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Home > News and Opinion > November Markets

November Markets

Michael Schwartz | Thursday, December 10th, 2009

Could November go down in history as a major turning point in the U.S. economy?

The shocking (in a positive way) unemployment report released last Friday by the Labor Department showed the economy lost only 11,000 jobs in November. The markets were bracing for a number well in excess of 100,000, according to CNBC. On top of that, revisions to the previous two months showed 159,000 fewer jobs were lost than initially reported. And, to complete the trifecta, the unemployment rate dropped to 10.0% in November, down from 10.2% in October. On the surface, this is extremely good news for the economy as it suggests the economy is healing nicely.
 
Initially, the stock market roared higher on the news. However, as the day wore on, prices started to fade as investors realized that if the economy is too strong, it will cause interest rates to rise sooner than expected. As interest rates rise, it may cause the economy to slow down. So, in the (almost) comical way that Wall Street works, investors like good news – but not too good of news!

Gold prices plunged on the unemployment report and interest rates and the U.S. dollar soared. True to form, whenever there is major market moving news, we tend to see some asset classes that benefit and some that lose out. This complex and ever-shifting interrelationship among various asset classes was on full display after the unemployment news broke. Of course, we do our best to stay on top of these relationships and profit from them on your behalf.

Data as of 12/4/09

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

1.3%

22.4%

26.2%

-7.8%

-1.5%

-2.5%

DJ Global ex US (Foreign Stocks)

3.2

40.4

55.6

-5.0

4.1

1.2

10-year Treasury Note (Yield Only)

3.5

N/A

2.6

4.4

4.2

6.1

Gold (per ounce)

2.0

36.9

53.9

22.6

21.3

15.7

DJ-UBS Commodity Index

-0.4

15.0

21.9

-7.7

-1.5

3.9

DJ Equity All REIT TR Index

9.0

25.6

56.8

-13.6

0.4

11.1

 

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable or not available.

THERE IS A DIFFERENCE BETWEEN LUCK AND SKILL and knowing when you are just lucky and when you are successful due to skill is of paramount importance as an investor. Let’s say you correctly called the flip of a coin five times in a row. What are the odds that you will correctly call the next flip? Correctly calling five flips in a row might be considered a “hot streak” and lead you to believe that chances are high you can correctly call the next flip. Well, assuming it is a fair flip, there is, of course, only a 50/50 chance that you will be correct because flipping a coin is a game of known probability. The fact is the coin flip has no memory of your hot streak.
 
An investor who is on a “hot streak” may or may not be lucky. Let’s take John Paulson as an example. He was a faceless hedge fund manager toiling in obscurity until he came upon an idea. He became convinced several years ago that the housing market was a bubble ready to burst. He put his money where his thesis was and he made billions of dollars for himself and his clients, according to a new book, The Greatest Trade Ever, by Gregory Zuckerman.
 
Today, Paulson is the toast of the hedge fund world and his latest “big bet” is that gold prices will continue to rise. This is not a recommendation from us to either buy or sell gold; rather, we want to make a point.
 
With millions of investors, odds are that some of them will make winning investments numerous times in a row. If these winning investors were, in reality, just lucky, but they think they were actually skillful, then that is when the situation turns problematic. The lucky investor may start to think they are infallible and get stubborn when the market turns against them. Eventually, when the lucky streak ends, it will likely mean serious losses for the investor. Only time will tell whether John Paulson got lucky or whether he has substantial investment skill.
 
The best antidote we know of to the danger of confusing luck and skill is to remain humble. When our investment strategy performs well, we are very thankful. When it doesn’t perform well, we try to learn from it. The investment business has an uncanny way of turning hubris into painful losses. We think humility is a safer route.
 
Weekly Focus – Think About It
 
“If we become increasingly humble about how little we know, we may be more eager to search.”
– John Templeton

 

Value vs. Growth Investing

Here are the numbers (12/4/09)

Name

1-Week

YTD

4-Week

13-Week

1-Year

3-Year

5-Year

US Market

1.64

26.65

5.97

9.15

36.99

-5.33

1.22

Large Cap

1.12

24.06

5.89

9.41

32.47

-5.19

0.89

Large Core

0.83

20.30

5.37

8.67

28.46

-3.23

1.87

Large Growth

1.27

40.93

5.90

11.64

51.90

-3.08

0.27

Large Value

1.30

13.26

6.43

8.16

19.86

-9.63

-0.10

Mid Cap

2.61

34.17

5.86

8.81

50.48

-5.91

2.20

Mid Core

2.78

34.00

5.95

8.45

52.44

-6.06

1.73

Mid Growth

1.95

35.54

4.53

8.73

52.10

-5.16

2.76

Mid Value

3.05

32.80

7.06

9.28

46.73

-6.92

1.80

Small Cap

4.13

32.72

7.18

7.67

50.42

-5.89

1.16

Small Core

3.99

35.04

6.40

7.85

54.75

-6.97

1.25

Small Growth

3.56

27.61

5.74

4.77

46.54

-5.83

0.07

Small Value

4.81

35.39

9.39

10.33

49.81

-5.33

1.80

US Core

1.44

23.80

5.56

8.56

34.14

-3.91

1.88

US Growth

1.57

38.75

5.60

10.50

51.46

-3.68

0.87

US Value

1.91

18.48

6.77

8.53

26.80

-8.74

0.47

Source Morningstar.com

©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

Office Notes

Have A Living Trust? Make Sure It’s “Funded”

Using effective Estate Planning strategies could prove to be one of your best overall investments. That’s because your estate is everything you own, including the value of life insurance in most cases. One of the most effective tools families can use to properly plan their estate is the revocable living trust.

Trusts aren’t just for the “rich and famous.” Families of more modest means could benefit as well, provided they use it properly. Experience suggests that many revocable trusts are often “unfunded” after they’ve been drafted by the attorney and signed by the grantor (the person who creates the trust).

Funding the trust simply means assets are placed in the name of the trust. For example, if Bob and Mary Jones have a brokerage account in their names as joint tenants with rights of survival (JTWROS) they would need to have the account re-titled in the name of their trust(s). This isn’t a big deal. It just requires some paperwork and follow-up. 

Once a regular brokerage account is re-titled into the trust, it would look something like this:

The Bob Jones Revocable Trust, dated June 10, 2009, Bob and Mary Jones Trustees. This would place all the assets in this account in Bob’s name. Mary should have her own separate trust with appropriate assets funding it in her name. This allows the full unified credit for estate tax exemption (currently $3.5 million per person as of November 2009) to be used when each one dies. Note: the unified credit is scheduled to be unlimited next year before reverting back to $1 million per person in 2011.  (There are currently 3 bills before congress that most believe will keep the current $3.5 million per person but until something passes and is confirmed this is just speculation).

It’s important to know that if assets aren’t placed in individual names (whether a trust is used or not) and remain as JTWROS, then the unified credit of the first spouse to die is lost forever! And, if the unified credit does revert back to only $1 million per person in 2011, it could be an important planning issue for many “middle class” households. Note: Qualified Retirement plans (IRA, 401(k), 403(b), etc.) should not be re-titled to the trust because that’s a taxable event.

Properly funding a living trust provides a variety of benefits. First, it enables the Trustee (the person who manages the trust after the grantor dies or becomes incapacitated) to manage the funds for the benefit of the beneficiaries without going through the probate process. Probate is a legal process, administered by the local court, to ensure a decedent’s estate is distributed properly. The court wants to make sure any debts they may have are paid before beneficiaries receive funds.

Unfortunately, for the dearly departed and their family, probate is public. Anyone is able to obtain a copy of the decedent’s will, which often lists bank accounts and brokerage statements, as well as the amount in each. And the amount each beneficiary receives may be listed as well! Some people don’t care about this lack of privacy, but others find it intolerable. You can easily confirm this by going down to your local courthouse and asking to see recent wills. They’ll even let you make copies and take them home if you like!

This is where the living trust really shines. Assets that have been placed in the name of the trust don’t have to go through the probate process at all; it’s completely private. In addition, unlike a will, funds can remain in the trust for the benefit of beneficiaries until they reach a certain age, or to protect them from predators or their own incompetence.

It’s important to note that some attorneys include trust language inside a will. This is called a “testamentary trust” that doesn’t become effective until after the estate has gone through the probate process. While it’s better than no trust at all, it doesn’t avoid the public nature of probate.

Of course this information is not intended to be “legal advice.” You should always meet with a knowledgeable estate planning attorney for professional advice. Some basic estate planning now could pay big dividends for your family in the years to come.

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