Fagan Associates Archive for September, 2010

Investors have a tendency to be unable to prioritize or “rank” issues or concerns that will have an impact on their portfolios.  For example, given the fact that fear or self-preservation is a greater motivator than greed, investors tend to overweight the negative issues and underweight positive influences.  A useful exercise that may help you avoid continuously being scared out of making the appropriate investment choices for your objectives is to assign each a percentage with the entire list adding up to one hundred percent.  Then, periodically, update the list along with your rankings.  Given the constant bombardment of bad news by the media, this will help you sort out what is news and what is only noise.

We have identified twenty-five different issues, fourteen negative and nine positive, that may have an impact on your portfolio.  Please keep in mind that despite the fact that there are 14 negative issues and only 9 positive, this does not imply that we are bearish.  Secondly, we have listed the issues in the order that we believe will impact your portfolio, from the most to the least.

First the negative influences.  These would include the fact that in an effort to get the economy moving again, the Federal Government is spending too much, putting our credit rating at risk; the labor market remains weak and unemployment remains high most likely hampering consumer spending; higher taxes will cause all to reign-in spending; continued weakness in the economy could cause deflation; the private sector continues to retrench, shoring up their balance sheets and reducing their debt; the across-the-political-aisle fighting is resulting in the inability or the belief that the government is unable or unwilling to deal with the issues affecting America; the government is maintaining too big of a role in the economy when they need to get out of the way and let the private sector do its thing; the United States is turning into a welfare state, one in which ingenuity and creativity will wane; too much government spending and the accompanying deficit may result in a devaluation of the dollar and inflation; the “flash crash” of early May, one which sent the Dow Jones Industrial Average down nearly 700 points in less than one-half hour has weakened investor confidence and caused the belief that the “playing field” is not level; energy prices have risen over the past few years placing U.S. dollars and therefore influence and power outside of our borders; gold is rising signaling destabilization; immigration is placing a strain on our system; the upcoming political season has heightened the rhetoric regarding class warfare; terrorism and finally that the bull market in bonds is over.

On the flip side, we have potential positive catalysts for investors.  These include the easy monetary policy or the accommodative stance by the Federal Reserve in the forms of low interest rates and quantitative easing; interest rates will most likely remain low for an extended period of time making stocks more attractive; stocks have gone nowhere for a decade while corporate earnings have more than doubled resulting in an attractive valuation; housing affordability is at multi-decade highs; there exists strong global demand, especially in the emerging markets; excesses in the U.S. housing market are being reduced as time passes; consumer debt is being pared down and finally that there is a transition from defined benefit to defined contribution plans resulting in a continually flow of funds into the financial markets.

THE BOTTOM LINE – Keep in mind that very few investors consider the risk they are assuming when the stock market is rolling.  Consider calendar year 1999.  Conversely, investors tend to not perceive opportunity amidst market turmoil, concentrating solely on the risk they are assuming.  By periodically reviewing the risks you are assuming and weighing them against the potential rewards, investors are much more likely to make an objective, intelligent decision rather than a subjective, fear-driven, emotional one.

With the mid-term elections quickly approaching, bringing with them all of the partisan rhetoric, it might be beneficial for all to take a look at ourselves and realize that regardless of who poked the hole in the bottom of the boat, it will sink unless we all pull together to plug it.  Why, you might ask, would two individuals whose column usually pertains to investing be addressing an issue out of their wheelhouse?  It’s simple, as America goes and as Americans prosper, so does the stock market.

TO CORPORATE AMERICA, no not the small businesses that fuel the economic growth of our country, but to the large ones, those with the ability to move their “costs of production” offshore, please keep in mind that a large component of those costs are human beings first, people with goals, dreams, families and with bills to pay.  Oh, by the way, we are also the most productive people in the world.  Yes, we understand that your first responsibility is to your shareholders.  However, given how you have acted over the past couple of decades, may we remind you that we believe that this is not your only responsibility.  We believe that good corporate citizenship considers the lives it impacts when deciding to relocate some or all of its’ workforce to another part of the world.  Finally, realign CEO salaries to get them more in line with your employees.  A corner office should not be like winning the lottery.

TO LABOR, let’s work like the dickens to get out of the vicious cycle of debt.  Take part of your paycheck and pay yourself first, spending what’s left.  When you spend first and then save what’s left, there usually is nothing left to save.  It also leaves one vulnerable to financial crises should a rainy day like short-term unemployment or a disability occur.  Finally, whether it is justified or not, recognize that we are in a global economy and business can relocate around the world in a heartbeat, leaving us holding the bag.  There is not much we can do about this, except work hard, save first and educate ourselves and our children to compete in this global economy.  To the public sector unions, stop, you have negotiated attractive wage and benefit packages.  Recognize that America is unable to foot this bill, especially if the private sector stays in this funk.  Enough is enough.

TO GOVERNMENT, this country was built on the backs of hard working Americans.  We don’t need you to be our parent.  We’re not five years old.  Keep us and our families safe from crime.  Maintain our infrastructure.  Maintain a strong national defense.  Get us independent from foreign influences such as oil.  Get out of bed with corporate America.  Then get out of our way.  That tax money we send you is ours.  Spend it prudently.  Spend it like it’s yours and not like some teenage kid who just found $100 on the floor at the local mall.  Don’t try to put a temporary patch on long-term secular problems just to get re-elected.  Don’t turn us into Greece, a country with too many citizens who feel a sense of entitlement to government programs.  Quit your squabbling and stop running for office 24/7.  This is not a monarchy so stop acting like you are all kings, queens, lords and dukes.  You are in office to serve your constituency, not yourself.  We voted you in.  We can vote you out.

THE BOTTOM LINE – We all lived and spent like drunken sailors for nearly twenty years.  The finger pointing will not help solve the problems of America.  We must also recognize that we are in for the fight of our collective lives and that it will take awhile to emerge from this mess.  The real threat is coming from Brazil, India, China and from countries similar to these – countries that aspire to be like America and are working hard to get there.  We can maintain our place in the global economy if we all pull together for the greater good; we educate our kids; we all chip in to get this national debt under control and we stop bickering like spoiled siblings.  If we can just accomplish a piece of this, the stock market will soar.  We did so during the early 80’s and 90’s and we can do it again.