Archive for October, 2016

Millennials and Debt

“Consider the total cost of life,” he said, which means it might make sense to look at other cities where the cost of living is lower and the salaries are, too, he added.
“Think about where you are going to get the highest return,” he said.
Like all things, consider your life choices as you would an investment! Hopefully many of our kids will heed this advice.

3th Quarter Update

Whiteford Wealth Management, Inc.
404 Broadway Street, South Haven, MI 49090
Tel: (269) 637-4400 Fax: (269) 637-4407

October 3, 2016
Market Update
Hello and welcome to Whiteford Wealth Management’s Third Quarter 2016 Update! We all know that there has been quite a bit of political rhetoric floating around next month’s election, so we will cover that later in this update; however, let’s begin by talking numbers.
Name of Index Dec. 31, 2015 (close) Oct. 3, 2016 (close) Percentage Change
Dow Jones Ind. Avg. 17,425.03 18,253.85 4.76%
NASDAQ (IXIC) 5,007.41 5,300.87 5.86%
S&P 500 2,043.94 2,161.20 5.74%
CBOE 10-Yr (^TNX) 2.269 1.622 -28.51%

Please be advised that the percentage change in yields do not necessarily represent a similar decline in value, it only serves to show you that a substantial change in interest rates has occurred—although it does in fact affect the values of outstanding bonds. Also, many stocks of the DJIA and the S&P500 have dividends which are not included in the NAV on the associated index.
As illustrated in the next chart, we are have recovered nicely from YTD lows.
Name of Index Feb. 11, 2016 (close) Oct. 3, 2016 (close) Percentage Change
DJIA 15,660.18 18,253.85 16.56%
NASDAQ 4,266.84 5,300.87 24.23%
S&P 500 1,829.08 2,161.20 18.16%
10-Year T-Bond 1.644% 1.622% -1.34%

Now let’s compare these figures to our foreign counterparts around the globe. We’ll do so by comparing the major indexes of Germany, China, UK, & Japan.
Name of Index Dec. 31, 2015 (close) Oct. 3, 2016 (close) Percentage Change
DAX (Germany) 10,743.01 10,619.61 (Oct. 4) -1.15%
SSE Comp. (China) 3,539.18 3,048.14 (Oct. 10) -13.87%
FTSE 100 (UK) 6,242.32 6,953.82 11.40%
Nikkei 225 (Japan) 19,033.71 16,598.67 -12.79%
German Bund (DE10Y:DE) 0.635% 0.030% -95.28%

Like before, the percentage change in Bund value is not necessarily reflective of a similar change in value, but, currently, if you loan the German government $100,000 for 10 years, are still charging you to hold onto your money. We still think that the European landscape is economically too risky for a very large apportionment of any of our clients’ savings because of what these rates imply.
Source: Google Finance
Please also look to the following website for MCSI data on all countries listed (click the country tab about 1/3-way down). Look at the YTD and the rolling 1, 5, and 10 year periods.

Over the past year, we have brought up the fact that there was really only one place to invest in the world when it came to regional investing. Again, our answer has not changed. When it comes to investing—especially pertaining to equities—there has really only been one economic region in the world that has made sense and outperformed the rest: North America. The absolute best performing region YTD has been the Pacific Region (excluding Japan) but we have only advocated small amounts of exposure to that region, as we feel that there has been quite a bit of unnecessary risk associated with investing there.
Since we manage the assets of our clients in a way that mitigates risk to the greatest extent while not ignoring the need for appreciation, we have felt and continue to feel that the US is the most prudent place to store our wealth for the near-term future.
The Large-Cap Dividend

We have no significant changes to our model portfolios in this regard. We still feel overwhelmingly that, in the upcoming political and economic environments, that the safest place to be in the market is having the benchmark of our clients’ portfolios in assets that are in line with the largest US companies that pay a dividend.

First, we will reiterate what is and has been going on in the bond market. For the most part, we feel that the overall bond market is the weakest point of the American economy. Bond prices, which we felt were already overvalued because they didn’t accurately price the risk of inflation and/or interest rate hikes by the Federal Reserve. Now, since the international markets have generally been at near-zero interest rates as far as governmental debt is concerned for quite some time now, foreign debt investors, especially those from the Eurozone, have been flooding our markets and driving the bond prices even higher than they were just a few years ago. This has led to T-Bond prices that sometimes go for 50% premiums or more. That means that the purchaser, in attempting to purchase a stream of coupon payments (based on interest rate of note), is sometimes paying over $1,500 for a note that, when due, will receive $1,000 back (face value). This is simply not sustainable in our opinion. The scary part is that roughly 40% of American’s assets are based upon this system. The typical coupon rate is roughly 2-4% for high quality debt.

US Large Cap Stock funds typically yield around 2% in current income in the form of dividend payments, so it is quite comparable to what one would yield in a high quality debt instrument. However, we feel strongly about this market. Many of these companies have, we feel, balance sheets that are attractive—even more attractive—than they were just one year ago. When comparing these balance sheets to those of the same types of companies in 2008 before the market crash, we feel that there is no fair comparison, as we see most Large-Cap US Stocks as having become much more lean as far as their employees and business operations go. Plus, even though many of these corporations have much more cash on hand than they used to, they have also taken advantage of the cheap debt that they can access. Like we stated in a prior quarterly update, many of us have taken advantage of the current market interest rates to refinance our homes, purchase cars, or what have you. Just imagine if you could do that with billions of dollars instead of thousands!
Now, looking back to prior analyses of the trends of US Large Caps (ask us for prior quarterly updates if you need a reference!), we simply feel that it is financially prudent for us to advise our clients to take a similar current income (dividend income vs. interest income) in the form of ownership of a Large Cap Dividend Paying Stock Fund when comparing it to ownership in a high quality bond fund.

Small-Caps and International Investments
While we advocate for the bulk of our clients’ savings to be invested in Large Cap Dividend Paying Stock Funds, we do advocate, based upon a client’s age and investment suitability to be paramount in diversifying over the long-term horizon. Up until recently, there really wasn’t a good risk/reward mix available to us in our opinion. Soon, though, we do see things changing overseas. We simply want to put this into our readers’ minds: soon enough we will advocate spreading more, albeit not that much more, of our model portfolio into what are traditionally riskier markets. This is because the reward is nearing the point when it will render the risk to be an adequate tradeoff. That is all we would like to cover in this section.

Oil Prices
The price of oil has finally made some headway in the form of higher prices as of late. This is neither a good nor a bad thing for our clients, as we feel that we have correctly hedged this development. Many of our clients’ assets love cheap oil, as the vast majority of them are the beneficiary of cheap transportation and manufacturing costs, but the assets that we have really seen receive the benefit of higher oil prices are the oil companies themselves so long as they have retained direct access to drilling activities. Fortunately, we saw this development coming and it is evident in the top holdings of many mutual funds that we have advocated to have a place in our clients’ portfolios.
Where this trend will take us, we can only make educated guesses upon. However, we feel that the price of oil is still historically cheap when taken into account inflation-adjusted pricing. There are still many circumstances in which the price of oil could come clambering back down in the short-term, but we will always plan on being in the right place down the line. This being said, we advocate for no change to our holdings in this regard.

Real Estate Market
This is a relatively new topic for our quarterly update. That being said, if we have talked in the last few years you may already know our stance on this segment of the overall market. We still feel that prices are relatively cheap when price-adjusted for inflation. We will keep is simple and only talk about the single-family residential market, as all other real estate markets tend to be tied to this vital part of the industry.
Historically, it costs about $100/sq. ft. to build a single family home when adjusting for inflation. So let’s compare it to 2005-2006 prices. Usually what we ended up seeing is the purchase price of a single family home well above the $100/sq. ft. benchmark. We feel that this was one of the indicators that the housing market was overpriced at that time. Today, home prices, nationally, are still below this important benchmark. This is why we are seeing considerable growth in many areas of the country when it comes to residential real estate construction and sales. With new construction comes vibrant growth in an industry that has been relatively stagnant for almost a decade. We feel that this filters back into many areas of our economy and part of the reason why the US economy is stronger than it has been in a long time.
US warehousing has entered a new age, in our opinion, in recent years. I know that many people advocated, albeit sometimes jokingly, that purchasing a “Forever Stamp” from the United States Postal Service was a favorable investment with interest rates as low as they have been. Well the USPS has lowered the price of a postage stamp for the first time in a very long time recently! This is because internet retailers have been relying on the USPS for many of their shipping needs. We feel that this is one of the key indicators that US warehousing is a great way to take advantage of this trend. Online retailers have a much higher propensity to have larger warehouses than many of the traditional retailers out there. We feel that this segment of the larger real estate industry, coupled with great residential growth, and strategic commercial holdings, are key drivers of building wealth for our clients.
The real estate market, we feel as a whole, looks like a great strength of the US economy. We have already begun to see the impacts that this market is having on the overall US market.

The US Presidential Election
With only about a month to go, this is the topic on everyone’s minds as of late. Well, many of you might already know our own political leanings, but for the purpose of this update, we will keep it as short, sweet, and objective as possible: we feel that our clients’ portfolios will win either way.
Hillary Clinton certainly has the backing of many Wall Street donors, especially when comparing the metaphorical “war chest” (donation pool) that she has at her disposal to that of Donald Trump’s. This is indicative of a relatively straight-forward concept. She is generally outspoken when it comes to “staying the course” of our prior President and many commentators have labeled her campaign as “business as usual”. Well, if she stays the course and continues to keep the now current status quo, there really is not much uncertainty as far as the markets go. Because there is less uncertainty, there is less perceived risk in the eyes of corporate America. Because there is less perceived risk, the stock market will probably not have as much price volatility if she wins the election. Because the fundamentals of the US economy are quite strong in our opinion, this will lead to more on-track growth in line with the past several years over the course of her tenancy as President.
Donald Trump’s potential win must be compared logically to that of last quarter’s Brexit vote over in the United Kingdom. “Wall Street” heavily favored a “stay” vote and even forecast it up until the night of the vote. It wanted more certainty in the post-election world and a “stay” vote would have done just that. However, the opposite occurred. Despite a 15% drop in the Pound Sterling/USD and freefall in the US market in the immediate aftermath of the unexpected vote, there was a near total breakeven, at least in the US, after only about 48 hours. Just 72 hours after the vote, the US market was once again in the green from the highly publicized political event. We tend to think that the same would happen in this country. Historically speaking, there are very few political trends that aid the large caps of domestic enterprise more than the trend of nationalism. Notice the YTD FTSE 100 Index returns for this year. We are seeing it in the UK and we might very well see it here in this country in about a month’s time.
When placed into this light, objectively-speaking, it seems like a great time to go long on the US market. This is why we are not worried, at least when it comes to our clients’ investments, whether the outcome of the upcoming election is Red or Blue.

The last quarterly update was longer than this quarter’s and many of you might appreciate this fact! However, we really don’t want to advocate changing very many aspects of our model portfolio at this time. When we purchase an asset, we choose to go long. We will very rarely purchase an asset on behalf of a client if our determined holding period will be less than two years. Plus, who wants to pay short-term capital gains rates on their taxes when they could pay long-term rates?
Our unofficial motto still stands: we don’t sell anything to our clients that we wouldn’t buy ourselves if we were in your financial/life situation. Much of the time that means that we own many of the same exact assets— usually in different allocations— as our clients. We eat what we cook. We attempt to find fund managers that have similar ideologies as us because nobody can correctly predict the market year after year. What we can do is attempt to analyze past trends and make the best possible decision out of those choices ahead of us. This update should correctly convey our reasoning in those decisions.
Should this brief synopsis of our opinions—and these are purely opinions based on our own analysis of the data—stir any questions about the markets, about our service, or anything else for that matter, please feel free to reach out to us. It takes a great deal of trust to allow someone to manage your life’s savings. The fiduciary duty that we voluntarily assume because of our relationship is nothing compared to the ethical duty that we have to you and your families. It’s not something that we take lightly; so, until the next time we speak, we will be in the boat with you.
Kevin S. Whiteford
Whiteford Wealth Management, Inc.

Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research, Inc., a Registered Investment Advisor. Whiteford Wealth Management, Inc. and Cambridge are not affiliated.
This letter is not meant to solicit the purchasing of any equities, bonds, mutual funds, or any investment of any kind. Any direct mention of any investment is meant purely as a reference point in the analysis of the issues discussed in this letter.
These are the opinions of Kevin S. Whiteford and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results. Diversification and asset allocation strategies do not assure profit or protect against loss.