Dispelling 3 ETF myths...

America on Sale...

Inflation... Don't worry about it???

Inflation or delfation?  This is one of the major debates of the day.  Given the Fed's committment to fight deflation, which seems to be working for the time being, the question turns to what we can expect in terms of inflation. 

We are told that the Fed has the tools in place to control money supply and rein in inflation if it should rear its ugly head.  "Dont worry about it," seems to be the message.

This isnt scientific, but these end of the year headlines should give you pause...

Gold Gains Nearly 30% for Year

Banner Year for Corn, Soybeans

Oil Prices Advanced 15.1% in 2010

Copper Hits Record

Tight Markets Seen for Coffee, Sugar, & Cotton

Treasuries Gain 5.5% in 2010

Dow Ends 2010 up 11%

The point is that prices of most commodities have been going up. These raw materials go into everything Americans build, do, drive, etc!  Companies can absorb some of these cost increases, but not indefinately.  Gas is a great example of a resource increasing in price that immediately impacts our wallets.  See the below chart for gas prices in California for 2010.

  

The threat to most people is that prices have already been going up, they appear to be continueing the upward trend, and most paychecks have been stagnant.  This stagnation seems consistant with Bill Gross termed as the "New Normal."

“Growth is slower, profit margins are narrower, and asset returns are smaller than in decades past.”  Bill Gross, summer 2009

 Barack Obama echoed the term...

“What is a danger is that we stay stuck in a New Normal where unemployment rates stay high, people who do have jobs see their incomes go up, businesses make big profits.  But they’ve learned to do more with less, and so they don’t hire.”  Barack Obama, Nov 7, 2010

 To make matters even more intersting, banks are starting to feel comfortable enough to start lending again.  This is great news for small businesses who need loans, but with the fractional reserve banking system the wave of new money hitting the market could be significant (see the WSJ article Banks Open Loan Spigot).

No one knows for sure how this will all play out.  My advice is not to be like the frog swimming in water being brought to a boil not noticing the subtle and incremential changes in the environment until its too late and you're boiled.  Instead I suggest thinking ahead and making sure you manage your personal cash flow and balance sheet with this very real threat of inflation in mind.... 

7 Billion People on the Planet!

Friedman on Capitalism...

Auto Sales: China Takes Poll (the Economist)

The World According to Jim Rogers...

WSJ: The Name Trap...

No Free Lunch...

Investors are constantly searching for a Free Lunch in the markets.  They often look for a a high yielding or high return investment with little risk of loosing their initial investment.  Now, very few investors will readily admit this belief in easy money with little risk.  However, I have conversations with investors almost daily where this belief is apparent and driving their investment decisions.

For example, a recent article in the Wall Street journal discussed the rebound of the credit markets.  In the article they talked about the current investors dilemma.  The dilemma is that interest rates are so low that holding cash yields very little.  The article describes investor preference as "leery of the stock market" and looking for higher return from some high yielding corporate bonds.

If you read between the lines you can see the "free lunch" mentality in action. Investors afraid of the risk of the market are looking for higher yields with the safety of bonds.

Unfortunately, investors often fail to realize that the yields are higher because of the perceived credit risk of the debt inside of those bonds (credit risk). 

Another way to get high yields is to extend the maturity of bonds.  Long term bonds have a great track record over the past couple of decades and these returns look attractive to investors.  the problem is that we have been in a declining interest rate environment for the past couple of decades.  Bonds flourish in this environment.  However, moving forward, it seems interest rates can only move higher.  When interest rates go up, the principle value of the bonds go down.  Investors are shocked to learn that you can loose money with bonds...  Sorry, no free lunch...

Read Article...

The Evolution of an Industry...

I was surfing around and I found this timeless quote from Warren Buffett slamming the commissions and fees of brokers and investment managers.

OMAHA, Neb. May 2, 1999 (AP) -- Multibillionaire investor Warren Buffett on Sunday criticized stockbrokers and investment managers who take high fees for their work.

Investment managers add nothing to the value of the businesses they trade stocks in, yet many demand 2 and 3 percent commissions and fees to help their clients invest, Buffett said.

The average investment manager adds nothing, he subtracts something from your investment performance. It's almost unique among professions that I can think of.

The writing is on the wall for brokers and investment managers who believe they can justify commissions and high fees.  I believe recent declines in the market have exposed, hopefully once and for all, the fact that active managers aren't able to forecast and predict the future with reliable accuracy.  Fees that didn't gain much attention during a time of double digit growth, will now face much more scrutiny.  The expertise investors thought they were paying brokers and active managers for has been exposed as imaginary.

Change Brings Opportunity!

The major change will be what services are valued.  Helping clients try to time the market and and pick stocks is out.  Choosing five star active-mutual funds with winning track records is out. Taking on new accounts and not communicating with clients is out!

Instead, prudent, efficient portfolio construction is in.  Helping clients make financial decisions and set financial goals for themselves and their family is in.  Coaching investors through turbulant markets to resist their temptations to flee the market only to re-enter at potentially the wrong time is definitely in!

Advisors who can adjust to meet the needs of investors will be tremendously appreciated and be in great demand.

The 2008 brought about a great extinction in the financial advisory business.  Now that the dust has settled, it is time for the industry to evolve...