Weekly Commentary

Weekly Commentary

Welcome to our weekly commentary. As always, feel free to call our office with any questions or comments that you may have.

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2100 Lake Eustis Drive, Tavares, FL 32778
Office (352) 343-2700
Fax (352) 742-2607

www.ruggiewealth.com
 

Around the Water Cooler

Welcome Back Kayla!  RWM’s Kayla Hunt returned this week after being off since December for the birth of her son Noah.  We are very excited to have Kayla back with us!
 

Portfolio Changes

This week the changes to our Portfolio are affected by the sells listed below.
 

Sells

Transocean LTD (RIG):  Our investment committee is not impressed with the growth record of this stock which seems to be slowing down considerably as they experience a slow pace of new contracts, declines in utilization and the stacking of idle equipment.  We sold to invest proceeds in a more dividend producing ETF.
 

Fund Highlight

VANGUARD EMERGING MARKETS STOCK ETF (VWO)

As the developed world continues to face slow growth in the near term, emerging economies remain solid because of new infrastructure construction, services exports, and rising domestic consumption.  Vanguard Emerging Markets ETF is following this trend by tracking the MSCI Emerging Markets Index, which spans more than 20 developing countries, including China, Korea, Taiwan, Brazil, Russia, South Africa, India, and Mexico.  VWO concentrates its holdings in energy and material, financials, telecoms and global technology such as semiconductors and consumer electronics within stocks issued by companies in these locations.

The emerging markets growing demand for natural resources should support healthy prospects for the oil, gas, and mining companies that dominate this index. With foreign currency reserves at record highs and domestic consumption growing, emerging economies look well positioned to weather a global downturn.  Furthermore, we believe a return to the 1997-1998 currency crises is unlikely.  However, this should not have investors expecting the 75% returns from 2009.

Due to the very nature of this ETF, it is not for the faint of heart that are unwilling to accept significant fluctuations in share prices and for those seeking significant dividend incomes.  This is a global play along with which comes exposure to international commodity prices which are closely tied to global growth trends. Potential investors should remember that emerging market large caps have been about 60% more volatile than developed markets over the past 15 years.  It is subject to price declines caused by changes in the value of the U.S. dollar against foreign currencies.

All this may sound like something straight from the “Investors Grim”.  We, however, still see the emerging markets as a place to be and thus have incorporated VWO into our Growth portfolio since October of last year. We feel it is appropriate as a smaller core holding in foreign investments as a solid diversifier to U.S. equities. 
It is important to note that this is only appropriate for long term growth of capital due to its potential volatility.  Remember thought that along with increased risk comes a greater potential for reward
As part of the successful Vanguard family of funds, VWO is rated four stars by Morningstar and made it to Money magazine’s “Money 70” list of the “best funds through thick and thin”.  The magazine's editors consider several factors when making their annual list, including low expenses, strong records for putting shareholder interests first, consistent investment strategies, experienced and trustworthy managers, and long-term performance.  Not a collection of “hot” funds, but more a list of high-quality funds and ETFs that can be helpful in constructing a diversified portfolio.
VWO has definitely proven itself for inclusion in the “Money 70” category by having one of the lowest (.27%) expense ratios of all emerging market ETFs (Money Magazine, Investor’s Guide 2010).  This could also be why its closest competitor continued to lose ground last year, seeing outflows of $2.4 billion, while VWO took in $1.1 billion, making it the sixth largest U.S. listed ETF by assets.
The men behind VWO have a significant history with the Vanguard funds.  George U. Sauter, Chief Investment Officer and managing director, oversees Vanguard’s Quantitative Equity and Fixed income group of which VWO is a part. Since 1987, he has been a key contributor to the development of Vanguard’s stock indexing investment strategies.  Duane F. Kelly and Michael Perre, both Principals of Vanguard, have been responsible for the day to day management of this ETF since 2005 and 2008 respectively.

***All growth investing involves some degree of risk which is why we recommend you seek assistance from a qualified financial advisor before investing in this or any other ETF.

The Markets

It was one year ago this week that the Standard & Poor's 500 closed at its bear market nadir of 676 on March 9, 2009. Last week, it closed at 1138, which represents a gain of 68% from the year ago low. What insights can we learn from the painful decline to 676 and the rapid rise to 1138? We have a few, but before we get to them, here's the market box score.
 

HIGHLY VOLATILE MARKETS can be great teachers and the last few years offered a great learning environment for those willing to pay attention. Here are a few thoughts to ponder:

• Cracks tend to appear in the dike before the dike breaks. The first cracks that led to the 2007-2009 bear market formed in mid-2005 as the housing market began to cool off and defaults among subprime mortgages began to rise, according to The Federal Reserve and Vanguard. However, early on, the cracks were largely dismissed as Fed Chairman Ben Bernanke told Congress on March 28, 2007 that subprime defaults were “likely to be contained,'' and former Treasury Secretary Hank Paulson said on August 1, 2007, "I see the underlying economy as being very healthy," according to Reuters. Reassured, the stock market continued rising until early October 2007. 

• Not all cracks in the dike lead to a major break. This is a really tricky part about investing--how to discern the difference between a cyclical issue and a secular issue. Cyclical issues are short-term blips that don't cause major long-term damage. Secular issues are multi-year problems that left untreated may cause real trouble. Overcompen-sating for the former and under-compensating for the latter is a bad combination. 

• When a major break does occur, it can lead to massive flooding. Almost all traditional asset classes declined during the 2007-2009 bear market, so it was hard to find shelter from the storm. Even many of the so called "smart investors," such as hedge funds, discovered that they too were vulnerable to the market's vicissitudes, according to Bloomberg.

• Hundred-year floods seem to happen much more frequently than theory suggests. Just since 1950, the U.S. has experienced 10 bear markets, defined as a drop of 20% or more from the market's previous high, according to Standard & Poor's. Excluding the most recent bear market, the average decline during these bear markets was 31.7%. And, don't forget, on October 19, 1987 the market dropped more than 20%--effectively a bear market in a day! This frequency of large declines makes it difficult to rely on modern portfolio theory as a panacea.

• Dikes can be repaired and the flooding cleaned up. After each of the first nine bear markets since 1950, the stock market went on to reach a new all-time high. We are currently in the 10th bear market so the jury is still out on whether we'll hit a new one again. However, unless you think the world is coming to an end soon, chances are the stock market will regain its previous high. When that new high will happen is subject to fierce debate.

• Bad floods may leave lasting damage--both physical and psychological. After particularly bad investment experiences, some investors yank their money from the market and seek safer pastures. It's akin to people who grew up during the depression and developed a lifelong habit of frugality; they were never quite able to shake the trauma of their early lean years. Financial wounds may heal, but scars persist.

• People continue to build homes in flood-prone areas. The reverse from above is also true. Some people have short investment memories and quickly bounce back into their aggressive investment ways. Rather than learn from the past, they continue to repeat it and hope that they will somehow manage to dodge the next bullet.

With the large rally we've seen since the March 2009 low, we seem to be in the "Dikes can be repaired and the flooding cleaned up" stage. However, given the size of the flood (bear market) we experienced, the clean-up stage could continue for some time and the chance of further flooding still remains.
 

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 or not available.

Weekly Focus – Think About It

"Experience fails to teach where there is no desire to learn."
--George Bernard Shaw

Best regards,

Thomas H. Ruggie, ChFC, CFP

* 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.