MPG Core Tactical 60/40: July 2014 Performance Update

MW-BB798_sm6040_20130422180557_MDDear Mr. Market:

Have you ever woken up long before your alarm clock was set to go off? Put yourself in that state of mind for a minute. You see the alarm clock, take a pleasant mental check that you still have some time to sleep and you pleasantly roll over and shut your eyes; it’s almost like you just were rewarded free time which is the one thing we can never get back!

CLANK, BANG, SCREECH, HONK!?!?! What on earth?? Something that is NOT your alarm clock rattles you awake and spoils this momentary feeling of pure relaxation.

That’s basically what Mr. Market did to everyone in July. The last day of July brought people a wicked reminder of what the market can do if you let it put you to sleep. We haven’t seen a sharp drop like this in a few years and it certainly got your attention, didn’t it?

We actually saw a rather sharp selloff in some of the technology and momentum stocks in April of this year but this time it is broad based and appears to be signaling something more. Before we talk further about the markets and how they may have finally awoken some of you, let’s refresh our often short-term memories on why we run this monthly series of articles.

Click here to revisit the first edition of the MPG Core Tactical 60/40 Portfolio.

Here’s the current summary of the MPG Core Tactical 60/40 portfolio mix, which is updated as of this writing (August 4, 2014).

Click here to compare our portfolio against the benchmark.

What adjustments did we make?

One thing we try to avoid when it comes to managing money is to “pat yourself on the back without breaking your arm”. We did very little this month aside from clearly communicate that we thought not only was the stock market ready to correct but we also laid out what we planned to do about it. Read and click here to see exactly what we said. The moves we made in advance of the worst down day of the year were as follows: Continue reading

MPG Core Tactical 60/40: April 2014 Performance Update

MW-BB798_sm6040_20130422180557_MDDear Mr. Market:

Unless you’ve never picked up a financial magazine or read the business section of any newspaper, you have undoubtedly heard of the old investment adage “Sell in May and go away”. Many financial “experts” and journalists do their best to paint the summer months as those that are primed to underperform. Does history always repeat itself in exactly the same way? Nope. It’s not hard to find investors who sold last spring (or even the one prior) in anticipation of a nasty summer and they are still in cash or underweight equities. If you’re in that boat and don’t trust the stock market, you may sleep better at night for now but in the interim you’ve lost opportunity cost and missed another bull market.

The flip side to this is that bearish investors will eventually be right! The S&P 500 has not had a correction of -10% or more since October 3, 2011. Like many investors out there we firmly believe a correction of -10% to -20% is coming this year but we don’t think it will be the start of a bear market. The challenge behind all of this, however, is that the longer we go without a healthy correction the deeper and more severe the inevitable sell-off will be. Continue reading

High Frequency Trading – How does it impact you?

HTF robotsDear Mr. Market:

The markets are constantly moving from one headline to the next – some of them having a profound impact on the markets. Last Sunday night “60 Minutes” aired a topic that has been lurking in the shadows for years, suddenly it jumped up and grabbed headlines raising concerns and paranoia with investors. High Frequency Trading (HFT) has dominated headlines over the last week prompting a federal investigation and hours of debate.

Michael Lewis, author of “Flash Boys”, has been on a publicity tour claiming the U.S. Stock Market is ‘rigged’. Is the average investor at a disadvantage, on the outside looking in at the security exchanges? This week we encourage you to view a letter being sent to our clients and friends of the firm (High Frequency Trading letter) Continue reading

The New “MyRA” … A Direct Route To Retirement Or A Bad Detour?

Dear Mr. Market:

MyRA#7

If you ask the average hard working American what their top financial concerns is, it’s that that they won’t be able to retire.  We could certainly go on and on about different solutions and how people can get on track to make their dreams a reality but today we will focus on a new program offered from the government.  On January 29th President Obama delivered his State of the Union address.  One of the takeaways from this speech was a new retirement account called MyRA (short for My Retirement Account).

Currently over half of the U.S. workforce is not covered by a retirement plan through their employer.  MyRA is targeted at low to middle-income workers, encouraging them to save for their own retirement.  Contributions will be funded through automatic payroll deductions where individuals can start with as little as $25 and contribute amounts as small as $5.  Individuals would be guaranteed that their account would never go down and they will not pay any fees on the accounts.  Sounds like a great product doesn’t it?!  Well let’s take a step back and dig a bit deeper to really explore what the MyRA is all about….

The MyRA can essentially be viewed as a way to introduce individuals that have not saved or funded a retirement account to the many long-term benefits of doing so. At this point companies are not required to be involved in the program, if President Obama wants to force employers to participate a vote from Congress would be required.  The accounts would be funded with after tax dollars much like a Roth IRA.  While it will be funded with payroll deductions individuals will be able to keep their accounts when they change jobs.  MyRA is subject to Roth IRA income and contributions limits.  Individuals can invest up to $5.500 per year (or $6,500 for investors 50 or older); once the owner reaches the age of 59 ½ they can make withdrawals tax-free.  There are also no required minimum distributions (R.M.D.’s). Continue reading

Should You Buy Target (TGT) Stock?

Target InvestigationDear Mr. Market:

With the holiday season now in the rear view mirror U.S. consumers are being reminded of the world we live in.  In the middle of the holiday shopping season Target made an announcement that had an impact on millions of individuals.  On December 19th Target announced that 40 million credit and debit cards had been jeopardized by a cyber attack.  Since then the number of cards has grown to 70 million, it has been reported that the number could grow to as many as 110 million!  Just last week Neiman Marcus released news that it is dealing with a similar situation and other retailers are likely to be in the same boat in the coming weeks.

On Friday (January 10th) Target announced that the security issue had a negative impact on their holiday shopping results.  Stores saw sales decline up to 5% (depending on location) when compared to the previous years results.  When 4th quarter earnings are announced on February 26, 2014, the additional expenses the company has incurred due to the hacking incident will certainly have an impact.  CEO Greg Steinhafel announced that 4th quarter EPS (earnings per share) were lowered to $1.20 – $1.30 from the previous guidance of $1.50 – $1.60.  Continue reading

Force your Portfolio to be Disciplined in 2014

Rebalance Cartoon

Congratulations Mr. Market…you’ve delivered a tremendous year of returns to equity investors!  With the broad equity markets delivering returns over 25% (S&P =29%, DJIA = 25% and the NASDAQ = 37% as of 12/27/2013) investors are now faced with the question of what to do now?  For those investors that were invested in stocks, especially domestic stocks, year-end statements are going to look very impressive but remember that is only on paper. As we step into 2014 what should investors do with their portfolios?

Often investors choose to go with an adage commonly heard in casinos – “Let it ride!” Although the market defied odds and dodged several ominous obstacles, there is no guarantee that it will continue to do so going forward.  Sitting back and doing nothing could very well allow those returns to dwindle away and become nothing but a memory.  It wasn’t that long ago that ‘The Tech Bubble’ hit investors with a strong left uppercut that they never saw coming.  Mr. Market delivered three years of impressive returns (1997 = 33%, 1998 = 28% & 1999 = 21%) only to see it disappear with three consecutive years of negative returns (2000 = -9%, 2001 = -11%, 2002 = -22%) and let’s not forget 2008 (-37%).   How can investors avoid repeating history while also managing the risk and unrealized gains in their portfolio?  Continue reading

Mutual Funds’ dirty little secret….Capital Gains Tax

cap gains tax cartoonDear Mr. Market:

With one of the strongest stock market years on record many mutual fund investors will end the holiday season by unwrapping a lump of coal. In January most mutual fund companies and the IRS (Internal Revenue Service) will mail out Form 1099-DIV. 2013 will bring mutual fund investors capital gains distributions ranging from 6% to 60%. It’s no secret that we’re not fans of most mutual funds and capital gains distributions are just one more reason.  Today we will take a moment to address an issue that every investor (especially mutual fund investors) needs to be aware of – Capital Gains Distributions.

Capital Gains Distribution – The payment of proceeds prompted by a fund manager’s liquidation of underlying stocks and securities in a mutual fund. Capital gains distribution occurs when a mutual fund manager liquidates underlying positions that have made gains since they were added to the fund. Capital gains distributions will be taxed as capital gains to the person receiving the distribution. (Source – Investopedia.com)

 When a mutual fund sells any position at a profit it creates a capital gain, these can be either short-term or long-term.  By law mutual fund companies are required to distribute these gains to all of their shareholders.  If the position was held for less than a year it will be considered short-term. These are distributed to shareholder as income dividends and taxed at their ordinary income rates.  Long-term capital gain distributions (over one year) are taxed as follows: 0% for taxpayers in the 10% and 15% tax brackets, 20% for individuals in the 39.6% bracket and 15% for all others.  The key thing to remember when looking at mutual funds is that the investor has absolutely no say as to when positions are purchased or sold within the fund and the taxable consequences that are incurred. Continue reading

Raise Minimum Wage = Higher Unemployment


images-28
Dear Mr. Market:

One of the greatest things about this country is that we are all free and entitled to voice our own opinions.  In this forum, however, we rarely intend to bring up political divisions as there are simply too many and we find very little upside in wasting our energy in that department.  Certain issues, however, have a direct economic impact to you and we believe those are worth digging into. The most recent debate over raising the minimum wage has certainly “ripped the Band-Aid” off an old but existing economic wound.  Taking all feelings and intuitively good intentioned emotions aside, let’s set the economic record straight on this hotly debated topic.

Currently Congressional Democrats want to raise the current minimum wage from $7.25 (nationally) up to $10.10/hour and also index it to the Consumer Price Index (CPI). With a Republican-led House this is unlikely to happen as they believe most businesses would have to cut jobs. Supporters of wage increases claim that the standard of living rises, poverty levels drop, and businesses become more efficient. The opposing side counters with claims of increased poverty, higher unemployment, and detrimental effects to most businesses. Who is right when it comes down to pure economics?

At a first glance raising the minimum wage obviously seems fair and just. Most people initially want that and so do unions who dislike low-cost labor competition. Clearly a full-time worker making the minimum wage is likely to be well under the poverty level. (family of 4 = $23,550 ) Over half of the minimum wage population is well under the age of 25. The majority of individuals in this population are unlikely to be supporting a family of four and in all likelihood are working their first job.

If it was just about picking a number and raising the wage to one that seems or “feels” right we ought to just go with $20/hour, right? Picking a random number or one that works backward to solve an economic problem won’t solve anything. In economics it comes down to basic realities like supply and demand, cause and effect etc. $20/hour seems a lot more “fair” than $10/hour but realistically when setting prices they must be derived from demand and economic data instead of grabbing them from thin air or what feels right.

The most famous economic study that supports raising the minimum wage is from 1992 by Card & Krueger. (David Card and Alan Krueger) These two economists surveyed fast food franchises in the New Jersey area before and after a minimum wage increase of 18.8% ($4.25/hour to $5.05/hour). Their studies showed that employment actually increased. Why was that and should proponents of raising the minimum wage really balance their main argument on this famous study? Continue reading

Who is the ‘Fed’ and what do they do?!

Fed Reserve CartoonDear Mr. Market:

“Who and what is the Fed”?  “What do they do” and “How do I understand what they are really saying and how it will impact me!?”  These are questions that we often hear from investors.  The Federal Reserve frequently dominates economic headlines and although its actions impact us all, very few of us truly understand what “the Fed” is or what it does.

We all hear terms like: “Don’t bet against the Fed”, “Dovish or hawkish sentiment” “Quantitative Easing” and “When will the Fed begin to taper”?  These are just the tip of the iceberg as the press and media attempt to interpret anything and everything released by members of the Fed.  Let’s take a moment and look at the basics of what the Fed is.

The Federal Reserve System (the “Fed”) is essentially the central banking system of the United States.  Through the Federal Reserve Act of 1913 it was created in response to financial uncertainties in the early 1900’s.  Over the last century the responsibilities and roles of the Federal Reserve System have evolved to address the changes in our economy. Continue reading

How to Add 3 Nobel Prizes to your Portfolio

nerd money Dear Mr. Market:

What if you, the investor, had all the knowledge and findings that it took to win a Nobel Prize in Economics? Would you be a better investor? Believe it or not…with the amount of news disseminated in today’s hyper-information and “data dumping” world…you likely already have all it takes to be a more disciplined and well schooled investor.

This past Monday (10/14/2013) the winners of the prestigious Nobel Prize for Economics where announced.  All three winners were American, which marks a trend as at least one American has won the award since 1999.  The winners: Eugene Fama, Lars Peter Hansen and Robert Shiller were recognized for their outstanding research and work in the financial markets.  While their work does not perfectly align there are several similarities and the bottom line is that you can never trust Mr. Market!

 Summary Of The Winners:

  • Eugene Fama’s research has revealed the efficiency of financial markets. If you’re a financial advisor who makes a living pitching expensive mutual funds or annuity products at clients you won’t likely have a framed portrait of Dr. Fama in your plush office.  Fama basically states that the market absorbs information so quickly that investors simply can’t outperform it consistently.  He is credited for popularizing the use of index funds as an investment option.
  • Lars Peter Hansen works strictly with data (econometrics), creating statistical models in an effort to test competing theories.  His work has allowed researchers to focus on what truly drives the financial markets. Of the three winners Hansen is the least known and popular but he ironically helps connect the other two winners’ work into something investors need to be aware of; you simply need to derive conclusions from what you do AND do not know.
  • Robert Shiller is best known for creating the Case-Shiller Home Price Index Study and now perhaps for the fact that he is married to Janet Yellen, the next Federal Reserve Chairman.  We’re huge fans of behavioral finance so the next time you hear someone talk about a “bubble” you will know who originally broke ground on the concept. His research has shown that investors are irrational and that markets develop bubbles that will eventually burst (he predicted both the Tech and Real Estate Bubbles). Continue reading