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THE BLUE MONEY REPORT.
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The Blue Money Report
"Keep in mind the three most important aspects of real data analysis:
compromise,
compromise,
and compromise."
~ Edward Leame
Welcome to the Blue Money Report
Today's Commentary: 01.09.03 Dear Shareholder:
It would be too easy for us to say, "oops! I did it again." But it isn't entirely our fault. Oh no. What we have done has been nothing but good, even if it isn't reflected in the statement you don't open each quarter.
What you don't see is how we have changed. Our mutual fund company has become more nimble with smaller research teams that can react better with a deeper quality decisions than we have made in the past. Not only that, but our analysts are better, not different, just better. In this age of information, where you as an investor have better access to materials, it helps that we also have improved access to pertinent information. After all, we are investing your money.
Another thing you should know is the review of your portfolio is done on a more regular basis and done with much more intensity. I know that you were under the belief that this was common practice here at XYZ Funds but in the past, we were so confident in our decisions that we still believed in our investments long after they started to head south. Like I mentioned, that has changed. To borrow the phrase of the 41st President, "Message: I care."
And you should note that because of these changes, we have gotten better at what we do. For instance, we determined that through the best rearrangement of the numbers possible and with our partners, Lipper, Inc. we have found that what you thought was bad in fact wasn't so bad. Lipper is a leading mutual fund rating company and with their help we stumbled across some interesting information about us. 75% of our funds earned first and second quartile rankings among the competition who seek to do good things with your money much in the same manner we have. If you go back far enough and we went back 10 years, our best fund is ranked number one among funds that invest in similar styles.
Now these aren't absolute numbers and your retirement fund is probably not going to let you retire early like you were planning, but hey, we are number one. Just remember that equities are still the best investment and that information is stacked dating all the way back to the twenties.
Now you probably wonder whether we should be doing something different to make you the money we so diligently lost and we are. In some cases we have taken a mathematical approach. We can actually hire the whole fund out and let a machine to the picking, and with any luck, it is the machine that will take the blame should there be another downturn in the market. We also let our managers do the job they have become experts doing, which they are good at because we still pay them well.
What we want you to know is that no matter what we do; no matter how much John Bogle, the old guy who claims the creation of the mutual fund as his own and the market venerated voice behind Vanguard complains about disclosure of our voting practices with your shares; no matter how many educated bystanders try and take a poke at how to rank funds and managers; the blame will still rest squarely on you.
Let's face it, the demographics of the investor class is simple. Young folks consumer, middle age folks invest, and old folks sell. Given the overwhelming amount of middle agers out there, this is a group that has lost it's direction. Not us. The fundamentals of the companies that we choose are still rock solid. Our methods are realistic and sometimes above reproach. But you folks react to news and sell stock whether the company is in jeopardy or not.
Just for a moment, put yourself in our shoes. We come to work, we read reams of information. We talk to folks in the industry and based on this infallible research and our keen sense of opportunity, we invest gobs of money. But something in the market out there doesn't see it the same way and you folks sell on rumor, news, and emotion. How in the heck are we supposed to compete with your erraticism?
You have to remember that there are 6,843 mutual funds out there. That's more than twice the publicly traded companies with valuations of $100 million or more. The competition for quality equities is stiff. Throw in a lethal dose of volatility, an administration's infatuation with attempted economic leadership, and boomers who wanted to retire at 50 and now will have to work a couple of ten years longer and you have a stew worthy of the best antacids.
But we have been around a long time, outlasting our peer group, in which 45% of the funds hoping to snag your investment dollar have been around less than five years. These funds certainly can't trot out their track record, now can they.
The bottom line is that you would be wise to keep hanging in there. Without sounding too optimistic, the landscape is littered with opportunities. Like a forest fire culls dead wood, we have learned to become more steady and strong like the trees left standing. You might say , "to hell with it all" and walk away but you would be missing another chance for regrowth of your devastated portfolio.
Best regards,
Your Mutual Fund Manager.
Next up, Dear Taxpayer:
Today's Commentary: 01.06.03 Equity Investing
What a convergence of non-events that drove the holiday shortened market into a week of multiple newsworthy items, as well as a stacking of plus signs.
First, let's try to understand just what drove all of the major indexes forward for the first two days of the New Year. There was very little volume and what volume there was found extreme good cheer. Anxious to put the last three, somewhat dreadful but necessary years behind us and in the absence of those who know the truth, the equity markets literally skipped forward like so many innocents on a playground.
The playground bullies will return this week (and I say this even as today's market surges) to add flavor and pessimism to the mix. These folks took some time off because they know that nothing has changed but the calendar. The cleansing process is far from over in spite of the increase in the manufacturing index. Most of that was driven by our continued build up in the Middle East, which now seems like a foregone conclusion, and restock of car builders who will make another assault on the American public in 2003. The fundamentals that make stocks attractive, like profits that are generated through growth not cut backs, have yet to make any improvement and in fact, are probably going to be the same for much of the current year. In other words, when valuations can be considered better than okay, and inflation (yes, inflation) stays under control, we will have a better place to invest. Until then...
Fixed Income Investing
As stocks go up, bonds go down... if you are of the school that believes that folks are ready to engage in a little bit of risk as they enter in 2003. But don't bet on it. There are still some very "risk averse" investors who want to be completely sure (if there is such a thing) before they return to those thrilling days of yesteryear.
For bonds in particular, the threat of renewed inflation poses a risk for the upcoming year. Inflation is right around 2% and the Fed funds rate is 1.25%. that's not news. What is news though is the fact that the Fed may just call that the bottom if you are basing what Fed governor Ben Bernanke recently said. Monetary policy is usually a tight lipped topic among the governors but his recent open thought about the spread between corporate bonds and the health of the nation's corporations suggests that the Fed might start overlooking Treasuries in favor of corporate bonds
The Fed's "whatever it takes" stance on monetary policy assures us that we will not go the way of Japan. Instead, the rates could rise, "at a moment's need", Mr. Greenspan said as part of his wait and see plan for the monetary policy. Until Mr. Greenspan starts promoting risk as the way to growth, his main concern shouldn't be deflation (which reared it's ugly head in the final quarter of 2002) but finding some way to "reflate" the economy.
The Federal Reserve Board would like to see inflation hold at 1-3%. But two things could happen that would be bad for bonds this year. Inflation above the 3% mark would put a serious cramp on capital gains even with rising yields. Longer maturities would feel particularly vulnerable. And secondly, if the stock market goes down, it would be too hard for investors to ignore yet another bargain sale in equities. This time though, they would probably be worth it.
Real Assets
Housing will probably remain on tips of everyone's forecast as the next bubble about to burst. Trouble is there is no real trouble in this asset group. Inventories have been kept in check which allows growth in all of those ancillary items that houses need to become homes, i.e. furniture, appliances, etc. But prices will be continue to be inflated regionally, but those regions, particularly in the southwest are expecting these increases. In 2002, existing home prices were up 11%. Expect half of that in the coming year.
One thing to note about housing is the spread between renting and purchasing a home with a monthly mortgage payment. Among the reasons that homes became so attractive to so many last year was that monthly payment was less expensive than paying rent. Landlords have recognized this problem and have begun a downward adjustment of rents, tightening the spread. When this happens, less mortgages are sold as the more mobile in our society recognize the benefit of renting over purchasing.
Gold will remain strong this year even if there is some leveling off of the price in the first couple of months. Once the bombs start flying through Saddam's palace windows, the price will once again begin to move. The only thing stopping gold in '03 is global peace or even better, the disappearance of the growing deficit.
Economic Policy
This week will give us a look at the President's economic stimulus package that has increased in size from $300 billion to what some folks guess will be closer to $600 billion. Expect that when he unveils his job and growth package in Chicago on Tuesday, it will be met with a sort of ho-hum reaction from the very folks he is trying to reach out to in earnest. Mr. Bush still believes that if the wealthy aren't wealthy, there will be no increase in jobs and the economy will stall as a result.
The Democrats have dropped their ideas for fiscal stimulus on the table and it hits at the heart of the matter. Don't be fooled by the commitment of the White House "to work to get the job done". These promises mean nothing if they are in conflict with what this President wants. They will debate. They will complain. But in the end, the President knows that the Democrats lack the spine to stand up against a "President at war".
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