 2010, Gross has steadily built it back up according to Bloomberg.

Gross favors government securities in the 5- to 7-year maturity range because of the Federal Reserve’s pledge to keep short-term rates low.

Okay, how do you reconcile the divergent views of two outstanding investors? Quite likely it’s a matter of timing. Buffett is probably looking at a 7- to 10-year time horizon and, in that scenario, bonds might lose purchasing power and could experience capital losses if interest rates rise and bond prices decline.

Gross, though, is probably thinking shorter term. With the Fed’s pledge to keep interest rates low for the next couple years and the economy still stuck in slow motion, the risk of bond prices declining and inflation rising rapidly in the short term may be manageable.

Bottom line, it’s not just your outlook that matters, it’s also important to know the timeframe for your outlook. 

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 IF…

 the keepers of the Dow Jones Industrial Average added Apple to the index in 2009 instead of Cisco Systems? This is not just a hypothetical exercise; rather, it makes an important point about using indices to measure overall market performance.

In June 2009, General Motors and Citigroup were removed from the Dow 30 average and replaced by Cisco and Travelers Cos, according to Bloomberg. At the time, Cisco was trading at about $19.50 per share. Last week, Cisco traded at about $20.00 per share – essentially no change in nearly three years. By contrast, Apple was trading at about $143 per share in June 2009 and closed last week near $500 per share.

Unlike most other market indexes, the Dow Jones Industrial Average is a “price weighted” index, which means stocks with a higher price (e.g., Apple) have greater impact than lower-priced stocks (e.g., Cisco).

So, taking a look at the woulda, shoulda, coulda, Bespoke Investment Group recalculated where the Dow would be if Apple was added to the index in 2009 instead of Cisco. They discovered that instead of the Dow being in the 12,800 range last week, it hypothetically would have been near 14,600 – an all-time record high.

Notice how one stock could have made nearly a 2,000 point difference in the Dow index in less than three years. Of course, the reverse is also true. A stock could have been added to the Dow in 2009 and gone down the last couple years and taken the Dow down with it.

Here’s the point. We tend to think of indexes are representing “the market,” but, in reality, they represent the keepers of the indexes representation of the market. There’s human intervention in some of these indexes and that could greatly influence their performance.

In the end, the only index that matters is your index – the one that measures your progress toward reaching your goals. That’s the index we try to beat.  

Weekly Focus – Think About It

“One must maintain a little bit of summer, even in the middle of winter.”

– Henry David Thoreau, author, poet, philosopher

Weekly Update: January 30 – Feb 3, 2012

THE MARKETS

How do you spell market rally? How about “Jobs.”

A much higher than expected 243,000 jobs were added to our economy in January and that helped push the Dow Jones Industrial Average to its highest close since May 2008, according to Bloomberg. On top of that, the unemployment rate dropped to 8.3 percent – the lowest since February 2009.

More good economic news came from the services sector as the pace of growth in January accelerated to its highest level in nearly a year, according to the widely followed index from The Institute of Supply Management and reported by CNBC.

While the overall economy has gained some momentum lately, the housing market is still stuck in the gutter. According to data released last week, the S&P/Case-Shiller index of home prices in 20 major cities declined 3.7 percent in the 12 months ending November 2011. Since its 2006 peak, average homes prices in the index have dropped 33 percent and prices are now back to where they were in mid-2003.

On the bright side, if you’re looking to buy a house or refinance, now is a great time. The average rate on a 30-year fixed-rate mortgage fell to 3.87 percent last week. That’s an all-time record low, according to MarketWatch.

Overall, after a scare back in the fall of 2011, the economy seems to be gaining steam and stock prices have reflected that. The big question remains… is this sustainable growth or is it temporarily driven by government stimulus and intervention?

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 THE INTERSECTION OF TWO MOVING AVERAGES …

…foretell the future direction of the stock market? Chart watchers like to follow what’s called the 50-day moving average (50 DMA) and the 200-day moving average (200 DMA). These are lines which plot the closing price of the S&P 500 index for the last 50 and 200 days. When a new day is added, the oldest day is dropped off, hence the term “moving” average.

The 200 DMA is supposed to reflect the longer-term “wave” or trend in the market while the shorter 50 DMA captures the shorter-term trend or momentum. How these two lines move relative to each other is what gets chart watchers excited.

Last week, the 50 DMA crossed above the slower moving 200 DMA. Market technicians refer to this as a “golden cross.” In layman’s terms it’s considered a bullish market signal, according to CNBC. In fact, Birinyi Associates said that in the 26 instances since 1962 when the 50 DMA crossed above the 200 DMA, the market was higher six months later 81 percent of the time.

Not surprisingly, when the 50 DMA crosses below the 200 DMA, there’s a name for that, too. It’s called a “death cross” and it’s supposed to signal bad times ahead. However, the last two “death crosses,” which occurred on August 15, 2011 and July 2, 2010, were not very prescient, according to The Wall Street Journal.

And, we can get further carried away with the funny technical names by throwing in the “Hindenburg Omen.” By its very name you can tell it’s not something you want to see in the markets, and, we’re happy to report, it is not being signaled right now.

Okay, does all this technical stuff really matter? It matters to the extent that some serious market participants invest based on these technical signals and their buying and selling based on these signals may affect the markets.

So, whether you believe in this type of market analysis or not, it may be helpful to at least be aware of it. 

Weekly Focus – Does this make sense?

Of our five senses, which one do you think is most important? Interestingly, if brain space indicates the importance of a sense, then vision is the most important. According to The National Geographic Society, roughly 30 percent of neurons in the brain’s cortex are devoted to vision. By contrast, just 8 percent are devoted for touch and 2 percent for hearing.

Weekly Update: January 23 – 27, 2012

The Markets

At its most basic level, a trade takes place when a buyer is willing to buy at a certain price and a seller is willing to sell at that price. Both parties could be smart, experienced, and looking at the same data, yet somehow one party thinks it’s a good price to buy and the other thinks it’s a good price to sell.

Last week, several news items represented good examples of how investors could look at the same data and draw different conclusions. Consider these:

1. Gross domestic product rose at a 2.8 percent pace in the October through December period.

Bullish investors say that’s up from 1.8 percent the previous quarter and the fastest pace in a year and a half.

Bearish investors say it’s less than the 3.0 percent growth expected by economists and most of the growth was due to inventory accumulation.
Source: MarketWatch

2. The International Monetary Fund (IMF) cut its forecast for global economic growth in 2012 and 2013.

Bullish investors say fears are overblown as private-sector economic activity in the 17-nation euro zone showed small, but unexpected, growth in January and durable-goods orders were up a strong 3.0 percent in December in the U.S. – the third straight increase.

Bearish investors say just heed the IMF’s warning, “Global growth prospects dimmed and risks sharply escalated during the fourth quarter of 2011, as the euro-area crisis entered a perilous new phase.”
Source: MarketWatch
 
3. Spanish and Italian bond yields dropped dramatically lately.

Bullish investors say the drop in yields and the strong demand in January’s bond auctions suggest the euro zone crisis is easing.

Bearish investors say the Portuguese bond market is now imploding, the Greek restructuring could fall apart, and the European Central Bank’s December offer of unlimited three-year loans to banks has simply delayed the inevitable day of reckoning.
Source: The Wall Street Journal

It’s differences of opinion like this that make markets. Thanks to the free market, there always seems to be a buyer for every seller – at a price.

Like Joni Mitchell who sang, “I’ve looked at life from both sides now,” we look at the markets from both the bullish and bearish sides and, ultimately, make decisions which we think will best position you to meet your long-term 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.

WHAT WORRIES AMERICANS THE MOST…

… about the national economy? Here’s the top 10 answers and the percentage who said it, according to an early January Gallup survey.

1. Jobs/unemployment ………………………………………………………..26%
2. National debt/Federal budget deficit ……………………………………….16
3. Continuing economic decline/economic instability………………………….10
4. Outsourcing of jobs overseas/creating jobs in U.S. ……………………………6
5. Obama not doing a good job/no plan/lack of leadership………………………….5
6. Political bickering/Congress………………………………………………..4
7. Healthcare/Medicaid………………………………………………………..3
8. Corporate corruption/corporations run the government…………………………..3
9. Housing crisis…………………………………………………………….3
10. The future of our children………………………………………………….2
11. Eight other responses also checked in at 2 percent

The top two items are not really a surprise, but what’s revealing is how low some “important” issues ranked. Taxes, recession, social security, gas prices, education affordability, and the divide between rich and poor (think Occupy Wall Street) all pulled just 2 percent. The stock market and interest rates barely made the list at 1 percent each and ranking 21st and 25th, respectively, out of 26 on the full list.

Interestingly, if we can resolve the two biggest items on the list – the jobs and debt situations – it would most likely also resolve the third item on the list – continuing economic decline.

Do you think the politicians are listening?

(Note: responses total more than 100 percent due to multiple answers.)

Weekly Focus – Just for fun: How to Turn a Watch into a Compass

Let’s assume that you are lost in the wilderness, but you have a watch that still works. You can easily find the cardinal points by pointing the hour hand at the sun. Then form an imaginary line directly through the center of the “wedge” that is created between the hour hand and 12 o’clock. This is your south–north line. The height of the sun in the sky and the time of day will then show you which end of the line is north and which is south, remembering that the sun sets in the west and rises in the east. Try this at home first!

–Bear Grylls, survivalist, TV host, adapted from his 2008 book, “Man vs. Wild”