July 2008

Portfolio Comments

Market View

Dorato Services

The Library: articles by Steve TeSelle

Portfolio Comments

If you’d like to lessen the load in your mailbox, Fidelity has given us an option for you to get statements via email. You can go to Fidelity.com and log on using your social security or account number. Or, if you’d rather have me set it up for you, give me a call or send me an email.

And on to an entirely different topic…

Retirement planning can get as complicated as you want to make it. Probably the first question most people ask is ‘how much do I need?’ I’ve found it’s helpful to point out that $1 million in savings generates about $40,000 per year in income, adjusted for inflation. If you withdrew $40,000 in the first year, and increased that by the rate of inflation each year afterward, that million dollars would most likely last about thirty years. There are a few key assumptions baked in there, but it gives you a general sense of the numbers involved.

With the demise of the company pension plan, most of us will be on our own to save enough for retirement. What is enough depends on your lifestyle. But I hope it’s clear that a million dollar nest egg doesn’t translate into a Rolls Royce and caviar retirement. A million dollars just ain’t what it used to be.

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 Market View

Investors in the US stock market seem to lurch from one investment theme to another. Several years ago, technology and telecommunications were all the rage, and if you weren’t on the bandwagon, you just didn’t get it. REITS and homebuilding came next. You simply had to be in real estate; they’re not making any more of it. The current excitement is centered on oil and other commodities.

In 1998, the price of a barrel of oil fell below $10; just recently, it hit $140. This new price is too high. I make that statement not because only I know the perfect price for a barrel of oil, but because the price should ultimately approximate the marginal cost to produce it, which is closer to $60. Throw in extra dollars for anxiety about supply issues and tension in the Middle East; it’s still hard to get to $140.

Declining demand should eventually force the price down. American and European demand are now falling. The 1% increase in demand in 2008 is coming entirely from developing countries, in part because many of those countries subsidize oil, which keeps prices artificially low. But those subsidies are getting expensive. Expect to see oil prices rise in developing countries, too, which will cause demand to fall. As demand falls, so will the world price. People are slow to adjust to higher oil prices; but we do adjust eventually. Just ask anyone who sells pick-up trucks.

The Federal Reserve has probably stopped lowering interest rates. Most people now think their next move will be to raise rates, probably late this year or early next year. We all have to believe that the Federal Reserve is tough on inflation, or else we’ll start demanding higher wages and interest, to compensate for the higher prices we expect in the future, which leads to a nasty spiral of higher and higher prices. Most of us would probably rather avoid that, even if we have to risk a recession.

The currency market is already starting to take note of the change at the Fed. The dollar has stopped its slide against other currencies. Investors will probably wait until a Fed-led interest rate increase is probable rather than possible before the dollar rises significantly. While higher interest rates relative to the rest of the world will help, a fiscally responsible President and Congress would help, too.

Inflation is more of a danger in international markets than it is in the US, especially in emerging markets. Many countries do not have independent central banks, and their governments have even less confidence than the US Congress in the wisdom of markets (like democracy, markets aren’t perfect, but they are usually better than any other alternative). These countries are more likely than the US to resort to price caps, trade bans, and other shenanigans that feel good for a day or two, but only serve to create bigger problems later on.

Stocks have bounced around near the lows we reached in April. The S&P500 is now down about 9% for the year. I think US stocks are still good investments, but expect more ups and downs as investors fret about recession and unemployment and other fret-able issues.

Within the US market, there’s a new bad word that starts with F: financials. These stocks, which used to be solid investments, have seemed more like lead weights. The financial stocks you own are some of the stronger companies in the industry, so I expect them to weather this period, and to emerge with more customers than before.

The average international stock market has performed in line with the US market, although that average hides wide disparity. Brazil has gained 15% this year; China is down 40%; and India is down 30%. I suggest keeping a lid on your international exposure. The potential for inflation to get out of control could cause problems in a number of foreign stock markets.

As always, I recommend investors stick to their long-term asset allocation strategies and retain a diversified stock portfolio.

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To provide separate account management that meets the needs of each investor, and to educate and inform both clients and the general public about investment and financial issues.

Dorato Services:

• Separately managed stock portfolios
• Allocations for retirement accounts
• Small business retirement accounts
• Retirement planning
• Advice on stock options
• Assistance with tax questions
  

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The Library: articles by Steve TeSelle:

• College Savings Options
• Retirement: What's the Target?
• Fun Facts About Taxes
• Understanding Your Finances
• Risk, Anyone?
• A Primer on Asset Allocation
• Debt, Friend or Foe?
• Life Insurance Basics
• Calculating a Return
• Estate Planning
• Index Investing
• Financial Checklist

To read them online, simply click on the title. To obtain a printed copy, please call us at 303-733-4999, or e-mail me at steselle@doratocapital.com.

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"May I have my allowance in Euros?"

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