Archive for December, 2009

A Guest Blogger to Close 2009

Thursday, December 31st, 2009

I never realized how nerve racking it could be when your friend, mentor and boss asks you to keep his blog current while he is on vacation. Combine the fact that I am a neophyte to the blog game with the fact that I am deathly afraid of sullying the good name of Mark’s Investment Blog and it creates the perfect storm for a restless night and morning.

In any case, by way of introduction, my name is John Clausen and I work for Mark in the Wealth Management Department at BankChampaign. I practiced law for 5 years in Champaign before joining the bank almost 3 years ago (I know…a lawyer and a banker…let the jokes fly). I handle most of the trust administration duties, estate probate and financial planning at the bank while helping Mark as much as possible in the investment management area. As such, while my periodic posts are sure to be void of the sexy graphs, technical charts and market scuttlebutt to which you have become accustomed, my hope is that you can glean some useful information from my periodic posts.

Below you will find an short article that I originally pieced together for the Active Senior, which was then reproduced for the most recent issue of the The Neil St. Journal, the bank’s quarterly newsletter.

First thing is first though. If, like me, you have no hope of ever visiting some of the places Mark travels to and you travel vicariously through him, he is safely in Transylvania (the highlighted portion in the map of Romania below), which he said was beautiful. I asked him all of the important questions regarding Romania and, for those interested, the Romanian national beer, Ursus, is not palatable. I am sure he and his friends will find other sustenance.

Transylvania

Happy New Year to you all! Be safe and have fun tonight! I tip my cup to a joyous and prosperous 2010 for all of you. This first post was designed to be introductory in nature and to see if I could actually work this blog machine. If this post turns out acceptable, I may try and find a juicier topic and post again early next week. Alternatively, if I mangle this first attempt, Mark will be back mid-week to restore the status quo, my hand will be smacked with a ruler and my blogging privileges may forever be taken away.

UNDERSTANDING THE ADVANTAGES OF A TRUST:
ISSUES IN SELECTING A TRUSTEE

Many individuals create a Trust to take advantage of the management expertise of the potential Trustee, so it’s important that the Trustee’s qualifications match what is expected.

The role of a Trustee is fiduciary in nature, meaning that the Trustee must act at all times only for the exclusive benefit of all Trust beneficiaries. If he or she does not, personal liability may result. The responsibilities of a Trustee include: (1) compliance with legal issues, (2) properly investing trust assets, (3) decision making (specifically in making distributions of income and principal in light of the needs of the beneficiaries) and (4) accounting and record-keeping duties.

Some of the qualities to look for in selecting a Trustee include: (1) personality traits like integrity, honesty, confidentiality; (2) the requisite knowledge base and experience necessary to be an effective manager and custodian; (3) time availability to properly handle the various issues and complexities of a trust; (4) administrative capabilities for record-keeping responsibilities; and (5) costs and fees charged to the Trust.

Given the various fiduciary responsibilities, a common question centers on who can best serve in the role of Trustee. Many times, first thoughts turn to family members, who are familiar with the Grantor, his or her intentions and the issues affecting the family. Relatives are also frequently willing to serve at little or no cost.

All of these advantages are often overshadowed by the pitfalls of a family member acting in a fiduciary role. The family member may lack the requisite expertise to serve in such a capacity. If the Trustee reaches out to organizations who do have expertise (particularly in investing and accounting), the cost savings from selecting the family Trustee may be negated. The family member may lack impartiality, especially when confronted with making discretionary decisions regarding distributions to family members who may be exerting pressure on the Trustee. If the family member Trustee is also a beneficiary, this can also exacerbate problems.

Selection of a Professional Trustee, such as a bank or trust company, may help alleviate some of these issues. Professional Trustees are impartial and are well versed in Trust administration, investment management and taxation. As such, the costs incurred are often worth it to the Grantor and the Beneficiaries.

2010 Forecast Preview

Sunday, December 27th, 2009

As we head into 2010, we are preparing to send out our Investment Strategies newsletter to clients and friends on our mailing list. I wanted to give you a preview of what we are calling our Most Likely Scenario for 2010. For those of you that don’t think you are on the mailing list, please email Melodie Davis and ask her to add you to it – just be sure to give her your physical mailing address and not your email.

You can reach Melodie at davis@bankchampaign.com

In the newsletter, I give you a lot of background analysis as to why I believe that 2010 will be better than I had expected before the analysis – which is why I thought we should end the year with a silly but upbeat 70’s pop hit.

Happy New Year!

2010 Most Likely Scenario

>We begin to see a gradual increase in interest rate and ending of quantitative easing by the Fed based upon the beginnings of the economic recovery

>Most investments will have a good year – stocks, corporate & high yield debt, and commodities – but returns are much less than 2009

>Yields increase across the curve as expectations for economic recovery grow, so government debt will likely not have a good year

>The dollar rallies initially as yields increase, but resumes its downtrend as our debt and deficit increases continue

>Housing will continue to slowly improve, but overhang from defaulted mortgages will be added to supply, keeping prices down and supply greater than demand

>We will have another jobless recovery, with a return to below normal economic growth and above average unemployment

China Weighs in on USA’s Debt Problem and the Dollar

Sunday, December 20th, 2009

This story from the Shanghai Daily news provides some insight into China’s desire to continue to fund our spending. Scary implications…

Published on ShanghaiDaily.com


Harder to buy US Treasuries

Created: 2009-12-18 0:13:35
Author:Zhou Xin and Jason Subler

IT is getting harder for governments to buy United States Treasuries because the US’s shrinking current-account gap is reducing supply of dollars overseas, a Chinese central bank official said yesterday.

The comments by Zhu Min, deputy governor of the People’s Bank of China, referred to the overall situation globally, not specifically to China, the biggest foreign holder of US government bonds.

Chinese officials generally are very careful about commenting on the dollar and Treasuries, given that so much of its US$2.3 trillion reserves are tied to their value, and markets always watch any such comments closely for signs of any shift in how it manages its assets.

China’s State Administration of Foreign Exchange reaffirmed this month that the dollar stands secure as the anchor of the currency reserves it manages, even as the country seeks to diversify its investments.

In a discussion on the global role of the dollar, Zhu told an academic audience that it was inevitable that the dollar would continue to fall in value because Washington continued to issue more Treasuries to finance its deficit spending.

He then addressed where demand for that debt would come from.

“The United States cannot force foreign governments to increase their holdings of Treasuries,” Zhu said, according to an audio recording of his remarks. “Double the holdings? It is definitely impossible.”

“The US current account deficit is falling as residents’ savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world,” he added. “The world does not have so much money to buy more US Treasuries.”

China continues to see its foreign exchange reserves grow, albeit at a slower pace than in past years, due to a large trade surplus and inflows of foreign investment. They stood at US$2.3 trillion at the end of September.

It’s Just a Touch of Grey

Wednesday, December 16th, 2009

This is for my friend Wendy who requested that we include The Dead somehow in a blog post – Cheers Wendy! :)

Well, today was one of those days. I had a customer in my office who’s been with me a number of years and they commented that they noticed that over the last year my hair had gotten noticeably greyer. As I look back over the past year, I’d say that I’ve earned every one of those grey hairs.

We survived the stock market crash, the oil market crash, the corporate bond market crash, the housing crash, the banking industry implosion (a step beyond a crash), and panic around the globe’s financial markets.

I have been working on my Forecast for 2010 that will be presented tomorrow to our Investment Committee and our Board, then to our clients with their year-end statements in the Investment Commentary section of their report. I might even see if our IT folks can make it a downloadable file on our website – that would save me from emailing it to those that read this blog but are not yet clients – one more thing for the to-do list :)

What surprised me is that the conclusions I’ve drawn are so much better than would have imagined going into the process. Don’t get me wrong, I do not believe that we will see the sort of economic growth we have been used to. The chickens have come home to roost, so to speak – all of our years of reckless economic policy (and misplaced consumer financial priorities), the exploding national debt, and the deficits the size of which people cannot comprehend guarantee that growth will be curtailed and taxes will have to go up.

But, our future is not as bleak as many would have you believe. You can use France and Germany during the 90’s and 00’s as models on what we will look like economically, then you can add a measure of improvement to the mix since our demographics are far superior to those in Europe.

The economies in Western Europe are slow growth mature economies with high unemployment, high taxes to pay for a social safety net the population desires, and a reduced emphasis on military activity. This is the scenario that the USA has chosen – it’s not an inherently evil or socialist scenario as many of my friends view it. It is simply the next stage in a maturing democracy.

Unfortunately, this stage exacerbates the dichotomy between the rich and the middle class – it moves more people into the lower middle class socioeconomically and increases the reliance on the social safety net.

Yet, the rich continue to increase their wealth and their share of the national treasure and the barriers to entry to their special club are reinforced by higher income taxes to pay for the social safety net. Here is the key concept that most politicians and the rich don’t want you to know: the rich – and that includes many, many politicians – have already accumulated their wealth. An income tax increase is an immaterial burden on them as they receive a slightly lower net-return on that accumulated wealth.

The real financial burden is on the middle class whose biggest asset is their income stream – and the increased taxes will be one of the things that moves some people downward in their relative position within the middle class and expands the chasm between the middle class and the rich.

Western Europe realized that they could only raise income taxes up to a point before the work disincentives were such a negative to society as to be disruptive to the tenure of the political class. So, they adopted a 15% national sales tax called the VAT (Value Added Tax). My best guess is that we will have our own VAT in a few years, once our national debt gets to the point that we can’t reasonably service it from our income tax revenue stream. Sadly, this impacts the poor more than either the middle class or the rich, but we will likely follow the European model as it has proven to work.

So, I hope this didn’t add to your own greying, but the good news is that economically, coming years will be better than they could have been given the depth of our problems a year ago. The measures adopted by Ben Bernanke and Hank Paulson in the chaotic days of the crisis and continued by Bernanke and Tim Geithner this year have kept us from The Great Depression, Part Deux. And that is definitely a better scenario than we were facing a year ago.

Remember, every silver lining has a touch of grey.

Mark

Oil Prices Retreat From Resistance

Tuesday, December 15th, 2009

sc3

I was poking around some of the technical charts for the oil market and saw this pattern that I thought was interesting.

On this chart, I’ve drawn the retracement lines from the 2008 high to the low. The move up from the low has clearly stalled at the 38.2% retracement level and moved down. This is pretty classic action based upon Fibonacci analysis and oddly represents the psychological state of investors relative to the sentiment in the oil market.

Long time readers of this blog have seen the explanation of Fibonacci analysis, but for those that are new or that would like a refresher, you can follow this link (and check out a video from the 60’s by the First Edition – you might need to copy and paste the link into your browser):

http://investmentblog.bankchampaign.com/2009/11/march-to-the-50-retracement-continues/

Much of the recent downward pressure on oil has to do with the counter-trend rally in the dollar. This catalyst was enough to move sentiment into a more negative position and oil prices followed suit. The longer it takes to break through a resistance level, the more likely a move will be turned back. That is what happened with oil prices here – remember, technical analysis is simply a way to visually see the sentiment in the market, and in our case investor enthusiasm waned and was vulnerable to the move in the dollar.

I read earlier today that this is the anniversary of the death of Chief Sitting Bull, which put me in the mood for some music (but what doesn’t). Does anybody but me remember this group? Its strange how random events bring back snippets of musical memory, and you can then find them on the internet – maybe its here to stay.

Mark

The Dollar Is Telling Us Something

Monday, December 14th, 2009

sc-11

Look at this chart and you can see that the dollar is about to move up through the 89 day moving average. This recent move came from nowhere, and it it breaks through this average, we could see a move higher that will continue to push down commodities, gold, and oil.

The move started with the much better than expected unemployment report, and the fact that investors are anticipating the Fed will raise interest rates sooner rather than later given the prospects for better employment numbers. The move then picked up steam as the Dubai debt crisis hit and there was a flight to quality move into the dollar.

The real question is whether it is sustainable. More and more institutional investors are repositioning their portfolios for a strong dollar. But, in doing so, they are buying into the theory that the economy is fully on the mend and that we will be seeing strong growth ahead.

I’m just not there yet. There are still some strong headwinds ahead of us that could derail this fledgling recovery. We may have acceptable GDP growth numbers for the 4th quarter, but it just doesn’t seem logical that those numbers can continue if the Fed does as they say are planning to do with regard to removing the monetary stimulus.

I can come up with a paranoid scenario for the rise of the dollar based upon Abu Dhabi’s need to pump significant amounts of oil to cover the financial problems with Dubai’s commercial real estate. This would give us a window of about six months of increasing dollar strength as they deal with the debt issues there. However, there is no evidence of that at this point, just speculation.

At this point, until we move through the 89-day moving average I am going to continue with the thesis that this is just a counter-trend rally. You can see that we tested the trendline and fell back with a lower dollar today. We are sticking with our plan that has worked so well so far – keep our equity positions in tact but keep stop losses in place to protect against the downside.

Right now, our stops are concentrated in energy, financials, and industrials – the early cycle stocks that have performed so well so far. We will likely add stops for other cyclicals, commodities, and emerging market positions – all of which will move down if the dollar makes a sustained move higher.

Mark

Bonds Feel Hurricane of Rising Yields

Sunday, December 13th, 2009

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This week’s bond auction did not go well. Yes, all the bonds were sold, but the yields were at much higher levels than the government had hoped and the bond market had anticipated.

It seems that our nation’s lenders are beginning to demand higher returns on their money based upon expectations for our economy. Investors are vacillating between the arguments in favor of a deflationary future and an inflationary future. You can see that from August to October, the deflation camp was winning. Now, the inflation camp is winning.

In this match between deflation and inflation, who will win? That is the prime question the bond market is struggling with: right now, this is the story of the hurricane of inflation expectations – but that could change as we work our way through our economic issues.

Mark

That Didn’t Take Long

Thursday, December 10th, 2009

oil-descending-wedge-2009-12-081

A couple of days ago, I noted how the price of oil had formed a flag (often termed a Bull Flag), consolidating the big move up in price since September and that 79% of the time price breaks out of the channel forming the flag in an upward direction.

This is one of those 21% of he times where it broke in a downward direction. We have had some of our stop losses activate because of this move, which is fine as it allows us to get a bit less cyclical in the portfolios we manage.

More on all this later, but I wanted to give you a quick heads-up on this emerging issue.

Mark