Monday, October 11, 2010

Are We in a Bond Bubble?

Sheila Bair, Chair of the FDIC, worried that we might be in a bond bubble while being interviewed by CNBC’s Becky Quick. Billionaire extraordinaire, Warren Buffett, added fuel to the fire on October 5 while speaking at a Fortune Magazine summit when he said that, “he can’t imagine the rationale for adding bonds to your portfolio at current prices.” Jeremy Siegel may have kicked off the debate on August 18 when he likened the current bond market rally to last decade’s tech bubble.
So, are we in a bond bubble? My short answer is that no, we’re not. But there’s a long answer, too. Sorry.

Over $500 billion has flowed into the bond market during the past three years, an orgy of buying similar to the frenzy that Pets.com exploited to become a famous (infamous?) Super Bowl advertiser on the backs of its IPO stock investors. However, the credit market, broadly defined, is about five times larger than the stock market, so asset prices aren’t moving as much. Moreover, the tech bubble was confined to fewer sectors; the impact on stock prices in those sectors was magnified even more.

The nature of buyers is also quite different. Rather than being fueled by greed, the money rushing into the bond arena is afraid of risk and reaching for yield. In fact, by some measures bond valuations are fairly reasonable – within sight of “normal.” Ten year bond yields historically sell around 3 percent above the level of inflation. With inflation practically non-existent, today’s 2.39% treasury yield actually seems fairly rational. Given this deflationary environment, even if bonds are overpriced a bit, the downside wouldn’t appear to be that bad. Nothing like the tech bubble, where many stocks went to $0 and the NASDAQ index still sells 50 percent below its peak, more than a decade later.

So am I saying investors should buy bonds? Definitely not. I believe that bond investors should keep their maturities short, so that when rates go up they can reinvest at higher yields. For bond owners, one of the worst things that could happen is a return to “normalization.” Fortunately, this possibility is on the radar! For bond holders to come out whole, things need to keep getting worse. That is not what anyone wants!

I am saying that investors need to keep “fear” on a short leash, including fear of a bond bubble. Studies prove that investors systematically exaggerate the probability of unlikely events. I may have fallen prey to that tendency this year. My fears of an interest rate surge and currency crisis caused me to underestimate the current recovery in the business sector. I’m not giving an “all clear” signal, but neither am I forgetting that investors’ “worst case” fears rarely come to pass.

The stock market rally is a positive signal. Hiring has turned up, though not to the degree that it normally would. Large companies have access to cheap bond money and rather than running scared, they are using it to buy back stock and grow by acquiring the undervalued shares of other companies. In fact, the longer things appear to be returning to normal, the more likely that they will return to normal.

Don’t let fears of a bond bubble prevent you from making money in the stock market, while we have a chance. I still expect that we’re in a trading range, rather than a new bull market, but in either case it’s important to make money while things are going up. Profits are hard to come by. As of the end of trading on October 11, our fund model is up +8.6% year-to-date and the individual stock model is up +9.7% YTD. It would take government bond buyers about six years, until 2016, to earn what stock investors have made in the first ten months of 2010.

The broad market has climbed +6.2% during this same time, despite strife in Washington, banks clinging tight to what used to be taxpayer money, and savers suffering from an interest rate experiment that is no less than punitive (even confiscatory) as Washington looks to fund its latest vote-getting schemes.

Imagine what return investors might get if we actually got our act together! 
 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

Leap Frogg LLC plans jump into blood clot prevention

A Grand Junction-based company is developing a product that company officials say could be a major advancement in the prevention of blood clots in the legs, which affect as many as 600,000 patients after surgery.

Leap Frogg LLC has successfully tested its prototype product, a device contained in the sole of a shoe that squeezes the veins in the arch of the foot. The squeezing action pushes blood up through the leg, reducing the possibility of clot formation. Matt Mayer, president and chief executive officer of the company, says the device – called a Frogg – could reduce the cost of blood clot preventative treatments and improve the mobility of patients.

According to research cited by Leap Frogg, blood clots (or “venous thromboemboli”) kill 200,000 to 300,000 people annually in the United States, more than AIDS, breast cancer, and highway accidents combined. Many blood clots occur in the hospital due to post-surgical immobility.

Typically, Mayer says, blood-clot prevention is accomplished in two ways: blood-thinning drugs and air-driven compression devices which squeeze limbs to increase blood flow. He says pharmaceuticals can be expensive, and compression devices require patients to remain tethered to an air compressor and are uncomfortable.

In contrast, Frogg devices don’t require drugs and are small and light enough to let patients move around.

“Our device is self-contained and portable,” Mayer says.

Froggs are thick-soled, lightweight sandals that attach securely to each foot. Each shoe’s sole contains an electronic device that pushes a small platform up into the arch of the foot every 30 seconds, putting pressure on a series of veins called the “plantar venous plexus.” Mayer says this compression forces blood up through the deep veins of the leg, encouraging better circulation and reducing the chance for clots to form.

The idea for Froggs originated with Mayer’s father, Dr. David M. Mayer, M.D., an orthopedic surgeon who has worked in private practice for three decades, served as chairman of Rocky Mountain Orthopaedic Associates in Grand Junction, and also was chief of surgery for St. Mary’s Hospital in Grand Junction. Dr. Mayer is co-founder and chief medical officer of Leap Frogg LLC.

Matt Mayer says his father believed for years that the methods for preventing blood clots needed improvement, and he eventually developed the concept that became Froggs. The company was formed in 2007.

A small, 60-patient trial of the devices was conducted in Grand Junction, and the study found that Froggs significantly improve blood flow in patients’ legs, Mayer says. Results of the initial trial are scheduled for publication in Clinical Orthopaedics and Related Research the first quarter of 2011, he says.

The company plans to conduct a much larger clinical trial at 10 to 15 locations across the United States, and Mayer says the U.S. Food and Drug Administration’s approval of Froggs is expected in six to nine months.

Mayer says the company has spent about $1.5 million on product development and initial testing, and it has embarked on an effort to raise approximately $5 million more in two tranches. The first $2.5 million would fund the completion of product development, undertake a larger clinical trial, and introduce Froggs to the market. The additional $2 million to $3 million would serve as working capital to improve sales capabilities, build inventory, and shift into full production mode.

The market for blood-clot prevention totals about $3 billion but could grow significantly as new guidelines expand the use of preventative treatments to more at-risk patients, Mayer says. Froggs could serve the growing medical demand inexpensively and effectively, especially if final agreement is reached with a “large medical device company” to sell the shoes under the company’s name, he says. He would not disclose the company’s name, but he said it is well-known in the medical industry and would give Froggs considerable market access.

Leap Frogg LLC is headquartered at the Business Incubator Center, 2591 B 3/4 Road in Grand Junction. The company can be reached at 970-245-0124.

MoneyGuidePro directs financial planning for May-Investments clients

Unless you’re a genuine fortune teller – and there aren’t many of those around – you can’t say with absolute certainty that you’re ready to meet financial goals in your life.

Whether you’re planning to buy a car in a few years, send a child to college, or retire early, a solid plan can help you meet your goals. May-Investments offers clients access to one of the most highly regarded financial-planning programs available – MoneyGuidePro. The program might be the closest thing to a financial fortune teller that you’ll find.

MoneyGuidePro takes a comprehensive look at an individual’s financial situation, using personal, financial, and investment data supplied by the individual and a set of calculations based on the information. The program also uses a series of scales to determine the relative importance of several variables in the individual’s profile, such as willingness to save more or delay retirement.

The program uses personal data and preferences to calculate various options, which it presents in a range from “Ideal” to “Acceptable.” For example, based on an individual’s profile and resources, the program might determine that 65 is an “ideal” retirement age, but 67 would be an “acceptable” retirement age. MoneyGuidePro contains a powerful set of tools that let users create various scenarios to determine how making certain changes in their goals or financial strategy might affect their likelihood of reaching their financial goals.

Finally, MoneyGuidePro can produce a customized report outlining the user’s chance of reaching financial goals and suggesting changes that might help the user reach those goals more effectively.

In an analysis of 13 financial-planning software products, independent researcher Aite Group ranked MoneyGuidePro as one of the top products available. According to an article appearing on the Financial Planning website, MoneyGuidePro ranked as the best tool for talking to clients about their goals, and Aite Group liked the program’s ability to establish a range of outcomes for various scenarios.

“We like its goal-oriented approach so we can identify what people need from their finances,” says Doug May, owner and chief investment officer for May-Investments. Once a client’s goals and financial needs are determined, an investment plan can be formulated to meet those goals, May says.

Another advantage of MoneyGuidePro is the fact that it is an online program and can be accessed from any place that has an Internet connection. May says clients and outside advisers can log into MoneyGuidePro at their convenience to update information and create different scenarios.

Concierge helps clients make the most of retirement

Like a concierge at a five-star hotel helps guests with a variety of needs, Lisa Mauser helps clients of May-Investments with various nonfinancial issues they encounter as they move into retirement.

Such assistance can range from helping clients locate and organize important papers to working with them on the nonfinancial aspects of their legacy.

Mauser, the retirement concierge at May-Investments, says an important aspect of nonfinancial planning is to create an inventory of important documents and collect them in one place. She can help clients collect their car titles, mortgage documents, health-care directives, lists of account numbers, and other such documents and put them in one accessible location.

Such a collection of documents can be helpful in a variety of situations, Mauser says. After such documents are collected, they should be reviewed regularly to ensure that they are up-to-date.

Mauser also can help clients collect and organize nontangibles, such as personal stories and photographs that will be important parts of the client’s legacy.

“Most people have done estate planning, but they don’t think about the little stuff or those personal stories,” Mauser says. Some of the most valuable parts of a person’s legacy can be the lifetime of stories, photographs, and mementos they leave behind.

The services of a retirement concierge are unique for a financial planning and investment firm, and they are part of what makes May-Investments a one-stop shop for retirement services.

“Doug (May) envisions more of a team concept – really being able to offer services that are customized to the clients’ needs. That’s something larger organizations aren’t able to do because they’re not as in touch with their clients’ needs,” Mauser says.

To a certain extent, the services that Mauser offers as retirement concierge will depend on what clients ask for. May-Investments aims to help its clients thrive financially and personally in their retirement, and Mauser is here to help clients with a wide variety of nonfinancial needs.

“If there is something clients think I can help them with, they can call and ask,” Mauser says. She can be reached at 970-263-5126 or by email at http://www.blogger.com/lisa@gjstocks.com.

Thinking about a charitable legacy?

Many Americans volunteer in some capacity to help others in their community. Most Americans make financial contributions to charitable organizations each year. For many, being involved in the community and giving to others is what makes one’s life rich.
What about some sort of contribution to benefit your community when you are gone? Come learn about what a charitable legacy is and the kinds of questions and planning you might want to consider as you do your estate planning. A seminar titled “Thinking about a Charitable Legacy” is scheduled from noon to 1 p.m. Tuesday, Oct. 26, in the May-Investments conference room, 244 N. 7th St. in Grand Junction. This seminar will focus more on the “softer side” of legacy planning – how to be thoughtful and strategic with your philanthropy, how to organize your legacy – and some of the tools, techniques, and tax benefits of charitable giving will be covered.

A light lunch will be provided. Please RSVP to Lisa at 263-5126.






Almost everything you ever wanted to know about Election Day 2010

Just in case you haven’t noticed, an election is coming up Nov. 2, 2010.

If you’re a registered voter in Mesa County, you have three options for casting your ballot – mail-in ballot, early voting, or voting on Election Day. Three options, but you can only vote once. This isn’t Chicago.

Mail-in ballot
To vote by mail-in ballot in a general election, you’ll need to fill out an application form supplied by the Elections Division of the Mesa County Clerk and Recorder’s office. Submit the completed application to the Elections Division, and they’ll send you a ballot in the mail. After completing the ballot, you can either mail it back to the elections office (be sure to put it in the mail several days ahead of the election or it might not get there in time to be counted) or drop it off in person before 7 p.m. on Nov. 2.

You can find an application for a mail-in ballot at http://www.sos.state.co.us/pubs/elections/vote/mib_application_eng_clr.pdf

Early voting
However, it’s getting late enough in the election season that if you try to vote by mail-in ballot this year, you might run out of time before all the paperwork is processed. A better option for casting your ballot early is to visit one of Mesa County’s early-voting centers. Beginning Monday, Oct. 18, Mesa County will set up voting machines at five sites throughout the county where you can cast your ballot. Hours at the vote centers are 8 a.m. to 6 p.m. Early voting will be available through Friday, Oct. 29.

For a list of early voting centers in Mesa County, visit http://recorder.mesacounty.us/earlyvotecenters.aspx

Election Day
Finally, if you’re tied to tradition, you can cast your ballot between 7 a.m. and 7 p.m. Tuesday, Nov. 2, at any one of the 21 voting locations set up throughout Mesa County. For a list of the voting locations, visit http://recorder.mesacounty.us/votecenters.aspx

Sample Ballot
Just like when you were back in school, it pays to study before an exam. You can find a sample copy of the Mesa County ballot at http://recorder.mesacounty.us/mcweb/clerk%20and%20recorder/elections/SAMPLEBALLOT2010Web.pdf. The process of voting on Election Day will go more quickly and smoothly if voters decide in advance how they want to cast their ballots on all the candidates and ballot questions.

And there will be plenty of questions on the ballot. The Blue Book, which the state of Colorado publishes before each election, contains thorough summaries of all statewide ballot questions, as well as arguments for and against each one. You can find a link to an online version of the Blue Book at http://www.colorado.gov/cs/Satellite/CGA-LegislativeCouncil/CLC/1200536134742

As a voter, you’ll also be asked whether to retain several judges. The Colorado Office of Judicial Performance Evaluation’s job is to assemble panels of attorneys and others who are familiar with various judges and ask them to evaluate judges’ performance. Those performance reviews are then posted online so voters can read them before Election Day. Links to the reviews of all judges who are standing for retention this year can be found at http://www.coloradojudicialperformance.gov/retentionlist.cfm/year/2010

For more information about this year’s election, visit the Mesa County Elections Department website at http://recorder.mesacounty.us/elections.aspx

Mesa Land Trust to celebrate 30 years of open-space protection

For 30 years, the Mesa Land Trust has worked to protect important agricultural and natural areas in Mesa County.

Today, the trust holds conservation easements on more than 50,000 acres of land, preserving the properties for wildlife, agriculture, and the enjoyment of future generations.

The trust is celebrating three decades of accomplishments with an open house from 5 p.m. to 7 p.m. Friday, Nov. 5, at the trust’s office, 1006 Main St. in Grand Junction. The open house, sponsored by May-Investments, is open to land trust members, conservation landowners, volunteers, trust partners, and friends of the organization. Appetizers and beverages will be served, and those who plan to attend are asked to RSVP to 263-5443 or info@mesalandtrust.org.

Conservation easements protect selected lands for wildlife habitat, open space, or agriculture, and easements also can produce wealth for property owners. Landowners wishing to protect their property from future development can basically give up development and subdivision rights in exchange for federal and state tax benefits, says Ilana Moir, land protection for the trust. Traditional uses such as agriculture can continue on the property, but it can never be subdivided or developed.

“A conservation easement limits development potential on the land, and it goes with the property in perpetuity,” Moir says.

At a time when real estate prices are down and property sales are slow, owners of land that has conservation potential can use conservation easements to monetize their land holdings, Moir says.

The federal government allows property owners to take a tax deduction for the value of conservation easements, and the deduction can be used for five years, Moir says. In addition, Colorado offers a state tax credit for conservation easements. Landowners who have significant income can use the state tax credit to reduce their tax burden, or they can sell their state tax credits to others. The sale of tax credits can generate significant cash for the landowner.  “The tax credits generally have sold at 80 cents on the dollar,” Moir says.

Several brokers operate in Colorado who match landowners wishing to sell conservation easement tax credits with prospective buyers. Landowners also can sell their tax credits directly to another party, Moir says.

After a conservation easement is created, it is held by a land trust. Mesa Land Trust holds more than 130 easements totaling more than 50,000 acres and maintains a fund to defend and administer easements well into the future, Moir says.

Mesa Land Trust is governed by a 17-person board whose members all live in Mesa County. The trust seeks conservation easements on properties that have special characteristics that make them good wildlife habitat, agricultural land, or open space. Properties range from orchards in the Palisade area to large ranches on Glade Park.

“We recognize that development is going to happen, but we believe there are places worth protecting,” Moir says. The conservation easement program lets valuable properties be protected and preserved for future generations while generating financial benefits to today’s landowners.

For more information about Mesa Land Trust, visit http://www.mesalandtrust.org.

Tuesday, October 5, 2010

Struggling Economy Stuck in Neutral

“The May-Investments Leading Economic Indicator was flat in September.  Continued contraction by lending institutions and weakening new order activity in the business sector offset increased drilling activity. The economy remains on the brink, with economic growth too slow to reduce the unemployment problem but not slow enough for economists to conclude that the economy has fallen back into a new recession.

“The monthly indicator increased from 1184 to 1187, which is less than a rounding error.  By next month, revisions to the data points, alone, could reverse that growth. Retail sales, money supply growth, small business confidence, corporate profits, and capacity utilization have all flat-lined.

Retail sales strength remains key. Sales growth started in June of 2009, but in September retail sales started falling again, albeit only modestly. Global export activity may also be slowing.  During the financial panic, sales slacked off but production came to a halt, so inventories were drawn down.  Since then, rebuilding inventories has helped turn things around. To much inventory restocking can force companies to cut back production. We need confidence and retail sales to start growing, or this recovery will be very short-lived.

The modest economic growth the country has enjoyed has been a consequence of low interest rates, lower housing costs, a more competitive manufacturing sector and continued innovation in the technology sector. Fortunately, those factors are still in place. Investors would be wrong to let today’s political pessimism lead them to conclude that the current recovery will necessarily be short-lived, or that continued growth is out of the question. 
 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

The Most Important Investment Decision You'll Ever Make

Research says that investor choice of asset class (whether to buy stocks or bonds or stick to cash equivalents) is the most important determinant of investor returns. Confusion about what to do with this knowledge, however, has led investors and even most professional financial planners to make costly mistakes in developing successful asset allocation strategies. In the face of this confusion, a simple “red money” and “green money” approach to developing portfolio strategy may be the most important decision investors make regarding their own investment approach. For a full explanation of this color-of-money approach, keep reading.

An investor’s allocation between stocks and bonds should be based on current market conditions. Most financial journals and financial advisors portray “market timing” as ineffective – at best – and very costly to those who make a mistake. True, mistakes in this area can be costly, since asset allocation is the most important determinant of investor returns. However, a static approach (deciding not to make a decision) is not the solution. Just because investors don’t have a crystal ball that lets them know the future doesn’t mean they should ignore risk in a high-priced market. Nor, when stock prices have fallen in spite of economic fundamentals that are improving, does it make sense to ignore the higher potential return that stock investors enjoy during the good times. Just because it is impossible to be 100% accurate in timing the market, investment advisors (and their clients) should not ignore the most important investing decision they will make – the allocation between stocks versus bonds or cash.

Plenty of obstacles stand in the way of making rational asset allocation decisions. For example, many brokers use a black-box approach, which clients don’t understand. A computer survey might indicate that an 80% allocation to stocks is right. And that allocation is supposed to be “right” for all market conditions. The problem is that unless investors truly understand why their allocation is appropriate, they won’t stick to it in good times and bad and are vulnerable to selling stocks in the midst of a stock market panic, like what occurred in the final months of 2008. If the asset allocation strategy fails the investor at that most critical point in time, it is worse than useless. It is, in fact, a major part of the problem.

Overly simplistic “rules of thumb” aren’t much better. These rules, based mostly on investor age or cash distribution rates, ignore the myriad of financial and emotional variables that make each of us unique. Sure, an investor may have reached an advanced age where he won’t even buy green bananas for fear that his time horizon is so short, but if that investor happens to be worth a billion dollars, he is actually investing for the next generation and shouldn’t be avoiding stocks just because he happens to be old.

Most asset allocation approaches are inflexible and don’t reflect current market conditions. Regardless of whether the market is overpriced and poised to fall along with a teetering economy, or whether stocks have fallen 50% in price and are being priced at “blue-light special” prices, most asset allocation strategies establish a fixed “strategic” weighting of stocks and bonds and allow no flexibility for managing portfolio risk. In contrast, most foundations and institutions have developed a fixed (static) allocation in their investment policy statement but also allow for tactical changes within a given range. Instead of mandating that stocks comprise 50% of the pension portfolio, investment managers are given a range (say, 35% to 65%) within which they can operate. Most investment managers, on the other hand, are given an allowable range but choose to huddle around the mid-point. It’s amazing how many professional managers are perfectly happy to charge exorbitant fees for managing investments but refuse to actively manage the portfolio’s stock/bond allocation, the most critical variable of all.

Developing an appropriate strategy requires a comprehensive view of the investor’s age, available resources, upcoming liabilities, risk tolerance, and previous investing experience. Investors need current market information to implement rational tactical changes to the strategic positioning.

May-Investments offers a half-dozen different approaches to asset allocation and selects the one that makes the most sense to clients. For many, our approach separates the portfolio into red money and green money buckets. Green money is “safe” money that might be used to meet near-term obligations for, say, the next 10 years. The rest of the money –long-term almost by definition – we call “red money.”

By segregating green money from red money, only long-term money is invested in volatile asset classes, and clients have time to recover from significant market declines. Our red money portfolios are actively managed, reducing stock exposure and increasing bond exposure at times when the market is falling. All tactical moves, such as reducing equity exposure when markets are selling off, occur in the red money portfolio.

Most importantly, clients understand the specific purpose of the two buckets of money. They have the confidence of knowing where they will be getting income for the next few years and can take comfort in knowing that they should have time to recover from market losses if red money portfolios go into a downward spiral.

In the short run, knowing where you will go to get your grocery money is the most important thing. With long time horizon portfolios, being invested in stocks when they are going up and getting out of the way of a stock market decline are the most important determinants of portfolio return. A proper allocation among stocks and bonds and cash, even though it is never exactly right, is the most important element in every investor’s portfolio strategy. 
 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .