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  One Man's Opinions - Spring 2013
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Statistics show that the stock market, on average, returns approximately 9-10% per year over time, including dividends. Yet the average investor, operating on their own, manages to capture less than three percent annually. Obviously they are doing something wrong, and these mistakes have been identified as originating from making decisions from their emotions. They buy when stocks are high and everyone around them has been “getting rich” in the market (or in real estate, gold, or tulip bulbs). They sell in a panic when markets break and plummet, usually somewhere near the bottom of a decline. Why do some people do this to themselves?
In previous editions of this missive I have written extensively about the human brain and how it functions and how it impacts our investment decisions. New readers can find these editions posted on my website, In this quarterly letter I continue sharing my thoughts as to how our emotions, triggered by the amygdala, our lizard brain, interfere with our using rational thoughts and beliefs in our investing decisions.
Our brains have two “minds.” One is the amygdala which operates independently and is there to warn us of danger and give us the necessary hormones to escape from whatever threatens us, either physically or abstractly, such as our relationships or our financial condition now or in the future. Let’s call this our emotional mind. The other mind is our rational mind, which takes into consideration our knowledge, wisdom, life experience, and judgments as to the future.
Making good decisions is not a matter of heeding one mind and ignoring the other. The brain is designed to work as a whole, integrating its emotional and analytic capacities. If someone is upset or rattled about their finances they tend to swing too far in one direction or the other. The best approach, I have found, is to take a middle path in which we use both our head and heart. This means using our prefrontal cortex, the part of our brain which receives and processes verbal and nonverbal input from both hemispheres of the brain. Anxiety disrupts this process and triggers the amygdala to flood our bodies with the stress hormone cortisol, putting the prefrontal cortex out of commission.
This condition is, of course, the absolute worst time to make decisions about our health, loved ones, or our financial condition, especially investing. Acknowledging our emotions is the first step toward integrating them. Vague discomfort and fears pale in their impact on us once we identify them and their sources. They can serve a real purpose, but we need to learn to feel them, report them, perhaps to our financial planner or investment manager, discuss them, and determine an appropriate course to take. This is “easy for me to say,” hard for most of us to do.
Let me make some suggestions based on the above considerations:
1.) Avoid making decisions while under stress. We humans tend to overestimate our ability to make rational decisions. But the reality is we may have only a few hours each week of quality thinking time to make difficult financial decisions since the prefrontal cortex (the center of our conscious decisions making) is small and tires easily.
2.) Consider your real needs and goals when making financial decisions. Avoid “tips” and salespeople trying to get you to buy products which may or may not fit you.
3.) Unresolved issues create major stress in our lives. We need to work through our emotional problems to relieve stress and get emotional release. Prayer, meditation, physical exercise, and other “calming” behaviors do actually work.
4.) Seek advice and guidance from someone who is calm and rational about these matters. Generally an experienced investment professional has learned to come to peace with his or her emotions. This stable condition is picked up by their clients. By all means, avoid CNBC and other financial media who trigger excitement and fear with their short term focus on the financial news. Remember their business is selling advertising, not making you money.
5.) We humans process information in different ways; verbally, visually, and kinesthetically (by physical movement). I thought for most of my life I was a visual since I read almost constantly. I still do. But I discovered several years ago that I take in information both verbally and visually, but I “absorb it” kinesthetically. I “feel it” once I get it! Like when I am starting these newsletters and blogs.
6.) The better we understand our brain and how it functions, the more effectively we can manage our emotions. Suppressing them tends to intensify them over time. The best way, as mentioned above, that I find is to recognize what I am feeling, report those feelings to someone else, and then process them appropriately.
7.) Do not discount your emotions in making decisions; they are a vital part of it. We often tend to assume that a gut (emotional) response cannot be right because it conflicts with a logical weighing of the pros and cons of an issue. But if we cut off the emotional part of our brain we may well make overly optimistic decisions, lacking in human values for example. The important thing is to be aware of both parts of our brain when they are in conflict. It may be that an emotional response is our brain is actually warning us of something, or intuiting it, which might be helpful in the situation we are faced with.
8.) Be aware of the lessons of behavioral finance. We advisors often note that client’s are not focused on “the now” when determining whether to buy or sell an investment, rather than its present and/or future value. Waiting until I can “break even” on a losing investment to sell it is often the wrong thing to do. It may never get back to what you paid, or it takes so long you would be far better off having the money elsewhere. By the same token, waiting for a market listed investment to go back to its “bottom” may be equally fruitless. If it is attractive now, why do you believe it will go down? If you believe it will go down, why do you even consider buying it?
9.) Practice ways to overcome your own anxiety. Fear is the first and most primal emotion. Our amygdala is programmed to be “on alert” for danger very waking moment. Fear and the need for security supersedes everything else and are highly stressful. Back off from a decision when you are feeling stress. Taking deep breaths, with the exhalation being twice as long as inhalation, reduces your stress. Noticing that you actually feel all right in the moment accesses signals from your body to brain that all is well. De-stressing has a hormonal effect on the body which will affect how well we can cope with whatever decisions we are facing.
10.) Be aware of what time of day you function best from both minds. I am a morning person. I arise relatively early, and do my best work before Noon. Others are night people, only coming alive after the sun goes down. Still others peak late in the day. Know when you are at your best and when your thinking is clearest. For example, I almost always start my blogs and newsletters first thing in the morning. My mind functions well, my creativity is at its peak, and I make fewer mistakes. By the same token, I edit better later in the day. It all depends on the person. None of us is alike.
Careful awareness of our feelings as well as our thoughts should lead to better decisions and better results in our financial affairs.
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or 317-571-1112 .
Annual Statements: Our clients and prospective clients are entitled to a copy of our Registered Investment Advisor form ADV II. If you would like a copy please send us a written request at 1098 Timber Creek Dr. #7, Carmel, IN 46032.
Privacy Notice: One of our primary goals here at McAllister Financial Planning is to protect our client’s privacy. No non-public information about our clients, either provided by them in person, or regarding any transactions they may have made with us, our affiliates, or others is shared with any other person unless authorized by the client. This specifically includes information gathered by us in opening an account. We do not disclose any nonpublic information about our clients with anyone except as provided by law. We do, of course, share information with our affiliated money managers and our broker/dealer, Morris Group, Inc., as is directed by regulation, law, and client instructions. From time to time McAllister Financial Planning may employ certain specialists or clerical workers who may be involved in servicing out clients. In such cases, the privacy policy also applies to them.
  One Man's Opinions - Winter 2012-13
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Usually in these quarterly newsletters I give my readers my ideas, and recommendations as to where the stock and bond markets have been, are, and possibly will be. Today I am delaying doing this as few of my readers have a clue about the immediate future of the economy, our investment strategies, or our tax liabilities. I certainly don’t!
As this is written (Dec. 30) , our leaders (??) in Washington D. C. apparently are at a standoff and both sides, but especially the president, seem to be willing to have taxes jump sharply and defense funding drop drastically next Tuesday. Other painful cuts and tax increases will become law as well. The Republican House majority rejected a very modest compromise by its leader, House Speaker Boehner. At this point he has no platform from which to negotiate.
The president, after declaring in 2010 that it would hurt the economy to raise taxes when it was recovering so feebly from the 2008, has now put himself in the corner to do exactly that. Most observers say that such a failure to act will trigger an economic recession. I agree. I am still hopeful they will compromise, if only to “kick the can down the road.” But if not, then we will have the first ever deliberate U.S. government imposed recession. We will have to deal with it as necessary. As usual, I will have suggestions in my weekly blogs as things unfold.
In lieu of those usual comments, today I am reminiscing about how much these markets have changed in the fifty years and five months since I joined the investment business. It has been a heckuva ride!
Virtually everything has changed, commissions on stock trades have plummeted after they were freed in 1975. Mutual funds, and now their less expensive and more liquid offspring, exchange traded funds, have exploded in popularity, justifiably in my opinion. Some of the best investment management in the world is available to any investor with $1.000 or even less to invest.
Professional investment management for those with larger portfolios, $250,000 or more, now allows the investor to, in effect, have his or her own mutual fund. Stock options and market options enable the conservative investor to “layoff” risk to speculators if they wish to do so, often at nice profits. Hedge funds exist to do the same thing, but with leverage which sharply increases risk in most cases. I am not fond of the latter.
The machine I am using to compose this quarterly newsletter has more computing power than the entire room full of $1.2 million IBM machines in a secure temperature controlled room at Merrill Lynch in New York, which I toured fifty years ago as a trainee.
Trading volume is over a thousand times larger now than in those days. A few hundred men on the floor of the New York Stock Exchange executed trades for investors as well as themselves. They earned, by today’s standard, ridiculously high commissions for doing so. Today you can trade thousands of shares for five or seven dollars by computer.
Back in our “boardroom” at Merrill Lynch we had an electronic “tape” moving from left to right at the front of the room. This system took the place of the old “ticker tapes” which had provided the same information on one inch wide tape delivered over phone lines for decades previously. Theater seats were available for customers who wished to “read the tape.” I quickly learned from my seat at the front of the room most of them were not there to do business, but to have something to do inside out of the weather.
My desk was the first one in the front row at the top of the escalator as I delivered a daily stock market report on WTTV, our local independent station, at the end of each market day. I supported my young and growing family my last two years of college as a radio announcer and disc jockey. So Merrill took full advantage of my experience to put me on the air for my seven years there. I continued a local radio report for another seven years thereafter. While I am sure this activity did not hurt my career, I do not remember a single new account which came my way as a result of it.
Today we have instant communication of all news, not just the markets, via the internet. All public information on nearly all investments is also available there instantly, world wide. The markets discount the future, as they always have, but surprises and reactions to them are normally the way prices work these days.
Over the years I learned that it was not enough to be intelligent and hard working. This business is full of people smarter than I, and harder working too, nowadays. In my younger years I worked harder than anyone in my shop. As my family grew, I saw the error of my ways, and my six children got a lot more of my time. Doing so was the best decision I ever made.
After thirteen years as a stockbroker I decided to open my own broker/dealer and become a pioneer financial planner, central Indiana’s first Certified Financial Planner(tm). In building a financial planning clientele, I specialized in estate planning and investments which had strong tax benefits. In fact, the tax benefits were, all too often, the only benefits to the investor. Over time I learned to sort out the one which had merit from the pure shelters, and over time the Congress and the IRS took away most of the extreme tax benefits and rightly so.
While still offering the few remaining deals with tax benefits, in the late eighties I shifted my business to individually managed investment accounts. As I had been throughout my career I was a pioneer here too. The large NYSE wire house firms followed in the 1990s and today much of their emphasis is on “AUM,” assets under management. For a stockbroker this activity is not time intensive, allowing their registered representatives to build very large “books of business” if they choose to do so. Many of my fellow CFPs have followed this avenue as well as other independent investment advisors.
After 35 years as a volunteer in our self regulatory organization, formerly the National Association of Securities Dealers, now the Financial Industry Regulatory Authority, I stepped down the first of this year. I treasure this experience and believe I made a substantial contribution as the person with the longest consecutive service to our regulatory bodies. I still serve FINRA as an arbitrator to this day.
We in the investment world are far better regulated than we were in 1977. Having said that, I believe we still have a long way to go, especially with the very large investment banks in Wall Street. They continue to constantly cause trouble and incur fines, which apparently are shrugged off as “costs of doing business.” Just last week the Financial Industry Regulatory Authority (FINRA) sanctioned Citigroup Inc., Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Morgan Stanley and Bank of America Corp.’s Merrill Lynch roughly $4.48 million for allegedly collecting fees from municipal and state bond funds to pay lobbyists. Without admitting any guilt they all agreed to the fines.
The heavier hand from our regulators that results from these continuing infractions falls unfairly, I believe, on the smaller members of FINRA, who make up the bulk of the membership, but contribute far fewer problems per employee, for the regulators.
I have been in semi-retirement for time now, since I began my lecture cruises eighteen years ago, some 65 of them so far. I have cherished this opportunity to share my own hard earned wisdom, discipline, knowledge, and experience with my audiences and the friends I have made among them. They have been well received and kept my modest business growing. More recently, in 2008, I began writing my weekly blogs for the same purpose. These have also been well received.
One Man’s Opinions, my quarterly comments on the markets and financial matters, have been distributed four times a year for thirty seven years now, originally by mail, now by email. Only 11 readers still get their copy by “snail mail.” If you are one of these 11 and now have an email address, please send it to me: . You will have faster access.
I remain thankful to my Maker for the fascinating, stimulating, educational, motivational, and financially rewarding career I have been blessed with these past fifty years. I am grateful to you, my clients, friends, audiences and readers for making it possible
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or 317-571-1112 .
Annual Statements: Our clients and prospective clients are entitled to a copy of our Registered Investment Advisor form ADV II. If you would like a copy please send us a written request at 1098 Timber Creek Dr. #7, Carmel, IN 46032.
Privacy Notice: One of our primary goals here at McAllister Financial Planning is to protect our client’s privacy. No non-public information about our clients, either provided by them in person, or regarding any transactions they may have made with us, our affiliates, or others is shared with any other person unless authorized by the client. This specifically includes information gathered by us in opening an account. We do not disclose any nonpublic information about our clients with anyone except as provided by law. We do, of course, share information with our affiliated money managers and our broker/dealer, Morris Group, Inc., as is directed by regulation, law, and client instructions. From time to time McAllister Financial Planning may employ certain specialists or clerical workers who may be involved in servicing out clients. In such cases, the privacy policy also applies to them.
  One Man's Opinions - Fall 2012
Energy Self Sufficiency for the United States?
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Scripps Howard News columnist DeRoy Murdock recently wrote an interesting column suggesting that the riots and uprisings in the Middle East do not have to be an economic threat to the United States going forward. For decades, as we developed a huge appetite for foreign oil, now over 50% of our usage, we feared over-dependency. Recent oil and gas discoveries and the potential for more right here in North America opened the door to the possibility of energy self sufficiency for the country, or at least for North America.
I quote the article in part. “Against this backdrop the United States should end this dangerous game (dependency on Middle East oil) and move urgently to increase supplies of North American energy. We should capitalize on the vast hydrocarbon resources literally beneath our toes and under our oceans. With all deliberate speed U.S. oil should be drilled, natural gas should be fracked, and the Keystone Pipeline should be approved at once.”
“Foreign oil” should refer to petroleum from our peaceful and relaxed neighbors in Canada, a NATO ally. The Keystone pipeline will create some 20,000 private sector jobs at no cost to exhausted American taxpayers. It should tell the voters plenty that President Obama torpedoed this privately funded shovel-ready project that would decrease U.S. unemployment, increase American national security, and redirect petrodollars from the Mid- East to mid-Canada.
“If President Obama has changed his mind on these matters after last week’s killings and chaos, he should lead the charge toward friendly oil. Otherwise Gov. Mitt Romney should champion this cause as boldly as possible between now and November.”

Strengthening these remarks is testimony from the American Energy Initiative (AEIA) in a recent hearing of the House Energy and Commerce Committee. It reinforces the fact that North American energy self sufficiency is achievable.
“We are an energy-rich nation. We have more oil and natural gas than anyone thought possible even 5 years ago. We have more potential energy than many oil-exporting nations in the Middle East, and more than most countries in the world.”
“If we are allowed to safely produce more of our domestic energy resources and invest in more Canadian oils sands we could provide 100 percent of our U.S. liquid fuel needs in a matter of years. We need leadership. We have an opportunity to spur millions of jobs and billions of dollars of revenue to our government. But we need smart public policies to develop these vast and critical resources now!”

I am convinced this is precisely the path we need to follow. Obviously, we need to develop oil fields we already know of, like the Arctic National Wilderness Reserve (bigger than many states) on acreage the size of Manhattan. Offshore prospects being held back by the U.S. government also should be drilled. We have a lot more oil to find
Let me be clear here. This newsletter is not oriented to the presidential campaign. Rather I wish to point out the obvious. Recent findings of more than 200+ years of natural gas supplies, on top of rapid development of new production techniques developed for mining Canadian oil sands at competitive costs, make it possible for our country, by 2020, to sever our dependency on Arab and other unstable country’s oil. This surprising development after decades of increasing supply from foreign sources, is a “once in a lifetime” opportunity for us to forever become self sufficient in energy.

An added benefit would be reducing U.S. dependence on coal as our base power source.
The discovery of vast amounts of natural gas and the consequent decline in its prices make gas powered electric generation plants far more competitive. Natural gas has replaced coal as the hydrocarbon of choice for new power plants being built today. These plants are much cheaper and take far less time to build than coal plants. They generate much less pollution. They have short construction times and are a lot cheaper and far less complex. To over-simplify, they are basically a jet engine hooked up to an electric generator. They are “the answer” to our peak power needs in the foreseeable future.
Nuclear power is far and away the best source for “base power,” which is the constant amount in demand around the clock. Environmentalists torpedoed these superb facilities with untrue scare stories some thirty years ago. The U.S. Navy has been powering many ships with nuclear for over fifty years and never had a fatality caused by a nuclear accident. The challenge for nuclear power is not safety, but very high capital costs and very long construction times.
The same high capital costs and construction complications and delays apply to coal gasification plants and other low polluting high tech coal plants that are now feasible.
It is unlikely that gasoline and oil prices will drop substantially even if we achieve self sufficiency in North America. Oil is a fungible commodity and it can be exported as well as imported. But the discovery of so much natural gas has dropped its price over 75% in the last several years. It is now highly competitive with diesel fuel for over-the-road trucks as well as buses. LNG fueling stations are already popping up all over the country.
Below is part of a report from an energy market consulting firm, PIRA Energy Group:
"Adoption of natural gas fuel by trucking fleets is approaching a critical threshold, which ultimately could lead to enormous gas demand growth at the expense of diesel fuel.
The report addresses both medium- and longer-term natural gas prospects in the U.S. transportation fuel market. PIRA says the sheer volume of U.S. recoverable gas resources relative to anticipated demand suggest that natural gas prices will remain deeply discounted relative to oil prices in the foreseeable future.”
“These lower prices are driving commercial trucking, corporate and government fleets to move to the cheaper alternative, Liquified Natural gas (LNG). Inexpensive North American gas is here already. . PIRA's report concludes that future gas demand in such natural gas vehicles (NGVs) have enormous upside potential, led by private sector initiatives, with or without federal government assistance.”
In a "high case" scenario, as much as 2.4 million barrels per day of diesel fuel demand could be saved. Liquefied natural gas (LNG) used in Class 8 trucks would be responsible for approximately 70% of that total, while fleet vehicles using compressed natural gas would account for the rest. In a more moderate forecast, it pegs natural gas demand at 3.4 BCF/D in 2030, or only 15% below the high case, which underscores less complex hurdles in these fleets. "Although the timing remains quite speculative, the private sector appears to be responding to this challenge without help from the federal government, which previously looked essential." Cummins is scheduled to make available an 11.9-liter natural gas engine that uses LNG in early 2013. "The implied payback period associated with this midsize LNG truck appears likely to generate high consumer interest," PIRA says.

Natural gas pipelines span the country already. They can be extended into the new fields relatively quickly. Local delivery pipelines can also be expanded fast. It would appear that the LNG revolution is very close, if it is not already launched.
The U.S. government currently is massively supporting several alternative energy approaches, including ethanol, solar energy, wind power, and electric cars. I have personally supported and even invested in such options since the late 1970s. Sadly, none are currently competitive with oil without subsidies. Let us examine these possibilities.
Ethanol is a renewable fuel which can provide between 10% and 85% (when mixed with gasoline) of the fuel necessary to power our automobiles. Unfortunately Congress has “muddied the waters” where ethanol is concerned by banning imports of it. Brazil alone has sufficient sugar cane waste to make enough ethanol to meet current U.S. demand. Needless to say, this raw material is much cheaper than the corn we use in this country to produce domestic ethanol (with a government subsidy of 50 cents per gallon), which means it could be imported for much less. But Congress will not allow this.
Solar energy is not yet economically competitive as a source of electricity. And without a drastic drop in the cost of batteries, it cannot be used as a “base source” for our electric grids. Simply stated, the sun does not shine all day, in fact it can provide electricity for less than ten hours a day on average. Solar will ultimately take its place in providing some peak power to the grid at mid-day, especially in and near the deserts. But by its very nature, it is a limited potential source of electric power.
The same limitations apply to wind power. The wind simply does not blow all the time at a rate sufficient to power windmill generators. Again, this is a useful source of peak power, since the wind tends to blow stronger during the daytime. But sites featuring relatively constant wind are few and far between.
Electric cars are still in the experimental stages. The problem is the batteries which are available for use in them. Currently the Chevy Volt has severe limitations as to the distance between battery charges, and costs 50-100% more than competing gasoline powered cars.
Ironically, Toyota has been selling its hybrid Prius cars for years now with great success. They have expanded these gasoline/electric power systems to their other makes, including the Camry and even the Lexus. My son drives a Prius and raves about his gas mileage (35-50 mpg) and how well it rides due to the heavy batteries on board. It is interesting to note that this highly successful Toyota system gets NO subsidies from the U. S. government. Might this be a message for our leaders in Washington? I would point out that there were no government subsidies or support for the mammoth natural gas finds in Appalachia and the Plains states. The capitalistic system can perform miracles if governments leave it alone!
A personal note and invitation for my readers: Why live in Carmel, IN? I live and work here, just north of Indianapolis, and have for 17 years. I love it! It is a delightful upscale community and with a great lifestyle. In case you missed it, the September issue of Money magazine chose us its #1 best small city (pop. 50,000-300,000) in the USA. Stop and see me if you come this way. I will buy breakfast, lunch, or dinner and show you around “my town Carmel!”
There will be no blog next week as I will be at sea on Golden Princess. My next Blog, #37-12, will be out Oct. 11. Have a wonderful fall and football season.
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or 317-571-1112 .
Annual Statements: Our clients and prospective clients are entitled to a copy of our Registered Investment Advisor form ADV II. If you would like a copy please send us a written request at 1098 Timber Creek Dr. #7, Carmel, IN 46032.
Privacy Notice: One of our primary goals here at McAllister Financial Planning is to protect our client’s privacy. No non-public information about our clients, either provided by them in person, or regarding any transactions they may have made with us, our affiliates, or others is shared with any other person unless authorized by the client. This specifically includes information gathered by us in opening an account. We do not disclose any nonpublic information about our clients with anyone except as provided by law. We do, of course, share information with our affiliated money managers and our broker/dealer, Morris Group, Inc., as is directed by regulation, law, and client instructions. From time to time McAllister Financial Planning may employ certain specialists or clerical workers who may be involved in servicing out clients. In such cases, the privacy policy also applies to them.
  One Man's Opinions - Summer 2012
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August 1st marks the 50th anniversary of my entry into the investment business with August 15 marking the 37th anniversary for McAllister Financial Planning. I look back at my career and thank my Maker for the great opportunities that have come my way. I am also grateful to my clients, past and present, my colleagues, and my readers, who have kept me on my toes. I have a fascinating and highly rewarding profession, psychologically and emotionally, as well as financially. I am very blessed indeed.
There have been some challenging times, such as 1973-74, 2001-02, and 2008-09, but to have survived and prospered as I have is a blessing second only to my wonderful and growing family and my good health. Thanks to all my clients and friends who made it possible.
And thanks too, to my audiences on the cruise ships, who have made my work even more satisfying and such great fun these past eighteen years. In September I will take my 65th cruise. I have now visited 143 countries! What a wonderful life!
Our topic this quarter is volatility. Most investors and many stock market observers and commentators complain about it. The financial media often remind us that we have more volatility “now” or “these days.” The implication is that volatility is bad and it is getting worse! But the fact is that stocks and the stock market are volatile. They always have been and surely always will be. It is the nature of the markets to move up and down in varying degrees of volume and breadth. For us human beings, that can be terrifying. But it is not abnormal and it is not necessarily bad. I will attempt here to at least ameliorate some of my readers’ fears.
I never hear or read complaints about volatility on the upside. Strong up markets are perceived as “good” and they make us feel that God is in His heaven and all is right with the world! Since such wonderful days can be, and most often are, of limited duration, the complaints have to do with the down days, weeks, months, or years. The advent of 24/7 news on cable TV and the internet has made all of us increasingly aware of the “down” aspects of the stock markets.
But what we need to keep in mind is the enormous growth in stock trading worldwide since World War II, and the enormous increases in trading volume here in the United States. I well recall the day in August 1962, as a brand new trainee with Merrill Lynch chosen to offer the firm’s radio market reports in Indianapolis, when I reported that the volume on the New York Stock Exchange for the day had been 1.8 million shares! These days we trade a thousand times as much on the NYSE; some individual stocks trade more than that all by themselves! So there is a lot more coverage, a lot more diverse base of stock owners, and a lot more attention being paid to the stock market and, naturally enough, to its innate volatility.
In just the first full week of June of this year, the stock market was up all five days on heavy volume. It recovered approximately 30% of its decline of the previous two months, which in turn had completely reversed the 10-12% gains in stock prices during the 2012 first quarter. That week represented a welcome turnaround, but it serves to demonstrate the complete randomness of the stock market. We simply cannot know when the market is going to retreat, rise, or to just to tread water for awhile. To make things even more frustrating, individual stock prices can, and many do, trade completely out of sync with the overall market.
If we are going to invest in stocks, we must accept the fact that they are completely random in their movements, and that such movements are going to sometimes be quite volatile. For starters let’s examine just what volatility is. It is neither good nor bad, it just IS! Volatility applies to both up and down movements.
In order to measure volatility we first determine a “standard deviation (SD).” You may have covered this in college, and perhaps I did too, long ago. So just what is this marvelous measuring stick? SD measures how much something deviates from its expected average. You can use SD to measure historical deviation of individual stocks, sectors, indices, or the market as a whole. For that matter we could also measure the SD of hot humid summer days in Indianapolis, or rainy days in Florida. A low SD number means results did not vary much from average. A higher SD means there was more variability.
From 1926 through the end of 2010, the Standard and Poor’s 500 Stock Index’ annual average deviation 19.2%, based on monthly returns. (Deviation can be calculated using yearly or daily data, but the investment industry normally uses monthly data to determine SD.) This result does, of course, include the bear market years of the Great Depression. Were we to exclude those years, the SD since 1926 would be only 12.9%.
One must remember that standard deviation is always a backward look at known numbers. It shows how stocks have behaved in the past. It cannot and does not predict anything about future volatility. However any historic look at the stock markets suggests that we certainly CAN expect it to deviate!
A standard deviation of 0 means that, historically, returns have not deviated at all. If we discard inflation, cash shows zero SD. A modestly positive number means some deviation; a higher number means higher deviation. But we don’t need historical deviation numbers to know that stocks have been volatile for as long as they have been traded. In certain years market volatility has been vastly above the norm, in other years far below. In some years it has been both. An average includes all prior years being measured.
Now let me surprise you. The most volatile year on record since 1926 was 1932, which included the bottom of the very worst market in U.S. history. The SD was 65.24%, with monthly returns varying hugely. So, stocks fell hugely in that year, right? Wrong! In 1932 stocks fell just 8.11%, not good, but not a disaster, either. The next most volatile year followed. In 1933 the SD was 53.8%. Wow, that must have been awful for stocks! Wrong again, stocks ended the year up 54.4%! More recently, in both 2008 and 2009 we had above average volatility. Which of the two years was worse? 2008 of course! Wrong again! In 2008, a terrible year in the market, SD was 20.1%. In 2009 it was 21.3%, and the markets were up 26.5% for the entire year, but had recovered 67.8% from the March 9 bottom of that bear market. In 2010 things quieted down, and SD was 18.4% with the market up 15.1%. Volatility in and of itself, is no indicator whatsoever of market direction or strength. We can have high volatility with and up markets and down markets with low volatility. We cannot use volatility to predict anything!
So why does this attribute of the market upset people so much? I think it has to do with our amygdala, or “lizard brains,” which I discussed in great detail in One Man’s Opinions spring edition three months ago. Anything that disturbs or threatens us triggers an instant reaction from this always alert, survive-or-die, portion of our brains. Lower animal forms all the way down to lizards have such a mechanism (In fact, in lower forms, that is all the brain they have!)
Just as unusual or extreme physical motion upset our bodies’ equilibrium, it seems to me that unusual or extreme movements of the market also upset and alert our amygdala, causing instant fear of loss or damage. Let me state here that, to my knowledge, this theory is completely mine! I know of no research or expert studies that indicate such reactions occur due to the amygdala.
Whether or not my theory proves correct, it’s obvious that something causes average investors to give in to their fears and make decisions contrary to their own best long term interests, needs, and plans. If there is any degree of truth in my theory, then the antidote surely is more information about the origin of our fears.
Volatility has not increased in our time. We are just more aware, due to rapid communication of market movements, with far more observers and commentators watching and informing us, and far more of us involved in the stock market, of changes in the prices of stock.
     People fear that the internet, technology and high tech trading, increasing U.S. debt, greedy investment bankers, and fancy investment wrappers like collateralized mortgage obligations (CMOs), are causing more volatility. There is not one iota of evidence that this is true! We actually have less volatility in widely traded stocks than was the case back in the 1930s. (Tell that to our amygdalas!)
     Based on standard deviation, stocks are not any more volatile than in past times, and they may indeed be less so. But I suspect SD is not how market participants, paying too much attention to the day-to-day market movements, experience volatility. Encouraged by CNBC, Fox Business News, Yahoo Finance, Google Finance, etc. etc., all of which spew forth angst all day, every day, fear overcomes common sense.
Many times in these spaces I have urged my readers to stand back from the day to day movements and take a long range approach. I tell my audiences; “Buy good stuff and weed the garden twice each year!”
Better yet, hire someone else to pick the good stuff and constantly stand by to weed the garden as necessary. These people are called money managers or investment managers. I am one. Professional management, by definition, lets us give up any need to stay involved in the markets daily, weekly, or monthly. A quarterly or semi-annual review with your manager of your accounts should suffice.
Know this: any investment proposal which offers significantly higher than normal returns without volatility is highly likely to be a fraud. There is no way for stocks to make a steady 10-12% or more annual return, paid monthly or quarterly. Nearly all Ponzi schemes bait their victims with such claims. Bernard Madoff got away with his fraud for years on a multi billion dollar basis. As I write this my professional news websites are outlining several more such schemes which have now come to light. ALWAYS check to make sure such offerings are registered with securities regulators, and offered by licensed securities salespersons. If it sounds too good to be true, it is highly likely it is!
What is happening right now? As this is being written in late June, the stock market remains undervalued on an historic basis.
     A great deal of financial news concerns economic troubles in Europe, which are real. However, I believe they are priced in to the current U.S. markets.
     The upcoming presidential election is also being priced in to the current rather sluggish markets. As the election campaign continues and a favorite emerges the markets should stabilize. In doing so they should also reflect the positives; high corporate profits, record cash on hand, low price to earnings ratios.
     On the economic side, the Federal Reserve Board has sharply reduced its forecast for growth in the U.S. economy for the rest of 2012. It sees unemployment barely budging for now. Until recently many economists were hopeful that the economy would strengthen in the second half of 2012. This optimism has faded as hiring and growth have slowed for the third straight spring. The Fed announced it would continue its programs of stimulus via low interest rates and heavy money growth at least through 2014.
All this surely bodes poorly for President Obama in his reelection bid. As things stand today, in my opinion, he would lose. I base this on various polls which show that he and Governor Romney both being favored by about 45% or so of the “likely voters.” What the press does not report is what the other 10% of the voters are probably going to do. History says about 80% of them will vote against the incumbent; this is true of any incumbent, not just Mr. Obama.
If history holds true, unless the race is subject to a very dramatic swing, we will have a new president next year. And we will have a successful businessman in charge, which the markets will surely approve of. This opinion is not a political one in my case, but rather the financial situation as I observe it.
As we approach the Fourth of July holiday, there are few indications that any severe changes in the economy are looming. By Labor Day, we should have a clear handle on the election. But, whatever the outcome of this (or any other) presidential election, remember:
There is almost nothing we can do about volatility. It is, it is irrational, irregular, erratic, completely random, and a fact of life in the markets.
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or 317-571-1112 .
Annual Statements: Our clients and prospective clients are entitled to a copy of our Registered Investment Advisor form ADV II. If you would like a copy please send us a written request at 1098 Timber Creek Dr. #7, Carmel, IN 46032.
Privacy Notice: One of our primary goals here at McAllister Financial Planning is to protect our client’s privacy. No non-public information about our clients, either provided by them in person, or regarding any transactions they may have made with us, our affiliates, or others is shared with any other person unless authorized by the client. This specifically includes information gathered by us in opening an account. We do not disclose any nonpublic information about our clients with anyone except as provided by law. We do, of course, share information with our affiliated money managers and our broker/dealer, Morris Group, Inc., as is directed by regulation, law, and client instructions. From time to time McAllister Financial Planning may employ certain specialists or clerical workers who may be involved in servicing out clients. In such cases, the privacy policy also applies to them.
  One Man's Opinions - Spring 2012
       More Lessons I Have Learned
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In my 2004 Fall quarterly newsletter , “One Man’s Opinions,” I discussed in detail an interview in the June 2004 Financial Advisor magazine with Dr. Daniel Kahneman, a tenured psychology professor who had won a Nobel Prize in Economics for his work in the field of behavioral psychology. In the interview he affirmed many of my beliefs regarding investing and investors during the prior 42 years. I shared them with my readers at that time. You might wish to read the newsletter on I evolved a lecture from that newsletter, “Lessons I Have learned,” which has proven very popular with my audiences on several dozen cruises
Dr. Kahneman has continued his work, as I have. Now I would like to discuss more recent lessons I have learned during my now fifty years in this highly fascinating and rewarding profession. Early in his career Dr. K coined a term “the illusion of validity” and has since expanded it to “a tendency for people to view their own beliefs as validity.” In the past two years or so we have had an excellent example of this as the media and the public continued to believe the United States was still in an economic recession. This is in spite of evidence that the recession bottomed out and the economy began to recover (albeit very weakly) in June of 2009. Only in recent weeks, after almost three years since the bottom, has the public and the media began to see and believe the facts.
In our defense, according to Dr. Kahneman, we humans have neither the temporal flexibility nor the neurological capacity to analyze all the data available to us in this day and age. This has been compounded by the internet, which has multiplied the already staggering amount of data available to the average literate human many times. We humans therefore, develop subconscious strategies as a problem solving aids; “short cuts,” which the psychologists call heuristics. These are time-saving, energy-saving rules of thumb which allow us to simplify the decision making process.
Normally this is not a bad way to go. Heuristics is a solution to our problem of ever limited mental resources. Even the brightest of us have this limitation. But Dr. Kahneman has discovered that there are certain situations, and I notice there are many of them in the investing process, where our reliance on heuristics leads to “severe and systemic errors.” These errors have been come to be known as “cognitive biases.” An example of this, common in my work, is “confirmation bias,” a tendency to search for and/or interpret information in such a way as to confirm our preconceptions. It is epidemic in Wall Street.
This bias is just one of a litany of them that I notice in investors. Especially in the financial media I see constant “negativity bias,” which is the tendency to give more weight to negative information and experiences than positive ones. This bias is easy to understand, bad news attracts more readers, listeners, and viewers than does good news. All the media tend to do this, not just the financial ones.
Then there is anchoring bias, the predilection to rely on one piece of information when making decisions. For example, we in the lower United States have had an extraordinarily warm winter this year. From this information one might conclude global warming is absolute and growing. This conclusion totally ignores the record cold winter experienced in Europe, Alaska, and other parts of the world.
Another bias in we humans is the “bandwagon effect,” the tendency to do or believe things because others do. We see this all the time in the stock markets. People see others “getting rich” so they rush in and buy very late in a market rally in an attempt to “get rich” also. All too often the result is a loss, after which they sell their positions, condemning “the market” and all involved. Most in this business are trying to help our clients meet their financial goals over the long run. It is good business to do so.
These, and other, biases tend to be experienced in pairs or trios. This makes it quite difficult for the average public investor to succeed on their own, given the enormous knowledge being generated for their consideration, and the volatile markets common today.
Also, in recent years, psychologists have begun to notice larger patterns in our biases. In hundreds of studies researchers have consistently found that we overestimate our own attractiveness, intelligence, work ethic, impact on external events and other people, as well as our chance for success, and chance of avoiding a negative outcome, and even the superiority of our own peer group. But there is a flip side: where we stubbornly overestimate ourselves, we also significantly underestimate the world at large!
We all too often tend to be control freaks, and are significantly more optimistic about things we think we can control. Stock and bond markets, by the way, are not controllable by anyone. By the same token, we tend to throw up our hands and quit in anger if we perceive we have no control over something, be it the stock market, bond market, oil and gasoline prices, or the unemployment rate.
Compounding all the above conditions and the source of most of our financial mistakes, is a very basic part of our brains called the amygdale (ah-mig-dah-lah) which is an almond shaped sliver of our temporal lobes at the lower back of the brain. It is responsible for our primal emotions like rage, hate, and fear. All primates possess such brain parts, even lizards. It is our early warning system, an organ that is always on high alert, whose job it is to constantly monitor our environment to find anything which might threaten our very survival.
Anxious under normal conditions, once stimulated the amygdala becomes hyper vigilant. Our focus tightens and our fight or flight response turns on. Our heart rate speeds up, nerves fire faster, eyes dilate for improved vision, the skin cools as blood moves to our muscles for faster reaction times. While all this is going on, cognitively our pattern recognition system scours our memories, hunting for similar situations to help identify the threat, and for potential solutions to help neutralize the threat. But so potent is this response that once turned on, it’s almost impossible to shut off. This is a huge problem in our modern world with its massive amount of stimuli!
Our days are saturated by information. This is in contrast to our ancestors, who hunted or gathered, and lived in small groups for mutual help and defense from outside threats, and whose world was pretty much limited to how far they could walk in one day. Today, on the other hand, we have literally millions of information sources from all over the world competing for mind share. How do they compete? By appealing to the amygdala, which is already primed to look for danger. It can almost always find something to be alarmed about in the world we live in today! The media, consciously or not, feeds our amygdala with 90% pessimistic news! Quite simply, good news does not immediately catch our attention. Rather bad news does because our amygdale is always looking for something to fear!
This has an immediate impact on our perception. Even under mundane circumstances, attention is a limited resource for us humans. Any fear responses only amplify our emotional reactions. What this means is that our amygdala is always hunting for bad news and it mostly is going to find bad news.
Compounding this tendency, our early warning system evolved in an era of immediacy, when threats were of the “tiger in the bush” variety. In contrast, most of today’s dangers are probabilistic, the economy might nose dive; the Iranians might develop a nuclear capability, the Israelis may move to eliminate the threat; the Taliban may take over Afghanistan; or Italy may renege on its debts. The amygdala cannot tell the difference! And worse yet, it is designed not to shut off until the potential danger has completely vanished. But probabilistic dangers never vanish completely! Add in a constant barrage of media bad news and you have a brain convinced it is living in a state of siege. This is why my readers often find me “ranting” about the financial media and its emphasis on short term bad news, both real and probable.
I first learned of the amygdala and it’s impact on our emotions last year when studying Imago, a relationship therapy which takes into consideration the effects generated by it on relationships. I found it fascinating. Now Dr. Kahneman has brought it home to me in my work, suggesting how these powerful emotions tend to trigger irrational or even plain stupid actions by us humans. For example, I recall a client, a dairy farmer with a large herd, who at very bottom of the stock market decline of 2002 closed his million dollar account with me. He said he believed the stock market, down some 25-30% at the time, was going to zero. I asked him if he thought there was a chance all 600 of his producing cows might die suddenly (They had daily veterinary supervision as to their environment and diets). His response was, “they might!” That ended our conversation. If he feared that about his business, in which he had spent his life, then it was fruitless for me to expect him to trust my judgment about the stock markets. Less than four months later his account would have been up 25% had he stayed the course.
That same month another client, an unsophisticated lottery winner, left because his account was down $50,000, more than he made at his job. This represented 1% of his $5 million account, 80% of which was in tax free municipal bonds. Again, I had misjudged his risk tolerance. But I would have been derelict in my fiduciary obligation to a man in his late 30s if I ignored inflation and put him 100% in bonds. (The long term goal was to have him 50/50 in stocks and bonds.) These two incidents in my career, happening in the same month, taught me a lesson about my client’s risk tolerance. I probe a lot deeper since then. Let us look at the lessons I listed seven years ago with our amygdala in mind.
People are not rational about their financial decisions. To one degree or another most make decisions from their emotions. In this case we are allowing our fears, almost always overrated, to control our actions. Many investors sell when prices have fallen to bargain levels, often after those same emotions have caused us to buy when prices were at all time highs. Almost all professional money managers have learned to override their emotions, to make decisions rationally. If not, we fail and drop out.
Here are updated summaries of the lessons I first discussed back in 2004 for your consideration.
Most investors “narrow cast.” They do not look at the big picture and their individual circumstances within that picture. They jump in on a “tip” and bail out when things get volatile.
Mistakes are inevitable in investing. They cannot be avoided, but one can plan for them. This means overriding our amygdala.
Ignorance of what is and what is NOT an investment opportunity. The investor is overrating his or her own ability to find such opportunities. For example, people like to buy stocks they are familiar with, local, their own industry etc. etc. This can be good or bad.
Most investors do not know the difference between “risk” and volatility. Our amygdala is afraid of volatility, we cannot control it.
Some watch their holdings too closely. This engages our amygdala as our fears intervene.
Some do not pay close enough attention, they do not “weed the garden” periodically. In these cases they have may have “turned off” or “tuned out” obvious warning signs.
For most investors the best advice is to; “Hire a Professional Investment Advisor.” There is NO substitute for decades of successful experience as an investment advisor. I and my managers would welcome an opportunity to discuss your personal situation.
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or 317-571-1112 .
Annual Statements: Our clients and prospective clients are entitled to a copy of our Registered Investment Advisor form ADV II. If you would like a copy please send us a written request at 1098 Timber Creek Dr. #7, Carmel, IN 46032.
Privacy Notice: One of our primary goals here at McAllister Financial Planning is to protect our client’s privacy. No non-public information about our clients, either provided by them in person, or regarding any transactions they may have made with us, our affiliates, or others is shared with any other person unless authorized by the client. This specifically includes information gathered by us in opening an account. We do not disclose any nonpublic information about our clients with anyone except as provided by law. We do, of course, share information with our affiliated money managers and our broker/dealer, Morris Group, Inc., as is directed by regulation, law, and client instructions. From time to time McAllister Financial Planning may employ certain specialists or clerical workers who may be involved in servicing out clients. In such cases, the privacy policy also applies to them.
  One Man's Opinions - Winter 2012
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As we enter the new year of 2012, we typically plan ahead and make resolutions for changes in our lives. While I am well aware that many readers are already retired, or at least, like me, semi-retired, spending Christmas weekend with my rapidly growing family (now numbering 32 blood descendants with #33 set to arrive this spring) makes we aware of the importance of helping them plan for their own retirements.
For starters, all six of my children are middle aged now (48-55), the older four already grandparents themselves. Almost half the 12 living grandchildren are now married with children. The 13 great-grandchildren, ages two months to 15 years old, have their lives pretty much ahead of them, of course. But a remark by my 21 year old grandson, who was holding his two month old son at the time, gave me pause.
He is still in college and remarked that he did not expect to receive any Social Security in his old age. Many of his generation have a similar belief. To an extent this is healthy, because they can and should save and prepare for their own retirement and old age now and throughout their lives, not counting on receiving full social security benefits. However, I do think he and they are in error in their belief that there will be NO Social Security for them. They will just not get as much or as soon as what did.
Let’s review the history of retirement in our culture. Prior to and during the Great Depression the concept of “retirement” did not even exist. People worked as long as they could at whatever work they could find or create. When they got too old or too disabled to work, they lived on their own savings and/or moved in with their children or other family. Retirement on one’s own savings was an option, but only a very few could do so.
We must remember that when Social Security was created in the late 1930’s, the average person lived only into his or her early sixties. Congress then set the age for Social Security to start at 65. With unemployment at 25%, their goal was not to give the old people a secure old age, but rather to bump them out of the workforce, making room for younger people to enter.
Prosperity after World War II allowed for earlier and earlier retirements. Corporations created “defined benefit” retirement programs to integrate with Social Security and promised a “comfortable” life style for the rest of employees’ lives. Fifty years ago, when I entered the investment business, it was common for these defined benefit programs to “kick in” when the combined age of an employee and his or her time in service to the company equaled 80. They would then receive retirement income for life. Indeed, as a young stockbroker, I met many people here in Indianapolis who joined Eli Lilly, Indiana Bell, or some other major employer right out of high school and who were eligible for full retirement at 49 or 50! Many employers even arranged for the full benefit programs to pay out enough extra to those under 62, who were not yet eligible for social security benefits, drawing extra offsetting funds from their pensions until they could qualify.
I point out to people that, if they do not take the retirement income due them at 50, 60, or even more, they are, in effect, working for far less than they are worth. I pointed this out to my 32 year old grandson this weekend. He is 14 year senior sergeant in the U. S. Army, and is about to become a Warrant Officer at considerably higher pay (He is a detective). He can retire after 30 years at 75% of pay. He will be 48 years old. Why should he continue to work for the army then, when he can retire, collect his 75%, and go to work for the local sheriff or police department for likely a higher salary than he is then drawing from the army? He will then also begin piling up another pension, and he may get some credit for his military time as well.
The entire scenario as originally envisioned after World War II was just wonderful, but something intervened! The medical and drug people produced a series of breakthroughs in geriatric health care, resulting in the average lifespan in the United States jumping from the early sixties to mid-80’s currently. People now live in retirement for decades, not just a few years.
The private corporate world saw all this coming and reacted accordingly. In the 1980’s they began to adopt 401(k) programs where employees can contribute to their own retirement plans on a pretax basis. The employers normally match a certain percentage of contributions, such as 6%, but the employee can contribute more if they wish, still tax deductible, up to a limit set by law. These became wildly popular with employees in the 1980’s, enabling employers to withdraw from offering defined benefit programs. In actual fact, defined benefit programs are generally superior (and much more expensive) than defined contribution programs, such as the 401(k) and its sister programs, 403(b) and 457 plans, which are for non-profits and government employers.
The problem we now face in the United States, and to an even greater extent, in the other western democracies and Japan, is that nearly all government employee benefit programs remain the more expensive defined benefit type. This is further hampered by the various government entities, from the U.S. military, to the states themselves, and to various municipalities NOT fully funding their pensions (setting aside money to pay these future benefits), or even not funding them at all! Some private employers have also been guilty of under-funding their retirement plans, but since this cost is deductible for federal tax purposes, most have been funded to at least a some degree.
Politicians are notorious for “kicking the can” down the road, rather than facing and solving a problem during their own time in office. We just saw an excellent example in our Congress refusing to renew the Social Security “tax cut” for another year, settling on two months instead, and saving the average worker the grand sum of $40 for 2012! I am pretty sure that will NOT have any enormous impact on the U. S. economy and job growth.
In any event, the majority of government defined benefit programs are not funded or are only partially so. Thus, today’s politicians are faced with the “cans” which their predecessors have kicked down the road and into their laps. Along with retirement plans, they may also be responsible for providing continuing health care until age 65 for their younger retirees. We all know these costs have escalated to a shameful degree.
So over the past 65 years, the employee retirement and health benefits to which long-gone politicians agreed were overly generous. Now current elected leaders are forced to pull things back to reality and amend future benefits. Often they face rebellion from their workers, especially from any unions involved. I can understand the fury; none of us likes to lose benefits that we have been promised and which we looked forward to. But the reality is all employers, not just the taxpayer- funded ones, are faced with reducing their exposure to increasingly lengthy future retirements.
The solutions are there but, just as in Europe, they are very painful to the employees and recipients involved. But changes MUST be made, since the problems will only get worse if we continue down the path we have been on.
For starters, Social Security must be adjusted to reflect the longer life expectancy. The current law, which moves the age when one can receive full benefits, must be continued, adjusted eventually to 70. The age for early retirement, again on a graduated basis, must be moved up to 65. The notion of taxing earnings over $110,000 to raise more funds for retirees is a poor one. The program would have to then adjust those workers’ future benefits reflecting the higher contributions. Wealthy people would get much more from the fund, and they do not need it. Not doing so would violate the whole principal of the program, in that it was created to force people to put money aside for their old age. To do otherwise would require a major legislative change, and I do not see this as possible with our current Congress, or the one I see coming in 2013.
Medicare has been a bonanza for us older citizens. Major changes are necessary, changing the entire medical system. But ObamaCare as currently enacted, taking the place of Medicare, simply will not work. As an example, all personal medical records must be digitalized and available to any medical personnel we designate. My own physician has already taken this step, and his group constitutes several hundred providers affiliated with a major hospital network. This is the way of the future.
Limits on medical liability, which we already have here in Indiana, must also be put in place. Estimates are that 20-30% of medical tests ordered by physicians are enacted as a precaution against possible lawsuits. Trials featuring non-medical juries ordering multi-million dollar penalties for human mistakes must stop. Doing so would also sharply lower the costs of medical liability insurance, which in turn would allow physicians and other providers to work part-time well into their 70s, alleviating the current shortage. The trial lawyers will howl, but right now their excesses cost us hundreds of billions of dollars annually.
There are surely many other ideas that sensible people in both parties serving the public can propose to further lower these costs. Let us hope the Congress will allow them to do so
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or 317-571-1112 .
Annual Statements: Our clients and prospective clients are entitled to a copy of our Registered Investment Advisor form ADV II. If you would like a copy please send us a written request at 1098 Timber Creek Dr. #7, Carmel, IN 46032.
Privacy Statement: McAllister Financial Planning does not reveal any information about its clients and prospective clients to any third party without full written authorization. All client documents are kept in separate files and are only reviewed by our personnel and by regulatory authorities who have their own privacy safeguards.
  One Man's Opinions - Fall 2011 - October 1st, 2011
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The stock market and the U.S. economy certainly led us on a merry chase these last three months. The Standard and Poor’s 500 index is down 9.64% for the year as of last Friday. Certainly this is not what I was expecting, as common stocks are a resounding buy at these prices, and corporate profits are quite strong, up 10% over last year. In the final analysis over the long term, stock prices are driven by corporate earnings. Stocks are now, as a group, at historically reasonable prices. What is driving them down is fear!  

Let me start with some facts. There will NOT be a “double dip” recession. This is for the simple reason that the last recession, 2008-2009, ended in June of 2009! We are over two years into this admittedly very weak recovery. A recession, if it comes, will be a new one, not an extension of the last one. Second, arguing against another recession, there are very few excesses or bubbles in our economy, such as the real estate bubble that burst in 2007, and the high tech stock craze of the late 1990s, which ended in disaster in 2001. Lastly, while Europe’s economic troubles are more severe than our own, as a group the Euro countries have sufficient financial resources to handle the Greek deficit problem, and probably those of Ireland, Portugal, Italy and Spain as well. The European central banks have pledged their resources to head off a financial meltdown. In recent days this fear has ameliorated.  

Last year at this time, the press was full of concerns about the Congress, health care, Greece, municipal bond defaults, and a double dip recession. Stocks had declined 16% and recovered to show a 12% increase for the year. This year we are down 20% (from the high). The news is full of fears about Greece, a double-dip recession (impossible, see above), lack of national leadership, debt reduction plans, and the downgrade of USA debt. All of this does not amount to a crisis, except to frighten the public and incite panic. It is relevant for traders and the CNBC audience, but NOT for long term investors, which describes nearly all my readers.  

So far we have made it through the municipal bond default scare of 2010 with almost no damage, the Congress and the administration are now all talking about (if not doing much about) lowering the national budget deficit. Cuts in entitlements are at least being talked about, even by the president and some of his allies. Interest rates hardly budged when S&P lowered its debt rating on the United States, and long term bonds keep rising in price, of all things. How much lower can interest rates go? They are already negative in the short term, up to two years, when taxes are considered. How many times must we listen to the “sky is falling” and other negative main stream media financial news?  

The facts are we are in a sluggish growth mode, interest rates are at historically low stimulative levels, and we are not making a dent in the unemployment rate. There is obviously a lack of public confidence in our political leadership in Washington D.C. Both the current administration and Congress have not demonstrated significant leadership in facing current economic challenges. The administration, especially, seems bent on further strangling private business with more and more regulation and higher taxes. While not a surprise, given the historic mindset of the left, especially the current leadership of the Democrat party, they appear to have a deep reluctance to give up long held ideas which have clearly not worked. At least this is the perception of private business owners, who generate the vast majority of new jobs. To a great extent they being ignored as well as irritated by our current administration.  

We are just thirteen months away from the 2012 Federal elections. Assuming things do not change dramatically, and I fail to see any way this can happen, we will have a new president in sixteen months. More than likely the current Senate will change hands also. Next summer, when this begins to appear to be the likely case, the markets will reflect this as a perceived positive change. For good or bad, a Republican congress and president is where we seem to be going. I was not at all happy with our last Republican presidency so far as financial discipline and deficit management is concerned. However, it would be very unlikely for any new administration to not learn from their failures and mistakes, as well as those of our current leaders. Better days surely are ahead.  

American firms have the largest cash positions in their history. This should allow them to weather almost any storm. This is in contrast to the dark days of 2008-09 when they were cash starved, and bankers closed their credit lines. At that time they could not expand, and often resorted to laying off employees to survive. Not so today.  

And let us not forget inflation, which is good for stocks as earnings adjust fairly quickly to rising prices. Producer and consumer prices have risen sharply this year. The Producer  

Price Index (PPI) is up 11%, meanwhile the Consumer Price Index (CPI), is up 4%. Further price increases seem inevitable to this observer.  

Most investors never seem learn, but the best policy is to ignore the chatter and buy strong stocks paying competitive dividends, ones that are historically cheap and should gain as sentiment improves, which should be less than a year away in a worst case. There is no shortage of blue chip stocks selling at fire sale prices, with strong balance sheets and good outlooks given the impetus from the monetary policy of the Federal Reserve. Only rarely in my 49 year career in the investment business have I seen bargains such as these.  

We continue to have room for a number of new clients, both for investment management and personal financial planning. Call 317-571-1112 or email to discuss your personal situation.  

Have an enjoyable fall.  

Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or 317-571-1112 .
Annual Statements: Our clients and prospective clients are entitled to a copy of our Registered Investment Advisor form ADV II. If you would like a copy please send us a written request at 1098 Timber Creek Dr. #7, Carmel, IN 46032.
Privacy Statement: McAllister Financial Planning does not reveal any information about its clients and prospective clients to any third party without full written authorization. All client documents are kept in separate files and are only reviewed by our personnel and by regulatory authorities who have their own privacy safeguards.
  One Man's Opinions - 7/07/11 - Summer 2011
The Impact of Aging On Financial Decision Making
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I recently encountered two men in their late 70’s, both of whom have done very well running their own portfolios. Each adamantly declined my recommendation to hire professional investment management for at least part of their portfolios. I was suggesting that they could monitor their managed accounts and determine if it was wise to trust the manager(s) to do a good job for their spouse and/or other heirs when they themselves reached the point at which they could no longer manage their own affairs, or they were simply no longer alive to do so. I was not, in either case, soliciting their accounts for myself and my investment managers, for to do so might have detracted from the credibility of my suggestion. I was genuinely concerned that they were going down a path which could possibly cause harm to them and/or their heirs.
To my mind, in both cases, these gentlemen are in denial of their own mortality and the effects of the aging process on our human abilities to continue to make good decisions about financial affairs. Both men have been taking more risk than I, as a 49 year veteran of the investment business, consider prudent. As of this point, though, by taking extra risks, both have, over time, outperformed the mark; both are proud of it.
The impact of the aging process on our human abilities to process information, sort out available options, and make appropriate decisions is not a positive one. We are, after all, human beings, and we all follow certain paths through this life, slowly losing some portion of our physical and mental abilities as we proceed toward our inevitable demise. For my part, I can no longer run or play racquetball at age 73.
I think it makes perfect sense for senior citizens with substantial means to interview and select one or more investment managers while they themselves are still mentally sharp, still able to judge a manager’s performance, abilities, and suitability. Instead, I observe, many older investors “hang in there’ until they come to the inevitable point that they no longer can effectively handle their own affairs, or they pass on and leave the problem in the hands of a spouse or other heirs who may or may not be qualified to take over these duties. All too often, in these cases, the survivors are taken advantage of by dishonest or inept people, even other family members, who prey on their ignorance.
I am all too aware of the tendency we Type A personalities have to keep control at all costs. My suggestion to these two gentlemen, and to my senior readers here, is a possible way to continue the control of important financial matters by finding trustworthy successors to handle the job they, the investors, have done so far.
In an article in the June issue of our professional Journal Of Financial Planning, Gregory Kasten, M.D., CFP, and his son Michael Kasten, a third year medical student, point out certain facts concerning the aging process. The article concerns seniors’ decisions regarding their retirement incomes, but I believe the process is applicable to all financial affairs.
The authors point out that even physically healthy seniors experience substantial declines in cognitive function, even without clinical dementia, after peaking in middle age.
Research has shown that in a cross section of the population, the average analytical cognitive function falls by about one percent per year after the 20s. Two relatively simple calculations show the loss of analytical performance over time. Try them here if you wish. Count backward by 7s from 100 to 60. Scoring is based on a scale of one to five based on the number of correct answers. Take the test if you wish. The answers are on the next page. I got a 5, but I work with numbers all day long and was taught arithmetic by the nuns before calculators existed. The average score at age 51 is 3.2. It declines to 2.2 in one’s 90’s.
The second test scores the number of people correctly answering a simple question. If five people all have the winning number in a $2 million lottery, how much does each receive? The answer is also on the next page. At age 53 only 52 percent get the correct answer, at 90 only ten percent. Again, thanks to my age, 73, born before calculators, my profession, and the Benedictine nuns, I got the correct answer.
Let me point out that these age declines in our analytical function are partially offset by related increases in experience, both our own and those observed in others. (“The wise man learns from experience, the wiser man learns from the other man’s experience!”) Experience is sometimes also known as wisdom and the analytical factor is usually offset by the experiential figure until one reaches their 80s. Of course, those with Dementia, Alzheimer’s, or other abnormal aging processes will lose this function more rapidly.
The research shows that 21% of those between 70 and 79, 53% of those between 80 and 85, and 76% of those 90 or older had at least some cognitive impairment.
Add these factors to those present to one degree or another in investors of all ages; inertia; anchoring; procrastination; framing; default choices; and the endorsement factor, and we can conclude that older people are often hard pressed to function effectively in their financial decisions. See my article “Seven Deadly Mistakes Retirees Make” below.
Ironically, older investors show a propensity to display negative attitudes toward products specifically designed to lower risk with more protection and guarantees, such as annuities. Somehow they perceive the risk that they will die prior to outliving the guarantees as a negative, even though, in the long run, we are all dead.
I urge my readers to assemble a trusted team of advisors, including a Certified Financial Planner, accountant, attorney, and qualified insurance representatives, early in your senior years while you are presumably better able to make these choices and track their contribution to you and your families’ financial well being. Over time it might be wisest to turn over a major part of your investment portfolio management to professionals, who bring far less emotional distraction to your problems, are aware of your risk tolerances, and of your own particular wishes.
Q1. 100, 93, 86, 79, 72, 65
Q2. $2,000,000 divided by five is $400,000.
In 49 years as a financial advisor I have noted a number of errors often made by we “senior citizens.” I list them in the order I most frequently encounter them.
1.) Procrastination. Most people fail to organize their financial affairs before it is too late to take advantage of available preferred options. This applies to retirement and estate planning, as well as insuring r isks and determining investment options and allocations. If you have not already done these, today is a good day to begin. If you have, then today is the day to review them in light of any financial, economic, tax, legal and/or family changes in your life.
2.) Making financial decisions on the basis of misinformation, or unreliable or inaccurate information. A large part this comes from listening to or seeking advice from inappropriate friends and relatives. The American public school system does a very poor job educating students in financial matters. Most high school graduates do not know even how to balance a checkbook. People often turn to equally ignorant others who have no clue what they are talking about. A good example of this is Bill O’Reilly of Fox News, with an MBA from Harvard, who once demonstrated his complete ignorance as to how international oil and gas markets work. He thinks the huge oil companies can manipulate the price of oil and gasoline. If this allegation is true, then they sure did a lousy job from 1981 to 2003 when oil prices, adjusted for inflation, steadily declined back to 1973 levels. If ever there was a case of supply and demand working in a capitalistic system, this is it! As the result of a significant decrease in supply due to the loss of 30% of refining capacity in the 2005 Gulf hurricanes, the price of gasoline spiked sharply to well over $3 per gallon and the news was full of this “awful” situation. In six weeks the refineries got back on line and gas was $2.10. The market worked exactly as it is supposed to. Supply suddenly dropped, so the price jumped to the level necessary to restrict demand and match up with the available supply. The capitalistic system of supply and demand worked as it should.
3.) Failure to match ones goals with the correct financial instruments. I see this most in certificates of deposit where investors load up a high percentage of their net worth in these inflexible and relatively low paying taxable instruments which offer NO inflation protection. Depending on your tax bracket, there is nothing wrong with putting your emergency reserves or interim cash in CDs, but they are not particularly attractive beyond these uses. With inflation historically at three percent, a taxable four percent CD guarantees a loss in an individual account! Other risks include investment allocation and diversification, market fluctuations, and liquidity of one’s entire portfolio. Are your risks in keeping with your personality and are you comfortable taking these risks? Do you even know them?
4.) Failure to minimize costs, fees, and taxes in order to keep more of your money. In today’s financial world there are many options available to do this. Are you familiar with the following five tax efficient personal tax methods? Do you use retirement accounts and/or annuities to defer your income? Did you know you can divert taxable income to your children and grandchildren? Are you converting some investment income to tax free municipal bonds? Or are you using qualified retirement plans or oil and gas inve stments or real estate to lower taxable income? Are you reducing your tax liabilities with tax credits? Also, to lower expenses, do you use discount stock brokerage commissions and free accounts; index and exchange traded funds; money market funds; or professional money management in place of mutual funds in larger accounts? If you are withdrawing money from your retirement accounts, are you doing so in an appropriate manner considering taxes owed and the tax impact of these withdrawals on your Social Security? Lastly, do you have a Living Trust to save your heirs 4-10% in probate and other estate costs at your death?
5.) Failure to own your assets in the correct form to protect them. Living trusts, irrevocable trusts, credit protection trusts, annuities, and most retirement accounts can usually be protected from creditors. In contrast, property held jointly with children or others exposes both parties to the creditors of the other.
6.) Failing to prepare for the possibility of the need for extended health care. This is often overlooked until it is too late, either because of failing health or premiums being too expensive later in life. Close attention to this possibility in one’s fifties or sixties is appropriate. Do you know your own choices when it comes to long term care? Can you afford to self insure, and are you willing to use your existing assets and income to do so? Is any existing coverage inadequate or outdated? Do you know and have you taken the steps to protect your assets if Medicaid is an option?
7.) Failure to protect assets from unforeseen risks. These risks include health, personal and property liability, litigation, business failures, interest rates, investments, and inflation. Insurance exists to cover nearly all eventualities. Credit protection trusts and other available options also can be utilized where needed.
Awareness of a problem is the first step needed in order to correct it. I trust these cautions will be helpful to my readers in their financial affairs
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or 317-571-1112 .
Annual Statements: Our clients and prospective clients are entitled to a copy of our Registered Investment Advisor form ADV II. If you would like a copy please send us a written request at 1098 Timber Creek Dr. #7, Carmel, IN 46032.
Privacy Statement: McAllister Financial Planning does not reveal any information about its clients and prospective clients to any third party without full written authorization. All client documents are kept in separate files and are only reviewed by our personnel and by regulatory authorities who have their own privacy safeguards.
  One Man's Opinions - 4/01/11 - Spring 2011
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The most obvious topic for this issue is the return of investor confidence in the first quarter. Three months ago I wrote that professional investors were highly optimistic. They led the way and brought public investors to the party as well. The stock market gained 5.42% as measured by the Standard and Poor’s Index so far this year. This is a healthy gain indeed, as we expected a market gain on the order of 12% for 2011. We have half of it already.
The rally continued right through March 31, which concerns me. It began last November and has had no substantial corrections since then, which is not normal. While still optimistic about both the markets and the U.S. and world economies this year, I am on the sidelines just now with any new funds.
March unemployment dropped again, to 8.8%. While welcome, the rate is not dropping nearly as fast as economists and the Obama administration would like. The economy is growing at a relatively slow rate of 2.9-3.5%. In a strong recovery the rate would be more than double this number. For example, after hitting bottom in the Great Depression the economy came back 7-14% a year for three years. While I, nor anyone else I can find, expects that type of roaring comeback, the current rate, on an historic basis, can best be described as anemic.
Of the 216,000 jobs added in the U.S. last month, private payrolls accounted for 201,000. Historically privately owned businesses are the chief source of new jobs in this country. Offsetting this, state and local governments, coping with heavy deficits, continue massive layoffs. Private sector layoffs fell to 41,528 last month against 50,702 in January.
For many months I have been warning my readers about the potential inflation I expect as a result of the U.S. government’s many stimulus programs these past three years. It appears inflation has started, and not just with gasoline prices at the pump. Raw material prices have literally shot up in recent months. Food prices are also up sharply in the same time frame. And just last week Bill Simon, the CEO of Wal-Mart, warned us that inflation is “going to get serious! We’re seeing cost increases starting to come through at a pretty rapid rate!” I can’t think of anyone who has his finger on the pulse of retail prices any better than Mr. Simon. I suggest we all pay attention to his alerts.
Along with steep increases in raw material costs I learned while in China last month that labor costs there and increased fuel costs are now weighing heavily on retailers, and their effects will be seen in this quarter. Nearly all retailers are paying more for their goods and they are passing them along, as Mr. Simon indicates in the previous paragraph.
Except for fuel costs U.S. consumers have not seen much in the way of inflation for about ten years, so broad based increases in prices are unprecedented in the last decade. But they are coming. The Consumer Price Index was up .5% in February, reaching for my predicted level of 6-8% on an annual basis. One month does not a trend make, but I believe it may well be an indicator of similar inflation just ahead.
I spent twenty enjoyable days last month on the Sun Princess, delivering my well attended ten lectures to a largely Australian audience. We traveled from Sydney to Shanghai, some 8000 miles from summer to early spring. There were no new countries for me this trip, but I did travel 20,000 miles on Delta in addition to the 8000 mile cruise. Invitations to do these cruises has dropped off sharply since the economic meltdown of 2008, but they have not ceased altogether. Hopefully they will pick up with the world economy.
While on the trip I heard that an Asian economist was predicting that the mainland China economy will continue to grow at a rate 8% FOR THE NEXT THIRTY YEARS! It went on to also say that their economy will pass the U.S. in size in the next ten years. I consider this outlook ludicrous of course. I don’t believe anyone can predict the economy of any country more than three years in advance, and that is a stretch! The prediction reminded me of similar predictions twenty five years ago that Japan would soon outpace the U.S. economy and become the largest in the world. This did not happen, of course; instead their economy languished for twenty years and has only recently began to recover a healthy growth rate.
China is very impressive of course, along with Hong Kong where I spent two days after an absence of seven or eight years. They have done a phenomenal job, growing their economy fourfold since 1994 when I first visited mainland China. But they have their troubles as well. Chinese banks are overextended in their loans to major businesses, especially those where the Chinese Army or the government itself has a major ownership stake. Corruption is widespread, and their reputation for quality products is slipping, and never was very good. They may be able to paper over their problems, but I cannot foresee any scenario where they overtake the United States in my lifetime.
My advice for investors remains the same. Avoid bonds (except U.S. government TIPS with inflation protection) with maturities of more than three years, two years would be better. Stay invested high quality and blue chip multi-national common stocks. Increase your equity exposure as opportunities present themselves. I plan to use any pull backs in the market to add to my equity positions.
My weekly blogs will resume the week of April 11. Have a great Spring!
Please note: My 800 number has been discontinued. See my email and phone number below.
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or 317-571-1112 .
We are required by our regulators to offer a copy of our annual income statement to our active and prospective clients. If you would like to receive one, please call or email us.
  One Man's Opinions - 1/11/11 - Winter 2010-2011
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In December, advisor confidence in the U.S. economy and stock market reached its highest mark since February 2007, according to the Advisor Confidence Index, a benchmark that gauges advisor views. The index jumped to 116.13 in December, an increase of 4% for the month.  In fact, all four measures of the ACI increased in December, with the 12-month economic outlook soaring 7.2%., the current economic outlook 4.5%, the six-month outlook 2.12%, and the stock market outlook 1.97%.
On the other hand the Conference Board Consumer Confidence Index also increased in both October and November. The index stood at 54.1 in December, up from 50.2 in November.  In a normal economic recovery, in order to make a significant impact on unemployment, this number needs to be in excess of 90!  The public thus continues very skeptical regarding the economic outlook, while professional investment advisors remain quite optimistic as a group.  Generally I am inclined to go with the latter.
What is clear is that there is still great public uncertainty. The dichotomy of good and bad economic news continues to impact the public daily and the mainstream media focuses on the bad news of course. Unemployment is historically very high for this point in a recovery, and there is a lack of spending and investment from businesses. The Fed’s recent announcements regarding the purchase of $600 Billion in U. S. government debt should be seen as a sign that the Fed fears deflation and high unemployment more than any inflationary signs in the economy.  On this I disagree heartily, as I think we are headed for an inflationary spiral in the next 18 to 24 months.
I will argue that many investors have gone through a full dose of emotions in the past couple of years. We had a sudden shock to the economic and financial markets in 2008, which caused an immediate sense of understandable fear. How badly am I hurt?  What is going to happen next? What will happen to me? The ensuing recovery has regained 80% of the lost ground.  But this assumes the investor did not panic and sell out.  After the initial shock, the next step was to assess the extent of the damage and make sure sufficient cash was on hand to meet anticipated expenditures. The next step was to make sure one’s financial plan was still appropriate to meet our goals. Finally, recovery began and has continued for the past year and a half.
The reality is that, although both advisors and consumers are now becoming more optimistic, there is still a long way to go before we can say we have a completely healthy economic recovery.  The current recovery, keep in mind, is already 18 months old, no longer in its early phase.  Past recoveries have been more dynamic.
My expectation for 2011 is more slow economic growth, on the order of 2.5-3.5% in Gross Domestic Product, with the stronger numbers coming in the second half of the year.  Unemployment will remain stubbornly high, probably above 9%, as tougher regulations are placed on an already anemic private business sector.  The extension of the Bush tax cuts is a very positive note, and will allow some loosening of the purse strings in this sector, as well as in the larger publicly owned blue chips.  Progress, however, will likely be slow.
Stock market performance bears out the slowness of the recovery as well as its strength. Prices remain reasonable, given good corporate earnings and expectations.  Most advisors, including myself, see buying opportunities aplenty, with little chance of a major economic downturn. These relative bargains will continue to attract at least the professional investment managers.  I expect another modest increase in stocks similar to the 12% gain in 2010, perhaps modestly lower.  Interest rates are, in my opinion, almost certain to continue to go higher.
The national press is making a big deal about the President’s dramatic “recovery” of popularity as represented by the achievements (??) of the lame duck Congress (which included cooperative Republicans).  While I believe this cooperative attitude was a step in the right direction, the $800 billion in deficit spending on new stimuli is being largely ignored.  Readers may recall I supported the February 2009 stimulus bill as psychologically necessary, while also predicting it would not work.  This one won’t either! Such programs never do.  We are looking at a huge addition to our gigantic and rapidly growing $14 TRILLION U.S. debt, while Congress and the President banter about minor programs to save tens or hundreds of $billions.  We have a long way to go in the new Congress.  On a more positive note, it surely cannot be as poorly run as the last one was.
Readers of these quarterly newsletters, all but 12 of you, also receive my weekly blogs.  We just completed 2.5 years of blogging, which have been well-received.  Our timing was also appropriate in view of the near collapse of the world economy in the latter months of 2008.  I am very proud of most of my 120 or so blogs. (Several were, I think, outstanding, most good, with a few less than satisfactory when read in hindsight. Not bad for a beginner, I think.) If you get this newsletter by U.S. mail and now have internet access, please mail me your EMAIL ADDRESS and I will add you to the blog list.
However, I want to caution my readers that it would be unrealistic to rely on my blog posts (or anybody else's) as a way of predicting how the economy will behave.  I will continue to wave yellow flags where I believe them necessary, yet I have no way of knowing when the economy might be preparing to drop like a rock or to soar. 
What is important is to remember that we cannot predict when the next painful market experience is going to take place. If you try to sit out the market until it “heals” you may well end up “sitting out” until the market is at new highs. Even worse would be to miss out on the periodic “fat tails” when returns skyrocket over a very short period of time. We need to remember that many years worth of returns often occur in just a few months in the markets. There is no way to make them up if you are on the sidelines.
A few months ago, several of my "blue chip" CFP peers, led by Harold Evensky, who is one of my most admired colleagues as is my friend Elaine Bedel here in Indianapolis, did an exploration of what, if anything, might signal the next downturn in the economy.  Among other things they looked at the VIX (market volatility) index, and found that, rather than being a good sell indicator, it actually provided good BUY signals.
After an exhaustive search, the group found nothing that could be relied on to ring the alarm.  They also found that, even were they able to find such a miracle, there was no clear way to get clients quickly out of harm's way. There is much talk of using hedging techniques and highly expensive hedge funds, but the group found that hedging would be insufficient protection. At the first sign of panic, the cost of hedging would go through the roof, as it did in 2008. They also point out that if you sell, you risk selling into a competing blizzard of sell orders in a market stampede, and triggering tax consequences that might make the problem even worse.  So, much as I regret the admission, there is NO magic sell indicator for the markets. The Great Recession may have ended months ago, but we will always face uncertainty in the world.  The best way to deal with it is to follow a specific plan and revise it as necessary.
I will continue to wave red flags from time to time. An example is the advice I've been repeating for the past few months to avoid bonds and bond funds, which have been priced at historic highs.  Unfortunately, many public investors continue to liquidate equities and invest the proceeds in longer term bonds for “safety” reasons.  In my opinion, this is at very high risk of losses in their fixed income holdings.
As we enter 2011 and my 49th year in the investment world, I'll continue to study the economic news and the markets, waving red, yellow, and green flags as I judge one is warranted.  Hang on and stay tuned. 
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or toll free 800-663-3419 .
We are required by our regulators to offer a copy of our annual income statement to our active and prospective clients. If you would like to receive one, please call or email us.
  One Man's Opinions - Fall 2010
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For some time now I have been puzzled by a ”disconnect” between the economy and the general public’s perception of the economy. There is no question that current growth in the economy is disappointing. Still, the economy is growing, but the general public does not appear to recognize this. I dug into the numbers to uncover why this is so.
The first and most obvious cause of the “disconnect” is the uncertainty created by Congress and the Obama administration. In a blog some weeks ago, I opined that the market would mark time until it became clearer which way the mid-term elections would go. A Republican takeover of the House of Representatives would create gridlock. (I believe gridlock would be good compared to the radical changes pushed through by the Obama administration and Congressional majority Democrats in the last two years.) It would appear that the market in September has began to move.
The second and equally obvious cause is the possibility of a pending very large tax increase January 1, as the Bush tax cuts end. The administration’s proposal to extend the cuts for all but the top 2% of earners ignores the fact that 760,000 of these taxpayers are independent business owners, the very segment of our economy which traditionally leads the United States out of recession! As this is being written, Congress is recessing without addressing the matter one way or the other. Thus, we are gridlocked and this is, I believe, good. Unless there is some huge change between now and November 2, it would appear the House will be going Republican. A true landslide may also produce Republican control of the Senate but, even if this occurs, there will not be a large enough majority in the Senate to overcome a filibuster. Either way we will likely be left with a Democrat in the White House, a Republican House and a deadlocked Senate for at least the next two years.
The third cause, which frankly was a little surprising to me, was the fact that the recent recession (which lasted 18 months) and its aftermath resulted in a SIX PERCENT loss in jobs. By contrast, the 16-month recession of 1974-75 had total job losses of 2.5%, and the one in 1980-81(also16 months) had a three percent loss. The bulk of the latter two job losses were concentrated in hourly workers, many of them union members. For the most part these hourly workers were cushioned by unemployment benefits while they waited to be called back to their jobs, which most of them were. (To put things further in context, job losses during the Great Recession of the 1930s were 20%.)
The recession of 2008-09 lasted 18 months (ending in June 2009, as I predicted at the time) and impacted a much greater swath of workers in the economy. To begin with, the percentage of union workers in the private sector is now less than half what it was in 1981. Union members who work for governments were hardly impacted at all.
In short, this time around, we have had twice as many job losses (as a percentage of total workers) and four times as many salaried worker layoffs. These job losses are thus much more spread out over the middle class than was the case before, with many of the losses appearing to be permanent! These job losses have hit home for me, in that two of my six middle-aged children saw their businesses largely disappear as the economy dropped and the recovery lagged.
This poor economic performance has created a striking gap in confidence between financial advisors and the public. According to the Rydex Advisor survey, the advisor confidence index was up to 109.8 this month, up 16% from 93.8 last month, a huge leap! In sharp contrast, the Conference Board’s consumer index for September dropped precipitously to 48.5 this month against 53.2 in August! (A reading of 90 represents a normal economy.) I believe this almost unbelievable gap in confidence has arisen due to the difference between advisors, who experience the markets and the economy with a world-wide and longer term view, and the U.S. public, who are struggling to regain the financial ground lost in the recent recession with a shorter time horizon. This struggle is compounded by the historically high unemployment at the stage of economic recovery.
Consumers have traditionally lagged in their perceptions of the economy, whether realizing too late that the economy is heading for trouble or realizing too late that there are better times just around the corner. Economists and professional market participants currently see modest growth ahead, while consumers are focused on high unemployment and weak job growth, with continuing deterioration in some business sectors such as real estate.
To sum it up, it appears that consumers are waiting for more jobs to be created and unemployment to come down, while business is waiting for consumers to start spending more before expanding operations and adding to the workforce. What a “Catch 22” !
Another survey, this one of Chief Executive Officer,s shows that 67% expect higher growth rates in the next six months. However, just four months ago the same survey showed that 79% had such an expectation! It certainly was a disappointing summer economically here in the United States.
As we approach the end of the year it behooves us to pay attention to our IRA accounts. I suspect that almost all my readers have such accounts and that most, like me, don’t pay a lot of attention to them. Here is a list of items to which we should look prior to 12/31/10.
          1. Take your required minimum distribution. Those over 70 ½ need to do so from regular IRAs.
          2. Check for any excess contributions. It is possible you contributed too much. The maximum is $5,000 this year, $6,000 if you are past 50, but no more than your earned income.
          3. Is everything in place? Double check on all IRA funds that moved during the year. Make sure those destined to your IRA did indeed arrive there, not in a Roth or other account.
          4. Can you do a Stretch IRA, which means your beneficiaries can use their own life expectancies instead of yours? Check with your custodian or 401(K) administrator.
          5. Who is/are your beneficiaries? Review your beneficiary designations. Be sure there are both primary and contingent beneficiaries named as you desire.
          6. One last chance at Roth conversions. If you wish to make such a conversion all funds must leave the IRA by Dec. 31 to be taxable in the current year and converted to a Roth.
          7. Review your investment plan. Make sure your asset allocation remains appropriate to your current financial goals. Rebalance the account, if you have not already done so this year.
          8. Roll old 401(k)s into an IRA. If you have one or more 401(k) accounts sitting with a former employer, you generally will have better investment choices and more control of your own IRA.
          9. Recharacterize your Roth IRA. If, for any reason, you determine your switch to a Roth IRA this year was not beneficial, you are allowed to put these funds back into the original IRA.
I remain very reluctant to invest in bonds at today’s low yields. I recommend refraining from any bond investments with more than two years’ maturity. An acceptable option might be Preferred Stocks, where decent yields of six to eight percent are available. Call for guidance in this area as there are yellow flags in certain issues.
The stock market has rallied sharply in September, up 8.8% as this is written, up more than 10% from its bottom in August. Stocks as a whole are still reasonably priced on an historic basis. While I would not be surprised to see a correction of the September gains in the next few days or weeks, I continue to believe the market will be markedly higher by year end. High quality multi-national blue chip stocks are especially attractive. Call for individual recommendations.
Lastly, since she was referred to in my last newsletter as being on the way, I would like to proudly announce the birth of my 31st lineal descendant, Camri Dowdell, who arrived in this world Sept. 22, a couple of weeks early. She and her mother are doing fine. I got to welcome her personally to the family this week.
Have a great fall.
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or toll free 800-663-3419 .
We are required by our regulators to offer a copy of our annual income statement to our active and prospective clients. If you would like to receive one, please call or email us.
  One Man's Opinions - Summer 2010
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One Man's Gratitude:
“Dancing While Standing Still.” was a description of the great joy Sandy Sasso, Senior Rabbi at an Indianapolis Jewish congregation, felt upon the arrival of her first grandchild, according to an article she wrote for the Indianapolis Star a few years ago. I could relate, as I remembered feeling the same way when my first grandchild arrived. I felt the same joy at age 18, upon the birth of my first child, Deborah.
I revisited this feeling last week as I held my eleventh great-grandchild, some three weeks old, while his almost two-year-old sister entertained us by being her delightful self. Older brother Devin, who is somehow related genetically to the Energizer Bunny, was also there to warm patriarch PapaT’s heart even more. Cameron brings the total of my lineal descendants to 30, an incredible number to me.
I am blessed with six children, all middle-aged now, and all doing fairly well (as things go in an economy like this). As they were taught, all of them value hard work, education, focus, family, and each other. These six have given me thirteen grandchildren, ages 8 to 31. The older of the grandkids are bringing their own children into the family, with the twelfth due in October. I look forward to more as the younger grandkids mature and marry. I/we are blessed.
Speaking of blessings, this summer marks 48 full years in the investment business for me. I accepted the proffered job with Merrill Lynch in June, 1962, and reported for duty August 1. Before this I managed an industrial chemical distributor in Columbus, IN for four years, and spent the prior two years as a disk jockey and radio announcer. I was a very busy young man, also having four children during these years.
I am very grateful for the opportunities for personal growth these 48 years have brought me. I spent seven years as a retail broker with Merrill, and then moved to Robert Baird & Co., another New York Stock Exchange member firm, as their founding Indiana manager for six years. August 15, 1975, I became self employed as I started McAllister Financial Planning, which I still operate, albeit at a reduced level.
Also, in 1975, I became a financial planner, two years later a Certified Financial Planner, one of the first 700 in the world. While I am sure I would have made more money staying in the brokerage end of the business, I believe I have served more people to a far deeper degree as a generalist pioneer financial planner. Now 72 and semi-retired, I still work part-time most week days. I also have been blessed with my lecture cruises, which are few these days, but which enabled me to satisfy my wander lust and to travel to 140 countries, and to share my experiences in the financial world with audiences totaling in the thousands. All of these career stages were accomplished while raising my large family in middle class comfort. I am blessed.
One Man's Opinions on the U.S. Economy:
I do not normally comment on politics or politicians in my weekly blogs. These newsletters though, are one man’s opinions, not the facts and news I attempt to communicate in my blogs. I try to avoid politics in both communications, and I will try to remain apolitical here, as best I can.
For example, I supported as necessary the Obama Economic Stimulus act of February, 2009. As I stated at the time, I doubted the stimuli would work any better this time than such programs ever have either in the U.S. or abroad. Rather, as I explained, I understood it was necessary for psychological reasons, that the Obama administration and Congress DO SOMETHING to interrupt the free fall in the economy at that time. Sure enough, with over $800 billion spent or committed so far, mostly on “shovel- ready” government projects, there is little to show so far as long term economic recovery. Borrowing money to spend on infrastructure projects with no discernable way to pay off the debt incurred is counter-productive, in my opinion.
I am very concerned about the economic outlook for the United States of America as I attempt to imagine where matters are likely to stand when my great grandchildren reach their adult years. For that matter, things do not look so great for their parents, my grandchildren either. I see little likelihood that they will have as good a climate in which to achieve success as I and my children had. We Depression babies owe most of our opportunities to our parents, the World War II generation, who endured so much and gave so much to the nation. We, in our turn, have prospered, along with our Baby Boomer younger siblings, to far greater heights than our parents.
My major concerns now include the relative lack of competent leadership on the national level, specifically Congress with its many failures, and the Obama administration which appears to lack both experience (which was obvious when they took office) and leadership ability to “get things done.” Frankly, I am surprised at the latter. I thought Mr. Obama had surrounded himself with highly capable people who had the experience and leadership abilities necessary to buttress his own lack of these qualities. Alas, that has not proven to be so.
My chief concern for my descendants' future here in the U.S.A. is the rapidly exploding debt we are incurring, largely with no plans as to how its rapid expansion can be slowed, much less paid off. I was highly critical of the deficit spending of the Bush administration. By contrast, they now look like "low achievers" in the spending department! Our deficit in the current fiscal year exceeds ALL FOUR of the last Bush years! Every responsible economist believes this is unsustainable. Yet, the administration and the Democrat leaders of Congress are proposing more deficit spending, not less, to battle the sluggish recovery. This surely borders on insanity! Fortunately, cooler heads in the majority party have begun to question this blind devotion to more and more spending. It would appear that, for the rest of this Congressional term at least, the expanding level of deficit spending will slow down, if not reverse.
Let’s look at one of the most seriously wounded sector, housing. Perhaps this story will illustrate why the recovery in housing is still not very visible. Democrats recently voted down the FIVE PERCENT RULE. Sen. Robert Corker (R-TN), in a bid to stem taxpayer losses on bad loans guaranteed by federal housing agencies Fannie Mae, and Freddy Mac, (both now 100% owned by the United States government), proposed that borrowers be required to make a down payment of at least five percent in order to qualify for a loan. Every banker I have ever known would say this is not large enough! But the proposal was rejected in the Senate 57-42 on a party line vote. Sen. Chris Dodd (D-Conn) explained the vote against the proposal as follows; “Passage of such a requirement would restrict home ownership to only those who can afford it!” Hello? Perhaps this explains more fully who inflated the housing bubble and caused it to burst, triggering the worst economy since the Great Depression!
Earlier this year I read a biography of Benjamin Franklin, arguably the “first” American. What I love about Franklin was that, while obviously a brilliant inventor, scientist, writer, and diplomat, he was not a dreamer. He was a doer! I have no doubt that, if alive today and running a portfolio, he would do quite well. He never stopped learning. Here are three Franklin quotes which seem appropriate for the situation in which we find ourselves:
1.    "We are all born ignorant, but one must work hard to remain stupid."
2.    "A penny saved is a penny earned."
3.    "By failing to prepare, you are preparing to fail."
As a practical matter, it seems to me many Americans are already moving down the right path when it comes to preparing their personal balance sheets for the inevitable. While the US government literally does the opposite of these quotes, Americans seem to be doing what they've always done, adapting.
On the first point; whether it be from a mortgage application or a US equity fund flow perspective, Americans are proving that they haven't remained "stupid" enough to make the same mistake twice. They aren't buying houses or stocks. Unfortunately, many are making a very big "new" mistake, by buying bonds at record rates, at a time when bonds are at an historic high level of risk of principal.
On the second score, while the savings rate in this country has its own problems in terms of how it's calculated, there is no doubt that the direction of cash in savings accounts of fiscally conservative Americans is going one way and that is up. Last month we saw the US savings rate bump back up to 4%.
“The US government has a technology, called a printing press, which allows it to produce as many US dollars as it wishes at essentially no cost." -Ben Bernanke. One of the sayings spreading around Wall Street this spring was "austerity equals civil unrest" and it has become increasingly clear that the Obama administration wants nothing to do with austerity. It's also clear, judging by developments at the G-20 weekend in late June, that the US is going to try to go it alone with big fiscal imbalances. I do not believe that the USA balance sheet can sustain the current trend of larger and larger deficits. In fact, if these deficits continue, one of the biggest losers will be the American consumer. As the Bernanke & Co printing press continues to roll on and on, piling debt upon debt upon debt, this can only end badly. In my opinion, VERY badly!
At mid-year, consumer discretionary spending was one of only three market sectors up year-to-date (up 2.7%). The other two are Industrials (up 3.3%) and Financials (up 0.7%). But in recent weeks I have noted both personally and in my business reading, a surprisingly broad and deep drop in consumer confidence. Everyone has a different view on the consumer, but there are some changes on the margin that should be considered as we look toward the rest of 2010. Mortgage rates are still going down. The employment picture is turning around, but growth is quite slow by historic standards. Gasoline prices are down year-over-year, but asset prices are rising. Looking at the data at the end of the second quarter 2010, it is clear that the American consumer is now being squeezed and is not going to be happy. In fact he is not happy NOW!
I don’t subscribe to the theory of a double dip forming now in the economy. However the housing market seems to be in or on the precipice of one. Housing prices have continued to decline and the economy slowed significantly quarter-to-quarter from the 4th quarter of 2009 through the first quarter of this year. The housing market is still in trouble. If a double-dip depression in housing is indeed underway, it will have a serious impact on consumer behavior. Following a decade of out-of-control spending by both Republican and Democratic administrations, the state of the USA's balance sheet inhibits our ability to navigate the still serious structural issues present in the economy. Points to keep in mind include:
(1)     The benefits from the Obama stimuli peaked in the first quarter, and we see slowing GDP growth.
(2)    In 2011, taxes are going up and that will hamper the economy - Slowing GDP growth.
(3)    Real estate prices may decline 10- 20% in the next twelve months - Slowing consumer spending.
The public focus on high unemployment numbers continues. Jobless claims have not shown any material improvement over the past six months, despite huge government stimuli. Private sector job creation remains a concern. May numbers decreased sequentially from April. In June the unemployment rate dropped to 9.5% from 9.9% SOLELY because an extraordinary number of workers stopped looking for jobs altogether! Real growth was only 83,000 jobs. We need 125,000 per month just to take care of new entrants into the work force.
While private sector job creation had been growing for five straight months, it seems to be coming to an impasse as businesses have become nervous about the state of the economy. Unemployment is still at an elevated level and indicates a continuing softness in the underlying economy. As census workers finish their temporary jobs, the rate will jump higher unless other sources of employment pick up hiring drastically. Uncle Sam is running out of crutches (and/or the political will to supply them):
(1)    The Administration failed to get Congress to pony up an extra $50B for unemployment claims. Our leveraged balance sheet inhibits the government's ability to provide more in the way of stimulus.
(2)    A strong dollar policy has proven to help job creation - Bill Clinton and Ronald Reagan were the last two presidents to oversee true job creation and both pursued strong dollar policies. The Obama administration appears to be debauching the US currency.
(3)    If a Double-dip scenario occurs, unemployment will remain elevated and may even go higher.
Reported inflation by the government looks to be under control. A closer look at the Inflation Index tells a different story. An inflation Index focuses on the part of the economy showing inflation which directly impacts the consumer, specifically the spread between the prices of things they buy and what they earn. Looking out over the next 6-12 months (and perhaps longer) consumers will be paying more to drive their cars, and to make sure they have health insurance for their family. Other energy prices also are poised to increase sharply. The prices paid by the US consumer for gasoline is far below the rest of the world and there is a possibility that the gap could close significantly under pending energy legislation. This would be a massive headwind for the consumer. The prices paid by the US consumer for gasoline are far below the rest of the world and there is a possibility that the gap could close significantly under pending energy legislation. This would be a massive headwind for the consumer.
The disaster in the Gulf is inflationary and will be a drag on growth. While certainly the greatest environmental crisis the U.S. has ever faced, I hope readers will take the constant TV oil covered pelican pictures with several grains of salt. The total amount of oil released into the Gulf of Mexico in the last 80 days is equal to less than half the amount of water coming from the mouth of the Mississippi per hour! Dilution is Mother Nature’s friend. But it will take decades to recover completely.
Debasing any currency, (even the “Almighty Dollar”), ALWAYS ends badly. A lack of austerity in government policies and an aversion to facing facts among our professional politicians is not helping the long-term outlook for equities. Let us look: (1) U.S. equity markets have lost $1.78 trillion since April 23 on concern the European debt crisis will spread; (2) China’s stock market is now down 29% year-to-date; (3) The U.S. S&P 500 at June 30 was down 6.6% year-to-date.
Better news. The consumer confidence index improved in May and the consumer is now spending less than he/she earns. In both cases the market ignored the data and moved lower. We apparently don't trust the government, nor the direction in which the country is headed. The consumer is not stupid and Washington does not get it.
One Man's Recommendations:
Having said all this, the U.S. stock market remains undervalued given the solid growth of corporate earnings coming in versus 2009. Bond yields remain very low on an historic basis. Net of inflation and taxes, bonds are producing automatic losses. Preferred stocks of non-financial U.S. companies are still paying 7-8% and they are a BUY! These are very competitive with bonds. Since taxes on these will rise next January from 15% to as high as 39%, they are best held in non-taxable retirement and charitable foundation accounts.
I hope your summer is a restful and pleasant one. We should have a very interesting fall on the political front here in the United States.
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or toll free 800-663-3419 .
We are required by our regulators to offer a copy of our annual income statement to our active and prospective clients. If you would like to receive one, please call or email us.
  One Man's Opinions - Spring 2010
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This newsletter marks thirty four years of my attempting to inform, stimulate, and educate my readers quarterly or, in the early days, more often as the situation warranted. Nowadays, of course, I do a weekly blog, so One Man’s Opinions is now on a regular quarterly schedule. Here I try to focus on broader issues of the day, not necessarily a specific topic, as in the blogs. This issue may well be among the more important and significant of all its predecessors. I have deliberately written this part BEFORE the U.S. House of Representatives vote on the Obama Care health proposal.
I recently finished a biography of Benjamin Franklin by Walter Isaacson. It is an excellent read on the life of the man who, perhaps more than any other of our founding fathers, understood and encouraged the potential of our country. I read Franklin’s autobiography as a young man, and have benefited greatly from the ideas and ideals he expounded in that missive. I highly recommend this book as a supplement to the autobiography as it gives much more background into the person and the life of the man who, with due respect to George Washington and Abe Lincoln, may well have been our “Greatest American.”
Shortly after the Constitution of the United States of America was adopted, a lady asked; “what have you given us Dr. Franklin, a monarchy or a republic?” Franklin replied, “A republic Madam, if you can keep it!” Franklin probably had more input into this marvelous document than any other drafter of this cornerstone of our country. His cautious response to the question was absolutely appropriate both then and now. Were he still alive I think he would share my great doubt about the ability of today’s American people and our leaders to keep us the greatest country in the history of this earth.
My doubt is rooted in the obvious inability of either party in our Congress, nor our most recent elected Presidents, to behave in a fiscally wise and sound manner when executing the business of governing our country. This has been going on since World War II, and can be traced further back to the Roosevelt administration in the 1930s, when spending far beyond revenues became commonplace. But FDR and his minions were underachievers compared to modern politicians.
With the possible exceptions of the Reagan presidency, that of John Kennedy, and the Republican Congress of the late 1990s, our Congress and our administrations have continued to spend more and more and more on “entitlements,” and have failed to raise taxes sufficiently to pay for all these goodies, lest it upset the voters. Huge deficits have become routine. With the current administration and Congress, there seems NO concern at all about doubling and tripling the current deficit, and it now looks like we are headed for far worse. Let’s look at the situation.
By 2020 U.S. government spending is projected to equal 26% of our Gross National Product, the sum total of all financial affairs in the U.S. Even worse, taxes are on pace to equal just 19% of GDP. President Obama recently appointed a Commission of ten Democrats and eight Republicans to “make recommendations” as to what to do about these deficits. Do?? Mr. Obama’s own budget director Peter Orszag was quoted soon after as saying, “By any reasonable projection we are on an utterly unsustainable path!” Presidential commissions are notoriously ignored by elected politicians, but I devoutly hope they will not be this time. If not finally addressed, this situation can bring down the United States of America! With that statement, I do not mean bankruptcy. A sovereign nation with taxing powers cannot go bankrupt. But look at Argentina, which has twice canceled its debts and which has become an economic basket case in the past sixty years. This is where we are headed!
Even if the Commission comes up with proposals that the Congress and the administration can accept, a tall order indeed, political leaders in both parties are in denial about what the solutions will entail. As is much of the public! Between them, and their leaders, I doubt they/we can keep our Republic!
What needs to happen? The biggest hurdle in solving the deficit problem Is politics, not economics. Taxes must rise and spending MUST be cut! No one likes the idea of paying more taxes and/or having benefits cut. But taxes will need to rise on far more than the top 5% of the income bracket, those over $250,000. There are simply not enough of the latter to solve the problem. And it cannot be restricted to just taxing income on the top 50%, it MUST go broader than that, otherwise the bottom 50% will continue to vote themselves a greater and greater share of the top earners income. This has been going on since the income tax was enacted (originally in 1913, and only one percent on income of more than $1million!). No, the poor must also pay a share, although not a proportionate share, of the cost of entitlements. I suggest a 2-4% national sales tax. Every industrialized country in the world except Saudi Arabia and the United States has some kind of consumption tax. A modest one would give citizens more incentive to save and invest, yet it would raise significant (and almost painless) revenue. In an ideal world, such a consumption tax would be far higher and REPLACE our tax on work, the income tax. But I am sure this is not possible in our nation today.
But a solution that relies only on raising taxes will not work either. To do so would muzzle economic growth and thus be self-defeating. To cover the costs of future spending already on the books, the retirement of the baby-boomers, their Medicare, and the relief of individual state’s required spending on Medicaid, taxes would have to be raised immediately and permanently by 50%! Obviously this is not possible. Benefits and entitlements MUST be adjusted.
Fortunately this does not have to be done all at once in a way that might ruin our still struggling economy. Instead we could, and should, begin to phase in a later and later full retirement age, say eventually up to age 70 or 72, for Social Security. Medicare could also be phased in similarly. The base on inflation adjustments on Social Security can immediately be changed to cost of living from the wage index, which tends to be about 1% higher than the cost of living. Why should we social security recipients receive compensation based on productivity improvements in wages? This change alone would stabilize the program.
Medicaid can be strengthened by insisting on co-payments for all but the most destitute. Health care, especially with Obama Care, is easily the biggest challenge facing us. Not only are more people in their 50s and 60s likely to live into their 80s and beyond, continuing technical advances promise individual medical care will continue to be more and more expensive. We cannot keep borrowing the money to pay for these benefits. The same is true for prescription drugs, although many miracle drugs will become generic, and thus far less expensive, in the next few years.
On a similar line, tort reform MUST be implemented, no matter how strong the trial lawyers lobby may be. It is estimated that 30% of all medical tests ordered by physicians are not necessary, but are done as a defense against possible malpractice suits. This is insane! Indiana has a thirty year old system that caps malpractice awards at reasonable levels and still compensates victims in instances of true mistakes. Under guidelines, Indiana judges handle most of these situations without jury trials in which trial lawyers appeal to the emotions of unsophisticated and/or ignorant jurors.
“Earmarks” attached to legislation without debate (or even the knowledge of them) in the Congress should immediately be identified as what they are, bribes of voters, and forbidden unless they receive and up or down vote in the legislature.
Written March 27.
Now I turn to the new “Health Care Reform Act” which was just passed. Despite the propaganda, this is a NEW entitlement for 15-20 million American citizens. It is FULL of provisions which will sharply increase costs, in most cases years before corresponding benefits. We needed health care reform. We did not need to put the government in charge of one sixth of our economy. The government NEVER can do things more efficiently than the private sector. More effectively sometimes, such as our U.S. military, but no one argues the military is efficient, no matter how effective they can be, such as in Haiti in recent months.
Last week David Brooks of the New York Times, hardly a conservative, had some remarks in his column in the New York Times, certainly a liberal newspaper. I quote in part; “The second biggest threat to American vibrancy is the exploding debt. Democrats can utter the words of fiscal restraint, but they do not feel the passion. This bill is full of gimmicks designed to get a good score from the Congressional Budget Office, but not to really balance the budget. Democrats did enough to solve their political problem (not looking fiscally reckless) but not enough to solve the genuine problem. “
Brooks continues; “Nobody knows how this bill will work out. It is an undertaking exponentially more complex than the Iraqi War, for example. But to me, it feels like the end of something, not the beginning of something. It feels like the noble completion of the great liberal project to build a comprehensive welfare system.”
“The task ahead is to save this country from stagnation and fiscal ruin,” he further says. “We know what it will take. We will have to (enact) a consumption tax. We will have to preserve benefits for the poor and cut (benefits) from the middle and upper classes. We will have to invest more in innovation and in human capital.” (Where are the doctors, nurses, and technicians going to come from to treat all these additional millions of patients?)
Brooks concludes; “The Democratic Party, as it revealed itself over the past year, does not seem to be up to the coming challenge. Neither is the Republican Party. This country is in the position of a free-spending family careening toward bankruptcy that at the last moment announced that it is giving a gigantic new gift to charity. You admire the act of generosity, but you wish that they had sold a few of the Mercedes to pay for it”
Mr. Brooks says it all, and says it far better than I can. I probably won’t live long enough to see this great country wreck itself. I hope our leaders come to their senses. But I don’t see any signs that, as a group, they get it! My grandchildren and great-grandchildren (almost 11 of these now) will live in a different environment than I have. And they, and their descendants, will still be paying interest on the debts run up by this current generation of leaders and their predecessors. I hope I am wrong!
All this being said, on the investment front, we investors have no place else to hide but in quality common stocks. I expect an eventual lowering of the AAA credit rating of United States debt. This means the price of currently held bonds will go down in price, interest paid will have to go up. U.S. government TIPS, which adjust for inflation, which I expect to surge in three to five years, will also be negatively impacted. And they currently pay very modest real interest rates. Real estate is probably a buy now for cash buyers of certain specific properties. But mortgage money remains tight, so does bank credit in general. Investors are hard pressed to take down leverage on all but the highest quality properties. Hold or add to common stock portfolios to protect against inflation.
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or toll free 800-663-3419 .
We are required by our regulators to offer a copy of our annual income statement to our active and prospective clients. If you would like to receive one, please call or email us.
  One Man's Opinions - Winter 2009-2010
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Recently former Federal Reserve Board Chairman Alan Greenspan, like a growing number of economists, was surprisingly upbeat on the current recovery from the recession. “Companies fired far too many workers during the financial crisis, he declared, and so they are operating at the limits of their capacity, setting the stage for a strong potential upturn in employment growth.”
Greenspan is not alone in his sunny outlook. I, for one, agree with him! The November unemployment figures of 11,000 jobs lost, versus a projection of 125,000, temporarily managed to turn around the dollar’s slide and halt the advance in the price of gold. I think it is a harbinger of things to come in 2010. Accompanied by a downward revision of 160,000 in the number of jobs lost in September and October, there are new reasons for optimism. Some economists have found evidence to support the V-shaped recovery they and I have been forecasting.
But we are not yet out of the economic dumps. Only three months ago, Greenspan himself was voicing dismay about the costs of long-term structural unemployment, as workers continue to see their skills erode in an increasingly dynamic high-tech economy that leaves them behind. My local paper has been featuring stories all this year of the dropout problems in our Indianapolis public schools. These young people are condemning themselves to a lifetime of financial underperformance. The days of dropping out and getting a high paid union job in a factory are over. And the few jobs like this available are more and more requiring a high school diploma.
This lost generation of workers will negatively impact every aspect of our U.S. economy, from chronic federal budget deficits to incomes, and from slower consumption to productivity and global competitiveness. Undoing this damage will not be easy. Even if the rebound in 2010 is much better than anticipated, returning to 5.0% unemployment levels in the U. S. will require five years of 5.0% GDP growth, an unlikely scenario at best.
The 75% increase in equity prices since March 9, 2009 is not just a change in the price of paper. It is real, and this re-creation of wealth has positive implications for both consumption and investment in the economy. But the way that wealth disappeared in 2008, and suddenly reappeared in 2009, leaves many businessmen and investors wary. In addition, just as workers unemployed for an extended period lose their skills, many investors, like those who panicked and sold or who were and still are overexposed to real estate, have experienced long-term wealth declines that won’t be so easy to replace.
I note the reappearance of a human phenomenon in this area. Investors are not cognizant of how much their investments have lost or gained versus the cost of them. Rather, they compare their current position with the very top of the market, the highest prices ever. This false mindset leads them to a certain behavior, similar to “deer in the headlights,” they freeze! They tell me they are “going to wait until the new year,” or “until the market stabilizes” or “gets back to what they paid,” or “until the cows come home!” Home owners tend to look at their homes in the same light. When they decide to sell them, for whatever reason, they tend to price them too high to readily sell. Then they complain about the poor job their agent is doing. I hear about this from every real estate person I have talk to in this winter.
As we enter a new year, there are more reasons to be upbeat than there have been for a few years. But when sober people like Greenspan change their outlooks so far and so fast, count this observer a little dubious.
I anticipate a relatively strong 4th quarter U.S. economic report, on the order of 3% annualized. The originally reported strong third quarter growth has been scaled back to 2.2% from an originally estimated 3.5%. This number includes a 1.5% “kick” due to the “Cash For Clunkers” boost in auto sales last summer. If we take this amount away as borrowing from future auto sales, we are left with an anemic .7% growth for the quarter. But it was a plus, and the 4th quarter looks quite a bit stronger including strong holiday retail sales. This represents the end of the recession according to how these things are calculated.
Looking into 2010 I anticipate U.S. economic growth on the order of 3-4%. This is quite modest, as normally coming out of a recession the economy will grow at twice this rate. Inflation will stay under control due to the Federal Reserve continuing it’s extremely low interest rates at least into the second half of the year. Their floodgates are still open!
Looking out to 2011 however, the chickens will come home to roost. The Fed’s extraordinary pump priming and the spending from Obama’s $780 billion stimulus package will finally take hold next year (after the economy has already begun to recover) and it will trigger heavy inflationary pressure. I expect inflation on the order of 6-8% in 2011!
For this reason I continue to recommend dividend paying blue chip stocks for investor portfolios. Look for U.S. multi-national stocks with strong foreign presences as part of global diversification. The giants which are part of the Standard and Poor’s average showed a 9% increase in foreign revenue in 2008 versus a decline of .3% in U.S. revenue due to the economic meltdown. This overseas growth has continued in 2009 and will do so again in 2010. I expect U.S. corporate profits, especially of these stocks, to jump substantially, coming off a very lean base due to broad cost cutting. This should trigger stock price gains of 10-20%.
For income in these portfolios I recommend avoiding bonds in favor of high interest recently issued preferred stocks. Yields of 6-8% are available. Most are fully taxable, so I recommend they be held in tax free IRA and other such accounts. Look at all your investments as one whole (which is how professional money managers normally do it) and take advantage of favorable tax impacts where possible.
The sharp 75% recovery in the stock market since last March reflects a return of confidence on the part of professional market participants, and, lately, on the part of the public as a whole. The lack of such confidence made last winters’ sharp declines even worse than they otherwise would have been.
I am not at all happy about the two Health Care Reform bills passed by the Congress. They represent a belief on the part of its Democrat leaders that the U.S. government can do a better job than the private sector with one sixth of our economy. The government has never before been able to do this, and I do not believe they will do so now. It is interesting to note that advocates are pointing to both Social Security and Medicare as favorable comparisons to this new effort. There are two problems with these comparisons: Both those programs were enacted with bi-partisan support and; both those programs are on track to go broke, Medicare in 2017, and Social Security in 2040.
As presently passed the health care effort will be in a deficit position as soon as it goes into full effect in 2013, and it completely ignores the supply/demand factor for medical personnel going forward from that date when 30 million people are added to the demand side. It also ignores the possibility that large numbers of physicians will retire or stop taking patients who are in government funded programs which are inadequate to the point they will lose money on them. Congress has been reacting to the latter matter by repeatedly repealing planned lower medical reimbursements. They just did it again last month, adding $250 billion to the deficit. With these challenges, along with others, I see no way for this proposed health care program to not add heavily to the federal deficit.
Have a Happy and Prosperous New Year.
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or toll free 800-663-3419 .
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  One Man's Opinions - Fall 2009
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SEC Chairman Ben Bernanke opined in mid-September that the economy has hit bottom and is now growing.  This confirms my own observation that we had hit bottom between May and July.  It is important that we remember we are still feeling the full effects of the worst recession in a generation, perhaps the worst since the Great Depression.  While things may be starting to get slightly better, we fell a long way this time, and it might take several years for us to get back to a thriving economy. 
In other good news, Treasury Secretary Geithner recently weighed in with a statement that a number of government rescue efforts in place to combat the Wall Street crisis are no longer needed.  He anticipates that banks will repay $50 billion in rescue funds over the next eighteen months.  Stating the U. S. still has a long way to go before “true recovery takes hold,” Geithner added, “I would not want anyone left with the impression that we are not still facing really substantial and enormous challenges throughout our financial system.”  His cautious but upbeat tone is part of a push by the administration to present the government’s financial rescue efforts as a success, and to attribute a large part of the credit to last February’s Obama stimulus bill.   In fact, only about 14% of that bill’s funds have been implemented.  Most of the credit for the improving economy belongs to the rescue efforts of last fall and, especially, the more than $2 Trillion "printed" and injected into the system by the Federal Reserve over the past year.  This, more than Federal spending, is responsible for turning things around.
Mr. Geithner further stated that banks have already paid back $70 billion of the $250 billion that the government had injected in the past year to boost their liquidity.  He said the government had earned a $12 billion positive return (17%) from the 23 banks which have paid back the government in full.
I believe that the stock market’s strength over the last six months has now been justified by the improving economy.  My opinion is that we actually had two bear markets rolled up in one during the past two years.   After Oct. 2007, the market pulled back from an overbought position not justified by the economy.  After a year of aimless direction, the sub-prime mortgage circumstances came to light, revealing an extremely over-leveraged financial system.   Lending seized up around the country and spread around the world.  The entire U.S. financial system was very close to a complete meltdown.  The Bush administration and a reluctant Congress came to the rescue.  (See my One Man’s Opinions Winter 2009 at for the full story.) The Obama administration, to its credit, continued the massive intervention, which has now been proven successful. 
The stock market, as we saw, dropped like a stone when the financial crisis hit a year ago.  It began to stabilize after dropping 25-30%, when Obama was elected.  In the face of uncertainty as to the plans and abilities of the new administration, it continued to drop further in the weeks between the election and Congress' passing of the Obama stimulus package in late February.  It hit bottom on March 9, 2009.  As I stated at the time, I thought the stimulus package was vitally necessary for psychological reasons, but would probably do more harm than good when fully implemented.  I still believe that will prove to be the case. 
I remain optimistic about the stock market twelve to eighteen months ahead as the economy recovers modestly from the depths of the recession.   Earnings should rebound nicely, and many stocks remain at historically low price/earnings ratios.  Careful stock selection, as is normally the case, remains the key.  But inflation protection will be necessary and there are few sectors in the economy other than stocks in which to place one's money.  Real estate will recover, but mortgage money will almost certainly continue to be scarce, although reasonably priced. Energy stocks and other commodity investments will also offer inflation protection.  I recommend you remain or become fully invested for the intermediate future. 
Bond yields should increase significantly in the next two years as inflation kicks in.  If this does happen, prices of existing bonds will decline.   I recommend keeping bond maturities at five years or less for safety of principal.
Beginning on Jan.1 2010, Roth IRAs are open to all taxpayers.  For the first time, those earning a modified adjusted gross income of over $100,000 will be able to contribute to these hybrid accounts.  More importantly, all taxpayers will now be able to convert any amount of assets currently held in regular IRA accounts into Roth IRAs.  Regular federal income taxes must be paid on such transfers (tax spread over two years), but subsequent accumulations will not be taxable when withdrawn from such accounts after age 59½.  The main attraction to Roth IRAs has always been this tax free withdrawal factor. Even more tempting, Roth IRAs can be passed on to one’s children or grandchildren and these heirs may subsequently withdraw them, again with no tax on the withdrawals.  Such inheritances are, however, a part of one’s estate for tax purposes.  These accounts from now on are a part of our Certified Financial Planners' toolboxes for our more wealthy clients. 
With the stock market still well down from its highs of several years ago, clients have even more incentive to consider switching all, or any part, of their current IRA balances into Roth accounts.  The government too, will benefit from getting additional tax payments over the next two years, rather than waiting many years for revenue. 
It's interesting that, as the government addresses reforms in the way financial institutions are regulated, an old dispute between Registered Investment Advisors and Registered Representatives who are employees of stock brokerage firms is once again coming to the forefront. RIA's like myself and my colleagues are subject, under securities law, to being held to the legal standard called "fiduciary responsibility." Registered Representatives, by contrast, are held to a lower standard of legal accountability, called "suitability." In earlier decades, this different treatment made sense.  Registered representatives acted as stockbrokers, selling investments as commission paid representatives of manufacturers of financial products.  Registered Investment Advisors, on the other hand, provided independent valuation and management of investments and offered financial planning advice.
In today's investment world, these differences have faded.  Many Registered Representatives of brokerage houses are earning fees on "managed accounts" in addition to doing commission-based sales. For this reason I, and my RIA colleagues, believe all investment advisers should be subject to the same regulatory standards. New SEC Chairman Mary Shapiro agrees, recently speaking in favor of fiduciary standard for all persons involved in the investment management process.
In other statements, Ms. Shapiro has also said that “the public perceives that there is no difference between broker/dealers and registered investment advisors so far as the services they provide.” She also opines that both entities should have common regulations. And that is where we in the RIA community part ways with the SEC.
We believe that brokers and advisors do NOT provide the same services. Brokers are paid representatives of manufacturers of financial products. In the last twenty years a major one of those products has become managing investment portfolios. They are marketed by representatives in much the same way that mutual funds and other financial products are sold. They are paid by their broker/dealer employer on much the same compensation terms as mutual fund sales. Registered investment advisors, on the other hand, provide independent evaluation of investment and give personal financial advice and management. They are paid by the investor directly, generally on a percentage (.5-2%) of assets under management or on a mutually agreed hourly fee basis. They offer no products, only service. Our position is that all regulated individuals who participate in any aspect of the investment management process, and are compensated for that participation, should be held to a fiduciary standard. I trust that you, my readers, will find this a reasonable position and support it with your Congressmen and Senators.
My keen interest in the regulation of financial advisors stems from the work I have done for many years in compliance and product research and review.  In addition to my work with my own clients, I do compliance reviews and product research for the Morris Group, a FINRA member broker-dealer.  I continue to serve as an industry arbitrator several times a year, and I am a volunteer member of a FINRA committee.
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or toll free 800-663-3419 .
  One Man's Opinions - Summer 2009
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The month of July takes me back 47 years to my decision to leave my four year career as an industrial chemical salesperson and join the investment world. I was only 24, married seven years, with five children. It was a big leap of faith as I had NO academic preparation for this new world. Merrill Lynch assured me they would teach me what I needed to know to succeed. And they did. At the time they had the best training program on Wall Street. I took full advantage of it. After almost a year of training, I started prospecting and “building a book” as a stock broker. It took a couple of years of very hard work, but I made it
Today, looking back upon my very satisfying and stimulating career, I am thankful my Maker saw fit to give me these opportunities. After thirteen years in the stock brokerage business, six as a New York Stock Exchange branch manager, I took another big leap of faith and started my own firm, McAllister Financial Planning. I admit to a degree of ego in the name, but at that time I had been on local TV and radio daily for most of the previous twelve years, so I had some name recognition. My leap was again successful and I have mostly enjoyed self employment for the past 34 years. For the last fifteen of those years, as most readers know, I have tried to give back some of what I have learned. I have been traveling the world giving lectures on finance, investing, and economics on cruise ships. I recently completed my 60th cruise and brought my country count up to 140. I am blessed indeed!
I have refrained from criticism of our new President since his inauguration. It is time to lift that ban and make a few observations. First, the entire U.S. government has not been a shining beacon of common sense and efficiency in the last couple of years. Congress, and especially its leadership, has largely been ineffective to hurtful in its actions. The Federal Reserve badly handled the value of the dollar from 2003-2007, setting off an inflationary spiral in the economy, which they fought with very low interest rates. These low interest rates were a big factor in the residential housing price bubble. The SEC lifted the “uptick rule” in the stock markets, setting off widespread short selling by hedge funds and other players, heavily punishing financial and other distressed stocks. Regulators also insisted on “mark to the market” valuations even on current residential mortgages and mortgage securities, triggering a near collapse of our financial system. Mark to market has been corrected. The short sale uptick rule has not yet been reinstituted.
Congressional Democrats intervened to “protect” Fannie Mae and Freddie Mac from tougher regulation by the Bush administration. Together they control over half the residential mortgages in the country. Both institutions drove themselves into bankruptcy with their unwise underwriting of junk mortgage pools, which ultimately brought them down and into government ownership. Congress still has not addressed the Community Reinvestment Act and other decrees mandating that banks grant mortgages to unsound borrowers. Lack of changes here will, sooner or later, recreate the problems which led to near collapse last year. The Obama administration has so far not suggested what should be done about these entities and their problems.
The administration has also been silent as to changes in regulating the credit rating agencies, which have government-sanctioned, almost “cartel-like” privileges. They have also ignored the problem of what to do with future institutions and companies which are “too big to fail.” If this huge issue is not addressed, politicians, Congress and our elected officials will come to dominate even more of our largest private institutions. The government’s track record in this area in the past has been awful, and we certainly have no reassurances currently, with interference in executive pay, marketing pressure, and other areas in those institutions given TARP funds.
Mr. Obama promised us “change” during his campaign. He carefully avoided telling us what changes he had in mind. Those of us who voted for his opponent thought we knew what the most liberal of the 100 U. S. Senators would likely do - institute wide-ranging initiatives to implement a very leftist agenda. This is what the administration has done so far and what it proposes to do in the future. Universal health care is a wonderful concept, but as proposed, it will not lower costs, but sharply increase them. It is a very bad idea and will decimate the flawed, but still best, health care system in the world. The president's energy plan would likely raise electrical prices 50-100% for every household and business in the country. The plan fails to address a realistic option, nuclear power, which liberals have been against for decades. Mr. Obama came out for more nuclear power plants just last week. There has never been a fatal nuclear power incident In the U.S. or in our Navy, which is heavily nuclear powered. France now gets 80% of their power from nuclear; we get 20%. Obama proposes more windmills and solar power, which are good in isolated spots, but useless to provide the base electrical power needed in our economy. Hopefully this unneeded destructive proposal will die in the Senate.
The Bush stimulus bill appears to now be having its full impact, and, as predicted here three months ago, the economy seems to be bottoming. Except for widely anticipated poor unemployment numbers, things are not as bad as they were 90 days ago. A few indicators have turned positive. The Obama stimulus bill and the huge budget bill with its 9000 “earmarks” have had little impact so far. When they do they kick in, the economy will be in recovery, one I think will be even stronger than most expect.
The stock markets continued their March rally through the second quarter and the correction I anticipated after a one third run up has not happened. Public sentiment has turned more positive also, with consumer confidence slowly returning. I expect a positive 4th quarter 2009.
Consumer saving is up sharply, which many in the media are seeing as a bad thing. As usual, I disagree. A seven percent savings rate is a GOOD thing, not a bad thing. Sure, deferring some spending for now hurts this month’s or this year’s consumer spending and the gross national product. But it also undergirds the financial well-being of American families. I often lamented in these missives several years ago the practice of “drawing down our home equity credit line” for current spending purposes. Now that has stopped. Family financial stability is a positive!
I wish everyone an enjoyable summer season. When business picks up after Labor Day we should begin to see much more good news. My blogs will resume July 9.
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or toll free 800-663-3419 .
  One Man's Opinions - Spring 2009
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Since my last newsletter ninety days ago, the financial sector has continued quite volatile and tumultuous, although not as bad as last fall. The stock market staged a second bear market (defined as a 20% down move) after President Obama took office, to add to last years’ 38% drop. The market was not demonstrating any faith at all in the new administration, nor, to be fair, in the Democrat leadership of the Congress. This changed, however, on March 23, 2009 when the Obama administration finally announced a new plan to buy up to $500 billion of “toxic” assets from banks, insurance companies, and various other financial institutions.
The stock market promptly shot up six percent, adding to a 15% earlier bounce from its March 5 lows. This largely made up for the losses since the Obama inauguration. The first rally was apparently in reaction to several positive developments in the economy, as well as a 180 degree shift by the administration, from predictions of catastrophe to ones of recovery and prosperity as the various stimuli take effect. This sudden shift was overdue in this observer’s opinion, as “talking down the economy” by Obama and his team seemed counterproductive once he took office.
I remain convinced that the U.S. government will eventually prevail. There is too much money being thrown at the economy by the Federal Reserve for it not to result in an eventual recovery. But the path has been hilly and rocky almost beyond belief. Let us review the past few months. The Bush administration asked for $700 billion to stabilize the financial sector by buying up toxic assets and injecting fresh capital into failing institutions. Last fall we were told that $700 billion was necessary to shore up failing financial institutions and to buy up toxic debt. Instead, after an infusion of government money buttressed their capital positions, banks and other financial institutions lost any interest in selling mortgages which had no market, but which were current in their interest and principal payments and certainly worth a great deal more than 28 cents on the dollar, what Merrill Lynch settled for in a distress sale of such assets prior to merging with Bank of America. But these “toxic” assets are still on bank books, limiting their available capital and, thus, their lending. Treasury Secretary Paulsen then switched to other actions to cure the moribund economy, which were also mostly unsuccessful.
Exit the Bush administration; enter the Obama administration; which has had a terrible problem staffing the U.S. Treasury with experienced, qualified people. This failure was largely self-inflicted. The standards for choosing appointees were overly cautious. At the same time they seemed to be picking people who had back tax problems! As this is written, there are still 14 vacancies in the 19 positions at the Treasury which need Senate approval, those serving directly under the new Secretary, Timothy Geithner. Surely the lack of people in these key positions contributed to the two month delay (some would say four months, since Obama’s election) to come up with their targeted plan to get the economy going again. The blame belongs at the White House, not across the street in the Treasury Dept.
The United States government is now engaged in attempting to spend its way out of a recession, on top of trying to spend its way out of a financial crisis, this on top of attempting to spend its way out of a sub-prime mortgage mess. It has not worked well! It never has. Both the Hoover and Roosevelt administrations attempted it during the Great Depression and were not successful. The advent of World War II finally bailed out the economy. The Japanese tried it in the 1990s, with little to show for it. We are now approaching $2 trillion dollars of stimulus spending, either in the hopper or being planned. But at least our Congress is proving it does one thing very well - spending our tax dollars and those of our descendants without restraint. So far these massive efforts have not shown much results. The Congressional Budget office recently estimated that we will have budget deficits of NINE TRILLION dollars over the next eight years. We clearly cannot afford to run deficits this large!
What the government has done is raise fears that the massive debt of United States will grow so large that we will not be able to finance it, that few will want to buy our bonds. These fears appear way overblown as there are no signs of a lack of buyers for our debt, even with interest rates from 1/4% to 2%! China and other foreign governments continue to have voracious appetites for our bonds. Between them, China and Japan bought over $21 billion worth in January alone. It would appear that the full faith and credit of the United States of America is intact.
The stock market hates uncertainty, yet our government, under both administrations, Republican and Democrat, has contributed nothing but uncertainty in its efforts to alleviate the damage done by the meltdown of the credit markets.
The new administration, after quickly pushing Congress to commit spending another $800 billion, in its first two months did not come up with a specific plan to attack our underlying economic challenges. They finally offered a “new” plan, to buy up toxic assets! It seems we have been here before, and not long ago. Add to this the Obama administration’s focus on its promises to change health care, education, and energy programs to a more liberal bias; all the while apparently largely ignoring the economic meltdown which was threatening to sink the ship entirely. Until recent days, there has been very little from the administration to encourage citizens that our economy will work its way out of trouble any time soon. Some of this is due to an inexperienced president with inexperienced key personnel, who together face a huge crisis at the very start of their watch.
This is to be expected; most presidencies stumble a few times while finding their way. The current president is further handicapped by having virtually NO management experience. By contrast, President Bush, who was widely criticized for his poor leadership by Democrats and the media from the very start, has a Harvard MBA, and had been a successful businessman and governor of a large state. He and his team still made many mistakes. I find it an interesting coincidence that both presidents have undergraduate degrees from Yale and postgraduate degrees from Harvard, Obama with a law degree. The Ivy League is still providing leadership after two hundred years.
I believe we need to give President Obama some slack as both he and his team settle in for their four year term. They have a lot to learn, including things of which most voters have no knowledge. Rightly or wrongly this is the leader a majority of voters selected to run the country. We can cheer their actions and decisions or disagree with them vociferously, but these are the ones we, collectively, put in charge. I pray for them daily.
It is time for my annual diatribe about the financial media, especially the electronic media. Recently on the Fox News Channel, normally a reasonably good source for financial news, a young woman anchor reported (breathlessly) that the number of workers now unemployed in the U.S. was “higher than at any time since 1967!” This is a great example of factual reporting which is misleading. Why? Because there are now 50% more people in the U.S. than 42 years ago. So the percentage of unemployed is only two thirds of what it was then.
The media is constantly reporting things like this without proper perspective. The print media, especially the more liberal newspapers and newsmagazines, constantly distorts the real picture. My all time misleader, CNBC, with relatively few viewers, around 200,000 most of the time, focuses on very short term financial news and opinions. Many of these opinions are faulty, in my opinion, and others are true but misleading simply because most investors should not be focused the next few days or weeks, but on the long term, years down the road. My advice is, take financial reporting with several grains of salt. Very few journalists are financial experts! But Steve Forbes and his team of writers come to mind, Neal Cavuto on Fox News, the Wall Street Journal and Barron’s teams, are all good sources. I am sure there are others. But ordinary mainstream journalists are just that, journalists. Their focus is attracting viewers, listeners, or readers. So bad news sells, good news is boring. Keep that in mind.
It is my expectation that the economy will bottom in the next 90-180 days, that the stock markets are discounting the improving outlook, and that the lows of March 5, 2009 will prove to be the bottom. Stocks are not likely to be this cheap again in my lifetime! Feel free to call or email us for advice and/or sympathy. Handholding is our specialty!
My weekly blogs will resume April 10.
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or toll free 800-663-3419 .
  One Man's Opinions - Winter 2008-2009
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Things have settled down in the markets in recent weeks. We are now seeing daily moves of .5 to 1% instead of “lurches” of 5, 6% or even more up and down, which were common a month or two ago. I believe it was necessary for things to settle down before a genuine recovery can begin. The credit system was indeed broken and on the verge of breakdown in September, 2008. We will examine what happened in the next few paragraphs, but let there be no doubt, the entire financial system was about to fail before the U. S. Government stepped in to fix it. This fixing has not been pretty, our three legged system of government is often messy, as it was in this case. But our government has the resources, and, I now believe, the will, to fix the problems.
Let us look at what happened. Until recent weeks, there were two kinds of banks, the commercial banks nearby in our communities, which most of us use, and the investment banks located in New York and in financial centers around the world. Most people did not know the difference, except they thought investment banks existed primarily for “the rich.”
While ordinary citizens did not think much about the differences in the two, the government did. Seventy five years ago, in the wake of the Great Depression, Congress erected a “wall” between the two types of banks in legislation which became known as “the Glass-Steagall Act.” It created the Federal Deposit Insurance Corporation (FDIC) to protect depositors of commercial banks and it forbade those banks from underwriting securities or acting as stockbrokers or dealers.
Beginning after the inflationary crunch of the early 1980s, Wall Street lobbied vigorously for the repeal of Glass-Steagall and, in 1999, succeeded. The banking industry immediately began to consolidate. Commercial banks could now turn loans into investment products and Wall Street investment banks were suddenly in the mortgage business.
A deregulated marketplace carries with it certain imperatives. It functions as it should only in the absence of criminal or stupid behavior. Laws can be passed to forbid and punish the former, but no regulations or regulators can prevent the latter, since traders in the markets, and even regulators themselves, are often stupid, at least in their actions. The “Law Of Unintended Consequences” often comes into play.
Two other changes had an important impact also. The Commodities Futures Modernization Act of 2000, transformed mortgage backed securities into a commodity, allowing them to be traded on the futures exchanges with little or no oversight by government regulators. Then, in 2004, the Securities and Exchange Commission waived its rules on leverage. Previously all broker/dealers were limited to a 12 to 1 ($12 of debt to $1 of equity, a ratio most would call very risky!). The five largest investment banks were granted an exemption from this rule, which they promptly used to lever up to 20, 30, even 40 to one! In retrospect this was an incredibly stupid thing to do, and many, including me, said so at the time. Hedge funds, which were exempt from any leverage regulations, compounded the problem by sometimes levering up to 100 to 1! Even more stupid, in my modest opinion! There is almost no room for human error or miscalculations with a 30 to 1 ratio, much less 100 to 1. So the stage was inevitably set for catastrophe. And a catastrophe was brewing.
After the “tech stock bubble” burst in 2001, the public recoiled in revulsion from common stock investments. But they immediately began to look for “next big thing” in which to place their investment dollars. Since home values had gone up virtually every year since World War II they settled on housing! In 1977 Congress passed the Community Reinvestment Act, which had as its goal extending home ownership to the largest possible number of citizens. Over the next 25 years an aggressive government enforcement of “fairness in lending” weakened bank standards on home mortgages and artificially inflated home values. In the meantime, the Federal Reserve Board reduced interest rates to near nothing while pouring more and more liquidity into the financial markets. Capital that had fled stocks found a home in residential housing.
Thanks to the Fed, commercial banks were awash with cash and started lending it to virtually anyone who asked, even those with bad credit, low income, and/or no down payment! Boy did things look rosy! The U.S. homeownership rate went from 62.1% in 1960 to 68.9% in 2006, and prices began to skyrocket, especially in California, Florida, and the east coast. Speculators “flipped” houses like crazy, often several at a time. And homeowners, encouraged by those cash rich lenders and by Congress, which took away tax deductions for all interest, except for loans against residential real estate, borrowed more and more against their rapidly rising home equity. There was no risk right? Home values could only go up, right? There was not a single down year for home prices from 1970 to 2006!
Of course the bubble had to burst, and burst it did, pricked by unrealistic prices, overbuilding, and interest rates rising as the economy heated up. Prices began to drop, while at the same time a lot of those adjustable no and low interest loans began to reset. The jig was up! Commercial bankers are not known as a reckless bunch. As mortgage standards dropped they found themselves making loans to shakier and shakier recipients. They did what any prudent conservative person would do, they hedged their bets! They moved most of their mortgages off their balance sheets.
The big Wall Street investment banks, with all that borrowed money available to them at low interest rates, had begun to “securitize” (bundle up) mortgages and other consumer debt into packages for sale to institutional and individual investors. Thus the mortgage business was largely uprooted from local commercial banks and transported into the investment houses, which had far less restrictive requirements for reserve capital, far less regulatory oversight, and huge markups on the pools of mortgages they created (called Collateralized Mortgage Obligations or CMOs). These, in turn were sliced, diced, and repackaged into a bewildering array of securities (called “tranches”) which supposedly more closely matched the risk tolerance of the investors buying them. The effect of all this was that the original mortgage was often tossed from buyer to buyer, or even split into parts. Totally gone was any local oversight of the actual market value of the underlying properties.
Wall Street decision makers are not known for their low IQs. On the contrary, these are normally extremely bright people who have a tendency to be blinded by greed and arrogance into making some very stupid moves. In this case the creators of all these various and wonderful artificial securities recognized the risks they were taking. So they invented still another entity to assume these risks called credit default swaps (CDSs). These are, in effect, an insurance policy, a way of dealing with fear, and a device for assuming the risks inherent in trading products the buyer (and the seller perhaps also) may not fully understand. Those buying the protection pay an upfront amount and yearly premiums to the protection sellers, who agree in return to cover any loss to the face value of the security. These are private two party contracts utterly devoid of any regulatory oversight. There are more than a few caveats to these nifty little documents. For one, the holder of that security, now “protected “by a CDS, may sell it to a third party, who might then protect it and sell it, and so on, creating an impossible chain of complex ownership and obligations. For another, the CDS itself might be traded in an over the counter market. And the underlying assets at some point may be partitioned into different tranches. Lastly, short sellers could and did operate on any part of the incredibly complex structure. Eventually there evolved $43 TRILLION worth of CDSs! To put this in perspective, the entire U.S. Government’s annual budget is less than $4 Trillion, and the U.S. National Debt is $10 Trillion.
Now, here is the problem with this incredibly large overhang in our economy. Suppose the party providing the initial protection, having collected its upfront fee and “premiums,” does not have the money to pay the insured buyer when a default occurs. Or perhaps they have gone bankrupt. The buyer finds himself left naked and alone with his loss. AIG was the biggest player in writing this protection and it is here they got in over their heads, not in their many insurance companies.
When the housing bubble inevitably burst, defaults hit the relatively small sub-prime sector (less than 20% of mortgages) starting a chain reaction that raced through the derivatives market, compounding geometrically until, in the end, our entire world financial structure was facing collapse. The following are two blogs I wrote some weeks ago explaining what happened.
Blog #10 (September 20th, 2008) RULES GONE WRONG
As the Music Man would say, "We've got trouble, trouble, trouble". Much of the trouble in the U.S. financial markets has been attributed to the sub-prime mortgage meltdown. But, as a financial planner and stock market observer for more than four decades, I know that at least two other factors are weighing very heavily on financial stocks now. Both these factors have to do with rules. In my opinion, one set of rules is too strict, the other too lax.
The first set of rules relates to banks, requiring them to do “mark to the market” accounting. These rules, launched just a few months ago, force banks (both investment and commercial banks), on their quarterly statements, to show all assets, including long term holdings, at current market value. That means that even long term home mortgages on which payments are current must be priced quarterly (as if the homes were being sold right now!). Of course such long term assets were never meant to be priced quarterly, and since home prices in general have fallen, the mortgages show up as losses on income statements. The irony is, no cash losses have occurred, because the mortgage payments are up to date and the homes are not all being sold right now! The same unreasonable rules apply to commercial real estate holdings by banks. The new regulations (part of the Sarbanes-Oxley legislation) that require this "mark to the market" are triggering unintended consequences by making the financial statements of investment banks and commercial banks appear to be in much worse condition than they truly are. In my view, Congress should immediately pass legislation suspending these “mark to the market", pending review and modification of accounting abuses. This set of rules is too strict and is hurting, not helping matters.
Just as Sarbanes-Oxley rules are "too strict", a second set of rules, this set perfectly sensible and effective, was changed last July by the SEC, regulators of the stock market. Now we have a situation where the rules are too lax, inviting some of the abusive practices that are helping drive stock prices down. This second set of rules has to do with "short sales" of stock. By way of background, a short sale is one made by a person or entity with borrowed stock. The seller borrows shares from a broker and delivers them to the purchaser's broker. The seller is betting the price of the stock will go down. (If I'm a short seller and ABC stock is now selling for $50 per share and I believe it's headed downward in price, I sell borrowed shares at $50, with the intention of buying shares at $45, delivering them to cover my sale and keeping the $5 per share profit.)
Until July of last year and going all the way back to the Great Depression, short sales could be made only on a “up-tick.", meaning at a price higher than the last transaction price. This rule kept short sellers from driving down the price of a stock by repeatedly selling it short. In the year since these very effective restrictions were removed, hedge funds and other speculators have deluged already troubled financial stocks with continued and repeated short selling. In my opinion, Congress should immediately pass legislation reinstituting the up-tick rule. In fact, as proof of what I'm saying about the need to limit short selling, just a couple of days ago the SEC put a temporary ban on short selling (whether on an up-tick or not!) on 799 different financial stocks.
Yes, we've got rules, rules, rules. Some are unreasonably strict, some overly permissive And, my friends, maybe that's the reason we've got troubles, troubles, troubles….
Blog #12 Oct. 3, 2008 What Happened?
Steve Forbes agrees with me, I was gratified to learn. And, since the CEO of Forbes Magazine is #1 among the few journalists I respect and whose work I’m careful to read thoroughly, that’s quite a compliment. Forbes’ lead comment in the Oct 6th magazine issue included five paragraphs virtually identical to my Blog #10 posted Sept. 17, in which I discussed the two underlying cause of our credit crunch. I cited the “mark to the market” rules introduced last year, and the suspension of the “uptick” requirement for short sales, and Steve Forbes thinks those two rules are at the root of the current troubles as well.
Since my blog was posted, the US. House of Representatives had one of its worst hours in history, voting down the President’s plan to rescue the credit markets. Then, on Oct. 3, the House reversed itself, but only after the Senate had attached enough “goodies” to sway sufficient representatives to switch their votes.
No economist I, but as a student of the markets and a financial planning professional in my forty-sixth career year, I am ashamed. I’m ashamed of the House, its leadership, and the members of both parties (including my own Representative Dan Burton), for voting against the rescue. Instead of doing the right thing for the country, I feel, they put their own re-election concerns first. Yes, I understand that comments from constituents were eight to one against the bill. But, remember this: in a republic, Representatives are sent to Washington to determine, collectively, what is best for the country. Secretary Paulson, Chairman Bernanke, and many other experts had clearly outlined the imminent danger facing the U.S. credit system, explaining that if our system shut down, that would shut down the world’s credit system. (In fact, two large European banks have already failed as a result of our lack of rescue action.)
Great damage has been done, and it will not all be cured by this reversal. We are probably now in a recession in this country, one which could have been avoided in the same manner as the economy escaped recession last winter and spring. In fact, we have just barely avoided a depression!
In addition to the two causes Steve Forbes and I pointed out earlier, a Sept. 30 article from The New York Times shows how the problems started. (click here for the New York Times article) The Times spells out how Fannie Mae and Freddie Mac heavily promoted sub-prime lending and guaranteed risky loans. (The article is posted on my website I’m sure you’ll agree, sometimes it’s hard to put sense into our Representatives!
So where are we now, and where do we go from here? The most dangerous words in Wall Street are supposed to be, “It’s different this time!” I have tended to agree. Near the end of the “Tech Bubble,” we heard repeatedly that “this is a new paradigm” (meaning, “it’s different this time.”). In previous market bubbles during my career we heard the same thing over and over: “It’s different this time!” When this topic came up I always had the same answer: “Maybe you (or they) are right! Maybe human nature has changed. But it has not changed in 6000 years of recorded history, so I am betting it is NOT different this time!” And time and again this position has proven to be the correct one. The markets and the economy sorted themselves out, and stocks advanced to new highs.
Well, now I am hearing the same thing at the ­ bottom of a very serious and deep decline. “It’s different this time!” “The market and the economy will never recover from this serious failure of the U. S. financial system, it is going to drop another 50%, or more!”
Well it IS different this time! Their concerns are justifiable and understandable. We have not had a systemic failure of our credit system like this in most of our lifetimes. Major financial institutions have disappeared; still others have been swallowed up by stronger firms. It is turmoil and volatility like none of us have ever experienced. But I am betting that human nature has not changed, that stock prices have been driven down to unsustainable levels by fear and panic on the part of investors and speculators, especially the latter. But the full power and credit of the United States government has been pledged to correct these market extremes and reenergize our financial system. It won’t be pretty and it won’t be efficient, but it will be done! If human nature has changed, then perhaps the pessimists are right. I am betting it has not! I believe things will sort themselves out as they always have done; the stock market will come back to life; and the economy will resume it’s long term growth over the next several years.
We are certainly in a deep recession, probably at or near the deepest part of it. Observers disagree as to when it started, but we are in it now! I anticipate a return to positive growth in the U.S. economy no earlier than the second quarter of 2009, more probably the third quarter. A grim prospect indeed, and you may rest assured the media will report every single piece of bad news in headlines. We will hear and read about more layoffs, higher unemployment, more claims, etc. etc. The incoming Obama administration will deny any fault for the situation, conveniently forgetting the year-long campaign when they, and their media supporters, talked down the economy at every turn. But they and their Democrat allies in control of the Congress are fully responsible for getting us out of this whole mess beginning Jan. 20. The initial cabinet appointees who will execute their new policies are quality people who appear to have the necessary experience and knowledge to resolve our problems. The “fly in the ointment” is Congress. In the last two years, since they assumed control, Democrat leaders have not demonstrated a great grasp of the problems the country is facing, nor any leadership in solving them.
So far as the stock markets are concerned, I am, as usual, optimistic about the long term, two years or more. Traditionally the market discounts economic events six to twelve months in advance. If my premises are correct and the economy returns to positive growth this coming summer, the stock market should reflect this potential improvement very soon. Stocks are at bargain levels rarely seen since the Great Depression. Every money manager I know of has funds in cash waiting to be committed. Evidence of buyers coming in the market abounds every time we see a dip.
I wish all my readers a much more Prosperous and Happy New Year. My blogs will resume Jan. 2.
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or toll free 800-663-3419 .
  One Man's Opinions - Fall 2008
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September 11, 2008. I am writing this on the seventh anniversary of the greatest attacks ever on our nation. The destruction of the Twin Towers of the World Trade Center and the crash of a fully fueled airliner into the Pentagon are unparalleled in our history. They have not been repeated since, thanks to a strong response from our government, including both political parties in the beginning, which has been able to intervene in the affairs of Al Qaida and other terrorist groups and “defang them” to a large extent. Many terrorist leaders have been killed, others jailed, and still others isolated in remote hideouts where they face great difficulty communicating with their terrorist bands.
But the terrorists still are a very real threat to the United States and the other western democracies. These fanatical Muslims see nothing wrong with killing innocent women and children, even though they are fellow Muslims, in furtherance of their perverted religious beliefs. Thus, to ignore this evidence that we are at war is to put our nation at great peril. Unfortunately, many on our political left do not see this. They advocate “negotiation” with groups who swear to completely annihilate us if they can.
In my winter missive of this newsletter I outlined this threat and my belief that only one presidential candidate, John McCain, understood this and was willing and able to do whatever necessary to combat it. Our very survival is at stake. I mentioned also that, in my opinion, only one of the Democratic candidates, Hillary Clinton, if she were elected had the background to do a complete switch from her campaign rhetoric if needed and do whatever might be necessary. This is no longer possible, of course since Barrack Obama is the Democrats choice. In the spirit of full disclosure I am a lifelong Republican, but my father was Democrat City Chairman and the #2 city office holder, Clerk Treasurer, back home in Vincennes , IN. If still alive I doubt he would agree much with current national leaders of his party.
A quiz for you. “Who am I?? I am under 45 years old; I love the outdoors; I love to hunt; I am a Republican reformer; I have taken on the Republican party establishment in my state; I have many children; and I have a spot on the national ticket as vice president with less than two years as current governor of my state! Have you ever heard of me before now?” The answer is at the end.
The introduction of Sarah Palin, Alaska’s governor, as McCain’s running mate, has thrown the entire race up for grabs. I find her a breath of fresh air. Others, especially Hollywood and the mainstream media, do not. While obviously inexperienced in foreign affairs and defense, she actually has quite a bit more executive experience than both her opponents combined, as well as her own running mate. McCain, at least, is a proven senior naval officer in his younger years and comes from a long line of Navy admirals. So I still think McCain is the best choice for the crisis now facing our country, although Obama is obviously a brilliant and gifted orator and a well educated and intelligent man. But he sorely lacks executive experience and has never shown any ability to do many things he says he wants to do.
 The political campaign is negatively affecting the U. S. economy, as the Democrats and the media continue to talk about how bad things are. They continue to insist we are in a recession, even though the Gross National Product is again growing at 3.3% in the second quarter, after a slowdown last winter. The outlook for the last half of the year is for more growth.
Our national unemployment rate is at 6.1% and rising. This is not good news , but in fact it is not at all high historically. Rather it is near the average since World War II. It also is a lagging indicator which hits its high some time after the economy starts growing again. The housing crisis is not over yet, but appears to be bottoming. The attendant mortgage crisis in Wall Street is serious, but one must keep in mind that many of these “losses” are paper ones, as 94% of all mortgage payments are current. Financial Accounting Standards Board rules mandate a “mark to the market” price for assets. The banks and other financial institutions must therefore treat 15 to 30 year mortgages, even though current on their payments, as if they all had to be sold today into a very soft market. It is not logical to assume that this would ever be the case. Foreclosures are up, but this was to be expected when lending standards, at the behest of liberal politicians, were so loose earlier in this decade. These loose standards drove up demand, which drove up prices, which encouraged more borrowing against home equity. Now, “ the chickens have come home to roost!” Interestingly enough, four liberal U.S. Senators called this week for a moratorium on foreclosures by Fannie Mae and Freddie Mac, now that they are under federal control. This is exactly the wrong type of pressure from the politicians and is what partly got us into the current mess. Will they ever learn? Probably not!
I believe that coming good conditions will eventually overcome the negativity of the media and the politicians. Home prices have started to firm up in some cities, and nationally the rate of decline has slowed. Financial institutions appear to have bottomed. For example Bank of America stock is up over 50% in the last two months. This demonstrates the underlying resilience of the better U.S. financial institutions, in spite of Fannie and Freddie’s problems.
The stock market has probably more than discounted the likelihood of capital gains and dividend taxes going up to 20% (from 15). And it probably does not much care who wins the presidency. The economy seems to be “muddling through” its slowdown of economic growth. The Federal Reserve Board finally sees inflation as an equal or bigger threat than recession, although it is not yet clear it is serious about fighting it. 2009 should be a good year, especially in the stock market. Nearly all indicators show it is oversold.
Two months ago I began a weekly web log (blog) and we have been sending it weekly to all our newsletter readers. I hope you are enjoying these tidbits and we would appreciate an email or phone call with any comments. The number is 800-663-3419. Indianapolis readers use 571-1112.
Have a great Fall!
Answer to the quiz: I am Theodore Roosevelt!
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or toll free 800-663-3419 .
  One Man's Opinions - Summer 2008
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These four paragraphs were written during an industry visit to New York City in April.
“As I write this I have just returned from a 1.5 mile walk around “Ground Zero” at the foot of Manhattan. From this desk in my hotel room I am able to look to my right and see it 21 floors below. Although most of the foundations for the new building are in, it is still a deep pit with constant truck traffic in and out 24/7.”
“My feelings are sober and somber as I sit here. The destruction of those magnificent 110 story buildings is, in my opinion, only a small sample of what our countries’ enemies, the radical Islamic terrorists, wish to bring down on us. They frequently tell us they are going to do so. I believe the United States faces the greatest threat in our history.”
“One of the candidates for our Presidency does not see the threat as I do. He repeatedly calls for immediate withdrawal from Iraq, the current front of our “War on Terror,” where we now have Al Qaeda on the run. He wants to “confer” personally with these enemies, with no clear stated goals as to what he plans to achieve, other than “change. He has almost no experience other than as a Chicago machine politician who ascended to the U.S. Senate three years ago. He has spent half that term campaigning seven days a week for the presidency.”
“His opponent, John McCain, stands for and exemplifies what I believe is mandatory if we, as a country, are to avoid many more , and far worse, Islamic terrorist acts on our country. He has faced our enemies before, indeed spent over five years as a POW, commanded the largest air wing in the Navy, and has been in the Congress of the United States for thirty years. He advocated using greater force in Iraq long before the Surge. He has been sharply critical of the Bush administration in many areas, even when it caused him political harm. He is a proven leader!”
As I review these thoughts some weeks later, the primaries are over and the Fall campaign is underway. While I believe Mr. Obama is an intelligent and decent man, well educated and certainly well spoken, I believe he is the exact opposite of what we need to lead us for the next four or eight years. He is not only inexperienced (and apparently naïve), he is the most liberal of our 100 U.S. Senators. He has not laid out clear plans as to how he will accomplish “change” and “hope.” In fact, he has shared very few plans on any subjects, even universal health care. The last similar candidate, another highly intelligent and decent man, Jimmy Carter, was a disaster, arguably the most ineffective President of the 20th century. But Carter had far more leadership experience than Obama, as both a Naval Academy graduate and Navy officer, and as a state governor.
My father was Democrat City Chairman and City Clerk Treasurer back home in Vincennes, IN. He was a conservative southern Indiana Democrat. I was long gone by then and a Republican precinct committeeman myself. We did not always agree on politics, but had common values. I learned them from him and Mom. I suspect he would share my doubts about Mr. Obama, and would have supported a more more conservative traditional Democrat.
2008 does look like a Democratic year across the board, except for U.S. President. McCain and Obama are in a dead heat in the polls. In spite of radicals on both sides, American voters have made only a few mistakes picking their Presidents down through the years. It appears the radical liberal left is far out of touch with the average voter. Either way, let us all pray for our country.
It is hard to believe the distortions the media and politicians are putting out these days. (Can we ever?) Contrary to their statements, the U.S. economy is surprisingly strong! The unemployment rate has grown only moderately, to levels that just a few years ago were considered full employment. Job growth continues strong. It now appears we are going to “skirt” a recession, and the shock of sharply higher energy and food prices is being assimilated far more easily than anyone dreamed possible. It is true that the economic growth rate has slowed to almost nothing. But it has not yet gone negative. The outlook for the rest of 2008 calls for slow growth as the economic stimuli of lower interest rates and taxpayer rebates flows into the economy. I am frankly surprised!
The biggest fear I have is of “stagflation” similar to the late 1970s. I do not see double digit inflation numbers, but we are already around 4.5% in real numbers due to the energy and food price increases. My fear is this could spiral to 6-7.5%. This would cripple any recovery and perhaps force the Fed to “slam on the brakes” and trigger a major recession, as was the case in 1981. The Fed’s announcement this week that they do not see any further interest rate cuts indicates they also are concerned. The Fed Open Market Committee has 18 people far smarter than I, and they have far more facts. I trust they can steer us clear of the danger.
Speaking of the Fed, and the Bush Administration in general, are you as puzzled as I am at their apparent failure to anticipate that, if we consciously allowed the dollar to depreciate against the Euro and most other currencies, OPEC and the other oil producers would raise their prices (in USD) to reflect this situation? Raise them they did, and they found there is apparently no limit to how high oil prices can go right now. As I said here in my last newsletter, the speculators are in charge and until they drive oil prices to the absolute limit people are willing to pay, they will continue to climb. My opinion is we are near the end of the spiral, although it could continue for some months. When the price breaks, I see a retreat of a third to half of the run up, whatever that might be in dollars.
I don’t like $4 gasoline either. I have cut back 10-15% on my driving, which is not a hardship for me. But my youngest daughter lives on the far south side of Indianapolis and works (at a very good job) on the far north side. Her daily commute is 70 miles (in a 4 cylinder Accord) and she does not have the option of cutting back much. There are millions like her. It is very tough for them.
Home prices have dropped even more than my pessimistic predictions of two and three years ago. In many hot areas, like California and SW Florida, where prices shot up 100-200% or more between 2001 and 2005, they have dropped back to below where they started. Home builders and realtors have left the business in droves. Foreclosures abound. Speculators are bloody and beaten and are taking their losses and selling out at any price. Renting homes in the formerly hot areas is not a good option due to the heavy inventory of empty homes driving rents to very low levels, not even enough to cover mortgage payments and taxes. Most unbiased observers believe we have yet to see the bottom in home prices.
The stock market appears to have stabilized in recent weeks. My money managers remain very optimistic for the rest of the year and into 2009. The indicators we follow show stock prices in general are very reasonably priced vs. fixed income and real estate. Exceptions are municipal bonds, where high quality tax free state and local government obligations are currently available at yields HIGHER than taxable U.S. government bonds.
Another exception is the recently issued financial preferred stocks, which are more like fixed income than equity, even though technically they are equity. They are available to yield 7.5-8%. And the 15% maximum federal income tax applies to these yields, at least until the end of 2010. These are stable companies for the most part and this is good value.
Stocks have been largely resilient in spite of oil and food price increases and the negativity emanating from politicians and the press. This scenario is called “climbing a wall of worry” when gloomy economic and market predictions are overwhelmed by a host of positive forces that are hidden from the spotlight. Some of these are the indicators referred to above. These are almost uniformly bullish (optimistic) as this is written. Valuations are attractive, short interest is high, and sentiment is cyclically depressed, all consistent with a market bottom, not a peak.
So we believe this is a time to commit cash, some of it to municipals and/or financial preferred stocks, and some to obviously undervalued stocks. I know it is hard to ignore the gloom and doom pervasive in the electronic media and in the newspapers. But time and again throughout my 46 years in this business, these have proven to be the times when bold action provides extraordinary returns. I hope you will take advantage of this opportunity, either with us or on your own. Call for ideas specific to your own situation.
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or toll free 800-663-3419 .
Annually we are required to offer to our clients a copy of our most recent income statement as filed with the Indiana Securities Division. If you wish to have a copy, call the number above, or email us at
We also wish to advise all our clients that our client financial information is strictly private and will not be revealed to any outside parties unless authorized by you in writing; or by subpoena from a court of law.
A word to the wise:
Spiritual teachers tell us that all of our fears ultimately come down to our fear of death. Because of our materialistic worldview, we are intent on preserving our bodies and everything that goes with them. We associate preserving our wealth with preserving our lives. We fear that oneness will interfere with the survival of our separate identity. Wisdom teachers say that this illusion of separateness is precisely the problem!
The Heart Of The Mind
  One Man's Opinions - No Fooling - April 1, 2008
  It has been 75 days since my last communication and I want to update my readers on where I see the economy and the markets.
I believe we have seen the worst in the stock market. We may test and even drop to new lows, but the "free fall" has stopped. Professionals (like ourselves) are picking up stock bargains as they present themselves. We continue to maintain some cash in reserve, but in my opinion it is unlikely that stocks will retreat substantially from here.
The media is full of gloom and doom about the housing and mortgage situation. As if this is new news! Politicians and TV pundits are assuring us we are in a recession. WE ARE NOT! By definition a recession in the economy is two consecutive quarters of negative growth. We may have had one negative quarter, the one ended just yesterday. We will know in two or three weeks. It will be late July before we find out if we have had a second negative quarter and only then will we know for sure..
For the record, I do suspect we are at the beginning of a mild one. Except for residential real estate and financial stocks, the damage should be relatively light. Except in real estate, we did not see a lot of excesses in the U. S. economy or the stock markets in recent years. What we have recently had is a massive meltdown in hedge funds and Wall Street credit markets due to poorly qualified borrowers and excess leverage (borrowing) in residential mortgages. We discussed this at length in our last edition, which is available on line at
The Federal Reserve Board has made it clear that they will not allow a meltdown, either in the economy or in Wall Street. Opening the Fed lending window to investment banks, in addition to its traditional availability to commercial banks, is a very significant change which has garnered little attention from the public. The Fed has made it clear that they are not going to allow the current credit crunch to cripple Wall Street or Main Street. Ironically, most larger blue chip corporations are flush with cash and have much more credit access than they did 12 months ago. These are the very firms which can spend it the most and the fastest. I believe they will.
The Fed has also sharply lowered rates, which will positively impact the economy during the rest of 2008 and beyond. So will the IRS rebate checks arriving in our mailboxes beginning next month. This latter program is relatively modest, but should at least help consumer confidence, which has been lagging lately. The negative part of this heavy stimulus is increased inflation down the road on top of already inflating prices. Higher energy prices are a big concern as they filter through the economy and prices move up. Similarly, higher commodity prices are also having a negative effect on prices across the board. A trip to the grocery store quickly reminds us of these trends.
History shows that the stock market discounts news, both good and bad, six to eighteen months in advance. By the end of 2008 I am comfortable that, although the economy may still just have started recovering, stocks will be significantly higher than they are now.
Interest rates have declined but the credit crisis in Wall Street has created several unusual opportunities for fixed income investors. There has been a "flight to quality" which has driven up the price of U.S. Government bonds, thus lowering yields sharply. But municipal bonds have not followed suit, allowing TAX FREE yields in this market to stay as high or higher than their U.S. government equivalents. I would not go longer than five year maturities as I expect lower prices in coming years as yields revert to a normal spread and overall bond prices fall.
In my last newsletter I also mentioned recently issued financial preferred stocks. Investors looking for high quality and high yield investments with a low tax (15% max.) on their dividends, should check out the larger recent issues which are selling to yield 7.5 to 8% or more. Long term bond interest on the exact same corporations typically yields two percent less, taxable at up to 35%! Citicorp, Bank of America, Wachovia, Fannie Mae and Freddie Mac are names to consider. Call for more information. (Disclosure: I personally hold several of these stocks)
Long time readers know I am a big fan of professional investment management. Those who have been through numerous financial troubles (over 45 years in my case) have learned some important lessons. To a great extent, we at least know some things NOT to do. For example, don’t pay a great deal of attention to the financial journalists, especially the electronic media. They typically focus on the short term outlook, ignoring the long term success and relative stability of the stock markets. Also, one should not allow their emotions to determine their financial decisions. And, do not look in the rear view mirror to predict your future course. Those are just a few mistakes investors often makes. Others are also discussed at length in Eight Great Mistakes Investors Make and Great Mistakes Retirees Make, available at
I invite you to "keep the faith" in the long term growth and strength of the United States economy, as well as those of our major trading partners abroad.
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or toll free 800-663-3419 .
  One Man's Opinions - Spring 2008
  This missive is going out three weeks early due to recent spreading investor panic in Wall Street and around the world. This is in spite of economic fundamentals remaining quite sound. Based on 45+ years experience I see this as a buying opportunity, one which only comes around only every few years. (After the previous sentence was written on Jan. 23, the Dow turned around 600 points. The author does not claim any special prophetic abilities.) There seems to be a lot of money on the sidelines waiting to be invested. As these funds are committed we expect a substantial stock rebound. Most money managers are quietly waiting for some signs of stabilization. We may have seen it.
I believe that the markets, stock and fixed income, are currently being driven by short term speculators in the futures and derivative markets. Every small nuance or perceived possibility is immediately reflected in these markets. One must also keep in mind that a “triple digit” (more than 100 points) gain or loss in the Dow Jones Industrial Average is not what it used to be, only a one or two percent change in overall market value.
At current levels the stock market is discounting every negative event I can imagine. The market is down 15-20% (depending on which index you use) from its highs last spring. Last year’s modest gains have now been taken back and then some.
Many journalists and politicians are saying that the economy is down, when the truth is that the “RATE OF GROWTH” in the economy is off. The consensus calls for just one percent growth during this first quarter of 2008, with a slow second quarter to follow. There is no surprise here for me. We have had five years of solid economic growth in the United States. Some slowdown was inevitable. A recession is defined as two consecutive quarters of NEGATIVE growth. That does not seem to be in the cards, although it could happen if public negativity worsens. Unemployment is now at five percent. Just a few years ago this was considered full employment. The strong economy of the past few years took the number well below five. Even a six percent unemployment number is not catastrophic, and I see no signs of it going that high this year.
Most large financial institutions took massive write downs against their earnings in the last quarter. When this happens in any industry one can normally assume that earnings in the next couple of years will compare very positively. The old saying is, they throw “everything but the kitchen sink” into these write downs. Given the sub-prime lending crisis, I think this time there were even quite a few kitchen sinks included.
In my newsletter in November I gave my opinions on the sub-prime mess, so I will not repeat them here. Past newsletters are posted on At this time I think the worst is over in this area. Bankers are overly cautious, so lending is still tight. But the Federal Reserve has signaled its intention to loosen up lending with its .75% drop in Federal Funds and the discount rate this week. The discount rate is what the Fed charges banks to which it loans funds on a day to day basis. Most banks prefer not to borrow from the Fed, but rather from each other. This lending was sharply curtailed in recent months due to the disruptions and losses incurred in the sub-prime debacle. I expect the Fed to continue to reduce rates in the months immediately ahead. This rears the ugly head of higher inflation six to twelve months out, but is a strong positive at this time. Higher inflation will have to be dealt with later.
There are some terrific bargains available in the markets now. Particularly attractive are a series of bank preferred stocks with yields of 7-8% which qualify for the 15% qualified dividend income tax rate. Names such as Citicorp, Bank of America, Fifth Third, and a number of others have been beefing up their the equity side of their balance sheet to maintain proper balance for regulatory purposes. Many municipal bonds tax free yields are now equal to those of taxable U.S. government notes. We would still stay short, no more than 5 years. Several troubled stocks have AAA bonds available with double digit taxable yields. Call for more info on these.
Speaking of calling, despite the sharp drops most days this month, I have not had a single call from a client concerning the market. This mirrors the experience of most Certified Financial Planners. We often discuss with our clients the volatility of the markets, make allowances for it, and react appropriately when it happens. It is NOT a non-event! Rather an expected one, with contingency plans. Our cousins the stockbrokers do not experience the same scenario.
It appears the President and the Congress will quickly pass a tax refund bill to stimulate the economy. What they are discussing will essentially replace what higher gasoline and energy excess costs have taken from consumer pockets in the past year. This will indeed stimulate the economy, but not greatly. A reduction in corporate taxes and making the Bush tax cuts permanent would help a lot more. We will see what Congress delivers.
Turning to the presidential race, now going full blast, I am troubled at the available choices. I will share my thoughts from my perspective as a conservative Republican who is gravely disappointed in domestic Republican leadership in Congress and the White House these past seven years. I believe our country is in deep trouble and facing a great terrorist peril. In my mind, there is only one candidate whose record and beliefs lead to the conclusion he is capable of coping with the challenges I foresee, John McCain. My problem is that I disagree with him and his decisions about one third of the time. Rudi has the right stuff, but lacks the experience necessary to be commander in chief.
But many believe this is a certain Democratic year and they may be right. In this case, there is also only one candidate whose record and previously professed beliefs make her qualified. I never would have believed that I would ever consider Hilary Clinton in this light, but her competition appears totally unqualified to lead the country in this war. Their election would invite more terrorist aggression, most likely domestically. But Mrs. Clinton’s current plan to withdraw from Iraq and accept defeat from the Islamic fanatics also disqualifies her. One has to only hope that once she gets her parties’ nomination she will flip again and do whatever is necessary as the leader of the free world to defend us all, as I McCain is committed to do.
Have a nice late winter and spring.
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or toll free 800-663-3419 .
  One Man's Opinions - Winter 2007-2008
  On Turning Seventy. Next week my family celebrates a brace of birthdays. Although I don’t think, act, look, or feel seventy, the calendar does not lie. I was born November 15, 1937 so the big 70 is staring me right smack in the face. The cofounder of my family and mother of my six children arrived on the same date the following year, 1938. Twenty one years later our fourth daughter arrived, on November 15, 1959. Yes, I said our fourth! We married very young, right out of high school, and had six kids before we were 26 and 25 respectively. Way too young you say; you are right, I say! There are six other family birthdays within five days of the 15th. It has been, and is, a wonderful family, now with 27 descendants, and the biggest blessing of my life. I thank God for them daily. The big party is Nov. 16.
Like many, I reminisce at birthday time. I think back over my life and the many lessons I’ve learned. I tell my prospective investment management clients the biggest thing we professional managers bring to the table is “we usually know what NOT to do!” I guarantee (a word we are not supposed to use in the investment world) we will make many mistakes in managing portfolios. This is the nature of investing. But I also guarantee there are SOME mistakes we will NOT make again! We learned our lessons the hard way and many were very painful. We do not go there any more.
It is the nature of life to have these lessons. I try to remember we are given one human body; we are given lessons to learn; lessons will be repeated until learned; and lessons continue throughout life! Keeping these thoughts firmly in mind, life is easier.
Almost fifty years ago, after two years as a radio disc jockey, I started my career in business as an industrial chemical salesman. My boss and the owner of the company quickly taught me the four basics of doing business. 1.) There is no free lunch; 2.) It must be a good deal for the other person or it is not a good deal for me; 3.) We do not want all the business we can get; and 4.) I must let the other person have my way! The latter principle sounds manipulative at first, but if one gives it more thought it becomes the basis of what has come to be called the “problem solving” school of salesmanship. When I started my sales career in 1958 nearly everyone used the “product” approach, of which IBM was the biggest and most successful example. “We have these wonderful machines and they will do these wonderful things. I’ll show them to you and you can buy one!” Although IBM was successful, other type prospects stayed away in droves.
The fourth principle is also the foundation of my still relatively young profession of Financial Planning, of which I have been privileged to be a pioneer. If I have answers to my clients’ problems and make them aware of them, then closing a sale is virtually automatic from both sides, assuming they have the money. My challenge is to make them become aware of the problems and then supply them with appropriate answers.
Let us return to basic number one, there is no free lunch. Nearly everyone has heard of this early on in life, laughed about it, and agreed with it. But I believe it is far deeper and more consequential than it first appears. And it is especially applicable to the investment world. And it continually amazes me how often highly paid people forget it!
For example, several weeks ago Merrill Lynch (my first employer in the investment world) announced an $8.4 billion write down in their most recent quarter. Their CEO (who made $60 million last year) lost his job over it. So did his counterpart at Citigroup, which announced additional write offs of $8-11 billion due to the debacle.
The losses occurred because they and their fellow executives (along with many other large Wall Street firms) became enamored with collateralized debt obligations (CDOs) where a large number of mortgages (or other debt obligations) are gathered into one entity, split into parts (called “tranches”) with varying degrees of risk, and sold to institutions and public investors. The theory was that those investors who were ready, willing, and able to assume the most risk (i.e. hedge funds) would buy the most risky and highest yielding part of the CDO, while those most risk adverse (i.e. pension funds and 85 year old Aunt Maude) would buy the least risky lower yielding portion of the deal, which were actually rated AAA by the fixed income rating agencies. Along the way Merrill and its competitors took billions of dollars in fees for their services in setting up and marketing these deals. Merrill actually paid $8 million per year to a 33 year old “whiz kid” to head up their CDO activities. It sure looked like a free lunch!
As most of us have learned, there is no such thing. But Wall Street keeps looking! Witness the Mainstay Capital scandal of 1997, headed by Nobel Prize winning mathematicians and economists, which nearly bankrupted the Street; the Savings and Loan debacle of the late 1980s; the high tech/high growth “it’s different this time” craze of the late 1990s; and many more. In the current case CDOs turned out to be poorly valued compared to the real aftermarket, which was also very badly misjudged as to its depth. The supposedly “best minds in the business,” did not know their own risks!
To make my point, the stock and bond market turmoil in recent months and related problems were to a large extent foreseeable. It you loan money to a family to buy a house and they do not have enough income to afford the house, is it any surprise they get in trouble? Do you solve this problem by gathering up their mortgage with thousands of others, put them in a pool, and sell pieces of it to a variety of mostly institutional investors? Or do you compound the problem by doing so? Obviously you make it far worse, and that is what has been going on.
The relevant question, of course, is what does this have to do with you and me? Will these troubles bring down many of the big players and cause a recession (or depression)? The answer is NO! Disruptions and troubles such as we are already seeing yes, with a lot of casualties among those in the executive ranks who are responsible. Some publicly owned corporations will go bankrupt, and quite a few hedge funds will shut their doors. That should be the extent of it. Our capitalistic system thrives on “creative destruction.” In the long run the economy will be healthier.
Let me quickly comment on the other two basics I learned at age 20. If a particular deal (or product or service) is not good for both sides, the client or customer as well as the person offering it, then it is not a good deal for either. The customer will be disappointed (or cheated) and the supplier will have an unhappy irritated (and irritating) person to deal with. Not to mention a damaged reputation, at least with that person and their acquaintances. No referrals will evolve from this deal!
The fourth basic, we do not want all the business we can get, is so true! In every business or profession we run into clients or customers or patients who just do not fit! Either they don’t fit us personally, emotionally, or psychologically, or we do not fit them. Or perhaps our product or service is just not their cup of tea. “Closing” a sale when the fit is just not there can be disastrous. I learned this truth the hard way!
The U.S. economy is still strong, far stronger than acknowledged by the media, who seem to either be totally ignorant of the facts, or so totally biased against the Bush administration as to be unwilling to state the truth. But strong it is, except for large investment and commercial banks and those involved in home building.
Long term readers will recall three and four years ago I was calling the housing boom a “bubble,” which of course it turned out to be! I do not believe we have seen the bottom yet. Homebuilders are in survival mode; lenders are either in trouble or cautious; realtors are constantly revising their calls of “reaching the bottom;” and sellers are both numerous and unrealistic. For the most part we have not seen the “clear out” yet, where speculators and others in trouble panic and sell at any price, just to get out from under the debt involved. We have seen some of this in Miami and some other highly overpriced areas, but it needs to spread to all the markets where prices more than doubled from 2002-2005. I expect a clear out in the next year.
Oil prices continue to spiral up, driven by speculators who buy and sell on a hour to hour basis. Turmoil in the Middle East is the explanation we hear for the recent push up to nearly $100 per barrel. When was the last time we did NOT have turmoil in the Middle East? I have been wrong in predicting the price would drop back, predictions which were based on fundamentals and history, not emotions. Emotions rule the day now and I have no idea where the surge might stop. After the fact we hear about demand from China and India, war with Iran, bad (or good) news in Iraq, global warming, and “carbon dioxide” footprints, whatever they are. Reality is there are a many people with a great deal of money in control of the price of oil. For now they are buyers. When they sell prices will drop 50-67% from the high. But where will be the high? No one knows.
Gasoline prices are higher too, reflecting the higher raw material costs. While acknowledging some drivers are badly hurt by $3+ gas, such as a commuting single mom with a gang of kids at home to shuttle around after work, I believe the average American family can afford these prices with little impact. Driving to Florida for the winter later this month will cost me around $150 instead of the $110 it cost to return last spring. I don’t like it, but I know when the Amex card is due next month I can handle it. Most Americans are in a similar mode. Gasoline is about one third the cost of driving now, up from one fourth a couple of years ago. An annoyance, yes, a crisis, no!
I am optimistic about the stock market near term. I believe the next few months will see higher stock values of 7-10%. Looking into 2008, we should see slowing in economic growth, still historically strong. A recession is unlikely next year. 2009 and beyond depends mostly on U.S. presidential and congressional elections. If we have a Democrat in the White House with a Democratic Congress, taxes will be raised and the economy will be harmed. A recession, perhaps a severe one, will occur. It will be bad for business. Can the country survive it? Of course! Look back to the Carter years in 1970s. Our capitalistic system, imperfect and troublesome as it is, harnesses the best of the human spirit and allows appropriate rewards. Long term we are OK! Keep that in mind.
Have a Happy Holiday Season
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or toll free 800-663-3419 .
  One Man's Opinions - Fall 2007
  The 2007 buying opportunity is here! Stock prices have backed off ten percent very quickly from recent record highs. For almost six months we have been playing defense in the market, taking profits and building cash in our accounts. Last Monday we shifted to an aggressive buy model. We are investing cash balances in managed accounts into select stocks which we have identified as attractive for the rest of 2007. We urge all our readers to go to a 100% fully invested position in your equity allocations as quickly as you can. We expect new record highs in stocks by year end.
The U.S. economy is booming, in spite of what the politicians and the media are saying. We are at full employment, corporate earnings are at record highs, and interest rates are still historically low. Price to earnings ratios are still reasonable, and many well known blue chips, such as GE, have not yet participated significantly in the bull market. Private equity firms continue to buy out public firms at good premiums to what the stock markets think they are worth. There are very good values to be had.
The financial media, both print and electronic, continue to focus on problems in the sub-prime mortgage markets where 7% are in default. While these problems are heavily impacting certain Wall Street firms, especially Bear Stearns, these firms have put themselves in jeopardy by taking on extra heavy risks. I would point out that the sub-prime mortgage market is only 15% of the entire U.S. mortgage market. While a 7% default rate in this area is certainly serious, especially to certain hedge funds which borrowed heavily to buy into these high risk and high yielding loans, in the larger picture this is not a big deal. The overall default rate for ALL home mortgages is just 1.05%, a historic low. Most of Wall Street is enjoying all time record earnings and will hardly be ruffled by what happens in risky sub-prime mortgages. The question we need ask is “what did these lenders expect to happen when they put such shaky borrowers into adjustable rate mortgages?” Trouble was inevitable!
Housing, on the other hand and as we predicted here several times in 2005 and 2006, is in big trouble. Home prices are coming down as speculators and builders tire of carrying homes which are no longer worth what they owe on them. I predict this selling pressure will continue for some time. It is harder for marginal buyers to get mortgages on easy terms, but most homebuyers should be able to do on reasonable terms. Rates are still historically low. The final shakeout is still some months ahead, in my opinion, but it is probably time to begin to look for the bargains that are sure to pop up, especially in regions where prices doubled in 2003-05.
The Federal Reserve Board notes that “readings on core inflation have improved modestly in recent months.” But they qualified that statement with “a sustained moderation in inflationary pressures has yet to be convincingly demonstrated.” As expressed in the last newsletter, my hunch is even stronger that the next likely movement by the Fed on short term interest rates is likely to be up rather than down.
U.S. Gross Domestic Product for 2007 now looks to gain 3.5% rather than the earlier forecast 2.5%. Inventories are being rebuilt; hours worked and payrolls are up; capital utilization is increasing. Our mature economy is still growing steadily. Corporate profits are still strong, as are individual incomes. The near term outlook is quite good.
The federal deficit for 2007 continues to decline, despite the costs of the Iraqi war. It is estimated now at $140 billion vs. $412 billion in 2004. President Bush’s tax cuts of 2002 continue to stimulate record tax collections. On the other hand, it is highly likely that the Democrats will raise taxes back to 2001 rates by letting the 2002 cuts expire in 2010. This action, or rather lack of action to extend these highly successful cuts, is certain to dampen the economy going forward from there. Our tax rates seem to be in the right place to maximize gross revenues without blocking the zeal of American business and consumers. They should be continued, but I doubt they will be. This will result in a less productive economy on a 5-10 year time horizon. Modern Democrats simply do not understand, as President John Kennedy did, that lower rates means MORE tax revenue to the government!
The fixed income market has been more volatile so far this year. The yield on10 year U.S. Government bonds got as high as 5.33% recently but has now backed up to as low as 4.7%. We are staying short in bonds so as to not get caught in a price decline. As a rule we would not go further than three years out, and prefer to keep our average at one year or less. Seven day maturity municipals, guaranteed by major banks, are still yielding 3.6% tax free. This looks like a safe haven to us!
Two years ago when Hurricane Katrina hit New Orleans I was very suspicious at the instant blame for the catastrophe heaped on President Bush, FEMA, and the U.S. Government in general. Granted FEMA performed poorly (are we sure we want this same government to take over our health care system??), and Bush should have visited immediately by helicopter. But FEMA was held out of the city by the Louisiana governor for several days, and Mayor Ray Nagin was a “no show” so far as any local leadership was concerned. (And then they reelected him!) Since Huey Long and his gang in the 1930s, Louisiana has offered its citizens very poor, often corrupt, leadership. An article in the August issue of National Geographic magazine of all places, hardly a right wing publication, tells the true story of how the New Orleans levees came to fail.
Let me quote the article extensively. “Locals wanted the cheapest possible protection system. But it wasn’t cheap, it was just badly built. The floodwalls along the city’s major drainage canals were a classic example of the shortcomings. The (Army) corps (of Engineering) did not want to build most of them. It planned to block strong surge with giant barriers across the eastern inlets of Lake Pontchartrain, beef up the levees along the southern lakeshore, and erect massive floodgates to keep high water out of the canals.
ENVIRONMENTAL GROUPS (caps mine), concerned about impacts on the lake and its wetlands, blocked this plan in court. The corps switched to a system that would rely on higher lake levees and floodgates.” STATE AND LOCAL AUTHORITIES (caps mine) balked at the cost of the gates, one third of which were their responsibility.
“Instead city leaders pushed for floodwalls along the canals. The two groups remained at loggerheads until 1992, when Congress passed a water resources act that forced the corps to do it the CITY”S WAY! (Caps mine) Foundation problems plagued the levees and floodwalls from day one. Underlying steel panels driven into the mucky ground to form a barrier shifted and pushed the concrete walls out of line.” “Katrina exposed these weak underpinnings. When the storm driven waters got four feet from the top, these walls deflected backward, opening a crack at their base. Water poured in, found a thin layer of clay as slick as jelly, and forced nearly 450 feet of levee into Orleans parish. Similar blowouts occurred on the London Ave. canal. FLOODWALL FAILURE LET IN NEARLY EIGHTY PERCENT OF THE WATER THAT FLOODED THE CENTRAL PART OF THE CITY! (Caps mine) Just ten million dollars more spent on sampling and foundation investigation and the system would not have failed! It did not come within a country mile of the design load!” said J. David Rogers, head of a team from the University of California which investigated the breaches. This responsibility lies with local authorities. The majority of federal funds granted to the city to handle these responsibilities were diverted away from the levee system to other more politically palatable spending.
A final quote from the Army Corps of Engineers: “Basically, you had political influence on significant engineering decisions. We went from fighting surge at the Rigolets and Chef Menteur passes (inlets to the Gulf) to fighting surge at the lakefront, to fighting surge in the heart of a major American city. Failure at the (inlets) would have had far less consequences than failure on 17th St.” The true responsibility therefore lies with local politicians and the United States Congress. Not George Bush. Not FEMA.
We hope this story is interesting and informative to our readers. If this makes us something of a “blogger” so be it. But it affirms my suspicions that the officials in Louisiana, not the federal bureaucracy bear the ultimate responsibility for the “greatest natural disaster” in United States history. I will not opine on the ongoing attempt to rebuild the entire city.
We hope all our readers have a nice Fall season and will enjoy the opportunity to pick up some well priced bargains in the stock market.
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or toll free 800-663-3419 .
  One Man's Opinions - Summer 2007
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Long time readers will remember that I cover two topics at least once a year; currency erosion and the resulting loss of purchasing power; and the irrelevance of the financial media, especially the electronic media. Here I cover both.
The imminent rise in the cost of US first class stamps from 39 to 41 cents is a way I measure the erosion of the US dollar. When I started this business 32 years ago first class stamps were 13 cents. In the intervening years the cost has tripled.
This is a good example of the escalating costs of living that we all need to fear most! NOT the loss of principal in the stock market, which was the overriding fear of our parents and grandparents who endured the Great Depression. History shows however, that even they had their fears in the wrong place. Since I started working full time in 1957 and bought my first home, “every year everything I bought cost me more!” This has been true for the entire history of the country, some 221 years, except for the years after the Civil War and the Great Depression.
I respect that most people have an emotional impulse to protect their capital. They learned this risk at their parents’ knees. But as a professional financial advisor I must point out YOU SHOULD BE TEN TIMES MORE AFRAID OF OUTLIVING YOUR MONEY THAN YOU ARE OF LOSING IT! That is the real risk!
The great tragedy of our current crop of investors is that they (you?) are fighting the wrong dragon, principal loss, rather than the right one, erosion of your purchasing power!
Principal loss in equities over a thirty year period simply does not and has not existed in the United States. I am 69 now. Of course I know I am NOT likely to last another 30 years. BUT I must PLAN for that possibility, for myself and for the clients and audiences who look to me for financial guidance. In my lifetime average life expectancies have gone from the early sixties to the late eighties. Each day I take medicines to head off heart trouble, which killed my dad at 67 and my younger brother at 58. These medicines did not exist when they died. So, with further medical progress maybe I could make it to 99! So I must remember that the one great risk I face is not losing some of my money, but outliving it! Keep in mind, with rare exceptions, “every year everything I buy costs more!”
Now let’s look at the “surprising” strength of the economy, here in the USA and all around the world. The “surprised” are the financial media and those who let them lead them by the nose. A quote from a couple of months ago (from the Wall Street Journal for goodness sake, they are supposed to be the good guys!) shows this bias;
“the surprisingly upbeat state of the world’s major economies, which continue to perk along despite the damage done by high energy prices and (in the US) sagging housing prices.” The “slowdown” almost universally reported in the financial media remains mostly a figment of their imagination. Recently they ballyhooed the fact that the US economy ONLY grew 1.3% in the first quarter. This admittedly modest number is still proof that the economy is continuing its liquidity driven growth and, along with the inflation referenced above, cascades over us in torrents.
The U.S. economy, and that of our major trading partners, show clearly that the doomsayers in the media are, once again, wrong in their analysis and are feeding fear of the future, which is an investors worst enemy. (see above)
The bulk of American economic and financial journalism is done by people with no background at all in economics or finance. Unrestrained by facts or proof to the contrary, they take any real or imagined cloud on the horizon and extrapolate it into, not a rainstorm, but a Category Five hurricane! They tend to randomly take a single economic negative and make the case that THIS will be the thing that tips a vulnerable economy over into catastrophe!
The fact is that they are repeatedly proven wrong by the constantly growing breadth, depth, flexibility and resiliency of our economy, which is such that it can shake off virtually anything!
Let us look at these myths and facts about our U.S. economy:
1) Myth, that the U.S. economy, which drives the rest of the world, is vulnerable. The likelihood that our entire economy will spin out of control is next to none. The fact is that our economy is so strong that is can absorb or shake off virtually anything imaginable.
2) Fact. Oil is far less important to the economy than it has been in our lifetimes. Oil is approximately half as important as in 1981 when the price peaked at a record $100 per barrel in 2007 dollars. Last summer’s price at $78 for a few days was far below the record, no matter what journalists say or believe.
3) Myth, that federal spending is causing increasing huge deficits. Fact. The federal deficit has DECLINED by $165 billion in the last two years as tax revenues, stimulated by the tax cuts of 2002, have surged.
4) Fact. The pundit/political Beltway class hates Bush and cannot bear to report or comment on anything which might reflect credit on him. Why this is, I will leave to sociologists and psychologists, but for some reason Bush threatens these people and their beliefs. One can quarrel with how his administration has handled certain things, like the aftermath of the war in Iraq. But reality is that our commander in chief is a skilled administrator, our first MBA president (from Harvard no less). He is a devout Christian, prays to God for guidance daily, advocates proven pro-growth, tax cutting, and free trade policies, which have been the source of America’s unparalleled economic achievements of the past quarter century. You do not read about this in the New York Times.
So be not surprised. The U.S. economy and its trading partners is far stronger than is being reported. Growth, job creation, and growth of real wages remain very strong. On the other hand, inflation continues higher than our government tells us and is, in fact, too high. Don’t be shocked if the next move in interest rates by the Federal Reserve is up, not down
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or toll free 800-663-3419 .
___________________Susan Shafer________________________
The article below by Susan Shafer, a life long social worker, is from the May issue of “Boomer” an online magazine. It points out an issue often overlooked by many families. It has happened twice recently in my own family, once to the 47 year old father of two of my grandkids who died suddenly of a heart attack, and again to his son, my 21 year old grandson, who was killed 10 months later in a motorcycle accident. Neither one had a valid will. The attorneys are still trying to sort everything out in both estates.
“Last March, my 89 year old father suffered a massive stroke. He was found on the floor in the morning by my 94 year old mother. At that moment, not only their lives, but the lives and families of my brother and I, some of their neighbors, dad's 97 year old great aunt, for whom he did bills and taxes, and other assorted friends and relatives, were changed forever.
A Will is very important, but only in the event that you die. A Living Will is important, but only if you're dying. The majority of old people do not die instantly; they suffer strokes, dementia, falls, broken bones, cancer, and other slow- moving, quality of life changes, that may topple their well constructed financial and health care plans. And even my parents, smart as they are, did not plan thoroughly. They had a "plan" for how it would go. Surprise! It didn't go that way.
As a single, 60 year old woman with a grown son, I am not exactly caught between caring for my own child and my parents. What I am caught between are the demands of working full time, case managing my mother's life and my father's death, trying to not ruin my relationship with my brother as we divvy up the tasks, figuring out whom to visit in between mom's several hospitalizations, and last but not least, my attempts to have a life.
The most important advice I can give anyone who's facing similar circumstances, and I'm finding out every day that so many people have faced, or are facing, similar circumstances, is….see an elder lawyer. Don't wait, don't try not to hurt your parents' feelings, don't be swept up in their need for "control, dignity, etc". Stand for their dignity as their health may decline, stand for family unity, stand for knowing the facts before you take the uniformed advice of friends who may have had a similar experience 5 years ago. Laws change, each person's story is unique, and you need to know what's out there and what's allowed. Now!”
  One Man's Opinions - Spring 2007
  One of my favorite financial writers, Nick Murray, has a column this month, entitled “You’re Not Bullish Enough!” It is subtitled “You See Too Much News and Not Enough Truth.” As a financial news junkie the latter struck home with me.
Nick opines that all theories about timing the stock market or beating it inevitably have long periods in which they do not work. The only value proposition with a chance of being consistently true is behavioral! I have found this true in my own practice. You can outperform most of your neighbors in real life provided you allow me, or some other financial advisor, to teach or persuade you to avoid making the great behavioral mistakes (like panicking and selling out at the end of a major decline or “betting the ranch” on one stock or industry) which a majority of investors make. I have written several times here recently warning readers of these mistakes. See; “Eight Great Mistakes Investors Make,” and “Seven Mistakes Made by Seniors in Their Financial Affairs.” They can be found included with three years of these newsletters at
Nick suggests in his article that I, along with most other financial advisors, am not bullish enough about the U.S. equity markets long term; that I am absorbing too much news and not enough truth. I will confess to a tendency toward this, but I think a review of my newsletters and my shipboard lectures shows that I normally keep my eye on the truly outstanding long term outlook for equity investing in the USA.
Look at the miracles of progress and of wealth building which have gone on just in my 45 years in this business. Among them are the triumph of capitalism and democracy; medical miracles like wiping out tuberculosis and polio; and my daily blood pressure and cholesterol lowering medicines which allow me to live longer and more actively than my parents did just 25 years ago. Consider too, the exponential technological growth which allows instant worldwide written and verbal communications such as this newsletter at virtually no cost.
These miracles are accelerating, not just continuing. The PC I used to compose this newsletter contains more computing power than was available for the entirety of the Apollo 13 mission to the moon in 1970. I paid $999 for it 18 months ago. When replaced later this year the new one will have more than double the power and likely sell for less than $999! My DSL fast internet access now costs just $22 per month versus several hundred ten years ago for a T-one line.
Speaking of technology, as Murray points out in his article, journalists often cite the huge number or engineers and other technologists that China and India are turning out, as if this spells doom for America. Journalists typically get their business and economic forecasts wrong by focusing on the wrong point. The key to cutting edge technological superiority is never technology itself, but science. New technology flows downstream from science and no country does science even remotely as well as we do in the USA. Our primary and secondary educational systems may be a mess, but at the university level there is no one to touch us. Murray further points out the number of recent Nobel laureates in the sciences who were NOT Americans was………. zero!
Finally, the deepest, strongest, most flexible, most entrepreneurial, most transparent economy in the history of mankind, the United States economy, will continue to allow its citizens to amass net worth on an hitherto unimaginable scale. The Federal Reserve Board recently showed U.S. households had $27.5 trillion of net financial assets. Not only more than any other country; but more than all the rest of the world combined!! This number is up $1.5 trillion in just twelve months. This gain alone is more than the total of all other countries in the world, except Japan, the U.K., Germany and France. Remember this the next time the press trumpets our “negative savings rate,” which does NOT include gains in capital. Nor does it include our homes as assets, although mortgages on these homes are included as liabilities. A more accurate definition of savings would not only make our households look much thriftier, but also much richer.
The point is, in the final analysis the stock market as a whole will inevitably reflect the progress of its components, all the publicly held companies. Within these will be winners and losers of course. It is the nature of capitalism to weed out the weak sisters and recognize and reward the companies who are succeeding.
For example, what do these companies have in common? American Cotton Oil, American Sugar, American Tobacco, Chicago Gas, Drilling and Cattle Feeding, General Electric, Laclede Gas, National Lead, North American, Tennessee Coal and Iron, U.S. Leather, and U.S. Robber have in common? Answer? They are the original components of the Dow Jones Industrial Average when established in 1896. Most no longer exist. GE, of course, is still going strong and is the only one still part of the average. Chicago Gas became part of Peoples Gas in 1897; Laclede, removed in 1899, is still in business; American Cotton is an ancestor of Best Foods, American Sugar of Amstar; National Lead, removed in 1916, became NL Industries; Tennessee Coal and Iron was absorbed by U.S. Steel; and U.S. Rubber became a part of Michelin after becoming known as Uniroyal. All the rest are gone! So it goes with capitalism. Other than completely undermining any possible way to make historical comparisons of the DJIA average, these facts dramatically show the dynamic nature of American capitalism. We have no peers in this area among other countries.
I do not believe most market “seers” like myself have a time horizon longer than three to five years. That’s about as far ahead as we think we can see. On the other hand, the philosophies discussed above suggest that, on a ten to twenty or thirty year period, U.S. equities should continue to perform quite well. One must, however, stay the course.
Turning to the current outlook, the economy remains strong, especially so at this late state of an economic upswing. As 2007 progresses a slowing of growth is to be expected, but a good year appears in order. The stock market should reflect this. Led by larger capitalization stocks, we expect an 8-10% growth in the overall market. The Dow Jones Industrials are already leading the way, with new highs day after day recently.
The only negative I have with this scenario is that it is the consensus of nearly every market commentator. I am normally a value contrarian. It is rare for me not to be so. But this year I join the majority in my expectations. Have a good Spring.
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or toll free 800-663-3419 .
  One Man's Opinions - Winter 2006-2007
  November 15th marks the 69th anniversary of my arrival on this earth. I am having a tough time with this one, just around the corner from 70. I can no longer claim to be just a “senior citizen.” I am finally, in my own mind, now truly “old!” Many of my readers are some distance past this milestone and they will be laughing at this I am sure. No doubt this “old” feeling has something to do with the very long recovery from my knee replacements some 16 months ago. I have had severe complications. But more than that, it seems that I have “been there, done that” a lot. I suppose these thoughts will pass, once the birthday has come and gone.
I had planned to start this edition of my news letter proclaimed “gridlock” in Washington D.C. for the coming two years, but the press beat me to it. But I suspect this will be the case. And I am not sure it will be a bad thing. As a life long Republican, I have been very disappointed in my party’s performance in recent years; particularly so in their massive overspending during the Bush administration and in the President’s failure to veto any of this. I voted for my party, but was not surprised to see it go down in defeat. It will be interesting to see where Congress goes under its new leadership for the next two years.
The stock market has appeared to anticipate and digest all these changes. The market is nearing our targets for 2006 and the outlook for early 2007 looks bright due to even stronger than expected corporate earnings. I am cautious about the economy for later next year, and suggest more defensive stock positions in portfolios for coming months. Take profits in more volatile situations and even accumulate some cash looking for a moderate market pullback in late winter or early spring.
Long time readers are aware of my negative opinions of the financial press. It upsets me that the press now is referring to “New Market Highs.” This is only true of the Dow Jones Industrial Averages. What is not true is the authenticity of that average. It consists of just thirty large stocks, mostly industrials, what are shuffled every three years or so, with older struggling stocks replaced with more healthy ones. In one case back in 1938, the Dow Jones mavens dropped a disappointing stock called International Business Machines. Had they left it in this average would now be over 30,000. Incidentally, they put it IBM back in the late 1980s, just in time for the company to lose its way and its momentum. The Dow simply does not reflect what the overall market is doing!
The broader market averages, such as the Standard and Poors, and the Russell 3000, are still 25% below their all time highs. A good case can be made for further stock gains after the current rally has run its course and the market digests its gains and looks ahead again in late winter or in the spring.
Interest rates have confounded me, as well as most observers, this year. I predicted a rise to as high as 5.5% on ten year U.S. Government bonds this year. They got as high as 5.2% at one point and declined to 4.625% since then. History says they should go higher in 2007. How much? I don’t know! Overseas demand, especially from China and Japan, seems to be keeping rates low.
So far as what financial strategies investors should employ given the new political realities, I see little change over the next two years. After that all bets are off! I have never believed the estate tax would be gone after 2010. More so now.
I suspect we will see a revision and a continuation of the estate tax for estates above three or four million dollars. The total abolishment in 2010 will probably not happen. The 15% income tax on dividend income is in jeopardy after 2008. I do not believe dividends should be taxed at all, or that they should be deductible against corporate income. But this is highly unlikely with a Democrat Congress.
The 15% capital gains rate may also be raised. I do not think there should be any capital gains tax at all, or that gains should at least be indexed for inflation.
Many corporate tax breaks, especially for the oil and gas industry, will probably be repealed. They are hard to justify with $60 oil. Other corporate breaks will also be attacked, but President Bush will defend the reasonable ones with a veto threat. There is a real possibility of an economic slowdown being caused by Congressional rhetoric and threats. The tax cuts of 2003 unleashed an economic boom which we are still enjoying. But a slowdown is already in force, led by housing, and consumer confidence could be jeopardized by liberals in Congress.
Oil prices near term should continue to come down, but OPEC cutbacks will slow this. The highest price I can justify in my own mind is in the mid-forty dollar range. But unless a lot of OPEC members cheat, the price will probably hold higher. Gasoline prices should decline further this winter, but bounce back up in the spring. I expect to pay less than $2 per gallon soon. I paid $2.16 yesterday here in Indianapolis.
Expect to see a long overdue raise in the minimum wage next years. Except for teenagers and part time workers, nearly all full time workers are actually paid higher wages now.
Many of my readers are also veteran cruisers and are always interested in my travels with Princess. This year I only did two trips, down from five last year. But they totaled 41 days at sea. In August I did a two week Mediterranean cruise from Southampton, England with mostly British families on this one. I picked up my 126th country, Corsica. In September and October, we took the new Pacific Princess from Bangkok to Cape Town, South Africa, a 27 day 10,000 mile trip. Most of the 593 passengers were Americans and my lectures were very well attended. I made many friends and picked up another two countries, Mauritius and Reunion Island. I am aware both Corsica and Reunion are departments of France, but they are listed as separate countries by the Century Club of Santa Monica, official keepers of the list of countries in the world.
I hope you have a great holiday season and a prosperous and happy 2007!
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or toll free 800-663-3419 .
  One Man's Opinions - Spring 2006
  As this is written, the stock market has rallied nicely so far in 2006. We expect high single digit returns in stocks this year and higher long term interest rates. Short term rates are near their highs and should decline later in the year. The economy is the strongest in 43 years. The Bush tax cuts are obviously working and are producing record federal tax revenues, as did the Reagan tax cuts in the 80s. Below are two articles I have recently written. I hope you enjoy them.
In 43.7 years as a financial advisor I have noted a number of errors often made by we “senior citizens.” I list them in the order I most frequently encounter them.
1.) Procrastination. Most people fail to organize their financial affairs before it is too late to take advantage of available preferred options. This applies to retirement and estate planning, as well as insuring r isks and determining investment options and allocations. If you have not already done these, today is a good day to begin. If you have, then today is the day to review them in light of any financial, economic, tax, legal and/or family changes in your life.
2.) Making financial decisions on the basis of misinformation, or unreliable or inaccurate information. A large part this comes from listening to or seeking advice from inappropriate friends and relatives. The American public school system does a very poor job educating students in financial matters. Most high school graduates do not know even how to balance a checkbook. People often turn to equally ignorant others who have no clue what they are talking about. A good example of this is Bill O’Reilly of Fox News, with an MBA from Harvard, who recently demonstrated his complete ignorance as to how international oil and gas markets work. His mind is made up; he thinks the huge oil companies can manipulate the price of oil and gasoline. If this allegation is true, then they sure did a lousy job from 1981 to 2003 when oil prices, adjusted for inflation, steadily declined back to 1973 levels. If ever there was a case of supply and demand working in a capitalistic system, this is it! As the result of a significant decrease in supply due to the loss of 30% of refining capacity in the 2005 Gulf hurricanes, the price of gasoline spiked sharply to well over $3 per gallon and the news was full of this “awful” situation. In six weeks the refineries got back on line and gas was $2.10. The market worked exactly as it is supposed to. Supply suddenly dropped, so the price jumped to the level necessary to restrict demand and match up with the available supply. I cut back on my driving at $3.00; I suspect most did. The capitalistic system of supply and demand worked exactly as it should.
3.) Failure to match ones goals with the correct financial instruments. I see this most in certificates of deposit where investors load up a high percentage of their net worth in these inflexible and relatively low paying taxable instruments which offer NO inflation protection. Depending on your tax bracket, there is nothing wrong with putting your emergency reserves or interim cash in CDs, but they are not particularly attractive beyond these uses. With inflation historically at three percent, a taxable four percent CD guarantees a loss in an individual account! Other risks include investment allocation and diversification, market fluctuations, and liquidity of one’s entire portfolio. Are your risks in keeping with your personality and are you comfortable taking these risks? Do you even know them?
4.) Failure to minimize costs, fees, and taxes in order to keep more of your money. In today’s financial world there are many options available to do this. Are you familiar with the following five tax efficient personal tax methods? Do you use retirement accounts and/or annuities to defer your income? Did you know you can divert taxable income to your children and grandchildren? Are you converting some investment income to tax free municipal bonds? Or are you using qualified retirement plans or oil and gas inve stments or real estate to lower taxable income? Are you reducing your tax liabilities with tax credits? Also, to lower expenses, do you use discount stock brokerage commissions and free accounts; index and exchange traded funds; money market funds; or professional money management in place of mutual funds in larger accounts? If you are withdrawing money from your retirement accounts, are you doing so in an appropriate manner considering taxes owed and the tax impact of these withdrawals on your Social Security? Lastly, do you have a Living Trust to save your heirs 4-10% in probate and other estate costs at your death?
5.) Failure to own your assets in the correct form to protect them. Living trusts, irrevocable trusts, credit protection trusts, annuities, and most retirement accounts can usually be protected from creditors. In contrast, property held jointly with children or others exposes both parties to the creditors of the other.
6.) Failing to prepare for the possibility of the need for extended health care. This is often overlooked until it is too late, either because of failing health or premiums being too expensive later in life. Close attention to this possibility in one’s fifties or sixties is appropriate. Do you know your own choices when it comes to long term care? Can you afford to self insure, and are you willing to use your existing assets and income to do so? Is any existing coverage inadequate or outdated? Do you know and have you taken the steps to protect your assets if Medicaid is an option?
7.) Failure to protect assets from unforeseen risks. These risks include health, personal and property liability, litigation, business failures, interest rates, investments, and inflation. Insurance exists to cover nearly all eventualities. Credit protection trusts and other available options also can be utilized where needed.
Awareness of a problem is the first step needed in order to correct it. I trust these cautions will be helpful to my readers in their financial affairs.
In the early fifteen hundreds, thousands of Dutch speculators drove up the price of unique and unusually colored tulip bulbs to astronomically heights. Their prices doubled overnight, then again and again and again, far exceeding any possible reasonable price. The bubble burst and prices dropped 95% or more.
In the late 1990s and early in this decade the stocks repeated this phenomenon, reaching ridiculous levels as investors (read speculators) raced to get into this “new paradigm.” They paid 100, 200, 300 t imes SALES for companies with no earnings at all and no prospect of any in the foreseeable future. The idea was to capture “market share” with this new internet concept. And they paid even more ridiculously for companies with no sales at all, just an idea! Spokespeople daily repeated the most dangerous words in Wall Street; “It’s different this time!”
I opined then that perhaps they were right, perhaps six thousand years of human behavior has changed. But, as I said then, “I doubt it, I believe human nature has NOT changed!” I publicly predicted a NASDAQ index drop from 5000 to 2000. I was overly optimistic as it slid to almost 1000, an 80% drop!
Less than five years after the (and high tech) craze cleaned out the portfolios of millions of stock speculators, American investors are doing it again, this time in real estate, especially residential real estate!
We are hearing; “they are not making any more of it;” and “people will always be retiring to Florida, California, and Arizona, or moving to the big cities, New York, Boston, Chicago, et cetera. While these statements may have a modicum of truth, they ignore the run up in prices and the basic laws of economics. Prices do not go up 20-25-30% per year forever! You soon run low on buyers who can afford to pay those sky high prices.
Fueling this craziness are the mortgage lenders. Investors cannot borrow more than 50% on stock purchases. Not so with resident ial lenders, who have gone from 10-20% down payments to zero down 100% financing! Lenders now offer “balloon mortgages” with suspended principal payments for the first three, five, or ten years. Interest only is owed for these periods. I have even heard of a few mortgages written with NOTHING DOWN and NO PAYMENTS OF ANY KIND for a year or more! Total insanity!
I believe the current boom in housing has peaked and is now beginning to unwind. Three factors are driving this; higher interest rates on mortgages; fewer qualified borrowers available at these higher rates and; higher prices in and of themselves. I expect prices to slowly retreat, then drop further and faster as much as 25-50% depending on how much they have gone up in a given area.
In the areas most affected by this craziness, the east and west coasts, Florida, the Southwest, Chicago, and other big cities, I expect selling panics. Speculators who are unable to maintain payments on mortgages which are upside down (meaning the worth of the underlining home is less than the mortgage on it) turn properties back to their lenders, who in turn dump them on the market. This forces prices dow n further, causing lenders to go bankrupt, causing more properties to be dumped on the already glutted market. All this happened in commercial and industrial real estate in the late eighties when the entire savings and loan industry went under and even the largest banks got into severe trouble. This was less than twenty years ago, and today prices have spiraled even higher for individual homes.
Readers who are considering joining this mob would be well served to step back and look at history, not only of markets, but also human nature.
Tom McAllister, CFP
Mr. McAllister is a registered investment advisor and a practicing financial planner in Carmel, IN. He may be reached at or toll free 800-663-3419 .
  One Man's Opinions - Winter 2005-6
  SEVEN DEADLY MISTAKES SENIORS MAKE AND HOW TO AVOID THEM. As I write this I am only days away from my 68th birthday, certainly, as someone once put it, “well past the sell by date!” Many, if not most of my readers are also senior citizens. I am adding this topic to my cruise lectures and thought it appropriate to also share these thoughts with my readers. The seven deadly mistakes are as follows:
1.) Procrastination. Most people fail to organize their financial affairs before it is too late to take advantage of available preferred options. This applies to retirement and estate planning, as well as insuring risks and determining investment options and allocations. If you have not already done this then today is the day to begin. If you have, then today would be a good day to begin a review of them in light of any financial, economic, tax, legal and family changes in your life.
2.) Making financial decisions on the basis of misinformation, or unreliable or inaccurate information. A large part this comes from listening to or seeking advice from inappropriate friends and relatives. The American public school system does a very poor job educating students in financial matters. Most high school graduates do not know how to balance a checkbook. People often turn to equally ignorant others who do not have a clue what they are talking about. A good example of this featuring a high profile TV commentator is discussed below.
3.) Failure to match ones goals with the correct financial instruments. I see this most with certificates of deposit where investors load up a high percentage of their portfolio in these inflexible and relatively low paying taxable instruments which offer NO inflation protection. Depending on your tax bracket, there is nothing wrong with putting your emergency reserves or interim cash in CDs, but they are not particularly attractive beyond these uses. With inflation historically at three percent a taxable four percent CD guarantees a loss in an individual account. Other risks include investment allocation and diversification, market fluctuations, and liquidity of one’s entire portfolio. Are your risks in keeping with your personality and are you comfortable taking these risks? Do you even know them?
4.) Failure to minimize costs, fees, and taxes in order to keep more of your money. In today’s financial world there are many options available to do this. Are you familiar with the following five tax efficient personal tax methods? Do you use retirement accounts and/or annuities to defer your income? Did you know you can divert taxable income to your children and grandchildren? Are you converting some investment income to tax free municipal bonds? Or are you using qualified retirement plans or oil and gas investments or real estate to lower taxable income? Are you reducing your tax liabilities with tax credits? Do you use discount stock brokerage commissions and free accounts; index and exchange traded funds; money market funds; or professional money management in place of mutual funds in larger accounts. If you are withdrawing money from your retirement accounts, are you doing so in an appropriate manner, including taxes owed and the im pact of these withdrawals on your Social Security? Lastly, do you have a Living Trust to save your heirs 4-10% in probate and other estate costs at your death?
5.) Failure to own your assets in the correct form to protect them. Living trusts, irrevocable trusts, credit protection trusts, annuities, and most retirement accounts can usually be protected from creditors. In contrast, property held jointly with children or others exposes both parties to the creditors of the other.
6.) Failing to prepare for the possibility of the need for extended health care. This is often overlooked until it is too late, either because of failing health or too high premiums later in life. Close attention to this possibility in one’s fifties or sixties is appropriate. Do you know your own choices when it comes to long term care? Can you afford to self insure, and are you willing to use your existing assets and income to do so? Is any existing coverage inadequate or outdated? Do you know and have you taken the steps to protect your assets if Medicaid is an option?
7.) Failure to protect assets from unforeseen risks. These risks include health, personal and property liability, litigation, business failures, interest rates, investments, and inflation. Insurance exists to cover nearly most eventualities. Credit protection trusts and other available options can be utilized where needed.
ECONOMIC AND MARKET OUTLOOK. The economy continues to boom, under pined by very strong corporate earnings. Even though the stock market is down slightly is has been relatively strong in recent weeks. Yes, it is back where it was eighteen months ago, but during the third quarter it “climbed a wall of worry” over hurricanes, Iraq, higher interest rates, and a variety of other ills which could have caused a tailspin. This did not happen. So the near term outlook looks fairly positive to me. Expect a stronger market into the New Year, on the order of six to seven percent. Longer term, into late 2006, things may look a little less positive. I recommend putting ready cash to work now with a view toward lightening up later next year as the 2006 picture evolves. The bond market continues to surprise as it is almost flat, with longer term rates in the low four percent range and short term rates very close to this area. This is normally a very temporary condition and usually precede s a stock market move upward. But there are no guarantees.
OIL AND GASOLINE PRICES. Bill O’Reilly of Fox News, who has an MBA from Harvard, is currently demonstrating his complete ignorance as to how the international oil and gas markets work. His mind is made up, he thinks the huge oil companies are manipulating the price of oil and gasoline! If ever there was a case of supply and demand working in a capitalistic system, this is it! As the result of a significant decrease in supply due to the loss of 30% of refining capacity in the recent hurricanes, the price of gasoline spiked sharply to well over $3 per gallon and the news was full of this “awful” situation. The refineries are now back on line and I can fill my tank today at $2.10 per gallon, but see no reference to this on the news. The point is the market worked exactly as it is supposed to. Supply suddenly dropped, the price the jumped to the level necessary to restrict demand to match the available supply. I cut back on my driving, I suspect most of you did too. The capita listic system worked exactly as it should. By the way, the price of oil itself is down over 15% from its highs and I believe it will drop another 25% from here. Gasoline prices will reflect this. There is plenty of oil around the world.
HOUSEKEEPING. The EMAIL address for McAllister Financial Planning and Tom McAllister is now . I have my own website and my own 800 line (800-663-3419). Our regular phone lines remain 317-571-1112, with fax at 317-581-1261, and cell 317-371-4311.
Have a great holiday season and a Happy New Year.
Tom McAllister, CFP
  One Man's Opinions - Labor Day 2004 - Sept 6th
  In my newsletter a few weeks ago I opined that the U.S. economy is booming! And, in spite of what we read and hear from the media Sen. Kerry and his minions, it is, at least very strong! I wish to share some facts with you, my readers.
Item: The economy “only” grew at an annualized pace of 2.8% in the second quarter. Fact: This is very close to the “ideal sustainable rate” of 3% which most economists say is the rate at which our economy can safely grow without inflationary pressure. It did very well in the last quarter in spite of runaway oil prices which were up 35% for the year last month and are now headed back down.
Item: The economy is in bad trouble due to mismanagement by the Bush Administration, which lost 2.5 million jobs since it took office. Fact: There have been substantial net new jobs, 1.9 million, created by the economy in the past 3.5 years. The U.S. Bureau of Labor Statistics survey being quoted by the media and Democrats is one which polls thousands of larger businesses concerning their payrolls, and extrapolates national numbers from that data. The job loss figures represent mostly manufacturing jobs, and have a net loss of 1 million since 2000, not 2.5million, the number at the bottom of the recent recession. It is generally known that larger businesses have been “cutting fat” for over twenty years, especially in manufacturing. The majority of the jobs “lost” by these activities are the results of technology, as in computerization, and higher productivity, and some have been “outsourced.” But there is a second, more accurate, B. of L. monthly sample of thousands of households determining who is working and who is not. It shows a net creation of 1.9 million jobs since the end of 2000. According to the first survey, jobs like mine, which I have held for thirty five years, do not exist. When I left Merrill Lynch in 1969, I ceased to exist for purposes of that survey. For example, the majority of we Certified Financial Planners work for small firms, or are self employed. Our profession, 43,000 of us, has grown up since 1969, but only a handful of us are counted in the first Bureau of Labor survey.
Item: Senator Kerry has repeatedly assured us that he will raise taxes, but “only on the rich,” those earning over $200,000 per year. Mr. Kerry has also stated that he will “not privatize nor cut benefits in Social Security.” Fact: There are only three possible solutions to the crisis facing the Social Security program. They are; cut benefits or increase the age at which benefits start; privatize individual accounts, or; raise Social Security taxes. Since Sen. Kerry has taken the first two options off the table, this leaves only the last option, raising taxes. Guess which segment of our working people pay SSI taxes? All of them! These taxes apply from the VERY FIRST dollar up to $85,000 of earnings. Thus, Mr. Kerry misleads us, and the media are not challenging him. He would raise Social Security taxes by up to 50% on EVERY dollar earned up to $85,000 (and going higher) of everyone’s wages and raise them even more on all those earning over $200,000! So much for not raising taxes, except on “the rich.”
For the record, I favor raising the age at which one can begin receiving maximum benefits from Social Security. When the program was initiated in 1937 the average life span of Americans was 62. Today it is near 80. Thus, the majority of workers then were not likely to receive benefits and those who did, as a group, were not going to collect for very long. Today participants can begin collecting at age 65 and a fraction, a huge burden on the program. We have in place a system which is raising the full benefit age to 66 (for those born after 1942). This system could easily be extended to continue to raise the age for maximum benefits for each year of birth after 1942 by two months. This is approximately the same rate as life expectancy is rising. I also favor privatization, as do nearly all financial professionals.
Item: The Census Bureau also reported that 12.5% of American citizens were living in poverty last year. This number was immediately seized by the media as “proof” that the Bush economic program is failing those least able to handle it. Fact #1: This number is normal in an economic recovery (it peaked at 15.1% in 1993, and 15.2% in 1983) Fact #2: This actual numbers are misleading as only cash income is counted. It is exactly this segment of our population which gets the Earned Income Credit (not counted), subsidized housing (not counted), Medicare and Medicaid (not counted) health care, food stamps and welfare payments (not counted), and a wide variety of other uncounted Federal and State programs designed to aid our poorest citizens. I have traveled widely, as most readers know. There are dozens of third world countries, a majority of whose inhabitants live in abject poverty, whose middle class would welcome the life style enjoyed by our most of our “poverty stricken” citizens. This does not mean I ignore the hundreds of thousands of mentally ill who have been turned out from state supported mental institutions into the streets, where many of them live. I believe it was criminal negligence for our state leaders to abandon these people, who supposedly are able to shift for themselves with proper medication. The problem is, of course, they often do not pick up their medications and thus do not take them. These poor souls need guidance and assistance just to exist. Too, millions of alcohol and drug addicts live on the streets. The few treatment facilities available are overwhelmed. These people can be helped, but have been abandoned by the very state governments which have been given the responsibility to care for them by the Feds.
Item: The Census Bureau also reported that there are more Americans, a record 45 million of us, without health insurance! Fact: There are also a record number of American citizens WITH health insurance, 243.3 million! The percentage of uninsured people has not changed in years. 45 million is, at best, misleading. It includes up to 14 million who are already eligible for Medicaid taxpayer paid medical care. It also includes many of “the rich” who choose to self insure their medical care. And it includes many young healthy Americans under age 34 who do not believe they need health insurance; wrongly in the opinion of this financial planner. And, lastly it includes people who are temporarily between jobs and thus between coverage.
Tom McAllister, CFP
  One Man's Opinions - Fall 2004 - August 1st
  This will be an especially lengthy letter as I have great deal to share with you. Please be patient with me.
August 1st marks the 42nd anniversary of entry into the investment business, The fifteenth is the 29th anniversary for McAllister Financial Planning. I look back at my career and thank my Maker for the great opportunities that have come my way. I have a fascinating and highly rewarding profession, with emotional and psychological rewards as well as financial. I consider myself very blessed indeed.
There have been some challenging times, such as the earlier part of this decade and 1973-74, but to have survived and prospered as I have is a blessing second only to my wonderful family and my good health. Thanks to all my clients and friends who made it possible. And thanks too, to my audiences on the cruise ships, who have made my work even more satisfying and such great fun these past ten years. In September I will take my 47th cruise, from Barcelona to Venice, and will visit my 117th country, Croatia. What a wonderful life!
The June 2004 issue of Financial Advisor magazine featured an interview with Dr. Daniel Kahneman, a tenured Psychology professor, not an economist, at Princeton University, and the 2002 Nobel Prize winner in Economics. The interview was conducted by Harold Evensky, CFP designee and a leading practitioner in the financial planning field. Dr. Kahneman affirmed many of the beliefs and opinions I have come to over the last 42 years. I wish to share some of them with you for whatever good they might be. I will quote him directly in some places, but will mostly write from my own experience based on his stimulus.
Behavioral economics, Dr. Kahnemans' specialty, is a hot topic in financial planning circles now. Those of us in practice for a long time have learned that many of the assumptions our clients bring to us are just not true! The first assumption we lose is that people will be rational in their financial affairs. Not so! We humans are very emotional about our money! These emotions often control our actions, and we do foolish things, such as buying when stock prices (and those of other financial assets, like residential real estate today) are at all time highs and then becoming discouraged and selling when our holdings “go on sale” and fall steeply in price. This is in lieu of taking advantage of lower prices to add to our holdings. I have often remarked that I am in the only business I know of where people knock down the doors to buy my merchandise when prices are at all time highs, and then sell and run away when that same merchandise is marked down 50%!
Dr. Kahneman says that the biggest and most common error committed by investors is what he calls “narrow framing;” looking at investment problems in isolation from their entire portfolio and circumstances. Professional financial advisors know that they cannot possibly design a portfolio without losers. We plan for this certainty by diversifying our clients’ portfolios in order to reduce risk. Depending on individual circumstances; age, net worth, income, period of life, and obligations, etc.; we design a portfolio which will allow the client to meet their goals. Dr. Kahneman urges investors to take a “very broad view and to begin with strategic decisions; how safe you want to be and feel; what basic allocation of your assets is comfortable for you; and the other points necessary given your own circumstances.” He urges investors to not spend much time trying to guess what a particular stock is going to do or worry about possible trends of particular economic indicators or industries. I agree completely!
Individual “mistakes” are not an unexpected consequence of owning an investment portfolio. They are inevitable! Investors, or their professional investment managers acting for them, must periodically “weed the garden,” removing investments which are not living up to expectations or which have reached unjustifiable levels. Most investors do the opposite, all too often aided by their commission paid brokers, selling their winners while holding on to their losers, not being willing to “take a loss.” Of course, the losses already exist! Recognizing them and replacing them with better opportunities is what professional investment managers get paid to do. Dr. Kahneman points out that, psychologically, this tendency makes sense since when one sells for a profit they feel good about it and “pat themselves on the shoulder.” In contrast, in selling for a loss one accepts “immediate punishment” for making a poor choice, or for having their investment advisor make a choice that went bad. It is not at all surprising that we humans would rather reward ourselves than punish ourselves. But the research, suggests that this understandable behavior is really very costly. We do much better selling our losers and hanging on to the winners. This is a good example of “normal” behavior leading to bad outcomes.
Dr. Kahneman also points out the tendency of investors to take too narrow a view which leads them to ask for the wrong advice. They ask about specific investments or strategies without giving their advisors or potential advisors the necessary details about their specific situation; the risks they are carrying and will be comfortable with, their status in life, etc. etc. This often happens to me on the cruise ships and I resist answering these type questions until I know their whole story. People should ask about their own big picture, and always consider specific decisions and their impact in the context of their overall situation and objectives.
I had a good example of this on my most recent cruise. An elderly gentleman, surely in his late 70s, came up to the podium after my lecture on Global Investing and called me a fool, suggesting that I was not properly informing my audience of “the most attractive investment” available at that time; namely buying euros and shorting the US dollar. I pointed out to him that this is speculation, not investing, and I do not publicly recommend speculations to my audiences, especially so on the ships when I normally have many senior citizens who are rightfully risk adverse. I also pointed out that his framework was too narrow, that the euro had indeed been going up for some months, but that it originally came out in 2000 at 1.17 to the dollar, dropped into the eighties for a couple of years, then began a rally. At that time the euro was 1.25, now it is 1.22 to the dollar. I don’t believe I was/am a fool.
I will raise a related point we financial planners see all too often. People have portfolios which are significantly undiversified, typically far too heavy in one industry or in the company they work for. For emotional reasons they refuse to sell any of “their” stock(s). In these situations I always point out that “I realize you love your Lilly stock (headquartered here in Indianapolis) but you need to understand that your Lilly stock does not love you!” Expanding on this, people also like to buy stocks they are familiar with; in their geographic area; in their industry; in their country, etc. They feel they know more about these companies than those from elsewhere. They may or may not. But it is a strong bias and, carried too far, usually delivers poor results.
Dr. Kahneman points out that “sensible clients will actually want their professional investment advisor to make these decisions.” We are supposedly qualified to do so and generally make these choices better than the clients can. The markets are cruel indeed, and soon weed out those advisors who are not qualified to do so. He continues, “merely being dispassionate about the outcome gives advisors a big advantage in getting things right. It is clear from the research on that the majority of individual investors are out of their league. They tend to be hyperactive; they churn their accounts (churning means overtrading); and they do not even know how well they are doing!” My own experience suggests this is mostly correct.
Dr. Kahneman also points out that most investors think of risk in terms of downside risk. They are concerned about the maximum amount they can lose. Professionals define risk in terms of variance, the degree of volatility in a stock or portfolio, called “beta.” This does not discriminate gains from losses. There is misunderstanding and miscommunication with the public because of these very different views on risk. I believe the veteran financial planner understands where their clients come from on risks, but all too often other investment professionals do not.
Dr. Kahneman also discusses the risk of underperformance, of not being with the pack when markets are running away on the upside, such as the late 1990s. He points out this is “why individuals typically get in too late. Everybody is getting rich and they are the only ones not getting rich.” At this point it is getting very late in the game and when these investors do get in, it may well be time to get out. He points out that “people are prone to think that the world has changed, and they do not appreciate that the end is near.” An old adage holds that the four most dangerous words in Wall Street are; “it’s different this time!” He also brings up the fact that; “losses loom larger than gains in people’s minds, and that causes them by and large to be too risk averse. (So) risk aversion thus causes the price of equities to be relatively too low.” This theory makes good sense and is probably true.
Another distinct problem is communication. This is a two way street. Investment managers generally are good at keeping in touch with their clients. The norm is a quarterly newsletter and a quarterly call. In my own case, when the markets are tumultuous, as in 2001, 2 &3, I call monthly. When they are quiet, as is the case this year, I call every other month. In some cases clients do not want this much contact, in which case I email them monthly with their results and my thoughts.
Clients who pay for services with commissions are another story. Brokers are notorious for their reluctance to contact their clients when times are tough or things have gone wrong. During my six years in the 70s as a NYSE branch manager for Robert W. Baird and Co., I was constantly harping on my brokers to call their clients. This especially was needed during the 1973-75 bear market. But there is another side to this problem. All too often the clients do not call their brokers either. If your account is inactive and little or no revenue is being generated for your broker, human nature is likely to put your account and your situation at a low priority. If you need help, advice, or just a shoulder to lean on, you can and should contact your broker. Many times I have gone through my mutual fund statements only to find that a client has sold a particular position without contacting me. Often the timing or the selection is a poor one; a better solution to their cash flow problem was available, if they had just asked. In my opinion though, there is no excuse for a commissioned broker to fail to contact his ­active clients at least twice each year. But inactive clients can usually get any service they need by initiating a contact.
Dr. Kahneman suggests that many investors pay too much attention to their holdings. He suggests that “the best advice is to do little and don’t think too much. Leave it to your investment advisor and don’t check your results too frequently as that may cause you to make mistakes.” This advice assumes you have a sound portfolio of quality securities which fit your investment profile. Which brings us to the electronic financial press. CNBC and its ilk on both TV and radio are not in the business of advising you how to invest your money, they are in the business of selling advertising! They are usually very short term in their focus and many people watch or listen daily. You can learn things from them, but their normal focus on the near term; today, tomorrow, next week, or coming months. This near term focus will probably cost you money.
The latter part of the above advice flies in the face of my own monthly or bi-monthly updates, but we rarely focus on individual holdings during these calls. Dr. Kahneman suggests the optimum time frame between reviews is thirteen months based on available research. I normally recommend “buying good stuff, holding on for the long term, at least three to five years, and weeding the garden twice a year.” Of course, a paid investment advisor is constantly looking for weeds in their clients’ gardens, and they will periodically weed out poor performers or overpriced holdings from all their client accounts as seems appropriate.
The economy continues its boom, and the public should be more and more aware of this as we go into the fall. This will improve consumer confidence and cause even stronger growth. It is interesting to note that final reports on the economy in 2001 are showing that the late recession, which began in March 2000, was a very shallow and shallow one. Thus, the economy has been slow to gain speed in this recovery.
Turning to the stock market, things have been sloppy this summer, with a tendency to the downside. My money managers are convinced there are good opportunities for current purchase and it is a time for adding them rather than liquidating portfolios further. The fiercely contested presidential campaign is causing some unrest, with many people “waiting to see what happens” in the fall. This strategy, which is really a decision to not make a decision, is usually wrong. The markets will, ordinarily a couple of months ahead of time, begin to discount the outcome of these events. Waiting until after results are in is not a good idea, the markets have already adjusted. I believe average Americans in a time of war will go with their incumbent president. Based on his previous record, going with the other option looks very risky to me, and I think most voters in the middle will see it the same.
Another concern giving stock investors pause is the conventional “wisdom,” that interest rates are certain to go significantly higher (I expect 5.5 to 6% on ten year U.S. Government bonds by the end of 2005) and that everyone “knows” that higher stock prices and higher interest rates are mutually exclusive. Although this has been largely true over the past twenty years as bond yields peaked and retreated all the way down to one percent last year on Federal Funds, there have been many times in the past when interest rates and stocks rose at the same time. Conditions appear to be ripe for that to happen again. Although stronger than expected corporate earnings are showing signs of slower growth versus year ago numbers going forward, it is hard to imagine how stronger than expected earnings cannot be positive for stock prices.
We expect a stronger market for the rest of the year and remain comfortable with our projection of an eight to ten percent gain in the broader averages. At July 30 the S&P 500 was down 1.4% for the year; the Dow Jones Industrials were off .1%; basically unchanged for the year. With a rapidly recovering economy, we expect an increase of 4.5% or more in Gross Domestic Product, continuing bigger than expected corporate earnings (20%+ in the second quarter vs. 2003), and rapidly improving employment figures, there is every reason to expect good overall stock gains for the balance of 2004. Looking into 2005, most economists expect slowing growth, but still a decent year economically.
There have been nationwide complaints regarding high gasoline prices this summer. I also “flinch” as I fill up my midsize luxury sedan. But we Americans asked for this in recent years with our addictions to bigger and more powerful trucks, SUVs, and ever high powered automobiles. When I began driving at age 16 (fifty years ago!) gas cost 25 cents a gallon. I made 50 cents an hour at the time, enough for two gallons of gas. Inflation adjusted that 1953 $.25 translates into $1.94 in 2004 dollars. My 17 year old granddaughter makes $5.35/ hour, the minimum wage, and this buys her 2.9 gallons today. Not too bad really, in comparison!
The problem is that, for many years, the oil companies and oil producers competed fiercely and Americans gorged on cheap gasoline and other oil products. During that time, environmentalists and other obstructionists opposed the construction of new facilities and refineries as well as new oil and gas production fields. Their efforts resulted in many older refineries being forced to close down. The results were not difficult to predict, as I did several times in these newsletters. In the United States we can now only refine 90% of the gasoline we need to fuel our fleet of gas guzzlers. We are importing the remaining 10% from oil producing countries, and this percentage appears highly likely to increase. Will we, our society, ever learn??
Since World War II we have been especially guilty of shortchanging the energy requirements of our growing economy. Middle East oil was cheap, so we neglected our own possible reserves as drilling slowed to a crawl. In the 1970s, when foreign suppliers began to raise prices as oil got tight, environmental concerns interfered, and continue to interfere, with domestic energy development. Coal fired plants have been regulated to the point of no return and no new plants are currently planned. Political concerns completely stopped development of huge new domestic oil and natural gas near Prudhoe Bay with easy transportation to market from a Manhattan sized slice of the Alaska National Wilderness (ANWAR), an area bigger than the state of Texas! Other unwarranted concerns forced a complete stoppage of the least expensive and cleanest possible energy source, nuclear power plants, and the extremists’ damage continues to this day.
So energy prices have now soared across the board and the politicians and the press blame “greedy” corporations for the problems we Americans and our leaders have caused. I see no answers to these problems other than continued dependence on foreign energy sources and higher and higher prices. Wise investors should consider energy investments for the indeterminate future.
Our former email address; has been discontinued. Please use
Tom McAllister, CFP
  One Man's Opinions - Summer 2004
  HOUSEKEEPING: OUR EMAIL ADDRESS for McAllister Financial Planning and Tom McAllister is now: . Yes, I now have my own website in addition to my own 800 line (800-663-3419). We will very shortly leave AOL behind and the email address will then disappear. Our regular phone lines remain 317-571-1112, and (fax) 317-581-1261.
Who would have thought twenty nine years ago when I started McAllister Financial Planning, that this kind of technology would be available for small businesses. Isn’t technology wonderful? I don’t know how we could conduct business now without it!
OPINIONS: The United States economy is booming! The last piece of the puzzle fell into place last week with the announcement of 288,000 new jobs in April and a revision upwards of the March numbers to more than 308,000. As I have pointed out over and over in recent months, job growth is a lagging economic indicator. Business resists hiring new people as long as possible in any economic expansion. Expanding new jobs is proof that the current economic recovery is for real. I this growth should continue well into 2005. This bodes very well for the reelection of President Bush, which I expect. However, a Bush reelection will need some very substantial changes in the situation in Iraq. I have been a strong supporter of the Iraqi war and the War on Terror in general. I believe this is World War III, and that western civilization cannot survive if we do not win this war. I too was shocked by the abuse of Iraqi prisoners by members of the U.S. Military Police, this is no how we play the game. But this situation needs to be put into perspective. It pales in comparison to what went on in that same prison under the Sadam regime, when torture, rape and murder were rampant. Nevertheless, swift and fair justice is needed and appropriate punishment applied. This appears to be in process and military justice is vastly swifter than domestic courts. The United States military has some of our finest citizens among its members, including my fine grandson, Sgt. Sean Lenn, US Army. And they are the norm, not the exception. I wish that all our society had so much right with it, and so little wrong with it.
Let me be clear that I am not putting the military on a pedestal. They are horribly bureaucratic and wasteful. They make huge mistakes, which not only cost billions of our dollars, but which cause many deaths that could be avoided. But compared to the armies of other nations (China for example, or Japan 70 years ago) it is an outstanding example of how the military should operate, responsibly and under civilian control.
The latest example of a huge military mistake was the failure to successfully plan for peace in Iraq. The military almost always plans to fight the last war, rather that the current one. The planning to quickly and decisively defeat the Iraqi army was again superb and it was quickly won with very few American and Allied casualties. But the plan for peace failed because it ignored several critical issues. First, it was expected that we would be greeted as Liberators by the Iraqi people who had spent 35 years under the heel of Sadam Hussein. The majority did welcome us, but a significant minority did not, including those who supported Hussein and benefited from his control of the country. This included France and Germany it turns out! Shame on them! United States military leaders apparently did not take into consideration those outside terrorists who have now congregated in Iraq to continue to wage their war on us where we are conveniently gathered as large choice targets.
Our prestige is on the line and the battle to win the peace is being taken to us. This was not unforeseen by our leaders. They have repeatedly warned us that this war will be very long and very difficult and costly. But a warning and reality are two different things. The failure of our plan (or lack of a plan) to handle a peacetime Iraq will continue to haunt us. Unless it is successfully dealt with in the next few months, and I believe it will be, then Bush will not win in November
A John Kerry presidency, based on his past positions and Senate voting record, would not likely lead to a U.S. victory in Iraq. Internationalization, which he has often advocated, has repeatedly failed in such situations. The United Nations, while it may do a good job at relief and peacekeeping, is NOT a substantial factor when it comes to military strength and leadership. Weak leadership is their norm, not the exception.
ECONOMIC OUTLOOK: As mentioned above, the economy is booming and should continue to do so well into 2005 and perhaps beyond. The recovery started over two years ago and has been quite steady, almost a classic rebound from a shallow recession. It has been clouded by the Iraqi war, the broader war on terrorism, and the presidential election year. I expect Gross National Product growth in the four to five percent area for 2004, with some moderation in 2005. Interest rates will start to be raised by the Federal Reserve Board later this summer or early in the fall, from the current one percent to as high as two. The full economic impact of these rates will not be felt until 2005, but I do expect ten year U.S. Treasury bond yields of five percent by year end, and six percent by the end of 2005. Overall, prospects for business are quite good for the intermediate and shorter term, more questionable looking out two years or more.
Prices will continue to rise, as they always do, but perhaps at three percent or more. Gasoline prices, another negative for Bush, should begin to decline now that Saudi Arabia has called for more production from OPEC members, who all realize the Saudis can dictate lower prices by themselves if they do not cooperate.
In defense of OPEC, which you will rarely hear from this commentator, it must be pointed out the actual price of most goods they purchase, starting with food, has escalated a great deal in recent years due to the strength of the Euro. Most of their imports are priced in Euros, while the price of their oil has always been stated in U.S. dollars. Thus, the sharp decline of the dollar in the past year versus other currencies and especially the Euro, justifies somewhat higher prices for their oil. In recent weeks the dollar/euro rate has stabilized around $1.20 to e1.00. It is interesting to note that a few years ago the euro was introduced at $1.17, almost exactly where it is today. It went into freefall for over two years, and has now recovered very nicely.
Overall, I expect the current boom to continue but not to get out of hand.
THOUGHTS ON INVESTING: As I near the forty two year mark in the investment business, I continue to marvel at the mistakes investors repeatedly make. My own philosophy has evolved into “buy good stocks at good prices and hold them until, and if, they become way overpriced. And weed the garden every six to twelve months.” This philosophy guides Warren Buffet, the greatest investor of our time, John Templeton, founder of the Templeton Funds, and many other highly successful investors. The average investor continues to under perform the overall market by huge margins. Last year a study by DALBAR, Inc. and the Bogle Investment Center gave us a clear picture. From 1984 through the end of 2002 the average equity mutual fund in the United States produced an average annual return of 9.6%. Not bad, considering the markets collapse in the last three years of the study. During that same period the average mutual fund INVESTOR earned just 2.7% (both numbers include dividends reinvested)! As a veteran investment advisor and personal investor, these numbers do not surprise me at all. People get greedy and excited and buy the wrong things, high priced stocks, at or near the highs of the market. Then they get scared and sell at or near the bottoms. I am in the only business I know of where people beat down the doors to buy our product when it is at record high prices, then madly run away when the same products are marked down to half price or less! Go figure!
During the recent bad markets we only lost two managed accounts (we gained three). Both left in the late summer of 2002, just before the rally started in October. Both thought the markets could and would drop another 50%. In the face of that kind of statement, I told them I disagreed, that they were probably making a big mistake, but if they really believed it then they should get out rather than worry about it daily. I learned a lesson then about judging an inexperienced clients’ risk tolerance. It did not matter than neither one had a great deal of stock market exposure related to their net worth, around ten percent in each case. They did not understand the nature of the stock markets and their fears deprived them of a fifty to seventy percent rebound.
In his book, The Nick Murray Reader, the author enumerates the eight classic behavioral mistakes which are serially made by investors who invest on their own without professional guidance or have such advice and ignore it. The eight are: 1) over diversification; 2) under diversification; 3)euphoria/overconfidence; 4) panic; 5) margin; 6)speculation rather than investing; 7) investing for yield rather than total return; and 8) letting cost basis dictate investment decisions. I would have to write a book myself to discuss all eight of these, or at least eight articles, but suffice it to say these are behavioral mistakes, not ones of ignorance or misinformation. Socrates advised us to “know thyself.” He was certainly right, especially where investing is concerned.
THE MARKETS: As this is written the stock market is touching new 2004 lows in the popular averages on fears of increasing interest rates, almost certain as we said above, and a variety of political concerns. Yet earnings reports are coming in mostly stronger than expected and the outlook is bright for more of the same. The stock market as measured by the Standard and Poor’s Index should gain eight to ten percent from these levels, the broader Russell 3000 index slightly more.
Our managed accounts are doing better than these averages and are showing gains for the year of three percent or so, an outstanding performance given last year’s achieving the same margin over the averages. The current pullback represents a buying opportunity. As mentioned previously, interest rates are almost certain to rise later this year and into 2005. Bond yields began to decline over twenty years ago and bottomed last year. There is not much room for further decline when the short term treasury rate is less than one percent. Avoid purchasing bonds with over two years maturity or longer term certificates of deposit. Also avoid lower quality corporate bonds, which have rallied substantially as investors “reached for yield” by lowering their quality expectations. Purchase of these lower quality bonds means taking a quality risk similar to investing in common stocks with no upside potential at all.
RECOMMENDATIONS: Those looking for better income should investigate a managed portfolio of quality dividend paying stocks. Current portfolio yields approach the four percent range available on risky ten year bonds. Such yields are now taxable at the new 15% income tax rate. And most dividend paying companies increase their dividends as earnings rise, providing inflation protection not available in a bond portfolio. Such management is, of course, a major part of our service here at McAllister Financial Planning. I invite your inquiries about our services.
I plan more use of the website in the future, but for now we are only posting each newsletter there. We will, of course, advise you when we add more features.
Enjoy the rest of spring and have a nice summer. Our anniversary issue will be out in August, the Good Lord willing.
Tom McAllister, CFP
  One Man's Opinions - Winter 2003-04
  I had a sobering moment this week. On Nov. 14th I was at an industry committee meeting at 165 Broadway in New York. From the 48th floor I was able to look directly down into Ground Zero. The last time I was in this building the view out in this direction was almost completely blocked by two 110 story buildings. Like many Americans, on Sept. 11, 2001, I watched on TV as those two magnificent buildings collapsed into rubble, taking almost 3000 lives in the process. Like most, I was stunned as I watched. This week I was angered as I looked down into that hole. We are at war! This is World War III! Like World War II, if we do not win western civilization cannot survive! And it cannot be won without the United States of America taking the lead and using all our enormous resources to assure victory, just as it was in World War II.
I am an impatient person by nature. My father was an extremely impatient man, a Democrat politician and City Chairman by the way, and after his death I was quite surprised to notice that my mother was also quite an impatient person. Not so much compared to Dad, but still very impatient, especially with people she did not understand. So I come by it naturally, by environment, or perhaps it is genes.
So it upsets me when my fellow Americans on the left criticize and complain about the war; our President; the military; and some of our allies; and do not seem to see the entire picture This is NOT the position of every Democrat, many are like my father and his friends back home, good decent patriotic people who were part of the "Greatest Generation," and who stood up to the challenge no matter their politics, and joined in saving western civilization from the Nazis and Japan.
We are the greatest country in the history of the world. We are a generous people, individually and as a government. We are not always good, but we are, as a people, not evil either. The enemy in this war IS evil! They have taken a monotheistic religion and twisted it into a parody, where killing all nonbelievers is not only justified, but is glorified as the will of God! Those who kill others by "suicide murders," are called martyrs! This is inhuman and Satanic!
The terrorists have enormous advantages in this war. They can meld into the population of the Arab countries and even the western democracies with our open societies, and lay low for months or years, until they suddenly strike out with deadly force. They are funded by both governments and private wealthy individuals, who share their insane beliefs. The must be rooted out and eliminated! This will take a long time, perhaps decades. The American people must not allow the enemy to undermine our beliefs and our mission with their tactics. Only American leadership can save the civilized world. And this wartime leadership is being undermined by misinformed and ignorant citizens who plead for us to "stop the killing!" We are NOT the problem. The fanatic terrorists and their supporters are the problem!
Turning to the economy, the welcome news of Gross Domestic Product growth in the third quarter at an annualized 7.2% rate overshadowed the even more stunning news of business growth of 15.4 %! To date the laggard recovery has been led by consumer spending. Now business is back in the game. Inventories and work forces have been cut sharply and the rebounding economy is now causing business leaders to start rebuilding capacity. This bodes very well for the economy going into 2004.
I have been saying for many months now that the economy is sound and growing, albeit slowly, and in 2004 we will be in full recovery. This belief has been verified by the strong stock market of the past six months. The stock market is a leading indicator, usually by six to nine months. A strong recovery seems present now.
I do not expect continued growth at the seven percent level, this is unsustainable in an economy as large as ours. But growth of 4-5% IS likely going forward for next year. This almost assures reelection for President Bush, which I expect will be the case. Another terrorist attack of the scope of 9/11 would throw things into disarray of course, but even then the American public most likely would stick with Bush as he seems to have their confidence so far as the War on Terrorism is concerned.
Even unemployment is on the mend with job increases of 300,000 expected in the fourth quarter. One pundit on Fox News suggested that the anticipated recovery which has now obviously begun will create 300,000 new jobs EACH MONTH in 2004. The Democrat presidential candidates and the elite media have been harping on the unemployment rate and the "loss of 3 million jobs since President Bush took office!" This latter point is a demonstrable lie. The true numbers are, as reported by the U.S. Bureau of Labor Standards at, are; Civilian Labor force: Jan. 2001 143,797,000; Sept. 2003 146,545,000; An increase of 2,748,000 jobs since President Bush took office!
The number 3,000,000 is taken from manufacturing jobs which have been transferred to other countries in the past few years. This is an ongoing trend which goes back to the 1960s. It is true that, since 1995 (not since 2001), the United States has lost 11% of our manufacturing jobs. All these have gone to China right? WRONG! China itself has lost 15% of these type jobs in that same time frame, Japan 16%, and, of all places, Brazil has lost 20%! Where did these jobs go? They went to lower cost countries in Southeast Asia, India, and S. America. To blame President Bush for the continuation of this world wide trend of decades is pure partisan politics and elite media bias! So far as the unemployment number, it has been hovering around six percent for many months, in stark contrast to a rate of 8-9% in the latter stages of the recession of 1991.
So where do we go from here? 2004 will be a good year for the United States. I expect Gross Domestic Product growth of four percent or better. Already rebounding corporate profits will get stronger, and dividends will grow with them. Business spending and employment will continue to grow. Productivity increases will slow down from current rates, but still do well.
Politically, the Democrat party at the national level will continue in its self destructive path. Bush will be reelected. The Republican majorities in the House and Senate will widen. The number of Republican governors and legislators will grow. Campaign rhetoric, especially from the left, will become even more extreme and the public will react negatively. Because we are at war, voters will turn out for the elections, but split tickets will be more common.
In my opinion, the stock market is now ahead of itself by five to ten percent. Major institutions and the public are driving prices higher now as they realize the economy is indeed in full recovery. They missed the bottom of the market and the initial most powerful stage of the recovery. Now they are getting on board and paying high prices to do so. I recommend building cash positions for three or four months while waiting for a correction in the market.
Our money managers are having a very good year. The Standard and Poor's 500 index is up over twenty percent this year. Even though they take less risky positions, our managers are keeping pace and, in most accounts, beating the averages. We expect a more modest year of gains in 2004. Ten to twelve percent would be a good continuation of the market's recovery.
As we approach year end, all investors should review their taxable income and their possible capital gains or losses. Existing losses should be taken to offset any gains or carry forward into next year. (Only $3,000 of capital losses may be taken against regular income.) In most cases, deductions which can be taken yet this year should be. Any discretionary income which can be deferred into 2004 should be done also.
If you have substantial taxable income you should know that it is still possible to make investments in natural gas and oil prior to December 31 and then take a tax deduction of 75-90% for doing so. We have several programs available for your consideration here at McAllister Financial.
Lastly, if you have substantial investment funds, we continue to recommend using professional money management for at least a portion of your portfolio. The stock market troubles in recent years have again proven that the professionals earn their fees. While pundits often protest that the professionals do not, as a group, beat the market averages, as usual they do not tell the whole story. Good investment managers take into consideration the investor's goals, objectives, and situation, and take less risky positions to achieve their results. On balance, given the record of the past, a professional money manager makes sense for most of us.
Have a good Holiday Season and a Happy New Year!
Tom McAllister, CFP
  One Man's Opinions - Summer 2003
  As a registered investment advisor, we are required by the Indiana Securities Division to make available to our clients a copy of Form ADV Part II, which is filed annually. If you wish a copy, please write us.
This week marked the 41st anniversary of my joining Merrill Lynch as a stockbroker trainee. Each year at this time I look back on this decision and thank my Creator, and the late Chuck Galbreath, Indianapolis manager for Merrill at that time, for the opportunity to pursue this fascinating and rewarding career. It has been mentally stimulating, emotionally satisfying, and financially rewarding. It has also been, at times, very challenging, frustrating, physically and emotionally draining, and occasionally a real financial roller coaster. I would not have missed it for anything! Thanks to all my clients, past and current, my other readers, and members of my audiences on the cruise ships, for giving me the chance to serve you.
Turning to my opinions, I believe the stock market rally this spring confirms that the 2000-2002 bear market is over. It also confirms the economic recovery, now nearly two years old, is finally gaining strength. It has been an anemic recovery after a very shallow recession. The terrorist attacks and their aftermath, along with the scandals perpetrated by less than a dozen corporate managements, badly hurt what should have been a relatively quick recovery. While the financial media continue to focus on unemployment, which always lags the economy, those who look more closely see corporate profits rebounding, interest rates still at very simulative levels, the Federal Reserve accommodating the recovery and concerned about deflation, and the Administration doing everything possible to "jump start" the economy to much higher growth rates ahead of next year's presidential race. This last activity could prove counter-productive in the long run, but overdoing things will not cause significant problems until long after the election.
The economy grew 2.4% in the second quarter; not bad, but certainly not a robust performance in a recovery. I expect the third quarter to be better, and the fourth quarter to be a very strong one. Negative factors to consider are, rising interest rates which slow down homebuilding, public confidence, which is badly undermined by the continuing problems in Iraq, and the financial media's continued focus on unemployment, which really has not been bad compared to past recoveries. In 1991, for example, unemployment topped out over 8%, in 1981, over 11%.
By early 2004, barring a major terrorist attack in the United States, the economic recovery, which began in November 2001, should be obviously doing better. This bodes well for President Bush to be reelected. So far his opponents, for all their carping and distortions, are not threatening his reelection prospects a great deal, nor have any of "the Nine" candidates lit a serious fire with the public in general. From this vantage point, I predict a fairly close reelection victory for the President and gains for the Republicans in both the House and the Senate. If anyone cares for my opinion, I suspect Arnold will win in California also!
The stock market has outperformed my expectations already this year. At this point, early in August, it seems to be somewhat ahead of itself considering the slow economic recovery. I the current digestive period may continue into October.
It should then trend higher through the balance of the year and into 2004. Selective purchases are in order, but I believe the banks and technology stocks have had their run and will likely lag the market from here through year end.
In this same cautionary vein, I recommend no purchases of any bonds of more than five years maturity, even in a strict asset allocation account. Longer term bond yields and home mortgage rates have recently bounced up, forcing bond prices down. I believe long term bonds (more than ten years maturity) are very risky holdings now, and purchasers are subject to the possibility of severe capital losses. Losses could approach those we experienced in the stock market three years ago, that is 25% or more. Bonds, of course, absent bankruptcy, eventually return par value, usually $1,000 per bond. But waiting twenty or thirty years for a bond investment to return to what you paid for it is a distinctly bad deal, especially since the interest you get in the meantime is less than what you could get from new bonds.
Compounding this problem, investors have been "reaching for yield" as interest rates have come down. This means lowering your acceptable quality ratings in order to get a higher yield. This tendency has partly caused so called "junk bonds," those of less than investment quality, to soar in price as demand for them has increased. AAA corporate bonds have increased just over 4% for the year to date, A bonds 6.55%, and Baa, the lowest investment grade rating, 10.16%. By contrast junk bonds, those rated Caa and CaD have gone up 40.5 and 50.75% so far in 2003. This extraordinary demand is a red flag for bond investors. A certain part of it represents a lessening of basic economic risk as the overall economy improves, but these price gains cause me great concern.
A recent survey showed that 57% of U.S. investors believe that interest rates will rise in the next two years. I agree. However, an astonishing 65% of investors are not aware that rising interest rates cause losses in bond portfolios. The reason is simple. Why would a bond buyer be willing to purchase a 3% twenty year bond you bought for $1,000 for that price, if they can purchase a brand new bond yielding 4 or 5% for the same $1,000. Holders of 3% wishing to sell will find them must do so at a discount, which can be as high as 25% or more.
I recommend the sale of all non-investment grade bonds (those with ratings of less than Baa) of more than two years maturity immediately! I also recommend taking profits (selling) higher quality corporate and U. S. Government bonds of over five years maturity too. Normally yields on five year U.S. Government bonds are about 85% of the yield on 30 years maturities. In my opinion it is not worth the higher risks involved for individual investors to hold long term bonds.
I have always thought that the business New Year begins the day after Labor Day. The summer doldrums are with us and business in general slows down as the summer goes on. As we approach Labor Day and a faster pace in the fall, I see investment opportunity in the energy sector, specifically natural gas, in qualityinternational value stock funds, and a continuing chance to exchange tax liabilities for real estate equity through the use of Low Income Housing Tax Credits. I expect value small cap stocks, especially those paying good dividends, to lead the market as it rallies later in the fall. As I said previously, stay with bonds of less than five years maturity and an average portfolio maturity of two or three years. You might consider certain "step up" agency bonds, which are either called at certain points, or the interest rate "steps up" to a higher level. Call me for more information. Keep CD purchases to a year or less, and spend some principal if you must for living expenses. You have probably been doing it for years, it was masked by inflation.
We also are aware of more and more badly burned investors engaging the services of professional investment managers. I represent several of these, all have been in business for over thirty five years, all are value investment managers, and all survived the recent bad markets with bruises and sprains, but with no broken bones or major surgery required. I continue to urge all my clients and audiences that professional money management makes sense, even if you continue to manage the major part of your funds yourself. The day will come when you, and I, will no longer be able to handle our own financial affairs, either because we are no longer mentally sound enough to do it, or because we have gone to meet our creator. The difficulty with the first scenario is, will we recognize our incapacity in time to head off major problems? The difficulty with the second is that, all too often, our heirs do not know whom to turn to when we are no longer around. Using quality money managers while you are around to judge their efforts is a manner of protecting your assets and your heirs.
As a registered investment advisor we are required to provide SEC Form ADV and our income statement to our clients annually. If you are a client and wish to receive this please contact me at or 800-663-3419, in Indianapolis 571-1112.
Enjoy the rest of your summer!
Tom McAllister, CFP
  One Man's Opinions - Spring 2003
  In my last newsletter three months ago U.S. investors were facing three of the "Four Horsemen of the Apocalypse," War, Death, and Famine, all involving the Iraqi people and U.S. military forces. Fear was rampant among investors, largely unreasonable, but fear nevertheless! It certainly had its impact on business and the stock market in the weeks leading up to the war itself. To make matters even worse, the fourth scourge, Pestilence, soon turned up in southern China and Hong Kong in the form of SARS, a new and dangerous infectious disease. It virtually shut down tourist travel to Asia, and deeply cut business travel and activity in the region. Airlines, particularly United and Cathay Pacific, Hong Kong's hometown airline, have been critically wounded.
The stock market rallied as the war began and the Coalition proceeded to quickly vanquish the Iraqi military and the ruling regime. Civilian and Coalition casualties were remarkably light. However, the Iraqi military was virtually wiped out. Only a few surrendered, tens of thousands were killed, and many more deserted as officers lost their grip on their troops. Restoring the infrastructure and keeping the peace in a rudderless society is proving a much more difficult job than winning the war. These problems are being solved, but their nature precludes quick fixes. In a few weeks or months they will be taken care of and the job of establishing a democracy to fill the voids left by Saddam's brutal excesses will be filled.
With the war behind us, investors have turned attention to the improving economy and politicians have begun to stake out positions for 2004 presidential campaign. The economy grew in the first quarter, albeit modestly, at an annual rate of 1.2%. This observer was pleased with this, as a negative performance would not have been a surprise given that Americans turned their attention to the war in February and March. Economic growth should pick up steadily now.
The stock market is already anticipating this, with the S&P up five percent during the first four months of the year. A similar performance for the rest of the year would give us 15%, a nice rebound from the previous three negative years, but disappointing as such market recoveries usually go. The media will continue to harp on poor unemployment figures, as if this is a precursor, rather than a follower of economic performance. As I have written many times, the degree of naiveté and ignorance in the electronic media astounds me! Print media is only slightly better.
The public in general remains very negative and pessimistic at exactly the wrong time! When they do act, the majority choose to put their funds in bonds, at exactly the wrong time! Bond prices are at forty year highs, with correspondingly low forty year yields. Why would you want to lock up your money for 20 or 30 years at the lowest yields in forty one years? But this is what is happening. It is eerily similar to the panic buying four years ago in the stock market, when it hit all time highs. The public in general normally buys at the top of markets and sells at bottoms. The savvy investor does the opposite. It is a matter of what drives our investment decisions, logic or emotions. Who is in charge here?
Let's take an imaginary conversation between a Savvy Investor (SV) and a typical public investor (TPI) to illustrate:
SI; "So you disagree with my positive outlook for stock prices from this level and that this is a good time to buy on a scale-in basis. Where, in your view, is the Dow going?"
TPI; "Well, er, uh, 5500!"
SI; "In other words, to less than half the highs of three years ago."
TPI; "Yes."
SI: "Do you know how many times the market has gone down over 50% in the past hundred years."
TPI; "No, I really don't."
SI; "Would you believe once, in 1929-32? Does this feel like 1932 to you, you know, 27% unemployment, breadlines, tramps riding the rails, Buddy, Can You Spare a Dime (or dollar)?"
TPI; "well, ummm, no, but …..."
SI; "It doesn't to me either. But let's assume you are right, that in spite of a positive economic outlook and a spectacular military victory in Iraq, the market is going to do something it has done only once in 100 years, go down four years in a row. When do you see this happening, how long will it take before it is over?"
TPI; "Well, uhh, the rest of this year."
SV; OK, so we are just seven months and 3000 points on the Dow from one of the great bottoms of all time, something that happened only once in 100 years. Do I understand you properly?"
TPI; "Wait, wait, I haven't thought this all the way through……"
SV; " ….but you are pretty sure I am wrong?"
TPI; " Well no, it's just that I'm a little afraid of the market right now."
SV; " Who wouldn't be, after the past three years? But let me get this straight, you would buy at 5500 on the Dow, right?
TPI; "Well, yes, maybe."
SV; "So, do you think you could be wrong. Is it possible the market might get to 5900 or 6300 or whatever, and then go back up to 8500, where it is now? What would you think and what would you do then?"
TPI; "I might start to think maybe I missed it, the bottom, so I guess I might buy then."
SV: "Let me get this straight, you would buy at 8500 then, but not now, with any fraction of your available capital."
TPI; "Well, put that way it does not make as much sense as I thought it did."
SV; "Actually, if we are governed by our emotions in our investment decisions, it makes a great deal of sense. These are fearful times, we would not be human if we did not feel some fear. But your theory requires you to be exactly right, and puts you under tremendous pressure to do so. Very few of us, especially not me, can be that right in our timing. But waiting for lower prices, while the thing to do the past three years, has not been the right thing to do historically. When we investors do that we tend to buy when stocks get too high, and sell they get too low. We must discipline ourselves to go against our normal fears and use logic instead."
TPI; "What do you think I should do?"
SV; "How about putting one third or your available funds in now, one third at Dow 7000 and one third at Dow 6000?"
TPI; "What if we never get to 7000?
SV; ; If that happens, we put in the second one third at 9500, the third at 10500."
TPI; "OUCH, why not put it all in right now at 8500?"
SV; "Bingo! We have just come full circle and you are suggesting doing exactly what I urged a few minutes ago? Of course, now I agree with you!"
I believe this type of conversation should be occurring many times each day between fearful investors and their financial advisors. No one can know if today is a better day than tomorrow or next week or next year to invest, but we can be sure that allowing our fears or our exuberance to control our investment decisions is a sure way to make the wrong ones. Scaling in your available capital beginning now should produce very good results over the next three to five years.
Next month marks my 41st anniversary of entering the investment business. It has served me, and my clients I think, very well. As a rookie with Merrill Lynch in the mid-1960s I made plenty of mistakes, but most were covered up by the bull market then running. After seven years at Merrill, at age 31, Robert Baird and Co., a fine New York Stock Exchange member and regional investment banker, named me their Indiana Manager. With the great help of some fine associates, I built a still successful operation for them in the next six years. Self employment then beckoned and I left to start my own financial planning practice, quickly becoming Central Indiana's first Certified Financial Planner. My practice has had its ups and downs, but on balance it was a good move. I would like to thank all my clients, past, present, and future, for the opportunity for a fascinating and emotionally and financially rewarding career. As long time readers know, as long as I remain mentally healthy and alert, I have no plans to retire from this endeavor until I approach ninety. Then I will reevaluate!
Have a great summer!
Tom McAllister, CFP
  One Man's Opinions - Winter 2002-03
  Despite public concerns about unemployment and the upcoming Iraqi war, government deficits, a very slow and spotty economic recovery is into its second year, with Gross National Product growth of a relatively anemic 2.4% for 2002. In addition, with fourth quarter growth at just .7% annualized, and the outlook for war and additional terrorist attacks highly likely, the picture for continued recovery is cloudy indeed. If we look at the entire picture though, things look better. In spite of rhetoric from the Democratic left, the late recession was really very shallow. It barely fit the definition of two straight quarters of negative growth. It is thus reasonable to expect a less than robust economic recovery, which has certainly been the case so far. Add to this a looming war and its attendant risk of additional domestic terrorist attacks and a strong stock market seems unlikely. People are "keeping their heads down and their powder dry!"
But we are not still mired in recession, as some politicians and the media are suggesting. We are in recovery, productivity gains for 2002 were solid, corporate profits were stronger at year end, and even unemployment seems to have peaked at 6%, and is currently at 5.7%. This compares favorably with the peak of 8.75% in the 1990-91 recession. It never fails to amaze me how, in the early stages of an economic recovery, the media and the public in general focus on unemployment as an indicator of how the economy is performing. Unemployment, while important and certainly a painful problem for those suffering from it, is a "lagging indicator" of the economy. It continues to climb for months after the economy hits bottom, as it did this time.
Long time readers are aware of my low esteem for the financial media, especially the electronic versions. With a few exceptions, their coverage tends to be shallow, naïve, ill informed, and incomplete. Having said that, I do tune in several times a day to see how the market is faring. I do this not to concern myself, but because I am often on the phone with clients and brokers and the topic usually comes up. I check my own portfolio only once or twice each month, and that may be more than necessary. I recommend and take positions for three to five years, so where the market is on a given day is irrelevant. I "weed the garden" once or twice a year, selling positions which no longer have the potential they did when I bought them. I suggest a similar approach works well for most investors.
I am grateful to my long time friend John Guy, a fine portfolio manager, for recently highlighting in his own newsletter the following excerpt from "The Babson Staff Letter" of August 30, 2002. It was called "The Perennial Unpredictables."
1. What stock prices will do next week, next month, or next year.
2. When the economy will change direction and for how long.
3. Which way political winds will blow?
4. Where the course of international developments will lead.
This really leaves a pundit like yours truly out to lunch so far as current comments are concerned. Babson continued however, with a list of Predictables as follows:
1. The population and labor forces will continue to grow.
2. More people will need more goods and services.
3. Research will continue to develop new products and techniques,
      creating more jobs, greater productivity, and higher demand.
4. The dollar's buying power will keep shrinking.
5. Well-managed companies with favorable long-term characteristics will continue to make above average progress in earnings and dividends.
Prudent, successful investors accept that there are limits to the information they can know with certainty. They expect the unexpected but do not try to predict it. They diversify their portfolios so as to limit its impact; they use compounding and time to minimize the financial disruptions of near-term market vagaries. With these thoughts in mind let us discuss what we now know regarding the economy and the markets.
As mentioned above, the economy has been in recovery for eighteen months. A "double bottom" recession is not in the cards. Any recession from here would be a new one, and the economy appears to be in a slow and erratic upward trend. Leading indicators suggest this will continue.
War with Iraq looks very likely. United States and Allied armed forces are overwhelming compared to those of Iraq. There is no possibility they will not prevail, and Saddam Hussein will be replaced. Casualties on both sides are inevitable, but those inflicted on the Iraqi army are likely to obliterate it as a substantial military entity.
Terrorist attacks on the United States and other western democracies are likely. Domestic incidents will probably strengthen the position of the anti-war protestors in the short term, but will rally the American public as a whole in support of the War against Terror over the longer term.
By most historic measures U.S. stock prices are reasonable. History suggests that any sharp declines as a result of the above incidents will provide a solid opportunity to establish long term equity holdings. It is prudent to stand pat just now, holding cash earmarked for investment when, and if, this opportunity presents itself.
President Bush has proposed an economic stimulus package, which I generally favor, but which is probably too late to have a heavy impact on current economic conditions. By the time it is debated ("too much for the wealthy") and passed, months will go by. More months will have elapsed before the stimulus works its way through the economy and has an impact, maybe twelve to eighteen months.
This is the history of such legislation. By the time the stimulus hits the economy is in full swing. This additional stimulus then often causes the Federal Reserve to try to slow down the recovery, lest inflation rear its ugly head.
A key part of the Bush package is elimination of double taxation of dividends paid to stockholders, which never should have been the case in the first place. I favor this in concept, but not as proposed. The current tax situation, which makes interest on corporate debt tax deductible, denies a similar deduction for dividends paid to stockholders. This encourages a disproportionate percentage of debt to be included on corporate balance sheets. Making dividends deductible would cure this and have more impact on the economy. But it would not be nearly as politically popular to give such a "tax goody" to those "rascally wealthy corporations". Therefore, I am in favor of the less effective individual tax break being offered. It solves at least part of the problem, and should have a very positive impact on the depressed stock market.
The balance of the stimulus program seems sure to face "tough sledding" in Congress due to proposed heavy deficit spending and the recently expressed opposition of Federal Reserve Chairman Greenspan. I expect much of it will go through, but with revisions. The complete elimination of the death tax, for example, probably will not pass as proposed, but a three to four million dollar exemption on each estate is likely. Acceleration of the reduction of income tax rates is also quite likely.
I continue to believe most investors would do well to consider engaging professional investment management to handle all or part of their investment portfolio. I have long suggested that the day inevitably comes for all of us when we can no longer make our own investment decisions, either because of death or illness. When that day comes it is a good idea to have a trusted and tested investment manager available to your spouse and your heirs. This would be someone in whom you have confidence, whom you have watched work in a variety of market climates. The experienced portfolio managers I use and recommend certainly qualify for your consideration. Call or email me to explore your situation.
Spring is coming! Enjoy!
Tom McAllister, CFP
  One Man's Opinions - Winter 2002-03
Special 65th Anniversary Edition
  November marked my 65th anniversary as part of this fascinating world. On the 15th I moved into senior citizen status. I don't feel 65 and most say I don't look it either, so I am a little bewildered to be here so soon. One very noticeable difference though, is in my attitude toward Social Security. In years past I have been known to berate this compulsory program in which politicians buy votes of the elderly in a "Ponzi scheme" where money is taken from newcomers and paid to earlier participants. Now that I am a recipient it takes on a whole new and positive light!
The same holds true for the socialized medicine program run by the government called Medicare. I was very critical of it thirty eight years ago when it was put into place. Now, in my newly enlightened state, it looks like a wonderful innovation which offers us seniors a degree of security in our old age where medical care is concerned. To be fair to myself, I mellowed in this area after ten years or so when I began to see the results of the program, with the lifting of fears and concerns it brought to my parents and to my elderly clients. I came to believe that our society can afford and ought to provide this for our senior citizens.
For the record I have no current plans to retire. I find my work very satisfying emotionally, psychologically, and financially. I do have a tentative retirement date in mind, Nov. 15, 2026, my eighty-ninth birthday! But I reserve the right to extend beyond that date depending on how I feel then.
It has been a wonderful life and I am grateful to my Maker for it. I take great pleasure and pride in my family, six children, thirteen grandchildren, and now three great-grandchildren. Regrets? To quote Sinatra and Paul Lanka, "I've had a few." But, overall, it has been a great life, and never more so than now, except for the morning arthritis pangs.
As I shared in my 40th Anniversary newsletter three months ago, I owe a great deal of thanks also to my clients, past and current, who have made it possible for me to practice this profession. I hope my experiences and the resultant knowledge, information, guidance, and wisdom I gained are helpful to all my readers.
Turning to more important issues, the stock market certainly looks better these past few weeks. I believe it is obvious we had the long awaited "capitulation" in September and July. Capitulation, in Wall Street terms, is the period when the public in general gives up all hope for the future and sells out at any price. As quarterly reports were filed by equity mutual funds, we can see after the fact that the severe drop in the markets was largely fed by mutual fund liquidation on an unprecedented scale. A stock mutual fund normally holds only a modest cash balance to take care of normal shareholder liquidations. When panic sales exceed this modest cash reserve, stocks must be liquidated and the shareholders paid off. There is no way for the managers to avoid this. They are paid to manage funds deposited by shareholders. They are not paid to sit on a pile of cash in case the investors want it back. At times, like this year, they are forced by their shareholders to sell at ridiculously low prices. It is one of the major defects of the mutual fund concept; the other being a lack of economies of scale where fees are concerned.
There was some validity in people bailing out of the market this year. The loss of public trust in the integrity of reported corporate numbers took us to new lows. The despicable actions of a small handful of high level corporate executives in a few high profile companies undermined the entire U.S. stock market. The active participation of nationally renowned auditing firms in helping "cook the books," and the apparent cooperation of some of our biggest investment bankers in these schemes, further betrayed the public trust. No wonder people panicked! But I must point out that there are over 9000 actively traded public stocks in the United States. The vast majority are run by honorable and honest people who play by the rules. The managers of less than twelve companies, a tiny percentage of the universe of public stocks, spoiled an already depressed market for everyone else.
In early October, as I predicted, we reached a point where the bargains available became too attractive to ignore. While the mutual funds were selling aggressively, other institutional investors, the pension fund managers, insurance companies, individual money managers, and the Warren Buffet's and John Templeton's of the world, stepped up and began buying the many bargains. As we can see now, seven weeks later, from the very depths of panic, the market began to rally and the buyers finally overcame the sellers.
To put this strength into better perspective, I would point out the old Wall Street adage that when the market "climbs a wall of worry" it is a very positive sign that the rally will continue. Investors have had a lot to worry about this autumn; the threat of new terrorist attacks, the election, the probability of war with Iraq, a weaker than expected economy, a continuing pessimism from the public, and the drumbeat of news of corporate wrongdoing. Despite all this, we have had a market climbing almost straight up. While it appears somewhat overbought just now and due for a consolidation, I recommend committing another 25 percent of cash reserves to the market between now and year end. I plan to fund my 2002 obligation to my own pension plan before year end, and to make the 2003 contribution shortly thereafter.
Despite what some politicians are saying, the economy is on the mend, albeit a slow healing. Unemployment is coming down; solid real corporate earnings in some areas are surprisingly good; and interest rates have been taken even lower from their already record post World War II lows by the Fed. Most third quarter earnings reports met expectations of modest gains vs. twelve months ago. This picture will continue to improve in 2003.
The recent election victory by the Republicans is very positive for business, removing the obstructionism of the Democratic Senate, which I believe was hurting the country greatly. Apparently many voters agreed with me. While total control of Washington by one party is not a good thing in the long run, this time in the short run I believe it is very positive.
Now let us discuss some year end ideas. Many investors purchased wildly popular variable annuities in recent years as the market spun higher and higher. Now, after 30 months of a disastrous stock market decline, most are showing big losses. It is possible to "harvest" such losses and deduct them in TOTAL against your REGULAR income tax liability! The IRS has determined that such a loss is totally deductible since capital gains treatment does not apply to withdrawals from an annuity, which are always taxable at regular income tax rates. This is in sharp contrast to taking investment losses in one's personal stock account, where the amount of the regular deduction is limited to $3000 per year. Congress is talking about raising this to $30,000, but for 2002 the $3000 limit applies.
If you own a variable annuity which you purchased in the late 90s and which is showing a substantial loss, please call me to discuss your situation. It is highly likely that you can recognize and use these losses by liquidating the annuity, then immediately replacing it with a new and better variable annuity which can guarantee you five percent a year and which will allow you a "bonus" that replaces any surrender charges you might incur. These annuities still offer the same long term upside potential by allowing you to invest your money in equity funds. The bear market of the last 30 months has also imposed competitive pressures on the annuity companies, which are now offering sharply improved policies.
This same strategy works equally well with Roth IRA rollover accounts which are show big losses, but the mechanics are somewhat more complex. In contrast to the variable annuities, one must wait 61 days before establishing a new Roth IRA. But the funds from the liquidation can be "parked" in a no load stock market index fund during the 61 day wait. Please call to discuss these ideas. Tax opinions are available.
Still another option is in energy. I am in touch with several natural gas energy programs which offer a good up front tax write off, generous projected cash flows at current prices, little dry hole risk, and favorable investor terms. Call me for additional information at 800-663-3419 if you wish to explore this area.
Lastly, if you agree with me that this last down leg in the stock market is the end of the decline, you may wish to engage professional investment management to handle your investment portfolio, in whole or in part. I have long suggested that the day comes for all of us when we can no longer make our own investment decisions, either because of death or illness. When that day inevitably comes it would be a good idea to have a trusted and tested investment manager available to your spouse or other family members. This should be someone in whom you have confidence, who you have watched work in a variety of market climates. The experienced portfolio managers we use and recommend certainly qualify. Call or email me to explore your situation.
I wish you and your loved ones a happy and blessed Holiday Season and a more prosperous New Year!
Tom McAllister
  One Man's Opinions - 40th Anniversary Edition
August 1, 2002
  Next week marks my 40th anniversary in this fascinating business. I began my investment career August 1, 1962, when I joined Merrill Lynch here in Indianapolis. I have been reminiscing about the climate in Wall Street that summer. President Kennedy and Roger Blough, then Chairman of U.S. Steel, had had some very sharp words earlier that spring and legend has it that Kennedy remarked his father had taught him that "all businessmen are SOBs." I believe history proves this is not true, but the repercussions of this exchange sent the stock market into a tail spin.
The market was in the doldrums that summer for sure. Merrill immediately put me on the radio with a daily market report and I remember well a day later in August when the grand total of 1.8 MILLION shares were traded on the New York Stock Exchange! The other day they exceeded 2.7 BILLION shares. 1500 times as much! How times have changed. But some things do not change; especially human nature.
My old boss in the chemical business, where I spent four years, told me I was crazy to go into something as volatile as the investment brokerage business. I already had five children (the sixth arrived the next year) and was taking a big financial risk. But Merrill matched the salary I was making (although I lost my company car and expense account) and I calculated that it was worth the risk to gain the education they offered even if I failed as a stockbroker. Being a broker with Merrill Lynch was a very reputable job in the business world in those days. Again, how things can change! I also thought that by the time I finished my training program ten months later the stock market would probably be in recovery. In fact it was, and three years later I was making an income far in excess of anything I could have ever made selling industrial chemicals. I was able to raise my large family comfortably and get them through college with only a few bumps along the way.
It was not all easy by any imagination. This business is very cyclical and highly volatile; boom or bust is its very nature. This is the only business I know where, when our investments are on sale at lower prices, the customers run away. When prices are at all time highs they knock down the doors to buy. Over these forty years I have learned many lessons, some of them very painful and costly. But learn them I did and they now serve me well. Just surviving thirty or forty years in the investment business is unusual and I thank my maker every day for these blessings.
August 15 marks another anniversary, being self-employed. I started McAllister Financial Planning August 15, 1975 after a seven year career at Merrill Lynch and six years as founding manager of Robert W. Baird's Indiana operations. Baird was, and is, a very fine regional investment banker and NYSE member firm. More experience, more lessons, more learning and more wisdom from this part of my career. I thoroughly enjoy my work, which I define as helping people solve some of their major problems, their financial ones: hopefully at a profit, occasionally at a loss. But it is very rewarding work for me emotionally and psychologically, as well as financially. I plan to continue working as long as I can mentally do so.
So at this time I want to express my heartfelt thanks to all my clients, past and current, who make it possible for me practice my profession. I hope my experiences and the resulting knowledge and wisdom are helpful to all of you, and also that they offer information and guidance to my audiences on Princess cruises, past and future. Thirty six cruises in the past eight years have been the "frosting on the cake" of my career. They are great fun for me and have been a very real learning experience as well, as I have visited nearly 100 countries on these voyages.
Turning to more important things, the stock market has been in "free fall" all through the month of July, hitting new bear market lows nearly every day. These times come around every generation or so, the last being 1973-74. I believed we were through with the bear market last fall, after the sell off following the Terrorist Attacks of September 11.
Obviously I was wrong in this belief. The loss of public trust in the integrity of reported corporate numbers has triggered another down leg in the bear market, taking us to new lows. The despicable actions of a handful of high level corporate executives in a few high profile companies have undermined the entire U.S. stock market. In turn, stock markets worldwide have also been affected. The active participation of nationally renowned auditing firms in helping "cook the books," and the apparent cooperation of some of our biggest investment bankers in these schemes, has further betrayed the public trust. All this must be sorted out before we resume the normal upward bias of stock prices. This is what the stock market does; it sorts out all the news, good and bad, and adjusts prices to reflect it all. It is doing this now and I suspect it will do it extremely well when all is said and done.
While I do not wish to excuse or explain away the criminal acts of these people, I believe we need to keep things in proper perspective. There are over 9000 companies that are actively publicly traded in the United States. The majority are run by honorable and honest people who play by the rules. A small handful of companies, currently less than TEN, have spoiled the market for everyone else. I expect we will see some more confessions in coming weeks from others who violated the public trust but, even if we have a couple of dozen more malefactors, this is still a very tiny percentage of the universe of public companies in our country.
Over time the market will recognize this, as it will recognize the rapidly recovering economy we are currently enjoying. We have reached, or perhaps soon will reach, a point where the bargains available have become too attractive to ignore. Maybe we already have done so, given the huge rally yesterday, July 24. If these past few weeks have not been the long awaited "capitulation" on the part of this generation of the investing public, I sense we are surely very close to it. Only time will tell. Selectively buying bargain value stocks in coming days should look very wise in two or three years, the time horizon I normally recommend all investors use.
While I dare not say that the Securities and Exchange Commission, the New York Stock Exchange, and the National Association of Securities Dealers are smooth functioning regulatory bodies, they ARE doing their jobs. Reforms have already been launched, beginning last fall. The SEC has taken steps within its existing legal mandate to both punish the guilty and to preclude repeats of this egregious behavior on the part of public corporate management and the auditing firms. The NYSE has instituted significant reforms in the makeup of the boards of directors of listed firms. The NASD, along with the state of New York, is looking into the major brokerage and investment banking firms to determine appropriate punishment for misbehavior. $100,000,000 is a lot of money, even for Merrill Lynch! Look for more similar fines of other major firms. Arthur Anderson is out of business for all intents and purposes. Probably a shame and too big a penalty for the sins of a few partners, but their culture had changed and "consulting" became the tail that wagged the dog. One can safely assume the surviving large auditing firms have taken due notice and are cleaning up their own side of the street.
The stock market itself has also delivered severe punishment to the guilty parties, many of whom are bankrupt or nearly so. Only a few took millions of dollars out on the way up. Many stayed the course and rode their insider positions all the way up and all the way down, no doubt ignoring advice to diversify. But most of those who caused this mess have been punished severely by the market.
Now, let me turn to one of my favorite topics, the incompetence of our elected officials in Washington. First, let us look at Congress. As usual, there is much political posturing and infighting going on. "Something must be done!" Ignoring, of course, what is already being done. "Pass some new laws! Increase the punishments! Vote for me in November!" Whatever comes out of this disreputable and demeaning exercise we can just about count on it being too little and too late. The time to be examining the barn and closing the door is BEFORE the horse gets away. The regulatory bodies, using existing laws and rules, launched reforms months ago, after the Enron scandal broke. Except for doubling existing jail terms, new laws are going to be superfluous at best, harmful at worst. If Congress gets carried away and passes something which truly hampers the markets and business in general (i.e. micromanaging how audits must be processed) then harm will definitely be done. In my opinion we can forget about a veto from W. Bush, he will sign anything Congress passes, again for political reasons. A sad commentary on our leadership I believe, but it is reality in our current political climate.
The economy is rapidly recovering from the recession. Economists expect growth for the year in the 3.5-4% range. This is not particularly strong as recoveries go, but the recession itself was short and not very deep, so an extremely strong recovery is not to be expected. As the recovery progresses, profits should begin to show sharp gains, probably beginning here in the second quarter. Most second quarter earnings reports are meeting expectations of modest gains versus twelve months ago. This picture will continue to improve as we go forward toward year end.
I remain very cautious about the technology and blue chip growth sectors. Those who have big losses in these sectors and who have not already sold, will be doing so as the market rebounds over the next few months. At each stage, as people get even, we will encounter heavier than usual selling pressure. In my opinion, buying in these areas currently is speculation, pure and simple. If that is your game, and only a few of my readers play it, go for it now. For the majority, stick with value stocks and take a three to five year time horizon in your expectations. You will surely be well rewarded for doing so. I recommend committing ten percent of your cash reserves now, another fifteen percent in the next few weeks before Labor Day. I anticipate making additional infusions into the stock market by Jan. 1
Some clients and prospective clients have asked us about alternative investments in lieu of stocks. Other than money market accounts, which current have historically low yields, we recommend short term tax free municipal bond funds or municipal portfolios with maturities of five years or less. Bond yields are at forty year lows and thus longer term bonds carry the risk of higher yields in coming months or years which would create losses of principal if sold. This risk is mollified by staying short, ensuring the return of principal relatively soon. In my opinion this is not the right time to buy bonds maturing in more than five years. The same advice applies to Certificates of Deposit, which are taxable and have the additional risk of forfeiture of all or part of their yield if one wishes to redeem them prior to maturity. CDs are thus less attractive than the same maturity bonds or tax free bonds which can be sold at will.
Another option is using hedge funds, which are not part of our activities here at McAllister Financial Planning. Hedge funds can go long (own stocks) or short (borrow and sell stocks they do not own, hoping to purchase them back at a lower price) as well as arbitrage securities of proposed merger partners, among other strategies. These funds can be profitable in bull or bear markets, but the fees and managers' profit sharing can be fairly expensive. Reports to investors tend to be rather sketchy also.
One of our long term favorite recommendation are Low Income Housing Tax Credits, which offer current yields of approximately 10% per year tax free over ten years; inflation protection; and possible capital gains. The credits, which are granted by the U.S. Government, are pre-funded by law and are usually in place prior to investor funds being committed. These credits are, by their very nature, illiquid. The holding period is approximately fifteen years.  
Still another option is venture capital. We are in touch with an energy program for accredited investors which offers a good up front tax write off, generous cash flow at current gas prices, no dry hole risk, and favorable sponsor terms. Accredited investors are those with a net worth of $1,000,000 or more OR regular taxable income of $200,000 or more. I know many of my readers meet these criteria. Call me for additional information at 800-663-3419 if you wish to explore this area.
Lastly, if you agree with me that this last down leg in the stock market is a rare buying opportunity, you may wish to engage professional investment management to handle your investment portfolio, in whole or in part. I have long suggested that, even if you have done a great job handling your own portfolio, the day will come for all of us when we can no longer make our own investment decisions, either because of death or illness. When that day inevitably comes it would be a good idea to have a trusted investment manager available to your spouse or other family members. This should be someone whom you have confidence in, whom you have watched work in a variety of market climates. The experienced portfolio managers we use and recommend would certainly qualify as prospects for your needs. Call or email me to explore your situation.
Tom McAllister, CFP
As part of the financial community we are required to disclose our privacy policy annually. McAllister Financial Planning, as a matter of policy, does not sell or share the names or personal information of its clients or prospective clients with any outside organizations or persons. The only time we would reveal names of our active clients is when we and our outside money managers have an active money management agreement with that client, at which point we, of course, would discuss their situations from time to time as appropriate. From time to time a client instructs us to contact his or her other professional advisers to discuss particular personal situations and we of course do so.
  One Man's Opinions - Summer 2002
  The U.S. Gross National Product was up sharply in the first quarter, confirming that the recession is truly over, as both Mr. Greenspan and I opined back in January. The numbers were quite a bit higher than I expected and I doubt they can be sustained. Much of the economy is still deeply depressed and I suspect it will take some months before we will be able to say business is vigorous again. But the economy is recovering.
As predicted, the financial media is doing its sensational thing and once more focusing on the bad news, unemployment, which continues to climb higher. This is NORMAL and to be expected! Unemployment is a lagging indicator. It happens this way every time we have a recession. Employers are naturally reluctant to add new employees until they are sure they are needed. As mentioned above, many sectors of the economy are still mired down.
I believe the U.S. stock market's action so far this year can be summed up in one word, "sloppy!" Most of our accounts have modest losses of three to six percent, the popular averages are at the lower end of that range or more. Until the recent May rally, it has been difficult to determine any sense of direction.
The events of the past three years have caused some severe losses for investors. But many are maintaining an interest in the stock market, expecting better times ahead. We will have better times, just not a quick return to unrealistic returns of twenty percent or more. The long term trend in the stock market, over ten years or more, is for returns averaging ten percent per year or so. In the intermediate term, two to seven years, I do not expect we will match these expected returns. Price/Earnings ratios are still historically high, and corporate earnings probably will not rebound as much as normal since the recession was fairly shallow and mild. Burned investors won't repeat the "tech bubble" of the late 90s.
I still expect a positive return this year for U.S. stocks, on the order of six to nine percent. The current level of the market represents an opportunity for adding value to one's portfolio. I would particularly look at financial stocks and Real Estate Investment Trusts, the latter of which weathered the recession in good order and offer very good yields.
I continue to recommend professional money mangers who elect a value approach to investing. Value investing is nothing more than bargain hunting, looking for investments which appear to be selling for less than they are truly worth for whatever reason. As I said in my last newsletter, it is part art, part science, part discipline, and a lot of hard work. Our money managers utilize this approach and their results show it. Over the long term they have returned approximately 1. 5% more than the Standard and Poors average. They have been doing this successfully for more than thirty years. I suspect this lengthy tenure has a lot to do with their successful records.
As I mentioned last time, one of these managers now has a seasoned public mutual fund available for our investors to utilize for smaller portfolios. The minimum investment is just $50,000, making their expert investment management available to smaller accounts. A significant percentage of the fund is owned by the employees of the manager and their families. If you would like more information about this fund, or individual portfolio management services, contact me at 800-663-3419, or by return email at .
A Unique Opportunity.

As of January 1, as a result of last year's Tax Act, we have a brand new tool available for investors and estate planners. Many of my readers are grandparents, quite a few, including myself, are great grandparents. Many of us have an ongoing interest in helping with our grandchildren's college educations. While the primary obligation is with their parents and with the young students themselves, many affluent grandparents do have a desire to help out. Now we have an exceptionally attractive tool to use in this process. They are called Section 529 College Savings plans. They are offered through the various state governments and have been around for many years. But as of this year the tax rules have changed dramatically and for the better.
For starters, earnings now compound Federal Income tax free within the plans. More importantly, when withdrawn and used for education of the beneficiaries, the distribution is ALSO tax free! Allowable educational expenses have been broadened to include private primary or secondary school, trade schools, even living allowances and equipment purchases such as computers. For wealthier investors subject to estate taxes, gifts to such plans are permanently out of their estate. And almost as important, the grantor can MAINTAIN CONTROL!
It is, of course, impossible to determine what type of person a child will become at age 18 or 21. For this reason grandparents are reluctant to make gifts early in a grandchild's life which becomes their property when they reach legal age. The fantasy of getting a "thanks for the new Porsche Grandpa" has haunted many of us. The new Section 529 plans solve this dilemma. If the child chooses not to go to college, the owner/grantor has the power to change the beneficiary to another family member; a sibling, first cousin, even a parent, aunt or uncle. If no appropriate secondary beneficiary is available, or even at will, the benefactor can take back the gift into his or her estate, pay the income taxes due when withdrawals are made, and pay an additional ten percent penalty. Even though the account is not legally a part of the grantor's estate, he or she can make these decisions as necessary. Or, if the grantor wishes, this power, and the ownership of the account itself, can be given to another party, generally a son or daughter.
Most major mutual fund companies and some insurance companies now have agreements with one or more states to sponsor these accounts. Specific fund choices are made in the beginning and can be changed annually. You can even set up an asset allocation plan if you wish, beginning with all equities and slowly adding to the fixed income portion of the account as the anticipated time of withdrawals gets nearer. A special provision allows us to "lump up" five years of annual $11,000 ($55,000) gifts into year one. The $11,000 gift exemption is available for any individual. So those with multiple grandchildren (my 13th was born last month!) can transfer substantial wealth out of our estate if we so decide.
We have complete details on this marvelous tool here at McAllister Financial Planning. Please contact us at 800-663-3419 or by email at and I will be happy to send a complete package for your consideration.
Many readers are veteran cruisers and curious about my adventures. I am appending the story of my recent three week sojourn through Asia. I hope you will enjoy it.
Tom McAllister
2002 Asia Trip
After a seven year absence I recently returned to Beijing and Shanghai as part of a 16 day Princess Cruise from Beijing to Bangkok. The changes were quite impressive; the most obvious is the changeover from bicycles and motorbikes to automobiles. When I was last there in the Fall of 1994, there were thousands of bicycles and motorbikes coming at you from every direction at each major intersection. The motorbikes are now largely absent, having been taxed to death due to their high pollution impact. While there are still dozens of bicycles coming at you at every turn, this is down from hundreds back in 1994. There appear to be far more taxis as well as a lot more private automobiles.
Another obvious change is in housing. Vast tracks of old shanty homes, which used to be home to most families, have been bulldozed and replaced with high rise apartment buildings. The government owns all the land, so all they have to do is notify people to move, give them a certain modest amount for the buildings involved, never enough to replace them, and knock down the neighborhood. The replacement high rises are very impressive, but the apartments themselves are quite modest, most 400-600 sq. ft. or so, at prices approaching $60,000 US. The average salary in China is $250 per month, so while other living costs are very low, it takes many years to save up for a modest apartment even with both partners working, which is normal. Long term mortgages are not normal, although the government will offer a certain amount of intermediate financing on new housing.
The city of Beijing is alive with changes planned in conjunction with the 2008 Olympics. This comes on top of a twenty year building boom and the results are most impressive. While we did not have the opportunity to do more than view the countryside from a moving car, even in rural areas things look more prosperous to a visitor.
The Chinese people are friendly and appear happy. The younger ones only have knowledge of the disastrous Cultural Revolution of the 1960's, and of the 1979 Tiananmen Square student's rebellion, from their grade school history books. They view their government as almost benevolent, as are its leaders. Mao is their George Washington, and they are taught that "he made a few mistakes," including the Cultural Revolution.
Capitalism is tolerated by the government, indeed encouraged at the individual level, but the government still is socialist and the major industries are all run by the government or the army. The enormous increase in the wealth of the country these past twenty three years is almost all due to individual enterprise as the government-run businesses almost all lose money.
The Beijing Palace Hotel is on a par with any luxury hotel in the U.S. and has more staff due to their lower wages. Prices, by U.S. standards, are quite reasonable. Labor intensive goods are downright cheap. This is a real treat for your bargain hunting correspondent.
We arrived in Shanghai on Sunday, March 31, 2002. Easter for us, just another day for most Chinese. The skyline of Shanghai is more than impressive, it is awesome! It is a very dynamic and progressive city, with magnificent architecture. The rapid economic growth of the country has triggered even greater growth in the cities, where most of this economic growth is occurring. This triggered a massive construction boom which has been going on for over ten years. In Shanghai this has taken the form of high rise buildings all over the city, but especially near the river to the south of the old downtown area. The architecture used in these high rises is the most impressive I have seen anywhere in the world. It has design features and graceful shapes unique to China and very pleasing to the eye.
Our two day stop in Shanghai was not long enough to go out into the countryside, but the city itself and its people certainly appear far more prosperous that in 1994. Like the United States and most of the western world, it seems the best and brightest Chinese citizens have moved to the cities for a better life, first through education, then through better jobs and housing. It shows in the dynamic heart throb of this great city too.
Our next stop was Hong Kong, one of my favorite cities in the world. I discerned no noticeable changes since the Chinese took charge, taking over from the British four years ago. It seems even more crowded and busy than before, but that is what I always perceive when I am there.
We then visited Vietnam, stopping at the beautiful seaside resort city of Nha Trang before going on to lovely Saigon. My impression is that conditions have improved since my last time there four years ago. Our visit, however, was a whirlwind bus tour, just hitting the high spots with no time to dig around. The previous two trips were on a smaller ship which was able to dock very near the downtown area. This time the Regal Princess had to dock fifty miles away, necessitating the use of an escorted tour.
We also stopped briefly, for six hours, in Singapore. I hired a cab for another quick tour but discerned little change in this clean, dynamic, and well run city-state. Would that all government was this efficient. The cruise ship terminal was largely shut down for renovation, although it was new and appeared to be in great shape my last time here, again some four years ago.
The cruise finished in Bangkok and my fiancé, Gertrude and I, stayed an additional two days. Hotels are very reasonable here and we had a very nice riverfront room at the Marriott Garden Resort Hotel for the price of a midlevel U.S. hotel. The people are warm, friendly, and extremely hospitable. The pollution is awful, especially from motor vehicles. Signs of recession are everywhere, with half finished buildings and vacant storefronts common. While things are better than they were a few years ago, the Thai economy has obviously not come back completely. Our trip home on Northwest ran extremely smoothly. But jet lag was as bad as I have ever experienced coming in from Asia. Perhaps I am just getting older.
Tom McAllister, CFP
  One Man's Opinions - Spring 2002
  Legal Notice
As a registered investment advisor I am required to offer an income statement annually to all clients who request one. Our 2001 statement is now available to our money management and/or financial planning clients. If you are a client and would like a copy please call us at 800-663-3419 or by email at .
As I suggested could be happening in my last communication in mid-January, the economy has bottomed. This is confirmed not only by the numbers, but also by Alan Greenspan. It was a relatively mild recession overall. We had Enron and a number of telecommunications and stocks and some others file bankruptcy, but these type troubles are normal in a recession. Inventory liquidations were made quickly and were deep. Layoffs also came rather fast as companies "leaned down." In contrast to previous recessions, white collar jobs were as subject to layoffs as blue collar ones. This no doubt is due to the continuing trend toward a U.S. service economy and away from a manufacturing based one.
The fourth quarter of 2001 has now been catalogued as one of modest growth, thus invalidating a recession, which is defined as two consecutive quarters of negative growth. I suspect economists will make an exception this time as we appear to have had negative numbers for six months or more, but not for two calendar quarters.
For this pleasant outcome I must pay equal tribute to the automakers and the American consumer for turning the fourth quarter around in offering and taking advantage of zero percent financing of new vehicles. Of all things, General Motors(!) took the lead in this, after decades of reactive and poor management. I was a big fan of GM and mostly bought GM cars until the 1980s, when their focus on cost control and lack of quality allowed the competition, especially the Japanese, to take almost half their market share. The phrase "uninspired styling" was often used to describe their cars back then. (To me, that meant ugly!) Domestic competitors Ford and Chrysler, as well as the foreign competition, offered better looking and better quality products and the market responded accordingly. I believe it was shameful for GM management to allow this to happen, but current management partially redeemed themselves with their aggressive and appropriate response to the events of September 11.
A negative factor to consider in this context is there exists little pent up demand for automobiles and trucks now. To some extent automakers "borrowed" sales from 2002 to book them in 2001. Another negative is historically high levels of consumer debt. Even at zero percent, a loan is a loan is a loan. It must be paid back. Consumers can only utilize a finite percentage of their income to service debt. In the United States we surely must be near the limit of what debt the average consumer can bear.
I expect the economy to continue to rebound this year, with increasing quarterly growth numbers as the year proceeds. As most companies are operating lean now, profits will rebound much more strongly. An expansion of several years can be expected. A caution though; unemployment figures may get worse before they get better. While the media never seem to understand, this is normal! Employment is a "lagging indicator" and unemployment figures normally lag swings in the economy by about nine months. So
we saw the economy slowing in 2000 but except for high technology and the dot coms, personnel cuts did not really dig deep until last summer. You can thus expect the politicians and the "talking heads" on TV to focus on poor unemployment figures as "proof" the economy is still in trouble. As usual, they will be wrong!
I continue to marvel at the shallowness of the financial media, print and, especially, electronic. CNBC and the cable news channels offer more and more information and opinions, but in my opinion the value of much of this is suspect. We should always remember that the purpose of these operations is to sell advertising. The more viewers they attract the more money they make. So, as in other aspects of the media, there is a focus on the short term and the sensational. Yes, they offer some value to the individual investor, but for the most part, the information and guidance they provide has a short term focus and is usually quite shallow. Guests also have their own agendas, pumping their own company, book, product, advice, or service.
The stock market overreacted to the terrorist attacks September 11. As I suggested at the time, it created a unique investment opportunity, taking advantage of many who were selling in a panic. The rally was quick and substantial through year end. This years, until recent days, stocks have been digesting the gains of the fourth quarter. This digestion period now may be over. A strong rally is under way which I think will cool down shortly.
Where do we go from here? Unlike some prognosticators, I am not expecting a quick return to the exuberance of the late 1990s. In fact, I expect the opposite. By historic standards the stock markets are still high. Strong corporate earnings later this year will make these comparisons look somewhat better, but I think we have some adjustments to make as to what stocks are worth. I believe this year we will do well to return five to ten percent on the average stock. As always, our money managers, with their focus on value investments, will attempt to do better than this, as they historically have done, with average records of the S&P plus 1.5% or more over the long term. An outstanding record indeed!
I should comment on another negative for the stock market, a lack of creditability regarding the numbers provided by many public companies, and their anointing by their public auditors. This game has been going on for decades, since the 1930s when the newly formed Securities and Exchange Commission promulgated rules and regulations for providing information to public investors. In recent times companies, aided by the consulting arms of their auditors, have become more and more adept at "massaging the numbers." Securities analysts, of course, are supposed to see though such maneuvers. But many were caught up in the exuberance of the stock market in the 1990s when companies with few or even NO numbers, at least so far as cash flow and earnings, soared to unbelievable heights. The analysts, eighty percent of whom in my opinion, should seek new careers, have been "seduced" by the times and the climate. Many were recruited, in the 80s and 90s from leading business schools, to come into the securities business at handsome salaries to tell the public, and their own executives, what they wanted to hear. Those days are over now, probably for a long time. (I hope for the rest of my career, which I plan to be only another twenty five years or so since I am sixty four now!)
I believe the accounting firms will be forced to choose between being auditors and being consultants. These functions will be separated, with no ownership connections between them. It has become a serious conflict of interest and has now become public.
Lowered expectations for stocks makes bonds look relatively more attractive. The problem here is we are at what appears to be a forty year low in fixed income yields. The purchase of longer maturity bonds at these yields is almost certain to result in lower bond prices if they have to be sold. As most readers know, as yields on new bonds rise the price of existing bonds must drop to motivate potential buyers to buy them, rather than a new bond. It is true that ultimately all bonds return to par, usually $1000 per bond. This limits the capital loss possibility of all bonds, particularly those which are closer to maturity. The combination of historically low yields and the potential for loss brings me to the conclusion that any bond purchases should be limited to five to seven years. Many municipal bonds in this maturity range offer attractive yields versus those available in government or corporate bonds, on the order of 90% of the yields available on comparable quality bonds.
We continue to recommend the use of professional money mangers. The events of the past three years in the markets have caused some severe losses for many investors. Of these, quite a few have retired defeated, swearing to "never again buy stocks." But most have maintained an interest in the stock market, hoping for better times ahead. And we will have better times, just not a quick return to unrealistic returns of twenty percent or more. The long term trend in the stock market is for returns averaging ten to eleven percent per year. Investing in growth stocks should return another two percent or so. These are long term expectations, over ten years or more. In the intermediate term, two to seven years, I do not expect to match these longer term expectations.
One answer, I believe, is utilizing professional money managers who elect a value approach to investing. Value investing is nothing more than bargain hunting; looking for investments which appear to be selling for less than they are truly worth for whatever reason. It is part art, part science, part discipline, and a lot of hard work. Our money managers utilize this approach and their results show it. Over the long term they have returned approximately 1.5% more than the Standard and Poors average. They have been doing this successfully for more than thirty years, forty in several cases. I suspect this lengthy tenure has a lot to do with their successful records.
I am happy to announce that one of these managers now has a seasoned public mutual fund available for our investors to utilize for smaller portfolios. The minimum investment is just $50,000; making their expert investment management available to smaller accounts. A significant percentage of the fund is owned by the employees of the manager and their families. If you would like more information about this fund, or our professional individual portfolio management services, contact me at 800-663-3419, or by return email at .
Many of my readers are veteran cruisers and most of these are always curious about my upcoming adventures. I am pleased to report that I am heading back to northern China on March 22, largely repeating my very first lecture cruise for Princess in the Fall of 1994. It was one of my top three so far and I am looking forward to seeing the changes that have taken place and the progress of the Chinese economy. It is truly a fascinating place. We will also visit Japan, Korea, Hong Kong, Vietnam, Singapore and Bangkok. I am truly blessed to have this exciting life.
Let us all welcome Spring.
Tom McAllister, CFP
  One Man's Opinions - January 16, 2002 Special
  The stock market has performed much as we anticipated two months ago in our last newsletter. The rally ran right up to year end, making up for most of the ground lost after the terrorist attacks Sept. 11. There have been no further attacks, but I continue to expect one or more, probably sooner rather than later. To its credit, the government has thoroughly scoured the country and detained the most obvious suspects. Undoubtedly this is why another round of attacks have not yet taken place. But our enemies are smart and canny and it is unlikely they will not hit us again in some different way.
The onset of the current recession has now been confirmed as March of last year. I opined in November and earlier that I thought it started in the Spring. It is good to be affirmed by the Uncle Sam. Now I am opining the other side of the equation, the economy is bottoming. The final figures should show a bottom this month or next, but the worst is over. The stock market rally in the last quarter of 2001 was in anticipation of this bottom.
My optimism as to the stock market, beginning last March 22, has been vindicated. So has my call of last September to move another 25-33% into the market immediately after the terrorist attacks. As measured by the Standard and Poors index, the market has moved from 1100 in March and 1033 in September to the current 1146. The NASDAQ performance has been even better, from 1800 and 1555, to the current 2000 area. We have had nice gains, averaging 7.5% plus dividends and still have 33-50% in cash. Two good calls in retrospect. And they came after eighteen months of my pessimism and recommendations to raise cash and the prediction that the NASDAQ “bubble” would burst and would drop to 2000. “There are no genius’s in Wall Street” is an old saying and it certainly applies to me. But there is a certain amount of wisdom one gains from being involved daily in the markets for almost forty years.
This came to mind recently when a client told me he “should have followed his instincts” and stayed away from the market last Spring. I challenged him immediately on this. Study after study has shown that individual investors operating in so called “no load” funds (I call them “no service” or “no advice” funds. Does anyone out there believe there are no costs of marketing borne by the investor in these funds?) show annual returns of between four and seven percent. The funds themselves, in the past twenty years, have shown returns of 11-15%. What’s the difference? It is in the timing. Individuals tend to buy at the end of bull (optimistic) markets and sell close to the bottoms of the inevitable bear (pessimistic) markets. Exactly the opposite of what one should do.
I analogize professional investment managers as similar to instrument rated airplane pilots, of which I am one, currently inactive. Pilots taught early on to ignore the signals from our body and senses and to “fly the instruments.” Military pilots start learning this from the beginning, civilians only after over 100 hours of time in the air. Without this training we might “follow our instincts” and kill ourselves and our passengers. JFK Jr. comes to mind. He found himself in an instrument environment with only a little actual instrument training. Any instrument rated pilot, even a rookie, would have known what to do that night and landed safely. By turning off his auto-pilot and assuming control of his aircraft, thus following his own instincts, he got into a “death spiral spin” and crashed. Grisly, but a good example of what happened to a lot of investors the past two years financially.
An experienced professional money manager has learned to ignore his or her emotions and “fly by instruments,” the philosophy of investing which they follow. It is not science, rather an imperfect art. It takes years to learn, at least through one market cycle. But once learned these lessons are not easily forgotten. Just as the airlines insist on a certain number of hours before hiring a pilot, and quite a few more before this pilot is put in charge by making captain, so too good professional money managers, or professional personal investors, need to learn their lessons. The only sure way is by experience. The secret to good judgment is experience. The secret to experience is bad judgment. We continue to suggest using professionals to handle at least part of your investment capital. If for no other reason, to ensure that, when you are no longer available, your family has a trusted investment advisor whom you selected.
Professional money managers have led us out of the bear market these past four months. I often am critical of them when they move in a herd, but in this case they did the right thing. The assumed control, went against the fear and the crowd, and saved their portfolios.
The message is fairly clear. Unless you spend a major part of each weekday watching, reading, investigating the markets, you are not a professional investor. You would do well to let the pros handle your money for you; or at least part of it. The fees are modest, and the results usually good if you select the right advisors. In my own practice, this selection is my responsibility. I pick the managers, monitor their movements and results, and report and interpret all this to my clients. This is true of mutual funds and of individually managed portfolios, which I normally recommend to anyone with over $500,000 in the markets.
Now, where do we go from here? I believe the stock market has swung too far toward optimism. We are now digesting the gains of this fall. I expect this to continue. Indeed, the first three to six months may well show a modest decline in the overall stock market. Something on the order of a few percentage points. I expect the economy to recover nicely, but not without some turmoil. Another terrorist attack would be an opportunity to invest more of our cash reserves.
Auto sales have been very strong due to “give-away” financing. which is ending. This will result in sharply lower sales, on the order of 20%, this year. Auto sales will switch from leader to laggard, at least during the next six months. Lower interest rates have also been very beneficial to housing starts and home sales. This should continue for the next several months, but will slow down as interest rates start back up. I would point out that mortgage rates in the seven percent area do not fully reflect the very sharp drop in short term interest rates from 6.5% to the current 2.5%. I expect mortgage rates back up to eight percent sometime later this year, with consequent downward pressure on demand.
As I predicted, we have had a sharp rally in technology stocks, 25-40% from their bottoms in September. I do not expect this to continue. Tech analysts are, as a group, very optimistic these days. I think this is overdone. Earnings are down sharply so the price earnings ratios in this sector remain very high historically. Earnings will not rebound quickly as the economy recovers. But I believe there is still a great deal of risk in technology stocks at this level. Remember, this does not mean I do not believe these are bad stocks. Some are very good indeed! But, as a group they are fully priced in my opinion. I would avoid new purchases and lighten up considerably if you are still holding a disproportionate amount in your investment portfolio. 15% of the total is plenty.
Our money managers had a very good year in 2001, with returns ranging from plus seven to minus seven percent, with most accounts at plus two to minus two percent. A very good performance in comparison with the Standard and Poors index down 13% and the NASDAQ down 21%. All portfolios are individually managed according to the circumstances, goals, and objectives of the client. Thus, we might take more risk in the account of a younger investor versus less than average for someone in their seventies. In last years climate the former fared worse than the latter in most cases.
I will have some more thoughts in my next regular newsletter, which should be out in early March. Please call me at 800-663-3419 or email me with any questions or comments.
Tom McAllister, CFP
  One Man's Opinions - November 7, 2001
  My last missive, just before the stock market reopened September 17, predicted a sharp selloff for a few days, followed by a sharp rally. This scenario proved correct, but my short term timing was off considerably, which is not unusual. It took ten days for the selling wave to subside, not the three or four I expected. Since September 24 the market has been very strong, especially considering we are at war and in recession at the same time. This was also the case in December, 1941, after the Pearl Harbor attacks. The United States survived then and we will survive now. The terrorists will be much harder to uproot than our enemies in World War II, and I suspect it will take quite a bit longer to achieve victory, many years in fact.
I have delayed writing this newsletter because of the current wave of irrational fear on the part of our populace, helped by the media, which is certainly not having its finest hour. Is anyone else wondering whatever happened to Gary Condit? This panic baffles me. I drive on the Interstate Highway system often. Dozens die every day out there. Yet we all continue to use our roads and highways, knowing full well an accident can happen or some drunk might kill us at any time. We leave our comfortable homes, drive to the airport, climb on a plane, and fly off around the world. The odds are with us we know, and we have long since come to grips with whatever fear is attached to going about our daily lives.
The possibility of anthrax, or some other deadly poison, in our mailbox is new. Obviously we should take extra precautions, examining our mail closely, being careful of our luggage, and so forth. But to put our lives on freeze, as many have done, is silly and grants a degree of victory to our enemies. The possibility that we, or anyone we know, will contract anthrax poisoning is less than that of a lightening strike. If this scare is the worst thing the terrorists do in response to our war on them, and I do not think for a minute it is, then we, as a people, will be very fortunate indeed. I expect more violent and senseless actions will come before we are able to stamp out this terrorist threat.
We can protect ourselves somewhat but, in the final analysis, life has risks and we are all going to die someday. My own approach is to try to live each day in tune with my maker and the universe, attempting to be ready whenever my God is ready to call me home; not anxious or fearful, but ready. Turning to business, the economy is officially in recession now, and has been so ordained by the experts. I stubbornly cling to the notion that it started last Spring, that the final figures, when they come in sometime next year, will be revised to show the second quarter was modestly negative. No matter, we are in it now. Unemployment has jumped, earnings reports for the third quarter show many disasters (and a few pleasant surprises) and the stock market is quite strong, as is normal at the bottom of a recession.
I expect this recession will prove quite a bit deeper than we anticipated a few months ago because of the affects of the terrorist attacks and the economic impact of our reactions to them. But it should end in the first quarter of 2002, which is now just weeks away. The eighteen month bear market was lengthy, but in my opinion it bottomed on Sept. 24. I predicted this rally, but it is much stronger than I thought it would be, the strongest market in at almost two decades, since the Fall, 1982.
Our money managers were aggressively buying in late September. Most, if not all, of our client’s September losses were regained by October 15. An extraordinary performance I think, for us and for the market as a whole. This current rally is being led by professional money managers and truly sophisticated individual investors. The general public, to its credit I think, has not been selling, but too few have taken advantage of the many bargains in the stock market. We have not committed all our cash, not by a long shot. But we have put another 25-30% or so in, and expect by year end to invest at least this much more. We are being selective, as always, and are investing primarily in depressed value stocks, although there are a few “fallen angels” in the technology area that deserve our attention. At the top of the list are EMC, Cisco, and Microsoft.
Yesterday the Federal Reserve Board lowered interest rates for the TENTH time this year, to two percent, which has not been seen since 1961. Long term rates have not come down as much, but mortgages are available at rates not seen since the 1960s. This vast amount of stimulus will restart the economy soon, probably in the early part of 2002. These Fed actions take six to nine months to have their effect. The first quarter cuts are all we have felt to date. In addition the Fed has, since September 11, flooded the economy with dollars, which action is even more stimulative than lowering interest rates. All this stimulus is taking effect, and the results will show up in a few months. The stock market always leads the economy, declining while the economy is still hot, rallying when it is still going down. Perverse? Not really. We humans are intelligent beings and capable, if we can overcome fear and procrastination, of looking beyond current troubles and anticipating the better days to come. Generally the stock market discounts nine to eighteen months into the future. It is highly likely that the economy will be in full recovery in the next few months. I mentioned in my last missive a recent study which showed that buying general market index funds in the bottom three months of an economic pullback produced an average gain of 34% in the subsequent eighteen months. Those who did this the week of Sept. 17 have gained almost half that much by now, but those first few days were admittedly scary.
Which cuts to the heart of the problem of investing by the public. Numerous studies show that the stock market returns about 10% per year on average, including inflation. Other studies show that investors buying mutual funds on their own get returns of just four to seven percent. What causes this disparity? Bad timing, which is caused by fear, procrastination and ignorance! They buy “story stocks” or “story funds” near the top of a market cycle, sell in a panic near the bottom, then blame the stock market or “insiders” for their own mistakes. Many people are currently still frozen in place. They say they don’t want to invest until “things settle down” or until they are again comfortable with the market outlook. This attitude guarantees poor returns on their money.
Trying to time the stock market is futile for most of us. I urge my readers to be careful and build cash when the markets are euphoric, as they were two years ago; and to be bold when they are depressed, which they have been for some months now. But probably the best solution is professional money management, which lets full time money managers determine when and where to put your investment dollars; how much cash to hold and when; and when to be careful or agressive. None of these professionals are perfect, we all make mistakes.
But experience, in my own case almost forty years as an investment adviser, does pay off. My clients and those of my recommended money managers generally sleep well whether the market is doing well or doing poorly. We are working a plan, individualized for each client, which allows our clients good returns when the market is strong, and modest losses when it is weak. During the past year and a half this has worked very well as our performance has beaten the overall market handily. For the record, through the whole eighteen month bear market I had exactly TWO calls from concerned investors. Two of my daughters called to ask if they should continue to put their 401(k) and 503(b) contributions into stocks, or into fixed income. I explained to them the benefits of dollar cost averaging, which is what we do with our monthly pension fund contributions, and that they should continue to buy stocks in order to get their average cost down while stocks were on sale. Both have done so and are quite happy with the results so far. The automatic discipline of a dollar cost averaging program always works over the long term.
Many of my readers are avid cruise takers. Prices are extraordinarily low just now, especially as sailing dates near. Security is very tight on the ships and in the airports. I believe it is quite safe to travel as the cruise lines have eliminated any ports of call that pose threats to their passengers and ships. We had zero problems on a cruise from San Francisco through the Panama Canal to San Juan back in late September. And the ship, the Dawn Princess, was full! I plan to continue my cruise lecture trips in the new year and I urge you to get out there on the ships too, if you are able.
Year end is just ahead and I would like to be among the first to wish you a most Happy Holiday season and a blessed, prosperous, and less tumultuous New Year.
Tom McAllister, CFP