January 11, 2012
I'D REFER TO THIS AS A WEEKLY COMMENTARY, but my notes tell me that it's been more than three months since we sent our last thoughts to you in this form. In fact, our last comments were as of the market's close on September 30th. That day ended one of the most challenging months of the year.
For the fourth quarter, as of the market's close on Friday, December 30, 2011, the Dow Jones Industrial Average closed at 12,217, up 1304 points, or 11.9%. The S&P 500 closed at 1257, up 126 points, or 11.1%, and the NASDAQ Composite closed at 2605, up 190 points, or 7.9%.
For the calendar year 2011, the DJIA is up 640 points, or 5.5%. However, broader indices, such as the S&P 500, the NASDAQ Composite, or the Wilshire 5000, tell a different story. The Wilshire 5000, the broadest market measure, is up only 1% for the year. The S&P 500 finished the year where it started, with its 2% gain coming from dividends. The NASDAQ Composite is off 47 points, or 1.8%. Effectively, we are finishing 2011 flat, with nothing but enormous volatility to show for our efforts.
Looking at other indices and markets, domestic small caps were off 4.2%, European stocks were off 11.8%, and emerging markets stocks were off 18.8%. Therefore, an all equity allocation to anything other than the Dow was off for the year.
Bonds had a better year, with many investors moving to the perceived safety of bonds. The Vanguard Total Bond Market Index was up 7.6%, and the International Bond Index was up 6.3%. Therefore, the greater the allocation to bonds for 2011, the better a specific portfolio performed.
Gold started the year at just under $1400/oz, and finished the year at $1580/oz, briefly touching $1900/oz in the meantime. Oil started 2011 at just over $94/bbl, and finished the year just shy of $99/bbl.
One of the largest business stories of the year was the passing of Steve Jobs, who succumbed to cancer at the age of 56. Zynga develops online social games, such as Farmville, and went public a couple of weeks ago. I'm intrigued by the concept of a company that can build profitability by developing online games.
Other significant news that had a substantial impact on markets and economies was the downgrading of U.S. debt by Standard & Poors, the Japan tsunami, Europe's bad debt, and the collapse of "Madoff II", MF Global. Portugal became the third European country, after Greece and Ireland, to require a bailout, and it looks as if Italy may not be far behind.
In order to succeed in the tablet market, companies will need to introduce tablets that are either more functional than the iPad, or cheaper than the Kindle Fire, which is priced at $199. RIM is learning this lesson the hard way, amidst a year of tough lessons for the company.
Citigroup will cut 4500 jobs, beginning in Q4 2011. John Corzine doesn't know where the $1.2 billion of investor money is, according to his testimony. Given his background as a senator and governor, this is no surprise. Most politicians have no clue where the money comes from that they so freely spend. It appears Corzine was simply continuing his ways as a politician.
Looking at economic activity, the largest domestic companies continue to report increases in top and bottom line growth. Manufacturing utilization and other measures of economic activity continue to improve, though slowly. In fact, while the stock market has been flat for the year, earnings have grown by 20%. All of this would seem to be good news for the stock market.
The challenges we face are a bit larger, in both context and geography. The concern on the minds of most is the massive global debt load, and the inability or unwillingness of our elected leaders to lead us toward viable solutions. Everyone, it seems, other than federal leaders across the world (who can print money) understands that debt must be brought under control, in order to return our countries and world to economic prosperity. In addition, there are many that fear a government continually encroaching on their lives and decisions.
There appear to be several ways to address the debt issue. One is to print money, which creates inflation. A second is to simply not pay what's due, which creates strain, perhaps to the breaking point, on those institutions and governments holding the debt. A third is to raise taxes, which inhibits behaviour that generates taxable revenue. A fourth is to cut spending, which impairs re-election opportunities. None of these are appealing options, and I suspect that none of them individually will solve the problem. It would be nice however, to find a statesman among the group, who would be willing to sacrifice self-interest for the benefit of resolving the problem.
What's interesting is that the financial crises we face, at home and abroad, are not the problem, but the symptom. Financial disarray is a symptom of moral and spiritual illness, which illness is rooted in an identity crisis. We don't know who we are, or why.
As a result, we attempt to use money to: look good, have power, buy love, affection, success, re-election, comfort, image, and the list goes on. Once we are clear on who we are, why we exist, and where we fit in the story, money loses its power to define us, and we can then learn to handle it well.
So, all the externals are simply indications of lack of clarity about internal questions. As the internal questions are answered, we move toward clarity, order, and peace. As individuals in large groups begin to experience this peace, order, and clarity, they will begin demanding the same from their elected leaders. At this point, there will be change.
One of the more interesting websites we've come across recently, www.ftpgov.com, was created to give you a quick and easy way to give your elected officials your opinion on bills, before they go to a vote. We would encourage you to check it out, and learn more. We believe the developers of the site are on to something.
Apple has introduced Siri for the iPhone 4S. It will be interesting to follow how and whether consumers use Google search, as Siri becomes more widely adopted.
Quotes of the week:
"Every government degenerates when left to the rulers of the people alone. The people themselves are its only safe repositories".
"Experience has shown that, even under the best forms of government those entrusted with power have, in time, and by slow operations, perverted it into tyranny".
"I believe that banking institutions are more dangerous to our liberties than standing armies".
"I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them".
"My reading of history convinces me that most bad government results from too much government".
"When the people fear the government, there is tyranny. When the government fears the people, there is liberty".
All quotes from Thomas Jefferson
Until next week, wishing you the best.
Centurion Advisory Group
Centurion provides fee-only financial advice and investment management services. The firm specializes in 401(k) rollovers, stock option analysis, and due diligence on real estate and private placements. If you are interested in scheduling a conversation with one of the firm's advisors please feel free to give us a call at the number provided above or email Marty Gates at email@example.com.