MarketCommentary October15,2012
TheMarkets
Twowidelywatchedindicatorsjusthitfiveyearextremelevelsandthatsapositivefortheeconomy. ConsumersentimenthitafiveyearhighinthepreliminaryOctoberreading,asmeasuredbythe UniversityofMichiganThomsonReuterssentimentgauge.Thisgaugecovershowconsumersview theirpersonalfinancesaswellasbusinessandbuyingconditions,accordingtoMarketWatch.Higher levelsofsentimentcouldtranslateintohigherconsumerspendingandhelppropeltheeconomy. And,thesecondindicator,housingforeclosurefilings,hitafiveyearlowinSeptember,accordingto RealtyTrac.Foreclosurefilingsincludedefaultnotices,scheduledauctions,andbankrepossessions.In September,therewere180,427foreclosurefilings.Bycontrast,thatnumberwasabove350,000in mid2009,so,yes,foreclosurefilingshaveimprovedsignificantlyoverthepastfewyears. And,forgoodmeasure,letsthrowinathirdindicatorweeklyjoblessclaimswhichfelltotheir lowestlevelinmorethanfouryearsfortheweekendingOctober6,accordingtoBloomberg.Lower claimsmaymeanemployersareseeingenoughdemandtomaintaincurrentstaff,anecessaryfirst steptobiggergainsinhiring,accordingtoBloomberg. Whilethesethreeindicatorslookgood,EarningspessimismamongU.S.chiefexecutiveofficersis climbingtolevelslastseenwhentheStandard&Poors500Indexwasmiredinbearmarkets, accordingtoBloomberg.Infact,analystsarenowforecastinga0.9percentdeclineincorporate earningsforthejustcompletedthirdquarter,accordingtoBloomberg. Goodnews,badnews,whatsaninvestorsupposedtotakefromthis?Well,likethemoviebythesame title,itscomplicated.TheeconomycontinuestorecoverandrebalancefromtheGreatRecessionand thisleadstosomeindicatorslookinggood,otherslookingbad,andsomelookingjustplainnormal.
Dataasof10/12/12
Standard&Poor's500(DomesticStocks) DJGlobalexUS(ForeignStocks) 10yearTreasuryNote(YieldOnly) Gold(perounce) DJUBSCommodityIndex DJEquityAllREITTRIndex
1Week
2.2% 1.8 1.7 1.0 0.6 0.7
YTD
13.6% 7.8 N/A 12.2 4.4 15.7
1Year 3Year 5Year
18.3% 4.6 2.2 5.0 0.6 29.2 9.9% 0.1 3.4 18.6 3.7 20.3 1.8% 7.0 4.7 18.7 3.7 1.4
10Year
5.4% 7.8 3.8 18.7 3.3 12.3
Notes:S&P500,DJGlobalexUS,Gold,DJUBSCommodityIndexreturnsexcludereinvesteddividends(golddoesnotpayadividend)andthe three,five,and10yearreturnsareannualized;theDJEquityAllREITTRIndexdoesincludereinvesteddividendsandthethree,five,and10 yearreturnsareannualized;andthe10yearTreasuryNoteissimplytheyieldatthecloseofthedayoneachofthehistoricaltimeperiods. Sources:Yahoo!Finance,Barrons,djindexes.com,LondonBullionMarketAssociation. Pastperformanceisnoguaranteeoffutureresults.Indicesareunmanagedandcannotbeinvestedintodirectly.N/Ameansnotapplicable.
DOYOUWANTTOKNOWTHESECRETtoWarrenBuffettsremarkableinvestmentsuccess?
First,somebackground.BuffettpartiallyownsacompanycalledBerkshireHathawayandheusesthis ashisvehicleformakinginvestmentsinothercompanies.So,whenpeoplesayBuffettisagreat investor,theyrelookingattheperformanceofBerkshireHathawaystockwhich,inturn,tendsto reflecttheperformanceofthecompaniesBerkshireowns. Further,arecentacademicpaperbyAndreaFrazzini,DavidKabiller,andLasseH.Pedersen,titled BuffettsAlpha,said,Buffettsperformanceisoutstandingasthebestamongallstocksandmutual fundsthathaveexistedforatleast30years. Now,heresthesecrettoBuffettsspectacularreturnsaccordingtothepapersauthors: WefindthatthesecrettoBuffettssuccessishispreferenceforcheap,safe,high qualitystockscombinedwithhisconsistentuseofleveragetomagnifyreturnswhile survivingtheinevitablelargeabsoluteandrelativedrawdownsthisentails. Letslookateachofthosecomponents: 1) Cheap:definedasvaluestockswithlowpricetobookratios 2) Safe:definedasstockswithlowbetaandlowvolatility 3) Highquality:definedasstocksofcompaniesthatareprofitable,stable,growing,andhavehigh dividendpayoutratios 4) Leverage:perhapsshockingly,theauthorsdiscoveredthatBerkshiremagnifieditsreturnsby leveragingitscapitalby60percentfinancedpartlyusinginsurancefloatwithalowfinancing rate
Source:BuffettsAlphapaper
ThisisnotabuyorsellrecommendationonBerkshireHathawaystock,rather,itshowsBuffettlatched ontoagoodstrategyearlyinhiscareer,usedleveragetomagnifyhisreturns,andstucktothestrategy evenwhenitsufferedlargedeclines. NowthatweknowhowBuffettachievedhisoutstandingreturn(includingthesurprisingleverage), doesthisinanywaydiminishhisresults?No.Infact,itsprobablyjusttheopposite.Buffettfiguredthis strategyoutmorethan30yearsagoandresearchersarejustnowcatchingupwithhim!
WeeklyFocusThinkAboutIt
Researchistoseewhateverybodyelsehasseen,andtothinkwhatnobodyelsehasthought. AlbertSzentGyorgyi,Hungarianbiochemist
Bestregards,
PattyLoris,MBA,CFP LPLFinancialAdvisor
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SecuritiesofferedthroughLPLFinancial,MemberFINRA/SIPC.
*ThisnewsletterwaspreparedbyPeakAdvisorAlliance. *TheStandard&Poor's500(S&P500)isanunmanagedgroupofsecuritiesconsideredtoberepresentativeof thestockmarketingeneral. *TheDJGlobalexUSisanunmanagedgroupofnonU.S.securitiesdesignedtoreflecttheperformanceofthe globalequitysecuritiesthathavereadilyavailableprices. *The10yearTreasuryNoterepresentsdebtowedbytheUnitedStatesTreasurytothepublic.SincetheU.S. Governmentisseenasariskfreeborrower,investorsusethe10yearTreasuryNoteasabenchmarkforthe longtermbondmarket. *GoldrepresentstheLondonafternoongoldpricefixasreportedbytheLondonBullionMarketAssociation. Preciousmetalinvestingissubjecttosubstantialfluctuationandpotentialforloss. *TheDJCommodityIndexisdesignedtobeahighlyliquidanddiversifiedbenchmarkforthecommodityfutures market.TheIndexiscomposedoffuturescontractson19physicalcommoditiesandwaslaunchedonJuly14, 1998. *TheDJEquityAllREITTRIndexmeasuresthetotalreturnperformanceoftheequitysubcategoryoftheReal EstateInvestmentTrust(REIT)industryascalculatedbyDowJones. *Yahoo!Financeisthesourceforanyreferencetotheperformanceofanindexbetweentwospecificperiods. *Opinionsexpressedaresubjecttochangewithoutnoticeandarenotintendedasinvestmentadviceorto predictfutureperformance. *Pastperformancedoesnotguaranteefutureresults. *Youcannotinvestdirectlyinanindex. *Consultyourfinancialprofessionalbeforemakinganyinvestmentdecision. *TounsubscribefromthePattyLorisWeeklyCommentarypleasereplytothisemailwithUnsubscribein thesubjectline.
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