Experienced Investment Advice.

Operating in Chaos:

We have reached a critical juncture in the various markets in the United States and across the world.  Stocks, bonds, precious metals and commodities have had major down and up swings in price over the last year.  Even residential and some commercial real estate is starting to find a bottom in various regions of the United States and in other parts of the globe. The question is how to properly allocate a portfolio from here and what could be the key factors that will affect each of the asset classes over the next 12 to 24 months.  With stocks you have had a major move off the lows and valuations both in the United States and abroad are not as good as they were when the markets were at the March lows.  Further, the dividend yields across the major market indexes are more in the 2% to 3% range as compared to 4% to 6% area just six months ago.  Historically, dividends make up 40% of the total stock market return.  With bonds, the overall interest rate yield for the aggregate bond index is around 3.8% and the average bond maturity in that portfolio is close to six years.  Investment grade corporate bonds are paying around 4% to 5% interest rates with bonds that mature on average in about five years.   High yield or junk bonds pay around 9% to 10% interest rates with bonds that mature in about five to six years. The publicly traded REIT index has an overall yield of 4%.  Historically the publicly traded REIT index has had a yield in the 7% to 9% range. Commodities and precious metals have rallied from their lows but the question remains just how much inflation is really in the global economy right now or in the near future. Currently due to excess capacity in many areas of the economy inflation is not an issue at all.  Interest rates are essentially telling us inflation is not what we need to worry about as we are still recovering from our recent deflationary decline.  

   

    Those are the questions but what are the investment answers?  Essentially, I believe you have to create and equity portfolio that is made up of quality assets where you can derive a yield in the 6% to 8% range and have some upside opportunity. You can essentially do this by purchasing dividend yielding stocks or stock indexes and writing covered calls on them.   Also, as necessary and depending on each individual investor’s risk tolerance the stock or stock index portfolio can be hedged against some of the downside risk too. In the area of bonds I would look into some investment grade corporate and high quality municipal bonds that mature in five years or less. With the corporate bonds you can get 3% to 5% in taxable interest and with the municipal bonds you can get 2% to 2.5% in tax free interest.  With real estate investments I would look for high quality real estate in apartments and big box needs retailers paying in the 7% range.  I would only add a small commodity related position as a hedge against inflation. 

 

     With the above in mind you can create an overall portfolio that has a cash flow yield in the 5% to 6% range and has the potential for upside and possibly a double digit overall total return.   At the same time due to quality, tactical asset allocation, cash flow, hedges and insurance you can buffer yourself against the worst of times like the markets that occurred in 2008. Strategic and tactical analysis and execution is what is needed in times like these, especially for those who are about to head into retirement or those who are already in retirement.

 

Robert Burpee

LPL Financial Consultant

Burpee Del Simone LLC

925-472-6688

[email protected]

www.burpeedelsimone.com

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

 

Asset Allocation does not ensure a profit or protect against a loss.

 

Securities offered through LPL Financial Member FINRA/ SIPC

The problem with the possibility of the improbable:

Today investors don’t really know what to think.  About 45 days ago the stock market and economy looked like they were at the brink of complete destruction; the banks that were supposedly insolvent and living on a government lifeline are now having a good quarter and are posting solid profits!! 

What happened? 

The mark to market accounting rule was changed so that the banks don’t have to take the terrible write downs they were having to take over the last year.  Even though the assets backing many of their loans may be off 30% or more their balance sheets on the surface look much healthier and therefore with their margin calls now under control they won’t need to go to the Treasury for more tarp money.  In fact, some of them are even talking about paying it back sooner rather than later.  Also, with a very steep yield curve the banks are borrowing funds cheaply and lending dear resulting in a situation where they are practically able to mint money for the time being. 

So here we are... the stock market has rallied almost 30% from the recent low, the bond market is relatively stable again and the commodity market is starting to show some signs of life.  Unfortunately, both the residential real estate market and the commercial real estate market are in aggregate continuing to struggle with excess oversupply and capacity.   

The question comes down to what is an investor to do going forward especially if they are near retirement or in retirement.  It is hard to live on 2 year treasuries if the yield is only 1%. CDs at 3% are okay but still not quite what is needed. It is not probable that our experience in the various markets between Sept 15^th 2008 and March 15^th 2009 will happen very often but can a pre retiree or a retiree afford to take a chance that it does again?  Modern portfolio theory professes that as long as you keep a quality asset allocation among the various asset classes that your portfolio will take care of itself.  Unfortunately even a very diversified asset allocation over the last 6 months has lost 1/3^rd of its value because pretty much all asset classes went down substantially at the same time.  

 

Portfolio management needs a new look.  One that focuses on cash flow, hedges, insurance, tactical asset allocation and tax efficiency.  An investor in pre retirement or in retirement cannot afford to have drawdowns of 30% or more in their portfolios and expect to retire on time or have the income stream necessary to live well in their golden years.  Younger investors at least have the time to recover and can use this down market as an opportunity to dollar cost average into it over time.  Risk adjusted returns and risk management is the name of the game going forward for the pre retiree or retiree.  Although the probability of an improbable second market meltdown is unlikely, can you take that chance? 

 

With Burpee Del Simone LLC we focus on this exact point in the management of our client’s portfolios and their entire financial picture.  Our focus is work towards an excellent risk adjusted return with the use of cash flow, hedges, insurance, tactical asset allocation and tax efficiency.  Please feel free to call or email us for a complimentary initial interview. 

Robert Burpee

LPL Financial Consultant 

Burpee Del Simone LLC

[email protected]

www.lpl.com/burpee.desimone

Office 925-472-6688

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Asset Allocation does not ensure a profit or protect against a loss.

 

Securities offered through LPL Financial Member FINRA/ SIPC

S&P 500 Market Index chart/what a pendulum swing/Trade-able rally at 600?

(Letter written and distributed to clients on 3/5, S&P Closing Price 682)

Please contact our office for copies of charts discussed in this report:

            Here is a chart of the S&P 500 index.  It tracks 500 of the largest corporations and major industry groups in America.  As you can see it has fallen off a cliff and is heading to levels not seen since 1996, about 12 years ago or so.   What is interesting about this is that historical growth of stocks has been around 10% per year when you look at the market from the perspective of a 100 year time frame. The market is down over 55% from peak as we speak  and looks to be heading into the low 600’s based on what is going on. At that point it would be down around 62% from its peak value.   If it were to hit 600, which is only 82 points or 12% away it’s 20 year return since the first quarter of 1989 when the index was at 300 would be about 5% per year annualized.  This is half of the typical average annual return of the stock market over the last 100 years.  Based on some of the estimates I have heard the aggregate earnings of the S&P 500 should be somewhere in the neighborhood of 40 to 50 dollars this year and in 2010.  The first quarter this year came in around 11 dollars.  If it did this all 4 quarters this year it would be about 44 dollars for the year.  At 600 this would be an earnings yield of 6.6% to 8.3% and the dividend yield at 600 would be slightly over 4%. The total historical return of 10% per year on stocks has been made up on average by about a 4% dividend yield and 6% appreciation of the capital.   Further, the price to earnings ratio would be somewhere around 12x to 15x earnings at 600.  The historical average price to earnings ratio has been around 15.  Aggregate earnings have fallen from around 90 dollars from the peak down to 40 dollars.  If for whatever reason earning went back to even 70 dollars in a few years that would make the market price to earnings ratio 8.5x which would make the index very cheap based on a 100 year historical comparison. 

What is my point?

Stocks are not as expensive like they were a year ago.  Fear is now driving the train and can make the pendulum swing further than we expect, however, at this point the market is starting to look cheap at 600 and would be dirt cheap in the 500’s.   Earnings have always been quite cyclical and when they start to go back up over 60 dollars the market won’t be at 500 or 600 it will be at 900 to 1000 or around 50% to 70% higher than it is at around 600.   The market will anticipate an earnings recovery 9 months to 12 months before the actual recovery starts to show itself and while the economic news is very bad.  A clue to understanding if the market is starting a somewhat sustainable bull move is if it goes up despite bad economic news coming out.  If it can go up in the face of bad news what would happen if the news becomes less bad or even somewhat good?  The market will continue a trend up and climb the proverbial “wall of worry”.  The key question is whether or not the earnings recovery starts to begin at the beginning of 2010, mid 2010 or in 2011.  If it is early 2010 we are only about 9 months away.   My estimate is earnings will show improvement year over year by early to mid 2010 and have good growth again as we head into 2011 and 2012.  If this is the case the S&P 500 will probably go back  900 to 1000 within the next 24 months after it hits a low of around 600 sometime in the near future, possibly even tomorrow or next week.   That is a substantial rally of 50% or more even if it is in the context of a longer term bear market and then turns around and goes back down to 500 or 600 again. 

I have included a couple of other pieces of information that draws on a market timing indicator chart that I use to estimate when a possible bullish or bearish market move may occur.  When the market timing indicator graph gets down to around .25 or less the market is very oversold and when it did this in November the market had a rally of around 25%.  Currently it is around .35 and heading to .25 very quickly by the looks of it.  Also, the chart called the buy/sell ratio is at .10 indicating a very oversold market.  In November it went to .02 and then the market started to rally.    Lastly, a popular sentiment survey that shows the number of investment advisors that are bullish versus bearish is widening again.  It is a contrary indicator as typically when investment advisors are most bullish is when the market goes down and when they are the most bearish is when the market goes up.  Currently the amount of bearish advisors is getting close to where it was at the November lows and could indicate a rally is around the corner.    

What does this all mean? 

Based on some fundamental reasons, some sentiment reasons and some technical reasons it seems we may be in for a rally at some point here in the near future.  My estimate is the market could go to 600 and then rally 50% from there.   Of course the pendulum could swing as far as 550 to 500 and at the same time it might not swing quite to 600 but only to 650 or 675. 

Since this letter was written on 3/5 the S&P 500 has gone up about 6%. The question now is if we will re-test the lows or build to new highs from these levels.

Please contact me if you would like to discuss this analysis and for a complimentary review of your investment portfolio.

Thanks,

Robert Burpee

LPL Branch Manager, Financial Consultant

[email protected]

www.lpl.com/burpee.delsimone

Office 925-472-6688

 

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Asset Allocation does not ensure a profit or protect against a loss.

 

Securities offered through LPL Financial Member FINRA/ SIPC

The Slope of Hope:

As investors know today’s markets have been a treacherous affair.  The moment you start to think the current hurricane has past another is showing up to take its place.  The question becomes how many hurricanes does an investor have to go through before it takes years to repair the damage.  I have made a table showing the rate of return necessary to get one back to breakeven after losing anywhere from 10% in a given year all the way to 50% in a given year.  The table below is sobering.

Portfolio down 10%.  You would need to make 11.1% to get back to even.

Portfolio down 15%.  You would need  to make 17.6% to get back to even.

Portfolio down 20%.  You would need to make 25% to get back to even.

Portfolio down 25%.  You would need to make 33.3% to get back to even.

Portfolio down 30%.  You would need to make 42.8% to get back to even.

Portfolio down 35%.  You would need to make 53.85 to get back to even.

Portfolio down 40%.  You would need to make 66.6% to get back to even.

Portfolio down 45%.  You would need to make 81.8% to get back to even.

Portfolio down 50%.  You would need to make 100% to get back to even.

(Based on a hypothetical portfolio of $1,000,000)

What to do as an investor right now?  First thing to do is assess ones assets, liabilities and overall budget and make sure that you can afford your lifestyle.  If there is potential for stress in the area look for ways to cut the budget so that it can be afforded. 

If you are working and consider your income is at risk due to job less or a pay cut it is a very real necessity to have 6 months to 1 year of reserves available to fall back on.  Meanwhile, if possible, keep contributing to a 401K, IRA or other investment vehicle at the current lower asset prices by dollar cost averaging into a portfolio of assets over time.  This way when prices recover you have bought in at lower prices and this will help get you whole again at a faster pace in regard to your overall asset base.   Further, if you work for a company that has a matching 401K or profit sharing plan this has very nice advantages as you start with an immediate return on your investment. 

If you are working and over 50 years old you should consider some principal protected investment vehicles along with your other investments as this protects you somewhat against a prolonged bear market environment.   Further, if you are very close to retirement and have enough to retire on you should look at principal protecting all of the stock investments and combine that with a quality bond portfolio and some alternative investments. 

There is no cure all for tough markets and economic conditions but proper risk and financial management can keep one from getting into deep financial difficulty.   A combination of good budgeting, cost controls, a quality asset allocation that has a good overall cash flow yield will typically get one through all economic scenarios. 

Please feel free to contact me with any questions or if you would like a complimentary investment analysis.

Sincerely,

Robert Burpee

LPL Financial

Branch Manager, Financial Consultant

925-472-6688

[email protected]

www.lpl.com/burpee.delsimone

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Asset Allocation does not ensure a profit or protect against a loss.

 

Securities offered through LPL Financial Member FINRA/SIPC