This Recovery Means Business

In a normal cyclical recovery, consumers soon tire of being cautious, saving money, and eventually “pent-up demand” results in a burst of new consumer spending which signals the start of a new expansionary phase of economic growth. Businesses, waiting for and responding to the increase in consumer spending, soon joins in the recovery and eventually hiring picks up as well. One of the many ways that this cycle is different is that consumers, which comprise about 2/3 of economic spending, are de-leveraging their balance sheets, cutting back on spending in order to pay back loans, rather than tapping their borrowing capabilities in order to buy more stuff. If measured strictly by consumer spending, I think most economists would agree that we’re still in a Recession.

Business spending, however, seems to be recovering. Business balance sheets are fairly healthy. The excess inventory problems have been resolved – at least for now. Global expansion is enabling manufacturing sales growth. Low interest rates and cutbacks on labor expense are keeping costs in line. The economic recovery, this time around, means a recovery for business, while consumers languish.

It probably can’t last for long. That may explain why this recovery is so unnerving, and doesn’t feel like a real recovery. A business-led expansion, though, explains why this recovery is being led by such an unusual cast of characters in our portfolio.

One aspect of a business recovery that we have long anticipated is that business debt will generally be repaid. Whereas 18 months ago, high yield bonds were being priced as if that vast majority of corporate America would default on its obligations, today’s resurging profitability and cash on the balance sheet means that default rates will remain under control. Since the 2008-2009 market panic subsided, junk bond returns have left even most stock sectors in the dust. The May-Investments portfolio still has nearly 30 percent invested in junk bonds and real estate income investments, and looking backwards they remain among the highest returning asset classes in our asset universe.

Businesses buy a lot of technology gear and electricity, which helps explain why we own 20 percent in hardware/software companies and our 10 percent position in utility companies (which have benefitted from falling interest rates as well).

The remaining 40 percent of the portfolio is invested in healthcare, where profits remain strong and valuations reasonable, or in Asia and gold that benefit from global growth and uncertainty surrounding the value of the U.S. dollar. The healthcare investments, however, are struggling to retain their place in the portfolio.

How far a business-led recovery can take us remains to be seen. If this market insists on rallying, we want to take advantage of those sectors that benefit most from this unique cycle. It might be an industrial up-cycle in the midst of a continuing secular bear market, yet still be able to generate some short-term profits for investors in spite of our long-term skittishness. But possibly (hopefully) an industrial sector recovery could be enough to jump start consumer spending, which would allow a full economic recovery to follow.

This recovery means business. As long as it does, our portfolios will tilt heavily in that direction.
 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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Upcoming events: Retirement-planning software and Roth conversion workshop

A “Retire Right” study showed that the most important prerequisite for a successful retirement is having a plan to help you through this season of life. As the old saying goes, those who fail to plan – plan to fail. May-Investments uses a goal-based software tool to help us address clients’ planning needs, but a thorough planning effort reaches well beyond just number-crunching.

eMag readers who attend our Sept. 28 workshop will learn how our retirement-planning software helps people answer the important question: “Do I have enough?” We also will provide attendees with free access to our planning software. For those interested in preparing for their own retirement-planning effort, the software is easy enough to use without any assistance from us.

Join us for our planning workshop to see how useful this software can be, then let us know if you’d like us to sign you up for your own free access.

On Oct. 12, Barbara Traylor Smith will present a Roth Conversion Seminar that will help people consider how converting a regular IRA to a Roth IRA might help them meet their goals. Attendees will look at a Roth calculator to learn if it can help them with their decision. In addition to the tutorial, the workshop will focus on key reasons why someone might consider this option and who might be the most likely candidates to benefit from conversion.

Our last Roth seminar in August was very technical and focused on how the Roth conversion can help investors avoid a new surtax on high-income earners. The upcoming October seminar is more general, easier to follow, and applies to a wider range of investors. We asked attendees to “strap in” for the August presentation, which was geared to CPA continuing-education classes. For October’s workshop, we’ve converted the information to a format that is much easier to digest, and it will apply to a broader set of concerns.

On Oct. 26, we will host a Legacy Planning Seminar and hope to draw on Western Colorado Community Foundation resources to help us take a look at how to leave behind much more than just a pile of money. If you are interested, save the Oct. 26 date on your calendar.

To register for any of these educational workshops, please call Barbara at 970-256-1748 or email Lisa@GJstocks.com. Our workshops start at noon and are limited to about 10 people. We provide sandwiches and ask only that you bring your questions!

If you like what you’re reading, ask a friend to subscribe!

The May-Investments team would like to welcome new readers of our eMag – and our existing friends and clients as well. We hope you enjoy the eMag’s new look and expanded content, and you are invited to ask other people to subscribe who might be interested in financial planning for retirement or other topics we’re covering.

Here’s an incentive to forward the eMag to someone else and ask them to subscribe. Previously, May-Investments pledged to contribute $5 to the Western Colorado Community Foundation for every new eMag subscriber who signs up by Nov. 15, 2010. Now, we’re sweetening the deal: If we get at least 100 new subscribers by Nov. 15, 2010, we’ll give $15 to the foundation for each new subscriber. That’s a great deal for every new subscriber, who will receive valuable and interesting information every month for free, and it’s a great deal for the Western Colorado Community Foundation, an organization that builds and manages charitable endowment funds to benefit a variety of community organizations in the region.

To subscribe, visit http://www.fund-scout.com and fill out a brief form. You will receive a confirmation email in your inbox. Reply to the confirmation email, and your subscription will be complete. It only takes a moment, and the subscription is free. We look forward to hearing from new subscribers!

Western Colorado Community Foundation manages scholarship funds

Ninety-seven students are pursuing their dreams of attending college this fall thanks to donors who have established 15 scholarship funds at the Western Colorado Community Foundation.

During the course of their education, these students will receive more than $1.4 million from funds managed by the Community Foundation, says Cindy Rhodes, the foundation’s program director for scholarships and grants.

May-Investments is a Circle of Friends investor in the Community Foundation, which promotes charitable giving, manages charitable endowment funds, and provides grants, scholarships and resources that benefit residents and communities in Western Colorado. For each new subscriber to May-Investments’ eMag through Nov. 15, 2010, the firm will contribute $5 to the foundation (or $15 per subscriber if we receive at least 100 new subscriptions by Nov. 15). To subscribe to the free eMag, visit http://www.fund-scout.com and look for the sign-up box. If you already subscribe, urge friends and family members to do so.

Community Foundation donors who set up scholarship funds typically are individuals who place a high value on education and appreciate how much difference a scholarship can make to a student. Donors can tailor the scholarship to match their interests and wishes, and they can choose the name of the fund, typically honoring or memorializing one or more people who are important to them, Rhodes says.

Current scholarships support graduates of specific high schools, including Coal Ridge, Rifle and Grand Valley high schools in western Garfield County, Fruita Monument High School in Mesa County, and high schools in Delta and Eagle counties. Other funds support students attending specific Western Slope colleges, including Colorado Northwestern Community College and Mesa State College. Still others support students who are majoring in specific areas of study, such as health care, criminal justice, and business. One fund was set up specifically to provide scholarship assistance to non-traditional students.

Rhodes says donors can fund scholarships in a variety of ways. Some fund scholarships on a year-to-year basis, while others provide lump-sum endowments or life-insurance proceeds to be managed by the Community Foundation.

To explore the possibility of establishing a scholarship fund, contact Anne Wenzel at 970-243-6787 or awenzel@wc-cf.org. Information about scholarships is also available on the Western Colorado Community Foundation website, http://www.wc-cf.org.

Business counselors help Incubator Center clients succeed

After decades of success in business and finance, Bob Hanson and Roger Martin are passing along the lessons they learned to the newest generation of Western Colorado entrepreneurs.

Hanson and Martin are volunteer counselors at the Business Incubator Center in Grand Junction, providing guidance and advice to fledgling businesses. The Incubator Center works with about a thousand “hopeful entrepreneurs” each year, says Julie Morey, director of the Grand Junction Small Business Development Center, and the four volunteer counselors on staff are an important resource.

“We would not be able to handle that volume without our volunteer counselors,” Morey says.

As much as the counselors’ work benefits the Incubator Center and its clients, those efforts also reward the counselors with a strong sense of satisfaction.

“If you can help somebody – and really help them – you get a lot of satisfaction,” says Hanson, former owner of Hanson Equipment in Grand Junction. Hanson has been a volunteer at the Incubator Center for about 10 years and counsels prospective businesses about twice a week.

A banking veteran of more than 30 years of service, Martin worked in commercial lending for U.S. Bank in Grand Junction and the Bank of Grand Junction. During that time, he worked with countless small businesses and became familiar with the issues they faced.

“It was a very good experience to work for small (financial) institutions, and you could talk to your customer face-to-face and make decisions locally,” Martin says.

Small-business counselors at the Incubator Center hear a wide variety of ideas from potential entrepreneurs. Counselors such as Hanson and Martin sit down with their clients and help them sort out the issues and roadblocks they might face in making their business desires become reality.

Martin says many prospective businesspeople bring strong technical knowledge to the table, but they don’t have the legal or financial expertise to properly start and operate a business. That’s where the counselors can provide advice and suggest resources to help them put their plan together.

“If they’re really serious, we ask them to do a business plan,” Martin says. “Some of the people are a little lazy, and they don’t want to do that.”

“We can tell almost every time after talking to these people for an hour whether they’re going to make it,” Martin says.

For those entrepreneurs who appear serious about their ideas, counselors help keep them on track for a successful business launch.

“I always try to be positive and point them in a direction,” Hanson says. He often refers clients to the Incubator Center’s Leading Edge program, an intensive 12-session course that trains business owners how to plan all aspects of their operation, from finance to personnel to marketing.

“Somebody going through that program has a better chance of success,” Hanson says.

“It’s the satisfaction we get from helping somebody. One of our main jobs is to encourage them,” Martin says. “There’s nothing more fulfilling than seeing prospective business owners with their ducks in a row.”

Sometimes, Hanson says, a client will do all the footwork to assemble revenue and expense projections, only to find the business idea isn’t viable. It can be a difficult realization, but helping someone see that the “big picture” isn’t as rosy as it first seemed can save them from sinking time and money into an ill-fated venture.

Morey says the Incubator Center is always looking for new volunteer business counselors. Applicants are asked to submit a resume, and if they are accepted, they are asked to become “certified business counselors” through Colorado Small Business Development Centers.

Volunteers are sought from the ranks of business owners and professionals in the community who have worked in fields where entrepreneurs need help, such as accounting, finance, banking, marketing, production operations, and legal.

For information about the business counseling program, visit the Incubator Center’s website at http://www.gjincubator.org/businessdevelopment/counselors.php or call 970-243-5242.

Couple pioneers trend in upscale camping

When part-time Aspen residents Shelley and John Bogaert bought a rustic 80-acre camp on San Juan Island, Wash., they didn’t think they would be among the pioneers of the latest trend in outdoor recreation.

But five years later, Lakedale Resort at Three Lakes (http://www.lakedale.com/) is a poster child for “glamorous camping,” a concept which the recreation industry and popular media have shortened into the memorable word “glamping.” The resort has been featured on websites such as Sunset.com and HipTravelMama.com.

“It started as an investment. It became an obsession,” Shelley says. “It’s been a labor of love. We’ve pretty much redone the place since we bought it.”

Glamorous camping means campers don’t have to contend with many of the hardships of pitching a tent, rolling out the sleeping bags on thin foam mattresses, and wondering whether the tent will leak if rain falls during the night. Instead, “glamping” means staying in a sturdy structure, sleeping on a bed, and not having to worry about getting too much dirt under your fingernails.

“It’s really for people who love the camping experience but for whom the idea of pitching a tent and sleeping on an air mattress isn’t that appealing,” Shelley says.

When the Bogaerts bought the property – half of which is lakes – it had a 10-room lodge, six cabins, a lakehouse, and a 120-site campground. They planned to add some yurts – round, tent-like structures elevated on wooden platforms – but as they discussed their plans with yurt makers, they decided to install four-sided tents like those used in hunting camps.

“It was less expensive to put tents in, plus it would be a lot more fun,” Shelley said.

Lakedale Resort now boasts 13 “upscale canvas cabins” built on durable imitation-wood platforms. Shelley, whose background is in interior design, selected the furnishings and highlights that give a feeling of luxury to the canvas cabins. The cabins feature queen-size beds, wrought-iron accessories, futons, tables, and chairs. Each has an outdoor fire ring, a picnic table, and four Adirondack chairs.

Initially, the Bogaerts thought the canvas cabins would attract families with kids who were looking for an easy way to camp. Indeed, the tents were a hit with families, but a big part of the clientele turned out to be upscale residents of nearby Seattle who wanted to visit San Juan Island and indulge in something less formal than a lodge but a step or two above ordinary camping.

The canvas cabins rent for about $149 per night, which makes them affordable for a wide range of customers. In contrast, a room in the lodge can cost between $200 and $300.

“A lot of (guests) have the money to stay in the lodge, but they like giving their kids the camping experience,” Shelley says.

Lakedale Resort also added some vintage Airstream trailers as a lodging option. The silver metal icons of 1960s-70s trailer camping have proven “very, very popular,” Shelley says. “They’re very retro.”

The resort offers an activity tent, where craft projects and other diversions are available for children and adults. The lakes are stocked with bass and trout each year for fishing, and boating is popular activity. There is no cellphone service, and Internet is not available outside of the main lodge.

“It gets everybody off their devices so they can chat and sit around a campfire,” Shelley says.

The Bogaerts, who are clients of May-Investments and split their time between homes in Aspen and Washington state, hired a management company to operate Lakedale, but Shelley says she and John spend a fair amount of time looking after the property.

“We weren’t supposed to be quite so hands-on, but it’s been a lot of fun,” she says.

"Do Over” Strategy to be Retired?

The growing popularity of a “Do Over” strategy to filing for Social Security benefits may soon be retired by policymakers looking to close loopholes. Retirees who filed for social security benefits soon after they were eligible (e.g. at age 62), could find themselves healthy and happy at the age of full retirement, yet suffering at the hands of banks who refuse to pay savers much of anything for money deposited in the bank. A “Do Over” strategy of paying back prior benefits and then beginning to take much higher monthly social security checks can make a lot of sense, but retirees must act quickly before new rule changes prohibit the maneuver.

Paying back, in a lump sum, the prior years’ social security income in order to benefit from higher future monthly social security checks (for life) is analogous to buying an annuity from the U.S. government. A fixed investment, today, purchases an additional income stream that will last for the rest of your lifetime. That is, after all, what an annuity is – although typically annuities are backed by an insurance company while the “Do Over” social security strategy is backed by the full faith and credit of the U.S. government.

As Barbara Traylor Smith recently reported in her "Money Matters" KREX TV segment, for many people the return from the Social Security “Do Over” is more attractive than what is available from an insurance annuity, and certainly higher than banks are paying Certificate of Deposit holders these days. For retirees who may be seeing bank C.D.’s mature and are wondering how to invest the cash, it makes sense to consider this strategy.

Recently, however, Kiplinger’s Magazine reported that the Social Security Administration is considering changing the rules so that any “Do Over” election would have to be made within a year of the original decision to begin collecting benefits. So if it makes sense, then it probably makes sense to hurry. Use the Social Security calculator to estimate the impact of adopting a “Do Over” strategy to your own situation. 
 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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The Omen

The “Hindenburg Omen” has been making appearances in places as diverse as The Wall Street Journal and the Glenn Beck radio show. The Omen is a statistical indicator that, when triggered, sometimes foretells a stock market meltdown. Though we are not completely sanguine about the market, we wanted to let readers know that it is not the Hindenburg Omen that would have us worried.

The Omen triggered on August 12, when a relatively large number of stocks hit the new high list at the same time that a lot of other stocks were making new lows. This divergence of behavior is said to describe a “confused” market and is thought to foreshadow an upcoming market meltdown. In fact, the Omen did trigger ahead of stock market panics in 2008, 2000, 1987, and 1974. However, the Omen also warned of meltdowns 45 times in the past 50 years. An Omen that triggers roughly once a year is bound to have a pretty good track record of predicting disaster, if you ignore the years when a market meltdown failed to show up.

The point that an unstable tape is often a precursor to a financial panic is a lesson worth remembering, but it is not a particularly reliable indicator in and of itself.

Ned Davis Research issued a report that I used to prepare this note. In it, NDR reports that when the Omen triggered in early August, the types of stocks making up the “new high” list were largely closed-end bond funds and Exchange Traded Funds and other non-operating company issues. We did not really have a situation where half of the normal stocks were going up, while the other half was falling like a rock. In general, the market was weak that day. A rally in the bond market sent these special issues up to new highs, but the general stock market was not, itself, “conflicted.”

Since the Omen triggered, the market has fallen some, before rallying strongly yesterday (September 1). Is the market conflicted? I dunno. Lacking self-esteem? I wouldn’t venture a guess. Feeling “guilty” about how it is treating investors? Definitely not. Is it manic-depressive? To the core. 
 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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