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.

Wednesday, February 24, 2010

Skeptics Shake the Street

Among the big headlines this week were the consumer confidence numbers, which came in surprisingly short of expectations, sending ripples through the financial markets. Fortunately for investors, consumer confidence, just like market sentiment, tends to be a good contrarian indicator.

Looking back over history, markets near a bottom are also typically near a bottom in consumer confidence – when consumer confidence should be high, in expectation of the coming recovery. Similarly, consumer confidence tends to be high near market peaks, when it should be low, reflecting fear among investors of the ensuing market decline.

However, what we’ve seen even more rampant in markets recently is widespread complacency. Investors remain hopeful that the market will not turn back towards its lows set in March of 2009, but they are plagued with uncertainty.

This uncertainty has led to, rather than changes in investor portfolios, to investors simply sitting on their hands and a general refusal to do anything, namely shying away from or taking on additional risk. This ‘out of sight, out of mind’ approach can be extremely damaging to investors, just as it was in the fall of 2008.

We would equate the results of this mindset to the old adage about boiling a frog. Unfortunately, this is precisely how markets tend to operate. While things can happen quickly in the market, trends develop over a longer period of time, and then one day people wake up only to realize that half their savings are gone.

Case in point: By the time many market commentators finally began coming out and saying that they thought the stock market had made a bottom in March, the market was already halfway to the highs it set last month.

Another example of this anomaly is with regard to the US dollar, which has lately been seeing increased strength as trouble spreads through European countries and doubt grows as to whether the Euro will survive.

Recently, many experts have begun saying that they expect the dollar to strengthen in the future, and we agree. However, we were forecasting relative strength in the dollar before it gained 10% against a basket of major global currencies.

Many of these developments in the markets are extremely difficult to time precisely, and given the violent market swings, due at least in part to government intervention in financial markets, which has seen a marked increase since 2008.

However, we have encountered a good deal of investors who, despite current circumstances surrounding the economy and financial markets, remain accustomed to the returns they were earning for several years leading up to 2008, when things were still booming.

Since 2008, much has been said about the ‘new normal’ and the need for investors to adjust their investing strategies to fit the new landscape. Investors need to adjust not only their strategies, but their expectations as well.

For several years, 20%+ annual returns were not uncommon among competent financial advisors. Many investors, as a result, became unrealistic in their financial expectations, just as many became unrealistic with regard to how large a home they should own, or how nice a car they could afford.

Just as is the case for consumer spending in this country, investors need to hunker down and adjust both their strategies and expectations for the growth of their savings and their prospects of retirement. It may not be what anyone wants to hear, but it’s something they need to hear if they are to climb their way out of the hole in which they now find themselves.

Wednesday, February 17, 2010

Asinine Assumptions Abound in Turbulent Times

Friends, it may come as a shock, but there is a war being waged under our very noses. This war is not fought with guns, tanks, or bombs; its casualties are hardly noticeable. In fact, many haven’t even been born yet.

The war being fought this very day is an economic war. Its trenches are stock exchanges and trading pits around the world. Its weapons, from foreign exchange and repurchase agreements to credit default swaps and collateralized debt obligations, are being deployed by troops, Goldman Sachs and JP Morgan Chase among them, worldwide.

While the war wages on and opposing forces shoot it out at trading posts across the globe, little thought is given to collateral damage or innocent casualties, mostly because many of the casualties are our grandchildren’s grandchildren. They will bear brunt of the goings-on in today’s markets, not us.

Even after all we’ve been through over the past two years, the trend of today remains excess: Excess spending financed by massive debt. The only difference is who is borrowing. Instead of individuals taking out mortgages with no-doc loans, the biggest borrowers now are governments, not consumers.

Rest assured, in the long-run the effect will be the same. The bill will come due, someday; just as it did two years ago for spending that began with baby boomers.

The biggest concern to investors today is, or should be, sovereign debt. Greece has been making headlines lately because of its own crisis, but that hardly skims the surface.

Far away from the euro zone, a grand experiment which may or may not survive this turbulent time, there are countless municipalities that have racked up considerable debt, only to see their tax revenues dry up as a result of high unemployment, falling property values, and tightening consumer spending.

Like corporations and consumers, governments on all levels must also rein in their excess spending and make every attempt to relieve themselves of debt burdens. Some will ultimately fail, just as Americans who filed for bankruptcy and Lehman Brothers before them. There are always casualties in war.

However, most governments possess tools unavailable to the private sector. Whether towns are forced into receivership or states must halt tax refunds, as California did last year, the tools available to the public sector are always more abundant. However, the decisions that have to be made are not easy.

It takes a lot of discipline for politicians to rein in spending and cut government programs, rather than playing the usual ‘blame game.’ The fact is that governments could very easily fix many of the problems they face, but not with gutless ‘leadership’ so common today.

That doesn’t mean it’s impossible for governments to change their ways. The world today is free of many long-held assumptions. Until 2008 who ever thought that Bear Stearns would cease to exist, or that GM could go into bankruptcy? Did anyone ever think that they could see home values cut in half?

Unfortunately, in the place of these abandoned beliefs, new assumptions are forming. The new idea quickly gaining popularity is that the US must be on the gold standard, or else the dollar will become worthless, that the price of gold is going to the moon on an Iranian shuttle, and, lastly, since the recession is finally over, that the markets will keep going up.

Unfortunately, these and other assumptions will certainly be proven wrong, as sure as the Earth is round. Among the most deeply-imbedded assumptions in popular thinking, with the most far-reaching consequences for people around the world, is that governments can’t go broke.

The United States’ AAA credit rating was not pre-ordained, it was earned after decades of financial responsibility; and Treasury bonds are not riskless securities. Just ask anyone who purchased a 30-year bond at the beginning of last year, only to see their bonds fall by more than 30% by the end of 2009.

The world is constantly changing. Assumptions can prove to be very, very dangerous to investors. Those who fail to adapt will go the way of the Dodo, as will their chances for retirement.

Thursday, February 11, 2010

Market to Consolidate While Economy Catches Up

With the market having pulled back since leveling off and topping out in January, we believe that was is now developing is the beginning of a trading range. Last month when the market made a top, after coming off the March bottom, it did so approximately halfway between the 2002 market bottom and the all-time high in 2007, which is technically significant.

Many readers will recall that we have been saying since the market started down two years ago that we expected, once the rebound passed, the market would enter a long-term consolidation pattern, where it was expected to say for as long as a few years.

Unlike some ‘doom-and-gloom’ preachers, we remain optimistic with respect to both the global economy and the financial markets. What we see developing in the market will certainly allow for profits, but certainly not for investors employing a buy-and-hold strategy for their portfolios.

Fortunately, we believe most investors have learned the valuable lesson that buy-and-hold doesn’t work, particularly after seeing no gains in stocks over the last decade. For those poor souls who have not yet adapted to the new investment landscape, their fruitless decade may last longer still.

While the market appears poised for a long-term consolidation, we continue to see improvement forthcoming for the economy. However, as financial markets tend to lead the economy, much of the coming improvement has already been anticipated, and is already priced into the market.

The US economy, after such a dismal couple of years, is particularly poised for improvement. Case in point is the US auto industry, which has lately been hiring back workers to fill renewed demand after inventory reductions.

Over the course of this recession the rate of auto production had slowed so substantially that it actually fell below the historical scrap rate, a condition that is absolutely unsustainable. Now that production is revving up again, the recovery in the auto sector will be especially noticeable in the US economy.

As markets so often do, the global financial markets seem to be expecting a relative strengthening of the US economy internationally, as evidenced by the recent rally in the US Dollar in foreign exchange markets.

Though many investors have voiced concern that the dollar might become worthless, we do not see this as a real threat. We believe most who make this argument are less experienced investors who, for the most part, lack knowledge for real-world economics.

In conjunction with the dollar’s recent rally, commodities prices have taken a tumble, as of late. This is due in part to recent revelations regarding China’s recent trading in commodities.

While it had long been assumed that China had been consuming the resources it was purchasing in order to fulfill increased demand, it now appears that China has been stockpiling resources in preparation for a recovery, though much remains available for consumption.

Thanks to the realization that these resources have yet to be consumed, prices of many commodities are set to correct and the dollar likely to continue its recent rally.

Wednesday, February 3, 2010

Smart Wealth: Accumulating and Assigning

This week, in keeping with the Free Press' theme of "money matters," we'd like to discuss several subjects that we consider crucial within the field of wealth management. First and foremost we'd like to tackle a topic that is widely misunderstood by individual investors: compound interest.

Recently Treece Investments launched a banner ad on 1370 WSPD Toledo's website ( with a focus on this subject. Titled "The Power of Compound Interest," the ad shows a calculation revealing how much money an investor would have if they saved twenty dollars each week for fifty years, making an average of ten percent per year over the life of the program.

For those who haven't seen the ad, the result of this calculation is absolutely remarkable. An investor who met these conditions would, at the end of their fifty years, be a millionaire, with $1,331,511.37 accumulated between savings and interest.

This ad reveals several crucial aspects of investing. First and foremost it is an excellent illustration of the importance of saving early. If an investor began saving their $20 per week at age 20, they would have massed their $1.3 million fortune at age 70.

If, on the other hand, they waited until age 30 to get serious about saving, assuming they put away the same amount of money, when they hit 70 they would have less than half their younger, more responsible counterpart, or roughly $506,000.

This concept of getting serious about saving early in life is perhaps the biggest obstacle for individual investors. Most people, particularly younger segments of our population, of quite a bit of difficulty committing to a plan to put money away over a long period of time.

Equally difficult comes once an investor begins to see some wealth accumulate, when they must resist the temptation to spend that money on any number of unnecessary purchases. This has been widely popular in recent history, and has been reflected in economic numbers, particularly in the historical US savings rate, which had been negative for several years leading up to the collapse that began in 2007.

The second important revelation from this ad is the incredible importance of finding a way to achieve a decent rate of interest on money that has been saved away. The most common solution to this obstacle is finding a sound financial advisor.

The search for a financial advisor can, of course, be a task in itself. This has been discussed in detail previously, particularly in my article from January of 2009, entitled "How to pick a financial advisor." While we encourage readers to refer to this earlier article as a resource, the following are two of the critical things to look for when searching for a reputable advisor.

First and foremost, investors are strongly urged to check into a broker's history with FINRA, the regulatory agency that oversees brokerage firms and individual brokers. Investors can go to to look into broker histories. Any complaints filed against a broker are revealed in this documentation, and they should be of particularly concern to investors.

The second major concern for investors ought to be an advisor's returns net of fees. While obviously investors should not choose any one advisor for returns alone, making money is, in the end, the driving force behind any financial relationship. After a decade of no returns in stocks, this metric can be especially revealing about how much value a particular advisor actually adds to their clients' portfolios.

One last issue for many investors, particularly those who have had success in saving and investing, is how to responsibly pass their accumulated wealth on to future generations. While some argue that giving kids any substantial sum ultimately does them more harm than good, there are smart ways of going about the transfer of wealth.

For years one of the most popular methods for transferring wealth, particularly among the super-rich, has been through trust accounts. Trusts have long been utilized as a way of transferring wealth in a controlled manner, prohibiting beneficiaries from losing control of their spending.

However, more recently this fantastic legal device has gained popularity among all Americans. No longer are trusts reserved for Americans on the top rungs of the socio-economic ladder. Trusts have become significantly more commonplace, in part because they have become much more economical to establish and administer.

While there are certainly fees associated with trusts, like other instruments, they can be very worthwhile in aiding with the controlled transfer of wealth. In addition to trusts, there is an ever-growing list of retirement plans provided by the government of which many investors can easily take advantage.

Because individual circumstances vary among investors and goals quite often differ, we encourage investors to speak with a financial advisor to learn which plans can benefit them, and how. A reputable financial advisor can help investors to navigate the sometimes confusing world of finance, and they should be utilized as a valuable resource in a wide range of capacities.

Monday, February 1, 2010

Jobs? Jobs. Jobs!

The big news this week comes, naturally, from US auto companies. Rather than missing earnings estimates, battling unions, or closing down plants, auto firms are now making news for their surprisingly optimistic employment outlook.

This week announcements have come from GM, Toyota, VW, and KIA, who plan to add 100, 850, 2000, and 1200 jobs, respectively. While GM is expanding operations in Detroit and Maryland, Toyota is adding a second shift in San Antonio, KIA is building on its operations in West Point, Georgia, and VW is opening a new plant in Chattanooga (Shhh! Don’t Look Now, But the Auto Industry is Hiring,

The real star, though, of big auto has been Ford. The only big auto company NOT to accept government bailout funds, Ford has been roaring back in recent weeks, making moves to capture significant market share as its competitors struggle for sure footing.

On the issue of employment, Ford is also a star-performer. The auto giant is planning to hire 1000 workers by 2012 in order to operate a new Detroit plant that will engineer electric cars. An additional 1200 jobs will be coming to Chicago, where Ford will be manufacturing the new Explorer SUV (Ford to bring 1,200 jobs to Chicago area,

Thankfully, job prospects aren’t limited to solely auto companies. Tech tycoon Larry Ellison announced Tuesday that his company, Oracle, in addition to acquiring Sun Microsystems, also intends to add 2000 sales and engineering employees (CEO Ellison Sets New Course as Oracle Gains Control of Sun, Wall Street Journal).

Generally speaking, the economy seems to be picking up, partially due to increased demand, but even more so because inventory is finally dwindling. One prime example can be found with Caterpillar, which reacted extremely quickly when demand for its heavy-machinery dried up months ago.

At that time, in a period of just a couple weeks, Caterpillar [over-]reacted by closing plants and laying off workers en masse. Now that circumstances are beginning to improve, Caterpillar has little or no inventory remaining, and is having to scramble to bring back workers and accumulate the resources it will need to satisfy coming demand.

This phenomenon, though exhibiting incredibly poor supply chain management on the part of Caterpillar, is good news for the American people, who will ultimately benefit from the company’s sudden demand for labor and resources (Caterpillar’s Profits Fall, But Demand Picks Up, Wall Street Journal).

We are also beginning to see this occur in the housing sector, especially in California. Like cars and heavy machinery, housing production also ground to a halt when demand for new homes took a dive and financing availability disappeared. Now, with housing prices having stabilized at unsustainable lows – many existing homes selling below their replacement costs – the rebound has begun.

Though demand for new homes remains low, the inventory of existing homes is vastly diminished. There remains a large “shadow” supply of existing homes, mostly foreclosures, being held on by banks and not yet listed on the market. This inventory, too, will ultimately diminish as banks slowly work through homes held on their books.

Before closing, one slightly sour note remains in the area of real estate. Unfortunately, uncertainty still remains about the possible coming wave of defaults in commercial real estate. Recall that much of the problems in residential real estate resulted from subprime Adjustable Rate Mortgages, or ARMs. The ARM equivalent in commercial real estate is the Alt-A mortgage, standing for Alternative A-paper.

Despite the issues that arose from the wave of defaults that came in ARMs when mortgage rates reset, many professionals continue to believe that they could pale in comparison to the troubles that may result when rates reset in Alt-A mortgages on commercial properties.

As circumstances continue to improve, it’s important that we remain cautious in our optimism. While a rebound seems underway for many manufacturing firms and, as a result, employment, the outlook can change remarkably quickly. This is, hopefully, one lesson we’ve all learned over the past two years.

Dock David Treece is a stockbroker licensed with FINRA. He works for Treece Financial Services Corp., The above information is the express opinion of Dock David Treece and should not be used without outside verification.