Monthly Archives: August 2013

Harried 401(k) Sponsors Put Their Faith in Advisors

From Financial Advisor IQ:

The ever-harsher spotlight on 401(k) plan fees may benefit advisors as more plan sponsors hire them to (let’s not mince words) cover their behinds.

Most plan sponsors don’t do enough to screen their 401(k) provider, mostly because it’s not their core competency.  They want to get a plan in place and then hope that it works out for them and their employees.  Here’s a thought: hire an experienced investment advisor to screen 401(k) providers.  That way you will be dealing with someone who’s not trying to sell you on his 401(k) platform.

According to the company’s recently published “Plan Sponsor Attitudes Survey,” 84% of sponsors use an advisor today, up from 75% last year. But 38% are dissatisfied with their current advisor, and 10% are looking to switch. Asked why, 31% said they “need a more knowledgeable advisor,” up from 30% last year and 25% in 2010. A “knowledgeable advisor,” according to the respondents, informs plan sponsors about regulatory changes, consults on how to manage fiduciary risk, consults on plan design and helps minimize costs, among other things. (Fidelity surveyed nearly 1,000 plan sponsors online in March, in the fourth such study since 2008; plan sizes ranged from 25 to 10,000 participants, and Fidelity didn’t identify itself as the survey sponsor.)

If you are a plan sponsor and are looking for unbiased advice regarding your plan, call us for a consultation.

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The bond market is anticipating a change in Fed policy

Via the First Trust Monday Morning Outlook.

While it certainly hasn’t made the headlines that it should have, the bond market has been kicked in the teeth.    After bottoming at  1.61%  on May 1, the yield on the 10-year Treasury Note hit 2.84% on Friday,  its  highest level in two years –  the worst bear market move in bonds since  the end of the 2008-09 financial panic.

This may well be the move in the bond market that we have been anticipating for some time.  It was utterly predictable and inevitable.   Having anticipated this move and positioned our portfolios appropriately, we will have to hang on for the ride as we have other market transitions.

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Auto Makers at Full Capacity

Karl Brauer, senior analyst at Kelley Blue Book, reported that U.S. automakers plan to spend $434 million to boost production capacity in order to meet rising demand, according to Yahoo! Finance. With new car sales climbing to an annualized pace of  roughly 15.5 million in 2013, which is closing in on pre-recession levels, most of the auto factories in the U.S. are currently operating near full capacity, according to The Wall Street Journal. New assembly plants are going up in the U.S. and in Mexico. Car companies have been able to increase sales despite higher prices, fewer incentives and lower inventory levels.

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Corporate Earnings News

From the investment management firm First Trust comes this bit of earnings analysis.

Of the more than 450 companies in the S&P 500 that have reported Q2’13 earnings, 65% topped their bottom-line estimates, but only 54% beat top-line estimates, according to S&P Capital IQ. At this stage of the recovery,  Companies have cut costs about as much as they possibly can, according to Jeffery Saut, chief investment strategist at Raymond James Financial. Saut believes that the economic activity is going to pick up moving forward. Thomson Reuters expects revenue growth among S&P 500 companies to rise 2.2% in the second half of 2013, and 3.9% in the first half of 2014, according to ChiefExecutive.net. That compares favorably to the 0.8% growth posted in the first half of 2013.

 

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Why Investors Should Ignore Economists

From the Daily Ticker

Ben Bernanke, chairman of the Federal Reserve and inarguably one of the most important economists today, has publicly chided his fellow economic brethren for their inability to correctly forecast the future.

“Economics is a highly sophisticated field of thought that is superb at explaining to policymakers precisely why the choices they made in the past were wrong,” he told Princeton University graduates this May. “About the future, not so much.”

This week Bernanke and other central bankers will convene in Jackson Hole, Wyo., for their annual summer retreat. They’ll speculate, they’ll pontificate and they’ll ruminate about how to fix the sluggish U.S. economy and boost job growth. Solutions and proposals will be shared and debated. But very few of this year’s attendees will accurately predict how the U.S. or global economy will perform next year.

For these reasons investors are better off tuning out the economic noise, says Barry Ritholtz, CEO of Fusion IQ and CIO of The Ritholtz Group.

“Economists distract investors from what’s important,” he tells The Daily Ticker.

Ritholtz points to the monthly nonfarm payrolls number as a perfect example of what he’s talking about — a data point that is closely tracked by investors, economists and policymakers. An upside surprise in the jobs report could lead to a 100-point spike in the Dow Jones Industrial Average. Yet a number that misses the consensus estimate could send U.S. markets plunging. Ritholtz says these diversions confuse investors and cause them to take their eye off the [investing] ball.

“The jobs report is overrated… it’s meaningless,” he says. “All we care about are the long-term trends: is the economy creating jobs? Are wages going up or are wages flat? What does this mean relative to inflation?”

Not quoted is the fact that economic data is aways revised in subsequent periods.  The GDP (Gross Domestic Product) number is revised for years after the first “guesstimate” is issued.  The payroll employment number is also misleading, not only because the actual number is always compared to the “expected” number (who cares?) but also because unemployment numbers are “adjusted” and depend on the estimates of the number of people in the work force.  If enough people leave the work force, “unemployment” drops.  As an example, if everyone stopped looking for work because they are so discouraged, the official unemployment number would drop to zero.  Another way that employment numbers are distorted is that part-time jobs are counted the same as full-time jobs.  If 10 full-time workers are fired and replace with 20 part timers, the jobs report shows a gain of ten jobs.  You can often learn a great deal more about the economy by looking around you that by studying government statistics.

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Bank of America may dissolve Merrill Lynch

Well, here’s a shocker.  Via Investment News:  Merrill Lynch, the 99-year-old firm known for its “thundering herd” of brokers pitching stocks to Main Street, may cease to exist as a legal entity more than four years after being acquired by Bank of America..

While Bank of America will keep the Merrill Lynch brand for its retail brokerage and investment bank, the Charlotte, North Carolina-based company plans to dissolve the subsidiary as early as the fourth quarter, according to an Aug. 2 filing. The firm will assume all of Merrill Lynch’s obligations and debt.

Merging the legal entity could help Bank of America hit its $8 billion-a-year cost-cutting target.

The change is not expected to change Merrill Lynch’s public face … but take it from someone who has been through corporate buy-outs before – that’s what the firms always say just before the old brand disappears.

From the article:

Bank of America faced regulatory probes, investor lawsuits and criticism from lawmakers over claims it didn’t warn shareholders about Merrill Lynch‘s mounting losses before they voted to buy the firm for $18.5 billion.

Last year, Bank of America agreed to pay $2.43 billion to investors who suffered losses during the takeover, engineered by former CEO Kenneth D. Lewis as the world’s biggest financial firms teetered near collapse during the 2008 credit crisis. Merrill’s operations were credited with fortifying Bank of America in the years that followed as costs piled up from bad home loans and credit cards.

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RIAs continue to surge while full-service brokerage firms sputter

From Investment News:

Independent registered investment advisors and discount brokers are expected to continue picking up market share from traditional brokerage firms this year, according to Aite Group LLC.

RIA firms expect to grow their client numbers 12% this year, while wirehouse advisers expect 7% growth, according to an Aite survey of advisers completed in the first quarter.

“We see that RIAs are still running ahead almost 2 to 1 in terms of growth, compared to the full-service brokerage models,” said Alois Pirker, research director in wealth management at Aite Group.

RIA have the advantage because they are more nimble and able to customize services, Mr. Pirker said. “The focus that RIAs have is really something that’s hard to replicate,” he said.

We sat down with some of our clients recently to ask them why they chose Korving & Company as their investment advisory firm.  Some of the comments were:

  • You’re not Merrill Lynch or UBS
  • Personal service
  • Our neighbor
  • Home town
  • Lot of attention
  • We trust you
  • Like visiting someone in their own home
  • Convenient location

We’re flattered by the praise and appreciate the loyalty of clients who have been with us for decades.  We are also pleased that the children of our older clients are ready, even anxious, to continue having us manage their finances after their parents have passed on.  It’s an honor and a responsibility that we take very seriously.

Thank you.

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The Northeast Blackout of 2003: When Grid Power Went Out, Diesel Power Came On

Did you ever notice those large, yellow engines that you find at facilities like hospitals and shopping malls?  When a facility absolutely has to have electricity even when the local power grid goes down, they have back-up generators.  A major manufacturer of these is Caterpillar, a company best know for earth moving equipment, but the premier supplier of back-up power generators.

From a recent press release:

Diesel Power Plays Growing Role in Preparedness, Responsiveness and Resilience

In Blackouts & Disasters

Washington, D.C. – One of the memorable images of the massive Northeast Blackout of 2003 was the continued illumination of the Statue of Liberty amid the overwhelming darkness throughout New York City and several other states.

This was possible because when the grid power went off, the diesel power came on.

Wednesday, August 14, 2013 is the 10 year anniversary of the massive blackout.

“The Northeast Blackout of 2003 and last year’s Superstorm Sandy were unfortunate reminders of the vulnerability of our electrical grid but they also highlighted the vital role diesel power plays in assuring public health and safety from natural and man-made disasters,” said Allen Schaeffer, the Executive Director of the Diesel Technology Forum.

In both instances, hospitals, data centers, water and sewage facilities, fueling stations, and critical communication and transportation systems required continuous power to protect public health and safety. Emergency backup electrical generators powered by diesel engines provided a unique combination of reliable, immediate and full strength electric power during these failures in the primary power supply systems.

“When grid power goes off, diesel-powered generators come on and uniquely provide a rapid response time – within just 10 seconds.  They were able to handle heavy electrical loads with a steady supply of high-quality power and superior performance for transient or fluctuating power demands due to the high-torque characteristics of diesel engines,” Schaeffer said.

Many people think fo the government and FEMA when they think about the reaction to natural disasters.  But often it’s local preparedness and things like back-up generators that really save lives when seconds count.

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Financial Illiteracy Prevails, Even Among the Well-Off

A recent issue of Financial Advisor magazine recounted a quiz that was given to 1,000 investors with annual household income of at least $75,000 and assets of at least $100,000.  Nearly half failed the test.

Here are some of the questions.  How well would you do?

  • What does an index fund do?
  • What happens to the value of bonds when interest rates go up?
  • Which one leaves you richer:
    • (A)saving $1,000 a year from age 35 to age 65 and earning an average 8% per year, or
    • (B)saving $1,000 a year from age 25 to age 35 with the same return and then stopping?

For the answers, scroll down.

  1. An index fund is a mutual fund that has a portfolio that matches a broad based index.  Examples are the Dow Jones Industrial Average or the Standard & Poor’s 500 index.  That are many other indexes for small and mid-cap stocks, foreign stocks or bonds of various kinds.
  2. When interest rates go up the value of existing bonds goes down.
  3. The answer is (B).  Beginning earlier makes all the difference.  The person who started at 25 and stopped at 35 would be worth more than twice the amount at age 65 than the one who started at 35 and saved until 65.
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What Is the Biggest Mistake Investors Make When Evaluating a Fund?

The Wall Street Journal asked a number of investment professionals and here are some of the answers.

  • Picking funds based on their past performance
  • Investing in a mutual fund without having the slightest idea what’s inside it (particularly target date funds)
  • Choosing a fund based on the number of “stars” it has.
  • Focus on recent performance.   Only 4.69% of all domestic funds kept their top-quartile rankings for the three
    consecutive 12-month periods.
  • Too much emphasis on expenses.  Ultimately the purpose of investing is to make money, not to save it.

All good advice.

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