Elizabeth Wilson, MS, CFP®, CMFC
The Monarch Report
October 15, 2012
The Markets
Two widely watched indicators just hit five-year extreme levels – and that’s a positive for the
economy.
Consumer sentiment hit a five-year high in the preliminary October reading, as measured by the
University of Michigan-Thomson Reuters sentiment gauge. This gauge “covers how consumers
view their personal finances as well as business and buying conditions,” according to
MarketWatch. Higher levels of sentiment could translate into higher consumer spending and help
propel the economy.
And, the second indicator, housing foreclosure filings, hit a five-year low in September,
according to RealtyTrac. Foreclosure filings include default notices, scheduled auctions, and
bank repossessions. In September, there were 180,427 foreclosure filings. By contrast, that
number was above 350,000 in mid-2009, so, yes, foreclosure filings have improved significantly
over the past few years.
And, for good measure, let’s throw in a third indicator – weekly jobless claims – which fell to
their lowest level in more than four years for the week ending October 6, according to
Bloomberg. Lower claims “may mean employers are seeing enough demand to maintain current
staff, a necessary first step to bigger gains in hiring,” according to Bloomberg.
While these three indicators look good, “Earnings pessimism among U.S. chief executive
officers is climbing to levels last seen when the Standard & Poor’s 500 Index was mired in bear
markets,” according to Bloomberg. In fact, analysts are now forecasting a 0.9 percent decline in
corporate earnings for the just completed third quarter, according to Bloomberg.
Good news, bad news, what’s an investor supposed to take from this? Well, like the movie by the
same title, it’s complicated. The economy continues to recover and rebalance from the Great
Recession and this leads to some indicators looking good, others looking bad, and some looking
just plain normal.
903B Murfreesboro Road • Franklin, TN 37064 • 615-614-0070
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Data as of 10/12/12
Standard & Poor's 500 (Domestic Stocks)
DJ Global ex US (Foreign Stocks)
10-year Treasury Note (Yield Only)
Gold (per ounce)
DJ-UBS Commodity Index
DJ Equity All REIT TR Index
1-Week
-2.2%
-1.8
1.7
-1.0
-0.6
-0.7
Y-T-D
13.6%
7.8
N/A
12.2
4.4
15.7
1-Year
18.3%
4.6
2.2
5.0
0.6
29.2
3-Year
9.9%
0.1
3.4
18.6
3.7
20.3
5-Year
-1.8%
-7.0
4.7
18.7
-3.7
1.4
10-Year
5.4%
7.8
3.8
18.7
3.3
12.3
Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a
dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends
and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on
each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not
applicable.
DO YOU WANT TO KNOW THE SECRET to Warren Buffett’s remarkable investment
success?
First, some background. Buffett partially owns a company called Berkshire Hathaway and he
uses this as his vehicle for making investments in other companies. So, when people say Buffett
is a great investor, they’re looking at the performance of Berkshire Hathaway stock which, in
turn, tends to reflect the performance of the companies Berkshire owns.
Further, a recent academic paper by Andrea Frazzini, David Kabiller, and Lasse H. Pedersen,
titled Buffett’s Alpha, said, “Buffett’s performance is outstanding as the best among all stocks
and mutual funds that have existed for at least 30 years.”
Now, here’s the secret to Buffett’s spectacular returns according to the paper’s authors:
We find that the secret to Buffett’s success is his preference for cheap, safe,
high-quality stocks combined with his consistent use of leverage to magnify
returns while surviving the inevitable large absolute and relative drawdowns
this entails.
Let’s look at each of those components:
1)
2)
3)
4)
Cheap: defined as value stocks with low price-to-book ratios
Safe: defined as stocks with low beta and low volatility
High-quality: defined as stocks of companies that are profitable, stable, growing, and
have high dividend payout ratios
Leverage: perhaps shockingly, the authors discovered that Berkshire magnified its
returns by leveraging its capital by 60 percent financed partly using insurance float
with a low financing rate
Source: Buffett’s Alpha paper
This is not a buy or sell recommendation on Berkshire Hathaway stock, rather, it shows Buffett
latched on to a good strategy early in his career, used leverage to magnify his returns, and stuck
to the strategy even when it suffered large declines.
Now that we know “how” Buffett achieved his outstanding return (including the surprising
leverage), does this in any way diminish his results? No. In fact, it’s probably just the opposite.
903B Murfreesboro Road • Franklin, TN 37064 • 615-614-0070
www.monarchadvisorygroup.com
Buffett figured this strategy out more than 30 years ago and researchers are just now catching up
with him!
Weekly Focus – Think About It…
“Research is to see what everybody else has seen, and to think what nobody else has thought.”
--Albert Szent-Gyorgyi, Hungarian biochemist
Best regards,
Your Monarch Team
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Securities offered through LPL Financial, Member FINRA/SIPC.
* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the
named broker/dealer.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be
representative of the stock market in general.
* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance
of the global equity securities that have readily available prices.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the
U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark
for the long-term bond market.
* Gold represents the London afternoon gold price fix as reported by the London Bullion Market
Association.
* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the
commodity futures market. The Index is composed of futures contracts on 19 physical commodities and
was launched on July 14, 1998.
* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of
the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific
periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to
predict future performance.
* Past performance does not guarantee future results.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
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www.monarchadvisorygroup.com
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Sources:
http://www.marketwatch.com/story/consumer-sentiment-jumps-to-five-year-high-2012-10-12
http://www.realtytrac.com/content/foreclosure-market-report/september-and-q3-2012-us-foreclosuremarket-report-7424
http://www.bloomberg.com/news/2012-10-11/jobless-claims-in-u-s-fall-to-four-year-low-as-quarterstarts.html
http://www.bloomberg.com/news/2012-10-11/profit-pessimism-highest-since-09-as-intel-fedex-cutforecasts.html
http://www.econ.yale.edu/~af227/pdf/Buffett%27s%20Alpha%20%20Frazzini,%20Kabiller%20and%20Pedersen.pdf
http://thinkexist.com/quotation/research_is_to_see_what_everybody_else_has_seen/193718.html
903B Murfreesboro Road • Franklin, TN 37064 • 615-614-0070
www.monarchadvisorygroup.com