Video Newletters: Insights and Observations

From Gary Klaben, Family Manager

  • Elegant Simplicity


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    If you enjoyed what you seen here, please check out our blog, Changing the Conversation. Discover financial and family well-being by looking at money differently. We hope this blog will help you change the conversation about money and begin to think about finances as a tool to help you navigate major transitions. Visit and sign up to recieve our content!

  • Shifting Sands and Wise Solutions


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    If you enjoyed what you seen here, please check out our blog, Money Changes Life Changes Money. We provide a weekly video blog with accompanying text for those of you who prefer reading. If you are not signed up yet, sign up and start getting our weekly blog which embraces Lifelong Learning and contains innovative information for everyone. Whether you are running a business, selling a business, retiring, settling an estate or just having a major transition in life, this blog is for you.

  • Phobophopia, the Fear of Being Afraid


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    If you enjoyed what you seen here, please check out our blog, Money Changes Life Changes Money. We provide a weekly video blog with accompanying text for those of you who prefer reading. If you are not signed up yet, sign up and start getting our weekly blog which embraces Lifelong Learning and contains innovative information for everyone. Whether you are running a business, selling a business, retiring, settling an estate or just having a major transition in life, this blog is for you.

  • Deconstructing Wealth: Prioritizing Your Journey To Find the "Purple Rain'


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    If you enjoyed what you seen here, please check out our blog, Money Changes Life Changes Money. We provide a weekly video blog with accompanying text for those of you who prefer reading. If you are not signed up yet, sign up and start getting our weekly blog which embraces Lifelong Learning and contains innovative information for everyone. Whether you are running a business, selling a business, retiring, settling an estate or just having a major transition in life, this blog is for you.

  • The thrill of victory, the agony of defeat – why your thoughts determine the outcome

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    If you enjoyed what you seen here, please check out our blog, Money Changes Life Changes Money. We provide a weekly video blog with accompanying text for those of you who prefer reading. If you are not signed up yet, sign up and start getting our weekly blog which embraces Lifelong Learning and contains innovative information for everyone. Whether you are running a business, selling a business, retiring, settling an estate or just having a major transition in life, this blog is for you.

  • Of Family, Its Function, and a Child’s Future

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    If you enjoyed what you seen here, please check out our blog, Money Changes Life Changes Money. We provide a weekly video blog with accompanying text for those of you who prefer reading. If you are not signed up yet, sign up and start getting our weekly blog which embraces Lifelong Learning and contains innovative information for everyone. Whether you are running a business, selling a business, retiring, settling an estate or just having a major transition in life, this blog is for you.

  • Vanquish entropy–and have a nice life!

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    If you enjoyed what you seen here, please check out our blog, Money Changes Life Changes Money. We provide a weekly video blog with accompanying text for those of you who prefer reading. If you are not signed up yet, sign up and start getting our weekly blog which embraces Lifelong Learning and contains innovative information for everyone. Whether you are running a business, selling a business, retiring, settling an estate or just having a major transition in life, this blog is for you.

  • Are We There Yet?

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    If you enjoyed what you seen here, please check out our blog, Money Changes Life Changes Money. We provide a weekly video blog with accompanying text for those of you who prefer reading. If you are not signed up yet, sign up and start getting our weekly blog which embraces Lifelong Learning and contains innovative information for everyone. Whether you are running a business, selling a business, retiring, settling an estate or just having a major transition in life, this blog is for you.

  • Freedom – and Fostering A Family’s Future

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    If you enjoyed what you seen here, please check out our blog, Money Changes Life Changes Money. We provide a weekly video blog with accompanying text for those of you who prefer reading. If you are not signed up yet, sign up and start getting our weekly blog which embraces Lifelong Learning and contains innovative information for everyone. Whether you are running a business, selling a business, retiring, settling an estate or just having a major transition in life, this blog is for you.

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From Kevin Coyle and John Finley

  • February 2017

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    Passive versus Active Investing

    The recent unseasonably warm weather and complete absence of snow this year in the Chicago area has been a very pleasant surprise. Flowers are pushing up through the soil and many migrating bird species have arrived a bit earlier than normal.

    What’s not so surprising is the ongoing debate in investment circles about the relative merits of active versus passive investing. Passive investing refers to the use of mutual funds or exchange traded funds that replicate well-known market indexes such as the S&P 500 or the Russell 3000. Active equity managers attempt to beat the market by offering superior stock picking.

    Investing in passive, index-based strategies has grown enormously in popularity in recent years. Last year alone, Morningstar estimates that $262 billion moved from active to passive U.S. equity funds (1). This is understandable: Index-based funds tend to have lower fees than active funds (1) and the average active manager does not outperform its index benchmark after fund fees and expenses (2).

    While the trend from active to passive seems to be showing no signs of slowing down, although, in theory at least, there is a limit to how far it can go. The reason is that indexes use only one characteristic to rank the constituent stocks: price times the number of shares of a company’s stock. Market value, of course, depends on price. And how are prices determined? Buying and selling of those shares on stock exchanges done by active managers.

    The price of a share of stock is a critical piece of information for skilled active managers, especially value investors. Value investors, such as Warren Buffett, seek to buy stocks that are undervalued and cheap relative to other stocks. They analyze the fundamentals of a company to arrive at an estimate of what the intrinsic value of a stock is, then compare that to the current price. If there is a sufficient discount (or margin of safety), the value manager purchases the stock in the hopes that eventually other investors will agree with that valuation and bid the price up to its fair value (or higher).

    Academic research has consistently shown that value investing outperforms growth over long periods of time, though it may underperform growth for shorter time periods. One problem with passive investing is directly related to its sole reliance on price valuation because popular growth stocks will always have a greater weight in the index than unpopular value stocks. Popular growth stocks also tend to have more price volatility.

    This became abundantly clear during the dotcom bubble of the late 1990’s when technology stocks (growth stocks) were everyone’s darling, eventually driving the tech sector to a weight of over 29% of the S&P 500 Index. That bubble ended in a three year bear market, where value investing (buying cheap stocks) outperformed growth (owning popular stocks) seven years in a row.

    While some may worry that our “Early Spring in February” may not end well for the flowers when the freezing weather returns, we need not fear that active managers will be driven to extinction by passive indexing any time soon. Skilled and experienced equity managers who can find quality companies with good fundamentals, purchased below their intrinsic value with a “margin of safety”, should always have a prominent place in every investor’s portfolio. The goal is to grow wealth over the long haul by diversified exposure to the global capital markets, capturing a share of what the market has to offer as cheaply as possible, with less volatility, and avoiding the never-ending parade of popular investment fads.

    (1) Morningstar Direct Asset Flows Commentary Feb. 14, 2017
    (2) https://us.spindices.com/documents/spiva/spiva-us-mid-year-2016.pdf

  • December 2016

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    The human impulse to make predictions about future events is understandable, and is another thing that separates us from the rest of the animal kingdom (along with the need we have for meaning and purpose). I can’t imagine that my pet Border Collie ever worries about where her next meal will come from or if there will ever be another frisbee toss coming her way. But for us humans, there are any number of things we can choose to worry about, and that worry is always focused in the future. Hence, the unending quest to predict things, to reduce or eliminate the anxiety and fear which often accompanies uncertainty.

    I marvel at the accuracy of weather forecasts, the fruit of years of sophisticated meteorological computer modelling, which most of us take for granted nowadays. This benefits us all. But even with such impressive advances in forecasting, we are sometimes prone to put too much stake in expert predictions based on complex statistical models. The recent U.S. Presidential Election stands as a good reminder of this. Right up to the night of the election, most election polls predicted Mrs. Clinton would emerge the victor over Mr. Trump.

    Like many of you, I stayed up to watch the election results. I kept a close eye on the Dow Jones Industrial futures contract. At one point that evening, blue chip stocks were selling off by over 800 points. Now, several days later, as we discuss in the accompanying Market Observer Video, U.S. stocks are up significantly, with certain sectors like financials and industrials up significantly. Why?

    Ironically, we can point to the experts again. Only this time, we’re not talking about political pundits but pundits from the world of investing. The reasoning is simple enough. If Mr. Trump can fulfill certain campaign promises, such as significant increased government spending on U.S. infrastructure improvement projects like roads, bridges and airports, certain industries and businesses will benefit from all that spending. It all sounds so logical. “Investors” then placed bets on those stocks, driving up stock prices, based on that prediction.

    The problem with this line of thinking is that it more closely resembles short-term speculation rather than long-term investing. A moment of reflection surfaces many questions. What will the actual infrastructure spending look like? How quickly will the legislation get passed? Will it involve outright government contracts or funded through individual states? Will it have a private component? How will the architects and construction companies be chosen? How long will all of this take before any of it actually gets counted in the GDP calculation? (Does anyone remember the phrase “Shovel-ready projects”? Google it. It wasn’t that long ago.) Similar questions can be raised about the assumptions underlying the big run-up in financial services stocks.

    The point of all this is to bring us back to something else mentioned in the accompanying video, that stock price valuations in the long run must be anchored to corporate profitability, and not on short-term speculation based on the thinly conceived predictions of so-called stock market “gurus”. It’s the growth in expected future cash flows from businesses that creates wealth in the form of increased stock prices.

    So, the next time I notice my dog staring at me, I can be reasonably sure that she is not worried about how the predicted deregulation and certainty of rising interest rates will benefit commercial banks in the future. She probably just wants me to know that I forgot to feed her (again).

  • August 2016

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    As we saw in the first last quarter, the market experienced some big swings and then bounced right back to previous levels. At the end of the second quarter, we saw the short term Brexit response (a two-day 5+% drop), was followed by a bounce back to pre-Brexit levels just one week later. Since then the S&P 500 has risen steadily, up close to 7% for the year.


    Interestingly friends and clients have said that the market is doing poorly. Rather than focusing on actual returns, they are reacting to market volatility, something that we see continuing until there is more certainty regarding interest rates, the direction of the economy and the presidential election. 

    With regard to interest rates, they are holding relatively steady at historically low levels, slightly above 1.5% right now for the 10-year Treasury bond. With inflation mild globally, the overall view is that the Fed and central banks in other developed countries will remain highly accommodative.


    Central bank accommodation along with energy prices stabilizing should help GDP and contribute to improved corporate earnings. The risk of any near-term recession appears minimal.

    Some Quick Takeaways:

    • Short-term swings drive fear and unnecessary trading; long-term returns drive future wealth creation.
    • Recession risk in the U.S. is limited as central banks remain accommodative.
    • History has shown that whichever party ends up in the White House does not have a big impact on the market. Don’t let the news stations get you thinking otherwise.
  • May 2016

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    The first quarter for the stock market was a perfect example of drama that takes you nowhere. If you only looked at the market at the first and last days of the quarter, you wouldn’t know the difference — no real change. In between, you saw a decline of 11% and subsequent complete recovery, mirroring the swing also experienced by oil prices.

     

    Oil’s impact on stock prices resulted partly from expectations that, if oil prices stay low, profits for oil production and related companies would continue to drop, and losses would steepen as more projects put in place over the past few years at higher oil prices became uneconomical.

    Partly due to oil’s impact, GDP growth for the first quarter of 2016 was a sluggish 0.5%, a first quarter phenomenon we have become familiar with. Similarly, corporate profits were soft — both because of oil as well as the strong dollar. In a period with a strong dollar, overseas profits look weaker when translated back into US Dollars.

    On the positive side, wage growth has been increasing. While not having an immediate impact, some economists believe that this will lead to greater consumer demand and consequently higher profit growth in the second half of the year.

    Another positive that has not been talked about much is the budget deficit. In 2009, coming out of the crisis, the budget deficit was 11% of GDP. It’s now down to 2.5%, a level we haven’t seen for 10 years.

     

    The latest quarter picture leaves us with no clear direction. A recovery of oil prices from their lows, the leveling off of the appreciation of the dollar and signs of real wage growth are providing some hint of stronger growth through the end of the year and into next year. The budget deficit is still growing, but at a lower rate. Because of growth uncertainties, the Fed has slowed down its plans to increase interest rates. Where does this all lead in terms of investment strategy?

    Balance between your cash flow needs and your long-term plans. We would reasonably err on the side of caution for your more immediate to intermediate liquidity needs. Make sure you have money available for cash flow in case we do run into a recession, but long-term money should stay where it is today — in line with your long term allocation plan.

  • March 2016

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    It finally happened. In December the Federal Reserve finally raised rates; just a one quarter percent increase. Unlike previous rate actions by the Fed, albeit it appears that additional increases going forward will be modest and gradual with rates at current levels until there is more clarity about the economy.


     

    After the sharp drop in global stock markets, the Fed quickly shifted to a more dovish, status quo posture, which provided some calming effect.

    Is a recession looming?

    With the Fed indicating more of a status quo stance and the market falling off, does this indicate weakness in the US economy? We don’t think that’s the case. Employment continues to improve and corporate earnings show resilience. As the chart below points out, unemployment at the end of last year stood at 5.0% (now at 4.9%), which is the lowest since 2008. Wage growth shows modest improvement.


    As we pointed out in our last report, corporate earnings, excluding energy companies, while tepid were positive and overall look like they will strengthen in 2016. Furthermore, we expect to see a lagging but positive impact on consumer purchases as a result of declining oil prices.

    Growth and Momentum vs. Value

    There are clearly some disconnects in the market. While the S&P 500 was up about 1.5% this past year, if you took out the FANG stocks - Facebook, Amazon, Netflix and Google – the rest of the market was down 4%. In fact, most stocks (60% or more) are down more than 20% from their highs.

    All of this points to growth stocks and the momentum from these stocks being a big driver last year. As we see it, momentum works, until it doesn’t.

    Value on the other hand, works over long periods of time. If you buy something and you feel comfortable with its value, you can hold that asset confidently for an extended time. That’s how Warren Buffett invests. Yet even his company, Berkshire Hathaway, was down 11%. That, of course, is a short- term picture.

    Avoid chasing momentum in this market and focus on value; after reviewing the liquidity and balance in your portfolio, that’s where you want to concentrate your risk management.

     

  • November 2015

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    We’ve been waiting for two events to happen this year. The first one occurred in August – the market experienced a 12% correction.  We like to see a 10% correction now and again. It’s been four years since the last one, so the market has been waiting a long time. The good news: as of this writing, the market has recovered most of those losses.

    The second event hasn’t occurred yet - the Federal Reserve has not yet raised interest rates.  While the odds that they will raise rates in December have been increasing lately, it won’t be a surprise if they maintain the status quo.  As any Chicago Cubs fan is used to saying, we may have to “Wait ‘til next year.”

    Corporate Earnings

    Earnings for the S&P 500 look like they will end the year at around the $117 per share amount from last year. There were two key factors holding back the earnings number: (1) lack of profits from energy companies (because of cheap oil) and (2) the strong US Dollar. As the first chart below shows, energy sector earnings fell off completely in the first half of the year but are expected to partially rebound for the rest of the year.

    Coming into 2015 and continuing through the year, the US Dollar has appreciated substantially relative to other currencies. While this makes it cheaper to buy goods overseas, it creates a big headwind for corporate profits of US companies with overseas revenues.

    With energy earnings improving and the future impact of a strong US dollar leveling off, 2016 earnings growth is expected to get back on track. They are currently projected at $128 per share.

    Concentration Versus Diversification

    While the stock recovery in October and early November has been solid, its strength has come from the safe mega-cap stocks. Each area of the market will have periods of underperformance and outperformance. Right now it is mega-caps; in the late 1990s, it was tech stocks.

    If you were concentrated at the time, it looked great; then it didn’t. At the bottom of that tech bubble the place to really be was in the areas that were most undervalued - emerging markets and developed international.

    So why have diversification? It’s not so much because you’re trying to hit a home run as it is that you want to have some dry powder to buffer your losses in a down market.  When you have a narrow rally, like in just mega-cap stocks, that’s when people forget the lessons of a full market cycles.

  • August 2015

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    Following a weak but positive first quarter, the US Economy grew at a more reasonable rate of 2.3% in the second quarter. It is the same sluggish growth we have seen before. General sentiment is pointing to a slow but steady growth rate of 3% in the second half.

     

    One consistently positive piece of data has been the decline in the unemployment rate, which is sitting at 5.3%, slightly below the 5.5% trigger rate for the Fed to begin raising interest rates.

     

    While we have reached that target, there are many factors, including wage growth that are influencing the Fed’s interest rate decision. One thing we know with certainty is the Fed will begin slowly raising interest rates. When and what the impact will be remains unclear.

    Uncertainty regarding Fed timing, the impact of a stronger dollar on GDP and whether consumers will step up their spending have contributed to the US Stock Market taking a break from its steady rise during the past two years. For 2015, the market has been relatively flat and appears to be sitting and waiting for more clarity.

    With the current lack of clarity, many people are asking which investment choices are best. We believe that uncertainty (and there is always some) is best addressed through diversification. Guessing what is going to be strong today leads to poor results. Diversification ultimately wins out over the long-term.

    We hope that by our third quarter report some of the uncertainty will have lifted and we will have more clarity from the Fed about interest rates. Although we are not going to hold our breath on that one.

  • May 2015

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    First quarter results for the US Economy were tepid at best. Following a common, winter chill theme, GDP grew at just 0.2%. Bad weather, cheaper oil and its impact on the energy sector and a stronger dollar were the likely causes.

    Lower oil prices have not fueled an increase in consumer spending or at least not yet. As the chart below shows, consumers realized $112 Billion of expense reductions from lower gas prices which contributed to an overall increase of savings of  $120 billion. Whether these expense reductions lead to future spending remains to be seen.

    In response to the GDP slowdown and still tepid job growth, the Fed is extending its timeline for raising interest rates, possibly out to December. Improvement in job growth and the unemployment rate will be key to the timing of any rate increases.

    First quarter equity markets showed us a switch from last year. The S&P 500 eked out a 1% increase, while International stocks performed better. This trend continued in April, where the S&P was flat, while International Developed stocks rose close to 4% and Emerging Market stocks rose nearly 8%.

    Valuations of US companies are relatively more expensive than those of International Developed and Emerging Market companies. At the same time, earnings for US companies are at peak levels, while the profits of International Developed companies are still below their historical peaks.

    The rapidly strengthening dollar is a key driver here. The stronger dollar causes a reduction in US company earnings when international sales are translated into dollars and causes US products to be more expensive overseas, hurting exports.

    The Fed is rolling back its timing to raise interest rates. US consumers are choosing to hold on to what they’ve got for now. Several factors including European Capital Bank accommodative monetary policy hint at the possibility of the continued relative strength of the International Developed markets. Where does this leave us?

    According to the Barrons recent Big Money poll, 50% of the participants are neutral on the U.S. market over the next six months. Ask them what’s going to happen in 12 months, however, and you find that 82% are bullish on the US and 83% are bullish on Europe. Caution mixed with longer term optimism – a healthy viewpoint during a time of transition.

  • February 2015

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    In 2014, the United States Economy, as measured by GDP, grew by 2.4%. This was on the heels of a 2.2% increase in 2013. Since the Great Recession, GDP growth has lagged the 3% average growth rate of previous post – WWII recoveries by about 25%.

    Inflation remained tame last year, averaging just under 2%, similar to the rate over the past five years. Internationally, inflation is close to non-existent, at least by traditional measures. A fear of deflation looms as Europe deals with stagnant GDP growth.

    Based on its August, 2014 Baseline Budget Forecast, the CBO is forecasting a 2015 Federal Budget Deficit of under $500 Billion. This deficit is under 3% of GDP, which is more in line with post- WWII deficits, and has resulted from increasing tax revenues and a slowing of Government expenditures. It is hoped that continued progress on the deficit front will stop the acceleration of accumulated Federal Debt levels experienced since 2008.

    Over the past two months, the US stock market has rallied and then pulled back around 4% to 5% on several occasions. This volatility of “angst” and uncertainty somewhat reflects the fully valued nature of this market. The S&P 500 Index stands at 16 times forward price earnings.

    Interest rates, as measured by the US 10-year Treasury Note, moved lower last year. This was a major surprise to most economists, market analysts and investors. Declining yields helped push large US stocks higher by about 13% in 2014. Small-cap, Mid-cap, Developed International and Emerging Market returns were between -4% and +6%.

    The big question this year is what will be the effect of lower oil prices on the consumer and the economy. Output may not be materially affected until mid-year due to drilling and fracking projects already in the works when oil began to dip last fall. The consumer is seeing $60 per month on average of savings at the pump. It is believed that consumers are using there savings partly to reduce debt, add to savings and increase spending. As measured by XLY, the Consumer Discretionary Select Sector ETF, we saw a blip up in consumer spending over the past two months. It’s still too soon to determine the net overall effect on economic growth in 2015 resulting from reduced energy related capital expenditures and possible job losses in the oil patch versus the offsetting increases in consumer spending and savings. We’ll have to wait and see what happens.

    Over the past six months, the Federal Reserve has been signaling an interest rate increase may occur around mid-year. Over the past year, the economy has added over 200,000 new jobs per month. The unemployment rate has dipped below 6% and is trending lower. The Federal Reserve has cited these developments along with other factors to support its intent to allow interest to rise to manage inflation expectations going forward while hopefully not interfering with what appears to be our ongoing recovery. We will have more to report in May.

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