McBork Quarterly Report 1st Quarter 2012
February 16, 2012
‘Til Debt Do Us Part
McBork Quarterly Report 1st Quarter 2012
Human thinking depends on metaphor. We understand new or complex things in relation to things we already know. Just a couple of months ago, CNBC capital markets editor Rick Santelli shared a particularly helpful metaphor for the vexing problem of our national indebtedness. Watching him deliver this narrative opened my eyes to the gravity of the situation in a new way. I would like to share it with you. Santelli likened our collective debt to an experience we all share: managing a household. In order to make the metaphor work, he divided $10,000,000 off the national debt to compare it to the financial circumstances of a fictitious American family. Here is his comparison: The United States Government
Fictitious American Family
US Tax Revenues: $2.3 Trillion
Annual Family Income: $23,000
Federal Budget: $3.6 Trillion
Annual Expenditures: $36,000
Annual New Debt: $1.3 Trillion
Annual New Credit Card Debt: $13,000
Current National Debt: $15.1 Trillion
Outstanding Credit Card Debt: $151,000
Reduction in Debt This Year: $38.5 Billion
Reduction in Debt This Year: $385
As you can see, “the American family” is incurring $13,000 additional debt each year on top of a prior balance of $151,000. Now they did some budgeting last year. In fact, the belt tightening was painful and caused tension in the household. At the end, they were only able to make $385 in cuts. You can see where this is going. From my dual perspectives, financial advisor and citizen, I am convinced this cannot continue. We are in deep trouble now and it only gets worse the longer we kick the can down the road. It is plain to see that there is a strong argument for spending cuts and revenue increases. But how? The devil is in the details, especially in our polarized political climate.
What happened in 2011 and what is in store for the markets in 2012? In the first quarter 2011 McBork Report, I shared my forecast for 2011. Some of my prognostications were spot on; others were not. Some of our investment themes played out well, such as US Large Cap Dividend Paying Stocks, while others such as Emerging Market Stocks, faltered. We were right on when it came to how we thought the bond market would play out, while we were off with the S&P 500 Index, which ended the year flat. (Continued on next page)
When Mike and I sat down at the beginning of 2011, we had five strategic investment themes that we thought would play out for the next several years: 1. We emphasized in our McBork Report last year that US Large Cap Dividend Paying Stocks were the place to be. This played out well in 2011. Stock dividends are golden, especially with interest rates so low. 2. We expected US Corporate Bonds to perform well. They did, although not nearly as well as Treasuries. The strong performance of the Treasury market was the shocker of the year. Just when we thought yields could not go any lower, they proceeded to do just that. 3. We felt that we would see M&A (merger and acquisition) activity pick up because companies are hoarding a great deal of cash. This did happen, but not to the degree we expected. Returns were in line with the overall market returns. 4. We thought the stage was set for robust Global Stock performance. We got this one wrong. Notwithstanding the anemic performance of U.S. stocks in 2011, ours was definitely the strongest among major world stock markets. 5. More specifically within the global theme, we expected to profit significantly from stocks and bonds of Emerging Markets. Demographics highly favor consumer growth in these markets as millions upon millions of people are becoming consumers. However, the world is interdependent. Both the European debt crisis and developing countries inflation concerns put a damper on this asset class. It did not do well at all in 2011. During January, I convened a series of meetings with Mike and our LPL Registered Associate Molly Helgren to reflect on the numerous events that affected the markets over the last twelve months. Each of us honed in on specific themes and absorbed the available research. Thus armed, we reviewed current economic conditions and market forces and asked ourselves how we could best position our clients for 2012. Our conclusion was to retain, with some modifications, 2011’s five broad investment themes above as our strategic approach for 2012. We feel that High Yield Bonds, along with US Corporate Bonds will do well this year. We also are taking a spin on the M&A activity, and now are looking not only at Mid Cap Funds, but also Merger Arbitrage Funds. Of course, there is still a lot of uncertainty out there. The European debt crisis is not going away anytime soon. There is political uncertainty due to this year’s presidential election. Of course, there are potentially unsettling international hot spots such as Iran and North Korea. The first six weeks of this year have been exceptionally strong for stocks. However, markets do not like uncertainty, so the current optimism could fade in short order. Still, the year is off to a good start with the S&P 500 Index being up 8.0%. Finally, LPL has come out with their 2012 Market Outlook as well. This document is over 20 pages long. Instead of cluttering your inboxes, please let me know if you would like me to send it to you via email or mail. You can also read this report on our website: www.responsibleinvestmentgroup.com. Take care. Here is to all of us having a great 2012! Sincerely,
Gregory Bork Jr. LPL Registered Principal " igh yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and H liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors."The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor's yield may differ from the advertised yield. The Standard & Poor's 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Stock investing involves risk including loss of principal. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Page 2
MCBORK QUARTERLY REPORT 1 S T Q U A R T ER 2 0 1 2
‘Til Debt Do Us Part
McBork Quarterly Report 1st Quarter 2012
Human thinking depends on metaphor. We understand new or complex things in relation to things we already know. Just a couple of months ago, CNBC capital markets editor Rick Santelli shared a particularly helpful metaphor for the vexing problem of our national indebtedness. Watching him deliver this narrative opened my eyes to the gravity of the situation in a new way. I would like to share it with you. Santelli likened our collective debt to an experience we all share: managing a household. In order to make the metaphor work, he divided $10,000,000 off the national debt to compare it to the financial circumstances of a fictitious American family. Here is his comparison: The United States Government
Fictitious American Family
US Tax Revenues: $2.3 Trillion
Annual Family Income: $23,000
Federal Budget: $3.6 Trillion
Annual Expenditures: $36,000
Annual New Debt: $1.3 Trillion
Annual New Credit Card Debt: $13,000
Current National Debt: $15.1 Trillion
Outstanding Credit Card Debt: $151,000
Reduction in Debt This Year: $38.5 Billion
Reduction in Debt This Year: $385
As you can see, “the American family” is incurring $13,000 additional debt each year on top of a prior balance of $151,000. Now they did some budgeting last year. In fact, the belt tightening was painful and caused tension in the household. At the end, they were only able to make $385 in cuts. You can see where this is going. From my dual perspectives, financial advisor and citizen, I am convinced this cannot continue. We are in deep trouble now and it only gets worse the longer we kick the can down the road. It is plain to see that there is a strong argument for spending cuts and revenue increases. But how? The devil is in the details, especially in our polarized political climate.
What happened in 2011 and what is in store for the markets in 2012? In the first quarter 2011 McBork Report, I shared my forecast for 2011. Some of my prognostications were spot on; others were not. Some of our investment themes played out well, such as US Large Cap Dividend Paying Stocks, while others such as Emerging Market Stocks, faltered. We were right on when it came to how we thought the bond market would play out, while we were off with the S&P 500 Index, which ended the year flat. (Continued on next page)
When Mike and I sat down at the beginning of 2011, we had five strategic investment themes that we thought would play out for the next several years: 1. We emphasized in our McBork Report last year that US Large Cap Dividend Paying Stocks were the place to be. This played out well in 2011. Stock dividends are golden, especially with interest rates so low. 2. We expected US Corporate Bonds to perform well. They did, although not nearly as well as Treasuries. The strong performance of the Treasury market was the shocker of the year. Just when we thought yields could not go any lower, they proceeded to do just that. 3. We felt that we would see M&A (merger and acquisition) activity pick up because companies are hoarding a great deal of cash. This did happen, but not to the degree we expected. Returns were in line with the overall market returns. 4. We thought the stage was set for robust Global Stock performance. We got this one wrong. Notwithstanding the anemic performance of U.S. stocks in 2011, ours was definitely the strongest among major world stock markets. 5. More specifically within the global theme, we expected to profit significantly from stocks and bonds of Emerging Markets. Demographics highly favor consumer growth in these markets as millions upon millions of people are becoming consumers. However, the world is interdependent. Both the European debt crisis and developing countries inflation concerns put a damper on this asset class. It did not do well at all in 2011. During January, I convened a series of meetings with Mike and our LPL Registered Associate Molly Helgren to reflect on the numerous events that affected the markets over the last twelve months. Each of us honed in on specific themes and absorbed the available research. Thus armed, we reviewed current economic conditions and market forces and asked ourselves how we could best position our clients for 2012. Our conclusion was to retain, with some modifications, 2011’s five broad investment themes above as our strategic approach for 2012. We feel that High Yield Bonds, along with US Corporate Bonds will do well this year. We also are taking a spin on the M&A activity, and now are looking not only at Mid Cap Funds, but also Merger Arbitrage Funds. Of course, there is still a lot of uncertainty out there. The European debt crisis is not going away anytime soon. There is political uncertainty due to this year’s presidential election. Of course, there are potentially unsettling international hot spots such as Iran and North Korea. The first six weeks of this year have been exceptionally strong for stocks. However, markets do not like uncertainty, so the current optimism could fade in short order. Still, the year is off to a good start with the S&P 500 Index being up 8.0%. Finally, LPL has come out with their 2012 Market Outlook as well. This document is over 20 pages long. Instead of cluttering your inboxes, please let me know if you would like me to send it to you via email or mail. You can also read this report on our website: www.responsibleinvestmentgroup.com. Take care. Here is to all of us having a great 2012! Sincerely,
Gregory Bork Jr. LPL Registered Principal " igh yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and H liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors."The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor's yield may differ from the advertised yield. The Standard & Poor's 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Stock investing involves risk including loss of principal. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Page 2
MCBORK QUARTERLY REPORT 1 S T Q U A R T ER 2 0 1 2
