Wednesday, April 7, 2010

Jersey Benefits Advisors Newsletter Spring 2010


The stock market indices have behaved in a much more modest fashion in the 1st quarter of 2010, prompting many to doubt the economic recovery which is blossoming all around us. At this juncture, many investors and much of the news media are focused on the unemployment numbers and the slowness of job growth. Yet retail sales figures, temporary hiring and manufacturing are ticking upward, while consumer spending rose in February for the fifth straight month, jumping by 3.4% from a year earlier.

Of course there are many concerns facing the US as a country, such as unemployment, paying for the healthcare legislation recently enacted this year, the moribund housing sector, Social Security, Iraq, Afghanistan, Iran, oil prices, terrorism and of course the dreaded double dip recession. All of these issues are definitely a drag on the national psyche as the extreme positions on the Right and Left scream for attention. As all of this plays out on the national stage, an interesting phenomenon is happening in the markets.

Thankfully, the major issues confronting usare being managed in a way the stock market indices, which are reflections of you and I, seem to appreciate. The fact of the matter is that the almost 75% gain in the S&P 500 over the last year has helped ease the concerns of financial collapse. While there are some analysts and pundits concerned the market has moved too fast, the proper context for the increase in the S&P 500 since last March, according to Michael Santoli of Barrons, is the index “has merely recouped 57% of the bear market losses, reattaining a level first reached in 1998 and still below where the market collapsed after Lehman Brothers failed.

As Mike O’Rourke of brokerage BTIG has noted, on Monday, September 29, 2008, as the first TARP vote failed in Congress, the S&P 500 fell to 1106 from a Friday close of 1213. So this leg of the rally to 1178 since hitting 1100 near Thanksgiving has merely recouped three-quarters of what was lost in a single, sickening day”. Do you remember how gut-wrenching that day was?

So, a subdued but very decent quarter has just ended with the Dow Jones IndustrialAverage gaining 4.10%, closing at 10,856.63 and recently climbing above 11,000. The S&P 500 ended the quarter at 1,169.43 which was a 4.87% increase. The NASDAQ finished the quarter at 2,397.96 scratching out a 5.68% gain. The performance was not spectacular, but three more quarters at half that rate would generate above average returns for the year.

It amazes me how the various state governments manage to forget to plan for the economic fallout of recessions. Since our economy is cyclical and the public sector relies on revenue from taxes to fund its operations, it would seem a prudent move would be to reign in expenditures when the private sector begins to contract. When the private sector sheds millions of jobs and the unemployment rate jumps from 4% to 10%, you would think governors, state legislatures and public employee unions would realize there might be a few less tax dollars rolling into the coffers of the local, state and federal governments. Unfortunately, the public sector just doesn’t seem to get it. With state budgets facing huge deficits, the public sector will be forced to shed jobs, which will definitely add to the ranks of the unemployed. This is an unfortunate fact of life and a lesson we seem to be destined to relearn each recession. No sector is immune to a recession’s wrath.


There has been a great deal of press in recent years given to portfolio diversification, in particular to the use of hedging strategies with alternative investments. Many times hedge funds are referred to as the vehicles to use for this type of strategy, because they are not linked to traditional investments, such as stocks and bonds. However, on a closer inspection, it becomes evident that many hedge funds, even though they use sophisticated tools such as derivatives, controlling purchases in companies, merger arbitrage and venture capital, are still very much connected to traditional investments, and also remain illiquid, expensive and prone to risk.

Are these investments suitable for your portfolio? The answer depends on your appetite for risk, tolerance for illiquidity and overall investment goals. In the past, hedge funds were marketed to very high net worth individuals, but recently, this unregulated asset class has been marketed to a larger group of investors, in order to increase market performance during times of low returns.

Many hedge funds have had lackluster performance recently, and this can lead managers to increase the risk, in order to increase the return for the year. Accurate data has only been collected on hedge funds for about 12 years. This doesn't give much information on which to " base an analysis, so you need to exercise caution in interpreting such results", according to Vikas Agarwal, of the J. Mack Robinson College of Business at Georgia State University.

During the last decade, there was a rotation out of technology into real estate, energy, natural resources, commodities, bonds and emerging markets, which created asset bubbles and culminated in the financial collapse of 2008-09. In my opinion, the idea is not to switch asset classes and try to time these rotations, but rather to attempt to build a portfolio, which holds positions in all of these asset classes and more. This requires a great deal of discipline, because it means holding and purchasing positions, which may be out of favor, at the same time you are building positions in sectors, which are in favor. This is why I recommend adding to your portfolio through dollar cost averaging, and monitoring performance on a calendar year basis.

Much of the same diversification hedge funds claim they can provide can be attained through the careful construction of a portfolio using sector mutual funds and Exchange Traded Funds. It can also be done without the cost structure of a hedge fund, which generally charges a fee of 2% of assets, plus a 20% incentive fee on the profits for the year. If you’d like information on ways to hedge your portfolio, feel free to call for an appointment.


I just wanted to remind you that consolidated statements for clients will be provided on a semiannual basis after the market results on June 30th and December 31st. All clients will still receive statements from the various mutual fund companies, insurance companies or Pershing. If you would like to discuss your consolidated portfolio value, or receive a consolidated statement after March 31st or September 30th, just give me a call. We can set up an appointment, or I can send you the statement by email or regular mail.

Clients with Transamerica or MetLife annuities should look for the Guaranteed Minimum Income Benefit, Managed Annuity Program, Family Income Protector or Retirement Income Choice Riders to compare market value to guaranteed value. Call me with your questions.


Investment Advisory Services offered through:
Jersey Benefits Advisors
P.O. Box 1406
Ocean City, N.J. 08226
Phone: 609 827 0194
Fax: 609 861 9257

Securities offered through:
Transamerica Financial Advisors, Inc.
A registered Broker/Dealer
570 Carillon Parkway
St. Petersburg, FL 33758-9053

Third Party Administration and Insurance Services offered through:
Jersey Benefits Group, Inc
P.O. Box 1406
Ocean City, N.J. 08226
Phone: 609 827 0194
Fax: 609 861 9257

All opinions expressed in this newsletter are solely those of John Kaighn & Jersey Benefits Advisors, formerly known as Kaighn Financial Services.