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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Office (352) 343-2700
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www.ruggiewealth.com
 

Around the Water Cooler

If you would still like to donate to the Haven of Lake and Sumter time is running out!  We will continue to accept donations through the month of March and all help is greatly appreciated.  This is a great opportunity for all you ladies to spring clean your closets!
 

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

Baron Investment Growth Trust (BGRFX) We track all of our managers based on their consistency in outperforming the index net of fees and Baron has not been able to show the consistency we look for. 
 

POWERSHARES WATER RESOURCES (PHO)

It is believed that Mark Twain once said, “Whiskey is for drinking, water is for fighting over”. (www.marktwainquotes.com)  Most of us can agree that the need for clean water is a pressing issue, not only in the United States but throughout the developing world.  With about 70% of the earth’s surface covered in water, and 97% of it in undrinkable saltwater, we are left with only 3% of all water usable for human consumption, irrigation and industrial production.  Worse, investment in water infrastructure is slow coming – the EPA estimates that the United State alone is $600 billion behind in water system upgrades.  A slight rainfall in some areas can cause sewage to spill into waterways and contaminate drinking water.  A good sign, however is $4 billion has been delegated to water-related improvements in every state, with another $7 billion to be delegated towards water treatment plants (ETF Trends, November 2009). 

Powershares Water Resources (PHO) is a way to invest in this narrowly focused industry of water.  PHO attempts to capture this ever growing industry by tracking the Palisades Water Index (“PWI”).  PWI represents the performance of companies in the global water industry, including water utilities, treatment plants and other companies that provide related products and services from pipe and pump manufacturing to analysis, monitoring and testing water quality.  It is somewhat difficult to invest strictly in the water industry via publicly traded equities due to the imperfect match caused by large industrial conglomerates, such as GE and Siemens, whose water-related revenues are only a fraction of the company’s profits, thus the reasoning behind the PWI tracking.

Of the four ETFs available relating to water, PHO is the largest and most liquid.  Its fee, although a bit higher than we normally like at .60%, is also the lowest of these thematically focused funds.  PHO equally weights its 30 or so holdings, rebalancing quarterly, so no one holding ever dominates.  Additionally it has slightly outperformed the industrial sector over the past one and three years. 

We believe the global fresh water crisis makes the oil “crisis” look minute when compared. 
The potential for profits, in our opinion, is greater than the gains made by oil stocks in the past few years, which is why we have held this in our more aggressive growth portfolio since October of 2009. 

Invesco Powershares Capital Management, LLC has overall responsibility as PHO’s investment adviser for the selection and ongoing monitoring of its investments. 
The fund uses a team of portfolio managers to leverage the various backgrounds and extensive resources each brings to the team.  The team was recently headed up by John W. Southhard, Jr. CFA, MBA who had been with the team since its inception.  Presently, and since July, 2007, day to day management of PHO is the responsibility of Peter Hubbard. He has been a research analyst since 2003. He is joined by several other analysts who perform various functions related to portfolio management.  Each member of the team has appropriate limitations on his/her authority for risk management and compliance purposes.
There are risks involved with investing in any ETFs, including possible loss of money.  The fund is subject to risk similar to those of stocks, that is why it is important to speak with an investment advisor prior to investing in this or any other ETF.  
 

The Markets

The American consumer is not dead.

Last week, a report from the Commerce Department showed a surprising increase of 0.3% in February U.S. retail sales compared to the month before. That may not seem like much of an increase, but it was much better than the drop of 0.2% expected by economists surveyed by Bloomberg. Importantly, it's also the fourth rise in the past five months and represents an increase of 3.9% over the year-ago period.

So, how can consumers ramp up spending when unemployment is so high? Barron's magazine pointed out a few reasons why this is occurring.

First, it is not unusual at this stage of the recovery. "The last time the unemployment rate broke double digits, during the deep recession of 1981-82, consumer spending also was increasing," according to Barron's.

Second, the government's February 2010 index of aggregate weekly payrolls was less than 1% below the number in February 2009. So, even though unemployment is high, total payroll income hasn't dropped dramatically in the last 12 months.

Third, the stock market has rallied substantially since a year ago. As a result, the "wealth effect" from a rising stock market helped consumers feel a bit wealthier and loosened their purse strings.

And, let's face it, Americans love to shop!
When you combine rising consumer spending with government stimulus and loose monetary policy, you have a recipe for rising stock prices. And, as if on cue, last week, the S&P 500 hit a new 17-month high, according to CNBC.

THE HARDER THEY FALL, the higher they rise. Would it surprise you to know that the worst stocks during the bear market that ran from October 9, 2007 to March 9, 2009 turned out to be--by far--the best performing stocks over the next 12 months?

Bespoke Investment Group did an interesting study where they took the S&P 500 stocks and ranked them from 1 to 500 with 1 being the worst performer and 500 being the best performer during the October 9, 2007 to March 9, 2009 bear market. Then, they sliced this ranking into deciles, with decile 1 being the 50 worst performers, decile 2 the next 50 worst performers all the way to decile 10, which were the 50 best performers.

They discovered that decile 1 (the 50 worst performing stocks during the bear market) turned around and rose, on average, 371% during the next 12 months that ended March 9, 2010. Decile 2, the next 50 worst performers, rose 184% over the ensuing 12 months. By contrast, decile 10, the 50 best performing stocks during the bear market, only rose 30% over the following 12 months. Essentially, the worst stocks during the bear market performed the best during the bull market and vice versa.

The study also showed that the average change of all stocks in the S&P 500 was 122% over the 12 months following the March 9, 2009 low.   
                                                 
This study points out one reason why understanding human emotion is an important factor in successful investing. Think of it this way: on March 9, 2009, at the bear market low, would you have been enthusiastic about buying stocks that had declined 80-90% over the previous 17 months? Probably not because your emotions would have been so rattled, yet, those were the types of stocks that turned out to be the best performers over the next 12 months, according to Bespoke Investment Group.

As the last few years have shown, successful investing sometimes requires that you gather your courage and do what seems most frightening because the point of maximum "frightening" may also be the point of maximum profit potential.
 

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.

"I learned that courage was not the absence of fear, but the triumph over it. The brave man is not he who does not feel afraid, but he who conquers that fear."
--Nelson Mandela

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.