Economic Growth Ignores Partisan Gridlock

Several people have asked me why the U.S. media circus du jour, concerns about the U.S. debt crisis, don’t seem to be bothering me as much as the Washington D.C. policy wonks think it should.

First, the market doesn’t seem to care much about the latest attempt at political grandstanding. If the market were worried about the U.S. defaulting on its Treasury debt, then the price of Treasury Bonds would be falling (i.e. interest rates would be going up). Instead, we see bond yields flirting with all-time lows despite rising inflationary pressures. The recent bond auctions have been well received – there appears to be no shortage of buyers. I don't know who is buying, and I can't imagine why, but the fact of the matter is that Treasury Bonds aren't suffering as a result of the bad p.r. that we've been generating. And while the stock market will swing day-to-day based on the latest headlines coming out of Washington, individual stocks are moving up based on strong earnings reports and continued merger and acquisition news. Cash rich companies are buying earnings rich competitors, driving prices higher in the process. Companies may be afraid to hire new employees, but they’re not afraid to purchase market share at current valuation levels.

 Also, May-Investments Leading Economic Indicator keeps moving higher.

• Retail sales continue to grow,
• Export activity is giving the manufacturing sector a boost,
• Drilling activity (nationally) remains quite strong and
• Banks are finding a few new borrowers.

Having spent most of the last three years kicking half of their old borrowers out the door, now banks are so overwhelmed by the generousity of U.S. taxpayers that a small amount of the bounty is actually finding its way out into the business community.

The money supply is growing at a 6 percent rate of growth – a key indicator for a closet monetarist like myself.  Finally, corporate profits are very strong. While the profits in the banking sector are, in my opinion, illusory (banks aren’t replenishing loan loss reserves the way they ought to, which bloats earnings and bonuses at the expense of honesty and transparency), the profit rebound experienced by most large publicly traded companies is nothing short of remarkable. With access to the public debt markets, these companies don’t face the same capital shortage as local businesses. They’ve cut labor expenses, interest expenses, and inventories. The rebound in profit margins and reported earnings is very real.

 As a result, the economy keeps growing.

The U.S. economy is a strong and powerful force. It took an inordinate amount of stupidity for Wall Street’s sub-prime mortgage cabal to bring the economy to its knees. Then an arrogant government attacked the engine of prosperity, creating a wave of panic and that is restraining the ensuing recovery. Soon, hopefully, the nightmare of endless deficits will be behind us and we will stop buying far more government than we need. It will still take awhile to pay off the debts incurred during the past decade of economic insanity, but at least the direction will reverse.

As they say, when you’ve dug yourself into a deep hole and you don’t know how you’ll get out – first, stop digging.
 
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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Insuring Against EuroRisky Behavior

Last year’s bailout of Greece didn’t “take.” While the markets recovered and eventually rallied, similar to the September 2007 U.S. stock market rally, government policies didn’t really solve, or even admit to, the seriousness of the crisis and the market peaked soon after. A continuation of EuroRisky behavior has implications for our U.S. oriented portfolio as well.

The first thing we’ve done is to avoid “ground zero” exposure. The portfolios, especially the fund portfolios, have little exposure to international equities. Interestingly, European stocks are among the short-list of asset classes that we would consider “buyable” based on recent market performance. For the moment, however, we’re not real interested in adding what could be the next “Lehman Brothers” back into the portfolio. We’ve owned it in the past. We’ll own it again in the future. Right now, however, we remain skeptics.

We recently took steps to reduce or eliminate our exposure to the insurance sector as well. The big problem with the profligate spending habits of Greece, Spain, Portugal and other large governments running disastrous deficits (which shall remain nameless, just in case there remains one more clueless U.S. Treasury buyer; I wouldn’t want to be the one that causes our own house of cards to tumble prematurely) – the problem is that the eventual default by Greece may threaten many European banks with insolvency.

If a European bank defaults, and that bank is a counterparty to a credit default swap (CDS) owned by a U.S. bank, then the virus jumps over the pond faster than you can say “derivative.” Furthermore, since we haven’t done much of anything to restrict CDS gambling by the best and the brightest on Wall Street (probably former Lehman bankers hired by Citigroup), then the risk of what the Fed calls a “systemic problem” remains a huge risk. And because we bailed out most of the criminals responsible for the sub-prime crisis, there remains little incentive for the banks to have cut back on their gambling with depositor savings. This includes a great deal of gambling with big, “safe” European banks on the other side of the bet.

Once the banking crisis re-starts, it will likely impact nearly all big banks in the sector because 1) they are all “black boxes” and 2) can’t accurately measure their CDS exposure and 3) have lied to shareholders so many times that no ones believes a word of what management says. Our guess is that the sell-off will once again spill over into the insurance sector, which demonstrates some of the same tendencies toward gambling that hurt the banks and investment companies in 2008.

We’re not saying that the sell-off will definitely be a repeat of 2008, but only that it could be as painful. Moreover, the insurance stocks would be much too close to the center of the crisis. Finally, the insurance stocks – although they have generally tracked the overall market since we purchased them in February – this past week have begun trading down more than the market, along with the banks. We believe that the problems in Greece are the reason, and until we can see that the crisis in Greece isn’t ramping up, we would rather reduce or eliminate that particular risk from the portfolio.

“What to buy with the proceeds” remains a problem. The market remains very narrow, although a few new asset classes have risen to “buyable” status. In general, however, the market is becoming very defensive, for whatever reason. If that is signaling further weakness ahead, perhaps holding a bit of cash will help preserve capital, instead of using it to buy “defensive” stocks that merely fall less than the market in a sell-off.
 
A year ago, we made a mistake during the first Greek crisis by being more defensive than we should have, given 20/20 hindsight. We may be about to make that same “mistake” again. It’s difficult to know what to hope for at times like this. We are “hoping” that the bureaucrats in Europe find a solution to the Greek problem. However, we are not comfortable relying on them to do so and have de-risked the portfolio a bit over the past few months just in case the Greek crisis continues to get worse.  
 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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RIP eMag; Long Live the Blog!

We recently decided to return to a more traditional blog posting process with "new post" e-mails issued whenever new articles are posted. Returning to a traditional blog posting process allows for more timley posts, albeit at the loss of some local content.

We want to thank Bob Kretschman, in particular, for helping us create content and develop article ideas over the past several months. It could not have been possible without the help of his Kretcom Communications. Many readers have spoken with Bob in interviews and I have personally come to appreciate his sense of humor and business perspective, in addition to his ability to put May-Investments “on the map” in the local media community.

The eMag was designed to be a ten-article monthly publication incorporating timely and interesting articles of local interest to our target audience, folks enjoying and beginning to plan for their retirement. Our strongest readership, however, has always been the articles that detail what is happening in portfolios. What I hadn’t anticipated, however, was that by tying ourselves to a monthly publication schedule, the timeliness of what we write would be impacted as well. In the past, we’ve been free to write about portfolio changes shortly after they occur, and market events as they unfold.

Just as you read a newspaper for one purpose, and a monthly magazine for something else, our most widely read articles were about time-sensitive issues more appropriate to a blog or newspaper, than to a monthly reader.

Another goal of the eMag was to incorporate information about broader financial planning topics, taking advantage of the expertise that Barbara Traylor Smith (President of Retirement Outfitters) has in Income Planning and insurance, and the experience that Kim Last (Kimberley A. Last Financial Services, Inc.) has in Long-term Care planning and many other topics. Unfortunately, because they own their own companies and have their own compliance people to satisfy, it was never really possible to integrate our information dissemination and education efforts.

While it’s easy for us to “play in the same sandbox” in order to provide clients with better and more comprehensive financial services, we were never able to convince the bureaucrats that “doing a better job for clients” was, in fact, an industry “best practice.” Too bad.

Fortunately, the short experiment with our eMag did teach us a lot about formatting and publishing, in addition to what we learned about misguided and inflexible regulatory insanity. We can continue to use parts of the eMag format to get the message out about upcoming workshops and seminars, and we will continue to include links to outside articles of interest, as well as our own internally generated posts.

Most importantly, our keys goals of being cooperative with clients’ full team of advisors, and fully transparent about the portfolio management process, still rule the day.  Let us know your thoughts so we can continue to improve the May-Investments communications strategies. 
 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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The Will Rogers Portfolio Maneuver

Will Rogers once counseled investors to “only buy stocks that go up.” About stocks that go down, he replied famously, “don’t buy them!” While his counsel frustrates portfolio managers because it creates an impossible performance benchmark by applying a standard of 20/20 hindsight to a world fraught with uncertainty, it is an important remark to consider if the market cycle is ready to roll over and start going in a generally downward direction.

The market is always moving, but it doesn’t only move “up” and “down.” It also changes in character – the type of stocks with the biggest moves up or down varies through the course of the market cycle – on a weekly, daily, and even intra-day basis. We do our best to monitor these changes and, ideally, stay in the way of what’s working and get out of the way of what isn’t working.

At the moment, international investing isn’t working. The U.S. stocks have been dominating the performance derby for the past few months. At the beginning of the year, perhaps coincident with the Arab Spring events, commodities rocketed higher and dominated the market’s move higher. Most recently, however, defensive stocks have been moving into the spotlight.

Many of the sectors that are doing better than average are considered “defensive” sectors. Consumer staples (soft drinks, personal care products, drug stores) have started doing better than average. Healthcare stocks, like the pharmaceutical and biotech companies in which we’re invested, are moving up near the top of the performance derby. Utility stocks, which were on the verge of getting kicked out of the portfolio a couple of months ago, are now back “above water” (doing better than the market over the past six months).

One problem that I have, personally, in trying to “hide out” in defensive stocks is that when they are doing best, often you would have been better being out of the market altogether. If you try to hide out in stocks that are going down less than the market, then you have good “relative performance,” which means that when the stock market turns in dismal performance, the good news is that the amount of money that you lose isn’t quite as bad – but losing money is always bad! The last time we bought consumer staples was in 2008. While the sector gave us good “relative performance,” we would have much rather just owned cash.

Good “absolute” performance means that your money wouldn’t have gone down at all. The problem that I have in hiding out in defensive sectors is that, often, you would have been better not being invested in stocks at all during those periods. If you knew that stocks were selling off, then rather than tweak the portfolio by owning defensive stocks, you would cash out of stocks altogether. Then, again, there’s that Will Rogers 20/20 hindsight problem. Without a crystal ball, sometimes it will make sense to stay on the sidelines, and at other times buying consumer staples truly does represent an opportunity to make more money than the broad market.

In any case, signs that defensive stocks are doing relatively better is a red flag that concerns us. In spite of a few economic variables that concern me – including a slight inventory build and unemployment starting to get slightly worse – our Leading Indicators remain stable. But problems in Europe seem to be serious, getting worse, and potentially as devastating as the sub-prime problems. Greek two-year bonds yield 25%. The market is clearly expecting a default in Greece, and worries about Spain are increasing as the dominos overseas weary of leaning against one another in order to support the fiscal irresponsibility of the European Union’s weaker and most profligate members.

There’s also our own government deficit in the U.S., and the unwillingness of either party to risk offending their political base in order to solve the problem. If a “Mediscare” can be used to win elections, then “truth” and problem-solving will be sacrificed to the greater God of partisan politics, until we experience Greece-like interest rates in this country.

Many client portfolios recently sold off gold, in spite of our long-term concerns about inflation and the dollar. Similarly, this week we further reduced our commodity position, which was starting to lag and really acted as a drag on portfolio performance during three successive sell-offs over the past two months. The main reason, I think, for commodities to decline is that the U.S. economy may be joining other global economies in a slowdown. In the long-run, the dollar may decline and inflationary pressures may continue, but if the U.S. economy goes back into recession, industrial demand for commodities will slow and commodity prices, likely, will fall.

If a slowdown is indeed what is being priced into the market, apparently it’s too early for it to show up in our Leading Economic Indicator. Though the LEI could be turning down, it hasn’t yet. However, the sell-off in commodities has been serious enough for us to sell out of some of our commodity investments and for now the proceeds of the sales remain in cash.

We’re taking reinvestment on a day-by-day basis. There are some new asset classes and industry choices that are beginning to show up as “buyable.” Most of the new alternatives are these “defensive” sectors. If they are just going to fall at a slower pace than the rest of the market, then perhaps we would be better off holding cash.

Hopefully the pause will be temporary and the economy can work through this. However, I still believe that the potential upside, from this level, is not as large as the potential downside should Europe implode. These problems in Europe, which caused us to get defensive a year ago, were never really resolved. Things are worse now. It is somewhat reminiscent of the sub-prime problems which were pooh-poohed by the incompetent bank managers that created them, and when the Fed started cutting rates in 2007 the strategists said that the issues were resolved. In fact, they weren’t, and a year later the bank panic unfolded with the bankruptcy of Lehman Brothers.

A year ago, the international bankers told us that they had bailed out Greece, and the problem would not spread beyond that country. They also implied that if problems did spread, they would be solved, just like the Greek bailout solved Greece’s problem. A year later, we know for a fact that the problems did spread and the the Greek problem wasn’t solved. The problem is growing and spreading and threatening Europe’s largest banks. Will Rogers also observed that, “If you ever injected truth into politics you’d have no politics.” So true.  Like the old saw - how do you know that a politician is lying?  Answer: his mouth is open.

Europe might well experience 2008 redux. It won’t be centered in the U.S., this time, but it would be silly to think that the U.S. would be immune to a bank panic on the other side of the pond. Since we never fixed our own “too big to fail” problem, a crisis will likely bring another round of misguided and costly political response. The risks are large enough to justify selling off a portion of our beloved commodities position, if only for a little while.
 
For the past year, we’ve been asking our “red money” clients to re-affirm that the long-term appreciation portfolios are truly invested with a long-term investment horizon. I don’t know if we’re going to have another big dip or not, but it’s always a good time to be certain that your long-term portfolios have only long-term money invested in them. 
 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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Palisade Greenhouse builds gardens -- and business -- from the roots up

Take a good look at those young flowers that you brought home from the garden center and carefully transplanted into the garden.

They don’t look like manufactured products, do they?

But they are. And many of them probably were built on an 11-acre site along the Colorado River east of Palisade. Each year, Palisade Greenhouse churns out about 3,000 different product lines supplying hundreds of grocery store chains, landscapers, and garden centers throughout the intermountain West.

“Essentially it’s like any other production facility,” says Mark Anema, chief financial officer for Palisade Greenhouse. “You’re taking raw materials and putting them together for an end product.”

Palisade Greenhouse has been owned since 1977 by Tom and Carolyn McKee, and the general manager is their son, Brad McKee. The operation is a wholesale grower and supplier; it grows and sells its products only to retailers, who sell the end products to consumers. In other words, you can’t buy plants from Palisade Greenhouse, but the garden center where you buy your yard supplies can.

Converting soil, seeds, water, and sunshine into finished products that consumers want to buy – and timing the products so that they are ready precisely when those warm spring weekends invite gardeners to part with their hard-earned dollars at their local garden center – is a constant challenge, Anema says.

An added pressure is to keep up with trends in plant development and the ever-changing tastes of landscape designers and gardeners.

“Hopefully we come up with things our customers like, and their customers like in turn,” Anema says. “It’s always a challenge trying to determine what our production is going to be the coming year.”

For Palisade Greenhouse, a lot rides on getting the right plants to the right places at the right time. Anema says more than 90 percent of the company’s revenue comes in during April, May, June, and July.

On its 11 acres, Palisade Greenhouse has about 100,000 square feet in greenhouses that are an oasis of color in late winter when the landscape outside is cold and brown. The operation has three divisions: one for annuals (plants that must be replanted each year), a perennial division (plants that survive year after year), and a small-plants division that produces seedling “plugs” that are sold to other commercial greenhouses.

Anema says he is particularly proud of a computerized inventory system that tracks tens of thousands of plants at any given time. The computerized system helps the greenhouse develop an inventory that appeals to the widest number of customers. For example, blooming plants can be tracked and timed so customers receive plants in exactly the stage of bloom they’re seeking. Customers submit orders online in real time.

“They can order based on bloom stage,” Anema says.

Such production procedures are necessary because greenhouses are a highly competitive business dealing in perishable products, Anema says. Operating such a company successfully requires the perfect blend of sales expertise, customer service, inventory management, high-quality facilities, and product selection.

Palisade Greenhouse works to improve its operations each year, refining the art of growing and selling plants in a region where spring weather is notoriously fickle and can greatly impact operations. Anema says he enjoys the challenge.

“I feel really blessed to be here,” he says. “It’s neat to be able to take some soil and a seed and water and sunshine and see what God does with it. We put it together, and He grows it for us.”

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ID theft workshop to examine causes and prevention

When Ron Rehberg talks to people about identity theft, he knows of what he speaks.

Several years ago, Rehberg – who is a certified identity theft consultant specialist – was a victim of medical ID theft. An individual who had been diagnosed with cancer used Rehberg’s medical information, probably to get health insurance. Even though Rehberg was healthy, the medical ID theft compromised his health and medical history. His blood type and other vital information were changed in some records.

In Rehberg’s case, the company he works for – risk consultant Kroll – stepped in and cleaned up the damage. Still, Rehberg reflects that if certain medical records had shown an incorrect blood type and he had been in an accident, the ramifications could have cost him his life.

“Medical ID theft can be fatal,” he says.

Rehberg will be the featured speaker at an educational lunch, Protecting Yourself from Identity Theft, sponsored by Kim Last, CFP®, CLU®, CLTC, president of Kimberley A. Last Financial Services, Inc., and Barbara Traylor Smith, president of Retirement Outfitters, LLC. The lunch is scheduled for noon Tuesday, June 14, in the conference room at 244 N. 7th St. Those who attend should plan to arrive about 15 minutes early to get lunch and get settled before the presentation begins. For more information, call Carolyn at 256-1748.

ID theft is a broad term that includes many types of information theft. They range from medical ID theft, such as Rehberg suffered, to theft of credit card information, to theft of other data used in routine transactions. Rehberg says about 27,000 cases of ID theft happen each day, and people should take steps to protect themselves.

“There is nothing that can prevent it. But there are many things you can do to be careful and cautious,” he says. “The time to pay attention is before it happens, not after.”

Rehberg says it can take nine months or longer for someone to become aware that his or her identity has been stolen. After that, it can take three to five years to clean up the damage, and the recovery effort can require hundreds of hours and thousands of dollars.

Since many stolen identities are used for illegal activities, you might not even know your identity has been stolen until a police officer notifies you that you’re wanted.

“Sixty-two percent of people with an ID theft issue end up with a warrant (for their arrest),” Rehberg says.

So what are some common-sense steps you can take to reduce that chance that you’ll be a victim? Don’t put outgoing mail in your mailbox and put the flag up. Outgoing mail can easily be stolen, and much of it contains bank account numbers, credit card information, and other types of information that ID thieves relish. Use a secure outgoing mailbox to send your bills and other mail.

Make sure you burn or shred everything that has identifying information and/or account numbers on it. Try to make it as difficult as possible for ID thieves to learn anything about you through your mail or trash.

“You can’t live in fear. Do what you can, and feel you’re protected the best you can be for all types of ID theft,” Rehberg says.

Rehberg will provide more details and information about ID theft prevention at the educational lunch June 14. Plan to attend.

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Service clubs work hard to provide extras to JUCO baseball teams

When the Central Arizona Vaqueros baseball team comes to town this week for the Alpine Bank Junior College World Series, members of the Grand Junction Downtown Rotary Club will be as busy as the players.

The Downtown Rotary Club is hosting the Vaqueros, which won the Western District title last Saturday to earn a place in the JUCO tournament. And spearheading the Rotary group’s efforts will be Barbara Traylor Smith, president of Retirement Outfitters, LLC, and chair of the club’s JUCO team host committee.

“We are essentially their concierge while they’re here,” says Traylor Smith, who is in her fourth year of serving on the club’s host committee. “There are lots of details that have to be addressed.”

Each of the 10 teams from throughout the country that come to Grand Junction for the tournament has a local service-club host. The hosts play a crucial role in keeping the teams and their fans happy and comfortable during their stay.

The JUCO organizing committee takes care of basic logistics such as booking hotel rooms and practice facilities for the teams. But the hosts provide many of the extras, such as a barbecue for the team and their families.

Because some teams exit the double-elimination tournament as early as Sunday, Traylor Smith says the trick is to schedule the barbecue early. For Central Arizona, the barbecue is Saturday night at Canyon View Park.

“We will feed somewhere between 80 and 100 people,” Traylor Smith says.

Hosts also provide water, Gatorade, and other supplies to teams for practices. Occasionally, hosts run errands for the teams – Traylor Smith says she once had to go back to a team’s hotel and retrieve a player’s forgotten glove. She once took a player to the JUCO doctor for a sinus infection.

The host club also supplies bat boys and bat girls for its team’s games at Suplizio Field, and the club serves as a tour guide for teams and their families. When teams win and remain in the week-long tournament for several days, players and their families often take in some sights around the Grand Valley in their spare time. Such touristy activities can include golf and visits to Colorado National Monument and Grand Mesa.

“Some of these kids have rarely or never seen snow, so we’ve taken them to Grand Mesa to play in the snow,” Traylor Smith says.

The host club also makes sure members of the team get to the annual youth clinic, in which JUCO players and coaches teach baseball basics to local kids.

All in all, the host clubs work to make sure the tournament and Grand Junction are positive, memorable experiences for the players.

“Some of these kids will go on to four-year schools, and some of them will be drafted. But for some of them, it’s their last time in a uniform,” Traylor Smith says.

JUCO is a Grand Junction tradition, and this year’s tournament opens Saturday, May 28, at Suplizio Field at Lincoln Park. For information about the tournament, visit http://www.jucogj.org/.

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