Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.
Tuesday, February 6, 2007
Bill Introduced to Eliminate Estate Taxes
Representative Mario Diaz-Balart (R-Florida) introduced House Bill 411 which would make permanent the current Estate Tax provisions, including ultimately the elimination of Estate Taxes, by deleting the sunset provisions reference to the Estate Tax in the original legislation. Introduced in the House on January 11, 2007, the bill was sent to the House Ways and Means Committee where it will no doubt languish and die after a bitter partisan fight.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.
Monday, February 5, 2007
Hard Assets
Commodity investments can be hard assets to figure out. The value of the dollar impacts their price. Oil, for example, is quoted (priced) in dollars. If the value of the dollar declines relative to other currencies, but world demand remains constant, then the price of oil will go up – all other things being equal. So a weak dollar stokes energy industry profits. On the other hand, energy is a key input for industrial commodities, like aluminum. As energy prices rise, so do manufacturing costs; profit margins in the aluminum industry can get squeezed.
The Scout Partners (now May-Investments)investment process often looks at commodity investments as an alternative to traditional stocks. In 2001-2002, while the U.S. stock market was losing 33% of its value, commodity stocks were off only modestly and managed futures portfolios were typically appreciating. Investors who employed a flexible asset allocation approach could have side-stepped parts of the bear market and employed their capital much more effectively by considering a wider range of asset classes.
The Scout Partners' ETF model follows two commodity-based ETFs at the moment, though many more exciting options are coming to market as the ETF industry matures. The iShares Natural Resources Index Fund (IGE) tracks stocks represented in the Goldman Sachs Natural Resources Index, including companies in extractive industries, energy companies, owners and operators of timber tracts, forestry services, producers of pulp and paper, and plantation owners. We also use the State Street Materials SPDR (XLB), to represent the domestic basic materials industry – as part of the U.S. stock market. However, the natural resources index (IGE) is more energy intensive than we’d prefer. There’s too much overlap between IGE and the domestic energy portfolio (XLE).
In time, we would expect to find a commodity-based ETF that is more broadly based with less energy exposure and a lower correlation with the U.S. stock market.
The Scout Partners (now May-Investments)investment process often looks at commodity investments as an alternative to traditional stocks. In 2001-2002, while the U.S. stock market was losing 33% of its value, commodity stocks were off only modestly and managed futures portfolios were typically appreciating. Investors who employed a flexible asset allocation approach could have side-stepped parts of the bear market and employed their capital much more effectively by considering a wider range of asset classes.
The Scout Partners' ETF model follows two commodity-based ETFs at the moment, though many more exciting options are coming to market as the ETF industry matures. The iShares Natural Resources Index Fund (IGE) tracks stocks represented in the Goldman Sachs Natural Resources Index, including companies in extractive industries, energy companies, owners and operators of timber tracts, forestry services, producers of pulp and paper, and plantation owners. We also use the State Street Materials SPDR (XLB), to represent the domestic basic materials industry – as part of the U.S. stock market. However, the natural resources index (IGE) is more energy intensive than we’d prefer. There’s too much overlap between IGE and the domestic energy portfolio (XLE).
In time, we would expect to find a commodity-based ETF that is more broadly based with less energy exposure and a lower correlation with the U.S. stock market.
The innovative ETFs coming to market will provide us with a better option, but next month we’ll take a look at why investors need to look closely before adding just any ETF to their portfolio.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.Tuesday, January 30, 2007
Do You Need an Annuity?
Annuities are like religion and politics - which are best when not discussed in polite company. Most financial advisors can be found on one side or another of a wide divide. Some advisors love the annuities and all the complex bells and whistles that add flash to the product (and make them difficult to understand). Other advisors hate annuities for being too expensive, over-hyped products that pay good salesman far too much money to incent them to lock unwary investors into these products (for life). For the record, I'm in the latter camp.
But even in my skeptical view, annuities have their place. (For more about annuities, check out this Morningstar article.)
Annuities will be the solution of choice for many retirees who have saved up some money, but not enough to truly provide them with financial security for life. These folks are at risk of outliving their financial resources, and for them it may make sense to transfer this risk to an insurance company which can afford to spread it around. For these people, an “immediate annuity” is worth considering. This investment will assure a certain amount of money for life. For a couple, a “joint annuity” will pay out until the second spouse dies. If the couple is killed in a car wreck on the way home from buying the annuity, bad news for them (but they won’t be around to complain). However, in the event that they have inherited good genes and live to be 105, it is the insurance company who takes it on the chin. For those with limited retirement funds, outliving your resources can be a sad end to an otherwise noble life. To me, it makes sense to insure against the “risk” of living too long, even if it means that an insurance company will receive a windfall if something happens to you in the near future.
As an example, an internet-based web calculator estimated that a joint life annuity for a 72 year-old male and his 74 year-old spouse will pay a 7.7% yield. This is far above what’s available in the bond market, but you would expect it to be because part of that income stream is return of principal. It’s an apples and oranges comparison to a 10-year bond at 4.87%. On a $200,000 portfolio, that would provide a payout of $15,400 annually. By way of contrast, many financial planners will tell you that tapping your portfolio for more than 4% annually (which provides only $8,000 per year) leaves investors at risk of outliving their resources if markets head south for a protracted period of time.
True, the comparison is patently unfair. At the end of most normal periods, the normal portfolio will still have money in it which can be passed on to the next generation. That’s why, for many, an annuity is inappropriate. But consider the downside in each scenario for a retiree of limited means. With an annuity, the downside is that maybe the kids don’t inherit as much. What did they do to earn it? With a normal portfolio of stocks and bonds, the downside is that the investor lives too long and ends up living with their offspring (providing that’s even an option). For many, the higher current income and worst case scenario with an annuity are preferable to the risk of outliving their resources and being without any resources at the end of life.
The other person who may want to consider an annuity is on the other end of the economic spectrum. If you happen to be one of the lucky few who is young and making more money than you can fit into your retirement plan, annuities provide a tax-deferred saving vehicle. Because they are more expensive than normal mutual funds, the money needs to remain in them for awhile (sometimes nearly 20 years!) before the benefit of tax deferral will offset the high fees of many annuity products. And keep in mind that money comes out as ordinary income instead of capital gains, and currently is taxed at a relatively high rate. But if you’ve maxed out your IRA and your 401(k) and there is still a need to build up the retirement nestegg, then annuities could provide some tax shelter. Take a professional athlete who has high earnings potential while he or she is young, but uncertain earnings power after retirement. They might be an excellent candidate to consider an annuity for all or a portion of their retirement planning needs.
If you don’t fit into either of these categories, feel free to shop for an annuity, but caveat emptor (buyer beware!). I’ve seen IRA’s put into annuities, where the tax deferral is unnecessary (IRA’s are already tax deferred vehicles, and have much lower expense ratios) and it would seem that advisor commissions, rather than common sense, drove the decision.
Also beware of the bells and whistles. Most bells and whistles are like fins on a 1950 Buick. They are there to sell the car, and have little real utility. By offering unique riders and options, annuity salesmen take themselves out of the commodity market – where returns can be compared – and put themselves in the arena where special features make comparison shopping impossible, and the commissions on these products are much higher. Sales commissions on annuities can be as high as 7% - 10% of the face value, and salesmen who have no shame love the complexity of these products.
Most investors ought to avoid the bells and whistles that make the products sound sexy. If you need to transfer the risk of outliving your resources to an insurance company, take a look. If you need a larger tax deferred retirement nestegg than you can stash away in your IRA and 401(k), then consider an annuity. Otherwise, take a look but be skeptical of the promises you hear.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.
But even in my skeptical view, annuities have their place. (For more about annuities, check out this Morningstar article.)
Annuities will be the solution of choice for many retirees who have saved up some money, but not enough to truly provide them with financial security for life. These folks are at risk of outliving their financial resources, and for them it may make sense to transfer this risk to an insurance company which can afford to spread it around. For these people, an “immediate annuity” is worth considering. This investment will assure a certain amount of money for life. For a couple, a “joint annuity” will pay out until the second spouse dies. If the couple is killed in a car wreck on the way home from buying the annuity, bad news for them (but they won’t be around to complain). However, in the event that they have inherited good genes and live to be 105, it is the insurance company who takes it on the chin. For those with limited retirement funds, outliving your resources can be a sad end to an otherwise noble life. To me, it makes sense to insure against the “risk” of living too long, even if it means that an insurance company will receive a windfall if something happens to you in the near future.
As an example, an internet-based web calculator estimated that a joint life annuity for a 72 year-old male and his 74 year-old spouse will pay a 7.7% yield. This is far above what’s available in the bond market, but you would expect it to be because part of that income stream is return of principal. It’s an apples and oranges comparison to a 10-year bond at 4.87%. On a $200,000 portfolio, that would provide a payout of $15,400 annually. By way of contrast, many financial planners will tell you that tapping your portfolio for more than 4% annually (which provides only $8,000 per year) leaves investors at risk of outliving their resources if markets head south for a protracted period of time.
True, the comparison is patently unfair. At the end of most normal periods, the normal portfolio will still have money in it which can be passed on to the next generation. That’s why, for many, an annuity is inappropriate. But consider the downside in each scenario for a retiree of limited means. With an annuity, the downside is that maybe the kids don’t inherit as much. What did they do to earn it? With a normal portfolio of stocks and bonds, the downside is that the investor lives too long and ends up living with their offspring (providing that’s even an option). For many, the higher current income and worst case scenario with an annuity are preferable to the risk of outliving their resources and being without any resources at the end of life.
The other person who may want to consider an annuity is on the other end of the economic spectrum. If you happen to be one of the lucky few who is young and making more money than you can fit into your retirement plan, annuities provide a tax-deferred saving vehicle. Because they are more expensive than normal mutual funds, the money needs to remain in them for awhile (sometimes nearly 20 years!) before the benefit of tax deferral will offset the high fees of many annuity products. And keep in mind that money comes out as ordinary income instead of capital gains, and currently is taxed at a relatively high rate. But if you’ve maxed out your IRA and your 401(k) and there is still a need to build up the retirement nestegg, then annuities could provide some tax shelter. Take a professional athlete who has high earnings potential while he or she is young, but uncertain earnings power after retirement. They might be an excellent candidate to consider an annuity for all or a portion of their retirement planning needs.
If you don’t fit into either of these categories, feel free to shop for an annuity, but caveat emptor (buyer beware!). I’ve seen IRA’s put into annuities, where the tax deferral is unnecessary (IRA’s are already tax deferred vehicles, and have much lower expense ratios) and it would seem that advisor commissions, rather than common sense, drove the decision.
Also beware of the bells and whistles. Most bells and whistles are like fins on a 1950 Buick. They are there to sell the car, and have little real utility. By offering unique riders and options, annuity salesmen take themselves out of the commodity market – where returns can be compared – and put themselves in the arena where special features make comparison shopping impossible, and the commissions on these products are much higher. Sales commissions on annuities can be as high as 7% - 10% of the face value, and salesmen who have no shame love the complexity of these products.
Most investors ought to avoid the bells and whistles that make the products sound sexy. If you need to transfer the risk of outliving your resources to an insurance company, take a look. If you need a larger tax deferred retirement nestegg than you can stash away in your IRA and 401(k), then consider an annuity. Otherwise, take a look but be skeptical of the promises you hear.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.
Thursday, January 4, 2007
Western CO stocks miss out on Christmas Cheer
The Scout Partners Index of Western Colorado Stocks fell sharply in November, -1.3% versus a +1.3% increase for the widely followed S&P 500 stock index. 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.
For the month of December, the strongest performer in the index was Safeway Companies (SWY), which surged 12.2%. The California-based grocer hosted a mid-month analyst meeting in which the company said that 2007 earnings may top current Wall Street expectations for the company. The company showcased its Blackhawk Network subsidiary which sells gift cards for major retailers such as Home Depot and Best Buy, and raised its stock repurchase plans from $400 million to $1 billion.
"When (Wall Street commentator) Jim Cramer started talking up Blackhawk," said Doug May, President of Scout Partners. "the stock shot up about 3 points in two days. The analyst meeting seemed to confirm what Cramer was saying about the stock, and it all happened during a week where investors seemed to be deciding that the housing sector wasn’t going to drag us into a recession after all. Blackhawk might indeed be a jewel in Safeway’s arsenal,” May said, “but I’m not convinced that we’re headed for a soft landing."
Arch Coal (ACI) was the index laggard, falling 16.4% during the month of December. In spite of recent upgrades from brokers HSBC Securities and Bank of America, the stock declined steadily throughout the month. May noted that “natural gas prices plunged during the month, and coal competes with gas on the electrical generation side so natural gas prices falling 30% creates some worries about future coal prices.”
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. In the month of November, the index’s concentration in energy stocks boosted index returns. Local stocks rose 2.3% last month while the overall market climbed 1.7%, but December’s weakness in the energy sector caused the situation to reverse while the rest of the market enjoyed a holiday surge.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.
For the month of December, the strongest performer in the index was Safeway Companies (SWY), which surged 12.2%. The California-based grocer hosted a mid-month analyst meeting in which the company said that 2007 earnings may top current Wall Street expectations for the company. The company showcased its Blackhawk Network subsidiary which sells gift cards for major retailers such as Home Depot and Best Buy, and raised its stock repurchase plans from $400 million to $1 billion.
"When (Wall Street commentator) Jim Cramer started talking up Blackhawk," said Doug May, President of Scout Partners. "the stock shot up about 3 points in two days. The analyst meeting seemed to confirm what Cramer was saying about the stock, and it all happened during a week where investors seemed to be deciding that the housing sector wasn’t going to drag us into a recession after all. Blackhawk might indeed be a jewel in Safeway’s arsenal,” May said, “but I’m not convinced that we’re headed for a soft landing."
Arch Coal (ACI) was the index laggard, falling 16.4% during the month of December. In spite of recent upgrades from brokers HSBC Securities and Bank of America, the stock declined steadily throughout the month. May noted that “natural gas prices plunged during the month, and coal competes with gas on the electrical generation side so natural gas prices falling 30% creates some worries about future coal prices.”
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. In the month of November, the index’s concentration in energy stocks boosted index returns. Local stocks rose 2.3% last month while the overall market climbed 1.7%, but December’s weakness in the energy sector caused the situation to reverse while the rest of the market enjoyed a holiday surge.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.
Monday, January 1, 2007
Who Ya Gonna Trust?
Leveraged buyouts are back in vogue. This is typically smart money – insiders and institutional investors, reminiscent of the leveraged buyout trend that launched a new bull market in the early 1980’s, when the “smart money” recognized great value in stocks coming out of the 1970-1982 bear market.
As a result of this deal-making, the Wall Street Journal reported that the top 5 investment banks bestowed year-end bonuses of $36 billion this holiday season. At Goldman Sachs, the payout equals roughly $750,000 for each of its 22,000 employees. Goldman’s new CEO, Lloyd Blankfein, “earned” (I use the term loosely) a bonus of $27 million, while his total compensation package topped $53 million for about a half a year’s work.Deal making, not money management, drives these bonuses, and bonuses drive Wall Street. Moneyscience.org reports that Goldman’s flagship Global Alpha hedge fund is -12% going into December.
Perhaps to turn around its flagging asset management returns, Goldman reportedly hired 17 traders from Amaranth Advisors, the hedge fund manager whose energy-bet-gone-awry cost investors more than $6 billion when it blew up last Summer.There is a disconnect between Wall Street compensation and investor returns that brings to mind the title of Fred Schwed’s classic book, “Where Are the Customer’s Yachts?”
A lot of assets are being managed by folks whose primary aim is to separate investors from their money. Big, leveraged bets are placed. Some cost investors billions, and the managers simply close down the shop and move across the street. In 2005, more than 1 in 10 hedgers had to liquidate their funds. Some bets work out well for investors, and even better for managers, who can sell that track record to pension funds across the nation who pay 2% on assets under management and 20% of profits to the managers, who can quickly attract billions in assets with the track record. As a result, hedge funds and “private equity” funds are attracting Wall Street money and talent, and investors ought not lose sight of Schwed’s perceptive observation.
The nature of leverage buy-out funds has also changed. There is less emphasis on running companies, and more people acting like “flippers” (to borrow a term from real estate speculation). Though not all hedge fund managers are cut from the same cloth as Enron’s former CEO, Jeff Skilling (who, on a happier note, finally vacated his luxurious River Oaks mansion for more appropriate living quarters in a converted college dorm room at a federal facility in Waseca, MN), Eugene Lockhart, the former CEO of New Power Holdings (an Enron spin-off caught in the midst of the deception at Enron), joined the private equity world as Chairman of New York’s Diamond Castle Holdings.
Another hedge fund recently raised $2 billion in the bond market. The fund already manages about $12-$13 billion in investor funds, and these funds are levered 7-8X, for a total of $90-$150 billion in current leverage, borrowed from major banks, that is probably senior to the bonds recently issued. Bond investors received roughly 6.5% return on their investment, as well as a return of their investment, assuming all goes well. If not, no worries, the manager is getting paid about $350 million a year in the interim. Helped by leverage and a strong market, top hedge fund managers are taking home more than $1 billion a year based on their asymmetrical payout arrangement with pension fund fiduciaries.
Why the rant? Because few would characterize this equity market as speculative, yet the sheer volume of leveraged private equity deals is a classic sign of speculation. Wall Street is not making these deals to capture gains for investors, but rather to pad their own bonus pool. Hedge fund managers live in a world of “heads I win, tails you lose” and they have been entrusted with billions of dollars of pension fund money. And the bond market and the stock market continue to disagree on where this economy is headed, with the bond market still forecasting a slowdown while the stock action over on the New York Stock Exchange is at least invigorating, and possibly exuberant. Who you gonna trust?
The bulls have the momentum. We are back to a fully invested position. But investors need to remain flexible. Though the market is not overvalued, per se, it is highly dependent on an unproven soft landing scenario. The Wall Street marketing machine says things are great, and things are great – on Wall Street.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.
As a result of this deal-making, the Wall Street Journal reported that the top 5 investment banks bestowed year-end bonuses of $36 billion this holiday season. At Goldman Sachs, the payout equals roughly $750,000 for each of its 22,000 employees. Goldman’s new CEO, Lloyd Blankfein, “earned” (I use the term loosely) a bonus of $27 million, while his total compensation package topped $53 million for about a half a year’s work.Deal making, not money management, drives these bonuses, and bonuses drive Wall Street. Moneyscience.org reports that Goldman’s flagship Global Alpha hedge fund is -12% going into December.
Perhaps to turn around its flagging asset management returns, Goldman reportedly hired 17 traders from Amaranth Advisors, the hedge fund manager whose energy-bet-gone-awry cost investors more than $6 billion when it blew up last Summer.There is a disconnect between Wall Street compensation and investor returns that brings to mind the title of Fred Schwed’s classic book, “Where Are the Customer’s Yachts?”
A lot of assets are being managed by folks whose primary aim is to separate investors from their money. Big, leveraged bets are placed. Some cost investors billions, and the managers simply close down the shop and move across the street. In 2005, more than 1 in 10 hedgers had to liquidate their funds. Some bets work out well for investors, and even better for managers, who can sell that track record to pension funds across the nation who pay 2% on assets under management and 20% of profits to the managers, who can quickly attract billions in assets with the track record. As a result, hedge funds and “private equity” funds are attracting Wall Street money and talent, and investors ought not lose sight of Schwed’s perceptive observation.
The nature of leverage buy-out funds has also changed. There is less emphasis on running companies, and more people acting like “flippers” (to borrow a term from real estate speculation). Though not all hedge fund managers are cut from the same cloth as Enron’s former CEO, Jeff Skilling (who, on a happier note, finally vacated his luxurious River Oaks mansion for more appropriate living quarters in a converted college dorm room at a federal facility in Waseca, MN), Eugene Lockhart, the former CEO of New Power Holdings (an Enron spin-off caught in the midst of the deception at Enron), joined the private equity world as Chairman of New York’s Diamond Castle Holdings.
Another hedge fund recently raised $2 billion in the bond market. The fund already manages about $12-$13 billion in investor funds, and these funds are levered 7-8X, for a total of $90-$150 billion in current leverage, borrowed from major banks, that is probably senior to the bonds recently issued. Bond investors received roughly 6.5% return on their investment, as well as a return of their investment, assuming all goes well. If not, no worries, the manager is getting paid about $350 million a year in the interim. Helped by leverage and a strong market, top hedge fund managers are taking home more than $1 billion a year based on their asymmetrical payout arrangement with pension fund fiduciaries.
Why the rant? Because few would characterize this equity market as speculative, yet the sheer volume of leveraged private equity deals is a classic sign of speculation. Wall Street is not making these deals to capture gains for investors, but rather to pad their own bonus pool. Hedge fund managers live in a world of “heads I win, tails you lose” and they have been entrusted with billions of dollars of pension fund money. And the bond market and the stock market continue to disagree on where this economy is headed, with the bond market still forecasting a slowdown while the stock action over on the New York Stock Exchange is at least invigorating, and possibly exuberant. Who you gonna trust?
The bulls have the momentum. We are back to a fully invested position. But investors need to remain flexible. Though the market is not overvalued, per se, it is highly dependent on an unproven soft landing scenario. The Wall Street marketing machine says things are great, and things are great – on Wall Street.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.
Saturday, December 2, 2006
Western CO stocks outperform in November
The Scout Partners Index of Western Colorado Stocks rose sharply in November, +2.3% versus +1.7% for the widely followed S&P 500 index. 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.
For the month of November, the strongest performer in the index was Williams Companies (WMB), which surged 13.6%. The Tulsa, Oklahoma-based energy company benefited from rising natural gas prices as colder temperatures, especially in the northeast, boosted investor interest in the sector. In November, Williams also announced the sale of its remaining interest in Williams Four Corners LLC to Williams Partners L.P. (WPZ), which had purchased a 25% interest in Four Corners from Williams Companies earlier in the year.
"The entire energy sector sold off during the summer," said Doug May, President of Scout Partners. "but the sector is enjoying tremendous profit growth and normal profit taking in the sector was exaggerated by the fiasco of Amaranth Advisors’ hedge fund blowing itself up. Once the Amaranth assets were lifted off the market, the entire sector started moving up again and Williams, with rising natural gas prices moving up, found a lot of investor interest."
Qwest Communications (Q) was the index laggard, falling 10.9% during the month of November. May noted that “even if you forget, for a moment, that Qwest’s customer base is canceling its land-based service in favor of VoIP alternatives that are much cheaper, in mid-November it was announced that the new regime at Qwest has decided to cash in $36 million of windfall option gains and, later in the month, that Phil Anschutz is parting with nearly 80 million shares, all of which tends to make investors a tad nervous.”
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.
In the month of November, the index’s concentration in energy stocks boosted index returns, while specific stock selection in the energy, industrial, and telecommunications sectors were the largest drags on portfolio performance. More specifically, Local energy stocks rose 6.7% during the month, while the national energy sector rose 8.0%. Local industrial sector stocks fell 0.5%, while S&P 500 industrial sector stocks rose 2.1% during the month. Qwest fell 10.9% while the S&P 500 telecommunications also fell, but only 0.5%.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.
For the month of November, the strongest performer in the index was Williams Companies (WMB), which surged 13.6%. The Tulsa, Oklahoma-based energy company benefited from rising natural gas prices as colder temperatures, especially in the northeast, boosted investor interest in the sector. In November, Williams also announced the sale of its remaining interest in Williams Four Corners LLC to Williams Partners L.P. (WPZ), which had purchased a 25% interest in Four Corners from Williams Companies earlier in the year.
"The entire energy sector sold off during the summer," said Doug May, President of Scout Partners. "but the sector is enjoying tremendous profit growth and normal profit taking in the sector was exaggerated by the fiasco of Amaranth Advisors’ hedge fund blowing itself up. Once the Amaranth assets were lifted off the market, the entire sector started moving up again and Williams, with rising natural gas prices moving up, found a lot of investor interest."
Qwest Communications (Q) was the index laggard, falling 10.9% during the month of November. May noted that “even if you forget, for a moment, that Qwest’s customer base is canceling its land-based service in favor of VoIP alternatives that are much cheaper, in mid-November it was announced that the new regime at Qwest has decided to cash in $36 million of windfall option gains and, later in the month, that Phil Anschutz is parting with nearly 80 million shares, all of which tends to make investors a tad nervous.”
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.
In the month of November, the index’s concentration in energy stocks boosted index returns, while specific stock selection in the energy, industrial, and telecommunications sectors were the largest drags on portfolio performance. More specifically, Local energy stocks rose 6.7% during the month, while the national energy sector rose 8.0%. Local industrial sector stocks fell 0.5%, while S&P 500 industrial sector stocks rose 2.1% during the month. Qwest fell 10.9% while the S&P 500 telecommunications also fell, but only 0.5%.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.
Friday, December 1, 2006
Time to Wrap It Up
What sort of finishing touch will the market put on this year’s present? Stocks go into the final month with double-digit returns. Will it be a pretty bow, with a final performance surge taking returns close to 20% for the year? Or will it be a lump of coal in the stocking?
The stock and bond markets are expecting different things for this Yuletide season. The 10-year Treasury bond, which climbed as high as 5.25% in late-June, has since fallen to below 4.5% on concerns that we’ll be talking less about inflation in 2007, and more about the need for an economic recovery. Stocks, on the other hand, have bought into a “soft landing” story that acknowledges the weakness in several economic indicators, but anticipate the Federal Reserve rising to the occasion to cut interest rates and “save” the economic recovery with heroic 9th inning (or is it 6th inning?) moves to reduce interest rates. Bonds are anticipating a lump of coal. Stocks are forecasting a pretty bow. Markets are sending mixed signals and our ETF model is responding accordingly.
In October, the model added long bonds to the portfolio, and those bonds have generally kept pace with the market’s advance since then. Adding bonds is typically a “defensive” move, which makes a lot of sense if we’re about to head into a recession, which should hurt stocks. On the other hand, in December the model replaced defensive “consumer staples” stocks with more aggressive technology stocks, reflecting strength in a sector which hasn’t moved much since 2003, despite impressive growth in earnings power and recent strength in the software and communications equipment sectors.
Market momentum favors stocks in the short run. Year-end and first-quarter money flows also tend to favor stocks. Storm clouds on the economic horizon continue to grow, however. The portfolio is positioned to make money in stocks, while the opportunity lasts. We at Scout Partners offer you our best wishes for a happy holiday season and a prosperous New Year.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.
The stock and bond markets are expecting different things for this Yuletide season. The 10-year Treasury bond, which climbed as high as 5.25% in late-June, has since fallen to below 4.5% on concerns that we’ll be talking less about inflation in 2007, and more about the need for an economic recovery. Stocks, on the other hand, have bought into a “soft landing” story that acknowledges the weakness in several economic indicators, but anticipate the Federal Reserve rising to the occasion to cut interest rates and “save” the economic recovery with heroic 9th inning (or is it 6th inning?) moves to reduce interest rates. Bonds are anticipating a lump of coal. Stocks are forecasting a pretty bow. Markets are sending mixed signals and our ETF model is responding accordingly.
In October, the model added long bonds to the portfolio, and those bonds have generally kept pace with the market’s advance since then. Adding bonds is typically a “defensive” move, which makes a lot of sense if we’re about to head into a recession, which should hurt stocks. On the other hand, in December the model replaced defensive “consumer staples” stocks with more aggressive technology stocks, reflecting strength in a sector which hasn’t moved much since 2003, despite impressive growth in earnings power and recent strength in the software and communications equipment sectors.
Market momentum favors stocks in the short run. Year-end and first-quarter money flows also tend to favor stocks. Storm clouds on the economic horizon continue to grow, however. The portfolio is positioned to make money in stocks, while the opportunity lasts. We at Scout Partners offer you our best wishes for a happy holiday season and a prosperous New Year.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.
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