Policy

In the last week of March, the Supreme Court held everyone’s attention as the justices took up the Patient Protection and Affordable Care Act, holding an unprecedented six hours of oral arguments over three days. The controversial act, drafted behind closed doors and rushed through Congress before its contents were well disclosed, will no doubt frame the election landscape in 2012. The court is due to publish its opinion on whether the law, with its individual mandate for the purchase of health insurance, is constitutional by the end of June. It is our opinion that the additional taxes contained in the law, if not struck down by the court or eliminated by Congress, may have a detrimental effect on the overall economic landscape for years to come. Irrespective, it is our hope that Congress will act to pass a law that fixes what we believe to be the root cause of the healthcare crisis in the United States today: the rising cost of care.

Economy

The big news in Q1 of 2012 was a rosy jobs report from the Department of Labor. The New York Times reported on March 9th that the economy added 227,000 new jobs and that the unemployment rate “held steady” at 8.3%.

Bonds

In Q1, the 10-year Treasury Bond rate increased from 2.0% to 2.3% as a sell-off in Treasuries increased yields. However, we do not believe that the apparent “bubble” in Treasuries has yet burst. Economic uncertainty along with another decision in the European Union to delay real progress in the sovereign debt crisis has not yet caused a wholesale flight to risk assets. Dorsey Wright Money Management reports that net mutual fund flows into bond funds continued to be dramatically robust compared to the modest inflows of international equity funds, not to mention the continued net outflows from domestic equity funds. We recommend investors stay with shorter duration securities in their fixed income portfolios, while holding both nominal fixed income securities, along with Treasury Inflation Protected Securities (TIPS) as a prudent long-term inflation hedge.

Real Estate

Greenstreet Advisors reports that publicly traded REITs are currently trading at about a 12% premium to net asset value. This places them inline cost-wise with many public, non-traded REITs. However, we believe that the deep value environment that created attractive opportunities for non-traded REIT investment has largely subsided. We continue to be diligent in searching for attractive non-traded opportunities. Also, we continue to recommend that clients maintain at least a 10% exposure to REITs in their investment portfolios, both as a diversifying asset, and as a dual-hedge against deflation (due to high current cashflow) and inflation (Real Estate is considered a real asset).

Equities

Equities rallied in Q1, and valuations richened with the Shiller CAPE10 (10-year Cycically-Adjusted Price to Earnings Ratio published by Prof. Shiller of Yale University) rising from around 21.6 at the beginning of the year to 23.5 as of this writing. Retail fund flows continue to be biased positively towards fixed income and international equities, while flows remain negative year-to-date for domestic equity funds. We generally take these flows as a positive contrarian indicator for the domestic equity market. However, due to these conflicting signals (negative flows vs. historical overvaluations), we recommend that clients stay well diversified in their equity exposure among domestic and foreign developed markets and emerging market stocks. Our current 10-year forward-looking return estimate for equities remains conservative, at around 6-7% in nominal terms.

Gold and Commodities

After gold’s dramatic -20% (approximate) correction in late 2011, the metal has rebounded slightly in the new year. In a recent article, the Wall Street Journal reports that Goldman Sachs has indicated a 12-month price target of $1940 per troy ounce, about 10% above the current price.

While, as you are aware, we do not actively recommend gold as an investment, we do concur with Goldman’s reasoning for further support in the market price of gold. Historically, demand for gold is predicated on the availability of a perceived “safe” instrument for maintaining real value of money. Short-term US Treasury Securities, T-Bills, are generally held as the safest store of value in the world. However, when real yields on these “safe” assets turn south, investors tend to flock toward gold as an alternative store of value. In our research, we perceive that an equilibrium point exists for the desired real-yield of a “safe” asset–somewhere between 1-3%. Currently, the real yield on short-term T-Bills is less than -2%. Thus, while real yields continue to be disappointing, capital will likely gravitate towards gold as an alternative store of value, supporting its price or potentially driving it upwards. The caveat, of course, is that the Federal Open Market Committee directs interest rates, and although they are unlikely to raise rates in the near future, gold’s price is likely to anticipate any move ahead of time, making timing the gold market based on interest rates difficult at best.

We continue to encourage clients to enhance their diversified asset exposure and to stay the course, even in these turbulent times. We value each one of our clients and wish to help you make the most of your wealth. Feel free to contact us at any time with any questions you may have about the markets, economy, or your investments with our firm.

Regards,

Jeremy S. Mitchell, CFP®

Policy

The congressional debt commission failed to come to agreement, and automatic spending “cuts” will take effect if the greater body of congress fails to act. In reality, there will be no automatic “cuts” as the cuts in question are simply reductions in the rate of increase in government spending over the next 10 years. With elections coming up, it is unlikely that any substantive changes will be made on the policy front as politicians focus instead on the 2012 elections.

Economy

Economically, anemic growth continues, and as we’ve mentioned before, corporate America is in great shape despite poor economic conditions. Stronger balance sheets abound, companies are cash-rich, and they are investing selectively in expansion opportunities as they find them. Many companies’ stocks look very attractive compared to earnings and dividend yields are relatively high.

Bonds

Bond yields have remained low. The Fed’s “Operation Twist” combined with further economic uncertainty have led to declining long term yields, with the 10-Year Treasury Bond now at 2.0% down from 2.99% in July . Triple-A credits currently yield 2.32% down from 2.77 just a month ago . We continue to urge our clients to avoid bond exposure as much as possible while maintaining enough exposure in short-term, high quality issues sufficient to buffer volatility to an acceptable level to ensure a minimum level of investor comfort. High-yields and junk issues should be avoided, as investors may be better served to search for yield among high-quality equity issues.

Real Estate

Publically-traded real estate prices have corrected with the rest of the equity market in the 3rd quarter. Green Street Advisors reports that publicly traded REITS are currently trading at a 3.9% premium to net asset value . We continue to look to real estate as a potential bond alternative, positioning our clients to hedge against both unexpected inflation (real estate is a real asset) and unexpected deflation (real estate, like nominal bonds, produce current income). Non-traded REITs continue to find bargains as distressed sellers liquidate properties to cover their losses from the poor real estate market. We expect that real estate will be a great asset to own as the economy recovers further in the next 3-5 years.

Equities

With the decline in equity prices in the 3rd quarter, the Shiller CAPE10 (10-year Cycically-Adjusted Price to Earnings Ratio published by Prof. Shiller of Yale University) has declined markedly to 20.0 from 22.97 at the beginning of the year, and from over 23 in the 2nd quarter . We continue to recommend that client accounts lean towards value managers who purchase stocks of companies with good growth prospects at reasonable prices. Indeed today represents a relatively good time to buy when compared to valuations of the past 12 months.

Gold and Commodities

Gold corrected in the August through October period, with prices as reflected by the SPDR Gold Trust (GLD) declining from a high of $184 to just $156 . We continue to urge investors to examine their purposes for wishing to add gold to their portfolios at this time. Some wish to use gold as a fail-safe for economic collapse, in which case a small amount of physical gold may be appropriate. Others wish to purchase gold simply as a hedge against further dramatic declines in the dollar. We believe there are better vehicles by which to hedge against both currency risk and inflation risk. Generally any real asset (Treasury Inflation Protected Securities, Equities, Real Estate, Commodities, etc) are a great way to hedge against long-term inflation risk. Liquid currency exposure can also be diversified through foreign currency investment. Generally we recommend that our clients re-examine their long-term investment goals and determine if any changes are necessary to their broad asset allocations.

We continue to encourage clients to enhance their diversified asset exposure and to stay the course, even in these turbulent times. We value each one of our clients and wish to help you make the most of your wealth. Feel free to contact us at any time with any questions you may have about the markets, economy, or your investments with our firm.

Regards,

Jeremy S. Mitchell, CFP®

As for financial markets, not much has changed from our last writing in Quarter 1 of 2011.

Bond yields have fallen slightly since the beginning of the year: the 10-year Treasury Note yield has declined from 3.39% to 2.99% as of 22 July#. At this point, our interest rate outlook is one of relative stability. We do not expect a huge increase in interest rates in the next 1-2 years, but rather we expect 10-year yields oscillation similar to the last year or two. As in our last writing, we believe fixed income should be used sparingly, and any exposure should focus on high-quality, short-duration securities to hedge against any rate fluctuation and to mitigate default risk. High yields should not be pursued at the expense of principal security.

Real estate prices have increased marginally, but not significantly. Green Street Advisors reports that publicly traded REITS are currently trading at a 13.3% premium to net asset value,# putting them in line with most non-traded REIT offerings. (Investors generally pay in the neighborhood of 13% over net asset value for non-traded REITs; this overage covers administration and distribution expenses associated with each individual offering.) At this point in time, we believe much of the deep value opportunities in real estate have subsided, although deals may still be found by the diligent manager. Moving forward, success in the real estate sector may be found by astute managers who are able to patiently await the right buying opportunity, for the right property in order to ensure adequate occupancy to provide sufficient investment income.

Equity valuations have remained largely unchanged, with the Shiller CAPE10 (10-year Cycically-Adjusted Price to Earnings Ratio published by Prof. Shiller of Yale University) at 23.77 vs. 22.97 at the beginning of the year.# We continue to recommend that clients lean towards value managers who purchase stocks of companies with good growth prospects at reasonable prices.

All That Glitters Is Not Gold

A recent publication by the New York Times cites some interesting statistics on our metal de jour. About 166,000 tons of gold has been mined in recorded history, about 29,000 tons of which is held by the world’s various central banks. Over 8,000 tons of gold are held in reserve by the United States, making the US the largest official holder of gold stock of any other nation. The Wall Street Journal reported that gold held by Exchange Traded Funds is up to 2155 tons from 2106 one year ago.

We’ve had many clients continue to ask us about the efficacy of holding gold as an investment. We are diametrically opposed to viewing gold as an investment. Gold does not produce cash flow, yet has associated expenses for storage and exchange. Gold may thus be considered a speculation. In fact, large run-ups in the price of gold have historically been driven by speculators in times of uncertainty. However, despite seemingly strong U.S. investor demand, the most dramatic accumulation of new gold has been by Asian countries for reserve purposes: the Wall Street Journal reports that China and India accounted for 58% of gold demand in the first quarter of the year.

We view the current run up in gold prices as largely unsustainable. While gold prices may not be considered a “bubble” subject to a near-term precipitous decline in price, substantive investor demand and demand by Asian central banks cannot and likely will not continue ad infinitum. We urge clients to view gold in its utilitarian form: as a component of jewelry, and potentially as a currency substitute–that is, a precious commodity used for a store of value. One cannot eat gold, one cannot trade gold bars for useful necessities of life, and one generally cannot use gold as a productive metal. For clients who wish to hold gold, we recommend an amount not to exceed 1-2% of total investment dollars, to be held in small denominations in coin form. Thus gold would serve as an adequate store of value along with a certain amount of cash, and could easily be used with denominations of silver coinage for trade or posterity if needed.

As always, we value each one of our clients and wish to help you make the most of your wealth. Feel free to contact us at any time with any questions you may have about the markets, economy, or your investments with our firm.

Regards,

Jeremy S. Mitchell, CFP®

Cash as an asset class remains stale at best. Money Market yields remain in the 0-1% range[1], while yields on Treasury Bills and other short-term notes remain lackluster. The US Dollar remained surprisingly strong against rival developed market currencies through late 2010 in the face of the Fed’s expansionist monetary policy, but has experienced expected dramatic weakness during the first quarter of 2011. Over the long-term, currency fluctuations are neutral to a diversified portfolio; on the short-term hedges against a weak dollar include commodities and foreign-currency denominated fixed income securities.

Bond yields have remained compressed. The 10-year US Treasury Note is yielding just 3.42% as of 04/26/2011[2]. In November, the Wall Street Journal reported that for the first time home buyers enjoyed a 30-year mortgage rate lower than the yield on 30 year US Treasury Bonds! Meanwhile, municipal bond yields have exceeded taxable bond yields reflecting increased apprehension about municipalities’ abilities to repay their sometimes excessive debt loads. On a broader swath, bonds in aggregate have enjoyed 30 years of falling interest rates, which have boosted bond investors’ returns and in some ways skewed the average investor’s perception of the efficacy of bonds as a long-term investment vehicle. Currently, yields are at all-time lows while default risks are at all time highs. We do not feel that bond investors are being adequately compensated for taking on the additional default risks present in the market at this time. Although we do not expect dramatic rate increases anytime soon, we there has been murmuring about a potential rate increase at the next Fed meeting. We are still recommending clients stick to short-duration, high quality notes alongside a generous helping of Treasury Inflation Protection Securities to hedge against risk asset volatility.

Good values in stocks abound, although history indicates that domestic markets may be overvalued in spite of rosy earnings forecasts. On the one hand, the current earnings yield on stocks in the S&P 500 is about 6.6% (compare to the 10-Year Treasury at 3.42%) and current cost of a dollar of earnings (Price/Earnings ratio) stands at $15.01[3]. These would indicate shorter-term fair to attractive valuations. However, trailing 10-year P/Es stand on the high side at 23.84, compared to the historical mean of 16.40[4]. Based on our research, this would indicate a more intermediate to long-term overvaluation in equities. Thus, although we cannot forecast next year’s market returns, we do expect domestic market returns to be at or below historical averages over the next 8-12 years, and are recommending investors diversify into international and emerging market equities while focusing on core value and select tactical investment management strategies. We feel that in light of present conditions, indexing and passive strategies are unlikely to yield satisfactory returns for the foreseeable future.

While inflation risk plagues cash positions, default risk and low interest rates discourage bond investors, and equities may be overvalued, real estate presently remains attractive. Distressed sellers and erratic debt markets have created great value for prudent real estate managers. These have led to historically low prices, high capitalization rates, and in some instances below-replacement cost purchase prices. A securitized real estate research firm, Green Street Advisors, currently estimates that the traded real estate investment trust market to be trading at a 15.3% premium to net asset value[5], meaning that, in large measure, publicly traded REITS may be overpriced. New non-traded programs are beginning to emerge, allowing investors opportunity to invest in high quality real estate assets at today’s net asset value prices, creating potential value compared to the publicly-traded alternatives. We are encouraging our clients to consider expanding their real estate allocations based on attractive valuations and as a hedge against inflation risk.

Gold and silver have taken center stage in the commodities arena, and have experienced dramatic increases in price of late. Storefronts have popped up all around the Phoenix area advertising “We buy gold!” and “Cash for Gold!”. In fact, there have even been street-corner sign-wielders advertising for gold and silver dealers. The last time this author remembers such fanfare was in 2005-2006, but instead of spinning gold and silver advertisements, the corner advertisers were pushing homes. This timeframe turned out to be the peak of one of the greatest real estate bubbles in history. If we observe the fundamentals, gold is currently trading well above its long-term inflation-adjusted average price, indicating a severe over-valuation from long-term norms. We believe that reversion-to-the-mean is a vital investment concept, and that a purchase of gold today would be ill-advised.

Rather, purchasing a representative basket of commodities could potentially serve as a short-term inflation hedge when added to investors’ existing portfolios. There are various investment vehicles in the commodity sector that can potentially meet this objective when added to investors’ portfolios. Jim Rogers, former co-manager of the Quantum Fund with George Soros, has been an ardent proponent of commodities as an investment since about 1998. He has since created several commodities indexes that are available for tracking via some of these investment vehicles. We prefer utilizing these tools and Rogers’ indexes based on their balance and international orientation. Please contact us to set up a phone or in-person appointment to discuss if adding commodities to your portfolio could provide added diversification.

In summary, our we recommend clients assume only the amount of cash and bond positions they feel absolutely necessary to reduce overall portfolio volatility, while increasing exposure to equities and real estate to increase their hedge against both long-term and short-term inflation risk.

This information is provided for general purposes and is subject to change without notice. The information does not represent, warrant, or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results investors should always seek individual financial advice based on their own personal circumstances before acting.

Best Wishes,

Jeremy S. Mitchell, CFP®
Financial Planner / Portfolio Strategist

________________________________________
[1] http://www.bankrate.com/brm/rate/mmmf_home.asp
[2] http://www.multpl.com/interest-rate on 04/26/2011 , data courtesy of Robert Shiller, Yale Department of Economics
[3] Standard and Poor’s 500 Index Data dated 04/19/2011 2010 earnings of 83.77 with an index price of 1257.64 on 12/31/2010.
[4] http://www.multple.com/ , data courtesy of Robert Shiller, Yale Department of Economics
[5] Based on Green Street NAV estimates 3/2011, source https://www.greenstreetadvisors.com/

Today, the financial world is full of credentials and designations. Some are respected, some aren’t. The CFP^® designation is easily the most respected. You really have to earn it. (There are some financial credentials simply conveyed to people after the completion of a glorified sales course. The CFP^® designation is not one of them.)

It denotes education. To become a Certified Financial Planner™ practitioner, you have to study financial planning at a college or university (or at the very least, through an educational program) that offers a comprehensive financial planning curriculum. You also have to pass a 10-hour exam administered over two days (kind of like a bar exam) which covers financial planning, tax planning, employee benefits and retirement planning, estate planning, investment management and insurance topics.

It reflects ethical and experiential standards. Before you can be certified as a CFP^®, you must pass a strict ethics review and agree to work by the CFP Board’s Code of Ethics and Professional Responsibility. As a CFP^® practitioner, you must put the interests of the client first, and act “fairly and diligently” when providing financial planning advice and services. Those services must be based on the client’s needs, and delivered with objectivity and integrity. You must also have at least three years of experience working within the financial planning field before you can even earn the CFP^® certification.

You must maintain these standards. As a CFP^® certificant, you have to be recertified every two years. That requires at least 30 hours of continuing education, so that you may stay informed of the latest developments affecting the financial planning profession. Two of those 30+ hours must be spent studying the CFP Board’s Code of Ethics and Professional Responsibility or Financial Planning Practice Standards.

This is why the CFP^® designation is so respected. Knowing all this, would you settle for any less qualified financial advisor? I doubt it.

The critical difference. Many people today call themselves “financial planners” without having this kind of experience and knowledge. Many of them work with a sales-based mentality. Often, they will suggest an investment product as a financial solution. Quite often, they get a nice commission off the sale of that product.   On the other hand, CFP® Practitioners know that investments are simply components in an overall financial plan, not financial solutions in  themselves. We have the education and experience to create integrated financial plans using not only investments, but also strategies for tax reduction, wealth accumulation, wealth preservation and tax-efficient wealth transfer. We have the knowledge to plan for the long-term goals of our clients, and the experience to implement, oversee and revise these plans through the years.

Choose a CFP^®. If you are searching for financial planning advice, you should first see a Certified Financial Planner™ practitioner. Talk to a CFP^® practitioner today, and enjoy the confidence that comes from meeting with a truly educated and qualified financial advisor.

Jeremy S. Mitchell, CFP® is a Representative with Geneos Wealth Management and may be reached at www.roberthardingfinancial.com, Jeremy.mitchell@roberthardingfinancial.com or at 800-977-9823.