Tag Archives: financial advisor

Buckle Up! The New Bear Market Has Begun!

1-5-2000-to-6_30-2014My Comments: The writer has a powerful message to send. He was right about this back in 2008 but that doesn’t mean he’s right this time. I have clients and prospective clients asking when the next downturn is going to begin. And yet there are many articles that suggest it’s still a long way off.

This week I received my copy of Investment Advisor. In it five famous advisors share their preferred asset allocation of the month. The most conservative of them has 30% in stocks, 50% in bonds with 20% in cash. The previous month he had 30% in stocks, 40% in bonds and 30% in cash. Clearly, he doesn’t think interest rates are going up soon. The other four had about 65% of their holdings in the stock market.

Another example is an investment manager whose results in 2013 were a plus 17.51%. Rather than moving away from the stocks, he is now fully invested in the stock market to the tune of 120%. (To understand how that works, you need to call or email me.)

PS – I’ve left out the charts since they do not add much to the message other than the one at the top.

Craig Brockle / May. 8, 2014

• This article reveals the convincing evidence that a new bear market has already started.
• Those who failed to sell near all-time highs in 2000 and 2007 have a chance to do it here in 2014.
• Learn the two proven, reliable assets that go up when everything else is going down.

Did you or a loved one lose money in the 2008 Financial Crisis? How about the real estate bubble bursting two years earlier? And if we go back to the turn of the millennium, there was the Dot-com Crash. Remember that one?

This article is intended to help as many people as possible avoid another devastating loss. I will explain where we appear to be in the current economic cycle, what appears to be coming next and how you can protect and grow your money like the top 1% of successful investors.

I’ve done my best to make this article understandable by everyone who reads it, whether you have previous investment knowledge or not. Investment terms, when first introduced have a link to their definition to help aid comprehension. If you see something you don’t understand, a Google search of the word + definition can help.

Before we go any further, observe what the above-mentioned financial events look like on a graph. First, we’ll look at the 2006 real estate bubble. Shown below is the past 20 years of home price data based on 10 US cities.

Up until 2006, the consensus was that real estate only goes up in value and that one’s home was a great investment. By 2009, this belief was proven to be utterly false as foreclosures and short sales became widespread.

There is a great deal of evidence that suggests the real estate market is again poised for a significant drop, but explaining that would be an article of its own. Perhaps after reading this article, you’ll agree that the next financial bear market has indeed begun. If so, you will likely conclude that owning real estate through this period will be hazardous.

Now let’s look at the overall US stock market over the past 20 years as represented by the S&P 500 index in the chart below. This shows the S&P 500 from 1994-2014. (at the top is the S&P from 2000-2014)

If a picture is worth a thousand words, I believe the above chart could be worth 30-60% of your current investment portfolio. That is if you fail to recognize the pattern that’s developed and act accordingly, you could stand to lose that much money.

It’s been over five years since the last bear market bottomed and many investors have forgotten what it was like. The following short clip from CBS 60-Minutes titled “The 401k Fallout” will remind you what average investors were experiencing at the time. Those who cannot learn from history are doomed to repeat it.

Now, let me give at least one reason why you might want to listen to me. After all, there are so many conflicting opinions and obviously not everyone can be right. I’m the first to admit that the market has a mind of its own, which no one, including myself can accurately predict at all times. That said, I went on the record in late 2007 with this YouTube video warning viewers to prepare for the upcoming market crash. That video was released the exact month the S&P 500 index peaked, after which it dropped 57%.

After the real estate bubble collapsed in 2006, it became obvious to my contrarian colleagues and me that it would have a spillover effect into the rest of the financial world. There were other telltale warning signs at that time that I’ll explain below as these signs are giving the same message today.

By October 2007, the S&P 500 index (500 largest US companies) was the focus of attention as it set a new all-time high that month. Meanwhile, the Russell 2000 index (2,000 of the smallest publicly-traded US companies) had already been in a bear market for three months, after peaking in July of that year. This is a sign of stock market exhaustion where only a smaller group of stocks continue to push higher while the overall pack falls off. You could picture this as a huge pack of companies climbing a wall. By the end of it, the overwhelming majority were already in their descent while only the biggest companies inched higher.

Today we’re seeing the exact same thing as the Russell 2000 has again been showing obvious signs of weakness, even though the S&P 500 has been revisiting its all-time highs. The Russell 2000 Index Peaked at 1,213 on March 4, 2014.

Another warning sign that a new bear market has begun is courtesy of the volatility index (VIX). In finance, volatility is a measure of the variation of stock prices over time.

Volatility, investor emotions and stock prices are all very closely related. In periods when volatility is low and investors are feeling complacent or even euphoric, we experience high stock prices. Conversely, when stock prices collapse and fear becomes widespread, we see volatility spike much higher.

Volatility measures can be a very early warning signal. For instance, in the last financial crisis, volatility began to rise seven months before the bear market in the Russell 2000 began and 10 months before the S&P 500 started its decline.

Taking a look at volatility in the current cycle, we see that it reached its lowest point on March 14, 2013. Since then volatility has been in an uptrend, setting a consistent pattern of higher lows. This time around, it has taken the Russell 2000 almost 12 months to peak, hitting its high on March 4th of this year. I suspect the S&P 500 will make at least one last push higher, at least above 1900. This would also help fool more people into believing that there’s nothing to worry about when they should actually be most concerned.

Other warning signals are currently blaring today as they did in 2007. These include stocks being extremely overpriced, selling by the most experienced investors and heavy buying by the least informed, the general public. Let’s look at each of these factors briefly.

Adam Hamilton, a contrarian colleague of mine, recently published an excellent article. In it he points out that as of this year, stocks are more overpriced than they were prior the 2008 financial crisis. In case you’re unfamiliar, the value of a stock is determined by comparing a company’s current stock price to how much profit it earns. This is referred to as a price to earnings ratio. For instance if a stock is currently priced at $10 and has earned a profit of $1 over the past year, the stock would be said to have a price to earnings ratio of 10.

Over the past 125 years, the average price to earnings ratio has been 14 for the largest 500 companies in the United States. Prior to the 2008 financial crisis, these same stocks reached peak price to earnings ratios of 23.1. As of the end of March of this year, the average price to earnings ratio for these same 500 stocks was 25.7. This indicates that even if corporate profits were to remain constant, that stock prices would need to drop 45% just to reach their historical average of 14.

Furthermore, we’ve recently seen a significant increase in insider selling of stocks combined with heaving buying by the general public. Insiders include directors and senior officers of publicly traded companies, as well as anyone that owns more than 10% of a company’s voting shares. Insiders are among the most knowledgeable and successful investors as they have such strong understanding of what’s really going on in their company and industry. When insiders are selling, it’s usually wise to take notice. Insiders are among the top 1% of successful investors and act more on logic rather than emotion.

Lastly, we have the average investor. We could refer to them as the other 99%, based on their sheer numbers. These are the least informed investors and have the worst track record. This group tends to react emotionally rather than rationally at major turning points in the market. This is evidenced by the fact that the heaviest selling of stocks by the general public occurred in the first few weeks of 2009. This was right before the last bear market transitioned into one of the strongest bull markets in history.

Recently there hasn’t just been strong buying by the general public, but they have been borrowing more money to buy stocks than they ever have. As always, knowledgeable insiders, commercial traders and contrarian investors are unloading their positions near the current all-time highs to an unsuspecting public that really should know better by now-especially after what happened in 2000 and 2007. Here we are in 2014, another seven years later and it is again time to prepare for another bear market.

While no one, including me, likes to live through difficult economic times, at least we all have a choice as to how we are affected. There are truckloads of lemons coming our way, so I think we’d best get started making lemonade. And while we’re at it, help as many other people as possible do the same.

In crisis, we find both danger and opportunity. Reportedly, there were more millionaires created during the Great Depression than any other time in American history. And that’s back when a million dollars was worth many times what it is today. A million dollars in the Great Depression would be worth over $35 million today.

So, what is one to do? How can you avoid becoming road kill and instead conquer the crash? Fortunately there are proven, reliable ways to protect and grow your money in a bear market. Below are the two best assets I know for doing so.

The first chart shows the US Treasury fund (TLT) rise as the US stock market fell. The period shown is the 2008 financial crisis. When investors panic, they sell everything they can and put their money in something they consider reliable. This is called a “flight to safety” and US Treasury bonds are considered one of the safest assets during times of trouble.

Based on the information in this article, I hope you too realize that a new bear market has begun. Volatility bottoming last year was the first warning signal. More recently we’ve seen the Russell 2000 run out of steam, corporate insiders selling and the general public buying in droves. On top of this, stocks are more overvalued today than they were at the peak in 2007.

My goal in writing this article is to help you and as many other people as possible avoid another devastating financial loss. My 2007 YouTube warning reached over one hundred thousand viewers. This time I’m hoping that millions of people are able to get this message in time. I appreciate you following me here on Seeking Alpha, leaving your comments and sharing this article with others.

Bear markets are not to be feared. In fact, they can be very profitable for those who are well prepared. Buckle up. This is going to be one heck of a ride!

Source: http://seekingalpha.com/article/2202043-buckle-up-the-new-bear-market-has-begun?ifp=0

Powered by the U.S., Global Assets Forecast to Hit $100 Trillion

My Comments: So, just how much is $100 Trillion?

Can you say “A lot!”?  What’s equally mind boggling to me is that in 1967 ( or maybe it was 1966?) I built a house for myself and my wife. In those days I acted as my own general contractor. Back then, I could also dig my own footers. The plans were drawn by an architect friend who charged me something but I have no idea what.

My point is the house cost less than $10 per square foot to build. And today is stands proudly in a quiet Gainesville neighborhood, though it could use a coat of paint. At the time, though the total was less than $17,000, it was a lot of money. Back then, to have been told that in 2014 it would cost at least $250,000 to build a house of similar size would have been equally mind boggling.

So while $100 Trillion is a lot of money, it’s all relative. It’s what you do with the money that counts, not how much there is. And if you can’t use it to spend on stuff you need and want, it has very little value.

By Nick Thornton / July 1, 2014

Worldwide assets under management are poised to hit $100 trillion by 2018, so long as U.S. markets continue to lead the way, according to Cerulli’s latest research.

The U.S. accounts for just under half of global assets under management.

Low interest rates around the globe have pushed cash into equity, boosting financial markets.

Cerulli’s five-year prognosis is optimistic, though the report predicts that managing assets going forward will be trickier than in the past several years.

“The dark days of late 2008 and early 2009 may be well behind us, but there continues to be pressure on net revenues,” said Shiv Taneja, a London-based managing director at Cerulli.

The firm’s annual report, now in its 13th year, is a massive analysis on markets around the world, from emerging markets to the developed economies of Europe, Asia and North America.

“For all the bashing the global emerging markets have taken over the past couple of years, Cerulli’s view is that it will be markets such as Southeast Asia and a handful of others that will top the leader board of mutual fund growth over the next five years,” said Ken F. Yap, Cerulli’s Singapore-based director of quantitative research.

US Cable Barons And Their Power Over Us

Internet 1My Comments: Professionally, I live in the world of finance and investments. Regulation is pervasive, most likely increasing, since there is a pervasive threat of abuse by the big players. I think it would help all of us to have a level playing field, including individuals, corporate America, and society as a whole.

I cannot run my business today without the internet. My predecessors couldn’t run their businesses without newspapers and telephones. Over the years, no one had a problem keeping those industries from being dominated by a few companies who just might become monopolies.

So why is Congress apparently willing to let Comcast become a virtual monopoly without restriction?

By Edward Luce | April 13, 2014 | The Financial Times

No one in Washington seems to have the will to stop industry moguls from tightening their grip on the internet.

Imagine if one company controlled 40 per cent of America’s roads and raised tolls far in excess of inflation. Suppose the roads were potholed. Imagine too that its former chief lobbyist headed the highway sector’s federal regulator. American drivers would not be happy. US internet users ought to be feeling equally worried.

Some time in the next year, Comcast’s proposed $45.2bn takeover of Time Warner Cable is likely to be waved through by antitrust regulators. The chances are it will also get a green light from the Federal Communications Commission (headed by Tom Wheeler, Comcast’s former chief lobbyist).

The deal will give Comcast TWC control of 40 per cent of US broadband and almost a third of its cable television market.

Such concentration ought to trigger concern among the vast majority of Americans who use the internet at home and in their work lives. Yet the backlash is largely confined to a few maverick senators and policy wonks in Washington. When the national highway system was built in the 1950s, it provided the arteries of the US economy. The internet is America’s neural system – as well as its eyes and ears. Yet it is monopolised by an ever-shrinking handful of private interests.

Where does it go from here? The probability is that Comcast and the rest of the industry will further consolidate its grip on the US internet because there is no one in Washington with the will to stop it. The FCC is dominated by senior former cable industry officials. And there is barely a US elected official – from President Barack Obama down – who has not benefited from Comcast’s extensive campaign financing. As with the railway barons of the late 19th century, he who pays the piper picks the tune.

The company is brilliantly effective. Last week, David Cohen, Comcast’s genial but razor-sharp executive vice-president, batted off a US Senate hearing with the ease of a longstanding Washington insider. A half smile played over his face throughout the three-hour session. One or two senators, notably Al Franken, the Democrat from Minnesota, offered skeptical cross-examination about the proposed merger. But, for the most part, Mr. Cohen received softballs. Lindsey Graham, the Republican from South Carolina, complained that his satellite TV service was unreliable when the weather was bad. Like many of his colleagues, Mr. Graham either had little idea of what was at stake, or did not care. With interrogations like this, who needs pillow talk?

Comcast is aided by the complexity of the US cable industry. Confusion is its ally. The real game is to control the internet. But a lot of the focus has been on the merger’s impact on cable TV competition, which is largely a red herring. The TV market is in long-term decline – online video streaming is the viewing of the future.

Yet Comcast has won plaudits for saying it would divest 3m television subscribers to head off antitrust concerns. Whether that will be enough to stop it from charging monopoly prices for its TV programmes is of secondary importance. The internet is the prize.

The public’s indifference to the rise of the internet barons is also assisted by lack of knowledge. Americans are rightly proud of the fact that the US invented the internet. Few know that it was developed largely with public money by the Pentagon – or that Google’s algorithmic search engine began with a grant from the National Science Foundation. It is a classic case of the public sector taking the risk while private operators reap the gains. Few Americans have experienced the fast internet services in places such as Stockholm and Seoul, where prices are a fraction of those in the US. When South Koreans visit the US, they joke about taking an “internet holiday”.

US average speeds are as little as a tenth as fast as those in Tokyo and Singapore. Among developed economies, only Mexico and Chile are slower. Even Greeks get faster downloads.

So can anything stop the cable guy? Possibly. US history is full of optimistic examples. Among the dominant platforms of their time, only railways compare to today’s internet. The Vanderbilts and the Stanfords had the regulators in their pockets. Yet their outsize influence generated a backlash that eventually loosened their grip.

For the most part, electricity, roads and the telephone were treated as utilities and either publicly owned, or regulated in the public interest. The internet should be no exception. Much like the progressive movement that tamed the railroad barons, opposition to the US internet monopolists is starting to percolate up from the states and the cities. It is mayors, not presidents, who react to potholed roads.

Last week, Ed Murray, the mayor of Seattle, declared war on Comcast even though it donated to his election campaign last year. Drawing on the outrage among Seattle’s consumers, Mr. Murray seems happy to bite the hand that fed him. “If we find that building our own municipal broadband is the best way forward for our citizens then I will lead the way,” he said.

Others, such as the town of Chattanooga, Tennessee, which is distributing high-speed internet via electricity lines, are also doing it for themselves. Forget Washington. This is where change comes from. “We need to find a path forward as quickly as possible before we [the US] fall even further behind – our economy depends on it,” said Mr. Murray. As indeed does America’s democracy.

World Weather Gone Haywire: Effect On… and the Economy

My Comments: No, we are not doomed. But it’s worth paying attention to from time to time. If you are looking for solace, you won’t find it here. My cousin in England just wrote to tell me their weather is noxious and unpleasant. Have you thought about the price of vegetables and fruit in the coming months, stuff that we normally get from California? No rain there at all.

The people who give us economic data now say that the first quarter of 2014 saw really bad numbers. Early on it was an assumption that the economy was poised to enter another recession. Now, the powers that be say it was largely the weather. That’s a mixed blessing.

If you insist on keeping your head where the sun never shines, sooner or later it won’t matter how hot it is. Regardless of whether this is Gods’ plan, if the oceans continue to rise, life is going to be more difficult for my grandchildren. But I guess if God hasn’t yet told you the plan can be changed by paying attention to CO2 levels, you don’t have to worry about consequences. And anyway, I’ll be dead by then and my Tea Party friends can claim all the credit.

James Roemer / Feb. 19, 2014

Cold U.S. Winter Affecting Nation’s Economy

You have heard it on your local news for weeks, read about it in dozens of newspapers around the world and if you live in the deep south, Midwest or Northeast, have “felt” it first hand—the most severe U.S. winter since 1982, at a time when much of the rest of the planet continues to see overall warmer than normal weather.

Look for another potential big storm in the east around February 26th and at the very least, record cold weather next week into early March.

You can hear a broadcast on Bloomberg a while back talking about natural gas prices possibly going over $6.00 and discussing global warming, the Brazilian drought, etc.

The adverse weather is having a multi-billion dollar affect on our nation’s economy. Pipes are bursting in the Northeast, salt companies are running out of supplies to remove snow, and various businesses are running into more economic hardship, as a result of the weather. Florists saw national revenues fall 60% during the Valentine’s Day period, unable to deliver flowers to tens of thousands of loved ones.

Our $16 trillion economy can usually ward off a couple of snowstorms, but NOT the incessant nature of 3 consecutive months of brutal cold and near record snowfall, in which tens of thousands of flights are being cancelled every other week. Other industries such as plastic and rubber products, auto sales, etc. are also being hurt.

The drought in California (one of the top 8 economies in the world), could also have a trillion dollar affect on our nation’s economy as food bills could soar without widespread rains and winter snow cover in the next winter or two. If El Nino forms, this could all change. It’s something I am arduously looking into.

TK – the balance of this article is full of charts and comments that may influence you if you are a short term trader. My primary interest is the long term performance of clients money (and mine) so I tend to ignore short term issues as they are largely noise. But global warming is going to have a long term influence on virtually everything, including our money. To get to the site where you can see the charts and read the rest…
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Some Hints About Inflation

080519_USEconomy1My Comments: How many of you remember the inflation numbers from the late 70’s? 12% comes to mind. And was that ever exciting and frightening.

Since then, the people who pull most of the strings have been sensitive to this and have taken steps to keep inlfation under control. The other extreme from high inflation is deflation, which is bad no matter how much you hate inflation. Why is beyond the scope of this blog post.

So, we now have a new head of the Federal Reserve, the person with the most power when it comes to pulling strings. How this will all play out is anyone’s guess but play out it will, and you and I will have to pay attention if our future investment performance is important, and if we understand that the purchasing power of any given dollar in the future will determine if we are happy or not.

June 26, 2014 by Scott Minerd

U.S. Federal Reserve policymakers are dismissing as “noise” signs that inflation pressure is building, but perhaps they should be listening more closely.

Global CIO Commentary
U.S. Federal Reserve Chairwoman Janet Yellen’s press conference last week came just hours after Consumer Price Index data revealed inflation of 2.1 percent year over year. Nevertheless, she was exceptionally dovish and sanguine on inflation. Yellen contended that even though the U.S. economy is near the Fed’s objectives of full employment and price stability, recent data on inflation was “noise” and there continues to be considerable underutilization in the labor market. This was only the most recent demonstration of a willingness among Fed policymakers to highlight any number of economic data points to support accommodative monetary policy. It came even though labor conditions are improving toward a level associated with the non-accelerating inflation rate of unemployment (NAIRU); a tipping point of around 5.5 percent unemployment which has historically corresponded with a period of Fed tightening.

I am increasingly of the view that the Fed and investors are complacent about inflation. While a broad-based secular increase in inflation is most likely a problem for the next decade, there are a number of technical and cyclical forces working to push consumer prices higher. One technical factor is the one-time 2 percent Medicare payment cut which went into effect in 2013 and temporarily depressed healthcare costs for Medicare recipients. The recent increase in healthcare costs results largely from the year-over-year effects of this one-time cost reduction expiring.

Another inflation factor at work is shelter. With rental vacancy rates hovering near 13-year lows and new home sales soaring by 18.6 percent to an annualized pace of 504,000 units in May, we can expect a continued rise in shelter costs for the rest of the year and possibly into early 2015. As a result of these technical issues and the cyclical factors associated with the economic expansion and employment growth gathering pace, we are likely to see inflationary pressures continuing to build. It is clear that we have now passed the days of low inflation growth.

We are in the late stages of a bull market and, as I have noted before, bull markets do not die of old age, but typically end as a result of a policy misstep. If Fed policymakers want to avoid such a mistake, they might start listening more closely to the “noise.”

Chart of the Week

U.S. Shelter Inflation Likely Heading Higher

May’s Consumer Price Index (CPI) data surprised to the upside, with transportation and medical costs adding to the 0.3 percent month-over-month gain in core CPI. However, the biggest contributor to increasing consumer prices continues to be shelter costs, which account for over 40 percent of core CPI (and 22 percent of core Personal Consumer Expenditures (PCE), the Federal Reserve’s favored gauge of inflation). Shelter inflation measured by CPI is already up 2.9 percent from a year ago, and due to falling vacancy rates and gains in home prices, shelter costs could accelerate to nearly 4 percent growth over the next year, which would push core CPI well above 2 percent.

14-06-30 INFLATIONSource: Haver, Guggenheim Investments. Data as of 06/25/2014. Note: Model inputs include the rental vacancy rate (six-quarter lead), home prices (seven-quarter lead), and growth in working age population (24-quarter lead).

Guggenheim Partners, LLC is a global, independent, privately held, diversified financial services firm. For more information visit guggenheimpartners.com.

Ten Brands That Will Disappear in 2014

bruegel-wedding-dance-ouMy Comments: From time to time we see predictions about all sorts of things. But as time passes, they fade into oblivion and rarely do we consider whether any of those predictions came to pass.

We give great credence to those who make those predictions since they usually appear in print, or on television, and we tend to think those folks know what they are talking about. But you and I know that the future is unknowable. I frequently tell my clients that not only do I not know what the markets will look like a year from now, but I have no idea what I will have for supper today.

This was written about a year ago. Was he right?

By Douglas A. McIntyre May 23, 2013

Each year, 24/7 Wall St. identifies 10 important brands sold in America that we predict will disappear before 2014. This year’s list reflects the brutally competitive nature of certain industries and the importance of not falling behind in efficiency, innovation or financing.

The list also reflects how industry trends can accelerate the demise of certain brands. This year, we included two magazines — Martha Stewart Living and Road & Track. With print advertising in a multiyear decline, some magazines have weathered the decline better than others. These two, however, have suffered sharp drops in advertising revenue over the past five years. Magazines also carry the heavy legacy costs of printing, paper and distribution — a problem not shared by online-only competition.

Consumer electronics is another category with disappearing brands. The Barnes & Noble Nook is on the list. It competes with better-selling products made by larger companies — Apple and Amazon.com — and is also in the e-reader business, a shrinking industry. The Olympus digital camera also will disappear from store shelves by the end of 2014. Camera sales, especially point-and-shoot models, have been eroded by smartphones, which have increasingly high-quality cameras.

Yet another industry with two brands on our list is automobiles. Car sales are growing in the United States, but brands with market shares under half a percent cannot compete with companies that either produce high-luxury models like Mercedes-Benz or multiline giants like General Motors. Suzuki pulled out of the American market last year. Mitsubishi and Volvo will follow soon.

Looking back on last year’s calls list, we have had some winners, and some bad calls. Suzuki, MetroPCS and Current TV are all gone in the United States. American Airlines is part of a new company through its combination with U.S. Airways, though the American Airlines name lives on. Talbots was acquired by a private equity firm less than two months after we called it. Research In Motion is no longer a brand, having been renamed BlackBerry. We bungled our predictions regarding Avon, the Oakland Raiders and Salon.

We continue to use the same methodology in deciding which brands will disappear. The major criteria include:
1. Declining sales and losses;
2. Disclosures by the parent of the brand that it might go out of business;
3. Rising costs that are unlikely to be recouped through higher prices;
4. Companies that are sold;
5. Companies that go into bankruptcy;
6. Companies that have lost the great majority of their customers; and
7. Operations with withering market share.

Each brand on the list suffers from one or more of these problems. Each of the 10 will be gone, based on our definitions, within 18 months.
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The Cost of Medical Care – Where Do you Live in the US?

healthcareThese cities are all over the map—and so are their medical prices

My Comments: A lot of my posts lately have been about healthcare. I guess that’s because as I get older, I find myself paying more and more attention to my personal health circumstances. It doesn’t help that my clients are also older and facing the same issues. At least none of us have died recently.

My recent post about the US having the most expensive health care system in the world without also having the best outcomes was unsettling. But on the same day there was a report that said “Two-thirds of Americans say they’re satisfied with the way the health care system is working for them, according to a new Gallup poll.” Makes you wonder, doesn’t it. Read the article HERE.

Dan Mangan | @_DanMangan / Friday, 13 Jun 2014 | 12:00 PM ETCNBC.com

A new study of four common, insurance-paid health services in the 30 largest U.S. cities found not only that those prices vary significantly between those cities, but that there were also radical differences in the prices for the same service within a given city.

In Dallas, for example, a lipid panel, a test for cholesterol levels, could cost anywhere from $15 to $343—a whopping 23-times more than the least-expensive test, according to the survey by Castlight Health Services.

A CT head/brain scan in Philadelphia could cost $264 or as much as 12-times that amount— $3,271, according the survey, which examined the prices of “in-network” providers in employer-based health insurance plans. In-network providers are, as a rule, less expensive for participants in a plan to use than out-of-network providers.

But “staying ‘in-network’ does not guarantee low-cost,” the study said.

Castlight Health also found that the average price for a given service in most expensive cities was at least 2.6-times that of the average price for the same services in the least-expensive city.

But the average price of a lipid panel in Indianapolis, the most expensive city in the study for that service, was 4.7-times as expensive at $89, as the average price in the cheapest city, Pittsburgh, where the test averaged just $19.

In addition to lipid panels and CT head/brain, Castlight Health also examined prices of preventative primary-care visits and lower-back MRIs. “For every service, for every payer, in every geographic region, we see a large variance for in-network providers,” said Dr. Jennifer Schneider, vice president for strategic analytics at Castlight Health. “It’s pretty remarkable.”

“Many Americans believe that if they select an in-network doctor from their company’s health plan they are assured of paying less, or think that health-care costs vary across the country, but not in their backyard. This analysis dispels both of those myths.”

The study by Castlight, which works with employer-sponsored plans to lower costs, comes on the heels of the end of the first open-enrollment period for Obamacare insurance plans sold on government-run exchanges. The pricing structure of many Obamacare and employer-provided plans reflects a growing trend toward shifting more out-of-pocket costs for services onto enrollees.

The study makes it clear that depending on where you live or which in-network provider you choose in your city, your annual medical costs can vary widely.

Providers in San Francisco, for example, charge an average of $251 for a routine adult preventative care visit, compared with $95 in Miami. But the cost of the same kind of visit in Phoenix could range from $40 to $195—the biggest variation for that service found within a single city.

And the average lower-back MRI cost $2,635 in Sacramento, California, versus $907 charged by in-network providers in Seattle, Castlight Health found. But in New York City, the same kind of MRI could cost as little as $416, or as much as 11-times more, $4,527—the biggest range for that service, study found.

While the Big Apple was at the extreme for that kind of price variation, Schneider noted that large differences for the same service in a city are far from uncommon.

In Detroit, for example, a lower-back MRI ranged form $938 to $2,240.

One way to avoid steep bills for most of the services examined is to not live in either Sacramento or San Francisco, which accounted for three out four highest average prices. In addition to San Francisco’s category-leading preventative care average price, and Sacramento’s MRI bills, Sacramento also was the priciest town for CT head/brain scans—$1,404.

For those who can’t move, or aren’t inclined to, Castlight Health said customers can keep their costs down with several strategies. Among them is using a national laboratory group for blood tests. It said such groups can charge 90 percent less than hospital labs, and customers have the option of asking for a written lab order and sending it to the lab of their choice.

Customers also should avoid going to a hospital for imaging tests such as x-rays, MRIs and CT scans, which can cost hundreds or thousands of dollars more than if done in standalone imaging center, the company said.

Click HERE to see two maps showing cities with highest and lowest costs.

The Rise of Tactical Asset Allocation

retirement_roadMy Comments: Yesterday I talked about investment risk, and how we, both clients and advisors alike, should understand it. Today, I’m reposting an article that describes, for me, a way to help clients achieve their perceived objectives, and keep the risk element under control.

As before, risk is not to be avoided, but to be managed. It’s only with risk can we hope to realize our financial goals, which for most people is a bigger pile of money than you started with, one that will translate to peace of mind and a greater ability to enjoy life.

It’s somewhat technical, so if that turns you off, then either struggle with it or call me for an explanation. Or both.

Posted by Michael Kitces on Wednesday, June 20th, 2012

The foundation of investment education for Certified Financial Planner (CFP) certificants is modern portfolio theory, which gives us tools to craft portfolios that effectively balance risk and return and reach the efficient frontier. Yet in his original paper, Markowitz himself acknowledged that the modern portfolio theory tool was simply designed to determine how to allocate a portfolio, given the expected returns, volatilities, and correlations of the available investments.

Determining what those inputs should be, however, was left up to the person using the model. As a result, the risk of using modern portfolio theory – like any model – is that if poor inputs go into the model, poor results come out. Yet what happens when the inputs to modern portfolio theory are determined more proactively in response to an ever-changing investment environment? The asset allocation of the portfolio tactically shifts in response to varying inputs!

The evolution of the industry for much of the past 60 years since Markowitz’ seminal paper has been to assume that markets are at least “relatively” efficient and will follow their long-term trends, and as a result have used historical averages of return (mean), volatility (standard deviation), and correlation as inputs to determination an appropriate asset allocation. Yet the striking reality is that this methodology was never intended by the designer of the system itself; indeed, even in his original paper, Markowitz provided his own suggestions about how to apply his model, as follows:

“To use [modern portfolio theory] in the selection of securities we must have procedures for finding reasonable [estimates of expected return and volatility]. These procedures, I believe, should combined statistical techniques and the judgment of practical men. My feeling is that the statistical computations should be used to arrive at a tentative set of [mean and volatility]. Judgment should then be used in increasing or decreasing some of these [mean and volatility inputs] on the basis of factors or nuances not taken into account by the formal computations…
…One suggestion as to tentative [mean and volatility] is to use the observed [mean and volatility] for some period of the past. I believe that better methods, which take into account more information, can be found.”
– Harry Markowitz, “Portfolio Selection”, The Journal of Finance, March 1952.

Thus, for most of the past 6 decades, we have ignored Markowitz’ own advice about how to apply his model to portfolio design and the selection of investments; while Markowitz recommended against using observed means and volatility of the past as inputs, planners have persisted nonetheless in using long-term historical averages as inputs and assumptions for portfolio design. Through the rise of financial planning in the 1980s and 1990s, though, it didn’t much matter; the extended 18-year period with virtually no material adverse risk event – except for the “blip” of the crash of 1987 that recovered within a year – suggested that long-term returns worked just fine, as they led to a stocks-for-the-long-run portfolio that succeeded unimpeded for almost two decades. Until it didn’t.

As discussed in the 2006 Journal of Financial Planning paper “Understanding Secular Bear Markets: Concerns and Strategies for Financial Planners” by Solow and Kitces, the year 2000 marked the onset of a so-called Secular Bear Market – a one or two decade time period where equities deliver significantly below average (and often, also more volatile) returns. The article predicted that the sustained environment of low returns would lead planners and their clients to question the traditional approach of designing portfolios based on a single, static long-term historical average input (which leads to a buy-and-hold portfolio), and instead would turn to different strategies, including more concentrated stock picking, sector rotation, alternative investments, and tactical asset allocation. In other words, stated more simply: planners would find that relying solely on long-term historical averages without applying any further judgment regarding the outlook for investments, as Markowitz himself warned 60 years ago, would become increasingly problematic.

The Growing Trend of Tactical
Although not widely discussed across the profession, the FPA’s latest Trends in Investing study reveals that the rise of tactical asset allocation has quietly but steadily been underway, and in fact now constitutes the majority investing style. Although not all financial planners necessarily characterize themselves in this manner, the study revealed that a shocking 61% of planners stated that they “did recently (within the past 3 months) or are currently re-evaluating the asset allocation strategy [they] typically recommend/implement” which is essentially what it takes to be deemed “tactical” in some manner.

When further asked what factors are being re-evaluated to alter the asset allocation strategy, a whopping 84% of respondents indicated they are continually re-evaluating a variety of factors: 69% indicated following changes in the economic in general, 58% indicated they watch for changes in inflation, and another 58% monitor for changes in specific investments in the portfolio. Notably, only 14% indicated that they expected to make changes based on what historically would have been the most popular reasons to change an investment, such as changes in cost, lead manager, or other administrative aspects of the investment.

Although not directly surveyed in the FPA study, another rising factor being used to alter investment allocations appears to be market valuation, on the backs of recent studies showing the value and effectiveness of the approach, such as “Improving Risk-Adjusted Returns Using Market-Valuation-Based Tactical Asset Allocation Strategies” by Solow, Kitces, and Locatelli in the December 2011 issue of the Journal of Financial Planning, and more recently “Withdrawal Rates, Savings ratings, and Valuation-Based Asset Allocation” by Pfau in the April 2012 issue, along with “Dynamic Asset Allocation and Safe Withdrawal Rates” published in The Kitces Report in April of 2009.

Notwithstanding the magnitude of this emerging trend towards more active management, it doesn’t necessarily mean financial planners are becoming market-timing day traders. The average number of tactical asset allocation changes that planners made over the past 12 months was fewer than 2 adjustments, and approximately 95% of all tactical asset allocators made no more than 6-7 allocation changes over the span of an entire year, many of which may have been fairly modest trades relative to the size of the portfolio. In other words, planners appear to be recognizing that the outlook for investments doesn’t change dramatically overnight; however, it does change over time, and can merit a series of ongoing changes and adjustments to recognize that.

Tactical Asset Allocation: An Extension of MPT

At a more basic level, though, the trend towards tactical asset allocation is simply an acknowledgement of the fact that it feels somewhat “odd” to craft portfolios using long-term historical averages that are clearly not reflective of the current environment, whether it’s using a long-term bond return of 5% when investors today are lucky to get 2% on a 10-year government bond, or using a long-term historical equity risk premium of 7% despite the ongoing stream of research for the past decade suggesting that the equity risk premium of the future may be lower.

Consistent with the idea that financial planners are recognizing tactical asset allocation as an extension of modern portfolio theory and not an alternative to it, a mere 26% of financial planners answered in the Trends in Investing survey that they believe modern portfolio theory failed in 2008. For the rest, the answer was “no”, modern portfolio theory is still intact, or at least “I don’t know” – perhaps an acknowledgement that while MPT may still work, many of us lack the training in new and better ways to apply it. Nonetheless, that hasn’t stopped the majority of planners adopting a process of making ongoing changes to their asset allocation based on the economic outlook and other similar factors.

Unfortunately, though, perhaps the greatest challenge for planners implementing tactical asset allocation is that we simply aren’t trained to do so in our standard educational process. Some financial planning practices are responding to the challenge by investing in training, staff, and/or research to support a more tactical process. Others are responding by outsourcing to firms that can help; the Trends in Investing survey showed nearly 38% of advisors intend to outsource more investment management over the next 12 months, and 42% are already outsourcing more now than they were 3 years ago.

Regardless of how it is implemented, though, the trend towards tactical itself appears to have grown from a broad dissatisfaction amongst planners and their clients that the “lost decade” of equity returns has left many clients lagging their retirement goals. Even if diversified portfolios have eked out a positive return, it is still far behind the projections put forth when clients made their plans in the 1990s, forcing them to adjust by saving more, spending less, or working longer, to make up for the historical returns that never manifested. And as long as the secular bear market continues, the strategy will continue to be appealing. Ultimately, though, the sustainability of the tactical asset allocation trend will depend on it delivering effective results for clients.

So what do you think? Would you characterize yourself as a tactical trader? Is tactical asset allocation a short-term phenomenon, or here to stay? Is tactical asset allocation simply modern portfolio theory done right, or does it represent an entirely new investing approach?

The Paradox of Investment Risk

profit-loss-riskMy Comments: First, let’s both understand we are talking about financial risk. Second, financial risk for me is likely to be defined differently from how you define it. Third, there is always an element of uncertainty about any future outcome, whether it’s getting married, having children, accepting a new job, etc. Uncertainty implies a potentially unfavorable outcome for almost anything we do, but to the extent it is “risky” depends on our frame of reference.

For example, walking along the roofline of my house, at age 73, is much riskier for me that it might be for someone age 22, who is a chamption gymnast. Mind you that’s physical risk and not financial risk, but there are parallels when it comes to money.

I’ve just taken a step that caused me to reflect very carefully because it has caused me to trust someone to do something with my money that I personally cannot replicate. For me, I had to come to terms with the “risk” involved because it’s something I can’t do. The person who I’m trusting has done this successfully for the past 35 years. For him, it is considered safe and conservative. Only I don’t “know” that, so there is an element of risk involved.

by: Franklin J. Parker / Tuesday, June 17, 2014

Like most retail financial advisors, I have thought a lot about how to reduce both actual risk and the perception of risk in my client’s portfolios. Since 2008 we have all thought, rethought, written and rewritten about risk.

I focus on financial planning to help clients understand why they are investing. I have had discussions about why portfolio allocation helps to protect clients; I’ve used all the financial metrics and Monte Carlo simulations. But no matter the conversation, it seems that clients see themselves forever in danger of falling off a 1,000-foot cliff — a fall they feel is one small misstep away.

And this, to me, is the real problem with the current wealth management paradigm. We do hours of financial planning work: calculating different saving scenarios, market returns and retirement dates. But when it comes time to actually construct a portfolio, we give the client a risk-tolerance questionnaire that is entirely unrelated to their financial planning needs.

What if a client scores very conservatively on the questionnaire but actually needs a more aggressive portfolio? Or vice versa? To not use the financial planning process to directly inform the investment management process makes no sense to me. Well, actually it does.

Let’s be honest: As an industry, planners continue to use risk-tolerance questionnaires because they are defensible in court. But these do the client a disservice; they let advisors avoid the real conversations our clients need.

We must ask clients which competing risks they are willing to accept: Are you willing to accept the risk of not retiring on time? If not, are you willing to take on more portfolio risk? That is the proper role of a risk-tolerance questionnaire: to inform the conversation about risk, but not to dictate it.

It is an easy thing to calculate the return requirement of a future goal. It seems sensible to assign a portfolio allocation that has the best likelihood of achieving that goal. And, taking this idea a step further, it is not a hard thing to figure out the maximum loss a portfolio can sustain before a plan gets derailed. You can even dust off the old stop-loss tool to help limit the risk of those catastrophic losses.

Using such a process might help give clients context, and a better sense of the risks they are actually willing to take. By assigning a loss threshold coupled with some hedging strategies (even as simple as stop-losses), we can help clients better understand which losses are tolerable and which are not.

This may be the point. As retail advisors, it is our job to keep clients rational and on track. With some safety nets, we may be able to help clients stay rational and not fear that 1,000-foot cliff so viscerally.

Franklin J. Parker is managing director of CH Wealth Management in Dallas.

Eric Cantor’s Defeat is a Shaft of Light in Dark Political Times

global investingMy Comments: There is nothing I can add to this except encourage you to read it.

By Jurek Martin / June 12, 2014

The House majority leader’s defeat disproves the hypothesis that money is all there is

These had not been the best of times in America. A seemingly endless round of shootings in public places – schools, Walmarts, pizza parlours – is bad enough. Events in Iraq and Syria, now one miasma of misery and violence, compound the gloom. Even good economic news is overshadowed by what looks like another high-tech stock market bubble of rampant speculation.

But on Tuesday there was a sudden, unexpected shaft of light. Eric Cantor, number two Republican in the House of Representatives and a possible next speaker, lost a primary election in Virginia to an unheralded and underfunded libertarian economics professor, David Brat, who wants to take the country back in time a good 200 years. Yet again, the result demonstrated that no establishment politician is safe while the insurgent right is on the rampage, crusading under its anti-immigration banner.

So why is this good news? First, the disappearance of Mr Cantor – arrogant, ambitious beyond belief and a conservative ideologue of the most dangerous kind because he is not stupid – can only help restore the tattered fabric of civic and political dialogue. Prof Brat will not improve it but he is a minnow while Mr Cantor is, or was, a seriously big shark.

Second, his departure frees up John Boehner, the speaker of the House, to lay before his chamber the comprehensive immigration reform bill already passed by the Senate. He has often said he wants to, because he knows his party’s anti-immigrant stance greatly reduces its chances of ever winning a national election in which new Americans vote in ever greater numbers.

But he has lacked either the guts or the imagination to face down the hard line conservative bloc, which danced more to Mr Cantor’s tune than his own. If I were him, I’d bring up the bill tomorrow. It may lose or it may be carried with Democratic support, but it will at least clear the air on one of the great issues of our time.

There is much talk that Mr Boehner is thinking of stepping down anyway, worn out by the task of herding the wildcats that constitute his party. At the very least, he may be challenged for the speakership, assuming the Republicans retain control of the House in November’s midterm elections – if not, in the wake of his defeat, by Mr Cantor then by a fistful of others even further to the right than his deputy.

What better way to leave a legacy than an act of brave leadership, going against his own party’s xenophobic grain. It might even in the longer haul save the party from itself. Mr Boehner could then exit trailing clouds of glory, even at the cost of committing party apostasy.

There is a third reason to take comfort in Mr Cantor’s defeat. He spent about $5m on his campaign, 20 times more than Prof Brat. According to one report, his restaurant entertainment expenses, largely for his army of well-paid advisers, nearly equalled his opponent’s total outlays. Taken at face value, this disproves the hypothesis that money – especially out-of-state funding brought in by the truckload by shadowy donors protected by crass Supreme Court rulings such as Citizens United, which in 2010 removed legal restraints on financial contributions from outside groups – is all there is in politics.

In Mississippi Thad Cochran, the entrenched Republican senator awash in establishment money, has been forced into a run-off he may well lose by a Tea Party-backed candidate. The insurgent also won a lot of out-of-state funding, from groups such as the Washington-based Club for Growth, but much less than the incumbent.

If it were not Mississippi, arguably the most reactionary state in the union, the 30-year Republican hold on the seat might be in danger in November, as was proved to be the case in more representative states such as Indiana, Kansas, Nevada and Delaware in the last two election cycles, when Tea Party candidates went down in the flames of their own extremism.

Of course, it is wishful thinking to imagine American politics will get off the money train – just as it is to hope that the hail of bullets that so often take lives in schools and shops will move the body politic to do anything serious about guns. A frustrated President Barack Obama summed it up well this week by saying that other countries had plenty of crazy people but didn’t have the ammunition piled up to implement their madness.

But the National Rifle Association will not allow this to change. Recently it even took down from its website a post mildly critical of rallies in which people provocatively flaunt their guns. Ironically, Mr Cantor liked to provoke as well – and now he has been taken down; eaten, as it were, by the revolution he helped foment.