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The Markets

Michael Schwartz | Wednesday, March 31st, 2010

The Markets

The stock market seems to be climbing the proverbial “wall of worry.”

Despite potential road hazards such as sovereign debt issues, rising interest rates, a weak job market, and a stalled housing recovery, investors bid up stock prices last week to an 18-month high, according to MarketWatch. Of course, these things could eventually affect stock prices, but, for now, stocks are riding the momentum of improving earnings and some underlying stability in the economy.

Lack of job growth has been a major problem for our economy the past couple years, but that could change this week. On April 2, the government will release the March employment report and, according to CNBC, economists expect it to show a rise of about 200,000 non-farm jobs. That would be a small down payment on the 8.4 million jobs lost since December 2007, according to Bloomberg. The fact that the S&P 500 has risen for four consecutive weeks may suggest that the market has been anticipating a good report. Ironically, on the day the employment report is released, the U.S. stock market will be closed for the Good Friday holiday, so we won’t know the market’s reaction until the following Monday.

Fear of a double-dip recession seems to be fading, too. In its final revision, the Commerce Department said fourth quarter 2009 GDP increased at a 5.6% annualized rate, which is the fastest rate in six years. For 2010, economists surveyed by MarketWatch expect GDP to expand at a non-recessionary 3% rate. On a regional note, the Great Lakes commercial shipping season has started early partly due to increased demand for iron ore and coal. “Things are moving quicker, sooner than a year ago. And it seems like more ships are involved,” said Eric Reinelt, Port of Milwaukee executive director as quoted in the March 28 edition of the Milwaukee Journal Sentinel.

So, despite the worries, there is some good economic news supporting stock prices.

Data as of 3/26/10 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 0.6% 4.6% 43.0% -6.7% -0.1% -2.6%
DJ Global ex US (Foreign Stocks) -0.2 0.5 50.6 -6.9 3.6 0.5
10-year Treasury Note (Yield Only) 3.9 N/A 2.7 4.6 4.6 6.2
Gold (per ounce) -0.8 -0.7 16.9 18.3 20.8 14.5
DJ-UBS Commodity Index -2.0 -6.8 14.9 -8.5 -3.9 2.8
DJ Equity All REIT TR Index 1.2 11.0 100.5 -10.2 4.5 12.0

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,, 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.

THE DAY OF RECKONING due to our country’s ballooning deficits may be getting closer. Back in 2008, the Congressional Budget Office (CBO), projected the U.S. would run a budget surplus of $247 billion for the years 2009 through 2018. Now, just two years later, CNBC and the CBO have crunched the numbers again and project that we will incur a $7.4 trillion deficit during that 10-year period, according to a March 26 CNBC article.

How could the situation deteriorate so much in just two years?

The CBO said 57% of the projected deficit increase was due to lower government revenues–much of which is due to the decline in our economy and projected sluggish economic growth. The other 43% included expenses such as, “the stimulus bill, a change in accounting for the war, extended unemployment benefits, and additional interest on debt.”

At the end of 2009, the U.S. national debt stood at $12.3 trillion, according to the Treasury Department. Tack on the projected deficit over the next 10 years and we could be close to $20 trillion in the hole 10 years hence.

Like chocolate chip cookie dough, a spoonful of annual deficit and national debt is fine, but gorging our country on borrowed money may eventually cause significant problems. Too much government debt could lead to rising interest rates and slower economic growth, according to Fortune Magazine. In a worst-case scenario, it could lead to economic collapse.

We have several options to solve the budding debt problem before it gets completely out of hand. First, we could grow our way out of it. This is the preferred method and the least painful. Second, we could raise taxes. Third, we could cut government spending. Most likely, we’ll see a combination of the three.

Given the magnitude of our swelling deficits, we will likely have pain in our future. Whether that pain happens in our generation, our children’s, or our grandchildren’s, remains to be seen.

Weekly Focus – Think About It

“The way to wealth depends on just two words, industry and frugality.”

–Benjamin Franklin

Value vs. Growth Investing

Here are the numbers (3/26/10)

Name 1-Week YTD 4-Week 13-Week 1-Year 3-Year 5-Year
US Market 0.60 5.53 5.91 4.40 45.14 -4.09 2.77
Large Cap 0.61 4.44 5.53 3.51 39.52 -4.42 2.12
Large Core 0.50 5.02 5.08 4.03 42.19 -1.79 3.23
Large Growth 0.50 2.47 5.61 1.76 42.71 -2.17 2.30
Large Value 0.81 5.73 5.92 4.63 33.28 -9.62 0.35
Mid Cap 0.59 7.99 6.50 6.35 59.57 -3.79 4.27
Mid Core 0.78 7.76 6.39 5.95 58.87 -3.93 3.90
Mid Growth 0.33 7.02 5.97 5.81 51.28 -2.78 4.96
Mid Value 0.61 9.19 7.14 7.33 69.32 -5.06 3.65
Small Cap 0.54 9.60 7.93 7.74 65.10 -2.50 4.44
Small Core 0.28 8.77 7.16 6.76 64.13 -3.83 4.08
Small Growth 0.65 8.56 8.31 7.38 51.49 -2.73 3.65
Small Value 0.70 11.51 8.40 9.16 81.50 -1.42 5.30
US Core 0.55 5.89 5.52 4.65 46.91 -2.17 3.53
US Growth 0.48 3.81 5.88 2.97 45.03 -2.31 3.00
US Value 0.76 6.81 6.34 5.49 43.03 -8.10 1.41


©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.

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Office Notes

The Pros and Cons of Alternative Investments

If you start to really look at all of your investing options and you start collecting advice, it would not be long before you ran into an investment professional who touts the benefits of a “public, all-cash, non-traded REIT. “ Your first response might be, “What’s the ticker symbol?”

Since they have no ticker symbols, your next conversation would probably consist of a description of what an “alternative” investment is and how, although there is a share price, it can’t be found on an exchange. Then, if market fluctuations make you queasier with age, this investment may start sounding pretty good the more you look into it because it’s a competitive investment that takes some of your money off of the daily pricing roller coaster. You may find that it’s an alternative worth exploring, although there are, of course, pros and cons.

What Alternative Investments Are

Investments that are considered “alternative” are investments other than the traditional stocks, bonds, mutual funds, and annuities offered by stock brokerage and insurance companies. They allow for a more direct way of investing in an entity in that you buy your shares, or units, from the company itself, not over an exchange like the New York Stock Exchange or the NASDAQ. They are usually long-term investments by nature with very limited liquidity.

One of the most common assets classes for alternative investments is real estate. Real estate investment trusts provide the opportunity to invest into a wide variety of different classes and types of real estate including, but not limited to, office, retail, industrial, houses, apartments, self- storage, timberland, healthcare, and government tenant buildings. In addition, there are varying degrees of risk which usually can be measured by the level of leverage the program uses. For example, a program that buys buildings using all cash has no mortgage default risk, so interest rate risk and property value fluctuations are less of a concern. There is no mortgage to default, whereas a speculative program that uses a high level of leverage and is probably aiming for spectacular returns, is much more likely to default if there is, say, a commercial credit freeze such as we are experiencing right now. Low debt is also usually associated with competitive monthly or quarterly distribution payments with limited appreciation potential. High debt is also usually associated with little or no periodic distributions, but high appreciation potential.

Those are the extremes. There are many levels of risk in between and it takes some effort to gauge the level of risk you are taking. What is somewhat helpful is that the alternative investment industry is using some general terms when titling their programs that loosely describe the level of risk for the program. “Core” means no leverage. “Core Plus” means some leverage, with probably an overall loan-to-value ratio of 25% to 50%. “Value Added” or “Growth and Income” means moderate leverage, with probably an overall loan-to-value of 40% to 60%. ”Opportunity” means they are probably on the high side with 55% to 75% overall loan-to-value.

In general, REITs usually have a Share Repurchase Program which typically states that they will buy back your shares at a reasonable discount to the purchase price in the first two or three years, and then at either 100% or the appraised REIT value thereafter. However, they are limited to redeeming 5% of the REIT per year and can stop redemptions at any time if it’s in the best interest of other shareholders. A “public” REIT is also one of the easiest alternative investments for which to qualify. You will typically need to have either a net worth of $250,000, or a net worth of $70,000 combined with an income of $70,000. It differs, though, REIT by REIT, and state by state.

Investing in real estate entails certain risks, including, but not limited to, changes in the economy, supply and demand, laws, tenant turnover, and interest rates. Some real estate investments offer limited liquidity options. There is no assurance that the investment objectives of any program will be met. REITs are not right for all investors. Be sure to consult your advisor regarding your specific situation.

For more information regarding risks, fees and expense, you can obtain a copy of a prospectus relating to the offering  from your financial professional. Read it carefully before investing.”

To sum it up, alternative investments can be useful in several ways. They can diversify your overall portfolio, provide some tax advantages, and provide strong cash flow and/or appreciation. On the minus side, your liquidity is very limited until the program goes full cycle and returns your principal along with whatever gain or loss it generated. As with all investments, the return of your principal is not guaranteed.

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