D3 Business Update:
Thank you all for attending our appreciation events. We had a good time and from what we hear, you did too.
For our family office clients, we are finishing up our review of your estate plans and Neil will be contacting you soon to discuss our findings if there are any issues. We are starting to get reports of mutual fund capital gain distributions, so we will be finishing up our year-end, tax minimization strategies for our family office clients. If you have any large charitable intentions, please let us know so we can estimate the impact on your 2011 taxes.
Adam is heading out to Wharton graduate school at the University of Pennsylvania next week for his CIMA designation (Certified Investment Management Analyst). Don, Patty, Ryan, Neil and Michael will be holding down the fort. If you email Adam next week, please copy Patty or me.
D3 Investment Insight:
The economic numbers being reported by the U.S. government continue to show slow and slightly accelerating growth in the U.S. economy. Both Black Friday and Cyber Monday retail sales showed strong year over year growth. The monthly indicators of U.S. industrial economic activity continue to improve. We even saw the unemployment rate drop today to 8.6% as the U.S. economy added 120,000 jobs in October. This was a good news/bad news report because the previous two months jobs reports were revised up but the labor force for the current month decreased by 315,000.
The headlines from Europe continue to generate market volatility around the world, although the news during the past week was generally positive. We witnessed a coordinated effort by the Central Banks of the World to ensure banks have enough dollar liquidity. Additionally, European governments announced that they are making an effort to hasten the structural reform required to keep governments from going bankrupt.
With that being said, we still anticipate that the European economies will experience a slow- down in economic activity. Our challenge is to assess how much this slow-down will affect the rest of the world.
Bill Gross and Mohammed El-Erian, co-chief investment officers at PIMCO (the largest bond fund manager in the world) have gone on record to say that they will be challenged to provide returns greater than 5% over the next five years. They have also said that investing around the world right now is like picking the cleanest dirty shirt from the dirty clothes bin. Luckily for the U.S., we appear to be the cleanest dirty shirt.
Gridlock in Washington is here until Congress goes on their Christmas break. We may get an extension of the payroll tax reduction and maybe some token job package before the break, but it is unlikely to be significant. Likewise, nothing significant is likely to get passed next year as all of the politicians will not want to risk offending their constituents in their reelection bids. This may not matter as Congress’ approval rate is currently at 9%.
D3 Investment Outlook:
We continue to emphasize investing in dividend paying U.S. equities. We anticipate that after this past week’s euphoria regarding the European Union, economic fundamentals will be the focal point and many of the European economies will struggle to show growth. December 9th is the next big intergovernmental meeting.
The emerging markets, including China, have already felt some impact from Europe. China’s manufacturing sector declined in November, purportedly due to higher inflationary pressures and a decrease in demand from Europe.
We still do not see interest rates rising dramatically until economic activity becomes more robust (unless a bond buyer strike occurs like Spain and Portugal are experiencing). With Europe being a drag on global economics, as we saw this week, Central Banks will be in a very accommodative and perhaps easing mode. Because of the lessons learned during the financial crisis in 2008-2009 (which was really a liquidity crisis), the Federal Reserve and other central banks will provide as much liquidity as necessary to avert bank runs and to help the world grow out of our debt problems. This will be in spite of all the current negative press regarding the $7.7 trillion dollars of loans the U.S. Fed made during the crisis.
D3 Investment Strategy:
Normally we do not write about our specific investment tactics, but due to some of the increased trading activity, we wanted to share some of the rationale behind our strategies.
We have been replacing under performing mutual funds in client portfolios. We swapped out of the Davis New York Venture fund (large cap growth) and replaced it with the Vanguard Dividend Growth Fund or the Fidelity Contrafund. We look to move out of one or two more lagging funds before year end.
We also pulled back U.S. equity exposure (value, large cap, small cap) to below the top range for the asset allocation models that each of you have for your portfolios. This was done to take profits where we could, and to hedge against the possibility of a European slowdown (or meltdown) significantly affecting U.S. equities.
We also decided that because of the volatility in the equity markets, we should invest in a volatility hedge for our growth and aggressive growth oriented portfolios. This investment is designed to increase in value when volatility increases. Because our income with growth and our income oriented portfolios already have a volatility hedge (with the exposure to fixed income assets), we are currently examining whether adding this volatility hedge would provide any incremental value.
Depending on the outcome of the upcoming European meetings, we are also looking at reducing or hedging some of the international exposure in client portfolios. Luckily we had the foresight to reduce international exposure 5% across all of our asset allocation models in January of 2011.
Our most important daily task is our continuous monitoring of your investments, taking actions consistent with your financial plans, rebalancing to your target strategic asset allocation and replacing underperforming mutual funds. Don’t hesitate to contact us if your goals, needs or risk tolerance changes.
We are still looking for additional clients to serve. Please feel free to tell anyone you know with a financial question, that D3 Financial Counselors are FIVE STAR advisors. As always, thank you for your business and we do our best to exceed your expectations.
Donald D. Duncan MBA CFA™ CPA CFP® Adam Glassberg CFP®
Michael Meyers MBA CFP® Patty Shipinski, Office Manager
Neil Lefort MBA J.D. CPA Ryan Pace, Junior Financial Planner