July roughs up local company index

The Scout Partners Index of Western Colorado Stocks fell in July, losing 3.9% versus a 2.9% monthly decline for the widely followed S&P 500 stock index (total return including dividends). The 25 stock index focuses on large companies whose operations have a significant impact in Western Colorado. It includes major Mesa County employers such as Wal-Mart, Halliburton, Kroger (City Markets), Exxon Mobil, StarTek, CRH (United Companies), and the Union Pacific Railroad.

Leading the index higher, rising 4.3% in the month, Halliburton Co. (HAL) ended the month at $35.96. The company announced strong profits, with operating earnings growing 28% and reported earnings almost tripling over year-ago levels due to one-time gains reported as a consequence of the sale of its KBR unit.

“Oil prices continued higher throughout the month,” said Doug May, President of Scout Partners, LLC, “which encourages drilling activity, which is benefiting many companies in the energy sector. After announcing strong earnings, the Jeffries analyst raised his target price and had positive things to say about Halliburton's presence in the Eastern Hemisphere and Latin American operations.” Halliburton is up nearly 16% since the beginning of the year.

Arch Coal (ACI) was again the worst performer in the index, falling -14.1% in July after an equally dismal -13.8% decline during the month of June. The stock, which was up almost 40% at the end of May, has given up all those gains and now sits $0.13 below where it began the year.

“Utility companies have been stockpiling coal, so on the 23rd of July the company acknowledged that production levels would come down and pricing is still soft,” May said. “They cut the earnings guidance to $1.00 to $1.30 for the year, which is well below the Street consensus of $1.53 per share.”

Scout Partners equal weighted Index of Western Colorado Stocks is comprised of 25 stocks that hope to reflect, to some degree, business conditions in Western Colorado. Reflecting the local economy, the index has a large (over 30%) concentration in the energy sector, which tends to drive index performance. The next largest sector concentration is in industrial stocks, which comprise over 20% of the portfolio. Local stocks are up 6.1% for the year while the overall market has returned +3.9% over the same time period.

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.

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Retirement Calculations

Are you paying active management fees to invest in a bunch of index funds? Why does that make sense for anyone except your financial advisor, who is spared the burden of having to do something to earn his keep?

In some (rare) cases, maybe your financial advisor is actually helping you develop and monitor a financial plan for your retirement years. I mean, a real plan. One with financial projections to help you see whether you've saved enough money to retire in the way you've imagined. A plan that examines any estate tax liability with options in place that prevent you from paying anymore to the tax man than is necessary. You know, a real working document that makes it clear how much you need to be saving so that you've truly saved "enough."

Your advisor isn't doing that? I didn't think so. Most don't. It is a lot of work, which tends to get in the way of the advisor's true calling - which is to lower their golf handicap as much as possible, which takes a lot of practice. Real work, the kind that benefits clients, kind of gets in the way.

So some folks might want to go online and try out a "retirement calculator" to do what their advisor should be doing for them, but can't or won't because his swing developed a hook that is just ruining his long game, and the only way to get rid of it is practice, practice, practice.

In fact, CBSMarketWatch just reviewed several calculators in a recent article titled Retirement by the numbers.

Online calculators can help you get a sense of whether you've saved enough money to live the life to which you would like to become accustomed after you hang up your canary and say good-bye to your friends in the coal mine. These calculators can only provide a general answer, but that's true of the most sophisticated planning programs available on the market. They all need to be used with a giant sense of skepticism. Though they calculate answers to the penny and draw charts and illustrations that extend out until the investor reaches the ripe old age of 119, in reality the investment markets rarely perform as expected, on cue, and the assumptions that go into a plan are usually quite different than the reality that one experiences as the plan unfolds and real life takes root. How many planning programs took the technology crash into account? (Answer: none. It's the planners job to try to avoid "garbage in / garbage out.")

On the other hand, unless you've got a sixth sense that gives you an innate sense of the time value of money and the ability to discount cash flows to net present value over a 30-year time span, remembering to factor in Social Security income, a calculator is the only way to get your arms around the question.

Will I have enough to live on in retirement? Can I afford to retire at all, or will I be singing with the canaries down in the shaft until the day I finally bite the dust and go to meet my maker?

And when you do finally cash in your chips and pass on to that big worldwide web in the sky, you might want to ask the big guy why we can't know more precisely just how long we need to plan for when we're using these retirement calculators. It would certainly make the job a lot easier.

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.

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Comparing Long-term Care Policies

One of the best things about the investment business is that you get paid to read. A lot. A recent Investment Advisor article included some very helpful comments about how to compare long-term care policies.

One important difference between policies are the "benefit triggers" that enable the policyholder to begin collecting benefits. Better policies will cover cognitive impairment such as Alzheimer's, senility, irreversible dementia and mental dysfunction caused by stroke.

Benefit periods also differ between policies. Be certain the policy covers at least 3-5 years, the length of a typical nursing home stay.

The elimination period is the period of time before benefits can begin to be paid. Are the policies you're comparing comparable, with each having 30, 60, or 90 days? Longer elimination periods reduce premium costs, but comparing two policies with different periods is difficult.

Look for a "guaranteed renewable" clause as well as inflation protection, and for policies that cover all levels of care, both skilled and non-skilled. Finally, compare the financial stability of the company offering the policy.

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.

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Money Market Funds

Back in the days when mutual fund companies used to focus on ways to help consumers - before the marketing guys took over and start pushing bad product out the door - money market funds were, at one time, an innovative product that enabled investors to get higher yields than were available on bank savings products. In the early 1970's, when the Federal Reserve was still in the habit of regulating interest rates - capping what banks could pay depositers - the money market mutual funds allowed investors an entry into the commercial paper marketplace, where corporate and financial borrowers were paying much higher rates of interest on short-term paper. By bundling savers' moneys together into a mutual fund, the mutual fund companies made it possible for investors to benefit from those higher yields.

These days, however, the mutual fund companies are replacing innovation with exploitation. The major financial services companies switch customers into new accounts with ongoing fees, regardless of activity, and then hope that these customers just let their money sit so the "financial advisor" can enjoy the best of both worlds, recurring fees with no actual work to do for the client. The financial services companies call this "annuitizing the book of business" because it turns a client into a constant fee source, though I can think of other names that better describe what the client is getting.

In recent years, several large brokerage firms have taken exploitation a step further. Noting that many brokerage accounts sit uninvested in anything except money market funds, brokerages like Charles Schwab, Citigroup (Smith Barney), Wachovia, and more recently Wells Fargo, have realized that they can do a lot more than merely scrape a 1/2% annual fee off money sitting in a money market fund. Now they are starting to automatically sweep uninvested cash into deposit accounts with their bank affiliated subsidiaries.

Investors, instead of receiving a fair market interest rate (currently 4.5% to 5.0% in a taxable account) receive only a fraction of that amount. Many investors will receive less than 2% on the money, while the bank subsidiary has the opportunity to turn around and lend that money out at a "prime" rate of interest (above 8% at the moment). You can see why the bank subsidiaries are salivating at the chance to earn 6% on the spread, instead of a 1/2% fee for managing the money market fund. What is less clear, of course, is why investors shouldn't be hopping mad at their broker once again giving them the short end of a conflict of interest.

There is already at least one class action suit levied on behalf of investors for this practice. But it is no wonder that investors place do not trust their brokers. Given practices like this, the brokers do not deserve their trust!

Schwab used to be a very customer-centric firm. It is really a shame to see them adopt this practice. I expect it from the wirehouse and bank firms. But really, Mr. Schwab, as long as this is your modus operandi, the housecleaning at Schwab isn't over yet.

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.

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Exxon Mobil added to Index

The Scout Partners Index of Western Colorado Stocks fell in June, losing 1.2% versus a 1.7% monthly decline for the widely followed S&P 500 stock index (total return including dividends). The 25 stock index focuses on large companies whose operations have a significant impact in Western Colorado. It includes major Mesa County employers such as Wal-Mart, Halliburton, Kroger (City Markets), StarTek, CRH (United Companies), and the Union Pacific Railroad. During the month, Exxon Mobil (XOM) was added to the index to replace Kinder Morgan following a management led buyout which took the company private and resulted in it being de-listed from the stock exchange.

Leading the index higher, rising 12.3% in the month, Airgas (ARG) ended the month at $47.90. The company pre-announced stronger than expected same store sales and raised its earnings estimates. “Management says that expected earnings from operations should be in the range of $0.61 to $0.63,” said Doug May, President of Scout Partners, LLC, “which is about 17% higher than the old estimates and the Street earnings estimates for the company. The next day, all the analysts raised their estimates and a couple of them raised their target price as well.” Airgas is up more than 18% since the beginning of the year. Arch Coal (ACI) was the worst performer in the index, falling -13.8% during the month of June, though the stock had spiked higher in May and is still +16.2% since the beginning of the year. “Utility companies have been stockpiling coal, so there are some concerns about the earnings impact of that going forward,” May said. “It also didn’t help that Goldman Sachs downgrade Arch Coal to a sell on June 18th. Wall Street almost never issues a ‘sell’ rating, so Goldman’s call really caught investors’ attention.”

The addition of Exxon Mobil helps maintain the index’s heavy weighting toward industrial material sector stocks, which now represent 21% of the index, which reflects the considerable impact of the energy sector on the local economy. Scout Partners equal weighted Index of Western Colorado Stocks is comprised of 25 stocks that hope to reflect, to some degree, business conditions in Western Colorado. Reflecting the local economy, the index has a large (over 30%) concentration in the energy sector, which tends to drive index performance. The next largest sector concentration is in industrial stocks, which comprise over 20% of the portfolio. Local stocks are up 10.4% for the year while the overall market has returned +7.0% over the same time period.


Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.

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