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Why lobster is cheap this summer

I’ve caught a few headlines online and blurbs on the radio about the unusually low price of lobster at this time of year. At first, I figured some environmental condition was the cause. Turns out I was partly wrong. After a little research, I learned about this fascinating lobster story that involves many different factors from changing consumer demands, to successful sustainable practices (maybe too successful) in the Gulf, to underutilized cod packaging plants in Canada, and even involves the collapsed Icelandic banking system.

Even if you’re not interested in lobster, this is a fascinating story about how interconnected the international markets really are.

Read the story

Bonds Got Hit

I have been writing, talking, and even ranting about duration, ultra-low interest rates, and the inevitability of higher rates and thus, lower bond prices (link). However, rates kept driving down to historic lows. But maybe it is finally time.

The interest rate on the 10-year Treasury rose off the bottom of 1.7% in May and broke through a 7-year trend line to 2.7%, as of this writing. Bonds prices dropped dramatically (link).

Our government needs to hold interest rates down to avoid the compounding effects of higher interest payments on the existing debt. In addition, our government needs to hold interest rates down until growth is strong enough for the economy to stand on its own. Their plan is to create new money, buy bonds, and keep interest rates low until the economy revives (Quantitative Easing). Inflation will then pick up along with higher wages. Deficits will subside due to higher taxes from a growing economy. Total debt will shrink in real terms due to controlled inflation, and interest rates will rise slowly. That is the plan.

They will do whatever it takes….which is to print money and buy bonds. The Fed simply cannot stop. Interest rates must stay down. But so far, little of this money has found its way past the stock market into wages. Hence, there is no growth. Their plan is not working.

GDP is growing at about an anemic 1.5% so far this year (link).

The July employment report confirms (as follows): link

I see no economic strength driving rates higher. The unemployment reports have not been positive. Full time, breadwinner jobs ($35,000+) are scarce and other employment measures are not good. The economy does not point to higher interest rates. The Fed has no reason to stop its Quantitative Easing maintenance of low interest rates.

However, the risk of principal loss has shown itself. Maybe something else is at play. Maybe with dividend yields so low, it is not worth the risk.

As always, it is not easy to see forward.

Should I invest now?

I’ve been getting this question a lot this summer: “Should I invest in the market now, or is this the top of the market?”

Here’s my response:

If you watch the news, there’s always a reason not to invest. Think back to the election and the fiscal cliff.  Who would be crazy enough to invest at the end of 2012 when the fiscal cliff was right in front of us?  Then again, The market has gone up and up this whole year with only a few speed bumps.

If you run the numbers, the research suggests that you’re better off moving the money into the markets despite what you hear from the media. Don’t try to time when to buy or sell. But that may be too hard to stomach for many investors.

And then there is the middle ground – invest in the markets on a regular basis over a certain period of time – called dollar cost averaging.  Instead of investing 100% of your portfolio right away, you could invest 25% of it for four months.  That may reduce the risk of buying a security only to see it drop shortly after you purchase it. This allows you to ease back into the markets, instead of jumping in.  Keep in mind, this method does not ensure a profit and does not protect against loss in a declining market, so investors should consider their willingness to continue purchases during a declining or fluctuating market.

Top takeaways from 10 articles on asset allocation.

I’ve been doing a lot of reading on Asset Allocation this morning and here are a few key takeaways that I think might be helpful to investors:

  • Static allocations assume the relationships between the various asset classes stay the same.  Dynamic allocations assume that the relationships are constantly changing.  Look back over the past five years and you can see how the relationships are in constant state of fluctuation.
  • Dynamic asset allocation can be accomplished with frequent reviews, opportunistic components, and flexible strategies.  It’s more active than static, and requires more effort and time.
  • Leveraging a portfolio (borrowing money to buy more of a certain asset class) to create risk parity across each asset class can reduce the overall risk of the portfolio while providing acceptable returns. This can be complicated to do on your own and comes with its own set of risks and higher costs (cost to borrow money).
  • Marcus Schlumerich, author of The Efficient Frontier in Modern Portfolio Theory, got it right when he stated that “a portfolio is efficient if no other portfolio has the same expected return with lower volatility.”
  • A growing trend in asset allocation goes beyond the standard 60/40 split between stocks and bonds.  New research suggests a broader and deeper use of asset classes can help to reduce risk.
  • Due diligence is becoming increasingly important as new asset classes in the alternative space emerge.
  • Asset classes are cyclical and respond based on economic environments. Changing economic environments cannot be predicted. Portfolios need to be designed with that in mind.

It’s nice to see new research supporting strategies that  have already been implemented in our client portfolios. If you’re interested in putting the Asset Allocation approach to work in your own investment portfolio, please feel free to contact us.

If interest rates were to rise…

There has been a lot of talk these last few months about what will happen to portfolios when the Fed eventually raises interest rates.  The Fed will only make changes to its low-interest policy when the economy confirms it will continue to improve.  The earliest the Fed would make any changes would be in September, although some experts predict it won’t happen until 2014. Below are a few key points that can help put this into perspective and explain what this means for you:

If interest rates were to rise…

  • Changing trends could provide new investment opportunities.
  • We could see certain domestic bonds decrease in value. Not all bonds but certain types, such as long-term government backed bonds, may be more affected than others when rates do rise. We see opportunities in short duration funds or funds with global diversification or a variety of sub asset classes (such as corporate bonds, senior loans, convertible bonds).
  • It could strengthen the dollar thus making stocks more attractive (both small and large cap could be buying opportunities).
  • The financial sector (regional banks, insurance companies, etc.) could be an opportunity as they historically perform well during periods of rising interest rates.
  • Large Multinational companies based in the US could see their values go down as a result of the strengthened dollar, while multinationals based outside of the US could be a better investment.

Talk about the magic of compounding interest!

I just stumbled upon this interesting nugget.  All things being equal, a 19 year old who contributes $2,000 per year for JUST 7 years will have more money at age 65 than a 26 year old who made $2,000 contributions each year until age 65.

Talk about the magic of compounding interest.  Too bad, most 20-somethings won’t realize this until it’s too late.

For details, read: Investment Advice for Gen Y

New Report on Upward Mobility

NY Times just released the results of a fascinating study about upward mobility in the United States.

The results show that a child who grows up in Bridgeport, CT area with parents who earn in the 10th percentile ($16k), ends up, on average, in the 38th percentile.

These results are indicative of the whole northeast, too.  Unfortunately, the south isn’t so lucky.

Read In Climbing Income Ladder, Location Matters.

3 Negative Views… And How to Spot Them.

The talking heads and supposed experts have done a good job of scaring investors away from the markets.  Their job isn’t to help investors reach their financial goals, rather they are looking to shock investors and make them stay tuned to the channel to learn more (and of course watch their advertisements).

“A connoisseur of woe, needs fresh worries from time to time, or he will become complacent”

Peter Mayle, A Year in Provence

A recent post at, has done a pretty good job at classifying these fear mongering talking heads.  Greg Harmon, breaks them into three categories:

The Postponement: Their rhetoric sounds like this, “The big market decline we’ve been talking about is going to happen, just not as soon as I said”.  This camp believes something big is coming and that it’s always right around the corner.  Remember Y2K, the election, the fiscal cliff, and even the recent Fed announcement?

The Rationalization: After a pundit makes a prediction and it turns out to be wrong, his strategy may be to rationalize why some unforeseeable event prevented his prediction from coming true.  It’s easy to explain everything away after it’s already happened.

The Decay: These “experts” look for all the small disappoints and set backs and attribute it to an overall decay of the markets, the economy, the country, etc.  This camp will look into the lowering of the GDP and turn it into something much, much larger.

These mindsets can be debilitating to an investor if they only look for the negative stories.  It’s important to remember these are opinions of people paid to keep you watching the TV and reading their articles.