This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Sunday, July 26, 2009

Stocks should keep rising

After putting in an emotional bottom nearly two weeks ago, the market has since turned back upward with considerable force. While lately we had been nervous that the bottom could fall out and stocks could be headed to new lows, stocks put an end to that when they had a severe sell-off, then abruptly turned on a dime and headed higher.

This more recent market action indicates that while it is still possible that stocks could turn back down and retest their lows, it is now much more likely that stocks will continue their upward trend, after a quick downward correction in the near future.

After seven consecutive days of bullish trading, the market is in need of such a correction in order to continue a healthy upward trend. Such corrections occur no matter which direction the market is heading in, and serve to calm any excess exuberance on any one side of the market.

Interestingly enough, stocks have lately been on the rise despite the US dollar falling in global currency markets. In fact, equities seem to be rising more quickly when the dollar falls faster. This could be indicative of foreign capital returning to the US markets as the dollar weakens.

As the dollar weakens, foreign investors benefit more from the exchange rate, receiving an increasing number of dollars per unit of foreign currency, Euros for example. If foreign capital truly is beginning to flow back into the United States, it would tell us that the US is beginning to look relatively safe to foreign investors, which is absolutely critical for our role in global economy.

This weakening of the dollar is something that we have seen coming from quite a ways off, and have written about on numerous occasions. Our case was supported earlier this week by an article in the London Financial Times, which cited published remarks from China’s premier, Wen Jiaboa, as saying that China would be using substantial portions of its foreign exchange reserves to buy foreign companies.

These comments have been interpreted by HSBC’s chief China economist, Qu Hongbin to mean that China will be diminishing its US dollar reserves in order “to reduce its reliance on the US dollar as a reserve currency,” (Anderlini, Financial Times).

As I’ve argued previously, China has taken advantage of this crisis in order to better its economic position internationally, and it is likely to emerge as one of, if not the world’s foremost economic superpower.

The economy, from a domestic standpoint, certainly may not be getting better, but at the moment it doesn’t seem to be getting any worse, with the obvious exception of unemployment. However, overall the market seems to like the news that has come out recently. This should imply that the market will continue its recovery, so long as the economic numbers being released don’t get any worse.

Remember that unemployment is a lagging indicator, while the stock market is a leading indicator. Generally speaking, the stock market will begin to improve about six months before the economy does, while unemployment will begin to subside six months after the economy begins its recovery.

Sunday, July 19, 2009

8500

The big question this week is whether the market has turned a corner. As I write this, the Dow Jones Industrial Index is trading back above the crucial 8500 level. We have considered this 8500 a critical pivot point.

If the Dow can stay above the 8500 point, it may be ready to advance further, following its recent correction. In any event, there are plenty of investors (myself included) that are breathing much easier with the market back up off its most recent bottom.

Some of this advancement is due to the Producer Price Index (PPI) numbers that were released on July 13. PPI is a reflection of prices at the wholesale level, essentially inflation before it trickles down to the individual consumer. When PPI was released, it was higher than the market had suspected, and stocks initially reacted positively to the news.

The next day, July 14, Consumer Price Index (CPI) numbers were released, and were also higher than expected. In response, stocks again showed strength. Furthermore, the dollar has resumed its downward trend in the currencies markets, weakening against several major global currencies, as well as commodities.

The big picture, as evidenced by PPI, CPI, and currency markets, is that inflation is picking up and the dollar is weakening. And lately the stock market has been reacting positively to any news hinting at approaching inflation.

This is because, despite being a four-letter word in many conversations, inflation isn’t inherently a bad thing, ITALespecially in this market. With all the new money created last fall, any signs of inflation indicate that this new money is beginning to circulate through the economy. This resumption of the flow of credit is exactly what is needed for an economic recovery.

However, that isn’t necessarily a bad thing. The Economics majors out there will recall that a weakening dollar does have its advantages on a global scale. First, it makes imports more expensive. Second, it makes American exports relatively more attractive in other countries.

Both of these things lead to increases in demand for American goods and services, which lead to increased production, lower unemployment; and a more healthy economy overall.

Unfortunately, inflation can also wreak havoc on an economy domestically. Just ask anyone who lived in the Weimar Republic. There are plenty of stories of wheelbarrows full of Weimar dollars being traded for a single loaf of bread.

Here’s a more relevant example: A typical American factory worker in 1970 was making $10,000 per year. Let’s say he retired with a $100,000 retirement plan, which was considered adequate at the time, and invested that $100k in a high grade corporate bond, which at the time were paying 6% interest.

This gave the retiree $6,000 per year, or 60% of his working income, which was considered plenty. To give you some perspective, in 1970 a new American car cost approximately $3,500.

Fast-forward to 1980, after a decade of high inflation and rising interest rates (a predicament which we are poised to see again very soon). The retiree is still getting his $6,000/year. However, a comparable new car costs about $12,000. Furthermore, if the retiree decided to sell his corporate bonds, the market price of the bonds he originally bought has fallen to about $57,000 because of the rise in interest rates.

Remember this: Bernanke is a student of the Great Depression. Since he was appointed Chairman of the Federal Reserve, he has maintained that he would inflate his way out of a financial crisis like the one we faced last year. And inflation isn’t bad — if you’re prepared for it. But if you aren’t prepared, look out.

Sunday, July 5, 2009

Living beyond means

Recently released numbers from the U.S. Bureau of Economic Analysis show that the US once again has an increasing personal savings rate. Unfortunately, this rate has been declining for decades as Americans began living increasingly beyond their means.

On more than one occasion the savings rate even dipped into negative territory, meaning that America’s population in aggregate was borrowing more than it was saving. This high consumption rate in turn has led to excessive borrowing, which was the ultimate cause of the financial crisis that occurred last year.

Generation Y, my generation, seems to have particular difficulty saving money. First off, we’re still relatively young, and young people in general are less inclined to think long term. However, young adults today are worse than previous generations in that they see disposable income and no need to save a portion.

This inability to save is partially the fault of parents. Many simply never taught their kids to save. Mine was the generation of the allowance. Parents thought they were teaching us a lesson and that by giving us a defined amount for any given period, we would learn to budget. Instead, kids got their allowance and viewed every cent as spending money.

To people who never think about the benefits of saving, allow me to introduce the 8th Wonder of the World: Compound Interest. Consider the following examples:

1. Let’s say that at age 25 a person had accumulated $10,000 to invest. If they can earn, say 10% per year for round numbers, on average, how much will he have at age 60, assuming he never contributes another dollar?

2. What if that same person waited until age 30? How much would they have at 60 then?

3. And if they waited until age 35, what’s there at 60?


The answers can be found at the end of the blog. Keep in mind that those results reflect growth with no additional savings. To see even more phenomenal results, consider the following:

4. Let’s say I have a friend who’s 25 years old and has little or no savings to date. Realizing the predicament he may face in the future, he has decided to adjust his spending habits to start saving $100 per week. While this is no large sum, let’s say he continues this pattern of saving for the next 35 years. Assuming 52 weeks per year and an average annual return of 10%, how much will my friend have when he’s 60?




The real concept here is to let your money work for you. For continued reading on the subject, we strongly recommend Rich Dad, Poor Dad by Robert Kiyosaki, which explains accounting and saving in terms that are much easier to understand than textbooks.

The lesson here is simple: Save early. By putting money back early on, you allow it to accumulate over an extended period of time with little or no extra work. The reality is that the young adulthood comprises some of the prime saving years. It’s the time before we start our own families and have kids, while living expenses are relatively lower. This is the time before diapers, toys, babysitters, Disney World, and, if they’re lucky enough, kid’s college tuition, room and board, etc.

The bottom line is to save early so you can afford to live better later on. And, perhaps most importantly, when you do have kids, pass the lesson on. Don’t make them learn the hard way.






Answers: 1. $ 281,024 2. $174,494 3. $108,347 4. $1,550,259