The Tornado – Is It Safe to Come Out Yet?
 
WHAT SCARES THE INDIVIDUAL INVESTOR SO?  What has investors quaking in their boots is the bewildering uncertainty pervading everything they see – high unemployment, confusing healthcare changes, higher food and energy prices while the FED insists inflation is not a problem, and the unimpeded government borrowing – to name a few.  Additionally, stock market investors, as the financial world grapples with the unknown – have fresh memories of the severe losses suffered in 2007 – 2009.

Our recommended course of action is to think in terms of 5 to 10 years with your stock market investments and keep an eye on the three factors reported on weekly in The “Heat Map.”  Think of the three factors in The “Heat Map” as “pillars’ that support the stock market over the long run.  Watching these three factors will lead to the right decision on stock market investing (over 5 to 10 years) in the vast majority of cases.  The cases in which The “Heat Map” may not work well are when the orderly functioning of the financial markets is disrupted by high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history and finance (often referred to as “Black Swans”).  We remain vigilant in search for Black Swans and intend to report on them to you in future issues of The Weekly Commentary.

Every American, I feel, should visit 3 places in Pennsylvania:

• Independence Hall

• Gettysburg battlefield, memorial and museum

• Yeungling, America’s oldest brewery (in Pottsville) – the company is a tribute to 5 generations of family perseverance and their steadfastness to deliver a quality product without government help or support.

Investors can boost their outcome by resisting behavioral pitfalls, avoiding hyped stocks, and looking for underappreciated signals. 

How to Avoid–and Benefit From–Common Behavioral Mistakes
In the portfolio, I would say there are three classic errors. The first is individuals often own too much of their own company stock, and that’s due to a familiarity bias that comes from the affect of, you like things you’re more familiar with. People do this: They tend to buy more stocks that are centered in their hometown. They tend to buy stocks that are in their states, stocks that are in their own country. And in particular they often buy the stocks that they themselves work for. That can be very dangerous. First of all, your human capital is intimately tied up with the success of that stock, but also it can lead to a lack of diversification.

The second classic error is known as the endowment effect, and that is, people tend to value things they have more than the things that they might get. … There is some research on this, many classic experiments, but where it applies in the stock market is that perhaps people inherited something from when their grandmother passed away, perhaps they’ve had a stockholding that’s grown to be a very large percentage of their portfolio, and they don’t get rid of it because they fell like, well, I have it, and they’re overly attached it, and that can lead to very lopsided portfolios as well. You can see how that could interact with the company stock also.

The third classic error in portfolios is the disposition effect. That is holding on to losers too long, and the reason is, people don’t like acknowledging a mistake, and they sort of think incorrectly that if they just never sell it, they don’t have to book the loss. Conversely, people tend to not hold on to their winners long enough. They like to be able to say, I checked the box, I made a profit, that’s good. And that’s something that people need to watch out for. I might add that the disposition effect goes completely against tax-planning as well. People actually would benefit perhaps from selling some of their losers, but they don’t because of this emotional reason (Source: Morningstar interview of Fuller & Thaler director of research Raife Giovinazzo). 

One of these days I will put it all together.  My golf game, that is.  I play infrequently so my game is inconsistent.  On any given day, I can drive the ball well.  But, not every day.  I can say the same about my putts.  And the same for  chipping with my short irons around the green.  Yesterday, I drove the ball well, chipped well, but I just could not sink a putt!  I am going to keep trying because the next time out, it could be THE day.

Our days certainly have been hot.  Hot enough to be classified as the “dog days of summer.”

By the way, The Old Farmer’s Almanac lists the traditional period of the Dog Days as the 40 days beginning July 3rd and ending August 11th, coinciding with the ancient heliacal (at sunrise) rising of the Dog Star, Sirius. These are the days of the year with the least rainfall in the Northern Hemisphere.

Valley National and I are pleased to announce we have converted to NaviPlan’s fantastic and powerful financial planning software.  The most impressive aspect about NaviPlan’s approach is to give the financial planner the ability to keep things simple or, alternatively, drill down deep into the details – at a single click.  NaviPlan provides the best calculation engine in the financial planning industry that easily compares “what if” scenarios, side by side comparison of Current situation versus Recommended, and many more benefits.  It has received the financial planning industry’s best software award – and, we agree.  Call or email me for details on how this tool can assist in your planning.

Valley National and I are pleased to announce the addition of two new employees – Douglas Marcincin and Laura Morganelli as entry-level professionals.  Both Doug and Laura have their roots in the Lehigh Valley having attended both high school and college in the Valley.  Doug is a Lehigh grad and Laura is a DeSales grad-both in the Class of 2013.  In addition to learning how to get things done at Valley National and studying for the myriad of exams required in the financial services industry, both Doug and Laura will be very busy helping to convert Valley National’s comprehensive data base program to a new, more powerful data base – a big project.  I am especially pleased in announcing their employment as part of Valley National’s effort to attract the best and the brightest college grads so as to keep that talent in the Valley.

I took notice the Pittsburgh Pirates have “brought up” their #1 draft
pick: Gerrit Cole who struck out the first batter he faced with a 99 mph fast
ball and followed up with a 2 RBI base hit with his first at bat against San
Fran’s Cy Young award winning pitcher. 
Gerrit went on to record a win in his first 4 starts.  The Pirates have a deep pitching staff.  And, they have the will and motivation to win
thereby snapping Pittsburgh’s more than 2 decade drought of winning seasons,
the longest in the history of professional sports.  Even if you are a Phillies or Yankees or Sox
fan, a small part of you has to cheer for the Pirates to finally have a winning
season.  If you end up cheering for the
Pirates, you will not be alone – the Pirates have sold out their last 3 home
games.  

Most of the time, the U.S. stock market looks to 3 factors to support its upward trend – let’s grade each of the factors:

CONSUMER SPENDING:  I grade this factor a C (neutral).

THE FED AND ITS POLICIES:  I grade this factor an A+ (extremely favorable) because the FED cannot do much more than it is doing to support the stock market and asset prices.  Concerns about the FED changing its stance spooked the stock market last week (and the bond market the last 4 weeks); but,  I believe there is only a slim chance the FED will change its accommodative policy anytime soon.  I believe the FED will take steps this week to calm the markets.  Here is why:

The economic data have improved a bit since the last FOMC meeting … But the improvement has been far from “substantial.” Growth remains sluggish and  jobs gains remain moderate.  Inflation, meanwhile, has continued to fall further below the FED’s target. Meanwhile, financial conditions have tightened since the last FOMC meeting, as bond yields have risen, mortgage and credit spreads have widened. The tightening in financial conditions appears in large part driven by worries that Fed officials will soon tighten policy.

The FED statement and projections are scheduled for release at 2 PM ET on Wednesday. Fed Chairman Ben Bernanke will hold a press conference at 2:30 PM. I’ll post a preview on Sunday, but I don’t expect any changes to policy.

BUSINESS PROFITABILITY:  I graded this factor an A (very favorable).