FORD WEALTH MANAGEMENT LLC
Integrity•Independence•Insight
536 Pennsylvania Avenue
Glen Ellyn, IL 60137
630.545.2800
www.fordwealthmanagement.com
Erik G. Ford, CRPC®, CFP®
Principal
erik.ford@lpl.com
Trent E. Warren, CRPC®
Vice President
trent.warren@lpl.com
April 5, 2013
“Shaken, not stirred.” – James Bond, 007
Dear Fellow Investors:
The first quarter is over and what a quarter it was. The S&P 500 increased 7.3% for the
quarter as both that index and the Dow Jones Industrials approached all-time highs. After
throwing off fear of the fiscal cliff, the market clearly ignored the doomsday predictions
of what would result from the federal spending sequester, deciding that the economy
moves on with or without fiscal sanity surfacing in Washington. Interest rates stayed low
and both expert predictions and Fed commentary lead to the conclusion that it should be a
while before higher rates are an issue, or perhaps an opportunity. I would like to note
that past interest rate predictions (by “experts” mind you) have been as much or more
often in error as to the direction of interest rate changes as to the degree of that change.
At least in the current record low interest rate environment, the ultimate direction of the
next significant change should be easier to predict. The when and how much is the big
question.
Economic growth and the current recovery remain a worry for investors. The current
recovery is so sluggish it seems to need its own recovery. The recent jobs number was
somewhat of a surprise and a major disappointment with a payroll increase less than half
of consensus estimates. See what we mean by those expert predictions? In addition the
labor participation rate continues to decline, hitting a low last seen in May 1979. Clearly
the job market is sluggish and its recovery will take much longer than in previous
recessions. This weighs heavily on market sentiment and is evident in consumer and
investor confidence measures. The silver lining is that the excess capacity will absorb
job growth without inflationary wage pressures.
Of further concern are international events such as the Cyprus banking bailout and North
Korea. We would postulate that these type issues have always been with us and always
will, but we pay inordinate attention to the crisis de jour.
Securities offered through LPL Financial. Member FINRA/SIPC.
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Ford Wealth Management
Investor Letter
April 5, 2013
The positive vibe of the first quarter’s equity markets led to positive net inflows into
equities in the first quarter of 2013 after being net negative on an annual basis since 2007.
However, net inflows were still about equal to net fixed income (bond) inflows for the
quarter. Looking at investment flows over recent years, there is an enormous amount
invested in fixed income which is susceptible to being “shaken” when the market is
“stirred”.
We have alluded to this in prior letters. As interest rates rise bond values will fall. The
longer the bond’s maturity, the larger the change in the bond’s market value for a given
change in rates. For example, a 1.0% increase in rates will cause a 3.7% decline in a five
year treasury bond, a 9.2% decline in the value of a 10 year treasury bond and a 20.3%
decline in a 30 year treasury bond. It will be a very unpleasant experience to realize these
declines after growing accustomed to today’s low bond yields. It is probably a similar
feeling to realizing no return on stocks after ten years circa 1999 to 2009. This is not
meant to say fixed income has no part in a portfolio. Quite the contrary, exposure to fixed
income sectors is an important component of a diversified portfolio. However, it is
critical that risks are identified and their potential negative impact recognized.
Equities remain a target of investor concern. With the S&P 500 reaching levels it hit 13
years ago and again 5 years ago, the recent run-up is understandably worthy of
skepticism. However it is important to understand that today’s equity prices are buying
very different values than in the past. For example, since the 2007 market peak, the S&P
500 taken as a whole has reduced its leverage ratio by half. Profits are considerably
higher for the index and the dividend yield is also higher. Trailing earnings per share for
the S&P are $104 per share compared to $88 per share in October 2007 and $51 in March
2000. According to Fidelity 56% of the component stocks have a dividend yield higher
than the 10 year US treasury, which may be an all-time high. To put this in perspective,
this percentage was well under 10% from 1990 to 2007 in all years but two. JP Morgan
calculates that P/E ratios are approximately 15% below their 20 year average for large
cap equities. Further, price to earnings, price to book and price to cash flow are all below
their 15 year averages. There are always prognosticators out there for both sides of the
market, but investors need to understand the fundamentals of where prices are relative to
traditional concepts of value.
As we enter the next earnings season, disappointments may well lead to a pull back, but
we believe the fundamentals outlined above are strong considerations for investors
looking for long term results. Current bond returns will not accomplish most investors’
objectives. For example, an investor trying to create a $100,000 annual income after tax
would need over $19 million in 5 year treasuries. Of course, having that kind of portfolio
would allow for dipping into capital, but it makes the point on income generation.
Despite the recent run-up, equity fundamentals remain attractive and equities remain the
best way to participate in the inevitable growth of the world economy.
Securities offered through LPL Financial. Member FINRA/SIPC.
Page 3
Ford Wealth Management
Investor Letter
April 5, 2013
Investing in times like these is never easy. We have cited before the positives of global
demographic trends and transformation potential of technology and domestic energy.
Putting capital to work and allowing it to work is the biggest challenge for today’s
investors. No more evidence of this is needed beyond looking at the enormous amount of
cash sitting on the sidelines. Investors have proven to be their own worst enemy,
consistently realizing results far below overall market performance. The usual culprits
behind these results are trying to time market moves, chasing last year’s performance or
letting emotions rule. As investing great Benjamin Graham said, “Individuals who
cannot master their emotions are ill-suited to profit from the investment process”. We
believe current conditions are favorable for the investor with a long term outlook.
Maintaining perspective from here will make our martinis the only thing shaken, not our
portfolios.
Sincerely,
Erik G. Ford
Trent E. Warren
The Standard and Poor’s 500 Index is a capitalizations weighted index of 500 stocks
designed to measure performance of the domestic economy through changes in the
aggregate market value of 500 stocks representing all major industries.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in
their industries and widely held by individuals and institutional investors.
Bonds are subject to market risk and interest rate risk if sold prior to maturity. Bond
values will decline as interest rates rise and bonds are subject to availability and change
in price. 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 cannot be invested into directly. International and
emerging market investing involves special risks such as currency fluctuation and
political instability and may not be suitable for all investors.
Securities offered through LPL Financial. Member FINRA/SIPC.