JR Snell Capital Management, LLC

Looking back over the last couple of months worth of posts, I’m thinking that it might appear that I’m a little opaque as to what areas of what markets you should be focusing on.

I’m not, so I’ll clear things up before I go AWOL for the week. First, understand that anything can happen over the short-term. What we always work on here in our laboratory is more macro-type thoughts for overall “big picture” positioning for ourselves and our clients. That’s what this is about.

[Sidebar... I think I might have mentioned that we are all about the "return of thought" when managing investments... That is, come up with a prospective course that we believe things will take and position for it. A little more active than reactive, and certainly not passive.]

If there’s no magic bullet or secret formula to this investing thing, the elephant in the room says that those investors who wish to survive (and thrive) in tomorrow’s markets might have to think for themselves (gasp)… or (at the very least) think for themselves enough to know they should hire those people who think for themselves.  – From “How We’re Fixing It”

First, the average inflation rate for the last 100 years or so is about 3.0%. The TIPS market (Treasury Inflation-Protected Securities) is showing the breakeven inflation rate at 1.9%… significantly lower than the 3.0% average. Translation: The market says that economic stimulus and other Fed stimulators (very low interest rates) will not work as planned… Translation: Extended period of very slow or non-growth. Translation: Buy TIPS because the treasury structured them to provide downside protection against deflation (which, of course the Feds assumed would never happen)… and this is really one of the very, very few investments that I can think of that offers this.

We’ve been buying the individual bonds for clients and mixing it up between 7 and 14 year maturities. If you can’t buy the individual things, you can consider the ETF (TIP)… This ETF makes sense for smaller accounts, but they have some additional internal management fees which is why we shy away from them in larger accounts

Following this premise, it wouldn’t hurt to accumulate some longer treasuries… like in the 20 year (give or take 5) range. I hear people whining about only getting 4.20% on a 20 year treasury… but I think if a person accepts what might be the ”new normal”… 4.20% might not look that bad, in hindsight.

We’re not married to holding on to the things for 20 years though. If we were presented with some outsized gains on our treasuries over the next year or two, we wouldn’t be afraid to take the profits and find a new home for the proceeds.

Dividend-spewing, old-line, consumer staples stocks look tasty for a couple of long-term reasons. First, we can get between 3 and 4% on many of these stocks (i.e. HNZ) and their business model isn’t so sensitive to the economic cycle.

Don’t get me wrong… anything and everything will go in the tank if the economy falls off a cliff again (people will even go without ketchup if things get bad). But generally, if our extended-malaise scenario becomes fact, then these consumer staples companies will still be chugging along same as always.

Just be sure to do your homework and feel comfortable that the stocks you’re choosing have low debt and decent enough margins to keep coughing up the dividend if things stay marginal for a long time. Email us if you need some help in this area.

Technically, in the stock market we’re acting a little short-term “toppy”… meaning it’s not a good time to be going after your favorite growth stock. Long-term? At the moment, none of the classic, fundamental, long-term stock market indicators are suggesting that now is a good spot to become a new “buy-and-hold” type of investor. Sorry. Be patient.

The upside to the “new normal” is that we can afford to be patient in the stock market. These days, nothing is going to run away from us for very long. No matter what the economy does, we still believe in volatility. Since volatility is how we’ve always made our money in the stock market, we still believe that there is money to be made in stocks.

As far as the thoughts of chasing stocks for fear of being left behind? We’re content to let everyone else risk heartburn while we just pick at the turkey.

Yesterday (11/19/09) on Capital Hill, Rep. Kevin Brady R-Texas got into a little a little “tiff” with Timothy Geithner (Treasury Secretary) during a Joint Economic Committee hearing.

It seems that Rep. Brady rankled Mr. Geithner a bit by insisting that he resign, blaming him for rising unemployment, growing federal deficits and accounting flaws in the number of stimulus jobs created, among other economic problems.

All of the articles that I’ve read about the exchange focused on how unusually forceful Mr. Geithner was and how hot the debate ended up getting. Included in most articles is this statement by Mr. Geithner:

“The economy fell into the worst crisis in generations after almost a decade — certainly, eight years — of basic neglect of basic public goods, in health care, in education, in public infrastructure, in how we use energy.”

Whaaaaaat?  I thought it was a credit crunch, lax regulation, an irresponsible banking system colluding with an irresponsible public piling on debt they couldn’t afford to buy things they didn’t need. Since when was the current economic crisis caused by not addressing health care? Or education? Or how we use energy?  That’s pretty far out there… even for you Tim.

Seriously, Timmy… If this is what you believe caused the economic crisis, then maybe you should step down. That kind of a statement is either simple felony stupid or reckless historical revisionism to get political points.

I was just reviewing and reorganizing my “…for further study” page and I tripped upon this quote. I had to post it again because I am still baffled and befuddled by what this means.

Maybe what it means is what he says? Is it even reasonable to postulate that our current economic conundrum is the simple result of one man’s mistaken economic theory? Could it all be that simple? 

REP. HENRY WAXMAN (D-Calif.): And my question for you is simple: Were you wrong?

ALAN GREENSPAN: And what I’m saying to you is, yes, I found a flaw….a flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

REP. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working?

ALAN GREENSPAN: That is–precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.

Utility Stocks (as a group) have forsaken me this year by advancing only about one-fifth of the amount of the S&P 500… which can act as a real short-term boat anchor in your portfolio if you own any quantity at all. Yet, my passion for the sometimes stodgy “dividend machines” still burns hot.

Why?  First, there’s the cash flow.  My favorite utilities ETF, the Utilities Select Portfolio (XLU) is spinning off a 4.31% dividend yield in an environment where a half a percent is doin’ good on your money market. That’s worth taking a little bit of market risk.

Then there’s long term performance. The Dow Jones Utility Index has outperformed the S&P 500 by 4.4% PER YEAR over the last 10 years. This puts the DJUI in positive territory for the last 10 years, whereas the S&P 500 is down almost 20% for the same period. And we are supposed to be long term investors, right?

Then… What’s the problem? Why the dismal performance?

To answer the questions, I think we have to look at it in context of what utility stock underperformance might be saying about the economy in general. The last time we emerged from a recession, the utility averages advanced about 25% in the first year of the recovery (2003). This time, they have only advanced about 4%. My opinion is that there’s nothing wrong with utility stocks per se, but they might be telling us that there is still something wrong with the economy.

Mix this in with the failing dollar, gold hitting all-time price highs, and oil’s recent jump back to the $78 per barrel neighborhood and there’s plenty of evidence afoot to suggest that all is not “right” in the realm.

There are so many variables out there that even Helicopter Ben doesn’t have a real clue. Bernanke (at the moment) must be contented to just dump cash on the U.S. economy and hope for the best… while walking the tightrope.

We have the early indicators of inflation that gold, oil and utility stocks might be showing us on the one hand while we have the deflationary pressures that come with collapsing employment, a housing value slam with a possible double-dip and consumer spending that has all but evaporated.

So, I think utility stocks really ain’t misbehavin’… I think they’re trying to tell us something about the economy. And if I’m hearing them correctly, I think I’d rather lie with my lovable dogs (of late), than to be all loaded up on or still chasing after “recovery” stocks.

I’ve gotten a fair number of questions about this Roth IRA conversion that’s going to be available to all IRA owners next year.

The basics are that you will be able to convert all of your regular IRA-type accounts over to Roth IRAs during 2010, regardless of your income level. The million dollar questions is, “Is it a good idea?” … and I can’t provide an answer to that question.

So, what good am I? Well, I brought it up didn’t I? Ok… actually, I’m willing to be the “go-fer” between my clients and their accountants… but they and their accountants have the ultimate say  whether it’s a right thing to consider… that’s what good I am.

Just to get the ball rolling, I stole an article that’s got way too much detail about the whole issue… It might be confusing to us mere mortals, but your accountant will probably be interested in it. So, read – copy – print the attached article and then pass it on to your accountant.

OK, it might be just a wee-bit twisted that I sit around and think about IRA accounts… but I do. Anyway, I was thinking about IRAs last night and I wanted to remind everyone about two things with IRA accounts that are coming up.

First…

Our rich Uncle Sam, in his efforts to help soften the blow of the stock and bond mess we’ve all experienced over the last year or so, has waived the Required Minimum Distribution for 2009. I IMPLORE YOU… if you do not absolutely, positively NEED your RMD to keep the lights on, PLEASE do not take the distribution. This is a GIFT… (another) from your Rich Uncle Sam… do not look it in the mouth.

Second…

2010 is the year of the Roth IRA conversion. This can be a tricky one, but the basic difference between a Roth IRA and a regular IRA is that Roth IRAs are the opposite of regular IRAs… their contributions are not tax deductible, but their withdrawals are tax free. The catch is that there are income limits on who can contribute to a Roth IRA… so most of my clients and others who I work with demographically, we have usually not been able to throw Roth IRAs into the mix…. EXCEPT:

THE LOOPHOLE…. during 2010 ONLY, regular IRAs can be converted to Roth IRAs FOR ANY INCOME LEVEL… not just the restricted lower income limits. You will have to pay taxes on the amount converted, but that will be it forever…. No required minimum distributions, no taxes on withdrawals, no affect on your Social Security Income if you have a pretty beefy IRA account.

Given that the taxes on your IRA can also be spread out over three years (2010 ONLY, AGAIN) and the investment markets may have handed you a fairly low valuation point for conversion, this just might be the best news you’ve gotten in a while.

It’s complicated and unique to each individual’s situation, so I will be working with my clients and their accountants over the next few months to help them decide if it is right for each of them. If you are not a client and would like additional information, contact me at 480-575-7688 and I’ll hook you up with the right people.

Remember when I wrote the “Market Timing for Dummies” thing? It was in December of 2008 and my little chart that I showed in the post indicated that, at that point we’d been out of the market for a year and we might be out of it a while longer too.

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We’ll, we’ve been out of the market another 8-plus months since then. Guess what? While you weren’t paying attention, we slipped into a bull market! What? Yes, it’s true… here’s the chart from almost a year ago brought up to today’s date.

Before you defrost those little wieners-on-a-toothpick that you’ve been saving for this party, here’s what it means and what I’m doing about it and what I think you should do…

Ready? Here’s the answer: “ATTITUDE SHIFT”. Since 75% of all stock price movements are in the direction of the overall market, we can begin to think that price situations will begin to resolve in our favor now, instead of assuming that everything’s going to immediately go into the crapper the instant we buy it like the last almost two years. That’s an attitude shift.

Before buying anything, make sure the financials are right and good… and that the chart looks favorable… and that you’re only putting an appropriate amount of your dough in each situation… and that you protect yourself against too much loss. (I like 10%).

As the rally continues to mature and goes through a couple of “tests” and subsequently continues to keep the wheels on, you can add to successful positions, start adding additional positions, etc. etc…. all the while limiting your risks.

So, it’s an attitude shift to where you would begin the process of investing in stocks when they look right. Moving all at once to a fully invested position could end up being a mistake if things take a sudden turn for the worse.

I remind all that you cannot predict the future.

This is fairly succint and seems to sum up pretty well what my big-picture concerns are about not just the economy, but society… at present. (I am an optimist/realist.)

“You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it.”

Dr. Adrian Rogers, 1931

One of my silly pleasures in life has been to surprise people with how little it actually costs to have your portfolio professionally managed, and custom-tailored by our firm… especially versus a mutual fund.

I present a listing of average expenses paid by mutual fund investors and then ask my prospective clients to propose a reasonable fee for our firm to charge them. They might want to consider that their portfolio will be custom built and managed with their personal objectives in mind… not to mention all of the retirement planning, goal-setting and progress-check sessions that we will complete over the years.

If we’re all being reasonable, I am almost without fail presented with a suggested management charge by the prospective client that is higher than our published rate schedule.

Mutual funds (for a whole raft of reasons) have built in disadvantages to all but the smallest of investors. But, one of the most obvious disadvantages is that they are fairly expensive to buy and hold for the long term. They get away with it because they don’t send an invoice to you that you have to pay… they just sneak it out of your net asset value.

Another disadvantage is the actual fee structure and the fixed cost portion of the internal fees causes something even stranger to happen… the more money you lose, the higher percentage fees that you get charged.

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If you look at the chart, you’ll see some percentages charged by AllianceBernstein last year and the expected charges coming up in this year. They’ve all gone up because of the dramatic loss of market value that they’ve all experienced.

Oh… and if you want to know total expenses that they’ll be charging, you have to take the portfolio turnover times 0.5% and add this to the published rates… these are trading cost averages. The average portfolio here turns over once (100%), so add 0.5% to the numbers for 2009 to find out how much you would be paying in total every year. In these cases, it’s roughly about 1.88% to 2.25% every year.

Oh… and don’t forget to add in the 4.25% commission that you would have to pay your “advisor” just to get in.

It’s important to know that it’s not just AllianceBernstein, it is all mutual funds to varying degrees… This example is just the latest that popped onto my radar recently and I felt like writing about this topic today.

Kick you down, beat you up, then kick you again. “Thank you sir! May I have another?”

OK. OK. OK. I know. Things are “all better” now, right? This seems to be the general mood on Wall Street and around investing circles on Main Street. There’s a feeling that things are getting better. The market has put in a fairly impressive rally for a couple of months.

People are starting to ask about when I am going to start making them some money. For the last year plus and some change, folks have been OK with simply having avoided the train wreck that the market is. Now, I can feel a shift back toward that old, familiar “left behind” fear… and some performance anxiety building up amongst the natives.

This has got my antennae up. But, putting the recent performance of the stock market aside, I’m having a whole lot of trouble finding the signs of recovery…. Is the recovery a mirage? Are others seeing things that I cannot?

As for me, rising interest rates and energy costs might be enough to derail this figment of a recovery, if it was even there. Or maybe the perceptions of a possible derailment of a potential recovery? You get my point, right? It is all a little nebulous at present.

Click to enlarge

So, what to do? Here’s the answer… Back in December I put together a post about “Market Timing for Dummies” and explained EXACTLY when I would call this a Bull market. If you take another moment and read the article, then you’ll see that “we ain’t there yet”.  Doesn’t mean we never will be… just not yet. Here’s the latest chart to go with a re-read of the article.