Archive for August, 2013

Easy Come; Easy Go

Friday, August 30th, 2013


It is a fact of life that, on occasion, the progeny of our clients end up with their parent’s hard earned assets by means of that inevitable transition we all must face.  While that reality is unavoidable, almost identically absolute is the fate which meets these inheritances.  All too often they seem to get frittered away in less than eighteen months.

“Shirtsleeves to shirtsleeves in three generations” is an old aphorism which describes this phenomenon, although it tends to be applied to the ultra-wealthy.  For instance, Vanderbuilt left over $100 billion (measured in today’s dollars) to his heirs.  According to an excerpt in WSJ.Money, at a family reunion held in 1973, none of the 120 descendants present was a millionaire.  Or consider Barbara (Woolworth) Hutton who left a net worth of $3,500 upon her passing, despite coming into almost half a billion bucks when papa passed.  What we see here at Atlas involves fewer dollars, but the results tend to be similar, they just happen much quicker.

The Boston College Center for Retirement Research is estimating that amongst baby boomers, two-thirds of them will inherit money, generally in their middle-years and they are quite likely to blow it.  We’re talking something like $7.6 trillion here.  It seems inherited money can be (1) hard to hold and (2) even harder to nurture.  A separate survey suggests the cause of such attrition is often (60% of the time!) a breakdown in trust and communication between the surviving family members.  Another 25% of the blame is ascribed to lousy education/preparation of the inheritors by the grantors.  If this issue is of concern to you, please feel free to discuss any estate planning you may be considering with us, and use us as a sounding board or intermediary when broaching the subject with your beneficiaries.    (by J R)

Helicopter Ben

Thursday, August 29th, 2013


Who can forget that famous speech by Ben Bernanke, beloved economics professor at Princeton and then member of the Board of Directors of the Federal Reserve System, back in 2002?  In it he quoted another famous economist, Milton Friedman, who suggested, presumably tongue in cheek, that one way of avoiding price deflation would be by “dropping money out of a helicopter.”  Today the media applies this term more frequently to Bernanke, now Chairman of the Federal Reserve, rather than Friedman, endowing him with the sobriquet “Helicopter Ben.”

I doubt many would take umbrage with that appellation.  After all, under Bernanke’s watch the Fed has embarked on a series of somewhat revolutionary monetary stimuli designed to bolster the economy.  We have seen Quantitative Easing, the Son of Quantitative Easing, QE III, and QE4ever.  But, while currently continuing to inflate the U.S. money supply by roughly $85 billion each month, the desired end result remains elusive.  Hoping to ignite a self-perpetuating recovery by inflating certain asset classes has not completely panned out.  The latter is in fine fettle; the former remains elusive.

So what’s up with that?  I reckon it depends on where you place the helicopter.  If it was hovering over Main Street, the results might have manifested as hoped.  Instead, it seems to be located above Wall Street and the wealthy grow more so.  Will most Americans continue accepting that it is the banks (and bankers) who seem to be catching most of those bucks by the bucketful?       (by J R)


Wednesday, August 28th, 2013

The TV show “Who Wants to Be a Millionaire?” allowed its participants various avenues of assistance.  I think they were called lifelines.  One of these permitted the contestant to call anyone he felt was qualified to assist in determining the correct answer.  In other words, he could call for an expert opinion.  Another lifeline was available from the audience attending the filming of this production.  Everybody, if asked, would vote for the correct answer, and it was up to the contestant to then decide if the majority opinion was valid.  Interestingly, statistics suggest the “expert” was right about 65% of the time.  Contrast that with the crowd which came up with the correct answer 91% of the time.

Here at Atlas we refer, from time to time, to Professor Philip Tetlock whose work illustrates that economic experts tend to be right in their predictions roughly half the time, suggesting a coin flip is just as accurate.  Consider the flap over sequestration which dominated the headlines as 2012 drew to an end.  Both the experts and conventional wisdom feared that the apparently “inevitable” result would cause our equity markets to falter while pulling the rug out from under companies comprising the defense industry.  As you know, the markets gained strength for the next six months or so while defense stocks enjoyed a substantial rally.

What happened?  This illustrates perfectly our quarrel with conventional wisdom and support for the wisdom of the crowd.  It was the latter which showed its foot print to momentum trackers.  Too often following the expert opinion and conventional wisdom can cause one, as this example illustrates, to come a cropper.      (by J R)

Over and Under

Tuesday, August 27th, 2013


Here at Atlas, part of our investment philosophy is called momentum or, alternatively, relative strength.  The argument for it, in its simplest form, is that investments which are rising tend to keep rising while those in decline tend to keep falling.  Of course, since nothing grows to the moon, turning points do happen and must be recognized.  The question is how?

First let us differentiate between conventional wisdom and the wisdom of the crowd.  We contend that the first is over-rated while the second is often underrated.  Conventional wisdom, the body of “truths” generally accepted by both experts and the public at large, often prefers to ignore contradictory outliers rather than question cherished beliefs.  The wisdom of the crowd, on the other hand, is more dynamic, pushing events forward.  Economically, Adam Smith’s concept of the invisible hand might be seen as emblematic of this force.

Conventional wisdom seems to generate investment bubbles.  It is seen when everyone knows you can’t lose money investing in real estate, or precious metals, or some particular industry.  It perseveres through the top and during the earliest part of a decline, ultimately changing sides and arguing that no one can make money investing in real estate, or precious metals, etc.  Unfortunately, a large number of folks often miss that transition and end up holding on to their losers much too long.

Relative strength, on the other hand, is a method which helps identify those changes in momentum.  While it generally can’t spot an exact top or bottom until after the fact, it does trace the subsequent rise or fall, and it is during that period, should prices enjoy a protracted trend in either direction, that this methodology can prove most rewarding.      (by J R)

Playing Defense

Monday, August 26th, 2013


Perhaps your evening conversation at the dinner table rarely centers around Carl von Clausewitz.  These days it may not even center around the dinner table.  But Herr Clausewitz might be considered the European equivalent of Sun Tzu.  Should that hint also prove elusive, I will add that both can be considered experts in the art of war.  It was Carl who penned such phrases still in broad use today as “the fog of war” and “the best defense is a good offense.”

As 2012 drew to an end and Congress opted for sequestration as the acceptable means to cut our nation’s spending, dire predictions ran rampant.  The conclusions were rather obvious.  If the government was to be presented with mandatory budget cuts in all departments, then defense spending would take a big hit.  This would, in turn, impact the sales of companies in the defense industry.  Like links in a chain the effect would then lead to shrinking profits followed by declining stock prices.  In fact sequestration would inevitably have a negative effect on just about everything, sending America back into a recession.

Things didn’t turn out that way.  The S&P500, a popular index designed to measure the general performance of U.S. stocks (remember, as a purely mathematical construct, no one can invest directly in any index) rose more than 10% from March of 2013 when sequestration took effect through the end of June.  An index of aerospace and defense was up well over 20% during that same period!

So old Carl nailed it.  An offensive position would have proved more rewarding than defense.  Who would have guessed?  Interestingly, employing relative strength measurements would have kept an investor who owned such a stock invested despite the dire headlines suggesting retreat was the best option in these times.   (by J R)

Federal Reserve’s Road Mop

Friday, August 23rd, 2013

There has been recent squawking about the Federal Reserve slowing its accommodative purchases.  As Atlas sees it, the central bank is not on the verge of reigning in its actions.  In January of this year, the Fed laid out two explicit measures that it is targeting.  First it is willing to remain accommodative as long as unemployment is above 6.5 percent.  Secondly, the central bank is willing to use its unprecedented measures as long as inflation expectations over the next one to two years do not rise above 2.5 percent.

From our vantage point, neither of these conditions is close to being met.  The most recent unemployment figure, 7.4, is well above the level.  The labor economy is improving, but it has many headwinds pushing against it.  One in particular is the labor participation rate.  As finding work became more difficult, Americans dropped out of the labor force.  However, this is not a one-way valve.  As the employment situation improves, those currently not in the pool of workers can jump back in.  If the combination of reentrants and new entrants to the workforce grows faster than new jobs are created, the unemployment rate will face upward pressure.

Recent measures of inflation have been showing the pace of price increases fatiguing.  The producer price index, consumer price index, and personal consumption expenditures have all been trending lower on a year-over-year basis, so unless there is a sudden change in this pattern, low inflation will also continue to justify the bank’s policies. 

The Federal Reserve’s explicit indicators are not suggesting any urgent need to unwind their unconventional measures at this point.  However, when the time to exit these policies arrives, Atlas is skeptical about the central bank’s ability to mop up cleanly the potential liquidity spill. The average aggregate amount banks carried in excess reserves from 1980 through August 2008 was $1.179 billion dollars.  In September 2008, it jumped to nearly $60 billion in one month. The average since that unusual month is over 1000 times the previously mentioned mean and currently stands at $1.863 trillion dollars! If banks begin to lend this money with any momentum, we may end up with many more dollars chasing the goods in the economy which will not help prices stay tame.  Of course, this is merely an observation and not a prognostication.  Atlas will watch the indicators and hope that we do not all get soaked.   (by C. Cox)

July Producer Price Index

Thursday, August 22nd, 2013

Signs of accelerating inflation continue to be absent in the economy.  The latest Producer Price Index (PPI) figure from the Bureau of Labor Statistics shows prices paid by wholesalers were unchanged in July.  Of course, this tally includes the volatile food and energy components, so it is worth looking at the “core” number which excludes these items.  Core PPI increased 0.1 percent, hardly an alarming uptick.
Looking into the earlier stages of production does not reveal reasons to be concerned about significant price pressures either.  The intermediate stage of production (lumber) was also unchanged in the period.  The crude stage (timber) was up 1.2 percent for the month which is in line with the range it has experienced during the last 13 months.
Many continue to debate about what the central bank’s next action should be.  The discussions center on the idea of the Federal Reserve easing its Quantitative Easing.  One side of the argument (this group is known as hawks) is concerned about inflation.  Figures like this month’s PPI report do not support the claim that upward moving prices are gaining momentum.  Instead, the PPI figure sides with those advocating continued accommodation (the doves).  Ben Bernanke and his cohorts meet again in September, and their policy announcement might be the most anticipated release from the committee in a while because there is speculation that the announcement will disclose the bank is reducing its support.  Atlas is concerned about the long-term unintended consequences of the central bank’s behavior but is not of the opinion that the Federal Reserve will change its actions in the next meeting since there are no signs of inflation growing too quickly.  (by C. Cox)